Overview of Fraud Claims in Canada

Fraud claims can arise under both criminal and civil law. They are governed by a combination of federal and provincial statutes, as well as case law. The legal framework includes Canada’s Criminal Code, which establishes a range of criminal offences, as well as other federal and provincial laws addressing areas including competition law, consumer protection and the regulation of securities. Civil claims for fraud can also arise under common law torts such as fraudulent misrepresentation, deceit and conspiracy, typically requiring proof of intentional or reckless deception, reliance and resulting harm.

False Statements

A false statement occurs when a person knowingly or recklessly misrepresents a material fact with the intent to mislead another. To establish liability under either statutory or common law principles, the claimant must show that the statement was false, was made with knowledge or disregard for the truth, was relied upon by the victim and resulted in measurable harm.

Corrupt Payments (Bribery)

Bribery involves the exchange of money, gifts or other benefits to improperly influence someone in a position of authority or trust. It is a criminal offence under the Criminal Code and the Corruption of Foreign Public Officials Act (CFPOA). In the civil context, such conduct may also give rise to actionable claims.

Conspiracy

Fraudulent conspiracy refers to an agreement between two or more individuals to commit an unlawful act or to use unlawful means to achieve a lawful goal. It requires proof of the agreement, intent to cause harm or to use unlawful means and measurable harm. This is both a criminal offence and a civil claim in Canada.

Misappropriation

Misappropriation involves the unauthorised use or diversion of funds or property. It is both a criminal offence and a civil claim referred to as conversion.

There is potential liability in both tort and contract for accepting a bribe. A common claim against an agent accepting a bribe is typically for breach of fiduciary duty, since agents must act loyally and in good faith. In the right circumstances the principal can recover ill-gotten profits from the bribe and compensation for any losses.

Courts may also impose a constructive trust, treating the proceeds as belonging to the principal. If the agent or another party was unjustly enriched, the principal can claim restitution. Other possible claims include civil conspiracy (if there was collusion), fraud (if the bribe was concealed) and tortious interference (if a third party encouraged the breach).

Bribery is also a criminal offence. Section 426 of the Criminal Code bans secret commissions, and the CFPOA makes it illegal to bribe foreign officials for business advantages.

Actions against third parties are based on the doctrines of knowing assistance and knowing receipt that permit a court to impose a constructive trust for the purposes of asset recovery. These two doctrines allow victims to recover misappropriated assets or their value from third parties who were not directly involved in the original fraud.

Knowing assistance applies when a third party knowingly helps someone commit a dishonest breach of trust or fiduciary duty. To succeed, the claimant must show that the third party had actual knowledge of the fraudulent conduct and actively participated in it. This is a fault-based claim focused on the third party’s involvement.

Knowing receipt applies when a third party receives property or funds for their use that that were misappropriated through a breach of trust or fiduciary duty, and the third party knew or ought to have known that the assets were wrongfully obtained.

Those who assist in committing fraud can also be charged under the Criminal Code for aiding and abetting. The Criminal Code also has offences that apply to third parties who knowingly receive or handle the proceeds of fraud, including offences like possession, trafficking or possession for the purpose of trafficking property obtained by crime. Liability generally requires knowledge that the property was criminally obtained.

Limitation periods differ between criminal and civil legal regimes. Under the Criminal Code, fraud is categorised based on the amount involved. Fraud over CAD5,000 is an indictable offence with no limitation period. Fraud under CAD5,000 is a hybrid offence; if prosecuted summarily (as a less serious crime), there is a one-year limitation from the date of the offence. Offences under the CFPOA are also indictable and not subject to any limitation period, allowing charges to be laid at any time.

In the civil context, most provinces and territories impose a two-year limitation period from the date the fraud is discovered or reasonably should have been discovered. Quebec allows three years. Additionally, many jurisdictions have an ultimate limitation period typically between six and 15 years – which bars claims regardless of discovery. In some circumstances, the doctrine of fraudulent concealment can suspend these periods to ensure that concealment does not shield a wrongdoer from liability.

A proprietary claim allows a victim of fraud to recover specific property or its traceable proceeds, rather than simply receiving compensation. This type of claim is based on the principle that the property still belongs to the victim, even if it has changed form. Proprietary claims can arise under common law, equity or statutory provisions such as the Fraudulent Conveyances Act or the Bankruptcy and Insolvency Act. Courts often use equitable remedies like constructive trusts to recognise the victim’s continuing ownership. Fraud judgments (and some breach of fiduciary duty or trust judgments) will also typically survive any bankruptcy proceeding that the fraudster(s) might undertake.

