R v. Posteraro and Dyck Date:, 2014 BCPC 31

Citation: R v. Posteraro and Dyck Date: 20140305 2014 BCPC 0031 File No: 93699-1 Registry: Kamloops IN THE PROVINCIAL COURT OF BRITISH COLUMBIA REGINA v. GIUSEPPE POSTERARO and MELISSA DYCK REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE L.S. MARCHAND Counsel for the Crown: Mr. M. Erina and Mr. G. Sair Counsel for the Accused: Mr. G. DelBigio, Q.C.

Place of Hearing: Kamloops , B.C. Dates of Hearing: September 16, 17, October 21, 22, January 21 and 22, 2014 Date of Judgment: March 5, 2014 INTRODUCTION: [ 1 ] Cougar Rock Contracting Ltd. (“Cougar Rock”) is based in Kamloops, BC. At all material times, Cougar Rock’s primary business was site preparation and railway maintenance work for the Canadian National Railway Company (“CN”). Cougar Rock had gross revenues of between $3.9 and 10.8 million in the years 2007 to 2009. [ 2 ] In 2007 to 2009, Giuseppe (Joe) Posteraro was the President and sole Director of Cougar Rock. Mr.

Posteraro also managed the daily operations of Cougar Rock. Mr. Posteraro’s daughter, Melissa Dyck, was the bookkeeper for Cougar Rock. [ 3 ] Mr. Posteraro and Ms. Dyck face various “tax evasion” and “false statement” charges under the Income Tax Act and the Excise Tax Act related to the corporate tax and GST liabilities of Cougar Rock for the 2007 to 2009 tax years. Mr. Posteraro faces additional charges related to his personal income tax liability during the same time period. The amounts at issue are substantial. [ 4 ] The charges against Mr. Posteraro and Ms.

Dyck flow from work undertaken by Canada Revenue Agency (CRA) auditors in 2010. A great deal of information relevant to Cougar Rock’s and Mr. Posteraro’s tax liabilities, as well as to the charges against Mr. Posteraro and Ms. Dyck, was gathered through the CRA’s use of statutory powers to compel taxpayers and third parties to provide information without Charter warnings or prior judicial authorization. Mr. Posteraro and Ms. Dyck apply in this voir dire to exclude certain evidence gathered by the auditors.

They argue the evidence was gathered in breach of their rights under ss. 7 and 8 of the Charter . [ 5 ] CRA has two mandates relevant to the voir dire . First, CRA conducts periodic audits of taxpayers to ensure the accuracy of self-reported tax liabilities. As part of this mandate, CRA may readjust tax liabilities, charge interest and assess civil penalties. CRA’s audit work is done by its Audit Division. Second, CRA conducts investigations into possible offences, including tax evasion and false statement offences.

CRA’s criminal investigations are conducted by its Enforcement Division. [ 6 ] The law is well settled that, in criminal proceedings, CRA may rely on information gathered by statutory compulsion during the audit stage. The law is equally well settled that CRA may not do so if the predominant purpose of the information gathering was to establish criminal rather than civil liability. When the predominant purpose of information gathering by CRA auditors is to establish criminal liability, the full panoply of Charter protections come into play for the benefit of taxpayers ( R. v.

Jarvis , 2002 SCC 73 ). [ 7 ] In this voir dire , I must determine when CRA’s predominant purpose shifted from determining tax liability to establishing criminal liability. The parties agree that, if any information was gathered by the Audit Division after that time, it was gathered in breach of ss. 7 and 8 of the Charter and further arguments will be made regarding the exclusion of evidence under s. 24(2) of the Charter . [ 8 ] After briefly setting out the relevant background, I will outline the defence and Crown positions followed by my analysis of the predominant purpose test from Jarvis .

BACKGROUND: [ 9 ] The CRA Audit Division has an office at the Southern Interior Tax Services Office (“SITSO”) in Penticton, BC. In 2006, a Workload Department Officer at SITSO named Jeff Orlik screened in Cougar Rock for a “full compliance” audit. An auditor named Faye Isaac was assigned to complete the audit. [ 10 ] Ms. Isaac completed her audit on December 6, 2006. She found that Cougar Rock had improperly claimed $159,780 of personal expenses as business expenses. She reassessed Cougar Rock’s tax liability. Ms.

