McMeekin, DCJ:—The corporate and individual accused are jointly charged as follows:
that Medicine Hat Greenhouse Limited and Neil V German, an officer of Medicine Hat Greenhouses Limited, both of Calgary, in the Province of Alberta, between the 31st day of December, AD 1964 and the 2nd day of March, AD 1970, did wilfully evade payment of taxes imposed by the Income Tax Act, RSC 1952, c 148, with respect to income received by Medicine Hat Greenhouses Limited during its 1965, 1966, 1967, 1968 and 1969 taxation years in the amount of $42,419.08 and did thereby commit an offence contrary to paragraph 239(1)(d) of the Income Tax Act.
It will be observed that the offence was alleged to have occurred during the years 1965 to 1969, inclusive, however the charge before me was not sworn until November 20, 1973.
Paragraph 239(1 )(d) came into effect with the promulgation of the Income Tax Act, c 63, SC 1970-71-72 and is worded in precisely the same fashion as paragraph 132(1 )(d) of the Income Tax Act, c 148, RSC 1952, the applicable section in force during the period in question.
Paragraph 239(1)(d) reads:
Every person who has
(d) wilfully, in any manner, evaded or attempted to evade, compliance with this Act or payment of taxes imposed by this Act.
is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary convinction to. ...
The individual accused, Neil V German, is joined as a party to the offence by virtue of section 242, c 63, SC 1970-71-72, which provides:
Where a corporation is guilty of an offence under this Act, an officer, director or agent of the corporation who directed, authorized, assented to, acquiesced in, or participated in, the commission of the offence is a party to and guilty of the offence and is liable on conviction to the punishment provided for the offence whether or not the corporation has been prosecuted or convicted.
Again, section 242 is in precisely the same terms as section 134, c 148, RSC 1952, the section in force over the period of time referred to in the charge.
The Crown elected to proceed summarily and in the interval of time since the charge was originally laid various preliminary applications were taken by the defence challenging the validity of the charges, which applications ran their course through the appeal courts and all of them ultimately proved unsuccessful. The matter finally came before me for trial on October 29, 1979, which trial concluded on November 13, 1979. Judgment was reserved until today’s date.
The Crown’s position was succinctly summed up by counsel at the commencement of the trial when he stated that the case concerned expense account living.
The evidence led consisted chiefly of company and personal documentation seized from the two accused and introduced through one Mr Jacobs, an official with the Department of National Revenue.
The documentation for the most part consisted of vouchers, receipts, cancelled cheques and similar items, outlining various travel expenses incurred by Mr and Mrs German and in a few instances certain children of the Germans, all of which were charged as business expenses to the corporate accused which in turn wrote them off as business expenses in in its tax returns for the years 1965 to 1969, inclusive.
The expenses incurred by the Germans were either paid directly by the corporate accused or alternatively reimbursed to Mr German in those cases where he had paid the expenses himself.
It should be stated at the outset that there is no suggestion in any of the evidence that the corporate accused failed to report any of its income, nor is there any suggestion in any of the evidence that either accused falsified the expenses claimed, either by deceitfully inflating the amount of them or recording expenses not actually incurred.
Indeed all the expenses challenged by the Minister of National Revenue were painstakingly documented and recorded in accordance with normal accounting procedure.
The books of the corporate accused were audited each year by a firm of chartered accountants, who in each case issued an unqualified auditors certificate.
The position taken by the Crown, however, was that these challenged expenses were not business expenses of the corporate accused but were in fact benefits conferred upon an officer which were not recorded or reported to the Minister as such and consequently attracted no tax in the hands of the recipient.
It became clear in the cross-examination of Mr Jacobs that the Crown was taking the position the challenged expenses, though considered by the tax department as benefits conferred upon an officer, by reason of their nature were still not deductible by the corporate accused as expenses made to gain income.
As a result these expenses were properly taxable in the hands of the corporate accused and, further, as a benefit conferred upon an officer, they would also be taxable in the hands of Mr German.
It might be prudent at this time to provide some background respecting the two accused.
Medicine Hat Greenhouses Limited was an Alberta public corporation and during all relevant times hereto no less than 79,169 ordinary shares of a total outstanding of 85,000 ordinary shares were owned by a private Alberta company named Western Enterprises Limited. There were no other classes of shares issued.
Mr and Mrs German together owned 50% of the shares of Western Enterprises Limited and were the only two directors of this company. The other 50% of Western’s shares were owned by Medicine Hat Greenhouses Limited.
Mr and Mrs German, and one Doreen Tillisch, the executive secretary of Mr German were the only directors of Medicine Hat Greenhouses Limited, and the corporate records disclosed that the two Germans held two shares each in the corporate accused. While it was suggested that the shares held by Mr and Mrs German were in fact held in trust and that they were not the beneficial owners, the evidence falls short of establishing the fact. This was the position taken by the Germans on reassessment, however, and the evidence is strong enough to draw the inference that neither of the Germans received dividends when same were paid by the corporate accused over the years.
