The Canada Revenue Agency is seeking sweeping court orders to scrutinize all of the payments made over the past four years from 146 Quebec municipalities to their contractors and consultants.
The move, which comes on the heels of several scandals involving the construction industry, is aimed at finding undisclosed income, according to an affidavit filed in Federal Court. It will affect waste disposal and snow removal companies, as well as engineering firms.
Quebec construction companies – some with alleged links to organized crime – have been at the centre of numerous scandals involving both provincial and municipal officials. The province’s Auditor-General has slammed the government for not improving the tendering process and police have launched numerous investigations, while Premier Jean Charest has fended off calls for a public inquiry.
Observers said this was the first time they had heard of auditors obtaining such court orders against municipalities. The orders, which are essentially a subpoena for documents known as “unnamed person requirements,” are usually served on charities, foundations and banks to find information on suspected tax evaders.
From Quebec City, the provincial capital, to tiny Saint-Benoît-du-Lac, population 45, the request affects municipalities where a total of 3.1 million Quebeckers live, nearly half of the province’s population.
“The scope of the information sought from the various municipalities is unusually large,” said Stéphane Eljarrat, a tax lawyer with Davies Ward Phillips and Vineberg LLP in Montreal.
Each municipality has been asked to provide federal auditors with a CD listing all the amounts other than wages that have been paid between 2007 and 2010, along with the recipients’ name, address, telephone number and social insurance number or corporate number.
Montreal is the only major city not named in the project, which includes large urban centres such as Laval, Longueuil, Brossard, Repentigny, Sherbrooke and Saguenay.
Federal auditors already obtained one order in June, forcing 88 municipalities in and around the Eastern Townships to open their books. Justice Department lawyers are scheduled to be back in Federal Court in Montreal on Monday to obtain similar orders for the towns in and around the city’s north and south shore.
The request appears to be aimed at tax evasion and the construction industry, said Louisette Tremblay, town manager of Stukely-Sud, one of the affected municipalities.
Ms. Tremblay said that when she asked an auditor for clarification about the request, she was told that the agency was not concerned with utility payments, but rather “invoices with labour costs on it.”
The request, for example, will enable auditors to find whether there has been a pattern of false invoicing, said administration professor Messaoud Abda, director of Sherbrooke University’s graduate program in fighting financial crimes.
To support its application for records from the Eastern Townships, the CRA filed an affidavit sworn by Lucie Provencher, a member of the non-filer/non-registrant section of its Revenue Collection Directorate.
“I will review the fiscal situation of each individual and company whose identities will be divulged to me, to find if all the tax returns, with all the required information and income, have been filed with the national revenue department,” she said in her sworn statement.
Her affidavit did not expressly identify a targeted industry, but mentioned a tax form frequently used for construction firms.
“Individuals or business that are noncompliant will receive from the CRA, for each relevant year, a demand to comply to the [Income Tax Act] and file the missing tax returns with the T1, T2 and/or T5018 if necessary,” Ms. Provencher stated in the affidavit.
T1 is the general tax form, T2 the corporate income form and T5018 is a form used to declare construction subcontracting payments.
Mr. Eljarrat said the affidavit struck him as “unusual” for a number of reasons. There are no limitations on the payments that CRA is seeking, which means that a municipality might feel expected to hand over records for everything – from cab rides to coffee purchases.
The federal courts have consistently given the agency a lot of leverage to make broad requests in such requirements because it is one of the only tools the agency has to ensure tax compliance. But they must be reasonable, Mr. Eljarrat said.
“They are legitimate tools regularly used by CRA to enforce the Income Tax Act,” he said. “But one of the main preconditions is that CRA cannot use this tool in the context of a fishing expedition, which courts have said are not permitted.”
With a report from Julian Sher
