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 that the audit can be completed? Or, does it appear rather, that they have sent the file back as a matter of expediency, so that the auditor may use ss. 231.1(1) and 231.2(1) to obtain evidence for a prosecution.
First, the Court notes that the word "appear" is used twice. Appearance is different from factual reality in that appearance must be assessed through the eyes of a neutral observer who has general knowledge of similar situations, and not through the eyes of one of the Applicants. A neutral, unbiased assessment must be done. Second, the situation is here further complicated since the originals of the Applicants' files were still being held by Investigations even though the criminal investigation had allegedly stopped. As the evidence shows, as of June 2004, the originals of most of the files (including Mr. Stanfield's own 500-page file) were under the control of team leader investigator Mr. Fleming. This is a full two (2) years after the criminal investigation had ended.
[41] The level of importance of the contacts between Audits and Investigations from the time the investigation begins is also something to look at, and the judges in Jarvis, supra, had this to say: "Moreover, there seems to have been but minor contact between Goy-Edwards and Chang from the moment when the file was transferred to Special Investigations" (at para. 101; my emphasis).
[42] In the present case, what were the nature of the contacts between Audits and Investigations during the criminal investigations (April 2001 to the summer of 2002)? Also, what was the level of importance of the contacts from March 2002 onward?
[43] Furthermore, in comparing the present factual situation to that in Jarvis, supra, and that in R. v. Ling, 2002 SCC 74, both of which deal with only one taxpayer and much less complicated facts, the Court notes that the current situation involves numerous taxpayers, promoters of tax schemes and tax shelters, and RRSPs involving the participation of corporate entities. Therefore, this complexity must be taken into account when assessing the factors in order to establish the predominant purpose.
[44] Lastly, the Court has to look at the situation that would result should the Minister be deprived of the results of the letters' and questionnaires' requests for documents and information. Will that create an unacceptable situation, or will the Respondent still be in a position to achieve its audits objective? This last factor is not determinative of the issues but helps in assessing the prejudice alleged by the Respondent.
[45] Therefore, the following five factors will be added to the assessment (see the factors listed above in paragraph 38) to be made. Specifically, these can be considered to be sub-factors under criteria g) ("other circumstances or factors"):
h) Were the criminal investigation and administrative audits being conducted simultaneously or otherwise interconnecting and, if so, for what purpose?
i) What was the nature of the flow of information between Audits and Investigations, both during and after the criminal investigation?
j) What was the level of importance of the contacts between Audits and Investigations while the criminal investigation was ongoing as well as after it apparently ended?
k) Considering the complexity of the factual and fiscal situations in the present case, how does this impact on the predominant purpose to be assessed?
l) Without obtaining the documents and information requested, will the Respondent be put in a position whereby it cannot meet its audit functions provided for in the Act?
[46] In order to determine the answers to these questions, the evidence will be assessed according to the preponderance of proof as required in such a situation. That is to say, the Applicants do not have to prove that the Respondent issued the letters and questionnaires with the intention of furthering a criminal investigation; rather, they must show that the predominant purpose of the letters and questionnaires was to garner information for such an investigation. There need only be a preponderance of evidence which supports that finding: see, e.g., Kligman, supra, at paras. 11 and 13. This is also made clear by the wording of the factors enumerated in Jarvis above at paragraph 38, in that many of the criteria are worded in relative, not absolute, terms; i.e., whether it "appears" from the record that a decision to proceed with criminal charges "could have been" made, whether the "general conduct" of the authorities was "consistent" with the pursuit of a criminal investigation, whether the auditor's "conduct" indicated he or she was "effectively acting" as an agent for Investigations, whether it "appears" that Investigations was using Audits' powers for investigative purposes, etc.
THE EVIDENCE PRESENTED BY THE PARTIES
The Applicants
[47] On behalf of the Applicants, Mr. Stanfield signed an affidavit dated September 27, 2002 in which he said that the letter and questionnaire which he received from Ms. Pumple indicated to him that he was under criminal investigation (despite her wording to the contrary) and that he believed that any documents and information he might provide would be used for criminal investigation purposes. Attached as exhibits to his affidavit were the letter and questionnaire. The Applicants also filed an affidavit from Department of Justice counsel Ron D.F. Wilhelm ("Mr. Wilhelm"), dated June 18, 2004, which was filed in a Tax Court of Canada procedure, in which Mr. Wilhelm advised that the originals of the Applicants' tax returns were, as of June 2004, still under the control of Mr. Fleming in Investigations, and that Investigations had collected some 18,000 pages of documents in an operation involving 110 CCRA employees. As mentioned previously, about 500 of these 18,000 pages concerned Mr. Stanfield personally.
