2012 BCCA 318 R. v. He

COURT OF APPEAL FOR BRITISH COLUMBIA

Citation:	R. v. He,
	2012 BCCA 318

Date: 20120725

Dockets: CA038954; CA038955; CA038956

Between:

Regina

Appellant

And

Bo Ping He, Yun Mei He and Yi Ming Jiang

Respondents

Before:	The Honourable Mr. Justice Donald
	The Honourable Madam Justice Kirkpatrick
	The Honourable Mr. Justice Hinkson

On appeal from: Supreme Court of British Columbia, March 25, 2011
(R. v. He, 2011 BCSC 368, Vancouver Docket No. 25363)

Counsel for the Appellant:	W.P. Riley and B.A. Harper
Counsel for the Respondent, B. He:	C.C. Sturrock, Q.C.
Counsel for the Respondent, Y. He and Jiang	G.P. DelBigio Q.C. and J. Schmidt
Place and Date of Hearing:	Vancouver, British Columbia May 16, 2012
Place and Date of Judgment:	Vancouver, British Columbia July 25, 2012
Written Reasons by:
The Honourable Mr. Justice Hinkson
Concurred in by:
The Honourable Mr. Justice Donald The Honourable Madam Justice Kirkpatrick

Reasons for Judgment of the Honourable Mr. Justice Hinkson:

[1] The Crown appeals the order of a summary conviction appeal judge (“appeal judge”) upholding the acquittal of the respondents by the provincial court trial judge (“trial judge”) on charges of tax evasion, altering or destroying tax records and making false or deceptive statements contrary to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) [ITA] and the Excise Tax Act, R.S.C. 1985, c. E-15 [ETA]. The reasons for judgment of the trial judge are dated March 23, 2010, and are indexed as 2010 BCPC 457. The reasons for judgment of the appeal judge are indexed at 2011 BCSC 368.

[2] The charges were laid following the electronic examination by Canada Revenue Agency (“CRA”) officers of records and tax returns of New BM Enterprises Ltd. (“New BM”), a company through which the three respondents operated a restaurant in North Vancouver, British Columbia known as Sushi Man.

[3] The principle issue in this appeal is whether the CRA was authorized by s. 231.1 of the ITA, or the parallel provision of the ETA, to seize and examine the respondents’ records under the circumstances in which they did in this case.

Background

[4] Bo Ping He and his niece Yun Mei He own New BM. That company operates the Sushi Man restaurant at 1301 Marine Drive in North Vancouver. Yun Mei He’s husband Yi Ming Jiang was also involved in the operation of the restaurant.

[5] The Crown alleged that the three respondents suppressed $1,644,000 in sales revenues from their books and records over a four year period, thereby enabling them to evade payment of $288,000 in federal income tax and $118,000 in Goods and Services Tax. In an effort to prove the allegations the Crown sought to rely on evidence obtained by the CRA through the purported exercise of the authority given to the Minister of National Revenue by s. 231.1 of the ITA or the parallel provision of the ETA, s. 288.

[6] The challenged evidence was obtained by members of a group within the Audit Division of the CRA known as the Electronic Commerce Audit Specialists ("ECAS"). The trial judge noted that historically, the ECAS has assisted auditors in retrieving electronic information for use in their audits and that in 2005, the CRA embarked on a pilot project called the Electronic Records Evaluation Pilot Project ("ERE").

[7] One purpose of the ERE’s research was described in a draft CRA document as:

The eCommerce Compliance Division conducts research into compliance issues, business practices and patterns of taxpayer behaviour as they relate to the creation, maintenance and retention of electronic records (eRecords), activities that may increase the risks of non-compliance with tax laws administered by the CRA. This research will, in 2005-2006, include the Electronic Records Evaluation (ERE) Pilot Project.

[8] The ERE manual identified the objectives and benefits of the project as follows:

(a) To determine if records are adequate, reliable, accessible, and available in readable format,

(b) To determine if electronic taxpayer records are maintained for the required six year time period,

(d) To earmark issues to be addressed with developers of electronic record keeping software systems.

(e) Establish a low-cost, high-visibility project to supplement and improve efficiency of compliance audits,

(f) Bring about behavioural changes leading to long-term voluntary compliance,

(g) Provide information and advice to taxpayers and representatives,

(h) Ensure that CRA requirements keep pace with technological changes,

(i) Facilitate eventual audit processes by ensuring that key business information is kept in a readable format,

(j) Raise awareness of CRA's record keeping requirements among taxpayers, system vendors and software developers.

[9] The evidence before the trial judge was that the CRA targeted specific businesses for research purposes. The targeted businesses included restaurants, convenience stores and small supermarkets. In the second year of the program 20 restaurants in British Columbia were selected for consideration by the ERE program. Sushi Man was one of those restaurants.

[10] The CRA sent a letter to New BM dated August 28, 2006. The letter states:

We wish to advise that your business has been selected for the evaluation of electronic record keeping. Please note that this review is not an audit, but rather a limited review of your current recordkeeping practices to determine if they are adequate for purposes of the Income Tax Act and Excise Tax Act (GST/HST).

The review will concentrate on the adequacy of electronic records created and maintained by your business systems such as Point of Sales systems, accounting software and any other electronic method(s) of keeping records. The review will also include a review of records and supporting documents maintained in traditional paper formats. We will also need to determine if the records have been retained for the period provided for in the legislation.

A representative of Canada Revenue Agency will be contacting you in early September to set up an appointment to attend your business premises for an Electronic Record Evaluation review. If you are not familiar with the operation of your electronic record keeping systems, please arrange for someone to be present to provide explanations relating to configuration options, report generation, export and retention features.

Please gather all documentation with respect to the Point of Sales system and the accounting system and have them available for our review. If necessary, we may borrow this documentation for review at our office.

Please note, under subsection 230(1) of the Income Tax Act and subsection 286(1) of the Excise Tax Act, you are required to keep records if you carry on a business. The records should contain sufficient information to enable the taxes payable under these Acts or the taxes or other amounts that should have been deducted, withheld or collected to be determined.

