Kelly Douglas and Co. Ltd. v. The Queen, 82 DTC 6036, [1981] CTC 457 (BCSC)

Macdonell, J:—Kelly Douglas and Company Limited (“Kelly”) applies under the Judicial Review Procedure Act to the court for an order quashing and setting aside an authorization to enter, search and seize under subsection 231(4) of the Income Tax Act and for an order returning all records seized.

Although joined, Her Majesty in the Right of the Province of British Columbia, the Attorney General for the Province of British Columbia and His Honour Judge Skipp did not participate in the argument.

The relevant facts are that Nabob Foods Limited (“Nabob”) at all material times was a wholly owned subsidiary of Kelly. In 1976 Kelly sold its shares of Nabob to Jacobs EG. Nabob was the user of certain trademarks registered in the name of Kelly. On the sale to Jacobs EG the trademarks were included as part of the assets of Nabob. The agreement evidencing the sale had attached to it a schedule of the trademarks which were to be transferred from Kelly to Nabob. Kelly in fact transferred the trademarks in question to Nabob in consideration of one dollar and the trademarks were not separately dealt with other than as part of the assets of Nabob in the sale to Jacobs EG.

The Tax Department carried out an audit of the books of Kelly in 1980. For a seven month period from April, 1980 to October, 1980, Mr H Bandula Caldera, an officer of the Tax Department, was in the offices of Kelly examining records where he was supplied with an office, telephone and stenographic assistance. On December 18, 1980, Mr Caldera swore an affidavit in support of an application for approval to enter and search under subsection 231(4) of the Income Tax Act. It was not until June 8, 1981 that Mr LeBlond, the Director of Special Investigations, issued an authorization under subsection 231(4) of the Income Tax Act. On June 12, 1981, officers of the Tax Department attended on His Honour Judge Skipp and received his approval of the authorization which authorized the entry and search not only of the offices of Kelly and Nabob, but also of Thorne, Riddell & Company, chartered accountants, Farris, Vaughan, Wills & Murphy, barristers and solicitors, and Russell & DuMoulin, barristers and solicitors.

On June 17, 1981, at 6:00 am, the offices of Farris, Vaughan, Wills & Murphy, Russell & DuMoulin, Thorne, Riddell & Company, Nabob and Kelly were entered by income tax and RCMP officers and, simultaneously, the offices of George Weston Limited in Toronto were entered pursuant to an authorization approved by a County Court Judge in Toronto, relying also on the affidavit of Mr Caldera. Some 32 boxes of files were removed from the offices of Kelly.

An interim injunction was obtained by the petitioner restraining the Tax Department from examining, copying or dealing with the documents until the determination of the petition.

The authorization is as follows:

AUTHORIZATION TO ENTER AND SEARCH

The Director, Special Investigations Division, Department of National Revenue, Taxation, hereby authorizes officers of the Department of National Revenue, Taxation, as listed on Appendix “A” attached, or any of them, together with such members of the Royal Canadian Mounted Police or other peace officers as they, or any of them, may call on to assist them, or any of them, to enter and search, if necessary by force, the following premises and any receptacles or places therein:

(a) The business premises of Kelly, Douglas & Company Limited at 4700 Kingsway, Burnaby, British Columbia.

for documents, books, records, papers or things that may afford evidence as to the violation of any provision of the Income Tax Act or a regulation and to seize and take away any such documents, books, records, papers or things and retain them until they are produced in any court proceedings, and

(b) The offices of Nabob Foods Limited and any storage facilities occupied or

controlled by them at 3131 Lake City Way, Burnaby, British Columbia.

(c) The offices of Thorne, Riddell & Co, Chartered Accountants and any storage facilities occupied or controlled by them at 1177 West Hastings Street, Vancouver, British Columbia.

(d) The offices of Farris, Vaughan, Wills & Murphy, Barristers and Solicitors, and any storage facilities occupied or controlled by them at 700 West Georgia Street, Vancouver, British Columbia.

(e) The office of Russell & Du Moulin, Barristers and Solicitors, and any storage facilities occupied or controlled by them at 1075 West Georgia Street, Vancouver, British Columbia.

for documents, books, records, papers or things pertaining or relating to Kelly, Douglas & Company Limited, that may afford evidence as to the violation of any provision of the Income Tax Act or a regulation and to seize and take away any such documents, books, records, papers or things and retain them until they are produced in any court proceedings.

Subsection 231(4) of the Income Tax Act reads as follows:

(4) Search. Where the Minister has reasonable and probable grounds to believe that a violation of this Act or a regulation has been committed or is likely to be committed, he may, with the approval of a judge of a superior or county court, which approval the judge is hereby empowered to give on ex parte application, authorize in writing any officer of the Department of National Revenue, together with such members of the Royal Canadian Mounted Police or other peace officers as he calls on to assist him and such other persons as may be named therein, to enter and search, if necessary by force, any building, receptacle or place for documents, books, records, papers or things that may afford evidence as to the violation of any provision of this Act or a regulation and to seize and take away any such documents, books, records, papers or things and retain them until they are produced in any court proceedings.

