On December 15, 2022, amendments to section 231.1 of the Income Tax Act[1] came into force, which blur the lines between sections 231.1 and 231.2, expand the scope of the Canada Revenue Agency's ("CRA's") powers to collect documents and information from taxpayers, and potentially remove some procedural safeguards that taxpayers could previously rely on. As set out below, the precise scope of the amendments is unclear and judicial guidance will be needed to delineate exactly how these amendments will operate going forward.
The Amendments
According to the Department of Finance, one of the purposes of the amendments is to modernize the language of certain paragraphs and render it consistent with the language employed in subsection 288(1) of the Excise Tax Act.2 The text of the amendments, however, could be interpreted to do more than that. The changes triggered by the amendments include:
- a broadening of paragraph (a) to "inspect audit or examine" not only documents that may be relevant in determining obligations or entitlements of the taxpayer, but also documents that may be relevant in determining the obligations or entitlements of "any other person";3
- the power to require a taxpayer or any other person to answer questions orally and in writing;4 and
- the power to require a taxpayer to answer those questions "in any form specified".5
The amendments also add new paragraph 231.1(1)(e), which empowers the authorized person to "require a taxpayer or any other person to give the authorized person all reasonable assistance with anything the authorized person is authorized to do under this Act".
A description of the implications of each of these amendments is below.
The Amendments Broaden the Powers Under Section 231.1
Prior to the amendments, sections 231.1 and 231.2 were more distinct: Former section 231.1, also referred to as the "inspection power", enabled auditors to "inspect, audit or examine" documents. Sub-section 231.2(1), which remains substantially the same, permits the Minister, under certain conditions, to compel any person to produce any information or any document.6 Thus, previous section 231.1 focused on the inspection of a taxpayer's books, records, and property, while section 231.2 was broader and permitted the CRA to collect "any information".
Because the audit powers under former section 232.2 were broader than the powers under section 231.1, section 232.2 also came with certain safeguards for taxpayers that were not present in section 231.1. Specifically:
- section 231.2 can only be exercised by the Minister or its delegate, not just by an auditor;
- prior judicial authorization is required in order to exercise section 231.2 in relation to third parties; and
- section 231.2 powers can only be exercised through a notice specifying a reasonable time for compliance.
These safeguards were not in place for former section 231.1. Thus, prior to the amendments, the CRA had broad powers to collect documents under section 231.1, and it had additional powers to collect information under section 231.2 (not limited to just documents), but these additional powers could only be exercised by the Minister or its delegate, required prior judicial authorization in the case of third parties such as accountants or lawyers, and required a reasonable time for the taxpayer or third party to comply.
The amendments now effectively give CRA auditors the powers previously available under section 231.2 without any of the safeguards in place under that provision.
The Amendments Permit "Information Gathering"
The amended section 231.1 is no longer titled "inspections" but "information gathering". Prior to the amendments, judges disagreed as to whether information could be compelled under section 231.1. In Miller v. MNR, the Federal Court and the Federal Court of Appeal held that this is possible.7 In Canada (National Revenue) v. Ghermezian, Justice Southcott explicitly disagreed with the view expressed by his colleague in Miller on this point.[8] The amendments render this judicial debate moot. They permit the CRA to collect information, not just documents, under new section 231.1.
The Amendments Permit CRA to Inspect Documents of "Any Other Person"
New section 231.1 enables an authorized person to access any document of third parties ("any other person") without the safeguards under section 231.2, such as Ministerial authority or prior judicial authorization before demanding information.
Similarly, paragraph 231.1(1)(d) previously referred to any other person "on the premises or place". Now it refers to "any other person", with no limit as to where that person must be. These changes permit the issuance of a requirement to third parties outside an organization, including lawyers and accountants.
As the Canadian Bar Association ("CBA") has pointed out, there is a risk that under new section 231.1, the CRA can compel lawyers to provide solicitor-client protected information. The CBA called for a corresponding amendment to subsection 232(2), which would provide that a lawyer prosecuted for failing to comply with a requirement under section 231.1 will be acquitted if the lawyer: (i) establishes that they had reasonable grounds for believing that the information or document sought was protected by solicitor-client privilege; and (ii) communicated to the CRA her? refusal to comply with the requirement.9 Such a provision exists with respect to section 231.2 requirements, but the legislator has not responded to the CBA's call for an amendment to the same effect for section 231.1.
