MINISTER OF NATIONAL REVENUE Applicant v. LUCA M. CICIARELLI, 2019 FC 900

Date: 20190708 Dockets: T-1147-16 T-1148-16 Citation: 2019 FC 900 Toronto, Ontario, July8, 2019 PRESENT: Mr. Justice Diner Docket: T-1147-16 BETWEEN: MINISTER OF NATIONAL REVENUE Applicant and LUCA M. CICIARELLI A.K.A. LUCA CICARELLI 1585677 ONTARIO LTD Respondents Docket: T-1148-16 AND BETWEEN: MINISTER OF NATIONAL REVENUE Applicant and GIUSEPPE MONTANA A.K.A. GIUSEPPI MONTANA AND JOE MONTANA 15856777 ONTARIO LTD PRIVATE DISPOSAL SYSTEMS LTD Respondents ORDER AND REASONS I.

Introduction [ 1 ] The Applicant brings this motion to vary this Court’s prior compliance order, by seeking to add as a condition that the requirement " “to provide” " documents for audit must include the requirement that they be " “delivered” " to the Applicant’s premises. However, the Respondents ask the Court to dismiss the Applicant’s motion to vary the compliance order because they are already in compliance with it, and have made the documents available for review and inspection at their accountants’ premises.

As a result, the parties are at an impasse. [ 2 ] For the reasons below, the Applicant’s motion will be granted, such that the compliance order will be varied to add as a condition that the documents will be provided by delivering them to the Applicant at her place of business. [ 3 ] Two substantially similar motions have been brought. This Order and these Reasons deal with both motions. Accordingly, a copy of this Order and Reasons shall be placed in each motion file. II. Background [ 4 ] This case has a lengthy litigation history that spans a number of years and includes numerous hearings. I will provide a

summary of only those matters that directly impact the issues arising in today’s motion, rather than a complete history of the various challenges brought by the Respondents, including to the Supreme Court. A. The Compliance Order [ 5 ] On August 9, 2016, Justice Brown issued an order requiring the Respondents to provide authorized officers of the Canada Revenue Agency [CRA] with certain documents within the 30 days that followed [Compliance Order].

The Compliance Order was made in contemplation of a pending audit by the CRA, pursuant to sections 231.7 of the Income Tax Act [ITA] and 289.1 of the Excise Tax Act [ETA]. The books, records, documents and information [Material] to be provided were set out in appendices to the Compliance Order. A listing of the Material has once again been reproduced as Schedules 1 and 2 to this Order. [ 6 ] Before rendering the Compliance Order, the Court denied the Respondents’ request for an adjournment of the application hearing.

After its issuance, the Respondents appealed the order denying the adjournment request, but not the Compliance Order, on the basis that the Court had denied the Respondents, among other things, procedural fairness and the right to a fair hearing. The Federal Court of Appeal [FCA] dismissed the Respondents’ appeal in September 2017.

[ 7 ] The Respondents then sought leave to appeal the FCA’s order to the Supreme Court of Canada. The Supreme Court of Canada denied leave. B. The Contempt Order [ 8 ] On April 19, 2018, Justice Phelan considered a motion for contempt of the Compliance Order. He held that all three requirements of the contempt test were satisfied, namely that (

i) the Compliance Order was clear and unequivocal in stating what should be done, (ii) the Respondents were all aware of the Compliance Order, and (iii) they had intentionally breached it. Justice Phelan thus issued a Contempt Order, which included a requirement that the Respondents produce the Material within 10 days. Justice Phelan countenanced Justice’s Brown’s observation that the Respondents’ questions were a delay tactic, and created confusion where none existed. C.

The Sentencing Order [ 9 ] On June 21, 2018, Justice Phelan issued a Sentencing Order (followed by an Amended Sentencing Order two weeks later), rebuking the Respondents for failing to produce the Material to the CRA as required first by the Compliance Order and subsequently, the Contempt Order [collectively, the Orders]. [ 10 ] The terms of the Sentencing Order included that if the Respondents did not provide the Material within 30 days, the Applicant could apply to the Federal Court to request that a warrant be issued for their arrest. D.

