Federal Court Decisions

Date: 20060503

Docket: T-1807-04

T-1808-04

Citation: 2006 FC 551

Ottawa, Ontario, May 3, 2006

PRESENT:      The Honourable Madam Justice Heneghan

BETWEEN:

FIDELITY INVESTMENTS CANADA LIMITED

Applicant

and

THE CANADA REVENUE AGENCY

Respondent

APPLICATION UNDER s. 231.6 of the Income Tax Act and Rule 300 of the Federal Courts Rules, SOR/98-106

REASONS FOR ORDER AND ORDER

I. Introduction

[1]                Fidelity Investments Canada Limited (the "Applicant") brings two applications for judicial review, pursuant to the Federal Courts Act, R.S.C. 1985, c. F-7, as amended, relative to two Notices of Requirement ("Notice" or "Notices"), issued by the Canada Revenue Agency (the "CRA" or the "Respondent"), under section 231.6 of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.), as amended (the "Act"). The relief sought by the Applicant is an order varying or setting aside the Notices.

II. Facts

[2]                The Applicant is a body corporate, incorporated in 1987 under the laws of Canada and continued, under the laws of Ontario, in 1989. It was amalgamated under the laws of Ontario in 1994. It has filed the affidavit of Mr. Kevin Ross Barber, Vice-President, Finance, with the Applicant, as evidence in these proceedings. By a Notice dated July 12, 2004, the Applicant was required to provide information and production of the financial statements of Fidelity Investments Money Management, Inc. ("FIMMI") for the taxation years ended 1999, 2000, 2001 and 2002. If the financial statements are not prepared, then the Respondent seeks production of schedules or summaries that reflect year-end, income, expense, assets and liabilities. The Applicant's challenge to that Notice is the subject of proceeding T-1807-04.

[3]                By another Notice dated July 12, 2004 and issued by the CRA, the Applicant was required to provide information and financial statements of Fidelity Management and Research Co. ("FMR Co.") for the taxation year 1998. That Notice is the subject of proceeding T-1808-04.

[4]                According to the evidence, the Applicant is the subject of an audit by the CRA for the taxation years 1998 to 2002, inclusive. The audit began in February 2002. Prior to receipt of the Notices, the Applicant received a letter, dated March 22, 2004, from the CRA, requesting it to provide certain information and documents. It has complied with the request with the exception of providing the financial statements of FIMMI and FMR Co. to the Respondent.

[5]                The Applicant is a wholly-owned subsidiary of FMR Corp. FMR Corp. is an American corporation, based in Boston, Massachusetts. It is the parent of a group of companies, collectively known as the "FMR Group" that also includes FIMMI. The FMR Group manages mutual funds and provides other services, including brokerage, life insurance, retirement, human resources and benefits outsourcing services. It provides investment management services to retail and institutional investors in Canada through the Applicant. FMR Corp., and each of its subsidiaries, including FIMMI, are private corporations and their shares are not traded on any public stock exchange.

[6]                FIMMI, a wholly-owned subsidiary of FMR Corp., is a registered investment advisor in the United States of America. It provides related investment services relative to certain portfolios of funds distributed by the Applicant. It is a private corporation and its shares are not traded on any public stock exchange.

[7]                Mr. Barber deposed that the Applicant has subcontracted some of its responsibilities to FIMMI and FIMMI has contracts with FMR Co. to manage the portfolios of certain funds. He further deposed that he had been informed by Mr. Gregory Wass, Vice-President, Taxation, FMR Corp., that FIMMI provides various services for other members of the FMR Group but not to non-members of the FMR Group.

[8]                Further, Mr. Barber deposed that the Applicant paid FIMMI and FMR Co. for the advisory services provided by them. The reasonableness of those fees is under review by the CRA. In that regard, FMR Corp. hired the accounting firm of Ernst & Young who "benchmarked" the fees using investment advisory fee dates provided by an independent third party for the Applicant's 1998 taxation year. A copy of that report was provided to the CRA. An earlier report had been prepared in 1996 by Coopers and Lybrand; that document was also provided to the Respondent.

[9]                The Applicant received further correspondence from Ms. Donna O'Connor, Auditor, International Audit Section, CRA, dated June 8, 2004. In that letter, attached as an exhibit to the affidavit of Mr. Barber, Ms. O'Connor attempted to respond to the concerns expressed by the Applicant in connection with the provision of the information and documents requested in the March 8, 2004 letter. She reviewed certain provisions of the Act that authorize the CRA to request information and documents. She advised that the CRA was unable to give a guarantee that the information obtained will not be used in any other audit or for any other purpose than the audit of the Applicant.

