New Garden Restaurant and Tavern Ltd. v. MNR, 83 DTC 5338, [1983] CTC 332 (SCO)

White, J:—The issue in this application is whether paragraph 231 (11)(d) of the Income Tax Act, RSC 1952, c 148 (“the Act”) and by implication its procedural appendage, subsection 231(2) of the Act, violate section 8 of the Constitution Act, 1982 (“the Charter”) and are thus of no force and effect having regard to section 52 of the Charter.

Mr Piirik is an officer of the Department of National Revenue duly authorized to conduct audits and investigations under the Act.

In such a capacity, he investigated the income tax returns of the applicants, New Garden Restaurant and Tavern Limited and its proprietor, James K Yee, for the period July, 1976 to June, 1981. In the course of his audit he examined the business and banking records of the company, those of Mr and Mrs Yee together with the accountant’s records pertaining to the income tax returns of the company and he asked Mr Yee some questions regarding the operation of the restaurant. From his examination of the records, Mr Piirik concluded that the true income of the company for the taxation years 1978, 1979, and 1981 had not been disclosed in the tax returns filed and that the company had thus filed false tax returns for such taxation years.

During his examination, Mr Piirik seized the applicants’ business records and documents in order to ascertain the true income of the company for the taxation years 1977 to 1981 and to calculate indirectly how much of the proceeds of unreported sales had been appropriated by Mr Yee.

It is important to note that Mr Piirik did not have a search warrant on any of the four days on which he seized the applicants’ records namely September 14, 15, 21 and 28, 1982, and he derived his sole authority from paragraph 231 (1 )(d) of the Act. Then, on 4 November, 1982, on the ex parte application of the Minister of National Revenue, His Honour Judge Gibson, on the basis of Mr Piirik’s affidavit, made a retention order under subsection 231(2) of the Act authorizing the Minister to retain the seized documents until they were produced in any subsequent court proceedings that could be commenced against the applicants for having violated the Act.

The applicants have brought this motion for an order to quash the retention order of His Honour Judge Gibson and for an order directing that the seized documents be returned to the applicants.

The relevant provisions of the Income Tax Act are as follows:

231. (1) Any person thereunto authorized by the Minister, for any purpose related to the administration or enforcement of this Act, may, at all reasonable times, enter into any premises or place where any business is carried on or any property is kept or anything is done in connection with any business or any books or records are or should be kept, and

(a) audit or examine the books and records and any account, voucher, letter, telegram or other document which relates or may relate to the information that is or should be in the books or records or the amount of tax payable under this Act,

(b) examine any property described by an inventory or any property, process or matter an examination of which may, in his opinion, assist him in determining the accuracy of an inventory or in ascertaining the information that is or should be in the books or records of the amount of any tax payable under this Act,

(c) require the owner or manager of the property or business and any other person on the premises or place to give him all reasonable assistance with his audit or examination and to answer all proper questions relating to the audit or examination either orally or, if he so requires, in writing, on oath or by statutory declaration and, for that purpose, require the owner or manager to attend at the premises or place with him, and

(d) if, during the course of an audit or examination, it appears to him that there has been a violation of this Act or a regulation, seize and take away any of the documents, books, records, papers or things that may be required as evidence as to the violation of any provision of this act or a regulation.

(2) The Minister shall,

(a) within 120 days from the date of seizure of any documents, books, records, papers or things pursuant to paragraphs (1 )(d), or

(b) if within that time an application is made under this subsection that is, after the expiration of that time, rejected, then forthwith upon the disposition of the application,

return the documents, books, records, papers or things to the person from whom they were seized unless a judge of a superior court or county court, on application made by or on behalf of the Minister, supported by evidence on oath establishing that the Minister has reasonable and probable grounds to believe that there has been a violation of this Act or a regulation and that the seized documents, books, records, papers or things are or may be required as evidence in relation thereto, orders that they be retained by the Minister until they are produced in any court proceedings, which order the judge is hereby empowered to give on ex parte application.

