Ta x E v a s i o n

William 1. Innes, B.Sc., LL.B., LL.M. of the Ontario Bar

a n d

Ralph Cuervo-Lorens, B.A., LL.B., M.A.,ACIArb. o f the Ontar io Bar

a n d

Matthew Fleming, B.A., LL.B., of the Ontario BarDouglas B.B. Stewart, B.A., LL.B., of the Ontario Bar

C A R S W E L L .

/•°"•••\

Mens Rea 4-1 9to create a loss carryforward deduction that effectively sheltered the income from

tax.43The CRA refused to accept that the profits of the food-flavouring business be-

longed to Grover. The Agency therefore reassessed Stubart on the basis that Stubartwas required to report as its own the income that it had transferred to Grover underthe agency arrangement. Stubart appealed from this assessment, and the issue even-tually reached the Supreme Court of Canada.

The Supreme Court rejected the position of the Agency and accepted the positionof the taxpayer. According to Estey J., who wrote the majority opinion, Stubart'sbusiness assets had been legally transferred to Grover; the operation of the businesshad been conducted by Stubart under a legal agency agreement with Grover, and,under the terms of that agreement, the income of the business belonged in law toGrover. The income was properly reported by Grover, and the loss carryforwardprovisions of the ITA permitted Grover to take advantage of its accumulated lossesas current deductions. Nothing in the ITA directed or empowered the Agency todisregard the legal consequences of the taxpayer's arrangements. Nor did the ITAexpressly or impliedly impose a business purpose test on tax-avoidance transactions.It was irrelevant that the taxpayer's arrangements had no business purpose otherthan the avoidance of tax. Therefore the arrangements were successful in shelteringthe profitable business from tax."

Stubart and a long line of civil cases leading up to it illustrate the general reluc-tance of the courts to find that business relations entered into by taxpayers are shams.On the other hand, if the parent corporation had operated the two businesses directly,instead of through subsidiary corporations, there was no doubt that the losses on theconcrete business could have been deducted against the profits on the food-flavouringbusiness. Where the Stubart concept has been applied, it has normally been in thecontext of dealings with a corporate group, often where the beneficiary o f thearrangement is a corporate resident of a tax haven jurisdiction.

Against that background, it might well be anticipated that the courts will evidencea reluctance to find culpable evasion based on an allegation of sham. That wascertainly the position taken by the Quebec Superior Court in R. v. Redpath IndustriesLtd.° In that case, Redpath Industries incorporated a subsidiary in Bermuda —

Peter W. Hogg and Joanne E. Magee, Principles of Canadian Income Tax Law (Second Edition)(Carswell, 1997) at 471.

44 Ib id. , at 472.

[ I 9841 C.T.C. 483,84 D.T.C. 6349 (Que. S.C.), affirming [1983] C.S.P. 1069, [1983] C.T.C. 132,r ‘1.1 83 D.T.C. 5117 (Que. Sess. Ct.). See also R. c. Descoteaux, [2002] J.Q. No. 205; Sako's Holdings

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4-20 E l e m e n t s of Offences

Albion Company Ltd. Albion purportedly carried on business in Bermuda sellingsugar, the same commodity in which Redpath dealt in Canada. Albion had noemployees and the sales it entered into were negotiated for it by the sales staff ofRedpath. It was common ground that the arrangement was entered into to facilitatethe cash needs of Redpath's parent, Tate and Lyle Ltd., a British corporation. Albionpaid its profits to Redpath in the form of dividends which the latter disclosed on itstax returns as tax-exempt dividends received from a foreign subsidiary. On the basisof these facts, Redpath was charged with evading tax on the profits of Albion duringthe years 1966-71. The accused were acquitted at trial and the Crown appealed tothe Quebec Superior Court.

Bergeron J. first set down the guidelines necessary for dealing with the civilaspects of a tax assessment (that is, the actus reus) in a criminal prosecution:

He also referred to one of the most singular elements of this case, the fact thatRedpath had, in fact, declared the income in question in the form of tax-exemptdividends from Albion; in other words, there was no suppression of the income fromthe Canadian tax authorities:

46

A criminal court is not the forum to determine income taxability and to make deter-minations as to rights to tax assessment or absence of rights of assessment involved.In a tax evasion charge, it must appear prima facie from the evidence that the taxabilityis clear-cut, obvious, indisputable, unquestionable from lack of reporting, before en-tering the examination of the other facts of the charge, e.g. whether the indisputabletaxability, based on income gained, proven and undeclared, leads to a conclusionbeyond a reasonable doubt that it was wilfully omitted by a taxpayer in his tax returns.

If such a basis is not present and there exists an obligation to enter into the exam-ination of the merit of a possible assessment in respect of a declared income in orderto weigh whether a taxpayer is susceptible to taxation or not, may or may not takeadvantage of claimed exemptions, a criminal court usurps its function and appropri-ates itself of a jurisdiction which it does not possess.46

The case law is replete with prosecution for failure to declare, but it is worth notingthat in regard to a charge of tax evasion, not a single reported case could be foundbased on wilfull omission to declare income such as in the present case where thetotal income is declared, and declared as nontaxable by virtue of exemption simul-taneously claimed in tax returns.

Ltd. v. Canada (Attorney General), supra, note 2 1; R. v. Anderson, supra, note 19, which was a GSTcase; and R. v. Vermette, supra, note 19, in which the accused did not report income of a corporationbecause the accountants assumed that they could not examine the books. Accused was acquitted.The Court stated that late reporting of dividend income was not wilful evasion of taxes.

Ibid., per Bergeron J., at p. 6351 (D.T.C.).

(Tax Evasion) (Rel. 2010 — 1)

Mens Rea

This mutism in he case law seems to me to stem from logic in that, once a total incomeis duly declared, whatever qualifications are attached to it, the taxpayer has satisfiedhis main and principal obligation. He may wrongly claim an exemption, possiblyopening the way to other recourses if the exemption claim is tainted with fraud, etc., butthe necessary element for an offence of omission to declare is not present to support acharge of that nature.

We have to deal here with a specific charge of 'failure to declare' and not with themanner in which an exemption was claimed in tax returns, since it is clear from therecord that a true and exact income was admittedly reported.47The Crown relied heavily on the decision o f the Federal Court of Appeal in Do-

minion Bridge Co. v. R . ,4 8 a c a s e i n w h i c h a s i m i l ar o f f s ho r e a r r a ng e m en t was f ou nd to

be ineffective to shift the incidence of taxation from the Canadian parent corporation.That case, Bergeron J. noted, was decided (at trial) four years after the period involvedin the alleged evasion. He referred to the fact that the accused had used the services oftax experts in establishing Albion and had attempted to stay within the four corners ofthe law as i t was then perceived. He also referred to the discussion o f the use o foffshore corporations in the Carter Commission Report and its implicit acknowl-edgement o f the existence o f "loopholes" within the system. In conclusion, he dis-missed the appeal and affirmed the acquittal of the accused:

All these instances [of civil cases cited by both the Crown and the accused] reflect thevalidity of measures taken with a view of tax avoidance. All of them found their waythrough civil debate, between the taxpayer and the MNR, without so much as a civilpenalty claimed and all of them dealing with the 'grey area' regarding taxability.

We are left, as outlined in the early part of this judgment, with a prima facie situation,where taxability becomes of prime importance, and where on the face of the record, it isnot only a very and truly debatable one, but one which would highly favour the taxpayer."

