COURT FILE NO.: CV-08-34649 PD1

DATE: 2020-05-28

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: SOFTCOM SOLUTIONS INC., SONYA ZENZ, DAN CATTO, DENNIS DOHEY, JOSEPH J. IAMARINO, CYNTHIA L. IAMARINO, IREN KISS, JOHN KISS, KAROLINE KISS CAMPANA, LESLIE KISS, DOLORES ROMANUK, MICHAEL ROMANUK AND SOFTCOM SOLUTIONS PARTNERSHIP, Plaintiffs

AND:

ATTORNEY GENERAL OF CANADA, CANADA REVENUE AGENCY, LYNN WATSON, TERRY LAW, JOHN HAISANUK, PETER HERYET, TERRY HARTER, GREG HOPFAUF, CLAUDE LEMARCHE, MICHELLE LEVAC, LUCIA FAVRET AND ROBERT GOLDSTEIN, Defendants

BEFORE: Schabas J.

COUNSEL: Sam Laufer and Daniel Freudman, for the Plaintiffs

Maria Vujnovic, Michael Bader and Kaitlin Coward, for the Defendants

HEARD: December 2, 3, 4, 5, 6, 9, 10 and 11, 2019, and February 21, 2020.

REASONS FOR JUDGMENT

Introduction

[1] This action arises from events that occurred many years ago. Two people, the plaintiff Sonya Zenz (“Zenz”) and her business partner Wally Dove (“Dove”), and the partnership they established in 1995, Softcom Solutions Partnership (“SSP”), were the subject of an audit and investigation by Revenue Canada (now the Canada Revenue Agency or “CRA”) between 1996 and 1999. In 1999, a prosecution was commenced by the Department of Justice, Criminal Division (the “DOJ,” now the Public Prosecution Service of Canada or “PPSC”) against Zenz and Dove for offences alleged to have been committed under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (“ITA”). The charges were ultimately dismissed for delay in 2004, though only after a 70-day preliminary inquiry at the conclusion of which, in November 2002, Zenz and Dove were committed for trial.

[2] This action, brought by Zenz, SSP and several partners/investors in SSP (but not Dove) for negligent investigation, malicious prosecution, breach of Charter rights and other torts against CRA, its agents, and two prosecutors, was commenced in 2008. The action was stayed in 2009 pending the outcome of appeals to the Tax Court of Canada arising from reassessments issued by CRA in 1999. Following the resolution of the tax litigation in 2015, this action was reactivated when the stay was lifted on March 24, 2016. An Amended Statement of Clam was filed on March 29, 2016. The action for malicious prosecution was dismissed on consent and discontinued against the two prosecutors, Lucia Favret and Robert Goldstein, and is now only against CRA and its agents relating to the audit and investigation.

[3] In 2017, the remaining defendants brought a motion for summary judgment. Affidavits were exchanged and cross-examinations were conducted at that time. However, the matter was eventually converted into a two-week “mini-trial” in which the affidavits and cross-examinations were filed as exhibits, and the affiants were called to give further evidence, viva voce, before me as the trial judge. In addition, the parties exchanged expert reports and called expert witnesses on the issue of standard of care and damages.

[4] At the outset of the hearing before me it was confirmed that although the defendants had brought a summary judgment motion and would present their evidence first, the proceeding was for all practical purposes a trial, not a motion for summary judgment, and that my role was to decide all issues in the case, including liability and damages. At the trial I also admitted, over the objections of the plaintiffs, the complete transcript of the evidence of the defendant John Haisanuk (“Haisanuk”) given over nine days at the preliminary inquiry in 2000. Haisanuk was the CRA auditor responsible for auditing SSP in 1996 and 1997. He died in 2011. My ruling may be found at Softcom Solutions Inc. v. Canada (Attorney General), 2019 ONSC 7191, now reported at 149 O.R. (3d) 123. As will be apparent from my Reasons, my reliance on Haisanuk’s testimony is limited, and is generally supported by contemporaneous documents.

[5] Despite the many parties to this action, the adversaries are, essentially, Sonya Zenz, her friend and a partner in SSP Dolores Romanuk (“Romanuk”), and the two Softcom entities, Softcom Solutions Inc. and Softcom Solutions Partnership (“SSI” and “SSP” respectively, or, generally, “Softcom”) as plaintiffs (the other plaintiffs being investors in Softcom), and CRA and its agents as defendants.

[6] Numerous causes of action are pleaded; however, the gist of the allegations is as follows: (1) that in conducting the audit CRA breached the plaintiffs’ rights under the Canadian Charter of Rights and Freedoms, s. 7, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (UK), 1982, c 11 (the “Charter”), by the auditor, Haisanuk improperly communicating with CRA’s Special Investigations section (“SI”) during the audit and conducting the audit with a view to prosecution; (2) whether the audit and investigation were conducted negligently and not in accordance with the appropriate standards of the time; and (3) whether any other steps taken against the plaintiffs constituted misfeasance in public office or breached the plaintiffs’ Charter or common law rights, including the referral to investigation by Haisanuk, the obtaining of search warrants, and the referral for prosecution.

[7] It is alleged by the plaintiffs that the audit, investigation and prosecution had the result of destroying the fledgling business of Softcom which, had it been allowed to proceed, would have resulted in significant profits for the business and the individual investors. Further, the plaintiffs Zenz and Romanuk seek damages for the harm caused to them personally as principals of the business entities and, in Zenz’s case, as one of the subjects of the investigation, which resulted in her prosecution.

[8] For the Reasons, which follow, I dismiss the action in its entirety. I conclude that the plaintiffs have failed to establish any actionable wrongs against them. While Haisanuk’s actions in conducting the audit involved some limited communication with SI, this was in order to obtain information in SI’s possession for assistance with his audit, not to obtain evidence for a prosecution. While suspicious of fraud, Haisanuk was properly conducting an audit seeking verification of Softcom’s claims. When that was not forthcoming, he referred the matter to SI. Although Haisanuk’s actions occurred prior to the Supreme Court of Canada’s decision in R. v. Jarvis, 2002 SCC 73, [2002] 3 SCR 757 (“Jarvis”), which clarified the law in this area, Haisaunuk did not violate the principles established in that case. The plaintiffs may have been upset with the audit, and its scope, but CRA was entitled to audit Softcom, did not do so improperly, and had good reason to refer the matter to SI when it did.

[9] The subsequent investigation was not negligently conducted and met contemporary standards for an investigation. The defendants did not commit any misfeasance in public office or other actionable wrongs against the plaintiffs. As to the search warrants and laying of charges, leaving aside my concerns as to whether it is even appropriate to revisit the validity of those steps in this action, I conclude that there is no basis to find that the search warrants were improperly issued, and that there were reasonable and probable grounds to lay charges, as illustrated by the reasons of the preliminary inquiry judge who, in rather strong terms, committed Zenz and Dove for trial.

[10] As I discuss below, evidence called at this trial demonstrates that there were substantial grounds to believe that Dove, Zenz, and perhaps others were engaged in a scheme to defraud the government through the obtaining of improper tax benefits. Zenz and Romanuk maintain that Softcom was a legitimate business enterprise destroyed by CRA’s investigation. But in doing so, they ignore the substantial evidence of fraud that caused CRA to investigate and prosecute Dove and Zenz. Without saying so, they would have the court accept that they were unwitting dupes of Dove, who is not a plaintiff and did not testify. I reject this position as unreasonable, especially respecting Zenz.

The Facts

Zenz and Dove and the establishment of Softcom

[11] In the early 1990s, Zenz and Dove, both of whom were chartered accountants, were employees of the Ontario Ministry of Finance. Dove had previously practiced accounting in the private sector and had also worked for CRA, or Revenue Canada as it was then known, in collections, audit and investigations. Zenz had also worked as an auditor at CRA and at an accounting firm before joining the Ministry of Finance. She also owned and operated a CD store at that time.

[12] In the summer of 1994, Dove introduced Zenz to a business investment involving a partnership called Smart Retail Operation, or “SRO.” It was going to market a “point of sale” (“POS”) computer program purportedly sourced from the British Virgin Islands that would replace cash registers, keep track of inventory, taxes and otherwise simplify and automate the bookkeeping functions of small retail businesses. Dove and Zenz registered a partnership called Devon Investments, in which they were 50-50 partners and bought one unit of SRO, which had approximately 30 units.

[13] The SRO investment failed due, according to Zenz, to poor management. Zenz said she declared a loss of about $15,000 on the investment. SRO also became the subject of attention by CRA, as will be discussed below. Nevertheless, Zenz said that the potential to market a POS software product for small retail businesses attracted her and Dove as a business opportunity. However, they needed a POS software product of their own.

[14] According to the plaintiffs’ evidence, Dove claimed to have met a man named “Tommy” in a bar in Coboconk, Ontario (which is not far from Norland, Ontario, where Dove lived), who said he knew of a POS program that might suit the plaintiffs’ plans, but that it would need some modifications to deal with provincial and federal taxes. Zenz says that Dove was put in touch with a man named Ivan Burgess (“Burgess”), in the Cayman Islands, about acquiring the program, known as “Retail Manager.”

[15] Zenz’s evidence is that she and Dove formed SSP in January 1995, although the name was not registered as a partnership until September 1995. In an unsigned Software Acquisition Agreement dated January 14, 1995, SSP purported to purchase the Retail Manager program from a company called Softcom International Inc. (“SII”), described in the agreement as “a Cayman Islands Company,” for $2.2M. In a letter written by Dove in January 1996 he refers to having signed the agreement with SII on January 14, 1995. However, at trial Zenz agreed that they did not locate the software through Tommy in Coboconk until at least May 1995, four months later. She also could not say when the unsigned January 14, 1995 Software Acquisition Agreement had been prepared or explain how they could have known in January of 1995 that the vendor would be Softcom International Inc. if they did not find the program until after May 1995. In the criminal investigation in 1998 it was learned that the final version of the agreement was not completed until around December 1995.

[16] SII was not registered as a corporation in the Cayman Islands until March 11, 1996, over a year after the date of the agreement and at a time when Dove and Zenz were visiting the Cayman Islands. On the Software Acquisition agreement, the name “Ivan Burgess” was typed above the signature line for SII, and Dove’s name is typed for SSP. The Agreement called for the following payments: $10,000 upon delivery of the software; $50,000 on or before January 31, 1996; $140,000 on or before July 31, 1997; and the balance secured by a promissory note to be paid in four annual installments of $500,000, to be paid in full by December 31, 2000.

[17] The purchase price, according to Zenz, was negotiated between Dove and “the software owner’s representative.” Zenz asserts that she believed the price was “reasonable” based on the potential of the business. At trial, Zenz conceded she did not know where the software came from or where it was created. The Software Acquisition Agreement also specified that the software could only be sold or distributed by SSP in Canada.

The Confidential Offering Memorandum and recruitment of investors

[18] In 1995 Zenz prepared a Confidential Offering Memorandum (“COM”) on which to seek investors. She acknowledged that the COM was based on the SRO offering memorandum. In fact, the COM was virtually identical to the SRO offering memorandum, but not all the similarities can be attributed to it being used simply as a template. For example, in addition to SRO sourcing its software from the Caribbean, Ivan Burgess also signed the SRO agreements and the address for SRO International Inc. was in the same building as SII in the Cayman Islands.

[19] As the SSP COM outlined, the business plan was focussed on marketing Retail Manager to small retailers making around $100,000 in sales annually who could use the software on MS-DOS 286 and 386 computers, which at the time were gradually being replaced by more advanced Windows-based computers. Indeed, Zenz testified at trial that they contemplated sourcing and selling used 286 and 386 computers for retailers to operate the software. The COM also proposed partnering with an experienced marketing company and to outsource expertise as necessary. Of particular significance, the COM indicated that SSP would register as a tax shelter and would be able to claim capital cost allowance for 100% of the cost of the software, allowing the investors to claim losses exceeding their investment.

[20] The COM included financial projections prepared by Zenz. These projections anticipated, before capital cost allowance, a loss for SSP in 1995 and profits from 1996 to 1999. Zenz projected sales of 115 units of Retail Manager in 1995. Although the COM stated that the retail price would be $99.99 per unit, the projections were based on sales at a “wholesale price” of $50.00 per unit. Zenz projected sales of 16,800 units in 1996 and slightly more for each of the following 3 years for a total of almost 80,000 units sold between 1995 and 1999 resulting in projected gross revenue of $6,394,100. As I will come to, no sales of Retail Manager were made in 1995 and 1996, and only a very small number appear to have been sold in 1997 and 1998.

[21] Included in the COM was a valuation of the software prepared by J.C. Appraisals, Corp., which was a business of James Chard (“Chard”). Chard was the boyfriend of a friend of Zenz who had some experience in appraising real estate. He was not a business valuator, and had no experience in valuing software, but worked with Zenz to prepare a valuation based on the business projections contained in the COM. The value, $2.85M, was contained in a document dated September 1995. It was prepared on Zenz’s computer, and much of it, such as the section on the “POS Environment”, would have been prepared by Zenz or Dove. Chard told CRA investigators in 1997 that he did not review the software when preparing the valuation. Chard’s invoice, for $200, was dated May 1995, four months earlier than the date on the valuation, although payment was not made until April 1996. Chard’s whereabouts is unknown and he did not testify at the trial.

[22] Zenz testified that the original $10,000 payment for the software was made around May or in the summer of 1995. Dove and Zenz apparently contributed $5,000 each, but aside from the SSP records showing they were each reimbursed for the payment, there is no documentation supporting them having made any payment. In her cross-examination Zenz said she might have given Dove cash, and she agreed that Dove may have paid the whole sum in cash. Nor is it clear when SSP, or Dove and Zenz, actually received a copy of the software. At some point, Zenz put it vaguely in her affidavit, “after Wally met Tommy in a bar, one thing led to another and several months later, Wally gave him $10,000 and he handed over the disk containing the program source code.” When questioned about this at trial Zenz could not provide the date Dove received the software, the name of the person who delivered it to Dove, any documentation acknowledging receipt of the deposit for the software, any correspondence regarding the delivery, nor could she explain why the delivery was not made in accordance with the Software Acquisition Agreement which stipulated that the software was to be delivered into escrow with SSP’s solicitors.

[23] Partnership units were sold for $24,000 each – the first installment of $11,000 was due on December 1, 1995 and the second of $13,000 due on June 30, 1996. According to both Zenz and Romanuk, they recruited family members, clients and friends as investors and partners in SSP. Although the COM contemplated selling 30 units and raising $720,000, ultimately SSP had about 25 partners who contributed $431,000 to the venture. Some investors only purchased partial units. Romanuk and Zenz earned commissions of $2,000 on the sale of each partnership unit made by them.

[24] In the course of recruiting investors, Zenz and Romanuk met with Romanuk’s sister and brother-in-law in December 1995. They operated a chain of retail clothing stores and used a POS program which apparently cost $150,000. It was not explained, in that context, how Zenz continued to think that $2.2M was a “reasonable” price for the Retail Manager software obtained by Dove after meeting “Tommy” in Coboconk.

Tax shelter application

[25] On November 20, 1995, Dove submitted an application for a Tax Shelter Identification number on behalf of SSP, which would allow the investors in SSP to deduct losses SSP expected to incur in its first few years of operation. Effectively, this would allow 100% of the capital cost of the software to be written off in the first two or three years of Softcom’s operation and the investors could claim tax credits that would exceed their investment. The application included a copy of the COM and related documents such as the Software Acquisition Agreement and Chard’s valuation.

[26] Tax shelter applications were dealt with by CRA’s Tax Avoidance Division and the matter was assigned to Haisanuk, who was a business auditor in Tax Avoidance in Belleville, Ontario. Haisanuk had been an employee of CRA since 1969, based in Belleville. Haisanuk was a certified general accountant who had worked in a range of functions at CRA, including field audits, business audits, appeals and tax avoidance. The matter was referred to him because the address on the tax shelter application was Dove’s home address in Norland, which is near Belleville.

