506913 N.B. Ltd v. The Queen

506913 N.B. Ltd v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-06-24
Neutral citation
2013 TCC 209
File numbers
2003-3382(GST)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2003-3382(GST)G
BETWEEN:
506913 N.B. LTD.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
Docket: 2003-3383(GST)G
CAMBRIDGE LEASING LTD.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard on April 16-17, 2012 and November 13-16, 2012
at Fredericton, New Brunswick.
Before: The Honourable Justice Steven K. D'Arcy
Appearances:
Counsel for the Applicants:
Eugene Mockler, Q.C.
Kevin Toner
Counsel for the Respondent:
John P. Bodurtha
Jan Jensen
Devon E. Peavoy
____________________________________________________________________
ORDER
Upon hearing from the parties;
In accordance with the attached Reasons for Order:
a) The Appellants’ application for an Order declaring inadmissible and excluding as evidence at trial, pursuant to sections 8 and 24 of the Canadian Charter of Rights and Freedoms, all documents, accounting records, invoices, purchase orders, bank records, computer printouts, sales records, ledgers, journals and transportation invoices, and certain information gathered by the Respondent and her employees, officers, servants, auditors and investigators and RCMP officers in the alleged audits and the investigation of the Appellants between 1998 and July 31, 2007 and all calculations, assessments, and worksheets or spreadsheets in connection therewith, accounting records, memorandums, emails, interoffice memos, letters, information brochures and witness interviews and statements compiled in whole or in part from reliance on the said information, is dismissed, and;
b) Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 24th day of June 2013.
“S. D’Arcy”
D'Arcy J.
Citation: 2013 TCC 209
Date: 20130624
Docket: 2003-3382(GST)G
BETWEEN:
506913 N.B. LTD.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
Docket: 2003-3383(GST)G
CAMBRIDGE LEASING LTD.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
D’Arcy J.
[1] The Appellants have brought a motion for an Order excluding certain documents as evidence at the hearing of their appeal. The specific wording of the motion is attached hereto as Schedule A.
[2] It appears that the Appellants are asking the Court to exclude all evidence gathered by the CRA during its audits and investigations of them. The specific documents include all the documents listed in Schedule A of the Respondent’s List of Documents (Partial Disclosure) and nearly all of the documents contained in the disclosure list for a criminal trial involving the Appellants. The Notice of Motion also refers to documents obtained by RCMP officers.
[3] In Part II of their Brief on Motion, the Appellants state that the issues to be addressed by the Court are as follows:
1. Whether the Appellants have suffered a breach of their section 8 Charter of Rights and Freedoms (“the Charter”) rights in the circumstances and, in particular, whether the Minister’s agents, auditors and investigators improperly conducted a criminal investigation under the guise of an exercise of audit powers.
2. Whether the searches and seizures of documents and records that were carried out under judicial authorizations by the Minister’s auditors, investigators and RCMP officers were illegal and therefore contrary to section 8 of the Charter because they were based on illegally obtained evidence as set out in the Brief on Motion, thus entitling the Appellants to an Order excluding the evidence under subsection 24(2) of the Charter.
[4] The Appellants relied on affidavits sworn by Mr. David Daley on February 24, 2011 (the “Daley Affidavit”) and Mr. Allen Skaling on January 27, 2012 (the “Skaling Affidavit”). During the relevant period, Mr. Daley was the president and a director of the Appellants and owned 50% of the shares of the Appellants. During the relevant period, Mr. Skaling was the comptroller and secretary-treasurer of the Appellants.
[5] A number of documents were attached to the Daley Affidavit and the Skaling Affidavit, including the transcripts of the examination for discovery in this appeal of CRA official Mr. Ron MacIntyre (the “Discovery of Ron Macintyre”) and the transcripts of a trial voir dire held in the New Brunswick Provincial Court (the “voir dire”).[1] The voir dire occurred during the criminal trial of Mr. Daley and the Appellants, which I will discuss shortly.
