Her Majesty the Queen - v. -, 2012 SKPC 116

IN THE PROVINCIAL COURT OF SASKATCHEWAN Citation: 2012 SKPC 116 Date: July 23, 2012 Information: 30764830 Location: Moose Jaw, Saskatchewan _____________________________________________________________________________ Between: Her Majesty the Queen - and - Wilfred Roy Smith Appearing: Ms. Darcia Schirr, Q.C. For the Crown In Person For the Accused JUDGMENT D.J. KOVATCH , J Background [ 1 ] The accused, Wilfred Roy Smith, is 63 years of age, his date of birth being March 2, 1949. He faced eighteen charges in the trial of this matter.

Count one alleged that between 2004 and 2008, both years inclusive, he failed to report net business income of $462,091.00 and evaded the payment of $74,995.00 in taxes. Counts two and three are tax evasion charges with respect to 2006 and 2007, respectively. Count four alleges that in 2007, by failing to report his proper income, he assisted his wife in obtaining a pension split, that she was not otherwise entitled to, and thereby reducing her tax by $2,094.00. Counts five and six allege that he assisted his

wife in obtaining the spouse or common-law partner tax credit that she was not otherwise entitled to, in 2006 and 2007, respectively. Count seven is an amalgamation of counts five and six. [ 2 ] In count eight, it is alleged that between July 1, 2008 and June 30, 2009, he obtained the Goods and Services Tax Credit, to which he is otherwise not entitled, by falsely declaring his income. [ 3 ] Count nine alleges that between January 1, 2006 and December 31, 2008, he underreported Goods and Services Tax (GST) collected, and underpaid GST in the amount of $11,072.16.

Counts ten to eighteen, inclusive, allege the underreporting and underpayment of GST in various quarters in 2006 to 2008, inclusive. The Evidence [ 4 ] The Crown called five witnesses and introduced, by consent, some very brief Can-Say statements from three other witnesses. The Crown’s evidence was largely uncontested by Mr. Smith. The two main witnesses were Robert Sonder and Carmon Halvorsen. I begin by reviewing their evidence, as it substantially sets out the narrative of the facts. [ 5 ] Mr.

Sonder testified that between May 2008 and October 2011, he worked for the Canada Revenue Agency (CRA) at the Regina office. He has since changed his employment to the University of Regina. For most of his time at CRA, he was an auditor, and in that capacity reviewed the tax and business records for various businesses as they were assigned to him. He advised that during this time, a number of individuals were employed as “screeners” with the CRA. These individuals conducted a cursory screen of returns and records filed with the department. As a result of this screening process, Mr.

Sonder was assigned to conduct an audit on the accused’s financial affairs for the 2006 and 2007 tax years. [ 6 ] Mr. Sonder testified that on January 28, 2009, he called the accused and advised Mr. Smith that Mr. Smith had been selected for an audit of his taxes for 2006 and 2007. During this conversation, Mr. Smith advised that he had previously been subjected to an audit for 2004 and 2005, and that he found that audit to be “grossly unfair”. Mr. Smith further advised that he might not cooperate and “might take jail time”.

Nevertheless, the two men did agree to meet on February 17, 2009. [ 7 ] At the February 17 th meeting Mr. Smith brought in three bags of records. The most important documents contained in these bags of records were lengthy handwritten ledger sheets showing all of the accounting transactions during the 2006 and 2007 years. Mr. Sonder indicated that these handwritten ledger sheets, which were entered as Exhibits P-500 and P-501, were relatively well organized and relatively easy to follow. Early on, Mr.

Sonder testified that he attempted to match these ledger sheets with the income tax returns that had been filed for 2006 and 2007. He was unable to match or reconcile them however. He concluded that the filed returns were simply wrong or inaccurate. He did use the ledgers as the accounting records for the affairs of the business. As a part of the audit, he tested the ledgers with background documents. That is, he compared some background documents like invoices, cheques, payroll records, etcetera, with entries made on the ledger sheets. He found these ledger sheets to be relatively accurate documents.

He indicated there were a couple of relatively minor mathematical mistakes and a couple of instances where he disagreed with how payments were accounted for or dealt with. For example, lease down payments for trucks were entirely expensed out when they were incurred, and not prorated over the lifespan of the lease. I will return to discuss this further in due course. [ 8 ] Overall, Mr. Sonder was not overly concerned with these relatively minor discrepancies or differences within the ledger records themselves. What he was concerned about was a large discrepancy between these ledger sheets and Mr.

Smith’s income, as reported in his income tax returns for 2006 and 2007. The tax returns for both of those years indicated substantial business losses. On the basis of the accounting ledgers, Mr. Sonder concluded that there was significant business income in each of those two years which was unreported. As a result, Mr. Sonder decided to refer the matter to the CRA’s enforcement division. [ 9 ] In cross-examination of Mr. Sonder, Mr. Smith indicated that during the 2004/2005 audit, representatives of the CRA suggested that Mr. Smith’s bookkeeping was “extremely poor”. Mr.

