Her Majesty the Queen v. John Henry Albert Maplesden, [1990] 2 CTC 276

Montgomery, J. [Orally]: —

Background

Mr. Maplesden (accused) is charged with ten counts under subsection 239(1) of the Income Tax Act ('Act"). The Crown's theory is the accused, the operating mind of the Albion group of companies, created fictitious expenses which were intended to reduce the tax payable under Part VIII of the Act, which is the scientific research tax credit part. The Crown alleges fictitious expenses were created by inflating:

1. The purchase price of 940-6th Avenue S.W. (Place 96) in Calgary.

2. The purchase price of 3225-12th Street N.E. (Deerfoot Junction) in Calgary.

3. The purchase price of 320 microelectronic processing units called Albion Intelligent Controllers (AIC).

The Crown submits that the purchase prices of Place 96 and Deerfoot Junction were deliberately inflated by an amount equal to the value of the preferred shares subscribed for by the vendors of the respective properties, which preferred shares had a face value of $3,600,000 and $2,000,000 respectively. With respect to the AIC contract, the Crown alleges that the purchase price was deliberately inflated by an amount equal to the difference between the total contract price in the sum of $5,426,200 as shown in Exhibit 19 and the bid of $1,414,539.26 submitted by Mr. Alert as shown in Exhibit 101, which difference is $4,011,660.74. The Crown submits that the stated purchase price values in the offers to purchase covering the two properties and the contract price contained in the purchase contract for the AIC units can be characterized as sham transactions (Paragraphs 18 and 19 in the Crown's submission made in November 1989, which submission was relied upon by Crown counsel in his closing argument).

Counts 1 to 6 were laid under paragraph 239(1)(d). Count 7 was laid under paragraph 239(1)(a). Counts 8 to 10 were laid under paragraph 239(1)(c). These paragraphs of the Act read as follows:

239.(1) Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,

(c) made, or assented to or acquiesced in the making of false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular, in records of books of account of a taxpayer,

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

is guilty of an offence . . .

Counts 1 to 6 allege that the accused did wilfully evade or attempt to evade compliance with the Act or payment of taxes imposed by the Act between June 1, 1984 and March 21, 1986 in regard to Counts 1 to 4, and between June 1, 1984 and September 7, 1985 in regard to Counts 5 and 6 by deliberately inflating expenditures made on scientific research.

Count 7 alleges that the accused did unlawfully make a deceptive statement in the Part VIII Income Tax Return of Albion Microelectronics Research Corporation (Albion Microelectronics) on September 5, 1985 by overstating the amount spent on scientific research.

Count 8 alleges that the accused between June 1, 1984 and March 8, 1985 did unlawfully make, participate, assent or acquiesce in the making of a false or deceptive entry in the records or books of account of Albion Microelectronics by deliberately inflating the purchase price of Deerfoot Junction by $2,000,000.

Counts 9 and 10 allege that the accused, between October 1, 1984 and March 21, 1986 did unlawfully make, participate, assent or acquiesce in the making of false or deceptive entries in the records or books of account of Albion Transportation Research Corporation (Albion Transportation) by deliberately inflating the purchase price of 320 AIC units by $4,011,660.74 (Count 9) and by deliberately inflating the purchase price of Place 96 by $3,600,000 (Count 10).

Law

In The Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1; 19 T.C. 490 at page 19, Lord Tomlin said: ”. . .Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. . .”.

In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294; 84 D.T.C. 6305, Mr. Justice Estey of the Supreme Court of Canada said at page 298 (D.T.C. 6308):

A sham transaction: This expression comes to us from decisions in the United Kingdom, and it has been generally taken to mean (but not without ambiguity) a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality . ..

In the Stubart case Madam Justice Wilson, in concurring with the decision of Mr. Justice Estey, said at page 318 (D.T.C. 6325): "Indeed, I cannot see how a sham can be said to result where parties intend to create certain legal relations . . . and are successful in creating those legal relations.”

The comment of Madam Justice Wilson in the penultimate paragraph of her decision is of interest where she rejects the business purpose test as a test distinct from that of sham because she thinks Lord Tomlin's principle is far too deeply entrenched in our tax law for the courts to reject it in the absence of clear statutory authority.

