Taxpayers have cause for concern over proposed amendments to the Income Tax Act.1 Buried in a recent 375-page omnibus bill, Bill C-31 is a provision giving Canada Revenue Agency ("CRA") officials the power to release taxpayer information to the police when, in their opinion, there are reasonable grounds to believe that the information will afford evidence of a serious offence. Providing CRA officials a list of offences in respect of which they may provide information to the police seems to create an obvious temptation, if not an invitation, to dig a little deeper in the course of a tax audit to look for dirty laundry. This is particularly concerning when auditors have access to a taxpayer's computer which may reveal significant personal details in addition to financial information. If Bill C-31 passes, CRA officials may be responsible for deciding whether there are reasonable grounds to believe that taxpayer information is evidence of a serious offence and should be turned over to police, rather than a judge hearing an application for a warrant, which would be the usual procedural route for obtaining this kind of evidence. The obvious question is whether the decision to breach taxpayer privacy should be left in the hands of government officials rather than a judge.
Admittedly, the CRA was previously able to disclose information of tax-related criminal wrongdoing disclosed in tax filings or legitimately uncovered in the course of an audit. The Supreme Court of Canada ("SCC") has carefully balanced the dual role of the CRA as auditor and enforcer of criminal tax evasion. The power to disclose confidential information was also extended in recent years to include disclosure of information about registered charities (and entities applying for registration as charities) to CSIS, the RCMP and FINTRAC, where the information may relate to national security, terrorist financing or money laundering. Bill C-31, however, takes the role of CRA officials much further. Thus, it seems likely that only a very narrow use of this new power would survive a Charter challenge on the basis that it constitutes unreasonable search and seizure and violates the right against self-incrimination.
The Serious Offences Amendment: Proposed Subsection 241(9.5) of the ITA
As it stands, section 241 of the ITA prohibits CRA officials from disclosing taxpayer information, with some narrow exceptions. The new proposed exception would allow an official to provide to a law enforcement officer taxpayer information, if the official has reasonable grounds to believe that the information will afford evidence of a criminal offence from a laundry list of offences. For ease of reference, we will refer to this provision as the "Serious Offences Amendment." The breadth of listed offences is disturbing. Some of the specific offences that the CRA would be on the lookout for under the Serious Offences Amendment include:
- corruption offences and conspiracy to commit those corruption offences
- prison breach
- criminal harassment
- sexual assault
- human trafficking
- motor vehicle theft
- breaking and entering into a non-dwelling place
- entering a dwelling-house without lawful excuse
- arson for fraudulent purpose
- money laundering
In addition, the Serious Offences Amendment applies when the CRA official has reasonable grounds to believe that the information is evidence of terrorism or organized crime, any offence that carries a mandatory minimum penalty, and any offence for which the maximum term of imprisonment is 14 years or 10 years, where the offence involves harm, drugs or weapons.
It would be an understatement to say that the Serious Offences Amendment is broad in its application. It is notable that the offences to which it applies have nothing to do with the enforcement of the ITA, and most have nothing to do with finances at all.
How Is the Law Changing?
Canadian residents are subject to income tax in Canada, as are some non-residents in certain circumstances. Subject to limited exceptions, taxpayers are required to file timely, complete and accurate income tax and information returns. The CRA has broad audit powers to compel taxpayers to provide documents and information to verify the information provided in tax filings.2 However, taxpayer information is strongly protected by s. 241 of the ITA and leading SCC cases, which confirm that the CRA cannot exercise its regulatory audit powers to gather information for a criminal investigation or on its own initiative or communicate such evidence to law enforcement authorities.
CRA officials may only disclose information if the taxpayer has already been charged with a crime, the police have obtained a warrant from the court, or there is an imminent danger of death or physical injury to a person. The Serious Offences Amendment fundamentally changes that, allowing CRA officials to communicate information to police on their own initiative and without warrant, if there are reasonable grounds to believe that the information is evidence of any of the listed offences.
While taxpayer information should be (and is) kept private from other citizens, there are numerous exceptions allowing for taxpayer information to be shared with other government bodies including the police. In particular, the CRA already has the ability to provide the police with information gathered using its powers under the ITA without warrant or imminent danger if the offence relates to a CRA official in the course of his or her duties.
What is so significant about the Serious Offences Amendment is that the offence need not have anything to do with the enforcement of the ITA. This is a considerable broadening of the CRA's power to communicate information to the police.
