Her Majesty the Queen v. Klundert [Indexed as: R. v. Klundert]

107 O.R. (3d) 561

2011 ONCA 646

Court of Appeal for Ontario,

Laskin, Goudge and LaForme JJ.A.

October 17, 2011

Taxation -- Income tax -- Evasion -- Mens rea -- Accused evading payment of income tax from 1993 to 1997 in honest belief that federal income tax was unconstitutional -- Accused having mens rea for offence of tax evasion.

Taxation -- Income tax -- Evasion -- Sentencing -- Accused evading payment of income tax from 1993 to 1997 in honest belief that federal income tax was unconstitutional -- Accused having no criminal record -- Accused's appeal from sentence of one year's incarceration allowed and sentence varied to one- year conditional -- No absolute rule existing that conditional sentence is not appropriate in tax evasion cases -- Trial judge failing to give sufficient weight to accused's low level of deceit and absence of fraud.

Between 1993, when he formed the opinion that the federal income tax was unconstitutional, and 1997, the accused failed to disclose his income or pay taxes. He was charged with tax evasion. His defence was that he did not intend to commit tax evasion, but rather to protest what he perceived to be unlawful government action. He was twice acquitted, and the Crown twice appealed successfully. The accused was convicted at his third trial. In addition to a fine in the amount of 150 per cent of the taxes evaded, he was sentenced to one year in jail. He appealed the conviction and the jail sentence.

Held, the conviction appeal should be dismissed; the sentence appeal should be allowed.

The gravamen of the offence of tax evasion is the wilful avoidance, or attempt to avoid, the payment of taxes. The accused had the necessary mens rea to commit the offence.

The trial judge erred in failing to impose a conditional sentence. There is no absolute rule that a conditional sentence is not appropriate in tax evasion cases. The trial judge failed to give sufficient emphasis to the accused's low level of deceit, if any, and the absence of fraud. The accused was a first offender and should have been sentenced as such. His disagreement with federal income tax law could not be taken to mean that he had a general lack of respect for the rule of law. Finally, the trial judge erred in finding that the accused's anxiety resulting from the lengthy proceedings was self-imposed and should not be considered on sentencing. In the circumstances, a conditional sentence could address the purposes and principles of sentencing, which in this case were predominantly specific and general deterrence. The sentence was varied to one-year conditional.

APPEAL by the accused from the conviction entered by Patterson J. of the Superior Court of Justice, sitting with a jury, on May 20, 2010 for income tax evasion and from a sentence.

Cases referred to R. v. Bertram, [1990] O.J. No. 2013, 40 O.A.C. 317, 11 W.C.B. (2d) 233 (C.A.); R. v. Onkar Travels Inc., [2003] O.J. No. 2939, [2003] O.T.C. 672, 2003 36389, 58 W.C.B. (2d) 220 (S.C.J.), consd Other cases referred to R. v. Klundert, 2004 21268 (ON CA), [2004] O.J. No. 3515, 242 D.L.R. (4th) 644, 190 O.A.C. 36, 187 C.C.C. (3d) 417, 23 C.R. (6th) 274, [2004] 5 C.T.C. 20, 2004 D.T.C. 6609, 63 W.C.B. (2d) 23 (C.A.); [page562] R. v. Klundert (2008), 93 O.R. (3d) 81, [2008] O.J. No. 4522, 2008 ONCA 767, 244 O.A.C. 377, 79 W.C.B. (2d) 849, 238 C.C.C. (3d) 6, [2009] 2 C.T.C. 108, 62 C.R. (6th) 90 (C.A.) Statutes referred to Criminal Code, R.S.C. 1985, c. C-46, s. 742.3(1) Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 239 [as am.], (1)(d)

Douglas H. Christie, for appellant. Xenia Proestos, for respondent.

The judgment of the court was delivered by

LAFORME J.A.: --

Introduction

[1] This is the third time this matter has been before the courts. In 2002, a jury acquitted the appellant; the Crown successfully appealed and a new trial was ordered. The appellant was again acquitted at the second trial; the Crown again successfully appealed.

[2] At the conclusion of the third trial, a jury found the appellant -- who was the only defence witness -- guilty of income tax evasion under s. 239 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "ITA") and he was convicted. His defence at this trial -- solely through his testimony -- was to negate mens rea. That is to say, he did not intend to commit tax evasion; rather, his actions were intended to protest what he perceived to be unlawful government action.

[3] The appellant appeals his conviction and also seeks leave to appeal the 12-month custodial portion of his sentence. He asserts that a fit and proper sentence would be a conditional sentence to be served in the community.

[4] At the conclusion of oral argument, we dismissed the appeal against conviction. However, we granted leave to appeal sentence and allowed the sentence appeal. The appellant had served a portion of his prison sentence; we therefore set aside the remainder of his prison sentence and substituted it with a conditional sentence for the conclusion of the 12-month sentence.

