Federal Court granted CRA access to big box store’s client lists that may uncover tax fraud and evasion: Guidance from a Canadian tax lawyer on CRA’s power to compel third parties to disclose information

Image of woman shopping in a dollar store

Federal Court granted CRA access to big box store’s client lists that may uncover tax fraud and evasion: Guidance from a Canadian tax lawyer on CRA’s power to compel third parties to disclose information

Big box store was ordered by the Federal Court to turn over its client lists to the CRA

In November 2022, the Federal Court granted the CRA’s request to force J.D.Irving to turn over its clients’ data from January 1, 2019, which included the complete name, contact information, CRA business number or social insurance number and total transaction amounts of a certain type of account holders who made purchases over $20,000 per year.

A big box construction store offered these account holders a service with 48 locations across Atlantic Canada with a dedicated service team and access to bulk purchasing and pricing. Because this service also gives J.D.Irving comprehensive records of its commercial clients, the CRA made a request under s.231.2 of the Income Tax Act to compel J.D.Irving to turn over its data related to unnamed persons on the basis that the CRA had identified significant non-compliance in the construction and renovation industry.

The CRA has turned its attention toward tax fraud and evasion in the construction industry in Atlantic Canada

According to a tax gap report published in early 2022, the CRA estimated that hidden income earned in the construction industry accounted for over one quarter of all unreported personal income tax in 2018, which represents a whopping $10 billion in unreported taxable income and $2.1 billion in estimated loss in tax revenue. In addition, the report identified that small and medium construction companies often rank among the top in terms of non-payment of corporate income taxes or GST and HST. Therefore, the CRA’s strategy to fight this underground economy in the construction industry is to obtain third-party information under section 231.2 of the Income Tax Act. The disclosure of the clients’ data will typically lead to the following consequences:

  • The CRA may verify J.D.Irving’s commercial clients’ actual tax filing, and this may trigger a tax audit if there’s any discrepancy;
  • The CRA will also likely be able to identify house flippers who did not pay the requisite HST on renovations. For example, the CRA will likely reassess a contractor who purchased more than $100,000 of materials but remitted zero HST with gross negligence penalties.

CRA’s investigation power under section 231.2 of the Income Tax Act

Under section 231.2 of the Income Tax Act, the CRA has broad powers to compel third parties to disclose information related to Canadian taxpayers when enforcing the Income Tax Act. Section 231.2 gives CRA the power to compel third parties to disclose taxpayer information even when the taxpayer’s identity is unknown to the CRA.

CRA’s power to compel third-party disclosure against unnamed persons has been subject to considerable litigation, especially when the CRA is suspected to have made these disclosure requests as a part of a “fishing expedition” where they simply compel third party institutions such as banks, charities, and utility companies to disclose confidential tax information from a large number of taxpayers without any valid reason to suspect their income tax non-compliance. However, such power from the CRA is not unlimited, the Federal Court in Ghermezian v Canada (Attorney General), stated that the purpose related to the administration or enforcement of the Tax Act is to “obtain information relevant to the tax liability” of the person who is under investigation.

See also  CRA's Business Tax Audits: Canadian Tax Lawyer Analysis

The Tax Court stated that the “determination of a taxpayer’s tax liability is a purpose related to the administration and enforcement of the Act.” To learn about the limits imposed on the CRA’s power to compel third-party information under s.231.2 of the Income Tax Act, read our article at CRA Power to Compel Third Party Info Under Sec 231.2 Has Limits (taxpage.com) and Case Comment – MNR v Roofmart Ontario Inc. (taxpage.com).

Pro Tax Tips – A voluntary disclosure application may waive off interest and penalties

Tax evasion is a crime, and tax evaders may face prosecution in court, including fines or jail time, in addition to gross negligence penalties plus interest. Luckily, taxpayers who are non-compliant with the Income Tax Act may take advantage of the voluntary disclosure application to fix previous errors or disclose unreported income. If the application is accepted, the taxpayer will receive tax payer relief in the form of prosecution relief, and in some cases, penalty relief and partial interest relief.

The general eligibility criteria for CRA’s voluntary disclosure program (VDP) are the following:

  • Voluntary: the CRA must have no prior knowledge about the taxpayer’s tax owing.
  • Complete: the taxpayer must disclose tax information on all tax years in which his or her filings were inaccurate.
  • Tax Owing: the taxpayer must owe tax to the CRA due to inaccurate filings.
  • One Year Past Due: the taxpayer can only disclose information for tax years that is at least one year past the filing due date.

Whether or not to accept a voluntary disclosure application is entirely at the CRA’s discretion, therefore it is highly recommended to consult with an experienced tax lawyer in Canada to maximize your chance of being accepted.

FAQ

What is CRA’s investigation power under s.231.2 of the Income Tax Act?

The CRA has broad powers to compel third parties to disclose information related to Canadian taxpayers when enforcing the Income Tax Act. Section 231.2 gives CRA the power to compel third parties to disclose taxpayer information even when the taxpayer’s identity is unknown to the CRA. However, there are limits imposed on the CRA’s power to prevent potential fishing expeditions. For the requirement to provide information to succeed, the targeted individual(s) must be “ascertainable,” and the purpose of the request must involve “verifying compliance” with the Income Tax Act.

What are the conditions of a voluntary disclosure application?

A VDP application must meet the following five conditions to be valid and qualify for relief. The application must:

  • be voluntary;
  • be complete;
  • involve the application or potential application of a penalty;
  • include information that is at least one year past due; and
  • include payment of the estimated tax owing.