Regina v. Redpath Industries Limited, Dominion Sugar Company Limited, [1983] CTC 132, 83 DTC 5117

Asselin, J S P:—The defendants were tried jointly before me on the following amended information, to wit:

REDPATH INDUSTRIES LIMITED — LES INDUSTRIES REDPATH LIMITEE (formerly Canada and Dominion Sugar Company Limited) of One Westmount Square, Suite 1212, Montreal, Quebec, and DOMINION SUGAR COMPANY LIMITED of 285 Merritt Avenue, Chatham, Ontario, between October 1, 1966 and April 1, 1972, at Montreal, District of Montreal in the Province of Quebec and elsewhere in Canada, wilfully evaded the payment of taxes imposed by the Income Tax Act, RSC 1952, Chapter 148 and its amendments for taxation years 1967 to 1971, both inclusive, to wit, by omitting to declare in their income tax returns taxable income of $7,404,635.37, thereby evading payment of $3,036,857.91 in income tax committing thereby an offence contrary to section 239(1 )(d) of the said Act.

Section 239 of the Income Tax Act, in virtue of which this accusation was laid, reads as follows:

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 offense;

(f) a fine of not less than 25% and not more than double the amount of that 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.

In accordance with section 244, paragraph 4 of the said Act, a copy of the Minister’s certificate was filed when the charge was laid and the originals produced as exhibit A.

At this point, we would do well to remind ourselves of section 27, subparagraph 2 of the Interpretation Act, RSC 1970, chapter I-23, which provides as follows:

All the provisions of the Criminal Code relating to indictable offences apply to indictable offences created by an enactment, and all the provisions of the Criminal Code relating to summary conviction offences apply to all other offences created by an enactment except to the extent that the enactment otherwise provides.

Although there are two accused in this case, in view of the proof made and the ultimate conclusion to which I come, I shall refer to Redpath Industries and Dominion Sugar as the accused, but it should be understood that I am referring to the two accused, unless the context requires otherwise.

At first, this case started out to be very complex, but as proof was led both by the Crown and the defence, it became evident that there was much common ground concerning the basic facts in this case, but what is mainly in contention is the interpretation that we must give to them.

During the whole period that concerns us, that is from October 1, 1966 and April 1, 1972, the accused were in the sugar business, trading worldwide and refining it in Canada, mainly in the Montreal region.

In 1959, a British company dealing in sugar, called Tate and Lyle, acquired some 56% of the voting control of Redpath, and Dominion Sugar was a subsidiary of Redpath. After this acquisition, the accused, through its parent company and various brokers who had head offices in England, conducted the overall buying and selling of sugar for the accused.

It is not necessary to go into all the various tactics and strategies that are essential to complete transactions in commodities, such as sugar, that are sometimes bought months and years ahead at future variable prices. Suffice it to say that Tate and Lyle on the one hand, and the accused on the other, either through direct contact or their brokers, operated in unison, to the greatest benefit of all concerned.

It must be said here that the business of dealing in sugar commodities is an extremely risky and complex one, that is not only conditioned by the vagaries of weather and prices, in such faraway places as India, South Africa, etc, but is also subject to shipping conditions, in various parts of the world. At this stage, I believe it is necessary in view of some of the points raised during the trial to state that it would be timorous on the part of anyone to intimate, much less suggest, that this whole commerce is rigged or somehow the seat of various unsavoury practices, including tax evasion.

Although majority control was held by Tate and Lyle in London, the accused, through their Boards of Directors and officers, enjoyed a generally autonomous existence and conducted their affairs in the best interest of themselves and the family of companies to which they belonged and which I need not enumerate.

In 1966, Tate and Lyle experienced money problems caused, in part, by currency restrictions imposed by the British government. At this same time the accused were buoyant with surplus funds.

Tate and Lyle wished to get its hands on the surplus funds, if possible, but many fiscal and bureaucratic obstacles were in the way. Amongst other solutions considered and rejected, was one whereby the accused would lend their surplus funds to Tate and Lyle because of the aforementioned currency restrictions in the United Kingdom; but there could be no guarantee that the funds would be transferred back, should the accused require them.

On the other hand, due to the accused’s autonomous control of their own affairs and the independence of their Boards of Directors, great care had to be taken to see that whatever arrangements might be made to transfer money from the accused to Tate and Lyle, they would have to be done in such a way that the conditions would be acceptable and advantageous to the accused.

One of the ways that was studied to help the parent company was the proposal to purchase two ships; but even this was judged insufficient. Finally, the accused and Tate and Lyle, agreed upon a scheme whereby the accused would incorporate an offshore corporation called the “Proposed Bermuda Corporation”, that would carry on many of the activities of the accused, thereby procuring a very impressive tax saving to the accused, which could be passed on to the parent company in London, England.

A detailed, and one might even say exhaustive picture of how the whole operation was to be brought about, is contained in exhibit E-17, which I believe necessary to reproduce “in toto”. (“C & D” represent the accused, “Canada and Dominion Sugar Company Ltd”, as they were then known.)

Confidential

PROPOSED BERMUDA CORPORATION

Background

Several months ago we were asked to consider various ways in which C & D’s surplus funds could be used, for a relatively short term, in assisting T & L’s tight money problems. Methods such as an equity investment by C & D in a T & L subsidiary, a direct loan, a C & D purchase and lease back of vessels, etc. were considered. At this time, the purchase and lease back of vessels by way of a “bareboat charter”, particularly if done through a Bermuda Corporation owned by C & D, was favoured. In considering the advantages to both parties, of such an arrangement, the idea of using a Bermuda Corporation for other C & D activities, both present and future, came into being. A meeting was held with our auditors, Messrs Keeping, Bell and Gick of Clarkson, Gordon & Co and Mr W R Booth of T & L to explore the concept of C & D purchasing vessels from T & L and leasing them back under a bareboat charter as well as the transfer of other activities to a Bermuda Corporation and the implication of such action on the financial statements of both C & D and T & L. Subsequent investigation by Mr Booth indicated that the transfer of vessels to C & D would present serious problems due to the difficulty of obtaining the necessary Treasury consent as well as the probability of a portion of the transfer price being subject to U K income taxes. The idea of a vessel transaction has, therefore for the time being, been set aside but it is still believed that serious consideration should be given to the establishment of a Bermuda Corporation for other activities.

Advantages of a Bermuda Corporation

The incorporation of an off-shore company for our purposes could be undertaken in either Nassau, Bahamas or Bermuda, the latter being favoured as the government of that country appears to be somewhat more stable and the services provided by the professional and banking members most satisfactory. In Bermuda, there are no taxes on profits, income or dividends, nor is there any capital gains tax. The Exempted Companies Act provides for the incorporation of “exempted companies” which are companies incorporated by non-Bermudians for the purpose of conducting business outside Bermuda from a head office in that country. The Exempted Companies Tax Protection Act provides for the Governor-in- Council giving an exempted company an undertaking that in the event of legislation imposing income or capital taxes being enacted, an exempted company shall be exempt from its application until 1986.

Under Section 28 of the Canadian Income Tax Act, any dividend received by a Canadian corporation from a non-resident corporation, more than 25% of the issued share capital of which (having full voting rights under all circumstances) belonging to the receiving corporation, would be non-taxable in Canada. The question of residence is somewhat complicated but if:

(a) management is conducted from outside Canada

(b) voting control be held outside Canada

(c) the non-resident company does not carry on a. business in Canada

then such a company is normally not deemed to be resident in Canada.