Respondents’ Motions to stay past Orders [ 11 ] On July 9, 2018, the Respondents filed motions with this Court to stay the Compliance Order, the Contempt Order and the Sentencing Order. On August 13, 2018, this Court denied all of the Respondents’ motions to stay these three Orders. E. Matter arising subsequent to the issuance of Orders [ 12 ] Subsequent to the issuance of the three Orders, a dispute arose between the parties regarding how the expression " “to provide” " was to be understood and applied in the context of the proceedings.

This dispute regarding the location for the production of the Material now forms the basis for this motion to vary the original Compliance Order, in which the Minister seeks to specify delivery to the CRA offices. F. Correspondence between the parties [ 13 ] Between July 26, 2018 and January 9, 2019, the parties exchanged correspondence as to how the Material, located at the Respondents’ accountant’s office in Burlington, Ontario [Burlington address], was to be provided to the CRA.

The Applicant took the position that given the circumstances and history of these proceedings – and most importantly pursuant to the Compliance Order – the Respondents were to provide and deliver the Material to the CRA offices. [ 14 ] The Respondents disagreed, taking the position that they were simply to provide access to the Material, making it available for review by the CRA officers at the Burlington address, and that there was no obligation to transport, courier or otherwise deliver the Material to the CRA offices. [ 15 ] By letter dated December 12, 2018, counsel for the Applicant wrote and advised of her understanding that Mr.

Montana, one of the Respondents, had recently passed away. Counsel for the Respondents confirmed this fact. In the same letter, the Applicant proposed a compromise to the delivery impasse, offering to use the services of a courier to pick up the 30 boxes of Material from the Burlington address, and deliver them to the CRA’s offices. This was subject to the Applicant’s requirement that the Respondents ensure organization of the Material by numbering the boxes, and providing an itemized inventory corresponding to the document listing in the Compliance Order appendices.

The Respondents refused to accept the CRA’s proposal for courier pick-up of the Material. G. Special Sitting of the Federal Court [ 16 ] This motion arises out of the impasse.

Originally filed in writing pursuant to Rule 369 of the Rules, given the long file history and the rarely-litigated issue regarding the meaning of " “to provide” " , the matter was converted into an oral hearing that took place at a Special Sitting of the Federal Court on May 15, 2019. [ 17 ] Following this Special Sitting, I directed the parties to provide post-hearing submissions regarding any relevant law or policy relating to the central issue raised regarding the

interpretation of " “to provide” " as it pertains to the Material requested for a CRA audit. These post-hearing submissions have been considered in these Reasons. III. Issue [ 18 ] The question to be answered appears to be simple at first glance: when ordered " “to provide” " documents to the CRA, must they simply be made available by the taxpayer, or must the taxpayer physically deliver them to the auditors? IV. Positions of the Parties

[ 19 ] The Applicant maintains that she does not know exactly what is in the boxes and whether the Material is organized as requested in the various Orders issued by this Court to date. Given the file history, the Minister submits that she cannot, with any confidence, assume that the Respondents will cooperate with CRA auditors if they attend at the Burlington address.

The Applicant contends that she is being conciliatory in bringing this motion to vary the Compliance Order to specify delivery of the Material to the CRA offices, asserting that the alternative would be to seek further and harsher enforcement pursuant to the Contempt and Sentencing Orders. [ 20 ] With respect to the state of the records, the Applicant submits that nothing is known other than the fact that there are 30 boxes located at the Burlington address.

The Applicant posits that the Respondents have been uncooperative since May 2014 when the Applicant first requested the Material, ultimately resulting in not only the need for the Compliance Order, but also the Contempt and Sentencing Orders issued, and now this latest Motion. [ 21 ] The Applicant cited examples of other instances where this Court has ordered a taxpayer to deliver the taxpayer’s documents to the CRA.

In Minister of National Revenue v Keytech Water Management Ltd et al , Court File T-213-12, Order and Reasons dated March 22, 2012 (Tab 10C of the Applicant’s Motion Record) [ Keytech ], as well as Minister of National Revenue v Beima , Court File T- 2047-15, Order dated August 12, 2015 at paras 19–25 (Tab 10B of the Applicant’s Motion Record) [ Beima ], the Applicant contends that frustration was the basis on which this Court ordered physical delivery of the documents.

