Tax Court of Canada Judgments

Date: 20000327

Docket: 98-1305-IT-G

BETWEEN:

MICHAEL NORWOOD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Order

McArthur J.T.C.C.

[1] This motion by the Appellant is under subsection 24(1) of the Canadian Charter of Rights and Freedoms requesting the Court to find that the Minister of National Revenue based a reassessment upon documents obtained by an unreasonable search and seizure that infringed the Appellant's rights under section 8 of the Charter. This Court must first decide if there was an unreasonable search or seizure and if so, what remedy if any should be granted. The hearing of the appeal was adjourned sine die pending the disposition of the motion. Evidence was adduced over a period of two days with argument on a third day. The litigants presented comprehensive written argument and numerous authorities. Koshy E. Koshy, Tom Armour and Kevin O'Reilley were called to testify by the Appellant.

[2] The facts I find that are pertinent to the question whether section 8 of the Charter was violated are the following. After an audit, the Minister of National Revenue added to the Appellant's income the amounts of $4,867, $41,493 and $65,806 for the 1991, 1992 and 1993 taxation years, respectively. In early February 1995, the Appellant was informed that Revenue Canada would conduct an audit on the Appellant and 450344 Ontario Inc.[1] (the Corporation) pursuant to section 231.1 of the Income Tax Act. The Corporation operates a restaurant and bar (the Silver Dollar). The Minister's auditor, Mr. O'Reilley, attended the offices of the accounting firm representing the Appellant and the Corporation, Connelly, Koshy & Frouin (CKF). The auditor dealt with two accountants, Mr. Koshy, C.A., and an employee, Mr. Armour, C.G.A.[2] The auditor was directed to use a designated office and to request documents he required from Mr. Armour. Several large boxes of cancelled cheques and other requested material were provided to the auditor.

[3] Mr. O'Reilley commenced his audit from the accountants' premises about mid-February 1995. His assigned office had no telephone. On March 23, while he was aware that Mr. Koshy and Mr. Armour were absent from Ottawa, he entered Mr. Armour's office to use the telephone. In order to do so, he had to go through an abutting office which was vacant and had a telephone. He had to open a closed but unlocked door to Mr. Armour's office. Having completed his call, and before exiting the office he saw a file on a storage shelf identified on its cover as a file for the Corporation. He took the file back to his office and photocopied hand-written notes (the notes) apparently made by Mr. Armour during his initial interview with the Appellant on December 11, 1992. He then returned the file to its original place in Mr. Armour's office without comment to the Appellant or his accountants. Notations in the notes that caught the auditor's attention included:

2. Door fee for entrants - $2 per person

Mike pockets gives to wife

~ $1000/week

i.e.: undeclared income

13. Sources of Money – Cash

- Pool Tables

- Game Machines

- Poker Machines

- $2 Loon (illegible)

- Undeclared income

- Mike to consider declaring in the future[3]

[4] Four years later, upon exchange of documents the Appellant and his representatives became aware of the existence and contents of the notes that give rise to this motion. The Appellant cries unfair and a blatant violation of section 8 of the Charter. The Respondent submits that Mr. O'Reilley's search and seizure was an administratively authorized search under section 231.1 of the Act which provision is constitutionally valid. The Appellant does not question the constitutionality of section 231.1 but submits that the auditor overstepped the authority granted to him. Paragraphs 231.1(1)(a), (c) and (d) read as follows:

231.1(1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act,

(a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and

(b) ...

and for those purposes the authorized person may

(c) subject to subsection (2),[4] enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and

(d) require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.

[5] The provisions of section 231.1 give a Revenue Canada auditor very broad powers. Mr. O'Reilley had the right to attend the accountant's premises, have access to the taxpayer's relevant documents and to require the taxpayer and his accountants to give him reasonable assistance. Does this include the right to enter an accountant's closed office in the accountant's absence and take a shelved file that had not previously been made available to him and that he did not request? I think not.