The first attack by the petitioner on the authorization is that it is more general than permitted by the Act as it is not restricted in any way to the offence alleged in the material filed in support of the application for approval of the authorization. It is argued for the petitioner that as it is necessary for the authorizing judge to believe on reasonable and probable grounds along with the Minister that a violation of the Act or regulations has been committed, it is reasonable to expect that what was intended by Parliament was that any search and seizure would naturally relate to the offence alleged that the person involved would have to meet. Following this reasoning it is Submitted that the words “the violation” in the subsection must relate to the alleged violation. It follows, therefore, it is submitted, that the authorization is to enter and search and seize documents that may afford evidence as to the alleged violation only. This is the view taken of the subsection by a majority of the Federal Court of Appeal in In the Matter of Collavino Brothers Construction Company Limited, Kendan Manufacturing Limited and Dan Bryan, [1978] CTC 100; 78 DTC 1783.

Counsel for the respondent tax department replies that the authorization is in the precise words of the section. Consequently, there is no reason why the authorization should not be in equally broad terms as the section and that the effect is that a search can be made for other offences than that disclosed in the material filed. This view is supported by the Ontario Court of Appeal in MNR v Paroian, Courey, Cohen and Housten, [1980] CTC 131; 80 DTC 6077, and the Alberta Court of Appeal in Royal Craft Products Ltd and Herbert Coulson v The Queen, [1980] CTC 97; 80 DTC 6143, and Mackay, JA of the Federal Court of Appeal, in a dissenting judgment in the Collavino case.

Both counsel cited a number of authorities, some of which deal specifically with subsection 231(4) and others with more historic decisions dealing with general warrants and warrants under the Criminal Code of Canada.

It is my opinion that subsection 231(4) permits officers of the Tax Department to enter and search the premises of a taxpayer with the approval of a judge for documents, books and records that may afford evidence of any violations of the Income Tax Act or regulations and to seize and take away those documents that may afford evidence of the violations. I see nothing in the section which persuades me that a narrow construction should be placed on the section to limit the search and seizure for documents relating to the material filed in support of the authorization. I prefer the reasoning of the Ontario Court of Appeal in MNR v Paroian et al and that of the Alberta Court of Appeal in Royal Craft Products Ltd. to that of the Federal Court of Appeal in the Collavino Brothers case.

The petitioner further argues that a broad interpretation of subsection 231(4) of the Income Tax Act offends against the Canadian Bill of Rights and in particular s 1:

It is hereby recognized and declared that in Canada there have existed and shall continue to exist ..., the following human rights and fundamental freedoms, namely

(a) the right of the individual to life, liberty, security of the person and enjoyment of property and the right not to be deprived thereof except by due process of law.

The petitioner argues that the expression “due process of law” found in the Canadian Bill of Rights has a distinguished history, going back to the days of the Star Chamber and general warrants. In the case of Entick v Carrington (1765), 19 State Trials 1029, the court struck down a general warrant. This case was followed in the United States in the case of Boyd v The United States (1885), 116 US 616 (USSC) at 610:

The principles laid down in this opinion [Lord Camden’s judgment in Entick v Carrington] affect the very essence of constitutional liberty and security. They reach farther than the concrete form of the case then before the court with its adventitious circumstances; they apply to all invasions on the part of the Government and its employees, of the sanctity of a man’s home and the privacies of life. It is not the breaking of his doors and the rummaging of his drawers that constitutes the essence of the offense; but it is the invasion of this indefeasible right of personal security, personal liberty and private property, where that right has never been forfeited by his conviction of some public offense; it is the invasion of this sacred right which underlies and constitutes the essence of Lord Camden’s judgment ... In this regard the Fourth and Fifth Amendments run almost into each other.

Can we doubt that when the Fourth and Fifth Amendments to the Constitution of the United States were penned and adopted, the language of Lord Camden was relied on as expressing the true doctrine on the subject of searches and seizures, and as furnishing the true criteria of the reasonable and unreasonable character of such seizures?

The Fourth and Fifth Amendments to the United States Constitution are as follows:

Amendment IV [1791]

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Amendment V [1791]

No person shall be . . . deprived of life, liberty, or property, without due process of law; . . .

It is submitted on behalf of the petitioner that the words “the right of the individual to .. . enjoyment of property and the right not to be deprived thereof except by due process of law” in the Canadian Bill of Rights also have their root in the judgment of Lord Camden in Entick v Carrington, supra. Counsel for the petitioner submits that when considering subsection 231(4) the section should be construed so that these principles are given full effect. The way this is done is to interpret the section to mean that only documents that may afford evidence of the violation alleged can be searched for and seized. It is submitted that to do otherwise allows for uncontrolled search and seizure which offends against the Canadian Bill of Rights.

