Her Majesty the Queen v. Hyman Walter Garshman, [1976] CTC 197, [1976] DTC 6103

Tavender, J:—This is an appeal by the Crown by way of trial de novo from an acquittal of the accused respondent on a charge that the accused:

Between the 3ist day of December, AD 1968 and the 1st day of May, AD 1973 did unlawfully and wilfully evade the payment of taxes imposed by the Income Tax Act, RSC 1952, Chapter 148, and amendments thereto, In relation to income received by him in the approximate amount of $135,604.05 and did thereby commit an offence contrary to Section 239(1 )(d) of the Income Tax Act.

Counsel agreed that the evidence given in the Court below (which was very lengthy) would be the evidence before me for the purpose of hearing and determining the appeal.

The basic scheme of the Income Tax Act is that every Canadian resident is liable to pay income tax on his income for the taxation year minus permitted deductions (section 2). The income of the taxpayer is the aggregate of his income less deductions permitted by the Act (section 3).

The Aci provides:

150. (1) A return of the income for each taxation year in the case of a corporation and for each taxation year for which a tax is payable in the case of an individual shall, without notice or demand therefor, be filed with the, Minister in prescribed form and containing prescribed information,

151. Every person -required by section 150 to file a return of Income shall in the return estimate the amount of tax payable. .—

152. (1) The Minister shall, with all due despatch, examine each return of income and assess the tax for the taxation year and the Interest and penalties, if any, payable.

(2) After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.

(3) Liability for the tax under this part is not affected by an Incorrect. or incomplete assessment or by the fact that no assessment has been made.

(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud In filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(il), in any other case,

reassess or make additional assessments, or asses tax, Interest or penalties under this Part, as the circumstances require.

239. (1) Every person who has

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

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

(f) a fine of not less than 25% and not more than double the amount of the tax that was sought to be evaded, or

(g) both the fine described in paragraph (f) and imprisonment for a term not exceeding 2 years.

Part XVII—Interpretation—provides:

248. (2) In this Act, the tax payable by a taxpayer under any Part of this Act by or under which provision is made for the assessment of tax means the tax payable by him as fixed by assessment or reassessment subject to variation on objection or on appeal, if any, in accordance with the provisions of that Part.

In order for the Crown to obtain a conviction it must prove beyond a reasonable doubt that the accused “did unlawfully and wilfully evade the payment of taxes imposed” by the Income Tax Act. Crown counsel conceded that mens rea must be established to obtain a conviction.

Since 1961 and probably for several years before that the accused had not been filing income tax returns in the usual form but had been filing on a net worth basis. It was agreed by counsel that the Income Tax Act makes no provision for such a procedure. Subsection 150(1) of the Act requires that a return of income shall be filed in the prescribed form and contain the prescribed information. It is a fact that the accused filed his income tax returns on the prescribed forms but the forms did not contain the prescribed information.

The facts in general can be summarized as follows: It did not appear as to what the occupation of the accused was but he owned a number of incorporated companies which he treated as proprietorships or as his alter ego. One of these companies, Joy Toy Company Ltd, filed income tax returns but none of the others did. He had a number of bank accounts in his own name and in the names of his companies. He conducted his business affairs in a most unorthodox manner, hence his use of net worth income tax returns. His 1968, 1969, 1970, 1971 and 1972 returns were prepared by chartered accountants. His returns for 1970 and 1971 showed his income as estimated and no net worth statement accompanied them. The other years’ returns were accompanied by net worth statements. Following a demand net worth statements covering the years 1970 and 1971 were filed under date of February 21, 1973.

I do not propose to examine the evidence in detail. I think it sufficient to say that it discloses that the income tax returns in question were prepared by chartered accountants from information given them by the accused and by one Legge, his right-hand man. There is no doubt but that the accountants did their best to provide the Department with what they believed to be accurate information of the accused’s financial affairs. There is in my mind no doubt but that the accused conducted his business affairs and kept his records in such a careless and negligent manner that it was virtually impossible for the accountants to prepare proper and accurate statements of his assets.

