R. v. Castelli, 92 DTC 6556, [1993] 1 CTC 76 (Ont. Ct. GD)

Glithero, J.:—On January 3, 1992 the appellant was convicted of one count of wilfully evading the payment of income tax in the amount of $19,475.84 on unreported income of $66,202.00 between January 31, 1982 and May 18, 1985. The accused was also convicted of making a false statement on his 1984 income tax return by stating a total income of $14,500 thereby failing to disclose additional income of $66,202. The charges were proceeded with summarily, the appellant pleaded not guilty, and the trial lasted some eight days. The appeal is against both conviction and sentence with respect to both counts.

In 1983 a non-profit group was formed to build 57 units of co-op housing, with CMHC funding, in Hamilton, Ontario. The project was known by the name of Red Hill Co-operative Homes (Red Hill). One Shane Watson was apparently the organizer of the Red Hill project and became chairman of the board of directors. According to the evidence, CMHC was persuaded to depart from its normal practice of utilizing a full public tender method whereby a general contractor is selected, and instead agreed to utilize a construction management system, under which system there would be no general contractor, but rather a construction manager who would deal directly with the sub trades. Through Shane Watson, one Owen Lyons became involved in the Red Hill project as the project manager, albeit through the medium of his company, Markland Management. Lyons was not an officer or director or actually an employee of Markland, but nevertheless acted in all material respects on this project as the driving force and representative of Markland. On the evidence, he wanted to avoid any recorded association with Markland so he would not jeopardize a veteran's pension that he was receiving. According to the evidence his financial position was precarious, and he was being sued and in fact had lost his house when he could not honour financing commitments on it. Similarly Mr. Watson's financial condition was somewhat precarious in the time period relevant to these events.

Part of Lyons’ job was to obtain bids from subcontractors, to analyze the prices and to come up with figures for the housing costs. Lyons prepared a list of jobs upon which he required people to tender. He then invited and received tenders for those various contracts and formed recommendations to the Board as to which subcontractor should get any particular subcontract.

The appellant at the time was a 50 year old married man who had been a carpenter since the age of 17. He too, had experienced some financial difficulties in 1979 and the years following. In 1983 he had filed an income tax return showing total earnings of $7,700. The accused ran a company called Tyche Building Corporation Limited (fyche).

Watson invited the accused to submit a bid for the carpentry work on the project, about which I will say more later.

After tenders were received, Lyons would prepare a list of the people who had tendered, and the amounts of their tenders, and would put a star beside the tender that he recommended to the Board as being the best choice for that particular subcontract. The Board would then meet and award contracts. CMHC would do inspections as the work progressed and would determine the percentage of the work which was by then completed, and would advance funds on a corresponding basis to the Red Hill project. Lyons would then apportion such amounts amongst the various subtrades who had submitted invoices or progress draws by that date. Lyons would prepare cheques to pay the subcontractors, and would take them to the Board's office for signature.

Ultimately the appellant personally entered into three contracts with Red Hill, a trim contract in the amount of $50,160, a stairway contract for $20,350 and a framing contract for $389,860, the total of the three contracts amounting to $460,370. He was paid those amounts, the evidence discloses, and he deposited $410,970 in his company's corporate account. The balance of approximately $50,000 he admitted to taking in cash from the Red Hill cheques payable to him for work done on the contracts. He would do this by attending, usually at his company's bank branch, tendering the cheque and depositing some of the money, but keeping some in cash. It is also clear that a further $16,502 was paid by Red Hill to the accused appellant in the form of three cheques after all work had been done. These cheques were cashed in their entirety and not deposited to the Tyche corporate account. The allegation is that a total of approximately $66,000 was taken personally by the accused which should have been reported as income in the accused's 1984 personal tax return. The accused's position was that he had indeed received those amounts, but that he immediately paid those amounts over to Watson and Lyons as part of a kick-back arrangement whereby Watson and Lyons had demanded a total of $100,000 from the accused in return for awarding him the contracts. The accused's position was that such money was not income as it simply flowed through him to the other two men, or if it was income, it was deductible as a business expense, and lastly, that in any event, if he was wrong about that then he had no mens rea and did not wilfully evade any tax.

I should add that the contracts to the accused were awarded to him personally rather than to his company, and the cheques were payable to him personally rather than to his company. The false statement charge arose out of the fact that the accused reported income in 1984 that did not reflect in any way the monies taken by him in cash, and which he says were paid over to Watson and Lyons.

The appeal against convictions is based upon four main areas of appeal.

The first involves what are alleged to be reversible errors by the learned trial judge on issues of credibility, which in turn led the Court below to find that the accused had kept the $66,000 for himself as opposed to having paid it over to Lyons and Watson. The appellant concedes that he must succeed on this area of appeal or the appeal as to conviction fails.