Isaac did not impose any civil penalties but did refer her findings to the Enforcement Division at SITSO to consider undertaking an investigation into whether any tax offences had been committed. [ 11 ] The Enforcement Division did not accept the referral. The Enforcement Division had doubts about its ability to prove the required mental element of any tax offence. [ 12 ] On December 8, 2006, Ms. Isaac sent letters to Cougar Rock’s accountants, BDO Canada LLP (“BDO”) and to Mr. Posteraro setting out CRA’s adjustments to Cougar Rock’s reported business expenses for the 2003 to 2005 tax years. In her letters, Ms.

Isaac highlighted that the CRA can also impose significant penalties “when it is established that (an) omission was made knowingly or arose from circumstances amounting to gross negligence”. [ 13 ] Ms. Isaac’s letters went on to conclude, and warn: After reviewing all of the information relating to your returns, we have decided not to apply penalties for the adjustments proposed above. However, future occurrences of the same kind could be subject to penalties.

[ 14 ] It appears CRA did not impose penalties nor investigate tax offences for the 2003 to 2005 tax years because: 1. Mr. Posteraro speaks English as a second language and may have had some confusion about Cougar Rock’s tax position; and 2. Ms. Dyck is not a professional bookkeeper and could have made some innocent errors. [ 15 ] Cougar Rock popped up on the CRA’s radar again in 2010. At that time, Cougar Rock requested a non-capital loss carry-back of $754,000 from 2009 to be applied to the 2006 to 2008 tax years.

All loss carry-backs in excess of $200,000 are internally referred by the CRA for audit consideration. Cougar Rock’s file was assessed by Mr. Orlik. [ 16 ] Between May 6 and 12, 2010, Mr. Orlik reviewed various sources of data to determine whether a tax audit of Cougar Rock was warranted and, if so, what type of audit should be undertaken. As a result of Mr. Orlik’s review, he determined that there was a sufficiently high risk of problems with Cougar Rock’s tax returns to warrant a full compliance audit for the 2008 and 2009 tax years.

The three main factors behind the audit referral were the size of the requested loss carry-back, the significant adjustments made in 2003 to 2005 as a result of Ms. Isaac’s audit and the identification of Cougar Rock as a candidate for audit follow up also as a result of Ms. Isaac’s audit. [ 17 ] During the course of his “screening” work, Mr. Orlik gathered some information regarding Mr. Posteraro and Ms. Dyck which he thought may be of interest to the assigned auditor. [ 18 ] The audit was assigned to a senior CRA auditor named Jason Roth. Mr.

Roth promptly completed a “desk review” of the materials gathered by Mr. Orlik and attempted to reach Cougar Rock. After first speaking with Ms. Dyck, on May 13, 2010, an accountant with BDO named Mackenzie Kanigan telephoned Mr. Roth on behalf of Cougar Rock. During that conversation, Mr. Roth advised Mr. Kanigan that Mr. Roth would be conducting an audit on Cougar Rock for 2008 and 2009 and that Mr. Roth was hoping to complete audit work in Kamloops during the week of June 7 or 21, 2010. [ 19 ] Mr. Kanigan advised Mr.

Roth that a BDO accountant named Brian Callander was responsible for the file and would get back to Mr. Roth by May 25, 2010. When Mr. Callander subsequently spoke to Mr. Roth, the two discussed various audit related matters and agreed on the week of June 21, 2010 for Mr. Roth to be in Kamloops to gather information relevant to his audit. On May 26, 2010, Mr. Roth sent a letter to BDO confirming the details of the field review. Mr. Roth’s letter listed specific information Mr. Roth wished to review during the field review. [ 20 ] Mr. Roth subsequently prepared a “Preliminary (Draft) Audit Plan”.

From the outset, the audit was set up to include an audit of Mr. Posteraro’s personal tax returns. Mr. Orlik and Mr. Roth both testified that it was a standard CRA practice to include a shareholder such as Mr. Posteraro in a full compliance audit such as the Cougar Rock audit. On June 8, 2010, Mr. Roth’s team leader, Craig Fraser, approved Mr. Roth’s Audit Plan. [ 21 ] During the week of June 21, 2010, Mr. Roth was in Kamloops to gather further information relevant to his audit. In addition to reviewing various financial expense and accounting records, Mr.

