Sheridan Warehousing Ltd. v. R., 83 DTC 5095, [1983] CTC 90 (FCTD)

Mahoney, J:—This is a special case stated pursuant to Rule 475. The subject is issue estoppel. The questions to be answered are:

1. Did the learned Trial Judge His Honour Judge E A Fairbanks, in the criminal proceedings Her Majesty The Queen v Sheridan Warehousing Limited (the Plaintiff herein), Sheridan Lax and Samuel Lax, heard in the Provincial Court (Criminal Division), Judicial District of Hamilton-Wentworth, determine the fair market value of the property at 80 Brant Street in Hamilton, Ontario, (the “subject property”) as at December 31, 1971?

2. If the answer to question 1 is in the affirmative, does such a determination estop the Defendant herein from asserting in the present proceeding that the fair market value of the subject property, as at December 31, 1971, was not more than $445,000.00 as alleged in subparagraphs 4(b), 4(c), 4(d), 6, 7, 9 and 10 of the Statement of Defence.

Transcripts of the reasons for judgment on conviction, delivered orally December 10, 1980, and on sentencing, delivered orally January 12, 1981, are attached to the agreed statement of facts.

The issue in this action is the taxable gain realized by the plaintiff on its disposition of real property for $1,400,000 on December 31, 1972. It had owned the property for many years. The question in dispute is the fair market value of that property on Valuation Day, December 31, 1971, hereafter the “V-Day value”.

The plaintiff and two of its officers were charged with tax evasion. The material part of the charge against the plaintiff was that it

...unlawfully did on or about [January 23, 1974, at Hamilton, Ontario] wilfully attempt to evade payment of taxes totalling $168,726.91 imposed by the Income Tax Act on [the Plaintiff for 1972], by submitting false documents to the Department of National Revenue purporting to be copies of correspondence.. .thereby committing an offence punishable under section 239(1 )(d) of the said Act.

The offence lay not in failure to report the transaction but in the submission of false documents intended to corroborate the V-Day value placed on the property in the plaintiff’s tax return.

The agreed statement of facts goes on:

7. On December 4, 1979, the Plaintiff pleaded not guilty to the said charge and was tried before His Honour Provincial Court Judge E A Fairbanks, in the Provincial Court (Criminal Division) for the Judicial District of Hamilton-Wentworth on December 4, 5, 6 and 7, 1979; March 31, 1980; April 1, 2, and 3, 1980; and October 20, 21, 22 and 23, 1980.

8. The Crown, at trial, as evidence relating to the offence with which the Plaintiff and the two others were charged, called three expert appraisers who testified that the fair market value of the subject property at Valuation Day was $430,000.00, $445,000.00 and $500,000.00 respectively. The Plaintiff and the two other accused, at trial, called two expert appraisers who testified that the fair market value of the subject property at valuation day was $1,400,000.00.

Paragraphs 9 and 10 recite the facts of the conviction and sentence and identify the exhibited transcripts and paragraph 11 states that no appeal was taken from conviction or sentence.

Judge Fairbanks, in convicting the plaintiff, made no determination of V- Day value. I think it a fair interpretation of his decision that, while he found the experts called by the Crown more reliable than those called by the defence, he also found that the Crown’s experts erred in law in refusing to consider the sale of the subject property as a transaction relevant to its V-Day value. He did, however, find, beyond a reasonable doubt, that there had been a taxable capital gain without quantifying it. He said he did not have to quantify the gain.

Subsection 239(1) provides, in part, that on conviction of an offence thereunder on summary conviction, a person is liable 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. . .

It is desirable to quote at some length from Judge Fairbanks’ orally delivered reasons on sentencing:

.. .Now I should point out that in my Judgment that I stated that the sale of this property that’s in question here should have been considered in the determination of fair market value.

I had no reasons by the Crown appraisers as to why they rejected it and I was left to speculate whether it was arm’s length or whether it was an open and unrestricted market and all the legal principles and, as I stated in my Judgment, I came to the conclusion that the Crown appraiser did not follow the legal principles in determining the fair market value of this property and actually as a result it was not my function to determine what the fair market value was. That’s in my opinion and I gave the authorities and I can understand, of course, that this matter is in dispute. I am saying this with respect to the fact that this comes down as the basic reason for the act of backdating certain documents and submitting them to the Department.

While those comments were made in the context of his general consideration of how severe the sentence should be, which included the option of imprisonment for the individuals, I recite them because they fairly summarize, in his own words, the position Judge Fairbanks expressed on conviction. He went on to consider further the question of severity and then continued:

. . .Now I did find, I had to find in my Judgment, that there was some tax payable. Then I have to go back to the section, the penalty section, of the amount sought to be evaded and this is the most difficult part of this sentence because it says it is based on the amount sought to be evaded and, in effect, it almost imposes on me some, if I can put it, calculation of that amount.

