R. v. Kleysen, 96 DTC 6265, [1996] 2 CTC 201 (Man QB)

Schwartz J.: -

I NATURE OF PROCEEDINGS

The evidence in this prosecution underscores the sometimes narrow line which separates aggressive tax avoidance planning and fraudulent activity resulting in tax evasion.

Tax courts have from time to time recognized the effective use of taxhaven entities created solely for the purpose of reducing income tax payable in Canada. They have also seen through paper transactions without substance and refused to give credence to those transactions.

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

This is a prosecution by the Government of Canada under the provisions of the Income Tax Act, R.S.C. 1952 C. 148 as amended; (“Act”). Hubert T. Kleysen (Hubert), Kley sen Transport Ltd. (Kleysen), 19546 Manitoba Limited (Numbered Company) and Riverside Gravel Company Limited (Riverside) are the accused. I will from time to time refer to them collectively as the “Accused”. I will refer to the Government of Canada as the “Prosecution”.

Riverside and the Numbered Company are different names for the same corporation. It was effectively controlled by Hubert. However, he had a minority shareholder who effectively managed the corporation. Then it used the Riverside name. After the minority shareholder was bought out and its gravel operations ceased, Hubert changed the name from Riverside to the Numbered Company.

The indictment dated June 4, 1993 and amended the 15th day of March, 1995 (Indictment) contains thirteen counts. The Accused are alleged to have committed offences under section 239(1 )(a) and (d) of the Act. Rather than repeat each of the counts, I have appended a copy of the Indictment.

II THE ACT/INDICTMENT

At all material times, the essential elements of section 239(1) of the Act provided as follows:

Every person who has

(a) made...false or deceptive statements in a return...filed...as required by or under this Act...[or]

(d) willfully, in any manner, evaded...payment or taxes imposed by this

Act,...

is guilty of an offence...

The Indictment alleges that various of the Accused filed income tax returns during the years 1982 through 1987 both inclusive, in which they falsely understated their respective incomes (239(1 )(a)). The prosecution further alleges that those Accused by falsely understating their respective incomes willfully evaded the payment of taxes imposed by the Act (239(l)(d)).

III NATURE OF CHARGES

The Accused in one of their written arguments describe and I adopt their description of the various counts in the Indictment as follows:

Counts 1 through 5 of the Amended Indictment allege that Hubert committed offences under paragraph 239(1 )(a) of the Act in respect of his 1982, 1983, 1984, 1985 and 1987 taxation years by understating his taxable income for those years, in the amounts set forth in the Amended Indictment. Count 5 of the Amended Indictment also alleges that the offence under paragraph 239(1 )(a) included the claiming of an Investment Tax Credit in 1987. Count 6 of the Amended Indictment is an aggregation [of the amounts alleged in] counts 1 through 5 and alleges that Hubert committed an offence under paragraph 239(1 )(d) of the Act by understating his taxable income by an amount equal of the total of the amounts in counts 1 through 5 and by claiming the Investment Tax Credit referred to in count 5.

Similarly, count 7 of the Amended Indictment is an aggregation of [the amounts referred to in] counts 8 through 10 and alleges that Kleysen committed an offence under paragraph 239(1 )(d) of the Act. Counts 8 through 10 allege that Kleysen committed offences under paragraph 239(1 )(a) of the Act in respect of its 1985, 1986 and 1987 taxation years by understating its taxable income for those years, in the amounts set forth in the Amended Indictment.

Count 11 of the Amended Indictment is an aggregation of [the amounts referred to in] counts 12 and 13 and alleges that the Numbered Company committed an offence under paragraph 239(1 )(d) of the Act. Counts 12 and 13 allege that Riverside and the Numbered Company committed offences under paragraph 239(1 )(a) of the Act in respect of its 1985 and 1986 taxation years by understating its taxable income for those years, in the amounts set forth the Amended Indictment.

Hubert is also individually charged as director or agent of Kleysen, Riverside and the Numbered Company in counts 7 through 13 both inclusive. He is named as a co-accused in those counts.

The prosecution’s claims against the accused are based on equipment sales by the accused to an offshore corporation controlled by Hubert. The accused reported those sales of equipment as dispositions in their tax returns.

The prosecution alleges firstly, that there was no true sale by the accused to the offshore corporation. The prosecution says that the offshore corporation. The prosecution says that the offshore corporation was merely a fictitious entity or “alter ego” of Hubert and as such there was no true sale at the prices reported by the accused. Secondly, in the alternative the prosecution alleges that if the sales to the offshore corporation were made by the accused, then the sale prices were false or fictitious and significantly below prices the accused should have obtained on disposition.

Thus the prosecution says that the accused falsely understated their respective incomes by avoiding recapture of Capital Cost Allowances

(CCA) claimed in prior taxation years. The disposition at prices claimed by the prosecution would have resulted in recapture. This recapture of CCA would have reduced expenses resulting in greater or increased income subject to tax.

Thus the prosecution claims the accused falsely understated their respective incomes and thereby evaded income tax payable on their true incomes.

IV AMOUNTS INVOLVED

A. Hubert

The amounts by which Hubert is personally said to have understated his incomes in counts 1 to 5 are:

1982: $85,226.26

1983: $45,013.35

1984: $384,953.51

1985: $256,655.95

1987: $22,013.00

The sixth count sets out a total of the above amounts plus $22,013.00 representing an Investment Tax Credit (ITC) claim by Hubert which I will describe more fully shortly..

As a result, of those understated incomes, the Prosecution alleges that Hubert evaded a total of $297,248.34 in federal income tax.

B. Kley sen

Similarly, in count 7, Kleysen, as taxpayer, and Hubert, as its director or agent, are charged with understating the incomes of Kleysen by $107,505.30. The amount of income tax alleged to have been evaded as a result was $41,672.69. Counts 8, 9 and 10 particularize those amounts as follows:

1985: $61,361.81

1986: $33,181.24

1987: $12,962.25

C. Riverside

Counts 11,12 and 13 charge the Numbered Company and Riverside as taxpayer and Hubert as its director or agent with evasion of $76,173.25, an understated income of $204,022.75 as follows:

1985: $22,183.61

1986: $181,839.14

To appreciate the scope of the business activities of the accused during these periods, I will set out some of the information they reported in their income tax returns for that period. I will also describe some of their activities according to the evidence of the prosecution’s witnesses.

V THE ACCUSED’S BUSINESS CONCERNS

The Accused were engaged collectively in the use of mechanical equipment. Much of it was substantial heavy construction equipment acquired for use in the construction, road building and mining industries. The accused, Kleysen, is of course involved in the transportation business as well.

A. Hubert

(i) Nature of Business Dealings

Hubert is a business executive whose leadership role in the operations of Kleysen is well known and recognized by the transportation community and the tax department. He was, during the years set out in the indictment, the principal shareholder, officer and managing director of Kleysen. He also personally financed certain of Kleysen’s and Riverside’s business activities by purchasing equipment they required and leasing that equipment to them. He was successful financially and his annual taxable income well demonstrates his business acumen and that success.

(ii) Amounts Involved

According to his tax returns for the years 1982, 1983, 1984, 1986 and 1987 he reported annual total incomes in the approximate amounts set opposite those years:

1982: - $247,000.00

1983: - $243,000.00

1984: - $307,000.00

1985:-321,532.00

1986: - 345,319.00

1987: - $640,804.00

Included in those incomes were substantial amounts received as rent from equipment he purchased personally and leased to Kleysen and Riverside.

In 1982 his rental income was approximately $158,000.00 gross and $54,794.00 net.

In 1983 his rental income was approximately $186,255.00 gross and $69, 164.00 net.

In 1984 his rental income was approximately $226,560.000 gross and $79,218.94 net.

In 1985 his rental income was approximately $227,655.00 gross and $104,279.95 net.

In 1986 his rental income was $228,510.00 gross and $113,641.00 net.

In 1987 his rental income was approximately $251,346.00 gross and $122,933.00 net.

(iii) Hubert’s Capital Cost Allowances

In those years he claimed, as he was permitted as expenses against income, Capital Cost Allowances (CCA) set out below:

1982: - approximately $85,000.00

1983: - approximately $94,000.00

1984: - approximately $100,000.00

1985: - approximately $ 94,000.00

1986: - approximately $188,000.00

1987: - approximately $440,000.00

All or almost all of the equipment for which the allowances were claimed was described as class 22 (trucks and heavy equipment). The CCA allowed was 50%.

While Hubert’s income includes some salary and revenue income from real estate, a large percentage of his income reflects his dealings in equipment.

(iv) Capital Cost Influences on Hubert

The witness, Arthur James Oakes, a former senior employee of the accused and Kleysen’s former chief financial officer, told the court and I accept his evidence that Hubert acquired equipment and leased it to Kley sen and Riverside for sound commercial reasons. It is no secret that the ownership of class 22 assets has created incentives for high income taxpayers to acquire such equipment as a tax shelter or reduction plan intended to reduce the impact of income tax.

Hubert’s income tax returns demonstrate the effective use of the CCA to reduce his taxable incomes. This has been done in accordance with the Act’s provisions.

The prosecution claims, and it is likely true, that from time to time the value of class 22 equipment is greater than its book values for tax purposes.

(v) Hubert’s Tax Planning and Tax Reporting

I am satisfied from the evidence of Oakes that Hubert was relatively unsophisticated in the area of tax planning and income tax reporting. He relied heavily on Oakes, his auditors, internal accountants, outside experts and probably what he picked up from other businessmen. There is no doubt he intended to reduce or minimize his income tax as much as possible.

I am absolutely certain that Hubert intended to take advantage of the tax law to reduce his taxable income and to avoid as much as possible the payment of income tax.

He claimed the maximum CCA available in part to finance his equipment purchases. In doing so he reduced his personal income tax and used the tax saved or postponed as capital to expand the businesses of the accused.

He was also prepared to challenge Revenue Canada whenever it suited his purpose, namely to pay the least amount of tax possible and to use those amounts to expand those businesses.

This, he had every right, and some would say a duty to do.

Included in his aggressive tax planning I have no doubt was his determination to plan the disposition of depreciable property so as to attract the least amount of recapture.

Any disposition of assets of a particular class affects the amount of the pool of assets in that class (the Undepreciated Capital Cost (UCC)). Any disposition in an amount greater than the UCC of the asset disposed results in a recapture of allowance which reduces the UCC.

Transactions at arm’s length normally determine market place values. Revenue Canada ordinarily accepts the values stipulated in dispositions between parties dealing at arms’ length without question. Non arms’ length transactions are subject to scrutiny and are frequently subject to audit and subsequent reassessment. Sometimes, as indicated by the witness Johnson, the prosecution’s chief investigator, for a variety of reasons non arms’ length transactions are subject to investigation and prosecution.

