Tax fraud contrary to the Income Tax Act, the Excise Tax Act and the Criminal Code

While the defendant retained the services of accountants and tax lawyers for his tax matters, his moral culpability was high, according to Justice Weatherill of the BC Supreme Court, explains David J. Rotfleisch, CA, CPA, JD, of Rotfleisch & Samulovitch P.C.

Introduction: Tax Evasion & the Issue in Regina v Reynolds

Tax fraud and tax evasion may occur through various activities including, but not limited to: (1) evading income tax obligations, (2) attempting to defraud the government by claiming false losses, or (3) intentionally evading charging, collecting or remitting GST/HST to the Canada Revenue Agency as required by the Excise Tax Act. It is contrary to Canada's Income Tax Act, the Excise Tax Act and the Criminal Code of Canada to evade taxes or commit tax fraud.

In Regina v Damien Reynolds [2020], the issue before the British Columbia Supreme Court was the sentencing hearing for Damien Reynolds (the defendant) who was found to have: (1) defrauded the government of income tax payable on $609,745 in unreported income concerning his 2004 and 2005 taxation years, contrary to paragraph 380(1)(a) of the Criminal Code; (2) failed to remit GST/HST of $121,179 contrary to paragraph 327(1)(c) of the Excise Tax Act; and (3) attempted to defraud the government of funds in excess of $5,000, contrary to paragraph 380(1)(a) of the Criminal Code.

Legal Principles for Sentencing

The British Columbia Supreme Court referred to section 718 of the Criminal Code, which sets out the fundamental purpose of sentencing is "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 purpose is achieved by imposing sentences that have, among others, the following objectives:

• Denouncing unlawful conduct and the harm to victims and or the community caused by lawful conduct;
• Deterring the offender and other persons from committing offences;
• Separating offenders from society, where necessary;
• Assisting in the rehabilitation of offenders;
• Providing reparation for harm done in the victims and to the community; and
• Promoting a sense of responsibility in offenders, and acknowledgement of the harm done to the victims and to the community.

Section 718.1 of the Criminal Code provides that "a sentence must be proportionate to the gravity of the offence and the degree of responsibility of the offender". Sentencing requires courts to take into consideration any aggravating or mitigating circumstances relevant to the offence or to the offender (Criminal Code, subsection 718.2(a)).

Count 1: Fraud Contrary to subsection 380(1) of the Criminal Code

Justice Weatherill held that although the defendant was convicted contrary to the Criminal Code for the period of 2003 through to 2017, the evidence at trial only proved beyond a reasonable doubt that the defendant committed this offence for the 2004 and 2005 taxation years. As such, the defendant was only sentenced for failing to file taxes for income earned with respect to his 2004 and 2005 taxation years.

Count 2: Excise Tax Act Offence

Justice Weatherill referred to subsection 327(2) of the Excise Tax Act which grants the lawyer carrying out the prosecution for CRA discretionary powers to proceed by way of indictment in which case fines range between 100% and 200% of the amount of tax that was sought to be evaded plus up to five years imprisonment. Although on indictment it was alleged that the defendant committed this offence between June 1, 2006 and March 1, 2017, Justice Weatherill determined that, based on the evidence, the defendant would be sentenced on the basis that he failed to remit GST/HST in the amount of $121,179 for his 2009 through to 2012 taxation years.

Count 3: Attempted Fraud

The charge of attempted fraud for the years 2007 and 2008 is governed by section 463 of the Criminal Code, which provides for a maximum sentence of seven years of incarceration.

Crown's Position on Sentencing

The tax lawyer carrying out the prosecution for CRA argued that a period of 3.5 years of incarceration was an appropriate sentence given the aggravating factors present in this tax fraud case. Specifically, the Crown addressed the aggravating factors in respect of each count and argued that the offences involved significant amounts of money and that they occurred in relation to multiple tax years. The Crown held that the defendant's actions were motivated by greed which "targeted the trust relationship between the government and its public on which the tax system is built and it must be inferred."

In addition, the Crown presented a long list of cases in support of its submission that the applicable case law sets out the principle that, due to the necessity of denunciation and deterrence, cases concerning tax fraud or tax evasion involving significant amounts are serious offences and, absent mitigating factors, these offences attract a custodial sentence. Further, the Crown acknowledged that the defendant did not have a criminal record but asserted that there were no other mitigating factors relevant to the case.

Position of the Defendant

The Canadian tax lawyer for the defence submitted that a conditional sentence order of 20 months served in the community would serve the sentencing goals of, among others, denunciation and deterrence.

The Canadian tax lawyer for the defendant argued that there were a number of mitigating factors that the court should consider in sentencing the defendant, including that:

• he had a tumultuous childhood;
• he suffered from poverty and violence at the hands of his father;
• he was 12 years old when his parents separated;
• he, his mother and siblings lived in a low-cost hotel;
• his father attempted to kill his mother;
• he changed school multiple times, and failed classes in grade 9, 10 and 11;
• he and his first wife separated;
• he presented to the court 32 letters of support provided that spoke highly of his character;
• he had no prior criminal history;
• his conduct did not involve a breach of a position of trust or involve vulnerable individuals;
• there was no evidence before the court that he engaged in an effort to conceal his tax frauds;
• with respect count 2 concerning GST/HST rules under the Excise Tax Act, the defendant did not keep any GST/HST for himself, he failed to collect and remit it to the CRA;
• he lived with being under a criminal investigation since 2016 and incarceration would have a severely negative impact on him and his family;
• there was no evidence, before the Court, that the defendant would endanger the community if he were to serve his sentence in the community.

Analysis of the British Columbia Supreme Court

Justice Weatherill of the BC Supreme Court held that while a court may consider and be guided by a range of sentences imposed on similar offenders committing similar offences, sentencing is an individualized process and courts must adequately weigh all sentencing objectives in light of the circumstances of each case. Justice Weatherill disagreed with the trial judge, whose decision emphasized deterrence and denunciations, instead of weighing all sentencing objectives.

Justice Weatherill agreed with Crown Counsel that the present case involved a large-scale tax fraud and accepted the Crown's aggravating factors submission in respect of Count 1 and Count 2, with the exception of the defendant having been motivated by greed. Justice Weatherill explained that at the material time the defendant retained the services of accountants and tax lawyers for his tax matters but his moral culpability was high because he must "be taken to have known or having been in reckless disregard of or willfully blind on his income tax and GST/HST" obligations.

However, Justice Weatherill accepted the mitigating factors presented by the Counsel for the defendant and explained that one of the fundamental principles of sentencing is that an offender should not be deprived of his or her liberty if a sanction, other than imprisonment, may be appropriate given the relevant circumstances. Justice Weatherill held that all available sentences, other than imprisonment, that are reasonable given the circumstances and that are consistent with the harm done to the victims or the community should be considered in sentencing all offenders. Justice Weatherill further explained that there was no evidence that a conditional sentence order would be less effective than a custodial sentence or that offenders given a conditional sentence orders are more likely to re-offend.

As such, Justice Weatherill held that in the present case, the objectives of deterrence and denunciation can be met by imposing a conditional sentence order on the defendant on the ground that there was no evidence that he (the defendant) posed any form of danger to the public and no reason has been proffered (by the Crown) that the defendant could not serve his sentence in the community.

Holding of the British Columbia Supreme Court

The defendant was sentenced to a conditional sentence of two years, less one day, to be served in the community and was required to pay a fine of $121,179 relating to his conviction for willfully failing to remit GST/HST.

David J. Rotfleisch, CA, CPA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm and is a Certified Specialist in Taxation Law. 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, 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 david@taxpage.com.