Her Majesty the Queen - v. -, 2014 SKPC 28

IN THE PROVINCIAL COURT OF SASKATCHEWAN Citation: 2014 SKPC 028 Date: May 12, 2014 Information: 42940380 Location: Regina _____________________________________________________________________________ Between: Her Majesty the Queen - and - Peter Hillcoff, Janis Hillcoff , Brachman, McKay International Investment Corp. and Automobility Manufacturing Corporation Appearing: Barrie Miller and Glennys McVeigh For the Crown James N. Korpan and Dwayne Anderson For the Accused JUDGMENT M. BEATON , J OUTLINE PARAGRAPHS INTRODUCTION.......................................................................................................................... 1

ISSUES........................................................................................................................................... 7 BACKGROUND............................................................................................................................ 9 CHARTER ISSUE......................................................................................................................... 16 Evidence of Christine Adams............................................................................................ 17 Analysis............................................................................................................................. 36 Conclusion......................................................................................................................... 81 THE MENS REA ISSUE............................................................................................................... 83 Evidence of CRA Investigators........................................................................................ 84 Findings by Canada Revenue Agency.............................................................................. 88 Net Worth Analysis......................................................................................................... 121 Bank Account Analysis................................................................................................... 127 Crown Theory.................................................................................................................. 129 Defence Theory............................................................................................................... 132 Evidence of Michele Wahus............................................................................................ 141 Evidence of Tony Wahus................................................................................................ 147 Evidence of Other Employees......................................................................................... 153 Evidence of Jim Zatulsky................................................................................................ 159 Evidence of Peter Hillcoff............................................................................................... 188 Evidence of Janis Hillcoff............................................................................................... 225 Evidence of Sean Callahan.............................................................................................. 228 Analysis........................................................................................................................... 229 Conclusions...................................................................................................................... 261 INTRODUCTION [ 1 ] Peter Hillcoff (referred to as P.

Hillcoff) is charged with failing to report income and therefore wilfully evading payment of taxes for the 2001, 2002 and 2003 taxation years contrary to paragraph 239(1)(

d) of the Income Tax Act and with unlawfully making false or deceptive statements in his income tax returns by understating his reported income in the 2001, 2002 and 2003 taxation years, contrary to paragraph 239(1)(

a) of the Income Tax Act . He is also charged with obtaining goods and services tax credits to which he was not entitled due to the failure to report income or the making of false or deceptive statements in his income tax returns for the years 2001, 2002 and 2003 contrary to paragraphs 239(1.1)(

a) and 239(1.1)(

e) of the Income Tax Act . [ 2 ] Janis Hillcoff (referred to as J. Hillcoff) is charged with failing to report income and therefore wilfully evading payment of

taxes for the years 2001 and 2003. She is also charged with unlawfully making false or deceptive statements in her income tax return by understating her reported income in the 2001 and 2003 taxation years. [ 3 ] Brachman, McKay International Investment Corp. (referred to as BMIIC) and P. Hillcoff as an officer or director of this company are charged with failing to report income and therefore wilfully evading the payment of taxes for the 2001, 2002 and 2003 taxation years. BMIIC and P.

Hillcoff are also charged with unlawfully making false or deceptive statements in the T2 corporation income tax returns for the 2001, 2002 and 2003 taxation years by failing to report income. [ 4 ] Automobility Manufacturing Corporation (referred to as AMC) and P. Hillcoff, being an officer or director of AMC and J. Hillcoff are charged with wilfully evading the payment of taxes for the 2001 and 2002 taxation years by failing to report income. AMC, P. Hillcoff and J.

Hillcoff are also charged with making false or deceptive statements in the T2 corporation income tax returns for the 2001 and 2002 taxation years by failing to report income. [ 5 ] The Crown alleges that the accused’s net unclaimed income, income tax evaded, and GST credit wrongly received for the relevant time period are as follows: Net Unclaimed Income Tax GST Credit Income Evaded Received BMIIC (Medical) $467,020.91 $ 65,027.82 AMC (Manufacturing) $ 59,114.71 $ 10,183.33 Peter Hillcoff $533,573.59 $137,508.01 $1,696.29 Janis Hillcoff $ 13,163.87 $ 2,105.95 [ 6 ] The following income/losses were claimed by the accused in their tax returns: BMIIC/Medical 31-Aug-01 31-Aug-02 31-Aug-03 $11,152.00 ($10,295.00) ($350.00) AMC Manufacturing 31-Oct-01 31-Oct-02 31-Oct-03 ($1,364.00) ($231.00) ($2,647.00) Peter Hillcoff 2001 2002 2003 $12,395.35 $23,520.43 $11,481.70 Janis Hillcoff 2001 2002 2003

$11,500.00 $10,070.08 $10,087.26 ISSUES [ 7 ] The following two issues need to be addressed in this case: 1. Did the Canada Revenue Agency (CRA) violate the accused’s rights under sections 7 and 8 of the Charter by using its audit powers to improperly obtain the accused’s financial records for the purpose of a criminal investigation, and if so, should such evidence be excluded pursuant to

section 24 of the Charter ? 2. Has the Crown proven beyond a reasonable doubt that the accused had the requisite mens rea to commit the offences as charged? [ 8 ] The evidence of the auditor is being relied upon in support of the defence’s assertion that the accused’s rights under the Charter were infringed. Although this evidence was not heard in a voir dire , the Crown concedes that that evidence is not to be considered in determination of whether the Crown has proven the charges beyond a reasonable doubt.

BACKGROUND [ 9 ] Peter and Janis Hillcoff are married and during the years 2000 to 2003 inclusive (relevant time period), they were the sole shareholders in three corporations, namely BMIIC, AMC and Hamilton Eaton Consulting Inc. Hamilton Eaton was basically a shelf company which was inactive and not subject to charges but which is mentioned in these proceedings. P. Hillcoff was a businessman who operated the business Automobility Manufacturing through the corporation AMC and the business Automobility Medical through the corporation BMIIC. P.

Hillcoff stated he operated the two businesses under separate corporations in case AMC was ever sued. [ 10 ] P. Hillcoff started Automobility Manufacturing (referred to as AMC (Manufacturing)) in 1993 when he purchased equipment and pending patents from a bankrupt company which had started developing automotive hand controlled systems. He made changes to the hand controlled systems and found a Canadian market for this product. He then expanded his business by developing and selling pedal extenders for automobiles.

AMC (Manufacturing)’s market eventually expanded to the United States where clients were primarily car rental agencies. Its business activities included some manufacturing of parts for hand controls and pedal extenders and assembling these products. There were few walk-in customers and most products were shipped to clients. P. Hillcoff stated that he had clients across North America and distributors in Japan, Europe and Mexico. Most of the sales were to American customers. [ 11 ] Not long after starting AMC (Manufacturing), P.

Hillcoff branched into the business of selling and renting medical supplies which ranged from large items like scooters, power wheelchairs, lifts and walkers, to smaller items like canes, bath aids, bandages and rubber gloves. This business operated out of the same premises as AMC (Manufacturing) at 1444 Lorne Street, Regina, Saskatchewan under the name of Automobility Medical (referred to as BMIIC (Medical)). This business had a store front with walk-in clients. [ 12 ] Even though P.

Hillcoff had two different businesses and two different companies running these businesses, the financial affairs of both companies were intermingled. Although business expenses paid by credit card were primarily paid with a CIBC VISA card, some business expenses were also paid with P. Hillcoff’s personal Sears and Hudson’s Bay Co. credit cards. AMC (Manufacturing) had a U.S. bank account and a Canadian bank account. The U.S. bank account was to accept deposits from customers paying in U.S. dollars and to pay U.S. suppliers.

