Shupe, J:—The defendant, a chartered accountant, having successfully passed the examinations of the Institute of Chartered Accountants in January 1974 was, at all material times hereto, engaged in public practice as a partner with the firm of Moen, Kent, Munro & Simons in the City of Kamloops, British Columbia, and while so employed prepared the financial statements which have given rise to the within charge, brought under paragraph 239(1 )(a), Income Tax Act, SC 1970- 71-72, c 63. Specifically, the defendant stands charged as follows:
That Robert George Lovell Simons of Kamloops, in the Province of British Columbia, between the 6th day of August, A.D. 1974 and the 26th day of November, 1974, did unlawfully participate in the making of a false statement in a Statement of Income and Retained Earnings filed with the return of Kiwa Lumber Ltd. for the 1974 taxation year as required by the Income Tax Act, by stating that the estimated cost of inventory of Kiwa Lumber Ltd. as at May 31, 1974 was $155,172.00 which statement was false by reason that the said estimated cost of inventory was understated by $52,485.00, contrary to Section 239(1) of the Income Tax Act.
The offence arises out of preparation by the defendant, pursuant to a non-audit engagement entered into between the said firm of chartered accountants and Kiwa Lumber Ltd, of financial statements for the said company for the fiscal year ended May 31, 1974, along with the 1974 corporation income tax return, both of the aforesaid having been filed as Exhibit #2 in the trial. Although the taxpayer company, Kiwa Lumber Ltd, had previously been a client of the said firm of chartered accountants of which the defendant was a partner, as aforesaid, the defendant’s involvement as an accountant for the said company began only in August 1974 when, as a result of a pending vacation, the defendant’s colleague, Mr K J Almond, a Crown witness herein, requested that the defendant attend to preparation of the said financial statements (Exhibit #2) and the defendant agreed.
History of the relationship existing between Kiwa Lumber Ltd and the said firm of chartered accountants, as related by several Crown witnesses, reflected communication difficulties, in part attributable to the approximate 200-mile distance between the base of operations of the said company at Valemount, British Columbia, and the City of Kamloops, where the said firm of chartered accountants was situate, and that such difficulties had, in the past, resulted not only in failure to file the income tax returns for the years 1972 and 1973 and prosecutions founded thereon, but also significant errors in the financial statements for those years as a direct result of the faulty financial records of the said company and the inadequate information communicated by them to the said firm of chartered accountants. Cognizant of that background the defendant, in the company of an articled student, James Calvin Steuart, attended at the Kiwa Lumber Ltd office in Valemount, British Columbia on August 6 and 7, 1974 to gather the information he required for preparation of the financial statements herein. It became readily apparent from his discussion with the recently engaged bookkeeper for the said company, Mrs Helen I Pittman, that the financial records were, at that time, in deplorably poor condition and that the principal shareholder and president of the company, William Osadchuk, who had relied exclusively on his previous bookkeeper, the Crown witness Karl Beyer, would be incapable of assisting the defendant in the preparation of the said financial statements and, specifically, in the area of inventory valuation. The incapability of the said Crown witness, William Osadchuk, was amply demonstrated by his demeanour during the course of the trial, including, inter alia, his evasiveness in responding to questions put to him on cross-examination by counsel for the defendant and, by his unreliability, as demonstrated by his having falsely sworn paragraphs 11 and 12 of a statutory declaration, being Court Exhibit #16 herein.
It is common ground that the terms of a non-audit engagement, such as pertained hereto, exist where, as here, the accountant prepares financial statements from and upon the basis of information supplied by management of the defendant company, and in so preparing the financial statements the accountant expressly refrains from expressing an opinion on the said financial statements. However, when preparing financial statements pursuant to a non-audit engagement, a chartered accountant within the Province of British Columbia is compelled, on pain of disciplinary proceedings, to comply with the standards referred to by the witness Michael Ashby, CA, called by the amicus curiae; which said standards require that he comply, at all time material hereto, with the provisions of Court Exhibit #28, “Un-audited Financial Statements and Accounting Summaries”, being section 8100 of the Handbook of the Canadian Institute of Chartered Accountants (originally referred to in Bulletin No 13 proclaimed March 1957 and being Court Exhibit #27; and later introduced into the Handbook of the Canadian Institute of Chartered Accountants and numbered section 5100 in January 1972). Specifically, the two relevant provisions by which the defendant was bound in fulfilling the terms of his engagement with Kiwa Lumber Ltd were as follows:
Exhibit #28 — section 8100 (.15):
Where Public Accountants associate themselves with un-audited Financial Statements, they should perform a review of such statements; the nature and extent of review required in each particular case is a matter of judgment. Such review does not constitute an audit, but would require Public Accountants to bring to bear on the work their analytical skills and experience to satisfy themselves that the Financial Statements reflect plausible circumstances.
Exhibit #28 — section 8100 (.27)
Un-audited Financial Statements should be in conformity with generally accepted accounting principles. Where Public Accountants become aware that generally accepted accounting principles have not been followed in the accounting methods, form of presentation or extent of disclosure, they must decide whether the Financial Statements are misleading.
