Judgments

[1997] 2 F.C. 878

A-514-96

AGT Limited (Appellant)

v.

The Attorney General of Canada (Respondent)

Indexed as: AGT Ltd. v. Canada (Attorney General) (C.A.)

Court of Appeal, Stone, Desjardins and Linden JJ.A. —Ottawa, March 11, 12, 13 and April 7, 1997.

Income tax — Seizures — Appeal from F.C.T.D. order dismissing judicial review application challenging validity, enforceability of notices of requirements under Act, s. 231.2(1) — AGT providing documents to CRTC in rate setting process — CRTC ordering documents sealed from public access — M.N.R. issuing notices of requirements requiring AGT to produce documents — Minister unable to determine whether documents relevant without examining them — That documents prepared for another forum, sealed by CRTC not preventing access by M.N.R. since relevant to potential tax liability, M.N.R. engaged in enforcing Act — S. 231.2 applies where information sought by M.N.R. relevant to tax liability of specific person(s), and when tax liability subject of genuine, serious inquiry.

This was an appeal from a decision of the Trial Division dismissing an application for judicial review challenging the validity and enforceability of notices of requirements issued under Income Tax Act, subsection 231.2(1). That provision permits the Minister for any purpose related to the administration or enforcement of the Act to require any person to provide, within reasonable time, any information. The appellant filed certain documents with the CRTC in a rate setting process. Those documents were ordered sealed from public access pursuant to CRTC Telecommunications Rules of Procedure, and the Railway Act. When the CRTC refused to release the confidential material, the Minister of National Revenue issued notices of requirements requiring the appellant to produce the documents. The appellant contended that the notices of requirements were invalid because they did not meet the conditions set out by the Supreme Court of Canada in R. v. McKinlay Transport Ltd., namely that the documents be relevant to the filing of the income tax return and that the seizure be “reasonable” within the meaning of Charter, section 8. As to relevance, the appellant submitted that the Minister had to demonstrate that the notices of requirements were designed to seek production of only those documents that were relevant to his compliance verification function. In the appellant’s submission, the Minister was on a fishing expedition. The appellant further argued that the seizure was unreasonable because the appellant’s privacy interest in the documents sought to be seized outweighed the state’s interest in those documents as evidenced by the CRTC’s confidentiality order and the fact that the documents came into existence by compulsion of law to allow the CRTC to discharge its statutory duty.

The issue was whether the notices of requirements were authorized under subsection 231.2(1).

Held, the appeal should be dismissed.

The Supreme Court of Canada found that subsection 231(3), now subsection 231.2(1), constituted a valid seizure within the meaning of Charter, section 8 in R. v. McKinlay Transport Ltd. It also held that the meaning of “unreasonable” in section 8 would be less strict in an administrative and regulatory context.

Under the Income Tax Act the Minister is concerned with verifying the tax liability of the taxpayer which is first revealed in the taxpayer’s return. It is often impossible to determine from the face of the return whether any impropriety has occurred in its preparation. Investigatory mechanisms which force corporations and other businesses to divulge what they and only they know about their internal affairs are part of the state’s interest in the enforcement of the Act. While an individual’s interest in having business strategies kept in confidence is recognized, the balancing favours the state. The Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them.

Neither the fact that the documents were prepared to provide the CRTC with information required under a rate setting process nor that they were sealed by the CRTC’s order prevented the Minister from having access to them since they were relevant to the potential tax liability of the taxpayer and the Minister was engaged in enforcing the Act.

The rules of interpretation have reduced the scope of subsection 231.2(1) to situations where the information sought by the Minister is relevant to the tax liability of some specific person or persons, and when the tax liability of such person or persons is the subject of a genuine and serious inquiry. Given these criteria, no error was committed by the Motions Judge.

Judgment was stayed on consent for 90 days to allow the appellant to apply to the Supreme Court of Canada for leave to appeal.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Alberta Government Telephones Reorganization Act, S.A. 1990, c. A-23.5.

CRTC Telecommunications Rules of Procedure, SOR/79-554, ss. 18, 19 (as am. by SOR/86-832, s. 3).

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.

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

Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 231.2(1).

Railway Act, R.S.C., 1985, c. R-3, ss. 350, 358.