The Redpath case is the leading authority on the subject o f prosecutions that arebased on the application o f some of the more complex aspects o f the I TA and jur-isprudence emerging out of the ITA, such as the various tax avoidance rules. I t standsas authority for the proposition that only in cases where the civil liability to tax isbeyond dispute wil l the criminal courts enter into the further inquiry as to whether the

47 ibid., at pp. 6350-6351 (D.T.C.).

48 [ 1977 ] C.T.C. 554,77 D.T.C. 5367 (F.C.A.), affirming [1975] C.T.C. 263,75 D.T.C. 51 50 (F.C.T.D.).

49 S e e note 45, supra, per Bergeron J., at p. 6356 (D.T.C.).

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Elements of Offences

failure to declare that income was part o f a wilful plan o f tax evasion. Equally asimportant, i t stands for the proposition that where the income at issue was actuallydisclosed in the years in question (albeit in the form of tax-exempt dividends, as wasthe case in Redpath ), that disclosure will normally be sufficient to negate any possibleinference of mens rea. Moreover, in the recent case of Matthys v. The Queen," theCourt held that a bona _fide reliance by the accused upon a departmental InterpretationBulletin to justify a method of reporting his income negated any proof of an actus reus.

The logic adopted in Redpath was followed by Hartt J. in the case of R. v. Burnett,'an unreported decision o f the Ontario Court (General Division), released Apri l 12,1991. In that case, undoubtedly one of the longest criminal trial in Canadian history,the accused were acquitted on all counts. They argued that the funds in dispute werenot taxable on the basis of the decision in Robertson Ltd. v. M.N.R." Ham J. held thathe could not be asked by the Crown to, in effect, second guess the tax courts:

Second, even if the Crown succeeds in its argument that the Robertson rule does notapply to 'business profits' which are illegally obtained, there is no allegation nor anyevidence that the amounts at issue in this prosecution were likewise, illegally obtained.Poynton may qualify Robertson in the limited context of dealing with illegally gainedincome from the source contemplated by that case. However, bearing in mind thelimited role of a Criminal Court in determining issues of taxation, and the constitutionalconstraints under which a criminal court operates, I cannot see how it can extendbeyond those limited circumstances. I am reinforced in this conclusion by the currencyof the orthodoxy of the Robertson rule in recent tax cases and appeals at the FederalCourt (see for example, Foothills Pipelines ( Yukon) Ltd. v. M.N.R. [1990] F.C.J. No.925 (FLA.), or Burrard Yarrows Corp. v. Canada [1986] F.C.J. No. 504 Court File no. T-637-84 Action No. A-306-90). As a result, I prefer to limit the effect of Poynton to itsparticular facts, and I hold that whatever the ratio decidendi for which it stands, it cannotimpair the jurisprudence which continues to govern the determination of issues oftaxat ion i n c o u r t s w h o a r e b e y o n d t h e a m b i t o f s t a r e dec i s i s

so [ 1986 ]2 C.T.C. 307, 86 D.T.C. 6385 (Ont. Dist. Ct.).

51 1 9 9 1 CarswellOnt 3371 (Ont. Gen. Div.).

52 [19441 Ex. C.R. 180, [1944] C.T.C. 75,2 D.T.C. 655 (Exch. Ct.). See also Huang & Danezkay Ltd. v.M .N .& (sub nom. R. v. Huang & Danczkay Ltd.) 2000 D.T.C. 6549, 261 N.R. 55, [2000] 4 C.T.C.219, ( sub nom. Minister of National Revenue v. Huang & Danczkay Ltd.) 185 F.T.R. 295 (note),[2000] F.C.J. No. 1517 (F.C.A.), for clarification on the Robertson principle; Pinot Holdings Ltd. v. R.(1999), (sub nom. Minister of National Revenue v. Pinot Holdings Ltd.) 249 N.R. 99, (sub nom. R. v.Pinot Holdings Ltd.) 99 D.T.C. 5772, [200011 C.T.C. 258, [1999] F.C.J. No. 1765 (F.C.A.); R. v.Burnett, supra;note 51 and R. v. Langille, 2009 CarswellNat 2376, 2009 CarswellNat 5314, 2009D.T.C. 1431 (Eng.), 2009 TCC 398, 2009 CC! 398 (T.C.C.), which dealt with similar issues toRobertson but distinguished Robertson on the basis that it predated paragraph 12( I )(a) and Section 32of the LTA which expressly deals with payments for services not yet earned and unearned insurancecommissions.

(Tax Evasion) (2011 — Rel. 1)

Mens Rea 4-2 3emanating from a Superior Court of any province, or for that matter a Court of Appeal.

To hold otherwise would invite the very real danger of the two parallel courts movingin different directions on points of income tax law. This is particularly invidious in viewof the fact that this Court does not deal on a national and unitary basis with issuesof taxation.53The issue of tax planning as opposed to tax evasion was examined again in the

case of R. v. Kleysen.54 T h a t c a s e i n v o l ve d t h e s a le of m a ch i n er y and e q ui p me n t by

a Canadian resident accused to a Bahamian corporation that was wholly owned bythe Canadian individual accused who, in turn, controlled the Canadian corporateaccused. The Bahamian corporation then resold the machinery and equipment at aprofit in the United States. The Crown alleged that the Bahamian corporation was asham or alter ego of the Canadian individual accused. In the alternative, it allegedthat the transfer prices of the machinery and equipment were fraudulently set atbelow fair market value, thereby reducing the recapture to the Canadian residentvendors resulting in an understatement of their income. The trial judge summarizedthe nature of the proceedings as follows:55

The evidence in this prosecution underscores the sometimes narrow line which sep-arates aggressive tax avoidance planning and fraudulent activity resulting in tax eva-sion.

Tax courts have from time to time recognized the effective use of tax-haven entitiescreated solely for the purpose of reducing income tax payable in Canada. They havealso seen through paper transactions without substance and refused to give credenceto those transactions.

Here the court is obliged to examine activities which constitute either an aggressivetax avoidance scheme or a fraudulent understatement of income and a resulting taxevasion.

In a lengthy judgment, the court rejected the Crown's contentions and concludedthat the facts merely disclosed aggressive tax avoidance planning.

In addition to the types of factors canvassed in Redpath and Burnett, two additionalelements found in the Kleysen decision stand out as important indicators of thedividing line between tax evasion and mere tax avoidance. First, the court accepted

" Ci ted in R. v. Fogazzi, [1992] 2 C.T.C. 321, per Hartt J., at pp. 331-332 (Ont. Gen. Div.).

54 (1996), 108 Man. R. (2d) 96, [1996]2 C.T.C. 201, 96 D.T.C. 6265 (Q.B.). See also R. v. Derose,supra, note 19; Kleysen v. Canada (Attorney General), 2001 MBQB 205, [2001] 11 W.W.R. 667,159 Man. R. (2d) 17, [2001] M.J. No. 350 (Man. Q.13.); R. v. Anderson, supra, note 19; and R. v.Vermette, supra, note 19.

(411.6.\ 55 Ibid., at p. 204 per Schwartz J.

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the taxpayers' evidence that they were constantly involved with the CRA in resolvinga large number of tax issues that arose out of their business operations. The courtaccepted their evidence that they believed that the CRA would carefully examinethe transactions with the Bahamian corporation and take issue with them i f theyfound them questionable. Second, the court noted that the individual accused hadnamed the Bahamian corporation "Carib Sales and Rentals Ltd." The court held thatthe use of the name "Carib" with all of its natural connotation of offshore tax havenswas evidence that there was no intention on the part of the individual accused toconceal the nature of the questioned transactions from the CRA.

