The Queen v. F.K. Clayton Group Ltd., 89 DTC 5417, [1989] 2 CTC 196 (S.C.O.)

Philip. J: —This is an application by the Attorney General of Canada for the issuance of two warrants to search the business premises and the residence of the respondents, to obtain documents relating to charges laid under the Income Tax Act which charges are proceeding in the Provincial Court.

While subsection 231.3(1) of the Income Tax Act provides for an ex parte application, the unusual circumstances involved in this application and the history of the matter, required the applicant, in fairness, to give notice to the respondents. Accordingly, at the hearing there were strong submissions made by counsel for the respondents that this application of the Ministry should be dismissed.

The issues to be decided on this application are as follows:

1. Has the Minister satisfied me that there are reasonable grounds to believe that an offence has been committed, a document is likely to be found, and the buildings named are likely to contain such documents?

2. (a) Was the evidence presented in support of this application obtained in a manner that infringed or denied the rights of the respondents under section 8 of the Charter to be secure against unreasonable search and seizure? (b) If so, have the respondents satisfied me that the admission of that evidence in this proceeding would bring the administration of justice into disrepute?

To properly deal with these issues it is necessary to review briefly the history of this case and the previous proceedings involving the parties before me.

In mid-1983 a "special investigator", Mr. R.O. Bailey, of the Department of National Revenue, made an extensive review of the work sheets previously prepared by the Minister’s auditors from the respondents' financial records and concluded that improper deductions from income had been made by the respondent company and the individual respondent (Clayton) had omitted income from his tax returns. Mr. Bailey met with Clayton in December 1983 on two occasions and then seized the books and records of the respondent company for the years 1978 through 1981 and some documents that went back as far as 1973. Mr. Bailey then obtained an order of a county court judge allowing him to retain the seized books and records until they were produced at court proceedings that were to follow.

The respondents then brought a motion in the Federal Court-Trial Division to quash the seizure and retention order. This motion was heard in March 1986 before Walsh, J. who ruled that the section of the Income Tax Act, under which the seizure and retention orders were made, was of no force and effect since it vilolated section 8 of the Charter of Rights. Walsh, J. therefore ordered that the seizure of the documents and the county court judge's retention order has to be quashed because of the invalidity of the Income Tax Act section. In so ordering, however, he did not consider the seizure itself unreasonable and therefore allowed the Minister to retain the documents until the trial of the criminal charges. He ruled that the admissibility of the documents seized was to be determined by the trial judge hearing the criminal matters. The respondents appealed Walsh, J.'s decision and the Federal Court of Appeal in March 1988 upheld Walsh, J.'s decision concerning the invalidity of paragraph 231 (1)(d) and subsection 231(2) of the Income Tax Act and the quashing of the seizure of the documents and the retention order, but went further and ordered that the documents retained by the Ministry were to be returned to the respondents. It ruled that the Crown was free to exercise any rights to seize the documents that it may have outside of the impugned paragraph 231(1)(d).

The day following this judgment Clayton appeared at the offices of the Department of National Revenue in London and received delivery of all the seized records and documents of his company. There were three boxes of documents and he took them by taxi to a truck which he had parked in a paint store parking lot. They were then transported to an unknown destination.

On March 22, 1988 counsel for the Ministry gave notice to the respondents of an application being made to obtain search warrants, returnable before a Supreme Court judge in London on April 8. On April 6, 1988 the respondents commenced a motion in the Federal Court-Trial Division for judicial review to quash the Minister's decision to apply for the search warrants. Accordingly the application for search warrants was adjourned by Catzman, J. on April 7, 1988 pending the Federal Court motion.

The Federal Court motion was heard before Dube, J. at London on October 18, 1988, and on November 2, 1988 he dismissed the motion. The respondents have appealed that motion and the date for hearing the appeal has not yet been set.

In February 1989 this application before me was commenced and served on the respondents. In March Yates, J. ordered the application to proceed without awaiting the Federal Court appeal hearing.