History of Proceedings
[6] The Appellant 506913 N.B. Ltd. (“506913”) is appealing a reassessment issued by the Minister for its GST reporting periods ending between May 1, 1998 and October 31, 2000. The reassessment increased 506913’s net tax by $5,627,882. The Minister also assessed penalties and interest of $1,253,746 and gross negligence penalties of $1,374,854.
[7] The Appellant Cambridge Leasing Ltd. (“Cambridge”) is appealing an assessment issued by the Minister for its GST reporting periods ending between November 1, 2000 and December 31, 2000. The assessment increased Cambridge’s net tax by $498,031. The Minister also assessed penalties and interest of $51,934 and gross negligence penalties of $124,508.
[8] There are two other relevant legal proceedings involving the Appellants. The Appellants, together with Mr. Daley, were subjected to criminal proceedings before the New Brunswick Provincial Court (the “Criminal Proceedings”).
[9] Further, the Appellants and their principals have brought a civil action against individual employees of the Canada Revenue Agency (the “CRA”) and the Attorney General of Canada in the Court of Queen’s Bench of New Brunswick (the “Civil Action”).
[10] With respect to the current appeal, a pre-trial conference was held before me on January 28, 2011. On February 7, 2011, I issued an Order providing for the filing by the Appellants of a motion to challenge the admissibility at trial of certain documents. The Appellants filed a motion on February 28, 2011. The motion did not comply with my February 7, 2011 Order.
[11] On March 23, 2011, I issued a second Order directing the Appellants to withdraw the motion they filed on February 28, 2011 and to file a new motion consistent with my Order of February 7, 2011. The Court also provided detailed directions with respect to the content of the new motion. The Appellants then filed this motion with the Court on February 3, 2012 (the “Main Motion”).
[12] On March 15, 2012, the Respondent filed a motion to have struck out certain affidavits filed by the Appellants in support of the Main Motion or, in the alternative, to have struck out certain specified paragraphs of the affidavits together with the associated exhibits. The Respondent’s motion raised three issues:
1. whether certain documents should be excluded because they are subject to solicitor-client privilege;
2. whether the Appellants were prohibited from using a transcript of the discovery of a CRA official in the Civil Action; and,
3. whether certain portions of the various affidavits should be struck because of the nature of the statements therein.
[13] I heard the Respondent’s motion over three days in April 2012 and rendered my oral decision on April 16, 2012. I found that:
1. the actions of the Respondent constituted an implied waiver of the solicitor‑client privilege;
2. the oral discovery testimony of Mr. Ron MacIntyre in the Civil Action should be removed from the affidavits since it was subject to the implied undertaking rule; and,
3. numerous statements contained in the affidavits should be struck, as they constituted speculation, opinion, argument and/or legal conclusions.
[14] After I rendered my decision on the Respondent’s motion, Mr. Skaling and Mr. Daley were cross-examined on their affidavits. The Appellants then requested an adjournment of the Main Motion to allow them time to bring a motion in the Court of Queen’s Bench of New Brunswick to have the implied undertaking rule waived by that Court. I granted the adjournment request.
[15] On July 3, 2012, Justice Rideout of the Court of Queen’s Bench of New Brunswick dismissed the Appellants’ motion to be “. . . excused from compliance with their implied undertaking. . . .”[2]
[16] The first issue I will address is whether the Minister’s agents, auditors and investigators conducted a criminal investigation under the guise of an exercise of audit powers.
Audit v. Criminal Investigation Issue
[17] The relevant sections of the Charter are sections 8 and 24. Section 8 of the Charter states that “[e]veryone has the right to be secure against unreasonable search or seizure.” Section 24 of the Charter reads as follows:
(1) Anyone whose rights or freedoms, as guaranteed by this Charter, have been infringed or denied may apply to a court of competent jurisdiction to obtain such remedy as the court considers appropriate and just in the circumstances.
(2) Where, in proceedings under subsection (1), a court concludes that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter, the evidence shall be excluded if it is established that, having regard to all the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute.
[18] I must first determine whether there has been a section 8 breach. If I find there has been a breach, I must then determine whether the Court should exclude evidence pursuant to subsection 24(2) of the Charter.
