R. v. Mori, 2015 ONCJ 810

Information No. S12 – 4624 CITATION: R. v. Mori , 2015 ONCJ 810 ONTARIO COURT OF JUSTICE (at St. Catharines, Ontario) B E T W E E N: HER MAJESTY THE QUEEN Respondent - and - WILLIAM MORI Applicant Mr. D. Frost and Ms. M. Caterina-Neufeld for the Crown Mr. D. Milot for William Mori Ruling on a

Section 7 and

Section 8 Application – (a Jarvis [1] Application) NADEL, J.: Introduction [ 1 ] William Mori (Mori), the Applicant, seeks to exclude evidence of records disclosed during a Canada Revenue Agency (CRA) audit of 411279 Ontario Ltd. (411) as well as records seized during the execution of search warrants and production orders obtained as a consequence of the audit disclosures. Mori is the sole shareholder of 411.

He submits that his rights under sections 7 and 8 of the Charter were infringed by the actions of the CRA’s auditor and investigator. [ 2 ] Specifically, Mori contends that the predominant purpose of the CRA’s audit of 411 was the determination of his alleged penal liability for non-payment of income taxes.

This predominant purpose engaged an adversarial relationship between the CRA and Mori at the time of or, in any event, shortly after the CRA auditor, Scott Prentice (Prentice), learned that Mori subscribed to the theory of “natural personhood.” [2] [ 3 ] The Defence contends that Victor Wiens (Wiens), MNL’s comptroller, and Glen Momot (Momot), MNL’s external accountant, told Prentice that Mori believed he was not required to pay income taxes on income earned as a “natural person.” [3] Having learned that Mori espoused this theory and that on one occasion his employer did not to deduct income tax from his salary, Mori submits that Prentice’s bona fide audit intentions were quickly subverted into a Charter infringing exercise to determine Mori’s penal liability for non-payment of income taxes. [ 4 ] Given this predominant purpose, Jarvis precluded Prentice from using the inspection and requirement powers granted to him by the Income Tax Act .

Mori submits that it was the misuse of those powers that garnered the evidence which led to him being tried criminally on six counts under the Income Tax Act . [4] [7] On January 18, 2010 Prentice was randomly assigned to conduct two audits. The first was a full scope audit of Mori Nurseries Limited (MNL). MNL is a farming operation. It produces wholesale nursery stock for its independent garden market centre and for some big box stores. It employs about 230 people and between 2007 and 2009 had annual gross sales of between $16 million and $20 million.

It is owned by a numbered company controlled by Mori’s father. Mori owned 7% of MNL. [8] The second audit was a restricted audit of 411. A restricted audit is an audit restricted to the comments of the CRA’s work development officer together with anything added by the auditor to the audit plan during the auditor’s desk review of his assignment plus anything else that might come to the auditor’s attention during the audit. [9] These two audits were carried out in what might be described as a staggered parallel manner.

The MNL audit was much the larger and more complex of the two audits and Prentice began the extensive field work for that audit first. Then, while that field work was still

ongoing, he commenced the audit of 411. The staggered but parallel nature of this manner of proceeding should become apparent. The Restricted Audit AIMS Sheet for 411 [7] [10] The CRA employs work development officers or “screeners” who use an “audit information management system” (AIMS) to produce AIMS sheets. These AIMS sheets identify persons or individuals to be audited. Each of the two audits assigned to Prentice came with an AIMS sheet.

An AIMS sheet usually contains “screener’s comments” that the assigned auditor is obliged to deal with. [11] The AIMS sheet for the restricted audit of 411 contained two comments by its screener. The first directed Prentice to audit 411 and determine whether “1: HAS A HOUSIG BENEFIT BEEN REPORTED BY S/H” (sic). The second screener’s comment directed Prentice to: “2: REVIEW EXP FOR PERSONAL” (sic).

The parties agree that “housig” means housing, “s/h” means shareholder and “exp” means expenses. [12] The first item (Has a housing benefit been reported by shareholder) required Prentice to determine whether Mori had properly accounted for and, if necessary, declared any housing benefit conferred upon him by 411, which owned the home that he lived in. Mori raises no issue about the scope of that item. [13] The scope of the second item, (Review expenses for personal,) was a matter of substantial contest between the parties.

Mori sought to have Prentice and the CRA investigator Steve Gall, (Gall,) agree that this second item was merely a particularization of the first item. Mori contended that the personal expenses referred to in the second screener’s comments were limited to expenses related to housing costs like hydro, gas, home and contents insurance, cable, television or internet bills and things of that sort. On this

interpretation any inquiries about other personal expenses would be outside of the scope of the audit. [14] Both Prentice and Gall disagreed with that

interpretation of the 411 AIMS sheet. Prentice understood the second screener’s comment to mean that he was being directed to determine whether the company was expensing matters that were not proper company expenses but rather were the personal expenses of Mori. [15] The exact wording of the second screener’s comment is not a full sentence. I accept Prentice’s testimony of how he interpreted that directive. I find corroboration of that

interpretation in Gall’s testimony. Gall interpreted this screener’s comment in a similar fashion. I am of the view that Prentice’s

interpretation of his mandate was reasonable. I reject the defence contention that Prentice’s

interpretation was contrary to and went beyond or extended the scope of his audit. [8] This conclusion and finding does not, however, resolve the main complaint made by Mori. That complaint is that Prentice’s inquiries and demands for information went beyond the assigned scope of this restricted audit. He intentionally and improperly exceeded the audit’s scope to seek information that disclosed Mori’s personal tax liability because his predominant purpose was adversarial and penal.

The Audit Period for 411 [16] The AIMS sheet for 411 stipulated an audit period of “2006 03 – 2008 02”. 411’s fiscal year ended on February 28 so the screener selected an audit period of two consecutive fiscal years. The CRA employs a 1 + 1 audit rule. That rule requires an auditor to audit the taxpayer’s currently filed year plus the taxpayer’s previous year. One further gloss on an assigned audit period results from the delay between the creation of an AIMS sheet and its assignment to an auditor.

On occasion, if there has been some substantial delay between the preparation of an AIMS sheet and the actual assignment of the audit, the most currently filed year may not accord with the AIMS sheet. In that case the 1 + 1 rule requires the auditor to audit the most currently filed year and the preceding one. [17] There is a further distinction to be drawn between the “extension” of an audit period and the “change” of an audit period.

An extension of an audit period denotes the continuation of an audit into a third contiguous year beyond the stipulated audit period because an auditor found something that is substantial and warrants opening up an additional year. A change in an audit period denotes changing the two year audit period from the assigned years to some other couplet of years. [9] [18] As a general rule Prentice would need the approval of his team leader to go beyond the audit period established by the AIMS sheet.

However, if an audit issue continued into subsequent years then that subsequent period would often be included in the audit. In 2010 Prentice did not recall having to take any formal steps to extend an audit period, though he said that some team leaders required more formality than others. He had been instructed by some of his team leaders to do what was warranted and not be restricted to the assigned audit period. [10] [19] As Mr. Milot colourfully and compellingly noted, Prentice did not carry around a sign declaring his predominant audit purpose.

Hence that purpose has to be determined through the application of the Jarvis criteria to the direct and circumstantial evidence adduced. Mori submits that, among other strands of evidence, the time period over which Prentice requested documentation assists in determining his predominant purpose. In Mori’s view, Prentice sought documentation about Mori outside a two year fiscal period of 411. Mori contends that his doing so is one of the many pieces of behaviour that demonstrate Prentice’s predominant audit purpose was a penal investigation of Mori’s income tax liability.

He takes that position despite Prentice’s evidence that the assigned audit period does not necessarily restrict his audit duties as he was obliged to investigate something that came to his attention during the audit, even if that audit risk leaked into another year. MNL and the “Independent Agent Invoice” [20] Mori was an employee of MNL, albeit a senior one. He was MNL’s general manager and he was also the company’s secretary- treasurer. As an employee, under MNL’s “automatic data processing system” (ADP system) in place at MNL, Mori received a tax-paid cheque.