BMIIC (Medical) had only one bank account and it was not set up to accept credit card payments. Therefore, VISA and Mastercard payments for goods purchased from BMIIC (Medical) went into the AMC (Manufacturing) bank account. As well, BMIIC (Medical)’s major U.S. suppliers would be paid through AMC (Manufacturing)’s U.S. bank account. Because of the transfers between the two corporations, BMIIC (Medical)’s general ledger computerized accounting system set up various accounts to track these inter-company transactions.

Inter-company transfers and the intermingling of corporate funds added a degree of difficulty to balancing the corporate books. [ 13 ] Upon starting their businesses, the Hillcoffs retained chartered accountant James Zatulsky (referred to as Zatulsky) to prepare

their personal and corporate tax returns. P. Hillcoff had hired several bookkeepers for BMIIC (Medical) during the period in question although the primary bookkeeper was his daughter Michele Wahus (referred to as M. Wahus). The bookkeeper for AMC (Manufacturing) was J. Hillcoff, although the Hillcoffs’ son-in-law Tony Wahus (referred to as T. Wahus) was also involved in some data entry for this business. [ 14 ] Both businesses had separate internal accounting systems. The accounting/bookkeeping system for AMC (Manufacturing) was not based on a commercially available accounting program.

The accounting system was more in the nature of a spreadsheet which kept track of invoices, cheques, bills, sales, etc. The accounting/bookkeeping system for BMIIC (Medical) consisted of commercially available accounting programs. During the period in question, BMIIC (Medical) changed programs twice, starting with Simply Accounting and moving to Mind Your Own Business (MYOB) and then QuickBooks.

These programs involved a general ledger system which necessitated entering data into various accounts. [ 15 ] The Hillcoffs kept all of their paper records in an organized fashion, so the sources of revenue and expenses could be tracked to a paper bill or invoice. They also kept most receipts for personal and business expenses. CHARTER ISSUE

(1) Did the CRA violate the accused ’s rights under ss. 7 and 8 of the Charter by using its audit powers to improperly obtain the accused ’s financial records? [ 16 ] In order to determine whether CRA used its audit powers to improperly obtain the accused’s financial records for the purpose of a criminal investigation, a detailed review of the audit is required. Evidence of Christine Adams [ 17 ] On April 26, 2004, Christine Adams (referred to as Adams), an auditor with the CRA, began an audit of the Hillcoffs and AMC (Manufacturing) to check for compliance with the Income Tax Act ( ITA) .

A GST auditor had already completed a GST audit of the accused and income tax issues were identified in that audit. Based on the information received from the GST auditor, Adams was to review continuity of sales invoices and determine whether revenues were fully recorded. In addition, she was to look into whether amounts accrued as wages payable had been credited to a shareholder loan. There was also an issue as to advances to an associated corporation and the source of funds for shareholders’ personal expenses.

The GST auditor suggested that there were unreported sales in the amount of $23,130.00. [ 18 ] Adams first contacted P. Hillcoff on May 18, 2004 to inform him that the CRA would be conducting an audit of the 2002 and 2003 corporate income tax returns of AMC Manufacturing. Adams also arranged for a time to meet and informed P. Hillcoff of the documents the CRA would be requiring for its audit. On that same day, Adams also provided the accused’s accountant Zatulsky with similar information and requested AMC (Manufacturing)’s working papers. On May 19, 2004, Adams sent a fax to P.

Hillcoff summarising the information request and advising him that she had obtained year end journal entries and trial balances from Zatulsky. [ 19 ] On May 27, 2004, Adams met with P. Hillcoff. Adams was given a tour of the business, as well as a description of its basic operation such as information concerning product supply and methods for recording sales and payments. The next morning, Adams again visited the business. During this visit, P. Hillcoff informed Adams that it was his practice to transfer money from various accounts belonging to himself, J.

Hillcoff, AMC (Manufacturing) and BMIIC (Medical) depending on who needed money. He advised that both corporations made use of the U.S. money bank account which was in AMC (Manufacturing)’s name. He advised that he and his wife had been mortgage free for years and had bought a new house in 2002 for $240,000.00. Prior to that they had lived in a residence at 2736 Rothwell Street for 17 years and had sold it to their daughter and son-in-law, Michele and Tony Wahus. The Wahus had previously lived at 2552 Rothwell Street and P. Hillcoff had co-signed a loan for the purchase of that property.

Michele and Tony had paid $110,000.00 for the property at 2736 Rothwell Street. [ 20 ] On June 1 and June 2, the auditor spoke with Zatulsky and obtained information regarding Hamilton Eaton. He explained why he had made certain entries and where the information had come from for those entries. He advised that he was the one responsible

for reconciling which transactions through AMC (Manufacturing)’s bank account were pertinent to which business. Again, Adams sought further information from Zatulsky including bank reconciliations, inventory count sheets, payroll working papers, accounts receivable listing, calculations of conversion of American to Canadian funds, and explanations of amounts due from Hamilton Eaton. [ 21 ] Adams met with P. Hillcoff on June 4, 2004 and discussed the topic of money transfers between the various corporate accounts.

Adams noted that the deposits were made to the bank accounts of Automobility (Manufacturing) for all U.S. transactions, VISA and Mastercard purchases for both Automobility (Manufacturing) and BMIIC (Medical). Given the intertwining nature of the companies, Adams informed P. Hillcoff that she would have to expand her audit to include BMIIC (Medical). This was necessary to reconcile the balances from the inter-corporate loans. She provided P. Hillcoff with a specific list of items she would be requiring from BMIIC (Medical). During this meeting, P.

Hillcoff supplied Adams with handwritten notes justifying his low cost of living and how he had made money each time he bought and sold a house. Adams’ next conversation with P. Hillcoff was June 17, 2004, during which they discussed the intermingling of funds between the two companies and the payment of a commission to Hamilton Eaton. At this point he was asked to supply supporting documents with respect to property tax deducted as corporate expenses in 2002 and 2001. [ 22 ] After reviewing further documentation provided by Zatulsky, Adams contacted P.

Hillcoff again to obtain more information and records concerning the inter-corporate transactions. P. Hillcoff advised that he had used two different accounting systems and switched midway through the fiscal year. He was aware of the flaws in the first system (MYOB) and stated that QuickBooks had bought out MYOB. Adams faxed P. Hillcoff a list of 14 types of documents which she needed.

This list included cheque registers, inventory purchase journals, VISA statements, daily sales journals, deposit books, U.S. currency purchase orders, house purchase loan agreement, invoices for property taxes and travel expenses, accounts receivable accounts and monthly statements for bank and investment accounts. Later on in the day, they spoke again and discussed the items which Adams was seeking. P. Hillcoff advised that he had been audited by one of his clients, the Department of Health, relating to supplying medical goods to First Nations.

He stated that the department had refused to pay a large bill as they believed he had a margin of profit in excess of 30 percent. When Adams questioned P. Hillcoff about transfers from the shareholder’s loan, he advised that he did not have a loan agreement between himself and his company because he was only using his own money. P. Hillcoff was unaware that he had withdrawn more from his shareholder loan account with BMIIC (Medical) than funds that had been in that account. P.

Hillcoff stated he would talk to Zatulsky to straighten things out. [ 23 ] On July 20, 2004, Adams again attended the offices of BMIIC (Medical). At this time P. Hillcoff was unable to provide a listing as requested of the VISA transactions which had been claimed as cost of goods on the corporate financial statements. They discussed the sales journal information and listings of payments by vendor which was produced by the accounting system and given to Zatulsky. P. Hillcoff consented to Adams borrowing the deposit books for three bank accounts for review. P.

Hillcoff advised that he was still attempting to locate information slips regarding the purchase of U.S. currency. P. Hillcoff also explained to Adams that the long term debt in the amount of $150,000.00 shown on BMIIC (Medical)’s financial statements was in fact a debt owing to him as it was an investment in the company that he had personally made. During this conversation, Adams also determined that BMIIC (Medical) paid for vehicle costs despite these items not being used solely for business purposes.

