Canada (National Revenue) v. Sharp

Canada (National Revenue) v. Sharp
Court (s) Database
Federal Court of Appeal Decisions
Date
2022-07-27
Neutral citation
2022 FCA 138
File numbers
A-166-20, A-169-20, A-170-20, A-171-20, A-172-20, A-173-20, A-174-20, A-175-20, A-176-20, A-177-20
Decision Content
Date: 20220727
Dockets: A-166-20
A-169-20
A-170-20
A-171-20
A-172-20
A-173-20
A-174-20
A-175-20
A-176-20
A-177-20
Citation: 2022 FCA 138
CORAM:
GAUTHIER J.A.
WOODS J.A.
DAWSON D.J.C.A.
Docket: A-166-20
BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
FREDERICK SHARP
Respondent
Docket: A-169-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
ESTATE OF MARY HETHEY
Respondent
Docket: A-170-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
RICHARD HETHEY
Respondent
Docket: A-171-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
BRUCE GASARCH
Respondent
Docket: A-172-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
ZHIYING Y. GASARCH
Respondent
Docket: A-173-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
CHARTERHOUSE CAPITAL INC.
Respondent
Docket: A-174-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
DANIEL BLAQUIERE
Respondent
Docket: A-175-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
TERESA SHARP
Respondent
Docket: A-176-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
SHAMSHER G. HIRJI
Respondent
Docket: A-177-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
FREDRICK COOMBES
Respondent
Heard at Vancouver, British Columbia, on November 17 and 18, 2021.
Judgment delivered at Ottawa, Ontario, on July 27, 2022.
REASONS FOR JUDGMENT BY:
WOODS J.A.
CONCURRED IN BY:
GAUTHIER J.A.
DAWSON D.J.C.A.
Date: 20220727
Dockets: A-166-20
A-169-20
A-170-20
A-171-20
A-172-20
A-173-20
A-174-20
A-175-20
A-176-20
A-177-20
Citation: 2022 FCA 138
CORAM:
GAUTHIER J.A.
WOODS J.A.
DAWSON D.J.C.A.
Docket: A-166-20
BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
FREDERICK SHARP
Respondent
Docket: A-169-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
ESTATE OF MARY HETHEY
Respondent
Docket: A-170-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
RICHARD HETHEY
Respondent
Docket: A-171-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
BRUCE GASARCH
Respondent
Docket: A-172-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
ZHIYING Y. GASARCH
Respondent
Docket: A-173-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
CHARTERHOUSE CAPITAL INC.
Respondent
Docket: A-174-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
DANIEL BLAQUIERE
Respondent
Docket: A-175-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
TERESA SHARP
Respondent
Docket: A-176-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
SHAMSHER G. HIRJI
Respondent
Docket: A-177-20
AND BETWEEN:
MINISTER OF NATIONAL REVENUE
Appellant
and
FREDRICK COOMBES
Respondent
REASONS FOR JUDGMENT
WOODS J.A.
TABLE OF CONTENTS
Paragraph
I. Overview
1
II. Frederick Sharp (the Respondent)
8
A. Introduction
8
B. Respondent’s statement of claim
14
(1) Overview
15
(2) 2013 Referral
18
(3) 2016 search warrant
20
(4) Panama Papers
21
(5) Improper use of audit powers
31
(6) The Jarvis claim
33
(7) The legislative challenge
35
(8) Relief sought
37
C. Federal Court decision
38
D. Issues and standard of review
43
E. Applicable principles — motions to strike
45
F. Applicable principles — audit powers
51
(1) Section 231.2
52
(2) Jarvis
54
(3) Kligman
60
G. Analysis — Jarvis Claim
62
(1) Preliminary issue
63
(2) Did the Federal Court err?
66
H. Analysis — legislative challenge
97
(1) Did the Federal Court err?
100
(2) Fresh evidence motion
113
(3) Conclusion
125
III. Analysis — other respondents
127
IV. Conclusion and disposition
131
A. The Respondent
131
B. Other respondents
132
C. Style of cause
133
I. Overview
[1] Before this Court are 10 appeals and cross-appeals from a decision of the Federal Court (2020 FC 724) on motions to strike statements of claim. The Federal Court struck the statements of claim in part and allowed other parts of the claims to proceed.
