Communications Et Services (Royal) Inc. And Gérald Doyon v. Her Majesty the Queen, [1994] 1 CTC 2226, 94 DTC 1163

Lamarre Proulx, J.T.C.C.:— These two appeals were heard on common evidence. The taxation years in issue are 1982, 1983, 1984 and 1985.

At the start of the hearing, counsel for the appellants submitted to the Court a preliminary application to exclude all the evidence obtained by the Minister of National Revenue (the "Minister") in a search conducted on May 21, 1986 under a warrant issued under section 231.3 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). This section was ruled unconstitutional by the Federal Court of Appeal in 1991 in Baron v. Canada, [1991] 1 C.T.C. 125, 91 D.T.C. 5055; aff'd [1993] 1 S.C.R. 416, [1993] 1 C.T.C. 111, 93 D.T.C. 5018.

This application for exclusion of the evidence was made verbally at the start of the hearing. Counsel for the appellants had given no prior notice either to counsel for the respondent or to the Court and submitted no case law on the morning of the hearing on which to base his application for exclusion of all the evidence. In these circumstances, the Court took this application under advisement and asked that the parties proceed in the appeals in question.

The questions at issue in the instant appeals are:

1. Must the evidence on which the Minister’s assessments are based be excluded pursuant to the judgment of the Supreme Court of Canada ruling section 231.3 of the Act null and void?

2. Can the appellant, Gérald Doyon, be assessed by the Minister on the basis of an income calculated according to the net worth method?

3. Did the appellants correctly declare all their income for the taxation years 1982 to 1985 inclusive?

In order to assess Mr. Gérald Doyon for the years in issue, the Minister relied on the facts described at paragraph 6 of the reply to the notice of appeal (the "reply"), as follows:

(a) The appellant was a shareholder of the company Communications et Services (Royal) Inc. until November 29, 1982, on which date he made a rollover to his management company "Les Placements Majoca Inc.”;

(b) During the years in issue, the appellant was the senior director of Communications et Services (Royal) Inc.;

(c) Since November 29, 1982, the appellant has owned the shares of the company Communications et Services (Royal) Inc. through the management company "Les Placements Majoca Inc.”;

(d) Following the audit of Communications et Services (Royal) Inc., the Minister of National Revenue prepared a statement of net worth in order to determine the appellant's actual income during the 1982, 1983, 1984 and 1985 taxation years, as witness the schedules attached hereto and forming an integral part thereof;

(e) The officers of the Minister of National Revenue have sought to obtain information from the appellant for more than two years. The appellant has displayed a total lack of co-operation in the face of repeated requests for information from the Minister of National Revenue;

(f) The Minister of National Revenue established additional income not reported by the appellant for the 1982, 1983, 1984 and 1985 taxation years of $164,151, $144,711, $64,383 and $221,053 for each of those years respectively;

(g) Following a review of the file, the Minister of National Revenue realized that he had underestimated the appellant’s income by $7,399 for the 1984 taxation year and over-estimated the appellant’s income by $100,000 for the 1985 taxation year;

(h) The Minister of National Revenue consequently reduced the assessed income by $100,000 for the 1985 taxation year. The appellant’s additional income for that taxation year is now $121,053;

(i) The amounts of $164,151, $144,711, $64,383 and $121,053 constitute taxable income of the appellant for his 1982, 1983, 1984 and 1985 taxation years respectively;

(j) During the years in issue, the appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his income tax returns by not reporting all his sources of income, such that, if his tax payable had been computed on the basis of the information provided, it would have been less than that payable under the terms of the Income Tax Act. . . .

[Translation.]