As may be seen, it therefore follows that dividends paid by a Bermuda company to a Canadian shareholder who owns more than 25% and less than 50% of the voting stock of the paying company and otherwise satisfies the foregoing test of residence, will not have been subjected to Bermuda taxes and furthermore, will not be liable for Canadian income taxes by virtue of Section 28. This situation vis-a-vis Canada and Bermuda is unlike the impact of taxation found on dividends flowing into Canada from countries with whom Canada has a tax convention.

It therefore follows that where a Canadian resident possesses income producing off-shore activities, it will be to his advantage to collect these profits in a Bermuda Corporation, and receive the income via the dividend route rather than in a fashion which would attract Canadian income taxes. We understand this device is utilized by many substantial companies who have bona fide trading activities carried on outside Canada. Examples of the type of activities are shipping and the handling of imports and exports to and from Canada. We believe that activities such as these are carried on by Canadian Pacific Railway, Melchers Distilleries, Canada Steamship Lines, Marshall Steel to name but a few.

Application of Concept to C & D

As mentioned earlier, the thought of a Bermuda company for C & D arose from our consideration of purchasing vessels from T & L and leasing them back on a bareboat charter. Additional activities, which might be transferred to such a company, are certain transactions conducted by the raw sugar purchasing department and the company’s portfolio of temporary investments.

The raw sugar purchasing department has from time to time the opportunity to purchase cargoes at substantial discounts. These discounts are now taken as profits in the raw sugar purchasing department and subject to Canadian income taxes. If the Bermuda Corporation were the buyers of such cargoes, they could in turn sell the cargo to C & D at market prices, taking the discount as its profits.

With reference to our investment portfolio presently represented by interest bearing securities, the same income if owned by a Bermuda Corporation would only suffer Canadian withholding taxes of 15% and the remainder could flow back to C & D via the dividend route without attracting further taxation. At present, this income suffers a 52% Canadian corporate income tax.

There may be other items of income presently being earned by C & D and subject to full tax rates which have foreign trading implications, such as our export sales, and which could be transferred to a Bermuda company. This would require further study which has not been undertaken as of this date.

In discussions with our auditors and counsel, both parties stress the necessity for having bona fide off-shore activities. They felt that shipping was a highly suitable activity for such a company and suggested that, should our arrangements with T & L re vessels not come to pass, we might attempt to arrange a similar transaction with some other reputable company. If there were no other activity than the occasional raw sugar purchase, the investment income should be restricted to some proportion which would represent a volume of business not significantly greater than that arising from raw sugar activity.

Suggested Capital Structure

The laws of Bermuda permit virtually any form of capitalization. It has been suggested that an investment along the following lines would meet the requirements of Section 28 of the Income Tax Act and residence interpretation.

(1) Class A — Voting Preferred Shares redeemable at par. These shares would be issued to non-residents and would be redeemable only at the option of the shareholders.

(2) Class B — Non-Voting Preferred Shares redeemable at the option of the shareholders at some substantial premium. These shares would be held by C & D.

(3) Common Shares with a nominal par value. These shares would be voting and would be held by C & D. The By-Laws of the company would provide that the common shares would have the right to force liquidation of the company at any time and that a vote of say 4 of the total votes would be required to authorize any changes in the company capital structure.

The voting ratios would be 60% to the Class A voting preferred shares and 40% to the common shares. Accordingly, the common shares would not have control of the company. However, they would have the power to liquidate such company were it deemed advisable.

It is suggested that C & D could increase or diminish its investment in the Bermuda Corporation by taking up unissued Class B stock or by the redemption of same. Income may be transferred at will by the declaration of dividends on Class B stock or by the redemption premiums thereon.

Effects on Financial Statements

Under the proposed capitalization, the Bermuda Corporation would not be a subsidiary of C & D under the Canadian Corporations Act. Its accounts need not, therefore, be consolidated with those of C & D and the investment could be grouped under the caption “Other Investments” on the company’s balance sheet. Current assets would be reduced to the extent of this investment as would working capital and the working capital ratio affected accordingly. However, with our extremely strong current position (current assets of $27,000,000 against current liabilities of only $6,000,000) it is not considered that such investment would affect the credit position of the company.

On the other hand, our auditors advise that they have had legal opinion which indicates consolidation, while not required by the Canada Corporations Act, is not prohibited, and therefore the question is one of which method gives the best presentation.

If the accounts are not consolidated, dividends received from the Bermuda Corporation would be grouped with “Interest Income” in the P & L statement. To the extent that dividend income from Bermuda supplants interest income, there would be no distortion. The portion of dividend income representing raw sugar discounts would tend to increase costs of sales, as present discounts are included in this figure, but it should not significantly distort the ratio between sales and cost of sales. Dividend income arising from shipping or other ventures would again be a substitute for interest income now appearing in the statement.

Should dividends received be less than the net income of the Bermuda company, our investment should be written up to an equity basis and investment income credited accordingly.

We believe it to be the opinion of Mr W R Booth as well as that of our auditors that under the U K Companies Act, C & D’s investment in a Bermuda Corporation would be treated on a consolidated basis as this Corporation would be considered to be a T & L subsidiary. This arises as the U K Act defines equity capital differently than does the Canadian Act and accordingly, C & D’s total investment would be deemed equity capital. As T & L control 56% of C & D, they would be in a position to treat the Bermuda Corporation as a subsidiary (more than 50% control) and accordingly, consolidate its accounts. C & D’s investment would, therefore, have no effect on the Group working capital.

Prevention of Defalcation or Misappropriation of Funds

As with any substantial investment, appropriate controls must be established to prevent misappropriation particularly where C & D would not have outright voting control.

It would appear that while it was originally suggested that local Bermudians owned all Class A Voting stock (60% of the votes) it now seems there would be no reason why a portion of this stock, representing say 20% of the votes, could not be registered in the name of someone within the Tate & Lyle Group — perhaps Galban Lobo or Eastern Sugar Trading might be suitable candidates. If this was desired, it would mean that no single group would exercise control and, therefore, it would require a combination of two of the three interests to take action.

The distribution of voting power would be as follows:

It has been suggested that the local Bermudians be representatives of the bankers (Bank of Bermuda) and the law firm acting as counsel (Messrs Conyers, Dill & Pearman).

At the time of incorporation, by-laws would be prepared which would require two-thirds of the voting shares, cast at an annual or special meeting of the shareholders to

(a) elect directors

(b) change the number of directors

(c) alter the powers of the directors

(d) change the capital structure

(e) apply for alterations to the charter

(f) change by-laws, and

in general, to effect changes which may not be desired by C & D.

In addition, the by-laws would require that two-thirds of the directors must be in favour of any resolution passed at their meetings for it to become effective. Bermuda law permits a director to vote as proxy for an absent director.

The foregoing proposals should of course be studied and approved by an attorney familiar with Bermuda law.

It is suggested that there be six members of the Board of Directors should a Group representative be a shareholder, otherwise five. There should be three Bermudian directors and two C & D directors. A quorum of three members would be required.