The Law
[19] There is a low expectation of privacy with regard to business records relevant to determining tax liability.[3] As the Supreme Court of Canada (the “SCC”) noted in R. v. Jarvis:[4]
With respect to the consequences related to s. 8 of the Charter, McKinlay Transport, supra, makes it clear that taxpayers have very little privacy interest in the materials and records that they are obliged to keep under the ITA, and that they are obliged to produce during an audit. Moreover, once an auditor has inspected or required a given document under ss. 231.1(1) and 231.2(1), the taxpayer cannot truly be said to have a reasonable expectation that the auditor will guard its confidentiality. It is well known, as Laskin C.J. stated in Smerchanski, supra, at p. 32, that “[t]he threat of prosecution underlies every tax return if a false statement is knowingly made in it”. It follows that there is nothing preventing auditors from passing to investigators their files containing validly obtained audit materials. That is, there is no principle of use immunity that prevents the investigators, in the exercise of their investigative function, from making use of evidence obtained through the proper exercise of the CCRA’s audit function. Nor, in respect of validly obtained audit information, is there any principle of derivative use immunity that would require the trial judge to apply the “but for” test from S. (R.J.), supra. If a particular piece of evidence comes to light as a result of the information validly contained in the auditor’s file, then investigators may make use of it.
[20] However, the SCC determined in Jarvis that compliance audits and tax evasion investigations must be treated differently. The Court summarized its conclusions as follows:
. . . While taxpayers are statutorily bound to co-operate with CCRA auditors for tax assessment purposes (which may result in the application of regulatory penalties), there is an adversarial relationship that crystallizes between the taxpayer and the tax officials when the predominant purpose of an official’s inquiry is the determination of penal liability. When the officials exercise this authority, constitutional protections against self-incrimination prohibit CCRA officials who are investigating ITA offences from having recourse to the powerful inspection and requirement tools in s. 231.1(1) and 231.2(1). Rather, CCRA officials who exercise the authority to conduct such investigations must seek search warrants in furtherance of their investigation.[5]
[21] The decision of the SCC in Jarvis relates to actions of CRA officials under the Income Tax Act (the “ITA”). It is my view that the SCC’s conclusions apply equally to actions of CRA officials under Part IX of the Excise Tax Act (the “GST Act”).
[22] The relevant portions of the SCC’s decision in Jarvis focused on the inspection and requirement tools provided to the CRA under subsections 231.1(1) and 231.2(1) of the ITA. The wording of subsections 288(1) and 289(1) of the GST Act is nearly identical to the wording of subsections 231.1(1) and 231.2(1) respectively of the ITA. The purpose of the subsections is the same.
[23] Subsections 288(1) and 289(1) of the GST Act read as follows:
288(1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Part, inspect, audit or examine the documents, property or processes of a person that may be relevant in determining the obligations of that or any other person under this Part or the amount of any rebate or refund to which that or any other person is entitled and, for those purposes, the authorized person may
(a) subject to subsection (2), enter any premises or place where any business or commercial activity is carried on, any property is kept, anything is done in connection with any business or commercial activity or any documents are or should be kept, and
(b) require the owner or manager of the property, business or commercial activity and any other person on the premises or in the place to give to the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Part and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.
. . .
289(1) Despite any other provision of this Part, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of a listed international agreement or this Part, including the collection of any amount payable or remittable under this Part by any person, by notice served personally or by registered or certified mail, require that any person provide the Minister, within any reasonable time that is stipulated in the notice, with
(a) any information or additional information, including a return under this Part; or
(b) any document.
[24] In reaching its decision in Jarvis, the SCC discussed the statutory context of the ITA, focusing on the regulatory nature of the statute and the self-assessing and self-reporting nature of the tax collection scheme under the ITA.[6]
[25] The statutory context of the GST Act is very similar to that of the ITA. The GST Act is a regulatory statute that controls the manner in which the federal GST[7] is calculated and collected. The process of GST collection relies primarily upon self-assessment and self-reporting. GST registrants collect the tax as agents for the government, claim input tax credits for the tax they pay on their purchases of goods and services, calculate the amount of tax they are required to remit (or the refunds they are entitled to claim) for a monthly, quarterly or annual reporting period, and disclose this amount to the CRA in the GST return they are required to file.
