Date: 20050804
Docket: T-1476-04
Citation: 2005 FC 1068
Vancouver, British Columbia, Thursday the 4th day of August, 2005
Present: THE HONOURABLE MR. JUSTICE CAMPBELL
BETWEEN:
ROGER ELLINGSON
Applicant
- and -
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR ORDER AND ORDER
[1] The present Application for judicial review concerns a decision, dated July 20, 2004, in which an authorized official of the Canada Customs and Revenue Agency (the "CCRA"), pursuant to s.231.2(1)(a) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act"), required the Applicant to produce his signed income tax returns from 1999 to 2003, which he had not previously filed, as well as signed statements of his assets, liabilities, and personal expenses for the same years (the "Requirement"). The provision under which the official acted reads as follows:
| Requirement to provide documents or information
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;
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Production de documents ou fourniture de renseignements
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; |
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[2] Knowledge of the Applicant's alleged criminal activity led to the Requirement being issued on the advice of a CCRA auditor (the "Auditor"). Therefore, for the purposes of the present Application, the Auditor is acknowledged as being the issuer of the Requirement.
[3] In January 2004, the Applicant was charged in California with various offences involving an illicit drug importation/distribution operation and the laundering of the proceeds between June 2000 and about March 2004. The Grand Jury Indictment was unsealed on April 1, 2004 (Applicant's Application Record (AR), pp. 18-27), and the next day a news release was issued by the United States Attorney, Southern District of California, that included the Applicant's name (AR, pp. 28-32). The following week, two British Columbia newspapers, The Province in Vancouver (AR, pp. 33-34) and The Herald in Penticton (AR, pp. 35-36), also printed articles about the drug charges against the Applicant. The Requirement was issued three months later.
[4] The Applicant refuses to answer the Requirement on the basis that, in the circumstances, its issuance is beyond the jurisdiction of the Auditor. Therefore, it is agreed that the standard of review of the decision to issue the Requirement is correctness.
[5] The jurisdictional issue arises from the Supreme Court of Canada decision in R. v. Jarvis, [2002] 3 S.C.R. 757. Jarvis stands for propositions of law respecting protection from self-incrimination; a taxpayer is required to comply with a Requirement when its "predominant purpose" (the "Purpose") is determining the taxpayer's tax liability, however, a Requirement is not to be used for the investigation of penal liability. Therefore, when the Purpose changes from determining tax liability to the investigation of penal liability under the Act, the taxpayer need not answer the Requirement. Of course, this result follows if the Purpose from the outset was the investigation of penal liability. With respect to the use of evidence obtained from an answer to a Requirement, if it was obtained before a penal liability investigation is commenced, the answer is admissible evidence which can be used in the penal liability investigation and potential prosecution, but once the penal liability investigation is commenced, any information obtained thereafter will only be admissible if the taxpayer's rights are protected under the Charter.
[6] It is agreed that, in the present case, the sole question for determination is as follows: "When the Auditor made the decision to issue the Requirement, was a penal liability investigation under way?" If the answer is "yes", on the authority of Jarvis, it is agreed that the Auditor acted beyond his jurisdiction.
[7] The standard of proof for coming to the answer to the question is low. In Jarvis, certain factors for consideration are suggested in determining the Purpose, the first of which includes this question: "Does it appear from the record that a decision to proceed with a criminal investigation could have been made?". The Federal Court of Appeal has determined that this text "is cast in terms of a mere possibility as opposed to a probability" (Létourneau J.A. in Kligman v. Canada (M.N.R.), [2004] F.C.J. No. 639 at para. 31).
[8] In the present case, the answer depends on an analysis of an evidentiary contest between the Auditor's own stated understanding and intention in issuing the Requirement versus the institutional obligation and intention within which he was operating.
A. The contest in the evidence
[9] It is agreed that the whole of the evidence with respect to the issuance of the Requirement must be considered in order to determine the Purpose. That is, the Auditor's opinion on the Purpose is not determinative; the Purpose must be derived from an "objective" analysis of the evidence, being an analysis of all of the evidence (see Capital Vision v. M.N.R., [2002] F.C.J. 1797 (T.D.)).
