Kligman v. Minister of national revenue, 2003 FCT 52

Date: 20030121

Neutral citation: 2003 FCT 52

OTTAWA, Ontario, this 21st day of January, 2003

Present:           THE HONOURABLE MR. JUSTICE BEAUDRY                                      

BETWEEN:

Docket T-203-01

                                                                    SAM KLIGMAN

                                                                                                                                                       Applicant

                                                                                 and

                                               MINISTER OF NATIONAL REVENUE

                                                                                                                                                   Respondent

Docket T-204-01

                                                                 ALLAN SANDLER

                                                                                                                                                       Applicant

                                                                                 and

                                               MINISTER OF NATIONAL REVENUE

                                                                                                                                                   Respondent

Docket T-205-01

                                          SNAPSHOT THEATRICAL PRODUCTIONS

                                                                                                                                                       Applicant

                                                                                 and

                                               MINISTER OF NATIONAL REVENUE

                                                                                                                                                   Respondent

Docket T-206-01

                                      MODERN WOOD FABRICATORS (MWF) INC.

                                                                                                                                                       Applicant

                                                                                 and

                                               MINISTER OF NATIONAL REVENUE

                                                                                                                                                   Respondent

Docket T-207-01

                                                    LES PLASTIQUES ALGAR LTÉE

                                                                                                                                                       Applicant

                                                                                 and

                                               MINISTER OF NATIONAL REVENUE

                                                                                                                                                   Respondent

                                               REASONS FOR ORDER AND ORDER

[1]                 This is an application for judicial review challenging the requirement to provide information issued by Canada Customs and Revenue Agency ("CCRA"), an agency operating under the supervision and control of the Minister of National Revenue (the "respondent"). The applicants are Sam Kligman ("Kligman"), Allan Sandler ("Sandler"), Snapshot Theatrical Productions ("Snapshot"), Modern Wood Fabricators (MWF) Inc. ("MWF") and Les Plastiques Algar Ltée ("Algar"). The five applicants, when referred to as a group, shall be referred to as the "applicants".

[2]                 The applications of the five applicants were originally filed separately and assigned individual file numbers. The applicants and the respondent agreed that the five applications should be consolidated into a single application. The order of Tremblay-Lamer J., dated February 13, 2001, provides assent to this consolidation and to the condition that the information and documents set out in the requirements to provide information be released to the respondent within 30 days of the final disposition of this judicial review.

[3]                 Some of the materials in the files related to this hearing are in French; notably the affidavit of André Faribault ("Faribault") of the Special Investigations Division ("SI") of the Respondent, and the transcript of his cross-examination on that affidavit. However, the Memoranda of Fact and Law prepared by the applicants and the respondent, respectively, are written in English. Accordingly, these reasons have been prepared in English.

FACTS

[4]             In October, 1999, the SI sent an informal requirement to Algar, requesting various documents and information. The requested materials included charitable donation receipts for the taxation years 1994 to 1998 inclusive. The request was sent by SI agent George Holz, who had been working on the file at the time.

[5]                 In November 1999, CCRA informed Kligman that the file had been suspended, then informed him in September 2000, that CCRA had confirmed that its investigation of the Rabbinical College of Montreal regarding charitable donations was completed and that no criminal prosecution would be recommended against that organization. CCRA then informed Algar in a letter dated October 18, 2000, that its file had been reassigned to Faribault.

[6]                 The letters which are the subject of the judicial review in the present case are the letters sent on January 12, 2001, to each of the five applicants (Applicants' Record, tab 3 through tab 7).

[7]                 The letters were titled Requirement to Provide Information and Documents (the "Requirement" or "Requirements"). The letters to Algar, Snapshot and MWF included requirements made pursuant to paragraph 231.2(1)(b) of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.) (the "Act", sometimes referred to as "ITA", as that is how it is cited in the pleadings of the parties. The letters to Kligman and Sandler made reference to paragraphs 231.2(1)(a) and (b) of the ITA. CCRA stated that it required information from the applicants with respect to donations that they had made to four charitable organizations: Rabbinical College of Montreal, Yeshiva Oir Hochaim, L'Association Gimilis Chasodim Keren Chava B'Nei Levi, and Les Amis Canadiens des Institutions de la Terre Sainte.

[8]                 CCRA required information for various periods between 1992 to 1999, inclusive. The relevant period differed from applicant to applicant. The information required of Kligman and Sandler consisted of account numbers (and the identification of the banks and branches at which the accounts were held), from which cheques were drawn to pay the donations, and the cancelled cheques related to these donations.

[9]                 The material requested from Algar, MWF and Snapshot included cancelled cheques, bank statements and donation receipts related to the donations to the organizations mentioned in the letters. Also requested were the cash disbursements journal, general ledger, adjusting entries and trial balance for the period specified in the letter. These are elements of the bookkeeping of the company.

[10]            Each of the letters concluded by stating that:

Your attention is directed to subsections 238 (1) and (2) of the Income Tax Act for default in complying with this requirement.

[11]            The applicants are challenging this requirement, claiming that it is an illegal seizure.

[12]            Following the hearing of this matter but before this judgment was released, the Supreme Court of Canada issued decisions in two cases which also dealt with the disclosure requirements of the Act. These cases are R v. 2002 SCC 73">Jarvis, 2002 SCC 73, [2002] S.C.J. No. 76 (QL) and R. v. 2002 SCC 74">Ling, 2002 SCC 74, [2002] S.C.J. No. 75 (QL).

[13]            On December 2, 2002, I granted the applicants' motion to file amended pleadings. In my order granting this motion, I also provided for the respondent to file amended pleadings of its own in response by December 6, 2002, which were filed.

