Date: 19981015
Dockets: 96-4107-IT-G; 96-3026-IT-G
BETWEEN:
BRIAN A. DONOVAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These are appeals for the years 1986, 1987 and 1988. The Appellant was reassessed for these years for unreported income in the approximate amounts of $10,000, $40,000 and $100,000 respectively. Penalties were also assessed pursuant to subsection 163(2) of the Income Tax Act (the "Act").
[2] The question at issue is principally whether the Appellant’s assessments should be vacated on the basis of the decision of this Court and of the Federal Court of Appeal in O’Neill Motors Limited v. The Queen, 96 DTC 1486 and 98 DTC 6424. These decisions derive essentially from the decision rendered on January 21, 1993, by the Supreme Court of Canada in Baron v. Canada [1993] 1 S.C.R. 416, that found section 231.3 of the Act not to be to be constitutionally valid.
[3] Mr. Daniel Nicholson, C.A., the Appellant’s accountant since the year 1990, Mrs. Maria Donovan, the Appellant’s sister, and the Appellant himself testified at the request of the Appellant’s counsel. Mr. G.A. MacDonald, a Revenue Canada auditor, now retired, Mr. M.H. Allen C.A., the Appellant’s accountant during the litigious events, and Mrs. Claudette Miller, formally Richard, an investigator in the Special Investigation Unit at the time of the events, now head of a similar division at Revenue Canada, testified at the request of the Respondent’s counsel.
[4] The Appellant has been in the logging industry since 1976. In that year, after having worked for a few years in a pulp company, he purchased a truck and began logging operations. The logging season lasts from early June to late Fall.
[5] In 1978 and 1979, the Appellant had 30 seasonal employees, woodcutters and truckers. The Appellant arranged a small office in the back of his garage for the three trucks that he then owned. In 1980 and 1981, he had 45 employees. The year 1982 was a year of hardship for the Appellant. It was the year in which the logging lots were divided between 11 major wood mills. This reallocation seems to have caused an absence of contracts to the Appellant.
[6] In 1983, the Appellant obtained an important contract with Miramichi Pulp and Paper Ltd., hereafter called Miramichi. In 1984, he had 50 employees. This is the year he hired Mr. Bud Simpson, a retired employee of the Department of National Defence. In that year he also bought a new truck.
[7] Although he had hired Mr. Simpson, it was his sister-in-law, Betty Donovan, who prepared the payroll. Usually the Appellant would be in the field for most of the week but on Fridays he spent his time at the office signing pay cheques as well as other cheques needed for running the business. Only the Appellant had signing authority. The Appellant made all the bank deposits. It was also on Friday that the Appellant received or picked up his cheque from Miramichi. A photocopy of this cheque was then sent to the governmental authorities by the Appellant’s sister Mary Donovan, to obtain the subsidies provided for under a governmental program.
[8] It is not clear whether it was in 1985, 1986 or 1987, but in these years, the Appellant obtained an additional contract from Michamichi. He had then 60 employees who would work for about 40 weeks of the year. The contract, according to the Appellant, differed from previous ones in the sense that he would receive some advance payments. It was difficult to understand on what basis the advance payments were made and why that system would have confused the Appellant in reporting his income. Miramichi provided the Appellant with all the amounts received in a year up to the last one.
[9] The explanation given by the Appellant sounded very much like the one put in writing by the Appellant’s actual accountant, Mr. Nicholson. I quote from Exhibit A-10:
Brian Donovan's Position:
Agrees that the above amounts were not included in revenue but the omission was not intentional. The contracts from Miramichi Pulp and Paper Ltd. run from April 1 to March 31 and are renewed each year. Brian's bookkeeper would file cheque stubs and invoices by contract. Therefore, Brian's fiscal year would cover three months of one contract and nine months of a renewed contract.
The reason given by Brian for not claiming income received during the first part of the year on the previous contract is that MPP paid advances to Brian before December 31, 1987 for wood that has been cut on a contract taken over from Elwood Sturgeon, but not delivered to the mill. Brian believed that these advances were included in revenue in the year they were received. When the wood was delivered to the mill, the company would give Brian an invoice for the net amount (wood sale price less advances). Brian believed that these invoices were for the full amount before deducting advances and did not include them in revenue for this reason.
[10] In the summer, which was the busy time for the business, he said that he did not have time to closely examine the records. In the month of March, this was different, as he had time to get them ready for his accountant, who was Mr. Murray Allen, until 1989.
[11] On September 25, 1989, Mr. McDonald from Revenue Canada came to the Appellant’s office and to his accountant’s office to audit the Appellant’s books for the years 1986, 1987 and 1988. Mr MacDonald had made the first of a few telephone calls on September 14, 1989 to obtain an appointment with the taxpayer and his accountant (Tab 18 of Exhibit R-1). Mr MacDonald had received a request to audit (Exhibit R-4) from a screener together with the screener’s file. This, he said, was the normal practice to commence an audit.
