Stanfield v. Canada (Minister of National Revenue)

Stanfield v. Canada (Minister of National Revenue)
Court (s) Database
Federal Court Decisions
Date
2005-07-21
Neutral citation
2005 FC 1010
File numbers
T-1554-02
Notes
Digest
Decision Content
Date: 20050721
Docket: T-1554-02
Citation: 2005 FC 1010
Ottawa, Ontario, this 21st day of July, 2005
Present: THE HONOURABLE MR. JUSTICE SIMON NOËL
BETWEEN:
HUGH STANFIELD, GRETA ANDERSON, ROBERT ANDERSON, DONALD APOLCZER, CAROL L. APOLCZER, JAMES C. AYEARST, ELIZABETH JOAN AYEARST, CHRISTINE BANVILLE, BRENT BEYAK, DAVID G. BLISSETT, JAMES L. BRADY, KEITH BROOKE, GEORGE BURDEN, DONALD CAREY, PATRICIA CARPENTER, ALAN CARPENTER, MARIA CLARKE, KENNETH CLARKE, JULIA S. CUNDLIFFE, KATE A. DAVIS, LARRY DAVIS, ALLAN DE HAAN, HERB DEMARS, TERRANCE DUNFORD, IRVINE J. DYCK, NORMA FARENICK, STEPHAN FRALICK, RENEE GALLANT, ROY GALLANT, MARY GELPKE, PAUL GELPKE, DIANNE GERMAIN, BEN GOERTZEN, MARTHA GOERTZEN, PETER GRABOSKI, FRANK GRAF, GARY H. GRUETER, DAVID R. HACKETT, ERIC R. HARRISON, KENNETH ALLAN HAY, JOHN A. HIGGINS, GEOFFREY HILLIARD, WILLIAM JOHNSON, PETER LEGER, EDNA L. LINDAL, ROBERT LINDAL, WAYNE GARRY MARTIN, ED MACINTOSH, ROBERT MCGINN, TERENCE MEADOWS, ROBERT NABER, EDITH NELSON, GARTH L. NELSON, GLENN PARKER, JOHN L. PARSONS, HELEN PARSONS, DANNY PAWLACHUK, JOSEPH PENNIMPEDE, IRENE PENNIMPEDE, BRENDA QUATTRIN, GARRY REIMER, NEIL REINHART, GLEN ROBBINS, LUC ROBERGE, JOAN ELLEN SABOURIN, PAUL WYATT SABOURIN, MARK SAMPSON, SUSAN SCOTT, PHILIP SCOTT, MICHAEL SLADE, KAZIK SMILOWSKI, FRANCES SMILOWSKI, CANDICE STANFIELD, SEONA STEPHEN, JOHN G. STEPHEN, GREGORY STEVENS, JENNIFER STEVENS, ROGER G. STOGRE, BRIAN E. STOUTENBURG, LESLEY SUGGITT, JAMES H. SUGGITT, SCOTT THOMSON, ALLAN TOLSMA, TOM TOLSMA, AGNES DOROTHY TOLSMA, ANDREW TROJNER, MARY TROJNER, JIM R. TROJNER, GEORGE H. WADSWORTH, SHARON WADSWORTH, GLENYS WHELAN, EARL WILKES, DAVID J. WILLIAMS, MILDRED WILLIAMSON, KERRY WILSON, HARVEY YARN, DAVID ZEVICK, PREBEN ANDERSEN, DANIEL M. ARRIGO, ROBERT P. BLAIR, STEPHEN P. BURKE, BRENT CARLSON, FIONA DOUGLAS-CRAMPTON, HELEN FADDEN, REID FREDERICK, EDGAR GIESBRECHT, JOHN GORDON, GARY HAMMER, JOHN F. HEATHE, JUDITH A. KOSTUK, RON A. KROWCHUK, LARRY LEDOUX, PENNY LEDOUX, ERNEST REIMER, LAURIE REIMER, MAXWELL THOMPSON
Applicants
and
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR ORDER AND ORDER
[1] This is an application for judicial review in respect of a request for audit information by the Minister of National Revenue ("Minister") contained in letters and questionnaires sent to each of the Applicants between August and October 2002. The Applicants have opposed responding to these letters and questionnaires on the basis that the request was not done for audit purposes but rather, for criminal investigation purposes. The Applicants seek an Order declaring that the letters, including the questionnaires, requesting the information are invalid or unlawful, and furthermore, an Order prohibiting or restraining the Minister from taking any action or proceedings against the Applicants for their failure to respond to the letters and questionnaires.
