Court File and Parties
Ontario Court of Justice
Date: October 20, 2016
Court File No.: Newmarket 13-06938
Between:
Her Majesty the Queen
— and —
Wolfgang Wilm
Before: Justice Joseph F. Kenkel
Heard on: May 11, 16, July 12, 2016
Judgment delivered: October 20, 2016
Counsel:
- Ms. Sandy Thomas, Ms. Wendy Levant — counsel for the Crown
- Mr. Edward G. Spong — counsel for the defendant
KENKEL J.:
Introduction
[1] Mr. Wilm is charged with tax evasion. From 2006 to 2011 he did not file tax returns. He received over $2 million in salary, bonuses and dividends from his company during that period. He says he always intended to pay some time in the future so it's not evasion just delay.
[2] The Crown submits that Mr. Wilm chose not to file returns to avoid payment of taxes at that time which meets the statutory definition of evasion. The Crown submits the accused's evidence of a future intent to pay is not credible nor does it provide a defence. The defence submits that the accused always intended to pay and that the Crown has not proved the intent required to make out the offence.
[3] The failure to file is admitted. The sole issue at trial is whether the Crown has proved beyond a reasonable doubt that the accused did so intending to avoid or attempting to avoid the payment of tax, or knowing that avoiding tax payment was a certain consequence of his actions.
The Failure to File
[4] The Crown's case was largely admitted through an Agreed Statement of Fact. Mr. Wilm was Vice President of Sales at ASI, a commercial contracting company that did large pre-cast concrete projects in the United States and Canada. He was also a Director of ASI and holds 8% of shares in the company.
[5] Mr. Wilm was an employee and paid his taxes up to 1998. He was setup in ASI and its predecessor company as an independent contractor, one of only two persons in the company who were not listed as employees and who did not have taxes deducted at source on income and bonuses. Mr. Wilm failed to file a tax return for the 1999 tax year. He then failed to file tax returns for the years 2000 to 2011 inclusive until a corporate audit revealed the discrepancy. 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 this charge. The tax payable on that income would have been $552,976.
The Charge
[6] Mr. Wilm is charged with wilfully evading or attempting to evade payment of $552,976 in Federal taxes imposed by the Income Tax Act by failing to file returns of income for the taxation years 2007, 2008, 2009, 2010 contrary to s.239(1)(d) of the Act RSC 1985 c.1 as amended. The Crown elected to proceed summarily.
The Actus Reus of Tax Evasion
[7] Tax evasion is a species of fraud and a true criminal offence.[1]
[8] The offence requires proof of an act or course of conduct which has the effect of evading or attempting to evade payment of taxes actually owed under the Act.[2] "The conduct component of the crime of evading tax contrary to s. 239(1)(d) is made out if the Crown proves that the accused voluntarily performed an act or engaged in a course of conduct that avoided or attempted to avoid payment of tax owing under the Act."[3]
[9] Both parties agree that the accused's failure to file taxes is sufficient proof of the acts alleged. Liability in this case turns on proof of intent.
The Mens Rea of Tax Evasion
[10] In R v Klundert[4], at para.47 Justice Doherty described the fault component as two fold:
First, the accused must know that tax is owing under the Act
Second, the accused must:
- intend to avoid or
- intend to attempt to avoid payment of that tax,
- or must have failed to file knowing that avoiding payment of tax was a virtual certain consequence of his actions.
[11] Justice Doherty notes at paragraph 48 of Klundert that a person may know there is tax imposed under the Act, do something that has the effect of evading the payment of tax without necessarily having done so for the purpose of evasion. He explains in the paragraphs that follow that knowledge may be negated by mistaken belief. Taxpayers who make mathematical mistakes as to the amount of tax owing, or who may have a genuine but mistaken understanding of the complex requirements of the tax Act such that they made an error which resulted in the non-payment of required tax may be found to lack the intent to commit the offence of evasion.
[12] Factual errors that result in underpayment or in some cases non-payment can negate the fault requirement where the evidence shows that the accused intended to comply with the law.[5] As tax law is notoriously complex, legal errors in some circumstances may also negate the fault requirement.[6]
The Evidence as to Intent
[13] The Crown's case as to intent rests on the following circumstances:
Mr. Wilm failed to file tax returns for 12 consecutive tax years including the 4 years that are the subject of this charge.
Mr. Wilm admits he was aware his high income must result in income tax but he chose not to put any money aside for taxes for 12 years.
Mr. Wilm did not consult an accountant, bookkeeper or lawyer at any time prior to 2011 to determine how he might meet his filing obligation despite having the financial means to do so, showing he had no intention to file.
The accused is a sophisticated businessman, a company Vice President, Director and Shareholder in an international commercial contracting firm who is well aware of the requirements to keep proper business records and the legal duty to file tax returns. He had told his employer he would pay his income taxes directly to the Canada Revenue Agency (CRA).
