The Confidentiality of Tax Returns Under
Canadian Law
Stephen J. Toope and Alison L. Young*
Synopsis
Introduction
I.
II.
III.
The Canadian Position
The American Position
The Confidentiality of Tax Returns in Canadian Law
A. The Protection of Confidentiality under the Income Tax Act
before 1966
B. The Effect of the 1966 Revisions
C. Recent Developments Relating to Confidentiality
D. Confidentiality of Tax Returns in American Law
Conclusion
Introduction
*
*
*
Canadians have, until recently, been either complacent about or
confident in the belief that all information released to the tax authorities is
kept secret. While s. 241 of the Income Tax Act’ purports to protect the
confidentiality of tax returns, a number of events in the past few years have
shaken these beliefs. Testimony before the McDonald Commission of
Inquiry into the R.C.M.P.2 revealed that tax information was released to the
R.C.M.P. on the basis of very remote and incidental “tax interests” relating
to non-tax prosecutions. Furthermore, the Alberta Royal Commission
headed by Mr Justice Laycraft which investigated Royal American Shows
Inc., uncovered a secret agreement between Revenue Canada and the
R.C.M.P. allowing release of tax information in any investigation of a
violation of the Income Tax Act by members of organized crime.3 Although
* LL. B. IV, Faculty of Law, McGill University. We would like to thank Professor John
W. Durnford for his continuing encouragement and support. Of course, any errors,
ommissions and infelicities remain ours alone. This paper states the law as of May 1982.
1 Income Tax Act, R.S.C. 1970-1-2, c. 63, s. 241.
2 Ellis, Tax Return Confidentiality (1979) 1 Cdn Taxation, 29-30.
3 Mr Justice James Laycraft, Royal Commission of Inquiry into Royal American Shows
Inc. and its Activities in Alberta [:] Report of a Public Inquirv (1978), C-40 et seq.
[hereinafter Royal Commission of Inquiry into Royal American Shows].
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Mr Justice Laycraft did not find this agreement to contain any breaches of
the secrecy provisions in s. 241 of the Income TaxAct, publicity surrounding
the McDonald Commission and the Laycraft Commission has raised
questions about the adequacy of existing safeguards. Perhaps the most
blatant example of the ineffectiveness of the secrecy provisions was the
release of information about Progressive Conservative Leader Joe Clark’s
tax return to a private investigator who then gave the information to
Toronto broadcasters Pierre Berton and Charles Templeton. 4
Another explanation for growing concern among commentators about
the confidentiality of tax returns is that such confidentiality is one aspect of
personal privacy which, like many others, is widely seen to be under
increasing attack in an age of computers, bureaucracy and extensive
government intervention. Professor A.S. Miller, an eminent American
academic, has put the point succinctly: “Emphasis on privacy and freedom
in law and legal literature.., comes at precisely the time that the demands of
the State for ever increasing amounts of data and the closing of the frontier
make their realization, in any substantial manner, unlikely at best.”5
The purpose of this article is to evaluate the Canadian position with
respect to confidentiality of tax returns. 6 The development of the Canadian
statutory provisions relating to confidentiality will be examined and the
effectiveness of the current provisions will be reviewed. Finally, using
American legislation on the subject as a basis of comparison, future
possibilities for the amendment of existing Canadian provisions will be
examined.
I. The Canadian Position
Privacy as an enforceable right appears to be at a rather anomalous stage
of development in Canada. It cannot be said that there is clearly a “right” to
privacy as in the United States.7 The Canadian legislative framework is
Individual and the Bureaucracy (1975), 44.
4 Ellis, supra, note 2.
5Miller, “Privacy in the Modern Corporate State: A Speculative Essay” in D. Baum, The
6 For general discussions of the right to privacy see: Prosser, Privacy (1960) 48 Cal. L. Rev.
383; H. Gross, Privacy: Its Legal Protection (1964), XI; S. Strdmholm, Right of Privacy and
Rightgof the Personality (1967), 17-8; A Report to the Alberta Legislature of the Special
Legislative Committee on the Invasion of Privacy (1970), 8 [hereinafter A Report to the
Alberta Legislature]; Miller, supra, note 5; United States Privacy Protection Study
Commission, Personal Privacy in an Information Society [:] Report (1977) 541, 564-5;
Mellors, “Governments and the Individual: Their Secrecy and his Privacy” in J. Young,
Privacy (1978), 87, 91; Velecky, “The Concept of Privacy” in J. Young, Privacy (1978), 13,
34; Glenn, “The Right of Privacy in Quebec Law” in D. Gibson, Aspects of Privacyi Lasv:
Essays in Honour of John M. Sharp (1980), 41 [hereinafter Aspects of Privacy Law];
Schafer, “Privacy: A Philosophical Overview” in Aspects of Privacy Law, 1.
7 Burns, “Privacy and the Common Law: A Tangled Skein Unravelling” in Aspects of
Privacy Law, ibid., 21; Prosser, supra, note 6, 386. For a recent, authoritative overview of
American privacy law, see Gavison, Privacy and the Limits of Law (1980) 89 Yale L.J. 421.
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CONFIDENTIALITY OF TAX RETURNS
based on the British model which tends not to affirm or enforce general
principles or rights. 8 On the other hand, American developments are
influencing Canadian legislators. The concept of privacy is increasingly
invoked in Canadian legislation. 9 Whether or not the introduction of mere
legislative terminology has provided any substantial protection of personal
privacy is an open question.
The position of the common law within the Commonwealth as it relates
to privacy is less ambiguous. There is no general protection for personal
privacy.’ 0 Violation of one’s privacy is not in itself a cause of action,
although there are several causes of action recognized at common law and
equity which do protect privacy interests – such as trespass to land, trespass
to chattels, trespass to the person and nuisance. It should be noted that none
of these actions could be the basis for an action resulting from the release of a
tax return to a third party for a purpose unrelated to the collection of taxes.
The absence of a right of privacy as an independent cause of action may
result from the inherent conservatism and reluctance of Commonwealth
courts to establish new causes of action. There may, however, be a more
positive theoretical reason which emerges from a perusal of British authors.
8 Infra, note 13, passim.
9Legislative attempts to imbed a right to privacy in Canadian law have not been
unqualified successes. For example, subs. 52(2) of the Canadian Human Rights Act, S.C.
1976-7, c. 33 as am., purports to provide protection of personal information:
52(2) Every individual is entitled to be consulted and must consent before personal
information concerning that individual that was provided by that individual to a
government institution for a particular purpose is used or made available for use for any
non-derivative use for an administrative purpose unless the use of the information for that
non-derivative use is authorized by or pursuant to law.
The most obvious problem with this subsection is the fact that no guidance is given to the
meaning of the term “non-derivative use”. In Canadian Human Rights Commission,
Annual Report of the Privac’ Commissioner 1979 (1980), 7, the Commissioner stated that
“the rather narrow provisions of the Act are easily misunderstood and some difficulties of
interpretation are bound to arise.” Perhaps because of these difficulties of interpretation,
none of the complaints with reference to “non-derivative use” of information dealt with by
the Commission in 1979 were found to bejustified. British Columbia (Privacy Act, R.S.B.C.
1979, c. 336), Saskatchewan (The Privacy Act, S.S. 1979, c. P-24 as am.) and Manitoba
(The Privacy Act, S.M. 1970, c. 74, am. S.M. 1971, c. 82, s. 49) have enacted legislation
creating tortious rights of action for violations of privacy. It is too early to predict how the
courts will deal with this legislation. The burden is on the judiciary to give the legislation
form and predictability, and to balance the needs of society and the interests of the
individual. See Osborne, “The Privacy Acts of British Columbia, Manitoba and
Saskatchewan” in Aspects of Privacy Law, supra, note 6,73,77-8. Canadian courts have not
enthusiastically welcomed such a role. See, e.g., the interpretation given the Canadian Billof
Rights, R.S.C. 1970 (App. III) in Lavell v. A.-G. Canada [1974] S.C.R. 1349 and A.-G.