In order to assess the appellant Communications et Services (Royal) Inc. ("Communications") for its taxation years 1982 to 1985 inclusive, the Minister relied on the facts described at paragraph 11 of the amended reply to the notice of appeal, as follows:

(a) The appellant's fiscal year runs from January 1 to December 31;

(b) Mr. Gérald Doyon was a shareholder of the appellant until November 29, 1982, on which date he made a rollover to his management company "Les Placements Majoca Inc.”;

(c) Mr. Doyon has been the appellant’s senior director for at least 15 years;

(d) Expenses totalling $18,151 in 1982, $26,838 in 1983, $41,877 in 1984 and $927 in 1985, incurred for professional fees, Visa and expense account, personal expenses, insurance and mileage (surplus claimed), were not made or incurred for the appellant in order to earn or produce income;

(e) The capital outlays affecting the value of the class 8 property and incurred respectively in 1982 and 1983 were of a personal nature:

1982
Bourget Stereo	$2,650
Michel Laurier TV	$ 690
	$3,340
1983
Eugène Francoeur Inc.	$2,150
I.C.G. Gaz Liquide	$ 562
Vidéotech Inc.	$ 564
	$3,276

and reduced the capital cost allowance of the class 8 property as shown in the schedule of adjustments;

(f) In 1983, the appellant did not take into account the fair market value of the class 10 property it disposed of in Mr. Gérald Doyon's favour. The proceeds of disposition were therefore revised from $3,515 to $6,500, which affected the allowable capital cost allowances, as the schedule of adjustments shows;

(g) In 1983, an amount was paid by "Les Produits de Béton Supreme Inc.” pursuant to an out-of-court settlement of $12,800 ($16,747.40 — $3,947 [legal expenses]) and was not entered in the appellant’s books;

(h) In 1984, an amount of $3,500 was paid to the appellant by the Société Radio Télé-Québec and was not deposited in the appellant’s bank account;

(i) The appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in its returns of income for the years 1982, 1983, 1984 and 1985;

(j) Mr. Gérald Doyon, the appellant’s president and director, did not indicate the undeclared income or the falsified invoices attesting to expenditures to the Samson Bélair accountant who audited the financial statements;

(k) Mr. Gérald Doyon, the appellant’s director, had personal knowledge of the fact that certain invoices had been falsified, that certain expenses were increased and that certain amounts were not reported in the appellant’s income tax return for the 1982, 1983, 1984 and 1985 taxation years.

[Translation.]

Evidence

The evidence adduced by the appellants consisted of the examination of a gambling companion of Mr. Doyon's in relation to trips to gambling establishments, the extended examination of Mr. Rousseau, the Minister's auditor in the instant appeals, the testimony of Mr. Doyon and, lastly, that of Mr. Doyon's former spouse, Marguerite Laguë.

The three search warrants issued on May 20, 1986 were search warrants issued by a Quebec superior court judge granting access respectively to the appellant’s commercial establishment, the appellant’s residence and to the office of the appellants’ accountants.

During the search conducted at Mr. Doyon's home, the Minister's auditors learned of bank deposits in foreign banks. The transfer of money had been made from Canadian banks. According to a memo (Exhibit A-9) from Mr. Rousseau, the Minister’s auditor in the instant case, a document that was obtained by Mr. Doyon under the Privacy Act, "The Minister had no idea that Gérald Doyon had bank accounts in the Bahamas and possessed more than $500,000 in deposit certificates".

Following this discovery, the Minister sent the Canadian banks concerned notices under subsection 231.2(1) of the Act requiring them to provide documents.

According to the Minister's auditor, it was this large unreported amount, the falsification of Communications invoices in favour of Mr. Doyon and the lack of cooperation on the latter’s part that led the Minister to determine Mr. Doyon's actual income by the net worth method.

Nothing in the evidence invalidated paragraph (e) of the reply. That paragraph describes a total lack of cooperation on the appellant's part in giving information to the Minister's auditors.

