Introduction – Tax Search Warrants
Canada’s federal Income Tax Act includes provisions that
grant the Canada Revenue Agency (the “CRA”) a wide range
of powers for administering and enforcing the Act. For instance,
section 231.1 grants the CRA the power to tax audit and inspect the
books and records of taxpayers and section 231.2 grants the CRA the
power to require a taxpayer, or a third party, to provide documents
and information upon request. These powers are applicable to
CRA’s civil tax audits. However, a taxpayers’ rights under
section 7 of the Charter of Rights and Freedom are engaged as soon
as a criminal tax investigation in commenced by the CRA. In R v
Jarvis, the Supreme Court of Canada set out the test for
determining when a civil tax audit has metamorphosized into in a
criminal tax investigation. In particular, the Supreme Court of
Canada held that “wherever the predominant purpose of an
inquiry or question is the determination of penal liability, all
Charter protections that are relevant in the criminal context must
apply.” When dealing with a criminal tax investigation the CRA can not
rely on the administrative and enforcement powers available under
sections 231.1 and 231.2 of the Income Tax Act. In context of
criminal tax investigations, the CRA must obtain a search warrant
under subsection 231.3(1) of the Income Tax Act. This article
provides tax guidance related to tax search warrants.
Tax Search Warrant – Section 231.3 of the Income Tax
Act
Subsection 231.3(1) of the Income Tax Act permits the CRA to
make an ex parte application to a judge of a provincial superior
court or a Federal Court judge for a warrant “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”.
Pursuant to subsection 231.3(3), a judge may issue a search
warrant where he or she is satisfied that there are reasonable
grounds to believe that:
- An offence under the Income Tax Act was committed;
- A document or thing that may afford evidence of the commission
of the offence under the Act is likely to be found; and, - The building, receptacle or place specified in the application
is likely to contain such a document or thing.
Tax Search Warrant – Seizure, Retention, Return of Content
When a search warrant is issued, under subsection 231.3(1) of
the Income Tax Act, it must specify the person authorized to enter
and search the building, receptacle or place for the document or
thing in question and bring it before, or report it to, the judge
(who issued the search warrant) or another judge of the same court
(Subsection 231.3(4), Income Tax Act). In addition, subsection
231.3(5) of the Income Tax Act permits any person executing a
search warrant to seize “any other document or thing”
that give evidence to any offence under the Act, in addition to the
documents and things listed in the search warrant.
Subsections 231.3(6) and 231.3(7) of the Income Tax Act require
the judge to determine whether, or not, the CRA is entitled to
retain the seized materials. Specifically, subsection 231.3(6)
requires a judge to make an order stating that, unless the CRA
provides otherwise, the seized materials shall be retained by the
CRA. Subsection 231.3(6) imposes an obligation on the CRA to take
“responsible care” of the seized document or thing and 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 such content is “required to
be produced for the purpose of a criminal proceeding.”
Under subsection 231.3(7) of the Income Tax Act, a judge may
order that the document or thing seized 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:
- Will not be required for an investigation or a criminal
proceeding; or, - Was not seized in accordance with the warrant or section 231.3
of the Income Tax Act.
Tax Search Warrant – Taxpayers’ Access to Seized Content
and Rights and Privileges During a Tax Search Warrant
Subsection 231.3(8) of the Income Tax Act allows the person from
whom any document or thing is seized “at all reasonable times
and subject to such reasonable condition” to inspect and
obtain copies of such materials “at the expense of the
Minister.”
However, it is difficult to provide exact tax guidance as to the
time-period to which a judge may order documents and things seized
(e.g., computers) to be “retained by the Minister” before
they are returned to the person from who it was seized or the
person who is otherwise legally entitled to such document or thing.
In addition, the time-period pertaining to retention of documents
or things seized may vary depending on relevant or external factors
including, but not limited to, the scope of CRA’s criminal tax
investigation or delays due to the COVID-19 pandemic. Accordingly,
since records will normally be retained by the CRA for a lengthy
period of time, it is important for taxpayers facing a potential
tax search warrant to maintain off-site or cloud back up of all
physical files and computer records, as they will also be
seized.
It is important to note that a taxpayer’s computers and
documents in an accountant’s files may also be retained by the
CRA, along with the accountant’s working papers. However, in
certain circumstances, solicitor-client privilege may be available
for accountant-client correspondence if the accountant is retained
by the lawyer to facilitate communications between the taxpayer and
the Canadian tax lawyer or to provide the tax lawyer with
information on behalf of the taxpayer. In Telus Communications Inc.
v Canada (Attorney General) the Federal Court of Appeal held that
advice that is communicated to a client through an agent acting for
the client (e.g., the accountant) is privileged because the
accountant was obtaining legal advice on behalf of the client.
It is highly recommended that when a search warrant is served
the taxpayer should immediately retain a Canadian tax lawyer to
ensure that all of their rights and privileges under subsection
232(1) of the Income Tax Act are preserved. In particular,
subsection 232(1) on the Income Tax Act provides taxpayers the
right to assert “solicitor-client privileges” and to
“refuse to disclose an oral or documentary communication on
the ground that the communication is one passing between the person
and the person’s lawyer in professional confidence.”
Section 487 of the Criminal Code and Search Warrants
Subsection 487(1) of the Criminal Code also permits a judge to
grant permission to an “interested person to examine detained
or seized material”. Accordingly, instead of obtaining a
section 231.1 search warrant, the CRA may proceed by way of
obtaining a search warrant under subsection 487(1) of the Criminal
Code. In Mandate Erectors and Weldings Ltd v The Queen, documents
were seized pursuant to a subsection 487(1) Criminal Code search
warrant. In this case, the taxpayer sought to prevent the CRA from
continuing to retain and use copies of the documents seized in a
criminal investigation on the grounds that the search warrant had
been improperly issued. However, the court disagreed with the
taxpayer and explained that no “irreparable harm” would
be done if the taxpayer’s application is dismissed.
Pro Tax Tips – Tax Guidance and Tax Search Warrants
Tax search warrants can create immense financial consequences
for businesses and their owners. Failure to comply with a search
warrant provisions is an offence under subsection 238(1) of the
Income Tax Act. A taxpayer who fails to provide the CRA with
documents and things listed in a search warrant may be required to
pay a penalty, pursuant to subsection 238(1). In addition, a
taxpayer found guilty of an offence under subsection 238(1) of the
Income Tax Act, in addition to any penalty, is liable on summary
conviction to (a) a fine of not less than $10,000 and not more than
$25,000; or (b) both a fine and imprisonment for a term not
exceeding 12 months.
If you are the subject of a tax search warrant or a criminal tax
investigation by the CRA, or if you are charged with an offence
under subsection 238(1) of the Income Tax Act, please contact our
tax law office for tax guidance from one of our top Canadian tax lawyers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.