T-1430-90
John D. Merko (Applicant)
v.
Minister of National Revenue (Respondent)
INDEXED AS: MERKO V. M.N.R. (T.D.)
Trial Division, Cullen J.—Calgary, October 9;
Ottawa, October 17, 1990.
Income tax — Enforcement — Taxpayer claiming deduc
tion of substantial business losses in limited partnership —
Application to set aside requirement under Income Tax Act, s.
231.6 to provide 'foreign-based information or document"
relating to activities of limited partnership — Neither abuse of
process provided for in Act, nor unreasonable given far-flung
nature of limited partnership and large loss claimed.
This was an application to set aside a requirement by the
Minister of National Revenue pursuant to section 231.6 of the
Income Tax Act that the applicant produce any "foreign-based
information or document" relating to the activities of a limited
partnership in respect of which he had claimed business losses
of $110,000. Revenue Canada refused to process the applicant's
1986 return pending the outcome of an audit of the limited
partnership, offering instead to process the return without the
deduction for the business losses. The applicant replied that the
failure to either disallow the deductions, stating the reasons
therefor so that he could cross-appeal or process his return as
filed, was an abuse of process. Revenue Canada then processed
the return without the deduction of business losses and the
applicant filed a notice of objection. The Tax Avoidance Sec
tion at Revenue Canada then wrote to applicant, requiring that
within 90 days he provide information and documentation
related to the activities of the limited partnership. In May 1990
the applicant was given reasons for the disallowance. The
applicant argued that the requirement was unreasonable as the
documentation was neither "necessary to permit a proper
assessment" nor could it "assist the Minister in arriving at a
proper assessment"—these being phrases found in technical
notes issued by the Department of Finance to accompany the
enactment of section 231.6 authorizing these requirements. The
respondent submitted that the demand was reasonable and that
the onus of demonstrating that it was unreasonable lay with the
applicant. The issues were whether the requirement to provide
the foreign-based information was an abuse of the process
provided for in the Act and whether the demand was excessive
ly broad in its terms.
Held, the application should be dismissed.
Section 231.6 not yet having been judicially considered, there
was no guidance from case law. Subsection 231.6(6) does
provide that a requirement may not be considered to be unrea
sonable on the ground that the information is in the control of a
non-resident who is not controlled by the person who has been
served with the requirement if the non-resident is related to the
person served, i.e., a non-resident parent company of a Canadi-
an subsidiary. Thus, one of the issues in this application was
whether the requirement was "appropriate in the circum
stances" or "reasonable". That was a question of fact. The
wording of section 231.6 indicates that Parliament intended to
give Revenue Canada strong, comprehensive and far-reaching
powers to secure "foreign-based information or document".
There is no time period within which the data must be request
ed and clearly the Minister is not confined to doing so during
the course of assessing or reassessing the taxpayer, notwith
standing the use of the words "assessment" in the technical
notes. Even after a taxpayer seeks relief in the courts, Revenue
Canada is still able to require the taxpayer or a third party to
produce foreign-based information or documents if it can main
tain that it is necessary for administration or enforcement of
the Act. The taxpayer is protected from abusive use of this
section through judicial review whereby a judge may confirm,
vary or set aside the requirement.
The request was neither unreasonable nor an abuse of pro
cess and the requirement should be confirmed. The demand for
foreign-based information was prima facie reasonable given the
far-flung nature of the business of the limited partnership and
the large loss claimed by the applicant.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, s. 231.6 (as
enacted by S.C. 1988, c. 55, s. 175), 251 (as am. by
S.C. 1980-81-82-83, c. 140, s. 129; 1988, c. 55, s. 190).
CASES JUDICIALLY CONSIDERED
CONSIDERED:
Canterra Energy Ltd y The Queen, [1985] 1 CTC 329;
(1985), 85 DTC 5245 (F.C.T.D.); Edmonton Liquid Gas
Ltd y The Queen, [1984] CTC 536; (1984), 84 DTC
6526; 56 N.R. 321 (F.C.A.); R. v. McKinlay Transport
Ltd., [1990] 1 S.C.R. 627; (1990), 106 N.R. 385.
COUNSEL:
H. George McKenzie and Leslie E. Skingle
for applicant.
