Her Majesty the Queen v. Alexander Street Lofts Development Corp. et al. [Indexed as: R. v. Alexander Street Lofts Development Corp.]
86 O.R. (3d) 710
Court of Appeal for Ontario,
Doherty, Borins and Feldman JJ.A.
April 24, 2007
Criminal law -- Appeal -- Fresh evidence on appeal -- Accused being convicted of wilfully obtaining refunds under Excise Tax Act by claiming false tax credits on GST returns -- Accused seeking to adduce fresh evidence on appeal from conviction that Canada Revenue Agency investigator failed to disclose certain documents to him -- Fresh evidence not being admitted -- Documents should have been disclosed to accused prior to trial but there was no reasonable possibility that non-disclosure affected outcome of trial or overall fairness of trial process -- Excise Tax Act, R.S.C. 1985, c. E-15.
Taxation -- Goods and services tax -- Offences -- Accused being convicted of wilfully obtaining refunds under Excise Tax Act by claiming false tax credits on GST returns -- Crown alleging that accused billed his companies for work which was not in fact done or grossly overvalued work done and then companies claimed refund for GST component of invoices -- Conviction being affirmed on appeal -- Amounts alleged in each count in indictment not being essential elements of offences charged -- Crown not being required to prove that entire amount of refunds referred to in indictment were in fact paid based on false invoices -- Defence of officially induced error not being available to accused in circumstances -- Excise Tax Act, R.S.C. 1985, c. E-15.
Taxation -- Goods and services tax -- Penalties -- Accused being convicted of wilfully obtaining refunds under Excise Tax Act by claiming false tax credits on GST returns -- Sentence of 30 months' incarceration and fine of $702,646.59 being affirmed on appeal -- Excise Tax Act, R.S.C. 1985, c. E-15.
The accused and his two companies were convicted to two counts of wilfully obtaining refunds under the Excise Tax Act by claiming false tax credits on GST returns filed by the companies and two counts of attempting to obtain refunds to which they were not entitled. The Crown alleged that the accused, through a [page711] number of sole proprietorships, billed his companies $10 million for work allegedly done in connection with the acquisition and development of certain properties and the companies then claimed a refund for the GST component of the invoices, and that the invoices were fraudulent because they claimed for work not done or grossly overvalued the work the accused had done. The accused was sentenced to 30 months' incarceration and fined $702,646.59. He appealed the conviction and the sentence.
Held, the appeal should be dismissed.
The amounts claimed in each count in the indictment were not essential elements of the offences charged. The accused was charged with wilfully obtaining or attempting to obtain refunds to which he was not entitled. The full offence and the attempt could be made out regardless of the amount of the fraudulent refunds claimed and paid. The Crown was not required to prove that the entire amount of the refunds referred to in the indictment were in fact paid based on false invoices.
The accused claimed that he was told by a tax office that as long as he performed the work claimed in the invoices, he could make the GST refund claims before the companies actually paid the invoices. The defence of officially induced error was not available to him in the circumstances. The Crown's case turned on whether the accused submitted false invoices for work that he either had not done or that he had grossly overvalued in the invoices. Even on the accused's version of what the tax officials told him, he knew he could not claim for work that he had not done.
The accused sought to introduce fresh evidence on appeal that certain documents were not disclosed to him by the lead Canada Revenue Agency investigator before trial. The fresh evidence was not accepted. While the investigator should have disclosed the documents to the accused, the accused had not discharged the burden of showing a reasonable possibility that the non- disclosure affected the outcome of the trial or the overall fairness of the trial process.
There was no reasonable possibility that the jury could have taken into account the accused's failure to offer any explanation to the lead CRA investigator in determining whether he knowingly made claims for refunds to which he was not entitled. While the trial judge could have, and if asked by defence counsel should have, made it clear to the jury that the accused was under no obligation to speak to the investigator once he was advised that he was the target of a criminal investigation, defence counsel did not request any instruction to that effect. The accused offered a reasonable explanation for his refusal, and the Crown did not challenge that explanation.