[26] As with income tax, the success of the administration of the GST depends upon taxpayer forthrightness. In addition, as with income tax, the nature of the GST tax collection scheme creates an obstacle in this regard. In fact, the problem is more acute in the GST context. The problem relates to the portion of the GST return that shows how the GST registrant determines the amount of tax it is required to remit or the amount of refund it is entitled to receive. It comprises only four lines. It will always be impossible, therefore, to determine from the face of a GST return whether any impropriety has occurred in its preparation. For this reason, consistent with the SCC’s findings in Jarvis,[8] the CRA must be given broad powers, in supervising this regulatory scheme, to audit GST registrants’ GST returns and inspect all records which may be relevant to the preparation of these returns.
[27] The SCC in Jarvis discussed the following sections of the ITA that provide the Minister with the required powers for the supervision of the regulatory scheme under that Act:
- Subsection 230(1), which sets out the requirement for taxpayers to maintain records and books of account at their place of business or residence in Canada.
- Subsection 231.1(1), which allows a person authorized by the Minister to inspect, audit or examine a wide range of documents and provides that the authorized person may, in the course of the inspection, audit or examination, enter into any premises that are not a dwelling-house (a warrant is required before the authorized person may enter a dwelling‑house).
- Subsection 231.2(1), which allows the Minister, by written notice, to compel a person to produce any information or document.
- Subsection 238(1), which provides that a summary conviction offence is committed where there is, among other things, failure to file returns or maintain books and records.
- Section 239, which provides for such summary conviction offences as making false or deceptive statements, destruction or alteration of documents, wilful evasion of income tax, and conspiracy to engage in prohibited activities.
[28] Subsections 286(1), 288(1) and 289(1), section 326, and subsection 327(1) of the GST Act provide the Minister with similar if not identical powers to supervise the regulatory scheme under the GST Act.
[29] As a result of the similar statutory context of the ITA and the GST Act, and the similar powers vested in the Minister under the ITA and the GST Act, it is my opinion that the SCC’s findings with respect to the application of section 8 of the Charter to the relevant provisions of the ITA apply equally to the relevant provisions of the GST Act.
[30] The key issue in the current motion is the determination of the predominant purpose of the inquiries made by the CRA auditors during the audits of 506913 and Cambridge. As the SCC stated in Jarvis,
In our view, where the predominant purpose of a particular inquiry is the determination of penal liability, CCRA officials 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. There is no clear formula that can answer whether or not this is the case. Rather, to determine whether the predominant purpose of the inquiry in question is the determination of penal liability, one must look to all factors that bear upon the nature of that inquiry.[9]
[31] I must determine whether the CRA auditors who audited 506913 and Cambridge crossed the Rubicon. The SCC provided the following guidance for the making of this determination:
To reiterate, the determination of when the relationship between the state and the individual has reached the point where it is effectively adversarial is a contextual one, which takes account of all relevant factors. In our opinion, the following list of factors will assist in ascertaining whether the predominant purpose of an inquiry is the determination of penal liability. Apart from a clear decision to pursue a criminal investigation, no one factor is necessarily determinative in and of itself, but courts must assess the totality of the circumstances, and make a determination as to whether the inquiry or question in issue engages the adversarial relationship between the state and the individual.
In this connection, the trial judge will look at all factors, including but not limited to such questions as:
(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?[10]
Application of Law to Facts Relating to the Appellants
Summary of Facts
[32] 506913 was incorporated on April 30, 1998[11] and began operations in May 1998. It is stated in the Amendment to the Notice of Appeal filed September 26, 2003 that 506913 carried on business as a dealer for the purchase, sale and export of automobiles.[12]
[33] 506913 was a monthly filer for GST purposes. 506913 claimed a refund of $320,000 in its first GST return, which was for its monthly GST reporting period ending on May 31, 1998.[13] When a GST registrant claims a refund in its first GST return, it is the CRA’s normal practice to audit the return. As a result, the CRA assigned Mr. George LeBlanc to conduct the audit of 506913 in August 1998.[14]
[34] At the time Mr. LeBlanc was assigned the audit of 506913, he was auditing a Moncton car dealer, Moncton Chrysler Dodge (“Moncton Chrysler”) He had been assigned the audit of Moncton Chrysler in June 1998. He left this audit in August to begin the audit of 506913.[15]
[35] Mr. LeBlanc audited 506913 until November 1998. During this period, he expanded the scope of his audit to include the monthly GST returns filed by 506913 for June, July, August and September 1998. 506913 claimed refunds exceeding $485,000 on these monthly returns.
