Civil Tax Audits vs.Criminal Tax Investigations
In 2002, the Supreme Court of Canada (“S.C.C.”) rendered its decision in the leading case of R. v. Jarvis (2002 SCC 73, [2002] 3 S.C.R. 757 [Jarvis]), in which it drew a distinction between civil tax audits and criminal tax investigations. The S.C.C. stated that a taxpayer’s right to remain silent and right to freedom from self-incrimination under s. 7 of the Charter of Rights and Freedoms (the “Charter”) are only triggered when an adversarial relationship crystallizes between the taxpayer and the state.
In most tax matters, the state is represented by officers of the Canada Revenue Agency (“CRA”). These include both CRA auditors and investigators. In Jarvis, the S.C.C. stated that a CRA officer may shift his or her focus or role during an inquiry into a taxpayer’s affairs from one that is purely cooperative to one that is patently adversarial. Once the “predominant purpose” of the CRA’s inquiry becomes investigative, it crosses the “Rubicon” and loses its ability to rely on ss. 231.1(1) and 231.2(1) of the Income Tax Act (“ITA”) to compel the production of information and documents.
Once it crosses the “Rubicon,” the CRA must also be careful when interacting with taxpayers and vice versa; taxpayers must be very cautious when interacting with the CRA. The CRA must caution taxpayers and make them aware of their right to remain silent and the right to counsel under the Charter. Taxpayers may exercise the right to remain silent and refuse to answer any questions put to them by CRA officers. If the CRA believes that taxpayers are withholding information or documents that are necessary to its investigation, as in any other criminal matter, the CRA must obtain warrants in order to lawfully search and seize taxpayer records, or relevant records in a third party’s possession.
The practical question for many taxpayers is what to do when the CRA has not told them that it has commenced an investigation, at least not officially, and demands the production of documents or information that the taxpayers believe are self-incriminatory: If only engaged in a civil tax audit, the CRA may rely upon ss. 231.1(1) and 231.2(1) of the ITA and issue Requirements to produce documents and/or information (“RTPs”). Can taxpayers still exercise their right to remain silent when they receive an RTP during the course of a civil tax audit?
Problems with the Current State of the Law
This is where the problems begin. In Jarvis, the S.C.C. recognized that no use or derivate use immunity applies to any documents or information that taxpayers produce during the course of an audit. Simply put, this means that self-incriminatory documents obtained by CRA officers during the course of an audit may later be used against taxpayers in subsequent proceedings, including criminal proceedings. Taxpayers involved in an audit must therefore be very careful when they receive an RTP.
The test in Jarvis is inadequate in terms of addressing the situation that arises when a taxpayer receives an RTP during the course of a civil audit. First, the test requires an ex post facto analysis of the circumstances under which an RTP was issued. Was the CRA engaged in an investigation at the time or had an adversarial relationship actually crystallized between the state and the taxpayer? Taxpayers do not have a complete picture before them when they receive an RTP from the CRA. They are not able to adequately understand or evaluate the CRA’s true purpose behind issuing an RTP.
Second, the test in Jarvis is objective and not subjective. This means that what a taxpayer believes at the time that he or she receives an RTP is immaterial to the ultimate determination of whether the CRA was engaged in an audit or an investigation. An auditor may act in a hostile manner from the onset of an audit and take an antagonistic position towards the taxpayer. The taxpayer may feel uncomfortable with the auditor and weary of what he or she is truly after, but this discomfort or weariness might be almost impossible to prove, on an objective basis, in subsequent proceedings. Nothing stops an auditor from having a “hunch” about a taxpayer and acting on that hunch during the course of a tax audit. What if the information or documents sought in an RTP are in furtherance of the auditor’s “hunch”?
In a perfect world, the test in Jarvis would invalidate an RTP on such grounds. The RTP might also be deemed to constitute a “fishing expedition” on the part of the CRA and may also be invalidated on that basis (see James Richardson & Sons, Ltd. v. M.N.R., [1984] 1 S.C.R. 614). However, the case law, at present, offers no guidance to taxpayers who are confronted with an RTP and who do not know what to do and how to respond. In many cases, taxpayers might not recognize or appreciate their own jeopardy. This alone is a serious deficiency with the present state of the law and further emphasizes the need for reform. It also highlights the need for taxpayers who receive RTPs and are unsure of what the CRA is asking, and whether they should provide information or documents to the CRA, to consult with legal counsel.