She contends that the same result should apply to this case, given the similarities of the current impasse. [ 22 ] In its post-hearing submissions, the Applicant relies on the recent decision in Canada (National Revenue) v Cameco Corporation , 2019 FCA 67 [ Cameco ], which offers guidance on the scope and conduct of an audit, even though its facts differ significantly. Nonetheless, the Applicant urges the Court to consider two key factors mentioned in Cameco which she argues are applicable in this motion: (

i) the state of the records and (ii) the tax history of the taxpayers. [ 23 ] The Respondents oppose any

interpretation of the Compliance Order which requires delivery of the Material. They submit that the vast majority of all audits are conducted at taxpayer business premises or those of their representatives. They maintain that they have provided the Material as ordered, and that any fault lies with the CRA auditors who refuse to attend the Burlington address where the Material has been made readily available.

They submit that there are no circumstances in this matter which would cause the CRA’s attendance at the Burlington address to be improper, or other than in the ordinary course: once the CRA officers attend at the Burlington address, they will be able to inspect and review the state of all records. [ 24 ] As for the jurisprudence raised by the Applicant, the Respondents distinguish those cases. Unlike the Court’s decision in Beima , the Respondents argue that they have not – and will not – frustrate the CRA’s ability to carry out its statutory audit duty.

The Respondents further assert that Keytech is distinguishable given that delivery of documents to CRA offices was only ordered after the Keytech respondents refused to make the documents available to the applicant for inspection at a suitable location. That, the Respondents say, is simply not the case in these circumstances. [ 25 ] In their post-hearing response, the Respondents disagree that Cameco is applicable, and instead rely on the CRA policy guidance as set out in Communiqué AD-19-02 : Obtaining Information for Audit Purposes [Communiqué], dated March 21, 2019.

This Communiqué, which has since been revised, reiterated that the CRA is permitted to visit the taxpayer’s place of business to conduct its examination. Therefore, the Respondents contend that there is no reason why CRA officers cannot attend at the Burlington address, where they will be free to examine, inspect and review all the Material. Further, the Respondents argue that the Applicant has failed to adhere to the CRA guidance as set out in the Communiqué, requiring it to taking reasonable steps to limit the compliance burden on the taxpayer. V.

Analysis [ 26 ] Subsection 231.7(1) of the ITA reads as follows: " 231.7

(1) On

summary application by the Minister, a judge may, notwithstanding subsection 238(2), order a person to provide any access, assistance, information or document sought by the Minister under

section 231.1 or 231.2 if the judge is satisfied that " " " " 231.7

(1) Sur demande

sommaire du ministre, un juge peut, malgré le paragraphe 238(2), ordonner à une personne de fournir l’accès, l’aide, les renseignements ou les documents que le ministre cherche à obtenir en vertu des articles 231.1 ou 231.2 s’il est convaincu de ce qui suit : " " (

a) the person was required under

section 231.1 or 231.2 to provide the access, assistance, information or document and did not do so; and " "

a) la personne n’a pas fourni l’accès, l’aide, les renseignements ou les documents bien qu’elle en soit tenue par les articles 231.1 ou 231.2; " " " " (

b) in the case of information or a document, the information or document is not protected from disclosure by solicitor-client privilege (within the meaning of subsection 232(1)). " "

b) s’agissant de renseignements ou de documents, le privilège des communications entre client et avocat, au sens du paragraphe 232(1), ne peut être invoqué à leur égard. " " " " [Emphasis added] " " " " [Je souligne] "

[27] As the statute reads, and given that "“provide”" is not defined in the ITA, the word "“provide”" could include various appropriatemethods of "“providing”" information and documents to the CRA, depending on the circumstances. [28] Furthermore, audits come in different forms. They range from less intrusive processes, or what are commonly referred to as "“deskaudits”", typically of an individual, where the CRA requests that specific documents be sent either electronically or by mail forverification.

At the other end, there are "“field audits”" which, in the case of a business audit, could involve an auditor or auditorsvisiting the office of the taxpayer to examine books and records, documents, and information relating to a particular set of taxation years(on-site audit), or an audit that takes place at a CRA office where the auditor or auditors will request that the taxpayer bring or send anysupporting documents required to centralize the management of some audit files (office audit). [29] The revised CRA Communiqué replacing that cited above, was very recently released as Communiqué AD-19-02R: ObtainingInformation for Audit Purposes, dated June 3, 2019.

