How the taxman uses the 'unnamed persons' rule to uncover potential tax cheats

National Post


Perhaps one of the most powerful tools in the taxman’s war chest is the “unnamed persons” rule, which allows the Canada Revenue Agency to obtain information from an individual or a company about unknown third parties. After the CRA gets this information, it can verify if the previously unnamed person(s) correctly reported their income and, where applicable, that the appropriate goods and services tax/harmonized sales tax (GST/HST) was sent to the CRA.

Fortunately for taxpayers, however, the CRA can’t simply run around haphazardly demanding personal information from third parties about unnamed taxpayers it seeks to audit without judicial authorization. Specifically, under the Income Tax Act, the CRA cannot require a third party (such as a bank) to provide information or any documents relating to unnamed persons (its customers) unless the CRA first obtains permission from a judge. This rule was put into place to limit “fishing expeditions” by the CRA.

In addition, for the requirement to provide information to succeed, the targeted individual(s) must be “ascertainable” and the purpose of the request must involve “verifying compliance” with the Tax Act.

In the past, the CRA has used the unnamed persons request with much success. For example, the CRA has recently been issuing unnamed persons requirements to property developers and builders that have information about buyers involved in assignment sales. This information is used to identify taxpayers who may not be correctly reporting for both income tax and GST/HST purposes.

Let’s say a residential condominium tower is built over several years, during which some investors buy units with the intention to resell them after the value rises. Some of them resell the rights to their condominium to a second buyer for a fee (an assignment sale) before ever living in the unit or even taking possession. The CRA can issue unnamed persons requirements to the builder, who keeps track of all assignments, allowing the taxman to determine whether a specific taxpayer properly reported the gain on the condo flip, or remitted any GST/HST that was due.

Between April 2015 and March 2021, the CRA issued 59 unnamed persons requirements to various developers in what it called “high-risk” areas of Ontario and British Columbia, and successfully identified unreported income associated with assignment sales.

But the unnamed persons request can also be used by the CRA to obtain information about one specific unknown taxpayer, as demonstrated in a recent case involving the Royal Bank of Canada.

The CRA applied for a court order to give it permission to obtain the names and addresses of certain unnamed persons who are all account holders, signing officers and powers of attorney associated with a specified RBC bank account at a branch in Calgary. RBC did not oppose the application, but awaited the court’s authorization before it was prepared to hand over this private information to the CRA.

The case involved a taxpayer who, back in 1997, provided the CRA with an authorization to deposit any tax refunds and credits, including GST credits and Canada Child Benefit (CCB) payments, to a bank account registered at RBC. Since 1997, CRA had been depositing all the taxpayer’s tax refunds, GST credits and CCB credits into that account.

In 2020, however, the taxpayer contacted the CRA to advise that she had not yet received her 2019 tax refund. The CRA advised the taxpayer that it was deposited into the RBC account. The taxpayer could not identify the account and had no recollection of authorizing deposits into the account. The taxpayer then reached out to RBC, which advised the taxpayer that the account was active, but was not in the taxpayer’s name. RBC stated that it could not release any other information “for privacy reasons.” Fortunately, the CRA subsequently re-issued the taxpayer’s 2019 tax refund and was able to successfully recall the payment of that 2019 refund from the RBC account.

The taxpayer then contacted the CRA about the GST credits and CCB payments deposited from 1997 to 2019, which she had never received. In early 2021, the CRA issued an unnamed persons requirement requesting that RBC provide information about the taxpayer’s accounts with RBC from 1997 onwards and to confirm whether the account in question was ever associated with the taxpayer (and, if so, for what years). In March 2021, RBC advised that the account was not associated with the taxpayer and that the taxpayer did not hold any bank accounts with RBC from 1997 onwards.

In Federal Court, the judge reviewed the two conditions that would authorize the CRA to require RBC to disclose the account information: that the unnamed person is “ascertainable,” and that the “requirement is made to verify compliance by the person … with any duty or obligation under the (act).”

The judge added: “Our tax system is a self-reporting and self-assessment system that depends on the honesty and integrity of each taxpayer in preparing their returns. The powers of the CRA to audit and to inspect information and documents are necessarily broad, to ensure compliance and to achieve the objectives of the (act).”

The court referred to prior jurisprudence which found that “Parliament has granted the (CRA) corresponding powers to verify and test compliance. These powers lie at the heart of the (CRA’s) ability to enforce taxation legislation. The broader public interest in the enforcement of our system of taxation outweighs the appellant’s private and commercial interests in not disclosing its clients’ personal information.”

After reviewing the evidence, the law and prior jurisprudence, the judge was satisfied that the account holder was ascertainable and that the purpose of the unnamed person request was related to the “administration and enforcement” of the Tax Act, specifically to determine whether the account holder(s) are associated with the taxpayer, whether any funds are owing to the taxpayer from 1997 to present, and whether the CRA can initiate collections proceedings against the account holder(s) to retrieve amounts paid into the account for the GST credit and CCB amounts.

The judge, therefore, concluded that the “evidence on this application meets the requirements for judicial authorization under (the unnamed persons requirement),” and granted the order requiring RBC to release the information about the account holder to the CRA.

Who was this account holder? We likely will never find out.