Smith suggested that following the 2004/2005 audit, he attempted to do a much better job of bookkeeping, and that he went back and attempted to properly prepare bookkeeping records for 2006 and 2007. The handwritten ledger sheets that he presented represented this renewed effort at bookkeeping. [ 10 ] Carmon Halvorsen testified that he has an accounting diploma from SIAST and is a Certified Management Accountant since 2004. He has been employed by CRA in Regina as an investigator with their enforcement division.

This involves a complete investigation of an individual’s financial affairs for the specified period, to determine if charges should be laid. In this case, he received various files and records from the audit division. He reviewed those documents and prepared an Information to Obtain a Search Warrant. The search warrant authorized a search of Mr. Smith’s home, as his office was contained within his home, and a search of

Paula Berg’s office. Paula Berg is an accountant in Moose Jaw who assisted Mr. Smith in filing amended returns for various taxation years, including 2006 and 2007. Mr. Smith did not argue that the issuance of the search warrant was in any way improper or that his Charter rights had been infringed via the search and seizure. Mr. Smith basically consented to admission into evidence of the documents seized pursuant to the warrant. [ 11 ] Mr. Halvorsen also swore out an Information and had Production Orders issued with respect to various banks.

These were properly served upon the banks, following which the banks provided the appropriate information. Mr. Halvorsen then assembled the complete documentary record, numbered all of those documents, presented a copy to the accused as part of the disclosure process, presented that documentary evidence to the Court and had the documents marked as exhibits, and presented his review and findings based upon that documentary record. [ 12 ] Mr. Halvorsen testified that Mr. Smith was involved in the trucking business. Mr. Sonder had previously advised that CRA had conducted an audit on Mr. Smith for 2004 and 2005.

It was abundantly apparent throughout the trial that Mr. Smith felt the audit for 2004 and 2005 was very unfair. Mr. Halvorsen testified that on November 7, 2007, a Notice of Reassessment was sent to Mr. Smith respecting the 2004 and 2005 taxation years. This Notice of Reassessment disallowed certain expenses and determined that Mr. Smith had unreported income and owed additional taxes for 2004 and 2005. [ 13 ] Mr. Halvorsen testified that he did not investigate 2004 or 2005. There was no appeal of the reassessment for these two years. Mr. Halvorsen utilized the income and tax situation for Mr.

Smith, as per the November 2007 Notice of Reassessment, as a starting point. [ 14 ] Earlier in the same year, on July 9, 2007, Mr. Smith filed his first 2006 income tax return. It indicated that he had a gross income or profit of $156,284.00, and a net business income of $1.29. This document is Exhibit P-051. At page 33 of that document is the standard certification, reading as follows: “I certify that the information given on this return and in any documents attached is correct, complete, and fully discloses all of my income”. It also contains the warning: “It is a serious offence to make a false return”.

The certification appears to be executed by Mr. Smith. [ 15 ] During Mr. Halvorsen’s evidence, the Crown entered a voir dire , to place in evidence statements made by Mr. Smith to Mr. Halvorsen, on September 1, 2011. During the voir dire , Mr. Smith led no evidence and made no argument that the statements, as quoted by Mr. Halvorsen, were not accurate or voluntarily given. Accordingly, these statements were admitted into evidence. Mr. Halvorsen testified that he asked Mr. Smith when the handwritten ledgers were prepared. These are the handwritten ledgers prepared by Mr. Smith and presented to Mr.

Sonder during the audit. (These documents are Exhibits P-500 and P-501.) According to Mr. Halvorsen’s evidence, Mr. Smith indicated that these documents were created in the fall of 2008. Mr. Halvorsen testified that he asked Mr. Smith why Mr. Smith did not then file an amended tax return, more accurately stating his income and expenses, as per the handwritten ledgers. Mr. Smith said he couldn’t afford to pay the taxes and was under investigation. As a result Mr. Smith indicated he decided to wait it out and see what happened as a result of the investigation. [ 16 ] In the fall of 2008, Mr.

Smith decided to submit a request to adjust his 2006 income tax return. It would appear that he had some difficulty doing that on his own, so he engaged Paula Berg for assistance. It would appear that he supplied her with information regarding increased business expenses for 2006, and she completed a revised statement of business activities for 2006, together with the request to adjust and reassess for that year. This request also contained a request to reassess for 2004 and 2005, based upon carrying back business losses as per the revised 2006 tax return.

This adjustment request also contains the certification indicating that all information given on the form and any attached documents is correct and complete. Once again, it appears to be executed by Mr. Smith. Most importantly, this document indicates that during 2006 Mr. Smith had a gross income of $156,284.45. This of course is the exact same gross income figure utilized by Mr. Smith when he filed his initial 2006 tax return. However, this request for adjustment contained very different and significantly increased business expense numbers.