Both Communiqués read, at the relevant part: The scope of an audit or review influences the type and volume of records required and may expand or contract dependingon what facts are determined and what information is provided during the process. More specifically, during an audit, theCRA officials may begin by carrying out a restricted or limited scope audit but may in the course of that audit determine thatit is to be expanded to include additional issues or that a full compliance audit is necessary. A limited scope audit will entailless extensive review of documentation than a full scope audit.

When compliance activities are modified or expanded fromthe original scope, officials must clearly communicate the modified or expanded audit focus to the taxpayer. [30] In each of the audits, whether restricted or full scope, the taxpayer "“provides”" the CRA with relevant information. [31] While there is a lack of case law interpreting the meaning of "“provide”" pursuant to

section 231.7 of the ITA (and

section 289.1 ofthe ETA), the wording of subsection 231.7(1) of the ITA speaks of a judge being able to order a person to "“provide any access,assistance, information or document sought by the Minister”" in exercising her audit powers under sections 231.1 or 231.2. [32] If it were only "“access”" that must be provided, as the Respondent argues, Parliament would not have added "“assistance,information or document”". Parliament clearly intended that the word "“provide”" have a flexible meaning. In terms of the law on thesepoints, there has been nothing directly on point.

Both parties raise valid arguments and accurately cite existing law and policy. [33] On the one hand, the CRA holds broad audit powers under the ITA, as recognized by the leading jurisprudence (see, for example, Rv McKinlay Transport Ltd, (SCC), [1990] 1 SCR 627 at p 648, R v Jarvis, 2002 SCC 73 at para 53, and RedeemerFoundation v Canada (National Revenue), 2008 SCC 46 at paras 12, 25).

On the other hand, recent case law has placed restrictions onaudit positions advanced by the CRA, including BP Canada Energy Company v Canada (National Revenue), 2017 FCA 61 at para 80,Canada (National Revenue) v Lin, 2019 FC 646 at paras 31–32, and recently in Cameco regarding the power to compel oral interviewsduring the course of an audit, as well as the related Tax Court of Canada decision regarding other issues, relating to transfer pricing rules,in Cameco Corporation v The Queen, 2018 TCC 195. [34] As a general rule, the Applicant correctly points out that audits ordinarily take place at the premises of the taxpayer.

However, asthe history of this matter demonstrates, this cannot be described as an ordinary matter.

Now at the five-year mark since the CRA firstattempted to commence the audits, the taxpayers have been found not to be in compliance with the ITA, resulting in Justice Brown’sCompliance Order, and then in continued non-compliance with that Order through Justice Phelan’s subsequent Contempt and SentencingOrders. [35] Despite the outcome of Cameco in favour of the taxpayer, I nonetheless agree with the Applicant that certain factors raised in thatdecision relating to the "“scope and manner”" of an audit are applicable to the case at bar.

Rennie J.A., speaking for the majority, statesat paragraph 43: The Minister is entitled to determine the scope and manner of an audit, its course and direction; as noted in BP Canada atparagraph 82, “auditors must engage in extensive poke-and-check exercises, and are essentially left to their own initiative inverifying the amounts responded by the taxpayer.” Auditors are not bounded by strictures of pleadings or relevance.

Thecourse of an audit is directed by a multitude of factors, including the auditors’ experience, training, the state of the records,the tax history of the taxpayer as well as considerations external to the particular taxpayer. [Emphasis added] [36] I do not agree with the Respondents’ counter argument that the delivery of the Material to CRA offices does not fall within the"“scope and manner”" of an audit, but rather that the "“scope and manner”" deals with when an audit has begun.

Rather, when Camecoclearly states that the Minister is entitled to determine the "“scope and manner”" of an audit, preparing and planning how an audit will beconducted falls squarely within this arena. [37] Here, history plays against the Respondents, given the lengthy background of these matters, including the procedural disputes thathave arisen at every step along the way, resulting in a particularly acrimonious history in attempting to conduct this audit which is stillpending before the CRA due to the Respondents’ procedural obstacles.