Roth attended the offices of Cougar Rock’s lawyers to review Corporate Records. Mr. Roth also visited various properties owned or leased by Cougar Rock or Mr. Posteraro. Mr. Roth took photographs of several properties, improvements and assets which had been identified in the Corporate Records as company assets. [ 22 ] Through the course of his field audit work, Mr. Roth was advised by BDO that Cougar Rock had under-remitted GST by approximately $165,000 and had planned to make a voluntary disclosure of this error and remit the unpaid GST. This discovery ultimately led Mr.

Roth to refer Cougar Rock for a GST audit. [ 23 ] Mr. Roth also discovered a number of possible problems with Cougar Rock claiming various personal expenses as business expenses. These personal expenses related to improvements at the residences of Mr. Posteraro, his son, Mike Posteraro, and his daughter, Ms. Dyck. In addition, Mr. Roth had problems verifying the existence and location of various claimed business assets and/or identifying any business use being made of properties claimed as business assets. [ 24 ] On June 28, 2010, Mr. Roth had a meeting in Penticton with his Team Leader, Mr. Fraser. Mr.

Roth explained his findings to Mr. Fraser, including that numerous personal expenses appeared to have been claimed as business expenses and that Cougar Rock had significantly under-remitted GST. Mr. Roth recommended expanding the audit to include 2007 to see whether there were any personal expenses claimed as business expenses in that year. Mr. Fraser agreed to expand the scope of the audit to include 2007. [ 25 ] Between June 30 and October 28, 2010, Mr.

Roth followed up with BDO on a number of outstanding requests and made direct “third party” contacts with certain suppliers and others regarding large and/or suspicious business expense claims. Mr. Roth made phone calls and wrote letters requesting information. Mr. Roth also prepared formal “Questionnaires” and/or issued “Requirements” to compel production of relevant information from Mr. Posteraro, Ms. Dyck and various third parties. [ 26 ] Mr. Roth found some third parties to be evasive and/or unreliable. Mr. Roth was increasingly skeptical and suspicious about the conduct of Cougar Rock.

By September 7, 2010, Mr. Roth was “reasonably certain” he would be referring his file to the Enforcement Division of the CRA to investigate possible criminal activity. Mr. Roth reached this conclusion because: 1. SITSO’s internal policy was to refer cases involving adjustments over $10,000 and gross negligence penalties to the Enforcement Division; 2. the adjustments to be made to Cougar Rock’s 2007 to 2009 tax returns were going to be significant; and 3. Mr. Roth was likely going to propose gross negligence (civil) penalties. [ 27 ] Between November 12 and December 5, 2010, Mr.

Roth completed his analysis of the data he had collected. His “working papers” consist of 14 separate analyses of various issues.

[28] On December 15, 2010, Mr. Roth completed his Audit Report and a further report recommending a gross negligence penalty. Mr. Roth’s

Summary of Adjustments dated December 1, 2010 shows “Total Corporate Income Tax adjustments” (i.e. disalloweddeductions) of $341,057.64 in 2007, $496,723.47 in 2008 and $587,485.72 in 2009. Mr. Roth’s Penalty Recommendation Report datedDecember 15, 2010 states that Mr. Posteraro “knew or ought to have known” that very significant personal expenses were beingdeducted as corporate expenses, particularly given his personal involvement in coding expenses for accounting purposes and the fact thatCougar Rock was previously audited and warned about this practice. The Penalty Recommendation Report also notes that Mr.

Posteraroand/or various suppliers may have been involved in altering invoices to make personal expenses appear to be corporate expenses. [29] On December 16, 2010, Mr. Roth completed a T-134 Referral to the Enforcement Division of CRA and provided theEnforcement Division with his audit work product, including copies of the documents he had collected from BDO and third parties. [30] The Enforcement Division accepted the referral and, in furtherance of its criminal investigation, on March 11, 2011, a CRAinvestigator named Lauren Kunimoto swore an Information to Obtain Search Warrants (“ITO”).

The ITO relied heavily on Mr. Roth’swork product but specifically indicated that Ms. Kunimoto was not relying on any information gathered by Mr. Roth after September 7,2010 - the date when Mr. Roth indicated that he was “reasonably certain” he would be referring Cougar Rock to the EnforcementDivision. SUBMISSIONS OF MR. POSTERARO AND MS. DYCK: [31] On behalf of Mr. Posteraro and Ms. Dyck, Mr. DelBigio correctly states that Jarvis is the leading case and establishes thepredominant purpose test that I must apply. Mr.

