Citation:
2016 TCC 136
Date: 20160531
Docket: 2015-413(IT)G
BETWEEN:
RONALD
BAUER,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Lyons J.
[1]
The respondent brought a motion to strike
(“Motion”) portions of the Amended Notice of Appeal pursuant to section 53 of
the Tax Court of Canada Rules (General Procedure) (the “Rules”). Only
the Amended Notice of Appeal, filed in August 2015, will be referenced in these
Reasons for Order. The impugned pleadings are reproduced on Appendix I of these
reasons.
[2]
Generally, the grounds in the Motion are that
the appellant pled factual allegations, issues and arguments relating to
matters outside this Court’s jurisdiction which have no chance of success, are
frivolous, abusive and, if retained, would delay the appeal. Specifically, the
pleading improperly:
a)
focuses on conduct of Canada Revenue Agency
officials during the investigation, audit, reassessment and objection processes
(“CRA officials” and “CRA conduct”), the disclosure of documents under the Privacy
Act and the legality of the requirements for information (“requirements”);
b)
raises the Minister of National Revenue’s motivation
and predominant purpose in issuing the requirements and obtaining from the
banks the appellant’s bank records, and documents and information derivative of
such records, used to issue the reassessments (“records”);
c)
contends that the Minister abused her audit
powers to issue unlawful requirements in the course of an alleged criminal
investigation (“investigation”);
d)
asserts that there has been a violation of his
section 8 Canadian Charter of Rights and Freedoms (the “Charter”)
in issuing the requirements and reassessments;
e)
seeks Charter relief to exclude evidence
(records) and vacate the reassessments under subsections 24(2) and 24(1),
respectively;
f)
challenges the net worth method that
CRA officials adopted including the manner of its application; and
g)
pleads net worth as a material fact, not as
argument.
Historical background
[3]
The appellant appealed reassessments made by the
Minister relating to his 2007 and 2008 taxation years (“relevant years”). The
Minister determined that the appellant had made misrepresentations attributable
to neglect, carelessness or wilful default, that he had unreported business
income in the amounts of $5,855,773 and $4,815,601, respectively, and is liable
for gross negligence penalties thereon (“reassessments”).
[4]
Prior to moving to and becoming a resident of
Canada in 2004, he earned significant sums from various sources outside Canada.
During the relevant years, his income consisted of office or employment income
from a company controlled by him. During the relevant years, he repaid a
portion of disgorged amounts of $840,000 USD. That amount, plus post-judgment
interest, was established by a judgment issued February 10, 2006 in respect of
a civil complaint by the U.S. Securities and Exchange Commission. The appellant
claims the disgorged amounts are deductible under subsection 9(1) and paragraph
20(1)(c) of the Income Tax Act (the “ITA”). At the time of
the hearing, the appellant is no longer a resident of Canada.
[5]
On December 1, 2010, the CRA Special Investigations
division commenced an investigation arising from a referral from a law
enforcement agency which alleged that he was engaged in criminal activities.
CRA conducted searches for information on the internet and the BC Assessment
Authority’s electronic records relating to the appellant.
[6]
Before December 6, 2010, the CRA had information
and documentation, prepared and provided by his accounting firm on his behalf,
including his personal and corporate tax returns. Around December 6-7, 2010,
the Minister issued two requirements relating to the appellant, pursuant to
subsection 231.2(1) of the ITA, to two banks. The banks provided the CRA
with records that was mostly relied on by the CRA to perform net worth
calculations prepared between December 2010 and were substantially complete by
June 1, 2011.
[7]
On June 1, 2011, an audit case was opened in the
CRA computer system, a CRA official was assigned to the audit, an audit plan
was prepared and a letter was sent to the appellant indicating that he had been
selected for audit in respect of his 2007 to 2010 taxation years. His
representative contacted the CRA. On November 15, 2011, the CRA sent a follow
up letter to the appellant followed by a proposal letter in January 2012
relating to the relevant years and 2009. Subsequently, he made submissions,
adjustments ensued and reassessments were issued on October 19, 2012 for the
relevant years. Allegedly, no “factual audit” was undertaken of his personal
tax returns relating to the relevant years.
Principles in Striking Pleadings
[8]
The Supreme Court of Canada in R v Imperial
Tobacco Canada Ltd., confirmed the principle
that a pleading, or portions, will only be struck if it is “plain and obvious”,
that the pleading discloses “no reasonable cause of action”, has “no reasonable
prospect of success” or has “no reasonable possibility of success”. A high
standard must be met. For the pleading to be struck, it must be plain and
obvious it will not succeed.
[9]
In considering this Motion, I am to presume that
the allegations in the impugned pleadings are correct (assuming these are
properly pled).
Jurisdiction of the Tax Court
[10]
As a statutory Court, this Court has been
granted exclusive original jurisdiction to determine references and appeals
from assessments (or reassessments) made under the ITA.
That authority, combined with subsections 169(1) and 171(1) of the ITA, limits
the Court’s statutory jurisdiction to determining the validity and correctness
of an assessment as to a taxpayer’s liability for the amount of tax assessed and
enables the Court to dismiss an appeal or allow an appeal by vacating, varying
or referring the assessment back to the Minister for reconsideration and
reassessment.
Jurisdiction to strike a pleading under
section 53 of the Rules
[11]
Under the Rules, an appellant must
articulate in his/her pleading a concise statement of relevant and material
facts, the issue(s), the statutory
provisions, the reasons relied on and relief sought. All of which defines the
dispute and necessarily the scope of documentary production, examination for
discovery and trial. The appellant indicated his pleadings were crafted not
only to define the issue but to set out the scope of discovery.
