October 26, 2020
By Selena Ing, Associate, and Boris Stanislav, Associate, Farber Tax Law
Decision in the Federal Court
In the 2019 Federal Court decision of Canada (National Revenue) v. Roofmart Ontario Inc., the Minister of National Revenue (the “Minister”) brought an application under subsection 231.2(3) of the Income Tax Act (the “ITA”) and subsection 289(3) of the Excise Tax Act (the “ETA”) to compel Roofmart Ontario Inc. (“Roofmart”) to provide information and documents related to certain unnamed persons (the “Requirement”).
Subsection 231.2(3) of the ITA provides:
(3) Judicial authorization
A judge of the Federal Court may, on application by the Minister and subject to any conditions that the judge considers appropriate, authorize the Minister to impose on a third party a requirement under subsection (1) relating to an unnamed person or more than one unnamed person (in this section referred to as the “group”) if the judge is satisfied by information on oath that
- the person or group is ascertainable; and
- the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under this Act.
Under this provision, the Minister requested an authorization to issue a Requirement related to residential and commercial construction contractors who have an account with Roofmart. The information the Minister sought to obtain included:
- The customer’s legal name, business or operating name, contact person, business address, postal code, and all telephone numbers on file;
- The customer’s business number, if known;
- The customer’s itemized transactions details including invoice date, invoice number, total sales amount, method of payment, and address of delivery, and
- All bank account information for the customers (including transit, institution, and account numbers) from credit applications a/or otherwise maintained by Roofmart in its records.
The Requirement stipulated that Roofmart were to provide information on contractors whose total annual purchase or billed amount was:
- $20,000 or greater for the period January 1, 2015 to June 30, 2018; and
- $10,000 or greater for the period January 1, 2018 to June 30, 2018.
The Minister indicated in an affidavit that the intent of the Requirement was to verify whether the customers of Roofmart had complied with their duties and obligations under the ITA and the ETA since studies have shown that 28% of the residential construction industry’s business is unreported or under-reported.
Pursuant to subsection 231.2(3) of the ITA, the Minister had to establish the following in order to succeed in her application:
- the person or group is ascertainable; and
- the requirement is made to verify compliance by the person or the persons in the group with any duty or obligation under the ITA.
Roofmart argued that the unnamed persons are not ascertainable within the meaning of paragraph 231.2(3)(a) of the ITA because the Minister failed to produce convincing evidence to establish that the target group of residential and commercial roofing contractors can be delineated from Roofmart’s customers who are not commercial roofing contractors. On the other hand, the Minister argued that the unnamed persons are well within the scope of the definition of ascertainable group applied by the Federal Court and the Federal Court of Appeal in other decisions, such as Canada (National Revenue) v. Paypal Canada Co., 2017 CarswellNat 6671,  G.S.T.C. 93 (F.C.) and Rona Inc. c. Canada (Revenu National), 2017 FCA 118,  G.S.T.C. 84 (F.C.A.).
In addition, Roofmart argued that the Minister had failed to meet the requirement pursuant to paragraph 231.2(3)(b) of the ITA,as the Minister has not established or alleged that she is engaged in a tax audit of the target group of unnamed persons.
With respect to paragraph 231.2(3)(a) of the ITA, the Federal Court held that the unnamed persons under review were an ascertainable group since the total annual purchase of the Requirement is sufficient to establish the target group of residential and commercial contractors among Roofmart’s customers. In addition, the Federal Court stated that Roofmart maintained its records of its customers and the customers’ identities are known to Roofmart.
With respect to paragraph 231.2(3)(b) of the ITA, the Federal Court referred to the Federal Court of Appeal’s decision in MNR v. GMREB, which stated that a good faith tax audit could include a tax audit project, as opposed to a tax audit of particular individuals already underway. The Federal Court was satisfied that the Requirement was made to verify compliance of the person or persons in the group with respect to their duties and obligations under the ITA and the ETA, such as:
- whether the person or the persons in the group have filed all of their required income tax returns, payroll remittances and GST/HST returns; and
- whether the person or the persons in the group have properly:
- reported all or any of the income earned on the sale or supply of roofing and building supplies/materials;
- claimed amounts as business expenses;
- collected and remitted payroll tax; and
- calculated and remitted GST/HST.
Thus, the Federal Court granted the application to the Minister and authorized the Minister to impose the Requirement on Roofmart since the conditions under subsection 231.2(3) of the ITA and subsection 289(3) of the ETA had been satisfied.
Decision in the Federal Court of Appeal
However, Roofmart appealed the order of the Federal Court on the basis that:
- the application brought by the Minister was ultra vires because it was not brought by a person authorized by the statute to do so;
- the Federal Court erred in finding that:
- unnamed persons are ascertainable within the meaning of paragraph 231.2(3)(a) of the ITA; and
- the Requirement was intended to verify compliance within the meaning of paragraph 231.2(3)(b) of the ITA.