ISSUES
[2] Was the issuance of the letters and questionnaires within the parameters of the audit functions as contained in subsection 231.1(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act")?
[3] If necessary, does this action by the Minister then engage the Applicants' rights pursuant to section 7 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 (the "Charter")?
CONCLUSIONS
[4] Without the benefit of the knowledge of the particular factual situation as herein described, the letters and questionnaires would seem to be within the parameters of the audit functions as described in the Act. However, in the particular circumstances of this case, the predominant purpose of the letters and questionnaires was the collection of documents and information for a criminal investigation. Therefore, the Applicants' Charter rights have been unfairly engaged and an Order will follow to that effect.
THE CONTESTED LETTER AND QUESTIONNAIRE
[5] This application for judicial review arises from the issuance of letters by the Minister to each of Applicants between August and October 2002. The majority of the letters were identical or substantially similar, and included a multiple-page questionnaire. Since these are key to a complete understanding of this case, the letter and questionnaire sent to Applicant Hugh Stanfield ("Mr. Stanfield") dated August 27th, 2002, will be reproduced in their totality here:
Dear Sir or Madam:
Re: Your 1999 and 2000 Income Tax Returns
This letter is to advise you that your 1999 and 2000 income tax returns have been selected for audit by this office. The reason for this audit is to review the amounts reported on your Statement(s) of Business Activities as well as other aspects of your return.
Please be advised that a criminal investigation regarding the promotion of transactions of the type claimed on your income tax return has been undertaken. You are not under investigation at the present time but we wish to advise you that any information submitted may be provided to our Investigations Division for review. Should you have any questions about this investigation please contact:
Christopher Fleming
Investigations Division
Vancouver Tax Services Office
1166 West Pender Street
Vancouver BC V6E 3H8
Telephone: (604) 666-4816
Fax: (604) 666-4676
Unioncal Trading Joint Venture, Futures Trading, Commodities Trading and/or any other Business Activities
We request that you make available for our review all books and records pertaining to this business for the 1999 and 2000 taxation years. Please note that for the purposes of the Income Tax Act, books and records include information maintained in an electronic format. The information requested includes the following:
1. Books and ledgers, including books of original entry such as revenue and expense ledgers, trial balances, journal entries, and the general ledger.
2. Documentation provided to you by the administrator of the Unioncal Trading Joint Venture relating to the amounts reported on your Statement of Business Activities, including invoices or billings for any fees claimed.
3. Statements of account, trade confirmations, settlement sheets, and any similar documents pertaining to your brokerage account. If you continued trading in the 2000 and 2001 taxation years, please provide these documents for those years as well.
4. Supplier invoices and similar documents to support any expenses deducted.
5. A listing of open contracts at the beginning and at the end of the year.
6. Bank statements or passbooks for all business and personal bank accounts, cancelled cheques, deposit slips, and other information slips relating to banking transactions such as debit and credit memos. These documents are requested for the 1999, 2000 and 2001 taxation years.
7. Details of sources of funds used to invest in this business. If you claimed interest or carrying charges in the 1999, 2000 and/or 2001 taxation years please provide documentation to support the interest expense. This would include loan documents, amortization schedules, and documentation to support payments of interest and/or principal on your loan.
8. Information and documents related to opening of your brokerage account, including your client agreement, statement of net worth, commission structure, client information form, margin requirements, etc.
9. Correspondence, notes or memoranda received, sent or prepared in connection with your entry into and carrying on of this business.
Questionnaire
As part of our audit we are requesting that you complete the attached questionnaire and provide the information and documentation referred to in the questionnaire.
RRSP
Please also provide any and all statements for any personal or spousal Registered Retirement Savings Plan you had during any of the 1999, 2000, and 2001 calendar years.
We are requesting that you provide the above noted information and documentation within 30 days from the date of this letter. Please contact the writer by telephone at (250) 363-0539 or at the address on the first page of this letter, when the information and documentation is available, to arrange for a suitable time for its review. If you have any questions about your audit and the foregoing request for information and documentation, please do not hesitate to contact me.
