R. v. Giroux Date:, 2014 BCPC 24

Citation: R. v. Giroux Date: 20140214 2014 BCPC 0024 File No: 74360 Registry: Nanaimo IN THE PROVINCIAL COURT OF BRITISH COLUMBIA REGINA v. SYLVAIN GIROUX CHRISTINE GIROUX RULING ON JARVIS APPLICATION VOIR DIRE OF THE HONOURABLE JUDGE J.P. MacCARTHY Counsel for the Crown: Brian Jones and Robert Gibson Appearing as Agent for George Jones, Q.C., Counsel for S Giroux: David S. Mulroney Counsel for the Accused, Christine Giroux: David S. Mulroney

Place of Hearing: Nanaimo , B.C.

Dates of Hearing: Dec.9, 10, 11, 12, 2013, Jan. 3, 12, 2014 Date of Judgment: February 14, 2014 Introduction [ 1 ] Sylvain Giroux and Ms Christine Giroux (the “Applicants”) are charged summarily on an eight count Information with various tax evasion and false reporting offenses under the Income Tax Act (“ ITA ”) and the Excise Tax Act (“ ETA ”) both personally and in their capacities as directors of their corporation Lyons and Noble Developments Ltd. (“LND”) for a charge period extending between 2006 and 2008. [ 2 ] This matter proceeded before me on a voir dire, following a Vukelich application and based on my reasons stated in R. v.

Giroux 2013 BCPC 330 . Therefore this application is brought by the Applicants for the exclusion of evidence pursuant to the principles enunciated in R. v. Jarvis , 2002 SCC 73 , [“ Jarvis ”] and the companion decision of R. v. Ling , 2002 SCC 74 [“ Ling ”] [ 3 ] The purpose of a Jarvis application is to exclude evidence obtained by government agencies acting in a civil capacity from use in subsequent criminal proceedings. A violation is usually asserted by the applicant of their

section 7 rights of life, liberty and security of person and their

section 8 rights against unreasonable search or seizure, all under the Canadian Charter of Rights and Freedoms (“ Charter ”). [ 4 ] The accompanying remedy is to seek the exclusion of the evidence compelled by the government agency from use in the criminal proceedings, such as tax evasion, pursuant to s. 24(2) of the Charter . [see: Jarvis at paras. 63-72] [ 5 ] In this application the Defence seeks, primarily through cross-examination of the Canada Revenue Agency Auditor Judith Wise [the “Auditor”], to establish that the evidence compelled in the course of an audit by Auditor Wise from each of the Applicants Christine Giroux and Sylvain Giroux and from their accountant, bookkeeper and their suppliers was such that: “the use of that evidence or evidence derivative from it in this criminal prosecution would amount to a violation of their Charter rights.

The rights violated include their rights against self-incrimination and to silence and their rights to be warned thereof, their privacy rights and their rights against unreasonable search and seizure.” [See Applicants’ submissions para 1] [ 6 ] Various statements and records of the Applicants were in fact obtained by the Auditor, as an authorized person for Canada Revenue Agency [“CRA”], in the course of an audit of LND, assigned to and conducted by her under s. 231.1 of the ITA. [ 7 ] Those records and the notes of those statements were subsequently obtained by a CRA criminal investigator, Greg Chan [“Investigator Chan”] after the Auditor referred the matter to CRA’s Enforcement Division. [ 8 ] Crown concedes that a number of those records form the basis of the Crown’s evidence for the trial proper of the offences under the ITA , as well as grounds for the Information to Obtain a search warrant (“ITO”) sworn by Investigator Chan in June of 2011.

Crown further concedes that the statements are also relevant to substantive trial issues. Position of the Applicants [ 9 ] The very crux of the basis for the Applicants’ Jarvis application is stated in the Applicant’s written submissions at paragraph 32: 32. This so-called "audit" was not simply an ordinary attempt to establish that Lyons and Noble Developments Ltd. had incorrectly set out its income and expenses, but it was also, at least after August 30, 2010, which is the initial date, an investigation of the corporation and of Mr. and Mrs. Giroux, aimed at proving that Mr. and Mrs.

Giroux were personally cheating on their taxes by knowingly receiving undeclared benefits, either in the form of personal expenditures or undeclared receipts. [ 10 ] Supplemental to this is the contention of the Applicants that the “pure function” of an audit, in this case being of LND, is to verify “..whether all revenue has been reported and reported correctly and whether all expenses which have been deducted have been deducted in the correct amount and the nature of the expense is such that they were incurred to earn income, so they are properly deductible ...” [See Applicant’s submissions para. 35] [ 11 ] Furthermore as set out in the Applicant’s submissions at para 36: 36.

If on the other hand the Auditor believes or suspects or even thinks there may be erroneous practices worthy of inquiry, but begins making inquiries aimed not at merely verification of the correctness of the expenses, but attempting to establish: a. Who actually recorded those expenses;

b. Were those expenses clearly personal; and c.

Did the person who was recording the expenses or directing the recording of the expenses have sufficient knowledge of the incorrectness of claiming those expenses that the persons actions could be regarded as intentionally wrongful or reckless (such as to attract penalties for intentional or reckless filings), then in respect of a. and c. the audit has strayed into an adversarial relationship where the State is seeking evidence of blameworthiness on the part of the individual and the protections of the Charter are engaged. [ 12 ] The Defence says that the offending evidence that is seeks to exclude was all evidence compelled after the Auditor was hunting for mens rea to assess penalties under s. 163(2) of the ITA .

As further noted below, that

section of the ITA is the basis for assessing civil penalties for false statements or omissions in a return made by a person “knowingly or under circumstances amounting to gross negligence”. [ 13 ] The Defence submits that August 30, 2010 (or after whatever date the Court concludes) is the operative date that delineates that search because it says such was the date that the Auditor endorsed within her audit steps contained on her audit plan the following handwritten notation: "perused electronic data and expense vouchers. Many appear to be personal in nature.

Assess S/H's [shareholder's] knowledge of business expenses in interview. Possible 163(2) penalties." (such notation hereinafter referred to as the “Section 163(2) Penalty Endorsement.”) [ 14 ] Therefore says the Defence such was the date that it can prove the Auditor was hunting for mens rea or intentional wrongdoing by a citizen. Therefore the Applicants’ Charter rights were engaged.

I take it that the Defence believes that the contraventions of the Applicants’ rights also include the right to be warned of their jeopardy. [ 15 ] The Defence further contends that the Auditor may have been hunting for mens rea proof earlier and on additional aspects or methods of income tax evasion as follows: …such as building the residence at corporate expense and/or concealing that in the cost of other jobs, or she may have been looking for intentionally undeclared (underground) income, but in the case of the over-claiming of personal expenses as business expenses and the objective of proving intent, Ms.

Wise reduced that objective to writing and then clearly pursued it in both interviews (the bookkeeper and the accused).

That pursuit should have engaged Charter protection and the State should have relinquished its powers of compulsion at that stage or not used the evidence and statements for a prosecution. [ 16 ] In the alternative or in addition the Defence also submits that the statements made by the Applicants to the Auditor and her team leader at an in person interview conducted on November 4, 2010 of the two Applicants, with their accountant, were involuntary statements made under compulsion and pursuant to threats of prosecution, cost orders or contempt citations and, as such, are inadmissible in a criminal proceeding as involuntary and ought not to have been used as a basis for the obtaining of a warrant. [See Applicants’ submission paragraphs 1 to 4] Crown’s Position [ 17 ] Crown summarizes their position following manner: During the period the Auditor was assigned to the audit of LND, being July 2010 to February 2011, the predominant purpose of her use of civil powers was to obtain information for the purpose of an audit. [ 18 ] It was not until the audit was eventually referred to the Enforcement Division on February 17, 2011 that the matter transformed from a civil audit to a criminal investigation. [ 19 ] Crown says that the principles set out in Jarvis have not been offended.

