Bergeron, J:—This Court is seized with an appeal by the Crown, under Part XXIV of the Criminal Code, from a judgment rendered on December 14, 1982, by the Court of the Sessions of the Peace of Montreal, acquitting respondents of a summary conviction charge reading (as later amended during the trial); as follows:
REDPATH INDUSTRIES LIMITED, LES INDUSTRIES REDPATH LIMITÉE (formerly Canada and Dominion Sugar Company Limited of One, Westmount Square, Suite 1212, Montreal, Quebec, and DOMINION SUGAR COMPANY LIMITED, of 285 Merritt Avenue, Chatham, Ontario, between October 1, 1966 and April 1, 1971, at Montreal, District of Montreal, in the Province of Quebec, and elsewhere in Canada, wilfully evaded the payment of taxes imposed by the Income Tax Act. RSC, 1952, Chapter 148 and its amendments, for taxation years 1967 to 1971, both inclusive, to wit, by omitting to declare in their income tax return: taxable income of $7,404,635.97, thereby evading payment of $3,036,857.91 in income tax, committing thereby an offence contrary to Section 239(1)(d) of the said Act.
(The emphasis on the word “taxable” is mine as representing the amendments brought by its addition in the course of the presentation of the defence.)
For the sake of abbreviation, I shall refer to various parties involved as “Red- path” for Redpath Industries Ltd, to “Dominion” for Dominion Sugar Limited, a wholly owned subsidiary of Redpath; to “T & L” for Tate and Lyle Limited of London, England (holding company) as the parent company of Redpath — I shall also refer to Redpath’s affiliated company, incorporated in Bermuda, Albion Company Limited, as “Albion”.
As already noted and emphasized, the original charge of “omitting to declare income” was later amended, at the request of the Crown and at the defence stage, by judgment of the trial Court, over the objections of the defence, by adding the word “taxable” to the word “income”.
For what it would have been worth for the sake of clarity and to reflect the true nature of the charge, if such a charge exists in law, and in view of the tax returns filed and their manner of filing and the evidence adduced, it might have been more factual to couch the information and state in the charge “‘by omitting to declare income as taxable income”.
In fact, and as it was duly demonstrated, respondents did declare income of some $7,400,000, indicating its source, nature and origin, eg, in the form of dividends received from a non-Canadian non-resident corporation, Albion, of Bermuda, indicating that such a company was affiliated to respondents in a non-arm’s length capacity, and respondents claiming, in their annual returns, a tax exemption under paragraph 28(1 )(d) of the ITA, as it then existed, for the period of five years, 1967 to 1971 inclusively.
Before entering into the merit of the case and because there exists here no discussion as to the fact that total income, exact almost to a penny, was duly declared as to its source and nature and an exemption claimed, it does call for a quick examination of the general concept of fiscal legislation regarding income, the duties and rights it imposes and confers on both parties, the taxpayer and the National Revenue and the basic principles normally applied and followed in matters of taxation.
The main thrust of the Act is to compel the taxpayer to declare his income, no matter what the source may be, and the taxpayer has no choice but to declare it as faithfully as his activities engendered. In doing so, he is entitled to take into account whatever exemptions are recognized by the Act and he may claim the benefit of such exemptions in his tax return.
The Revenue, upon such disclosure, may not agree with the taxpayer’s exemptions claim and may move to reject such claim by notice of assessment, opening the door to legal civil proceedings to be decided on the merit of the respective contentions of the parties by the Appeal Board and the Exchequer Court (for the years involved), later on by the Tax Appeal Board (now the Tax Court of Canada) and the Federal Court.
These authorities constitute the forum where adverse contentions are debated as to taxability or not.
The obligation to declare his revenue on the part of the taxpayer is unquestionable and wilful failure to do so may entail the commission of an offence of evading compliance with the Act, which 1s not to be confused with an avoidance of tax.
The case law is replete with prosecution for failure to declare, but it is worth noting that in regard to a charge of tax evasion, not a single reported case could be found based on wilful omission to declare income such as in the present case where the total income is declared, and declared as non-taxable by virtue of exemption simultaneously claimed in tax returns.
This mutism in the case law seems to me to stem from logic in that, once a total income is duly declared, whatever qualifications are attached to it, the taxpayer has satisfied his main and principal obligation. He may wrongly claim an exemption, possibly opening the way to other recourses if the exemption claim is tainted with fraud, etc, but the necessary element for an offence of omission to declare is not present to support a charge of that nature.
We have to deal here with a specific charge of “failure to declare” and not with the manner in which an exemption was claimed in tax returns, since it is clear from the record that a true and exact income was admittedly reported.
A criminal court is not the forum to determine income taxability and to make determinations as to rights to tax assessment or absence of rights of assessment involved. In a tax evasion charge, it must appear prima facie from the evidence that the taxability is clear-cut, obvious, indisputable, unquestionable from lack of reporting, before entering the examination of the other facts of the charge, eg, whether the undisputable taxability, based on income gained, proven and undeclared, leads to a conclusion beyond reasonable doubt that it was wilfully omitted by a taxpayer in his tax returns.
If such basis is not present and there exists an obligation to enter into the examination of the merit of a possible assessment in respect of a declared income in order to weigh whether a taxpayer is susceptible to taxation or not, may or may not take advantage of claimed exemptions, a criminal court usurps its function and appropriates itself of a jurisdiction which it does not possess.
We are faced in this instance, with a strict problem of taxability, originating from the creation of an affiliated company, a foreign offshore corporation, a device widely used over more than the last half century by numerous large and multinational corporations to conduct some of their international commercial operations and as a means of recuperating tax-free dividends, due to a certain elasticity, if not to say laxity, in the Canadian legislation as it then existed.