[27] On December 12, 1995, Haisanuk wrote to Dove to confirm that SSP had complied with s. 237.1(4) of the ITA, which prohibits the sale of any units prior to the approval of the tax shelter application and granting of the number. Despite the fact that units had been sold to investors in December 1995, Dove confirmed compliance on December 19, 1995, and a tax shelter number was granted to SSP on January 12, 1996. SSP only opened a bank account in Toronto sometime later, towards the end of January 1996.

Softcom activities in 1996 and early 1997

[28] SSP finalized its partnership agreement on February 17, 1996. According to Zenz, SSP rented office space in Brampton in March 1996, and had a “fully operational” office up and running that month. At this time, however, Zenz continued to work full-time for the Ministry of Finance.

[29] As the software needed to be modified to deal with sales taxes, Zenz says they hired Steve Lager (“Lager”) to work on it. Lager, however, was “new at programming.” In a statement Lager gave investigators, he said he had met Dove while he, Lager, was working in a bar in Coboconk that Dove frequented. According to Zenz and Romanuk, Lager had difficulty modifying the software and had made it “unstable.” Lager was paid a total of $2,200 for “consulting” in May and June 1996. Lager was not called as a witness.

[30] Zenz then says she searched for programmers in the Yellow Pages and found a man named Ron Boyd (“Boyd”) in Markham. Boyd’s recollection, according to a later statement to CRA, is that he may have met Dove and Zenz through a “tennis buddy.” Regardless, in about May 1996, Boyd was hired through his business, Willow Technologies, to “stabilize” Retail Manager and to modify and upgrade the program. Boyd may have salvaged the design of Retail Manager, but it appears he did much to rebuild, if not create, the program himself. He billed $8,700 for his work on Retail Manager. Boyd said he also worked on developing a related software, “Bar Manager”, for bars and restaurants. Boyd’s work continued into 1997. He billed Zenz and Dove a total of about $11,000 for his work between June 1996 and March 1997. Boyd did not testify at the trial.

[31] In early March 1996, Zenz and Dove took a trip to the Cayman Islands. Zenz states that they went to the Cayman Islands to finalize a renegotiation of the price of the software with SII. Dove and Zenz did not get as many investors in the partnership as they had hoped and so, at Dove’s request according to Zenz, SII, through Ivan Burgess, agreed to reduce the price from $2.2M to $1.5M. This was documented in an Amended Software Acquisition Agreement dated April 19, 1996. Dove and Zenz also signed a promissory note on behalf of SSP to SII for $1.4M, which was said to be the amount outstanding following payments totalling $100,000 said to have been made under the original agreement. Although Zenz’s evidence was that Dove had paid the first $10,000 to Tommy when he received the software, in cross-examination she could not remember when the further $90,000 was paid. The note provided that they were to pay the $1.4M in four installments of $350,000 commencing December 31, 1997. Zenz says that when she and Dove met with Burgess in the Caymans Burgess told them he represented the vendor. Zenz said she relied on and trusted Dove’s judgment in their dealings with Burgess.

[32] The price for the acquisition of the software may have been reduced in March 1996, but the financial statements of SSP for the year ending December 31, 1995 indicate a capital cost of $1.5M when at that time, according to Zenz, the price was still $2.2M.

[33] During the week of March 6 to 13, 1996, while Dove and Zenz were in the Cayman Islands, SII, which had represented itself in the Software Acquisition Agreement in January 1995 as “a Cayman Islands Company,” was registered as a corporation in the Cayman Islands. In addition, a company called International Business Solutions Inc. (“IBS”) was also registered at that time. This is significant, as a receipt signed by Ivan Burgess dated March 31, 1996, was later obtained by Haisanuk which discloses that SSP paid IBS $40,000 on March 8, 1996 for “[a]cting as intermediary with Softcom International Inc.” in “[l]ocating software development company” and “[c]onsultations re: financing of software acquisition.” However, during the audit Zenz and Dove said the $40,000 payment was made towards the purchase price of the software and was not for any intermediary fees.

[34] The cheque for $40,000 was in Zenz’s handwriting. There was no reference to IBS in either the 1995 or the 1996 General Ledger Reports for SSP. Instead, SSP’s General Ledger Report for 1995 shows a payment of $40,000 to Consultants International Inc. for “consulting fees.” At trial, Zenz could not explain why there was no reference to IBS, why the 1995 General Ledger Report showed a payment to Consultants International Inc. or why a payment to IBS did not appear in the bank statements.

[35] Zenz denied having anything to do with SII or IBS. She said she never met anyone from IBS, but she did meet Ivan Burgess who she said she believed at the time to be an owner of SII. Zenz also testified in her out-of-court cross-examination that Burgess was an employee of Euro Bank Corporation in the Cayman Islands, and that Burgess assisted her in opening a personal account with Euro Bank, which she said she did because she had been asked by a former client at an accounting firm she had once worked at to “possibly do some business with them down in the Caribbean.” Euro Bank comes up again later.

[36] In 1995, Dove and Zenz also retained a lawyer, Daved Muttart, to provide legal advice to Softcom. Muttart’s letters and accounts in early 1996, which were provided to Haisanuk during the audit, indicate that he raised concerns regarding the one-sided nature of the agreements with SII, including the lack of support from SII in the event of problems with the software. Muttart also discussed with Zenz and Dove the possibility that CRA might review the commercial bona fides of the transaction.

[37] Zenz’s evidence is that during the balance of 1996 SSP advanced its business in a number of ways. SSI was incorporated in May to be the contracting party for SSP. At some point later in 1996 Dove connected with David Russ (“Russ”), who was with a company called Media Duplications Corp. (“Media Duplications”), which it was said would produce and package the software. I address SSP’s dealings with Media Duplications in more detail below.

[38] In mid- to late 1996, Zenz and Romanuk said they were busy testing the software as it was provided by Boyd. Romanuk, a bookkeeper by profession, said she did this from September to December, 1996. In the fall of 1996, SSI placed an advertisement in the Toronto Sun for commissioned sales people and Zenz says they interviewed candidates at the Brampton office. Softcom rented a booth at the Mississauga Business Expo in October 1996 and had business cards, some flyers and a banner made.

[39] Romanuk claims that the Retail Manager program was “copied, boxed and available for sale on or about January 1997.” However, Zenz’s affidavit states that “Boyd would not be finished with all the bugs until 1997.” Zenz also says she took a leave from the Ministry of Finance from January 13 to January 31, 1997 “to work exclusively for SSP/SSI business.” However, as I discuss below, in the fall of 1996 Haisanuk had initiated an audit of SSP, and he conducted field audit meetings with Dove and Zenz at SSP’s offices on January 14, 15 and 16, 1997.

[40] Zenz also became ill in late 1996, and she saw several doctors and had to take time off work at times in the first half of 1997. In March 1997 she was diagnosed with a bi-polar mood disorder. In May she quit her job at the Ministry of Finance “to attend to SSP/SSI duties full time.”

[41] Dove had taken a leave of absence from his job at the Ministry of Finance in February 1996 and he apparently resigned from his job in February 1997, he told CRA, “to devote as much time as possible to Softcom Solutions.” However, it appears that Dove was also doing private accounting work at this time, and was involved in at least one other software-related venture, MLM Partnership, which I discuss briefly later in these Reasons.

[42] Sometime after the field audit at SSP’s office in January 1997, Media Duplications produced about 200 copies of Retail Manager in about late January 1997. In February 1997, Softcom set up a web page, and it established email accounts in March. Curiously, one of those email accounts was for Steve Lager. Through a company called “Q-Ponz”, Zenz says that Softcom printed and distributed 24,000 flyers. In April 1997 an agreement was signed between SSP and SSI formalizing the role of SSI to conduct business for the partnership.

[43] Zenz said that after leaving the Ministry of Finance in May, “whenever possible…I spent most of my time running SSP/SSI” which apparently continued to involve testing the software and overseeing the sales team; however there are no details of any sales people being hired, or commissioned, other than Dove and Zenz advising Haisanuk on May 30, 1997, that on the previous day, May 29, 1997, a Daniel Vujic (Vujic”) “was contracted for a 45 Day Marketing Plan to begin June 2, 1997.” The contract, with “Daniel Vujic Photography Inc.,” was not signed until June 27, 1997. According to Zenz, Dove was attempting during this time “to secure some large software deals (Staples and Future Shop) through networking and some business contacts as well as dealing with the CRA on this ongoing SSP audit.”

The audit – later 1996 to May 1997

[44] Following the correspondence between Dove and Haisanuk in December, 1995 and January, 1996 regarding the tax shelter number, Haisanuk conducted a review of the material submitted by Dove. This included SSP’s financial statements, the COM, the Software Acquisition Agreement between SSP and SII, and the Amended Software Acquisition Agreement signed after the March 1996 trip to the Cayman Islands by Dove and Zenz, as well as Chard’s valuation. Haisanuk also reviewed the personal income tax filings of Dove and Zenz, which disclosed they had claimed losses in 1994 arising from their investment in SRO.

[45] On October 31, 1996, after discussions with Claude Lamarche (“Lamarche”), who oversaw tax shelter matters in Tax Avoidance at CRA in Ottawa, Haisanuk wrote to Dove to advise him that he would be auditing SSP and included a list of questions. Dove and Zenz apparently found it odd that an audit would be commenced when the business had been operating for less than 2 years; however Zenz has not led any evidence that the audit was premature or contrary to any CRA policy. Dove responded by letter on November 9, 1996, requesting that the file be transferred to CRA’s Mississauga office since Softcom had established a business office in Brampton - a complaint renewed in this action, as the plaintiffs said that the matter was complex and should have been handled by a larger office than CRA’s office in Belleville. This request was refused. On January 9, 1997, Dove provided responses to Haisanuk’s questions but, as CRA learned in the course of the audit and investigation, much of the information given by Dove could not be supported.

[46] Haisanuk made some inquiries about SRO in late 1996. He learned that the SRO file had been referred to SI in Calgary. Haisanuk contacted Terry Harder (“Harder”) at SI in Calgary and sent him a copy of the COM, which included the Software Acquisition Agreement, to compare it to the SRO documents. Haisanuk learned that the documentation for SRO and Softcom was virtually identical, and that the software had been appraised using the same business valuation methodology in both cases. At the preliminary inquiry in June 2000 Haisanuk testified that Harder’s comparison was as an audit step. He was also cross-examined on his state of mind at the time:

Q: All right. And, if he [Harder] determined at that point, what I’m suggesting to you, sir, is you suspected that they may be the same and that charges would then be appropriate, fair?

A: No, I didn’t have an audit trail.

Q: No – you certainly knew enough to contact and send the documents to Mr. …

Q: My point is, as at December the 17th, sir, 1996, you suspected they were the same thing and that there was a violation of the Income Tax Act?

A: I didn’t know that.

Q: You suspected it?

A: I suspected, yes.

[47] Prior to conducting a field audit at SSP’s office, Haisanuk spoke to Peter Heryat (“Heryat”), then the chief of SI at CRA’s Belleville office, about the file. Heryat, who retired in 1999, filed an affidavit and testified at this trial. According to a short memo Heryat prepared at the time, on January 8, 1997 Haisanuk provided him with a binder containing various Softcom agreements, a valuation report and other documents. Haisanuk’s note at the time was that he had a file that “might turn out to be a good file” and that he showed Heryat the audit plan. At the preliminary inquiry, Haisanuk was cross-examined at length by Zenz’s counsel on this issue. Haisanuk said he went to Heryat because he did not have a group head available at the time, and explained that his reference to it being a “good file” meant that there could be a good adjustment or reassessment to the benefit of CRA. He said he was not seeking any direction from Heryat, but just wanted to make him aware of the file.

[48] Heryat returned the binder to Haisanuk the following day and “advised him to proceed with whatever audit steps he had planned and for him to get back to me if he found any significant suspicious irregularities in his audit.” As Heryat put it in his affidavit in this proceeding, he “did not find anything to indicate that an initial investigation was warranted.” Heryat did not expect to see the file again, and in cross-examination said he had no idea why Haisanuk showed it to him and that it “didn’t make any sense” to him. Heryat confirmed that Haisanuk had no basis to refer anything to SI at the time.

[49] Heryat, however, also called Terry Harder, at SI in Calgary, since the SRO investigation was referred to in Haisanuk’s materials. Harder called him back and said he had just recently been assigned the file, and provided no information to Heryat.

[50] During the subsequent field audit on January 14, 15 and 16, 1997, Haisanuk reviewed SSPs books and records, and took copies for further review. He commented at the time that there was “not much there.” There were no copies of Retail Manager ready for sale, no contracts and very little promotional material. He also contacted retail organizations in the Belleville area and found that no one had ever heard of the Softcom program.

[51] Haisanuk sought the assistance of the Valuations Section of CRA in the fall of 1996, which assigned the matter to Michelle Levac (“Levac”), who was a valuator at CRA in Ottawa. Levac had worked as an accountant for several years before joining CRA as an auditor. In 1995 she joined the valuations section and in 1995 and 1996 she completed the Chartered Business Valuation course. She obtained her designation as a Chartered Business Valuator in 1997.

[52] Levac attended SSP’s office with Haisanuk when he was conducting the field audit in January 1997. She was given a copy of the software, including a copy of the source code and object code, by Dove and Zenz. She also learned that Dove and Zenz had no experience with computer software, nor could they indicate what version of Retail Manager they had acquired. Although the software she was given functioned - Levac’s notes say it “runs well” - she qualified that in cross-examination, stating that it was opened for her on the screen and seemed to function properly but that she needed to have it reviewed by an expert. Levac was advised by Dove at the time that the production of copies of the software had ceased due to viruses being found in it. Although Dove and Zenz said the software had been successfully marketed in the United States, they had no information about it. Levac was told as well that a programmer was developing a “bar manager” software – presumably Boyd.

[53] Levac testified at the trial. Her evidence, supported by contemporaneous notes of what she was told, contradicts in several ways what Zenz told the court, including that Lager’s modifications to add Canadian sales tax took little time and were prepared by Lager for approximately $500.

[54] On any interpretation of the evidence, at the time of the January 1997 field audit Dove and Zenz had not progressed very far in marketing the software. Lager’s work, if any, had not made the software ready for market; quite the contrary. Dove and Zenz had not done any market studies to assess demand or appropriate pricing for Retail Manager. Softcom had no contracts with Lager, Boyd or Media Duplications, let alone any marketing material or any specific plans for producing copies of the software. According to Levac’s notes, Softcom was considering marketing by mail as Dove and Zenz said they did not want sales people “on the road,” despite Zenz’s evidence in this action that they were recruiting a sales team. Haisanuk gave similar, if more detailed, evidence at the preliminary inquiry, noting the lack of any software ready to be sold at any time during the audit, the lack of contracts and the lack of documentation relating to the acquisition of the software, including payments made for it.

[55] Haisanuk was told by Dove and Zenz that they had a contract with Media Duplications, but Haisanuk later learned that Dove had only recently been in contact with Media Duplications and that no written contract existed. A quote from Media Duplications appears to have been backdated to May 1996, even though the first contact between Dove and Media Duplications was more recent, likely mid-December 1996, after Haisanuk notified Dove he would be conducting an audit. Further, at Dove’s request, David Russ of Media Duplications had told Haisanuk he had first met Dove in September 1995, something Russ later admitted was false. Media Duplications did submit some modest invoices to SSI in early 1997 for making, it appears, about 200 copies of the Retail Manager software.

[56] In the course of the field audit, Dove and Zenz were asked about who created the software, for how much, and where it was created. They said they had no idea, other than they thought it may have been created in the Cayman Islands. Nor did they have any knowledge of how much SII had paid for it. They confirmed they had only received 2 diskettes containing the source code and the English version, and while they said they received a manual they did not keep it as it was “computerized.” Dove and Zenz said they just received a brief description and demonstration of the software, and that they both picked it up, which is inconsistent with Zenz’s evidence at this trial, that “one thing led to another” and Tommy “handed over the disk” to Dove after he paid $10,000.