[6] Mr. O'Reilley testified that prior to entering Mr. Armour's private office, he was directed there by a female staff member of the accounting firm. He could not remember any details of that person whatsoever other than her gender. He also believed that the door to Mr. Armour's office was open but was somewhat unsure. Mr. Koshy stated that he questioned his staff and no one could remember directing Mr. O'Reilley to Mr. Armour's office. Further, from the evidence I am satisfied, on a balance of probabilities, that Mr. Armour's office door was closed before Mr. O'Reilley entered. Mr. Armour is a creature of habit who was reputed to close his door whenever he left the premises.

[7] Mr. O'Reilley replaced the file without mentioning to Mr. Armour through the many discussions they had following the incident that he took the file and removed a document in Mr. Armour's absence. This is probably one of those instances where an honest person seeking to recall events four years past sees those events in the light of his own present-day interests and wants to put his prior conduct in the best possible light.

[8] I believe that a more candid approach and higher standard is expected of Revenue Canada auditors. In several meetings with the Appellant and his representatives after March 23, 1995, officers of the Ministry of National Revenue never mentioned that they had copies of these notes which compromised the Appellant's position. This is not dealing in good faith. It strengthens the conclusion that the notes were obtained surreptitiously and without colour of right. Their behaviour was that of one who has something to hide. I do not consider Mr. O'Reilley's actions too distant from entering the premises with a key in the dead of night. This type of behaviour is not intended in paragraphs 231(1)(c) and (d) of the Act notwithstanding the broad powers it grants to an auditor. There was a method of conduct established when Mr. O'Reilley attended the premises of CKF. He was given and provided with all of the documents he requested when he requested them. The Appellant and his accountants were entitled to rely on that procedure and not be subject to secretive file searches. CKF is host to an average of 20 Revenue Canada audits annually and their tradition has been when documents are asked for, they provide them.

[9] Counsel for the Respondent argued that the search involved the books and records of the Corporation which was the operating company of the Silver Dollar and the Appellant did not have a personal right to privacy of the company books. The Corporation was in turn owned by 947014 Ontario Inc. and the Appellant owned all of the shares of both companies, 450344 and 947014. The Respondent urged the Court to look at the context. He stated that this was an audit of the Corporation and there cannot be exaggerated claims to privacy. Section 231 requires disclosure. He believes that It was not a personal file of the Appellant which was searched by Mr. O'Reilley but a file of 450344. Counsel emphasized that the most important factor is that this is an audit conducted pursuant to statutory provisions. There is no privilege between accountant and client. He added that this was a civil search, not a criminal search.

[10] I have no difficulty concluding that the audit included the Appellant personally. Exhibit A-2 is a letter dated February 6, 1995 from Mr. O'Reilley to the Corporation 450344 that includes:

Dear Mr. Norwood:

The purpose of this visit is to examine your books and records and to obtain any further information that may be required in connection with the corporate tax returns and your personal income tax returns. ...

In addition, Exhibit A-6 is a memo dated May 27, 1996 from Mr. O'Reilley to Mr. Koshy stating:

As requested, attached you will find copies of the schedules and forms pertinent to the ongoing audit of 450344 Ontario Inc. (o/a Silver Dollar), and Michael Norwood.

[11] The Respondent raised the fact that Mr. Armour was employed by 729024 Ontario Inc. which was controlled by CKF. This has no effect on these proceedings. It, 729024, was a silent corporation for the internal purposes of CKF. The Appellant at all times believed he was dealing with CKF in general and in particular, Mr. Koshy and his employee, Mr. Armour.

