SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CRIMJ(F) 3431/09
DATE: 20130201

RE: HER MAJESTY THE QUEEN v. DEBORAH DIECKMANN AND GEORGE SALMON

BEFORE: Baltman J.

COUNSEL:
X. Proestos for the Crown
H. Epstein for Ms. Dieckmann
E. Brown for Mr. Salmon

HEARD: January 10 and 15, 2013

Ruling on Crown motion to dismiss “Jarvis” application

Overview

[1] The applicants are charged with fraud. They are alleged to have operated a number of businesses which stole several million dollars from the federal government, in the way of “source deductions.” According to the Crown, the applicants carried on a seemingly legitimate business providing payroll services to various employers. However, instead of remitting amounts collected to Canada Revenue Agency (CRA), they allegedly converted them to their own use.

[2] The Crown alleges that the applicants attempted to conceal their identities as the real operators of these businesses by enlisting dozens of unwitting dupes: family members, impecunious and unsophisticated nominee directors, and misguided professionals.

[3] The applicants seek to challenge the admissibility of a wide range of evidence based on allegations that the CRA abused its audit function by gathering evidence for a criminal investigation under guise of exercising its civil audit powers; this is commonly referred to as a “Jarvis” application, based on the Supreme Court of Canada’s leading decision in R. v. Jarvis, 2002 SCC 73, [2002] S.C.J. No. 76. The applicants characterized the alleged breaches as violating sections 7 and 8 of the Charter and seek a stay of proceedings or, in the alternative, that all the evidence recovered be excluded under s. 24 of the Charter and broad abuse of process principles.

[4] However, in advance of this application being heard on its merits, the Crown sought to have it dismissed summarily, on two bases: 1) that the applicants lack standing to launch the application, and 2) even if they have standing, the application has no reasonable prospect of success because there is no evidence to prove the CRA abused its audit powers.

[5] Rule 34.02 of the Criminal Proceedings Rules provides that the presiding judge may conduct a “preliminary assessment” of the merits of any pre-trial application on the basis of the materials filed, and, if satisfied that “there is no reasonable prospect that the application could succeed”, may dismiss it without “further hearing or inquiry”: see also R. v. Kutynec, 1992 7751 (ON CA), [1992] O.J. No. 347 (C.A.) paras. 31-35.

[6] On January 15, 2013, after hearing submissions from both parties, I ruled in favour of the Crown’s motion and dismissed the application summarily, with written reasons to follow. My reasons are set out below.

[7] This was one of several pre-trial motions before me. The trial is scheduled to begin, with a jury, on March 18th, 2013. The original indictment contained six defendants; two have pled guilty and two others, Caroline Hartman and Thomas Davis, have passed away. It is anticipated that the trial of the remaining two defendants will take 5-6 months. A previous trial before Corbett J. ended in a mistrial when he recused himself for a conflict of interest, after having presided over various pre-trial motions and eight days of evidence before a jury.

[8] At the point where Corbett J. recused himself he had already heard – and granted - an identical motion by the Crown to have this same application dismissed summarily. When I was appointed as the new trial judge, I was asked to determine whether his ruling should stand or the matter should be re-litigated. I decided the matter needed to be re-heard. In the course of hearing submissions it was necessary for me to review Corbett J.’s previous ruling and the brief reasons that accompanied it. While I have reached the same conclusion as he, in view of my ruling that it was necessary to re-litigate the pre-trial motions I have assessed this motion on its own merits, independently of any opinions he may have previously expressed.

Factual Background

[9] Except where indicated, the following facts are largely undisputed.

[10] At some point in 2003 the CRA became aware that a company known as Trafalgar Industries Ltd., operating as Canada Custom Packaging (CCP), had failed to remit source deductions. Source deductions include income tax, Canada Pension Plan and Employment Insurance contributions. Employers are required to withhold those funds from their employees and remit them to the federal government along with the employer’s contribution.