At the first meeting of Directors, a resolution should be passed appointing the Bank of Bermuda, investment manager, and instructing them as to the nature of investments to be held. For example, the investments could be limited to obligations of the Federal or Provincial Governments having maturities of not less than one year or more than five years. The Bank of Bermuda would appoint the Canadian Imperial Bank of Commerce its agent to effect security transactions upon instruction.

A further resolution would require that all securities be held for safekeeping in the Canadian Imperial Bank of Commerce and that securities may only be removed from safekeeping to effect settlement on sale. All securities would be registered in the name of the Canadian Imperial Bank of Commerce — bank nominee.

A bank account would be maintained with the Canadian Imperial Bank of Commerce, Montreal and all monies received on sale of securities deposited therein. Similarly, all payments for securities purchased and delivered for safekeeping would be charged against this account. The Canadian Imperial Bank of Commerce would be authorized to effect payment for securities delivered (of nature approved by the Bermuda Board) and to deposit all proceeds from sales of securities. All cheques would require two signatures, one of which would be a C & D representative.

A modest balance would be kept in a Bermuda account to provide funds for payment of local expenses.

Messrs Arthur Young, Clarkson, Gordon & Co maintain an office in Bermuda and it is proposed that they be appointed auditors. It is also proposed that they perform the necessary bookkeeping services.

Exchange Control

The Bermuda Currency and Exchange Control Board is-an organ of the Government. Within the overall sterling area framework and general policy, it is autonomous and therefore will consider each bona fide case on its own merits, in Bermuda’s best interests and those of the sterling area as a whole.

At the outset, the Bermuda attorneys and a C & D representative will discuss our proposed plans informally with the Board. The Board, upon written application, will then determine the designation or status of the proposed company which will be either “resident” or “external”. Because the proposed company will be funded in Canadian dollars and operating outside the sterling area, it will be designated “external” and permitted to deal freely with its dollar and other currency assets through the bank.

Extra Profits for C & D

If the activities of the Bermuda company were initially restricted to raw sugar transactions and the holding of say $2,000,000 of bonds yielding 6%, the additional net profits which would accrue to C & D in the first year, would be as follows:

	Net after taxes
Purchase of 75,000 tons raw sugar at discount
of approx 20¢ per 100#	$335,000	$161,000	$335,000
Income on bonds	120,000	58,000	$102,000
	$455,000	$219,000	$437,000
Deduct incorporation and other expenses			13,000
			$424,000

*After deducting non-resident withholding tax of 15%

**Expenses have been estimated as follows:

Incorporating:

Stamp duty — % of 1% of capital	$5,000
Legal fees including value of shares
donated to Bermudians	3,000	$ 8,000
Operating:
Annual fees	$ 600
Audit and accounting	1,000
Directors fees	2,000
Travel, telephone etc	1,400	5,000
		$13,000

As may be seen, it is expected that the creation of a Bermuda Corporation would improve C & D’s net profit by approximately $205,000 in the first full year of operation.

General

While it has been stated that Bermuda enjoys a politically stable climate, it is recognized that this could change or that new legislation could effectively discourage the continuing operation of the proposed corporation. However, in the event of a serious change in the political climate it is believed that we would receive sufficient warning to withdraw our investment, the time required being not more than a day or two.

Similarly should new legislation be enacted, either by the Canadian or Bermudian Governments, it is to be expected that we would have some warning so that capital could if necessary, be withdrawn. While our tax advisors are not aware of any particular intention on the part of the Canadian Government to amend section 28 of the Income Tax Act, this could always happen. However, while such an action might nullify the tax advantages, it is not likely to be done retroactively. It would therefore create no penalty and the only loss would be expenses incurred which would be covered by one or two months’ operations.

Conclusion

It is recommended that management be authorized to proceed with the incorporation of a Bermuda company for the purposes set forth in this memorandum; the initial capitalization to amount of $15,000 (minimum required by Bermuda law) and that this amount be later increased to a sum determined by the Board.

November 11, 1966.

As we can see, the purpose of this whole operation was to find a method to transfer funds from the accused to Tate and Lyle at a minimum of fiscal costs to the accused, to avail themselves of the Provisions of paragraph 28(1 )(d) of the Income Tax Act, which is herewith reproduced:

28 (1) Where a corporation in a taxation year received a dividend from a corporation that

(a) was resident in Canada in the year and was not, by virtue of a statutory provision, exempt from tax under this Part for the year,

(b) was exempt from tax under this Part for the year by virtue of the provision exempting investment companies,

(c) had never paid tax under this Part by virtue of provisions allowing a deduction from tax on income derived from the operation of base metal, strategic mineral, metaliferous and industrial mineral mines during the first three years of production,

(d) was a non-resident corporation more than 25% of the issued share capital of which (having full voting rights under all circumstances) belonged to the receiving corporation, or

(e) was a foreign corporation more than 25% of the issued share capital of which (having full voting rights under all circumstances) belonged to the receiving corporation,

an amount equal to the dividend minus any amount deducted under subsection (2) of section 11 in computing the receiving corporation’s income may be deducted from the income of that corporation for the year for the purpose of determining its taxable income.

In other words, the accused decides to set up what is commonly called an offshore company, which in this case would be headquartered in Bermuda.

Exhibit E-38 sheds more light on the intentions of this group of companies and it is reproduced herewith in its totality.

November 24th, 1966

J O Whitmee, Esq,

The West Indies Sugar Company Ltd,

Calton House,

1 Knightsbridge Green,

London SW1,

England

Dear Mr Whitmee:

As you know, we have been examining the way in which a Bermuda corporation would work in regard to raw sugar buying, and following is our concept. We intend to call Michael Attfield this morning to put him in the picture, and we will ask him to brief you. We are also asking Czarnikow to talk with Michael on some of the details, and we hope that the telephone will enable us to fill in the blanks of what is necessarily a hurried letter to you, and to answer any queries you may have.

1. C & D would notify Bermuda representative in London that under certain terms C & D is a buyer for 100,000 tons of Natals.

2. Bermuda representative bids Czarnikow (Natal’s broker to C & D) on basis advised by C & D. The bid could go either to Czarnikow London or Montreal, but from the standpoint of maintaining the usefulness of the local people, Montreal may be preferable. In any case this is not a major point and can be decided later.

3. If bid accepted, the contract would be issued in London as usual, to Bermuda Corporation, and signed in Bermuda.

4. Bermuda Corp, would then issue contract from Bermuda to C & D, embodying the same terms, but at a different price.

5. Czarnikow Montreal would be appointed as local agents for the Bermuda Corp. at a fee, and calls would be made through them. They would notify their London office, who would notify the London Bermuda Corp. representative and Natal. It would probably be desirable to have periodic records of pricing calls sent to Bermuda to have on file there.

6. On arrival of a ship, Czarnikow would present documents to a bank, who would be empowered to accept for Bermuda Corp. The bank would notify C & D, and would present documents to C & D including pro-forma invoices at the different price.

In actual practice this would likely all be done simultaneously, so the bank would not have to advance any money, and we would be able to examine the documents before any acceptance. Customs invoices would have to be transferred, but this does not appear to be any great problem. Proper insurance coverage would also have to be maintained, but there will be ample time to consider such details.