[5] The following are the reasons that I would rely on for our decision. [page563]

The Conviction Appeal

[6] The appellant submits that the trial judge made numerous errors, some of which he fairly concedes are variations of the others. We did not call upon the respondent in connection with the conviction appeal as we found no merit to any of the grounds advanced. Indeed, the core of this appeal amounts to a reconsideration of issues decided by this court in the two previous appeals: R. v. Klundert, 2004 21268 (ON CA), [2004] O.J. No. 3515, 242 D.L.R. (4th) 644 (C.A.) and R. v. Klundert (2008), 93 O.R. (3d) 81, [2008] O.J. No. 4522, 2008 ONCA 767.

[7] There are, however, two grounds that were pressed in oral argument that deserve brief comment. First is the appellant's intent, a necessary element to proving the offence. Second is a matter involving a juror, which is described below.

(i) The appellant's intent

[8] As noted, the appellant's evidence at trial was that he did not intend to commit tax evasion. He says that what he did intend to do by his actions was to protest what he perceived to be unlawful government action. A brief summary of his actions will be helpful.

[9] Prior to 1993, the appellant, an optometrist, always properly filed and paid his income taxes. In 1993, the appellant received a publication in the mail that discussed Canadian income tax and questioned its constitutional validity. After receiving the publication, and after further contemplation, the appellant formed the opinion that it was unconstitutional for the federal government to impose and collect income tax.

[10] Thus, in his tax returns for the years 1993 to 1997, the appellant did not disclose his income or pay any of the taxes owing on approximately $1.4 million he earned in those years.

[11] The offence of tax evasion under s. 239(1)(d) of the ITA is committed when a person engages in conduct that avoids or attempts to avoid the payment of tax he knows he owes. Recovery of the tax is irrelevant to whether or not the tax was owed. The gravamen of the offence is the wilful avoidance, or attempt to avoid, the payment of taxes: Klundert 2004, at para. 46.

[12] The appellant's defence at trial was a very narrow and focused one. On the basis of his testimony only, he sought to convince the jury that he did not have the necessary mens rea to commit the offence. The trial judge correctly instructed the jury on the law related to this issue. No error was made in the determination that the appellant had the necessary mens rea to commit the offence. [page564]

(ii) The jury issue

[13] On the fourth day of trial, the judge alerted counsel that he had received a note from juror #10, the essence of which was that juror #12 had a daughter who worked for the Provincial Finance Department in the Tax Department of Toronto. Juror #10 wondered if this was a "conflict of interest".

[14] After reviewing the conversation between the two jurors with them -- through an enquiry agreed to by counsel -- both jurors agreed that neither of them would be disentitled to continue. Nevertheless, defence asked that juror #12 be dismissed. The trial judge refused the request. I can find no fault with either the process the trial judge engaged in or his decision.

[15] The trial judge correctly stated the test to be applied, namely, whether the incident in question disclosed a reasonable possibility of prejudice to or an impairment of the right to a fair trial. His decision was made in a judicious and fair manner and was a proper exercise of his discretion.

The Sentence Appeal

[16] The sentence imposed in this case was a fine in the amount of 150 per cent of the taxes evaded and a prison sentence of one year. The appellant only takes issue with the one-year imprisonment.

[17] In his reasons for sentence, the trial judge concluded that the sentence should be less than two years. He then went on to note that he "must consider whether a conditional sentence is appropriate". Principally relying on the case of R. v. Onkar Travels Inc., [2003] O.J. No. 2939, 2003 36389 (S.C.J.), at para. 34, the trial judge concluded:

I am guided by the Court of Appeal affirming Justice Chapnik's decision in the Onkar Travel case that a conditional sentence is not appropriate in these circumstances because it does not provide a sufficient degree of general deterrence.

[18] The trial judge then imposed a sentence of one-year imprisonment, but refused to order that the appellant serve it by way of a conditional sentence. I believe the trial judge was in error, on this record, in not ordering a conditional sentence. As I explain, there are two reasons why I would grant leave to appeal sentence and allow the appeal. Accordingly, I would set aside the sentence of one-year imprisonment and substitute it with a one-year sentence to be served in the community on terms set out below. [page565]

(i) Consideration of the Onkar Travels case

[19] First, the trial judge's strong reliance -- arguably his sole reliance -- on the Onkar Travels case to determine that a conditional sentence was inappropriate was misplaced.

[20] In Onkar Travels, the individual defendant and his company, Onkar Travels Inc., collected Goods and Services Tax from various airlines and tour operators, which they failed to remit to the government. Instead, the individual defendant made false entries in the books and records of Onkar Travels Inc. and false statements in the tax returns filed with Revenue Canada to cover up his actions. The sentencing judge found that a conditional sentence would be an insufficient deterrent in the circumstances of this "serious, large-scale fraud" and imposed prison sentence of two years less a day.

[21] The trial judge seems to interpret a rule from Onkar Travels that he appears to suggest is absolute. That is, a conditional sentence is not appropriate in tax evasion cases. There is no such absolute rule. As was demonstrated to the trial judge, there are tax evasion cases in which conditional sentences have been imposed.

[22] Further, this case is simply not comparable to Onkar Travels, just as the trial judge found. Indeed, he characterized the case this way: "By any assessment this case presented unique facts. Defence counsel is correct that this behaviour was not, on the face of it, as deceitful as the 'average evasion case'."