[12] The Respondent raises the questions whether the Appellant has a personal right to privacy. I find that the notes are not financial records nor are they "the books and records of a taxpayer and any document that may relate to the information that is or should be in the books and records of a taxpayer ...".[5] The notes do not contain information that should be in the books and records. The notes appear to simply be the reflections of Mr. Armour during a private and personal conversation between an accountant and his client. It is repugnant to the public's perception of the rule of law and acting in good faith that an officer of Revenue Canada would covertly search and seize a document and, secondly, use its contents as assistance in reassessing the Appellant. I do not accept the Respondent's position that if there was a right of privacy, the right was that of the Corporation and not that of Mr. Norwood who is the applicant in this motion. The Respondent submitted that context is everything and pursuant to subsection 231.1(1), the auditor had a right to obtain the file. I believe the Appellant's view of the context is more accurate. He is the president and sole shareholder of the Corporation and 947014. From a layman's position, he intermingles his acting personally with his actions on behalf of the Corporations. The audit clearly included him personally. The notes, the accuracy of which he denies, are part of a very personal sharing between a client and his accountant which he expected to be confidential. Pursuant to the rules of professional conduct of the Institute of Chartered Accountants of Ontario,[6] chartered accountants may not

... disclose or use any confidential information concerning the affairs of any client, former client, employer or former employer except ...

(c) when such information is required to be disclosed by order of lawful authority or, in the proper exercise of their duties, by the Council, the professional conduct committee or any subcommittee thereof, the discipline committee, the appeal committee, or the practice inspection committee: ... [7]

The above requirement extends to any non-chartered accountants that are employed by a chartered accountant.[8] Surely, if the conversation took place, the Appellant cannot be said to have been speaking for the Corporation alone. That is an untenable concept.

[13] The Court held in R. v. McKinlay Transport[9] that a taxpayer's private interest with respect to accounting documents is relatively low vis-à-vis the Minister. I do not think that the notes are accounting documents envisioned by the Supreme Court of Canada in McKinlay.

[14] I do not believe subsection 231.1(1) contemplates the Minister's auditor entering into an accountant's private office, through a closed door, during his absence and taking a shelved file. I do not accept that he was shown in by an employee of CKF. The Act has defined a course of conduct to be followed that Mr. O'Reilley could have taken to obtain access to Mr. Armour's office and its relevant files.[10]

[15] Having found the auditor exceeded the authority given to him under section 231.1, were the Appellant's rights violated under section 8 of the Charter and if so, what remedy, if any, should be granted. Section 8 and subsections 24(1) and (2) read as follows:

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

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

(2) Where, in proceedings under subsection (1), a court concludes that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter, the evidence shall be excluded if it is established that, having regard to all the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute.

[16] As previously stated, counsel for the Respondent submits that to make a Charter challenge, a personal right must be infringed. In written argument, he stated:

A section 8 analysis requires two distinct inquiries: i) Did the impugned state conduct interfere with the reasonable expectations of privacy of the Applicant? ii) If so, was that interference unreasonable? The onus is on the Applicant to demonstrate that his individual reasonable expectation of privacy is at stake. If he cannot, there is no need to proceed further. If the Applicant can demonstrate a reasonable expectation of privacy, he must then show that the searches were an unreasonable interference with that expectation of privacy.

Counsel stated that this is where the Appellant's argument fails and referred the Court to the principles flowing from Edwards v. The Queen.[11] These include that section 8 is to protect a personal or person's right to privacy and the Court must consider whether the search was reasonable considering the totality of the circumstances.

[17] In Edwards, because the Court found no personal right was affected by the police conduct at a search of a third party's premises, the Court held that the applicant could not contest the admissibility of evidence under subsection 24(2) of the Charter. I agree with the reasoning in R. v. Jarvis.[12] After reviewing the Edwards guidelines together with assistance from other cases, Alberta Provincial Court Justice Fradsham concluded that Jarvis, a taxpayer, had a reasonable expectation of privacy with respect to his documents in the possession of his accountant. The Court found that the documents belonged to Jarvis and had been delivered by him to his accountant under a misapprehension that he was being audited under subsection 231.1(1) of the Act. The Court concluded that Jarvis had a reasonable expectation of privacy in respect to the documents which were seized from his accountant's office without a warrant and the seizure was unreasonable. In Donovan v. The Queen,[13] the following remarks of Lamarre Proulx, J. of this Court are relevant to the present situation:

Section 8 of the Charter, that stipulates that everyone has the right to be secure against unreasonable search or seizure, applies to the administrative inspections. These inspections must be carried out in a reasonable manner. The standards to be applied are different from those applied to criminal proceedings as seen in McKinlay (supra). In the matter of regulatory and administrative context, the standard is determined in accordance with the expectation of privacy and the legislative goal pursued. ...

