R. v. Ross, [1998] 3 CTC 159

Scanlan J.:

This is an appeal from a decision of the Provincial Court acquitting the Respondent on two charges pursuant to s. 239(1 )(d) and two charges pursuant to s. 239( 1 )(a) of the Income Tax Act. The acquittal followed six days of trial. The trial court Judge heard evidence from at least eight witnesses and received in excess of three hundred paper exhibits. The charges alleged that the Respondent evaded the payment of income taxes in the approximate amount of twenty-four thousand dollars ($24,000.00). The charges also allege that the Respondent made false or deceptive statement in an Income Tax Return and failed to include approximately one hundred and sixty-two thousand dollars ($162,000.00) in income. All of these offenses were alleged to have occurred between the years 1992 and 1993.

There were a number of grounds of appeal set out by the Appellant but only the following were argued at the time of the appeal.

(a) That the learned trial Judge erred in law in his interpretation of the burden of proof on the Crown pursuant to paragraphs 239(1 )(a) and (d) of the Income Tax Act.

(b) That the learned trial Judge erred in law by allowing into

evidence and considering hearsay to establish Defence evidence.

(d) That the learned trial Judge erred in law by rejecting the joint Net Worth as a cogent and reliable piece of evidence.

(e) That the learned trial Judge erred by restricting the Crown in cross-examining Defence witnesses.

(g) That the learned trial Judge erred in law by rendering a decision that is contrary to the evidence and the weight of evidence adduced at trial.

Grounds (a) and (g) of the appeal were argued together. Grounds (b), (d) and (e) were argued separately. I do not deal with all of the grounds of appeal separately as they are very much inter-related.

Summary of Facts

The Respondent had been convicted in an earlier, separate, prosecution in relation to cigarette smuggling operations. The R.C.M.P. advised Revenue Canada of the conviction and the Respondent’s involvement in the drug smuggling operation. As a result of that information Revenue Canada began an investigation related to the issue of compliance with the Income Tax Act. Initially Revenue Canada asked the Respondent for all income and expense records relating to the Respondent’s activities. Revenue Canada was advised that many of the records were destroyed in a fire. Revenue Canada then decided to continue the investigation by conducting a net worth assessment of the Respondent. In carrying out the net worth assessment, Revenue Canada included not only the information relating to the Respondent but also included the Respondent’s wife. The net worth assessment covered two years, 1992 and 1993. Revenue Canada alleges the net worth audit revealed the Respondent had a substantial unreported income which increased his net worth during the audit period.

According to Revenue Canada the Respondent acquired and disposed of several automobiles, skidoos, seadoos and motor cycles all which added to his net worth. They were either registered in his name or the names of other individuals. Counsel for the Respondent argued there was evidence which would indicate that some of the motor vehicles in question did not belong to the Respondent.

There was evidence to suggest the motor vehicles in question were acquired using the Respondent’s line of credit to facilitate in the acquisition of a motor vehicle for family or friends.

In addition to the motor vehicles as noted above, Revenue Canada included in the net worth, large sums of money which were posted as bail to secure the release of the Respondent and others charged with the related offences. The Respondent alleged that he borrowed much of this money and that it should not have been included in the calculation of his net worth. Revenue Canada did not accept the Respondent’s submission that he had borrowed large sums for his bail and they included these sums in the net worth of the Respondent. The total cash bail was seventy-four thousand dollars ($74,000.00) which represented bail for the Respondent, Mr. Troy Ross and Mr. Ronald Ross.

Counsel for the Respondent also argued that during the period of the net worth assessment, 1992 and 1993 the Respondent’s wife, Debbie Ross, earned income which was not reported to Revenue Canada. It was argued that in terms of the net worth assessment, this amount should not have been used in calculating the Respondent’s net worth. In the preparation of the net worth assessment there was no allowance for any unreported income the Respondent’s wife may have had.

Revenue Canada was also informed that the Respondent had received substantial sums of cash in the form of insurance proceeds. Counsel for the Respondent argues that Revenue Canada did not give full credit to the Re- spondent for the cash that he received as insurance proceeds as it related to the value of a cottage owned by the Respondent.

There were a number of other issues raised by the evidence and through submissions. Based on the issues raised in the evidence the Respondent questioned the validity of the net worth assessment as prepared by Revenue Canada.