Canada v. Canard [1976] 1 S.C.R. 170. The traditional conservatism of Canadian courts
and, in particular, their tendency to place restrictive interpretations upon generally phrased
statutes, has placed an onus on the legislator to define clearly and unambigously the right
which he wishes the courts to enforce.
10 Burns, supra, note 7.
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Privacy has been seen as a right which must, to a certain extent, be
surrendered in return for social benefits.”
While the influence of Britain is clearly manifest in the Canadian
parliamentary system, the American influence has also been strong. The last
twenty years in Canada have brought with them a great interest in individual
rights and a move towards constitutional guarantees of these rights such as
exist in the United States.’ 2 For the most part, however, it is not accurate to
say that an enforceable right to privacy per se exists in Canada.13
It should be mentioned that the situation in Qu6bec civil law is very
similar to the common law in the rest of Canada. Although “the right to
respect for … private life” is a right enumerated in the Qudbec Charter of
Human Rights and Freedoms,4 the Charter is simply declaratory of a group
of independently existing rights. 5 Violation of privacy leading to moral
damages may constitute a civil fault under art. 1053 of the Civil Code. While
the courts have not widely endorsed this position, it was expressly recognized
in Robbins v. C.B.C.16
II. The American Position
In the United States there is a general, independent right of privacy
which will support a cause of action.’ 7 The origin of that right is clear. In
1890, Samuel D. Warren and Louis D. Brandeis published an article entitled
The Right to Privacy. ‘ 8 By interpreting a series of old English cases related
to the invasion of property rights, breach of confidence and defamation,
Warren and Brandeis were able to construct an individual right to determine
“ordinarily, to what extent … thoughts, sentiments, and emotions shall be
communicated to others.” 9 This general right of privacy opened an “action
of tort for damages in all cases”. 20
I I Mellors, supra, note 6. See also D. Flaherty, Privacy’ and Government Data Banks [:]
An Internal Perspective (1979).
12 See, generally, A Report to the Alberta Legislature, supra, note 6; Glenn, supra, note 6;
Canadian Human Rights Act, S.C. 1966-67, c. 33 as am.; Canadian Bill of Rights, R.S.C.
1979 (App. III); see also the Canada Act, 1982, Schedule B, The Constitution Act, 1982, Part
1, The Canadian Charter of Rights and Freedoms.
13 See, generally, Burns, supra, note 7; Osborne, supra, note 9; R. v. Snider [ 1954] S. C.R.
479, 483-4 per Rand J.
14 Quebec Charter of Rights and Freedoms, L.R.Q., c. C-12, s. 5.
15 Glenn, supra, note 6, 42.
16[1958] C.S. 152. The prospects for the development of privacy as an enforceable
principle or right may, however, be better in Qu6bec than in the common law provinces,
since the civil law is by nature much more comfortable with broad principles. See Glenn,
supra, note 6, 45.
17See Burns, supra, note 7, and Gavison, supra, note 7.
18(1890) 4 Harv. L. Rev. 193.
19 Ibid., 198.
20 Ibid., 219.
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CONFIDENTIALITY OF TAX RETURNS
American courts did not immediately adopt the analysis of Brandeis and
Warren. Their opinion was rejected by a superior court in New York soon
after the article was published. 20a In 1905, however, the Supreme Court of
Georgia rendered its decision in Pavesich v. New England Life Insurance
Co.2
1 -a case involving the unauthorized use of the plaintiffs photograph
in an advertisement -and gave judicial recognition to an independent right
of privacy for the first time.22 For some thirty years, American courts
vacillated between recognition and rejection of the “right” to privacy. It was
not until the publication of the Restatement of Torts in 1939 that the Warren
in United States
and Brandeis analysis was
jurisprudence. 22a
firmly established
In 1960, a leading expert on American tort law, Professor William
Prosser, published a seminal article entitled Privacy.23 Prosser accepted that
there was a right of privacy in the United States but he suggested that it was
not one right; rather, he described it as a compendium of four distinct torts
which dealt with the protection of solitude, disclosure of embarrassing facts,
publicity which places an individual in a false light, and the appropriation of
an individual’s name or likeness for the advantage of another.24
Against
the American
this general background,
legislator has
superimposed two wide-ranging statutory provisions which affect the right
of privacy as manifested in the confidentiality of tax returns. In 1974, the
United States Congress enacted the Privacy Act24a which established for all
government agencies “a broad set of restrictions regarding the uses and
disclosures that can be made of records” of individuals. 25 In 1976, Congress
passed the Tax Reform Act.25a One of the essential provisions of the Act was
the modification of s. 6103 of the Internal Revenue Code to include a
lengthy and complex set of guidelines governing the disclosure of tax return
information. Both of these recent statutes start from the premise that
20a Roberson v. Rochester Folding Box Co. 64 N.E. 442 (N.Y.C.A. 1902).
2150 S.E. 68 (Ga 1905).
22The decision in Pavesich, ibid., per Cobb J. has become the leading American case on
privacy and it owes its theoretical basis to the work of Brandeis & Warren, supra, note 18.
The Supreme Court of Georgia, at p. 69, held that “[t]he right of privacy has its foundation in
the instincts of nature” and, at p. 70, that “[i]f personal liberty embraces the right to publicity,
it no less embraces the correlative right of privacy, and this is no new idea in Georgia law.” In
fact, it was a new idea – new in 1890 when it was first suggested by Warren & Brandeis. It
was not until the decision in Griswold v. Connecticut 381 U.S. 479 (1965) that the United
States Supreme Court (Black and Stewart JJ., dissenting) recognized that the right to
privacy was a civil right guaranteed by the Constitution.
22a For a complete historical review, see Prosser, supra, note 6, 384-8.
23 Ibid., 383.
24 Ibid., 389.
24a5 U.S.C. 552a (1976).
25 Personal Privacy in an Information Society, supra, note 6, 537.
25a26 U.S.C. 6103 (1976).
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privacy is a right and that disclosure of personal information should be
allowed only in strictly limited circumstances. American legislators, like
jurists before them, have adopted the basic reasoning of Warren and
Brandeis.
III. The Confidentiality of Tax Returns in Canadian Law
Although a growing number of authors have expressed concern about
the inadequacy of existing confidentiality safeguards, there is scant evidence
that the general public is concerned. In 1978, only eight complaints were
registered with the Privacy Commissioner against the Minister of National
Revenue (M.N.R.) with respect to confidentiality of tax information. 26 The
following examination of the development of the Canadian “secrecy”
provisions will attempt to define both the direction in which Canadian law
has been moving as well as the extent to which s. 241 of the Income Tax Act
protects the privacy of the taxpayer’s tax information.
Richard Green commented ten years ago that “[t]he annual or quarterly
outpouring to the confessional in Ottawa is thought, by the confessors, to be
veiled in the utmost secrecy. The foundation of these beliefs is uncertain. ’27
The confidentiality of tax returns is not only important because it involves a
right to personal privacy. Professor J. Ellis has suggested that confidentiality
is also a means of maximizing revenue collection:
It is well established that the charging provisions of the Income Tax Act apply both to
legally and illegally obtained income. Surely we cannot expect a lawbreaker (for
example, a professional gambler) to make a complete report of his income unless he
believes that the potentially incriminating evidence could under no circumstances be
used against him.28
from organized crime -is
The validity of this point is open to question. Is it realistic to believe that
illegal income -especially
likely to be set down
on income tax forms? A more serious argument is that unlimited access to
tax returns could substantially impair the effectiveness of Canada’s self-
assessment tax system by diminishing the average, non-criminal taxpayer’s
disposition to co-operate voluntarily with the tax authorities.2 9 The recent
revelation that a private investigator was able to obtain information about
the tax returns of Joe Clark serves as an example of the ineffectiveness of
current secrecy safeguards. One might expect Clark to be disillusioned
about the supposed confidentiality of his tax returns, and perhaps uninclined
to co-operate with the M.N.R. any more than is absolutely necessary. When
public figures are disillusioned, the general public may be expected to follow
26 Annual Report of the Privacy Commissioner 1979, supra, note 9.
27Green, The Confidentiality of Income Tax Returns (1972) 20 Cdn Tax J. 568.
