Court File and Parties
COURT FILE NO.: 12-9675 DATE: 20160606 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: HER MAJESTY THE QUEEN – and – LAWRENCE WATTS
Counsel: Erin Carley and Jason Morische, for the Crown Lawrence Watts, in person Miriam Watts, in person (March 31, 2016)
Heard: January 28, February 1, February 18, March 11, March 31 and May 10, 2016
Bale J.
Background Facts
[1] Following a twenty-three-day jury trial, Lawrence Watts was found guilty of one count of fraud, in an amount exceeding $5,000, contrary to section 380(1)(a) of the Criminal Code. The charge arose from the preparation, by the offender, of one or more income tax returns for 241 Canadian taxpayers. In each case, a non-existent business loss, of a non-existent business, was reported which had the effect of extinguishing the taxpayer’s tax liability for the then current, and three previous years. This resulted in a claim for a refund of all of the tax paid in the three previous years, and of the money withheld at source by their employers for the then current year. The taxpayers who testified at trial gave evidence that they had not carried on a business, or incurred the losses reported on their returns, had not suggested to Watts that they had incurred losses, and did not know where the numbers on their returns had come from.
[2] The total amount of federal tax revenue that would have been lost had all of the returns been assessed as filed was $10,507,131, based upon the reporting of $64,253,889 of non-existent losses. However, at some point, Canada Revenue Agency caught on to the scheme and began to disallow the refund claims. The actual amount paid out in federal tax refunds, or otherwise credited to the taxpayers’ federal tax accounts, was $2,750,288.
[3] In preparing the tax returns, Mr. Watts used the business name “Fiscal Arbitrators”. For his services, the taxpayers were charged twenty per cent of the tax refunds, or credits, received from CRA. Documents seized from Watts’ office showed projected revenue of $1,902,227.
[4] Pursuant to an admission made by Mr. Watts under section 655 of the Code, the parties agreed that the total amount received by Fiscal Arbitrators was $545,401.92, that after payments to agents and promoters, a sum of $298,256.21 remained, that the remaining amount was split between Watts and a partner, Carlton Branch, all with the result that the personal benefit to Watts was $149,128.11.
Circumstances of the Offender
[5] The following circumstances are taken from the pre-sentence report, with which Mr. Watts concurred.
[6] Mr. Watts is 62 years old. He has been married to his wife Miriam for twenty-two years, and they have two young adult sons. He enjoyed his childhood, was a good student, and was without behavioural problems. Family members describe him as intelligent, hardworking, strong-minded, friendly and patient, as well as a good husband, good father, good brother and good brother-in-law. He has the respect and support of his family.
[7] He has a high school education, as well as postsecondary education in computer programming, and obtained a Chartered Financial Planner designation in 1985.
[8] In 2008, Mr. Watts and a partner, Carleton Branch, started an income tax return preparation business using the name “Fiscal Arbitrators”. As a result of his arrest in November of 2012, the business was terminated, and he remains unemployed.
[9] Mr. Watts, his wife, and their younger son have been living with her sister, because of their current limited financial resources. After Mr. Watts’ arrest, they were forced to sell their home.
[10] Mr. Watts has no problems with alcohol or drug abuse, no history of psychological intervention, and no criminal record.
The Positions of the Parties
[11] Crown counsel’s position is that the appropriate range of sentence in this case is between eight and ten years in federal penitentiary, and that Mr. Watts should serve a sentence of ten years. In addition, she argues that he should be ordered to pay a fine in lieu of forfeiture, in the amount of $149,128.11, being the amount admitted to be his personal benefit from the fraud.
[12] Mr. Watts’ position is that the appropriate range of sentence in this case is between six and thirty-three months, and argues that a conditional sentence would be appropriate (his offence was committed prior to the 2012 amendments to section 742.1 of the Code). He opposes the imposition of a fine in lieu of forfeiture.
Sentencing Objectives and Principles
[13] Section 718 of the Criminal Code provides the following sentencing objectives:
- to denounce unlawful conduct;
- to deter the offender and other persons from committing offences;
- to separate offenders from society, where necessary;
- to assist in rehabilitating offenders;
- to provide reparations for harm done to victims, or to the community; and
- to promote a sense of responsibility in offenders, and acknowledgment of the harm done to victims and to the community.
[14] Section 718.1 of the Code provides, as a sentencing principle, that a sentence must be proportionate to the gravity of the offence, and the degree of responsibility of the offender.
