Ottawa, Ontario, April 18, 2006
PRESENT: The Honourable Madam Justice Mactavish
BETWEEN:
and
THE MINISTER OF NATIONAL REVENUE
REASONS FOR JUDGMENT AND JUDGMENT
[1] Edward Palonek did not file Canadian income tax or Goods and Services Tax returns for the 1993-2001 taxation years. In June of 2002, Mr. Palonek's counsel contacted what was then the Canadian Customs and Revenue Agency in an effort to initiate a voluntary disclosure, in accordance with the Agency's Voluntary Disclosure Program.
[2] While the Agency was prepared to accept that Mr. Palonek's disclosure was voluntary, in that he was not under investigation by the Agency at the time that the disclosure was initiated, a Minister's delegate ultimately declined to exercise her discretion in his favour because his disclosure was incomplete.
[3] Mr. Palonek now seeks judicial review of this decision, alleging that numerous errors were made by the Agency in its handling of his case. Amongst other arguments, Mr. Palonek contends that the Minister's delegate engaged in corrupt practices, acted in bad faith, made erroneous findings of fact without regard to the material before her, and failed to observe principles of natural justice and procedural fairness in this matter.
[4] Mr. Palonek further submits that his rights under a number of different sections of the Canadian Charter of Rights and Freedoms were violated as a result of the Agency's conduct in this matter. He has also served a Notice of Constitutional Question, questioning the constitutional validity of the Voluntary Disclosure Program.
[5] For the reasons that follow, I am satisfied that there is no merit to Mr. Palonek's submissions, and that, as a result, this application for judicial review must be dismissed.
The Voluntary Disclosure Program
[6] Before turning to consider the facts of Mr. Palonek's case, it is helpful to have an understanding of the Voluntary Disclosure Program (or "VDP") administered by the Canadian Customs and Revenue Agency and its successor, the Canadian Revenue Agency, both of which will be referred to in this decision as the "Agency".
[7] Section 220(3.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("ITA") gives the Minister of Revenue the discretion to grant relief against the operation of certain sections of the Act. Specifically, the section authorizes the Minister to waive or cancel some or all penalties or interest otherwise payable under the provisions of the ITA.
[8] Similarly, section 281.1 of the Excise Tax Act, R.S.C. 1985, c. E-15 makes comparable provision for the waiving of penalties and interest with respect to the Goods and Services Tax.
[9] This discretionary power is exercised, in part, through the vehicle of the VDP. The terms and conditions of the VDP are set out in an Information Circular. The document in effect at the times relevant to this proceeding is a June 12, 2000, document entitled "Information Circular 00-1".
[10] Information Circular 00-1 states that the purpose of the VDP is "to promote voluntary compliance with the accounting and payment of duty and tax" under the relevant legislation. The policy "encourages clients to come forward and correct deficiencies to comply with their legal obligations".
[11] As Justice Strayer observed in Karia v. Canada (Minister of National Revenue - M.N.R.), [2005] F.C.J. No. 774, 2005 FC 639, ¶ 2, "The incentive for making voluntary disclosures of past omissions under this program is that if full disclosure is made to the satisfaction of [the Agency] then the discretion of the Minister may be exercised so as to waive all or part of the penalties that otherwise could be imposed".
[12] Under the provisions of paragraph 6 of the VDP, there are four conditions that must be satisfied in order for there to be a valid voluntary disclosure. Firstly, the disclosure must truly be voluntary, in that the taxpayer must not be coming forward knowing that an audit, investigation or other similar enforcement action has been initiated by the Agency.
[13] Secondly, the disclosure must be complete. As it is the alleged lack of completeness of Mr. Palonek's disclosure that is in issue in this case, it is helpful to reproduce the relevant portions of paragraph 6(b) of the Information Circular, which state that:
The disclosing client is expected to provide full and accurate reporting of all previously inaccurate, incomplete, or unreported information. While the information provided in a disclosure must be substantially complete, a disclosure will not be disqualified simply because it contains minor errors or omissions. However, if a disclosure is found to contain material errors or omissions, the disclosure will not qualify as a voluntary disclosure, with the result that the disclosed information may be processed, and interest and penalties can be applied to the entire amount.
[14] The third condition for there to be a valid disclosure is that the disclosure must involve a monetary penalty. Fourthly, the disclosure must involve information that is at least one year overdue.
[15] It is common ground that Mr. Palonek has satisfied the first, third and fourth conditions of the policy. As was noted above, what is in issue in this case is whether the disclosure provided by him met the completeness requirement of paragraph 6(b).
[16] With this understanding of the VDP, I turn now to review the facts giving rise to this application.