Issue

Did the accused create fictitious expenses by way of sham transactions or was he ordering the affairs of the Albion companies to pay the least amount of tax?

Decision

The Crown must establish the actus reas of each count and the criminal intent of the accused beyond a reasonable doubt. I have instructed myself throughout the course of this trial on what is termed reasonable doubt as I would instruct a jury on reasonable doubt. In addition, I have reviewed thoroughly what I would say to a jury concerning circumstantial evidence in reaching my decision. In my judgment, the Crown has failed to prove the criminal intent of the accused. Mr. Maplesden testified for five and a half days. I am satisfied that he consulted the lawyers and the accountants retained by the Albion companies with regard to the three transactions with which he is charged and in relation to all matters concerning the Albion companies. I find that he had no criminal intention and did not deliberately inflate any of the values with which he is charged and was in no way deceitful. On this ground, and for other reasons, I find the accused not guilty on all of the counts.

Reasons for Decision

By way of summary, I find that the two building transactions were negotiated transactions between arm's length parties on terms which each side was, for its own reasons, prepared to accept. The AIC transaction was also an arm's length transaction creating legally enforceable rights between the parties. In each case, the transactions were structured by legal and accounting professionals so as to achieve the maximum business and tax benefit for the client. To paraphrase Mr. Justice Estey in Stubart at page 313 (D.T.C. 6320-21):

The transaction(s) and the form(s) in which (they were) it was cast by the parties and their legal and accounting advisers cannot be said to have been so constructed as to create a false impression in the eyes of a third party, specifically the taxing authority. The appearance created by the documentation is precisely the reality. [. . .] There is, in short, a total absence of the element of deceit, which is the heart in these circumstances of the doctrine of sham as it has developed in the case law of this country.

I find that meticulous recordkeeping was maintained to document the transactions so as not to mislead Revenue Canada, and without deception as to any material fact. In addition, the evidence is overwhelming that the Albion companies, under Mr. Maplesden's direction, were conducting scientific research which the scientific research tax credit (SRTC) program was designed to encourage. This was established by a number of Crown witnesses,as well as by Mr. Maplesden, and confirmed by an independent scientific audit performed at the request of Revenue Canada by Dr. D.H. Norrie dated August 9, 1985 (Exhibit 65).

In reaching my decision, a review of each transaction is necessary.

Place 96

The executed offer to purchase is found at Tab 1 of Exhibit 2. It was executed on August 16, 1984 by Albion Transportation per the accused and by CCB Mortgage Investment Corporation (CCB MIC). It should be noted that the Canadian Commercial Bank (CCB) and CCB Realty Investors (CCB RI) were participants in this transaction as exemplified by Exhibits 131 and 132. The purchase price was $20,000,000, with an allocation between lands and buildings of $750,000 and $19,250,000 respectively. There were extensive negotiations leading up to the execution of the offer to purchase, including Exhibits 154,155 and 123. In addition, Mr. Fulton, a lawyer practising in Calgary, became involved with Mr. Maplesden concerning scientific research tax credits and drafted an offer to purchase (Exhibit 8) covering Place 96 which provided for a purchase price of $20,000,000. Mr. Fulton stated that Mr. Maplesden did not participate in any way in the drafting of Exhibit 8, nor did Mr. Maplesden have any input into the allocation of $500,000 for land and $19,500,000 for buildings as set out in paragraph 5 of that offer.

The complexities of the scientific research tax credit legislation is evidenced from this excerpt from the cross-examination of Mr. Fulton:

Q. How important was the structure of a purchase of a building in relation to the scientific research tax credits?

A. Critical.

Q. Can you expand?

A. Certainly. There had to be in order to raise the funds the ability to shelter potential Part VIII tax liability. Now, one of the fundamental concerns of any investor at that time in the market was this, could the person cover his Part VIII tax exposure after the financing was done, and to do that typically investors would require a person placing these credits to place in escrow a sum of money equivalent to the deficiency between the amount of actual cash he got and his total Part VIII tax liability. So going back to our example of $1 million. If an investor was paying $400,000 for a $500,000 tax credit, he would require that the investor put into escrow to be drawn against as research expenditures were incurred, not only the $400,000 that he gave to purchase the tax credit, but an additional $100,000 to ensure that there was enough cash to pay the Part VIII tax liability in trust.

