Judgments

[1995] 3 F.C. 44

T-243-95

The Minister of National Revenue (Applicant)

v.

Sand Exploration Ltd., 512436 Alberta Ltd., 383316 Alberta Ltd. and Cantana Energy Inc. (Respondents)

Indexed as: M.N.R. v. Sand Exploration Ltd. (T.D.)

Trial Division, Rothstein J.—Calgary, April 27 and May 11; Toronto, May 19, 1995.

Income Tax — Practice — Enforcement of Act — S. 231.2 allowing M.N.R. to require provision of information — Where sought of third party re: unnamed taxpayer, judicial authorization necessary — M.N.R. seeking names of seismic data purchasers, suspecting excessive tax deduction claims by investors — Whether s. 231.2 entitles M.N.R. to judicial authorization and if so whether evidence herein justifying authorization — Legislation amended since James Richardson & Sons case, relied on by respondents — Amendments addressing mischief resulting from broad interpretation of former s. 231(3) — S. 231.2(3)(a) not providing ascertainability requiring M.N.R. show knows one or more individuals exist.

This was an Income Tax Act, subsection 231.2(5) application for the review of an authorization granted by Muldoon J. under subsection 231.2(3), of a ministerial requirement that the respondents provide a list of the names and addresses of all purchasers of its seismic data and the purchase dates. Section 231.2 allows the Minister to require any person to provide information or documents, but where the information or documents from a third party relate to an unnamed taxpayer, the Minister must first obtain judicial authorization. The judge must be satisfied that the requirements in subsection (3) are met i.e. there must be evidence on oath that (1) the person is ascertainable; (2) the purpose is to verify compliance by the person with the Act; (3) it is reasonable to expect, on any grounds, non-compliance with the Act; and, (4) the information is not otherwise more readily available.

The respondents sold seismic data, which could indicate the underground location of oil or gas, to investors. There was little or no evidence of exploration activity arising from the sale of the seismic data. The Minister was concerned that the sale price of the data was inflated solely to provide an excessive tax deduction for those investors. If there was no bona fide intention to explore for oil or gas using the seismic data, the expenditure for the data would not have been incurred for the purpose of gaining or producing income from a business or as a “Canadian exploration expense”, and the purchasers would not be entitled to any deduction. The Minister relied on the affidavit of an auditor with Revenue Canada, who identified twelve persons or companies who had purchased seismic data, but believed that there were more, based on the percentage interests purchased by the identified parties which did not total 100% of the seismic data.

The issues were whether section 231.2 entitled the Minister to obtain a court authorization to require third parties to provide the names of taxpayers who he believes are not complying with the Act, and if so, whether the evidence justified the issuance of such an authorization herein.

Held, the application should be dismissed.

Unlike the former subsection 231(3), subsections 231.2(2) and (3) expressly provide a procedure by which the Minister may require third parties to disclose information about unnamed taxpayers. Forcing the Minister to comply with this procedure addresses the mischief identified in James Richardson & Sons, Ltd. v. Minister of National Revenue et al., and was intended to prevent fishing expeditions. Since such a procedure is intrusive, a restrictive interpretation is valid. That the Minister may obtain a Court authorization ex parte places an obligation on the Minister to act in the utmost good faith and to ensure full and frank disclosure of information.

If the Minister is entitled to require from third parties information about unnamed persons, he must also be able to obtain their names. There is no absolute prohibition from obtaining the names of taxpayers from third parties and indeed section 231.2 now provides a procedure for obtaining such information. Intrusion into the privacy of individuals is authorized provided the subsection 231.2(3) requirements are met.

