Federal Court - Soft-Moc Inc. v. Canada (National Revenue)
Citation: 2013 FC 291
Ottawa , Ontario , March 20, 2013
PRESENT: The Honourable Mr. Justice Russell
| || SOFT-MOC INC.
| || Applicant
| THE MINISTER OF NATIONAL REVENUE AS REPRESENTED BY THE ATTORNEY GENERAL OF CANADA
| || Respondent
| || || |
REASONS FOR JUDGMENT AND JUDGMENT
 This is an application for judicial review pursuant to subsection 18.1 of the Federal Courts Act , RSC, 1985, F-7, and subsections 231.6(4) and 231.6(5) of the Income Tax Act , RSC, 1985, c 1 (5 th Supp) (ITA). The Applicant seeks review in respect of a decision (Decision) of the Assistant Director, Toronto East Tax Services Office, Canada Revenue Agency (Director), dated 21 December 2011, to issue a Foreign-Based Information Requirement (Requirement) requiring the Applicant to obtain and provide to the Canada Revenue Agency (CRA) certain foreign-based information and documents.
 The Applicant is a Canadian resident corporation that sells footwear. Mr. Bryan Bardocz is the President of the Applicant and owns 10% of the Applicant’s common shares. Mr. Bert Krista owns, directly or indirectly, 90% of the Applicant’s common shares. In 2004, Mr. Krista took up residence in the Bahamas and incorporated the other four corporations involved in this application: ITPC Inc. (ITPC), Manser Inc. (Manser), MWF Inc. (MWF) and SoftPOS Inc. (SoftPOS). Mr. Krista wholly owns these four corporations.
 During the course of its operations, the Applicant received services from ITPC, Manser, MWF and SoftPOS, all of whom have their centers of operation in Nassau, Bahamas. During 2005 and 2006, the Applicant paid substantial amounts to these four corporations for a variety of services, such as merchandising services, information technology consulting services, business development services and software licensing fees.
 In April 2009, the Minister undertook an audit of the Applicant (Transfer Pricing Audit or TPA). Part of the TPA included a review of the payments made by the Applicant to ITPC, Manser, MWF and SoftPOS as consideration for the services provided by them to the Applicant. The TPA also aimed to determine whether the services said to be provided by the four companies were provided in the Bahamas or in Canada and, if the services were provided in the Bahamas, how they were provided.
 The Minister also sought to determine whether the consideration paid by the Applicant to the four companies benefited the Applicant. This determination was to assist in ascertaining whether the transfer price paid by the Applicant was an “arm’s length transfer price.”
 On 6 October 2009, the Applicant received an audit query from the Minister. The Applicant provided a binder of material in response. The Applicant received a second audit query on 28 January 2010, to which it responded on 26 March 2010. On 21 December 2011, the Minister issued the Requirement to the Applicant for foreign-based information pursuant to subsection 231.6(2) of the ITA.
 In addition to the Requirement, the Applicant was served with a request to provide certain domestic information dated 16 January 2012. On 20 March 2012, the Applicant provided the Minister with a binder of material in response to this request.
 On 24 January 2012, Mr. Bardocz wrote to Terry North, counsel for Mr. Krista, Manser, ITPC, MWF and SoftPOS in the Bahamas, informing him of the Requirement. On 5 March 2012, Mr. North responded to a portion of the 74 questions issued in the Requirement. MWF, ITPC, SoftPOS and Manser declined to provide some of the requested information on the basis that such information did not exist or was confidential and proprietary, or that the release of such information would detrimentally affect the competitive advantage of each corporation.
 The following information was not provided by the Applicant in response to the Requirement:
a. Minute books, personnel charts, information relating to the organizational structure and financial statements of ITPC, Manser, MWF and SoftPOS;
b. The names of independent buyers and purchasing agents with whom ITPC networked and any correspondence exchanged with them;
c. The names of industry experts contacted by ITPC in 2005 and 2006;
d. The names of information technology specialists who were involved in providing services, and documents supporting payments made to these specialists;
e. Documents to support payments to a U.S.-based company from Manser, and correspondence exchanged between it and Manser;
f. Whether Manser and SoftPOS provided services to other arm’s length or non-arm’s length customers and, if so, the names of those customers and a detailed description of the services provided; and g. The names of employees or external computer contractors hired by Manser and their telephone numbers.