1. The Auditor's understanding and intention
[10] The Auditor's evidence is found in his affidavit filed for the purposes of the present Application as follows:
1. I am employed as a Special Enforcement Program Auditor in the Investigations Division of the Southern Interior B.C. Tax Services Office ("SITSO") of the Canada Customs and Revenue Agency ("CCRA").
2. I have made a diligent search of CCRA's records and have made appropriate inquiries of others to inform myself in order to make this Affidavit.
3. I have personal knowledge of the facts and matters deposed to in this Affidavit except where they are stated to be on information and as to those facts and matters, I believe them to be true.
4. I currently have conduct of the audit of the Applicant. I have reviewed the files carefully and this Affidavit is based on the information in the file as well as my own personal knowledge.
5. I have been a Special Enforcement Program ("SEP") auditor in SITSO since December 2001. Prior to that, I was an auditor in the Verification and Enforcement Division of SITSO.
6. The SEP Unit is a separate audit unit within the Investigations Division. In the same that business audit deals with audits of legal businesses, the SEP Unit deals with audits of taxpayers where there is an indication they may have earned income from illegal activities. The SEP Unit does not conduct investigations. Where, during the course of a SEP audit, it is determined that an offence may have been committed, the file is referred to an investigator within the Investigations Division.
7. My duties within SEP are to gather information necessary to determine whether an audit should be commenced and to conduct audits of non-filers where there is an indication that income may have been earned from illegal activities. I do not conduct criminal investigations as a member of SEP.
8. Since December 2001, I have done several dozen SEP audits. I have never referred any of my files to an investigator within the Investigations Division. Since beginning with Investigations in December 2001, all of my files have concluded by either assessments being issued by me or in no action being taken.
9. On or about April 16, 2004, the Investigations Division of SITSO received a copy of a Suspicious Transaction Referral Form (the "Referral") received by FINTRAC from the HSBC Bank, which detailed a deposit to the Applicant's account of $5,000 all in $20 bills. Attached as Exhibit A to this Affidavit is a copy of the Referral.
10. The Referral came to the SEP Unit of the CCRA from the RCMP Proceeds of Crime Unit and was initially received by [JL], the liaison between the CCRA and the RCMP Proceeds of Crime Unit.
11. The Referral then went to [DW], a SEP investigator in the Investigations Division of the CCRA. [DW] is also located in SITSO.
12. [DW] found a newspaper article published in the April 7, 2004 edition of the Penticton Herald (the "Article"). The Article is attached as Exhibit D to the Affidavit of [RW] sworn September 1, 2004 and filed in these proceedings.
13. [DW] then conducted an "Option I" search of the CCRA electronic database to determine what tax returns the Applicant had filed with the Respondent. Attached as Exhibit B to this Affidavit is a copy of the Option I printout (the "Printout").
14. The Printout shows the Applicant did not file any tax returns for the years 1997 to 2003.
15. Once [DW] determined that the Applicant was a non-filer, the Referral, Article and Printout were given to me for action.
16. Had there not been any hint that the Applicant's income may be from illegal activities, the Applicant's file would have gone to the Non-Filer Non-Registrant Unit of the Collections Division of the CCRA.
17. On July 20, 2004, I issued the letter dated July 20, 2004 (the "Requirement") to the Applicant.
18. The first and, to date, only action taken by me with respect to the Applicant has been to issue the Requirement.
19. The Requirement contained standard requests in situations where the taxpayer has not filed tax returns and we have no, or very little, financial information on them:
a) As the Applicant was a non-filer, paragraph (A) of the Requirement was inserted in the Requirement to require the Applicant to file a tax return, which could be reviewed and verified by me.
b) As it is my experience that many of these audits do not turn up sufficient information regarding income sources but rather, end of with assessments being issued on a net worth basis, paragraphs (B) and (C) of the Requirement were inserted in the Requirement to gather the type of information necessary to determine whether a net worth assessment is warranted and, if so, the amount of such assessment.
20. The Respondent issued the Requirement to the Applicant for purposes related to the administration and enforcement of the Income Tax Act (the "Act") and not for the purpose of further a criminal investigation of the Applicant.
21. The Applicant is not under criminal investigation.
22. The Applicant is being audited to determine his correct tax liability under the Act.
23. Prior to being shown the Affidavit of [RW] sworn September 1, 2004, I had never seen the documents attached as Exhibits A, B and C to the Affidavit of [RW].