[10]            Further, Ms. O'Connor rejected the suggestion that the CRA attend to review the financial statements in Boston without copies being made. Finally, she referred to a "Transfer Pricing Memorandum", TPM-04, a document generated by the CRA, and advised that the CRA would use the requested information as a "secret comparable" in another file only as a last resort, as a basis of assessment, if it was unable to use publicly available documents.

[11]            The Applicant's concerns about the use of the requested information and documents, respecting both FIMMI and FMR Co., were again addressed in correspondence dated June 25, 2004, from its solicitors to Ms. Maria Praulins, Director of CRA. The Applicant offered to provide the financial information contained in the FIMMI and FMR Co. financial statements in a specific manner. First, the Applicant proposed that the CRA review FIMMI and FMR Co.'s financial information that specifically dealt with transactions with the Applicant. If this information was inadequate, the Applicant was prepared to discuss what further information would be required. Alternatively the Applicant proposed that the CRA agree to enter into a confidentiality agreement concerning its review of FIMMI and FMR Co. financial statements. The Applicant says that the information requested bears no relationship to the reasonableness of the fees that it paid to FIMMI and FMR Co.

[12]            The CRA responded to these proposals by letter dated June 30, 2004. It refused to grant an undertaking that the information requested from FIMMI and FMR Co. would be protected from being used for purposes other than the audit of the Applicant or that the information would not be made public as the result of being used in the audit of another Canadian taxpayer. The CRA took the position that such an approach, that is an undertaking to protect confidential material, is governed by section 241 of the Act and the relevant treaty.

[13]            Mr. Barber deposed in his affidavit that he had been advised by Mr. Gregory Wass that the financial information of FIMMI and FMR Co. that is the subject of the Notices is "an extremely confidential trade or business secret" and that public release of this information could be prejudicial to the competitive position of FMR Group in the marketplace. Finally, Mr. Barber deposed that he had been informed by Mr. Wass that FIMMI and FMR Co. will provide the information requested to the Applicant if appropriate protection is provided by the CRA upon the loss of confidentiality and the use of that information for other purposes. The Applicant is not in a position to compel FIMMI and FMR Co. to disclose the requested information.

[14]            For its part, the CRA filed the affidavit of Ms. Donna O'Connor. In her affidavit, Ms. O'Connor reviewed the history of the audit, the delivery of correspondence and documents pursuant to the Notices, and the rationale for the issuance of the Notices. The CRA takes the position that the information contained in the financial statements of FMR Co. and FIMMI is necessary in order to complete its audit. She deposed that the CRA is not satisfied that the transfer-pricing studies prepared relative to the fees paid by the Applicant to FMR Co. and FIMMI are reliable. She also questioned whether these reports relied on adequate methodology.

[15]            In cross-examination upon her affidavit, Ms. O'Connor said that the CRA was looking for the financial statements in order to advance its work relative to review of the transfer-pricing, that is the fees paid by the Applicant to FIMMI and FMR Co. She said that the 1996 study prepared by Coopers and Lybrand was neither relevant nor helpful since it had been prepared for the American tax authorities. Similarly, she said that the 1999 study, prepared by Ernst and Young was not acceptable because the CRA could not determine the relationship between the parties for the purpose of establishing the best comparables. That issue, that is the best comparables, is important to the Respondent for the purposes of assessing the reasonableness of the fees in issue.

[16]            As well, according to Ms. O'Connor, the two studies that were provided by the Applicant do not contain sufficient quality information to support a proper application of the CUP method, that is "comparable uncontrolled price". She said that the CRA does not believe that the CUP method submitted by the Applicant is reliable for the purpose of assessing the transfer pricing. Further, she said that it is part of a regular audit to "review the financial position of related party services to establish if their financial results are consistent with that other party charged for such services regardless of the transfer pricing methodology used".

[17]            Ms. O'Connor expressed doubt about the reliance of both Coopers and Lybrand and Ernst and Young upon Lipper data in carrying out their respective studies of transfer-pricing relative to the fees paid by the Applicant to FIMMI and FMR Co.

III. Submissions

[18]            The Applicant argues that according to the Act, the Notices are to be reviewed by this Court upon the standard of reasonableness. It submits that the Notices are unreasonable on several grounds. First, it says that the Notices are too broad and relate to companies that are separate companies. Then, it submits that the CRA has not shown why it needs this information or that it is relevant for the purpose of administering the Act.

