R. v. Vermette, [1999] 3 CTC 270

Bekolay Prov. J.:

The Facts

The accused stands charged as follows:

Count #1

Archie Vermette (DOB August 8, 1939) also known as Buckland Bingo and Buckland Bingo Ltd., of the City of Prince Albert, in the Province of Saskatchewan, between the 31st day of December, 1989, and the 30th day of April, 1993, did wilfully evade the payment of taxes imposed by the Income Tax Act, R.S.C., 1985, c.1 (5th supp.) as amended, for the 1990, 1991 and 1992 taxation years in the amount of $22,353.02 by failing to report income in the amount of $73,594.25 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239(1 )(d) of the Income Tax Act, R.S.C., 1952, c. 148, as amended and the Income Tax Act, R.S.C., 1985, (5th supp.), as amended.

Count #2

Archie Vermette also known as Buckland Bingo and Buckland Bingo Ltd., of the City of Prince Albert, in the Province of Saskatchewan, on or about the 30th day of April, 1991 did make, participate in, assent to or acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1990 by failing to report income in the amount of $21,625.25 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239(1 )(a) of the Income Tax Act, R.S.C., 1952, c. 148, as amended.

Count #3

Archie Vermette also known as Buckland Bingo and Buckland Bingo Ltd., of the City of Prince Albert, in the Province of Saskatchewan, on or about the 30th day of April, 1992, did make, participate in, assent to or acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1991 by failing to report income in the amount of $24,480.24 from the operation of the bingo business in Prince Albert sometimes known as Bingo gardens and did thereby commit an offence contrary to Section 239( 1 )(a) of the Income Tax Act, R.S.C., 1985, c.] (5th supp.), as amended.

Count #4

Archie Vermette also known as Buckland Bingo and Buckland Bingo Ltd., of the City of Prince Albert, in the Province of Saskatchewan, on or about the 30th day of April, 1993, did make, participate in, assent to or acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1992 by failing to report income in the amount of $27,488.75 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239( 1 )(a) of the Income Tax Act, R.S.C., 1985, c.1 (5th supp.), as amended.

Count #5

Gilbert Vermette (DOB May 27, 1936) also known as Buckland Bingo and Buckland Bingo Ltd., of the Rural Municipality of Buckland, in the Province of Saskatchewan, between the 31st day of December, 1989 and the 30th day of April, 1993, did wilfully evade the payment of taxes imposed by the Income Tax Act, R.S.C., 1985, 0.] (5th supp.), as amended, for the 1990, 1991 and 1992 taxation years in the amount of $22,232.35, by failing to report income in the amount of $76,389.25 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239(1 )(d) of the Income Tax Act, R.S.C., 1952 c. 148, as amended and the Income Tax Act, R.S.C., 1985 c.1 (5th supp.), as amended.

Count #6

Gilbert Vermette also known as Buckland Bingo and Buckland Bingo Ltd., of the Rural Municipality of Buckland, in the Province of Saskatchewan, on or about the 30th day of April, 1991 did make, participate in, assent to or acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1990 by failing to report income in the amount of $21,625.25 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239(1 )(a) of the Income Tax Act, R.S.C. 1952, c. 148, as amended.

Count #7

Gilbert Vermette also known as Buckland Bingo and Buckland Bingo Ltd., of the Rural Municipality of Buckland, in the Province of Saskatchewan, on or about the 30th day of April, 1992 did make, participate in, assent to or acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1991 by failing to report income in the amount of $24,480.25 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239( 1 )(a) of the Income Tax Act, R.S.C., 1985, c.1 (5th supp.), as amended.

Count #8

Gilbert Vermette also known as Buckland Bingo and Buckland Bingo Ltd., of the Rural Municipality of Buckland, in the Province of Saskatchewan, on or about the 30th day of April, 1993 did make, participate in, assent to acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1992 by failing to report income in the amount of $30,283.75 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239( 1 )(a) of the Income Tax Act, R.S.C., 1985, c.] (5th supp.), as amended.

Count #9

Delmar Henry (DOB September 7, 1952) also known as Buckland Bingo and Buckland Bingo Ltd., of the City of Prince Albert, in the Province of Saskatchewan, between the 31st day of December 1989 and the 30th day of April, 1993, did wilfully evade the payment of taxes imposed by the Income Tax Act, R.S.C., 1952, c. 148, as amended, and the Income Tax Act, R.S.C., 1985 c.1 (5th supp.), as amended, for the 1990, 1991, and 1992 taxation years in the amount of $31,379.23 by failing to report income from the operation of a bingo business in Prince Albert sometimes known as Bingo Gardens for the 1990 and 1991 taxation years in the amount of $46,105.50 and by failing to file a 1992 income tax return and report business income of $71,238.75 and did thereby commit an offence contrary to Section 239(1 )(d) of the Income Tax Act, R.S.C., 1985, c.1 (5th supp.), as amended.

Count #10

Delmar Henry also known as Buckland Bingo and Buckland Bingo Ltd., of the City of Prince Albert, in the Province of Saskatchewan, on or about the 1 Sth day of April, 1991, did make, participate in, assent to or acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1990 by failing to report income in the amount of $21,625.25 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239(1 )(a) of the Income Tax Act, R.S.C., 1952, c. 148, as amended.

Count #11

Delmar Henry also known as Buckland Bingo and Buckland Bingo Ltd., of the City of Prince Albert, in the Province of Saskatchewan, on or about the 18th day of January, 1992 did make, participate in, assent to or acquiesce in the making of a false or deceptive statement in his return of income for the taxation year 1991 by failing to report income in the amount of $24,480.25 from the operation of the bingo business in Prince Albert sometimes known as Bingo Gardens and did thereby commit an offence contrary to Section 239(1 )(a) of the Income Tax Act, R.S.C., 1985, c.1 (5th supp.), as amended.

From the evidence adduced at trial, I find the following facts: A. Relevant Income Tax Information

1. Bingo Gardens was a partnership which carried on a bingo business in the City of Prince Albert, Saskatchewan. Bingo Gardens had, at all relevant times, a year end for tax purposes of April 30. During the years ended April 30, 1989, April 30, 1990, April 30, 1991, and April 30, 1992, the financial statements for Bingo Gardens indicated the following:

2. Archie Vermette’s Tl Income Tax Returns filed for the 1990, 1991 and 1992 taxation years reported the following:

3. Gilbert Vermette’s Tl Income Tax Returns filed for the 1990, 1991 and 1992 taxation years reported the following:

4. Delmar Henry’s Tl Income Tax Returns filed for the 1990 and 1991 taxation years reported the following:

Delmar Henry did not file his 1992 Tl Income Tax Return within the time required by the Income Tax Act. In the 1992 taxation year, Delmar Henry had employment income from Bingo Gardens of $33,128.00. In addition, Delmar Henry had revenue from the Bingo Gardens operation in 1992 which was disclosed to Delmar Henry’s accountant, George Whitrow, during the preparation of such income tax returns and which were treated by George Whitrow as a dividend from Buckland Bingo Ltd. Delmar Henry had taken only limited steps to engage and inform George Whitrow so that his tax returns could be filed up to the time Revenue Canada commenced its audit.

5. None of the accused at any time included as business income any amounts of profit allocated by the partnership, Bingo Gardens, to the partner “Buckland Bingo”.

