Citation: 2012TCC251
Date: 20120713
Docket: 2009-3250(IT)G
BETWEEN:
EVERTON BROWN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1]
By Notices of
Reassessment dated June 6, 2008 (collectively “the Reassessments”) the Minister
of National Revenue (the “Minister”) reassessed the appellant’s tax liability for
the 2004 to 2007 taxation years through the addition of undeclared income. The
Minister used a modified deposit method to add $20,715, $116,992, $26,405 and
$31,296 of alleged undeclared income for the appellant’s 2004, 2005, 2006 and
2007 taxation years respectively. The Minister also assessed under subsection
163(2) of the Income Tax Act (Canada) (“the ITA”) gross
negligence penalties of $1,620, $15,544, $4,036 and $2,959 for the same
taxation years.
[2]
The respondent submits
that the documentary evidence provided at trial shows systematic cash deposits
and cash purchases in excess of the income reported by the appellant for the
2004 to 2007 taxation years.
[3]
The appellant claims
that the cash deposits and purchases were from savings accumulated over prior
years and gifts from family and friends that were kept by the appellant in
private homes and not deposited in the Canadian banking system.
II. Factual Background
Criminal Investigation
[4]
On October 17, 2007
officers from the London Police Service (the “LPS”) executed a warrant at the
appellant’s residence located in the city of London, Ontario (the “Residence”).
The warrant was issued pursuant to the Controlled Drugs and Substances Act
(“CDSA”) and was based on allegations that the appellant was engaged in the
traffic of cocaine. The appellant was not home at the time the warrant was
executed.
[5]
The warrant authorized
the seizure of, among other things, the alleged proceeds of crime, illegal
drugs, financial documents and other relevant information.
[6]
Constable Bhabba
testified that the appellant was well known to the police. As early as 2000, he
received information from confidential sources about the appellant’s activities
as a drug dealer. On the basis of this information, a search warrant was
executed at an apartment unit located in the city of London. No one was home at
the time. A quantity of 13.6 grams of crack cocaine was seized from the apartment
unit along with a cellular phone, tax records and other documents belonging to
the appellant.
[7]
The appellant
was seen entering the apartment unit during the execution of the warrant. He
was witnessed disposing of 1.7 grams of cocaine and he resisted the attempt by
the police to arrest him. A further quantity of 2.6 grams of cocaine was found
on the appellant’s person a short while later. When the phone rang and was
answered by the police on two occasions, in both instances the callers were
unknown females who were ordering 40 pieces, which is a common street reference
to a defined amount of crack cocaine. Charges were laid against the appellant
but they were subsequently dropped.
[8]
Constable Rafiq Bhabba testified
that he shared the documents seized with officials of the Canada Revenue Agency
(the “CRA”). The officer testified that the CRA was not made aware of the
warrant, search or seizure.
[9]
The officer
explained that it was common practice for the LPS to turn over to the CRA
information obtained on persons charged with trafficking or other illegal
business activities as often these individuals do not report the income therefrom
for fear of prosecution for their crimes. He himself had provided over 75
referrals to the CRA over a four-year period with respect to individuals who
had accumulated large unexplained wealth.
[10]
Chris Christodoulou, an
auditor in the CRA’s special enforcement program, received copies of the documents
seized by the LPS. Constable Bhabba also surrendered cash and other goods belonging
to the appellant to the CRA pursuant to a jeopardy order
obtained by the CRA.
Deposit Analysis
[11]
The information passed on
from the police to the CRA formed part of the record used by the CRA to prepare
the deposit analysis of the appellant’s income. In carrying out the deposit
analysis, the CRA auditor testified, he also examined all of the appellant’s known
bank accounts. The bank statements were obtained by way of requirements for
information under the ITA.
[12]
In assessing the
appellant, the Minister excluded deposits that could be traced by the auditor
to non-taxable sources and made the “adjustments” shown in the schedule to the
Reply, attached to these reasons for judgment as Schedule A. These adjustments reflected
the net business and interest income reported by the appellant in his tax
returns for the years under review, GST/HST credits and income tax refunds. The
Minister also excluded all inter-bank transfers between the appellant’s accounts
and all deposits in Bank of Montreal account number 212, which was a joint bank
account opened in the name of the appellant and his former girlfriend, Diana
Rigopoulos. The CRA auditor was satisfied that all of the transactions in
account number 212 were traceable to banking activities of and for Diana
Rigopoulos.
