In our previous blog, we discussed the Federal Court of Appeal’s decision in Canada v. Cameco Corporation (“Cameco”) which considered the CRA’s broad audit powers in paragraph 231.1(1)(a) of the Income Tax Act (“ITA”) (and/or 286 of the Excise Tax Act(“ETA”)), ultimately holding that a request for oral interviews was outside of the scope of those powers. Recently, the Federal Court (the “FC”) in Canada (National Revenue) v. Miller (“Miller”) considered the Cameco decision and the same ITA provisions but this time with respect to CRA’s use of Requests for Information (“RFIs”) to compel taxpayers to provide information that ought to be in the taxpayer’s books and records – even if it was not recorded/diarized there. In Miller, the FC upheld the CRA’s use of RFIs as within the scope of legislation, and issued a compliance order.

Background

On the facts, Mr. Miller was a consultant who worked for several foreign companies, including Casala Limited (“Casala”) and received payment via his Luxembourg bank account.

The CRA began auditing Mr. Miller in 2016, eventually auditing his personal income tax for 2007 – 2016. During the course of the audit the CRA requested numerous documents from Mr. Miller, and issued an RFI requesting, inter alia: (1) copies of the contract between Mr. Miller and Casala, (2) invoices issued to Casala, (3) a detailed schedule outling the compensation received from Casala; and (4) copies of Mr. Miller’s Luxembourg bank statements.

Mr. Miller generally had no written records with respect to items 1 and 2, refused to provide a detailed schedule of compensation for item 3, and alleged he was unable to travel to Luxembourg in person to obtain the bank statements for item 4 due to COVID.

The CRA viewed Mr. Miller’s answers as non-responsive and had the Department of Justice apply to the FC for a compliance order under subsection 231.7(1) of the ITA on the basis that the information requested “should be” in Mr. Miller’s books and records per 231.1(1)(a).

Mr. Miller alleged that since the documents requested for items 1, 3, and 4 did not exist, he had responded to the CRA’s request sufficiently. Mr. Miller further argued generally that under Cameco the CRA was not authorized to compel him to present this information.

The Decision

The FC disagreed with Mr. Miller and generally granted the CRA’s compliance order on the basis that subsection 231.1(1) protects minister’s ability to conduct audit by ensuring access to information.

With respect to items 1 and 2, the FC indicated at paragraph 37 that “a taxpayer can be expected to maintain contracts and invoices regarding the source, terms and conditions, and quantum of income derived from its business. Such information is or should be documented in the taxpayer’s books or records.” Accordingly, the CRA was entitled to any information in Mr. Millar’s knowledge regarding the contract and invoices, even if the contract was unwritten and the invoices did not exist.

With respect to item 3 the FC stated at paragraph 50 that “a taxpayer is required to exercise reasonable efforts to obtain and provide to the Minister information and documentation that should be in its books and records” including the detailed schedule of compensation requested.

Similarly, with respect to item 4, while the FC agreed that Mr. Miller could not be compelled to travel to Luxembourg, the FC indicated at paragraph 60 that the Minister is not precluded from requiring “Mr. Miller to pursue the Luxembourg bank and attempt to access the documentation electronically from Canada”.

That said, the FC clarified that their order should not be seen as suggesting that Mr. Miller was required to respond to CRA by way of a sworn affidavit, given such requirement had been specifically removed from the legislation in 1986.

Commentary

While most taxpayers are aware of the CRA’s power to issue RFIs during the course of an audit, very few are aware that the RFI power extends to inspecting, auditing, or examining any document that “relates or may relate to the information that is or should be in the books or records of the taxpayer” under either ITA 231.1(1)or ETA 288(1).

Practically this means that a taxpayer who answers that they “do not have” the requested document may not be sufficient if that inforamtion should have been in their books and records. This represents a real risk for taxpayers because CRA auditors can be like a “dog with a bone” with these types of requests, and the CRA is willing to pursue RFIs by way of compliance orders until they get the information they want. Anyone receiving an RFI from the CRA should consider engaging a tax practitioner to assist with their response.

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