R. v. Scholz — A Canadian tax lawyer analysis of document forging and tax fraud
David Rotfleisch provides analysis of falsely claiming GST/HST rebates
If you're building a home, you should only claim a GST/HST rebate if you're a builder and intend to sell it once it's complete, explains David J. Rotfleisch, CA, CPA, JD, of Rotfleisch & Samulovitch P.C.
Introduction: Forging Corporate Documents to Falsely Claim GST/HST Rebates
The Accused, Michael Scholz, was charged with three counts of violating the Excise Tax Act, under Sections 327(1)(a), 327(1)(c), and 327(1)(d). These sections generally set out that anyone who makes false statements or provides fake documents when complying with the Excise Tax Act or anyone who attempts to evade tax or obtain a rebate that they are not entitled to is guilty of an offence and is liable to a summary conviction.
Scholz was also charged twice under the Criminal Code Section 368(1) for forging documents. Scholz's charges under the Excise Tax Act and the Criminal Code are a result of allegations that he prepared and gave false documents to the Canada Revenue Agency to obtain a GST/HST rebate that the law did not entitle him to.
In August 2009, Scholz and his wife decided to build their dream house on a vacant property — 1071 Groveland Road, West Vancouver, BC. For various reasons, a corporation held legal title to the property, and Scholz's wife held a 100% beneficial title. Scholz didn't want to be the beneficial owner due to his fear that creditors would try to take the property if he fell on hard times.
Scholz and his wife planned to develop this land into a massive home and make it their residence. In this circumstance, the Excise Tax Act would not provide Scholz with a GST/HST rebate. Only someone building a home to sell would be entitled to a GST/HST rebate. However, as soon as construction on the house started, Scholz began to claim GST/HST rebates.
As the project commenced, the estimated cost went from $3 million to $6.1 million. Scholz claimed that at this point, he decided to sell the house because he couldn't afford it. However, he didn't inform his wife or the architects or contractors on the project. Scholz also didn't speak to any realtors or inquire about potential selling prices. Further, he claimed that he didn't sell the house at that point because the current construction state would result in a price that was a fraction of the final home's value and cutting back on expensive materials would hurt the home's value as a luxury home. Scholz also didn't take a mortgage to pay for construction due to a past deal where the bank foreclosed on his mortgage.
Scholz and his wife then moved into the property in December 2012 and lived there until their separation in 2017.
Scholz's Encounter with the Canada Revenue Agency
In November of 2011, the Canada Revenue Agency started questioning Scholz about his GST/HST rebate claims. In 2013, the CRA rejected Scholz's claims to his GST/HST rebates and assessed the fair market value of his property at $6.8 million. The CRA used this fair market value to determine what Scholz owed in GST/HST taxes, resulting from the construction of this home as a personal residence.
Scholz then sent the CRA a copy of a Bare Trust and an Agency Agreement. Scholz purported that the corporation that held the 1071 Groveland property issued these documents. The documents claimed that Scholz was the sole beneficiary of the property, which was requisite for him to claim the GST/HST rebate. These documents were only prepared after the CRA told Scholz that they needed further proof that he was the property's beneficial owner and thus eligible to claim the GST/HST rebate.
The Decision by the Provincial Court of British Columbia
At trial [R. v. Scholz, 2020 BCPC 120 (CanLII)], the Provincial Court of British Columbia found that Scholz created the documents for the sole purpose of satisfying the CRA's requirements for the GST/HST rebate. The judge at the Provincial Court of British Columbia further denied the legitimacy of many of Scholz's testimonies and claims, as his actions were inconsistent with his stated intentions. For example, Scholz said that he planned to sell the property but took no steps to do so.
The Provincial Court of British Columbia ultimately found that Scholz forged documents to attempt to supply them as genuine. The judge at the Provincial Court of British Columbia found that Scholz understood that he submitted forged documents to the CRA and that the CRA would potentially accept them as genuine. As a result, Scholz was convicted for the three charges under the Excise Tax Act and the two charges under the Criminal Code.
Forging Documents and Tax Fraud
Forging documents to commit tax fraud is a serious offence and can lead to convictions under the Excise Tax Act and Criminal Code. These convictions can lead to harsh fines and possible jail sentences. If you're building a home, you should only claim a GST/HST rebate if you're a builder and intend to sell it once it's complete. Otherwise, you're generally not entitled to a GST/HST rebate. Claiming it is therefore considered tax fraud.
David J Rotfleisch, CPA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Visit www.Taxpage.com and email David at firstname.lastname@example.org.