[19]            The Applicant argues that these Notices are in conflict with the provisions of the Convention Between Canada and the United States of America With Respect to Taxes on Income and Capital, 31 August 1984, Can. T.S. 1984 No. 15, as amended (the "Treaty"). Finally, it submits that the lack

of any guarantee of protection of confidential information leads to the inference that the Notices are unreasonable.

[20]            For its part, the Respondent takes the position that it can request information for ensuring that taxpayers comply with the principles of self-reporting and self-assessing income, as authorized by the Act. It argues that the Applicant has failed to provide acceptable evidence that the information sought is confidential information. It submits that the applicable standard of review in this case is unreasonableness and says that, in any event, the Notices are not unreasonable, having regard to the statutory authority for production of information or documents that are relevant to the administration or enforcement of the Act.

[21]            The Respondent argues that section 231.6 is not inconsistent with the requirements of the Treaty. It notes that pursuant to subsection 3(c) of Article XXVII of the Treaty, there is no obligation to provide information that would disclose trade secrets, the disclosure of which is not contrary to public policy. It submits that subsection 3(c) of that Article limits, but does not prohibit, a contracting state's obligation to comply with section 1 of that Article. Article XXVII provides that contracting states shall exchange information concerning taxes. The Respondent argues that the Applicant has failed to show that the information contained in the financial statements comes within the terms of subsection 3(c) and if it does, that its disclosure would be contrary to public policy.

[22]            Second, the Respondent submits that the affidavits of Mr. Barber constitute inadmissible hearsay evidence because they are based on information and belief, not personal knowledge. It argues that the affidavits should be stricken out.

[23]            Finally, the Respondent alleges that the Applicant has improperly named the CRA as the respondent to this proceeding. It says that the Minister of National Revenue (the "Minister") is the appropriate respondent since the Minister, not the CRA, is authorized to issue notices pursuant to section 231.6 of the Act.

IV. Discussion and Disposition

[24]            This proceeding arises under section 231.6 of the Act which provides as follows:

[25]            I will first address the applicable standard of review. Contrary to the submissions of the Respondent, the standard of review here is the standard of reasonableness. That standard of review is identified in the Act, in paragraph 231.6(5)(c). In light of the language of this statutory provision, it is not necessary to engage in a pragmatic and functional analysis to determine the appropriate standard of review. In Saipem LuxembourgS.V. v. Canada(Customs and Revenue Agency), [2005] 3 C.T.C. 294 (F.C.A.),leave to appeal to S.C.C. refused, [2005] S.C.C.A. No. 368 (Q.L.) at paragraph 21, the Federal Court of Appeal confirmed this standard of review.

[26]            The standard of reasonableness was discussed in Canada(Director of Investigation and Research) v. Southam Inc., [1997] 1 S.C.R. 748 where the Supreme Court of Canada said the following at paragraph 56:

56. ... An unreasonable decision is one that, in the main, is not supported by any reasons that can stand up to a somewhat probing examination. Accordingly, a court reviewing a conclusion on the reasonableness standard must look to see whether any reasons support it. The defect, if there is one, could presumably be in the evidentiary foundation itself or in the logical process by which conclusions are sought to be drawn from it. An example of the former kind of defect would be an assumption that had no basis in the evidence, or that was contrary to the overwhelming weight of the evidence. An example of the latter kind of defect would be a contradiction in the premises or an invalid inference.

[27]            The question, then, is whether it was reasonable for the CRA to seek production, pursuant to section 231.6, of the financial statements of FMR Co. and FIMMI, having regard to the purposes of the Act and the known facts. I need address only the issue of production of the financial statements of FMR Co. and FIMMI since the evidence of Mr. Barber, to the effect that the Applicant has provided all documents and information requested with the exception of the financial statements, is corroborated by Ms. O'Connor in the transcript of her cross-examination upon her affidavit.

[28]            The purpose of the Act, broadly stated, is to allow the federal government to collect funds that will be spent by the Government of Canada. The Canadian income tax system is based upon self-reporting of income. The purpose of the Act and its reliance upon self-assessment of income is discussed in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627 at pp. 636 and 637.

[29]            In McKinlay, the Supreme Court also discussed the availability to the Minister of broad investigatory powers, including the authority to require the production of information and documents; see AGT Ltd v. Canada (Attorney General), [1997] 2 F.C. 878. Section 231.6 is one of those far-ranging provisions that authorizes the Minister to seek the production of information and documents. Section 231.6 is directed to the production of foreign-based information or documents, as defined in subsection 231.6(1).

