Unofficial English Translation Agence du revenu du Québec c. Groupe Enico inc. 2016 QCCA 76 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL N°: 500-09-024047-136 (540-17-003193-082) DATE: January 25, 2016 CORAM: THE HONOURABLE YVES-MARIE MORISSETTE, J.A. MARIE-FRANCE BICH, J.A. DOMINIQUE BÉLANGER, J.A. AGENCE DU REVENU DU QUÉBEC ATTORNEY GENERAL OF QUEBEC APPELLANTS – INCIDENTAL RESPONDENTS – Defendants v. LE GROUPE ENICO INC.

JEAN-YVES ARCHAMBAULT RESPONDENTS – INCIDENTAL APPELLANTS – Plaintiffs JUDGMENT [ 1 ] The appellants appeal from a judgment rendered on October 23, 2013, by the Superior Court of Quebec, District of Laval (the Honourable Mr. Justice Steve J. Reimnitz), finding them jointly and severally liable to pay the respondents compensatory and punitive damages totalling $3.95 million, with interest, the additional indemnity, and costs. [1] [ 2 ] The respondents have filed an incidental appeal.

They allege that the trial judge erred by refusing to award the respondent Groupe Enico inc. full reimbursement of professional fees incurred in this litigation. Being of the opinion that the appeal is dilatory and an abuse of process, they also seek additional damages for Jean-Yves Archambault under

article 524 of the Code of Civil Procedure . [2] [ 3 ] For the reasons of Bélanger, J.A., with which Morissette and Bich, J.J.A. agree, THE COURT : [ 4 ] ALLOWS the appeal in part, without costs given the mixed outcome, for the sole purpose of varying paragraphs [1198], [1199], [1210], and [1211] of the judgment a quo , so that they may read as follows: [1198] DISMISSES the plaintiff Jean-Yves Archambault’s claim for $50,000 in moral damages; [1199] CONDEMNS the defendants jointly and severally to pay the plaintiff Jean-Yves Archambault $50,000 in non-pecuniary damages and DISMISSES his claim under

article 1615 of the Civil Code of Québec ; [1210] DISMISSES the Jean-Yves Archambault’s claim for punitive damages; [1211] ORDERS the Agence du revenu du Québec to pay Le Groupe Enico inc. $1,000,000 in punitive damages; [ 5 ] DISMISSES the incidental appeals and application for additional damages, without costs given the circumstances. YVES-MARIE MORISSETTE, J.A. MARIE-FRANCE BICH, J.A. DOMINIQUE BÉLANGER, J.A.

Mtre Jacques Larochelle Jacques Larochelle avocat inc. Mtre Donald Béchard, Legal Counsel DS Welch Bussières, avocats For the Agence du revenu du Québec Mtre Christian Boutin Larivière Meunier (Revenu Québec) For the Attorney General of Quebec Mtre Lyne Guilbault Gilbert Séguin Guilbault For Le Groupe Enico inc.

Jean-Yves Archambault Representing himself Date of hearing: September 1, 2015 REASONS OF BÉLANGER, J.A. [ 6 ] The appeal concerns the liability of the Agence du revenu du Québec (the “ARQ”) towards a corporation and its principal shareholder arising from a tax audit, the resulting collection measures, and the withholding of tax credits owed to the corporation.

At the heart of this matter are the principles of abuse of right and the duty to act fairly towards a taxpayer. [ 7 ] Because the trial judgment [3] recites the facts of the case at great length, I will merely describe them in broad strokes. * * * * * [ 8 ] In 1990, Jean-Yves Archambault (”Archambault”) founded Le Groupe Enico inc. (”Enico”), a Quebec corporation offering consultation and automation system integration services. Over the years, Enico grew and was involved in major projects in Quebec and abroad. Between 2001 and 2007, the corporation’s annual sales went from $1.8 million to $5.6 million.

Over that same period, the number of persons employed by the corporation went from 22 to 38.

The fall of 2007 was difficult because of cash shortages due, among other things, to a debt they were having trouble collecting and, as we will see, to the issues that arose from a tax audit riddled with mistakes, where tax credits owed to the corporation were withheld, and to the complete lack of cooperation between the various departments of the ARQ. [ 9 ] The saga begins on November 2, 2005, when the ARQ received an anonymous tip stating that Enico [ translation ] “has been making false monthly statements for many months with respect to its consumption taxes” and that the corporation owed over $80,000 in taxes to the ARQ. [ 10 ] The ARQ therefore decided to audit the taxes (GST, QST) for the 2003 to 2006 fiscal years.

The audit began on September 26, 2006 when an inspector, Guy Fournelle (”Fournelle”), went to the offices of Enico with François Boudrias (”Boudrias”), whom he introduced as a [ translation ] “QST tax intern”. Boudrias, however, was not only a [ translation ] “QST tax intern” but also an experienced income tax auditor. At the time, the representatives of Enico did not know that Boudrias was a tax auditor or that he was actually performing a tax audit of the corporation.

Boudrias had little contact with the Enico representatives, leaving it up to Fournelle to ask for any documents. [ 11 ] Boudrias therefore began his income tax audit without informing Enico of the fact, while applying, with the approval of his immediate superior, the [ translation ] “bank deposit method” to estimate the corporation’s revenues. [ 12 ] This is an indirect tax audit method, which essentially consists in comparing deposits to a taxpayer’s bank account with the revenue declared by this taxpayer.

Under this method, any deposit that the taxpayer cannot explain is considered to be taxable income. [4] Choosing this audit method therefore places the onus of demonstrating that deposits in a bank account are not income squarely on the taxpayer’s shoulders. [5] This may sometimes be difficult to prove, especially when the taxpayer’s books are not in order, as was the case with Enico. [ 13 ] The consequences of using this method to determine income are not inconsequential and manifest in three ways. First, all the unjustified deposits are considered to be corporate income.

Then, any discrepancies are systematically considered to be an appropriation of funds (undeclared income) by the individual, Archambault in this case. This is the reason Archambault received a draft personal income tax assessment. Finally, discrepancies are considered to be taxable sales for which taxes were neither collected nor remitted. Use of this method therefore has an impact on the notices of tax assessment.

Thus, the draft income tax assessment prepared by Boudrias had a direct impact on the notices of tax assessment that were issued. [ 14 ] Between October 2006 and March 2007, the inspectors visited Enico’s offices about a dozen times. During this time, Fournelle acted as the principal mouthpiece for the ARQ and took charge of asking the corporation’s representatives for the supporting documents required for the QST tax audit. These documents were made available to the auditors at the premises of Enico.

[ 15 ] Starting in February 2007, the expense accounts for 2003, 2004, and 2005 were examined more closely, and the documents requested by Fournelle were placed in boxes that were kept in the conference room at Enico’s offices. One of these boxes disappeared. [ 16 ] At the same time, Enico received notices of assessment of penalties and interest. Archambault did not understand what these assessments related to, but because the amount was low, he paid without asking any questions. Over time, the assessments increased. Archambault contacted many ARQ representatives to try to make sense of the situation.

He found out that the ARQ reproached Enico for failing to remit its withholdings for the month of October 2006 ($10,962) and that the corporation’s file had been referred to the Centre de la perception fiscale (tax collection centre). Archambault was taken aback because for years Enico had entrusted the task of making the government remittances to the ARQ to a payroll management firm. [ 17 ] On May 15, 2007, Fournelle and Boudrias met with Archambault and his administrative assistant to give them draft notices of assessment of taxes (for the period between August 31, 2003, and December 31, 2006).

These draft assessments showed amounts due of $161,267 (GST/HST) and $163,278 (QST). Archambault was dumbstruck by the magnitude of the amounts. He and Fournelle had previously discussed a tax debt of about $79,000. It was then that Archambault found out that Boudrias was preparing draft notices of assessment of income tax and that his work had had an impact on the draft notices of assessment of taxes.

Boudrias gave Archambault a copy of his work sheets showing amounts totalling $1.2 million in undeclared income that Boudrias attributed to Enico. [ 18 ] On June 1, 2007, Archambault sent the ARQ two letters of contestation. He submitted many questions regarding Boudrias’s spreadsheets. He questioned the method he used to calculate the corporation’s income and disputed the amounts established using this method. He also attempted to explain the business expenses incurred by Enico that Boudrias had refused and submitted documents in support of his arguments.

