R. v. Lombardo Date:, 2011 BCPC 177

Citation: R. v. Lombardo Date: 20110221 2011 BCPC 0177 File No: 662-1 Registry: Vancouver IN THE PROVINCIAL COURT OF BRITISH COLUMBIA REGINA v. MARCELLO LOMBARDO RULING ON VOIR DIRE REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE W.F.W. YEE Counsel for the Crown: M. Erina, D. Meneley Counsel for the Defendant: C. Sturrock, N. Reid Place of Hearing: Vancouver , B.C. Date of Hearing: February 21, 2011 Date of Judgment: February 21, 2011 INTRODUCTION [ 1 ] THE COURT: The accused, Marcello Lombardo, is charged under ss. 239(1)(

a) and 239(1)(

d) of the Income Tax Act and 327(1) (

a) and 327(1)(

c) of the Excise Tax Act as set out in Robson Court Information 662. [ 2 ] A voir dire is held to determine the application by defence for: (

a) a stay of proceedings pursuant to common law or under s. 24(1) of the Charter ; (

b) alternatively an exclusion order of the evidence; or (

c) an order setting aside all search warrants and production orders issued in the course of the investigation on the basis that there were abuses of the applicant's Charter rights, the improper utilization of the civil audit powers under s. 231.1 of the Act in a criminal investigation which led to the pending criminal charges. AGREED STATEMENT OF FACTS

[ 3 ] The agreed statement of facts for the voir dire contains the following facts. Lombardo operated a restaurant, Marcello Ristorante & Pizzeria, through his company, 581787 B.C. Ltd., which I will be calling as the numbered company. The restaurant was located at 1404 Commercial Drive, Vancouver, B.C. Lombardo resided at 2-1704 Kitchener Street, Vancouver, B.C. The residence is located on the second floor of the same building and that house is the restaurant. [ 4 ] The numbered company is a B.C. company that was incorporated on March the 18th, 1999. Lombardo was the sole director of the numbered company.

On May 13th, 2009, the numbered company changed its name to Marcello Ristorante & Pizzeria Ltd. [ 5 ] Mario Montagano is the chartered accountant who operated the accounting firm, Mario Montagano Ltd. Isabelle Klein [phonetic] is a certified general accountant who worked as an associate at the accounting firm. The numbered company and Mr. Lombardo were clients of the accounting firm. The business premises of the accounting firm was 880, 1500 West Georgia Street, Vancouver, B.C. [ 6 ] Lily Cao is a CRA officer and was the main investigator assigned to the investigation therein.

Jurgen Leske is a CRA officer and was Lily Cao's team leader. Lily Cao and Jurgen Leske were members of the enforcement division of the Vancouver Service Tax Office of the CRA. The mandate of the enforcement division is to investigate offences under the Income Tax Act and Excise Tax Act . [ 7 ] The restaurant used an electronic point of sale system, in short called a POS, to record sales. The POS consisted of three data entry terminals on the restaurant floor that were networked to a computer in the restaurant office. Servers enter their sales into the POS at the data entry terminals.

Sales entered into the POS were automatically stored on the POS server hard drive. [ 8 ] This information included the particulars of each sale such as the name of the server, the bill number, the date and time the bill was opened and closed, the number and nature of the items purchased, the cost of the items purchased, and the associated GST and liquor tax, the amount of the tip, and how the bill was paid, i.e., whether cash, Visa, MasterCard, or Amex. [ 9 ] Lombardo generated reports from the POS that he used to manage the restaurant's financial affairs.

Examples of these reports are as follows: POS gross transaction report for October 1st, 2004; POS gross transaction report for January 5, 2007, to January 31st, 2007; POS gross employee cashed-out report for October 1st, 2004; POS gross employee cash-out report for October 1st, 2004, to September 30th, 2005. [ 10 ] Servers generated customer bills from the POS. Servers used sales reports from the POS to reconcile their daily sales.

An example of this report is in tab 37 of the voir dire binder. [ 11 ] On August 29th, 2008, Lily Cao applied for a warrant to search the accounting firm, the residence, and the restaurant. The Information to Obtain that Ms. Cao swore in support of the application is in tab 23 of the voir dire binder. Judicial Justice of the Peace E.E. Bowes, or Bowes, issued a warrant, a copy of which was in tab 24 or 26 of the voir dire binder. [ 12 ] On October 8th, 2008, Lily Cao applied for a warrant to search the accounting firm.