In any event, it appeared from the evidence that the Crown viewed the challenged expenses as benefits conferred upon an officer rather than on shareholders.
The balance of the issued shares of the corporate accused were held by some 6/7 different parties, although this number did fluctuate slightly over the time period involved.
The evidence further established that Mr German was president and chief executive officer of the corporate accused. Mrs German, in addition to being a director was secretary-treasurer of the company and paid a salary for her duties. She filed her own tax returns.
One of the arguments raised by the defence was to the effect that the Crown had failed to prove the corporate existence of Medicine Hat Greenhouses Limited at the time the within charges were laid and relied upon the Ontario Court of Appeal decision in Rex v Ash-Temple Limited et ai, 8 CR 66.
In view of this Court there was sufficient evidence before it to infer the existence of the corporate accused and accordingly this argument is rejected.
Medicine Hat Greenhouses Limited was engaged principally in the business of growing flowers for wholesale distribution. The business itself is located in the City of Medicine Hat but it head office was situate in Calgary, apparently sharing office space with the law firm of the accused, Mr German. During the years 1965 to 1969 an average break-down of the cor- porate accused’s sales to retail florists per province were as follows: Alberta 54%, Saskatchewan 29%, Manitoba 11 %, British Columbia 5% and Ontario 1%. Gross sales during the 1965 year, for the sake of example, amounted to in the order of $468,000.
It will be observed from the foregoing that the bulk of the corporate accused’s sales took place in Canada, however, in cross-examination, Mr Jacobs acknowledged that the corporate documentation disclosed suppliers in other locations throughout both North America and Europe. It appears Mr Jacobs had not fully investigated this aspect of the corporate accused’s activities and had not prepared a summary respecting suppliers as he had done respecting the customers.
The evidence led clearly establishes that Mr German was a very active individual indeed. In addition to his role as president and chief executive officer of the corporate accused, he practice law in the City of Calgary. He was actively involved internationally with the Optimist’s Clubs. He was actively involved in the National executive of the Canadian Chamber of Commerce and in fact became president of that organization subsequent to the period of time under consideration here but before these charges were laid. The documentation further establishes that he was an attender at the Canadian Tax Foundation meetings and also actively involved in politics. It was his participation in these various activities and expenses relating thereto that led to these charges being laid.
The relevant provisions of the Income Tax Act respecting these expenses are to be found in section 12, c 148, RSA 1952, as amended, and hereunder are recited those portion of section 12 involved in this case.
In computing income, no deduction shall be made in respect of
(a) General limitation—an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer,
(h) Personal or living expenses—personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business.
(2) Unreasonable expenses—In computing income, no deduction shall be made in respect of an outlay or expense otherwise deductible except to the extent that the outlay or expense was reasonable in the circumstances.
I turn now to a consideration of the evidence led by the Crown respecting the travelling expenses challenged.
As mentioned previously this documentation may be summarized as involving cheques, credit card receipts, invoices, personal notations and the like verifying actual travel costs such as air or train fare, hotel or other accommodation, meals, taxi fares, rental cars, oil and gas expenses, and similar costs.
Also introduced was the documentation outlining capital cost allowances respecting two camper vehicles and a motor bike owned by the corporate accused at various times over the five years in question, as well as the receipts, vouchers, cheques and similar material respecting repairs, service, maintenance, oil and gas expenses and other costs incurred in connection with these vehicles.
This documentation was all seized from the offices of the corporate accused in both Medicine Hat and Calgary.
Also seized from the personal files of Mr German located in the offices his law firm shared with the corporate accused in Calgary was personal correspondence, diaries and other material which the Crown sought to introduce as evidence respecting the nature and purpose of the various trips challenged and the uses to which the above mentioned vehicles were put.
The personal documentation referred to was audited into evidence over the objections of the defence which argued that such personal documentation was irrelevant to the charge against the corporate accused. The defence further argued that since the charge against Mr German personally was based entirely upon his position as an officer and director of the company the personal charge must be viewed in a narrow sense as being against him only in his capacity as an offier and not as against him personally in the broadest sense. Accordingly, such documentations would also not be relevant in the charge against Mr German.
The Crown’s position was simply that the documentation was obtained from the possession of one of the accused and was accordingly ad- missable.
Neither counsel nor the Court were able to find a great deal of law on this issue, however, the Court has made reference to the following passage taken from the English case of R v Horne Tooke (1974), 25 How St Tr 1, portions which were cited with approval in Rex v Hashem, 73 CCC 124, a decision of the appeal division of the Nova Scotia Supreme Court and R v Russell (1920), 51 DLR 1.