[12]
Whilst the appellant correctly asserts that
subsection 53(1) does not reference jurisdiction, this Court has the
jurisdiction to enforce its own Rules. strike portions of a
pleading “that may prejudice or delay the fair hearing of an action, that is
frivolous or vexatious or that is an abuse of the process of this Court”.
This Court may, on its own volition or on application by a party under
subsection 53(1) of the Rules, strike out or expunge all or part of a
pleading, with or without leave to amend, on the ground that the pleading:
(a) may prejudice or delay the fair hearing of
the appeal;
(b) is scandalous, frivolous or vexatious;
(c) is an abuse of the process of the Court; or
(d) discloses no reasonable grounds for appeal
or opposing the appeal.
[13]
Jurisdiction and subsection 53(1) are
encapsulated in the recent decision of Cheikhezzein v Canada,
in which Bocock J. states:
15 … Simply put, if a pleading relates to a matter which cannot
succeed because the Court lacks jurisdiction, then it is the retention of those
“impossibly successful” pleadings which causes the delay (rule 53(a), is
frivolous (rule 53(b)) or is abusive (rule 53(c)).
[14]
The question on this Motion is: Is it plain and
obvious that the arguments to be advanced relating to the impugned pleadings will
have no reasonable possibility of success at trial? Broadly, these comprise
of:
a)
CRA misconduct, the manner/method in which the
amount assessed was determined and the processes by which it was established;
b)
the exercise of the Minister’s powers in issuing
the requirements during an investigation resulted in records illegally obtained
and used for the reassessments;
c)
the issuance of the requirements and reassessments
violated his section 8 Charter rights; and
d)
relief that:
i) the requirements
be “found unlawful”;
ii) the records be excluded under subsection 24(2) of the Charter;
and
iii) the reassessments
be vacated under subsection 24(1).
Parties’ positions
[15]
The respondent’s position is that the proper
issues arising from the reassessments under appeal are those set out in
paragraph 3 of these reasons. It is plain and obvious, therefore, that there is
no reasonable possibility of success on the matters pled. These matters fall
outside this Court’s jurisdiction and/or are irrelevant to the validity and
correctness of the reassessments. Advancing matters that engages areas of documentary
and oral discovery involving CRA conduct at various junctures; CRA’s selection
and implementation of the net worth methodology; the alleged investigation of
the appellant; the purpose and legality of the requirements and exercise of the
Minister’s powers; and disclosure under the Privacy Act are frivolous,
abusive and if retained would delay the conduct of the appeal within the
meaning of subsection 53(1) of the Rules and should be struck.
[16]
The appellant’s position is that this Court has
the jurisdiction to consider the matters in the impugned pleadings. He mainly
alleges that the Minister abused her powers in issuing unlawful requirements to
procure the records from the banks, to further an investigation and not as a
serious and genuine inquiry as to his tax liability, thus the records were illegally
obtained and relied on by the CRA to issue the reassessments. Therefore his
section 8 Charter rights were violated in the issuance of the
requirements and then the reassessments warranting Charter-based relief
(“principle argument”). Instead of striking any of his pleadings, he requests
that the Court permit his Amended Notice of Appeal to be amended further to
more clearly articulate matters over which this Court has jurisdiction.
[17]
For the reasons below, I would allow the
respondent’s Motion to strike all the impugned pleadings on Appendix I to the
Reasons for Order except paragraph 37. Paragraph 37 is to be moved to the
Reasons section of the Amended Notice of Appeal.
Conduct
[18]
The respondent asks that pleadings relating to
alleged CRA misconduct, challenges to the choice of the net worth method and
its manner of implementation, the processes which established the reassessments
and motivation (collectively “CRA conduct and other elements”) should be struck
because this Court lacks jurisdiction and/or such pleadings are irrelevant to
the validity and correctness of the reassessments.
[19]
The appellant argues that CRA conduct and other
elements are within the purview of this Court’s jurisdiction if those relate to
“evidence collection conduct” and the determination of the amounts reassessed where
the evidence was “obtained in a manner” that infringed section 8 Charter rights
such that it has application to the Charter and is relevant to onus.
In raising the allegations as to CRA conduct and other elements, he seeks
relief that the requirements be found unlawful, the records be excluded and the
reassessments be vacated. He relies on the following comment by Sharlow J.A. in
Ereiser v Canada:
[40] … The fact that a seizure of documents is unlawful may
affect the admissibility of evidence obtained as a result of the seizure, but
wrongful conduct unrelated to an evidentiary matter generally is not relevant
to the admissibility of evidence.
[20]
This, he says, acknowledges that conduct can be
material to a tax appeal and in his case wrongful conduct is related to an
evidentiary matter and material to his appeal. He was under investigation and
the records were obtained by misconduct and this goes to admissibility of evidence.
Examples of conduct he highlighted encompass the Minister’s exercise of her
powers and legality of the requirements issued during an investigation which resulted
in obtaining the evidence (records) collection; the issuance of arbitrary
reassessments based on incomplete information previously supplied; the selection
of the net worth method without contacting him in advance; the flawed
application of that method and no factual audit, or concurrent audit, was
conducted. All of which derogated, he says, from reaching the appellant’s
correct tax liability. This goes to onus and the Minister should not benefit
from the factual assumptions.
[21]
Ostensibly the comment in Ereiser is
restricted to a seizure context but it is unclear as to what “may” be a factor
and it is apparent from other remarks in that case that it involved “unusual
circumstances.” It is also an obiter comment.