Mr. Doyon tried to convince the Court that, on December 31, 1981, he held cash amounts totalling $325,000 in safety deposit boxes. This sum allegedly consisted of an amount of $150,000 accumulated over the years which Mr. Doyon called "old earned money", and an amount of $175,000 representing gambling winnings in Las Vegas. A gambling companion of Mr. Doyon, Mr. Léonard Dorey, testified that Mr. Doyon was a great gambler. On this point, he submitted a statement signed on March 19, 1990 (Exhibit 1-1). That statement says that, from 1980 to 1984, he went to Las Vegas, Nevada, with Mr. Doyon, that he was unable to state specific amounts, but that the approximate amounts of his total winnings were in the order of five figures.

With respect to Communications, counsel for the appellant informed the Court that, with regard to paragraph (d) of the reply, the appellant did not dispute the part of tne amounts added to its income under criminal proceedings instituted against it and in which guilty pleas had been entered. These amounts appear in Exhibit A-2, and are amounts of $10,032 for the 1982 taxation year, $17,146 for 1983 and $12,532 for 1984.

There was dispute concerning other expenses claimed by Communications and disallowed by the Minister as being Mr. Doyon's personal expenses. They included, in particular, expenses incurred as entertainment expenses on Saturdays and Sundays, expenses for a life insurance premium and professional fees. Apart from Mr. Doyon's testimony, there was no written evidence or other testimonial evidence on the subject of these expenses.

The appellant did not dispute paragraphs (e) and (f) of the reply. With respect to the amounts mentioned at paragraphs (g) and (h) of the reply, Mr. Doyon told the Court that he did not believe he had to include them in computing Communications' income and that they should therefore not be included in computing the penalty.

It should be noted that Communications' accountant did not testify. Communications was a large business specializing in radio communications systems for businesses, industries and building contractors. The business's head office was located in Sherbrooke, with subsidiaries in Montréal, Trois- Rivières, Quebec City and in Beauce. The business owned a number of communications towers, as well as several vehicles containing communications units. This business, like every business of this size, had an accounting and bookkeeping service. However, neither the accountant employed by the business, Mr. Lalancette, nor any other secretarial employee came and explained the circumstances surrounding the points at issue.

As regards the testimony of Mr. Rousseau, the Court was impressed by his knowledge of the case and his meticulous work.

Arguments

Counsel for the appellants relied mainly on his application for exclusion of the evidence pursuant to the finding that section 231.3 of the Act is unconstitutional and on the validity of the use of the net worth method.

In Baron, cited above, the Federal Court of Appeal, by its order, quashed the search warrants and ordered that the documents seized under the warrants be returned. Since the appellants did not argue that the remedy granted by the Court of Appeal should be amended, the Supreme Court of Canada did not consider that it had been asked to rule on the question of a remedy other than that which had been granted by the Federal Court of Appeal.

What is requested in the instant case, under section 24 of the Canadian Charter of Rights and Freedoms (the "Charter") is not the return of the documents, but rather the exclusion of all of the evidence obtained by the Minister.

Section 24 of the Charter reads as follows:

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.

Counsel for the appellants referred to the following judgments:

Lagiorgia v. The Queen, [1987] 1 C.T.C. 424, 87 D.T.C. 5245;

The Queen v. Peel Air Services, [1993] 1 C.T.C. 71, 92 D.T.C. 6553 (Ont. Ct.);

Hatzinicoloau v. M.N.R., [1987] 1 C.T.C. 365, 87 D.T.C. 5191 (S.C.O.).

He referred, in particular, to the following passage from the Federal Court of Appeal judgment delivered by Hugessen, J. in Lagiorgia, cited above, at page 426 (D.T.C. 5246-47):

In our view, it would be difficult to think of any more appropriate remedy for the unreasonable and therefore illegal seizure of property than to order its immediate return to its rightful owner and lawful possessor. Anything less negates the right and denies the remedy. The only circumstances which suggest themselves to us as justifying a Court in refusing such an order would be where the initial possession by the person from whom the things were seized was itself illicit, e.g. in the case of prohibited drugs or weapons. While there may be other cases, there can be no doubt in our minds that when the Crown seeks, as in effect it does here, to profit from a Charter-barred seizure it bears a very heavy burden indeed. . . .

