ONTARIO SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 90/08
DATE: 20120412

BETWEEN:

HER MAJESTY THE QUEEN
Respondent

– and –

MICHAEL ZUK
Appellant

Sandy Thomas, for the Crown
Christopher Biscoe, for Michael Zuk

HEARD: January 12, 2012

TROTTER J.

REASONS FOR JUDGMENT

INTRODUCTION

[ 1 ] After a 52 day trial before the Honourable Madam Justice Geraldine Sparrow of the Ontario Court of Justice, the appellant, Michael Zuk, was found guilty of one count of evading taxes, contrary to s. 239(1) ( d ) of the Income Tax Act , R.S.C. 1985 (5 th Supp.), c. 1) (the “Act”), and two counts of failing to file or make a tax return, contrary to s. 238 of the Act. Mr. Zuk was found not guilty on another count under s. 239(1) ( d ). He was sentenced to an 18 month conditional sentence (concurrent on all three counts), fined $189,260.59 on the tax evasion count and an additional $2,500 on each count of failing to file a tax return.

[ 2 ] Mr. Zuk initially appealed all three of his convictions and sentences. During oral argument, his counsel only advanced arguments in relation to the tax evasion conviction. He argues that the learned trial judge erred in her approach to the mens rea for this offence. He further argues that there was an inconsistency in her verdict on this count. Further, he argues that the trial judge reversed the burden of proof. For the reasons that follow, I dismiss the appeal.

BACKGROUND

[ 3 ] I do not intend to set out the facts in great detail. They are set out fully in the very thorough and comprehensive Reasons for Judgment of the trial judge, which span 50 pages. At the most basic level, the appellant was alleged to have evaded taxes in tax years 1996 (Count #1) [1] and 1997 (Count #2) by failing to disclose income. He was also charged with two counts of failing to file returns for the same tax years.

[ 4 ] As the trial judge observed, the appellant is a business man, involved in various endeavours, including stock promotion. The case revolves around dealings by the appellant and his wife with Cantech Composites Incorporated in 1995, a company purchased by the appellant. In 1996, the appellant sold the company to Transway Capital Incorporated (“Transway”) in exchange for shares in Transway at no cost. Some of the appellant’s income was generated from the sale of these shares.

[ 5 ] It would appear that the appellant’s financial affairs in general were quite confusing and disorganized, at least as far as documentation was concerned. This is why the trial took so long. As the trial judge explained in her Reasons for Judgment at paras. 3 to 5:

It is the Crown’s theory that Michael Zuk was in the business of investing and trading in stock in the tax years in question, and earned large sums of money by doing so. A massive volume of documents was seized by investigators from the Canada Revenue Agency…at his home in Delhi Ontario, and at an apartment used partly as an office…the Etobicoke area of Toronto. Others were obtained from various banks and brokerage houses in Toronto, southwestern Ontario and Switzerland.

The method referred to by the Crown and CRA personnel as the “direct method”, “the prescribed method” or “the prescribed method with assumptions”, is the standard method of calculating income or capital gains from the sale of shares – namely determining the adjusted cost base (referred to as ACB) of each share and the proceeds of sale, and calculating the difference. A positive result is determined to be income, rather than a capital gain, if the taxpayer is in the business of share trading. Losses are subtracted from gains to calculate ultimate taxable income. If records or other evidence do not clearly reveal the adjusted cost base of a share, the investigator may choose to establish it on the basis of logical assumption.

The second method, referred to as the “net worth method”, is frequently used when it is difficult to determine the adjusted cost base of some or all of the shares traded and particularly if a return has not been filed. The investigator examines evidence of all of the taxpayer’s assets and liabilities at the beginning of the tax year, and at the end, to determine if there has been an increase in his or her net worth. Expenditures that are not tax deductible are added to any increase. In short, the theory behind this method is that the increase in assets and expenditures must have been made possible by the earning of taxable income, unless some or all of the income flows from a non-taxable source such as an inheritance. In such a case, the non-taxable amount is deducted. [2]

The Crown attempted to prove guilt on the tax evasion offences by relying on both methods.

[ 6 ] On Count #1 (tax evasion for 1996), the trial judge found that the offence was proved beyond a reasonable doubt on the basis of the direct method, but not on the net worth method approach. On Count #2 (tax evasion for 1997), the trial judge was not satisfied beyond a reasonable doubt on either approach.

ANALYSIS

(a) The Mens Rea Issue

[ 7 ] The appellant argues that the trial judge erred in finding the presence of the requisite mens rea in this case. He acknowledges that the trial judge stated the test correctly, but argues that her conclusion on this issue was unreasonable and not supported by the evidence.