According to Oakes, during the relevant periods, January, 1982 to some time in 1988 when the income tax returns of the accused were filed for the 1987 taxation year, he personally prepared draft or outline returns for Hubert and for Kleysen. These were submitted to the firm of Coopers & Lybrand for review and final preparation. He obtained Kleysen’s information from the books of Kleysen and its other employees and from Hubert with respect to Hubert’s own transactions.

The accounting staff of Kleysen was supervised by Oakes. Hubert kept his business records at the Kleysen’s place of business. Originally I had some doubts as to some of Oakes’ evidence. I initially believed he was favouring Kleysen and Hubert in his answers. On reading and re-reading his evidence and on reflection and reconsideration, I find no reason to doubt any of the evidence elicited from him by the prosecution in chief or by the accused in cross-examination.

B. Kleysen

At all material times, Kleysen was a significant interprovincal and international trucker and transporter with various allied activities. The principal manager and director of Kleysen was Hubert. There is no doubt that Hubert was the controlling director and at times agent of Kleysen. However, having regard to its size and the scope of its business, it required a sizable management team to operate.

I do not intend to set out here the size and scope of the business of Kleysen and Riverside for each year in which their returns are challenged. However, I will provide some examples.

For the fiscal year ended 1985 Kleysen reported the following:

depreciation of operating equipment (miscellaneous equipment, contractor’s equipment, trucks and trailers) is provided over the estimated useful life of the equipment on a straight line method or rates between 5% and 25%.

I cite this note to underscore the difference between statements prepared for tax purposes and those prepared for other purposes in accordance with generally accepted accounting practices.

The amounts I have just stated are taken from Kleysen’s 1985 financial statements enclosed with its 1985 tax return.

Obviously CCA taken for tax purposes increases expenses for tax purposes but if the same rates were used for general purposes, income would be artificially reduced. As well, asset values would likely be reduced below actual values.

Also described in note 10 are the following statements:

(a) During the year the company disposed of trucks and equipment to a subsidiary company. The proceeds of disposal were $45,300.00...with no resulting loss or profit on disposition.

(b) During the year the company disposed of trucks and equipment to affiliated companies. The proceeds of disposal were $342,500.00...with a resulting loss on disposition of $8,000.00.

Schedule T2S(8), part of the 1985 income tax return, sets out the total amount of UCC at the end of the prior year and the cost of additions, proceeds from disposals, ITC, UCC before CCA and the CCA claimed.

For 1985:

Again these amounts are set out to give the reader some indication of the sizable scope of the business involved, the number of transactions recorded and the volume and number of decisions taken in the period.

For 1987, Kleysen’s taxable income reported was $1,323,826.00. Current assets were greater and total assets were $24,441,369.00 compared with $21,928,416.00 in 1985. Retained earnings at the end of the fiscal year 1987 were $5,435,339.00 compared with $4,983,916.00.

Kleysen showed consistent revenue growth from 1985 to 1987. Revenue rose from 39,848,107.00 to $42,451,354.00.

For CCA allowances the 1987 return showed opening:

The accused submit and I accept their submission that the court must relate the questioned transactions not in isolation but rather in the context of the total dealings of the accused.

C. Riverside/Numbered Company

While Riverside’s operations pale in amounts compared to those of Kleysen, its business was nevertheless substantial. Its balance sheet as at April 30, 1985 discloses:

Total assets after depreciation and depletion of: $ 4,159,847.00

Its liabilities were:	$	2,314,111.00
Its shareholder equity was:	$	1,845,736.00

In 1985 it showed a loss of $227,055.00 on revenue of $6,479,418.00.

Its assets for capital cost allowances were shown at:

At all material times, Riverside was engaged in the gravel business in Manitoba and elsewhere.

It was controlled by Hubert but the manager of its activities and minority shareholder was Antoine Anthony Deger (Deger). Deger gave evidence as to Hubert’s decision to wind up their joint activities and the requirement to dispose of its assets. Since Hubert controlled Riverside, it was he who determined how those assets were sold.

Deger testified that Hubert undertook the responsibility for disposing of those assets. Hubert set the price for the disposal of the equipment used by the company. Deger had an interest in the price obtained for the equipment disposed by Hubert. Deger also testified as to the worn condition of the equipment disposed of by Riverside.

VI CCA/TIMINGS

As I have previously indicated, one of the rights of taxpayers who own depreciable property used in a business is the right to claim CCA as an allowable expense against other or business income. These allowances are considered expenses in calculating net income for taxation purposes.

Hubert carried on the business of acquiring and leasing vehicles and equipment to others under the name of HTK Rentals. Thus he was entitled to set off as an expense against his income the maximum CCA permitted by regulation under the Act.

According to the Act and its regulations, during the years 1982 to 1987 a taxpayer in the equipment leasing business such as Hubert, who acquired depreciable equipment at any time during the calendar year (say for example in December), was entitled to claim the permitted allowance for the whole year.

I point this out here because during this period it was not uncommon for persons or corporations to acquire depreciable property in December. This acquisition entitled them to claim the allowance and the resulting expense for the entire year. This allowance produced an expense for tax purposes for the calendar year in which the asset was acquired. It was not necessary to pay for the asset in that year to claim the expense.

This expense was claimed against other income such as business, employment or investment income. Again this practice was well recognized by Revenue Canada, taxpayers and their professional advisors.

VII OUTLINE OF THE PROSECUTION’S THEORY

The prosecution alleges that the accused reported dispositions of such equipment at false or fraudulent prices.

The prosecution states those prices were significantly lower than prices then available in the market place. These sales were to a corporation, Carib Sales and Rentals Ltd. (Carib), a corporation said to be secretly owned and controlled by Hubert.

The prosecution claims that the sales were not made to Carib at all; that the sales were made to the ultimate purchaser; that the documentation of the sale to Carib was false and had no real substance; that Carib was really Hubert; and that the court is obliged to disregard the sales to Carib.

In the alternative, if the sales to Carib were real they were at falsely deflated prices designed to evade the recapture of CCA previously claimed.

Thus the prosecution alleges the accused filed fraudulent income tax returns claiming taxable income lower than actual. Thus it is submitted the accused evaded income tax which should have been paid.

VIII CATEGORIES OF CONDUCT

In considering the allegations against the accused I have divided them arbitrarily into three different categories of transactions. They are Hubert’s ITC claim, Disposition of Used Equipment, and Disposition of New or Unused Equipment.

A. The Income Tax Credit (ITC)

In Count 5 the crown alleges that Hubert claimed an ITC in the amount of $22,013.00 and in doing so he committed an offence against section 239(1 )(a) (making a false or deceptive statement in his return).

In Count 6 the crown alleges that Hubert, by claiming the ITC, understated his income by $22,013.00, and thereby willfully evaded the payment of taxes imposed by section 239(1 )(d) of the Act. The amount of tax evaded is included in the total amount described in that Count.

There is no doubt that Hubert claimed that amount on his return. There is also no doubt that the opinion of his tax advisers was at the time he made the claim, that he was not entitled to make it. This was because, in their opinion, ITC was available to corporations and not to individuals.

Hubert had in prior tax returns made similar claims and had been challenged by assessment by the revenue officials.

Does his further attempt to make the ITC claim constitute the false or fraudulent act of understating his income and resulting in tax evasion?

B. Disposition of Used Equipment by Hubert, Kleysen and Riverside

Hubert, Kleysen and Riverside disposed of certain used equipment specifically shown on Exhibit 84 (copy attached). These dispositions were to Carib, a corporation incorporated under the laws of The Bahamas.

The prosecution claims that the sale to Carib was fraudulent and ought to be disregarded.

In the alternative, the sale prices reported were substantially below “market value” and the dispositions should have been at market value.

The prosecution alleges that Carib, immediately and without expending any monies repairing or improving the equipment, resold the same equipment acquired from the accused at prices significantly higher than those paid.

Exhibit 84 sets out those transactions. It was prepared by the prosecution. The prosecution in its evidence followed a plan of identification of these transactions based on their ultimate sale in the United States at auction. It has grouped all the equipment into subgroups based on the place and date of its ultimate disposition.

For example, on page 1 of Exhibit 84 the equipment disposed of by auction on April 6, 1982 at Olympia, Washington is grouped under that auction date. Here Hubert, operating under the name of HTK Rentals disposed of four pieces of used equipment, three loaders and one grader (plus ripper). This equipment was sold on March 17, 1982 by Hubert to Carib for a total of $57,000.00 Canadian. That date was shown in Hubert’s books.

Six days earlier on March 11, 1982, Ritchie Bros. Ltd., an arms’ length auctioneer, agreed to sell these four pieces of equipment and ripper at auction. In order to ensure that the equipment was sold at its auction Ritchie agreed to guarantee a price of $220,000.00 U.S.

This sale was originally intended to be made by Hubert direct to Ritchie Bros. However, on March 17, 1982, Hubert arranged a sale to Carib for $57,000.00 Canadian. At the same time he knew that Ritchie Bros. was prepared to guarantee $220,000.00 U.S. for the same equipment. The original contract from Hubert or HTK Rentals to Ritchie Bros. was canceled and the intervening sale made by him to Carib. This example the prosecution submits is clear evidence of a false transaction.

C. Disposition of New or Unused Equipment

The prosecution also alleges that Hubert sold to Carib four new or unused pieces of equipment at prices significantly below both their cost and real value. Then Carib immediately disposed of that equipment by direct sale to and auction by one of the Ritchie Brothers corporations. (See Exhibit 84, pages 2 and 3.)

There are a number of Ritchie Bros. Ltd. corporations, including U.S. subsidiaries and other controlled entities. In my view the actual Ritchie Bros, corporation which ended up disposing of the equipment at auction is irrelevant. I will refer to all of those corporations as “Ritchie Bros.”

The subsequent sales at auction by Carib and Ritchie Brothers were at prices significantly higher than those obtained by Hubert from Carib. The differences resulted in apparent gains by Carib said by the prosecution not to be taxable in Canada. I say apparent because we have before us no record on any of Carib’s expenses. There is also no evidence of any attempt to tax Carib in Canada on the basis of allegations that it is Hubert’s “alter ego .

IX CROWN’S POSITION/ACCUSED’S RESPONSE

The prosecution’s position is set out at page 5 of Volume 60 A.M. by its lead counsel as:

Insofar as the tax evasion aspect of it, we are submitting to the Court...that Mr. Kleysen developed a scheme essentially to hide money from the...Re venue, and it was deliberate, it was fraudulent and it continued over a period of time. And he used the vehicle of Carib as the means of diverting the money that should have been recorded properly in the returns, his returns in Canada. And that not being done, we submit that there was tax evasion.

Thus Carib becomes the focus of the fraud because it is alleged to be the “means” of diverting taxable income from the accused.