6. In the 1992 taxation year of the individuals accused, Gilbert Vermette and Archie Vermette reported taxable dividends from Buckland Bingo Ltd. based upon amounts received from Buckland Bingo Ltd. via the partnership, Bingo Gardens. Delmar Henry similarly, included dividend income from Buckland Bingo Ltd. in his 1992 tax return however, such return was not filed in a timely fashion and, in fact, was not filed until 1994.

7. Gilbert Vermette, Delmar Henry and Archie Vermette did not include in any taxation years a claim for an allowable business investment loss based on money loaned to Buckland Bingo Ltd. in 1987 and 1988. Similarly, Vermette’s Trucking & Wood Preservers Ltd. did not claim losses in any taxation years for amounts loaned to Buckland Bing Ltd. in 1987 or 1988.

8. Buckland Bingo Ltd. did not file T2 corporate income tax returns for its 1988, 1989, 1990, 1991, 1992, 1993, and 1994 taxation years in a timely manner.

B. Books and Records of Bingo Gardens

9. Bingo Gardens was at all relevant times a partnership.

10. The evidence establishes that in the relevant years the net income of the partnership was as follows:

11. The Financial Statements prepared for Bingo Gardens introduced into evidence for the relevant years indicated the following statement of partner’s equity in each of the relevant years:

ciency) at end of year

The financial statement for Bingo Gardens’ year ended April 30, 1992 was not entered into evidence.

12. The notes to the Financial Statements in each of the relevant years indicates the following:

l. Significant Accounting Policies

(b) Salaries and Interest

No provision has been made in these financial statements for salaries to the partners or interest on their investments.

C. Books and Records of Buckland Bingo Ltd.

13. On December 30, 1988, the Landlord of the premises where Buckland Bingo Ltd. originally carried on its bingo business seized the books and records of Buckland Bingo Ltd. and such records were under seizure until the spring of 1993. As a result of this seizure and of the accountants lack of understanding that he could have examined the books in the hands of the sherrif, no financial statements or corporate tax returns were prepared for Buckland Bingo Ltd. until 1994. When Revenue Canada seized the books and records of Graham Holm in July of 1994, draft financial statements and corporate tax returns had been prepared for Buckland Bingo Ltd. which reported the income allocated to “Buckland Bingo” by the partnership, Bingo Gardens.

14. Leon Gobeil testified that he was asked by the accountant for Buckland Bingo Ltd. if he would release the files that were the subject of his seizure of December 30, 1988 so that the accountant could do income tax returns and that he refused to release such files.

15. Graham Holm testified that Buckland Bingo did not file T2 corporate income tax returns for the years 1989 to 1994 as the records for Buckland Bingo were under seizure and he was unaware of anyway to obtain such records from the landlord to facilitate the preparation of the T2 corporate tax returns. Mr. Holm stated in direct examination that it is “hard to file if your base year is missing”.

D. Books and Records of Vermette’s Trucking & Wood Preservers Ltd.

16. Vermette’s Trucking & Wood Preservers Ltd. (“Vermette’s”) had, at all relevant times, a year and for tax purposes of August 31.

17. In the period 1989 to 1993, Graham Holm prepared the financial statements of Vermette Trucking & Wood Preservers Ltd. on the basis that Buckland Bingo Ltd. was still in operation and was, in fact, the partner in the partnership, Bingo Gardens. Accordingly, Graham Holm did not write off, for income tax purposes, amounts which Vermette’s had loaned to Buckland Bingo Ltd. in the 1987 and 1988 taxation years. In fact, Graham Holm deducted from the loan balance of Vermette’s amounts received from Bingo Gardens in the 1989, 1990 and 1991 taxation years as being payments from Buckland Bingo Ltd.

18. In the working papers for Vermette’s Graham Holm specifically noted in his Working Paper File for Vermette’s for the fiscal period ended August 31, 1991 that Vermette’s had “got back some of their money” in relation to its investment in Buckland Bingo Ltd.

19. In the 1988, 1989 and 1990 T2 corporate returns of Vermette’s, Form E2013 was prepared showing Buckland Bingo Ltd. as an “associated corporation”, and filed showing no small business allocation to Buckland Bingo Ltd. In the 1991 and 1992 corporate tax returns of Vermette’s, no T2013 was included.

E. Preparation of Financial Statements and Tax Returns

20. In preparation of the 1988 financial statement for the partnership, Bingo Gardens, Dennis Ulmer, of Woodhouse, Tucker & Partners, made inquiries as to who the partner “Buckland Bingo” was and concluded, based on conversations with Fred Trach and Gordon Balon, that the partner was Buckland Bingo Ltd., a corporate entity. All fur- ther financial statements prepared for the partnership, Bingo Gardens, during the relevant years were prepared by Dennis Ulmer on the basis that Buckland Bingo Ltd. was a partner in Bingo Gardens.

21. In preparation of Vermette’s Trucking & Wood Preservers Ltd. books and records, financial statements and corporate tax returns Graham Holm, at all relevant times, prepared such financial statements and corporate tax returns on the basis that Buckland Bingo Ltd. was a partner in a partnership, Bingo Gardens.

Gilbert Vermette

22. The Tl income tax returns of Gilbert Vermette were prepared by Graham Holm during the relevant times on the basis that Gilbert Vermette was not a partner in the partnership, Bingo Gardens. With respect to Gilbert Vermette’s 1990 TI income tax return, which would be due to be filed on or before April 30, 1991, Graham Holm recorded amounts received as drawings from Bingo Gardens by way of a reduction to the loan which Vermette’s Trucking & Wood Preservers Ltd. had made to Buckland Bingo Ltd. With respect to Gilbert Vermette’s 1991 income tax return, which would be due to be filed on or before April 30, 1992, Graham Holm reported amounts received by Buckland Bingo Ltd. from Bingo Gardens by way of a reduction to the loan which Vermette’s Trucking & Wood Preservers Ltd. had made to Buckland Bingo Ltd.

23. Discussions took place in December of 1991 between Graham Holm and Archie Vermette, Gilbert Vermette and Beverly Vermette wherein Graham Holm indicated that the loan amounts owing from Buckland Bingo Ltd. to Vermette’s Trucking and Wood Preservers Ltd. although not repaid by Buckland Bingo Ltd. by April 30, 1991 (being the year end of the partnership, Bingo Gardens) were likely to be repaid by April 30, 1992, (being the year end of Bingo Gardens). Accordingly, Graham Holm advised that amounts received by Archie Vermette, Delmar Henry and Beverly Vermette from Buckland Bingo Ltd. during the period May 1, 1991 to April 30, 1992 would have to be reported as either dividends or income on Gilbert Vermette’s and Archie Vermette’s 1992 income tax returns. In fact, in both Gilbert Vermette’s and Archie Vermette’s 1992 income tax returns, a dividend was reported as having been received from Buckland Bingo Ltd. in an amount that with other funds reported through Vermette’s Trucking & Wood Preservers Ltd. and repayment of loans to Buckland Bingo Ltd. included almost if not all funds paid out to them from the Bingo Gardens operation.

Archie Vermette

24. The Tl income tax returns of Archie Vermette were prepared by Graham Holm during the relevant times on the basis that Archie Vermette was not a partner in the partnership, Bingo Gardens. With respects to Archie Vermette’s 1990 TT income tax return, which would be due to be filed on or before April 30, 1991, Graham Holm recorded amounts received as drawings from Bingo Gardens by way of a reduction to the loan which Vermette’s Trucking & Wood Preservers Ltd. had made to Buckland Bingo Ltd.