[22]
The appellant submits that the evidence
collection conduct approach would require the Court to parse problematic
conduct, that relates to evidence collection and how the amount assessed was
determined, from the rest of the conduct and review the problematic conduct to
aid in determining tax liability. In his case, that would entail this Court delving
into CRA conduct and the other elements in the examples highlighted which would
demonstrate the existence of an investigation. I have concerns about the
approach and about the references to the investigation. I will return to the
investigation aspect later in my reasons.
[23]
With respect to the approach, the examples of
conduct that he focussed on involve areas over which this Court has no
jurisdiction. Generally, these relate to the exercise and propriety of the Minister’s
use of her powers in issuing the requirements (abuse of power) and the processes
leading up to the reassessments (abuse of process), not admissibility of evidence.
In my view, the approach goes beyond the scope of the comments in Ereiser, is
untenable and I fail to see how it would aid in, or link to, the correction of
the amount of tax liability.
[24]
Significantly, the jurisdictional limits of this
Court are not only circumscribed by section 169 of the ITA, but have been
consistently reaffirmed by the findings of the Federal Court of Appeal in Main
Rehabilitation Co. v Canada, Ereiser, Canada (Minister of National Revenue -
MNR) v JP Morgan Asset Management (Canada) Inc.
and other jurisprudence. That is, the Tax Court’s jurisdiction in a tax appeal
is limited to determining if an assessment is valid and correct, but does not include
challenges to the processes by which the reassessments and tax liability were established,
the manner/method in which the amount was determined, the exercise of ministerial
powers nor CRA conduct generally (the “Main principle).
[25]
In Main, Rothstein J.A., as he then was,
stated that:
[8] This is because what is in issue in an appeal pursuant to
section 169 is the validity of the assessment and not the process by which it
is established […] Put another way, the question is not whether the CCRA
officials exercised their powers properly, but whether the amounts assessed can
be shown to be properly owing under the Act […]
[26]
After reaffirming the Main principle,
the Court in Ereiser held that “it is plain and obvious that this Court
will not vacate the reassessments under appeal on the basis of the wrongful
conduct of a tax official in authorizing them”. Sharlow J.A. stated:
[31] […] the
role of the Tax Court of Canada in an appeal of an income tax assessment is to
determine the validity and correctness of the assessment based on the relevant
provisions of the Income Tax Act and the facts giving rise to the
taxpayer’s statutory liability. Logically, the conduct of a tax official who
authorizes an assessment is not relevant to the determination of that
statutory liability. It is axiomatic, the wrongful conduct of an official is
not relevant to the determination of the validity or correctness of an
assessment. …
[21] It
is also settled law that the Tax Court of Canada does not have jurisdiction to
set aside an assessment on the basis of abuse of process or abuse of power (see
Main Rehabilitation Co. Ltd. v. The Queen, [2004] F.C.J. No. 2030, 2004 FCA
403, at paragraph 6;…
[Emphasis added]
[27]
Even where CRA conduct leading up to an assessment
is reprehensible, this Court does not have jurisdiction. As stated by Stratas
J.A. in J.P. Morgan:
[83] The Tax Court does not have jurisdiction on an appeal to
set aside an assessment on the basis of reprehensible conduct by the Minister
leading up to the assessment, such as abuse of power or unfairness[…] If an
assessment is correct on the facts and the law, the taxpayer is liable
for the tax.
[28]
To the extent that the Minister has engaged in
reprehensible conduct, the Court in Ereiser and J.P. Morgan, noted that
other adequate and effective recourses exist outside of the Tax Court appeal
process.
[29]
In Johnson v Canada (Minister of National
Revenue – MNR), 2015 FCA 52, [2015] FCJ No. 216 (FCA), Webb J.A. indicated
that “The motivation of the Minister or delay in issuing such assessments are
not relevant to” the determination of the validity and correctness of an
assessment.
[30]
It is plain and obvious that the matters pled
and the arguments to be advanced at trial relating to CRA conduct and other
elements would have no reasonable possibility of
success at trial.
Requirements
[31]
The appellant claims that his pleadings relating
to the requirements are being used in support of his principle argument. He
submits that the Supreme Court of Canada decision in R v Jarvis, 2002
SCC 73, [2002] 3 S.C.R. 757 [Jarvis], and other authorities cited by the
respondent, do not cover all the aspects in his appeal.
Jarvis
[32]
In Jarvis, the Court discussed the
regulatory nature of the ITA, the supervisory powers and how those are
utilized in the self-assessing and self‑reporting system. It involved CRA
officials’ actions in the context of the inspection and requirement powers
conferred on the Minister to inspect, audit or examine records and obtain
documents and information under subsections 231.1(1) and 231.2(1) of the ITA
(“inspection and requirement powers”, respectively). These are designed to
facilitate the Minister’s fulfillment of her statutory duty to assess the
amount of tax payable in administering or enforcing the ITA by verifying
the accuracy of a taxpayer’s self-assessment of the amount of tax payable reported
in the tax return filed.
[33]
The decision reached in Jarvis safeguards
taxpayers against self‑incrimination when facing prosecution. Once the
predominant purpose of an inquiry is a penal liability that relates to the
investigation and prosecution of an offence under section 239 of the ITA,
CRA officials must relinquish the authority to use the inspection and
requirement powers to gather information or documents that may be used for the
purpose of advancing the investigation and prosecution as captured in the
following summary of the Court’s conclusions:
2. … While taxpayers are statutorily bound to co-operate with CCRA
auditors for tax assessment purposes (which may result in the application of
regulatory penalties), there is an adversarial relationship that crystallizes
between the taxpayer and the tax officials when the predominant purpose of an
official’s inquiry is the determination of penal liability. When the officials
exercise this authority, constitutional protections against self-incrimination
prohibit CCRA officials who are investigating ITA offences from having recourse
to the powerful inspection and requirement tools in ss. 231.1(1) and 231.2(1). Rather,
CCRA officials who exercise the authority to conduct such investigations must
seek search warrants in furtherance of their investigation.