His employer deducted, among other things, income tax, C.P.P. and E.I. before paying him his salary net of those deductions. [21] In early 2007 Mori insisted on not being paid under ADP. He was espousing “natural personhood.” He told Wiens and Momot that he was a “natural person.” [22] In March of 2007 by invoice #202 Mori invoiced MNL for compensation from January 1 to February 28 of 2007. This

invoice [11] , in the amount of $16,200.00 was titled “Independent Agent Invoice” (IAI) in very large font. It contained the printed words: “For Service Rendered Under A Private Employment Contract.” At its bottom the following explanation appeared: “This invoice is from a natural person, working in his own capacity, for his own benefit, without the reasonable expectation of profit.” [23] Mori prevailed upon Wiens to issue a cheque to him for this invoice without deducting income tax, C.P.P. or E.I. as required by law.

Wiens testified that he did so but felt that he was under duress to do so given Mori’s position in MNL. [24] This was the only time MNL paid Mori without taking source deductions. Having done it once, Mr. Wiens refused to do so again because he knew that doing so was illegal. Wiens knew that there was nothing wrong or illegal about paying Mori for his services as general manager. Rather, Wiens knew that while Mori remained an employee of MNL the company was legally obliged to deduct “at source” the requirements mandated by the Income Tax Act .

Yet, Mori was adamant that he should be paid without having income tax deducted from his gross pay. [25] In the face of Mr. Mori’s insistence that he be paid a gross cheque outside of MNL’s ADP system and without the collection and remittance of “at source” deductions, a solution was developed. [26] Mr. Mori was the sole shareholder of 411 and 411 received farm rental income payments from MNL.

Wiens, (likely in conjunction with Momot), suggested that MNL could outsource its general management needs to 411. 411 would then bill MNL for Mori’s services on a gross cheque basis plus HST. [27] In the result, Mori ceased to be an employee on the books of MNL and that company ceased to retain and remit at source deductions from the cheque that it paid to 411 for Mr. Mori’s services as MNL’s general manager. That was the situation that obtained in January of 2010 when Prentice was assigned to audit MNL and 411.

Prentice’s Audit Plans [28] As noted above, Prentice was assigned the audits of MNL and 411 on January 18, 2010. Prentice was a member of a small local (Niagara Region) audit team led by Armida Angaran (Angaran), his team leader. The MNL audit was to be a full scope compliance audit. The CRA has developed an audit manual that sets out nationally mandated policies and procedures. [29] On January 28, 2010 Prentice prepared a written audit plan for his audit of MNL. His audit plan was approved in writing by his team leader, Angaran, on February 1, 2010. A scanned copy of that plan is appended next.

Prentice placed check marks against his audit tasks as and when he completed them. This was the first of the two audits that he tackled. The “x”ed bullet denotes that another CRA employee, (a GST auditor,) completed that task.

[30] Prentice prepared a written audit plan for 411 on February 1, 2010. A scanned copy of that plan is appended next. That audit plan was approved in writing by Angaran on February 1, 2010. Prentice checked off each assignment after he had addressed an audit issue, finished all of his working papers with respect to the item and completed that audit task. The last item “review management salaries” is a matter of particular contention in this application. It was not checked off by Prentice because he did not finish that item.

While I shall discuss this aspect of Prentice’s audit plan for 411 in due course, several points ought to be kept in mind; namely: • that this restricted audit plan of 411 was developed on February 1, 2010 before Prentice began the MNL audit and before he encountered the IAI; • that as a step in this restricted audit plan Prentice set himself the task of reviewing the management salaries of 411; and, • Prentice’s audit plan for this restricted audit was approved in this form by his team leader, Angaran. [31] Prentice’s evidence that reviewing management salaries was a standard step in any restricted audit of a company is uncontradicted.

I accept that evidence. Mr. Milot’s submission that such a step was unreasonable and unnecessary was unsupported by any evidence. Nor could that submission be acted upon by resort to judicial knowledge or even by the application of common sense. It must be borne in mind that Momot, 411’s accountant testified, Gall, a CRA investigator testified, and two CRA team leaders testified. None of them were asked if that aspect of Prentice’s audit plan was unusual or inappropriate as part of a restricted audit and nothing that they testified to suggested that it was.

Audit Procedures and Prentice’s Practices [32] As a CRA auditor, Prentice was required by the provisions of the Income Tax Act to respect a taxpayer’s privacy. He was only permitted to discuss a taxpayer’s information with the taxpayer or the taxpayer’s authorized representative. [33] Prentice spent much of his time in the field; i.e., at the premises of corporate taxpayers. In order to carry out his duties he travelled with a briefcase, a laptop computer and a portable printer.

His laptop contained templates of blank documents, including query forms, which he could complete and print out during his field audits. [34] Queries are written questions that a CRA auditor would pose to a taxpayer or a taxpayer’s authorized representative. The choice to pose a written query rather than simply make a verbal request for some item, document or box of documents was a matter of discretion. Prentice said he chose to make written queries for a variety of reasons. Sometimes the taxpayer or its authorized representative preferred or requested matters to proceed by written queries.

Sometimes Prentice chose that route so that he would have a record of what he had asked for and could have a record of knowing if his requests had been complied with and completed. Sometimes the authorized representative would not have access to the items and would need to seek them out from the taxpayer or some other source. In cases like that Prentice would usually use a written query. [12] The MNL Audit [35] Prentice called MNL on January 15, 2010 and spoke with Wiens to advise him that MNL had been selected to be audited.

Wiens told Prentice that Momot was the company’s external accountant and Prentice then called Momot and the men exchanged telephone messages. Next, Prentice sent MNL a letter dated January 20, 2010 advising that he would be auditing their tax years ending in February of 2008 and February of 2009.

[36] Prentice chose that audit period because while the MNL AIMS sheet had stipulated an audit period of March of 2006 to February of 2008, Prentice received this audit assignment in January of 2010. At that point MNL’s most currently filed tax year was 2009 and so Prentice applied the 1 + 1 rule. [37] He also advised MNL that the field audit work for a company of their size might take three to four weeks.

Finally, he asked that the company have an itemized list of books and materials available for inspection commencing February 16, 2010. [13] Wiens estimated that for each tax year MNL saved eight bankers’ boxes of accounts payable documents and 20 bankers’ boxes of customer receivable materials. [38] Prentice and two other CRA employees arrived as scheduled. In addition to Prentice, a computer specialist attended and downloaded information that MNL had stored electronically.

An HST auditor also attended for some time to conduct a compliance audit for those taxes [39] Prentice continued to attend MNL’s Niagara-On-The-Lake premises to pursue his audit duties equipped with a computer and a portable printer. He was given room to work and access to all of the MNL files together with any other documents that he wished to examine and/or photocopy. Prentice was left alone to dig through the boxes.

If Prentice had questions about documents or if he needed anything he would approach Wiens or the payroll administrator for the company. [40] Wiens testified that the CRA wanted everybody’s T4 slip.

In addition, Wiens said that it was a standard part of this audit for the CRA “to look at all non-arm’s length, and they will ask for all non-arm’s length vendors, anyone who is receiving a cheque from the corporation who is either related by blood or in some way related that they would want to see how they are being paid over the course of the year.” [14] [41] Prentice attended at MNL’s Niagara-on-the-Lake premises and conducted field work for his full scope audit of that company on February 16, 17, 18, 22, 23, 24, 25, 26, March 1, 4, 8, 9, 12, 15, 16, 17,18, April 26 and 27, 2010.

February 23, 2010 – Wiens’ Evidence [42] On February 23, 2010, after several days of working on the MNL audit, Prentice came across the IAI that Mori submitted on March 1, 2007. [15] Prentice also located the $16,200.00 cheque paid to Mori in settlement of that invoice. Prentice photocopied those documents and spoke to Wiens about them, albeit briefly. [43] The Defence contends that this invoice was a “smoking gun” that alerted Prentice to the fact that Mori espoused the concept of natural personhood. Mr.

Milot submits that from that point on, (or at the very latest from March 10, 2010 as explained subsequently,) Prentice was on notice that Mori did not pay income taxes on income paid to him. As a result of that knowledge the Defence contends Prentice ceased to conduct a restricted compliance audit with respect to 411. Rather, once clothed with knowledge of this IAI, Prentice’s predominant purpose was the pursuit of a penal investigation of Mori.