Delmar Henry

25. The Tl income tax returns of Delmar Henry were prepared on the basis that Delmar Henry was not a partner in the partnership, Bingo Gardens. With respect to Delmar Henry’s 1990 and 1991 TI income tax returns, the amount received by Del Henry from Bingo Gardens was approximately equal to the amount he had loaned to Buckland Bingo Ltd. in 1987 and 1988, namely $30,000.00. In the preparation of Delmar Henry’s 1992 TT income tax return, George Whitrow advised Delmar Henry that his “drawings” from Bingo Gardens would need to be reported as dividends and in a draft 1992 income tax return prepared by George Whitrow for Delmar Henry, a dividend equal to the amount received from Bingo Gardens was reported as a divided from Buckland Bingo Ltd. The 1992 returns were prepared after commencement of the audit by Revenue Canada.

26. The Tl income tax return of Delmar Henry for the 1992 taxation year was not filed in a timely fashion. George Whitrow testified in cross-examination that such return was not filed by its due date because Delmar Henry had not made arrangements with George Whitrow to pay for the preparation and filing of the return. I conclude that Delmar Henry had also failed to provide George Whitrow with details of his loan to Buckland Bingo Ltd., and of his income from Bingo Gardens/Buckland Bingo Ltd. with the exception of wages until after the commencement of the audit by Revenue Canada. F. Summary of Relevant Dates

27. The following chronology summarizes several of the relevant dates:

a. November, 1987 - lease of Buckland hall premises by Archie Vermette, Delmar Henry, Gilbert Vermette and Beverly Vermette

b. December, 1987 - incorporation of Buckland Bingo Ltd., draft Minutes indicating Archie Vermette, Delmar Henry, Gilbert Vermette and Beverly Vermette each hold 25 shares

C. January 12, 1988 - Assignment of Lease prepared by Gordon Balon purporting to assign lease of Buckland premises to Buckland Bingo Ltd.

d. April, 1988 - business operation of Buckland Bingo Ltd. on Shellbrook highway ceases

e. May, 1988 - Bingo Gardens begins operations

f. May, 1988 - Gordon Balon prepares agreements between Trac Ventures Ltd. and Buckland Bingo Ltd. - Re: Merger

g. December 30, 1988 - landlord, Leon Gobeil, seizes books and records of Buckland Bingo Ltd.

h. January 6, 1989 - Russell Vermette advises Gordon Balon not to proceed with merger and that “the arrangement with the other Bingo corporation ... may be accommodated by other means than having control of Buckland Bingo change”

i. March, 1989 - Russell Vermette provides Gordon Balon with instructions to prepare agreements transferring shares of Buckland Bingo Ltd. to Vermette’s Trucking & Wood Preservers Ltd.

j. April 30, 1989 - Bingo Gardens year end, net income <$2,271.00>

K. May, 1989 - Russell Vermette leaves accounting practise, Graham Holm assumes primary carriage of Buckland Bingo Ltd. file

l. August 31, 1989, Vermette’s Trucking & Wood Preservers Ltd. year end

m. February, 1990 - Trac Ventures Ltd. registers business name Prince Albert Bingo Gardens under The Business Names and Registration Act

n. 1989 or 1990 - Graham Holm calls landlord, Leon Gobeil, to ask for Buckland Bingo Ltd. records but Gobeil refuses

o. April 30, 1990 - Bingo Gardens year end, net incomes $173,003.00

p. May 30, 1990 - Buckland Bingo Ltd. struck from corporate registry

q. August 31, 1990 - Vermette’s Trucking & Wood Preservers Ltd. year end

r. April 30, 1991 - Bingo Gardens’ year end, net income $194,688.00

s. August 31, 1991 - Vermette’s Trucking & Wood Preservers Ltd. year end

t. December, 1991 - Graham Holm obtains Bingo Gardens financial statements and meets with Archie Vermette, Gilbert Vermette and Beverly Vermette and discusses reporting of amounts coming out of Buckland Bingo Ltd.

u. December, 1991 - Graham Holm obtains Bingo Gardens financial statements and meets with Archie Vermette, Gilbert Vermette and Beverly Vermette and discusses reporting of amounts coming out of Buckland Bingo Ltd.

v. April 30, 1992 - Bingo Gardens year end, net income $569,910.00

w. August 31, 1992 - Vermette’s Trucking & Wood Preservers Ltd. year end

x. December, 1992 - George Whitrow telephones Graham Holm - re: Beverly Vermette amounts of “equity drawings” from Bingo Gardens. Holm advised in 1992 report as dividends, corporation Buckland Bingo Ltd. is partner

y. April, 1993 - dividend declared in 1992 To tax return of Archie Vermette and Gilbert Vermette

z. Spring, 1993 - Graham Holm, has staff person spend 18 hours on books and records of Buckland Bingo Ltd. But has person stop because records still under seizure by landlord

aa. March, 1993 - landlord releases records, Graham Holm becomes

aware of this in fall 1993 and has subcontract worker being work on Buckland Bingo Ltd. records

bb. January, 1994 - audit commences

G. Revenue Canada’s Reassessing Position

28. Revenue Canada, Taxation issued Notices of Reassessment under the Income Tax Act on the one hand, assessing the income from Bingo Gardens as properly income of the partners Archie Vermette, Delmar Henry, and Gilbert Vermette and, on the other hand on September 1, 1995 they issued a Notice of Reassessment to Buckland Bingo Ltd. including the same income as Buckland Bingo Ltd.’s income.

29. Sheila Nixon testified that it was “not normal to assess two entities for the same income amount” and that Revenue Canada “normally would examine the facts and determine who was entitled” prior to issuing Notices of Reassessment. Sheila Nixon further testified that the “right to equity (in Bingo Gardens) had been put in issue so all the legal entities were assessed”. On cross-examination, Sheila Nixon further testified that Notices of Reassessment were raised against both Buckland Bingo Ltd. and the individuals accused despite the fact that Revenue Canada had no doubt that the income was the income of the Bingo Gardens partnership. Sheila Nixon testified under cross-examination that the reassessment of Buckland Bingo Ltd. was done on direction of her supervisors in the Department because the expiry of the detention orders for seized documents was fast approaching and her supervisors did not have time to adequately review the information complied during the investigation to make a decision as to which “entity” should be reassessed to include income from Bingo Gardens. However, under further cross-examination, Sheila Nixon acknowledged that to the date of trial the Department of National Revenue has never abandoned the Reassessments against Buckland Bingo Ltd. which include the income from the partnership, Bingo Gardens, as the income of Buckland Bingo Ltd.

30. Sheila Nixon testified that in reaching her conclusion that the accused were the partners and not Buckland Bingo Ltd. She considered the following factors:

For:

1. The unsigned June ’88 agreement on the sale of Trach’s bingo supplies to “Trach Ventures Ltd. Trading as Bingo Gardens” and on the division of profits/losses is between Trach party of the first part” and Archie Vermette, Gilbert Vermette, Beverly Vermette and Del Henry “part of the second part”.