The Ontario Court of Appeal reached a different conclusion in the case of R. v.Fogazzi.56 T h e re t he a cc us ed was a ct iv el y engaged in a real estate investment busi-

ness and misappropriated funds received from investors. The Court held that suchfunds clearly had the character of income:

The agreed statement of facts set forth that the respondent was engaged in the realestate investment business both as an active investor and consultant in real estateinvestment. On January 9, 1979 he received $240,000 U.S. funds from two investorsfor the express purpose of investing those funds ($285,264 Can.) on their behalf inNorth American real estate. The funds were subsequently misappropriated in 1979by the respondent.

We are of the view that the funds in question were received by the respondent duringthe normal course of the operation of his investment business and that although heused the funds for a purpose not authorized by the investors, the dishonest act onhis part took place in connection with the operation of his business. It related to fundsprovided to him by investors for the purposes of his business and the receipt andmisappropriation of the business funds were inseparably connected with his invest-ment and consulting business. The fact that the agreed statement of facts disclosedonly one act of dishonesty on the part of the respondent does not in any way detractfrom characterizing the misappropriated funds as taxable income. They were fundsreceived and misappropriated during the conduct of an ongoing business. We con-clude that the funds constituted taxable income from a business within the meaningof subsection 9(1) of the Income Tax Act.57The decisions in Redpath and Burnett are difficult to completely reconcile with

that in Fogazzi. The gist of the distinction that the courts seem to make is that if thefunds sought to be taxed were dishonestly misappropriated, the accused cannot relyupon the civil characterization of those funds had the business" been conducted

56 [1992] 2 C.T.C. 321, 92 D.T.C. 6421 (Ont. Gen. Div.), reversed [1993] 2 C.T.C. 319, 80 C.C.C.(3d) 572,93 D.T.C. 5183, 63 O.A.C. 184 (Ont. C.A.).

Ibid., per Lacourciere, Goodman and Doherty ILA., at pp. 320-321 (C.T.C.).

" O r , as in the case of R. v. Poynton, [1972] 3 O.R. 727, [1972] C.T.C. 411,9 C.C.C. (2d) 32, 29D.L.R. (3d) 389, 72 D.T.C. 6329 (Ont. C.A.), the employment relationship. Cited in Johnston v.

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Mens Rea 4 - 2 5

honestly. The public policy behind the Fogazzi decision is evident. From the view-point of civil tax liability, it would seem that the ratio in Fogazzi is that once therehas been a clear criminal appropriation of funds, the taxpayer cannot rely upon pre-existing contractual rights to those funds that, had they been respected, would havedelayed or avoided the incidence of taxation. The more difficult, and as yet unan-swered, question is whether an appropriation of funds that falls short of criminalmisconduct will similarly disentitle a taxpayer from relying upon the Kenneth B.S.Robertson principle and similar rules for delaying or avoiding the incidence oftaxation.

In contrast to the situations in Redpath and Burnett, the decision in R. v. Myers"illustrates how a "sham" can transcend the boundaries of a civil dispute and emergeas a fraudulent act of tax evasion. The individual accused, along with a Swisscorporation known as Inter Publishing Company Ltd., was charged with evading taxon $1,400,000 during the years 1969-1974. Myers was a financial pundit whopublished a series of publications giving investment advice, primarily aimed at theAmerican market. He lived in Calgary and all of the writing, printing and distributionof those publications was done out of Calgary. In 1969 he purported to set up anarrangement where all of the assets of his publishing venture were sold to a Liech-tenstein anstalt, Euro-American Publishing Establishment, which in turn licensed itsrights to Inter Publishing, a Swiss corporation. The evidence of fraud was over-whelming. Myers had been advised by his lawyer and his accountant that if he wereto set up such a structure, controlled by him from Canada, it would be subject toCanadian tax. Although Myers denied owning either Euro-American or Inter Pub-lishing, the Crown demonstrated conclusively that he did indeed own both entities;the proof included a draft of a will dictated by Myers to his secretary, purporting todispose of the shares of Euro-American. In addition to everything else, the Crownrelied on passages from various publications written by Myers (but only for Americaninvestors) in which he openly counselled tax schemes remarkably similar to the oneof which he was accused.

At trial, Inter Publishing was convicted but Myers was acquitted. The Crownappealed the acquittal to the District Court, with Inter Publishing appealing theconviction. On appeal, the acquittal was reversed and a conviction entered; InterPublishing's appeal was dismissed.

Canada, [2002] T.C.J. No. 124; So-ca./Ian v. R. (2000), 7 B.L.R. (3d) 59, [2000] 3 C.T.C. 2863, 200D.T.C. 2308, [2000] T.C.J. No. 408 (T.C.C.); Bure v. R., 2000 D.T.C. 1507, [2000] 1 C.T.C. 2407,[1999] T.C.J. No.769 (T.C.C.); Kennedy v. R., [1999] 4 C.T.C. 2277, [1999IT.C.J. No. 401 (T.C.C.);and Peek v. R., 2007 CarswellNat 610, 2007 CarswellNat 6086, 2007 TCC 152, 2007 CCI 152,[2007] 3 C.T.C. 2355, 2007D.T.C. 602 (Eng.) (T.C.C.).

[1977] C.T.C. 507,3 A.R. 605,77 D.T.C. 5278 (Alta. Dist. Ct.).

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Where a practice is widely thought to be legitimate, this may also go to negatemens rea, even i f there is significant doubt about its efficacy from a civil point ofview. In the case of R. v. Armstrong,6" t h e a c c u s e d h a d m a d e a s u b s t a n t ia l p r o f it i n

1966 in the promotion of some mining stock. He wanted to invest that profit in astock portfolio and sought legal and accounting advice. He was advised to use aBahamian corporation which would be half owned by himself and half owned byone of his business associates who was also a resident of Canada. The directors ofthe corporation were residents of the Bahamas. The evidence was that all instructionsto trade in stock were given by the Bahamian directors; although the accused advisedon trades, he did not control the management of the corporation. The expert account-ing evidence was that the use of offshore corporations by Canadian residents wasvery widespread and regarded as perfectly legal. One accountant testified that therewere probably one hundred such companies used by his clients alone, and of themthis was the only instance of a prosecution. As was the case in Redpath,6' t h e C r o w nrelied on cases such as Dominion Bridge.62 T h e a c c u s e d w a s a c q u i t t e d a t t r i a l a n d

the acquittal was upheld on appeal. After reviewing the facts at some length, theappeal judge held, at pages 22-23 ("Reasons for Judgment") (W.C.B.):

The learned trial judge was quite justified in his finding that there was nothing unlawfulabout conducting business through off-shore corporations, particularly when this wasdone on assurances from independent professional advisors who gave specific adviceas to what must be done.

It is difficult to distinguish between legitimate planning and unacceptable avoid-ance because the boundaries between the two continue to shift. In recent years, anumber of decisions of the Federal Court of Appeal seemed to have shifted theboundary strongly in favour of the CRA. These cases were all subsequently appealedto the Supreme Court of Canada, with the appeal court decision being overturned ineach case. In the process, the Supreme Court has shifted the boundary back to aposition that is more favourable to taxpayers. The comments of the Supreme Courtin regard to tax avoidance in three 1998 decisions are particularly relevant.63

6') (1977), 2 W.C.B. 113 (B.C. Co. Ct.).