RELEVANT STATUTORY PROVISIONS

Income Tax Act

[14]            Sections 231.1, 231.2, subsections 238 (1) and (2) and subsections 239 (1) and (1.1) of the Act read as follows:

231.1

231.2(1)

S. 238 (1) and (2)

239 (1) and (1.1)

[15]            The Canadian Charter of Rights and Freedoms, ss. 7, 8, 24, Part I of the Constitution Act, 1982, Canada Act 1982 (U.K.), c. 11, (the "Charter") reads as follows:

ISSUES

[16]            Does the Requirement constitute a breach of sections 7 and 8 of the Charter?

[17]            If the Requirement does violate the Charter, should an order be issued pursuant to subsection 24(1) of the Charter quashing the Requirement?

SUBMISSIONS

Section 7 and 8 - Applicants

[18]         The Requirement was issued to each of the applicants in the context of a criminal investigation, not simply an administrative proceeding. The applicants referred on several occasions in their statement of facts (Amended Memorandum of Fact and Law of the applicants, filed on August 19, 2002) to the cross-examination of Faribault on his affidavit.

[19]            The applicants indicate that Faribault's answers reveal SI to be a division which executes criminal investigation programs to investigate, penalize and recommend prosecution of taxpayers for deliberate evasion practices. In this case, Faribault's responsibility was to investigate the applicants for the purpose of gathering evidence of a criminal offence and to take steps for the prosecution of the applicants under s. 239 of the Act.

[20]            The respondent did not apply for a search warrant, since they did not have reasonable and probable grounds to believe that an offence had been committed. Instead, they issued the Requirement to obtain a search of the documents of the applicants without a warrant. The lack of a judicial authorization prior to issuing the Requirement, and the failure of the respondent to specify whether copies or originals of the documents mentioned in the Requirement were wanted are also facts that are pertinent to the argument that the Requirement violates s. 8 of the Charter.

[21]            The Supreme Court of Canada stated in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, that a requirement issued under the predecessor of s. 231.2 was a seizure. The Court did not find that it was an unreasonable seizure of the kind that would violate s. 8; however, that case is distinguishable from the present case. In McKinlay, supra, the requirement was issued in the context of a purely regulatory matter, whereas this Requirement has been issued in the context of an investigation where criminal charges are envisioned.

[22]            Létourneau, J.A. stated in Bisaillon et al v. Ministre du Revenu national et al (1999), 251 N.R. 225 (F.C.A.), while dealing with an interlocutory matter, then in Bisaillon v. Ministre du Revenu national et al (1999), 264 N.R. 21 (F.C.A.), that s. 231.2 was not to be used to gather evidence for a criminal proceeding. Therefore, given the evidence in the present case, s. 231.2 cannot be used to gather evidence against the applicants for the purpose toward which Faribault is working.

[23]            The cross-examination of Faribault revealed that the primary purpose in issuing the Requirements was to gather evidence in preparation for a prosecution of the applicants under s. 239 of the Act. In Knox Contracting Ltd. v. Canada, [1990] 2 S.C.R. 338, Cory J. firmly concluded that violation of s. 239 is a criminal offence.

[24]            In [1984] 2 S.C.R. 145">Hunter v. Southam Inc., [1984] 2 S.C.R. 145, it was noted that seizures made without prior judicial authorization, such as a warrant, were deemed to be unreasonable. The Requirements were issued without prior judicial authorization, and it is up to the respondent to rebut the presumption that they are unreasonable.

[25]            The applicants submit that the Requirements were unreasonable on several grounds. In Thomson Newspapers v. Canada (Director of Investigation and Research, Restrictive Trade Practices Commission), [1990] 1 S.C.R. 425, the privacy interest in particular documents and the reasonable expectation of privacy that one could have, were discussed by La Forest J. In the present case, a high expectation of privacy exists, particularly in light of the criminal nature of the investigation. In addition, the high expectation of privacy to which the applicants claim to be entitled is supported by a finding with respect to bank records in R. v. Dial Drug Stores Ltd. (2001), 52 O.R. (3d) 367 (Ont C.J.).

[26]            If prior judicial authorization is not obtained, the seizure is not valid, and cannot be made valid by asking a court to validate the search after it has taken place. So said the Supreme Court of Canada in Southam, supra, and R. v. Dyment, [1988] 2 S.C.R. 417 and the Federal Court of Appeal in Canada (Minister of National Revenue) v. Kruger Inc., [1984] 2 F.C. 535.

[27]            The respondent used s. 231.2 to circumvent the requirement of prior judicial authorization that s. 8 imposes. The respondent knew that it could not obtain such authorization because it did not have reasonable and probable grounds to obtain that authorization. They are therefore using s. 231.2 of the Act to do indirectly what they cannot do directly to get evidence for a charge under s. 239. In R. v. Norway Insulation Inc., (1995) 23 O.R. (3d) 432 (Ont. Gen. Div.), the Court noted that the provision permitting the issuance of requirements was meant to assist in audits to ensure compliance with the Act, not as a tool to gather evidence for a criminal prosecution.

[28]            The respondent admitted, through the cross-examination of Faribault, that the Requirements were vague and imprecise with respect to what was needed. This demonstrates the unreasonableness of the requirements and the need for prior judicial scrutiny. The circumstances in the present case do not justify the issuance of the requirement without prior judicial authorization. The situation is not urgent. Therefore, the respondent cannot rebut the presumption of unreasonableness.

