Her Majesty the Queen, Complainant, v. Phillip Thetrault, [1976] CTC 719, [1976] DTC 6425

Patterson, J (orally):—The accused is charged with five counts of unlawfully making, participating in, assenting to or acquiescing in the making of a false statement in his return of income for each of the taxation years 1969 through 1973 inclusive, contrary to paragraph 239(1 )(a) of the Income Tax Act. He further stands charged with a sixth count alleging unlawful and wilful evasion of payment of income tax in relation to unreported income totalling approximately $34,930.50 for the same five-year period, contrary to paragraph 239(1)(d) of the Income Tax Act. It was conceded by the Crown that the sixth count was based on the alleged false statements contained in the first five counts, and accordingly the doctrine enunciated in Kienapple v The Queen (1974), 26 CRNS 1, was applicable.

As a result, the Court was asked to make a number of preliminary decisions as to the proper procedure to be followed so that the maxim nemo debit bis vexari pro uno delicto would not be offended. Counsel for both Crown and defence agreed that such procedures have not been subject to judicial review by the appellate courts, and, accordingly, there are no firm guidelines in that respect.

Accordingly, the following preliminary rulings were made:

1. That the information was proper and valid, notwithstanding the conflict between Count 6 and the first five counts.

2. That either Count 6 or the first five counts must be designated for adjudication first at the end of the evidence and that this designation rested with the Crown. For the sake of clarity, the charge or charges so designated were referred to as the “primary” charge or charges.

3. That in order that the accused should not be prejudiced in making his full answer and defence, the Crown should make this designation at the outset of the trial.

4. That the Crown’s evidence during the trial would relate to all of the charges in the information.

5. That the accused, however, at his option, would only be required to present a defence in respect of the primary count.

6. That if the adjudication on the primary charge resulted in a conviction, the remaining charge or charges would be quashed. If the accused was acquitted on the primary charge, the remaining charge or charges would be considered and the defence could then call evidence in respect of them.

I appreciate the reasoning of Laskin, J, as he then was, in Kienapple in applying the principle of res judicata and specifically rejecting the narrower grounds of autrefois convict. Prima facie, the principle of res judicata is as applicable to an acquittal as it is to a conviction. However, Kienapple was concerned only with the consequences of multiple convictions and in my view, with respect, does not restrict the adjudication of a second charge based on the same facts where the first resulted in an acquittal.

I am not unmindful of the procedural consequences of the defence being permitted to call evidence following an adjudication on one charge. This may particularly create inconveniences in jury trials. Nevertheless, it would see to me to be a negation of the vexari principle of Kienapple to require an accused person to provide an answer and defence to a charge on which he may not stand in peril of conviction. While the procedure may be novel, it is by no means unique. For different reasons, somewhat the same situation prevails in the Narcotic Control Act.

Pursuant to the ruling in number 3 above, the Crown designated Count 6 as the primary charge.

There is little dispute as to the facts of the case; rather, the issue revolves around the interpretation to be placed on these facts, and what, if any, inferences should be drawn. Accordingly, I do not propose to deai with the evidence of each individual witness, but rather to set forth in a chronological order what I consider to be the salient facts.

In 1949 Phyllis Elizabeth Thetrault (now Forster) and her husband commenced operating a general store business at Grovedale. The bookkeeping system used was quite unsophisticated. Indeed, for many years the store did not even have a cash register. The annual income tax return was prepared by Mrs Thetrault who employed the method of filing all invoices for purchases on a clipboard for the year, adding them up at the end of the year and taking 15% of this sum as the gross profit of the store. In her words, she felt that this was a proper and reasonable method; indeed that the mark-up was quite generous. While some articles clearly sold with a greater mark-up than 15%, certain items such as sugar, butter, flour and milk were not marked up as much. In addition, certain dry goods which were out of style or became dirty might be sold for cost or less. In later years, the store had weekly “specials” which would be sold with little or no mark-up or even as “loss leaders”.