In light of this position I shall review Wiens’ and Prentice’s evidence in substantial detail. [44] Wiens testified that their discussion was very brief, “probably not more than five minutes” and that he was uncomfortable talking to Prentice about the IAI. He did not recall everything said between them or indeed who said what. He further qualified his recollections by saying that he recalled the general conversation but that he could not recall any exact words used. On that basis Wiens testified that Prentice generally made an inquiry about what the IAI was.

Wiens told Prentice that this was how Mori wanted to be paid; that Mori did not want to be paid using the ADP system and that it was a payment to Mori. [45] Wiens stated that he did not know if Prentice knew anything about natural personhood or anything about independent agent invoices “or any of that.” Wiens, too, said he was not familiar with the concept and he did not have any input about it in their conversation. Wiens did not recall any lengthy conversation about Mori’s views on natural personhood or taxation or things like that.

Wiens testified that Prentice may have asked him what “natural person” meant to some degree but he could not recall him doing so. [46] He recalled that Prentice either told him that that was illegal or he told Prentice that it was illegal so he, (Wiens,) asked Mori if MNL could pay him through 411. Further, Wiens said that he never knew and did not want to know how Mori dealt with the payments MNL made to 411. While he had his personal suspicions he did not offer them to Prentice. [47] He could not recall if Prentice asked him whether MNL was continuing to pay 411.

While Wiens testified that he told Prentice MNL was paying 411, moments later he testified that he did not recall Prentice asking him what the current arrangement with Mori was.

He did agree that a CRA auditor has to ensure that the auditor only speaks with a person authorized by the taxpayer to deal with them and that he was authorized by MNL to deal with Prentice. [16] [48] Wiens then volunteered his 100% certainty that Prentice “would’ve been looking into our accounts payable file for [411] to find any number of those invoices.” I take that to mean that he was certain that Prentice had looked for further invoices from 411 to MNL and that Prentice would have found them in MNL’s accounts payable files. [49] Finally, Wiens telephoned Momot to advise him of several items that he had discussed with Prentice including Prentice’s discovery of the IAI dated March 1, 2007 and the cheque that paid it; (a call that Momot memorialized in a dated note. [17] ) February 23, 2010 – Prentice’s Evidence (in-chief) [50] Prentice had a somewhat different recollection.

He found and copied these documents on February 23, 2010 during his standard audit inquiries into MNL. [18] As matter of course Prentice would go through cancelled cheques looking for any cheques paid to the company’s shareholders and he was aware that Mori was a shareholder in the numbered company that owned MNL. To Prentice this cheque qualified as a related party transaction that merited further investigation since whether the invoice was properly expensed by MNL could be an audit issue.

[51] Prentice’s audit notes of February 23, 2010, from which he refreshed his recollection, do not mention this invoice or cheque. His notes relate to his queries regarding the other matters that were clearly germane to his compliance audit of MNL including issues regarding the foreign workers employed seasonally by MNL and the company’s accounting methodology for its nursery stock as noted in footnote 15. [52] His testimony in direct examination was unequivocal.

He testified that, while he copied both items and while they raised a question in his mind, he did not bring the IAI or the cheque in payment of it to Wiens. Further, he did not raise either of them with Wiens.

Given the other audit issues that he was dealing with, he elected to resolve his questions about these documents at a later time during the MNL audit. [53] In addition, Wiens was not an authorized representative of Mori and so he, (Prentice,) was prohibited by the Income Tax Act from speaking to anyone about a taxpayer’s personal tax situation unless that person was the taxpayer’s authorized representative. [54] Further, Prentice explained that he did not refer the IAI to a CRA payroll specialist because it may have been a “one-off” transaction and Prentice knew that it was not unusual for a company to make payments to a shareholder and he did know what this transaction was about.

For all of these reasons he deferred investigation of the matter and proceeded with his other audit tasks. [55] In the result, he did not discuss the matter with Wiens. The natural person wording on the invoice had no significance to him other than raising a question in his mind. He put the copies he made into his briefcase, electing to deal with the issue later and he continued with other aspects of the MNL audit. [56] Those other aspects of the audit included a number of queries or written requests for information to answer specific audit questions.

He provided these queries to Wiens who passed them along to Momot for response. February 23, 2010 – Prentice’s Evidence (in cross-examination) [57] Prentice’s evidence was substantially modified by cross-examination.

He conceded that it was clear to him that the cheque had been negotiated and that no at source withholdings had been taken from what, on its face, was an invoice for “services rendered under a private employment contract.” Further, while he was curious about the words “natural person” [19] that appeared in the invoice he made no immediate effort to ferret out their meaning or significance, despite having internet access. [58] Prentice maintained that he was unsure about the nature of the invoice and cheque. He knew that Mori was an employee, a shareholder and a signing officer of MNL.

Prentice testified that he was sensitive to invading Mori’s privacy in relation to these items with Wiens, who was not Mori’s authorized representative for tax purposes. Prentice’s concern was that these items documented a payment to a shareholder and signing officer of MNL and that they may have had tax implications for Mori. [59] Prentice denied having any recollection of initiating any discussion with Wiens about this IAI on February 23 rd despite having a number of other discussions with him that day. Indeed, he denied having done so because Wiens was not Mori’s authorized representative.

Despite that, Prentice admitted that it was possible, though he thought it unlikely, that he did so. [60] In a situation like that Prentice said that he tries to deal with the shareholder directly but I note that he did not do so or try to do so that day. Despite the questions these items raised in his mind, including whether this payment had implications for Mori’s shareholder’s loan account with MNL, he made no effort on February 23 rd to seek clarification about these documents.

When pressed that he ought to have done so his response was that he intended to do so eventually , suggesting that he would want to know how long this had been going on for. Prentice’s evidence was that he made no express or identified efforts to do so at any time during the MNL audit, other than being spoken to by Wiens . [61] Ultimately, Mr.

Milot brought Prentice to the following admissions: • he did not recall bringing the IAI to Wiens but he admitted it was possible he walked into Wiens’ office with the IAI; • Wiens did have a conversation with him about the IAI on February 23 rd ; • Wiens may have used the words “natural person” although he does not actually recall him doing so; • if Wiens did so, Wiens was the one to raise and voice them; • he did not respond to Wiens and engage Wiens in a discussion; • he did recall Wiens saying things to him about it and wishing Wiens would stop; and, • he was uncertain about whether Wiens spoke to him about the ADP system but he may have said something to him about payroll though he does not recall if it was in relation to Mori. [62] Despite all of this foregoing uncertainty Prentice conceded that it was possible that Wiens told him: • that no withholdings were deducted from the cheque; • that Wiens thought that was illegal; and, • that Wiens said MNL was now paying 411 directly. [20] [63] Given Wiens’ and Prentice’s evidence I find as follows.

Prentice found the IAI and the cheque in payment of it on February 23, 2010 and brought them to Wiens to ask what they were. Prentice must have done so otherwise Wiens would have had no knowledge that

Prentice had discovered them. The precise substance of the discussion that Wiens and Prentice engaged in about these items was unavailable to both men. Neither man made any contemporaneous notes to assist in a subsequent recollection.

However, given the congruence of elements of their respective, albeit vague recollections, I find that Prentice learned the following on that date: • the IAI was a salary payment to Mori from MNL; • the payment was made on a gross basis and not under the ADP system; • Wiens thought that this payment was illegal for MNL ; • this was the only time Mori had been paid like this; • MNL now paid 411 instead; • Prentice was curious about what “natural person” meant; and, • Prentice intended to follow up on these issues later in the MNL audit.

Conclusion and Findings Respecting February 23, 2010 [64] I find that this IAI and its associated cheque were not significant issues in the MNL audit. Momot made this assessment expressly in his testimony. Moreover these items were much more significant to Wiens than to Prentice in February of 2010 at that point in the MNL and 411 audits. It must be remembered that in March of 2007 Wiens felt that he was under “duress” and felt compelled to pay the invoice because of Mori’s stature in MNL. Mori was Wiens’ superior and in addition Mori was a shareholder in MNL and the boss’ son.