Who therefore is “Carib” and how does it become the “means” by which the alleged fraud was perpetrated?

Hubert acted on Carib’s behalf in its dealings with Ritchie Bros. He also received documents and cheques made to Carib.

Hubert is described by Mr. Margolis (page 50, Vol. 60 A.M.) as “the guiding hand of Carib”.

Carib, according to the prosecution, was incorporated in the Bahamas by or on behalf of Hubert. Cyril K.S. Ijeoma whose address was at Deloitte Haskins & Sells, Chartered Accountants, P.O. Box N7120, Nassau, Bahamas was one of its signing officers. He also was Hubert’s Carib contact in the Bahamas. Carib’s address was Centreville House, Nassau, Bahamas.

On February 3, 1983 (sometime after March, 1982, the first sale by Hubert [H.T.K. Rentals] to Carib of used equipment and before the sale by Hubert to Carib of the new equipment (April, 1984), Hubert wrote to Ijeoma instructing Ijeoma “to transfer 100% of the shares in Carib Sales and Rentals Limited to my wife Bernice Kleysen on my death.” (Exhibit 38)

This letter is submitted by the prosecution as proof that Carib was owned by Hubert.

X DIRECTING MIND

The prosecution advanced arguments dealing with the concepts of “directing mind” and “corporate veil”.

It is the prosecution’s contention that Hubert was the “directing mind” of Carib, and therefore, Carib’s separate corporate existence should be disregarded.

“Directing mind” is a concept often considered in determining the residence of a corporation for taxation purposes.

The accused reply by stating the concept of “directing mind” is not relevant to this prosecution. Even if it were relevant they claim that the evidence does not prove that Hubert was the “directing mind” of Carib as that term is used in tax jurisprudence.

They argue that the residence of Carib is not at issue in this prosecution. Even if Carib were to be declared a resident of Canada because its directing mind and management was in Canada, that does not advance the prosecution’s case. It is merely one factor in establishing Carib’s separate legal existence.

The prosecution has also chosen to characterize Carib as Hubert’s “alter ego” or agent. The accused claim that the prosecution has not proved that Carib was either Hubert’s “alter ego” or agent.

The accused have set out their response to this argument at pages 72 to 74 of their written argument and I do not propose to deal further with the point.

The prosecution has offered evidence of the existence of offshore resident directors of Carib who executed the documents of the sales between Carib and Ritchie Bros.

The accused argue that the prosecution’s evidence supports a finding that Carib was incorporated offshore, had representatives in the Bahamas, had directors resident in the Bahamas, had bank accounts in the United States and the Bahamas and had telephone and mail addresses in the Bahamas and that the offshore directors were actively involved in the operation of Carib.

They submit that the prosecution has established all of the criteria necessary to confirm Carib as a separate legal entity.

XI LIFTING, PIERCING OR OTHERWISE DISREGARDING THE CORPORATE VEIL

The principles involved in disregarding the separate existence of a corporation, however they may be euphemistically described, are similar principles which are considered in arguments alleging sham transactions.

The accused submit that the prosecution has not established, on the evidence as a whole, that the dealings between the accused and Carib were not real, legal and binding.

They argue that the prosecution have not satisfied the court beyond a reasonable doubt that Carib was created and used as a fraudulent device allowing the accused to understate their respective incomes by creating deceitful and false sales in transactions which the prosecution say did not exist in fact.

On the whole of the evidence the accused submit that Carib was real and valid; the sales to it were real and valid; the prices used may be questioned for assessment purposes but were not proved to be false or deceitful in understating their incomes for the purpose of evading income tax.

XII APPROPRIATIONS/HUBERT

The prosecution advances a further argument relying on certain “deeming” sections of the Income Tax Act to create a criminal responsibility.

The prosecution states that these sections, 56(2), 245(2) and 15(1) of the Act, oblige Hubert to include in his income for the various tax years described in the indictment amounts by which they claim Carib was effectively enriched. They allege that this results from sales at below market prices.

They say Hubert appropriated to himself the differences between the prices obtained by Kleysen and Riverside from Carib and the prices obtained for the same equipment by Carib from Ritchie Bros. They argue that the amounts appropriated constitute income on which tax was evaded.

The accused submit that section 56(2) does not apply on the facts in this case. In the alternative, they say if section 56(2) applies and if Hubert is required to include such amounts in his income for those years, his failure to include those amounts in his return does not constitute a false or misleading understatement of income. Therefore, they argue that the concept of deemed income is inconsistent with a deliberate understatement of income in order to evade tax. They say the deeming provisions are an after the fact result of the Act and not an intended consequence of the accused.

In McClurg v. Minister of National Revenue (sub nom. McClurg v. The Queen), [1991] 1 C.T.C. 169, (sub nom. R. v. McClurg) 91 D.T.C. 5001 (S.C.C.) the purpose of section 56(2) was described as an anti-avoidance technique to ensure that payments otherwise received by a taxpayer are not diverted to a third party.

The accused argue that this case is no authority to prosecute a taxpayer for evasion by not including in income a “constructive receipt”.

The prosecution contend that /ndalex Ltd. v. R. (sub nom. Indalex Ltd. v. The Queen) [1988] 1 C.T.C. 219, 88 D.T.C. 6053 (F.C.A.) is authority for the application of section 56(2) in similar circumstances. The accused say that authority does not support the prosecution.

The prosecution makes a similar argument based on its interpretation of section 245(2) of the Act. That subsection is also a “deeming” provision when correctly applied.

The accused submit the same analysis to the use of section 245(2) as the basis of a prosecution for evasion as I have previously discussed with respect to section 56(2).

The accused have referred to R. v. Esskay Farms Ltd., [1976] C.T.C. 24, 76 D.T.C. 6010 where section 245(2) was considered. There, in a civil assessment case, the revenue authorities attempted unsuccessfully to establish by the use of then section 137(2), now section 245(2), that the taxpayer received a benefit to be included in taxable income.

The accused argue here that there is no evidence before the court that Hubert received any benefit from or by Carib’s transactions.

Similarly, the prosecution argues that section 15(1) obliges a taxpayer to report as income a benefit or advantage conferred on the taxpayer by a corporation. They claim Hubert received a benefit from his co-accused or Carib. The accused submit there is no evidence of a benefit or advantage conferred on Hubert by his co- accused, Carib or any other corporation.

XIII INVESTMENT TAX CREDIT

I now propose to deal in greater detail with the ITC claim and other aspects of the case.

The prosecution alleges that Hubert’s ITC claim in his 1987 return is evidence of false reporting of his income and an evasion of income tax.

During the trial I indicated to counsel that I was satisfied that Hubert had the right to make his claim for the ITC even though he was told by his advisor he was not a corporation and that the claim was limited to corporations.

The claim of a credit in this case does not constitute fraudulent conduct and cannot, in my view, support a prosecution for fraud or evasion.

Hubert as a taxpayer has no other reasonable method to contest Revenue Canada’s interpretations of the Act but to make a claim, openly on his return and contest his re-assessment.

To subject a taxpayer to criminal prosecution for claiming a credit which she wishes to argue is allowable strikes at the fairness of the Canadian Tax System. Taxpayers ought not to be threatened with prosecution for such claims. Taxpayers ought to be encouraged to claim and argue their respective positions in order to ensure the system is fair and equitable. It is only a fair and equitable system which will retain the respect of taxpayers whose voluntary compliance is essential to its successful, efficient and effective operation.

XIV HUBERT/ALTER EGO/AGENT

Throughout the trial the prosecution has advanced as a matter of fact the argument that Carib had no separate legal existence.

According to the prosecution I am required to disregard Carib as a legal entity and ignore the sales to it by the accused. This is so because the prosecution believes that the accused did not sell the equipment to Carib but made the sales direct to Ritchie Bros.

It is the prosecution’s case that Carib existed only as a phantom of Hubert’s self; namely his “alter ego” or other self.

The prosecution argues that the court should disregard the accused’s transactions with Carib because the accused did or ought to have made the sales direct. They say the accused created Carib as a false purchaser to avoid recapture or gain.

The prosecution also alleges agency. It is the prosecution’s allegation that Carib was the agent of Hubert and it must prove that agency beyond a reasonable doubt.

That matter was discussed in Denison Mines Ltd. v. Minister of National Revenue, [1971] C.T.C. 640, 71 D.T.C. 5375 (F.C.T.D.); affirmed on other grounds [1972] C.T.C. 521, 72 D.T.C. 6444 (F.C.A.); affirmed [1976] 1 S.C.R. 245, [1974] C.T.C. 737, 74 D.T.C. 6525.

That was a civil assessment matter.

The essential elements of agency were originally discussed by Atkinson, J. in Smith, Stone & Knight v. Birmingham, [1939] 4 All E.R. 116(K.B.).

I will not here repeat those elements except to say that on all of the evidence presented in this case the prosecution has failed to prove that Carib was the agent of either Hubert or either of his co-accused.

In the alternative, even if Carib was Hubert’s agent, I do not believe that fact by itself establishes the offence of evasion. It establishes the basis of a revenue reassessment.

Denison is authority for the proposition that in circumstances as we have here any attempt to establish agency where it is denied is an erosion of general corporate and business law. At page 662, (D.T.C. 5389) the court stated:

Any attempt to erode this principle must be based upon clear and unequivocal facts leading to the irrebutable conclusion that one legal entity is acting as agent of another and that legal entity is really doing the business of the other and not its own at all.

The prosecution has not met that test on the evidence in this case.

XV SHAM

I do not intend to deal at length with the accused’s answer to the prosecution’s submissions on “sham” transactions.

It should be sufficient here for me to note the Supreme Court of Canada in Stubart Investments Ltd. v. R. (sub nom. Stubart Investments Ltd. v. The Queen), [1984] C.T.C. 294, 84 D.T.C. 6305 adopted the definition of sham transactions in Snook v. London & West Riding, [1967] 1 All E.R. 518 (Q.B.) at page 528 as actions:

...which are intended by (the parties) to give to third parties or the courts the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

In my view, the prosecution has failed to prove that the sales from the accused to Carib were actions which the accused intended to give third parties or the courts the appearance of creating between them legal rights and obligations different from the actual legal rights created.

To paraphrase the Federal Court of Appeal in Irving Oil Ltd. v. R. (sub nom. Irving Oil Ltd. v. The Queen), [1991] 1 C.T.C. 350 (sub nom. R. v. Irving Oil Limited), 91 D.T.C. 5106, these accused by their actions and documents did not mask or artificially create a transaction of purchase and sale. Their actions and documents recorded the actual sales between the accused and Carib.