[13]
In assessing the
appellant for the 2005 taxation year, the Minister included an amount totalling
$25,867 and representing home furnishings, decorations and design services
acquired for cash.
Appellant’s Lifestyle
[14]
The evidence shows that
the appellant reported total income of about $52,000 for the 1989 to 2003
taxation years. He reported $8,000, $22,320, $25,500, and $24,364 as income on
his income tax returns for the 2004, 2005, 2006 and 2007 taxation years
respectively.
[15]
Notwithstanding the
modest amount of income disclosed by the appellant, the evidence shows that he
maintained a fairly lavish lifestyle. The appellant, acting alone, purchased the
Residence in London, Ontario for approximately $272,000 in 2005. He made a
deposit of $52,387 towards the purchase of the house and obtained a 5-year
mortgage of approximately $220,000, on which the payments were to be made monthly.
[16]
The appellant had two
luxury motor vehicles, one owned and one leased. He also had a Honda Accord
registered in his name.
[17]
The appellant testified
that he has fathered 17 children, three of whom lived with him in the taxation
years under review.
Appellant’s Evidence
[18]
The appellant called
seven witnesses to attempt to show that he had sufficient cash savings from
taxation years pre-dating the period under review, funded in part through gifts
received from family members and girlfriends, to account for the deposits and
cash purchases treated as undeclared income by the CRA auditor.
[19]
Mark Colpaert testified
that the appellant worked as a seasonal farm worker from May to September from
mid-1989 to the mid-1990s. The appellant then took a break for a year or two
and resumed working for Mr. Colpaert until 2000. According to Mr. Colpaert
the appellant earned approximately $5,000 to $6,000 per year plus free lodging but
not food.
[20]
Gail Brown testified
that she dated the appellant from 1993 to 1996 and was married to him from 1996
to 1999. They had one child together. According to the witness, she and the
appellant accumulated $30,000 in savings during their period together, which
they divided equally upon their separation. Ms. Brown claims the couple was
able to save this amount because they received wedding gifts from the
appellant’s sister and financial assistance from her family. The witness claims
that the couple had low expenses because they had roommates who shared the
rent, utility and grocery expenses.
[21]
Kelly Gordon testified
that she dated the appellant off and on from 1995 to 2005. The witness claims
that the appellant kept money under the mattress in her bedroom during that
period as he had frequent access to her home, to which he had his own key. She stated
that she did not count the money under the mattress although she claims that
she stole $4,000 from the appellant’s cash savings. Once the appellant
discovered Ms. Gordon’s theft, he moved the money elsewhere for safekeeping.
[22]
Roxanne Alexandrea Carroll
testified that she lived with the appellant in her father’s home until the
appellant moved out in 2004. She had a child with the appellant. The witness
claims that she travelled to Jamaica on multiple occasions and brought money
back for the appellant from his sister. According to Ms. Carroll, she
brought back $10,000 in July 2005, $7,000 in December 2005 and $5,000 in April
2006.
[23]
Diana Rigopoulos dated
the appellant on and off from 2003 to 2005. She had three children with the
appellant. She testified that she and the appellant owned and operated a
roofing business together over the 2004 and 2005 calendar years. Although she jointly
owned the business with the appellant, she reported 100% of the net business
income on her tax returns. Ms. Rigopoulos claims that she purchased for
cash the $25,867 worth of household furnishings delivered to and found in the
appellant’s home and that the purchases were wrongly attributed to the
appellant by the CRA auditor. She claims that the invoices issued in the
appellant’s name with respect to these purchases were either duplicates of
these issued in her name or mistakes made by the store.
III. Analysis
Violation of the Appellant’s Charter
Rights
[24]
As a preliminary
matter, the appellant asserts that his Charter rights were violated when the LPS
forwarded to the CRA copies of the documents seized pursuant to the CDSA warrant.
The appellant was self-represented. He was unable to clarify which of his
rights were allegedly violated. Nonetheless, I suspect that the appellant’s
concerns revolve around section 8 of the Charter, which protects
against unreasonable search and seizure.