Background
[17] Mr. Palonek is a Canadian who currently resides in Panama. As was noted at the outset, he did not file income tax or GST returns for the 1993-2001 taxation years. In June of 2002, Mr. Palonek's counsel telephoned the Agency in order to initiate a voluntary disclosure, in accordance with the Agency's Voluntary Disclosure Program. Mr. Palonek's counsel spoke to an individual by the name of Kevin Matthews at the Agency's Hamilton, Ontario office. Counsel then followed up with a letter to Mr. Matthews dated June 20, 2002, which confirms that a voluntary disclosure had been made on behalf of Mr. Palonek, in accordance with the provisions of Information Circular
00-1.
[18] Counsel goes on to confirm that he and his client would be in a position to provide the late filed returns for the 1993-2001 taxation years within 60-90 days, and asks Mr. Matthews to confirm "... that there had been no prior contact by the CCRA with respect to Mr. Palonek that would invalidate his prior disclosure".
[19] Mr. Palonek deposes that his counsel was told that he would have to wait a few days in order to determine whether Mr. Palonek met the criteria for the VDP. He further deposes that an Agency employee by the name of James McDermott contacted his counsel a few days later to say that "everything was fine", and that Mr. Palonek should begin preparing his documentation for submission.
[20] On August 12, 2002, Mr. Palonek met with Mr. McDermott, and provided him with T-1 income tax and GST returns for the1993-2001 taxation years. Mr. Palonek indicated to Mr. McDermott that he wanted to have Notices of Assessments issued within the week, as he was engaged in matrimonial litigation, and wanted to be able to demonstrate to the Court that he owed in excess of $400,000 in back taxes, so as to reduce his net worth.
[21] Mr. McDermott pointed out to Mr. Palonek that his returns indicated that his gross and net business income were the same, and asked Mr. Palonek about the nature of his business. Mr. Palonek responded "computer consulting" and directed Mr. McDermott to his accountant for information regarding his business expenses.
[22] On August 14, Mr. McDermott contacted Mr. Palonek's accountant and asked him, amongst other things, for details of Mr. Palonek's consulting business, and how his gross income had been determined.
[23] On September 4, 2002, Mr. McDermott received a call from an individual working in the Agency's Special Investigations unit in Toronto, who reported that he had just received a "cold call" from Mr. Palonek's accountant and his legal counsel. These individuals evidently wanted to report that Mr. Palonek's wife had evaded over $250,000 in taxes as a result of her alleged failure to declare income received by her in the form of support payments made by various corporations and family trusts including Rothwell Properties Inc., Rothwell Corporation, Found Money Inc. and the Rothwell Family Trust.
[24] Mr. Palonek's accountant and his legal counsel evidently acknowledged quite candidly that this report was being made in an effort to exert pressure on Ms. Palonek in relation to her matrimonial litigation.
[25] By letter dated October 30, 2002, Mr. Palonek's counsel requested an additional 45 days in which to make further submissions on Mr. Palonek's behalf. Mr. McDermott agreed to hold the file in abeyance until December 16, 2002, noting that if no additional information was received by that time, the Agency would finalize its review of the disclosure based upon the material in the file.
[26] On December 16, 2002, Mr. Palonek's counsel faxed Mr. McDermott advising that he had not been able to obtain instructions from Mr. Palonek, and was, therefore, unable to make any further submissions with respect to this matter.
[27] The following day, a letter was received by Mr. McDermott from Mr. Palonek's accountant advising that Mr. Palonek had decided not to make any further submissions. The accountant advised that although Mr. Palonek was able to substantiate some of the expenses and deductions claimed, he had decided not to claim any of them, because he was preoccupied with his family litigation.
[28] As "a sign of good faith" Mr. Palonek provided a payment of $50,000 towards his outstanding tax liability.
[29] Mr. Palonek and Mr. McDermott had several further telephone discussions, the result of which was that Mr. McDermott was told by Mr. Palonek to direct all further contact to Mr. Palonek's accountant.
[30] In early February of 2003, the Agency's audit department advised Mr. McDermott that it appeared that Mr. Palonek was potentially involved with two or three companies, as well as with a "T3 trust". Amongst other things, the Agency's audit department had located a website for Mr. Palonek which indicated that Mr. Palonek had been very successful in a business venture known as "FoundMoney". Found Money Inc. and Found Money International were noted as associated companies.
[31] On February 14, 2003, Mr. Palonek contacted Mr. McDermott and advised him that he had been successful in preventing the re-opening of his separation agreement in his matrimonial litigation, but that he had to make some additional payments to his former spouse. Mr. Palonek agreed to provide Mr. McDermott with an updated copy of his separation agreement.
[32] At this time, Mr. McDermott advised Mr. Palonek that he had come into possession of information suggesting that Mr. Palonek may have been involved with various corporations, stating that the Agency would have to have confirmation that all tax consequences had been reported on Mr. Palonek's tax returns.