Secondly, the appellant urges that the amounts he alleges to have paid to Watson and Lyons were not income in his hands and did not attract income tax, as the money simply flowed through him.

Thirdly, he argues in the alternative that even if such amounts were in the nature of income to him, these amounts were properly deductible expenses reasonably incurred to earn income and therefore not taxable.

Lastly, and in the alternative, he argues that even if the amounts were income, and were not deductible business expenses, the crown had not proven mens rea or a wilful evasion of income tax beyond reasonable doubt and that the learned trial judge erred in her treatment of that issue.

Certain portions of the factual situation required elaboration. The appellant testified that he was first asked to submit a tender for the framing contract, labour only, and that he did so in the amount of $119,000 for the 57 unit project. He testified that he was subsequently told by Lyons that he had to lower his bid in order to get the job, but that a trim contract and a stairway contract were offered to him, causing him to agree to lower his bid on the framing contract. In addition,the appellant says that Lyons told him that he was to supply all of the materials for his three contracts and that he, the appellant, was to get quotes on the cost of lumber for the framing contract. The appellant did so and reported an estimated cost for the lumber of $178,000. The appellant testified that the actual cost of the lumber turned out to be $173,000, and that that figure actually included some trim lumber so that the real cost of the framing contract lumber was approximately $168,000.

The appellant further testified that after obtaining this quote on the cost of the lumber for the framing contract, that he met with Lyons and Watson at the appellant's home. He further testifies that Lyons had also obtained lumber quotes, similar in amount to that obtained by the appellant. The appellant swore that Watson and Lyons told him that they would give him the contracts but that he would have to pay them each $50,000. This $100,000 sum was to be available to the appellant to pay to Watson and Lyons because the appellant was told to put in a quote using a figure of $280,000 for the cost of the framing contract lumber. After this meeting which lasted some two or three hours, according to the appellant, during which time the appellant's wife was said to have been in and out of the room, the appellant was told he was given the framing contract for a total of $389,000 (labour and material), the Stairway contract for about $20,000, and the trim contract for about $50,000.

Lyons testified that in fact the appellant was told not only to bid for the labour portion of the framing contract, but also was asked to supply the lumber. Lyons testified that because in his view lumber prices were volatile, he decided to have the appellant contractor supply the lumber as well as the labour so that Red Hill would be protected by virtue of having a fixed contract price. Lyons' evidence was that he estimated a lumber cost per unit of $4,000, to which he then added 14 per cent for theft and wastage, and another 10 per cent for profit, creating a total framing contract lumber cost of $280,000 (for materials). Initially in explaining how this figure was arrived at, Lyons testified that the $4,000 per unit lumber cost included trim lumber. He then conceded on cross-examination that the trim contract included the trim materials as well as labour, and therefore agreed that a more appropriate figure for the cost of lumber for the framing contract would be in the range of $3,000 to $3,500 per unit. At $3,000 per unit, he agreed that the total would be some $171,000, which he agreed closely resembled the appellant's actual cost of $173,000. Lyons denied that this lumber figure was inflated to $280,000, for materials, so as to create the extra $100,000 so it would be available for payment to he and Watson, as alleged by the appellant. Lyons did concede however that he had told the appellant to use the figure of $280,000 for the cost of the lumber for the framing contract. Lyons denied that he was advised of the appellant's lumber quote of $178,000, but agreed that he (Lyons) had himself obtained a lumber cost quote of $3,605 per unit for a total of $205,502. Lyons also conceded that he had told appellant to lower his bid submitted for the labour component of the framing contract, and further conceded that he had told the appellant to put in a tender for labour and materials on the framing contract, using Lyons' material or lumber figure of $280,000.

Watson denied discussing the matter at the appellant's home, and testified that the apparent discrepancy between the $173,000 paid by the appellant for the lumber, and the $280,000 that the appellant was paid by Red Hill for the lumber was never brought to the attention of the Board.

Between April 3, 1984 and October 19, 1984, 14 cheques were issued by Red Hill to the appellant personally for various amounts totalling $167,502. Eleven of these cheques were negotiated by the appellant personally at his company's bank branch, and out of those 11 cheques a total of $49,517 was taken in cash by the appellant, and admitted by him to have been taken and cashed, with the balance of the funds represented by those 11 cheques being deposited in his company’s back account. One other cheque from Red Hill to the appellant was cashed by him at his own personal bank branch with the entire $5,000 amount of that cheque being paid to the appellant personally and nothing being deposited in his account. The two remaining cheques were cashed in their entirely, totalling $11,685, by a friend of the appellant’s on one occasion, and by the wife of that friend on another occasion, the said cash in each case going to the appellant personally.