DelBigio notes that Jarvis lists a number of factors that I must consider and that no onefactor is determinative. Mr. DelBigio also notes that the factors are simply to be considered as guidance and that my true task is toconsider the totality of the circumstances to determine when the CRA’s predominant purpose shifted from determining tax liability toinvestigating criminal liability. [32] Mr.

DelBigio draws my attention to a number of Supreme Court of Canada decisions which highlight the right to remain silent,the right against self-incrimination and the right to be free from a warrantless search as “basic pillars of fairness” in Canada’s criminaljustice system. Mr. DelBigio notes that, generally: 1. absent statutory authority, no citizen can be compelled to assist the state in his or her own prosecution (R.J.S. v. The Queen, (SCC), [1995] 1 SCR 451 and R. v.

Turcotte, 2005 SCC 50 , [2005] 2 SCR 519); 2. any statements taken from an accused by statutory compulsion may not be used against the accused in a subsequent prosecution. (See for example R. v. White, (SCC), [1999] 2 SCR 417); and 3. if the state wishes to conduct a search to obtain private information, the state must obtain a warrant authorized by an independentjudicial officer who must be satisfied that there are reasonable and probable grounds to believe an offence has been committed and thatevidence will be found at the place to be searched (Hunter v. Southam Inc., (SCC), [1984] 2 SCR 145). [33] Mr.

DelBigio recognizes that Jarvis establishes that the CRA’s audit powers to compel taxpayers and third parties to provideinformation under the Income Tax Act are “exceptions to the rule” in the sense that information gathered by auditors in this fashion maybe relied on by the state in a subsequent prosecution. Mr. DelBigio highlights, however, that this is so only when the predominantpurpose of the inquiry is to determine tax liability. Mr. DelBigio relies heavily on the following passages from Jarvis: [2] ...

While taxpayers are statutorily bound to co-operate with CCRA auditors for tax assessment purposes (which may result in theapplication of regulatory penalties), there is an adversarial relationship that crystallizes between the taxpayer and the tax officials whenthe predominant purpose of an official’s inquiry is the determination of penal liability. When the officials exercise this authority,constitutional protections against self-incrimination prohibit CCRA officials who are investigating ITA offences from having recourse tothe powerful inspection and requirement tools in ss. 231.1(1) and 231.2(1).

Rather, CCRA officials who exercise the authority to conductsuch investigations must seek search warrants in furtherance of their investigation. … [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. [34] Because the state in this case seeks to rely on information gathered by compulsion by Mr. Roth, Mr. DelBigio submits that Imust scrutinize the evidence very carefully to determine “when the Jarvis line has been crossed”. [35] Mr. DelBigio does not directly challenge the credibility and reliability of Mr. Orlick, Mr. Roth and Mr. Fraser.

Rather, Mr.DelBigio asks that I look at the totality of the circumstances objectively and submits that a number of factors make clear that the CRA’spredominant purpose was to investigate criminal liability by August 2010. [36] Mr. DelBigio emphasizes the internal SITSO policy that made referrals to the Enforcement Division “mandatory” whenadjustments exceeded $10,000 and gross negligence penalties were going to be imposed.

He says it was clear from an early stage thatboth of these factors were present and that the referral to the Enforcement Division was not made earlier for practical and policy reasonsinternal to the CRA. Mr. DelBigio argues that Mr. Roth and Mr. Fraser wanted to complete the audit before referring the file so that theAudit Division would “get the stat” (meaning credit for amounts collected pursuant to the adjustments and civil penalties proposed in theaudit) and avoid the file being rejected by the Enforcement Division and returned for further work (which would increase the workload

on the Audit Division). Mr. DelBigio describes this as the “best of both worlds” for the CRA, meaning the Audit Division “gets the stat” while the Enforcement Division gets the benefit of the information gathered by compulsion by the Audit Division. Mr. DelBigio calls this an “organizational incentive to disregard the Jarvis line.” [ 37 ] Mr. DelBigio does not identify a specific date but asks that I make a finding of fact that Mr. Roth knew full well by August 2010 that he was going to refer the file to the Enforcement Division and that the Jarvis line was crossed at that point. In the alternative, Mr.