[33] Mr. Palonek advised Mr. McDermott that he no longer owned any shares in Found Money Inc., having sold all of his shares to a third party some five or six years before. He acknowledged that he still received commissions from the company, indicating that there was some question as to whether he was an employee of Found Money Inc. or was self-employed.
[34] Found Money Inc. was evidently making a voluntary disclosure of its own, and Mr. Palonek directed Mr. McDermott to contact the accountant for further information.
[35] Insofar as Found Money International was concerned, Mr. Palonek admitted that he received consulting income from this entity, but was reluctant to divulge information with respect to his involvement with the company. He did, however, acknowledge that he had been an employee of the company as far back as 2000, and possibly before.
[36] Mr. McDermott advised Mr. Palonek that in order for his disclosure to be considered complete, and thus to qualify for the VDP, Mr. Palonek would have to provide details of all of his income sources. In this regard, Mr. McDermott noted that Mr. Palonek had acknowledged disposing of his shares in Found Money Inc. five or six years previously, and that, as a result, a capital disposition should have been reported on his 1997 or 1998 income tax returns. In fact, no capital gain or loss had been declared on any of Mr. Palonek's tax returns at any time between 1993 and 2001.
[37] In accordance with Mr. Palonek's instructions, Mr. McDermott then contacted Mr. Palonek's accountant, and advised him that he was prepared to hold off finalizing his review of the matter until March 4, 2003, so as to afford Mr. Palonek the opportunity to make further submissions.
[38] On February 25, 2003, Mr. Palonek's accountant asked for a further extension until May 4, 2003, due to Mr. Palonek's responsibilities outside of Canada. On April 2, 2003, Mr. Palonek faxed Mr. McDermott asking for an additional 90 days from May 4, 2003, noting that in the absence of a written response, he would assume that the extension had been granted.
[39] Around this time, Mr. Palonek evidently filed a request under the Privacy Act, seeking information regarding the Agency's attempts to verify his disclosure. Not being content with the Agency's response to his request, Mr. Palonek filed a complaint with the Privacy Commissioner.
[40] On September 12, 2003, Mr. Palonek advised Mr. McDermott that he was in the process of completing a submission to the Office of the Privacy Commissioner in order to obtain complete disclosure from the Agency.
The First Level Review
[41] Although Mr. Palonek's additional submissions in support of his application for voluntary disclosure were due on August 4, 2003, no such submissions were ever provided to the Agency, and no further extensions of time had been requested. As a result, the Agency proceeded to base its decision on the information then in Mr. Palonek's file.
[42] By letter dated October 21, 2003, Mr. Palonek was advised that his disclosure under the VDP was not being accepted, as it was considered to be incomplete as he had failed to disclose all material tax matters that could potentially affect his income tax and GST liabilities.
[43] The Agency noted that although Mr. Palonek had been provided with numerous extensions of time to allow him to provide additional information in support of his application, no such information had ever been provided.
[44] On February 20, 2004, Mr. Palonek wrote to Mr. McDermott indicating that he "was very upset that [Mr. McDermott] would consider attempting to revoke [his] already approved acceptance to the Voluntary Disclosure Program". So as to avoid having to "take this matter up with [Mr. McDermott's] superiors", Mr. Palonek asked for an explanation of the reasoning behind the decision.
[45] In a March 23, 2004 letter, the Agency stated that Mr. Palonek had not made complete disclosure of all material tax matters that could potentially affect his income tax and GST liability. By way of example, the Agency observed that Mr. Palonek's involvement with Found Money Inc. had not been clearly explained, and that the disposition of Mr. Palonek's shares in that company had not been reported in his 1993 to 2001 returns.
[46] Similarly, the Agency noted that Mr. Palonek had been "both reluctant and very vague" in disclosing his relationship to Found Money International.
[47] As a consequence of Mr. Palonek's failure to provide the requested information, notwithstanding the repeated extensions of time allowed for him to do so, the decision was made to disallow Mr. Palonek's request.
[48] In a letter to Mr. McDermott dated July 8, 2004, Mr. Palonek requested an impartial second level review.
The Second Level Review
[49] Upon Mr. Palonek requesting a second level review, his file was sent to the Agency's Kitchener/Waterloo office for review, so as to preserve the impartiality of the process. A report was prepared on July 8, 2004, detailing the history of this matter.
[50] In particular, the report noted that Mr. Palonek had acknowledged receiving income from Found Money International, and had admitted disposing of his shares in Found Money Inc. in approximately 1997 or 1998. Although he had been granted numerous extensions of time in order to allow him to provide information with respect to his involvement with these companies, no such information had ever been provided by Mr. Palonek.
[51] The report specifically noted that neither Mr. Palonek or his accountant had ever claimed that the monies received by Mr. Palonek from either Found Money Inc. or Found Money International had already been included in the consulting income reported in the tax returns filed by Mr. Palonek in August of 2002.
