Regina v. Donald Kloster, [1999] 3 CTC 242

Bagnall Prov. J.:

Donald Kloster is charged with having contravened s. 239 of the Income Tax Act in two related ways with respect to his 1989 Tax Return: by making a false or deceptive statement by failing to include all of his income, and by evading or attempting to evade compliance with the Act by failing to report that same amount of income.

Mr. Kloster has made application under s. 24(2) of the Charter of Rights and Freedoms for an order excluding much of the evidence proposed to be presented by the Crown on this trial, on the basis that it was obtained in violation of his rights as guaranteed by s. 8.

The facts upon which this application is based were the subject of evidence presented during an extended voir dire. I do not propose to review the evidence in great detail, but I have considered all of it in the course of preparing this ruling. The onus is on the applicant/accused and the burden of proof is the balance of probabilities.

For the most part, the facts are not in dispute. Mr. Hansen, in the course of submissions on behalf of the applicant, suggested that I should not accept all of what was said in evidence by Ms. Del Spencer, the main witness on the voir dire. I do not agree with his characterization of her evidence as less than forthright in some areas. I concluded after hearing extensive cross examination that she was a forthright witness, subject only to the frailties in accuracy naturally occasioned by the passage of time. No credibility or reliability issues arose with respect to any of the other witnesses.

The facts upon which this application is based may be briefly set out as follows: Mr. Kloster’s tax situation was referred to the Special Investigations section of Revenue Canada by an internal memo. To put the situation informally, but not inaccurately, someone reviewing someone else’s returns thought something might be amiss. No firm details were known to Revenue Canada at the time. Del Spencer received the memo in February, 1994 and began to collect financial information about Mr. Kloster. Nothing that she did was unusual given the law and policy of Revenue Canada at that time.

In particular, Ms. Spencer caused to be issued Requirements as permitted by s. 231.2 of the Income Tax Act. Some of those Requirements were directed to banks of whom Mr. Kloster was a client. Some were directed to Mr. John Motiuk, who had acted as Mr. Kloster’s solicitor with respect to certain matters of interest to Revenue Canada. Compliance with the Requirements on the part of the banks and Mr. Motiuk resulted in the surrender of a number of relevant and incriminating documents to Revenue Canada.

No requirements were directed to Mr. Kloster personally, nor was he alerted by Revenue Canada to the service of the other Requirements.

It is agreed that none of the documents in question would have been surrendered to Revenue Canada in the absence of the compulsion of the Requirements.

In the process of preparing this decision, I have read all of the cases referred to by counsel, a complete list of which is attached as an appendix to these reason. It is unnecessary in my view to refer to each case in detail. For example, some of the authorities consider the situation that pertains where citizens have been charged with failure to comply with demands or requirements. In my view, quite different considerations are significant in that variety of case than in the case at bar.

The issues may be stated as follows:

I. Did the applicant have a reasonable expectation of privacy regarding the information contained in the documents in the hands of his lawyer and bank?

2. If so, did the obtaining of the information under the power of s. 231.2 by Revenue Canada infringe or deny the applicant’s rights as guaranteed by the Charter of Rights and Freedoms?

3. If so, should the evidence be excluded under s. 24(2) of the Charter?

The Crown takes the position that Mr. Kloster could not have had any expectation of privacy regarding the documents obtained using the power created in Revenue Canada by s. 231.2. The Crown points out that all of the documents had been exposed to some other persons, or “published”, if only to a limited extent. Many of the documents in question were created by the bank’s employees or by Mr. Motiuk and his staff and had never even been seen by Mr. Kloster, in this regard, the Crown referred to the case of United States v. Miller, 425 U.S. 435 (U.S. Ga. 1976), a decision of the U.S. Supreme Court.

In my view, the Canadian authorities support a different conclusion.