The case law abounds with instances where, in taxation matters, the Revenue Department has constantly frowned upon the practice and, not seeing eye to eye with the taxpayer’s exemption claims, has on multiple occasions set the civil machinery in motion to contest the validity of the exemption claim pursuant to a declaration so qualified by the taxpayer; in all such cases, always introduced in civil jurisdictions, the Revenue has often relied on the theory of “sham”, an artifice to camouflage the true nature of a taxpayer’s operations through a corporate dummy or puppet.
But never, as well as I could ascertain, has a criminal prosecution been instigated, based on a totally declared income couched in returns duly filed as required by law but qualified by direct and unequivocal indications of the source and nature of the income, and the dispositions of the law on which the taxpayer relies to claim tax exemption.
If the true income has been declared, what opposite views the parties may adopt as to their respective merit, should not be the concern of a criminal court, but that of civil tribunals, and the matter could end right there as far as an information for “failure to disclose” is concerned.
However, it would not be fair and just to the parties and counsels, who not only went through an original lengthy criminal trial, scrutinized some nine volumes of transcript evidence, hundreds of documentary exhibits, filed voluminous arguments, notes, submissions of considerable jurisprudential authorities and further verbally argued before this Court for a period of more than two and a half weeks, if I did not summarize the facts and the principles of law involved so as to determine whether in some criminal fashion and as per the information charged, a mandatory or prohibitive disposition of the ITA has been infringed.
Redpath is and has always been a sugar refiner buying at large throughout the world, raw sugar, 96 per cent pure, for the purpose of refining and eventual sale for Canadian consumption. It is not a sugar trader per se, eg, to simply buy and sell sugar in its original form.
Dominion is a wholly owned subsidiary of Redpath, a paper corporation with a capitalization of $500, kept on the shelf and totally inactive until the incorpo- ration of Albion; its sole activity thereafter was to become a sometime assignee of dividends received by Redpath from Albion.
Throughout the 1950s, Redpath incurred substantial commercial and financial losses mainly through lack of expertise in the world sugar market.
T & L, of London, a sugar trading corporation, if not the largest such trader worldwide, with 36 subsidiaries and dealing with some fifty countries, took an interest in Redpath and acquired a 56 per cent interest in Redpath, becoming thereby its largest shareholder having final word on the destiny of Redpath, leaving Redpath with wide latitude, through its own board of directors on matters of day-to-day policy, but holding the high hand on matters of worldwide policy.
Sometime during the year 1966, the events took a turn. Whereas Redpath had become flourishing and showed profits, T & L went through a period of shortage in its liquidity position.
Various means and ways were explored in order to restore T & L’s liquidity position. Firstly, a loan by Redpath to T & L was considered; it was discarded due to possible obstacles which might be raised by the British currency control authorities in case a loan recall on short notice should be needed and exercised by Redpath and also due to the uncertain situation of the currency, the English pound undergoing fluctuations and presenting dangers of devaluation.
The examination of other possibilities then veered unto another avenue, a proposal by which Redpath would acquire ships from another subsidiary of T & L, such purchase providing fresh, much needed and important funds to T & L, this purchase to encompass a charter arrangement or lease-back of the ships to the vendor subsidiary company. This second avenue did not materialize in its original concept, although steps had been taken and approved by the English authorities concerned; it did however materialize at a later date after the incorporation of Albion, but by Albion going through with the ship-charter deal with a T & L subsidiary quite outside the intervention of Redpath.
While these avenues were being explored, a third one was envisaged, eg, the formation of an offshore corporation, preferably in Bermuda, due to the absence or near absence in that country of income tax legislation.
Important Canadian tax specialists were consulted, to ascertain the requirements to be met, in order to take advantage of fiscal exemptions under the Canadian ITA.
All aspects of the proposed incorporation were thoroughly couched, as outlined in the tax experts’ advice, T & L wanting to make sure that the proposed plan would be completely above-board and in no way contravening any dispositions of the law, in a lengthy memorandum emanating from T & L dated November 11, 1966 and filed as exhibit E-17 and entitled “Proposed Bermuda Corporation”. Another internal memorandum, addressed by a Mr Dennis, manager of the purchasing department of Redpath, to London, on November 24, 1966 (exhibit E-38) amplifies on the former memorandum by setting the factual procedure which would be used to implement the proposed offshore corporation’s day-to-day operations that would ensue.
It is plain as day, without any hiding whatsoever, that the whole purpose and intent of the proposed plan, was to take advantage of the existing stipulations of the ITA, leading to tax exemptions under paragraph 28(l)(d), while staying within the confines of what was legal and permissible.
The experts, in their advice, may have even seemed overcautious in indicating the needed requirements; in outlining first, as was true and exact, the necessity of creating a bona fide offshore corporation subscribing therein at least 25 per cent of its voting stock but seeming to place a maximum limitation of 50 per cent to such subscription, whereas no such limitation existed in the ITA.
They further advised, having probably in mind the character of residency which may attach to Albion, if conducting business in Canada, through intermingled management and control by various directors and officers acting in one of the other corporations and Albion becoming thereby susceptible of taxation in Canada, that care should be taken that management and control of Albion be confined to Bermuda. Again, this aspect of local management and control is not the subject of a requirement of the law, keeping in mind however that if it should lead to a factual situation whereby management and control were exercised in Canada, the legal consequences would be to possibly open the way to fiscal recourses against Albion, a corporation which is not the object of the present recourse.
The original concept in creating Albion, was to funnel through it the operations in respect to raw sugar purchases by Redpath, in order to satisfy its needs as a sugar refiner, in accordance with a day-to-day schedule based on its inventory position.
The ship-charter aspect, however, was altogether present as well as the use of Albion as a raw sugar trader at large, on a very sophisticated market, involving purchases on the “Spot” market, dealings in “futures” based on paper transactions as would exist on the commodities market, buying and selling “short” and “long” on the terminal market, eg, on a term basis without actual and physical sugar deliveries.