It also became clear that some property taxes for the Hillcoffs and the Wahus’ residences were being paid by BMIIC (Medical). P. Hillcoff explained that the wages that he reported each year but didn’t draw, offset the amount of property taxes on his house. The corporation paid property taxes for the Wahus’ residence in exchange for the use of T. Wahus’ half-ton truck in the business. P. Hillcoff went on to explain the travel costs that were claimed for a business trip to Florida. They also again discussed the First Canadian Health accounts receivables which were written off in 2002 with P.

Hillcoff providing an explanation. P. Hillcoff supplied CRA with letters and statements regarding this account receivable and also provided bank and brokerage house statements as requested. [ 24 ] The following day Adams and P. Hillcoff again discussed the amounts which were added to “cost of goods sold” for VISA purchases. Adams was looking for confirmation that these amounts were actually for business expenses in order to determine whether they were properly recorded. Adams informed P.

Hillcoff that CRA had IT employees who could come out and copy information from the computer system and then produce reports as necessary. P. Hillcoff stated that the data on his system was corrupt and he did not want to be using that information. He said he would prefer to work from the actual invoices and hard copies of all documents. During this meeting P. Hillcoff provided a typed loan agreement for the purchase of their new residence. It stated that the loan was not to exceed $240,000.00 and was to be repaid on April 1, 2012. No interest rate was noted. The loan agreement was dated April 1, 2002.

Adams testified that although she knew that only $76,744.00 had been reported as a shareholder’s loan for the purchase of a residence, she was not suspicious of this loan agreement. Adams testified that at this point she did not have enough information to know whether or not the taxable income of the corporation was under-reported because she did not have a set of books that were sufficient to identify the inter-corporate loan balance problems. It did not occur to her that she was looking at an evasion at this point. [ 25 ] On August 6, 2004, Adams advised P.

Hillcoff that after reviewing the information that had been submitted to date, the correct net incomes of the corporations could not be ascertained from the records. Given that P. Hillcoff had had troubles with his computer system throughout the period and that he had stated that the information was corrupt, Adams concluded that the statements produced could not be relied upon. She advised that in such situations where the corporation is held by related shareholders, another

method of verifying net income would be to prepare a net worth statement on the shareholders. The changes in the net worth of the shareholders would serve to verify the net income of the corporation. In order to do a net worth assessment, P. Hillcoff was advised that CRA would need further information, namely balances in personal accounts, investments, shareholdings held by the Hillcoffs, and further explanations of transfers of money within the accounts including monies which were transferred to purchase U.S. funds.

Adams also noted that personal items were charged to credit cards which were paid by the corporations. She stated that she would send off a listing of required documents to him so that they could get the information sorted out. She asked him to indicate which costs were business costs. [ 26 ] After having the net worth calculation process explained to him, P. Hillcoff stated that he had had significant cash on hand at the beginning of this period and that may explain any discrepancy. Adams informed P.

Hillcoff that this amount should be included in the calculation but did not at this point ask for proof of the amount of cash on hand. [ 27 ] On August 9, 2004, P. Hillcoff asked if there was some sort of way of negotiating a dollar amount to settle the matter as he had heard that sometimes negotiations are possible under these circumstances. Adams responded by stating that “we really have no basis at this point to draw any conclusions so there would be nothing to base negotiation on”. [ 28 ] On August 13, 2004, P. Hillcoff contacted Adams about how to properly calculate net worth assessments. At this time, P.

Hillcoff stated that he had purchased publicly traded shares in his name with excess funds available from the corporations. These stocks were purchased for the corporation as the corporations were not able to purchase shares on their own. He acknowledged that there were no publicly traded shares mentioned on the corporate balance sheets and he did not have an answer for how it connected with his accounting system. [ 29 ] On September 3, 2004, CRA was able to arrange to have their eCAS system obtain the records from the QuickBooks accounting system used by BMIIC (Medical).

At this time Adams also learned that AMC (Manufacturing) had never utilized an electronic accounting system and that the system was a manual one. [ 30 ] On September 9, 2004, Adams attended P. Hillcoff’s office. P. Hillcoff provided additional information concerning the sale of his former home to his daughter and son-in-law. Upon further examination, it appeared that P. Hillcoff had received $30,000.00 more than the agreed sale price. Believing this was not possible, P.

Hillcoff volunteered to figure out the discrepancy. [ 31 ] In conducting the net worth assessment, Adams also inquired about the shares owned by the Hillcoffs. The Hillcoffs had shares in a CIBC brokerage account and in a View trade account. The latter shares were American holdings. The value of these shares when purchased and when sold was obviously required to calculate the net worth. On September 29, 2004, Adams and P. Hillcoff discussed the cost and price of some of the shares owned by the company.

Adams advised that she needed further information in order to value the shares held in the View trade financial account. She also needed some debit and credit memos from BMIIC (Medical) in order to complete her net worth assessment. [ 32 ] On October 14, 2004, P. Hillcoff explained numerous transactions made in the View trade account. He also confirmed that the discrepancy concerning the housing payment from his daughter was due to the alleged overpayment actually being a loan repayment he had made to his daughter and son-in-law that allowed them to purchase his former house. During this time, P.

Hillcoff also advised that he had had large sums of cash on hand. He stated that on December 30, 2000, he had $187,000.00 but by January 1, 2004, he only had $21,000.00. He claimed that $166,000.00 of his cash was spent on the business during this time frame. Despite Adams trying to get P. Hillcoff to explain what he had done with this cash, he was unable to provide a satisfactory explanation. P. Hillcoff stated that it was common for him to spend $20.00 on business items from his own pocket on a daily basis.

Adams stated that even if he spent $20.00 per day on the corporation, he would not be spending $166,000.00 over the period under review. Given the lack of evidence, Adams did not take this amount into consideration when concluding her audit. [ 33 ] In the next communication on November 3, 2004, Adams informed P. Hillcoff that the cost price of some of his shares held in the View trade account was still missing. She received this information the next day. This was the last contact that Adams had with P. Hillcoff.

[ 34 ] Adams produced a net worth statement on April 21, 2005. The delay in producing the net worth statement was due to the sheer volume of information and the fact that U.S. exchange rates needed to be applied in many of the share value calculations. As well, Adams was waiting for one of her co-workers to bring back templates from a training conference concerning net worth assessments and she was working on five or six other audits at this time. In her final report, Adams concluded that there were large amounts of income not reported by the audited corporations.

As a result of this unreported income, Adams spoke to her team leader about referring the file to the Investigations Branch. These discussions resulted in a decision on April 25, 2005 to refer the file to Investigations. Adams testified that she did not have any contact with the Investigations Branch until the point when she referred the matter to that branch. Finally, she stated that she could not have completed her audit before completing the net worth assessments. [ 35 ] Steve Button was the first investigator assigned to the Hillcoff files on August 9, 2005.

He stated that there had been no communication between him and Adams prior to the file being assigned to him. He testified that he did a review of Adams’ report and subsequently based his primary report on this information. The primary report was forwarded to three other CRA employees and relied upon to authorize a full investigation. He subsequently prepared the documents in support of obtaining search warrants. ANALYSIS [ 36 ] The accused contends that when the CRA’s auditor executed her powers under ss. 231.1 and 231.2 of the ITA , she did so for the purpose of pursuing a criminal investigation.

By so doing, the accused argues that the auditor violated their rights to due process, counsel, and against self-incrimination, as guaranteed by s. 7 of the Charter , as well as their right to be protected from unreasonable search and seizure pursuant to s. 8 of the Charter . As a result of this alleged breach, the accused seeks exclusion of evidence pursuant to s. 24(2) of the Charter . [ 37 ] The underlying rationale for the accused’s constitutional challenge is best understood by first overviewing the auditing scheme of the ITA .

