Regina v. David Michael Warren Hummel, [1971] CTC 803, [1976] DTC 6114

Robinson, J. (orally) :—This case was adjourned on May 6th to this date to give me an opportunity to review the extensive evidence and the many exhibits filed, and to review the arguments and authorities submitted by counsel. Daily transcripts were supplied of the evidence and I took the opportunity of reviewing them daily as the trial progressed and also have reviewed them on more than one occasion since it was adjourned.

The accused is charged in Count 1 under Section 132(1) (d) of the Income Tax Act—wilful evasion of the payment of taxes. Counts 2 to 5 are under Section 132(1) (a) of the Income Tax Act, namely making a false and deceptive statement in his income tax returns over the periods of time referred to in Counts 2 to 5 inclusive, and further particulars were supplied and were filed as Exhibits 2 and 3.

The Crown had completed their case and a Morabite Motion [sic] was made by Mr. Spencer on behalf of the accused; namely, that there was a lack of sufficient evidence to legally and properly record a conviction.

Very comprehensive and capable arguments were presented by both counsel for the Crown and the accused, and I wish to thank them for their able assistance in this matter, particularly for furnishing me with copies of the various Dominion Tax Cases which were not readily available to me.

Both counsel presented arguments as to the matter of whether or not mens rea was an integral part of the offence; that is, an essential ingredient that the Crown must prove to order to support a conviction.

There was little argument with respect to mens rea concerning Count 1. The main issue was whether or not it was necessary for the Crown to prove mens rea—namely, a guilty intent, to support a conviction under Counts 2 to 5 inclusive.

Mr. Spencer submitted that mens rea was an essential ingredient and an integral part of the offence. Mr. Hutchison, in turn, argued that the offences in Counts 2 to 5 inclusive were absolute offences and mens rea was not an essential ingredient, and even if it were, the Crown had adduced evidence from which the finding of mens rea—guilty intent—could be supported.

Mr. Hutchison, in support of his argument, referred to the case of James Pollock Campbell, an officer of the Department of National Revenue, in Campbell v. Arnold W. Jacques, 80 DTC 1039. This was a County Court of the County of Kent decision, and dealt with false statements in a return. It was held that it was not necessary for the prosecution to establish mens rea.

Also in support of his argument he referred to the case of R. v. Pierce Fisheries, Limited (1970), 12 D.L.R. 591. The accused was charged with having in his possession, without lawful excuse, lobsters of a length less than the minimum length specified in the schedule, contrary to the Lobster Fishery Regulations. This was a Supreme Court of Canada decision, and the Court held that the offence created by the Lobster Fishery Regulations was one of strict liability, and mens rea was not required. Further, that while a presumption exists that mens rea is an essential ingredient of all acts that are criminal in the true sense, there does exist a wide category of offences created by statute which are enacted for the regulation of individual conduct in the interests of health, convenience, safety and the general welfare of the public, and which are not subject to any such presumption. This was a regulatory enactment.

Mr. Speneer, in turn, referred to the case of The Queen v. Henry Heinz Regehr, [1968] C.T.C. 122. This was the Court of Appeal for the Yukon Territory, which is the Court of Appeal of British Columbia. This case involved Section 132(1) (a) and also Section 132(1) (d) namely, the same sections involved in the case at bar. Mr. Justice McFarlane at page 123 says as follows :

With regard to the five counts under the Income Tax Act, Section 132(1) (a), a great amount of consideration in both Courts was given to the question whether or not mens rea is an essential element, Both tribunals held that it is. In this Court counsel for the appellant conceded, in my opinion correctly, that this view is right.

Mr. Spencer also referred to the case of The Queen v. Kipnes, [1971] 2 C.C.C. 56. This again involved Section 132(1) (a) of the Income Tax Act, and was in the Alberta Supreme Court, Appellate Division. Chief Justice Smith, at page 63, says as follows:

It is clear beyond doubt, that the income of the respondent was understated and this is, no doubt, an element which the trial Judge took into consideration in deciding whether or not mens rea was established.