For your convenience, we have attached a document titled "What you should know about audits". Further information is available on our web site at http://www.ccra-adrc.gc.ca.
Yours truly,
Deanna Pumple
Verification and Enforcement
QUESTIONNAIRE FOR BUSINESS LOSS CLAIMED
Taxpayer: Hugh Stanfield
SIN: *** *** ***
Taxation Years: 1999 and 2000
1. Have you purchased any products or services offered by, or associated with, any of the following:
The Global Prosperity Group
The Institute of Global Prosperity ("IGP")
Global Prosperity 2001
Omnicorp
World Wide Investor ("WWIN")
2. Have you attended any meeting, seminar or conference associated with, promoted or sponsored by, any of the following:
The Global Prosperity Group
The Institute of Global Prosperity ("IGP")
Global Prosperity 2001
Omnicorp
3. At any time during the years 1998, 1999, 2000, or 2001 did you receive any advice or representation that certain business opportunities were available that would provide you with losses resulting in a tax refund(s)?
If yes:
a. Provide the name of the person, organization, or website address from which this information was obtained;
b. Provide any and all literature, brochures, promotional material, correspondence, faxes, or similar documents that you received.
4. Have you completed and provided to any person, worksheets or forms detailing the amounts in your RRSP, your taxable income, or taxes assessed for any or all of the years 1998 to 2001?
If yes, provide the names of the persons to whom this information was provided.
5. Did you obtain advice from a promoter, broker, financial planner, accountant, lawyer, or any other person regarding the set up or operation of your business?
If yes:
a. Provide the name of the person, organization, or website address from which this information was obtained;
b. Provide any and all literature, brochures, promotional material, correspondence, faxes, or similar documents that you received.
6. Prior to the commencement of your trading activity, were you advised that it was predetermined that your trades would ultimately result in losses, which you could claim for tax purposes?
7. Prior to the commencement of your trading activity did you receive any representations regarding the tax treatment of losses resulting from your business?
8. In the year you incurred the loss did you receive any loan, advance, or similar proceeds from any source?
If yes:
a. Who provided these funds?
b. Provide all agreements, correspondence, faxes, payments schedules and other related documents.
c. Was the lender aware that you intended to use these funds in your trading activities?
d. Have you borrowed funds from this lender before? If not, how did you become aware of the lender?
e. Did the lender ask for permission to do a credit check?
f. Did you provide any documentation with respect to your assets or credit worthiness to the lender? If so, provide copies of these documents.
g. What collateral were you required to post as security for the loan?
h. Did you at any time receive representations or assurances that you would not be required to repay the loan?
i. Did you at any time receive representations or assurances that the lender would not take any collection action against you in the event of non-payment?
j. Have you made any payments of principal and/or interest on the outstanding debt?
If yes:
i) Provide details of payments;
ii) Provide proof of payment.
k. Were you advised at any time that all or a portion of any payment would be made available to you for your personal use and/or benefit?
l. Were you advised that you should use the tax refund arising from your trading losses to make a payment on this loan?
9. Do you or did you have access to any account located outside Canada to which deposits can/could be made and funds withdrawn by you or on your behalf (whether or not the account is registered in your name)?
10. Do you or did you have a debit or credit card which gives/gave you access to an account of funds located outside of Canada (whether or not the account is registered in your name)?
11. If you answered yes to question 9 or 10 above, provide:
a. The name and address of the bank or entity where the account is held;
b. Any and all statements, pass books, or other records showing deposits and withdrawals for the 1999 - 2001 calendar years;
c. Any and all correspondence, faxes, notes or other documentation regarding the set up of the account and its ongoing operation.
12. To your knowledge, are you the trustee or beneficiary of any trust that is not resident in Canada?
13. Do you have the right to directly or indirectly appoint new beneficiaries or new trustees of an existing trust that is not resident in Canada?
14. If you answered yes to question 12 or 13 above, please provide:
a. The name and address of the trust;
b. Copies of the trust and other related agreements;
c. Any and all correspondence, faxes, notes, or other documentation regarding the creation of the trust an any trust meetings.