The Respondent
[48] Ms. Pumple filed two affidavits on behalf of the Minister. The first one is dated October 31, 2002, and the second one, June 8, 2004. She was cross-examined at length by counsel for the Applicants on her first affidavit over a period of two days. She filed more than 95 exhibits with her affidavits and in response to a Direction to Attend.
[49] The basic position of Ms. Pumple is that there was no ongoing criminal investigation of the Applicants, that the letters and questionnaires were necessary for audit purposes to determine the Applicants' correct tax liability, that the 1999 tax returns of the Applicants were to become statute-barred as of September 12, 2003, and that the Applicants' failure to respond to the letters and questionnaires would create a prejudice for Audits in properly completing its reassessments. The transcript of her cross-examination indicates that she did not always have personal knowledge of the Applicants and their dealings with CCRA. To inform herself, Ms. Pumple only communicated with other auditors in a limited way. She says that she did not make inquiries of Mr. Fleming in Investigations in preparation of her affidavits:
Q. Now, for purposes of making your appropriate inquiries to inform yourself in order to make the affidavit, did you speak to Mr. Fleming?
A. Not directly, no.
Q. Not directly?
A. No, no, I wouldn't speak to him.
[See volume 2 of the Applicants' Record at page 116.]
Nor did Ms. Pumple make any inquiries of anyone else at Investigations. The Court notes that the evidence shows that Ms. Pumple had numerous email communications with Mr. Fleming, and some of the other investigators, as well as some meetings and telephone calls between April 4, 2001 and December 9, 2002. As mentioned previously, she signed her first affidavit on October 31, 2002. The subject matter of her discussions with Investigations personnel were all taxpayer-related and in relation to the ongoing investigation except for one email, already referred to, dated June 3, 2002, in which she informs Mr. Fleming of her upcoming holidays and inquires whether these will be "a problem" (see volume 3 of the Applicants' Record at page 630). The Court has read the full transcript of her cross-examination and finds her hesitant and reluctant at times when answering questions, and not always personally knowledgeable on many very important subjects (for example, the status of the criminal investigation, the concept of tax shelters, the nature of many of the questions on the questionnaire which she forwarded to close to sixty (60) Applicants, etc.). While the Court understands that strategy is of the utmost importance when criminal investigations are ongoing and that the Respondent has to present a defence, it finds it surprising that no one from Investigations was presented to the Court. This could have been done without causing prejudice to these investigations. At the very least, the Court finds it puzzling that Ms. Pumple says she did not even inquire with Investigations personnel as to the status of any investigations against any of the Applicants prior to swearing her affidavit, especially since the evidence clearly shows that she was in regular contact with Investigations prior to signing her first affidavit, as well as afterwards.
[50] As a follow-up to objections made by counsel for the Respondent during the cross-examination of Ms. Pumple, a motion to decide these objections was decided by Prothonotary Hargrave in a decision dated April 20, 2004. In it, Prothonotary Hargrave makes some obiter comments in respect of the evidence that he reviewed (both that provided by Ms. Pumple and the other evidence) to determine the motion. The Court notes, however, that it is not bound by these obiter comments, and to this effect, the present decision contains its own findings.
The predominant purpose of the letters and questionnaires: audit or criminal investigation?
[51] Following the methodology suggested in Jarvis, supra, in addition to its own factors (listed above in paragraph 45), the Court will address each one of the twelve (12) subject matters referred to above and then, on the basis of the preponderance of the facts being presented, pronounce itself on the predominant purpose of the letters and questionnaires.
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?
[52] There is no evidence available that could indicate the nature or the strength of the evidence collected by the investigators. In April 2001, CCRA became aware of "important disclosures", including the names of the promoters. This suggests some level of knowledge of the overall schemes (see memo dated April 6, 2001, in volume 5 of the Applicants' Record at page 811). The evidence presented, however, does not inform on the development of the investigations nor does it give a chronology of the "ongoing investigation."