J. N. Shaw for respondent.
SOLICITORS:
Bell, Felesky, Flynn, Calgary, for applicant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for order ren
dered in English by
CULLEN J.: This is an application for review of
a requirement by the Minister of National Reve
nue that the applicant, John D. Merko, produce
any "foreign-based information or document" rele
vant to the administration or enforcement of the
Income Tax Act [S.C. 1970-71-72, c. 63] pursuant
to subsection 231.6(2) [as enacted by S.C. 1988, c.
55, s. 175] of the Act.
The applicant filed a tax return for the 1986 tax
year in which he claimed a refund of $19,930.80
based upon a negative income of $32,627. Included
in the computation of the negative net income
were two business losses totalling $130,000 in
respect of the applicant's share as a limited part
ner of the losses incurred by the following limited
partnerships: CRL Management and Overhead
Limited Partnership (CRL)—$20,000; and First
Taxinvestors Limited Partnership—$110,000.
A listing of the written exchanges between the
parties is necessary.
By letter dated July 22, 1987, Revenue Canada
informed the applicant that losses could not be
included in the applicant's return pending the out
come of audits being conducted on the limited
partnerships. The letter was quite specific; it reads
in part:
We wish to advise you that the business loss[es] in the amounts
of $20,000.00 from your participation in CRL Management
and Overhead Limited Partnership and $110,000.00 from your
participation in First Taxinvestors Limited Partnership will be
verified prior to your Return being processed. This verification
will be carried out by our Calgary District Office. Accordingly,
your Return will be held in abeyance until the completion of
the verification.
However, should you wish us to process your Return without
the deduction for the business losses claimed from CRL Man
agement and Overhead Limited Partnership and First Tax-
investors Limited Partnership, please forward your request in
writing to: [address follows]. [Emphasis added.]
The applicant was not amused and replied
March 28, 1988 as follows:
This letter is to formally complain about your refusal to process
my 1986 Tax Return in an efficient and reasonable manner.
The only correspondence I have received was a letter, a copy of
which is attached, in which you advised you were "verifying my
participation in the partnership", which I understand you had
done last summer.
I hereby demand that you process my return immediately.
Either disallow the deductions in respect to my limited partner
ship investments and state your reasons so I can appeal, or
process my return as filed. To do otherwise is an abuse of
process. This is certainly the case since you have three years to
reassess, if you desire to do so.
On April 11, 1988, Revenue Canada wrote:
We are writing in reply to your letter of March 28, 1988 to Mr.
Elstyme concerning the Department's practice of delaying the
processing of your 1986 tax return pending the results of audits
that are being carried out on businesses in which you are a
partner or investor.
You have indicated that in your opinion Revenue Canada—
Taxation should process your tax return in an efficient and
reasonable manner and any changes arising from audits should
be reassessed at a later date.
Although reviews are being carried out as quickly as possible,
invariably there are, delays in obtaining all the necessary infor
mation to complete these audits. For this reason, you are given
the option of having your return assessed without the deduction
for the business losses claimed from CRL Management and
Overhead Limited Partnership and First Taxinvestors Limited
Partnership before the audits of the businesses are finalized.
This option has been available to you since July 22, 1987, the
date of the initial letter and it gives you the opportunity of
exercising your right of appeal.
You mentioned that holding your 1986 return unassessed is an
abuse of the process. The Department's responsibility for main
taining public confidence in the integrity of Canada's self-
assessment system of taxation is of paramount importance.
Accordingly, preventative measures as these are necessary to
ensure that the Department is, and perceived to be, fulfilling its
responsibility and protecting the Crown's assets. Further, the
presumption of honesty or innocence as set out in the "Declara-
tion of Taxpayer Rights" is still applicable. Departmental staff
are responsible to make an impartial determination of law and
facts to ensure collection of the correct amount of tax, no more
and no less. However, the Department cannot abdicate its
responsibility for the administration and enforcement of the
Act by ignoring potential problem areas, and must take such
action as is determined necessary to meet its responsibilities.
With respect to CRL Management and Overhead Limited
Partnership and First Taxinvestors Limited Partnership, these
audits are still in progress. At this moment, it is difficult to
determine exactly when these audits will be completed.
As requested in your letter as one option, and as we are not
prepared to process your 1986 return as filed, we will assess
your 1986 Income Tax Return without the deduction for the
business losses claimed from CRL Management and Overhead
Limited Partnership and First Taxinvestors Limited Partner
ship. [Emphasis added.]