Being found in your possession, they undoubtedly are producible as evidence; but, as to the effect of them, very much will depend upon the circumstances of the contents of those letters, and whether answers to them can be traced, or whether any thing has been done upon them. A great number of papers may be found in a man’s possession which will prima facie evidence against him, but will be open to a variety of explanations; and it is always a very considerable explanation that nothing appears to have been done in consequence of the paper being sent to him. But all papers found in the possession of a man are, prima facie, evidence against him, if the contents of them have application to the subject under consideration.
As this passage clearly states and I take the law to be, “relevancy” is always a requirement in such matters.
The determination of relevancy is unquestionably the function of this Court, however, the practical problem presented is how to determine relevancy when the challenged material is not before the Court and the case is of such a nature that is is difficult to determine relevancy at the time the issue is raised.
Accordingly, I admitted the documents upon the understanding that in the event they were subsequently determined to be irrelevant, they would be rejected.
After hearing all the evidence led and considering the nature of the Crown’s case I am satisfied that the distinction sought by the defence is too narrow. Mr German is charged personally, the documents were found in his possession and bearing in mind the very substance of the Crown’s case is the purpose for which these expenses were incurred, I am satisfied any documents which touch on this issue were properly admitted. The weight to be given to them is quite another matter.
Prior to considering the challenged expenses themselves, it is relevant to note that the Tax Department audited the books and records of the corporate accused for the year 1963 in the year 1964.
Included in that audit was a review of the expenses of the company during the 1963 year. The working paper prepared by the auditor covering travelling expenses ran to some 12 pages in length and covered $7,205.81 in travelling expenses deducted by the corporate accused in its 1963 tax return.
It is not clear from the evidence but presumably this total of $7,205.81 would cover the travel expenses of all employees of the corporate accused during the period covered.
The report following this audit stated with respect to travelling expenses:
A review of travel expense indicated that the amounts expended was for business purposes. Some items were discussed with Mr German and satisfactory answers obtained.
It is quite clear from the evidence led that among the travelling expenses claimed in the 1963 year was a trip by Mr and Mrs German to the Canadian Tax Foundation Annual Conference in 1963. All of these expenses were allowed.
By way of comparison, the travelling expenses challenged in the case at bar amounted to $1,469.50 in 1965, $4,265.99 in 1966, $4,665.91 in 1967, $6,772.26 in 1968 and $4,165.26 in 1969. Not challenged by the tax department during the period 1965 to 1969 were the trips of at least one employee of the corporate accused with his wife to various places in Europe and North America.
It was also clear from the evidence that all vehicle expenses claimed in the 1963 year were allowed except that a $250 item for personal use of a company car by Mr German was deemed to be a personal benefit and he was required to declare it as such.
It is also relevant to note that the 1963 audit report was prepared following full communication with Mr German, as well as a review of the books and records of the corporate accused.
The criminal charges before this Court were based solely upon a review of the corporate documentation by Mr Jacobs with little or no communication with Mr German.
While Mr Jacobs testified that Mr German was fully co-operative, little if any discussion was held between them because the Tax Department required company resolutions authorizing Mr German to speak on behalf of the accused corporation.
It seems the Germans were experiencing matrimonial difficulties at the time; lawyers were involved, and there was a hiatus in the company which prevented completion of the required documentation. In the result Mr Jacobs apparently following Departmental policy, did not communicate with the individual accused.
In considering now the challenged expenses, I have divided them into various categories based upon the nature of the Crown’s objection to them.
A. Expenses relating to Mr and Mrs German at conventions and meetings:
This category covered primarily trips to attend Canadian Tax Foundation meetings and Liberal Conventions. In each case the time, place and pur- pose of the trip was primarily determined from the documentation seized from the personal files of Mr German. The trips involved were Saskatoon in 1966, Ottawa and Winnipeg in 1968 for Liberal functions; Toronto in 1967 and 1968, Montreal in 1967 for Canadian Tax Foundation meetings.
In addition there was a further trip to Edmonton in 1966 which was believed by Mr Jacobs to be for a Liberal meeting, however, the evidence satisfies me that his basis for such a conclusion was entirely erroneous.
Again, in each case it was Mr Jacobs’ opinion based upon the purpose of the trip that the expenses were not business expenses although he had no knowledge respecting whether or not any business was actually done on these trips.
B. Expenses relating to Mrs German at Conventions and Meetings:
This category involved trips by Mr and Mrs German throughout North America and Europe to attend Chamber of Commerce and Optimist’s meetings and conventions. There were three such trips in each of the years 1965, 1966 and 1969, six trips in 1967 and four in 1968.
In each case the tax department acknowledged the trips as having legitimate business purposes for Mr German and permitted the deduction of his expenses however, challenged Mrs German’s expenses and included same in the total amount of income alleged to have been evaded. Where Mr Jacobs could not ascertain Mrs German’s share he estimated it usually on the basis of one-third of hotel costs and one-half of meals and taxis.