7. Final invoices would be made up by Czarnikow to Bermuda Corp, and also by Czar as Bermuda Corp agent at the enhanced price to C & D.

After full discussions here it was decided that as Czarnikow are to be brought into this, it was necessary to be quite frank with them, and to depend on their being discreet. We therefore had Leslie Palmer in and went over the proposed Bermuda Corp sugar operations with him so far as seemed important to their understanding of the modus operand!. He appeared quite willing to co-operate in all respects and felt his London office would agree. He had one or two useful comments, one of which was that while Natal would know that the sugar was to go to C & D, they would probably want some assurance as to the financial capability of Bermuda Corp. We told him this could be arranged as soon as we knew the requirements of his principals. He also mentioned the possibility of dealings with south Africa being banned by the sterling block as Sangster is advocating. This is something that you can evaluate better than we can.

We had in mind pricing 2-4 cargoes in Sterling to offset our short paper position, but there is a possibility that there may be some sort of restriction on this. Norman would like to do at least part of the contract on an fob basis in order to create a greater flow of business through Bermuda Corp, but the objections are firstly, the freight risk we would assume, secondly, the poorer service we would probably get, and thirdly we had thought it would be disadvantageous to Natal, and therefore a further obstacle to their accepting an already very tough bid. On the other hand there would be the benefit to Montships. However, Leslie seemed to think it might be an attraction to Natal, as they could bury any discount more easily, and it would not show so flagrantly as on a cif contract. The freight risk might be got over by booking a block as Natal do now; the Colonel might take it on, if it were desirable from a group standpoint; or if not, probably Thordahl, who do it now. Further thought will have to be given this.

In thinking of Natal, one point I should mention, even though the possibility might be very remote, is the situation we would be in if South Africa were banned from Canada and we had priced several cargoes ahead on a rising market. It does not seem likely, but South Africa could be drawn more closely into the Rhodesian situation, and it is difficult to foresee what might happen. The Preference clause could not protect us against market losses on sugar they could not deliver.

We also enclose a summary of what we intend to bid Natal, subject of course to any further thoughts or suggestions in the meantime. In view of everything it seemed best to take Leslie fully into our confidence, to explain that these were the lines on which we were intending to bid, but that for reasons he could understand, no bid could be forthcoming until Bermuda Corp was in being, which would probably be another 2/3 weeks. He was expecting a tough bid, so was not unduly shocked. He is calling London this morning and probably David Harcourt will be around to see Michael.

Michael Fletcher from Swaziland is appearing today, after we declined their offer, and unless they have something startling to put before us we will merely repeat that we do not know what the situation will be this year (are not in a position to buy at this time), and can make no promises. In any case we will consult before doing anything with them.

As mentioned above, we have not had time to polish our thinking, or to give much thought to some of the points, but as time is important, we thought it best to get this off to you as quickly as possible, and discuss it by telephone.

Yours truly,

H E Dennis

“It might be possible to include a clause to the effect that if unable to supply by reason of Government intervention, Natal would buy and deliver other sugars.

The accused were very careful to consult both their legal and accounting counsel and on page 3 of Exhibit E-17, we read as follows:

In discussions with our auditors and counsel, both parties stressed the necessity for having bona fide offshore activities.

At this point, it is important to note that even the Crown admits that the accused were properly advised because we read at page 33 in the factum of the Crown the following words:

It seems obvious that the Redpath’s management sought and received from its accounting and legal experts the proper fiscal advice as to what was required for it to benefit from certain tax exemption sections of the Income Tax Act.

We make those words our own. However it must be immediately pointed out that the Crown having, with great fairness, admitted the propriety and legality of the advice given to the accused contends nevertheless that the latter, instead of adhering to this advice, conducted themselves otherwise and thereby contravened the law.

Exhibit C-14 sheds some light on how the officers of the companies intended to proceed. On October 20, 1966, minutes of the Policy Committee read as follows:

Mr Booth said that he was satisfied that under the present tax regulations such dividends would neither be taxed in Bermuda, where there was no income tax, nor in Canada when received by C & D. Subject to final confirmation that there would be no tax on the interest passing as income to the Corporation, this meant that there would be a substantial tax saving. But there were two important provisos to the arrangement.

The first was that the Corporation could not be controlled by C & D it being necessary for control to rest in Bermuda. To achieve this without significant dilution of the dividend to C & D, and with safeguards for their funds, required a complicated company structure. Three classes of shares were envisaged: Class A Preferred shares to be held locally would give 60% of the voting rights but only nominal dividend rights; the Common shares with the main dividend rights to be held by C & D, and these would also give the right to put the company into liquidation; and finally, Class B, non-voting, Preferred shares to be held by C & D and, being redeemable at a substantial premium, would enable funds to be withdrawn as required. It had to be appreciated that although the final safeguard of putting the company into liquidation would rest with C & D, day to day control of substantial investments would legally pass out of C & D’s hands. But C & D were satisfied that the controlling shares could be put into safe hands such as local but internationally connected banks.

It was also necessary for the Bermuda Corporation to have a bona fide trading reason for its being set up. It was thought that this requirement might be met by its undertaking C & D’s raw sugar trading, and there was also the suggestion of its becoming a shipping company through the purchase of some of the UK fleet.

Mr Booth said that although there remained the chance that the Canadian Authorities would not accept the new company or that future legislation would eliminate its advantage, the proposal seemed workable and legally in order. But the Committee would wish to consider whether they felt it right to make use of this means of saving a substantial amount of tax.

It would seem from this extract of the minutes that the Policy Committee were prepared to make every effort to satisfy Canadian exigencies to be able to take advantage of the relevant legislation. Exhibit C-16 reveals a report made by the President of Redpath to the Tate and Lyle Policy Committee that reads as follows:

The C & D Board, including its members in Canada, did not wish to go ahead with the Bermuda Corporation until they were satisfied of the propriety of so doing. This meant that a good trading reason would have to be found for the setting up of the Corporation. Sugar trading and insurance were among possibilities under consideration, but it might be some time before a proper basis could be decided.

However in perusing E-38, we note that although the whole scheme is laboriously set out, the author states,

We have not had time to polish our thinking, or to give much thought to some of the points.

In any event, the Bermuda Corporation was set up and was thereafter referred to as “Albion” which appellation will serve for the rest of this judgment. Once created, Albion was declared to be in the raw sugar purchasing business and the accused would purchase some of its supplies from it.

We must now look at Albion in its reality. This company has been variously referred to as a “dummy” corporation, a “puppet” company and other such like terms.

In effect, it had no officers, no employees, no assets, no warehouse, not even a telephone. Its total annual expenses or budget was extremely low when compared to the volume of business that it purported to carry out. It is clear that its operations were carried out in Montreal by the accused, with Tate and Lyle in the background. It did have a Board of Directors, but actual operating control was confined almost exclusively to the purchasing department of the accused here in Montreal.

It is also clear that Albion was created at first for multiple purposes, but finally its role would be the handling of the accused’s raw sugar purchases which would be negotiated by Redpath management, the whole to take advantage of the then paragraph 28(1 )(d) of the Income Tax Act (supra).

Without commenting fully on all the legal implications and ramifications that can be deduced from a study of section 28, we can say that a Canadian corporation, such as the accused, which sought a tax exemption for dividends received from an offshore corporation, had to own at least 25% of the issued shares having full voting rights. This was recognized by the accused in Exhibit E-17 (supra).