[53] As noted before, a decision to proceed with a criminal investigation was made in early April 2001. It is at that time that the auditors were told by the Vancouver head of Investigations, Mr. Jamieson, that "the audit [of the Applicants] was now considered a criminal investigation" and that Mr. Jamieson wanted a chronology of the information gathered by them so that he could evaluate "the evidence" obtained so far (see the same memo as referred to above in paragraph 52).
[54] The position of the Respondent is that the investigations of the Applicants stopped in March 2002 for the 1998 tax returns and sometime in June or July 2002 for the 1999-2000 tax returns. The Respondent points out that the letters sent to the Applicants clearly stated that only "the promotion of transactions of the type claimed on your income tax returns has been undertaken" (emphasis added), and that none of the Applicants were themselves under investigation at that time, though any information they might have submitted could be provided to Investigations for review (see letter and questionnaire in paragraph 5 above).
[55] During her cross-examination, Ms. Pumple admitted to not being familiar with the promotion of these types of transactions, but she assumed that they were a promotional scheme of some sort: "someone has to have thought it up and designed the business or whatever they're going to ... that they're promoting that they want you to invest in as a taxpayer" (see cross-examination of Ms. Pumple, in volume 2 of the Applicants' Record at page 230). She testified that some promoters had been identified and that a list of these existed, but that she had not seen it.
[56] Ms. Pumple also testified that the investigations of the Applicants had stopped in March 2002 and June 2002 since a "green light" had been given to Audits by the investigators. She admitted that she did not have personal knowledge of the investigation and that she had not spoken to Mr. Fleming or any other investigator at the time of signing her affidavit on October 31, 2002. She also said that there was no document from Investigations saying that the investigations had stopped. Her explanation for how a "green light" could be interpreted as existing in the evidence is that this was simply the way the system worked; i.e., Audits could not otherwise proceed with a file under investigation (see cross-examination of Ms. Pumple, in volume 2 of the Applicant's Record at pages 98 and 206). She also advised that the concern in Audits was that the audit process itself would become statute-barred because of the three-year limitation imposed by the Act (see cross-examination of Ms. Pumple, in volume 2 of the Applicant's Record at pages 205-206, 223 and 236).
[57] The only document filed as evidence indicating that a "green light" had been given is a memo concerning a meeting of auditors held in Edmonton on July 3 and 4, 2002. The representative for Investigations at this meeting was Mr. Kuhn (on secondment from Audits). The memo states: "Larry advised the Vancouver SI had given the green light to go ahead on resuming contact with the investors for all years and all schemes..." (see volume 3 of the Applicants' Record at page 572). It is to be noted that this document does not say that because the investigations of the Applicants have stopped, a green light has been given by Investigations for Audits to recommence their work.
[58] There is also an email from Mr. Kuhn, dated June 6, 2002, to some auditors and Mr. Fleming, that makes two proposals to solve the statute-bar problem from preventing the audits' completion. Mr. Kuhn suggests that an audit letter be sent to the Applicants which would "include a notification of the ongoing investigation ... [and] will also state that the investor is not under investigation at the present time" (see volume 3 of the Applicants' Record at page 608). Ms. Pumple, in her cross-examination, admitted that the reference "at the present time" could mean that the Applicants could eventually be charged with a criminal offence:
Q. Isn't it possible from the wording and the circumstances that giving answers to these questions could cause them to be charged with a criminal offence?
A. I never thought that was the result. I guess that's within the realms of possibility.
[See Applicant's Record at page 398.]
[59] There is also documentary evidence indicating the ongoing investigation was still alive. On June 6, 2002, Mr. Kuhn wrote that, "Chris [Mr. Fleming] is interested in this issue because apparently there are several potential criminal charges that could arise as a result of false valuations. If that is what occurred." (See volume 3 of the Applicants' Record at page 606.) On June 10, 2002, Mr. Nakano, the audit coordinator, writes to the other auditors to inform them that seizures are still being considered by Investigations: "[M]y understanding based on my discussions with Chris Fleming and Mr. Kuhn, is that while the SI investigation is proceeding, however they have not yet done the seizures and were not willing (or possibly able) to discuss when these might occur." Mr. Nakano goes on to say that, "Larry [Mr. Kuhn] has gotten SI's go to initiate contact on the 1999 and is preparing a draft contact letter" (see volume 3 of the Applicants' Record at page 602). There is also another reference to the ongoing investigation: "as the organization and promotion of the Global Scheme is a criminal organization, any identified promoters are part of that investigation until the investigations division advises us otherwise" (see volume 4 of the Applicants' Record at page 689). Also, on August 25, 2002, there is a reference to another seizure being considered by Investigations (see volume 4 of the Applicants' Record at page 689).
