Federal Court of Appeal Decisions

Date: 20071102

Docket: A-435-06

Citation: 2007 FCA 346

 

CORAM:       LÉTOURNEAU J.A.

                        PELLETIER J.A.

                        TRUDEL J.A.

 

BETWEEN:

MINISTER OF NATIONAL REVENUE

Appellant

and

GREATER MONTRÉAL REAL ESTATE BOARD

Respondent

 

 

 

 

Hearing held at Montréal, Quebec, on October 9, 2007.

Judgment delivered at Ottawa, Ontario, on November 2, 2007.

 

 

REASONS FOR JUDGMENT BY:                                                                              TRUDEL J.A.

CONCURRED IN BY:                                                                                       LÉTOURNEAU J.A.

                                                                                                                       PELLETIER J.A.

 

 

 

Date: 20071102

Docket: A-435-06

Citation: 2007 FCA 346

 

CORAM:       LÉTOURNEAU J.A.

                        PELLETIER J.A.

                        TRUDEL J.A.

 

BETWEEN:

MINISTER OF NATIONAL REVENUE

Appellant

and

GREATER MONTRÉAL REAL ESTATE BOARD

Respondent

 

 

 

REASONS FOR JUDGMENT

 

TRUDEL J.A.

The facts and the proceeding

[1]               The Minister of National Revenue (MNR) is appealing a decision by Madam Justice Johanne Gauthier (the judge) dated September 6, 2006. This decision set aside an earlier order dated June 28, 2005, which was made ex parte under subsection 232.2(3) of the Income Tax Act, R.S.C. 1985 (5th supp.), c. 1 (the Act). That order authorized the MNR to impose a requirement on the Greater Montréal Real Estate Board (the GMREB) to provide information and documents relating to a group of unnamed taxpayers.

 

[2]               The GMREB is a non-profit organization whose primary mission is to promote and protect the professional interests of its members. In the course of operating an inter-agency service, it collects various information about its members and the properties they are selling.

 

[3]               In the autumn of 2004, the Canada Customs and Revenue Agency serving the Montérégie/Rive-sud area set out to verify whether the real estate agents and licensed brokers living or carrying on business in that area were complying with the Act. This investigation was intended to determine, inter alia, whether the agents and brokers had completed their income tax returns properly and whether they had reported the commissions they had earned.

 

[4]               In order to carry out this investigation relating to the administration and enforcement of the Act, the MNR required authorization from a judge under subsection 231.2(3). Section 231.2 states:

 

[5]               This provision clearly states that the ex parte order will be made if the person or group referred to is ascertainable and if the information or documents are required to verify compliance with any duty or obligation under the Act.

 

[6]               In the order at issue, the judge upheld her initial finding that the group referred to by the MNR in its ex parte application constituted an ascertainable group within the meaning of paragraph 231.2(3)(a). She also set aside her previous order and determined that the “Minister has not established that, at this stage of the project, the request for information is intended to determine whether each and every one of the GMREB members (real estate agents and brokers) has complied with the Act by reporting all of their income”: paragraph 58 of the order.

 

The issues

[7]               The analysis of section 231.2 of the Act and its application to the facts of this case are at the heart of the dispute, as evidenced by the parties’ submissions. The MNR contends that the first judgment is erroneous in that the judge found that there was no “genuine and serious inquiry” about the agents and brokers referred to in the request for information. For its part, the GMREB argues that the judge erred in finding that the group was ascertainable.

 

[8]               I therefore propose to examine each of the issues beginning with the GMREB’s submission.

 

The identifiable group

[9]               The judge was correct in finding that the group referred to in the application was ascertainable under paragraph 231.2(3)(a) of the Act.