The jury's verdicts indicated that it was satisfied that over a two-year timeframe the accused systematically made monthly refund claims based on false invoices as a way of funding his development projects. Even if not every dollar of every refund was attributable to a false invoice, the jury was clearly satisfied that the accused perpetrated a substantial fraud on the public purse. That finding provided ample justification for the jail term imposed by the trial judge.
APPEAL from the conviction entered by Milanetti J., sitting with a jury, and from the sentence imposed, [2005] O.J. No. 2392, [2005] G.S.T.C. 141 (S.C.J.). [page712]
Statutes referred to Excise Tax Act, R.S.C. 1985, c. E-15, s. 327(2)
Adam Stelmaszynski, in person. Rick Visca and Xenia Proestos, for respondent.
The judgment of the court was delivered by
[1] DOHERTY J.A.: -- Mr. Stelmaszynski, the appellant, and his two companies were convicted of two counts of wilfully obtaining refunds under the Excise Tax Act, R.S.C. 1985, c. E- 15 by claiming false tax credits on GST returns filed by the companies (counts 1 and 3). The appellant and his companies were also convicted of two counts of attempting to obtain refunds to which they were not entitled (counts 2 and 4). The appellant was sentenced to 30 months in jail and fined $702,646.59. The fines were equal to the total of the refunds referred to in the four counts of the indictment.
[2] The appellant appeals his conviction and sentence. Technically, it would appear that the appeal is brought only by Mr. Stelmaszynski; it is acknowledged, however, that the corporate accused were entirely under his control. Their liability thus depends on his liability.
The Conviction Appeal
[3] The appellant, through his companies, attempted to acquire three properties. He wanted to develop upscale condominium projects on these properties. Ultimately, he purchased only one of these properties and none of the projects proceeded to development.
[4] Through a number of sole proprietorships, the appellant billed his companies $10 million for work allegedly done in connection with the acquisition and development of the properties. These invoices contained a GST component which reflected the GST charge to the companies for the services allegedly performed by the appellant's sole proprietorships. Although the appellant's companies did not pay these invoices and consequently his sole proprietorships did not remit any of the GST to the government, the companies claimed a refund for the GST component of the invoices. Over the two-year time period covered by the indictment, the appellant's companies received about $670,000 in GST refunds. The two attempt counts related to an additional sum of about $30,000 in refunds sought by the appellant but not paid by the government.
[5] The Crown argued at trial that although the appellant had done some work in connection with the proposed developments, the invoices submitted by him in support of the refund claims [page713] were fraudulent because they claimed for work not done or grossly overvalued the work the appellant had done. The Crown contended that the appellant submitted false invoices on a monthly basis to generate funds in the form of refund payments which he used to help finance his attempts to acquire and develop the properties.
[6] The appellant claimed that the work referred to in the invoices had been done and that the rates charged reflected industry practice. The appellant maintained that before he made any claims for GST refunds, he went to the tax office in Hamilton and outlined his operation to tax officials in that office. He said that he was told by them that as long as he performed the work claimed in the invoices, he could make the GST refund claims before the companies actually paid the invoices. While it would appear that this advice may not have been correct, the Crown's case did not turn on the appellant's right to make the claim when he did. Rather, the Crown's case turned on whether the appellant submitted false invoices for work that he either had not done or that he had grossly overvalued in the invoices. The Crown maintained that even on the appellant's version of what the tax officials told him, he knew he could not claim for work that he had not done.
[7] The evidence at trial consisted primarily of documents, including hundreds of invoices, all of which were filed on consent, Crown accounting summaries based on the documentation, the evidence of a Mr. Kleinschmidt, the lead investigator for the Canada Revenue Agency ("CRA") and the appellant's evidence detailing his attempts to acquire the properties and complete the condominium developments. Neither the Crown nor the defence went through all of the invoices with the jury.