On February 22, 1988, several months before he was charged, but after a search warrant had been executed at his home, the appellant provided to investigators information disclosing 11 occasions, with specific dates, times and locations and dollar amounts, upon which occasions the appellant said he paid cash amounts to Watson, to Lyons, or to both. The total of the payments was $65,202. The appellant also gave this evidence at trial under oath confirming this information. The remaining $1,000 (the difference between the $66,202 received in cash from the above-described cheques, and the $65,202 allegedly paid to Watson, Lyons, or both) could not be accounted for by the appellant in terms of where it had gone although he agreed he received it from the bank.

Three of the 11 occasions alleged by the appellant to have involved payoffs to Watson or Lyons or both, namely on April 27, 1984, May 31, 1984, and August 29, 1984 were said to have taken place at a construction trailer on Ventura Drive. The locations alleged by the appellant for the said payoffs were known to the crown well before trial, and those alleged occasions were put to Lyons and to Watson, when they testified in chief, both of whom denied that such payoffs took place. In reply evidence, without objection by defence counsel, and without any comment by the Court, two subcontractors were called and testified that they had worked on the site and that the construction trailer was not at the Ventura Drive location in late May or in June, 1984.

With respect to one of the alleged payoff incidents, namely on May 25, 1984, the appellant testified that his wife had taken the cash from him to give to Watson. The appellant's wife testified at trial that in fact she had done so, but as Watson was not in his office, that she had given the money to Watson's wife to give to Watson. In reply, Mrs. Watson denied receiving any such money.

The appellant testified that Watson and Lyons were dissatisfied with the money they had received by August of 1984, and that the two of them came to the appellant's house to discuss it. The appellant testified that he had his wife type of a list of the amounts of money that he had paid to them by that date, that he showed this list of payments made to Watson and Lyons when they were at his house, and that the list was then left on or in the appellant's desk but that copy of the list was no longer to be found after Revenue Canada had executed its search warrant. The list was never found. The appellant's wife testified as to having typed out the list, and also testified that she had given a copy of the list to Watson when he was at the accused’s home with Mr. Lyons on this occasion in August. She also testified that she was in and out of the room while the two men were visiting her husband and that she heard the three of them discussing money and how much the appellant had paid to them. Mr. Watson and Mr. Lyons denied that any such meeting took place, that any monies had ever been received from the appellant, or that there had ever been any agreement to pay money to them.

During the investigation by Revenue Canada, the appellant was asked to provide a sworn statement confirming what he had alleged about the payments made to Lyons and Watson. The appellant testified at trial that he had refused to do so on the advice of counsel, because he had been told he would be charged anyway unless he not only provided the sworn statement, but also agreed to wear a bodypack and to meet with Lyons and Watson so their conversations could be recorded. He testified he did not want to wear a bodypack. Evidence was adduced at trial that the appellant's then counsel wrote to the investigators to clarify the Department's position as to whether the appellant would be charged if he gave a sworn statement but refused to wear a bodypack. The Department chose not to answer the question, but rather replied by directing the inquiry to their counsel. No reply to the inquiry of the appellant's counsel was received.

As earlier stated, both Watson and Lyons swore that no such payments of money were received from the appellant. Lyons produced receipts from expenses for various places in England between August 6, 1984 and August 31, 1984 and therefore testified that he was not even in Canada on August 24 or August 29, 1984, two of the payment dates alleged by the appellant. He did not produce any airline tickets with respect to that trip to England.

All witnesses agreed that the carpentry work on the Red Hill project was completed by May 31, 1984. When asked why the appellant would have re- ceived three cheques totalling $15,000 in August, 1984, so long after the fact, Lyons testified that the payments were for late payments because draws did not come through on time, or were for extras for supplying a compressor, for putting up temporary hydro lines, and for temporary staircases and some backfilling. The appellant denied doing any such extra work, or any extra work at all, and said he did not submit any invoices for those three cheques. He testified that he was simply telephoned and told that there were cheques for him to cash, and that he did so.

When asked about the last three Red Hill cheques payable to the appellant for a total $16,502, issued in September and October, 1984, Lyons said he did not know anything about them, that he had received no invoices for them. He agreed that usually payments were only made on his recommendation. Watson testified the $16,502 may have been paid to the appellant as the holdback, but when confronted with evidence indicating the holdback had been paid elsewhere he also agreed he had no explanation.

The members of the Board of Directors of Red Hill were volunteers. The only Board member called as a witness, besides Watson, was the treasurer, John Little. He testified that he was not on the Board when the contracts to the appellant were created. Most often, according to Little, Lyons would bring cheques that were already prepared to the Board offices for signature. Mr. Little, although treasurer, could not recall that the Red Hill project had gone over budget by approximately $100,000 and did not recall any bills being submitted for extras.