[11] Once the problem was identified CRA trust examiners contacted Jerry Nelson, the CEO of Trafalgar. He explained to the CRA that he had been approached by Mr. Davis and other individuals who offered to provide payroll and human resources services to CCP. Eventually, through their intervention, he entered into a contract with “Paladiem”, who would perform all payroll services, including remitting source deductions paid by Trafalgar. Nelson understood that an individual named Deborah Dieckmann would be doing the “leg work” for his payroll needs but did not recall ever meeting her.

[12] Mr. Nelson was surprised when the CRA contacted him in 2003 because his previous payment record with them was unblemished. He provided the CRA with the name “Caroline Hartman”, who had been his contact person at Paladiem. He also produced invoices proving he had paid Paladiem the amounts owing for source deductions and the corresponding cancelled cheques. Mr. Nelson alerted Ms. Hartman to the CRA audit. She assured him that the remittances had been made and hired an accountant, Darryl Hayashi, to handle the audit.

[13] Ms. Sujatta Deengar, a senior trust examiner with the CRA, then attempted to locate the money. She learned that Paladiem had outsourced to “Russell Staffing Incorporated” and contacted Russell’s accountant, Wayne Stubbington. Ms. Deengar met twice with Mr. Stubbington and followed various other leads, to no avail.

[14] By early 2005 Ms. Deengar had reached the following impression: Mr. Nelson had outsourced to Paladiem; Paladiem then outsourced to Russell Staffing; Russell Staffing outsourced to Deborah Dieckmann; Dieckmann, through an entity known as Unique Ventures, outsourced to an outfit called Time+Plus and Time+Plus was paying CCP’s employees. However, Ms. Deengar still had not figured out where the source deductions went. At that point CCP (Mr. Nelson’s company) owed the CRA between $800,000 and $1,000,000.

[15] Eventually Ms. Deengar set up a meeting with Roger Oke, the individual listed as a director of Russell Staffing. The meeting took place on Feb 24, 2005, and was attended by Ms. Deengar and two of her colleagues (Sandra Osadec and Anna Gatti), along with Mr. Oke, Mr. Stubbington, and Peter Silverberg, the counsel for Russell Staffing. Ms. Deengar quickly formed the impression that despite being listed as the director of Russell Staffing, Mr. Oke did not know anything about his company, or about Paladiem, or about many of the people involved. Neither Mr. Stubbington nor Mr. Silverberg was able to fill in the blanks. The meeting ended with Mr. Oke excusing himself to go to the washroom and not returning.

[16] In March 2005 Ms. Deengar and Ms. Gatti issued various information requests to several individuals, including Ms. Dieckmann and her company, Unique Ventures. On May 5, 2005, Ms. Gatti officially referred the file to the Investigations branch of CRA. In February 2006 lead investigator Chris Zolis swore an Information to Obtain (ITO) in support of an application to obtain ten search warrants, all of which were issued by the presiding J.P. On March 1, 2006, all ten warrants were executed simultaneously at the various locations.

[17] The applicants seek to have the Court exclude “all evidence seized pursuant to the Search Warrants, Production Orders, and the statement of Roger Oke”. It is undisputed that one search warrant was executed at Ms. Dieckmann’s residence and one at the business premises of Unique Ventures. One other was executed at Davis’ residence. The remaining search warrants were executed at third parties’ residences and businesses. Production orders were granted in respect of third parties’ banking records.

[18] The applicants argue the search warrants violated section 8 of the Charter and seek, as a remedy, that the charges be stayed or in the alternative, that all the evidence recovered be excluded under s. 24.

[19] Although both Ms. Dieckmann and Mr. Salmon seek to benefit from this application, it is being pursued primarily by Ms. Dieckmann, and her counsel advanced most of the submissions on behalf of the defence.

The Issues

[20] Section 8 of the Charter provides that “everyone has the right to be secure against unreasonable search or seizure.”

[21] Once it is established that a search or a seizure has actually occurred, there are two distinct questions which must be answered in any s.8 challenge. The first is whether the accused had a reasonable expectation of privacy. This is often referred to as “standing” to assert a s. 8 claim. The second is whether the search was an unreasonable intrusion on that right to privacy.