In the meantime charges laid against the respondents in August 1985 have been adjourned from time to time pending the current litigation over the application for seizure of documents and the appeal of the respondent's motion to quash the Minister’s decision to make such application.

The new section of the Income Tax Act which replaced the old invalid section, and which is the basis for this application, reads as follows:

231.3(1) Search warrant.—A judge may, on ex parte application by the Minister, issue a warrant in writing authorizing any person named therein to enter and search any building, receptacle or place for any document or thing that may afford evidence as to the commission of an offence under this Act and to seize and, as soon as practicable, bring the document or thing before, or make a report in respect thereof to, the judge or, where the judge is unable to act, another judge of the same court to be dealt with by the judge in accordance with this section.

(2) Evidence in support of Application.—An application under subsection (1) shall be supported by information on oath establishing the facts on which the application is based.

(3) Evidence.—A judge shall issue the warrant referred to in subsection (1) where he is satisfied that there are reasonable grounds to believe that

(a) an offence under this Act has been committed;

(b) a document or thing that may afford evidence of the commissions of the offence is likely to be found; and

(c) the buildings, receptacle or place specified in the application is likely to contain such a document of [sic] thing.

(4) Contents of warrant.—A warrant issued under subsection (1) shall refer to the offence for which it is issued, identify the building, receptacle or place to be searched and the person alleged to have committed the offence and it shall be reasonably specific as to any document or thing to be searched for and seized.

The respondent argues that since the bulk of the evidence contained in Mr. Bailey's information was obtained in an unreasonable manner, it ought not to be accepted by me to support the application for search warrants and therefore the application should be dismissed.

Much of the evidence contained in the information of Mr. Bailey was obtained under the former section of the Income Tax Act which, as related above, was subsequently ruled to be invalid because it violated section 8 of the Charter of Rights. Section 8 reads as follows:

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

The Federal Court of Appeal in the reported case of Clayton v. M.N.R.,

[1988] 1 C.T.C. 353; 88 D.T.C. 6202, ruled that the procedure used by Mr. Bailey to obtain the documents, while in accordance with the then existing provisions of the Income Tax Act, was unreasonable and hence could not be subject to retention and therefore ordered the return of the documents to the respondents.

It is these very documents that the Crown is now again trying to search and seize, but this time under the new section, 231.3, of the Income Tax Act. Counsel for the respondent submits that because these documents were seized in a manner which has been ruled illegal and unreasonable, the information contained in those documents cannot be used in this application since their admission would bring the administration of justice into disrepute.

I am satisfied that upon reading the information to obtain of Mr. R.O. Bailey, that there are indeed reasonable grounds for me to believe that an offence has been committed, that the documents are likely to be found and that the buildings specified in the application are likely to contain the documents. The complaint of the taxpayer in this application is that the information provided by Mr. Bailey on this application, and hence the basis on which I find reasonable grounds, is information obtained in an illegal manner, although in good faith and in accordance with the existing procedures provided by the Income Tax Act at that time. In fact, much of the information contained in the information to obtain of Mr. Bailey was the same information that he had available to him prior to the illegal seizure. This application for a search warrant can be granted on evidence not obtained by the illegal search and seizure. In my opinion there is enough evidence before me to satisfy me that there are reasonable grounds as above stated.

Subsection 24(2) of the Charter of Rights reads as follows:

24(2) Where in proceedings under ss.1, a court concludes 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 of the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute.

The respondent has not satisfied me that for me to consider the evidence contained in the information to obtain, some of which evidence was obtained by Mr. Bailey in a manner that has subsequently been ruled illegal because of the invalidity of the existing section of the Income Tax Act, would bring the administration of justice into disrepute as required by subsection 24(2).

