Appeal court orders seized material to be sealed in Uber case

Nearly six months after 20 Revenue Quebec officials raided the Montreal offices of Uber Canada Inc. as part of a tax investigation, the popular ride-sharing service won a legal battle against the provincial taxman after the Quebec Court of Appeal overturned a lower court ruling and held that the seized evidence must be sealed.

The succinct 12-page ruling will likely pave the way for more applications for impoundment as the courts and tax authorities grapple with the challenges posed by e-commerce, disruptive business models, and technology, according to tax lawyers.

“The ruling demonstrates that the courts and tax authorities have no choice but to adapt to today’s technology,” noted Alexandre Dufresne, managing partner of Spiegel Sohmer in Montreal. With laptops, smartphones, tablets likely to contain business — and personal — information, “the courts are coming to grips over how to deal with the issue of search warrants and privacy, which is a constitutionally protected right.”

The San Francisco-based firm first launched in Montreal in 2013 as a mobile application that allowed users to hail a cab using their smartphones. In late 2014 the firm drew the ire of tax drivers – and the attention of authorities — after it introduced its UberX service, which allows people to use their own cars in order to offer lifts to customers for money. Montreal taxi drivers, like elsewhere around the world, have argued that Uber enjoys an unfair advantage, compromises their ability to make a living, and is illegal. Montreal’s taxi bureau has ramped up its efforts to crack down on UberX drivers and seized more than 400 vehicles last year.

In May 2015, six months after the launch of UberX, Uber faced more legal headaches. Revenue Quebec obtained two search warrants under the Tax Administration Act to seize computers, cellphones, tablets and documents from Uber’s Montreal offices, based on a sworn statement that alleged that information contained in the high tech devices would prove that it breached tax laws. Following the execution of the warrants, Uber brought a certiorari application before Superior Court seeking to quash the warrants, based on provisions of the Code of Penal Procedure, the Quebec Code of Civil Procedure as well as the Canadian and Quebec charters. While awaiting the outcome of the certiorari application, Uber also applied for a safeguard order, requesting that the seized be impounded based on articles 8 and 24 (1) of the Canadian Charter.

The trial judge, heeding guidance from an Quebec appeal court decision in Constructions Louisbourg Ltée c. Agence du revenu du Québec 2011 QCCA 1636, refused to grant the application for impoundment. The judge held that allowing Revenue Quebec to examine the seized material would not cause Uber irreparable harm, that Uber’s expectation of privacy with respect to regulated activities was low, and that the balance of convenience weighed in favour of the taxpayers’ right to have tax laws respected and investigations seen through to the end.

The Quebec Court of Appeal overturned the ruling. In a unanimous decision in Uber Canada Inc. c. Agence du revenu du Québec 2016 QCCA 1, the three-judge panel held that the lower court judge “erred in his assessment” of the harm Uber would suffer if the impoundment was denied. The appeal court noted that the seized documents in the Louisbourg case were “exclusively” commercial, and were seized by Revenue Quebec from Revenue Canada offices, under no objection from Louisbourg.

That was not the case in the Uber case, pointed out the appeal court. The property seized at Uber’s Montreal offices contained information that was not “strictly commercial.” Rather, there is a “significant risk” that the information found on the laptops and smartphones belonging to Uber employees was private in nature, and beyond the scope of the search warrants. In a catchy phrase that will likely be repeatedly cited, the appeal court noted that “information cannot be unlearned and documents cannot be unread.” The scope of the seizure, the premises where the searches were performed, and “the allegations by Revenue Quebec read in conjunction with the minutes of the seizure sufficiently demonstrate” the existence of irreparable harm, held the appeal court.

“Following the Louisbourg decision, there were doubts within the legal community whether applications for impoundment had a chance of succeeding,” said Montreal tax lawyer Paul Ryan. “The appeal court reiterates in the Uber case that the expectation of privacy is relatively low when it comes to commercial documents.  But it also points out that devices such as smartphones and laptops contain both commercial and private information — and the expectation of privacy in that case is much higher.”

