R. v. Hutton, [1990] 2 CTC 258 (Alta. C.A.)

Bracco, J.A. (Laycraft, C.J., Stratton, J.A. concurring):—The appellant, Hutton, appeals the dismissal of his appeal to the Queen's Bench following his conviction in Provincial Court that he wilfully evaded payment of income tax. He was fined $30,000.

The circumstances of this case can be briefly stated. Hutton was, and still is, the manager in Alberta of Opron, a major construction company based in Montreal. In 1983 he was led to believe by the president of his company that he could borrow funds from the company to effect renovations to the home that he purchased in Calgary. Some months later, and after he had already incurred substantial renovation expenses, he sought the loan promised him. He was refused, apparently because the company was experiencing some financial difficulties and there were some shareholder dissensions. Hutton then embarked on a scheme whereby he directed the persons doing his renovation work to make out false invoices to Opron, purporting to be for materials and services rendered to various company projects. On Hutton's instruction those invoices were paid out of Opron funds.

After the renovations were completed in 1984 Hutton informed the company vice-president and controller in charge of finance, of his diverting company funds to pay for his renovations. Both the vice-president and the president on being informed were upset and angry with Hutton but agreed to treat the misappropriated funds as a loan. The full amount was not ascertained until 1985. The delay was in part attributable to the seizure of company records by Revenue Canada. No terms regarding interest or time of payment had been incorporated in the company records regarding the loan at the time of trial.

In addition to renovation costs paid by Hutton with company funds, there was a payment of $23,000 by Hutton with company funds for the purchase of a Porsche automobile. Hutton subsequently sold the vehicle but did not pay those funds back to the company. That transaction was not discovered by company officials until November 1984. Those funds also were then designated as a loan with the requirement that they be repaid without delay, but no express terms as to time of payment or rate of interest were specified on the company records.

The Department of Revenue further alleged that Hutton received a benefit when one of the company subcontractors, Kidco, paid $950 to Jimco Trucking for hauling loam to Hutton's premises. The officer of Kidco testified that he made that payment as a favour to Hutton.

A further sum of $9,750 was alleged to be income. It arose from the circumstance of Hutton, together with Mr. Bassek, having worked with Kidco regarding a very substantial highway construction project that Kidco succeeded in getting. Bassek presented an invoice to Kidco for $19,500 for these services. Kidco paid the entire sum to Bassek, who kept the full sum explaining that Hutton owed him more than that sum for the renovation work that Bassek's company had already completed for Hutton.

In the charge against Hutton, Revenue Canada alleged that he received income in the sum of $120,361.23 which he did not report in his tax returns for 1983 nor 1984. Hutton contended that he viewed the company money that he used to complete his renovations and to purchase the automobile as loans and not income. He did not say that he was authorized to use those funds but contended that the subsequent characterization of those funds as loans by the president confirmed his own view as to a loan. He likewise denied that the other funds were income.

Judge Adolphe in Provincial Court, found that the company funds used by Hutton for his own purposes were income and that he wilfully evaded payment of tax on all of those funds by omitting to report those funds as income in his tax returns. He likewise held that the other benefits secured by Hutton were income and that Hutton was guilty of wilful evasion regarding those funds also. He found Hutton guilty of the charge and imposed a fine of $30,000.

Hutton appealed to the Queen's Bench. Montgomery, J., in detailed reasons for judgment, concluded that the trial judge's findings of fact were founded on sufficient admissible evidence and that he did not misapprehend the applicable law as he applied it to the facts. He found no error in the trial judge's decision and dismissed the appeal.

The appellant Hutton, in his appeal before us, argued that Montgomery, J., erred in affirming the conviction. Hutton's counsel urged before us that the trial judge was wrong:

(1) in holding that Hutton's "brash" and “unreasonable” conduct was a wilful evasion of payment of tax,

(2) in failing to direct himself on the test for wilful evasion, and

(3) in applying an objective or "reasonable man" test in this case.

The appellant further contended that there was no evidence before the trial judge upon which Montgomery, J., could properly uphold the conviction regarding three transactions referred to as the "Kidco transaction", the "car purchase" and the "loam haulage".

