An out-of-court statement is generally inadmissible as evidence in court to prove the truth of the statement’s contents – this is the general rule against hearsay.  There are a number of exceptions to this rule including an admission – where a party wishes to use a statement made by the opposing party against that opposing party.  An admission is admissible as evidence of the contents of that admission.  Where that opposing party’s agent makes such a statement, it is also admissible as evidence of the truth of its contents.  The recent decision in Spears et al. (2016 NSPC 20) stands for the proposition that a taxpayer’s accountant’s statement to CRA can be admitted as evidence for the truth of its contents.  This is an important case for business-owners who rely on their accountants to deal with the CRA on behalf of the business.

Spears is a procedural decision in a Nova Scotia criminal proceeding against the taxpayer under paragraph 327(1)(c) of the Excise Tax Act for wilful or attempted evasion of compliance with GST legislation or payment/remittance of GST.  Details of the offence were not included in the judgment; however, it appears that the corporate defendant, a framing company, had a significant unpaid GST/HST balance.  The defendant submitted an RC59 form to CRA making an accountant (who was not an employee of the defendant) the defendant’s “authorized representative”.  The accountant allegedly made certain statements to CRA that CRA wished to use as evidence for the truth of their contents in the criminal proceedings, to which the taxpayer objected.   

The central issue was whether the accountant was acting as agent for the defendant when she made the particular statements.  The Minister argued that she was acting as the defendant’s agent, while the defendant argued that she was not an agent because she was an independent contractor. 

The Court noted that there was no bright line precluding an independent contractor from having agency powers from the party who had engaged the contractor’s services.  Although the accountant did not enjoy the broadest range of agency powers such as power to contract on behalf of the taxpayer or assume liability for its debts, this was not determinative of whether she acted as agent in making the particular statements to CRA.  Similarly, the lack of express authorization to make the statements to CRA did not imply that an agency authorization did not exist.  The court cited authority that noted that it would be rare to find such express authority for these types of statements.

The court ultimately concluded that the accountant was acting as agent of the defendant in making the statements, such that the statements were admissible as evidence in the criminal proceeding for the truth of their contents. Supporting factors the court cited included the fact that the accountant was heavily involved with CRA on the defendant’s behalf, including signing and filing GST/HST returns and routinely speaking with CRA officials when they called about the defendant (even after the defendant had ceased active operations). 

This decision suggests that where an accountant or other professional advisor (including a lawyer) is dealing with tax authorities regarding a taxpayer’s affairs, the information provided by the professional may bind the taxpayer and be used against that taxpayer as evidence of the statement’s contents.  The court acknowledged that this is a fact-driven analysis, which suggests that a professional retained by the taxpayer will not always be considered an agent of the taxpayer.  That said, owner-managed businesses tend to have arrangements with outside accountants and other professionals similar to that between the defendant and the accountant in this case – namely, the accountant is responsible for filing returns and dealing with CRA on the business’ behalf.  Accordingly, we expect that statements made by accountants for owner-managed businesses will typically be admissible as evidence of their contents.  Lawyers making similar statement should be even more careful, as lawyers are generally viewed as even higher placed agents for their clients.

The finding of an agency relationship here is probably correct on these facts.  The accountant was the exclusive person dealing with CRA on behalf of the taxpayer (including signing off on returns), and a conclusion of implied agency relationship seemed appropriate. 

That said, and in our view, the mere fact that an accountant or other professional is dealing with the CRA on behalf of a taxpayer (even where signing the returns) ought not always imply that the statements made by the accountant should be admissible for the truth of their contents.  The extent to which the accountant truly has knowledge of the taxpayer’s business operations and the actual content of the statements themselves should be key factors when the court conducts its “fact-driven” analysis.

The main takeaway here is that businesses must ensure that they have competent and knowledgeable professionals handling tax matters on their behalf.  Where business-owners and managers leave their tax matters exclusively up to their hired professionals, they ought to beware that those professionals’ statements could be used as evidence against them in court proceedings.

* A version of this article appeared in the July 2016 edition of Tax for the Owner-Manager.