Date:
20060530
Docket: A-376-05
Citation: 2006 FCA 202
CORAM: SEXTON
J.A.
EVANS
J.A.
MALONE
J.A.
BETWEEN:
THE MINISTER OF NATIONAL
REVENUE
Appellant
and
ROGER ELLINGSON
Respondent
REASONS FOR JUDGMENT
MALONE J.A.
I. INTRODUCTION
[1]
This appeal
concerns the scope of the power granted to the Minister of National Revenue
(Minister) under paragraph 231.2(1)(a) of the Income Tax Act, R.S.C.
1985, c.1 (5th Supp.) (the Act) in issuing a requirement
letter where a suspicion exists as to unreported income and illegal activity.
That paragraph permits the Minister, in the administration and enforcement of
the Act, to compel any person to provide documents or information, including a
return of income or supplementary return.
[2]
Paragraph
231.2(1)(a) of the Act reads as follows:
|
Requirements to provide documents or information
231.2 (1) Notwithstanding any other provision of this Act, the
Minister may, subject to subsection (2), for any purpose related to the
administration or enforcement of this Act, including the collection of any
amount payable under this Act by any person, by notice served personally or
by registered or certified mail, require that any person provide, within such
reasonable time as is stipulated in the notice,
(a) any information or additional information, including
a return of income or a supplementary return;
|
Production de documents ou fourniture de renseignements
231.2 (1) Malgré les autres dispositions de la présente loi, le
ministre peut, sous réserve du paragraphe (2) et, pour l'application et
l'exécution de la présente loi, y compris la perception d'un montant payable
par une personne en vertu de la présente loi, par avis signifié à personne ou
envoyé par courrier recommandé ou certifié, exiger d'une personne, dans le
délai raisonnable que précise l'avis:
a) qu'elle fournisse tout renseignement ou tout renseignement
supplémentaire, y compris une déclaration de revenu ou une déclaration
supplémentaire;
|
II. THE DECISION UNDER APPEAL
[3]
The
Minister appeals the August 4, 2005 order of a Federal Court judge (the
Applications Judge) that quashed a requirement letter dated July 20, 2004,
issued by an officer in the Special Enforcement Program (SEP), a unit within
the Investigations Division of the Canada Revenue Agency (CRA). This
requirement letter directed Roger Ellingson to produce his signed income tax
returns from 1999 to 2003, as well as signed statements of his assets,
liabilities and personal expenses for those same years (the Requirement). Mr.
Ellingson did not respond but sought judicial review to quash the Requirement.
[4]
The
Applications Judge determined that when the Requirement was issued, a penal
liability investigation was already underway, giving rise to protection under
the Canadian Charter of Rights and Freedoms (the Charter) in accordance
with the Supreme Court of Canada decision in R v. Jarvis, [2002]
3 S.C.R. 757 [Jarvis]. On appeal, it is the position of the Minister
that the conduct of the SEP official correctly followed the auditing practices
sanctioned by the Supreme Court of Canada in Jarvis. Put simply,
according to the Minister, based on the facts of this case, the predominant
purpose of the Requirement issued to Mr. Ellingson was a pre-audit inquiry and
Charter protections do not arise.
[5]
While a
number of legal errors are raised, the Minister’s primary argument is that the
Applications Judge ignored key facts and mischaracterized a 1992 Working Arrangement
between the Royal Canadian Mounted Police (RCMP) and the Department of National
Revenue (now CRA) (the 1992 Working Arrangement). According to the Minister,
the Applications Judge erroneously determined that the SEP unit functioning
under the 1992 Working Arrangement can only conduct criminal investigations.
III. FACTS
[6]
In January
2004, Mr. Ellingson was charged in California
with various offences involving an illicit drug importation/distribution
operation and the laundering of the proceeds between June 2000 and March 2004.
A grand jury indictment was unsealed on April 1, 2004 and the next day a news
release was issued by the United States Attorney that included Mr. Ellingson’s
name.
[7]
On or
about April 16, 2004, the SEP unit received a copy of a suspicious transaction
referral form (the Referral) from the HSBC Bank located at 201 Main Street in Penticton, B.C. The Referral detailed a deposit by
Mr. Ellingson into a joint account that he shares with his wife. The
transaction consisted of $5,000, all in twenty dollar bills. Under a part of
the Referral entitled “description of suspicious activity” the following bank
notation appears:
Client brought in
$5000.00 in cash all in 20s to be applied to two car loans he has with HSBC.
The CSR noticed that the money had the distinct odour of marijuanna [sic]. A
further review of the loans revealed that client consistently makes payments to
the loans by way of cash.
[8]
The
Referral came from the RCMP Proceeds of Crime unit, but the RCMP did not
provide any other information regarding Mr. Ellingson. The Referral was first
directed to Darren Wilms, an investigator in the Investigations Division of the
CRA. As part of his regular duties in checking local newspaper articles, Mr.
