Revcon Oilfield Constructors, 2017 FCA 22: a section 231.7 compliance order against a taxpayer survives the Supreme Court's read-down for lawyers and notaries

2017 FCA 22 · Federal Court of Appeal

Author: Sas Tullo

This is a short judgment delivered from the bench on an appeal from a Federal Court compliance order. During an audit the Canada Revenue Agency asked Revcon Oilfield Constructors for documents and information; the company refused, saying the material was covered by legal professional privilege; the Federal Court ordered it to produce whatever was not in fact privileged. On appeal, Revcon added a new argument built on two Supreme Court of Canada decisions released after the Federal Court’s order, which had struck down the compliance-order power as it applied to lawyers and notaries. The Federal Court of Appeal dismissed the appeal. The case matters to any taxpayer under audit who hopes that the Supreme Court’s privilege decisions weakened the CRA’s power to obtain a court order compelling production: they did not, except for the legal professionals themselves.

Facts

The appellant appealed from an order of the Federal Court dated April 23, 2015 (Mosley J.), reported as 2015 FC 524, made on an application by the Minister under section 231.7 of the Income Tax Act for an order that the appellant comply with requests for documents and information issued during an audit (para 1). The appellant had refused to comply on the ground that the documents and information were subject to legal professional privilege; the Federal Court found that some of the requested material was not privileged and had to be disclosed (para 1). The requirements had been issued against the appellant itself, and the appellant is neither a lawyer nor a notary (para 7).

Issues

Two questions were before the court. First, whether the Federal Court committed a reviewable error in finding that some of the requested documents and information were not subject to legal professional privilege (paras 1-2). Second, a new argument raised for the first time on appeal: whether the Federal Court had the authority to make a compliance order under section 231.7 at all, given the Supreme Court’s decisions in Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20, and Canada (National Revenue) v. Thompson, 2016 SCC 21, and whether the order was in substance an order against the appellant’s law firm (paras 4-5, 8).

Holding

The appeal was dismissed with costs fixed, by agreement, at $1,730 all-inclusive (para 10). The Federal Court made no reviewable error on the privilege findings, and the court agreed with it substantially for the reasons it gave (para 3). The new argument was rejected: the Supreme Court read down section 231.7 only insofar as it relates to lawyers and notaries, the provision otherwise remains in force, and it authorized the order against the appellant (paras 6-7). The order was directed only against the appellant, not against its law firm (para 9).

The court’s reasoning

The court first set out the standard of review. To obtain intervention the appellant had to show that the Federal Court erred in law or on an extricable legal principle, here the law of legal professional privilege, or committed a palpable and overriding error on a question of fact or of mixed fact and law with no extricable legal principle, citing Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 and Hospira Healthcare Corporation v. Kennedy Institute of Rheumatology, 2016 FCA 215 (para 2). The court described palpable and overriding error as a high standard for an appellant to meet, citing Benhaim v. St-Germain, 2016 SCC 48 at paragraphs 38-39, Canada v. South Yukon Forest Corporation, 2012 FCA 165 at paragraph 46, and J.G. v. Nadeau, 2016 QCCA 167 at paragraph 77 (para 2). Measured against that standard, the Federal Court’s privilege findings disclosed no reviewable error (para 3).

The court then explained why it would hear the new argument. It was purely legal, it rested on two Supreme Court authorities that postdated the Federal Court’s order, no further evidence was needed, and the respondent did not object; on the authority of Quan v. Cusson, 2009 SCC 62, [2009] 3 S.C.R. 712, the court could entertain it (para 4).

On the merits of that argument, the court read Chambre des notaires and Thompson narrowly and, in my view, correctly. In those cases the Supreme Court “declared section 231.7 to be of no force or effect only insofar as it relates to lawyers and notaries”, citing Chambre des notaires at paragraphs 92-93 and Thompson at paragraph 36 (para 6). The provision was read down to exclude lawyers and notaries, but “section 231.7 otherwise remains in force” (para 6). Because the requirements under the Act were issued against the appellant, which is neither a lawyer nor a notary, section 231.7 still authorized the Federal Court to make the order it made (para 7).

The court also rejected the characterization of the order as one directed, directly or indirectly, at the appellant’s law firm (para 8). The order was directed only against the appellant and in effect required it to disclose all documents in its power, possession, and control, wherever located; it therefore fell outside the Supreme Court’s concern that requirements issued against lawyers and notaries might subvert the client’s privilege. The client had had a full opportunity to contest privilege, and privilege “was fully respected in this case” (para 9).

Practical implications

The decision closes an argument that was bound to be tried after Chambre des notaires and Thompson. Those cases turned on the position of the legal professional who receives a requirement: the Supreme Court held that the scheme, as applied to lawyers and notaries, did not adequately protect the client’s privilege. Revcon confirms that the remedy was surgical. A taxpayer who is not a lawyer or notary cannot borrow the constitutional holding to resist a compliance order under section 231.7; the taxpayer’s protection is the privilege exception written into subsection 231.7(1) itself, which is applied document by document by the judge hearing the application.

The second point is of more day-to-day use. A taxpayer cannot defeat a compliance order by pointing out that the documents sit in its lawyer’s files. The order attaches to documents in the taxpayer’s power, possession, and control, wherever located, so the location of the file does not change who must answer the requirement (para 9). In my view the practical consequence is that privilege claims must be made and substantiated on the section 231.7 application, with proper evidence and a document-level description, because that hearing is where the client’s interest is protected and where, as this case shows, the Federal Court of Appeal will defer to the first-instance findings on a standard of palpable and overriding error (paras 2-3).

The current text of section 231.7 on the Justice Laws website shows an amendment history of 2001, c. 17, s. 183 only, so the provision as construed here has not been amended since the decision. Whether an appeal was taken is not verified here.

For a corporation under audit, the message is that the CRA’s route to the Federal Court for a compliance order is intact, and that privilege has to be proven, not merely asserted, at the hearing of that application. That hearing is where the real contest now lies.

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

Revcon Oilfield Constructors Incorporated v. Canada (National Revenue), 2017 FCA 22, judgment delivered from the bench at Edmonton on 1 February 2017, Stratas, Webb, and Scott JJ.A., reasons of the court by Stratas J.A. Reasons on the court’s site. Also on CanLII. The decision under appeal is the order of Mosley J. of the Federal Court dated April 23, 2015, cited as 2015 FC 524 (para 1).