Tax fraud and tax evasion in the same case: Analysis of Regina v Reynolds
A case before the BC Supreme Court included violations of the Income Tax Act and Excise Tax Act explains Canadian accountant and lawyer David J Rotfleisch
David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.
Tax fraud and tax evasion can manifest through a range of actions, encompassing, yet not restricted to: (1) avoiding income tax responsibilities, (2) endeavouring to deceive the government via falsified loss claims, or (3) deliberately evading the assessment, collection, or remittance of GST/HST as mandated by the Excise Tax Act. Evading taxes or engaging in tax fraud is in direct violation of Canada's Income Tax Act, the Excise Tax Act, and the Criminal Code of Canada.
In the case of Regina v Reynolds, the British Columbia Supreme Court was engaged in the sentencing hearing for Damien Reynolds (the defendant). The defendant was found to have been involved in the following activities: (1) defrauding the government of income tax amounting to $609,745 on unreported income related to his taxation years of 2004 and 2005. This action was in violation of paragraph 380(1)(a) of the Criminal Code; (2) failing to remit GST/HST amounting to $121,179, which was in contravention of paragraph 327(1)(c) of the Excise Tax Act; and (3) attempting to defraud the government of funds exceeding $5,000, an act that contravened paragraph 380(1)(a) of the Criminal Code.
Guiding Legal Principles for Sentencing
The British Columbia Supreme Court made reference to section 718 of the Criminal Code, which outlines the primary aim of sentencing as follows: "protect society, and contribute, along with crime prevention initiatives, to respect for the law and the maintenance of a just, peaceful and safe society by imposing just sanctions." This goal is realized by imposing sentences that encompass various objectives, including:
- Condemning illegal actions and the damage inflicted on victims and/or the community due to such actions;
- Discouraging both the perpetrator and others from engaging in criminal acts;
- Isolating offenders from society if required;
- Aiding in the rehabilitation of offenders;
- Offering compensation for the harm suffered by victims and the community; and
- Instilling a sense of accountability in offenders, and fostering recognition of the harm inflicted on victims and the community.
According to Section 718.1 of the Criminal Code, a sentence should be commensurate with the seriousness of the offence and the level of responsibility demonstrated by the offender. During the sentencing process, courts are mandated to consider any aggravating or mitigating factors pertinent to the crime or the offender, as stipulated in the Criminal Code, subsection 718.2(a).
Charge 1: Fraud as Per Subsection 380(1) of the Criminal Code
Justice Weatherill determined that even though the defendant was found guilty under the Criminal Code for the duration spanning 2003 to 2017, the evidence presented during the trial solely established, beyond reasonable doubt, the defendant's involvement in this offence for the years 2004 and 2005. Consequently, the defendant's sentencing was confined to the failure to file taxes for income earned during his 2004 and 2005 taxation years.
Charge 2: Violation of the Excise Tax Act
Justice Weatherill made reference to subsection 327(2) of the Excise Tax Act, which grants discretionary powers to the lawyer overseeing the CRA prosecution. In cases where indictment is pursued, fines can range from 100% to 200% of the evaded tax amount, coupled with a potential imprisonment term of up to five years. Despite the indictment claiming the defendant's involvement in this offence from June 1, 2006, to March 1, 2017, Justice Weatherill concluded, based on the available evidence, that the defendant's sentencing should be based on his failure to remit GST/HST totaling $121,179 for the tax years spanning 2009 through 2012.
Charge 3: Attempted Fraud
The charge of attempted fraud during the years 2007 and 2008 falls under the jurisdiction of section 463 of the Criminal Code. This section stipulates a potential maximum prison term of 7 years.
Crown's Sentencing Position
The prosecuting lawyer representing the CRA contended that a 3.5-year incarceration term was a fitting sentence, considering the aggravating elements in this tax fraud case. Specifically, the Crown (prosecuting lawyer) addressed these aggravating aspects for each count and argued that the offences involved substantial monetary sums, spanning multiple tax years. The Crown emphasized that the defendant's actions stemmed from avarice, deliberately undermining the foundational trust between the government and the public that the tax system relies upon. The Crown further noted that this inference is evident. Additionally, the prosecuting lawyer provided an extensive list of legal cases to support its stance that precedent establishes the principle that cases involving significant amounts of tax fraud or evasion are grave offences, necessitating custodial sentences due to the imperative need for denunciation and deterrence. While acknowledging that the defendant had no prior criminal record, the Crown asserted that there were no other mitigating factors applicable to the case.
