Beima, 2017 FCA 85: a taxpayer cannot set the terms of a CRA audit; compliance order upheld

2017 FCA 85 · Federal Court of Appeal

Author: Sas Tullo

This is a short bench decision of the Federal Court of Appeal about the Canada Revenue Agency’s audit powers. A self-represented taxpayer tried to dictate how his audit would run: one auditor only, a video camera running, and no copying of his records. The CRA obtained a compliance order from the Federal Court under section 231.7 of the Income Tax Act, and the Court of Appeal dismissed the taxpayer’s appeal with costs. It matters to anyone who is audited: the Act gives the CRA, not the taxpayer, the right to decide how an inspection is carried out.

Facts

On April 16, 2014, the CRA advised the appellant, John Charles Beima, that his returns for 2006 to 2010, which were under objection, and for 2011 and 2012, not yet assessed, were under review, and listed the records it required (para 2). The audit was to begin on May 6, 2014. When the assigned auditor arrived with a second auditor and her team leader, the appellant said he would admit only one auditor and intended to videotape the audit. The CRA did not proceed, as it was not confident the audit could go ahead without interference (para 3).

On May 28, 2014, the CRA wrote again, citing section 231.1 and warning that it would seek a compliance order under section 231.7 if the records were not submitted by the specified date (para 4). When they were not, the Department of Justice set a further deadline. The appellant replied late, denying that he had withheld access, alleging that the CRA had refused to conduct the audit, and stating that the CRA could audit him but would not have his consent to copy the records. The Minister applied for a compliance order (para 5), which Strickland J. of the Federal Court granted on August 12, 2015 in file T-2047-14 (para 1).

Issues

The appeal raised two questions as the Court framed them: whether the Federal Court made a reviewable error in finding that the appellant had failed to provide the access, assistance, or information required under section 231.1, so that a compliance order could issue under section 231.7 (para 8); and whether it erred in directing, before the hearing, that the appellant’s proposed motion to strike and adjourn be treated as additional responding submissions rather than as a separate motion (para 9).

Holding

The appeal was dismissed with costs (para 11). There was no reviewable error in the finding that the appellant had not provided the required access, assistance, or information, and so no ground to set aside the compliance order (para 8), nor any error in the handling of the proposed motion, which even on its own disclosed no basis for striking the application (paras 9-10).

The court’s reasoning

Near J.A., for a panel that also included Stratas and de Montigny JJ.A., delivered the reasons from the bench. Under paragraph 231.7(1)(a) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), a judge may, on summary application by the Minister, order a person to provide any access, assistance, information, or document sought under section 231.1 or 231.2, if satisfied that the person was required under those sections to provide it and did not do so (para 6).

On an appeal from a compliance order, questions of law are reviewed for correctness and questions of fact or of mixed fact and law for palpable and overriding error, absent an extricable question of law, citing Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, and BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61 at paragraph 56 (para 7).

Applying that standard, the Court saw no reviewable error in the finding that the appellant had not provided the access, assistance, or information sought under section 231.1 (para 8). Two findings were decisive. First, contrary to the appellant’s understanding, the CRA did not require his consent to copy his records (para 8, citing paragraphs 22 and 23 of the Federal Court’s reasons). Second, the appellant, as a taxpayer, could not “dictate how CRA conducts an audit or frustrate the respondent’s ability to carry out its statutory duties by refusing entry to a second auditor or insisting on videotaping an audit process” (para 8, citing paragraphs 21 and 23 of the Federal Court’s reasons).

On the procedural complaint, the proposed motion had sought to strike the application and the auditor’s affidavit and to adjourn, on the basis that the audit was commenced for an improper purpose. The Federal Court considered those submissions and made no reviewable error in dismissing the relief (para 9, citing paragraphs 12 and 25 of its reasons). Even treating the motion on its own, there was no ground to strike the application, because the Federal Court had found at paragraphs 19 to 24 of its reasons that the prerequisites for a compliance order were met (para 10).

Practical implications

The decision is brief, but it settles three practical points. First, an appeal from a compliance order is governed by the ordinary Housen standard, as the Court had recently confirmed in BP Canada Energy, so a taxpayer who loses on the facts in the Federal Court faces the palpable and overriding error threshold on appeal. Second, the taxpayer’s consent is not a precondition to the CRA copying records in an inspection under section 231.1. Third, conditions a taxpayer attaches to an audit, such as limiting the number of auditors or recording the process, can amount to a failure to provide the access and assistance the Act requires, and so can ground a compliance order.

In my view, the case is a useful reminder that section 231.7 is not confined to outright refusals to produce documents. The appellant said the CRA was welcome to audit him; what defeated him was that he attached his own conditions, and the Federal Court found as a fact that those conditions frustrated the audit. Advisers whose clients are uneasy about an audit should raise legitimate objections, such as solicitor-client privilege where it exists, rather than impose unilateral terms on the auditors at the door. An allegation that the audit was begun for an improper purpose is likewise not a reason to refuse access; the Court treated it as a responding submission to be weighed on the application, not as a bar to it.

The current consolidated text of section 231.7 on the Department of Justice website reads as the Court described it; its history note shows only the enacting provision (S.C. 2001, c. 17, s. 183). Whether an appeal was taken to the Supreme Court of Canada is not verified here.

A taxpayer under audit does not get to set the ground rules. The CRA may bring the staff it chooses and may copy the records it inspects without the taxpayer’s permission. Refusing to cooperate on those terms invites a compliance order, with costs, and a breach of that order can be punished as contempt. Readers should watch for how the Federal Court applies the standard confirmed here to finer disputes about the scope of an audit, such as oral interviews and requests for working papers.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Beima v. Canada (National Revenue), 2017 FCA 85, judgment delivered from the bench at Edmonton on April 25, 2017. Panel: Stratas, Near, and de Montigny JJ.A.; reasons of the Court by Near J.A. Appeal from an order of Strickland J. of the Federal Court dated August 12, 2015, Court File No. T-2047-14 (no neutral citation is given in the reasons). Reasons on the Federal Court of Appeal’s site. Also on CanLII.