[22] In this case both those issues are before me: first, the Crown maintains the applicants do not have standing to challenge the reasonableness of any searches, apart from those conducted in Ms. Dieckmann’s home, office, and bank account. Moreover, asserts the Crown, even those search warrants were based on information which Ms. Dieckmann has no standing to challenge.

[23] Second, the Crown argues that even if the applicants have standing, the application should be summarily dismissed because it has no reasonable prospect of success, as there is no evidence to support the applicants’ assertion that the CRA abused its audit powers. Consequently, they cannot demonstrate that the search was unreasonable.

Issue #1: Do the Applicants have standing?

A. Legal Framework

[24] The applicants are only entitled to challenge the propriety of a police search or seizure if the state conduct interfered with their privacy interests. The onus is on the applicant to establish on the balance of probabilities that they have standing. The governing principles were set out by Cory, J. in the 1996 decision of the Supreme Court of Canada in R. v. Edwards (1996), 1996 255 (SCC), 104 C.C.C.(3d)136. After emphasizing that a reasonable expectation of privacy is to be determined on the basis of the totality of the circumstances, Cory, J. identified the following factors as relevant to that assessment:

• Presence at the time of the search
• Possession or control of the property or place searched
• Ownership of the property or place
• Historical use of the property
• The ability to regulate access, including the right to admit or exclude others from the place
• The existence of a subjective expectation of privacy; and
• The objective reasonableness of the expectation

B. Submissions and Analysis

[25] In this case the Crown concedes that Ms. Dieckmann has standing to challenge any of the evidence seized from her home, office or bank account, as she obviously has a reasonable expectation of privacy in those locations. The dispute arises over the remaining evidence, namely 1) production orders executed in respect of third parties’ banking information; 2) search warrants executed at third parties’ homes and businesses; and 3) the “statement” made by Roger Oke to the CRA auditors. The Crown asserts that even if those searches or statements resulted from a Jarvis breach (which it denies), Ms. Dieckmann has no standing to challenge them because none of her personal rights were affected.

[26] In particular, argues the Crown, Ms. Dieckmann has no basis in law to challenge searches of third parties’ homes and businesses. Nor does she have any reasonable expectation of privacy in the banking records of corporations for which she was not a director. And finally, at no point was she compelled to incriminate herself.

[27] Ms. Dieckmann argues that because that evidence was obtained through an “abuse of process”, she has the right to challenge it. The defence maintains there are “various prongs” to this abuse, consisting of not only a “Jarvis” violation but also the wrongful seizure of documents protected by solicitor and client privilege (the “Bruce Power” argument, based on R. v. Bruce Power Inc. et al 2009 ONCA 573), and a failure to abide by the doctrine of issue estoppel.

[28] This application was originally framed as a “Jarvis” application. Its focus has always been the alleged misuse of audit powers after the predominant purpose had become a criminal investigation. While the defendants have also filed materials referring to other alleged abuses, including breach of solicitor client privilege and issue estoppel, those allegations, assuming there is any foundation to them, have nothing to do with the alleged misuse of administrative compulsion. Nor should the applicants be permitted to turn a flawed Jarvis application into a viable “abuse of process” motion by throwing in other “prongs of abuse”. While the schedule for these pre-trial motions agreed to by the parties refers to “Bruce Power” being addressed during submissions on the Jarvis application, one has nothing to do with the other. It is useful to keep in mind the following commentary by McLachlin C.J. in R. v. Mahalingan 2008 SCC 63, [2008] 3 S.C.R. 316, at para. 42:

Abuse of process is a broad, somewhat vague concept, that varies with the eye of the beholder. Traditionally, it has been reserved for obviously egregious abuses of the Crown power, and this Court has said that successful reliance upon the doctrine will be extremely rare – only in “a process tainted to such a degree that it amounts to one of the clearest of cases”: Blencoe v. British Columbia (Human Rights Commission), 2000 SCC 44, [2000] 2 S.C.R. 307, at para. 120

[29] I turn then to what is properly the subject of this Jarvis application, namely whether any of the search warrants arose from the auditors exceeding their authority. The essence of Ms. Dieckmann’s argument in this regard appears to be that once it is established that the predominant purpose of the investigation was criminal rather than civil, and that she was one of the targets of the investigation, then any evidence seized thereafter is automatically a Charter violation.