With these significantly increased expense numbers, this return indicates that Mr. Smith suffered a business loss in 2006 totalling $38,351.71. [ 17 ] Meanwhile, on April 21, 2008, Mr. Smith filed his 2007 income tax return. It would appear that this return was prepared with the assistance of Paula Berg. This return is Exhibit P-055. This return indicates that during 2007, Mr. Smith had a gross profit of $289,587.79. When all business expenses are deducted, he is then left with a net loss during 2007 of $147,164.74. [ 18 ] On October 28, 2008, the very same date that Mr.

Smith filed the adjustment request for 2006, Ms. Berg filed an adjustment request on his behalf respecting 2007. This is also contained in Exhibit P-052. This adjustment request states: “Please adjust the 2007 income tax return to provide for the losses to be carried back to 2004 and 2005 in the amounts indicated in the attached T-1A”.

[ 19 ] As a result of these returns, Mr. Smith was left with no income and no tax payable for the 2006 and 2007 years. In addition, the income previously assessed to him for 2004 and 2005, together with any taxes owing by him for those years, were wiped out. He was also able to carry a business loss forward from 2007 to 2008, in the amount of $4,423.00. [ 20 ] As mentioned above, Mr. Smith provided Mr. Sonder with the handwritten ledger sheets for the business. These handwritten ledger sheets for 2006 are Exhibit P-500. The handwritten ledger sheets for 2007 are P-501. Mr.

Halvorsen testified that he used these two exhibits to determine Mr. Smith’s income and expenses for 2006 and 2007. Page 45 of Exhibit P-500 clearly indicates that during 2006, Mr. Smith had a gross income of $378,816.22, not $156,284.45, as previously stated in the original income tax return and the adjusted return. Mr. Halvorsen then looked at the expenses in detail, and determined there were allowable deductions of $323,035.02. He determined that in 2006 Mr. Smith had a net income of $48,665.50, not a loss of $38,000.00 as reported. [ 21 ] With respect to 2007, Mr.

Smith’s filed tax return, Exhibit P-055, indicates that he had a gross profit and total income of $289,587.79. Page 77 of Exhibit P-501, the handwritten ledgers for 2007, indicate that he had a 2007 income of $900,681.46. According to Mr. Smith’s income tax return for 2007, he claimed total expenses of $436,752.53, leaving him with a net business loss for the year in the amount of $147,164.74. Mr. Halvorsen adjusted Mr. Smith’s income upward just slightly from the handwritten ledgers to $928,446.31. This was based on an unrecorded bank deposit and a couple of relatively minor mathematical errors. Mr.

Halvorsen determined that Mr. Smith had total allowable deductions in the amount of $700,536.76, leaving him with a net business income in 2007 of $227,909.55. [ 22 ] In a sentence, I would describe Mr. Smith’s tax returns for 2006 and 2007 as not just inaccurate, but wildly inaccurate. As a result of all of the above, for the taxation years 2004 to 2008, inclusive, Mr. Smith has underreported his income in the amount of $462,091.00.

His statement of losses which were not incurred and the loss carry back and forward provisions resulted in a reduction of his taxable income and taxes during the years 2004, 2005 and 2008. The result is that the federal government has suffered a tax loss in each of the years 2004-2008, inclusive. Mr. Halvorsen calculated the total federal government tax loss or the amount sought to be evaded in the amount of $77,088.14. [ 23 ] Mr. Halvorsen also testified that in April 2008, Mrs. Marilyn Smith filed her 2007 tax return. She elected to split her pension income with Mr. Smith. This was allowed because Mr.

Smith’s 2007 income tax return indicated a net business loss. The result was that pension income in the amount of $24,339.00 was attributed to Mr. Smith, as opposed to Mrs. Smith. This allowed Mrs. Smith to reduce her tax by $2,094.00. Mrs. Smith would not have been able to obtain this reduction in her taxes but for Mr. Smith indicating that he had no income for 2007. [ 24 ] Mr. Halvorsen also testified that for each of 2006 and 2007, Mrs. Smith was able to obtain the spouse or common-law partner amount tax credit, totalling $2,585.00. She could not have received this amount but for Mr.

Smith’s income tax returns indicating that he had no income. [ 25 ] Mr. Halvorsen also testified that in 2008-2009, based upon his 2007 income tax return, Mr. Smith received a GST credit in the amount of $216.00 to which he was not entitled. He received this by reason of his filing of a tax return indicating that he had no income. [ 26 ] With respect to the charges under the Income Tax Act , Mr. Halvorsen focused on two particular aspects of Mr. Smith’s returns. As mentioned above, he identified that the gross profit or income figures were very inaccurate in the returns, and Mr.