2. The unsigned November ’91 agreement on the division of profits/losses is between Trach and “Buckland Bingo (on behalf of): Archie Vermette, Beverly Vermette, Gil Vermette and Del Henry”

3. Bingo Garden’s operating agreement with the Royal Bank is signed by Delmar Henry, Archie Vermette, and Fred Trach. The officer who witnessed the signatures stated that while it is not uncommon for corporations to be members of a partnership she discussed the agreement with the individuals and that it was her understanding that the individuals were partners. The officer has no knowledge of any corporate interests of Henry and Vermette.

4. On the GST application signed by Archie Vermette he shows his title as “partner” rather than “director of corporate partner”.

5. There are no minutes of directors or shareholders meetings in Buckland Bingo Ltd.’s minute book other than some unsigned minutes at the time of incorporation.

6. “Buckland Bingo’s” partnership equity draws are paid to the Vermettes and Henry, not to Buckland Bingo Ltd. And the bookkeeper Lynn Hicks keeps a handwritten record of how much each has taken.

7. The only known bank accounts in the name Buckland Bingo Ltd. are the accounts from the Buckland operation that were dormant since 1988. Mr. Holm’s working paper dated March ’94 on TD act #0772-3303586 is headed Buckland Bingo Ltd. but the account is in the name of Archie Vermette and Delmar Henry.

Against:

1. Some of the supplies and/or equipment were transferred from the Buckland operation to the P.A. operation.

2. When WTP began the first year-end, they contact Balon and were advised that Buckland Bingo Ltd. was a corporation.

3. Bingo Gardens’ general ledger only has two partners’ equity accounts, Trach and “Buckland Bingo”.

4. In May, 1988, “representatives” of Buckland Bingo Ltd. and Trach Ventures Ltd. met with Balon and Balon prepared buy/sell agreements and minutes of a special directors meeting for a cross-issuance of shares. The agreements and minutes were never signed. In January 1989 Russell Vermette (Graham Holm’s office) recommended that the merger not be completed because of the income tax stop loss rules.

5. Bingo Gardens paid and expensed some of the outstanding bills of Buckland Bingo Ltd. and debited approximately $100,000.00 paid to Vermette Trucking & Wood Preservers Ltd. for Buckland Bingo Ltd.’s debts to the partners’ equity account of “Buckland Bingo”.

H. The Crown’s Position

31. The Crown initially took the position that taxes should be assessed on the basis that each of the accused individuals were partners in the operation of Bingo Gardens entitled to receive 25% of 50% of Bingo Garden’s profit allocation. In initial cross-examination Sheila Nixon agreed with counsel for the accused that salaries paid to partners by a partnership are not a deductible business expense of the partnership and, accordingly the allocation of partnership income on the basis of a 25% entitlement of each individual in the “Buckland group” to 50% of the net profit of Bingo Gardens would produce calculations markedly different from those on which the Crown had relied to that point in the trial. In fact the result for some years would be an over reporting of income by some of the accused.

32. Following an adjournment of the trial, the Crown applied and I allowed the Crown to recall Sheila Nixon to correct her earlier testimony. Sheila Nixon testified that the distributions to Archie Vermette and Del Henry as “salaries: would be treated by Revenue Canada as distributions prior to any distribution by the partnership of 25% of 50% of the net income of Bingo Gardens.

33. Thus the Crown’s theory of profit allocation was modified to ask the court to find that the partners of Bingo Gardens had agreed, if not overtly by implication that the individuals of the “Buckland Group” who “worked” in the partnership were entitled to an additional distribution of partnership income in excess of 25% of 50% of the net income (or profit allocation) of the partnership. The result of the application of this theory would be very similar to the original calculations of “unreported income” upon which the prosecution originally relied.

34. In addition to submitting that it has proved that the accused were partners and that it has proved the accused’s share of income distribution of the partnership was to be “salaries” for “work” plus 25% of 50% of the remaining net profit of the partnership, the Crown relies on certain other evidence as to establishing its case. It submits that it has proved certain sums were never reported. Exhibit P-182 - a cheque for Gilbert Vermette for $5,000.00; exhibit P-94 a cheque for Archie Vermette for $2,500.00; P-107, a cheque for $5,264.98; P- 171, a cheque for $4,800.00; P-181 - a cheque for $2,500.00.

35. In support of its theory of profit allocation the Crown relies on the lack of any record of dividends in the minute book and records of Buckland Bingo Ltd. It submits that the evidence as a whole must lead to the conclusion that Buckland Bingo Ltd. did not continue to have any factual operation. The Crown submits that to suggest that it did is a fiction; that it is an attempt to retroactively structure affairs, to say we could have done it this way and benefitted.

30. The Crown invited the Court to conclude from the evidence that the company ceased to do anything from May 1990 until a time after Revenue Canada commenced its audit. The Crown submits that the conduct of the individuals of the “Buckland Group” prior to the audit leaves one hard-pressed to see anything that would indicate that they wanted to have or conducted themselves as if a corporation were involved. The Crown relies on the accused reference to the monies from Bingo Gardens as their “equity”. The Crown submits they treated this money as their’s. The Crown would have the court conclude that these individuals were astute business people who knew exactly what they were doing. The Crown invites the Court to conclude that the evidence establishes that these accused drew large sums of money from the Bingo Gardens operation and failed to tell their accountants, failed to instruct their accountants or even ask their accountants to do something about all these dollars they were taking out.

37. In support of its theory the Crown relies on banking documents, workers’ compensation board documents, and good and services tax registration form signed by one or other of the accused using the title partner. It suggests the Court must conclude that the Crown has proved that these individuals intended to evade taxes. The Crown suggests they knew because of their involvement in other ventures, such as Vermette Trucking & Wood Preservers Ltd., how to do it properly. The Crown suggests that an inference of mens rea can be drawn from the sheer amounts. In the alternative the Crown suggests that it has proved mens rea by proving the wilful blindness of these accused.

H. The Defence Position

38. The defence submits that the evidence presented at trial leads to the conclusion that the profit allocation of the partnership, Bingo Gardens, to the partner Buckland Bingo was properly income of Buckland Bingo Ltd., a corporate entity and not income the individuals of the “Buckland Group” personally. The following evidence supports such a conclusion:

i) Dennis Ulmer, the chartered accountant for the partnership Bingo Gardens, testified that in the first year of Bingo Gardens he confirmed the identity of “Buckland Bingo” to be Buckland Bingo Ltd., a corporate entity. Such confirmation was received from Gordon Balon, solicitor for the accused and Buckland Bingo Ltd. Dennis Ulmer further testified that his reporting of partnership income for Bingo Gardens remained consistent with Buckland Bingo Ltd. being the partner in the partnership to subsequent years. Such examples included confirming that wages and salaries could be paid to Archie Vermette, Del Henry and Beverly Vermette because Buckland Bingo Ltd. was the partner in the partnership. Dennis Ulmer further testified that in the event the individuals were the partners in Bingo Gardens it would not be appropriate for the partnership to pay wages and salaries to such individuals and claim a business expense in relation thereto.

ii) Gordon Balon, solicitor for the accused and Buckland Bingo Ltd. during 1987, 1988 and 1989 testified that it was his belief that the partnership Bingo Gardens was a partnership between Buckland Bingo Ltd. and Trac Ventures Ltd. and, in fact, Gordon Balon, prepared a series of documentation after the commencement of business of the partnership, Bingo Gardens, which indicated that Buckland Bingo Ltd. was the partner.

