Date: 20000327
Docket: 98-1305-IT-G
BETWEEN:
MICHAEL NORWOOD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Order
McArthur J.T.C.C.
[1] This motion by the Appellant is under subsection 24(1) of
the Canadian Charter of Rights and Freedoms requesting the
Court to find that the Minister of National Revenue based a
reassessment upon documents obtained by an unreasonable search
and seizure that infringed the Appellant's rights under
section 8 of the Charter. This Court must first decide if
there was an unreasonable search or seizure and if so, what
remedy if any should be granted. The hearing of the appeal was
adjourned sine die pending the disposition of the motion.
Evidence was adduced over a period of two days with argument on a
third day. The litigants presented comprehensive written argument
and numerous authorities. Koshy E. Koshy, Tom Armour and Kevin
O'Reilley were called to testify by the Appellant.
[2] The facts I find that are pertinent to the question
whether section 8 of the Charter was violated are the
following. After an audit, the Minister of National Revenue added
to the Appellant's income the amounts of $4,867, $41,493 and
$65,806 for the 1991, 1992 and 1993 taxation years, respectively.
In early February 1995, the Appellant was informed that Revenue
Canada would conduct an audit on the Appellant and 450344 Ontario
Inc.[1] (the
Corporation) pursuant to section 231.1 of the Income Tax
Act. The Corporation operates a restaurant and bar (the
Silver Dollar). The Minister's auditor,
Mr. O'Reilley, attended the offices of the accounting
firm representing the Appellant and the Corporation, Connelly,
Koshy & Frouin (CKF). The auditor dealt with two accountants,
Mr. Koshy, C.A., and an employee, Mr. Armour, C.G.A.[2] The auditor was
directed to use a designated office and to request documents he
required from Mr. Armour. Several large boxes of cancelled
cheques and other requested material were provided to the
auditor.
[3] Mr. O'Reilley commenced his audit from the
accountants' premises about mid-February 1995. His assigned
office had no telephone. On March 23, while he was aware that Mr.
Koshy and Mr. Armour were absent from Ottawa, he entered Mr.
Armour's office to use the telephone. In order to do so, he
had to go through an abutting office which was vacant and had a
telephone. He had to open a closed but unlocked door to Mr.
Armour's office. Having completed his call, and before
exiting the office he saw a file on a storage shelf identified on
its cover as a file for the Corporation. He took the file back to
his office and photocopied hand-written notes (the notes)
apparently made by Mr. Armour during his initial interview with
the Appellant on December 11, 1992. He then returned the file to
its original place in Mr. Armour's office without comment to
the Appellant or his accountants. Notations in the notes that
caught the auditor's attention included:
2. Door fee for entrants - $2 per person
Mike pockets gives to wife
~ $1000/week
i.e.: undeclared income
13. Sources of Money – Cash
- Pool Tables
- Game Machines
- Poker Machines
- $2 Loon (illegible)
- Undeclared income
- Mike to consider declaring in the future[3]
[4] Four years later, upon exchange of documents the Appellant
and his representatives became aware of the existence and
contents of the notes that give rise to this motion. The
Appellant cries unfair and a blatant violation of section 8 of
the Charter. The Respondent submits that Mr.
O'Reilley's search and seizure was an administratively
authorized search under section 231.1 of the Act which
provision is constitutionally valid. The Appellant does not
question the constitutionality of section 231.1 but submits that
the auditor overstepped the authority granted to him. Paragraphs
231.1(1)(a), (c) and (d) read as
follows:
231.1(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) ...
and for those purposes the authorized person may
(c) subject to subsection (2),[4] enter into any premises or place
where any business is carried on, any property is kept, anything
is done in connection with any business or any books or records
are or should be kept, and
(d) require the owner or manager of the property or
business and any other person on the premises or place to give
the authorized person all reasonable assistance and to answer all
proper questions relating to the administration or enforcement of
this Act and, for that purpose, require the owner or
manager to attend at the premises or place with the authorized
person.