The co-ordinator of the Red Hill Co-operative, as of the time of trial, was called at trial and testified that most of the books and records of Red Hill pertaining to this project had gone missing, and that not one invoice for the construction project could be found, and that the minutes of the meetings of the Board of Directors pertaining to the Red Hill construction project were also missing.

One John Bottomley was called as a witness. He was a resident of the co-op and was a member of the Residential Board, by which I understand to be a separate Board from the original Board of Directors. He testified that towards the end of the construction of the project, while he was working as a security guard for the project, he had been in Lyons' office and had seen a list of the projected costs and of the actual cost of the various contracts involved in the project, and that virtually all aspects of the construction had come in under budget. He swore that he was told when the final figures for the project showed that it had gone over budget by approximately $100,000, that he went to the Board, and was told by Mr. Watson that it was because of some extra road work which had cost approximately $100,000. Bottomley testified that the extra work consisted of minor matters, that he was a former truck driver, having some experience in matters pertaining to gravel and grading, and that he would have thought this extra road work would have cost approximately 3,000.

Anna Castelli was the appellant's sister-in-law and his bookkeeper. She testified that the difference between the contract amounts ($461,003) and the amounts deposited by the appellant ($410,970) between September 1, 1983 and August 31, 1984 was recorded in Tyche's books as a receivable for that taxation year, and then was written off subsequently as a bad debt. She testified that she saw no change in the appellant's lifestyle during this time period. She did testify as to three trips that the appellant or members of his family had made in December of 1983, in 1984, and in 1986. The travel expenses for those trips were paid by Tyche cheque, but were recorded as personal expenses attributable to the appellant's draw. They were for relatively small amounts, which would have not account for the missing money in any sense, but it was pointed out related only to the direct travel expenses and did not include any amounts for cash that might have been spent while on such holidays. Similarly two loans totalling $1,750 had been made to the appellant's sister-in-law, were made by means of a Tyche cheque, but were charged to the appellant's drawing account with the company.

The appellant’s chartered accountant at the time was called at trial and testified that he believed the appellant understood what advice he was given, and knew to ask questions if he did not understand something. He testified that in the 1983-1984 taxation year a receivable in the amount of $50,035 was set up in the sales journal. The appellant had testified that he did not know why the books were set up in that way. The accountant further testified that for the 1985 taxation year he had made a note in a sales journal of a $16,035 reserve for extras billed that the Red Hill Co-op would not pay, and also testified that a note made by him of "set up B/D” was likely a note by the accountant to the bookkeeper to create a bad debt for that amount, and that such a note would be made following a meeting with the appellant. The accountant could not actually recall the incident as he testified. The effect of treating that amounts as a doubtful account would be to reduce the taxable income for that year, and the following year it was written off. The appellant testified that he had no recollection as to how that $16,035 figure was treated from an accounting point of view, and that he could not recall discussing it with the accountant.

One of the cheques received by the appellant was dated August 22, 1984 in the amount of $34,000, and was negotiated by depositing the entire amount in his corporate bank account on August 24, 1984. The accountant testified that he had a note in his working papers dated August 31,1986 to the effect that that deposit was never received although it was recorded. He understood that as a result of his note someone would have checked with the company's bookkeeper to see if indeed the cheque had not cleared the bank, and that thereafter it was set up as a bad debt. The accountant testified that the appellant told him that it must be a bookkeeping error because he never received the $34,000. The accountant could not recall the appellant thereafter returning to ask him to amend the records to correct that $34,000 bad debt entry but agreed it was possible that something had been said to that effect. The net effect was that Tyche had in fact paid tax on the $50,035 receivable in the 1984 tax year, but that by the 1986 tax year this amount had been written off as a bad debt in two instalments of $16,035 for 1985, and $34,000 for 1986. The appellant signed the tax returns of Tyche, and testified that he had gone over the 1986 return but did not recall anything about a bad debt. He did testify that he had spoken to his bookkeeper who had told him that he had received all of the money from Red Hill and that he should go to see his accountant to straighten out any discrepancy. The appellant testified that he did so but was told it would be worse for him if he filed a revised return and that he should leave it and see what the Department did. Anna Castelli, the appellant's bookkeeper, also testified about the $34,000 bad debt to the effect that after seeing it on the return prepared by the accountant, she had asked the appellant if he had a bad debt, and upon being advised that he did not, she advised him to see the accountant to have the return amended because the $34,000 had in fact been received. She testified the appellant said that he would do so. The appellant's accountant further testified that the first time he was specifically told by the appellant that the money in question had been paid to other people was several days after the Tax Department had come and taken his records. The accountant did testify however to earlier discussions, after the 1986 statement had been prepared, wherein the appellant had asked about the Department's position concerning expenses for which the taxpayer did not have receipts, and he further recalled telling the appellant that the expense would be disallowed if there were no receipt or something standing in its place.