Smith made no attempt to correct these numbers by filing an amended return. With respect to Mr. Smith’s expense statements, Mr. Halvorsen was generally in agreement with that but for one aspect. During the two years in question, it appears that Mr. Smith was attempting to significantly expand his business. To do so, he was acquiring a number of new trucks. He then struck agreements with drivers to drive those trucks, and established hauling contracts with various importers or warehouse businesses. It appears that Mr. Smith was executing lease agreements with truck vendors in order to acquire his new trucks.

Most or all of these lease agreements required Mr. Smith to make a significant down payment, and then a monthly payment thereafter for the duration of the lease. [ 27 ] Mr. Halvorsen testified that prior to 2006, and when Mr. Smith filed his original 2006 income tax return, he did not claim the entire lease down payment portion made during a single year as an expense. However, in the request for adjustment of the 2006 return and in the 2007 return, Mr. Smith claimed the entire lease down payment incurred during that year as a business expense incurred during that year. Mr.

Halvorsen testified that in his view this was wrong. It was contrary to generally accepted accounting principles and contrary to the Income Tax Act . Mr. Halvorsen indicated that the lease down payment should be amortized or spread over the entire duration of the lease, and only such portion of the down payment as would then be properly attributable to that taxation year, should be claimed as an expense during that taxation year. This results in a very significant reduction in the allowable expenses for Mr. Smith in each of the 2006 and 2007 taxation years. (See Exhibits P-004 and P-013.)

[ 28 ] Mr. Halvorsen also testified there were significant problems with respect to Mr. Smith’s quarterly GST returns. In this regard, Mr. Halvorsen made reference to Mr. Smith’s written agreements with his drivers and the pay statements, or accounting statements, for the drivers. These statements indicate the gross revenue earned by the truck during the month. Mr. Smith made several deductions from the gross revenue. He charged the driver for the monthly truck payments plus GST. In addition he charged them $500.00 per month, representing a portion of the lease down payment. He also deducted fuel and other costs.

After deductions of various costs, the net amount was remitted to the driver. [ 29 ] When making deductions for the fuel or truck down payment, Mr. Smith also charged the truck driver with the appropriate GST amount. This resulted in the driver, who is a GST registrant, claiming a GST credit in that amount. It also resulted in Mr. Smith receiving the GST in the appropriate amount, which he would later claim that he collected, and have to remit the appropriate amount to the CRA. [ 30 ] The major exception or problem in all of this came in relation to the trailer. Mr.

Smith supplied the truck and the operator with a trailer. He charged the truck driver with ten percent of the gross revenue earned by the truck for the trailer. Mr. Halvorsen testified that Mr. Smith should have charged GST on these trailer payments and collected these amounts from the driver. He then of course should have accounted for these GST payments on his quarterly returns, and remitted the appropriate amounts to the CRA. By reason of not having charged GST on these trailer payments, Mr. Smith did not collect or account for the appropriate amount of GST from the drivers.

He also did not then remit the appropriate amount to the CRA. According to Mr. Halvorsen, in all of the individual quarters referred to in counts ten to eighteen, Mr. Smith underreported and underremitted the appropriate amount of GST. The aggregate of these shortfalls was greater than the $11,072.16 figure alleged in the overall GST charge referred to in count nine. However, Mr. Halvorsen found that in a number of quarters Mr. Smith remitted too much GST. When these extra credits are offset against the underreported amounts in counts ten to eighteen, the net difference is $11,072.16. [ 31 ] Mr.

Halvorsen also testified that he determined that during these relevant tax years, Mr. Smith transferred significant assets to his wife and his daughter. In his view, the transfer of these assets was to avoid the result of a subsequent reassessment and collection action by the CRA. [ 32 ] During cross-examination of Mr. Halvorsen, Mr. Smith asked a number of questions about whether the CRA had a specific policy to deal with individuals suffering from dementia or some other form of mental incapacity. In these questions, Mr.

Smith certainly suggested that he was suffering from a mental disability and that it was unfair for the CRA to deal with him in exactly the same fashion as they did other individuals. [ 33 ] The Crown’s next witness was Mr. Floyd Fry. Mr. Fry has been with the CRA for 34 years at their Regina office. He too is an enforcement officer with the investigation unit. He was present at Mr. Smith’s residence on April 15, 2010, when they searched Mr. Smith’s residence pursuant to a search warrant. He testified in a voir dire as to giving Mr. Smith the standard warning or caution, and then asking Mr.

Smith a number of questions. He asked Mr. Smith why the income numbers for 2006 and 2007 were so inaccurate. Mr. Smith advised that he didn’t keep a ledger. He simply determined that his income from any truck contract was ten percent of the gross amount of the contract. He also didn’t keep track of bank deposits or expenses. After the audit for 2004 and 2005 was completed, he realized that his bookkeeping was inadequate and decided to redo the books by preparation of appropriate ledgers.