[57] Dove and Zenz told Levac they no longer had the original version of the software purchased from SII. According to Levac’s notes, “they held on to it only for a while,” they made modifications, and did not keep the original versions. This is significant since the plaintiffs complain that the software valued by Levac and CRA is not the software purchased from SII, and therefore CRA should not have relied on its valuation. However, that position is puzzling as Dove and Zenz did not provide Levac with the original software as, according to them, they no longer had it. It is also surprising that Dove and Zenz would not have kept intact the product for which they had agreed to pay $2.2M, and that the modifications they say were made completely changed this expensive software.

[58] Levac and Haisanuk also received information regarding payments to SII. According to Levac’s notes, Dove and Zenz told them that the original $10,000 payment for the software was made in November 1995, and that an additional $65,000 was paid in September 1996 - $25,000 to SII and $40,000 to IBS. As noted earlier, this is inconsistent with documentary evidence that describes the $40,000 payment to IBS as a consulting fee, a payment made in March, 1996. And there are banking records showing that a $25,000 payment was also made in March 1996, but to IBS, not SII.

[59] Levac considered various approaches to valuing the software and decided to use a cost approach. As she explained in her later memorandum to Haisanuk summarizing her valuation, dated May 29, 1997, the lack of documentation to support the ownership of the software, the inexperience of Dove and Zenz in the software business, and the lack of credible support for SSP’s business plans and financial projections which she noted had not been met in 1996, among other things, informed her decision to adopt a cost-based approach to valuation.

[60] Levac had not done a software appraisal previously, and sought a scientist specializing in technology to review the software and assist in valuing it. She learned that Kay James (“James”), a Science Advisor with Scientific Research and Experimental Development (“SR&ED”) Tax Incentive Program of CRA, had the expertise. On February 11, 1997, Levac asked James to analyze how many hours would be required to write a similar program and an estimate of the cost.

[61] Two days later, on February 13, David Seal, another scientist from “SRED,” called Levac and expressed his view that the software could not be valued without talking to the software developer. He said that “writing the program could be very quick or long, very simple or very complex” and that “unless you can find out who developed it, when, how long it took and who was working with them it is impossible to estimate cost.” It does not appear that Levac shared Seal’s comments with anyone. When cross-examined on the note about her conversation with Seal at trial, Levac said she had been looking for an expert who could value the software, and as she had found James who said she could do it without contacting the developer, she did not follow up with Seal.

[62] At trial, counsel for the plaintiffs was critical of Levac’s failure to follow up with Seal, whose comment only came to light much later when disclosure was provided as part of the prosecution. Counsel argued that CRA ought to have pursued this route; however, the plaintiffs led no evidence that Seal’s view was correct, nor did counsel explain how this could be done when the developer of the software was unknown, as Dove and Zenz had told Levac. In fact, as I will come to, there is strong reason to believe the developer was Ron Boyd, who charged $8,700 to produce it, and all the estimates obtained by CRA valued the software as being worth somewhere between nil and, at most, $250,000 - far below $1.5M, $2.2M or $2.8M, which were the range of values that came from Dove and Zenz and formed the basis for the large tax credit they asserted to CRA.

[63] James was apparently not able to run the program as she lacked a sign-on code and password, but she was able to review a feature list and the codes. She spoke to Levac at some length about it on March 4, 1997, telling her that the programming likely dated back to the 1980s. James said that the software had standard programming that could have been developed by a competent programmer in about 50 days of work, that it was old-fashioned, and that it would not get good market share. James sent Levac a memo in April, 1997, noting that the software contained about 2000 lines of code and had a “dated look”. She said that the same type of product had been available since at least mid-1993 and that there were at least 20 POS programs on the market dating back to 1991 selling at prices of US$89 upwards. James concluded from this that “$20,000 should easily cover programming costs” of Retail Manager. James did not testify at the trial.

[64] Levac considered the information from James, the fact that 286 model computers were no longer being used, and the high-risk nature of software development in concluding there was no market for Retail Manager, which undermined the business valuation model taken by Chard and Zenz. She reported to Haisanuk that she valued the software as “nil to $20,000.” She included a range down to zero as she believed there was no market for it.

[65] In a memorandum dated February 26, 1997 to Claude Lamarche, Haisanuk concluded that “[t]here is complete lack of documentation and an audit trail and for this reason I don’t think I could refer the file to S.I.” He says that “because nothing was done in 1995, I believe I can propose to disallow the 1995 losses as there was no business carried on with an expectation of profit.” This was consistent with Haisanuk’s evidence at the preliminary inquiry that he needed to complete his audit to determine whether the case should be referred to SI. The memo did, however, show that Haisanuk was considering that there may have been fraud, but that he was waiting “to determine if there is fraud by comparing what we have with what comes out of the Calgary audit of SRO.”

[66] Haisanuk’s view that little had been done to advance Softcom’s business is reflected in his February 26, 1997 memorandum to Lamarche in which he states: “I don’t think they would have ever done anything had I not contacted them last October 31.” In his evidence at the preliminary inquiry, Haisanuk pointed to the lack of steps to outsource services as was proposed in the COM, or to otherwise produce, market or sell the software.

[67] Haisanuk had sent a copy of his February 26, 1997 memorandum to Calgary to keep them informed of his progress. His memo noted that he and Harder had compared the various agreements of SRO and Softcom and observed that they “appeared to be exact duplicates with only different names.”

[68] On March 25, 1997, Haisanuk met with Larmarche and Levac in Ottawa to discuss his audit and possible adjustments. They reviewed Haisanuk’s memo of February 26, 1997 and the legal grounds on which the deductions claimed by SSP could be disallowed. This included a lack of a reasonable expectation of profit and the valuation of the software as determined by Levac and James.

[69] On April 8, 1997, Haisanuk spoke with Greg Hopfauf (“Hopfauf”) in Calgary SI, who had been assigned the SRO investigation. According to Hopfauf’s note of the call, Haisanuk was contemplating referring the matter to SI in Mississauga. In response to Hopfauf’s question “what the fraud was?,” Haisanuk said if they “both bought the same software then that is fraud.” Hopfauf asked Haisanuk to put a note on the file for SI to give him a call when they started the case. However, Hopfauf did not tell Haisanuk that the software was the same; in fact, the SRO and SSP software were only compared and found not to be the same many months later during the investigation.

[70] By letter dated April 9, 1997, Haisanuk told Dove and Zenz he would be reassessing Softcom for 1995 and 1996 as there “was no promotion of the software,” “no production of the shrink wrapped software available for sale,” “no reasonable expectation of profit in 1995 and 1996,” “no business,” and because “the software is antiquated and has little value.” He noted that the only income reported by SSP in 1995 and 1996 was interest income of $224. He proposed to disallow the deductions for capital cost allowance, which over the two years was almost the entire $1.5M alleged cost of the software.

[71] On May 21, 1997, Dove responded at length to Haisanuk’s letter of April 9, 1997, taking issue with Haisanuk’s view that little had been done to advance the business and the valuation of the software; however, he provided little or no new information. Dove asked for a meeting on May 30, 1997.

[72] On May 26, 1997, Haisanuk sent his April 9, 1997 letter proposing reassessment to Calgary. Harder filed an affidavit in this case saying that there was nothing unusual about sharing this reassessment information with them. Hopfauf and Haisanuk had a telephone conversation that day which Hopfauf recorded in a memorandum. It notes that Hopfauf asked Haisanuk why he was making a “referral” to Mississauga, presumably following up on their conversation on April 8. Haisanuk said it was due to Softcom moving its operations to Brampton. Hopfauf did not testify at the trial.

[73] On May 29, 1997, Levac sent Haisanuk a memorandum confirming her valuation of the Retail Manager software as being between nil and $20,000. She noted that “software development is a relatively high risk venture” at which few companies succeed. She stated that SSP “has not been able to demonstrate the necessary resources to overcome the ‘high risk’,” and that the principals “have no software development expertise and no track record of successfully marketing and developing software.” These facts, and others set out in the memorandum, informed her decision to adopt a cost-based approach to valuation. She also noted that the software was “outdated and not completely debugged and adapted to the Canadian market.”

[74] A meeting between Softcom and CRA occurred on May 30, 1997. It was held at the law office of Daved Muttart. Haisanuk was accompanied by a technical advisor at CRA, Terry Law. Dove, Zenz, Romanuk and Muttart attended for Softcom. According to Haisanuk’s notes of the meeting, Dove was adamant that they had been carrying on a business since December 1995 “and it was only unforeseen circumstances that prevented them from getting the software marketed and available for sale.” Dove claimed they had difficulty finding a company to outsource marketing and develop a marketing strategy. However, Dove and Zenz advised that the previous day they had engaged Vujic, who had responded to an advertisement in the Toronto Sun and they had “contracted for a 45 Day Marketing Plan to begin June 2, 1997.” Haisanuk and Law asked Dove and Zenz to provide any additional documentation to show their attempts to market and sell the software since 1995. They also asked for a copy of the promissory note to SII for the remainder of the purchase price, which Dove had said was signed by all the investors/partners in SSP.

The referral to Special Investigations

[75] Following the May 30, 1997 meeting, Haisanuk made the decision to refer the matter to Special Investigations. In his referral to Heryat in SI, contained in a Form T134 dated June 10, 1997, Haisanuk named Dove as the subject of the investigation. He presented two theories of fraud to SI. These were described by plaintiffs’ counsel at trial as Haisanuk’s “myths.” First, he said that the software “appears” to be exactly the same as the software purchased by SRO. Second, he said the software was “antiquated and worthless.” Although Haisanuk turned out to be incorrect about the SSP software being the same as the SRO software, the investigation found no support for the value of the Retail Manager software claimed by Dove and Zenz, or even that it was acquired from SII.

[76] At the preliminary inquiry in June 2000, Haisanuk confirmed he made the referral decision after the May 30 interview, stating: “[T]here was just too much wrong with it. Too many points weren’t cleared. It appeared nothing was forthcoming by way of the documents that had been asked for over a few months, so, I made up a referral outlining all the transactions and the lack of audit trail and asked them [SI] to have a look at it.”

[77] At the preliminary inquiry Haisanuk was cross-examined on the timing of the referral and when he decided the matter should go to SI. He agreed that “so many lights were flashing” such that he knew from an early stage that it could end up as an enforcement matter, but said he was not in a position to conclude that until he completed his audit.

[78] Zenz complains that Haisanuk did not understand the source code or the business concept, nor did he contact Chard about his valuation. Zenz said that the valuation of the software should not be based simply on how long it took to produce, but on its value to SSP to make a profit from it. However, Zenz does not address the fact that many other POS programs were on the market at this time, and that Boyd had to essentially rewrite the software, even though it was supposedly worth $2.2M. Zenz herself was no expert on how much the software was worth; indeed, she had learned that Romanuk’s sister had a program for her stores that cost $150,000 – a far cry from $2.2M, or even $1.5M.

[79] In my view, Haisanuk’s conclusions were reasonable. By late May 1997 about two years had passed since the software had supposedly been acquired for an original price of $2.2M. It had been well over a year since Chard had prepared his “valuation” (for $200) and a tax shelter number had been obtained and investors recruited. Yet the software was still being “modified” or, as Boyd later said, effectively rewritten by him (for $8,700), after having been made “unstable” by Steve Lager (who was paid $2,200), and had not been marketed or sold to anyone. Haisanuk had the opinion of CRA valuators that the software was worth between $0 and $20,000.

The preliminary investigation

[80] Prior to Haisanuk completing the formal referral on June 10, 1997, Heryat learned, presumably from Haisanuk, that the T134 was coming, as sometime in the first week of June he contacted Calgary SI and spoke with Lynn Watson, a junior investigator in Calgary SI who was about to move to Belleville to work in SI there. Heryat told Watson that he would be assigning the conduct of the initial investigation of the SSP matter to her. He asked her to review the SRO file while still in Calgary, which she did, starting her work in advance of June 10, but sometime after June 1.

[81] Heryat accepted the referral to SI on June 10, 1997. He commenced a preliminary investigation to determine whether misrepresentations had been made respecting SSP’s filing and the losses claimed by the investors/partners in SSP. In particular, he said that the information obtained from the audit indicated that the cost of Retail Manager to SSP may not have been $1.5M, or more, and that there was suspicion that it may not have been purchased from a corporation in the Cayman Islands at all.

[82] On June 16, 1997, Heryat went to Calgary and met with Hopfauf and Watson. They discussed the SRO matter and the similarities to SSP, including the similarities in the agreements and connections to the Cayman Islands. It was agreed that Heryat would obtain the Retail Manager software from Levac and send it to Hopfauf to compare it to the SRO software. On June 24, Heryat took a statement from Haisanuk. Watson began working on the file in July after relocating to Belleville.

[83] Watson had limited experience as an investigator. She had joined CRA as an auditor in 1992, and, like Heryat, had no experience with software or start-up companies. She had only been involved in one or two other investigations, although she had taken a 3-week course for investigators. She was at level “AU1” within CRA, which was the lowest level rank, although Heryat said he made Watson an acting AU2 in order to assign her the file. Watson said she did not achieve permanent AU2 status until 2001 or 2002. Although her experience was limited, Watson did not conduct the investigation alone. Most interviews with potential witnesses were conducted with another investigator, often Heryat or, when he was away, his replacement as acting head of SI, Robert Hahn. Both Heryat and Hahn appear to have been actively involved in the investigation with Watson. Her draft reports were reviewed by them, and search warrant applications were reviewed by her superiors in Belleville and in Ottawa. Watson also took detailed contemporaneous notes of her actions and conversations.

[84] Watson began by reviewing Haisanuk’s referral file and the COM, and she spoke with Haisanuk, Levac and James. Her task was to determine if there were sufficient grounds to move the case from a preliminary investigation to a full-scale investigation.

[85] On July 10, Watson and Heryat interviewed Chard. They tracked him down at the Newmarket courthouse. Chard told them he recalled being asked by Zenz to put a value on some software. He said he told her he “wasn’t qualified” but gave them a framework and he was given figures to use. The appraisal was prepared on Zenz’s computer and simply went by her projections as an income appraisal. Chard said he never saw the software, something he later contradicted. He did not know why the invoice was dated May 1995 when the “valuation” was dated September 1995, but Watson’s note says that he speculated that he may have been asked to backdate it. Watson and Heryat did not take a statement from Chard, but both of them took notes of what he said and typed them up shortly afterwards. Heryat’s notes indicate Chard told him that “Sonya [Zenz] said she and someone else had developed the software.”

[86] On August 21, 1997, Dove called Haisanuk as he, Zenz and Romanuk had prepared a package of materials following the May 30, 1997 meeting. Dove and Haisanuk spoke that day and again on August 22. At that time, Haisanuk confirmed that the matter had been referred to SI, something Dove had suspected. Dove knew the implications of this as he had previously worked for CRA, including in SI. Nevertheless, knowing that there had been a referral, which was also confirmed by Romanuk at trial, Dove sent the materials to CRA on about August 28, 1997. Because of the referral, Dove asked Haisanuk where the materials should be sent. At Haisanuk’s suggestion, Dove sent them to Haisanuk who then forwarded them to Watson for her review.

[87] The materials included a 16-page letter dated August 28, 1997, signed by Dove on behalf of the Management Committee of Softcom, which consisted of him, Zenz and Romanuk. Although Zenz and Romanuk said they spent a lot of time working on this response, when asked at trial if she had input into the letter, Zenz only said “I may have.” The materials added little to what Haisanuk had already obtained in his audit. They consisted largely of argument and assertions. Enclosed with the letter were some handwritten notes with names and phone numbers dated from the fall of 1996, and a handful of invoices for some printing, copying, computer parts, internet assistance and for renting space at the Mississauga Business Expo in October 1996. Romanuk said that much of this had already been shown to Haisanuk. All of this was presumably to demonstrate that Softcom was a legitimate business enterprise.