A person who is required to keep records and who records them electronically must retain those records in an electronically readable format. Therefore, if you use computerized systems to generate books and records, you must retain the electronic records, even when a hard copy is kept.

Although this evaluation of records is intended primarily to assess the adequacy of your business records and making recommendations in case of deficiencies, it may result in a referral to our Audit Division.

Should you have any questions with regards to the contents of this letter, please contact the writer at (604) 666-5970.

Terry,G. Condio C.G.A.

[11] The only reference to any statutory authority in the letter is to s. 230(1) of the ITA and the parallel section of the ETA which are described as requiring records to be kept by a business. While the letter said that the review was not an audit, it pointed out that in case of deficiencies in the records a referral to the Audit Division may result.

[12] In late October or early November 2006, CRA officers Mr. Fines and Mr. Condio had lunch at Sushi Man and determined that Sushi Man used a record system known as Profitek POS.

[13] On November 21, 2006, Mr. Amanjit Dhaliwal, an ECAS team member, spoke with a person he believed to be the manager of Sushi Man and explained the ERE process. When he was told that the owner had no interest in participating, Mr. Dhaliwal said that the review was not optional. On November 28, 2006, Messrs. Fines, Condio and Dhaliwal went to Sushi Man and met with Bo Ping He and two managers.

[14] At the meeting on November 28, 2006, Mr. Condio copied the data from Sushi Man's Profitek POS system onto a USB key. Mr. Condio asked about the lack of further data and was told that Sushi Man had recently updated its system and the data from the previous system was on 14 back-up diskettes.

[15] Mr. Condio seized the 14 diskettes, gave a receipt to Bo Ping He, and took them back to the CRA’s offices to copy them. On the same visit, Mr. Dhaliwal interviewed Bo Ping He to complete the ERE questionnaire, in English, with one of the managers providing translating services.

[16] Many of the questions in the questionnaire that Bo Ping He was asked to complete appear to have had little or nothing to do with the evaluation of the records or record keeping of New BM. Included in the questionnaire were the following questions:

(a) What operating system does the front end POS system use?

(b) Who is the developer of the POS program?

(d) Who is the distributor of the POS program?

(e) What is that distributor’s website address?

(f) Who provides services for the POS system?

(g) Where is the service provider located?

(h) Who services the Back Office system?

(i) What is the brand name of the electronic cash register?

(j) Who is the distributor of the electronic cash register?

(k) Who is the developer of the electronic cash register software?

(l) Who makes the handheld point of sales hardware?

(m) Who distributes the handheld point of sales system?

(n) Who services the handheld point of sales system?

(o) Who is the provider of the electronic payment system?

(p) What is the model number of the electronic payment system hardware?

(q) Is there any auto upload of offline sales data when reconnected or does it have to be inputted manually?

(r) Does your system have a training mode?

(s) How often is the training mode used and by whom?

(t) Is the POS system password protected?

(u) Is the Back Office system password protected?

(v) Are some menus protected, while others are not?

(w) How many levels of passwords are there? What are the levels?

(x) Can the POS system accommodate backward compatibility?

(y) What is the name, address and city of the distributor of the accounting program?

(z) Does the distributor of the accounting program have a website?

(aa) Do you have any procedures in place in case of a computer crash?

[17] The 14 diskettes that were seized on November 28, 2006 were returned to the restaurant on December 6, 2006. On that day, Mr. Dhaliwal and Mr. Condio went to the offices of New BM’s accountant and examined the company’s accounting records and obtained an electronic copy of the company’s general ledgers.

[18] The information obtained by the CRA was then subjected to what Mr. Fines described as “massaging the information to make it more understandable for our auditors”. Based upon that analysis of the company’s records, Mr. Fines concluded that Sushi Man had deleted or suppressed sales data and underreported its sales revenues. On January 11, 2007, he submitted a referral to the CRA’s Investigations Division which led to a criminal investigation resulting in the charges against the three respondents.

Statutory Provisions

[19] Section 231.1 of the ITA provides in part that:

231.1 (1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act,

(a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and

(b) examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act,

and for those purposes the authorized person may

(c) subject to subsection 231.1(2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and

(d) require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.

(2) Where any premises or place referred to in paragraph 231.1(1)(c) is a dwelling-house, an authorized person may not enter that dwelling-house without the consent of the occupant except under the authority of a warrant under subsection 231.1(3).

[20] Section 288 of the ETA is a parallel provision to s. 231.1 of the ITA and provides in part that:

288. (1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Part, inspect, audit or examine the documents, property or processes of a person that may be relevant in determining the obligations of that or any other person under this Part or the amount of any rebate or refund to which that or any other person is entitled and, for those purposes, the authorized person may

(a) subject to subsection (2), enter any premises or place where any business or commercial activity is carried on, any property is kept, anything is done in connection with any business or commercial activity or any documents are or should be kept; and

(b) require the owner or manager of the property, business or commercial activity and any other person on the premises or in the place to give to the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Part and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.

(2) Where any premises or place referred to in paragraph (1)(a) is a dwelling-house, an authorized person may not enter that dwelling-house without the consent of the occupant, except under the authority of a warrant issued under subsection (3).

[21] Section 231.2 of the ITA was amended in 1986 and presently provides:

(1) Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act (including the collection of any amount payable under this Act by any person), of a comprehensive tax information exchange agreement between Canada and another country or jurisdiction that is in force and has effect or, for greater certainty, of a tax treaty with another country, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as stipulated in the notice,

(a) any information or additional information, including a return of income or a supplementary return; or

(b) any document.

(2) The Minister shall not impose on any person (in this section referred to as a “third party”) a requirement under subsection 231.2(1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection 231.2(3).