 

[10]           The GMREB argues that a group is ascertainable when the persons in the group have done something specific together in the pursuit of a common objective, which is not the case here [TRANSLATION] “because there is no reason to believe that there is a common link related to the administration of the Act”: respondent’s memorandum, paragraph 52. The GMREB refers to the decisions in: Canada (M.N.R.) v. National Foundation for Christian Leadership, 2004 FC 1753 (appeal dismissed: 2005 FCA 246), [Christian Leadership]; Artistic Ideas Inc. v. Canada (Customs and Revenue Agency), 2005 FCA 68, [Artistic Ideas]; M.N.R. v. Sand Exploration Ltd. et al., [1995] 3 FC 44, [Sand Exploration]; and Fédération des caisses populaires Desjardins du Québec, No: 200-00-000001-94, [1997] 2 C.T.C. 159 (Sup. Ct.), [Fédération des caisses].

 

[11]           These judgments are of no assistance in this case and do not support the GMREB’s position on “ascertainable group”. The reasons in these cases must be read with caution, bearing in mind the particular context of the legislation in effect at the time they were written since section 231.2 of the Act was significantly amended in 1996. The other legislative provisions on which the reasons were based must also be considered.

 

[12]           Accordingly, in Fédération des caisses, the MNR made an arbitrary identification based on the nature of the transactions and not on the persons making those transactions. In that case, the individuals or companies had transferred sums of money out of Canada through the Fédération or one of the Caisses affiliated with it for a given period. This case required the analysis of section 231.2 prior to its amendment.

 

[13]           In Artistic Ideas, our Court authorized the MNR to obtain the names of charitable organizations involved in “art flips” under subsection 231.2(1), not subsections (2) or (3). The Court ruled that there was no evidence that the MNR wanted to obtain the names of the charities to verify their compliance with the Act. In fact, their names were necessary solely for the Minister’s investigation of the third party Artistic Ideas.

 

[14]           The Sand Exploration and Christian Leadership cases also do not support GMREB’s argument that the pursuit of a common objective is a prerequisite for a group to be ascertainable.

 

[15]           Last, the GMREB contends that the group is not ascertainable because it numbers close to 2,000 people: respondent’s memorandum, paragraph 52. This argument is not convincing. In All Saints Greek Orthodox Church v. Canada (MNR), 2006 FC 374, at least 1300 donors made up the ascertainable group within the meaning of the Act.

 

[16]           In this case, the audit involves the group composed of real estate agents and brokers living or carrying on business in the area served by the Canada Revenue Agency’s Montérégie/Rive-Sud Tax Services Office. Gauthier J. correctly concluded that this was an ascertainable group for purposes of section 231.2 of the Act.

 

[17]           I will now deal with the arguments about a genuine and serious inquiry.

 

The genuine and serious inquiry

[18]           The judge accepted the GMREB’s submission that the MNR was not conducting a genuine and serious inquiry about one or more individuals in the identified group. She ruled that a genuine and serious inquiry was a condition precedent for judicial authorization under subsection 231.2(3) of the Act.

 

[19]           The judge suggested that any new application for authorization by the MNR would have to specify “that a genuine audit is under way in regard to each and every one of the members of this group and not only an investigation or project aimed at selecting the members of the group who are to be audited later”: paragraph 59 of the order. Consequently, she was not satisfied with the evidence, ruling that the MNR was only conducting an audit project, and she set aside her previous order, concluding that there was no genuine and serious inquiry.

 

[20]           The statutory provision under review does not mention “genuine and serious inquiry.” This expression, which originated in The Canadian Bank of Commerce v. The Attorney General of Canada, [1962] S.C.R. 729, [Canadian Bank of Commerce] and resulted from a simple admission by the parties (ibidem, p. 733), has since been repeated and argued as if it were an established legal principle.

 

[21]           In my view, whether a “genuine and serious inquiry” exists is not the appropriate test in considering an application under subsection 231.2(3) of the Act. The question is not whether the MNR began a genuine and serious inquiry, let alone one involving every unnamed person of the group. Rather the question is: was the applications judge satisfied that the information or documents relating to one or more unnamed persons (forming an ascertainable group) was required to verify compliance with the Act?

 

The Richardson and Canadian Bank of Commerce decisions

[22]           Over the years, the provision under review has been the subject of legislative amendments that must be borne in mind when analyzing the cases cited by the parties to support their arguments. I will spend more time discussing Richardson (James Richardson & Sons) v. the Department of National Revenue, [1984] 1 S.C.R. 614, [Richardson], which, together with Canadian Bank of Commerce, is cited as the leading case on the concept of serious and genuine inquiry.