[2] In 2016, the CRA issued requirement letters to each of the respondent taxpayers under its audit powers seeking information from them. The CRA also issued requirement letters to third parties under its audit powers requiring financial information pertaining to the respondents.
[3] The respondents filed judicial review applications in the Federal Court challenging the CRA’s decisions to issue the personal and third party requirement letters. The challenge to the personal requirement letters is no longer at issue, and only the challenge to the third party requirement letters remains.
[4] Upon motion by the respondents, and on consent, the judicial review applications were ordered to be treated and proceeded with as actions and became subject to the rules applicable to actions. The respondents then filed the statements of claim at issue in these appeals.
[5] The appellant Minister of National Revenue (the Minister) moved to strike the statements of claim. The statements of claim mainly concern the validity of requirements to provide documents issued by the Canada Revenue Agency (CRA) and the constitutionality of legislative provisions entitling the CRA to disclose such documents to other agencies. The respondents submit that the requirement letters and the legislative provisions violate their rights under ss. 7 and 8 of the Canadian Charter of Rights and Freedoms, s. 7, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.) 1982, c. 11 (Charter).
[6] The Federal Court’s decision on the motions focussed on the statement of claim of one of the respondents, Frederick Sharp. The motions judge, Barnes J., described the other statements of claim as “substantially similar” and wrote that the single set of reasons applied to all the proceedings (reasons at para. 3).
[7] Since the motions judge dealt centrally with the motion to strike Frederick Sharp’s statement of claim, I will first discuss the appeal and cross-appeal of this motion decision before considering the others. But for the discussion at the end of these reasons concerning the other respondents, all references below relate to Frederick Sharp’s statement of claim and Mr. Sharp will be referred to as the Respondent.
II. Frederick Sharp (the Respondent)
A. Introduction
[8] The Respondent’s statement of claim has two parts. In the first part, the Respondent alleges that the CRA misused its audit powers when it issued the third party requirement letters and that the Respondent’s rights under ss. 7 and 8 of the Charter were breached. Relying on R. v. Jarvis, 2002 SCC 73, [2002] 3 S.C.R. 757 [Jarvis], the Respondent alleges that the requirement letters were invalid because they were issued for the predominant purpose of furthering criminal investigations. I refer to this part of the statement of claim as the “Jarvis claim”.
[9] Second, the statement of claim challenges the validity of provisions in three statutes under which the CRA may disclose taxpayer information: Income Tax Act, R.S.C. 1985, c. 1 (5th Supp. (ITA); Criminal Code, R.S.C. 1985, c. C-46; and Privacy Act, R.S.C. 1985, c. P-21. The Respondent seeks declarations that the disclosure provisions are of no force and effect because they permit the CRA to disclose confidential taxpayer information, including to domestic and international criminal law enforcement, and this unjustifiably violates ss. 7 and 8 of the Charter. In the alternative, the Respondent seeks a declaration of invalidity of the provisions entitling the CRA to issue requirements for information and documents. I refer to this part of the statement of claim as the “legislative challenge”.
[10] The Minister moved to strike out the statement of claim in whole or in part, without leave to amend. The motions judge declined to strike the Jarvis claim but struck the legislative challenge.
[11] The Minister appeals to this Court from the decision not to strike the Jarvis claim. The Respondent cross-appeals from the decision to strike the legislative challenge, but only with respect to some of the provisions in the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (ITA).
[12] In the appeal on the Jarvis claim, the Minister submits that the Federal Court erred by not striking this claim for failure to disclose a reasonable cause of action and constituting an abuse of process. In the cross-appeal, the Respondent submits that the Federal Court erred when it struck the legislative challenge as being unfocussed and factually empty.
[13] As I will explain, I conclude that the Federal Court erred with respect to the Jarvis claim and did not err with respect to the legislative challenge. In the result, the Respondent’s statement of claim should be struck in its entirety. However, leave to amend with respect to the Jarvis claim should be granted, subject to strict conditions.
B. Respondent’s statement of claim
[14] This section summarizes the Respondent’s statement of claim. The claim makes the following allegations:
(1) Overview
[15] The Respondent is a Canadian citizen and resides in Vancouver, British Columbia.
[16] The CRA has targeted the Respondent for years in investigations that the CRA knew were predominately criminal in nature.