[88] Also included was a promissory note to SII for $1.4M signed by Dove and Zenz, but none of the other partners. However, Dove’s letter asserted that “the note is a full recourse note that will have to be paid.” The letter went on to note that a $350,000 payment was due to SII in December 1997 and would need to be paid “from profits or a combination of profits and additional contributions by the partners.” As I will come to below, $350,000 was contributed by the partners to create the appearance of a payment in December 1997 and January 1998, but the funds were returned to the partners a few days later.

[89] As well, in his August 28, 1997 letter, Dove stated that he first met the people from “Softcom” in a bar in the Cayman Islands when he was on vacation there, which is different from Dove’s evidence that he connected with Softcom through “Tommy” in Coboconk.

[90] Watson wrote Softcom, on September 9, 1997, confirming Haisanuk’s call with Dove that “the Investigations Division of the Belleville office is now involved in a preliminary investigation of the tax affairs of Softcom Solutions.” Over the following 6 months, Watson, Heryat, Dove and Muttart exchanged correspondence with CRA complaining about the investigation, including that it was harming Softcom’s business.

[91] In October 1997, Heryat, Hopfauf and Harder interviewed John Salowski, a programmer who they learned had written the software for the SRO venture. They also interviewed Susan Bell who created the source code for the SRO program. In December 1997 Salowski advised Heryat and Watson that the SRO and SSP software were not the same. This debunked one of Haisanuk’s two bases for referring the file to SI, that the software was the same in both cases. However, Salowski also told them that the SSP software might have been worth between $150,000 and $250,000. In cross-examination, Heryat said that given the wildly different values they had received, they were investigating whether the purchase price was valid at all, whether SSP had paid anything for the software, and who made it.

[92] Watson had observed that the source code for the Retail Manager software provided to CRA indicated that Willow Technologies was the author. She called them and made contact with Ron Boyd. On December 11, 1997, Watson and another investigator, Michelle Locke, met with Boyd and showed him the diskettes provided by Dove and Zenz to Haisanuk and Levac in January 1997. Boyd confirmed that he had developed the software, having salvaged the original design and rebuilt the program. Boyd told them the software he was provided was not stable and needed to be fixed. Boyd used a programming language called “Clipper,” which was not the programming language of the program originally provided to him by Dove and Zenz. Boyd confirmed that the source code and diskettes were created by him. Boyd also confirmed that between approximately June 1996 and February 1997 he was paid a total of $8,700 by Dove and Zenz for his work on Retail Manager. This was for approximately 150 hours of work. Boyd said that the software was not ready to be marketed until December, 1996. Watson had a further telephone conversation with Boyd on December 17, 1997. Watson did not prepare a statement for Boyd at the time.

[93] On December 11, 1997, Watson had a telephone conversation with Steve Lager, who told Watson that he had met Dove in a bar when he was a bartender in Coboconk. He said that Dove asked him to evaluate some software and provide a report. Lager said the software was “dated” as it was “maybe a DOS application” and that he did not create any source code for Dove. As noted earlier, documents obtained during the audit showed that Lager had been paid $2,200 for “consulting.” Watson did not obtain a statement from Lager.

[94] Boyd was interviewed again on March 5, 1998, by Watson and Robert Hahn, the Acting Assistant Director, Investigations Division in Belleville, as Heryat was away for a period of time. Watson also brought a computer expert, Ron Allen, to assist her at the interview. Boyd confirmed that the software he was provided had “bugs they couldn’t get rid of” and that he converted Retail Manager into a different programming language. Boyd told CRA that the value of the software he provided to Dove and Zenz was worth $50,000. He speculated that Softcom might have spent between $50,000 and $150,000 on the program he was provided to repair. He said $250,000 would “seem rich.”

[95] During the preliminary investigation Watson was not aware of Levac’s conversation with David Seal, something she only learned of when Levac’s entire file was sent to her to provide disclosure after charges were laid. At trial, Watson was cross-examined on this lack of information, on the differing values obtained, and on why they did not value the Retail Manager software as a business asset. It was suggested this undermined Haisanuk’s second ground for referral to SI, that the software was antiquated and essentially worthless. Watson responded that those points did not address whether the software had actually come from the Caymans, who created it and whether Dove and Zenz actually spent, or were committed to spending, $1.5M on it, as they had told CRA.

[96] Watson completed a “Primary Report” signed by Robert Hahn, on March 20, 1998. It summarized the findings to date and proposed a full-scale investigation, including obtaining search warrants and attempting to obtain information from the Cayman Islands. The Primary Report and its proposed action were approved by Charlaine MacLean, Director, Tax Services Office, Belleville, on March 25, 1998.

Softcom activities in later 1997

[97] From June, 1997 to March, 1998, while Watson was conducting the preliminary investigation, Zenz’s evidence is that SSP continued to operate, contracting with Vujic for a second “45 Day Marketing Plan” and subsequently hiring a full-time marketing manager, who happened to be Dove’s daughter. Zenz asserts that at the end of 1997 “the business was ready to explode,” citing a potential deal with the New York Housing Authority. But Zenz did not explain how the New York Housing Authority could use the program, as it was hardly a small retail business, was in the United States, and SSP had only purchased a license to sell Retail Manager in Canada.

[98] In October 1997, Dove appears to have also sought a loan of $350,000 from the Business Development Bank of Canada (“BDC”). The letter and proposal to the BDC says that SSI was intending to embark on “a rather aggressive R&D program” and an “aggressive marketing program,” and that the loan was to be used to market Retail Manager and Bar Manager. In cross-examination, however, Zenz said that the intended purpose of the loan was “probably” to make the $350,000 payment that was due to be paid to SII at the end of 1997.

[99] Also included in the loan application were financial projections anticipating that 14,800 units of the software would be sold in the balance of 1997, resulting in gross sales revenue of $740,000, and a similar number for 1998 together with 7,400 “Updates.” According to the Financial Statements of SSP for 1997 prepared by Dove in February 1998, actual revenue from sales for 1997 turned out to be just $29,785. At a unit cost of $149 this amounts to selling only 200 units in 1997. When cross-examined on the inaccuracy of these projections, Zenz testified that there were still three months in 1997 and that “…things were really starting to move with our teaming agreement and all that…” However, the “teaming agreement” she referred to, which related to a proposed collaboration with an entity in Rhode Island regarding the “New York deal,” only came up April 1998, not in 1997.

[100] Sales appeared to increase in 1998, to $169,452, but aside from a handful of individual sales all of that amount was from a single alleged sale at the very end of the year, on December 28, 1998, to an entity called Toronto Computer Technology for $163,013. There was no evidence about this sale other than what appears on the General Ledger. Had it been legitimate, given the size of the sale one would have expected Zenz and Romanuk to have said something about it in their lengthy affidavits or at trial, but they did not. The 1998 Financial Statements for SSP are dated February 28, 1999, and indicate accounts receivable of $189,473, which suggests that as of that date Softcom had not collected anything on that one large “sale.” There were no financial statements for SSI for any year, and none for SSP after 1998. As I will come to, when the plaintiffs’ damages expert asked Zenz and Romanuk if Softcom ever collected on the 1998 receivables, they told her they did not know.

The full-scale investigation: search warrants and requests for information

[101] Watson swore an Information to Obtain (“ITO”) search warrants on April 6, 1998. The search warrants were issued by Justice Hunter of the Ontario Court of Justice (Provincial Division) and executed on April 16, 1998. An additional warrant was obtained and executed on April 17, 1998.

[102] The ITO alleged a number of offences by Dove and Zenz, including that they:

(a) had made false or deceptive statements by overstating the value of the Retail Manager software;

(b) had understated their income in 1995 and 1996;

(c) committed tax evasion by claiming fraudulent deductions, and by having the investors also claim those deductions; and

(d) committed the criminal offence of fraud.

[103] The ITO provides a detailed summary of the audit and investigation to that point, including the contradictions and inconsistencies in the evidence gathered from the audit and the interviews with Chard, Lager, Boyd and others. The ITO also notes that Dove and Zenz had each claimed a business loss from Softcom in 1995 of $44,846.14, and $45,797.24 for 1996 arising from the alleged purchase of the software. This arose from the amortization of the value of the software, based on the $1.5M purchase price in those two years, which resulted in losses to Softcom that were allocated among the investors. Similar losses were claimed by the other investors/partners of SSP.

[104] The warrants were executed at a number of locations, including the Softcom office in Brampton, Dove’s and Zenz’s residences, Lager’s residence, and the offices of Boyd and Muttart.

[105] Watson also requested registration documents for SII and IBS from the Cayman Islands. These documents were received in the latter part of April, 1998. They showed that both entities had been registered in March, 1996, when Dove and Zenz were in the Caymans.

The $350,000 payment

[106] Watson also obtained banking records which raised more questions about the legitimacy of the purchase of the software. As noted above, at the end of 1997, pursuant to the Amended Software Acquisition Agreement, SSP was to make a payment to SII of $350,000. Although no resolution was passed by the partners, the investors/partners contributed funds to make this payment by forwarding funds to Muttart at Dove’s request. A person with a full partnership share was required to pay $20,065. In a letter to Muttart at the time, Dove described the contributions as being “in the form of a loan to Softcom from each partner.” Dove advised that he would be travelling to the Cayman Islands to make the payment personally in January, 1998.

[107] An ITO was sworn by Heryat on August 31, 1998 for search warrants to obtain information regarding wire transfers from the Royal Bank of Canada (“RBC”) relating to the $350,000 payment. Documents obtained showed that on January 15, 1998 a $351,000 wire transfer was sent from Muttart’s TD trust account to Softcom International Inc.’s Cayman Islands Euro Bank account held with RBC. However, upon receipt of the wire transfer Euro Bank was to contact Dove who was in the Caymans at the time. Also with Dove were the Romanuks and another investor, Dennis Dohey, who seems to have been quite active in the enterprise and other activities with Dove, and is a plaintiff in this action but did not testify.

[108] The next day, January 16, 1998, cheques were issued by Euro Bank, or wire transfers were subsequently made, to almost all of the investors in virtually the same amounts that they had contributed, less a $300 transaction fee. The purported payment was a sham. The only investors who do not seem to have been reimbursed, at least directly, were Zenz and Dennis Dohey.

[109] Zenz said she was ill and did not make the trip to the Caymans in January, 1998. Romanuk said she went there to assure herself that there really was an SII and a Mr. Burgess. She said she was comforted by seeing a sign for SII at the offices of Euro Bank. Romanuk also met Burgess, but agreed that Dove had already met with Burgess alone during which, she says, he would have negotiated the return of the $350,000 payment. She said she trusted Dove and Zenz.

[110] Between June and November, 1998, Watson and Heryat attempted to meet with many of the investors. However, Dove had written to the investors urging them not to speak to CRA, and many turned them away. Some who did speak to CRA asserted, falsely, that they had not received funds back from the $350,000 payment made in January, 1998.

[111] The financial statements of SSP for 1997 also suggested that the $350,000 payment for 1997 had been made, as they indicated long-term debt was reduced to $1.047M, and that the partners had contributed $358,317 in 1997. When asked about this at trial, Zenz said the money came back because the vendor was willing to assist them so that SSP could use the funds. She said, however, that all of this was dealt with by Dove. There is no documentation supporting it. In response to the question as to why she wouldn’t want to make sure the financial statements were accurate, Zenz responded: “Well, we had discussions with Mr. Dove, every one of the partners, and we all trusted him. And basically we did what we were told to do.” Of course, the money did not come back to be used by the partnership as Zenz suggested, it just went in a circle back to the investors. Eventually, in cross-examination, Zenz agreed that the financial records (the purported payment continued to be reflected in the 1998 financial statements) should have been corrected. She did, however, provide these uncorrected financial statements to the plaintiffs’ damages expert on which to base her calculations, as I discuss below.

[112] In late 1998, after Watson informed Dove that CRA was aware that the $350,000 payment had come back and had not, in fact, been paid, Dove nevertheless wrote back to Watson, insisting that it had been paid, but only attached Muttart’s letter confirming the transfer to Euro Bank Corporation. Dove copied “all partners” on his letter. Only following disclosure in the criminal case did Dove change his story.

[113] There is no evidence of any further installment payments being made to SII at the end of 1998 or later. Nor is there evidence that SII ever attempted to enforce the promissory note to collect what Dove, Zenz and SSP had promised to pay it for the sale of the software.

Further investigation

[114] Following the search of his residence in April 1998, Lager reached out and spoke to Watson and Hahn and changed his story, saying that Dove asked him to make modifications to a program that was written in Clarion, another computer programming language. However, based on further investigation, Watson learned that Zenz had purchased Clarion for Lager, which Watson believed was so that Lager could create Retail Manager.

[115] Watson and Heryat also interviewed Daniel Vujic, of the “45 Day Marketing Plans”, who signed a statement that he had terminated his contract with Softcom because he became “uncomfortable with the environment at Softcom.” Vujic said he was familiar with SII and IBS, and that they were owned by Dove, Zenz and other investors. Watson also found documents on Dove’s computer that included letterhead templates and correspondence for IBS and SII, suggesting that Dove, and perhaps Zenz, controlled those two Cayman Island entities. Vujic did not testify at the trial.

[116] CRA hired a computer consultant, John Baker, in October 1998, to review and compare the programs seized during the searches. In a report dated January 2, 1999, Baker concluded that Boyd’s Retail Manager program was not derived from the earlier Clarion source code, was in a different programming language, and was “almost certainly an entirely new program.” It is different than the program Lager had and which was given to Boyd by Dove and Zenz. All of this supported the conclusion that the Retail Manager software had not been purchased from SII at all, let alone for $2.2M, or $1.5M.

[117] Following the receipt of Baker’s report, Watson, Heryat and Baker met with Boyd on January 19, 1999, and Boyd signed a statement this time. Boyd confirmed that he “salvaged the design” as “he could not use much of the program” he was given by Dove and Zenz. He said he “cannibalized” it and created a new program in a different programming language for which he was paid $8,700. Although Dove and Zenz said they wanted the program to work on a 286 computer, the program they gave Boyd was written in Clarion which could not be expected to work on a 286.

[118] Boyd was asked for his opinion on what Dove and Zenz would have spent on the program provided to him. He estimated between $35,000 and $150,000. According to Watson’s interview notes, he said “if someone paid $1,250,000 he’d shoot them first and then ask questions (or something to this effect).”

Impact of the search on SSP

[119] Zenz’s evidence is that the searches in April 1998 were extremely upsetting, and effectively shut down SSP’s business. She highlighted the New York Housing Authority prospect as something that could not proceed due to the search; however, she did go to New York after the search. Zenz had made similar complaints about the audit interfering with SSP’s day-to-day affairs and inhibiting its progress. This is difficult to accept. In 1997, Zenz and Dove met with Haisanuk over 3 days in January, and again on May 30. That is all. Dove provided more documents in late August, 1997, together with a letter outlining his position. The documents were not voluminous and might have taken, at most, a few days to compile, yet Zenz and Romanuk say they worked hard for over two months gathering the documents to include with the August 28, 1997 letter. Further, after the searches in April, 1998, Watson returned copies of documents, diskettes and hard drives to Dove and Zenz in order to avoid disruption of their work.

[120] In a letter Dove sent to Romanuk in October, 1998 cautioning her not to speak to CRA investigators, Dove told Romanuk that he and Zenz were close to obtaining new financing and launching an “ambitious marketing program very soon.” He also noted that “the negotiations with the City of New York… have discontinued, pending the completion of a Windows based Point of Sale program.” These statements are not supported and appear inconsistent with Zenz’s evidence of what was going on around that time, including her assertion that SSP’s business was effectively shut down by the searches in the spring of 1998.