One must remember, that in the sugar world, there exists a daily price setting for sugar, determined by traders and brokers, meeting every day and agreeing as to price remaining valid for 24 hours. It is a recognized norm called LDP, or London Daily Price. Once a buyer agrees on a physical purchase, of sugar, the price that he binds himself to pay is the one set by the LDP or “Spot” market.
It has great importance on the determination of the various activities of Albion, of its true character and functions over a five-year period; the evidence shows that Albion did not limit itself to being solely a purchaser for resale of raw sugar to meet the requirements of Redpath at a price determined by an external agency, but engaged in the business of sugar trading at large, involving a high degree of speculation, with expectations of profit making but with the risks of losses which at times did occur, and important ones as reflected on Albion’s financial statements, these losses eventually having an influence on the dividend to its shareholders.
Redpath, on the other hand, by virtue of its objective to operate as a sugar refiner, was not expected to enter into the field of a sugar trader at large, and incur the risks involved in such a trade, and therefore confined its own activities to the refining aspect for resale.
Also shown by the evidence, there were two additional facets in which Albion engaged in way of commercial activities, and in which Redpath was not connected.
One consisted in the purchase of two ships by Albion, from a T & L subsidiary, Sugar Line Limited, for a price close to $4,000,000, involving a charter- back agreement. With the rights and obligations involved, particularly as regards third parties, it can hardly be said, in this regard, that the identity of Albion was fused with the identity of respondents.
A third aspect of Albion’s income producing operations, consisted in portfolio investments, again totalling hundreds of thousands of dollars, by way of term deposits, in England, Bermuda and Canada.
All of Albion’s various activities are fully substantiated by voluminous documentary evidence regarding each and all transactions, concerning the four facets of its commercial operations, physical raw sugar purchases for Redpath, raw sugar trading at large, ship-charter and investment dealings.
The whole tenor of the prosecution thesis is to the effect that Albion was a mere “sham” or puppet standing for Redpath, which used it as a vehicle to camouflage its own personal operations, Redpath being at all times and in every respect the Deus ex machina, Albion’s every dealing being that of Redpath acting behind the scene through a fictitious dummy. The Crown draws a parallel with the Dominion Bridge-Span case ([1975] CTC 263; 75 DTC 5150), a civil matter decided in 1975, four years after the period involved in the present instance, by the Federal Court, both in the first Court and in appeal, on a strict factual basis that Span was a “sham” offshore corporation fictitiously created for the sole purpose of acting as an apparent purchaser of offshore steel, for resale to its one and only customer, Dominion Bridge, at a price higher than its costs, the profit derived from the operation flowing back to Dominion Bridge as dividends which were then declared as tax free.
The evidence adduced in the Dominion Bridge case may offer a number of similarities with the case at hand, such as regards the creation of an offshore corporation, little or no management and control by the offshore company within the confines of the Bahamas, every move being directed by its parent company, absence of a real place of business except a pied-à-terre, absence of private telephone service and staff, etc.
In order to decide on the factual grounds of the case, the Federal Court queried itself on six aspects leading to conclusions that the business of the offshore corporation was a “sham”:
1. Who was really carrying on the business?
2. Were the persons conducting the business appointed by the parent company?
3. Was the company the head and the brain of the trading venture?
4. Did the company govern the adventure, decide what should be done and what capital should be embarked on the venture?
5. Did the company make the profits by its skill and direction? 6. Was the company in effectual and constant control?
All these aspects being present, the Court then attached itself to the facts of the case, to reach a decision that Span was a “sham”.
However, caution must be exercised not to extend the presence of the above criteria as being conclusive per se of the existence of a “sham”.
As observed by Cattanach, J, in Denison Mines Ltd v MNR, [1971] CTC 640; 71 DTC 5375, with whom I agree, they are criteria that are helpful in determining the question, but one must consider all other indicia which may nevertheless bring a conclusion that the subsidiary business is separate from that of its parent.
Two dominant evidential factors were, in my opinion, instrumental in leading the Federal Court to conclude that Span was a “sham”. First, the insignificant if not ridiculous investment of a paid-up capital of 35 shillings by way of five shares on a total of 100 shares and on a total capitalization of 350 pounds sterling.
The second one resides in the finding that the cost of offshore steel to Dominion Bridge, via its purchases from Span, was purely artificial, offended the fair market value rule as couched in subsection 17(1) of the ITA then in effect, and resulted in an illegal increase in costs of operation over and above the normal price of the domestic market, overcosts then claimed as an operational expense, such overcosts ultimately finding their way back to Dominion Bridge by way of dividends emanating from Span’s profits.
Whereas in the present case we may find the presence of some of the above criteria, at least two important aspects totally differ from the Dominion Bridge case.
Shortly after the creation of Albion, some $4,000,000 were infused into it by way of capital investment, and it eventually reached a sum close to $10,000,000.
It is far from the 35 shillings invested in Span.
Furthermore, the factual finding based on the fair market value rule, could not come into play because the sugar market 1s conditioned and regulated by the LDP exchange, establishing daily and on a 24-hour basis, what the price of raw sugar is to be.
Because of the existence of such an external norm, over which respondents had no control, the price of raw sugar could be spotted and examined for any given day, rendering any artificial overcost claim impossible to achieve by a purchaser desiring to fix an arbitrary consensual price for his purchases. The price of sugar, with the most minute daily variation, is posted and readily available to all concerned and can be ascertained at a glance without the need of expert testimony as would be the case in a great number of commodities.
In the present instance, it therefore can hardly be said, that other than the criteria invoked, having particular regard to these two distinguishing facets, that the factual situation is a valid reflection of the Dominion Bridge-Span case.