As it finally worked out, 40% of the voting Class A Preferred shares were placed in the hands of Bermudian bankers and lawyers, while another 40% of the voting shares were held by the accused and the remaining 20% were registered in the name of a Tate and Lyle subsidiary company. The actual incorporation took place under the laws of Bermuda on January 13, 1967. It would seem that the company never had any sort of physical installations and was never even listed in the phone directory of Bermuda.

Mr lan Campbell, an accounting expert testifying on behalf of the Crown, Studied the financial statements of Albion, and gave the following assessment which is not really contested:

In the financial statements as presented to me here, the balance sheet has shown to me that there are no furniture and fixtures owned by this company. I find in my statement of revenue and expenditures that I do not have normal operating office expenses such as telephone and telegraph. What I do find is legal, secretarial, accounting and audit expenses in there which indicates to me from experience in dealing with companies, offshore, that tend to show to me that the company is operating through professional help hired in the country to maintain an office, rather than maintain a permanent office of its own.

Deposition of lan Campbell, March 23, 1978.

At this point, a brief look at how the operations were actually carried out would seem to be warranted. It was obviously the intention of this group of corporations, that is Tate and Lyle, Redpath, Dominion Sugar and Albion to maximize the operations through Albion so that the profits accruing would not thereby be taxed in Canada and could then be transmitted to Tate and Lyle.

However, as already noted, Albion had no telephone, no employees and no facilities with which to purchase sugar worldwide.

The way that this was effected was that the raw sugar purchasing departments of Redpath, headed by a Mr Howard Dennis, would carry out all negotiations with a sugar broker, but the purchaser would officially be Albion. Howard Dennis was authorized, by Redpath’s management, to negotiate Albion contracts as well as Redpath’s. Once this initial transaction had been accomplished, papers were then drawn up by which Albion then contracted to sell the same sugar to Redpath Once these documents had been prepared, copies would then be sent to the Albion company’s files, held in a Bermuda law firm and copies would also be held in Redpath’s headquarters, here in Montreal, and the transaction would then take place according to the terms set out therein.

In other words, at all times, it was the accused, here in Montreal, that was wholly in control of the operations and negotiations supposedly carried out by Albion. The profits realized would be treated as “offshore dividends” and thereby subject to the provisions of the then section 28 of the Income Tax Act of Canada. We must emphasize that at all times, Redpath management considered Albion an extension of itself. It couldn’t be otherwise since Albion didn’t have so much as an employee.

During the period under review, there were three main sugar refining companies in Eastern Canada: “Atlantic”, “Saint-Lawrence” and “Redpath”. Raw sugar was purchased in various parts of the world and refined in Canada, to be sold to the Canadian public.

There was an accord called the “Commonwealth formula” which was adopted by all Commonwealth raw sugar suppliers and by Canada’s refiners. It meant that raw sugar would be sold at the spot price or the LONDON DAILY PRICE (LDP), to which was added a duty preference and freight.

The LDP was the price fixed daily by a London committee of sugar brokers and purchasers as the spot price of the day.

Raw sugar producing countries, which belonged to the Commonwealth, enjoyed a one dollar duty preference over raw sugar entering Canada from “MOST FAVOURED NATIONS” (MFN).

The tax returns of the accused for the fiscal years ending September 20, 1967, 1968, 1969, 1970, 1971 were filed as Exhibit E-1. In these exhibits, Albion is clearly identified and declared as being Redpath’s affiliated company and Dominion Sugar is referred to as being a subsidiary of Redpath.

Exhibit E-2 is the income tax returns for the same fiscal years as Dominion’s, and there again, Albion is referred to and declared as Dominion’s affiliated company, while Redpath is described as Dominion’s parent company.

These ten returns form the basis of the Crown’s charge of tax evasion against both accused corporations.

As we make it out, the case for the Crown rests upon two theses:

1. That the creation and maintenance of Albion was a “sham” from beginning to end;

2. That by a system of simulated transactions, meaningless documents, and secret codes, the accused actually carried out a tax evasion scheme.

Before dealing with the weightier question of “sham”, I will deal with the second of the two theses upon which the Crown bases its case.

As stated at the beginning of this judgment, the case started out to be very complex, with the production of an enormous amount of documents. But, from my understanding, of this mountain of evidence, as explained by the various witnesses, a certain number of realities stand out in my mind.

The first is that we must not demand of the officers of the accused to have a thorough grasp and understanding of the niceties of corporate law and the dividing line between corporate entities. It is certain that at times, some of the officers of the accused were somewhat confused on these points, but they clearly understood that their instructions were to route as much of their business as possible through Albion.

After consideration, I have come to the conclusion that none of the documents placed before me constitute evidence of a criminal intent on anyone’s part to mislead the authorities.

I am rather of the opinion that the officers of the accused, in their attempt to carry out the instructions and opinions that they had received from their legal and accounting experts, tried to satisfy what they considered to be the exigencies of section 28 of the Canada Income Tax Act.

I say this, because to take one lone transaction, or two or three transactions, and extrapolate them or study them out of context, is fraught with the danger of reading into such a transaction an element of illegality on a much higher and more global scale than in reality exists.

As an example of the above, we may mention the Exhibits E-17 and E-38. One can read many interpretations into what is stated in these documents, but in my view, they are nothing more than an extension or a fleshing-out of the primordial intention of creating an offshore corporation, acceptable to Canadian tax law. On the whole evidence placed before the Court, I find it difficult to give them any other interpretation.

Therefore, concerning the conduct of the officers and employees of the accused, I can find no proof of acts or intentions to do otherwise than to carry out the stated purpose of the setting up of the offshore corporation in Bermuda, and that at no time can any of them be taxed with illegalities, subterfuge, false entries or other such reprehensible acts usually perpetrated for the purpose of tax evasion.

Much was made of the fact that secret codes were used between the accused and its parent company in London, England, or with, or through its brokers. These codes were used in such a way that only certain employees or officers of these companies or brokers would be aware of the real transactions that were being carried out as opposed to the apparent transactions. In any event, outsiders would not be privy to what was actually going on.

When one comes face to face with codes, one immediately is inclined to suspect that some nefarious plot is afoot; but in the case at hand, I come to the conclusion that one could suspect that the codes could be used for illegal purposes, but nevertheless, I have not found any evidence of the slightest probative value to show that the codes were in any way involved in tax evasion. They were rather part of the ongoing commercial transactions between England and Montreal, and that necessarily included Bermuda. No evidence was led to show that the codes were utilized contrary to the interest of Canadian fiscal authorities, or at least no relationship or “liens” were shown between the use of the codes and tax evasion.

Many explanations can be given for the use of the codes, and some of these explanations are innocuous, such as those advanced by the Defence: that the codes were merely used to prevent competitors from knowing the accused’s position in international markets. Others fall into the realm of hypothesis and conjecture and are therefore of no concern to this Court.

Both Mr Attfield and Mr Dennis were quite clear and categorical in stating that the introduction and utilization of the codes were not accompanied by any discussion or understanding that they were to be used for tax purposes. I accept their testimony at face value. But even without their testimony, it is clear that the Crown has failed to show any relationship between the use of the codes and tax evasion. Crimes against other statutes may hsve been contemplated or envisaged, but no proof was led by the Crown on this point either.