Mr Jacobs, in cross-examination stated that it was the view of the Department that such items were a benefit conferred by Mr German upon Mrs German notwithstanding the fact that the expenses were paid by the corporate accused and Mrs German was both a director and officer of that Company.
Again, Mr Jacobs stated he had no knowledge of the purpose of Mrs German at those functions. In considering hotel expenses, the estimated amount of one-third was deducted from Mrs German, however Mr Jacobs had no knowledge of whether there was one rate for single or double rooms.
C. Expenses relating to Mr and Mrs German during periods of time before during and after meetings and conventions:
This category involved many of the trips referred to in category B. There was one such trip in each of the years 1965 and 1969, three such trips in 1966 and four in each of the years 1967 and 1968.
The periods of time involved and the locations were all determined by Mr Jacobs from the personal documentation seized from Mr German, as well as from corporate documentation.
The purpose of being in the areas involved during such periods of time was for the most part determined from personal letters, diaries and Similar material seized from Mr German. Often it was personal correspondence to friends and acquaintances referring to having a holiday or visiting with them.
In a few instances there was correspondence with boat manufacturers regarding appointments to view their merchandise.
It must be noted, however, that respecting a trip to Florida, between other conventions in 1968, the correspondence relied upon by the Crown and also referred to the fact Mr and Mrs German intended to examine propagation in the Flower industry.
Again, Mr Jacobs had no personal knowledge whether or not any business was done during these periods of time. Similarly it was also clear that the Germans personally bore the expenses of a portion of a European trip in 1968 and did not attempt to include those as company expenses. Further, no investigations had been done to determine the relative costs of staying over at a certain location between two conventions rather than flying back to Calgary from one and then returning to the site of the second, although Mr Jacobs acknowledged in cross- examination that such would be a legitimate business consideration.
In addition, the documentation tended to indicate in many instances that not all living expenses in this or any of the categories were charged to the company.
D. Expenses relating to trips taken by Mr and Mrs German and/or children not apparently connected with conventions and meetings:
This category involved some twelve trips over the five years in question. The challenge by the Tax Department was based either upon the contents of personal correspondence, diaries and other material found in Mr German’s files, such as a reference to attending a child’s graduation, a boat show, a tour of mines, a fishing trip or some other function which must be assumed to be entirely personal, or by reason of the fact the trip was made with a camper often with a boat and trailer attached.
In some cases, the presence of the boat and trailer could be readily inferred by the documentation involved. In other cases, such an inference would be very dangerous. In one instance a diary found in Mr German’s files covering a trip to British Columbia in 1968, left little doubt in the Court’s mind that a great deal of fishing and camping was being done.
In any event, Mr Jacobs took the position that a camper could be used for no other purpose but pleasure and appeared to reject any suggestion that a business function could be attached to it. He had no personal knowledge of whether or not business was done on any of these trips or whether customers or business associates were being entertained.
It also must be noted that most of the expenses for trips taken in the camper related to oil and gas charges or perhaps minor maintenance costs. Very few, if any, living expenses were claimed.
E. Expenses relating to two campers and a motorcycle at various periods over the five year period:
The subject vehicles were owned by the corporate accused and capital cost allowances were claimed. One of the campers was purchased in 1968, and customized at considerable expense with various items some of which, no doubt, related to personal comforts.
Additional expenses challenged by the Tax Department in this regard involved Insurance costs, gas and oil charges, maintenance costs and the like. While it is clear from the evidence that Mr German had the use of these vehicles on a considerable number of occasions, it is by no means clear on the evidence that he alone had the possession and use of them, or that they were never utilized for what might be considered business purposes. The Crown’s position, however, was that because of the nature of the vehicle, and the business of the corporate accused, an inference must be drawn that they were owned only for the personal benefit of Mr German.
F. Expenses relating to children or other parties:
In 1966, a daughter of Mr and Mrs German accompanied them to New Orleans and Mexico. An estimated amount for her expenses in relation to this trip was included in the total amount of tax alleged to have been evaded. There is also some indication in the documentation, however that the daughter may have in fact paid her own way.
Mr German also took an 18-year old daughter on a 1966 trip involving both Chamber of Commerce and Optimists meetings, however, his wife did not accompany him on this trip. Mr Jacobs acknowledged in cross- examination that he had no personal knowledge as to whether it was deemed necessary by the corporation to have the daughter accompany Mr German.
In 1967, Mrs Tillisch, a director of the accused corporation and as mentioned previously, the executive secretary of Mr German, travelled to one of the Optimist’s conventions with her husband. The accused corporation paid her expenses and deducted them from its income. It is not readily apparent from the evidence why these expenses were challenged. The documentation further discloses from time to time expenses were incurred by Mr German’s son and in 1969 a number of vehicle expenses were challenged by the Department, apparently upon the basis that Gary German had signed the credit card invoices. Mr Jacobs again stated that he had no personal knowledge of why these expenses were incurred but assumed they were for the personal benefit of the son. He did acknowledge that the son had been employed from time to time by the accused corporation and that he had in fact reimbursed certain expenses charged to the accused corporation. The Crown introduced evidence seeking to establish the son was employed elsewhere at the relevant times however, in the view of this Court such evidence was inconclusive.
