CRA Reprimanded in Malicious Prosecution Case, Couple Acquitted of Tax Evasion Charges Awarded $1 Million in Damages

Mark Feigenbaum

The B.C. Supreme Court has ordered the Canada Revenue Agency to pay more than $1 million in damages for malicious prosecution of two B.C business owners whom it had chased after for alleged tax evasion.

What Happened?

In June 2008, an indictment was issued against a married and their corporations (they operated a restaurant, nightclub, and motel) charging them with 21 counts of tax evasion. It was alleged that the couple skimmed $1.7 million from their restaurant between 2004 and 2005.

The restaurant the couple owned operated three shifts- the day shift, night shift, and graveyard shift. At the end of each shift, an employee rang off the till to produce a “till tape” and determine the total of the sales, which was then recorded on a daily sales summary sheet that was divided into three columns, each relating to one of the shifts.

The Crown (i.e. prosecution) initially alleged that the couple had failed to report one of the three restaurant shifts by failing to provide till tapes or ring offs to their bookkeeper. During the trial, the Crown shifted tactics, and instead of claiming that the couple had failed to report one of the shifts on the daily summary sheet, they argued that there was actually a second daily sales summary sheet that documented the income from the graveyard shift, and that it was this second summary sheet that was never provided to the bookkeeper.

After a 19-day trial, the couple was acquitted on all counts. The judge found the husband to be a credible witness, with an impressive demeanour, and plausible explanations. The judge accepted evidence that the couple used to use only one daily sales summary sheet to record all sales from the restaurant, and that staff was later told to record sales from the graveyard shift in the night shift column as sales from the graveyard shift were so low.

Damages Sought

The couple subsequently filed a malicious prosecution case against the Crown prosecutor and a senior investigator for the Canada Revenue Agency (CRA) intentionally and wrongfully charged them with a crime and that the prosecution was not conducted fairly or lawfully. They sought damages of:

• $347,731.74 for legal fees and other out-of-pocket expenses spent in defending themselves against the charges;
• $500,000 each in aggravated damages;
• $6,000,000 in punitive damages;
• $6,000,000 in Charter damages.

The couple argued that the impact of the tax evasion charges and the resulting publicity was significant and long-lasting, affecting both them and their children. Their daughter testified that she stopped using her surname and withdrew from people. She also testified that her parents became very quiet and depressed and that her mother showed signs of anxiety while her father started working less, became quiet and reclusive and drank more. The acquittal has no appreciable effect on her parents. The couple’s son confirmed this evidence, noting also that the family name had been “forever damaged” and that his mother was too embarrassed to go out in public.

The wife testified that her life had been “turned upside down” by the charges, she felt embarrassed to go to the restaurant and visit her customers, and that she felt that the charges had ruined her reputation. She further testified that the acquittal she had a breakdown and spent six months in bed.

The husband testified that he had lost his spirit, strength and ambition, his hard-obtained credit score, and that he now feels like a different person.

The Decision

The court dismissed the charges against the Crown prosecutor but awarded the couple damages as against the CRA.

The court noted that the CRA is tasked with the enforcement of Canadian tax laws, and its expected to “act in good faith and deal with the citizens of Canada fairly and objectively. Its employees are expected to do the same”. The CRA was found to be vicariously liable for the conduct of their investigator. The judge noted that

[The CRA’s] conduct in this case was high-handed, reprehensible and malicious. The behaviour of [the investigator] respecting the suppressing and misstating of evidence deserves rebuke. It offends the Court’s sense of decency and was a marked departure from conduct expected of an individual in [the investigator’s] position and an agency such as the CRA.

The Court noted that the charges against the couple should never have proceeded since it had been clear prior to the approval of the charges that more evidence was required to meet the threshold for bringing such charges. The Court found that “evidence was concealed. Inculpatory evidence was created”, and that such conduct was “highly blameworthy as it engaged core values in our society and the checks and balances that exist when invoking the power of the State against the individual.”

The Court further found that:

the CRA employees looked forward with unprofessional glee to the plaintiffs’ anticipated conviction and sentencing and their resulting ruination. It is appalling that the incarceration of the plaintiffs would be joked about…[i]n addition, the CRA’s advertising of its successes indicates a deeply troubling approach to its duties. No doubt the average citizen would find it objectionable if a police force advertised, on a government website, how many people they incarcerated each year.

The Court noted that a finding of malicious prosecution alone would have the necessary effect of “deterrence, denunciation and repudiation”, and a monetary award was required in order to “bring home the seriousness of the defendant CRA and [investigator’s] conduct.

The Court went on to emphasize:

…a government agency maliciously used the criminal justice system to pursue the plaintiffs, and its wrongful conduct continued into the criminal trial itself. The CRA was seeking substantial terms of imprisonment and significant penalties. The manner in which the prosecution was initiated and carried out was egregious. It must be denounced. It affected the reputations of the plaintiffs, their professional lives and their family lives. It involved the concealment of exculpatory evidence. It involved the power imbalance of the State over the individual. It violated fundamental rights and was highly reprehensible.

The Court also criticized the CRA and the investigator for their failure to “acknowledge their wrongdoing or their violation of professional standards”, noting that they “expressed no apology and were without remorse.

With respect to the damages requested, the Court highlighted the fact that the couple was seeking an award that would recognize the inherent power imbalance between them and the CRA, and noted that

No amount of punitive damages will cause the CRA financial hardship. At the same time the award must address the purpose of punitive damages and bring home to the CRA and its employees that conduct such as has occurred here is not acceptable.

The Court ultimately awarded the couple:

• $347,731.74 for legal fees and other charges incurred in defending the tax evasion charges;
• $300,000 to each spouse for aggravated damages;
• $750,000 in punitive damages.

The CRA’s Response

In an email statement to the National Post, the CRA said that it is:

…firmly committed to responsible enforcement in order to preserve the integrity of Canada’s tax system. The CRA and the Department of Justice have 30 days to appeal the decision, from the date of the judgment. It would be inappropriate to comment further at this time.

We will continue to follow developments in this matter and will provide updates as they become available.

In the meantime, if you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the US, Canada and around the world. Contact Mark online or call him at (416) 777-8433 or toll-free at (877) 275-4792 to book a consultation.