The Minister complied with the requirements of subsection 231.2(3). (1) The auditor’s affidavit demonstrated that the group, purchasers of seismic data, was ascertainable. Nothing in subsection 231.2(3)(a) indicates that ascertainability requires the Minister to show he knows one or more individuals exist. (2) The requirement to verify compliance by “the person or persons” with the Income Tax Act does not mean that the person or persons must be known. Members of the relevant group must be ascertainable, not known. (3) As to the requirement of a reasonable expectation of non-compliance with the Act, the dearth of information from known investors as to the use of the seismic data provided grounds for the concern that there may be no business or exploration purposes for purchasing the data. (4) The names of the unnamed investors were not more readily available by asking other known investors or through an audit of the vendors. This was not a partnership or other tax shelter in which it would be reasonable to expect that each investor would know the names of other investors. For the Minister to obtain the names of unnamed investors by way of an audit of the vendors would be to do indirectly what the Minister is not allowed to do directly. The Minister must seek a Court order to obtain the names of unnamed persons from third parties.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Canadian Charter of Rights and Freedoms, being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44], s. 8.

Federal Court Act, R.S.C., 1985, c. F-7, s. 57 (as am. by S.C. 1990, c. 8, s. 19).

Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 18(1)(a), 66.1(6) “Canadian exploration expense” (as am. by S.C. 1994, c. 41, s. 37(1)(o)), 231.2.

Income Tax Act, S.C. 1970-71-72, c. 63, s. 231(3).

CASES JUDICIALLY CONSIDERED

DISTINGUISHED:

James Richardson & Sons, Ltd. v. Minister of National Revenue et al., [1984] 1 S.C.R. 614; (1984), 9 D.L.R. (4th) 1; [1984] 4 W.W.R. 577; 7 Admin. L.R. 302; [1984] CTC 345; (1984), 84 DTC 6325; 54 N.R. 241; Regina v. Bruyneel, A. (1985), 86 DTC 6119 (B.C.C.A.).

REFERRED TO:

R. v. 311326 Alberta Ltd., [1993] A.J. No. 25 (C.A.) (QL); Canada v. Duncan, [1992] 1 F.C. 713 (1991), 47 F.T.R. 220 (T.D.).

APPLICATION for judicial review of Income Tax Act, subsection 231.2(3) authorization of a ministerial requirement that the respondents provide a list of the names and addresses of all purchasers of seismic data, and the purchase dates. Application dismissed.

COUNSEL:

Max J. Weder for applicant.

Lorne W. Scott and John C. Zang for respondents.

SOLICITORS:

Deputy Attorney General of Canada for applicant.

Singleton Urquhart Macdonald, Calgary, for respondents.

The following are the reasons for order rendered in English by

Rothstein J.: This is a review, pursuant to subsection 231.2(5) of the Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 (Act), of an order of Muldoon J., a judge of this Court. The sequence of events giving rise to this review are as follows.

On or about February 6, 1995, the applicant Minister of National Revenue (Minister), by way of ex parte application, applied to this Court for an order, pursuant to subsection 231.2(3) of the Act, authorizing the imposition of requirements by the Minister on the respondents pursuant to subsection 231.2(1). Under the requirements, the respondents were to provide a list of all persons who had been sold interests in certain seismic data. In support of the application the Minister relied upon the affidavit of Brian Kennedy dated January 31, 1995.

Muldoon J. granted the orders requested by the Minister and ordered the respondents to provide a list of all persons who were sold seismic data relating to certain properties. The Minister required the list to include the full names and addresses of the purchasers and the dates seismic data were purchased. No other information was requested because, according to counsel, all other information could be obtained from the purchasers once they are known and contacted.

On or about March 2, 1995, the Minister forwarded to the respondents the requirements authorized by the order of Muldoon J. The requirements provided that the information was to be supplied within 30 days of that date (March 2, 1995).

On March 6, 1995 the respondents brought a motion returnable on March 7, 1995 for, amongst other things, a review of the authorizations granted by Muldoon J. The motion was adjourned on consent to April 27, 1995 and was further adjourned to May 11, 1995 to enable counsel for the respondents to cross-examine Mr. Kennedy on his affidavit.

The issues on this application of the respondents are: (a) whether section 231.2 of the Act entitles the Minister to obtain a court authorization to require third parties to provide the names of taxpayers who he believes are not complying with the Act, and (b) if section 231.2 provides such entitlement, whether the evidence in this case is sufficient to justify the Court issuing such an authorization.