The Information to Obtain that she swore in support of the application is at tab 27 of the voir dire binder. JJP Maihara issued a warrant, a copy of which is at tab 28 of the voir dire binder. [ 13 ] September 4, 2008, CRA investigators executed a search warrant for the accounting firm and seized the records in binders 21, tabs 1 to 25.

On October 8, 2008, CRA investigators executed a second search warrant for the accounting firm and seized the records in binder 2. [ 14 ] On September 4, 2008, CRA investigators executed a search warrant at the restaurant and seized items that included an electronic copy of the POS data stored on the POS server, a Mac Notebook computer belonging to Lombardo, and the documents in binders 3, 4, and 10. [ 15 ] On September the 4th, 2008, CRA investigators executed a search warrant for the residence and seized documents pertaining to Lombardo. [ 16 ] The CRA served the following financial institutions with a production order that Lily Cao obtained pursuant to s. 476.012 of the Criminal Code .

The purpose of these production orders was to obtain financial records pertaining to Lombardo from the Royal Bank of Canada, CIBC, MBNA Canada Bank. [ 17 ] The CRA served the following financial institutions with production orders that Lily Cao obtained on March the 9th, 2009, pursuant to s. 476.013 of the Criminal Code . The purpose of these production orders was to obtain information regarding the accounts held by Lombardo, the numbered company, and three other companies associated to Lombardo, from the Royal Bank of Canada, CIBC, and Coast Capital Savings Credit Union.

BACKGROUND [ 18 ] The background of this matter, as I see it, is this. Mr. Justice McEwan of the B.C. Supreme Court pronounced his decision with respect to the application by Patricia Lombardo for child support against Marcello Lombardo on February 28th, 2007. [ 19 ] Among numerous findings of fact, Mr. Justice McEwan found that Marcello Lombardo obstructed disclosures, destroyed records, diverted cash, and manipulated the POS system to suppress sales of his restaurant business operated under the numbered company and under the name of Marcello's Pizzeria. On July the 31st, 2007, Mr.

Justice McEwan confirmed the findings of his first judgment and mentioned in the decision that admissions had been made by Mr. Lombardo of Guidelines income of $470,000. [ 20 ] In the first week of March 2007, Mr. Fjoser, leader of the special enforcement program of Canada Revenue Agency, came across

the first decision of Mr. Justice McEwan and printed a copy and left it on the desk of Mr. Bob Schell who was the workload development officer attached to the enforcement division of CRA at that time. He also left a photocopy of the newspaper

article regarding this same case of March the 3rd, 2007, with a Post-it note which reads, "Use

article to tie in with the court decision" on Mr. Schell's desk on the Monday following. [ 21 ] Mr. Walter Ko, one of the workload development officers attached to the audit division of CRA, found a copy of Mr. Justice McEwan's decision on his desk. [ 22 ] After reading the judgment, Mr.

Ko prepared a screener's report to the auditor for the file in August of 2007 containing the following: Shareholder appropriated takeout cash sale in prior years and is now indebted to the corporation in the amount of $200,000, "see court case," review current years for understated cash sales and appropriation, review source of shareholder's loans to the corporation, reveal all cash purchases and source of cash. [ 23 ] Ms.

Sun Shin, an auditor at the Vancouver Tax Service Office, overseeing compliance to Income Tax Act and Excise Tax Act was assigned to audit the numbered company for the taxation year from 2004 to 2006. Ms. Shin made initial contact with Mr. Lombardo and Mario Montagano Ltd, the accounting firm for Mr. Lombardo, with regard to the audit on January 18th, 2008. [ 24 ] She conducted her initial interview with Mr. Lombardo at the restaurant, toured the premises, inspected capital assets, and layout of the cash register system as well as the Squirrel System of recording sales, and met with Mr.

Mario Montagano, copied the accounting soft copy on January 29th, 2008. [ 25 ] She examined both the basement and the second floor of the restaurant and determined that Mr. Lombardo occupied the upper floor as his living quarters and that the rent was paid by the corporation and was debited to his shareholder's loan on February 7th, 2008. [ 26 ] Ms.

Shin obtained the 2005 and 2006 bank statements; sample deposits; logbook; endorsements from vendors for the usage of the car; 2005 and 2006 monthly sales report; 2005, May 24 to 31st, detailed sales report; sample lawyers' invoices; and other documents on February 22nd, 2008. [ 27 ] On March the 26th, 2008, Ms. Shin discussed with her team leader, Mr. Gus Lu, as to whether the audit should be expanded to include 2007. Ms.