[34]
The Court further recognized that whilst barred
from using documents and information from the inspection and requirement powers
to further an investigation, the CRA could use the documents and information
for administrative matters, such as a reassessment, based on the distinction
between an audit inquiry in administering the ITA and an investigation
that could lead to criminal charges under section 239.
[35]
The Federal Court of Appeal in Piersanti, referring
to Romanuk, followed that approach and stated:
[7] In dismissing
the appellant’s motion, the Judge relied on this Court’s recent decision in Romanuk
v. R., 2013 FCA 133, 445 N.R. 353 (F.C.A.) (leave to appeal to SCC refused,
35480 (November 21, 2013) [2013 CarswellNat 4317 (S.C.C.)]) and held that the CRA
could use documents obtained under its audit powers to further an
administrative matter, such as a reassessment.
[8] Romanuk is dispositive of this ground of appeal. In Romanuk,
Webb J.A. noted paragraph 103 of Jarvis and concluded that “… the
results [of an audit] can be used in relation to an administrative matter, such
as a reassessment”.
[Emphasis added]
[36]
In Klundert v Her Majesty the Queen, 2014
FCA 155, the Court, in referring to Jarvis, said “…the Supreme Court of
Canada expressly confirmed that although an investigation has been commenced,
audit and administration powers may continue to be used in relation to the
administration of the ITA including in relation to a reassessment.”
[37]
The respondent submits that Jarvis, Piersanti
and Romanuk applies to the appellant’s situation since requirements
issued during an ongoing investigation permits the CRA to use the records
obtained from those requirements provided these are used only for reassessment
purposes in determining tax liability. Even if the CRA only contemplated an
investigation before issuing requirements, its right to issue requirements
continues, provided the information and documents obtained in response to the
requirements are used for the purposes of administering the ITA, such as
a reassessment, to the determine tax liability.
[38]
The appellant’s stance is that the issuance of
the “unlawful” requirements culminated in a seizure of records obtained during
or arising from an investigation. His starting point is that the Minister
abused her powers in issuing the requirements and ultimately places emphasis on
the investigation involving penal liability, instead of the determination of
tax liability.
[39]
Ultimately, the difficulty the appellant faces
is that the Tax Court does not have the jurisdiction to set aside an assessment
relating to CRA conduct and other elements nor declare that the requirements be
“found unlawful”. I will expand on these points later in these reasons.
Charter issues
Section 8
[40]
Section 8 of the Charter has been pled
and reads “[e]veryone has the right to be secure against unreasonable search or
seizure.” Taxpayers are protected by the Charter when the predominant
purpose of an official’s inquiry is the determination of penal liability.
It must be apparent that the predominant purpose of an official’s inquiry is an
investigation relating to the determination of penal liability before section 8
of the Charter will be breached if evidence is “illegally obtained.”
(a) Requirements
[41]
The respondent argues that section 8 of the Charter
has no application to subsection 231.2(1) of the ITA when using
requirements relied upon by the Minister to obtain bank records which have a
low expectation of privacy when raising an assessment unlike an investigation
context. Even if requirements were issued and records obtained in the course of
an investigation, CRA conduct relating to the issuance of the requirements and
reassessments cannot violate the appellant’s rights nor provide a basis for Charter
based relief.
[42]
Integral to the factual allegations pled are
that the CRA commenced an investigation against the appellant prior to issuing
the requirements, yet the CRA did not attempt to perform a factual audit or a
genuine and serious inquiry into the appellant’s tax liability. He contends
that the Minister’s purpose and motivation in issuing requirements was to
advance an investigation. Therefore she illegally exercised her authority under
subsection 231.2(1) of the ITA in issuing the requirements in the course
of a investigation and the records that were seized, and used in the
reassessments, were illegally obtained. Issuance of the requirements and
reassessments violates his section 8 Charter rights.
[43]
Relying on paragraphs 46 and 88 of the Supreme
Court of Canada’s decision in Jarvis, the Federal Court of
Appeal in Romanuk v Canada held that if information or documents were to
be used in the investigation or prosecution of an offence, it would be the
particular court presiding over the prosecution of the offence that would be
tasked with determining the predominant purpose of the inquiry, and whether the
information and documents could also be used for an offence, is not a matter
for the Tax Court as the focus of the Tax Court is on determining tax
liability. He stated:
6. Once the
“predominant purpose” of an inquiry is related to the investigation and
prosecution of an offence under section 239 of the Act, the CRA can no
longer use its inspection and requirement powers under subsections 231.1(1) and
231.2(1) of the Act to gather information or documents that may be used
in such investigation and prosecution.
…
8. … If the information or documents are to be used in an
investigation or prosecution of an offence under section 239 of the Act,
the issue for the particular court dealing with the prosecution of the offence
… will be whether the predominant purpose of the exercise of such powers was to
gather information or documents for such investigation or prosecution.
[10] … Whether such information and documents could also be used for
the purpose of an investigation of an offence under section 239 or the
prosecution of such offence is not a matter for the Tax Court of Canada. The
only issue before the Tax Court of Canada is the validity of the reassessment,
…
[44]
In Romanuk, the Court found that it was
“plain and obvious” that the taxpayer could not succeed as the Minister could
use any information or documents obtained using her civil inspection and audit
powers to reassess the taxpayer. The CRA’s use of information and documents did
not violate the appellant’s rights as the “CRA has the right to continue to use
its audit powers provided that the information or documents are only used for
the purposes of administering the Act.”