111) Up until January 1989, Russell Vermette, the accountant for

Buckland Bingo Ltd., was proceeding to look at ways of reorganizing the structure of Bingo Gardens, which inquiries all assumed that Buckland Bingo Ltd. was a partner in Bingo Gardens.

iv) Graham Holm testified that subsequent to taking over personal conduct of the accounting for Buckland Bingo Ltd. in the spring of 1989 that he believed that Buckland Bingo Ltd. was the partner in Bingo Gardens. Such testimony was consistent with the financial statements prepared in 1989, 1990, 1991 and 1992 by Graham Holm for Vermette’s Trucking & Wood Preservers Ltd. During such time period, such financial statements included calculations of amounts received from Bingo Gardens by Vermette’s Trucking & Wood Preservers as repayment of a loan Vermette’s Trucking & Wood Preservers Ltd. had made to Buckland Bingo Ltd. in 1987 (P-718, P- 719, and P-720).

v) Graham Holm testified that he did not prepare income tax returns for Buckland Bingo Ltd. during the period 1989 to 1993 due to the fact that no records had been available, such records having been seized by the Landlord of the property. This is consistent with the testimony of Léon Gobeil who was the Landlord who had seized such records. Graham Holm testified that as early as 1989 or 1990 he had attempted to obtain the records from the Landlord which is consistent with the testimony of Léon Gobeil who testified that an accountant had contacted him in 1989 or 1990 asking for the records of Buckland Bingo Ltd. for the purpose of preparing income tax returns.

vi) Graham Holm testified that in December of 1991 he had extensive meetings with Archie Vermette, Gilbert Vermette and Beverly Vermette to discuss the status of Buckland Bingo Ltd. (P-724) and, in particular, the reporting of amounts being received from Bingo Gardens.

vii) In December of 1992, prior to preparation of the individuals 1992 tax returns, which were due on April 30, 1993, George Whitrow, the accountant for Beverly Vermette and Archie Vermette, contacted Graham Holm to inquire about the drawings which Bingo Gardens had recorded Beverly Vermette as receiving from Bingo Gardens. During such conversation, Graham Holm indicated that the amounts were receipts from Buckland Bingo Ltd. and that the 1992 taxation year such amounts should be reported as dividends. Graham Holm’s testimony indicated that the 1992 taxation year of the individuals was the first year in which such amounts needed to be reported as dividends as any previous amounts did not, in his opinion, exceed their outstanding Shareholder loan and/or loan balances in Buckland Bingo Ltd.

viii) Graham Holm testified that in the full of 1993 he received the records of Buckland Bingo Ltd. and commenced attempting to prepare financial statements and corporate tax returns. Prior to the finalization of such returns the audit of the accused began.

ix) Exhibit P-2, an unsigned “Partnership Agreement”, and Exhibit P-3, an executed “Partnership Agreement” indicate that the proper allocation between Fred Trach and the “Buckland Group” was to be 50% each. The profit allocation reported on the Financial Statements of Bingo Gardens prepared by Dennis Ulmer supports such a partnership agreement. A finding that Buckland Bingo Ltd. was not a partner in Bingo Gardens and, rather, the four individuals of the “Buckland Group” were partners would not be consistent with the profit allocation indicated in either the Partnership Agreements or the Financial Statements of Bingo Gardens.

x) The Partnership Act requires that partnership profits and losses be allocated equally between the partners unless there is a written or implied agreement to the contrary. Section 26 of The Partnership Act states as follows:

26 The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be deter- mined, subject to any agreement express or implied between the partners, by the following rules:

I. All the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses whether of capital or otherwise sustained by the firm;

5. Every partner may take part in the management of the partnership business;

38. In addition to the evidence above, Defence counsel submitted that the evidence of Revenue Canada’s own officials indicate that there is uncertainty with respect to whether the individual accuseds were partners in the partnership of Bingo Gardens. In fact, Revenue Canada issued Notices of Reassessment including partnership income in the hands of the individual accused and at the same time in the hands of Buckland Bingo Ltd. Sheila Nixon testified that it was unusual for Revenue Canada to include the same income amount in income for different taxpayers, however, the Department of National Revenue felt it was necessary in the within case to “protect their position”. It is submitted that such a reassessing position by Revenue Canada in and of itself indicates an uncertainty amongst Revenue Canada as to whether the accused individuals were partners in the partnership, Bingo Gardens.

39. Defence submits that even in the laying of the Information in January of 1998, the Crown was ambiguous as to who the partner in Bingo Gardens was. The charges in the Information describe each of the accused individuals as “Gilbert Vermette also known as Buckland Bingo and Buckland Bingo Ltd.”. It is trite to say that a corporation is a separate entity apart from its shareholders. Even in the laying of the Information, the Crown indicates a reasonable doubt as to who are the partners in the partnership Bingo Gardens.

40. In addition, Sheila Nixon indicated that Revenue Canada did not at any time in the three years between the date of the reassessment and the date of trial alter their position that the partnership income was the income of Buckland Bingo Ltd.

41. Defence submits that the fact that Buckland Bingo Ltd. was struck from the corporate register in and of itself does not render Buckland Bingo Ltd. incapable of being a partner in Bingo Gardens. It is clear that the consequence of being struck from the corporate register is not that the corporation is dissolved, but, rather, that a corporation is not capable of commencing or maintaining an action or other proceeding in the Court in respect of a contract made in whole or in part in Saskatchewan in the course of or in connection with its business (section 275 of The (Saskatchewan) Business Corporation Act.

42. In À. v. Rasmussen (1995), 130 Sask. R. 308 (Sask. Prov. Ct.), the Court considered in looking at offences under the Excise Tax Act the consequence of a corporation being struck from the corporate register. In Rasmussen, the Court held that the corporation which as been struck from the register in Saskatchewan was not therefore ipso facto dissolved and, further, that The Business Corporations Act clearly envisaged a corporation carrying on business in Saskatchewan after being struck from the register.

43. Defence submits that the court must conclude that the Crown has failed to prove that each of the individual accused did wilfully evade the payment of taxes and/or make “false or deceptive statements” in the returns filed for the taxation years 1990, 1991 and/or 1992?

44. Defence submitted that in the present case there exists two elements to the actus reus, both of which the Crown must prove beyond a reasonable doubt. The elements are as follows:

i) Each of the individual accused must have had income from Bingo Gardens; and

ii) Each of the individual accused must have failed to report any in come received from Bingo Gardens.

45. Defence submits that the first step in determining whether each accused is guilty or not guilty is to decide whether the actus reus has been proven, beyond a reasonable doubt. In R. v. Matthys (1986), 86 D.T.C. 6385 (Ont. Dist. Ct.), at 6387, the Court correctly stated that “only after the Court is satisfied on this point should it go on to consider whether or not the act was done with the requisite intent”.

46. Defence submits that the Crown has failed to establish beyond a reasonable doubt whether the Bingo Gardens partnership income allocation to “Buckland Bingo” was properly income of each of the accused personally in the taxation years alleged. In other words, it is submitted that the Crown must establish beyond a reasonable doubt that each of the individual accused was a partner in the partnership, Bingo Gardens, for the actus reus of the alleged offence to have occurred.

47. Defence submits that the principles espoused in Redpath are applicable in a situation where a criminal court must examine whether an amount received by a taxpayer was properly income for the purposes of The Income Tax Act. Applying Redpath, it is respectfully submitted that a criminal court usurps its function and exceeds its jurisdiction if it has to examine whether an amount received by a taxpayer is income for tax purposes.