(3) On ex parte application by the Minister, a judge may, subject to such conditions as the judge considers appropriate, authorize the Minister to impose on a third party a requirement under subsection 231.2(1) relating to an unnamed person or more than one unnamed person (in this section referred to as the “group”) where the judge is satisfied by information on oath that

(a) the person or group is ascertainable; and

(b) the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under this Act.

(4) Where an authorization is granted under subsection 231.2(3), it shall be served together with the notice referred to in subsection 231.2(1).

(5) Where an authorization is granted under subsection 231.2(3), a third party on whom a notice is served under subsection 231.2(1) may, within 15 days after the service of the notice, apply to the judge who granted the authorization or, where the judge is unable to act, to another judge of the same court for a review of the authorization.

(6) On hearing an application under subsection 231.2(5), a judge may cancel the authorization previously granted if the judge is not then satisfied that the conditions in paragraphs 231.2(3)(a) and 231.2(3)(b) have been met and the judge may confirm or vary the authorization if the judge is satisfied that those conditions have been met.

[22] Section 289 of the ETA is a parallel provision to s. 231.2 of the ITA and provides:

(1) Despite any other provision of this Part, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of a listed international agreement or this Part, including the collection of any amount payable or remittable under this Part by any person, by notice served personally or by registered or certified mail, require that any person provide the Minister, within any reasonable time that is stipulated in the notice, with

(a) any information or additional information, including a return under this Part; or

(b) any document.

(2) The Minister shall not impose on any person (in this section referred to as a “third party”) a requirement under subsection (1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection (3).

(3) On ex parte application by the Minister, a judge may, subject to such conditions as the judge considers appropriate, authorize the Minister to impose on a third party a requirement under subsection (1) relating to an unnamed person or more than one unnamed person (in this section referred to as the “group”) where the judge is satisfied by information on oath that

(a) the person or group is ascertainable; and

(b) the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under this Part.

(4) Where an authorization is granted under subsection (3), the authorization shall be served together with the notice referred to in subsection (1).

(5) Where an authorization is granted under subsection (3), a third party on whom a notice is served under subsection (1) may, within fifteen days after the service of the notice, apply to the judge who granted the authorization or, where that judge is unable to act, to another judge of the same court for a review of the authorization.

(6) On hearing an application under subsection (5), a judge may

(a) cancel the authorization previously granted if the judge is not then satisfied that the conditions in paragraphs (3)(a) and (b) have been met; or

(b) confirm or vary the authorization if the judge is satisfied that those conditions have been met.

The Judgments Below

A. The Provincial Court of British Columbia

[23] The trial judge held a voir dire to determine the admissibility of the evidence obtained from the respondents’ business by the CRA, and to determine whether two CRA officers would be permitted to offer opinion evidence in relation to technical matters before the court.

[24] In his reasons, the trial judge described the purpose of the ERE at para. 10 of his reasons as follows:

... the CRA proposed to undertake a pilot project to evaluate in real-time the adequacy and reliability of the electronic Records of 300 businesses in 2005-2006. Where deficiencies were identified in Point of Sales systems or Accounting software, to earmark issues to be addressed with software developers, and to ensure that their requirements kept pace with technological changes and to minimize its burden.

[25] The trial judge found that included in the objectives and aspects of the ERE were:

* To raise awareness among taxpayers, system vendors and software developers of CRA requirements.

* ERE was to be distributed in regions across Canada and in the restaurant, convenience store and small supermarket industries.

* The ERE was structured to include ongoing information sessions, interim reports and a final report for sharing with stakeholders and senior management.

* A standard form was designed to gather feedback from the field in order to monitor all Point of Sales (POS) systems being encountered.

[26] The trial judge found at paras. 19 and 35–36 of his reasons that:

[19] The evidence suggests that at the time the ECAS team attended the New BM for the ERE, they were aware that some other restaurants using Profitek POS systems were using an electronic sales suppression system, also known as a "zapper" to erase the records of certain transactions. In 2005 the ERE program in BC reviewed three restaurants that used a Profitek POS system but none of them were using a zapper. However in June and July 2006, ECAS was involved in assisting an auditor in the audit of a restaurant called Honjin which used a Profitek POS system and found evidence that a zapper was being used. Also in late September, 2006, ECAS did an ERE at Kits Sushi restaurant, which used a Profitek POS system, and found evidence of a zapper being used. In October, 2006 three other restaurants using Profitek POS systems were reviewed, but no evidence was found that they were using a zapper.

…

[35] I find that the most troubling aspect of the behaviour of the CRA officers in this case, is the misleading and deceptive letter dated August 28, 2006 which was sent out to New BM Enterprises Ltd purporting to be a genuine request for a taxpayer's voluntary cooperation in participating in a research project embarked upon by the CRA. The letter goes so far as to try to reassure the taxpayer that the agency's intentions were innocuous enough when it states: "Please note that this review is not an audit, but rather a limited review of your current record keeping practices to determine if they are adequate for purposes of the Income Tax Act and Excise Tax Act". Then it seems that this seemingly innocuous letter suddenly took on the force of law when Mr. Dhaliwal advised the manager that the owner's participation was not optional, thereby giving the owner the unmistakable impression that this review had nothing to do with voluntary cooperation, because it had the force of law which compelled him to participate despite the fact that it was conveyed to Mr. Dhaliwal that he did not want to participate. The claim therefore by the CRA officials that they were allowed to "borrow” the records for copying, implying that somehow the owner was not compelled to turn them over, seems rather hollow, when one realizes that prior to the attendance by CRA officials to New BM premises, it was understood that the participation of the owner was not optional. I find that I must conclude that there was in fact no informed consent given by Mr. Bo Ping He to the records being taken, compounded by the fact that Mr. Bo Ping He was interviewed in English without the help of a qualified interpreter, although the officials were advised that he could not speak English. I find therefore that the records of New BM Enterprise Ltd. could hardly be described as having been "borrowed" for copying, but were in fact seized by CRA officials without the actual or implied consent of the owner and that this seizure constituted a warrantless seizure and was therefore unlawful.