SSP’s private investigation

[121] In the summer of 1998, Dove, Zenz and SSP, through another lawyer, Les Morris, hired a private investigator who interviewed Chard, Boyd, Muttart, Lager and Lager’s girlfriend, Kim Bot. In his interview with the private investigator, Chard took issue with some things he told Watson and Heryat which were summarized in the ITO. Chard said CRA had taken him by surprise meeting him outside a courtroom in Newmarket, and he told the private investigator that he had in fact seen the software. However, Chard did confirm that he had no experience valuing software, and prepared an appraisal with Zenz based on information she provided to him. The notes of Boyd’s interview simply provided a different gloss on what Boyd had been provided by Dove and Zenz. The interviewer provided his own interpretation, stating that Boyd seemed “honest although somewhat cryptic in his response.” Lager took issue with one point about a particular software language, but otherwise largely confirmed what has already been stated, that he met Dove in a bar, tried to make changes to the software and was out of his depth and “may have done more damage than good.”

MLM Partnership

[122] At various places in the record, and in the out-of-court cross-examinations, there are references to another another software partnership called MLM Partnership, which appeared to have a similar set-up to SSP and for which Dove and another SSP partner (who is not a plaintiff) had claimed business losses of $116,445 in their 1997 income tax returns. In her investigation, Watson discovered that Ivan Burgess was MLM Partnership’s contact person for the software vendor, which was SII. She also learned that MLM’s Confidential Offering Memorandum, Software Acquisition Agreement and letters to Burgess requesting a reduction in price (from $5M to $2M) are similar to SSP’s documents, and that Chard provided the software valuation for MLM Partnership found in their COM under the company name “Software and Business Evaluation and Consulting Company.” He valued that software at $25,000,000.

[123] I heard no testimony at the trial about MLM, but in her Prosecution Report Watson regarded it as similar fact evidence supporting her conclusion that the SSP acquisition was fraudulent.

Reassessments and referral for prosecution

[124] In February 1999, Zenz was advised by letter from Watson that CRA would be recommending to the Department of Justice that charges be laid against her. The letter to Zenz alleged that she had committed tax evasion relating to the claims for losses by investors in SSP in 1995, 1996 and 1997. The amounts in issue were $773,596 (1995), $855,153 (1996), and $86,430 (1997). The letter stated Watson’s conclusion that “the sole purpose of the Partnership was to provide income tax write-offs to the partners/investors. Therefore, the Partnership appears not to have a legitimate business purpose.” Zenz was also advised that she would be reassessed for the losses she had claimed in those years.

[125] In March 1999, Watson and Heryat submitted a Prosecution Report to the DOJ recommending charges under s. 239(1)(a) and (d) of the ITA and under s. 380(1)(a) of the Criminal Code, R.S.C. 1985, c. C-46.

[126] Watson was cross-examined on her preparation of the Prosecution Report and omissions in the report that it was suggested were exculpatory. These included not noting that Dove and Zenz were small investors in SRO, that Lager and Boyd’s evidence had shifted over time, that the grounds in the T134 had been undermined, that the CRA valuation was of a program prepared by Boyd rather than the one allegedly purchased from SII, and that it omitted reference to the conversation between Levac and Seal. As observed earlier, however, Watson was still unaware of Seal’s comments when she prepared the report, and the investigation had in any event gone in a different direction. The CRA had no choice but to value the program prepared by Boyd as that is what Dove and Zenz gave Haisanuk, as they said they no longer had the original software. While it might have been more complete to add additional details regarding Lager, his evidence did not help Dove and Zenz, and Boyd’s evidence questioned whether there had been any acquisition of a valuable software program from a company in the Cayman Islands at all.

[127] Watson also reassessed Dove, Zenz, and the other investors, disallowing their deductions for losses arising from Softcom - $44,846 in 1995, $45,797 in 1996 and $4,881 in 1997, amounts which far exceeded the investments of $24,000 per unit. They were also assessed with gross negligence penalties. The General Audit Report prepared by Watson rejected the position that the software had been purchased from SII; instead, Watson concluded that Retail Manager had been purchased from Boyd’s company, Willow Technologies, for $8,700. She rejected the dealings with SII, noting the “sham payment” of $350,000 in January 1998. Watson also concluded that SSP was itself a “sham” as it had no reasonable expectation of profit and was simply a vehicle “to provide the investors with a tax write-off.”

The prosecution and Tax Court litigation

[128] Charges of tax evasion and making false statements were laid against Dove and Zenz under the ITA (not the Criminal Code) in April, 1999. The decision to lay charges was made by the Department of Justice, not CRA. A 70-day preliminary inquiry took place over a period of 30 months, between May 2000 and October 2002. That court heard from many more witnesses than I have heard from at this trial, including Boyd, Lager, Chard, Vujic, Russ, Muttart, James and many of the investors (“virtually all,” according to the plaintiffs), as well as people I heard from, including Watson and Romanuk. Justice K.L. McLeod had no difficulty committing Dove and Zenz to trial. In her reasons for committal, on November 28, 2002, the preliminary inquiry judge noted, among other things, that a jury could infer:

• that the valuation by Chard, who had no experience in the computer software field, was “wildly inflated” and “was directed by Mr. Dove” who created the headed note paper on which the valuation appeared;

• that the actual value of the software was $20,000;

• that the pre-existing software “never in fact was purchased” for $2.2M;

• that Dove and Zenz set up IBS and SII when they were in the Caymans in March 1996; and

• that no money was owing for the software because “none of [the investors] had ever been approached either individually or as a corporate entity to pay the balance of the purchase price,” a fact corroborated by the repayment to the partners of the $350,000 installment purportedly paid in December 1997-January 1998.

[129] Justice McLeod stated that “[t]he evidence revealed at best, some lame efforts to market the product, and from that a jury could infer that the real interest of Softcom Solutions Partnership was the reduction of tax liability and the personal gain of the managing partners, the defendants, rather than attempt at selling the product.” The judge also stated that a jury could conclude that Zenz was “an all knowing and all contributing partner” based on her “close working association” with Dove, her significant involvement in the entirety of the matter, including meetings with Lager, at partnership meetings, at the SSP office during the Haisanuk audit, her instructions to Muttart, her presence in the Cayman Islands when SII and IBS were incorporated, and the materials found on her computer.

[130] Justice McLeod went further and said that “[g]iven all of the evidence, in my view, a jury could conclude not only that Mr. Dove and Ms. Zenz collaborated in the creation of the tax shelter, but also that they knew that the represented cost of the software was entirely fictitious, and therefore the claims of losses … were false.” Lastly she stated:

In my view, not only could a jury conclude that there was sufficient evidence to find Mr. Dove and Ms. Zenz guilty beyond a reasonable doubt of the offences with which they are charged, a jury could conclude if asked, that Mr. Dove and Ms. Zenz had set up Softcom International, had set up International Business Solutions, had paid themselves the consultants fees, had paid themselves all of the contributions, had [mis]represented all of those facts to the unknowing investors, as well as to Revenue Canada, and in fact were guilty of many other offences, including fraud.

[131] A pre-trial motion to stay the proceedings for delay under s. 11(b) of the Charter was heard by O’Connor J. in the Superior Court in September and October, 2004, and the charges were stayed by him on December 8, 2004.

[132] On the civil side, in a Notice of Objection dated May 26, 1999, prepared by Dove, all of SSP’s investors, including Dove, Zenz and Romanuk, objected to the reassessments. In the Notice, Dove states that Zenz had “moved on” and that he was “left to fight the battle with Revenue Canada.” In her cross-examination, Zenz said she was quite ill at the time, and that they no longer had an office in Brampton “because this whole thing was in a shambles.”

[133] The Notice of Objection, which was reviewed by Romanuk, contains some surprising statements. It asserts, for example, that Retail Manager was “available for sale in 1995. In fact, early in 1995.” That is incorrect by two years. The Notice claims that Softcom located Media Duplications in 1995, which is also incorrect by two years. Dove also states: “I believe that Softcom Solutions should never have been registered as a ‘tax shelter’,” and that it occurred “due to the confusion surrounding the interpretation of a tax shelter.”

[134] The objections were held in abeyance pending the criminal prosecution. Following further submissions by Dove, the assessments were eventually confirmed in March, 1998. Appeals were launched to the Tax Court of Canada. Zenz declared bankruptcy and discontinued her appeal in 2013. Eventually, in 2015, the other individual plaintiffs settled their appeals by having the gross negligence penalties vacated; however, the disallowance of the deductions remained.

Expert evidence

[135] The parties each called an expert witness to address the standard of care of the investigation. Both experts were retired former police officers, one with the Ontario Provincial Police and the other with the Royal Canadian Mounted Police, and both had extensive experience in fraud and commercial crime investigations. I permitted both of them to give opinion evidence.

[136] The plaintiffs’ expert, Gregory Gard, worked from a very limited record, which undermined his conclusions regarding the evidence, some of which are contradicted by the evidence presented at the trial. The defendants’ expert, Donald Perron, was given a much fuller record. He worked from a framework he created that in some respects was overly subjective, such as making his own conclusions about the integrity of the investigators. Both experts formed conclusions on the integrity of the investigation that seemed to me to carry too much weight in their approaches, assuming it was properly within their expertise to assess that issue at all.

[137] Gard made much of the fact that Watson was inexperienced, that Levac should have followed up on Seal’s suggestion, and that interviews of certain important witnesses – Chard, Boyd and Lager - were not recorded or statements taken. But the interviews were conducted by Watson with at least one other person, detailed notes were made, and Gard does not address how this had a detrimental impact on the plaintiffs. Gard finds some shortcomings in Watson’s ITO because it failed to mention certain facts and did not append source documents, but he does not say the search warrants should not have been issued.

[138] Gard says that Chard, Lager and Boyd “recanted” the information they had provided to CRA when they spoke to Dove’s investigator and that, had that been included in the ITO, the warrants may not have been issued. Assuming there were such recantations, they occurred after the ITO was sworn and were not made to CRA investigators. Further, had Gard been provided with more complete information, including the transcripts of the evidence of Chard, Lager and Boyd at the preliminary inquiry, he could not reasonably have placed any weight on the so-called recantations. Chard, for example, contradicted himself and was evasive on a number of issues at the preliminary inquiry, such as when confronted with his statement to SSP’s investigators that he had not told CRA he had not seen the software, among others. Boyd and Lager never had their so-called recantation statements put to them at the preliminary inquiry.

[139] On the other hand, despite shortcomings noted above, the defendants’ expert conducted a helpful review of the steps taken by the auditor and investigators in relation to CRA manuals and practices of the day. He concluded that the investigation was “reasonably in line with the policies in place” and that the standard of care was reasonable for the time.

Damages

[140] Zenz described the stress the audit, investigation and subsequent prosecution had on her, emotionally and financially. She claims loss of income for several years and special damages largely related to legal fees for her criminal defence totalling close to $800,000. At the time of the events in the late 1990s Zenz was a qualified accountant. She faced crippling costs to defend herself and eventually declared bankruptcy. She also suffers from serious medical issues, but at least some of those pre-date the audit and there is no evidence that they are attributable to the actions of the defendants. Although there is limited evidence on this, Zenz’s position appears to be that the harm caused by the audit, investigation and prosecution continues to this day. Although the pleading sought $22,000,000 in general damages, at the conclusion of the trial Zenz sought general damages of up to $500,000.

[141] Romanuk also claims she has dealt with 25 years of stress, and identifies about $45,000 in special damages and seeks up to $200,000 in general damages. Her husband, Michael Romanuk, testified very briefly as to the impact this has had on his wife Dolores, and on their marriage, essentially saying that she is obsessed with this case and he wishes it would end. He and the other plaintiffs seek the losses from their investment in Softcom and a modest amount for general damages.

[142] The plaintiffs also led evidence from a damages expert, Melanie Russell, who opined that, based on the financial statements and assuming it was a going concern, Softcom had a fair market value of between $696,000 and $866,000 at December 31, 1998. She then projected that over the following few years Softcom would have generated profits from the sale of its software and updates that, by 2001, would have exceeded $2M per annum.

[143] However, Ms. Russell’s evidence is only as good as the information she was given and the assumptions she made. She acknowledged that the information provided to her was very limited. It was based on the financial statements which have already been discussed, and which were incorrect by crediting a $350,000 payment in 1997 that had not been made. In projecting large increases in sales, she relied on Dove’s letter to the BDC in October, 1997, which contained projections even for 1997 that bore no relation to reality.

[144] Russell also relied on the veracity of the single alleged sale on December 28, 1998 to Toronto Computer Technology of $163,013, for which she had no back-up documentation and no information as to whether that sum was ever collected. In cross-examination, Russell said she asked if it had been collected, but was told “they do not know.” Russell obtained her information from Zenz and Romanuk. As I stated earlier, given the size of this sale, one might have expected to have heard about it from Zenz or Romanuk at this trial, but I did not, and I do not accept that it occurred. Russell also took into account tax deductions, which had been disallowed.

[145] Zenz and Romanuk also did not provide Russell with complete information regarding the alleged opportunity with the New York Housing Authority, as they did not advise her that SSP only had the rights to sell Retail Manager within Canada.

[146] Russell assumed that SSP/SSI was a “going concern”, which was not supported by documents beyond the financial information she was provided, which was very limited and either inaccurate or unsupported. She agreed that it is preferable to have 3 to 5 years of experience in order to value a company, and in this case she only had 2 years. She agreed that software has a short lifespan unless one does upgrades, and she was not aware of any upgrades. She also did not have financial information for SSI (as opposed to SSP) other than the BDC letter. Russell assumed that SII would not seek to have the full amount of the promissory note paid.

[147] In these circumstances, I am unable to give any weight to Russell’s damages calculations. In fact, Russell provided other information supporting the conclusion that SSP had very little value as of December 31, 1998. According to Russell, the value of SSP as of that date would depend on a range of factors, including any value added from sales and marketing efforts, the time and cost to replace the software, and the state of the market, including competing products. Given the very limited sales and marketing, and the evidence that such software could be developed relatively inexpensively, and that there were many competing products available, one must conclude that SSP’s value, if any, was low.

Dove’s failure to testify

[148] I must also consider the fact that Wally Dove did not give evidence. Zenz said they all trusted Dove, who was at the centre of Softcom. It was Dove, according to Zenz, who met “Tommy” in a bar in Coboconk, paid $10,000 and received the software, and negotiated with Burgess who it is said represented SII and IBS to obtain not just a price reduction in March 1996, but also the return of $350,000 in January 1998. Only Dove could speak to these issues. If Dove could have helped support the position that Softcom was a legitimate business, that it had actually bought software from SII, was truly trying to market it, and had indeed obtained indulgences to permit the price reduction and return of payments, he ought to have been called as a witness by the plaintiffs. In contrast, the defendants, who are being sued for actions they took, or ought to have taken, do not need Dove’s evidence to explain their conduct.

[149] There was no explanation for Dove’s absence, even though Zenz acknowledged that he is living in Norland, Ontario, and while she is “very rarely” in touch with him, she is able to contact him. In her out-of-court cross-examination Romanuk said Dove was asked if he wished to be a plaintiff in the lawsuit, and he said: "I'll help you in any way I can but I don't want to be one.” Romanuk also said that he was bankrupt.

[150] I conclude that Dove was not called because he would not have helped the plaintiffs’ case, and infer from his absence that he would have hurt their case. While decisions as to who to call as witnesses in a trial is up to the parties, and adverse inferences should be drawn with caution and not in every case, the failure to call individuals who have information that cannot be presented by anyone else, or are more knowledgeable and in a better position to testify to certain facts, can have consequences, especially in the absence of an explanation for why the witness is not called: see P. Sankoff, The Law of Witnesses and Evidence in Canada (Toronto: Thomson Reuters, 2020), at 7.2(d)(ii); Levesque v. Comeau, 1970 4 (SCC), [1970] S.C.R. 1010 (S.C.C.), at pp. 1012-1013; Stikeman Elliot LLP v. 2083878 Alberta Ltd., 2019 ABCA 274, 95 Alta. L.R. (6th) 1, at para. 87. As summarized in Sopinka, Lederman & Bryant, The Law of Evidence in Canada, 5th ed. (Toronto: LexisNexis, 2018) 6.II.J.3(d)(iii):

§6.471 In civil cases, an unfavourable inference can be drawn when, in the absence of an explanation, a party litigant does not testify, or fails to provide affidavit evidence on an application, or fails to call a witness who would have knowledge of the facts and would be assumed to be willing to assist that party. In the same vein, an adverse inference may be drawn against a party who does not call a material witness over whom he or she has exclusive control and does not explain it away. The inference should only be drawn in circumstances where the evidence of the person who was not called would have been superior to other similar evidence. The failure to call a material witness amounts to an implied admission that the evidence of the absent witness would be contrary to the party's case, or at least would not support it. [emphasis added]

Conclusions on the evidence

[151] Before turning to the legal issues, I provide some comments and conclusions on the evidence.