Counsel for the respondents argues, on the other hand, that Entick v Carrington does not help in interpreting the Income Tax Act as wished for by counsel for the petitioner as, at p 1066, Lord Camden said:

The great end, for which men entered into society, was to secure their property. That right is preserved sacred and incommunicable in all instances, where it has

not been taken away or abridged by some public law for the good of the whole. The cases where this right of property is set aside by positive law, are various.

Distresses, executions, forfeitures, taxes, &c. are all of this description; wherein every man by common consent gives up that right for the sake of justice and the general good.

[my italics]

Counsel for the respondent argues that in this case we are dealing with a taxation Act which is one of the specific exceptions mentioned in the Entick v Carrington case. Thus the respondents say that it is not repugnant to our law that general powers of search and seizure be bestowed by a taxing Act as an exception to the general rule of the sanctity of a man’s property.

I am not persuaded that the Canadian Bill of Rights helps me to construe the section in question in other than the clear manner I perceive the section to be expressed. I consider that officials of the Tax Department are justified under such an authorization to enter and search for evidence of any violation of the Income Tax Act or regulations.

As I view subsection 231(4), it is to be considered in two parts. The first part is the entry and search for evidence, the second is the seizure of evidence. They are not the same thing as the only seizure that is authorized is of documents that may afford evidence of a violation. If no documents are found in the search that may afford evidence, then nothing can be seized. Likewise, the authorization does not permit documents to be taken that have not been examined or searched for their evidentiary value in proving a violation.

The principles of due process of law are of some value in assessing what happens following the authorization. The manner of seizure and what is seized must meet the due process of law test. Looked at another way, the section must be examined to see what can be seized and taken away. It is my view that for the officers of the Tax Department to lawfully deprive a person of his “enjoyment of property” it can only be done by “due process of law” as provided in the Canadian Bill of Rights. This means, in my view, when applied to subsection 231(4) of the Income Tax Act, that only documents that may afford evidence of violations may be seized. Due process prohibits the seizure of documents that do not afford evidence of violations. Therefore, a wholesale seizure is not authorized. The scheme of the Act is not to seize, then search — but to search, and seize only documents that may afford evidence of violations.

I have carefully read the affidavits of the officers of the Tax Department and the cross-examination of both Mr Kanjer and Mr Brown and am unable to find that there were any documents or records examined or seized that in the words of the section “may afford evidence as to the violation of any provisions of the Income Tax Act or regulations”. I find that the records seized in this case were not lawfully seized pursuant to the authorization. There is no right to seize, then search, and if the officers are not able to say that they seized documents that may provide evidence of the breach, then those documents cannot be seized by the Department and must be returned.

The next head of attack by the petitioner is on the basis that there was non-disclosure to the learned County Court Judge of material facts that, if known by him, would have resulted in his declining to authorize the search and seizure. I have carefully considered the affidavit of Mr Caldera in support of the application. On the face of the affidavit I have no quarrel with the authorization having been approved. However, a number of matters alleged in the affidavit only disclose part of the story and not the whole. Example Mr Caldera alleges that Kelly disposed of the trademarks to Jacobs EG, when in fact they were conveyed by Kelly to Nabob and form part of the assets of Nabob rather than a separate transaction. The final agreement between the parties was not appended and had it been it would have been perfectly clear that there was no concealment of the trademark transaction. The only question open was on an arguable case for an assessment or not. The affidavit material indicates an apportionment of the purchase price for trademarks relying on a minute of a meeting of directors as if it were the actual agreement. Again, if the actual agreement had been appended it would have been clear that there was no such apportionment. It is also apparent from the affidavit of Mr Kanjer that the draft agreement was in the hands of the Department before the search and that it was unsigned and provided an alternative method of disposing of trademarks at the option of the purchaser. Likewise, there was no disclosure that Mr Caldera himself had been in the office of Kelly for some seven months and that documents were supplied to him on a regular basis as requested. Nor was it disclosed to the learned judge that trademarks themselves depend on use for their validity rather than registration. Had counsel, performing their proper role as officers of the court, made the application rather than officers of the Department, these matters no doubt would have been made clear. Having considered the affidavit evidence and the cross-examination of the various deponents, I have very grave doubts whether there are any taxable benefits or proceeds of the disposition of the trademarks as between Kelly and Nabob. There is in my view nothing to suggest that there has been any payment to Kelly by the purchaser Jocobs EG for trademarks. I consider that there has been material non-disclosure. Had all the material been placed before the learned judge, he would unquestionably have refused to approve the authorization.

The final argument addressed to me was of a constitutional nature, but was not advanced strenuously and was more related to the Canadian Bill of Bights argument than a pure constitutional issue. I consider that there is no constitutional basis to question the authority of the Parliament of Canada to pass subsection 231(4) of the Income Tax Act. It is my view that it clearly has this power under subsection 91(3) of the British North America Act.

For the foregoing reasons the authorization in question is set aside and all documents and records seized are to be returned to the petitioner forthwith without examination by the Tax Department and without copies or records being made of them.