Therefore, there has been no related breach of any Charter right of either of the Applicants. [ 20 ] Crown further submits that if this Court ultimately rules that there has been an infringement of the Charter : “it will be necessary to proceed to a separate hearing respecting the exclusion of evidence under s. 24(2) of the Charter . If the Applicants seek a remedy pursuant to s. 24(1) of the Charter , the Applicants have failed to provide proper notice pursuant to the Constitutional Questions Act and must be barred from seeking such a remedy.” [see Crown’s submissions paragraph 8] Circumstances The Auditor

[ 21 ] Evidence in the voir-dire was provided by a single witness, namely the Auditor who was examined in chief and also cross examined at great lengths over five days of hearing. [ 22 ] The Auditor holds a Certified General Accountant’s designations and has worked as a CRA Auditor for approximately four years, primarily conducting audits of proprietorships and small companies. She is based at the Vancouver Island Tax Services Office in Victoria. She commonly is involved in more than ten audits each year.

Background to the Audit [ 23 ] The Applicants’ corporation, LND carries on residential construction and construction management for clients mostly requiring custom built homes. [ 24 ] The Auditor was assigned to the audit of LND, by at least July 21, 2010, being a date appearing in the audit plan prepared by her. Her memory as to the exact date was unclear.

Other information contained within her audit file indicates the Auditor may have been carrying out some preliminary work on this inquiry in early July 2010. [ 25 ] On the last day of her testimony, the Auditor confirmed that this inquiry file is what she and her CRA colleagues refer to as “an underground economy file” being one in which CRA is typically “looking for unreported revenue.” [Cross Examination: Judith Wise, January 14, 2014 p. 71 lines 34-44] [ 26 ] It is common ground that the inquiry and resulting audit was triggered by an anonymous informant tip made to CRA and that the Auditor was aware of this tip.

Since the tip and information surrounding it is protected by confidential informer privilege, Crown has conceded that it may be assumed that the Auditor had read the confidential informant tip at the commencement of the audit. The Desk Review and the Audit Plan [ 27 ] Following receipt of the assigned audit of LND from the Work Load Development

Section of CRA, the Auditor started a procedure known as a desk review. This involves a review of various CRA records and other information immediately available to the Auditor, including tax filing databases, and obtaining and reviewing searches of land title records and land transactions, personal property registry searches, searches and inquiries into assets and liabilities, internal CRA risk assessments and credit checks conducted to determine outstanding loans and liabilities.

This information obtained was for LND and also for both Applicants, as the shareholders of LND. [ 28 ] From this information and her desk review, the Auditor subsequently prepared a 3 page audit plan of LND dated August 27, 2010 (the “audit plan”).

It was likely completed by that date and approved thereafter by her CRA team leader around August 30, 2010, that is before the Auditor started any field work activity and the commencement of formal audit procedures. [ 29 ] The audit plan included the Auditor’s own risk analysis of taxpayer non-compliance and listed the 14 steps she planned to be undertaking in the course of completing the audit. [ 30 ] She testified that she considered LND to have a “high risk” of unreported revenue and over-reported expenses in its books and records.

The audit plan also shows a “preliminary assessment of high risk” under the following identified categories: “income tax”, “non-capital losses”, “unreported revenue”, “expenses overstated”, “shareholder loan”, “shareholder benefits” and “non-arm’s length transactions”. [ 31 ] There is a clear indication by way of the Section 163(2) Endorsement hand written on the audit plan that the Auditor intended to assess whether the imposition of s. 163(2) administrative penalties was appropriate.

The Auditor testified that it was her intention to obtain information with respect to the applicability of those administrative penalties. [ 32 ] The typed information in the audit plan contained some of the following information: under the category of “non-capital losses” that in 2008 LND had sustained such loss in the amount of $227,000; under the category of “unreported revenue” that LND had $245,000 in trade payables but no inventory, that the shareholders were not drawing out cash from LND and there were sizeable debt obligations that were being serviced; under the category “shareholder loan” that there had been an increase in that amount but that the shareholders do not report sufficient income; under the category “expenses overstated” that the electronic records suggested numerous personal expenses were claimed against business income; and under the category of “shareholder benefit” that during the audit period shareholders had built a home assessed by B.C.

Assessment Authority at $1.6 million. [ 33 ] From the Auditor’s evidence, we learned that the audit plan can be characterized as an ongoing document and is intended to be used throughout the audit. As the audit progressed the Auditor added to the audit plan a number of handwritten notes regarding matters that turned up in the course of the audit. Auditor’s Communication with the CRA Enforcement Division [ 34 ] Aware of the confidential tip, the Auditor sought access to it around the time she was preparing the audit plan; she eventually gained access to it by means of a Work Load Development

Section managed data base. Initially the appropriate person in that

section was not immediately available and therefore delayed the Auditor’s access. During that access delay, the Auditor attempted to gain that access by contacting an Enforcement Division officer, Terry Finlay. Finlay was unable to provide access to the tip data base. The Auditor says that this brief conversation was the only contact she had with a member of the Enforcement Division until the file was subsequently referred by her for criminal investigation to the Enforcement Division. The Auditor’s Communication with the Applicants [ 35 ] On July 22, 2010 the Auditor first contacted Sylvain Giroux and informed him of the CRA audit of LND. Sylvain Giroux

referred the Auditor to Greg Sabo CGA of Sabo, Jang & Co. Ltd., LND’s accountant based in the Parksville, B.C., to obtain LND’s books and records. The Auditor spoke to Mr. Sabo on that date and then prepared and sent a letter to LND, marked to the attention of Mr. Sabo dated July 23, 2010. It sets out what are described as a “non-exhaustive” list of the books and records that were required for the audit. Nineteen categories of items are listed. The Auditor confirmed that the audit was to commence the week of August 30, 2010 and that a meeting with the directors (being the two Applicants) was to be arranged.

Electronic Information Required and Obtained for the Audit [ 36 ] In early August 2010, the requested electronic records of LND had been delivered to CRA. Thereafter the Auditor received LND’s electronic accounting data through CRA’s “ECAS” division, a group which is responsible for obtaining taxpayers’ electronic records. As I understand the evidence, CRA Auditors do not receive the taxpayers electronic records in the completed format in which it may have been created, using common software accounting packages such as QuickBooks or Simply Accounting.

Rather ECAS extracts the financial information from those types of records and provides the Auditor with the taxpayers the financial information in an Excel spreadsheet format for transfer into a CRA audit program known as WinALS, which also has Excel spreadsheet capabilities for use in analysis that is then undertaken. [ 37 ] As I understand it, as a result of this data transfer, the Auditor received financial information about LND but did not receive the descriptive information that maybe available on the taxpayer’s accounting package.

Hence there was a necessity to obtain original source documents from the LND in order to progress with and to complete the audit. Pre-Interview Activities of the Auditor and Receipt of Further Records [ 38 ] As part of the desk review, the Auditor attempted to conduct an analysis of profitability and a cost of goods sold (“COGS”) analysis using the electronic records that she had received from ECAS.

However she was unable to complete that work without the further source records that had been requested from LND. [ 39 ] The Auditor appears have made the handwritten Section 162(3) Penalty Endorsement on the audit plan on or about August 30, 2010. [ 40 ] At some time she also added a hand written notation stating: “perusal of suppliers’ invoices suggests some have had the ship to address altered/deleted.

Many invoices are photocopies not originals.” A further handwritten addition states: “verify that client was billed for questionable invoices, otherwise, expenses related to building s/h [shareholder’s] residence may be in COGS [cost of goods sold]”. [ 41 ] In other words, the Auditor was noting a risk that Applicants, as shareholders, had built their personal residence with LND funds, which could be an unreported benefit conferred upon the shareholders by LND. [ 42 ] On or about August 31, 2010, the Auditor met with Mr. Sabo at his office.