Mr. Justice Sopinka commented as follows in R. v. Plant (1993), 84 C.C.C. (3d) 203 (S.C.C.) @ 212-213:

Some indication of the parameters of the protection afforded by s. 8 with respect to informational privacy can be derived from the following passage from the reasons of La Forest J. in Dyment, supra, at p. 256, commenting on the Report of the Task Force on Privacy and Computers:

In modern society, especially, retention of information about oneself is extremely important. We may, for one reason or another, wish or be compelled to reveal such information, but situations abound where the reasonable expectations of the individual that the information shall remain confidential to the persons to whom, and restricted to the purposes for which it is divulged, must be protected.

Consideration of such factors as the nature of the information itself, the nature of the relationship between the party releasing the information and the party claiming its confidentiality, the place where the information was obtained, the manner in which it was obtained, and the seriousness of the crime being investigated, allow for a balancing of the societal interests in protecting individual dignity, integrity and autonomy with effective law enforcement. It is, then, necessary to apply this contextual approach to the facts of the case at bar.

The United States Supreme Court has limited application of the Fourth Amendment (the right against unreasonable search and seizure) protection afforded by the United States Constitution to situations in which the information sought by state authorities is personal and confidential in nature: United States v. Miller, 425 U.S, 435 (1976). That case determined that the accused’s cheques, subpoenaed for evidence from a commercial bank, were not subject to Fourth Amend- ment protection. While I do not wish to be taken as adopting the position that commercial records such as cancelled cheques are not subject to s. 8 protection, I do agree with that aspect of the Miller decision which would suggest that in order for constitutional protection to be extended, the information seized must be of a “personal and confidential” nature. In fostering the underlying values of dignity, integrity and autonomy, it is fitting that s. 8 of the Charter should seek to protect a biographical core of personal information which individuals in a free and democratic society would wish to maintain and control from dissemination to the state. This would include information which tends to reveal intimate details of the lifestyle and personal choices of the individual. The computer records investigated in the case at bar while revealing the pattern of electricity consumption in the residence cannot reasonably be said to reveal intimate details of the appellant’s life since electricity consumption reveals very little about the personal lifestyle of private decisions of the occupant of the residence.

The Supreme Court of Canada has set out in succinct form a suggested paradigm of analysis respecting the issue. It is found in the case of R. v. Edwards (1996), 104 C.C.C. (3d) 136 (S.C.C.) @ p. 150-1 where Mr. Justice Cory wrote:

A review of the recent decisions of this court and those of the United States Supreme Court, which I find convincing and properly applicable to the situation presented in the case at bar, indicates that certain principles pertaining to the nature of the s. 8 right to be secure against unreasonable search or seizure can be derived. In my view, they may be summarized in the following manner:

I. A claim for relief under s.24(2) can only be made by the person whose Charter rights have been infringed: see R. v. Rahey (1987), 33 C.C.C. (3d) 289 at p. 308, 39 D.L.R. (4th) 481 at p. 500, [1987] 1 S.C.R. 588.

2. Like all Charter rights, s. 8 is a personal right. It protects people and not places; see Hunter v. Southern Inc., supra.

3. The right to challenge the legality of a search depends upon the accused establishing that his personal rights to privacy have been violated: see Pugliese, supra.

4. As a general rule, two distinct inquiries must be made in relation to s. 8. First, has the accused a reasonable expectation of privacy? Second, if he has such an expectation, was the search by the police conducted reasonably?; see Rawlings, supra.

5. A reasonable expectation of privacy is to be determined on the basis of the totality of the circumstances; see Colarusso, supra, at pp. 215-16 C.C.C., pp. 320-21 D.L.R., and Wong, supra, at p. 465.

6. The factors to be considered in assessing the totality of the circumstances may include, but are not restricted to, the following:

(i) presence at the time of the search;

(ii) possession or control of the property or place searched:

(iii) ownership of the property or place;

(iv) historical use of the property or item;

(v) the ability to regulate access, including the right to admit or exclude others from the place;

(vi) the existence of a subjective expectation of privacy; and

(vii) the objective reasonableness of the expectation.

See United States v. Gomez, 16 F.3d 254 (8th Cir. 1994) at p. 256.

7. If an accused person establishes a reasonable expectation of privacy, the inquiry must proceed to the second stage to determine whether the search was conducted in a reasonable manner.