I have read and repeat the following taken from the very helpful judgment of Bowman, J. in Continental Bank of Canada v. R. (sub nom. Continental Bank of Canada v. Canada), [1995] 1 C.T.C. 2135, (sub nom. Continental Bank v. The Queen) 94 D.T.C. 1858 at p. 2150 (D.T.C. 1866-67):

In cases of this type expressions such as sham, cloak, alias, artificiality, incomplete transaction, simulacrum, unreasonableness, object and spirit, substance over form, bona fide business purpose, step transaction, tax avoidance scheme and, no doubt, other emotive and , in some cases, pejorative terms are bandied about with a certain abandon. Whatever they may add, if anything, to a rational analysis of the problem, apart from a touch of colour in an otherwise desiccated landscape, they do not exist in separate watertight compartments. They are all merely aspects of an attempt to articulate and to determine where “acceptable” tax planning stops and fiscal gimmickry starts.

Shams are more easily recognized than defined. The classic definition of sham is found in the judgment of Diplock, L.J. in Snook v. London & W. Riding Invest. Ltd....

And also at pages 2151-52 (D.T.C. 1868):

The law has, I believe, come a long way in its view of what constitutes a sham since the days of Gibson Bros. Industries Ltd. v. Minister of National Revenue, 72 D.T.C. 6190, Minister of National Revenue v. Leon, 76 D.T.C. 6299 and Dominion Bridge Co. v. R., 75 D.T.C. 5150 (aff'd 77 D.T.C. 5367). If the legal relationships are binding and are not a cloak to disguise another type of legal relationship they are not a sham, however much the tax result may offend the Minster or, for that matter, the court, and whatever may be the overall ulterior economic motive. When something is a sham the necessary corollary is that there is behind the legal facade a different real legal relationship. If the legal reality that underlies the ostensible legal relationship is the same as that which appears on the surface, there is no sham.

In this case the accused have argued, and I accept their argument that the prosecution has failed to establish that the relationship between the accused and Carib was a sham. I am satisfied that the transactions between the accused and Carib were in legal terms those set out in the documentation filed as exhibits.

XVI METHOD OF INVESTIGATION

The accused argue as a defence that the revenue officials auditing and investigating the accused failed to give the accused “ample opportunity to make explanations or representations”. This argument is set out at pages 56 to 64 of the Argument of the Accused.

I accept the accused’s assertions that the investigators did not follow their own policy on this point during this investigation.

I am satisfied that the investigators were aiming at an investigation which would result in a prosecution rather than simply an inquiry into the facts.

I do not know why this particular group of accused or their industry was chosen. However, Mr. Johnson has given evidence of the use of prosecutions for the purpose of encouraging other taxpayers and the community at large to report honestly their business transactions. I will not speculate on the subject.

I am satisfied that nothing turns on the department’s failure to elicit further information from the accused other than to say that failure is not helpful to the prosecution.

I would surmise that most likely the investigators did not want to “tip off’ the accused to the extent of their investigations to prevent the accused from covering their tracks or destroying evidence of their activities.

It is sufficient for me to say that there is no evidence of any such conduct on the part of the accused even though it is likely they were aware of the investigators’ attempt to obtain information from Ritchie Bros. long before the investigators obtained search warrants.

Finally, the department’s failure to give the accused an opportunity to explain how the sale prices were arrived at with Carib gives the accused no defence to the charges. It does, however, permit the accused to argue, as they do, that the prices were not concealed, that they were open and not hidden, and that if asked for information the accused would have given a truthful response to the Revenue Canada auditors.

XVII DEFENCE OF REASONABLENESS

The accused submit that the prosecution must satisfy the court beyond a reasonable doubt that the prices agreed to between the accused and Carib “were something other than reasonable in the circumstances”. They argue that such proof has not been tendered, and therefore, the accused are entitled to be acquitted.

The court is satisfied that while the prices for the sale of both new and used equipment were favourable to the accused’s tax planning scheme, the transactions were not proven to be fraudulent. The accused make the argument that in transactions between the accused and Carib, the required test was not market value but instead was reasonable value.

XVIII RELATIONSHIP OF HUBERT TO CARIB

The accused have contested (as is their right) all proof which tends to associate Hubert with Carib. Nevertheless the court is satisfied that an association has been proven and that dealings between Carib and the ac- cased were not at arms’ length.

However, mere proof of association does not constitute fraud in the absence of proof of both a false or fraudulent act combined with an intention to commit the fraudulent act to evade tax.

The prosecution argues the dispositions reported by the accused would have passed as arms’ length transactions had the revenue officials not been vigilant. They argue that the income tax returns of the accused would have been accepted without investigation and this is proof of an intent to defraud.

I cannot accept that argument.

The audit of the revenue officials and their decision to assess on the basis of the return or to re-assess on some other basis does not in itself prove intention to commit a fraud by the accused where transactions have been clearly and openly recorded in their returns.

XIX CARIB/ALTER EGO/HUBERT - REVISITED

The prosecution has throughout its argument referred to Carib as the “alter ego” of Hubert. The accused describe the prosecution’s argument as having “no basis in law”.

There are times when a court may disregard the existence of a corporation. When a corporation is established by a taxpayer in order to create paper transactions which do not exist at law, the court may be obliged to disregard firstly the corporation so created and secondly the transactions purported to have taken place.

The tests are basically ones of fact from which legal consequences flow. The factual circumstances here are that the corporation Carib was created ostensibly for a valid business purpose. This may be inferred from the evidence of Oakes and others.

The evidence as a whole raises a doubt as to the prosecution’s allegation that there was no business purpose to Carib’s existence.

If it were necessary for the accused to establish, on the balance of probabilities, a valid business purpose for Carib, (which I don not believe the accused are required to do), I am satisfied that such business purposes have been established.

In the alternative, the accused have quoted Estey, J. in Stubart (above) to argue that a transaction may not be disregarded for taxation purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose.

Stubart was a case arising from a civil assessment appeal where the taxpayer with the “avowed purpose of reducing its taxes” established an arrangement to re-route further profits through a subsidiary in order to use an existing loss carry forward.

The judgment of Estey, J. is particularly helpful in defining or describ- ing a “sham” transaction. At page 313 (D.T.C. 6308), Justice Estey points to an essential ingredient in a sham transaction as one:

..conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction, or simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality.

In this case the prosecution asks this court to find that the transactions between the accused and Carib were not real, did not convey title or ownership and did not have the legal authority of a bona fide purchase and sale.

However, the prosecution led no evidence to show the transaction was not real, that title did not pass, or that there was no legal authority to the transaction.

In fact the opposite is true. The prosecution led evidence both documentary and oral to confirm that the transactions between the accused and Carib did take place exactly as documented.

XX TAX ALLOWANCE AND TAXPAYER CHOICE

The prosecution, in essence, argues that the failure of Hubert and his co-accused to deal direct with Ritchie Bros. at the higher prices (those paid by Ritchie Bros. to Carib) is evidence of the accused’s deceit.

At pages 6311 to 6319, both inclusive, Estey, J. describes and discusses “the right of a taxpayer to order his affairs so as to reduce his tax liability without breaching any express term of the statute”. He does this under the title “Business Purposes Test” citing Lord Halsbury L.C. in Bradford v. Pickles, [1895] A.C. 587 (U.K.) at page 594 and the traditional position in Inland Revenue Commissioners v. Duke of Westminster, [1936] A.C. 1 (U.K.).

Tax avoidance is sometimes a persistent and oft-times a significant motive behind Canadian corporate organization and reorganization. Scores of practitioners across Canada examine and re-examine each provision and the amendment of each provision in our tax legislation, searching for tax reduction or tax avoidance opportunities.

So long as regulations, such as those permitted at the time for CCA, are in force, taxpayers will organize their affairs so as to obtain maximum benefit in order to reduce tax payable. They will also attempt to organize their transactions to retain the tax benefit for as long as possible.

In this case the accused attempted to avoid the recapture of capital cost allowances. So far as the Used Equipment is concerned there is no evidence at all produced by the prosecution to dispute the sale values used by the accused. The prosecution has established that the used equipment required substantial repairs and resultant expense to meet Ritchie Bros.’s auction sale requirements. There is no evidence that the accused made those repairs. There is every inference that they were made by Carib.

So far as the New Equipment is concerned, the accused made no secret of their sale to an offshore corporation at prices below cost and probably below market. Thus even though the transactions may not pass a civil re-assessment process, the prosecution has not established deceit or fraud.

The fact that Hubert did not make known or even hid his relationship as a shareholder of Carib does not constitute a fraud or a deceit. If he had been asked and denied a relationship, the case would be a different one. The very use of the name Carib is a clear indication to revenue authorities of its offshore existence.

Whether these accused are successful in establishing that the disposition prices with Carib were reasonable is a question to be determined elsewhere. As civil assessment proceedings remain outstanding it would be inappropriate for me to discuss this element further.

Certainly taxpayers have the right in a free and democratic society to set out their positions, create their transactions and submit them to the treasury in their returns for either acceptance or challenge.

Sales of used equipment by these accused are not infrequent occasional transactions. They form part of the every day business of Hubert and Kleysen. The acquisition, use and disposition of equipment for the purpose of gain is implicit in their business purposes.

According to the evidence, these dealings are constantly audited by revenue Officials.

These were transactions made by the accused with the full knowledge they were subject to audit review, were in the past and will be in the future.

All taxpayers must be able to take positions, report their transactions and defend them if necessary without the fear of coercion by threats of criminal proceedings. Positions taken by taxpayers may be different from the stated opinions of the revenue officials. They may be different from those of their advisors. Taking such positions against the advice of others is not in itself criminal, disgraceful or shady.

Taxpayers must be encouraged to use their good judgment, depart from the opinions of others and press their interpretation of the taxing statutes and regulations in their respective interests. This must generally be done, albeit in an environment of cooperation, openness and candor. As I have indicated, fairness of the system is vital to the success of the voluntary self-assessment income taxation procedure we have in Canada.

It is also useful to recall the language of Estey, J. at page 312 (D.T.C. 6319-20) of Stubart where he discussed “non-arms’ length transactions”. He emphasizes the right of a taxpayer to employ “tax reduction devices” describing a variety of choices which a taxpayer may make “solely for tax reasons”. He points out situations where “Motive would nowhere appear to be a precondition of eligibility.”

He goes on to say that “The same applies to the decision of a taxpayer to incorporate or to carry on business in partnership with a corporation.” Whether these choices are made solely on the basis of tax advantage, whenever the Income Tax Act prescribes different tax rates for different forms of business, the taxpayer must be free to choose whichever mode best fits her plans.

Here the taxpayer for reasons I will shortly describe, chose to dispose of depreciable assets through a third party. This the taxpayer must be free to do.

Having chosen to dispose of those assets (the new equipment) at possible below market price, the accused must be free to make whatever case they can on “reasonable” values.