[36] Mr. LeBlanc stopped auditing 506913 in November 1998 and returned to the audit of Moncton Chrysler. However, he retained responsibility for the audit of 506913. It also appears that he authorized the payment of refunds to 506913. In December 1998, the government paid GST refunds of approximately $600,000 to 506913. These refunds comprised the amounts claimed by 506913 in its GST returns for its reporting periods ending between May 1, 1998 and September 30, 1998 less a $200,000 adjustment the CRA made for 506913’s May 1998 GST reporting period.[16]
[37] 506913 continued to claim substantial refunds in its monthly GST returns. The CRA paid 506913 approximately $4.3 million in respect of refunds claimed by 506913 in its GST returns filed for the reporting periods ending between October 1, 1998 and July 31, 2000. The $4.3 million represented the total amount claimed by 506913 during this period.[17]
[38] On February 17, 2000, Mr. LeBlanc referred the audit of Moncton Chrysler to the CRA’s special investigations group (the “SI Group”).[18] The CRA assigned Mr. Ron MacIntyre, a CRA special investigations officer, to the investigation of Moncton Chrysler.[19] The New Brunswick Provincial Court subsequently convicted the principal of Moncton Chrysler of 30 offences under the GST Act.[20]
[39] In early April 2000, Mr. LeBlanc accepted a new job at the CRA and ceased being a GST auditor.[21] Mr. Yvon Boudreau, a CRA auditor, replaced Mr. LeBlanc as the auditor of 506913.
[40] Mr. Boudreau was also assigned the audit of a Nova Scotia company owned by Mr. Daley and Mr. Kay, Nautica Motors Inc. (“Nautica”). Mr. Boudreau elected to audit Nautica first. He completed the audit of Nautica in mid-to late May 2000 and then began the audit of 506913.[22]
[41] On October 25, 2000, Mr. Boudreau and Ms. Claudette Miller, a member of the SI Group, met with Mr. Daley and Mr. Skaling. Ms. Miller gave a verbal Charter warning to Mr. Daley and Mr. Skaling with respect to answering questions regarding the activities of Mr. Daley and 506913.[23]
[42] From October 26, 2000 to early December 2000, Mr. Boudreau continued his audit of 506913. I will discuss the nature of his work later on in my reasons. Mr. Boudreau transferred his audit files to Mr. MacIntyre of the SI Group on February 16, 2001.[24]
[43] By February 2001, Cambridge had filed its first GST returns. These returns related to its November and December 2000 reporting periods. Cambridge claimed large refunds in both returns. The CRA assigned Mr. Boudreau the audit of these returns. He met with Mr. Skaling and Mr. Daley in February 2001 to discuss the audit of Cambridge’s returns. During this meeting, Mr. Boudreau became aware that Cambridge and 506913 had sold vehicles to the same company. Mr. Boudreau then stopped the audit. In early March 2001, he referred Cambridge to the SI Group.[25]
[44] On November 15, 2001, the Minister assessed 506913 for $8,256,482. The assessment was in respect of 506913’s GST reporting periods ending between May 1, 1998 and October 31, 2000.[26]
[45] On November 22, 2001, the Minister assessed Cambridge for $674,472. The assessment was in respect of Cambridge’s GST reporting periods ending between November 1, 2000 and December 31, 2000.[27]
[46] On June 1, 2005, criminal charges were laid against 506913, Cambridge and Daley. On July 30, 2008, the Provincial Court of the Province of New Brunswick granted the three accused a stay of proceedings on the basis that the accused’s rights under section 11(b) of the Charter had been infringed.[28]
[47] The evidence before this Court indicates that the CRA conducted three inquiries regarding the Appellants; the first was carried out by Mr. LeBlanc, the second by Mr. Boudreau and the third by Mr. MacIntyre and other members of the SI Group (the “MacIntyre inquiry”). The first step in the Charter analysis is to determine the predominant purpose of each of these inquiries.