[29]            The applicants understand that the respondent sees Del Zotto v. Canada, [1999] 1 S.C.R. 3, rev'g [1997] 3 F.C. 40 (F.C.A.) [hereinafter "Del Zotto (S.C.C.)"] as approving the use of regulatory investigation provisions of the Act even when investigating criminal or quasi-criminal offences.

[30]            However, the ruling in R. v. Saplys (1999), 132 C.C.C. (3d) 515 (Ont. Gen. Div.) suggests that Del Zotto (S.C.C.), does not suggest that a regulatory audit can be conducted to further a criminal investigation without engaging Charter rights. The applicants distinguish Del Zotto (S.C.C.) from the present case. They note that in Del Zotto (S.C.C.), a subpoena duces tecum had been issued to someone other than the taxpayer whose affairs were in question. In the present case, the applicants received Requirement letters addressed directly to them. The applicant cited further jurisprudence supporting this point of view.

[31]         The applicant cites passages from Dyment, supra and Thomson, supra, in support of its argument that the presumption of unreasonableness is not rebutted by the absence of physical intrusion at a home or place of business. In addition, R. v. Gorenko, [1997] A.Q. No. 3206 (QL) (Que. Sup. Ct., appeal to Q.C.A. dismissed) does not support the respondent's position because in that case s. 231.1 of the Act was used in connection with a regulatory audit conducted in good faith. Additionally, in Gorenko, supra, information was gathered from a third party, not the taxpayer himself.

[32]            In the Amended Memorandum of Fact and Law which were filed December 2, 2002 upon my order, the applicants noted that the Supreme Court in 2002 SCC 73">Jarvis, supra, held that where the predominant purpose of an inquiry is to conduct an investigation aimed at criminal conduct, the full panoply of Charter rights are engaged and the use of the requirements under s. 231.2 violate the Charter rights of taxpayers.

[33]            The Court also confirmed this in 2002 SCC 74">Ling, supra, heard and decided by the Supreme Court at the same time. CCRA agents must warn taxpayers that they are under investigation for prosecution under s. 239. Otherwise, evidence gathered after the criminal investigation is found to have begun and which is found to have been obtained without such warning may be excluded.

[34]            The evidence confirms that the respondent was carrying out a determination of penal liability. A sample of the testimony of Faribault on his examination for discovery bears this out. Accordingly, Charter protections are engaged and the requirement powers of s. 231.1 were not available to the respondent.

[35]            The applicant maintains the arguments stated in its pre-hearing pleadings that the Requirements constitute a seizure as defined in s. 8 of the Charter, and that this seizure is unreasonable in the circumstances. They continue to cite McKinlay but add that 2002 SCC 73">Jarvis confirms that not all forms of search and seizure under the ITA will be valid. The need for safeguards of the individual rights of taxpayers continues to be proportional to the level of intrusion into the privacy interest of the individual.

Sections 7 and 8 - Respondent

[36]            The respondent did have reasonable and probable grounds at the time at which the Requirements were issued to obtain a warrant. He knew that two registered charities had been investigated for falsely issuing tax receipts; one of these charities pleaded guilty; the other, Collège Rabbinique de Montréal (Montreal Rabbinical College), was cleared of the charges. He also knew that the applicants did not claim donations in respect of the charity against whom a conviction under s. 239 was registered, namely "Construit toujours avec Bonté", but did claim such deductions in respect of donations to the Montreal Rabbinical College. It is in this framework of facts that Faribault knew or did not know that the reasonable and probable grounds existed.

[37]        The Supreme Court of Canada held in R. v. Collins, [1987] 1 S.C.R. 265, that the applicants have the burden of convincing the Court, on a balance of probabilities, that their Charter rights were breached.

[38]            The Minister's two arguments under s. 8 are the reasonableness of the seizures by letters of requirement in the course of a tax evasion investigation and the question of whether the Requirements are inherently vague or imprecise.

[39]            The respondent discusses McKinlay, and Thomson, which were released concurrently by the Supreme Court of Canada. In McKinlay, Wilson J. noted that although the power to compel production of documents by a requirement letter was a seizure within the meaning of s. 8, it did not constitute an unreasonable seizure. The nature of our tax system, which functions based on self-assessment, requires that taxation authorities need wide powers of supervision, which allow them to review the returns and records of a taxpayer whether or not there are reasonable grounds to believe that the Act has been violated.

[40]            In Thomson, Wilson J. expressed her dissenting view that the subpoena in that case violated the Charter because it required documents in the context of a violation of competition law, which she considered a criminal investigation. However, she was of the view the reasonableness of the requirement to produce documents in McKinlay was supported by the vulnerability of the self-assessment scheme to abuse and the need to permit the investigation of such conduct.

[41]            In addition, La Forest, L'Heureux-Dubé and Sopinka JJ. wrote brief concurring reasons in McKinlay and, unlike Wilson J., held the view that s. 8 was not violated in Thomson.

[42]            In a tax case such as the present case, the reasoning presented in the above cases should apply because the investigative powers laid out in the ITA serve a dual purpose; namely, they allow for the investigation of a tax evasion offence as well as a tax assessment on a civil basis. On the other hand, the competition law statute in Thomson was purely penal in nature, and the evidence gathered in Thomson was sought for the sole purpose of determining whether an offence under the Combines Investigation Act (now the Competition Act, R.S. 1985, c. C-34), had been committed.

[43]            In the period that followed, two contradictory lines of cases have developed. Some courts have taken the view that once a taxpayer is suspected of tax evasion offences, CCRA is considered to have begun a criminal investigation and can no longer use s. 231.1 to examine books and records, order document production under s. 231.2, or hold an inquiry pursuant to s. 231.4. Section 8 applies in full and prior authorization is needed, without variation from the prior authorization criteria from Southam.

