“The courts have always been reluctant to cancel or quash demand letters or requests for information, and one of the reasons is that it is not a collection measure per se but rather it is part of an investigation conducted by tax authorities,” noted Étienne Gadbois, a Montreal tax lawyer with De Grandpré Chait LLP. “It’s impossible for tax authorities like Revenue Quebec to make a determination if the taxpayer is liable to pay tax based on where the central management and control is exercised if it does not have access to certain types of documents to complete the analysis.”

The case began in January 2014 when the Quebec taxman launched an investigation into an Albertan trust that it believed had activity in Quebec. A Revenue Quebec investigator came across during the audit of certain Quebec corporations a cheque signed by a beneficiary of the trust who lives in Montreal. As part of its investigation, the tax authority issued a demand for the disclosure of certain banking information of a numbered company,1068754 Alberta Ltd., which was the sole trustee of DGGMC Bitton Trust, held by a National Bank branch in Calgary. The demand, issued under section 39 of the Quebec Tax Administration Act, sought to determine whether or not the trust was subject to the Income Tax Act. The National Bank did not contest the demand and furnished the requested documents, but it was held under seal in the court file.

The trustee contested the demand and argued that the demand was ultra vires of the powers Revenue Quebec has under section 92 of the Constitution Act, 1867 as Quebec is entitled to direct taxation only within the province. The trustee also argued that under sub-section 461(1) and 461(2) of the Bank Act that the demand, issued under penalty of prosecution, was invalid because it was sent to a bank branch located outside of Quebec and was therefore extraterritorial.

“The case is not about whether Revenue Quebec has the power to send these demand letters (nor) is about whether non-residents are subject to (Quebec) fiscal laws or not,” explained Stéphane Eljarrat, a Montreal tax and white collar crime litigator who unsuccessfully argued the case. “The real question is whether or not they can send demand letters under penalty of prosecution to a third party, who is not the subject of an audit and who is located in another province, without judicial authorization.”

Quebec Superior Court Justice Thomas Davis dismissed the arguments. He held that to deny Revenue Quebec the power to investigate under these circumstances would be the equivalent of allowing corporations and trusts to do all their banking at a branch outside of Quebec and potentially avoid taxation, even if all the management decisions were taken in the province. “The Court cannot conclude that they stand for the proposition that a person who resides outside of Quebec may not be asked for information,” said Justice Thomas in a ten-page ruling in 10856 Alberta Ltd. v. Agence de revenu du Quebec 2015 QCCS 1135. “Their scope is limited to the fact that a non-resident may not be charged for failing to file an income tax return.”

The ruling makes perfect sense, according to tax litigator Caroline Desrosiers. It’s not as if Revenue Quebec went on a fishing expedition to obtain information without any grounds, added the founder of CD Legal. As with corporations, a trust is resident in the jurisdiction where it makes its management decisions, otherwise that would open the door to tax evasion, said Desrosiers. “I am convinced that we are going to see more and more of these cases,” said Desrosiers. “Many companies have put in place fiscal strategies where they set up offshore accounts but the central management and control is exercised here. The goal is to avoid paying taxes. But their real residence is here when you look at where management decisions are taken.”

But other tax lawyers wonder about the scope of the ruling. Justice Davis held that for requests for information to be effective, the tax authority must send it to the branch of the bank that has the information sought by the taxman. But once it is sent to the branch, it constitutes notice to the bank as a whole, given that the branch is not a separate entity for the purposes of the demand. He concludes that while the demand seeks information about an Alberta trust, the information is being sought to determine where the decisions of the trust are taken. “Therefore, it is perhaps premature to call the demand extra-territorial. However, even if the demand has an extra-territorial effect, that effect is incidental to Quebec’s power to tax within the province,” said Justice Davis.

That finding seems to imply that because the National Bank’s headquarters is based in Quebec, the demand was not extra-territorial, said Geneviève Léveillé, a tax lawyer with Wilson & Partners LLP, a law firm affiliated with PricewaterhouseCoopers LLP. “The question that arises following this ruling is whether the judge would have come to the same conclusion if the bank was not based in Quebec, like the Bank of Alberta or Toronto-Dominion Bank – I’m not sure,” said Léveillé, a former interim Deputy Director of the Tax Law Services branch of the Department of Justice. She points out that in another case, Agence du revenu du Québec c. SAP Canada inc., 2013 QCCQ 4206, Revenue Quebec sought to obtain documents that were held outside of Quebec and was denied on the basis that section 39.2 of the Quebec Tax Administration Act did not apply outside of Canada.

“It’ll be interesting how Revenue Quebec will interpret this ruling,” said Léveillé. “Will it use this decision to expand its investigative powers and issue more demand letters? I think they will have to be prudent.”

Eljarrat, a partner with Davies Ward Phillips & Vineberg LLP, believes that’s exactly what will happen. He says it will provide Quebec tax authorities with a “new avenue” to issue extra-provincial demand letters. But the ruling will most likely be appealed, he added. “We disagree with the judge’s conclusion on the interpretation of the Bank Act, and there appears to be a discrepancy between the arguments that were put forward before the court and the way they were reflected in the decision.”