CASES JUDICIALLY CONSIDERED

APPLIED:

R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627; (1990), 68 D.L.R. (4th) 568; 55 C.C.C. (3d) 530; [1990] 2 C.T.C. 103; 76 C.R. (3d) 283; 47 C.R.R. 151; 90 DTC 6243; 106 N.R. 385; 39 O.A.C. 385.

REFERRED TO:

R. v. Gruenke, [1991] 3 S.C.R. 263; [1991] 6 W.W.R. 673; (1991), 67 C.C.C. (3d) 289; 8 C.R. (4th) 368; 7 C.R.R. (2d) 108; 75 Man. R. (2d) 112; 130 N.R. 161; 6 W.A.C. 112; Thomson Newspapers Ltd. v. Canada (Director of Investigation and Research, Restrictive Trade Practices Commission), [1990] 1 S.C.R. 425; (1990), 67 D.L.R. (4th) 161; 54 C.C.C. (3d) 417; 29 C.P.R. (3d) 97; 76 C.R. (3d) 129; 47 C.R.R. 1; 106 N.R. 161; 39 O.A.C. 161; 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; 84 DTC 6325; 54 N.R. 241.

AUTHORS CITED

Wigmore, John Henry. Evidence in Trials at Common Law. McNaughton Revision, vol. 8. Boston: Little, Brown & Co., 1961.

APPEAL from a Trial Division order ([1996] 3 F.C. 505 [1996] 3 C.T.C. 143; (1996), 96 DTC 6388; 115 F.T.R. 1 (T.D.)) dismissing an application for judicial review challenging the validity and enforceability of notices of requirements issued under Income Tax Act, subsection 231.2(1). Appeal dismissed.

COUNSEL:

Al Meghji and John E. E. Lowe for appellant.

Naomi Goldstein for respondent.

SOLICITORS:

Bennett Jones Verchere, Calgary, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

Desjardins J.A.: This appeal deals with the validity and enforceability of three notices of requirements issued by the Minister of National Revenue (the Minister) to the appellant AGT Limited (AGT) pursuant to subsection 231.2(1) of the Income Tax Act.[1]

These notices of requirements read in their substantive parts:[2]

For the purposes related to the administration or enforcement of the Income Tax Act, pursuant to the provisions of subsection 231.2(1) thereof, I hereby require from you within 30 days from the date of delivery of this notice, file copies of correspondence, agreements, reports, memoranda, schedules, working papers, minutes of meetings, notes to files, telexes, facsimile transmissions and other documents in your possession or under your control, and in the manner originally kept relating directly or indirectly to the following:

(i) documents and information filed with the Canadian Radio and Telecommunication Commission and not previously provided for the years 1990 to July 1995

The aforementioned enumeration of classes of documents or information is not to be presumed to be exhaustive of the material which the officer or officers of this Department will wish to review and subsequent reference may be made to classes or specific documents or information which must be provided pursuant to this agreement.

…

If this requirement is not complied with you may be liable to prosecution without further notice under subsection 238(1).

The documents and information sought by the Minister under the notices of requirements are materials the appellant filed with the Canadian Radio-television and Telecommunications Commission (the CRTC) for the years 1990 to July 1995, which now enjoy the status of confidential material by virtue of a decision of the CRTC made pursuant to sections 350 and 358 of the Railway Act,[3] and sections 18 and 19 of the CRTC Telecommunications Rules of Procedure.[4]

The facts

The appellant is a telephone company whose activities have been regulated by the CRTC since October 4, 1990. Prior to October 4, 1990, telephone service in the province of Alberta was provided by the Alberta Government Telephones Commission. Being a Crown corporation exempt from federal and provincial income tax, it never claimed capital cost allowance. For accounting purposes, however, it did calculate an annual depreciation expense which it included in the calculation of its revenue requirement. Pursuant to the Alberta Government Telephones Reorganization Act,[5] the Commission was restructured as of October 4, 1990, for purposes of privatization. Telus Corporation was formed to act as a holding corporation to facilitate the privatization of the provincial Crown agent. Most telephone operations and assets were transferred to the appellant, a subsidiary of Telus which became a regulated business under the jurisdiction of the CRTC. AGT became, at the same time, a taxable entity.