It is common ground here that the Charter, the supreme law of the land, has been breached. We cannot read subsection 24(1) as giving a discretion to hold that such breach may be overlooked in order to facilitate a simple prosecution for tax evasion or price maintenance.

Counsel for the respondent referred to the Supreme Court of Canada judgment in R. v. Collins, [1987] 1 S.C.R. 265, 38 D.L.R. (4th) 508, more particularly to the passages of the judgment delivered by Lamer, J. at pages 283-85 (D.L.R. 525-27).

In determining whether the admission of evidence would bring the administration of justice into disrepute, the judge is directed by subsection 24(2) to consider “all the circumstances". . . . The factors that the courts have most frequently considered include:

— what kind of evidence was obtained?

— what Charter right was infringed?

— was the Charter violation serious or was it of a merely technical nature?

— was it deliberate, wilful or flagrant, or was it inadvertent or committed in good faith?

— did it occur in circumstances of urgency or necessity?

— were there other investigatory techniques available?

— would the evidence have been obtained in any event?

— is the offence serious?

— is the evidence essential to substantiate the charge?

— are other remedies available?

It is clear to me that the factors relevant to this determination will include the nature of the evidence obtained as a result of the violation and the nature of the right violated and not so much the manner in which the right was violated. Real evidence that was obtained in a manner that violated the Charter will rarely operate unfairly for that reason alone. The real evidence existed irrespective of the violation of the Charter and its use does not render the trial unfair. However, the situation is very different with respect to cases where, after a violation of the Charter, the accused is conscripted against himself through a confession or other evidence emanating from him. The use of such evidence would render the trial unfair, for it did not exist prior to the violation and it strikes at one of the fundamental tenets of a fair trial, the right against self-incrimination. . . . It may also be relevant, in certain circumstances, that the evidence would have been obtained in any event without the violation of the Charter.

There are other factors which are relevant to the seriousness of the Charter violation and thus to the disrepute that will result from judicial acceptance of evidence obtained through that violation. As Le Dain, J. wrote in R. v. Therens, [1985] 1 S.C.R. 613, 18 D.L.R. (4th) 655 at page 652 (S.C.R.):

The relative seriousness of the constitutional violation has been assessed in the light of whether it was committed in good faith, or was inadvertent or of a merely technical nature, or whether it was deliberate, wilful or flagrant. Another relevant consideration is whether the action which constituted the constitutional violation was motivated by urgency or necessity to prevent the loss or destruction of the evidence.

[Emphasis added.]

She also referred to the Supreme Court of Canada judgment in R. v. Généreux, [1992] 1 S.C.R. 259, more particularly to the following passage from the judgment delivered by Lamer, J. at page 312.

On the reasoning of this Court in R. v. Collins, [1987] 1 S.C.R. 265, 38 D.L.R. (4th) 508, and in particular in R. v. Strachan, [1988] 2 S.C.R. 980, I agree with the courts below that this evidence was properly admitted at trial. The evidence in question is real evidence, which pre-existed the violation of section 8, as opposed to evidence emanating from the accused, which was generated by the violation. There can be no question that the evidence was essential to substantiate a very serious criminal charge. Moreover, while the procedure followed by the police was unacceptable, there was a good faith attempt to comply with a procedure which was evidently believed to be correct.

For these reasons, in my opinion, the exclusion, rather than the admission, of the impugned evidence would have brought the administration of justice into disrepute. Consequently, this ground of appeal fails.

Relying on the tests developed in Collins, supra, I am of the view that there are no grounds to exclude the evidence found by the Minister in the search. The existence of the foreign bank accounts is a material piece of evidence which existed before the search. That evidence did not come from the taxpayer's admission. Furthermore, the warrants were issued by a Superior Court judge and were requested and executed in good faith; a power of inspection in places of business exists under the Act; and once the knowledge of the foreign bank accounts was acquired, the evidence was obtained through requirements for information from the banks.