61 See note 45, supra.

62 See note 48, supra.

6' G . Kent Davison, "Avoidance, Evasion, and the Problem Client" in Report of Proceedings of theFiftieth Tax Conference, 1998 Conference Report (Toronto: Canada Tax Foundation, 1999), 7:1, at7:5.

(Tax Evasion) (Rel. 2010 — 1)

Overview  of  R.  v.  Burnett  –  Case  Follows  Logic  of  R.  v.  Redpath  Industries  –  Judge  Hartt  says  that  he  could  not  be  asked  by  Crown  to  second  guess  the  Tax  Court  –  mentioned  in  Tax  Evasion  by  Innes,  Cuervo-­Lorens,  and  Fleming.  Taxpayers  here  argue  that  they  initially  received  promissory  notes,  which  are  not  income,  as  they  could  not  spend  a  promissory  note.  When  years  later  the  promissory  notes  were  converted  into  money  taxpayers  reported  the  converted  money  as  income.  Despite  that,  Revenue  Canada  charged  taxpayers  with  tax  evasion.      

R. v. Burnett

Between Her Majesty The Queen, and

Joseph Burnett and Burnac Corporation, formerly Ruthbern Holdings Limited

[1991] O.J. No. 2259

Ontario Court of Justice - General Division Toronto, Ontario

Hartt J.

April 12, 1991

(660 pp. – 260 pages)

Criminal law -- Tax evasion -- Failure to report income -- False and deceptive statements -- Elements of offence -- Mens rea -- Actus reus -- Business income -- Fees or commissions -- Income, what constitutes -- Quality of income test -- Shareholder loans -- Promissory notes as income Ownership of money, determination of -- Reporting of income, timing. The accused were charged with several counts of tax evasion. The accused B was involved in arranging large construction loans secured by mortgages on the real estate. The accused R was a corporation controlled by B which financed the loans in part. Arranging fees or brokerage commissions were paid by the borrowers to B or to one of his companies. Most of the monies encompassed by the indictment were fees or commissions received by B or R in connection with these loans. The Crown alleged that the accused failed to report these fees as income when earned. A substantial part of the monies was reported by the accused several years later. The accused did not contradict any of the evidence relied on by the Crown but argued that the monies in question were not the property of the accused at the time alleged and were thus not income under the Income Tax Act. The Crown alleged that these monies were falsely represented in the

books and records as being owned by others or being subject to a fictitious obligation to others, while the accused had, at all times, unrestricted use of the monies.

HELD: The accused were acquitted on all counts. The prosecution must prove that the monies received were in fact income for the particular year alleged, that B knew that they were income for that year and that he wilfully failed to declare them as such with the intention to deceive. Based on the evidence of the accused and the defence witnesses, the court concluded that the accused raised a reasonable doubt that the monies were not taxable as income in the years alleged by the Crown. Much of the accused's testimony was supported by other witnesses and not shaken under cross-examination. The court did not accept the Crown's position that the testimony was fabricated and that it should be ignored.  No counsel mentioned.    

A. OVERVIEW Joseph Burnett and Ruthbern Holdings Ltd., a corporation over which Burnett

admittedly had absolute control, are charged with wilfully evading payment of taxes, contrary to paragraph 239(1)(d) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended. Burnett is also charged with making false and deceptive statements contrary to paragraph 239(1)(a) of the Income Tax Act. It is the general allegation of the Crown that 54.7 million of undeclared income was earned by the accused in the years 1971 to 1974 resulting in evasion of $2.1 million in taxes. None of the income in question was reported by Burnett or by Ruthbern Holdings Ltd. when according to the Crown's theory it was earned and received. A substantial part of the alleged income in question was reported by the accused some one, two or three years after the Crown alleges it was received and earned, but before the laying of the indictment.  

Despite the rather extensive, and in some instances at least, cogent viva voce evidence called by the defence, the prosecution called no evidence in reply to rebut the major themes of the defence position. It is also a matter of considerable significance that the key person in each of the three alleged schemes of evasion, namely, John Pullman, Frederick Gale and Zoltan Roth, were not called at any time to give evidence, nor were several other persons who could have made substantial contributions to a clarification of the essential issues in dispute. After years of trial and sometimes bitter confrontation where virtually every piece of evidence was vigorously contested, it now turns out there is substantial agreement on many of the underlying factual and legal issues. ELEMENTS OF THE OFFENCE OF TAX EVASION (page 213 of 260)

The criminal offence of tax evasion is set out in s. 239 of the Income Tax Act, S.C. 1970-71-72, c. 63 as amended.

Although the offence created by the section is general in nature and may be committed in a variety of ways, in the case at bar the onus falls on the prosecution to establish to the exclusion of any reasonable doubt that the monies received were in fact income of the accused for the particular year alleged, that Burnett knew that they were income for that year and that he wilfully failed to declare them as such with the intention to deceive. Basically the same issues are raised by the offence of making false or deceptive statements in a return. The prosecution must prove that the returns were false to the knowledge of the accused, that is, that he failed to disclose income he knew to be properly reportable and taxable in that year.

It is the function of the criminal court to determine actus reus and mens rea. It is only tangentially concerned with issues of income tax law. The actus reus of evasion is the fact of income tax, to the knowledge of the accused, properly owing for a given taxation period, but not being paid due to improper reporting of income, and/or impermissible methods of computing taxation on income which has been reported.

In a tax evasion prosecution the Crown must establish a tax law foundation upon which the criminal law can operate. In the instant case the prosecution must prove that income tax law operates so as to require reporting of the various receipts as income amounts in the specified year. The question of the existence of "income" and therefore its disclosure derives from the provisions of the Income Tax Act as interpreted by the courts.

A charge of wilful tax evasion cannot be maintained in the absence of mens rea. The question of the mental element of an evasion charge is an intriguing one. A very fine distinction exists between the concept of legitimate avoidance, and criminal evasion of tax. To speak of this distinction is trite, however it is an exceedingly difficult one to draw. This is because an individual can and will "wilfully" embark upon a course of action aimed at reducing his tax burden in an effort to legitimately avoid payment of taxes. Similarly, an evader will "wilfully" embark upon a course of action aimed at reducing his tax burden in an effort to illegitimately evade payment of taxes. In both legitimate and illegitimate circumstances therefore, there exists a mental state of volition, planning and appreciation of what is being implemented.

It appears therefore that the only real distinguishing characteristic between the mental element of avoidance and mens rea in evasion, is whether the appreciation that the planned course of action is, or is not, within the limits of the law. In a charge of evasion wilfulness denotes a specific intent to violate the statute.

It is therefore essential to consider what these legal limits are. As will be seen, this in itself is an exercise fraught with arcane complexities, and most importantly, a surprisingly wide degree of subjectivity.

INSTITUTIONAL FRAMEWORK GOVERNING TAX EVASION (page 214 of 260) Tax evasion charges operate within a particular framework of law and institutions.

The most relevant aspects of this framework are the effect of income tax law itself on the

criminal prosecution, and secondly, the constitutional rules which govern the process. The former is particularly relevant to the resolution of fundamental factual issues while the latter concerns the relative roles to be played by the separate judicial jurisdictions in Canada, and therefore, inter alia, the applicable jurisprudence.

1. Structure of the I.T.A.

The structure of the Income Tax Act itself is very important to this case since the resolution of the element of actus reus hinges upon the question of whether there existed "income" whose disclosure for taxation purposes was required by law. Of particular importance is the manner in which "income" is derived.