It should also be noted that the financial statements which the defendant was engaged to prepare were general-purpose statements supplied for a variety of uses including use by potential buyers, lenders, creditors, bankers and governmental departments including, inter alia, federal and provincial tax departments, all of which made preparation of the financial statements in the instant case more problematic in terms of inventory valuation, being the central issue herein, for the following reasons:
(1) at all material times hereto the company, Kiwa Lumber Ltd, was seeking capital financing to facilitate an expansion programme by acquisition of barking and chipping equipment as reflected in Court Exhibit #6A, a letter dated June 7, 1974 and directed to Northwood Pulp and Timber Ltd, a potential source of capital funds, and in which the said company, Kiwa Lumber Ltd, had a vested interest in reflecting the value of its assets, including its inventory on hand, at the maximum possible, thereby improving its asset position when applying for capital funding, as aforesaid; and
(2) difficulties the said company was experiencing with its principal source of operating capital, the Toronto Dominion Bank, by virtue of irregular filing of declarations of stock on hand; and capital purchases made without the required prior notification to the said Toronto Dominion Bank.
Against the within background the defendant set about preparing the financial statements required, specifically, Court Exhibit #2 within sufficient time to meet the deadline required for filing of the 1974 corporation income tax return, that is, by not later than November 30, 1974. In furtherance thereof he instructed the said articling student, Calvin J Steuart, to prepare working papers and a working trial balance, all of which resulted in Court Exhibit #3A being prepared. From the said working papers the defendant prepared the draft financial statement (Court Exhibit #8), and applying generally accepted accounting principles he noted, immediately, that the gross profit margin (being the gross profit remaining after deduction of direct costs) derived by using the inventory valuation figure provided by Kiwa Lumber Ltd was totally out of proportion with past performance and thus a question as to the plausibility of the draft financial statement arose in the mind of the defendant at that time. Nevertheless, for dis- cussional purposes only, the defendant prepared Court Exhibit #8 using the inventory valuation figure provided by Kiwa Lumber Ltd, that is, $100 per 1,000 foot board measure (hereinafter called: MFBM) for rough lumber, and forwarded same to the said company with a request that they attend the defendant’s offices in the near future to discuss finalization of the said financial statements. After making calculations to substantiate his concern (and I find as a fact that such calculations were made despite there having been no record retained of his having done so), the defendant expressed same in discussions with his colleague, Mr K J Almond, the partner who would be responsible for retention of the file in the future, all as indicated in the following portion of Mr Almond’s evidence-in-chief (vol Il, p 74):
336 Q. Actually, I should ask you, was that discussed between you and Mr. Simons? A. I guess so, I don’t know, specifically, again, I say that he was concerned about not over-stating the inventory and as to this, the specific points raised, I am not too sure about it at this time. I believe that he was concerned not only, about the decreasing markets, but a backing up with a cost that was realistic to be shown on the Financial Statements and he probably doubted the figures that Kiwa had given him.
337 Q. Okay, was there any discussions as to more information to show any doubt for these costs? A. That would probably be at the end of the conversation, well, I think, you know, you should investigate it and try to make a determination as to what costs could be realistically, make an estimation of it.
With that suggestion in mind, the defendant then set about satisfying compliance with proper inventory valuation, such valuation being in the manner prescribed by subsection 10(1) of the Income Tax Act, which provides as follows:
10. (1) For the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation.
(2) Notwithstanding subsection (1), for the purpose of computing income for a taxation year from a business, the property described in an inventory at the commencement of the year shall be valued at the same amount as the amount at which it was valued at the end of the immediately preceding year for the purpose of computing income for that preceding year.
It is of interest to note that on the evidence before this Court and upon the submission of counsel, it appears clear that neither the Income Tax Act nor the regulations to same provide either the taxpayer or the accountant with any clarification of the method by which either cost or fair market value are to be determined and, consequently, the accountant must resort to the standard set by his profession as to the guidelines to be applied in determining the aforesaid. In pursuance of Mr Almond’s suggestion, the defendant contacted Mrs Helen Pittman, bookkeeper for Kiwa Lumber Ltd, to discuss validity of the inventory valuation figure and, specifically, upon so doing was advised that there had been sales of lumber in September 1974 at $66/MFBM (noting that Court Exhibit #11, the Shipment Control Ledger, which was not made available to the defendant throughout, reflects several sales at less than $66/MFBM throughout the month of September 1974) and all tended to confirm the conclusion earlier arrived at by the defendant, that is, that the inventory valuation used in preparation of the draft financial statement (Exhibit #8), and being the inventory at a cost of $100/MFBM figure provided by Kiwa Lumber Ltd, contained glaring inaccuracies. Such inaccuracy is shown not only by the defendant’s calculations, but also in the evidence of the Crown witness Karl Beyer, prospector-cum-bookkeeper, who was responsible not only for the deplorable state of the financial records of Kiwa Lumber Ltd, but also for having arbitrarily selected the cost figure of $100/MFBM based on his limited past experience while employed with a warehouse firm, all as indicated in his evidencein-chief, where he said the following (vol I, p 110):
