Fitzpatrick, J (orally):—Duncan J Morris is charged with five offences under paragraph 132(1 )(a) of the Income Tax Act and with one offence under paragraph 132(1)(d) of the same Act. The five offences under paragraph 132(1)(a) charge Mr Morris with making false or deceptive statements in returns of income filed for the taxation years 1964, 1965, 1966, 1967 and 1968. The charge under paragraph 132(1 )(d) of the Act charges Mr Morris with wilfully evading payment of taxes imposed by the Income Tax Act, RSC 1952, c 148, in relation to income received by him in the amount of $46,777.88, thereby committing an offence contrary to paragraph 132 (1)(d) of the said Act.
I should like first of all to deal with the question of mens rea. With regard to the charge under paragraph 132(1)(d) of the Act there is, of course, no doubt whatsoever that mens rea is an essential element. With regard to the charges under paragraph 132(1)(a) of the Act there is no doubt either in respect of these that mens rea is an essential element.
I would refer to the cases of Regina v Regehr, [1968] CTC 122; 68 DTC 5078, and Regina v Hummel, [1971] CTC 808. It is clear that in all these charges mens rea has to be established and has to be found.
With regard to the background which led to the laying of these charges I wish briefly to deal with Mr Morris and with his method of filing income tax returns for the years which these charges cover. Mr Morris is now and has been for many years a funeral director, an undertaker in the town of Alexandria. He is a man of extremely limited formal education. For a good many years he was in partnership with Mr Marcoux under the firm name of Marcoux and Morris. Latterly, for some years now, he has been running his own business, and, from the information I have received in evidence, it is apparent that he has been a relatively successful person in his own field. He is married and has a large family.
Mr Morris’s difficulties would appear to have arisen when he retained an accountant, now deceased, from the City of Hull to prepare his income tax returns in each year. That arrangement lasted over a considerable number of years. The method by which it was done was highly informal and extremely unsatisfactory, as it turned out. It became the custom in the Morris household, when it was known that income tax time was approaching and a visit from the accountant was imminent, for the family, that is, the relatively grown-up members of the family, to gather together with their father in the basement of their home after having collected, in so far as they were able to do so, I gather, all of the bills and all of the accounts for the previous year. There then followed a cooperative, if you will, gathering together and scheduling and breaking down into divisions of all of the accounts of various natures and kinds from the previous year, with one or the other of the family taking one set of accounts, reading them off to Mr Morris or one of his older sons who would run them off on an adding machine and get the totals together. They would then transfer these figures to a set form. That is, they would use a copy of the statement made by the accountant in the previous year and, using the subtitles that he had used and the headings for various items of income and overhead expenses, they would fill in the various totals.
The accountant would then arrive—and from the evidence I have heard his visit was usually a very short one indeed, lasting perhaps an hour to two hours. The information which had been added and collected and itemized would then be given to him. The accountant had at all times, of course, access to the books of the business, if he wished to see them. There is no suggestion so far as I know in any of the evidence that there was at any time any effort made by Mr Morris or anyone in his family to hide or secrete away any of the books of the business. Those books were available to Mr Morris’s accountant and, in due course, also equally available and freely given to the investigators from the income tax Department, the Department of National Revenue.
To go back to the question of the filing of returns, sometimes when the accountant was here, in Alexandria, Mr Morris would sign the forms, the income tax returns, in blank and give them to the accountant who, in due course, would make the necessary completions of the returns and send them to the Department. On other occasions the returns would be sent down to Mr Morris who would then sign them after they had been filled in by the accountant and the forms would then be returned to the accountant for forwarding to the Department.
The evidence is not entirely clear as to what methods were used at what times. That is to say, it is not clear on how many occasions these forms were signed in blank and on how many they were signed after they had been filled in. As I have already noted, the method by which this was done was very informal and, as I have indicated, the end result was extremely unsatisfactory, eventually bringing Mr Morris to the position he is in today.
In any event, in due course Mr Morris, according to his own evidence, would receive back the returns. He told us in evidence that the only thing he looked for was to see how much income tax he had to pay and how much, therefore, he would have to spend on his family. As 1 have indicated, Mr Morris has a large family. He seems to be an extremely strong family man. it is obvious, too, that the moneys that he made were spent on supporting his family.
Now, with respect to the years which I have referred to, which are covered by the informations from 1964 to 1968, it eventually turned out upon investigation having been made by the Department that Mr Morris had reported a net income of $41,161.10 but that he had not reported an additional income of $46,777.88. In effect, therefore, he had a revised net income for these five years of some $87,938.98.
I may say, too, before going on, that the additional income to which i have referred, and I am now looking at Exhibit No 38, of $46,777.88 was finally arrived at by making allowances for additional expenses in the amount of some $11,204.43. So on the one hand Mr Morris was greatly understating his income, but on the other hand he was substantially understating his expenses.
