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Foreign-based Requirement Under Section 231.6 of the Income Tax Act Upheld by the Federal Court

By Cheryl Gibson
March 22, 2013
  • Administration and Enforcement
  • Federal Court
  • Foreign-based Requirements
  • Judicial Review
  • Transfer Pricing
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The Canada Revenue Agency had an important win this week in its efforts to access information outside of Canada.  On March 20, 2013, the Federal Court issued its decision in Soft-Moc Inc. v. M.N.R.  2013 FC 291, dismissing Soft-Moc’s judicial review application to have the CRA’s decision to issue a Foreign-Based Information Requirement set aside or varied.

The CRA has broad powers to access information related to the determination of a taxpayer’s tax obligations.  Under subsection 231.6 of the Income Tax Act, these powers include the issuance of a Foreign-Based Information Requirement to obtain information or documents located outside of Canada.

In Soft-Moc, the CRA was conducting a transfer pricing audit and sought information from corporations in the Bahamas who provided services to Soft-Moc.  These corporations and their individual Bahamian resident shareholder owned 90% of the common shares of Soft-Moc.  The CRA issued a Foreign-Based Information Requirement to Soft-Moc under subsection 231.6(2) of the Income Tax Act.

The Requirement requested substantial amounts of information related to the Bahamas Corporations including extensive details of the services provided, customers, financial statements, costs and profits and employee data.  Soft-Moc applied for judicial review of the decision to issue the requirement.

Primarily, Soft-Moc argued that the information requested went well beyond that necessary to enable the CRA to complete the transfer pricing audit and that the decision to issue the requirement was, therefore, unreasonable.  Soft-Moc argued that a portion of the information requested was irrelevant and that some portions were confidential or proprietary.

The Court was not sympathetic to Soft-Moc’s arguments, noting the wide-ranging statutory powers of the CRA to collect information and the low threshold to be met in determining whether the requested information is relevant and reasonable.

This win, which was not surprising in light of the Federal Court of Appeal’s earlier decision in Saipem Luxembourg S.A. v. The Canada Customs and Revenue Agency, 2005 FCA 218, will encourage the CRA to continue to use foreign-based requirements more frequently and earlier in the audit process.

231.6, audit powers, foreign-based requirements, judicial review, transfer pricing audits
Cheryl Gibson

About Cheryl Gibson

As former head of Dentons' Edmonton Tax Group, Cheryl practises in numerous facets of taxation law. She has extensive experience in the resolution of income tax and GST disputes including criminal tax evasion matters and focuses on getting results in a timely and efficient manner. Cheryl also plans and implements tax-driven corporate reorganizations and the establishment of trusts. She advises on pension matters and has prepared opinions on numerous income tax and GST topics.

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