The current state of the law also places lawyers in a difficult position with respect to advising a client who receives an RTP during the course of an audit. Lawyers traditionally tell their clients to remain silent and to not disclose any information to the authorities, especially information that may be self-incriminatory. That option, however, is not available to taxpayers involved in tax audits. Therefore, not knowing what the CRA’s motivations might have truly been when it issued the RTP, lawyers either advise their clients to ignore the RTP—and risk the possible consequences—or to comply with the RTP and risk being prosecuted. If confronted with the situation, most lawyers would clearly select the former, rather than the latter option.
If taxpayers ignore RTPs or refuse to produce documents and information on the grounds that they are self-incriminatory, the CRA may apply to the Federal Court for an Order compelling them to respond to the RTPs within a limited time period. Taxpayers must then argue that the RTPs are invalid because the CRA was actually engaged in an investigation and not an audit when they were issued. This may not be easy to prove, or even argue, especially before a Motions Court, which is far from the ideal forum in which to raise and argue the Charter.
Greater Clarity Going Forward
The right to remain silent exists just as much in civil tax audits as it does in criminal tax investigations. Courts should not feel restricted by Jarvis and should instead look to other leading Canadian jurisprudence that, when applied, confirms this proposition.
In this regard, courts should be cognizant of the S.C.C.’s 1999 decision in R. v. White [1999], 2 S.C.R. 417 [White]. The S.C.C. considered White in Jarvis with respect to the principle that a contextual analysis and examination is required in order to determine whether s. 7 rights are engaged in a particular instance. While it is true that a contextual examination is required in each case, White also stands for the important principle that information compelled by the state from a person in circumstances where its agents stand not only in a partnership, but also a possibly adversarial role to the person, is contrary to s. 7 of the Charter and inadmissible against him or her in subsequent proceedings. It is curious why this principle was not further explored by the court in Jarvis.
In White, the accused reported an accident to the police under the compulsion of provincial highway traffic legislation that required all motorists to report motor vehicle accidents to the authorities for the purpose of preparing a provincial accident report. The police officer who responded to prepare the accident report ultimately arrested the accused for having failed to remain at the scene of the accident, based on her disclosure to him. The S.C.C. recognized that state agents, like the police officer, may often play a dual administrative and investigative role, particularly when individuals are forced to provide information to the state under statutory compulsion. Special cautions need to be followed in such circumstances. The S.C.C. in White held that the self-incriminatory information that the accused provided to the police was by compulsion of the state, pursuant to provincial highway traffic legislation, and therefore inadmissible against her in the criminal proceedings as a violation of her rights under s. 7 of the Charter.
White paves the way for courts to recognize a person’s right to remain silent and right to freedom from self-incrimination in civil tax audits. Although a criminal case, the S.C.C.’s decision in White is equally applicable to tax matters. Like police officers, CRA officers have the unique ability to play a dual administrative and investigative role. In the same way that a police officer arrives at a person’s home to prepare an accident report, only to ultimately arrest the person for a criminal offence, CRA officers may launch an investigation by virtue of the information that they obtain from taxpayers during the course of an audit.
Interestingly, the S.C.C. in Jarvis considered White alongside its 1995 decision in R. v. Fitzpatrick, [1995] 4 S.C.R. 154 [Fitzpatrick]. In Fitzpatrick, the S.C.C. held that fishing logs that were kept by a fisherman in compliance with federal fisheries legislation could be used against him with respect to the offence of over-fishing. The Court held that the logs that the fisherman was required to keep were generic; the level of state compulsion behind the logs was muted and keeping the logs was part and parcel of the fisherman’s responsibilities to maintain his fishing licence.
The S.C.C. in White distinguished Fitzpatrick on its facts. The distinction between the two cases is both interesting and important. Unlike the fishing logs in Fitzpatrick, RTPs are anything but generic questionnaires. They are often lengthy and contain pointed questions that arise out of the very specific circumstances of a tax audit. Audits in themselves can be antagonistic and there is no doubt that CRA officers can easily turn an audit into a serious investigation based on the information that they receive from taxpayers. In this regard, the circumstances under which a taxpayer is issued an RTP, under that authority of the ITA, are more akin to the facts in White than the circumstances in Fitzpatrick.
Conclusion
Nearly ten years after the S.C.C.’s landmark decision in Jarvis, the present state of the law leaves too many questions unanswered and fails to provide taxpayers with adequate protection against state coercion and the possible abuse of state power, the very reasons for the rights and freedoms granted under s. 7 of the Charter.