It was during that meeting she requested an interview with the shareholder or shareholders of LND, being the Applicants. The Auditor testified that purpose of the meeting was for her to gain an understanding of LND’s day to day operations that would assist her in interpreting its books and records. From those discussions, the Auditor gained the impression, whether or not it was actually correct, that the shareholders of LND were reluctant to meet with her. [ 43 ] The evidence indicates that the Auditor received three boxes of various LND source documents from Mr. Sabo’s office on August 30, 2010.

A further “bag of records” was later obtained by the Auditor on September 3, 2010. On September 14, 2010, the Auditor contacted Mr. Sabo in search of further books and records. At that time, the Auditor was still missing LND’s revenue invoices, deposit book, construction contracts, as well as LND’s and the shareholders’ personal credit card and banking statements. [ 44 ] In her testimony, the Auditor characterized her receipt of the required documents as “piecemeal”.

Therefore the 14 steps described in the audit plan were not necessarily carried out by her in the sequential order listed in the audit plan. [ 45 ] There appears to be no accurate inventory created by the Auditor or any CRA record that confirms the actual date of receipt of the documents describe in the Auditor’s July 23, 2010 letter to LND. [ 46 ] Among the bundles of records received were a number of supplier invoices that would subsequently be identified by the Auditor as having been altered from their original form, such that information on them had been “whited out”. [ 47 ] On October 4, 2010, the Auditor through the Mr.

Sabo scheduled an interview with the Applicants for October 27, 2010. The interview was subsequently cancelled by Christine Giroux and rescheduled for November 4, 2010. [ 48 ] On October 8, 2010 the Auditor sent another letter to LND at the same postal address used for the July 23, 2010 letter directed to Mr. Sabo, but which postal address appears from other documents to be that used by LND. [ 49 ] This letter was specifically addressed to the “Directors” of LND. It confirms the November 4, 2010 meeting to conduct an interview of the Applicants.

It also details books, records or documents for both LND and the Applicants that had not been made available. It lists bank statements, cancelled checks and records of deposit for numerous bank accounts, mortgage and purchase documents in support of certain land transactions involving the Applicants, credit card statements and personal expenditure statements for each of the Applicants. The letter also reminds the Applicants of the necessity to submit “all invoices and/or other documentation or contracts to support business expenses”.

An October 25, 2010 deadline for delivery is set. [ 50 ] The October 8, 2010 letter also references applicable sections of the ITA which were being relied upon by the Auditor for the production of this information and in particular

section 231.1. Reference is also made to various sections of the ITA which deal with failure or refusal to comply with the demands being made, and in particular

section 231.7 which deals with Compliance Orders.

[ 51 ] The Applicants complied with the document production demands contained in the October 8, 2010 CRA letter by the October 25, 2010 deadline date. It appears that was with the assistance of Mr. Sabo’s office. [ 52 ] Between October 12, 2010 and October 29, 2010, the Auditor created a number of spreadsheet tables in which to further analyse the high risk areas of concern identified by her. [ 53 ] These spreadsheet tables included:

a) non-deductible advertising and promotion expenses and personal expenses of the Applicants paid for by LND and charged as business expenses,

b) an analysis of the Applicants shareholders’ loan identified for the principal residence to determine whether or not it had been reported in accordance with the ITA ,

c) a profit analysis of projects undertaken for specific LND clients,

d) a continuation of an analysis of COGS for a sample of clients which included matching suppliers invoices to client revenue invoices and which determined that several supplier invoices identified as being for particular clients had never been billed to those clients. [ 54 ] The Auditor testified that the computer program utilized by CRA automatically assigns dates to the various tables that she created to conduct her analysis; that date was the date that the table was first created.

However, she further testified that the work on those tables was not completed on those dates but rather in the course of the audit which continued for several weeks into the latter part of 2010 and certainly following the date of the interview of the Applicants. [ 55 ] She does concede that while she had not analysed all the financial records prior to the interview, she had analysed “a great deal of them” to the extent that she had completed a “very rough analysis” of such things as the profitability analysis.

The Auditor testified that in the course of doing some of her analysis she did not recall looking at supplier invoices prior to the Applicants’ interview, although she did have a recollection of viewing certain RV holiday park expenses. She says that she had not completed the COGS analysis prior to the interview of the Applicants. Interviews Conducted by the Auditor [ 56 ] In addition to starting some analysis prior to meeting with the Applicants, the Auditor prepared an interview questionnaire for use in her November 4, 2010 interview of the Applicants.

The interview questionnaire was based on CRA generic models apparently used in audits but customized by the Auditor in order to deal with various matters of specific concern for her in this particular audit and arising out of the work that she had undertaken prior to the interview. The interview questionnaire is lengthy and detailed. [ 57 ] Around November 1 st or 2 nd of 2010, which preceded the interview with the Applicants, the Auditor conducted a telephone interview of LND’s bookkeeper. [ 58 ] The typed notes of the interview formed part of the Auditor’s file and was reviewed in her testimony.

The notes of the various questions asked and the answers recorded support the Auditor’s evidence about her attempt to establish who was responsible for LND’s bookkeeping processes, including who determined the allocation of business versus personal expenses. [ 59 ] The Auditor confirmed in her evidence that this information went to the issue of whether the bookkeeper had made errors in the expense allocations or whether the allocations had been made by the Applicants or either of them.

The Auditor testified that in her view, this information was relevant as to whether or not there was a basis for assessing section 163(2) administrative penalties. [ 60 ] In cross examination the Auditor also confirmed that she was interested in obtaining information from the bookkeeper that related to issues of benefits conferred on the Applicant shareholders which may be subject to the provisions of section 15 (1) of ITA entitled “Benefit conferred on shareholder” and also about expenses that may be disallowed as business expense deductions under the general limitation provisions of section 18 (1) (

a) of the ITA . [ 61 ] On November 4, 2010, the Auditor and her CRA team leader Gord Hawes, met with the Applicants and Mr. Sabo in the board room at Sabo’s office. In her earlier testimony, the Auditor confirmed that an interview with a taxpayer or with directors of a taxpayer corporation is usually held much earlier in the audit process than was the case in the LND audit.

Commonly the interview takes place before an Auditor starts looking at books and records other than electronic data. [ 62 ] The interview questionnaire formed the basis of the interview questions, although it was indicated during the Auditor’s evidence that she may not have asked every question in the interview questionnaire.

According to her testimony the interview of the Applicants was necessary to assist the Auditor in understanding LND’s books and records and to assist in determining whether or not the issues of her concerns arose from simple bookkeeping errors or lack of knowledge or lack of experience on the part of the Applicants or either of them. [ 63 ] The Auditor testified that she did not go into the November 4, 2010 interview thinking of tax evasion on the part of LND or the Applicants.

But she was also clear in her testimony that she intended to obtain information as to the Applicants’ understanding of accounting and the Applicants’ respective responsibilities for LND’s bookkeeping. [ 64 ] Therefore the Auditor says that the inquiries at the Applicants’ interview were necessary: to determine the appropriate individual to whom specific address concerns could be addressed; to assess the likelihood of inadvertent bookkeeping inaccuracies; to consider whether administrative penalties under s. 163(2) of the ITA were appropriate; and to determine whether other adjustments for benefits conferred on a shareholder may be applicable.

She did note that if she determined that the Applicants were inexperienced with bookkeeping, a conclusion she had reached with respect to the bookkeeper, then her view would be that gross negligence penalties under

section 163(2) would not be appropriate. [ 65 ] Therefore some of the interview questions were directed at assessing the knowledge or gross negligence component of administrative penalties, particularly under s. 163(2) of the ITA . Also the Auditor sought to learn of the Applicant’s knowledge about receipt of conferred benefits from LND. Answers from the Applicants as to their knowledge and participation in LND’s bookkeeping processes were also obtained. [ 66 ] At no point in the interview were the Applicants formally “Chartered” and warned nor were they formally cautioned.

No specific disclosure was made to them about the extent of the audit that had been undertaken prior to the interview. However the unusually late timing of this interview was explained to them. [ 67 ] According to the Auditor’s evidence, at one point during the interview, Sylvain Giroux objected to the questioning, indicating that it seemed like “trick questions” were being posed to the Applicants. [ 68 ] In the course of relating what occurred at the interview, the Auditor had some specific recollections on one hand and on the other relied upon the notes that she prepared following the interview.