[12] Respecting the Appellant’s 1988 tax return, it was not filed at the time of the audit in September 1989. The Appellant had signed an incomplete return form, asking his accountant to file it when completed. The notes taken by the auditor (Tab 18 of Exhibit R-1) indicate that on September 15, 1989, the Appellant was aware that his income tax return for the year 1988 was not yet filed. A document signed by the Appellant dated September 25, 1989, authorized Mr. MacDonald to discuss the Appellant’s income tax returns for the 1988 and prior years with his accountant (Tab 16 of Exhibit R-1).
[13] On the day of his visit to the Appellant's accountant, the auditor brought the return to Revenue Canada with the permission of the Appellant’s accountant. This was confirmed by Mr. Allen. The return was filed, as completed, by the Appellant’s accountant. However, the Appellant testified that he had not authorized the filing of the return. For that year 1988, the auditor determined, a short time later, that an amount of $103,178, paid by Miramichi had not been included in the Appellant’s statement of income.
[14] Mr. MacDonald, after discussion with his superiors, transferred the file to the Special Investigation Unit on October 6, 1989 (Exhibit A-19). This note reads as follows:
Taxpayer omitted $103,178 he received from Miramichi Pulp and Paper between Jan. 28, 88 and March 24, 88. His initial response to our question concerning the lack of income in this period was that the roads were closed and he was not paid. When confronted with the cheque copies he agreed they should have been included in his income summary but were deposited to his savings account rather than the business account.
Taxpayer omitted $57,536 in 1987 and $12,746 in 1986.
Brian Donovan conducts this operation and makes all decisions without any control. He has been in the business for 15 years and knows the income should have been reported.
The taxpayer was reassessed for unreported income of $17,600 for the 1985 taxation year.
[15] On November 21, 1989, there was another meeting with the Appellant and Mr. MacDonald. This time an investigator of the Special Investigation Unit, Mr. Terry Le Blanc, was also in attendance. He did not inform the Appellant that he was from this unit.
[16] On November 22, 1989, Mr. MacDonald met the Appellant's accountant, Mr. Allen, with Mr. Leblanc and made notes of his meeting which have been produced as Exhibit R-5. These notes are:
Nov. 22 – 9 a.m. Mr. Allan said he gets the records from Brian Donovan and prepares the return. We told him about the amounts of income which were unreported during the years 1986, 87 and 88. He does not attempt to reconcile any figures with General Ledger prepared by the T/P. He works from the file folders which contain the cheque stubs and expense vouchers. If he needs information, such as interest expense, it is provided by the T/P. He does not verify income or expense and would not be aware of any missing cheque stubs.
He meets with taxpayer during the year and they estimate profits and what equipment T/P may buy in order to reduce taxable income through capital cost allowances. Mr. Allan says T/P understands how CCA works.
Mr. Allan has suggested that T/P keep records which would enable him to prepare a balance sheet but the T/P was not interested.
"G.A. MacDonald"
[17] Mr. Murray Allen indeed testified that when he prepared the Appellant's tax returns, he did not review the back up documents. He took the amount of income and expenses that were given to him by the Appellant.
[18] Later on, a letter dated December 6, 1989, was received by the Appellant from Mr. McDonald. This letter was produced as Exhibit A-5 and also as Tab 13 of Exhibit R-1. It stated that the Appellant's income had been understated and that Revenue Canada was considering the imposition of penalties. It gave time for any explanations or comments that the Appellant wished to make. The summary of the proposed adjustment was attached to that letter. The unreported income indicated for the years 1986 to 1988, was in the respective amounts of $12,746.43, $57,536.01 and $93,779.49.
[19] On December 12, 1989, the Appellant wrote asking for a delay, (Exhibit A-6), which was granted by letter dated December 21, 1989, (Exhibit A-7). A letter was sent by the Appellant’s accountant to Mr. MacDonald dated February 12, 1990, (Exhibit A-8). The accountant did not deny the inclusion of the unreported income but made pertinent accounting points on a few other issues. No comments were made at that time about the imposition of penalties.
[20] Mr. MacDonald, in his letter dated March 5, 1990 (Exhibit R-6), confirmed that the adjustments requested by the Appellant’s accountant were to be taken into account in the reassessments that would follow.
[21] Mrs. Claudette Miller, formerly Richard, explained to the Court that in January 1990, she joined the division of Special Investigation of Revenue Canada. At that time, it was the practice not to inform the taxpayer that he was under special investigation until the issuance of the search warrant. Ms. Miller considered the matter a good case for prosecution. In 1990, the decision was made to issue the reassessment and for the year 1988 to issue an assessment.
[22] She said that she prepared the copies of the T7WC as well as the letter dated March 5, 1990 (Exhibit R-6), above mentioned at paragraph 14 of these reasons. They were made in accordance with Mr. MacDonald’s findings.
[23] She stated that she drafted the letter of March 5, 1990 and that Mr. MacDonald signed it. This had the purpose of not informing the taxpayer that he was under special investigation. Although, when Mr. MacDonald was examined, he mentioned that he had drafted the letter. It is an innocuous letter which says that all adjustments requested by the Appellant's accountant will be incorporated into the reassessments which will be forthcoming.
