Paragraph 239(1)(d)

The Samaroos were acquitted in 2011 on all counts of tax evasion respecting their having allegedly skimmed $1.7 million in cash from the restaurant operations of their corporation. In 2018, they were awarded damages (including $750,000 in punitive damages) by the B.C. Supreme Court in an action brought by them against CRA for malicious prosecution and breaching their s. 7 Charter rights.

This decision has now been reversed by the B.C. Court of Appeal. One of the requirements for finding malicious prosecution was that “the prosecution was undertaken without reasonable and probable cause.” Although CRA had suspected that the Samaroos had failed to provide the “till tapes” for one of the daily shifts to the corporate bookkeeper, Harris JA indicated that the trial judge had erred in considering “proof of the till tape theory, a particular scheme, as essential to proving the actus reus” of the alleged s. 239(1)(d) offence (para. 57) - whereas, in fact (para. 58):

[T]he actus reus of the offence does not depend on proof of any particular method by which taxable income is not reported. What matters is the fact that taxable income is intentionally not reported. The existence of unreported taxable income does not necessarily require proof of how it is hidden or disguised.

As the “Samaroos failed to prove an absence of reasonable and probable cause to initiate and continue the prosecution,” their appeal was dismissed.

During 1997, 1998 and 1999, the accused developed and implemented a scheme that allowed taxpayers to withdraw money from their RRSPs, RPPs or LIRAs (collectively, "pension plans") on a purportedly “tax free” basis. The taxpayer qua plan annuitant might direct the trustee of the plan to purchase shares of one of several corporations under the control of the accused, with the corporation lending to the annuitant approximately 80% of the value invested in the corporation's shares, secured by the shares acquired. The corporations were sold in the Bahamas. The taxpayer took a share of the funds that were shifted out of the pension plans in this manner. Various of the taxpayers were assessed on the basis that their pension plans had made nonqualified investments. The accused appealed from the verdict The Queen.v. Gagné, 2010 QCCQ 18420 (CanLII) that convicted him of four counts of tax evasion contrary to s. 239(1)(d).

In dismissing the appeal, the Court stated (at paras 13, 20, TaxInterpretations translation):

… The trial judge and the respondent are correct in stating that "[a] person who avoids the payment of a tax imposed under the Act, necessarily avoids compliance with the Act." The provision creates a single offence - tax evasion - the meaning and scope of which would be even clearer by rephrasing the wording as follows: "has voluntarily, in any way, evaded or attempted to evade the payment of a tax imposed under that Act, or otherwise evaded or attempted to evade compliance with this Act ". The appellant criticizes the judge for creating a problem of duplication that does not exist. …

[T]he tax evaded underlying the counts in issue was not due by the appellant. The Cardoso judgment of this Court, however, establishes that allowing others, via a stratagem, to evade tax due, constitutes the actus reus of the offence of tax evasion; the offence is not limited to avoiding one’s own tax.

Mills J found that the accused, a self-described "natural person", was guilty of tax evasion for failing to report any income from a business he ran - whose purpose was to assist others in self-declaring as natural persons, and thereby exempting themselves from tax or other kinds of government authority. The Crown proved gross revenues beyond a reasonable doubt; in order to establish profit, the Crown estimated business expenses (e.g. phone, utilities, office supplies) for a business of that size and kind. Mills J noted that a precise calculation of income was not an element of the offence, but also found that the Crown's estimated profit was enough to establish the amount of income tax that accused failed to report.

Mills J also relied (at para. 57) on the finding in R. v. Klunder, 2008 ONCA "that the accused's belief that the Income Tax Act did not apply to him was a mistake of law which did not constitute a defence to the charge of tax evasion." The accused was also guilty of counseling his clients to evade tax contrary to s. 380(1)(a) of the Criminal Code.

The charge were dismissed in light inter alia of failure to prove that the accused had ever seen the returns in question.

The accused was not qualified as a public accountant but operated a bookkeeping and tax preparation service for which he charged up to $500 an hour. He did not track his revenues and expenses, and instead inserted low-ball estimates of his professional income in his returns. Before convicting the accused, Agnew J stated (at para.60):

There is caselaw supporting the proposition that those with greater knowledge are to be held to a higher standard. ...[T]he proposition might better be phrased that an accused's degree of knowledge and experience form part of the context in which his actions must be assessed.

It was not established that the accused had any intent to evade taxes for his 1991 to 1995 years, as small amounts were due and source deductions were expected to have been withheld. Before finding the accused guilty under s. 239(1)(d) on counts for subsequent years, Eiircke J noted evidence that the accused had told others he was going to file returns, and stated (at para. 121) "talking about filing is not filing," and (at para. 122) "there was no evidence that during the years Mr. Andrus was cashing in large investments and earning a substantial amount of business income he put anything aside for taxes."

Before finding the accused guilty of evasion, Mrozinski J stated (at para. 73):

R. v. Alexander Street Lofts Development Corporation Inc., ... 2007 ONCA 309, provides sound authority for the proposition that the precise amount alleged in the count is not an essential element of the offence charged. The charge may be made out if the court is satisfied beyond a reasonable doubt that the accused has failed to report income, not by reason of a mistake or ignorance, but knowing taxes were due and failing to report that income for the purpose of evading taxes.

