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Commercial Contractors: Beware CRA Fishing Expeditions!

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An oft-forgotten power of the CRA is its ability to issue a Requirement for Information (“RFI”) which compels a third party to turn over evidence which the CRA can use to determine if another taxpayer has met its obligations under the Canada’s tax laws. This power also extends to “unnamed” persons, where the CRA does not know the exact identity of who may be in violation of the law but knows that the third party possesses information on that person. In this “unnamed” person situation, the CRA must obtain court approval before they issue the RFI.

A recent case before the Federal Court dealt with this very issue.

In Minister (National Revenue) v Roofmart Ontario Inc, 2019 FC 506, the CRA brought forward an application to require the titular Roofmart Ontario Inc. (“Roofmart”), which operated roofing materials stores across the country, to disclose their customers’ information. The CRA’s objective was to gain information about residential and commercial construction contractors who may not have been complying with their tax obligations.

Specifically, the CRA wanted access to the contact details, banking information, and itemized transaction details for all Roofmart customers who either made total annual purchases of $10,000 or more between January 2018 and June 2018 or made total annual purchases of $20,000 or more between January 2015 to June 2018.

Roofmart opposed the application.

Sections 231.2(3) and 289(3) of the Income Tax Act (“ITA”) and Excise Tax Act (“ETA”), respectively, allow the Minister of National Revenue to bring an application to the federal court to require a person to disclose information and documents related to an ‘unnamed person’ or a group of ‘unnamed persons’ for the purposes of assessing their compliance with their obligations under either Act.

In order to evaluate the merit of the application, the judge must then consider if the unnamed person or group is ‘ascertainable’ and that the requirement is made to verify that person or group’s compliance with the Acts.

Whether or not the unnamed person or group is ‘ascertainable’ is the big sticking point. Essentially, the court has to evaluate whether the unnamed person or group in the Minister’s application is sufficiently distinguishable from all of the information possessed by the third party (in this case, Roofmart). This is to prevent the CRA from going on an open-ended “fishing expedition” in an attempt to stumble upon evidence relevant to whether a person or group has obeyed Canada’s tax laws.

This “fishing expedition” problem was an issue in Canada (National Revenue) v Hydro-Québec, 2018 FC 622. There, the federal court was asked to rule on whether the CRA’s RFI of unnamed “business customers” of Hydro-Québec met the conditions as set out in the Acts. The court denied the CRA’s application on the basis that the application did not contain any means to distinguish between “business customers” and the rest of Hydro-Québec’s 4.3 million customers and the information requested (billing start dates, end dates, late penalties on the accounts, etc.) had no connection to information that could be used to verify whether they had complied with their duties under the Acts.

In the current case, the court found in favour of the CRA because the total annual purchase amounts set out in the application were sufficient to distinguish the target group of residential and commercial contractors from among Roofmart’s other customers.

The big picture issue here is that the CRA has determined that many commercial contractors are cash-based businesses which operate in the underground economy. The CRA uses information gained from businesses like Roofmart to match purchases to the records of contractors to see if they accurately reflect the contractor’s taxable income. Ultimately, there is no better time to consult a tax lawyer to discuss issues in this area than now, since the CRA still permits voluntary disclosures in certain situations to disclose past tax liability, allowing contractors to start over with a clean slate.

Do you require assistance in this area? If so, click here.

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