XXI MORE BUSINESS TESTS

The accused further argue that the Federal Court of Appeal applied the principle stated by Estey, J. in Stubart (above) in Irving Oil Limited (above). There the Court at page 358, (D.T.C. 5112) found no business purpose to the transaction:

Be all that as it may, a transaction or arrangement does not fail effectively to avoid tax simply because it lacks a bone fide business purpose.

Although that was a civil assessment case, the accused argue that even if I determine that the accused’s transactions with Carib lacked a bona fide business purpose, they are not fraudulent. They argue that the lack of business purpose does not in itself make a transaction criminal.

In this case, the prosecution has not established the lack of a business purpose in the transactions between the accused and Carib. The evidence rather raises a valid business purpose. At the least the evidence discloses an arguable business purpose.

The accused argue that they had a valid business purpose in selling the used or new and unused equipment to Carib. They say the purpose was to interpose a valid, lawful corporation between them and any subsequent purchaser. This was done to prevent such subsequent purchaser from being able to make a claim or take any court action directly against them. They argue they were attempting to prevent their exposure to third party court actions. Thus they claim the sale to an existing valid offshore corporation was a desired business objective.

Each of Hubert, Kleysen and Riverside had, at the relevant time, a significant value or net worth. This net worth was potentially exposed to risk in any suit brought against them by an equipment purchaser.

According to Oakes, the disposal of equipment by the accused in the United States was never direct and always through a dealer for such liability reasons. I accept his statement. I further accept this reason as a possible valid reason for the establishment of Carib. I accept Oakes’ evidence that a selling entity had been advised in the past and that it was Kleysen’s policy to dispose of equipment in that fashion for that reason.

A further possible reason, nor argued, was the potential problems arising from the sale of the new equipment outside of Canada.

There is included in Exhibit 26 as part of the Powell Equipment and HTK Rentals invoice dated April 13, 1984 (shipping date May 9, 1984) an invoice from Caterpillar Americas Co., Mississauga, Ontario to Powell Equipment. That document contains the following language: “These commodities licensed by the United States for Ultimate Destination — Canada.” The commodity described is the 950 wheel loader 31 RO 1608.

The Caterpillar Americas Co. to Powell Equipment invoice containing this provision is presented as part of the original purchase agreement. There was no explanation given as to why that statement was made part of the purchase agreement. Certainly, if it prevented or limited sales in the U.S., such a provision would effectively reduce the value of the equipment.

It is a real possibility that Hubert and Kleysen chose to avoid that potential difficulty by making the sale to Carib. If Carib took the ownership of the new equipment in Canada, subject to that restriction, Hubert and Kleysen would arguably not be liable to Powell or anyone else consigning the new equipment to a destination other than Canada.

Hubert and Kleysen wished to sell the new equipment into the United States where the best prices were obviously obtainable. This was a better alternative to keeping the equipment unused and carrying expensive financing charges. It was also better than attempting to dispose of the equipment in Canada.

It can easily be inferred that the accused did not wish to jeopardize their relationship with Powell Equipment.

Thus a sale to Carib could avoid a possible problem with Powell and Caterpillar and create an entity relatively secure from attachment in Canada. At the same time they could attempt to avoid the recapture of CCA. I do not diminish this alternative. It may have been the major reason behind Carib’s creation.

Mr. Johnson, the principal revenue investigator, decided to recommend prosecution based primarily on the subsequent resale prices obtained by Carib from Ritchie Bros.

At Volume 29 (A.M.), pages 59 and 60 he answered counsel’s question as to why he was suspicious of the transactions. Firstly, the sale was to an offshore corporation. Secondly, he stated:

I could - we could not understand how brand new equipment could be sold at such a low price and then all of a sudden get such a high price at the auction.

When he was questioned further he acknowledged he did not ask the accused for an explanation.

At that point, during the investigation, I am satisfied that Mr. Johnson made up his mind that he had the evidence to prosecute an evasion case. He sought no reason from the accused that might establish either a business purpose or justification for prices agreed by the accused and Carib.

XXII SALE PRICES BY RITCHIE BROS.

According to the evidence of Mr. Cmolik of Ritchie Bros., which I accept, the prices ordinarily obtained for new equipment when sold at auction are probably at a discount of 30 to 40 per cent off full list price (Volume 24, P.M., pages 58 and 59).

The accused have argued that the prosecution failed to establish that the new equipment sold by them to Carib was the same equipment sold by Carib to Ritchie Bros. I reject that argument.

I am satisfied that the prices paid by Carib to Hubert and Kleysen and those paid by Ritchie Bros. to Carib for the new or unused equipment are as shown on Exhibit 84 and for substantially the same equipment.

I am also satisfied that Powell Equipment Ltd. sold the new equipment to Hubert and Kleysen at prices substantially discounted. These prices were well below the normal list price for caterpillar equipment.

I am also satisfied that these discounted prices accurately reflected the values then prevailing in the Canadian and particularly Manitoba market at the time of the sale.

The value of that equipment in the U.S. market was greater than those prices. The accused argue that for tax purposes they were entitled to use values of equipment in Manitoba. They claim there is nothing specific in the Act that prevents such values being used. There is substance to this argument. It militates against mens rea in the conduct of the accused.

I am also satisfied that the value of the new equipment was worth no more to Powell Equipment than the prices sold to the accused. This was so in part because Powell could not sell the equipment outside its territory. Thus the accused argue in Manitoba the equipment was worth no more to them than to Powell.

I am also satisfied that when the new equipment was purchased, Kleysen and Hubert intended to use that equipment in Kleysen’s business.

At the time or purchase, Hubert intended to lease the new equipment to Kleysen or Riverside or some other company with which he had dealings. These companies had tendered major construction contracts which had not yet closed.

I am also satisfied that Hubert and Kleysen as astute business people had alternative plans for the new equipment in the event it could not be used in the contracts upon which Kleysen had bid.

Firstly, they knew of the tax advantages of owning such equipment. Secondly, they knew of Ritchie Bros.’s emerging role in the United States auction market. Thirdly, having purchased the equipment at a substantial discount, they knew that any loss they might sustain on a resale would be limited.

I am satisfied Hubert knew that the equipment could be disposed of in the United States. He also knew that there were potential problems, including tax consequences and potential legal restrictions on the sale of the new equipment in the United States. It had been manufactured for sale in Canada.

As indicated, I accept the evidence of Oakes to the effect that neither Kleysen or Hubert had in the past sold used equipment direct to U.S. purchasers. There was always a U.S. sales entity even if controlled by Hubert or his family, (see Volume 34 P.M., page 73 and Volume 35 A.M., page 14)

I am not satisfied beyond a reasonable doubt that the new equipment sales by Hubert and Kleysen at the prices stipulated were made to evade income tax. it is possible that the sales were made to Carib rather than direct to Ritchie Bros, for the following valid business purposes:

(a) the possible restriction on sale of the equipment to Canada,

(b) the potential legal and tax complications on sale by a Canadian into the U.S. Market of equipment manufactured and designated to the Canadian market,

(c) the creation of a legal buffer between both Hubert and Kleysen, both of whom had significant net worths and either Ritchie Bros. or any subsequent purchaser.

Naturally any such sale could be expected to be made at prices that would permit Carib a gross profit. Its expenses would have to be covered otherwise its operations would be at a loss likely with no tax write-off. Carib had the right to earn a profit whether taxable in Canada or not.

As I have said, there is no evidence before the court to establish that Carib ever made a profit.

XXIII THE CARIB SALES, NEW EQUIPMENT

The 1984 new 225 Excavator serial #51U5361, as an example of the new equipment sales, was ordered in 1983.

Exhibit 84 (page 2) shows the relevant prices obtained on their dispositions, including those of the accused.

The original purchase price from Powell Equipment Ltd. was $112,487.00 U.S. or $143,983.00 Canadian. The equipment was invoiced on March 29, 1984 and shipped on April 18, 1984. Hubert paid for it on April 30, 1984.

Hubert claimed the maximum capital cost allowance on the purchase price in 1983. The CCA in 1983 was $71,991.50, reducing its UCC to $71,991.50.

The sale to Carib by Hubert on April 23, 1984 was $89,000.00 U.S. or more than its book value for tax purposes of $71,991.50 Canadian.

Carib resold the same equipment to Ritche Bros. for $130,000.00 U.S. on April 25, 1984.

Thus this Excavator purchased by Hubert in December, 1993 for $112,487.00 U.S. ($143,983.00 Canadian) was sold by Carib to Ritchie Bros. for $130,000.00 U.S. ($166,218.00 Canadian) or approximately $17,500.00 U.S. more than the original price paid by Hubert to Powell Equipment.

For its own reasons Revenue Canada arbitrarily allowed a $2,000.00 Canadian expense for shipping and insurance.

Therefore, the prosecution alleges that Hubert’s proceeds of disposition disregarding the sale by Hubert to Carib and assuming a sale by Hubert direct to Ritchie Bros. was $164,218.00 Canadian.

Hubert had reported his disposition of that equipment in 1984 at the price to Carib of $113,920.00 Canadian ($89,000.00 U.S.).

Thus, the prosecution alleges that Hubert failed to include a recapture of CCA amounting to $30,063.00 Canadian on this piece of equipment.

For the six pieces of new equipment the differences were:

(a): Hubert

51U5361	$	30,063.00
51U5327	$	29,800.00
31R1608	$	33,420.00
99Y2851	$	41,153.00
(b): Kleysen
99Y02877	$	61,231.69
31R01725	$	43,662.00
XXIV NEW EQUIPMENT - BACKGROUND

In March, 1986, as part of the audit of Hubert and Kleysen, Mr. Bisignano, the auditor, made inquiries concerning Hubert’s ownership of equipment. He was particularly interested in Hubert’s acquisition of two new units in 1983, three new units in 1984 and the disposition of four of those units in 1984. He was also interested in Hubert’s sale of certain vacant Calgary land. He also noted Hubert’s ITC claim and he was aware that the conventional view was that ITC could not be claimed by Hubert as an individual.

Hubert provided explanations in writing to the questions raised by Mr. Bisignano during the audit (Exhibit 22).

I accept the evidence tenured by the prosecution which established that at the time the equipment was ordered the accused Hubert and Kleysen anticipated tendering successfully on significant highway construction work for which the purchased equipment was intended to be used.

I also accept the evidence which established that late in 1983, the western Canadian economy was turning or had turned down. Heavy equipment dealers such as Powell Equipment Ltd. of Winnipeg had slow sales and were experiencing increasing inventories. There was considerable pressure from manufactures and particularly the Caterpillar company to move (namely sell) not only the inventory on hand but also the productions planned at Caterpillar’s U.S. manufacturing company for Canadian use.

Heavy equipment prices were considerably depressed. This was said to be due to a variety of circumstances including the then national energy policy, high interest rates and low construction activity.

