Smells Fishy: Canada Revenue Agency Obtains Court Orders To Access Books and Records of Quebec Municipalities
The Globe and Mail newspaper is reporting that the Canada Revenue Agency (CRA) has obtained Court orders from the Federal Court of Canada ordering 146 Quebec municipalities to provide records on payments to outside contractors and consultants. In the article entitled "CRA seeks court orders to open books of 146 Quebec municipalities", the Globe and Mail reports that based on affidavits filed with the Federal Court, the CRA is focusing on unreported income of persons to whom the municipalities make payments. The report indicates that the CRA has obtained Court orders previously in respect of 88 municipalities in and around the Eastern Townships and Department of Justice lawyers are scheduled to be back in Federal Court in Montreal on Monday to obtain similar orders for the towns in and around the Quebec City’s north and south shore.
I have concerns that the CRA's Court orders set a precedent. The CRA may be emboldened to obtain similar Court orders for municipalities everywhere. It sounds (and smells) like a fishing expedition on the part of the CRA. The CRA believes (rightly or wrongly) that certain illegal activity is happening in the area of Quebec municipal contracting (there are news reports of mob activity in Quebec in the construction industry) and yet the CRA affidavits that accompanied the motion filed with the Federal Court is not focused on named companies. Based on the news reports, the affidavits seek information on "unnamed persons" and are extraordinarily broad in scope (meaning large volumes of documents and information are required to be provided by municipalities to the CRA).
I have concerns that the CRA's Court orders are not limited to just income tax and failures by contractors and consultants to pay income tax. What about goods and services tax ("GST") and Quebec sales tax ("QST")? If there is unreported income tax, there is surely unremitted GST and QST. If municipalities and townships paid contractors and consultants "under the table", there could be assessments against the municipality/township for failure to pay GST and QST. These assessments could get quite large if there are indeed "payment issues". Municipalities already have budget deficit issues - large assessments may prove to be financially problematic (not to mention that the provincial government and federal government (depending on whether federal or provincial taxes are assessed) would receive a penalty and interest payment from the municipalities.
What is ironic is that the recent judicial review applications (e.g., Tele-Mobile) have been denied by the Federal Court on the basis that the Tax Court of Canada has jurisdiction over tax matters and tax statutes contain a complete code. A resolution will be tabled at the Canadian Bar Association meeting in Halifax in August to expand the jurisdiction of the Tax Court of Canada.
Municipalities throughout Canada should watch these cases carefully and any municipality could be next (the Department of Justice lawyers have the motion materials precedent ready amend and file). There should be a cause for concern not only to municipalities, but also businesses. If the CRA would go to the Federal Court and ask for broad access to the books and records of municipalities, would they not make similar requests against businesses?
Cyndee Todgham Cherniak is the founding lawyer of LexSage, a boutique international trade law and sales tax firm in Toronto,
