INCOME TAX
Practice
Judicial review regarding request for audit information by Minister of National Revenue (Minister) contained in letters, questionnaires sent to each applicant between August and October 2002—Applicants opposing responding to letters, questionnaires on basis request done for criminal investigation, not audit purposes—Claiming rights under Canadian Charter of Rights and Freedoms (such as s. 7; right to remain silent) engaged—Seeking order declaring documents requesting information invalid or unlawful; prohibiting Minister from taking action against applicants for failure to respond to letters, questionnaires—Applicants involved in commodities trading transactions, financing schemes—Reporting substantial trading losses in tax returns— Situation also involving promoters of tax schemes, tax shelters, and RRSPs involving participation of corporate entities—Applicants audited to determine tax liability under Income Tax Act for 1998, 1999, 2000 tax returns—In April 2001, audit becoming criminal investigation—Copies of partially‑audited tax return files of all applicants transferred to Investigations—Some of Audits personnel assisting Investigation division, providing information—One auditor seconded to work for Investigations, also acting as “liaison” between Audits and Investigations—In March 2002, Investigations gave Audits “green light” to recommence auditing applicants’ 1998 tax returns—Notices of reassessment forwarded to applicants disallowing commodity losses claimed, levying penalties—Applicants filing appeals against reassessments—Applicants sent notices of reassessment despite still being investigated because of “statute‑bar problem”—In July 2002, Investigations gave Audits “green light” to recommence auditing applicants’ 1999‑2000 tax returns—Applicants sent letters, questionnaires indicating criminal investigation undertaken regarding promotion of types of transactions claimed, specifying applicants’ not personally under investigation—All applicants, save one, received notices of reassessments for 1999‑2000 tax returns—Applicants appealed reassessments—Some Audits personnel maintained contact with Investigations regarding related matters after letters, questionnaires issued—Originals of applicants’ files held by Investigations up to two years after criminal investigation allegedly ended—Under Act, ss. 231.1(1), 231.2(1) Minister may exercise inspection, require-ment powers to verify taxpayers’ compliance with duties, obligations imposed by Act—Authority not allowed where predominant purpose of inquiry to determine penal liability— Determination as to whether predominant purpose of letters, questionnaires for purposes of audits or investigations question of mixed fact and law—Correctness applicable standard of review—R. v. Jarvis, [2002] 3 S.C.R. 757 establishing guiding factors to assess whether Canada Customs and Revenue Agency (CCRA) exercising audit or investigative function when letters, questionnaires created, issued—CCRA having audit powers to examine, assess income tax returns within certain period of time—CCRA’s audit powers also providing for penalties where tax returns not filed or inaccurate—Audit is administrative process, not criminal process—Not triggering implication of Charter rights—CCRA’s investigative functions completely distinct from audit functions—Investigative functions including collection of evidence for prosecutorial purposes—When exercising investigative functions, CCRA, taxpayer in “adversarial relationship” bringing into play constitutional protections against self‑incrimination, including right to remain silent—CCRA must relinquish authority to use inspection, requirement powers under Act where predominant purpose of inquiry determination of penal liability—Transfer of information from Audits to Investigations not forbidden as long as there is no commencement of investigation into penal liability—Where investigation has begun but later stopped and then audit requirement is made, penal investigation must have clearly stopped to permit flow of information from Audits to Investigations—Location of file, level of importance of contacts between Audits and Investigations from time investigation begins also to be considered—Predominant purpose of requirement to provide documents, information must be assessed in light of all factors related to request—Five other questions identified in addition to questions suggested in Jarvis—Overall evidence showing predominant purpose behind creation, issuing of letters, questionnaires was use of audit information and functioned for investigators’ purposes—Notion of “predominant purpose” not precluding other purposes—Evidence showed Investigations took control of applicants’ files, retained control despite fact some auditors genuinely trying to assume roles required by Act—Therefore, Charter rights (such as s. 7 right; right to remain silent, avoid self‑incrimination) triggered—Applicants not informed of rights—Order relying on Charter, s. 24 granted quashing letters, questionnaires forwarded to applicants; prohibiting respondent from taking action against applicants’ failure to respond thereto—Application allowed—Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 231.1(1) (as am. by S.C. 1986, c. 6, s. 121; 1994, c. 21, s. 107), 231.2 (as am. by S.C. 1986, c. 6, s. 121; 1988, c. 55, s. 174; 1996, c. 21, s. 58; 2000, c. 30, s. 176)—Canadian Charter of Rights and Freedoms, being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44], s. 7.
Stanfield v. M.N.R. (T‑1554‑02, 2005 FC 1010, Noël J., order dated 21/7/05, 50 pp.)