Shin testified that it was upon the receipt of presentation of the findings from the Electronic Commerce Audit Specialist division, known as ECAS, that she became aware that there was a possibility of fraud. [ 28 ] On April 23rd, 2008, Ms. Shin discussed her audit with Mr. Lu and was agreed that the file should be referred to the investigation division and a T134 was made on that day. [ 29 ] Ms. Lily Cao, an investigator with the enforcement division at the Vancouver Tax Service, was assigned to the Lombardo file on April the 24th, 2008, with the T134 referral together with the attachment from Mr.

Bob Schell, the workload development officer of the enforcement division of CRA. [ 30 ] After her interviews with Ms. Shin and Mr. Lu on May the 21st, 2008, and with the members of the ECAS team involved in retrieving electronic data obtained from the audit process in June of 2008, Ms. Cao was able to obtain all the information and documents to commence her investigation. [ 31 ] On August the 29th, 2008, Ms. Cao swore an Information to Obtain of three warrants under s. 487 of the Criminal Code .

Subsequently, on October 7, 2008, she swore another Information to Obtain attaching the previous Information to Obtain as an exhibit. [ 32 ] Pursuant to those warrants, CRA was able to seize documents from the restaurant on Commercial Drive, accounting records from the office of the accountant as well as from Mr. Lombardo's residence. [ 33 ] Execution of the search warrants eventually led to the issuance of production orders against various financial institutions culminating to the notices of reassessment having been issued to Mr.

Lombardo personally as well as to the numbered company which had since changed its name to Marcello's Pizzeria & Ristorante Ltd. [ 34 ] The reassessment for the company came to about $900,000 of unreported cash sales for the corporate years, 2005, 2006, and 2007, while the reassessment for individual returns of Mr.

Lombardo came to be more or less the same amount, but for the year 2004 to 2007 inclusive, in addition to the pending criminal charges. [ 35 ] What that meant was that $900,000 was added to the income for the company for those three years and that both federal and provincial income tax, plus non-deductible compound interest based on prescribed quarterly interest rates in addition to the 50-percent penalties, had to be paid. The reassessment of the company also resulted in payments for GST.

Other than that, the same applies to Lombardo personally with the exception that the reassessment was for four years instead of three. [ 36 ] The result of the assessment together with the double-tax interest and penalties came to about $1.5 million. Defence takes the position that CRA was engaged in a criminal investigation right from the outset and, as such, has breached the defendant's s. 7 and 8 Charter rights that form the basis for this application.

POSITION OF CROWN [ 37 ] The Crown takes the position that the criminal investigation began after the T134 referral which was April the 23rd, 2008, and therefore there were no breaches of the defendant's Charter rights. Alternatively, if there was a shift from the audit to criminal investigation, it was on March the 20th, 2008, when Mr. Fines of the ECAS division requested Ms. Shin to obtain further information so he could substantiate his findings of suppressed sales.

[ 38 ] The Crown submits that if this is indeed the finding, it would not affect the outcome of the POS data which formed the basis of Ms. Cao's Information to Obtain which would have already been received by Ms. Shin prior to that point. Specifically, Crown submits that redaction of references to what occurred after March 20th, 2008, in the two Informations to Obtain of Ms. Cao would not in any way affect their issuance which meant that the evidence were legally seized.

ANALYSIS [ 39 ] Both Crown and defence agree that the overriding authority for the court for this voir dire is the decision of the Supreme Court of Canada in the case of Jarvis , a 2002 decision. The important question for the court to decide is, in consideration of the totality of the circumstances of this case, at what point in time did CRA commence its criminal investigation. [ 40 ] The most unique fact in this case is that the action of CRA was triggered by the decision of Mr. Justice McEwan of the B.C. Supreme Court of February 20th, 2007.

The Crown characterized what CRA did in this case as "a routine tax audit triggered by a civil judgment." [ 41 ] However, I find the characterization to be overly simplified in two aspects. The first oversimplification has to do with the judgment on Mr. Justice McEwan. Unlike those judgments involving child support hearings where the court is simply asked to impute income for a payer spouse based on whatever evidence that may be presented, Mr.