[45]
The Federal Court of Appeal in Piersanti v R
upheld the Tax Court decision on the basis that Jarvis and Romanuk
was dispositive of the appeal and held that the appellant’s sections 7 and 8
rights were not violated when the CRA used information gathered in the course
of the investigation to reassess the appellant’s tax liability. Before
dismissing the appellant’s appeal, the Court indicated that the Tax Court had correctly
stated that the issue before the Tax Court was the determination of her income
tax liability, not penal liability.
[46]
In the present appeal, the Tax Court will be
tasked with the determination of his income tax liability arising from the
reassessments that he appealed. Yet, his pleading is replete with references
to an investigation, but also pleads that approximately five days after the
investigation commenced, the Minister issued requirements pursuant to
subsection 231.2(1) of the ITA. He also pleads that records were then
obtained pursuant to the requirements and relied on those in reassessing. He
claims the Minister’s motivation/purpose in issuing the requirements was to
procure records to advance the investigation. It does appear, however, from the
pleadings that different purposes were at play but it is not obvious what those
were. It may well be that the CRA was interested, as pled, in information or
documents pertaining to years outside the relevant years under appeal and there
may be other explanations in its administration of the ITA. It appears
that the appellant’s situation is similar to Romanuk and Piersanti.
The appellant’s focus on the investigation involving penal liability has
nothing to do with the determination of tax liability and the correctness of
the reassessments. This Court is not concerned with nor tasked with the determination
of penal liability, it is concerned with tax liability.
[47]
As to the relief sought, the impugned pleading
states:
G. RELIEF
SOUGHT
1. The
Appellant asked this Honourable Court to order that:
…
(b) the
issuance of the Requirements be found unlawful and the Bank
Records be excluded from the evidence;
[48]
Regardless of how the appellant frames his
arguments, it is apparent from the relief that the quintessential challenge he
makes is first and foremost a foundational challenge to the legality of the
requirements in asking that these be “found unlawful”. Recognizing that the
appellant is claiming such relief in his Charter argument, as pled it
can also be construed as in the nature of declaratory relief directed against
the exercise of the Minister’s powers and her decision to issue the
requirements under subsection 231.2(1) ITA.
Challenging the legality of the requirements or her powers is within the domain
of the Federal Court.
[49]
Subsection 18(3) and section 18.1 of the Federal
Courts Act, set out the powers and remedies of that Court and provides that
proceedings for declaratory relief against the Minister’s must be pursued by
judicial review application in the Federal Court
Subsection 18.1(3) provides:
18.1 (3) On an
application for judicial review, the Federal Court may
(a) order a federal board,
commission or other tribunal to do any act or thing it has unlawfully failed or
refused to do or has unreasonably delayed in doing; or
(b) declare invalid or unlawful, or quash, set aside or set aside and
refer back for determination in accordance with such directions as it considers
to be appropriate, prohibit or restrain, a decision, order, act or proceeding
of a federal board, commission or other tribunal.
[50]
The Federal Court, not the Tax Court, has the
jurisdiction to determine the legality of the requirements and declare that the
requirements be “found unlawful” as contemplated in paragraph 18.1(3)(b)
of the Federal Courts Act, such that the relief sought from this Court
is unattainable.
[51]
Inextricably linked to that is the related
request for evidence to be excluded. Ultimately, the remedy sought is that the
reassessments be vacated under subsection 24(1) of the Charter.
[52]
It is plain and obvious that questioning the
propriety and legality of the issuance of the requirements for records and
using those in support of the reassessments while an investigation was ongoing
has been decided. Advancing such arguments at trial would have no possibility
of success.
(b) Reassessments
[53]
The appellant submits that a search and seizure
occurred when the illegally obtained records and reassessments arose out of an
investigation and violated his section 8 Charter rights.
[54]
The Court noted in Smith v Canada, 2006
BCCA 237 (QL), in referencing other jurisprudence, that taxation does not
amount to seizure. I agree with the respondent that the issuance of the reassessments
do not constitute a search and seizure within the meaning of section 8 of the Charter
and is irrelevant to the validity and correctness of the reassessments.
Section 24
[55]
If a section 8 Charter breach was found
at trial because of the issuance of the requirements or the reassessments, a
determination is necessary as to whether relief should be granted and the form
of that relief under section 24 of the Charter. It is undisputed between
the parties that as a general proposition this Court has the jurisdiction to
grant Charter remedies in relation to Charter issues. The parties
disagree with respect to the applicability of section 24 of the Charter in
this case and the interpretation and application of O’Neill Motors Ltd. v R.
[56]
Subsection 24(2) provides for the exclusion of
evidence and subsection 24(1) contains a broad discretion to grant “such a remedy
as the court considers appropriate and just in the circumstances.”
The appellant seeks both forms of relief. Specifically, he asks this Court to
vacate the reassessments under subsection 24(1) of the Charter based on
his interpretation of O’Neill. He contends that the Federal Court of
Appeal in Main misinterpreted the same Court’s decision in O’Neill.
[57]
The respondent
says the Court’s interpretation in Main of O’Neill, that a
reassessment would only be vacated if the Minister has no evidence available
upon which to support the correctness or validity of the reassessment, should
be followed. In Main the Court stated:
O’Neil [sic] merely stands for the proposition that an
assessment may be vacated in an appeal pursuant to section 169 if it is not supported
by reason of the exclusion of the evidence which led to its issuance.
[58]
The Federal Court of Appeal in Romanuk
distinguished O’Neill as follows:
[T]his case can be easily distinguished from O’Neill Motors Ltd.
In O’Neill Motors Ltd. the documents had been seized under an illegal
search as the search warrant had been issued under a section of the Act
that was subsequently held to be unconstitutional. There is no
allegation here that any documents had been seized under any invalidly
issued search warrant. The information and documents in this case were
either voluntarily submitted or were obtained by CRA using its audit powers.