It should be noted at the outset, that it is necessary to disabuse oneself of the normal, pedestrian connotations, which associate to the word "income". "Income" in the context of Income Tax law is a term of art, which has diverse, and multiple meanings.

The safest definition to be given to the term "income" is, simply, "that upon which we are obliged to pay tax". This is also however, probably the least helpful definition which could be ascribed to it. The Act's approach to defining income is neither qualitative as in a simple dictionary definition, nor is it purely an economic concept based upon relative increases in economic power. The Act adopts a far more pragmatic approach to defining income. The actual definition is the sum total of rules and mechanics which govern the scope of the quantum upon which we pay income tax. In contrast to the plain and simplistic meaning ascribed to the term by laymen, dictionaries or economic theorists, the technicalities are prodigious.

The Income Tax Act determines income in a two-stage process. First, it prescribes the formula or equation which, when computed, provides "income" for taxation purposes. This is done by means of section 3 of the Act. Krishna, V. in The Fundamentals of Canadian Income Tax, 2d Ed. Carswell, states at p. V.2:

"Section 3 contains the basic rules for determining a taxpayer's income for a taxation year for the purposes of Part I of the Act. This section sets out the separate sources of income and losses that are aggregated in determining income."

Second, it provides at least four principal "sources" of income which are the component numbers to be plugged into this equation. The source definitions themselves prescribe various inclusions and deductions whereby income from the source is derived. It is important to note that section 3 alone is bereft of any actual definition of these component income items. The Income sources are characterized by the Act as follows: sections 5 to 8: Income whose source is an Office or Employment, sections 9 to 37.1: Income whose source is Business or Property, sections 38 to 55: income whose source is taxable capital gains, and sections 56 to 59.1: "other" source income. The distinct character of these separate sources has led to different rules of computation and thereby, different "definitions" to the concept of "income".

This case focuses upon the definition contained in the second of the four sources described above. That is to say income whose source is business or property.

2. Constitutional Aspects of a Tax Evasion Charge

There exists in Canada a specific conferral of judicial jurisdiction to the Federal Court (I.T.A, s. 172-180), and Tax Court (I.T.A, s. 169, 170) to determine issues of a civil nature in the area of Income Tax. This conferral is constitutional in that it is based upon specific legislative authority within the Constitution Act, 1867; section 91(3) The Federal Taxation power, as well as the power to provide for the better administration of the laws of Canada under section 101 of the Constitution Act, 1867. There exists a clear statutory grant of exclusive jurisdiction to the Federal and Tax Courts by the federal Parliament. Moreover, there exists a body of federal law which nourishes this statutory grant of jurisdiction to better administer these laws of Canada.

At the same time, it is clear that the Supreme Court of Ontario (now Ontario Court of Justice - General Division), a Superior Court of general and inherent jurisdiction is the correct forum to deal with an evasion charge in that it is constitutionally capable of dealing with what is essentially a criminal prosecution. It is well settled in light of Knox Contracting Ltd. v. The Queen (1990) 58 C.C.C. (3d) 65 (S.C.C.) that section 91(27) the power to govern Criminal Law and procedure is the constitutional source of section 239 of the I.T.A., and that this establishes evasion to be a Criminal matter. I note however that pursuant to the Federal Court Act, R.S.C. 1985 Ch. F-7, the Federal Court which is also constituted as a Superior Court of record, also enjoys a conferral of Criminal Jurisdiction

3. The Court of law, equity and admiralty in and for Canada now existing under the name of the Federal Court of Canada is hereby continued as an additional court for the better administration of the laws of Canada and shall continue to be a superior court of record having civil and criminal jurisdiction. (Emphasis added)

The Federal Court has never been called upon to exercise this jurisdiction and it is not settled whether, given the stringent test for Federal Court Jurisdiction restated in ITO-Int. Terminal Operators Ltd v. Miida Electronics Inc. [1986] 1 S.C.R. 752., that it is jurisdictionally capable of dealing with such a criminal case. It appears to be a dormant jurisdiction as Parliament has not deemed it necessary for the better administration of the laws of Canada, to vest that national Court with the requisite jurisdiction to deal with tax evasion, as it presently deals with Civil matters of income tax.

The bifurcation in judicial jurisdiction results from the two distinct legal contexts in which the Income Tax Act operates. That is, in the realm of determining issues of taxation; and in the realm of deciding questions of criminal liability.

In the instant case, the resolution of the issue of actus reus is dependent upon whether the money upon which the tax was allegedly owed was income of the accused. Thus, in coming to this determination on actus reus, this court must have regard to the relevant income tax law. This law, by and large, comes from the Federal Court and Tax Court. To hold otherwise on this point of law implies that an individual, charged with evasion, could conceivably be found guilty of tax evasion by a criminal court and at the same time not owe any tax under a different definition of income applied by the tax court.

This is clearly an anomaly to be avoided, and therefore, the jurisdictional cleavage described above must be respected.

The question of the jurisdiction of the two systems of courts assumes much more than academic significance because of the opposing arguments presented here. For its proposition of law relating to the concept of income derived from business, the defence relies primarily on the judgment of the Exchequer Court in Kenneth B.S. Robertson v. M.N.R., [1944] C.T.C. 75. The prosecution in presenting its case, relies upon a definition of income expressed by the Ontario Court of Appeal in Poynton v. The Queen (1972) 72 D.T.C. 6329. Mr. Bloom argues that the Court of Appeal in Poynton laid down a general definition of income, regardless of the source from which it was derived, which at the very least qualified the Robertson rule, and is "the law irrespective of whether the matter is civil or criminal" (374-28). The Crown specifically agreed with the defence that a receipt is not income unless it has the Quality of Income, but argued that the test laid down in Poynton obviates that which is found in Robertson.

The Poynton decision, being a judgment of the Ontario Court of Appeal is, of course, authority binding upon me for the proposition for which it stands. I am not convinced, however, that it is on its facts applicable to this case, nor am I prepared to accept the Crown's formulation of the ratio decidendi of the decision.

In Poynton the Ontario Court of Appeal, on an appeal from an acquittal from a charge of tax evasion, found that money obtained illegally, i.e. money stolen from an employer, was at all times impressed with a constructive trust for repayment to its legal owner. It was held by the Court of Appeal that the stolen money was income, taxable in the hands of the thief despite the very real contingency which attached to the money that it could be claimed by the legal owner. In coming to this decision, the Court of Appeal appears to offer obiter dicta to the effect that the Quality of Income test (first enunciated by the Exchequer Court in Robertson), should be limited to profits which were not used and enjoyed by the holder in breach of his legal or equitable obligations. That is to say that if an individual appropriates monies or property to his own use then those monies or property have the necessary "Quality of Income" to bear an obligation to be reported to the taxation authority despite that the amounts are impressed with a contingent obligation to be returned or divested.

Two essential problems arise from the Crown's interpretation of Poynton. First, Poynton is readily distinguishable on its facts from the instant case. Unlike the case at bar, where the receipts are clearly from a source contemplated under section 9(1) of the Act, the monies acquired by the accused in Poynton were something other than profits from a business or property. They appear to have emanated from his office of employment or were some form of benefit associated with "other" source income. The Court of Appeal did not deal with that case on the basis of business or property source income. Nor did the Court of Appeal express an intention to apply this standard across the board, to all sources of income. As a result, I am not convinced that the Robertson rule of "Quality of Income" had anything to do with deferral of income of the nature of that which is considered in the Poynton case.