The total net worth increase for 1992 is alleged to have been fifty-seven thousand nine hundred and forty-seven dollars and eighteen cents ($57,947.18). For 1993 the net worth increase is alleged to have been twenty-nine thousand two hundred and six dollars and forty-five cents ($29,206.45). It is worth noting that Revenue Canada accepted that the Respondent’s net worth at the beginning of 1992 was three hundred and thirteen thousand seven hundred thirty-one dollars and eight cents ($313,731.08). This would indicate that the Respondent was not without means at the beginning of the audit period.

For the purpose of this appeal it is not possible to summarize the approximately four hundred page transcript but the above-noted points are indicative of the types of issues raised by counsel for the Respondent at trial.

The Trial Judge’s Decision

The trial Judge rendered a brief oral decision on August 28th, 1997, and filed a detailed written decision thereafter. His oral decision reads in part as follows (p. 405):

Two issues were raised by Mr. MacLeod on behalf of the Defendant, Wayne Warren Ross. They are: one, the appropriateness of using net worth statements for both Mr. and Mrs. Ross as the basis for a prosecution under the Income Tax Act against Mr. Ross alone and two, the failure by Revenue Canada to exercise the care and restraint necessary to guard against the pitfalls referred to by Mr. Justice Clarke in Holland v. United States by not investigating leads furnished by Mr. Ross which could explain a significant portion of the increase in his net worth during the three years in question.

For reasons set out in my written decision, I have resolved both those issues in favour of Mr. Ross. Therefore, it is my view that the prosecution is fundamentally flawed, and is a result of coming to a conclusion that the Crown has failed to prove all the elements of the offences beyond a reasonable doubt, and I find Mr. Ross not guilty of all offences.

In the written decision the trial Judge set out the reasons for his decision in greater detail. The trial Judge correctly noted that the use of net worth statements as a means for determining a tax payers income, in circumstances where there are inadequate financial statements, has been approved as an accepted method for supporting income tax prosecutions. The failure of the tax payer to report significant amounts of income may support an inference that his or her actions were wrongful (see R. v. Lowe (1975), 26 C.C.C. (2d) 345 (Ont. Prov. Ct.) and R. v. Nicholson (1974), 75 D.T.C. 5095 (Ont. Prov. Ct.) at pp. 5097-5099). The trial Judge noted that it appears to be a common practice for Revenue Canada to include assets and liabilities of both spouses in net worth assessments. He went on to note that it is surprising that neither counsel for the prosecution nor defence could provide any cases where that issue was raised in an income tax prosecution.

Discussion of the Issues:

In the present case much of the evidence, if accepted by the trial Judge would tend to impeach the validity of the net worth statement as a means of proving the various offences against the Accused/Respondent. I say this not to suggest that a net worth audit cannot provide a proper basis for a prosecution under the relevant sections of the Income Tax Act. A net worth assessment can provide evidence sufficient to maintain a conviction. The evidence must prove beyond a reasonable doubt that the accused person committed the offence charged. In this case for example the joint net worth assessment included unreported income of the Respondent’s wife. That income must be excluded from the accused’s net worth in order to be used in the prosecution of the accused.

A joint net worth statement is only evidence against an accused to the extent that the crown can prove beyond a reasonable doubt that the assets included in calculating the net worth are assets of the accused. If the assets are not proven to be assets of the accused then the evidence does not tend to prove that the accused had committed the offense as alleged. If the crown is not able to prove what amounts an accused contributed to the net worth then the most that can be adduced from the evidence is that one of the two people covered by the net worth statement had unreported income or unpaid taxes.

By way of analogy I would point out that in a criminal proceeding it would not be sufficient for the crown to prove that there were only two people in a room and that one of them must have stolen missing property. Additional evidence would be required to show which of the two actually stole the property in order to obtain a conviction of either. In this case it would be necessary that the crown prove which person covered by the net worth statement had the unreported income or unpaid taxes.

If the Crown uses a joint net worth statement in a criminal prosecution the Crown must be prepared to fully investigate both spouses as regards their income, whether it be from legitimate or illegitimate sources. In the present case there was a great deal of evidence which would indicate that Debbie Ross had unreported income amounting to several thousands of dollars. This unreported income would, of course, have contributed to the net worth of the couple but it is not evidence that the accused had unreported income. That evidence is only evidence against the accused’s spouse. It is inappropriate that the unreported income of the Respondent spouse would be used as part of the total net worth attributed to Mr. Ross as part of the basis for the charges now under review.