[ 8 ] The trial judge’s conclusion on this issue is found at para. 123 of her Reasons, in which she said:

In R. v. Klundert [2004 O.J. No. 3514 ] O.C.A., Doherty J. described the actus reus for tax evasion as an act or a course of conduct which has the effect of evading taxes, and the mens rea as knowing that tax is owed and intending to avoid payment. Ultimately, the Crown has proved beyond a reasonable doubt that in 1996: 1) Michael Zuk orchestrated the earning of $265,840.15 of family income which was attributed to his wife, and earned at least another $260,118.09 from the sales of shares from various accounts; 2) he knew that tax was owing on these amounts; 3) he failed to file a return for 1996, and failed to take any steps to ensure that his wife was aware of the income generated by him and attributed to her and filed a return for 1996; and 4) he did so with the intent to avoid payment of tax on these sums. The elements of the offence as described in Klundert have been proved beyond a reasonable doubt on the prescribed method basis. He will be convicted on count one.

[ 9 ] By way of background, the appellant was prosecuted under s. 239(1) ( d ) of the Act , which provides:

239(1) Every person who has

( d ) wilfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act,

is guilty of an offence…

[ 10 ] The pre-conditions for establishing liability under this section were discussed in R. v. Klundert (2004), 2004 21268 (ON CA) , 187 C.C.C. (3d) 417 (Ont. C.A.). In terms of the actus reus , Doherty J.A. made the following observations that are helpful to the resolution of this aspect of the appeal. After reviewing the various authorities concerning the act requirement of s. 239(1)( d ), he said the following at pp. 427 and 428:

Section 239(1)(d), unlike other parts of s. 239, is not limited to specified conduct, but speaks in broad terms… 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 .

The authorities that require that the evasion be deceitful or underhanded confuse the conduct component of the crime of tax evasion with the fault component of that crime. Fault rests in the state of mind that accompanies the doing of the prohibited conduct. It is the culpable state of mind that distinguishes the legitimate tax planner from the dishonest tax evader. Both may engage in the same course of conduct that can aptly be described as a deliberate attempt to avoid payment of tax. The difference lies in their respective states of mind. Unlike the tax evader, the tax planner does not intend to avoid the payment of a tax that he or she knows is owed under the Act , but rather intends to avoid owing tax under the Act.

The functioning of the Act depends on accurate self-assessment of tax owing through timely reporting of income and calculation of tax owing. Where tax is owed under the Act, a failure to report income and properly calculate the tax owing on that income has the inevitable effect of avoiding, at least for a time, the payment of tax required under the Act. As observed by the trial judge in the course of his instructions to the jury, Dr. Klundert's liability turned on his state of mind.

[ 11 ] Turning to the mens rea requirement of the provision, Doherty J.A. engaged in an analysis of many of the foundational authorities concerning criminal liability and the interpretation of the word “wilfully” as fault requirement (see R. v. Docherty (1989), 1989 45 (SCC) , 51 C.C.C. (3d) 1 (S.C.C.) and R. v. Buzzanga and Durocher (1979), 1979 1927 (ON CA) , 49 C.C.C. (2d) 369 (Ont. C.A.)). Relying on the decision of Bayda J.A. (as he then was) in R. v. Paveley (1976), 1976 969 (SK CA) , 30 C.C.C. (2d) 483 (Sask. C.A.), Doherty J.A. said at p. 436:

Although I would avoid the use of the phrase "ulterior motive", I agree with Bayda J.A. that the word "wilfully" in s. 239(1) (d) signals that culpability will follow only where the accused engages in conduct intended to avoid the payment of tax owing under the Act . More precisely, I think the fault component in s. 239(1) (d) is twofold. First, the accused must know that tax is owing under the Act and second, the accused must intend to avoid or intend to attempt to avoid payment of that tax. An accused intends to avoid, or intends to attempt to avoid, payment of taxes owing under the Act where that is his purpose, or where he knows that his course of conduct is virtually certain to result in the avoiding of tax owing under the Act.

[ 12 ] As noted above, the appellant acknowledges that the learned trial judge articulated the correct test as set out in R. v. Klundert , supra . I agree. However, the appellant argues that the trial judge’s finding that the appellant intended to evade the payment of taxes by failing to file his 1996 tax return was against the weight of the evidence. I disagree.