I now must deal with the main “cheval de bataille” of the Crown, that is that the creation, maintenance and operation of Albion was a “sham” from beginning to end.

But, before entering into that domain, I would like to make the following points, which I believe are pertinent and germane to what is to follow.

It is neither deceitful nor illegal to set up what are sometimes called “puppet” or “dummy” companies that are without employees etc, so long as no deceitful or illegal means are used in so doing.

Throughout this whole case, it must never be forgotten that the accused stand before the Court on a charge of tax evasion and not “refusal to comply”.

It does not necessarily follow that because the accused and the Bermuda corporation had “mutually supportive interlocking directorates” that this is necessarily illegal or even a sign of tax evasion. There is no law that prevents the existence of affiliated companies and it is taken for granted that they will work together for their mutual davantage.

To come to grips with the main thrust of the Crown’s case, we must underline, with the greatest emphasis, the fact that there are Civil law provisions to the Canada Income Tax Act, as well as the Criminal law provisions. It necessarily follows that a taxpayer can be considered a delinquent, under the Civil law provisions of the Act, and wholly innocent of any wrongdoing under the Criminal law provisions; but the converse is not true.

This must be borne in mind when considering the jurisprudence that will be cited since, on the subject of “sham”, with very rare exceptions, all the jurisprudence is in the Civil law realm.

In the case at hand, the Crown, as I see it, is trying to draw the concept of “sham” into the realm of Criminal law, or at least make this particular case of alleged “sham” into a criminal case. We will therefore have to examine this concept of “sham” or “simulacre” to decide if it has any application in this case.

But, before so doing, I believe it necessary to call to mind certain general principles, on the subject of alleged tax evasion.

Tax motivation in the creation of companies is legal. GOWER’S “Modern Company Law’, Second Edition, in 1957 stated:

Nevertheless, it is a trite observation that today taxation is one of the main factors for consideration in any legal transaction and this is especially true of company law, as the following pages may reveal. Indeed, it is probably fair to say that in the last thirty years more companies have been formed because of the real or imagined taxation advantages than for any other single reason. (at p 161)

And, we would do well to look at the words of Lord Tomlin in Duke of Westminster v CIR, [1936] AC 1:

(The taxpayer) is entitled, if he can, to order his affairs so as that the tax attracted under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay more.

Or as expressed by Lord Sumner in CIR v Fisher’s Executors, [1926] AC 395, at 412:

My lords, the highest authorities have always recognized that the subject is entitled to so arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law and that he may legitimately claim the advantage of any express term or of any omissions that he can find in his favour in the taxing acts. In so doing, he neither comes under liability nor incurs blame.

It follows that the taxpayer is not obliged to show a “business purpose” as against a “tax purpose” to justify his claim for a reduction in taxes.

The concept of sham is best set forth in the leading case of Snook v London & West Riding Investments Ltd, [1967] 1 All ER 518 at 528:

. . . it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to the third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

Since this is a criminal law case and the charges that are before me are of a criminal nature, we must immediately bring to mind the case of RA v Baker, [1974] 16 CCC (2d) 126, where the Court stated:

Evasion required an element of artifice, craft or strategy . . .

To examine the case for the Crown more closely, I believe we can state that the Crown contends that the creation and use of Albion was an artifice, a sham, a scheme wilfully and fraudulently adopted by the accused to mask some of their profits and to present them as being profits of Albion, and that the said company was a mere pretence, fraudulently employed by the accused to reduce their taxable income in an illegal way.

The Crown states emphatically that it believes that if it has established that Albion is a sham, then it necessarily follows that its operations and profits are those of the accused, and it has therefore fulfilled its burden under the Law (Notes and authorities of the Crown, page 106).

In defence of its thesis, the Crown cites the case of Dominion Bridge Company Ltd v The Queen, [1975] CTC 263; 75 DTC 5150, where Decary, J stated at 269:

The issue appears to me as one solely of fact: are the operations those of the appellant or of Span? Such an issue is not per se a fiscal one, but its consequences are.

To incorporate a subsidiary company wherever it might be, in a tax or tax free country, is, in my view, immaterial. The intent of prompting such an incorporation, the way the object is implemented and the uses to which the subsidiary is put are pivotal for deciding if the subsidiary acted on its own or if the appellant used the stratagem to camouflage and hide its own operations.

and he further continues:

The means resorted to by the appellant for the operations of the business of Span and the manner in which Span was controlled and managed by the appellant preclude my being able to find that the business of Span was its own and not that of the appellant, I believe that the appellant has camouflaged, disguised the operations of Span to make them appear as independent of the appellant’s whereas, in fact, the evidence, documentary and oral, is pervaded with the control, management and presence of the appellant, its sole client.

In causing Span to be incorporated the appellant was in fact going to put aside part of its profit in the hands of Span for safe-keeping in a tax-free country and the appellant could always repatriate these profits to Canada tax-free by virtue of Section 28 of the Act.

He continues at 270:

The fact that the appellant always controlled every step of the operations of Span from the purchase price to the selling price of off-shore steel, that the apel- lant paid Span the price of domestic steel for off-shore steel, the latter having a lower fair market value, and the power the appellant had to control the board by virtue of Article 74 of the articles of association of Span was a sham and that its operations were also a sham because, in point of fact, these operations were those of the appellant and consequently the expenses and disbursements of the appellant pertaining to the creation and the operations of Span and the income of Span from interest and dividends are as feigned as the creation and operations of Span.

Judge Decary also cited with approval the remarks of the then President of the Exchequer Court (later Chief Justice of the Federal Court) Jackett who, in Lagace v MNR, [1968] CTC 98; 68 DTC 5143, said at 109:

The most significant feature of the appellant’s contention in this Court, as it strikes me, is that it is inherent in the contention that profits that would otherwise have accrued to the appellants have ended up in the name of the company controlled by them, not because of bona fide business transactions between the appellants and such company, but because of transactions that have been arranged between the appellants and a third person to accomplish objects desired by the third person. In other words, the contention is based on the assumption that profits of the appellants’ business operations were put into the hands of the company by a device and that the profits were not the result of the company having embarked on business transactions. In my view, therefore, the short answer to the contention, even assuming the fact to have been established, is that, for purposes or Part I of the Income Tax Act, profits from a business are income of the person who carries on the business and are not, as such, income of a third person into whose hands they may come. This to me is the obvious import of sections 3 and 4 of the Income Tax Act and is in accord with my understanding of the relevant judicial decisions.

The Crown also submits the case of Dominion Taxi Cab Association v MNR, [1954] SCR 82; [1954] CTC 34; 54 DTC 1020, Cartwright, J said at 85:

It is well settled that in considering whether a particular transaction brings a party within the terms of the Income Tax Act, its substance rather than its form is to be regarded.