DelBigio points out that the CRA is not relying on any information gathered by Mr. Roth after September 7, 2010 in support of the ITO sworn by Ms. Kunimoto. Mr. DelBigio submits that I should find that the Jarvis line was crossed no later than the “line drawn in the sand” by the CRA itself, namely September 7, 2010. SUBMISSIONS OF THE CROWN: [ 38 ] The Crown differs little with Mr. DelBigio regarding the test I must apply - which is not surprising given how clearly the test has been stated by the Supreme Court of Canada in Jarvis . The difference lies in the application of the test. [ 39 ] The Crown disputes Mr.

DelBigio’s contention that any use of the CRA’s audit powers of compulsion must be scrutinized very carefully. The Crown argues that the Supreme Court of Canada has already dealt with self-incrimination, right to silence and privacy concerns in Jarvis and maintains that no special degree of scrutiny is required. The Crown reminds me that the burden of proof is on Mr. Posteraro and Ms.

Dyck to establish on a balance of probabilities that the Jarvis line was crossed prior to the time the Audit Division referred the file to the Enforcement Division. [ 40 ] While the Crown maintains that Jarvis is the only case I need to consider, the Crown cites a number of cases in support of various propositions and/or to provide examples of when the CRA’s use of its powers of compulsion were on- or off-side. [ 41 ] At the end of the day, the Crown’s position is simply that “sometimes an audit is just an audit and not a criminal investigation in disguise”. The Crown submits that this is one of those cases.

THE PREDOMINANT PURPOSE TEST: [ 42 ] I begin my analysis by setting out in full the predominant purpose test developed by the Supreme Court of Canada in Jarvis . At paragraphs 93 and 94, Justices Iacobucci and Major state the test as follows: [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? [ 43 ] I turn to my application of the test. APPLICATION OF THE PREDOMINANT PURPOSE TEST: Factor (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? [ 44 ] This factor received a great deal of attention from Mr. DelBigio and the Crown in submissions. There is no doubt that by August 2010, Mr.

Roth’s suspicions regarding the conduct of Cougar Rock were heightened. The audit was a high risk audit from the outset and it was clear relatively early on that Cougar Rock had claimed very substantial personal expenses as business expenses in the 2007 to 2009 tax years. [ 45 ] While I have carefully reviewed all of evidence, I do not propose to review every piece of evidence in detail. I consider it sufficient to highlight several key examples of the obvious concerns that arose through the course of Mr. Roth’s audit: 1. During the field audit in late June 2010, Mr.

Roth reviewed records that appeared to show that Cougar Rock had claimed expenses related to the construction of personal residences as business expenses in 2008 and 2009. These “definitely” concerned Mr. Roth. In fact, as some of these expenses were “finishing” construction expenses, Mr. Roth was so concerned that he recommended expanding the audit to include 2007. He suspected that he might identify additional construction expenses in the corporate expense records for that year. 2. In early July 2010, Mr.

Roth made an internal follow up inquiry regarding James Larsen Custom Homes Inc. (“James Larsen”), a contractor whose invoices Cougar Rock had claimed as business expenses. Mr. Roth had, in his words, “one of those moments” when the CRA’s GST Audit Support team confirmed that James Larsen’s primary business was framing homes. 3. In July 2010, Mr. Roth identified concerns with a number of entries in Cougar Rock’s General Ledger, some because of the amounts at issue and others because there was no indication where and/or for whom the work was performed. Mr.

Roth requested further backup documentation and received a response from BDO on August 16, 2010. Concerns remained so Mr. Roth began making third party enquiries. 4. On August 20, 2010, Mr. Roth spoke to Mr. James Larsen about an invoice that identified “Munsey Siding” as the location of a particular job. Mr. Larsen indicated that Cougar Rock may have prepared this invoice itself and was vague about the location of his company’s work for Cougar Rock. Mr. Roth was “skeptical” about the information he was receiving from Mr. Larsen. 5.