Sections 231.1(1) and 231.2(1) of the ITA grant the state the following audit powers: 231.1

(1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act, (

a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and (

b) examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act, and for those purposes the authorized person may (

c) subject to subsection (2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and (

d) require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person. 231.2

(1) Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as is stipulated in the notice, (

a) any information or additional information, including a return of income or a supplementary return; or (

b) any document. [ 38 ] When auditors are merely conducting an audit, they are granted the extensive powers by the above sections. Taxpayers are statutorily bound to cooperate with CRA auditors for tax assessment purposes. Given that the tax system is based on voluntary compliance and self-assessment, the government has broad powers in supervising this system to audit taxpayers’ returns. In order to ensure compliance, the tax system also requires effective penalties. Section 239(1) of the ITA , which is the penalty section, states:

(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, (

b) to evade payment of a tax imposed by this Act, destroyed, altered, mutilated, secreted or otherwise disposed of the records or books of account of a taxpayer, (

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 or 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 (

e) conspired with any person to commit an offence described in paragraphs (

a) to ( d ), is guilty of an offence and, in addition to any penalty otherwise provided, is liable on

summary conviction to (

f) a fine of not less than 50%, and not more than 200%, of the amount of the tax that was sought to be evaded, or (

g) both the fine described in paragraph (

f) and imprisonment for a term not exceeding 2 years. [ 39 ] The law states that the moment a criminal investigation is being pursued, the adversarial relationship between the state and the accused crystallizes. When the predominant purpose of an official’s inquiry is the determination of penal liability, the taxpayer’s right against self-incrimination is triggered. As such, any search of the accused’s property or premises will require a warrant: see R. v. Jarvis , 2002 SCC 73 at para. 2 , [2002] S.C.J. No. 76. (

a) The Rule in R. v.

Jarvis [ 40 ] In Jarvis , supra , at para. 88 , Justices Iacobucci and Major held for a unanimous Supreme Court that “where the predominant purpose of a particular inquiry is the determination of penal liability, CCRA officials must relinquish the authority to use the inspection and requirement powers under ss. 231.1(1) and 231.2(1) [of the Income Tax Act ].” The Court went on to state that “officials ‘cross the Rubicon’ when the inquiry in question engages the adversarial relationship between the taxpayer and the state.” The burden of proving that this adversarial relationship has been triggered falls to the plaintiff: see R. v.

Anderson et al , 2003 SKCA 27 at para. 3 , [2003] S.J. No. 165. [ 41 ] Although the Court in Jarvis stated that there was “no clear formula” for deciding when the predominant purpose of the auditor was to investigate a criminal offence, the Court gave a number of factors to consider in so determining. These factors include: (

i) Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made? (ii) Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation? (iii) Had the auditor transferred his or her files and materials to the investigators? (iv) Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators? (

v) Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence? (vi) Is the evidence sought relevant to taxpayer liability generally? Or, as is the case with evidence as to the taxpayer's mens rea , is the evidence relevant only to the taxpayer's penal liability? (vii) Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance audit had in reality become a criminal investigation? [ 42 ] None of these seven factors is to be given more or less weight than any other.

The courts must assess the totality of the circumstances in deciding whether the adversarial relationship between the state and the individual has been engaged: Jarvis , supra , at para. 93 . As the Supreme Court concludes in Jarvis at para. 98 , when the predominant purpose of the investigation is to determine criminal liability, “all Charter protections that are relevant in the criminal context must apply.”

[ 43 ] Subsequent case law has elaborated upon these factors. The following is an overview of this case law and an application of these factors to this case. (

i) Reasonable Grounds to Lay Charges [ 44 ] In Jarvis , supra , at para. 89 , the court stated the existence of reasonable grounds to believe the accused was evading taxes is not a sufficient indicator to conclude that the CRA was conducting a de facto investigation: Even where reasonable grounds to suspect an offence exist, it will not always be true that the predominant purpose of an inquiry is the determination of penal liability.

In this regard, courts must guard against creating procedural shackles on regulatory officials; it would be undesirable to “force the regulatory hand” by removing the possibility of seeking the lesser administrative penalties on every occasion in which reasonable grounds existed of more culpable conduct. [ 45 ] However, the Court concluded that “[i]n most cases, if all ingredients of an offence are reasonably thought to have occurred, it is likely that the investigation function is triggered.” [ 46 ] The Court also stated that the test cannot be set at the level of mere suspicion that an offence has occurred.

At paragraph 90, the Court stated: ... the test cannot be set at the level of mere suspicion that an offence has occurred. Auditors may, during the course of their inspections, suspect all manner of taxpayer wrongdoing, but it certainly cannot be the case that, from the moment such suspicion is formed, an investigation has begun. On what evidence could investigators even obtain a search warrant if the whiff of suspicion were enough to freeze auditorial fact-finding?

The state interest in prosecuting those who wilfully evade their taxes is of great importance, and we should be careful to avoid rendering nugatory the state’s ability to investigate and obtain evidence of these offences. [ 47 ] The Jarvis decision was followed by our Saskatchewan Court of Appeal in R. v. Anderson , supra and the courts in both decisions found no Charter breaches.

Reviewing the factual circumstances in these two cases can assist in determining when the adversarial relationship has been triggered. [ 48 ] In Jarvis , after the accused’s wife had passed away, the accused began to sell the art work of his late wife. Following an anonymous tip that the accused was under-reporting income, the CRA began an audit of the accused. Although the accused was notified of the audit, he did not initially respond to the requests of the auditor. As such, the auditor began to inquire as to which galleries Ms. Jarvis’ artwork had been sold.

Based on this inquiry, the auditor determined that Mr. Jarvis’ income was significantly greater than reported. [ 49 ] After further attempts to contact Mr. Jarvis, a meeting was finally arranged between the auditor and Mr. Jarvis. The auditor did not inform Mr. Jarvis that she had contacted third party sources, nor did she give Mr. Jarvis any cautions. Moreover, the auditor brought her superior, known as a “team leader,” to the meeting. At the meeting Mr. Jarvis provided banking information, signed a bank authorization, and provided records of sales and expenses related to the art.

Upon analysing the totality of the information thus far received, the auditor discovered a discrepancy of approximately $700,000.00. As a result, the file was referred to Investigations. No further civilian interviews were conducted, and the accused was not notified that the file had been sent to Investigations. In fact, the Investigations Branch specifically told the auditor to delay informing the accused about the investigation. [ 50 ] Justice Iacobucci and Justice Major concluded that the accused’s Charter rights were not violated at any point before the referral was made to the investigatory division.

Therefore, at no time did the predominant purpose become an investigation of criminal liability. Although not informing the accused that the file had been transferred to Investigations was not proper, it did not violate the accused’s Charter rights.

[ 51 ] In Anderson , supra , (facts taken from the lower court decision: 2001 SKQB 334 , [2001] S.J. No. 416) the accused was audited due to a project called “Car Curbers,” which sought to identify individuals who sold multiple cars without reporting the income. One of the auditors discovered that the accused had over 90 placements in various car magazines and he requested that he be assigned the file. The auditors were also aware that an individual from the Investigation Division of the CRA had, sometime before the “Car Curbers” project began, sold a car to the accused, and that he had paid in cash.

This had raised the suspicions of the investigator who had purchased the car. [ 52 ] The auditors told the accused about the missing income from the sale of the 90 cars. They then gave the accused a chance to provide a list of all sales for the reported cars; however, the auditors did not provide the accused with a list of cars they believed were sold. The auditors then requested the accused’s banking records. No evidence of the car sales turned up in the accused’s bank accounts.

When further pressed about the car sales, the accused stated that he was selling the cars for his father’s business as his parents needed his support after a recent financial loss.

