Court File and Parties
Ontario Court of Justice
Between:
Her Majesty the Queen
— and —
Wolfgang Wilm
Sentencing
Before: Justice Joseph F. Kenkel
Submissions: December 19, 2016
Sentencing: January 20, 2017
Counsel:
- Ms. Sandy Thomas, Ms. Wendy Levant — counsel for the Crown
- Mr. Edward G. Spong — counsel for the defendant
Decision
Introduction
1Mr. Wilm was convicted at trial of tax evasion. For four consecutive tax years he chose not to file income tax returns. He received over $2 million in salary, bonuses and dividends from his company during that period. The Crown submits that a jail sentence in the maximum term of 2 years is required plus a fine of 100% of the taxes evaded. The defence submits that a conditional sentence in the higher end of the range along with a fine of 50-100% of taxes evaded would be sufficient to meet the purpose and principles of sentencing.
The Offence
2Mr. Wilm is Vice President of Sales at ASI, a commercial contracting company that does large pre-cast concrete projects in the United States and Canada. He is also a Director of ASI and holds 8% of the shares in the company.
3Mr. Wilm was an employee up to 1998 when he asked ASI and its predecessor company to change his status to that of independent contractor. He was one of only two persons in the company who were not employees and who did not have tax deducted on income and bonuses. Mr. Wilm told the company that he would pay all of the relevant taxes.
4Once set up as an independent contractor, Mr. Wilm stopped filing tax returns. He did not file a return for the 1999 tax year. He then failed to file returns for the years 2000 to 2011 inclusive until a corporate tax audit revealed the discrepancy. When he was asked to provide his social insurance number pursuant to the audit he deliberately provided a false number in order to delay the investigation. He attempted to make a voluntary disclosure during the delay to avoid penalties. When he finally filed returns on November 2, 2012, they showed he'd failed to report $2,081,167 in income during the four tax years 2007-2010 that are the subject of the charge before the court. The tax payable on that income would have been $552,976.
Sentencing in Major Tax Evasion Cases
5In Knox Contracting Ltd v Canada, [1990] SCJ No 74, at paras 17-18, Justice Cory described the offence of income tax evasion as a true criminal offence:
It is fitting and appropriate that the s. 239 offences be considered as criminal law. The Income Tax Act is a major source of funds for the federal government. Its provisions are applicable to most adult Canadians. The vast majority pay their income tax by way of payroll deduction with little or no opportunity for evasion or misstatement. Those who do evade the payment of income tax not only cheat the State of what is owing to it, but inevitably increase the burden placed upon the honest taxpayers. It is ironic that those who evade payment of taxes think nothing of availing themselves of the innumerable services which the State provides by means of taxes collected from others.
The entire system of levying and collecting income tax is dependent upon the integrity of the taxpayer in reporting and assessing income. If the system is to work, the returns must be honestly completed. All taxpayers have the right to know that it is a criminal violation to commit any of the offences described in s. 239. The Act imposes a public duty. A breach of that fundamentally important public duty should constitute a criminal offence.
6The Crown elected to proceed summarily. Section 239(1)(g) of the Income Tax Act, RSC 1985 c1 (5th Supp) (ITA) prescribes two penalties: a fine ranging from 50 to 200% of the taxes evaded, and imprisonment for a term not exceeding two years.
7Criminal Code sentencing provisions apply to income tax offences except as the ITA otherwise provides – s.34(2) Interpretation Act, RSC 1985 c I-21. Although not listed as a sentencing option in s.239 of the ITA, conditional sentences are available for those offences where the Criminal Code criteria are met.
8The purpose and principles of sentencing are set out in s.718 of the Criminal Code, RSC 1985 c C-46. Sentences are meant to address multiple objectives including general deterrence, specific deterrence, separation of offenders from society, rehabilitation, reparation for harm done and the promotion of a sense of responsibility in the offender. The sentence imposed must be proportionate to the gravity of the offence and the degree of responsibility of the offender – s.718.1.
9In tax evasion cases, specific and general deterrence are the most important sentencing factors – R v Klundert, 2011 ONCA 646 at para 34. Both parties agree that a custodial sentence is required. They disagree as to the term of that sentence and whether it should be served in the community by way of a conditional sentence.
10Conditional sentences have been imposed in some tax evasion cases. Typically lower amounts are involved and the evasion is for short periods of time. Despite those mitigating factors, the conditional sentences still tend to be of significant length. For example, in R v Tyskerud, 2013 BCPC 277 an 11 month conditional sentence was imposed for $14,186 in tax evaded. A conditional sentence of 16 months was imposed on joint submission in R v Freake, 2003 NLSCTD 35 where the offender had participated in tax evasion as a tax preparer for multiple clients with little financial gain for himself. He was retired, unemployed and impoverished. The tax evaded was $129,203 and the joint submission included a fine for 100% of that amount.