Application of Law to the Facts
[48] It is the Appellants’ position that each of the three inquiries was a criminal investigation. In their Brief on Motion, they argue that the alleged audits conducted by Mr. LeBlanc and Mr. Boudreau between August 1997 and February 2001 were part and parcel of a criminal investigation.
[49] I note that the Appellants argue that a criminal investigation of 506913 began in the summer of 1997, nearly a year before 506913 was incorporated and began to carry on a business. I do not understand how a criminal investigation of a corporation could have begun a year before the corporation came into existence. Regardless, I do not accept that Mr. LeBlanc’s and Mr. Boudreau’s audit activities were part of a criminal investigation.
[50] I have reached this conclusion after considering the factors set out in Jarvis. I will now discuss the application of these factors to the current motion.
Factor 1: 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?
[51] The SCC provided the following guidance with respect to the application of this factor:
To begin with, the mere existence of reasonable grounds that an offence may have occurred is by itself insufficient to support the conclusion that the predominant purpose of an inquiry is the determination of penal liability. Even where reasonable grounds to suspect an offence exist, it will not always be true that the predominant purpose of an inquiry is the determination of penal liability. In this regard, courts must guard against creating procedural shackles on regulatory officials; it would be undesirable to “force the regulatory hand” by removing the possibility of seeking the lesser administrative penalties on every occasion in which reasonable grounds existed of more culpable conduct. . . . While reasonable grounds indeed constitute a necessary condition for the issuance of a search warrant to further a criminal investigation (s. 231.3 of the ITA; Criminal Code, s. 487), and might in certain cases serve to indicate that the audit powers were misused, their existence is not a sufficient indicator that the CCRA is conducting a de facto investigation. In most cases, if all ingredients of an offence are reasonably thought to have occurred, it is likely that the investigation function is triggered.[29]
[52] There is no evidence before the Court to support a finding that Mr. LeBlanc was aware, during the course of his audit of 506913, of any grounds for the laying of criminal charges.
[53] During the course of his audit of 506913, he discovered that 506913 was purchasing vehicles from certain Montreal companies that were not filing GST returns. However, Mr. LeBlanc stated during the voir dire that this fact, in and of itself, was not evidence that 506913 was involved in illegal activities. His specific comments were as follows:
Well, we know the problem lies with the non-filer. The non-filer has normally collected more tax than he’s paid out and has not remitted. And we know that the tax loss is going to be at the non-filer. The person selling to the non-filer or the person buying from the non-filer, there’s no evidence that there’s anything illegal there in and of itself. Now, once you begin an audit and do an audit, you may run into indications that this can be some problems. However, in and of itself, it’s not where the problem lies; the problem lies with the non-filer.[30]
[54] Mr. LeBlanc noted that during the period when he physically conducted the audit of 506913 - August 1998 to November 1998 - he saw no evidence to indicate that 506913 was involved in illegal transactions. In fact, in November 1998 he approved the payment of approximately $600,000 of refunds claimed by 506913 in its GST tax returns.[31] The fact that the CRA paid 506913 refunds of approximately $600,000 is strong evidence that they did not suspect 506913, at that point in time, of any criminal activity. In fact, it supports Mr. LeBlanc’s comments that he did not see any problems with 506913’s GST filings.[32]
[55] It appears that Mr. LeBlanc’s audit of 506913 did raise concerns in his mind with respect to Moncton Chrysler. During his audit of 506913 he discovered that vehicles 506913 purchased from the Montreal non-filers originated with Moncton Chrysler. As a result, in November 1998 he returned to his audit of Moncton Chrysler.[33] As previously noted, Moncton Chrysler and its principal owner were eventually charged with and convicted of criminal offences.