[24] Ms. Miller explained that a penalty under subsection 163(2) of the Act was imposed because the difference in income was very significant. It was impossible for the taxpayer to not know how much money he had received from Miramichi since each payment stub showed the total income to date. It was easy to verify the cumulative totals. These stubs could have been obtained from Miramichi and from the National Transportation Agency ("NTA"). The Appellant had claimed all the subsidies that he could and had provided the agency with copies of all the payment stubs. These claims have been produced at Tab 15 of Exhibit R-1.
[25] These documents were obtained February 21, 1991 by Ms. Miller, then Richard, from the National Transportation Agency. Ms. Miller stated that it was common knowledge at that time that if you did trucking you obtained subsidies from the NTA. The request was made to NTA to see if Mr. Donovan had claimed subsidies on the unreported income from Miramichi and he had done so.
[26] The dates the assessment and reassessments were made are as follows:
Taxation year 1986: reassessment made on July 5, 1990, on a revised taxable income of $35,615 and a reassessment made on November 21, 1991, on the same revised taxable income.
Taxation year 1987: reassessment made July 5, 1990, on a revised taxable income of $69,219 and on November 21, 1990, on a revised taxable income of $90,965.
Taxation year 1988: assessment made July 5, 1990, on a taxable income of $12,545, a reassessment made on October 5, 1990, on a revised taxable income of $69,491 and another reassessment made on November 21, 1991, on a revised taxable income of $103,194.
[27] An inspection was made on September 25, 1989, pursuant to subsection 231.1(1) of the Act. That inspection led the Minister of National Revenue (the "Minister") to believe that there was matter for a criminal investigation. On July 10, 1990, three search warrants were issued by the Court of Queen’s Bench, Trial Division, pursuant to section 231.3 of the Act to enter and search the Appellant’s place of business and residence, and the Appellant’s accountant’s office and to seize the items described in the search warrants. The search warrants were executed on July 17, 1990.
[28] On May 24, 1991, an action was instituted by the Appellant in the Court of Queen’s Bench, Trial Division, challenging the validity of section 231.3 of the Act.
[29] On May 28, 1991, Revenue Canada made an application before a judge of the Provincial Court for a search warrant under section 487 of the Criminal Code to search the Special Investigation's Office and to seize therefrom the Appellant’s documents that had been seized pursuant to the search warrants executed on July 17, 1990. This motion was contested and denied.
[30] On December 6, 1991, an Information was laid in the Provincial Court by Revenue Canada against the Appellant. However, it was agreed between the parties that the penal proceedings would be held in abeyance and the documents sealed pending the outcome of the Baron (supra) appeal.
[31] On January 21, 1993, the Supreme Court of Canada rendered its decision in the case of Baron (supra) that section 231.3 of the Act was not valid.
[32] Apparently, the documents seized were supposed to be returned to the Appellant’s solicitor's office. They were in fact returned to the Appellant’s place of business and to the accountant’s office on January 26, 1993. However, early on that same day Revenue Canada, without informing the Court of the previous problems incurred in the seizure of these documents, obtained search warrants from the Provincial Court. It proceeded then to re-seize what had been returned.
[33] On November 29, 1993, the Court of Queen’s Bench, Trial Division, quashed the search warrants issued on July 10, 1991 and those issued on January 26, 1993.
[34] The trial of the Information laid against the Appellant commenced on November 7, 1994. Preliminary objections were made and in January 1995, the charges were dismissed.
[35] The Appellant had prepared written notes on the subject of the search. It was moving and very sad to hear the description of events, among them the intrusion early in the morning in the family dwelling house and in the quietness of the family life. On that day, the Appellant left early for work. He arrived when the search of his office's premises was almost complete. He spoke of the publicity and its effect on his friends and his business affairs. The long judicial debate has taken its toll on the Appellant’s physical and mental health and this has had repercussions on his relationship with his family.
[36] The sequence of events concerning the Notices of Objection and Confirmations are described as follows at paragraphs 6 to 9 of the Amended Reply to the Amended Notice of Appeal:
6. The Appellant filed Notices of Objection which were received by the Minister on January 30, 1992.
7. By letter mailed February 18, 1992, the Minister advised the Appellant's solicitor that consideration of the Notices of Objection would be held in abeyance pending conclusion of related proceedings commenced against the Appellant pursuant to section 239 of the Income Tax Act (the "Act").
8. As late as September 28, 1995 the Appellant advised that written submissions were forthcoming concerning the merits of the Notices of Reassessments under objection. No submissions were made and only by letter dated February 2, 1996 was the Minister advised that the Appellant would not be making submissions.
9. A Notice of Confirmation was issued on May 13, 1996.
Argument of the Appellant
[37] Counsel for the Appellant submitted that the reassessments were not validly made because they were based upon information and documents obtained pursuant to an illegal search and seizure that infringed the taxpayer's rights under section 8 of the Canadian Charter of Rights and Freedoms (the "Charter"); that by virtue of paragraph 24 of the Charter, the evidence must be excluded because its admission would bring the administration of justice into disrepute and that consequently, the reassessments must be vacated, as they were in O'Neill, (supra).
[38] Counsel for the Appellant submitted that the common points between O'Neill and the instant case were as follows:
(1) Both cases involve Revenue Canada performing searches and seizures under s. 231.3 of the Income Tax Act.
(2) In both cases Revenue Canada used documents obtained in the searches and seizures to make reassessments.