15. Do you have a direct or indirect interest in a company that is an International Business Corporation (an "IBC")?
If yes, provide the name of any such company.
16. Did you receive advice from a financial planner, broker, accountant, tax advisor or any other person regarding the type of trades you would make prior to the commencement of your trading activities?
If yes:
a. Provide the names and addresses of the person(s) who gave the advice;
b. Provide any and all literature, brochures, promotional material, correspondence, faxes, or similar documents provided to you.
17. Did you direct each trade yourself (i.e. did you instruct your broker which specific transactions to conduct)?
If yes, provide any and all documentation of instructions given (including faxes, telephone bills).
OVERVIEW OF THE FACTUAL SITUATION
[6] The parties agreed that Mr. Stanfield's situation could be used as an example of the trading investments and activities engaged in by each of the Applicants, which led to the audits and investigations by the Minister, as well as the eventual issuing of the letters and questionnaires. In his 1999 income tax return, after applying a $2,607,797.00 non-capital loss carry-forward from his 1998 taxation year, Mr. Stanfield also reported a taxable income of $60,000.00. In computing his net income for the 1999 taxation year of $2,667,797.00, Mr. Stanfield reported business income in the amount of $2,231,489.00 from a business called "Hugh Stanfield Trading". This business income was the result of sales, commissions and fees of $6,184,074.00 minus "trading losses and expenses" of $3,952,543.00 and a capital cost allowance of $47.00. No information or documents were supplied to further explain these revenues, losses or expenses.
[7] As a result of the receipt of the Applicants' tax returns by the Minister (including Mr. Stanfield's), auditors for the tax avoidance section ("Audits") of Canada Customs and Revenue Agency ("CCRA") began an audit. Ms. Deanna Pumple ("Ms. Pumple"), an auditor for the Vancouver Island Region, was in charge of most of the Applicants' audits (again, including Mr. Stanfield's). Ms. Pumple was the only affiant for the Minister, and in order to inform herself of the audit procedures taken by the other auditors who were dealing with some of the Applicants' returns (all of whom had entered into a series of transactions similar to those of Mr. Stanfield), she spoke to some of them, including the Regional Coordinator for tax avoidance in the Prairie Region. Prior to the judicial review hearing, she was cross-examined at length on her affidavit.
[8] The Applicants were audited in order to determine their correct tax liability under the Act for their 1998, 1999 and 2000 tax returns. One aspect of the audit was to determine if the Applicants had invested in suspected tax shelters or other tax avoidance systems established by various promoters.
[9] In early 2000, the audit of the 1998 returns became a national project involving numerous tax payers (including all the Applicants) from different areas of the country, as well as a number of corporate entities involved in the systems established by promoters.
[10] From April 4 to 6, 2001, Rod Jamieson ("Mr. Jamieson") and Chris Fleming ("Mr. Fleming"), investigators with the investigations division in Vancouver ("Investigations"), met with some of the Audits personnel, including Ms. Pumple and Larry Kuhn ("Mr. Kuhn"), an auditor in the Vancouver office, in order to discuss commodities trading losses and the financing of these losses by some of the taxpayers by means of loans from a certain Yukon company. Specifically, CCRA had learned from a newspaper article that some people had been arrested in the U.S. in relation to a similar tax evasion scheme. Also, a taxpayer's lawyer in Penticton, British Columbia, had told an auditor that his client wished to meet with CCRA officers in order to discuss why these commodities trading and financing schemes were considered frauds. The taxpayer met with Mr. Kuhn and Mr. Fleming. As a result of this interview, Mr. Jamieson announced on April 6th, 2001 to all auditors during a conference call that "the audit was now considered a criminal investigation ... [and] that no contact [should] be made by tax avoidance auditors with any taxpayers or their representatives on these files and that no further work [should] be done at the present time" (see memo to file dated April 6th, 2001, in volume 5 of the Applicants' Record at page 811).