The defence's lawyer proposed that a community-based conditional sentence order lasting 20 months would effectively address sentencing objectives, including denunciation and deterrence.
The defendant's lawyer contended that several mitigating factors warrant the court's consideration during the defendant's sentencing, including:
- he underwent a tumultuous childhood marked by hardships;
- he experienced poverty and suffered violence from his father;
- at the age of 12, his parents separated;
- he, along with his mother and siblings, resided in an inexpensive hotel;
- his father made an attempt on his mother's life;
- he encountered frequent changes in schools and struggled academically, failing classes in grades 9, 10, and 11;
- he went through a separation with his first wife;
- he presented 32 letters of support to the court, all of which attested to his exemplary character;
- he had no prior criminal record;
- his actions did not breach any position of trust or involve vulnerable individuals;
- there was no evidence indicating an attempt to conceal his tax fraud;
- regarding count 2 under GST/HST rules in the Excise Tax Act, he did not retain any GST/HST funds for himself; instead, he failed to collect and remit them to the CRA;
- he has lived under the shadow of a criminal investigation since 2016, and imprisonment would adversely impact him and his family;
- no evidence suggested that he posed a danger to the community if he served his sentence outside of incarceration.
The British Columbia Supreme Court's Analysis
Justice Weatherill from the British Columbia Supreme Court determined that although a court can take into account and be influenced by various sentences handed down to comparable offenders committing akin offences, sentencing remains an individualized procedure. Courts are obligated to meticulously evaluate all sentencing objectives considering the specifics of each case. In contrast to the trial judge's decision, which prioritized deterrence and denunciation, Justice Weatherill disagreed, asserting that all sentencing objectives should be thoroughly balanced.
Justice Weatherill concurred with Crown Counsel's assertion that the present case encompassed a large-scale tax fraud. The Justice accepted the Crown's arguments regarding aggravating factors for Charge 1 and Charge 2, excluding the defendant's motivation being rooted in greed. Justice Weatherill elaborated that during the pertinent period, the defendant engaged the services of accountants and lawyers for his tax-related affairs. Despite this, his ethical responsibility was significant, as he was deemed to "have known or having been in reckless disregard of or willfully blind on his income tax and GST/HST" obligations.
Nevertheless, Justice Weatherill acknowledged the mitigating factors put forth by the defendant's Counsel and clarified that a core principle of sentencing is to avoid depriving an offender of their liberty if an alternative sanction, apart from incarceration, is suitable in light of the relevant circumstances. Justice Weatherill stipulated that all plausible non-custodial sentences, rational within the context and aligned with the harm inflicted upon victims or the community, should be contemplated for the sentencing of all offenders. Furthermore, Justice Weatherill expounded that there was no substantiated evidence indicating that a conditional sentence order would be less effective compared to a custodial sentence, nor was there evidence supporting the notion that offenders under conditional sentence orders are more prone to reoffending. In light of these considerations, Justice Weatherill held that, in the present instance, the objectives of deterrence and denunciation could be realized by imposing a conditional sentence order on the defendant. This decision was grounded in the fact that no evidence suggested that the defendant posed any threat to the public, and the Crown had not provided any reasons why the defendant could not serve the sentence within the community.
Decision of the British Columbia Supreme Court
The defendant received a two-year conditional sentence, with one day less, to be served within the community. Alongside this, the defendant was directed to settle a fine of $121,179 linked to the conviction for intentionally not remitting GST/HST.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.
With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, 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 audit representation and tax litigation. Visit www.Taxpage.com and email David at email@example.com.
Read the original article in full on TaxLaw Canada. Author photo courtesy Rotfleisch & Samulovitch P.C.