Date: 20020826
Docket: T-510-02
Neutral citation: 2002 FCT 912
Vancouver, British Columbia, this 26th day of August 2002
PRESENT: The Honourable Madam Justice Eleanor R. Dawson
BETWEEN:
FRASER MILNER CASGRAIN LLP AND
GILBERT SCHMUNK
Applicants
- and -
THE MINISTER OF NATIONAL REVENUE
Respondent
[1] The issue in this case is whether certain Requirements to Provide Information ("Requirements") issued by the Minister of National Revenue pursuant to paragraphs 231.2(1)(a) and (b) of the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, ("Act") should be quashed.
THE FACTS
[2] The following facts are agreed. The applicant Mr. Schmunk is a businessman who was a director and officer of Ceco Holdings Ltd. ("CHL"), Ceco Properties Ltd. ("CPL") and Ceco Operations Ltd. ("COL"). The applicant Fraser Milner Casgrain LLP is a law firm formerly known as Fraser & Beatty.
[3] As of March 1, 1998, COL and SML Operations (Canada) Ltd. ("SML") entered into a general partnership agreement referred to as the Madill Equipment Canada Partnership ("MEC").
[4] CHL, COL, and CPL (together the "audit subjects") are being audited by the Canada Customs and Revenue Agency in connection with a reorganization which occurred in or about March 1998. On February 26, 2002, the Minister served Mr. Schmunk and Fraser Milner Casgrain with the Requirements. Mr. Schmunk was served with the Requirements as a director, officer or agent for CPL, COL, CHL or MEC.
[5] Three of the Requirements ("Sale Strategy Memorandum Requirements") demand production of a Sale Strategy memorandum referred to in certain Fraser & Beatty invoices.
[6] The remaining six Requirements ("Tax Planning Requirements") demand production of certain documents relating to tax planning. The tax planning information is subject to a claim of solicitor-client privilege which is being adjudicated upon by the British Columbia Supreme Court.
[7] The applicants also submit that:
a. The purpose of the Requirements was to determine whether there was an avoidance transaction as defined in subsection 245(3) of the Act, thereby attracting the potential application of the general anti-avoidance rule ("GAAR").
b. Other than the documents demanded by the Requirements, the Minister has been provided with access to all documents relating to the reorganization.
[8] Those facts are not admitted by the Minister. The Minister submits that the purpose of the Requirements was not only to determine whether there was an avoidance transaction, but also to verify the audit subjects' compliance with the Act.
PROCEDURAL HISTORY
[9] Initially, nine applications were brought in this Court: one in respect of each of the Requirements. Pursuant to the order of Prothonotary Hargrave the matters are now conjoined under file No. T-510-02.
THE ISSUES
[10] Two issues are raised with respect to the Requirements:
1. Should the purported Sale Strategy Memorandum Requirements be quashed because the invoices to which they refer do not contain any reference to a "Sale Strategy memorandum"?
2. Should the Tax Planning Requirements be quashed on the ground that they were not requested for any purpose related to the administration or enforcement of the Act?
RELEVANT LEGISLATION
[11] The following provisions of the Act are relevant:
| SECTION 231.2: Requirements to provide documents or information.
(1) Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act, including the collection of any amount payable under this Act by any person, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as is stipulated in the notice,
(a) any information or additional information including a return of income or a supplementary return; or
(b) any document.
245(3) Avoidance transaction. An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or (b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
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ARTICLE 231.2: Production de documents ou fourniture de renseignements.
(1) Malgré les autres dispositions de la présente loi, le ministre peut, sous réserve du paragraphe (2) et, pour l'application et l'exécution de la présente loi, y compris la perception d'un montant payable par une personne en vertu de la présente loi, par avis signifié à personne ou envoyé par courrier recommandé ou certifié, exiger d'une personne, dans le délai raisonnable que précise l'avis:
a) qu'elle fournisse tout renseignement ou tout renseignement supplémentaire, y compris une déclaration de revenu ou une déclaration supplémentaire;
b) qu'elle produise des documents.
