Introduction – Tax Audits and Penal or Criminal Investigations

In R v. Jarvis, the Supreme Court of Canada held that while tax authorities are granted a wide range of powers, including tax audit powers and criminal tax investigative powers, prior to crossing the "Rubicon" of converting a tax audit into a criminal tax investigation, tax authorities must set out the distinctions between their tax audit and criminal tax investigative powers and protect taxpayers' rights as set out in the Charter of Rights and Freedoms. Violations of these principles may result in the exclusion of evidence, pursuant to section 24(2) of the Charter of Rights and Freedoms, which could result in an acquittal verdict. Consequently, tax authorities must recognize that "there must be a certain separation between the verification and investigation functions within the agency" and the scope of their associated powers.

B.T. Céramiques inc., et al. v. Québec Revenue Agency is a case that reflects the blurred lines between tax audits and criminal tax investigations and ongoing concerns that are associated with the exercise of power available to tax authorities. On the one hand, tax audits and criminal tax investigations are valuable regulatory tools that ensure compliance with Canada Income Tax Act and Regulations. On the other hand, the exercise of audit and investigative powers can create negative consequences for taxpayers where their distinctions are equivocal and or merged. In 2015, the Court of Québec granted B.T. Céramiques Inc.'s application to exclude the evidence gathered during the searches of 2008 and 2009 as well as acquitted them of all charges. In 2017, the Superior Court of Québec dismissed B.T. Céramiques Inc.'s application to exclude evidence, setting aside verdicts of acquittal, and ordering a new trial. However, in 2020, the Québec Court of Appeal upheld the original Court of Québec's order to exclude the evidence and verdicts of acquittal were restored.

B.T. Céramiques inc., et al. v. Québec Revenue Agency – The Facts

Initially, the Canada Revenue Agency (the "CRA") launched a tax audit against the Appellants, B.T. Céramiques et al., after the CRA received information pertaining to the Appellants' tax strategies and business activities. In exercising its broad tax audit powers, the CRA continued to audit the Appellant's corporate records and compelled the disclosure of further information and documents from the Appellant's accountant, who was already under investigation for an unrelated tax avoidance scheme. The CRA then, through its Criminal Investigations Department, used the information and documents gathered during the tax audit to obtain multiple search warrants against the Appellant. The investigators searched and seized the Appellant's corporate, financial and third-party records. Consequently, the Appellants faced a series of charges for tax evasion relating to income tax, Goods and Services Tax (GST) and Québec Sales Tax (QST).

Before the Court of Québec, the Appellants presented an application requesting the exclusion of evidence citing (1) the erroneous use by the CRA of its tax audit powers, conferred by the Income Tax Act, to conduct a criminal investigation without their knowledge; and, (2) the violation of their right to reasonable search and seizure, pursuant to the Charter of Rights and Freedoms. The trial judge (the Honorable Dominique Larochelle) (hereafter referred to as the "Trial Judge") examined the facts in association with the interpretation and application of the principles set out in the Supreme Court of Canada's leading decision in R v. Jarvis and granted the Appellant's application and ordered the exclusion of evidence obtained during the searches on the grounds that the evidence gathered during the searches were considered "tainted". The Trial Judge acquitted the Appellants of all charges.

However, a judge of the Superior Court of Québec (the Honorable Daniel W. Payette) (hereafter referred to as the "Appeal Judge") dismissed the Appellant's application to exclude evidence, set aside the Trial Judge's verdict of acquittal, and ordered a new trial. The Appeal Judge concluded that the Trial Judge erred in understanding the nature of the tax audit and the "starting point of the investigation into a criminal liability of a taxpayer". The Appeal Judge then "noted several errors of law which, in his opinion, warranted intervention" including the Trial Judge's examination of the relevant facts and the Trial Judge's equation of CRA's conduct with that of the Québec Revenue Agency (also knowns as ARQ). Noting the error of the Trial Judge from the beginning of his analysis, the Appeal Judge, as previously mentioned, dismissed the Appellant's motion for exclusion of the evidence, set aside the acquittal verdict, and ordered a new trial.