While admitting to some mistakes in his accounting, he provided explanations and supporting documentation. He asked questions, but he never received an answer. After reviewing all of Fournelle’s work tables – excluding Boudrias’s work on the income tax – Archambault found that, as at June 1, 2007, Enico owed the ARQ somewhere between $125,000 and $134,000. Archambault also notified the tax auditors that the box of documents containing the expense accounts for 2005 had [ translation ] “disappeared”, and that this was causing him some difficulties.

The judge accepted that Boudrias was responsible for the disappearance of this box. The two letters were never answered. [ 19 ] On June 13, 2007, Fournelle and Boudrias went to Enico’s offices to retrieve supporting documents, including a box of photocopies of documents relating to Enico’s expense accounts for 2005. At the same time, Enico filed a claim for tax credits for scientific research and experimental development (”SR&ED”) for the 2007 fiscal year. [ 20 ] On July 6, 2007, Fournelle informed Archambault that the ARQ needed time to examine the supporting documents sent on June 13, and that he would

schedule a meeting with Archambault for some time in September 2007. He also requested some documents and asked Enico to file any GST/QST statements missing to date, since the corporation, in his words, had failed to do so since February 28, 2007. [ 21 ] In early August 2007, Manuel Honores (”Honores”), financial management officer for the ARQ collection centre, got involved in the file. He explained the final notice to Archambault, which was dated July 5, 2007, and informed Archambault that the portion not included in the audit was due.

He also informed Archambault that Enico had to make its current remittances and file its tax returns. Enico complied. [ 22 ] On August 9, 2007, Honores discovered that Enico had in fact remitted its withholdings for October 2006. This error, however, was corrected only on October 31, 2007. [ 23 ] Meanwhile, on September 13, 2007, Fournelle and Boudrias met with Archambault to give him the new draft assessments of taxes and income tax for the period between September 1, 2003 and December 31, 2006.

Fournelle presented him with a new draft assessment of taxes that showed an assessment of $155,652 for QST and $154,649 for GST/HST. Boudrias gave him his draft assessment of income tax. The amounts he had established did not really vary from those in his May 2007 spreadsheets. Boudrias explained that he had analyzed his individual [ translation ] “tax profile” and that it did not allow him to inject funds from his personal line of credit into the corporation. In short, Boudrias did not believe Archambault’s claim that some deposits were a personal investment.

Yet, according to Archambault, the documents provided on June 13, 2007, showed that he had personally put money into the corporation. When the meeting came to a close, Archambault was angry and under the impression that they thought he was a thief because they refused to listen to his explanations. Before he left, Fournelle told him that he had twenty-one days to contest the draft assessments. Thus, the amounts personally injected by Archambault into the corporation were now considered undeclared income, with the previously discussed consequences. [ 24 ] On September 14, 2007, Archambault mandated Mtre Charles M.

Leibovich and the accountant Louis Grossbaum to deal with the ARQ. [ 25 ] From that moment until February 2008, the professionals hired by Archambault began serious discussions with Antony Starnino (”Starnino”), director of the auditing department and Fournelle and Boudrias’s superior. Starnino was open to significantly reducing the amounts of the issued notices of assessment.

Despite Starnino’s attempts to tamp down the Collection centre’s enthusiasm, the situation did not return to normal. [ 26 ] On September 24, 2007, Boudrias and Fournelle sent the collection centre a form with information for collection purposes indicating that the Enico file presented a risk of loss and should be processed urgently and without delay . [ 27 ] That same day, Boudrias issued a recommendation against Enico to impose a penalty for “gross negligence” (under

section 1049 of

Part 9 of the Taxation Act [6] ). This recommendation, which was supported by his team manager and Starnino, indicated that significant amounts in undeclared sales had been discovered through the [ translation ] “bank deposit method”. The penalty recommended for the period between August 31, 2003, and August 31, 2005, was $30,581. [ 28 ] On September 27, 2007, Mtre Leibovitch got in touch with Starnino to inform him that he had many supporting documents that could markedly reduce Enico’s income as established under the [ translation ] “bank deposit method”. Starnino told him that the

notices of assessment of taxes for Enico and the draft income tax assessments for Archambault had already been approved and were about to be issued, but that the ARQ would not issue the notices of assessment until it received Enico’s supporting documents. [ 29 ] On October 3, 2007, Archambault received draft income tax assessments in his personal name. His personal income would be increased to take into account an alleged [ translation ] “appropriation of funds” from Enico and a [ translation ] “car benefit”.

Strictly regarding the income resulting from the application of the [ translation ] “bank deposit method”, the draft assessment increased Archambault’s income by $61,051 (2003), $417,065 (2004) and $151,902 (2005). [7] [ 30 ] On October 5, 2007, Enico received notices of assessment of taxes totalling $224,347.18 for QST and $228,383.42 for GST, for the period between September 2003 and December 2006. [ 31 ] On October 31, 2007, Starnino asked Fournelle and Boudrias to obtain additional information and supporting documents from Enico and Archambault.

He also called Honores at the collection centre to let him know that [ translation ] ”the notices of assessment of income tax [Enico] might be reduced from $600,000 to about $50,000” and that if they were, [ translation ] “the assessments of taxes would be proportionately diminished as well”. [ 32 ] That same day, Honores sent Archambault an up-to-date statement of account for Enico claiming an amount of $12,479 to discount his file. Enico paid this amount forthwith.

The ARQ also sent Enico a new notice of assessment that corrected the error respecting the withholdings for the month of October 2006. [ 33 ] In early December 2007, Archambault called on the services of Mtre Alain Ménard, a tax lawyer, to help him solve his own problems and those of Enico with the ARQ. [ 34 ] On December 6, 2007, Starnino, who was well aware of Enico’s precarious situation, asked Honores whether the collection centre could do something about the federal R&D tax credit applied to the GST.

On this issue, Honores noted: [ translation ] ... he [Starnino] will have to get back to me with the amount of the new assessment before we can ask our accounting to make the reimbursement. Respecting the provincial credit, we have to wait for the assessment to be issued before we can make the same request. Starnino has explained to me that the company is in trouble, according to its representative, as the bank has already pulled the line of credit in part and the R&D credits are already earmarked to pay back loans. If the situation fails to right itself, the company could be forced into bankruptcy.

I asked him to send me an email through Outlook with the details of the new assessments being considered.

He does not have the exact amount of IC, but the assessment will be substantially reduced to about $30,000. [8] [ 35 ] Before the Christmas holidays, Enico filed notices of objection to the notices of assessment issued by the ARQ. [9] Starnino agreed to continue discussions with Enico’s representatives despite the filing of these notices of objection. [10] [ 36 ] On January 4, 2008, the Toronto-Dominion Bank sent Enico a notice of default claiming that the line of credit had been exceeded by $49,000. [ 37 ] On January 15, 2008, Mtre Ménard spoke with Starnino.

Starnino confirmed that: (1) it was unusual for an income tax auditor to introduce himself as a [ translation ] “QST tax intern”; (2) 70% of the difference established by using the [ translation ] “differential method” had been explained and other documents would be sent by Mtre Leibovich; (3) explanations for the taxes had been provided and accepted; (4) the expense account for 2005 represents the refused ITC-ITRs amounting to $40,000 or $45,000; (5) the research and development credits withheld for the 2006 fiscal year were sufficient to cover the sales tax assessments, which were reduced following Enico’s representations; (6) consequently, Starnino made it clear to the collection centre that the SR&ED credits for 2007 should not be withheld; (7) with respect to the missing box of supporting documents for 2005, Starnino was ready to consider [ translation ] “audit tests” based on documents found or provided by employees, which appear to indicate that the entries in the general ledger were correct; and (8) he was open to a meeting where the purpose would be to reduce the GST/QST assessments as much as possible. [ 38 ] In early February 2008, Honores noticed that Enico had failed to file its tax reports and pay its withholdings since October 2007.

He deemed that [ translation ] “the situation could not go on” and decided, with the approval of his superior Gaétan Vinette, to seize Enico’s bank account. The only final notice sent to Enico before the ARQ decided to seize its account was the one dated July 5, 2007, regarding the withholdings from October 2006, which, we now know, had in fact been remitted. Discounting any warnings, Honores made the decision to seize without consulting Starnino. [ 39 ] On February 6, 2008, Mtre Ménard and Mtre Leibovich met Starnino and Boudrias to review the situation.