Even when a cash register was eventually acquired, it was the practice to examine the tapes nightly and then discard them. From time to time, Mrs Thetrault consulted a Mr McIntosh, a schoolteacher in Grovedale, about income tax matters. It is not clear whether any advice was sought respecting the method of calculating gross sales, but evidentially Mr McIntosh did not comment adversely on it.

About 1965 Mrs Thetrault’s son, the accused, commenced working in the store. Prior to this, he had been engaged in the construction industry for eight or nine years. In 1968, as a result of joining the Retail Merchants’ Association, the store was given a notebook entitled “A Simplified Accounting System for Smaller Stores” which I will hereafter refer to as “the accounting book”.

Upon examining the book, Mrs Thetrault and her son concluded that it would be a good idea to use it. Apparently one was prepared in 1968 although it was not before me. In the beginning of 1969, the accused took over the operation of the store from his parents. From that point on he alone made the entries in the accounting books, and it is obvious from an examination of them, that he was meticulous in that respect. Clearly it is evident that they contain sufficient information to prepare a proper income tax return. However, for the purpose of preparing his income tax return, the accused called upon his mother who consistently employed the same method that she had used since 1949, that is to say, add up the store purchases, take 15% and call this the gross profit. Using this method the accused’s mother prepared the returns for 1969, 1970, 1971 and 1972.

In the early part of 1974 the accused decided that preparing his return was too much of an imposition on his mother, and he took his books and records to J H Bennion and Company, a chartered accountant firm in Grande Prairie. There his books were turned over to an employee, a Mr Mike Lewchuk, who prepared a profit and loss statement for the Grovedale General Store for 1973. For this purpose, he primarily used the accounting book together with certain other documents.

Sometime later the accused called on Mr Lewchuk and expressed the view that the figure for sales was in error; that, in fact, it was too high. Mr Lewchuk then asked for more documents, and by comparing sales with deposits and cheques with total expenses, concluded that his figures were correct. He informed Mr Thetrault of this on the last Saturday morning before the April 30 deadline. Mr Thetrault said he would not accept the figures. There was some discussion on the normal method of preparing a statement and Mr Thetrault doubtless told Mr Lewchuk of the method he had been employing up to this time. It is clear that the discussion concerned accounting principles. There was no talk of illegality or fraud, although Mr Lewchuk did mention the possibility of being reassessed by the Department of National Revenue. Mr Lewchuk had the 1972 return, but this was only used for the purpose of preparing capital cost allowance schedules. He did not examine the method of reporting, and as he said, he was not concerned how Mr Thetrault reported in previous years.

In any event, Mr Thetrault would not accept the figures, and his personalized income tax return and books were returned to him. Time for filing was running out and the accused again asked his mother to prepare the income tax return for 1973, which she did. The same method was used as in previous years, and we do not know if there was any discussion concerning the method suggested by Mr Lewchuk.

On October 16, 1974, as a result of information obtained from a field audit, the informant, Mr Dennis Medwid commenced an investigation of the accused’s returns. Mr Medwid is a special investigator for the Department of National Revenue. He conducted an examination of all of the accused’s sources of revenue which included not only the Grovedale General Store, but also salary paid as a postmaster and rural mail carrier, trapping revenues, farming revenues and investment revenue. He sought verification of each revenue source and found all except the Grovedale Store operations to be in order.

Mr Medwid’s examination of the accused’s returns and the accounting books 1969 through 1973 clearly indicated to him the method, previously referred to, by which Mr Thetrault calculated his sales. The method was consistent other than in 1969 when there appears to have been an arithmetical error in calculating inventory. By adding the weekly sales figures in the accounting books, he was able to arrive at the true gross sales figures. The accounting book figures were subject to some adiustment for unreported credit card sales and a deduction for NSF cheques which had been reported twice in the sales figures.

Mr Medwid further discovered that the accused was in receipt of certain volume rebate cheques issued by McGavin Toastmaster Limited. Some of these cheques were deposited in the store account of Grovedale General Store; others were deposited in bank accounts of the accused, his wife and a joint account operated by both, which were not associated with the store account.