Now, the Kipnes case and the Regehr case which I have referred to in my opinion clearly held that mens rea is an essential ingredient, and I am bound by their decision. Accordingly, I hold that mens rea is an integral part of the defence, and for the Crown to succeed—that is, to make out a case to support a conviction—they would have to prove a guilty intent on the part of the accused.

If I were to find that that all or some of the items referred to in Counts 2 to 5 were income, the Crown still could not support a conviction unless they prove guilty intent. The question then is, what evidence, if any, is there before me to make a finding of guilty intent ? There may be evidence of guilty intent or there may be evidence from which guilty intent may be inferred. A simple example of evidence of guilty intent would be where evidence is adduced that a taxpayer failed to show obvious in- come in his returns. For example, salary, dividends, interest on bonds, etc. Other examples are the Kipnes case, which I have referred to, where the company had previously reported the accused’s earnings and commission as $32,324.40 substantiated by the company records. Records of the company were altered so as to remove some of the amounts from the accused’s income.

Also the case of The Queen v. Samuel Ciglen, [1970] S.C.R. 304. In that case the ledger had been rewritten and was a falsification of the facts of the Kroy-Fulton deal. Also in the case of Campbell v. Jacques, previously referred to. There was evidence of the failure to disclose the sales of certain used batteries and sales to branch stores. The accused knew the return did not fully disclose the income from all sources.

In these examples which I have referred to there is evidence from which guilty intent can be inferred and thus put the accused to his defence to show that they were done innocently and not with guilty intent.

Now, it is important to look carefully at the particulars in Counts 2 to 5 with respect to means rea—guilty intent. First, there is the matter of the gain on the sale of shares of the Park Royal Holdings and the Red Lion Motor Inn. I have before me the evidence of Mr. Thorsteinsson who was called by the Crown as an expert on the subject of income tax, and he gave evidence that the gain on the sale of shares, whether capital or income, presented problems of indissoluble difficulty, and that this was a problem to the Tax Department, the Exchequer Court and the Supreme Court of Canada.

Mr. Stokes, also called on behalf of the Crown, gave evidence to this effect.

This is also evident in the proposals for tax reform of the Hon. E. J. Benson, Minister of Finance, in the White Paper. Capital gain and income is dealt with at page 37, paragraph 3-11 :

Because the line between taxable income and tax exempt capital gain is not clear cut, the present system leads to uncertainty. In some instances a taxpayer may be uncertain whether he has succeeded in transforming income into capital gain.

The Tax Department Circular No. 70-6 dated December 4, 1970, deals with the rulings the Department is prepared to give to a taxpayer in advance, with the exception of whether certain items are income or capital.

Also, I feel that I can take judicial notice of the large number of cases reported with respect to whether the gain on sale of shares is capital or income. Each case depends on its own circumstances and there are different findings in the various tribunals, if the taxpayer or the Tax Department takes the appropriate steps to re-assess as provided for in the Income Tax Act.

Again, the sale of shares depends on the frequency, intention, and whether or not the transaction is in the nature of a trade.

In summary, a number of these types of cases are borderline. They are in the grey area, and certainly, if the taxpayer decides it is capital this does not necessarily mean that this is evidence of guilty intent, or evidence from which an inference of guilty intent may be inferred, as opposed to the matter of obvious income that has not been disclosed.

Another item in Counts 2 to 5 is the matter of salary paid to the accused’s wife. Again, Mr. Thorsteinsson, the expert, gave evidence as to the salary of a wife in a corporate body, and the question is—" ‘ Is this salary reasonable and justified ? ‘ ‘

Mr. Stokes again confirmed this, and Mr. Marquardt and Mr. Warren gave evidence for the Crown; they gave evidence of Mrs. Hummel’s participation in the business enterprises; of her knowledgeability and various other items. Again, whether this salary is justified depends on the circumstances. The taxpayer says it is reasonable and justified. The Department says—no. Surely this in itself is not evidence of guilty intent or evidence from which guilty intent can be inferred.

Another item dealt with in Counts 2 to 5 is the matter of car expenses and allowances. Allowances from companies depend on circumstances and reasonableness and the amount of it. Again Mr. Thorsteinsson and Mr. Stokes confirmed this, and there was evidence adduced from Mr. Marquardt as to the extent to which the vehicles of the accused were used with respect to the various business enterprises. The question is, "‘Is it income or proper reimbursement of expenses?’’ Again, it depend supon the circumstances and is not a simple matter of drawing the inference of guilty intent.