(3) In both cases the searches and seizures under s. 231.3 were rendered illegal and in violation of the Charter by Baron v. R., 91 DTC 5055, aff'd [1993] 1 S.C.R. 416.
(4) Both cases involve Revenue Canada attempting to circumvent the ruling in Baron by seeking new warrants in order to retain possession of the seized documents.
[39] Counsel for the Appellant also submitted that the Minister, in failing to reply to the Appellant's Notice of Objection in a timely manner, violated the Appellant's rights under section 7 of the Charter. I quote from his written notes:
The Minister, contrary to subsection 165(3) of the Income Tax Act, did not reply to the Taxpayer's Notice of Objection with all due dispatch and the failure to do so in the circumstances of this case has prejudiced the Taxpayer in that a key witness to his appeal, Bud Simpson, the Taxpayer's office clerk, has died.
Bud Simpson died on July 19, 1994. He worked in the Taxpayer's office during the relevant period of this appeal, as office clerk, and was much involved in the keeping of records and documents with respect to the Taxpayer's business particularly cheques and revenues received in the course of a year. For each year involved in this matter, Mr. Simpson prepared papers showing income which he compiled from tally or explanatory sheets attached to cheques.
That as a result of Mr. Simpson's death, the Taxpayer is left without evidence from him to explain the papers and records he compiled and which are very material to the issue of this appeal...
[40] Another submission of Appellant’s counsel is that it is very important to note that on October 6, 1989, without advising the Appellant nor the accountant, the audit officer referred the file to the Special Investigation Unit and that on November 22, 1989 the audit officer, with someone from Special Investigation, came to speak with the Appellant’s accountant without informing him that he was from Special Investigation. Counsel for the Appellant said that during this interview, information detrimental to the Appellant was obtained from the accountant as is shown by Exhibit R-5. The content of this exhibit is set out above at paragraph [16] of these Reasons.
[41] On this particular point, Counsel for the Appellant adds that during cross-examination, Mr. Allen, the accountant testified that if he had known that the matter had been referred to Special Investigation, he would have sought legal advice before speaking with the officers, that at no time the accountant and the Appellant were advised that they had the right to consult and speak with legal counsel prior to giving them information, and that the accountant should have been informed of the presence of the Special Investigation officer, so that the accountant could have exercised his rights to remain silent, as provided by section 7 of the Charter.
[42] Counsel for the Appellant submits that the law is now very clear that Revenue Canada's tax audit function is to be kept apart from Revenue Canada's criminal investigative powers. The principal reason for this important separation is that the auditing power is highly intrusive and employs methods which if employed in a criminal investigation, would breach a taxpayer's rights under the Charter. To secure the taxpayer's rights, the fruits of an audit cannot find their way into a criminal investigation. Counsel for the Appellant refers to Del Zotto et al. v. The Queen (F.C.A.) 97 DTC 5328.
[43] The Appellant argues that, even if penalties should be assessed in the instant case, the Crown has failed in its obligation to prove the amount of penalties alleged owing. The penalties in this case relate to subsection 163(2) of the Act.
Argument of the Respondent
[44] Counsel for the Respondent argued that the fact that neither the Appellant nor his accountant were informed that the matter had been passed on to Special Investigation was not relevant to the present civil proceeding. While judicial authorities have established that mingling of the two can contaminate a criminal proceeding, there is no authority or logic for the Appellant's proposition that any such alleged mingling would contaminate a civil appeal of a tax assessment. Carrying out a tax audit function does not require that an investigatory or police warning be given against self-incrimination, etc., as does a criminal proceeding. Nor does it require advice as to the existence of any concurrent criminal investigation.
[45] As to the basis of the assessments, counsel for the Respondent submitted that there had been extensive evidence at the hearing from Mr. MacDonald and Ms. Miller that the reassessments substantially reflected the unreported income as determined by Mr. MacDonald many months prior to the July 17, 1990 search and seizure. It was admitted that the only reassessments based on documents seized July 17, 1990 were the two November 21, 1991 reassessments that reflected further unreported income of the Appellant for the 1987 and 1988 taxation years in the respective amounts of $22,024 and $28,258. They also reflect certain adjustments favourable to the Appellant. The reassessment dated November 21, 1991 for the Appellant's 1986 taxation year merely reflects an interest adjustment.
[46] As to the remedy of vacating the assessment as was done in O'Neill, Counsel for the Respondent referred to the decision of the Federal Court of Appeal (98 DTC 6424) at page 6428, that stated: "... 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." He submitted that the case at bar was not one involving serious violations where other remedies would be insufficient.
[47] Counsel for the Respondent stressed that a basic difference between the facts in O'Neill and those in this appeal, is that in O'Neill the reassessment vacated had been issued beyond the normal reassessment period, and so the onus was on the Crown to show fraud or misrepresentation. This the Crown could only have done through the documents that had been illegally seized. This was clearly a material factor in both the Tax Court and Federal Court of Appeal decisions in O'Neill. In that case, both Courts relied upon the Crown's admission because of the onus shift, that excluding the evidence under subsection 24(2) of the Charter would be "tantamount to vacating the O'Neill assessments."