[5] The provisions of section 231.1 give a Revenue Canada
auditor very broad powers. Mr. O'Reilley had the right to
attend the accountant's premises, have access to the
taxpayer's relevant documents and to require the taxpayer and
his accountants to give him reasonable assistance. Does this
include the right to enter an accountant's closed office in
the accountant's absence and take a shelved file that had not
previously been made available to him and that he did not
request? I think not.
[6] Mr. O'Reilley testified that prior to entering Mr.
Armour's private office, he was directed there by a female
staff member of the accounting firm. He could not remember any
details of that person whatsoever other than her gender. He also
believed that the door to Mr. Armour's office was open but
was somewhat unsure. Mr. Koshy stated that he questioned his
staff and no one could remember directing Mr. O'Reilley to
Mr. Armour's office. Further, from the evidence I am
satisfied, on a balance of probabilities, that Mr. Armour's
office door was closed before Mr. O'Reilley entered. Mr.
Armour is a creature of habit who was reputed to close his door
whenever he left the premises.
[7] Mr. O'Reilley replaced the file without mentioning to
Mr. Armour through the many discussions they had following the
incident that he took the file and removed a document in Mr.
Armour's absence. This is probably one of those instances
where an honest person seeking to recall events four years past
sees those events in the light of his own present-day interests
and wants to put his prior conduct in the best possible
light.
[8] I believe that a more candid approach and higher standard
is expected of Revenue Canada auditors. In several meetings with
the Appellant and his representatives after March 23, 1995,
officers of the Ministry of National Revenue never mentioned that
they had copies of these notes which compromised the
Appellant's position. This is not dealing in good faith. It
strengthens the conclusion that the notes were obtained
surreptitiously and without colour of right. Their behaviour was
that of one who has something to hide. I do not consider Mr.
O'Reilley's actions too distant from entering the
premises with a key in the dead of night. This type of
behaviour is not intended in paragraphs 231(1)(c) and
(d) of the Act notwithstanding the broad powers it
grants to an auditor. There was a method of conduct established
when Mr. O'Reilley attended the premises of CKF. He was
given and provided with all of the documents he requested when he
requested them. The Appellant and his accountants were entitled
to rely on that procedure and not be subject to secretive file
searches. CKF is host to an average of 20 Revenue Canada audits
annually and their tradition has been when documents are asked
for, they provide them.
[9] Counsel for the Respondent argued that the search involved
the books and records of the Corporation which was the operating
company of the Silver Dollar and the Appellant did not have a
personal right to privacy of the company books. The Corporation
was in turn owned by 947014 Ontario Inc. and the Appellant owned
all of the shares of both companies, 450344 and 947014. The
Respondent urged the Court to look at the context. He stated that
this was an audit of the Corporation and there cannot be
exaggerated claims to privacy. Section 231 requires disclosure.
He believes that It was not a personal file of the Appellant
which was searched by Mr. O'Reilley but a file of 450344.
Counsel emphasized that the most important factor is that this is
an audit conducted pursuant to statutory provisions. There is no
privilege between accountant and client. He added that this was a
civil search, not a criminal search.
[10] I have no difficulty concluding that the audit included
the Appellant personally. Exhibit A-2 is a letter dated February
6, 1995 from Mr. O'Reilley to the Corporation 450344 that
includes:
Dear Mr. Norwood:
The purpose of this visit is to examine your books and records
and to obtain any further information that may be required in
connection with the corporate tax returns and your personal
income tax returns. ...
In addition, Exhibit A-6 is a memo dated May 27, 1996 from Mr.
O'Reilley to Mr. Koshy stating:
As requested, attached you will find copies of the schedules
and forms pertinent to the ongoing audit of 450344
Ontario Inc. (o/a Silver Dollar), and Michael Norwood.
[11] The Respondent raised the fact that Mr. Armour was
employed by 729024 Ontario Inc. which was controlled by CKF. This
has no effect on these proceedings. It, 729024, was a silent
corporation for the internal purposes of CKF. The Appellant at
all times believed he was dealing with CKF in general and in
particular, Mr. Koshy and his employee, Mr. Armour.
[12] The Respondent raises the questions whether the Appellant
has a personal right to privacy. I find that the notes are not
financial records nor are they "the books and records of a
taxpayer and any document that may relate to the information that
is or should be in the books and records of a taxpayer
...".[5]
The notes do not contain information that should be in the books
and records. The notes appear to simply be the reflections of Mr.
