R. v. Ling, [1999] 3 CTC 386

Millward J.:

The Appellant, Mr. Ling, is seeking an order under s. 24(2) of the Charter that all evidence obtained directly or indirectly through an audit conducted under the Income Tax Act is inadmissable. The Appellant argues that information obtained by Revenue Canada during the audit was statutorily compelled, thereby violating Mr. Ling’s s. 7 right against self-incrimination and that the information could be used for civil audit re-assessment purposes, but not in a criminal proceeding. The appellant also argues that the predominant purpose of the audit was in pursuance of a criminal investigation, which triggers full Charter protection, and because the investigators did not obtain search warrants, none of the evidence can be used against Mr. Ling for any purpose.

The Appellant sought a stay of proceedings under s. 24(1) of the Charter. It was submitted that a stay is appropriate because the Revenue Canada auditors shredded their working papers and notes resulting in an abuse of process and a violation of the Accused’s Charter rights.

Stay of Proceedings for Non-Disclosure of the Auditors’ Rough Notes

In seeking a stay of proceedings, Mr. Ling argued that his s. 7 right to full answer and defence had been violated as the original notes made by Mr. Pacheo and Mr. Thatcher of meetings they attended during the course of the audit had been destroyed. The learned trial judge found that no violation of the Appellant’s s. 7 right to full answer and defence had occurred, as the Crown made full disclosure of documents it had in its possession or control, as required by R. v. Stinchcombe (1995), 178 N.R. 157 (S.C.C.). According to the findings of the trial judge, the auditors destroyed the notes only after recording their contents in other documents, which were disclosed by the Crown.

The Appellant relies on R. v. Carosella (1997), 112 C.C.C. (3d) 289 (S.C.C.), for the proposition that once material which was destroyed met the threshold test for disclosure, the Accused’s Charter rights had been breached and there was no requirement to demonstrate additional prejudice. However, in À. v. Buric, [1997] 1 S.C.R. 535 (S.C.C.), the Supreme Court of Canada held that the principles in Carosella have no application where there is no evidence to justify a conclusion that there was a deliberate failure to make a record to avoid production. The principles in Buric are applicable to the case before me. No evidence was presented that would support the argument that the notes were destroyed to avoid production. The rough notes were destroyed only after the information had been transcribed and checked for accuracy. In addition, the auditors did not have any difficulty recalling the events in question, which occurred two years before the trial.

If my conclusion that the appellant’s section 7 rights were not violated is incorrect, I agree with the trial judge that a stay of proceedings is not warranted in these circumstances.

Can Information Gathered during an Audit that is not a criminal or quasi-criminal investigation be used in a prosecution under the Income Tax Act?

The appellant relies on the recent cases of R. v. Lin (May 28, 1997), Doc. Vancouver CC960762 (B.C. S.C.); R. v. Warawa (1997), 56 Alta. L.R.

(3d) 67 (Alta. Q.B.), and R. v. Kloster, (4 November 1997), Vancouver Registry 14679-01 (B.C. Prov. Ct.) [reported (1997), 98 D.T.C. 6258 (B.C. Prov. Ct.)], in arguing that it does not matter when an audit becomes a criminal investigation and that no material gathered during an audit can be used in a criminal proceeding.

In Warawa, at paragraph 136, the trial judge held:

All of the information that is given by a taxpayer during the audit is conscripted information. When used by [Special Investigations] it can result in the taxpayer being subject to criminal sanctions. When that information comes into the hands of S.I. and is used in a criminal prosecution it is tainted evidence obtained in violation of the accused’s s. 7 Charter rights. In other words audit’s conscriptive powers may only be used for audit purposes. S.I. may not use the results of those conscriptive powers unless the taxpayer has from the beginning been advised of his s. 7 rights through the proper caution.

Similar reasoning was employed by Judge Bagnall in Kloster. Even though the audit’s predominant purpose was not a criminal investigation, the evidence was excluded under s. 24(2) of the Charter as it violated Kloster’s s. 8 rights. The Provincial Court Judge found that it was the ultimate use of the information that brought s. 8 into play, not the purpose of Revenue Canada in uncovering the information.

I do not agree with the appellant that Lin stands for the same principle as Warawa and Kloster. In that case, Madam Justice Boyd, in a summary conviction appeal, agreed with the trial judge that the predominant purpose of Revenue Canada was a criminal investigation of Mr. Lin. The Court held, that in all of the circumstances, the accused was entitled to derivative use immunity regarding any information Revenue Canada uncovered. However, this decision seemed to rest on the conclusion that the investigation was criminal in nature, and not because evidence was obtained via statutory compulsion.

The appellant also submits that the recent Court of Appeal case of R. v. White (1998), 122 C.C.C. (3d) 167 (B.C. C.A.) established that R. v. Spyker (1990), 63 C.C.C. (3d) 125 (B.C. S.C.), where statutorily compelled information was excluded from a criminal proceeding, was not overruled by R. v. Fitzpatrick (1995), 102 C.C.C. (3d) 144 (S.C.C.).

The Crown relies on Fitzpatrick to support the argument that the evidence gathered through statutory compulsion can, in appropriate circumstances, be used in a prosecution under the Income Tax Act. The Crown submits that Fitzpatrick overrules Spyker, and that White is completely distinguishable from the case at bar.