The accused’s income tax returns were prepared on a basis of net worth. Net worth statements were filed (ultimately) for each of the years in question. I am satisfied on the evidence that these statements can be prepared in several different ways resulting in different figures of estimated income for the year in question. As an example, the depreciation or loss of a capital asset used to generate income or the loss or destruction of stock-in-trade could be treated differently.

The evidence shows that where the accountants asked for specific information it was supplied to them. As an example when the accused was asked for his bank account balance the accused went to the telephone and obtained the figure immediately. In other cases he instructed Legge to get the information and it was duly supplied. In one case (Midway Slide) the asset value was considerably overstated which resulted in an overstatement of the accused’s apparent income (which was, of course, against his interest).

On one occasion in February 1973 Legge supplied the accountants with the proper Joy Toy asset figure. The accountants misinterpreted the figure and reduced it when they prepared the net worth statement for the year in question. The accountants said that if they had accepted and used the proper figure it would have corrected the deficiencies for the former years.

In summary the evidence is that the accused conducted his affairs in such a careless and unorthodox manner that it was very difficult for accountants to prepare proper statements of his assets. From time to time he formed numerous limited liability companies, put money into them and then when they were not successful simply forgot about them. He treated them all as personal proprietorships. Only the Joy Toy Company kept reasonable records and filed income tax returns. But even this company was treated as a proprietorship. Money was constantly transferred from his bank account to its bank account and he collected and kept accounts owing to it and took out stock-in-trade.

The Crown stresses the non-disclosure of a number of items. First there was the matter of $35,000 being found in bank bills in the accused’s safety deposit box. The key to this box was produced and the box opened on demand. The Department Investigator said that the accused told him that this sum was received in July 1971 from the Calgary Exhibition and Stampede for casino equipment, together with $10,000 for the cancellation of a contract, and that the $35,000 had been in the box ever since. Neither of these items was ever shown in any tax return or net worth statement. The accountant was of the Opinion that the $35,000 should have appeared in a net worth statement and should have been taken into consideration sometime but that the $10,000 would not give rise to apparent income. The accountant had never heard of the $35,000 as such but in February 1973 the accused told him that he had money to pay estimated income tax arrears of about $30,000 and the accountant assumed that this was money obtained since the year 1972.

Secondly the Crown alleges that several bank accounts were not disclosed. The accused operated several bank accounts:

The accused operated oniy one of these accounts in 1969, the Calgary account 38-00814. He showed it in the net worth statement attached to his 1969 tax return as $1,995.54 overdraft. (The Investigator in giving evidence said it was $1,195.54 overdraft, which is apparently incorrect.) The accused operated four of these accounts in 1970. (The Investigator said he operated three which appears to be incorrect.) He showed only the Calgary account 38-00814, in the net worth statement supplied to the tax department in 1973 for the year 1970— overdraft $5,016.21. He failed to disclose the Edmonton account 4494 with a credit balance of $9,793.13; the Garshman Tours account 38-04518 with a credit balance of $5,379.72; and the Sun Fun Holidays account 88-07310 with a credit balance of $26.55. The accused operated six accounts in 1971. He showed only Calgary account 40-06410 in the net worth statement supplied in 1973 for the year 1971—overdraft $944.03. He failed to disclose the Edmonton account 4494 with a credit balance of $15,607.35; the Calgary account 38-00814 with a credit balance of $1,443.46; the Garshman Tours US$ account with a credit balance of $3,858.17; the Garshman Tours account 38-04518 with a credit balance of $3,720.39; the Sun Fun Holidays account 88-07310 with a credit balance of $1,077.98; and the Garshman Tours account 38-11611 with a credit balance of $4,056.18. The accused operated six accounts in 1972 according to the evidence of the Investigator and his evidence was that four of these had credit balances and two minus balances. He said that the total unreported bank account assets were $15,800. I do not arrive at the same figures. According to all the evidence the accused operated seven bank accounts in 1972—Edmonton account 4494, credit balance $10,968.87; Calgary account 38-00814, debit balance $1,701.26; Garshman Tours US$ account, credit balance $4,358.17; Garshman Tours account 38-04518, debit balance $12,414.92; Sun Fun Holidays account 88-07310, credit balance $837.98; Calgary account 40-06410, credit balance $114.25; and Garshman Tours account 38-11611, credit balance $1,346.95. Oniy one bank account was included in the net worth statement attached to the 1972 tax return—a Calgary Commerce account with a debit balance of $12,400. This was the Garshman Tours account 38-04518 with an actual debit balance of $12,414.92. It would appear that on balance the accused had a credit balance of $3,510.04 in his bank accounts at the end of 1972. Having shown a debit balance of $12,400 his statement was out in that year by $15,910.04.