A great deal of evidence was given as to whether Mr Morris was using the cash method or the accrual method of reporting his income. Of course, a firm method should have been set up by his original accountant. As I have said, that accountant is now deceased. Actually, a primary fault in all of this sad business was made by the accountant, because, so far as I can determine from the exhibits which I have examined very carefully, the accountant originally retained by Mr Morris never really determined in his own mind, as evidenced by the returns, whether Mr Morris was operating on a cash basis or an accrual basis.
Defence counsel at one stage in his argument referred to the method used by Mr Morris as a “hybrid”, and I think that is probably the best way to describe it. It was neither cash nor accrual. There are some elements of each method in his returns and, indeed, the officials of the Department themselves had a considerable amount of difficulty over the years, according to the evidence I have heard, in determining just what method it was that Mr Morris was using.
I think it is also evident that Mr Morris himself, although he is ‘Successful in the undertaking business, has absolutely no knowledge ‘of accounting. I believe him when he says in the witness box that he himself had no idea what method was being used. He said that what he was doing, in effect; was following the form of the previous year and following it to the best of his ability.
There is no doubt from the evidence that I heard from the Crown’s witnesses that income in the amount of $46,777.88 was not declared by Mr Morris over the years 1964, 1965, 1966, 1967 and 1968. Also equally clear from the evidence that I have heard is that some $11,200 in expenses were not claimed by Mr Morris over those five years to which I have just referred.
It is also clear from the evidence, and from the authorities, that there is evidence on which I could very well come to the conclusion that there was mens rea, a guilty intent, because this was not something that happened in one year but was: something that happened over: five successive years. Certainly, from the evidence presented by the Crown, I believe that the defence was put in the position where evidence had to be presented to explain, if possible, the reasons why the methods that were used were used, and to explain away, if one can put it that way, the mens rea which could very easily be found from the Crown’s evidence.
Mr Morris gave evidence on his own behalf. I must say immediately that he impressed me as an honest man. I believed his evidence. He, in his evidence, said that what he did he did through ignorance. He did not do it with any intent to deceive the Government. He did not do it with any intent to evade the payment of taxes. There is no doubt that his knowledge of accounting is—I was going to say “minimal”. I think perhaps it is better to say “non-existent”. There is no doubt whatsoever that his business methods were chaotic in the extreme. There is no doubt that, although he may be in the technical side of his business successful, he is an extremely poor businessman and he is an extremely incompetent businessman in so far as the keeping of his books and records is concerned.
However, that in itself, in my opinion, really amounts to no more than gross negligence, and that is covered in another section of the Act. I may say, too, that no matter what my decisions are in this matter, Mr Morris, of course, will have to pay the income tax on the additional income together with the interest from year to year and also together with a 25% penalty as provided under section 56 of the Act. So there is a very substantial burden which has to be carried by Mr Morris. That I mention only in passing. It does not influence in any way the decision that I have to make here.
As I said earlier, there were in the Crown’s evidence elements from which mens rea could be determined; that is, guilty intent on the part of the taxpayer—the accused in this case. However, having listened to Mr Morris l find on carefully examining his evidence that, although I thoroughly disapprove. of his business methods and although, as I have said, he carries on his. accounting. in a most chaotic and unsatisfactory way, and although he has put the Department of National Revenue to numerous hours oi work and considerable expense, I do not find that he is dishonest: I believe him when he says that he had no intent to deceive the Government to deceive the Department.
r. When all is said and: done this is what this. case- comes down to. There are three very simple elements involved. First, there is the fact that Mr Morris was filing incorrect réturns. Second, there is the question of. whether thç’rë. was ns. rea. Third, ere is e question ‘whether I must; find; won the evidence that there was. I must come to the conclusion on ‘the: evidence that mens réa did not exist in these charges.
As I said, there is no doubt in my mind that Mr-Morris was. guilty of gross negligence. Gross negligence, although it may in some instances be an indication of mens rea, certainly does not constitute it-here on the totality of the evidence. I may say, too, that although his books were chaotic there was no attempt to keep a double set of books or a hidden set of books. The books were readily available to the Department when they came. All of the information was in there. It certainly had not been transcribed or reported or interpreted correctly, but it was all there and only through the grossest of errors was it not properly done.
I am also impressed by the evidence given by Mr Morris’s sons. They struck me as honest young men not trying to shield their father but telling the truth as they knew it. They supported his evidence as to the method in which the material for the returns was gathered and put into columns and into totals every year. It is a most unsatisfactory way to deal with one’s income tax, but that is the way it was done. Although it certainly was gross negligence, certainly, on the evidence, I have to come to the conclusion that Mr Morris was not guilty because mens rea did not exist in any of the charges which he faces.
I should also like to add that I am grateful to counsel for their conduct of this case and for the extremely cogent and articulate arguments with which they supplied me, each of which was of considerable assistance to me.
Mr Morris, would you be good enough to stand, please. I find you not guilty of the five charges under paragraph 132(1)(a) of the Act. I also find you not guilty of the charge under paragraph 132(1 )(d) of the Act.