[17] The investigations have involved coordination between CRA’s Audit Division, its Criminal Investigations Directorate (CID), and external law enforcement agencies, both domestic and foreign, including the Royal Canadian Mounted Police (RCMP), the U.S. Federal Bureau of Investigation (FBI), and the Joint Intelligence Taskforce on Shared Intelligence and Collaboration (JITSIC).
(2) 2013 Referral
[18] On November 13, 2013, the Audit Division made a criminal referral to the CID based on a detailed memo prepared by a CRA case officer. The memo described allegations that the Respondent’s business, the Corporate House Group of Companies (Corporate House), was involved in a complex tax evasion scheme. The memo alleged that Corporate House assists Canadians to hide assets and income, and to hinder and delay the CRA as a creditor. Hundreds of companies were said to be involved and “capital flows” allegedly originated mostly from offshore sources. The memo further alleged that the strategy devised by Corporate House was designed so that the “principals and architects” of the strategy would not file or pay any taxes in Canada. The Respondent was alleged to be a “central controlling mind” of Corporate House. The Respondent alleges that this memo shows that the Audit Division had concluded that the Respondent was engaged in large-scale tax fraud, both as an intermediary and personally.
[19] The Respondent further alleges that the Audit Division had concluded that the Respondent was guilty of criminal conduct long before the criminal referral in 2013. In order to understand the scope and scale of Corporate House’s criminal operations, the Audit Division misused its audit powers to acquire bank records and other financial information to further an investigation that was predominately criminal in nature.
(3) 2016 search warrant
[20] This misuse of audit powers was said to be predominately criminal in nature at least from the date of the criminal referral. In February 2016, the CID executed a search warrant on Corporate House. The Information to Obtain sworn in support identified the Respondent in connection with a CID investigation into tax evasion by a client of Corporate House. Parenthetically, I note that it is not alleged that the Respondent was the subject of this investigation. The CID, through the execution of the warrant, sought to obtain extensive business records held by Corporate House in order to identify persons who participated in the criminal offences under investigation and to prove the nature and details of the alleged fraudulent scheme.
(4) Panama Papers
[21] In April 2016, after the execution of the search warrant, a group of journalists began to report on documents taken from a Panamanian law firm (the Panama Papers). The events relating to the release of the Panama Papers are said to further demonstrate that the CRA’s investigation of the Respondent and others connected to Corporate House was predominately criminal in nature.
[22] It is alleged that the reporting of the Panama Papers led to great public attention amid allegations of tax evasion and fraud committed by the Panamanian law firm, its clients, and its intermediaries. Canadian officials began coordinated efforts with international allies in furtherance of enforcement actions. The United States Department of Justice and the RCMP opened criminal investigations relating to persons named in the Panama Papers.
[23] One week after the public release of the Panama Papers, the Minister announced that the CRA was accelerating compliance actions on offshore activities of some Canadians and would be initiating criminal investigations where warranted.
[24] At the same time, members of JITSIC (overseen by the OECD), including Canada, met to discuss the information obtained in the Panama Papers and the OECD announced that each JITSIC member state would follow up in accordance with its domestic laws and information-sharing agreements.
[25] On May 2, 2016, the RCMP Commissioner advised the media that the RCMP would be commencing a criminal investigation into Canadians named in the Panama Papers. The Commissioner told the Globe and Mail that the RCMP had discussed with foreign partners how to obtain the documents as “there are tremendous suggestions of criminality ...”.
[26] On May 9, 2016, the CBC identified Corporate House as the “go to” firm for wealthy Canadians wanting to keep assets private and offshore to minimize their tax burden. The Respondent was identified as the principal of Corporate House.
[27] On May 9, 2016, the Globe and Mail reported that the Minister had announced that she “had already started to identify targets for audits” and “[i]f there needs to be criminal prosecutions, there will be criminal prosecutions.”
[28] On November 15, 2016, the Toronto Star reported that the CRA had launched 60 formal audits into Canadians identified in the database of the Panamanian law firm. In addition, the CRA had executed search warrants and launched criminal investigations.