However, on the finding of facts by the trial Court in the present matter, from which a parallel is drawn with Dominion Bridge, one would tend to conclude that these facts bear all the hallmarks of the Dominion Bridge criteria, and that once these criteria are acknowledged to exist, the trial court unreasonably erred in deciding that Albion was not a “sham”. It is worth reproducing at length the summary of the criteria supported by the evidence, and capsulated as follows: (p 1816-7 of volume 9 of the record):
At this point a brief look at how the operations were actually carried out would seem to be warranted. It was obviously the intention of this group of corporations, that is Tate & Lyle, Redpath, Dominion Sugar and Albion, to maximize the operations through Albion so that profits accruing would not thereby be taxed in Canada and could then be transmitted to Tate & Lyle.
However, as already noted, Albion had no telephone, no employees and no facilities with which to purchase sugar worldwide.
The way that this was effected was that the raw sugar purchasing departments of Redpath, headed by a Mr Howard Dennis, would carry out all negotiations with a sugar broker, but the purchaser would officially be Albion. Howard Dennis was authorized, by Redpath’s management, to negotiate Albion contracts as well as Red- path’s. Once this initial transaction had been accomplished, papers were then drawn up by which Albion then contracted to sell the same sugar to Redpath. Once these documents had been prepared, copies would then be sent to the Albion company’s files, held in a Bermuda law firm and copies would also be held in Redpath’s headquarters, here in Montreal, and the transaction would then take place according to the terms set out therein.
In other words, at all times, it was the accused, here in Montreal, that was wholly in control of the operations and négociations supposedly carried out by Albion. The profits realized would be treated as “offshore dividends” and thereby subject to the provisions of the then Section 28 of the Income Tax Act of Canada. We must emphasize that at all times, Redpath management considered Albion as an extension of itself. It couldn’t be otherwise since Albion didn’t have so much as an employee.
This summary by the trial Court brings into focus the whole concept on which the corporate world is based. In its essence, there is hardly a greater artificial machinery than the life-creating of corporations; they emanate from a fiction of the law, giving them birth, identity, powers to acquire rights and to incur liabilities, separate and distinct from the physical persons needed and required to direct their destiny.
Viewed in the light of an artifice, the corporation is a “gimmick by excellence” which would be incapable of any activity were it not for the physical persons generating profitable actions such as directors and officers, on behalf of its interested participating shareholders.
Thus, it is not surprising to find that the artifice is commonly extended by the creation of off-shoots, in the form of related corporations such as subsidiaries, or by engaging in affiliations with other corporations, by subscribing in their capital structure and most often acquiring a degree of control over them, as well as the large word to say in their management. Needless to say that the situation to come about and develop will depend on the extent of the shareholding, as regards management and control of a corporation, through the power of appointment by shareholding majority, of the people who will guide and direct the corporate operations.
It is therefore normal to visualize that familiar faces will be found in one and the other of the parent, the subsidiary or the affiliated corporations, often acting in similar capacities, but separate and distinct as regard each corporation concerned. There is nothing novel in the corporate world in the idea that the majority rules, and does so by its directors.
They are the head that wags the tail and there is therefore nothing wrong to find that a particular board of directors, acting on behalf of one corporation may originate and approve a business decision, and concur in, and accept such consensual decision, as a board of directors of another affiliated or subsidiary corporation, without even so much as changing seats after a first sitting when passing to a second one.
What greater artificiality can there be, in matters of management and control, where separate identities are involved, as that examined by our courts in the matters of Sazio, Caflk, Cameron, Massey-Ferguson etc, where the general criteria of Dominion Bridge were present and yet did not lead to the conclusion that a “sham” existed even though it could be nothing else but an instrument, a device, a gimmick to save tax?
The artificiality of a creation of a company, to take advantage of a lesser rate of taxation, is shown most vividly in the Sazio case, it being an example of the extreme the concept of artificiality may reach (Sazio v MNR, [1968] CTC 579; 69 DTC 5001). Being the coach of the Hamilton Tiger-Cats Football club, Ralph Sazio incorporated “Ralph W Sazio Ltd”, owned solely by him and his wife, a passive shareholder. With the consent of the club, he assigned his coaching contract to his company.
Although the coaching services were physically rendered and performed by Sazio himself, the validity of the device was upheld in spite of forceful argument by the MNR that the income of the company was the income of Ralph Sazio. There could hardly be a case more blatant and obvious of management and control, nor a closer and apparent one of a corporation identifying itself with its directing mind.
In the same vein of thought can be examined the cases of Cameron, Cafik, Spur Oil, Raoul Engel, Atinco Paper Products, Frederick G Vivian, Massey-Ferguson, Lawrence Shapiro, etc. referred to in the Appendix to this judgment.
In all these instances, the dominant principle of management and control residing in the hands of the people presiding over the incorporation and remaining] in charge of it, does not lead to an automatic conclusion that the corporation so formed and substituting itself to its originators, must be treated as a “sham” or in some other way ineffective because a tax reduction motive led to its formation. In the same manner was the John W Daly case decided, although adversely to the taxpayer, not by virtue of the principle not applying but because the taxpayer claimed that the assignment of his contract with a radio station had been implemented during the taxable years and he had waited some seven years before doing so, thereafter claiming the existence of an assignment which the evidence did not support.
All these instances reflect the validity of measures taken with a view of tax avoidance. All of them found their way through civil debate, between the taxpayer and the MNR, without so much as a civil penalty claimed and all of them dealing with the “grey area” regarding taxability.
In the present case, we are obviously faced with a device, an instrument, a means resorted to as a tax saving vehicle, but we cannot escape the fact that, although the operations of Albion were directed and conducted by its parent companies, it was nevertheless created as a separate entity, which dealt extensively not only in the raw sugar market to meet the needs of Redpath as a refiner, but as a trader of raw sugar at large, and furthermore exceeded the simple scope of business authority given by Redpath to its employee, Howard Dennis, in that it conducted business of buying and chartering ships and generated separate income through substantial investments.
