Rans Construction (1966) Ltd. v. The Queen, 87 DTC 5415, [1987] 2 CTC 206 (FCTD)

Dubé, J.:—This application heard at Saskatoon, Saskatchewan on September 29, 1987, is for an order dismissing the plaintiff's actions (excepting the action concerning the 1975 and 1976 taxation years of the plaintiff John Miazga) as scandalous, frivolous and vexatious and an abuse of the process of this Court under rules 419(1)(c) and (f) on the ground that these matters constitute res judicata having previously been tried and the plaintiffs convicted in the criminal courts of Saskatchewan.

It is common ground that the plaintiffs were prosecuted on 17 counts of tax evasion and convicted on October 28, 1980 by Chief Judge Boychuk of the Provincial Court for Saskatchewan on counts 1, 2, 3, 8, 10 and 14, being the substantive tax evasion counts. (The remaining counts were subsumed into those six counts and stayed). On appeal, the convictions were upheld by Mr. Justice Gerein of the Court of Queen's Bench for Saskatchewan on May 3, 1982 which decision was confirmed by the Court of Appeal for Saskatchewan. Leave to appeal therefrom was denied by the Supreme Court of Canada on January 25, 1983.

The plaintiff Rans Construction (1966) Ltd. is a company which at all times relevant to this motion was engaged in a business of water line and sewer construction in Western Canada. The other plaintiffs, Joseph Rans, Lucille Rans, Malcolm Rans and John Miazga are the shareholders of the company.

The several statements of claim filed by each of the plaintiffs in separate actions (now consolidated for trial by order of the Court) request that the notices of reassessment in each case be quashed and that the moneys paid by them for additional tax interest and penalty under the Income Tax Act of Canada and the provincial Income Tax Act be returned to them. In addition, the plaintiffs claim the amounts paid to Revenue Canada as tax and other payments on behalf of the family members (and the plaintiff Frank Pscheida) and interest on these sums.

In the alternative, the statements of claim request an order that the reassessments of all the plaintiffs be reduced by the amounts paid for the family members' tax and other deductions directly to the defendant.

The position of the plaintiffs, as outlined in the statement of claim, is that the retention by Revenue Canada of these moneys would constitute taxation of the same moneys in three places, that is in the hands of the family members, the shareholders and the corporation. It is to be noted that not all of the moneys covered by the statements of claim were the subject of criminal proceedings.

There are three essential elements to res judicata: one, identity of the parties; two, identity of the subject-matter; and, three, that the previous decision be final.* [1] (The plaintiffs admit that the criminal proceedings are final.)

As to the identity of the parties, the plaintiffs submit that the parties in the criminal proceedings and the parties in these civil proceedings are not the same: in the previous proceedings, the Queen was acting in her capacity as Attorney General for Canada, whereas in these civil proceedings, the Crown is Her Majesty the Queen acting in her capacity as the Minister of National Revenue. In my view, that argument cannot stand. The Queen is indivisible and wears the same crown in civil or criminal proceedings. [2] +

There is jurisprudence to the effect that convictions in criminal proceedings constitute an estoppel in civil proceedings on the same subject-matter. In Demeter v. British Pacific Life Insurance Co. (1984), 48 O.R. (2d) 266; 13 D.L.R. (4th) 318, a 1984 decision of the Ontario Court of Appeal, the plaintiff sued on three life insurance policies covering the life of his wife, after having been convicted of her murder. The Court held that it was clear from the record that the plaintiff was seeking to relitigate the very issue that had been decided against him in his criminal trial. The conviction amounted to prima facie evidence of the plaintiff's guilt in the civil matter; to use a civil action to initiate a collateral attack on a criminal conviction in the absence of fresh evidence, or evidence of fraud or collusion, amounts to an abuse of process.

In Hunter v. Chief Constable of the West Midlands Police and Others, [1982] A.C. 529; [1981] 3 All E.R. 727, the House of Lords held that where a final decision had been made by a criminal court of competent jurisdiction, it was a general rule of public policy that the use of a civil action to initiate a collateral attack on that decision was an abuse of the process of the court. The Court also ruled that such fresh evidence as the plaintiff sought to adduce in his civil action fell far short of satisfying the test to be applied in considering whether an exception to that general rule of public policy should be made, which is whether the fresh evidence entirely changed the aspect of the case. The case was about alleged assaults by the police after a murder conviction.