The ruling also underscores the need for the courts to develop a body of guidance that will provide a clear framework for authorities when executing search warrants and seizing materials such as high tech devices, said Ryan. Often times judges do not provide detailed instructions in search warrants to authorities, creating “legally ambiguous and uncertain” situations, added Ryan. Until well-defined boundaries are spelled out by the courts, Ryan believes that the Uber decision will likely make it easier to obtain motions for impoundment.

Granting an order to impound until final judgment is rendered over the challenges to the search warrants  would not cause prejudice to the provincial tax authority, said Louis-Frédérick Côté, a Montreal tax litigator who used to work for Revenue Quebec. It is an interim measure that protects the taxpayer.

“The seized material has been in Revenue Quebec’s hands for several months, and we don’t know what they have done with it,” said Côté. “Are civil servants analysing it, perhaps. Have civil servants downloaded material from the devices, perhaps. It is difficult to unread what you have read. That’s why orders to impound are important. In the meantime, the tax authority suffers no harm.”

Quebec tax authorities chastised for expecting business to act as “tax police”

The Tax Court of Canada, in yet another legal blow to Quebec’s tax authorities, chastised Revenue Quebec for expecting business to act as a “taxation police” after it withheld input tax credits from a meat processing company because it ostensibly had not been diligent in its dealings with its suppliers.

The precedent-setting ruling, the third to harshly castigate the Quebec taxman in recent months, found that nothing in the Excise Tax Act (ETA) allows tax authorities to hold a company liable for the tax delinquencies of its suppliers. In uncharacteristically blunt language, Justice Alain Tardif noted that it would be unreasonable to expect business to perform complete background checks on all its suppliers, especially since legislation grants tax authorities large powers to investigate and demand information.

“If Parliament had intended that a taxpayer doing business with a delinquent subcontractor would be held solidarily liable for the amounts the subcontractor owes to the state, it would have expressly stated that as the legislator did for contributions owed to the CSST,” said Justice Tardif in Salaison Lévesque Inc. v. The Queen, 2014 TCC 36. “It is not for the Court to usurp the function of Parliament.”

This ruling, coupled with another two very critical rulings issued late against Revenue Quebec last fall, has prompted tax lawyers to question whether the provincial tax department has gone too far in its battle to fight tax evasion. When the Quebec government announced four years ago its intention to “return to a balanced budget by 2013-2014,” it increased the pressure on Revenue Quebec to recoup more monies.

“Revenue Quebec employees are under a lot of pressure to recoup monies, and that leads to problems in the market,” noted Paul Ryan, a tax lawyer with Ravinsky Ryan Lemoine LLP in Montreal. “Ever since the provincial government introduced the return to a balanced budget program, the government is running Revenue Quebec like a business. I don’t know if it is appropriate for a tax department with all the powers they have in hand to be run like a business.

In a position that has long befuddled tax lawyers and practitioners, Revenue Quebec maintains that business have a so-called duty to investigate. Over the past several years it has compelled business claiming input tax credits to investigate the integrity of its suppliers, notes Louis Tassé, a tax lawyer with Couzin Taylor LLP who successfully argued the Salaison case. “I find it incomprehensible that Revenue Quebec tells its taxpayers three, four, five years down the line that you should have known what your obligations were when they were not written in law, its regulations or its information bulletins.”

Revenue Quebec has refused to refund input tax credits if it deemed that a business did not conduct proper due diligence on its suppliers. Indeed, in one case Revenue Quebec withheld $4-million in input tax credits from a company because some 30 out of 6,000 suppliers it was dealing with were apparently not legit, said a Montreal tax lawyer.