2 Ellis, supra, note 2, 30.
29See Benedict & Lupert, Federal Income Tax Returns- The Tension Between
Government Access and Confidentiality (1979). 64 Cornell L. Rev. 940, 944.
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CONFIDENTIALITY OF TAX RETURNS
suit. The following examination of the past and present secrecy provisions of
the Income Tax Act will illustrate the current status of confidentiality of tax
returns. 30
A. The Protection of Confidentiality under the Income Tax Act before
1966.
The first secrecy or confidentiality provision with respect to income tax
information appeared in s. 11 of the 1917 Income War Tax Act: “No person
employed in the service of His Majesty shall communicate or allow to be
communicated to any person not legally entitled thereto, any information
obtained under the provisions of this Act, or allow any such person to inspect
or have access to any written statement furnished under the provisions of this
Act.”31
The section also stipulated that such a violation, upon summary
conviction, led to a fine of not more than $200. This was re-enacted as s. 81 in
the 1927 Income War Tax Act,32 and the only change made was that the
penalty section became subs. 81(2). In 1948, the provision was re-enacted as
s. 121 of the Income Tax Act, with minor changes in wording, and was
reconsolidated as one section. 33 In 1952, it was re-enacted as s. 133 of the
Income Tax Act.34 Although this section underwent important changes in
1966, 35 it continued to be numbered as s. 133 until 1970 when it became
s. 241, as it remains today.
The most cursory analysis of subs. 133(1), as it stood before 1966,
indicates that it provided a minimal degree of protection for the taxpayer.
The wording consisted of a sweeping principle of non-communication –
just the sort of principle that Canadian courts are loathe to handle with any
great courage. 36 This may partly explain the fact that the provision was
simply not applied in cases such as Clemens v. Clemens,37 Weber v. Pawlik3 8
and M.N.R. v. Die Plast Co. 39 The section was couched in very general
30 In Qu6bec there is no general protection of tax return confidentiality. In La loi sur les
imp6ts, L.R.Q., c. 1-3, the only recognition of a possible wish for confidentiality is contained
in s. 1074, which deals with appeals to the Provincial Court: “Such appeal may, at the
discretion of the court, be heard in camera or in public, unless the taxpayer requests that it be
heard in camera, in which case it shall be ordered to be heard in camera.” There are no
provisions preventing disclosure of tax information nor is any duty imposed upon the
Minister to protect the taxpayer’s privacy.
31 S.C. 1917, c. 28.
32R.S.C. 1927, c. 97, s. 87.
33S.C. 1948, c. 52.
3R.S.C. 1952, c. 148.
35S.C. 1966-7, c. 47, s. 17 and S.C. 1966-7, c. 91, s. 22.
36 Supra, note 9, passim.
37(1952) 6 D.T.C. 1128 (Ont. S.C., T.D.).
38(1952) 6 D.T.C. 1059 (B.C.S.C.).
39(1952) 6 D.T.C. 1082 (Qu6. Q.B.).
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language and offered no definitions. There are, in fact, no reported cases
which applied the old s. 133 in the ratio of thejudgment. It is also interesting
to note that in none of the cases which dealt even peripherally with s. 133 or
its predecessor sections was it the taxpayer himself who sought the
protection of the section to prevent the release of confidential information
from his own tax records.
In Weber v. Pawlik, an action for accounting of partnership profits, the
plaintiff subpoenaed tax records of the partnership from the M.N.R. It was
the Minister who objected to the release of the information. Robertson J.A.
of the Supreme Court of British Columbia, found that s. 121 bf the 1948 Act
provided no justification for the Minister’s objection to release of the
information, but nevertheless the Court found that the Minister’s objection
could validly be based on grounds of “public interest”. Similarly, in M.N. R.
v. Die Plast Co. the taxpayer wanted to gain possession of his own records to
use as evidence in a civil action. The Minister argued in this case that
according to s. 121, only the M.N.R. could decide whether or not to release
tax return ififormation even if the taxpayer authorized release. Again, the
Court avoided applying s. 121. In fact, Casey J. held that s. 121 in itself was
not a sufficient basis for the Minister’s objection. As in Weberv. Pawlik, the
Court justified the Minister’s objection on the broader grounds of public
policy. It should be noted that these cases do not support a principle of
confidentiality of tax returns on behalf of the taxpayer. Rather, they support
broad discretionary powers of the Minister to decide how “public interest” is
served. As Casey J. pointed out in M.N.R. v. Die Plast Co., “public interest”
as defined by the Minister may not always be to the taxpayer’s advantage. 40
McPherson v. Vang4′ explicitly stated that the Minister may refuse to release
information even to persons otherwise legally entitled to it.
These cases support the proposition that the courts tend to avoid the
application of legislation framed in broad principles. The highly generalized
nature of s. 121 was not, however, its only problem. The sole guideline
provided in the statute for discerning who may see tax return information
was the prohibition against release to persons “not legally entitled thereto”.
No definition of this term was provided. Consequently, a court which did
wish to apply the section would be forced to grapple first with the meaning of
that term. Such vagueness in the wording of the prohibition was a further
40 Ibid., 1086. See also Clemens v. Clemenssupra, note 37, as an example of a similar case
in which the Court found S.C. 1948, c. 52, s. 121 to be irrelevant.
41(1967) 21 D.T.C. 5041 (B.C.S.C.). ,In Weberv. Pawlik, supra, note 38, 1060, Robertson
J.A., in obiter dicta, stated that the phrase “person legally entitled thereto” referred to people
in the Department as well as others “who might find it necessary for the administration and
enforcement of the Act to see the [return] and to obtain information with regard thereto.”
This comment about enforcement has now found statutory expression in subs. 241(3) of the
Income Tax Act. It first appeared in S.C. 1966-7, c. 47, s. 17.
1982]
CONFIDENTIALITY OF TAX RETURNS
disincentive to judicial application of the section. 42 Section 121 was
intended, at least superficially, as a protective device for the taxpayer. In
fact, the section created a carte blanche for the Minister to consider almost
anyone to be “legally entitled” to the information as long as they could show
some vague need. At the same time, it is clear from cases such as McPherson
v. Vang that the Minister was most likely to refuse to release information to a
person “otherwise legally entitled” when that person was the taxpayer
himself.
In the cases discussed above, one finds very little concern for the right of
the individual, either to prevent disclosure, or to obtain release of documents
for his own use. The Minister, on the other hand, had only to utter the words
“public interest” and the issue was settled. He had almost total discretion to
prevent or allow disclosure. This judicial attitude, which was probably to a
large extent reflective of the public mood, suggests that in the 1950s the
Canadian position with regard to privacy and the rights of the individual was
much closer to the British outlook, stressing broad social utility, than to the
individualistic American approach which emphasized concern for personal
liberties. The Canadian legislator apparently approved of this judicial
attitude, for in 1966, the new subs. 133(2) explicitly stated that the Minister
could not be required to release information with respect to any legal
proceeding.
A limitation on this Ministerial discretion was made apparent in In the
Matter of Regina v. Snider43 in which the Supreme Court of Canada found
that the Minister could not refuse to disclose information subpoenaed with
respect to a trial under the Criminal Code. In this case, the Minister objected
to the subpoena on the grounds that release of the information would be
contrary to the public interest under s. 121 of the Income Tax Act. This case
perhaps came closest to directly testing the effectiveness of the privacy
principle. The result could not have been encouraging for civil libertarians.
In discussing the principle involved, Mr Justice Rand stated:
The disclosure of a person’s return of income for taxation purposes is no more a matter
of confidence or secrecy than that, say, of his real property which for generations has
been publicly disclosed in assessment rolls ….
The ban against departmental disclosure is merely a concession to the inbred tendency
to keep one’s private affairs to one’s self.44
42Subsection 133(2) was added when s. 133 was reworked in S.C. 1966-7, c. 47, s. 17:
133(2) Notwithstanding any other Act or law, no official or authorized person shall be
required, in connection with any legal proceeding,
(a) to give evidence relating to any information obtained by or on behalf of the Minister
for the purpose of this Act, or
(b) to produce any book, record, writing, return or other document obtained by or on
behalf of the Minister for the purposes of this Act.