Albeit that the last two facets emanated from the directives issued by the parent companies, it is not shown by the evidence that Redpath by itself, or through its purchasing manager, Mr Dennis, had much to do with these latter particular aspects.
We are left, as outlined in the early part of this judgment, with a prima facie situation, where taxability becomes of prime importance, and where on the face of the record, it is not only a very and truly debatable one, but one which would highly favour the taxpayer.
As to tax abatement claimed from dividends produced by a non-resident corporation, the ITA as existed for the period concerned, 1967 to 1971 inclusive, contained a single requirement that
more than 25% of the issued shares (having full voting rights under all circumstances) belong to the receiving corporation
There was no other requirement couched in the Act, except this single and only one, under paragraph 28(1 )(d).
It therefore did not matter if the shareholding was greater than 25 per cent, it could have been 50 per cent as it could have been 100 per cent owned by the receiving corporation.
Nor did the Act require that management and control be exercised only from the situs of the non-resident corporation.
As previously underscored, and at the risk of being repetitious, the matter of management and control being exercised partly from Canada, may entail a question of de facto residency regarding a non-resident corporation and lead to a scrutiny as to whether or not such corporation as Albion was in fact conducting business in Canada, possibly rendering it accountable taxwise for such business operations. We are not however concerned with this aspect in this case, Albion not being the object of a recourse, either civil or criminal.
In statutory criminal matters, there must exist a provision on which a criminal information rests, by way of prohibition or by mandatory stipulation, as to what one is required by law, to do or not to do, failing which an infringement is committed quite apart from the element of intent.
Even where the disposition exists, but is unclear, it is to be interpreted in favour of the taxpayer. Whereas, in a civil aspect a debated claim may shift the burden of proof to the taxpayer, in criminal matters the burden of proof lies with the prosecution to make its case beyond a reasonable doubt. Here, we are bound by the statutory limitations as far as the criminal information goes, and I am at a loss to find what specific provision of the law has been infringed.
Although the Crown relies on a general allegation of “wilful tax evasion” based on section 239 of the Act, it saw fit to particularize, in its charge, the manner in which it was done, namely by “omitting to declare”; and it relies on an act of omission while conscious that a declaration was made, and specifically made with the divulgence of the source, nature and origin of the income, after having met the single requirement imposed by law for claiming a tax free dividend, eg, the subscription of more than 25 per cent of the voting stock of Albion.
As said by Dickson, J of the Supreme Court of Canada in Morgentaler v The Queen, (30 CRNS 209 at 257):
it seems to me to be of importance to indicate what the court is called upon to decide in this Appeal, and not equally important, what it has not been called to decide.
Assuming, without having to decide, that the Crown was right in its contention as to some facets of the evidence, but to which I am not ready to agree, that there was some shenanigan involved in the way the whole scheme of things developed, it might possibly have had some grounds for invoking fraud, conspiracy, false documents or bookkeeping entries, etc . . . but neither the trial Court was, nor this Court is seized with such specific infractions.
The prosecution relies on four main grounds which, it contends, the evidence indicates:
(A) management and control of Albion, originating and conducted largely from the Montreal base of Redpath; it is true as regards raw sugar purchases for Redpath’s requirements and partly true as regards raw sugar trading in general by Albion, done through Montreal and London, but not factual as regards the other facets of Albion’s business activities. As we have seen, how- ever, it may have been done and where, other than from a situs in Bermuda, is an irrelevant matter to be considered;
(B) a camouflage used by respondents, through a letter of instructions from Mr Dennis, purchasing manager of Redpath, in Montreal, to a nominal representative of Albion, in Bermuda, outlining documents to be signed, kept or returned, by way of offer, acceptance and confirmation, all documents which in the eyes of the prosecution demonstrate that Albion was a pure puppet, without any proper self identity, and reflecting indications that what Albion did in every respect, was what the respondents decided and did, the former being only a shadow moving along as the respondents moved. There again, one must bear in mind that in the corporate system, the head wags the tail, and it should come as no surprise that instructions, written or verbal, are issued; without much latitude, if any, left to the affiliated or subsidiary company. Furthermore, whether a transaction is evidenced post facto to reflect a transaction already consummated in order to have it recorded on file, is quite immaterial, particularly when the records show and indicate clearly that the transaction was effected.
(C) the use of a code between respondents and T & L, for raw sugar calls, which according to the prosecution, was a device to hide from any eventual scrutiny by the MNR, the true transactions between them. In itself, a code is nothing of a perverse character. In the world sugar market, T & L occupied a position of command where its every move was subject to scrutiny by competitors as to anticipated trends of the market, particularly on “futures” and terminal market. A disclosure of intention may carry with it financial consequences in a field of speculations. This was duly explained by the witnesses heard, experts in the matter, declaring that the code was introduced to hide the extent of their sugar trading not only to other traders but to their own sugar broker. Correspondence and telexes bear three different code names, the main one being for sugar trading at large conducted through Albion. It may not have been the safest nor the most appropriate confidential way to keep the information from reaching outsiders, not privy to the intercompanies relationship, but as the trial Court found, and it is for that Court to assess credibility, and not for this Court unless it is totally unreasonable and unsupported by the evidence, there was nothing nefarious in the use of a code, having nothing to do with an intent to camouflage the operations with a taxation view in mind, since apart from the code, the transactions in their objective aspect were duly posted and inscribed in the respective company records. A private notation of that nature, found in respondents’ records, for everyday purposes when sugar calls were being made, finds its reflection on the eventual posting as to who bought what and on what day, and the transactions themselves are fully documented by contracts, invoicing and payments.