245(3) Opération d'évitement. L'opération d'évitement s'entend:
a) soit de l'opération dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s'il est raisonnable de considérer que l'opération est principalement effectuée pour des objets véritables - l'obtention de l'avantage fiscal n'étant pas considérée comme un objet véritable; b) soit de l'opération qui fait partie d'une série d'opérations dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s'il est raisonnable de considérer que l'opération est principalement effectuée pour des objets véritables - l'obtention de l'avantage fiscal n'étant pas considérée comme un objet véritable. |
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[underlining added]
ANALYSIS
(a) Sales Strategy Memorandum Requirements
[12] The Minister admits that the Sale Strategy Memorandum Requirements cannot be complied with because no "Sale Strategy memorandum" is referred to in any of the invoices referred to in the Sale Strategy Memorandum Requirements.
[13] Therefore, the application will be allowed in respect of these requirements.
(b) Tax Planning Requirements
[14] The applicants argue that the Tax Planning Requirements should be quashed because the Requirements only seek tax planning information, and that information is irrelevant to the issue of whether any of the transactions under investigation are avoidance transactions as defined in subsection 245(3) of the Act.
[15] More particularly, the applicants say that a requirement to provide information under section 231.2 of the Act is valid only if it is issued for a purpose related to the administration or enforcement of the Act. See: James Richardson & Sons Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 614 at page 623; AGT Limited. v. Canada (Attorney General), [1997] 2 FC 878 (CA), leave to appeal to the Supreme Court of Canada denied [1997] SCC No 314.
[16] The applicants assert that while the Tax Planning Requirements were issued to determine if the reorganization is an avoidance transaction as described in subsection 245(3) of the Act, the purpose test contained in subsection 245(3) is objective, not subjective. See: OSFC Holdings Ltd. v. The Queen, 2001 FCA 260 at paragraph 46, leave to appeal to the Supreme Court of Canada refused [2001] SCC No. 522; The Queen v. Canadian Pacific Limited, 2001 FCA 398 at paragraph 16.
[17] Therefore, the applicants say that GAAR's applicability depends upon objective criteria and not upon the thoughts of a particular taxpayer. If it were otherwise, identical transactions and circumstances could lead to different tax results, depending solely upon the thoughts of a taxpayer. It is said that GAAR is not about thought, but rather applies equally whether a taxpayer consulted a tax lawyer or took no advice at all. It follows, it is said, that the tax planning information requested in the Requirements cannot be relevant.
[18] Moreover, the applicants say that by making imprisonment a potential consequence of the failure to comply with a requirement issued pursuant to section 231.2 of the Act, Parliament indicated its intention that such a requirement is to be issued sparingly and judiciously, and only where there is a purpose related to the administration or enforcement of the Act. Examining a taxpayer's thoughts is not such a purpose.
[19] In response to those submissions, the Minister says that, first, in order for a requirement issued under subsection 231.2(1) to be valid, it is not necessary that the information or documents requested be relevant for a particular issue. Second, the Minister says that the purpose of the Tax Planning Requirements was not merely to determine whether the transactions in the reorganization are avoidance transactions as defined in subsection 245(3) of the Act.
[20] Proper consideration of these submissions begins with subsection 231.2(1) of the Act which provides that the Minister may issue a requirement under this section "for any purpose related to the administration or enforcement of this Act".
[21] The scope of the Minister's power under the predecessor to this subsection was considered by the Supreme Court of Canada in James Richardson & Sons, supra, where it was determined that the scope of the Minister's power was not so broad as would appear on the face of the provision. Justice Wilson, writing for the Court at pages 622 and 623, wrote as follows:
The language of s. 231(3) of the Income Tax Act is unquestionably very broad and on its face would cover any demand for information made to anyone having knowledge of someone else's affairs relevant to that other person's tax liability. It would, in other words, if construed broadly, authorize an exploratory sortie into any taxpayer's affairs and require anyone having anything to contribute to the exploration to participate. It would not be necessary for the Minister to suspect non-compliance with the Act, let alone to have reasonable and probably grounds to believe that the Act was being violated as required in s. 231(4). Provided the information sought had a bearing (or perhaps even could conceivably have a bearing) on a taxpayer's tax liability it could be called for under the subsection.