Wilms had previously located a newspaper article published on April 7, 2004, by
the Penticton Herald which referred to Mr. Ellingson being indicted in the United States for drug trafficking charges.
[9]
Mr. Wilms
then conducted a search of the CRA electronic database to determine what tax
returns Mr. Ellingson had filed in the past. The search revealed that he had
not filed any tax returns for the years 1997 to 2003. Once Mr. Wilms determined
that the respondent was a non-filer, he directed the referral, newspaper
article and the database search to David Matheson, an auditor/inspector in the
SEP unit. Mr. Matheson was not provided with the grand jury indictment or the
newspaper release issued by the United States Attorney.
[10]
The SEP unit
is a separate audit unit within the Investigations Division of the CRA that deals
with audits of taxpayers where there is an indication that they may have earned
income from illegal activities. According to Mr. Matheson the SEP unit does not
currently conduct criminal investigations (see Matheson Affidavit, paragraph 10
of Reasons). However, when an auditor determines during the audit that a
criminal offence may have been committed, the file is then referred to an
investigator within the Investigations Division.
[11]
Mr.
Matheson’s first task was to gather information to determine whether an audit
should be undertaken. Having the sole conduct of this file, Mr. Matheson issued
the Requirement on July 20, 2004. This is the only activity undertaken by Mr.
Matheson. There is no evidence of any criminal investigation by the
Investigations Division nor was Mr. Ellingson ever interviewed by any CRA
official.
IV. ANALYSIS
[12]
In Jarvis,
the Supreme Court of Canada was called upon to settle the line of
demarcation between audits and criminal investigations for income tax purposes pursuant
to subsection 231.2(1) of the Act. Writing for a unanimous court, Iacobucci and
Major JJ. wrote as follows:
Although the taxpayer
and the CCRA [now CRA] are in opposing positions during an audit, when the CCRA
exercises its investigative function they are in a more traditional adversarial
relationship because of the liberty interest that is at stake. It follows that
there must be some measure of separation between the audit and investigative
functions within the CCRA.
…
…where the predominant
purpose of a particular inquiry is the determination of penal liability, CCRA
officials must relinquish the authority to use the inspection and requirement
powers under ss. 231.1(1) and 231.2(1). In essence, officials “cross the
Rubicon” when the inquiry in question engages the adversarial relationship
between the taxpayer and the state. There is no clear formula that can answer
whether or not this is the case. Rather, to determine whether the predominant
purpose of the inquiry in question is the determination of penal liability, one
must look to all factors that bear upon the nature of that inquiry.
…
…Apart from a clear
decision to pursue a criminal investigation, no one factor is necessarily
determinative in and of itself, but courts must assess the totality of the
circumstances, and make a determination as to whether the inquiry or question
in issue engages the adversarial relationship between the state and the
individual. [emphasis added]
….
…the test cannot be
set at the level of mere suspicion that an offence has occurred.
Auditors may, during the course of their inspections, suspect all manner of
taxpayer wrongdoing, but it certainly cannot be the case that, from the moment
such suspicion is formed, an investigation has begun. [emphasis added]
(See Jarvis,
paragraphs 84, 88, 93 and 90)
[13]
This
predominant purpose test is not a bar to the Minister conducting parallel
criminal investigations and audits (see Jarvis at paragraph 97).
However, the timing of such processes is important. Auditors can share information
they obtain with CRA investigators, provided that the information was gleaned
prior to the start of the criminal investigation. At that stage, the
adversarial relationship arises and Charter protections are engaged. At
paragraph 103 of Jarvis, the Supreme Court of Canada summarized the law
in the following words:
…as previously stated,
it is clear that, although an investigation has been commenced, the audit
powers may continue to be used, though the results of the audit cannot be used
in pursuance of the investigation or prosecution. (See also R. v. Ling, [2002]
3 S.C.R. 814 at paragraph 30)
[14]
Jarvis requires a reviewing court to
consider what the dominant purpose in issuing a requirement was: the conduct of
an audit or the pursuit of an investigation. This is a two step test. The first
step is to determine whether there is a clear decision to pursue a criminal
investigation based on the evidence. If the answer to the first step is yes,
the inquiry ends there and the power to issue a requirement can no longer be
exercised by the Minister (see for example Kligman v. Canada (Minister of
National Revenue), 2004 FCA 152).