542 Q. Where did you obtain those figures from, sir? A. You mean the $100.00 figure?
543 Q. Yes, and the $60.00 for logs, where did those figures come from?
A. Well, I don’t know the exact term, I don’t know if it’s an arbitrary figure or What, but that’s all it is.
544 Q. Is that a cost figure, sir? A. Cost to manufacture?
545 Q. Yes? A. NOT NECESSARILY, NO, IT WOULDN’T BE THAT HIGH, PROBABLY.
546 Q. It is not a cost of manufacturing to Kiwa Lumber? A. No, sir.
With such arbitrariness and inaccuracy evident to the defendant, he attempted to arrive at a more realistic valuation for the inventory and, upon concluding that the state of the financial records of the company were such that there was no segregation between the component parts of the logging operation herein, that is, the logging operation, the sawmilling and the planing, he properly decided that a detailed and accurate cost analysis could not be performed herein. Consequently, the defendant estimated costs only and, therefore, described the inventory on the balance sheet annexed to and forming part of Exhibit #2, as follows:
KIWA LUMBER LTD.
BALANCE SHEET
May 31, 1974
(with comparative figures for 1973)
(Prepared Without Audit)
ASSETS
1974 1973 1973 CURRENT ASSETS: Cash in bank $ 31,571 $ 7,992 Accounts receivable — 30,812 Inventories, at estimated cost —logs (Note 1) 12,000 50,000 —lumber 143,172 35,000 Prepaid expenses 600 3,250 187,343 127,054
Such nomenclature was designed to alert the attention of any reader of the statement who would be accustomed to seeing inventory recited at either cost or fair market value, but not at “estimated cost’’; all as confirmed by the Crown witness, C P Schelard, an officer with the Department of National Revenue who, having failed his chartered accountancy exams, became, eventually, a certified general accountant and who, in answer to questions directed by the Court, agreed that the word “estimated’’ is one which would ordinarily draw attention.
Substantiation, by the Crown, of the allegation contained in the information herein, that the defendant participated in falsely understating the inventory of Kiwa Lumber Ltd, as at May 31, 1974, by $52,485, is dependent upon the Crown substantiating the validity of the aforesaid figure of $100/MFBM as the cost of inventory. Having alleged a particular, which this Court finds was material to the Crown’s case, the Crown is bound by such particular, even though not ordered by the Court pursuant to the provisions of section 516 of the Criminal Code of Canada; as was held by the Supreme Court of Canada in the case of Cox and Paton v The Queen (1963), 40 CR 52 at 63, where it was said, by Mr. Justice Cartwright:
Turning now to the grounds on which Miller, CJM dissented as to the conviction on Count 3, I would first observe that, in my opinion, the appellants are entitled to rely on the particulars given orally by counsel for the Crown to the same extent as if they had been furnished pursuant to an order made under section 497 of the Criminal Code. On this point I agree with the statement of Beck, J in Rex v Carswell (1916), 10 WWR 1027 at 1038:
“Section 859 [a predecessor of s 497] empowers the trial judge to order particulars. If he does so it must be clear that the prosecutor is bound by the particulars which he gives in accordance with the order. If without order he gives particulars he must be equally bound.”
This statement of the law is particularly reinforced in view of the recent trend of authorities in which it has been held, contrary to what had earlier been the law, that informations which lack essential averments are no longer thereby rendered nullities incapable of amendment and that if the matters covered by the missing averment were proved, the information can be amended accordingly: Regina v Major (1976), 27 CCC (2d) 239 (Supreme Court of Canada); Regina v Robert James Cochrane (unreported—December 15, 1976, BCCA).
In this Court’s view, it cannot be said that stipulation of the precise quantum of understatement of the inventory herein, that is, $52,485, is mere surplusage, inasmuch as it is the very essence of the alleged falsity giving rise to the within charge and is, therefore, not within the category of what was before the Ontario Court of Appeal in the case of Regina v Van Hees (1957), 27 CR 14, in which it was held that the failure of the Crown to prove that the stolen motor vehicle in issue bore the same licence plate number as that alleged in the information was not fatal to conviction as it constituted an unnecessary allegation which the Court was entitled to treat as surplusage, not required to be proved. Similarly, this is not a situation where a proper theft is alleged, but the value of what was stolen is, subsequently, shown to be less than that alleged, but of some value, inasmuch as the purpose of value goes to jurisdiction of the Court and sentence: Regina v Norcross (1958), 24 WWR 160 (BCCA), whereas, in the instant case, the quantum of the false statement is the very essence of the Crown’s case.