I accept the evidence of Stuart Black concerning the general situation in Canada, Western Canada and specifically the Manitoba market for heavy equipment (see Volume 24 P.M., page 65 et seq.).

In recognizing these difficult economic times, I am also satisfied that Hubert saw a real opportunity to acquire new equipment at a significant discount. He, as I have described, was an exceedingly capable businessman. He analyzed the market for heavy equipment and realized that he could acquire new equipment at a deep discount. He intended to use the equipment on successfully tendered road building contracts.

Hubert knew in December, 1983 what his 1983 personal income was likely to be. He also knew Kleysen’s financial results for the first 8 months (year end April 30th). Thus he knew his downside or potential loss on an acquisition was limited.

Hubert realized his opportunity and gambled on the equipment purchases expecting that if he had to dispose of one or more of the pieces at below purchase price, he had some margins to protect himself and Kleysen.

These are reasonable inferences I have drawn from the evidence which I believe were borne out by subsequent events.

I am also satisfied that when equipment was disposed of Hubert, Kleysen, Riverside and their numerous professional advisers chose methods, timings and sales terms which were most favourable to the accused and which would attract the least amount of recapture of allowance or other tax treatments.

I believe considerable time, effort and expense went into the accused’s tax planning from every aspect.

I am also satisfied that the use of a selling vehicle was planned by the accused, not only to protect them from third party liability, but also as a tax avoidance vehicle.

I also accept the evidence of Oakes that early in 1984, Hubert and Kleysen were short of cash and that the disposition of the new equipment became a required option. Having lost the construction tenders, the new equipment became redundant and disposition was required to reduce inventory, debt and carrying expenses.

I also accept the evidence of Oakes that Powell Equipment Ltd. would neither re-acquire the new equipment nor cancel the original sales.

I also accept Oakes’ evidence that there was no one in the Manitoba market who would pay more for the new equipment than the price ultimately agreed to by Carib.

I prefer Oakes’ evidence to that of Asselstine on whether Powell would have accepted a cancellation of the new equipment purchase.

I do so because I am satisfied Oakes and Hubert made the necessary enquiries of Powell through Black.

Asselstine was not employed by Powell at the time and was in no position to articulate Powell’s policy. I am also satisfied that when he gave the evidence he did in chief, he was not properly informed of Powell’s position. In cross-examination, Asselstine admitted that the had no direct knowledge of Powell’s policy on such potential cancellations.

XXV USED EQUIPMENT

The prosecution has simply not proven that the used equipment sold to Carib was worth more than stated in Hubert’s sales invoices to Carib.

The prosecution argues that Hubert knew the prices that Ritchie Bros, was prepared to pay for the used equipment (when put into sale condition). They further argue that the accused knew the used equipment was worth the prices Ritchie Bros. was prepared to pay and these prices were greater than the prices which the accused accepted from Carib.

I am satisfied that Hubert, and therefore, the other accused were generally aware of the prices of used equipment sold at auction in auction condition. The prosecution has not established that the condition of the used equipment when sold to Carib was in the same condition as when sold to Ritchie Bros.

The prosecution’s argument fails to recognize the condition of the equipment when it was sold by the accused to Carib. It also fails to recognize the cost to Carib to put the equipment into auction sale condition.

The court cannot infer that the condition on Carib’s sale to Ritchie Bros, was the same as the condition when sold to Carib. Prosecution witnesses have testified that the opposite is true.

The accused in their written argument (undated but entitled “Argument of the Accused” containing 109 pages) at pages 24 to 45 both inclusive, set out in detail the evidence of the poor condition of the used equipment.

I have no doubt that prior to seizure the prosecution expected to find (and certainly looked for) evidence that repairs to the used equipment were made and paid for not by Carib but by the accused. The prosecution seized voluminous documentation of Kleysen and none of it disclosed that such was the case.

The opposite was discovered; there were no such repair costs either noted or put through as expenses to Kleysen or any of the accused.

If the accused were engaged in the fraud described by counsel for the prosecution, namely that Carib was the “alter ego” of the accused or of Hubert, one would have expected that investigators would have found evidence of repairs made by the accused to the used equipment.

Instead the prosecution argued that the onus is upon the accused to show that Carib did the repairs and expended significant monies on the obviously required repairs.

There is no such onus or responsibility on the accused to either tender that evidence or provide explanations.

The mere fact that Ritiche Bros. paid more for the used equipment than did Carib does not create an obligation on the part of the accused to provide explanations or prove innocence or raise doubts.

On the evidence as a whole, the court concludes that the prosecution has not made out its case against the accused based on the sales of used equipment.

I should note that Kleysen kept extensive records as to the repairs made to its equipment (see evidence of Kowall - Volume 35 P.M., pages 57 and 58 and Exhibit 77).

As part of its cost control, Kleysen kept records which showed the exact amount of “selling costs” as it related to each price of equipment. Those cost included all expenses spent on the maintenance and repair of that equipment prior to sale.

I also note that the application for the warrant to search and the warrant to search Kleysen specifically provided for the search of documents which, if they existed, would establish expenditures by Kleysen to put the used equipment into sale condition. Those documents did not exist in Kleysen’s records.

By March, 1992, it became apparent to the revenue investigators that their investigation did not disclose the information they expected to find regarding used equipment repair expenses.

Mr. Johnson then wrote to Hubert (see Exhibit 14) referring to him and his co-accused by name and asking for details of information relating to:

(a) transportation costs of shipping the equipment,

(b) insurance costs,

(c) repair costs that were required to prepare the equipment, and

(d) U.S. state taxes on equipment.

This letter was written post seizure and post charge but before the trial began.

The phrase used in Mr. Johnson’s request was: “It is apparent that there may be additional expenses that were incurred.”

No such letter was written to Carib.

XXVI RELATIONSHIPS

In order to fairly consider the evidence in this case it becomes necessary to consider the relationship between the accused and Revenue Canada prior to these charges.

Oakes gave evidence of the relationships between Hubert, Kleysen and Revenue Canada. I accept his evidence and his descriptions of the dealings of the accused with Revenue Canada prior to and after the sales to Carib.

I note that Oakes did not deal with the actual day-to-day accounting of Riverside but he was involved with Hubert and Kleysen’s accounting as well as their tax reporting. He also dealt with Revenue Canada and its officials, auditors, investigators, etc. throughout the challenged taxation years. He had also been responsible for tax matters for the accused for some years prior to 1982. He was familiar with the fact that Carib was being utilized to accomplish foreign sales on behalf of the accused. He denied knowing of Hubert’s ownership of shares in Carib.

Over the years prior to 1982 and subsequent, Hubert, Kleysen, and companies associated with them have been audited by Revenue Canada on a regular basis.

He described at some length the manner in which he and others negotiated with Revenue Canada officials over a variety of issues (see Volume 34 P.M., pages 57 et seq.).

So far as the taxation years 1982, 1983 and 1984 are concerned Mr. Bisignano, the Revenue Canada auditor, made a variety of enquiries concerning equipment dispositions. He asked for and received all of the information he requested from the accused through Oakes. There was according to Oakes no information requested that was not provided.

The only open issue so far as Oakes was concerned was the ITC claim by Hubert and challenged by the tax auditor.

At no time did Oakes refuse to provide Mr. Bisignano with information he requested. Bisignano had full access to all files, documents and information in the possession of the accused.

I have examined the evidence relating to the dealings between Oakes and Bisignano in considering inferences that might be drawn as to the intentions of the accused at the time they filed their tax returns.

I am satisfied from the prosecution evidence that there was nothing in the accused’s dealings with Revenue Canada to indicate anything but an honest and open response to Revenue’s inquiries. I am also satisfied that in his dealings with Revenue Canada on behalf of the accused, Oakes did everything he believed he was obliged to do on their behalf. No requests were made of Hubert for information although he had informed Bisignano that the was available if required. The accused on their part volunteered nothing which was not asked for. That is not an unusual posture.

So far as record keeping was concerned, I am satisfied the accused attempted to observe the spirit as well as the formal aspects of the law.

From the evidence as a whole I am satisfied that the accused believed they had the right to claim the amounts they claimed in their tax returns. They fully believed that any dispute as to values or CCA claims would be subject, firstly to negotiation, and secondly to assessment challenge if necessary.

The accused dealt with Revenue Canada on a regular basis over several years. Although particular auditors came and went, the process of satisfying revenue officials was an ongoing necessity which the accused knew they had to meet and which they attempted to meet. Their negotiations were sometimes concluded by agreement and occasionally by formal challenge by assessment. Often their differences were solved by concessions on both sides.

I am also satisfied that both Oakes and Hubert believed that an aggressive posture with Revenue Canada was desirable and satisfactory. By “aggressive” I mean maximum claims of expense whenever possible designed to reduce taxable revenue to minimum levels.

When Hubert and the other accused disposed of their equipment to Carib, I am satisfied he and they believed they were doing so on the basis they could support the values they used to Revenue Canada. They did not intend to do more than they had done in the past. They did not intend to evade tax.

As a negotiator Hubert intended to bargain values with Revenue Canada. He intended to start from the best possible starting point from his perspective i.e. the lowest values.

These are inferences I draw from the prosecution’s evidence.

XXVII HUBERT

From the evidence presented, I have been able to make certain observations and conclusions concerning Hubert. Those observations and conclusions are drawn from the descriptions given of him by associates, tax officials, and those dealing in business with him on a variety of levels.

Hubert was and presumably is a tough, rarely compromising businessman. He seeks advice but is technically inept in matters of taxation. He has strong views, among them is his heartfelt duty to pay the least amount of tax possible in each and every circumstance. I should add that I have seldom met a successful business person with a significantly different point of view or perspective on taxation.

He makes deals on a handshake or less formally on the phone. He expects to deliver on his undertakings and he expects others to do so likewise.

He has little interest in the fine points of either accounting or taxation regarding one as a business tool and the other as an unfortunate fact of life or necessity.

He regards Revenue Canada as a competitor for his dollars. He has no intention of aiding his competitor in any way. In fact he would like to hinder this competitor in any way possible within the law. He gives no inch and expects none.

He negotiates with Revenue Canada as a competitor, believing this is the appropriate way to deal with the tax authorities.

His policy may have served him well in the past but he apparently met his match in Mr. Johnson.

XXVIII UNITED STATES AND CARIBBEAN SALES

As I have indicated, I am satisfied that the accused did not intend to sell either new or used equipment direct to a purchaser. This was policy developed by the accused and I am satisfied they disposed of all of their equipment through a sales entity ordinarily for business reasons.

I am also satisfied that Hubert established Carib as an offshore selling agent for the purpose of disposing of equipment. He did so to accomplish both a business purpose and to create a tax reduction or avoidance opportunity.