[Emphasis added]
[59]
Webb J.A. remarked that in Romanuk there
was no allegation of an invalidly issued search warrant and the Minister relied
on a constitutionally valid provision in exercising her powers. At
the hearing in the present appeal, the appellant suggested that the search warrant
feature differentiates Romanuk from his situation. However, the
appellant’s pleading does not refer to an illegally issued search warrant,
albeit he suggests the Minister should have obtained a warrant and contends
there could have only been an investigation and argues the records were seized.
All of which deal with penal liability aspects and irrelevant to his income tax
appeal. As well, the appellant’s pleadings indicate that requirements were
issued after an investigation had commenced and the records were used for the
reassessments. Unlike O’Neill, subsection 231.2(1) of the ITA is
constitutionally valid and the appellant was not prosecuted.
[60]
In O’Neill the impugned evidence was
used for dual purposes: prosecution of an offence and reassessment of income
tax. The Charter breach resulted in evidence characterized as “illegally
obtained” and could not be used against the taxpayer in the penal context. The
reassessments were vacated because they had no evidentiary basis because section
231.1 was relied on to obtain such evidence and was declared unconstitutional.
Therefore, the same evidence relied upon could be characterized as “illegally
obtained” in the reassessment context too but for a different reason. Of note,
the trial and appellate Courts in O’Neill cautioned that section 24 is
an extreme remedy reserved for egregious violations where other remedies are insuffice.
To be clear, I agree with Main’s interpretation and O’Neill is
distinguishable such that the present appeal aligns with Romanuk.
[61]
In Klundert, the taxpayers alleged that
the CRA had used its audit powers to gather information for an ongoing
investigation and sought a declaration that the requirements be found unlawful
and the records gathering, using the CRA audit powers while such investigation
was ongoing, infringed his rights guaranteed under the Charter. An
exclusion of records was sought under subsection 24(2) of the Charter on
the basis these had been gathered illegally, were inadmissible and asked that
the reassessments be quashed. The Federal Court of Appeal rejected the
appellant’s arguments and upheld the Tax Court decision.
[62]
Similarly, in Cheikhezzein, Bocock J.
Court considered a motion to strike pleadings involving allegations of
ministerial conduct relating to an arbitrary seizure of evidence and section 8 Charter
violations and abuses during the investigation, audit and assessment processes.
He held that this Court lacks jurisdiction to vacate an assessment based on
ministerial conduct in the context of section 8, and subsection 24(1) of the Charter
would not provide a remedy. He stated:
14. … This Court cannot begin the legal and factual inquiry into
such an issue since it is a means without end; it is a potential right without
a statutory remedy in this forum. … Moreover, this Court lacks inherent
jurisdiction and has not been given statutory jurisdiction to conduct an
analysis into, assess evidence of or invalidate an assessment upon Ministerial
Conduct because it is irrelevant to the validity and correctness of the
assessment: Ronald Ereiser v Canada, 2013 FCA 20, [2013] 3 C.T.C. 49
(FCA) at paragraphs 31 to 33.
[63]
Whatever the rationale in the present case as to
why the records were obtained through the use of the requirements, in Jarvis
and Ling and the more recent pronouncements in Piersanti, Romanuk,
Klundert and Cheikhezzein, the Courts have firmly rejected the
contention that the Minister’s issuance of requirements and reassessments based
on such documents obtained in response to the requirements could lead to a section
8 Charter violation and Charter based relief in the Tax Court
even when the taxpayer is or was the subject of an ongoing or prior
investigation as these are irrelevant considerations to his income tax appeal.
Ultimately, the pre-existing records from banks obtained under the requirements,
and consistent with Jarvis, were used to reassess the appellant’s income
tax liability and related penalties. I conclude that this Court lacks
jurisdiction based on CRA conduct and other elements.
Section 7
[64]
The appellant pled that his section 7 Charter
rights were violated as to “the right to life, liberty and security of the
person and the right not to be deprived thereof except in accordance with the
principles of fundamental justice”. This occurred when the CRA penalized him by
reassessing a large amount of tax payable and subjecting him to choosing
between a prejudicial litigation process or paying an arbitrary penal sum.
[65]
Section 7 is not broad enough to encompass
economic rights or assessments of income tax. As such, this has no bearing on
the correctness or validity of the reassessments.
[66]
Based on the foregoing reasons, it is plain and
obvious that there is no reasonable possibility that the appellant’s arguments
can succeed at trial in his arguments that the Minister’s issuance of the
requirements or reassessments violated his section 8 Charter rights nor
is there any basis for the Court to grant the remedies as to the exclusion of
the records and/or vacate the reassessments under section 24 of the Charter.
It is also plain and obvious that the arguments relating to Section 7 Charter
rights cannot succeed.
Privacy Act
[67]
The respondent submits that the pleadings
relating to the Minister’s decision on disclosure under the Privacy Act
are outside this Court’s jurisdiction and irrelevant to the validity and
correctness of the reassessments and should be struck.
[68]
The appellant asserts that his pleading is to
demonstrate alleged criminal investigatory conduct during the Privacy Act.
[69]
Notwithstanding the appellant’s assertion, it
appears that the pleadings attempt to place in issue CRA conduct or by pleading
allegations relating to the Privacy Act, potentially seek disclosure of
information denied under the privacy process relating to redactions and
communications with law enforcement officials. In either event, such
considerations are irrelevant to the correctness of the reassessments. Disclosure
under the Privacy Act is to be sought by a complaint mechanism with the
Privacy Commissioner. If unresolved,
a judicial review application can be initiated in the Federal Court which has
the jurisdiction.