Justice McEwan's judgment in this case was made after 55 days of hearing over some 18 months. [ 42 ] His findings of fact were made after hearing from many witnesses including employees who worked in Mr. Lombardo's restaurant. His conclusions of Mr. Lombardo having diverted cash revenue of his restaurant business by using handwritten bills to avoid entering those transactions into the POS system, by holding cheques open until the end of the day so only credit card sales would be entered, and by manipulating the POS system in reducing the amount of sales.

Short of being in a position to calibrate the amount of tax owing to CRA due to the lack of records from Mr. Lombardo, Mr. Justice McEwan was able to determine the amount of suppressed income for the period he was dealing with which came very close to the amount the CRA assessed after having concluded the audit and the seizure of accounting and other financial documents. [ 43 ] More importantly, Mr. Justice McEwan again reaffirmed his earlier findings with respect to Mr. Lombardo's liberty to apply in July of 2007 which contain admission by Mr.

Lombardo himself of a much higher amount of income than originally declared. [ 44 ] The second oversimplification has to do with the way the audit was carried out which was certainly not routine. Mr. Ko's evidence was that he assigned the file for audit after having read the judgment of Mr.

Justice McEwan, unlike most of the files which are either generated by CRA's computer program when irregularities in filed returns are detected or the files that are open upon receipt of allegations of certain wrongdoing from some other informers. [ 45 ] In those cases, if the workload development officer decides to assign any of those files to audit, the screeners' comments would likely and logically reflect the irregularities detected or allegations made by the informers. However, in the circumstances of this case, Mr. Ko appeared to have accepted the significance of the findings of Mr.

Justice McEwan and simply chose to direct the auditor to zero in on the areas of the audit to determine the amount of the suppressed sales as reflected in the screeners' comments. [ 46 ] It really is the case where the work for the auditor was aimed to confirm the means by which the sales were suppressed and the amount of cash being diverted. Viewed from this perspective, it cannot be said that the file assigned to Ms. Shin for audit was a routine audit. [ 47 ] It is fair to say that the findings of fact of Mr.

Justice McEwan were made in a civil proceeding pertaining to an application for child support and thus all the findings of fact were made pursuant to a civil standard on a balance of probabilities and not the higher standard for criminal cases of beyond a reasonable doubt. [ 48 ] However, his findings that Mr. Lombardo having destroyed business records, diverted cash, and manipulated the POS system to suppress sales are certainly sufficient to constitute reasonable and probable grounds for CRA to commence a criminal investigation of Mr. Lombardo under the Income Tax Act and the Excise Tax Act .

As stated in paragraph 89 of the Jarvis decision: In most cases, if all ingredients of an offence are reasonably thought to have occurred, it is likely that the investigation function is triggered. [ 49 ] The Crown argues that the findings of Mr. Justice McEwan in the first judgment relate to the time period between 1999 and 2003 and not the period of the subject of the charges at bar and therefore no reasonable grounds to lay charges existed. However, close examination of the judgment shows that by comparing the cash-to-credit ratio of sales at Marcello's, Mr. Justice McEwan actually calculated Mr.

Lombardo's income for 1999 through to February of 2007. [ 50 ] More importantly, Mr. Justice McEwan's second judgment of July the 31st, 2007, not only confirmed the findings of his first judgment, the amount of suppressed sales at Marcello's that he inferred turned out to be very close to the amount reassessed to him after the audit. Considering the above and the admission made by Mr. Lombardo in his affidavit in that liberty to apply, it is clear that there were reasonable grounds for CRA to conclude that offences had been committed by August of 2007. [ 51 ] The evidence from Mr.

Ko is that he does not know how the first judgment of Mr. Justice McEwan got on his desk. However, it is clear that Mr. Fjoser was the person in CRA who first became aware of this judgment and then made a copy of it and left it on the desk of Mr. Bob Schell. Upon seeing a newspaper

article about the decision, Mr. Fjoser also made a copy of that

article and left it on Mr. Schell's desk with a note. According to him, Mr. Schell was "the appropriate person" to decide either to keep the matter in enforcement for investigation or to pass it on to the audit division. [ 52 ] Mr. Schell, while acknowledging having received both the judgment and the newspaper

article on Lombardo from Mr. Fjoser, testified that after having read them simply left them in a folder. The only thing that he remembered about the materials he received was

that after the T134 referral was made, he gave the package to Ms. Cao in April of 2008. [ 53 ] I have to say that I have a lot of difficulty with Mr. Schell's evidence that he took no action after having read the judgment of Mr. Justice McEwan and the newspaper

article about Lombardo for the following reasons. Mr. Schell was the only workload development officer for the enforcement division at the time and it was his job to either pass the file on to the audit division or to commence investigation as testified to by Mr. Fjoser. [ 54 ] The fact that Mr. Ko made the decision to assign the file for audit after having gone through the same judgment again suggests that Mr. Schell's decision not to take any action is neither reasonable nor practical or probable. It is noted that the Crown has argued against concluding from the evidence that Mr.