[56] There was no active physical audit of 506913 between November 1998 and May 2000. However, during this period, the CRA continued to pay substantial refunds to 506913 that were based upon the GST returns 506913 filed during this period.
[57] Upon taking over the audit of 506913 in May 2000, Mr. Boudreau continued to conduct an audit of the company to determine its civil liability under the GST Act. While conducting his audit, he met with Mr. Skaling, Mr. Daley and other employees of 506913. It appears that he used the inspection powers and third party demand powers provided in sections 288 and 289 respectively.[34] During this period, the CRA continued to pay substantial refunds to 506913.
[58] The evidence before me is that the first time Mr. Boudreau received an indication that 506913 might be involved in criminal activities was in October 2000.
[59] In October 2000, Mr. MacIntyre informed Mr. Boudreau that he had evidence that he believed implicated 506913 and Mr. Daley in a tax evasion scheme. In October 2000, Mr. MacIntyre, in the course of his criminal investigation of Moncton Chrysler, met with a Mr. Mike Levi. In the course of the meeting, which occurred at the offices of Scott Fowler, a Moncton lawyer, Mr. MacIntyre received information, which he believed implicated 506913 and Mr. Daley in a tax evasion scheme.[35] He then contacted Mr. Boudreau and advised him that a Charter warning would have to be given before Mr. Boudreau obtained any additional information from 506913 or Mr. Daley.[36]
[60] Mr. MacIntyre did not share the actual evidence obtained from Mr. Levi with Mr. Boudreau. Mr. Boudreau and Mr. MacIntyre worked in separate CRA offices: Mr. Boudreau in the Moncton office and Mr. MacIntyre in the Saint John office. Mr. Boudreau noted that, at the time Mr. MacIntyre and another CRA official, Ms. Miller, came to his office in Moncton in October 2008, he had no reason to believe 506913 was engaged in fraudulent transactions.[37] Further, he did not know why those two officials came to his office and told him that 506913 should be given a Charter warning. Mr. Boudreau stated, “I didn’t - - I didn’t know why he [Mr. MacIntyre] was approaching me. I had no idea what - - what it related to . . . . I had an audit to do and I was going to pursue my audit.”[38]
[61] As noted previously, on October 25, 2000, Mr. Boudreau and Ms. Miller met with Mr. Daley and Mr. Skaling. Ms. Miller gave a verbal Charter warning to Mr. Daly and Mr. Skaling with respect to the activities of Mr. Daley and 506913.[39]
[62] I believe that Mr. MacIntyre and Ms. Miller had reasonable grounds to proceed with a criminal investigation by the latter part of October 2000. In fact, I believe that a criminal investigation by the SI Group began when Ms. Miller issued the Charter warning on October 25, 2000. During his examination for discovery, Mr. MacIntyre acknowledged that, at that point in time, the SI Group had reasonable grounds to believe that Mr. Daley and 506913 were involved in criminal activity.[40]
[63] The evidence before me does not support a finding that the CRA had reasonable grounds to lay charges before October 25, 2000. There is no evidence before me that Mr. LeBlanc had at any time uncovered evidence that led him to believe or suspect that 506913 was engaged in criminal activity.
[64] As I just discussed, Mr. MacIntyre informed Mr. Boudreau in October 2000 that a Charter warning should be issued before he spoke with Mr. Daley or obtained information from 506913. Clearly, this must have raised suspicion in Mr. Boudreau’s mind. However, the SI Group did not provide Mr. Boudreau with the details of Mr. Daley’s and 506913’s alleged criminal activity. The first time that Mr. Boudreau obtained direct evidence that 506913 may have been engaged in criminal activities was in November 2000.