In German v. Major et al. (1985), 39 Alta. L.R. 270, a 1985 Alberta Court of Appeal decision, on action for malicious prosecution, there had been a finding of prima facie case in criminal proceedings by a trial judge and by a judge on appeal, demonstrating reasonable and probable grounds for prosecution. The Court struck out the entire claim against the defendant holding that it was beyond doubt that the plaintiff's case was hopelessly doomed to fail. Kerans, JJ.A. said at page 282:

German's other grounds are no more than a regurgitation of the arguments for German at the criminal trial, which, as I have observed, were not entirely accepted.

The jurisprudence has therefore clearly established that issues resolved in criminal courts as final decisions may not be revived in civil courts, provided the issues are the same. This brings us to the second and remaining criterion for res judicata, namely the identity of the subject-matter.

So as to properly determine whether matters decided in criminal proceedings are the same matters which are raised again in the civil actions, it is necessary to identify those issues which were properly decided in sustaining the criminal convictions. In a Supreme Court decision, Angle v. M.N.R., [1975] 2 S.C.R. 248 at 254-55; 47 D.L.R. (3d) 544 at 555-56, Dickson, J. appropriately put the question as follows:

Is the question to be decided in these proceedings, . . . the same as was contested in the earlier proceedings? If it is not, there is no estoppel. It will not suffice if the question arose collaterally or incidentally in the earlier proceedings or is one which must be inferred by argument from the judgment . . . The question out of which the estoppel is said to arise must have been “fundamental to the decision arrived at" in the earlier proceedings.

Then Dickson, J. goes on to quote the following passage from the English Court in Spens v. I.R.C., [1970] 3 All E.R. 295 at 301:

. . I whether the determination on which it is sought to found the estoppel is "so fundamental to the substantive decision that the latter cannot stand without the former. Nothing less than this will do".

At the outset of this hearing, counsel for the plaintiffs filed a table listing the amounts dealt with under the various criminal charges and the amounts referred to in the civil proceedings, from which it would appear that several substantial amounts claimed in the civil actions were not covered in the criminal charges. As an illustration, in the case of Rans Construction (1966) Ltd., the criminal charges cover the sum of $145,753.66 whereas the civil action deals with the amount of $314,481.16. Obviously, any strike out order would not affect the items claimed in the civil actions which were untouched by the criminal charges. Neither would the exceptions, already made by the Crown in the instant motion for the 1975 and 1976 taxation years of the plaintiff John Miazga, be affected by the strike out prayed for by the defendant.

However, the main argument of counsel for the plaintiffs is more subtle and somewhat more complex. As I understand it, it goes as follows.

The counts upon which the plaintiffs were convicted for tax evasion are for offences contrary to paragraph 239(1)(d) of the Income Tax Act which reads as follows:

239. (1) 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 conviction . . .

The several counts recite that the amounts were overstated for the purpose of a deduction under paragraph 18(1)(a) of the Act which reads as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) 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 the business or property.

According to the affidavit filed by the Crown, central to the prosecution of the plaintiffs for tax evasion were the issues of whether the year-end adjustments for wages payable to family members were legitimate expenses or deductions of the corporation and whether these amounts were appropriated to the shareholders within the meaning of paragraph 15(1)(b) of the Income Tax Act. The paragraph reads as follows:

15. (1) Where in a taxation year

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

The affidavit goes on to say that the above issues were fully dealt with in the reasons for judgment of the trial judge and of the Court of Queen's Bench on appeal. The plaintiffs submit that the finding that the moneys in question were appropriated by the shareholders was an unnecessary finding in order to sustain a conviction: all that was necessary for the criminal courts to decide was that the moneys were received by the shareholders and that the moneys were not declared as income by the shareholders. The plaintiffs submit that the finding that the moneys were received by the shareholders should have been made under section 3 of the Income Tax Act which provides as follows:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the yer from each office, employment, business and property.

[My emphasis.]

In other words, the plaintiffs claim that the moneys received by the shareholders and found by the court to be an appropriation should properly have fallen within paragraph 3(a), either as an amount which formed part of the taxpayer's income for the year, or as an amount falling within the enumerated examples in that subsection, and at least under the heading of "business".

