Regina, Complainant, v. Edwin H Metke, [1976] CTC 258, [1976] DTC 6313

Cawsey, J (orally):—The accused was charged that:

between the 31st day of December, AD 1968 and the 1st day of May, AD 1972, did unlawfully and wilfully evade the payment of taxes imposed by the Income Tax RSC 1952, Chapter 148, and amendments thereto in relation to income received by him in the amount of $34,950.00 and did thereby commit an offence contrary to Section 239(1 )(d) of the Income Tax Act.

The relevant portion of the section under which the charge was laid reads:

239, (1) Every person who has

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

is guilty of an offence . . .

Accused is a successful dairy farmer who was also a shareholder and a director of two private companies, SKM Farm Developments Ltd and Leduc Alfalfa Products Ltd. The former company was in the business of buying cattle and growing feed for cattle. On December 30, 1969 accused gave his cheque to SKM Farm Developments for $15,000 and there is a notation on the cheque that it was for “beef cattle”. In the records of the accused was a note which reads as follows: “$15,000.00 worth of cattle bought from SKM in 1969 December (signed) Edwin H Metke.” On January 6, 1970 this transaction was recorded in the records of SKM as a shareholder’s loan of $15,000 in the name of E Metke. The special shareholders loan ledger sheet recorded the $15,000 as a “loan for operating”, and the sum of $15,000 plus interest of $1,425 was paid to Metke by cheque from SKM, December 29, 1970 and the sum of $16,425 was deposited to the account of Edwin Metke in the Bank of Montreal at Leduc on January 20, 1971. The interest ledger of SKM shows the interest of $1,425 credited to accused in December 1970. Metke claimed the $15,000 as an operating expense on his 1969 income tax return.

In 1970 Metke used a slightly different procedure. On December 18, 1970 he issued a cheque to O A Brown Ltd, Livestock Commission Agents, for $10,000, marking the cheque “cattle”. The receipts and disbursements ledger of SKM recorded this transaction as an account payable to Metke in the amount of $10,000. The receipts and disbursement journal of SKM records a transfer of $17,387.58 to Metke’s shareholders loan, and I am satisfied that the $10,000 represented by the cheque of $10,000 dated December 18, 1970 is included and is a part of the $17,387.58. The interest ledger of SKM dated January 1972 indicates a payment of interest of $800 to Metke. This payment was made by cheque of SKM to Metke of January 14, 1972 in the amount of $800. On December 21, 1971 a cheque of SKM was issued to Metke in the amount of $10,000 and I am satisfied this is to repay Metke for the purchase of cattle on December 18, 1970.

On December 10, 1971 Metke gave a “Farmer’s Statement” to the Bank of Montreal, Leduc in which he states that he has a $10,000 loan to SKM for feeder steers.

When filing his income tax return for 1970 he claimed the sum of $10,000 as an expense item.

On December 31, 1971 Metke gave his cheque for $10,000 to SKM and a memo in Metke’s papers which were seized indicates that this cheque was for cattle (feeders). SKM’s receipt and disbursement ledger shows the sum of $10,000 as a loan to SKM from Metke. This amount was also shown as a loan on the special shareholders loan ledger. On his 1971 income tax return the aforesaid $10,000 was claimed as an expense by Metke.

These transactions, over a period of three years, resulted in Metke claiming as an expense “cattle purchases” in the amount of $25,000 and at the same time SKM was treating these amounts as loans which were subsequently repaid to Metke with interest.

The accused gave evidence, and stated that he carried on a mixed farming operation, which included the buying and selling of cattle. He was one of the two shareholders in SKM, which also bought and sold cattle. The accused had an interesting method of recording income and expenses. He had three Kleenex boxes—one for SKM, one for Leduc Alfalfa Products and one for his own farming operations. Invoices, cheques and other notes and documents would be placed in the appropriate box during the year, and at the end of the year all documents would be taken out of the boxes and were given to Nestor Plawuk, of Scona Agencies Ltd of Leduc, who were accountants for Metke and the two limited companies. Plawuk would then prepare the journals, ledgers and income tax returns. I am satisfied that although he was a very successful farmer, Metke had little or no knowledge of accounting procedures or income tax, and that he relied solely on Scona Agencies for his accounting and income tax returns. The 1969 and 1970 income tax returns were filed by Scona Agencies, which then sold out to a chartered accountant, who filed subsequent returns. I am satisfied that the accused did not read the returns before he signed them. (The 1972 return was not signed by Metke.)

Nestor Plawuk of Scona Agencies gave evidence that he did about 500 income tax returns for farmers every year. He prepared Metke’s and the companies’ bookkeeping and income tax returns. He confirmed that Metke would bring the boxes of records to his office. He further confirmed that Metke knew nothing about accounting.

Counsel for the accused referred to the following cases: Regina v Baker, 16 CCC (2d) 126; Regina v Regehr, [1968] CTC 122; 68 DTC 5078; Regina v Hummel, [1971] CTC 803; Acme Slide Fastener Co Ltd v Knott (The Queen), [1962] CTC 320; 62 DTC 1261; Shiomi v Regina, CRNS 362; Regina v Morris, [1973] CTC 629; Udell v MNR, [1969] CTC 704: 70 DTC 6019; The Queen v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577.

It was conceded by both counsel that mens rea is an essential element to this charge and that the accused must have a guilty mind before he can be convicted under this section. The investigation of this case was very thorough, and at the conclusion of the Crown’s case there was a very strong inference of guilt. However, after seeing the accused on the stand, observing his demeanour, I have a very grave doubt as to whether what was done was done intentionally, and not merely by inadvertence or ignorance of accounting and income tax procedures.

When the first series of exhibits were presented with respect to the cheque of December 30, 1969, showing that the sum of $15,000 was claimed as an expense, and then paid back with interest, it was very persuasive. When a similar procedure was followed the next year it indicated a design or scheme to wilfully evade the payment of income tax. When it happened a third time it became very clear.

However, the method or scheme is so obvious and transparent that I do not think that anyone who was wilfully trying to evade the payment of income tax could have adopted such an obvious and transparent scheme, and this is one of the reasons I find the mental element required for a conviction to be lacking.

I was impressed by the statement the accused gave to the Bank of Montreal. Only the accused and the bank manager were present at that time, and the accused, I am satisfied, considered the transaction as a loan to SKM.

I must comment on the evidence of the accused. His net worth statement filed with the bank in 1971 indicated a very successful farming operation. I am satisfied that Metke left his accounting and preparation of income tax returns to others. I am forced to the conclusion that what the accused did was bad business; it might be considered negligence on the part of the accused; it indicates a complete lack of knowledge of bookkeeping, accounting and income tax practice.

After reviewing all of the cases referred to, plus others, I cannot convince myself that these actions should bring the accused before a Criminal Court charged with “unlawfully and wilfully” evading the payment of taxes. This is not a criticism of the officers enforcing the Income Tax Act. It is a difficult Act to enforce and investigations must be protracted. The thoroughness with which this case has been investigated, prepared for and presented at trial is a credit to the investigators and the prosecutor.

I find the accused not guilty.