[152] The plaintiffs presented affidavits from Zenz and Romanuk, and they were each cross-examined in advance of the trial. The transcripts were made exhibits, and they each testified at the trial as well. Michael Romanuk the husband of Dolores Romanuk, also testified very briefly. The defendants presented affidavits from Watson, Heryat, Levac, Harder and Joselito Fournier (a law clerk who attached many documents). Watson, Heryat and Levac testified at trial, and all five of them were cross-examined before the trial. Those transcripts were also part of the record before me. As noted, Haisanuk died in 2011, but I admitted his testimony from the preliminary inquiry heard in 2000.

[153] Watson, Levac and Heryat were all cross-examined at some length at trial. While I accept that Levac and Watson had limited experience at the time, they explained what were asserted to be shortcomings in their audit work and investigation and provided reasonable and credible justifications for what they had done, bearing in mind that they were speaking to events and documents dating back over 20 years, to 1997, 1998 and 1999.

[154] Zenz’s evidence in chief was contained in a 140-page long affidavit. She attempts to present Softcom as a legitimate business, citing efforts to promote and market the software. That evidence, however, is limited and inconsistent, and lacks credibility. What makes her affidavit so long is that it, like the plaintiffs’ submissions, is replete with speculation, complaints, and rhetorical questions which are not evidence but simply assert the plaintiffs’ positiion that CRA decided that Softcom was a fraud at the outset, that the audit was effectively a criminal investigation, and that the investigation itself was incompetent and negligent, conducted by inexperienced investigators who presented their case in the ITOs and reports in a biased, misleading and incomplete manner.

[155] Zenz’s affidavit, like the plaintiffs’ submissions, ignores or dismisses the facts that supported the conclusions of Haisanuk and, later, Watson and Heryat. These conclusions included that Softcom had not acquired a $2.2M, or $1.5M asset from SII on which it was claiming large tax deductions, and that there was good reason to believe that Softcom, despite some trappings of a business, was not a viable enterprise and perhaps had never been intended to be one. While one of Haisanuk’s two theories – that the software was the same as that in the SRO matter – was incorrect, there were many other similarities between the two ventures, and his concerns about the value of the software and the very limited activities of SSP/SSI in developing its business were confirmed in the investigation. Further, the theory developed by the investigators, Watson and Heryat, that the acquisition of the software from SII was likely fictional and that SSP was simply a vehicle for a tax fraud, is well-supported by their findings, as the judge at the preliminary inquiry also found almost 20 years ago.

[156] In assessing and weighing the evidence I have been mindful of the fact that the affidavits, drafted for a summary judgment motion, include hearsay evidence based on information and belief. I have not heard from Dove, Chard, Lager, Boyd and Russ, nor have I heard from James, Lamarche or Baker, among others, on the CRA side. And I only have a transcript of the evidence of John Haisanuk given at the preliminary inquiry. I do, however, have an extensive record of contemporaneous documents of what people said at the time, and records of various transactions and events. To the extent that I must rely on out-of-court statements by people who did not testify, the hearsay dangers are limited since, in light of the causes of action, much of that evidence is not needed to prove the truth of facts but rather simply to establish what the defendants were told in order to explain why CRA took the steps it did. The action is against CRA for its conduct in the audit and investigation. While relevant, the case does not turn on proving that the theories of Haisanuk, or of Watson and Heryat, were right or wrong. but whether their actions were reasonable and met an appropriate standard of care in the circumstances based on information they were provided, and whether they complied with the Charter.

[157] Zenz and the other plaintiffs complain that Haisanuk should have sent the audit to the Mississauga CRA office when he learned that the Softcom business office was in Brampton, although they cited no requirement that he do so. They complain that Haisanuk and Levac had no experience valuing software, that what was valued was not what was purchased, and that they should have followed up on David Seal’s comment that it was necessary to speak to the creators of the software to value it. But this ignores the fact that Levac sent the software to a technical expert, James, who provided an estimate of the value. It also ignores the fact that Zenz and Dove gave Haisanuk and Levac what they had, and that their own evidence was that they no longer had the original software they had supposedly agreed to pay so much for, and they did not know who created it.

[158] With respect to the investigation, the plaintiffs complain that Watson was inexperienced, and that this was the most complex investigation Heryat had undertaken. Counsel for the plaintiffs argued repeatedly that the matter should have been sent to what he said was a larger CRA office in Mississauga. But this ignores the fact that Watson worked with others throughout, including Heryat and Hahn, in conducting interviews, and that she compiled detailed reports and drafted a lengthy ITO which were reviewed by her superiors, and which persuaded a judge to issue search warrants which were never challenged. The Prosecution Report persuaded lawyers at the Department of Justice to prosecute Dove and Zenz, who were committed for trial after a lengthy preliminary inquiry. Yet the plaintiffs argue, or assert, without meeting the evidence against them, that had more experienced CRA investigators in a larger office handled the matter, charges never would have been laid, or would have been stayed or withdrawn due to a lack of a reasonable prospect of conviction – a speculative assertion inconsistent with the facts and the judicial determinations in the case.

[159] In cross-examination, Zenz professed reliance on Dove on critical issues, such as the origins of the software, and negotiations with SII. Her memory of events was inconsistent. She could not provide details or names of any supposed salespeople other than Vujic, for whom there was a contract and he was interviewed by CRA. Zenz could not or did not explain discrepancies in the financial statements. She was evasive when confronted with documents inconsistent with her narrative. I have noted a number of concerns with her evidence in my review of the facts above. As in her affidavit, Zenz was at times argumentative and complained that information had not been disclosed to her by CRA or the prosecutors, but this had little to do with her own evidence regarding the alleged business activities of Softcom, which was not credible.

[160] Romanuk’s evidence was much more limited, but also contained argument and complaints. She did not provide cogent or persuasive evidence that satisfied me that SSP/SSI was a viable business or, more importantly, that CRA acted unreasonably, improperly or incompetently, in auditing and investigating Softcom, Dove and Zenz.

[161] I do not accept the conclusion I am being asked, implicitly, to reach - that Zenz and Romanuk may have been innocent dupes of Dove. Softcom had at least the appearance of a legitimate business, with an office and some activity in producing and promoting the sale of Retail Manager. But the limited efforts to market and sell the software, which seemed to ramp up somewhat only after Haisanuk commenced his audit, went nowhere, as very few sales were ever made and the enterprise quickly fell apart.

[162] Perhaps Zenz believed, or persuaded herself, that the business had potential, and she may well have done some of the work she asserts she did and for which she was paid (from the funds provided by the investors). However, Zenz was a chartered accountant, had experience in small businesses, was knowledgeable of the financial and investment industry, and must have known that the software was not worth $1.5M, that there was no obligation to pay for it, and that she and Dove were misrepresenting that fact to CRA, and perhaps investors (although some may not be innocent either), in order to obtain large tax credits. Zenz was involved from the start and worked closely with Dove. While at critical times she claims Dove managed things, Zenz also was involved in the suspicious activities – drafting documents from the SRO template, obtaining the Chard “valuation,” traveling to the Cayman Islands to “renegotiate” the price, testing the software, and maintaining the books, such as they were, which did not properly, if at all, document payments for the software.

[163] Romanuk, a bookkeeper by profession, was less involved at the outset and may have been taken in by Dove and Zenz at first. But as time went on she became more involved, joining the management committee of SSP in May, 1997. She ought to have known of, or chose to turn a blind eye to, the scheme. This may have been because she had brought many friends and family into it as investors and wanted to believe in it. She said she went to the Cayman Islands with Dove in January 1998 in order to assure herself and those she had encouraged to invest in SSP that there really was a Softcom International. Romanuk had herself benefitted by earning commissions from the sale of partnership units – all of which ultimately turned out badly when the company stopped operating and the tax benefits were reassessed, with penalties. To this day, she may well believe that Softcom could have been viable and blames CRA for its failure, but that requires her to ignore the significant evidence of fraud that caused CRA to do what it did.

[164] Like Justice McLeod at the preliminary inquiry, I conclude that the evidence on this trial also points to the Softcom enterprise being a tax fraud. From the start, the evidence contains many badges of fraud and unanswered questions. To name a few:

• the mysterious purchase of software from, or through, “Tommy” in Coboconk;

• the backdated 1995 acquisition agreement with SII, an entity which was not registered until Dove and Zenz went to the Cayman Islands in March 1996;

• the lack of documentation or information about the software supposedly purchased for $2.2M, or $1.5M;

• the similarities to the SRO scheme which provided a ready template for Dove and Zenz;

• the valuation supposedly prepared by Chard, but drafted on Zenz’s computer and based on her information, for which Chard was paid only $200;

• the stories around the roles of Lager (another man from a bar in Coboconk) and Boyd and their efforts to modify, or salvage, or create, the software;

• Boyd’s statements as to what the software might really be worth;

• the lack of information about payments to SII, and conflicting information about the payment to IBS;

• why Zenz and Romanuk were, apparently, spending their time in 1996 and early 1997 testing the software even though they had no expertise;

• the lack of investigation of the market, or evidence of efforts to promote and market the software beyond some very preliminary steps;

• the conflicting evidence about when Media Duplications was contacted and its backdating of correspondence;

• what happened to the money that was invested;

• the sham payment of $350,000;

• the incorrect and misleading financial statements; and

• the lack of evidence of any attempt by SII to enforce the contract and collect the balance of the purchase price from Dove, Zenz, or the other investors.

Issues

[165] Despite my conclusion that the evidence supported CRA’s belief that the Softcom enterprise was a fraudulent tax scheme, I must nevertheless consider the legal issues on which the plaintiffs’ ground their case against CRA, and for which they seek damages. The issues for the court to decide have been framed in different ways by the parties.

[166] The plaintiffs state five issues in their written opening: (1) whether Haisanuk had “reasonable and probable grounds” to initiate a criminal investigation; (2) whether Watson had reasonable and probable grounds to obtain search warrants and, later, to lay charges; (3) whether the investigation met “contemporary standards of criminal investigation”; (4) whether the plaintiffs’ Charter rights were infringed; and (5) damages. In their written submissions (opening and closing), the plaintiffs elaborate on these issues, identifying a number of sub-issues. These include whether Haisanuk’s “myths” were sufficient to justify a referral to SI; whether he approached the matter as a competent and neutral auditor; and the propriety of his contacts with SI while conducting the audit, which, it is submitted, breached the Charter. Also, with respect to the Charter, there appears to be an allegation that it was breached due to a lack of full disclosure in the criminal prosecution, and that the failures in the investigation prevented the accused from having a fair trial such that the proceedings ought to have been stayed.

[167] In contrast, the defendants address the numerous causes of action pleaded, which they distill into four main issues: (1) whether Haisanuk’s contacts with SI during his audit breached the Charter, in particular the principles in Jarvis; (2) whether the audit and/or investigation was conducted negligently, including whether they owed a duty of care to the plaintiffs and, if so, whether their conduct fell below an acceptable standard; (3) whether the CRA auditors and/or investigators committed a misfeasance in public office; and (4) damages. The defendants also address other wrongs pleaded in the statement of claim, including Charter breaches arising from the searches, trespass, breach of fiduciary duty, conspiracy, conversion, and abuse of process.

[168] In my view, having particular regard to the pleadings, and the fact that the claim for malicious prosecution has been abandoned, the issues that require determination are as follows:

(1) whether Haisanuk, in conducting his audit and in communicating with SI before the matter was referred to SI, had the “predominant purpose” of investigating criminal offences in breach of the plaintiffs’ Charter rights;

(2) whether CRA acted negligently in its audit and/or investigation of the plaintiffs;

(3) whether any other steps taken against the plaintiffs constituted misfeasance in public office or otherwise breached the plaintiffs’ Charter or common law rights, including the referral to investigations by Haisanuk, the obtaining of search warrants and the referral for prosecution; and

(4) if CRA did breach the Charter, act negligently or otherwise commit misfeasance in public office of other actionable wrongs, what remedies should follow.

Analysis

The Jarvis Issue: Haisanuk’s contacts with SI

[169] This issue stems from the Supreme Court’s 2002 decision in R. v. Jarvis, 2002 SCC 73, [2002] 3 SCR 757, which held, at para. 2, that while taxpayers must cooperate with auditors exercising their audit functions, “there is an adversarial relationship that crystallizes between the taxpayer and the tax officials when the predominant purpose of an official’s inquiry is the determination of penal liability.” Once officials “cross the Rubicon” to the “predominant purpose” of determining penal liability, then “constitutional protections against self-incrimination prohibit CCRA officials who are investigating ITA offences from having recourse to the powerful inspection and requirement tools in ss. 231.1(1) and 231.2(1). Rather, CCRA officials who exercise the authority to conduct such investigations must seek search warrants in furtherance of their investigation.”

[170] Prior to the Jarvis decision, which is when the events in question in this case occurred, there was no consensus as to where and at what point the line between audit and investigation should be drawn. Some courts stated that once reasonable and probable grounds existed to believe an offence had occurred the line was crossed. Other judges said the line is “reasonable suspicion,” while still others said that the line is crossed once the matter is referred to SI and it assumes direction of the matter. In adopting the “predominant purpose” test, the Supreme Court emphasized that “[t]here is no clear formula that can answer whether or not” the test is met. Rather, “one must look to all factors that bear upon the nature of that inquiry.” (Jarvis, paras. 86 -88)

[171] This means, the Supreme Court said at para. 89 of Jarvis, that “the mere existence of reasonable grounds that an offence may have occurred is by itself insufficient to support the conclusion that the predominant purpose of an inquiry is the determination of penal liability.” Similarly, “[e]ven where reasonable grounds to suspect an offence exist, it will not always be true that the predominant purpose of an inquiry is the determination of penal liability,” and “courts must guard against creating procedural shackles on regulatory officials” as “it would be undesirable to ‘force the regulatory hand’ by removing the possibility of seeking the lesser administrative penalties on every occasion in which reasonable grounds existed of more culpable conduct.” As the Court noted at para. 90, “[a]uditors may, during the course of their inspections, suspect all manner of taxpayer wrongdoing, but it certainly cannot be the case that, from the moment such suspicion is formed, an investigation has begun.”

[172] On the other hand, the Court noted at para. 91 that “[i]t would be a fiction to say that the adversarial relationship only comes into being when charges are laid.” But to the same effect, even though a matter has been sent to SI, that does not always mean the line has been crossed. As the Court stated at para. 92: “An auditor’s recommendation that investigators look at a file might result in nothing in the way of a criminal investigation since there is always the possibility that the file will be sent back,” although the Court commented that “if, in an auditor’s judgment, a matter should be sent to the investigators, a court must examine” the behaviour that follows carefully to ensure that it has not been sent back to audit “as a matter of expediency.”

[173] At para. 94 of Jarvis, the Court listed a number of factors to consider in determining whether the Rubicon has been crossed and Charter rights against self-incrimination apply, as follows:

(a) Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made?

(b) Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation?

(c) Had the auditor transferred his or her files and materials to the investigators?

(d) Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators?

(e) Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence?

(f) Is the evidence sought relevant to taxpayer liability generally? Or, as is the case with evidence as to the taxpayer’s mens rea, is the evidence relevant only to the taxpayer’s penal liability?; and

(g) Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance audit had in reality become a criminal investigation?

[174] In R. v Ling, 2002 SCC 74, [2002] 3 S.C.R. 814, the companion case to Jarvis, the Supreme Court reiterated, at para. 30:

As stated in Jarvis, an audit and an investigation are not mutually exclusive. Revenue Canada may conduct both concurrently. Revenue Canada must be careful, however, not to use the requirement power of the audit to gather further evidence for an investigation after it has commenced. If it does so it violates the Charter rights of the investigated taxpayer.