 

[23]           In Richardson, the Supreme Court of Canada reviewed the facts in light of section 231 of the Act [1970-71-72 (Can.), c. 63]; the relevant parts at that time read as follows:

 

The section referred to the commission of a violation and authorized certain persons to enter and search for evidence of the violation.

 

[24]           In that case, the MNR had decided that it was necessary to verify whether traders in the commodities futures market were complying with the Act. In order to do so, the Minister had asked Richardson to provide its clients’ commodity monthly statements so that the information could be processed on a test basis. Richardson had supplied the information but with clients’ account numbers only and no means of identifying them. The MNR had asked for additional information, including a complete list of customers and personal information about them. Richardson had refused, alleging, inter alia, that the MNR’s demands were for “information returns respecting . . . [a] class of information” required in connection with assessments. Richardson added that these demands fell instead within the ambit of paragraph 221(1)(d) and section 233 of the Act, which provided:

 

[25]           Richardson was successful before the Supreme Court of Canada, which confirmed that a demand could only be made for information relative to the tax liability of a person or persons under the former subsection 231(3) of the Act if a genuine and serious inquiry was being conducted into the tax liability of such person or persons. The section did not authorize a general survey of compliance by a class of taxpayers. The MNR was invited to use paragraph 221(1)(d) to “obtain a regulation . . .  requiring all such traders to file returns of their transactions in the commodities futures market” (ibidem, p. 625).

 

[26]           The Richardson decision must be read and applied with caution. In Artistic Ideas, Mr. Justice Rothstein, writing for the Federal Court of Appeal, was reserved about Richardson and Bank of Commerce. Rothstein J.A. wrote:

[9]     …These authorities pre-date subsections 231.2(2) and (3), although it is apparent that their enactment was prompted, at least in part, by the Richardson case. While they provide useful background, the relevant legislation is different today than at the time of those decisions.

 

 

[27]           In fact, subsection 231.2(1), as it currently reads, is the former subsection 231(3) supra, to which, in 1986, Parliament added the terms “notwithstanding any other provision of this Act” and “subject to subsection 2”. This amendment to section 231.2 did not substantially change the earlier wording.

 

[28]           At the same time, Parliament added subsections 231.2(2) to (6), which, in 1995, led Rothstein J., as he then was, to state that compliance with the procedure in subsections 231(2) and (3) of the Act addressed the “mischief” identified in Richardson (Sand Exploration, supra).

[29]            I do not believe that Richardson and Canadian Bank of Commerce pose an obstacle to the MNR’s submission in this case. In Richardson, as I indicated earlier, the MNR requested information in order to process it on a test basis. Furthermore, the judgment in Canadian Bank of Commerce was premised on the fact, acknowledged by the parties, that the requirement in that case was made in good faith and that it involved a genuine and serious inquiry about specific persons. Mr. Justice Cartwright wrote on page 738:

… it appears to be common ground, (i) that the requirement addressed to the appellant relates to a genuine and serious inquiry into the tax liability of some specific person or persons …

 

[Emphasis added]

 

[30]           With respect, and unlike Madam Justice Wilson who wrote for the Court in Richardson, I do not believe that Cartwright J. thereby “makes it clear that his judgment is premised on that prerequisite being there” (ibidem, p. 624), that is, that the requirement must relate to a genuine and serious inquiry.

 

[31]           But there is more. Prior to 1996, subsection 231.2(3) of the Act required that the application for authorization be supported by information on oath addressing the following four conditions:

 

[32]           In 1996, the conditions in paragraphs (c) and (d) of subsection (3), i.e., reasonable grounds to believe that there has been non-compliance with the Act and the difficulty in obtaining the information otherwise, were repealed.

 

Section 231.2 of the Act currently in effect

[33]           According to the judge, the MNR had to establish that each and every one of the members of the GMREB identified in the application was the subject of a genuine and serious inquiry. Otherwise, the Minister was conducting a fishing expedition, which is prohibited by Richardson. I do not agree. This finding perpetuates the reasoning in Canadian Bank of Commerce and Richardson without distinguishing the facts of the case and the statutory provision currently in effect.