[30]            Section 231.6 speaks to the general criterion that the information and documents requested "may be relevant to the administration or enforcement" of the Act. In AGT, the Federal Court of Appeal commented upon this requirement of relevance as follows:

27. Subsection 231.2(1) is drafted in broad language, but its scope has been reduced through the rules of interpretation to situations where the information sought by the Minister is relevant to the tax liability of some specific person or persons, and when the tax liability of such person or persons is the subject of a genuine and serious inquiry. ... [Notes omitted]

[31]            In the present case, the Respondent argues that the financial statements are relevant for the purposes of conducting an audit of the Applicant. That audit must relate to the tax liability of the

Applicant. There is no question that such liability relates to the enforcement and administration of the Act. There is no challenge made to the initiation of the audit.

[32]            Specifically, the Respondent says that the financial statements of FMR Co. and FIMMI, two American corporations that are related to the Applicant, are necessary because it is unable to assess the reasonableness of fees paid by the Applicant to FIMMI and to FMR Co. In light of subsection 231.6(6), the fact that the Applicant is related to FMR Co. and FIMMI does not make the requirement to produce information and documents unreasonable. In my opinion, however, the relationship alone does not make the requirements "reasonable". The factor of relevance must also be satisfied. In my view, there must be evidence that the documents requested are relevant for the purposes of the Act.

[33]            The Applicant challenges the Respondent's dismissal of the two transfer pricing studies that it provided, on the grounds that the Respondent's employees were unfamiliar with the Lipper methods and did not adequately investigate the bases upon which Coopers and Lybrand and Ernst and Young, respectively, reached their conclusions. The Applicant argues that the Respondent did not understand the two studies.

[34]            As noted above, the decision of the Respondent to issue the Notices is reviewable on the standard of reasonableness. The concept of reasonableness includes relevance, relative to the Act. Although the Applicant argues that the information sought is not relevant and that its principal concern here is with the protection of confidential material, I am not persuaded that the material in question is not relevant. I draw this conclusion from the Applicant's offer to disclose the information to the CRA, albeit in a protected environment where no copies would be made and subject to the provision of an undertaking to maintain confidentiality.

[35]            In view of the evidence submitted by the Respondent, I am satisfied that the information sought to be produced, that is the financial statements of FIMMI and FMR Co., is relevant to the conduct of an audit of the Applicant. The conduct of an audit pursuant to the Act is relevant for the administration and enforcement of the Act.

[36]            It is not necessary for me to address, in detail, the Applicant's submissions concerning the Treaty. In my opinion, the existence of the Treaty does not overrule or limit the Minister's right to pursue the requested information by means of notices issued pursuant to section 231.6 of the Act. That is the course of action chosen in this case.

[37]            I am satisfied that the financial statements in question are essentially confidential materials. In this regard, I refer to Montana Band of Indians v. Canada (1988), 51 D.L.R. (4^th) 306 (F.C.T.D.) at 315. I am also satisfied that the evidence submitted by the Applicant is sufficient to support the claim to confidential status of the financial statements of privately held corporations, that is FIMMI and FMR Co., notwithstanding the fact that the affidavit of Mr. Barber is based on information and belief and that he has no personal knowledge of the contents of those documents. Mr. Barber's evidence is the "best evidence" available.

[38]            I agree with the Applicant's submissions concerning the admissibility of hearsay evidence on a principled basis, as discussed in R. v . Khan, [1990] 2 S.C.R. 531 and R. v. Smith, [1992] 2 S.C.R. 915. As well, in P.S. Partsource Inc. v. Canadian Tire Corp. (2001), 11 C.P.R. (4^th) 386 (F.C.A.), the Federal Court of Appeal discussed the applicability of the common law principles concerning the admissibility of hearsay evidence.

[39]            The production of an affidavit from Mr. Wass would have potentially exposed that individual to cross-examination or, alternatively, to the risk of having the affidavit stricken out if he failed to submit to cross-examination. The cross-examination of Mr. Wass may well have destroyed any claim for non-disclosure of the financial statements on the grounds of confidentiality. Any order striking out his affidavit may have impacted upon the evidentiary basis of the Applicant's application for judicial review.