43[1954] S.C.R. 479.
44Ibid., 483-4.
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The majority found that the real test of whether or not to prevent disclosure
was a test of “public interest”. Therefore, the reasoning in Snider did not
differ from the earlier cases. A distinction was drawn, however, between civil
and criminal matters, the Court holding that the Minister could be
compelled to release tax information with respect to criminal proceedings.
The net result of Snider seems to have been to lessen even further the
degree of confidentiality protected by s. 121. The individual whose records
were involved was in a very vulnerable position. If he requested them for use
in a civil proceeding the Minister could refuse on grounds of public interest.
In criminal cases there was no possibility that ministerial discretion could
operate in the individual’s favor. In such cases, Snider compelled the
Minister to release tax information. In summary, the original confidentiality
provisions of the Income Tax Act did not have the effect of protecting
confidentiality of tax returns per se.
B. The Effect of the 1966 Revisions
In 1966, the entire section dealing with communication of information
was overhauled. It was then still called s. 133, but since the amendments have
been only slightly altered -in
1979 and 1981 -and are now in s. 241 of the
Income Tax Act, when citing the 1966 amendments we will refer to the
section numbers according to the numbers in the current Act.
The critical change in 1966 occurred in the wording of the general
prohibition in subs. 133(1), which is now s. 241 of the Income TaxAt. 45 The
new section took the form of a prohibition against release to anyone – not
just against release to persons “not otherwise legally entitled thereto” as in
subs. 133(1).46 Subsections 133(2) and 133(3) were also amended in 1966 and
have also remained identical to the present subs 241(2) and 241(3).
Subsection 133(2) incorporated the previous jurisprudential rule that no
official or authorized person could be compelled to produce tax information
in civil matters. Subsection 133(3) was enacted to apply and extend the
Snider decision, and has continued as subs. 241(3).47 The exception to the
rule of non-disclosure has been extended by subs. 241(3) to include
45241(1) Except as authorized by this section, no official or authorized person shall
(a) knowingly communicate or knowingly allow to communicate to any person any
information obtained by or on behalf of the Minister for the purposes of this Act, or
(g) knowingly allow any person to inspect or to have access to any book, record, writing,
return or other document obtained by or on behalf of the Minister for the purposes of this
Act.
46 It should be remembered that the problem of defining a person “not otherwise legally
entitled thereto” still exists. See discussion, infra, note 55 and accompanying text.
47 Subsections 241(1) and (2) of the Income Tax Act do not apply in respect of criminal
proceedings, either by indictment or on summary conviction, under an Act of the Parliament
of Canada, or in respect of proceedings relating to the administration or enforcement of the
Act.
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CONFIDENTIALITY OF TAX RETURNS
“proceedings relating to the administration or enforcement of this Act”.
Subsection 241(4) provides more details with respect to the right of the
Minister to disclose information in respect to the administration or
enforcement of the Act.48 The only changes to this section subsequent to
1966 were the additions of paras 241(4)(d)-(f) in 1981. 49 Paragraph 241(4)(d)
permits release of information relating mainly to the assessment or
reassessment of a
income. Paragraph 241(4)(e) allows
communication of certain information relating to the cost of newly acquired
property. Paragraph 241(4)(f) permits the communication of information to
officials of the Department of Finance solely for the purposes of formulating
tax policy and to officials of the Department of National Revenue to aid in
the enforcement of Acts under their administration.
spouse’s
The general effect of these provisions is to make the section easier to
apply. There is now a general prohibition against release of tax information
to anyone. The subsections which follow the general prohibition set up
exceptions to the rule, and the circumstances in which ministerial discretion
may operate seem to be clear. 50 The organization of the section is, in this
respect, more amenable to application by common law courts as it resembles
a set of rules rather than an abstract principle.
The recent case of Re Glover and Glover5′ was decided under s. 241 and
as such became the first case to protect the right of the taxpayer not to have
such information released. In a divorce action, Mrs Glover was awarded
4 241(4) An official or authorized person may,
(a) in the course of his duties with the administration or enforcement of this Act,
(i) communicate or allow to be communicated to an official or authorized person
information obtained by or on behalf of the Minister for the purposes of this Act,
and
(ii) allow an official or authorized person to inspect or to have access to any book,
record, writing, return or other document obtained by or on behalf of the
Minister for the purposes of this Act;
(b) under prescribed conditions, communicate or allow to be communicated information
obtained under this Act, or allow inspection of or access to any written statement
furnished under this Act to the government of any province in respect of which
information and written statements obtained by the government of the province, for
the purpose of a law of the province that imposes a tax similar to the tax imposed
under this Act, is communicated or furnished on a reciprocal basis to the Minister; or
(c) communicate or allow to be communicated information obtained under this Act, or
allow information of or access to any book, record, writing, return or other document
obtained by or on behalf of the Minister for the purposes of this Act, to or by any
person otherwise legally entitled thereto.
49A minor amendment adding para. 241(4)(d) to the Income Tax Act was made in S.C.
1978-9, c. 5, s. 9. This amendment was repealed in S.C. 1980-1, c. 48, s. 107, and replaced by
para. 241(4)(d)-(f).
50Subsections 241(2), 241(4) and 241(5).
5′[1980] C.T.C. 531 (Ont. C.A.), aff’d Glover v. M.N.R. (1981) 130 D.L.R. (3d) 383
(S.C.C.). See the discussion of the decision in (1982) 1 Cdn Current Tax 508.
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custody of her two young children, but Mr Glover absconded with the
children. When the decree nisi was granted, Mr Justice Lerner of the
Supreme Court of Ontario made an order directing, inter alia, that “Revenue
Canada, Taxation, … provide ‘this Court with particulars of the addresses of
the respondents Paule Wenenn and James Glover.”‘ 52 The Minister moved
to set aside the order but this was denied by the trial judge. MacKinnon
A.C.J. allowed the Minister’s appeal, stating, “[s]ection 241, in my view, is a
comprehensive code designed
the confidentiality of all
information given to the Minister for the purposes of the Income TaxAct. ’53
The Supreme Court of Canada, in a unanimous decision, affirmed the
judgment of the Ontario Court of Appeal. In adopting the reasons of
MacKinnon A.C.J., the Chief Justice commented that “the statutory
provisions above-mentioned for non-disclosure, in connection with any legal
proceedings of a civil character, do not give any power to a Court to qualify
them, nor do the exceptions set out in s. 241(4)(c) assist the appellant. 54
to protect
Mrs Glover’s case did not fall within any of the exceptions to the general
rule of prohibition and consequently the information could not be released.
In this respect, the decision lends support to the contention that the revision
of the section in 1966 made it much more likely to be applied broadly by the
courts. But there may be an additional factor in that, unlike the courts in
Clemens v. Clemens, Weber v. Pawlik, McPherson v. Vang and Regina v.
Snider, the Court of Appeal in Re Glover and Glover seems to place a
greater emphasis on the confidentiality of the individual’s return rather than
on public interest. For example, MacKinnon A.C.J. considered whether
Mrs Glover was a person “otherwise legally entitled” within para. 241(4)(c)
and decided that she was not. To find otherwise, he said, “would … give far
too wide a meaning to the words ‘otherwise legally entitled’ and once again
the result would be to ignore or subvert the limitations imposed by the
section in its attempt to ensure the confidentiality of the information secured
and received by the Revenue Department under the Act. ’55
It is submitted that in the 1950s, the judicial reaction would have been to
find Mrs Glover to be a “person otherwise legally entitled” even if the effect
was to emasculate the confidentiality provision. Re Glover and Glover may
be a landmark in that it did not use the first escape-hatch available to avoid
enforcing individual privacy provisions in favour of a larger public interest.
This may be partly due to the new structure of the section, but it is submitted
that the social consciousness of the late 1970s and early 1980s is one which is
much more concerned with individual rights and protections than the social
consciousness of the 1950s.56
52 Ibid., 532.
53Ibid., 533.