(4) Where the Minister has reasonable and probable grounds to believed that a violation of this Act or a regulation has been committed or is likely to be committed, he may, with the approval of a judge of a superior or county court, which approval the judge is hereby empowered to give on ex parte application, authorize in writing any officer of the Department of National Revenue, together with such members of the Royal Canadian Mounted Police or other peace officers as he calls on to assist him and such other persons as may be named therein, to enter and search, if necessary by force, any building, receptable or place for documents, books, records, papers or things that may afford evidence as to the violation of any provision of this Act or a regulation and to seize and take away any such documents, books, records, papers or things and retain them until they are produced in any court proceedings.

(5) Any application to a judge under subsection (4) shall be supported by evidence on oath establishing the facts upon which the application is based.

The relevant sections of the Charter are as follows:

1. The Canadian Charter of Rights and Freedoms guarantees the rights and freedoms set out in it subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society.

8. Everyone has the right to be secure against unreasonable search and seizure.

24. (1) Anyone whose rights or freedoms, as guaranteed by this Charter, have been infringed or denied may apply to a court of competent jurisdiction to obtain such remedy as the court considers appropriate and just in the circumstances.

(2) Where, in proceedings under subsection (1), a court concludes that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter,d 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.

52. (1) The Constitution of Canada is the supreme law of Canada, and any law that is inconsistent with the provisions of the Constitution is, to the extent of the inconsistency, of no force or effect.

The applicants submit that, since a lawful seizure is a jurisdictional condition precedent to the making of a valid retention order under subsection 231(2) of the Act, and since in their view, paragraph 231(1)(d) of the Act is by its very wording contrary to section 8 of the Charter, that a seizure made under paragraph 231 (1 )(d) of the Act is not a lawful seizure and the retention order made pursuant to such a seizure is thus invalid.

The respondent, although conceding that a lawful seizure is a jurisdictional condition precedent to the making of a valid retention order under subsection 231(2) of the Act, submits that paragraph 231 (1 )(d) and subsection 231(2) of the Act do not, in themselves, imply any unreasonable conduct on the part of the tax investigator and thus, do not, in themselves, violate section 8 of the Charter.

The sole issue, as presented to me on this application, is wheter paragraph 231 (1 )(d) and, by implication, subsection 231(2) of the Act are unconstitutional on the grounds that paragraph 231 (1)(d) necessarily implies an unreasonable search and seizure contrary to section 8 of the Charter. The order sought by the applicants would in effect prohibit all tax investigators conducting audits under the aegis of paragraphs 231 (1 )(a), (b) and (c) of the Act from seizing, without a warranty pursuant to paragraph 231 (1 )(d) of the Act, any documents they find in the course of their audits on the ground that such a seizure contravenes section 8 of the Charter. In support of their submission, the applicants rely on a decision of the Alberta Court of Appeal in Southam Inc v Hunter et al (1983), 3 CCC (3d) 497 in which the court held that section 10 of the Combines Investigation Act, RSC 1970, c C-23 was unconstitutional as violating section 8 of the Charter. In my opinion, the Southam case does not help the applicants. I read the decision of the Alberta Court of Appeal as indicating that, in their opinion, section 10 of the Combines Investigation Act in itself necessarily implied that before a search was conducted, the Restrictive Trade Practices Commission, which authorized the search, had already formed the belief of probable guilt of the party searched. In my view, paragraph 231 (1 )(d) of the Act does not imply in itself any such preconceived belief of guilt and thus in my opinion, the Southam case is distinguishable from the case at bar.

In my view, paragraph 231 (1 )(d) of the Act does not necessarily imply in itself any unreasonable conduct on the part of the tax investigator and thus does not, by its very wording, violate the taxpayer’s reasonable expectation of privacy, which is the interest protected by section 8 of the Charter.