I think it should be noted that he never disclosed the existence of his Edmonton account which at.the end of 1970, 1971 and 1972 had substantial credit balances. It is also of interest that he did not always disclose the existence of the same account. In 1969 and 1970 he showed his Calgary account 38-00814 which in each of those years had a debit balance but in 1971 he showed his Calgary account 40-06410 which was the only account with a debit balance that year.

Thirdly the Crown alleges that the accused made a loam of $9,800 either in 1969 or partly in 1969 and partly in 1970 to one Albert Rotstein. The accused’s records indicated that nothing was ever repaid. This asset was never disclosed on the net worth statements.

Fourthly the Crown alleges that the accused’s disclosure respecting Joy Toy Company Ltd was grossly inaccurate. Crown counsel conceded that there was some disclosure here and that there may have been some confusion as to just how much the asset was. He alleged that the accused was at least wilfully blind as to the amount of his advances to this company.

Joy Toy kept its own records and filed its own corporate income tax returns prepared by an independent accountant. The evidence is that its tax returns were correct with one exception when the tax department audit showed an error of $3,178.50 against the accused’s interests. Its records and tax returns showed that the accused was advancing money to the company each year by way of shareholders’ loans. These loans were normally made and transferred directly out of one of the accused’s bank accounts into the Joy Toy account and numbered some 246 over the four years in question. The company was not a paying proposition and there was no chance of the accused ever recovering the amounts he was lending it. At one point during the period in question a large portion of the company’s assets were condemned by the Department of Consumer Affairs as unsaleable. I think it should be noted that the tax department had the means of checking the accused’s returns against the Joy Toy returns.

The accused’s accountant prepared a net worth statement for him as at December 31, 1972 to be filed with the Air Traffic Conference. This was for the purpose of his obtaining certification as a travel agent and the evidence is that it would be to his advantage to show the best possible asset picture. An amended statement was prepared by him on August 31, 1973. All these statements showed roughly the same figures for “advances to Associated businesses” as appeared in the accused’s tax returns. They. were considerably less than the Investigator said they should be.

The Crown’s position is that the accused had been reporting his income on a net worth basis since at least 1961 and that he well knew wnat was required and yet he consistently underestimated his assets. He knew what he had to disclose but deliberately failed to disclose assets or underestimated them. He should therefore be found guilty of unlawfully and wilfully evading payment of income tax contrary to the Income Tax Act.

Counsel for the accused presented four arguments for a dismissal:

1. No wilful evasion.

2. No mens rea.

3. The information is void for duplicity and uncertainty.

4. No proof any taxes due in any event.

First as to wilful evasion. There is no doubt but that the accused was extremely careless in keeping records. His financial affairs were confused and careless. He formed numbers. of companies and treated them all as proprietorships except that in the case of Joy Toy it did keep separate records and filed its own income tax returns. There is no doubt but that he failed to report some assets as for example the $35,000 in cash in his safety deposit box and some of the bank accounts. There is also no doubt but that he underestimated some of his assets as for example his advances to Joy Toy.