[29] On January 16 and 17, 2017, the CRA met with JITSIC member states and a large simultaneous exchange of information through tax treaties occurred. The JITSIC members also agreed to “pool information on key intermediaries from domestic efforts.” The CRA commented that it was conducting audits, had executed search warrants, and was performing criminal investigations, all in relation to the Panama Papers.
[30] It is alleged that the CRA coordinated investigative efforts targeting the Respondent with the RCMP, the Internal Revenue Service (IRS), and other foreign and domestic law enforcement agencies. As part of this effort, the CRA supplied the Respondent’s private information, compelled through audit powers, to domestic and international law enforcement agencies. In doing so, the CRA shared the Respondent’s private information in violation of the Charter.
(5) Improper use of audit powers
[31] It is alleged that after the Audit Division made the criminal referral, the Audit Division continued to use its audit powers to gather evidence for the improper use of that information in a criminal investigation. This included the issuance of personal and third party requirements in relation to the Respondent and his alleged associates.
[32] The requirement letters were issued at a time when the Respondent was under criminal investigation by the CID and in circumstances where the information obtained was then shared with the CID and other law enforcement agencies, both domestic and international.
(6) The Jarvis claim
[33] The Audit Division issued eight third party requirement letters relating to the Respondent in June 2016. Another four were issued subsequently. The required information related to bank accounts, credit cards, investment accounts and business dealings.
[34] The Respondent alleges that since the Audit Division sought this information for the predominant purpose of obtaining evidence for use in a criminal investigation both domestically and internationally, the issuance of the requirement letters unjustifiably violated the Respondent’s rights under ss. 7 and 8 of the Charter.
(7) The legislative challenge
[35] Material to this appeal, the Respondent alleges that parts of the disclosure provisions in the ITA violate his Charter rights. In particular, he alleges that these provisions permit the transfer of private information, compelled without prior judicial authorization, to domestic and international law enforcement and to the Canadian Security Intelligence Service (CSIS), without use limitations. The Respondent alleges that to the extent the CRA disclosed his taxpayer information pursuant to these provisions, these provisions breach his rights under ss. 7 and 8 of the Charter.
[36] In the alternative to the legislative challenge concerning disclosure provisions, the Respondent alleges that the audit powers under ss. 231.1 and 231.2 of the ITA breach his ss. 7 and 8 Charter rights because the confidentiality of the information gathered under these provisions has been eroded by amendments to s. 241 enacted after the audit powers were declared constitutional in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, 68 D.L.R. (4th) 568 [McKinlay Transport].
(8) Relief sought
[37] The relief sought by the Respondent includes:
• A declaration that the third party requirement letters are invalid;
• An injunction prohibiting the Minister from disseminating information or documents compelled through the third party requirement letters to any person or agency outside of the Audit Division; and
• A declaration that ss. 241(4)(e)(xii), 241(9), 241(9.1), 241(9.5) and 241(4)(e)(iv) of the ITA, or alternatively ss. 231.1 and 231.2 of the ITA, unjustifiably infringe ss. 7 and 8 of the Charter and are of no force and effect.
C. Federal Court decision
[38] The Minister moved to strike the Respondent’s statement of claim in whole or in part without leave to amend on the basis that it does not disclose a reasonable cause of action, is scandalous, frivolous or vexatious, and is otherwise an abuse of process.
[39] With respect to the Jarvis claim, the Federal Court first considered whether the pleadings contained sufficient material facts. The Court concluded that the pleadings were sufficient, but “barely so”, to withstand the challenge. In particular, the Court determined that the allegations “are arguably sufficient to establish, if later proven, that the Requirements were issued in the face of an ongoing criminal investigation where reasonable grounds to lay charges then existed.” Further, the allegations “could help to establish that the audits were being pursued with a prosecution motive in mind.” (paras. 28-30).
[40] The Court also considered whether the Jarvis claim had no chance of success because declaratory relief was not appropriate and the only recourse was in defence of a criminal prosecution (at paras. 32-34). The motions judge was not able to make a definitive finding on this point of law, and concluded that the Respondent should be given the benefit of the doubt on the motion to strike as a result of the decision of this Court in Kligman v. M.N.R., 2004 FCA 152, [2004] 4 F.C.R. 477 [Kligman].
[41] With respect to the legislative challenge, the motions judge summarized this claim as alleging that “the Minister has breached or intends to breach the [Respondent’s] Charter interests by sharing audit information with domestic and foreign law enforcement agencies” (para. 35).