24. I make this Affidavit in opposition to an application by the Applicant for an Order quashing the Requirement.
[11] Thus, when the Requirement was issued, the Auditor did not have knowledge of the Grand Jury decision or the Attorney General's news release. However, he did have some greater knowledge of suspicious conduct than that precisely stated in his affidavit. The complete statement under the heading "Description of Suspicious Activity" in the Referral is as follows:
(STR 9584804) Description of suspicious activity*
Client brought in $5000.00 in cash all in 20s to be applied to two car loans he has with HSBC. The CSR noticed that the money had the distinct odor of marijuanna [sic]. A further review of the loans revealed that client consistently makes payments to the loans by way of cash.
Loan
#1 opened Aug 30/02-original amount was $50,084.00- current loan balance is $23,799.73. Has paid off over $25M in 15 months.
Loan #2 opened June 10/03-original amount was $19,218.00- current loan balance is $7,769.42. Has paid off over $10M in 6 months.
It is certainly not difficult to understand why the Applicant would be of interest to the SEP as a potential target for pursuing earned income from illegal activities.
[12] In any event, during the course of oral hearing of the Application, Counsel for the Applicant agreed that the Auditor was acting on an honest belief and intention that the issuance of the Requirement was for tax liability purposes only.
[13] Counsel for the Respondent argues that the Auditor's evidence should be accepted as conclusive proof that the Purpose of issuing the Requirement was with respect to tax liability:
29. There is nothing but speculation on the part of the Applicant that the purpose of the Requirement was to further a criminal investigation of the Applicant (whether it be for tax or other offences). The unequivocal evidence of the Auditor was that the sole purpose was for audit. This stated purpose is in accord with common sense given no evidence of any contact between anyone involved in the US indictment and the CCRA, the lack of material in the possession of the CCRA at the time of the Requirement and the very preliminary type of information being sought in the Requirement.
30. There is no question the CCRA is at a very early stage of its look (to use neutral language) into the tax affairs of the Applicant. The problem with hindering the CCRA at such an early stage was recognized by the SCC in Jarvis at para. 90:
90. All the more, the test cannot be set at the level of mere suspicion that an offence has occurred. Auditors may, during the course of their inspections, suspect all manner of taxpayer wrongdoing, but it certainly cannot be the case that, from the moment such suspicion is formed, an investigation has begun. On what evidence could investigators ever obtain a search warrant if the whiff of suspicion were enough to freeze auditorial fact-finding? The state interest in prosecuting those who wilfully evade their taxes is of great importance, and we should be careful to avoid rendering nugatory the state's ability to investigate and obtain evidence of these offences.
31. As well as thwarting any criminal prosecution, prohibiting the Minister from using its requirement powers to gather the very preliminary type of information requested in the Requirement may lead to the Applicant's tax affairs being immune from scrutiny because it is far from certain that the Minister could satisfy the requirements necessary to obtain a search warrant given the Minister's lack of knowledge.
(Respondent's Memorandum at paras. 29-31)
[14] Relying on the affidavit of the Auditor, Counsel for the Respondent also submits that the function of the SEP is to conduct audits and that it does not conduct criminal investigations. That is, the preliminary information being requested, and the scant information in the possession of the Auditor, is indicative of a gathering of information to determine whether or not to commence an audit.
[15] Counsel for the Applicant argues that, effectively, the Auditor's belief and intention is irrelevant to the true Purpose of issuing the Requirement, being the institutional obligation and intention.
2. The institutional obligation and intention
[16] Counsel for the Applicant argues that the Purpose of issuing the requirement is proved by the nature of the institutional framework within which the Requirement was issued. That is, regardless of the Auditor's personal belief and intention, the institutional obligation and intention within which he was operating, was, from the outset, to investigate the Applicant for penal liability.
[17] The Requirement was issued by the Auditor as an employee of the Special Enforcement Program ("the SEP"), being part of the Special Investigations Division ("SID") of the Canada Customs and Revenue Agency ("the CCRA"), and operating according to a 1992 Taxation Operations Manual, and a 1992 Working Arrangement ("the Arrangement") (AR, pp. 136-144) between the Royal Canadian Mounted Police ("RCMP") and the predecessor of the CCRA. The Arrangement details the governing of the SEP as follows:
The various activities which are carried out under these Working Arrangements will be categorized by the RCMP as the Tax Program and by the RCT as the Special Enforcement Program.