54 Glover v. M.N.R., supra, note 51, 384.
55 Supra, note 51, 535.
56 Supra, p. 487.
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CONFIDENTIALITY OF TAX RETURNS
The suggestion that the result in Re Glover and Glover may reflect a shift
in values rather than a simple reaction to the changes in the Act is illustrated
by comparing the Glover case with the earlier Federal Court of Appeal
decision of Mr Justice Thurlow in In re M.N. R. v. Huron Steel Fabricators
(London) Ltd.57 With one minor alteration, s. 241 was identical when the
Glover and Huron Steel decisions were reached.
In the Huron Steel case, however, the Court upheld the subpoena of tax
records of Peron Holdings by Huron Steel Fabricators (London) Ltd.
Thurlow J. noted:
The statutory provisions with respect to disclosure have undergone notable changes
since the Snider case was decided, but it appears to me to follow from the reasoning in
that case that in this country there is no basis for a conclusion that the disclosures which
the Income Tax Act requires the taxpayer to make are confidential and there is no
immunity for them from production in legal proceedings except to the extent that
Parliament has expressly spelled out such immunity in the statute.5 8
The Court found that as there was no statutory basis for preventing dis-
closure, no broad ground of public policy could do so either. The Court, it
appears, was narrowing the broad application of public policy that had
existed in earlier cases but still did not recognize any basis for individual
protection from release of tax information. Interpreting the same s. 241, the
Court in Huron Steel refused to find the general right of confidentiality that
only seven years later would be asserted in Glover.
C. Recent Developments Relating to Confidentiality
In light of Glover, then, it would appear that the courts may now be
willing to apply s. 241 more broadly, putting a higher value on protection of
the confidentiality of an individual’s tax information. However, one should
not have too much faith that the courts will protect personal privacy as no
clear attitude has yet been established. Glover may be a mere aberration.
Citizens must look to the legislature for protection. The central question is
whether the Income Tax Act, in its present form, offers a sufficient gua-
rantee of confidentiality, with limited and well defined exceptions.
Subsection 241(1) of the Income Tax Act prohibits any official or
authorized person from “knowingly” communicating or allowing to be
communicated to any person any information obtained for the purposes of
the Act. The prohibition may not be as wide as it first appears: the burden of
proof on the victim of such a release is very heavy. Consider, for example,
the position of Joe Clark if he wished to press charges under subs 241(1) and
241(9). Because subs. 241(1) is framed in individual terms, he would first
have to be able to identify the official or authorized person who divulged the
information. As this was apparently done over the telephone, and as the
57(1973) 27 D.T.C. 5347 (F.C.A.).
58 Ibid., 5352.
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natural reflex of many bureaucrats is never to volunteer their identity, the
matter would probably end right there. But even if Mr Clark could identify
the person, he would then have to prove that the individual “knowingly”
communicated the information. If, for example, the individual negligently
assumed he or she was speaking to another official or authorized person
involved in the processing of the tax returns, it seems that subs. 241(1) would
not apply.
Another problem raised by subs. 241(2) is that even if the taxpayer could
identify an intentional violator of s. 241, the enumerated exceptions to the
confidentiality rule could provide further obstacles. The broadest exception
to subs. 241(1) is subs. 241(3) which states that subs 241(1) and 241(2) do not
apply “in respect of criminal proceedings, either by indictment or on
summary conviction, under an Act of the Parliament of Canada, or in
respect of proceedings relating to the administration or enforcement of this
Act.” The most obvious problem with this section is that no definition of
criminal “proceedings” has ever been provided. A court so inclined might
find that an investigation of suspected criminal activity constituted a
criminal proceeding. If this were the case, the R.C.M.P. would have a free
rein to conduct “fishing expeditions” into anyone’s return without the need
for a warrant. Mr Justice Laycraft interpreted the term somewhat more
narrowly:
In my view, the words “in respect of criminal proceedings” in section 241(3) are words of
wide import, which comprehend every step of the criminal procedurefrom the time a
charge is laid until the final disposition of the matter by the court…. The disclosure of
tax information to assist in preparation of the charges for court, once a criminal charge
is laid, is within the exemption provided by section 241(3).59
While Laycraft J.’s opinion may be preferred, there is no case law at present
which supports his restrictive interpretation.
The other exemption in subs. 241(3) is “in respect of proceedings relating
to the administration or endorsement of this Act”. The combination of the
two exemptions may in fact be extremely wide when one considers that the
R.C.M.P. are involved in both criminal and tax investigation. What
happens, one may ask, if in the course of a prosecution for tax evasion, the
R.C.M.P. discovers evidence connecting the tax evader to a theft ring? It
might be argued that, as subs. 241(1) simply does not apply once the
proceedings fall within subs. 241(3), any information discovered is fair game.
This seems to be the opinion of Mr Justice Laycraft who stated that, once
disclosed for a tax investigation, “nothing in the section precludes the use of
tax information for any other purpose.” 60 On the other hand, the exemption
of subs. 241(3) is in respect of the proceedings, not of the information in
59 Royal Commission of Inquiry into Royal. American Shows, supra, note 3, C-46
60 Ibid., C-47.
[emphasis altered].
1982]
CONFIDENTIALITY OF TAX RETURNS
question, so it could be argued that such information would not be within the
subs. 241(3) exemption after the tax proceedings ended. The effect would
not, however, be very significant; the R.C.M.P., put on the track by the tax
information, could work back from that point to gain additional evidence,
lay charges and bring back the tax information a second time. The effect of
subs. 241(3) suggests that the notorious Ms Eldridge61 may have had a solid
basis for her reluctance to report income from her “house of ill repute”.
Section 241 contains further provisions which limit the confidentiality of
tax return information. Subsection 241(4) permits an official or authorized
person to communicate or allow to be communicated tax information in
certain defined circumstances. Paragraph 241(4)(a) allows an official or
authorized person to communicate such information to other officials or
authorized persons in connection with their duties. Paragraph 241(4)(b)
allows such information to be communicated to the government of a
province “for the purpose of a law of the province which imposes a tax
similar to the tax imposed under this Act.” Paragraph 241(4)(d) allows
information to be given to a spouse when it “is necessary for the purposes of
an assessment or reassessment of tax”. In para. 241(4)(c), communication of
information is permitted to “any person otherwise legally entitled thereto”.
This phrase is similar to the wording used in s. 121 of the 1948 Act.
Formerly, it was placed in the general prohibition, and as discussed above, it
contributed to the ineffectiveness of the section. Now that it is within a
section which states an exception, it may be less likely to cause serious
difficulties of interpretation, as Re Glover and Glover suggests. A problem
does arise, however, when one tries to envision just who is “otherwise legally
entitled thereto”. The first possibility which comes to mind is the taxpayer
himself, but if this is the intended meaning, then subs. 241(5) is redundant.
Another possibility might be that the phrase refers to other officials or
authorized persons in the Department, but again, para. 241(4)(a) permits
this explicitly. It is difficult to imagine someone not already mentioned in
subs 241(4) or 241(5), who could be considered “otherwise entitled thereto”
without rendering subs. 241(1) nugatory. This phrase, it is submitted,
effectively leaves the application of subs. 24 1(l) to the absolute discretion of
the judiciary.
Mr Justice Laycraft pointed out another major problem with the 1966
amendments: “[t]he only persons for whom s. 241 creates an offence are
‘officials’ or ‘authorized persons’ as defined in subsection (10). The person
receiving
the information commits no offence, nor does his further
communication of it render him liable unless he is, himself, an ‘official’ or
‘authorized person.”‘ 62 There was no obligation placed on third parties
receiving such information legitimately, to protect the confidentiality of the
61 M.N.R. v. Eldridge [1965] 1 Ex. C.R. 758.
62 Supra, note 3, C-44-5.
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information. This problem has been dealt with by the 1981 amendment
adding para. 241(9)(b).63
The new paragraph places an obligation upon persons legitimately
receiving such information to protect its confidentiality. As discussed in
Part IV, recent American legislation has also attempted to remedy a similar
situation. The change is welcome. However, there is a curious legislative
lacuna in the 1981 amendment. Paragraph 241(9)(a), dealing with the
liability of the “official” or “authorized person”, refers back to subs. 241 (1).
