Canada: Be Careful What You Ask For: Limits On Oral Interviews Confirmed In Cameco

Last Updated: May 23 2019
Article by John Sorensen

Introduction

MNR v Cameco Corporation, 2019 FCA 67 ("Cameco") was an unsuccessful appeal by the Crown of a failed compliance order application in the Federal Court ("FC"). The issue was whether the Minister of National Revenue ("Minister") could compel Cameco employees to attend interviews and answer questions posed by CRA auditors. Although the Federal Court of Appeal ("FCA") unanimously upheld the ruling, two sets of reasons were issued, with different opinions on the merits of some of the FC`s guidance.

The Canada Revenue Agency ("CRA") conducted a transfer pricing audit of Cameco's 2010 through 2012 taxation years and sought interviews and oral answers to questions from 25 employees. Cameco offered to answer in writing, leading to the compliance order application to force in-person interviews. Readers will likely already know that a compliance order application is a court process under section 231.7 of the Income Tax Act (Canada) ("ITA")1 by which the CRA seeks to compel a taxpayer to comply with an audit or requirement for information. Where a court grants a compliance order, failing to comply may mean that the person is guilty of contempt, which could result in being sentenced to a fine and/or imprisonment, as well as an order to comply.

The FC rejected the Minister's application based on a textual and contextual reading of paragraph 231.1(1)(a) and also stated that oral interviews were tantamount to discovery of the taxpayer, but without the procedural safeguards of the rules of court. The FCA carefully analyzed the wording of subsection 231.1(1) and upheld the FC's determination.

CRA's General Audit Powers

The general audit provision in subsection 231.1(1) reads as follows:

An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act,

  1. inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and
  2. examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act,

    and for those purposes the authorized person may
  3. subject to subsection 231.1(2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and

  4. require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.

Parties' Positions

The Minister's position was that paragraph 231.1(1)(a) and the words "inspect, audit or examine" are broad and include the power to compel oral answers from a taxpayer, a taxpayer's employees or even employees of a foreign subsidiary. According to the Minister, "audit" means seeking information and a corresponding requirement to provide responses which, it was argued, is consistent with the scheme of the administration provisions of the ITA. The Minister argued (oddly, with respect) that the root meaning of the word "audit" was "to hear" which means an oral answer to a question may be required. The Minister also argued that paragraphs (c) and (d) did not limit the scope of her authority, but rather enhanced it, requiring questions to be answered by any person at a business premises, in addition to the general power for the Minister to compel oral answers.

Cameco argued that the Minister was seeking a summons power that had no basis in the ITA and further that the Minister's interpretation of paragraph (a) rendered paragraph (d) superfluous and undermined the protections for taxpayers established pursuant to the Minister's enquiry powers under section 231.4. Cameco further argued that the CRA's audit powers under paragraph 231.1(1)(a) are in respect of documents and not any information, and further that its cooperation with the CRA during the audit militated towards an exercise of discretion in Cameco's favour.

FCA Decision

The FCA held that the Minister's position was not supported by specific wording of the ITA, subject to the caveat that questions must be answered concerning the provenance and location of records. However, that is not what the Minister was seeking from Cameco. Instead, the Minister sought from Cameco oral answers to questions concerning facts within the audit period and the development of a functional analysis of a non-arm's length transaction between Cameco and a foreign subsidiary. The FCA analyzed subsection 231.1(1) based on the usual textual, contextual and purposive analysis followed by the courts since Canada Trustco Mortgage Co v Canada, 2005 SCC 54.

Text of Subsection 231.1(1)

According to the FCA, the focus of the Minister's audit powers in paragraphs 231.1(1)(a) and (b) is on information that is or ought to be documented in a taxpayer's books and records. Property or processes may also be examined for the purpose of ascertaining information that is or should be in the taxpayer's books and records. The FCA gave short shrift to the Minister's strange argument that "audit" imported "audibility" into the statutory scheme. The key words in the provision are "inspect, audit or examine". Neither "inspect" nor "examine" suggest a power to force oral answers and, when words in a provision are set out in a list, they take their colour and meaning from one another. Even if the word "audit" could somehow be stretched to mean "audible", that meaning cannot be established when the word "audit" is sandwiched between "inspect" and "examine". This slightly limited scope of paragraph 231.1(1)(a) is affirmed by paragraphs (c) and (d): the focus of paragraph (c) is to ensure access to records, authorizing entry into anywhere that books and records are or should be kept; and paragraph (d) requires an owner, manager or other person on the premises to provide assistance and answer proper questions. According to the FCA, reading paragraph (a) in context means that Parliament meant for auditors to have full access to taxpayer records and there is no need for a taxpayer to actually be present since the obligation to assist can fall to any person on a business premises, pursuant to paragraph (d). If the right to compel oral answers were included in the Minister's general audit powers, then paragraph (d) would be rendered meaningless, which is untenable as a matter of statutory interpretation.

Context and Subsection 231.1(1)

The FCA also observed that section 231.1 is located close to section 230, which is the provision that requires that books and records be kept. Taken together, the provisions fulfill a tax determination purpose, based on books and records. Further, the FCA stated that where Parliament intended to allow a regulator to compel oral answers, it did so expressly and not by implication.