[36] I will go so far to say that I do not accept Mr. Fines and Mr. Condio’s evidence that their visit for lunch to the Sushi Man restaurant after the letter of August 28th was sent and before their attendance at the restaurant for their purported review was anything but coincidental, and I am [of] the opinion that these officials set up a pattern of undercover visits to restaurants they suspected of employing zappers to collect evidence prior to their official visit in accordance with the letter of August 28. I find Mr. Fines explanation that he obtained a receipt from the restaurant to apprise himself of the type of POS system the restaurant used, unbelievable.

[27] At para. 37 of his reasons, the trial judge relied on the reasoning of the Supreme Court of Canada in James Richardson & Sons v. M.N.R., [1984] 1 S.C.R. 614, and concluded that because there was no “genuine and serious inquiry” into the tax liability of a specific person or persons, a letter of Requirement could not be issued, but that the CRA officials acted upon the letter of August 28, 2006 as if it were a letter of Requirement. He concluded that in so acting, the officials were without proper lawful authority to force compliance with the ERE and seize the respondents’ records, and that in doing so they breached the respondents’ s. 7 and s. 8 Charter rights.

[28] The trial judge then considered whether the records and documents obtained by the CRA officials should be admitted into evidence, and concluded at paras. 42–47 that the CRA officials were aware of and took advantage of the respondents’ belief that they had no option but to participate in the ERE, ignored their right to be informed before consenting to the review and seizure of their records, took advantage of the language constraints of Mr. He, and ignored the rules set out in the Richardson case. In applying the principles set out in R. v. Grant, 2009 SCC 32, [2009] 2 S.C.R. 353, and R. v. Harrison, 2009 SCC 34, [2009] 2 S.C.R. 494, he found the conduct of the CRA officials to be very serious “Charter-infringing state conduct” that was detrimental to the respondents and concluded that “the price paid by society for an acquittal in these circumstances is outweighed by the importance of maintaining Charter Standards”.

[29] The trial judge ruled that the evidence obtained from the respondents’ business was inadmissible, and that the two CRA officers could not give the opinion evidence proffered by the Crown. The Crown then consented to the acquittal of the respondents, and appealed the ruling on the voir dire respecting the business records, but not the ruling relating to the proposed witnesses.

B. The Supreme Court of British Columbia

[30] In dismissing the appeal, the appeal judge considered ss. 230(1), 231.1 and 231.2 of the ITA. Section 230(1) requires that every person carrying on business must keep records at the place of business containing information that will enable taxes payable to be determined.

[31] The appeal judge presumed that the ETA had parallel provisions to those he referred to from the ITA. Section 286(1) of the ETA is the comparable section to s. 230(1) of the ITA, s. 288 of the ETA is the comparable section to s. 231.1 and s. 289 of the ETA is the comparable section to s. 231.2 of the ITA.

[32] The appeal judge framed the issues before him as follows:

a) Did the CRA act with lawful authority in seizing and copying the respondents’ electronic records?

b) If not, did the seizure result in a breach of the respondents’ s. 7 or 8 rights under the Charter of Rights and Freedoms?

c) If the Charter rights of the respondents were violated, should the evidence be excluded under s. 24(2) of the Charter?

[33] The appeal judge agreed with the trial judge that the reasoning in Richardson applied not just to s. 231.2 of the ITA, but to s. 231.1 as well. He found that the CRA conducted an unauthorized seizure of the electronic data of the respondents as the Crown did not establish that the seizure was lawful under the relevant taxation statutes. At paras. 32–34 he reasoned that:

[32] In considering the appellant's reliance on the powers of s. 231.1 in the case at bar, it is important to note that while purporting to only use the power to conduct a review of the respondents' books and records, the result was the same as if an audit had been conducted. The appellant used the information gathered to complete an audit which led to criminal charges being laid.

[33] Clearly, s. 231.1 is more intrusive than s. 231.2 in permitting CRA officers to enter business premises without notice for the purposes stated in s. 231.1. In addition, as is evident from the facts in this case, the use of s. 231.1 to inspect or examine books and records is practically inseparable from its use to determine tax liability. Surely the tax liability of a business flows from what is found when its books and records are inspected or examined. That is exactly what happened in this case. The examination of the respondents' books and records led to a determination that they had a liability for taxes and further, to the laying of criminal charges.

[34] In my view the test from Richardson applies to the CRA's use of s. 231.1 and not just to the exercise of the powers under s. 231.2. If that were not so, the CRA could simply require a taxpayer to produce its books and records for inspection under s. 231.1 when it is not able to support a requirement under s. 231.2 because of the restraints imposed by Richardson. The inspection and examination of a taxpayer's books and records is so closely tied to the determination of a taxpayer's liability under the taxing statutes it is my view that the test in Richardson should apply to the use of that power under s. 231.1 in the same way as it does to s. 231.2.

[34] At paras. 36–37, the appeal judge concluded:

[36] ... The intention of the ERE was to raise awareness among taxpayers in Canada as to the record keeping requirements for businesses using Point of Sale software systems. It was not intended to be an audit but the respondents were told that the findings of the CRA officers might result in a referral to the audit division. The evidence of one of the officers was that the CRA wanted to better understand the systems that were being used by businesses. ... There is no evidence that establishes that the purpose of the ERE was an inquiry into the tax liability of anyone, let alone a genuine and serious inquiry. It was a program to evaluate the electronic record keeping of randomly-selected businesses. The CRA purported to use its investigatory powers to require the respondents to provide the information that it wanted to obtain as part of its survey of electronic record keeping. I agree with the respondents that this is the type of action by the CRA that the Supreme Court of Canada found to be an unacceptable use of their powers.

[37] ... when the test from Richardson is applied, it is clear that the CRA were not engaged in a genuine and serious inquiry into the tax liability of the respondents. As a result, the entry into the respondents' premises was not authorized by the Income Tax Act and the resulting seizure of the respondents' electronic records was unlawful as was the subsequent copying of the respondents' data which the CRA purported to justify under s. 231.5.

