Taxation and the Criminal Law

Transcription

1 CHAD J. BROWN Presentation Overview 1. Recent History of CRA s Criminal Investigation Program ( CIP ). 2. Offences and Penalties Overview. 3. Typical Offenders. 4. File Chronology. 5. Search Warrants. 6. Key Principles to Remember. 2

2 CRA s Criminal Investigation Program Federal government mandate to be tough on crime created the Public Prosecution Service of Canada ( PPSC ) in Report critical of CRA/PPSC performance: - Too focused on small cases - 25% of cases rejected due to poor investigations - Fines go unpaid - Only 16% of offenders incarcerated versus 81% in the USA 1200 convictions and 5000 audits in four years generated $428 million dollars. 3 CRA s Criminal Investigation Program Tax evasion cases have an abnormally high conviction rate. 98% of tax evasion charges prosecuted by the CRA in resulted in convictions. The CRA s conviction rate has never fallen below 94% in the past five years. -Canada Revenue Agency s Annual Report to Parliament 2006/2007 Impaired driving (79%), assaults/violence (52%) and property cases (65%). -Alberta Summit on Justice

3 Common Offences 239(1) of the Income Tax Act ( ITA ) or subsection 327(1) of the Excise Tax Act ( ETA ): Paragraph (a): making false or deceptive statements in a return. Paragraph (d): wilfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act. 5 Common Offences Income Tax Act Excise Tax Act Failure to file a return or failure to comply with an obligation 238(1) 326(1) Failure to make books and records available 238(2) 326(2) Court order for compliance 238(2) 326(2) False or deceptive statements 239(1)(a) 327(1)(a) Destruction of records 239(1)(b) 327(1)(b)(I) False entries 239(1)(c) 327(1)(b)(ii) Omission from records 239(1)(c) 327(1)(b)(ii) Wilful evasion 239(1)(d) 327(1)(c) False refund or rebate 239(1.1) 327(1)(d) Conspiracy 239(1)(e) 327(1)(e) Communicating information 239(2.2) 328 Failure to pay/collect/remit 329(1) General offence 329(2) Officers of corporations

4 Penalties On Conviction Crown proceeds summarily (less serious): - Fine of 50% to 200% of tax sought to be evaded ; OR. - Fine and Imprisonment for a term not exceeding 2 years. Crown proceeds by indictment (more serious): - Fine of 100% to 200% of tax sought to be evaded. - AND imprisonment for a term not exceeding 5 years. When does CRA proceed by indictment? 7 Other Relevant Provisions Limitation Periods: ITA 244(4)/ETA 332(4) provide a limitation on summary conviction offences of 8 years. No limitation period applicable to indictable offences. Minimum Sentences: ITA 243/ETA 331 state that the Court has no power to impose less than the minimum fine or imprisonment fixed by the Act. Vicarous Liability: ITA 242/ETA 330 provide for vicarious liability of officers, directors, and agents. Penalties: ITA 239(3)/ETA 327(3) penalties are in addition to fine, so long as they are assessed BEFORE the information is laid. 8

5 Other Sentencing Options In addition to the fine the PPSC/CRA will often demand: Probation, or A Conditional Sentence Order. 9 Types of Offenders OFFENDER A Successful business person with no prior criminal record. Sophisticated knowledge of business, accounting, and taxation matters. Begins to misrepresent facts to accounting advisors or, in the alternative, takes advantage of advisor s mistakes or assumptions. More deliberate action; electronic zappers, deletion of accounting entries, suppressing income by keeping funds in cash or depositing to unknown account, coding misrepresentations in GL. Views tax evasion as a victimless crime. 10

6 Types of Offenders OFFENDER B Successful small business person with no prior criminal record, or unrelated record. Extremely unsophisticated knowledge of accounting and taxation matters - believe they are sophisticated based upon success of business. Relies largely on accounting advisors to catch errors and make adjustments at year end to correct their mistakes. Significant errors occur throughout the year poor records keepers. Cheapskates won t pay for proper bookkeeping and/or accounting services needed to accurately prepare returns; As such, accounting advisors conduct no due diligence at all, and rely on info. provided. Misrepresentation in returns are more a function of perceived sophistication and unwillingness to pay for competent advice than any deliberate attempt to evade the payment of taxes. Clients blame accounting advisors; Accounting advisors blame clients as financial statements and returns are prepared on a Notice to Reader/Compilation basis. Accounting engagement agreements and management representation letters become key. 11 Chronology of a Tax Prosecution Audit by Verification and Enforcement Division - Obtains evidence of potential evasion by Taxpayer. Actus Reus (the guilty act): the act of committing the crime. Men Rea (the guilty mind): the intention to commit the offence. Must be proven beyond a reasonable doubt. - Much higher burden than civil tax appeals, in which the Minister must only meet the civil standard of balance of probabilities. - No assumptions in criminal matters. Each element of the offence must be proven beyond a reasonable doubt. - Note that the Taxpayer has NO charter protection during this stage. 12