[23] He went on to hold that, while deceit or fraud may be an aggravating factor, the absence of such features does not create a mitigating factor. While that may be an acceptable general rule of sentencing, the absence of deceit or fraud can nevertheless be a factor in deciding whether or not a conditional sentence is warranted. To the extent the trial judge did consider the appellant's low level of deceit, if any, and lack of fraud, it was not fairly emphasized in his reasons and amounts to error.

(ii) Consideration of aggravating factors

[24] Second, the trial judge overemphasized or misapprehended some of the facts to be aggravating factors sufficient to deny the appellant a conditional sentence. I review some of them below.

[25] The facts established that the appellant directed OHIP to deposit his claims for payment into his wife's account. The trial judge found that this amounted to the appellant's concealing his income and, therefore, was an aggravating factor. I am unable to understand how claiming income from OHIP but directing it to [page566] be paid to a specific account, by itself, amounts to concealing income. In any case, it was overemphasized as an aggravating factor. This is especially true in light of the trial judge's finding that the appellant's conduct and circumstances were not the "average evasion case".

[26] In his reasons, the trial judge found that the appellant's comment concerning this court's "siding with the [g]overnment to protect the [g]overnment's right to take as much money as they want" was "a demonstration of [the appellant's] lack of respect for the [r]ule of [l]aw". He found this to also be an aggravating factor.

[27] The appellant's history actually shows that in virtually every other respect he was a law-abiding citizen. Indeed, he was a first-time offender and should have been sentenced as such. His disagreement with the specific law for which he was charged and convicted cannot sufficiently underpin a conclusion that the appellant had a general lack of respect for the rule of law. This was not a proper aggravating factor.

[28] Next, the trial judge held that the authorities establish that the absence of a prior criminal record and of otherwise good character and reputation is less of a mitigating factor in tax evasion cases. He relies on this court's decision in R. v. Bertram, [1990] O.J. No. 2013, 40 O.A.C. 317 (C.A.).

[29] Even if one could discern such a precise interpretation from Bertram, otherwise good character and reputation can still be of significance and of more importance when deciding whether or not a conditional sentence is warranted. It was an error for the trial judge not to do so.

[30] Finally, the trial judge observed that these proceedings have been protracted, starting in 2001. There have been, he notes correctly, three trials and two Court of Appeal decisions. However, the trial judge also notes that "the law substantiates that long proceedings and the anxiety they impose on an accused can be a factor on sentencing but certainly it can be argued that it was self-imposed in this case".

[31] I have difficulty with the trial judge's conclusion that anxiety imposed by the long proceedings in this case can be said to be self-imposed by the appellant and, thus, cannot be a factor to be considered on sentencing. In this case, the appellant was acquitted in his first trial; the Crown successfully appealed and a new trial was ordered. The same occurred after his acquittal in the second trial. It was not until the third trial that he was finally convicted.

[32] Thus, it was the Crown exercising its right of appeal after the first two trials in which the appellant was acquitted that [page567] resulted in the long proceedings and the anxiety they imposed on the appellant. These factors were not at all "self-imposed". It was an error for the trial judge not to give at least some consideration to the length of the process and its attendant anxiety on the appellant as a factor to consider on sentencing.

[33] Given the errors noted above, the trial judge's decision on a fit and proper sentence is not entitled to deference. I agree with the trial judge to this extent: this is a unique case where the appellant's behaviour was not as deceitful, nor as fraudulent as the average evasion case. When the mitigating and aggravating factors are properly weighed and considered, it seems to me that the interests of justice can be served by a conditional sentence.

[34] First, the appellant will not pose a danger to the public if he is allowed to remain in the community. Second, in the unique circumstances of this case, a conditional sentence can address the purposes and principles of sentencing, which in this case are predominantly specific and general deterrence.

Conclusion

[35] The appeal against conviction is dismissed. For the reasons given, I would grant leave to the appellant to appeal sentence and allow his appeal. I would set aside the sentence of one-year imprisonment and substitute it with a one-year conditional sentence.

[36] The conditional sentence should contain the compulsory conditions required by s. 742.3(1) of the Criminal Code, R.S.C. 1985, c. C-46, namely, the offender must

-- keep the peace and be of good behaviour;

-- go to court when required;

-- report to a criminal justice system supervisor regularly;

-- stay in the area under the court's authority and get written permission to travel outside this area; and

-- tell the court or criminal justice system supervisor before moving or when changing jobs.

[37] In addition, I would order that the conditional sentence also contain additional terms. The parties are in agreement with each of the additional terms except for the time required for the appellant to pay the fine. The parties addressed this issue in brief written submissions. After a review of the submissions, [page568] I agree with the position of the Crown. Accordingly, I would order that the appellant be required to comply with the following additional terms:

-- remain in the Province of Ontario;

-- surrender his passport;

-- reside at [address omitted], Oldcastle, Ontario and advise Fay Berlie, in writing, of any change in address 48 hours prior to such change;

-- perform 180 hours of community service; and

-- pay the fine imposed by the trial judge prior to the expiry of the conditional sentence.

[38] In all other respects, I would affirm the sentence.

Conviction appeal dismissed; sentence appeal allowed.