[ 13 ] The trial judge’s ultimate conclusion on the mens rea for this count must be read in the broader context of how she dealt with all of the evidence touching on this count. At trial, defence counsel (not Mr. Biscoe) argued that the evidence raised a reasonable doubt about whether the appellant knew about many of his trades in his Transway shares that generated income. An important aspect of this position was the evidence of the appellant’s brother, Robert Zuk, who testified that he traded shares in Michael Zuk’s name without authority. The learned trial judge realized the importance of this position in her Reasons for Judgment at para. 12:

With respect to the direct method as relied upon in count one, he [defence counsel] submits that sales in his client’s brokerage accounts and Madeleine Zuk’s account were conducted by Michael’s brother Robert Zuk, unbeknownst to either of them, and that Crown counsel has therefore not proved the mens rea of tax evasion. [emphasis added]

[ 14 ] This argument was rejected. The trial judge made the following findings about Robert Zuk’s lack of credibility:

a. “In my view, Robert Zuk’s testimony is sorely lacking in credibility.” (para. 115);

b. “In my view, his testimony that Michael Zuk did not know about the trades is implausible for several reasons: (1) Michael was clearly a sophisticated investor, listing himself as such in various account forms, and described in Robert’s testimony as having worked in the investing industry, as well as in corporate financing his entire career.” (para. 116);

c. “For all of the above reasons, I do not accept Robert Zuk’s testimony that he conducted all of the trades in his brother’s account without his brother’s knowledge. Nor am I left in a state of reasonable doubt about it. He may have forged his brother’s signature when convenient, but the only reasonable inference to be drawn is that Michael Zuk authorized and/or conducted the trades and knew the result – the earning of the income that financed his lifestyle.” (para. 117).

[ 15 ] On appeal, the appellant points to evidence of Mr. Ed Svoboda, the appellant’s accountant, who gave evidence suggesting that the appellant failed to file a return for 1996 because he was driven by the expectation that he would be taxed arbitrarily whether or not he filed a return, resulting in the payment of taxes at a higher rate. This was apparently borne out of the appellant’s state of complete disorganization and his declining health. As Mr. Biscoe submitted, at the time, Mr. Zuk was attempting to get on top of his tax situation and that he failed to file out of negligence, and not for the purposes of evading tax.

[ 16 ] This argument is largely undermined by the appellant’s main position at trial that he did not know his brother had made unauthorized trades on his behalf. Moreover, the evidence demonstrated that the appellant hired Mr. Svoboda to file his 1996 return in 1998, long after the deadline for the filing of this return had passed. The trial judge was entitled to treat this theme in the evidence as a convenient after the fact justification.

[ 17 ] In the end, there was overwhelming evidence that the appellant failed to file a return in 1996 for the purpose of evading the payment of taxes owing. For example, the evidence was clear that the appellant orchestrated making substantial sums of money and attributing it to his wife. Mr. Zuk kept things from Mr. Svoboda, who was preparing tax returns for the appellant and his wife, including the fact that Mrs. Zuk filled in a document referred to as a “rollover” under s. 85 of the Income Tax Act and then filed it with the CRA. Moreover, the appellant made RRSP contributions in 1997, reflecting that he knew he had generated taxable income in 1996. In short, there was ample evidence to support the trial judge’s conclusions on Count #1.

[ 18 ] Lastly, in evaluating the appellant’s claim of whether the trial judge’s conclusions were unreasonable and unsupported by the evidence, I note that the appellant did not testify in his defence. As Sharpe J.A. wrote in R. v. Dell (2005), 2005 5667 (ON CA) , 194 C.C.C. (3d) 321 (Ont. C.A.), at p. 334:

I would add here that it is a well-established proposition that, when considering the reasonableness of a verdict, an appellate court is entitled to treat an appellant's silence as indicating that the appellant could not provide an innocent explanation of his or her conduct: R. v. Corbett (1975), 1973 199 (SCC) , 14 C.C.C. (2d) 385 (S.C.C.) at 387-88; R. v. Noble (1997), 1997 388 (SCC) , 114 C.C.C. (3d) 385 (S.C.C.) at 428-29; R. v. Rowley and Currie (1999), 1999 3804 (ON CA) , 140 C.C.C. (3d) 361 (Ont. C.A.) at paras. 19-21 ; R. v. Wang and Lo (2001), 2001 20933 (ON CA) , 153 C.C.C. (3d) 321 (Ont. C.A.) at para. 44 .

More recently, see R. v. Duvivier , 2010 ONCA 136 () , [2010] O.J. No. 683 (C.A.), at para. 9 . This principle would appear to take on greater significance in a mens rea case such as this.

[ 19 ] This ground of appeal must fail.