Second, even if the Crown succeeds in its argument that the Robertson rule does not apply to "business profits" which are illegally obtained, there is no allegation nor any

evidence that the amounts at issue in this prosecution were likewise, illegally obtained. Poynton may qualify Robertson in the limited context of dealing with illegally gained income from the source contemplated by that case. However, bearing in mind the limited role of a Criminal Court in determining issues of taxation, and the constitutional constraints under which a Criminal Court operates, I cannot see how it can extend beyond those limited circumstances. I am reinforced in this conclusion by the currency of the orthodoxy of the Robertson rule in recent tax cases and appeals at the Federal Court (see for example, Foothills Pipelines (Yukon) Ltd. v. M.N.R. [1990] F.C.J. No. 925 (F.C.A.), or Burrard Yarrows Corp. v. Canada [1986] F.C.J. No. 504 Court file No. T-637-84 Action No. A-306-90). As a result, I prefer to limit the effect of Poynton to its particular facts, and I hold that whatever the ratio decidendi for which it stands, it cannot impair the jurisprudence which continues to govern the determination of issues of taxation in courts who are beyond the ambit of stare decisis emanating from a Superior Court of any Province, or for that matter a Court of Appeal. To hold otherwise would invite the very real danger of the two parallel courts moving in different directions on points of Income Tax law. This is particularly invidious in view of the fact that this Court does not deal on a national and unitary basis with issues of taxation.

Similarly, the Gagnon decision is distinguishable from the instant case in that it does not deal with business or property income under section 9(1). The Gagnon case, a decision of Beetz J., perceptively points out that the Federal Court of Appeal was in error when it held in The Queen v. Pascoe [1976] 1 F.C. 372 that the Robertson rule could attach to income whose source is in the nature of an "allowance". In the absence of any express application of Beetz J.'s formulation of the Robertson rule, which in essence echoes the Crown's view of Poynton, I cannot agree that it in any way impairs the scope of the Robertson formulation of "quality of income" when dealing with business profits. No case which has been presented to this Court appears to have the effect of so limiting the rule in Robertson with respect to income whose genesis is owed to profits from business or property. In the result, save for any specific statutory proscription, it appears that the defence may rely upon the Robertson formulation of Quality of Income.

QUALITY OF INCOME: "INCOME" AND THE CONCEPT OF "PROFIT" (Page 217)

The majority of the particularized allegations requires that this decision come to grips with the concept of "income" and how exactly it is defined for business and property source income. This is because the defence argues, by and large, that actus reus has not been established.

Subsection 9(1) states that:

Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for that year". (emphasis added)

The reliance upon the term "profit" is central to the definition of income from a business or property. Unlike the other sources of income contemplated by the Act, subsection 9(1)

applies this qualifying mechanism to putative income amounts before they can be determined to be income for the purposes of tax. Ultimately, before an amount can be determined to be profit, it must be analyzed according to business and accountancy standards.

In 1944, when Robertson was decided, section 3 of the Income War Tax Act ch. 97, R.S.C. 1927, as amended, attempted to define the meaning of "income" in a comprehensive manner. As does its contemporary counterpart, it placed central importance upon the word "profit" in its more elaborate formulation of the definition of "income" from a business or property.

PART I TAXABLE INCOME.

Taxable Income Defined

3. For the purposes of this Act, "income" means the annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary, or other fixed amount, or unascertained as being fees or emoluments,or as being profits from a trade or commercial or financial or other business or calling, directly or indirectly received by a person from any office or employment, or from any profession or calling, or from any trade, manufacture or business, as the case may be whether derived from sources within Canada or elsewhere; and shall include the interest, dividends or profits directly or indirectly received from money at interest upon any security or without security, or from stocks, or from any other investment, and, whether such gains or profits are divided or distributed or not, an also the annual profit or gain from any other source including (thereafter following a list of specific sources...)(emphasis added)

In the Robertson case, this statutory formulation was determined to have specific effects upon the quality of income, and in particular, when such "profits" should be recognized. The Court held that before an amount could be income, it had to be profit.

"...can an amount in a taxpayer's hands be regarded as an item of profit or gain from his business, as long as he holds it subject to specific and unfulfilled conditions and his right to retain it and apply it to his own use has not yet accrued, and may never accrue?" (at page 91, (emphasis added)

By so doing, the Court was importing into the Act, reliance upon business and accounting practice to determine the meaning of the word profit and hence, "income". Generally Accepted Accounting Principles (GAAP) are now the initial defining mechanism of business and property income. Since businesses have traditionally relied upon accrual accounting methods, recognition of a business profit, and hence business "income" for Income Tax Act purposes is similarly determined on an accrual basis, subject of course, to specific provisions which displace the rule. This proposition appears to be largely unimpaired by subsequent jurisprudence. The present definition of "income" in so far as it relies upon the meaning of the word "profit" is consonant with this former incarnation.

The Robertson case is therefore very important to the defence. It establishes the basis of the defence's argument that most of the amounts in question, alleged by the Crown to have been hidden from the Department of National Revenue, were without the essential "quality of income" to be legally "income" in the hands of the accused.

This case deserves to be considered in some further detail. In Robertson the taxpayer attempted to deduct from its declared income, amounts which it placed, for particular accounting reasons, into reserve accounts. These reserves were segregated amounts which were subject to possible distribution at the year end for the purpose of equalizing payments to various parties (the taxpayer included) who were associated with the taxpayer's business. It was the nature of the contractual arrangements between the parties that necessitated a future reckoning and settling of accounts to be done at yearly intervals. Thus, contingent upon future events, the parties (the taxpayer included) could expect to pay or receive amounts in excess of certain minimum amounts which were not subject to any divestiture.

The Minister disallowed these deductions and included the reserves in the calculation of the taxpayer's taxable income. The taxpayer appealed the reassessment, claiming that the reserves were prudent accounting measures reflecting the reasonable need to segregate the unearned receipts which should not be taxable as income until the periodic accounting between the parties had been completed.

The Court divided the victory between the parties by disallowing the reserves, but granting that these same amounts had not yet achieved the necessary "quality of income" to even be included in the aggregate of the taxpayer's income for tax purposes. The department of National Revenue was left with a rather hollow victory when the implications of this decision are considered. The amounts clearly cannot be taxed until they qualify as income. The limits of such deferral appear to be nebulous at best. An agreement carefully drafted with the purpose of creating a deferral mechanism of the kind contemplated in Robertson has enormous potential to stave off taxation.

The indictment in this prosecution specifically alleges the modus of evasion as being failure to disclose income. Thus, essential to the determination of this evasion charge is how the tax law impacts upon the duty to disclose. If an amount is not income, there exist no obligation to disclose it's receipt.

Parliament appears to have put its mind to the problem presented by Robertson. Into the Act was inserted a provision which on its face deals with such contingent amounts. A plain reading of subparagraph 12(1)(a)(i) suggests that unearned receipts are to be recognized as income within the meaning of the Income Tax Act on a "cash" basis, and are thus to be included in "income". It is puzzling how such plain language as exists in this provision has been distinguished by judicial consideration. Consider the provision:

12(1) Amounts to be included as income from business or property.-There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable: (a) services, etc., to be rendered.-any amount

received by the taxpayer in the year in the course of a business (i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or (ii) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of articles in or by means of which goods were delivered to a customer; (emphasis added)

The defence contends that subsection 12(1) does not apply to the amounts at issue in this prosecution. It points to case law which it argues eclipses the applicability of subsection 12(1). It contends that the Quality of Income test first enunciated in Robertson continues to apply in spite of the statutorily prescribed requirement of including in business income receipts not yet earned.

