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Director Jailed for Ignoring Auditor

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All taxpayers under audit should be aware of both the scope and limitations of Canada Revenue Agency’s audit powers, as well as the consequence of failing to respond to a CRA Auditor’s valid request for documents or information.

The Federal Cout decisions in Canada v. Money Stop Ltd. (2013 FC 133), and Canada v. Money Stop Ltd. (2013 FC 684) are poignant reminders that ignoring the demands of a CRA auditor may land the Director(s) of the Corporation in prison!

Background

In 2011, a CRA Auditor was conducting an audit of The Money Stop Ltd. (the “Company”), and requested certain documents be provided by October 2011. Not having received the documents requested, the Auditor had Crown Counsel apply to the Federal Court for a compliance order under section 231.7 of the Income Tax Act, which was granted on February 6, 2012.

Although faced with a Federal Court order that the Company provide the CRA with the requested documents and information, nothing was provided. Following an application by CRA, on April 3, 2012 the Federal Court ordered that the Company appear for a contempt hearing.

The Company appeared through their representatives on July 3, 2012, and admitted they had failed to comply with the February 6, 2012 court order. The Federal Court gave the Company a further 30 days to comply with the order and provide six items of information, including, inter alia, the username and password for QuickBooks records previously provided, and corporate and personal bank statements.

Within that 30-day deadline, the Company provided some information, but the CRA filed evidence with the Federal Court that the Company had failed to provide much of the information, including the username and password for the QuickBooks records, and the personal bank statements.

The Federal Court held a sentencing hearing on January 29, 2013 at which the Company failed to appear, although the evidence indicated they were aware of the hearing date.

At the sentencing hearing, the CRA requested a $5,000 fine, and for the Director of the Company, Tel Sutherland, to be imprisoned until the remaining information was provided. The judge accepted the CRA’s submissions but allowed the corporation a further 30-days to provide the information in order to avoid penalties, and allowed the Director to provide further information to the Court if there was a reason the Corporation could not provide the information.

No further information was provided, and so the Federal Court issued a warrant for Mr. Sutherland’s arrest on April 15, 2013.

On June 17, 2013 the CRA informed the Federal Court that all outstanding pieces of information had been submitted. Accordingly, on June 19, 2013, Mr. Sutherland was ordered released, after just over two months in prison.

Takeaways

Compliance with Court orders is a critical part of the Canadian tax regime. As a result, taxpayers need to be aware of both their responsibility to comply and the consequences of a failure to do so.

Accordingly, it is never too early to get legal advice on the steps to take when interacting with revenue authorities!

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