On August 27, 2010, Ron Pederson Drafting & Design Ltd. confirmed its invoices were for the design of Mike Posteraro’s home as well as a warehouse. 6. By late August 2010, Mr. Roth had spoken with Tri-Lake Ready Mix

(1987) Ltd. (“Tri-Lake”) about some invoices that were said to relate to a “Monte Lake CN Rail Project”. Mr. Roth did not know where Monte Lake was so he called CN on September 1, 2010. Mr. Roth learned that Cougar Rock only worked for CN in Northern BC and at a rock quarry in Clearwater, BC. Mr. Roth also learned that the rail line running through Monte Creek is actually a CP rail line. 7. On September 1, 2010, Mr. Roth spoke to Curtis Jacobson of Timberwolf Contracting (“Timberwolf”) who was “evasive” but confirmed Timberwolf had done quite a bit of work at Mr. Posteraro’s farm and on Ms.

Dyck’s house. [ 46 ] While the above is just a sample of the information gathered by Mr. Roth, it is not surprising that he was “reasonably certain” that he would be making a referral to the Enforcement Division by September 7, 2010. By that date, it appeared that Cougar Rock had repeated the behaviour of claiming personal expenses as business expenses (despite the warning that flowed from Ms. Isaac’s 2006 audit), the amounts at issue were substantial, some invoices may have been altered and gross negligence penalties were likely to be recommended.

Even though I heard and accept that the SITSO referral policy had fallen into some level of disfavour, common sense supports the conclusion Mr. Roth reached by September 7, 2010 that he would likely be making a referral to the Enforcement Division. [ 47 ] It is difficult to give a precise date at which the CRA could have decided to proceed with a criminal investigation. As Mr. DelBigio points out, mere suspicion often triggers criminal investigations. On the other hand, there are strong policy considerations which favour allowing audits to proceed in the face of suspicion.

In Jarvis , the Court dealt with the topic of suspicion as follows: [89] To begin with, the mere existence of reasonable grounds that an offence may have occurred is by itself insufficient to support the conclusion that the predominant purpose of an inquiry is the determination of penal liability. Even where reasonable grounds to suspect an offence exist, it will not always be true that the predominant purpose of an inquiry is the determination of penal liability.

In this regard, courts must guard against creating procedural shackles on regulatory officials; it would be undesirable to “force the regulatory hand” by removing the possibility of seeking the lesser administrative penalties on every occasion in which reasonable grounds existed of more culpable conduct… While reasonable grounds indeed constitute a necessary condition for the issuance of a search warrant to further a criminal investigation…, and might in certain cases serve to indicate that the audit powers were misused, their existence is not a sufficient indicator that the CCRA is conducting a de facto investigation.

In most cases, if all 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 course oftheir inspections, suspect all manner of taxpayer wrongdoing, but it certainly cannot be the case that, from the moment such suspicion isformed, 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, andwe should be careful to avoid rendering nugatory the state’s ability to investigate and obtain evidence of these offences. [48] It is somewhat easier to consider the date on which Mr. Roth could reasonably have referred his file to the EnforcementDivision. In my view, that date is September 7, 2010. [49] Prior to receiving further information from BDO on August 16, 2010, Mr.

Roth had suspicions but there was also someconfusion about the extent to which personal expenses had been (or had been intended to have been) coded to Mr. Posteraro’sshareholder loan account (which would have been perfectly acceptable). Further, some of the information Mr. Roth received from BDOon August 16, 2010 validated certain expenses of concern as true business expenses. In my view, it was not until Mr. Roth had theresponses to his first wave of third party inquiries that Mr. Roth could reasonably have referred the Cougar Rock file to the EnforcementDivision. I find as a fact that Mr.

Roth was in this position on September 7, 2010 after he had spoken with CN, discussed further resultsof his inquiries with Mr. Fraser and given consideration to all of the information he had gathered to that point. [50] If Mr. Roth had made the referral on September 7, 2010, he was free to have continued with his own inquiries to complete hisaudit. The difference is that the Enforcement Division could not have relied on the responses to any of those additional inquiries andwould have had to pursue a parallel criminal investigation. [51] Factor (

a) is, of course, not concerned with when the Audit Division could reasonably have referred its file to the EnforcementDivision nor is Factor (

a) restricted to a determination of when a decision could have been made to proceed with a criminalinvestigation. Factor (

a) also asks when the CRA had reasonable grounds to lay charges. This is a difficult question to answer and is aquestion which neither party addressed squarely in submissions. What I can say is that Mr. Roth received very important additionalinformation from third parties after September 7, 2010 and that, even with the benefit of this additional information, the CRA continuedits criminal investigation before the Crown laid charges. Factor (b): Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation? [52] Mr. DelBigio argues that many of Mr.