[175] In R. v. Tiffin, 2008 ONCA 306, 90 O.R. (3d) 575, Juriansz J.A. reviewed the Jarvis factors. He emphasized, at para. 123, that the test is “not a matter of choosing between two evenly balanced alternatives: whether the predominant purpose of the inquiry is penal investigation or whether the predominant purpose of the inquiry is regulatory enforcement. The test is one-sided. The task is to determine whether the predominant purpose of the inquiry is the determination of penal liability of the taxpayer.”

[176] At paras. 125-126 of Tiffin, Juriansz J.A. stated that a “trial judge should resolve any uncertainty in favour of CRA's continued recourse to the inspection and requirement powers. It must be apparent that the predominant purpose is criminal investigation before the Charter is engaged….[I]f the matter is at all uncertain, one cannot conclude the CRA's statutory right to use the powers has been displaced. Put another way, taxpayers are protected by the Charter when it is apparent the investigation of criminal tax offences is underway.” In this way the “predominant purpose” test is consistent with the point made in Jarvis, at para. 90, that "[t]he state interest in prosecuting those who wilfully evade their taxes is of great importance, and we should be careful to avoid rendering nugatory the state's ability to investigate and obtain evidence of these offences."

[177] In my view, the evidence does not support the conclusion that Haisanuk’s “predominant purpose” in conducting his audit was to determine penal liability. Rather, as an auditor, he was seeking verification of the taxpayers’ positions. Once he had completed those efforts, he sent the matter on to SI because he had reached the point, on May 30, 1997, that he thought it should be investigated, which would allow for more intrusive investigative methods. As he said at the preliminary inquiry, “nothing was forthcoming by way of documents that had been asked for over a few months, so, I made up a referral outlining all the transactions and the lack of audit trail and asked them to have a look at it.”

[178] There is also no evidence that prior to May 30, 1997 Haisanuk had “reasonable and probable grounds” to lay charges. Although Haisanuk had “suspicion” and was contemplating a referral, this does not mean he had reasonable and probable grounds. Perhaps a decision “could” have been made earlier to refer it to SI, but that is too low a test to be determinative, especially bearing in mind that one objective of the Jarvis test is to permit the audit function to continue and not to impose “procedural shackles on regulatory officials.” The ITO, which asserted reasonable and probable grounds, was prepared almost a year after Haisanuk made his referral, after Watson had gathered much more information in her preliminary investigation, and charges were not laid for almost two years following the referral.

[179] Nor was the conduct of Haisanuk’s audit such that it was consistent with the pursuit of a criminal investigation. Although, as Juriansz J.A. noted in Tiffin at para. 129, “much of the information sought for audit inquiries and for criminal investigations under the ITA is the same,” in this case Haisanuk did not resort to using compulsory audit powers available to him under the s. 231.1 and s. 231.2 of the ITA to obtain banking or other records, or access to computers to obtain evidence.

[180] There was very little to go on in January 1997, before Haisanuk had even gone to Softcom’s offices for the field audit. Further, as the audit progressed, Haisanuk commented that he lacked documentation and that he did not have enough evidence for a referral to SI. The need for a documented audit trail was also reflected in the CRA manual at the time, as it can work to the benefit of a taxpayer where, in the end, the auditor may conclude a referral to SI is not appropriate, rather than rushing into an unjustified criminal investigation.

[181] Although Haisanuk showed his file to Heryat in SI in January 1997, it was given back the following day, with no direction or input from Heryat. Indeed, Heryat did not see anything which would cause SI to take the file and did not really know why Haisanuk had asked him to look at it. Although as the Supreme Court noted such conduct requires close scrutiny, there is no evidence to suggest that Heryat gave the file back to Haisanuk for reasons of “expediency;” in fact, Heryat said he did not expect to see the file again. And the law is certainly not, as the plaintiffs argue, that the moment Haisanuk contacted anyone in SI, “for whatever reason,” the audit became a criminal investigation.

[182] Similarly, Haisanuk’s contacts with SI in Calgary were for the purpose of conducting his audit. He was gathering information about SRO, which was a similar business enterprise and to which the taxpayers Dove and Zenz were connected, as part of his audit function. Haisanuk was not seeking advice or direction from Calgary. As Watson stated in cross-examination: “Looking at SRO was an audit step and I think a normal audit step for somebody dealing with tax shelters. Mr. Haisanuk sees that in the 1994 tax returns, Dove and Zenz claimed losses from the SRO partnership, and because tax shelters are a Tax Avoidance responsibility, I think it's a normal thing for an auditor to look, would have looked at that…. He was asking questions. That's what auditors do.”

[183] Further, aside from being able to compare SRO documents to the Softcom documents, which Haisanuk did even before the field audit, he received no other information from Calgary, and also received no direction from them.

[184] Although on April 8, 1997, Haisanuk apparently told Hopfauf he would be referring the matter to SI in Mississauga, this did not happen, perhaps because it was based only on a theory Haisanuk did not confirm, that SRO and Softcom used the same software. The plaintiffs submit that this conversation, and the follow-up discussion with Hopfauf on May 26, 1997, shows that Haisanuk had made up his mind to refer the matter to SI. But Haisanuk’s evidence, in memoranda and at the preliminary inquiry, was that he still needed to complete his audit. On April 9, Haisanuk wrote to SSP outlining a proposed reassessment and gave them an opportunity to respond. He received Dove’s May 21 response and had a further meeting with Dove and Zenz on May 30, where he might have expected to see more information that would address his concerns, but did not. While he clearly had suspicion of fraud during his audit, as he expressed on a few occasions, that does not transform an audit into an investigation.

[185] Returning to the Jarvis factors, Haisanuk did not transfer his file or materials to SI prior to making his formal referral. It cannot be said that he was acting as an agent for SI, in Belleville or in Calgary, nor is there any evidence that any investigators intended to use Haisanuk as their agent in collecting evidence. Rather, they seemed quite uninterested in his work.

[186] I conclude, therefore, that the plaintiffs’ Charter rights were not breached by obtaining evidence using audit powers. Up to and including the meeting on May 30, 1997, Haisanuk’s “predominant purpose” was to conduct an audit, not to investigate criminal offences.

[187] Counsel for the plaintiffs also spent much time on the activities of Watson in the first days of June 1997, before the formal referral to SI by Haisanuk in his T134 on June 10, 1997, arguing that this was improper and contrary to the Jarvis principles. I see no issue here. Following his meeting with Dove and Zenz on May 30, Haisanuk made the decision to make the referral and must have told Heryat it was coming. What Watson did after May 30 and prior to June 10 was simply review information about SRO, which was available to her in any event, and did not breach any Charter rights.

[188] Perhaps of more concern might have been the receipt by Haisanuk of material from Dove and Softcom on August 28, 1997. However, Dove was aware that the referral had been made to SI and chose to send material in anyway. It is not known what was said between Dove and Haisanuk when Dove called him before sending the materials, other than Haisanuk confirmed that the matter was now with SI and that if Dove sent anything to Haisanuk he would forward it to SI. Dove was a sophisticated taxpayer, having worked in SI at CRA. He would have been aware that he was under no obligation to send information to CRA, and aware that any information he provided could be used against him. In any event, as I stated in reviewing these events, very little, if any, new information was provided in the package sent at that time, as much of it had been reviewed and/or discussed during the field audit in January or at the meeting on May 30, 1997. Nor have the plaintiffs pointed to any information disclosed in that package that was not already known or acquired independently in the investigation, or that was relied upon to further the investigation. Furthermore, at that time, it was Dove who was under investigation based on the T134, and it was Dove who sent the letter. Dove is not Zenz, and Dove is not a plaintiff.

Negligence

[189] To establish negligence, the plaintiffs must prove the following: (1) that a duty of care was owed by the defendants to the plaintiffs; (2) that the duty was breached by conduct falling below the acceptable standard of care; and (3) that the plaintiffs suffered damage as a result: Hill v. Hamilton-Wentworth (Regional Municipality) Police Services Board, 2007 SCC 41, [2007] 3 S.C.R. 129 (“Hill”), at para 20. I address each of these elements below.

Duty of Care

[190] The issue of whether CRA owes a duty of care, and to whom, may differ depending on the functions carried out. The defendants submit, for example, that auditors owe no duty of care to taxpayers under audit. The defendants also submit that investigators do not owe a duty to those who are not under investigation, which would in this case exclude at least all the investors other than Zenz and Dove. Indeed, they go further and submit in this context that CRA investigators are not analogous to police officers and, in accordance with Hill and the “Anns/Cooper test” (stemming from Anns v. Merton London Borough Council, [1978] A.C. 728 and Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537), owe no duty of care to persons under investigation which would include Zenz and SSP/SSI.

[191] Dealing first with the audit function, in Grenon v Canada Revenue Agency, 2016 ABQB 260, 35 Alta. L.R. (6th) 139, Dario J. conducted a review of the jurisprudence and principles and concluded that CRA auditors do not owe a duty of care to taxpayers under audit. She found, at para. 82, that “the weight of authority is that the CRA, in conducting an audit, is not in a relationship of sufficient proximity with an individual taxpayer to give rise to a duty of care.” This finding was upheld by the Alberta Court of Appeal (2017 ABCA 96), which stated at para. 25 that “[i]t is clear that, because of the inherently adverse relationship between auditors who are exercising a statutory function and taxpayers, a finding of sufficient proximity to ground a private law duty of care does not exist.” I agree, and find, therefore, that the tort of negligence cannot be asserted against CRA or the individual defendants who were involved in conducting the audit.

[192] Turning to the investigation function, the defendants submit, first, that the CRA investigators owe no duty of care towards those who were not under investigation, i.e. all of the plaintiffs except Zenz. The defendants cite Dafesh v. Amormino, 2017 ONSC 1748 (“Dafesh”) at para. 55, in which Monroe J. found that in conducting an investigation of a small business the police did not owe a duty of care to the employees of the business. Although there was an “economic and reputational effect on the employees by the actions of the police against their employer,” the relationship was indirect and did not give rise to a duty of care. By analogy, the defendants submit that as there was no investigation of the many investors who had purchased partner units in SSP, there was no relationship of sufficient proximity to create a duty of care towards them.

[193] In my view, the analogy is apt. While some impact on investors from the investigation may be foreseeable, in Hill McLachlin C.J.C. held that this is only one aspect of the analysis. Quoting from Cooper v. Hobart at para. 22, McLachlin C.J.C. stated, at para 23 of Hill, “there must also be a close and direct relationship of proximity or neighbourhood.” The Chief Justice continued: “The proximity inquiry asks whether the case discloses factors which show that the relationship between the plaintiff and the defendant was sufficiently close to give rise to a legal duty of care. The focus is on the relationship between alleged wrongdoer and victim: is the relationship one where the imposition of legal liability for the wrongdoer’s actions is appropriate?”

[194] Applying this analysis, and considering the factors in Hill, in my view CRA investigators owed no duty of care towards the investors, other than Zenz (and Dove), as there is no evidence that the other investors were ever the subject of CRA’s investigation. While the investigators did attempt to interview investors, and obtained information about them in exploring the sham payment of $350,000 in January 1998, there is no basis on which to conclude that they were ever themselves under investigation. Further, as in Dafesh, the claim by the investors is “economically driven” and if a duty was found in such circumstances it would raise policy concerns about expanding a duty of care too widely.

[195] That brings me to whether CRA in fact owed a duty of care to Zenz, who was clearly a subject of the investigation. The defendants make a number of arguments against finding a duty, including that CRA investigators are not police officers, as they do not have the same degree of independence. CRA investigators do not lay charges but only refer the matter to the Department of Justice, now the PPSC, which decides whether charges should be laid. Further, it is submitted that applying the Anns/Cooper test, a duty of care should not be found on the basis that there are policy reasons why the duty should not be extended.

[196] I find these submissions unpersuasive. As highlighted in Jarvis, the investigations branch of CRA investigates potential offences under the ITA, which are serious and criminal in nature. That is why the Charter rights against self-incrimination apply. As in Hill at para. 32, “we are concerned with the relationship between an investigating police officer and a suspect. The requirement of reasonable foreseeability is clearly made out and poses no barrier to finding a duty of care; clearly negligent police investigation of a suspect may cause harm to the suspect.” So too in the tax investigation context, the investigation is personal, close and direct. The suspects have been singled out and they have a critical personal interest as their liberty may be at stake. As stated in Hill at para. 34, “[t]hese high interests support a finding of a proximate relationship giving rise to a duty of care.”

[197] The fact that CRA investigators do not actually make the decision to lay charges, unlike police in most cases, does not negate the duty. Nor do I find the argument compelling that police officers, unlike tax investigators, may be subject to more direct political direction; see, e.g., Smith v. Ontario (Attorney General), 2019 ONCA 651, 436 D.L.R. (4th) 680,at paras. 48 -58. In this case, the investigation was conducted by Watson and Heryat, who submitted a Prosecution Report recommending charges, which was then, presumably, the basis on which charges were laid. There is no evidence of any political direction affecting their independence, which would give rise to other concerns. In my view, the duty of care cannot be avoided just because the final decision to charge is made by someone else, especially when the decision is based on the work of the investigator.

[198] Turning to the second part of the Anns/Cooper test, the defendants argue that there are policy reasons not to extend the duty of care to CRA investigators. The policy reasons are not clearly articulated, but reliance is placed on discussion in R. v. Imperial Tobacco, 2011 SCC 42, [2011] 3 S.C.R. 45, at paras. 43-46, which addresses concerns over imposing a private law duty of care on state actors working under a statutory scheme, such as in a regulatory context. In my view, in the context of criminal investigations under the ITA the law crossed this “Rubicon” in Jarvis, if not earlier, when it recognized the obligations on investigators of tax offences to comply with and respect Charter rights. Finding that tax investigators owe a duty of care to the subject of what is a criminal investigation does not upset or undermine the regulatory context of income tax generally, which relies on voluntary compliance and self-reporting, and does not impair the audit function, for which no duty of care is recognized.

[199] Accordingly, I conclude that CRA investigators owed a duty of care to Zenz.

Standard of Care

[200] In light of my findings on duty of care, the issue of standard of care only needs to be determined in respect of Zenz. However, in the event that I am incorrect in not finding that a duty of care applies to the audit function or is owed to the other plaintiffs, my discussion of whether CRA met an adequate standard of care will consider both the audit and investigative functions.

[201] I find that the plaintiffs have failed to prove, on a balance of probabilities, that the audit and investigation fell below the standards one would expect of reasonable, competent auditors and investigators. As Chief Justice McLachlin stated in Hill, at para. 73, the “standard is not perfection, or even the optimum, judged from the vantage of hindsight.” Rather, she continued:

[The standard] is that of a reasonable officer, judged in the circumstances prevailing at the time the decision was made — circumstances that may include urgency and deficiencies of information. The law of negligence does not require perfection of professionals; nor does it guarantee desired results (Klar, at p. 359). Rather, it accepts that police officers, like other professionals, may make minor errors or errors in judgment which cause unfortunate results, without breaching the standard of care. The law distinguishes between unreasonable mistakes breaching the standard of care and mere “errors in judgment” which any reasonable professional might have made and therefore, which do not breach the standard of care. [citations omitted]

[202] Turning first to the audit, aside from the complaint that Haisanuk communicated with SI, there is no evidence suggesting he fell below the standard of a competent auditor. He sought information from Softcom and obtained what he could. He sought a valuation and obtained it. He looked into the similarities between Softcom and SRO, and while his hunch that the software was the same was incorrect, that does not mean he was negligent. Even had he determined the two programs were different, Haisanuk had grounds to refer the matter and leave it to the investigators to compare the two programs. While the plaintiffs complain that he did not obtain a valuation of the software that had supposedly been acquired from SII, that was not his fault – it was the fault of Softcom which said it no longer had the original software.