Thus, even if I were to agree with the Respondents’ argumentsregarding recently having made, and continuing to make, the Material available, Cameco’s "“tax history”" factor weighs heavily infavour of the CRA in this matter. Indeed, the Minister has been requesting the Material since May 2014, and has been unsuccessful in allattempts to even commence the audits of the Respondents. She has thus had no choice but to seek, and obtain the three Orders againstthe Respondents.

Through the course of the proceedings which resulted in the issuance of the Orders, this Court has criticized – in harshterms – the Respondents’ failure to cooperate with the CRA, and their ongoing arguments in defence of their lack of cooperation. [38] For example, Justice Brown notes in his Compliance Order that the Respondents’ correspondence to the CRA had been "“non-responsive”" and "“calculated to delay”" the Minister’s requests.

And, Justice Phelan finds in his Contempt Order that the Respondents’defence that the Compliance Order "“was not clear”" was "“nonsense”", and affirmed Justice Brown’s conclusion that the Respondentsused "“delay tactics”".

[ 39 ] Finally, Justice Phelan’s Sentencing Order found the Respondents’ contempt to be continuing, having " “barefacedly defied” " the Compliance Order and the FCA confirmation of the Compliance and Contempt Orders.

He added that the Respondents " “have a history of non-compliance, having not filed income tax returns since 1998” " , did not present any mitigating factors regarding their non- compliance with court orders, and neither provided any " “evidence of good faith, or inadvertence” " , or " “apology or purging of the contempt” " . [ 40 ] Clearly, to say that there has been a history of non-cooperation is an understatement. The Applicant has now been trying to audit the Respondents for over five years, but the Respondents have resisted at every turn.

For instance, and most recently, the Respondents rejected the Applicant’s seemingly simple solution to send a courier to the Burlington address to pick up the boxes. Once again, the Applicant’s good faith attempts to undertake its audit have been stymied. Again, the Respondents’ conduct is just the latest in a long history of non-cooperation in preventing the Applicant from properly carrying out its statutory duties mandated by its legislation, which has precipitated this latest motion before the Court. [ 41 ] Finally, I agree with the Respondents that the underlying facts differ in Beima and Keytech .

However, the scenarios also share similarities in that in each, the taxpayer failed to comply with a compliance order that the Minister was compelled to seek for audit purposes, and ultimately received in both cases. While the taxpayers’ factual matrices differed – as they almost always do – the underlying element of taxpayer frustration of the audit process courses through each of these situations.

As the FCA stated in the appeal of Beima v Canada (National Revenue) , 2017 FCA 85 at paragraph 8 : […] The Judge also found that the appellant, as a taxpayer, could not dictate how CRA conducts an audit or frustrate the respondent’s ability to carry out its statutory duties by refusing entry to a second auditor or insisting on videotaping an audit process: reasons at paragraphs 21, 23.

We are unable to identify any reviewable error in the Judge’s findings. [ 42 ] In closing, the words of the FCA in Tower v Minister of National Revenue , 2003 FCA 307 at paragraph 20 are apt: Paragraph 231.2(1)(a), when properly interpreted, empowers the Minister to compel a taxpayer to provide "information", meaning knowledge or facts. In order to exercise this power, the Minister must be able to ask questions to elicit the knowledge, facts or figures. The words "return of income or supplementary return" in paragraph (

a) does not detract from this

interpretation as the preceding word "including" means that the phrase is not exhaustive of the meaning of "information." These words enable the Minister not only to get the information regarding a taxpayer's income, but also to specify the form in which this information must be provided, i.e. a tax return containing prescribed information rather than in a letter. In my view, the Minister is therefore able to compel production of documents and records under paragraph 231.2(1)(

b) and ask questions to elicit knowledge or facts under paragraph 231.2(1)(a). [ 43 ] Respondents’ counsel alleges the Applicant has engaged in a " “bullying tactic and sharp practice” " , and has asserted that he will be filing a complaint against Applicant’s counsel with the Law Society of Ontario. No evidence of any such complaint has been provided to this Court. VI. Conclusion [ 44 ] Given (

i) the Cameco factors of the unknown state of the records and taxpayers’ lengthy tax history, as well as the Minister’s entitlement to determine the scope, manner, course and direction of an audit, and (ii) past orders of this Court specifying that " “to provide” " may mean the delivery of taxpayer documents to the CRA in Keytech and Beima , the Applicant’s motion to vary the Compliance Order is accordingly granted.