[44]            The other line of cases holds that search warrants must be obtained when reasonable and probable grounds to believe that a tax evasion offence has been committed are present. This also precludes use of the sections cited in the previous paragraph.

[45]        The respondent submits that both of these lines of cases were wrongly decided as the Courts that decided them did not consider s. 8 rights in the proper context. Many of the cases did not identify the person's expectations of privacy under the regulatory scheme in question, or failed to give sufficient weight to the low degree of intrusiveness of the mechanism provided by statute for the gathering of evidence. The decision of Strayer J.A. in Del Zotto v. Canada (Minister of National Revenue), [1997] 3 F.C. 40 (C.A.) [hereinafter called "Del Zotto (F.C.A.)"] is highlighted for correctly considering such factors. The respondent goes on to note the factors that should be considered in the case at bar.

[46]            The first of these factors is the nature and purpose of the Act. It is a regulatory statute that governs the collection of the most important source of the operating revenue of the federal government. The self-assessment nature of the tax system requires honest and full disclosure, and broad powers to verify compliance with the regulatory scheme in order to protect the integrity of the system against those who would unfairly take advantage of it. To that end, a taxpayer who reports a given amount of income or who claims a deduction must expect that he can be asked to support such claims with documentary proof. The Act spells out a requirement to keep records. Accordingly, the privacy expectations of the taxpayer with respect to these books and records are low. Such an expectation does not increase by reason of the investigation of a tax evasion offence under s. 239.

[47]            As stated by Strayer J.A. in Del Zotto (F.C.A.), this type of offence is not criminal in nature for the purposes of s. 8 of the Charter. It is to ensure compliance with the self-reporting mechanisms provided in the Act. This is supported by academic studies which support the position that penalties for tax evasion are a factor in promoting compliance with fiscal laws.

[48]            The degree of intrusiveness of the Requirement is the next factor that the respondent addresses. Although the letter requiring production of a document, is a seizure under s. 8 of the Charter, it is not unreasonable. It is, according to Wilson J. in McKinlay, the least intrusive means of monitoring compliance. It does not involve physical presence in the home or business premises of a taxpayer. The respondent points to body searches and inspections of premises as examples of procedures that are more intrusive and require greater scrutiny in light of the provisions of s. 8.

[49]            The lack of intrusiveness must be considered in a s. 8 analysis in order for the analysis to be considered a proper one. The investigation of a tax offence under s. 8 or the existence or absence of reasonable and probable grounds are therefore immaterial considerations and therefore do not foreclose the use of less intrusive investigative powers when available.

[50]            The respondent cites judicial supervision as another factor to be considered in the s. 8 analysis, noting that, like the subpoenas in Del Zotto (F.C.A.), a requirement letter can be challenged by way of an application for judicial review before the Federal Court (Trial Division).

[51]            With respect to vagueness, the respondent submits that the letters themselves were not inherently imprecise or vague. Their meaning is clear when read in conjunction with s. 231.5 of the Act, which allows CCRA to make copies of documents submitted. Since the letter did not specify anything other than originals, it ought to have been understood that originals, not copies, were requested. The letters were therefore not vague and did not therefore violate s. 8 on this basis.

[52]        The Minister's amended pleadings emphasized that Faribault was assigned to investigate the returns of the applicants following the completion of an investigation by a colleague into the legitimacy of donations made to at least two registered charities to whom deductible donations were allegedly made by the applicants. SI not only investigates tax evasion offences, but also, like the Audit Division, assesses tax, interest and penalties that taxpayers owe under the ITA.

[53]            In preparing its Amended Memorandum of Fact and Law pursuant to the December 2, 2002 order, the applicant replaced its submissions on the question whether the Requirements violated section 8 because they were issued in the course of a tax evasion investigation with submissions on sections 7 and 8 and the predominant purpose of the enquiry.

[54]        The submissions made by the Minister on the "predominant purpose" test highlighted in 2002 SCC 73">Jarvis and 2002 SCC 74">Ling, began by noting that section 7 does not apply to corporations. Corporations cannot enjoy life, liberty or security of the person. The Supreme Court so held in British Columbia Securities Commission v. Branch, [1995] 2 S.C.R. 3. The corporate applicants, that is those other than Sandler and Kligman, can rely only on s. 8.

[55]            In 2002 SCC 73">Jarvis and 2002 SCC 74">Ling, the Supreme Court held that the CCRA can use its requirement powers under s. 231.2 of the ITA up to the point at which the predominant purpose of an inquiry becomes the determination of the penal liability of a taxpayer. The finding of "predominant purpose" is a question of mixed fact and law which must be determined using a contextual approach. Such an approach considers all factors that bear upon the nature of the inquiry.

[56]            It is the decision of the CCRA as an institution, rather than that of an individual investigator, that determines whether a clear decision to pursue a criminal investigation has been made.

[57]            In this case, Faribault personally decided to start an investigation further to his suspicions of tax evasion, but that does not show that CCRA made a clear institutional decision in this regard. The underlying facts show that a "reasonable investigator" could not reach a clear decision. The respondent uses the term "reasonable investigator" with reference to case law which dealt with the reasonable grounds of a police officer to believe that he can make an arrest. The respondent cited R. v. Storrey, [1990] 1 S.C.R. 241, as the case from which this line of analogy is generated.

[58]            In this case, the matter was within the hands of SI, but it was not sent there from the Audit Branch with a recommendation that penal liability be examined. This case differs from 2002 SCC 73">Jarvis and 2002 SCC 74">Ling in this regard. The case is said to have been an "offspring" of a failed SI investigation into particular charities. That file was already at SI.

