Tax & Trade Blog
Serious consequences for failing to comply with CRA RFI
Special rules in the Excise Tax Act (“ETA”) provide the Canada Revenue Agency (“CRA”) with tools to request or require information for verification and administrative purposes. The CRA can send out a “requirement to provide information” – known as RFI – relating to the enforcement of Part IX of the ETA to a registrant or third party (section 289). Where the person refuses to comply with an RFI, the Minister may make an application to the Federal Court and obtain a “compliance order” and, if the person still fails to comply with the compliance Order and provide the information as ordered, the person can be subject to contempt of court penalties (section 289.1). (Note that there are parallel provisions under the Income Tax Act (“ITA”): see section 231.2(1) and section 231.7 of the ITA).
As shown in the recent federal court decision, Minister of National Revenue v. Chi (2018 FC 897), contempt of court is a serious offence and failure to properly respond to a CRA RFI can lead to substantial fines and/or imprisonment.
In Chi, the taxpayer was involved in an income tax audit. The CRA sent an RFI to the taxpayer, demanding, among others, banking records for three Hong Kong bank accounts that appeared to relate to the taxpayer. The taxpayer did not respond, and the CRA made an application to the Federal Court pursuant to section 231.7 of the ITA and obtained a compliance order from the court. When the taxpayer still did not provide the information stipulated in the compliance order, the Minister brought an ex parte motion to the Federal Court and obtained an order requiring the taxpayer attend a show-cause hearing regarding a possible charge for contempt of court.
At the hearing, the Court examined the three-part test for establishing civil contempt in the Prescott case, and found that the first two were met: the compliance order (1) stated clearly and unequivocally what should be done by the taxpayer and (2) the taxpayer had knowledge of the compliance order (as he was present at the original hearing and agreed to the terms of the compliance order sought by the Minister). The Court then proceeded to determine if the third part of the test applied (namely whether (3) the taxpayer was knowingly disobeying the compliance order).
Ultimately the Court rejected the taxpayer’s defences and concluded that he was knowingly disobeying the compliance order. The Court found that there was minimal efforts by the taxpayer to comply during the nine months between the date of the compliance order and the show-cause hearing (the taxpayer had only sent two short e-mails to HSBC asking for information, and failed to follow-up on same; he had not sought written confirmation from HSBC confirming that two of the HSBC accounts had been purged and did not produce evidence to support that he had requested information from the main branch of HSBC regarding the third HSBC account). The Court also noted that the taxpayer had only retained counsel the day prior to the show-cause hearing and certain other records that had been provided were provided very late.
In the result, the Court ordered the taxpayer to pay a fine of $2,000 and the Minister’s costs in the amount of $3,500, and to comply with the remaining aspects of the compliance order – or face a further 15 days’ imprisonment.
As illustrated in Chi, a person who receives an RFI from CRA needs to treat the request extremely seriously. If the CRA is not provided what it wants on a timely basis, or is not satisfied with the person’s level of attention or information, the CRA can escalate matters extremely quickly, and to the taxpayer’s overall detriment.
Where legitimate issues exist with trying to respond to a CRA RFI – e.g., whether the information exists, whether it is protected from disclosure by solicitor-client and/or other privilege – it is advisable to seek legal assistance.
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