11Custodial sentences are the norm in major fraud and tax evasion cases – R v Bogart, [2002] OJ No 3039 (CA), but conditional sentences are available – Klundert at para 21. Where conditional sentences have been imposed in major-scale fraud cases, there have been exceptional circumstances:
R v Klundert – A conditional sentence of 12 months and 150% fine was imposed for evasion of $1.4 million over 5 years. The Ontario Court of Appeal stressed at para 33 that it was a "unique case" in which there was a low level of deceit or fraud on the part of the accused. In addition, the matter was protracted with three trials, two prior acquittals and two prior Court of Appeal decisions.
R v Amery, [2005] AJ No 1947 (PC) – The offender under-reported income for four tax years to a total of $1.36 million. On a guilty plea with a joint submission, he was given a 12 month conditional sentence plus a fine of 100% of the tax evaded. The proceedings were protracted. The plea was significant, as there were evidentiary issues with the Crown's case. He had sole custody of his children. His culpability was limited to wilful blindness. He was fully cooperative with the Canada Revenue Agency (CRA) and prior to sentence had provided his lawyer with a substantial portion ($260,000) of the fine to be paid to the court.
R v Grimberg, [2002] OJ No 526 (CA) – On a guilty plea, a twelve month conditional sentence and 100% fine was imposed for failure to remit $617,940 in GST. The trial judge said the offence warranted a penitentiary sentence but imposed a conditional sentence with house arrest as the accused was 80 years old.
R v Finch, 2001 ABCA 223 – The offender was convicted of evading approximately $300,000 in excise duties, GST and taxes per truckload for four loads of liquor. Two years jail was reduced to a 12 month conditional sentence on appeal, given the accused's low level of participation in the scheme, the fact that he lost his job and pension, his family with serious medical conditions depended upon him financially, and the co-accuseds had both received conditional sentences.
12Cases of major-scale evasion including amounts similar to the $500,000 evaded in this case tend to result in custodial sentences ranging from 12 months to 3 years:
R v Mahmood, 2016 ONCA 75 – Tax evasion over four years resulted in $358,588 income tax evaded and GST evaded of $116,412. He was sentenced to 12 months imprisonment with a fine of 150% of tax evaded. The Crown argued on appeal that a penitentiary sentence was required, but the Court of Appeal found that it was a "close call" but the 12 month sentence was not "manifestly unfit".
R v Mori, (Unreported) St. Catharines 25 July 2016 Ontario Court of Justice S12-4624 Nadel J. – False statements were made in income tax returns over three years evading tax to a total of $223,313. After conviction at trial the accused was sentenced to a twelve month term of imprisonment with a fine of 75% of tax owing. He fully cooperated with the audit and cooperated with a focused trial.
R v Wang, 2015 BCPC 302 affirmed 2016 BCCA 390 – The accused ran an immigration fraud scheme. For 5 years he failed to report his income. He evaded $730,837 in income taxes. The trial court identified the range of sentence as 2 years less 1 day to 3 years. The two year sentence imposed was upheld on appeal.
R v Witen, 2012 ONSC 4151 affirmed 2014 ONCA 694 – An accountant tax preparer ran a scheme which resulted in false returns for clients over 9 years. There was $1.13 million total evaded from which Mr. Witen made $448,000 in profit. Three years imprisonment and a 100% fine were imposed.
R v Leo-Mensah, 2010 ONCA 139 – A tax preparer filed false returns for others, failed to report income, evaded tax of $145,766 and failed to file a return for the 2006 tax year. His one day sentence imposed after guilty plea was varied by the Court of Appeal to two years imprisonment with a 100% fine.
R v Loosdrecht, 2009 BCPC 196 – The offender was convicted after trial for failing to report income for 4 years to a total evasion of $98,211. Given a prior history of non-compliance, the offender was sentenced to 20 months in prison and a fine of 100% of taxes evaded.
R v Sydel, 2007 BCPC 486 – Tax evasion by a dentist over five years totalled $253,089. She was sentenced after trial to a term of 18 months with a fine of 75% of taxes owing.
R v Bulua 2006 BCSC 1234 – The offender was convicted of tax evasion by failing to report income where $400,000 in tax was evaded over two years. Thirty months imprisonment was imposed along with a fine of 100% of tax evaded.
R v Alexander Street Lofts, 2007 ONCA 309 – Fraudulent GST rebates totalling $671,279 with more attempted resulted in 30 months imprisonment with a 100% fine.
R v Valley Heavy Equipment Inc., 2005 BCPC 32 – Fourteen false GST returns were filed resulting in a profit of $500,000. Two years and six months imprisonment was ordered on conviction after trial with a fine of 100% of the amount.
Aggravating Circumstances
13The following factors aggravate sentence:
Culpability - Mr. Wilm is a sophisticated corporate businessman who used his position in the company to stop tax deduction at source. He lied to the company about filing taxes independently. Given his business expertise he was well aware of the need to keep proper records and file tax returns. He didn't make any effort to file taxes for more than a decade and didn't obtain advice about the situation he'd created until the evasion was uncovered by the auditor. He attempted to delay the audit by providing a false social insurance number. His lack of proper business records and his actions throughout showed he had no intention of filing until caught. There is significant planning and deceit in this case.