Armour during a private and personal conversation between an
accountant and his client. It is repugnant to the public's
perception of the rule of law and acting in good faith that an
officer of Revenue Canada would covertly search and seize a
document and, secondly, use its contents as assistance in
reassessing the Appellant. I do not accept the Respondent's
position that if there was a right of privacy, the right was that
of the Corporation and not that of Mr. Norwood who is the
applicant in this motion. The Respondent submitted that
context is everything and pursuant to subsection 231.1(1),
the auditor had a right to obtain the file. I believe the
Appellant's view of the context is more accurate. He is the
president and sole shareholder of the Corporation and 947014.
From a layman's position, he intermingles his acting
personally with his actions on behalf of the Corporations. The
audit clearly included him personally. The notes, the accuracy of
which he denies, are part of a very personal sharing between a
client and his accountant which he expected to be confidential.
Pursuant to the rules of professional conduct of the Institute of
Chartered Accountants of Ontario,[6] chartered accountants may not
... disclose or use any confidential information
concerning the affairs of any client, former client, employer or
former employer except ...
(c) when such information is required to be disclosed by order
of lawful authority or, in the proper exercise of their duties,
by the Council, the professional conduct committee or any
subcommittee thereof, the discipline committee, the appeal
committee, or the practice inspection committee: ... [7]
The above requirement extends to any non-chartered accountants
that are employed by a chartered accountant.[8] Surely, if the conversation took
place, the Appellant cannot be said to have been speaking for the
Corporation alone. That is an untenable concept.
[13] The Court held in R. v. McKinlay Transport[9] that a
taxpayer's private interest with respect to accounting
documents is relatively low vis-à-vis the Minister.
I do not think that the notes are accounting documents envisioned
by the Supreme Court of Canada in McKinlay.
[14] I do not believe subsection 231.1(1) contemplates the
Minister's auditor entering into an accountant's private
office, through a closed door, during his absence and taking a
shelved file. I do not accept that he was shown in by an employee
of CKF. The Act has defined a course of conduct to be
followed that Mr. O'Reilley could have taken to obtain access
to Mr. Armour's office and its relevant files.[10]
[15] Having found the auditor exceeded the authority given to
him under section 231.1, were the Appellant's rights
violated under section 8 of the Charter and if so,
what remedy, if any, should be granted. Section 8 and
subsections 24(1) and (2) read as follows:
8 Everyone has the right to be secure against unreasonable
search or seizure.
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
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 the circumstances, the
admission of it in the proceedings would bring the administration
of justice into disrepute.
[16] As previously stated, counsel for the Respondent submits
that to make a Charter challenge, a personal right must be
infringed. In written argument, he stated:
A section 8 analysis requires two distinct inquiries: i) Did
the impugned state conduct interfere with the reasonable
expectations of privacy of the Applicant? ii) If so, was that
interference unreasonable? The onus is on the Applicant to
demonstrate that his individual reasonable expectation of privacy
is at stake. If he cannot, there is no need to proceed further.
If the Applicant can demonstrate a reasonable expectation of
privacy, he must then show that the searches were an unreasonable
interference with that expectation of privacy.
Counsel stated that this is where the Appellant's argument
fails and referred the Court to the principles flowing from
Edwards v. The Queen.[11] These include that section 8 is to protect a
personal or person's right to privacy and the Court must
consider whether the search was reasonable considering the
totality of the circumstances.
[17] In Edwards, because the Court found no personal
right was affected by the police conduct at a search of a third
party's premises, the Court held that the applicant could not
contest the admissibility of evidence under subsection 24(2) of
the Charter. I agree with the reasoning in R. v.