(D) the finding in respondents* book of an entry of $151.50 as a travelling expense, whereas at the original stage of the incorporation of Albion, a corresponding entry is couched in the form of a subscription of capital shares of Albion, in favour of third parties, members of the T & L corporate family. This again, as claimed by the Crown, is a device to veil the real presence of Redpath in Albion’s corporate structure.
I find this to be irrelevant as respondents were not limited to a 25 per cent participation in the voting stock of Albion. They could furthermore give or otherwise donate assets to other members of the corporate family without interference of any kind. It is not an offence, and whatever inspired or caused such a posting in the books, illegally or not, is not for this Court to decide. This benign sum is a “de minimis non curat praetor” and a trivial one in the light of a $7,000,000 tax evasion charge, although it would seem that the discovery of such a book entry was the spark that triggered a complete investigation in which respondents fully co-operated, and the present prosecution, together with the other findings previously mentioned in A, B and C.
Respondents were charged jointly in the information. Redpath, as a principal, and Dominion as a participant, because of having received the dividends from Redpath by way of assignment, the Crown then relying, as far as Dominion was concerned, on section 21 of the Criminal Code, by being a party to the offence.
There is, of course, nothing criminal in the assignment of dividends by Redpath, to its wholly-owned subsidiary, as long as the tax exemption is not claimed twice in the returns and on behalf of both respondents.
I think, before concluding, save for a short examination of the question of the jurisdiction of this Court regarding the matter at hand, as an appeal Court under Part XXIV of the Criminal Code, a word can be added as to the views generally held, in the taxation years involved in respect to the widely used system of offshore corporations by Canadian companies, and the state of ineffectual legal situation which called for adoption of proper remedial legislation in order to do away with extensive tax avoidance, all properly taken advantage of, within the scope of the ITA.
Back in 1969, the Carter Commission was charged, by the Canadian Government, to enquire and report on the opportunity to revise, amend and bring up- to-date, the fiscal legislation.
Paragraph 28(l)((d) and rules relating to offshore corporations, retained the particular attention of the Commission, which found them to be a “substantial loophole in the tax system” and it confirms the attitude of the tax experts up to then recommending the use of offshore companies to their clients, such as McDonald Currie, Coopers & Lybrand, Clarkson Gordon, Peat Marwick et al.
I quote from the report of the Commission:
Because income not brought into Canada must necessarily result in an increase in the value of the resident’s interest in foreign property (ignoring foreign source income that the resident spends on personal consumption outside of Canada) all foreign source income would ultimately become subject to Canadian taxation. This would close what is now a substantial loophole in the tax system.
Residents can now establish a foreign corporation to hold their income earning assets in a country with low corporation taxes. The income can be retained in the foreign corporation and the resident can realize this income without Canadian tax by the sale of the shares in the foreign corporation. (Vol IV, p 504.)
One result of these provisions is that the Canadian taxpayer has enjoyed a much greater simplicity and ease of calculation for foreign income than his United States or United Kingdom counterparts. The tax minimization possibilities of the exemption privilege, in combination with the use of foreign tax havens, have not gone unnoticed. The provision can be used to reduce Canadian tax on income generated in Canada for the benefit of Canadians. By establishing companies in jurisdictions which impose little or no tax, Canadians can reduce their Canadian tax by engaging in a series of paper transactions which exploit the provisions of tax treaties in combination with Section 28(1)(d). (Vol IV, p 511.)
The proposals of the Carter Commission evoked national debate. The Minister of Finance, in the same year 1969, tabled a ‘‘White Paper” in the House of Commons: “Proposals for tax reforms”, part of which dealt with “taxing international income”:
Some countries do not levy income taxes. Other countries levy income taxes but do not apply them to particular types of income. Taxpayers, both here and abroad, have not been reluctant to use such jurisdictions to artificially reduce or unduly postpone the Canadian taxes they would otherwise pay. Some types of income (eg, foreign dividends, rents and royalties, shipping income and some export profits) are easily diverted to tax-haven jurisdictions.
Canadian taxes are thereby at least postponed until the funds are needed in Canada, and may be avoided altogether. In some instances, Canadian income can also be routed through a tax haven to produce a tax advantage. Consider a Canadian Corporation contemplating the purchase of a Canadian bond. If it buys the bond itself, the interest will bear corporate tax of 50 per cent. If, however, it causes a wholly-owned corporation in a tax-free jurisdiction to buy the bond, Canada will settle for a 15-per-cent withholding tax on the interest, and the subsidiary corporation can distribute the funds to its Canadian parent corporation tax-free by way of a dividend. A number of the proposals in this chapter are designed specifically to counter such manoeuvres.
Section 6.20. As noted above, the exemption privilege is susceptible to abuse. Not all foreign corporations carry on bona fide business operations. Some are merely devices of convenience to which income for other sources — dividends, interests, royalties and trans-shipment profits — may easily be diverted. The dividend exemption system would permit such income to be brought back to Canada tax-free.Even the tax-credit system would permit the Canadian tax on such income to be postponed indefinitely.
Notwithstanding the acknowledgement by both the Carter Commission and the Minister of Finance, of a state of the law allowing for tax loopholes in respect to offshore corporations and its wide usage, it was not before 1972 that a brand new Income Tax Act was introduced, but because its revolutionary provisions tended to greatly disturb Canadian corporations in their international dealings through offshore corporations, it was found necessary to suspend the application of the law in order to give taxpayers time to rearrange their affairs; revisions were made from time to time, and the law became effective in 1976, eg, five years after the period covered by the present case.
In view of such acknowledgement by official authorities, as to the state of the law, it can hardly be said that the resorting to offshore company, for tax saving purposes, justifiably or not, offended the statute. The existence of a void in such matter, was patent, recognized and admitted.