[52] Insofar as Mr. Palonek's GST returns were concerned, the report noted that although the total amount of GST allegedly collected had been reported, no sales or revenue figures had been provided, making it impossible to determine if the full amount of GST payable had indeed been reported.
[53] The report noted that the separation agreement provided by Mr. Palonek indicated that he was to make annual spousal and child support payments in the amount of $10,000 for 1993, and $30,000 for each subsequent year. In the tax returns filed by Mr. Palonek in August of 2002, Mr. Palonek had claimed deductions for support payments in the tax years from 1993 to 2001 that ranged from a low of $18,670 for 1993 to a high of $126,053 in 1997. No documentation had been provided by Mr. Palonek to prove that these payments had ever been made.
[54] Finally, the report noted that Mr. Palonek's separation agreement made reference to 30,000 shares in Rothwell Corporation being transferred to Ms. Palonek, as part of an equalization payment. The report also observed that this portion of the agreement had been struck out, suggesting that Mr. Palonek had maintained his interest in that company. Moreover, the last corporate return filed for Rothwell Corporation in 1995 listed Mr. Palonek as the contact person, further suggesting that he continued to have an interest in the company in at least some of the taxation years under review.
[55] Mr. Palonek had not, however, disclosed his interest in this company, or provided any information with respect to any dividends that he might have received from the company, nor had he declared any proceeds that he might have received from any disposition of his shares.
[56] As a consequence, the report recommended that Mr. McDermott's finding that Mr. Palonek had failed to make complete disclosure be upheld.
[57] Based upon this report, the decision was made on August 19, 2004 to affirm the first level decision, again finding that the disclosure made by Mr. Palonek did not meet the qualifying condition of "completeness". The decision states that Mr. Palonek never explained the nature of his business, or provided any breakdown of his gross income.
[58] In addition, the decision observes that despite numerous extensions of time having been granted, Mr. Palonek never provided the Agency with any proof of the support payments allegedly made, a full explanation of the income reported on the returns, or any information with respect to his involvement in Found Money Inc. and Found Money International Ltd.
[59] Mr. Palonek says that he never got this decision. The record discloses that he was notified of the second level decision by a letter sent by registered mail to his Panama address. Although Mr. Palonek had previously asked that the Agency send all correspondence to his new Toronto counsel, with a copy to his mailing address in Panama, it appears that Mr. Palonek had not provided the Agency with the necessary signed direction to allow the Agency to communicate with a third party on Mr. Palonek's behalf at that point. As a result, the decision was not sent to Mr. Palonek's Toronto counsel.
The Third Level Review
[60] Mr. Palonek wrote to the Agency on August 26, 2004, complaining about the Agency's "arbitrary" conduct in "withdrawing [his] voluntary disclosure". Mr. Palonek further notes that at no time was the VDP explained to him prior to his having provided "full and complete information" to the Agency. Moreover, Mr. Palonek stated that he was never asked to sign a "Client Agreement Form", despite the fact that the use of such a form is referred to in the Agency's internal manual dealing with the administration of the VDP.
[61] Mr. Palonek goes on to state that "The only obvious conclusion someone can make is that you continue to mishandle the administration of this program through gross negligence, fraud or some other ulterior motives". Mr. Palonek's letter details numerous other complaints about the Agency's handling of this matter, and includes allegations that the Agency and its employees had committed perjury, as well as an unidentified "federal offense", and, in addition, had acted in bad faith.
[62] A second letter form Mr. Palonek a few weeks later asks for a report on the status of the second level review.
[63] From these letters, the Agency realized that Mr. Palonek had not received the second level decision. In light of this, and having regard to the additional submissions received from Mr. Palonek, the Agency undertook a third level administrative review. A third level review is ordinarily only conducted where new and relevant information has been provided by the taxpayer. Even though Mr. Palonek had not provided any new information with respect to his financial affairs, the decision was made to conduct a third review of the case so as to ensure that judgment had been exercised appropriately in this case.
[64] In a decision dated November 15, 2004, Janice Charlton, the Director of the Hamilton, Ontario Tax Services Office upheld the first and second level decisions, once again based on the finding that Mr. Palonek had not made complete and full disclosure of all material matters that could affect his income tax and GST liability.
[65] Ms. Charlton's decision observes that while Mr. Palonek had acknowledged his ownership interest in various companies during taxation years in question, no evidence was provided by him to establish the type of income that he had received from these entities, nor had he provided a detailed breakdown to confirm that all sources of income had been included in his disclosure.
[66] Ms. Charlton also confirmed that no information had been received from Mr. Palonek to substantiate his deduction of support payments.
[67] Finally, the decision refers to the 30,000 shares in Rothwell Corporation apparently owned by Mr. Palonek, noting that at no time during the VDP process had Mr. Palonek ever mentioned either his ownership interest in or involvement with this corporation.
