Thyssen Canada Ltd. v. The Queen, 84 DTC 6049, [1984] CTC 64 (FCTD)

Walsh, J:—This is a motion dated the 9th day of August, 1983 on behalf of the plaintiff, for an order pursuant to section 24 of Part I of The Constitution Act, 1982 requiring the defendant to return all copies in its possession and expunging from the record and enjoining the defendant from producing at trial, a letter of the plaintiff, dated September 1, 1976, sent to its parent company in Germany, or for such other order as this honourable Court may deem just.

In order to understand the significance of the letter in question it is necessary to resume the facts in this case. Jeno Gal, an auditing officer of the Department of National Revenue was auditing plaintiffs records for its 1976, 1977 and 1978 taxation years as a result of which he spent about fifty working days between June 2, 1980 and March 1981 in plaintiffs premises. The present appeal does not relate to those years but to assessments for its 1973, 1974 and 1975 taxation years. Plaintiff is a wholly owned subsidiary of a German parent corporation from which it purchased fabricated steel for resale at arm’s length to customers in Canada and elsewhere. Late payment charges were levied by the German parent against plaintiff and plaintiff for its part imposed late payment charges against each customer which it treated as interest. When late payment charges were levied against it by its parent it included an interest element in the sales price of the sale products sold to its customers. It will be plaintiffs contention when the action comes to trial that it was in error when it treated the late payment charges levied against it as interest and grossed up these payments to reflect Canadian withholding tax. Interest deductions of over $1,000,000 were disallowed during the 1973 to 1975 taxation years. As a result plaintiff will contend that the parent company, which does not have an establishment in Canada, and plaintiff have been subjected to double taxation in that the parent company paid German tax on the late payment charges charged to plaintiff while plaintiff has been denied a deduction with respect to the same amounts in Canada.

It is conceded that during his audit Mr Gal received full cooperation from Mr Johan Vos, the vice-president for finance of the plaintiff. He sought permission to examine plaintiffs books and records which he understood to include correspondence relating to plaintiffs financial affairs and Mr Vos did not limit his access to mere bookkeeping records such as journals, ledgers and vouchers. He was shown two rooms in which some of the books and records were kept and was assigned a desk in one of them where he could work undisturbed and invited to ask Mr Vos or his staff for any further assistance required. The room in which he was working was unoccupied save for him and contained non-current posting vouchers, cancelled cheques, and outgoing correspondence of plaintiff relating to its financial matters which were kept in hard covered binders with pull-apart rings in full view on a shelf in the room. Among them was a carbon copy of plaintiffs letter to the German parent company dated September 1, 1976 which referred to the company’s practice in treating these payments in the earlier years under dispute in the present action. Mr Gal stated in his affidavit on which he was cross-examined that he was aware that plaintiffs 1973, 1974 and 1975 taxation years were under objection and one of the objects of his audit was to ascertain whether plaintiff had made similar interest payments on its overdue trade debts to specified non-residents in the 1976, 1977 and 1978 taxation years as well.

Mr Vos also gave Mr Gal permission for the use of plaintiffs photostating facilities for the purpose of making copies of portions of plaintiffs books and records. While Mr Gal denied when cross-examined on his affidavit that this permission was subject to any proviso, Mr Vos in cross-examination on his affidavit states that he wanted to know what was going to be copied as he was trying to restrict his staff from copying too much and outside auditors are easy about photocopying. It appears that what he was concerned with however was the cost of making the copies, which are not billed to the Department of National Revenue. According to his evidence while Mr Gal showed him some of the documents he had photocopied he did not show them all. Some of Mr Vos’ staff assisted in the photocopying from time to time.

In due course Mr Gal arranged to have a photocopy of this letter placed in the file of the Department of National Revenue for the 1973, 1974 and 1975 taxation years with a covering memorandum stating that he had obtained it “without the plaintiffs knowledge”. It is contended that by this Mr Gal merely meant that he had not drawn it to plaintiffs specific attention at the time he had obtained it, but that this comment is not an indication that he had obtained it without plaintiffs permission.