As to the nature of a “sham”, we find that our Supreme Court adopted in the James A Cameron v MNR, ([1972] CTC 380; 72 DTC 6325) the definition given by the English Courts, in Snook v London and West Riding Investments Ltd, [1967] 1 All ER 518, at 528:
As regards the contention of the plaintiff that the transactions between himself, Auto Finance, Ltd and the defendants were a “sham”, it is, I think necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give the third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.
It appears to me, from the reviewing of the evidence, that the legal rights and obligations which were created, by the formation of Albion as an offshore company, were those which all parties intended to create, as per the memorandum filed in evidence as exhibit E-17 and entitled “Proposed Bermuda Corporation”.
The proposal was thereafter fully implemented and totally documented. It may be trite to say that substantiating documentation alone would cast aside any resort to a “sham”, because a “sham” may exist in spite of an outward appearance by documentation; here, however, in the light of the evidence, we find the activities of Albion were not confined to dealing in raw sugar, either to supply Redpath’s need as a refiner, or as a trader of raw sugar at large.
As already pointed out, Albion bought and chartered ships; it further produced investment income to the extent of some $2,500,000, in which dealings Redpath had nothing or little to do, except at times, as collateral guarantor and security by bank loans.
I find, as the trial Court did, that, what was achieved, was what the parties intended to do from the start, on all the facets of the proposed plan and in no way did it fall under the definition of a “sham” as couched in the Snook, Cameron and Dominion Bridge matters.
Ex majore cautela and further to invoking the fact that the evidence showed total absence of mens rea and of actus reus, respondents submit that on matters of jurisdiction of this Court, as an appeal tribunal from summary conviction under Part XXIV of the Criminal Code, the long-standing rule should apply that this Court has no jurisdiction to disturb the findings of the trial Court on the facts and on its assessment of credibility, which must remain intact, unless such findings of facts and assessment of credibility, are unreasonable and unsupported by the evidence.
Respondents however, subsidiarily, went much further in their contention, by submitting that the right of appeal by the Crown, from an acquittal, is restricted to a question of law alone.
In this line of thought they seek support from the Parliamentary debates preceding the amendments, changing the former concept of a trial de novo into a formal appeal on the face of the record, a form of trial de novo being kept in a limited way, but by leave of the Court, as also was kept the appeal by stated case limited to questions of law or excess of jurisdiction.
Respondents contend that the Parliamentary debates reflect the intent of the legislator to treat such appeals before this Court in the same manner as are treated appeals before the Court of Appeal in matters of indictment.
They further argue that subparagraph 613(4)(b)(ii), applicable by virtue of subsection 755(1) clearly shows this intent of Parliament through the use of the words “but for an error of law”. This, respondents contend, is not a strict procedural matter but a matter of jurisdiction as it is incorporated in the section headed and dealing with the “powers” of the Court. The words so left, incorporated indistinctively as regards appeals before this Court on summary convictions as on appeals to the Appeal Court on indictments, would reflect the intent of Parliament, to restrict appeals of the Crown, on acquittals, to questions of law alone.
Having regard to the trend of our highest Courts (as shown in Vasil, [1981] 1 S.C.R. 469 and Babineau, 32 OR (2d) 545), it would now seem that in exceptional cases, resort can be had to the Parliamentary debates as a help on interpretation.
Whether the intention of the Legislator, in the House of Commons debates, was to restrict the appeals of the Crown, on matters of acquittals, to questions of law alone or not, one significant feature of the amendments resides in the fact that such limitation as contained in subsection 605(1) was not made applicable in appeals under section 748 and namely in the governing subsection 755(1).
In view of the clear wording of subsection 755(1), not incorporating subsection 605(1), it would seem to indicate that the right of appeal of the Crown from an acquittal is unfettered and not restricted to questions of law alone.
In this respect, I share the view adopted by Farris, J. in Regina v Antonelli, 38 CCC (2d) 207 regarding the weight to be given to the expression “but for the error in law” couched in subparagraph 613(4)(b)(ii), as to implying that the Crown’s right to appeal is restricted to questions of law alone:
He argued that the words ‘‘but for an error of law’’ were sufficient to restrict by implication the Crown’s right of appeal to questions of law alone. This argument is unsound. The incorporating section, s 755(1) qualifies its absolute incorporation with the words “mutatis mutandis’’. They mean of course “with the necessary changes in points of details” (see Jewitt’s Dictionary of English Law, 2nd Ed, 1977).
It seems to me that a necessary change which must be made in ss (4) when it is applied to summary conviction appeals, is the striking out of the words “but for the error in law”. Those words are a necessary part of the section as it applies to appeals in proceedings by way of indictment because of the application of s 605(1 )(a) restricting the Crown to appeals on questions of law alone. However, as has already been pointed out, s 605(1)(a) does not apply to appeals in summary conviction matters and the words “but for an error in law” are thus irrelevant in that context.
I believe, however, that if the Crown is not restricted to questions of law alone, but may do so on questions of fact, it does not give a licence at large to this Court on such appeals, as if it were a retrial and not simply a power to review, and we fall back on the earlier propositions of respondents, that the power to review can only be exercised where there exists a palpable and overriding error in the trial court’s findings on the facts or its assessment of credibility, findings that would be unreasonable and unsupported by the evidence (see: Jae- gli Enterprises v Taylor, [1981] 2 S.C.R. 2 at 4). It is not sufficient to be able to conclude otherwise than the trial Court did; a review, if made, must be based on an error which is “manifeste et dominante”. Therein resides the scope of the Superior Court intervention.
I do not find such criteria in the judgment a quo and therefore I would feel unjustified to disturb the findings of facts or credibility assessment of the trial Court.
I have tried to address the salient aspects of the present case, realizing full well that my examination in the present judgment does not exhaust all the points covered by counsel, who spent considerable time in sifting the evidence at great length, presented a thorough and complete analysis of the case law, couched their arguments and submissions in voluminous factums.