A very recent decision of the Federal Court of Appeal deals specifically with banking records. Mr. Justice Linden said in Schreiber v. Canada (Attorney General) (1997), 144 D.L.R. (4th) 711 (Fed. C.A.) @ 732-4, after referring to segments of À. v. Plant and R. v. Dyment [infra] included in this judgment:

In contrast, the bank records sought in the Letter of Request, unlike electricity consumption records, reveal important and personal details about an individual. The heightened privacy interest in banking records was described by Puddester J. in À. v. Eddy (1994), 119 Nfld. & P.E.LR. 91 (Nfld. S.C.T.D.) at 126 as a “substantially greater expectation of privacy relating to the records of an individual’s personal financial position, and the pattern of the individual’s operating on his or her bank account’’, Puddester J. found in that case that warrantless inquiries by the police at a bank regarding the identity of a bankbook holder and about a major transaction which took place on that account did interfere with a reasonable expectation of privacy. In part because of this privacy interest, the relationship between a customer and his or bank is characterized at common law by a duty of confidentiality and secrecy (see M.H. Ogilvie, “Banker and Customer Revisited” (1986), 65 Can. Bar Rev. 3 at 6). This duty was also discussed by McCombs J. in R. v. Lillico (1994), 92 C.C.C. (3d) 90 (Ont. Ct. (Gen. Div.)) at 94-95:

[T]he bank ... has an obligation to keep the information confidential. It is an implied term of the contract between a bank and its customer that the bank will not divulge information about the state of the customer’s account or any of the transactions, or any information relating to the customer acquired through the keeping of the account, unless the bank is either compelled by a court order to do it, or the circumstances give rise to the public duty of disclosure: see Tournier v. National Provincial and Union Bank of England, [1924] 1 K.B. 461 (C.A.).

A bank is not at liberty to freely disclose information about its customer’s accounts and bank activity to members of the public or the police. The information cannot be obtained by any member of the public wishing to find out more about the banking affairs of the respondent.

The application of these principles to the facts in the case at bar leads to the conclusion that for all of the material seized pursuant to the Requirements issued by Revenue Canada, Mr. Kloster had a reasonable expectation of privacy. The documents, strictly speaking, were not his property. Some of them he had caused to be published, or would have expected to be disseminated to a limited degree. But together they constituted, and must have been intermingled with, information which can only be characterized as private. The very fact that neither the banks nor Mr. Motiuk would have disclosed these documents to Revenue Canada without the Requirements, strongly supports this conclusion. A common sense consideration of the reaction of the reasonable right-thinking citizen to the suggestion that his or her bank might communicate details of his or her financial circumstances to Revenue Canada strongly supports this conclusion. That the relationship between lawyer and client and between banker and client at common law is confidential, strongly supports this conclusion.

The matter has been considered by a number of courts.

In Le Comte v. British Columbia, March, 1990, Viet. Reg. No. 90 1521 [reported at (1990), I C.R.R. (2d) D-1 (B.C. S.C.)], Madame Justice Hud- dart (as she then was) said @ p. 5:

1 am of the view that a person’s expectation of the privacy of his personal financial records should not be less worthy of protection than his oral communications by telephone or the contents of his rented post office box. The common law has always inferred a term of confidentiality in every bank/customer contract. That implied term persuades me that a customer of a bank gives information to that bank with the ordinary expectation that the bank will keep it private unless he consents to its disclosure for a particular purpose or a Court otherwise orders.

Mr. Justice Tysoe of the B.C.S.C. reached the same conclusion in Mas- sicotte v. British Columbia (1995), 31 C.R.R. (2d) 77 (B.C. S.C.) as did Judge Vaillancourt in R. v. Soviak March 24 1997 [reported at (1997), 5 G.T.C. 7130 (Ont. Prov. Div.)].