[40]            The Respondent relies on section 241 of the Act in response to the Applicant's concerns with the protection of confidential information. The correspondence exchanged between employees of the CRA and the Applicant clearly shows that the Respondent is not prepared to accord to the Applicant any guarantee of confidentiality, other than is provided by section 241 of the Act. Generally, that section provides that taxpayer information shall not be "knowingly" disclosed to any person, except as authorized by this section.

[41]            The status of the information sought here as "taxpayer information", relative to the Applicant, was not addressed in this proceeding. However, Ms. O'Connor, as the representative of the Respondent, said in her cross-examination that the Respondent would support a request by the Applicant for an in camera proceeding if such request was made in relation to future judicial proceedings. As well, she stated that the Respondent would give the requisite notice if any request was made for the disclosure of the financial statements, in order to allow the Applicant to pursue its legal remedies.

[42]            Section 231.6 does not identify the confidential nature of information as a basis for non-disclosure when a notice is issued pursuant to this provision. There is no evidence to suggest that the Respondent is engaged in a "fishing trip" for the purpose of using the financial statements of FIMMI and FMR Co. other than in the conduct of an audit of the Applicant. In general, the Minister is subject to the obligation of acting in good faith. That obligation has been recognized by the Courts in respect of notices issued pursuant to section 231.2 of the Act; see M.N.R. v. Sand Exploration Ltd., [1995] 3 F.C. 44 (T.D.). I see no reason in principle why the same obligation of good faith would not exist with respect to notices issued pursuant to section 231.6 of the Act.

[43]            That being so, I conclude that the Applicant's concerns about the confidential nature of the financial statements in issue do not establish that the request for their production is unreasonable. Having regard to the evidence before me, including the cross-examination of Ms. O'Connor, I am satisfied that the Notices are reasonable.

[44]            There is a final issue to be addressed. The Respondent argues that it is not the most appropriate respondent in this proceeding, that the Minister should have been named in that capacity. In this regard, the CRA refers to subsection 231.6(2) and says that this provision authorizes the Minister, not the CRA, to issue the Notices. It submits that the situation is not remedied by the Canada Customs and Revenue Agency Act, S.C. 1999, c. 17, s. 69 (now called the

Canada Revenue Agency Act) that allows the CRA to be named in judicial proceedings only "in respect of any right or obligation acquired or incurred by the Agency".

[45]            The Applicant's response to this argument is that the Notices were issued by the CRA, not by the Minister. Further it submits that in Saipem, the CRA was named as the Respondent, without comment by the Federal Court of Appeal.

[46]            According to Rule 303(1) of the Federal Courts Rules, SOR/98-106 (the "Rules"), an applicant in a judicial review proceeding shall name, as respondent, every person "directly affected"

by the order sought or "required to be named as a party under an Act of Parliament" under which the proceeding is brought. It is clear that the Minister is a person "directly affected" since the order sought here if granted, would result in the non-disclosure of information sought by him. The Minister would certainly be an appropriate Respondent.

[47]            The Act is silent as to the identification of the respondent in an application for review of a Notice, pursuant to subsection 231.6(2). The general rule is that set out in Rule 303(1). In my opinion, it may be more appropriate for the Minister to be named as the respondent but in this case, the absence of the Minister as a party caused no prejudice or confusion. The failure to name the Minister had no material effect.

V. Conclusion

[48]            These applications for judicial review are dismissed. The Respondent shall have its taxed costs on the basis of Column III of Tariff B, counsel fees for one counsel only and for one proceeding only.

ORDER

            These applications for judicial review are dismissed. The Respondent shall have its taxed costs on the basis of Column III of Tariff B, counsel fees for one counsel only and for one proceeding only. This Order shall be filed in T-1807-04 and placed on the file in T-1808-04.

                                                                                                                    "E. Heneghan"

FEDERAL COURT

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                           T-1807-04 and T-1808-04

STYLE OF CAUSE:                           FIDELITY INVESTMENTS CANADA LIMITED

                                                            and THE CANADA REVENUE AGENCY

PLACE OF HEARING:                     Toronto, Ontario

DATE OF HEARING:                       November 1, 2005

REASONS FOR ORDER

AND ORDER :                                   HENEGHAN J.

DATED:                                              May 3, 2006

APPEARANCES:

Salvador Borraccia	FOR THE APPLICANT
Peter Vita, Q.C. Carol Shirtliff-Hinds	FOR THE RESPONDENT

SOLICITORS OF RECORD:

Salvador Borraccia Barrister and Solicitor Toronto, Ontario	FOR THE APPLICANT
John H. Sims, Q.C. Deputy Attorney General of Canada	FOR THE RESPONDENT