[8] The Crown led evidence aimed at demonstrating that over a two-year period the appellant systematically made monthly refund claims based either on a gross over-evaluation of the work he had done or on work he had not done. For example, the Crown led evidence that:
-- the invoices contained virtually no detail;
-- several different invoices filed by different sole proprietorships controlled by the appellant billed for the same work;
-- other business and tax records kept and filed by the appellant did not reflect any of the income allegedly earned by the sole proprietorships and reflected in the invoice amounts; [page714]
-- in respect of two of the properties, the appellant claimed construction costs exceeding $500,000, even though he had not obtained a demolition or building permit;
-- in respect of the Welland project, the appellant claimed for work valued at $430,000 in July 1997 despite the fact that his proposal for the development of that property had been turned down in June 1997; and
-- the appellant claimed architectural related costs of $450,000. That work was valued at $20,000 by an architect who testified at trial.
[9] In his evidence, the appellant offered explanations for the various matters relied on by the Crown in addition to attempting to demonstrate the amount of work he had done on the projects. The appellant's credibility was central to his defence.
[10] The appellant was initially represented by counsel on the appeal. Counsel filed a factum. At some point, counsel was dismissed and the appellant filed his own detailed factum. The court has considered the grounds of appeal advanced in both the appellant's and counsel's facta and found counsel's factum particularly helpful.
[11] The appellant's factum contains many grounds of appeal. None have merit and most do not require any detailed comment. The appellant submits that he should have been acquitted because the Crown did not prove that the entire amount of the refunds referred to in the indictment were in fact paid based on false invoices. In other words, the appellant argues that if the fraud was less than the amount alleged, an acquittal should follow.
[12] The amounts alleged in each count in the indictment are not essential elements of the offences charged. The appellant was charged with wilfully obtaining or attempting to obtain refunds to which he was not entitled. The full offence and the attempt could be made out regardless of the amount of the fraudulent refunds claimed and paid, although the amount of the fraud proved can become important on sentencing.
[13] Several of the appellant's arguments are not relevant to any issue in the proceedings. For example, he made submissions as to the proper application of the similar fact rule and the law pertaining to criminal negligence. Neither the similar fact rule nor the law of criminal negligence were engaged in this proceeding. The appellant also made extensive references to the jurisprudence dealing with a trial judge's obligation to [page715] give reasons for judgment. This was a jury trial. Those cases have no application.
[14] The appellant made submissions concerning the law relating to officially induced error. A stay of proceedings was sought on this basis at trial, post-conviction but before sentence. It would appear that the appellant relies on the advice he obtained from the tax officials in Hamilton in support of his argument that the doctrine of officially induced error applies to his case.
[15] The evidence of the advice the appellant received from the tax authorities does not give rise to a defence of officially induced error. It was treated by the trial judge as going to whether the appellant "wilfully" claimed a refund to which he was not entitled. The trial judge so instructed the jury. Indeed, it would appear that she gave an instruction that was unduly favourable to the appellant. The trial judge told the jury that it must acquit the appellant if he was "merely mistaken in his understanding of when the GST was payable". As Crown counsel on appeal correctly pointed out, the question of when in law the GST was payable was not crucial to the Crown's allegation. The Crown alleged that regardless of when the GST was payable, or more to the point, when the appellant thought it was payable, the appellant had knowingly submitted false invoices to obtain a refund on the GST. If the invoices were false, the appellant was not entitled to those refunds regardless of when the GST was payable.
[16] The appellant submits that the trial judge should have given a Vetrovec warning in connection with the evidence of Mr. Kleinschmidt. It was open to the appellant to challenge the impartiality of Mr. Kleinschmidt and the manner in which he conducted his investigation of the appellant. There was, however, nothing in the record that could reasonably lead to the conclusion that Mr. Kleinschmidt's credibility was so inherently suspect as to necessitate a Vetrovec caution in respect of his evidence.