[42] The Court stated (at para. 38) that the legislative challenge is “unfocussed and factually empty,” and that “[h]ypothetical Charter challenges are inappropriate because there is no factual matrix to support the legal theories that are being advanced.” The Court accordingly struck the parts of the Respondent’s statement of claim relating to the legislative challenge.
D. Issues and standard of review
[43] The main issues in the appeal and cross-appeal relating to the Respondent are:
• Did the Federal Court err when it did not strike the parts of the Respondent’s statement of claim relating to the Jarvis claim?
• Did the Federal Court err in striking the parts of the Respondent’s statement of claim relating to the legislative challenge?
[44] The standard of review is set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 [Housen]. Questions of law are to be determined on the correctness standard, and questions of fact and questions of mixed fact and law (excluding extricable questions of law) are to be determined on the standard of palpable and overriding error (at paras. 8, 10, 36).
E. Applicable principles — motions to strike
[45] The Minister moved to strike the Respondent’s statement of claim under rule 221 of the Federal Courts Rules, S.O.R./98-106 (Rules) on the basis that the Respondent’s claim disclosed no reasonable cause of action; was scandalous, frivolous, or vexatious; and was otherwise an abuse of the process of the Court (rr. 221(1)(a), (c), and (f), respectively).
[46] On a motion to strike under r. 221(1)(a) for failure to disclose a reasonable cause of action, a motion judge must consider whether, assuming the facts as stated in the statement of claim can be proved, it is “plain and obvious” that the plaintiff’s statement of claim discloses no reasonable cause of action (Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959 at 980, 74 D.L.R. (4th) 321; R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45 at para. 17 [Imperial Tobacco]). The statement of claim must be construed generously (Mancuso v. Canada (Minister of Health and Welfare), 2015 FCA 227, 476 N.R. 219 at para. 16 [Mancuso]).
[47] In Mancuso, this Court provided guidance on the distinction between material facts and bald allegations:
[18] There is no bright line between material facts and bald allegations, nor between pleadings of material facts and the prohibition on pleading of evidence. They are points on a continuum, and it is the responsibility of a motions judge, looking at the pleadings as a whole, to ensure that the pleadings define the issues with sufficient precision to make the pre-trial and trial proceedings both manageable and fair.
[19] What constitutes a material fact is determined in light of the cause of action and the damages sought to be recovered. The plaintiff must plead, in summary form but with sufficient detail, the constituent elements of each cause of action or legal ground raised. The pleading must tell the defendant who, when, where, how and what gave rise to its liability.
[48] In addition to striking a pleading for failure to disclose a reasonable cause of action, the Court may strike a pleading on the ground that it is scandalous, frivolous, or vexatious (r. 221(1)(c) of the Rules). Rule 221(1)(c) has been applied in a variety of circumstances, including to pleadings that did not sufficiently reveal the facts on which the plaintiff bases his cause of action to make it possible for a defendant to answer them or for a court to regulate the proceedings (Murray v. Canada (Public Service Commission) (1978), 21 N.R. 230 at para. 10, [1978] 2 A.C.W.S. 337 [Murray]).
[49] Finally, this Court may strike pleadings under r. 221(1)(f) of the Rules where the pleading is an abuse of the process of the Court. The guidance to be applied under r. 221(1)(f) of the Rules is that set out in Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63, [2003] 3 S.C.R. 77 [C.U.P.E.]. The doctrine of abuse of process is a flexible doctrine that engages the Court’s inherent power to prevent the misuse of its procedure in a way that would bring the administration of justice into disrepute (C.U.P.E. at para. 37).
[50] Evidence is not admissible on a motion under r. 221(1)(a), but is admissible on a motion under rr. 221(1)(c) or (f). (Rules, r. 221(2); Kremikovtzi Trade v. Phoenix Bulk Carriers Limited, 2007 FCA 381, 370 N.R. 317 at para. 32).
F. Applicable principles — audit powers
[51] This section sets out the relevant legal principles applicable to the Minister’s audit powers.
