[1995] 3 F.C. 507
T-2022-93
Angelo Del Zotto (Plaintiff)
v.
Her Majesty the Queen in Right of Canada, John Edward Thompson and D. Reilly Watson (Defendants)
T-992-93
Herbert B. Noble (Applicant)
v.
Minister of National Revenue, John Edward Thompson and D. Reilly Watson (Respondents)
Indexed as: Del Zotto v. M.N.R. (T.D.)
Trial Division, McKeown J.—Toronto, June 14; Ottawa, August 3, 1995.
Income tax — Practice — Application to lift stay of order appointing hearing officer under Income Tax Act, s. 231.4, and to vacate order restraining inquiry pending determination of action for declaration s. 231.4 unconstitutional — In British Columbia Securities Commission v. Branch, S.C.C. holding exemption from compulsion to testify where purpose of inquiry criminal investigation rather than legitimate public purpose — Plaintiff relying on Tax Operations Manual, providing inquiry may be conducted to determine what witnesses, whose evidence material to anticipated prosecution, will say in Court, for allegation purpose of inquiry to obtain evidence for criminal proceedings against him — Insufficient evidence to establish purpose of inquiry — Manual, Branch case not material change of circumstances justifying lifting stay.
This was an application by the Crown to (1) lift a stay of an order appointing a hearing officer for an inquiry into the financial affairs of Mr. Del Zotto, and (2) vacate an order restraining the conduct of the inquiry until after the final determination of Del Zotto’s action for a declaration that Income Tax Act, section 231.4 was unconstitutional. Subsequent to the appointment of the hearing officer, a subpoena was issued and served on Noble to compel him to testify and to produce documents at the inquiry. He applied to quash the subpoena on the grounds that section 231.4, and the attempt to compel him to testify, were unconstitutional. The same constitutional issues were raised in the plaintiff’s action. No charges have been laid.
Del Zotto and Noble relied on letters from counsel for the Minister to their lawyer, the Tax Operations Manual, and on the fact that the investigation was being conducted by the Special Investigations Section, a unit used to investigate persons suspected of criminal violations of the Income Tax Act, for their allegation that the inquiry was merely a criminal investigation designed to secure evidence to that end. The Tax Operations Manual provides that an inquiry may be conducted to determine what witnesses, whose evidence is material to an anticipated prosecution, will say in Court and to draw out facts not otherwise obtainable from witnesses friendly to the tax evader. The defendants/respondents submitted that the purpose of the inquiry had already been dealt with when the Federal Court of Appeal in the same matter found that the inquiry was purely an administrative matter.
Subsequent to the impugned orders and the Court of Appeal’s decision, the Supreme Court of Canada held, in British Columbia Securities Commission v. Branch, [1995] 2 S.C.R. 3, that, in deciding whether an exemption from the compulsion to testify should be granted, the Court has to determine whether the predominant purpose in seeking the evidence is to obtain incriminating evidence against the person compelled to testify, or if there is some legitimate public purpose.
The issues were: (1) what is the real purpose of the inquiry; (2) what is the test for lifting the stay in both proceedings; and (3) whether, having regard to the Branch decision, the stay and restraint orders were still justified.
Held, the application should be dismissed.
(1) The purpose of the inquiry remained in question. The Court was not in a position to find that the Tax Operations Manual showed that the purpose of the inquiry was a criminal investigation given the minimal evidence before it and the fact that the parties had not even started oral discoveries. In order to rule on constitutional issues a court must have a full factual record before it.
(2) The test with respect to lifting the stay was whether there had been a material change in the circumstances. (3) The Court was not satisfied that there had been a material change of circumstances in light of the Tax Operations Manual. The Supreme Court of Canada has consistently held that the Income Tax Act is essentially a regulatory statute, but in none of the cases referred to did the Court have the Tax Operations Manual before it. There was no evidence as to the extent to which the Manual governs inquiries. If it is the governing document, that a court has validated a statute on the basis that it is primarily a regulatory statute does not entitle the Department to bypass any regulatory aspect of it and concentrate solely on bringing penal actions without the need to have any economic input. The Court was unable to determine because of the existence of the Tax Operations Manual whether there was any other intention than to pursue the tax evader.
Income Tax Act, section 231.4 would be in compliance with the Charter if there was no question as to the effect of the Tax Operations Manual in implementing it. In trying the plaintiff’s action, the Court will have before it a full record upon which to make this decision. The decision in Branch did not constitute a sufficient material change of circumstances to justify lifting the stay.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Canadian Charter of Rights and Freedoms, being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44], ss. 7, 8.
Competition Act, R.S.C., 1985, c. C-34 (as am. by R.S.C., 1985 (2nd Supp.), c. 19, s. 19), s. 79 (as am. idem, s. 45).
Criminal Code, R.S.C., 1985, c. C-46.
Federal Court Act, R.S.C., 1985, c. F-7, ss. 18.2 (as enacted by S.C. 1990, c. 8, s. 5), 50(3).
Federal Court Rules, C.R.C., c. 663.
Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 128, 231.3, 231.4.
Securities Act, S.B.C. 1985, c. 83, s. 128(1).
CASES JUDICIALLY CONSIDERED
APPLIED:
Union Carbide Corporation et al. v. W.R. Grace & Co. et al. (1983), 77 C.P.R. (2d) 274 (F.C.T.D.); MacKay v. Manitoba, [1989] 2 S.C.R. 357; [1989] 6 W.W.R. 351; (1989), 61 Man. R. (2d) 270; British Columbia Securities Commission v. Branch, [1995] 2 S.C.R. 3.
DISTINGUISHED:
Del Zotto (A.) v. Canada, [1993] 2 C.T.C. 342 (F.C.T.D.); (1993), 93 DTC 5455 (F.C.A.), leave to appeal to S.C.C. refused [1994] 1 S.C.R. vi; Guay v. Lafleur, [1965] S.C.R. 12.
CONSIDERED:
Canadian Tire Corp. Ltd. v. Pit Row Services Ltd. (1987), 19 C.P.R. (3d) 230; 13 F.T.R. 145 (F.C.T.D.); R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627; (1990), 76 C.R. (3d) 283; 106 N.R. 385; R. v. S. (R.J.), [1995] 1 S.C.R. 451; (1995), 121 D.L.R. (4th) 589; 177 N.R. 81; 78 O.A.C. 161; Samson v. Canada, [1995] 3 F.C. 306(C.A.).
REFERRED TO:
Del Zotto v. Minister of National Revenue et al. (1995), 90 F.T.R. 200 (F.C.T.D.); Noble v. Minister of National Revenue et al. (1995), 90 F.T.R. 203 (F.C.T.D.).
APPLICATION to lift a stay of an order appointing a hearing officer for an inquiry into the financial affairs of Mr. Del Zotto, and to vacate an order restraining the conduct of the inquiry pending the final determination of an action for a declaration that Income Tax Act, section 231.4 was unconstitutional ((1993), 71 F.T.R. 1 (F.C.T.D.)). Application dismissed.
COUNSEL:
Edward Greenspan, Q.C. and David Stratas for applicant Angelo Del Zotto.
Alan D. Gold and David W. Stratas for applicant Herbert B. Noble.
Ivan S. Bloom, Q.C., John Vaissi-Nagy and Gordon S. Campbell for respondents Minister of National Revenue and John E. Thompson.
Graham Pinos, Q.C. for defendant D. Reilly Watson.
SOLICITORS:
Osler, Hoskin & Harcourt, Toronto, and Greenspan, Rosenberg& Buhr, Toronto, for applicant Angelo Del Zotto.
Osler, Hoskin & Harcourt, Toronto, and Gold & Fuerst for applicant Herbert B. Noble.
Deputy Attorney General of Canada, for respondents Minister of National Revenue and John E. Thompson.
Graham Pinos, Q.C., Toronto, for defendant D. Reilly Watson.
The following are the reasons for order rendered in English by
McKeown J.: The defendants/respondents, Her Majesty the Queen in right of Canada, the Minister of National Revenue and John Edward Thompson, seek orders lifting a stay that was granted by me on November 26, 1993 [(1993), 71 F.T.R. 1 (F.C.T.D.)], and vacating the orders of restraint. The issue in this case is whether the stays and orders of restraint are still justified in law having regard to the judgment rendered on April 13, 1995, by the Supreme Court of Canada in British Columbia Securities Commission v. Branch [[1995] 2 S.C.R. 3]. In order to decide the issue I must determine what the test is with respect to lifting the stay in both proceedings. There is no issue as to my jurisdiction to lift the stay; subsection 50(3) of the Federal Court Act, R.S.C., 1985, c. F-7, as amended, provides jurisdiction for the lifting of a stay in the discretion of the Court. This can therefore be done in both the Del Zotto and Noble proceedings. In the case of Noble, there is an alternative jurisdictional basis under section 18.2 [as enacted by S.C. 1990, c. 8, s. 5] of the Federal Court Act which provides some powers to the Court to vacate the orders of restraint.
FACTS
The three defendants/respondents who brought this motion state that the facts are not in issue, however, this is vigorously contested by both Mr. Del Zotto and Mr. Noble. I will set out the facts as described by the three defendants/respondents.
By an authorization dated October 9, 1992, Pierre Gravelle, the Deputy Minister of National Revenue for Taxation, authorized “John Edward Thompson, Q.C., with the assistance of such counsel as he may choose, to make an inquiry into the financial affairs of … Angelo Del Zotto for the taxation years 1979 to 1985 inclusive.”
By a letter dated November 25, 1992, supported by the aforesaid authorization, the said Deputy Minister of National Revenue for Taxation, Pierre Gravelle, applied pursuant to subsection 231.4(2) of the Income Tax Act, R.S.C. 1952, c. 148 [now R.S.C., 1985 (5th Supp.), c. 1] (the Act), for an order appointing a hearing officer for the inquiry.
By an order signed December 2, 1992, His Honour, Chief Judge Couture of the Tax Court of Canada, appointed Mr. D. Reilly Watson as the hearing officer.
For the purpose of compelling testimony and the production of documents by Herbert B. Noble at the inquiry, a subpoena dated April 21, 1993, was issued by the hearing officer. The said subpoena was served on Herbert B. Noble on April 26, 1993.
No subpoena has been issued by the hearing officer for the purpose of compelling testimony from, or the production of documents by, Angelo Del Zotto.
The investigation, which has given rise to the inquiry, has not produced sufficient grounds to obtain a search warrant. No charges have been laid as a result of the said investigation.
On May 5, 1993, an originating notice of motion was filed on behalf of Herbert B. Noble seeking “an order … quashing … the aforesaid subpoena” served on him on the grounds that:
Section 231.4 of the Income Tax Act …, which is the statutory basis for the issuance of the said subpoena, is contrary to sections 7 and 8 of the Charter … and, therefore, of no force or effect, in that it authorizes unreasonable searches and seizures and purports to authorize the state to compel citizens to furnish potentially incriminating evidence against themselves;
In any event, even if section 231.4 of the Income Tax Act is not per se and in its entirety constitutionally invalid, its operation in the particular circumstances relating to the state’s attempt to compel … [Herbert B. Noble] to testify at the … inquiry is constitutionally invalid.
The action brought by Angelo Del Zotto raises the same constitutional issues as the general constitutional challenge to section 231.4 of the Income Tax Act made in the aforesaid originating notice of motion.
On November 26, 1993, I made orders in the Noble and Del Zotto proceedings in the following terms:
1. The operation of the order dated December 2, 1992 of the Tax Court of Canada made pursuant to s. 231.4(2) of the Income Tax Act, which purported to appoint D. Reilly Watson as a hearing officer for an inquiry … into the … affairs [of Angelo Del Zotto] is stayed until 30 days after the final determination of … [the Noble and Del Zotto proceedings].
2. D. Reilly Watson is restrained from acting as hearing officer at the Inquiry and John Edward Thompson is restrained from conducting the Inquiry until 30 days after the final determination of … [the Noble and Del Zotto proceedings].
On April 13, 1995, the Supreme Court of Canada rendered judgment in British Columbia Securities Commission v. Branch, supra.
Messrs. Noble and Del Zotto state that the facts are very much in dispute since the real question to be decided here is what the purpose is of the inquiry into the financial affairs of Angelo Del Zotto. I will set out the document which appointed Mr. Watson to conduct the inquiry in full:
ORDER
WHEREAS Pierre Gravelle, an official holding the office of Deputy Minister of Revenue Canada, Taxation, has authorized an inquiry into the affairs of Angelo Del Zotto, Province of Ontario, pursuant to subsection 231.4(1) of the Income Tax Act.
AND WHEREAS the said Pierre Gravelle has applied to this Court, pursuant to subsection 231.4(2) of the said Act, for the appointment of a hearing officer before whom the inquiry will be held;
NOW THEREFORE THIS COURT DOTH ORDER, pursuant to subsection 231.4(2) of the Income Tax Act, that Mr. D. Reilly Watson, be and he is hereby appointed a hearing officer before whom the said inquiry will be held;
This appointment is valid until such time as this inquiry has been completed.
Signed at Ottawa, Canada
this 2nd day of December 1992.
Although subsection 231.4(1) uses the words “administration or enforcement”, counsel for Messrs. Noble and Del Zotto states that there can be no doubt as to the purpose of the inquiry being criminal when one reads certain letters from Mr. Bloom, counsel for the Minister, to counsel for Messrs. Del Zotto and Noble, and that any doubt is removed by the Tax Operations Manual. Mr. Bloom, in a letter where he describes himself as senior counsel, Criminal Prosecutions Section, Toronto Regional Office, Department of Justice Canada, dated December 8, 1993 to Mr. Stratas of Messrs. Osler, Hoskin& Harcourt, states that in connection with the issue of costs “in all circumstances the parties ought to bear their own costs. Though circumstances include the principles governing the award of costs in criminal matters.” This was in connection with the discussion of costs regarding the stay that I had granted. Mr. Bloom wrote to me on February 17, 1994 discussing the awaiting of the decision by the prothonotary [Del Zotto v. Minister of National Revenue et al. (1995), 90 F.T.R. 200 (F.C.T.D.); Noble v. Minister of National Revenue et al. (1995), 90 F.T.R. 203 (F.C.T.D.)] in relation to the consolidation of the Del Zotto and Noble matters and expedition of the same. He then concluded by stating:
In that eventuality, it is my submission that representations to Your Lordship must be in open court. The proceedings relate to a criminal investigation; the rights of the parties would be seriously affected by decisions as to the pleading and discovery process. For those reasons it is my submission, previously made known to Mr. Stratas, that if such issues must [be] addressed, the appropriate forum is open court.
Mr. Bloom, in his submissions, stated that he used the word “criminal” in the sense of a regulatory penal provision as opposed to civil but there is nothing in the evidence before me to confirm this, save the recent case law.
There is other evidence regarding the true nature of the inquiry. In June 1986, the investigation into Mr. Del Zotto’s affairs had been placed in the hands of individuals working in Revenue Canada, Special Investigations Section. This section is used to investigate persons suspected of criminal violations of the Income Tax Act. By June 1987, officials of the Special Investigations Section confirmed that the plaintiff, Mr. Del Zotto, was the subject of a criminal investigation by their section. The statement of claim alleges that criminal proceedings against the plaintiff, as a result of which the plaintiff may be imprisoned, have been and are contemplated by the inquiries which are merely a criminal investigation designed to secure evidence for this purpose. The defendants have not specifically denied this fact in the Del Zotto action. The inquiries’ proceedings were being videotaped in order to record the evidence for the purpose of admitting it into the later proceedings, according to an affidavit of Mr. Meredith which was filed in support of a stay motion before me.
I then come to the Tax Operations Manual which was submitted to Mr. Greenspan by letter dated April 21, 1995, as a copy of documentary productions of Her Majesty the Queen in the Del Zotto action. The relevant parts of the document read as follows:
11(12)0 INQUIRIES UNDER
SECTION 231.4 OF
THE INCOME TAX ACT
11(12)1.1 When Use is Justified
(1) An Inquiry may be conducted as a means of strengthening our case in either of two areas of the investigation.
(2) Firstly, witnesses whose evidence is material to our case in an anticipated prosecution are examined under oath to determine what they will say in Court …
(3) Secondly, the following types of witness may be questioned under oath to draw out facts not otherwise obtainable:
…
(B) Witnesses—perhaps friendly to the tax evader—who will not reveal what they know in an interview but who infer or admit that, if they were put under oath, they would tell the truth. [Emphasis mine.]
…
11(12)1.2 Timing
(1) An Inquiry is not normally implemented until the more conventional methods of investigation have been exhausted.
(2) In a broad sense, before a witness is questioned in an Inquiry, the Investigator should know the facts and be able to determine whether he is telling the truth.
…
11(12)1.(10) Termination
…
(2) An Inquiry is never irrevocably closed; in practice, its proceedings are simply adjourned sine die.
Counsel for the three defendants/respondents takes the position that this matter of the purpose of the inquiry has already been dealt with. In the Federal Court of Appeal in Del Zotto (A.) v. Canada, [1993] 2 C.T.C. 342, at pages 343-344, the Court found that it was a purely administrative matter. The Court quotes Justice Abbott, speaking for the majority, in Guay v. Lafleur, [1965] S.C.R. 12, where he stated at pages 16-17:
The power given to the Minister under s. 126(4) to authorize an enquiry to be made on his behalf, is only one of a number of similar powers of enquiry granted to the Minister under the Act. These powers are granted to enable the Minister to obtain the facts which he considers necessary to enable him to discharge the duty imposed on him of assessing and collecting the taxes payable under the Act. The taxpayer’s right is not affected until an assessment is made. Then all the appeal provisions mentioned in the Act are open to him.
The Court continues on to say at page 344:
The changes effected by the 1972 legislation are those which are now reflected in subsections (2), (4), (5) and (6) of section 231.4. They provide for the appointment of a hearing officer who is different from the person authorized to conduct the inquiry, they limit that officer’s powers to punish for contempt and they create a right for witnesses and the person whose affairs are investigated to be represented by counsel, a right which had been denied by Guay v. Lafleur, supra. They do not otherwise change the nature of the inquiry which remains, as it was described by the Supreme Court, “a purely administrative matter which can neither decide nor adjudicate upon anything”.
This decision was based on Guay v. Lafleur, supra, which was decided prior to the Charter [Canadian Charter of Rights and Freedoms, being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44]]. Furthermore, the case was argued on the basis of no Charter challenge. The Court did say in Del Zotto, supra, that section 231.4 “cries out” for a Charter challenge. Therefore, there was no discussion about whether this was a criminal or civil inquiry. The Supreme Court of Canada affirmed the Federal Court of Appeal by denying leave but only after granting a stay in the matter until such time as the leave was dismissed [[1994] 1 S.C.R. vi]. The Federal Court of Appeal did not have the Tax Operations Manual before them when they stated at page 344:
Finally, since there is no question of the appointment affecting the rights or obligations of the applicant, the question of the administrative duty of fairness does not arise.
I note that the document in the Tax Operations Manual was created in 1987. We have no evidence at the present time as to whether it was created prior to the time of the decision in Guay v. Lafleur, supra, or the extent to which it governs inquiries. The evidence at trial may show that there are administrative purposes to the statute which the Department is pursuing.
LAW
There are a number of different tests suggested for changing the stay order, however, in my view I can accept for the purposes of this case, the lower test as submitted by the three defendants/respondents. The defendants/respondents submit that the Court should exercise its jurisdiction to lift the stay or vacate an order of stay when there has been a material change in circumstances (see Union Carbide Corporation et al. v. W.R. Grace & Co. et al. (1983), 77 C.P.R. (2d) 274 (F.C.T.D.), at page 276). In the Union Carbide case, supra, the Court refused to quash the earlier stay, because the fact which was the central basis to the granting of the stay was still present. In that case, it was argued that the courts should be very reluctant to interfere with criminal investigations by granting relief in the nature of injunction to individuals who are subject to such investigations. I accepted that argument in the original stay application when I commenced my judgment, by stating at page 2:
The courts have been particularly reluctant to interfere with criminal investigations by granting relief in the nature of injunction to individuals who are subject to such investigation.
The purpose of the inquiry remains in question in this case. Messrs. Del Zotto and Noble have always taken the position that this is a criminal inquiry and it can be seen from some of the letters from the Crown prosecutor that the Crown agreed with this. I fail to see why I should lift the stays and vacate the orders of restraint when there is no agreement on the facts of the matter. I am not in a position to find that the Tax Operations Manual is the “smoking gun” that shows there was no other purpose to the inquiry than a criminal investigation, as alleged by the applicant/ plaintiff. There is, however, enough doubt at this stage of the proceedings as to whether the inquiry is for criminal purposes or for administrative and enforcement purposes, which were found to be valid by the Supreme Court of Canada and the Federal Court of Appeal. In my view, there may be exceptional cases where a government department uses an otherwise valid legislation for purposes other than those approved by the courts. I am unable to determine on the record before me if this is one of these rare cases. This said, I am unable to find that there has been a material change of circumstances. Furthermore, Hugessen J.A. in Samson v. Canada, [1995] 3 F.C. 306stated that it was very important to analyze the object of the inquiry because this is required by the Branch case, supra. He stated at page 329:
Finally, the analysis of the purpose of the inquiry and its legislative and regulatory background required by Branch, supra, is completely absent. That analysis would have shown that the predominant purpose of the inquiry was to pursue economic and commercial objectives of great importance to the public, not to incriminate the respondents.
A court is going to have to decide whether the purpose of this inquiry is related to the administration of the Income Tax Act and only incidentally to incriminate Mr. Del Zotto or whether it is primarily to incriminate Mr. Del Zotto and has no important economic and commercial objectives.
Furthermore, the Supreme Court of Canada has emphasized that in order to rule on constitutional issues the courts must have a full factual record before them. The Federal Court Rules [C.R.C., c. 663] also specify that the constitutional declaration of invalidity may only be obtained from the Federal Court by way of action including oral examinations for discovery and the opportunity to cross-examine at trial. Here there is minimal evidence before me and the parties have not even commenced oral discoveries. In MacKay v. Manitoba, [1989] 2 S.C.R. 357, at page 361, Cory J. stated:
Charter cases will frequently be concerned with concepts and principles that are of fundamental importance to Canadian society. For example, issues pertaining to freedom of religion, freedom of expression and the right to life, liberty and the security of the individual will have to be considered by the courts. Decisions on these issues must be carefully considered as they will profoundly affect the lives of Canadians and all residents of Canada. In light of the importance and the impact that these decisions may have in the future, the courts have every right to expect and indeed to insist upon the careful preparation and presentation of a factual basis in most Charter cases. The relevant facts put forward may cover a wide spectrum dealing with scientific, social, economic and political aspects. Often expert opinion as to the future impact of the impugned legislation and the result of the possible decisions pertaining to it may be of great assistance to the courts.
Charter decisions should not and must not be made in a factual vacuum. To attempt to do so would trivialize the Charter and inevitably result in ill-considered opinions. The presentation of facts is not, as stated by the respondent, a mere technicality; rather, it is essential to a proper consideration of Charter issues.
I am not satisfied that there has been a material change in circumstances in light of the Tax Operations Manual. While I do not have to determine that the purpose is criminal, I have to be satisfied that there is still an issue in that respect. I do not have to resort to the test for lifting a stay used by Jerome A.C.J. in Canadian Tire Corp. Ltd. v. Pit Row Services Ltd. (1987), 19 C.P.R. (3d) 230 (F.C.T.D.) where he held [at page 231] that the reconsideration of interlocutory injunctive relief was “the most extraordinary kind of disposition of any kind of matter adjudicated upon by the court”. In order to get such relief, there must be “material in support which would have to be also of an extraordinary nature”. Since I have found that the three defendants/ respondents do not meet the requirement of the lower test in Union Carbide, supra, it is not necessary for me to decide which is the appropriate test in this case.
I am not unmindful that the plaintiff, Mr. Del Zotto, has an uphill battle. The Supreme Court of Canada has consistently held that the Income Tax Act is essentially a regulatory statute. For example, in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, Wilson J., at page 641 stated with respect to the search and seizure subsection:
Section 231(3) is not criminal or quasi-criminal legislation. The Income Tax Act is essentially a regulatory statute since it controls the manner in which income tax is calculated and collected. This Court pointed out in R. v. Grimwood, [1987] 2 S.C.R. 755, at p. 756, that “the purpose of ss. 231(3) and 238(2), when read together, is not to penalize criminal conduct but to enforce compliance with the Act”.
However, in none of the cases submitted by counsel did the Supreme Court of Canada or the Federal Court of Appeal have the Tax Operations Manual before it. As I have stated, I am unaware of the extent to which the Tax Operations Manual governs the Department’s practices in the area of inquiries under the Income Tax Act. If it is the governing document, it does not appear to me that simply because a court has validated a statute on the basis that it is primarily a regulatory statute, the Department is entitled to bypass any regulatory aspect of it and concentrate solely on bringing penal actions without the need to have any economic input. Counsel for the Minister in a most able argument pointed out to me that in Samson v. Canada the inquiry concerned an investigation into price fixing by the notaries in the Sherbrooke area. However, as Hugessen J.A. pointed out, under the Competition Act [R.S.C., 1985, c. C-34 (as am. by R.S.C., 1985 (2nd Supp.), c. 19, s. 19)] the offence is not price fixing per se but an agreement which is undue which connotes economic aspects. Furthermore, as well as proceeding under the criminal section of the competition legislation, it is possible to proceed by way of an injunction. Also, the same set of facts could lead to a civil proceeding under section 79 [as am. idem, s. 45] of the Competition Act being the “Abuse of Dominant Position” section. Hugessen J.A. concluded by saying [at page 328]:
I conclude from this that the inquiry at which the respondents have been summoned to testify will be held to achieve legitimate, public and important objectives and is not simply designed to incriminate the respondents. Accordingly, this inquiry meets the standards laid down by the Supreme Court in Branch, supra, and therefore the summonses do not infringe the rules of natural justice.
In the case at bar I am unable to determine because of the existence of the Tax Operations Manual whether there is any other intention than to pursue the tax evader.
It should also not be forgotten that section 231.4 is an addition to the Minister’s powers under section 231.3 of the Income Tax Act. Section 231.3 reads as follows:
231.3 (1) A judge may, on ex parte application by the Minister, issue a warrant in writing authorizing any person named therein to enter and search any building, receptacle or place for any document or thing that may afford evidence as to the commission of an offence under this Act and to seize the document or thing and, as soon as practicable, bring it before, or make a report in respect of it to, the judge or, where the judge is unable to act, another judge of the same court to be dealt with by the judge in accordance with this section.
(2) An application under subsection (1) shall be supported by information on oath establishing the facts on which the application is based.
(3) A judge shall issue the warrant referred to in subsection (1) where the judge is satisfied that there are reasonable grounds to believe that
(a) an offence under this Act has been committed;
(b) a document or thing that may afford evidence of the commission of the offence is likely to be found; and
(c) the building, receptacle or place specified in the application is likely to contain such a document or thing.
(4) A warrant issued under subsection (1) shall refer to the offence for which it is issued, identify the building, receptacle or place to be searched and the person alleged to have committed the offence and it shall be reasonably specific as to any document or thing to be searched for and seized.
(5) Any person who executes a warrant under subsection (1) may seize, in addition to the document or thing referred to in that subsection, any other document or thing that the person believes on reasonable grounds affords evidence of the commission of an offence under this Act and shall as soon as practicable bring the document or thing before, or make a report in respect thereof to, the judge who issued the warrant or, where the judge is unable to act, another judge of the same court to be dealt with by the judge in accordance with this section.
(6) Subject to subsection (7), where any document or thing seized under subsection (1) or (5) is brought before a judge or a report in respect thereof is made to a judge, the judge shall, unless the Minister waives retention, order that it be retained by the Minister, who shall take reasonable care to ensure that it is preserved until the conclusion of any investigation into the offence in relation to which the document or thing was seized or until it is required to be produced for the purposes of a criminal proceeding.
(7) Where any document or thing seized under subsection (1) or (5) is brought before a judge or a report in respect thereof is made to a judge, the judge may, of the judge’s own motion or on summary application by a person with an interest in the document or thing on three clear days notice of application to the Deputy Attorney General of Canada, order that the document or thing be returned to the person from whom it was seized or the person who is otherwise legally entitled thereto if the judge is satisfied that the document or thing
(a) will not be required for an investigation or a criminal proceeding; or
(b) was not seized in accordance with the warrant or this section.
(8) The person from whom any document or thing is seized pursuant to this section is entitled, at all reasonable times and subject to such reasonable conditions as may be imposed by the Minister, to inspect the document or thing and to obtain one copy of the document at the expense of the Minister.
I have set out Wilson J.’s views with respect to section 231.3 [then subsection 231(3)] of the Income Tax Act which show why the income tax authorities already have extraordinary powers of investigation under section 231.3 and that accordingly, section 231.4 should be examined very carefully in light of the Tax Operations Manual. Wilson J. in McKinlay Transport, supra, at pages 648-649 stated:
At the beginning of my analysis I noted that the Income Tax Act was based on the principle of self-reporting and self-assessment. The Act could have provided that each taxpayer submit all his or her records to the Minister and his officials so that they might make the calculations necessary for determining each person’s taxable income. The legislation does not so provide, no doubt because it would be extremely expensive and cumbersome to operate such a system. However, a self-reporting system has its drawbacks. Chief among these is that it depends for its success upon the taxpayers’ honesty and integrity in preparing their returns. While most taxpayers undoubtedly respect and comply with the system, the facts of life are that certain persons will attempt to take advantage of the system and avoid their full tax liability.
Accordingly, the Minister of National Revenue must be given broad powers in supervising this regulatory scheme to audit taxpayers’ returns and inspect all records which may be relevant to the preparation of these returns. The Minister must be capable of exercising these powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. Often it will be impossible to determine from the face of the return whether any impropriety has occurred in its preparation. A spot check or a system of random monitoring may be the only way in which the integrity of the tax system can be maintained. If this is the case, and I believe that it is, then it is evident that the Hunter criteria are ill-suited to determine whether a seizure under s. 231(3) of the Income Tax Act is reasonable. The regulatory nature of the legislation and the scheme enacted require otherwise. The need for random monitoring is incompatible with the requirement in Hunter that the person seeking authorization for a search or seizure have reasonable and probable grounds, established under oath, to believe that an offence has been committed.
I point out that under section 231.4 the Minister “must have reasonable and probable grounds to believe a violation of the Act or Regulations has been committed or will likely be committed”.
Wilson J. then limited the search provisions to business areas and weighed the state interest in monitoring compliance with the legislation against an individual’s privacy interest, at page 649:
This is not to say that any and all forms of search and seizure under the Income Tax Act are valid. The state interest in monitoring compliance with the legislation must be weighed against an individual’s privacy interest. The greater the intrusion into the privacy interests of an individual, the more likely it will be that safeguards akin to those in Hunter will be required. Thus, when the tax officials seek entry onto the private property of an individual to conduct a search or seizure, the intrusion is much greater than a mere demand for production of documents. The reason for this is that, while a taxpayer may have little expectation of privacy in relation to his business records relevant to the determination of his tax liability, he has a significant privacy interest in the inviolability of his home.
La Forest J. agreed with Wilson J. for different reasons, but did state, at page 650 that:
… we are dealing with a statute which, though supported by penal sanctions, including imprisonment, is essentially of an administrative nature.