The parties acknowledge that their overall objective is:
"In order to address more effectively the accumulation of unreported illicit wealth amassed by Organized Crime and increase the effectiveness of criminal law enforcement and thus cause maximum disruption to Organized Crime, stem the infiltration of legitimate business by criminal elements, and reduce the activities of Organized Crime on society, RCT and the RCMP agree to act in concert with one another in combatting [sic] Organized Crime through enforcement under the Income Tax Act."
[Emphasis added]
(AR, p. 136)
[18] Thus, Counsel for the Applicant characterizes the SEP as a "quasi criminal investigatory program" and argues that "members of the SEP are either directly or indirectly involved (as agents of the RCMP or agents of other officers of the Special Investigations Division) in the advancement of criminal investigations" (Applicant's Memorandum, para. 33).
[19] In support of this characterization, Counsel for the Applicant relies on the decision in R. v. Harris, [1995] B.C.J. No. 1467, in which Justice Oliver of the British Columbia Supreme Court upheld a judicial stay of proceedings where the accused was charged with failing to meet the very same type of Requirement as was issued to the Applicant in the present case. Justice Oliver had this to say about the functioning of the SEP:
9. It is uncontradicted that Mr. Anderson, in serving Mr. Harris with the Requirements pursuant to s.231.2(1), was doing so in his capacity as an officer advancing the goals and objectives of the Program. Clearly, the function of the Income Tax Act here as it was used with the "assistance and support of the Department of the Solicitor General, represented by the R.C.M.P." in all fairness cannot be said to be solely regulatory or administrative.__Indeed the first step in Anderson's procedure is to identify persons earning income from illegal activities and determine their position in the criminal community. The appellant would have the Court turn a blind eye to the close working relationship between the Department of National Revenue and the R.C.M. Police existing under the Special Enforcement Program.__With respect, I am not prepared to do that. It is not the function of the Income Tax Act alone which must be considered in this case (as it was in McKinlay); rather, it is the function of the Income Tax Act in conjunction with the Special Enforcement Program which must be considered.__I am in agreement with the Court below which found that McKinlay is distinguishable, and further, that in the context of this case there is a criminal or quasi-criminal function apparent in the procedures and methods which were followed.
[Emphasis added]
[20] Counsel for the Respondent does not dispute that, at the time the Requirement was issued, the Arrangement was still in effect, but in the following argument advances the proposition that its application has changed significantly:
36. The Applicant fails to refer to the subsequent 2002 publication by the CCRA (Applicant's Application Record, pages 149-163) dealing specifically with the Special Enforcement Program, however. The very first paragraph of that publications casts doubt on the relevance of the older material, and the relevance of the case R. v. Harris, [1993] B.C.J. No. 3140 (B.C. Prov. Ct.) aff'd [1995] B.C.J. No. 1467 (B.C.S.C.), as it states "This [SEP] program has evolved through the years and its focus has shifted from a criminal to a mainly civil approach." Whatever was the situations in 1992, 1993 or 1995, the program clearly had changed by 2002 into one focusing on civil audits rather than criminal investigations. It would appear the focus since 2002 has shifted yet again as it was the evidence of [the Auditor] that currently SEP only conducts audits and not criminal investigations.
37. This shift is understandable given the Supreme Court of Canada decision in Jarvis and Ling rendered on November 21, 2002. It would strain credulity to argue that, after the clear decision of the SCC in Jarvis and Ling, the CCRA would leave in place an entire program that would use requirement powers to conduct criminal investigations.
(Respondent's Memorandum at paras. 36-37)
In addition, the Respondent refers to the following sections of the 2002 "Operational Guidelines for SEP" as support for this argument:
39. Section 20.4 (Applicant's Application Record, page 154) deals specifically with Special Enforcement Program Audits. Section 20.4.1 gives the objective of a SEP audit:
SEP audits are carried out to determine, as accurately as possible, the taxes, duties, interest and penalties payable under the law by those persons earning income from illegal activities. SEP audits will also be carried out as a means to determine the flow of funds, in an effort to uncover other members of the specific criminal organization for Tax compliance enforcement purposes.