Post-decision Events
[68] By way of "Notices of Amendment" dated February 7, 2005, Mr. Palonek made major amendments to his income tax and GST returns. These included decreasing his business income, increasing his employment income (from Found Money Inc.) and reporting capital gains realized from the disposition of shares (including shares in a Trust that owned Found Money Inc. as well as shares in Rothwell Corporation).
Issues
[69] Mr. Palonek's memorandum of fact and law identifies some 30 different points in issue, while his Notice of Constitutional Question raises 17 additional issues. Not all of these issues were addressed by Mr. Palonek in his oral submissions, and many of the issues that he has identified either lack any evidentiary foundation or remain completely undeveloped.
[70] In the course of his oral submissions, Mr. Palonek identified numerous additional matters, many of which were not only not raised in his memorandum of fact and law, but were also not supported by any evidence.
[71] While I have carefully considered all of the issues and arguments advanced by Mr. Palonek, it is only necessary to address some of them in this decision.
Standard of Review
[72] This case involves a discretionary decision made in relation to the Voluntary Disclosure Program established by the Canadian Revenue Agency, pursuant to the 'fairness' provisions of the Income Tax Act and the Excise Tax Act.
[73] In accordance with the recent decision of the Federal Court of Appeal in Lanno v. Canada Customs and Revenue Agency, [2005] F.C.J. No. 714, 2005 FCA 153, the standard of review applicable to such decisions is that of reasonableness. That is, the question is whether the decision can withstand a somewhat probing examination: Law Society of New Brunswick v. Ryan, [2003]
1 S.C.R. 247, 2003 SCC 20.
[74] However, to the extent that Mr. Palonek argues that he was treated unfairly by the Agency in relation to his voluntary disclosure, the question for the Court is whether or not the Agency satisfied the requirements of procedural fairness in its dealings with Mr. Palonek.
[75] Finally, Mr. Palonek asserts that certain of his rights under the provisions of the Canadian Charter of Rights and Freedoms were breached by the Agency. For the most part, these issues were not raised by Mr. Palonek in any of the various reviews carried out by the Agency. As a consequence, the standard of review issue does not arise. Rather, the task for the Court is to determine for itself whether or not the Agency's actions violated any of Mr. Palonek's Charter rights.
Analysis
[76] As was noted above, Mr. Palonek's written material and lengthy oral submissions raised literally dozens of issues. The issues that need to be addressed by this Court will each be addressed in turn, starting with Mr. Palonek's request that this application for judicial review be allowed by reason of the failure of the Agency to include the tax returns filed by Mr. Palonek in August of 2002 in the tribunal record.
i) The Missing Tax Returns
[77] Mr. Palonek argues that his application for judicial review should be summarily allowed because of the failure of the Agency to produce copies of the T-1 tax returns that he filed with Mr. McDermott on August 12, 2002. According to Mr. Palonek, this omission means that he is not in a position to demonstrate that all material information had in fact been disclosed to the Agency by Mr. Palonek.
[78] It should be noted that no issue with respect to the failure of the Agency to produce the T-1 returns was raised by Mr. Palonek at the outset of the hearing. He only took issue with the matter several hours into his lengthy submissions, and then only after questions as to the whereabouts of the returns had been raised by the Court.
[79] There are several reasons why I cannot accept Mr. Palonek's contention that this matter should be summarily dismissed.
[80] Firstly, judicial review is ordinarily to be conducted on the basis of the record that was before the decision-maker, when the decision under review was made. While there is no question that the T-1 tax returns were in the possession of the Agency, there is no evidence before me to indicate that they were before Ms. Charlton at the time that she made the decision under review. Ms. Charlton's affidavit lists the documents that she paid particular attention to in conducting the third level review. Mr. Palonek's tax returns were not amongst them. Indeed, after this became an issue, counsel for the respondent confirmed that the documents in question were not in the material considered by Ms. Charlton in rendering the third level decision.
[81] Moreover, if Mr. Palonek was of the view that documents were missing from the record, it would have been open to him to bring a motion to have these deficiencies addressed in advance of the hearing. He did not do so.
[82] It must also be recalled that the documents in question are Mr. Palonek's own documents. While Mr. Palonek filed an affidavit in support of his application, including numerous documents relating to his dealings with the Agency, he chose not to include copies of the tax returns in his affidavit.
[83] It should also be observed that Mr. Palonek's argument that the income in issue had already been reported in the August 12, 2002 T-1 returns is not contained anywhere in his memorandum of fact and law. Nor is there any mention of this in his affidavit. As a consequence, his argument lacks an evidentiary foundation.
[84] Moreover, what evidence there is on this point directly contradicts Mr. Palonek's position. That is, the report prepared in connection with the Second Level Review specifically notes that neither Mr. Palonek nor his accountant ever claimed that the monies received by Mr. Palonek from either Found Money Inc. or Found Money International had already been included in the consulting income reported in the tax returns filed by Mr. Palonek in August of 2002.