In the event that this Court has erred in its finding that the allegation as to quantum of the alleged understatement of cost of inventory, that is, $52,485, was a material allegation, this Court will now examine the evidence pertaining thereto as though, firstly, the said quantum was surplusage, the precise amount of which was not required to be proved by the Crown; and, secondly, on the basis that the Crown has made application for amendment of the information to accord with the evidence, noting that there is before the Court no such amend- ment application. Any such analysis, of necessity, entails a determination of what mens rea must be proved by the Crown to substantiate the within offence.
Clearly, the offence herein, being one under paragraph 239(1 )(a) of the Income Tax Act, is one in which mens rea must be proved beyond all reasonable doubt, and the exact nature of that mens rea is a planned, intended, or deliberate concealment or deception. Carelessness
or recklessness in completing the income tax return would be insufficient. However, an inference of planned, intended or wilful concealment may be made from the existence of a series of omissions by the taxpayer to report items of income even though each omission in itself may be properly regarded as mere negligence: Regina v Regehr, [1968] CTC 122; 68 DTC 5078; 3 CRNS 163, where Mr Justice McFarlane of the Yukon Territory Court of Appeal said at page 123 [5079, 163-4]:
Counsel for the appellant submits that the learned Judge misdirected himself in law by holding that the number of proved omissions due to carelessness and negligence does not constitute some evidence from which an inference of guilty intent may be drawn. I think it is clear on principle and authority that an inference of the fact of guilty intent may, as a matter of law, be made from the existence of a series or multiplicity of omissions although each such omission may in itself be properly regarded as merely negligence.
and at page 125 [5080, 166]:
I think also the use of the word “mere” in the second extract quoted earlier in these reasons from the judgment of the learned Judge on appeal is important as indicating an awareness that repeated negligent omissions could justify the inference of planned, intended or wilful concealment or deception. My study of the whole of the learned Judge’s judgment related to that of the Magistrate, which he affirmed, does not satisfy me that there was misdirection as contended by the appellant, but does convince me that when the learned Judge said “there was no evidence ” his real purpose was to say that on the whole of the evidence he was not satisfied that the Crown had proved mens rea beyond a reasonable doubt.
Further, contrary to what was urged by counsel for the Crown in the instant case, this Court is of the view that the aforesaid mens rea is One requiring a specific intent as opposed to a general intent, as those terms are defined by our Supreme Court of Canada when discussing the defence of drunkenness in the case of Regina v George (1960), 34 CR 1; and, therefore, in that regard this Court concurs with the statement of law set out in the case of Regina v Lundy, 72 DTC 6093 at 6117 (BC Provincial Court); although the evidence in the instant case is not such as to support the finding of the Court in the Lundy case (supra), where it was held that the accused’s failure to disclose the items of income in question was done deliberately and deceitfully by and with the specific intent to evade the payment of income tax on the said unreported income.
A substantial number of reported decisions, subsequent to Regina v Regehr (supra), and in which, in every instance, the principles enunci- ated in the Regehr case (supra) were applied, are of limited assistance to this Court inasmuch as each is dependent upon its unique set of facts; however, the said cases are as follows: Regina v Novlan (1971), 9 CCC (2d) 85 at 90 (Ontario County Court), in which it was held that the Crown had proved mens rea by the evidence which indicated that the accused had been told several times of the errors being made in the sales tax return and, thus, in the cheques forwarded in payment thereof, but was evasive in connection therewith and took no steps to rectify the said errors; Regina v Morris, [1973] CTC 629 (Ontario Provincial Court); and Regina v Nicholson, 75 DTC 5095 (Ontario Provincial Court).
Crown Argument
Inasmuch as we are here concerned with one calculation only, that being the valuation of inventory to be used in preparation of Court Exhibit #2, 1974 corporate income tax return for Kiwa Lumber Ltd, we are not involved in the principle of a multiplicity of errors or omissions supporting an inference of guilt, but rather in a case in which the Crown must prove that the defendant, by his conduct in stating the inventory as was done, engaged in a planned, intended or deliberate concealment or deception.
In support thereof, the Crown argues as follows:
(1) Inasmuch as this was a non-audit engagement, the defendant should have accepted, at face value, the cost figure provided by Kiwa Lumber Ltd, that is, $100/MFBM for lumber without questioning same. While subsection 10(2) of the Income Tax Act requires acceptance, at face value, of the opening inventory figure, such is clearly not the case with respect to the determination to be made as to the inventory used during the fiscal period in question and this is so despite the suggestion, by counsel for the Crown, that the defendant should have gone back over the fiscal years 1972 and 1973, with which he had no prior involvement, and make appropriate adjustments to the inventory figures for those years; this Court finds as a fact, that no such duty existed at law and nor was it required herein.
In addition, in the absence of specific provisions in either the Income Tax Act or the regulations thereto, rendering section 8100 of Exhibit #28 either contradictory or unsuitable to the calculation required to be made under subsection 10(1) of the Income Tax Act and to any of the things required to assure that such calculation does not entail a breach of the provisions of paragraph 239(1 )(a) of the Income Tax Act, this Court finds that it was appropriate for the defendant to govern himself in accordance with the provisions of Exhibit #28 and, specifically, to make an inventory calculation which he deemed plausible in the circumstances presented to him with respect to Kiwa Lumber Ltd.