[48] Counsel for the Respondent argued that recent Supreme Court of Canada decisions, and more particularly R. v. Stillman, [1997], 1 S.C.R. 607, indicate that exclusion is not appropriate where the evidence illegally seized, in good faith at the time, was "real" evidence that is, evidence that existed independently of the particular Charter breach and that this real evidence was non-conscriptive. Such is certainly so in the case at bar where the evidence basing the two November 21, 1991 impugned reassessments come from documents and not from the Appellant’s statements and that these documents by their nature existed independently of the search and seizure of July 17, 1990.
[49] Counsel for the Respondent added that in the same decision, the Supreme Court noted at paragraphs [72] to [74], that in considering subsection 24(2), "trial fairness is of fundamental importance." Factors determining fairness include, "the nature of the evidence obtained" and "the nature of the violation", "and not so much the manner in which the right was violated. Real evidence that was obtained in a manner that violated the Charter will rarely operate unfairly for that reason alone. The real evidence existed irrespective of the violation of the Charter and its use does not render the trial unfair”.
[50] As to the alleged failure to reply with all due dispatch to the Appellant's notices of appeal, pursuant to subsection 165(3) of the Act, counsel for the Respondent submitted that the Minister did not fail to proceed, "with all due dispatch" following the filing of the Appellant's Notices of Objection in early 1992 with receipt of notices of confirmation and further reassessment in May, 1996. The time lapse was purely to ensure that the criminal proceedings pending in the interim would not be prejudiced by the simultaneous going forward of the civil matters.
[51] Further and in any event, subsection 169(1) of the Act provides that the taxpayer can proceed on appeal to the Tax Court if the Minister has not responded to a notice of appeal within 90 days of having received same. This option the Appellant did not exercise. As stated by the Federal Court of Appeal in Bolton v. The Queen, 96 DTC 6413 (F.C.A.), failure by the Minister to act with all due dispatch pursuant to subsection 165(3) does not have the effect of vacating the assessment as the taxpayer could have simply proceeded to appeal pursuant to paragraph 169(1)(b) of the Act.
[52] As to whether the Appellant is liable for the subsection 163(2) penalties, counsel for the Respondent stated that subsection 163(2) provides for a civil penalty for every person who, "knowingly, or under circumstances amounting to gross negligence ... has made ... a false statement or omission in a return ...". He submitted that in the case at bar the Appellant has either knowingly or in circumstances amounting to gross negligence failed to report significant amounts of income, in the case of 1988 well exceeding $100,000. The factors in the case at bar that support the imposition of penalties pursuant to subsection 163(2) against the Appellant include the following and I quote from the written notes:
- The fact that the correct amount of income received by the Appellant from MP & P for each of 1987 and 1988 could be easily and readily ascertained from the cumulative income statements attached to each MP & P cheque, or by simply contacting MP & P itself.
- The fact that the quantum of the unreported income in 1987 and 1988 was substantial. The fact that the non-reporting was not just an isolated occurrence but happened with respect to several cheques in each of two concurrent years, while during the same period the cheques were all scrupulously accounted for purposes of extracting maximum federal freight subsidies from the federal government.
- The fact that during the period from late March into May the Appellant's business was particularly slow as the roads were closed to heavy axle vehicles, permitting him additional time to review the material being prepared for presentation to his accountant, Mr. Allen, for preparation and filing of his personal income tax return by the pertinent April 30 filing deadline.
- The fact that the Appellant retained sole signing authority for his business and did most of the banking in relation thereto. Thus, despite his denials, he in fact kept strict personal control of and interest in the financial state of the business on a regular and ongoing basis.
- The fact that the Appellant engaged Mr. Allen to do only the most minimal accounting possible to file a tax return. He only retained Mr. Allen to do an annual income and expense statement, based not on independent testing by his accountant but rather on records that the Appellant himself supplied to Mr. Allen.
- The fact that there is no indication that the Appellant even reacted with any surprise when Mr. MacDonald told him in late September, 1989 that he had found significant specified amounts of income unreported for each of those two years.
- The fact that the Appellant did no even make written representation to the Minister, although having been provided an opportunity to do so, to object to the civil penalties assessed against him under the Act due to the unreported income.
- The fact that there is no evidence or indication that the Appellant even initially had contested Mr. MacDonald's conclusion arising from his audit that there had been unreported income. Throughout, the Appellant seemed surprisingly accepting of that finding. Of course, the fact that the amounts were wrongly unreported is clearly admitted in this proceeding, and has never been an active issue.
[53] On the particular point that the Appellant does not deny that the amounts were wrongly unreported, but asserts that the occurrences were not his fault, but rather were his clerk's, Counsel for the Respondent referred to Frenette v. M.N.R., 58 DTC 579 (Tax Appeal Board): - "In any case the alleged errors of his employees could not be used to excuse a tax return which the Appellant signed and certified as accurate and in which the errors did not involve a few hundred dollars but several thousand."
Analysis and Conclusion
[54] Section 24 of the Charter reads as follows:
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.
24(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.
[55] Evidence gathered pursuant to the search and seizure made by virtue of section 231.3 of the Act, as it stood at that time, is evidence gathered in a manner that infringed a right guaranteed by the Charter, as that section of the Act was found to violate section 8 of the Charter in Baron (supra).