Mr. Wilm admitted he has participated in payment agreements with the CRA in past years so he knew that even if filing resulted in a balance owing there were steps he could take to meet his obligations.
The accused's decision not to file was not based on a mistake of fact or law.
The accused did not file GST returns as required by law for an independent contractor with those earnings, showing a consistent disregard for the tax duties arising from the way he arranged to receive his income.
Mr. Wilm received $2,081,167 in income and bonuses during the four tax years relevant to the charges. He had the means to pay taxes and simply chose not to do so.
The post-offence filing of tax returns in 2012 does not negate the mens rea of the offences.
[14] Mr. Wilm testified that he decided not to file a tax return for the 2007 tax year to avoid showing the government that taxes were owing. He repeated that strategy in the later years at issue in this case. ASI did not deduct taxes from him during this period as he was treated as an independent contractor at his request. Mr. Wilm received bonuses during this period without taxes being deducted on the same basis.
[15] Mr. Wilm testified that it was always his intention to file and pay taxes owing someday.
[16] In February of 2011 Mr. Wilm called a tax lawyer Mr. Rotfleisch and explained his situation. He said he wanted to make a voluntary disclosure. Mr. Wilm met with a Canada Revenue Agency (CRA) Auditor in 2009 at his business but he testified that the CRA audit was never discussed at the company or at the directors' board meetings. His contact with a tax lawyer in January of 2011 was motivated only by his wish to clear up his affairs. A disclosure letter was sent to the CRA on February 24, 2011. Mr. Wilm testified that he didn't know about the company audit until June 12th of 2011 when he was advised that his disclosure was not accepted as voluntary given discoveries during that audit.
[17] From February of 2011 to September of 2012 Mr. Wilm did not file his returns. He blamed his lawyer. Given the ongoing failure to file, on September 27, 2012 the CRA executed a search warrant at Mr. Wilm's house to locate and seize his financial records. It was after the warrant was executed that Mr. Wilm finally filed his returns although he testified that was done in a hurry against his instructions. His voluntary disclosure claim had been denied 8 months earlier. Mr. Wilm disagreed that he delayed filing to avoid triggering taxes owing and penalties until an appeal/review of the voluntary disclosure ruling had been completed.
[18] The returns filed were based on a simple chart that Mr. Wilm provided to the accountant.
[19] Mr. Wilm explained that the reason he didn't file tax returns is that he spent all of his income and didn't save money to pay. He chose not to file to avoid paying at that time but he says he always knew that at some point in the future he would have to "do something about it".
[20] In cross-examination Mr. Wilm testified that before he worked at ASI and its predecessor he was an employee at Beer Precast Concrete. He performed similar tasks at that company to his duties now at ASI. During those years he filed tax returns and paid taxes although he admitted he'd had some difficulties paying during those years. He'd had payment arrangements with the CRA during that time. The last tax return Mr. Wilm filed was in 1998.
[21] During the tax years 2007 to 2010 Mr. Wilm agreed he did not set aside money to pay taxes. He deposited $2,172,603.71 to his account during those years yet withdrew almost all of it - $2,134,622.
[22] Mr. Wilm agreed in cross-examination that he attended all board meetings from January of 2007 to December of 2010. He stated that there was never a discussion of a CRA audit and he was unaware of it.
[23] Mr. Wilm agreed he spoke to the CRA auditor and later spoke with a company employee who was assisting the auditor. She asked him for his social insurance number (SIN) and he provided her with a number. The number he provided was not his SIN number. He disagreed that he knew she was asking him for his SIN number as part of the audit. He blamed the employee for likely writing down the number incorrectly.
[24] Ms. DiGiovanni is the financial controller in the company Mr. Wilm works for. She's known Mr. Wilm since 2001. From 2007 to 2010 there were only two persons in the company who were independent contractors and Mr. Wilm was one of them. Mr. Wilm worked out of the company office, held a company position, received health benefits as the employees did.
[25] During the CRA audit, the auditor asked for every employee's SIN number. She didn't have Mr. Wilm's SIN so she asked him for it and he provided her with a number. She gave the number he provided to the auditor. She agreed in cross-examination that the audit started as a check of the flow of money between their company and a related United States company. They deal with tax authorities in two countries and multiple provinces and states so audits are routine and she looks after them. The CRA audit was different as it then moved to internal compensation and that's when she had to ask Mr. Wilm for his SIN. She later learned that the SIN number he'd given her wasn't correct.
[26] Mr. Slatt conducted the audit for the CRA. He was initially looking to ensure that fair market value had been applied to international non-arms-length transactions. He spoke directly with Mr. Wilm in that context when he first began the audit. He identified himself as a CRA auditor and spoke with Mr. Wilm for 20 minutes to half an hour. By 2010 he was satisfied that no adjustments were required in relation to his audit but the records provided gave rise to further queries about executive bonuses that the company had expensed on their financials. Tax on bonuses has to be paid within 60 days of accrual. Mr. Slatt was sent back to determine whether bonuses had been expensed on the company journals properly and whether taxes had been paid by the recipients. It was during that inquiry that he asked Ms. DiGiovanni to provide the relevant SIN numbers.