[59]            Faribault had no information to constitute reasonable grounds to believe that the applicants had committed a tax evasion offence. He knew only that the applicants claimed deductions or credits for donations to charities that had not been prosecuted for tax evasion in relation to donations. In addition, neither CCRA nor Faribault abandoned the possibility of civil tax assessments with regard to the applicants. The examination of Faribault on discovery shows this. These factors show that the determination of penal liability was not the predominant purpose of the activities of SI with regard to these applicants.

[60]            In 2002 SCC 73">Jarvis, the Court identified a non-exhaustive list of factors that could assist in determining whether the predominant purpose of an investigation was to look for criminal conduct. Among the factors applicable here were whether authorities had reasonable grounds to lay charges and whether their general conduct was consistent or inconsistent with the pursuit of a criminal investigation.

[61]            The other factor applicable here is whether the evidence sought is relevant to taxpayer liability generally or only to the penal liability of the taxpayer. The other factors were related to compliance audits performed by auditors and were said by the respondent not to be applicable to this case.

[62]            In light of these factors, the Minister reiterated that the investigation was conducted by Faribault because related files remained fortuitously in the hands of SI, and he was not acting with the predominant purpose of determining penal liability. The documents requested were sought to determine tax liability generally as opposed to a specific search for penal liability. The holdings in 2002 SCC 73">Jarvis and 2002 SCC 74">Ling are therefore not a barrier to the validity of the Requirements.

[63]            In the alternative, the respondent plead that the predominant purpose test is not applicable upon judicial review as it applies only to exclude evidence under subsection 24(2) of the Charter in the context of a criminal trial. The respondent cite passages from 2002 SCC 73">Jarvis and 2002 SCC 74">Ling in support of this submission. They conclude that application of the predominant purpose test would be premature as the documents could be used only for assessment of tax liability in a civil context and may ultimately never be used in a criminal prosecution.

[64]        The respondent maintains that the letters are not so vague as to violate s. 8 and therefore should not be quashed due to vagueness. Submissions on this point were made in the pre-hearing pleadings of the respondent.

Section 24 - Applicants

[65]            Since the respondent seized or attempted to seize documents in violation of s. 8, the Requirements ought to be quashed. The quashing is a remedy that is available to the Court pursuant to subsection 24(1) and is one that should be applied here. Furthermore, evidence obtained as a result of this breach should be excluded, as its admission would bring the administration of justice into disrepute.

[66]            The applicants note that they are not challenging the constitutionality of the provision itself; they are questioning whether the Requirements in particular are authorized by s. 231.2 in light of the overall context and the information sought.

[67]            The applicants point out that in Collins, supra, it was held that for a search to be reasonable it must be authorized by law, the law itself must be reasonable and the manner in which the search is carried out is reasonable. They submit that the Requirements are not authorized by law and were issued in an unreasonable manner. In their view, "authorized by law" means what the Supreme Court said it means in R. v. Caslake, [1998] 1 S.C.R. 51: there must be a statute or common law rule authorizing the search, it must be carried out in accordance with the procedural and substantive requirements set out in that statute or rule, and the scope of the search is limited to the area and to those items for which the law has granted an authority to search. These Requirements did not meet the procedural and substantive requirements of s. 231.2 and exceeded the authority granted by that provision.

[68]            In the amended pleadings filed December 2, 2002, the applicants reiterate that this is a case in which the Requirements ought to be quashed. At the moment, there is no evidence to exclude, since the applicants have not yet complied with the Requirements. That said, it is preferable to avoid Charter breaches from the outset, as opposed to making a determination on the admissibility of evidence after it has been obtained, possibly in violation of Charter rights. The applicants have qualified their arguments in this regard by submitting that both sections 7 and 8 have been violated in a manner that justifies the quashing of the Requirements, a remedy that is open to this Court.

Section 24 - Respondent

[69]            Subsection 24(2) does not apply to this case since no evidence has yet been obtained. There is therefore no evidence that subsection 24(2) can be invoked to exclude. Subsection 24(2) is also inapplicable to the extent that these are judicial review proceedings, and that subsection only applies to proceedings in which the administration of justice may be brought into disrepute by the admission of evidence in those proceedings. The respondent does admit that the Requirements could be quashed under subsection 24(1) of the Charter if the Court finds that the Requirements violates s. 8 of the Charter.

[70]            The respondent submit that subsection 24(2) has no application to this case, as letters have not been produced. Since subsection 24(2) applies to the exclusion of evidence, and there is no evidence to exclude at this time, subsection 24(2) is inapplicable. The respondent does admit that if the "predominant purpose" test is held to apply on judicial review or if the letters of requirement are found to be so vague as to be in violation of s. 8 of the Charter, then the Requirements could be quashed under subsection 24(1).

ANALYSIS

Sections 7 and 8

[71]            The Supreme Court of Canada recently issued two decisions in which taxpayers challenged evidence gathered against them by the CCRA. These cases are 2002 SCC 73">Jarvis and 2002 SCC 74">Ling. In both cases, Charter rights were thoroughly discussed and applied.

[72]            In 2002 SCC 73">Jarvis, the taxpayer received letters from an auditor asking that books and records be made available. Subsequent information was provided by the taxpayer and his accountant. The auditor and a supervisor then met with a taxpayer to review the documents. Several months after that meeting, banking records were sent.

[73]            The taxpayer was charged with tax evasion. Evidence obtained at the meeting between the taxpayer and the tandem of the auditor and her supervisor, as well as records obtained afterward, were excluded and the trial judge granted a motion for a directed verdict of acquittal. On appeal, the reviewing Court agreed only that the records obtained after the personal meeting ought to be excluded under subsection 24(2), not the material obtained at the meeting. That Court ordered a new trial. The Supreme Court of Canada ultimately upheld this order.

