Federal Court Decisions

Decision Information

Decision Content

Date : 20040126

Docket : T-285-02

                                             Citation : 2004 FC 114







                         REASONS FOR ORDER


[1]                 This is an application for review of a Requirement by the Canada Customs and Revenue Agency (the "CCRA") that European Marine Contractors Limited provide foreign based information and documents. The Notice dated December 6, 2001 required the applicant to produce, pursuant to section 231.6(4) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended (the "Act"), the following:

"...information, and production of all invoices, correspondence, agreements, contracts with amendments, financial statements, books and records of account, reports, memoranda, schedules, working papers, minutes of meetings, telexes, faxes or other documents regarding Europena Marine Contractors Limited for the December 31, 1999 fiscal year."

[2]                 The applicant alleges that the Requirement is far-reaching and includes information and documents which may have no link to the determination of the applicant's liability for Canadian taxation and that in the circumstances it could be said that the Requirement, at the very least, is far too wide and unreasonable.

[3]                 The applicant was incorporated in the United Kingdom in 1988. Its activities consist in acting as a sub-sea pipeline construction company. For tax purposes, the applicant is a resident of the United Kingdom and its head office is located in South London.

[4]                 In late 1998, the applicant was approached by Sable offshore Energy Inc. ("SOEI"), and informed that a key component of the undersea pipeline installation was in jeopardy due to the inability of an unrelated contractor to guarantee the provision of a highly specialized vessel necessary to perform the contracted work; would it be prepared to perform the work in the event the originally elected contractor failed to deliver its vessel on time?

[5]                 The Sable Offshore Energy Project is located within Nova Scotia, Canada and the Nova Scotia Offshore region and includes the offshore and onshore facilities.

[6]                 As a result, the applicant carried out, at its head office in London, a review of the work requirements; it identified a project team and vessel that could be mobilized to perform the work.

[7]                 During the period January - April 1999, preliminary contract work was performed by the applicant's project team, most of which was based in the United Kingdom. Also it performed certain preliminary contract work in Canada. Such activities were always pre-agreed with SOEI and consisted mainly in arranging for accommodation, reviewing documentation, arranging for necessary permits as well as some work related to engineering, procuring and logistic aspects of the contract.

[8]                 The applicant did not rent office space in Canada but had entered into temporary living arrangements for the employees involved in the project; this consisted primarily of six month leases on apartments.

[9]                 The applicant entered into a contract with SOEI on April 15, 1999 retroactively to December 15, 1998.

[10]            In September 2000, the applicant was informed that the CCRA wished to conduct an audit in relation to the applicant's taxation year ending December 31, 1999.

[11]            In a letter dated July 24, 2001, the applicant was advised of the initial audit steps plan and the issues which caused some concern then apparent. These issues included:

A) Contract revenues

B) Reimbursements

C) Calculation fees

D) Carrying on business in Canada; and

E) Permanent establishment

[12]            By letter dated October 16, 2001 the applicant refused to allow permission for the respondent to carry on the audit.

[13]            On December 6, 2001, a Notice of Requirement to provide foreign-based information or documents (the "Requirement") was issued by the respondent.

[14]            The applicant submits that the Requirement is far reaching and argues that the Requirement includes information and documentation which has no link to the determination of the applicant's liability to Canadian taxation, if any.

[15]            The applicant underlines that, as a UK resident, it has had very limited activities in Canada; that Article XXIV of the Canada-UK Tax Convention provides for exchange of information between the competent authorities of both contracting states, a requirement to the carrying out of the provisions of the Convention; further, that at no time did the officials of the CCRA communicate with the UK tax authorities with respect to any matter pertaining to the applicant's activities.

[16]            The applicant concludes that the CCRA is in a position to determine precisely the gross income earned by the applicant without having to proceed with an audit.

[17]            In reply, the respondent argues that it is not possible to audit the applicant without access to all of its books and records for the period being audited; that it is impossible to determine the extent of the applicant's activities in Canada.

