Canada: "Crossing The Rubicon" Against Corporations: Authorities Cannot Investigate Corporations Under The Guise Of An Audit

Authorities must relinquish their broad compulsory auditing powers when engaging in an adversarial determination of penal liability or, as stated by the Supreme Court in R. v. Jarvis, [2002] 3 SCR 757¹ when they "cross the Rubicon". This flows from the protection against self-incrimination enshrined under section 7 of the Canadian Charter of Rights and Freedom, a protection which, traditionally, only benefits individuals. However, according to a recent Court of Québec decision in Agence du revenu du Québec c. BT Céramiques inc., 2015 QCCQ 14534² the protection of the Rubicon is not exclusive to individuals: it also shields corporations. This decision's pending appeal is one to keep an eye out for, as it might revisit the scope of corporations' rights during regulatory audits and penal investigations.

A "domino effect" triggered by suspicions of corruption and tax evasion

BT Céramiques concerns an illegal and disguised federal criminal investigation that contaminated subsequent enforcement actions through a "chain reaction".

Informed of possible corruption within its ranks, the Canada Revenue Agency ("CRA") launched an administrative audit against corporate and individual suspects, including BT Céramiques. Broad compulsory powers were exercised by CRA auditors to compel those persons to disclose information. The audit revealed regulatory noncompliances, but did not lead to the issuance of tax reassessments or other administrative enforcement actions.

Instead, the matter was referred to the CRA's investigation division, which conducted searches in business and residential premises based on the information obtained by the auditors. The results of the searches were then shared with and relied upon by the Québec Revenue Agency to charge the targets, including a corporation, with several counts of provincial tax offences.

BT Céramiques and its co-accused sought to exclude the prosecution's evidence on the basis that it had been obtained in violation of their fundamental rights. Specifically, they argued that the evidence was the fruit of a poisonous tree as it derived from an illegal audit made in furtherance of a criminal investigation.

A protection also afforded to corporations

The Court agreed that the evidence did in fact derive from the CRA audit, whose predominant purpose was to determine the accuseds' criminal liability. In finding so, the Court stated that the prohibition on audits made in furtherance of criminal investigations applied notwithstanding the corporate nature of BT Céramiques:

[Unofficial translation from French] In Jarvis, the [Supreme] Court was dealing with an individual only, whereas in the present matter the respondents include both a corporation and individuals. In addressing the distinctions between the situation of an individual and that of a legal entity, the Federal Court of Appeal, in Kligman v. M.N.R. (C.A.), 2004 FCA 152 observed that the Supreme Court did not distinguish between these two types of entities for the purpose of the audit powers.

"[6] I should add that the Supreme Court's conclusions relating to the availability of the requirement powers in subsection 231.2(1) of the Act do not distinguish between an individual and a corporate taxpayer: such powers are not available for the purpose of advancing a criminal investigation. [...]"

Given the highly objectionable conduct of the authorities and their lack of transparency towards the investigation's targets, Justice Larochelle concluded that the violation was serious enough to exclude the evidence.

Implications

BT Céramiques is a reminder of the prohibition on the authorities to use compulsory auditing powers as the work horses of simultaneous penal investigations. More significantly, it further supports the applicability of such prohibition to investigations concerning corporations. Subject to the outcome of the appeal, one may theorize that the prohibition has evolved into a general principle that applies independently of the scope of the fundamental rights afforded to corporations.

Case Information

Agence du revenu du Québec c. BT Céramiques inc., 2015 QCCQ 14534, appeal pending

Docket: 540-61-060698-138

Date of Decision: October 30, 2015

Footnotes

1. [2002] 3 SCR 757.

2. 2015 QCCQ 14534, appeal pending.

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