The Long Arm of the Minister of National Revenue Grows Another Foot - Disclosure in eBay Canada

By: John Sorensen, Stevan Novoselac and Corrinne Lobe

The Federal Court of Appeal ("FCA") judgment in eBay Canada Ltd. and eBay CS Vancouver Inc. v. M.N.R., 2008 FCA 348 ("eBay") is the latest in a series of decisions extending the power of the Minister of National Revenue ("Minister") to compel disclosure of confidential taxpayer information. As a result of this judgment, the appellants (collectively, "eBay Canada") were required to disclose to the Minister personal information stored on servers in the United States. The information concerned so-called eBay "PowerSellers" residing in Canada, including names and sales information, to verify the PowerSellers' Canadian tax compliance. The eBay case has ramifications for Canadian taxpayers generally, as the FCA concluded that information stored on a server in another country, but readily accessible by a Canadian company, is not "foreign-based information" within the meaning of that term under the Income Tax Act (Canada) ("Act").

The Minister's requirement to produce taxpayer information was imposed on eBay Canada under s. 231.2 of the Act. To challenge the requirement, eBay Canada argued that;

1. the information sought was "foreign-based" information;
2. any demand for such information must be made pursuant to s. 231.6 of the Act; and
3. s. 231.6 of the Act did not authorize a requirement to provide information in relation to unnamed persons, such as the information the Minister was seeking about eBay's PowerSellers.

Thus, the issue before the FCA was whether the information sought was "foreign-based" because it was "available or located outside Canada" for the purpose of s. 231.6.

The FCA held that the information sought was not "foreign-based" information. This was because although it was stored on servers located outside Canada, it was also located in Canada, in that it was readily electronically accessible by eBay Canada. There was no evidence that eBay Canada had ever printed or downloaded and stored the information sought by the Minister. At best, the information was merely viewed electronically in Canada.

However, the FCA held that "with the click of a mouse," eBay Canada could make the information appear on computer screens in Canada as easily as they could access their own filing cabinets in Canada. Therefore, the FCA considered the distinction between information located in Canada and elsewhere artificial and held that information in electronic form stored outside Canada is capable of being located in Canada. Consequently, the FCA concluded that the Minister was correct to have imposed on eBay Canada the requirement to provide information under s. 231.2 of the Act, as the information was not subject to the provision of the Act governing "foreign-based information".

The eBay judgment has wide-ranging ramifications. Entities for whom client privacy is critical may be reluctant to do business in Canada in the future. At the very least, non-resident companies doing business in or with Canada in the future should be reluctant to allow Canadian companies ready access to electronic records stored on servers outside Canada. In fact, it may be advisable for sensitive information and records stored outside Canada to be available to Canadian entities in hard-copy only and on a temporary basis, to reduce the risk of mandatory production to the Minister.

A secondary issue the FCA considered in eBay was whether the Minister was required to provide evidence that he was conducting a "serious and genuine inquiry" into one or more specific individuals for the purposes of issuing the requirement to compel eBay's information. The FCA concluded that, since the Greater Montreal Real Estate Board judgment,¹ the Minister is no longer obliged to prove that he is conducting a "serious and genuine" inquiry into one or more specific individuals in the group included with a requirement to provide information. The FCA affirmed that the Minister must only satisfy a judge that the information or documents sought are required to verify compliance with the Act, a much lower standard than the "serious and genuine" inquiry test.

The current trend in the case law expands the Minister's powers to compel taxpayers to produce information. This enhances the effectiveness of the Minister's compliance powers and it is advisable to seek legal counsel before responding to any requirement to produce information to the Minister. In light of the eBay decision, moreover, it would be prudent to revisit and update all document and information retention and management policies.

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Stevan Novoselac is a partner in the Toronto office of Gowlings and heads up the tax dispute resolution ("TDR") practice at the Toronto office as part of Gowlings' National Tax Practice Group.

John Sorensen is an associate in the Toronto office of Gowlings practicing in the areas of corporate tax planning and TDR.

Gowlings' TDR group resolves complex tax disputes with federal and provincial taxing authorities, including voluntary disclosures, requirements for information, audits, objections, appeals, collections issues, fairness applications, rectification orders and remission orders. Corporate, individual and international tax issues handled by the TDR group include tax avoidance, tax shelters, securities taxation, scientific research and experimental development tax credits, directors' liability and commodities tax disputes.

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1. M.N.R. v. Greater Montreal Real Estate Board, 2007 D.T.C. 5740 (FCA)