Now without the purchase of a building, Mr. Maplesden would not have been able to cover the Part VIII tax exposure but the building gave him enough immediate Part VIII coverage that he would have had enough cash free to complete the down payment on the building, and to cover the funds that he would otherwise have had to put into trust to ensure his full Part VIII exposure was covered. So the purchase of a building, or I would say other leverage capital asset was critical in order for him to raise funds.

Q. And therefore, the less of—the benefit to using a building in the scientific research tax credit program is it was an asset that was capable of being highly leveraged?

A. That is right.

Q. And the goal of a company wishing to place a scientific research tax credit sale was to put as little cash into the transaction of his own as possible?

A. The object being to preserve as much cash as possible and to look for an immediate and dramatic potential income out of the cash that would be employed for the conduct of the scientific research.

With respect to the value of Place 96, numerous officers of CCB were called who testified that CCB wished to receive at least what CCB had invested in the property, which was in the range of $14,000,000 to $15,000,000. That price excluded any occupancy improvements, as the building had never been occupied. Each of these witnesses, as well as other witnesses, acknowledged that a sale on terms was considerably different than a cash transaction. The more beneficial the terms to a purchaser, the higher the purchase price was likely to be. Each witness said it was difficult to place a value on the property because of the economic situation in Calgary in 1984.

Messrs. Fitzsimonds and Hansen, who were real estate agents for Canada Trust, and who were acting on behalf of CCB in marketing Place 96, gave evidence that Mr. Gaudet, the senior officer on behalf of CCB, had advised them that, for scientific research tax credit purposes, the CCB was prepared to put together a sale based upon a $20,000,000 price. I accept that evidence and find that the $20,000,000 sale price did not originate with Mr. Maplesden or any other Albion officer. Exhibits 111 and 156 do not persuade me to reach any other conclusion but that the purchase price of the property was $20,000,000, which included the purchase of 360,000 Class "A" preferred shares for $3,600,000.

While there was evidence that the preferred shares had little or no value, one must not overlook the fact that the offer to purchase (Exhibit 2—Tab 1) finally executed was drawn by the lawyers acting for CCB, and this included a subscription agreement which provided in Schedule "A" that the Class "A" preferred shares shall be redeemable, at the option of the holder, at any time after September 1,1989 at a redemption amount equal to $10 per share plus accrued and unpaid dividends. It should be noted that none of the officers of CCB asked to review the financial statements of Albion Transportation and no independent appraisal of the value of the shares was offered by the Crown.

The details of the transaction are set out on page 10 of the agreed statement of facts (Exhibit 276).

Following the acquisition of Place 96, Mr. Maplesden ordered an appraisal. Mr. Eagleson valued the property effective August 28, 1984 at $18,000,000 (Exhibit 177). This value did not include leasehold improvements. The offer to purchase between CCB and Albion Transportation provided that CCB would advance $1,400,000 for leasehold improvements. Mr. Eagleson agreed that with leasehold improvements added to his appraised value of $18,000,000 the pur- chase price of $20,000,000 in the offer to purchase signed by Albion Transportation was a fair value and within a reasonable variation of ten per cent. Based on this evidence, which I accept, the Crown has failed to establish beyond a reasonable doubt that the property was inflated by $3,600,000. Furthermore, I am satisfied, having heard the evidence of Mr. Maplesden, that he did not inflate the value of the property, nor was there any evidence of deliberateness on his part to do so. On September 21, 1984 Mr. Maplesden signed a comfort letter on behalf of Albion Transportation to Thorne Riddell, which letter was included in a letter by Thorne Riddell of the same date sent to Mr. John Rennie of Goodyear Canada Inc., an investor with Albion Transportation in scientific research tax credits (Exhibit 1—Tab 14). Attached was a schedule of budgeted expenditures showing the building at $16,500,000. This value had been determined by Mr. Penner of Thorne Riddell. Paragraph 5 of the letter signed by Mr. Maplesden reads as follows: "The cost of the real estate which the company proposes to acquire, in our view, represents the fair value of the property and the allocation of the costs between land and building is reasonable and appropriate in the circumstances."