[85] Finally, it must also be observed that Mr. Palonek's position as to what was in the tax returns varied throughout his submissions. While Mr. Palonek was quite insistent that the income in question had definitely been disclosed in his August, 2002 tax returns, elsewhere in his submissions, in a different context, he was equally insistent that he had neither prepared nor signed the tax returns, and thus had no idea as to what was in them.
[86] Accordingly, I am not prepared to summarily allow Mr. Palonek's application for judicial review.
[87] The next issues for consideration are those that relate to Mr. Palonek's allegations that he was treated unfairly by the Agency in this matter. The first issue that I will address is Mr. Palonek's allegation that Mr. McDermott lied about his role within the Agency in an effort to entrap him.
ii) Mr. McDermott's Position Within the Agency
[88] Mr. Palonek contends that he was treated unfairly by the Agency because Mr. McDermott misrepresented his role in the VDP process by holding himself out as an Appeals Officer, when he was actually a Tax Auditor in the Agency's Verification and Enforcement Section. Mr. Palonek asserts that Mr. McDermott's misrepresentation of his position amounted to an effort by the Agency to unlawfully obtain information so as to entrap people such as Mr. Palonek, calling the administration of justice into disrepute.
[89] In support of his contention that Mr. McDermott had misrepresented his position, Mr. Palonek points to a document that he evidently obtained from the Agency under the provisions of the Access to Information Act, listing the positions held by Mr. McDermott. Given that Mr. Palonek's argument relates to the fairness of the process, I am prepared to consider this document, notwithstanding that it was not before Ms. Charlton when she made the decision under review.
[90] The document relied on by Mr. Palonek is dated July 25, 2003, that is, well after Mr. Palonek's dealings with Mr. McDermott. The document indicates that as of July 25, 2003, Mr. McDermott was indeed working as a Tax Auditor in the Agency's Verification and Enforcement Section. The document also indicates that Mr. McDermott's previous position was that of an Appeals Officer.
[91] While the document indicates that Mr. McDermott had been in his substantive position since 1987, this does not mean that he could not have been acting as an Appeals Officer in 2002, or have been seconded to that position. Moreover, in her affidavit, Ms. Charlton identifies Mr. McDermott as being an Appeals Officer at the Agency's Hamilton office at the material time.
[92] As a consequence, I am not persuaded that Mr. McDermott misrepresented his position to Mr. Palonek.
[93] The next question for consideration is the significance of Mr. McDermott's statement to Mr. Palonek's counsel in mid-2002 that "everything was fine".
iii) Mr. McDermott's Statement That "Everything Was Fine"
[94] Mr. Palonek submits that when Mr. McDermott contacted his original lawyer in late June of 2002 stating that "everything was fine", this meant that Mr. Palonek had been accepted into the VDP. According to Mr. Palonek, from this point forward, he had immunity from prosecution, and it was not then open to the Agency to unilaterally, unfairly and arbitrarily turn around and deny him the protection of the program.
[95] A review of the timing and sequence of events makes it clear that there is no merit to this submission. At the time that Mr. McDermott made this comment, the issue that he was addressing was whether Mr. Palonek was under investigation by the Agency at the time that he came forward with his voluntary disclosure, such that he would be ineligible for consideration under the terms of the VDP.
[96] Indeed, there is no suggestion that at this time Mr. Palonek had provided any financial information to the Agency, let alone complete financial disclosure. As a result, there is no way that Mr. McDermott could possibly have been suggesting that Mr. Palonek had fully complied with the terms of the policy, and would therefore have the discretion of the Agency exercised in his favour.
[97] Moreover, it bears noting that elsewhere in his submissions, Mr. Palonek himself acknowledged that Mr. McDermott's comment simply confirmed that he was not currently under investigation by the Agency.
iv) The Failure of the Agency to Have Mr. Palonek Sign a Client Agreement Form
[98] Mr. Palonek also asserts that he was treated unfairly as at no time was the VDP ever explained to him by representatives of the Agency. Mr. Palonek also notes that the Agency's internal manual states that it is important for taxpayers to be educated about the implications of making a voluntary disclosure. To assist in this process, the Manual calls for taxpayers to sign a "Client Agreement Form" prior to disclosing any incriminating information. However, Mr. Palonek says that he was never asked to sign any such form.
[99] While I am of the view that it would have been preferable for the Agency to have had Mr. Palonek sign a Client Agreement Form, in all of the circumstances of this case, I am not persuaded that its failure to do so leads to the conclusion that Mr. Palonek was treated unfairly in this process such that the Third Level decision must be set aside.
[100] First of all, the Manual to which Mr. Palonek refers states that the Client Agreement Form may be used, not that it must be used.