In preparation for the organization and privatization of the Alberta Government Telephones Commission, the Minister was asked for an advanced tax ruling as to whether depreciable assets for tax purposes should be valued at original cost, approximately $ 4 billion, or a net book value, i.e. original cost less depreciation of about $ 2.2 billion. The tax ruling allowed the original cost as undepreciated capital cost.

In October 1991, the appellant filed an application with the CRTC for a revenue requirement proceeding, initially for 1992. The revenue requirement is intended to cover AGT’s expenses, costs of capital and other items; but of relevance here, is the fact that the allowed revenue is also intended to cover AGT’s income tax liability.

During the course of its application to the CRTC, AGT took a more conservative approach on its income tax liability than in its income tax returns to the Minister. Before the CRTC, the corporate taxpayer furnished the CRTC with certain documents on which it claimed and obtained confidentiality pursuant to sections 18 and 19 of the CRTC Telecommunications Rules of Procedure.

The Minister of National Revenue, who had been conducting a general audit of AGT involving the review and verification of the financial statements and tax returns filed by the appellant in 1990 and 1991,[6] became aware of the confidential material the appellant had filed with the CRTC. As a result of an internal memo, three representatives of the Minister visited the CRTC on 22 June 1995, so as to have access to the material. The CRTC, however, refused to release the confidential documents.

In July 1995, after attempting unsuccessfully to obtain the confidential documents in issue directly from the CRTC, the Minister issued the notices of requirements under subsection 231.2(1) of the Act requiring AGT to produce the documents in question.

The taxpayer applied for judicial review to the Trial Division of this Court challenging the validity and enforceability of the notices of requirements. The application was dismissed in a decision which is now reported.[7]

The parties’ contentions

The appellant has pressed upon us two key arguments. Firstly, that the notices of requirements were not authorized under subsection 231.2(1). Secondly, that the documents sought to be seized were privileged under the “Wigmore rules” [Wigmore, Evidence in Trials at Common Law, vol. 8, McNaughton Revision, para. 2285] as outlined in cases such as R. v. Gruenke.[8] We chose not to hear the respondent on this second issue, since we are satisfied that the Motions Judge did not err in his disposition of that argument.

With regard to the first issue, the appellant contends that the notices of requirements are invalid because they do not meet the conditions set out by the Supreme Court of Canada in R. v. McKinlay Transport Ltd.,[9] namely that the documents “be relevant to the filing of the income tax return”, and that the seizure be “reasonable” within the meaning of section 8 of the Canadian Charter of Rights and Freedoms.[10]

With regard to the threshold test for relevance, the appellant submits that although McKinlay stands for the proposition that seizures under subsection 231.2(1) of the Income Tax Act have a lower threshold test than the “reasonable grounds” test for seizure in a criminal law context, it is still incumbent upon the Minister to demonstrate to the Court, by affidavit or otherwise, that the notices of requirements are designed to seek production of only those documents that may be relevant to his compliance verification function. To issue a notice of requirement which deliberately disregards the potential relevance of a document is clearly outside the scope of the section.

In the case at bar, there are issues as between the Minister and AGT with regard to the classification of certain assets for tax purposes.[11] The appellant submits that the Minister has admitted that the notices of requirements seek the production of information which is irrelevant to these issues. During cross-examination, Ms. Sharon Marlene White, a representative of the respondent, conceded that AGT could not be forced to give its opinion on the risk assessment of those assets.[12] She made clear, however, that the Minister is interested in the facts underlying the risk assessment. The following exchange then occurred:[13]

Q. You just issued the requirement knowing that a consequence may be that you would end up with information that you are not entitled to?

A. I issued a requirement asking for all documents filed with the CRTC, whatever they may be. [Emphasis added.]

Such an admission, claims the appellant, indicates that the Minister is operating an impermissible fishing expedition. The Minister, it says, is entitled to business records a taxpayer is obligated to keep, but not to opinion documents and business strategies.