The defence points to Zoel Chicione Inc. v. The Queen (1986) 86 DTC 6251 (F.C.T.D.), (appeal dismissed The Queen v. Zoel Chicione Inc. [1987] 2CTC 240 (F.C.A.)) as standing for the proposition that in circumstances such as those at bar, subsection 12(1)(a) has no applicability. In that case, an amount received by, and subject to the use of a taxpayer was held not to have the necessary Quality of Income. The Court made the legal finding that the receipt was subject not to "cash based", but to accrual based recognition. At p. 6253:

"From its inception up to the present, the plaintiff has prepared its financial statements and reported its income on the accrual basis, which has meant that its income was reported not when it was received but when it was receivable. This accrual accounting has been recognized by Revenue Canada in audits and approved."

Subsection 12(1) is in no way commented upon in that case. The Court goes on to assume that the receipt would properly be dealt with on an accrual basis. That case was determined upon two theories of why the Quality of Income was not achieved. First, the decision determines whether the received amount was a "receivable". In reasoning that as such, an amount receivable must be impressed with (1) a right to compensation, and (2) a binding agreement between the parties or a judgment fixing the amount. The facts led the Court to conclude that the timing of the compensation was not clearly within the taxation period which the Crown maintained. Thus, the amount was not "receivable", (i.e. it had not accrued).

The second theory disclaiming the amount as a receipt echoes the Robertson test: p. 6255:

Another theory is that of the "absolute right". Can a taxpayer regard the amount received as his own, without any limit as to his enjoyment or disposal of it? - or are there still certain preconditions to be met? The evidence established that the advances received by the plaintiff from the sale of the shopping centre were not final and

absolute amounts. The plaintiff was of course free to spend these advances as he wished, but at his own risk because the final audits were still to come. The final adjustments made in 1975 could have been substantiated, since they included in one calculation the profit from the shopping centre and the profits on its sale. The total amount could result in a surplus or deficit in terms of the advances already made to the plaintiff."

Thus, the Court held the amount not to be income.

In The Queen v. Imperial General Properties Ltd. [1985] 1 C.T.C. 40 (F.C.A.), it was held that (then) section 85B(1)(a)(i) (sub number 12(1)(a)(i)) of the Act did not supersede the Quality of Income test where a receipt could be characterized as being a "deposit". As a result of this case it appears that the determination of when a deposit becomes business and property "profit", and thereby "income", continues to be subject to GAAP, and accrual based recognition of income.

The result in Imperial General Properties has led editorialists to conclude that the ostensible purpose of 12(1), to overcome the Robertson rule, has been placed in some doubt by this case. Accordingly, the Canada Tax Service, Stikeman (DeBoo, 1990, Don Mills) p. 12-12 states:

"...By specific legislation (i.e. 12(1)(a)) amounts which might be excluded from income on the (Robertson) principle are now included in income (subject always to the possibility that the taxpayer might be entitled to deduct a reserve under subsection 20(1) in respect of the unearned portion of such income). In practice, however, it is understood that receipts which are within the general contemplation of the Kenneth B.S. Robertson Limited case and which can be said to have been more or less formally received in trust, will not be brought into charge by way of this provision."

Presumably this provides some guidance to accountants but a lawyer would be inclined to ask "understood by whom?", what is meant by "being within the general contemplation of the Robertson case and what is "more or less in the nature of a trust?" While this passage can hardly be said to be binding, nor for that matter particularly convincing, it tends to create even greater ambiguity as to whether such receipts as those contemplated in this prosecution, are income. This is to say nothing of the effect that such conventional wisdom would have on the mental state of an individual seeking legitimate means by which to defer recognition of income in order to minimize his tax bill.

The rather startling consequences which flow from these cases seem to be lost to all but those who practice and move in the arcane world of tax law. Assuming that the rule is indeed as enunciated in Robertson, then it follows that a taxpayer who is given custody of money or property to which attaches some form of contingency "contractual or otherwise", and at the same time enjoys the right to use the funds, then it appears that such "income" falls to the holder's enjoyment without entering into the taxation equation until the contingency lapses. It appears as a result that a proper course of action would be that the taxpayer not even report the contingent sum, as it is not income.

CONTINGENCIES Contingencies of the type contemplated under the Robertson rule are treated very

differently under the income tax law of the United States. In that country, there appears to have developed a well formulated statutory doctrine of "Claim of Right" which deals with business profits in a more comprehensive way. Under this approach, receipts, be they "profits" or not, are to be included in income and are thereby subject to disclosure. They are subject to a deduction at a later time when the contingent loss crystallizes. By contrast, Canada's income tax law does not seem to have developed in the same direction, or at least to the same extent.

It is ironic that the U.S. claim of right law finds its genesis in Brown v. Helvering (1933) 291 US 193; the very same authority upon which Robertson was largely decided. Unlike the result in Robertson, in Brown v. Helvering the money at issue was held to be income. Indeed, the seminal passage in Brandeis J.'s reasons upon which the Canadian formulation was based clearly establishes that this decision moved in a direction 180 degrees from that of Robertson.

"The overriding commissions were gross income of the year in which they were receivable. As to each such commission there arose the obligation - a contingent liability - to return a proportionate part in case of cancellation. But the mere fact that some portion of it might have to be refunded in some future year in the event of cancellation or reinsurance did not affect its quality as income."(emphasis added) Brown v. Helvering at 199.

The Court in Robertson derived inspiration and guidance from these and other words in Brown v. Helvering to conclude that the test of Quality of Income is:

"Is his right to it absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment? To put it another way, can an amount in a taxpayer's hands be regarded as an item of profit or gain from his business, as long as he holds it subject to specific and unfulfilled conditions and his right to retain it and apply it to his own use has not yet accrued, and may never accrue?"

Canada's income tax law appears to be moving in the direction of "claim of right" in that subsection 12(1)(a) purports to include such receipts in income, and subsection 20(1)(m) provides a reciprocal deduction. However, as explained above, the Canadian version of the doctrine does not appear to have taken root to such an extent that Robertson has been overruled. Thus, in order to resolve this prosecution with respect to the items which are defended on the basis of quality of income, it is necessary to determine whether in fact the contingencies are substantial and applicable. It is recognized that in large part this indicates the triumph of form over substance. This however appears to be wholly within the nature and context of the law as stated.

The Federal Court Trial Division, in Imperial General Properties held inter alia that the conditions in that case were not true conditions precedent, and therefore, the deferral provided under Robertson was not applicable. That is to say that the only contingency

contemplated by the Robertson rule is a condition precedent: a condition upon the occurrence of which an agreement would take effect. Typically, such a condition would be beyond waiver by either party. The Federal Court of Appeal approved this approach in determining the applicability of Robertson, but held that at least some of the obligations were true conditions precedent. Following this rationale it might have been argued that the contingencies in this prosecution were not conditions precedent but conditions subsequent. The Prosecution did not make any submissions in this regard.