He indicated that after preparation of the ledgers, he prepared income and expense summaries, which he then supplied to his accountant, Ms. Paula Berg. Ms. Berg then submitted the requests for adjustments and loss carry forward and back to the CRA. [ 34 ] During cross-examination, Mr. Smith suggested to Mr. Fry that he would not be responsible for any inaccurate or inappropriate steps taken by the accountant. Mr. Smith also suggested that he was astounded by the increase in income that the CRA had located. [ 35 ] The Crown also called Ms. Paula Berg as a witness.

She testified that she has no professional designation as an accountant. However, for 29 years she has worked in that capacity in a sole proprietorship. She testified that in 2007 she prepared the first return for Mr. Smith, and 2010 was the last year she prepared a return for him. She also testified that she did not do any bookkeeping for Mr. Smith, and prepared no GST returns for him. Mr. Smith would prepare a

summary of income and expenses, and provide her with a one page

summary. She then utilized this information to prepare the tax returns which were in turn submitted to the CRA. This included the request for the loss carry back and carry forward. She was specifically asked about the pension income split. She testified that Mr. Smith advised her that he had no income and asked her about the split. She recommended they do this to save taxes. [ 36 ] Under cross-examination, she indicated she could not recall if Mr. Smith had asked her to keep books for him. She did agree that it was possible that he did make such a request and she advised she was too busy to take that on.

She agreed that Mr. Smith often found accounting confusing. She also agreed that, based upon the materials that had been supplied to her from Mr. Smith, she did not detect any conspiracy to avoid taxes and did not see that he was doing anything wrong or illegal. She certainly did not assume that he

was attempting to defraud the CRA. [ 37 ] She indicated that Mr. Smith instructed her to expense the entire amount of the lease down payments and that she did that. She testified that it depends on the terms of the individual lease as to how the lease down payments are handled. [ 38 ] The last witness called by the Crown was Mr. James DeGroot. Mr. DeGroot testified that he entered into a written agreement with Mr. Smith and drove truck for Mr. Smith in 2007 and 2008. Mr. DeGroot indicated that he could not have acquired a truck on his own. The agreement offered to him by Mr. Smith allowed Mr.

DeGroot to acquire a truck and make payments on it through the trucking business. He was clearly grateful to Mr. Smith for this opportunity. The charge for the trailer was ten percent of the gross amount of the truck. He indicated that no GST was charged for the trailer and that he made no claim for having paid any GST. He agreed with Mr. Smith that the driver’s statement was simply an accounting document that determined how much he was to be paid out of the gross revenue for the truck. Lastly, he indicated that in 2008 Lipsett took over his lease from Mr. Smith. Thereafter, they handled GST exactly as did Mr.

Smith. In other words, GST was not assessed on the trailer. [ 39 ] As mentioned above, statements were admitted as sworn evidence from Dennis Foret, Richard Kazakoff and Nelson Renner. Each of these individuals held positions with various truck companies that Mr. Smith was negotiating leases with. Each individual deposed that Mr. Smith negotiated the deals to lease trucks and trailers and “there was no advice neither asked for nor provided in regards to lease down payment deductibility”. [ 40 ] Mr. Smith did not give evidence. He did call his wife, Mrs. Marilyn Smith, as a witness.

She testified that in 2006, she retired after a lengthy career with Mental Health. Someone advised her of the possibility of pension splitting. She asked Mr. Smith about it, who advised her that he knew nothing, but referred her to Paula Berg. Ms. Berg consulted with Mr. Smith, and then advised the witness that “Mr. Smith had lots of room” so that Mrs. Smith could proceed with the pension split. Ms. Berg also advised that Mr. Smith’s tax return would be prepared at a later date. On this basis, Mrs. Smith prepared her tax return requesting the pension split. [ 41 ] Mr.

Smith asked her if he sometimes suffered from irrational behaviour or had memory issues. She indicated that he did. Under cross-examination, she agreed that the certification contained on the income tax return was important. However, she indicated that she probably didn’t read or understand that the certification contained an indication that she would be jointly and separately liable. She indicated that she received no wages from his business. Argument [ 42 ] In argument, Ms. Schirr spent some time dealing with the evidence and specifically linking some of the various documents.

In a nutshell, she argued that the Crown had proved all essential elements of the offence, and that Mr. Smith should be convicted of all of the charges. She also later submitted some materials in writing, specifically dealing with the issues of the lease down payments and whether the trailer payments were a charge back for which GST had to be reported and collected. I will deal with these materials when I specifically deal with those issues. [ 43 ] As I understand Mr. Smith’s argument, he indicated that he was attempting to keep the books as best he could following the 2004/2005 audit.