Such an offshore entity would expect to make profits on its sales, either by commission or by direct purchase and resale. If successful, I have no doubt the accused intended to extend Carib’s activities.

Whether Carib is taxable in Canada is not at issue in this prosecution. Presumably if it was properly established with a mind and management outside of Canada it could earn profits which might not be taxable in Canada. That possibility existed, and I am satisfied, if correctly done such activity was not a tax evasion offence.

Any sales by the accused to Carib have to stand civil assessment tests where the onus is on the accused to establish either “fair market” or “reasonable” value to the satisfaction of Revenue authorities. They have a right to challenge such transactions by assessment or re-assessment.

I am satisfied that the establishment of an offshore corporation (in a non-taxing host jurisdiction) does not of itself constitute either a fraudulent transaction or an intention to evade income tax. I am also satisfied that the sale of depreciable property at below market values does not by itself constitute a fraudulent transaction or an evasion of income tax.

I am also satisfied that the establishment of Carib by Hubert and his intention to keep the testamentary disposition of shares in Carib private, or as the prosecution contends secret, does not make the equipment transactions fraudulent or criminal.

XXIX SECRECY

It is true that Hubert did not report his shareholder relationship in Carib and as a result the relationship of Kleysen and Riverside to Carib. I do not believe he had an obligation to report his ownership of shares in Carib at all. So far as his obligation to report a relationship between Kleysen and Carib is concerned, he may well have failed to report them as “associated corporations”. He was not charged with that activity. Nor was he called on to answer any such accusation.

I am very impressed with Hubert’s lack of secrecy in the naming of the offshore corporation with the prefix “Carib”. It is important in ascertaining the accused’s intention. Hubert displayed candor in the use of a name such as Carib. I Ido not believe for a moment that Hubert and his advisors lacked sophistication. The use of the name “Carib” and its associations with offshore tax havens which automatically would trigger a suspicion in any auditor or investigator employed by Revenue Canada is evidence not of secrecy but rather of openness.

Auditors and investigators of Revenue Canada in the 1970’s and 1980’s were fully familiar with frequent taxpayer attempts to establish offshore corporations for the purpose of avoiding Canadian income tax through income or profit diversion. The development of pricing policies designed to reduce Canadian taxable income and create profits offshore was known throughout the taxation community and particularly Revenue Canada.

The lines between evasion and avoidance have been described by tax consultants in countless articles published in Canadian tax and accounting journals. How to avoid without evading income tax is an every day activity of tax lawyers and tax accountants.

Lawyers and accountants have established their own organizations on national and international levels to explore and describe international tax avoidance opportunities. The Canadian Tax Foundation, organized by the accounting and legal professions in Canada, publishes journals which often describe tax avoidance plans using offshore corporations. The so-called national accounting firms frequently have offices in offshore countries to aid in such planning.

These tax avoidance plans usually described by revenue officials as “schemes” have attracted special revenue attention since the 1970’s. From time to time revenue officials make themselves available at Canadian Tax Foundation conferences to warn professional advisers that the government will in appropriate cases institute prosecution of advisors when revenue officials believe such professionals have crossed the line from counseling avoidance plans to counseling evasion plans.

In the early 1980’s the policy of Revenue Canada with respect to offshore tax shelters was well known to Canadian taxpayers and their consultants.

Revenue Canada’s declared departmental policy was to challenge transactions between Canadian and offshore corporations where those transactions were designed to reduce tax payable in Canada. Such challenges are made both by assessment and by prosecution.

I have seriously considered the prosecution’s argument concerning Hubert’s non-disclosure or secrecy of his ownership of the shares of Carib as evidence of criminal intent in this prosecution. I have concluded, however, that such argument should be rejected in part because of Hubert’s naming of Carib.

If one was contemplating secrecy in the accused’s dealings with an offshore entity, it was incredibly naive or stupid to name that corporation “Carib”. I do not believe that Hubert or his advisers fall into either category. Rather, I infer that the use of the name “Carib” is inconsistent with an intention to hid or keep secret Carib’s offshore residence and the implications which result.

XXX CRITICAL ISSUE VALUES/PRICES

The accused argue that the critical issue for the Court to determine on the subject of “values” and “prices” and “consideration” is the intention of the accused when the selling prices were established between them and Carib.

They argue that the prosecution have not established that the accused intended to defraud or fraudulently evade the payment of income tax.

The accused argue that different markets will determined different values for the same article. They have quoted from civil tax authorities to show in assessment cases that the minister may not use inappropriate comparisons, for example, with respect to timber rights (Central Canada Forest Products v. Minister of National Revenue, 52 D.T.C. 359, also see J. Hofert Ltd. v. Minister of National Revenue, 62 D.T.C. 50).

The accused here submit that the “market” to be considered when Hubert and his co-accused sold the equipment to Carib was the Winnipeg market. The evidence as I have indicated is that the price for the same equipment was much lower in Winnipeg, Manitoba than it was in the United States markets shown on Exhibit 84. Thus they argue that prices obtainable in the United States, such as those obtained by Carib from Ritchie Bros, were not appropriate comparisons to the sale prices from them to Carib.

The accused argue that by using Winnipeg market values they did not understate values and resulting incomes.

XXXI MARKET VALUES vs. REASONABLE VALUE

The accused also submit that the court must recognize the difference between section 69(1) and section 69(3) of the Income Tax Act when considering the prices established between them and Carib and between Carib and Ritchie Bros.

The prosecution submits that section 69(1) applies and that the deemed proceeds of disposition are “fair market” value of the assets disposed of by the taxpayer. This is so, the prosecution argue, because the accused in their dealings with Carib were not dealing with a person “at arms’ length”. Thus the prosecution claims the accused were deemed to have disposed of the equipment described in Exhibit 84 at fair market value (namely the amount paid by Ritchie Bros, to Carib) rather than the amounts agreed between the accused and Carib.

The accused submit that the test is not “fair market” but rather “a reasonable amount in the circumstances” according to section 69(3). They say that the amounts agreed between them and Carib were reasonable amounts in the circumstances.

The accused cite not only the authority of Pierre-Andre Coté, The Interpretation of Legislation in Canada, 2nd ed. at page 279 but also an “information Circular” (I.C. 87-2) and Technical Notes (1985) of Revenue Canada.

Mr. Pintea, a tax consultant engaged by Hubert, in his evidence, agreed with counsel for the accused that there were differences in transfer pricing policies in the United States and Canada.

He concedes, as the accused argue, that this is not a simple area. While international pricing conventions are far more easily understood in Canada in the 1990’s following adoption of the Free Trade Agreements, he states and I accept his view and the accused’s contention that international pricing was far more vague and esoteric in the early 1980’s. Taxpayers at that time and Revenue officials as well had less defined authorities for their respective positions.

The accused argue and I accept their contention that the prosecution has not established to a criminal standard that market value in the United States is the appropriate value to consider on this issue. As I have indicated, I am not satisfied that the values used by the accused in their dealings with Carib were reasonable in all the circumstances of this case.

XXXII RITCHIE BROS.

The attempt by Ritchie Bros, to establish itself in the U.S. markets as an auctioneer of heavy equipment and machinery is well documented in the evidence of Mr. Cmolik (see evidence: Volume 24 P.M., from page 75).

I accept his testimony that Ritchie Bros, was paying top market or high prices to acquire for their sales, new or almost new Caterpillar equipment. This equipment was well publicized by Ritchie Bros. and used to attract customers and bidders to their auctions. They were attempting to establish a market presence in the United States where they were not well known.

I am also satisfied that the prices paid by Ritchie Bros. to Carib for unused or new caterpillar equipment were extraordinarily high in relation to the general market prices available for such equipment. This pricing policy of Ritchie Bros. enabled them to acquire the unused equipment of Carib which was not generally available in the U.S. market place. Ritchie Bros. made its offer to ensure that such equipment was on its list of equipment for its auctions. I have no doubt that this equipment was offered for sale to induce buyers to attend the Ritchie Bros. auctions.

According to Exhibit 84, Ritchie Bros. did not make any significant profit in their sale of the new or unused equipment and in fact in some cases recovered less on the auction sale than the prices they guaranteed to Hubert.

I am satisfied that Ritchie Bros, paid prices or gave guarantees significantly higher than ordinary market values in order to advertise and offer new or unused Caterpillar equipment at their auctions scheduled for the United States.

XXXIII BASIC PRINCIPLES

Canada’s tax system, as has so often been stated, rests on the taxpayer’s obligation of honest self-assessment. At the same time the Canadian taxpayer has the right and some would say the obligation to arrange her affairs so as to attract the least amount of tax.

So much for a trite observation of duty and responsibility. What is far more important is the need to respect the taxpayer’s right to honestly self-assess without the terror of being prosecuted when the revenue officials disagree with the taxpayer’s basis of reporting.

Valuation is seldom an easy matter and is typically difficult to apply. Each transaction must be examined with care.

In non-arms’ length circumstances the taxpayer is entitled to report on the basis of self-interest and the onus is ordinarily upon her to sustain the valuation in the civil courts, if challenged.

A taxpayer, after reporting on a self-assessed basis, must await the revenue’s acceptance or rejection of her declared values. Once a notice of assessment or re-assessment issues she may challenge such an assessment and she has the onus of proving to the satisfaction of an independent judge the validity of the amount of her reported income or the basis of the report.

In this case there was considerable evidence as to the value of certain real estate in Calgary owned by Hubert and sold by him to Kleysen. The sale price agreed between Hubert and Kleysen was set out in his tax return. This portion of his return was audited because initially the auditors and investigators were not prepared to accept the sale price.

The principal prosecution witness, Mr. Johnson, was convinced that the transfer price of the Calgary lands (which was not at arms’ length) was too low. He was so convinced throughout the investigation and he candidly conceded at the trial that he was still convinced that the transfer price was too low. In the face of concurring values from his own department, Mr. Johnson could not proceed with a prosecution based on the sale of the Calgary lands. He testified that up to and including the date of his evidence at the trial he still does not accept the valuation used by Hubert. He remains convinced that Hubert ought to have reported a gain on his sale of the Calgary lands. So much for opinions as to value.

This is a good example of difficulty in determining values. Values are seldom stated in exact terms but are usually described by experts as being within certain ranges. Even professional valuators who give opinions as to the value of land regularly concede that their valuations are amounts arrived at by comparing various analyses to arrive at a compromise. Arms’ length transactions normally determine the amount that a willing seller is prepared to accept from a willing buyer.

However, in non-arms’ length transactions other means must be used.

“Cost”, “market”, “replacement”, and “economic” are all common adjectives which precede the word “value” in an attempt to describe the basis of a valuation.

Here the accused reported their incomes based on sale transactions on a non-arms’ length basis. The accused argue that the values they used were not false or deceitful. I accept their submission.