[35] The appeal judge found that the trial judge was correct in his finding that the CRA had breached the respondents' rights under s. 8 of the Charter to be free from an unreasonable search or seizure.

[36] He concluded that the trial judge considered the proper factors in determining that the evidence obtained as a result of the Charter breach should be excluded under s. 24(2) of the Charter, and agreed that the evidence obtained by the CRA was properly excluded.

Issues on Appeal

[37] The Crown raises two issues on this appeal. First, it contends that the appeal judge erred in upholding the finding that the examination of the respondents’ books and records was not authorized by s. 231.1 of the ITA or the parallel provision of the ETA. Second, it contends that the appeal judge erred in showing deference to the decision of the trial judge despite the numerous reviewable errors in the decision.

Discussion

a) The Interpretation of s. 231.1 of the ITA

[38] As the interpretation of the relevant sections of the ITA and the ETA are matters of statutory interpretation, their interpretation attracts a standard of correctness on review.

[39] The ITA and the ETA established a self-reporting system in which taxpayers have a duty to report and to remit taxes. The Minister is entitled to information that will permit the CRA to determine if a taxpayer is keeping records at its place of business, containing information that will enable taxes payable to be determined. The CRA is also entitled to conduct an audit to verify taxpayer compliance with the obligations imposed by the ITA and the ETA. Even without an audit, it is possible for the CRA to obtain information from a taxpayer that it is entitled to see in the course of an audit. If the CRA wishes to obtain taxpayer information beyond what could be obtained in the course of an audit, it faces statutory constraints. If the statutory constraints are not complied with, then any search or seizure is unauthorized.

[40] In Canadian Imperial Bank of Commerce v. Attorney General of Canada, [1962] S.C.R. 729, the Supreme Court of Canada dealt with the Bank’s objection to a Requirement for Information and Production of Documents by the Minister of National Revenue that it provide documents relating to the tax affairs of one of its clients. The Requirement was issued pursuant to the authority granted to the Minister by what was then s. 126(2) of the ITA. That section permitted the Minister for any purpose related to the administration or enforcement of the Act to require any person to provide, within reasonable time, any information. That section provided:

126.(2) The Minister may, for any purpose related to the administration or enforcement of this Act, by registered letter or by a demand served personally, require from any person

(a) any information or additional information, including a return of income or a supplementary return, or

(b) production, or production on oath, of any books, letters, accounts, invoices, statements (financial or otherwise) or other documents, within such reasonable time as may be stipulated therein.

[41] The majority of the Court held that where it was conceded that the government was engaged in a “genuine and serious inquiry into the tax liability of some particular person or persons”, it followed that a Requirement issued for that particular purpose was valid as it was issued for a “purpose related to the administration or enforcement of” the ITA.

[42] The equivalent section of the current ITA is s. 231.2(1). That section and its parallel section in the ETA contain the same statutory language in that a Requirement may be issued “for any purpose related to the administration or enforcement of this Act”.

[43] If a Requirement is issued, s. 231.2(1) of the ITA and its ETA equivalent require the CRA to send a notice, served personally or by registered mail, to a taxpayer from whom it requires information and documents. Section 231.1(1) of the ITA and its parallel section in the ETA, in contrast, permit the CRA to enter a premise and inspect, audit or examine the taxpayer’s records and documents and interview the taxpayer on site without any specific requirement that the CRA give notice. Section 231.1(1) of the ITA and its ETA equivalent contain the same statutory language concerning the purpose for which the CRA is authorized to perform those activities: “for any purpose related to the administration or enforcement of” those acts.

[44] The decision of the Supreme Court of Canada in Richardson began the line of authorities that examined the scope and the limitations of what was then s. 231(3) (now 231.2) of the ITA. In Richardson, the Department of National Revenue decided that it was necessary to check on compliance with the ITA by traders in the commodities futures market. The appellant, who was a commodities futures market broker had participated in a feasibility study and then received a demand from the CRA for confidential information about its clients' affairs. The appellant provided some information, but declined to produce information that could identify specific client transactions.

[45] The CRA then served the appellant with formal Requirements under then s. 231(3)(a) of the ITA for the third party information, together with details of all monthly transactions in certain calendar years as used in the preparation of clients' commodity statements, be delivered on magnetic tape to the Department of National Revenue. The appellant attacked the validity of the Requirements in certiorari and declaration proceedings. In her reasons for the Court, Madam Justice Wilson referred to Canadian Imperial Bank of Commerce v. Attorney General of Canada at page 623:

I have some difficulty with the respondent's submission in relation to the Canadian Bank of Commerce case. If, indeed, the ratio of that case is that a demand for information which meets the test of being related to a genuine and serious inquiry into the tax liability of some specific person or persons is a demand made for purposes of the administration or enforcement of the Act, how can it be said, consistent with that decision, that a demand which does not meet such a test is also for a purpose related to the administration or enforcement of the Act? If this is so, it was pointless for the Court in the Canadian Bank of Commerce case to make a genuine and serious inquiry into the tax liability of some specific person or persons a prerequisite of the validity of the requirement in that case. Yet Mr. Justice Cartwright makes it clear that his judgment is premised on that prerequisite being there.

[46] At pages 624–625, Wilson J. found that as a matter of statutory interpretation, the Requirements were invalid under s. 231(3) (now 231.2(1)) of the ITA:

The respondent acknowledges that neither the appellant nor its customers are under investigation. It submits, however, that the requirement is aimed at a specific class of taxpayers, namely clients of the appellant who trade on the commodities futures market. That may be so, but it does not in my view bring the Minister within the purview of s. 231(3).