The respondents also challenged the constitutional validity of section 231.2 as being in contravention of section 8 of the Canadian Charter of Rights and Freedoms [being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44]] which involves unreasonable search and seizure. However, the respondents did not comply with section 57 of the Federal Court Act, R.S.C., 1985, c. F-7 [as am. by S.C. 1990, c. 8, s. 19] which requires at least ten days notice to the Attorney General of Canada and all provincial attorneys general of the constitutional challenge. As a result the constitutional issue was not argued before me.

Section 231.2 provides:

231.2 (1) Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as is stipulated in the notice,

(a) any information or additional information, including a return of income or a supplementary return; or

(b) any document.

(2) The Minister shall not impose on any person (in this section referred to as a “third party”) a requirement under subsection (1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection (3).

(3) On ex parte application by the Minister, a judge may, subject to such conditions as he considers appropriate, authorize the Minister to impose on a third party a requirement under subsection (1) relating to an unnamed person or more than one unnamed person (in this section referred to as the “group”) where the judge is satisfied by information on oath that

(a) the person or group is ascertainable;

(b) the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under this Act;

(c) it is reasonable to expect, based on any grounds, including information (statistical or otherwise) or past experience relating to the group or any other persons, that the person or any person in the group may have failed or may be likely to fail to provide information that is sought pursuant to the requirement or to otherwise comply with this Act; and

(d) the information or document is not otherwise more readily available.

(4) Where an authorization is granted under subsection (3), it shall be served together with the notice referred to in subsection (1).

(5) Where an authorization is granted under subsection (3), a third party on whom a notice is served under subsection (1) may, within 15 days after the service of the notice, apply to the judge who granted the authorization or, where the judge is unable to act, to another judge of the same court for a review of the authorization.

(6) On hearing an application under subsection (5), a judge may cancel the authorization previously granted if the judge is not then satisfied that the conditions in paragraphs (3)(a) to (d) have been met and the judge may confirm or vary the authorization if the judge is satisfied that those conditions have been met.

This section allows the Minister, for any purpose related to the administration or enforcement of the Act, to require any person to provide information or documents. Where the Minister seeks information or documents from a third party respecting an unnamed taxpayer, the Minister must first obtain the authorization of a judge. The Minister may apply to the judge ex parte and where the judge is satisfied as to the matters specified in subsection (3) by information on oath, such authorization may be granted. Where authorization is granted on an ex parte application, the third party required to provide the information may, within 15 days, apply to the judge granting the authorization or where that judge is unable to act, to another judge of the same court, for a review of the authorization. On the review, the reviewing judge may cancel, confirm or vary the authorization. It is the respondents’ application for review of the authorization granted by Muldoon J. on February 6, 1995 pursuant to subsection 231.2(3) that gives rise to this decision.

As to the first issue, counsel for the respondents submits section 231.2 is intrusive in that it establishes a procedure whereby a third party may be required to provide the Minister with information about other taxpayers. He says the provision must therefore be construed restrictively. In this case he says the Minister simply seeks a list containing the names of unidentified taxpayers, not information relating to them, and that the provision of such a list is not contemplated by the section.

He relies primarily on James Richardson & Sons, Ltd. v. Minister of National Revenue et al., [1984] 1 S.C.R. 614 and Regina v. Bruyneel, A. (1985), 86 DTC 6119 (B.C.C.A.). While he concedes these decisions were rendered before the enactment of section 231.2, he says that subsection (1) is essentially the same as subsection 231(3) of the Act which applied at the time those decisions were rendered.[i]

In Richardson, Wilson J. held [at page 625] that the Minister, in seeking the names of unnamed commodity traders was trying to check generally on those traders’ compliance with the Act. She also held that subsection 231(3) did not authorize such a survey, and that the subsection was only available

… to obtain information relevant to the tax liability of some specific person or persons if the tax liability of such person or persons is the subject of a genuine and serious inquiry.

In Bruyneel the British Columbia Court of Appeal observed that what the Minister was seeking were the names of taxpayers and not information relating to tax liability. The Court decided, on the facts, that the Minister was not entitled to the names he sought.

