Around the courts

In Canada v. Rona Inc., 2017 FCA 118, the CRA issued a Requirement for Information to Rona, which operates hardware stores across Canada, to disclose details about contractors who bought supplies from 57 Rona stores from 2012 through 2015. Unlike consumers, contractors normally have accounts at hardware stores that allow them to buy materials at a discount. This means that the stores keep records identifying these customers and their purchases, even if they pay cash.

The CRA can normally issue a Requirement without a court’s assistance, for purposes of audit. However, where information is sought about “unnamed persons”, a Court Order is required. This is a protection against “fishing expeditions”. For the Court to authorize the Requirement, the persons about whom information is sought must be ascertainable, and the Requirement must be justified as aimed at verifying whether the persons are complying with their tax obligations.

The CRA brought this application in Federal Court and Rona resisted it. The Federal Court granted the application in 2016. Rona argued that the CRA was trying to “intimidate” the construction industry with threats of criminal prosecution, but there was no evidence of this. The request was legitimately for audit purposes.

Rona appealed further, to the Federal Court of Appeal. The Court of Appeal has now confirmed that the order issued was within the Federal Court’s discretion, and would not be overturned. The fact a CRA auditor had obtained Rona’s contractor registration form under pretext of being a contractor did not matter; the form was generally available to the public.

Rona has filed an application for leave to appeal this decision to the Supreme Court of Canada, so there is still a remote chance the decision will be overturned. Meanwhile contractors who use Rona may wish to consider using the CRA’s Voluntary Disclosure Program to disclose unreported sales and GST/HST. If the CRA starts an audit, it will be too late for a voluntary disclosure.

It may be unwise to go to Court with a story about defrauding someone else!

The recent Tax Court decision in Mineiro v. The Queen, 2017 TCC 109 (released only in French so far), is a lesson in how not to conduct one’s affairs. It was an appeal under the “non-arm’s length transfer-of-property” rule (section 160 of the Income Tax Act, or section 325 of the Excise Tax Act for GST/HST), whereby the CRA or Revenu Québec (RQ) can assess a relative to whom a “tax debtor” (person with an unpaid tax liability) transfers property. The relative to whom money or property is transferred is liable for the transferor’s tax debt, up to a limit of the value transferred (minus any “consideration” given back).

Marisa was Joe’s daughter. She received a $15,000 cheque from Joe’s company in 2012. At the time, the company owed GST. RQ, which administers the GST in Quebec, assessed Marisa for the company’s GST debt.

Marisa appealed to the Tax Court of Canada, arguing that the cheque was partial repayment of a loan she had made to her father. Both she and her father testified in Court. Their explanation went back to a condominium she had bought in 2002 together with her then-fiancé. Joe did substantial renovation work on the condo, intending to do this for free. When Marisa and her fiancé broke up, they sold the condo and split the proceeds after paying off the mortgage. However, to reduce the value of those proceeds, Joe billed Marisa $32,000 for the renovation work he did, and then registered a “legal hypothec” (equivalent to a construction lien) on the property. Joe was paid the $32,000 out of the proceeds, with the ex-fiancé’s agreement.

Marisa and Joe testified that the $32,000 was not really for Joe. It was secretly agreed to be a loan from Marisa to Joe, so that when Joe’s company paid her $15,000, that was a partial repayment of the loan. Thus, Marisa argued, she had provided “consideration” for the $15,000 by reducing the amount of the loan owed to her.

The Tax Court judge dismissed Marisa’s appeal. The story Marisa and Joe told was not sufficiently probable to be believed. There was no documentation of this supposed loan, which contradicted notarized documents, and no reason why the company rather than Joe would have repaid part of it to Marisa. The evidence was also inconsistent with testimony that Joe had given on appeal of his own assessment some years earlier. As well, Marisa’s credibility was questionable, both because she had never reported her gain on the condo and because she herself testified to using this false-invoice scheme to cheat her ex-fiancé.

The Court’s conclusion was fair. Marisa and Joe may indeed have conspired to cheat the ex-fiancé as they described, but the Court did not need to approve such conduct by allowing Marisa to use it to escape her GST assessment.