The appellant further argues that the seizure is unreasonable because the appellant’s privacy interest in the documents sought to be seized outweighs the state’s interest in those documents. The appellant submits that it has a compelling privacy interest in the documents because, at the time the notices of requirements were issued, the sought for documents enjoyed confidentiality by virtue of the CRTC’s decision which had determined that it is in the public interest that the documents remain confidential. The fact that the appellant is not required by the Act to maintain the type of documents in issue is further evidence that the state’s interest in obtaining the documents does not outweigh the appellant’s privacy interest. The Motions Judge should have considered that the documents at issue came into existence by compulsion of law for a very specific purpose since the information was prepared and provided to the CRTC so as to allow the CRTC to discharge its statutory duty. The diversion which the Minister is seeking is, therefore, unreasonable.

The appellant finally argues that the Minister’s extra-legal conduct in seeking access to the information is clearly at odds with the rule of law and the values embodied by section 8 of the Charter. The attempt to obtain the documents through the CRTC is an intricate part of the seizure in issue and goes to the determination of whether the seizure was reasonable.

The respondent maintains that the notices of requirements meet the legal requirements of McKinlay. The Minister is entitled to obtain documents which might contain not only facts, but which might reveal the roadmap followed by the taxpayer in his assessment. The Minister is entitled to have access to documents which might flag situations likely to assist him in the enforcement of the Act.

Analysis

The seminal case is McKinlay where the Supreme Court of Canada found that subsection 231(3) of the Income Tax Act [S.C. 1970-71-72, c. 63], now 231.2(1), constitutes a valid seizure within the meaning of section 8 of the Charter. The Court upheld the Minister’s warrantless demand for a taxpayer’s private documents and information, in the context of the administration or enforcement of the Act, on the basis that there was a lower standard of reasonableness for the production of those documents.

Wilson J., speaking for herself and Lamer C.J.,[14] noted that the federal Income Tax Act was a regulatory statute, and that the meaning to be given to the word “unreasonable”, as found in section 8 of the Charter, would be less strict in an administrative and regulatory context:[15]

It is consistent with this approach, I believe, to draw a distinction between seizures in the criminal or quasi-criminal context to which the full rigours of the Hunter criteria will apply, and seizures in the administrative or regulatory context to which a lesser standard may apply depending upon the legislative scheme under review. I do not believe that when the Chief Justice said in Simmons at p. 527 that departures from the Hunter criteria would be rare he was applying his mind to searches or seizures in the context of regulatory legislation. I think he was addressing as in the cases of Hunter and Simmons themselves searches or seizures in a criminal or quasi-criminal context. It is with these considerations in mind that I examine the reasonableness of s. 231(3) of the Income Tax Act.

She then continued:[16]

At the beginning of my analysis I noted that the Income Tax Act was based on the principle of self-reporting and self-assessment. The Act could have provided that each taxpayer submit all his or her records to the Minister and his officials so that they might make the calculations necessary for determining each person’s taxable income. The legislation does not so provide, no doubt because it would be extremely expensive and cumbersome to operate such a system. However, a self-reporting system has its drawbacks. Chief among these is that it depends for its success upon the taxpayers’ honesty and integrity in preparing their returns. While most taxpayers undoubtedly respect and comply with the system, the facts of life are that certain persons will attempt to take advantage of the system and avoid their full tax liability.

Accordingly, the Minister of National Revenue must be given broad powers in supervising this regulatory scheme to audit taxpayers’ returns and inspect all records which may be relevant to the preparation of these returns. The Minister must be capable of exercising these powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. Often it will be impossible to determine from the face of the return whether any impropriety has occurred in its preparation. A spot check or a system of random monitoring may be the only way in which the integrity of the tax system can be maintained. If this is the case, and I believe that it is, then it is evident that the Hunter criteria are ill-suited to determine whether a seizure under s. 231(3) of the Income Tax Act is reasonable. The regulatory nature of the legislation and the scheme enacted require otherwise. The need for random monitoring is incompatible with the requirement in Hunter that the person seeking authorization for a search or seizure have reasonable and probable grounds, established under oath, to believe that an offence has been committed. If this Hunter criterion is inapplicable, then so too must the remaining Hunter criteria since they all depend for their vitality upon the need to establish reasonable and probable grounds. For example, there is no need for an impartial arbiter capable of acting judicially since his central role under Hunter is to ensure that the person seeking the authorization has reasonable and probable grounds to believe that a particular offence has been committed, that there are reasonable and probable grounds to believe that the authorization will turn up something relating to that particular offence, and that the authorization only goes so far as to allow the seizure of documents relevant to that particular offence.