The defence, in oral submissions, suggested that the potency of the Robertson contingency rule would also comprehend the mere possibility of a loss being suffered on a loan funded by Burnett or one of his corporate entities. Specifically, this argument would apply to any item where the fees generated and received by Burnett or his entities are eclipsed by the amount of money loaned by a Burnett entity. The argument is that until the loan is repaid in full, a profit, and hence income, could not be discerned. While this result strains credulity in the face of paragraph 12(1)(a), given General Imperial Properties and the stated conventional wisdom of editorial Income Tax Services, at the very least it does bear consideration as a live issue of tax law. It deserves to be re-emphasized however, that a Criminal Court can only operate upon a foundation of certainty above and beyond this kind of question.

SHAREHOLDERS LOANS (Page 222 of 260) The primary defence which arises in relation to the Meipoom transaction has to do

with the Income Tax Act's treatment of Shareholder loans. Simply put, this is a mechanism within the Act which permits post facto characterization of money or property received by a shareholder from the corporation to be a loan. The Crown accepted the defence's formulation of the law in this respect, although it disputed the applicability of this law to the facts at bar. The Court finds no fault with the law as agreed to by the parties in this regard.

Both the Courts as well as the Minister of National Revenue have recognized that advances made to shareholders may be shareholder loans regardless of the form in which the parties advance the monies, and that whether this advance constitutes a shareholder loan is a question of fact. Furthermore, the fact that the taxpayer and the corporation do not document the monies advanced as a shareholder loan does not affect the determination as to whether the monies advanced are in fact and in law a shareholder loan.

Taxpayers generally are not required to include monies received pursuant to a loan agreement in the computation of the taxable income; however, Section 15(2) of the Act specifically provides that shareholders are to include loans they receive qua shareholders in the computation of their taxable income.

RECOGNITION OF PROMISSORY NOTES AS INCOME (Page 223 of 260) The series of accusations which are based upon the $75,000.00 transaction with

Ignat Kaneff begs certain legal questions about the effect of promissory notes on recognition of income.

It appears to be common ground that in order for a promissory note to constitute income for tax purposes, it must be included within the net cast by section 76 of the Act:

"(1) Where a person has received a security or other right or a certificate of indebtedness or other evidence of indebtedness wholly or partially as, in lieu of payment of, or in satisfaction of, a debt that was then payable, the amount of which debt would be included in computing his income if it had been paid, the value of the security, right or indebtedness or the applicable portion thereof shall, notwithstanding the form or legal effect of the transaction, be included in computing his income for the taxation year in which it was received.

(2) Idem. Where a security or other right or a certificate of indebtedness or

other evidence of indebtedness has been received by a person wholly or partially as, in lieu of payment of, or in satisfaction of, a debt before the debt was payable, but was not itself payable or redeemable before the day on which the debt was payable, it shall, for the purpose of subsection (1), be deemed to have been received when the debt became payable by the person holding it at that time."

Both sides are in agreement that the law limits from inclusion in income under this section, securities evidencing a debt not yet payable in circumstances where the taxpayer operates on a cash basis. Both prosecution and defence agree that the test in this regard is whether the accused received the promissory note as absolute satisfaction of a debt. The Crown urges that he did, the defence of course, that he did not.

The defence goes a step beyond the legal effect of the promissory note to again rely upon the deferral effect of contingent quality of income imposed upon the amount received in exchange for the Kaneff fee. This is because the note was exchanged in 1973 for a cash sum. The defence contends that the proceeds of sale of the note, inasmuch as it was part of the October 26, 1973 agreement between the accused and CNA Financial, were contingent upon the successful closing of that deal. Resolution of this depends upon the applicability of the "quality of income" doctrine on these facts.

Finally in this connection, is the legal question of the adequacy of the indictment in specifying the charge with respect to the Kaneff amount. The Court must decide whether, pursuant to the powers of amendment specified in subsection 601(2) of the Criminal Code, to specify that the Kaneff $75,000.00 amount became income of the accused upon sale of the note in 1973, and not as indicated on the indictment in 1972. The determination of this issue is contingent upon the Court's finding as a fact that the amount was not an income amount in 1972. DUTY TO KEEP BOOKS (Page 224 of 260)

The Crown's case is largely based upon inferences which it draws from a lack of documentation and books recording the transactions at issue. However, the Crown has not provided any formulation of the nature and extent of such documentation as required by law. The defence contends that a taxpayer's responsibilities in this regard are, at law,

almost non-existent. While the Court cannot accept this proposition in light of section 230 of the Act, it is noted that no specific prescription of duty in this regard appears to exist outside of the very broad statement found in subsection 230(1):

230(1) Books and records. Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at his place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined."

Subsection 230(1) is a vague formulation. Indeed, it was argued by the defence that the responsibility to determine the assiduity of books is in the hands of the taxpayer, as it does not specify by whom tax is to be determined. I cannot agree. This section must contemplate some reasonable measure of objectivity. The section must therefore require of a business taxpayer such books and records sufficient to enable a tax auditor to perform his function. To hold otherwise, i.e. as the defence suggests, that the section contemplates a standard entirely subject to the individual taxpayer's reckoning, suggests an absurdity. In a taxation system which relies upon voluntary self assessment, an objective duty to keep accurate books of account is fundamental.

The Crown argues that subsection 230(1) of the Income Tax Act provides that every person carrying on business shall keep books and records in such form and containing such information as will enable the taxes payable to be determined. The books kept are to be made available to the tax auditors.

"In this way, an auditor can verify what is and what is not income and what is the tax payable".

I completely agree. The books should show the income of the business and the existence of the contingencies, if any, to which receipts shown on the books are subject. The final aim of all accounting work is to accurately portray the occurrence of economic events. The bookkeeping record should be so explicit and precise in detail that at any subsequent time the nature and character of the transaction may be readily perceived without any oral explanation, even if it were possible.

It is noted that the accused is not charged with failure to keep adequate books of account. He is charged with wilful failure to disclose income and making false statements and thereby having evaded payment of taxes. The state of the accused's books and records cannot be determinative of these charges. It can only be evidence tending to prove or disprove the specific allegations.

PART VII - CONCLUSION

All parties involved in the trial carried out their responsibilities in a most professional manner. I am deeply indebted to everyone concerned. The case for the prosecution, which consisted almost exclusively of accounting and other documentary evidence, was extremely well investigated, prepared and presented. The inculpatory inferences to be drawn from the documents presented in the case for the prosecution coupled with the complete absence of meaningful documentation to support the position of the defence as disclosed in the "objections", added up to an extremely compelling case. In essence, no effort was made by the defence to refute or contradict, in a direct manner, the facts led in evidence by the prosecution. Various exculpatory theories, as stated in evidence by Joseph Burnett and generally supported by some quite impressive witnesses were advanced, The prosecution called no evidence in reply to refute this defence evidence but chose instead to rely on the strength of the inferences to be drawn from their case in chief. Despite the exceptional strength of that case I have come to the conclusion, for the reasons set out in some detail in the body of this judgment, that, taking the evidence as a whole, the position of the defence must prevail.

This does not mean that tax was not owing as specified in the Burnett assessments. It may well have been. It is important to note however that this court was not seized simply of an assessment of income tax. These other obligations of Joseph Burnett, under the Income Tax Act, will have to be determined elsewhere.

This is a criminal matter involving allegations of serious crime. The burden is on the prosecution to prove their case to the exclusion of any reasonable doubt. In my opinion, on the evidence presented before me, a reasonable doubt does exist and the accused under our law are entitled to the benefit of this doubt.

The Accused Joseph Burnett and Ruthbern Holdings Ltd., are found not guilty on all counts.