After this meeting, Starnino agreed to send Archambault Boudrias’s work chart for the expense accounts totalling nearly $505,000 for 2004–2005, according to the tax auditor’s calculations. After receiving this document, Archambault realized that many expense accounts had been counted twice. Confronted with the obvious, the ARQ acknowledged the mistake. Several months would pass, however, before the notice of assessment was corrected to its final tally of $95,000.

This error inflated the corporation’s income, which, combined with the use of the [ translation ] “bank deposit method” (which deposits had not been entirely explained by the fall of 2007) resulted in the filing of the previously discussed draft assessments. [ 40 ] Similarly, that same day, Honores sent the Canada Trust Bank a notice of seizure of Enico’s bank account, which turned out to be a line of credit, and a formal request for payment of $395,217. In actual fact, the seizure was not performed until February 19, 2008.

The trial judge accepted that on February 12, 2008, the ARQ was well aware that the bank was on the verge of recalling the loans and that it had a [ translation ] “duplication” issue (expenses counted twice, referred to in the previous paragraph). It therefore knew at that point that the notices of assessment were wrong. The judge added that, despite Starnino’s requests, the collection centre did not release the research tax credits. [ 41 ] On February 21, 2008, the ARQ released the seizure in exchange for a $10,000 payment and the undertaking that, going

forward, it would receive monthly payments of $10,000, [ translation ] “in case the notices of assessment should increase”. The judge also accepted that at that time, the ARQ acknowledged that tax credits totalling $290,000 were due to the corporation. [ 42 ] The judge determined that Boudrias knowingly inserted duplicates in his calculations and deliberately made the box with the expense accounts for 2005 disappear. The ARQ maintains that this finding of fact is a palpable and overriding error requiring the intervention of the Court.

The ARQ has not convinced me, however, that the judge committed an overriding error in that regard One thing is certain: clearly, Boudrias’s error was at least a gross error with consequences that were significant and devastating because they had a direct impact on the notice of assessment for taxes. [ 43 ] And, to prove that when it rains, it pours, at the same time, the Toronto Dominion Bank recalled its loan despite the fact that the ARQ had released the seizure two days after it was carried out. [ 44 ] On February 29, 2008, Enico filed a notice of intention to make a proposal in accordance with the Bankruptcy and Insolvency Act . [11] [ 45 ] On May 5, 2008, through the collection agent Gilles Boucher (”Boucher”), the ARQ offered a proof of claim in the amount of $350,000; one week later, the claim was reduced to $206,446.

During the meeting of the creditors, Boucher made Enico amend its proposal so that it offered 100 cents on the dollar, failing which, he would vote against the proposal. [ 46 ] Finally, new notices of assessment were issued on May 30, 2008, which were still wrong. It was not until June 12, 2008, that the ARQ sent new, revised notices of assessment to Enico. According to these new notices, Enico owed $113,864 for QST and $103,749 for GST/HST. [ 47 ] On June 27, 2008, the ARQ sent Enico a new notice of assessment for taxes (QST) for the period between September 1, 2003, and December 31, 2006.

According to this new assessment, Enico was now owed $133,975. [ 48 ] On June 30, 2008, the ARQ issued a corrected notice of assessment for GST/HST for the 2003-2006 period.

This notice showed that Enico was owed $216,396. [12] The new assessments issued cancelled those dated October 4, 2007, thus rendering the notices of objection filed in December 2007 by Enico moot. [ 49 ] On July 7, 2008, Boucher contacted Enico’s trustee in bankruptcy asking him not to take into consideration the ARQ’s notice of claim (a claim, we should recall, that totalled $350,000 on May 5, 2008). [ 50 ] On July 10, 2008, Boucher sent Enico an up-to-date statement of account showing a debit balance of $137,384.71 and a credit balance of $427,650.81 for GST/HST for the 2006-2008 period.

As for the QST, the statement of account showed a debit balance of $238,499.95 and a credit balance of $137,625.81 [13] for the same period. [ 51 ] On July 14, 2008, the Toronto Dominion Bank definitively closed Enico’s account because it had paid off the balance on its line of credit. [ 52 ] On July 15, 2008, the ARQ sent Enico a notice of assessment for the tax credits sought for the fiscal year ending on August 31, 2007. This notice of assessment indicated a credit balance of $290,025. [ 53 ] One might be forgiven for thinking that from that point on, Enico’s difficulties with the ARQ were winding down.

They were not. [ 54 ] Archambault then tried to obtain information and explanations with respect to the interest and penalties claimed and the transfer periods. Enico had obtained the RS&DS tax credits that had been seized for allocation but could not retrace all of the amounts which totalled about $980,000. He was therefore seeking explanations as to the allocations that had been performed. All these questions remained unanswered. [ 55 ] On August 4, 2008, the ARQ’s access to information department answered Archambault’s access request.

It informed him that the document he wanted to see was 4811 pages long and that some elements could not be sent. [ 56 ] On August 8, 2008, Enico filed notices of objection against the notices of assessment (GST/HST) dated May 30 and June 30, 2008, and against the notice of assessment (QST) dated June 12, 2008. [ 57 ] On August 21, 2008, Archambault went to the ARQ’s offices without an appointment, to meet with Boucher and get some answers to his questions. He was unsuccessful. The following day, he sent Boucher a new list of questions. [ 58 ] On August 25, 2008, Boucher sent Enico a new statement of account.

This statement showed a debit balance of $349,432 for the QST and a credit balance of $427,650 for the GST/HST. [ 59 ] On September 15, 2008, Archambault sent Boucher a new letter to denounce [ translation ] “ a great number of errors , anomalies, and inconsistencies in the auditors’ documents” with respect to the documents and revised notices of assessment sent to Enico by the ARQ in the previous weeks. (Emphasis in the original.) [ 60 ] On September 24, 2008, counsel for the respondents sent the Minister of Revenue, the Deputy Minister and the ARQ a letter of demand requiring them to cease their wrongful and malicious conduct against them, cease breaching their fundamental rights, and pay them any amounts due that were being illegally withheld. [ 61 ] A general meeting of Enico’s creditors was held on September 29, 2008.

On that date, Enico made a new composition proposal offering its ordinary creditors 80 cents on the dollar. Boucher, who was there, presented a notice of assessment in the amount of $14,000. Archambault, who was not aware of the existence of this notice of assessment, asked for explanations. In answer, Boucher told

him that a new $14,000 debit balance had appeared on his computer screen the previous evening. [ 62 ] On November 28, 2008, Enico’s representatives met with Starnino, who gave them documents explaining the amounts Enico owed to the ARQ. At the bottom of one document titled [ translation ] “Summary of the calculation of taxable benefits”, the following note appeared: [ translation ] “interest and penalties of $26,237.05 [owed by Enico] should be cancelled based on inconvenience and oppression” caused by the ARQ.

It appears that Starnino had recommended the cancellation of the interest and penalties. [ 63 ] On December 29, 2008, the respondents brought their action in compensatory and punitive damages against the appellants. [ 64 ] The judge accepted that on January 8, 2009, Boucher threatened Archambault with voting against Enico’s new composition proposal if Enico did not withdraw his name from the legal proceedings against the appellants. [ 65 ] On January 19, 2009, Mtre Ménard sent the ARQ’s Direction générale de la législation a letter in which it requested the cancellation of interest, penalties, and recovery charges imposed on Enico for the periods of September 1, 2003, to December 31, 2006, and November 1, 2007, to February 29, 2008. [ 66 ] On January 23, 2009, Enico and the ARQ filed a conditional consent to the homologation of Enico’s composition proposal.

The proposal dated May 13, 2008, was ratified on February 4, 2009, due in part to the ARQ filing a certificate attesting that Enico had as of then corrected the defaults alleged against it. [ 67 ] On February 13, 2009, the Canada Revenue Agency (”CRA”) sent Enico a notice of assessment regarding the tax credits claimed in 2008. The credits granted amounted to $173,210, whereas the assessment showed that $160,608 had been reimbursed. [ 68 ] On September 30, 2009, Desjardins Business Centre notified Enico that it would gradually reduce its line of credit.

