Redeemer Foundation v Canada: The CRA Is Coming To Get Your Donation Records!

The Supreme Court of Canada’s decision in Redeemer Foundation v Canada (National Revenue), [2008] 2 SCR 643, marks a dramatic expansion of the Canada Revenue Agency’s (“CRA”) investigative powers as regards charities. However, the expansion is qualified, and the policy implications of such an expansion are far from ignored.

The Redeemer Foundation is associated with Redeemer University College, a privately funded Christian undergraduate university in Ontario. Over time, the CRA grew concerned with the Foundation’s allocation of funds, suspecting that it was potentially a front for parents to pay for their children’s tuition as a tax credit – by “donating” the appropriate amount to the Foundation, which would then apply the “donation” to their child’s tuition expenses, they would thus receive a charitable tax credit on fraudulent grounds.

The CRA began investigating the Foundation, auditing their returns (and those of Redeemer University College) for the taxation years of 1997 through 2000. It requested certain transmittal forms, which would record the name of each donor and the name of each student who would receive credit for the donation. The Foundation said it had not kept records for those years. The CRA responded by serving the Foundation with a court order to maintain proper records, pausing the investigation until proper records were available.

In 2003, the CRA re-entered its investigation, requesting the records that the Redeemer Foundation was now legally required to preserve; however, the Redeemer Foundation refused to disclose information without being provided a court order pursuant to s.232.2(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp), which states that

The Minister shall not impose on any person (in this section referred to as a ‘third party’) a requirement under subsection (1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection (para 3).

The Redeemer Foundation then brought forward an application for judicial review of the CRA’s 2003 request, seeking a declaration that it was an improper request and that the CRA’s investigation be halted accordingly. Hughes J. of the Federal Court allowed the application, stating that the purpose of the relevant section of the Act was to protect third parties from being drawn into other individuals’ audits (which would inevitably happen if the CRA proceeded with its investigation).

The Federal Court of Appeal, however, overturned the decision, with Justice Pelletier citing s.230(2) of the Income Tax Act, which states:

Every registered charity and registered Canadian amateur athletic association shall keep records and books of account at an address in Canada recorded with the Minister or designated by the Minister containing

(a) information in such form as will enable the Minister to determine whether there are any grounds for the revocation of its registration under this Act;

(b) a duplicate of each receipt containing prescribed information for a donation received by it; and

(c) other information in such form as will enable the Minister to verify the donations to it for which a deduction or tax credit is available under this Act.

Justice Pelletier decided that this section, combined with the general requirement for specific information to be kept by charities stated in s.230(2) and the Minister’s general audit powers under s.231.1(1), gave the CRA the power to request the information. He further rejected the argument that the third-party status of the Foundation’s donors should give them additional protection, on the basis that the reciprocal nature of the tax relationship between a charity and its donors made the potential for complicity obvious.

In a slim 4-3 decision, Chief Justice McLachlin and Justices LeBel, Fish and Charron agreed with the Federal Court of Appeal. McLachlin C.J. and LeBel J. co-wrote the majority opinion, which at times becomes almost sarcastic in its dismissal of the appellant Foundation’s legal arguments:

The position of the appellant would require the CRA to obtain judicial authorization whenever it has as even one of its purposes the reassessment of unnamed persons. This approach would compel the CRA to obtain judicial authorization to access the records of practically any charity it chooses to audit. When a charity is audited, we presume that it will generally be to review the validity of the organization’s charitable status and/or the legitimacy of the donations it receives. Such a review will always entail a possibility, depending on the outcome of the initial investigation, that the donors will be investigated and, ultimately, reassessed. It is therefore unclear under what circumstances the CRA would be able to audit a charity without having to obtain judicial authorization to review information pertaining to the charity’s donors. We find it hard to imagine how this test would be workable in practice other than by requiring the CRA to obtain judicial authorization every time it audits a charity.

More noteworthy is their dismissal of the policy argument advanced by the Redeemer Foundation, which argues that allowing the CRA this broad audit power might potentially invalidate s.231(1) altogether. Instead of seeking judicial authorization to obtain information about unnamed parties from a third-party record holder, the CRA could simply audit the record holder and bypass the need for judicial authorization.

The majority dismisses this, primarily because they classify the tax transaction information as “business information,” which under Canadian law traditionally warrants a low expectation of privacy (as set forth in R v McKinlay Transport Ltd., [1990] 1 SCR 627). They also note that in the instance of a charity being non-compliant with tax law, this automatically renders donors to the charity non-compliant as well, and that the CRA in such an instance has a valid reason to investigate both parties. Chief Justice McLachlin sums up the policy discussion as follows: “In our view, the risk seems minimal that the CRA would use its authority to audit a taxpayer who is not personally suspected of non-compliance merely to investigate other unnamed taxpayers for non-compliance.”

That last line is the sort of judicial prognostication that, in retrospect, can become either sagacious or disastrous. However, given its tentative phrasing, should the CRA begin abusing its newfound privilege, this writer expects it should not be difficult to overturn; the Supreme Court of Canada has clearly given the CRA extra power in investigating charities for compliance. That said, the court has also made it clear that the scope of the CRA’s power should not be construed broadly.