The CRA is entitled to require Canadian residents, or non-residents who carry on business in Canada, to provide it with any foreign-based information that may be relevant to the enforcement of the Income Tax Act as long as the requirement is reasonable.
The CRA enforces this by issuing a so-called FI requirement. This power may be particularly useful to the CRA in transfer pricing audits.
If a taxpayer fails to substantially comply with a valid FI requirement, the taxpayer may be prohibited from using any of the information or documents covered by the FI requirement in court.
There have been a number of taxpayer challenges to FI requirements. Soft-Moc Inc. v The Queen is the most recent case illustrating the uphill battle taxpayers face when challenging the CRA’s ability to obtain information and documents using an FI requirement.
During the course of a transfer pricing audit, the CRA issued an FI requirement to Soft-Moc. This required Soft-Moc to provide information and documents in the possession of companies in the Bahamas.
Soft-Moc asked the FC to set aside or to at least vary the FI requirement on the basis that it:
· Was overly broad in scope;
· Was unnecessary because the taxpayer had previously provided the CRA with information which was sufficient to determine the transfer pricing issues in question;
· Required the taxpayer to provide information and documents that contained confidential and proprietary information; and
· Had consequences which were prejudicial to the taxpayer if the taxpayer did not or could not comply with the requirement.
In refusing to set aside or vary the FI requirement, the FC rejected all of Soft-Moc’s arguments. In particular, the FC noted that:
· The test with respect to production of requested information or documents is that they “may be relevant” to the administration and enforcement of the ITA and not that information and documents are relevant;
· It is not for the taxpayer to determine whether the required information can be ascertained by the CRA by means other than an FI requirement;
· The fact that information or documents are confidential or proprietary does not take such information or documents outside the scope of an FI requirement or result in a requirement being unreasonable;
· Relevance and reasonableness of an FI requirement has nothing to do with compellability of information or documents where, as in this case, the Canadian taxpayer and the non-resident are related; and
· While the consequences of failure to comply with a valid FI requirement are serious, the consequences have nothing to do with the relevance or reasonableness of the FI requirement.
By principal Tax Disputes correspondent for Canada, Deborah Toaze (email@example.com) of Blake, Cassels & Graydon’s Vancouver office.
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