Wiens, I find, honestly felt that continuing to submit to Mori’s demand to be paid outside of the ADP system could harm and jeopardize MNL. Given this history and these feelings Wiens was very sensitive to having been complicit in what he believed had been an illegal transaction. Moreover, the solution to this dilemma had been arrived at through his collaboration with Momot. That is why he raised Prentice’s finding of the IAI with Momot on February 23, 2010, and not because Prentice was making an issue of it. [21] [65] The IAI and cheque were far less a matter of significance to Prentice on February 23, 2010.

While these matters raised a question in Prentice’s mind and piqued his curiosity they were not matters of pressing concern at that time for a variety of reasons. First, they did not implicate the screener’s comments in the MNL AIMS sheet, which were matters that Prentice was obliged to respond to. In addition, by that point in his MNL audit, this invoice and cheque were a “one-off” anomaly. Further, Prentice had no familiarity or facility with the concept of natural personhood. Finally, as he testified to and as I accept, he had much more pressing matters to deal with to complete in his audit plan.

I therefore accept his evidence that he copied these items and put them in his briefcase intending to deal with them later. [66] In the result, on February 23, 2010, far from being the “smoking gun” posited by the Defence, this IAI and cheque were merely a burned out ember in the MNL audit. Momot, Mori and 411 – some context [67] Momot became the external accountant for MNL and the accountant for 411 and for Mori in 2002.

He did Mori’s personal tax returns including his 2006 return but stopped doing them when Mori began to espouse the concept of natural personhood. [68] As the accountant for 411 Momot knew that Mori was the sole shareholder and controlling mind of that company. He knew that the company was basically a “flow through” and that any audit issues for the company would probably end up in Mori’s personal tax return. [69] Momot knew that as of March 1, 2007 MNL began outsourcing its general management needs to 411. He prepared 411’s income tax returns.

As a result of doing so he knew that a very large portion of 411’s income was earned from what was described on its books as “consulting income.” That consulting income was earned by 411 billing MNL for Mori’s services as MNL’s general manager. [70] Momot also knew that the largest “operating expense” incurred by 411 was for “compensation” that 411 paid to Mori as a result of IAIs that Mori submitted to 411. These IAIs were in the same form with the same recitations as the one Mori first submitted to MNL in March of 2007 – the one that Prentice discovered on February 23, 2010.

The March 10, 2010 Meeting Between Prentice and Momot [71] Prentice continued the MNL audit field work and audit steps for many months after February 23, 2010. Momot was not surprised by the scope of this audit. He testified that the information that Prentice was seeking was very consistent with what he would have expected. I find that the MNL audit was clearly a bona fide full scope compliance audit. [72] In addition to this full scope audit of a $20 million company, Prentice had also been assigned the audit of 411, a company with estimated revenues of $400,000 annually.

This was a company with some relationships to MNL. The sole owner/shareholder of 411 was a minority shareholder in MNL and Prentice knew that Mori was the scion of Leno Mori, the patriarch of MNL. In addition, Prentice knew that Momot was the external accountant for MNL and that Momot was the authorized representative of 411. [73] Knowing this and after some telephone tag, Prentice attended upon Momot on March 10, 2010. Like the February 23 rd meeting with Wiens, this meeting is fraught with significance for the Defence position on this application and so its contents must also be closely

parsed. March 10, 2010 – Momot’s Evidence (in-chief) [74] Momot believed that the purpose of this meeting was to further the MNL audit by permitting Prentice to inspect the MNL minute book and obtain information about real estate inquiries that Prentice had made. Momot knew that Prentice had scheduled two days of attendances at his offices.

While Momot did not make any notes at the March 10, 2010 meeting or place any memos to a file he believed that he had a secure recollection of its events, when he testified in August of 2014 to the following recollections. [75] Prentice had the IAI that he had discovered on February 23 rd and they talked about it. Momot told him that Mori believed in the natural person concept and that income earned by a natural person was not taxable. Prentice told him that he had heard something about the concept though he did not expand upon what he had heard.

Momot then left Prentice but a few minutes later Prentice asked to speak to Momot and said, “You realize Bill is in a lot of trouble.” Momot was not surprised by that comment because he felt that it was inevitable that Mori would get into trouble as a result of his belief in natural personhood. [76] He told Prentice that this was the first IAI and Mori was now billing 411 for them instead.

Prentice asked if Momot did Mori’s personal returns and he told Prentice that he used to but stopped because Mori began espousing natural personhood and Momot felt Mori’s returns would be misleading as a result. [77] During this meeting Prentice presented Query No. 1 in the 411 audit to him. Momot believed the audit of 411 was initiated as a result of Prentice’s discovery of the IAI on February 23, 2010. He believed that Query No. 1 for 411 was created as a direct result of Prentice’s discovery of that IAI.

A copy of that query has been scanned and will be pasted subsequently in these reasons. [78] In relation to item 8(

b) of this query Mr. Milot asked Momot about the management salaries paid by 411. Momot replied that 411 did not pay any management salaries, (“Well, there were not any management salaries.”) [22] Next, Mr. Milot asked whether Prentice made any verbal requests for additional documents at this meeting. Momot responded that Prentice also asked for a copy of all of the independent agent invoices that Mori had issued to 411. Momot collected all of this information from Mori and provided it to Prentice at a meeting that they eventually arranged for July 14, 2010.

March 10, 2010 – Momot’s Evidence (in cross-examination) [79] Momot conceded that in preparation for his testimony he had been provided with Prentice’s notes for the MNL audit. Those notes are referred to as T2020’s by CRA employees. In addition, Momot had been provided with and had read the formal Defence application for this

section 7 and

section 8 application. Given the passage of time and the fact that Momot did not make any notes regarding this meeting he also agreed to defer to Prentice’s notations of the meeting.

[80] Momot agreed that this meeting was a formal event that involved both the MNL and the 411 audits. One of Prentice’s tasks on this date was an examination of the MNL corporate minute book that Momot had available, having sought it from MNL’s lawyers. [81] Despite this being a joint meeting to deal with both the MNL audit and the 411 audit, Momot believed and was firmly of the view, (at least during his direct examination,) that the 411 audit must have been initiated as a result of Prentice discovering the IAI on February 23, 2010.

This was so despite his having read the formal Defence application form that stated that both audits had been assigned to Prentice at the same time. [82] In addition to erring about the cause of the 411 audit, Momot either agreed with or accepted the likely correctness of a number of suggestions put to him by Mr.

Frost, including: • that Prentice told him at this meeting that he had been assigned both audits at the same time; • that Wiens was not 411’s authorized representative so Prentice had difficulty dealing with him about 411 issues; • that while he had no memory of it Prentice may have told him that Stacey Mori, (Mori’s wife,) was an authorized representative of 411. [83] Momot recalled telling Prentice that he did 411’s tax returns, but had not done Mori’s personal returns since 2006 and that he was not an authorized representative of Mori. [84] Momot agreed that Query No. 1 for 411 only dealt with 411 and that there was no request in it for information about Mori.

He also agreed that the questions about 411 were bona fide inquiries for a company audit, for fiscal 2008 and 2009 of the company. [23] He said that he received Query No. 1 for 411 from Prentice towards the end of the day on March 10, 2010. [85] Finally, Mr. Frost had Momot concede that Prentice’s focus was on the items that ended up being addressed in the MNL audit proposal as a result of MNL’s tax reassessments.

[86] Momot’s opinion was that item number 6 on this query may have but would not necessarily have disclosed the IAIs that Mori submitted to 411 since that would be contingent on how a company’s accountant would characterize those invoices. That characterization would depend on a particular company’s financial circumstances and what the accountant thought was most advantageous for the company’s shareholder. [87] Significantly, Momot agreed that an auditor would want to see what business arrangements a company had with its shareholder.

He agreed that it made perfect sense in the course of a corporate audit of a “flow through” company for the auditor to be interested in the relationship between a company and its shareholder, including determining the payroll or salary paid by the company to the shareholder. [88] So far as management salaries were concerned Momot testified that he told Prentice that there were no management salaries but there were payments to Mori and that is when Momot told Prentice about the stream of IAIs that Mori had submitted to 411.

Momot said that he and Prentice discussed the formal query when Prentice presented it in case he had any questions about what the auditor wanted. [89] Momot was insistent and unwavering in his recollection that Prentice came to him and said that Mori was in trouble. Yet, despite this statement to him Momot did not contact Mori and did not tell Mori of it or warn Mori about it when he eventually did contact him to seek the information required to answer Query No. 1 for 411. March 10, 2010 – Prentice’s Evidence (in-chief) [90] Prentice kept separate written logs, (separate T2020’s,) for each of his audits.