Further, that it is not clear that he could not claim the entire amount of the lease down payments. He thought he was able to claim the entire amount of the lease down payments, and in that context, properly accounted for those payments. [ 44 ] With respect to the GST, and the trailer payments, he indicated that the statement for the drivers was simply an accounting document. All of the income for the truck came to Mr. Smith. He then prepared an accounting document calculating what was owed to the driver. Part of that calculation included a deduction for use of the trailer.

However, there is nothing charged back to or collected from the driver, so there was no reason to charge GST or collect GST on that amount. [ 45 ] With respect to the charges of tax evasion, Mr. Smith agreed that his income figures were all wrong. He then said that he was mentally incapacitated throughout this time and has very little recollection. He said this incapacity occurred as a result of him having an undiagnosed diabetes condition. He indicated that just in the past few months, he was diagnosed with diabetes, placed on insulin, and has now stabilized. He filed an

article contained in a magazine that indicates there is a relationship between diabetes and dementia. During argument, when I indicated that I had real difficulties in determining that he was under any legal incapacity during this time, Mr. Smith became agitated, indicating that the medical professionals would not agree with me, and sat down. He declined to make any further argument.

Analysis The GST Charges and the Issue of Charge Back for the Trailer [ 46 ] Counts ten to eighteen in the Information allege offences contrary to section 327(1)(

d) and (1)(

a) of the Excise Tax Act . Section 327(1) of the Excise Tax Act reads as follows: Everyone who has

a) made, or participated in, assented to or acquiesced in the making of false or deceptive statements in a return, application, certificate, statement, document or answer filed or made as required by under this Part or the regulations made under this Part, …

d) wilfully, in any manner, obtained or attempted to obtain a rebate or refund to which the person is not entitled under this Part, … is guilty of an offence and in addition to any penalty otherwise provided, is liable on

summary conviction to … [ 47 ] Crown counsel, Ms. Schirr, referred me to section 221(1) of the Excise Tax Act: Every person who makes a taxable supply shall, as agent of her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply. [ 48 ] It seems to me based upon a literal

interpretation of section 221(1), that Mr. Smith was supplying a taxable supply, and as a result was obligated to collect and remit the tax. He was clearly supplying a trailer. He was being paid to supply that trailer, although he alleges the payment was coming from the trucking company. In addition, it doesn’t appear to me that there is any difference between the trailer charge and the charges made for fuel and other matters against the driver. With respect to those other charges, Mr. Smith charged, collected and remitted the GST.

As a result, I would conclude that he was making a taxable supply available to the driver, and thus was obligated to collect and remit the tax. [ 49 ] However, I note that section 327(1)(

a) and (

d) of the Excise Tax Act is worded in similar fashion to

section 239 of the Income Tax Act dealing with income tax evasion.

Section 239 speaks of making false or deceptive returns or declarations and speaks of wilfully evading taxes in any manner. The case law is clear that the mens rea or mental element is required to establish an offence under

section 239 of the Income Tax Act . As a result, I would conclude that a mens rea or mental element must also be established for the Crown to prove these offences under the Excise Tax Act . In my view, the Crown must establish that Mr. Smith knowingly provided false GST statements in order to avoid the collection and remittance of GST. It is clear from Mr. Smith’s cross-examination and his argument that he did not regard his GST returns to be false or deceptive. To the contrary, he regarded them as accurate.

It was his view that he was not selling anything to the driver, so he didn’t need to collect or remit the GST. It follows from the above that he was wrong in this assertion and that under the provisions of the Act , he was required to collect and remit this tax. However, in my view, the Crown has established that he is properly assessed for the amount of the GST, but has not established the requisite mental element, and as a result cannot be convicted of the GST charges. Accordingly, I dismiss counts nine to eighteen, inclusive, in the Information.

The Lease Down Payments - Must They Be Amortized Over the Life of the Lease? [ 50 ] In the amended returns filed by Mr. Smith, he greatly increases the claimed expenses for doing business. The largest or most significant increase in expenses is in relation to the lease down payments. Mr. Smith has argued that the accounting rules respecting lease down payments are not sufficiently clear and that he was entitled to or justified in claiming the entire lease down payment as an expense deduction during the year in which it was incurred. With respect, this view is contrary to the Income Tax Act .

Section 18(9) of the Income Tax Act reads as follows : Notwithstanding any other provision of this Act, (

a) in computing a taxpayer’s income for a taxation year from a business or property …, no deduction shall be made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred (

i) as consideration for services to be rendered after the end of the year,….