I have organized the foreging material in the fashion indicated for convenience purposes and while certain specific items may not have been directly dealt with the substance of the Crown’s case is outlined in these categories.
I turn now to a consideration of the case law and arguments of counsel on these matters.
It must always be borne in mind that the charges against the two accused in the case at bar are criminal in nature. The evidence discloses that the accused corporation was indeed reassessed by the Tax Department and assessed penalties under subsection 56(2) of the Income Tax Act, c 148, RSC 1952, which section covers gross negligence.
For some reason the accused corporation was not assessed penalties under subsection 56(1) of the Act which covers the wilful evasion of taxes, however, counsel for the Crown has submitted that what the Tax Department has done in the civil matter can have no bearing upon a criminal prosecution such as the case before the Court.
Counsel for the defence, on the other hand, submits that while it has no direct effect upon the charges before the Court, it must have some bearing on any inferences required to be drawn.
In any event, the evidence establishes that the entire amount of the reassessment has been paid but under protest, notices of objection having been filed by the accused corporation. The civil matter has been held in abeyance pending the outcome of these charges.
Bearing in mind the criminal nature of the charges it is now trite law that the Crown must establish, beyond reasonable doubt, the two elements of the case, namely, the actus reus and mens rea. In this regard I refer to the following passage taken from the decision of Mr Justice Bayda of the Saskatchewan Court of Appeal in Regina v Paveley, reported at (1977), 70 DLR (3d) 237:
It follows then that for a conviction to take place under s 239(1)(d) of the Act there must be proof of the actus reus, the “manner”, to use the word of the statute, in which the alleged offence was committed, and, also proof of a specific intent, that is to say, proof that the act which constitutes the “manner” was done with a particular purpose—the purpose of evading the payment of tax. (I use the term “specific intent” in the sense in which the Courts generally have used the term and not in the narrower, and perhaps more precise, sense in which some academic writers have chosen to use the term.)
In considering the meaning of the word “evade’ the authorities appear to be divided.
In Regina v Baker (1973), 16 CCC (2d) 126, his Honour, Judge McLelland of the county Court of Nova Scotia stated:
The weakness of the Crown’s argument on this point lies in the fact that it assumes there has been an evasion within the terms of the Act, but that merely begs the question. If I am correct in the conclusion that “evade” in section 239(1)(d) is used in the sense of avoid by craft, strategim or artifice, then it is irrelevant in this case whether the avoidance was temporary or permanent. As I see the case, it falls to be decided on the meaning to be attributed to “evade” in section 239(1)(d).
Counsel with the respondent made reference to Information Circular Number 73-10 issued by the Department of National Revenue, Taxation, on May 9, 1973. Paragraph 8 reads:
Tax evasion is the commission or omission of an act knowingly with intent to deceive so that the tax reported by the taxpayer is less than the tax payable under the law, or a conspiracy to commit such an offence.
Of course, such a definition is not binding on a court, but it is interesting to observe that the meaning attributed by the Department to “evade” is the same as that attributed by Her Honour, Judge Oxner, Provincial Magistrate, and myself. There must be some clement of deceit before there is an evasion within the meaning of section 239(1)(d) and so given the favourable finding of fact on the Department’s own definition, this accused is not guilty.
This reasoning was followed in Regina v Branch, 76 DTC 6112, a decision of His Honour, Judge Medhurst (as he then was) of the Alberta District Court who stated at 6113:
In my opinion the word evade implies something of an underhanded or deceitful nature. In other words a deliberate attempt to escape the requirement of paying tax on income that had been earned. This intention can be inferred from acts of omission or commission. Certainly failure to file tax returns and to pay taxes for four successive years might suggest an attempt to evade in some way the payment of taxes.
Mr Justice Woods in the Paveley case (supra) also accepted that statement of Law in the Baker case on p 240 of the report:
Viewing s 239(1)(d) in the context of the other provisions of the Act, and taking note that the provisions of the section are penal, it would seem to me that to fall within the section would require a scheme or artifice with intent to deceive. The facts in the case as stated makes it clear that such is not the case here.