The Amendments Require Taxpayers to Provide Information Orally and in Writing
Another broadening of the Minister's audit powers stems from the additions of subparagraphs 231.1(1)(d)(i) and (ii). These subparagraphs permit an authorized person to require a taxpayer and any other person
- to attend with the authorized person, at a place designated by the authorized person, or by video-conference or by another form of electronic communication, and to answer the questions orally;
- to answer the question in writing, in any form specified by the authorized person.
These amendments are a response to Canada (National Revenue) v. Cameco Corporation, where the Federal Court of Appeal had held that section 231.1(1)(a) confers a general power to compel oral answers with respect to tax liability.10
On a plain reading, this amendment means that anybody, including lawyers and accountants, can be required to be interviewed by the CRA or provide answers to questions in writing, in any form specified by the authorized person.
In its Letter, the CBA also cautioned "that individuals required to submit to oral interviews by any governmental authority should, at the very least, be advised of their right to be assisted by legal counsel or another representative".11
The Amendments Require Taxpayers to Provide Information "in any form specified"
The ability of the authorized person to request answers "in any form specified by the authorized person" means that persons exposed to requirements under section 231.1 may have to incur additional expenses to provide the information in the requested form. The Explanatory Notes provide some examples of types of information that could be required under paragraph 231.1(1)(d): "For example, authorized persons may require answers to be provided in electronic form, such as by way of an electronic spreadsheet or table. They may also require that questions be answered by means of an organizational chart, or by another similar form of presentation."12 In Canada (National Revenue) v. Amdocs Canadian Managed Services Inc., the Federal Court had held that "The ITA does not contemplate the creation of records where they do not exist. That which does not exist cannot be produced".13 To what extent the authorized person can require the creation of documents may be an issue in future litigation under section 231.1.
Conclusion
The amendments to sections 231.1 and 231.2 are of concern for taxpayers, but they will likely also be subject to further refinement as they are interpreted by courts over the next few years. Any such interpretation should make clear that the procedural safeguards that are still present in section 231.2 should remain in place, and cannot be completely overridden by what appears to be overly broad language that Parliament has adopted in new section 231.1. It is well-established that Parliament does not legislate in vain. If the CRA could now rely on new section 231.1 to collect information (and not just documents) from third parties such as lawyers and accountants, then there would be no need for the procedural safeguards that remain in place under section 231.2. Thus, while the precise boundaries of the two provisions will need to be delineated by courts, we expect that the importance of the procedural safeguards that remain in place in section 231.2 will remain applicable when CRA attempts to collect documents or information from third parties such as lawyers and accountants.
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Footnotes
1. RSC, 1985, c1 (5th Supp) (the "Act"). All statutory references are to the Act unless otherwise indicated.
2. Department of Finance, "Explanatory Notes of the Legislative Proposals Relating to the Income Tax Act and Other Legislation", (February 2022) ("Explanatory Notes").
3. Paragraph 231.1(1)(a)
4. Subparagraphs 231.1(1)(d)(i) and (ii).
5. Subparagraph 231.1(1)(d)(ii).
6. R. v. Jarvis, 2002 SCC 73 at paras. 53-54.
8. 2022 FC 236 at para. 108 (under appeal, court number A-65-22, heard by Stratas J.A., Locke J.A., Roussel J.A.) ("Ghermezian").
9. Letter to Minister Chrystia Freeland, Re: February 4, 2022 Draft Legislation Pertaining to Reportable Transactions, Notifiable Transactions and Enhanced Audit Powers (April 5, 2022), at para. 24 ("Letter").
10. 2019 FCA 67 at para. 34.
11. Letter to Minister Chrystia Freeland, Re: February 4, 2022 Draft Legislation Pertaining to Reportable Transactions, Notifiable Transactions and Enhanced Audit Powers (April 5, 2022), at para. 23.
12. Department of Finance, "Explanatory Notes of the Legislative Proposals Relating to the Income Tax Act and Other Legislation", (February 2022) at 83.
13. 2015 FC 1234 at para. 75.
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