- the Federal Court applied an incorrect burden of proof to its assessment of the Minister’s application.
The Federal Court of Appeal made some preliminary observations and stated that:
- the Federal Court of Appeal will be reviewing the Federal Court decision based on a standard of palpable and overriding error, as opposed to correctness, since the questions were of mixed fact and law;
- where the words of a provision are clear and unambiguous, the words must be applied. Additional conditions cannot be read into the legislation nor can a supposed purpose be used to create an unexpressed exception to clear language. Where Parliament has specified precisely which conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers and the Minister would rely on those conditions; and
- with respect to the legislative history of subsection 231.2(3) of the ITA, deleted provisions cannot be resuscitated or brought in through the back door in the guise of policy arguments. No additional criteria need to be met before the Court can issue an authorization for subsection 231.2(3) of the ITA.
The Vires Argument
Roofmart argued that it was not the Minister who made the application, but Mr. Blackmore, the CRA official who swore the affidavit in support of the application. Under subsection 220(2.01) of the ITA grants the Minister the authority to delegate the exercise of her powers to an officer or a class of officers, who may make an application to a judge. Mr. Blackmore did not have delegated authority to bring the application, and this lack of authority is fatal for the application.
The Federal Court of Appeal held that the Notice of Application was brought by the Minister of National Revenue, and not by Mr. Blackmore. Roofmart’s argument confounded the authority to bring the application, which rests with the Minister or their delegate, with the role of the person who swore the affidavit filed in support of the Minister’s application.
Roofmart also argued that there was no evidence that the Minister’s counsel did not discharge her burden to establish that she had the authority to bring the application. The Federal Court of Appeal held that this argument failed since counsel have all the authority to take all necessary steps and actions in litigation on behalf of their counsel. This type of argument should generally be raised in a motion to stay the proceedings and should not be raised as an objection as if it were a defence.
The Requirement of Ascertainable Group
Roofmart relied on the Federal Court’s decision in Canada (Revenu national) c. Hydro-Québec, 2018 FC 622 in which the Court held that “[w]hen the group is generic and has no connection with the ITA, and information can be requested outside of the scope of the ITA”, it constitutes an impermissible fishing expedition. Roofmart argued that the Federal court erred in applying the legal test articulated in Hydro-Québec and the result of this failure would invade the privacy of thousands of taxpayers with detailed personal information.
However, the Federal Court of Appeal held that the decision in Hydro-Québec does not set out a legal test but an analysis of the evidence with respect to whether there was an “ascertainable group” and whether the information was required for the purposes of verifying compliance. The Federal Court of Appeal agreed with the Federal Court’s conclusion that the group was ascertainable based on the total annual purchase requirement. The size of the request does not affect its validity even if it captures customers who may be of no interest to the Minister for the purpose of verifying compliance. The question of whether a group is ascertainable is not determined by the scale of the request.
Verification of Compliance
Roofmart argued that the Minister failed to prove that the information it sought will verify compliance with the ITA since “verify compliance” in paragraph 231.2(3)(b) of the ITA requires the Minister to demonstrate that a tax audit is underway and is conducted in good faith.
However, the Federal Court of Appeal held that establishing a pending or existing tax audit of a particular individual is not a precondition to the exercise of power under subsection 231.2(3) of the ITA. The Federal Court of Appeal agreed with the Federal Court’s conclusion that evidence is sufficient to demonstrate that the information would be used for the purposes of verification of compliance.
Standard of Proof
Roofmart argued that the Federal Court did not apply the correct standard of proof in assessing the Minister’s application. Roofmart argued that the Minister has a “high standard of good faith” to make “full disclosure” so as to “fully justify” an order under subsection 231.2(3) of the ITA.
Roofmart also argues that the order is an intrusion into the private business affairs of individuals and requires it to breach its obligation to protect the confidentiality of their customers’ information. As such, the ex parte standard of disclosure, a higher standard, should apply.
The Federal Court of Appeal stated that the broader public interest in the enforcement of the taxation system outweighs the private and commercial interests in not disclosing its clients’ personal information per eBay Canada Ltd. v. Minister of National Revenue, 2008 FCA 141. Further, even if the criteria set out in the ITA are met, the judge has discretionary authority to remedy abuses. While judicial discretion remains a component of subsection 231.2(3), it is not supposed to be used to revisit Parliament’s policy choices but rather it must “be cautious in intervening, doing so only where it is established that the discretion was exercised in an abusive, unreasonable or non-judicial manner” 1
The Federal Court of Appeal dismissed the appeal.
References “Rona Inc. c. Canada (Revenu National), 2017 FCA 118”