... If I have to make my decision to preserve jurisdiction of the sentence under that section, I have to make some sentence that’s relative to subsection 239(1 )(f) which is the penalty section. Now having found that the assessment of the determination of fair market value is not satisfactory to me, the only evidence was the evidence of Mr Strung* [1] and he was evasive and I use that word not that strongly but he couldn’t or didn’t put a figure on what would be the assessment of fair market value assuming that he took into consideration the sale of this property.

The only evidence and this is Mr Salvona’s* and he was asked “assuming that this is an arm’s-length transaction, what would be your assessment of the fair market value be” and he said one million, two hundred and fifty thousand to one million, three hundred and fifty thousand but no one ever said that they treated it as not an arm’s-length transaction so this is the difficulty that I had with the Judgment and it also to an extent it affects the Sentence so all I can do to keep it in the confines of that section is to do what Mr Goodmant [2] has already set out, take one million, three hundred and fifty thousand dollars as some guideline for me with respect to that section to come up with a figure and that’s fifty thousand dollars difference.

The capital gain tax,.’p [3] of course, is after that, twenty-five thousand dollars. The Federal portion which we are dealing with here is ten thousand dollars and before I say what I am doing with that I have to deal, of course, with the deterrent effects and rehabilitation and.. .character witnesses. ..

Having decided that the punishment should relate entirely to the fraud, that is the attempt to deceive the fisc, His Honour continued:

It’s the act but it has to bear a relation, of course, to subsection (f) so I will not consider a jail sentence as the Crown has suggested. That’s not appropriate, under these circumstances, in my opinion and I’m only left with one matter and that's based on the ten thousand dollar amount sought to be evaded and to express the other element of the punishment in the nature of a fraud, a crime element, that one hundred percent of that should be imposed so that the company and Messrs Lax are fined ten thousand dollars.

...all are equally involved so perhaps the fine equally three thousand, three hundred and thirty-three dollars and thirty-three cents. ..

I have quoted Judge Fairbanks’ reasons on sentencing at considerably more length than may have been necessary to avoid taking any relevant comment out of its context.

Judge Fairbanks was manifestly dissatisfied with the evidence as to V-Day value. He rejected the evidence of the experts called by the defence as less reliable than those of the Crown’s but he also rejected the evidence of the Crown’s experts because they did not apply proper legal principles in arriving at their opinions. Only one Crown expert, Salvona, was willing to express an opinion as to V-Day value assuming the sale giving rise to the capital gain in issue to be a transaction that ought to have been taken into account. He gave a range: $1,250,000 to $1,350,000. Judge Fairbanks accepted the higher figure because it resulted in the lowest capital gain. That effectively gave the benefit of any doubt to those being sentenced. He held that paragraph 239(1 )(f) “almost” imposed on him a duty of calculating the precise amount of tax sought to be evaded but he did not do so.

The legality of that approach is res judicata between the parties. I am neither called upon, nor entitled, to conclude that Judge Fairbanks must have determined the precise amount of tax sought to be avoided and thus, necessarily, the V-Day value because that, in law, was what he was required to do. In other words, I cannot take the approach, assuming it to be valid, that paragraph 239(1 )(f) requires a finding of exactly how much tax was sought to be evaded as a prerequisite to the imposition of a fine and that, therefore, Judge Fairbanks must be deemed to have made it.

I must say that I do not conceive how any precise finding of value dependent on the opinion evidence of experts in land valuation could be arrived at beyond a reasonable doubt.* [4] This Court tries no criminals but it sees and hears many appraisers.

I am bound to deal with the question whether Judge Fairbanks determined the V-Day value as a pure question of fact. Clearly, he did not. Rather, being “almost” required to do so, he adopted $1,350,000 as “some sort of guide line” that gave those he was sentencing the benefit of the doubt which he obviously entertained as a result of the unsatisfactory state of the expert evidence.

The first question must be answered in the negative. It is a matter of considerable intellectual regret that I am not, therefore, called upon to deal with the second. It was most ably argued by both counsel. Costs of this reference will be in the case.

Order

THIS COURT DOTH ORDER AND ADJUDGE THAT His Honour Judge E A Fairbanks did not, in the criminal proceeding: Her Majesty the Queen v Sheridan Warehousing Limited (the plaintiff herein), Sheridan Lax and Samuel Lax, heard in the Provincial Court (Criminal Division), Judicial District of Hamilton Wentworth, determine the fair market value of the property at 80 Brant Street in Hamilton, Ontario, as at December 31, 1971, AND THAT the costs of this reference be in the cause.