The Canadian Bank of Commerce case, however, makes it clear that the subsection is not to be construed that broadly. It establishes through the majority judgment written by Mr. Justice Cartwright (as he then was) that:
(a) the test of whether the Minister is acting for a purpose specified in the Act is an objective one and has to be decided on the proper interpretation of the subsection and its application to the circumstances disclosed;
(b) the obtaining of information relevant to the tax liability of some specific person or persons whose liability to tax is under investigation is a purpose related to the administration or enforcement of the Act;
(c) it is not necessary that the person from whom the information is sought be one whose liability to tax is under investigation;
(d) the fact that the giving of the information may disclose private transactions involving persons who are not under investigation and may not be liable to tax does not invalidate the requirement.
[22] Justice Wilson went on, at page 624, to further clarify that a prerequisite to the statutory purpose is that someone's tax liability be the subject of investigation.
[23] This decision was referred to with approval by the Supreme Court of Canada in R. v. McKinlay Transport Limited, [1990] 1 S.C.R. 627, where the Court upheld the constitutionality of the predecessor to section 231.2. There, Justice Wilson, writing for the majority, observed at paragraph 38 that:
In my opinion, subsection 231(3) provides the least intrusive means by which effective monitoring of compliance with the Income Tax Act can be effected. It involves no invasion of a taxpayer's home or business premises. It simply calls for the production of records which may be relevant to the filing of an income tax return. A taxpayer's privacy interest with regard to these documents vis-a-vis the Minister is relatively low. The Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them. At the same time, the taxpayer's privacy interest is protected as much as possible since section 241 of the Act protects the taxpayer from disclosure of his records or the information contained therein to other persons or agencies.
[underlining added]
[24] In her analysis, Justice Wilson concluded, at paragraph 36, that the criteria established in the criminal context to be met in order for a search to be reasonable were not applicable to regulatory provisions under the Act. In particular, Justice Wilson found no requirement that there be reasonable grounds to believe that a requirement will lead to disclosure of something related to a particular assessment, or that only documents strictly relevant to the assessment may be authorized to be seized.
[25] In AGT Ltd. v. Canada (Attorney General), [1996] 3 FC 505 (TD) Justice Rothstein, as he then was, considered the validity and enforceability of notices of requirements issued under subsection 231.2 (1) of the Act in circumstances where, among others, it was asserted by the taxpayer that much of the information sought by the Minister was irrelevant and where there were admissions in the cross-examination of the Minister's deponent to that effect. Justice Rothstein summarized the guiding principles with respect to subsection 231.2(1) as follows, at paragraph 17:
Having considered Richardson and McKinlay, I conclude:
1. The expectation of privacy in relation to business records is relatively low.
2. As long as the Minister's purpose is related to the administration and enforcement of the Income Tax Act, relevance of the material sought to a particular issue is not a prerequisite to a requirements notice under subsection 231.2(1).
3. Documents may be compelled even if they are not required to be prepared or kept under the Income Tax Act.
4. It is not necessary that a requirements notice set out the grounds or particulars for which the documents sought are required.
5. As long as the documents pertain to a genuine inquiry into the tax liability of a person, they may be the subject of a requirements notice under subsection 231.2(1).
[underlining added]
[26] Justice Rothstein's decision was upheld by the Federal Court of Appeal, [1997] 2 F.C. 878. At paragraphs 23 and 24 of that decision, Justice Desjardins for the Court wrote:
Under the Income Tax Act, the Minister is concerned with verifying the tax liability of the taxpayer which is first revealed in the taxpayer's return. It will often be "impossible to determine from the face of the return whether any impropriety has occurred in its preparation". Because of the nature of the conduct regulated by the Income Tax Act, there are, in many cases, no ways of determining whether proscribed conduct has been engaged in, short of studying the process by which a suspected corporation or business has made and implemented its decision. Investigatory mechanisms which force corporations and other businesses to divulge what they and only they can know about their internal affairs are part of the state's interest in the enforcement of the Act.
While an individual or a corporation's interest in having business strategies kept in confidence is recognized, the balancing no doubt favours the state. Wilson J. in McKinlay recognizes that the "Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them". There is an ultimate safeguard. Not all of those documents are necessarily admissible against the taxpayer in a court of law or in another proceeding. Only those in accord with the rules of evidence shall be admissible.