For the four years in question and for many years before he did not file the normal required income tax returns but made returns on a net worth basis. It may be that this is not a method permitted by the Act and it may be that it is an inaccurate method. The Department however permitted him to use this method and there is no evidence that it ever objected to it. The Department accepting his returns under this method, I think they qualify as income tax returns under the Statute. That being so it was his duty to file accurate and true statements. This he did not do. It would seem to follow that he evaded compliance with the Act but he is not charged with this offence.

The Income Tax Act provides that “with all due despatch” the Minister shall “examine each return of income and assess the tax for the taxation year and the interest and penalties, if any, payable” (subsection 152(1)). “After examination of a return the Minister shall send a notice of assessment to the person by whom the return was filed” (subsection 152(2)). The Interpretation Part of the statute provides that the tax payable by a taxpayer under the Act means “the tax payable by him as fixed by assessment”.

The evidence is that assessments for tax were made for the years 1969 to 1972 inclusive on December 16, 1974, that a notice of objection was filed by the accused and that there is presently a dispute as to what taxes are owing. The information herein was sworn on December 18, 1974. The Income Tax Act provides that the taxpayer shall within 30 days of mailing the notice of assessment pay any part of the assessed tax, interest and penalties remaining unpaid (subsection 158(1)). And where the Minister is of the opinion that a taxpayer is attempting to avoid payment of taxes he may direct that all taxes, penalties and interest be paid forthwith upon assessment (subsection 158(2)). The notices of assessment for the years in question were not filed as exhibits before me although they are included for the years 1970 and 1971 in the Ridell-Stead working papers filed as Exhibit 7. There appears to have been no demand for immediate payment of taxes.

It therefore appears to me that the accused was Charged with evading payment of taxes before the taxes were due.

I was referred by counsel for the accused to three reported income tax civil penalty cases. Two of these were Tax Appeal Board cases— Légaré Foundry Limited v MNR, 36 Tax ABC 351; 64 DTC 696, and Isherwood v MNR, 36 Tax ABC 420; 64 DTC 728. In each of these it was held that there was no basis for imposition of penalties for evasion of payment of tax until after assessment or reassessment. The other case is an Exchequer Court case—Elchuk v MNR, [1970] CTC 326; 70 DTC 6235. In this case the learned judge disagreed on this point with the decisions of the Tax Appeal Board. These were all civil cases. I am not bound by any of them but I feel that the Tax Appeal Board reached the right decision. In any event this being a criminal case I have no doubt but that in view of the difference of opinion indicated in the said cases I must have a reasonable doubt that the accused evaded or attempted to evade payment of taxes.

Counsel for the accused also argued that the charge was void for duplicity or uncertainty and referred me to Regina v Rafael, [1972] 3 OR 238, a judgment of the Ontario Court of Appeal. Subsection 510(1) of the Criminal Code provides that each count in an indictment shall in general apply to a single transaction. Subsection 529(1) provides that an objection to an indictment for a defect apparent on the face thereof shall be taken by motion to quash before the accused has pleaded and thereafter only by leave of the court of judge before whom the trial takes place. Subsection 755(1) brings in sections 729 to 744 mutatis mutandis in a summary conviction appeal. Section 729 brings section 510 in in the case of a summary conviction trial and it accordingly applies on the appeal. Subsection 732(1) provides that an objection to an information for a defect apparent on its face shall be taken by motion to quash before the defendant has pleaded and thereafter only by leave of the summary conviction court before which the trial takes place.

In the Rafael case (supra) the indictment charged that the accused between dates covering five years defrauded certain persons of certain sums of money, etc. Particulars supplied named 24 victims. The Court of Appeal by a unanimous judgment held that the occurrences did not together form a single transaction and therefore the indictment did not conform with subsection 510(1) of the Criminal Code and was void. The Court held that “duplicity” is not a “defect apparent on the face” of the indictment and that “the Courts have not permitted s 529(1) to stand as an answer to an allegation which turns out to be correct that an indictment is wholly void for failure to comply with s 510”. If the charge here is duplicitous then following the reasoning in this case and in Regina v Granberg, [1973] 4 WWR 91 (Alta CA) I would annul the conviction if there had been one or otherwise dismiss the charge. In my view however the charge is not duplicitous. In the words of Smith, CJA in Regina v Kisinger, [1972] 3 WWR 147 (Alta CA) at page 150, “there was in the case at bar ‘a general scheme of operation which constituted one continuing offence’.” Here the accused filed successive income tax returns following the same pattern each year and in my view they form together one transaction and the charge is therefore not void on this ground.