The crown submits in ground (b) of the notice of appeal that the trial Judge erred in allowing into evidence and considering Defence’s hearsay evidence. That complaint related mainly to the issue of how much income Debbie Ross had during the review period. Some of the evidence may have been considered hearsay but there was a substantial amount of admissible evidence to support the finding that Debbie Ross had unreported income. This is confirmed through the records from Veterans Affairs offices. There is clear evidence that Debbie Ross did provide the care as alleged by Mrs. Ross. If there was any hearsay admitted it did not prejudice the crown in the sense that there was plenty of other evidence to support the Judge’s findings.

The use of joint net worth statements is an important and necessary tool for Revenue Canada to use against tax payers. It is important to recognize that there is a very substantial difference in the burden of proof on the criminal prosecution as opposed to a assessment under the Income Tax Act based on net worth. Unless the Crown is able to distinguish between the income generated by the accused and that generated by his spouse then the family net worth statement contributes very little in a criminal prosecution. I am satisfied that it is not necessary to indict both spouses where a family net worth statement is relied upon in a criminal prosecution. For the Crown to succeed it will be necessary that the Crown be able to separate the income generating activities of the spouse who was not charged.

The mere fact that both parties might be charged is not in and of itself, a magic solution to the problem faced by Revenue Canada. In other words, it is not enough to say that the net worth of the family increased by “x” number of dollars and that between the two spouses one or both of you must not have reported certain amounts of income. If the Crown were to simply charge both of the spouses, and say; one of you must be guilty or both of you must be guilty, then it would shift the burden to the defendants to prove their innocence. In other words, whether one or both of the spouses is charged the burden remains on the Crown to prove which of the family members failed to report the income in question or failed to pay the taxes in question.

The trial Judge did find that, in the present case, the Respondent’s wife, Mrs. Ross did have income from at least one unreported source and that she may well have contributed to the increase in the family net worth in other ways. (See p. 3 of the trial Judge’s decision). Evidence to support the trial Judge in this conclusion, included records maintained by Veteran’s Affairs Canada Limited. These records included reimbursement forms, for house keeping which Mrs. Ross provided to a veteran, and for which she was reimbursed through the Veteran’s Independence Programs. The crown must prove beyond a reasonable doubt the full extent of the contribution to net worth by the unindicted person before the joint net worth can be used a evidence to convict the accused in a criminal prosecution. There is evidence to support the trial Judge’s findings that the crown did not prove the full extent of Mrs. Ross’s contribution to net worth.

In addition to issue of how much the Respondents spouse contributed to the net worth, the Respondent made submissions through his accountant to Revenue Canada which would explain substantial portions of his net worth increase during the years in question. These representations included suggestions that certain vehicles that were attributed to Mr. Ross’s net worth were vehicles which he acquired for family or friends using his line of credit. In addition there were amounts included in the valuation of the cottage which Mr. Ross explained were paid through proceeds from insurance claims. He said the cash from the insurance would explain, in part, his net worth. The trial Judge noted the various explanations. He said this could explain approximately one hundred thousand dollars ($100,000.00) of the increase in Mr. and Mrs. Ross’ net worth during the years in question. An Appeal court is entitled to review the evidence before the trial court, reexamining it and re-weighing it, but only for the purpose of determining if it is reasonably capable of supporting the trial Judge’s conclusions. If the evidence could reasonably support the trial Judge’s conclusions then an appeal court should not substitute its view for that of the trial Judge. (See R. v. Yebes, [1987] 2 S.C.R. 168 (S.C.C.).) In the present case there was an abundance of evidence to support the trial Judge’s findings.

The trial Judge categorized the attitude of Revenue Canada representatives as being “rather cavalier” and/or a lack of understanding of the burden of proof in criminal prosecution. The evidence would support the trial Judge in reaching that conclusion. There are numerous examples which may be cited in this regard. By way of example the Respondent explained to Revenue Canada that a substantial part of his bail money was obtained through the use of loans from family or friends. There is a cheque which was introduced in evidence showing approximately thirty thousand dollars ($30,000.00) was received from a friend of the Respondent’s mother. This friend is now deceased but there was a note provided to Revenue Canada from the deceased which indicated the money was loaned and not repaid. This would explain another thirty thousand dollars of the net worth of the Respondent if accepted. There were a number of other people who also were said to have loaned money to make up the total bail of seventy-four thousand dollars.

