The Queen v. J.P. Consultants Ltd. and James Paulos, [1990] 2 CTC 514 (Man. P. Ct.)

Devine, P.J.: —Both Mr. Paulos and his company are charged, pursuant to subsection 238(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), with failing to file the returns of the corporation for the taxation years 1986, 1987 and 1988, as and when required by the Minister of National Revenue in demands served January 5,1989 pursuant to paragraph 231.2(1)(d) of the Act.

At the outset defence counsel, acting for both accused, admitted all elements of the Crown case, stating that the only issue for the Court was whether or not Mr. Paulos and his company had exercised due diligence in attempting to comply with the demand. I therefore find, based on defence's admissions and the exhibits filed by the Crown, that the offence alleged has been proved unless I accept Mr. Paulos’ explanation, advanced on behalf of himself and his company, that he took all reasonable steps to comply with the demand served by Revenue Canada and is therefore not guilty of the offence, which is one of strict liability.

Mr. Paulos and his accountant both gave evidence for the defence. The accountant, who described himself as a specialist in income tax and in mergers and acquisitions, had become Mr. Paulos’ accountant in 1975 and continued to be at the time of trial. The company, a small multifaceted company which operated a couple of restaurants, made stock investments, and did some consulting and management work in the food and beverage industry, apparently had no difficulty in filing returns promptly until 1985. In 1986 the company sold its major restaurant business, including the premises out of which the company had operated. Some of the records in connection with the sale of the restaurant and its 1986 operations were taken to Mr. Paulos’ home and some to his accountant's office. Prior to 1986 a junior representative of the accounting firm had attended directly to the restaurant premises to do the returns but, as of 1986, the firm started doing the return in its own office and calling upon Mr. Paulos to bring in certain records in order to complete the return. It appears that from sometime in the summer or fall of 1986, to May of 1989, Mr. Paulos and his accounting firm were involved in a scenario wherein the firm was of the view that it was unable to do the work of completing the financial statements and corporate returns without further records being produced by Mr. Paulos. Meanwhile Mr. Paulos was confident that he had long before brought in the necessary documents to the firm and that they were no longer in his possession. As it transpired Mr. Paulos was right. On a reorganization of the accounting firm in May 1989 resulting from the death of a partner the missing documents, i.e. cancelled cheques and deposits necessary to prepare the 1986 financial statement and return, were located "in a corner in a box under a desk" where they had apparently been all along.

Both witnesses acknowledged that Revenue Canada had started making inquiries in the spring of 1988 and had regular contact thereafter with both Mr. Paulos and his accountant up until the charges were laid approximately one year later. Mr. Paulos agreed that he had been told by Revenue Canada perhaps as early as June of 1988 that it was his own responsibility to see that the returns of himself and his company were filed.

Mr. Paulos and his accountant differed in certain material respects in that Mr. Paulos denied that he had been told about missing materials until about one month after the papers were served, while the accountant stated that Mr. Paulos had been told previously that papers were missing. Mr. Paulos said that throughout 1988 he would contact his accountant whenever he was contacted by Revenue Canada, and then weekly after the demand was served, and would be told "we've got lots of time, we'll take care of it, leave it to me”. When he was ultimately told about the missing materials he testified that he searched his home but that he didn't feel he could go to another accounting firm without the records. In cross-examination he stressed that it was his trust of the accountant and his fifteen-year relationship with him that caused him to retain the accountant's services up to the time of trial.

In this regard it should be noted that after the accountant found the missing documents in May 1989, the 1986 return was filed one month later in June 1989. The 1987 return was apparently ready as of July 31, 1989 but was sent to the appellant's solicitor by the accountant. The solicitor, believing it to be only a copy of the return, retained it in his office until the date of trial on May 24, 1990. The 1988 return was not filed until May 1990 as well, only a few days before trial and some thirteen months after charges had been laid. Mr. Paulos' explanation for the delay in filing the 1988 return after summer of 1989 was that he had a heart attack and had then gone on a trip to Greece but he conceded that he had left all the necessary documents for the accountant. Upon his return from Greece in October 1989 "the file was buried again” by the accountant until May 1990.

Mr. Paulos and his accountant denied suggestions that it was outstanding fees owed to the accounting firm which were responsible for the delay in filing. The accountant acknowledged that an attempt to reconstruct the file could have been initiated but that it would not have been cost-effective in his view and Mr. Paulos asserted that no such option had ever been put to him.

Mr. Paulos’ submission is that his actions in turning the matter over to his accountant did constitute due diligence and did amount to taking all reasonable steps to avoid the commission of the offence by filing the returns requested. In support he cites The Queen v. Merkle, [1979] C.T.C. 519; 80 D.T.C. 6027 (Alta. C.A.) in which the trial judge found that passing the demand on to an accountant had amounted to a defence to the charge on the facts before him.

The Crown submission is that Mr. Paulos has not established on a balance of probabilities that he had taken all reasonable care to avoid the occurrence but rather his position was one of abdicating responsibility to the accountant and allowing a bad situation to continue for close to three years from July 1986, when the first return was due, until April 1989, when the charge was laid. The Crown asserts that blind loyalty cannot be an excuse for breaching an obligation which is personal to the taxpayer.