[60] As detailed above, the evidence shows that, at least up until July 3, 2002, the Applicants were still subjects of interest for Investigations for the 1999-2000 tax returns. As already noted at paragraph 15 above, Ms. Pumple admitted that the Applicants were still being investigated in March 2002 at the time the 1998 Notices of Reassessment went out. Furthermore, the files of the Applicants were being held by Investigations, with the originals remaining with them until at least June 2004 (see volume 3 of the Applicant's Record at page 631). (This will be dealt with separately below.) There is also evidence that investigations were still ongoing in the summer of 2002 at the time that the Respondent says that the investigations of the Applicants had completely stopped. The evidence of the Respondent on that point is weak. The Court is not able to identify the necessary evidence to indicate to it that, on a balance of probabilities, the investigation of the "promotion" of these types of transactions does not also include investigation of the Applicants, or that the ongoing investigations did not involve the Applicants in any way. Ms. Pumple's testimony was simply not helpful on these points. How could she know about promotion and a list of promoters if she had not spoken to investigators? At best, the situation concerning the investigations and the Applicants is cloudy and the appearance (as required by the question posed in Jarvis) indicates that an investigation into the Applicants' activities remained a distinct possibility if not an actual fact. The Court is surprised that no documentation from Investigations informing that the Applicants were no longer being investigated (as of March 2002 for the 1998 tax returns and June or July 2002 for the 1999-2000 tax returns) was presented as evidence. Surely, such an important decision must have been documented. At the very least, it should have been.
b) Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation?
[61] As of April 2001, CCRA considered that the 1998, 1999 and 2000 tax returns of the Applicants should be looked at with possible criminal ramifications. As stated above, the investigations began at that time. The evidence gives all indication that throughout most of 2001 and 2002 the CCRA investigators were investigating the Applicants, the promoters and the corporate entities involved. It is also important to note that the evidence itself indicates closeness in the operations of Audits and Investigations, as well as numerous exchanges of information, consultation and seeking of advice. The evidence leaves the strong impression that both divisions (Audits and Investigations) were working as one unit even in the summer 2002 and, to a lesser degree, that fall. In all fairness to Mr. Kuhn, who had been seconded to Investigations from Audits, the Court notes that he had perceived this reality and wanted to correct it. In an e-mail to auditors, he stated:
As far as Investigations is concerned, my opinion is that now that the audits have re-started, Audit should make its decisions independently and do whatever is needed to finish the audits. There should not be consultation with Investigations as to what to do and what not to do. My only concern is that Audit may not be able to get some of the evidence. Some of the information may only be obtainable through the use of search warrants.
[See e-mail dated September 6, 2002, in volume 4 of the Applicants' Record at page 719.]
His perception of the events to come was somewhat prescient. The Court notes the frustration Mr. Kuhn felt that his secondment to Investigations "hasn't accomplished anything that would help audit (much to my disappointment and frustration)" (see e-mail dated June 13, 2002, in volume 4 of the Applicants' Record at page 653; see also page 649). The evidence shows that his warning that Audits be independent was not followed. The exchange of information between Ms. Pumple and Mr. Fleming in the fall of 2002 is notable in that regard and gives the impression that such was not the case (see e-mails dated September to December 2002 in volume 3 of the Applicants' Record at (in chronological order) pages 623, 622, 621, 620, 619, 618, 617, 613, 616 and 615). It is important also to add that as of July 9, 2002, Investigations was keeping an up-to-date database on the 1998 reassessments, which included the amounts and types of losses claimed "on behalf of tax avoidance auditors," and was also informing the revenue collections division of these reassessments (see volume 4 of the Applicants' Record at page 678, and cross-examination of Ms. Pumple, in volume 2 of the Applicants' Record at pages 319 and 230). The Court does not comprehend why Investigations would be keeping an updated database on the Applicants' 1998 tax reassessments if the investigations of these had truly been stopped, nor why Investigations would be acting "on behalf of" Audits.
c) Had the auditor transferred his or her files and materials to the investigators?