Based predominantly on the information provided up to this point, the CRA was able to obtain a warrant to search for the accused’s residence and offices. [ 53 ] In overturning the two lower courts’ rulings that all the evidence should be excluded due to significant breaches of the accused’s rights as protected in ss. 7 and 8 of the Charter , Justice Cameron of the Saskatchewan Court of Appeal stated at para. 4 that “... the two auditors were not shown to have obtained their information in the course of an investigation rather than an audit.” Justice Cameron went on to state that the lower courts did not have the benefit of the Supreme Court of Canada’s then recent decision in Jarvis , supra .

Following Jarvis , Justice Cameron found that the accused’s Charter rights had not been breached and ordered a new trial. [ 54 ] The Anderson decision is the leading pronouncement in Saskatchewan concerning the

interpretation of Jarvis . Although the facts from Anderson and the instant case are distinguishable in some respects—most notably by the fact that the audit in this case was completed while the audit in Anderson was not—the decision provides useful insight as to what will constitute a predominant purpose of investigation as opposed to audit. [ 55 ] The Jarvis and Anderson decisions state that crossing the line from an audit to an investigation must be viewed contextually, and that significant latitude must be given to auditors in carrying out their roles.

In other words, the public interest in ensuring citizens pay the taxes they owe is high, and will not be set aside easily. [ 56 ] Defence counsel submits that the CRA’s audit had effectively turned into a criminal investigation prior to the referral to Investigations. The defence argues that substantially all of the relevant evidence used by the prosecution was found by the auditor before referring the matter to the Investigation Branch of the CRA. The defence is troubled by the fact that the Crown now seeks to use this evidence to prove beyond a reasonable doubt that the accused is guilty of tax evasion.

As a result, the defence contends, it must follow that the predominant purpose of the audit must at some point have been to investigate penal liability. [ 57 ] It is important to keep in mind the prerequisites of the offence as found in s. 239(1) of the ITA .

As the Supreme Court states in Jarvis , supra , at para. 91 , “[b]ecause the s. 239 offences contain an element of mental culpability, the state will, one must presume, usually have some evidence that the accused satisfied the mens rea requirements before laying an information or preferring an indictment.” During the course of the audit, there were numerous indicators that the accused may not know how to properly manage the flow of funds in his businesses. For instance, during the June 28 meeting, P.

Hillcoff, after admitting to having used corporate money for personal purchases, verbalized a complete misunderstanding of the rationale for dividing individual and corporate taxes. In later meetings concerning claimed expenses, P. Hillcoff suggested such a misunderstanding. Although the conduct thus far could very well attract civil penalties, it was reasonable for Adams to not come to the conclusion that P. Hillcoff was intentionally evading taxes.

Also, mere suspicion that an offence has occurred does not necessitate stopping the audit. [ 58 ] Defence counsel also suggested to Adams that she must have believed that the shareholder loan agreement between the Hillcoffs and BMIIC (Medical) for the house purchase was created after the fact and that this would therefore be definitive evidence of fraudulent intent.

In response, Adams testified that although there were discrepancies in the interest rates and amounts in the shareholders loan and the income tax return, the discrepancy in the amount was explained by the fact that the loan was not to exceed $240,000.00, and the loan being approximately $76,000.00 did not do so. Concerning the interest rate, Adams testified that the financial statements only indicated that there was an interest rate. [ 59 ] Adams also testified that she knew that a corporate loan for $240,000.00 had been made to the Hillcoffs and that only

[ 59 ] Adams also testified that she knew that a corporate loan for $240,000.00 had been made to the Hillcoffs and that only $76,744.00 had been recorded as a shareholder’s loan for that purpose. The defence argued that this figure alone was half of the amount of the evasion and therefore required that the file be sent to Investigations at the point of obtaining the shareholder loan agreement.

In response, Adams stated that at that point in time she did not have enough information to know whether the taxable income of the corporation was under-reported or not because she did not have a set of books that were sufficient to identify how the discrepancy was treated, otherwise known as the inter-corporate loans balance problems. This set of circumstances was not present in Jarvis , supra , or Anderson , supra . In both of those cases, the file was referred to Investigations when sufficient evidence of fraud existed.

In this case, such evidence by its nature could only arise after a substantially complete understanding of all the relevant transactions of the companies and the Hillcoffs was reached. As such, it is unsurprising that Adams testified that it did not occur to her that she was looking at an evasion at this point. [ 60 ] It is important to keep in mind that the audit in this case was extremely complex given the numerous missing documents, various bank accounts and the system crash of BMIIC (Medical)’s accounting system.

Given the complex nature of the investigation it is difficult to see how the evidence would have provided reasonable and probable grounds before the net worth was completed. No parts of the evidence demonstrated this individually. Moreover, as Adams noted, various transfers from other bank accounts, the records of which were missing at this time, may have been able to explain the discrepancy. [ 61 ] Counsel for the defendant also argued that discrepancies in the sales invoices first identified by the GST auditor required that the file be sent to the Investigations Branch.

Adams stated that when she discussed this matter with the Hillcoffs that J. Hillcoff had candidly stated that she had not always recorded all the sequence numbers of the sales on the computer correctly. In addition to Adams being unclear how the GST auditor arrived at the $24,000.00 total, based on the potential for inconsistencies identified by J. Hillcoff, she also was not able to rely on the invoices.

As a result, Adams continued her audit and did not send the file to the Investigations Branch at that time. [ 62 ] In support of the above arguments, the defence relied on a number of cases in its written materials. Each of these cases warrants comment. However, I find these cases to be distinguishable. [ 63 ] The first of these cases is Anderson et al v. The Queen , 2007 PCU 72. In Anderson , the auditor had discovered a second set of books that was completely inconsistent with another book he had found. The accused did not know the auditor possessed either of these books.

In combination, the books showed evidence of criminal fraud. By not stopping the audit at this point, Judge Smith of the Saskatchewan Provincial Court held that the auditor had taken on an investigatory function and thereby breached the accused’s rights as protected in ss. 7 and 8 of the Charter . However, exclusion of the evidence was not granted, nor was a stay of proceedings. The appropriate remedy in the circumstances was held to be a judicial reprimand. [ 64 ] The Anderson case is distinguishable because Judge Smith had found evidence that demonstrated intent to commit fraud.

There was no other evidence that could have been found that would have redeemed the accused. This is an entirely different situation than the case at hand, where the complex nature of the transactions did not allow for any reasonably concrete factual conclusions, let alone determination of mens rea . [ 65 ] The defence also relies on R. v. Borg , 2007 ONCJ 451 , [2007] O.J. No. 3866.

In Borg , before conducting an initial interview with the accused, the auditor had discovered a T-4A slip that was issued by an insurance company which should have been claimed as income, as well as certain small amounts of interest income that had not been claimed. At the first personal meeting with the accused’s accountant on May 25, 1995, the auditor discovered a suspicious transaction concerning sales of the accused’s carpet business. The accused claimed to have purchased large amounts of carpet and not having sold them for any profit.

However, there were discrepancies in the amount of income reported and the amount of money in the accused’s bank account that were in excess of $100,000.00 per year. At the next meeting with the accountant on June 20, 1995, the auditor was told by the accused’s accountant that the accused had not claimed income for a major transaction.

Despite this information, the auditor continued with the audit for over half a year. [ 66 ] The Court found that the auditor had, at an early stage, both subjectively and objectively found evidence of tax evasion and had set out from that point to build a case with penal consequences, using the compliance audit as a means of gathering evidence. This conclusion largely stemmed from the fact that the auditor was found to contradict herself on numerous occasions and was found to have intended to mislead the Court concerning her knowledge of the relevant provisions of the ITA.

Based on the unreliability of the testimony of the auditor, the Court found that it could come to no other conclusion than her intent in pursuing her audit of the accused was to gather evidence to be used in a criminal trial. This conclusion was bolstered by the fact that the auditor demonstrated a complete misunderstanding of the rationale for referring an audit for investigation. As a result, the evidence gathered after the May 25, 1995 interview was excluded.