[17] The appellant seeks to introduce fresh evidence on the appeal. The proposed fresh evidence relates to the appellant's contact in August 1997 with a CRA auditor named Mr. Marcaccio. That contact generated certain internal CRA memoranda. Mr. Kleinschmidt also obtained a witness statement in the form of a statutory declaration from Mr. Marcaccio. Neither the memorandum nor the statutory declaration were disclosed to the appellant prior to trial. In its response to the appellant's fresh evidence application, the Crown has filed an affidavit from Mr. Kleinschmidt in which he indicates that he did not [page716] regard the documents or the statutory declaration as "potentially relevant to the proceedings and to the defence".
[18] In light of the broad meaning given to relevance at the disclosure stage, I am satisfied that the material described above should have been disclosed to the appellant. I am also satisfied, however, that the failure to disclose the material could not possibly have had any effect on the conduct of the defence and did not undermine the fairness of the trial.
[19] There is nothing in the proposed fresh evidence to suggest that Mr. Marcaccio had any evidence to give that could assist the appellant on the crucial issue of whether the invoices were false. Indeed, it would appear from the material that the appellant probably lied to Mr. Marcaccio about the status of the projects. This information could only have further undermined the appellant's credibility.
[20] Counsel for the appellant did not suggest at trial that the appellant acted or relied on anything Mr. Marcaccio told him. The appellant acknowledged in his submissions in this court that he did not testify at trial that he relied on anything Mr. Marcaccio said to him. He submitted, however, on appeal that Mr. Marcaccio had "approved" his claims, including the invoices. There is nothing in the material that offers any support for this contention. In fact, many of the invoices were submitted before the appellant met Mr. Marcaccio.
[21] Consequently, although the Marcaccio materials should have been disclosed prior to trial, the appellant has not discharged the burden of showing a reasonable possibility that the non-disclosure affected the outcome of the trial or the overall fairness of the trial process.
[22] I turn now to the grounds of appeal advanced in the factum filed by counsel. She argued that the jury should have been specifically instructed that they could draw no adverse inference from the appellant's failure to offer any explanation to Mr. Kleinschmidt when he sought an explanation for the refund claims in the course of his investigation. It was the appellant's position that he co-operated with the tax authorities throughout the process until Mr. Kleinschmidt became involved. He further testified that he was willing to answer Mr. Kleinschmidt's questions, but requested that Mr. Kleinschmidt advise him of the nature of his concerns in writing before the appellant attempted to answer those concerns. Mr. Kleinschmidt did not put his questions in writing and the appellant did not meet with him. As counsel properly acknowledged in her factum, the defence position that Mr. Kleinschmidt was not impartial in his investigation and had not treated the appellant fairly put the [page717] dealings between Mr. Kleinschmidt and the appellant into issue at trial.
[23] In the course of the trial judge's instructions on the mens rea of the offences, she told the jury that they could look to the entirety of the appellant's conduct both before and after making the refund claims in determining whether he knowingly made claims for refunds to which he was not entitled. Counsel argues that this broad instruction would be taken by the jury as including the appellant's ultimate failure to offer any explanation to Mr. Kleinschmidt. She asserts, quite correctly, that once Mr. Kleinschmidt was engaged in a criminal investigation, the appellant was entitled to remain silent.
[24] The trial judge could have, and if asked by counsel for the appellant should have, made it clear to the jury that the appellant was under no obligation to speak to Mr. Kleinschmidt once he was advised that he was the target of a criminal investigation. I agree with Crown counsel, however, that in the context of the entirety of the evidence, there is no reasonable possibility that the jury would infer anything from the appellant's refusal to speak with Mr. Kleinschmidt. The appellant offered a reasonable explanation for that refusal and I do not understand the Crown to have challenged that explanation. The defence did not request any instruction to the effect that the appellant's refusal to answer Mr. Kleinschmidt's questions should not be taken as evidence against him. The absence of that request confirms my assessment that the appellant's right to silence was not an issue in the trial. Neither the Crown nor the defence saw this as a case either in which the Crown was attempting to make something out of the appellant's decision not to co-operate with Mr. Kleinschmidt or where the jury would draw an adverse inference against him based on his failure to co-operate.
