WARNING
The court hearing this matter directs that the following notice be attached to the file:
A non-publication and non-broadcast order in this proceeding has been issued under subsection 539(1) of the Criminal Code. This subsection and subsection 539(3) of the Criminal Code, which is concerned with the consequence of failure to comply with an order made under subsection (1), read as follows:
539. Order restricting publication of evidence taken at preliminary inquiry.—
(1) Prior to the commencement of the taking of evidence at a preliminary inquiry, the justice holding the inquiry
(a) may, if application therefor is made by the prosecutor, and
(b) shall, if application therefor is made by any of the accused,
make an order directing that the evidence taken at the inquiry shall not be published in any document or broadcast or transmitted in any way before such time as, in respect of each of the accused,
(c) he or she is discharged, or
(d) if he or she is ordered to stand trial, the trial is ended.
(3) Failure to comply with order.— Every one who fails to comply with an order made pursuant to subsection (1) is guilty of an offence punishable on summary conviction.
Court Information
Ontario Court of Justice
Between:
Her Majesty the Queen
— AND —
Lawrence Watts
Before: Justice Joseph F. Kenkel
Evidence Heard on: March 31, April 1, 2, 3, 7, 8, 9, 10, 11, 14, 15
Submissions: May 26, 2014
Committal with Reasons released on: May 26, 2014
Counsel:
- Ms. Erin Carley, Mr. Jason Morische — counsel for the Crown
- The accused Mr. Lawrence Watts on his own behalf
KENKEL J.:
Introduction
1Mr. Watts is charged with two counts of defrauding the Government of Canada contrary to s. 380(1)(a).
2Mr. Watts operated a business called Fiscal Arbitrators which the Crown alleges prepared false income tax returns for numerous clients charging a fee plus a percentage of the refunds fraudulently obtained. A second count alleges similar fraud in relation to his own personal tax returns.
The Admissibility of Documentary Evidence
3The documentary evidence is all set out in electronic form on a DVD marked as Exhibit 1. Exhibit 1 is divided into volumes with tabs and pages. For ease of reference the court adopted the indexing system present on the DVD.
4The Crown applied with notice to adduce certain documentary evidence in volumes 1 to 3 of Exhibit 1 as credible and trustworthy evidence pursuant to s. 540(7) of the Criminal Code. The Crown called witnesses to establish the manner in which those documents were located, seized, copied electronically and stored. The witnesses also established that the evidence was credible and trustworthy and relevant to the charges before the court. As noted in the ruling at the time, the documents referred to appear to be precisely the type of evidence contemplated by s. 540(7). The defence was given prior notice and disclosure of the documents and there was ample time at the preliminary hearing for meaningful cross-examination.
5With respect to the remaining documents within Exhibit 1, the court heard evidence from the lead investigator, Mr. Menniti of the Canada Revenue Agency, as well as ten civilian witnesses whose tax returns had been prepared by Fiscal Arbitrators.
6Canada Revenue Agency (CRA) records including tax returns and correspondence filed with the agency were shown to be credible and trustworthy evidence and were further shown to be admissible under s. 30 of the Canada Evidence Act as business records.
7Documents provided to the CRA by the civilian witnesses were identified by those witnesses as well as the lead investigator. Those documents relate to the Fiscal Arbitrators business and Mr. Watts. The Crown has shown those documents are both relevant and admissible.
8Banking records obtained by production orders for accounts related to the Fiscal Arbitrator's business and Mr. Watts were shown to be trustworthy and credible evidence and were also admissible as banking records pursuant to s. 29 of the Canada Evidence Act.
9Documents, ledgers and records seized from the accused's place of business and his residence relating to the Fiscal Arbitrator's business were shown to be relevant and admissible. A few documents seized from the residence of Mr. Carlton Branch who is alleged to be the other principal in the Fiscal Arbitrator's business were shown to be relevant and admissible.
10Not every document within Exhibit 1 is admissible as evidence. For example, the worksheets used by Mr. Manneti while useful to follow his testimony and useful for cross-examination are not themselves evidence but rather aid evaluation of his oral testimony.
Fiscal Arbitrators and Mr. Watts
11Ten clients of Mr. Watts testified that they hired Mr. Watts and his business Fiscal Arbitrators to prepare their tax returns. Some hired him directly, others went through agents. Two were referred by an investment organization. All of them said they had been promised large tax refunds not only for the current year but also for prior years. The evidence shows Fiscal Arbitrators prepared their returns with claims for business losses in each case even though none of the clients were operating a business that had incurred the losses claimed.
12There's evidence that Mr. Watts set up the Fiscal Arbitrators business and the bank accounts associated with that business. He was the sole corporate officer in the related company CBLW (Carlton Branch Lawrence Watts). He had signing authority on the bank accounts associated with the Fiscal Arbitrators business. A trier of fact could reasonably conclude he was involved in every aspect of the business and was the controlling mind in conjunction with Mr. Carlton Branch.
13There's direct and documentary evidence showing that the structure of the business income and business loss claims and the numbers claimed were all generated by Mr. Watts and his business without client input on that aspect. Fiscal Arbitrators created fictional "Agent Agreements" that cast all personal living expenses as business expenses in order to generate large refund claims contrary to the provisions of the Income Tax Act. The witnesses testified that they did not operate businesses that had those incomes and they did not suffer any business losses as claimed in their returns. In that context a trier of fact might reasonably conclude that the business loss numbers created by Fiscal Arbitrators were fictitious amounts inserted solely to generate tax refunds.