(2)(a) To buttress its case the Crown indicates that not only is the cost figure of $100/MFBM for lumber reliable, but also suggests, through the evidence of the Crown witness C K Schelard, that not only was he readily able to make a direct cost calculation per 1,000 ft board measure on the financial records available herein (all of which were made available to him), but also that such calculation was simplistic. Court Exhibit #21-C “Cost of lumber production for year ended May 31, 1974’’ shows that C K Schelard’s calculation disclosed a cost of lumber production at $118.10/MFBM, thereby purportedly disclosing the reliability of the lesser figure provided to the defendant by Kiwa Lumber Ltd, that is, $100/MFBM. Bearing in mind that the witness Schelard was not operating under the time pressure by which the defendant was bound in preparing the financial statements by the deadline of November 30, 1974 and also bearing in mind that he had all of the financial records of Kiwa Lumber Ltd available to him, some of which were not made available to the defendant, the erroneousness of such a simplistic approach was disclosed by the two very substantial errors made by the witness Schelard in arriving at his calculations, and one of which was acknowledged by him upon cross-examination as follows (vol 11):
296 Q. Now, my point in looking at 21-C, Mr. Schelard, is that the lumber inventory of $50,000.00 should not be added to the previous total of $597,297.00? A. Why not?
297 Q. Because the direct cost should not be spread over that lumber, it has already been made into lumber, it was in the period ending May 31, 1973? A. I don’t know whether we are talking about the same thing, or not, but the elements that go to make up costs are, you start out with your opening inventory, that could be your opening inventory, logs and your opening inventory to your lumber?
298 Q. But, the cost, the direct cost should be restricted to the product produced, what I am saying to you, that $50,000.00 of this product was produced at a preceding period? A. Oh, I see what you are, all right, I am sorry, yeah, that opening inventory of lumber should be in there at that, that enters into your cost of sales of lumber, yes, I agree, I agree to that statement, yeah, I’m sorry, that is an error.
(2)(b) The evidence of the defence witness Mr R H Beattie, a chartered accountant since 1958 and an eminent member of his profession, engaged as a specialist in the logging and the lumber industries for a number of years, indicated, as well, that inclusion of depreciation as a direct cost of manufacturing as was done by the said Crown witness, Mr Schelard, is an error inasmuch as such a cost remains constant whether there has been production or not. Wherever the evidence of the said defence witness Beattie conflicts with that of the Crown witness Schelard, this Court unhesitatingly accepts the evidence of the said defence witness Beattie over that of the said Crown witness Schelard.
The defence witness Beattie also established that a number of other errors could be found in the calculation made by the Crown witness Schelard, in arriving at Court Exhibit #21-C, as follows:
COST OF LUMBER PRODUCTION
as at May 31, 1974 — KIWA LUMBER LTD
Base figure (after removal of prior incurred planing costs pursuant to error made by witness Schelard in earlier calculation) $108.00/MFBM Less: Depreciation (wrongfully included) $10.31/MFBM Insurance (wrongfully included) 1.87/MFBM Estimated planing cost (conservative estimate) 15.00/MFBM Administrative & office salary (estimated) 4.00/MFBM TOTAL ERROR IN EXHIBIT #21-0 $31.18/MFBM $ 31.18/MFBM REVISED COST OF INVENTORY IN EXHIBIT #21-0 $ 76.82/MFBM
As shown above, deduction of the aforesaid error of $31.18/MFBM from the base cost figure of $108/MFBM leaves a cost figure of $76.82/MFBM, which closely approximates the estimated cost figure relied upon by the defendant herein, being a cost of $73.175/MFBM. The said witness Beattie indicated that in the circumstances pertaining hereto (remembering that the said witness Beattie sat through the majority of the Crown’s evidence herein), it was not possible to calculate either market value or cost accurately on the basis of the financial records available herein and, further, that he wasn't certain that he would have made the effort the defendant did herein to estimate costs in the manner done.
(2)(c) In addition, while the preference of the said defence witness Beattie was not to use the gross profit margin method of arriving at a valuation of inventory, he indicated it was a generally accepted and acceptable accounting principle which he has himself used in the past, and that such a calculation involves a determination of Current replacement cost of inventory less a proper profit margin; and which said calculation, in the instant case, resulted in the following:
Thus, the anything but simplistic direct cost calculation suggested by Mr Schelard, or the gross profit margin evaluation calculation used by the defendant, both, when adjusted for errors made in the former, arrive at approximately the same valuation to be applied to the closing rough lumber inventory herein, that is, an inventory of 1,957,000/FBM at $76/MFBM (approximately) $148,732 (approximately).