40. Section 20.4.2(2) (Applicant's Application Record, page 160) indicated how SEP audits are concluded:
Audits will be completed to the issuance of applicable assessments and penalties, except those with the necessary indication of tax evasion, which will be referred to the Criminal Investigation Program (CIP) on form T134 for investigation. [Emphasis added]
(Respondent's Memorandum at paras. 39-40)
[21] Counsel for the Applicant responds that, in effect, no measure of self serving statements in the 2002 Guidelines can change the fact that the Arrangement, and actions taken thereunder, are all about prosecution. That is, regardless of the stated purpose in the 2002 Guidelines that "SEP audits are carried out to determine, as accurately as possible, the taxes, duties, interest and penalties payable under the law by those persons earning income from illegal activities", by the Arrangement, the purpose of this action is the investigation of penal liability.
B. Conclusion on the contest
[22] I find I agree with the Applicant's arguments. In particular, I find that the comments of Justice Oliver in Harris are applicable to the Requirement issued in the present case.
[23] In my opinion, the Arrangement is the most important piece of evidence from which to conclude that the Purpose of issuing the Requirement was to investigate the Applicant's penal liability. The Arrangement provides cogent evidence that this was the CCRA's institutional obligation and intention. A stated purpose of the Arrangement is to "stem the infiltration of legitimate business by criminal elements, and reduce the activities of Organized Crime on society". In addition, by its terms, the RCMP and the CCRA agree to "act in concert with one another in combating organized crime through enforcement under the Income Tax Act". I find it is difficult to understand how stemming the infiltration of, and reducing the activities of, organized crime through "enforcement" can be conducted by the RCMP and the CCRA in any other way but prompt concerted effort to investigate for the Purpose of attempting to ultimately impose penal sanction.
[24] During the course of oral argument, I asked whether there is any doubt that any answer the Applicant might provide to the Requirement would be immediately sent to the RCMP. There was no debate on the point. Acting in concert with the RCMP is to be expected of the CCRA under the Arrangement, and there is no doubt about the RCMP's intention under the Arrangement: the imposition of criminal sanction for wrongdoing. By the same token, as a obliged partner in the Arrangement, I cannot find that the CCRA's institutional Purpose in gathering information, that both partners to the Arrangement might use, is anything but the imposition of penal tax sanction.
[25] I give no weight to the evidence that inside the SEP there is a bureaucratic division between "audit" and "investigation" functions. In my opinion, on an objective examination of all the evidence, the whole of the activity of the SEP is dedicated to the investigation of penal liability, with different roles being performed by different persons. In this respect, I find that the Auditor, in fact, took a preliminary investigative step in issuing the Requirement.
[26] I also give no weight to the statements in the 2002 Guidelines that SEP "has evolved through the years and its focus has shifted from a criminal to a mainly civil approach" as proof of the Purpose of issuing the Requirement. It might very well be that a "civil approach" is ultimately adopted in many cases, but this does not mean that the obligation and intention when first approaching a given case is not the imposition of penal sanctions.
[27] As stated in paragraph five above, the question is: "When the Auditor made the decision to issue the Requirement, was a penal liability investigation under way?" In my opinion, the answer is "yes".
[28] As a result, I find the Auditor acted beyond his jurisdiction in issuing the Requirement.
ORDER
Accordingly, I quash the Requirement.
I award costs to the Applicant.
(Sgd.) "Douglas R. Campbell"
Judge
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1476-04
STYLE OF CAUSE: ROGER ELLINGSON
- and -
THE MINISTER OF NATIONAL REVENUE
PLACE OF HEARING: Vancouver, BC
DATE OF HEARING: August 2, 2005
REASONS FOR ORDER AND ORDER: CAMPBELL J.
DATED: August 4, 2005
APPEARANCES:
Mr. Steve Cook FOR APPLICANT
Mr. Robert Carvalho FOR RESPONDENT
SOLICITORS OF RECORD:
Thorsteinssons LLP FOR APPLICANT
Mr. John H. Sims, Q.C. FOR RESPONDENT
Deputy Attorney General of Canada