(1) Section 231.2
[52] The Respondent seeks judicial review of the Minister’s decision to issue third party requirement letters. Subsection 231.2(1) of the ITA provides the Minister with a broad authority to require information and documents from any person for a purpose related to the administration or enforcement of the ITA. Subsection 231.2(1) is reproduced in the appendix to these reasons, together with other relevant ITA provisions.
[53] In McKinlay Transport, the Supreme Court of Canada in 1990 upheld the validity of a predecessor to s. 231.2 of the ITA, finding that the provision did not violate the right to be secure from unreasonable search and seizure under s. 8 of the Charter.
(2) Jarvis
[54] In Jarvis, the Supreme Court in 2002 placed limits on the Minister’s powers under ss. 231.1(1) and 231.2(1) of the ITA in accordance with ss. 7 and 8 of the Charter. Those sections provide:
7 Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.
7 Chacun a droit à la vie, à la liberté et à la sécurité de sa personne; il ne peut être porté atteinte à ce droit qu’en conformité avec les principes de justice fondamentale.
8 Everyone has the right to be secure against unreasonable search or seizure.
8 Chacun a droit à la protection contre les fouilles, les perquisitions ou les saisies abusives.
[55] In Jarvis, the taxpayer sought to exclude information obtained pursuant to ss. 231.1(1) and 231.2(1) of the ITA from evidence in his criminal trial (Jarvis at paras. 35-36). The Supreme Court concluded that certain evidence should be excluded in accordance with the Charter.
[56] The Supreme Court held that where CRA officials conduct an inquiry for the predominant purpose of determining penal liability, they may not make use of the requirement and inspection powers under ss. 231.1(1) and 231.2(1) (Jarvis at para. 96). Conversely, CRA officials conducting an inquiry for the predominant purpose of determining tax liability may make use of the requirement and inspection powers (Jarvis at paras. 97, 99).
[57] Further, CRA officials conducting an investigation into penal liability may not make use of information obtained pursuant to ss. 231.1(1) or 231.2(1) where that information was obtained after the investigation into penal liability began (Jarvis at para. 97). Conversely, CRA officials conducting an investigation into penal liability may make use of information obtained under ss. 231.1(1) and 231.2(1) where that information was obtained before the investigation began (Jarvis at para. 97).
[58] The Supreme Court clarified that the CRA may conduct parallel criminal investigations and administrative audits and auditors may use their requirement and inspection powers so long as the predominant purpose of the administrative audit is the determination of the taxpayer’s tax liability (Jarvis at para. 97).
[59] The Court provided a non-exhaustive list of factors for determining whether the predominant purpose of an inquiry is the determination of penal liability (Jarvis at para. 94). The Court wrote that courts must assess all the circumstances, and that apart from a clear decision to pursue a criminal investigation, no factor was determinative (Jarvis at para. 95).
(3) Kligman
[60] In 2004, in this Court’s decision in Kligman, the Court allowed taxpayers’ applications for judicial review and quashed requirements for production of documents issued to the taxpayers on behalf of the Minister on the basis that the requirements were issued in the course of a criminal investigation (Kligman at paras. 39-41). Notably, the investigator who issued the requirements admitted that the purpose of the investigation was to investigate and gather evidence of tax evasion offences (paras. 11, 13). The decision to use the audit powers was made prior to the release of the Supreme Court’s decision in Jarvis.
[61] In Kligman, the Minister argued that the taxpayers should comply with the requirements and object to their admissibility in any subsequent criminal proceedings (para. 3). This Court rejected that argument on the basis that prohibiting the taxpayers from asserting their Charter right to protection from unreasonable search and seizure and from impeding its imminent violation would seriously undermine the beneficial and protective effect of the Charter (para. 3).
G. Analysis — Jarvis claim
[62] The Minister has appealed the Federal Court’s decision not to strike the Jarvis claim. As I will explain, I would strike this part of the statement of claim and grant the Respondent leave to amend on strict conditions.
(1) Preliminary issue
[63] As mentioned earlier, the Respondent initiated this proceeding by filing an application for judicial review. The Federal Court subsequently issued an order on consent under s. 18.4(2) of the Federal Courts Act, R.S.C. 1985, c. F-7. The order required that the proceeding be treated and proceeded with as an action, a statement of claim be filed, and the proceeding be governed by Part 4 of the Rules (those applicable to actions).
