Minister's audit request failed to meet proportionality principle

19 September 2017



Sanity prevailed in a recent Federal Court ("FC") decision involving an application by the Minister of National Revenue ("Minister") to compel a taxpayer to produce approximately 25 employees for interviews as part of an audit. The FC held in favour of the taxpayer in Cameco Corporation v Canada (National Revenue), 2017 FC 763 ("Cameco") and dismissed the Minister's application for a compliance order on the basis that the Minister's broad audit powers are not unlimited and the request to interview that many employees did not meet the principle of proportionality.

Background and Arguments

The Minister made three requests to interview Cameco personnel in the context of to a transfer pricing audit of its 2010 through 2012 taxation years, relying on s. 231.1 of the Income Tax Act (Canada) ("ITA"). The issues under audit were the same as those currently being litigated before the Tax Court of Canada ("TCC") for previous years. Evidently, Cameco fully complied with all audit requests for the 2010 through 2012 taxation years, but for the interview requests which were all refused. The Minister thus sought a compliance order under s. 231.7 of the ITA before the FC.

The general audit provision in ss. 231.1(1) of the ITA reads as follows:

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

(a) 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

(b) 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

(c) 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

(d) 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.

[emphasis added]

Before the FC, the Minister argued that s. 231.1 confers broad powers to administer and enforce the ITA within Canada's self-assessment system. In this regard, it was argued that s. 231.1 explicitly authorizes the Minister's delegates to conduct oral interviews, which power is inherent and integral to her authority to inspect, audit or examine for the purposes of administering and enforcing the ITA. The Minister further argued that if written questions are insufficient to achieve results, compelling people to attend a meeting is necessary and it is not for the person under audit to dictate the manner in which an audit is conducted. In the Minister's submission, a person under audit must answer proper questions including oral questions and any other interpretation of the ITA audit provisions would generate an absurd result.

The Minister also relied on Tower (2003 FCA 307) for the proposition that she may compel taxpayers to answer questions. In Tower, the Federal Court of Appeal ("FCA") held that the Minister could rely on para. 231.2(a) to ask questions so as to elicit knowledge or facts. Thus, in that case, an accountant was compelled to answer written questions.

Cameco's position was summarized by the FC more succinctly: the Minster's powers are not unlimited and the Minister's application to compel interviews was: not proportional; vague; overbroad; and prejudicial to matters pending before the TCC. Evidently, Cameco would have responded to written questions a la Tower and its objection to the audit process was limited to the request for oral interviews.


The FC stated that written questions would have provided the Minister with the requested information and would have been consistent with Tower. The FC agreed with Cameco that the Minister's audit powers, though broad, are not unlimited and went on to state that a compliance order under s. 231.7 can only be issued if the Minister proves a taxpayer did not comply with the audit or requirement provisions of the ITA (found in s. 231.1 and 231.2, respectively). In this case, Cameco was fully co-operative with the CRA, other than granting interviews, which were refused on the basis that too many were requested and the subject matter of the audit was similar to if not the same as the pending TCC matter.

The FC also referenced BP Canada Energy Co. v MNR, 2017 FCA 61 ("BP"). The FC acknowledged that while the subject matter of Cameco differed from BP, the position the Minister advanced in both cases called for very wide interpretation of the Minister's powers to compel the production of information. Just as the FCA held in BP, the FC held in Cameco that s. 231.1 does not grant unlimited powers, and thus was not so broad as to allow the Minister to compel an indeterminate number of people to appear for oral interviews.

The FC tethered its conclusion to the wording of s. 231.1. The provision allows an authorized person, for any purpose related to the administration and enforcement of the ITA, to inspect, audit or examine books, records, documents and property. For those purposes, an authorized person may do various things, including entering premises or a place of business, or require an owner, manager or other person in the premises or place to give reasonable assistance and answer proper questions. Thus, the FC concluded that the general power to inspect, audit and examine books, records and documents under para. 231.1(1)(a) does not directly include authority to ask questions: that interpretation would render meaningless para. 231.1(1)(d) which requires reasonable assistance and answers to proper questions posed by an authorized representative. The FC further concluded that Parliament could not have intended to grant the Minister's delegates unrestricted powers. The FC noted in particular that the audit of Cameco for its 2010 through 2012 taxation years concerned the same issues under appeal to the TCC for other years and the proposed interviews could compromise that litigation, and that Cameco had "clean hands" in the sense that it was otherwise fully co-operative, including granting oral interviews in prior audits.

Finally, the FC noted that in the audits leading to Cameco's TCC appeals for other years, there had been oral interviews during which counsel for the Minister and Cameco took notes. Evidently, those notes and counsel's recollections ended up being inconsistent. The Minister argued in the FC application that any future interviews for the 2010 to 2012 audit could be transcribed by a Court reporter to avoid inconsistent notes and recollections. However, this would be tantamount to an examination for discovery in a matter not yet under appeal and, in fact, would be discovery without procedural safeguards. The TCC Rules set out, among other things, a rule that allows a taxpayer to choose its nominee for discovery and rules governing scope and consequences for refusing to answer. The Minister's request to interview 25 Cameco employees from around the world would be vastly more onerous than discovery in a tax appeal and likely unnecessary since the issues before the TCC may resolve the audit issues for the 2010 through 2012 taxation years. Thus, the requested compliance order did not meet the test for proportionality.

The result in this application is just and fair. At a high level, the case affirms the propositions that the Minister's broad audit powers are not unlimited and must be proportionate. That said, the outcome is also somewhat fact specific and the case does not stand for the proposition that all CRA requests for oral interviews can be readily declined without consequences.

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