While Richardson and Bruyneel provide a useful background, it is important to note that the relevant legislation is different today than at the time of those decisions. The strict approach adopted in those decisions was necessitated by a broad statutory provision which, if interpreted too broadly, left open the possibility of abuse by tax enforcement officials. In Richardson, at page 622 Wilson J. outlines the mischief that could result from a broad interpretation of the former subsection 231(3):

The language of s. 231(3) of the Income Tax Act is unquestionably very broad and on its face would cover any demand for information made to anyone having knowledge of someone else’s affairs relevant to that other person’s tax liability. It would, in other words, if construed broadly, authorize an exploratory sortie into any taxpayer’s affairs and require anyone having anything to contribute to the exploration to participate. It would not be necessary for the Minister to suspect non-compliance with the Act, let alone to have reasonable and probable grounds to believe that the Act was being violated as required in s. 231(4). Provided the information sought had a bearing (or perhaps even could conceivably have a bearing) on a taxpayer’s tax liability it could be called for under the subsection.

Counsel for the Minister submits, and I accept, that section 231.2 was enacted to address these difficulties. By contrast with subsection 231(3), subsections 231.2(2) and (3) expressly provide a process with which the Minister must comply in order to require third parties to provide information or documents relating to unnamed taxpayers. A ministerial requirement to third parties to provide information about another person’s tax affairs now requires a court authorization. Pursuant to subsection 231.2(3) there must be evidence on oath that: the person is ascertainable; the purpose is to verify compliance by the person with the Act; it is reasonable to expect, on any grounds, non-compliance with the Act; and the information is not otherwise more readily available. Forcing the Minister to comply with this procedure addresses the mischief identified in Richardson and is intended to prevent fishing expeditions.

Although section 231.2 addresses many of the problems associated with seeking information about unnamed taxpayers under the former subsection 231(3), I still agree with counsel for the respondents that a procedure by which the Minister may require third parties to disclose information about unnamed taxpayers is intrusive. I further agree that the restrictive approach mandated in Richardson remains valid. See R. v. 311326 Alberta Ltd., [1993] A.J. No. 25 (C.A.) (QL). Further I think the fact that the Minister may obtain a court authorization ex parte places an obligation on the Minister to act in the utmost good faith and ensure full and frank disclosure of information. See for example, Canada v. Duncan, [1992] 1 F.C. 713(T.D.), at page 730. For all these reasons, the standard to be met by the Minister in making an application for court authorization under subsection 231.2(3) is high.

Having said this however, I do not agree with counsel for the respondents when he says that a third party cannot be required to provide a list of names of theretofore unnamed persons pursuant to a court authorization. Subsections 231.2(2) and (3) refer to information or documents “relating to one or more unnamed persons”. I do not see why such information could not include the names of the unnamed persons. Indeed, to provide information about unnamed persons without naming the persons seems to me pointless. If the Minister, provided he obtains Court authorization, is entitled to require from third parties information about unnamed persons he must also be able to obtain their names. What would be the point of authorizing the Minister to require information about unnamed persons if their names could not be required to be provided at the same time?

Intrusion into the privacy of individuals is always a sensitive matter, especially when third parties, who themselves may have valid reasons for not wanting to disclose, are required to provide the information. Undoubtedly this is the reason Parliament saw fit to require the Minister to obtain court authorization for such intrusion upon satisfying the court of the matters specified in subsection 231.2(3). But provided the requirements of this subsection are met, such intrusion is authorized. There is no absolute prohibition from obtaining the names of taxpayers from third parties and indeed section 231.2 now provides a procedure for obtaining such information.

With respect to the second issue, counsel for the respondents argues that even if section 231.2 allows for a requirement on third parties to provide the names of unnamed taxpayers, the criteria listed in subsection 231.2(3) have not been met in this case. This assertion by counsel requires a close examination of the facts in this case, the reasons why the Minister chose to seek the names of unnamed persons from the respondents, and the Minister’s adherence to the strictures of subsection 231.2(3).