Jarvis.[12]
After reviewing the Edwards guidelines together with
assistance from other cases, Alberta Provincial Court Justice
Fradsham concluded that Jarvis, a taxpayer, had a
reasonable expectation of privacy with respect to his documents
in the possession of his accountant. The Court found that the
documents belonged to Jarvis and had been delivered by him
to his accountant under a misapprehension that he was being
audited under subsection 231.1(1) of the Act. The Court
concluded that Jarvis had a reasonable expectation of
privacy in respect to the documents which were seized from his
accountant's office without a warrant and the seizure
was unreasonable. In Donovan v. The Queen,[13] the following
remarks of Lamarre Proulx, J. of this Court are relevant to
the present situation:
Section 8 of the Charter, that stipulates that everyone has
the right to be secure against unreasonable search or seizure,
applies to the administrative inspections. These inspections must
be carried out in a reasonable manner. The standards to be
applied are different from those applied to criminal proceedings
as seen in McKinlay (supra). In the matter of regulatory
and administrative context, the standard is determined in
accordance with the expectation of privacy and the legislative
goal pursued. ...
[18] In Jarvis, the Court recognized a confidential
relationship between accountant and client. This is not a
privilege that is respected in the Act between solicitor
and client. This right of confidentiality does not override the
provisions of the Act but, proper procedure must be taken
under the Act. The Appellant testified that he expected
the information he supplied his accountant and the contents of
the files were held in confidence and privacy. This
confidentiality is recognized by the Institute of Chartered
Accountants of Ontario in Rules 210.1 and 210.2.[14] Considering the evidence, I am
satisfied that the Appellant personally was a client of CKF
together with his Corporations. In compliance with the
Act, by obtaining a warrant, the Minister could have
obtained the file including the notes. The reasonable expectation
of privacy is to be determined on the basis of the totality of
the circumstances. Section 231.1 does not allow the
Minister's representative complete authority to do as he
wishes. There is a procedure in the Act which he is to
follow. The Appellant had a reasonable expectation of privacy in
the notes. The auditor's search and seizure was unreasonable
pursuant to section 8 of the Charter.
[19] Prior to the Gernhart v. The Queen, 99 DTC
5749, under subsection 176(1) of the Act, the
Minister was required to transmit to the Tax Court all relevant
documentation in respect of an appeal. The Federal Court of
Appeal found that subsection 176(1) created a significant
intrusion on the privacy interests of a taxpayer and was an
unreasonable seizure contrary to section 8 of the Charter.
The Court found that a taxpayer has a privacy interest in the
contents of an income tax return. Applying the Gernhart
reasoning to the present situation, it is consistent to conclude
that the Appellant had a privacy interest in the contents of
notes made by his accountant during a personal interview.
[20] The notes contained personal information whether accurate
or not. The auditor acted on that information. During
examinations for discovery of Mr. O'Reilley by
Appellant's counsel Mr. Vanier in October 1999, there was the
following exchange speaking of the notes:
Q. ... No. 2,[15] what's your knowledge, information and belief as
to what No. 2 indicates?
A. It appears that the owner is taking roughly $1,000 a week
from the door fee and not reporting it.
Q. Okay. That's your interpretation?
A. Yes.
Q. What date was this that you obtained this document? Is that
the same date as recorded on there, March 28th, '95?
A. Yes. Mr. Koshy was in Shawville at the time, I believe.
(Transcript, page 41)
...
Q. ... Note 13,[16] there's another asterick there. What to your
knowledge and information does that note stand for?
A. To me it indicates the owner has all these individual
sources of cash which he is not declaring and he's going to
consider declaring it in the future. (Transcript, page
44)
[21] Mr. O'Reilley testified that the final assessment was
not completed relying on a net worth basis. He stated that the
information in the notes was used as a basis for "our
assessment" and that "it definitively assisted us,
yes".[17]
There appear to be two issues before the Court in the Notice of
Appeal, namely, the pool table revenue and the discrepancy
between the cash register tapes and the GST and PST returns and
the revenue reported in the financial returns.
[22] The Appellant admits not reporting pool table revenues of
$4,867 in 1991, $18,604 in 1992 and $20,028 in 1993. These
amounts were easily detected. The pool tables belonged to Regent
Vending and the revenues were divided equally with Regent giving
the Appellant or the Corporation a cheque for a 50% share. The
Respondent states that the further amounts of $22,889 in 1992,
$45,776 in 1993 were arrived at after a review of cash register
tapes and bank records revealing discrepancies between sales and
bank deposits after allowing $93,019 in undocumented cash
expenses.