Schell was not involved in the clandestine action in planting the judgment on Mr. Ko's desk for a purpose of getting the audit as its enforcement agent. [ 55 ] However, when the following factors and circumstances are considered, I am prepared to infer that to be the case. Firstly, Mr. Schell's inability to recall the important meetings that the auditors and the members of the ECAS team members of April 16 and with Ms. Cao and others on May the 21st, 2008, but he was able to remember and to provide after the T134 referral to Ms. Cao, the judgment and newspaper

article about the judgment which he allegedly took no action of any sort for 13 months is highly suspicious. [ 56 ] Mr. Schell stated that he may have seen Mr. Ko only two or three times in the two years; that he does not know or recall that Mr. Ko was one of the workload development officers for the audit division. Given Mr. Schell's 30 years of service and Mr. Ko's 35 years of service in the Vancouver CRA office prior to their retirements and the fact that one of Mr. Schell's responsibility was to liaise with the auditors and their team leaders on a weekly basis, it seems preposterous that he does not know Mr.

Ko was his counterpart in the audit division. [ 57 ] It appears from all the above that Mr. Schell is trying unreasonably hard to leave the court with the impression that he does not know Mr. Ko and, therefore, he would not be the one who would have dropped the judgment on Mr. Ko's desk. The evidence is that Mr. Fjoser read the judgment and that he thought that there should either be a referral for audit or a criminal investigation. There is also no dispute that Mr. Ko read the judgment and, as a result, the file was assigned for audit, but Mr.

Schell, being the only workload development officer for the enforcement division at the relevant time testified that he did not do a thing after reading the judgment of Mr. Justice McEwan and the newspaper

article for a period of 13 months. This is simply not believable. [ 58 ] The timing of the judgment found on the desk of Mr. Ko in August of 2007 happened to be the time when Mr. Justice McEwan would have dealt with the liberty to apply by Mr. Lombardo suggests that it was done by someone who was following the case. Since Mr. Schell did not initiate a criminal investigation of Mr. Lombardo or refer the file for audit, it appears likely that he would be keeping an eye out on the result of the liberty to apply hearing decision. [ 59 ] It is noted that Mr. Ko acknowledged that the copy of Mr.

Justice McEwan's judgment placed on his desk to have a yellow stickie containing a reference number with a B before it means that the notation was made by somebody from within CRA. Of course, this by itself does not prove that Mr. Schell was the author of the note or that he has anything to do with the placement of the judgment on Mr. Ko's desk. [ 60 ] The evidence from Mr. Fjoser is that once the judgment was left on Mr. Schell's desk for Mr. Schell to decide what to do with the file, he had nothing further to do with the matter. So that would mean only Mr. Schell would have a copy of the first judgment of Mr.

Justice McEwan. While it is true that someone else in CRA could have printed off the judgment just around the time that his second judgment came about in August of 2007, but what would be the odds of that happening? [ 61 ] Even if it was the case that someone else in CRA happened to be aware of this decision of Mr. Justice McEwan around August of 2007 and decide to alert someone in CRA to follow it up, it would be more logical to have the second judgment printed instead. [ 62 ] Finally, given Mr.

Lombardo's admission of having failed to have all the income made in his affidavit on the liberty to apply, it would appear to be more likely than not that the person from CRA would be leaving it on the desk of Mr. Schell since he was the only workload development officer for the enforcement division rather than on the desk of an auditor like Mr. Ko. [ 63 ] As mandated by the decision of the Supreme Court of Canada in Jarvis , I now apply the two-step analysis to determine what CRA was doing in the circumstances of this case.

With respect to the first step, this court needs to decide whether there was a clear decision made to investigate criminally. [ 64 ] The evidence by Mr. Schell was that he simply put the material in a folder and filed it in his filing cabinet after having received and read the judgment of Mr. Justice McEwan and the newspaper article. According to the Crown, Mr. Schell made a conscious decision not to investigate.