[62] As indicated previously, originals or photocopies of the files had been transferred from Audits to Investigations after April 2001. Furthermore, the originals of all the files were kept by investigators from sometime in the first six months of 2002 until at least as late as July 2004, over two years after the investigations had allegedly ceased. Mr. Fleming, the team leader of Investigations, kept the original tax returns of all the taxpayers, including investors, promoters and other involved persons, because the files "are required by the investigation division as part of the investigation" for the purposes of "evidence, forensic tests, etc.," should such become necessary (see volume 3 of the Applicants' Record at page 631). This evidence is clear, to the point, and does not need any further explanation.
d) Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators?
[63] The Court has already noted the importance of the exchanges between Ms. Pumple and Mr. Fleming in the summer and fall of 2002, even though the investigations had allegedly stopped as of March 2002 (for the 1998 tax returns) and June or July 2002 (for the 1999-2000 tax returns) (see volume 3 of the Applicant's Record at (in chronological order) pages 633, 630, 627, 625, and 621). The Court has also indicated that Ms. Pumple felt the need to consult with Mr. Fleming regarding her summer vacation dates. If Audits and Investigations are indeed two distinct divisions, why was an Audits employee (who was in charge of the audits of close to sixty (60) Applicants) in such constant contact with the team leader of Investigations at a time when the investigations of the Applicants had allegedly ended?
e) Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence?
[64] Having already referred to Mr. Kuhn's warning that Audits must be independent when carrying out its legislative duties, the Court remains concerned with the communications between Ms. Pumple and Mr. Fleming in the summer and fall of 2002. The collection and transfer of information from Audits to Investigations (e.g., bank records) is certainly an example of the appearance of an auditor (who again, it must be remembered, was working on the files of close to sixty (60) Applicants) acting as an agent for investigators. Furthermore, Mr. Kuhn's actions (after being seconded to Investigations though still responsible for the auditing of thirteen (13) Applicants) during the summer of 2002 is also of concern. It is clear from the evidence that Mr. Kuhn acted as "liaison" between Audits and Investigations, and the evidence shows that he played a major role within Investigations, as well as within Audits. He was more than a mere representative of Audits within Investigations. The Court notes that after September 9, 2002, the date of Mr. Kuhn's return to Audits, the rate of communication between Ms. Pumple and Mr. Fleming increased. The Court can only conclude that on the preponderance of evidence, there is an appearance of investigators using auditors as their agents in the collection of evidence. The secondment of Mr. Kuhn during the spring and summer of 2002 at a time when there were allegedly no investigations of the Applicants still ongoing (at least as of June or July 2002), is also problematic. His involvement was significant within Investigations. It may be that the secondment finished when the investigations of the Applicants was terminated, but if that was the case, it was not made clear to the Court.
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?
[65] The letter and questionnaire reproduced at paragraph 5 of the present decision were prepared with the input of Mr. Kuhn (while on secondment to Investigations) and Mr. Nakano from Audits. The investigators had input in clarifying the first part of the letter which refers to an ongoing investigation and the fact that the Applicants were not being investigated at that time. They were otherwise not involved in the drafting of the letter nor the questionnaire. This is what the evidence shows. The documents requested in the letter are conventional ones for audit purposes (i.e., books, ledgers, bank statements, correspondence, etc.). The RRSP spousal requirement is also something of clear interest to Audits. The questionnaire, however, does pose some potential problems by asking for very detailed information on matters such as tax shelters, RRSPs, trust funds, loans, etc. It is not so much the subject matter of the questionnaire that is of concern, since surely Audits may obtain documentation on such matters but rather, keeping the facts of this case in mind, the way in which the questions are phrased. This gives the impression that intent ("mens rea") is being questioned, something which would be of little interest to Audits, though of considerable interest to Investigations. For example, questions 2, 4, 5, 8 and 15 of the questionnaire clearly seem to be an attempt to assess intent and nothing further. Having said that, the Court does not have any evidence before it that Investigations was involved in the drafting of the letter (other than the one paragraph concerning the investigation) and questionnaire. Under the audit functions and without any evidence of an ongoing criminal investigation - in other words, were the facts of this case completely different - the letter and questionnaire might not have raised the same level of concern.
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?