I am guided as well by the comments made in R. v. Dyment, [1988] 2

S.C.R. 417 (S.C.C.) @ p. 429-30:

Finally, there is privacy in relation to information. This too is based on the notion of the dignity and integrity of the individual. As the Task Force put it: “This notion of privacy derives from the assumption that all information about a person is in a fundamental way his own, for him to communicate or retain for himself as he sees fit.” In modern society, especially, retention of information about oneself is extremely important. We may, for one reason or another, wish or be compelled to reveal such information, but situations abound where the reasona- ble expectations of the individual that the information shall remain confidential to the persons to whom, and restricted to the purposes for which it is divulged, must be protected.

The next issue is whether or not the Applicant has demonstrated an infringement or violation of his rights under s. 8 of the Charter.

During the presentation of evidence as well as submissions, counsel focused on the purpose of Revenue Canada’s actions in respect of Mr. Kloster as a critical factor in determining whether or not his s. 8 rights had been denied. Indeed, many of the cases referred to focus on that issue as well. I have considered all of the material placed before me and have concluded that this issue is not as critical as it seems at first glance.

In my view, the question may more properly be framed as whether the use at a criminal trial of evidence discovered by government agents employing the power provided by s. 231.2 infringes any Charter guaranteed rights of the accused.

The agents of Revenue Canada often use their audit power to determine whether or not an individual has evaded tax liability. In doing so, the agents may have mixed criminal and civil investigatory purposes. In reality it is often impossible to untangle the one purpose from the other. As well, experienced agents in particular may correctly opine on the basis of very little information that a crime has been committed and set out to discover evidence making use of the audit power. Indeed, whether or not the opinion is correct, for any further step to be taken, the audit power often must be used. It is a necessary tool in the hands of the authorities who are responsible for the administration of our honour system of taxation.

Indeed, Ms. Spencer alluded to this reality a number of times in her evidence. To paraphrase what she said, “When I set about issuing these requirements, I did not know the address of the property, nor the owner, nor the precise income from its sale nor anything about relevant expenses. If it turned out at the end of my investigation that there had been no income, I’d have resolved it civilly and closed it down.”

Assuming for a moment that the objectives of Revenue Canada could be separated into discrete categories of criminal investigation and civil audit, there would still be an issue as to the admissibility of the evidence obtained at a later criminal trial.

Unless it is suggested that the inculpatory fruit of an audit without criminal investigatory overtones (i.e. an “innocent” audit) might be admissible at a trial of relevant criminal charges, then the issue is only relevant to the good faith factor under the s.24(2) analysis. What matters in determining the reasonableness of the seizure is not what Revenue Canada may have suspected at the time of the issuance of the Requirements, but rather, whether on a criminal trial the rights of the accused are infringed by the admission of documents seized without consent or prior judicial scrutiny. It is the use to which the seized items are proposed to be put which triggers the application of the Charter, not what was in the minds of the agents of the government at the time of the search.

If it were the case the purpose of Revenue Canada was a determining factor, then a citizen ought to be able to resist compliance with Requirements on the basis that his or her s. 8 rights are infringed when Revenue Canada uses its audit power for a criminal investigation purpose. It is clear that this is not the case (R. v. Lin (May 28, 1997), Doc. Vancouver CC960762 (B.C. S.C.)).

In my view, the protection of s. 8 of the Charter in circumstances such as these is not aimed at curtailing the state’s power to discover the citizen’s tax liability, but rather at the ultimate use of whatever is disclosed during the audit process to incriminate the applicant in proceedings with penal consequences.

One of the dangers of focusing on an analysis of Revenue Canada’s motives in wielding the audit power is alluded to in R. v. Norway Insulation Inc. (1995), 95 D.T.C. 5328 (Ont. Gen. Div.) @ 5333. Mr. Justice La Forme said:

Judge Ratushny’s position in Coghlan is that,

The answer again lies, in my opinion, in the determination of what a reasonable search or seizure is, in the regulatory context as opposed to the criminal or quasi-criminal context. So long as the searches or seizures are for the bona fide purpose of determining compliance with the Income Tax Act, whether or not Revenue Canada suspects a criminal offence during that time, then in my view a search warrant is not required. However, as soon as Revenue Canada decides to lay criminal charges, it is then that the Hunter criteria ... apply.

