By Ryan M. Prendergast

The case of Canada (National Revenue) v Miller demonstrates that charities and not-for-profits (“NFPs”) should be aware of the CRA’s extensive audit powers, including the power to request a taxpayer to disclose the particulars of unwritten business agreements. The case, decided in the Federal Court by Madam Justice Walker on August 19, 2021, came about in the context of the Minister of National Revenue (the “Minister”) seeking a compliance order requiring a taxpayer, Mr. David Miller, to provide certain documents, records and information to an authorized officer of the CRA.

Mr. Miller was a businessman who engaged in consulting work, including with a client who was based out of Europe (the “European Firm”). Mr. Miller had an oral contract with the European Firm, but no written contract for services and no written invoices for amounts received from them. In 2016, the CRA began an audit of his personal income tax returns for the years of 2007-2015 and subsequently extended the audit to include the 2016 tax year. Throughout 2017 and 2018, Mr. Miller and the CRA auditor engaged in correspondence regarding requests for documents and information. From the end of 2018 to mid-2020, several demand and response letters were exchanged between the Department of Justice (“DOJ”) on behalf of the CRA and Mr. Miller’s representatives from a professional audit and tax firm. The CRA viewed Mr. Miller to be unresponsive and directed the DOJ to begin an application in court on behalf of the Minister.

The Minister’s application submitted that Mr. Miller failed to produce the documents, records and information contrary to subsection 231.1(1) of the Income Tax Act (“ITA”) which sets out the auditing powers of an “authorized person.” The Minister sought an order under subsection 231.7(1) of the ITA for a judge to order Mr. Miller to provide the Minister with access to the information she sought. Mr. Miller submitted that he had complied with the Minister’s request to the best of his ability and that certain documents were unavailable. He further argued that the court should not grant the Minister’s application.

The Minister’s position was that her power to access a taxpayer’s books and records under paragraph 231.1(1)(a) of the ITA is broad and not only permits her to access a taxpayer’s books and records, but also permits her to request written information about such books and records. Mr. Miller submitted paragraph 231.1(1)(a) should be interpreted more narrowly as per the Federal Court of Appeal’s decision in Her Majesty the Queen v Cameco Corporation (“Cameco”). Cameco held that the Minister did not have authority under paragraph 231.1(1)(a) to require employees of a corporation to attend interviews and to answer questions posed by CRA auditors.

Madam Justice Walker considered the distinction raised in Cameco between independent verification versus compelling answers to questions. If the information the Minister sought should be in Mr. Miller’s books and records, then the Minister must be able to gain access to that information through relying on paragraph 231.1(1)(a). Therefore, the Minister’s requests for contracts and invoices outlining Mr. Miller’s provision of services to the European firm was within paragraph 231.1(1)(a), because such information should be documented in a taxpayer’s books and records. Mr. Miller’s responses were incomplete and equivocal; as a result, the Minister’s request for a detailed schedule of compensation was included in the court’s compliance order. The Minister’s request for details regarding how Mr. Miller became involved with the European Firm was rejected, however, as it was not obviously caught under subsection 231.1(1).

The takeaway from this case for charities and NFPs is that the CRA can compel the production of any information that should be documented in books and records, even if a transaction was originally an oral agreement. In an audit, charities and NFPs should be prepared to make reasonable efforts to accurately respond to requests for documents and information that fall within the scope of subsection 231.1(1).

Read the October 2021 Charity & NFP Law Update