Significant legal confrontations have arisen from the CRA's use of its civil audit powers to ensure tax compliance. In R. v. Jarvis,3 the SCC declared the search and seizure of Mr. Jarvis' personal information by the CRA to be unconstitutional once the focus of the audit shifted from civil tax compliance to criminal tax evasion. After the authorities "cross the Rubicon" from civil auditing to investigating tax evasion, gathering information constituted unreasonable search and seizure pursuant to section 8 of the Charter and violated the right against self-incrimination.
Section 8 of the Charter governs the right to be free from unreasonable search and seizure. An individual's reasonable expectation of privacy is determined by the context in which privacy rights are invoked.4 In R. v. Plant,5 the SCC explained that factors to consider in assessing the expectation of privacy are the relationship between the party releasing information and claiming confidentiality, the place where the information was obtained, the manner in which it was obtained and the seriousness of the crime being investigated. While few privacy rights attach to information supplied to the authorities, and the authorities are generally free to share that information, taxpayer information is different in that taxpayers have no choice but to supply the CRA with information related to their tax returns. The ITA also allows the CRA to demand further information from taxpayers, as well as inspect their books, records and other documents (including bank statements, investment, business, and employment records), for the purposes of administration and enforcement of the ITA. The SCC held in Jarvis6 that "a taxpayer's privacy interest in records that may be relevant to the filing of his or her tax return is relatively low."
It was in the exclusively tax-related context of Jarvis that the SCC examined whether or not the CRA could use its audit powers to assist its investigation of criminal tax evasion offences for which Mr. Jarvis could serve jail time. The decision in Jarvis turned on a distinction between the audit context and the criminal tax evasion investigation context. The SCC concluded that use of audit powers constitutes an unreasonable search and seizure "where the predominant purpose of a particular inquiry is the determination of penal liability..."7. However, the SCC qualified this statement by saying that "there is nothing preventing auditors from passing to investigators their files containing validly obtained audit materials."8 To summarize, CRA officials could run both a civil audit and a criminal investigation, but once the criminal investigation was the predominant purpose, the CRA could no longer use its audit powers. Those same searches, seizures and compelled information from the taxpayer would have to be authorized by warrant.
The statutory requirement that individuals provide information to the CRA also raises the right against self-incrimination. Not all statutorily compelled statements must be excluded from evidence in a proceeding where liberty is at stake.9 This is particularly so in regulatory contexts "where the procedures being challenged have generally been designed (and are employed) as part of an administrative scheme in the public interest..."10 In R. v. White,11 the SCC explained that "[i]n some contexts, the factors that favour the importance of the search for truth will outweigh the factors that favour protecting the individual against undue compulsion by the state."
The SCC explained in Jarvis that to respect the taxpayer's right to silence, once a criminal tax evasion investigation is commenced, CRA officials may no longer avail themselves of the power to compel information from the taxpayer pursuant to its audit powers. The investigators must at that stage provide the taxpayer with a proper warning that an investigation has commenced12 and only conduct intrusive searches and seizures with warrant authorization.
Likely Charter Consequences
The courts will be obliged to apply an analysis similar to Jarvis to the Serious Offences Amendment, but the context will be much different. The SCC deemed the privacy interest in records to be relatively low in the context of providing information relevant to filing a tax return. However, the Serious Offences Amendment allows CRA officials to provide information to police on a broad array of offences, which go well beyond records or information relevant to the filing of a tax return. Indeed, it is hard to conceive how CRA officials, doing their job in a reasonable manner and respecting the privacy interests of Canadian citizens, are going to find information relevant to serious crimes beyond tax evasion and other financial offences. Tax evasion and other financial offences have a direct link to what we expect auditors to examine in the course of an audit. However, the long list of offences listed in Bill C-31 would seem to invite CRA officials to do some digging well beyond their audit role.
The SCC's remarks in Jarvis were made in the context of investigating offences directly connected with the administration of the ITA. With the Serious Offences Amendment, the fruits of this information gathering can be used for criminal investigations completely unrelated to the ITA. It is possible that this aspect of the Serious Offences Amendment leaves it vulnerable to an overbreadth or arbitrariness attack pursuant to the Charter.
For the CRA to apply the Serious Offences Amendment in a manner consistent with the Charter, the CRA would have to use the provision almost exclusively to address the problem that the government says it is there to solve: in cases where CRA officials truly stumble upon evidence of a listed offence in the process of an audit. It is very concerning, however, that a carefully constructed investigation by CRA officials may result in "stumbling upon" evidence of interest beyond that truly required under a civil tax audit. In other words, evidence relevant to the range of offences in the Serious Offences Amendment lacks a direct link to what we would anticipate auditors to come across doing their jobs reasonably. Bill C-31, therefore, does not appear to further the goals of a fair and reasonable self-reporting tax regime. Rather, it encourages broad investigations that "stumble" into the true criminal realm. The SCC has repeatedly emphasized the importance of context in the application of the Charter. In the future application of Bill C-31, the Crown is unlikely to have as favourable a context as in the Jarvis case. Unlike Jarvis, Bill C-31 will not simply lead to shades of gray situations (from audit of taxes to related investigation of tax evasion). Rather, it will lead to stark black and white situations (from audit to completely unrelated broad criminal investigation) that will raise red flags of Charter rights abuses.