Mr Gal, apparently a diligent employee of the Department of National Revenue did not wish to draw the letter to Mr Vos’ attention at the time, intending that the appeal officers of the Department of National Revenue (Taxation) could do so at an appropriate time so that plaintiff would therefore be surprised by it, which he thought would further the Department’s chances of defending the assessments. According to his testimony in his examination he also wished at the time to avoid raising a possible controversy with Mr Vos regarding the issue of deductibility of interest charges. He also states that he does not make a practice of giving the party being audited a complete list of all the documents which he has photocopied. Mr Vos in cross-examination on his affidavit conceded that had Mr Gal shown him the letter at the time he would not have objected to the production of it but would have discussed it and tried to explain it to Mr Gal, and perhaps had a meeting with his accountants. He stated that once Mr Gal had the letter in his hands he knew he had a right to it and could not object to it any more. It is conceded that section 231 of the Income Tax Act gives wide authority for the examination of books and records of the taxpayer being audited and that, if there had been any objection to the audit, authority could have been obtained under that section. The fact that the audit was performed with the permission and assistance of the taxpayer would not in my view limit the nature of the records which could be examined or which could be copied. There is no issue here of an illegal search or seizure and the original letter was not taken but merely photocopied.

At most it can be said that Mr Jeno Gal was guilty of a “dirty trick” in not specifically calling to the attention of Mr Vos that he had found a letter during the course of his audit for the 1976, 1977 and 1978 taxation years which, if produced in the litigation now before the Court with respect to the 1973, 1974 and 1975 taxation years, might be damaging to plaintiffs case in those years, and by so doing hoping to take plaintiff by surprise when it was produced in the said proceedings. There is no doubt that once he had seen it the letter could have been obtained and used in the proceedings by other means, and, in fact there is some doubt in my mind as to the importance of the letter in any event. The manner in which the plaintiff treated these payments in its 1973,1974 and 1975 taxation returns appears from those returns and any admissions made thereafter or recommendations in a letter to the parent company, or any change in practice in the subsequent years, if this was the case, cannot alter that. Even an admission in such a letter that the practice was erroneous, if in fact such an admission were made would not be binding on the Court hearing the case on the merits which must merely determine whether the practice adopted in the years under litigation was correct or not.

I turn now to the law and jurisprudence which was argued at some length both orally and by written submissions by counsel for both parties. The first argument and one which would be decisive if it were adopted is that the Court has no jurisdiction to grant the relief sought in the present motion in that it relates to admissibility of evidence which is a matter which should be left for the trial judge. There is considerable force to this argument and in fact what are sometimes referred to in the United States as “suppression hearings” are not recognized in Canada, and the Charter of Rights has not changed this. For example in the case of Regina v Siegel 39 OR (2d) 337, O’Driscoll, J stated at 342:

The Courts of Great Britain have always shunned any procedure which sought a ruling upon the admissibility of evidence at a time prior to the moment of tendering the evidence.

and again at 343:

. . . prior to the Charter, Canadian courts have refused to make rulings on admissibility of evidence in advance of the tendering of the evidence at the trial; the Canadian courts have always held that the judge at the preliminary hearing and the judge at trial had the right and the duty to determine admissibility.

This was a criminal matter however and the applicability of section 24 of the Charter was considered in this light.

Moreover defendant further argues that the order sought in the motion is in essence one for declaratory relief which cannot be given in an interlocutory proceeding and that subsection 24(1) of the Canadian Charter of Rights and Freedoms does not change this principle nor does it alter the procedures set out in the Rules governing the Federal Court of Canada or any other Court of competent jurisdiction (see Gary Banks et al v The Queen (unreported).

On the other hand plaintiff stresses the desirability of having this issue determined at an early stage of the proceedings contending that the Court is a Court of competent jurisdiction to make this determination on this motion in accordance with its inherent jurisdiction to administer its own process. It is contended that the issue has now been fully argued at great length on this motion and it is not in the interest of the Court to merely leave the matter for determination of the trial judge at that stage since unless Defendant should decide not to seek to introduce the said letter in evidence, it will have to be argued again on the same basis with the result of delaying the conduct of the trial. There was some suggestion that the matter might be determined as a preliminary determination of a question of law on admissibility pursuant to Rule 474 or Rule 327 of the Rules of this Court. After consideration of the jurisprudence however I have reached the conclusion that this would not be an appropriate case in which to apply Rule 474. Its use was dealt with in the case of Foodcorp Limited v Hardee's Food Systems, Inc, [1982] 1 FC 821 in which Heald, J rendering the judgment of the Court of Appeal points out at page 825 that Rule 474 empowers the Court upon application to declare certain evidence admissible, but in the case before him it was common ground that no such application had been made. In the case before him he had found that the material was clearly inadmissible in any event, and moreover it dealt with section 59 of the Trade Marks Act in an expungement matter in which procedure is specifically set out in Rule 704 of the Rules of this Court. He concluded therefore that the admissibility or non-admissibility of the material would normally be a matter for the judge hearing the expungement proceeding and should not be dealt with in a preliminary way. In the case of The Clarkson Co Ltd v The Queen, [1978] 1 FC 481 Mahoney, J stated at 483:

The situation contemplated by Rule 474 is one where, while there are a number of issues in an action, the disposition of one of them will likely have the effect of putting an end to the action.