[64] In the decision under appeal, the Federal Court concluded that r. 221 (applicable to actions) did not govern this motion to strike, and instead the Court should apply the principles for striking judicial review applications (reasons at para. 12). This conclusion runs contrary to the terms of the s. 18.4(2) order, which specifies that Part 4 of the Rules is applicable to these proceedings. Since Part 4 includes r. 221, the order under s. 18.4(2) provides that r. 221 governs this motion to strike.
[65] Although the Court erred in concluding that r. 221 did not apply, nothing turns on this as the motions judge took the precautionary step of also applying r. 221 in his analysis (reasons at paras. 14-16).
(2) Did the Federal Court err?
[66] The Minister submits that the Federal Court erred in refusing to strike the Respondent’s challenge to the third party requirement letters.
[67] One of the Minister’s arguments is that the Federal Court erred in law by failing to consider that requirement letters may be issued for purposes of an audit even if a parallel criminal investigation is ongoing. I understand the Minister as arguing that the Federal Court failed to identify the proper legal test from Jarvis.
[68] In my view, the Federal Court did not fail to identify the proper legal test. The motions judge recognized that it is permissible for the Minister to issue requirements for audit purposes in the face of a criminal investigation when he discussed collaboration between the Audit Division and the CID (reasons at para. 30). Material facts capable of establishing such collaboration are relevant because, if proven, they may demonstrate that the investigation and audit were not in fact parallel.
[69] Although the Court did not err in identifying the proper legal test, the Court did err in applying the test.
[70] In the Court’s discussion of collaboration between auditors and investigators at paragraph 30, the motions judge commented that the statement of claim is “notably lacking” in information about collaboration and stated that the deficiency may be caused by numerous redactions in documents provided by the Minister. The Court did not state that this relieved the Respondent of the requirement to plead sufficient material facts to establish a reasonable cause of action. It does not. A plaintiff must plead sufficient material facts to disclose a cause of action, even if the facts are unknown to the plaintiff and he only hopes to prove them (Imperial Tobacco at para. 22).
[71] However, the motions judge did refer to an allegation in support of a finding of collaboration between the auditors and investigators. The Respondent alleges that, around the time the Panama Papers were released, a newspaper reported that the Minister stated that the CRA was identifying targets for audits and “if there needs to be criminal prosecutions, there will be prosecutions.” The motions judge concluded that this allegation could help establish that “the audits were pursued with a prosecution motive in mind.” (reasons at para. 30).
[72] This was the sole material fact that the motions judge referred to in relation to collaboration. This material fact is simply a general statement by the Minister about the CRA’s approach in addressing the Panama Papers. The statement suggests that audits may precede criminal investigations, but this is permitted in Jarvis. The contents of the newspaper report, if proven, are not capable of demonstrating that this was not a parallel audit and criminal investigation and do nothing to advance the allegation that the issuance of the requirements breached the Respondent’s Charter rights. Accordingly, the Federal Court failed to identify sufficient material facts to disclose a reasonable cause of action.
[73] The deficiency in the Federal Court’s reasons at paragraph 30 raises an issue of mixed fact and law. This Court has held that such an issue is subject to appellate review on the very high standard of palpable and overriding error (Bewsher v. Canada, 2020 FCA 216, 325 A.C.W.S. (3d) 345 at paras. 6-7). A palpable error is one that is plainly seen (Housen at para. 6). An overriding error is one that affects the result (Hydro-Québec v. Matta, 2020 SCC 37, 450 D.L.R. (4th) 547 at para. 33; Mahjoub v. Canada (Citizenship and Immigration), 2017 FCA 157, [2018] 2 F.C.R. 344 at para. 62).
[74] In my view, the Federal Court’s error is plain to see and it affects the result.
[75] The Respondent submits that, in any event, the statement of claim contains another material fact that makes up for any deficiency in the Federal Court’s reasons. I disagree for reasons that follow.
[76] The Respondent refers to the allegation in the statement of claim that the Audit Division shared information gathered from the requirement letters with criminal investigators. The Respondent suggests that this allegation is sufficient to demonstrate collaboration such that the investigation and audit were not parallel.