In some cases she was unable to distinguish between which of the Applicants provided the answers and indicated that she was not concerned about drawing that distinction, being more interested in gaining information from a knowledgeable source as between the two Applicants.

She was also of the view that the bestowed benefits of possible concern to her were applicable to both of the Applicants as shareholders and as spouses. [ 69 ] The questions asked of the Applicants and answers received certainly touched on many of the high risk areas identified by the Auditor in her audit plan and were also relevant to section 163(2) administrative penalties. [ 70 ] It is safe to conclude that the Auditor had formed an intention to consider administrative penalties by the date of the November 4, 2010 interview; this intention may have been formed much earlier than that date. [ 71 ] The Auditor testified that after the interview she was “pretty sure” that there had been shareholder’s conferred benefits caught by section 15(1) of the ITA that required adjustment. [ 72 ] She apparently based this conclusion in part upon what I take to be her understanding of “intent” to confer such a benefit, in contrast to a bookkeeping mistake or some other unintentional error, which therefore may not amount to a conferred benefit or which may not attract administrative penalties.

She also spoke about the proper deduction of amounts paid on behalf of the shareholder by a company from a shareholder’s loan account and stated that such amounts would not result in a conferred shareholder benefit. [ 73 ] As I understand the Auditor’s evidence, it was discernable to her from the answers offered by the Applicants, that following the interview she would have likely proposed section 163(2) administrative penalties based upon the existence of the required element of “gross negligence”.

However, she qualifies that by saying it would have occurred only if she “had got to that point”. [ 74 ] She provides further qualifications as to the time frame of reaching such a conclusion, indicating that it would not have been immediately after the interview. I understand her to say that what was revealed later by January of 2011, as a result of her further post interview audit analysis, would then have allowed her to conclude that the civil penalties were appropriate.

She also says she was not convinced at the point immediately following the interview that income tax evasion had occurred. [ 75 ] According to the Applicants affidavits filed in this application they felt legally compelled by law to provide the records subject of CRA’s request because of CRA’s letter of July 23, 2010. Furthermore they were under the impression and belief having received the October 8, 2010 CRA letter that they were each legally obligated:

a) to provide the documents demanded in that letter for both LND and themselves personally,

b) to personally answer inquiries that the Auditor made of each of them,

c) to instruct their accountant and LND’s bookkeeper to answer inquiries about the Applicants personal and LND’s business affairs. Activities of the Auditor After the Interviews [ 76 ] Following the November 4, 2010 interview, some additional requested records apparently relating to personal loans and mortgages of the Applicants were sent to the Auditor at her Victoria office through Mr. Sabo’s office. No further requests or inquiries were made of the Applicants following their interview. [ 77 ] The Auditor also carried on with various analyses of the books and records, which had commenced prior to the interview.

Her work was interrupted by other CRA work related commitment as well as by formal leave, that occurred during this period from November through December, 2010. [ 78 ] Instead of contacting the Applicants, who seemed reluctant to provide information and from whom it appeared difficult to obtain information, the Auditor began to compile a “Summary of Proposed Adjustments” in a document dated November 19, 2010.

She intended that this would form the basis of a CRA proposal letter, setting out intended changes to LND’s, and presumably the Applicants’, tax filings for the years under review. [ 79 ] Thereafter the onus would be on the Applicants to formally voice their disagreements to the proposed adjustments contained in the proposal letter within a stipulated time frame. [ 80 ] The

Summary of Proposed Adjustment for LND’s 2007 and 2008 year ends is comprehensive in nature and sets out an extensive list of “Expense(

s) Disallowed”, covering cost of sales and numerous categories of operating expenses including advertising

and promotion, donations and sponsorships, travel entertainment and automobile expenses, to name a few. In addition an adjustment is made for GST input credits that have been disallowed on the basis that they originate out of disallowed expenses, and a calculation of shareholder benefits under section 15 (1) of the ITA.

The proposed adjustments are financially very significant. [ 81 ] I understand that this “Summary of Proposed Adjustments” was never forwarded to the Applicants nor incorporated into any CRA proposal letter because the Auditor referred the matter to the Enforcement Division prior to the conclusion of the audit.

A considerable portion of the information appearing in this “Summary of Proposed Adjustments” was drawn from the various tables of analysis eventually completed by the Auditor at various times, but starting in October 2010. [ 82 ] In her testimony, the Auditor characterized various aspects of this audit as difficult. As I understand it a significant part of the Auditor’s COSA analysis occurred in the months following the interview. This included “sampling” the revenue and expenses of LND based on source documents.

An extensive amount of time was required to sort and match the supplier invoices with various client projects and to isolate a large number of them as being suspicious. In the course of this analysis the Auditor concluded that a number of discrepancies existed with respect to the handling of LND’s expenses. She found that a number of supplier invoices had been allocated to cost of sales, but had not been actually charged to LND’s clients. This was inconsistent with the method of billing generally employed by LND. A number of these invoices had delivery addresses which had been covered over with “white out”.

The Auditor testified that she considered that these invoices might relate to the construction of the Applicants’ personal residence or some other project that was not disclosed on the books and records of LND. A review of the shareholder’s loan accounts indicated that the invoices had not been charged as a personal expense of the Applicant shareholders. [ 83 ] On January 16, 2011, with the approval of her new team leader, the Auditor completed some third party- checks by contacting various suppliers, including a redi-mix concrete company.

Shortly thereafter she obtained the suppliers’ copy of the invoices rendered to LND. A comparison of the suppliers’ invoices and the copies of the invoices provided by LND from those same suppliers showed that the delivery addresses on the original, unaltered version of the invoices was the address for the Applicants’ personal residence. The addresses were not the residential addresses of the clients to whom the expenses had been allocated and posted in LND’s records; also such amounts had never been actually invoiced to those clients. Referral to the Enforcement

Section [ 84 ] Although she had not completed her audit, at that point in January of 2011 the Auditor suspected “that something was wrong enough in the file that it needed to be referred” to the CRA Enforcement Division. She approached her new team leader with that recommendation. Although she made the recommendation she also testified that she was not completely convinced that tax evasion was present. The referral occurred on February 17, 2011 and was accepted on February 21, 2011.

Time Expended By the Auditor On the Audit [ 85 ] In cross examination the Auditor was questioned about the time expended by her on the audit. According to her CRA time records and the analysis of Defence counsel, by October 8, 2010, the Auditor had spent 150.5 hours on the audit. By November 4, 2010 she had worked an additional 82 hours (over 12 days) for a total time on the audit prior to the interview of the Applicants of 197. 5 hours. [ 86 ] The Auditor conceded two relevant points in cross examination. The first was that she was a terrible timekeeper.

Second, due to the inflexibility of both CRA timekeeping programs and various CRA policies regarding required reports for time written off, she did not necessarily properly record her time to the file on which she was working. [ 87 ] She also stated that the time spent by her was not an inordinate amount of time to spend on this type of audit file (that is an “underground economy file”) and also given the fact that it was also an “out of town” audit.

She also held to her position that even given the amount of time expended on the audit, she did not have sufficient time to complete much of the required analysis, especially with respect to the supplier invoices, until after the interview. Furthermore notwithstanding the time that she had expended on the audit, she had not reached any conclusions about income tax evasion or mens rea for penal liabilities prior to the interview. Analysis of the Credibility and Reliability of the Auditor’s Evidence [ 88 ] I have concluded that the Auditor was a credible and reliable witness during the lengthy voir dire .

As Crown submits, she testified in a forthright manner and she admitted when she was uncertain of some fact that she was attempting to recall from several years ago. Understandably some of those facts may be subject to the vagaries of her memory, this being a fairly complicated audit matter which included a large of number of details and information reviewed and analysed over a lengthy period of time.

