On May 11, 2020, the Federal Court of Appeal upheld a sweeping order for Canada’s tax authorities to obtain customer information from Roofmart Ontario Inc. (“Roofmart”) to investigate the group’s tax compliance.
In the court’s decision Roofmart Ontario Inc. v. Canada (National Revenue), 2020 FCA 85 (CanLII), Roofmart was ordered to disclose business information and customer purchase history of unidentified businesses to the Canada Revenue Agency (“CRA”). As a result, Roofmart is required to deliver information to the CRA about its customers who spent over $20,000.00 annually with the supplier during the period from January 1, 2015 to December 31, 2017.
The information ordered to be disclosed to the CRA includes Roofmart’s customers’ name, contact information, business number, itemized transaction details, and all bank account information from credit applications or other records maintained by Roofmart.
Importantly, Roofmart was not under audit by the CRA during this period, and the disclosure order is not limited to any individual customers under audit by the CRA. The order operates as a dragnet, capturing Roofmart’s customer information who are not otherwise targets of the CRA.
The Minister of Revenue applied for the order under section 231.2(3) of the Income Tax Act (“ITA”), and its companion provision under section 289(3) of the Excise Tax Act (“ETA”). The provisions allow the Minister of Revenue to acquire information from individuals about one or more “ascertainable” unnamed persons in order to verify those persons’ compliance with the ITA and ETA.
In support of the application, the Minister of Revenue relied on a study by Statistics Canada that estimated 28% of the construction industry was “unreported or underreported”. As the largest supplier of roofing companies in Ontario, Roofmart was targeted for the application.
Roofmart attempted to appeal the order from the lower court on several grounds, including that the tax authorities ought to be held to a higher standard of proof. Roofmart argued that a higher standard was appropriate to protect unnamed persons from undue invasions of privacy. The argument was not accepted by the appeal court. The court relied on its earlier decision in eBay Canada Limited v. Canada (National Revenue), 2008 FCA 348 (CanLII), citing the Supreme Court of Canada case Redeemer Foundation v. Canada (National Revenue), 2008 SCC 46, where it held that taxpayers in a self-reporting system have a very low expectation of privacy when it comes to business records.
Roofmart further alleged that the Minister had not satisfied the ITA and ETA provisions’ requirements that the group of persons was “ascertainable” or that the application was to “verify compliance” with their duties under those acts. The appeal failed on both counts. The court upheld the Minister’s ability to compel information related to an unspecified or large group, as long as it was defined by a variable such as the $20,000 expenditure threshold. Even though the CRA official whose evidence underpinned the application could not explain on cross examination precisely how the information would be used to verify compliance, the court remained satisfied that his general explanation was sufficient. Given that the CRA official was not an auditor, and an auditor’s evidence could have easily been filed in support of the Minister’s application, this sets a low bar for future applications by the Minister.
Another argument advanced by Roofmart was that the application was ultra vires, meaning there was no jurisdiction to bring the application. Simply put, the CRA official who swore the affidavit in support of the application had not advanced evidence he was authorized to do so by the Minister of Revenue. The appeal court did not accept this argument, in part because the notice of application was authorized and brought in the name of the Minister of Revenue. Despite the fact that there was no evidence to suggest that the CRA official had the Minister’s explicit authority to bring the application, and it was the Minister’s burden to prove there was authority granted, there was also no evidence that the Minister’s lawyers had proceeded without appropriate authority. This ground of appeal was unsuccessful.
The CRA’s dragnet approach to investigating Ontario’s roofing industry using information obtained through a large supplier may be considered by the industry to be a troubling development. Even in a self-reported tax system, businesses do have an expectation of privacy when they submit banking information to suppliers with account numbers, bank branch addresses, and other sensitive information. Statistics Canada is also a federal government entity. Although the CRA and Statistics Canada are different branches, the government in effect relied on evidence that it created to support an application to obtain private information about unnamed individuals not currently under tax compliance investigation.
More troubling is that the appeal court did not place any limits on how the obtained information may be used, despite that the ITA and ETA only authorize names to be collected for “verification” purposes. The CRA may now be in possession of sensitive personal banking information that it may then use not only for tax compliance investigations, but also for eventual collection and enforcement purposes, all without notice to the affected individuals.
Construction companies and stakeholders are well advised to revisit their recordkeeping and tax compliance practices in advance of any attention from the CRA. In particular, customers of Roofmart ought to be aware what information the company may have been required to disclose to the CRA in the wake of this decision.