(

b) such portion of each outlay or expense (other than an outlay or expense of a corporation, partnership or trust as, on account of, inlieu of payment of or in satisfaction of, interest) made or incurred as would, but for paragraph 18(9)(a), be deductible in computing ataxpayer’s income for a taxation year shall be deductible in computing the taxpayer’s income for the subsequent year to which it canreasonably be considered to relate… [51] Counsel for the Crown also filed with the Court a copy of the CRA’s

Interpretation Bulletin No. IT-417R2, dealing withprepaid expenses and deferred charges. The

Interpretation Bulletin expressly provides that the bulletin does not have “the force of law”. In other words, the

Interpretation Bulletin is not binding upon the Court, and it is open to the Court to interpret a particular provision ofthe Act in a manner different than the department has interpreted that provision in its

Interpretation Bulletin. In my view however, it isalso open to the Court to adopt an

Interpretation Bulletin or a portion thereof as accurately interpreting and applying a specific legislativeprovision. The bulletin referred to above specifically states as follows: Prepaid expenses and deferred charges both represent costs incurred or laid out from which benefit is expected to be derived after thecurrent fiscal period.

As such, unless the Income Tax Act provides otherwise, the accounting for these expenses for income tax purposesshould be in accordance with generally accepted accounting principles which would, in most cases, require that the expenses be matchedto the year in which the benefit is to be derived (the “matching principle”). Section 18(9) ensures that the matching principle governs byrequiring tax payers to defer and amortize prepaid expenses over the period to which they reasonably relate when computing profit underSection 9. [52] In this case, Mr. Smith was leasing trucks on a long term basis.

The expenses were clearly incurred over a longer term,considerably longer than the one year being dealt within a specific income tax return. Mr. Smith also clearly had long term contractswith other companies to haul for them. In other words, he was generating income from the lease and his long term contracts over a muchlonger term. On this basis, and on the basis of Mr. Halvorsen’s testimony, I conclude that section 18(9) of the Income Tax Act is directlyapplicable to Mr. Smith’s situation and the case at bar. As a result, Mr.

Smith was obligated to amortize the lease down payments overthe lifetime of the lease, and he could declare as an expense for that year, only that portion of the lease payment applicable to that year. Iconclude that Mr. Halvorsen was correct in disallowing the lease down payment as a deduction, to the extent that he did, and that Mr.Halvorsen has correctly calculated the amount of tax owing by Mr. Smith, as a result of disallowance of this deduction.

The Charges of Tax Evasion [53] As mentioned above, in order to establish tax evasion, the Crown must prove a physical element, or a criminal act, and mentalelement, or a criminal mind. The Ontario Court of Appeal decision on R. v. Klundert, (ON CA), 2004 O.J. No.3515, speaks to the elements of tax evasion as follows: 42 The conduct component of the crime of tax evasion, as I would describe it, was not an issue in this case. Dr. Klundert did not declarehis income or pay his income taxes owing under the Act for a number of years. He owed tax under the Act.

The functioning of the Actdepends on accurate self-assessment of tax owing through timely reporting of income and calculation of tax owing. Where tax is owedunder the Act, a failure to report income and properly calculate the tax owing on that income has the inevitable effect of avoiding, at leastfor a time, the payment of tax required under the Act. (emphasis added) [54] In describing the mental element, the Court said wilfully is determined “in relation to the achievement of a purpose”.

Atparagraph 46 the Court stated: Although I would avoid the use of the phrase “ulterior motive”, I agree with Bayda J.A. that the word “wilfully” in section 239(1)(d)signals that culpability will follow only where the accused engages in conduct intended to avoid the payment of tax owing under the Act. More precisely, I think the fault component in section 239(1)(

d) is twofold. First, the accused must know that tax is owing under the Actand second, the accused must intend to avoid or intend to attempt to avoid payment of that tax. An accused intends to avoid, or intendsto attempt to avoid, payment of taxes owing under the Act where that is his purpose, or where he knows that his course of conduct isvirtually certain to result in the avoiding of tax owing under the Act. (emphasis added) [55] Did Mr. Smith file false and inaccurate income tax returns? Clearly he did.

I have already concluded that his statements werefalse or inaccurate with respect to the deductions claimed regarding lease down payments. However, they were also false and inaccuratein a much larger sense. With respect to the income declared for both 2006 and 2007, his returns were not just inaccurate, but could onlybe described as “wildly inaccurate”. He did not put in evidence any accounting or basis as to how the income figures were arrived at. Itwould seem to be nothing more than a figure picked out of the air.

The only explanation for this wildly inaccurate number came fromthe Crown’s evidence, introducing a statement from Mr. Smith at the time the search warrant was executed. Mr. Fry testified that Mr.

Smith told him the income figure was simply based on ten percent of the gross value of the contract. [ 56 ] As a result, the clear and inescapable conclusion must be that Mr. Smith’s tax returns were very false and inaccurate. [ 57 ] Did those false and inaccurate income tax returns have the effect of avoiding the payment of tax? Clearly they did. The documents filed by the Crown and assessed and reviewed by Mr. Halvorsen clearly establish that Mr. Smith failed to report a net business income of more than $462,000.00 and avoided the payment of more than $74,000.00 in tax. [ 58 ] Did Mr.