[25]
The appellant’s
argument can be broken down into two parts. First, he complains that the
warrant was issued in relation to an alleged offence under the CDSA for which
he was not convicted. The warrant does not mention the CRA or otherwise
indicate that the purpose of its issuance was to further a subsequent civil
audit of the appellant under the ITA. Second, the appellant claims that
some of the documentation named other persons and that their rights were
violated as a consequence of their seizure. The appellant also alleges that his
rights under the Privacy Act, R.S.C. 1985, p. 21 have been violated.
[26]
Section 8 of the Charter protects
the privacy rights of Canadians. It reads as follows:
Everyone
has the right to be secure against unreasonable search or seizure.
[27]
Subsection 24(2) of the Charter
provides courts with the authority to exclude evidence where it was obtained in
violation of the Charter and where its admission would bring the
administration of justice into disrepute.
[28]
Section 231.1 of the ITA gives
auditors undertaking compliance activities very broad powers of inspection. The
relevant portions of that provision read as follows:
(1) An
authorized person may, at all reasonable times, for any purpose related to the
administration or enforcement of this Act,
(a) inspect,
audit or examine the books and records of a taxpayer and any document of
the taxpayer or of any other person that relates or may relate to the
information that is or should be in the books or records of the taxpayer or
to any amount payable by the taxpayer under this Act, and
(b) examine
property in an inventory of a taxpayer and any property or process of, or
matter relating to, the taxpayer or any other person, an examination of which
may assist the authorized person in determining the accuracy of the inventory
of the taxpayer or in ascertaining the information that is or should be in the
books or records of the taxpayer or any amount payable by the taxpayer under this
Act. . . .
[Emphasis added.]
[29]
The inspection powers in paragraph
231.1(1)(a) are not limited to documents in the taxpayer’s possession
only. CRA officials can also issue third-party information requirements for the
purpose of administering and enforcing the ITA. The requirement power was
not used with regard to the documents shared by the police because Constable
Bhabba shared those documents of his own accord.
[30]
The facts in Markovic v. Canada very closely resemble the
facts of this appeal. In that case, the Toronto Police Service executed search
warrants against the taxpayer and his wife in the context of a narcotics
investigation. The police charged both the taxpayer and his wife. The charges
against the taxpayer were stayed and those against the taxpayer’s wife were
withdrawn.
[31]
An officer of the Toronto Police
Service provided to a CRA official copies of documents seized on the execution
of the search warrants. In the Tax Court, the appellants argued that this
constituted a violation of their section 8 Charter rights.
[32]
Beaubier J. held that it was not
improper for the CRA to use information gathered pursuant to a valid warrant
issued and acted upon in the course of a criminal investigation. He wrote:
. . . It was simply
a case of the police informing CRA after the searches and after subsequent
criminal proceedings. Ultimately the charges against Natasa Markovic were
withdrawn and the charges against Milos were stayed. As a result, this Court
finds that there is no basis for the Appellant's claim that his Charter rights
under sections 8 and 24 were violated.
[33]
The Supreme Court has ruled on the
scope of the section 8 right to protection against unreasonable search and
seizure in several cases. R. v. McKinlay Transport Ltd and R. v. Jarvis are the cases most
relevant to this appeal.
[34]
In McKinlay Transport, the
issue was whether demands for information issued by Revenue Canada officials under former subsection 231(3) violated the taxpayers’ section 8
rights. Wilson J., whose reasons were adopted by the majority, held that
demands for information issued under the ITA for the purpose of
enforcing that Act are not “unreasonable” seizures. Critical to her decision
was her finding that a taxpayer’s privacy interest vis-à-vis the Minister of
National Revenue in documents relevant to filing a tax return is relatively
low. That being so,
an auditor’s seizure of such documents through the demand-for-production powers
under the ITA was reasonable and did not violate section 8 of the Charter.
[35]
In Jarvis, the Supreme
Court considered whether there is a difference between the audit and
investigative functions of the Canada Customs and Revenue Agency (CCRA, now the
CRA) and if so, whether different constitutional considerations applied to the
two situations. The case largely concerns the issue of when the section 7 Charter
right against self-incrimination will limit the CRA’s powers to inspect, and
demand the production of, documents. The case also considered the circumstances
in which section 8 would apply to prevent the CRA from using its
inspection and demand powers under the ITA.