Roth’s inquiries were directed at establishing the required mental element of the taxevasion and false statement charges. Mr. DelBigio specifically highlights inquiries about the roles and responsibilities of Mr. Posteraroand Ms. Dyck as well as inquiries directed at establishing that invoices were altered. Mr. DelBigio says that there were internalincentives at play which led to Mr. Roth doing the work of a criminal investigator.

As noted above, these incentives were the AuditDivision’s desire to “get the stat” and to avoid the referral being bounced back. [53] Jarvis and other cases make clear, however, that there is significant overlap between information necessary to complete an auditand information necessary to establish criminal liability. For example, in R. v.

Tiffin, 2008 ONCA 306 [motion to quash the appealgranted on the basis of mootness (SCC)], Juriansz J.A. for a majority of the Court wrote: [129] Determining whether the predominant purpose of an inquiry is the investigation of penal liability is not an easy task becausemuch of the information sought for audit inquiries and for criminal investigations under the ITA is the same. A comparison of the civiland penal offences created by the ITA illustrates this. Subsection 163(2) creates the civil offence of filing a false statement in a tax return.Subsection 239(1)(

a) creates an equivalent penal offence: 163.

(2) Every person who, knowingly, or under circumstances amounting to grossnegligence in the carrying out of any duty or obligationimposed by or under this Act, has made or hasparticipated in, assented to or acquiesced in the makingof, a false statement or omission in a return, form,certificate, statement or answer … is liable to a penalty… 239.

(1) Every person who has (

a) made, or participated in, assented to or acquiesced inthe making of, false or deceptive statements in a return,certificate, statement or answer filed or made as requiredby or under this Act or a regulation … is guilty of anoffence … [130] As can be seen, these two provisions of the ITA are close cousins. The proscribed conduct is defined by the same language. Bothapply to the act of making a false statement in a tax return. The use of the word “knowingly” in s. 163(2) makes relevant the mental stateof the taxpayer to the regulatory offence, just as the implicit mens rea in s. 239(1)(

a) is relevant to the penal offence. … [132] Examination of these… provisions demonstrates the considerable overlap in the elements of the civil and criminal offencescreated by the ITA. It follows that inquiries into whether the elements of the regulatory offences are established would be relevant tocriminal culpability as well.

The evidence to sustain the criminal charges of tax evasion and fraud would encompass the evidencerequired for the regulatory offence of filing a false return under s. 163(2). … [135] The fact that the CRA inquiry seeks information that is technically relevant to a criminal charge is not enough to conclude that thepredominant purpose of the inquiry, at the time it is made, is the investigation of criminal liability.

[ 54 ] In the present case, Mr. DelBigio is correct that Mr. Roth made numerous inquiries that were relevant to establishing who was responsible for conduct that could turn out to be criminally culpable conduct. I find as a fact, however, that all of Mr. Roth’s inquiries were also relevant to determining Cougar Rock’s tax liabilities and, in some cases, to determining whether civil penalties ought to be imposed. For example, it was important for Mr. Roth to inquire about the roles and responsibilities of Mr. Posteraro and Ms.

Dyck so that he could understand Cougar Rock’s accounting system and properly consider civil penalties. It was also important for Mr. Roth to know whether various invoices accurately reflected the location of work performed and for whom the work was performed. In other cases, such as the purchase of a jet boat claimed as a business expense, it was important for Mr. Roth to know whether particular assets had a valid business use. It was only with this information that Mr.

Roth could properly calculate his adjustments and determine whether to recommend civil penalties. [ 55 ] While a criminal investigator may have made the very same inquiries as Mr. Roth, I conclude that Mr. Roth’s conduct was entirely consistent with the pursuit of a valid audit. I specifically find that Mr. Roth followed standard audit procedures from the moment he received the Cougar Rock file until the moment he completed his Audit Report and T-134 Referral. Factor (c): Had the auditor transferred his or her files and materials to the investigators? [ 56 ] Though Mr.

