R. v. Collins, 85 DTC 5174, [1985] 1 CTC 342 (Ont CA)

Grande, JA, (dissenting):—I have had the advantage of reading the reasons for judgment prepared for delivery by my brother Cory. He has set forth all the facts and all the relevant provisions of the Income Tax Act. The issue is whether the amount of the appellant’s fine should be calculated according to the total tax that would have been assessed if all the income were earned in Canada or in accordance with the actual Canadian tax imposed after giving effect to the tax paid to the US authorities. My brother Cory has adopted the former resolution; I have reached the opposite conclusion.

I agree that the appellant sought originally to avoid payment of all tax both Canadian and US, but it is my view that the statute in its penalty section refers only to the Canadian tax sought to be evaded. It is true that the Canadian tax would be substantially greater if the appellant had not chosen to take advantage of the provisions of subsection 126(2) of the Income Tax Act but the same argument applies to every deduction an evading taxpayer would be entitled to make in calculating his income, for example, medical expenses, charitable donations and the host of deductions permitted to businesses. Obviously if the tax were not paid to the foreign country, just as if the expense were not incurred, he would be subject to Canadian tax on the amount claimed (and no doubt to a penalty for evading tax) but the US tax was paid and is legitimately deducted from the appellant’s tax return.

Admittedly the US tax was not paid in the year the income was earned but the statute does not require that. The taxpayer is permitted to deduct “for the year . . . such part of the . . . income tax paid by him for the year in respect of businesses carried on by him in that country . . .”. So long as the tax has been paid to the foreign country and so long as it can be claimed as a deduction in the appropriate Canadian taxation year, that is enough to entitle the taxpayer to the deduction and his total tax for that year will reflect that deduction. In the statement of facts filed before the provincial judge, the Crown concedes that the income tax owing in Canada is reduced accordingly.

Paragraph 239(1 )(f) is a penal section of a taxation statute and traditionally such sections are interpreted strictly. Perhaps that rule should apply here or perhaps we should resort to section 11 of the Interpretation Act, RSC 1970, c 1-23, but in any event parliament has used the words “tax sought to be evaded”. Parliament has no jurisdiction over taxes owing to a foreign country. If the intention had been to impose the penalty for a failure to disclose income subject to tax in this country, it could easily have been so enacted. Failing an express provision to that effect, I think the penalty must be assessed on the basis of the tax eventually found to be owing in Canada. If the tax to the United States has been paid by the time of trial and can be claimed in Canada for the appropriate taxation year then, in my opinion, the resultant Canadian tax will determine the penalty.

I would allow the appeal, set aside the order of Steele, J and would answer the stated case posed in the negative.

Cory, JA:—The issue in this appeal is whether, in calculating “the amount of tax that was sought to be evaded” as required by paragraph 239(1 )(f) of the Income Tax Act, RSC 1970-71-72, c 63, as amended (the Income Tax Act), an amount should be deducted for the taxes eventually paid by Thomas N Collins to the United States of America and the State of New York.

Factual Background

In the calendar years 1979, 1980 and 1981, the appellant Collins earned income in Canada and the US selling candy and fruit drinks. On March 8, 1983, Collins was charged with violating paragraph 239(l)(d) of the Income Tax Act for failing to declare income earned in the years 1979, 1980 and 1981, thus seeking to evade payment of income tax for those years.

The charges were framed as follows:

(4) between the 3lst day of December, 1978 and the 30th day of April, 1980, at the City of Niagara Falls, in the said Judicial District of Niagara South and elsewhere in the province of Ontario, did unlawfully evade the payment of federal taxes in the sum of $13,844.68 imposed by the Income Tax Act, RSC 1952, c 148 as amended, by failing to report income in the amount of $51,046.66 for the taxation year 1979 and did thereby commit an offence contrary to paragraph 239(l)(d) of the said Act, and

(5) between the 31st day of December, 1979 and on or before the 30th day of April, 1981, at the City of Niagara Falls, in the said Judicial District of Niagara South and elsewhere in the province of Ontario, did unlawfully evade the payment of federal taxes in the sum of $36,448.73 imposed by the Income Tax Act, RSC 1952, c 148 as amended, by failing to report income in the amount of $110,571.62 for the taxation year 1980 and did thereby commit an offence contrary to paragraph 239(1 )(d) of the said Act, and

(6) between the 31st day of December, 1980 and on or before the 30th day of April, 1982, at the City of Niagara Falls, in the said Judicial District of Niagara Falls, in the said Judicial District of Niagara South and elsewhere in the province of Ontario, did unlawfully evade the payment of federal taxes in the sum of $59,476.57 imposed by the Income Tax Act, RSC 1952, c 148 as amended, by failing to report income in the amount of $157,593.02 for the taxation year 1981 and did thereby commit an offence contrary to paragraph 239(1) of the said Act.

At the commencement of the hearing on July 11, 1983, the amount of tax referred to in each of the counts was amended. In count (4): the amount of $13,844.68 was increased to $17,494.40; count (5): $36,448.73 was increased to $48,439.65, and count (6): $59,476.57 was increased to $80,174.52.

In May of 1983, two months after he was charged and two months before his trial, Collins paid income tax to the United States of America and to the State of New York on the income which he had failed to declare in the years 1979 through 1981 inclusive as set out in the amended counts.