[36]
The Court found that there is a
difference between the CRA’s audit and investigative functions. The dividing
line between the two is drawn according to the predominant purpose of the CRA’s
actions, which is to be determined contextually. When the CRA is undertaking a
prosecutorial investigation, the taxpayer and the CRA are in a “traditional
adversarial relationship” due to the taxpayer’s liberty interest being at
stake. There could be a violation of the Charter if the CRA collected
information using its extremely broad civil audit powers with the purpose of
conducting a criminal investigation.
[37]
Importantly for the present
appeal, the Supreme Court in Jarvis considered whether information
properly gathered in furtherance of the CRA’s audit function could be shared
with officials conducting a subsequent criminal investigation. The Court held
that such information sharing would not contravene section 8, writing:
With respect to the
consequences related to s. 8 of the Charter, McKinlay Transport, supra,
makes it clear that taxpayers have very little privacy interest in the materials
and records that they are obliged to keep under the ITA, and that they are obliged
to produce during an audit. Moreover, once an auditor has inspected or required
a given document under ss. 231.1(1) and 231.2(1), the taxpayer cannot truly
be said to have a reasonable expectation that the auditor will guard its
confidentiality. It is well known, as Laskin C.J. stated in Smerchanski,
supra, at p. 32, that “[t]he threat of prosecution underlies
every tax return if a false statement is knowingly made in it”. It follows
that there is nothing preventing auditors from passing to investigators their
files containing validly obtained audit materials. That is, there is
no principle of use immunity that prevents the investigators, in the
exercise of their investigative function, from making use of evidence
obtained through the proper exercise of the CCRA’s audit function. Nor,
in respect of validly obtained audit information, is there any principle of derivative
use immunity that would require the trial judge to apply the “but for” test
from S. (R.J.), supra. If a particular piece of evidence comes
to light as a result of the information validly contained in the
auditor’s file, then investigators may make use of it.
[38]
The situation envisaged in the
above passage is that of a CRA officer passing on material or documents
properly discovered in the course of an audit to officials later carrying on a
criminal investigation. That is more or less the opposite of the facts in the
present case, where police shared with CRA auditors documents obtained in the
course of a criminal investigation.
[39]
If the former does not violate
section 8, then the latter should be acceptable. The subsequent use of
information which the Supreme Court found acceptable in Jarvis involved
the furtherance of a criminal prosecution, which engaged the liberty interest
of Mr. Jarvis. By contrast, in the present case, the subsequent use is to
further the Minister’s regulatory enforcement of the ITA via audit. The
consequences of an audit, while no doubt serious, do not threaten Mr. Brown’s
liberty interest.
[40]
Two issues require further
comment. First, does it matter that the warrant upon which the LPS acted made
no mention of any intent to share information with the CRA? Second, is it
relevant that the criminal charges laid against Mr. Brown were dropped?
[41]
On the first point, I note that
the validity of the underlying warrant was not challenged. Moreover, Constable
Bhabba testified that the CRA was not aware of or involved in the LPS’s
criminal investigation. More importantly, per McKinlay Transport,
Mr. Brown’s privacy interest vis-à-vis the CRA in the documents at issue
was relatively low.
[42]
A similar analysis applies to the
second issue. The fact that the charges were dropped has no relevance to the
question of whether Mr. Brown’s privacy interest in the documents was
sufficiently high to render CRA inspection of the documents a violation of his Charter
rights. Jarvis is authority for the proposition that use of the
CRA’s inspection and production powers is inappropriate when the predominant
purpose is criminal investigation rather than ensuring regulatory compliance
with the ITA. Here, there is no suggestion that the CRA auditor, in
accepting the documents from the LPS, intended to carry out a criminal
investigation. Therefore, the auditor’s acceptance of the documents is
constitutionally appropriate even though the CDSA charges against
Mr. Brown never proceeded to trial.
[43]
Mr. Brown’s second
constitutional argument was that the information sharing violated Diane
Rigopoulos’s rights because some of the documents seized and shared were
addressed to her. In R v. Edwards, the Supreme Court held that it is the
privacy rights of the person bringing the challenge that must have been
allegedly infringed.