The other item in Counts 2 to 5 is funds appropriated by the accused as a shareholder from the Victoria Private Hospitals Ltd., and the question is whether the Victoria Private Hospitals Ltd. got proper value for its money; namely, approximately $104,000. This again depends on the fair market value; again a questionable item. A fair market value at the time the transaction took place.

Now, all of these items are not obviously income but, as I have stated before, are borderline cases depending on the circumstances. In my opinion, from the evidence adduced with respect to them, there is no evidence of guilty intent, or evidence from which a guilty intent can be inferred.

In summary on that point, it simply means this: the taxpayer says they are not income and the Tax Department says they are and the circumstances of each one would determine whether they are or not.

There was complete and comprehensive evidence adduced by the Crown with respect to the above transactions. But, on the whole of the evidence before me—as I previously stated—I have perused it very carefully and also many of the exhibits referred to by counsel. The question is, Is there any evidence from which guilty intent can be inferred, and thus sufficient to support a conviction if some or all or any of the items are income, and thus put the accused to his defence to show that if the statements were false, they were innocent and not done with guilty intent?

Again, I would refer to the Regehr case where the matter of mens rea was dealt with, and it was held that at the most the taxpayer was careless and negligent.

Now, I have evidence before me that the business enterprises involved started out with family arrangements and understandings, and started off with some private hospitals. The four families were to share in this equally. Later it became three families and later on a company was formed for the purpose of arranging, managing and promoting the various businesses. This was Diversified Management and Development Company.

I have before me the evidence of Mr. Stokes, who was called on behalf of the Crown, to the effect that the records of the various companies involved were most extensive; much more than you would normally find in a similar type of investigation to this. Evidence that funds had passed through solicitor’s trust accounts and there were ledger sheets kept by the company of these records. There was no hiding of these funds going through the solicitor’s trust account. The records were open; no evidence of any false entries or of any hidden documents. The Crown made much of an entry of $20 posted in error. It was posted to “promotion'' and this was the only evidence of any error in any of the records, in spite of the numerous number of ledgers, journals and documents involved and in spite of the large amount of money transferred through the records from one company to the other.

The Crown made much of a certain document; the agreement with Mr. Warren when he was bought out; a letter of Mr. Thorsteinsson’s, given in evidence with respect to some items; an assignment with respect to the Victoria Private Hospitals; the Economic History prepared by the accused of the business affairs of the company, and dealt with certain paragraphs from which, the Crown suggested, there was an inference of guilty intent to be drawn.

I have perused all of these very carefully and I find no evidence from which I could infer guilty intent.

There was clear evidence that the family arrangements and agreements were entered into. There was always considerable delay in reducing these arrangements and agreements to writing. There is no evidence of any sham, scheme, gimmick, hiding of facts, misstating the true picture or falsification of documents or accounts for the purpose of evading taxes or falsifying returns.

There was evidence that chartered accountants were employed for the various companies, which was the firm of Roberts, Benson & Hill and another chartered accountant was also employed at the Red Lion. There was considerable evidence adduced regarding the financial problems—the financing of the various enterprises and the manoeuvres to accomplish this. But, these manoeuvres were for the purpose of financing and not for the purpose of evading income tax or falsifying returns.

From the whole of the evidence, and having examined it minutely and weighed with care the arguments of counsel on behalf of the Crown and the accused, and having held that I am bound by the Regehr case, I can find no evidence of mens rea, guilty intent, or any evidence from which I can infer guilty intent.

Accordingly I would grant the motion of Mr. Spencer on behalf of the accused and find the accused not guilty on all five counts and would dismiss all five counts accordingly.

Mr. SPENCER:—Your Honour, in your very comprehensive reasons for judgment you did not advert to the particulars dealing with household. I would assume they are meant to be included ?

ROBINSON, J.:—I am sorry. The same thing. I was just illustrating the various examples. That’s right.

Mr. SPENCER :—Thank you, Your Honour.