[67] The Borg case turned mostly on credibility of the auditor. (ii) Pursuit of a Criminal Investigation [68] The auditor, Adams, initially received a note from a screener, concerning the file. The note flagged for Adams certainconcerns raised by the GST auditor, namely unreported sales, advancements to an associated corporation, an absence of a source forpersonal expenses of shareholders, the absence of a

schedule 9, and an issue regarding wages payable. Adams stated that “these areitems I would have to clear to complete my audit.” Based on these circumstances, the defence suggested that it is clear that from theoutset the true purpose of Adams was to conduct a criminal investigation. [69] I cannot accept this argument. As Adams testified, she did not communicate with the GST auditor. She only had certain factspresented to her.

I note that in both Jarvis, supra, and Anderson, supra, circumstances that suggest fraud were present from the outset.However, in neither of these cases did the courts conclude that this meant the purpose of the auditor was to conduct a criminalinvestigation. Absent specific evidence tending to prove that Adams’ intent was to investigate a criminal offence, I come to the sameconclusion. [70] Brief comment is also warranted concerning Adams’ statement that the items in the note are required to be “cleared” beforecompleting the audit.

The defence submitted that this statement also suggested that Adams was determined to complete the audit,whether or not it turned into an investigation. This is a misinterpretation of this statement. All Adams was conveying was that if heraudit was to be completed, these items would have to be analysed.

This says absolutely nothing about her intent when pursuing the audit. [71] Further, the defence suggested that the unreported sales and the payment of the shareholders’ personal expenses, being two ofthe major categories forming the basis of the charges against the accused, shows the purpose of the audit was from the very beginninginvestigatory in nature. I cannot agree with this submission. A major consideration at this stage of the analysis is whether the auditor wascovert in inspection. Indeed, the hallmark of an audit is that the auditor and the subject get together: see R. v.

Tiffin et al (2008), 2008ONCA 306 , 90 O.R. (3d) 575 (ONCA). Given these observations, the Supreme Court in Jarvis, supra, at para. 97 concludedthat the mere fact that evidence might relate to both criminal and general liability does not require a finding that the evidence was soughtto further a criminal investigation. To conclude otherwise would stifle any communications between the GST auditor and Adams’ office.I conclude that throughout the audit, the process was open and collaborative.

Although these transactions certainly raised some suspicion,Adams was within her powers to continue the audit as it was certainly reasonable, given the complicated nature of the audit as well as thefact that many documents were still required at this point, to continue the audit for the purpose of enforcing compliance with the civilprovisions of the ITA. [72] Finally, the defence argues the fact that a referral was made to the Investigations Branch only five days after the audit wascompleted supports a finding that Adams was pursuing a criminal investigation.

In response, I would again note the complex nature ofthe audit in this case. A clear picture was not available until after the audit had been completed. In the circumstances, I cannot concludethat Adams intended to do anything other than conduct an audit. (iii) Files have been Transferred to an Investigator [73] There was no transfer until the audit had been completed. This is not problematic in light of my above conclusions. (iv) Auditor Conduct Effectively that of an Agent of the Investigators

[ 74 ] Adams was not effectively an agent of the investigators. (

v) Does it appear that the Investigators were using the Auditor as their Agent? [ 75 ] The investigators were not involved in the audit. (vi) Is the evidence related to taxpayer liability generally or, as is the case with evidence as to the taxpayer's mens rea, is the evidence relevant only to the taxpayer's penal liability? [ 76 ] Much of the evidence uncovered by Adams could be relevant to both penal and civil liability. This is not problematic. As the plain wording of this factor suggests, the relevant question is whether parts of the audit were relevant only to the mens rea of the accused.

Defence counsel did not suggest that Adams used a particular question or tactic that was solely aimed at uncovering the mens rea of the Hillcoffs. (vii) Other Circumstances that show the Audit was a Criminal Investigation [ 77 ] Counsel for the accused raised a number of other concerns with the audit process that warrant comment. [ 78 ] First, it was suggested that the administrative structure of the CRA automatically breaches a taxpayer’s right against self- incrimination and to be free from unreasonable search and seizure. Counsel for the accused cited at length Anderson et al v.

The Queen , 2007 PCU 72, where Judge Smith condemned some of the CRA’s practices, namely allowing the Enforcement Branch of the CRA to send anonymous tips it received to the Auditing Branch, and a practice of auditors that they must finish their audits before determining whether a file must be sent to the Investigatory Branch. Neither of these circumstances is present in the instant case. Moreover, if there are structural deficiencies that result in the CRA ignoring the constitutional rights of accused persons, nothing of the sort was proven in this case.

Although Adams testified that she had sent two files to Investigations, and that both times she finished her audit before so doing, there was no evidence put before me that showed the CRA’s policy is to ignore the constitutional rights of the accused on an institutional level.

For the same reason, the “thank you” notes received by auditors for referring matters to Investigations does not demonstrate that the constitutional rights of accused persons are being ignored by the CRA. [ 79 ] Second, counsel for the defence also raised the fact that the accused were not informed of the potential consequences of the audit. However, I do not think it is correct to discern an investigatory intent from this fact. It does not follow from the fact that an audit is undertaken that a criminal prosecution will follow.

I am satisfied that the accused understood the potential civil consequences of an audit. [ 80 ] Finally, counsel for the defence raised a number of further points, such as the fact that no civil interviews were held to allow for explanations before the matter was sent to the Investigatory Branch of the CRA. I would note that this fact did not warrant mention in Jarvis , supra , despite this same factual circumstance arising. As such, I conclude that silence before referring the matter to the Investigations Branch does not allow for any inference concerning investigatory intent.

At the very least, I certainly cannot see how such an inference can be drawn in this case. As well, I note that Adams and P. Hillcoff communicated regularly and P. Hillcoff provided her with explanations on a number of matters throughout the audit. (

b) Conclusion on Charter arguments [ 81 ] For the above reasons I find that the predominant purpose of the auditor was at all times to conduct an audit. Although at times Adams’ suspicions were raised, at no time did the predominant purpose of her audit become to investigate the penal liability of the accused.

(

c) Section 24 of the Charter [ 82 ] As I have not found a breach of the accused’s rights under ss. 7 or 8 of the Charter , it is unnecessary to consider remedy. THE MENS REA ISSUE (

b) Has the Crown proven beyond a reasonable doubt that the accused had the requisite mens rea to commit the offences as charged? [ 83 ] The defence acknowledges that some income was not reported in the appropriate tax returns. However, the accused never intended to commit the offences as charged. In order to determine whether mens rea on the part of the accused can be inferred, each manner in which income was not reported needs to be examined. EVIDENCE OF CRA INVESTIGATORS [ 84 ] As a result of the auditor’s findings, an investigation covering the 2001, 2002 and 2003 taxation years began.

This led to the issuance of search warrants and the seizure of large volumes of documents from the Hillcoffs’ business premises, their residence at 3474 Keohan Crescent, Zatulsky’s office, financial institutions and the audit offices of CRA. Three principal CRA investigators, Daryl Dreger, Lavinia Tam and Conan Haider reviewed the seized documents and recreated the accused’s financial situation for the time period under consideration being January 1, 2000 to December 31, 2003.

All sales invoices, payment receipts and personal and business expense receipts were reviewed and compared to the data entered in the accused’s computerized accounting systems and to the accounting information given to and used by Zatulsky. Investigators also compared the accused’s accounting information on Zatulsky’s files with the final financial statements and income tax returns prepared by Zatulsky to determine their accuracy. The goal was to determine if the financial statements prepared by Zatulsky accurately reflected the financial status of the accused. The investigators all analysed the following:

a) all inter-company transfers;

b) all entries in the personal and corporate bank accounts;

c) all adjustments made by Zatulsky to the data provided by the accused; and

d) all entries to the shareholder loan account made by Zatulsky. [ 85 ] As a result of the investigators’ review, they prepared numerous schedules and spreadsheets which were tendered as exhibits. [ 86 ] CRA found a number of discrepancies relating to the accused’s financial affairs which impacted the revenue they declared. These discrepancies were summarized in the Statement of Findings documents (Exhibits P-001 and P–002). The ultimate goal of the investigation was to determine what income had been generated by the accused and what income had been claimed.