Tracing Misappropriated Property

Tracing is the legal process used to follow misappropriated property or funds as they change form or move through different accounts or hands. It allows a victim to identify and claim substitute assets – such as when fraudulently obtained funds are used to buy a piece of art or invest in stocks. Equitable tracing, which is more flexible than common law tracing, can follow property even when it has been mixed with other funds, if the victim can show a clear and continuous link between the original asset and its current form. A “bona fide purchaser for value without notice” who buys the property in good faith, pays fair value and has no knowledge that it was obtained through fraud will break the link such that if such a person acquires the asset, then the original owner cannot recover it, although there will be a claim against the funds paid to acquire the asset.

Mixed Funds and Recovery

When stolen funds are mixed with other money, in the right circumstances courts will apply equitable rules to protect the victim’s interest. These include the presumption that the fraudster spent their own money first, and the “lowest intermediate balance” rule, which will sometimes limit recovery to the lowest amount the account held after the fraud. If multiple victims are involved, courts may divide the remaining funds proportionally.

Wrongful Profits

If the fraudulently obtained funds generated profits, the victim may also claim those profits through the doctrine of disgorgement, which refers to judgments/awards that are calculated by reference to the wrongdoer’s gain, irrespective of whether it corresponds to damage suffered by the victim.

There are no specific rules of pre-action conduct in Canadian fraud law claims. However, a written demand for payment will frequently be made before commencing a claim.

A claimant alleging fraud can apply to the court for a Mareva injunction to prevent a wrongdoer from dissipating assets before or after judgment. This remedy is in personam, meaning it binds the defendant personally rather than attaching to specific property. To obtain a Mareva injunction, the claimant must demonstrate a strong prima facie case, a real risk of asset dissipation and that the balance of convenience favours the injunction. The court also requires an undertaking from the party seeking the injunction for any damages that may be caused to the defendant if the injunction is later found to be unjustified. There are minor filing fees associated with seeking an injunction which vary across Canada, but they are not linked to the amount of the claim.

Non-compliance with a Mareva order can result in a contempt of court finding, leading to fines or imprisonment. Courts may also issue ancillary terms or orders requiring production of sworn world-wide asset statements by the defendant(s), cross-examination on same, disclosure of asset locations and third-party co-operation requirements for the enforcement of the injunction.

Typically, upon granting an asset freezing or Mareva order, the court will also order the defendant to provide a sworn asset disclosure affidavit. In the affidavit, the defendant is required to describe the full value, nature and location of all assets held, directly or indirectly, worldwide. The order often specifies that it applies to assets whether in the defendant’s name or not, and whether solely or jointly owned. The claimant has the right to cross-examine the defendant on the asset affidavit.

Failure by the defendant to comply with a Mareva order, including the delivery of the asset disclosure affidavit, will expose the defendant to cost consequences or even potential penal sanction through a contempt proceeding.

Canadian courts may issue what is known as an “Anton Piller” order to preserve evidence in circumstances where there is a real danger that evidence might be destroyed, dispersed or altered. Anton Piller orders direct a defendant to permit the claimant or its lawyers to enter the defendant’s premises to secure such evidence.

Anton Piller orders are discretionary and will only be granted when there is no other reasonable alternative. To obtain an Anton Piller order, the claimant must demonstrate:

• a strong prima facie case;
• that the damage to the claimant arising from the defendant’s alleged misconduct, potential or actual, must be very serious;
• that, on convincing evidence, the defendant had in its possession incriminating documents or things; and
• that there is a real possibility that the defendant may destroy the material.

Absent unusual circumstances, the claimant is generally required to provide an undertaking and/or security to pay damages in the event the order turns out to be unjustified or wrongfully executed. To reduce the risk of privileged information being obtained, the court will typically appoint an independent supervising solicitor to oversee the search and ensure privileged materials are not disclosed.

Parties may seek what is known as a “Norwich” or “Norwich Pharmacal” order to require third parties to produce information before a lawsuit has been initiated or served. Norwich orders have been used by parties to obtain information necessary to determine the identity of a wrongdoer, to evaluate whether a cause of action exists, to plead a known cause of action, to trace assets or to preserve evidence or property.