His first entry for the 411 audit was dated March 10, 2010. He told Momot that he was auditing 411 and would give him a written query. [91] Many of the audit steps that he took in his 411 audit are mandatory and the others are his standard queries whether he was undertaking a full scope or a restricted audit. Those various steps were set out in his audit plan that was approved by his team leader. His Query No. 1 for the 411 audit that he gave to Momot was in pursuit of his approved audit plan.

Because March was Momot’s busy tax season, Prentice did not rush Momot to complete the query. [92] While the start and focus of an audit is on the company being audited, in companies with a limited number of shareholders audit issues often end up in the personal tax returns of those shareholders. [93] Prentice recalled that Momot did tell him that he did not do Mori’s personal tax returns anymore. As a result Prentice realized Momot was not Mori’s authorized representative so Prentice did not raise the IAI with him, as the IAI that he discovered on February 23 rd was not germane to the 411 audit.

Nonetheless, Prentice testified that Momot may have mentioned the concept of natural personhood to him. [94] Prentice testified that he did not make a specific request for IAIs that were eventually disclosed to him in Query No. 1 in the 411 audit, except perhaps that they could be considered to have been requested under item 8(b), being the request he made for management salary information.

Moreover, Prentice said that he had no recollection of making any general verbal requests or any specific verbal request for the IAIs that were eventually disclosed to him March 10, 2010 – Prentice’s Evidence (in cross-examination) [95] Prentice conceded that he began the 411 audit without any letter or prior notice to 411 or any of its authorized representatives.

This is so even though he had been talking to Momot by telephone in January and notwithstanding that he was coming to a pre-arranged meeting in Momot’s office to received MNL documents. [96] While he did not recall saying anything to Momot about the IAI that he had discovered in February, Momot did tell him something to the effect that he was not doing Mori’s personal tax returns after some year that he cannot recall.

Prentice reiterated that and as soon as Momot said that Prentice realized that Momot was not an authorized representative so that he would not have wanted to seek any further information from him about Mori. [97] At a point in Prentice’s cross-examination, (which persisted over days,) Prentice made the following statements, admissions or concessions: • he did not recall showing the IAI to Momot; • he did not recall asking Momot what he knew about natural persons; • he did not recall if Momot used the words “natural person” or not; • while he did not recall bringing up the concept of natural personhood he accepts that Momot may have done so; • he agreed that he may have told Momot that he had heard of the concept; • he did recall that Momot told him that Mori went to a seminar in regard to something to do with taxes and that the seminar may have been in Toronto; • he did not recall Momot discussing the IAIs that Mori billed to 411; • he thinks he recalls a discussion of natural personhood by Momot. [98] While Prentice agreed that he may have knocked on Momot’s door he testified that he did not recall telling Momot that “Bill’s in a lot of trouble.” However, and significantly, he agreed that it was possible that he did so, (although he doubted that he did because of his concern about breaching a confidence.) [24]

[99] At one point however, Prentice stated that it was his “preference” (sic) not to discuss anything to do with a taxpayer’s tax situation unless it was with an authorized representative of the taxpayer.

Yet, he agreed that Momot was the authorized representative of MNL and clearly he was for 411, too, and so, he agreed that it would have been appropriate for him to speak to Momot about the IAI he located on February 23 rd . [100] Ultimately Prentice agreed that it was possible that he did ask Momot to obtain IAIs that Mori had issued to 411. [25] Despite this admission he did not agree that Query No. 1 for 411 did not ask for these documents. Prentice’s view was that he asks for documentation and then proceeds on the basis of what is provided.

When challenged as to why he would be asking to review management salaries in a restricted audit he responded that their amount may be large for a company of this type or their amount may be large when compared to the income earned by the company. Findings Respecting March 10, 2010 [101] When Prentice was challenged by Mr. Milot that Momot had told him that Mori was failing to disclose earned income Prentice astutely responded, ‘How would he know?’ Momot did not do Mori’s personal tax returns.

Clearly, Momot was suspicious that that was the case but his suspicions could not rise above speculation without access to the actual tax returns. Similarly, any concerns that Prentice may have had, as a result of his dealings with Wiens and Momot, could not and did not rise above suspicion at that point in time since he had no actual invoices from Mori to 411 or the dollar value of them, if they existed. [102] Mr. Milot has submitted that the natural person verbiage used by Mori on the IAIs was tantamount to a declaration by Mori that he did not pay income taxes.

It may well be that in due course that conclusion was reached by Prentice but I am unable to find that to be the case on March 10, 2010. By that point in time Prentice had only seen one IAI in the MNL audit from Mori to MNL and that invoice played an inconsequential

part in that audit. Unless and until Prentice saw documentation to support Momot’s suspicions or any that Prentice harboured and until he was able to compare that documentation to Mori’s filed income tax returns, suspicions were all that he could harbour. [103] This is necessarily so since, as I shall review later, Mori would not talk to Prentice . Moreo ver, the fact that both Wiens and Momot suspected that Mori was not declaring earned income did not make it so. Neither they nor Prentice knew what Mori’s income tax returns actually contained as of March 10, 2010.

The fact that Mori espoused a natural person philosophy did not mean that he would actually act on it when it came time to filing his tax returns. As Prentice said, he ‘needed to see the documentation and then go from there.’ [26] [104] While the evidence about this meeting that was given by Prentice and by Momot is conflicting, there are many aspects of their evidence that do accord. The two main factual issues in contention are first, whether Prentice told Momot that “Bill was in a lot of trouble” and second, whether Prentice made a verbal request for the IAIs that Mori had billed to 411.

The legal consequences, if any, should those findings be made, are also disputed. [105] Momot’s recollections of the meeting are unaided by any written memorandum or note. Further, he conceded that Prentice had the advantage of having the ability to refresh his memory from notes made at or shortly after the time of this meeting.

In addition, Momot displayed several failures of recall and more significantly was testifying under what I would call conceptual errors about the meeting. [106] He believed that the 411 audit was initiated as a result of Prentice’s discovery on February 23, 2010 of the first and only IAI that Mori delivered to MNL. He maintained this belief throughout his evidence in-chief despite having read the formal Defence Application materials prior to his testimony.

Those materials clearly stated that both audits had been assigned on the same date in January; viz ‘On January 18, 2010 CRA auditor Scott Prentice was simultaneously assigned both audits.’ [107] In addition to this errant view of the genesis of the 411 audit, which, in my view, implies a worrisome tendency to re-interpret the past based upon incorrect assumptions, Momot was saddled with another memory hurdle to surmount. Prior to his testimony Mr. Milot provided him, albeit innocently, with a copy of Prentice’s notes for the MNL audit which included entries about this March 10 th meeting.

But, he was not provided with a copy of Prentice’s notes of that meeting with respect to the 411 audit. (Prentice kept his audit notes for each audit separate.) It is, of course, next to impossible to tease out what effect the provision of someone else’s notes might have on a person’s memory. As a rule, witnesses are excluded from courtrooms to avoid this dilemma of tainting or tailoring. [108] A further example of Momot’s capacity to re-invent or confabulate occurred when he discussed the events of July 14, 2010.

Not knowing or remembering that Prentice travelled with a portable printer, Momot testified that his recollection was that Query No. 2 for the 411 audit was brought to his office and handed to him by Prentice. When he was confronted with the fact that Prentice travelled with a portable printer, Momot conceded that his initial recollection and testimony may well have been mistaken and that Prentice may have printed Query No. 2 while at Momot’s office.

These errors of inference demonstrate that Momot’s recollections are unreliable and that he has created false recollections by inference to accord with what he believes he remembers. [109] In addition to these concerns Momot demonstrated a number of discrete memory deficits respecting this meeting and that general time-frame.

At one point Momot testified that he contacted Mori prior to March 10 th to alert him to the impending audit of 411, though he recognized this error and corrected that testimony. [110] At another point he stated that after their meeting of March 10 th he never talked to Prentice again but then quickly agreed that they spoke the next day. Granted this is a very minor matter given that there is no issue but that the two men met at least twice later in 2010, on July 14 th and September 21 st .