While the decision of the Saskatchewan Court of Appeal was unanimous, Mr Justice Brownridge and Mr Justice Bayda appear to have taken a contrary view. Mr Justice Brownridge stated at p 242 of the judgment:
In my opinion “wilfully” should be interpreted as “with an evil intention”: Fl v Miller (1944), 81 CCC 110 at 112, . .. so that the question in this case becomes not, was the wilful refusal to file income tax returns as required by the Act “evasion” under s 239(1)(d), but rather: Did the respondent in wilfully refusing to file income tax returns as and when required, do so with the intention of evading or attempting to evade the payment of taxes? If the answer to that question is either “no” or if the issue cannot be resolved beyond a reasonable doubt, then the respondent is entitled to an acquittal. But if the question is answered in the affirmative there should be a conviction even if there is no intention to deceive within the meaning of R v Baker.
Further, at p 249 of the report, Mr Justice Bayda states:
It follows from what I have said to this point that I am not prepared to go so far as to say that only in those cases where there is an artifice or a scheme can there by a conviction for evasion under this subsection. The presence of an artifice or scheme would tend to make it easier to draw the necessary inference of intent to evade payment of taxes, but in my respectful view it cannot be said that the existence of an artifice or scheme is a necessary element of the offence created by this subsection. Where the necessary intent is present, then the “manner” in which the intent is carried out is not important. The plain words of the subsection specify it may be done “in any manner”. That the Act does not contemplate an artifice or scheme to be the only manner in which an “evasion” may be accomplished is further evidenced by s 163(1) which clearly enacts that an attempted evasion under that subsection can take place by simply “failing to file a return of income”. To te extent that R v Baker, supra, holds that an artifice or scheme is a necessary element of an offence under s 239(1)(d) of the Act, I find, with respect, that it does not correctly state the law.
With respect, I prefer the reasoning of the majority of the Saskatchewan Court of Appeal that an artifice or scheme need not be present to sustain a conviction under paragraph 239(1)(d) of the Income Tax Act, however the presence of such factors would unquestionably make it easier for a Court to infer the necessary intent.
The Crown, of course, has taken the position that there was an artifice or scheme in the case at bar, namely, the burying of personal expenses amongst legitimate business expenses to evade the payment of tax.
I cannot accept this line of reasoning. The evidence led indicates that all challenged expenses were particularized in great detail in the books of the company and duly claimed in the tax returns filed. This factor no doubt led Subsequently to the investigations carried out by the tax officials. The fact that ultimately certain expenses are determined to be personal and not deductible while others are found to be legitimate business expenses and deductible is not evidence per se of a scheme or artifice where there is no additional evidence of falsifying such expenses in some fashion such as improperly inflating them or claiming expenses not incurred. As previously Stated, there is no such evidence in the present case.
The fact that there is no evidence here of a scheme or artifice is not an end to the matter adopting the line of reasoning of the majority in R v Pave ley (supra).
It will be seen from the foregoing review of the evidence that the Crown is seeking to have the Court make the same inferences from the documentation adduced that the Tax Department obviously has, namely, that the expenses challenged were in fact entirely personal without any redeeming business features which would permit them to be deducted from the income in the tax returns of the corporate accused. Further, once having drawn such an inference, this Court is then asked to infer the necessary mens rea on the part of both accused to evade taxes in this manner.
The cardinal rule in criminal proceedings in this Country is succinctly stated by Mr Justice McRuer of the Ontario Court of Appeal in Rex v Wright, 1 CR 40 at 42:
In this, as in all criminal cases, the onus is on the Crown to make out a case against the accused beyond a reasonable doubt in law as well as in fact.
The Crown, however, advances the innovative proposition that in the case at bar, the deductibility of the challenged expenses depends upon the provisions of paragraphs 12(1 )(a) and 12(1)(h) of the Income Tax Act, which sections provide exceptions to the general provisions, namely, that no deductions are allowed respecting personal or living expenses except travelling expenses incurred for the purpose of gaining or producing income.
The provision of such an exception in the Act, in the submission of the Crown, puts this case under the line of authority referred to in Rex v Oliver, [1944] KB 68, a decision of the English Court of Criminal Appeal which held that in such circumstancs the onus shifts to the defence. In other words, the Crown must only prove that expenses were deducted whereupon the onus is on the defence to show that these deductions were legitimate business expenses.
The Crown relies upon the Canadian decisions of the Supreme Court of Canada in Robinson v The Queen, 10 CCC (2d) 505 and the Alberta Court of Appeal in Regina v Volk, 12 CCC (2d) 395 for this proposition. While both of these decisions are perhaps examples of where the onus shifts to the defence both are distinguishable upon their facts.
In the Robinson case, the charge was possession of counterfeit coin and the relevant section of the Criminal Code contained an express provision to the effect that the onus of establishing lawful justification or excuse was on the accused.
The Volk case involved a charge of gross indecency and the Criminal Code provided an exception involving age and consent. The Court of Appeal held that the onus of establishing such an exception lay with the defence.
The basis for this line of authority seems to rest upon the concept that where exceptions are present in the statute and the facts are peculiarly within the knowledge of the accused, the onus lies upon the accused to adduce them.