It seems to me that what the Minister is trying to do here, namely check generally on compliance with the statute by traders in the commodities futures market, cannot be done by conducting a "fishing expedition" into the affairs of one broker's customers under s. 231(3) of the Act. If the Minister seriously thinks that traders in the commodities futures market generally are not reporting their transactions properly for income tax purposes, then he has s. 221(1)(d) available to him. He can obtain a regulation under that subsection requiring all such traders to file returns of their transactions in the commodities futures market. Having obtained such a regulation, he is then in a position to demand such returns at large without regard to whether or not any specific person or persons are currently under investigation. The very presence of those provisions in the Act serves, in my view, to support the approach taken in the Canadian Bank of Commerce case that s. 231(3) is only available to the Minister to obtain information relevant to the tax liability of some specific person or persons if the tax liability of such person or persons is the subject of a genuine and serious inquiry.

It seems to me that if the Minister wishes to conduct the kind of survey he clearly had in mind in this case, it is right and proper that he obtain a regulation authorizing it. The business implications for the appellant are serious. It agreed to cooperate on the basis that the Minister was conducting a test and that other commodity brokers would also be participating. If its customers were less than happy with their broker's role as conduit to the tax department, its competitors would be in the same position. It now finds that this is not the case. If the tax liability of its customers or one or more of them were the subject of a genuine inquiry, then the Minister would clearly be entitled under s. 231(3) to single out the appellant even although innocent taxpayers' trading activities were disclosed in the process. But it cannot, in my opinion, be singled out otherwise. It cannot be compelled under s. 231(3) to provide the random sample for a check on general compliance by the entire class. This is the purpose of ss. 221(1)(d) and 233.

[47] In R. v. Jarvis, 2002 SCC 73, [2002] 3 S.C.R. 757, the Supreme Court of Canada discussed the relationship between the taxpayer’s duty under s. 230(1) and the Minister’s powers under s. 231.1(1) of the ITA. In that case a CRA auditor was investigating Mr. Jarvis’ sales of certain works of art. In the course of her investigation, the auditor made inquiries of Mr. Jarvis and his accountant relying on her powers under ss. 231.1 and 231.2 of the ITA. The Court found, at paras. 52–53, that:

52 The sections within Part XV of the ITA provide the Minister with "Administration and Enforcement" powers. They also impose reciprocal obligations upon taxpayers: for example, in furtherance of the overall reporting and verification scheme, s. 230(1) of the ITA requires all taxpayers, for various specified periods of time, to maintain books and records of account at their place of business or residence in Canada. These documents must be kept "in such form and containing such information as will enable the taxes payable under [the ITA] or the taxes or other amounts that should have been deducted, withheld or collected to be determined".

53 The provisions that are central to the instant appeal vest the Minister with extensive powers that may be used "for any purpose related to the administration or enforcement" of the ITA. Section 231.1(1) continues the inspection power that was introduced in An Act to amend the Income War Tax Act, S.C. 1944, c. 43, s. 11. Paragraph (a) allows a person authorized by the Minister to "inspect, audit or examine" a wide array of documents, reaching beyond those that the ITA otherwise requires the taxpayer to prepare and maintain. In the course of the inspection, audit or examination, para. (c) provides that the authorized person may enter into any premises or place that is not a dwelling-house; furthermore, para. (d) imposes a correlative duty upon persons at the premises or place to provide "all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act". (Section 231.1(2) requires that, absent the occupant's consent, a judicial warrant be obtained for entry into a dwelling-house.)

[48] It is clear, and the Crown accepts, that examination or production of taxpayer records must be specifically authorized by law: R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627 at 640. The Crown accepts that the examination of the books and records of New BM constituted a search or seizure which engaged the respondents’ s. 8 Charter rights but contends that the extension of the “genuine and serious inquiry” test to s. 231.1 of the ITA extends the test well beyond the circumstances discussed in Richardson and its progeny.

[49] The respondents accept that the Minister of National Revenue is entitled to conduct an administrative review of a taxpayer’s books and records. They contend, however, that that was not what transpired with respect to the books and records of New BM. They contend that if s. 231.1 of the ITA is relied upon by the CRA, the examination or production of the records must be undertaken for the predominant purpose of ensuring statutory compliance with the legislation, and not for a criminal investigation: R. v. Jarvis at paras. 88 and 95. The respondents contend that the real purpose for which the CRA administered the ERE was to enable it to educate itself as to POS systems use in Canada, not to conduct an administrative review of New BM’s books and records.

[50] The Crown relies on the comments of the Federal Court of Appeal in Canada (Minister of National Revenue - M.N.R.) v. Greater Montreal Real Estate Board, 2007 FCA 346, [2008] 3 F.C.R. 366, respecting the present authority of Richardson at paras. 25–28 and 45:

25 Richardson was successful before the Supreme Court of Canada, which confirmed that a demand could only be made for information relative to the tax liability of a person or persons under the former subsection 231(3) of the Act if a genuine and serious inquiry was being conducted into the tax liability of such person or persons. The section did not authorize a general survey of compliance by a class of taxpayers. The MNR was invited to use paragraph 221(1)(d) to "obtain a regulation ... requiring all such traders to file returns of their transactions in the commodities futures market" (ibidem, p. 625).

26 The Richardson decision must be read and applied with caution. In Artistic Ideas [Inc. v. Canada (Customs and Revenue Agency), 2005 FCA 68] Mr. Justice Rothstein, writing for the Federal Court of Appeal, was reserved about Richardson and Bank of Commerce. Rothstein J.A. wrote:

[9] ...These authorities pre-date subsections 231.2(2) and (3), although it is apparent that their enactment was prompted, at least in part, by the Richardson case. While they provide useful background, the relevant legislation is different today than at the time of those decisions.

27 In fact, subsection 231.2(1), as it currently reads, is the former subsection 231(3) supra, to which, in 1986, Parliament added the terms "notwithstanding any other provision of this Act" and "subject to subsection 2". This amendment to section 231.2 did not substantially change the earlier wording.

28 At the same time, Parliament added subsections 231.2(2) to (6), which, in 1995, led Rothstein J., as he then was, to state that compliance with the procedure in subsections 231(2) and (3) of the Act addressed the "mischief" identified in Richardson (Sand Exploration, supra [M.N.R. v. Sand Exploration Ltd. et al., 95 D.T.C. 5358 (F.C.T.D.)]).