In West Hill Redevelopment Company Limited v MNR, [1969] CTC 581; 69 DTC 5385, Kerr, J describes his legal task as follows at 594:

Coming now to the consideration of the question of the character of the transaction or arrangement by which the payments in question were made, it is well settled that in considering whether a particular transaction brings a party within the terms of the Income Tax Act its substance rather than its form is to be regarded, and also that the intention with which a transaction is entered into is an important matter under the Act and the whole sum of the relevant circumstances must be taken into account. Consequently, I must endeavour as best I can to ascertain the real character and substance of the transaction or arrangements by which the payments in question were made and in doing so I must consider individually and collectively the agreements that were entered into and the surrounding circumstances and the course that was followed. I think that in the final analysis what I must determine is whether the appellant established a true superannuation or pension plan and made thereto the payment in question for the purposes of such plan, or whether its Pension Plan was a sham designed to give an appearance of bona tides to the payments which would enable the appellant to deduct them in computing its income and thereby escape some payment of income tax.

At 597 he continues:

The scheme was ingenuous and was pursued step by step, but the steps add up to one large stride intended, in my opinion, not really to provide pensions but predominantly to achieve for the company a substantial deduction from income. While a taxpayer may arrange his affairs so as to legitimately obtain a deduction from income, he is not entitled to it if he does not clearly bring his claim for deduction within the terms of the provision conferring the right of deduction from what would otherwise be taxable income. If a claim for deduction of payments into a pension plan is to succeed the plan must be a true pension plan and not a plan which masquerades as a true pension plan but is not one.

In Aluminum Company of Canada v City of Toronto, [1944] SCR 267, Mr Justice Rand, delivering the judgment of the Supreme Court of Canada said:

By the decision of this Court in the case of City of Toronto v Famous Players Canadian Corporation Ltd (1936) SCR 141 (1935-37) CTC 143 settled that the business of one company can embrace the apparent or nominal business of another company where the conditions are such that it can be said that the second company is in fact the puppet of the first; when the directing mind and will of the former reaches into and through the corporate façade of the latter and becomes, itself, the manifesting agency. In such a case it is not accurate to describe the business as being carried on by the puppet for the benefit of the dominant company. The business is in fact that of the latter . . .

As we can see from this jurisprudence, it is the duty of a judge, sitting ina case of this nature, to “lift the corporate veil” to see what realities are hidden beneath it, if any. He must also be on the lookout for a situation described as follows in Snook (supra):

. .. give . . . to the Court the appearance of creating between the parties’ legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

On this latter point, we would do well to look at certain cases on this subject. One of the most striking is the case of Sazio v MNR, [1968] CTC 579; 69 DTC 5001. Sazio was the coach of a football team and incorporated a private company under the name of Ralph J Sazio Limited, and assigned his football coaching contracts to his company, and thereupon entered into an employment agreement under which the company became, as he claimed, the “head coach”. At page 584 of the judgment, we read as follows:

It was elicited in cross-examination that the coaching duties performed by the appellant, as manager of the Company, were identical to those performed by him under his previous contract for personal service and that in the radio and television programs and press releases the appellant was therein personally referred to as the head coach. This the appellant conceded to have been the case but he persisted in his contention that this was not necessarily an accurate description of his capacity which was that the Company was the head coach and he was the general manager of the Company.

We therefore have a classic case that this company was a “dummy” or “puppet” company.

Here the appellant and his Company are two separate entities. In my view this is not a matter of form but rather a matter of substance and reality. Both the appellant and the Company could sue and be sued in its own right and indeed there is nothing to prevent the one from suing the other if need arose.

Ever since the Salomon case, (1897) AC 22, it has been a well settled principle, which has been jealously maintained, that a company is an entirely different entity from its shareholders. Its assets are not their assets, and its debts are not their debts. It is only upon evidence forbidding any other conclusion can it be held that acts done in the name of the company are not its acts or that profits shown in its accounts do not belong to it. The fact that a company may have been formed to serve the interests of a particular p.rson is not sufficient to establish the relationship of principal and agent between that person and the company. In order to hold otherwise it must be found that the company is a “mere sham, simulacrum or Cloak” (at p 588).

However, the doctrine of sham is narrowed down, as we shall see, by the following cases. In Her Majesty the Queen v Alberta & Southern Gas Co Ltd, [1976] CTC 639; 77 DTC 5244:

Put another way and in more succinct and colloquial language if the parties to a contract do precisely what they contract to do there is no sham.

As a corollary of that if the parties do as they contract to do when that is the substance of the contract. The agreements were realitites and not fictitious and they were within the competence of the plaintiff as incidental to its business of marketing natural gas.

Lord Tomlin in Commissioners of Inland Revenue v His Grace the Duke of Westminster, (1936) AC 1, said at page 20:

“This so-called doctrine of ‘the substance’ seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.

For these reasons I conclude that the arrangements between the plaintiff and Amoco were not shams or subterfuges.” (at p 652).

In the case of Simard-Beaudry Inc v MNR, [1974] CTC 715; 75 DTC 5124, CTC at 716:

On the other hand, in order to determine if a document constitutes or not a sham and for this reason must necessarily attract financial consequences, one must not take an exaggerated view of the motives of the parties for the sole purpose of arriving at an interpretation favourable to the taxing authority. The rule which lays down that the substance and the nature of the transaction must be considered, must not serve as a pretext for a detailed search into motives in order to attain a farfetched or exaggerated interpretation of its exact nature. Lord Greene in the case of Commissioners of Inland Revenue v Wesleyan and General Assurance Society, 30 CA (HL) 11; 176 LT 84 (KB & CA); 64 TLR 173, described the restrictions which must be applied to such a search in the following terms at page 16 of the report:

It is perhaps convenient to call to mind some of the elementary principles which govern cases of this kind. The function of the Court in dealing with contractual documents is to construe those documents according to the ordinary principles of construction, giving to the language used its normal ordinary meaning save in so far as the context requires some different meaning to be attributed to it. Effect must be given to every word in the contract save in so far as the context otherwise requires.

Another principle which must be remembered is this. In considering tax matters a document is not to have placed upon it a strained or forced construction in order to attract tax, nor is a strained or forced construction to be placed upon it in order to avoid tax. The document must be construed in the ordinary way and the tax legislation then applied to it. If on its true construction it falls outside the taxing category, then it escapes tax.

There have been cases in the past where what has been called the substance of the transaction has been thought to enable the Court to construe a document in such a way as to attract tax. The particular doctrine of substance as distinct from form was, I hope, finally exploded by the decision of the House of Lords in the case of Duke of Westminster v Commissioners of Inland Revenue, 19 TC 490. The argument of the Crown in the present case, when really understood, appears to me to be an attempt to resurrect it. The doctrine means no more that that the language that the parties use is not necessarily to be adopted as conclusive proof of what the legal relationship is. That is indeed a common principle of construction.” (at p 721)

Before citing a final and we believe decisive case, we would do well to take a look at the distinctions that must be made between some of those cases and the case at hand, with the particular view of seeing whether the case at hand can fit into the Snook definition of “sham”.

That is, we must see if the documents, which we already have spoken of and the transactions that occur between the accused and its offshore company Albion really represent what they intended or are they only to create an appearance of legal rights and obligations which in fact do not exist. We will remember that in Snook, Diplock clearly speaks of “acts done or documents executed by the parties to the ‘sham’ ”.

To begin with, there never was any question of fake or dubious expenses or deductions in determining income. There was no contention that Albion did not really exist or that dividends were not paid or received or that there was a failure to disclose the deductions or their nature. All these things were set forth clearly in the respective returns of the accused.