However and with the greatest of respect, to apply Judge Ratushny’s rationale and assessment set out above, there is, in my opinion, the very real possibility that Revenue Canada could view the authority of s. 231.1(1) of the Income Tax Act as never requiring the necessity of obtaining under any circumstance since all evidence could be obtained through specifically instructed “auditors” simply by Revenue Canada relying on their subjective view of what constitutes mere “suspicion”. Any issue of the “reasonableness” of any search or seizure as a result of such an interpretation would be a moot point.

The focus on the reasonableness of the use in criminal proceedings of articles seized under a regulatory power, in my view removes any potential for misuse, recognizes the reality of the common purpose of audits and does not paralyze Revenue Canada in its ability to lawfully collect information about the liability of taxpayers.

As was said by Mr. J. MacGiugan in Del Zotto v. Canada (1997), 116 C.C.C. (3d) 123 (Fed. C.A.) @ 136:

Whether one conceives of the Act as regulatory legislation whose application is not in all instances governed by that fact, or, as seems better to me, as legislation with a regulatory side (audit and payment) and a criminal investigatory side, makes no difference to the realism of the judicial scrutiny as to what is really underway. In the opinion of the Court in Baron what mattered was the intrusive nature of the search in question and gathering of evidence for the prosecution of the taxpayer.

On the basis of the evidence I heard I conclude that when Ms. Spencer issued the Requirements in question, that she was engaged in a lawful inquiry into the tax liability of Mr. Kloster. She also thought he may have committed a criminal offence, but she did not have reasonable and probable grounds to believe that was the case. The searches and seizures were lawful at that point.

The next question is whether the admission of evidence obtained thereby would be an infringement or denial of Mr. Kloster’s s. 8 rights. I conclude that the admission of this evidence would infringe his rights. Lawful though these seizures were for civil purposes, there had been no prior judicial scrutiny of these searches. On the basis of the reasoning in Canada (Director of Investigation & Research, Combines Investigation Branch) v. Southam Inc., [1984] 2 S.C.R. 145 (S.C.C.) and Baron v. R. (1993), 99 D.L.R. (4th) 350 (S.C.C.), I am satisfied that such scrutiny is critical to the reasonableness of the search and seizure as guaranteed by s. 8. Mr. Justice LaForest put it this way in À. v. Colarusso (1994), 87 C.C.C. (3d) 193 (S.C.C.) @ 214:

The requirement for seizing items for the purpose of criminal law enforcement has always been set at a high level; not surprisingly - it involves the freedom of the individual. Absent exigent circumstances, there is a requirement of prior authorization by a judicial officer as a precondition to a valid seizure for criminal law purposes; see Hunter. And the minimum requirement for such authorization is that the judicial officer be satisfied that there are reasonable and probable grounds that an offense has been committed and that the search will afford evidence of that offence. This high threshold, together with the general approach set forth in Hunter ... that the function of the Charter “is to provide ... for the unremitting protection of the individual rights and liberties” sought to be pro- tected, is the proper perspective from which the situation in the present case must be assessed.

Finally, I turn to a consideration of the necessary questions under s. 24(2). The evidence obtained in this case was real evidence although there is some question as to whether it could have been obtained by Revenue Canada by means other than those employed. It is not conscriptive evidence strictly speaking, although I am satisfied that it would have been very difficult, if not impossible, for the authorities to have discovered the body of information in question via routes other than the one taken. The fairness of the trial would not be adversely affected by the admission of the evidence. There was no lack of good faith on the part of the authorities. What was done in this case was done routinely at the time and was lawful in itself.