[74]            The auditor and her supervisor were not very forthcoming about their contemplation of criminal charges, but that did not prevent much of the evidence that they obtained from being admissible. In a decision written for the Court by Iacobucci and Major JJ., the Supreme Court held that while taxpayers are bound to cooperate with CCRA auditors for tax assessment purposes, an adversarial relationship crystallizes between the CCRA and the taxpayer at the point at which the predominant purpose of the inquiry is the determination of penal liability.

[75]            According to the Court, the fundamental protection against self-incrimination offered by the Charter means that the inspection and requirement powers granted by subsections 231.1(1) and 231.2(1) cannot be used for the purposes of criminal investigations. Search warrants must be obtained pursuant to s. 231.3 for these purposes.

[76]            The distinction between regulatory action and criminal investigation action for the purposes of Charter application requires a contextual analysis. It is the values at stake, rather than the classification of a given approach, that matters. For example, entry onto residential property to obtain documents or information will engage a different set of rights and interests than a written demand that information be forwarded.

[77]            The Court cautioned that there is no static line that determines, for all purposes and in all contexts, when the predominant purpose of an inquiry becomes the determination of penal liability and ceases to be determination of tax liability on a civil basis, if that was previously a purpose. Iacobucci and Major JJ. do note, however, that the mere existence of reasonable grounds will not suffice to cross this threshold. Nor, however, is it necessary to wait until charges have been laid before it can be found that the predominant goal was criminal prosecution.

[78]            Likewise, the fact that SI has assumed responsibility for inquiring into the affairs of a taxpayer is one factor in the determination of the predominant purpose. It is likely a necessary precondition to a finding that the predominant purpose is determination of criminal responsibility, but the Court stated that this factor is not determinative on its own. The Court stressed that the totality of the circumstances must be taken into account.

[79]            The Court provided a useful but non-exhaustive list of factors that assist in determining whether the search for penal liability is the predominant purpose of the inquiry. It is this determination which is applied to determine if an adversarial relationship between the taxpayer and the state has been created in such a manner as to engage the full spectrum of Charter rights. The seven factors cited by the Court appear at paragraph 94 of the judgment, which appears at page 45:

(a) Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made?

(b) Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation?

(c) Had the auditor transferred his or her files and materials to the investigators?

(d) Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators?

(e) Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence?

(f) Is the evidence sought relevant to taxpayer liability generally? Or, as is the case with evidence as to the taxpayer's mens rea, is the evidence relevant only to the taxpayer's penal liability?

(g) Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance audit had in reality become a criminal investigation? [emphasis in original]

[80]            The Court proceeded to discuss the Charter consequences of investigations. It noted that the expectation of privacy is limited with regard to records that one is required to maintain and those that must be produced during an audit. There is also no derivative use immunity. This means that information validly gathered during an audit, before the predominant purpose became penal in nature, can be used by investigators after that threshold has been crossed.

[81]            It is only when the predominant purpose becomes the determination of penal liability that taxpayers must receive warnings that they are under investigation for an offence before providing evidence. This does not prevent the CCRA from carrying out an administrative audit and a criminal investigation simultaneously; however, once the criminal investigation has begun, criminal investigation techniques, including the use of warrants, must be practised, as Charter rights will apply.

[82]            The "full panoply" of Charter rights will be engaged for the protection of the taxpayer when the predominant purpose of an investigation is the determination of criminal liability: 2002 SCC 73">Jarvis, at para. 96. A consequence of this finding is that no further statements may be      compelled from the taxpayer by the use of paragraph 231.1(1)(d) for the purpose of furthering the criminal investigation. A second effect is that no written documents may be inspected or examined, except by warrant. In addition, no documents may be required from the taxpayer or any third party to assist in furthering the criminal investigation. The CCRA therefore loses the benefit of the requirement powers of subsections 231.1(1) and 231.2(1).

[83]            The Supreme Court applied the test that it developed in 2002 SCC 73">Jarvis to the finding in the companion case, 2002 SCC 74">Ling. In 2002 SCC 74">Ling, the Court upheld a decision quashing a conviction for tax evasion and ordering a new trial. Evidence gathered before and during a meeting between the taxpayer and an auditor was admissible; after that meeting, the predominant purpose had become one of establishing criminal guilt. Therefore, evidence gathered after that point without proper warning to the taxpayer was inadmissible.

[84]            As noted by the respondent, items (c), (d), (e) and (g) of the above analysis do not apply in the case before us as the Audit Section of CCRA was not involved in this matter at any time. We are therefore left with the other questions suggested by the Supreme Court. Although the list is non-exhaustive and this Court is not limited to considering these factors, I will focus the analysis on these factors to the extent that they are sufficient to allow me to dispose of this matter.

[85]            This case turns on the conduct of SI and its objectives with respect to the cases that it decides to handle. The testimony of Faribault on discovery is particularly informative in this regard. Faribault reviewed his career progression at CCRA, formerly known as Revenue Canada. He then read aloud excerpts from a CCRA directive with respect to tax evasion.

[86]            Faribault was then asked about his involvement in the present case. This is part of the exchange between Faribault and counsel for the applicants:

Q - Dans le présent dossier [...] ici, on mentionne "Où l'on soupçonne qu'il y avait eu évasion fiscale", dans le présent dossier, vous aviez des soupçons... qu'il y avait eu évasion fiscale au moment où vous avez émis les demandes péremptoires, c'est exact?

R - Des soupçons? Oui.