One of the effects of subs. 241(1) is that in order to attract liability, the
disclosure must have been knowingly made. Paragraph 241(9)(b), however,
refers the reader only to subs. 241(4), which contains no comparable
restriction. It may be, then, that the effect of para. 241(9)(b) is to place a
higher standard of liability on the person receiving the information from the
official or authorized person than that placed on the official or authorized
person himself. There seems to be no rational purpose in imposing two
different standards of liability.
An overview of the protection of the confidentiality of tax information in
Canada suggests that, both in terms of the legislation and the attitude of the
courts, the taxpayer’s protection is increasing. On the other hand, a closer
examination of s. 241 reveals that a court reluctant to apply subs. 241(1)
could easily avoid doing so. The Americans have recently instituted major
changes in their legislation regarding protection of the confidentiality of tax
returns. Some of these changes will be examined. A comparison of the two
statutory positions could provide useful suggestions for improving the
privacy of the Canadian taxpayer.
D. Confidentiality of Tax Returns in American Law
The law of the United States, unlike that of Canada, does provide a
general protection for the privacy of the individual, even though the concept
of privacy has not yet been defined comprehensively. 64 This general
protection has been extended in specific statutes to protect the right of the
individual, in most situations, to confidentiality of his income tax returns.
Nevertheless, A.S. Miller has stated recently that “[w]hen the State reallj
needs information … it can lawfully get it, despite the Constitution and
63 S.C. 1980-1, c. 48, s. 107 adds subs. 241(9) to the Income Tax Act:
Every person
(a) who, being an official or authorized person, contravenes subsection (1) or
(b) to whom information has been provided pursuant to subsection (4) who uses,
communicates or allows to be communicated such information for any purpose
other than that for which it was provided,
is guilty of an offence and is liable on summary conviction to a fine not exceeding $1,000 or
to imprisonment for a term not exceeding 2 months or to both such fine and imprisonment.
6 For a general discussion of tax return confidentially under American law, see Benedict
& Lupert, supra, note 29.
1982]
CONFIDENTIALITY OF TAX RETURNS
despite any legal or moral notions of personal or associational privacy.” 65 He
went on to say that American courts will recognize an individual right of
privacy only when recognition of that right also benefits the state.
Professor Miller’s rather bleak outlook is completely at variance with the
declared hopes and intentions of the United States Privacy Protection Study
Commission. In their final Report of 1977, the Commission issued a stirring
call to arms for the protection of individual privacy: “As long as America
believes, as more than a matter of mere rhetoric, in the worth of the
individual citizen, it must constantly reaffirm and reinforce its protections
for the privacy, and ultimately the autonomy, of the individual.” 66 Just how
far has the United States Congress gone in reaffirming and reinforcing its
protection of privacy in respect of income tax returns? Has it followed the
wishes of the Privacy Protection Study Commission, or has it cynically
offered plums while retaining control over information it really wants, as
Professor Miller suggests? As regards tax returns, the issue was stated
succinctly by the Privacy Protection Study Commission: “The fact that tax
collection is essential to government justifies an extraordinary intrusion on
personal privacy by the IRS (Internal Revenue Service), but it is also the
reason why extraordinary precautions must be taken against misuse of the
information the Service collects from and about taxpayers.” 67
The first “extraordinary precaution” taken by American legislators to
control government invasion of personal privacy was the Privacy Act of
1974.68 In that Act, Congress expressly recognized that “the privacy of an
individual is directly affected by the collection, maintenance, use, and
dissemination of personal information by Federal agencies”.69 It also
recognized that the potential harm to individual privacy by government
information-collection had been magnified greatly by “the increasing use of
computers and sophisticated information technology”. 70 Following the lead
of the Supreme Court in Griswold v. Connecticut,7′ Congress also stated
that privacy “is a personal and fundamental right protected by the
Constitution of the United States”.72
After its ringing declaration of principle, Congress went on to enact a
far-reaching compendium of provisions designed to regulate the collection
65 Miller, supra, note 5, 67.
66 Personal Privac in an Information Society, supra, note 6, 537.
67 Ibid.
68 Privacy Act of Sept. 3, 1974, 5 U.S.C. 552a (1976).
69 Privacy Act of Sept. 3, 1974, Pub. L. No. 93-579, 2(a)(l), 88 Stat. 1896 (congressional
findings and statement of purpose).
70 Section 2(a)(2). See also Horvitz & Sardinas, Impeachment of Government Systems
Documentation for Taxpayers Classifiedas Nonfilers (1977) 6 Rutgers J. of Computers and
Law 73, 89.
71381 U.S. 479 (1965).
72 Pub. L. No. 93-579, 2(a)(4), 88 Stat. 1896.
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and dissemination of personal information by all agencies of the federal
government. The governing principle of the Act is found in s. 552a(b) which
provides that: “No agency shall disclose any record which is contained in a
system of records by any means of communication to any person, or to
another agency, except pursuant to a written request by, or with the prior
written consent of, the individual to whom the record pertains”. The Privacy
Protection Study Commission noted that the Act had succeeded in making
all Federal agencies “subject to a broad set of restrictions regarding the uses
and disclosures
that can be made of records they maintain about
individuals”. 73 However, the Commission also noted that there were eleven
statutory exceptions to the principle of non-disclosure.
Many of these exceptions are uncontroversial. For instance, an
employee of the agency which collected the information can secure its release
if he needs the record in the course of his duties with that agency.74 Release of
information is also allowed for statistical purposes to the Bureau of Census,
employees of which must take an oath of secrecy, and to other statisticians
only if the transferred record is “in a form that is not individually
identifiable. 75
Other exceptions to the general rule of non-disclosure are potentially
more objectionable. Section 552a(b)(9) allows records to be released to
Congress or to any Congressional subcommittee which has jurisdiction over
the requested information. Under s. 552a(b)(10), the Comptroller-General’s
Office is also given access to records needed “in the performance of the
duties” of that Office. The head of a civil or criminal law enforcement agency
may also request records in writing if he describes the portion of the record
required and reveals the nature of the particular investigation for which it is
required. There are no further controls placed on the release of records to
these three elements of the federal governement.
The Act does offer some further protection to the individual by requiring
that an agency which releases records to any other organ of government
must keep a record of the date, nature and purpose of the disclosure, and the
name and address of the person or agency to whom the disclosure was
made.76 In addition, an individual does have a right to view any records
relating to him which are kept by a federal agency, except when those records
have been compiled “in reasonable anticipation of a civil action or
proceeding”.77 Section 552a(g) provides that an agency which incorrectly
releases records or which unjustifiably refuses an individual’s request to view
his own records may be the target of a civil action. This provision is very
73 Personal Privacy in an Infornation Socie’, supra, note 6, 537.
745 U.S.C. 552a(b)(l) (1976)
75 Section 552a(b)(5).
76 Section 552a(c)(1).
77 Section 552a(d)(5).
1982]
CONFIDENTIALITY OF TAX RETURNS
significant because it means that the agency itself may be liable for breaches
of confidentiality. In Canada, s. 241 of the Income Tax Act makes only the
individual employee liable, and as was discussed in Part III(C), it may be
difficult to identify that individual.