[101] Secondly, it must be recalled that Mr. Palonek did not contact the Agency directly - he did so through his legal counsel. In these circumstances, it was entirely reasonable for the Agency to presume that Mr. Palonek would have had the benefit of legal advice regarding the parameters of the program. This is especially so where, as here, the lawyer made specific reference to the Information Circular describing the VDP, and also asked for confirmation that Mr. Palonek was not under investigation at the time that he was coming forward, both indicating a familiarity with the VDP process.
[102] Finally, while Mr. Palonek's affidavit asserts that he was not advised by the Agency of the implications of making a voluntary disclosure, there is nothing in his affidavit to suggest that he was not fully aware of the implications of making such a disclosure at the time that his counsel contacted the Agency on his behalf.
v) Events After the Third Level Review Decision
[103] Both parties made reference to the amended income tax returns filed by Mr. Palonek in February of 2005, well after the third level decision was rendered, with counsel for the respondent asserting that these returns disclose hundreds of thousands of dollars in previously undisclosed income, as well as hundreds of thousands of dollars of previously undisclosed capital gains arising from the sale of shares in Found Money Inc. and Rothwell Corporation. According to counsel, by including these documents in his affidavit, Mr. Palonek has admitted that his August 2002 tax returns were materially incomplete.
[104] Mr. Palonek also made reference to these returns in his submissions.
[105] The task of this Court is to review the third level decision itself, in order to determine whether it was arrived at fairly, and was reasonable, based upon the information before Ms. Charlton. While there are limited circumstances where a reviewing court may consider other information in its deliberations, those circumstances do not arise here. As a consequence, I am not prepared to consider any changes that Mr. Palonek may have made to his tax returns after the decision under review was rendered.
vi) The Alleged Charter Violations
[106] Mr. Palonek asserts that a number of his Charter rights were violated by the Agency in its handling of his voluntary disclosure.
[107] Many of Mr. Palonek's arguments lack any evidentiary foundation, such as his contention that his section 6(1) mobility rights were detrimentally affected by the Agency having communicated with border authorities in the United States. Another such argument is Mr. Palonek's contention that his section 15 equality rights were infringed by the Agency's pursuit of him, and by its failure to pursue the alleged tax evasion committed by his former spouse.
[108] As the Supreme Court of Canada has repeatedly observed, alleged Charter violations are not to be determined in the absence of a proper evidentiary record: see, for example, Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130 at ¶ 80, and MacKay v. Manitoba, [1989] 2 S.C.R. 357 at ¶ 8 and following.
[109] Other alleged violations of Mr. Palonek's Charter rights are not explained beyond the bare assertion that such violations have occurred. An example of this is Mr. Palonek's claim that his right under section 8 of the Charter to be free from unreasonable search and seizure was violated. Mr. Palonek did not identify which actions of the Agency amounted to either a search or a seizure, and thus it is both impossible and unnecessary to address this claim.
[110] The one issue that was a recurring theme throughout Mr. Palonek's submissions, and needs to be addressed, is his assertion that the Agency had a duty to warn him prior to his having made his disclosure that in the event that he was ultimately found not to have met the requirement of the Voluntary Disclosure Program, any information disclosed by him could later be used against him in a prosecution for tax evasion.
[111] Although it was not phrased in precisely these terms, as I understand Mr. Palonek's argument, he is contending that the failure of the Agency to explicitly warn him of his right to remain silent, and of the potential risks of making a voluntary disclosure, offended his right against self-incrimination guaranteed under sections 11(c) and 13 of the Charter.
[112] This argument can quickly be disposed of on the basis that it is premature. Section 11(c) applies where an individual has been charged with an offence. If Mr. Palonek is charged with tax evasion at some future date, he may wish to advance his arguments at that time. At this point he is not facing any such charges. As a consequence, section 11(c) of the Charter is not engaged.
[113] Section 13 of the Charter restricts the use that can be made of testimony given in a proceeding. Mr. Palonek has not given any testimony in any proceeding, and thus this section also has no application in this case.
vii) The Constitutional Question
[114] Mr. Palonek served a Notice of Constitutional Question in which he identifies that he intends to question "the constitutional validity of the Voluntary Disclosure Program".
[115] In accordance with section 57 of the Federal Courts Act, a Notice of Constitutional Question is to be served where an individual intends to challenge the constitutional validity, applicability or operability of an Act of Parliament or of the legislature of a province, or of regulations made under such an Act. The VDP is a policy adopted by the Agency, and as such is not properly the subject of a Notice of Constitutional Question.
[116] However, at the hearing Mr. Palonek advised the Court that what he actually sought to challenge were the sections of the Income Tax Act that allowed the Agency to prosecute individuals based upon information that the individuals provided to the Agency under the VDP. No Notice of Constitutional Question has been served with respect to Mr. Palonek's challenge to the prosecution provisions of the Income Tax Act.