7 Chronology of a Tax Prosecution T134 - Referral to Investigations - Verification and Enforcement Division refers matter to Special Investigations. - Taxpayer unaware of referral. - If not rejected, file is accepted for a preliminary investigation. - Upon preliminary review, file may be accepted for a full scale investigation. - This should happen within 60 days of referral. - Taxpayer s charter rights arguably apply upon the referral to CRA Special Investigations Unit. 13 Chronology of a Tax Prosecution Obtaining and Securing Evidence Search warrant (Section Criminal Code ( CC ), Section ITA, Section 290 ETA). Production orders (CC or ). Obtaining evidence seized by other law enforcement agencies (CC ). Informed voluntary consent. Surveillance. 14

8 Chronology of a Tax Prosecution Judicial Review of Solicitor and Client Privilege Claims. - Documents seized at Taxpayer s home or business. - Documents seized at Taxpayer s accounting advisors office. - Documents seized at Taxpayer s legal counsel. 15 Chronology of a Tax Prosecution Forensic Audit and Document Examination - CRA completes forensic audit of Target. - Where necessary forensic document examiners will analyze evidence. Computer Search and Evidence Recovery (CSER) Officers analyze digital evidence seized. Interviews of Target and Third Parties - Administrative Interviews. - Investigative Interviews. 16

9 Chronology of a Tax Prosecution Preparation of the Prosecution Report. Reassessment of Target(s), including penalties. Letter to Justice recommending charges be laid. Justice reviews the report and exercises prosecutorial discretion: - Purpose is to ensure justice is done, not simply obtain a conviction. Reasonable likelihood of conviction? Public interest to prosecute the offence? 17 Chronology of a Tax Prosecution If the PPSC decides to lay an information, the following then takes place: 1. Information is laid, and summons is issued and served upon the accused. 2. Accused appears and Crown enters election as to whether it will proceed by (a) summary conviction or (b) indictment. 3. If indictable: a) Accused would plea and elect mode of trial, and b) Preliminary inquiry may be set and heard. Subsequent to inquiry will usually be remanded for trial. 4. If summary conviction: a) Accused enters plea: guilty or not guilty. Scheduled for Trial. 5. The Crown will provide disclosure to the Defence (R. v. Stinchcombe). Very large files with electronic disclosure. 6. Matter will proceed to trial, which will result in: a) Acquittal, or b) Conviction and Sentencing. 18

10 CRA Audits Generally An authorized person (auditor) may enter any place where: Business is carried on Property is kept Books and Records are kept If a business premises is also a dwelling-house, the authorized person requires: Consent of the occupant; or, obtain a Search Warrant 19 Audits vs. Investigations Once the "criminal investigation" has begun, auditor cannot rely administrative audit powers (R. v. Jarvis). Individual Charter protections apply. Right to Remain Silent Freedom from Self Incrimination Right to be Free from Unreasonable Search and Seizure. Must obtain any information from accused by way of a search warrant. 20

11 What is a Search Warrant? A warrant is a judicial pre-authorization for a peace office or public officer to search a particular place for evidence relating to a criminal offence. The warrant will also allow the peace officer to seize any such evidence that may be found in that particular place. 21 How is a Search Warrant Obtained? In the tax context, a warrant may be obtained under one of three provisions: - section 487 of the CC; - section of the ITA; or - Section 290 of the ETA. It is the CRA s standard practice to obtain a warrant under the CC. 22

12 How a Search Warrant is Obtained? Under section 487 of the CCC, someone must swear an information to obtain [ITO] setting out reasonable grounds to believe that there is, in a particular building or place: - Anything that, there are reasonable grounds to believe, will afford evidence that an offence has been committed. 23 Executing a Search Warrant Section 487 of the CCC allows for a warrant to search any place set out in the information. In the tax context, the CRA will likely seek a warrant for any place where business and tax records are kept. - Usually attend the taxpayer s home, accountant s office, and business premises all on the same day. - These are highly intrusive. 24

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15 Executing a Search Warrant Once the search warrant has been issued by a judge, the CRA will normally attend at the place(s) set out in the warrant. - This will normally occur within a few days of the warrant being issued. - The officers from CRA Special Investigations will usually be accompanied by RCMP officers/city Police. 30