I have no hesitation in accepting the evidence of the accountant that the filing of these financial statements and corporate returns, while a relatively simple task for a professional accountant, was beyond the capabilities of Mr. Paulos, an experienced businessman. The three charges before me allege non- compliance with the demands within the specified relatively brief periods after they were served on January 5, 1989, but in weighing the steps taken by Mr. Paulos to comply with these time frames, I feel that I am entitled to look at his entire course of conduct both before and after these time limits, in relation to the filing of the returns.

Mr. Paulos' 1986 corporate return was due in July 1986 and for the period of almost two years until Revenue Canada became involved in the spring of 1988 it would appear that Mr. Paulos was not unduly concerned about his failure to file returns. This is perhaps explained by his comment in his evidence that he didn't think he had any taxable income, whereas if he owed $50,000 to Revenue Canada he would think that was a little more serious.

Once Revenue Canada became involved in the spring of 1988 Mr. Paulos appeared to become more concerned, as he testified that ne did in fact phone his accountant whenever Revenue Canada phoned him. He was aware of the formal legal demand well in advance of January 5 because in fact he had been served with a technically deficient demand earlier in December 1988. Interestingly, he testified that no mention of the missing materials was made to him by his accountant in any of these telephone calls prior to service of the demand, as he said he only found out about the problem one month after the demand was served. For some six to eight months then, Mr. Paulos, according to his own evidence, allowed himself to be put off by his accountant's vague reassurances not to worry, that he'd take care of it, when so far as Mr. Paulos knew there was nothing preventing the accountant from doing the return. Mr. Paulos even had the benefit of an additional ten days in December of 1988 when the first demand was served and had to be re-served. Even then, when he acknowledged he knew he faced prosecution, Mr. Paulos appears to have been put off with vague excuses for at least another month until the accountant told him that his reason for not filing was the missing records. It was only at this point that Mr. Paulos indicated that he thought of changing accountants but decided he couldn't without the missing documents. Even after charges were laid against him however, it appears that Mr. Paulos did little to follow up and explore alternatives. He says the reconstruction of files was never discussed with the accountant, so it is apparent that Mr. Paulos never explored his alternatives with the accountant.

After the fortuitous location of materials at the accountant's office in May 1989, the 1986 return was filed by June 19, 1989. I will not place any reliance on the filing date of the 1987 return as Mr. Paulos may have been justified in relying on the combined efforts of his accountant and lawyer to ensure that the return had in fact been filed in July 1989. However, Mr. Paulos did not seem to be in the least concerned that this same accountant did not bother ensuring filing of the 1988 return until May 1990, 17 months after the filing of the demand and 13 months after the laying of the charge. Again Mr. Paulos’ evidence was to the effect that he had done his part in providing the necessary information but the file had nonetheless been buried by the accountant.

Mr. Paulos is a businessman involved in operating restaurants and consulting in the food and beverage industry. His decision to hire an accountant to carry out the tax obligations of himself and his corporation is understandable but the hiring of accounting services is not an outright transfer of responsibility to a third party. Mr. Paulos was still obliged to monitor the functioning of the person he had hired and to evaluate whether or not he was in fact satisfactorily performing the function for which he was retained. Perhaps it was not surprising that a longstanding friendship and business relationship of some ten years' duration prevented Mr. Paulos from pressing his accountant too closely prior to 1988. Once Revenue Canada became involved however, Mr. Paulos should have pressed the accountant more closely as to the reasons for delay and attempted to obtain some firm undertakings as to a date as to when the task would be performed. I have no doubt that at the point in time when the demand was served it was incumbent on Mr. Paulos to do more than merely turn the demand over to the accountant, repeat the same ineffectual questions, and receive the same vague responses. At that point he had a specific legal obligation under the Income Tax Act and in my view, if he chose not to fire the accountant, he should at the very least have pressed for an immediate meeting and given an ultimatum to the accountant. Again I note that it is significant that Mr. Paulos appears not to have uncovered the alleged reason for the delay, the missing materials, until what he estimates to be one month after the demand was filed and it is also significant that the accountant indicates that at no time did Mr. Paulos demand the return of his file or request an attempt at reconstruction. Thus the actions of Mr. Paulos prior to being served with the demand, and thereafter in complying with the time limits contained therein, can in no way be seen as taking all reasonable steps to avoid the offence nor do they amount to due diligence. Even once the time for compliance had expired, the decision to continue to retain the services of an accountant whose advice and actions had resulted in charges being laid, and who then failed to perform the services necessary for compliance with the third demand until 17 months after the demand, 12 months after the missing information was found and 10 months after the 1987 return was filed, can by no means be seen as constituting due diligence.

The Merkle case cited by the defence involved an accountant's filing a return approximately two weeks after the expiry of the time limit imposed by the demand. The accused however had taken the information to the accountant almost two weeks prior to the expiry of the time limit. It is certainly distinguishable in its facts from the case before me.

Although I utterly reject Mr. Paulos' claim that he exercised due diligence in this case and therefore must find him guilty as charged, it is perhaps appropriate to comment on the accountant's actions. It was apparent to me both from the accountant's testimony and demeanour, and from his part in the events of 1988 through 1990, that his attitude to Revenue Canada was somewhat cavalier and that he was not overly concerned about their queries and activities even insofar as the laying of charges against his client. To some extent he must have communicated his own attitude to his client who may well wish to rethink his own assessment of the services provided him to date.

Guilty of the offence as charged.