Whether or not Fitzpatrick overrules Spyker, I conclude that Fitzpatrick is applicable to the facts at bar. Fitzpatrick considered the admissibility of compelled self-reporting documents in a regulatory prosecution. At p. 156, the court noted that the right against self-incrimination does not extend so far as to tie the hands of the regulatory state. In determining that the hail reports were admissible, the court found that the essential purpose of the reporting requirement wasn’t to accumulate information to use against fishers, but to provide the government with information necessary for effective regulation of the fishery. This was therefore found to be a non-adversarial relationship. The court also found that the fisher entered the ground fishery voluntarily and therefore there was no coercion exercised by the state.

There are similarities between the regulation of the fishery and the collection of income tax. As was held by Mr. Justice Vickers in R. v. Graham (1997), 121 C.C.C. (3d) 76 (B.C. S.C.), there is no direct adversarial relationship between the taxpayer and the state. A taxpayer is not required to claim any specific deductions, and when a claim is made, the taxpayer is aware that he or she must maintain the documentation that is not required to be submitted to support the deduction claimed. This is a practical reality of a self-reporting system. Thus, there is no coercion. Tax collection is a primary source of government revenue. As in the case of the fishery, the government needs accurate information about its revenues to set tax policies for future years.

The court in Fitzpatrick noted that in cases such as Thomson Newspapers Ltd. v. Canada (Director of Investigation & Research) (1990), 76 C.R.

(3d) 129 (S.C.C.) and British Columbia (Securities Commission) v. Branch, [1995] 5 W.W.R. 129 (S.C.C.) pre-existing business documents were afforded a low level of s. 7 and s. 8 Charter protection. The information requested or demanded by Revenue Canada under the Income Tax Act took the form of pre-existing documents and receipts, accordingly the reasoning in Fitzpatrick would apply a fortiori to this type of information. These documents and receipts were produced during the ordinary course of business and not because they were required under the Income Tax Act.

The appellant relies on Spyker and White. However, in those cases, the information gathered under a regulatory regime, the Motor Vehicle Act, was to be used in a prosecution under the Criminal Code. In addition, the compelled information was a statement by the accused to a person in authority after the incident that led to the criminal charge occurred. In cases involving the Income Tax Act, the information comprises pre-existing documents that the taxpayer is aware may be required to support deductions claimed or to confirm the declared amount of income.

In White, the Court of Appeal noted that it is important to determine which statute the charges arise under. Although a compelled statement under the Motor Vehicle Act was not admissible in a Criminal Code proceeding, the majority noted at paragraph 20:

If the Motor Vehicle Act did not include the use immunity set out in s. 61(7), R. v. Fitzpatrick might apply to permit a s. 61(1) report to be introduced in evidence in proof of a breach of a provision of that Act which itself is a statutory scheme for the regulation of traffic. So, had this respondent been charged with, say, changing lanes without signalling or driving without due care and attention, the reasoning in Fitzpatrick could logically be invoked in support of the admissibility of the report.

And at paragraph 22:

An important element in the reasoning underlying the decision in Fitzpatrick is that if the logs and reports could not be introduced in evidence, the integrity of the statutory scheme would be damaged. Were the Crown’s position in this case to be upheld, the result surely would be to damage the effectiveness of the regulatory scheme.

Case law in British Columbia, including White and Graham supports the proposition that information gathered during an audit can be used in a subsequent prosecution under the Income Tax Act. The relevant information consists of pre-existing business documents, the prosecution and demand for information are both part of the same regulatory scheme, and the taxpayer is aware that a consequence of the “honour system” is that the supporting documentation may be required by Revenue Canada.

An integral component of the regulatory system is the imposition of sanctions on those who do not honestly claim their income and expenses. To find that information gathered during an “innocent” audit could not be used in a prosecution would render those portions of the Act ineffective and without that information, a search warrant for the purposes of an investigation could not be obtained.

Were the Actions of Revenue Canada an Audit or an Investigation?

The Appellant submitted that evidence gathered by the auditors should be excluded as the predominant purpose of the audit was to gather evidence in a criminal or quasi-criminal investigation. The Crown agreed that the threshold question is whether the predominant purpose of the auditor’s actions was to gather evidence that an offence under the Income Tax Act had been committed.

Although the parties’ positions and the relevant case law dictate that I apply the predominant purpose test, this line of inquiry seems an artificial and largely inappropriate route by which to determine the issue of guilt or innocence in a criminal context, especially when the evidence consists of both pre-existing documents and statements made to Revenue Canada employees.

The learned trial judge found that Mr. Pacheo did not reach any conclusion that the Accused had evaded taxes before he was told by his supervisor to refer the file to the Special Investigations Section. The evidence of Mr. Thatcher was also accepted, and the trial judge found that even after the meeting of December 18, 1995, Mr. Thatcher thought it was premature to refer the file to Special Investigations because the audit was not yet completed. There was evidence to support these findings of fact, and I do not propose to alter them.

However, Mr. Thatcher had concluded by that point in time that the evidence supported a penalty application and ultimate referral to the Special Investigations Section. This finding, combined with an objective view of the circumstances of Mr. Ling’s audit, leads me to disagree with the trial judge’s conclusion that the audit did not become an investigation until the first week of January 1996.

The predominant purpose of the auditor’s actions after the December 18, 1995 meeting was to gather information that the Special Investigations Section would use in their criminal investigation. As a result, Mr. Ling’s Charter rights were engaged and warnings should have been issued before further information was sought from Mr. Ling.

Although the lack of a Charter warning may not dictate the exclusion of any evidence gathered after this point, it will be necessary to categorize the evidence gathered after this point and examine it in light of s. 24(2) of the Charter. A re-trial is ordered for this purpose.

Appeal allowed.