The institution informed Enico that it could not pay out the balance of the funding granted because the corporation had defaulted on producing certificates attesting that any amounts due to the tax authorities had been paid in full. [ 69 ] During the month of November 2009, Boudrias resigned from his position as tax auditor, per his union’s recommendation. At the time, he had a disciplinary record with the ARQ for [ translation ] “inappropriate consultations” and illegal transmission of files to his wife, who is an accountant.

The facts allegedly took place between 2007 and 2009. [ 70 ] On November 2, 2010, Enico’s new lawyers asked the ARQ’s collection centre to cancel and reimburse any unduly paid interest. This request was reiterated on several occasions but always refused. An official response was given on March 2, 2012, indicating that the decision was final and without appeal, and that revision was not possible.

As for the CRA, a few months later, it agreed to cancel the interest, charges and penalties imposed on Enico. [ 71 ] On November 26, 2010, Enico laid off its employees and ceased its operations. [ 72 ] On April 19, 2012, the ARQ sent Enico a final notice demanding payment in the amount of $1,043,647.27 for GST/QST including interest and penalties calculated up to April 18, 2012. The ARQ asked Enico to pay this amount before May 4, 2012, failing which it could take the [ translation ] “necessary steps” to collect the amount owed. A statement of account was attached to the final notice.

Enico filed an objection. [ 73 ] On May 18, 2012, Junior St-Urbain (”St-Urbain”), a collection agent, prepared a certificate to obtain a judgment under

section 13 of the Tax Administration Act . [14] On May 22, 2012, the special clerk of the Superior Court of Quebec rendered judgment under this provision and ordered Enico to pay to the ARQ the amount of $1,048,792.18 (plus interest accrued daily from May 19, 2012).

That same day, St-Urbain sent Enico an official claim for payment of this amount and a table explaining the amounts claimed by the ARQ. [ 74 ] During the summer of 2012, Archambault and his new lawyer asked St-Urbain many questions in order to understand the more than $1 million the ARQ was claiming from Enico. [ 75 ] On October 17, 2012, Gilles Lareau, J.C.Q., dismissed Enico’s appeal from the assessments for 2008 and 2009, when none of Enico’s representatives were present.

According to the judgment under appeal, the ARQ objected to Archambault filing a defence for Enico, and because Enico did not have any means to defend itself, it was condemned ex parte . The judgment [ 76 ] The hearing lasted fifteen days, at the end of which the judge found the ARQ liable in a judgment spanning 1226 paragraphs.

In broad strokes, the judge’s main findings can be summed up as follows: ➢ The ARQ committed a fault when it processed the anonymous report without vetting it or verifying the reporting party’s interest and without informing the taxpayer of the report’s existence or the true purpose of the audit, thereby violating its right to make full answer and defence during the auditing process; ➢ Boudrias infiltrated the corporation under false pretences and wrongly used the [ translation ] “bank deposit method” from the beginning of the audit; the conditions to use this arbitrary method, which is a last resort, were not met in this case; ➢ Boudrias made 153 false or fictional entries in connection with the expense accounts for 2005.

The judge [ translation ] “... [did] not hesitate to find that Boudrias had in all likelihood been involved in the disappearance of the box of documents from 2005”; the method he used to count duplicates without attracting the reader’s attention was deliberate and intentional. The explanation offered by the appellants that the accounting of duplicates was the result of a mistake was rejected;

➢ The existence of performance targets is inconsistent with the role of a tax auditor because such a system exerts direct pressure on the auditor and is likely to lead to abuses. This system partially explains why the auditing method used resulted in the inflation of tax assessments by $218,000 through an accounting of duplicates; ➢ Early on in the auditing process, the managers at the ARQ should have understood that the notices of assessment resulting from a process that was [ translation ] “vitiated by a public officer whose reputation was not blameless” could not be valid.

At the same time he was working on the file as a QST tax [ translation ] “intern”, Boudrias was the target of an internal investigation at the ARQ for appropriating a taxpayer’s confidential information for unauthorized purposes. The ARQ committed a fault by failing to ensure sufficient supervision of Boudrias, whom it knew was an [ translation ] “at-risk” individual; ➢ The ARQ committed a fault by waiting nine months to confirm and correct the errors in the notices of assessment dated October 2007. This delay is unreasonable and caused enormous harm to Enico and Archambault personally.

The ARQ is responsible for [ translation ] “bungling” the lost payment of the October 2006 withholdings. ➢ The draft assessments and notices of assessment from October 2007 should never have been issued since they were the result of the [ translation ] “questionable” work that [ translation ] “would end up being almost entirely undone ..., going from more than $1,800,000 to less than $200,000”. Income tax and tax assessments issued by the ARQ benefit from a presumption of validity and are [ translation ] “fraught with consequences on a corporation’s ability to raise capital and, therefore, on its very survival”.

The presumption of validity, together with the priority granted claims of the State under article 2651(4) of the Civil Code of Québec , make it practically impossible for a corporation to obtain funding once it has received a large assessment; ➢ The withholding of tax credits for 2006 to compensate for the debt created by the notices of assessment from October 2007 was [ translation ] “wrong and abusive” because these notices of assessment were themselves abusive.

The refusal to explain the allocation of the tax credits to the respondents was also wrong; ➢ The seizure of the line of credit was unreasonable; the ARQ’s collection centre did not take into account information that had been sent by the Director of the auditing department; the damages sustained then became highly foreseeable. The strict separation between the auditing department and the collection centre is inexplicable.

Furthermore, the seizure is contrary to the ARQ’s internal guidelines, which provide that the collection process must be [ translation ] “based on a progressive and strategic application of recovery measures favoring first and foremost voluntary payments and payment agreements with the debtor” and must be supported by an analysis of the debtor’s financial situation. [15] The guidelines were not followed. Seizing a line of credit is fraught with consequences to the taxpayer but provides no benefit to the creditor.

The ARQ failed to issue a final notice before carrying out the seizure, in violation of its own collection guidelines; ➢ There is a causal connection between the abusive conduct of the ARQ and the Toronto-Dominion Bank’s decision to pull the line of credit; ➢ The judge dismissed the expert report and testimony of the expert Arthur Lavigne, who was found to lack credibility; ➢ The conduct of the collection agent Boucher, who was in charge of the file after the seizure, revealed a wrongful and unjustified administrative tenacity. Obtaining a judgment under

section 13 BIA [ translation ] “contributed to establishing evidence of extraordinary administrative zeal”, [ translation ] “zeal that after all is said and done constitutes wrongful conduct incurring the liability” of the ARQ. The [ translation ] “strategy” of the ARQ’s legal department, which was to ask a public officer to obtain judgment under the BIA , took place after the dispute had been brought to the courts [ translation ] “and it was known that the file would soon go to trial and that the taxpayer was having trouble paying his attorneys to assert its rights”.

This conduct constitutes an abuse of power; ➢ The degree of independence and impartiality of the ARQ’s mechanism for processing complaints is questionable, given that it is the department concerned by the work of the public official who is the subject of the complaint that is mandated to rule on the complaint in question; ➢ Through out the file, the ARQ committed many faults and acted with malice, knowing full well the inevitable consequences of its conduct on the corporation; ➢ The ARQ is subject to the rules of extracontractual civil liability under articles 1376 and 1457 C .C.Q .

There is a clear fault, malicious and abusive conduct, gross carelessness tantamount to abuse of power, and reckless conduct tantamount to bad faith. The ARQ weakened the corporation financially. The dispute in appeal [ 77 ] Characterizing the judgment a quo as an [ translation ] “idol with feet of clay”, the appellants maintain that the trial judge committed many errors of fact and law that justify the intervention of the Court. They challenge practically all of the judge’s conclusions respecting the faults alleged against them.

They also question the judge’s conclusions on the causal connection and the damages awarded to the respondents. Overall, they allege that the judge committed over twenty errors and have submitted as many questions to the Court. [ 78 ] Despite the appellants’ submissions, this appeal raises a more general issue. It concerns a prolonged series of suspect behaviours that, when taken together and in conjunction with what was, quite frankly, the ARQ’s obstinacy, caused the corporation damage. Basically, it must be determined whether the trial judge’s findings of fact were clearly wrong and whether he erred in law.