Either way, the answer to that question is clearly a big no. [ 65 ] The second step of the analysis involves consideration of the totality of the circumstances to decide penal liability. [ 66 ] I now apply the evidence of this case to seven factors as suggested by the court in the Jarvis case. Question 1: Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made? [ 67 ] The answer from Mr. Schell or the evidence from Mr.

Schell was that he took no action whatsoever after he was made aware of the decision of Mr. Justice McEwan. The Crown suggests this court should accept Mr. Schell's decision not to "push forward into enforcement for further action" to mean no criminal investigation could have been made. [ 68 ] However, Mr. Fjoser, after having read the first judgment of Mr. Justice McEwan, believed the CRA should either do an audit or investigate. In addition, Mr. Ko after having read the same judgment felt obliged to commence an audit. [ 69 ] Considering the judgment of Mr.

Justice McEwan containing essentially findings of tax evasion on the part of Mr. Lombardo as

well as the respective actions taken by Mr. Fjoser and Mr. Ko after having read the same judgment, it would appear that Mr. Schell's inaction or Crown's position of him having made the decision not to investigate is both unreasonable and improbable, particularly if one is to consider his years of experience and his position in the enforcement division. [ 70 ] Based on my earlier analysis of Mr. Justice McEwan's first judgment, I am of the view that CRA had reasonable grounds to proceed with a criminal investigation after it was pronounced in February of 2007.

By the time his second judgment on liberty to apply was rendered in July of 2007, the agency certainly had reasonable grounds to lay charges or at least charges could have been made at that point in time. [ 71 ] Question 2: Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation? As I understand it, the defence is not challenging the right of the CRA to use its powers under s. 231.1 and 231.2 of the Income Tax Act to conduct the audit and all of the results of the audit which led to the reassessment and imposition of penalties on both Mr.

Lombardo and his company. [ 72 ] The position of the defence is that the CRA cannot use its civil audit powers while conducting a criminal investigation in violation of Lombardo's Charter rights and thus any materials so obtained cannot be used in this criminal proceeding. Mr.

Ko's comment worksheet of August 2007 with reference to $200,000 appropriated cash sales, reviews of understated cash sales, and the source of shareholder's loans, all cash purchases, and source of cash are comments of direction to the auditor which are consistent with the pursuit of a criminal investigation. [ 73 ] Question 3: Has the auditor transferred his or her files and materials to the investigators?

The inference I drew after my analysis of the evidence was that the file was in essence an informal referral from enforcement in August of 2007 to audit before it was officially referred back to enforcement in April 2008. It is also clear from the evidence of Ms. Shin that she turned over everything to Ms. Cao upon the T134 referral having been made. [ 74 ] Question 4: Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators? The T134 clearly shows that the auditor, Ms.

Shin, was following the screeners' comments in obtaining the POS data and other records from Lombardo and with the assistance from ECAS to verify the suppressed sales for the audit year to be in the amount of $900,000. [ 75 ] It is also clear that Ms. Cao, who was assigned to investigate after the T134 referral, after only having prepared two Informations to Obtain, executed a number of search warrants and its issuance of production orders, was able to conclude her investigation.

This would suggest that the audit department was effectively acting as an agent for the investigator. [ 76 ] Question 5: Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence? Given the inference I drew from the evidence that it was Mr. Schell who caused Mr. Justice McEwan's first judgment to be left on the desk of Mr.

Ko, the obvious answer to that question is a yes. [ 77 ] Question 6: Is the evidence sought relevant to taxpayer liability generally or, as is the case with evidence as to the taxpayer's mens rea , is the evidence relevant only to the taxpayer's penal liability? [ 78 ] I am satisfied that on the evidence that Ms. Shin genuinely believed that she was performing an audit of Mr. Lombardo's restaurant business and that she does not know what " mens rea " meant. She obviously had no clue as to when or how Mr. Ko got hold of the judgment of Mr.

Justice McEwan and that she did not have sufficient training or experience to know that the file was clearly a criminal matter. [ 79 ] To be fair, the information and evidence she obtained through the compliance order certainly were relevant both to Mr. Lombardo and his company's general tax liability as well as to Mr. Lombardo's penal liability. The problem is in the way the judgment was caused to be placed on Mr.

