http://decisions.fct-cf.gc.ca/fc-cf/decisions/en/item/71079/index.do
Canada (National Revenue) v. Chamandy (April 11, 2014 – 2014 FC 354) was an application by CRA for a compliance order pursuant to section 231.7 of the Income Tax Act:
[1] The Minister of National Revenue seeks a “Compliance Order” against Glenn Chamandy based upon his alleged failure to comply with a demand letter issued by the Canada Revenue Agency on November 29, 2012, under the authority of section 231.1 of the
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (ITA). This letter sought the production of specified books, records and information which, it is alleged, were requested in the course of an income tax compliance audit with respect to 7049960 Canada Inc.
The background to the requirement from CRA involved transactions by Mr. Chamandy’s investment corporation which were completely disclosed to CRA in advance and approved at both the planning level and the audit level:
[4] Mr. Chamandy is a director and shareholder of 7049960 Canada Inc. On September 26, 2008, counsel for 7049960 Canada Inc. informed the Canada Revenue Agency (CRA) that the company was planning to undertake a series of “straddle” transactions. The Minister describes these transactions as “highly complex, off-shore currency transactions” involving millions of dollars.
[5] Counsel for 7049960 Canada Inc. provided the CRA with a 19-page memorandum outlining the contemplated transactions. The memorandum also spelled out the company’s understanding as to the tax implications of the transactions. Counsel asked the CRA for confirmation that the Agency agreed with the company’s position as set out in its memorandum.
[6] The CRA responded on October 8, 2008, indicating that based upon the proposed transactions, it agreed with the tax position identified in counsel’s memorandum. However, the CRA stated in its letter that an audit and examination of the relevant tax returns would be conducted, and that it would not be bound by its opinion letter until such time as the audit and examination of the transactions was completed.
[7] On April 14, 2009, counsel for 7049960 Canada Inc. advised the CRA that the proposed straddle transactions had been completed. The corporation’s tax return and financial statements for the taxation period between October 1, 2008 and January 31, 2009 were filed with the CRA at this time.
[8] The CRA’s Laval Tax Service Office examined the relevant transactions in June and July of 2009. During this audit process, the CRA requested that 7049960 Canada Inc. produce additional information and documentation related to the transactions in question. There is no evidence before me that any of this requested information was not provided by the company.
[9] By letter dated July 29, 2009, the CRA advised 7049960 Canada Inc.’s counsel that the company’s T2 tax returns had been “examined and audited”, that the returns were accepted “as filed” with “no changes”, and that the returns were being sent for processing. On August 14, 2009, 7049960 Canada Inc.’s tax return for the taxation period in question was assessed as filed.
Subsequently however the corporation was caught in a special audit program that led to the issuance of the requirement in question:
[14] On November 29, 2012, a CRA auditor in Ottawa sent a 12-page letter (the “demand letter” or “request for information”) requesting “all documents and records” as well as information related to approximately 175 different topics. This is the demand underlying the CRA’s request for a Compliance Order.
[15] The information requested in the November 29, 2012 letter included, amongst other things:
− all corporate, tax and financial records for 7049960 Canada Inc. from the date of incorporation;
− Information and documents regarding a Bahamian company called Waterquest Holdings Ltd. (Waterquest), including correspondence with Waterquest, and information regarding two loan transactions between Mr. Chamandy and 7049960 Canada Inc. and Waterquest;
− Information and documents regarding INSCH Capital Management Attorney General;
− Information, documents and records related to 7049960 Canada Inc.’s tax planning and transactions; and
− Documents and records regarding the activities of WAM [Strategy Partners G.P.], including information, documents and records related to a roll-over transaction involving 7049960 Canada Inc.
[16] The November 29, 2012 letter states that the request was being made pursuant to subsection 231.1(1) of the ITA. The letter was addressed to 7049960 Canada Inc. However, the salutation portion of the letter says “Dear Mr. Chamandy”, and the letter goes on to ask that “you provide [the requested information] to the Canada Revenue Agency (CRA) within 30 days” [my emphasis].
CRA was not satisfied with the information provided and brought this application for a compliance order against Mr. Chamandy.
The court first noted the conditions under which a compliance order can be issued:
[26] As is evident from the text of section 231.7, there are a number of conditions that must be satisfied by the Minister before this Court will exercise its discretion to grant a Compliance Order.
[27] First, the Court must be satisfied that the person against whom the order is sought “was required under section 231.1 or 231.2 to provide the access, assistance, information or document” sought by the Minister: paragraph 231.7(1)(a).
[28] Second, the Court must be satisfied that although the person was required to provide the information or documents sought by the Minister, he or she did not do so: paragraph 231.7(1)(a).
[29] Finally, the Court must be satisfied that the information or document sought “is not protected from disclosure by solicitor-client privilege” (as defined in the Act): paragraph 231.7(1)(b).
Ultimately the court was not convinced that the requirement was addressed to Mr. Chamandy in his personal capacity, as opposed to his capacity was a representative of the corporation:
[39] The fact that the salutation portion of the letter says “Dear Mr. Chamandy” could arguably support the view that the true addressee of the letter was Mr. Chamandy rather than 7049960 Canada Inc. It is not clear, however, whether the salutation is addressed to Mr. Chamandy in his personal capacity, or as a representative of 7049960 Canada Inc.
[40] While the November 29, 2012 letter does go on to ask that Mr. Chamandy provide the requested information to the CRA within 30 days, once again it is not clear that Mr. Chamandy is being asked to do so in his personal capacity, or on behalf of the taxpayer corporation.
[41] As the Court noted in SML Operations, potentially serious consequences can flow from non-compliance with a request for information under either section 231.1 or 231.2 of the ITA. I likewise agree that, as a result, I should not exercise my discretion to order the production of the documents sought by the Minister under section 231.7 of the ITA unless I have been satisfied that the statutory conditions of this section have clearly been met.
[42] In light of the uncertainty as to the true addressee of the November 29, 2012 demand letter, the Minister has not satisfied me that Mr. Chamandy was personally required to provide the documents and information sought. Consequently, one of the constituent elements of paragraph 231.7(1)(a) of the ITA has not been satisfied, with the result that the Minister’s application is dismissed.
The court gave the parties two weeks to make submissions as to the costs payable to Mr. Chamandy as the successful party.
Another interesting aspect of this decision is the court’s comments about the fact that the requirement expressly requested copies of communications with counsel made for the purpose of obtaining legal advice. The court was quite clear that this was inappropriate and should not have formed part of the requirement:
[44] Given the above finding, it has not been necessary to address the parties’ submissions with respect to the issue of solicitor/client privilege. I do not wish to conclude, however, without expressing my dismay over the fact that the November 29, 2012 demand letter expressly sought the disclosure of advice provided by lawyers with respect to a number of issues. As counsel for the Minister quite properly conceded at the hearing, this information was clearly protected by solicitor/client privilege. As a consequence, production of the information should never have been sought.