In theory, the protections offered by the Privacy Act are substantial,
although the uncontrolled release of records to members of Congress is
somewhat at variance with the stated purpose of the Act. In practice,
however, the statutory restrictions on the release of information seem to
have been somewhat ineffective. In Hearings before the House Committee
on Ways and Means concerning the confidentiality of tax return
information, Representative Charles A. Vanik revealed the results of a
survey of forty-eight agencies. The survey examined the release of records
after the Privacy Act of 1974 and indicated that, in large measure, the
requirements of the Act were not being met. In most agencies there was an
“appalling failure” to maintain accurate records of which information had
been disseminated. It was virtually impossible for an individual citizen to
exercise the rights granted to him under the Act.78
The Committee also heard testimony from Vanik which suggested
another weakness in the practical application of the 1974 statute. While
acknowledging that the survey of agencies indicated that the Internal
Revenue Service (I.R.S.) had tried diligently to fulfill its obligations under
the Privacy Act of 1974, Vanik went on to say: “The problem is that the IRS,
as well as many other Federal agencies that we polled, are so large and
decentralized that record-keeping by the headquarters office is often
inadequate, and it is highly doubtful whether field offices… maintain records
which are complying with the Privacy Act. ‘ 79 Unless the bureaucracy is in a
position to implement effectively the guidelines established in the Privacy
Act of 1974, the broad assertions of principle contained in the purposes
clause of the Act shall always have a hollow ring. Of course, this problem of
discontinuity between the expressed will of the
legislator and the
performance of the bureaucrat is not limited to the United States. Should
the Canadian Parliament decide to enact stronger protections of tax return
confidentiality, our legislators will have to explore ways to encourage and
help the government agencies affected to comply with the new policy or any
changes will be ineffectual.
American legislators were perhaps aware of the practical difficulties
surrounding the Privacy Act of1974 when they enacted the Tax Reform Act
in 1976.79a One of the major objectives of that legislation was to provide a
78 Confidentiality of Tax Return Information: Hearing before the Committee on Ways
and Means, 94th Cong., 2d Sess., 1-7 (1976).
79 Ibid., 3.
79a Tax Reform Act of Oct. 4, 1976, 26 U.S.C. 6103 (1976).
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comprehensive set of rules governing the confidentiality of tax returns. The
Act added s. 6103 to the Internal Revenue Code, a section which enumerates
in great detail rules governing the release of information obtained by the
I.R.S. The Code is far more specific than the Privacy Act of 1974, because it
regulates the actions of only one of the myriad of government agencies which
were covered by the Privacy Act. Section 6103 of the Internal Revenue Code
is entitled “Confidentiality and Disclosure of Returns and Return
Information”. It begins with the premise that no one who possesses
information obtained from income tax returns shall be permitted to disclose
the information. The governing principle of non-disclosure follows directly
from the interim report of the Privacy Protection Study Commission which
recommended a general rule of confidentiality of individually identifiable
data unless an individual has consented to a disclosure.8 0 Section 6103(b)
defines exactly what information is covered by the non-disclosure provision.
The section enumerates certain categories of information but the list ends
with the words “or any other data received by, recorded by, prepared by,
furnished to, or collected by the Secretary.” It appears, then, that any
information received under the authority of the Internal Revenue Code is
included within the purview of s. 6103.
At the outset, one important distinction is evident between s. 6103 and
s. 241 of the Canadian Income Tax Act. The American Act prohibits all
disclosure, whereas the Canadian Act proscribes only knowing disclosure by
officials or authorized persons. Strangely enough, the recent addition of
para. 241(9)(b) is more in line with the American approach. It proscribes all
unauthorized disclosure by persons receiving information from officials or
authorized persons, thus covering the case of negligent or incompetent
employees.
Another important contrast is evident upon even a cursory comparison
of the Canadian and American statutes. Section 241 contains certain
exceptions to the general principle of non-disclosure but these exceptions are
phrased in very general terms. Section 6103 of the Code enumerates over
twenty very specific circumstances in which tax information can be released.
It is clear that the American legislators sought to be extremely precise in
framing any derogations from the general rule of non-disclosure, whereas
their Canadian counterparts saw fit to allow disclosure whenever a
particular case could be brought within the general guidelines of s. 241. This
is not to say that the American statute is an obviously superior model which
should be followed verbatim in Canada.
The Tax Reform Act of 1976 contains certain exceptions to the general
non-disclosure provision which do not seem to meet the criterion of
“compelling societal need” set down by the Privacy Protection Study
8OSupra, note 6, 541.
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CONFIDENTIALITY OF TAX RETURNS
Commission. 8′ They seem to be based on political expediency rather than on
any legitimate need for information. The most striking example of a
politically sensitive exception is s. 6103(g) which allows full disclosure of any
tax information to the President, upon written request stating why the
information is required. The Privacy Protection Study Commission did not
endorse this provision, finding that the exception was far too broad. 82 Of
course, the Commission was well aware of the abuse of the President’s power
to inspect tax records which occurred during the Nixon Administration. In
testimony before the House Ways and Means Committee, Representative
Vanik took strong exception to s. 6103(g). He pointed out that the exception
gave the executive a virtual carte blanche to examine personal tax records
and cited one case where the Justice Department had requested and received
information by stating merely that the return was “of interest in connection
with the matters … under investigation”. 83 No further or more explicit
justification is required. The potential for abuse is enormous.
Another exception which has been criticized by the privacy monitoring
agency is s. 6103(h)(5) which gives Department of Justice attorneys access to
tax records for the purpose ofjury selection. The rationale for this exception
is that the government wants to know whether a prospective juror is biased
against it as a result of a past conflict with the I.R.S. The Privacy Protection
Study Commission has stated that it believes that such use of tax records is
wrong because the use is incompatible with the purpose for which the
information was collected. 84
The Study Commission also reported that it believed that the 1976 Tax
Reform Act allowed too much disclosure to officials involved in the
prosecution of non-tax criminal offences. 85 Section 6103(i)(1) permits
disclosure of tax information to all “officers” or “employees” of an agency in
preparation for an administrative or judicial proceeding pertaining to the
enforcement of a “specifically designated Federal Criminal Statute”. This
exception may be wider than the criminal law exception contained in s. 241
of the Canadian Income Tax Act depending upon the judicial interpretation
of subs. 241(3) which states that the non-disclosure rule does not apply “in
respect of criminal proceedings”. If a “criminal proceeding” exists only once
81 Ibid.
82 Ibid., 551. The position of the Study Commission is endorsed by Benedict & Lupert,
supra, note 29, 967-9.
83 Supra, note 78, 3.
84 Supra, note 6, 545.
85 Ibid., 553. For a similar point of view, see Gortlan, The Need for Reform of the
Information and Evidentiary Use of Tax Returns in Nontax Criminal Proceedings (1976) 14
Am. Crim. L. Rev. 163. The article was written before final passage of the Tax Reform Act
of 1976, but the author criticizes certain provisions of the proposed legislation which were
subsequently enacted. See also Joyce, Raiding the Confessional- The Use of Income Tax
Returns in Nontax Criminal Investigations (1980) 48 Fordham L. Rev. 1251, for a
comprehensive review of the issues.
Mc GILL LAW JOURNAL
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a charge has been laid, the disclosure cannot take place at the stage of mere
investigation. It appears that in the United States, disclosure can be
authorized during an investigation because “investigation” is certainly
encompassed within the words “in preparation for” an administrative or
judicial proceeding.
Despite the potentially wider exception of s. 6103(i)(1), the American
statute actually offers greater protection for privacy of citizens under
investigation for criminal offences than does its Canadian counterpart. The
Canadian Act merely allows the exception without providing any guidelines
as to how, in practice, it will operate. In s. 6103(i)(1) of the American Act, the
legislators have decreed that any application for disclosure of information to
be used in preparation for a criminal proceeding must be heard before a
Federal District Court Judge. Although the application is heard exparte,
the judge must nevertheless be convinced of three things. First, that there is
reasonable cause to believe that a criminal act has been committed.
Secondly, that there is reason to believe that the requested return contains
probative evidence relating to the criminal act. Thirdly, that the information
to be disclosed cannot reasonably be obtained from any other source. The
federal criminal investigators have a heavy burden of proving reasonable
cause which is entirely absent in the Canadian Act.