[30] Importantly, Ms. Dieckmann seeks to exclude all the evidence seized in this case – not just from her own home, office, and bank account, but also any evidence seized from other search locations and other people. In effect, beyond her own places, she is asserting standing in three discrete ways: 1) production orders executed in respect of third parties’ banking information; 2) search warrants executed at third parties’ homes and businesses; and 3) Roger Oke’s “statement” to the CRA auditors.

[31] As the Supreme Court of Canada has consistently stated, an accused person must demonstrate a violation of her own rights in order to obtain a remedy under s. 24 of the Charter; when the alleged breach falls under s. 8 of the Charter, it is only where she has a personal expectation of privacy that the court may proceed to the question of whether a breach occurred.

[32] Thus in Edwards the Court ruled that the accused cannot challenge the admission of evidence obtained as a result of the search of a third person’s premises. In that case the accused was arrested for a traffic violation that was admittedly a ruse to investigate him for suspected drug trafficking. The police were suspicious that the accused stored his drugs at his girlfriend’s apartment, but they did not have enough evidence to obtain a search warrant. While the accused was in custody the police tricked his girlfriend into letting them search her apartment, where they found drugs.

[33] Significantly, the Supreme Court emphasized that the decision as to whether an accused had a reasonable expectation of privacy “must be made without reference to the conduct of the police during the impugned search” (para. 33). Although the police there clearly violated various Charter provisions, none of those violations related to a right asserted by Edwards.

[34] Similarly, in R. v. Belnavis, 1997 320 (SCC), [1997] 3 S.C.R. 341 the Court held that a passenger in a car had no expectation of privacy, either in relation to the vehicle or the items seized from inside it.

[35] Nor does being a target of the search, on its own, give an accused standing to launch a Charter argument. In R. v. Pugliese, 1992 2781 (ON CA), [1992] O.J. No. 450 (C.A.) the accused attempted to exclude evidence seized during the search of the apartment of a third party on the basis that as the owner of the building and one of the targets of the search he had a sufficient interest to engage his right under s. 8 to be secure from an unreasonable search and seizure. The Court held that because the accused could not demonstrate he had a reasonable expectation of privacy in relation to the third party’s apartment, he had no standing to bring a s. 8 motion.

[36] In Edwards the Supreme Court approved of Pugliese and specifically rejected the target theory, noting that the theory has been rejected in American courts. It observed that the adaptation of the automatic standing rule “would seem to fly in the face” of the wording of s. 24 of the Charter, which provides that “anyone whose rights or freedoms….have been infringed or denied may apply…to obtain such remedy”. The court concluded that the reasonable expectation of privacy concept has worked well in Canada because it is “reasonable, flexible and viable”. (paras. 52-56)

[37] In this case Ms. Dieckmann cannot demonstrate any personal privacy interest in any of the three sources listed above. In fact during submissions her lawyer ultimately conceded that Ms. Dieckmann had no expectation of privacy in the homes or businesses of the third parties that were searched, or in any utterances made by Mr. Oke, and that at no point was her right against self-incrimination breached.

[38] Ms. Dieckmann argues, however, that because those other searches were improper (being part of a criminal investigation disguised as an audit), and the information derived from them was then used to obtain a search warrant on her places, her rights were violated as well. This is distinct from the target approach discussed above, and appears to be more like a challenge to “the fruits of the poisonous tree”.