The defendants ran "The Paradigm Education Group," a business in which they conducted self-help seminars and set up teachers to conduct such seminars. The Paradigm curriculum was meant to establish acolytes as "natural persons," working in their own capacity, under private contract, for their own benefit, and thereby supposedly to make them exempt from tax.

Myers J. convicted the defendants under s. 239(1)(d) of the ITA in respect of their own tax liabilities and for counseling people to commit fraud on the Crown. The "Paradigm view," that individuals who were also "natural persons" were exempt from tax, was logically incoherent and had no basis in common sense. It was immaterial whether the defendants held this view honestly - Myers J. stated that it was, "at best, a mistake of law" (para. 70).

The accused taxpayer provided false charitable receipts to his clients in order to generate $3.28 million in fraudulent tax refunds. He was convicted of two counts of tax evasion under s. 239(1)(d), and one count of criminal fraud under s. 380(1)(a) of the Criminal Code. The trial judge sentenced the taxpayer to a day in jail (after giving two-for-one credit for 11 months of pre-trial custody) and imposed a $145,766 fine.

The Court of Appeal found that the trial sentence was inadequate, and sentenced the taxpayer to be re-incarcerated for two additional years. Gillese J.A. for the court at para. 11: "a penitentiary sentence is the norm, not the exception, in cases of large-scale fraud."

The trial judge had erred in instructing the jury that a person who refused to pay his taxes as a protest could not be convicted of evading the payment of taxes if that protest was made "honestly". Doherty J.A. stated (at p. 6617):

"There are solid policy reasons for drawing a distinction between an accused who mistakenly believes that he or she is complying with the Act and an accused who knowingly violates the Act, but mistakenly believes that the Act is invalid."

The appellant, who was the president of a mineral exploration company, had the company renounce fictitious exploration expenditures to purchasers of flow-through shares. In finding that the conviction of the appellant under s. 238(1)(d) should be maintained, the majority noted that the common law offence of cheating the public revenue was not limited to the case where the unpaid tax was that of the accused or his company, and (at p. 489) that the section was "sufficiently clear ... to include fraudulent acts committed wilfully by the appellant and which have the effect of depriving the State of the collection of income tax".

Before rejecting a submission for the accused that a charge for "wilful evasion or attempt to evade payment of taxes" was void for vagueness, Goodearle J. stated (p. 6092):

"Such an argument might well succeed had the charge been framed under the 'evade ... compliance' alternative. For to expect the average well-informed and intelligent citizen to comprehend all of the proscriptions set forth in the Income Tax Act, having regard for the endless exceptions and provisos, would be to set a threshold well beyond that which is reasonable."

However, given that such a citizen would know that individuals receiving income were liable to payment of tax thereon, the charge as levelled was acceptable.

Because the accused was guilty both of evasion under s. 239(1)(d) of the Act and fraud under s. 380(1)(a) of the Criminal Code, and the fraud charge was the most serious one, a conviction was entered on the fraud count, and a conditional stay was entered on the tax evasion count.

The taxpayer fraudulently caused his employer to pay invoices for work on renovation to his home in 1983 and 1984. After the renovations were completed in 1984, he informed the company vice-president and controller that he had done so, following which it was agreed that the misappropriated funds would be treated as a loan to him. Because at the time of filing his tax return for 1984, this agreement had been reached, there was no wilful evasion of tax through failing to report the amount misappropriated by him in 1984 as income to him. However, the finding of the provincial court judge of wilful evasion with respect to the failure to report the amount of the 1983 misappropriation as income, was not disturbed.

The appellant had the requisite mens rea when, at a time when he was in funds sufficient in his belief to meet his liability to the income tax department, he made a deliberate choice to continue his failure to file returns and to pay the funds to his bank and family instead.

The reasoning of a Queen's bench justice - that once the Crown establishes a prima facie case that the accused deducted personal expenses of its individual shareholder in computing its income, then the burden of establishing that the expenses were incurred for business purposes, as required by s. 18, lies upon the accused - was rejected. S.239(1)(d) does not make it an offence per se to contravene s. 18. The onus remained on the Crown throughout to establish evasion, and the willfulness of that evasion, beyond a reasonable doubt.

The requisite mens rea was not present respecting the deduction by the taxpayer of expenses of an allegedly personal nature, given that similar expenses had been allowed by Departmental auditors for prior years.

A deliberate failure to file income tax returns, without more, did not constitute the wilful evasion of taxes. "The word 'wilfully' as used in the subsection under consideration, carries a distinct connotation of deliberate purpose and ulterior motive."

The trial judge committed an error of law when he indicated that a falsification of records of a corporation, in order to attribute transactions to that corporation rather than to the accused, would not be sufficient to establish a charge in suppressing taxable income, and that only a total failure to account would be sufficient to support the charge. The trial judge also erred in law in holding that the determination as to whether profits were income or capital gains was for the Minister of Revenue to make and beyond the purview of the Court, and that he was unable to make a decision on the evidence before him.