She was candid in admitting her deficiencies in her time keeping and in not following CRA policies about time recording or writing off time expended in matters not proceeding to audit. [ 89 ] There was a satisfactory internal and external consistency to her evidence.

Where she may have subsequently corrected or even contradicted her prior evidence, there was a reasonable explanation offered by her. [ 90 ] Defence obviously found it a frustration when the Auditor would not agree with the Defence suggestion that the Auditor had formulated an early theory or opinion about the Applicants’ participation in an income tax evasion scheme. She did say that she had identified areas of high risk that required further inquiry.

She also expressed reluctance in her evidence about coming to early conclusions in the course of the audit that there was enough for civil penalties to apply or that there was enough to conclude that income tax evasion had occurred.

These are the answers that I would expect from a careful and experienced auditor who is approaching the audit with an open and objective mind and who was seeking not to jump to early conclusions in a complicated matter but rather to complete her appointed task in a proper and thorough manner. [ 91 ] I agree with Crown’s suggestion that from the vantage point of after the fact, Defence may see what they suggest is an inescapable early conclusion about tax evasion that should have been reached by the Auditor.

However, the evidence of the Auditor must be assessed in the context of considering what she could have reasonably concluded in the midst of this complicated and lengthy audit, which did require an extensive amount of analysis over an extended period in order to put the puzzle together.

The Law Onus in a Charter Application [92] Crown does not challenge the standing of the Applicants to bring the present application. That standing is accepted by thiscourt. [93] The Applicant bears the burden of proof, on the civil standard of a balance of probabilities, in order to succeed on a Charterapplication. That includes the burden of adducing evidence and persuading the court that their Charter rights or freedoms have beeninfringed or denied. In a case where the evidence does not establish whether or not the appellant's rights were infringed, the court mustconclude that they were not. [see : R. v.

Collins, (SCC), [1987] 1 SCR 265 at para. 21 [94] Since the foundation for a Jarvis application relies upon the Charter, the Applicants must persuade the Court, on a balance ofprobabilities, in order to succeed on this application.

In their submissions the Applicants identify and accept this as their burden. [see: Jarvis at paras. 63-72] CRA’s Civil and Criminal Powers Under the ITA [95] A Jarvis application places into sharp focus the distinct regimes of CRA’s powers namely, first: the civil regulatory, audit andenforcement powers; and second: its ability to investigate criminal offences under the ITA and to initiate recommendations forprosecution of such offences.

The Civil Powers, Audits and Penalties [96] Parliament has conferred upon CRA broad statutory civil powers to administer the national taxation system; among the mostimportant are those found in the ITA. [97] Useful examples are the audit and inspection powers found in

section 231.1, the enabling provisions for requiring production ofdocuments and information found in

section 231.2 and the civil penalty provisions, such as are found in

section 162 for failing to fileincome tax returns and

section 163 for repeated failures to report income and for failing to file income tax returns, failing to provideprescribed information and for making false statements. [98] As explained by Vern Krishna in The Fundamentals of Canadian Income Tax 9th

(2006) Edition, Thomson Carswell (Toronto)[“ V. Krishna”] under the heading of “Penalties” “the Canadian income tax system essentially relies on self-assessment and voluntary compliance. Taxpayers make voluntary disclosureof their income to the Agency in the form of an income tax return. There are, however, several penalty provisions that address failures tocomply with the Act. [see V.

Krishna at p. 38] [99] The extensive administrative, audit and examination powers bestowed to the Minister of National Revenue and delegated to theCRA under the ITA and the administrative requirements, such as maintenance of books and records, filing of returns, payment of taxes,interest and penalties under the ITA are directed towards persuading taxpayers to remain on the “straight and narrow path” in this self-assessment tax system. [see V. Krishna at p.955 and 956] [100] V.

Krishna describes the civil audit process that may be undertaken by CRA as part of its substantial and audit and investigativepowers to ensure compliance with the ITA on the following terms: A civil audit is an examination for the purpose of verifying the accuracy of the taxpayer’s self-assessed income. Such an audit under theCRA’s regulatory powers is simply a routine process for verifying the taxpayer’s financial information and examining relevantsupporting documents. The purpose of the audit is to ensure regulatory compliance, mathematical accuracy and supporting data.

If theAgency disagrees with the taxpayer’s self-assessed income, it will reassess the taxpayer and charge interest on any deficiency in taxespaid. The CRA has the power to impose civil penalties in circumstances where it can show egregious conduct by the taxpayer in preparinghis or her return. [see V. Krishna at p. 956] [101] Thus, the civil penalty provisions of sections 163 (1) and (2) of the ITA that may be applicable to the outcome of an auditprocess state as follows: 163.

(1) Every person who (

a) fails to report an amount required to be included in computing the person’s income in a return filed under

section 150 for ataxation year, and (

b) had failed to report an amount required to be so included in any return filed under

section 150 for any of the three precedingtaxation years is liable to a penalty equal to 10% of the amount described in paragraph 163(1) (a), except where the person is liable to a penalty under

subsection 163(2) in respect of that amount.

(2) Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to oracquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this

section referred to asa “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of…… [102] Thereafter that

section goes on to describe the amount of the tax deficiency plus interest that can be added to a penalizedtaxpayer’s tax bill, which may be an additional 50% plus interest. [103] Significantly the term used in that

section is “penalty” and not the term “offence” ; that term “offence” appears in sections 238 and 239 of the ITA. [104] These important civil functions of the ITA and many other functions about it are extensively canvassed in Jarvis. [ seeparagraphs: 47 -55]. The relationship between the civil and criminal functions and powers is also analysed in R. v. Romanuk 2013 FCA133. The Burden of Proof in Civil Tax Cases [105] The burden of proof in civil tax cases is on the balance of probabilities.

An assessment made by CRA is deemed by subsection152(8) of the ITA to be valid and binding notwithstanding any error, defect or omission in the assessment. Therefore the taxpayer carriesthe burden of proof to rebut the factual basis and assumptions used and disclosed by CRA for the assessment. [see V. Krishna at p. 37] [106] However, V.

Krishna notes under the heading “Reversal of Onus” as follows: “Subsection 163 (2) of the Act authorizes the Minister to impose a penalty on a person who has either “knowingly” or “undercircumstances amounting to gross negligence” made a false statement or omission in an income tax return. In these circumstances,where the Minister imposes a penalty on the basis of the taxpayer’s gross negligence, the Act reverses the burden of proof and puts it onthe Minister to show the gross negligence on the basis of the particular facts.” [V. Krishna citing Snell v.

Farrell, (SCC), [1990] 2 S.C.R. 311 (S.C.C.); Redash Trading Inc. v. R., 2004TCC 446 (T.C.C. [General Procedure] and other cases in the footnotes at page 38)]. Subsection 163 (2) requires that the Minister show not only that there has been

an act of omission or misstatement by the taxpayer (or hisor her agent), but also that the taxpayer (or agent) had a state of mind that justifies a finding of gross negligence. In Udell v. M.N.R., forexample, the court stated: ‘in my view the use of the verb “made” in the context in which it is used also involves a deliberate andintentional consciousness on the part of the principle to the act done…’ ”. [see V. Krishna at p.38 citing Udell at (CA EXC), [1969] C.T.C.704, 70 D.T.C. 6019 at 6025 (Ex.

Ct.)] Criminal Investigations and Charges Under the ITA [107] Criminal investigations undertaken by CRA may lead to charges under s. 239, of the ITA including for tax evasion, under s.239(1)(d), and for false reporting, s. 239(1)(a). [108] As noted in Crown’s submissions, the criminal offence of tax evasion requires the Crown proving the following elements of theoffence, on the criminal burden of proof of beyond a reasonable doubt: jurisdiction; identity; time; actus reus, which comprises,earning/receiving taxable income and failing to report that income; and, mens rea, which comprises, knowing that the evasion of taxeswould result by failing to report earned income. [see R. v.