Ko's desk which amounted to a referral from the enforcement division which led to the audit to be done. [ 80 ] Question 7: Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance order had in reality become a criminal investigation? The judgment of Mr. Justice McEwan pronounced in February and July of 2007, the unreasonable and improbable explanation by Mr. Schell of his inaction after having received the first judgment until the T134 referral, the mysterious way the judgment appeared on Mr.

Ko's desk considered together lead me to infer that the compliance order was in essence a criminal investigation right from the beginning. [ 81 ] Since the evidence clearly shows that in performing her audit, Ms. Shin failed to give the accused any warning or advise the accused of his rights to counsel, the accused's s. 7 and 10(

b) Charter rights were violated, I therefore find the statements, documents, and electronic records obtained by Ms. Shin by use of the civil audit powers were obtained in breach of s. 7 and 8 and in violation of s. 231.5 of the Income Tax Act. [ 82 ] As a result of the breaches, defence submits that the prejudice caused by the abuse in question will be manifested, perpetuated, or aggravated through the conduct of the trial or by its outcome and, therefore, a stay of proceedings is warranted.

Alternatively, the evidence ought to be excluded on the basis that admission of the evidence would bring the administration of justice into disrepute. [ 83 ] Counsel for the defence, in seeking a stay, submitted that CRA's conduct in this case was egregious: 1. Mr. Schell used a surreptitious informal referral to deliberately circumvent the defendant's Charter rights. 2. Ms.

Shin ignored information clearly and obviously justifying a criminal investigation so that she could avoid addressing the issue, while at the same time she used her audit powers in flagrant violation of the defendant's Charter rights and contrary to her authority under the Income Tax Act to collect evidence that she could have and should have known would be used to prosecute the defendant for tax evasion. 3. Likewise, the ECAS auditors, in particular, Mr. Fines, ignored information clearly and obviously justifying a criminal investigation

so he could direct Ms. Shin to use her audit powers to collect particular pieces of evidence that he intended to be, and that from anobjective viewpoint would inevitably be, used to prosecute the defendant for tax evasion. 4. Ms. Shin and the ECAS auditors, particularly Mr. Fines, then passed all of the improperly compelled information to theenforcement division to be used against the defendant in criminal proceedings. 5. Ms.

Cao swore the Information to Obtain the Search Warrant relying entirely on the work product of the audit division wherein shemisled a judicial justice of the peace as to the nature of the findings in the first judgment which she referred to as mere allegations. Shealso failed to inform the JJP that the first judgment had been in the enforcement possession in March of 2007 and the audit division inAugust of 2007. 6. CRA executed illegally obtained search warrants publicly during business hours creating stigma and embarrassment for thedefendant. 7. Mr.

Schell adopted amnesia at the voir dire for the purpose of deflecting this court from enforcement division's participation in thedefendant's file. [84] The defence argues that the above-noted egregious violations of the rights of the accused constitute a clear case of abuse ofprocess by CRA and that the only possible remedy is a stay of proceedings. In R. v. O'Connor, (SCC), [1995] 4 S.C.R.411, our highest court adopted on paragraph 75 the two criteria to be fulfilled before entering a stay of proceedings: 1.

The prejudice caused by the abuse in question will be manifested, perpetuated, or aggravated through the conduct of the trial or byits outcome; and 2. no other remedy is reasonably capable of removing that prejudice. [85] Given the second criteria, it becomes necessary to first consider whether exclusion of all of the evidence obtained by use of thecivil audit powers from the trial pursuant to s. 24(1) and 24(2) of the Charter is capable of removing the prejudice caused by the abuse ofprocess by CRA. In the case of R. v.

Grant, it was held that when faced with an application for exclusion under s. 24(2), a court mustassess and balance the effect of admitting the evidence on society's confidence in the justice system having regard to: 1. the seriousness of the Charter-infringing state conduct; 2. the impact of the breach on the Charter-protected interests of the accused; and 3. society's interest in the adjudication of the case on its merits. [86] The court went on at paragraph 69: Section 24(2)’s focus is not only long-term, but prospective.

The fact of the Charter breach means damage has already been done to theadministration of justice. Section 24(2) starts from that proposition and seeks to ensure that evidence obtained through that breach doesnot do further damage to the repute of the justice system. [87] At paragraph 70: Finally, s. 24(2)’s focus is societal. Section 24(2) is not aimed at punishing the police or providing compensation to the accused, butrather at systemic concerns. The s. 24(2) focus is on the broad impact of admission of the evidence on the long-term repute of the justicesystem.