| Actual realized value (per average sales on | |
| 1,977,00/FBM for months of June through August 1974) | $114.00/MFBM |
| Less: Approximate planing costs to be | |
| removed from rough lumber inventory | $ 15.00/MFBM |
| SUB-TOTAL (net realizable value) | $ 99.00/MFBM |
| Deduct: Normal gross profit margin for | |
| Kiwa Lumber Ltd. — being 20% | $ 22.80/MFBM |
| Inventory valuation at cost (Lumber) | $ 76.20/MFBM |
(3) The Crown has argued that an inference of surreptitious behaviour on the part of the defendant can be drawn from the absence of notes in the working papers, or the retention of calculations, to substantiate his application of the aforesaid gross profit margin calculation in arriving at the proper valuation for closing inventory of rough lumber, but two significant factors exist to negative the drawing of any such inference, as follows:
(a) the defendant’s evidence given during the course of the trial and his demeanour as a frank, forthright, truthful and totally reliable witness whose professional integrity was attested to as being beyond reproach by the two Crown witnesses, Almond and Steuart; that evidence being that he in fact made such a gross profit margin calculation, both in his head and on an adding machine. In addition, the aforesaid evidence is substantiated by the defendant’s consistent conduct throughout his interview with officers of the Department of National Revenue on September 17, 1975 and being the subject of a voir dire during the course of the trial; the content of which said interview is set out in Court Exhibit #22, which discloses that the defendant revealed, to the said officers, at that time, use of a gross margin figure of 20% in arriving at his calculation; and
(b) verification of that earlier calculation, by the defendant’s detailed calculation prior to trial, and as set out in Court Exhibit #26A, “Re-stated Financial Information’’ which confirms that use of his inventory valuation figure, as set out in Exhibit #26(d), while having the effect of writing down the inventory by $52,485, produced a gross profit margin percentage, consistent throughout, and being as follows:
(4) The Crown argues that, having used the gross profit margin calculation, as aforesaid, to arrive at an estimated cost for rough lumber inventory of $75/MFBM, the reduction, by the defendant, by way of writing down, from the said figure of $75/MFBM to the figure actually used in Exhibit #2 (ie, $73.175/MFBM) constituted an arbitrary action amounting to practice of a deception within the meaning of paragraph 239(1 )(a) of the Income Tax Act. In reply thereto the defendant’s evidence in connection therewith, which is accepted by this Court, in its totality, is that the decision to "write down’ the estimated closing inventory unit cost from $75/MFBM to $73.175/MFBM was because the approximate $3,000 difference pro- duced thereby was non-material in a company having assets of approximately $481,000 (noting that the exact amount of the write down herein was $3,603). This Court finds as a fact that the aforesaid principle of materiality is a generally accepted accounting principle, and that its application in the instant case was warranted (in view of the scanty financial information and deplorable financial records available to the defendant in preparing the financial statements herein). Even if this Court is in error in that regard, such decision as to non-materiality could, at the best, be labelled a judgmental error and not even mere negligence, let alone negligence of the kind to warrant drawing inferences of guilty intent, as set out in the Regehr case (supra).
| May 31, 1973 | 19.9% |
| January 31, 1974 | 19.0% |
| May 31, 1974 | 19.3% |
(5) The Crown next argues that the phraseology of Note #1 appended to the financial statements forming part of Exhibit #2, being the 1974 corporation income tax return, in itself, in the circumstances, constitutes both a falsehood for which the defendant is by law responsible, and a deliberate deception, by the defendant. The note provides as follows:
Note 1: Inventory:
Subsequent to May 31, 1974, market values on timber products declined substantially. The effect of the decreases in lumber values has not been reflected in these Financial Statements since the industry conditions are continuously fluctuating.
It is interesting to observe that the Crown witness, K J Almond, commenting on the said note, indicated it was not, in the circumstances before this Court, necessarily inaccurate, which of necessity precludes this Court concluding that the statement contained a falsehood. Further, the evidence of the expert defence witness, Beattie, indicates that, while arriving at an estimated cost of closing inventory figure, subsequent market values cannot be directly applied. However, it is indeed proper to compare those subsequent market values to the cost figure arrived at, to determine the lower of the two and to ensure compliance with the aforesaid accountant’s duty to ensure that the financial statements prepared are plausible. Further, a perusal of Court Exhibit #11, the “Shipment Control Ledger’’, shows such wide fluctuations in net sales revenue derived from the sale of lumber by Kiwa Lumber Ltd in the period subsequent to May 31, 1974 that even though the defendant was entitled to examine those figures to determine plausibility of his calculation, there is no inaccuracy in the Statement that such fluctuating market values are not reflected in the financial statements since, in this Court’s view, they were not so reflected. It should also be noted that in drafting the said Note #1 to Exhibit #2, in this Court’s view, the defendant complied with the policy set out in what remains, apparently, one of the most authoritative texts used by chartered accountants, in connection with inventory valuations, being Use and Meaning of “Market” in Inventory Valuation by Gertrude Mulcahy, FCA (5th printing, 1976) at page 32, where it was said:
Subsequent changes in selling prices
There is also a question of whether the net realizable value should be based on the selling price as at the end of the fiscal period or should take into account changes in selling prices between the end of the period and the date the Financial Statements are prepared.