Analysis

Fault [ 79 ] The judge stated many criticisms of the ARQ, criticisms that should be put into one of three categories: (1) criticisms of the ARQ’s general way of doing things; (2) criticisms of the audit and collection; and (3) criticisms of the ARQ’s use of its exorbitant powers, including the measures subsequent to judicial proceedings. 1. Criticisms of the ARQ’s general way of doing things [ 80 ] I agree with the appellants that some of the judge’s findings are without merit. That is the case with the criticisms of the ARQ’s general way of doing things.

Here is why. [ 81 ] In principle, a trial between a taxpayer and an administrative body must not become a commission of inquiry into all of that body’s operations. The judge must decide only what is useful to determine the alleged faults. In this case, the trial judge questioned, in passing, some of the ARQ’s internal management practices. In my opinion, it was not up to him to opine on the performance incentives adopted for the ARQ’s employees or the way the ARQ manages its Service de traitement des plaintes (”complaint department”).

These questions fall under the ARQ’s executive and discretionary power to implement the policies it sees fit for the proper functioning of its internal governance.

These decisions may be called into question only when they are so unreasonable that they require judicial intervention. [16] [ 82 ] Let us now consider the criticisms made by the appellants. 1.1 Verification of the validity of the report and the duty to inform the taxpayer [ 83 ] The judge found that the ARQ had committed a fault by failing to verify the validity of the report, inform the respondents of the existence of the report and identity of the informant, and ensure that the report was not made in vengeance.

In short, he was of the view that there should have been a preliminary verification of the validity of the allegations in the report. I am of the view that the ARQ is right on this point. Here is why. [ 84 ] In 1990, in McKinlay Transport , [17] the Supreme Court highlighted the idea that the success of a tax system based on the principles of self-assessment and self-reporting [18] relies first and foremost on the honesty of the taxpayer [19] and that, consequently, the minister needs to have broad powers to audit the taxpayers’ income tax returns.

The Supreme Court then asserted that the minister “must be capable of exercising these powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act”. [20] It adds that “[a] spot check or a system of random monitoring may be the only way in which the integrity of the tax system may be maintained”. [21] [ 85 ] These principles were reiterated in 2001 in Jarvis , [22] where the Supreme Court stated the notion that the tax auditing process is not an investigation, which requires the existence of reasonable and probable grounds to believe that a person or corporation has failed to comply with their fiscal obligations.

The distinction between the powers of audit (leading to establishing the income tax due by the taxpayer) and the powers of investigation (leading to establishing the penal liability of the taxpayer) was clearly established. [ 86 ] As far as principles go, the tax system in Quebec is no different than the federal one.

It confers upon the ARQ broad powers to apply or execute a tax statute. [23] The minister is not bound by the statements, reports, and requests provided by the taxpayer, [24] and he or she has the power to determine the amount due by the taxpayer in rights, interest, and penalties under a tax statute. [25] [ 87 ]

Section 95.1 T.A.A . allows the minister to assess, at his or her own discretion, a taxpayer’s tax file without having to first identify irregularities calling into question the truthfulness of the taxpayer’s returns. [26] [ 88 ] The ARQ may therefore, of its own volition and at any time, undertake a tax audit process with a taxpayer. Consequently, it also has the power to undertake such a process when it receives a report of a taxpayer’s wrongdoing. [ 89 ] To verify the validity of a report, the ARQ needs to access a corporation’s internal documents and records.

An audit allows the ARQ to observe whether a taxpayer is in compliance with the obligations incumbent upon it under the various applicable tax laws. If performed in good faith and transparently, with no assumption of the taxpayer’s bad faith, the audit makes it possible to invalidate or confirm the informant’s allegations. [ 90 ] The argument that the report must be subject to some sort of [ translation ] “pre-investigation” is therefore without merit.

If it were necessary to verify the informant’s intention, anonymous or malicious reports would have to be rejected out of hand. [ 91 ] Moreover, confidentiality ensures the effectiveness of the reporting process. The information gathered in the context of a report is also protected under the Act respecting access to documents held by public bodies and the protection of personal information . [27] 1.2 The performance targets mechanism [ 92 ] The judge determined that the existence of a quota system explained in part the auditing methods used in this case.

He also found that this system contributed to establishing the overall conduct of the ARQ, which was held liable. I find that it was not up to the judge to address this problem as he did in this case by concluding that the implementation of the performance target mechanism was in itself a fault committed by the ARQ. [ 93 ] The evidence has shown that the government establishes collection or performance objectives based on results of previous years and that when ARQ employees meet the established objectives, they may receive a cash bonus.

Cash bonuses are awarded according to both the employees’ performance (from a quantitative point of view) and the quality of their work. [28]

[ 94 ] The issue of collection targets is political, a fact the trial judge acknowledged when he wrote that [ translation ] “it is not up to the Court to suggest a political direction”. [29] He nevertheless found that the existence of a performance mechanism could explain some of the inadequate behaviours of the ARQ’s representatives, going so far as to suggest that such a mechanism might create a conflict of interest for tax auditors who also act as [ translation ] “decision-makers”. [ 95 ] It is true that tax auditors play an important

part in establishing notices of assessment and that their actions can have significant repercussions on taxpayers. Yet, it is the tax auditor’s actions that must be examined rather than his or her underlying motives. That being the case, this error is not determinative of the outcome of the dispute. 1.3 The complaint- processing service [ 96 ] Finally, it was not up to the judge to criticize the ARQ’s complaint service in general. It was enough to determine, as he did, that in this case this service was completely ineffective and unable to ensure that the complaints made by Archambault were adequately processed.

The complaint service was not able to answer the questions put to it within a reasonable period of time. 2. Criticisms at the audit and collection stage 2.1 Liability of ARQ as public administrator [ 97 ] The liability of the ARQ and its employees when performing a tax audit and collecting debts depends on compliance with the general rules applicable to employees of the State and to an administrative authority. These rules arise from various sources, which warrant a review here. [ 98 ] In principle, an examination of the liability of the State begins with the liability regime under

article 1376 C .C.Q ., which provides that the rules of the Civil Code of Québec apply to the State, “subject to any other rules of law which may be applicable to [it].” [ 99 ] As LeBel, J. notes in Finney , “[t]his reserve on the part of the legislature reflects the specific nature of governments, and the diversity and complexity of the duties assigned to them.” [30] Thus, it is possible that some specific rules of public law are stumbling blocks to the application of the general civil liability regime. These specific rules of public law, however, cannot be used abusively or indiscriminately. As such, this statement perfectly captures the civil law rule under

article 7 C .C.Q .: 7. Aucun droit ne peut être exercé en vue de nuire à autrui ou d'une manière excessive et déraisonnable, allant ainsi à l'encontre des exigences de la bonne foi. 7. No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith. [ 100 ] For a long time now and even before it was clearly codified in the Civil Code of Québec , the abusive and unreasonable exercise of power was recognized in Quebec as a source of liability for public authorities, Rocarelli v.

Duplessis being of course the leading case on the question. [31] [ 101 ] A discretionary power is therefore never absolute. [ 102 ] Moreover, since 1998, the Quebec legislator has established general rules of procedure applicable to individual decisions respecting citizens, which differ depending on whether the decision was made in the performance of an administrative or a judicial function.

An overarching principle is evident in the Act respecting Administrative Justice : [32] Regarding the performance of an administrative function, any procedure resulting in an individual decision must be made in keeping with the duty to act fairly. [33] [ 103 ] In the same vein, the Quebec Minister of Revenue adopted the Déclaration de services aux citoyens et aux entreprises (” Service Statement” ) that contains the undertakings and objectives of his department. The purpose of the Service Statement is to facilitate the relationship between the government and its citizens.

It is a guidebook for personnel, so that they may render services that meet the citizens’ expectations, [ translation ] “in an environment of transparency, accountability, and respect for the population”. [ 104 ] The principles governing the Service Statement are: (1) respect for the legitimate right of citizens to obtain exact and reliable information quickly and easily; and (2) ensure that citizens will be treated fairly, equitably and impartially. [ 105 ] The ARQ’S undertakings toward citizens are: ➢ To inform citizens of the time, purpose, and scope of an audit, unless special circumstances prevent it from doing so; ➢ Establish the identity of those who will work on the file that concerns them; ➢ Ask for only the information and documents relevant to the audit; ➢ Make sure that changes brought to the notice of assessment are understood and that tax rights and obligations are disclosed. ➢ Perform the required adjustments, if any. [ 106 ] Also, in 2012, the Code d’éthique et de déontologie à l’intention des dirigeants et des employés de Revenu Québec (Code of conduct and ethics for Revenu Quebec officers, managers and employees) was enacted.