...

45 Regardless of what the GMREB says on this point, it appears to me that in removing paragraphs (c) and (d) from subsection 231.2(3), Parliament permitted a type of fishing expedition, with the authorization of the Court and on conditions prescribed by the Act, all for the purpose of facilitating the MNR's access to information. It seems to me that the strict approach adopted by the judge in this case is not appropriate for the provision under review. This approach, borrowed from Richardson, was necessitated by the scope of the former statutory provision which, if interpreted too broadly, left open the possibility of abuse by tax enforcement officials (Sand Exploration, supra).

[51] The Crown suggests that Greater Montreal Real Estate makes a comment on the applicability of the test, as articulated in Richardson, to s. 231.2(1) of the ITA. The discussion in the passage quoted above specifically referred to the inapplicability of that test to s. 231.2(3) of the ITA. The test is inapplicable to that section because the amendment requires the Minister receive authorization of the Court before Requirements demanding information from third parties may be issued. This judicial oversight eliminates the need for the Richardson test to limit the statutory authority of the CRA under that section. I am of the opinion, however, that the Richardson test remains applicable to s. 231.2(1).

[52] In M.N.R. v. Sand Exploration Limited, 95 D.T.C. 5358 (F.C.T.D.) at 5361, Rothstein J., as he then was, discussed the Richardson test as having been necessitated by a “broad statutory provision which, if interpreted too broadly, left open the possibility of abuse by tax enforcement officials.” The amendments to s. 231.2 have eliminated the specific mischief relating to inquiries into matter related to third parties; however, there may be the possibility of abuse relating to non-third party issues which would not be subject to judicial oversight under the amendments to that section.

[53] In AGT Limited v. A.G. of Canada, [1997] 2 F.C. 878 (F.C.A.), the Federal Court of Appeal dealt with a case in which AGT challenged a Requirement issued by the CRA on the basis that the Requirement was invalid because, inter alia, the CRA was on an “impermissible fishing expedition”. The Court, at para. 27, relied on the application of the Richardson test to determine the issue:

Subsection 231.2(1) is drafted in broad language, but its scope has been reduced through the rules of interpretation to situations where the information sought by the Minister is relevant to the tax liability of some specific person or persons, and when the tax liability of such person or persons is the subject of a genuine and serious inquiry. Given these criteria, I find that no error was committed by the Motions Judge.

[54] In my opinion, s. 231.1 of the ITA, if interpreted too broadly, is open to that same possibility of abuse. It and its parallel section in the ETA permit the same broad authority to the CRA as does s. 231.2 and its parallel section in the ETA. Further, as discussed by the appeal judge, s. 231.1 allows for a more intrusive power than that permitted under s. 231.2. It is my opinion that the correct interpretation of s. 231.1 requires that the reasoning in Richardson must therefore be applied to that section.

[55] In Redeemer Foundation v. Minister of National Revenue, 2008 SCC 46, [2008] 2 S.C.R. 643, the Court considered the interplay between s. 230(2)(a) and s. 231.1 of the ITA. In that case, a registered charity operated a forgivable loan program that financed the education of students at an affiliated college. The CRA was concerned that some donations to the program were not valid charitable donations because the donors' contributions were made solely to finance the education of their own children. In an audit, the CRA requested donor information, which the Foundation provided. In a subsequent audit, the CRA then sought further donor information. The Foundation applied for judicial review of the CRA's request for further donor information.

[56] The case required the Court to consider the combined effect of ss. 230(2)(a) and 231.1 of the ITA in circumstances where CRA was seeking to verify the legitimacy of the donations to the Foundation. Chief Justice McLachlin and Mr. Justice LeBel, writing for the majority, found that the Minister was entitled to information about the identity of the donors through the combined effect of s. 230(2)(a) and s. 231.1. McLachin C.J.C. and LeBel J. identified the issue as first and foremost one of statutory construction, and described the Minister’s power under s. 231.1(1) as “a broad power to inspect audit and examine taxpayer’s records”. At para. 15, they concluded:

Statutory provisions must be interpreted in a textual, contextual and purposive way, and all sections of a related group of provisions should be given coherent meaning if possible. But, we do not accept the argument that s. 231.2 serves no purpose if s. 231.1 is read as authorizing the Minister to obtain information on unnamed third parties during the audit of a taxpayer. The Minister may well need to obtain information about one or more taxpayers outside the context of a formal audit. Section 231.2 responds to this need, subject to a requirement for judicial authorization if the Minister is seeking information relating to unnamed persons from a third party record holder. It follows that the argument that s. 231.1(1) should be read down to avoid redundancy fails.

[57] At para. 22 the majority wrote:

The s. 231.2(2) requirement should not apply to situations in which the requested information is required in order to verify the compliance of the taxpayer being audited. Regardless of whether or not there is a possibility or a probability that the audit will lead to the investigation of other unnamed taxpayers, the CRA should be able to obtain information it would otherwise have the ability to see in the course of an audit.

[58] Writing in dissent for himself and Binnie and Deschamps JJ., Rothstein J. saw the issue somewhat differently and described it at para. 39 in the following terms:

The question here is whether, in the exercise of its authority to audit, the CRA may avoid s. 231.2(2). The majority's approach would eliminate the need for s. 231.2(2) entirely whenever the CRA is auditing a taxpayer. Nothing in the Act suggests such a restricted application of s. 231.2(2).

[59] He concluded at paras. 40–41:

40 I think the difference between ss. 230 and 231.1 on the one hand and s. 231.2 on the other is that under ss. 230 and 231.1, the focus is on the taxpayer's compliance with the Act and the ability of the CRA to ensure that under a self-reporting system, it may seek and obtain information that will enable it to ensure such compliance or determine non-compliance by the taxpayer. Under s. 231.2, the information and documents sought by the CRA, with a judge's authorization when necessary and otherwise without it, may be seen as enhancing the CRA's audit power of the taxpayer, but may also be for other purposes such as dealing [page 663] with non-payment and obtaining information about unnamed persons.