[56] Subsections 231.3(1), (2) and (3) of the Act now read as follows:
(1) A judge may, on ex parte application by the Minister, issue a warrant in writing authorizing any person named therein to enter and search any building, receptacle or place for any document or thing that may afford evidence as to the commission of an offence under this Act and to seize the document or thing and, as soon as practicable, bring it before, or make a report in respect of it to, the judge or, where the judge is unable to act, another judge of the same court to be dealt with by the judge in accordance with this section.
(2) An application under subsection (1) shall be supported by information on oath establishing the facts on which the application is based.
(3) A judge may issue the warrant referred to in subsection (1) where the judge is satisfied that there are reasonable grounds to believe that
(a) an offence under this Act was committed;
(b) a document or thing that may afford evidence of the commission of the offence is likely to be found; and
(c) the building, receptacle or place specified in the application is likely to contain such a document or thing.
(Emphasis added)
[57] The change that was brought by the Baron decision (supra) was the use of the word "may" rather than "shall" in subparagraph 231.3(3) of the Act. It read formerly as follows:
(3) A judge shall issue the warrant referred to in subsection (1) where he is satisfied that there are reasonable grounds to believe that
(a) an offence under this Act has been committed;
(b) a document or thing that may afford evidence of the commission of the offence is likely to be found; and
(c) the building, receptacle or place specified in the application is likely to contain such a document or thing.
(Emphasis added)
[58] In accordance with subsection 24(2) of the Charter, the evidence gathered at the time of the non-validly authorised search and seizure, shall be excluded if, having regard to all circumstances, its admission in a proceeding would bring the administration of justice in disrepute.
[59] The meaning of subsection 24(2) of the Charter has often been examined by the Supreme Court of Canada mostly if not in all cases in matters of criminal proceedings. The standard of exclusion of evidence would be higher than for a civil proceedings. The analysis of the standards to be applied to civil proceeding and to criminal proceedings has been analysed in depth by Wilson J. in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627. I will again refer to this analysis in paragraphs [66] to [69] below. For the time being, let us review the findings of the Supreme Court regarding the principles surrounding the exclusion of evidence.
[60] The first important decision on the matter of exclusion of evidence is R. v. Collins, [1987] 1 S.C.R. 265. I quote from Collins, at page 283 to 285:
In determining whether the admission of evidence would bring the administration of justice into disrepute, the judge is directed by s. 24(2) to consider "all the circumstances." ... The factors that the courts have most frequently considered include:
— what kind of evidence was obtained?
— what Charter right was infringed?
— was the Charter violation serious or was it of a merely technical nature?
— was it deliberate, wilful or flagrant, or was it inadvertent or committed in
good faith?
— did it occur in circumstances of urgency or necessity?
— were there other investigatory techniques available?
— would the evidence have been obtained in any event?
— is the offence serious?
— is the evidence essential to substantiate the charge?
— are other remedies available?
...
It is clear to me that the factors relevant to this determination will include the nature of the evidence obtained as a result of the violation and the nature of the right violated and not so much the manner in which the right was violated. Real evidence that was obtained in a manner that violated the Charter will rarely operate unfairly for that reason alone. The real evidence existed irrespective of the violation of the Charter and its use does not render the trial unfair. However, the situation is very different with respect to cases where, after a violation of the Charter, the accused is conscripted against himself through a confession or other evidence emanating from him. The use of such evidence would render the trial unfair, for it did not exist prior to the violation and it strikes at one of the fundamental tenets of a fair trial, the right against self-incrimination ... It may also be relevant, in certain circumstances, that the evidence would have been obtained in any event without the violation of the Charter.
[61] In 1997, the Supreme Court of Canada reviewed again the principles surrounding the exclusion of evidence in Stillman (supra), where Cory J. stated at pages 651 to 653:
[71] There can be no question that the Collins decision was the pathfinder that first charted the route that courts should follow when considering the application of s. 24(2). However, subsequent decisions of this Court and their interpretations by the courts below indicate that a further plotting of the course for courts to follow is required, while maintaining the basic principles outlined in Collins. For example, confusion has arisen as to what constitutes "real" evidence and in what circumstances its exclusion or admission would render the trial unfair. ...
[73] It is apparent from this passage that the primary aim and purpose of considering the trial fairness factor in the s. 24(2) analysis is to prevent an accused person whose Charter rights have been infringed from being forced or conscripted to provide evidence in the form of statements or bodily samples for the benefit of the state. It is because the accused is compelled as a result of a Charter breach to participate in the creation or discovery of self-incriminating evidence in the form of confessions, statements or the provision of bodily samples, that the admission of that evidence would generally tend to render the trial unfair. That general rule, like all rules, may be subject to rare exceptions.
[74] Thus, as a first step in the trial fairness analysis it is necessary to classify the type of evidence in question. Evidence to be considered under "fairness" will generally fall into one of two categories: non-conscriptive or conscriptive. The admission of evidence which falls into the "non-conscriptive" category will, as stated in Collins, rarely operate to render the trial unfair. If the evidence has been classified as non-conscriptive the court should move on to consider the second and third Collins factors, namely, the seriousness of the Charter violation and the effect of exclusion on the repute of the administration of justice. The key, then, is how to distinguish between "non-conscriptive" and "conscriptive" evidence.