It highlights certain values such as proficiency, honesty, impartiality, and diligence in performing the tasks and responsibilities assigned. While it was adopted after the facts at issue here, this Code includes certain basic rules that make good sense.

[ 107 ] Thus, if tax auditors or collectors fail to comply with the professional, deontological, and ethical obligations incumbent upon them, including the obligation to act with transparency and honesty, fail to comply with the duty on every public officer to act fairly, or abuse their discretionary powers, the ARQ could find itself bound to compensate the taxpayer harmed by these actions. These are the stakes here. [ 108 ] The primary mission of the ARQ is to ensure the collection of income tax and other taxes, so that we each pay our fair share to fund public services.

The ARQ also manages the socio-fiscal programs and all the other collection and fund redistribution programs it has been assigned by the government. [ 109 ] The ARQ has many powers that are easily characterized as exorbitant, and there is certainly reasonable justification for this to be the case. The widespread nature of undeclared or [ translation ] “under-the-table” work and the objective of achieving fiscal parity between citizens justify the legislator in confering such powers, which, it should be recalled, place a heavy burden on taxpayers.

Tax laws oblige citizens to: (1) self-report and self-assess; (2) give auditors access to their offices and ledgers, and answer their questions; (3) bear the burden of rebutting the presumption of validity of notices of assessment; (4) acquit the amounts claimed in the notice of assessment without delay, even where an objection is filed; (5) deal with a statute that favours the ARQ in the event of bankruptcy and facilitates seizures; and (6) bow to the ARQ’s power to use allocation for its own benefit, to name but a few. [ 110 ] In exchange, the ARQ has increased responsibilities, proportionate to the powers it has received.

The more a government agency’s powers are exorbitant, the more it risks causing the taxpayer harm if it exercises them abusively, unreasonably, or without considering the consequences that may arise therefrom. [ 111 ] A duty of prudence and good faith in exercising these powers is of course essential. If the ARQ shirks this duty, it must not be surprised when the courts, also concerned with public welfare, judge its lack of rigour harshly.

This is in fact what happened in this case. [ 112 ] It cannot be denied that in Quebec, undeclared work and other forms of tax evasion can impact the investigative, auditing, or even collection methods of the ARQ.

It is easy to see that the ARQ’s primary mission involves methods that will spot taxpayers who have failed to report all of their income. [ 113 ] The temptation for tax auditors to assume that taxpayers are in bad faith is understandable, especially when there is a report. [ 114 ] There are two opposing priorities here: on the one hand, the efficiency the ARQ must display to accomplish its mission to collect income tax and other taxes from taxpayers to ensure fiscal fairness for all and, on the other hand, compliance with its own rules and guidelines and its duty to act fairly and not abuse the powerful tools placed at its disposal.

It cannot be denied that combining or weighing these two priorities may at times prove to be difficult. [ 115 ] In this case, as we shall see, the judge rightly determined that the ARQ acted in violation of all the rules that govern it. 2.2 The judge’s findings of fact [ 116 ] Let us first establish that the appellants have not shown any palpable and overriding error in the judge’s findings of fact with respect to events that took place at the auditing and collection stage.

We reiterate that the judge deemed that Boudrias was not a credible witness and gave detailed reasons for his finding. [ 117 ] Boudrias should have identified himself as an income tax auditor and told the respondents that he was conducting an income tax audit rather than letting them believe that he was assisting Fournelle with his QST tax audit. He should have disclosed his actual role at the first opportunity, not in May of 2007. He also had a duty to tell the corporation which method he intended to apply to complete his audit and inform the taxpayer of the burden that such a method placed on him.

His silence was a trap for the taxpayer. The issue is not really the choice of method applied to assess the corporation’s income, but the fact that the taxpayer was not informed of the ins and outs of its use and, especially, that the taxpayer was not informed in a timely fashion.

This certainly contributed to the mess in which the corporation found itself. [ 118 ] Moreover, the conduct of the auditors clearly violates the principles on which the Service Statement adopted by the ARQ rests and runs directly counter to the ARQ’s specific undertakings in the context of its auditing operations. [ 119 ] Boudrias’s mistake or malice on the matter of the duplicates is gross and constitutes at least carelessness, recklessness, or incompetence so serious as to be tantamount to bad faith.

As behaviour tantamount to bad faith, it may incur the civil liability of a public body. [34] [ 120 ] The rest is hardly any better. It constitutes a series of mistakes and faults that resulted in the damage sustained by the respondents.

Sending the alert to the collection centre with the note [ translation ] “urgent and risk of loss” in September 2007; the grossly exaggerated and erroneous notices of assessment issued in October 2007, with unwarranted haste in light of the circumstances; the unreasonable seizure of the bank account; the time spent correcting the notices of assessment; the fact that the auditing and collection departments do not coordinate their actions and work separately; and the failure to respond to the respondents’ questions –the appellants have not shown a determinative error in any of these findings of fact. 3.

Appropriation of tax credits, processing of bankruptcy file, and judgment obtained in 2012 under

section 13 T.A.A. [ 121 ] In 2005, Archambault discovered a program allowing corporations to obtain investment tax credits for SR&ED. He revised his business plan according to this new opportunity. The program provides that the CRA perform a financial and scientific audit of a project and establish the reimbursement to be granted the taxpayer. The provincial government then pays its share, based on the audit led by the CRA. [ 122 ] In October 2006, Enico filed its first SR&ED tax credit application for 2004-2005. Enico took out a loan with R&D Capital to

ensure funding for its tax credits. For 2004-2005, Enico obtained the total amount of tax credits it claimed, $725,000. [35] The judge accepted that from that point, the SR&ED tax credits represented about 9% of Enico’s revenues. [ 123 ] On November 28, 2007, the CRA issued a notice of assessment respecting Enico’s tax credits for 2006. The credits granted totalled $162,640. A few months later, in February 2008, the ARQ in turn issued a notice of assessment showing tax credits of $130,862 granted for 2006.

Enico never received these amounts, however, because the ARQ decided to withhold the corporation’s tax credits (federal and provincial) to compensate for the fiscal debt created by the notices of assessment dated October 4, 2007, [36] which were later proved to be erroneous. [ 124 ] The Tax Administration Act [37] grants the ARQ the right to withhold SR&ED tax credits. But that is not the issue. The real question is whether the ARQ abused its right to withhold these amounts in this case.

As we have just seen, when it withheld the amounts, the ARQ knew two things: (1) that its notices of assessment were significantly incorrect, and (2) that the corporation might have to declare bankruptcy. [ 125 ] One brutal fact remains: the collection centre employees decided to withhold the amounts despite the requests of the auditing department manager and with full knowledge of the foreseeable consequences of their decision to do so. They thus acted indiscriminately. [ 126 ] The judge did not err when he claimed that the appropriation of the tax credits was abusive.

In the circumstances of the case, it is an abuse of power giving rise to a civil fault. An abuse of power may take many shapes. Its purpose may be unrelated to the statute or constitute excessive conduct in the exercise of a discretionary power. [38] [ 127 ] In this case, the ARQ used its extraordinary powers to keep the SR&ED tax credits in its coffers, just as it used them to seize a bank account (without judicial authorization), impose its views during meetings of creditors, and obtain a judgment under

section 13 T.A.A . [ 128 ] The judge’s findings on the conduct of the collection centre when the bank account (a line of credit) was seized and on the conduct of Boucher during the meetings of creditors are free from error. They are basically observations of fact. [ 129 ] Nor is there any error in the judge’s finding that the ARQ obtaining a judgment under

section 13 T.A.A . was nothing short of harassment. [ 130 ]

Section 13 T.A.A . allows the Minister to issue a certificate attesting to the exigibility of a debt. The certificate may be issued as soon as the debt becomes exigible, without having to inform the taxpayer. When the certificate is filed in the office of the competent court, the special clerk renders judgment in favour of the ARQ. While taxpayers may assert their rights by filing an objection to the assessment, there is no doubt that obtaining a judgment under

section 13 T.A.A . can have negative consequences for the debtor. [ 131 ] It is true that, at the time, Ennico had failed to make its current remittances. It is inaccurate, however, to claim that Enico had a debt in excess of $1 million at the time. Over 60% of the amount claimed consisted of interest and penalties the ARQ always refused to cancel. The judge even pointed out that the public officer who prepared the claim could not vouch for its reliability.