 

[34]           Generally, the MNR’s powers of investigation and audit in the Act are the consideration for a self-reporting and self-assessing tax system that depends upon the honesty and integrity of taxpayers for its success (R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627).

 

[35]           It is recognized that the audit powers in section 231.2 of the Act are an intrusive measure affecting the right to the protection of private information and must be construed restrictively (Sand Exploration, supra, p. 52).

 

[36]           These general principles are not being challenged, but it is nonetheless necessary to give meaning to the legislative amendments. Commenting on the 1995 Budget Papers, tax expert David M. Sherman wrote the following about the conditions in paragraphs (c) and (d):

These restrictions [231.2(3)(c) and (d)], which make it difficult for Revenue Canada to obtain timely information in order to verify compliance with the Act, are being eliminated. This proposed measure will improve Revenue Canada's ability to verify compliance with the self-assessment system with respect to transactions where no information reporting is required. [The Practitioner’s Income Tax Act, 32nd ed. (Toronto: Carswell, 2007)].

 

[37]           I believe that removing conditions (c) and (d) from the former subsection 231.2(3) shows Parliament’s intention to ease the MNR’s burden of proof in the sense suggested by tax expert Sherman because the MNR no longer has to establish reasonable grounds for believing that a violation has been committed or demonstrate that the information is not otherwise more readily available.

 

[38]           While I recognize that a strict interpretation is required, it must not have the effect of adding another condition to the provision—which occurs if we accept the respondent’s argument—that is, that the MNR must prove that he or she is conducting a genuine and serious inquiry relating to unnamed persons referred to in the application. Nor can the provision be interpreted in such a way as to re-insert the conditions in paragraphs (c) and (d).

 

[39]           Section 231.2 of the Act must be interpreted by considering all of its parts, including the headings and sub-headings, which are also part of the statute (Pierre-André Côté, The Interpretation of Legislation in Canada, 3rd ed. (Carswell: Scarborough, 2000) p. 79; R. v. Lucas, [1998] 1 S.C.R 439, 463). Headings may help to situate a provision within the general structure of the statute and determine the intention of Parliament.

 

[40]           What about section 231.2 of the Act? This section is found in Part XV of the Act, entitled “Administration and Enforcement,” under the heading “General”. Subsections 231.1(1) and 231.2(1) explicitly state that they are intended to be used for “the administration and enforcement” of the Act.

 

[41]           This general expression, which introduces the provision under consideration, allows us to situate section 231.2 of the Act in context; the section refers to the MNR’s audit powers, as opposed to its investigative powers. As the Supreme Court of Canada pointed out in R. v. Jarvis, [2002] 3 S.C.R. 757 at 761, “a distinction can be drawn between the audit and investigative powers” under the Act.

 

[42]           Administrative policy and interpretation, while not binding, can also be an important factor where there is doubt as to the meaning of legislation (R. v. Nowegijick, [1983] 1 S.C.R. 29). In the case before us, the respondent is relying on Information Circular IC71-14R3, entitled The Tax Audit, to establish that an “audit project” relating to certain members of the GMREB is not an audit within the meaning of the Act.

 

[43]           This argument is without merit. On the one hand, I find that there was, in this case, an audit within the meaning of the Act. On the other hand, the circular describes the role, policies and practices of the tax audit; the audit project is only one of the methods available to the MNR in its “selection of files for audit” process (ibidem).

 

[44]           In this case, the MNR asked the respondent to provide a list of its members in a given geographic area in order to compare the data with the information it already had. The fact that the MNR was just beginning the audit in no way precludes the application of paragraph 231.2(3)(b). Clearly, the MNR cannot argue that each and every one of the members were the subject of a “genuine and serious inquiry”, which was what the judge criticized: those members are still not identified. Imposing such a requirement on the MNR neutralizes the utility of subsections 231.2(2) and (3) of the Act, which permit, under judicial authorization, verification of the honesty of a tax return.