Smith have as his purpose the avoidance of tax, or was the avoidance of tax a virtually certain outcome as a result of his actions? Once again, the evidence established this matter beyond doubt. Consider the chronology of certain key events. Mr. Smith filed a tax return for 2006 indicating he had a gross profit of $156,284.45 and a net taxable income of $1.29. This return was wildly inaccurate, and resulted in the payment of no tax. He then amended his return claiming significantly greater expenses, and significantly greater expenses for lease down payments.

He did this over a period of time when he was doing a better and more correct accounting of his business affairs in 2006 and 2007. The amended return and requests to adjust were an attempt to more correctly account for the business expenses, but made no attempt to account for or report the true income of the business. The amended returns were a clear attempt to change a small business income into a significant business loss.

He achieved this result in that he achieved a net loss for 2006 of greater than $38,000.00. [ 59 ] Similarly, with respect to 2007, he grossly misstated his income and expenses as a result of which he achieved a loss in excess of $147,000.00, as opposed to taxable income of $263,000.00. There can only be one reason for taking these steps, and that was the avoidance of income tax. Mr. Smith’s Argument of Mental Incapacity [ 60 ] Mr. Smith did not take the stand and did not attempt to explain his actions or these tax returns in any way, except to say that he was mentally incapacitated at the time. As Mr.

Smith is charged with criminal offences of tax evasion, the establishment of a mental disorder defence must be governed by

section 16 of the Criminal Code of Canada. That

section establishes that no person is criminally responsible for

an act that rendered the person incapable of appreciating the nature and quality of the act or omission or of knowing that it was wrong. Subsection (2) provides that no person is presumed to suffer from a mental disorder until the contrary is proven on a balance of probabilities. The burden is on the party alleging the mental disorder to establish that such a disorder exists. For a number of reasons, I am compelled to conclude that Mr. Smith has not established a mental disorder and that he is responsible for his actions in this matter. First, Mr.

Smith has not led any medical evidence to establish any medical condition or any mental disorder. He has not even led medical evidence to establish he suffers from diabetes. He has only made the bald and unsubstantiated assertion that he does suffer from diabetes, and has filed an

article that speaks of some relationship between diabetes and dementia. With that lack of evidence, I could not possibly conclude that he was suffering from a disease of the mind and was mentally incapacitated. Second, most often the argument that an individual suffers from a mental disorder is made in relation to an accused doing one act in a very short period of time. Here the accused’s acts are stretched over a period of approximately three years. I cannot possibly conclude that he suffered from a mental incapacity over such a lengthy period of time. Third, Mr.

Smith alleges a mental incapacity with respect to his filing of income tax returns at the same time he was operating a business and earning significant profits. Am I to conclude that he was of sound mind and of full capacity to make a large number of business decisions but at the same time was incapacitated when it came to filing income tax returns? Simply stated, the argument of mental incapacity flies in the face of all of the accounting evidence as to the money he was earning in his business. Fourth, on at least two separate occasions, Mr.

Smith was confronted with why he didn’t file amended tax returns and pay the tax that was owed. On these occasions, he said he didn’t have the money to pay the tax that would be owed and he would pay whatever the judge directed be paid. Both of these statements speak not to any mental incapacity, but to knowledge of the fact that taxes are owing and an avoidance of payment. Conclusion with Respect to the Charges Regarding Tax Evasion [ 61 ] For the above mentioned reasons, I find Mr. Smith guilty of count one, failing to report a net business income of $462,091.00 and evading tax of $74,995.00.

I enter a judicial stay with respect to counts two and three. With respect to count four, Mrs. Smith testified that she filed her own tax return for 2007, and claimed the pension income split. Clearly Mr. Smith led this evidence in an attempt to establish he was not guilty of this charge. With respect however, he misunderstood the nature of the allegation and the evidence against him. The charge is not that he assisted in the preparation of her income tax return. The allegation and evidence, as I understand it, is that this pension split would never have been allowed had Mr.

Smith’s true income situation been known. This pension split was only allowed because Mr. Smith filed a false income tax return alleging that he had no income. In so doing, he assisted Mrs. Smith in gaining this deduction. As a result, I find Mr. Smith guilty of count four.

[ 62 ] In count seven, it is alleged that Mrs. Smith was able to use the spouse or common-law partner deduction amount for 2006 and 2007, as Mr. Smith wrongly declared that he had no income. I convict Mr. Smith of count seven. I enter a judicial stay with respect to counts five and six. [ 63 ] Lastly, count eight alleges that Mr. Smith received a GST credit of $216.00 between July 1, 2008 and June 30, 2009, by reason of his declaring that he had no income. I find Mr. Smith guilty of count eight. [ 64 ] I will now hear sentencing submissions from the Crown and Mr. Smith. Dated at Moose Jaw, Saskatchewan, this 23rd day of July, 2012. ________________________________________ D.J. Kovatch, J