[23] In O'Neill Motors Limited v. The Queen,[18] Bowman J. was
faced with the question as to what remedy, if any, was available
to an Appellant under section 24 of the Charter from
reassessments based on information and documents obtained by an
illegal search and seizure that infringed the Appellant's
rights under section 8 of the Charter. He concluded that
the reassessments should be vacated because to exclude the
evidence was tantamount to vacating the reassessments because
without such evidence the Minister could not justify the
reassessments or the penalties. At page 1496, Bowman J. added the
following caution:
I would not want my conclusion in this case to be taken as a
wholesale sanctioning of the vacating of all assessments where
some component of the Minister's basis of assessment was
unconstitutionally obtained information. Other cases may arise in
which a simple exclusion of evidence is sufficient, others in
which the evidence is of little or no significance in the making
of the assessments or where its introduction would not bring the
administration of justice into disrepute, or still others in
which Suarez solution will commend itself. In the exercise
of the discretion vested in the court under section 24 of the
Charter one must be vigilant in balancing, on the one
hand, the rights of the subject that are protected under the
Charter, and on the other, the importance of maintaining
the integrity of the self-assessing system. As each case arises
these and, no doubt, other factors will play a role and all
factors must be assigned their relative weight. In the
circumstances of this case I have concluded that the most
appropriate exercise of my discretion is to vacate the
assessments.
[24] O'Neill Motors[19] was upheld by the Federal
Court of Appeal and Linden J. supported that statement stating at
page 6428:
I would like to specifically underscore the words of the Tax
Court Judge, with which I fully agree, to the effect that this
type of extreme remedy must not be considered to be an automatic
one, being reserved only for cases of serious violations where
other remedies are insufficient. ...
What remedy if any is available to the Appellant? The
Appellant submits that the basis for the reassessments was the
information obtained through a violation of section 8 of the
Charter and therefore, the assessments should be vacated
entirely. For this position he relies on O'Neill
Motors. The situation in that appeal differed from the
present one since an agreed statement of facts included the
admission that the assessments could not be sustained without
tainted evidence. This admission was essential to Judge
Bowman's decision to vacate the reassessments.
[25] The facts in the present appeal can be easily
distinguished and do not warrant the O'Neill Motors
remedy which, in my opinion, would be excessive. In review, Mr.
O'Reilley entered Mr. Armour's office at a time when
he knew that Mr. Armour was out of town for one day. While he may
have used Mr. Armour's telephone, he then acted in a
manner which he knew or at the least ought to have known,
required proper authority. Without authorization he removed a
file that he knew concerned the Corporation. He took that file
back to his assigned office and removed the notes. He returned
the file and made no mention of the incident to the Appellant or
his representatives. Information from the notes assisted the
Respondent's investigation and final reassessments. The
evidence was not divulged by the Minister for four years. The
course of investigation was outside the scope of subsection
231.1(1). Alternate methods under section 231.2 were available to
permit the Minister to search and seize files. This does not
support the Respondent's position.[20] The Supreme Court of Canada
observed in R. v. Collins[21]that because evidence
could have been obtained without a violation of the
Charter tends to render the violation more serious.
[26] The Respondent submits that even if the Charter
was breached in obtaining the notes, this evidence should not be
excluded under section 24(2) of the Charter and cites
R. v. Stillman.[22] The Court in Stillman looked to the
seriousness of the breach and whether the evidence would have
been discovered without the breach. Counsel for the Respondent
adds that the information in the notes was known or obtainable
without the notes. He offered no evidence to support this
statement.
[27] The issue now narrows down to how my discretionary powers
are to be exercised. The evidence seized in violation of the
Appellant's Charter rights was helpful but is not
fundamental to all the assessments. There is no doubt that the
undisclosed pool table revenue was easily discovered by the
auditor without assistance from the information in the notes.