[44]
Finally, Mr. Brown’s written
submissions also suggest that the LPS sharing documents with the CRA violated
the Privacy Act. The LPS is a provincial body and not covered under the Privacy
Act. The CRA, on the other hand, is a “government institution” subject to
the Privacy Act.
It is sufficient to note, however, without considering whether the acceptance
of the information from the police might have violated the Privacy Act,
that nothing in that legislation suggests that the result of a breach would be
the exclusion of evidence in a trial.
Appellant’s Evidence
[45]
The appellant’s
explanation as to the sources of the cash used to make the unexplained deposits
and cash purchases in the relevant taxation years lacks credibility.
[46]
According to the appellant
he received gifts from family members. In addition, he had very low personal
expenses in the taxation years preceding the years reassessed because he lived
off the earnings of his girlfriends and former wives. This allowed him to save
his own modest income. Finally, the cash purchases attributed to him as
undeclared income totalling $25,857 were made by his girlfriend, Diana Rigopoulos,
and not him.
[47]
The appellant denies
that he earned income from the sale of illegal drugs. Yet the appellant offers
no explanation as to why he would have kept $106,000 hidden under a mattress in
Ms. Gordon’s bedroom. If, as suggested by the appellant, the cash originated
from gifts and earnings from legitimate sources reported as income in prior
taxation years, why was the money not deposited in a bank account? The appellant
offered no explanation as to why he was comfortable with making large cash
deposits in the taxation years under review but not in earlier taxation years.
[48]
The appellant brought
forward five witnesses who testified that they knew he was in the habit of
keeping his savings in cash. I did not find their evidence to be reliable.
[49]
Gail Brown claims that
she and the appellant managed to save $30,000, which they divided between them in
the late 1990s upon their separation. The evidence shows that Ms. Brown
did not file tax returns from 1989 to 1993. From 1993 to 1999, Ms. Brown
received social assistance. Her total declared income from 1997 to 1999 was
$52,000. She claimed that the couple had low personal expenditures. On
examination-in-chief, she claimed that the couple did not own property or rent
an apartment. She claimed that the appellant and she lived in other people’s
homes or had roommates. However, on cross-examination, it was shown that she
incurred rental expenses totalling $27,000 over the 1993 to 1999 taxation
years. Finally, Ms. Brown was charged with, and convicted of, theft over $5,000. She was also charged with possession
of narcotics for the purpose of trafficking. Ms. Brown claims that she knew the appellant
kept money at Kelly Gordon’s house, but says she did not know how much.
Apparently, the couple agreed to split their joint savings but, surprisingly,
not the appellant’s significant cash savings of which Ms. Brown was aware.
[50]
Ms. Gordon admits that she
stole $4,000 from the cash hidden by the appellant under the mattress she slept
on, yet claims she never counted the money. The evidence shows that
Ms. Gordon also has a history of criminal activities. The
case law is clear that, in assessing a person’s testimony, a judge may consider
the witness’s moral behaviour.
[51]
Joseph Carroll,
Ms. Carroll’s father, testified that the appellant kept cash in his root cellar
when the appellant was living in Mr. Carroll’s home with Roxanne, but stated
that he did not know how much.
[52]
Roxanne Carroll
testified that she knew the appellant kept savings in cash in her father’s
home, yet she too did not know how much.
[53]
Ms. Carroll also
claimed that she brought cash to the appellant from his sister in 2005 and
2006. On cross-examination she stated that she was unaware that Jamaican law prohibited
a tourist from leaving the country with large sums of money that the tourist
had not taken into the country. When informed of this, she suggested that
perhaps she had taken with her up to $50,000 in cash to support herself and her
daughter on their vacation.
[54]
Diana Rigopoulos
claims that she was the one who made the cash purchases of household furnishings
that were attributed to the appellant as undeclared income. She also claims
that she made a number of cash deposits, totalling approximately $28,500, in
the couple’s joint bank account over the period from 2004 to 2007.
[55]
The household
furniture she claims she purchased was seized from the appellant’s home in
2007. The witness states that she never lived there. Ms. Rigopoulos’s tax
returns produced as Exhibit R-9 show that she reported an average annual income
of $5,000 per year, including employment insurance, social assistance and child
care benefits. The evidence
also shows that Ms. Rigopoulos attempted to pay the appellant’s Visa bills
with counterfeit bills. Ms. Rigopoulos’s testimony that she purchased the
furniture and household furnishings and had them delivered to a home that she
did not live in is not plausible. Her modest declared income would not have allowed
her to accumulate such savings.
