Federal Court restricts Canada Revenue Agency fishing expeditions for "Unnamed Persons"

18 September 2018

In Canada (National Revenue) v. Hydro-Québec (2018 FC 62) ("Hydro-Québec"), the Federal Court ("FC") restricted the Canada Revenue Agency's ("CRA") authority to force businesses to provide information about their customers pursuant to section 231.2 of the Income Tax Act ("Act").[1] In rejecting the CRA's request for permission to obtain the information, the FC held that the CRA betrayed a lack of consideration for taxpayer privacy, with an insufficient connection to determining compliance.

The CRA sought to gather information and documents on Hydro-Québec's 4.3 million "business customers", with the exception of "large-power" customers, such as mining companies, processing plants and government agencies, as well as customers paying residential rates for household use. The CRA wanted a list of customers paying a business rate, presumably to find out who was carrying on a business, but not reporting income. Despite the puzzling absence of any objection from Hydro-Québec to comply with the CRA's broad request, the FC expressed the need to protect the interests of the unrepresented targeted group and refused to grant the CRA authorization to compel Hydro-Québec to release personal information about their business customers.

In determining whether to grant authorization, the FC applied the test outlined in subsection 231.2(3). The "unnamed persons" rule in section 231.2 empowers the CRA to compel third parties to release information about unnamed persons, only when the FC is satisfied that certain preconditions have been met. In this case, the FC found that the CRA's request did not satisfy the requirements of the Act, nor was the CRA's reasoning consistent with Parliament's intention. First, the group identified by the CRA was not ascertainable, as there was no identifiable characteristic that indicated the group's composition. The CRA's reasoning created a group that could comprise at least tens of thousands of hydro users in Québec. The second criterion was that the information requested had to be used to verify compliance with the Act after a tax audit in good faith was conducted. The CRA was similarly unable to satisfy this test. Instead, the FC found that the CRA was still in the preliminary stages of determining who should be audited.

The FC analyzed previous case law pursuant to section 231.2 and its legislative history and held that Parliament intended to limit the scope of requests for information, especially when the targeted group were unnamed persons and moreover intended to protect these individuals from potential abuse when indiscriminately being targeted by the CRA without a genuine connection to a tax audit. The FC ruled that a strict interpretation of subsection 231.2(3) is necessary to prevent seizures under the provision from becoming too broad and violating taxpayers' rights under section 8 of the Canadian Charter of Rights and Freedoms.

Hydro-Québec illustrates the importance of judicial discretion being exercised to prevent CRA overreach when seeking to compel third parties to release information about unnamed persons. Taxpayers should know their rights and consult with legal counsel before acquiescing to such an extremely broad and unsubstantiated request. The application of the "unnamed persons" rule in subsections 231.2(2) and (3) can be challenged and taxpayers should be aware of the constraints protecting their right to privacy. With respect, it was appropriate for the FC to take it upon itself to protect taxpayers' interests, despite the corporation itself not trying to prevent, with no justifiable audit connection, what the FC called the CRA's "full-fledged fishing expedition".


[1] All statutory references are to the Act. The CRA also relied on the analogous provision (section 289) in the Excise Tax Act.


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