[18] In Jarvis, the Court recognized a confidential relationship between accountant and client. This is not a privilege that is respected in the Act between solicitor and client. This right of confidentiality does not override the provisions of the Act but, proper procedure must be taken under the Act. The Appellant testified that he expected the information he supplied his accountant and the contents of the files were held in confidence and privacy. This confidentiality is recognized by the Institute of Chartered Accountants of Ontario in Rules 210.1 and 210.2.[14] Considering the evidence, I am satisfied that the Appellant personally was a client of CKF together with his Corporations. In compliance with the Act, by obtaining a warrant, the Minister could have obtained the file including the notes. The reasonable expectation of privacy is to be determined on the basis of the totality of the circumstances. Section 231.1 does not allow the Minister's representative complete authority to do as he wishes. There is a procedure in the Act which he is to follow. The Appellant had a reasonable expectation of privacy in the notes. The auditor's search and seizure was unreasonable pursuant to section 8 of the Charter.

[19] Prior to the Gernhart v. The Queen, 99 DTC 5749, under subsection 176(1) of the Act, the Minister was required to transmit to the Tax Court all relevant documentation in respect of an appeal. The Federal Court of Appeal found that subsection 176(1) created a significant intrusion on the privacy interests of a taxpayer and was an unreasonable seizure contrary to section 8 of the Charter. The Court found that a taxpayer has a privacy interest in the contents of an income tax return. Applying the Gernhart reasoning to the present situation, it is consistent to conclude that the Appellant had a privacy interest in the contents of notes made by his accountant during a personal interview.

[20] The notes contained personal information whether accurate or not. The auditor acted on that information. During examinations for discovery of Mr. O'Reilley by Appellant's counsel Mr. Vanier in October 1999, there was the following exchange speaking of the notes:

Q. ... No. 2,[15] what's your knowledge, information and belief as to what No. 2 indicates?

A. It appears that the owner is taking roughly $1,000 a week from the door fee and not reporting it.

Q. Okay. That's your interpretation?

A. Yes.

Q. What date was this that you obtained this document? Is that the same date as recorded on there, March 28th, '95?

A. Yes. Mr. Koshy was in Shawville at the time, I believe.

(Transcript, page 41)

...

Q. ... Note 13,[16] there's another asterick there. What to your knowledge and information does that note stand for?

A. To me it indicates the owner has all these individual sources of cash which he is not declaring and he's going to consider declaring it in the future. (Transcript, page 44)

[21] Mr. O'Reilley testified that the final assessment was not completed relying on a net worth basis. He stated that the information in the notes was used as a basis for "our assessment" and that "it definitively assisted us, yes".[17] There appear to be two issues before the Court in the Notice of Appeal, namely, the pool table revenue and the discrepancy between the cash register tapes and the GST and PST returns and the revenue reported in the financial returns.

[22] The Appellant admits not reporting pool table revenues of $4,867 in 1991, $18,604 in 1992 and $20,028 in 1993. These amounts were easily detected. The pool tables belonged to Regent Vending and the revenues were divided equally with Regent giving the Appellant or the Corporation a cheque for a 50% share. The Respondent states that the further amounts of $22,889 in 1992, $45,776 in 1993 were arrived at after a review of cash register tapes and bank records revealing discrepancies between sales and bank deposits after allowing $93,019 in undocumented cash expenses.