16 The RCMP Are At The Door? If the CRA and RCMP have obtained a warrant to search your office, there is little you can do to prevent the search. - It is a criminal offence to interfere with the execution of a search warrant - The only issue which may present itself during the search is whether documents are subject to solicitor and client privilege. These documents should be sealed for review by a judge. - Keep notes of how search is conducted. 31 Special Cases Searches of Law Offices Applicable Principles (Lavallee, Rackel & Heintz v. Canada, 2002 SCC 61). 1. No search warrant can be issued with regards to documents that are known to be protected by solicitor-client privilege. 2. It should be established that there is no other reasonable alternative to the search. 3. When allowing a law office to be searched, the issuing justice must be rigorously demanding so as to afford maximum protection of solicitor-client confidentiality 4. Generally, all documents in possession of a lawyer must be sealed before being examined or removed from the lawyer's possession. 5. The lawyer, client, or representative of the local Bar should be allowed to oversee the sealing and seizure of documents. 6. CRA must contact all potential privilege holders, who should then be given a reasonable opportunity to assert a claim of privilege and, if that claim is contested, to have the issue judicially decided. 7. The Attorney General may make submissions on the issue of privilege, but should not be permitted to inspect the documents beforehand. The prosecuting authority can only inspect the documents if and when it is determined by a judge that the documents are not privileged. 32

17 Law Office Searches Result: 1. Where sealed documents are found not to be privileged, they may be used in the normal course of the investigation. 2. Where documents are found to be privileged, they are to be returned immediately to the holder of the privilege, or to a person designated by the court. 33 Search Warrants Charter Analysis: - Section 8 Right to be free from unreasonable search and seizure. - Expectation of Privacy v. Law Enforcement - Warrants challenged in a voir dire at trial. - Burden is on the accused, on the balance of probabilities, to establish that The accused had an expectation of privacy. The search was not reasonable. 34

18 Search Warrants Does the accused have a reasonable expectation of privacy? How does the breach affect the accused s freedom or dignity Bodily integrity (blood, breath) - high Residence - high Business records low 35 Search Warrants Was the search conducted reasonable? - Is it authorized by law; Section 487 CCC - judicial predetermination based on reasonable grounds that: an offence has been committed, and the search will afford evidence of that offence. - The law itself is reasonable; Can challenge the provision itself. - The manner in which the search is carried out is reasonable. Manner in which the search was conducted breached the accused rights. 36

19 If so unreasonable... will evidence be excluded? R. v. Grant (2009 SCC) How serious was the conduct which led to the discovery of the evidence? Would the admission of the evidence bring the administration of justice into disrepute from the perspective of society's interest in respect for Charter rights (i.e. freedom from unreasonable search and seizure)? What is the effect of admitting the evidence on the public interest in having the case adjudicated on its merits? 37 Search Warrants: What to remember? Do not interfere with execution of the warrant. Provide reasonable access to records/evidence. Only issue to be addressed is privileged records. Identify those to searchers, and advise as to potential privilege claim. Do not agree to be interviewed as part of search, do not allow client to be interviewed. Privileged records should be sealed for judicial review. Remember that special rules pertain to law office searches. Call Law Society and, if necessary, retain counsel to seal records and address privilege claims. - Investigators cannot review records in law office searches. Consider taking contemporaneous notes of what takes place during search. Zealously protect privilege. 38

20 Generally: Things To Remember Once search warrants are executed or a T134 referral is made, the file becomes a criminal matter, and advice should be sought. Know your client s Charter rights. Understand distinction between Administrative Interviews and Investigatory Interviews. Legal obligation to provide information during audit. No obligation to speak to CRA Special Investigators conducting criminal investigatory interviews. You may have a duty to keep client information confidential unless compelled by law (search warrant or subpoena)? Get instructions from client and your own legal advice. Lawyers and accountants should protect clients right to remain silent and only provide information when (a) compelled by law or (b) after careful consultation with experienced counsel. Do NOT try and help your client by continuing to provide information and explanations. Information should only flow through criminal counsel. Lawyers and accountants should be ready for the execution of search warrants at any time. Have office procedures in place. 39 Proper Representation Average criminal lawyer cannot adequately advise clients on these cases. Do not understand basic accounting and tax principles. Cannot do a proper analysis of GL, accountants working papers, year end adjustments, tax returns, etc. Do not have the resources and expertise to conduct in-depth critical review of auditors/investigators working papers. 40

21 Proper Representation Properly representing tax offenders requires an understanding of: Criminal trial procedure and evidence. Application of the Charter to tax investigations. Understanding of regulatory context of tax audits which result in criminal investigations. Understanding of accounting and taxation issues, including the ability to review investigator s audit file with a critical eye from both a criminal and tax perspective. Tax Lawyers Criminal Lawyers Criminal Tax Lawyers 41