[15]
If there
is no clear decision, then the trial judge must embark on a search to determine
whether the inquiry or question in issue gives rise to an adversarial
relationship. All factors are to be examined including, but not limited to, the
questions as framed by the Supreme Court of Canada in Jarvis (hereafter
“the Jarvis Factors”). The Jarvis Factors include: At the time of issuing the
Requirement were there reasonable grounds to lay charges? Could the decision to
proceed with a criminal investigation have been made based on the record? Was the
general conduct of the authorities consistent with a criminal investigation? Were
the files transferred to investigators? Was the auditor an agent for the
investigators or intended to be used as such? Was the evidence sought relevant
to the taxpayer liability generally? Were there are any other circumstances or
factors which would lead the trial judge to believe that the audit had become a
criminal investigation?
[16]
In the
present case, there is no evidence of a clear decision by either the RCMP or
the Investigations Division of the CRA to embark on a criminal investigation.
The record is silent on this point. Accordingly an inquiry in accordance with
step two of Jarvis must be conducted. Instead of proceeding in that fashion,
the Applications Judge chose to state the issue in the following words:
…the sole question for
determination is as follows. “When the Auditor made the decision to issue the
Requirement, was a penal liability investigation under way?” If the answer is
‘yes’, on the authority of Jarvis, it is agreed that the Auditor acted
beyond his jurisdiction.
[17]
That is clearly
an error of law. As indicated in Jarvis at paragraphs 97 and 103, audits
and investigations are permissible on parallel tracks. The
issue of whether the Applications Judge correctly applied the relevant case law
to whether the CRA had the jurisdiction to send the Requirement is a question
of law, which suggests the least deferential standard of review (see Zenner
v. Prince Edward Island College of Optometrists, 2005 SCC 77).
[18]
I turn now
to an analysis of the Jarvis factors relevant to the Requirement issued
to Mr. Ellingson; the key question being whether its predominant purpose was to
further a criminal investigation against him. In this analysis, the standard of
proof as to whether his Charter rights have been engaged is on a balance of
probabilities (see R. v. Collins, [1987] 1 S.C.R. 265).
Factor A – Reasonable Grounds to Lay
Charges
[19]
At the
time the Requirement was issued, the inquiry by the CRA through its audit
function was responding to mere suspicion of unreported income from illegal
activity. While it was open to the CRA to conduct both a criminal investigation
and audit, the evidence does not show that the CRA were doing both. Rather the
evidence is that the pre-audit inquiry was but a first step in determining
whether Mr. Ellingson was a non-filer for the taxation years 1999 to 2003. Accordingly,
I can see no basis on the present evidence to conclude that the CRA had
reasonable grounds to lay criminal charges under the Act at this early stage.
Factor B – Basis to Proceed with Criminal
Investigation
[20]
While Mr.
Matheson was unaware of the indictment at the time he issued the Requirement, presumably
the Referral and the grand jury indictment could provide a basis upon which an
investigation under the Act could be commenced by the RCMP or criminal
investigators within the CRA. This factor favours Mr. Ellingson.
Factor C – General Conduct
[21]
The
general conduct of the CRA with respect to Mr. Ellingson is also not consistent
with the pursuit of a criminal investigation, in that the CRA did not issue a
search warrant or conduct an interview. Rather its conduct is consistent with
simply gathering information to determine whether to commence an audit.
Factor D – Have the Files Been
Transferred to Investigators
[22]
Whether a
file has been transferred to an investigator is yet another factor in
determining whether an adversarial relationship exists. However, by itself it
is not conclusive (see Jarvis at paragraph 92). The present case does
not involve a situation where the file is first transferred from the audit to
investigation section and then returned to the auditor who then issues a
requirement for documents. In such circumstances, the Supreme Court of Canada
has directed that courts must pay close attention to determine whether an investigations
section has truly declined to pursue the case or whether the auditor is merely
collecting information on its behalf.
[23]
Here, the
file relating to Mr. Ellingson has only been acted upon by Mr. Matheson. It is
his undisputed evidence that while the file could have been transferred to the Investigations
Division if he had determined that an offence had been committed, that was not
done in this case. While it is true that Mr. Matheson does work as an auditor
in the SEP unit, which is part of the Investigations Division, the current
policy indicates that the SEP unit only conducts audits and Mr. Matheson said
that he had never conducted a criminal investigation. Accordingly, there is
nothing in this record to suggest that information was exchanged that could
give rise to an adversarial relationship.
Factors E and F – Auditor as Agent of
Investigators
[24]
There is also
no evidence of any conduct by Mr. Matheson which could suggest that in his
audit function he was being used as an agent of the Investigations Division or
the RCMP in the collection of evidence. Rather, the record suggests that there
was no contact once Mr. Matheson assumed conduct of the file.
Factor G – Evidence Sought Relevant to
Penal Liability Only
[25]
In my
analysis, the information sought in the Requirement is relevant to Mr. Ellingson’s
tax liability generally and is not only relevant to penal liability. It
contains what can only be viewed as a normal CRA request in a situation where
the taxpayer has not filed any tax returns and little or no financial
information is available. For example, it sought the actual tax returns for the
relevant years so as to be reviewed or verified by Mr. Matheson. It also sought
information regarding income sources, assets, liabilities and personal
expenditures also necessary so as to determine whether a net worth assessment
was warranted. Again, in and of itself, this factor does not point to an
adversarial relationship.