To obtain a Norwich order, the claimant must:

• provide sufficient evidence to raise a bona fide claim;
• demonstrate that the third party from whom the information is sought is involved in the acts complained of;
• prove that the third party is the only practicable source of the information available;
• confirm that it will indemnify the third party for costs and expenses arising out of compliance with the order (in addition to its legal costs); and
• demonstrate that the interests of justice favour the disclosure.

Norwich orders are increasingly being used by claimants who have been victimised/defrauded by anonymous parties online and thus require information from, for example, internet service providers to identify the perpetrator.

The procedural orders discussed previously, including Mareva injunctions and Anton Piller orders, are often sought ex parte – that is, without notice to the defendant. When a claimant seeks these orders on an ex parte basis, they are under a continuing duty to provide full, frank and fair disclosure. In effect, this means that the party seeking the order must be forthright with all the evidence – particularly in respect of evidence that might be considered helpful to the litigation opponent. This obligation extends to providing the court with any law adverse to the claimant’s position.

Failure to provide full and frank disclosure may result in the ex parte order being set aside and/or significant costs (up to full indemnification) being awarded to the defendant. As noted previously, generally, the party seeking the order will also need to provide an undertaking for damages to the defendant, which may be significant if it is later determined the order was unjustified.

Concurrent criminal complaints and civil actions are commonplace in cases of fraud. To maximise recovery potential, experienced fraud counsel can advise on timing issues with respect to the sequence of commencing civil claims (with any related freeze or injunctive relief) and law enforcement reporting. Victims of fraud must be careful not to use the threat of criminal proceedings (or the withdrawal of complaints) as leverage within a civil proceeding, and should be mindful of the implied/deemed undertaking rule which provides that evidence or information obtained in discovery during a civil proceeding can only be used for that proceeding. Under the Canadian Victims’ Bill of Rights, victims of fraud in Canada may seek an order for restitution in criminal proceedings as an additional method of redress.

Criminal prosecution may in some cases delay the progression of parallel civil claims. A defendant may apply to stay the civil action pending resolution of criminal charges.

Judgments can be rendered without the necessity of a trial through either default judgment or summary judgment. The specific procedures vary between Canadian provinces and territories, but generally, a claimant may move for default judgment where a defendant fails to file a defence. Where the claim is for unliquidated damages, which is generally the case in fraud cases, the claimant may need to prove its allegations by way of affidavit evidence.

Similarly, the rules of civil procedure in the different provinces and territories provide mechanisms for dealing with defences that are wholly unmeritorious. For example, under Ontario’s Rules of Civil Procedure, a motion for summary judgment may succeed where the court is satisfied that there is no genuine issue requiring a trial. The threshold for summary judgment is high and, typically, questions of credibility requiring live testimony (often at issue in fraud cases) will render the claim unsuitable for summary judgment.

Given the serious nature of allegations of fraud, full particulars are required when pleading. In Ontario, for example, the Rules of Civil Procedure provide that where fraud or misrepresentation is alleged, full particulars of the allegation must be pleaded. This has been clarified by the court in Ontario to mean that the pleading must set out with careful particularity the elements of the misrepresentation relied upon, including:

• the alleged misrepresentation itself;
• when, where, how, by whom and to whom it was made;
• its falsity;
• the inducement;
• the intention that the claimant should rely upon it;
• the alteration by the claimant of his or her position relying on the misrepresentation;
• the resulting loss or damage to the claimant; and
• that the defendant knew of the falsity of his or her statement.

While evidence is not pleaded, counsel must (under the Rules of Professional Conduct) ensure that fraud allegations are capable of being supported by reasonable evidence. Further, claims of fraud that are determined to be unfounded may result in heightened cost consequences against the claimant.

A claim can be brought against “unknown” fraudsters using pseudonyms such as John or Jane Doe. Pseudonyms cannot be used simply as a placeholder in the event a cause of action is subsequently discovered against someone else. Rather, the intention to sue the unidentified party and the basis of the claim against that unidentified party must be apparent from the pleading.