 Mr. Bardocz, on behalf of the Applicant, says that he does not know why the information is confidential or proprietary in nature, or how it would affect the competitive advantage of the four companies. Upon receiving the answers provided by the four companies, the Applicant commenced this judicial review.
DECISION UNDER REVIEW
 The Decision under review in this application is the Requirement issued by the Director on 21 December 2011. Pursuant to subsection 231.6(2) of the ITA, the Director lays out 74 questions to which the Applicant’s previously provided responses from the audit queries were considered incomplete or lacking in detail.
 The questions in the Requirement ask for a variety of detailed information about the four Bahamian companies. Employees’ names and phone numbers are requested, as is the personal information of external contractors and specialists. There are also questions about service contracts, how business relationships were built up, details about manufacturers, independent buyers and purchasing agents, merchandising agents, marketing and advertising allowances, new retail stores and their images, new products, and sales and customer programs.
 The Requirement requests specific details of some of the services provided by Manser to the Applicant. It also requests expenses incurred by Manser, and the cost and profit allocated to the Applicant by Manser. There are also a variety of questions about tradeshows attended by ITPC.
 The Applicant raises forward the following issues:
a) Whether the Requirement should be entirely set aside as being unreasonable on account of the following:
i. It is overly broad in scope;
ii. It requires the production of information and documents that are not relevant to the administration or enforcement of the ITA; and iii. It requests certain information that cannot be obtained or provided by the Applicant because such information is confidential and proprietary, non-existent, or otherwise unavailable; or b) Whether the Requirement should be varied so as to delete all questions relating to information that cannot be obtained or provided by the Applicant by virtue of such information being confidential and proprietary, non-existent, or otherwise unavailable.
STANDARD OF REVIEW
 The Supreme Court of Canada in Dunsmuir v New Brunswick , 2008 SCC 9 held that a standard of review analysis need not be conducted in every instance. Instead, where the standard of review applicable to a particular question before the court is well-settled by past jurisprudence, the reviewing court may adopt that standard of review. Only where this search proves fruitless must the reviewing court undertake a consideration of the four factors comprising the standard of review analysis.
 In Saipem Luxembourg S.A. v Canada (Customs and Revenue Agency) , 2005 FCA 218 [ Saipem ], the Federal Court of Appeal held that the standard of review applicable to a requirement under subsection 231.6 of the ITA is reasonableness. This was also the finding of the Federal Court in Fidelity Investments Canada Ltd. v Canada (Revenue Agency) , 2006 FC 551 [ Fidelity ] at paragraph 27.
 The Applicant points out that in the context of subsection 231.6, the Requirement may be found to be unreasonable even if all the requested information is relevant to the administration of the ITA. The Federal Court of Appeal said at paragraph 27 of Saipem :
The element which is present in section 231.6, and which is lacking in section 231.2, is the availability of judicial review of the notice of requirement on the ground of unreasonableness. Such a review lacks any substance if a notice of requirement is reasonable simply because the information requested is, or may be, relevant to the administration and enforcement of the Act. Given that Parliament took the trouble to provide for a review on the basis of reasonableness, I conclude that Parliament intended that a notice of requirement in respect of a foreign-based document must not only relate to a document which is relevant to the administration and enforcement of the Act but that it must also not be unreasonable.
 When reviewing a decision on the standard of reasonableness, the analysis will be concerned with “the existence of justification, transparency and intelligibility within the decision-making process [and also with] whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.” See Dunsmuir , above, at paragraph 47, and Canada (Minister of Citizenship and Immigration) v Khosa , 2009 SCC 12 at paragraph 59. Put another way, the Court should intervene only if the Decision was unreasonable in the sense that it falls outside the “range of possible, acceptable outcomes which are defensible in respect of the facts and law.”
 The following provisions of the ITA are applicable:
| Definition of “foreign-based...