...
Conscriptive Evidence
[80] Evidence will be conscriptive when an accused, in violation of his Charter rights, is compelled to incriminate himself at the behest of the state by means of a statement, the use of the body or the production of bodily samples. The traditional and most frequently encountered example of this type of evidence is a self-incriminating statement made by the accused following a violation of his right to counsel as guaranteed by s. 10(b) of the Charter. The other example is the compelled taking and use of the body or of bodily substances of the accused, such as blood, which lead to self-incrimination. It is the compelled statements or the conscripted use of bodily substances obtained in violation of Charter rights which may render a trial unfair.
...
Trial Fairness Summary
[112] A simple method by which trial judges may approach the trial fairness factor is to divide the analysis into two steps. First, the evidence must be classified as either "conscriptive" or "non-conscriptive". The classification will be based on the manner in which the evidence was obtained.
Classification
[113] If the evidence, obtained in a manner which violates the Charter, involved the accused being compelled to incriminate himself either by a statement or the use as evidence of the body or of bodily substances it will be classified as conscriptive evidence. See Manninen, supra; Ross, supra, and Bartle, supra. On the other hand, if the evidence, obtained in a manner which violates the Charter, did not involve the accused being compelled to incriminate himself either by a statement or the use as evidence of the body or of bodily substances it will be classified as non-conscriptive evidence. See R. v. Silveira, [1995] 2 S.C.R. 297, and Evans, supra.
[62] It is my view that the evidence gathered pursuant to the search and seizure appears to be in the nature of non-conscriptive evidence. It was evidence found in documents located on the searched premises and it did not come from statements made by the Appellant. As a matter of fact, the greatest part of the seizure was made in his absence.
[63] If I return to the factors described in Collins (supra), (paragraph 60 of these Reasons), to determine whether the admission of evidence would bring the administration of justice into disrepute, I have to consider whether the Charter violation was made in bad faith. I am unable to find bad faith from the Minister's agents in obtaining the search warrants and proceeding to the search. At that time, the section of the Act was valid and there is no evidence whatsoever that erroneous information was provided to the judge of the Queen's Bench, Trial Division, who issued them. No doubt much care must be exercised in deciding on a search and seizure expedition. However, the search and seizure process is allowed by most if not all regulatory acts. It is a legal means.
[64] If, at the time when the Minister's agents tried to obtain new search warrants from the Provincial Court of New Brunswick on January 26, 1993, for the purpose of the criminal prosecution, they apparently did not inform that Court of the entire course of events, it is a matter to be considered by the Courts having jurisdiction in the criminal proceeding. Indeed, it was considered by these Courts as is shown in the summary of facts that can be found at paragraphs [28] to [34] of these Reasons.
[65] If I look at the other factors described in the decision of the Supreme Court of Canada in Collins (supra), I find no factors that would prevent the admission of the evidence for ensuring a fair civil trial. Therefore, the evidence gathered from the search and seizure pursuant to paragraph 231.3(1) of the Act that was found to be unconstitutional because it violated section 8 of the Charter is admissible and, therefore, the assessments made on November 21, 1991 are valid.
[66] Let us return now to the validity of the evidence gathered pursuant to the inspection power provided for by subsection 231.1(1) of the Act. If the means of search and seizure will be used when there are reasonable grounds to believe that an offence was committed with the view of criminal prosecution, inspection powers on the other hand are used for the purpose of the civil enforcement of the Act. As to the distinction between administrative inspection and criminal investigation and the standards to apply to each, I find useful to refer to the decision of the Supreme Court of Canada in McKinlay Transport Ltd., (supra), at pages 647 to 649:
... It is consistent with this approach, I believe, to draw a distinction between seizures in the criminal or quasi-criminal context to which the full rigours of the Hunter criteria will apply, and seizures in the administrative or regulatory context to which a lesser standard may apply depending upon the legislative scheme under review. I do not believe that when the Chief Justice said in Simmons at p. 527 that departures from the Hunter criteria would be rare he was applying his mind to searches or seizures in the context of regulatory legislation. I think he was addressing as in the cases of Hunter and Simmons themselves searches or seizures in a criminal or quasi-criminal context. It is with these considerations in mind that I examine the reasonableness of s. 231(3) of the Income Tax Act.
At the beginning of my analysis I noted that the Income Tax Act was based on the principle of self-reporting and self-assessment. The Act could have provided that each taxpayer submit all his or her records to the Minister and his officials so that they might make the calculations necessary for determining each person's taxable income. The legislation does not so provide, no doubt because it would be extremely expensive and cumbersome to operate such a system. However, a self-reporting system has its drawbacks. Chief among these is that it depends for its success upon the taxpayers' honesty and integrity in preparing their returns. While most taxpayers undoubtedly respect and comply with the system, the facts of life are that certain persons will attempt to take advantage of the system and avoid their full tax liability.
