Quebec Superior Court overturned a ruling that held that the investigative methods used by federal and provincial tax authorities to investigate corruption in the Quebec construction industry were “highly reprehensible,” paving the way for Canada Revenue Agency and Revenue Quebec to once again pursue tax evasion inquiries that were put on hold for the past two years.
In a series of concurrent decisions, Quebec Superior court Justice Daniel Payette held that the investigation conducted by tax authorities did not contravene the leading Supreme Court of Canada decision in R. v. Jarvis,  3 SCR 757, which draws a distinctions between civil tax audits and criminal tax investigations.
In Jarvis, the SCC stated that a CRA auditor may shift his focus during an inquiry into a taxpayer’s affairs from a civil tax audit to an investigation. But once the “predominant purpose” of the CRA’s inquiry becomes investigative, an adversarial relationship between the taxpayer and the state takes hold because “of the liberty interest that is at stake.” CRA officials are then obliged to caution taxpayers and make them aware of their right to remain silent and the right to counsel under the Charter. If the CRA believes that the taxpayer has documents that are necessary to its investigation, the tax authority must obtain warrants in order to lawfully search and seize taxpayer records.
Court of Quebec Judge Dominique Larochelle held in Agence du revenu du Québec c. BT Céramiques inc., 2015 QCCQ 14534 that the evidence produced to charge the owner and three other company officials of a Montreal company, B.T. Céramiques, was obtained illegally because federal tax officials crossed the “Rubicon” and failed to inform the taxpayers that the inquiry had turned into a criminal investigation, thereby breaching their right to freedom from self-incrimination and right to reasonable expectation of privacy guaranteed under s.7 and s.8 of the Charter of Rights and Freedoms. Moreover, Judge Larochelle found that CRA’s probe into B.T. Céramiques and its officials overstepped the boundaries from an audit into a criminal investigation when a tax official obtained information that some CRA civil servants might have been corrupted. She concluded that the purpose of the CRA investigation, known as Project Legaux, was to investigate B.T. Céramiques — and certain CRA officials.
Judge Larochelle also held that evidence obtained by Revenue Quebec during the course of its own investigation against the same company and individuals was inadmissible because it originally stemmed from the CRA investigation. That finding seemed to suggest that the “fruit of the poisonous tree” doctrine, an American doctrine first described in 1920, too applies in Canadian tax law.
But Superior Court Justice Payette was not swayed by the evidence, overturned the lower court ruling, and ordered a new trial. He found that there was nothing illegal about the investigation conducted by the taxman, and held that the CRA internal and criminal probe on its employees were not “pertinent factors” that should be considered when applying guiding principles of the Jarvis ruling. Justice Payette also held that the fact evidence from Revenue Quebec’s subsequent investigation was “fueled” by the CRA probe should not necessarily lead to the exclusion of evidence obtained by the provincial tax authority.
“The decision essentially is based on the fact that Justice Payette takes the position that there was no evidence to support the findings of fact mostly determined by the Court of Quebec judge,” noted Montreal tax lawyer Christopher Mostovac who plead the case for B.T. Céramiques and its officials. “But there’s no question that if this decision stands it really is an important decision regarding the way that Jarvis should be interpreted by the lower courts so in that sense it potentially has very big implications.”
Justice Payette’s decision, if it stands, will likely change the way that federal and Quebec tax authorities approach audits and criminal tax investigations as it would allow them “a lot more flexibility” to determine when they can shift the focus of an inquiry from a civil tax audit to a criminal tax investigation, added Mostovac, who said he will appeal the decision.
“Under Jarvis the rule is simple but hard to interpret: the moment an auditor has in his own mind established that he has found an indication of a tax criminal or penal offence, he has no choice but to cease using his audit powers,” explained Mostovac of Starnino Mostovac. “That’s the way Jarvis should be interpreted and the way it should be maintained. Some would argue that Justice Payette’s decision changes that.”
Part of the challenge is that the test in Jarvis is at best ambiguous and it can very difficult to determine when tax authorities have crossed the “Rubicon,” said Paul Ryan, Montreal tax lawyer with Ravinsky Ryan Lemoine LLP. While the SCC held that the Rubicon is crossed once the “predominant purpose” of the CRA’s inquiry becomes investigative, Ryan pointed out that the nation’s highest court also states that 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, added the SCC.
“It is not clear in Jarvis when the Rubicon is crossed because of the ambiguousness of the predominant test” said Ryan. “One almost has to put oneself in the minds of tax officials and how do you prove what they were thinking at the time. I think that the Supreme Court will eventually have to review the matter to provide more guidance.”
The Payette decision also plainly states that tax authorities do not have to be transparent with taxpayers when conducting an audit. According to Justice Payette, the Jarvis decision does not state that the taxman must divulge evidence that led it to launch an audit nor is it obliged to adopt a “transparent approach” with taxpayers during an audit. “On the contrary,” said Justice Payette in R. c. BT Céramiques inc. 2017 QCCA 4262.
That is a troubling finding, according to tax lawyers. Mostovac believes that when tax officials conduct a criminal tax investigation, it is understandable to carry out investigative tactics that include elements of surprise.
“But for audit, that’s a different story,” said Mostovac. “There has to be a cooperative approach between the taxpayer and the tax system because otherwise taxpayers will no longer believe in the tax system. It would be terrible for the system.”
The other concurrent decisions by Justice Payette include:
Agence du revenu du Québec c. BT Céramiques inc., 2017 QCCS 4233
Bruno c. R., 2017 QCCS 4261