The applicable provincial or territorial rules of civil procedure generally provide methods to compel non-party witnesses to give evidence. In Ontario, for example, a party can seek leave of the court to examine non-party witnesses before trial and can compel any individuals with relevant evidence to attend at trial by issuing a summons. A summons may also require the witness to attend at trial and to produce documents or other things in his or her possession, control or power relating to the action that are specified in the summons. Failure to respond to a summons may ultimately result in an arrest warrant to compel the witness be brought before the court.       

A corporation may be held liable for the fraudulent conduct of an individual director or officer through the corporate attribution doctrine. Under this doctrine, the individual director/officer’s mental state may be imputed to a corporation.

The Supreme Court of Canada has set out the following guiding principles regarding the applicability of the doctrine:

• an individual’s fraudulent acts may be attributed to a corporation where the wrongdoer was the directing mind of the corporation, and the wrongful actions were performed within their scope of their corporate responsibility;
• the corporate attribution doctrine will not apply when the directing mind acted in fraud of the corporation and where the acts were not designed to benefit the corporation;
• courts have the discretion to refuse to apply corporate attribution if it would be contrary to the public interest; and
• in all cases, the court must apply the doctrine purposively, contextually and pragmatically.

Claims can be brought against individuals standing behind companies when the company is being used as a vehicle for fraud by piercing the corporate veil. A court will consider whether the corporation is: (i) completely dominated and controlled; and (ii) being used as a shield for fraudulent or improper conduct. When the two elements are present, the corporate veil will be lifted to prevent the individual from being shielded from liability.

Additionally, company principals (including directors, officers and shareholders) may be held personally liable for their own tortious conduct when civil fraud has been pled and proven, and/or when their conduct exhibits a separate identity or interest from that of the company so as to make the act or conduct their own. Where the tortious conduct at issue is a fraudulent misrepresentation, it may be presumed that the act was that of the individual, even where that individual was acting as a representative of the company.

Under various provincial, territorial and federal corporation acts, shareholders may apply to the court for permission to bring a derivative action on behalf of a company, including against fraudulent directors. The goal in a derivative action is to recover for wrongs done to the company itself. To obtain leave to bring a derivative action the court will need to be satisfied that:

• the corporate directors will not pursue the claim;
• the complainant is acting in good faith; and
• it appears in the best interests of the corporation that the action be brought.

Shareholders and other complainants may also seek redress against fraudulent directors through the oppression remedy. Unlike the derivative action, an individual complainant does not need to obtain leave from the court to pursue an oppression claim. It allows the individual complainant to recover for wrongs done by the company or because the affairs of the company are being conducted in manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interest of, the complainant.

The rules applicable to joining overseas parties may depend on the rules of procedure in the province. Generally, a Canadian court may add additional parties where the claims for relief arise from the same occurrence, there is doubt as to the persons from whom the applicant is entitled relief or where doing so would promote the convenient administration of justice.

Canadian courts apply a two-stage “real and substantial connection” test for taking jurisdiction over a foreign party. At the first stage, the claimant must establish a “connecting factor” between the subject matter of the litigation and the forum, which creates a presumption of jurisdiction. Such a presumption can be based on factors such as residence, carrying on business activity, committing torts or forming contracts in the specific jurisdiction within Canada.

At the second stage, the defendant can seek to rebut the presumption by demonstrating the weakness of the connection. The test is designed to prevent judicial overreach and reconcile fairness with the need for security, stability and efficiency in conflict of laws. The focus is on the defendant’s connection to the jurisdiction, not the relationship of the dispute to the jurisdiction.

Finally, even after jurisdiction is established, a court may nonetheless opt not to exercise its jurisdiction if adjudication in another jurisdiction is determined to be more appropriate under the doctrine of forum non conveniens.

Service of proceedings out of the jurisdiction may be made without leave of a court. By way of example, in the province of Ontario, there is a list of specific categories of types of claims connected to Ontario for which service ex juris may be made without leave, including contracts made in Ontario, torts committed in Ontario and claims in respect of real or personal property in Ontario.

If the foreign litigant is resident in a country that is party to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the “Convention”), compliance with the requirements of the Convention is mandatory.

If the litigant resides in a country that is not party to the Convention, service must be carried out in accordance with the local rules of procedure in the jurisdiction within Canada in which the proceedings are commenced. In an Ontario-based proceeding, this would include service in a manner provided by the rules of service in Ontario, or service in a manner provided by the law of the foreign jurisdiction where service is made, if service in that manner could reasonably be expected to come to the notice of the person to be served.