Greed – Greed was the sole motivation for this offence. Mr. Wilm's explanation that he didn't file then "put his head in the sand" while the offence compounded mischaracterizes his deliberate actions for an extended time. He plainly had the financial means to satisfy his tax obligations but he deliberately chose not to do so.
Scale – During the 4 years at issue, Mr. Wilm defrauded the public of over half a million dollars in taxes. This is a major-scale tax evasion.
Term – Unlike other cases cited, this was not an isolated period of non-compliance preceded by years of compliance. While Mr. Wilm is being sentenced only for the four years at issue, the fact that he did not file tax returns for a dozen years distinguishes this case from many others where the evasion was for a brief term.
Mitigating Circumstances
14There are several mitigating factors:
Rehabilitation - As the psychologist's letter shows, Mr. Wilm's behaviour was not driven by addiction or compulsion. He does not suffer from a major mental illness. There is no further factor that would present a bar to his rehabilitation. He has not lost his employment nor has he lost his equity interest in his company.
Good Character - Mr. Wilm is otherwise a person of good character. He has no prior criminal record. The Crown submits that evidence of good character is less important in tax cases relying on R v Bertram [1990] OJ No 2013 (CA). The brief reasons in Bertram note that rehabilitation is often not a concern in these cases as the accused persons tend to be first offenders. It's also true that the fact that Mr. Wilm is otherwise of good character does not distinguish him from other similar offenders who have received significant sentences. That doesn't mean that the accused's prior good character isn't relevant to sentence – Klundert at para 29. I find that Mr. Wilm's prior good character is a mitigating factor, albeit one that is common in these cases.
Remorse – The accused's expression of remorse at the time of sentence is relevant. The accused's excuses minimize the nature of the fraud, but the expression of remorse is entitled to some weight.
Focused Trial – The Crown was not put to the strict proof of every document or fact, resulting in a savings to the administration of justice.
Analysis
15Canada's income tax system is based on an honour system. The federal government trusts taxpayers to file accurate returns. Persons like Mr. Wilm who choose not to file returns not only cheat the state of much needed revenue, but they increase the tax burden on their friends and neighbours.
16This case shows how easy it can be to evade taxes. Mr. Wilm arranged to have his company stop deducting taxes at source. Once that was done he stopped filing returns. Even though he was a high income earner in mid-career, he was able to go 12 years without being detected. His evasion was only discovered by chance, when an auditor looking at company tax records for another purpose checked corporate bonuses and discovered that Mr. Wilm wasn't paying income taxes.
17Tax evasion can be very hard to detect and very lucrative. In the four years that are the subject of this charge, Mr. Wilm fraudulently kept over half a million dollars. In that context, there is a very strong need for general deterrence, specific deterrence and denunciation.
18While a conditional sentence can include restrictive and punitive elements, I find that form of sentence would not provide sufficient specific and general deterrence in this case. With his salary and the tax monies he kept, Mr. Wilm enjoyed a very comfortable lifestyle. He spent all of the half million dollars he withheld. Some of that spending went to renovations on his home and on a vacation property. Confining Mr. Wilm to his residence while not working in these circumstances would provide little specific deterrence. More importantly, a conditional sentence would not address his level of culpability and the ease with which the offence is committed. Even if the financial penalty can go some way to address the monetary incentive, I find that a conditional sentence would not be adequate to deter Mr. Wilm or others like-minded from committing similar offences in the future.
19The cases submitted identify a range of sentence of 12 months at the very lowest end to three years for this level of tax evasion. A one year term would not meet the purpose and principles of sentencing in this case. Given the Crown's summary election, the maximum term of imprisonment is two years. The cases indicate that a custodial sentence at or close to the maximum of two years would be appropriate here. Considering the circumstances of the offence, and the accused's personal circumstances, I find that a 20 month sentence of imprisonment is the least restrictive sentence that would be proportionate to the gravity of the offence and the degree of responsibility of Mr. Wilm.
20Section 239(1)(g) of the ITA provides that a fine ranging from 50% to 200% of the tax evaded must be imposed in addition to a term of imprisonment. Both the Crown and defence agreed that a 100% fine was within the range. Mr. Wilm has made substantial but not complete payment of taxes owing pursuant to a settlement with the CRA. Considering the circumstances of the offence and the present circumstances of the offender I find that a fine amounting to 100% of the taxes evaded is appropriate.
Conclusion
21Mr. Wilm is sentenced to imprisonment for 20 months. He is ordered to pay a fine of 100% of taxes evaded. The victim fine surcharge does not apply to an ITA fine – s.737(1) Criminal Code.
Delivered: 20 January, 2017
Hon. Justice Joseph F. Kenkel