In Ghermezian v. MNR, 2023 FCA 183, the Federal Court of Appeal may have put the last nail in the coffin for taxpayers trying to dispute the broad reach of the CRA’s audit powers.
CRA’s Use of 3rd Party Requests for Information
The case revolved around the CRA’s Related Party Initiative, and the CRA’s issuance of various requests and requirements for information under section 231.1 of the Income Tax Act (and parallel provisions in section 289 of the Excise Tax Act (alternatively, the “RFIs” and the “Demands”, and the “ITA” and “ETA”).
The RFI’s were focused on extended members of the Ghermezian family and a related corporation (the “Appellants”) – well known as the family group owning the West Edmonton Mall, and a number of other commercial ventures.
The Ghermezian family attacked the CRA’s issuance of the Demands as overbroad, but all four arguments were rejected by the FCA:
- The FCA first rejected the argument that ITA section 231.1 required the CRA to physically attend at the taxpayer’s business premises to “inspect, audit or examine” the taxpayer’s books and records. Instead, the FCA confirmed the CRA’s long-standing practice of reviewing such documents remotely, stating that it would be “illogical” to require the CRA to physically attend at the taxpayer premises each time it wished to inspect documents.
- Next, the FCA rejected the Appellants’ argument that CRA was relying improperly on ITA 231.1 because the introductory wording in ITC 231.2 (e.g., “notwithstanding any other provision of this Act”) made that 231.2 paramount, and the only provision that could be applied. Instead, the FCA rules that while the two provisions overlapped, there was no conflict between them, allowing CRA to proceed as it did under section 231.1.
- Next, the FCA concluded that notwithstanding ITA 231.2’s requirement that taxpayers be afforded a “reasonable time” to satisfy RFI’s, the CRA’s 30-day dead-line met those requirements! The Appellants’ strong argument that this was not sufficient was, unfortunately, rejected because no evidence had been presented to substantiate their position.
- Finally, the FCA confirmed that no “prior judicial authorization” was needed for the application of ITA 231.2(2) even though many of the Demands appeared related to unnamed persons. The Appellants had argued that CRA’s Demands had a dual intention of auditing not only the Appellants but also a number of unnamed parties; nonetheless, the FCA relying on the Supreme Court’s decision in Redeemer Foundation, 2008 SCC 46, ruled that prior judicial authorization was not required. The purpose of the documents being requested was to verify compliance of the particular taxpayers under audit, even though third parties might ultimately be investigated.
The Bottom Line
The FCA’s decision in Ghermezian seems to confirm CRA’s broad RFI powers and the difficulty one will have in challenging them.
Most unfortunately, obtaining prior judicial authorization will only be required in situations where the sole purpose of the RFI is to verify compliance of the unnamed persons (e.g., a request to a bank).
This means that taxpayers under audit will have to expend even greater resources in responding to CRA inquiries and underscores that the best practice: when confronted with such CRA demands, immediately consult legal counsel to determine how best to proceed. We have found that it is often possible to speak with the CRA to narrow down the information request and to ensure a reasonable response time.