Published: December 31, 2020
Introduction – Tax Search Warrants & Seizures
When investigating suspected cases of tax evasion, the Canada Revenue Agency typically relies on search warrants as part of the evidence-gathering process. A search warrant allows the Canada Revenue Agency to enter a taxpayer’s premises (and that of his accountants), search for anything that evidences the commission of a tax-related offence, and seize that potential evidence, which may include computers, laptops, and external hard drives.
This article discusses the CRA’s powers to search a taxpayer’s premises and seize purported evidence of a tax-related offence. After providing tax guidance as to the CRA’s search-and-seizure powers, this article offers pro tax tips.
CRA Tax Investigation Powers: Distinguishing Tax-Audit Powers from Criminal-Investigation Powers
When investigating suspected criminal offences—like tax evasion—the Canada Revenue Agency must obtain a search warrant to gather evidence. The CRA cannot rely on its normal tax audit and information-gathering powers, such as those found in sections 231.1 and 231.2 of Canada’s Income Tax Act and in sections 288 and 289 of Canada’s Excise Tax Act.
These sections permit the CRA to do any of the following:
- inspect, audit, or examine any document of the taxpayer;
- examine the property of the taxpayer or any other person;
- inspect, audit, or examine any document of any other person;
- enter any premises to examine documents or property; and
- require any person to provide any information or document.
But the CRA can only use its tax-audit powers under the above-listed sections during civil tax audits or verifications; it cannot use these powers when pursuing a criminal investigation or considering prosecution for tax evasion.
This is because, when the Canada Revenue Agency’s enquiry shifts from a civil tax audit to a criminal investigation, it will engage the protections granted by the Canadian Charter of Rights and Freedoms (Constitution Act, 1982). The Charter affords everyone in Canada with various protections when faced with criminal prosecution, including tax-fraud prosecution. For example, section 8 of the Charter provides everyone with “the right to be secure against unreasonable search and seizure.” Section 13 of the Charter protects a witness from self-incrimination:
A witness who testifies in any proceedings has the right not to have any incriminating evidence so given used to incriminate that witness in any other proceedings, except in a prosecution for perjury or for the giving of contradictory evidence.
As a result, to pursue a criminal investigation, the Canada Revenue Agency must obtain a search warrant to gather evidence. The Supreme Court of Canada analysed this very issue in R v Jarvis (2002 SCC 73):
When, in light of all relevant circumstances, it is apparent that [Canada Revenue Agency] officials are not engaged in the verification of tax liability, but are engaged in the determination of penal liability under [the tax-evasion provisions], the adversarial relationship between the state and the individual exists. As a result, Charter protections are engaged.
When this is the case, investigators must provide the taxpayer with a proper warning. The powers of compulsion in ss. 231.1(1) and 231.2(1) are not available, and search warrants are required in order to further the investigation.
The Income Tax Act and the Excise Tax Act each contain provisions governing the CRA’s power to obtain and execute a search warrant. Yet the Canada Revenue Agency will typically obtain a search warrant under section 487 of Canada’s Criminal Code.
CRA Search Warrants & Seizures under Section 231.3 of the Income Tax Act and under Section 290 of the Excise Tax Act
Section 231.3 of Income Tax Act contains the provisions governing the Canada Revenue Agency’s ability to obtain and execute a search warrant. Similar rules appear in section 290 of the Excise Tax Act. This article will refer to the rules appearing in the Income Tax Act.
To obtain a search warrant under section 231.1 of the Income Tax Act, the Canada Revenue Agency makes an ex parte application to a superior-court judge. (An ex parte application is one that doesn’t require notice to, or the involvement of, the other party—in this case, the taxpayer being investigated.) The CRA’s application must be supported by information establishing the facts upon which the application is based, and this information must be given on oath.
The judge may issue the search warrant if he or she is satisfied that there are reasonable grounds to believe all of the following:
- an offence under the Income Tax Act (or the Excise Tax Act) has been committed;
- a document or thing that may afford evidence of the offence is likely to be found; and
- the place specified in the application is likely to contain the document or thing.
