Her Majesty the Queen v. Thomas N Collins, [1984] CTC 592, 84 DTC 6292

Steele, J:—This is an appeal by the Crown by way of stated case from the conviction of the respondent on charges of unlawfully evading payment of income taxes for the years 1979, 1980 and 1981. The trial was based primarily on an agreed statement of facts. The respondent was convicted on all charges with the trial judge finding that the amount evaded was $7,488.40 for the year 1979; $7,570.79 for the year 1980; and $9,909.52 for the year 1981. These amounts were after an allowance for taxes paid to the United States of America and the State of New York. The trial judge imposed fines on this basis.

The respondent admitted that he failed to report income of $51,046.66 for 1979; $110,571.62 for 1980; and $157,593.02 for 1981, with the intention of evading the payment of tax thereon. This income was primarily earned in the United States of America, but also partially in Canada. The charges were laid on March 8, 1983. On May 11, 1983, the respondent filed income tax returns with the United States government and the New York State government for the relevant years and paid the appropriate taxes thereon. The Crown submits that the amount of taxes attempted to be evaded was not just the amount found by the trial judge which relates to Canadian taxes payable after allowing for foreign taxes paid, but the total of the two. Its position is that when the charges were laid the intention of the respondent was to evade all the taxes and his subsequent act of paying foreign taxes should not reduce the offence any more than if he had made restitution by payment on account of Canadian taxes directly to the Canadian government. If no allowance had been made for foreign taxes, the amount of Canadian taxes would have been increased by $10,006 for 1979; $40,868.86 for 1980; and $70,265.70 in 1981.

The trial judge has stated the following question:

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?

Section 239 of the Income Tax Act provides in part:

(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 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,

Subsection 126(2) of the Act provides in part:

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 business 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, [Emphasis added]

Counsel for the respondent states that there are three stages under the Income Tax Act in determining tax payable. First, Division B — Computation of Income, secondly, Division C — Computation of Taxable Income, and, thirdly, Division E — Computation of Tax. There is no real dispute with respect to Divisions B or C. The dispute arises out of the interpretation of Division E, as it applies to this charge.

Under Division E, according to the Federal government tax form T-2203, the total in federal income tax on taxable income is determined under subsection 117(5.1). From this a dividend tax crdit is deducted under section 121, as well as a federal tax reduction under subsection 120(3.6). To this is added a surtax under subsection 120(1). This determines the federal tax, as stated therein. From this, a federal foreign tax credit is allowed under subsection 126(2) to determine the federal tax payable. From this, deductions that are not relevant are allowed under subsections 127(3), 127(5) and 127(13), to arrive at the net federal tax payable.

The Crown says that the foreign tax crdit under subsection 126(2) is not to be considered in a criminal prosecution even though the other deductions or credits are to be considered. The respondent says you must consider all of the items, both positive and negative, under Division E in determining the tax payable and, in particular, the foreign tax deduction “for the year” under subsection 126(2).

The respondent has referred me to The Queen v The Bank of Nova Scotia, [1981] CTC 162; 81 DTC 5117 at 166 [5118], in which it was stated that subsection 126(2) was intended to relieve against double taxation by providing for a tax credit based on the amount of tax payable for a taxation year on income earned in a foreign country in that taxation year regardless of when the foreign tax was to be paid. I agree with that decision but am of the opinion it has no application to a criminal prosecution for deliberate evasion of taxes on all income wherever earned.

I was also referred to The Canada-United States of America Tax Convention Act, 1943, which is to prevent double taxation, and prevent fiscal evasion, and includes the exchange of information between the two countries. In my opinion, this Act prevents double taxation but does not interfere in any way with the right or obligation of either country to prosecute tax evaders. On the facts of this case, it is obvious that the respondent intended to evade tax on all the income wherever earned. It was only after he was charged that he paid the foreign tax, likely at a time before the United States was aware of any intended evasion. It is unlikely that the United States will lay any charges, but even if it does it does not preclude Canada from laying charges. For the respondent to get the benefit of subsection 126(2), he would have had to intend to report and pay US taxes. The agreed facts are entirely to the contrary.

Paragraph 239(1 )(f) provides for a penalty relating to the amount of the tax sought to be evaded. The respondent had no intention of paying United States taxes and sought to evade all taxes. Subsection 126(2) is only permissive to the taxpayer to deduct foreign taxes paid. He need not claim or ask for their deduction if he does not wish to. At the time of the charge, he had no such intention and therefore the payment of them after being charged is of no more benefit to him than a payment on account of taxes directly owing to Canada. It may affect the penalty to be imposed within the limits prescribed by the Act but it has no effect upon the charge itself. The time of the offence can be no later than when the charge was laid.

For these reasons the appeal is allowed, the decision of the trial judge is set aside, and the question is answered in the affirmative. The matter is remitted back to the trial judge for further consideration in light of the answer given.