[39] However this position also ignores the prevailing law. In R. v. Chang (2003), 2003 29135 (ON CA), 173 C.C.C. (3d) 397 (C.A.) the Court of Appeal upheld the conviction by Molloy J. of the accused for conspiracy to assist an illegal immigration scheme. The conviction was based in large part on a wiretap, issued in Ontario, in which the accused, who worked as an immigration officer at Pearson, agreed to facilitate a women’s entry into Canada without making the necessary inquiries. It emerged at trial that the Ontario wiretap authorization was based on information gathered under a Quebec authorization, and that the latter authorization was in fact unlawful. On that basis the accused argued that without the information obtained from the illegal Quebec wiretap, there would have been no evidentiary basis for the issuance of the Ontario wiretap, and therefore any evidence gained thereby should be excluded.

[40] The Court of Appeal noted that none of Chang’s communications were intercepted by wiretaps authorized in Quebec; they were all contained in intercepts authorized in Ontario. The Court held that once an Ontario judge is satisfied that the Quebec judge had jurisdiction to make the original order, and the steps that were taken to execute it were lawful, then that is the end of the Ontario court’s inquiry (para. 40):

We agree that the appellants do not have standing to challenge the sufficiency of the evidence upon which the Quebec judge made his order. We also agree with the trial judge that to permit such a challenge would not appear to have any principled or logical basis.

[41] Ms. Dieckmann makes a similar argument here, saying that under the guise of a civil audit the police improperly gathered evidence from other sources (Nelson, Oke, the business and banking records of third parties, etc.), and then used that information to obtain a warrant to search her home, office and bank account.

[42] Significantly, Ms. Dieckmann does not suggest that any of the information contained in the Informations to Obtain (that formed the basis of the search warrants on her places) was false or misleading, or that it was obtained in breach of her personal rights. Nor can she say that the principle against self-incrimination has been violated, because she did not incriminate herself. Ms. Dieckmann never met with, nor spoke to, the trust examiners. The entirety of her contact with the CRA trust examiner is contained in her response to a drop letter dated March 29, 2005, in which she denied any meaningful connection to the entities under investigation. In short, she cannot explain how her Charter protected rights were infringed.

[43] I would add, parenthetically, that it is ironic that the applicants take great pains to insulate themselves from the entities that were under audit, including Oke himself, but yet for the purposes of this motion seek to bootstrap themselves into the position of Roger Oke, Russell Staffing Inc., and the other target corporations. In any case, the facts demonstrate no nexus between the information obtained by the CRA before they searched the applicants’ places and any rights possessed by the applicants. It is important to recall that Jarvis does not preclude the introduction of incriminating evidence; it precludes self-incrimination.

[44] In R. v. Wilder, 2003 BCSC 859, another case involving alleged violations of the Income Tax Act, Romilly J. dealt with evidence obtained from third parties after the predominant purpose of the CRA’s search had allegedly become criminal in nature. The accused attempted to rely on Charter violations in respect of third parties. Justice Romilly concluded the accused had no standing to rely on alleged violations of the rights of third parties. He also concluded that the accused could not rely on s. 7 of the Charter to challenge corporate records that had been obtained by CRA, as he had not been compelled personally to produce anything and the records that were recovered were not of a personal nature (paras. 122-23; 131-34; 174-92).

Conclusion

[45] For all those reasons I conclude the applicants do not have standing to challenge any of the impugned evidence. That result makes it unnecessary to consider the question of whether the application should be dismissed summarily on the other ground advanced, namely there is no evidence to prove the CRA abused its audit powers. However, in case I am incorrect in my conclusion on the issue of standing, I will proceed to consider whether there is any merit to the substantive aspect of the application.

Issue #2: Does the Application have any reasonable prospect of success?

[46] The applicants maintain that the trust examiners violated their Charter rights by using their audit powers to gather evidence for a criminal investigation. They contend that although the trust examiners strongly suspected they were dealing with a fraud, they pursued the investigation as if it were simply an audit.