[11] As a consequence, copies of the partially-audited tax return files of all the taxpayers (including the Applicants) were transferred to Investigations. On June 3rd, 2002, Mr. Fleming informed Audits that he wanted the original tax returns of all the taxpayers, promoters and any other relevant persons, including the returns of all of the Applicants, to be kept by Investigations for prosecution purposes in case such became necessary (such as forensic tests, original signatures of taxpayers for evidence purposes, etc.) (see email from Mr. Fleming to Ms. Pumple dated June 3rd, 2002, in volume 3 of the Applicants' Record at page 631). As of June 2nd, 2004, the control of the taxpayers' original returns was still with Mr. Fleming in Investigations. The information was maintained on 9 compact discs containing 18,000 pages of documents on the schemes and each individual taxpayer. As an example, about 500 of these pages concerned Mr. Stanfield's returns (see the affidavit of Ron D.F. Wilhelm dated June 18, 2004, counsel for the Department of Justice, in volume 1 of the Applicants' Record at pages 43 and 46-48).
[12] From the beginning of the investigation until late August 2002, Ms. Pumple kept in regular contact with Investigations by answering technical matters, giving advice, and supplying further information when needed. She even sought Mr. Fleming's consent for her 2002 holidays even though she was an auditor and not an investigator (see email from Ms. Pumple to Mr. Fleming dated June 3rd, 2002, in volume 3 of the Applicants' Record at page 630). As will be discussed later on in these reasons, Ms. Pumple kept in contact with Mr. Fleming even after August 2002 (see paragraph 20 of this decision).
[13] From November 28th, 2001 to September 9th, 2002, Mr. Kuhn, auditor of thirteen (13) Applicants, was seconded to work for Investigations in Vancouver. He also acted as "liaison" between Audits and Investigations. He was actively involved in all matters of the investigation and was of "tremendous help" to investigators (see email from Cheryl Hildebrand to Mr. Fleming dated August 29, 2002, in volume 4 of the Applicants' Record at page 710).
[14] In March 2002, Investigations gave the "green light" to Audits to recommence auditing the 1998 tax returns of the Applicants. Notices of Reassessment were forwarded to the Applicants in the spring and summer of 2002. These disallowed the commodity losses claimed and levied penalties pursuant to subsection 163(2) of the Act. The Applicants filed appeals against these reassessments.
[15] The reason given for having issued the Notices of Reassessment even though the Applicants were still being investigated was "the statute-bar problem" (see cross-examination of Ms. Pumple dated January 20, 2003, in volume 2 of the Applicants' Record at page 206).
[16] On June 6th, 2002, Mr. Kuhn (still on secondment to Investigations) emailed Mr. Fleming, who was the team leader of Investigations, proposing two solutions to solve the problem that the reassessment of the 1999-2000 tax returns would also soon become statute-barred. One of these was chosen: to issue the letters and questionnaires, which was done in late August to October of 2002 (see paragraph 5 of the present decision).
[17] Early in July 2002, Investigations told Audits to recommence auditing the 1999-2000 returns of the Applicants. A verbal green light was given by Investigations. This directive from Investigations was given by Mr. Kuhn (on secondment) to auditors at a meeting in Edmonton held on July 3rd and 4th, 2002. Mr. Kuhn advised that:
Vancouver SI had given the green light to go ahead on resuming contact with the investors for all years and all schemes ... should the taxpayer wish to provide any information on how the scheme works ... we should immediately refer the taxpayer to Vancouver SI and not take the information ourselves ... if we are able to arrange an interview ... we should advise Vancouver SI prior ... the taxpayer should be informed that they are NOT under investigation however, there is an investigation ongoing ...
[See minutes of meeting dated July 3rd and 4th, 2002, in volume 3 of the Applicants' Record at pages 521 and 572-573.]
[18] As mentioned previously, the letters and questionnaires went out between late August and October 2002 to each Applicant stating "that a criminal investigation regarding the promotion of the transactions of the type claimed on your income tax return has been undertaken." The letters continued, "You are not under investigation at the present time but we wish to advise you that any information submitted may be provided to our investigations division for review." It gave the coordinates of Mr. Fleming, team leader, Investigations, as the contact person should more information be desired. The letters were signed by an auditor ( for the most part, Ms. Pumple or Mr. Kuhn).
[19] With the exception of one Applicant, all the Applicants received, in 2003 or before, Notices of Reassessment for their 1999-2000 returns. Again, they have each filed appeals of these reassessments with the Tax Court of Canada.