[65] In November of 2000, Mr. Boudreau received, from a car dealership in Toronto, information with respect to five high-value SUV’s that did not appear to be consistent with information provided by 506913. He then contacted a person who operated a car-auctioning business in New Brunswick. The information he received from the Toronto car dealer and the New Brunswick auction house led him to believe that certain transactions recorded in 506913’s records may not have occurred. He then concluded that it was time to refer the Appellant’s file to the SI Group.[41]
[66] There is no evidence before me that Mr. Boudreau was aware, before November 2000, of any evidence that would support the laying of criminal charges. Although the information he obtained in November 2000 raised suspicion in Mr. Boudreau’s mind that an offence had occurred, it is not clear from the evidence before me that this information was sufficient to support the laying of charges. Regardless, the SI Group began its criminal investigation in October 2000.
Factor 2: Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation?
[67] On the basis of the evidence before me, I have concluded that the conduct of Mr. LeBlanc and Mr. MacIntyre was at all times consistent with the pursuit of a civil audit of the Appellants. The conduct of Mr. MacIntyre and the other members of the SI Group was consistent with the pursuit of a criminal investigation.
[68] Counsel for the Appellant argued that conduct of Mr. LeBlanc and Mr. Boudreau was at all times consistent with the pursuit of a criminal investigation because they reviewed each purchase and sale of an automobile made by 506913. He argued that in a true audit the CRA would only audit a sample of a registrant’s purchases and sales and then extrapolate using statistical sampling. Mr. Skaling stated that 506913 and Cambridge completed 1,271 transactions between May 1998 and December 2000.[42]
[69] I do not accept that the review by a CRA auditor of each purchase and sale of an automobile made by a GST registrant is consistent with the pursuit of a criminal investigation as opposed to a civil audit.
[70] As noted previously, the CRA chose 506913 for audit because it had claimed a large refund in the GST return it filed for May 1998, its first GST reporting period. My review of the evidence before me, particularly Mr. LeBlanc’s and Mr. Boudreau’s testimony during the voir dire, leads me to conclude that their actions were those one would have expected from trained GST auditors auditing a registrant such as 506913.
[71] From a CRA audit perspective, 506913 was clearly a high-risk GST registrant. It was a new GST registrant which, during its first two and a half years of operations, claimed GST refunds of over $5.8 million dollars. It operated in an area involving high-value taxable supplies, namely the purchase and sale of automobiles. Further, Mr. LeBlanc determined during his audit that 506913 was purchasing automobiles from GST registrants who were not filing GST returns and from related companies.[43] The following voir dire testimony of Mr. LeBlanc shows that the presence of non-filers had an impact on the audit techniques used by the CRA to audit 506913:
Q. And then comes June, July, August, and ultimately September, and I think you’ve acknowledged that there was rather unusual procedures adopted there of doing every month as they came, right?
A. Yes, it was a full scope audit that was assigned at that point.
Q. What I want to know now is, what sort of a purpose did you as an auditor set for yourself.
A. Well the purpose of was, of course, to verify the accuracy of the returns.
Q. Right.
A. And we knew that the vehicles were being purchased from a non-filer, so we wanted to verify that indeed we should be paying these credit returns and that Nautica [506913] was not involved, you know in the—with the non-filers.[44]
[72] As noted previously, after conducting this portion of his audit, Mr. LeBlanc concluded that 506913 was not involved with the non-filers, and authorized the payment of $600,000 of the $800,000 of refunds claimed by 506913 at that point in time.
[73] The audit of 506913 was further complicated by the fact that 506913 was making taxable supplies of automobiles that were potentially taxable at the 0% rate applicable to exports, or at the 7% GST rate for supplies made in a non-participating province, or at the 15% HST rate for supplies made in a participating province. In fact, 506913 did not collect GST on a number of sales of automobiles on the basis that the sales were made outside of Canada, that the vehicles were sold in Canada for export from Canada, or that they were sold to a status Indian and delivered on a reserve.[45] The non-taxation of each of these sales is dependent on meeting the requirements of numerous statutory provisions and on the production by the supplier (506913) of very specific documentation for each sale.
[74] In my view, it not unusual for a GST auditor, when faced with such a high‑risk and complicated audit, to review individual sales and purchases of the supplier, particularly when the property being purchased and sold is a relatively high‑priced product, such as an automobile. Mr. LeBlanc and Mr. Boudreau had to be satisfied that the amounts that 506913