That is certainly not the case here.

In the case of Canadian Javelin Ltd v Sparling et al, 60 CPR (2d) 220, Addy, J stated at 221:

In any motion under Rule 474 of the Federal Court Rules, the question to be determined must be a pure question of substantive law or of the application of the law of evidence.

At 22 he states:

. . . Yet, the determination of that question as presented would not finally dispose of the litigation between the parties even if the defendants obtained the answer which they are seeking because it would presumably still remain open for the plaintiff to continue to trial of the action.

It does not appear that Rule 327 would be appropriate either. It reads as follows:

Rule 327. Upon any motion the Court may direct the trial of any issue arising out of the motion, and may give such directions with regard to the pre-trial procedure, the conduct of the trial and the disposition of the motion as may seem expedient.

The only issue raised by the motion is one relating to admissibility of a specific document in evidence in order to expunge it from the record.

While certainly I would not wish to create a precedent of general application to the effect that questions of this nature can be considered in advance rather than being left for consideration by the trial judge, it appears to me that on the facts of this case and in view of the very complete argument on the question which has been made it is in the interest of justice and the inherent jurisdiction of this Court over its process that in the circumstances of this particular case the Charter of Rights argument invoked by plaintiff relating to production of said document should be considered and dealt with.

I now deal with another argument which I believe would decide the present motion conclusively against plaintiff, namely that the Charter of Rights cannot be invoked since it only came into effect in 1982 as part of the Constitution Act, 1982 whereas the document was only obtained during the audit between June 2, 1980 and March 1981 before the adoption of said Charter which does not have retroactive effect. Plaintiff argues that the fact that the Crown continues to hold the document as evidence and refuses to return it or to refrain from using it at trial constitutes a continuing breach of the provisions of the Charter, thus giving the Court jurisdiction to order that the evidence be expunged. In support of this reliance was placed on the case of R v Davidson 40 NBR (2d) 105 APR 702 where drugs were illegally seized as a result of a defective search warrant prior to the said Charter. At 708 the judgment stated:

While established rules of statutory construction must be applied to construing the application of the Charter I cannot think that artificial or tedious reasoning should be applied to thwart the remedial character of the Charter. To isolate the search and seizure of the articles from their tendering as evidence would be just that. Although I have not seen the text of his judgment, Eberle, J, in Re Potma, 7 W.C.B. 365 appears to take the contrary view.

In the Potma case (Potma v The Queen, 37 OR (2d) 189), Eberle, J stated at 200:

. . . 1 conclude that s 24 can only be applied to rights which are guaranteed by the Charter; and that means only on and after the Charter became law.

A similar finding was made in the case of Regina v Shea, 38 OR (2d) 582, and in Regina v Longtin, 41 OR (2d) 545 where Blair, J A states at 548:

The same reasoning applies to s 8 of the Charter which creates the new substantive right to be secure against unreasonable search and seizure. That section does not have retrospective effect and, accordingly, cannot be relied on by the appellant.

I conclude therefore that the weight of jurisprudence indicates that the Canadian Charter of Rights and Freedoms cannot be invoked with retrospective effect on the facts in this case.

Even if I had reached the conclusion sought by plaintiff that section 24 of the Charter can apply this would not have resulted in a finding in favour of plaintiff. The said section reads as follows:

24 (1) Anyone whose rights or freedoms, as guaranteed by this Charter, have been infringed or denied may apply to a court of competent jurisdiction to obtain such remedy as the court considers appropriate and just in the circumstances.

(2) Where in proceedings under subsection (1), a court concluded that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter, the evidence shall be excluded if it is established that, having regard to all the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute.