This is not to say that any and all forms of search and seizure under the Income Tax Act are valid. The state interest in monitoring compliance with the legislation must be weighed against an individual’s privacy interest. The greater the intrusion into the privacy interests of an individual, the more likely it will be that safeguards akin to those in Hunter will be required. Thus, when the tax officials seek entry onto the private property of an individual to conduct a search or seizure, the intrusion is much greater than a mere demand for production of documents. The reason for this is that, while a taxpayer may have little expectation of privacy in relation to his business records relevant to the determination of his tax liability, he has a significant privacy interest in the inviolability of his home.

In my opinion, s. 231(3) provides the least intrusive means by which effective monitoring of compliance with the Income Tax Act can be effected. It involves no invasion of a taxpayer’s home or business premises. It simply calls for the production of records which may be relevant to the filing of an income tax return. A taxpayer’s privacy interest with regard to these documents vis-à-vis the Minister is relatively low. The Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them. At the same time, the taxpayer’s privacy interest is protected as much as possible since s. 241 of the Act protects the taxpayer from disclosure of his records or the information contained therein to other persons or agencies.

The appellant claims in essence that although subsection 231.2(1) of the Act has been declared constitutionally valid, each notice of requirement issued under that provision must meet the test of relevancy and reasonableness.

The short answer to this contention is that once a statutory provision is declared valid, as was done with respect to subsection 231.2(1) of the Act in McKinlay, the constitutional analysis ends. Only a statutory analysis is then required. It is under this analysis that I now consider the appellant’s arguments about relevancy and reasonableness.

Under the Income Tax Act, the Minister is concerned with verifying the tax liability of the taxpayer which is first revealed in the taxpayer’s return. It will often be “impossible to determine from the face of the return whether any impropriety has occurred in its preparation”.[17] Because of the nature of the conduct regulated by the Income Tax Act, there are, in many cases, no ways of determining whether proscribed conduct has been engaged in, short of studying the process by which a suspected corporation or business has made and implemented its decision.[18] Investigatory mechanisms which force corporations and other businesses to divulge what they and only they can know about their internal affairs are part of the state’s interest in the enforcement of the Act.[19] While an individual or a corporation’s interest in having business strategies kept in confidence is recognized,[20] the balancing no doubt favours the state. Wilson J. in McKinlay recognizes that the “Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them”.[21] There is an ultimate safeguard. Not all of those documents are necessarily admissible against the taxpayer in a court of law or in another proceeding. Only those in accord with the rules of evidence shall be admissible.

The fact that the documents in issue were prepared for another forum, namely for providing the CRTC with information required under a rate setting process, does not prevent the Minister from having access to them since they are relevant to the potential tax liability of the taxpayer. Moreover, the fact that they were sealed by order of the CRTC from public access does not prevent the Minister from having access to them when he is engaged in enforcing the Act. These propositions follow from McKinlay.

The notices of requirements constitute the least intrusive means by which effective monitoring of compliance with the Act can be effected.[22] The fact that the Minister used extra-legal means to try to obtain the documents is an irrelevant consideration with respect to the validity of the notices of requirements. The fact of the matter is that those documents were not obtained from the CRTC.

Subsection 231.2(1) is drafted in broad language, but its scope has been reduced through the rules of interpretation[23] to situations where the information sought by the Minister is relevant to the tax liability of some specific person or persons, and when the tax liability of such person or persons is the subject of a genuine and serious inquiry. Given these criteria, I find that no error was committed by the Motions Judge.

I would dismiss this appeal with costs.

The appellant asked, in the event the appeal is dismissed, that the judgment of this Court be stayed for a period of ninety days so as to allow the appellant to submit an application to the Supreme Court of Canada for leave to appeal to that Court. The respondent agreed. On consent, I would stay this judgment for a period of ninety days. If an application for leave to appeal to the Supreme Court of Canada is filed before the expiry of that period, the stay would stand until the application is disposed of by that Court.

Stone J.A.: I agree.

Linden J.A.: I agree.

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