The ruling allows the minister of national revenue to compel Canadian-based companies to turn over electronic customer records so the government can look for evidence of tax fraud. Adding to the powers is the ability to ask for records that are held offshore by affiliates so long as the Canadian company can access those records.
The only other test says Bill Innis, tax litigator with Fraser Milner Casgrain LLP, is to allow the minister to “verify compliance with the (tax) act.
“The ramifications of [the ruling] are potentially enormous,” Innis tells Law Times. “The world is so wired these days, using this decision you’d think that there would be very, very little foreign-based information that the government couldn’t get and extremely easily compel people on the force of criminal action to produce.”
This, says Innis, could lead to companies thinking twice before doing business in Canada. “By giving me access to their computer system, anything I can access the Canadian government can access, are they going to have second thoughts about dealing with me?” asks Innis. “You could see, for example, eBay getting really worried about selling through Canada.”
Baker & McKenzie LLP lawyer Matthew Latella, who acted as counsel for the appellants - including eBay Canada Ltd. - in the case, said the ability to access data was a “determining factor,” and that the decision will be applied beyond the tax realm. Specifically, he said, the court’s decision that the facts of the case didn’t engage s. 231.6 of the Income Tax Act will have wider ramifications.
Parliament created the section, noted Latella, to apply to requirements for any “person resident in Canada or non-resident person carrying on business in Canada” for the production of “any information or document that is available or located outside Canada.” But the Federal Court of Appeal in eBay found that the “mere ability to access data was sufficient to consider that data to be ‘located’ in Canada,” said Latella.
Latella, who last week discussed the case at the Canadian Law & Technology Forum conference in Toronto, noted that a legal doctrine exists suggesting that “if there is a specific provision and a general provision, and the interpretation of the general provision taken at its most expansive would leave the specific provision with nothing left to do, that’s not the appropriate way to approach the statute.”
Latella suggested that the appeal court seemed not to apply that legal principle in the decision.
“At the end of the day, I think one of the legacies of this case will be that the specific foreign-based information provision, because of the approach taken in this case, will now atrophy, and you will not see the [Canada Revenue Agency] having any particular use for utilizing that, because everything has now become domestic effectively, if you can access it from Canada,” he said.
Despite the fact that the information was not downloaded, stored, or copied in Canada, the court found that if you can access information from here, it will determine that it is located in Canada “for all time.”
The decision is an example, he said, of legislation drafted “with one set of realities in mind, and then the technological landscape evolves.”
Latella also noted that the court justified a discrepancy in the treatment of electronic data versus hard-copy data by saying accessing electronic information “is so easy to do.”
“It’s like leaning over into your filing cabinet in your office and taking something out of it,” Latella paraphrased the court’s reasoning.
A factor that may require clarification, he said, is the lack of discussion of whether the party with easy access to electronic records was authorized to do so and did so legally.
“So, although it might be a bit of an unlikely scenario that a hacker would be required to produce something, based on the rule that has been established by this decision, access is the key,” said Latella. “The mere ability to access. It doesn’t say legitimate access, doesn’t say access authorized for a particular purpose, it doesn’t say anything in the legislation about that at all, and yet it has become the test.”
While the eBay case seems settled, he said the content of the decision is far from set in stone.
“I can tell you that I don’t believe it’s going . . . in our particular case, to Ottawa. But I believe it will be a matter of time before this case is revisited by one or other courts across the country,” said Latella.
A recent challenge before the Swiss courts deals with an American customer of the banking giant UBS AG having his records turned over to authorities. According to various media reports the customer is challenging the release of his records on the basis that the release to U.S. authorities contravenes Swiss banking law. In Switzerland the authorities must first show clear evidence of tax fraud before banks can turn over customer information.
For Swiss bank affiliates in Canada, the eBay ruling could be used to go through the back door to get customer records, but Peter Wells of Lang Michener LLP says the Canadian government would be unlikely to succeed.
“I think that if push comes to shove, UBS would rather wind up all its Canadian business rather than produce the records, and it appears that there will be no records physically located in Canada,” he says.
“The Swiss authorities are unlikely to co-operate in providing such documents to Revenue Canada. The end of the story is that the IRS probably has sufficient power to force the documents from UBS, but CRA does not.”