[70]
In Taylor v The Queen, the taxpayer had
claimed that the respondent had breached the Privacy Act and the Income
Tax Act. The Tax Court noted its jurisdiction is limited to determining
whether the tax assessed was properly determined in accordance with the
provisions of the Income Tax Act.
[71]
It is plain and obvious that the appellant could
not succeed at trial relating to the pleadings involving the Privacy Act.
Net Worth Method
[72]
I agree with the respondent’s submission that
paragraph 37 of the Amended Notice of Appeal is bereft of any material
allegations, contains principally argument and is improperly placed under the
subheading “Material Facts to be Relied on”. It is to be moved to the Reasons
(section F).
Conclusion
[73]
I conclude that based on the foregoing reasons,
it is plain and obvious that the factual allegations, issues and reasons pled
in support of arguments to be advanced at trial would have no reasonable possibility
of success, are abusive and if retained would delay the hearing of the appeal.
[74]
The respondent’s Motion is granted and the
following pleadings are struck from the Amended Notice of Appeal:
a. paragraphs 11, 12, 14, 15, 16, 17, 18,
19, 20, 21, 22, 23, 24, 25, 26, 38, 39, 40, 41, 42, 44, 47, 48, 53, 54, 55, 56,
57, 58, 59, 61, 62, 63, 66, 67, 68, 69, 70, 72 and the portion of paragraph 52
that reads “sections 8 and 24 of the Charter, and”;
b. the sub-headings above paragraphs 53 and 61 entitled “The Bank
Records” should be excluded from evidence under 24(2) of the Charter”
and “The Appellant is entitled to a s.24(1) remedy”, respectively; and
c. subparagraph
1(b) under section G.
[75]
Paragraph 37 shall be moved to the Reasons
section of the Amended Notice of Appeal. Since the appellant seeks to amend by
elaborating on the relief, which cannot be granted, this would not cure the
pleading and leave is denied to the appellant further amendments his existing
Amended Notice of Appeal.
[76]
Within 60 days of the date of this Order, the
respondent shall file and serve a Reply to the pleadings that have not been
struck from the Amended Notice of Appeal.
[77]
Costs are fixed at $1,000 and awarded in favour
of the respondent.
Signed at Ottawa, Canada, this 31st day of May 2016.
“K. Lyons”
APPENDIX I
Impugned Paragraphs
11. On or about December 1, 2010, the CRA Special Investigations
division commenced investigating the Appellant, further to a referral received
from another law enforcement agency which alleged that there were reasonable
grounds to believe that the Appellant was engaged in financial criminal
activities.
12. The
Investigator’s first and immediate actions were to:
(a) On or about December 1, 2010, search the internet for
online information relating to the Appellant;
(b) On or about December 1, 2010, search BC Assessment
Authority electronic records for information relating to real properties held
in the name of the Appellant; and
(c) On or about December 6-7, 2010, issue two demands for
information and documents relating to the Appellant, purportedly pursuant to
subsection 231.2(1) of the Income Tax Act (the “Act”), to the Bank of
Montreal and to HSBC (the “Requirements”).
…
14. Despite being in possession of the information described
in paragraph 10, the Investigator relied solely on the Bank Records, and to a
very limited extent on the electronic BCAA information referred to in paragraph
12, to perform net worth calculations in respect of the Appellant’s 2007 and
2008 taxation years.
15. The net worth method was chosen by the Investigator prior
to contacting the Appellant and prior to attempting to undertake a factual
audit of the Appellant’s T1 income tax returns for the 2007 and 2008 taxation
years.
16. The CRA did not attempt to perform a factual audit of the
Appellant at any material time.
17. The Investigator’s net worth calculations were prepared
between December 2010 and June 2011.
18. The Investigator’s net worth calculations were
substantially completed on or before June 1, 2011.
19. An audit case was first opened in the CRA computer system
on June 1, 2011.
20. The screener’s comments for the opening of the audit case
refer to the Investigations file by file number.
21. The Investigator was first assigned to audit the Appellant
on June 1, 2011.
22. The
Investigator prepared an audit plan dated June 1, 2011.
23. The
Investigator first charged the audit file on June 24, 2011.
24. The Investigator first contacted the Appellant by a
standard-form initial contact letter dated June 1, 2011. The letter of June 1,
2011 states that the Appellant has been selected for audit in respect of his
2007 to 2010 taxation years, and states that the Appellant should contact the
Investigator within 30 days to schedule a date, time and place for the audit to
begin.
25. In response to the June 1, 2011 letter, the Appellant’s
representative contacted the Investigator as requested, on or about June 30,
2011.
26. The Investigator sent a further letter to the Appellant
dated November 15, 2011. The letter states:
(a) that the Appellant has been selected for audit in respect
of his 2007 to 2010 taxation years;
(b) that the Investigator received no response to his June 1,
2011 letter;
(c) that the Appellant should contact the Investigator within
15 days to arrange a date for the audit to begin; and
(d) that the audit may involve the preparation of net
worth statements.
…
The Net Worth Method
37. The net worth method is, and is known by the Minister to
be, a method of determining a taxpayer’s income that is:
(a) arbitrary,
(b) imprecise,
(c)
inaccurate with a range of indeterminate magnitude, and
(d) a
method of last resort.
…
The Privacy Act Request
38. The Appellant made a request to the CRA under the Privacy
Act for all records relating to his 2007 and 2008 taxation years.
39. The materials provided to the Appellant in response to
that request included redactions made pursuant to subparagraph 22(1)(a)(i),
paragraph 22(1)(b) and section 25 of the Privacy Act.