The search warrant authorizes a named person to enter a specified place, search for the document or thing relating to the alleged offence, and seize that document or thing. The seized items must be either reported to a judge of the court that issued the search warrant or brought before a judge of the court that issued the search warrant.
The search warrant itself must (i) refer to the specific tax-related offence for which it was issued, (ii) name the person alleged to have committed that offence, and (iii) identify the place to be searched. It must also be “reasonably specific” about the documents and items that are subject to search and seizure.
Under subsection 231.3(5), when executing the search warrant, the Canada Revenue Agency may seize not only the items listed in the search warrant but also “any other document or thing that the [CRA] believes on reasonable grounds affords evidence of the commission of” a tax-related offence. This rule allows the CRA to seize any material sitting in plain view at the time of the search—e.g., computers, laptops, and external hard drives. (Granted, in the tax context, the search warrant itself will very likely contain a comprehensive list of any device capable of storing electronic documents. So, when executing a tax search warrant, the CRA probably won’t need to rely on the plain-view rule to seize a taxpayer’s computers, laptops, external hard drives, SIM cards, flash drives, USB sticks, CDs, DVDs, etc.)
Subsections 231.3(6) and 231.3(7) govern the retention or return of the things seized by the Canada Revenue Agency. Subsection 231.3(6) requires the judge to order that the CRA retain the seized items unless the CRA decides to waive retention and return the seized items. But a judge may order that the Canada Revenue Agency return any seized item if the judge is satisfied that the document or thing (i) won’t be required for an investigation or a criminal proceeding or (ii) wasn’t seized in accordance with the search warrant or with section 231.3. Such return order may stem from the judge’s own motion or from a summary application by a person “with an interest in the [seized] document or thing.” In other words, the taxpayer may apply to have any seized item returned on the basis that (i) the seized item won’t be required for an investigation or a criminal proceeding or (ii) the seized item wasn’t seized in accordance with the search warrant or with section 231.3. If a taxpayer intends to make such an application, the taxpayer must give three days’ notice to the Deputy Attorney General of Canada.
CRA Search Warrants & Seizures under Section 487 of the Criminal Code
Although the Income Tax Act and the Excise Tax Act each contain provisions allowing the CRA to obtain a search warrant, the CRA will typically obtain a search warrant under section 487 of Canada’s Criminal Code. This is because it allows the Canada Revenue Agency to use a single information (formal charging document) to allege offences under all three acts—that is, the Criminal Code, the Income Tax Act, and the Excise Tax Act. In addition, to obtain a search warrant under section 487 of the Criminal Code, the CRA need only apply to a justice of the peace or a provincial-court judge. By contrast, only a superior-court judge may issue a search warrant under section 231.3 of Income Tax Act and section 290 of the Excise Tax Act.
Section 487 of the Criminal Code contains procedural safeguards that are substantially similar to those in section 231.3 of Income Tax Act and section 290 of the Excise Tax Act. For example, the CRA’s application must be supported by information establishing the facts upon which the application is based, and this information must be given on oath. And the issuing judge or justice of the peace must be satisfied that there are reasonable grounds to believe that an offence has been committed, that a search will likely lead to a document or thing serving as evidence of the offence, and that the place specified in the application is likely to contain the document or thing.
CRA Procedure during Tax Search & Seizures: Executing the Search Warrant
The Canada Revenue Agency will generally seek a warrant to search any premises where one might expect to find the business and tax records of the taxpayer under investigation. This means that the CRA will typically acquire a search warrant allowing it to search not only the taxpayer’s home and place of business, but also the office of the taxpayer’s accountant.
When executing the search warrant, agents from the CRA’s Criminal Investigations Division will attend each premises listed in the warrant, serve a copy of the warrant on the occupant, and conduct the tax search and seizure. The CRA agents will be accompanied by local police or by police officers from the Royal Canadian Mounted Police (RCMP). If the search warrant permits a search of multiple premises—e.g., the taxpayer’s home, the taxpayer’s business, and the accountant’s office—the CRA and police will usually hit all locations at the same time.