But he also failed to recall receiving a telephone call from Prentice within the week, on March 16, 2010, regarding a meeting about the MNL inventory evaluation. [111] That having been noted, Prentice’s recollection was hardly impressive either, given that he was prepared to accept the possibility

that most of the aspects of Momot’s recall of their meeting were generally correct. [112] In the result, I come to the following findings.

Since Prentice had questions in his mind about the IAI that he discovered during his MNL audit and since he was coming to meet with MNL’s outside accountant, it seems reasonable to me that he would and I find that he did bring the IAI to Momot’s office on March 10, 2010 as Momot said he did. [113] Prentice’s “preference,” but I infer not his invariable practice, (given that this was his characterization,) was to only discuss a taxpayer’s situation with the taxpayer or the taxpayer’s authorized representative.

The fact that the two men had some discussion of this IAI, of natural personhood and of Mori is, to my mind, reasonable, understandable and to be expected. After all, 411 was a single shareholder flow-through company and Prentice was there to begin an audit of it. [27] Moreover, Momot was 411’s accountant and had been Mori’s personal accountant.

Momot knew of Mori’s belief in natural personhood and had rejected him as a personal client because of it. [114] Prentice admits the possibility that these topics were discussed to some extent and Momot says that they were and so I find that they were discussed to some extent. I cannot be certain of and cannot make discrete findings of fact with respect to the exact or precise scope or the content of these discussions since they were not recorded or memorialized.

However, I have no doubt that Prentice and Momot did talk about 411, Mori, natural personhood and an ongoing stream of invoices issued by Mori to 411, the company he controlled. “Bill’s in a lot of trouble” [115] I am uncertain about whether Prentice came into Momot’s office and said that “Bill was in a lot of trouble.” Despite Prentice’s admission that it is possible he did so, Prentice promptly qualified that admission by discounting its likelihood due to his policy of protecting taxpayer confidentiality. Concessions of “possibility” are an inadequate basis for a positive finding of fact.

My uncertainty is compounded by the frailties that I found in Momot’s evidence. It seems to me that this averment by Momot is more likely a revisionist confabulation by Momot than something that Prentice actually said to him in the fashion recounted by Momot. I come to that conclusion for a variety of reasons. [116] First, as I noted above, Momot displayed several failures of recall and displayed incidents of seriously flawed inferential reconstruction in his evidence.

One of the flawed inferences, (that the February 23 rd IAI discovery was the reason for the 411 audit,) was at odds with contrary information that Momot had previously gleaned before his testimony and his testimony that “Bill’s in a lot of trouble” relates to an undocumented meeting four years in the past. [117] Second, having watched and listened to Prentice for several days, he did not refer to Mori as “Bill”.

The phrase as recited by Momot would not have been uttered in that fashion by Prentice and I am not satisfied that it ever was. [118] Third, after Momot professed to hear these words spoken he did nothing to alert Mori to what he says was Prentice’s view that Mori was in a lot of trouble.

In this regard, while Mori was no longer his personal client, Mori was still the scion of a very important client, still an ex-client to whom some duty of loyalty was owed and he was still the operating mind of a subsisting client of Momot. [119] Yet despite this web of relationships Momot says that he did not call Mori and warn him that a CRA auditor said he was in “a lot of trouble.” Momot’s explanation for not doing so is that he felt it would not have been heeded by Mori since Momot felt Mori was committed to a philosophy of natural personhood.

If this alleged utterance clearly portended criminal prosecution, as the Defence contends, Momot would undoubtedly have done something about it by way of warning to Mori. [120] There is a fourth and compelling reason why I am unconvinced that this utterance was made, in addition to the foregoing considerations. Prentice was not clothed with sufficient knowledge to come to such a conclusion and therefore utter such a statement. To this point in his audits, he had seen the IAI on February 23, 2010. He did not know the state of Mori’s personal tax returns and did not obtain them until April of 2010.

On March 10, 2010 Prentice had no actual knowledge of Mori’s declared income or any actual knowledge of the amounts of any IAIs that Mori was submitting to 411. In short, Prentice had no factual basis to make the statement attributed to him. [121] I find that the statement “Bill is in a lot of trouble” was never uttered by Prentice, in the fashion Momot testified to.

It seems far more likely to me that Momot merely thought Mori was in a lot of trouble given his suspicions about Mori than that Prentice said so. [122] It was Momot who thought that the 411 audit was instigated by Prentice’s finding of the IAI on February 23, 2010. By Momot’s own admission he disclosed information to Prentice about Mori that, in hindsight, he ought not to have disclosed. Momot testified that he felt conflicted about doing so, about breaching confidences, but he did so because he did not want to mislead a CRA auditor.

Like Wiens, Momot was far more sensitive about Mori and the first IAI that Prentice located and about IAIs that he knew Mori was invoicing 411 than was Prentice at that point in his audit investigations. [123] Accordingly, I doubt that the statement was made, at least in that overt fashion. But, in my view, at this point in the 411 audit , even if I am wrong in this finding, and even if that utterance was made, contrary to Mr. Milot’s submission, it is of no consequence in support of the defence contention that Prentice’s primary purpose was penal.

I come to that conclusion for a variety of reasons. [124] Momot suspected Mori’s tax returns would misrepresent his actual income and implied as much to Prentice but he offered no particulars. Prentice knew that if audit issues were discovered in companies run by sole shareholders, those issues often ended up as the personal responsibility of the sole shareholder. Both men knew that 411 was a flow-through type of company. But, none of that knowledge known or conveyed altered the nature of the audit of 411 being conducted. [125] It was a randomly assigned bona fide audit.

The audit plan created by Prentice was created before these words were alleged to have been spoken. That audit plan was approved by Prentice’s team leader. The elements of Query No. 1 were either mandated or standard inquiries. That first query could have required the disclosure of the IAIs issued in 2007 and 2008 ab initio . Moreover, for the reasons I shall review, it was Momot and not Prentice who precipitated the specific request for those IAIs. In short, this remained a real,

albeit, restricted audit of 411. The purpose of it was non-penal and predominantly, indeed completely, oriented to determine civil compliance with the Income Tax Act . [126] Even if one posits that the purported statement was made, it does not alter the nature of Prentice’s audit at that point in time.

Prentice did not know about Mori’s declared income on March 10, 2010 and since Prentice did not know the dollar amount of Mori’s IAI invoices to 411 and since Prentice had limited knowledge about 411’s financial situation, (which was why he produced Query No. 1,) even if he made the statement as alleged it could have only referred to civil “trouble” at that point in the audit. [127] While I have found that Momot’s failure to warn Mori is evidence tending to show the “Bill’s in a lot of trouble” statement was not actually made, if my finding is in error, Momot’s lack of warning is merely evidence of the impending civil trouble that Momot felt was going to be inevitable.

Any other

interpretation of Momot’s non-action makes no sense to me, if I assume for these purposes that the statement was actually made as Momot alleged. [128] It seems far more likely to me that Momot “thought” Mori was going to be in a lot of trouble and that he confabulated the memory he now professes to recall. But, whether Prentice actually said this or not is inconsequential because the audit of 411 was and at that time remained a bona fide restricted compliance audit. That was its predominant purpose.

In further support of that finding I note the uncontradicted evidence that the queries Prentice made in Query No. 1 for the 411 audit were all proper matters of inquiry for a restricted audit of this sort. [28] [129] Further, while the Defence contention that a “verbal” request was made is correct, the Defence characterization of that request as being significant or sinister is not. The Verbal Request for the IAIs [130] Mr. Milot submits that Momot’s testimony that Prentice made a verbal request for any IAIs that Mori invoiced to 411 should also be accepted. Prentice did not recall making such a verbal request.

He thought that the IAIs disclosed to him on July 14, 2010 were produced in answer to item 8(

b) of Query No. 1. I accept Momot’s evidence on this point for the reasons provided next. [131] Momot’s evidence on this point makes sense. Momot testified that he would normally sit down with an auditor and review the elements of a query to ensure that he understands what the auditor is seeking. That clearly happened here between Momot and Prentice. [132] While Momot told Prentice there were no management salaries paid by 411 he also told him that there were these other things, the IAIs that Mori invoiced to his company.