Counsel for the plaintiffs further submitted that the criminal courts found that the non-reporting of that income was contrary to section 15 (the appropriation section) and established these three conclusions:

1. the money was received by the shareholders;

2. it was not earned by the shareholders; and

3. it should have been reported as income by the shareholders.

The plaintiffs allege that the second step (not earned) was entirely unnecessary to sustain a conviction. All that was required was that the moneys be received by the shareholders and that it should have been reported as income by them.

In other words, the plaintiffs claim that by making a finding of appropriation the criminal courts essentially decided a question which they themselves stated was not a question before them. Mr. Justice Gerein of Queen's Bench said as follows in his judgment at page 48:

In determining the guilt or innocence of the accused the trial judge was concerned solely with whether evasion occurred. He was not concerned with the amount of tax avoided. Whether a tax is being paid on the same income more than once was not a matter before the trial judge. That issue must be determined in another forum.

Therefore, the plaintiffs submit that the issue of whether the moneys in question were earned by the shareholders in their work for the company was not essential to the criminal proceedings. The fundamental issue decided by the criminal courts was that those moneys were not earned by the family members. There was no proof that the moneys were not earned by the shareholders in their work for the company.

The plaintiffs claim that the fundamental issue in the civil actions is whether or not the moneys in question were earned by the shareholders, whereas the criminal convictions of the shareholders could stand without a finding of appropriation by them under section 15 of the Income Tax Act. The plaintiffs submit that the Demeter case and the other decisions are distinguishable in that the finding in those cases were identical issues as in the civil cases, whereas in the case at bar the issue of whether the moneys had been appropriated to the shareholders was not an essential finding to their guilt. Since it was not an issue which was essential to a finding of guilt, there was no need for the plaintiffs to present any evidence on the matter at the criminal proceedings.

The plaintiffs therefore submit that, by making a finding that it was an appropriation of the moneys in question to the shareholders, the criminal courts found inadvertently not only that the shareholders evaded tax on those moneys, but that Rans Construction (1966) Ltd. was not entitled to claim those moneys as an expense against income earned by the shareholders. In other words, the criminal courts found tax liability which they were not competent to find.

The plaintiffs also submit that the question of whether tax is being paid on the same income more than once is one of the issues to be determined in the instant actions before the civil courts. As stated by Gerein J. at page 48 of his judgment this issue was not determined by the criminal courts:

Whether tax is being on the same income more than once was not a matter before the trial judge. That issue must be determined in another forum.

[My emphasis.]

It must be borne in mind that in a strike out procedure under rule 419 of the Federal Court it must be plain and obvious that the plaintiff has no cause of action, or more precisely in this instance, that the action of the plaintiffs is plainly and obviously frivolous or vexatious, being a relitigation of issues already determined in previous criminal proceedings. It is not for the motion judge at this very preliminary stage to forecast the outcome of the trial. Several issues are being raised in these civil actions that have not been dealt with in the criminal proceedings.

Summing up, it seems clear to me, firstly, that several sums reassessed as income in the hands of Rans Construction (1966) Ltd. for the taxation years 1973, 1974 and 1975 were not the subject of criminal charges, but are the subject-matter of these civil actions. Secondly, at issue in these civil actions is the contention of triple taxation, a contention which the criminal courts rightfully declined to decide. Thirdly, the plaintiffs claim the deduction from tax payable of certain sums already paid to National Revenue, a matter which was not for the criminal courts to resolve. Therefore, one criterion essential to res judicata has not been met: the subject matters in the criminal and civil litigations are not identical.

Furthermore, as a practical consideration, all these actions having been consolidated by consent, and since one of these actions (concerning the 1975 and 1976 taxation years of the plaintiff John Miazga) is excepted from the instant motion of the defendant, the trial would proceed in any event. It would proceed with reference to the John Miazga taxation and the other items untouched by the criminal courts. All these issues are so intertwined as to be inseparable and to deny the plaintiffs the right to deal with some of them in their civil proceedings would serious interfere with the proper presentation of their overall arguments at trial.

Consequently, this motion is denied but, under the circumstances, with costs in the cause.

Motion denied.