Citation: 2007TCC695
Date: 20071116
Docket: 2002-310(IT)G
BETWEEN:
JOAN M. BLACKWELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
Docket:
2002-314(IT)G
MICHAEL
C. JENKINSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] The question to be
decided in these appeals is whether the appellants are required to include in
their income amounts for which they were convicted of fraud. The assessments relate
to the 1989 and 1990 taxation years.
[2] The appeals were
heard together, with Michael Jenkinson representing himself and Joan Blackwell
being represented by counsel.
The assessments
[3] In the fall of
1994, the appellants were tried and convicted by an Ontario court on 13 counts of fraud. They
were sentenced to four and one-half years in prison, and ordered to pay restitution
to the victims in a total amount of $1,858,000. None of this had been paid when
these appeals were heard.
[4] A Canada Revenue
Agency auditor was an observer at the trial and she commenced an audit in
relation to these transactions shortly after the trial was completed. The
assessments which are under appeal resulted from that audit and were issued in
1998.
[5] For purposes of assessing, the Minister
took the view that the amount of the restitution order should be included in
the income of the appellants as business income under section 9 of the Income
Tax Act. The total amount, $1,858,000, was divided equally between the
appellants, and it was included in their income for either the 1989 or 1990
taxation years depending on when the amounts were received. In addition, the
Canada Revenue Agency informed the appellants that a deduction would be allowed
if the restitution order was later satisfied.
[6] The appellants were
also assessed penalties under subsection 163(2) of the Act for
failing to report this amount in their income tax returns. No penalty was
imposed for Michael Jenkinson’s 1990 taxation year, however, because the
Minister believed that he had not filed an income tax return for that year. It
seems a little odd that taxpayers who file tax returns should be penalized more
heavily than taxpayers who do not, but nothing turns on this.
The revised position
[7] During discoveries,
Ms. Blackwell provided the Crown with nine bound volumes of financial records
and other documents that had been used at the criminal trial. A review of these
documents ultimately led the Crown to concede that the appellants should not be
taxed on the entire restitution order, but only on a much lower figure.
[8] There was
considerable confusion at the commencement of the hearing as to exactly what
the Crown’s revised position was. Was the Crown changing the basis of the income
inclusion from business income to the receipt of shareholder benefits? What
were the revised amounts that were now being proposed to be brought into income?
[9] It is unfortunate
that the pleadings were not amended to make the Crown’s position clear prior to
the hearing, especially because Mr. Jenkinson was self-represented and Ms.
Blackwell’s counsel did not appear to be a tax specialist. From what I can
gather, the focus of attention prior to the hearing had been on settlement
discussions, and these discussions had led the appellants to believe that the
Crown’s case was shifting to a shareholder benefit analysis. As important as
settlement discussions are, they do not alleviate the need to clearly set out
the essential facts and issues in the pleadings.
[10] Matters were partly
clarified by counsel for the Crown during his opening, but needless to say this
gave the appellants no time to shift gears. Counsel stated that he would not
attempt to argue that there were shareholder benefits because the pleadings had
not been amended. The amounts at issue, however, could not be clarified. Counsel
informed me that he had provided the appellants with a draft proposal but he
said that the amounts had not been finalized. The draft may have assisted the
appellants in preparing their case but I was left a bit in the dark as to
exactly how the new position differed from the old.
[11] The Crown’s position
became clear when the appeals officer took the witness stand, which was after
the appellants had testified. The Crown based its argument on net amounts
received by the appellants which could not be traced to business uses. The
amount was settled at $341,919,
which was allocated to each of the appellants as set out in the following
chart.
|
|
1989 Income Inclusion
|
1990 Income Inclusion
|
|
Jenkinson
|
$91,097.01
|
$134,748.89
|
|
Blackwell
|
$56,668.40
|
$59,404.65
|
Factual background
[12] The only witnesses at the hearing were the
appellants themselves and the appeals officer from the Canada Revenue Agency
who had reviewed the objections. This oral testimony did not shed much light as
to the circumstances which led to the convictions, but the judge in the
criminal proceeding had provided extensive reasons. Many of the following findings
of fact are based on these.
[13] The appellants met in 1987 while attending
a mortgage brokers’ course and decided to form a business partnership. Each of
the appellants had a background in real estate, and the business concept was to
create several businesses that had a real estate connection in one way or
another. Joan Blackwell had a background in banking and mortgages. Although Michael
Jenkinson had been a police officer, he was also a real estate investor.