[25] In her factum, counsel next argues that the trial judge undermined her initial proper W.D. instruction in a subsequent part of her initial charge and again in response to a question from the jury. Counsel submits that the trial judge's reformulation of the burden of proof and the reasonable doubt standard withdrew from the jury the possibility of acquitting the appellant on the basis that his evidence, while not believed by the jury, left the jury with a reasonable doubt.
[26] It would have been better had the trial judge tracked the language of her initial W.D. instruction in her subsequent formulation of the reasonable doubt standard as applied to the evidence of the appellant. However, in the initial charge and in the trial judge's response to the jury's question, she made it clear to [page718] the jury that the jury must acquit either if it believed the appellant or if it had a reasonable doubt based on the entirety of the evidence. The jury would understand that the entirety of the evidence includes the evidence of the appellant. Considering the charge as a whole, I am satisfied that the trial judge's formulation of the reasonable doubt standard as it applied to the appellant's evidence would not have misled the jury in its application of the burden of proof to his evidence.
The Sentence Appeal
[27] The trial judge correctly told the jury that it could convict even if the amounts of the fraudulent invoices "do not match identically with those set out in the indictment". She told the jury that the amount of the fraudulent refunds, if the jury found the claims were fraudulent, was "a matter of law for me to deal with".
[28] On sentencing, counsel for the Crown and the appellant proceeded on the basis that the convictions indicated that the jury was satisfied that the amounts alleged in the indictment had been proved by the Crown. The trial judge proceeded to impose sentence based on the same assumption.
[29] The amount of the fraud is potentially important on sentence for two reasons. First, it goes to whether incarceration is warranted and, if so, the length of that incarceration. Second, the amount of the fraud is essential to a determination of the quantum of the fine to be imposed. Section 327(2) of the Excise Tax Act provides for a mandatory fine with a fixed minimum and maximum amount based on the amount of the refund sought. It would appear, although I need not finally determine this question, that the "amount" referred to in s. 327(2) must refer to the "amount" of the refund that an accused was not entitled to claim.
[30] In the course of oral argument, the court expressed some concern, given the nature of the Crown's allegations, the evidence adduced at trial, and the trial judge's instruction to the jury, that the trial judge should have made a factual finding as to the quantum of refunds to which the appellant was not entitled. It would be difficult, if not impossible, for this court to make that finding at this stage.
[31] I am satisfied, however, based on the way this case was put to the jury by the Crown and the defence, that the jury's verdicts indicate that it was satisfied that over a two-year timeframe the appellant systematically made monthly refund claims based on false invoices as a way of funding his grand, but cash starved [page719] development projects. Even if not every dollar of every refund was attributable to a false invoice, the jury was clearly satisfied that the appellant perpetrated a substantial fraud on the public purse. That finding provides ample justification for the jail term imposed by the trial judge.
[32] Neither counsel for the appellant in her factum, nor the appellant in his own factum, took issue with the quantum of the fine. The trial judge imposed the minimum fine assuming that the amounts referred to in the indictment were the proper amounts for the purpose of calculating the fine. It was accepted at trial that there was no realistic possibility that the appellant could pay the fine. The trial judge does not appear to have imposed any additional penalty, either concurrent or consecutive to the term of imprisonment should the appellant not pay the fine. The amount of the fine appears to be of no practical consequence. As the quantum of the fine was not put in issue on the appeal and appears to be of no practical consequence, I see no reason to consider the appropriateness of the fine imposed at trial.
[33] I would dismiss the conviction appeal, grant leave to appeal sentence, and dismiss the sentence appeal.
Appeal dismissed. [page720]