CRA Fishing Expeditions

John Loukidelis has posted about a questionnaire a taxpayer has received in response to an item listed on its T1135 return. The questionnaire is slightly ridiculous, but more concerning is that this request for information is a classic “fishing expedition”. Let me explain. First, please check out what John has to say about the questions, and look at the questions themselves.

A T1135 is an “information return” called the Foreign Income Verification Statement. It’s required to be filed by all taxpayers with “specified” foreign property holdings of over $100,000, including most foreign funds and shares and securities. In this case, CRA has asked the taxpayer a series of 13 questions, related to one of the properties a taxpayer has listed on a T1135. But the questions that have been asked, are almost all entirely unrelated to determining the taxpayer’s own liability. Of that 13-question list, only 1 and 2, plus 11 and arguably 13, go to determining the taxpayer’s own liability. The rest are just trolling for something interesting to pop up. Gathering information about other taxpayers, for other purposes.

I won’t deny that the Income Tax Act gives CRA some pretty wide-ranging powers to ask questions. Section 231.2 of the Act is a very broad power, requiring any person to provide any information (or indeed any document) to CRA when CRA ask for it. But courts have significantly reduced this power in one specific circumstance: fishing expeditions by CRA. The Federal Court of Appeal has said that the only scope of 231.2 is situations where the CRA is making a: (1) “genuine and serious inquiry” into (2) a “specific person or persons” and where (3) the “information sought… is relevant to the tax liability” of that person or persons.

That’s what we don’t have here. These questionnaires are gathering information about no one in particular, and the information is of no relevance to any particular person’s tax liability. Courts have consistently ruled that taxpayers don’t have to fork over in this kind of context.

And what’s more, the Act doesn’t permit it either. CRA (and the Minister of National Revenue) “shall not impose on any person a requirement to provide any information… related to one or more unnamed persons unless the Minister first obtains the authorization of a judge.”

Of course, this is “just a questionnaire” and not a requirement: the equivalent of uniformed officers showing up at your door, inviting themselves inside, opening their notebooks and asking questions. CRA often seem to put much stock in this distinction. As you can see, I don’t.

Let me emphasize here: taxpayers generally have very little leeway to refuse to answer questions put to them by CRA. But the sort of unnamed third-party-oriented questionnaires that John quoted in his piece, I do feel strongly that you do not have to answer much of that. Your clients (or customers, or suppliers, and so on) do not have to answer much of that. I recommend seeing a lawyer and being careful if questionnaires like that arrive at your door. You have customers, friends, brokers, business partners and others who do not want you to share their secrets with CRA. You can help protect them by being circumspect in how you answer a questionnaire like this.

And finally, if you are an accountant, or indeed a broker or other professional, consider what you will do if (when!) a client comes to you with such a request for information and asks for guidance. (It doesn’t have to be from a T1135; CRA might ask for unnamed third-party information for any reason.) Legal advice–which this piece is not–may be appropriate for them.

Written by Craig Burley

Craig is a tax lawyer in private practice in Hamilton, Ontario. Call Craig at (905) 870-0196 to discuss issues that you think may need independent tax advice. In addition to tax, Craig writes and works publicly on a number of other issues related to law, justice, and public affairs.

Website: http://craigburley.com