 

[45]           Regardless of what the GMREB says on this point, it appears to me that in removing paragraphs (c) and (d) from subsection 231.2(3), Parliament permitted a type of fishing expedition, with the authorization of the Court and on conditions prescribed by the Act, all for the purpose of facilitating the MNR’s access to information. It seems to me that the strict approach adopted by the judge in this case is not appropriate for the provision under review. This approach, borrowed from Richardson, was necessitated by the scope of the former statutory provision which, if interpreted too broadly, left open the possibility of abuse by tax enforcement officials (Sand Exploration, supra).

 

 

The applicable test

[46]           Despite its penal sanctions, the Act is essentially and primarily regulatory and administrative. The MNR’s audit powers, including the powers described in subsection 231.2(3), are necessary to achieve the objectives of the Act and to ensure compliance with it (McKinlay, supra; Thomson Newspaper Ltd. v. Canada (Director of Investigation and Research, Restrictive Trade Practices Commission, [1990] 1 S.C.R. 425).

 

[47]           In a tax system based on the principle of self-reporting and self-assessment, the MNR must be given broad powers to audit taxpayers’ returns and inspect all records that may be relevant to the preparation of these returns (Bisaillon et al v. The Queen, 99 D.T.C. 5695 (FCA)).

 

[48]           It follows from my reading of paragraph 231.2(3)(b) that the MNR’s ex parte application will be granted if the applications judge is satisfied that the information or documents are required for a tax audit conducted in good faith. This good faith guarantees that the MNR will act judiciously in the exercise of its audit power under section 231.2 to ensure the administration and enforcement of the Act.

 

[49]           Having thus defined the applicable test on an application for judicial authorization under subsection 231.2(3), it is my view, based on the MNR’s ex parte notice of application, supported by the affidavit of auditor Christiane E. Joly, that the tax audit in this case was conducted in good faith, that it had a genuine factual basis and that its objective was to ensure compliance with the Act.

 

[50]           In this case, the MNR received documents from the GMREB in March 2005 while auditing a real estate agent who was a member of the organization. Several months later came the ex parte application at issue involving certain unnamed members of the GMREB. The affidavit in support of the application expressly states the objective: [TRANSLATION] “to determine whether the brokers who earned commissions following the sale of immovable property complied with all the duties and obligations under the Act” (appeal book, p. 39). The MNR therefore satisfied the requirements in the Act and, more specifically, those in section 231.2.

 

[51]           Last, at the hearing and in the event that the Court were to find in favour of the MNR, counsel indicated that they had reached agreement on the method of exchange of documents and information. The MNR asks that this agreement be homologated. The Court cannot accede to this request because the agreement was not filed and the parties made no submissions about its contents.

 

 

 

 

 

 

 

 

 

 

[52]           Accordingly, I propose to allow the appeal and to set aside the order made by the Federal Court on September 6, 2005, with costs before both courts.

 

 

                                                                                                                  “Johanne Trudel”

 

 

“I concur.

     Gilles Létourneau J.A.”

 

“I concur.

     J.D. Denis Pelletier J.A.”

 

 

 

Certified true translation

Mary Jo Egan, LLB

 

 

 

FEDERAL COURT OF APPEAL

 

SOLICITORS OF RECORD

 

 

DOCKET:                                                                              A-435-06

 

STYLE OF CAUSE:                                                              MNR v. Greater Montréal Real Estate Board

 

PLACE OF HEARING:                                                        Montréal, Quebec

 

DATE OF HEARING:                                                          October 9, 2007

 

REASONS FOR JUDGMENT BY:                                     TRUDEL J.A.

 

CONCURRED IN BY:                                                         LÉTOURNEAU J.A.

                                                                                                PELLETIER J.A.

 

DATED:                                                                                 November 2, 2007

 

 

APPEARANCES:

 

Pierre Lamothe Maria-Grazia Bittichesu	FOR THE APPELLANT
Simon Grégoire François Morin	FOR THE RESPONDENT

 

 

SOLICITORS OF RECORD:

 

John H. Sims, Q.C. Deputy Attorney General of Canada	FOR THE APPELLANT
Borden Ladner Gervais LLP Montréal, Québec	FOR THE RESPONDENT