What does this mean for the Serious Offences Amendment? It is likely that searches without a warrant conducted for the purposes of investigating criminal offences for which charges have not been laid could constitute unreasonable search and seizure, violating section 8 of the Charter. Thus, the use of audit powers by CRA officials on behalf of the police in order to obtain information and evidence that the police would otherwise need a warrant to obtain would not likely pass constitutional muster. For the sake of individual rights, it is important that courts curtail any such behaviour because it would unreasonably circumvent the need for judicial authorization to search and seize personal information for the purposes of a criminal investigation. It may also lead to closer scrutiny of CRA audits as people have more reason to challenge the breadth of those audits.
Why a New Exception?
The Serious Offences Amendment was ostensibly proposed to avoid the frustrating possibility that CRA auditors would find evidence of a crime that could not be disclosed to the police because the usual statutory conditions were not met. The usual example given by proponents is a CRA auditor finding child pornography when examining a taxpayer's computer. Police have also complained that to obtain a warrant to search tax files, they had to prove to the court that the proceeds of crime or money laundering existed prior to the search. The Serious Offences Amendment may also be intended to encourage reciprocity with police, who often provide the CRA with information for CRA investigations while the CRA is currently prevented from reciprocating.
The Broader Privacy Implications
The searching of computers and electronic databases is a fast-developing area of investigation and jurisprudence. Canadians store personal information on a wide variety of electronic devices and if we are deemed to waive our privacy interest in electronic information as a result of our state-mandated income tax regime, then we may lose our constitutional right to privacy. Fortunately, in R. v. Cole13 the SCC recognized the slippery slope leading to the annihilation of privacy if we do not retain some reasonable expectation in the information stored on our electronic devices. One can hope that the courts will be keen to maintain a relatively broad sphere of privacy protection over electronic evidence that is statutorily mandated to be provided to the CRA, but over which we otherwise all hold a high reasonable expectation of privacy. In other words, while the CRA may need to search the contents of a computer for data relevant to an audit, it ought to be very limited in accessing anything other than what is strictly required for an audit.
From a practical perspective, the possibility of information being passed on to police may also cause ITA compliance issues for the CRA. People who feel that their privacy may be violated may be reluctant to provide necessary information to the CRA. This could have serious consequences for the administration of the ITA and require the CRA to deploy all of its draconian powers to enforce compliance, which is a costly and undesirable outcome. As the SCC observed in Jarvis,14 the success of the administration of the ITA "depends primarily upon taxpayer forthrightness." On the other hand, failing to comply with the administration and enforcement provisions of the ITA may result in onerous civil penalties or the application of the ITA's criminal sanctions.
If the Serious Offences Amendment is not struck down as overbroad or arbitrary, it must be narrowly applied to respect sections 7 and 8 of the Charter. While in some contexts the factors that favour the search for truth will outweigh the factors favouring protecting the individual against undue compulsion by the state, in this context protection of the individual against undue compulsion by the state ought to prevail. As the SCC stated in Jarvis, even in cases of prosecutions under the ITA itself, "the state is pitted against the individual in an attempt to establish culpability" and jail terms can result from conviction.15 The Serious Offences Amendment goes well beyond the goals of the statute, which are to uphold a self-assessing and self-reporting income tax regime. The Serious Offences Amendment appears to invite the use of audit powers conferred by the ITA to assist in a broad spectrum of criminal investigations. Should the Serious Offences Amendment become law, CRA officials should only use this new power to pass along clear evidence of the listed offences when they, truly by chance, encounter such evidence in the course of an audit that is otherwise carefully managed to protect the privacy rights of the taxpayer.
1 Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA").
2 Sections 231.1 and 231.2 of the ITA.
3 2002 SCC 73 ("Jarvis").
4 Jarvis, at para 64
5  3 SCR 281, at page 293.
6 Jarvis, at para 72.
7 Jarvis, at para 88 and 96.
8 Jarvis, at para 95.
9 Jarvis, at para 68.
10 Jarvis, at para. 72.
11  2 SCR 417, at para 48.
12 Jarvis, at para 99.
13 2012 SCC 53.
14 Jarvis, at para 51.
15 Jarvis, at para 62.
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