[66] Looking at the situation as a whole and keeping in mind what the Court has already outlined in some detail, a number of factors lead to the conclusion that the letters and questionnaires, while ostensibly issued for the purpose of completing an audit, served rather as a way to garner information for a possible (or actual) criminal investigation. As noted above in paragraphs 38 and 45, the Court has identified five (5) additional questions whose answers also point to "other circumstances or factors" which suggest the existence of an ongoing criminal investigation (rather than a more routine administrative audit).
h) Were the criminal investigation and administrative audits being conducted simultaneously or otherwise interconnecting and, if so, for what purpose?
[67] Prior to April 2001, there was only an administrative audit of the Applicants' tax returns. After April 2001 and until March 2002, there was only a criminal investigation of the Applicants' tax returns. Beginning in March 2002, when the "green light" was apparently given to audit the 1998 tax returns, there were parallel criminal investigations and audits being conducted. These became on certain occasions interconnected. Similarly, from June 2002 onward, the criminal investigations and audits for the 1999-2000 tax returns were parallel but also became interconnected on occasion. Mr. Kuhn's involvement and Ms. Pumple's communications with Mr. Fleming in Investigations demonstrate that there was a flow of information between the two units. The Court has already made reference to the evidence on that issue. Therefore, on a balance of probabilities, there is evidence that the investigations and audits, although ostensibly parallel, became interconnected even after the date when the criminal investigations of the Applicants were allegedly stopped (again, in March 2002 for the 1998 returns and June or July 2002 for the 1999-2000 returns).
i) What was the nature of the flow of information between Audits and Investigations, both during and after the criminal investigation?
[68] The Court has already noted that in 2001 and 2002 Investigations and Audits, despite being separate and distinct divisions, were in reality acting as one unit. The interaction between Mr. Fleming, Mr. Kuhn, Ms. Pumple and other auditors indicates that Mr. Kuhn acted as liaison between Audits and Investigations (see cross-examination of Ms. Pumple, in volume 2 of the Applicants' Record at pages 101-102), from about November 2001 when Mr. Kuhn was first seconded to Investigations. It is clear from the evidence that the flow of information was fairly constant between the two divisions in 2002. Even after the investigations allegedly stopped, in March and June or July 2002, and the audits resumed, the flow of information continued between Mr. Kuhn, Ms. Pumple and persons in Investigations. Therefore, the nature of the flow of information between the two divisions was of some importance.
j) What was the level of importance of the contacts between Audits and Investigations while the criminal investigation was ongoing as well as after it apparently ended?
[69] From November 2001 onwards, the contacts between the two units were of major importance. The strategic position of Mr. Kuhn, an auditor working in Investigations, up until September 9, 2002, and the important role played by Ms. Pumple up until at least December 9, 2002, are both significant. After the apparent termination of the investigations (in March 2002 for the 1998 tax returns and June or July 2002 for the 1999-2000 tax returns), the contacts between the divisions remained important for Mr. Kuhn up to the end of September 2002 and December 2002 for Ms. Pumple.
k) Considering the complexity of the factual and fiscal situations in the present case, how does this impact on the predominant purpose to be assessed?
[70] The Court is fully cognizant of the complexity of the situation for CCRA. The issues at stake are not easy to comprehend and a lot of work has been done by CCRA to get to the bottom of it. Numerous taxpayers, promoters and corporate entities are involved in the tax structures set up. More than 110 CCRA employees across Canada have been involved. Having said all that, this situation does not justify in any way the use of audit functions for the purposes of assessing s. 239 offences under the Act if that investigation is ongoing. CCRA must set up its organization in such a way that the audits functions are not perceived as being used for obtaining information on potential criminal offences in the context of an ongoing criminal investigation. The Court looked attentively at the evidence of the Respondent in order to understand the distinction that was being made between "promoters" and investors such as the Applicants. Ms. Pumple was not able to help the Court on this point. Surely if such a distinction had been key to the investigations, better evidence could have been supplied. Without such clarification, the Court clearly cannot make the distinction between promoters, who were still under investigation, and the Applicants, who were allegedly no longer under investigation. The Court has not been satisfied that the Applicants were not perceived as promoters or some other kind of party still under investigation, as the Respondent would like the Court to accept. As mentioned before, it would perhaps have been helpful for the Respondent to produce someone from Investigations in order to shed some light on this very complex situation. The complexity of an investigation can explain the fact that more than one investigation is ongoing, but this alone cannot justify the factual situation as shown by the evidence in this case.
l) Without obtaining the documents and information requested, will the Respondent be put in a position whereby it cannot meet its audit functions provided for in the Act?