Factor H – Other Circumstances – The 1992
Working Arrangement
[26]
Key to the
Applications Judge’s order was his determination that regardless of Mr.
Matheson’s personal intention, his role as auditor was tainted by the 1992
Working Arrangement. That document obliges the RCMP and the CRA to act in
concert to disrupt and combat organized crime in the enforcement of the Act.
This, according to the Applications Judge, can only mean cooperative
investigations and a sharing of information with the ultimate purpose to impose
penal sanctions. Respectfully, I do not read the 1992 Working Arrangement and
the surrounding exhibits in that light, especially when the unrefuted evidence
of Mr. Matheson is considered.
[27]
As early
as 1972, the Department of National Revenue, Taxation and the Department of the
Solicitor General had a signed protocol in place with the stated objective to
disrupt and combat organized crime through criminal prosecutions only. That
protocol was replaced by the 1992 Working Arrangement with the same objective,
but with a methodology expanded beyond criminal prosecutions to include: identifying
those earning income from illegal activities and determining their position in
the criminal community, carrying out preliminary investigations in relation to
case development, carrying out audits towards assessment/re-assessment where
the criteria for tax evasion prosecution is not met and providing the maximum
information to the Collections Division in order to maximize actual collection
of taxes, penalties and interest.
[28]
The
Applications Judge found it difficult to understand how stemming the activities
of organized crime could be carried out other than by investigations for the
purpose of imposing criminal sanctions. However, it is self-evident that auditing
those involved and issuing a reassessment for taxes, interest and penalties is
also highly disruptive to organized crime.
[29]
The Applications
Judge also gave no weight to a subsequent 2002 publication by the CRA dealing
specifically with the Specific Enforcement Program (SEP Manual). While that publication does not have the
force of an act or regulation, it can be used to provide legal context and
inform decisions. Here, the SEP Manual is a helpful source for discerning the
operation of the SEP and should be accorded some weight.
[30]
The first
paragraph of the SEP Manual casts doubt on the currency of the 1992 Working
Arrangement, and the relevance of the case of R. v. Harris, [1995]
B.C.J. No. 1467, relied on by the Applications Judge. It states: “This [SEP]
program has evolved through the years and its focus has shifted from a criminal
to a mainly civil approach.” Whatever the situation in 1972 or 1992, the SEP program
had evolved by 2002 into one primarily focusing on civil audits rather than
criminal investigations.
[31]
Two
specific sections of the SEP Manual are instructive. Section 20.4.1 and
subsection 20.4.2(2) read as follows:
SEP audits are carried
out to determine, as accurately as possible, the taxes, duties, interest and
penalties payable under the law by those persons earning income from illegal
activities. SEP audits will also be carried out as means to determine the flow
of funds, in an effort to uncover other members of the specific criminal
organization for Tax compliance enforcement purposes.
Audits will be completed
to the issuance of applicable assessments and penalties, except those with the
necessary indication of tax evasion which will be referred to the Criminal
Investigation Program (CIP) on form T134 for investigation.
[32]
Clearly,
separate audit and investigative units do function within the CRA, a fact
recognized by other courts which chose not to follow the decision in Harris
(see R. v. Lin (1997), B.C.J. No. 1277 and R. v. Xidos
(1999), 181 N.S.R. (2d) 381).
[33]
This
change in focus of the SEP unit is also evident from Mr. Matheson’s evidence
that since at least the time when he joined the SEP unit in 2001, it only
conducts audits and not criminal investigations. Accordingly, there is no evidentiary
basis for the Applications Judge’s conclusion that at the time that the
Requirement was issued in 2004 the SEP unit could only conduct criminal
investigations. In reaching that conclusion, the Applications Judge chose to
marginalize and ignore Mr. Matheson’s evidence and the above provisions of the
SEP Manual.
[34]
Accordingly,
considering the Jarvis Factors, as well as the 1992 Working Arrangement and the
SEP Manual and based on a balance of probabilities, I am unable to conclude
that Mr. Matheson was acting in any way beyond mere suspicion when he issued
the Requirement. On the present facts, an adversarial relationship simply does
not arise.
[35]
In this
circumstance, the appeal should be allowed, the order of the Applications Judge
dated August 4, 2005 should be set aside and the Requirement issued by the CRA
on July 20, 2004 should be restored. The Minister should have his costs both on
appeal and in the Federal Court.
“B.
Malone”
“I
agree.
J. Edgar Sexton J.A.”
“I
agree.
John M. Evans J.A.”
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