The appellant denied in his evidence that he had any intention to evade taxes, and that he did not report the money as income because as far as he was concerned it was not his, was immediately paid out, and that he considered it to be an expense.

One Robert Murray, a construction contractor became involved in the Red Hill project after invitation from Owen Lyons to submit bids on three different contracts. He testified that after submitting the bids he was told by Lyons that his bid was too low on a sewer contract but that he could bring that price up, and further that his bid on another inside sewer project was too high and would have to be lowered. He further testified that he was told by Lyons that some extra money would be generated which he and Lyons would then split. He testified there was only one discussion to that effect and that indeed he never did pay any money to Lyons. Murray’s evidence in other respects is hard to follow as I review the record, or that portions of it to which I was referred by counsel, and it seems fair to conclude that Mr. Murray's evidence contained inconsistencies or ambiguities that could well cause a Court to give his evidence reduced weight. The evidence had some evidentiary value to the accused's case however in that, if believed, it suggested an offer to Murray by Lyons in form somewhat akin to what the appellant alleged had been the offer and the arrangement with him. It does appear from Murray's evidence that he was not paid for the last $40,000 worth of work that he did, and that he had been told by Lyons that Red Hill did not receive the funds for the work so he would not be paid. It would appear from other evidence led at the trial that indeed Red Hill did receive the money, but that the money was used for other purposes. Murray testified that he had been continually told by Lyons that the money was not available. The substance of those allegations were put to Mr. Lyons in cross-examination, who denied them. In reply, Lyons was recalled and asked about the allegation of offering to split the money with Murray. His answer was to the effect that he did not remember that taking place, but there was nothing serious about it, but that in any event he never got any money from Mr. Murray.

Evidence was admitted at trial to the effect that as a result of the appellant's allegations to the investigation officers that payments had been made to Watson and Lyons, extensive investigations were carried out by Department investigators, the result of which was that no improprieties were detected with respect to other non-profit housing projects that Lyons and Watson had been involved in.

It should perhaps also be noted that the method used by the appellant to cash the Red Hill cheques, to take part of the money in cash, and to deposit the balance in his corporate account, involved paper work that would not divulge the fact of the cash portion going to the appellant. The cheque would be endorsed on the back. The deposit slip would record only the amount being deposited in the corporate account. There would be no written record of the cash received.

Findings of credibility

In the facts of this case, the finding of the Court with respect to credibility was crucial in terms of whether the payments to Watson and Lyons had been made as alleged by the appellant, or at least as to whether a reasonable doubt remained on that issue. The learned trial judge dealt with the question of credibility on pages 13, 14, and the first part of page 15 of the reasons. The consideration of credibility issues commences with the recital of the usual factors that a trial judge takes into account, and ends with a conclusion that on each of them the trial judge found Mr. Castelli to be wanting. With respect to the three main participants Watson, Lyons, and Castelli, there is no analysis of their demeanour on the stand, their biases, or any analysis of the other factors listed in the opening statement. Near the beginning of the analysis as to credibility, the reasons in the Court below contain a finding by the trial judge that the evidence of a Department of Revenue investigator was accepted, such evidence being that Mr. Watson and Mr. Lyons were both fully co-operative with the investigation, and had declared their positions under oath for the investigators, while the accused, on the contrary, "for reasons which he cannot, or will not, now articulate” refused to do likewise. The learned trial judge also in the analysis supporting the findings of credibility, describes how the appellant had been allowed wide latitude in terms of cross-examination throughout the trial and had in her judgment been unsuccessful in terms of producing any evidence as to the dishonesty of Watson and Lyons.

It is trite law that a Summary Conviction Appeal Court has no jurisdiction to retry the case. It is also trite to say that the Summary Conviction Appeal Court is not there to substitute whatever view of credibility it might form from reading therecord, for the findings of credibility made by the trial judge who had the benefit of hearing the witnesses during the trial. It is however the duty of the Summary Conviction Appeal Court to interfere even on a question of credibility where the basis for the finding of credibility is so tenuous as to fail to provide a reasonable basis for a conviction: R. v. Sailaley (1979), 52 C.C.C. (2d) 191 (Ont. C.A.). Of concern in this case is the impression that in dealing with the question of credibility, after reciting the normal list of factors but without analyzing how they apply to the witnesses in question, the learned trial judge appears to have bolstered her assessment of the credibility of Lyons and Watson by virtue of the fact that they had co-operated with the investigators and given a sworn statement to the same effect as was their evidence at trial, and to have found against the credibility of the appellant, in a very large measure, as a result of his alleged failure to co-operate with the authorities and to provide a sworn statement. The evidence of the investigator as to the cooperation demonstrated by Watson and Lyons was surely inadmissible as being evidence of a previous consistent statement, or even if admissible on some other ground, certainly was inadmissible for the purpose of bolstering credibility. Even in a trial by judge alone, a warning to oneself would have been prudent. To recite the co-operation of those two witnesses in the very portion of the judgment wherein credibility is assessed in their favour, leaves at least an impression that the evidence was improperly used for that purpose.