No evidence was ever adduced that the tax department was deceived nor was there, and this is very important, any proof led that there was a clear cut obligation on the part of either the accused to pay the alleged income tax deficiency, as distinct from the very different concept that there might be a contestable civil claim in relationship thereto.

Albion was incorporated with a capitalization of about four million dollars and other infusions of capital brought the paid up capital to around ten million dollars by September 30, 1971. By any standards, this is a very substantial material investment and a far cry from any usual notion of a “dummy, puppet or shell” company.

It is well to remind ourselves that in the case of Dominion Bridge, a very important case to the whole thesis of the Crown, the capitalization of its subsidiary Span was thirty-five shillings.

In the present context, it is my considered opinion that Albion was openly and honestly organized on a basis of being non-arm’s length to the accused. The accused and Albion were, from the outset “related persons” as defined in paragraph 139(5)(a) of the Income Tax Act. This section points out that related persons are deemed not to deal with each other at arm’s length.

There was no element of income that was not fully and properly recorded. There were no documents destroyed or records missing. There was no failure to record. There was nothing that had to be reported that was not reported. There were no false entries made. There was nothing in the tax returns or the records that was in any way deceptive. There was no hiding of anything from the fiscal authorities at any time. At all times, the accused were cooperative and in fact helpful to the fiscal authorities in aiding them to carry out their investigation.

The following words, which appear in the submissions by the defence, I make my own:

Of overwhelming importance is the fundamental point that Albion was not buying and reselling on a simultaneous “cost plus” basis. It was not doing that which on a civil count was directed against Span vis-a-vis its sales to Dominion Bridge. The Span method involved an absolute certainty of profit at a very high markup and no risk or possibility of any loss. Albion was selling to Redpath when Redpath called. The calls fixed the price Redpath based in each instance on the then prevailing LDP rate, without reference to the purchase price to Albion, which was determined by its own calls.

By calls are meant the international market system by which a certain type of trading is done.

But, at all times, it must be noted that it was the London Daily Price that fixed the price that would exist as between the accused and Albion. The prices as fixed between the accused and Albion were not fixed by the contracting parties but by an independent market agency. These prices vary from day to day, and sometimes the fluctuations were a very wide margin. Exhibit E-32-E discloses that in 1971, Albion sustained a loss on raw sugar transactions of 22,222 pounds Sterling. This goes to show, among other things, that the parent or dominating company and Albion were subject to the vagaries of the international market in their dealings between each other.

At this point, we must state that in our opinion, there has been a profound evolution in legal thinking since the Dominion Bridge case.

None of the cases we have mentioned are criminal cases. All of them fall under the realm of the civil law sections of the Income Tax Act of Canada.

We even state that there is a very large doubt in our mind that the Crown has even proved that income tax was owed by the accused to the Income Tax Department in the first place. Needless to say we do not have to make any comment on this aspect of the case, since we are sitting in a criminal law jurisdiction; but since almost all the jurisprudence cited before us was for civil responsibility, it has become clear in our mind, and we are now operating in the criminal law realm, that no case has been made out, beyond reasonable doubt, that any taxes are owed, other than those that were declared by the accused in the present case.

But in our opinion, there is one final case which is of the greatest importance, and that is the case of Spur Oil Limited (formerly Murphy Oil Quebec Limited) v Her Majesty The Queen, [1981] CTC 336; 81 DTC 5168.

This case comes to us from the Federal Court of Appeal, and it would seem to have laid to rest Dominion Bridge and provide more than enough answers to the questions that are raised by the Crown’s thesis in this case.

The appellant Spur Oil had been purchasing crude oil from its United States parent company called Murphy Oil Trading Company. In 1970, the appellant set up a Bermuda corporation called Tepwin, which was 100% owned by Spur Oil.

Tepwin, the moment it was incorporated, “bought” oil from Murphy Oil Trading Company at the same price which its Canadian owner had formerly paid, and then resold it to its Canadian parent at a much higher price. Tepwin never entered into any contracts with other oil suppliers (we will remember that Albion bought its raw sugar from all sorts of different suppliers). In other words, Tepwin was really a created third person interposed between Spur and its parent American company.

As in the case at hand, all the operations of Tepwin were controlled by Spur, which then reported to its parent company in the United States (in our case it is London, England). As in our case, Tepwin had a Board of Directors that was entirely compliant with the orders and instructions that it received from Spur, just as Albion’s were with the accused.

The officers and directors of Tepwin had nothing to do with the purchase of oil, just as in our case the directors of Albion had nothing to do with the purchase of sugar anywhere in the world. The purposes for the incorporation of Tepwin were exactly the same as those for Albion.

From this leading case, which has not been appealed to the Supreme Court of Canada, and which thereby remains a final judgment, it clearly emerges that the incorporation of a company to obtain a tax benefit in an offshore jurisdiction does not constitute a wrongful act under the Income Tax Act and does not even subject the parent company in Canada to taxation on the income of its offshore corporation. It is equally clear that there is no offence “per se” merely because the offshore subsidiary takes its instructions from elsewhere. Finally it makes no difference that the parent company owns 100% of its offshore subsidiary, whereas in our case it was much less than that.

The Federal Court of Appeal also ruled that there was no sham if payments had been made pursuant to a written contract. That is precisely the case as between the accused and Albion.

There are other striking similarities between the Spur case and the accused, but suffice it to say that on the whole, it is quite clear that a profound and extensive evolution having taken place since the Dominion Bridge case, we must consider the latter no longer applicable. But, it can be said, with absolute certainty, that it is not applicable, at least in our case, not only because of the progress in jurisprudence but also that important factual distinctions must be made, which I have already dealt with.

From all the direct and circumstantial proof that was led both by the Crown and the defence, I consider the following facts as proven:

1. After obtaining legal and accounting advice from their attorneys and accountants, which advice was legal and ethical, the accused, with the sole intention of taking advantage of the provisions of Section 28, as it then was, of the Canadian Income Tax Act, set up a corporation in Bermuda called Albion;

2. Looking beyond appearances, it is clear that this Bermuda corporation was wholly controlled and managed by the accused;

3. By this, we mean that the actual operations of the Bermuda corporation were carried out through and by the accused and their parent company in London, England;

4. The accused and Albion did not deal with each other “at arm’s length”;

5. At no time did the accused hide or even attempt to hide this state of affairs from the fiscal authorities, but on the contrary, explicitly declared their relationship as between themselves and Albion to the effect that they were not dealing “at arm’s length”;

6. The accused fully disclosed all pertinent information to the fiscal authorities as required by law;

7. The contracts between the accused and Albion were real and binding instruments that created contractual obligations between the parties, and both parties could sue and be sued by the other, on the basis of their contracts;

8. The Crown has not proven that any income tax other than that which was declared by the accused, is owed to the Department of Revenue;

9. The Crown has not proven any sham in this case;

10. Even if one were to consider that a sham existed in this case, no proof was led that it was a criminal sham;

11. No proof was made that the accused engaged in any tax evasion scheme and without limiting the foregoing, it must be stated that no proof was led that would show lies, deceit, falsehood, false documents and all other usual means of unlawfully avoiding taxes.

Therefore, the accused are acquitted.

One final word. I would like to thank all the attorneys involved in this case for their extraordinary competency which enlightened the Court and thereby made my work easier.