[56]
The only witness who
knew the amount of the appellant’s cash savings from prior years was the appellant
himself, who was not a credible witness. The appellant’s evidence cannot be
accepted without reliable corroborating evidence, of which there is none in the
trial record.
[57]
The Crown led evidence
to show that fraudulent documents were given to the appellant’s mortgage lender
to support the appellant’s loan application in 2005. These documents included
false notices of assessment showing that the appellant reported the $56,684 that
his fake employment letter stated he had earned from City Wide Surplus. The appellant
claims he had nothing to do with these documents, yet they were seized under
the search warrant executed at his home. Undoubtedly, the mortgage lender would
have been unwilling to provide the appellant with a mortgage loan without proof
of a source of steady income. No one but the appellant had an interest in
obtaining the loan.
[58]
The evidence
considered as a whole supports the Crown’s theory that the appellant was
engaged in the traffic of illegal drugs. The appellant stresses that he was not
convicted in either of the instances in which he was investigated for offences
under the CDSA. However, the Crown’s lack of evidence to support the criminal
allegation is inconclusive for the purposes of this trial. It is well
established in tax appeals that the onus is on the taxpayer to disprove an
assessment issued within the normal assessment period.
[59]
The appellant bears that
onus for all of the taxation years under review save 2004. The Crown bears the
onus for the 2004 reassessment, which was issued after the normal assessment
period, and for the penalties imposed under subsection 163(2) of the ITA.
It is important to recall that the standard of proof in this Court is always that
of the balance of probabilities and not of proof beyond a reasonable doubt, as
is the case for a criminal prosecution. Considering the evidence as a whole,
the respondent has satisfied its burden in each of those regards.
[60]
It is well established
that a taxpayer is subject to tax on his income regardless of its source. A
taxpayer must keep reliable books and records of all his income, including
income from illegal sources. If he does not, the Minister may issue a
so‑called arbitrary assessment using any method that is appropriate in
the circumstances.
[61]
In the absence of
reliable books and records and plausible or reliable evidence from the appellant
or third parties, a deposit analysis based on the appellant’s bank deposits is
sufficient to uphold the reassessments.
[62]
For all of these
reasons, the appellant’s appeal is dismissed, with costs to the respondent.
Signed at Ottawa, Canada,
this 12th day of July 2012.
“Robert J. Hogan”
SCHEDULE “A”
|
Taxation Year
|
Bank Account
|
Amount
|
|
2004
|
Bank of Montreal
account no. . . .
|
$10,031
|
|
|
TD Canada Trust
account no. . . .
|
$19,000
|
|
|
|
$29,031
|
|
|
Less: adjustments
|
($8,316)
|
|
|
|
$20,715
|
|
|
|
--------------
|
|
|
|
|
|
|
|
|
|
2005
|
Bank of Montreal
account no. . . .
|
$22,814
|
|
|
Bank of Montreal
account no. . . .
|
$15,500
|
|
|
TD Canada Trust
account no. . . .
|
$75,482
|
|
|
|
$113,769
|
|
|
Add: cash
purchases
|
$25,867
|
|
|
Less:
adjustments
|
($22,673)
|
|
|
|
$116,992
|
|
|
|
--------------
|
|
|
|
|
|
|
|
|
|
2006
|
Bank of Montreal
account no. . . .
|
$8,000
|
|
|
TD Canada Trust
account no. . . .
|
$44,255
|
|
|
|
$52,255
|
|
|
Less:
adjustments
|
($25,850)
|
|
|
|
$26,405
|
|
|
|
--------------
|
|
|
|
|
|
|
|
|
|
2007
|
Bank of Montreal
account no. . . .
|
$8,000
|
|
|
Bank of Montreal
account no. . . .
|
$7,980
|
|
|
TD Canada Trust
account no. . . .
|
$46,111
|
|
|
|
$62,091
|
|
|
Less adjustments
|
($30,795)
|
|
|
|
$31,296
|
|
|
|
--------------
|
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