Perhaps more importantly, in my analysis it appears that the adverse finding of credibility in terms of the accused was in large part based upon his failure to co-operate with the authorities and to give a sworn statement during the investigation setting forth the evidence which he later gave at trial. It is the right of any accused person to exercise their right of silence, and that includes the right to do so during the investigative stage. If for any reason the degree of co-operation exhibited by any of these three people became relevant at the trial, perhaps as pertaining to some allegation of improper or incomplete investigation, it could not become admissible evidence on the issue of the credibility of the appellant. To assess his credibility, it would appear, in large part upon the fact that he did not co-operate with the authorities, as did the others, in my judgment is a serious error. Clearly the theory of the crown in this case with respect to the accused's explanation was that it was an explanation that arose after the investigation had commenced, and after the search warrant had been executed, and was a concocted attempt by the accused to meet what was unfolding against him. Similarly in R. v. Chambers, [1990] 2 S.C.R. 1293, [1990] 6 W.W.R. 554, 59 C.C.C. (3d) 321 there was an allegation by the crown that the evidence of the accused as given at trial was a concoction created to meet the crown's case. There on several occasions during cross- examination this allegation was put to the accused along with questions as to why the accused had not advanced the explanation that he gave at trial to the investigative authorities at an earlier stage. The Supreme Court of Canada at pages 1315-16 S.C.R., 340-41 C.C.C., clearly held that the right to remain silent exists at the investigative stage as well as at the trial. In that case the failure of the trial judge to strongly charge the jury in terms making it clear that the failure of the accused to co-operate or give a statement could not be used against him in terms of assessing credibility, proved fatal and a new trial was ordered. Similarly in this case, although a a trial without a jury, the trial judge not only failed to direct herself as to what limited use, if any, might have been made of the evidence, but clearly appears to have used it here adversely to the accused in terms of assessing his credibility. Indeed it appears to be the major factor.

Over and above that, in my judgment having reviewed the record, the comment in the reasons that the accused "cannot, or will not, now articulate” his reasons for refusing to co-operate in the investigation is simply inaccurate. Evidence was clearly led at the trial to the effect that the accused did not want to give a sworn statement was clearly coupled with evidence that investigators were also demanding that he wear a bodypack and that he speak to Watson and Lyons while so equipped in hopes of capturing comments from them in a recorded fashion. There was further evidence at trial that the appellant's refusal to give a sworn statement was on the advice of counsel, and that counsel had written to the investigators trying to seek clarification as to whether or not the appellant would still be charged if he agreed to give a sworn statement, but refused to wear a bodypack. The investigators, according to the evidence, referred that inquiry to crown counsel, but no answer was ever provided to the defence. In my judgment then, not only was it an error to in effect use the appellant's reliance on his right to remain silent as a factor adverse to his credibility, but with respect, it was compounded by a misunderstanding as to the evidence pertaining to the appellant's choosing to remain silent.

In the recent unreported decision of the Ontario Court of Appeal in R. v. Richardson, McCarthy, J.A. on behalf of the majority held as follows:

There is no need that the reasons of a trial judge be as meticulous in attention to detail as a charge to a jury. In moving under pressure from case to case it is expected that oral judgments will contain much less than the complete line of reasoning leading to the result. Nevertheless if an accused is to be afforded a right of appeal it must not be an illusory right. An appellant must be in a position to look to the record and point to what are arguably legal errors or palpable and overriding errors of fact. If nothing is said on issues that might otherwise have brought about an acquittal, then a reviewing Court simply cannot make an assessment, and justice is not afforded to the appellant.

