The CRA cannot use its civil audit powers in a criminal investigation
When the Canada Revenue Agency (CRA) investigates potential tax fraud, they will typically rely on search warrants in order to seize books and records to gather evidence. This is because when the CRA conducts a criminal investigation, it can no longer use its civil audit powers to gather evidence as the taxpayer's rights under the Canadian Charter of Rights and Freedoms must be protected. In R v Jarvis, 2002 SCC 73, the Supreme Court of Canada held that a line must be drawn between the CRA's tax audit powers and its criminal investigative powers, therefore it must obtain a search warrant in order to gather evidence.
For a judge to issue a search warrant, under s.231.3(3) of the Income Tax Act, he or she must be satisfied that there are reasonable grounds to believe:
- An offence under the Income Tax Act has been committed;
- A document or thing that may afford evidence to the commission of the offence is likely to be found;
- The building, receptacle or place specified in the application is likely to contain such a document or thing.
CRA's procedures regarding a search warrant
The search warrant sought by the CRA will generally list all premises that they expect to find the books and records of the taxpayer under investigation. The CRA agents will be accompanied by local police or RCMP officers when they attend each premise listed on the search warrant and will serve a copy to the taxpayer at the outset of the search. Since the CRA has the discretion in deciding how it conducts the search, the agents may take photographs of any area listed on the search warrant and seize any potential evidence including electronic devices such as computers, laptops, tablets, external hard drivers or flash drives.
Always have a plan to deal with CRA's tax search warrant
In December 2019, the CRA announced that it executed two search warrants in Vancouver in its continuing efforts to combat domestic tax evasion and non-compliance in the real estate sector. In 2018-2019, there were 12 taxpayers that were sent to jail for tax evasion for a total of 19 years. Since the liberal government has greatly increased allocation of resources to the CRA, all business should at least have a general plan to deal with a potential CRA search warrant. Here are our general tips:
- Designate a liaison: appoint an experienced or senior officer to act as the liaison between the investigators and the corporation during the search.
- Review the search warrant: read the warrant carefully to verify there is no defect such as the corporation's name or address. If there is such defect, raise it to the investigators and make a note of any such defect and the conversation with the investigators.
- Contact your legal counsel: immediately contact your lawyer and ask the investigators politely to delay the search until the lawyer arrives. However, the investigators do not have an obligation to wait. In that case, request a copy of the search warrant so your legal counsel can review them later.
- Cooperate: always cooperate with the investigators and never attempt to obstruct the search.
- Assert all applicable privileges: assert privilege over all documents that may reasonably be categorized as such. You should make a statement to the investigators before they start the search that the business is claiming privilege over documents in the possession of its lawyers. It is always a good practice for a business to isolate privileged documents by keeping them in a separate hard copy or electronic folder.
- Shadow the investigators: assign a person to follow each investigator through the search to make sure the investigators do not enter areas not authorized in the search warrants.
- Take notes: write detailed notes throughout the search. A business owner should record all items seized by the investigators, any defects on the search warrant and all conversation between the investigators regarding any objections made to the manner or conduct of the search. There are constitutional rights against unreasonable search and seizes, therefore the written notes can be very important later.
It is highly recommended to have a plan to prepare for unexpected tax search because once evidence has been seized, taxpayers are generally at a disadvantaged position.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.