On February 21, 1985 Mr. Maplesden wrote a letter to the attention of Mr. O’Brien, the partner handling the account at Thorne Riddell (Exhibit 204), expressing his view that the amount allocated to the building of $19,250,000 in the offer to purchase was a reasonable allocation and that the letter that he wrote on September 21,1984 was based on advice received from the professional advisors which was reasonable in the circumstances as of September 21, 1984. It is evident from the third paragraph on page 1 of a letter dated February 13, 1985 written by Mr. O'Brien to Burnet Duckworth that Mr. Maplesden had questioned earlier the decision by Thorne Riddell to fix the allocation at $16,500,000 for the building. Mr. O'Brien sought authority to authorize a release of escrow funds based on the allocation of $19,250,000 set forth in the offer to purchase. Mr. Brussa, a tax lawyer with Burnet Duckworth, responded by letter dated February 15, 1985, which two letters form part of Exhibit 206, stating it would be reasonable to rely upon the price allocation in the offer to purchase. I find that Mr. Maplesden did not make any moves without first consulting with the accountants at Thorne Riddell and with the lawyers at Burnet Duckworth.

The Crown has failed to establish any mens rea on the part of Mr. Maplesden to deliberately inflate the value of Place 96.

Deerfoot Junction

Exhibit 25 is the offer to purchase executed on August 7, 1984 by Albion Microelectronics per the accused and by Trojan Properties Ltd. (Trojan). The purchase price was $7,000,000. It was a term of this transaction that Trojan would purchase 200,000 Class "C" preferred shares of Albion Microelectronics for $2,000,000. The purchase price of the building was made up as follows:

Included in the purchase price was prepayment of interest on the first mortgage in the sum of $757,000, an interest-free second mortgage, as well as all occupancy improvements by Trojan on the building which had never been occupied, and no recourse against Albion microelectronics on either mortgage. In the offer to purchase, the value of the building was set at $6,500,000 and land at $500,000.

The evidence of Messrs. Douglas and Seleshanko, the executive vice- president and treasurer respectively of Trojan, was that in the summer of 1984 Trojan was seeking $3,900,000 to $4,500,000 cash for the building in an "as is" condition; that is, without improvements necessary for a purchaser or tenant to occupy the building.

While Mr. Seleshanko said the property was carried internally on Trojan's books at $3,900,000 and Mr. Douglas said that he had discussed selling the property in the range of $3,700,000 to $4,100,000 with Mr. Sabot of Trojan, I find the purchase price in Exhibit 25 was a negotiated transaction by two parties at arm's length. Mr. Douglas said the deal was "a logical solution to a difficult market situation." It is quite clear from the evidence of Messrs. Douglas and Seleshanko that the preference shares made the deal work. In addition, Mr. Basskin, a chartered accountant, had reviewed the transaction to determine its reasonableness with Mr. Seleshanko who advised Mr. Basskin that Trojan was anxious to complete the transaction as negotiated.

The Crown called no expert evidence as to the fair market value of the property at the time of purchase.

Messrs. Douglas and Seleshanko did not believe the preferred shares had any value. Mr. Seleshanko acknowledged that in the event that Albion Microelectronics was successful, the shares would have resulted in a gain to Trojan. There was no expert evidence offered by the Crown as to the value of the shares.

Mr. Ryckman, who was the financial vice-president of the Albion companies, gave evidence of the value of Albion Microelectronics shares. Although ne stated a belief that the shares had no value, he confirmed that the accused was hesitant to do the transaction if it included the sale of shares in his company because he did not wish to give up any interest in the company. As well, for income tax purposes, Mr. Ryckman valued the sale of common nonvoting shares back to Albion Microelectronics at $133,000 in January 1985, less than six months after the sale to Trojan.