XXXIV MORE VALUES

From time to time during argument counsel for the accused submitted that there is here a valid dispute and argument between the accused and Revenue Canada as to values. They submit that so long as the dispute between the parties as to values was real and not manufactured or false, the case was not one which warranted prosecution but rather assessment.

Citing Irving Oil Limited v. R. (above), the accused compare the valuation issue there with this case. The accused argue that Revenue Canada’s decision to prosecute shifts the evidentiary onus to the prosecution. They say that the prosecution must establish the value of the equipment in the Winnipeg market rather than the U.S. market.

The accused further argue that the prosecution has failed to establish the value of the equipment in the Winnipeg market, and therefore, the prosecution cannot say the accused’s sale prices were not the same as the Winnipeg market values.

XXXV THE CARIB SHARES

I am satisfied that at all material times Hubert owned 100% of the shares of Carib. During the prosecution’s search of Hubert’s home, investigators found evidence of Hubert’s ownership in his safe.

Exhibit 38 is the evidence on this point. Hubert wrote to Ijeoma of Deloitte Haskins & Sells on February 3, 1983 concerning his testamentary intention. Hubert advises in his letter that the residual beneficiary of his estate was his wife, Bernice. He then advises Ijeoma:

Kindly accept this letter as your instructions in the event of my death to transfer 100% of the shares in Carib Sales and Rentals Limited to my wife, Bernice Kley sen such shares forming part of the share of the Estate which should go to her on my death. These instructions are to be carried out on condition that she presents to you a certified copy of my Will.

The prosecution impliedly argues that Hubert had no intention of having those shares form part of his estate. However, that is not how the law is applied in Manitoba or Canada. Those shares, if owned on his death, would form part of his estate and be dealt with accordingly.

The further implied argument is that if they were not referred to in his will, somehow they would not be included in the estate. That is simply nonsense as his executors would be obliged at law to list them and deal with them.

The letter, Exhibit 38, is advice to Ijeoma of Hubert’s testamentary intention to have her shares transferred to his wife on his death.

Normally such letters of testamentary intention are kept safe and secret. They are normally treated in the same way as a will.

No one, not even Revenue Canada, has the right to see a taxpayer’s will as to her intentions on death. The safekeeping of such a document in a safe or vault is entirely in keeping with the nature of the document. It is not evidence of a guilty or fraudulent intent.

Therefore, I draw no inference of guilty intention from the manner in which the letter was written, a copy kept, or its purpose. Hubert was attempting to ensure that his lawful testamentary intentions were respected by Ijeoma.

XXXVI FAILURE OF THE ACCUSED TO TESTIFY

The prosecution has argued that the accused, and particularly Hubert had some obligation to answer what it argues is a prima facie case made against him.

In this prosecution, the prosecution has not made out a prima facie case of guilt. Here there is not strong and cogent net which has enveloped the accused as that terminology is used in Lepage v. R., [1995] 1 S.C.R. 654, 95 C.C.C. (3d) 385.

Here the prosecution had in its hands a fair case of suspicion concerning the sale by the accused of the new or unused equipment to Carib. This is particularly so in the light of Hubert’s canceled transactions and interposition Carib.

So far as the ITC claim there is no prima facie case to answer as there is no suspicion that the accused evaded or attempted to evade income tax by claiming the credit.

So far as the used equipment is concerned, the prosecution has not established that the equipment in the condition it was when sold by the accused to Carib was worth more than the price stipulated. With respect to the used equipment one cannot fairly argue that the subsequent sale by Carib to Ritchie Bros. proves the value of the used equipment when sold by the accused to Carib.

So far as the new or unused equipment is concerned, I have already noted the price used is suspicious and was worthy of investigation.

However, in the face of the facts submitted by the prosecution themselves that suspicion has been answered on the evidence. Those facts are:

1. The purchase of the new equipment was made by the accused at extremely low or advantageous prices.

2. The market conditions were such that there was a possibility that the equipment might be disposed of at a loss but Ritchie Bros. would likely pay a premium for equipment to be auctioned in the U.S.A.

3. The purchase was significantly aided by generous CCA allowances permitting the purchase to be made and effectively reducing the risk of loss and subsequently the amount of any loss.

4. The market conditions worsened for the accused and they were unable to use the equipment on jobs they had expected to receive as low bidders.

5. The accused intended to use a corporate sales buffer to dispose of the equipment into the U.S. market.

6. The equipment was not originally intended to be diverted into the U.S. market. There may have been potential risks for anyone disposing of that equipment in the United States because it was sold “for ultimate destination in Canada”.

7. The accused were well aware of possible tax shelter havens or low jurisdictions.

8. The accused were aware of the opportunity to create a selling agency which might not attract Canadian income tax.

9. The accused had previously negotiated valuations and expenses claimed during prior audits of their tax returns and expected that practice to continue.

10. The accused knew their income tax returns would be audited.

11. The accused were prepared to answer inquiries from tax auditors.

12. The tax auditors and investigators never asked Hubert of his possible relationship to Carib.

13. The tax auditors and investigators did not ask Hubert or anyone on his behalf the basis for the prices fixed between the accused and Carib.

14. Hubert made no secret of Carib’s tax haven jurisdiction. He in fact chose a name that drew attention to his activities.

15. Hubert had answered audit questions concerning the reason why the new equipment was disposed of at the time it was sold.

16. Carib had, at the time, the right to be considered a separate corporate entity and the right to make a profit.

XXXVII COMMENT ON THE FAILURE OF THE ACCUSED TO TESTIFY

The accused have made the point that it was inappropriate of the prosecution to argue failure to testify and the inferences the court ought to draw from such failure.

In R. v. Johnson (1993), 79 C.C.C. (3d) 42, 61 O.A.C. 189 the Ontario Court of Appeal refused to allow an appeal from a conviction where the trial judge stated that the crown’s case was a “very compelling” one and that he was drawing an adverse inference from the failure of the accused to testify.

In the light of that decision which appears quite sound, I find no objection to the prosecution’s argument that I ought to consider the case a “very compelling one” and that I ought to draw an adverse inference from the failure of the accused to testify.

Where we part company, is that I do not accept the prosecution’s characterization of its case as being “a very compelling one”. Accordingly, I cannot or ought not to draw an adverse inference from the accused’s refusal to answer suspicious circumstances. Only when the evidence establishes that the prosecution has met its obligation of proving both a guilty act and guilty intent can such a characterization be made. The prosecution has not met that standard.

I, therefore, refuse to draw such an adverse inference on the evidence before me.

In R. v. Ishmael, a decision of our Court of Appeal (1993), 79 C.C.C. (3d) 530, [1993] 4 W.W.R. 269 the trial judge who convicted the accused was upheld. There evidence accepted by the trial judge established the doctrine of willful blindness on the facts.

However, it is important to note that Twaddle, J.A. for the court reminds the trial court that the prosecution must establish a case before the judge can proceed further. He noted at page 536 (W.W.R. 276) that:

Once a fact is proved to the required standard, it is still disputable. It may be disputed by contraction or explanation. The accused is entitled to an acquittal if the contradiction on explanation is believed or if it raises a reasonable doubt. Strictly speaking, the absence of a contraction or explanation adds nothing to the case against the accused.

(Emphasis added).

Here the case against the accused has not been established. I have a reasonable doubt firstly as to whether the returns of the accused falsely understated their incomes. Secondly, even if I am wrong in that analysis of the evidence, I have a reasonable doubt that the accused intended by their returns to commit a tax evasion under the Income Tax Act as alleged against them.

R. v. Brydon (1995), 95 C.C.C. (3d) 509 (B.C.C.A.), a case also quoted by the prosecution, involved a definition or description of the term “reasonable doubt”.

That case involved the use of the phrase satisfaction to “moral certainty” in a charge to a jury. I have not imposed that standard on the prosecution here.

The prosecution have directed me to the Lepage case (above) and argue that I ought to make the inference that the accused deliberately understated their incomes to evade income tax.

The facts in Lepage are so removed from the facts in this case that I cannot say it is helpful to me. I believe that case turns on its particular facts.

The prosecution has also referred me to the case of À. v. Théroux, [1993] 2 S.C.R. 5, 79 C.C.C. (3d) 449. It is advanced to establish the definition of the actus reus of the offence of fraud contained in section 380 of the Criminal Code.

That case is certainly helpful to remind me that firstly in order to convict I must determine that a prohibited act was committed. Such act may be an act of deceit, of falsehood or some other fraudulent means.

The reasons go on to deal with deprivation caused by the prohibited acts which are not relevant here. The prohibited act in Théroux was a false representation by the accused to investors that their deposits with him were insured. In fact, there were not. The project in which they invested failed and was not completed.

There, even though the accused honestly believed he could complete the project, the trial judge found such a belief to be no defence. In that case the actus reus was the making of a false representation which was established on the evidence. The mens rea was established by the accused’s knowledge that he was placing the investors’ money at risk.

It is sufficient, in my view, to convict an accused of evasion if the prosecution is able to establish beyond a reasonable doubt that the accused made false or deceptive statements in their tax returns with the intent of evading or attempting to evade the payment of taxes.

That has not been established in this case.

XXXVIII DECISION

I have examined all of the evidence, and as a whole I have concluded that the prosecution has failed to satisfy me beyond a reasonable doubt that the accused understated their incomes as alleged.

If I am wrong and if there were such understatements, I am not satisfied that the accused made such understatements for the purpose of evading income taxes as alleged in the indictment.

I, therefore, find the accused not guilty on all counts and I direct the clerk of the court to enter such verdicts of not guilty on each count in the indictment.

XXXIX POSTSCRIPT

At one time, earlier in these proceedings I intended to give written reasons on the voir dire decision to admit the evidence challenged by the accused. I do not believe it is now necessary for me to do so. Rather I refer simply to the authorities presented to me by both the prosecution and the accused. I would ask them to provide a clean list of their authorities and I will append them to the court copy of these reasons.

For some time I have been concerned about the nature of the seizure made by the revenue official. The accused describe the seizure as an “overseizure”. There were real questions raised as to the nature of the search and the volume of material taken from the accused. However, as I indicated orally, the evidence was saved by section 24(2) of the Charter. Perhaps that issue will be dealt with further in these proceedings or elsewhere. It is certainly worthy of further consideration.

The nature of the search was also criticized because various officers seemed to believe that they were not limited by the warrant’s language. Certainly they and their superiors know that conduct was wrong and such conduct would imperil any future search.

I will say no more on those issues at this time.

I will express my appreciation to counsel for their assistance in what proved to be an unexpectedly long and protracted trial. Certainly from time to time all of our respective patiences were tried. Nevertheless I very much value counsel’s submission and careful consideration to my many questions. Thank you.

The accused were found not guilty on all counts.