Roth was reasonably certain by September 7, 2010 that he would eventually transfer his files and materials to the Enforcement Division, there is no dispute that Mr. Roth did not do so until December 16, 2010. Factor (d): Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators? [ 57 ] Though the parties made very limited submissions on this factor, I find that Mr. Orlick, Mr. Roth and Mr. Fraser were not “effectively acting as... agent(

s) for the investigators”. The Audit and Enforcement Divisions at SITSO operated independently of one another. Mr. Orlick, Mr. Roth and Mr. Fraser had no training to investigate tax offences and were not informed of the criteria employed by the Enforcement Division to determine whether to pursue a criminal investigation, let alone lay criminal charges. Mr. Orlick, Mr. Roth and Mr. Fraser followed standard audit procedures and made rational audit inquiries. Unlike the audit staff in Jarvis , there was nothing misleading or deceptive about their conduct. On the whole, I find the conduct of the audit team of Mr.

Orlick, Mr. Roth and Mr. Fraser to have been highly competent, thorough and appropriate. Factor (e): Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence? [ 58 ] Again, the parties made very limited submissions on this factor. Perhaps that is because the evidence was clear, and I find as a fact that, the Enforcement Division investigators had absolutely nothing to do with directing the audit team in this case. Factor (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? [ 59 ] I must confess to having some difficulty in analysing this factor. As noted above with respect to Factor (b), mens rea is relevant to the imposition of both civil and criminal penalties. [ 60 ] In any event, in this case I conclude that all of the inquiries made by Mr. Roth related to taxpayer liability generally and none related exclusively to penal liability. For example, Mr.

Roth’s enquiries to determine whether work was done by James Larsen and Tri- Lake at railway sidings (as indicated on their invoices) or at the family residences of the Posteraros were just as relevant to calculating tax adjustments as they may turn out to be to establishing criminal liability. Likewise, pursuing information regarding the purchase of the jet boat (which was ultimately determined to have been equipped with fishing equipment) was also just as relevant to calculating tax adjustments as to establishing criminal liability.

For all I know, the jet boat may have had a dual purpose - business and pleasure - and was therefore a valid business expense. Even the “roles and responsibilities” inquiries had a valid audit purpose. Mr. Roth needed to understand Cougar Rock’s accounting system. The answers to the “roles and responsibilities” inquiries were also relevant to Mr. Roth’s consideration of civil penalties. [ 61 ] Put simply, I can think of no inquiry made by Mr. Roth that was relevant only to establishing criminal liability.

Factor (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? [ 62 ] Neither party raised any other circumstances or factors that would lead to the conclusion that the audit had become a criminal investigation and I am unable to identify any other relevant circumstances or factors. CONCLUSION: [ 63 ] As both parties noted, applying the predominant purpose test is not an exercise of checking off boxes and counting which side has more check marks.

I must instead assess the totality of the circumstances to determine whether the adversarial relationship between the state and the individual was engaged earlier than the date on which the Audit Division referred its file to the Enforcement Division. [ 64 ] I have found that Mr. Roth could reasonably have referred his file to the Enforcement Division on September 7, 2010 but I am not satisfied on a balance of probabilities that the CRA’s predominant purpose was to establish criminal liability until the Audit Division

transferred its file to the Enforcement Division on December 16, 2010. [ 65 ] I accept that the CRA is a “stats driven” organization. As I see it, this finding actually supports the conclusion that the CRA’s predominant purpose did not shift from an audit function to an investigatory function until December 16, 2010. Mr. Roth, in my view, was driven to complete his audit and to do so accurately. Mr. Roth, in my view, was not driven by a desire to investigate criminal activity nor by a desire to allow the CRA to “have the best of both worlds”. Mr.

Roth was not knowledgeable about criminal investigations and was not being directed by the Enforcement Division. All of Mr. Roth’s inquiries had a valid audit purpose. [ 66 ] It may be the case that Mr. Roth could have referred his file sooner and that the Enforcement Division derived significant benefit from the high quality of Mr.

Roth’s audit work but that does not mean that the CRA’s predominant purpose was to establish criminal liability earlier than December 16, 2010. [ 67 ] On the totality of the evidence, I find that CRA’s audit of Cougar Rock for the 2007 to 2009 tax years was simply an audit. [ 68 ] I find no breach of ss. 7 or 8 of the Charter and dismiss Mr. Posteraro’s and Ms. Dyck’s Application to exclude evidence. _______________________________ The Honourable Judge L.S. Marchand