Exhibit 225, a letter written by Mr. Seleshanko on August 16, 1984 to the Bank of Nova Scotia, which bank held a debenture on the property and had to approve the sale, indicates the nature of the transaction, which includes the statement of Mr. Seleshanko that the preferred shares had no value. Nevertheless, Mr. Seleshanko strongly recommended the deal based on the significant benefits to Trojan. Exhibit 220, a letter written by Mr. Douglas on August 3, 1984 to Central Trust Company, which held the first mortgage on the property and had to approve this transaction, reviews the terms of the purchase. In this letter, Mr. Douglas said:

As I stated to you, these values have all been enhanced to make the SRTCs workable.

As we are facing an election and almost certain changes in the rules governing SRTCs, we need to have an immediate concurrence with the course of action to be followed in order to capitalize on this opportunity. ....

Mr. Douglas stated in his testimony that the 200,000 preferred shares had no value, as Trojan had no financial statements of Albion Microelectronics and it was a company untried and with no record. While Mr. Seleshanko said the $2,000,000 for the preferred shares was handled through the lawyers' trust accounts, it is admitted in an amendment made at the close of the Crown's cause to page 8 of the agreed statement of facts (Exhibit 276) that Trojan's lawyer did not tender a cheque for $2,000,000 with the subscription for shares made by Trojan on September 14, 1984 (Exhibit 270). While this might be of some concern, I am satisfied that Mr. Maplesden did not know that the $2,000,000 was not tendered by Trojan's lawyer.

In my judgment, taking the transaction in its entirety, the Crown has failed to prove beyond a reasonable doubt that the value for Deerfoot Junction was inflated or that it was unreasonable.

Furthermore, I am satisfied, having heard the evidence of Mr. Maplesden, that he did not inflate the value of the property, nor was there any evidence of deliberateness on his part to do so. I accept the evidence of Mr. Maplesden that Mr. Ryckman determined the value at $7,000,000. Thus the Crown has failed to establish any mens rea on the part of Mr. Maplesden.

AIC Contract

The theory of the Crown is that the source of funds available to Albion Transportation were the funds held in the escrow account established by the escrow agreement (Exhibit 1—Tab 21). As at July 2, 1985 the escrow account contained $3,512,387.44 (agreed statement of facts, page 13). As the fiscal year end for Albion Transportation was September 20, 1985, as agreed between Counsel, Albion Transportation had to incur scientific and research expenses of a sufficient magnitude to cause the release from escrow of all the funds before the year end or face a substantial tax liability. Thus the Crown alleges that Mr. Maplesden structured an agreement with Mr. Fitzsimonds (Exhibit 19), which deliberately inflated the value of the AIC units to be manufactured by $4,011,660.74.

This contract was first offered to Mr. Alert, who commenced working for Albion Microelectronics in 1984 as a project engineer. He was terminated by letter dated July 2, 1985 (Exhibit 97), at which time he was working on the AIC prototypes. Mr. Alert believes that he received a copy of a draft agreement of purchase and sale and licence agreement (Exhibit 99) from Mr. Sproule, the vice-president of finance for the Albion companies. He read the documents and gave them back to Mr. Sproule. Mr. Alert said he was contacted by Sylvia Davidson, the executive secretary of the accused, and was requested to prepare a bid for the manufacture of 320 AIC units. After some discussion he prepared Exhibit 101 which he delivered to the accused or to Mrs. Davidson. The following week he met Mr. Maplesden and went to the office of Mr. Spackman, a lawyer with Burnet Duckworth. Mr. Maplesden gave Exhibit 100, which is an agreement and a licence agreement, to Mr. Alert who was asked to read the documents. Following lunch, because time was of the essence, he was asked to sign. Mr. Alert compared his original bid price of $1,414,539.26 in Exhibit 101 to the $5,426,200 called for in Exhibit 100 and he questioned the price. It should be noted that the purchase price of $5,426,200 in Exhibits 100 and 19 has two components—$4,022,220 for the manufacture of the 320 AIC units and $1,404,000 for their installation. Thus the unit cost per AIC under the contract was $12,569 without installation. It was explained to Mr. Alert that he would receive "a windfall, good profits". Mr. Alert said the accused stated that Mr. Alert would never see the difference between the aggregate price and the down payment. Mr. Alert did not agree with the documents because he felt this was "a scam”. Mr. Alert took Exhibit 100 to his lawyer for review, following which Mr. Alert advised Mr. Maplesden that he would not sign the documents unless there were a number of changes made, including a change in price.