[20] After the letters and questionnaires were issued to the Applicants, Mr. Fleming and Ms. Pumple continued their ongoing communications. The matters discussed were varied, but mainly concerned themselves with the audit and the investigation, including:
< the proposal of one taxpayer to provide evidence in exchange for immunity from prosecution (dated September 20th, 2002, in volume 3 of the Applicants' Record at page 623);
< the relationship of certain companies and the issuance of shares in RRSP accounts (dated September 24th, 2002, in volume 3 of the Applicants' Record at page 622);
< an inquiry about one certain company (dated October 29th, 2002, in volume 3 of the Applicants' Record at page 620);
< an inquiry about the issuance of a requirement to produce information concerning an RRSP account (dated November 27th, 2002, in volume 3 of the Applicants' Record at page 619);
< an inquiry about the issuance of a requirement to produce the bank account information of a taxpayer (specifically, Mr. Fleming wanted a copy of these requirements) (dated November 27th, 2002, in volume 3 of the Applicants' Record at page 617);
< the decision of the Supreme Court of Canada in Jarvis (see infra), which Mr. Fleming was reviewing, as well as the chronology of events supplied by Audits to Mr. Fleming (dated November 28th, 2002, in volume 3 of the Applicants' Record at page 616);
< the retention of banking information for the purposes of Mr. Fleming's and Investigations' investigation (dated December 9th, 2002, in volume 3 of the Applicants' Record at page 615); and,
< the recent appearance of a newspaper report about one of the companies involved (dated December 9th, 2002, in volume 3 of the Applicants' Record at page 614).
In addition to his correspondence with Ms. Pumple, Mr. Fleming also kept in contact with another auditor with regard to another taxpayer, and the two exchanged some information as well as inquiries about a particular company thought to be involved in the scheme (dated September 25th and October 29th, 2002, in volume 3 of the Applicants' Record at pages 620-621).
[21] After September 9th, 2002, when he returned to Audits from his secondment with Investigations, Mr. Kuhn also kept in contact with Investigations. In addition to giving them his new coordinates, Mr. Kuhn inquired whether certain statutory declarations should be sent to Investigations, and offered "contacts" for Investigations if they should so wish. In return, Investigations requested his knowledge about the location of a particular newspaper article. (These exchanges are dated September 9, 16, 17, 18 and 23, 2002, and can be found in volume 4 of the Applicants' Record at pages 713-714 and 721-722.)
[22] The Notice of Application concerning the letters and questionnaires was served on the Minister and filed with the Court on September 20th, 2002. The affidavit of Ms. Pumple (with documents) was dated October 31st, 2002.
SUMMARY OF THE SUBMISSIONS OF THE PARTIES
The Applicants
[23] The Applicants submit that the predominant purpose of the letters and questionnaires was to further a criminal investigation. Pursuant to ss. 231.1(1) and 231.2(1) of the Act, the Minister may exercise inspection and requirement powers, but this authority is not allowed where the predominant purpose of the inquiry is to determine penal liability.
[24] The Applicants claim that it is clear in the circumstances that Audits had transferred its files to Investigations, and that nothing in the file shows that Investigations ever actually ended their investigation of the Applicants. The auditor Ms. Pumple was therefore effectively acting as an agent for Investigations. Investigations and Audits were in regular communication regarding the Applicants' files. There was no reason for Audits to desire the information requested in the letters and questionnaires, other than to obtain information for Investigations, since, in the Applicants' submission, Audits already had determined the basis for the reassessment of the Applicants' 1999 taxation year.
[25] Finally, the Applicants submit that a number of other factors give the appearance that Investigations was using Audits as its agent in the collection of evidence, including the wording of the letters themselves, Mr. Kuhn's dual role within Investigations and Audits, Ms. Pumple's assertion that Investigations had given Audits a "green light" to continue its audits despite the fact that no such evidence is in the file, and the fact that many of the Applicants' files continued to be held by Investigations despite the resumption of the audits.
[26] The Applicants believe that allowing the Minister to proceed with its request for information at this point, two years after the normal reassessment period for the Applicants has expired, and in this manner, asking for information which can only be reasonably used for the purposes of investigation, would be an abuse of process by the tax authorities. The letters and questionnaires clearly promote a criminal tax investigation rather than a civil reassessment, and should be declared invalid or unlawful pursuant to s. 7 of the Charter.
