R. v. Bouclair Inc., 2020 QCCQ 4548 (Court of Quebec)

During a routine audit of a home fashion and décor company (“Bouclair”), the ARQ discovered that Bouclair had paid for the construction of a home for its CEO by paying false invoices (i.e., invoices purportedly for work done for Bouclair) rendered to it by VP Construction (a builder of log cabins in the Mont Tremblant area). The ARQ (“RQ”) predetermined from the outset that the file would never be flagged for a criminal investigation. The auditor received the falsified invoices, and confessions and admissions by company representatives, and the ARQ then audited VP Construction, thereby obtaining copies of the “real” invoices for the log cabin work. In 2012, RQ reassessed Bouclair and the CEO, and also assessed penalties, which were paid promptly. In 2013, CRA in reliance on the ARQ legwork, made corresponding reassessments, including under s. 163(2) - also paid promptly.

However, in 2015, the CRA Investigations Division, in order to find sufficient work for its investigators, began selecting files, including the Bouclair one, from a list of old, closed and archived files, not flagged for investigation but for which significant penalties had been imposed under s. 163(2), on the basis that there was a high likelihood of criminal tax evasion. The CRA investigator obtained a full copy of the RQ auditor’s Bouclair files, leading to the investigator obtaining three search warrants for Bouclair’s head office, for VP Construction’s office, and for the accused’s external accounting firms’ offices. Following the investigation, the three accused – Bouclair, its CEO and its Vice-President of Real Estate-- were charged jointly with various ITA tax evasion offences.

After finding (at para. 162) that “the improvised system established by the CRA to pick from closed audit files was not abusive, in and of itself” and that the transfer of the file information from the RQ to CRA was unlawful as being contrary to the relevant inter-governmental agreement given that “the CRA’s investigative body sought to obtain it from RQ for the explicit purpose of incriminating the accused in a criminal matter – in contravention of the statutory prohibition against sharing (subject to exceptions)” (para. 232), and (at para. 264) “that the applicants did not have a reasonable expectation of privacy in the emails, faxes or billing and commercial documents held by VP Construction in its premises” given that “a taxpayer’s privacy interest with regard to his tax record vis-à-vis the Government is – without being absent – relatively low,” Galiatsatos JCQ went on to find that there had been a violation of the Jarvis principle (notwithstanding that CRA had not performed the audit), stating (at paras 297, 298, 300):

…[T]he closed RQ audit files may be seen as a treasure trove of ready-made files for “investigation” and prosecution containing uncautioned conscripted evidence.

The Court cannot condone such a practice. … Otherwise, the Jarvis protections simply melt away.

…[I]f the evidence establishes that the Jarvis protections are systemically neglected from the outset, for internal policy reasons or otherwise, this may prove fatal to the entire admissibility of the fruits of the audit.

Galiatsatos JCQ further noted that the ARQ auditor had already concluded before even seeing the false invoices that the VP Construction work had not been performed for Bouclair, and stated (at paras 315, 345, and 346):

…[T]he … auditor… at that very early stage, had both subjectively [and]… objectively found evidence of tax evasion and set out from that point to build a case to establish the requisite intent, using the compliance audit mechanisms as a means of gathering evidence, even though she never intended the matter to be prosecuted criminally.

… If Jarvis precautions had been on RQ’s mind at the relevant times, in my view, the matter would have – and should have – been referred for criminal investigation before even requesting and receiving the VP invoices… . … [B]efore even requesting to see the invoices, the potential for an innocent explanation was far-fetched. …

…[T]he Court finds that the applicants’ constitutional rights were violated from the moment the auditor required production of the invoices for the VP Construction expenses.

After noting (at para 389) that this breach of the applicants’ charter rights was serious as they had “uncautioned, volunteered incriminating documents and incriminating statements that served as the foundation for the criminal charges that were eventually brought against them,” Galiatsatos JCQ went on to find that, in addition to excluding the improperly obtained evidence (including the false invoices), obtained in the searches – but not the evidence obtained from the audit of VP Construction as this had been decided upon at the outset, that a stay of proceeding would be appropriate, so as to avoid an abuse of process, stating (at paras. 440, 442, 469):

… [T]he systematic and institutionalized neglect of Jarvis by RQ … would not necessarily be objectionable. … [I]t was (and still is) the prerogative of RQ to decide from the outset that certain offences will never be the object of criminal charges.

However, should the State choose not to engage the criminal process despite obvious signs of criminality, thereby choosing not to offer constitutional protections, it is expected that is will in turn choose to forego criminal prosecution. In order to ensure that the taxpayer’s constitutional rights are respected, such a broad discretionary decision must have a built-in mechanism by which it ensures that the taxpayer will not later be prosecuted on the basis of the fruits of such an expansive audit. …

Considered as a whole, the history of this investigation directly harms the integrity of the justice system and irreparably compromised the community’s sense of fair play and decency. Alternative remedies are insufficient to redress this prejudice. Even if much of the evidence is excluded under s. 24(2), the case would still be viable, since a significant portion of the evidence was deemed admissible by this Court.

A Revenue Quebec audit team gathered incriminating evidence respecting the alleged diversion of company funds to pay for the construction of a chalet for its CEO (by allegedly paying false invoices directed to it by the builder). RQ did not accord any of the Jarvis protections to the company and its CEO, because it had no intention of criminally prosecuting – it was content to impose the equivalent of s. 163(2) penalties (in addition to the tax) – as did CRA, a year later, following the RQ lead.

However, in a bizarre twist, several years later, the CRA Investigations Division, in order to find sufficient work for its investigators, began selecting closed files for which s. 163(2) penalties had been imposed, for criminal investigation – which in this case, consisted mostly of asking the RQ for a copy of much of its file (a transmission of information which Galiatsatos JCQ found to be contrary to the intergovernmental agreement), and then executing searches on the company premises as well as those of the builder. The company and CEO then were charged with tax evasion under the ITA.

Galiatsatos JCQ acknowledged that, in a dry technical sense, perhaps CRA had not violated the Jarvis protections as conventionally expressed as it itself had not used any of its audit powers. However, he stated that he could not “condone … a practice” of using a “treasure trove of ready-made files for ‘investigation’ and prosecution containing uncautioned conscripted evidence,” as “otherwise, the Jarvis protections simply melt away” (paras. 297-8).

Here, the usual remedy of simply excluding evidence under s. 24(2) of the Charter was not a satisfactory solution as RQ likely would have audited the builder regarding the chalet even if it had observed Jarvis. Galiatsatos JCQ took the further step of ordering a stay of the prosecution, stating (at paras. 442, 469):

[S]hould the State choose not to engage the criminal process despite obvious signs of criminality, thereby choosing not to offer constitutional protections, it is expected that is will in turn choose to forego criminal prosecution. In order to ensure that the taxpayer’s constitutional rights are respected, such a broad discretionary decision must have a built-in mechanism by which it ensures that the taxpayer will not later be prosecuted on the basis of the fruits of such an expansive audit. …

Considered as a whole, the history of this investigation directly harms the integrity of the justice system and irreparably compromised the community’s sense of fair play and decency. Alternative remedies are insufficient to redress this prejudice. Even if much of the evidence is excluded under s. 24(2) [of the Charter], the case would still be viable, since a significant portion of the evidence was deemed admissible by this Court.