That’s what happened to Salaison Levesque, a Quebec family-run business that resorts to staffing agencies during the high-peak season in order to maintain its production. Between 2005 and 2009, the Montreal-based firm retained the services of four staffing agencies, and in accordance with the ETA, Salaison Levesque paid the GST on the invoices issued by the agencies for services rendered. The agencies, which had an obligation to remit taxes to the tax authorities, apparently did not. Revenue Quebec withheld Salaison’s input tax credit because it claimed that the staffing agencies could not have rendered the services identified on the invoices and paid by Salaison because the agencies did not have the resources to do so.

The tax authority also contended that the agencies outsourced the work and had not provided the services themselves. In the absence of a payroll registry, Revenue Quebec maintained that the agencies did not have any employees to provide the services, and therefore the invoices they issued were “invoices of accommodation” – the issuance of invoices where no service was rendered or supplies traded. Finally, Revenue Quebec asserted that Salaison did not act diligently in its dealing with the staffing agencies, and that it should have known that the agencies were fraudulent and did not remit the sales taxes that were collected.

Justice Tardif dismissed Revenue Quebec’s arguments, noting that its position was contradictory, farfetched, and ridiculous. Pointing out that there is a clear distinction between a lack of resources and non-declared resources, Justice Tardif noted that the fact that workers were not declared by the agencies did not change the fact they were employees of the staffing agencies. That the agencies did not remit the taxes and used undeclared resources to provide the services should not be attributed to a business that had no knowledge of the fraud and that acted in good faith.

“Under our tax laws, a declared or undeclared business, whether illegal or not, is subject to all tax legislation,” explained Tassé. “Revenue Quebec has even assessed drug dealers because they did not remit GST and QST. No kidding.”

Justice Tardif also held that the fact that the agencies may have hired unidentified subcontractors to provide the services made no difference. Regulations, noted Justice Tardif, allow for an invoice to include either commercial name of the supplier or its intermediary. Since the family-run business complied with the regulations, it could not held liable for the fraud committed by the agencies.

Justice Tardif also dismissed Revenue Quebec’s contention that Salaison should have been more diligent in its efforts to investigate its suppliers. The first mission of a business is to generate revenues, “and not act as a taxation police,” held Justice Tardif. “Nothing in the ETA provides that a business must act as a police officer or investigator to ensure that the business whose services have been retained complies with the ETA. Indirectly, Revenue Quebec wanted the appellant to do its own work.” Justice Tardif added that it would be not realistic to expect business to perform complete background checks on its suppliers, given the tools, personnel, and technical resources the tax authority has to uncover and sanction fraudsters.

“The important thing that comes out of this judgment is the fact that the court reiterates on more than one occasion that the first objective of a business is to generate revenues and not to be the tax authority’s police,” said Alexandre Dufresne, a tax lawyer and managing partner of Spiegel Sohmer in Montreal. “That to me is key because in the cases we have been seeing lately Revenue Quebec seems to impose more on taxpayers than what is imposed by law — and that is verify the legitimacy of their subcontractors.”

Justice Tardif also points out that under the Quebec Civil Code if an agent is acting for the government, as is any business collecting GST and PST, there is a presumption of good faith.

According to Etienne Gadbois, a tax lawyer with De Grandpré Chait in Montreal, that reasoning will likely give tax professionals added munitions in its legal tangles with Revenue Quebec. “I have never seen that particular reasoning,” said Gadbois. “Everyone who is collecting GST or QST are acting as agents for Revenue Quebec. Under the Civil Code, there is a presumption that the agent is acting in good faith so even though a subcontractor is delinquent the government cannot presume I am participating in the scheme. This reasoning adds value to the position that if your services are value-rendered you should be able to claim your input tax credits.”

The key part of the ruling for Montreal tax lawyer Emmanuelle Campeau is that Justice Tardif held that there is a clear distinction between an administrative stance adopted by tax authorities and what the law and its regulations demand of taxpayers.

“This duty to investigate does not emanate from the law,” said Campeau of Ravinsky Ryan Lemoine LLP. “It stems from Revenue Quebec’s administrative policies. At this moment Revenue Quebec is applying their administrative policies instead of the law. They are interpreting the law as it sees fit.”