[117] Elsewhere in Mr. Palonek's submissions, he suggested that the constitutional question related to how the VDP policy had been administered in his case.
[118] As I understand Mr. Palonek's submissions, his primary concern is with the way that the Agency handled his case. At the heart of his argument is his belief that an individual may be induced by the VDP to come forward and provide incriminatory information to the Agency which may ultimately be used against the taxpayer in a subsequent prosecution for tax evasion.
[119] To the extent that this is Mr. Palonek's concern, I have already addressed this issue in the section of this decision dealing with the alleged violations of his Charter rights.
[120] This then leaves the question of whether Ms. Charlton's decision was reasonable, having regard to the evidence before her. This issue will be considered next.
viii) The Reasonableness of the Decision Under Review
[121] Counsel for the Agency candidly acknowledged that Ms. Charlton erred in noting in her decision that Mr. Palonek had admitted having an ownership interest in Found Money Inc. and Found Money International. Mr. Palonek had admitted to having an ownership interest in Found Money Inc. and also admitted having been involved with Found Money International. While the nature of his involvement with this second company was never made clear, it is clear that at no time did Mr. Palonek admit to having an ownership interest in Found Money International.
[122] I am not persuaded that this error, by itself, is sufficiently material as to justify setting aside Ms. Charlton's decision, which was otherwise eminently reasonable.
[123] Mr. Palonek has advanced numerous arguments as to why he says that Ms. Charlton's decision in her third level review was not reasonable. Most of these submissions lack any evidentiary foundation. While I have considered all of Mr. Palonek's submissions, both oral and written, it is only necessary to refer to some of them.
[124] While acknowledging that he disposed of shares in Rothwell Corporation during the period in question, Mr. Palonek submits that the minimal value of these shares was such that his failure to disclose the proceeds could hardly be considered to be material, having regard to the fact that his overall tax liability was in the vicinity of $1.7 million. There is no admissible evidence before the Court as to what Mr. Palonek sold his shares for, or what, if any, capital gain or loss may have been realised on the disposition. Nor is there clear evidence before the Court as to the overall amount of Mr. Palonek's indebtedness to the Agency.
[125] As a consequence, I am not persuaded that Mr. Palonek's admitted failure to disclose that he had received money from the disposition of shares in Rothwell Corporation was not material information, with the result that his voluntary disclosure to the Agency was indeed incomplete.
[126] Similarly, there is no evidence to support Mr. Palonek's claim that Found Money Inc. was a dormant company. Moreover, this claim is at odds with Mr. Palonek's admission that he had received income from this company during the period in question.
[127] During the hearing, Mr. Palonek was insistent that all of his sources of income were fully disclosed to the Agency in the tax returns that he filed in August of 2002. According to Mr. Palonek, the only debate was as to whether he should be claiming as an employee or as an independent contractor.
[128] First of all, the evidence before this Court does not support Mr. Palonek's submissions in this regard. In addition, it is difficult to understand how Mr. Palonek can assert that all income was properly disclosed to the Agency in August of 2002, given his equally emphatic insistence that he had not prepared the tax returns in question, never signed them, and had no knowledge as to their contents.
[129] Finally, contrary to Mr. Palonek's submissions, the evidence before this Court does not provide any basis for concluding that Mr. McDermott lied, or misrepresented the information provided by Mr. Palonek. Nor does the evidence establish that the Agency has engaged in extortion, blackmail, corrupt practices, a personal vendetta or fraud in its handling of this case.
[130] Having subjected Ms. Charlton's decision to a probing examination, I am satisfied that, with the exception of the finding with respect to Mr. Palonek's ownership interest in Found Money International, the decision was one that was not only reasonably open to her, but was indeed correct on the record before her.
Conclusion
[131] In his oral submissions, Mr. Palonek volunteered that his counsel had told him in December of 2002 that he had better provide the Agency with the information it had requested, or he would have to face the consequences. Mr. Palonek dismissed this advice as "fear-mongering". It appears that Mr. Palonek was given good advice. It is unfortunate that he chose not to take it.
[132] For these reasons, this application for judicial review is dismissed.
Costs
[133] The parties were afforded an opportunity to address the issue of costs at the close of the hearing. Having taken those submissions into account, I am not persuaded that there is any reason to deprive the successful party of its costs in this matter.
JUDGMENT
THIS COURT'S JUDGMENT IS that:
This application for judicial review is dismissed, with costs to the respondent.
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-241-05
STYLE OF CAUSE: EDWARD PALONEK v.
THE MINISTER OF NATIONAL REVENUE
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: March 28-29, 2006
APPEARANCES:
| Edward Palonek
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| Kevin Dias
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SOLICITORS OF RECORD:
| Edward Palonek
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| John H. Sims, Q.C. Department Attorney General of Canada Ottawa, Ontario
|