B.T. Céramiques inc., et al. v. Québec Revenue Agency – The Issues

The issues presented before the Québec Court of Appeal were:

  • Did the Appeal Judge err in law in applying the standard of "deferential correctness" to review of the trial decision, hen the applicable standard is that of palpable and overriding error?
  • Did the Appeal Judge err in concluding that the Trial Judge had altered the legal test set out in Jarvis?
  • Did the Appeal Judge disrespect the Trial Judge's findings of fact?
  • Did the Appeal Judge err in law in applying the correctness standard to the analysis of the sufficiency of the remainder of the grounds for the Québec Revenue Agency search warrants?
  • Did the Appeal Judge err in law in substituting his analysis for that of the Trial Judge concerning the appropriate remedy for violations of the appellants' rights enshrined in the Canadian Charter of Rights and Freedoms with regard to the Québec Revenue Agency?

B.T. Céramiques inc., et al. v. Québec Revenue Agency – Tax Analysis

First, the Québec Court of Appeal explained that while the Trial Judge enjoyed a "wide latitude in assessing the evidence and deciding on the conclusions to be drawn from it", it is not for a Court of Appeal Judge to intervene by way of substituting his or her assessment of the evidence because of differences of opinion.

Next, in examining whether (or not) the Appeal Judge disrespected the Trial Judge's findings of fact, the Québec Court of Appeal reviewed the positions of the parties as well the principals set out in the Supreme Court of Canada's decision in R v. Jarvis, and their applications. The Québec Court of Appeal held that the Appeal Judge failed to consider the reasons for the judgement at trial and while he (the Appeal Judge) concluded that the questions before him qualify "as mixed fact and law" he only approached those questions "which he qualifies as law". The Québec Court of Appeal held that the Trial Judge did not commit a reviewable error in her analysis of the various elements of the facts including the conduct of the auditor and their relevance to the evidence sought.

Furthermore, the Québec Court of Appeal held that the Appeal Judge ascribed errors to the Trial Judge that were not in fact errors and that he (the Appeal Judge) could not "substitute his assessment of the evidence" for that of the Trial Judge.

Finally, the Québec Court of Appeal agreed with the Trial Judge's decision that the Canada Revenue Agency and the Québec Revenue Agency are associated in that they both "constitute state agencies". The Québec Court of Appeal also agreed with the Trial Judge's conclusion that the evidence could not justify the search warrant and it upheld the Trial Judge's decision that the documents and information obtained during the searches were obtained illegally and the seizure itself also became illegal.

B.T. Céramiques inc., et al. v. Québec Revenue Agency – The Holding

The appeals were therefore allowed, and the verdicts of acquittal were restored. The Québec Court of Appeal allowed the appeal on the grounds that the Appeal Judge ascribed errors to the Trial Judge that were not in fact errors and that he (the Appeal judge) could not "substitute his assessment of the evidence" for that of the Trial Judge.

Pro Tax Tips - Tax Audits and Penal Investigations

B.T. Céramiques inc., et al. v. Québec Revenue Agency demonstrates the significant need to understanding the distinctions between tax audits and penal or criminal tax investigations, particularly in context of the Income Tax Act. Corporate shareholders should engage in ongoing communications with tax authorities through their experienced Canadian tax lawyers during the course of an ongoing tax audit or criminal tax investigation as well as implement the necessary measures to safeguard their corporation from illegal searches and seizure, and criminal tax investigations in disguise. Further, this case sheds light on the blurred lines between audit and investigative powers as well as the consequences that may result where the blurred lines are violated and or crossed illegally. If you have questions pertaining to CRA's tax audit and criminal tax investigative powers or if your corporation is dealing with the CRA in an ongoing tax audit and or criminal tax investigation, please contact our tax law office to speak with one of our experienced Certified Specialist in Taxation Canadian tax lawyers.

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