Search & Seizure in Tax Cases

Originally appeared in Fall 2001 Tax Litigtaion Briefings

The Canadian Charter of Rights and Freedoms (the "Charter") protects taxpayers from unreasonable search and seizures. When evidence has been obtained through an unconstitutional search, section 24 of the Charter says that a court may give such remedy as it considers to be "appropriate and just in the circumstances." Three recent tax cases consider the question of excluding tainted evidence in a civil tax case. The cases show a variety of approaches depending upon the use to be made of the tainted evidence and depending upon how egregious the behaviour of the Canada Customs and Revenue Agency ("CCRA") has been.

In The Queen v. O’Neill Motors Limited tax assessments were vacated under section 24 of the Charter on the basis that the assessments could not be maintained without the illegally obtained evidence. In O’Neill, the CCRA seized documents under a warrant obtained under former section 231.3 of the Income Tax Act (the "ITA"). The subsequent civil assessment was made on the basis of the information in the seized documents. Following the seizure, section 231.3 of the ITA was declared to be unconstitutional and of no force or effect by the Federal Court of Appeal (in Baron v. Canada,[1991] 1 F.C. 688). As a result the seizure in O’Neill was illegal.

The CCRA retained possession of the seized documents and then re-seized them pursuant to a war-rant issued under the Criminal Code. In applying for the new warrant, the CCRA withheld significant information-particularly that the taxpayer had applied to have the documents returned and that the Crown was attempting to appeal the Baron decision to the Supreme Court of Canada.

When the taxpayer was prosecuted for tax evasion the re-seizure was held to be a violation of the taxpayer’s Charter right against unreasonable search and seizure. The documents were excluded from evidence in the criminal proceedings and the taxpayer was acquitted. The question then arose as to whether the tainted evidence could be used in the civil case.

In the Federal Court of Appeal, Justice Linden upheld the Tax Court’s decision to vacate the assessments. Integral to the decision was the fact that without the illegally obtained evidence, the minister would have had no evidence on which to base an assessment. The Federal Court of Appeal characterized the behaviour of the CCRA as "flagrant and egregious," but carefully specified that vacating an assessment is not an automatic remedy for Charter breaches. In O’Neill the assessments were issued beyond the statutory limitation period on the basis of the taxpayer’s alleged misrepresentation. As a result the onus of proof was on the minister; the court felt that the onus could not be met in the absence of the tainted evidence.

In Norwood v. The Queen, no criminal proceedings were involved. During a standard audit, the CCRA auditor attended at the accountant’s offices. While using the phone he noticed a file relating to the taxpayer. The auditor surreptitiously copied working notes made by the accountant. Some of this information was used to support a civil assessment. The taxpayer became aware of the auditor’s conduct when the examinations for discovery were held. The Tax Court found that the copying of the notes was an unreasonable search and seizure and under the Charter and had to consider the appropriate remedy. On the evidence, the harm caused by the Charter breach was minimal (the evidence was not relied upon to justify the reassessments). As a result, the proper remedy was the exclusion of the tainted evidence, but not a vacation of the assessments.

The facts in Donovan v. Canada are similar to the facts in O’Neill: an initial seizure made pursuant to an unconstitutional warrant was followed by a re-seizure under the Criminal Code. In both cases, the CCRA failed to disclose relevant information to the court when obtaining the second warrant. As well, in Donovan the criminal and civil investigations were "mingled:" an official from the Special Investigations Unit ("SIU") accompanied the auditor during the initial searches, but the taxpayer was not aware that a criminal investigation was occurring (the mingling of criminal and civil investigations by the CCRA has been found to be unconstitutional). Finally, in obtaining the new search warrants under the Criminal Code the CCRA violated its own agreement to return the documents to the taxpayer’s lawyer and failed to advise the Justice of the Peace of this fact.

Notwithstanding the egregious conduct of the CCRA, the Federal Court of Appeal refused to vacate the civil assessments. The court held that although the CCRA must be careful not to abuse its investigative powers for civil purposes in order to acquire information for use in criminal prosecutions, the tax assessments should not be vacated solely because of the "co-operation" between the audit branch and the SIU. Of note is the fact that the tainted evidence was not fundamental to the assessments: unlike O’Neill, the minister did not have the onus of proof in Donovan and had other evidence to support its assessments.

The Federal Court of Appeal also refused to exclude the evidence obtained during the initial search and seizure. The court cited R. v. McKinlay Transport Ltd., in which the court stated that a different standard of reasonableness may apply to criminal and civil matters for Charter purposes in determining whether the admission of evidence would bring the administration of justice into disrepute. Ultimately, only the fresh evidence obtained through the re-seizure was excluded. This remedy was granted because of the CCRA’s "reprehensible as well as illegal" conduct in failing to return documents to the taxpayer’s lawyer.

Although Donovan was distinguishable from O’Neill on the question of onus of proof, it is difficult to see why the behaviour of the CCRA in O’Neill as seen to be flagrant and egregious while the behaviour in Donovan was not. Donovan may mark a shift in the court’s attitude towards illegal search and seizures. Nevertheless, the prudent accountant will always keep her client’s Charter rights in mind and seek the advice of legal counsel if the circumstances the audit are suspicious or questionable. The Charter remedies available may merit a challenge of the CCRA’s authority and/or behaviour.