Of particular interest on this point is the English Court of Criminal Appeal decision in Regina v Edwards, [1975] 1 QB 27, which reviews extensively this line of authority.
At p 35 of the report, Lord Justice Lawton states:
There is not, and never has been, a general rule of law that the mere fact that a matter lies peculiarly within the knowledge of the defendant is sufficient to cast the onus on him. If there was any such rule, anyone charged with doing an unlawful act with a specified intent would find himself having to prove his innocence because if there ever was a matter which could be said to be peculiarly within a person’s knowledge it is the state of his own mind. Such rule as there is relating to negative averments in informations and indictments developed from the rules for pleading provisoes and exceptions in statutes and is limited in its application.
Further, at p 39 of the decision the Learned Justice of Appeal states:
In our judgment this line of authority establishes that over the centuries the common law, as a result of experience and the need to ensure that justice is done both to the community and to defendants, has evolved an exception to the fundamental rule of our criminal law that the prosecution must prove every element of the offence charged. This exception, like so much else in the common law, was hammered out on the anvil of pleading. It is limited to offences arising under enactments which prohibit the doing of an act save in specified circumstances or by persons of specified classes or with specified qualifications or with the licence or permission of specified authorities. Whenever the prosecution seeks to rely on this exception, the court must construe the enactment under which the charge is laid. If the true construction is that the enactment prohibits the doing of acts, subject to provisoes, exemptions and the like, then prosecution can rely upon the exception.
In our judgment its application does not depend upon either the fact, or the presumption, that the defendant has peculiar knowledge enabling him to prove the positive of any negative averment. . ..
First, as it comes into operation upon an enactment being construed in a particular way, there is no need for the prosecution to prove a prima facie case of lack of excuse, qualification or the like; and secondly, what shifts is the onus: it is for the defendant to prove that he was entitled to do the prohibited act. What rests on him is the legal or, as it is sometimes called, the persuasive burden of proof. It is not the evidential burden.
While it is true that the general provisions governing the deductibility of expenses may be found in section 12 of the Income Tax Act, it is clear that the section under which the two accused have been charged is paragraph 239(1)(d). As had been submitted by the defence, there are no exceptions or provisos to be found in paragraph 239(1)(d). There is an absolute prohibition against evasion, not a prohibition with qualifications, and accordingly I am Satisfied that the onus remains upon the Crown throughout to prove the elements of the charge. The accused is not therefore charged with the burden of proving that the expenses claimed were in fact business expenses.
It now falls to consider the whole of the evidence to ascertain if the inferences sought by the Crown can be drawn.
Neither counsel has been able to refer me to any reported cases involving paragraph 239(1)(d) of the Income Tax Act where the circumstances were Similar to the case at bar. In all the cases heretofore referred to and indeed in all the numerous cases cited by both counsel there was always another element present such as the failure to file returns at all, a failure to declare income, or a falsification of expenses.
Perhaps the closest factual situation to the one at bar found in the Manitoba Queen’s Bench decision of Hechter et al v MNR, [1971] CTC 12; 71 DTC 5066.
There the Court was concerned with the issue of whether solicitor client privilege attached to certain documents seized by the Tax Department.
The Court stated with respect to certain documents:
I consider I am entitled to infer the suite in the penthouse was occupied by Gerald Hechter as his personal residence. When a company enters in its books as company debts accounts incurred by the President for his personal benefit the company records to that extent are false.
In my opinion there is proof that this occurred on three occasions and, in the absence of some satisfactory explanation and I emphasize that, establishes a prima facie case of fraud which destroys the client’s privileges on non disclosure. This would apply to both the company and its President since both are involved in the fraud.
It is clear in this case, however, that the inference was being drawn by the Court upon evidence of expenses respecting a personal dwelling and even in that situation the Court was clearly indicating that it was open to the accused to adduce a satisfactory explanation.
The Crown has also referred me to Regina v Kidd (1974), 60 R (2d) 769 which I accept as authority for the proposition that a conviction for evasion will lie where income has not been declared by a taxpayer, notwithstanding the fact that such income is adequately recorded in the taxpayers books and records and the taxpayer has reason to believe he will be audited at some time in the future.
This case of course would preclude the two accused in the case at bar arguing that because the expenses were adequately recorded, this was a defence to the charges laid.
The Crown’s case is really dependent upon the sheer volume of trips involved, coupled with the inferences to be drawn from certain portions of the evidence such as the diaries covering portions of the trips to British Columbia and Ireland in 1968.
In considering firstly the expenses falling into category A and B hereinbefore recited this court is not prepared to make the same inferences as did the Tax Department officials.