The Minister’s rationale is disclosed in the affidavit of Brian Kennedy, an auditor with Revenue Canada, and the cross-examination on that affidavit. The four respondents were in the business of selling seismic data—data which may indicate the location of oil or gas far underground. This data was sold to investors. The Minister’s first concern is that the sale price of the seismic data is inflated solely for the purpose of providing an excessive tax deduction for those investors. According to the evidence an investor may acquire seismic data for say $100,000, paying $15,000 in cash and executing a promissory note for the balance of $85,000. Under the agreement signed by the purchaser, if the purchaser does not pay the amount evidenced by the promissory note, he is not liable for it. The vendor’s only recourse is to recover possession of the seismic data. In such a scenario, a taxpayer in the 50% tax bracket would be entitled to deduct $100,000 from his income for a tax saving of $50,000. The cost to him would be the $15,000 that he paid in cash for the seismic data. His net gain would be $35,000.

Mr. Kennedy produced on cross-examination three appraisals indicating that the seismic data was grossly inflated in value, e.g. certain seismic data purchased by the taxpayer for $100,000 had a value of $21,000, as appraised by Revenue Canada. If the appraisals are correct, the amount the purchasers may deduct for income tax purposes is excessive.

The Minister also says evidence of exploration activity arising from the sale of the seismic data is non-existent or inadequate. Letters were written to known investors respecting exploration activity but the responses were unsatisfactory, and did not satisfy the Minister the seismic data was acquired for a purpose envisioned by the Act. If there was no bona fide intention to explore for oil or gas using the seismic data, the expenditure for the data would not have been incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act or as a “Canadian exploration expense” within the meaning of that term in subsection 66.1(6) [as am. by S.C. 1994, c. 41, s. 37(1)(o)] of the Act. If the transactions had no business purpose, or were not Canadian exploration expenses, the purchasers would not be entitled to any deduction.

Mr. Kennedy says he identified twelve (originally 14) persons or companies who have purchased seismic data from the four respondents but he believes there may be more purchasers, the names of whom he does not know. He comes to this conclusion because, from the information he has, the total purchases of interests in specific seismic data does not total 100%.

Although originally arguing only that paragraph 231.2(3)(c) had not been complied with, respondents’ counsel ultimately argued the Minister has not satisfied any of the criteria in subsection 231.2(3). I will deal with each paragraph in turn.

231.2 …

(3) …

(a) the person or group is ascertainable;

Respondents’ counsel says ascertainability means there must be some hard evidence there are some unnamed investors. He says this evidence is missing in this case. He says Mr. Kennedy admits he is not certain if seismic data was sold to purchasers in addition to those already known. In his affidavit Mr. Kennedy says:

I have identified approximately 14 purchasers of the seismic data but I believe that there are additional purchasers based on my examination of the percentage interests purchased by the identified parties which do not total 100% of the seismic data purchased from any of the selling parties.

I think Mr. Kennedy’s affidavit sufficiently demonstrates the group is ascertainable. I do not follow the argument that the Minister must know of the existence of at least one unnamed person in the group to meet the ascertainability criterion. It may be, as in Richardson, that because of co-operation from a third party the Minister may know of the existence of unnamed taxpayers, although not their names. However, in other cases, where the third parties have not disclosed any information respecting unnamed taxpayers, the Minister will not know they exist. I see no logical reason, and nothing in the wording of paragraph 231.2(3)(a), which indicates ascertainability requires the Minister to show he knows one or more individuals exist. The group, purchasers of seismic data from the four respondents, is ascertainable. If there are only 12 purchasers, the respondents will say so. If there are more, they can be identified from the respondents’ records.

In any event Mr. Kennedy states in his affidavit:

I subsequently spoke with Joe Struck, who advised me that he was acting for the four corporations and that in his view, the information concerning any other investors could not be provided without judicial authorization under subsection 231.2(3).

In a letter from Mr. Struck to Mr. Kennedy dated January 20, 1995, Mr. Struck states:

As indicated, the above-named persons believe they owe a duty to the various individuals and corporations in respect of whom you are seeking information not to disclose any confidential contractual information to any third party unless clearly required so to do.

I infer from Mr. Kennedy’s affidavit and Mr. Struck’s letter that there are other individuals in the relevant group.