There are a range of enforcement methods available to judgement creditors in Canada, including:

• garnishment, by which a third-party, including an employer or other party who might owe money to the debtor, is required to pay such monies directly to the court or the creditor;
• writs of seizure and sale for personal property, by which a government official in the form of a sheriff or other similar official is empowered to seize an asset;
• a writ of seizure and sale for real property, by which a registration is filed against land, establishing a lien on the property, which can have the effect of preventing the debtor from selling or encumbering the property and which can lead to its sale;
• conducting an examination in aid of execution, by which a creditor can require a debtor to disclose details assets, debts, income, etc, under oath; and
• the appointment of a receiver, particularly if the debtor is attempting to conceal assets, or in more complex cases that call for such measures.

A party seeking to enforce a foreign judgment would need to commence a proceeding for recognition and enforcement. In such enforcement proceedings, Canadian courts will generally enforce a foreign money judgment under the following circumstances.

• The court giving judgment is a judicial body or tribunal regularly established and exercising the jurisdiction conferred upon it by the relevant competent authority.
• The foreign court had proper personal and subject-matter jurisdiction according to Canadian rules regarding the conflict of laws. Jurisdiction is viewed as being properly taken if:
1. the foreign court had proper in personam jurisdiction over the defendant;
2. there is a real and substantial connection between the foreign jurisdiction and the subject matter of the proceeding; or
3. the defendant attorned to or by contract agreed to the jurisdiction of the foreign court.
• The foreign judgment is for a debt or a definite sum of money.
• The judgment is final and conclusive with respect to the rights and liabilities of the parties to it so as to be res judicata in a foreign jurisdiction, although Canadian courts may recognise and enforce interlocutory orders if they meet the requirement of finality. For an interlocutory order to be recognised and enforced, the foreign court’s jurisdiction to vary or set aside the judgment must be exhausted.

Certain Canadian provinces have passed reciprocal enforcement of judgment statutes that apply to foreign judgments. However, the scope of such legislation varies from province to province and tends to be limited to other Canadian provinces, the UK, a few select US states and parts of Australia.

Under the Canada Evidence Act, where a person is compelled to answer incriminating questions, that testimony cannot be used against them in future proceedings except if it involves perjury or the impeachment of contradictory evidence. In a civil proceeding, a witness can be compelled by court order to answer incriminating questions, but that testimony cannot be used against them in other or future proceedings. In criminal proceeding, the right to silence ensures that defendants cannot be required to testify, and no adverse inference can be drawn from this choice.

If a client seeks legal advice to facilitate or further a crime or fraud then solicitor client privilege can be lost. The exception is narrow, and it must be shown that the client intended an illegal purpose and the lawyer either shared or was deceived concerning that purpose.

Punitive/exemplary damages are primarily governed by common law principles but there are specific statutory provisions that permit them in cases involving human trafficking, consumer protection or discriminatory business practices. Punitive/exemplary damages are often awarded in intentional tort cases such as fraud or breach of fiduciary duty.

Banks are precluded from sharing customer information with third parties without consent under their duty of confidentiality, as well as under privacy legislation. Exceptions include disclosures compelled by court order, required by law or justified by a public duty, such as prevention of a crime or fraud.

Canada is lagging other countries in developing a comprehensive legal framework governing crypto-assets, but guidance for crypto-assets has been issued by securities regulators across Canada, the Canadian Securities Administrators (which assist regulators in developing a harmonised approach across Canada) and the Investment Industry Regulatory Organization of Canada (IIROC), which oversees investment dealers, brokers and trading activity in Canada. This guidance has been intended to adopt existing Canadian securities laws to the unique issues that apply to crypto-asset trading platforms.

Crypto-assets are treated as property for tax purposes in Canada and Canadian civil courts have adopted a similar approach.

In several recent disputes including cases where fraud has been alleged, Canadian courts have issued freezing orders over crypto-assets, and Canadian courts have been receptive to treating crypto-assets like other assets that can be traced and seized by court orders. However, the decentralised and anonymous nature of crypto-assets makes tracing and recovering the fraudulently stolen crypto-assets difficult, particularly where the defendants are out of the jurisdiction and the passwords for access to the crypto-assets cannot be obtained.