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Legal Developments: Income Tax Act

Drawing the Line Between Audits and Investigations: The “Predominant Purpose” Test in R. v. Jarvis and R. v. Ling


Sections 231.1 and 231.2 of the Income Tax Act (ITA) permit Canada Revenue Agency (CRA) to conduct an audit. The ITA permits auditors to carry out a warrantless search and seizure, demand information or the production of documents, and compel the taxpayer to assist the CRA in their own audit. Taxpayers are required to provide reasonable assistance, allow the auditor to inspect books, records, and answer proper questions. This power is available to CRA for a non-investigatory purpose, to determine tax liability.


However, as soon as CRA’s predominant purpose in acquiring information from or about the taxpayer becomes an investigation to determine criminal liability, the taxpayer is no longer compelled to provide reasonable assistance to CRA. As soon as the audit becomes an investigation, all of the taxpayer’s fundamental rights protected by the Canadian Charter of Rights and Freedoms (Charter) are engaged, including the right against self-incrimination pursuant to section 7 of the Charter, and the right to be secure against unreasonable search and seizure pursuant to section 8 of the Charter.


CRA is required to refer files from an audit to an investigative division once it is determined that the taxpayer has or may have criminal liability for such offences as tax evasion or submitting false documents. However, this referral does not always occur. In some cases, CRA auditors continue to maintain the guise of an audit when, unbeknownst to the taxpayer, they are in fact conducting an investigation into the taxpayer’s criminal liability.

In 2002, the Supreme Court of Canada released two judgments: R. v. Jarvis [2002] 3 S.C.R. 757 and R. v. Ling [2002] 3 S.C.R. 814. Jarvis and Ling established a test to distinguish between audits to determine tax liability, and investigations to determine criminal liability. Courts are required to look at a number of factors, including:


  1. 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?

  2. Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation?

  3. Had the auditor transferred his or her files and materials to the investigators?

  4. Was the conduct of the auditor such that he or she was effectively acting as an agent in the collection of evidence?

  5. Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence?

  6. Is the evidence sought relevant to taxpayer liability generally, or is the evidence relevant only to the taxpayer’s criminal liability?

  7. 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?


This is what is known as the “predominant purpose” test. Once the predominant purpose of the audit transforms into an investigation, statements can no longer be compelled via section 231.1 of the ITA, documents cannot be seized and examined without a search warrant, and no documents can be required of the taxpayer or third party for the purpose of establishing criminal liability. Any statements or documents obtained under the guise of an audit when the “predominant purpose” is to investigate criminal liability may be excluded from evidence by the Courts.

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