[71] The Court has read the "audit and reassessing strategy union cal and LFG cases" (dated September 2002, in volume 3 of the Applicants' Record at page 510) and the "union cal loss audit strategy" (dated November 2002, in volume 3 of the Applicant's Record at page 534). These documents indicate that in the fall of 2002, at the latest, Audits was in a position to reassess even though they had not received the information and documents requested in the letters and questionnaires. As a matter of fact, Notices of Reassessment went out to the Applicants in the spring and summer of 2002 for the 1998 tax returns and, with the exception of one Applicant, in 2003 for the 1999-2000 tax returns. Appeals have been filed and are being heard by the Tax Court of Canada. Therefore, Audits seems to have been able to assume its legislative functions even without the requested information. While this factor is certainly not determinative, it permits the Court to evaluate the true nature of the prejudice that the Respondent claims to have suffered by reason of the fact that no answers were provided by the Applicants to the letters and questionnaires.
What is the predominant purpose of the letters and questionnaires and what are the consequences of this finding?
[72] The Court has approached this litigation with an open mind without any prior determinations or preconceptions. The approach taken was to apply the Jarvis factors, supra, to the evidence and then let the preponderance of the proof indicate a final conclusion. The Court tried to use the submissions of counsel for the Respondent to counteract its eventual conclusions, but was not able to do so. The evidence indicates the weakness of the position of the Respondent. The Court cannot invent evidence that it does not have. The position of the Respondent was a difficult one to present. A lot was at stake, including the integrity of an investigation and the involvement of more than 110 CCRA officers. However, the fact remains that even though the Applicants were informed that they were not the subjects of the ongoing criminal investigations into other similarly-situated taxpayers, promoters and other corporate entities, the totality of the evidence leads the Court to conclude that the predominant purpose behind the creation and issuing of the letters and questionnaires was the use of audit information and functions for the purposes of the investigators. The notion of "predominant purpose" does not preclude other purposes. Mr. Kuhn's comments on the importance of Audits' independence in carrying out its audit duties comes to mind. Having said that, it is evident to the Court that as of April 2001, Investigations took control over the Applicants' files, and as far as the evidence shows, retained this control despite the fact that some auditors were genuinely trying to assume their roles as required by the Act.
[73] As a consequence, and as also noted in Jarvis, supra, fundamental Charter rights, such as section 7 of the Charter and, more specifically, the right to remain silent and to avoid self-incrimination, are triggered. The Applicants were not informed of these rights. Therefore, an Order relying on s. 24(1) of the Charter will be granted, quashing the letters and questionnaires forwarded to the Applicants between late August and October of 2002. Furthermore, the Respondent is prohibited from taking any action or proceedings against the Applicants for their failure to respond to the letters and questionnaires. It must allow the procedures in the Tax Court of Canada to follow their course. Considering the facts of this case, the findings made and the Order to be rendered, costs will be in favour of the Applicants.
CONCLUSION
[74] Therefore, having decided, based on the particular facts of this case, that the predominant purpose of the letters and questionnaires was to aid in the furtherance of a criminal investigation, it was not within the parameters of the audit functions as contained in section 231.1(1) of the Act for the Minister to issue the letters and questionnaires, at least at the time and in the manner this was done. Additionally, since the predominant purpose was a criminal investigation involving the Applicants, the Applicants' Charter rights were engaged, specifically the right to remain silent and to avoid self-incrimination.
ORDER
THIS COURT ORDERS THAT:
- The letters and questionnaires forwarded to the Applicants are quashed.
- The Respondent is prohibited from taking any action or proceedings against the Applicants for their failure to respond to the letters and questionnaires.
- Costs are against the Respondent.
"Simon Noël" Judge
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231.1. (1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act,
(a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and
(b) examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act,
and for those purposes the authorized person may
(c) subject to subsection 231.1(2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and
(d) require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.
[...]
231.2. (1) Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act, including the collection of any amount payable under this Act by any person, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as is stipulated in the notice,
(a) any information or additional information, including a return of income or a supplementary return; or
(b) any document.
[...]
239. (1) Every person who has
(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,
(b) to evade payment of a tax imposed by this Act, destroyed, altered, mutilated, secreted or otherwise disposed of the records or books of account of a taxpayer,
(c) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular, in records or books of account of a taxpayer,
(d) wilfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act, or
(e) conspired with any person to commit an offence described in paragraphs 239(1)(a) to 239(1)(d),
is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax that was sought to be evaded, or
(g) both the fine described in paragraph 239(1)(f) and imprisonment for a term not exceeding 2 years.