Tyskerud, 2013 BCPC 27 [Tyskerud] at paras. 225, 302 and the cases reliedupon therein]. [109] Similarly the criminal offense of false reporting requires proving the following elements beyond a reasonable doubt:jurisdiction; identity; time; actus reus, which comprise making, participating in, assenting to, or acquiescing in the making of false ordeceptive statements in a return; and, mens rea, which comprises knowing that the statements are false or deceptive [see Tyskerud atparas. 228, 302 and the cases relied upon therein] [110] V.

Krishna notes under the topic heading “Criminal Penalties” as follows: In addition to the civil penalties available under the Act, sections 238 [for failure to file] and 239 provide for penalties on conviction of acriminal offense under the Act. Subsection 239 (1) provides that a person who has made or participated in tax evasion is subject to a fineof not less than 50 per cent, and not more than 200 per cent of the amount of tax sought to be evaded. In addition to the monetary penalty,a taxpayer convicted of income tax evasion may be imprisoned for a period of up to two years.

If the Crown elects to proceed byindictment rather than by way of

summary conviction, subsection 239 (2) increases the penalties to a fine of not less than 100 per cent

and not more than 200 per cent, and imprisonment for no more than five years. [see V. Krishna at p.39] [ 111 ] As noted by Jarvis at paragraph 57 , as with the s. 238 offence, the s. 239 offence is central to the income tax regime and ‘designed to ensure compliance with the self-reporting requirements of the ITA ’ while not altering the regulatory or administrative nature of the inspection and requirement powers under the ITA. Furthermore the kind of conduct giving rise to a s. 239 charge may be discovered by those civil inspection and requirement powers.

Some Differences Between a CRA Audit and an Investigation [ 112 ] V. Krishna offers some useful information and observations about these two separate civil and criminal processes under the ITA . [ 113 ] He notes the broad nature of audit powers conferred on the CRA by sections 231.1 (access to records on business premises) and 231.2 (demand for information) which he says allows CRA considerable latitude under which taxpayers’ constitutional rights are only minimally protected.

Those broad audit powers must be contrasted with a tax investigation which is a criminal investigation and therefore subject to Charter control. [ 114 ] He further comments that an examination that the starts out as a routine civil audit can turn into a criminal investigation in which case the nature of the relationship between CRA and the taxpayer also changes and CRA’s powers become subject to Charter restrictions. [ 115 ] He opines that civil audits and investigations are both relationships of “opposing interests” but there is an important difference between the nature of the parties’ interests in an audit and those in an investigation.

He describes that difference as follows: Although all audits between taxpayers and the CRA are adversarial, the intensity of the adversarial relationship increases exponentially where the agency is looking to lay criminal charges against the taxpayer. In an investigation “the state is pitted against individual in an attempt to establish culpability” [quoting from the headnote in Jarvis ]. The adversarial relationship escalates because the liberty of the subject is at stake. [see V.

Krishna at pages 955 -957] The Jarvis Predominant Purpose Test [ 116 ] The Supreme Court of Canada’s decision in Jarvis is the leading authority on the type of application before me. It examines this important dichotomy in the relationship between CRA and a taxpayer which is dependent upon the audit versus the tax investigation distinction under the ITA.

Summary of the Facts in Jarvis [ 117 ] The facts in Jarvis are important to understanding the Supreme Court of Canada’s contextual analysis.

Briefly, the facts in Jarvis are that in February 1994 Revenue Canada (subsequently known as CCRA and now known as CRA) acting on a tip that the defendant Jarvis had sold a number of his late wife’s paintings and prints in 1990, but failed to report those sales as personal income in 1990 and 1991, informed Jarvis by letter dated February 17, 1994, that he was being audited and requested books and records within a 15 day deadline. [ 118 ] Prior to receiving a response from Jarvis, in order to determine the validity of the tip, the assigned Auditor inspected the books and records of a number of art galleries that had been identified in the tip as purchasing the art from Jarvis.

As part of the inspection the Auditor obtained information about the proceeds of the art sales received by Jarvis and completed a cost of sales analysis, thereby determining that the tip had some validity. [ 119 ] The Auditor finally had direct contact with Jarvis ’ accountant on March 16, 1994 and further information was obtained. An interview with Jarvis conducted by the Auditor was subsequently held on April 11, 1994 to “commence a review of the books and records”.

The Auditor’s supervisor, incorrectly introduced to Jarvis as the Auditor’s assistant, was also in attendance to provide a second opinion to the Auditor about a referral to the investigation section. [ 120 ] Jarvis was not provided any form of Charter warning or caution on this occasion. He answered questions and provided the Auditor with various authorizations to obtain relevant documentary evidence. The Auditor did not advise Jarvis that she had already obtained information from third party sources.

Some of the questions asked of Jarvis were intended for the purpose of comparing his responses to information that the Auditor had already obtained through government and third party sources. Further records were obtained from Jarvis in late April 1994, following which the Auditor performed an audit analysis and determined there was a significant, gross under reporting of income by Jarvis . [ 121 ] On the basis of this type of under reporting, suggesting that fraud was possible and further action was a possibility, the matter was referred to the Special Investigations

Section (now known as the Enforcement Division) on May 4, 1994 without the completion of the audit. The Auditor intentionally did not advise Jarvis that the file had been referred notwithstanding requests from Jarvis for status updates at various times between May and November of 1994.

Also following the file referral, Jarvis provided further bank statement records that the Auditor then forwarded to the criminal investigator on March 6, 1994, again without notification to Jarvis of the file referral by the Auditor. [ 122 ] The information obtained by the Auditor pursuant to her audit powers was ultimately used as grounds to support the issuance of a search warrant in November of 1994, the execution of which resulted in key evidence for use in the prosecution of tax evasion and

false reporting charges sworn against Jarvis. [123] The Alberta Provincial Court trial judge excluded the evidence obtained via the search warrant on the basis that the audit hadbecome an investigation by March 16, 1994, the date that the Auditor first made direct contact with Jarvis’ accountant. A directedverdict of acquittal was made thereafter. The Alberta Court of Appeal subsequently reversed the ruling.

The Decision in Jarvis [124] In upholding the decision of the Alberta Court of Appeal, the Supreme Court of Canada stated as follows: Ultimately, we conclude that compliance audits and tax evasion investigations must be treated differently. While taxpayers arestatutorily bound to co-operate with CCRA auditors for tax assessment purposes (which may result in the regulator penalties), there is anadversarial relationship that crystallizes between the taxpayer and the tax officials when the predominant purpose of an official's inquiryis the determination of penal liability.

When the officials exercise this authority, constitutional protections against self-incriminationprohibit CCRA officials who are investigating ITA offences from having recourse to the powerful inspection and requirement tools in ss.231.1(1) and 231.2(1).

Rather, CCRA officials who exercise the authority to conduct such investigations must seek search warrants infurtherance of their investigation. [see: Jarvis at paras. 2, 106] [125] The key to the analysis of the Supreme Court of Canada in Jarvis is found at paragraphs 88 to 94 as follows: 88 In our view, where the predominant purpose of a particular inquiry is the determination of penal liability, CCRA officials mustrelinquish the authority to use the inspection and requirement powers under ss. 231.1(1) and 231.2(1).

In essence, officials "cross theRubicon" when the inquiry in question engages the adversarial relationship between the taxpayer and the state. There is no clear formulathat can answer whether or not this is the case.

Rather, to determine whether the predominant purpose of the inquiry in question is thedetermination of penal liability, one must look to all factors that bear upon the nature of that inquiry. 89 To begin with, the mere existence of reasonable grounds that an offence may have occurred is by itself insufficient to support theconclusion that the predominant purpose of an inquiry is the determination of penal liability. Even where reasonable grounds to suspectan offence exist, it will not always be true that the predominant purpose of an inquiry is the determination of penal liability.

In thisregard, courts must guard against creating procedural shackles on regulatory officials; it would be undesirable to "force the regulatoryhand" by removing the possibility of seeking the lesser administrative penalties on every occasion in which reasonable grounds existedof more culpable conduct.