14As to why they signed returns with information they now acknowledge was not provided by them and was false, many of the witnesses testified to the effect that they did not understand tax form preparation and relied on the supposed expertise of Fiscal Arbitrators and Mr. Watts. Some of the witnesses testified that they received direct assurances from Mr. Watts that the scheme was legal.
15As the false loss claims were generated solely by Fiscal Arbitrators, Mr. Watts would have been aware that his clients had not provided him with business loss information and in most cases were not operating any business. He would have known that the business loss amounts created by Fiscal Arbitrators were fraudulent and that claiming such losses would result in financial loss to the Government of Canada.
16Many of the clients of Fiscal Arbitrators received large tax refunds from the CRA. Remarkably, the court heard evidence that it was the policy of the CRA to pay out such claims without question, even in large amounts and even though the claims were unsupported by even the most basic documentation. The fact that the CRA immediately issued cheques was touted by Mr. Watts and his agents as proof of the success of the scheme. Some witnesses referred to the history of CRA refunds to explain why their initial skepticism about the scheme diminished. Given the speedy refunds in large amounts the witnesses thought that Watts' Fiscal Arbitrator's scheme was legal and had passed CRA scrutiny.
17Fiscal Arbitrators clients were directed not to discuss matters with the CRA if their returns were assessed. Fiscal Arbitrators provided clients with draft CRA response letters described as "nonsensical" by one witness. Former clients testified that during the assessment process they began to realize that there were problems with their returns. They have all been assessed significant financial penalties post audit even in those cases where no refund was issued. One witness described the resulting impact on him and his family as "a living hell".
18There's documentary evidence showing that Mr. Watts applied the same process to his own personal taxes filed with the CRA. On income of over $1.6 million dollars in 2009 and 2010, even on the conservative and generous assessment made there's evidence that Mr. Watts evaded $62,900.74 and $100,236 of personal taxes for those tax years. The amount of taxes evaded in the 10 client returns before the court was $432,719.
19Documentary and direct evidence shows Lawrence Watts owned and operated the Fiscal Arbitrators business along with a second principal Carlton Branch and other agents and employees. Their tax scheme was contrary to the rules and provisions of the Income Tax Act and has no basis in law. The notion that a person could exempt themselves from their obligation to pay taxes and better yet receive large refunds from the government all by the use of certain documentary incantations is illogical and nonsensical. Such tax evasion schemes have repeatedly been rejected by courts across the country. See: R. v. Porisky, 2012 BCSC 67, R. v. Crischuk, 2010 BCCA 391
Analysis
20Mr. Watts is charged with fraud in relation to his tax scheme. The criminal act of fraud is established where the Crown proves an act of deceit, falsehood or other fraudulent means which causes deprivation. R. v. Théroux, [1993] 2 SCR 5. Whether an act is deceitful or fraudulent is measured on an objective basis. Proof of subjective knowledge of the prohibited act, along with proof of subjective knowledge that the act could lead to deprivation of another satisfies the intent requirement of the offence.
21Mr. Watts submits that if the Crown is right that there's evidence of tax evasion, that it's a matter for the tax court only. Proof of participation in a tax evasion scheme not only is an offence under the Income Tax Act but also typically satisfies the elements of proof for the criminal offence of fraud (s. 380). See: Germany v. Schreiber, [2006] OJ No. 789 (CA), and see the discussion in R. v. Polisky, 2012 BCSC at paras. 86 to 91. Where a person is charged with both tax evasion and criminal fraud in relation to the same transaction a stay will be applied where the Crown proves both. R. v. Cancor Software, [1990] OJ No. 1287 (CA). Whether to proceed with charges under the Income Tax Act or the Criminal Code is a matter of Crown discretion.
22In relation to count 1, Mr. Watts submits that there are waiver provisions in the documents signed by Fiscal Arbitrators clients that insulate him and his business from criminal liability for any fraudulent returns prepared by his business but submitted by his clients. Considering the direct evidence from certain witnesses regarding representations made by Mr. Watts about the Fiscal Arbitrators scheme, the accused's actions and the documentary evidence as a whole, I find that on this evidentiary record as a matter of law the provisions referred to in the Fiscal Arbitrators contract could not relieve the accused of criminal liability for promoting and preparing false tax returns.
23Considering the testimony of the witnesses along with the admissible documentary evidence, a trier of fact could reasonably find that Mr. Watts set up, promoted and operated a scheme whereby tax returns were prepared by Mr. Watts and his company Fiscal Arbitrators for clients using information falsified and fabricated by Watts and Fiscal Arbitrators to generate large refunds contrary to the rules and provisions of the Income Tax Act. Mr. Watts was paid a percentage of the refunds generated along with a $500 application fee. The evidence shows that the Government of Canada was deprived of income tax in relation to Fiscal Arbitrators clients, the Fiscal Arbitrators business and Mr. Watts' own tax obligations. The Government of Canada also lost money paying out refunds based on false business loss claims generated by Mr. Watts and Fiscal Arbitrators. The deprivation of the Government of Canada was the central purpose of the fraudulent scheme.
Conclusion
24The Crown has proved that there is sufficient evidence which if accepted could reasonably lead a properly instructed trier of fact to conclude beyond a reasonable doubt that the accused is guilty of fraud in relation to both counts alleged. Mr. Watts will be committed to stand trial before a judge and jury in the Superior Court of Justice on both counts. The Information No. 12-9747 will be marked withdrawn at the request of the Crown.
Released: May 26, 2014
Signed: Justice Joseph F. Kenkel