41 Where the CRA seeks information or documents for a purpose other than compliance by the taxpayer with the Act that may be determined through audit, it is acting outside ss. 230 and 231.1.

[60] Redeemer Foundation is of limited application to the facts of this case, as it was concerned with the use of s. 231.1 to obtain information relating to third parties. Where it is of assistance is with respect to identifying the focus of a review under s. 231.1. That focus is on information that is or should be in the books and records of New BM. As the trial judge, and the appeal judge both recognized, CRA was seeking far more than information that was or should have been in the books and records of New BM.

[61] The scope of the ERE that Sushi Man was selected to participate in went well beyond an effort to assess taxpayer compliance with the duty to keep proper records. It was, to paraphrase the words of Madam Justice Wilson in Richardson, a check generally on compliance with the statute by looking into the adequacy and reliability of the electronic Records to earmark issues to be addressed with software developers, and to ensure that the Minister’s requirements kept pace with technological changes and to minimize its burden.

[62] It is worth repeating the objectives and aspects of the project that the trial judge found it included:

* To raise awareness among taxpayers, system vendors and software developers of CRA requirements.

* ERE was to be distributed in regions across Canada and in the restaurant, convenience store and small supermarket industries.

* The ERE was structured to include ongoing information sessions, interim reports and a final report for sharing with stakeholders and senior management.

* A standard form was designed to gather feedback from the field in order to monitor all Point of Sales (POS) systems being encountered.

[63] The trial judge found that the CRA’s true purpose in conducting the ERE was not for the purpose of reviewing the books and records of the individual businesses selected for the ERE, nor for the purposes of audits of those businesses. His factual finding is entitled to the deference it received from the appeal judge, and to deference from this Court.

[64] Accepting that finding, I agree with the reasoning of the appeal judge at paras. 36–37 of his reasons as set out above, and cannot accede to the submission of the Crown that the appeal judge erred in upholding the finding that the examination of the respondents’ book and records was not authorized by s. 231.1 of the ITA.

b) Deference to the Findings of the Trial Judge

[65] The Crown concedes that the balancing of the relevant factors under s. 24(2) of the Charter by a trial judge attracts a high degree of appellate deference, and will only be interfered with if an extricable legal error can be demonstrated or the decision is manifestly unreasonable.

[66] The Crown relies on the rejection by the appeal judge of one of the findings by the trial judge as support for the contention that the deference afforded to the trial judge’s conclusion to exclude the CRA’s evidence under s. 24(2) of the Charter can be rejected by this Court. At para. 37 of his reasons, the appeal judge rejected the finding of the trial judge that the August 28, 2006 letter from Mr. Condio to New BM was deceptive and misleading, stating:

I do not agree with the learned trial judge that the letter to the taxpayer dated August 28, 2006, was deceptive or misleading. While it did not refer to s. 231.1, it did make clear that s. 230 required the respondents to keep records for certain purposes. The CRA proceeded to do what they had told the respondents they were going to do - examine the records and borrow them for further review in the offices of CRA.

[67] With respect, I am unable to agree with the rejection of the trial judge’s conclusions concerning the letter. In my view, the trial judge was critical of the letter as much for what it failed to include as for what it did include. The finding by the trial judge that the letter was deceptive or misleading was a finding of fact, and as such entitled to deference, in the absence of a legal or palpable and overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235.

[68] When considered together with the inaccurate advice provided to Bo Ping He by Mr. Dhaliwal, that participation in the review was not optional, there is an evidentiary basis for the finding that the letter was deceptive or misleading, and it is my opinion that the appeal judge erred by rejecting that finding by the trial judge.

[69] I would not, therefore, accede to the submission that the appeal judge’s rejection of the trial judge’s categorization of the August 28, 2006 letter is a basis upon which to interfere with the findings of the trial judge under s. 24(2) of the Charter.

[70] The Crown further submits that the trial judge’s finding that the conduct of the CRA officials was very serious “Charter-infringing state conduct” overstates its seriousness, given that the Richardson line of authority had not previously been applied to s. 231.1 of the ITA. With respect, I am unable to agree that the lack of a prior application of Richardson to s. 231.1 of the ITA lessens the seriousness of the conduct of the CRA, and I would not accede to the Crown’s submission respecting the categorization of the CRA’s conduct.

[71] The Crown also challenges the trial judge’s finding of the impact of the Charter-infringing conduct on the respondents, given the diminished expectation of privacy in commercial records in regulated fields of activity such as taxation, citing Redeemer Foundation at para. 25. This submission fails to recognize the reality that what the CRA did in this case was to abuse its powers and mislead Bo Ping He, in order to obtain from the respondents information from a survey that had nothing to do with the information that is or should be in the books or records of New BM or is related to any amount payable by New BM or the respondents under the ITA or the ETA.

[72] The information sought and obtained from New BM and the respondents was not information in commercial records in the regulated field of taxation, and thus their Charter-protected interests were as the trial judge found, significantly affected.

[73] Finally, on this ground of appeal, given the amount of alleged tax evaded by the respondents, the Crown challenges the trial judge’s conclusion that “the price paid by society for an acquittal in these circumstances is outweighed by the importance of maintaining Charter Standards”. I am unable to identify a basis for refraining from affording this finding by the trial judge the considerable deference to which it is entitled pursuant to the principle set out in R. v. Côté, 2011 SCC 46, [2011] 3 S.C.R. 215 at para. 44.

[74] I would not accede to the Crown’s second ground of appeal.

Conclusion

[75] I would dismiss the appeal.

“The Honourable Mr. Justice Hinkson”

I agree:

“The Honourable Mr. Justice Donald”

I agree:

“The Honourable Madam Justice Kirkpatrick”