[23] In O'Neill Motors Limited v. The Queen,[18] Bowman J. was faced with the question as to what remedy, if any, was available to an Appellant under section 24 of the Charter from reassessments based on information and documents obtained by an illegal search and seizure that infringed the Appellant's rights under section 8 of the Charter. He concluded that the reassessments should be vacated because to exclude the evidence was tantamount to vacating the reassessments because without such evidence the Minister could not justify the reassessments or the penalties. At page 1496, Bowman J. added the following caution:

I would not want my conclusion in this case to be taken as a wholesale sanctioning of the vacating of all assessments where some component of the Minister's basis of assessment was unconstitutionally obtained information. Other cases may arise in which a simple exclusion of evidence is sufficient, others in which the evidence is of little or no significance in the making of the assessments or where its introduction would not bring the administration of justice into disrepute, or still others in which Suarez solution will commend itself. In the exercise of the discretion vested in the court under section 24 of the Charter one must be vigilant in balancing, on the one hand, the rights of the subject that are protected under the Charter, and on the other, the importance of maintaining the integrity of the self-assessing system. As each case arises these and, no doubt, other factors will play a role and all factors must be assigned their relative weight. In the circumstances of this case I have concluded that the most appropriate exercise of my discretion is to vacate the assessments.

[24] O'Neill Motors[19] was upheld by the Federal Court of Appeal and Linden J. supported that statement stating at page 6428:

I would like to specifically underscore the words of the Tax Court Judge, with which I fully agree, to the effect that this type of extreme remedy must not be considered to be an automatic one, being reserved only for cases of serious violations where other remedies are insufficient. ...

What remedy if any is available to the Appellant? The Appellant submits that the basis for the reassessments was the information obtained through a violation of section 8 of the Charter and therefore, the assessments should be vacated entirely. For this position he relies on O'Neill Motors. The situation in that appeal differed from the present one since an agreed statement of facts included the admission that the assessments could not be sustained without tainted evidence. This admission was essential to Judge Bowman's decision to vacate the reassessments.

[25] The facts in the present appeal can be easily distinguished and do not warrant the O'Neill Motors remedy which, in my opinion, would be excessive. In review, Mr. O'Reilley entered Mr. Armour's office at a time when he knew that Mr. Armour was out of town for one day. While he may have used Mr. Armour's telephone, he then acted in a manner which he knew or at the least ought to have known, required proper authority. Without authorization he removed a file that he knew concerned the Corporation. He took that file back to his assigned office and removed the notes. He returned the file and made no mention of the incident to the Appellant or his representatives. Information from the notes assisted the Respondent's investigation and final reassessments. The evidence was not divulged by the Minister for four years. The course of investigation was outside the scope of subsection 231.1(1). Alternate methods under section 231.2 were available to permit the Minister to search and seize files. This does not support the Respondent's position.[20] The Supreme Court of Canada observed in R. v. Collins[21]that because evidence could have been obtained without a violation of the Charter tends to render the violation more serious.

[26] The Respondent submits that even if the Charter was breached in obtaining the notes, this evidence should not be excluded under section 24(2) of the Charter and cites R. v. Stillman.[22] The Court in Stillman looked to the seriousness of the breach and whether the evidence would have been discovered without the breach. Counsel for the Respondent adds that the information in the notes was known or obtainable without the notes. He offered no evidence to support this statement.