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231.1. (1) Une personne autorisée peut, à tout moment raisonnable, pour l'application et l'exécution de la présente loi, à la fois:
a) inspecter, vérifier ou examiner les livres et registres d'un contribuable ainsi que tous documents du contribuable ou d'une autre personne qui se rapportent ou peuvent se rapporter soit aux renseignements qui figurent dans les livres ou registres du contribuable ou qui devraient y figurer, soit à tout montant payable par le contribuable en vertu de la présente loi;
b) examiner les biens à porter à l'inventaire d'un contribuable, ainsi que tout bien ou tout procédé du contribuable ou d'une autre personne ou toute matière concernant l'un ou l'autre dont l'examen peut aider la personne autorisée à établir l'exactitude de l'inventaire du contribuable ou à contrôler soit les renseignements qui figurent dans les livres ou registres du contribuable ou qui devraient y figurer, soit tout montant payable par le contribuable en vertu de la présente loi;
à ces fins, la personne autorisée peut:
c) sous réserve du paragraphe (2), pénétrer dans un lieu où est exploitée une entreprise, est gardé un bien, est faite une chose en rapport avec une entreprise ou sont tenus ou devraient l'être des livres ou registres;
d) requérir le propriétaire, ou la personne ayant la gestion, du bien ou de l'entreprise ainsi que toute autre personne présente sur les lieux de lui fournir toute l'aide raisonnable et de répondre à toutes les questions pertinentes à l'application et l'exécution de la présente loi et, à cette fin, requérir le propriétaire, ou la personne ayant la gestion, de l'accompagner sur les lieux.
[...]
231.2. (1) Malgré les autres dispositions de la présente loi, le ministre peut, sous réserve du paragraphe (2) et, pour l'application et l'exécution de la présente loi, y compris la perception d'un montant payable par une personne en vertu de la présente loi, par avis signifié à personne ou envoyé par courrier recommandé ou certifié, exiger d'une personne, dans le délai raisonnable que précise l'avis:
a) qu'elle fournisse tout renseignement ou tout renseignement supplémentaire, y compris une déclaration de revenu ou une déclaration supplémentaire;
b) qu'elle produise des documents.
[...]
239. (1) Toute personne qui, selon le cas:
a) a fait des déclarations fausses ou trompeuses, ou a participé, consenti ou acquiescé à leur énonciation dans une déclaration, un certificat, un état ou une réponse produits, présentés ou faits en vertu de la présente loi ou de son règlement;
b) a, pour éluder le paiement d'un impôt établi par la présente loi, détruit, altéré, mutilé, caché les registres ou livres de comptes d'un contribuable ou en a disposé autrement;
c) a fait des inscriptions fausses ou trompeuses, ou a consenti ou acquiescé à leur accomplissement, ou a omis, ou a consenti ou acquiescé à l'omission d'inscrire un détail important dans les registres ou livres de comptes d'un contribuable;
d) a, volontairement, de quelque manière, éludé ou tenté d'éluder l'observation de la présente loi ou le paiement d'un impôt établi en vertu de cette loi;
e) a conspiré avec une personne pour commettre une infraction visée aux alinéas a) à d),
commet une infraction et, en plus de toute autre pénalité prévue par ailleurs, encourt, sur déclaration de culpabilité par procédure sommaire:
f) soit une amende de 50 % à 200 % de l'impôt que cette personne a tenté d'éluder;
g) soit à la fois l'amende prévue à l'alinéa f) et un emprisonnement d'au plus 2 ans.
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FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1554-02
STYLE OF CAUSE: Hugh Stanfield et al v. The Minister of National Revenue
PLACE OF HEARING: Vancouver, B.C.
DATE OF HEARING: July 7, 2005
REASONS FOR ORDER: Noël, J.S.
APPEARANCES:
Mr. Edwin G. Kroft & Ms. Elizabeth Junkin FOR APPLICANTS
Mr. Robert H. Carvalho FOR RESPONDENT
SOLICITORS OF RECORD:
McCarthy Tétrault LLP FOR APPLICANTS
Vancouver, B.C.
Mr. Morris Rosenberg FOR RESPONDENT
Deputy Attorney General of Canada