Unsurprisingly, the search itself is highly intrusive. The CRA has a great deal of discretion in how it conducts the search, and, for the most part, CRA agents may search—and take photographs of—any area within the place specified on the warrant. It’s also a criminal offence to interfere with the execution of a search warrant.
After completing the search, the Canada Revenue Agency will seize any potential evidence, including devices capable of storing electronic documents, such as the taxpayer’s computers, laptops, external hard drives, SIM cards, flash drives, USB sticks, CDs, DVDs, etc. After seizing electronic-storage devices, the CRA may then extract and copy any information stored on the device.
Pro Tax Tips – Solicitor-Client Privilege & Protecting Your Rights (and Records) During CRA Search Warrants & Seizures for Tax Investigations
A CRA tax search and seizure is highly intrusive, and taxpayers can face criminal liability if they attempt to interfere with CRA tax investigators who are executing a search warrant. As a practical matter, however, a tax search and seizure can leave a taxpayer without his or her important records for a lengthy period of time. The CRA will typically retain seized records for several months before returning them. Under subsection 231.3(8) of the Income Tax Act and subsection 290(8) of the Excise Tax Act, a taxpayer has the right to obtain one copy of each seized document at the CRA’s expense. Yet this right is “subject to such reasonable conditions as may be imposed by” the CRA. So, if you believe that you could be at risk of a search warrant, you should use offsite or cloud storage to back up your documents and computer files.
The Canada Revenue Agency cannot seize documents subject to solicitor-client privilege. In general terms, solicitor-client privilege is a person’s right to refuse to disclose a communication that the person had with his or her lawyer in professional confidence.
Section 232 of the Income Tax Act sets out a procedure for claiming solicitor-client privilege when the CRA attempts to seize documents under a search warrant. But this procedure likely fails to pass constitutional scrutiny. In Lavallee, et al. v. Canada,  3 SCR 209, 2002 SCC 61, the Supreme Court of Canada examined a similar procedure in section 488.1 of the Criminal Code. The Court concluded that the Criminal Code’s procedure for claiming solicitor-client privilege had infringed section 8 of the Charter for the following reasons:
- the procedure resulted in a loss of privilege if the lawyer failed to act;
- it required the naming of the client for whom privilege was claimed;
- it didn’t require that any notice be given to the client;
- it came with strict time limits;
- it was absent any discretion on the part of the judge in determining whether privilege applied; and
- it raised the possibility that the Attorney General could access the seized material before a judicial determination.
Of the six problems that the Court identified in section 488.1, the procedure in section 232 suffers from the first five. As a result, if challenged, the Income Tax Act’s onerous procedures for claiming privilege will likely be found unconstitutional. If the CRA has executed a search warrant on your premises, consult one of our experienced Canadian tax lawyers for tax guidance.
In any event, your communications with an accountant remain unprotected, which typically means that, when the Canada Revenue Agency executes a search warrant at a taxpayer’s premises, the CRA will simultaneously execute a search warrant at the office of the taxpayer’s accountant. So, if you seek tax guidance but want to keep that information away from the CRA, you should approach a Canadian tax lawyer first. If an accountant is needed, your Canadian tax lawyer can retain the accountant on your behalf and extend the privilege.
In addition, you may qualify for relief under the CRA’s Voluntary Disclosures Program (VDP). If your VDP application qualifies, the CRA will renounce criminal prosecution and waive gross-negligence penalties (and may reduce interest). A voluntary-disclosure application is time-sensitive, however. The CRA’s Voluntary Disclosures Program will reject an application—and thus deny any relief—unless the application is “voluntary.” This essentially means that the VDP must receive your voluntary-disclosure application before the CRA contacts you about the non-compliance you sought to disclose. Our experienced Canadian tax lawyers have assisted numerous Canadian taxpayers with the CRA’s Voluntary Disclosures Program. We can carefully plan and promptly prepare your voluntary-disclosure application. A properly prepared disclosure application not only increases the odds that the CRA will accept your disclosure but also lays the groundwork for a judicial-review application to the Federal Court should the CRA unfairly deny your disclosure.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."