48. Defence submits that in the event each or any of the individual accused is determined to have received amounts which are properly included as income from Bingo Gardens in the 1990, 1991 and 1992 taxation years, it must still be determined, to find the actus reus of the alleged offence, that each or any of the individuals accused did “evade the payment of taxes”. In order to make such a determination it is in necessary to determine whether federal taxes were actually evaded.

49. Defence submits that if Buckland Bingo Ltd. was not the partner in Bingo Gardens that Buckland Bingo Ltd. had no other operations and accordingly the accused, Archie Vermette, and Delbert Henry would have had available an allowable business investment loss from previous years to reduce taxable income.

50. In À. v. Fogazzi (1992), 92 D.T.C. 6421 (Ont. Gen. Div.), the Court held that it is fundamental to find that the actual payment of federal taxes was evaded for the actus reus of the offence to exist. As stated by Mr. Justice Sheppard, at 6433:

The object of the trial is to determine the amount of tax otherwise payable and evaded or sought to be evaded. To get to that point, one has to look at deductions permitted in computing income (Part I - Division B) and deductions permitted in computing taxable income (Part I - Division C).

51. This proposition was followed in the Saskatchewan case of R. v. Nusch, (supra.). In Nusch, the Court of Appeal upheld the trial judge’s approach of considering, in determining whether federal taxes were actually evaded, or were intended to be evaded, the actual payment of federal tax that would have arisen had all allowable deductions and losses under The Income Tax Act been utilized.

51. Defence submits that if Buckland Bingo Ltd. was not the partner in Bingo Gardens the partnership arrangements between Fred Trach and the individuals in the Buckland Group must have entitled each of the individuals in the Buckland Group to receive an allocation of profit of the partnership in excess of 12.5%. Failing such a finding, Archie Vermette would not have failed to report income in the 1991 and 1992 years and Delmar Henry would not have failed to report income in the 1991 year in that in aggregate each would have reported more income than his alleged profit allocation from Bingo Gardens (D-19). In addition, in the absence of such a finding, Archie Vermette would have reported in the aggregate of all three years, an amount in excess of the partnership contributions.

52. Defence submits that even if the Crown is successful in establishing the actus reus of the offence in relation to any of the accused, that the mens rea of the offences are not proven beyond a reasonable doubt.

53. In À. v. Baker (1973), 45 D.L.R. (3d) 247 (N.S. Co. Ct.), the accused had repeatedly failed to respond to demands to file income tax returns and had paid several fines in respect of that offence. However, when his records were seized they were found to reveal a complete record of his income. He was nevertheless charged with an offence under paragraph 239(1 )(d) of the Act for having “wilfully, in any manner, evaded or attempted to evade ... payment of taxes imposed by this Act...”. Holding that the word “evade” implied some element of “craft, stratagem or artifice”, and finding none, the County Court of Nova Scotia found the accused not guilty of the offence.

54. In À. v. Hummel (1971), 76 D.T.C. 6114 (B.C. Prov. Ct.), the accused taxpayer was charged under the predecessors to the current section 239 for failing to report his income gains resulting from the sale of shares and other assets in claiming improper deductions. The Court found the evidence established that the offences were borderline cases and the taxpayer’s treatment of items of income and expenditure to his advantage did not make him guilty, even though that treatment was wrong.

55. Defence submits that the Crown has failed to establish, by inference or otherwise, an intention to evade income tax. In fact, it is clear that if a finding of fact is made that Archie Vermette was a partner in the partnership Bingo Gardens, that he did not avail himself of all available deductions which could have been offset against income from Bingo Gardens. Specifically, in the event Buckland Bingo Ltd. was not a partner in Bingo Gardens, it would as a consequence have ceased to have carried on business and losses relating to amounts loaned to Buckland Bingo Ltd. would be deductible to Archie Vermette and/or Vermette’s Trucking & Wood Preservers Ltd., a corporation in which Archie Vermette was a principal. No such deductions were taken.

56. Defence submits that Gilbert Vermette clearly involved his accountant, Graham Holm, to give advice throughout the preparation of person income tax returns. Graham Holm’s testimony was unequivocal in that he considered and believed, at all relevant times, the partner in Bingo Gardens to be Buckland Bingo Ltd. In addition, Graham Holm specifically advised Gilbert Vermette, Archie Vermette and Beverly Vermette, prior to the preparation of their 1992 income tax returns that, in his view, (although he did not have the books and records of Buckland Bingo Ltd.) that the repayment of loans made by Vermette’s Trucking & Wood Preservers Ltd. and the individual accused to Buckland Bingo Ltd. had likely been repaid. As a consequence, Gilbert Vermette and Archie Vermette reported dividends in their 1992 income tax returns representing amounts which they had received from Buckland Bingo Ltd.

57. Defence submits that such evidence is contrary to a finding by this Honourable Court that the intention to evade taxes existed. If the individual accused, including Gilbert Vermette, intended to evade the payment of taxes, it would be illogical to report dividend income for a portion of the very amount which it is alleged they sought to evade.

58. In respect to Delbert Henry, defence submits that the failure to file an income tax return in and of itself does not constitute evasion. Several cases have indicated the same in concluding the following:

59. In R. v. Bishop (1997), 186 N.B.R. (2d) 295 (N.B. Prov. Ct.), the New Brunswick Provincial Court examined the issue of whether a failure to file returns constituted wilful evasion. In reviewing the leading cases on this matter, the Court concluded that the Court must be able to infer that the accused had never intended to file the returns unless faced with a request or an indication of an investigation by Revenue Canada officials. Reading from the head note of the Saskatchewan Court of Appeal in R. v. Paveley (1976), 76 D.T.C. 6415 (Sask. C.A.), the Court cites the following passage:

The failure to file income tax returns may supply the actus reus to the offence contrary to Section 239(1) of The Income Tax Act. But in addition, the Court must prove the mens rea of the offence. The mere proof of a wilful failure to file returns does not obligate the court to infer that such omission was with the intent to evade taxes.

60. In Bishop (supra.) the Court notes that where there is evidence that there was an accidental oversight, any degree of disorganization or difficulty which may have raised a doubt as to the reason for the failure to file the return, then the Crown has not established the mens rea of the offence.

61. Defence submits that, in the within case, no evidence was led to suggest that Delmar Henry did not intend to file his 1992 income tax return, in fact, he provided his accountant, George Whitrow, with sufficient information to prepare such return, however due to the inability to pay for the preparation of the return was not able to file it in a timely manner.

The Issues

62. (1) Has the Crown established beyond a reasonable doubt that each or

any of the accused did receive income from Bingo Gardens as partners in a partnership known a Bingo Gardens’?

(2) Has the Crown established beyond a reasonable doubt that each or any of the accused did wilfully evade the payment of taxes and/or make “false or deceptive statements” in the returns of income filed for the taxation years, 1990, 1991 and/or 1992?

The Law

63. I have carefully considered the cases relied upon by the Crown:

1) Excerpt from Ewaschuk, Chapter 28:0050;

2) R. v. Sansregret, [1985] 1 S.C.R. 570 (S.C.C.) esp. at p. 584;

3) R. v. Blondin (1970), 2 C.C.C. (2d) 118 (B.C. C.A.);

4) R. v. McFall (1975), 26 C.C.C. (2d) 181 (B.C. C.A.);

5) R. v. Aiello (1978), 38 C.C.C. (2d) 485 (Ont. C.A.);

6) R. v. Zlatic, [1993] 2 S.C.R. 29 (S.C.C.);

7) R. v. Théroux, [1993] 2 S.C.R. 5 (S.C.C.).