The Respondent
[27] The Respondent claims that the letters and questionnaires are properly issued and a necessary tool to better determine the Applicants' tax liability for 1999 and 2000. Without an understanding of how the 1998 arrangements worked, Audits will be unable to properly reassess the Applicants' 1999 and 2000 taxation years.
[28] The purpose of the letter, issued pursuant to s. 231.1(1) of the Act, was to verify compliance by the Applicants with the duties and obligations imposed upon them by the Act, and in particular, to verify whether they correctly reported their taxable income under the Act for that year. The requests in the letter were standard. The questionnaire itself was developed in order to understand the tax aspect of the transactions as well as whether the Applicants had invested in non-qualified investments for RRSP purposes. Both were drafted by persons in Audits without input from Investigations, with the exception of the second paragraph of the letter dealing with the criminal investigation, which was drafted by Mr. Fleming.
[29] The Respondent further submits that none of the Applicants were under criminal investigation at the time Audits was told by Investigations that it could recommence its audits. It is standard practice that audits are not conducted while investigations are ongoing and that audits will only recommence once advised accordingly by Investigations. This sequence of events, of files moving from Audits to Investigations then back to Audits, is not uncommon. It is also not uncommon that personnel confer with each other as necessary, or that occasionally an auditor will be seconded to Investigations. None of these practices, in the particular circumstances of this case, can be shown to amount to abuse.
STANDARD OF REVIEW
[30] For the purpose of the present decision, the most relevant provisions of the Act are ss. 231.1(1), 231.2(1) and 239(1). These are attached to this decision as an annexe for reference.
[31] No explicit right of review is granted in s. 231.1(1). In determining the appropriate standard of review for decisions made pursuant to this section, Wilson J. for the Court in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, stated at page 648 that "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." These powers are explained further by Iacobucci and Major JJ. in R. v. Jarvis, [2002] 3 S.C.R. 757 at 788-89 (Jarvis):
The sections within Part XV of the ITA provide the Minister with "Administration and Enforcement" powers. They also impose reciprocal obligations upon taxpayers: for example, in furtherance of the overall reporting and verification scheme, s. 230(1) of the ITA requires all taxpayers, for various specified periods of time, to maintain books and records of account at their place of business or residence in Canada. These documents must be kept "in such form and containing such information as will enable the taxes payable under [the ITA] or the taxes or other amounts that should have been deducted, withheld or collected to be determined."
The provisions that are central to the instant appeal vest the Minister with extensive powers that may be used "for any purpose related to the administration or enforcement" of the ITA. Section 231.1(1) continues the inspection power that was introduced in An Act to amend the Income War Tax Act, S.C. 194, c. 43, s. 11. Paragraph (a) allows a person authorized by the Minister to "inspect, audit or examine" a wide array of documents, reaching beyond those that the ITA otherwise requires the taxpayer to prepare and maintain. In the course of the inspection, audit or examination, para. (c) provides that the authorized person may enter into any premises or place that is not a dwelling-house; furthermore, para. (d) imposes a correlative duty upon persons at the premises or place to provide "all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act.
[32] In James Richardson & Sons, Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 614 (James Richardson), the Supreme Court, in its review of a previous decision (Canadian Bank of Commerce v. Attorney General of Canada, [1962] S.C.R. 729) which was based on s. 231(3) of the Act (roughly the equivalent of today's s. 231.2(1), but with broader wording than s. 231.1(1)), outlined four criteria that serve to narrow the interpretation of that section:
(a) the test of whether the Minister is acting for a purpose specified in the Act is an objective one and has to be decided on the proper interpretation of the subsection and its application to the circumstances disclosed;
(b) the obtaining of information relevant to the tax liability of some specific person or persons whose liability to tax is under investigation is a purpose related to the administration or enforcement of the Act;
(c) it is not necessary that the person from whom the information is sought be one whose liability to tax is under investigation;
(d) the fact that giving of the information may disclose private transactions involving persons who are not under investigation and may not be liable to tax does not invalidate the requirement.
[My emphasis.]
