Authors: Sébastien C. Caron, Fanny Albrecht and Sébastien Girard (stagiaire)

In R. c. Goldberg, 2020 QCCQ 4548, the Court of Québec permanently stayed proceedings and concluded that a criminal investigation for tax fraud that had been brought by the Canada Revenue Agency “harms the integrity of the system of justice” and “irreparably compromises the community’s sense of fair play and decency” [our translation].

The Court underlines that the Quebec Revenue Agency (QRA) and the Canada Revenue Agency (CRA) are vested with investigative powers under the law and in exercising their powers of inspection, audit and investigation, they must respect the constitutional rights of taxpayers. The same principles apply to all regulators with similar powers, such as the provincial bodies responsible for enforcing the laws and regulations related to securities and financial products, including the Autorité des marchés financiers du Québec.

Context

During a routine administrative audit of the Bouclair Corporation in 2011 and 2012, the Quebec Revenue Agency discovered evidence of tax evasion. Without submitting the file to its Investigation Division and without informing the accused of their constitutional rights, the QRA continued its audit of Bouclair and of third parties. The QRA gathered evidence, including confessions and other incriminating admissions from representatives of the corporation. Once the audit was completed, the QRA sent new tax notices to the concerned persons, requesting the payment of taxes, interests, and penalties. The taxpayers paid without contesting.

In 2014, based on the QRA audit report, the CRA also sent new tax notices to the same persons, requiring payment of taxes, interests, and penalties. Again, the taxpayers paid without contesting and the CRA closed the file.

In 2015, the CRA Investigations Division selected for investigation several closed files of entities whose tax audits had resulted in significant penalties. Thus, the present file was selected and the CRA opened a criminal investigation based solely on the information provided by the QRA.

In 2017, the CRA requested, obtained, and executed three search warrants targeting the offices of Bouclair as well as the residences of certain executives.

Bouclair and two of its executives, Peter Goldberg, and Erwin Fligel, were then criminally charged of tax evasion.

Decision

The Court found that the violations of the accused’s constitutional rights by the QRA and CRA were “serious, multiple and systemic”. In these circumstances, the Court concluded that if the trial were to continue it would bring the administration of justice into disrepute. Due to the multiple violations of the accused’s constitutional rights, the Court of Québec permanently stayed the proceedings.

     Powers of audit vs. criminal investigation

In 2002, the Supreme Court developed seven non-exhaustive factors that distinguish an audit (also sometimes known as an inspection) from an investigation and determine whether the predominant purpose of an investigation is the determination of penal liability of an individual (R c. Jarvis [2002] 3 R.C.S. 757). Considering the specifics of the case at hand, including the fact that the investigation occurred several years after the audit and that the information was transferred from a provincial agency to a federal one, the Court primarily retained four (4) of the Jarvis factors. In addition to these factors, the Court insisted on the underlying principles that must guide the courts in determining when the “Rubicon” between an audit and a criminal investigation was crossed.

The Court recalled that when a person is the subject of an audit (or inspection) they have the obligation to (i) reasonably cooperate, (ii) answer questions, and (iii) provide the requested documents.

Conversely, if they are the subject of a criminal investigation they benefit from the right against self-incrimination as well as the full scope of the constitutional rights applicable in similar circumstances, including the right to remain silent, the right to counsel and the right to refuse to help the State in building a case against a citizen.

The Court indicated that while an audit can continue when a criminal investigation is instituted, the information obtained during the audit cannot be used for the purpose of a criminal investigation. Indeed, the State cannot be forced to institute a criminal investigation even if a regulator is in possession of information suggesting criminal activity. The regulator can always continue an audit in the presence of information that suggests criminal activity, but the information obtained during this audit can only be used in proceedings of an administrative nature, not penal or criminal.

The Court concluded that the violation of the accused’s constitutional rights began as soon as the CRA used information obtained by the QRA during its audit where it had discovered signs of tax evasion and that the “Rubicon” had clearly been crossed. The Court also concluded that the QRA “demonstrated a complete misunderstanding of the rationale for referring an audit for investigation” as well as “what ‘tax evasion’ is”.

     Sharing of confidential information

The Court concluded that the sharing of confidential information by the QRA to the CRA is, in this case, illegal. The Court found it “alarming” and “highly problematic” to see that the requirements regulating communications under the Tax Administration Act and the agreement between the parties were ignored by both the QRA and the CRA.

To remember

A permanent stay of proceedings is only ordered by the Courts in very rare and exceptional cases. This is the case when constitutional rights are not respected, bringing the administration of justice into disrepute.

In addition to highlighting the importance of the principles developed in Jarvis, the Court recalled that it is critical for public entities vested with powers of inspection, audit and criminal investigation to respect the constitutional rights of Canadian taxpayers, failing which criminal proceedings may be permanently stayed. A regulator can always continue an audit with information suggesting criminal activity, but the information obtained therein can only be used in the course of administrative proceedings, not penal or criminal. In choosing to not offer constitutional protections to the person being subjected to an audit (or inspection), the regulator renounces to the future use of the information obtained in any penal or criminal proceedings.