Lipsey v. MNR, [1984] CTC 208, 84 DTC 6191 (FCTD)

Cattanach, J:—The applicant is a taxpayer whose affairs are under investigation by officials of the Department of National Revenue at whose disposal the Parliament of Canada has placed awesome weapons to conduct such an investigation to which resort is freely made.

The inclusion of such provisions in the Income Tax Act is a matter of public policy designed to facilitate the collection of income tax and as such is not a matter of judicial concern other than it may bear upon the interpretation of a section brought into question and the possibility of the section being in conflict with one or more of the guarantees of rights and freedoms written into the Canadian Charter of Rights and Freedoms in the Constitution Act, 1982.

The applicant, Dr Lipsey is an economist who enjoys an international renown and his teaching abilities are welcome at the outstanding universities on the North American continent. He is a Canadian citizen but his academic qualifications recognize no national boundaries.

He held a full professorship at Queen’s University at Kingston, Ontario from January 6, 1976 to December 20, 1978.

In the spring of 1979 he accepted a post at Yale University, New Haven, Connecticut, one of the states of the United States of America, which post he occupied throughout the academic years until July 31, 1980 at which time he returned to a post at Queen’s University.

Thus the officials of the department appear to have concluded that the applicant was a non-resident of Canada for the 1979 taxation year and from January 1, 1980 to July 31, 1980.

The applicant filed income tax returns with the Department of Revenue for the taxation years 1977, 1978, 1979 and 1980 which were prepared by his solicitors.

He also filed tax returns with the equivalent taxing authority in the United States for the 1979 and 1980 taxation years which returns were prepared by a reputable accounting firm practising in that jurisdiction.

The applicant made his best effort to comply with the laws of the respective jurisdictions by engaging competent legal and accounting advice.

In those returns the applicant disclosed salary from Yale University, lecture fees and royalty income.

The salary from Yale University was excluded from income because Dr Lipsey was a citizen of Canada and held a visiting professorship at Yale.

Likewise the royalty income was exempted from income because it was determined by the USA authority that Dr Lipsey was a non-resident alien of the US and a resident of Canada and this despite determination that under Canadian law he was a non-resident of Canada prior to his return to Canada in 1980.

For the 1980 taxation year and the coincident 1979 and 1980 taxation years the applicant filed income tax returns with the Department of National Revenue disclosing income of $161,690.38, $32,705,14 and $121,018.34 in those respective years.

There was royalty income disclosed in Dr Lipsey’s Canadian income tax returns for the taxation years 1978 and 1980 but none in 1979. In the taxation year 1978 he had not gone to the United States. He was there in the 1979 taxation year and disclosed substantial royalties in his tax return to that jurisdiction. In the taxation year 1980 he had returned to Canada for the latter half of that taxation year. Royalty income was disclosed in his Canadian tax return and a lessor royalty income was disclosed in the United States tax return.

All such returns were prepared by highly qualified professional advisers in these respective fields and jurisdictions.

On October 7, 1981 a letter was written to Dr Lipsey on a letterhead reading “Revenue Canada Taxation’’ which was not signed by any person purporting to be an authorized officer of the Department of National Revenue.

There was no obligation to respond to that demand which did not emanate from a department of the Government nor from a person identified therein as an officer ot the appropriate department.(See In re Solway [1979] 2 FC 471; [1979] CTC 154; 79 DTC 5116, affirmed Re Corsini (1980) 49 CCC (2d) 208.

There is in process an amendment to the Income Tax Act to deem an instrument bearing the words “Revenue Canada’’ to have from from the Department of National Revenue by a notice of ways and means introduced into the House of Commons but even if the amendment eventually finds itself in the income Tax Act, it is not retroactive to the taxation years here in question

In any event the solicitors for the applicant volunteered complete answers to the queries made but declined to give information relating to their client’s world income for the years when he had not been resident in Canada.

It is readiy apparent that the residence of Dr Lipsey is of crucial importance in the taxation years 1979 and 1980 to determine his liability to taxation in the jurisdiction of one or other of the parties to the Canada — US Tax Convention.

The Convention has a preamble which declares two of the objectives to be: (1) the avoidance of double taxation and (2) the prevention of fiscal evasion in the case of income taxes.

To that end Article VIII A was added and approved in 1950.

Article VIII A provides that a professor who is resident of one of the contracting states who temporarily visits the other contracting state for the purpose of teaching for a period not exceeding two years in such other state shall be exempt by such other state from tax on his remuneration from teaching for that period. But he is stuck for tax on that remuneration in the other state in which he is resident.

Likewise Article XIII C provides that royalties for the right to use copyrights derived from sources within one of the contracting states by a resident in the other contracting state shall be exempted from tax by that state if he does not engage in trade or business through a permanent establishment in that state.