[14] In short order, the appellants had
incorporated a large number of companies, each carrying on a separate business.
The transactions which are the focus of these appeals centre on three of these:
a horse breeding operation (Cholderton Farms), a mortgage business (Ansdel
Mortgage), and an office condominium development (Meadowvale Project).
[15] All of the
businesses operated extensively on credit, and the whole enterprise quickly became in desperate financial
condition. As described by the trial judge in the criminal proceeding, the
appellants then embarked on an aggressive scheme to raise money from individual
investors.
[16] It appears that most of the investors
provided cheques to the appellants or their companies and were given promissory
notes in return, upon promises that their money would be invested in a particular
manner, such as to acquire a joint venture interest in the office condominium
development or to acquire a mortgage on the farm properties used in Cholderton
Farms. It appears that most, if not all, of the investments were lost. The largest restitution order was granted
to a couple who ran the horse breeding operation. They had owned a farm
property that lost its value when it was used to raise money by way of
mortgages.
[17] In the criminal
proceeding, the Crown had engaged a forensic accountant to trace the funds
provided by the investors. Some of it could be traced, but it was impossible to
track it all. Part of the reason for the difficulty was that the money was
often deposited into Mr.
Jenkinson’s personal bank account, and the companies’ bookkeeper presumably had
no way to keep track of it.
[18] When the investors’ money could be traced, it was
sometimes traced to the specific use intended by the investor, and in other
cases the money was diverted to other uses, often being used to pay down whatever
bank overdraft was at its limit.
[19] The appellants were convicted on all counts
of fraud that were brought, 13 in all.
[20] It is relevant for these appeals that the
fraud convictions were not always dependent on a finding that the funds had
been diverted to a use not intended by the investor. In many cases the
investors had been defrauded by misrepresentations as to the financial state of
the businesses that were being invested in. In these cases, the fraud consisted
of the misrepresentations, not the diversion of funds.
[21] It is also relevant
that not all investors sought
restitution in the criminal proceeding. It appears that other investors likely
lost money, but the circumstances of their losses were not extensively discussed
by the trial judge.
[22] During the criminal
trial, the appellants
attempted to defend themselves by testifying that none of the investors had
been deceived. According to their testimony, each of the investors knew exactly
how their money was being used.
[23] All of this testimony was rejected out of
hand by the judge in the criminal proceeding. At times his comments were scathing,
as illustrated by the following excerpt from his oral reasons:
[…] I not only reject that evidence as a
lie, but it illustrates the blatant audacity with which the accused expect to
mislead and bamboozle whomever they deem fit to listen to them.
Discussion
[24] After reviewing the
financial records, the Crown was satisfied that much of the investors’ money
was put into bona fide businesses and it was conceded that in such cases
the amounts should not be included in the appellants’ income. It becomes necessary,
then, to determine how much of the investors’ money was not put into the
businesses. As mentioned earlier, it was not necessary for the judge at the
criminal trial to make this determination.
[25] The appellants attempted to satisfy me,
mainly by their own testimony, that they had not used any of the investors’
money for personal purposes, at least without an investor’s consent, and that they
had other sources of funds to live on.
[26] I see no reason to accept this evidence
without clear supporting evidence, and there was none. The simple fact that a
portion of the investors’ money was traced to Mr. Jenkinson’s personal
bank account and that accurate record keeping was impossible suggests that part
of the money was probably used for personal purposes. Because none of the appellants’
testimony was well supported either by documentation or independent witnesses, I
have given it no weight, especially in light of the nature of their criminal
convictions, which were based on a large scale deception of investors.
[27] That is not the end of the matter, however.
The appellants argue that they cannot realistically respond to the Crown’s case
when the relevant transactions took place so long ago and they suggest that it
would be unfair for them to bear the onus to establish what the funds were used
for. I agree with this.
[28] The assessments were issued in 1998, which
is approximately nine years after the relevant transactions took place. At that
time, and until shortly before this hearing commenced, the Crown took the view
that all of the investors’ money had the quality of business income to the
appellants, regardless of whether the funds were actually invested in the
businesses.
[29] Accordingly, until very recently it was not
necessary to determine how much of the investors’ money, if any, was expended by
the appellants for personal purposes. The appellants cannot possibly be
expected to trace these funds 17 years after the fact. This is precisely the
type of situation where the onus of proof should shift to the Crown, especially
because the Crown did not provide a reasonable explanation for why this
position was being taken so late.