Contracts were subsequently signed (Exhibit 19) as of July 11, 1985 between Albion Transportation as purchaser, Albion Avionics Research Ltd. as licensor, and Mr. Fitzsimonds on behalf of 329277 Alberta Ltd. Exhibit 19 is exactly the same as Exhibit 101 which was presented to Mr. Alert, including Schedule "A" attached to the agreement and to the licence agreement which defines the AIC. Mr. Fitzsimonds had been a vice-president with the Albion companies but had decided for personal reasons to leave and had resigned as of July 1, 1985. Mr. Fitzsimonds was not an engineer, as was Mr. Alert, but Mr. Fitzsimonds stated that, in conjunction with others, the contract could be performed.

Having reviewed the evidence, particularly that of Mr. Fitzsimonds, I am satisfied that this was an arm's length transaction.

The next question is whether the purchase price of $5,426,200, including installation, for 320 AIC units was a reasonable price or was it deliberately inflated by Mr. Maplesden by $4,011,660.74.

I do not believe the evidence of Mr. Alert when he said in cross-examination that Mr. Maplesden made an off-the-cuff remark "not to worry about the balance of the contract price" because he would not get it anyway. Furthermore, I do not accept his evidence when he reviewed Schedule "A" of Exhibit 100 and said that “this did not include software". I am satisfied that the AIC unit contemplated in Schedule "A" to the agreement marked as part of Exhibit 19 is a much more sophisticated unit than that contemplated by Mr. Alert when he prepared Exhibit 101. I accept the evidence of Mr. Vanderlaan that no software costs were included in Exhibit 101. In my opinion, the evidence of Mr. Alert was coloured because he had been terminated by Mr. Maplesden. In my judgment, he did not have a full appreciation of the type of unit, in particular the software and firmware, which is defined in Schedule "A" to the agreement which he rejected (Exhibit 100).

I heard evidence from a number of witnesses concerning the value of an AIC unit, including Mr. Milton who was vice-president research, Mr. Schnell who was trained in electronics and had been working at SAIT before he joined the Albion companies as a project manager and subsequently became manager of component research, and Mr. Campbell who worked in the testing laboratory and became manager of technical information services. I was particularly impressed with the evidence of Mr. Campbell who gave a detailed review of the description of the AIC unit in Schedule "A" to the agreement, marked as Exhibit 19 or Exhibit 100, in relation to price lists which he had prepared on June 4 and June 5, 1985 in the memoranda marked Exhibit 247. Using his price list, he fixed the value of the AIC shown in Schedule "A" of the agreement in Exhibit 19 at $16,500. Mr. Schnell’s evidence was equivocal, as he stated in answer to a question put by Crown counsel that the AIC unit could possibly be sold in the open market in July 1985 for $12,569, but he would not be the first buyer. In my judgment, Mr. Milton's evidence does not in any way assist the Crown.

I was very impressed with the evidence given by Mr. Maplesden in reviewing the reason for the manufacture of 320 AIC units for in-house testing and how he arrived at a value of $12,000 per unit.

The obligation is on the Crown to establish beyond a reasonable doubt all of the elements of the charge. The evidence leaves me with a substantial doubt, particularly so when I do not accept Mr. Alert's evidence as to value.

Furthermore, I have no hesitation in finding that Mr. Maplesden did not have the mens rea alleged by the Crown.

Other Submissions by Counsel

In view of my decision, I see no point in reviewing the other submissions made by counsel during their closing arguments.

Accordingly, Mr. Maplesden, you are free to go. Is there anything further, Mr. Conley?

Mr. Conley: No, My Lord, thank you.

Mr. Gruman: Thank you, My Lord.

The Court: Mr. Gruman?

Mr. Gruman: No, thank you.

The Court: We will adjourn.

Appeal dismissed.