[203] Haisanuk was also unaware of Levac’s conversation with David Seal suggesting that to value the software one should speak to the maker or creator of it. However, Levac explained why she did not follow up on Seal’s suggestion as she had another valuator who did the task in a different way. In any event, Levac had no information as to who had created the software, and nor, allegedly, did Softcom. And while the plaintiffs complain that Levac ought to have adopted the same valuation approach as Chard’s valuation, Levac considered different approaches and explained why she took the cost approach.

[204] The plaintiffs have also suggested that Haisanuk’s decision to audit was improper because losses are expected in tax shelters in their first couple of years. But the losses must be legitimate losses, not losses based on an inflated, or fictional, expense.

[205] Further, while the plaintiffs’ expert witness, Gard, criticized Haisanuk for his contact with SI, saying it was improper, this is in the nature of a legal conclusion and is not helpful. The defendants’ expert, Perron, also commented briefly on Haisanuk, but pointed out that at the time CRA manuals and policies advised caution, but did not prohibit liaison between Audit, SI and Tax Avoidance. The defendants’ expert at least addressed standards at the time rather than just asserting what Haisanuk did was improper or illegal. Accordingly, I have no basis on which to conclude that the audit fell below an acceptable standard of care.

[206] The investigation is more complicated, but my conclusion is the same, that the investigators met a reasonable standard of care, “judged in the circumstances prevailing at the time.”

[207] One indicator of an investigation that meets a reasonable standard of care is its outcome. In this case, while the matter was never tried to a conclusion, the evidence gathered by the investigators led prosecutors to exercise their discretion to prosecute. Even more compelling is the committal for trial which in this case was accompanied by strong reasons from the preliminary inquiry judge. In 495793 Ontario Ltd. v Barclay, 2016 ONCA 656, 132 O.R. (3d) 241 (“Barclay”) at paras. 99-106, the Court of Appeal held that a trial judge in assessing the standard of care in a police negligence matter had erred by failing to “accord proper weight that there had been a committal on all charges after a preliminary hearing.” Justice Juriansz stated, at para. 99:

The trial judge said “[I]n my view, the police cannot hide behind a committal order to suggest that their investigation was not negligent”. The trial judge failed to consider the substantial body of jurisprudence holding that the fact that a preliminary hearing concluded that there was reasonable probable grounds for the charges laid is strong evidence that the investigation, to that point at least, did not violate the standard of care.

[208] In a subsequent decision of this Court, J.H. v. Windsor Police Services Board et al., 2017 ONSC 6507, O.J. No. 5597, at para. 6, Leach J. held that a failure to place weight on a committal for trial is an error of law:

A preliminary inquiry is not a trial, but another pre-trial screening procedure aimed at filtering out weak cases that do not merit trial; its paramount purpose is to protect an accused from a needless and improper exposure to public trial where the enforcement agency is not in possession of evidence to warrant continuation of the proceeding. The presiding justice is required to commit an accused person for trial in any case in which there is admissible evidence which could, if it were believed, result in a conviction. A committal for trial after a preliminary inquiry therefore also provides strong evidence supporting the existence of reasonable and probable grounds, and failure to place weight on a committal for trial is an error in law. [emphasis added, citations omitted]

[209] As Juriansz J.A. observed in Barclay at para. 89, citing Hill at para. 55, “the standard of care is informed by the legal requirement of reasonable and probable grounds to believe the suspect is guilty.” In this case, the committal for trial is strong evidence of the existence of reasonable and probable grounds and is evidence supporting the conclusion that the investigation met a reasonable standard.

[210] However, the conduct of the investigation must also be reviewed. The plaintiffs argue that the matter was “complex,” involving several offices, search warrants, obtaining information from the Cayman Islands, and understanding computer coding and software in what was then a new industry. Rather than have the matter dealt with by a larger, better-resourced office, as the plaintiffs argue should have happened, the investigation was conducted out of Belleville, supervised by Peter Heryat who had no experience with software or start-up companies and was assigned to a junior and inexperienced investigator, Lynn Watson.

[211] But inexperience does not equal negligence. It is necessary to examine what the investigators did and did not do, not just who they were. While there are complaints that Watson did not take statements from Chard, Lager and Boyd at their initial interviews, the evidence is that she took detailed contemporaneous notes which she typed up shortly after each discussion. Furthermore, Watson did not investigate alone; she worked with others in conducting interviews and they also took notes, her work was frequently reviewed, and her recommendations were subject to approval by superiors.

[212] Although related to the audit, the plaintiffs also submit that Levac was not qualified or experienced with software valuations, and that her valuation was inadequate. But Levac sought expert support for her valuation from James, and in any event the investigators sought their own information about the software and its value, speaking to Boyd, Salowski and hiring an expert, Baker.

[213] Although the plaintiffs make much of the failure to follow up on David Seal’s suggestion to Levac that one should speak to those who developed the software, Levac gave a very reasonable explanation as to why she did not pursue Seal’s suggestion. Further, Levac’s discussion with Seal was not known to the investigators until much later, and was in any event impossible to follow up on as the developers of the software, according to Dove and Zenz, were not even known. In any event, as the Court of Appeal observed in Barclay at para. 84, it is well-established that “police are not required to exhaust all avenues of investigation, establish that an accused has no defence, or even obtain an accused’s version of events.”

[214] As I have discussed, the plaintiffs’ case is built on the assumption that everything done by Dove and Zenz was legitimate and that Haisanuk, Watson and Heryat should simply have accepted that fact and left Softcom alone to become a business success. But the plaintiffs do not meet, or explain, the many questions raised by the evidence that suggest that the acquisition of the software did not occur as claimed, that Softcom’s operations were not nearly as extensive as asserted, and that Softcom was perhaps never intended to develop into a successful business, but simply to be used as a vehicle for a tax fraud.

[215] In this case, the investigators pursued many avenues to determine whether the purported purchase of software from SII had in fact occurred, whether the price alleged to be paid was reasonable, and whether SSP and SSI were truly created to market and sell a software product. In doing so, the investigators did not ignore explanations by Dove and Zenz, but found that the explanations and information given were not supported and, indeed, were contradicted by the other evidence. To give just two examples, Dove and Zenz misled CRA as to when they engaged Media Duplications, and whether the $350,000 payment to SII in January 1998 had in fact been paid.

[216] In Barclay, at para. 53. Juriansz J.A. observed that “[t]he general rule is that the content of the standard of care of a professional, such as a police officer, will require expert evidence.” In this case I heard expert evidence from both sides, which I have reviewed above. In my view, the plaintiffs’ have not led compelling expert evidence which would cause me to conclude that CRA did not meet a reasonable standard of care. Gard’s report is flawed by the limited access he had to evidence and documentation. Much of his focus was on his own view as to legal issues. While he did find some deficiencies in the investigation, he overstated them and failed to link the deficiencies to harm to the plaintiffs. In contrast, Perron at least had a fuller picture and assessed the conduct of the investigation in the context of the policies and practices of the time in concluding that the investigation was conducted reasonably and in accordance with accepted practices. The investigation may not have been perfect, but as Hill states, perfection is not the test.

[217] I return to Barclay in which the Court of Appeal summarizes the role of an investigator, albeit in the police context, at paras. 51 and 52:

The function of police is to investigate incidents which might be criminal, make a conscientious and informed decision as to whether charges should be laid and present the full facts to the prosecutor…. Although this requires, to some extent, the weighing of evidence in the course of investigation, police are not required to evaluate the evidence to a legal standard or make legal judgments. That is the task of prosecutors, defence lawyers and judges….

Nor is a police officer required to exhaust all possible routes of investigation or inquiry, interview all potential witnesses prior to arrest, or to obtain the suspect’s version of events or otherwise establish there is no valid defence before being able to form reasonable and probable grounds. [citations omitted]

[218] These comments are apt for this case. Accordingly, I conclude that there was no breach of a reasonable standard of care by CRA in its audit or investigation of SSP, SSI, Dove, Zenz, or any of the other plaintiffs.

Causation

[219] Having determined that there was no breach of a reasonable standard of care, it is not necessary to address whether the plaintiffs suffered damage caused by negligence.

Misfeasance and other alleged wrongs

[220] The plaintiffs raise a number of other causes of action and allegations of wrongdoing, none of which have merit.

[221] The plaintiffs plead misfeasance in public office against CRA’s agents. However, the tort requires deliberate and unlawful conduct by officers in the exercise of their public functions with the awareness that it is likely to injure the plaintiffs: Odhavji Estate v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263, at paras. 22 - 25. No evidence of such conduct was led at this trial.

[222] Haisanuk decided to audit SSP following receipt of a tax shelter application. His contacts with SI have been reviewed above, but even if he had crossed the Rubicon and improperly continued with his audit, which I have found he did not, his conduct still did not meet the Odhavji test. Nor is there anything in his 8 days of testimony at the preliminary inquiry which would support a conclusion that he engaged in deliberate unlawful conduct to hurt Dove and Zenz, or anyone else.

[223] Similarly, there is no evidentiary basis to support such claims against Watson or Heryat. While there may have been deficiencies in the investigation, there is no evidence supporting any wrongdoing, let alone deliberate wrongdoing, that would give rise to the tort of misfeasance in office.

[224] The torts of conspiracy and abuse of process fail on the same grounds.

[225] Other torts pleaded also have no merit. The plaintiffs plead trespass and conversion, for example, arising from the searches and seizure of records. But these actions of CRA were conducted pursuant to valid search warrants, which have not been set aside, nor is there any evidence that the warrants should not have been issued or that the searches were conducted unreasonably.

[226] Breach of fiduciary duty is pleaded, but there is no basis on which to find a fiduciary duty existed between CRA and the plaintiffs. Quite the contrary, the relationship between auditors and investigators, and taxpayers, is typically adversarial. Indeed, our self-assessing tax system is dependent on the good faith and full disclosure of the taxpayer, but audits and investigations are necessary to ensure compliance.

[227] Finally, the plaintiffs plead lack of reasonable and probable grounds to refer the matter to SI, to obtain search warrants, and to lay charges. These claims are not, however, necessarily causes of action, and might only give rise to liability if framed as Charter violations for which damages could be awarded under s. 24(1) of the Charter. This was not clearly been done in the pleadings or in argument. These claims also involve challenges to statutory action that is more appropriately addressed through judicial review or prerogative relief. None of this happened – the decision to refer to SI was not reviewed, the search warrants were not challenged by prerogative writ or at trial, nor did Zenz (or Dove) move to quash the Indictment. It is possible that some of these issues may have arisen if there had been a trial – but there was no trial and, as the defendants submit, Zenz obtained a remedy when the charges were stayed by Justice O’Connor.

[228] Assuming, however, that I can consider these claims, I would reject them. First, for the reasons I have given, Haisanuk had ample basis to refer the matter to SI. Whether that amounted to “reasonable and probable grounds,” begs the question as to whether that is the test, and it isn’t. Rather, as we know from Jarvis, a referral must be made when the predominant purpose of the audit changes from one of compliance and correction to one of investigating penal or criminal liability. It is then for the investigator to determine if there are reasonable and probable grounds to support the obtaining of search warrants and to recommend that charges be laid.

[229] Second, Zenz has not directly challenged the validity of the search warrants nor, as I have stated above, is there evidence that the searches were conducted unreasonably.

[230] Third, as the malicious prosecution claim was dismissed it is no longer open to me to consider the laying of the charges, which was affected by the DOJ, not CRA. In any event, the outcome of the preliminary inquiry is a conclusive answer to the assertion that the defendants lacked reasonable and probable grounds to lay the charges against Zenz and Dove.

[231] Another alleged Charter violation is that Zenz (and Dove) did not receive full disclosure in the criminal case in accordance with s. 7 of the Charter and the decision of the Supreme Court in R. v. Stinchcombe, 1991 45 (SCC), [1991] 3 SCR 326. Zenz submits that disclosure is still wanting in this action. While I accept that not all of the documents before me were disclosed in the criminal case, and there are complaints that disclosure is still incomplete as there has not been discovery in this proceeding, I have no evidence that any lack of disclosure, had it been remedied, would have resulted in a different outcome at the preliminary inquiry; indeed, given the limited function of a preliminary inquiry it is unlikely that it would have made a difference at that stage. As the trial did not go ahead, the issue of a lack of disclosure and non-compliance with the requirements set out in Stinchcombe was never litigated, but nor did it deny Zenz the right to full answer and defence as the trial did not proceed due to a different breach of the Charter under s. 11(b).

Damages

[232] I have addressed the weaknesses in the plaintiffs’ damages report earlier in these Reasons. In my view, the report of Ms. Russell is based on inaccurate financial information, projections and assumptions that are not supported by the evidence. After supposedly acquiring the Retail Manager software in 1995 for which it still owed at least $1.4M, as of the end of 1998 Softcom had made no more than a handful of sales. As there is no evidence of the alleged sale to Toronto Computer Technology at the end of 1998, I do not accept that that sale took place at all. But even if it did, Softcom was not successful at the time, and no weight can be placed on Dove’s and Zenz’s projections, on which Russell based her report. Accordingly, even if I had found any liability against the defendants, there is no basis on which to assess damage to the value of SSP/SSI’s business.

[233] With respect to Zenz, were she entitled to damages, her claim for 7 years of lost income at $80,000 per year is not unreasonable. However, this would require accepting that Softcom was a viable business on which she would have earned such amounts had CRA not audited and investigated, and the DOJ prosecuted. Her claims for legal fees are supported by invoices, but most of it relates to her defence at the preliminary inquiry which was conducted by the Department of Justice. As she has abandoned her case for malicious prosecution against the prosecutors, I find no entitlement to such damages. Her other claims, for the return of her initial investment of $24,000 and liability for approximately $12,000 of the Softcom line of credit, are documented but suffer from the same concern about causation I have identified with respect to her loss of income.

[234] Zenz also seeks damages for harm to her physical and mental wellbeing, attributing much to the stress of the audit and investigation. Again, though, there are causation issues since, as she testified, even in early 1997 she was diagnosed with a bi-polar condition, and I have no evidence to support a conclusion that the actions of the defendants caused such harm. Zenz also asserted that her long-term relationship with a boyfriend, Eric Frey, ended due to the CRA actions. However, in a letter dated March 26, 1997, submitted as evidence of her medical and personal damages, she is described as being single, and Zenz admitted on cross-examination that she and Frey split up prior to the CRA’s disallowance of the tax deductions or the investigation in 1997.

[235] Dolores Romanuk also seeks damages for what she describes as out-of-pocket expenses arising from her travels from her home to the Softcom offices in Brampton in 1996, 1997 and 1998. This seems to be a claim for reimbursement for expenses, which I find, are too remote to award against CRA, leaving aside issues of causation similar to those raised respecting Zenz’s claim. Romanuk also seeks damages for emotional harm but has led virtually no evidence on this issue other than a vague and recent 2-sentence letter from a physician. She has produced no evidence linking such harm to the relevant time and the actions complained of in this lawsuit. Her claim for damages amounting to the return of her investment in SSP suffers from the same concern about causation discussed earlier.

[236] In short, in my view the particular claims for damages, and damages for physical and mental harm made by Zenz and Romanuk have not been established.

[237] Similarly, specific claims for damages advanced by Michael Romanuk and another plaintiff, Cynthia Iamarino from whom I heard no evidence, for psychological harm are rejected, as unproven and remote.

[238] I also reject the claims by Mr. Romanuk, Ms. Iamarino and the other plaintiffs who seek damages in the amount of their investment in SSP. Not only is causation not established, but an award of damages reimbursing the plaintiffs strikes me as also being inconsistent with the conclusion of the Tax Court, albeit on consent, that disallowed the plaintiffs’ losses for tax purposes.

Conclusion

[239] For the foregoing reasons the action is dismissed. Should the parties be unable to agree on costs, the defendants shall provide me with brief written submissions on costs within 30 days of the release of these Reasons, and the plaintiffs shall provide a response within 30 days of the receipt of the defendants’ submissions.

Schabas J.

Date: 2020-05-28