From the voluminous information of which the Department of National Revenue appears to be possessed including information obtained from its US counterpart pursuant to Article XXI of the Convention it would appear that the officials of the Department could readily make that determination.

However, the chief, investigations section, special investigations division of the Department of National Revenue, and he gratuituously adds the word “Taxation’’ which does not belong there, issued an authorization to enter and search dated August 11, 1983 pursuant to subsection 231(4) of the Income Tax Act directed to sixteen named officers of the Department together with such members of the Royal Canadian Mounted Police or other peace officers as they or any of them may call upon to assist them or any of them to enter and search, by force if necessary, the private residence of Dr Lipsey, two private automobiles registered in his name, the premises of Dunning Hall at Queen’s University, storage premises of the applicant and Queen’s University at Kingston, the offices of Cunningham, Swan, Carty, Little & Bonham, the solicitors for the applicant and storage facilities of that firm of solicitors elsewhere located to search for all material pertaining or relating to Dr Lipsey that may afford evidence as to the violation of any provision of the Income Tax Act or regulations thereunder and seize and take away such material and retain it all until produced in any court proceedings.

Application was made by the chief, investigation section of the department to a judge of the County Court to approve that authorization pursuant to subsection 231(4) of the Act based upon an affidavit of Donald J Woodcock, who approved that application on August 11, 1983.

Subsection 231(4) provides that where the Minister has reasonable and probable grounds to believe that a violation of the Act or regulations has been committed he may, with the approval of a superior or county court judge which may be given on an ex parte application, authorize any officer of the Department of National Revenue to enter and search which the above instrument authorizes to be done as recited above.

The affidavit of Donald J Woodcock upon which the application to the county court judge to enter and search was based is Exhibit D to the affidavit of Mr Milliken, a member of the firm which is the solicitors to Dr Lipsey. That affidavit discloses the wealth of information in the possession of the Departmental officials and emphasizes the critical issue as to the residence of Dr Lipsey at the material times. Armed with this authorization to enter and search Mr Woodcock attended at the offices of the applicant’s solicitors unannounced, supported by a member of the RCMP and other members of his staff and demanded to examine and take possession of each and every file pertaining to Dr Lipsey and his wife and all solicitors’ accounts rendered to Dr Lipsey and his wife.

Despite the fact that he was specifically interested in the 1979 and 1980 taxation years he demanded files as far back as 1969, all of which were seized and carted away except two current real estate files but copies of certain documents in that file were made and also except an old file in storage on a real estate matter and another relating to an immigration matter and this against the sanctity of the assertion of a claim for privilege on behalf of the client as an officer is entitled to do but without examining the document or making copies thereof.

Provision is also made for the expeditious determination of the existence of the privlege claimed.

The seized material on which privilege was claimed was, sealed and by agreement placed in the custody of Noel O’Neill, an officer of the department.

By order dated September 9, 1983 my brother Dubé quashed the authorization to enter and search executed by the chief of investigations of the Department of National Revenue dated August 11, 1983 and approved on that same date by a County Court judge.

Pending any appeal of his decision Dubé, J ordered that all documents seized should be delivered into the custody of the district office of the department in Kingston, Ontario.

That appeal was not long in forthcoming. The notice of appeal was filed on September 12, 1983.

In quashing the enter and search order as he did, Dubé, J did so for reasons expressed by himself in Kruger Inc, et al v MNR, [1983] CTC 319; 83 DTC 5322, on July 29, 1983 the circumstances of which are the same in the present matter.

It was common ground in the earlier Kruger case that the grounds of the belief that violation of the Income Tax Act had been committed related to the question of the residence of the taxpayer but the application for the enter and search order was for “any violation” of the Act and/or regulations — not “a violation” as expressed in the statute. The present authorization refers to documents that may afford evidence as to the violation of “any provision of the Income Tax Act or Regulations”.

Dubé, J then expressed the view that the authorization under attack violates section 8 of the Constitution Act, 1982 in that it constitutes an unreasonable search and seizure, a right and freedom guaranteed thereunder. He found it unreasonable because it was not limited to particular violations allegedly committed but was a blanket order covering any possible violation of the Act. In his view it was a fishing expedition and ought not to be allowed.

It is interesting to note that in Re Collavino Construction, [1978] CTC 100; 78 DTC 6050, the Appeal Division held that an authorization pursuant to subsection 231(4) could only authorize the seizure of documents relating to the transactions referred to in the affidavit in support of the application. This decision was reversed on other grounds by the Supreme Court of Canada.

Now it appears that officers of the Department purport to audit or examine the books, records, vouchers, letters and other like documents which relate or may relate to the amount of tax payable under the Act in furtherance thereof and as authorized by the statute require the owner of the “business” to answer all proper questions relating to the audit or examination either orally, in writing, or on oath and the owner can be required to attend at the premises with the investigator to do so.