Here the evidence given by the appellant's wife was of great significance to the defence. She not only corroborated the appellant's evidence that meetings with Lyons and Watson did take place, but in addition testified as to the existence of the list of payments that had allegedly been made to them, and more importantly, testified that she herself had delivered one of the payments to Watson, albeit by giving it to his wife as Watson was absent at the time. I have already indicated that Mrs. Watson denied receiving such a payment. The point is that the evidence was obviously extremely beneficial to the appellant, was relevant, and yet it is not mentioned at all in the reasons for Judgment. There is no indication in the reasons that it was considered. Similarly in the reasons for Judgment there is no reference whatsoever to the evidence of Mr. Murray who had testified to an attempt by Lyons to involve Murray in the same type of kickback scheme as that alleged by the appellant. In my judgment where evidence is led from witnesses who clearly support the appellant's position through their evidence, in whole or in part, on crucial issues, the appellant is entitled to some sort of reasons as to why their evidence was not accepted. At the least, there ought to be an indication that it was considered.

In Harper v. The Queen, [1982] 1 S.C.R. 2, 133 D.L.R. (3d) 546, 65 C.C.C. (2d) 193, at page 210 S.C.R. (D.L.R. 563), Estey, J. held that:

An appellate tribunal has neither the duty nor the right to reassess evidence at trial for the purpose of determining guilt or innocence. The duty of the appellate tribunal does, however, include a review of the record below in order to determine whether the trial Court has properly directed itself to all the evidence bearing on the relevant issues. Where the record, including the reasons for judgment, discloses a lack of appreciation of relevant evidence and more particularly the complete disregard of such evidence, then it falls upon the reviewing tribunal to intercede.

In the portion of the reasons wherein the question of credibility is discussed, at page 13, the learned trial judge found that there was intensive involvement of the Board of Directors and ongoing scrutiny by CMHC and the architect such that there was in effect no possibility of fraud by Watson and Lyons as they were aware that every expenditure would be scrupulously inspected. In my judgment the evidence is not to that effect. The only Board member called, other than Watson, as set forth in the factual recital above was Mr. Little. In light of that evidence, in my judgment the prospect of close supervision by the Board, at least on the evidence led at trial, was not such as to bolster the credibility of the crown's witnesses as against that of the appellant.

The learned trial judge in her consideration of the framing lumber contract, which is dealt with in the portion of the reasons wherein the facts are recited, is not considered later. It was obviously very relevant in that it was through that vehicle that the appellant alleged that the extra money for the kickback scheme was created. Indeed some of the evidence from Mr. Lyons as to how the contract came to be so inflated seems curious at least. There is no attempt in the reasons for Judgment to consider that peculiar development in terms of how it might assist the appellant and enhance his credibility.

In my judgment improper reply evidence was also led, albeit without objection, and without comment really by anyone. The evidence of the two subcontractors, Linde and Halstead to the effect that the trailer was no longer on Ventura Drive in late May and June, 1984 was not admissible in that the fact that the appellant alleged that three cash payoffs to Watson or Lyons had taken place at that trailer was known before trial, was the subject of evidence in the main part of the crown's case, and in my judgment was an error to allow the crown to call further evidence on the point in reply, with the accused having testified in between. The crown was in effect allowed to split its case. This evidence was of some significance in terms of credibility. Not only was it wrongly admitted, but it was also misapprehended in that of the three occasions alleged by the appellant as payoffs, the evidence led in reply only answered two. The third occasion was not affected by the reply evidence. This would not appear to have been appreciated in the factual recitals in the reasons of the Court below.

In my judgment, with respect, the findings of credibility are founded, at least on the record, on such a tenuous basis that they cannot be allowed to stand.

Was the money income?

On appeal before me it was argued on behalf of the appellant that the learned trial judge had erred in failing to determine whether the amounts received by the appellant, but which he testified he had paid to Watson and Lyons, were income so as to attract tax in his hands. The appellant’s argument is that the money simply flowed through the hands of the appellant, to Watson and Lyons, and that those two men were always the intended recipients of the money and simply used the appellant as their vehicle. Reliance is placed upon R. v. Poynton, [1972] C.T.C. 411, 72 D.T.C. 6329, 29 D.L.R. (3d) 389, at pages 417-18 (D.T.C. 6333-34, D.L.R. 397-98) as authority for the proposition that regard must be had to all of the circumstances surrounding the receipt of the money and the manner in which it was held. It would appear from the reasons in the Court below that although this issue was raised, it was not directly dealt with, and that the learned trial judge simply went on to determine whether. or not the moneys paid could be deducted as expenses. Reliance is also placed upon R. v. Burnett, (unreported), 1991. Reliance is also placed upon the R & J Machine and Engineering Limited and The Queen, (unreported) Salhany, J., 1982. That case involved a summary conviction appeal. The trial judge had found that the money was in fact paid as an under the table transaction in order to produce income for the corporate taxpayer appellant. On appeal, the Court found that the money did not have to be reported as income. There the funds had been received from another company which was doing business with the appellant company.

It would appear that there was enough of a legal argument as to whether or not the money was in fact income that the issue ought to have been dealt with in the Court below.