64. I have carefully considered the cases referred to and the very helpful submissions on the law submitted by counsel for the defence. Some of which I have set out above under the rubric of the defence’s position.

65. The law in this area is well settled

Onus of Proof

66. Paragraph 239(1 )(a) and (d) as in force at the relevant time, read as follows:

Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,

(d) wilfully, in any manner, evaded or attempted to evade, compliance with this Act or payment of taxes imposed by this Act, or

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(f) a fine of not less than 50%, and not more than 200%, of the amount of the 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.

67. The courts have held that an offence under section 239 of the Income Tax Act is a true criminal offence. In other words it is a full mens rea offence with the Crown having the burden of establishing both elements of the offence, the actus reus and the mens rea. Canada (Attorney General) v. Nusch (April 24, 1996), Henning Prov. J. (Sask. Prov. Ct.); restored [1998] 9 W.W.R. 356 (Sask. C.A.).

68. The courts have held that the prosecution must prove both evasion or the attempt to evade tax (the actus reus) and mens rea (guilty intent) on the part of the accused. In R. v. Medicine Hat Greenhouses Ltd. (1981), 81 D.T.C. 5100 (Alta. C.A.), the Alberta Court of Appeal reversed the judgment of the Alberta Court of Queen’s Bench [reported (1980), [1981] 3 W.W.R. 577 (Alta. Q.B.)] and restored the decision of the court of first instance, (1980), 80 D.T.C. 6031 (Alta. Prov. Ct.), which had held that, in a charge under paragraph 239(1 )(d), the onus remains on the Crown throughout to establish both evasion (Le., a breach of the Act) and wilfulness of evasion. The onus, it concluded, is on the Crown to establish both elements of its case beyond a reasonable doubt: an evasion and mens rea. In June, 1981, the Supreme Court of Canada dismissed the Crown’s application for leave to appeal.

69. It is now reasonably well established that the offence of tax evasion under paragraph 239(1 )(b) (and, by analogy, the offence of making false statements under paragraph 239( 1 )(a)) of the Act is an offence of specific intent; that is, it is not sufficient to demonstrate the general fraudulent intent on the part of the accused. In order to sustain a conviction for tax evasion, the Crown must prove a fraudulent intent to evade the payment of taxes. This principle emerges clearly from the decision of the Ontario Court of Appeal in R. v. Sihler (1976), 31 C.C.C. (2d) 73 (Ont. C.A.). Sihler was convicted in that trial and the conviction was sustained on trial de novo. On appeal to the Court of Appeal, the conviction was again sustained on most counts, however, the conviction was quashed insofar as it related to one issue. Brooke, J.A., for the Court, stated the following:

The Learned Trial Judge considered all of the circumstances and found that there was a general intent on the part of Dr. Sihler to mislead the Department and suppress income. Be that as it may, I am of the view that there was no evidence of a specific intent to mislead and so to make a false or misleading statement in his tax return with respect to the loss of his property on Brandon. Avenue by reason of the foreclosure. Indeed, the evidence called by the Crown is to the contrary. The Crown called the witnesses, E. Houser, one of Her Majesty’s counsel, who testified that as counsel for the Mercantile Bank (which had certain claims against the Appellant) he met with him with respect to his properties. He testified that he had advised both the banks and Dr. Sihler that he was of the opinion that if foreclosed the Appellant would not be required to recapture the appreciation for purposes of income tax. Mens rea is an essential element of the offence upon which the Appellant was charged, and insofar as the Crown’s allegation depended on the failure to report the sale or disposition of the Brandon Avenue property, it has failed to show that he intended to report falsely or misleading in this regard. With greatest deference, the Learned Trial Judge’s finding of a general intention based on the overall dealings of Dr. Sihler with his tax problems was quite insufficient to support his findings with respect to this matter in the face of the evidence referred to.

70. The distinction between specific and general intent is subtle but is important as the requirement of specific intent includes the further element that the act be committed with an added ulterior motive of achieving an illegal object.

71. This is consistent with the decision in R. v. Baker (1973), 45 D.L.R.

(3d) 247 (N.S. Co. Ct.), where the County Court of Nova Scotia found the accused, who had filed income tax returns, not guilty of an offence under paragraph 239(1)(d). The court held that the words “evade” implied an element of “craft” stratagem or artifice”.

72. Moreover, it has been held that in a tax evasion charge, “it must appear prima facie from the evidence that the taxability is clear-cut, obvious, indisputable, unquestionable from lack of reporting, before entering the examination of the other facts of the charge, e.g. whether the undisputable taxability, based on income gained, proven and undeclared, leads to a conclusion beyond a reasonable doubt that it was wilfully omitted by a taxpayer in his tax returns”. In R. v. Redpath Industries Ltd. (1984), 84 D.T.C. 6349 (Que. S.C.), the Quebec Superior Court (Criminal Division) dismissed an appeal by the Crown from an acquittal of a summary conviction charge brought under paragraph 239(1 )(d). Redpath has been followed in several subsequent decisions, including the recent Saskatchewan Court of Appeal decision in R. v. Nusch, (supra.).

73. The decision in R. v. Kleysen (1996), 96 D.T.C. 6265 (Man. Q.B.) Is consistent with Redpath. In Kleysen, the accused had claimed an investment tax credit on his return of income despite the fact that both his professional advisors, an accountant and a lawyer, had advised him that the investment tax credit was not available to him in that he was not eligible for such investment tax credit. Schwartz, J. stated, at page 6273, as follows:

During the trial I indicated to counsel that I was satisfied that Hubert had the right to make his claim for the ITC even though he was told by his advisor that he was not a corporation and that the claim was limited to corporations. The claim of a credit in this case does not support fraudulent conduct and cannot, in my view, support a prosecution for fraud or evasion. Hubert as a taxpayer has no other reasonable method to contest Revenue Canada’s interpretations of the Act but to make a claim, openly on his return and contest this reassessment. To subject a taxpayer to criminal prosecution to criminal prosecution for claiming her credit which she wishes to argue is allowable strikes at the fairness of the Canadian Tax System. Taxpayers out not to be threatened with prosecution for such claims. Taxpayers ought to be encouraged to claim and argue their respective positions in order to ensure the system is fair and equitable. It is only a fair and equitable system which will retain the respect of taxpayers whose voluntary compliance is essential to its successful, efficient and effective operation.

74. Accordingly, based on the decisions in Redpath, Nusch, and Kleysen, where the total income of the taxpayer is duly declared, the claiming of expenses and/or credits should not rest in criminal liability even where such expenses or credits may be open to question.

Recklessness and Carelessness

75. The Courts have consistently found that carelessness or recklessness in the preparation of income tax returns does not in and of itself constitute evasion.

76. In À. v. DiPasquale (1993), 93 D.T.C. 5389 (Ont. Gen. Div.), wherein the Court stated that carelessness or recklessness without knowledge of the facts constituting the offence of tax evasion was not sufficient, although wilful blindness could, in some circumstances, be the equivalent of such knowledge. The Court stated at page 5391 as follows:

With respect to the mens rea of the offence, a charge of wilful evasion is a specific intent offence. The Court must find on the evidence beyond a reasonable doubt and intend to evade the payment of income tax. Carelessness or recklessness without knowledge of the facts constituting the offence is not sufficient. Wilful blindness may be the equivalent of knowledge if the facts are such that a Court can infer knowledge.