40. In making the redactions referred to in paragraph 39
above, the CRA implemented decisions made by a third party, whom the CRA
consulted in respect of the Appellant’s Privacy Act request.
41. The CRA stated to the Appellant that it was unable to
explain the bases for the redactions it implemented on behalf of the third
party.
42. The CRA refused to identify the third party to the
Appellant but implied that the third party was a law enforcement agency.
…
The Objection Stage
…
44. The
Objections process was initially hampered by the Investigations Division’s
refusal to provide the Appellant’s file in respect of the Reassessments to the
Appeals Division on the basis that it was “protected”.
…
D. ISSUES
TO BE DECIDED
47. Whether the Bank Records were obtained illegally and
in violation of the Appellant’s rights under section 8 [of] the Canadian
Charter of Rights and Freedoms (the “Charter”), because:
(a) The Investigator issued the Requirements in the course
of a criminal investigation; and/or
(b) The Investigator issued the Requirements otherwise
than in furtherance of a genuine and serious inquiry into the Appellant’s tax
liability,
and if so,
(c) whether the Bank Records should be excluded from
evidence pursuant to subsection 24(2) of the Charter,
and if so,
(d) Whether the Reassessments must be vacated as invalid
because the Minister is unable to meet her onus under subsection 152(4) of the
Act in respect of the issuance of the Reassessments beyond the expiry of the
“normal reassessment period”;
...
48. Whether the Appellant’s s.8 Charter
rights were breached by the issuance of the Reassessments, by virtue of the
Reassessments relying on illegally-obtained information and being issued for an
arbitrary amount and for an ultra vires purpose, and if so,
(a) whether the Appellant is entitled to a
remedy under s. 24(1) of the Charter,
and if so,
(b) whether vacating the Reassessments is
a just and appropriate remedy.
…
E. STATUTORY
PROVISIONS ON WHICH THE APPELLANT RELIES
52. …
sections 8 and 24 of the Charter, …
…
F. REASONS
ON WHICH THE APPELLANT RELIES
The Bank
Records should be excluded from evidence under 24(2) of the Charter
53. The Investigator was conducting a criminal investigation
at the time he issued the Requirements (purportedly) under section 231.2 of the
Act.
54. Section 231.2 does not authorize the compelling of
information and documents in the context of a criminal investigation.
55. Section 231.2 of the Act authorizes the issuance of a
requirement for the purpose of administering and enforcing the Act. This
purpose, in relation to the assessment function as opposed to the collection
function of the CRA, has also been expressed as a genuine and serious inquiry
into the tax liability of a named person. The Investigator did not issue
the Requirements for the purpose of administering and enforcing the Act. The
Investigator did not issue the Requirements in furtherance of a genuine and
serious inquiry into the Appellant’s correct tax liability pursuant to the
Act.
56. The Requirements were unlawfully (and invalidly)
issued, and the Bank Records were thereby unlawfully obtained.
57. The unlawful issuance of the Requirements violated the
Appellant’s right to be free from unreasonable search and seizure under section
8 of the Charter.
58. The Bank Records, and any evidence derivative thereof,
should be excluded pursuant to subsection 24(2) of the Charter.
59. The Bank Records are essential to the Minister’s case.
In the absence of the Bank Records, the net worth calculations that underpin
the Reassessments have no evidentiary basis and the Minister cannot meet her
onus under subsection 152(4) of the Act.
…
The Appellant
is entitled to a s. 24(1) remedy
61. The Minister relied upon illegally-obtained information
in computing the amount to be assessed against the Appellant.
62. The
Minister adopted the net worth method without:
(a) attempting
to contact the Appellant;
(b) attempting to contact a “factual audit” of the
Appellant’s 2007 and 2008 taxation years and/or;
(c) considering the documents and information in CRA’s
possession as described in paragraph 10 of this Amended Notice of Appeal.
63. There was no examination or review in respect of the
Appellant’s returns or the information supplied with those returns prior to
adopting the net worth method to compute the amounts to be assessed to the
Appellant.
…
66. The procedure by which the Reassessments were raised
was arbitrary, was carried out without regard to the information in the
Minister’s possession, without application of the provisions of the Act to that
information and by making unreasonable, baseless assumptions (none of which were
made, and none of which would be insufficient in any event, to justify
reassessing beyond the statutory limitation period).
67. The arbitrary procedure by which the Reassessments were
raised demonstrates disregard for the Appellant’s correct tax liability.
68. The CRA’s purposes in issuing the Requirements and the
Reassessments were twofold:
(a) to investigate for or on behalf of the CRA with a view
to an offence-related proceeding pursuant to the Act or to assist another law
enforcement agency towards an offence-related proceeding pursuant to another
enactment; and
(b) to use the CRA’s ostensible authority to issue
assessments for the purpose of penalizing the Appellant by contriving a large
amount payable.
69. As such, the issuance of the Reassessments breached the
Appellant’s s.8 Charter rights.
70. By the Reassessments, the Minister has further placed
the Appellant in the position of choosing between subjecting himself to a
prejudicial litigation process or paying the arbitrary and penal sum assessed
against him. To the extent the Appellant chooses to dispute the Reassessments
through the litigation process, the state is positioned to conscript the
Appellant into assisting the state with an investigation in respect of another
proceeding and providing evidence to be used in such proceeding, which would
violate the Appellant’s section 7 Charter rights.
…
72. The Appellant says that a just and appropriate remedy
pursuant to s. 24(1) is the vacating of the Reassessments.
…
G. RELIEF SOUGHT
1.
The Appellant asked this Honourable Court
to order that:
…
(b)
the issuance of the Requirements be found unlawful and the
Bank Records be excluded from the evidence;
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