[30] Moreover, although the parties did not
raise this as an issue, I would note that the Crown’s revised position involves
facts which were not assumed at the time of the assessments. It is well
established that the Crown has the burden of proof with respect to them. In The
Queen v. Loewen, 2004 D.T.C. 6321 (F.C.A.), Sharlow J.A. states:
11 The constraints on the Minister that apply to the
pleading of assumptions do not preclude the Crown from asserting, elsewhere in
the reply, factual allegations and legal arguments that are not consistent with
the basis of the assessment. If the Crown alleges a fact that is not among the
facts assumed by the Minister, the onus of proof lies with the Crown. This is
well explained in Schultz v. Canada, [1996] 1 F.C. 423, [1996] 2 C.T.C.
127, 95 D.T.C. 5657 (F.C.A.) (leave to appeal refused, [1996] S.C.C.A. No. 4).
[31] In this case, the Crown’s revised position not only
requires determining what funds were used for personal purposes, but it also
requires looking at all of the funds raised by the appellants, and not just
funds from investors who received restitution. None of this was relevant to the
assessments.
[32] I conclude, then, that the Crown should
have the burden to prove the amount of investors’ money that was used by the
appellants for personal purposes. Furthermore, for the reasons below, I
conclude that this burden has not been satisfied.
[33] The only witness for
the Crown was the appeals officer from the Canada Revenue Agency who first
became involved in this matter in 2001. In her testimony, she gamely attempted
to show that at least $341,919 was received by the appellants and could not be
traced to a business use. Her main source of information for this conclusion
was the bank statements and journal entries contained in the nine volumes of
documents that were used in the criminal trial.
[34] The documentation on
which the appeals officer relied is not, in my judgment, sufficient. I would
first note that although Ms. Blackwell did not object to the introduction of
the documents, Mr. Jenkinson did, on the basis that the authenticity of the bank
records was not established in accordance with the Canada Evidence Act.
He was correct. Also, the appeals officer obviously did not have first hand
knowledge of the documents, and she had not conducted any investigation
herself, except to review whatever records the appellants provided. Also, it
appears that the documents that the appeals officer examined were only the tip
of the iceberg in terms of documents that were seized in the criminal
investigation. In all, there was somewhere in the neighbourhood of 50 to 60
boxes seized, as I understand it. I would also note that Ms. Blackwell’s bank
account records were never seized, and these would have been very relevant to
the analysis.
[35] In addition to this,
each of the appellants had provided a line by line criticism of the appeals officer’s analysis in extensive
written submissions. The Crown did not provide any response to this, even
though they were provided with the opportunity to do so.
[36] As mentioned
earlier, it seems improbable that the appellants did not use a portion of the
investors’ money for themselves, but the evidence before me is not sufficient
for me to make any finding as to how much of the investors’ money was in fact so
used.
[37] I am also not
satisfied that the amounts received have the quality of business income. In
this regard, I note that amounts received by the appellants were recorded in
the corporations’ journal entries as shareholder loans, which tends to suggest
that they are not business income.
[38] These findings are
sufficient to dispose of these appeals and it is not necessary that I consider in
detail a statute bar issue that arose during the hearing. I will comment on it
briefly.
[39] Three of the four
assessments that are being appealed were issued beyond the normal reassessment
period and are statute barred unless the Crown can establish that the
appellants either carelessly or fraudulently failed to report at least some
portion of this amount in their income tax returns. There is no dispute about
this. The issue is whether the fourth assessment, which was issued to Mr. Jenkinson
for the 1990 taxation year, is subject to the same condition.
[40] It is not clear from
the evidence whether Mr. Jenkinson’s 1990 assessment was issued beyond the
normal reassessment date or not. The Crown takes the position that this is not
relevant, and that the statute bar requirements in subsection 152(4) do not
apply if the taxpayer does not file an income tax return for the year. I have
trouble seeing how the failure to file a return allows the Minister to escape
from the requirements of subsection 152(4), but in any event the Crown should
be precluded from taking a different position with respect to this assessment as
this issue was not raised in a timely manner. It was not clearly raised in the
pleadings and it was only raised midway through the hearing, after Mr. Jenkinson had testified. In my
view this was simply too late.
[41] In the result, the
appeals will be allowed in
their entirety. The assessments will be referred back to the Minister of
National Revenue for reconsideration and reassessment on the basis that the
full amount of the restitution order should be excluded from the appellants’
income, as well as the related penalties. The appellants are also awarded
costs.
Signed at Ottawa, Canada, this 16th day of
November 2007.
Woods
J.
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