(b) Inconsistent Verdicts

[ 20 ] The appellant also argues that the trial judge’s verdict was inconsistent because her findings on the net worth method were inconsistent with her findings on the direct method. The key passage relied upon to make this argument is found at para. 102 of the trial judge’s Reasons, in which she made the following findings on Count #1 based on the net worth method:

Making proof beyond a reasonable doubt of tax evasion on a net worth basis in a case involving massive numbers of frequently unclear records is obviously difficult. Nevertheless, I am left in a state of reasonable doubt as to whether the Zuks’ net worth at December 31, 1995 was in the area of $1,236,928.30 as suggested by defence counsel, rather than $128,444.38 as calculated by the CRA. Given that according to CRA, his undeclared income in 1996 was $525,908.24, there is reasonable doubt as to whether his income decreased substantially, rather than increased in 1996 . It is not necessary to analyze the correctness of the alleged non-deductible expenditures which are part of that sum. The Crown has simply not proved count one beyond a reasonable doubt on a net worth basis . [emphasis added]

[ 21 ] On appeal, convictions are sometimes challenged on the basis that a conviction on one count is logically inconsistent with an acquittal on another. As Doherty J.A. explained in R. v. Klundert , supra, at p. 436:

Inconsistent verdicts cannot stand where the appellant demonstrates that the verdicts are so at odds that no reasonable jury who understood the evidence and followed the legal instructions could have arrived at those verdicts: R. v. McShannock (1980), 1980 2973 (ON CA) , 55 C.C.C. (2d) 53 at 55-56 (Ont. C.A.); R. v. Varga (2001), 2001 8610 (ON CA) , 159 C.C.C. (3d) 502 at 526-27 (Ont. C.A.).

[ 22 ] The appellant’s contention does formally fit within the inconsistent verdicts paradigm, largely because the argument is focused on a single verdict. The appellant does not challenge his conviction on Count #1 on the basis of his acquittal on Count #2. Nor does this argument engage the principles discussed in R. v. Thatcher (1987), 1987 53 (SCC) , 32 C.C.C. (3d) 481 (S.C.C.) concerning jury unanimity and alternative routes of liability. The Crown did not pursue alternative bases of liability under s. 239(1) ( d ) (assuming that is plausible under that section); instead, it offered alternative methods of proof . As Ms. Thomas for the Crown submitted, the net worth method and the direct method are merely two different methods of proving the same thing – taxable income.

[ 23 ] The essence of the appellant’s argument is that the trial judge’s reasoning on Count #1 is internally inconsistent. This goes back to the two methods of proof offered by the Crown concerning the appellant’s taxable income in 1996. Both methods were legitimate. The trial judge was simply not satisfied that liability had been established on the net worth method. Nothing in her findings on the net worth approach undermined her conclusions based on the direct method. The appellant submits that the import of the trial judge’s conclusions on the net worth method is that the appellant made no income in 1996. I disagree. As the emphasized portion of the passage above indicates, the trial judge merely found that Mr. Zuk’s “income decreased substantially, rather than increased in 1996,” not that he made no income during that year. This finding is not inconsistent with the trial judge’s conclusions on the direct method.

[ 24 ] This ground of appeal fails.

(c) Reversal of the Burden of Proof

[ 25 ] Lastly, the appellant argues that the trial judge improperly reversed the burden of proof by relying on certain assumptions made by the CRA investigator, Mr. Locke. With respect, there is no merit in this submission. The learned trial judge properly instructed herself and then applied the burden of proof. The assumptions referred to are ones that are typically made in accounting evidence of this nature.

CONCLUSION

[ 26 ] For these reasons, the appeal against conviction for tax evasion is dismissed. The appeal against conviction for the counts of failing to file tax returns and against the sentences imposed on all counts are dismissed as abandoned.

TROTTER J.

Released: April 12, 2012

COURT FILE NO.: 90/08
DATE: 20120412
ONTARIO SUPERIOR COURT OF JUSTICE

HER MAJESTY THE QUEEN Respondent – and – MICHAEL ZUK Appellant

REASONS FOR JUDGMENT TROTTER J.

Released: April 12, 2012

[1] Mr. Zuk was jointly charged with his wife, Madeleine Zuk, on Count #1. Mrs. Zuk was found not guilty on this count. Mrs. Zuk was charged separately with failing to file a return for 1996 (Count #5). She was found guilty.

[2] This method has been approved of in other cases: see Regina v. Robert Zuk , 2005 ONCJ 428 , [2005] O.J. No. 4323 (C.J.) ( Holland v. United States , 348 U.S. 121 (1954), and United States v. Massei , 355 U.S. 595). These authorities, and others, were relied upon by my colleague Kiteley J. in R. v. Hunter (2006), 2006 40994 (ON SC) , 84 O.R. (3d) 34 (S.C.J.) , at para. 10 .