Q - Donc [...] et votre principale responsabilité comme enquêteur des enquêtes spéciales était [...] d'enquêter dans ce cas qui occupe les requérants ici [...]

R - Oui.

Q - [...] dans le but de recueillir des preuves de toute infraction criminelle, conformément au paragraphe 7, qui ont pu être commises, et si de telles preuves sont recueillies, de prendre les [...] des dispositions en vue de porter l'affaire devant les tribunaux en vertu de l'article 239 de la loi? [emphasis added]

R - Oui.

[87]            Counsel for the applicants then succeeded in getting Faribault to answer the following question in the affirmative, after an interjection by counsel for the respondent to ensure that the question was well understood:

Q - Dans le présent dossier, la politique du ministère était que le...résultat d'un acte d'évasion fiscale, là, par les réquerants pouvait être un acte...une accusation au criminel en vertu du paragraphe 239 de la loi [...]

(Interjection by counsel for the respondent) - Si...vous voulez dire par ça que ça peut mener au dépôt d'accusation criminelle...

Q - C'est ça.

[...]

R - Oui. Bien, ça, oui.

[88]            The examination then covered the possibilities open to the investigator. Faribault testified that he has dealt with cases which he concluded by calculating reassessments of tax liability. He stated that this has been an option for him when the evidence was insufficient to support a criminal charge of tax evasion.

[89]            However, Faribault stated that the primary purpose of the investigation regarding the applicants in the present case was to look for evidence of tax evasion:

Q - Alors, votre objectif, donc... si je comprends bien, votre objectif principal à l'égard des requérants était d'établir qu'ils aient commis une évasion fiscale, c'est ça?

A - Enquêter l'évasion fiscale, oui...

Q - Oui.

[...]

Q - Mais si évidemment, ça arrivait pas en bout de ligne, vous avez toujours l'opportunité de cotiser au civil?

A - Voilà.

Q - O.K. O.K. Mais vous êtes pas (sic) en train de me dire que votre objectif principal dans le dossier ici, c'était simplement d'établir des cotisations d'impôt.

A - Non [...]. (Emphasis added.)

[90]            The evidence on the record as a whole leads to the conclusion that the predominant purpose of the investigation of CCRA, from its outset, was prosecution of the applicants for tax evasion and eventual imposition of penal sanctions against them. The statements on discovery by Faribault are not the only indicia of this predominant purpose; they are simply among the most succinct elements of evidence which support this conclusion. Accordingly, I find that the predominant purpose of the investigation was prosecution of the applicants for tax evasion.

[91]            In 2002 SCC 73">Jarvis, the Supreme Court noted that where the s. 7 requirements of fundamental justice are engaged by a finding that the predominant purpose of an investigation is penal in nature, self-incrimination is the primary principle of fundamental justice on which the determination will be based. However, the Court added that protection against self-incrimination does not mean an absolute ban on requirements to provide information. The right of a person not to provide information adverse to his liberty interest must be balanced against the opposing principle of fundamental justice which posits that relevant evidence should be available to the trier of fact in the search for the truth.

[92]            With these conflicting principles in mind, I am inclined to follow the findings in 2002 SCC 73">Jarvis and 2002 SCC 74">Ling that CCRA cannot expect taxpayers to provide information that has the effect of assisting the state in its efforts to deprive them of their liberty. Accordingly, I find that the rights of Kligman and Sandler would be compromised by requirements to provide information to further an investigation which is geared mainly toward assessing criminal liability.

[93]            Notwithstanding this conclusion, it is not possible in this case to proceed directly to a finding that the Charter rights engaged in ss. 7 and 8 are immediately in play and that the Requirements ought to be quashed in their entirety. In 2002 SCC 73">Jarvis and 2002 SCC 74">Ling, the Supreme Court gave ample guidance on the effects of CCRA investigations on the rights of physical persons. However, the cases did not expressly address the rights of corporations in the context of such inquiries. It is therefore necessary to address this important distinction, which is more than a mere nuance.

[94]            An adversarial relationship between the state and the taxpayer does crystallize when the predominant purpose of the inquiry is to determine penal liability. This is a valid statement whether the taxpayer is a physical person or a corporation. However, the interests engaged in that relationship will differ depending on the nature of the taxpayer. The Supreme Court alluded to this possibility in 2002 SCC 73">Jarvis and 2002 SCC 74">Ling when it stated that the scope of a Charter right will vary according to circumstances. Such variances in circumstances underscore the importance of analyzing such rights using a contextual approach.

[95]            A corporation cannot enjoy life, liberty or security of the person. Accordingly, s. 7 of the Charter does not apply to corporations. The Supreme Court has held that a corporation cannot invoke this right in order to shield itself from criminal investigation or prosecution. This rule was originally stated in Irwin Toy Ltd. v. Québec (Attorney General), [1989] 1 S.C.R. 927. The rule has been reiterated in Thomson and British Columbia Securities Commission, supra. It therefore remains only to be determined whether s. 8 can be applied in respect of the corporate applicants.

[96]            In 2002 SCC 73">Jarvis, the Supreme Court stated that the determination of whether a search or seizure is reasonable is specific to the context in which it is performed, or sought to be performed. Quoting Southam, Iacobucci and Major JJ. in their judgment in 2002 SCC 73">Jarvis stated at paragraph 69:

[...] In the application of s. 8, "an assessment must be made as to whether in a particular situation the public's interest in being left alone by government must give way to the government's interest in intruding on the individual's privacy in order to advance its goals, notably those of law enforcement" ([Southam], at pp. 159-60).