[33] Relying on the jurisprudence reviewed above, especially factor a) outlined in James Richardson, and keeping in mind the Federal Court of Appeal's approach in Kligman v. Canada (Minister of National Revenue), [2004] F.C.J. No. 639 (Kligman), the Court views the question before it as being one of applying facts to a particular legal situation. That is to say, the Court must look at the exact facts of this case in order to determine whether the predominant purpose of the letters and questionnaires was one of audits or investigations. Although this litigation is a fact-finding mission, it remains that it is a question of mixed fact and law - see Jarvis, supra at para. 100; Housen v. Nikolaisen, [2002] 2 S.C.R. 235 at para. 27; Kligman, supra, at paras. 97-111 - and therefore the applicable standard of review is that of correctness.
THE GUIDING FACTORS
[34] The guiding factors to assess whether, at the time the letters and questionnaires were created and then issued, CCRA was exercising an audit function or an investigative one, were established by the Supreme Court inJarvis, supra.
[35] We learn from the Act and the Jarvis decision that the process of tax collection relies on the assessment and reporting done by individual taxpayers. There is an obligation on taxpayers to estimate their yearly income and to assess and disclose the income tax consequently payable on their income tax return which they are obliged to file. The success of such a system depends fully on the honesty, integrity and collaboration of taxpayers. Only then do CCRA's audit powers, which permit auditors to examine and assess income tax returns within a certain period of time (according to ss. 152(3) and (4) of the Act, reassessments can be made within three years of filing) come into play ("the statute-bar problem"). Furthermore, the audit powers granted to CCRA provide for penalties where tax returns are not filed or are inaccurate. An audit is not a criminal process but an administrative one which does not trigger the implication of Charter rights.
[36] CCRA also has at its disposal investigative functions which are completely distinct from its audit functions. The purpose of these investigative functions is to investigate cases of importance which might divulge schemes of suspected tax evasion of a criminal nature which are punishable as criminal offences pursuant to s. 239 of the Act. The investigative functions include the collection of evidence for prosecutorial purposes. When exercising its investigative functions, CCRA and the taxpayer are in an "adversarial relationship", bringing into play the whole panoply of constitutional protections against self-incrimination, including the right to remain silent.
[37] Therefore, how should a trial judge assess a situation of an audit requirement to provide documents and information when there is evidence of a possible concurrent criminal investigation or an investigation that had begun but was later stopped?
In our view, where the predominant purpose of a particular inquiry is the determination of penal liability, CCRA must relinquish the authority to use the inspection and requirement powers under ss 231.1(1) and 231.2(1). In essence, officials "cross the Rubicon" when the inquiry in question engages the adversarial relationship between the taxpayer and the state.
[See Jarvis, supra at para. 88.]
[38] The predominant purpose of the requirement to provide documents and information must be assessed in light of all the factors related to the request. Again, in Jarvis, supra at para. 94, Iaccobucci and Major JJ. ("the judges") suggest some questions to pose when assessing the situation:
a) Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made?
b) Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation?
c) Had the auditor transferred his or her files and materials to the investigators?
d) Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators?
e) Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence?
f) Is the evidence sought relevant to taxpayer liability generally? Or, as is the case with evidence as to the taxpayer's mens rea, is the evidence relevant only to the taxpayer's penal liability?
g) Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance audit had in reality become a criminal investigation?
As will be seen, the Court has identified five (5) other questions which may be of some help in assessing the predominant purpose (see paragraph 45 below).
[39] While indicating that CCRA can conduct parallel criminal investigations and administrative audits, the judges at para. 97 make the following precision:
However, if an investigation into penal liability is subsequently commenced, the investigators can avail themselves of that information obtained pursuant to the audit power 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.
Thus, the transfer of information from Audits to Investigations is not forbidden as long as there is no "commencement of the investigation into penal liability." What is the situation if such an investigation has begun but later stopped, and then an audit requirement is made, such as is the situation in the present case? Subject to analysis later in these reasons, there must be a clear indication that the penal investigation has in reality stopped in order to permit the flow of information from Audits to Investigations.
[40] The judges in Jarvis, supra, also express, at para. 92, their thoughts on the location of a file (i.e., whether it is held by Audits or Investigations) as a matter of inquiry, though this, in itself, is not determinative:
Still, if in an auditor's judgement a matter should be sent to the investigators, a Court must examine the following behaviour very closely. If the file is sent back, does it appear that the investigators have actually declined to take up the case and have returned the matter so