The Crown asserts that the appellant, in seeking leave to appeal and in his appeal, is restricted to questions of law alone. The standard of review by the Queen's Bench of an appeal from the summary conviction hearing differs from the standard of review of the Queen's Bench decision. Section 839 of the Criminal Code expressly restricts appeals to the Court of Appeal to questions of law alone.

839.(1) An appeal to the Court of Appeal may with leave of that court or a judge thereof, be taken on any ground that involves a question of law alone.

Section 834 places no such restriction on an appeal to the Queen's Bench from the decision of a summary conviction court.

It is fundamental that the standard of review by the Queen's Bench is that the findings of fact by the trial judge are not to be reversed unless the trial judge "made a palpable and overriding error which affected his assessment of the facts": Stein v. The Ship Kathy "K" [1976] 2 S.C.R. 802; 62 D.L.R. (3d) 1 at 808 (D.L.R. 5). In the context of an indictable offence, the Supreme Court made the following statement regarding an appellate court's function: "The function of the court is not to substitute itself for the jury, but to decide whether the verdict is one that a properly instructed jury acting judicially, could reasonably have rendered." Corbett v. The Queen [1975] 2 S.C.R. 275; 42 D.L.R. (3d) 142 at 282 (D.L.R. 146).

Thus the function of the Queen's Bench court in this case was to determine whether the trial judge made a palpable and overriding error which affected his assessment of the facts. And it is for this Court to determine firstly whether there are questions of law alone to be resolved and if there are, did the Queen's Bench judge err regarding the question or questions of law in his disposition of the appeal.

Adolphe, Prov. J., the trial judge, had no difficulty in finding that Hutton knowingly and deliberately arranged to pay for the renovations to his home by having falsified invoices directed to Opron and that he then had those false invoices paid out of company funds. Hutton testified and did not dispute that that was what he did. However he protested that he viewed all such diversions of company funds to his benefit as loans. The trial judge gave very careful consideration to this issue, acknowledging that if those funds were in fact a loan, then the charge against Hutton would fail. He considered the difference in the testimony of Hutton and Bassek and Willows. It is clear that he accepted the evidence of both Bassek and Willows as more worthy of belief regarding Hutton's attempt to evade the payment of tax by omitting any reference to the funds he diverted from the company for his own use and benefit. Montgomery, J., reviewed those findings of facts and found no error.

I agree with Montgomery, J.'s review of the trial judge's finding of fact as being properly founded on sufficient evidence and that that evidence reasonably supports the conclusions reached regarding the 1983 income as reported by Hutton in his 1983 tax return.

However, it is my respectful view that both Adolphe, Prov. J., and Montgomery, J., fell into fundamental error in failing to distinguish between the 1983 and 1984 tax returns. When Hutton completed his 1983 tax return he had not disclosed to hissuperiors his scheme of falsified invoices which he paid out of company funds. The trial judge's finding that the failure to disclose those funds as income in 1983 constituted a wilful evasion of the payment of tax and cannot be disturbed. However, neither of the courts below distinguish the 1984 tax return from the 1983 tax return. The trial judge accepted, as he was entitled to do, the testimony of the controller and the president of Opron that they were displeased with Hutton's scheme and cautioned him against repeating it. He also accepted their testimony that sometime in October or November, 1984, they agreed that all of the funds diverted by Hutton would be considered a loan from the company with the obligation to repay, even though they had not by the time of trial, specified a rate of interest nor a date for payment. That finding of fact must stand.

Thus the 1984 tax return requires a separate analysis. When Hutton was completing his 1984 tax return sometime in 1985, he knew that the company moneys that he diverted to his own use and benefit were considered a loan by his superiors. The trial judge accepted that evidence but focused on Hutton's state of mind regarding the misappropriation of funds at the time the deeds were done. That consideration would be relevant in the context of a finding of theft or wrongful misappropriation of the funds. However, in this case, the charge relates not to the taking or using of the funds but rather to the intent to wilfully evade the payment of tax on income. Whatever may have been in Hutton's mind at the time he diverted company funds to his own use and benefit is not directly relevant to the state of his mind at the time he completed his tax return. The trial judge, having accepted that it was agreed by all concerned in October 1984 that the diverted funds were a loan, was clearly wrong in finding that Hutton wilfully evaded payment of tax by not including those funds as income in his 1984 return.