For a proper understanding by the Court of the matter at hand, they presented a detailed study of sugar trading, necessitating the outlining of sugar calls under all their forms, with the incidence of FOB and CIF commitments, tied to a Commonwealth price formula, involving discounts etc.
All of it was of great help in understanding the broad as well as the minute aspects of the debate.
I extend my sincere thanks to counsel for having been of such great assistance to me in the complex, difficult and somewhat sophisticated field of business.
My conclusions hold no surprise in that the appeal of the Crown is dismissed, for the present judgment intimated as much from its very inception.
Respondents, however, called for an adjudication with costs, as it is the discretion of this Court to grant, under section 758 of the Criminal Code, even as against the Crown (R v Ouellette (1979), 50 CCC (2d) 346).
However, it must be recalled that the present appeal would seem to be a first, “une Première”, instituted by way of criminal prosecution, without any previous guidelines to enlighten the path, a prosecution based primarily on the manner in which tax returns were made and not a failure per se to declare income. I tend to entertain a compassion for the little taxpayer on whom a granting of costs would eventually reflect.
I am further aware, through the evidence, that the parties still have a long way to travel, in view of the fact that, immediately prior to the lodging of a criminal information, a notice of assessment was served on respondents, which is being contested. This side of the picture will find its way through the civil tribunals with eventual adjudications as to costs to follow the merits of the case; they shall more properly be dealt with according to specific rules existing in civil matters than they would be by way of discretionary powers of a criminal jurisdiction.
This appeal of the Crown is therefore dismissed without costs.
Authorities Examined
Re: Appeal Jurisdiction, procedure, amendments, etc
R v Antonelli (1977), 38 CCC (2d) (CA BC);
R v Gillis (1981), 60 CCC (2d) 169 (NS App Div);
R v Purves (1980), 50 CCC (2d) 2111 (CA Man);
R v Nelson, [1979] 3 WWR 97 (CA Sask);
R v Wilkie (1980), 56 CCC (2d) 61 (CA Ont);
R v Webb, 56 CCC (2d) 26;
R v Joy Oil Co Ltd, 123 CCC 370;
R v Ayer, XIV CCC 210;
R v Ross, 94 CCC 150;
R v MacDougal, [1970] 4 CCC 369;
R v Colbeck, 42 CCC (2d) 117;
Roberge v The Queen, 147 DLR (3d) 493;
R v Medicine Hat Greenhouses, 59 CCC (2d) 257;
R v Arthur, 63 CCC (2d) 118;
R v David John Warren, CA BC, March 26th 1982;
R v Hall, [1982] 2 WWR 249:
R v Andres, [1982] 2 WWR 249;
R v Elliott (re amendment), [1970] 3 CCC 233;
R v Dreher, 14 CR 339;
R v Podetz, 58 CCC (2d) 259;
Rose v The Queen, 31 CR 27;
Bill C-71, House of Commons, 1st reading, July 17th, 1975;
Minister of Justice House of Commons p. 29-6 sq, of Justice and Legal Affairs, Nov 27th, 1975;
MNR v Leon et al, [1976] CTC 352; 76 DTC 6299.
Authorities Examined
Re: On the merit (in civil matter)
King George Hotels Ltd et al v The Queen, [1981] CTC 87; 81 DTC 5082; MNR v Pillsbury Holdings Ltd, [1964] CTC 294; 64 DTC 5184;
Spur Oil Ltd v The Queen, [1981] CTC 336; 81 DTC 5168;
Aluminum Co of Canada Ltd v City of Toronto, [1944] S.C.R. 267;
Raoul Engel v MNR, [1982] CTC 2422; 82 DTC 1403;
Corporation of the City of Toronto v Aluminum Co of Canada Ltd, [1943] CTC 114;
Frederick G Vivian v The Queen, [1983] CTC 107; 83 DTC 5144; Lawrence Shapiro v MNR, [1983] CTC 2618; 83 DTC 563;
Bonavista Cold Storage Co Ltd v MNR, [1983] CTC 2093; 83 DTC 89; Massey-Ferguson Ltd v The Queen, [1977] CTC 6; 77 DTC 5013;
Duke of Westminster v CIR, 12 TC 490;
Simard-Beaudry Inc v MNR, [1974] CTC 715; 74 DTC 6552;
The Queen v Esskay Farms Ltd, [1976] CTC 24; 76 DTC 6010;
MNR v James A Cameron, [1972] CTC 380; 72 DTC 6325;
Ralph J Sazio v MNR, [1968] CTC 579; 69 DTC 500;
Norman Cafîk v MNR, [1976] CTC 2183; 76 DTC 1141;
Asamera Oil (Indonesia) Ltd v The Queen, [1973] CTC 305; 73 DTC 5274;
MNR v Tara Exploration & Development Co Ltd, [1970] CTC 557; 70 DTC 6370; [1972] CTC 328; 72 DTC 6288 (SCC);
Allied Farm Equipment Ltd v MNR, [1970] Tax ABC 1265; [1972] CTC 107; Dominion Bridge Co v The Queen, [1975] CTC 263; 75 DTC 5150.
Lagacé v MNR, [1968] 2 Ex CR 98;
Estate of MW Israel et al v MNR, [1978] RDFQ 182;
R v Myers & Inter Publishing Co Ltd (1977), 35 CCC (2d) 1;
The Queen v John J Daly, [1981] CTC 270; 81 DTC 5205;
Snook v London & West Riding Investments Ltd, [1967] 1 All ER 518.
N.B. After signing and depositing the present judgment, a recent decision of the Supreme Court of Canada, dated June 7th, 1984 has come to my attention, relating to the matter of “Sham” in re: Stubart Investments Limited v The Queen, (no 16623).
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