[97]            It is settled law that the Requirement pursuant to s. 231.2 is a seizure: McKinlay. The remaining contentious question regards whether that search is reasonable, and should therefore be allowed, or unreasonable, and therefore a violation of s. 8 of the Charter.

[98]            In Del Zotto (S.C.C.), the Court decided that the requirements served on a taxpayer in that case, which called for the production of documents relating to the financial affairs of another taxpayer, did not violate sections 7 or 8 of the Charter. In their brief decision, they stated that their basis for the decision was the reasons given by Strayer J.A. in Del Zotto (F.C.A.).

[99]            In the decision of Strayer, J.A., several noteworthy points were made. In particular, he carefully noted that in an investigation based on possible infractions of the Act, the Charter rights of a taxpayer are not reduced; they are simply defined with reference to their context:

[...] while the full panoply of constitutional rights are of course available to the appellants, one must consider, in the specific context, what are the relevant constitutional rights. [emphasis added]

[100]        While acknowledging the importance of the privacy interest, Strayer J.A. noted that it is conditioned by conflicting public interests.

[101]     To the extent that a taxpayer claims a deduction from the income on which he or she is taxable in order to reduce the amount of tax liability, the taxpayer must be prepared to establish his or her entitlement to that deduction. This is necessarily an intrusion into the private life of an individual, albeit one that is required in order to ensure compliance with the Act. Unduly broad claims of privacy rights could lead to abuses.

[102]        Although the decisions of 2002 SCC 73">Jarvis and 2002 SCC 74">Ling have altered to a certain extent the course of jurisprudence that was being drawn out by Del Zotto (F.C.A.) and the cases which preceded it, it is still valid to consider that the privacy interests of corporate entities will be minimal. The nature of this interest is low in comparison to that of individuals and must also be considered in light of the interest of the state in maintaining the integrity of the taxation system.

[103]        Although the corporate applicants in the case at bar are not publicly traded companies like the company in question in British Columbia Securities Commission, they still have records that they must maintain for regulatory purposes, including purposes related to the ITA. The privacy interest in these records will be minimal.

[104]        The privacy interests of corporate entities are substantially limited compared to those of individuals. The values, on which the privacy interests of individuals include recognition of, and respect for, the physical and psychological integrity of human beings, are simply not present in the case of corporate entities. Accordingly, I find that neither s. 7 nor s. 8 of the Charter would be violated by compelling the corporate applicants to comply with the Requirements as issued by the CCRA.

[105]        The applicants argued that the Requirements violated s. 8 to the extent that they were vague, and therefore unreasonable. This question turns on the clarity of the Requirements; in particular, whether the original documents were being required or whether copies of these documents are what the CCRA wanted.

[106]        I do not find the Requirement letters to be vague. The letters, particularly when read in conjunction with the ITA, state clearly that original documents are expected. Subsection 231.5(1) of the ITA states:

[107]        The mention of the probative force of the original document and the taking of copies by CCRA suggests that original documents are to be provided. Furthermore, the Requirement letters did not specify documents in any condition other than original. It is presumed that originals are to be supplied. The Requirements are therefore not so vague as to be quashed on this basis.

[108]        Having determined that the predominant purpose of the Requirements is penal in nature, and given the guidance of the Supreme Court in 2002 SCC 73">Jarvis and 2002 SCC 74">Ling with respect to the constitutionality of the gathering of evidence for criminal tax investigations, I must consider remedies available under s. 24 of the Charter. I now turn to this question.

[109]        The respondent has correctly noted that subsection 24(2) is not applicable to this application for judicial review. To the extent that the evidence sought by issuance of the Requirements has not yet been produced, there is no evidence to exclude. This subsection deals only with the exclusion of evidence. It is therefore more appropriate to turn to subsection 24(1).

[110]        Subsection 24(1) allows me to provide "such remedy as the court considers appropriate and just in the circumstances" in the event of a breach of the Charter. Technically, a Charter breach has not yet occurred since the evidence has not yet been delivered. However, I have found that the Charter rights of Kligman and Sandler will be violated if they are compelled to provide the materials sought by CCRA. It is possible to order that they provide what they have been told to provide by the Requirements, and leave it to the presiding judge to make a decision as to the exclusion or admission of that evidence in the event that Kligman and Sandler are charged with tax evasion. However, Iacobucci and Major JJ. addressed this hypothesis in 2002 SCC 73">Jarvis at para. 91:

Although the respondent argued that such situations could be remedied by the courts, we view it as preferable that such situations be avoided rather than remedied.

[111]        I agree. Accordingly, I exercise my discretion under subsection 24(1) of the Charter to quash the Requirements issued personally to Sandler and Kligman. As I have found no breach of the Charter in respect of the Requirements issued to the corporate applicants, these Requirements shall be upheld.

[112]        In light of the above considerations, this application for judicial review shall be allowed in respect of the applicants Kligman and Sandler. The Requirements issued to each of these applicants are hereby quashed. This application is dismissed in respect of the applicants MWF, Algar and Snapshot. Each of these applicants shall produce the documents listed in the Requirements within thirty (30) calendar days of the receipt of this order. Since some of the applicants were successful and others were not, no costs will be awarded.

                                                  ORDER

THIS COURT ORDERS that:

1.                    This application for judicial review shall be allowed in respect of the applicants Kligman and Sandler. The requirements issued to each of these applicants are hereby quashed.

2.                    This application is dismissed in respect of the applicants MWF, Algar and Snapshot. Each of these applicants shall produce the documents listed in the Requirements within thirty (30) calendar days of the receipt of this order.

3.                    Since some of the applicants were successful and others were not, no costs will be awarded.

__________________________

Judge