[18]            Moreover, the respondent submits that the fact the CCRA did not communicate with the UK tax authorities is irrelevant since there is no requirement of the CCRA to apply other information gathering techniques prior to issuing the Requirement in question.

[19]            The respondent through one of its officials, one David Hunter, responsible for external audit clearly explained to the applicant the dilemma with which the Agency was faced after receiving an income tax return filed by the applicant. In cross-examination it was evident that much information was lacking and further clarification was required. Dealing with the issue of various invoices which may or may not have been referred to in the income tax return, the following questions and answers from the discovery are enlightening:

"Q. [371] So, are we in agreement that this would cover invoices, for example, which have nothing to do with the Canadian activities we've been discussing?

A. It could include all of those invoices, yes.

Q. [372] It could include, for example, reports pertaining to activities carried on by the Applicant with respect to contract performed in Japan, for example?

A. It could, yes.

Q. [373] And it could cover memoranda involving situations between the Applicant and non-Canadian activities totally?

A. That is correct."

[20]            The respondent argues that, other than the issues raised during the cross-examination of Mr. Hunter, permanent establishment of the applicant is a complex matter which requires verification of all of the applicant's activities to verify whether they took place in Canada or elsewhere.

[21]            Section 231.6 of the Act was introduced in 1988 to provide rules enabling the Minister to obtain such foreign-based information or documentation as is necessary to permit a proper assessment for Canadian tax purposes.

[22]            In the case of Merko v. Canada (Minister of National Revenue-M.N.R.) [1991] 1 F.C. 239, Cullen J. of this Court stated:

"It is clear from the wording of the legislation, supra, that Parliament intended to give Revenue Canada strong, comprehensive and far-reaching powers to secure "foreign-based information or document". Section 231.6, in defining "foreign-based information or document", sets forth "any information or document which is available or located outside Canada". To secure this information or document National Revenue need only be able to show "it is relevant to the administration or enforcement of this Act"."

[23]            Thus, the test to be applied is not whether the information requested will be relevant in determining the applicant's Canadian tax liability, but rather whether the information is relevant to the administration of the Act.

[24]            In the present case, the respondent seeks information in order to carry out a general audit of the applicant's affairs for the 1999 fiscal year with a view to determining its Canadian tax liability. It is trite law that one of the purposes of an audit is to verify information. The fact that some information has been provided by the taxpayer or may be available from another source is irrelevant.

[25]            It is the CCRA's duty to verify the applicant's tax liability which necessarily requires the production of the applicant's books and records. If, after being examined, they have no impact on Canadian tax liability and if some information gleaned from the audit proves to be irrelevant it shall be treated as such but, before such a determination can be made, the books and records must be made available.

[26]            In conclusion one need only refer to the summary of Merko v. Canada (Minister of National Revenue-M.N.R.), supra:

"Parliament intended to give the Minister far-reaching powers under section 231.6 to obtain information available outside of Canada. The Minister need only show that it is relevant to the administration or enforcement of the Act. The taxpayer is protected from abusive use of the provision through the power of a judge to review the requirement. The respondent's requirement was not an abuse of the process nor was the request unreasonable."

[27]            As stated by the Supreme Court of Canada in McKinlay Transport Ltd. v. Canada, [1990] 2 C.T.C. 103, the requirement to provide information, though broad in its terms, is not an abuse of the process.

[28]            The application is hereby dismissed.



OTTAWA, Ontario

January 26, 2004

                                                           FEDERAL COURT


DOCKET:              T-285-02





                                               THE CANADA CUSTOMS AND

                                                          REVENUE AGENCY


PLACE OF HEARING:         Montreal, Quebec

DATE OF HEARING:           January 6, 2004


DATED:                                   January 26, 2004


Mr. Wilfrid Lefebvre                   FOR THE APPLICANT

Mr. Peter J. Leslie                                   FOR THE RESPONDENT


Ogilvy Renault                          FOR THE APPLICANT

Montreal, Quebec

Morris Rosenberg                                    FOR THE RESPONDENT

Deputy Attorney General of Canada

Montreal, Quebec

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