It appears that questions are posed in this regard to the applicant.

Accordingly the applicant has applied for an order pursuant to section 18 of the Federal Court Act restraining the Minister, Noel O’Neill or Donald Woodcock or their agents from taking any further steps in the investigation of the tax affairs of Richard D Lipsey and specifically from conducting an interview with Dr Lipsey pending the hearing of the appeal from the order of Mr Justice Dubé.

The grant of a request for injunctive relief is a matter of discretion but being a discretion must be exercised upon sound and accepted judicial principles.

One such principle is that a public officer shall not be enjoined from performing a duty which by statute that officer is required to perform.

In this instance the officials of the department have had resort to subsection 231(4) of the Income Tax Act and obtained an enter and search authorization to seize and retain documents that may afford evidence of a violation of any provision of the statute, the failure to disclose all revenues received might constitute such a violation.

This search was obtained upon the basis of prior investigations which indicated that a determination of the taxpayer’s residence was essential to the taxability in Canada of certain revenue received by the taxpayer.

The affidavit in support of the application for such order so indicates.

That order which was granted has been quashed by Dubé, J.

However the contention is advanced that there is a continuing investigation of the taxpayer’s affairs to determine the amount of the tax payable and that in the furtherance of that audit or examination the officials may require a manager or owner of the property or business and any person on the premises to answer all proper questions relating to the audit or examination.

This is predicated upon the premise that Dr Lipsey is self-employed. That such premise exists is moot. Income arises from an office, employment, business or property.

Dr Lipsey obtained income in the relevant taxation years from employment at Yale and Queen’s, from property which is the return on his intangible copyright form of property and investments, that is the return on an annuity none of which appears to be a “business” or a venture in the nature of trade.

Thus the examination could be directed only to the return on copyrights owned by Don Lipsey and since those returns have been disclosed both in Canada and the United States the one assumption to be made is that the amount of those returns have been misrepresented which does not seem practicable since tax returns are required to be supported by evidence of the amount emanating from the payor (in Canada I think they are called T-4 slips).

The contentions made in support of the grant of the injunction were therefore:

(1) that having made resort to subsection 231(4) resort cannot now be had to paragraph 231(l)(c) because no audit or examination is in progress under paragraph 231(1)(a);

(2) that to permit the posing of questions is a subterfuge to circumvent the order of Dubé, J and that the questions could not be proper because the taxpayer is precluded from access to documents upon which answers can be based, and

(3) that the taxpayer is not protected from self-incrimination by common law principles or the Canada Evidence Act which is contrary to fundamental justice and constitutes a breach of the duty of fairness which is obligatory in administrative proceedings.

In my view there is no evidence, and I have in mind particularly the affidavit sworn by Donald J Woodcock, to support the contention that the examination is predicated upon a possible violation of the Income Tax Act other than the disclosures required to be made to the appropriate taxing authority dictated by the determination of the taxpayer’s residence.

That being so it follows that the enquiries before Mr Justice Dubé are so inextricably interwoven with the subsequent enquiries as to the amount of tax as to be not segregative therefrom.

Thus it seems to me that to permit the respondents to achieve the end characterized by my brother Dubé as “‘such a fishing expedition” that “is not necessary and ought not to be allowed” by a different but similar means is to stultify the order given by him. More colloquially doing something by the back door which could not be done by the front door.

In my view there is no relief available to the taxpayer from giving selfincriminating answers if asked of him under section 231. At common law and under the Canada Evidence Act because the circumstances therein provided for only apply to questions asked in “proceedings” and paragraph 2(a) of the Canadian Bill of Rights is that no law should be interpreted so as to “authorize a court, tribunal, commission, board or other authority to compel a person to give evidence if he is denied protection against self-incrimination”.

The ejusdem generis rule of construction requires that the general words “‘or other authority” are limited to the same things as the special words preceding. That being so the investigating officers of the Department are not included. They are embarked on an administrative act as contrasted to judicial or quasijudicial acts.

But the order of Mr Justice Dubé is law and remains law until it is said to be in error by a court of higher jurisdiction.

A paramount purpose that an injunction is designed to acomplish is the maintenance of the status quo as nearly as may be to ensure that a party’s rights are not meanwhile frustrated.

For that purpose it is expedient that the injunctive relief sought by the appellant should be granted.

Accordingly the Minister of National Revenue and persons acting under his control and direction are restrained from taking further steps in the investigation of the affairs of Richard G Lipsey and specifically from conducting an interview with Dr Lipsey pending the disposition of the appeal from the order of Mr Justice Dubé dated September 9, 1983 herein.