[27] During his bonus investigation Mr. Slatt noticed that Mr. Wilm did not have T4 summaries. He checked the SIN number that had been provided to Ms. DiGiovanni and determined that it was not Mr. Wilm's SIN. He received that incorrect Wilm SIN on February 10th, 2011. That day he'd been working at the company in the office directly across from Mr. Wilm. He was not given a correct SIN for Mr. Wilm until he asked again on March 3rd. Further investigation using the correct SIN revealed that Mr. Wilm had not filed tax returns from 2000 to 2011.
[28] Mr. Rich was the accountant who worked on Mr. Wilm's taxes. He prepared returns based on a simple chart document provided by Mr. Wilm. That was the extent of the financial records of his independent contracting business that Mr. Wilm provided. He prepared the returns but to be filed they had to be approved by Mr. Wilm and the tax lawyer. His recollection is that Mr. Wilm and his lawyer were hoping not to file until the voluntary disclosure appeal or review was complete. If the returns had been filed that would trigger tax owing and penalties. Given the amounts involved the CRA would have aggressively engaged in collection. Correspondence he had with the lawyer as late as December 6, 2011 shows the returns had not been filed.
Analysis
[29] The agreed facts, documentary evidence and testimony heard at trial all combine to provide a strong circumstantial case showing Mr. Wilm chose not to file tax returns to avoid paying taxes as alleged. There's no credible evidence that could reasonably leave a doubt in that regard. Mr. Wilm was not a credible witness, but even if he were believed his testimony would not provide a defence.
[30] Considering Mr. Wilm's testimony in the context of all of the evidence I find that he was not a credible witness for the following reasons:
Much of his testimony was illogical and was contradicted on central points by credible external evidence.
It's not credible that Mr. Wilm provided his social insurance number to Ms. DiGiovanni without knowing that it had been requested by the CRA auditor. Mr. Wilm had met the auditor and knew he was working nearby in the office on the day the social insurance number was requested. The circumstantial evidence and the credible direct evidence of Ms. DiGiovanni show that Mr. Wilm deliberately provided a false SIN number to delay discovery of his tax situation. That circumstance goes directly to intent and otherwise detracts from his credibility as a witness.
It's not credible that Mr. Wilm's disclosure to CRA was "voluntary" motivated only by conscience. It's not a coincidence that Mr. Wilm contacted a tax lawyer right after he'd provided a false SIN to the CRA auditor. He'd failed to file tax returns or make any effort at remedial steps for 12 years. The circumstantial evidence including the timing of his letter to the CRA shows that Mr. Wilm was aware he was about to be found out by the audit, he provided a false SIN to delay discovery and attempted to file a "voluntary disclosure" in the interim to avoid penalties.
Even after his failure to file was discovered Mr. Wilm did not file his tax returns as required by statute. He attempts to blame others for that failure but his evidence on this point was self-serving and incredible. It was his responsibility to ensure that the returns were filed in a timely way and it wasn't until his inaction forced the CRA to execute a search warrant on his house that he complied.
It's simply not credible that Mr. Wilm had an ongoing intention to pay taxes when he received over $2 million in income, bonuses and dividends during the 4 years in question but took no steps to file returns or make payments on the tax he knew he owed.
[31] The offence is complete where the Crown proves that the actus reus and the mens rea co-existed during the offence period.[7]
[32] Mr. Wilm's evidence that he had intended to pay his debts at some time in the future is not credible and in any event does not provide a defence. It's not open to the accused to choose when he will comply with the law. It's not open to him to engage in evasion of a statutory obligation until some underdetermined time in the future when it might suit him to comply.
[33] Mr. Wilm knew that there was tax imposed by the Act on his income. He structured his affairs so that the tax would not be deducted at source as it was for other employees. He admitted he chose not to file his returns so that he could avoid the tax liability those returns would trigger at that time. He committed the prohibited acts with the intention prohibited by statute. The prohibited acts and the prohibited intent coincided thus completing the offence.[8]
Conclusion
[34] I find the Crown has proved the offence alleged beyond a reasonable doubt. There will be a finding of guilt.
Released: 20 October, 2016
Signed: Hon. Justice Joseph F. Kenkel
Footnotes
[1] R v Klundert, [2004] OJ No 3515 (CA) at para 32 leave refused [2004] SCCA No 463
[2] Klundert at para 35.
[3] Klundert at para 40
[4] Klundert supra.
[5] See: Klundert at para 50
[6] Klundert at para 55
[7] R v Cooper, [1993] SCJ No 8 at para 28
[8] Cooper at para 28