[underlining added]
[27] I accept that from this jurisprudence the following principles emerge:
i) The determination of a taxpayer's tax liability is a purpose related to the administration and enforcement of the Act.
ii) In order for a requirement to produce records to be valid, the Minister need not show the records will be relevant, he need merely show the records requested may be relevant.
iii) Relevance is tested by determining whether the particular record requested may be relevant in the determination of a taxpayer's tax liability and not whether the particular record requested is relevant with respect to a particular issue under audit.
[28] It follows, in my view, that even if the sole purpose of the Requirements was to determine whether there was an avoidance transaction, this does not impair the validity of the Requirements. Relevance to a particular issue is not a prerequisite, it is sufficient that the material may be relevant to the determination of a taxpayers' tax liability.
[29] Here, the Tax Planning Requirements were served upon a director, officer or agent for the audit subjects, and the tax planning documents sought pertain to their tax liability.
[30] Moreover, while without doubt the purpose test found in subsection 245(3) of the Act is objective, that does not necessarily make irrelevant the factual matrix which led to the transactions at issue, or preclude evidence as to what motivated certain actions. In applying the purpose test, the Court will look to all of the relevant facts and circumstances, determining intent at the time the transactions in question were carried out. Looking to what a party expected to receive from a transaction may be relevant, and a comparison of the amount of the estimated tax benefit to the estimated business earnings may be helpful. See, for example, the comments of the Federal Court of Appeal in OSFC Holdings, supra, at paragraph 58.
[31] By way of further example, in Duncan v. Canada [appeal by Water's Edge Village Estates (Phase II) Limited] 2002 FCA 291, when considering whether the impugned transactions reasonably could be considered to have been undertaken primarily for a purpose other than to obtain a tax benefit, the Federal Court of Appeal had regard to the taxpayers' evidence as to their motivations and to the findings of fact made below with respect to that evidence. This evidence of motive was not excluded or considered irrelevant or inadmissible.
[32] Therefore, I am not satisfied that tax planning information is per se irrelevant to a proper subsection 245(3) analysis. In any event, even if such information is in the end found not to be relevant, as Justice Desjardins noted for the Federal Court of Appeal in AGT Ltd., supra, the ultimate safeguard is that the documents are not necessarily admissible against the taxpayers in another proceeding.
[33] For these reasons, the application as it relates to the Tax Planning Requirements will be dismissed.
CONCLUSION
[34] The application is allowed with respect to the Sales Strategy Memorandum Requirements and dismissed in respect of the Tax Planning Requirements.
[35] To the extent the applicants have been unsuccessful, they request in the alternative a declaration that they are not required to produce any documents determined by the Supreme Court of British Columbia to be subject to solicitor-client privilege. In my view, such declaration is unnecessary. Counsel for the Minister confirmed that the Minister will await the result of that proceeding in respect of documents for which a claim for solicitor-client privilege is advanced.
[36] As for the costs of the proceedings in this Court, both the applicants and the respondent seek costs. As success was divided in that some of the requirements were quashed while others were not, I find it appropriate that the parties bear their own costs. There will be no award of costs.
ORDER
[37] THIS COURT HEREBY ORDERS THAT:
1. The Sale Strategy Memorandum Requirements directed to provision of the Sale Strategy memorandum referred to in certain invoices issued by Fraser & Beatty are hereby quashed.
2. The application as it relates to the Tax Planning Requirements is dismissed.
3. No costs are awarded.
(Sgd.) "Eleanor R. Dawson"
Judge
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-510-02
STYLE OF CAUSE: Fraser Milner Casgrain LLP et al. v. MNR
PLACE OF HEARING: Vancouver, BC
DATE OF HEARING: August 15, 2002
REASONS FOR ORDER AND ORDER : DAWSON J.
DATED: August 26, 2002
APPEARANCES:
Mr. Gordon Funt FOR APPLICANTS
Ms. Lori Mathison
Mr. Robert Carvalho FOR RESPONDENT
SOLICITORS OF RECORD:
Fraser Milner Casgrain FOR APPLICANTS
Vancouver
Morris Rosenberg FOR RESPONDENT
Deputy Attorney General of Canada