As previously mentioned, the Hillcoffs’ paper documentation was extensive and complete so that CRA investigators were able to accurately determine the accused’s financial situation. [ 87 ] Dreger also completed a net worth analysis in order to confirm the other investigators’ findings of under-reporting of revenue.

FINDINGS BY CANADA REVENUE AGENCY 1. Explanation of Prosecution Items for BMIIC (Medical) (Exhibit P-001) [ 88 ] Investigators analysed sales and expense documents seized from BMIIC (Medical) and compared the figures from these documents with the data which had been entered in the corporation’s internal accounting system and with the financial statements prepared by Zatulsky. Based on the analysis, investigators came to the conclusion that BMIIC (Medical) had not declared income in the amount of $467,020.91 during the relevant time period based on the following factors:

i) sales were not fully reported; ii) some debts payable by First Canadian Health which had been written off were eventually recovered, but not reported as income; iii) a vehicle purchase was expensed as an operating expense instead of a capital expense; iv) personal expenses were claimed as business expenses;

v) BMIIC (Medical) funds were transferred to the Hillcoffs personally and these transfers were shown as business expenses in the financial records; and vi) a vehicle was overvalued and therefore the capital cost allowance was overstated.

a) Unreported Income

i) Net Unreported Income [ 89 ] CRA investigators found sales invoices totalling $44,639.37 which had either not been entered into the accused’s internal computerized accounting system or had been entered incorrectly for the fiscal year ending August 31, 2001 (see Exhibit P-019).

As a result, the sales figures given to Zatulsky were lower than actual sales by $44,639.37 which represented 6.5% of total sales and which sales were not reflected in the corporate financial statements and tax returns. [ 90 ] For the fiscal year ending August 31, 2002, investigators also found sales invoices which had either not been entered at all on the internal accounting system or only partially entered and therefore actual sales were not reflected in the records given to Zatulsky and hence not reflected in the financial records of the company (see Exhibit P-018).

Based on a review of the sales invoices, unreported sales totalled $15,224.43. For some unknown reason the total sales listed in the invoices and other material seized from the accused were lower by $3,766.68 than those listed in the accused’s accounting reports (see Profit and Loss Statement at Exhibit P-162) located on Zatulsky’s file. As a result, sales had been over-reported.

CRA therefore only alleged unreported sales of $11,457.75 which represented 1.4% of the total sales that year (see Exhibit P-018 and Exhibit P-015). [ 91 ] In January 2003, BMIIC (Medical) had switched accounting packages from Mind Your Own Business to QuickBooks. Investigators found that many sales invoices had been entered incorrectly in the company’s internal accounting system and were not reflected in the records given to Zatulsky. A small number of invoices were not even recorded. The total unreported sales for the fiscal year ending August 31, 2003, was $194,659.88 (see Exhibit P-017).

This figure represented 30% of the actual sales for that fiscal year and also a 30% drop from the previous year’s sales. Investigators noticed that Zatulsky had made an adjustment (a journal entry to move $17,165.98 from a suspense account to a revenue account) when calculating the company’s sales and so the total unreported revenue for prosecution purposes was reduced by CRA for a total of $177,493.90 of unreported income for 2003. [ 92 ] Investigators determined that for the 2003 fiscal year for AMC (Manufacturing), Zatulsky had increased sales through journal entries.

On journal entry #10 found on Exhibit P-173, Zatulsky had a note “to adjust inter-company account to agree”. Investigators believed that this had been done because there were excessive bank deposits sitting in the AMC (Manufacturing) account. The result of this journal entry was that AMC (Manufacturing)’s sales were over reported by $3,658.46. Investigators therefore used this figure to offset BMIIC (Medical)’s unreported sales since some of BMIIC (Medical)’s sales revenue would be deposited into AMC

(Manufacturing)’s bank account. ii) Recovery of First Canadian Health Debt Not Recorded as Income [ 93 ] Investigators analysed all invoices for First Canadian Health (referred to as FCH) which was a major client of BMIIC (Medical) (see Exhibit P-021). For the 2002 fiscal year, bank deposits of FCH payments exceeded what investigators expected to see in the bank account after having analysed the invoices and accounts receivable at the end of 2001. Investigators believed that the excess deposits of $37,503.60 indicated a recovery of bad debts.

On Zatulsky’s file there was a handwritten note relating to that figure which stated “Medical Services Branch we won’t collect”. Medical Services Branch and First Canadian Health was basically the same client. During testimony, P. Hillcoff acknowledged that this note was written by him but that the information in the note would have been given to him by M. Wahus.

He stated that he had no independent knowledge of the figures in that note. [ 94 ] Investigators located information from the accused’s records which showed that First Canadian Health had audited their account with BMIIC (Medical) and the result of the audit was that FCH would pay all outstanding invoices. Even in the 2000 fiscal year, FCH bills which were outstanding for 90 days or more were written off and never reported when received (see Exhibit P-160). According to Zatulsky these write offs were made on the instruction of P.

Hillcoff (see adjusting journal entry #9 for the 2002 fiscal year which reads “to set up bad debt for Medical Services Branch according to PH”). In

summary, the investigation revealed that BMIIC (Medical) recovered more from FCH than the amount recorded in the company records.

The amounts which had been written off were in fact collected but not claimed as income. iii) Disallowed Vehicle Purchase Expensed as Operating Expense [ 95 ] In their review of the seized records, the investigators disallowed a number of expenses which had been claimed as business expenses and which therefore affected the net income shown in the financial statements and tax returns of BMIIC (Medical). [ 96 ] Upon review of BMIIC (Medical)’s internal computerized accounting system, investigators noted that the purchase of an Astro van for $5,600.00 had been entered as a vehicle expense (account 6-1300 on MYOB system, see Exhibit P-036).

Investigators disallowed this expense as the vehicle expense account was meant to capture operating expenses and not capital purchases. The accused’s records on Zatulsky’s file did not contain a breakdown of this vehicle expense account but only listed the total figure ($16,936.94). iv) Disallowed Personal Expenses Claimed as Business Expenses [ 97 ] Investigators discovered that P. Hillcoff had a CIBC VISA credit card which was used mostly for business expenses. Upon review of the expenses paid with this CIBC VISA card, investigators noted a number of expenses which they believed were personal in nature.

This CIBC VISA card was always paid in full with BMIIC (Medical) funds. Personal expenses such as eye exams, golf fees and equipment, dental bills, mens and ladies tourist bikes, donations to charities and to political parties, cat supplies, physiotherapy expenses, hot tub chemicals, house insurance and men’s clothing, were examples of expenses paid with this VISA card.

Investigators also noted that personal expenses were being paid by cheques drawn on the BMIIC (Medical) bank account for such personal items as security, phone, water bills, and property taxes for the Hillcoffs’ residence, accountant fees for personal taxes, home inspection of the Hillcoffs’ new home, alarm system costs, and furniture such as beds and dining room suites. There were also a number of travel expenses which included airline tickets, hotels and meals while travelling to Manitoba, British Columbia, Florida and Mexico.

The investigators disallowed expenses in the amount of $72,844.28 which had been claimed as business expenses by BMIIC (Medical) but which CRA deemed to be personal expenses. Investigators also noted that funds from the BMIIC (Medical) bank account were used to pay some personal expenses incurred on the Hillcoffs’ Sears and Bay cards in the amount of $8,080.66. [ 98 ] Investigators also reviewed all receipts which P. Hillcoff kept at the business. Many of the receipts had “Peter paid” written on them. These receipts were entered as business expenses in the internal accounting system kept by BMIIC (Medical).