Plaintiff presumably would have to rely on section 8 of the Charter which reads:

8. Everyone has the right to be secure against unreasonable search and seizure.

In the present case there was no formal search or seizure but merely an income tax audit carried on by Mr Gal with plaintiffs permission during the course of which he found a letter, which was not concealed or hidden, which letter plaintiff considers would be damaging to it if produced at the trial of the action. He took a photostat of it and did not advise Mr Vos that he had done so, in fact hoping that Mr Vos would not be aware that he had even seen the letter. While his motives may not have been commendable, although certainly in the interest of his employer the Department of National Revenue, I do not find that as a consequence the search was unreasonable or illegal.

To go a step further even if I had found that the plaintiffs rights had in any way been infringed as a result of Gal having made a copy of this document without directing plaintiffs attention to the fact that he had done so I would still apply the provisions of subsection (2) of section 24 of the Charter, concluding that the admission of this document in evidence in the proceedings would not bring the administration of justice into disrepute. It has long been established in Canada, unlike the United States, that even illegally obtained evidence can be used at trial in the discretion of the Court depending on the facts of the case. In the case of R v Esau, 20 Man R (2d) 230, Huband, JA at 237 makes reference to the judgment of Martland, J in the Supreme Court case of The Queen v Wray, [1972] SCR 272 in which he stated:

The issue of law before this court is as to validity of the principle stated in the reasons of the Court of Appeal of Ontario . . . that a trial judge in a criminal case has a discretion to reject evidence, even of substantial weight, if he considers that its admission would be unjust or unfair to the accused or calculated to bring the administration of justice into disrepute.

I will deal with the latter part of this proposition first. I am not aware of any judicial authority in this country or in England which supports the proposition that a trial judge has a discretion to exclude admissible evidence because, in his opinion, its admission would be calculated to bring the administration of justice into disrepute.

At 238 Huband, J states:

The wording of s 24(2) suggests that illegally obtained evidence will continue to be admitted as evidence against an accused, save in those cases where its admission would bring the administration of justice into disrepute.

In the case of The Queen and Ruby Collins, a judgment of the British Columbia Court of Appeal dated March 22, 1983, Chief Justice Nemetz stated at 6 and 7:

The Supreme Court of Canada has already commented on the admission of statements made by an accused. Mr Justice Lamar, in Rothman v The Queen (1981), 59 CCC (2d) 30, said this in regard to the admission of statements made by an accused:

The Judge, in determining whether under the circumstances the use of the statement in the proceedings would bring the administration of justice into disrepute, should consider all the circumstances of the proceedings, the manner in which the statement was obtained, the degree to which there was a breach of social values, the seriousness of the charge, the effect the exclusion would have on the result of the proceedings. It must also be borne in mind that the investigation of crime and the detection of criminals is not a game to be governed by the Marquess of Queensbury

(sic) rules. The authorities, in dealing with shrewd and often sophisticated criminals, must sometimes of necessity resort to tricks and other forms of deceit but should not through the rule be hampered in their work. What should be repressed vigorously is conduct on their part that shocks the community.

Reference was also made in this judgment to the judgment of Lord Cooper in Lawrie v Muir, [1950] SC (J) 19 at 26 (which was quoted with approval by Cartwright, CJC in his dissent in Wray) which passage reads as follows:

The law must strive to reconcile two highly important interests which are liable to come into conflict — (a) the interest of the citizen to be protected from illegal or irregular invasions of his liberties by the authorities, and (b) the interest of the state to secure that evidence bearing upon the commission of a crime and necessary to enable justice to be done shall not be withheld from courts of law on any mere formal or technical ground. Neither of these objects can be insisted upon to the uttermost. The protection for the citizen is primarily protection for the innocent citizen against unwarranted, wrongful and perhaps high-handed interference, and the common sanction is an action for damages. The protection is not intended as a protection for the guilty citizen against the efforts of the public prosecutor to vindicate the law. On the other hand the interest of the state cannot be magnified to the point of causing all the safeguards for the protection of the citizen to vanish, and of offering a positive inducement to the authorities to proceed by irregular methods.

We are not here dealing with a criminal matter nor is there any suggestion that plaintiff is in any danger of being accused of any crime. The issue at trial will merely be whether the manner in which the charges for late payments have been treated as interest in plaintiffs tax return is correct or not. In finding some evidence which may be helpful to the determination of this issue and making a copy of it without advising plaintiff that he had done so, Mr Gal may have been indiscreet, but I find nothing in this nor the admission of the document into the record with a possibility of defendant producing it at trial which constitutes conduct that “shocks the community” to use the words of Mr Justice Lamar in the Rothman case.

For all the above reasons plaintiffs motion will be dismissed with costs.