The Privacy Protection Study Commission believed that this heavy
burden of proof was justified. Indeed they suggested that it be extended: “In
sum, the Commission believes that Federal law enforcement officials should
not have easier access to information about a taxpayer when it is maintained
by the IRS than they would have if the same information were maintained by
the taxpayer himself.”86 This forceful position was not adopted in full by
Congress. It is, at the same time, completely contrary to the spirit of s. 241 of
the Canadian Act. Indeed, the Canadian statutory position would be much
to the satisfaction of American law enforcement officials who have criticized
s. 6103(i)(1) because they believe that it inhibits criminal investigations. 87
Section 6103 of the United States Internal Revenue Code permits many
other exceptions to the general rule of non-disclosure but these exceptions
are generally considered to be necessary even by strong proponents of
confidentiality. For example, the Code permits release of information to the
taxpayer himself (s. 6103(e)) or to his designated representative (s. 6103(d))
and to State tax officials to the extent necessary to administer state tax laws.
Of course, federal officers are given access to tax records for purposes of tax
administration under s. 6103(h). The Code also permits disclosure by
s. 6103(1)(6)(A) to federal state or local child support agencies of names,
addresses and certain income information to aid in the location of persons
owing child support payments. It appears from the Glover case discussed
86 Supra, note 6, 546.
87Supra, note 78, 26 (statement of Richard L. Thornburgh).
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CONFIDENTIALITY OF TAX RETURNS
above, that such disclosure is not permitted under the Canadian Income Tax
Act.
One serious practical problem has emerged after the passage of the Tax
Reform Act of 1976. The Privacy Protection Study Commission has pointed
out that although s. 6103 authorizes release of information only when
necessary, the collection of information contained in I.R.S. files is so
tantalizing and so well organized that there exists “a tendency of other
agencies to view IRS files as sources of information that could have been
easily obtained from other sources”.88 The Assistant Attorney-General of
the Criminal Division of the Justice Department, in testimony before the
House Ways and Means Committee explained why I.R.S. files are such a
rich source of information:
Even where alternate sources are used, other problems arise. First, it is often impossible
to verify the validity of the information obtained in the alternative source without the
tax return.
Second, the use of alternative sources and the resultant publicity may infringe upon the
privacy of innocent third parties, as when bank records dealing with these individuals
must be subpoenaed for information concerning transactions with a person under
investigation.
In this sense, the ability of the government to focus on the particular transaction and
obtain the information through the more discreet use of tax returns actually protects
and enhances rights of privacy.89
A cynical observer might question the motives behind the Assistant
Attorney-General’s pious invocation of the rights of privacy. The first
reason he gives for allowing disclosure is probably more to the point.
Despite the potential loss in efficiency of other government agencies who
are now required to use alternate sources of information, the American
legislator has obviously been at least partially convinced by the reasoning of
the Privacy Protection Study Commission which urged the passage of
s. 6103 in the first place. The Commission believed that
the individual taxpayer is inherently at a disadvantage vis & vis a government
agency that has access to IRS information because the IRS has the threat of serious
punishment to compel the disclosure of information the individual would otherwise not
divulge. That fact alone, in the Commission’s view, argues in general for carefully
controlled dissemination of IRS data on individual taxpayers and in most cases for no
disclosure. 90
In large part, s. 6103 fulfills the goal of non-disclosure. However, the section
does permit wide exceptions which may be hard to justify on grounds of
public utility if that concept is divorced from political considerations. This
failing aside, the Tax Reform Act of 1976, when read together with the
Privacy Act of 1974, does provide a coherent and comprehensive set of
guidelines which ensures the confidentiality of tax returns except under
88 Supra, note 6, 563.
89 Supra, note 78. 29 (statement of Richard L. Thornburgh).
9oSupra, note 6, 540.
REVUE DE DR OIT DEMcGILL
[Vol. 27
specifically enumerated circumstances. If the federal government is able to
improve the functioning of the huge bureaucracy which must comply with
the guidelines thereby limiting the number of accidental disclosures, the
privacy of the individual’s financial situation will be very well ensured. The
generalized notion of privacy first propounded by Brandeis and Warren has
been given a precise statutory meaning in the law of income tax
confidentiality in the United States.
Conclusion
It is clear that since 1966 there has been a considerable improvement in
Canada in the protection accorded the individual taxpayer with respect to
the confidentiality of tax returns. The 1966 amendments to the Income Tax
Act set down a general principle of non-disclosure. More importantly, the
1966 amendments and the more limited changes made in 1979 and 1981 have
provided a clear set of exceptions. The latest improvement to s. 241 included
the significant addition of para. 241 (9)(b) which creates an offence for a third
party who discloses tax return information. Despite these improvements,
significant problems remain.
In contrast to the American Tax Reform Act, the exceptions under
s. 241 are very broadly drawn. In particular, the provision of para. 241(4)(c)
which allows disclosure to persons “otherwise legally entitled thereto” is so
wide that it could deprive the entire section of any effect.
An extremely serious deficiency of the Act is that only an individual
employee is made liable under s. 241. The individual whose personal
information has been released has no recourse against the Ministry as a
whole. In the United States, a separate tort action does lie against the I.R.S.
for any unauthorized disclosure of information. In Canada a plaintiff must
furthermore prove that a particular individual who disclosed information
did so “knowingly”. In practice, such a burden is very difficult to meet. The
American statute imposes no such burden. In Canada, a plaintiff must
furthermore prove that a particular official or authorized person who
discloses information did so “knowingly”.
Perhaps inadvertently, Parliament has lifted this burden with respect to
persons receiving information from officials or authorized persons. It is
difficult to envision why the standard of liability should be different as
between officials and receivers of information. Nevertheless, the imposition
of liability upon receivers of information is a positive step.
The recent changes made to the United States Internal Revenue Code in
the field of confidentiality have enhanced the privacy of the American
taxpayer. Canadian legislators would do well to study these recent changes
and amend s. 241 along similar lines.
The American Act, however, should not be followed slavishly. The Tax
its exceptions to
Reform Act has one great weakness. Although
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CONFIDENTIALITY OF TAX RETURNS
confidentiality are defined narrowly, the basis for some of the exceptions is
highly questionable. The Act allows almost unlimited release of information
to members of congressional committees, to White House officials and to the
President himself. Such widespread release of information at the whim of
political figures substantially undercuts the American guarantees of
individual privacy. Despite
the structure of the
American Act is worthy of emulation. Its exhaustive enumeration of
exceptions to the general principle of non-disclosure facilitates the task of the
judiciary.
these inadequacies,
Even if the Canadian legislator sees fit to follow the American example,
it would be a mistake to assume that personal privacy of tax information
would be absolutely guaranteed. The widespread diffusion of information in
government data-banks is increasingly difficult to control, in part because in
a large bureaucracy, it is impossible to avoid human error. Moreover, when
personal financial information is also in the hands of private organizations, it
may be difficult to establish where or when a breach of confidentiality has
occurred. Despite these inevitable difficulties, it is important to try to protect
individual privacy. Even though privacy may not be an absolute right, it is
an important individual need which has been recognized in all Western
democracies. In the field of tax return confidentiality, the assurance of
privacy may be an important incentive to voluntary compliance.
Some British authors have suggested that it is more important to know
to whom information is being released than to know that it will not be
released. 9’ This highly debatable assumption implies that freedom of
government information is valued more highly than personal privacy.
Unquestionably, some information is widely considered to be “personal”
and although citizens are willing to divulge information on the grounds of
social utility, they expect that such information will be dealt with in
confidence. The government cannot always ensure that no breach will occur,
but as the Commissioner of the’I.R.S. stated to the House Committee on
Ways and Means, “we can’t legislate integrity, but by a combination of good
laws, stiff penalties, and a strong enforcement, we can do much to meet [the
problem of] the unauthorized and impermissible and illegal disclosures”. 92
The 1966 and 1981 amendments to the Income Tax Act and the decision of
the Supreme Court of Canada in Re Glover and Glover indicate a modest
trehd toward the protection of privacy interests in tax law. However,
problems remain which must be studied and remedied by Canadian
legislators.
91 See Flaherty, supra, note I1; Velecky, supra, note 6. For an excellent discussion of the
conflict between freedom of information and personal privacy see Rosenfeld, The Freedom
of Information Act’s Privacy Exemption and the Privacy Act of 1974 (1976) 11 Harv. Civ.
Rts – Civ. Lib. L. Rev. 596.
92Supra, note 78, 14 et seq. (statement of Donald C. Alexander).