Thus, for the reasons stated above, Revenue
Canada issued a notice of assessment July 26,
1988 disallowing the business losses. The applicant
filed a notice of objection dated July 27, 1988. A
notice of reassessment dated November 2, 1988
reassessed the applicant's 1986 tax return in
respect to a matter not related to the business
losses. On January 5, 1989 a notice of objection
was served on the Minister by the applicant.
Then, I believe, the Tax Avoidance Section of
Revenue Canada made a mistake and misinter
preted or misapplied subsection 231.6(3) and sent
a letter to the applicant dated September 18, 1989
requesting him to provide within 30 days of the
date of the September 18, 1989 letter, certain
information and documents regarding, inter alia,
his investment in BOHAR Investment Club and
CRL and the subsequent conversion to Morning
Land Ventures Ltd. and/or Cold Spring Resources
Ltd. (See Exhibit H to affidavit of John Merko
sworn 15 May 1990.) Apparently to correct this
error the Tax Avoidance Section sent a further
letter dated January 5, 1990 to the applicant
which reads in part as follows:
The attached requirement letter replaces the requirement letter
previously sent to you in September 1989. The ONLY change is
that the Subsection of the Income Tax Act cited is changed
from 231.6(1) to the current 231.6(2). The 90 day period for
compliance with the revised requirement is effective from the
date of this letter.
But the September 18, 1989 letter contained no
mention of subsection 231.6(1) and 30 days, not
90 days, had been given to reply. Obviously the
respondent in the September 1989 letter had failed
to comply with its own legislative requirements.
The error is however not fatal.
Another letter was sent by the Tax Avoidance
Section pursuant to subsection 231.6(2) of the
Income Tax Act requiring the applicant to provide
information and documentation related to broad
matters described in the said letter within 90 days.
This was in, reference to activities carried on by
First Taxinvestors Limited Partnership.
By letter dated May 4, 1990 from the Chief of
Tax Avoidance Section of the respondent, the
applicant was advised of the respondent's intention
to disallow the deduction of business losses in
respect of his 1986 taxation year and the reasons
for such disallowance. This was the first time the
applicant had received reasons for disallowing the
deduction of business losses. The applicant then
instructed counsel to take action in the Federal
Court of Canada appealing the reassessment. By
notice of motion dated May 17, 1990, the appli
cant applied to set aside the February 26, 1990
requirement to provide foreign-based information
in respect of the activities of First Taxinvestors
Limited Partnership.
APPLICANT'S POSITION
The applicant states that the issuance of the
requirement constitutes an abuse of process and
that in any event the terms of the requirement are
unreasonable and should be set aside or varied.
The applicant provides copies of technical notes
issued by the Department of Finance to accompa
ny the enactment of section 231.6 of the Act in
which he highlights the following phrases: "as is
necessary to permit a proper assessment for
Canadian tax purposes"; "which could assist the
Minister in arriving at a proper assessment"; and
"to obtain the necessary information to make a
proper assessment of tax for Canadian tax pur
poses". The applicant argued that the documents
requested by Revenue Canada are neither neces
sary for a proper assessment nor will they assist
the Minister in arriving at a proper assessment.
In his statement of fact and law, the applicant
also relies upon two cases: Canterra Energy Ltd y
The Queen, [1985] 1 CTC 329 (F.C.T.D.); and
Edmonton Liquid Gas Ltd y The Queen, [1984]
CTC 536 (F.C.A.). The substantive issues in these
cases are not related to section 231.6 but do
contain rulings on evidentiary points. In Canterra,
Reed J. admitted a budget document in support of
the Crown's interpretation of a regulation, but
accorded it very little weight. In the Edmonton
Liquid Gas case the Court quoted the remarks of
the Minister of Finance with respect to the inter
pretation of certain provisions of the Income Tax
Act. The applicant cited these cases in support of
his attempt to rely on the above-quoted remarks in
the technical notes.
RESPONDENT'S POSITION
With respect to the issue of abuse of process, the
respondent states that there is no abuse of process,
as the issuance of the requirement to produce was
an administrative matter under the control of the
Minister, and has nothing to do with the process of
this Court. The respondent further submits that in
any event the demand is reasonable and that the
onus of demonstrating that it is unreasonable lies
with the applicant. In support of this position the
respondent cites the recent case of R. v. McKinlay
Transport Ltd., [1990] 1 S.C.R. 627, in which the
Supreme Court of Canada held that a demand for
the production of certain documents pursuant to
subsection 231(3) of the Act constituted a reason
able search and did not violate section 8 of the
Charter [Canadian Charter of Rights and Free
doms, 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]].