With respect, the finding that the Appellant was wilfully blind in the sense that he knew that he was evading the payment of tax is totally inconsistent with the evidence that had he computed his tax correctly, he would have paid less tax than he did. The evidence was such that the Appellant was careless, indeed possibly reckless, but in my view, the evidence is insufficient to raise the level of motivation to that of knowledge or wilful blindness.

77. The same Court again dismissed a charge under paragraph 239(1 )(d) in À. v. Garshman (1976), 76 D.T.C. 6103 (Alta. Dist. Ct.). Here the taxpayer, whose books were in a “deplorable condition”, had regularly reported his income on the basis of increases in net worth. When these statements proved unacceptable, the taxpayer hired an accountant to revise them, but again the errors and unreported funds were found by the Department. A charge of attempted evasion followed. On appeal, the Court found the taxpayer to have been extremely careless but doubted that he had attempted evasion.

Mens Rea Generally

78. The absence of mens rea in R. v. Branch (1975), 76 D.T.C. 6112 (S.C.C.), enable a dentist to escape prosecution under paragraph 239(1)(d). Despite adequate records, he failed to file tax returns for four years, during which his income amounted to $113,417. The Court accepted his argument that marital troubles had left him “emotionally washed up” and unable to discharge his responsibilities in filing tax returns.

79. In R. v. Metke (1975), 76 D.T.C. 6313 (Alta. Prov. Ct.), the Provincial Court of Alberta dismissed a charge under paragraph 239(1 )(d) in a case which the Department evidently viewed as a transparent attempt to understate income. At the end of each year, for three consecutive years, the taxpayer, a dairy farmer, issued a $10,000.00 or $15,000.00 cheque to a corporation in the cattle business, in which he was a shareholder, making it “for cattle” and claiming it as a deduction for tax purposes. The corporation, however, treated each of these amounts as a loan from the taxpayer, repaying it to the taxpayer with interest the following year. The Provincial Court of Alberta conceded that what the taxpayer did was bad business, and could be considered negligence on his part, and that it indicated a complete lack of knowledge of bookkeeping and income tax practice, but concluded that it could not be construed as an “unlawful and wilful” attempt to evade tax.

Analysis and Conclusions

80. I have very extensively reviewed the evidence in the context of the positions of the Crown and defence. For the Crown to succeed it must have established the foundation of its theory of assessment. That is, it must have established beyond a reasonable doubt that the accused were partners in the operation known as Bingo Gardens and that they were entitled to 25% of 50% of the net profit plus “salary” where they had worked in the partnership. Much of the evidence does not support such a conclusion:

1) Some of the supplies and equipment were transferred from the Shellbrook Highway operation of Buckland Bingo Ltd. to the new operation in Prince Albert.

2) In May, 1988, “representatives” of Buckland Bingo Ltd. and Trac Ventures Ltd. met with lawyer, Gordon Baton, and Baton prepared buy/sell agreements and minutes of a special meeting for cross-issuance of shares. The agreement and minutes were never signed. In January, 1989, Russell Vermette of Graham Holm’s office recommended that the merger not be completed because of the income tax stop loss rules.

3) The accountants for Bingo Gardens, Woodhouse, Tucker & Partners, always maintained the books of the partnership on the basis that there were two partners: Fred Trach and Buckland Bingo Ltd. The accountants approach would have been markedly different if the individuals had been partners.

4) Gilbert Vermette, Archie Vermette, and Delbert Henry filed their returns for 1990, 1991 and 1992 on the basis that Buckland Bingo Ltd. was the partner, most of this done before Revenue Canada’s Audit.

5) Vermette Trucking & Wood Preservers Ltd. books and returns were always filed as if Buckland Bingo Ltd. was still operating and was the partner. Vermette Trucking & Wood Preservers Ltd. did not claim losses in any taxation years a claim for an allowable business investment loss based on money loaned to Buckland Bingo Ltd. in 1987 and 1988.

6) Gilbert Vermette, Delmar Henry and Archie Vermette did not include in any taxation years a claim for an allowable business investment loss based on money loaned to Buckland Bingo Ltd. 1987 and 1988.

7) In December 1991 the accountant, Graham Holm, had discussions with Archie Vermette, Gilbert Vermette, and Beverly Vermette, wherein Graham Holm indicated the loan amounts owing from Buckland Bingo to Vermette’s Trucking and Wood Preservers were likely to be repaid by April 30, 1992. Mr. Holm advised the amounts received by the accused and Beverly Vermette from Buckland Bingo Ltd. during the period May 1, 1991 to April 30, 1992 would have to be reported as either dividends or income on their 1992 tax returns.

8) In December 1992, George Whitrow, accountant for Beverly Vermette telephoned Graham Holm and discussed reporting “equity drawings” from Bingo Gardens as dividends from the corporate partner Buckland Bingo Ltd.

9) In April 1993, Archie Vermette and Gilbert Vermette reported a dividend from Buckland Bingo Ltd. in their 1992 tax returns.

10) In the spring of 1993, Graham Holm had a staff person spend

18 hours on the books and records of Buckland Bingo Ltd. but had the work discontinued because the books and records were still under seizure from the landlord.

11) Lack of evidence of any acknowledgment by Fred Trach, the

individuals of the “Buckland Group” or any of the professionals that any of them were instructing that there had been any change to the original partnership arrangement. That is 50% Fred Trach, 50% Buckland Bingo Ltd.

81. Considering these factors and all of the evidence I am, at minimum, left with a reasonable doubt that the accused were partners in the operation known as Bingo Gardens. I conclude that the Crown has failed to establish beyond a reasonable doubt that they were.

82. It follows that if it is not established that they were partners of Bingo Gardens, it has also not been established that they had an obligation as individuals to report the income of Buckland Bingo Ltd. except in the form of dividends received therefrom.

83. With the exception of Delmar Henry I am satisfied that prior to the commencement of the Revenue Canada Audit the other accused had taken steps with their accountants to see that the dividend income would be reported. Their tardiness and carelessness in tending to this does not amount to wilful evasion of taxes.

84. Delmar Henry’s failure to file his 1992 income tax return and his failure to instruct and provide information to his accountant prior to the commencement of the audit certainly raise a suspicion that he was avoiding facing his obligation to pay taxes. His accountant, George Whitrow, testified that Mr. Henry’s failure to pay his account was at least in part responsible for the lack of communication between them. I conclude that the evidence does not lead to the inevitable conclusion that Mr. Henry’s actions (lack of action) was a wilful evading of tax. I must, therefore, conclude that the Crown has failed to establish that it was for the purpose of evading taxes.

85. The Crown relied on certain sums as never having been reported by anyone. I am satisfied that all funds paid out by Bingo Gardens were meticulously accounted for in the books of Bingo Gardens. These books were supplied to Graham Holm whom I am satisfied ac- countanted for all of these funds either through repayment of loans or as dividends received by the accused from Buckland Bingo Ltd. His advising of his clients to report the income in this manner does not suggest the conclusion that tax was being evaded.

86. In conclusion, I find that the Crown has failed to prove the elements of the offence in any of the counts before the Court and I find each of the accused not guilty in respect to each of the charges that apply to him.

Accused acquitted.