It was Momot who raised the existence of an income stream being paid by 411 to Mori, whether or not it was designated as management salaries. [133] It is clear to me and I find that when Momot brought up these IAIs to Prentice, Prentice asked for them to be provided. In my view there is no significance and certainly no sinister or mal fide connotation to this verbal request. As noted before, Prentice sometimes merely asked for documents and sometimes he presented written queries.

While it is true that the words “Independent Agent Invoice” do not appear on Query No. 1, it was Momot who analogized them to management salaries. It was the work of a moment for Prentice to then verbally request them, in these circumstances. Finally, I note that Momot also made no written memo of this request.

He simply asked his secretary to remind him to get them from Mori. (Whether his secretary made a written note of her task is not in evidence.) Conclusions on the March 10, 2010 meeting [134] The IAI discovered on February 23, 2010 was of little consequence to the MNL audit and it had no significance for the 411 audit. When Prentice learned that Mori issued IAIs to 411 Prentice asked for them. This was a reasonable request given the information Momot had provided to him.

On March 10, 2010 Prentice had no actual knowledge of Mori’s personal tax returns and no knowledge of the quantum of income that he was directing 411 to pay to him. [135] The salaries paid by a company were audit worthy in the normal and ordinary course of any audit for the reasons explained previously. A verbal request was undoubtedly made but that did not make it a tainted request. The elements of Query No. 1 in the 411 audit were appropriate and unexceptional. Momot thought so and said so. Prentice said so, too, and no witness called has said anything to the contrary.

The audit of 411 as of March 10, 2010 proceeded for a predominantly non-penal purpose and I reject any of the Charter complaints made to this point in time. March 17, 2010 – Prentice meets Mori [136] On March 17, 2010 Prentice met with Mori at Mori Gardens, a retail outlet of MNL. Prentice told Mori that he had been assigned to audit 411 along with the MNL audit. He assured Mori that he had not spoken about the 411 audit to anyone inappropriate. Mori told Prentice that Momot had called him about Query No. 1 and that he, Mori, preferred to have Prentice deal with Momot about any 411 matters.

Prentice asked Mori if he lived in a company owned house and Mori said that he did. Prentice then asked if he paid rent and Mori said he would prefer that Prentice deal with Momot. Mori did say that 411 was a very simple company. Prentice did not tell Mori that the audit of 411 was a “restricted” audit. Those were the only direct dealings that Prentice and Mori had. The Culmination of the MNL Audit and Mori’s Secondary File [137] The MNL audit and the 411 audit proceeded on parallel paths during some of the same time periods.

Having completed his field work and having considered what he had found, Prentice wrote a “proposal” letter to MNL. That letter, dated April 29, 2010 was filed as Exhibit 3, tab – 25. It speaks for itself but demonstrates that the major compliance issue discovered by Prentice was an inventory valuation practice that was unacceptable to the CRA. One other modest dollar amount adjustment was also included; namely, the valuation of legal work. While this was of minimal dollar value, it appears to me to be a matter that was the subject of a “screener’s comment” and as such had to be dealt with by Prentice.

The other issue being adjusted was the cost of some non-deductible medical expenses paid for by the company for one of its shareholders.

[138] Prentice’s “proposal” was the subject of negotiations. Momot was successful in convincing Prentice to reduce the amount to be adjusted by just under $250,000.00. The other matters remained as initially proposed. I shall scan and paste the final proposal letter that incorporates the negotiated reduction next. Before doing so, however, it should be noted that the effect of these reassessments on MNL’s tax returns did not result in MNL having to pay any money to the CRA.

Rather, MNL was permitted to deplete the accumulated tax losses that they had been claiming, which were incurred using the unacceptable inventory valuation practices. MNL had been using these tax losses to decrease their taxable income, a practice that this audit identified and precluded thereafter. [139] In effect, MNL was able to take the benefit of an improper accounting practice that created these accumulated losses. Prentice, on behalf of the CRA, treated MNL’s improper inventory valuation practice as a “one-off” situation that was not to happen again. [140] Mr.

Milot submits that Prentice ought to have adjusted the failure to deduct the “at source” deductions for the IAI he found on February 23, 2010. It is clear to me that this was a matter of “small change” in respect of the MNL audit. Including it in the proposals would have had no adverse financial consequence to MNL. This is obvious in light of Prentice’s treatment of the main inventory valuation issue. Moreover, by the time Prentice finalized the MNL audit, he had just received his responses to Query No. 1 in the 411 audit.

As a result he proceeded to pursue the 411 audit with full knowledge of the ambit of the IAIs in that audit, as explained subsequently in these reasons.

Mori’s Secondary File [141] In addition to discovering and disallowing MNL’s payment of a medical expense bill for one of its shareholders, Prentice also discovered that MNL had been providing automobile benefits to Mori and that Mori had not declared the value of those benefits on his 2007 and 2008 personal income tax returns.

As a result of these discoveries, Prentice opened up a “secondary file” to reassess Mori and require him to include the value of these automobile benefits as income. [142] Mori did not respond to Prentice’s initial letter outlining his proposed readjustments to Mori’s personal income tax liability for these automobile benefits. So, Prentice sent Mori a final proposal letter dated June 30, 2010. [143] By June 30, 2010 , Prentice had determined what amounts Mori had declared to be his taxable income for 2007 and 2008.

Prentice adjusted those declarations upwards by reassessing Mori’s tax returns so as to require him to include the value of the automobile benefits that he had received from MNL but not declared as part of his earned income. [144] Prentice’s final proposal letter to Mori reassessing Mori’s 2007 and 2008 tax returns together with a

summary of those returns is attached next in these reasons. They show that after including the value of the automobile benefits into Mori’s income for these two tax years, Mori had a declared net taxable income for 2007 of $23,679.00 and $28,566.00 for 2008. These documents demonstrate Prentice’s knowledge of Mori’s affairs on June 30, 2010, prior to Prentice’s meeting with Momot on July 14, 2010 to receive the answers to Query No. 1 for 411.

July 14, 2010 [145] After a series of telephone-tag calls Prentice and Momot agreed to meet at Momot’s office on July 14, 2010 so that Momot could provide Prentice with the answers to Query No. 1 for 411. The Defence contends that Prentice arrived at Momot’s office with Query No. 2 for 411 in hand; that Prentice had prepared that second query before he came to Momot’s office and before Momot provided him with the documents in answer to Query No. 1. [146] Mr.

Milot submits that by preparing Query No. 2 beforehand Prentice effectively demonstrated that he had begun a penal inquiry into Mori’s tax liability and that Prentice knew or truly believed, as opposed to merely suspecting, that Mori had committed tax crimes.

Preparing and tendering Query No. 2 before receiving the answers to Query No. 1 shows that Prentice did not need to review or even see the IAIs elicited by Query No. 1 to know that there were reasonable and probable grounds to believe Mori was committing tax fraud or tax evasion. [147] To be clear, one must note that it was not until Prentice received the IAIs elicited by Query No. 1 that he first actually saw their number and dollar amounts.

It was only after Prentice received them that he knew how many IAIs Mori submitted to 411 and how much money he received from 411 in satisfaction of those invoices. [148] Those IAIs form the bases of the charges that Mori is facing for the 2007 and 2008 tax years. If the documents elicited by Query No. 1 are excluded from evidence then all of the counts will fail, because any further queries for 2009 would also be infected by Prentice’s purported penal purpose.

This can be seen from Prentice’s request for all of 411’s bank statements and cancelled cheques from March of 2009 to February of 2010 that is contained in Query No. 2 for 411, which will be scanned and pasted into these reasons in due course. [149] Mr. Milot contends Query No. 2, which contains a request for bank statements and cancelled cheques, demonstrates that Prentice was both extending the assigned audit period and that he was seeking to determine the amount of income received by Mori from 411 for the balance of 2009.

That information would only be relevant to Mori’s income tax liability as an “individual.” I shall paste Query No. 2 next into these reasons as both its form and its contents play a role in these Defence submissions.