Whether the documents should be admitted into evidence will depend upon the trial judge's decision. Having regard to all the circumstances in this case, he must decide if the admission of the evidence into the trial proceedings would bring the administration of justice into disrepute. In Zevallos v. The Queen (1987), 37 C.C.C. (3d) 79, Morden, J.A. of the Ontario Court of Appeal, considered an application by an accused, after being committed for trial on the charge of possession of cocaine for the purpose of trafficking, and to quash the search warrant. The only purpose of the pretrial application was to obtain a ruling that by reason of section 8 and subsection 24(2) of the Charter the evidence of the seizure of cocaine was inadmissible. At page 81 Morden, J.A. states that:

Assuming that the evidence in question were obtained in a manner that infringed the appellant's rights under s. 8 of the Charter it would not be excluded unless he “establishes that having regard to all the circumstances the admission of it in the proceedings would bring the administration of justice into disrepute.”

Then, at page 84 Morden, J.A. states as follows:

If the only issue sought to be resolved is one of admissibility at trial of the evidence of seizure, I think that it is preferable that the trial judge decide all aspects of the question of admissibility rather than to have them decided by different judges, one before the trial and the other during it. Although the issues of infringement of rights guaranteed by s. 8 of the Charter and of satisfaction of the requirements of s. 24(2) are separate issues a large body of the same evidence will be considered in applying each provision: see Collins v. The Queen, S.C.C., April 9, 1987, at pp. 17-8 [since reported 33 C.C.C. (3d) 1 at pp. 18-19, 38 D.L.R. (4th) 508, [1987] 1 S.C.R. 265]. To avoid duplication in the adducing and consideration of the evidence it is preferable that it be heard at one time by the same judge. It is also preferable that the judge who finds infringement of s. 8 rights, if such be the case, be the one who characterizes the nature and extent of the infringement for s. 24(2) purposes.

I am of the view that the interests of justice in this case should not be further delayed. The Crown should be entitled to marshal all its evidence and then proceed to trial, at which time the trial judge can consider the objections to the admissibility of the evidence in the course of the fact- finding process of the trial (see re: Kendall v. The Queen (1982), 2 C.C.C. (3d) 224 at pp. 226-227; 144 D.L.R. (3d) 185).

Counsel for the respondent has asked me to scrutinize each paragraph of the information with great detail and pick out each minute little flaw and thereby reject the application. The cases clearly state that that is not the purpose of this court on this application. The merits of the information provided by Mr. Bailey should be left to the trial judge to determine. In Re: Church of Scientology v. The Queen (#6) (1987), 31 C.C.C. (3d) 449, 18 O.A.C. 321, the Ontario Court of Appeal at pages 474-75 states as follows:

First, we do not believe that it is appropriate for a motions court judge, on an application to quash a search warrant, to become involved in the merits the informant's allegations as to what offences have been committed. The motions court judge is not dealing with an indictment, but with an investigative tool, and the fact that there may be facts that would constitute a defence to the proposed charges is a matter for a trial judge or a Provincial Court Judge on a preliminary hearing . . .

Police work should not be frustrated by the meticulous examination of facts and law that is appropriate to a trial process. It may or may not be that the informant has honestly made mistakes in the preparation of the information that supports the warrant. There may be serious questions of law as to whether what is asserted amounts to a criminal offence. It should be a matter of concern to a trial court . . . However these issues can hardly be determined before the Crown has marshalled its evidence and is in a position to proceed with the prosecution.

I am, therefore, satisfied that there are reasonable grounds as required under section 231.3 of the Income Tax Act. While there is no doubt that some of the evidence presented in support of this application was obtained in a manner that infringed or denied the rights of the respondents under section 8 of the Charter, I am not satisfied that the admission by me of the evidence to provide reasonable grounds to believe the offence was committed, would bring the administration of justice into disrepute.

In any event, the trial judge will have a better opportunity to consider the admissibility at trial of the documents seized pursuant to the two warrants that will be issued under this application.

I therefore grant the application for the issuance of the two warrants to enter and search the premises described in the application form.

There will be no costs on this application.

Application granted.