In a context where that proceeding was used not to obtain amounts owed but in support of this legal action, the judge’s conclusion is not vitiated by a palpable and overriding error. Indeed, it is the overall context of the case and the series of actions taken one after the other that must be considered. [ 132 ] It is the overall management of the case by the ARQ that is at fault. There is no doubt that the ARQ had the power to proceed as it did. The judge, however, decided that in the context of this case, the ARQ used its rights abusively.

Causal connection [ 133 ] The appellants’ argument states that Enico’s financial situation had been of serious concern to its banker several months prior to the seizure, and that the judge failed to take into account the evidence on this issue. In actual fact, however, the evidence allowed the judge to establish a connection between the faults committed by the ARQ and Enico’s financial issues, including their line of credit being pulled.

The evidence supported a conclusion that the bank pulled its loan concomitantly to the seizure. [ 134 ] The evidence also grounds the conclusion that, in the fall of 2007, bank representatives were worried because substantial notices of assessment had been issued to Enico and Enico was having cash flow issues. Moreover, it was not only the pulling of the line of credit in February that caused this liquidity shortfall. It will be recalled that large tax credits had been withheld. To say that the erroneous notices of assessment were issued at a bad time would be an understatement.

In the fall of 2007, the corporation was having cash flow issues, but there is nothing to indicate that it would not have pulled through these tough times were it not for its troubles with the tax authorities. [ 135 ] It was in this context that the judge affirmed that the ARQ was aware of Enico’s delicate state and contributed to making it even more so, thereby increasing its liability, which the judge characterized as an intentional fault. [ 136 ] The judge analyzed all the evidence, and there is no palpable and overriding error allowing this Court to intervene on his findings of fact on the causal connection between the ARQ’s faults and the damage suffered by the respondents, which the judge characterized as highly foreseeable.

Damages [ 137 ] The appellants call into question each of the heads of damage awarded by the judge. They are:

ARCHAMBAULT Moral damages $50,000 Material damages (breach of his psychological integrity) $50,000 Exemplary damages: $1,000,000 ENICO Loss of value of the corporation: $1,400,000 Exemplary damages: $1,000,000 Extrajudicial fees: $350,000 Special fees: (to counsel) $100,000 1. Non-pecuniary damages [ 138 ] The judge evaluated the non-pecuniary damages under two separate headings: moral damages and psychological damages. He considered the latter to fall under physical damages. [ 139 ] Quebec law provides that injury may be bodily, material or moral.

Cinar [39] reminds us of the importance of seeking out the nature of the primary violation, because it is that initial violation, and not its consequences, that must be considered to characterize the injury. The three categories of injury may result in both pecuniary and non-pecuniary damages. [ 140 ] For example, bodily injury may create pecuniary damages (loss of wages) and non-pecuniary damages (suffering). It should be noted that bodily injury may arise from

an act that constitutes a violation of the victim’s physical or psychological integrity. [ 141 ] Material injury (the loss of a business) may create pecuniary damages (value of the business) and non-pecuniary damages (suffering arising therefrom). [ 142 ] To reiterate the remarks of Taschereau, J. from over sixty years ago, moral prejudice includes [ translation ] “any violation of extrapatrimonial rights, such as the right to liberty, honour, one’s name, or freedom of conscience or speech”. [40] For example, injury to reputation constitutes a moral prejudice that may create pecuniary damages (loss of income) and non-pecuniary damages (psychological suffering). [ 143 ] According to current Quebec law, [41] only non-pecuniary losses arising from bodily injury are subject to the ceilings established by the Supreme Court in the 1978 trilogy. [42] [ 144 ] I will therefore review the trial judgment in the context of these decisions, which were followed in Cinar . 1.1 Moral damages [ 145 ] Let us first point out that, for different reasons, the judge dismissed Archambault’s $1 million claim for attacks on his honour and reputation, among other violations, because these damages had to be claimed within a year of the incident.

Archambault’s claim arising from material prejudice, including the fact that he had to cash in his RRSPs, mortgage his house, and so on, suffered the same fate. [ 146 ] With respect to moral damages, the judge indicated that Archambault was also claiming $1 million under this head and referred to paragraphs 441 to 463.2 of the Re-re-re-re-re-amended motion to institute proceedings dated October 22, 2012, which in turn refer to the “Injury to Archambault’s physical and psychological integrity”, points that will be addressed under the head of physical damages. [ 147 ] We may question the exact basis for this claim, knowing that the judge dismissed the claim for defamation and the attack on Archambault’s honour and that non-pecuniary damages connected to a psychological violation would be discussed under the next head.

In short, this claim is made redundant by the next one. [ 148 ] We must therefore intervene with respect to paragraph [1198] of the judgment. 1.2 Physical damages (harm to psychological integrity) [ 149 ] Under this head, the judge attempted to determine the amount of psychological damage suffered by Archambault by equating it to physical damage. [ 150 ] As discussed, in Cinar , [43] which was rendered after the judgement a quo , the Supreme Court reiterates that the characterization of the prejudice must be established according to the violation rather than the nature of the harm suffered.

Accepting Professor Gardner’s position, it deems that “in making this characterization, it is important to look to whether the act that caused the injury was itself a breach of the victim’s physical integrity, rather than to whether the act had an impact on the physical health of the victim.” [44] [ 151 ] In this case, the act was not an attack on physical or psychological integrity but on assets, with psychological consequences, such that it was an error to refer to the ceiling established in the trilogy. [ 152 ] The judge, however, accepted that Archambault had suffered real and direct psychological harm as a result of the dispute and the faults committed by the ARQ.

In some way, his psychological injury arises from the material injury he suffered as the alter ego of the corporation.

[ 153 ] The judge deemed that Archambault should be compensated for the pain and suffering he had experienced. He explained his reasons at length. He accepted that the two experts that were heard were unable to determine when his situation would be crystalized or stabilized. That being said, he accepted that the fixation of a non-pecuniary loss also includes a consideration of the damages, suffering, and inconvenience he suffered. [ 154 ] Despite the judge’s error, there is no cause to intervene at this point with respect to the amount awarded. Intervention is required, however, with respect to the application of

article 1615 C .C.Q ., which applies only to bodily injury. 2. Loss of value of the corporation [ 155 ] Following a meticulous analysis of the evidence, the judge accepted the testimony of accountant Jean Legault on the corporation’s value. He found that Enico had been a profitable business before its problems with the ARQ. The expert Legault assessed the value of the corporation as it was before the events at issue to be between $1.2 and $1.6 million. The judge accepted a median value of $1.4 million.

On August 31, 2009, its value was non-existent. [ 156 ] Thus, the judge deemed the expert report presented by the appellants to lack credibility and to be accommodating, and he explained himself clearly, providing numerous reasons in support of his conclusion.

He accepted, inter alia , that the appellants’ expert: (1) systematically dismissed all the elements in favour of Enico’s theory, including those he admitted were relevant (e.g., tax credits due to the corporation); (2) was reluctant to admit that the October 2007 notices of assessment had a direct impact on the availability of tax credits and Enico’s funding; (3) completely failed to address the possible impact the ARQ’s seizure had on Enico’s financial situation and was reluctant to admit this impact during his examination; (4) addressed only Enico’s weaknesses in his report. [ 157 ] It was up to the trial judge to assess the testimony of the two experts and assign probative value to them. [45] Absent a palpable and overriding error, his determinations are not subject to review. 3.