Accordingly, the Minister of National Revenue must be given broad powers in supervising this regulatory scheme to audit taxpayers' returns and inspect all records which may be relevant to the preparation of these returns. The Minister must be capable of exercising these powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. Often it will be impossible to determine from the face of the return whether any impropriety has occurred in its preparation. A spot check or a system of random monitoring may be the only way in which the integrity of the tax system can be maintained. If this is the case, and I believe that it is, then it is evident that the Hunter criteria are ill-suited to determine whether a seizure under s. 231(3) of the Income Tax Act is reasonable. The regulatory nature of the legislation and the scheme enacted require otherwise. The need for random monitoring is incompatible with the requirement in Hunter that the person seeking authorization for a search or seizure have reasonable and probable grounds, established under oath, to believe that an offence has been committed. If this Hunter criterion is inapplicable, then so too must the remaining Hunter criteria since they all depend for their vitality upon the need to establish reasonable and probable grounds. For example, there is no need for an impartial arbiter capable of acting judicially since his central role under Hunter is to ensure that the person seeking the authorization has reasonable and probable grounds to believe that a particular offence has been committed, that there are reasonable and probable grounds to believe that the authorization will turn up something relating to that particular offence, and that the authorization only goes so far as to allow the seizure of documents relevant to that particular offence.
This is not to say that any and all forms of search and seizure under the Income Tax Act are valid. The state interest in monitoring compliance with the legislation must be weighed against an individual's privacy interest. The greater the intrusion into the privacy interests of an individual, the more likely it will be that safeguards akin to those in Hunter will be required. Thus, when the tax officials seek entry onto the private property of an individual to conduct a search or seizure, the intrusion is much greater than a mere demand for production of documents. The reason for this is that, while a taxpayer may have little expectation of privacy in relation to his business records relevant to the determination of his tax liability, he has a significant privacy interest in the inviolability of his home.
[67] 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. The inspection of business records is necessary to secure compliance with the regulatory provisions of the Act for the purpose of protecting the public interest and a taxpayer's expectation of privacy regarding those, is minimal except when these records are located in his residential dwelling. Subsection 231.1(3) of the Act provides for the issuance of an ex parte judicial authorization in that latter case.
[68] Thus, when Mr. MacDonald made his audit on September 25, 1989, he was acting in an administrative or regulatory context under the authority of subsection 231.1(1) of the Act. Before coming at the Appellant's place of business, he called to set an appointment and there is surely nothing reprehensible to the fact that, an auditor who during an inspection encounters what he believes to be a criminal offence, refers the matter to the unit specialised in criminal investigation.
[69] Should the fact, that the auditor came on a further visit with someone from the Special Investigation Unit without informing the Appellant affect the validity of the ensuing assessments which by their nature are civil proceedings? There may be some doubt that it was appropriate for the auditor to be accompanied by someone from the Special Investigation Unit without informing the Appellant, and in this manner use the guise of a civil inspection to sustain a criminal prosecution. However, I do not believe that the state of the law is such that this inappropriateness would affect the validity of this civil proceeding and that I should vacate the assessments. I am not aware of any court decision to this effect. It may affect the criminal proceedings in view of the constitutional guarantees afforded to an accused, but I fail to see how it may have any effect on a civil proceeding, especially in a matter of verifying the accuracy of the self-reporting and self-assessment. Therefore, respecting the reassessments issued before November 21, 1991, the evidence has shown clearly that they were made on Mr. MacDonald’s findings before the seizure took place and pursuant to an inspection power lawfully carried out and consequently, they are found to be valid.
[70] I am of the view that, for the taxation years 1986 and 1987, the penalties imposed by virtue of subsection 163(2) of the Act were correctly assessed for the reasons submitted by Counsel for the Respondent as they appear in paragraphs [52] and [53] above. However, I have some reservation as to the taxation year 1988. When the auditor came to visit the Appellant's accountant, the income tax return for that year had not yet been filed. The auditor arranged to file it that day as previously completed by the accountant. However, the auditor more than likely knew at that time that there was unreported income. It appears that if the filing of the income tax return had been delayed for one or two days, the unreported income would have been included. As was mentioned by Counsel for the Respondent, the Appellant never contested that the unreported income once discovered should be included. It was discovered by the auditor and there may be some doubts that if it had not been discovered it might not have been reported. However, the return had not yet been filed for undisclosed reasons and one could think that a reason may have been the taxpayer's hesitation in not reporting a substantial part of his income. In these circumstances, I am of the view that the income tax return should not have been filed by the auditor's action, when the latter knew, or at least had serious doubts, that not all income was properly reported. The filing could have waited a day and the calculation of income properly done. The penalties imposed under subsection 163(2) of the Act for the taxation year 1988 are therefore vacated.
[71] Respecting the argument that the Minister has not acted with due dispatch in conformity with subsection 165(3) of the Act, I am in agreement with the submissions made by Counsel for the Respondent as they appear at paragraphs [50] and [51] above.
[72] The appeals for the years 1986 and 1987 are dismissed. For the taxation year 1988, the appeal is allowed regarding the imposition of the penalties. Otherwise, the assessment stands. There will be one set of costs in favour of the Respondent.
Signed at Ottawa, Canada, this 15th day of October, 1998.
"Louise Lamarre Proulx"
J.T.C.C.