In effect, the Income Tax Act contemplates a system of tax collection based upon the fair and honest reporting of income by the taxpayer. Such a tax system requires that the government be permitted in the ordinary course of events to check the business records of the taxpayer in order to ascertain that the income tax returns filed are reasonably accurate. The checking and collating of such records by the government does not violate the taxpayer’s reasonable expectation of privacy since by the very filing of his return the taxpayer is aware that he must have records to back up the representations made in his income tax return and that the records used in the preparation of his income tax return must be as available for audit as the very tax return filed with the government. It is only when a tax investigator has formulated a belief of the taxpayer’s guilt based on reasonable and probable grounds that the taxpayer’s expectation of privacy would reattach to his records and documents. In such circumstances, the obtention of an order pursuant to subsection 231(4) of the Act, which order is in effect a search warrant, is a condition precedent to a lawful search and seizure made of the taxpayer’s records by the investigator and a seizure without warrant made pursuant to paragraph 231 (1 )(d) of the Act would violate the taxpayer’s rights.

Moreover, the public interest in a reasonably efficient system of collecting tax revenue outweighs the taxpayer’s expectation of privacy in the circumstances contemplated by paragraph 231 (1 )(d) of the Act which I interpret as specifically authorizing a seizure without warrant in cases where the tax investigator comes upon incriminating evidence in the course of his audit without having formulated prior to the audit any belief of the guilt of the party searched.

While I am conscious of the fact that I must regard American precedents with care, I find the decision of the Supreme Court of the United States in United States v Bigwell, 406 US 311 worth noting on the issue of the balancing of the public interest in effective law enforcement against the individual’s right to be secure against unreasonable search and seizure.

In that case, the court upheld the constitutional validity of paragraph 923(g) of the Gun Control Act of 1968 which authorized the warrantless search and seizure “of weapons found to be in possession of the party search contrary to the statute”. Mr Justice White speaking for the court at 317 stated:

We have little difficulty in concluding that where as here regulatory inspections further urgent federal interests and the possibilities of abuse and the threat to privacy are not of impressive dimensions the inspection may proceed without a warrant where specifically authorized by statute.

For the above reasons, I find that paragraph 231 (1 )(d) of the Act does not by its very wording necessarily imply any unreasonable conduct on the part of the tax investigator and thus does not, in the abstract, violate the applicants’ right to be secure against unreasonable search and seizure. Similarly, I find, by implication, that subsection 231(2) of the Act does not violate section 8 of the Charter.

My finding that paragraph 231(1)()d) and, by implication, subsection 231(2) of the Act do not, in the abstract, violate section 8 of the Charter would not however preclude the applicants in subsequent court proceedings from relying on section 24(2) of the Charter in order to seek an order excluding the records and documents seized pursuant to paragraph 231 (1 )(d) of the Act on the ground that, on the facts, the seizure made by Mr Piirik under paragraph 231 (1 )(d) were made after he had formulated a belief of probable guilt and thus, at a time when the order or warrant contemplated by subsection 231(4) of the Act should have been obtained prior to his seizing the documents.

I interpret paragraph 231 (1)(d) of the Act as implying that the tax examiner at the time of the seizure therein authorized has come upon the document, book, record, paper or thing without having previously formulated the belief contemplated in subsection 231(4) of the Act, namely, a belief based on reasonable and probable grounds, that a violation of the Act or a regulation thereof, has been committed or is likely to be committed.

Subsection 231(4) contemplates that once the Minister, and I interpret Minister to include any agent of the Minister, such as Mr Piirik, concludes that there are reasonable and probable grounds to believe that a violation of the Act has occurred, he must then obtain an order to search and seize pursuant to subsection (4), which order is in effect a search warrant.

In conclusion, the regulatory scheme propounded by subsections 231(1) and (2) of the Act implies a reasonable search and seizure and thus, does not, in my opinion, violate section 8 of the Charter.

This application is therefore dismissed.