The items in A relate to expenses involving trips to the Canadian Tax Foundation and Liberal Conventions. With respect to the Canadian Tax Foundation, the tax department has previously ruled in 1963 that expenses relating to such a trip were proper business expenses and while, no doubt, Mr Jacobs does not consider himself bound by his predecessor, as he stated in his evidence, this court is not about to make the inference that these were entirely personal expenses in such circumstances. Even if I were to make such an inference, it would still be necessary to infer from that assumption the necessary mens rea in both accused notwithstanding the fact the department had previously allowed the very items claimed. This I cannot do.
Similarly, I I can make no distinction between Liberal Party Conventions, Tax Foundation meetings, Optimists and Chamber of Commerce meetings, the latter two of which were deemed to be legitimate business expenses by the tax department in the case before the bar but the former two were not.
With respect to category B, the tax department already acknowledged a legitimate business purpose for Mr German and bearing in mind that Mrs German was a director and secretary-treasurer of the company, had travelled before with her husband and had the expenses allowed by the tax department, this court would be loath to make the necessary inferences to impute criminality.
The numerous civil cases cited by defence counsel dealing with the issue of whether a wife’s expenses are allowable on conventions and trips leaves no doubt but what there is an arguable point on the issue and accordingly would preclude an inference of either actus reus or mens rea.
Categories C, D, E and F create more difficulty, particularly regarding those trips covered in part by Mr German’s diaries which can lead the Court to no other conclusion but that a substantial portion of the time involved was spent on personal matters.
This however, is not an end to the matter since as Mr Jacobs readily acknowledged, there is no prohibition against mixing business with pleasure on these types of trips.
To summarize, the evidence led respecting the majority of these trips, and much of the evidence led respecting the camper expenses including capital cost allowances, is, in my view, insufficient to draw an inference that they were not incurred for business purposes. It follows that if I can’t make that inference, I can hardly infer mens rea.
The documentation put in by the Crown falls short in many instances of firmly establishing the purpose of the trip, although it may well have established a personal element in the trip. In other cases, it may have established a personal motive but does not go the one step further in establishing that little or no business was accomplished.
The court notes that the accused corporation had customers all over Canada and suppliers in both Europe and North America. In most cases, the documentation appeared to indicate that only a portion of the expenses were claimed, and one might just as easily draw an inference that the portions declared related to business and those not claimed related to personal matters.
The Crown argued vigorously that it would be mere speculation in some areas to infer that business was done, however, it is equally speculation that business was not done and as I have found, the onus is on the Crown to establish both elements of their case beyond reasonable doubt.
In some cases it was apparent that expenses challenged related to periods of time between conventions considered to be legitimate business endeavours, however, no attempt was made by the Crown to show that in fact there could be no savings in costs by reason of the accused remaining in that area rather than returning to Calgary, a point acknowledged by Mr Jacobs to be a legitimate business decision.
In those cases where the court is prepared to draw the inference that a substantial portion of the expenses relating to the trip were personal and I’m referring now particularly to a trip to British Columbia and a portion of a trip to Europe, both in 1968, which were outlined in diaries found in Mr German’s files, the court is still not in a position to infer the necessary mens rea. Even in these situations the documents tend to indicate that not all expenses were claimed which introduces an element of doubt. Further, the company books were reviewed by the company’s auditors, acting on behalf of all the shareholders and none of these expenses were challenged.
I am not unmindful of the decision in Regina v Regehr a decision of the Yukon Territorial Appeal Court, reported at [1968] CTC 122; 68 DTC 5079, wherein Mr Justice McFarlane stated:
I think it is clear on principle and authority that an inference of the fact of guilty intent may, as a matter of law, be made from the existence of a series or multiplicity of omissions although each such omission may in itself be properly regarded as merely negligence.
The Regehr case, however, dealt with the failure to include in income tax returns some 50 items of income. On the facts of that case, the court still found the omissions were negligent and acquitted the accused of evasion.
As I have previously indicated, in my view, a substantial portion of the Crown’s case in terms of trips and vehicle expenses must be rejected since the evidence fails to satisfy me beyond reasonable doubt that the expenses incurred were in fact purely personal in nature and not for business purposes.
The few cases where I can make such an inference would not satisfy the requirements of the Regehr decision in the sense that mens rea must be inferred from them. The taxpayers of this country are entitled to take the position, without fear of criminal prosecution, that certain types of expenses, while on the face of them appearing to be personal in nature, by reason of special circumstances qualify as business deductions.
In my view, after considering the whole of the evidence, this case is very similar to the situation in Regina v Hummel, 76 DTC 6114, the headnote of which states:
The taxpayer was not guilty. Mens rea was an essential ingredient in the offence charged and the Crown failed to discharge the onus of proving that the taxpayer had any guilty intention. The evidence established that the offences were borderline cases and the taxpayers treatment of the items of income and expenditure to his advantage did not make him guilty even though that treatment was wrong.
Bearing in mind the foregoing conclusions, I need not deal with the other points raised by the defence in their submissions.
In the result, I find both accused not guilty.
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