[27] The issue now narrows down to how my discretionary powers are to be exercised. The evidence seized in violation of the Appellant's Charter rights was helpful but is not fundamental to all the assessments. There is no doubt that the undisclosed pool table revenue was easily discovered by the auditor without assistance from the information in the notes. Given the broad language in subsection 24(1) of the Charter, this Court has the discretion to apply an "appropriate and just" remedy to correct the damage inflicted upon the Appellant. The use of the notes would, or at the least may, have an unfair impact on a trial. In particular, its use to sustain the penalties assessed would I believe, diminish the public perception of fairness and "bring the administration of justice into disrepute".[23]

[28] This would be an appropriate case to simply exclude the tainted evidence, but for reasons discussed below, it is not an adequate remedy. Its use would diminish the public perception of fairness although I find that the Appellant is not entitled to the additional relief that the entire reassessments be vacated. In O'Neill, the Court found that no evidence remained to sustain the reassessments. That is not the case here. Mr. O'Reilley obtained tainted evidence which assisted him in concluding there was unreported income. Using the notes the Minister's suspicions were strengthened and given direction. Originally the audit proceeded by the net worth method; proposals were made to the Appellant, reassessments were completed which were later reduced by further and final reassessments. The Minister states in argument and in the Reply to the Notice of Appeal that his position is based on facts. He adds that the pool table revenues come directly from Regent Vending and the approximate $150,000 discrepancy less estimated expenses were taken from discrepancies in the records of the Corporation. This conflicts with Mr. O'Reilley's testimony in his examination for discovery where he stated he used some net worth methods in 1992 and 1993.

[29] I recognize that the auditors' job is not an easy one. They do require tools to carry out their work and our tax system relies essentially on voluntary compliance. To ensure or enforce compliance, Revenue Canada has a variety of mechanisms at its disposal including audits, investigations, searches and seizures. The Minister must be given broad powers to administer the Act.[24] The present case was not a criminal investigation but a civil audit in which the Minister may have believed the taxpayer to have underreported or not reported taxable income. Indeed, without difficulty and without need of the information in the notes, the auditor discovered unreported pool table revenue.[25] The auditor admitted that the notes assisted or directed his search for additional unreported income. It is reasonable to conclude that the auditor should have used the additional remedies provided in the Act and specifically, subsections 231.2(1) and (3). The Appellant and Mr. Armour had a right to expect privacy of the notes.

[30] There is no perfect solution. To simply exclude the notes does not remedy the situation because the tainted information has already been acted upon. The damage has been done. Apart from the pool table revenues, the amount in question is remarkably similar to that referred to in the notes as unreported income. The language of subsection 24(2) of the Charter is mandatory, "the evidence shall be excluded ... " if the stated conditions are met. Subsection 24(1) permits one whose rights have been infringed to have the Court grant such remedy as the Court considers appropriate and just in the circumstances. As stated, a simple exclusion of evidence does not provide a meaningful remedy. To use an analogy, too much salt has been added to the soup and the whole pot is unpalatable. I agree with the Minister's statement that it would bring the administration of justice into disrepute given the Appellant's acknowledgement with respect to the pool table revenues to vacate the entire assessment.

[31] I have considered the various options open to me which include: (i) finding the notes were of little significance in the arriving at the assessments; (ii) a simple exclusion of the notes; (iii) a Suarez solution;[26] and (iv) a wholesale vacating of all assessments. The Respondent acknowledges that the notes were of use. I believe the Minister's recommendation of simply excluding the notes is not a practical solution because it is too late. It is vague and open-ended and does not impose a meaningful sanction. The fact remains that tainted evidence assisted the Minister's assessment. It is all but impossible to be specific with respect to how harmful the notes were to the Appellant. But for the pool table revenues, the Respondent relied on at least part, if not all, of the notes for the assessments.

[32] Choosing a reasonable alternative, I therefore grant the Appellant's motion, with costs, and direct that the assessments be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis of including in the reassessments the undeclared revenues relating to the pool tables in the amount of $4,867 in 1991, $18,604 in 1992 and $20,028 in 1993 together with the appropriate interest and penalties, and the balance of the assessment in each year is to be vacated. While it is important that people pay their taxes and not be allowed to engage in tax evasions and the suppression of income, it is more important that the integrity of our system and the taxpayers' Charter rights be protected.

Signed at Ottawa, Canada, this 27h day of March, 2000.

"C.H. McArthur"

J.T.C.C.

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