231.2 …

(3) …

(b) the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under this Act;

Respondents’ counsel argues that the requirement to verify compliance by “the person or persons” with obligations under the Income Tax Act means that the person or persons must be known. I do not understand why, if the person who is the subject-matter of the Minister’s application is unnamed, he must be known. As I have indicated with respect to paragraph 231.2(3)(a), members of the relevant group must simply be ascertainable, not known.

231.2 …

(3) …

(c) it is reasonable to expect, based on any grounds, including information (statistical or otherwise) or past experience relating to the group or any other persons, that the person or any person in the group may have failed or may be likely to fail to provide information that is sought pursuant to the requirement or to otherwise comply with this Act; and

Respondents’ counsel submits there is no evidence that the unnamed individuals have failed to comply with the Act. However, as noted above, in his affidavit and cross-examination Mr. Kennedy explains the basis of his concerns. He says the twelve known taxpayers and the unnamed purchasers of seismic data may have acquired the data for inflated prices and not for the purpose of gaining or producing income or as a Canadian exploration expense. On cross-examination, appraisals were produced which indicated that the appraised values of the seismic data were far less than their purchase prices. If the purchase prices of the seismic data are inflated, the investors will receive a tax benefit to which they are not entitled. The appraisals obtained by Mr. Kennedy suggest such a result.

Mr. Kennedy says in cross-examination that although he has asked for information indicating the seismic data is being used for exploratory purposes, there has been very little forthcoming from the known investors to indicate this is so. If there is no business or exploration purpose for purchasing the seismic data, it may well be that the purchase price cannot properly be deducted from income for income tax purposes. The absence of information as to the use of the seismic data from known investors at least provides grounds for the concern that there may be no business or exploration purposes for the data by the investors.

Respondents’ counsel also says that Mr. Kennedy does not swear to the inflated purchase prices himself but relies only on appraisals made by others, who are not affiants in this proceeding. Certainly, it would have been preferable to have the appraisers submit their own affidavits; perhaps if the Minister had relied solely on hearsay evidence in support of his application, he may well have been unsuccessful in this review. However, even if reliance on appraisals made by others is an impediment to the Minister’s inflated price assertion, it would not affect his second assertion. In short, the Minister’s failure to introduce affidavits sworn by the appraisers themselves is, in the circumstances of this case, not fatal to his application because the evidence supporting his concern that purchases of seismic data were not made for business purposes or as exploration expenses is direct evidence of Mr. Kennedy under oath, as it was given in the course of his cross-examination.

231.2 …

(3) …

(d) the information or document is not otherwise more readily available.

It is submitted by respondents’ counsel that the names of the unnamed investors could more readily be available by asking other known investors or through an audit of the vendors. I disagree. This is not a partnership or other tax shelter in which it is reasonable to expect that each investor would know the names of other investors. Further, I agree with counsel for the Minister that for the Minister to obtain the names of unnamed investors by way of an audit of the vendors would be to do indirectly what the Minister is not allowed to do directly. To obtain the names of unnamed persons from third parties, the Minister must seek a court order. He cannot, and should not, circumvent that requirement by performing an audit without judicial authorization to obtain the names of such investors. That is what subsections (2) and (3) of section 231.2 are intended to cover.

From the affidavit of Brian Kennedy and his cross-examination, I am satisfied the Minister has complied with subsection 231.2(3) in this case. In my view, compliance with subsection (3) ensures the Minister, in seeking the names of unnamed taxpayers from third parties, is not conducting a fishing expedition, but a serious inquiry. I am satisfied, even on a restrictive interpretation of subsection 231.2(3), that the Minister has satisfied these requirements in this case.

I would therefore vary the authorizations granted by Muldoon J. only with respect to particulars of service and response by the respondents. Counsel for the Minister shall prepare a draft order consistent with these reasons and submit it to counsel for the respondents and the Court. He shall, without delay, make arrangements for a conference call with counsel for the respondents and the Court at which time the parties may seek directions respecting time limits and other particulars of service and responses, costs and other necessary details. The order will be finalized after the conference call.

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