LEGISLATION
Section 231.6 was enacted in 1988 and reads as
follows:
231.6 (1) For the purposes of this section, "foreign-based
information or document" means any information or document
which is available or located outside Canada and which may be
relevant to the administration or enforcement of this Act.
(2) Notwithstanding any other provision of this Act, the
Minister may, by notice served personally or by registered or
certified mail, require that a person resident in Canada or a
non-resident person carrying on business in Canada provide any
foreign-based information or document.
(3) The notice referred to in subsection (2) shall set forth
(a) a reasonable period of time of not less than 90 days for
the production of the information or document;
(b) a description of the information or document being
sought; and
(c) the consequences under subsection (8) to the person of
the failure to provide the information or documents being
sought within the period of time set out in the notice.
(4) The person on whom a notice of a requirement is served
under subsection (2) may, within 90 days after the service of
the notice, apply to a judge for a review of the requirement.
(5) On hearing an application under subsection (4) in
respect of a requirement, a judge may
(a) confirm the requirement;
(b) vary the requirement as he considers appropriate in the
circumstances; or
(c) set aside the requirement if he is satisfied that the
requirement is unreasonable.
(6) For the purposes of paragraph (5)(c), the requirement
to provide the information or document shall not be considered
to be unreasonable because the information or document is
under the control of or available to a non-resident person that is
not controlled by the person served with the notice of the
requirement under subsection (2) if that person is related to the
non-resident person.
(7) The period of time between the day on which an applica
tion for review of a requirement is made pursuant to subsection
(4) and the day on which the review is decided shall not be
counted in the computation of
(a) the period of time set forth in the notice of the require
ment; and
(b) the period of time within which an assessment may be
made pursuant to subsection 152(4).
(8) If a person fails to comply substantially with a notice
served under subsection (2) and if the notice is not set aside by
a judge pursuant to subsection (5), any court having jurisdic
tion in a civil proceeding relating to the administration or
enforcement of this Act shall, upon motion of the Minister,
prohibit the introduction by that person of any foreign-based
information or document covered by that notice.
ISSU ES
1. Is the requirement to provide the foreign-based
information an abuse of process provided in the
Income Tax Act?
2. Alternatively, is the demand excessively broad
in its terms?
Section 231.6 was enacted in 1988 for the pur
pose of assisting the Minister to obtain informa
tion or documents which are available or located
outside Canada and which may be necessary for
the administration and enforcement of the Act. A
person resident in Canada or a non-resident person
carrying on business in Canada must provide, upon
being notified by the Minister, any "foreign-based
information or document" defined as being any
information available or located outside Canada
that could be relevant to enforcement of the Act.
If the person notified fails to comply by providing
substantially all the required information, it may
result in the prohibition of introduction of such
information as evidence in a civil proceeding relat
ed to the enforcement of the Act.
A person served with a requirement notice may
apply for review of the requirement to a judge
within 90 days of receiving the notice. The judge
on a review application has the power, pursuant to
subsection 231.6(5) to confirm the requirement,
vary the requirement as he considers appropriate
in the circumstances, or set aside the requirement
if he is . satisfied that the requirement is
unreasonable.
The issue of whether the requirement is "appro-
priate in the circumstances" or "reasonable" is a
question of fact to be determined on the facts of
the case. Unfortunately section 231.6 has not yet
been judicially considered and there is no guidance
in the case law. The section does set out in subsec
tion 231.6(6) that a requirement may not be con
sidered to be unreasonable on the ground that the
information is in the control of a non-resident who
is not controlled by the person who has been served
with the requirement if the non-resident is related
to the person served, i.e., a non-resident parent
company of a Canadian subsidiary. The question
of relation to a non-resident is considered in sec
tion 251 [as am. by S.C. 1980-81-82-83, c. 140,
s. 129; 1988, c. 55, s. 190] of the Act.