[47] In Jarvis the Supreme Court of Canada drew a distinction between the audit and investigative powers under the Income Tax Act. Once the “predominant purpose” of an inquiry is the determination of penal liability, all the usual Charter protections apply. Importantly, Jarvis makes it clear that even where an auditor suspects criminal activity, use of civil powers of compulsion amounts to a breach only where the predominant purpose of their use is to collect evidence for a criminal prosecution. The Court held that in order to determine when an audit has crossed the line and become a criminal investigation, one must consider a number of factors, including:

a) Did authorities have reasonable grounds to lay charges or could a decision have been made to proceed with a criminal investigation?

b) Was the general conduct of the authorities consistent with a criminal investigation?

c) Did the auditor transfer his or her file to the investigators?

d) Was the auditor’s conduct such that he or she was acting as an agent for the investigators?

e) Does it appear that the investigators intended to use the auditor as their agent?

f) Is the evidence relevant to taxpayer liability generally or only to penal liability? and,

g) Do other circumstances or factors suggest that an audit became a criminal investigation?

[48] In this case, the trust examiners testified at the preliminary hearing, and explained that they were solely motivated by legitimate civil purposes, namely to locate the missing source deductions and arrive at a collections arrangement. Importantly, there was no reliable evidence to contradict them.

[49] Nor do the applicants intend to call any evidence on this application that is likely to show anything different. Although they propose to call additional witnesses on this motion, the defence advises their evidence will be consistent with the evidence given by the auditors at the preliminary hearing – who all stated unequivocally that they were investigating a civil matter, not a fraud.

[50] The applicants note that in early February 2005, Mr. Nelson told Ms. Deengar that he believed he had been defrauded and that he had reported the matter to the police. However, he testified that he pursued that course of action on his own and that the CRA did not point him in that direction.

[51] The applicants also rely on a power-point presentation that Ms. Deengar gave to her colleagues regarding this file on February 15, 2005, as evidence of the trust examiners’ true purpose. In particular, they refer to a decision not to refer the file to Investigations in order to prevent “danger of loss”. However, during cross-examination at the preliminary inquiry Ms. Deengar testified that “danger of loss” referred to the potential for the client to flee and not pay Revenue Canada. She explained that the reason for not making a referral was because they anticipated meeting with Mr. Oke, and “if we could settle it between the trust examination and the client, there would be no need to involve investigations.”

[52] There was nothing to contradict Ms. Deengar’s evidence on that point. She testified that as a senior trust examiner she is trained to deal with difficult clients who can take a lot of time to pin down. As she put it:

…this is a big puzzle that I’m trying to put the pieces together and therefore I may have a theory that maybe this is the relationship between these files, but I haven’t yet worked this out because I haven’t met the key people till (sic) now, and until I do that, I can’t complete my audit.

[53] Consequently, none of the factors that, in hindsight, were components of the fraud could reasonably have been seen as such as they were occurring, including:

• Delays in producing books and records;
• A chain of sub-contracting among several entities;
• A cooperative accountant with little information about the business.

[54] In short, contrary to the assertions of the applicants, I do not see anything sinister in the actions taken by the CRA that would suggest this was in reality a criminal investigation under the guise of a civil audit.

[55] For those reasons, I do not see that this application has any reasonable prospect of success, and would dismiss it at this preliminary stage.

Conclusion

[56] For the reasons set out above, I have concluded that this application should be dismissed summarily, on two bases: 1) the applicants lack standing to launch the application, and 2) the defence has no reasonable prospect of demonstrating that the CRA abused its audit powers.

Baltman J.

DATE: February 1, 2013

COURT FILE NO.: CRIMJ(F) 3431/09
DATE: 20130201

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: HER MAJESTY THE QUEEN v. DEBORAH DIECKMANN AND GEORGE SALMON

BEFORE: Baltman J.

COUNSEL:
X. Proestos for the Crown
I. Epstein for Ms. Dieckmann
F. Brown for Mr. Salmon

Ruling on Crown motion to dismiss “Jarvis” application

Baltman J.

DATE: February 1, 2013