While Cameco admittedly differs from this fact situation, including in its outcome, it reviews the relevant legislative provisions in subsection 231.1(1) of the ITA regarding the powers of the Minister to conduct an audit. The Court notes that CRA auditors can be expected to attend at business premises. Indeed, if this were in the ordinary course of an audit, the auditors would be expected to attend at the Burlington address to inspect and review the state of the 30 boxes of Material.

But this case lies in the realm of the extraordinary, at the very opposite end of the ordinary. [ 45 ] Given the circumstances that have transpired in this matter, as well as the Applicant’s prior offer to arrange for courier pick-up of the Material, the Material will be provided by delivery via courier pick-up at the Applicant’s expense, as is set out in the Order below. ORDER in T-1147-16 and T-1148-16 THIS COURT ORDERS that : 1 .

The Compliance Order dated August 9, 2016, is varied to add as a condition to that Order pursuant to subsection 231.7(3) of the Income Tax Act and subsection 289.1(3) of the Excise Tax Act , that the Material be provided by delivering it to the CRA officers at the CRA offices in the manner set out as follows:

a) Pursuant to the application made by the Minister under

section 231.7 of the Income Tax Act and

section 289.1 of the Excise Tax Act that: (

i) An Order under subsections 231.7(1) and 231.7(3) of the Income Tax Act and subsections 289.1(1) and 289.1(3) of the Excise Tax Act that the Respondents within 30 days from the date of this Order, provide by delivering, through courier pick-up at the Applicant’s expense, to an authorized officer, Victor Tobar, of the Canada Revenue Agency, Toronto Centre Tax Services Offices having carriage of the respective audits or collection actions, at the Toronto Centre Tax Services Offices (1 Front Street West, Toronto, ON, M5J 2X6), the access, assistance, information and documents sought from them as set out in

Schedule 1 (Appendices " “A” " , " “B” " , " “C” " , and " “D” " ) to these Reasons, which contains the charts attached to the affidavit of Kumar Coomarasamy as Exhibit " “E” " , to the affidavit of Ajay Kumar as Exhibit " “C” " , and the affidavit of Victor Tobar as Exhibits

" “C” " , and " “F” " , in the Montana File, and

Schedule 2 (Appendices " “A” " , " “B” " , " “C” " , " “D” " and " “E” " ) to these Reasons, which contains the charts attached to the affidavit of Kumar Coomarasamy as Exhibit " “B” " , to the affidavit of Ajay Kumar as Exhibit " “B” " , and the affidavit of Victor Tobar as Exhibits " “C” " , " “E” " and " “G” " , in the Ciciarelli file; (ii) An Order that the Minister is authorized to effect service of this Order on the Respondents pursuant to Rule 139 of the Federal Courts Rules ; (iii) The costs of this application; 2 .

The terms of the Sentencing Order dated July 3, 2018, sentencing the Respondents for their contempt of the Compliance Order, be otherwise maintained. 3 . Costs of this motion to the Applicant. "Alan S. Diner" Judge

SCHEDULE 1 Montana Documents

Schedule 2 Ciciarelli Documents

FEDERAL COURT SOLICITORS OF RECORD DOCKET: T-1147-16 STYLE OF CAUSE: MINISTER OF NATIONAL REVENUE v LUCA M. CICIARELLI, A.K.A. LUCA CICARELLI, 1585677 ONTARIO LTD AND DOCKET: T-1148-16 STYLE OF CAUSE: MINISTER OF NATIONAL REVENUE v GIUSEPPE MONTANA, A.K.A. GIUSEPPI MONTANA AND JOE MONTANA, 15856777 ONTARIO LTD, PRIVATE DISPOSAL SYSTEMS LTD MOTION HELD BY TELECONFERENCE ON MAY 15, 2019 FROM OTTAWA, CANADA AND TORONTO, ONTARIO

ORDER AND Reasons: DINER J. DATED: July 8, 2019 APPEARANCES : Alisa Apostle Brendan Tait For The Applicant Tony De Bartolo For The Respondents SOLICITORS OF RECORD : Attorney General of Canada Toronto, Ontario For The Applicant The Law Office of Antonio De Bartolo Barrister and Solicitor Mississauga, Ontario For The Respondents