[150] Mr. Milot submits that there are two matters that support his position about the creation of Query No. 2 in addition to Prentice’s testimony that it was “possible” he had prepared that query before reviewing the items Momot gave to him in answer to Query No. 1. [29] First, Momot testified that Prentice brought it to his office and presented it to him before he handed over the answers to Query No. 1. I do not accept that evidence. As previously noted, Prentice did not actually have a memory of that sequence of events.

He inferred that that must have happened because he did not realize or remember that Prentice always travelled with a portable printer. Upon being apprised of the fact that Prentice had the capability of printing out Query No. 2 while at his office, Momot resiled from that evidence. He was prepared to accept that his recollection of the sequence of events leading to the presentation of Query No. 2 was uncertain at best. [151] Mr. Milot’s second submission is that since Prentice put handwritten requests on Query No. 2, Prentice must have prepared the typed query before coming to Momot’s office.

That explains why there are handwritten notations on the document. Mr. Milot submits that if Prentice had typed out the query at Momot’s office then there was no need to hand-draft any part of it. Prentice would have simply re-typed it all at Momot’s office, if it was created there. [152] I reject that submission and find that Prentice typed out Query No. 2 at Momot’s office after he received and briefly reviewed the answers Momot provided to him in response to Query No. 1. I come to that conclusion for several reasons. [153] First, Prentice testified to that effect and I accept his evidence on that point.

Second, Mr. Milot’s submission is inconsistent with common experience. Amending a typed document with handwritten amendments or augmentations is a common and every day experience. Third, Prentice did the same thing in adding to his audit plan for MNL [30] . This was a plan he prepared in his own office while under no time constraints. That audit plan was as formal a document as Query No. 2 was and yet it, too, contains hand-written portions.

[154] For these reasons I accept Prentice’s evidence that he created Query No. 2 after he attended at Momot’s office, after he received the documents that Momot provided to him in answer to Query No. 1, and after he reviewed those materials to some extent, as he said. The documents tendered to him in answer to Query No. 1 included the IAIs that Mori submitted to and was paid for by 411 in 2007 and 2008. [155] Prentice did not create or present Query No. 2 for 411 until he received, reviewed and considered the answers to Query No. 1. While Mr.

Milot argued that Prentice began a predominantly penal inquiry into Mori’s tax liability from some point before Prentice received these IAIs from Momot, I do not accept that submission for the reasons provided to this point in this ruling. [156] It is very likely that Prentice’s brief review of the IAIs tendered to him on July 14, 2010 was sufficient time for him to digest their significance.

Given what Prentice knew about Mori’s declared income by that date, the only fact that causes me some doubt about whether Prentice’s predominant purpose changed immediately upon receipt and brief review of those IAIs is that the hand-drafted portions of Query No. 2 sought further information about the value of the housing benefits conferred upon Mori by 411.

That request suggests that on July 14, 2010 Prentice was still engaged in pursuing the housing benefit compliance task set for him by the 411 screener. [31] [157] So, I find that Prentice’s predominant purpose in pursuing Query No. 1 was non-penal and appropriate from the date of his assignment of the 411 audit in January of 2010 through and to some point shortly after July 14, 2010.

However, I find that well prior to September 21, 2010, (when he attended upon Momot’s office to receive the answers to Query No. 2,) Prentice’s predominant purpose had become a penal investigation into Mori’s income tax liability for non-payment of income taxes on earned but undeclared income. My Reasons for Finding a Predominantly Penal Purpose After July 14, 2010 [158] First, Prentice had no actual or quantifiable knowledge of any undeclared income until July 14, 2010.

Prentice may well have had suspicions because of finding the IAI in the MNL audit and because of what Wiens or Momot told him, but he had no real knowledge. [159] That changed on July 14, 2010.

On that date, and before Prentice received the IAIs, he knew what Mori’s declared income was for 2007 and 2008, both as initially declared and as reassessed for automobile benefits. [160] The briefest of glances at the IAIs tendered to Prentice on July 14, 2010 placed him on notice that something was badly amiss between what Mori had declared and what earned income he had actually received. [161] The IAIs showed Prentice that in Mori’s 2007 and 2008 tax years 411 had paid him hundreds of thousands of dollars for compensation or bonuses.

It was obvious that those sums did not accord with Mori’s declared income for those years. While Prentice may not have had immediate access to a hard copy of Mori’s 2007 and 2008 filed income tax returns at Momot’s office on July 14, 2010, he had that access upon his return to his own office. [162] There was no evidence available to Prentice to suggest that Mori had incurred major expenses to earn the amounts of income that he had earned by invoicing 411 for those IAIs.

Accordingly, I find that within days of July 14, 2010, at the latest, Prentice had reasonable and probable grounds to believe that Mori had committed tax fraud or tax evasion for the 2007 and 2008 tax years. Yet Prentice did not refer the 411 audit or Mori’s personal file to the Special Investigations (Enforcement) branch of the CRA. Instead, in the face of this information he purported to pursue the restricted audit of 411. [163] Second, in addition to the foregoing knowledge I have considered Prentice’s explanation for why he created and tendered Query No. 2.

Prentice agreed that when he drafted Query No. 2 he had turned his mind to Mori’s personal tax situation and he sought to obtain information to pursue Mori’s personal “audit risk” for 2009. Prentice conceded that when he issued Query No. 2 he knew there were issues with Mori’s tax return. Under cross-examination Prentice effectively admitted that he wanted documents to expose Mori’s 2009 income because he had determined that Mori had unreported income. [32] [164] Third, Prentice never completed the 411 audit.

I find that he did not do so because he became focused on pursuing Mori’s personal tax liability once he received the IAIs on July 14, 2010. [165] Fourth, Prentice’s personal audit of Mori and his referral of Mori to Enforcement were precipitously quick.

While Prentice insisted that he did not refer Mori’s personal file to Enforcement and that the referral was made by his team leader, Angaran, she testified Prentice was the predominant instigator of that referral. [166] One reason for the speed with which Prentice undertook and completed the personal audit of Mori and the speed of the referral to Enforcement was that criminal tax issues had become apparent to Prentice very shortly after receiving the IAIs on July 14, 2010.

However, as noted above, Prentice sought to obtain income information about Mori for his 2009 individual tax year by Query No. 2 in the 411 audit. He did not receive that information until he met with Momot on September 21, 2010. Once Prentice had that information the procedural history set out below speaks for itself.

The Audit of the Applicant in September of 2010 [167] On September 20, 2010, Prentice spoke with Angaran regarding 411 and Mori. [168] On September 21, 2010, Prentice met with Momot and received the answers to Query No. 2 for the 411 audit, which included documentation which formed the basis of the counts relating to the 2009 personal income tax year for Mori.

When Prentice met with Momot Prentice did not tell him that he had been assigned to conduct a personal audit of Mori to review whether Mori had received any consulting or management fee income. [169] On September 21, 2010, Prentice attended upon Momot and received the 411 documents pertaining to Query No. 2 which included, amongst other things: financial statements, bank statements and IAIs.

[170] On September 21, 2010, Prentice was assigned the personal audit of Mori. [171] On September 22, 2010, Prentice created an audit plan for Mori’s audit. [172] On September 23, 2010, Prentice completed Mori’s audit. [173] On September 23, 2010, Prentice and Angaran signed the form required to refer Mori’s personal file to the CRA EnforcementDivision. [174] On September 27, 2010, Prentice and Angaran met with Dakers, a team leader in Enforcement, and Dakers accepted the referral ofMori’s file for preliminary review by Enforcement.

The Search Warrant Execution Issue [175] Dakers, as a team leader in Enforcement, executed a search warrant at Momot’s office at One St. Paul Street, 10th Floor, St.Catharines, Ontario, on November 22, 2011. One banker’s box of materials was seized during the execution of this warrant. [176] Mr. Milot contends that the warrant stipulated that the place to be searched was One St.

Paul Street, 10th Floor, but somedocuments held in Momot’s storage space across the street at a different municipal address were or at the very least may have beenseized in contravention of the terms of that search warrant. [177] Dakers testified that this was a “soft” search. She and her search team arrived and were escorted to Momot’s boardroom by one ofhis firm’s employees. Momot cooperated in getting the documentation identified in the warrant for Dakers. That is to say, he or his staffbrought the materials to Dakers. [178] Momot only kept the two most recent years of client documents at that address.

Older documents were stored in his firm’s storagespace provided to the firm as

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