Here again, it would seem unrealistic to look merely to the selling prices prevailing at the end of the fiscal period. If net realizable value is the figure desired, actual information of sales procedures is available for the valuation of goods sold between the inventory date and the date of completion of the Financial Statements. As for the remainder of the inventory, estimates of its realizable value which take into account developments since the end of the period, including changes in costs, selling prices, etc., would provide a more accurate basis for estimating probable losses than would selling prices prevailing some two or three months before.
In addition to the foregoing, two fundamental questions preclude the drawing of the inference suggested by the Crown, those being:
(i) if it was the intention of the defendant to deceive readers of the financial statement in issue (Court Exhibit #2), why alert the said readers, including the Department of National Revenue, to the inventory “write-down” by use of the word “estimated” which the Crown witness Schelard agreed had the effect of drawing attention to that item in the financial statements? and
(ii) if it was the intention of the defendant to deceive readers of the financial statement, as aforesaid, why would he have drawn attention to Mrs Pittman, representing the management of Kiwa Lumber Ltd, to the use of the reduced cost of inventory figure, which this Court finds as a fact occurred, as testified to by the defendant and as implicitly confirmed by Mrs Pittman when she said (vol I, p 57):
224 Q. And specifically, did he suggest to you that the information that you had provided him with would support the cost of inventory at $75.00 per thousand board feet? A. I seem to remember, not specifically, I can't be absolutely sure, but it seems to me that figure rings a bell, but I can’t remember in what relation, what the figure was on what and at what particular time.
Had it been the intention of the defendant to deceive readers of the financial statements, as alleged by the Crown, surely no mention would have been made of the allegedly deceptive entry since to do so would be only to attract attention to same.
Defence Argument
In addition to the general issue, the defence argues as follows:
(1) That applying the aforesaid gross profit margin calculation, the defendant was not only applying a generally accepted accounting principle, as he was duty-bound to do, but he was also acting in the most propitious manner available to him, as commented upon earlier in the within judgment. In that regard, this Court finds that for the reasons hereinbefore mentioned there was ample evidence to substantiate the validity or correctness of the defendant’s cal- culations, with the result that this was not the kind of situation as was before the Alberta Court of Appeal in the case of Regina v Kipnes (1971), 2 CCC (2d) 56, in which said case there was simply no evidence to justify reduction of the commissions earned by the defendant taxpayer in the manner done by his accountant and endorsed by the defendant, which said reduction was entirely arbitrary.
(2) Bearing in mind the general purpose nature of the financial Statement the defendant was called upon to prepare, and the hereinbefore mentioned reasons for suspecting an inflation by Kiwa Lumber Ltd of its inventory valuation, the defendant exercised even greater scrutiny than would otherwise have been the case to ensure compliance with the requirement that the financial statements ultimately prepared be plausible, particularly in view of his potential civil liability to creditors and others. Such liability is referred to and discussed in the judgment of the Supreme Court of Canada in the case of Ha/g v Bamford, Hagan, Wicken and Gibson, [1976] 3 WWR 331 (on appeal from the Saskatchewan Court of Appeal and being a case involving an audit engagement and differentiation between same and the situation in the instant case, being a nonaudit engagement). The disclaimer contained in the accountant’s comments on the opening pages of the financial statement appended to Court Exhibit #2 confirms the non-audit nature of the engagement herein, that statement being as follows:
ACCOUNTANTS’ COMMENTS
To the Shareholders,
Kiwa Lumber Ltd,
Valemount, BC.
We have prepared the accompanying balance sheet of Kiwa Lumber Ltd as at May 31, 1974 and the statement of income and retained earnings for the year then ended, from the books, accounts and records of the company and from information supplied by the management.
In accordance with the terms of our engagement we have not performed an audit, and consequently do not express an opinion on these financial state men ts
MUNRO, KENT, ALMOND & SIMONS
Chartered Accountants
September 24, 1974
In this Court’s view the defendant acted properly throughout, in applying the plausibility test he did, for the reasons aforesaid.
(3) The defendant possessed no possible motivation to conduct himself in the manner alleged by the Crown and this Court finds as a fact that there is not even a suggestion, in the evidence, of the existence of a motive on the part of the defendant to falsely State the inventory valuation herein, and to deceive the tax department in the manner alleged by the Crown. This is particularly borne out by the evidence of the defence witness Beattie, whose evidence is accepted by this Court in its entirety, when he indicated that had Kiwa Lumber Ltd taken the full capital cost allowance allowed by the Income Tax Act, as a deduction, in arriving at net taxable income, then using the rough lumber estimated inventory cost figure of $73.175/MFBM utilized by the defendant, the effect would have been only to postpone income tax payable and would have had no effect on the total income taxes payable by that company. Thus, there was no consequential effect in terms of a tax saving, by utilizing the inventory figure, aforesaid, rather than the arbitrary figure of $100/MFBM provided by Kiwa Lumber Ltd; so that there is not here the standard evasion of income taxes payable, or even avoidance of income tax payable, which one would ordinarily expect in support of a prosecution such as is before the Court in the instant case.