Given the broad language in subsection 24(1) of the
Charter, this Court has the discretion to apply an
"appropriate and just" remedy to correct the damage
inflicted upon the Appellant. The use of the notes would, or at
the least may, have an unfair impact on a trial. In particular,
its use to sustain the penalties assessed would I believe,
diminish the public perception of fairness and "bring the
administration of justice into disrepute".[23]
[28] This would be an appropriate case to simply exclude the
tainted evidence, but for reasons discussed below, it is not an
adequate remedy. Its use would diminish the public perception of
fairness although I find that the Appellant is not entitled to
the additional relief that the entire reassessments be vacated.
In O'Neill, the Court found that no evidence remained
to sustain the reassessments. That is not the case here. Mr.
O'Reilley obtained tainted evidence which assisted him
in concluding there was unreported income. Using the notes the
Minister's suspicions were strengthened and given direction.
Originally the audit proceeded by the net worth method; proposals
were made to the Appellant, reassessments were completed which
were later reduced by further and final reassessments. The
Minister states in argument and in the Reply to the Notice of
Appeal that his position is based on facts. He adds that the pool
table revenues come directly from Regent Vending and the
approximate $150,000 discrepancy less estimated expenses were
taken from discrepancies in the records of the Corporation. This
conflicts with Mr. O'Reilley's testimony in his
examination for discovery where he stated he used some net worth
methods in 1992 and 1993.
[29] I recognize that the auditors' job is not an easy
one. They do require tools to carry out their work and our tax
system relies essentially on voluntary compliance. To ensure or
enforce compliance, Revenue Canada has a variety of mechanisms at
its disposal including audits, investigations, searches and
seizures. The Minister must be given broad powers to administer
the Act.[24] The present case was not a criminal investigation but
a civil audit in which the Minister may have believed the
taxpayer to have underreported or not reported taxable income.
Indeed, without difficulty and without need of the information in
the notes, the auditor discovered unreported pool table
revenue.[25] The
auditor admitted that the notes assisted or directed his search
for additional unreported income. It is reasonable to conclude
that the auditor should have used the additional remedies
provided in the Act and specifically, subsections 231.2(1)
and (3). The Appellant and Mr. Armour had a right to expect
privacy of the notes.
[30] There is no perfect solution. To simply exclude the notes
does not remedy the situation because the tainted information has
already been acted upon. The damage has been done. Apart from the
pool table revenues, the amount in question is remarkably similar
to that referred to in the notes as unreported income. The
language of subsection 24(2) of the Charter is mandatory,
"the evidence shall be excluded ... " if the
stated conditions are met. Subsection 24(1) permits one whose
rights have been infringed to have the Court grant such remedy as
the Court considers appropriate and just in the circumstances. As
stated, a simple exclusion of evidence does not provide a
meaningful remedy. To use an analogy, too much salt has been
added to the soup and the whole pot is unpalatable. I agree with
the Minister's statement that it would bring the
administration of justice into disrepute given the
Appellant's acknowledgement with respect to the pool table
revenues to vacate the entire assessment.
[31] I have considered the various options open to me which
include: (i) finding the notes were of little significance in the
arriving at the assessments; (ii) a simple exclusion of the
notes; (iii) a Suarez solution;[26] and (iv) a wholesale vacating of all
assessments. The Respondent acknowledges that the notes were of
use. I believe the Minister's recommendation of simply
excluding the notes is not a practical solution because it is too
late. It is vague and open-ended and does not impose a meaningful
sanction. The fact remains that tainted evidence assisted the
Minister's assessment. It is all but impossible to be
specific with respect to how harmful the notes were to the
Appellant. But for the pool table revenues, the Respondent relied
on at least part, if not all, of the notes for the
assessments.
[32] Choosing a reasonable alternative, I therefore grant the
Appellant's motion, with costs, and direct that the
assessments be referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis of including in
the reassessments the undeclared revenues relating to the pool
tables in the amount of $4,867 in 1991, $18,604 in 1992 and
$20,028 in 1993 together with the appropriate interest and
penalties, and the balance of the assessment in each year is to
be vacated. While it is important that people pay their taxes and
not be allowed to engage in tax evasions and the suppression of
income, it is more important that the integrity of our system and
the taxpayers' Charter rights be protected.
Signed at Ottawa, Canada, this 27h day of March, 2000.
"C.H. McArthur"
J.T.C.C.
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