If you are involved in securities litigation, you know how important it is to distinguish between regulatory audit and penal investigation.
If the regulator is conducting an audit to ascertain whether a corporation or its officers comply with securities legislation, it may usually rely on broad investigative powers to obtain documents and information upon request.
However, if the dominant purpose of the investigation is to determine whether a penal offence has been committed, then the protection afforded by the Canadian Charter of Rights and Freedoms kicks in, including the right of every person to be secure against unreasonable search or seizure.
Unfortunately, it is not always easy to identify the regulator’s purpose and to distinguish between mere regulatory audit and full-fledged penal investigation, especially where the investigation starts as an audit but slowly morphs into a penal investigation.
In R. v. Jarvis,  3 SCR 757, the Supreme Court of Canada identified seven criteria to assist the Court in ascertaining whether an inquiry’s purpose is to administer and enforce the law or to investigate penal liability.
As with most legal tests, the application of those criteria to a specific set of facts may sometimes be challenging and it is useful in those circumstances to examine the relevant case law, especially case law emanating from a Court of Appeal.
This is why the recent decision of the Quebec Court of Appeal in BT Céramiques inc. c. Agence du revenu du Québec, 2020 QCCA 402 is of such great interest. In that case, all of the seven criteria were examined, first by the Court of Quebec and then by the Quebec Superior Court, before being reviewed and commented on by the Quebec Court of Appeal.
The relevant facts
The Appellants were charged with various tax offences. They presented a motion to have some of the evidence filed against them excluded from the Court record on the grounds that it had been obtained in violation of the Charter.
In order to decide that motion, the Court applied the seven criteria test developed by the Supreme Court of Canada in Jarvis to determine whether the evidence in dispute had been obtained for purposes relating to the administration and enforcement of tax legislation or whether it had been obtained in furtherance of a penal investigation.
The Court of Québec first held that the Revenue Agency had « crossed the Rubicon » and that the evidence had been obtained for various purposes including the determination the Appellants’ penal liability. The Superior Court, however, reversed that decision and, applying the same test as the Court of Quebec, held that the Rubicon had in fact never been crossed such that the evidence should not have been excluded.
The Court of Appeal’s decision
The Court of Appeal granted the appeal and held that the Superior Court should not have reversed the first judge’s decision given the absence of any error justifying its intervention. In making that determination, the Court of Appeal reviewed the analysis performed by each of the Courts below regarding each of the seven applicable criteria.
Obviously, this short article does not aim at providing an exhaustive review of the Court of Appeal’s 44-page decision. The objective of the article is merely to highlight some of its most interesting aspects.
First criteria : Did authorities have reasonable grounds to lay charges or could a decision have been made to proceed with a criminal investigation ?
According to the Court of Appeal, the mere fact that a person has the authority to launch a penal investigation does not mean that this person “could” have decided to proceed with a criminal or penal investigation within the meaning of the Supreme Court decision in Jarvis. The Court of Appeal acknowledges that this person enjoys a certain level of discretion in deciding whether a penal investigation should be conducted.
The Court of Appeal also mentioned that it was not ideal for the same person to head both regulatory audits and penal investigations. However, this fact alone is not, in and of itself, sufficient to conclude that authorities could have made a decision to proceed with a penal investigation.
Second criteria : Was the general conduct of the authorities consistent with a criminal investigation ?
The Court of Appeal confirmed that a specific piece of evidence may serve both a regulatory audit and a penal investigation. Therefore, the fact that a document is ultimately filed in support of penal proceedings does not necessarily mean that it had been obtained for the purposes of penal prosecution.
Third criteria : Did the auditor transfer his or her file to the investigators ?
The Court of Appeal confirmed the Court of Quebec’s findings that the evidence supporting the penal proceedings was essentially the auditor’s file, with the penal investigator merely acting as an affiant.
Fourth and fifth criteria : Was the auditor’s conduct such that he or she was acting as an agent for the investigators ? Does it appear that the investigators intended to use the auditor as their agent ?
The Court of Appeal dealt with the fourth and fifth criteria together. The decision of the Court of Appeal does not really expand on the issue of whether the auditor was acting on behalf of the penal investigator. The Court merely confirmed the view expressed by the Court of Quebec that the Revenue Agency conducted a verification for various purposes, including for the purpose of obtaining evidence supporting the penal charges, without any consideration for the Appellants’ fundamental rights.
Sixth criteria : Is the evidence relevant to taxpayer liability generally or only to penal liability ?
The Court of Appeal confirmed the finding of the Court of Quebec that the investigation was directed at multiple concerns, some of which were clearly of a penal nature.
Seventh criteria : Do other circumstances or factors suggest that an audit became a criminal investigation ?
The Court of Appeal noted that the person in charge of the investigative process insisted that the investigation be kept a secret within the Agency. According to the Court of Appeal, this was indicative of the fact that the dominant purpose of the investigation was actually of a penal nature.
The Court of Appeal’s decision is a reminder of the importance of the factual context upon which the seven criteria test developed by the Supreme Court in Jarvis is applied.
It also confirms that where a single investigation serves multiple purposes, including obtaining evidentiary support for penal charges, there is a risk that the Rubicon will be crossed, that the evidence will be considered to have been obtained in violation of the Charter and be excluded from the record.