The recent Federal Court decision in Canada (National Revenue) v. Hydro-Québec, 2018 FC 622 made a strong statement against an interpretation of the CRA’s powers that would allow virtually unlimited invasions of taxpayer privacy. The decision considered the scope of the CRA’s power to compel information about unnamed taxpayers from third parties under section 231.2 of the Income Tax Act (and the analogous section 289 of the Excise Tax Act). In this context, the decision held that the Court will both strictly interpret the CRA’s powers, and exercise its discretion in appropriate cases, to protect taxpayers from unjustified intrusions by the government and to prevent abusive “fishing expeditions”.
Under the Income Tax Act, the CRA has the power to compel information about a named taxpayer from the taxpayer directly or from third parties. However, where the CRA seeks to compel information from a third party about unidentified taxpayers, the CRA needs prior judicial authorization. Under subsection 231.2(3), the Court can authorize the CRA’s demand where the unnamed person or group is ascertainable and the purpose of collecting the information is to verify the taxpayer’s or group’s compliance with tax obligations.
In this case, the CRA sought to obtain from Hydro-Québec a list of all of its “business customers”, including their names, addresses, and certain other details. Hydro-Québec was not opposed to providing the information, but the court found this to be irrelevant since it was the business customers, not Hydro-Québec, who were the targets of the CRA’s inquiries, and these unnamed persons were not represented. Accordingly, it was up to the Court to consider their interests.
The Court found that the CRA’s request did not meet the requirements of section 231.2, both because the business customers of Hydro-Quebec do not constitute an ascertainable group, and because the information sought did not pertain to compliance with tax laws. First, the group was not ascertainable because it was not identified by any characteristic relevant to tax compliance. The CRA did not demonstrate that it was conducting a tax audit in good faith and with a genuine factual basis, as required by the case law; rather, the CRA was in a preliminary stage of trying to determine who should be audited. Second, the information sought – names and contact information for accounts Hydro-Québec classifies as “business customers” – was beyond the scope of section 231.2. This information in itself has no connection to compliance with any tax laws.
Further, the judge held that even if these requirements had been met, the Court would exercise its discretion to refuse the order sought by the CRA. The judge reviewed the case law on subsection 231.2(3), in which the courts have consistently expressed concerns about protecting against abusive state action that would violate taxpayers’ right to be free from unreasonable search and seizure under section 8 of the Charter. In this case, there would be a considerable invasion of privacy in light of the number of people indiscriminately targeted, the fact that the information sought was in the form of an electronic database, and the fact that there would be no restriction on the CRA’s use of the information. The Court found this to be an appropriate case in which to exercise its discretion to refuse the authorization sought by the CRA.
This case highlights the CRA’s attempt to construe its powers in the broadest possible terms. The Court found the CRA’s request was “a full-fledged fishing expedition”, of “unprecedented magnitude”, of “practically unlimited scope” and “a complete lack of consideration for the invasion of privacy and the consequences for all taxpayers involved in the request.” Not only did the CRA interpret its own powers in s. 231.2(3) as practically limitless, but its interpretation of the Court’s discretion was so narrow as to render the judicial involvement useless, making the protection of taxpayers “deceptive in practice”.
The force with which the Court rejected the self-serving interpretation advanced by the CRA should be encouraging for taxpayers. The case serves as an important reminder that despite its considerable powers, the CRA is not entitled to act outside the bounds of law and it is the courts, not the CRA, that interpret the law.