An examination of the accused’s return also made it clear that he reported the profit on sales of certain petroleum products by extending the number of gallons sold by a margin of two cents. This required a further calculation because the cost of these petroleum products to the accused was not reported.

As a result of the audit, Mr Medwid calculated that the accused had failed to report revenue totalling $34,930.50 for the five years in question. The federal tax on this sum understated amounted to $9,482.54.

One final discovery by Mr Medwid is significant. In four out of the five annual record books he found that the weekly sales had been totalled so that the actual annual gross sales must have been known to the accused for those years. There were arithmetical errors in three of these, and no other computation involving inventory appears.

I note in passing that until the trial, Mr Medwid was under the impression that Mr Thetrault prepared his own income tax returns for the years in question. It was only on cross-examination that he realized by comparing obvious handwriting differences, that the returns were prepared by someone else.

The Crown’s case satisfies me that as a result of the improper reporting procedures, Mr Thetrault understated his income by the amount claimed. The question is whether this reporting procedure was as a result of a deliberate scheme on the part of the taxpayer. In other words, the issue is whether or not there was mens rea on the part of the accused. The points upon which the Crown relies to show mens rea are:

1. The size of the amount unreported and this matter was particularly drawn to the Court’s attention by Mr Jones today.

2. The deposits to other accounts of the McGavin rebate cheques.

3. The totals of actual annual sales figures in the accounting books.

4. The conversation with Mr Lewchuk.

In response, the accused replies that his returns followed a consistent pattern, and that his method of reporting gross sales would be readily ascertainable to any knowledgeable person examining the returns. He further states that the 15% method was approximately accurate and is based on certain hypotheses which are not invariably eluded in this calculation. There was also some evidence that the conventional method of reporting a merchant’s income is not entirely accurate and is based on certain hypotheses which are not invariably true. Finally, in respect of this point, the accused points out that some $55,000 in expenses were not, in fact, deducted.

With respect to the second indication of mens rea, the accused points out that with his method of reporting it did not matter where he deposited receipts of whatever kind; he did not ascertain gross sales from receipts in any event.

The accused explains the sales figures in the accounting books as a reporting requirement of Statistics Canada. Frankly, I do not accept the accused’s explanation in this respect. The Statistics Canada reports were made monthly, not annually. Moreover, it would appear that such reports were not required in the earlier years under review, and yet such totals appear in the accounting books. The figures were found by themselves, however, and there was no further computation in any year involving the opening and closing inventory which would be required to arrive at a proper sales figure. The accused’s bookkeeping methods satisfy me that if such a computation had been made, it would have appeared in his accounting books. Had such a computation been found, the results of this case might well have been different. Why did the accused total the figures if not to make a determination of his income?

The evidence indicates that the accused belonged to the Retail Merchants’ Association and was affiliated with Alberta Grocers. His income tax returns include expenses to attend conventions sponsored by this organization. It seems to me that in his discussions with fellow merchants, he must have been aware of the significance in the trade of gross volume as an indicator of the health of the business, and wanted to know how he compared with his colleagues. In using that particular explanation, I am in essence applying the rule in Hodge's Case [(1838), 2 Lew CC 227; 168 ER 1136] to this particular aspect.

I nave also taken note of the completeness of the accused’s records. Nothing appears to have been hidden. The accused throughout the investigation was co-operative and even went out of his way to assist Mr Medwid in a seizure when Mr Medwid did not have transportation.

Dealing with the session with the accountant, Mr Lewchuk, the results of that conversation are perhaps more germaine to Count 5 than they are to Count 6. However, it was pointed out that the system which the accused was employing was one that had been used for some 20 years, in fact more, at that time, and that system appeared on the face of it to be working well. Any person, of course, has the right to reject professional advice and in this case the accused did so, and in my view, did so on the basis of the apparent success of his reporting method up to that time in question.

Taking all of the foregoing factors into consideration, I have no hesitation at all in stating that I am not satisfied beyond a reasonable doubt that the necessary element of mens rea has been established. in the result, Count 6 is dismissed.