On July 11, 1983, Collins’ trial took place before a Provincial Court judge. At that time, an agreed statement of fact was filed. Collins admitted that he had failed to declare the income set forth in the charges. However, he contended that he should be given the credit permitted by subsection 126(2) of the Income Tax Act for the payment of the United States income tax. Judgment was reserved.

Judgments Below

On October 7, 1983, the case was resumed. At that time, the trial judge gave effect to the submissions of Collins and calculated “the tax sought to be evaded” by giving credit to Collins for the United States income tax which he had paid. On this basis, it was found that the tax sought to be evaded by Collins in respect of $7,488.40, count (5) $7,570.79, and count (6) $9,909.52. Collins was found guilty and assessed the following penalties: on count (4) a $5,000 fine or five months in default of payment, on count (5) a $5,000 fine or five months in default of payment to be served consecutively, and on count (6) a $6,000 fine or six months in default of payment to be served consecutively.

An appeal was taken by the Attorney General of Canada by way of stated case. The question was framed in this manner:

When determining ‘‘the amount of the tax that was sought to be evaded” within the meaning of paragraph 239(1)(f) of the Income Tax Act, did I err in law in holding that, in the circumstances of this case, an amount should be deducted pursuant to subsection 126(2) of the Income Tax Act with respect to taxes paid by the Respondent to the government of the United States of America and to the government of the State of New York in respect of the Respondent’s income from each of the taxation years 1979, 1980 and 1981 specified in counts four, five and six respectively?

Steele, J heard the appeal. He agreed with the position of the Attorney General of Canada and determined that in calculating the tax sought to be evaded no credit should be given to Collins for the United States tax paid by him. He found that the Provincial Court judge was in error and answered the question posed in the affirmative.

Consideration of subsection 239(1) of the Income Tax Act

The relevant portions of subsection 239(1) are as follows:

Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,

(d) wilfully, in any manner, evaded or attempted to evade, compliance with this Act or payment of taxes imposed by this Act, or

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(f) a fine of not less than 25% and not more than double the amount of the tax that was sought to be evaded, or

(g) both the fine described in paragraph (f) and imprisonment for a term not exceeding 2 years.

The relevant portions of subsection 126(2) of the Income Tax Act are as follows:

Where a taxpayer who was resident in Canada at any time in a taxation year carried on business in the year in a country other than Canada, he may deduct from the tax for the year otherwise payable under this Part by him an amount not exceeding the least of

(a) such part of the aggregate of the business-income tax paid by him for the year in respect of businesses carried on by him in that country and his foreign-tax carryover in respect of that country for the year as the taxpayer may claim,

(b) the amount determined under subsection (2.1) for the year in respect of businesses carried on by him in that country, and

(c) the amount by which

(i) the tax for the year otherwise payable under this Part by him exceeds

(ii) the amount or the aggregate of amounts, as the case may be, deducted under subsection (1) by him from the tax for the year otherwise payable under this Part.

In my view, the conclusion reached by Steele, J that subsection 126(2) does not come into play in the calculation of the tax sought to be evaded was correct.

It is conceded that Collins attempted to avoid his obligations under the Act by failing to disclose income in excess of $300,000 earned over the critical three-year period.

What was the tax which Collins sought to evade? The Income Tax Act contemplates disclosure of all income earned by the taxpayer from all sources in all jurisdictions. It follows that Collins sought to evade the tax which should have been paid upon all his income, wherever earned. It matters not that some of the tax should have been paid in a jurisdiction other than Canada. Nor does it matter that if such tax had been paid that a credit would have been allowed for it in calculating the Canadian tax payable. The critical time is the date upon which the taxpayer is charged with the offence, and not the date upon which he is tried. If it were otherwise, the taxpayer, by the simple expedient of a series of adjournments, could substantially alter his position by payment of the tax in the foreign jurisdiction before he came to trial.

Collins sought to avoid payment of income tax in Canada by failing to disclose his true income. His responsibility was to pay tax to Canada which could grant a credit for US tax only if it was paid pursuant to subsection 126(2). He did not at the critical time intend to pay this tax or indeed any tax. The tax payable by Collins would be based upon the total income which he earned. He fraudulently sought to achieve a well nigh total exemption from the payment of income tax. The fact that Collins, after he was caught and charged, then paid income tax in the United States, cannot logically affect the calculation of the tax he had sought to evade before he was charged. The offence crystallized at the moment the charge was laid.

The assessment and collection of income tax in Canada is based upon the complete and honest disclosure of income earned by taxpayers. The vast majority of those required to file tax returns are on salary where full disclosure of income and deduction of tax is a matter of course. It is not only equitable and just but essential that not only salaried taxpayers but all who file returns will disclose all the income they have earned. Section 239 provides the statutory obligation to make a full disclosure and imposes a penalty for its breach.

The purpose of the penalty imposed by section 239 is to encourage honest and complete disclosure. The penalty is eminently suited to the offence for it is related directly to the extent of the dishonesty. The greater the tax sought to be evaded, the greater the penalty which will be exacted. To repeat, the tax sought to be evaded by Collins was all income tax that was payable by him.

In the circumstances, I would dismiss the appeal and remit the matter to the trial judge for disposition pursuant to the answer given by Steele, J to the stated case submitted to him.

Appeal dismissed.