With respect to the question of the inclusion of the evidence bringing disrepute to the justice system, Judge Fradsham had this to say in R. v. Jarvis [[1997] 7 W.W.R. 757 (Alta. Prov. Ct.)] @ p. 11:

Without doubt, Revenue Canada has a large and difficult tab in administering a self-reporting taxation system. To fulfil its monitoring mandate, Revenue Canada has been given a significant power by the provisions of section 231.1. It can demand to see documents the confidentiality of which the law would otherwise protect. The section permits Revenue Canada to make serious, and substantial intrusions into the private affairs of people in this country. While Canadians generally acknowledge the need for Revenue Canada to have such powers, I am confident that Canadians would be justifiably concerned if those powers were not confined to the specific situations for which they were granted. Personal freedom, though at times ostensibly taken for granted, is a cherished aspect of Canadian society, it is integral to many of the constitutionally entrenched rights’ found in the Charter. Canadians expect that restrictions affecting it will not exceed the minimums necessary to accomplish the societal goal being sought. Section 231.1 of the Income Tax Act effects a significant intrusion into the private lives of Canadians and therefore their personal freedom.

The issue is not whether the power granted to Revenue Canada is justified. That is not challenged. Rather, the issue is what might Canadians think of the administration of justice if it failed to confine the power of section 231.1 to that for which it was created. What might they think if the courts permitted the Crown, in prosecuting an accused, to bring into evidence documents obtained through the improper use of extraordinary powers which were granted to Revenue Canada not for the purposes of prosecution, but rather to monitor compliance with the Act?

In my view, Canadians expect those administering the justice system to guard against the improper use of power, particularly when that power is an exception to the general protection from judicially unsupervised government intrusion. Accordingly, the use of section 231.1 should be strictly confined to its intended purpose, and Canadians would likely think poorly of a justice system that per- mined those invested with the section’s significant power to use it in such a way as to avoid the safeguards (i.e.: judicial supervision of the granting of search warrants) normally applicable to investigations conducted by the state.

For these reasons I conclude that this evidence should be excluded and 1 rule accordingly.

Application granted.

Appendix

1. R. v. Edwards, [1996] 1 S.C.R. 128 (S.C.C.)

2. R. v. Feeney (1997), 146 D.L.R. (4th) 609 (S.C.C.)

3. Le Comte v. British Columbia (1990), 1 C.R.R. (2d) D-l (B.C. S.C.)

4. Massicotte v. British Columbia (1995), 31 C.R.R. (2d) 77 (B.C. S.C.)

5. R. v. Jarvis (1997), 195 A.R. 251 (Alta. Prov. Ct.)

6. R. v. Jarvis, [1997] 7 W.W.R. 757 (Alta. Prov. Ct.)

7. R. v. Lin (May 28, 1997), Doc. Vancouver CC960762 (B.C. S.C.)

8. R. v. Soviak (1997), 5 G.T.C. 7130 (Ont. Prov. Div.)

9. Schreiber v. Canada (Attorney General) (1997), 144 D.L.R. (4th) 711 (Fed. C.A.)

10. R. v. Norway Insulation Inc. (1995), 95 D.T.C. 5329 (Ont. Gen. Div.)

Appendix

1. Baron v. R. (1993), 99 D.L.R. (4th) 350 (S.C.C.)

2. Del Zotto v. Canada (1997), 116 C.C.C. (3d) 123 (Fed. C.A.)

3. R. v. Edwards (1996), 104 C.C.C. (3d) 136 (S.C.C.)

4. R. v. Fitzpatrick (1995), 102 C.C.C. (3d) 144 (S.C.C.)

5. James Richardson & Sons Ltd. v. Minister of National Revenue (1984), 84 D.T.C. 6325 (S.C.C.)

6. R. v. McKinlay Transport Ltd. (1990), 90 D.T.C. 6243 (S.C.C.)

7. R. v. Kokesch (1990), 61 C.C.C. (3d) 207 (S.C.C.)

8. R. v. Plant (1993), 84 C.C.C. (3d) 203 (S.C.C.)

9. Canadian Bank of Commerce v. Canada (Attorney General)(1962), 62 D.T.C. 1236 (S.C.C.)

10. Thomson Newspapers Ltd. v. Canada (Director of Investigation & Research) (1990), 54 C.C.C. (3d) 417 (S.C.C.)

11. United States v. Miller, 425 U.S. 435 (U.S. Ga. 1976)