The deductible expense argument

It is common ground that in effect at all relevant times in this case was an Information Circular Number 76-4R2, dated January 31, 1986 wherein the position of Revenue Canada in terms of policy in respect of kickbacks was set forth. In the circular, it is indicated that expenditures described as "under the table" payments would be deductible even though they are without receipt, if the recipient of the payments is identified, and if the payment was made or incurred to earn income and the amount was reasonable in the circumstances. In R. v. Medicine Hat Greenhouses Ltd. et al., [1981] C.T.C. 141, 81 D.T.C. 5101, 59 C.C.C. (2d) 257, the Alberta Court of Appeal held that the crown bears the onus of proving that claimed expenses are not reasonable. At page 12 of the reasons in the Court below, the learned trial judge found "there is absolutely no evidence before me to demonstrate that the amount paid was either reasonable or necessary to generate income.” There being no evidence that the expenses were reasonable, or that they were unreasonable, it follows that the crown had failed to discharge the onus of proof in this respect and that the learned trial judge erred in finding, without evidence, that the amounts would not be a deduction within the terms of the Information Circular. The Court below found that the recipients had been identified. In my judgment there was also evidence that could have been relied onto find that the payments were necessary to generate income, namely that of Mr. Castelli. In my judgment it was an error to find that the amounts were not proper deductions, as the Court below reversed the onus of proof, and having found that there was no evidence, could not have concluded that issue in favour of the crown. The Court below, through mathematical calculation, determined that the amount paid constituted approximately 14 per cent of the total contract price and concluded that that was outrageously high. There was no evidence to support that finding. In my respectful judgment, that was not a matter that could be determined by the trial judge as a matter of opinion, and without evidence.

Mens rea

The learned trial judge dealt with this issue and concluded that the accused had the required criminal intent with respect to the payments he had received from Red Hill, and with respect to which payments the trial judge disbelieved him in terms of his alleged payments to Watson and Lyons. No assessment of mens rea was made in the event that the money had in fact been paid to Lyons and Watson as the appellant alleged, or in the event that the Court was left with a reasonable doubt on that issue. The issue of mens rea was only material if in fact the Court concluded the money was paid, or was left in a reasonable doubt with respect to that issue, and went on to find that it was still income, and that it was not a proper deduction. Only in that event would the question of whether the crown had proven mens rea be relevant. The issue was not decided in that context, because of the decision reached by the trial judge beforehand concerning credibility. In my judgment, there is a real issue as to whether or not the appellant" wilfully” evaded the payment of income tax if his allegations were accepted, or if they left the Court with a reasonable doubt, and hence the mens rea issue has to be dealt with. It was unnecessary to decide the issue of mens rea in the context of the Court having found that the appellant had received the funds from Red Hill, and that the appellant had not paid the amounts to Lyons and Watson. It was only if the Court found that the payments to Lyons and Watson were made that the appellant urged that there was an issue as to mens rea.

In the Burnett decision, cited earlier, at pages 554 and 555, it was held that the mens rea required in the case of income tax evasion is the specific intent to violate the Statute, as opposed to an intent to avoid tax.

Charge of income tax evasion—239(1) (d)

In light of the conclusions I have reached with respect to the findings of credibility and the basis upon which such findings were made, and given my remarks with respect to the other issues of income, deductible of expense, and mens rea, it follows that in my judgment the appeal from conviction on the charge of tax evasion should be allowed. A new trial would be necessary in order to reassess credibility. The only exception to this could be the $1,000 amount referred to earlier, which amount the appellant acknowledged receiving but admits was not paid to Watson and Lyons. With respect to that amount, the appellant not being able to say where it went, it may well be that a conviction could stand. Given that that amount of $1,000 was part of the amount alleged to have been evaded in count one, I would not propose to uphold a conviction for that amount as the ultimate effect may well be to preclude a new trial with respect to the larger amount that is contained in that same count.

Charge of making a false statement

This count related to the 1984 personal income tax return of the appellant. In that return there is nothing whatsoever mentioned about amounts that would bear on the facts of this case. The creation of a bad debt, and the subsequent writing off of the bad debt were all matters reported in the corporation's income tax return. If the appellant succeeded on a new trial with respect to the charge of income tax evasion, then there would be nothing by way of false statement in this personal tax return. In my opinion, this is not a proper case upon which to apply section 686(1)(b)(iii).

In the result, the appeal against conviction on both counts will be allowed, the convictions quashed and a new trial ordered. An order was previously granted extending the time within which the fine could be paid and accordingly an order remitting payment of the fine will be unnecessary.

I am indebted to both counsel for their thorough written materials and their able submissions.

Appeal allowed.