Counsel for the accused argued that there was no allegation in the information of the evasion of the payment of any stated amount of tax. The information merely alleged evasion of payment of taxes imposed by the Income Tax Act in relation to a stated amount of income. The information seems to follow the wording of paragraph 239(1 )(d) and I think is sufficient. The accused could have asked for particulars of the amount of tax alleged. There might be a difficulty in the case of a conviction in the Court giving effect to the provisions of paragraph 239(1)(f) but this I do not have to decide. In this connection the views of Jackett, P in the Elchuk case (supra) at page 329 [6237] are of interest:

Without saying whether or not the pleading would otherwise be sufficient, it will suffice to say that there is no allegation of any amount of tax that was evaded, or sought to be evaded. In the absence of such information, it is impossible for the Court to determine whether any particular penalty was in an amount authorized by Section 56(1).

On the other hand Martin, CJS speaking for the majority of the Court in the Zentner case (1959), 29 WWR 679 (Sask CA) says at page 684:

If the evidence presented is sufficient to enable the court to determine the amount of the evasion which resulted from false statements of the Accused in his return, the court will have the information necessary for the imposition of the heavy penalty provided. , . .

Coming now to the fourth argument of counsel for the accused that there is no proof that there are any taxes due in any event. It appears that an appeal was filed under the statute with respect to the December 1974 assessment and that appeal has not been disposed of. Counsel argued that if there is any doubt about civil liability then a fortiori there can be no criminal liability. Counsel argued that there is overwhelming evidence of doubt as to civil liability—there is no provision in the statute for making returns on a net worth basis, they are approximate and inept; there were both overstatements and understatements of assets; there are $37,000 of questionable items; prospects of collecting the Joy Toy shareholders’ loans and money advanced to other companies of the accused are questionable to say the least; advances to the accused’s companies can be considered legitimate business losses; etc.

in my view this argument is sound. If there were no taxes owing he cannot be convicted of evading payment of them. In order to be convicted it must first be established by evidence that taxes were owing. He could perhaps have been charged with wilfully evading or attempting to’ evade compliance with the Act but this is a different charge. In the present case taxes were assessed in December 1974 and a couple of days later this charge was laid and the assessed taxes were not yet due and also they were in dispute.

On all the evidence I think the Crown’s appeal fails for several reasons. First I cannot find mens rea. The accused’s records were in a deplorable condition. Such returns as he filed both favoured him and worked adversely to his interests. One of the worst errors came when he supplied -correct figures for loans to Joy Toy but the accountant misinterpreted the situation and used a lesser figure. There is an accounting question as to what should be done with bad debts and stock-in-trade losses when preparing a net worth statement. There is also the fact that the accused was completely co-operative with the Department investigators—he immediately provided access to his safety deposit box containing the $35,000 in cash; he immediately obtained his bank account balance when asked for it. On all the evidence I cannot find mens rea with respect to the charge.

In any event I think the charge was premature. Assessment notices were delivered followed two days later by the laying of this information. But under the statute the accused had 30 days to pay the assessment and therefore the taxes in question were not due. In addition he appealed the assessments. I am satisfied that a prosecution for this offence cannot succeed until after delivery of a tax assessment and an opportunity provided for payment as contained in the Act.

I do not wish to be considered as in any way condoning the actions of the accused. If the tax department thought that he was not filing proper returns he should have been charged with evasion of compliance with the Act. If it thought that he was evading payment of taxes then it should have assessed them and charged him with that offence after the proper amount was finally fixed and payable under the provisions of the Act.

I find the accused not guilty and dismiss the appeal. There will be no costs.