Thus, one of the issues in this application is
whether the requirement to produce is "reason-
able" or whether it is "appropriate in the circum
stances" to vary or set aside the requirement. In
my opinion, the argument of the applicant based
on the phrases outlined in the technical notes as to
whether the information requested is necessary for
a proper assessment to be made is simply another
way of saying "reasonable" or "appropriate in the
circumstances".
COMMENTS
As indicated earlier, section 231.6 was enacted
in 1988 and to the best of my knowledge this is the
first time it is being judicially considered.
At the outset counsel for the applicant made it
clear he was suggesting an abuse of the process
provided for in the Income Tax Act, and not
alleging an abuse of the court's process by the
respondent. He made the point that the scheme of
the Act provides for a self-assessment by the tax
payer and assessment or any reassessment by Na
tional Revenue, a provision for the taxpayer to file
a notice of objection and finally an opportunity for
Revenue Canada to accept the notice of objection
or to confirm the earlier assessment (reassess-
ment). Then, if the taxpayer is not satisfied, the
matter can be dealt with in the Tax Court or the
Federal Court.
In the situation here the reassessment of the
applicant was made by the respondent on Novem-
ber 2, 1988 and on January 9, 1989 the applicant
filed a notice of objection. As at May 17, 1990 the
respondent had not notified the applicant that he
had vacated or confirmed the reassessment (see
statement of claim, paragraph 8 filed May 17,
1990). However, in paragraph 15 of the affidavit
of John Merko sworn the 15th day of May 1990,
Merko affirms that the Chief of Tax Avoidance
Section had written to him on May 4, 1990 advis
ing that National Revenue was disallowing the
business losses and the reasons for so doing (noth-
ing really turns on this however).
CONCLUSIONS
It is clear from the wording of the legislation
(supra) that Parliament intended to give Revenue
Canada strong, comprehensive and far-reaching
powers to secure "foreign-based information or
document". Section 231.6, in defining "foreign-
based information or document", sets forth "any
information or document which is available or
located outside Canada". To secure this informa
tion or document National Revenue need only be
able to show it is "relevant to the administration or
enforcement of this Act". There is no time period
within which the data must be requested and
clearly it is not obliged to do so during the course
of assessing or reassessing the taxpayer, notwith
standing the strong argument made by counsel for
the applicant nor the use of the words "assess-
ment" in the copies of the technical notes issued by
the Department of Finance to accompany the
enactment of section 231.6 of the Act. Had Parlia
ment wanted this sweeping power to be confined to
the period between the time of the assessment
(reassessment) and the notice of objection (or
confirming or denying the objection), it would
have been an easy matter to say so. They did not.
Even after a taxpayer seeks relief in the courts,
National Revenue is still able to require the tax
payer or a third party to produce foreign-based
information or documents if it is able to maintain
it is necessary for administration or enforcement of
the Act.
The taxpayer is protected from abusive use of
this section through the review of foreign invest
ment requirement wherein a judge may confirm
the requirement, vary the requirement as he/she
considers appropriate in the circumstances, or set
aside the requirement if he/she is satisfied that the
requirement is unreasonable. Thus, for reasons
stated above, I find the respondent's requirement
to produce in the circumstances here is not an
abuse of the process provided for in the Income
Tax Act.
Is the demand reasonable? Parliament, through
the wording of the Act, leaves no room for doubt
that the demand for the foreign-based information
or document is prima facie reasonable given the
far-flung nature of the business of the limited
partnership and the large loss claimed by this
applicant. The applicant must clearly make an
attempt to secure the foreign-based information or
document unless it is his contention that the
request/demand is unreasonable in which case a
procedure is in place to make his case, and hence
the application to this Court. I cannot find the
request unreasonable. There is no requirement that
any information or document be provided but
there is the sanction of subsection 231.6(8) i.e., the
taxpayer, if he withholds any such required infor
mation or document, cannot use it at a subsequent
civil proceeding. The requirement puts the taxpay
er on notice about the kind of information being
sought, not only from him but others. He can
choose to seek out all the data possible, and tender
it to National Revenue or he can indicate that
some or all of the information sought cannot be
produced, or will not be produced. If he takes the
latter position, there is the sanction of subsection
231.6(8) mentioned earlier.
Accordingly, there being no abuse of the process
provided in the Income Tax Act, and in the cir
cumstances here the requirement is reasonable, I
will confirm the said requirement. The respondent
is entitled to its costs of this motion in any event of
the cause.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.