By Alex Kerslake
Taxpayers are often aware of the common triggers for a Canada Revenue Agency (CRA) audit, such as claiming large expenses, failing to report a tax slip, or simply working in an industry known to underreport their income. There are many other methods the CRA employs to identify taxpayers who may owe additional taxes.
One less-known method is the CRA’s ability to go to a third party and request information related to unnamed taxpayers, authorized under subsection 231.2(2) of the Income Tax Act (a similar provision exists in subsection 289(2) of the Excise Tax Act).
In other words, the CRA could approach a business and ask for details of their clients (taxpayers). Notably, the CRA does not need to know who these taxpayers are at the time of the request. Consequently, subsection 231.2(2) serves as an effectively tool for the CRA to generate lists of taxpayers to scrutinize. As a comparison, many other requests for information by the CRA requires them to “name” the taxpayer that the information is requested for.
Subsection 231.2(2) is not commonly used by the CRA, but it has been used with some well-known businesses in recent years. These requests will and undoubtably have resulted in the identification of a significant number of taxpayers to audit.
The power for the CRA to conduct an unnamed search is not unlimited and requires judicial authorization. Further, the CRA cannot simply be going on a “fishing expedition”. The unnamed person or group must be ascertainable, and the request must be made to genuinely determine if these taxpayers have complied with the Income Tax Act. For this reason, there are possible defenses to a subsection 231.2(2) request.
Examples of where subparagraph 231.2(2) was used by the CRA:
Coinsquare: In MNR v Coinsquare 2021 CarswellNat 1193 (FC), the CRA requested an extensive list of information of Coinsquare’s customers. Coinsquare was able to limit their disclosure but was still required to hand over information of certain clients, such as clients with CAD$20,000 on Dec. 31 in the years 2014 through 2020, and the biggest 16,500 clients by trade volume (among other qualifying factors).
Rona: In Ministre du Revenue national c. Rona Inc. 2017 FCA 118, the CRA was able to request Rona to release information related to commercial customers of its stores.
PayPal Canada: In Canada (National Revenue) v PayPal Canada Co 2017 CarswellNat 6671 (FC), the CRA was able to request PayPal Canada to provide information related to business account holders who used a Canadian address.
KPMG: In MNR v. KPMG LLP 2016 FC 1322, the CRA was able to request KPMG to provide information related to unnamed clients in their participation in an offshore company tax structure.
Ebay Canada: In eBay Canada Ltd. V. MNR 2008 FCA 348, the CRA was able to request eBay Canada to provide information related to “PowerSellers” in Canada who sold a certain volume of items.
The bottom line
So, what does this mean for you the taxpayer? Even if you believe you haven’t set off any ‘red flags’ to trigger an audit, the CRA has endless methods to identify taxpayers who may be underreporting their income which can still result in audits. You may not even be aware a business you have engaged with is subject to a subparagraph 231.2(2) request, and it will be down to the business itself to defend the request.
How about if you are in charge of the business subject to a subparagraph 231.2(2) request? It may seem like the simple method is to comply with the request, but it is almost certainly worth challenging the request. If none of your competitors are disclosing information pursuant to a subparagraph 231.2(2) request, your clients will probably be very unhappy to learn that you willingly handed over their information to the CRA.