In Zeifmans LLP v. MNR, 2021 FC 363, the Federal Court considered whether a requirement for information regarding unnamed persons issued to an accounting firm was properly made under section 231.2 of the Income Tax Act (Canada) (the “ITA”).
For several years, the CRA audited members of a family (the “Named Persons”) that were clients of an accounting firm (“Zeifmans”). The CRA had taken many steps to secure information from and about the Named Persons and their business and banking transactions; however, little to no information was provided in response to the CRA’s audit queries. In its pursuit of the Named Persons’ banking and business records, the CRA then issued a requirement for information (“RFI”) to Zeifmans pursuant to section 231.2 of the ITA. The RFI specifically sought information and documents pertaining to the Named Persons and “entities owned, operated, controlled or otherwise connected to the [Named Persons]”.
Zeifmans challenged the CRA’s authority to issue the RFI without judicial authorization and brought an application for judicial review on the basis that the CRA’s decision to issue the RFI was ultra vires or otherwise contrary to law, and that the RFI contained serious errors. To that end, four issues were considered by the Federal Court:
- Was the RFI an “unnamed persons” requirement for information such that the CRA was required to apply for judicial authorization in accordance with subsections 231.2(2) and (3) of the ITA?
- Was the RFI imposed on a “person” as required by subsection 231.2(1) of the ITA?
- Was the RFI issued for a purpose other than the administration or enforcement of the ITA?
- Is the RFI unreasonable due to lack of clarity or because the CRA did not make enquiries or seek clarification from the CRA audit team prior to its issuance?
The Court began its analysis by noting that the appropriate standard of review for all four issues was reasonableness rather than correctness. Each issue was then considered separately as discussed below.
Issue #1: Was the RFI an “unnamed persons” requirement for information such that the CRA was required to apply for judicial authorization in accordance with subsections 231.2(2) and (3) of the ITA?
Zeifmans’ main argument was that the RFI, in essence, sought to obtain information on “Unnamed Persons” (i.e. the “entities owned, operated, controlled or otherwise connected” to the Named Persons) that were under audit by the CRA and, as a result, the RFI should be subject to the stricter requirements of subsections 231.2(2) and (3) of the ITA, which require prior judicial authorization – that is, the Tax Court preemptively authorizing its issuance. Where these stricter provisions apply, the Court will grant authorization for an RFI in respect of unnamed persons if it is satisfied that:
(a) the unnamed person or group of unnamed persons is ascertainable; and
(b) the requirement for information is made to verify compliance by the person or persons in the group with any duty or obligation under the ITA (subsection 231.2(3)).
The Court reviewed the relevant caselaw and confirmed that if the unnamed persons are under audit by the CRA, then the CRA is required to obtain judicial authorization prior to issuing an RFI to a third party in respect of those unnamed persons. However, where the unnamed persons are not themselves under audit by the CRA, but rather their information is being sought by the CRA in connection with an audit of other named persons, then the CRA may issue the RFI without judicial authorization under subsection 231.2(1) of the ITA.
The only evidence put forward by Zeifmans in support of its argument that the RFI targeted unnamed persons under audit by the CRA was a statement in a CRA document that indicated one of the reasons for requiring the information was to “verify if offshore entities are managed and controlled from Canada (by the [Named Persons])”. Zeifmans argued that the CRA intended to use information obtained via the RFI to determine if the Unnamed Persons were subject to taxation under the ITA. The CRA disagreed and argued that the information relating to the Unnamed Persons was needed to properly characterize certain transfers from the Unnamed Persons to the Named Persons for the purposes of the ITA and existing audit of the Named Persons.
The Court rejected Zeifmans’ argument and noted that the above statement from the CRA document was consistent with the CRA’s efforts to audit the Named Persons. The Court also noted that the possibility the CRA may audit one or more of the Unnamed Persons in the future in part due to information obtained from the RFI did not establish a reviewable error by the CRA in relying on subsection 231.2(1) of the ITA to issue the RFI.
Accordingly, after reviewing the evidentiary record, the Court concluded that the CRA was not engaged in an audit of the Unnamed Persons’ compliance with the ITA and, as a result, the RFI was not subject to the requirement for judicial authorization under subsections 231.2(2) and (3) of the ITA.
Issue #2: Was the RFI imposed on a “person” as required by subsection 231.2(1) of the ITA?
As a limited liability partnership, Zeifmans argued that because it was not a “person” at law, the RFI was not imposed on a “person” as required by subsection 231.2(1) of the ITA. This argument was also rejected by the Court given the straightforward language in subsection 244(20) of the ITA which states, in part, that “a reference in any notice or other document to the firm name of a partnership shall be read as a reference to all the members thereof”. While the Court was clear to note that this subsection does not transform a partnership into a “person”, the effect of the legislation was to permit the RFI to be addressed to each partner of Zeifmans for administrative purposes of the ITA. Accordingly, as the individual partners of Zeifmans were “persons” under the ITA, the issuance of the RFI to Zeifmans was within the reasonable exercise of the CRA’s powers under subsection 231.2(1) of the ITA.
Issue #3: Was the RFI issued for a purpose other than the administration or enforcement of the ITA?
Zeifmans further argued that the information and documents sought in the RFI were so broad that they had no apparent connection to the CRA’s audit of the Named Persons or any purpose related to the administration or enforcement of the ITA. However, the Court found no evidence in the record that the RFI was issued for any purpose other than in furtherance of the audit of the Named Persons, “a purpose which is squarely within the Minister’s obligation to administer and enforce the provisions of the ITA”. Accordingly, the Court rejected this argument as well.
Issue #4: Is the RFI unreasonable due to lack of clarity or because the CRA did not make enquiries or seek clarification from the CRA audit team prior to its issuance?
Lastly, Zeifmans argued that the RFI was unclear in many respects, most notably in its definition of the Unnamed Persons as those “entities owned, operated, controlled or otherwise connected” with the Named Persons. To Zeifmans, this made compliance with the RFI difficult and, in their view, posed unreasonable risks in potentially failing to comply with the RFI which could result in penalties under section 238 of the ITA.
While the Court agreed that an RFI must be worded with sufficient precision to enable meaningful compliance by the recipient, it was not persuaded that the RFI failed to meet that threshold. Noting that the CRA cannot be expected to know the structure of each taxpayer’s personal and business holdings, and having regard to the statutory framework of section 231.2 of the ITA, the Court concluded that the RFI reasonably described the entities that fell within the group of Unnamed Persons at issue.
This decision serves as a reminder of the extensive powers granted to the CRA to obtain information and documents not subject to solicitor-client privilege and reaffirms the broad discretion afforded to the CRA by the courts in exercising those powers. Such powers, however, are not unlimited. To determine whether an RFI is valid, it is important to have a clear understanding of the applicable statutory framework and to analyze the statutory basis relied on in light of the relevant facts. It is also important to note that an RFI that relates to unnamed persons does not automatically invoke the stricter requirements of subsections 231.2(2) and (3) of the ITA. As stated above, where the unnamed persons are not themselves under audit by the CRA, but rather their information is being sought by the CRA in connection with an audit of other named persons, then the CRA may issue the RFI without judicial authorization under subsection 231.2(1) of the ITA.
Although the Federal Court ultimately found in favour of the CRA, the decision has since been appealed to the Federal Court of Appeal. A hearing date has not yet been scheduled.
 Pursuant to the recent Supreme Court of Canada case of Vavilov (2019 SCC 65), in applying the more deferential reasonableness standard, the Court will not substitute the CRA’s decision for its own but instead will defer to the CRA’s decision provided it is based on an internally coherent and rational chain of analysis and is justified in relation to the facts and law.