Investigators believed that some of those receipts were altered to look like business expenses. For example, there was an invoice from Paradise Pools for a spa tote and chemicals that had a written note on it “automobility water system - Pete paid”. As well there was an invoice from Richardson Lighting for a palm leaf fan and written on the invoice was “fan back shop”. Investigators had noted a palm leaf fan in the

bedroom at the Hillcoff’s residence. As well, a total of $6,077.60 represented disallowed personal expenses which had been originally paid by P. Hillcoff but later claimed by BMIIC (Medical) as business expenses. Therefore, the total disallowed personal expenses claimed as business expenses totalled $87,002.54.

v) Disallowed Amounts Allocated from Account #6-1025 - Withdrawals/ Transfers and from Account #6-1750 - VISA Payments [ 99 ] Investigators reviewed account #6-1025 which was a “withdrawal/transfer” general ledger account from the internal accounting records of BMIIC (Medical). Only the total figure for this account was located in Zatulsky’s file for the 2002 fiscal year (see

Summary Trial Balance). In other words, there was no listing of entries to this account. CRA noted that this particular account correctly included transfers to AMC (Manufacturing) bank accounts but also included transfers from BMIIC (Medical) to the Hillcoff’s personal bank accounts and payments of the CIBC VISA card which was also used to pay personal expenses.

CRA investigators also noted that significant amounts of money were being transferred from the BMIIC (Medical) bank account to the AMC (Manufacturing) bank accounts (approximate $120,000.00 in Canadian dollars) but not all recorded in BMIIC’s accounting system or in the financial statements prepared by Zatulsky. As a result, the inter-company transfer account was not balanced. [ 100 ] Investigators believed that Zatulsky allocated $85,053.82 from the “withdrawal/transfer” account to various “cost of goods sold” general ledger accounts on a prorated basis in order to balance the books.

But, by allocating funds to various “cost of goods sold” accounts, Zatulsky effectively increased BMIIC (Medical)’s expenses for the 2002 fiscal year. As a result, transfers of corporate funds for the Hillcoff’s personal use were in effect turned into corporate expenses in order to balance the books. [ 101 ] As well, $30,526.70 which was listed as a FCH accounts receivable was moved by Zatulsky to the bad debt account and written off apparently to balance the books. This was not a legitimate bad debt as CRA’s investigation showed that the accused had in fact recovered the FCH debts.

Again, this allocation to bad debts in effect turned transfers of corporate funds for the Hillcoffs’ personal use into corporate expenses. [ 102 ] Investigators also reviewed account #6-1750 which was the general ledger account under which VISA payments were to be entered. Only some of the entries were in fact VISA payments. Some were inter-company transfers, transfers to personal bank accounts, and personal share purchases. Zatulsky closed out this VISA general ledger account through journal entries and expensed $33,274.40 (a portion of the VISA general ledger account) as cost of goods sold.

In other words, he expensed funds which had been transferred from BMIIC (Medical) to the Hillcoff’s personal bank accounts as operating expenses. According to the investigators, there was no documentation on Zatulsky’s files which stated that the general ledger account for VISA payment expenses contained anything other than VISA card payments. vi) Disallowed Capital Cost Allowance for Class 10 [ 103 ] The investigators found reference in the accused’s records located in Zatulsky’s files to the purchase of a van on June 29, 2001.

The account inquiry printout for miscellaneous account 6-1050 (which is one of the accounts in the MYOB program) showed a debit memo of $8,000.00 and “van” was written beside that figure (see Exhibit P-161). Investigators discovered that $8,000.00 had been transferred from the BMIIC (Medical) bank account to P. Hillcoff’s personal bank account. Investigators also believed that only one van had ever been purchased by any of the accused and that it was for the amount of $5,600.00. As Zatulsky noted the value of the van to be $8,000.00, capital cost allowance for this van was overstated.

Investigators determined that the overstatement for the capital cost allowance over the three years for this van was $1,400.40. This amount was therefore disallowed as an expense. vii) Less Unclaimed Expenses for Cost of Goods Sold [ 104 ] Investigators, in analysing the computerized accounting records of BMIIC (Medical), also reconstructed the expenses for the 2003 fiscal year of BMIIC (Medical).

Investigators examined all expenses and compared them to the accounting records which Zatulsky had been provided by BMIIC (Medical) and what Zatulsky had actually claimed in the financial statements and income tax returns. The investigators analysed the expenses and determined which were allowable expenses and which were not.

The investigators disallowed certain expenses which had been claimed in the financial statements of BMIIC (Medical) by Zatulsky but they also noticed that certain expenses for “cost of goods sold” were allowable and had not been noted in the records given to Zatulsky and therefore not reflected in the financial statements of BMIIC (Medical). The amount of unclaimed expenses was offset against all other expenses which had been

disallowed by CRA. The end result was a total of $43,353.11 in unclaimed expenses. 2. Explanation of Prosecution Items for AMC (Manufacturing) (Exhibit P-001) [ 105 ] CRA investigators believed that AMC (Manufacturing) had not declared income in the amount of $59,114.71 during the relevant time period in the following ways.

a) Unreported Sales and Other Revenue [ 106 ] AMC (Manufacturing) did not have the same accounting programs as BMIIC (Medical). The accounting system used by AMC (Manufacturing) was an Excel spreadsheet program which had been set up by a former employee. Investigators compared all seized sales invoices with the accounting records which had been given to Zatulsky and discovered that not all of the invoices were accounted for in the records. There was also revenue from the Saskatchewan Government for employee work placements which had not been noted as revenue.

A review of the invoices showed that many sales were in U.S. dollars. The investigators believed that U.S. dollars were converted to Canadian dollars using a lower rate than the existing Bank of Canada exchange rate when sales were entered in the Excel spreadsheet.

The exchange rate used by AMC (Manufacturing) was 1.3 instead of the monthly Bank of Canada exchange rate which varied between 1.5 and 1.6, depending on the month. [ 107 ] Investigators concluded that based on unreported sales and other sources of revenue and an incorrect exchange rate, AMC (Manufacturing) had unreported sales and revenue in the amount of $68,387.48 for the fiscal years of 2001 through to 2003. This amount was offset by a journal entry (increasing sales by $13,237.91) that Zatulsky had made in the 2003 fiscal year in order to balance the books.

The effect of increasing sales by that amount was to create an over reporting of sales by AMC (Manufacturing) in the amount of $3,658.46 in the 2003 fiscal year. This figure was used by CRA to offset BMIIC (Medical)’s under-reporting of revenue as BMIIC (Medical) often used AMC (Manufacturing)’s bank account and there was an intermingling of funds. Therefore, for prosecution purposes, CRA claimed that that total unreported sales and other revenue was $58,808.03 for the fiscal year of 2001 and 2002 only (see Exhibit P-026).

b) Disallowed Personal Expenses [ 108 ] Investigators also reviewed the expenses claimed by AMC (Manufacturing) and disallowed two annual maintenance fees for a resort membership as they were seen as a personal expense. The total disallowed personal expenses claimed as business expenses was $306.68. 3. Explanation of Prosecution Items for Peter Hillcoff (Exhibit P-002)

a) Appropriations from BMIIC (Medical) [ 109 ] Investigators reviewed all transactions in the BMIIC (Medical) bank account and in the CIBC VISA credit card account. Investigators determined that corporate funds were being transferred to P. Hillcoff for personal use. This transfer of funds occurred in the following ways: (

i) P. Hillcoff’s personal expenses paid through CIBC VISA which was paid in full by BMIIC (Medical), the total being $39,236.62 (previously discussed); (ii) P. Hillcoff’s personal expenses paid by cheques drawn on BMIIC (Medical) bank accounts, the total being $36,206.08 (previously discussed)

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