Purpose of Subsection 231.1(1)

The Crown argued that it was important for the Minister to be able to ask questions to verify information. The FCA agreed, but that important objective cannot replace the express language in a statute. The purpose of subsection 231.1(1) is to allow access to taxpayer books, records and information and section 231.7 provides for recourse to the courts. In any case, the Minister is not hamstrung. The Minister can compel documents and information and in the absence of answers she can make factual assumptions that the taxpayer bears the burden of disproving. Further, the Minister's various powers are substantial. She can enter a business premises, examine property or inventory, compel information from third parties and so on.

Legislative History

The FCA noted that the 1986 amendments to the ITA included changes to paragraph 231.1(1)(a) which, among other things, removed an express duty to orally answer questions relating to an audit and the obligation to give answers under oath or by statutory declaration. It is understandably difficult to argue that a power that was expressly removed from a statute continued to exist implicitly.

Collateral Matters

The FC judgment on the initial compliance order application also included reasoning that suggested a compliance order can be rejected at a court's discretion. That reasoning was deemed obiter by the FCA. However, to eliminate any doubt, the FCA's majority reasons state that the so-called "clean hands" doctrine is irrelevant to a compliance order. Clean hands means that a party might not be granted relief based on past conduct or acting in bad faith. However, clean hands is an equitable doctrine that does not apply to compliance orders. The courts might control the Minister's behaviour where it constitutes abuse of process, but equity has nothing to do with it. To illustrate the point, the FCA stated that co-operating with an audit generally does not generate goodwill that would allow the taxpayer to at some point stop co-operating and then plead past co-operation as a justification.

The FC considered whether audit compliance would compromise Cameco's other pending Tax Court litigation. However, the FCA's majority reasons clarified that the Tax Court Rules, as subordinate legislation, do not help with interpreting the Minister's audit powers, and the impact of current or future litigation is not relevant. Any prejudice or admissibility issues in the Tax Court are for the trial judge to consider. Further, according to the majority, proportionality has no place in deciding a compliance order application. An audit is not discovery. Auditors are not bound by pleadings or relevance.

Woods JA's concurring reasons held that the FC did not make an error and thus it was unnecessary to generally consider the scope of the Minister's audit powers. Amplifying this point, Woods JA listed the four factors considered by the FC, as follows:

  1. The transfer pricing issue involves many other taxation years: this established that the Minister already had significant knowledge of Cameco's transfer pricing and the Minister "was hardly starting from scratch", which suggested that interviewing 25 employees was overreaching.
  2. Cameco came to court with clean hands, having complied with all requests including a number of oral interviews in previous years: this confirmed that Cameco had legitimate reasons for not wishing to submit to further oral interviews.
  3. The number of interviews proposed by the Minister and the compromise position of Cameco to answer questions in writing: the FC conclusion that written answers would provide the necessary information was reasonable; Cameco was already in the midst of transfer pricing litigation and the Minister likely already understood Cameco's transfer pricing model.
  4. The Tax Court was hearing a transfer pricing appeal for previous taxation years: Cameco's concerns about the audit having a negative effect on pending litigation were understandable and militated towards a cautious approach by the FC.

Woods JA concluded that the above noted factors and reasoning were all relevant to the exercise of the FC's discretion under section 231.7 and further that because compliance orders are discretionary, the FCA must be cautious about intervening.

Conclusion

While the Cameco judgment is obviously a win for the taxpayer, for the following three reasons the lessons the tax community can derive from Cameco remain an open question.

First, the FCA's judgment is qualified: the judgment concerns the interpretation of paragraph 231.1(1)(a) and the Minister's power to compel oral answers under that paragraph. The scope of paragraph 231.1(1)(d) was not argued, although it may provide a distinct basis for compelling attendance at an interview and oral answers to questions. Until that issue is considered by the courts, tax advisors should be cautious about concluding that oral interviews can be refused with impunity in reliance on Cameco.

Second, the FCA judgment will certainly be reviewed and considered by the CRA, Department of Finance and Department of Justice. It would not be surprising if the government of Canada revisited the language in section 231.1 and amended it to expressly allow auditors to accomplish what they sought to accomplish in Cameco. The prevailing view at the CRA is likely that auditors are entitled to a full and complete review of a taxpayer's affairs in any way the CRA deems appropriate and that there should be no impediments to their enquiries. In light of the restrictive approach of the courts in recent years, legislative amendments to section 231.1 might be looming.

Third, in my view the FCA judgment is less restrictive on the CRA's audit powers than was the FC decision. The FC's interpretation of subsection 231.1(1) was consonant with the FCA's interpretation, but the FC's other comments were helpful. The FC decision confirmed that the Minister's broad audit powers were not unlimited (as also confirmed in BP Canada Energy Co. v MNR, 2017 FCA 61), invoked the clean hands doctrine and cited proportionality as a guideline. Although the FCA's majority reasons overruled that guidance, the concurring reasons should be recognized as highly persuasive, since they were authored by a judge with significant tax experience, both as a leading tax practitioner and as a Tax Court judge.

As of the date of this article, the period for seeking leave to appeal to the Supreme Court of Canada has not yet expired, so perhaps the last word in the Cameco compliance order case has not yet been written.

Footnote

1 All statutory references are to the ITA.

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
19 Sep 2019, Seminar, Birmingham, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

26 Sep 2019, Seminar, London, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

8 Oct 2019, Seminar, Birmingham, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions