Date: 20010112
Docket: A-220-00
CORAM: STRAYER J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
MICHAEL NORWOOD
Respondent
Heard at Ottawa, Ontario, January 11, 2001
JUDGMENT delivered at Ottawa, Ontario, January 12, 2001
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: STRAYER J.A.
SEXTON J.A.
Date: 20010112
Docket: A-220-00
CORAM: STRAYER J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
MICHAEL NORWOOD
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
| _. The Crown appeals the decision of a Tax Court Judge, reported at [2000], 2 C.T.C 2900, [2000] D.T.C. 2019, ordering the Minister of National Revenue to reduce income tax assessments made against the respondent Michael Norwood for 1991, 1992 and 1993. The order was made as a remedy under section 24 of the Canadian Charter of Rights and Freedoms for a breach of the right of Mr. Norwood under section 8 of the Charter to be secure against unreasonable search or seizure. |
| _. During the period relevant to this appeal, Mr. Norwood was the sole shareholder of 947014 Ontario Inc. which in turn was the sole shareholder of 450344 Ontario Inc., which operated a restaurant, bar and adult entertainment parlour. Mr. Norwood and his corporations were clients of Connelly Koshy & Frouin, a firm of chartered accountants. Mr. Koshy was the partner in charge. Most of the work was done by Mr. Armour, C.G.A. The Crown disputes that the accounting firm represented Mr. Norwood personally. However, the Tax Court Judge found otherwise and his conclusion is supported by the evidence. |
| _. In early 1995, Mr. Norwood received a telephone call from a Revenue Canada auditor to advise that there was to be an audit of 450344 Ontario Inc. The statutory authority for the audit was subsection 231.1(1) of the Income Tax Act. The Tax Court Judge found that the audit was intended to include Mr. Norwood personally. That conclusion was supported by the evidence, including the letter quoted above. |
| _. The auditor commenced the audit in mid-February of 1995. The audit was conducted at the premises of 450344 Ontario Inc. and the offices of Connelly Koshy & Frouin. As of February 16, 1995, the auditor was seeking information on a number of questions, including the manner in which pool table revenues were reported, and the explanation for a discrepancy between the cash register receipts and reported revenues. |
| _. The events that resulted in this appeal occurred on March 23, 1995, and are described as follows by the Tax Court Judge (at paragraph 3): |
| [The auditor] commenced his audit from the accountants' premises about mid-February 1995. His assigned office had no telephone. On March 23, while he was aware that Mr. Koshy and Mr. Armour were absent from Ottawa, he entered Mr. Armour's office to use the telephone. In order to do so, he had to go through an abutting office which was vacant and had a telephone. He had to open a closed but unlocked door to Mr. Armour's office. Having completed his call, and before exiting the office he saw a file on a storage shelf identified on its cover as a file for the Corporation [450344 Ontario Inc.]. He took the file back to his office and photocopied hand-written notes (the notes) apparently made by Mr. Armour during his initial interview with the Appellant [Mr. Norwood] on December 11, 1992. He then returned the file to its original place in Mr. Armour's office without comment to the Appellant or his accountants. Notations in the notes that caught the auditor's attention included: |
| 2. Door fee for entrants - $2 per person Mike pockets gives to wife [approximately] $1000/week i.e.: undeclared income |
| 13. Sources of Money - Cash |
| - Mike to consider declaring in the future |
| _. These notes were Mr. Armour's reflection of an interview he had with Mr. Norwood in December of 1992, shortly after Connelly Koshy & Frouin had been retained. On the cover of the file from which the notes were taken was a reference to 450344 Ontario Inc. and a reference to Mr. Norwood. The auditor could not have known what was in the file from looking at the cover, because he took it without notice or permission. |
| _. Mr. Armour testified that the file was his working paper file for 450344 Ontario Inc. for its 1992 fiscal year. The general policy of Connelly, Koshy and Frouin, when information from one of their working paper files was required for a tax audit, was to give the auditor only the specific information requested, which usually consisted of financial or mathematical information required to explain or support the financial reports. Generally, they did not consider their own internal notes or memoranda to be information that they were obliged to disclose. There is no evidence, and the Crown does not contend, that the auditor asked to see any working paper files in their entirety, or any notes of Mr. Armour or the other accountants that might be in the working paper files. The evidence was that he was given all information he requested from the working paper files. |
| _. At no time during the remainder of the audit did the auditor tell Mr. Norwood or the accountants that he had looked in a file in Mr. Armour's office, or that he had taken a photocopy of Mr. Armour's notes. He did not subsequently ask to see the file, or the notes. |
| _. The auditor said that the notes were of some help during the course of the audit because they confirmed areas of enquiry that he was already pursuing, and helped him focus on sources of cash receipts. The Tax Court Judge said that the notes "compromised" Mr. Norwood's position, but he does not explain what he considered to be the nature of the compromise. Counsel for Mr. Norwood suggests that an inference can be drawn that the notes at least had an adverse effect on the auditor's assessment of Mr. Norwood's credibility, because after the notes were taken, the audit became more aggressive and intrusive, the file was referred to Special Investigations, and criminal proceedings were threatened. However, Special Investigations returned the file without taking any action, and there were no criminal proceedings. |
| _. It cannot be said that the reassessments finally made against Mr. Norwood were supported or justified by the notes. The matter of the door receipts referred to in item 2 of Mr. Armour's notes was investigated by the auditor but no adjustment was made to the income of the corporations or Mr. Norwood with respect to such receipts. |
| _. The undeclared pool table revenue referred to in item 13 of the notes was added to the income of 450344 Ontario Inc. and like amounts were included in the income of Mr. Norwood for 1991, 1992 and 1993 as shareholder appropriations. Penalties were assessed against Mr. Norwood in respect of these amounts. But pool table revenues were the subject of investigation by the auditor before he found the notes. They were ultimately quantified by records obtained from the vending machine operator that owned the pool tables, information that probably would have been obtained without the notes. |
| _. The only other adjustment to Mr. Norwood's income related to amounts not referred to in Mr. Armour's notes. These were unreported cash register receipts, net of an allowance for unvouchered expenses paid in cash. These amounts were added to the income of 450344 Ontario Inc. and like amounts were included in Mr. Norwood's income for 1992 and 1993 as shareholder appropriations. Penalties were assessed in respect of these amounts as well. |
| _. Mr. Norwood appealed the 1991, 1992 and 1993 reassessments to the Tax Court. His appeal challenges the income inclusions and the penalties. It was in the course of examinations for discovery that Mr. Norwood learned that the auditor had taken Mr. Armour's notes as described above. Mr. Norwood brought a motion in the Tax Court alleging a breach of the Charter and seeking remedies under section 24. |
| _. The Tax Court Judge found that the taking of Mr. Armour's notes from his working paper file in the circumstances outlined above was an unreasonable search and seizure in breach of the right of Mr. Norwood under section 8 of the Charter. With respect to the appropriate remedy, he concluded that merely ordering the exclusion of the notes as evidence would be insufficient. Instead, he ordered the reassessments of Mr. Norwood's returns for 1991, 1992 and 1993 to be referred back to the Minister for reassessment on the basis that the undeclared pool table revenue would be included in income and appropriate interest and penalties would be assessed, but the balance of the assessments for all years were to be vacated. |
| _. For the reasons that follow, I have concluded that the Tax Court Judge was correct to find a breach of the rights of Mr. Norwood under section 8 of the Charter. However, I must respectfully disagree with him as to the appropriate penalty. |
| _. The Tax Court Judge found that the notes were a record of Mr. Armour's reflections of his meeting with Mr. Norwood in December of 1992. He considered the notes to be outside the scope of subsection 231.1(1) because they were not "a 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." The Crown takes issue with conclusion, but in my view it is not necessary in this case to determine the scope of subsection 231.1(1). Even if it is assumed that the auditor could have obtained the notes under subsection 231.1(1), the issue is whether he obtained them lawfully, and if not what the consequence ought to be. |
| _. I agree with the Tax Court Judge that the manner in which the auditor took the notes was not authorized by section 231.1. I endorse this statement of the Tax Court Judge (at paragraph 8 of his reasons): |
| I believe that a more candid approach and higher standard is expected of Revenue Canada auditors. In several meetings with the Appellant and his representatives after March 23, 1995, officers of the Ministry of National Revenue never mentioned that they had copies of these notes which compromised the Appellant's position. This is not dealing in good faith. It strengthens the conclusion that the notes were obtained surreptitiously and without colour of right. Their behaviour was that of one who has something to hide. I do not consider [the auditor's] actions too distant from entering the premises with a key in the dead of night. This type of behaviour is not intended in paragraphs 231(1)(c) and (d) of the Act notwithstanding the broad powers it grants to an auditor. |
| _. It must also be noted that subsection 231.1(1) permits the authority to investigate to be exercised "at all reasonable times". One might question whether an auditor can be said to have exercised his powers of investigation at a "reasonable time" if he takes a document from an accountant's private office when he knows the accountant is out of town and that the accountant has not been informed of or consented to the taking. |
| _. The Crown argues that Mr. Norwood did not have the standing to challenge a seizure of Mr. Armour's notes because he had no reasonable expectation of privacy with respect to them. I cannot accept this argument. The notes record Mr. Armour's thoughts during an interview with Mr. Norwood in which his personal tax affairs were discussed, even if only tangentially. The relationship between Mr. Norwood and Mr. Armour was by its nature a confidential one, in the sense that Mr. Norwood had a reasonable basis for believing and did believe that Mr. Armour and the members and staff of Connelly, Koshy and Frouin would keep confidential any information he gave them. I am mindful of jurisprudence that suggests that a taxpayer's expectation of privacy in an accountant's notes recording personal information are at the low end of the scale, but still they exist. |
| _. Having found that the auditor was not authorized by subsection 231.1(1) to take the notes as he did, and that the notes contained information with respect to which Mr. Norwood had a reasonable expectation of privacy, the Tax Court Judge was correct to conclude that Mr. Norwood's right under section 8 of the Charter was breached. Even the lowest possible expectation of privacy should be sufficient to protect Mr. Norwood from the secret taking of Mr. Armour's notes without notice, request or consent. |
| _. With respect to the penalty for the Charter breach, the evidence is that at the end of the day, the notes were not relied upon to justify the reassessments. Moreover, the notes by their nature are not capable of proving that Mr. Norwood was in receipt of any particular income. I conclude that the harm actually caused to Mr. Norwood by the breach of his Charter right was minimal. The remedy should similarly be minimal. |
| _. In my view, an order for an exclusion of the notes as evidence is appropriate in this case, even though such an exclusion may have little practical effect. Mr. Norwood's Tax Court appeals are still outstanding. One of the questions to be determined on those appeals is whether the Crown can meet its burden of justifying those penalties. It is conceivable that the notes may be considered relevant to the Crown's case, even if their weight is marginal. It seems to me reasonable, in the circumstances of this case, to ensure that Mr. Norwood is not required to deal with whatever evidentiary value the notes may have in respect of his income tax appeal. |
| _. For these reasons, this appeal should be allowed in part. The portion of his judgment relating to the Charter remedy should be quashed and replaced with an order that Mr. Armour's notes of the December, 1992 interview with Mr. Norwood are inadmissible in the appeal of his 1991, 1992 and 1993 reassessments now outstanding in the Tax Court. Mr. Norwood's costs of this appeal should be borne by the Crown. |
Karen R. Sharlow
J.A.
"I agree
B.L. Strayer, J.A."
"I agree
J. Edgar Sexton J.A."