The trial Judge said (p. 3-4 trial decision):

In spite of this Revenue Canada did not make any serious attempts to investigate the accuracy of those representations other than to send form letters to the persons who allegedly made the personal loans requesting a detailed statement of assets and liabilities, without explaining the purpose of, or authority for, the request (exhibit 298 is an example of those letters)

Revenue Canada investigators did not inquire of the named persons whether the loans were made, were they repaid, did the loans take the form of cash, how were they arranged, etc. Instead Revenue Canada sent letters requiring the people who were said to have made the loans to file net worth statements. It is not surprising that the letters were not answered and this is noted by the trial Judge. Revenue Canada did not follow up to ask the questions after the net worth statements were not provided. In this case the trial Judge did accept that at least thirty thousand dollars of the bail money was loaned to the Respondent by a now deceased person.

The Crown, on appeal and at trial, argued strenuously that there was evidence to question whether or not the loans were indeed made. The Crown pointed to the fact the cheque from the deceased individual was cashed after the bail was paid. There was evidence from the Respondent’s mother indicating that until she was able to cash the cheque of the deceased individual she, the Respondent’s mother Daisy Ross, used her own cash for the purposes of posting the bail.

In relation to the evidence of Daisy Ross the Trial Judge said at p. 6:

I found her generally to be a credible witness and I am not prepared to totally discredit her evidence. Therefore, the evidence of the defence witnesses, in and by itself is, in my view, sufficient to raise a reasonable doubt about a significant portion of the alleged unreported income.

I again refer to R. v. Yebes and would not interfere with the findings of the trial Judge.

Much of the issue relating to the funding of the bail money was centred on the evidence of Daisy Ross. In reviewing the evidence I note the Crown cross examined Daisy Ross extensively as to how much cash she had available to her. One of the grounds of appeal, (e), complains that the court erred by restricting the Crown in cross-examining Defence witnesses. The Crown Prosecutor cross examined as to why a friend, Mrs. Spence, might pay the thirty thousand dollars ($30,000.00) bail based on mere friendship. The witness offered an explanation that their friendship was based on a long standing family relationship. It included the fact that the witness’ husband went down into the Springhill mine after the mine disaster and retrieved the wedding band from the hand of the deceased’s husband. Apparently the rescuers were unable to remove the bodies of the deceased miners from the mine but Mr. Ross did recover the wedding band as requested. The Crown seemed to take issue with the fact that friends could loan this much money and that a bond could be so strong as between friends. I find no fault in the trial Judge reaching the conclusion which he did.

There was also evidence which suggested that Daisy Ross funded the cash bail from cash she had on hand pending the receipt of money from Ms. Spence. The trial Judge indicated to the Crown Prosecutor that he found it quite plausible that people might have large sums of cash hidden in their home. This point was made by the trial Judge while Daisy Ross was still being cross examined. This was after the Crown had cross examined Ms. Ross for a lengthy period of time which is covered in some 28 pages of the trial transcript. The trial Judge’s interjection came just after Ms. Ross had explained the fact that her husband went down to retrieve the wedding band off of the hand of Mrs. Spence’s husband’s finger because they were not able to remove his body from the Springhill mine after the mine disaster. Ms. Ross was 74 years old at the time of the trial.

A trial Judge must always be cautious when interrupting cross examination. In this case I am satisfied that the interjection was appropriate in terms of maintaining control in relation to the cross examination. The trial Judge appropriately recognized that the cross examination was having an impact on the 74 year old lady. The emotional toll on this witness was obvious to the extent that the court had to recess to allow her to regain her composure. He said at p. 330:

... Obviously she’s very upset and I’m a little concerned...

The trial Judge said at p. 331:

I’m not foreclosing any arguments that you may wish to make, but all I have to do is, unless you can totally destroy the witness’ credibility I think you’re wasting your time and mine and everyone else’s.

Mr. Richard on behalf of the Crown continued with his cross examination for another five and one-half or six pages. Crown was obviously not completely deterred by the trial Judge’s comments. Even though the trial Judge was satisfied that the cross examination had dealt with the issue to the extent necessary for him to make a determination of credibility he allowed the prosecutor continued with the cross examination. Even with the subsequent cross examination the trial Judge, as I noted above, said that he generally found Daisy Ross to be a credible witness. The trial Judge did not restrict the Crown in cross examination of the Defence witness beyond that which was necessary to maintain control of the proceedings having regard to the age and health of the witness.

The decision of the trial Judge was supported by the evidence. Clearly there were substantial sums of monies Revenue Canada included in the net worth statements which could be explained away. The burden is on the Crown to prove beyond a reasonable doubt that there was unreported income or unpaid taxes. The decision of the trial Judge is supported by the evidence. The judge did not make any error in determining the proper burden of proof or in finding the crown did not satisfy the burden of proof.

The appeal is dismissed.

Appeal dismissed.