This point was clearly stated in McKinlay Transport, supra, at p. 648, where Wilson J. wrote: "The Ministermust be capable of exercising these [broad supervisory] powers whether or not he has reasonable grounds for believing that a particulartaxpayer has breached the Act." While reasonable grounds indeed constitute a necessary condition for the issuance of a search warrant tofurther a criminal investigation (s. 231.3 of the ITA; Criminal Code, s. 487), and might in certain cases serve to indicate that the auditpowers were misused, their existence is not a sufficient indicator that the CCRA is conducting a de facto investigation.

In most cases, ifall ingredients of an offence are reasonably thought to have occurred, it is likely that the investigation function is triggered. 90 All the more, the test cannot be set at the level of mere suspicion that an offence has occurred. Auditors may, during the courseof their inspections, suspect all manner of taxpayer wrongdoing, but it certainly cannot be the case that, from the moment such suspicionis formed, an investigation has begun. On what evidence could investigators ever obtain a search warrant if the whiff of suspicion wereenough to freeze Auditorial fact-finding?

The state interest in prosecuting those who wilfully evade their taxes is of great importance,and we should be careful to avoid rendering nugatory the state's ability to investigate and obtain evidence of these offences. 91 The other pole of the continuum is no more attractive. It would be a fiction to say that the adversarial relationship only comesinto being when charges are laid. Logically, this will only happen once the investigators believe that they have obtained evidence thatindicates wrongdoing.

Because the s. 239 offences contain an element of mental culpability, the state will, one must presume, usuallyhave some evidence that the accused satisfied the mens rea requirements before laying an information or preferring an indictment. Theactive collection of such evidence indicates that the adversarial relationship has been engaged, since it is irrelevant to the determinationof tax liability. Moreover, although there are judicial controls on the unauthorized exercise of power (Roncarelli v. Duplessis, (SCC), [1959] S.C.R. 121; Babcock v.

Canada (Attorney General), [2002] 3 S.C.R. 3, 2002 SCC 57, at para. 25), we believethat allowing CCRA officials to employ ss. 231.1(1) and 231.2(1) until the point where charges are laid, might promote bad faith on thepart of the prosecutors. Quite conceivably, situations may arise in which charges are delayed in order to compel the taxpayer to provideevidence against him or herself for the purposes of a s. 239 prosecution. Although the respondent argued that such situations could beremedied by the courts, we view it as preferable that such situations be avoided rather than [page 806] remedied.

It is for this reason thatthe test is as set out above. 92 Whether a matter has been sent to the investigations

section is another factor in determining whether the adversarial relationshipexists. Again, though, this, by itself, is not determinative. An Auditor's recommendation that investigators look at a file might result innothing in the way of a criminal investigation since there is always the possibility that the file will be sent back. Still, if, in an Auditor'sjudgment, a matter should be sent to the investigators, a court must examine the following behaviour very closely.

If the file is sentback, does it appear that the investigators have actually declined to take up the case and have returned the matter so that the audit can becompleted? Or, does it appear, rather, that they have sent the file back as a matter of expediency, so that the Auditor may use ss.231.1(1) and 231.2(1) to obtain evidence for a prosecution (as was found to be the case in Norway Insulation, supra)?

93 To reiterate, the determination of when the relationship between the state and the individual has reached the point where it is effectively adversarial is a contextual one, which takes account of all relevant factors. In our opinion, the following list of factors will assist in ascertaining whether the predominant purpose of an inquiry is the determination of penal liability.

Apart from a clear decision to pursue a criminal investigation, no one factor is necessarily determinative in and of itself, but courts must assess the totality of the circumstances, and make a determination as to whether the inquiry or question in issue engages the adversarial relationship between the state and the individual. 94 In this connection, the trial judge will look at all factors, including but not limited to such questions as: (

a) Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made? (

b) Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation? (

c) Had the Auditor transferred his or her files and materials to the investigators? (

d) Was the conduct of the Auditor such that he or she was effectively acting as an agent for the investigators? (

e) Does it appear that the investigators intended to use the Auditor as their agent in the collection of evidence? (

f) Is the evidence sought relevant to taxpayer liability generally? Or, as is the case with evidence as to the taxpayer's mens rea , is the evidence relevant only to the taxpayer's penal liability? (

g) Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance audit had in reality become a criminal investigation? It should also be noted that in this case we are dealing with the CCRA. However, there may well be other provincial or federal governmental departments or agencies that have different organizational settings which in turn may mean that the above factors, as well as others, will have to be applied in those particular contexts. [ 126 ] At paragraph 99 of Jarvis , the Supreme Court provides the following

summary: 99 By way of

summary, the following points emerge: 1. Although the ITA is a regulatory statute, a distinction can be drawn between the audit and investigative powers that it grants to the Minister. 2. When, in light of all relevant circumstances, it is apparent that CCRA officials are not engaged in the verification of tax liability, but are engaged in the determination of penal liability under s. 239, the adversarial relationship between the state and the individual exists. As a result, Charter protections are engaged. 3. When this is the case, investigators must provide the taxpayer with a proper warning.

The powers of compulsion in ss. 231.1(1) and 231.2(1) are not available, and search warrants are required in order to further the investigation. Analysis in the Present Case The Questions to Be Determined [ 127 ] Therefore based on the Jarvis analysis the questions that I must determine are as follows: 1. Was the predominant purpose of the Auditor’s inquiry in this matter the determination of penal liability of the Applicants? 2. Did the inquiry in this matter ever crystalize the adversarial relationship between the Applicants and the state, as

represented by CRA, such that the Charter protections were engaged against self-incrimination thereby preventing the Auditorfrom continuing to utilize and to have recourse to the broad and powerful tools of inspection and other requirements under the audit provisions of the ITA?

Answer to the Predominate Purpose of the Auditor’s Inquiry Question [128] First, I have concluded that the predominant purpose of the Auditor’s inquiry in this matter was the permitted audit function ofverifying the accuracy of LND’s self-assessed income and the various aspects of its regulatory compliance. [129] The areas of high risk identified by the Auditor relate to the accuracy of that self-reporting and regulatory compliance. Adifference found in any of those high risk areas could result in a difference in the amount of LND’s income and the applicable incometax.

The investigation of civil penalties is also relevant to that audit process because civil penalties under section 163(2) that are added toa taxpayer’s account in a reassessment can be a very significant amount. [130] While the applicability of civil liability penalties under section 163(2) of the ITA was examined by the Auditor in depth, I cannotconclude that the Auditor strayed into the determination of penal liabilities for the Applicants that may arise for offences under thesection sections 239 (1) (

a) and section 239 (1) (

d) of the ITA or under paragraphs 327 (1) (a), (

c) or (

d) of the ETA. [131] The Auditor conducted an extensive and comprehensive audit. It took a very significant amount of time for the Auditor to reviewand analyse information obtained from LND pursuant to the audit powers of the ITA and also from the Applicants in their personalcapacities as shareholders of LND. [132] Notwithstanding the complexity of the audit and its duration, its focus remained on verifying LND’s financial information andexamining relevant supporting documents.

The examination of the Applicants’ personal financial information and filings was relevant tothe audit of LND because of the high risk possibilities initially identified by the Auditor, including as to whether appropriations fromLND were used for the Applicants’ personal expenses, while being incorrectly characterized in LND’s records as business expenses, andwhether the records of LND properly reflected any bestowed shareholders’ benefits on the Applicants, that had not been reported on theApplicants’ income tax filings. [133] I do agree with the Applicants’ submission that an assessment of whether the LND corporate entity knowingly or undercircumstances amounting to gross negligence did something to attract section 163 (2) civil penalties, can only be assessed by assessingthe knowledge and actions of the Applicants in their capacity as LND’s principles.

The Applicant’s in this case were LND’s guidingmind, as the only shareholders and directors. [134] A good deal of the time spent by the Auditor was focused on whether or not the necessary requirements existed to assess section163(2) civil penalties namely the intention (that is the knowledge) on the part of the Applicants or either of them or whether there werecircumstances amounting to gross negligence, on the part of the Applicants or either of them.