This error had the effect of lumping together Hutton's intent regarding both tax returns, whereas the facts as found by the trial judge required separate consideration regarding the mens rea as to each tax return. The Queen's Bench justice in his review failed to recognize the distinction. The charge of wilful evasion cannot stand as to the 1984 tax year.

The reliance by both the trial judge and the appellate judge on the R v. Poynton, [1972] 3 0.R. 727; [1972] C.T.C. 411; 72 D.T.C. 6329 is well founded regarding the 1983 return but is misapplied regarding the 1984 return. In the agreed statement of facts in the Poynton case, it was clear that Poynton received unauthorized kickbacks. When found out, he resigned and was sued by his employer. He settled that action before the tax evasion trial. The issue in that case was whether the kickback money was income. Poynton had not reported those funds in his tax returns. The Crown appealed the acquittal. Evans, J.A., after careful review of the circumstances and the law, concluded that the kickbacks fall within the definition of income for taxation purposes. He stated at pages 419-20 (D.T.C. 6335-36; S.C.R. 738):

I am of the opinion that there is no difference between money and money's worth in calculating income. They are both benefits and fall within the language of sections 3 and 5 of the Act, being benefits received or enjoyed by the respondent in respect of, in the course of, or by virtue of his office or employment. I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, eg loan or gift, then it is within the all-embracing definition of section 3.

Later at page 421 (D.T.C. 6336; S.C.R. 739-40), he made this further statement:

The fact that here the stolen money was repaid by Poynton following the institution of a civil action by his employer does not affect the result as the repayment was not made in the years in which the funds were misappropriated and in which they were sought to be taxed. Whether the moneys would attract tax if repaid during the year in which they were misappropriated; whether the taxpayer is entitled to claim a deduction in the year in which repayment is made or whether the employer would be taxable on the repayment are not matters for consideration and determination in the instant case.

Both the trial judge and the appeal judge erred in failing to consider the mens rea regarding each of the tax returns separately. This is a reviewable error in law regarding the 1984 tax return.

There was evidence regarding all of the transactions in 1983 upon which the trial judge made his findings of fact. The Queen's Bench justice properly reviewed the sufficiency of that evidence and concluded that the findings of fact were reasonably made and were supported by the evidence. I find no error in law in the appeal justice’s review regarding the 1983 tax return.

Thus the conviction will stand but it is amended by deleting reference to the 1984 taxation year. The amended count of which Hutton is guilty will thus read as follows:

Peter B. Hutton between the 31st day of December, A.D. 1982 and the 1st day of May, A.D. 1984, unlawfully did wilfully evade the payment of taxes imposed upon him by the Income Tax Act R.S.C. 1952, Chapter 148, and amendments thereto, in relation to income received by him during his 1983 taxation year, in the amount of $34,750, and did thereby commit an offence contrary to Section 239(1)(d) of the Income Tax Act.

In the result the fine imposed must likewise be altered. In the sentence hearing the trial judge determined that the total tax evaded for both 1983 and 1984 was in the sum of $41,218. He considered the penalty section which provided that: "(f) a fine of not less than 25% and not more than double the amount of the tax that was sought to be evaded. . .”.

Although there is provision for imprisonment as well, the Crown did not seek any term of imprisonment and none was imposed. The fine imposed was $30,000 and in default of payment a term of ten months in jail was indicated. In the sentence hearing there was evidence, which was accepted by the trial judge that the amount of tax evaded in 1983 was $11,815.

In the result leave to appeal is ranted and the appeal against conviction is dismissed but the fine is reduced. Applying a similar ratio of fine to the tax evaded, as used by the trial judge, I reduce the fine to $8,500 and direct that in default of payment Hutton will be imprisoned for three months. The appellant is granted 30 days from the date of filing this judgment to pay the fine.

Appeal allowed in part.