Net worth method

Counsel for the appellants claimed that the courts have restricted the context in which this method may be used, in light of its particular nature and the complexity it entails. According to counsel for the appellants, use of this method will be restricted in circumstances in which a taxpayer's accounting records are lacking, in which the taxpayer does not have accounting vouchers or cash vouchers making it possible to determine his income with reasonable certainty. Counsel for the appellants claimed that it must be determined in order to justify the explanation of this method, that it was impossible to reconstitute the taxpayer's income without using such a method.

The net worth method was used in the case of Mr. Gérald Doyon, not in that of Communications. As mentioned above, it was admitted that certain expenses claimed by Communications were the appellant’s personal expenses for the years in issue. Charges were laid and guilty pleas entered (Exhibits A-2 and A-3). Furthermore, the interest from investments in foreign banks was not declared by Mr. Doyon, and no plausible information explaining how these large amounts had accumulated was given to the auditor during his investigation. The circumstances are therefore such that assessing the income by the net worth method was justified.

Mention was made of gambling winnings and money placed in safety deposit boxes. Can this explain the additional earnings of $164,151 for year 1982, $144,711 for year 1983, $64,383 for year 1984 and $121,053 for year 1985? Even if the taxpayer already had a considerable sum in his possession on December 31, 1981, that would influence only on year 1982, not on the other years. However, there was no evidence that could be accepted of the possession of a large sum on December 31, 1981. Statements uncorroborated by written documents and vague memories of continuous gambling winnings do not constitute evidence that can cause a painstaking net worth analysis to be set aside. The question may arise why one would wait until the hearing to make such statements. If the evidence is believed to be plausible and truthful, why not submit it to the auditors, supported by documents, calculations and testimony given during the investigation.

On the subject of the penalties assessed under subsection 163(2) of the Act, counsel for the appellants referred to the following passage by Strayer, J. in Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247, at page 236 (D.T.C. 6258):

The subsection obviously does not seek to impose absolute liability but instead only authorizes penalties where there is a high degree of blameworthiness involving knowing or reckless misconduct. The section has in the past been applied subjectively to taxpayers, taking into account their intelligence, education, experience, etc. and I believe this implies that an ignorance of the law which is not unreasonable for the particular taxpayer in question and the particular circumstances may be acceptable as a defence to the application of penalties. On this basis, and having regard to the fact that the onus is on the Minister to prove that the penalty should be applied, I find the evidence ambiguous and therefore conclude that the penalty should not be applied even in respect of the unreported income from interest.

[Emphasis added.]

Mr. Doyon is clearly very intelligent, educated and has a great deal of experience. Unlike the taxpayer in the judgment cited above who relied on his accountants, Mr. Doyon always had an active hand in his affairs, and it was he who made the decisions not to include certain amounts in computing income without consulting his accountants on this subject.

The Minister proved that sums received had wilfully not been included in the calculations when they should have been and that the cause of these omissions was the taxpayer's gross negligence.

With respect to Mr. Doyon's appeal, the inability to provide a logical explanation of the large sums deposited in foreign banks, the failure to declare interest and the falsification of Communications’ accounts in his favour amount to gross negligence.

With respect to Communications, the unreported amounts described at paragraphs (g) and (h) were not declared because Mr. Doyon preferred not to ask the accountants any questions on the subject and to appropriate them. The evidence of falsified expenses, expenses made to purchase personal property for Mr. Doyon and amounts not included in computing income and described at paragraphs (g) and (h) of the reply as a result of negligence on Mr. Doyon's part amount to gross negligence.

The penalties were correctly assessed against the appellants in the circumstances of the instant appeals.

The appeals are dismissed, with costs.

Appeals dismissed.