(4) No reliance can be placed, by the Crown, upon the $100/MFBM inventory valuation figure used by the defendant in preparing the draft financial statement herein as that was for discussional purposes only, and this Court so finds.
A cursory perusal of the draft financial statement, and comparison with the financial statement for the preceding year, quickly alerted the defendant to the wide discrepancy in gross profit margin in the period with which he was concerned and he was thus compelled, by his duty, to examine such discrepancy and to effect whatever change was required to make the final financial statement prepared by him plausible in view of the existent financial situation of Kiwa Lumber Ltd. In this Court’s view, the defendant set about so doing conscientiously and with due skill and diligence. The defendant expended more effort in preparation of the financial statement for Kiwa Lumber Ltd for the fiscal year 1974 than the said company had received from other members of the defendant’s firm, in connection with prior fiscal periods, as demonstrated by his suggestions for improvement in the bookkeeping system set out in Exhibit #9.
(5) The defendant’s evidence was, and this Court accepts same, that use of the word “estimated” in assessing the cost of inventory, and “writing-down” the inventory to produce a nil income balance, was calculated to have the effect of alerting all readers of the financial statement, including the Department of National Revenue, to the problems posed in arriving at a precise inventory valuation for Kiwa Lumber Ltd, in view of its poor financial records; and that such problems could readily be rectified by reassessment in the Same manner as appears to have been done by the Department of National Revenue, with respect to the fiscal year 1973, as indicated in Court Exhibit #18, the notice of reassessment.
As the events herein unfolded, clearly the desired effect of alerting attention of the Department of National Revenue to the inventory valuation problem was in fact accomplished, and the defendant’s goal, in that regard, was therefore satisfied.
(6) The defendant was a truthful witness throughout, and this Court concurs with the defence submission in that regard. There are no material discrepancies between the evidence given by the defendant during the course of the trial and the contents of Court Exhibit #22.
In this Court’s view, an amendment application, as earlier alluded to, would not assist the Crown, by virtue of the total absence of proof of mens rea therein.
Conclusion
In conclusion, this Court is of the view that not only has the Crown totally failed to prove the allegations set out in the information herein, beyond reasonable doubt, but it has also failed even to meet the civil test, that is, to prove the said allegations on the balance of probabilities. Further, there is some suggestion in the unchallenged evidence of the Crown witness, K J Almond, that officials of the Department of National Revenue had opportunity to avert any difficulties in connection with preparation of the 1974 corporation income tax return for Kiwa Lumber Ltd (being a company twice previously prosecuted, successfully, for failure to file an income tax return) by discussing any such problems with the defendant. The said officers chose, instead, to invite possible commission of an offence, as indicated in the following portion of the said witness Almond’s evidence (vol Il, p 79):
361 Q. Yes, as far as I am concerned? A. That when the Tax Department officials were up to our office originally before the Tax returns were filed, this situation was pointed out to them. They went up to Valemount and did whatever they did and they came back to our office and said, “okay, get the Tax returns filed and we will go from here’’, you know, just like there was no problem, but that was pointed out to them before the Tax returns were filed.
362 Q. The difficulty with the accounts? A. That particular inventory that you’re discussing and the difficulty with that bank account and they were—
THE COURT: You have used the word “returns” in the plural, witness, are you using it with reference to both the 1973 and 1974 returns? A. That is correct, yes. And 72, Your Honour.
In this Court’s view there was virtually no basis for the Crown proceeding with a charge under paragraph 239(1)(a) of the Income Tax Act herein, and that so doing, in the absence of even a prima facie case, was tantamount to an abuse of the process of this Court. Had it been within the power of this Court to order punitive damages for the possible damage done by this prosecution to the professional reputation of this defendant within a smaller community such as Kamloops, British Columbia, such damages would have been so awarded.
Further, had it been within the scope of this Court to order solicitor/ client costs, such would have been done. Unhappily the only costs which this Court is empowered to award are pursuant to section 744 of the Criminal Code of Canada exclusively those contained in the schedule following section 772, Criminal Code of Canada: Regina v Tremblay, [1964] RL 324; 11 Cdn Abr 9865 (Quebec), and Regina v Abram (1946), 1 CR 151 (Ont).
Accordingly, this Court not only finds the defendant not guilty of the offence with which he was charged, but also awards the defendant costs as against the informant in accordance with section 772, Criminal Code, in an amount to be taxed before the Registrar of the Court and to include, inter alia, item #25 for all witnesses called during the within trial, not just defence witnesses called.
In closing, this Court suggests that an aura of confrontation between the accounting profession and the Department of National Revenue, which is the inevitable by-product of this unfounded prosecution, could well lead to destruction of our self-assessing income tax system, and could be avoided by better communication prior to proceeding with such a prosecution.