The question of imprisonment is very important, because in the B.C. Securities Commission’s factum in the Branch case, supra, it was stated:
In the case at bar, the orders which may be issued by the Commission after a hearing into the Appellants’ conduct include the removal of their rights to trade securities and to be corporate directors. These orders, made in the public interest, are remedial, and do not involve “true penal consequences”.
It is possible that the subpoena power could be exercised in the course of an investigation into conduct which is a violation of section 128 of the Act or of the Criminal Code [R.S.C., 1985, c. C-46]. However, the primary purpose behind the section 128 subpoena power is not to acquire evidence for a quasi-criminal or criminal prosecution. The key purpose is to acquire evidence which will be reviewed by the Commission to assist it in determining whether to make any regulatory orders. Neither the Commission’s investigators, nor the Commission itself, has the power to impose “penal consequences” on the appellants or anyone else.
Again it is not possible on the evidence before me to determine what is the key purpose in the case before me.
I will now examine British Columbia Securities Commission v. Branch, supra, in detail. Sopinka and Iacobucci JJ. gave the majority judgment. In that case, the British Columbia Securities Commission commenced an investigation into a company following a report by the company’s auditors disclosing questionable expenditures. The appellants, two of the officers of the company, were served with summonses compelling their attendance for examination under oath and requiring them to produce all information and records in their possession relating to the company. In response, they applied for a declaration to the effect that subsection 128(1) [of the Securities Act, S.B.C. 1985, c. 83] violates sections 7 and 8 of the Canadian Charter of Rights and Freedoms. In R. v. S. (R.J.), [[1995] 1 S.C.R. 451], it was decided that the courts could, in certain circumstances, grant exemptions from compulsion to testify. The crucial question is whether the predominant purpose for seeking the evidence is to obtain incriminating evidence against the person compelled to testify, or rather some legitimate public purpose. Here, Mr. Del Zotto was not subpoenaed. This would raise different matters. Many are resolved by British Columbia Securities Commission v. Branch, supra. However, more importantly to the matter before me, is the finding of the Supreme Court of Canada with respect to section 8. Subsection 128(1) of the Securities Act did not violate section 8 of the Charter.
According to the Supreme Court of Canada, the Act is essentially regulatory legislation designed to protect the public, including investors and discourage detrimental forms of commercial behaviour. Sopinka and Iacobucci JJ. stated, at pages 27-28:
An inquiry of this kind legitimately compels testimony as the Act is concerned with the furtherance of a goal which is of substantial public importance, namely, obtaining evidence to regulate the securities industry. Often such inquiries result in proceedings which are essentially of a civil nature. The inquiry is of the type permitted by our law as it serves an obvious social utility. Hence, the predominant purpose of the inquiry is to obtain the relevant evidence for the purpose of the instant proceedings, and not to incriminate Branch and Levitt. More specifically, there is nothing in the record at this stage to suggest that the purpose of the summonses in this case is to obtain incriminating evidence against Branch and Levitt.
This is unlike the case at bar where we have the Tax Operations Manual before us. At page 38 Sopinka and Iacobucci JJ. stated:
It is clear that in numerous instances a regulatory regime will be needed in order to act as a check on an individual’s self-interest. There are surely times when one’s own motivations and objective are not of benefit to society on a wider scale.
Then at page 38:
There are areas of business, for example, that are subject to regulation as a matter of course. Persons who carry on the business of trading in securities realize that the industry is heavily regulated and for good reason. It is a crucial part of our economy that is at stake.
At pages 39-40 Sopinka and Iacobucci JJ. stated:
Hence, the Securities Act is essentially a scheme of economic regulation which is designed to discourage detrimental forms of commercial behaviour. The provisions provided by the legislature are pragmatic sanctions designed to induce compliance with the Act.
They went on to point out that the search and seizure provision authorized by the Securities Act “is one of the least intrusive of the possible methods which might be employed to obtain documentary evidence”. There is no invasion of the taxpayer’s home or business premises, and it simply calls for production of records. They stated at pages 40-41:
… the Securities Act serves an important social purpose and the social utility of such legislation justifies the minimal intrusion that the appellants may face. The law in question, is therefore, reasonable.
In my view section 231.4 of the Income Tax Act would be held to be in compliance with the Charter if there was no question as to the effect of the Tax Operations Manual in implementing section 231.4. In my view, the action commenced by Mr. Del Zotto will enable the Court to have a full record before it to make this decision. However, I am not persuaded that British Columbia Securities Commission v. Branch, supra, is a sufficient material change of circumstances to justify lifting the stay at the present time. The stay shall remain in effect and the action shall continue on an expedited basis. The application to lift the stay is dismissed.