Punitive damages 3.1 The right to punitive damages [ 158 ] The judge condemned the appellant to pay Archambault and Enico $1 million each in exemplary damages. [ 159 ] In his view, the ARQ’s conduct constituted unlawful interference with the right of all persons to the peaceful enjoyment and free disposition of their property, within the meaning of

section 6 of the Charter of human rights and freedoms [46] because the tax credits were owed to Enico and should not be considered a mere claim. [ 160 ] The judge asserted that when an individual can, despite many obstacles, demonstrate the wrongful conduct of the state, the objectives of punishment, deterrence and denunciation set out under

article 1621 C .C.Q . must be pursued. He pointed out that it was abnormal for taxpayers to find themselves obliged to address the courts to obtain information the ARQ had a duty to give them. He determined that the violation of Archambault and Enico’s fundamental rights was intentional and deliberate within the meaning of

section 49 of the Charter . On this point, he found that unlawful and intentional interference included [ translation ] “cases where the offender acted with full knowledge of the immediate and natural consequences, or at least the extremely probable consequences, that his or her conduct would cause”. [ 161 ] The judge pointed out the flagrant power imbalance between the appellants and the respondents, the latter having gone through real difficulties accessing justice due to the cost of a trial.

Respecting the quantum, he found that all the applicable factors argued in favour of a significant award, likely to have a certain social significance and real consequences. He explained that this award had to be in favour of the two respondents, who were both victims of the ARQ’s intentional fault, because Archambault is Enico’s alter ego. * * * * * [ 162 ]

Article 1621 C .C.Q . states the conditions for the awarding of punitive damages: 1621. 1621. Lorsque la loi prévoit l'attribution de dommages-intérêts punitifs, ceux-ci ne peuvent excéder, en valeur, ce qui est suffisant pour assurer leur fonction préventive.

Ils s'apprécient en tenant compte de toutes les circonstances appropriées, notamment de la gravité de la faute du débiteur, de sa situation patrimoniale ou de l'étendue de la réparation à laquelle il est déjà tenu envers le créancier, ainsi que, le cas échéant, du fait que la prise en charge du paiement réparateur est, en tout ou en partie, assumée par un tiers. 1621. 1621. Where the awarding of punitive damages is provided for by law, the amount of such damages may not exceed what is sufficient to fulfil their preventive purpose.

Punitive damages are assessed in the light of all the appropriate circumstances, in particular the gravity of the debtor's fault, his patrimonial situation, the extent of the reparation for which he is already liable to the creditor and, where such is the case, the fact that the payment of the damages is wholly or partly assumed by a third person. [ 163 ]

Section 49 of the Charter provides that punitive damages may be awarded where there is intentional and unlawful interference with a right or freedom recognized by the Charter . [ 164 ]

Section 6 of the Charter provides for the right of any persons to the “peaceful enjoyment and free disposition” of their property:

6. Toute personne a droit à la jouissance paisible et à la libre disposition de ses biens, sauf dans la mesure prévue par la loi. 6. Every person has a right to the peaceful enjoyment and free disposition of his property, except to the extent provided by law. [ 165 ] The judge was not wrong when he decided that, in the circumstances of this case, the tax credits were “property” within the meaning of

section 6 of the Charter .

Section 6 applies to the property of a natural person as much as that of a legal person. [47] It is indisputable that Enico was owed the tax credits, and the ARQ actually issued notices of assessment confirming this. The fact that the ARQ appropriated the tax credits the way it did violated

section 6 . But there is more. The unwarranted seizure of Enico’s bank account, the excessive number of notices of assessment for exorbitant amounts leading to the corporation’s demise, and the very act of obtaining the 2013 judgment (even though, at the time, the damage to Enico had already been done) – all these manoeuvres harmed Enico’s patrimony and made any chance of recovery impossible, in circumstances that also violated

section 6 of the Charter . These abusive and deliberate actions effectively brought about Enico’s ruin and thereby constituted direct damage to its property in that they directly affected the corporation’s right to its peaceful enjoyment. [ 166 ] The Supreme Court offered a clear definition of the notion of intentional violation. First, in Quebec (Public Curator) v. Syndicat national des employés de l’Hôpital St-Ferdinand [48] in which the Court specified that the intent to commit a wrongful act should not be confused with the intent to cause the consequences of that act. The Court then added the following: 121.

Consequently, there will be unlawful and intentional interference within the meaning of the second paragraph of s. 49 of the Charter when the person who commits the unlawful interference has a state of mind that implies a desire or intent to cause the consequences of his or her wrongful conduct, or when that person acts with full knowledge of the immediate and natural or at least extremely probable consequences that his or her conduct will cause. This test is not as strict as specific intent, but it does go beyond simple negligence.

Thus, an individual’s recklessness, however wild and foolhardy, as to the consequences of his or her wrongful acts will not in itself satisfy this test. [ 167 ] The Court more recently reaffirmed this principle in Cinar . [49] [ 168 ] It is appropriate to repeat the trial judge’s reasons respecting the occurrence of an intentional violation, which he connected to an abuse of right and the knowledge of the immediate and extremely likely consequences of damage that may be suffered by a taxpayer known to be vulnerable: [ translation ] [1083] As in Markarian v.

Marchés mondiaux CIBC Inc ., by using its power to appropriate the tax credits as explained in this judgment, the ARQ took the law into its own hands. It had a powerful weapon, which it had to wield reasonably and refrain from abusing. Because the ARQ knew of the weakness of the audit results, it should have shown elementary caution. The appropriation and its duration implied that the ARQ was aware of the immediate and natural, or at least extremely probable, consequences of the damages that would ensue. … [1098] The Court must also consider the hierarchical level at which these decisions were made.

The top managers of the departments concerned were informed of the situation. They all acted as if their power was limited to a portion of the file and thus none of them could redirect the file, even knowing of the faults and the consequences thereof. This aspect of the case is worrisome. The ARQ and its managers were entirely familiar with the Enico file.

For them, it was a file that should have been taken on by a manager who had the power to intervene quickly. [1099] In a field where the time taken to act is fundamental, it was not appropriate to pass the buck, as was done here. [1100] Taking into account the preventive and deterrent role, the fact that hundreds, even thousands, of taxpayers may have rights to assert with the ARQ must be taken into consideration at the highest level. … [1102] The Court must also consider the vulnerability of the taxpayers at issue.

From the moment notices of assessment or draft notices are issued, as in this case, it is necessary to be consistent. Because it was known that the notices would be revised as of October, one month after they were issued , the ARQ should not have acted as if it did not know. ... The vulnerability of Enico and JYA was largely known by the ARQ and was greatly increased when, not happy with allowing the bloated assessments to lie dormant, the ARQ decided to appropriate the credits despite the obvious upcoming review of the notices. Enico’s vulnerability was becoming too obvious to deny.

This vulnerability had a direct impact on the highly foreseeable nature of the ARQ’s conduct. [1103] It is abnormal for taxpayers to have to present motions and address the courts to obtain information the ARQ had a duty give them.

Acting this way was entirely deliberate and the consequences of this conduct violated Enico’s right under sections 6 and 49 of the Quebec Charter of human rights and freedoms whereby all persons are entitled to the peaceful enjoyment and free disposition of their property. [1104] This violation is intentional in that it denotes a will to keep the taxpayer in the dark, with full knowledge of the immediate consequences of its conduct. 1105 The same is true regarding all aspects of the seizure.

The Court has carried out a detailed analysis of this aspect of the file and everything concerning Boucher’s role during the proposal in bankruptcy. (Emphasis in original.) [ 169 ] These conclusions are amply supported by the evidence and are not tainted by any palpable and overriding error justifying this

Court’s intervention. [ 170 ] Finally, the appellants’ argument that some of the legislative provisions allow the ARQ to withhold tax credits must be dismissed. Insofar as it has been decided that the ARQ abused the rights conferred upon it by sections 31 and 31.1 T.A.A ., it can no longer argue that the violation arising from this conduct was [ translation ] “provided by law”. [ 171 ] The conditions for awarding punitive damages to Enico were therefore met. [ 172 ] The judge also awarded punitive damages to Archambault, without offering much in the way of reasons.

As the appellants have pointed out, the tax credits withheld by the ARQ were Enico’s. The fact that Archambault was Enico’s alter ego does not entitle him to receive punitive damages for the violation of a fundamental right belonging to his business. I would therefore intervene on this issue. [ 173 ] Furthermore, the trial judge erred in law by condemning the appellants jointly and severally to pay punitive damages.

In Cinar , the Supreme Court established that “punitive damages cannot be awarded on a solidary basis under the Charter ”. [50] Moreover, there is nothing to show that the appellant Attorney General of Quebec or one of its employees was involved in any way whatsoever with the acts the judge attributed exclusively to the ARQ or its employees. The condemnation to pay exemplary damages should therefore be against solely the ARQ, which is n

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