The civil burden of proof borne by CRA toestablish these requirements is, of course, fairly substantial notwithstanding that it less than the criminal burden of proof. [135] The fact that there are similarities between the elements giving rise to the imposition of penalties under section 163 (2) andincome tax evasion and false reporting charges under section 239(1) and that there is a considerable overlap in the elements of civil andcriminal offences, does not necessarily mean that an inquiry in aid of possibly assessing section 163 (2) civil penalties is also an inquirythat is automatically subsumed into a tax evasion investigation. [136] Such a conclusion ignores the important dichotomy between CRA’s civil and criminal powers.

Jarvis makes it clear that thepredominant purpose test does not prevent CRA from conducting parallel criminal investigations and thereby examining a taxpayer’spenal liability and also conducting administrative audits for which the predominant purpose is a determination of the same taxpayer’s taxliability. [see Jarvis at paragraph 97 and R. v. Tiffin, 2008 ONCA 306 , 90 O.R. (3d) 575 (“Tiffin”) at paragraphs 129-136]. [137] When the Auditor created the audit plan, at best it may be said that the Auditor had a “mere suspicion that an offense hadoccurred”.

However, I do not think that to be the case here, based on all of the evidence. Even if it were, Jarvis makes it clear that suchmere suspicion does not mean that an investigation has begun. [see Jarvis at para 91]. [138] Moving along the continuum, as the audit progressed it is possible that the Auditor became aware of the existence of reasonablegrounds that an offense may have occurred. That in itself is insufficient to support the conclusion that the predominant purpose of theAuditor’s inquiry was the determination of penal liability [see Jarvis at para 89].

Perhaps the Auditor could have reasonably concludedthe existence of those reasonable grounds earlier than her evidence suggests. However, I am not satisfied that her focus lay in thedirection of establishing that an offense attracting penal liability had occurred. Rather her focus was on the audit function and on thepossibility of lesser administrative penalties.

Jarvis warns against the court creating procedural shackles and the undesirable result offorcing “the regulatory hand” by removing the possibility of administrative penalties where there are existing reasonable grounds ofmore culpable conduct. [139] I cannot reasonably conclude that all of the ingredients of the offenses attracting penal liability could be thought by the Auditorto have occurred while she was in the course of conducting this audit and specifically at some time well before January 2011.

It is morelikely that such a point was reached upon receipt of the third party confirmations of the altered invoices. That occurred almostimmediately preceding the referral to the CRA Enforcement Division. Hence the investigative function was not triggered prior to thereferral to the Enforcement Division. [See Jarvis at para 89]. I am not convinced that the Auditor purposefully or unreasonably delayedcoming to such a conclusion about penal liability to enable her to conduct a criminal investigation for tax evasion.

Analysis of the Jarvis Factors in the Present Case and Conclusions Reached [140] As part of my analysis in applying the predominant purpose test of the inquiry, I have examined the list of factors set out inparagraph 94 of Jarvis. As noted in Tiffin, these factors are not the test itself but are intended to assist the trial judge with the analysis.[see Tiffin at para 136].

[ 141 ] The conclusions that I reached when considering these factors are as follows: (

a) Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made? My conclusions are set out in apart above. I accept that the interview with the Applicants was held for the purposes of determining whether there were any reasonable explanations for the high risk areas of concern that had been at all substantiated by the Auditor prior to the interview. A further level of audit analysis after the interview was required to establish the extent of the possible civil penalties.

Therefore on the basis of the evidence, it is unreasonable to expect that the required analysis had been completed in order to say there were reasonable grounds to lay charges or to decide to proceed with a criminal investigation. The Auditor referred the file for investigation at an appropriate time. (

b) Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation? It is possible that the conduct could be interpreted, as the Defence has done, as being consistent with a criminal investigation and a search for mens rea . However based on the evidence the much greater probability is that its focus only extended into a consideration of civil penalties and not a search for mens rea . The Defence makes much of the extent of the time expended and the work undertaken by the Auditor prior to interview and the fact that this was not disclosed to the Applicants.

But in this case there were no covert examinations or discussions with third parties or other conduct described as not being “praiseworthy” that marked the inquiry undertaken in Jarvis . My conclusion here is that the Auditor’s conduct was consistent with pursuing the civil administration of the tax system and possible civil penalties. (

c) Had the Auditor transferred his or her files and materials to the investigators? The Auditor did not attempt to nor did she transfer her files and materials to the Enforcement Division until after the formal referral to the Enforcement Division. (

d) Was the conduct of the Auditor such that he or she was effectively acting as an agent for the investigators? There is a lack of anything more than incidental contact between the Enforcement Division and the Auditor in this case during the course of the Auditor’s inquiry. That incidental contact was for a particular purpose, namely gaining access to the confidential tip, which thereby proved unsuccessful. There is no evidence of active consultation between the Auditor and the Enforcement Division in the course of this inquiry. (

e) Does it appear that the investigators intended to use the Auditor as their agent in the collection of evidence? Again there is nothing before me that suggests this to be the case. There is nothing to confirm that the comprehensive audit undertaken had been intended by the Enforcement Division to be an exercise for the active collection of their required evidence in a criminal investigation. (

f) Is the evidence sought relevant to taxpayer liability generally? Or, as is the case with evidence as to the taxpayer’s mens rea, is the evidence relevant only to the taxpayer’s penal liability? For the reasons mentioned earlier, the evidence being sought by the Auditor was relevant to taxpayer liability generally and in particular liability for civil penalties. It is not relevant only to the taxpayer’s penal liability but it was eventually seized under warrant from the Auditor and used to assist the Enforcement Division with their own analysis and the laying of charges.

As noted in Tiffin , when considering this factor the word “only” is critical to the analysis. Tiffin concludes at paragraph 180 and 181 as follows: [180]…It is not enough that the inquiry seeks evidence that could be seen as relevant to penal liability when it is clearly relevant to civil liability as well. [181] It would gut the broad inspection and requirement powers to reason that an inquiry is predominantly penal as soon as an inquiry seeks information that could be (used) in a penal prosecution.

Such reasoning would prevent any use of the inspection and requirement powers without warrant because the elements of the criminal tax offenses always encompass the elements of the regulatory tax offenses. One must keep in mind that the ITA is essentially a regulatory statute and the broad inspection and requirement powers are valuable regulatory tools. (

g) Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance audit had in reality become a criminal investigation? Notwithstanding the depth, comprehensive nature and the duration of the audit inquiry and the early identification of what Defence characterizes as obvious and suspicious circumstances of tax cheating, and what the Auditor characterized as some areas of “high risk” requiring further inquiry, there is very little for me to conclude that during the course of this audit it had become a criminal investigation.

The overall behavior of the Auditor including the creation and intended use of the “Summary of Proposed Adjustments” by the Auditor as part of her audit helps me arrive at this conclusion. Answer to Whether the Adversarial Relationship Was Triggered thereby Engaging Charter Protections for the Applicants. [ 142 ] Generally it would be inappropriate for the court to lay down strictures on how CRA is to conduct an audit and what steps must or can be taken.

That would interfere unduly with their administrative discretion in the exercise of their statutory powers. [ 143 ] However, the courts must view the overall process used by CRA to determine whether or not the adversarial relationship has

been crystallized because the predominant purpose of the inquiry utilized is the determination of penal liability.

If the auditor takes suchan irreversible step then that CRA official, like Julius Caesar’s army has “cross(ed) the Rubicon” [see Jarvis at para 88] and Charterprotection is triggered for the taxpayer who is subject of the inquiry. [144] On the basis of my analysis above, even if the Auditor may have through her comprehensive and lengthy audit process possiblywaded into the waters of the analogical Rubicon, I am not satisfied that the Applicants have proven that she did in fact cross it andtherefore that the Applicants’ Charter rights were engaged. [145] Accordingly, in my view the Applicants cannot rely

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