DECISION [88] There is no question in my mind that the Charter-infringing conduct of CRA in this case is serious. I am particularly concernedwith how Mr. Schell deliberately used the extraordinary audit powers of tax officials by way of informal referral to investigate what heknew or ought to have known to be a case of tax evasion after having read the judgment of Mr. Justice McEwan.

His conduct becomesthat much more aggravating when one considers his duty in CRA included the review of referrals with respect to due diligence or Jarvisissues. [89] I also find his testimony in the voir dire to be problematic when he used "don't recall" answers to many of the questions relatingto his involvement in the audit or the T134 referral.

His conduct alone in this case is sufficient to erode society's trust in the taxauthorities. [90] As there were numerous flagrant breaches, the impact on the accused is far reaching in that the evidence obtained in the auditappears to be essential and reliable in making out the Crown's case against the accused.

At the same time, given the foundation of ourtaxation system relies primarily on an honour system of self-reporting and, when allegations of tax evasion by an operator of a restaurantbusiness for a number of years occur, as in this case, there is a great societal interest in the adjudication of this case on its merits. [91] In balancing all of the above factors, I find that the admission of all of the evidence obtained directly or derivatively by the use ofthe audit powers, including all information and documents, records, and data obtained by search warrants and production orders in thiscase, would bring the administration of justice into disrepute. [92] As I see it, if an order to exclude the admission of all of the evidence obtained from day 1 of the audit in this case is made, theCrown will likely not be in a position to prove the charges against the accused beyond a reasonable doubt which would mean that theprejudice resulting from the breaches would reasonably be removed.

Consequently, I make an order for exclusion of all of the evidenceobtained by use of the civil audit power from the trial as I am satisfied that admission of that evidence would bring the administration ofjustice into disrepute.

[ 93 ] Now, I remember, Mr. Sturrock, you mentioned about costs and I do not know whether that is something you want to pursue given my decision. If the costs issue is raised, then Crown would be at liberty to make submissions. [ 94 ] MR. ERINA: Sorry, just before we get to the costs -- [ 95 ] THE COURT: Yes. [ 96 ] MR.

ERINA: -- just to clarify it, I think the answer, of course, is yes, but Your Honour is also excluding, then, all the fruits of the search warrant done by enforcement, not the direct use of the audit powers appreciating that the audit power -- the fruits of the audit power were used to obtain the search warrants so now, of course, having removed that, the warrants -- I understand Your Honour is making a formal ruling, then, that the warrants are quashed, but also that any evidence obtained by enforcement through the execution of the warrants, that evidence is excluded, as well, just so we are clear? [ 97 ] THE COURT: Yes. [ 98 ] MR.

ERINA: Okay, so that brings us to the issue -- if my friend is pursuing the issue of costs and, if so, I guess we would have to set down a date. I am not prepared to argue -- deal with costs today. [ 99 ] MR. STURROCK: I am not, either, Your Honour, thank you very much, but -- [ 100 ] THE COURT: I did not think it should be pushed, anyway. [ 101 ] MR. STURROCK: Should not be pushed anyway? [ 102 ] THE COURT: Yes. [ 103 ] MR. STURROCK: Thank you, then we will not be seeking that order. [ 104 ] MR. ERINA: All right.

Could I just have five minutes and then -- [ 105 ] THE COURT: Sure, let me know what happens on that, yes. [ 106 ] MR. ERINA: Thank you. [ 107 ] MR. STURROCK: Thank you, Your Honour. [ 108 ] THE CLERK: Order in court. All rise. (PROCEEDINGS ADJOURNED) (PROCEEDINGS RECONVENED) [ 109 ] MR. ERINA: I guess the proper way is to, I guess, if we will proceed with the trial right now and the Crown will call no further evidence and invite Your Honour to acquit and my friend to make a no-evidence motion and that will be that. [ 110 ] MR.

STURROCK: Yes, Your Honour, I make a no-evidence motion. [ 111 ] THE COURT: That is fine. It is granted, so -- [ 112 ] MR. ERINA: Acquittal on all counts. [ 113 ] THE COURT: -- acquittal, yes, on all counts. (RULING ON VOIR DIRE AND REASONS FOR JUDGMENT CONCLUDED)