[77] The Respondent cites paragraph 97 of Jarvis, in which the Supreme Court wrote:
97 The predominant purpose test does not thereby prevent the CCRA from conducting parallel criminal investigations and administrative audits. The fact that the CCRA is investigating a taxpayer’s penal liability, does not preclude the possibility of a simultaneous investigation, the predominant purpose of which is a determination of the same taxpayer’s tax liability. However, if an investigation into penal liability is subsequently commenced, the investigators can avail themselves of that information obtained pursuant to the audit powers prior to the commencement of the criminal investigation, but not with respect to information obtained pursuant to such powers subsequent to the commencement of the investigation into penal liability. …
[Emphasis added]
[78] This submission suggests that the Respondent has pleaded material facts which, if true, are capable of demonstrating that the Audit Division issued requirements and obtained information pursuant to those requirements after the commencement of the criminal investigation, and that the criminal investigators availed themselves of that information. I understand the Respondent as submitting that this pleading discloses a reasonable cause of action on the basis of a Charter breach as described in paragraph 97 of Jarvis.
[79] However, the facts pleaded in support of this Charter breach are deficient.
[80] As discussed above, a proper pleading must clearly state the facts giving rise to the cause of action so that the pre-trial and trial proceedings are manageable and fair (Mancuso at paras. 18-19). Transactions must be described with particularity, and if, as in the present case, a party is a stranger to a transaction, the transaction must still be described with sufficient detail that the other party can identify it (Enercorp Sand Solutions Inc. v. Specialized Desanders Inc., 2018 FCA 215, 160 C.P.R. (4th) 79 at paras. 34-37 [Enercorp]). Further, the court must be able to regulate the proceedings (Murray at para. 10).
[81] The parts of the statement of claim alleging sharing information fail to satisfy these conditions as they lack the particularity required of a proper pleading. This is evident in both the pleading of the material facts and the pleading of the cause of action.
[82] To illustrate, the Respondent asserts a Charter breach on the basis of the Audit Division sharing information with criminal investigators. In the relevant material facts, the Respondent alleges that there were many investigations over a number of years: “the CRA has targeted him for years in investigations that were known to the CRA to be predominately criminal in nature, some known to the [Respondent], but all known to the CRA” (statement of claim at para. 10). However, the statement of claim did not identify with particularity any criminal investigation into the Respondent. The pleading specifies one criminal investigation which led to the 2016 search warrant, but this was an investigation into a client and not the Respondent himself.
[83] The allegations of sharing are also lacking in particularity. The Respondent alleges that “documents and information compelled by the Audit Division were then shared with the CID and other law enforcement agencies, both domestic and international” (statement of claim at para. 27). The pleading does not link the alleged sharing of information to any particular criminal investigation.
[84] Similarly, the pleading of the cause of action in the statement of claim is couched in extremely broad language: “By issuing the … Third-Party Requirements, as referenced above, for the use and assistance of domestic and international criminal investigation, the CRA has unjustifiably breached the Plaintiff’s rights under ss. 7 and 8 of the Charter.” (statement of claim at para. 34).
[85] The claim and the material facts supporting it relating to the allegation of sharing with a criminal investigation are extremely broad and unfocussed. The unfocussed nature of this pleading will make it difficult to determine the scope of discoveries, as illustrated in paragraph 90 below which describes the evidence sought by the respondent. Inevitably, the conduct of the proceeding would be unmanageable and unfair. In the circumstances, this part of the Respondent’s statement of claim is vexatious within the meaning of r. 221(1)(c) and should be struck on that basis (Murray at para. 10).
[86] As such, I disagree with the Respondent that the material facts relating to sharing information with criminal investigators are capable of remedying the deficiency in the Federal Court’s reasons. The statement of claim must properly plead sharing with criminal investigators in order to demonstrate collaboration such that the third party requirements were not issued in a parallel investigation. As held in Enercorp, sharing must be identified with sufficient detail that the Minister can identify it. The statement of claim does not do this, and accordingly the statement of claim fails to disclose a reasonable cause of action.
[87] The remaining issue is whether the Court should grant leave to amend the statement of claim.
[88] The general principle to be applied is that leave should be granted unless it is plain and obvious that the defect in the pleading cannot be cured by amendment (Enercorp at para. 27; Simon v. Canada, 2011 FCA 6 at para. 15, 410 N.R. 374). This is a low bar.
[89] The Minister’s submissions on the Jarvis claim include argume