[15] In cases of large commercial frauds, the predominant factor in determining the length of sentence is general deterrence.
Range of Sentence
[16] Under section 718.2 of the Criminal Code, a court that imposes a sentence must take into consideration the principle that “a sentence should be similar to sentences imposed on similar offenders, for similar offences, committed in similar circumstances.”
[17] In support of their positions with respect to the appropriate range of sentence, more than sixty cases were cited by the Crown and Mr. Watts. While I have reviewed those cases, no useful purpose would be served by dissecting them in these reasons.
[18] Mr. Watts argued that his sentence should be consistent with sentences imposed under the Income Tax Act, for the offence of tax evasion, with a maximum penalty of imprisonment for five years. However, in R. v. White (1997), 32 O.R. (3d) 722, the Court of Appeal rejected this argument as being without merit. In determining an appropriate sentence in cases of fraud, the court may look at cases decided under the Income Tax Act, but is not limited by them.
[19] In R. v. Waxman, 2014 ONCA 256, the Court of Appeal held that the sentence of eight years imposed by the trial judge was within the appropriate range for a major commercial fraud; and in doing so, referred to R. v. Koval, [2001] O.J. No. 1205 (S.C.J.), R. v. Bjellebo (2003), 177 O.A.C. 378 (C.A.), and R. v. Drabinsky, 2011 ONCA 582.
[20] In Koval, Watt J. referred to the difficulty involved in establishing a range of sentence in cases of fraud, as a result of the ingenuity of persons who commit fraud, and the wide range of conduct covered by the offence. However, he found (at para. 72) that in cases involving: (i) very large amounts of money or economic risk; (ii) breach of trust; (iii) victims of a vulnerable class; or (iv) the diminution of public confidence in a regulated activity or industry; or similar factors, sentences of five to eight years, or more, are imposed. In Bjellebo, the Court of Appeal upheld sentences of seven and ten years. In Drabinsky, a sentence range of five to eight years for large commercial frauds was approved by the Court of Appeal.
[21] I find that an appropriate range of sentence for a fraud in the nature of the one in this case is between four and eight years. In determining where this case falls within that range, I have considered the following aggravating and mitigating circumstances.
Aggravating Circumstances
[22] Under section 380.1(1) of the Code, the court is required to consider a number of things as aggravating circumstances, including the magnitude, complexity, duration, or degree of planning of the fraud.
[23] A considerable amount of time was spent by the parties in arguing about the magnitude of the fraud. The position of Crown counsel was that it was a fraud in excess of ten million dollars, because that was the amount that the government would have lost had all of the fraudulent tax returns been assessed as filed, and was therefore the amount put at risk. The position of Mr. Watts is that, based upon evidence led by the Crown at trial as to how the fraud was discovered, the ten million dollars in refunds claimed were never really at risk.
[24] All of the numbers in this case are relevant to sentence. I find that federal tax revenue of $10,507,131 was at risk, and it was in that amount that Mr. Watts intended to defraud the federal government, by filing the returns in question. Although it is not, in order for an accused to be convicted of fraud, necessary for there to be any actual loss, the actual loss suffered is a relevant consideration in determining sentence. In this case, the actual loss suffered by the federal government is not entirely clear, because there is no evidence with respect to amounts recovered by the government, and because the amount actually paid out to taxpayers (as opposed to credited to their tax accounts) of $3,705,907 included refunds of provincial tax, and interest. Similarly, although it is not, in order for an accused to be convicted of fraud, necessary that he or she personally benefitted from the fraud, the amounts of both the intended benefit, and actual benefit received, are also relevant considerations in determining sentence. In considering the magnitude of the fraud, I must also consider section 380.1(1.1) of the Code which provides that the court shall consider, as an aggravating circumstance, the fact that the value of the fraud committed by the offender exceeded one million dollars.
[25] Crown counsel argued that the fraud was complex. On this issue, I agree with Mr. Watts that it was not. A simple calculation with the help of a spreadsheet was all that was involved. However, the degree of planning of the fraud was significant, involving as it did, seminars, power point presentations, agents and promoters.
[26] Crown counsel submits that the duration of the fraud was four years. Mr. Watts argues that it was less, and that the period of time to be considered should be from the first of the returns filed for the 241 taxpayers, to the date that the last refund cheque for those taxpayers was issued. However, in my view, the more important considerations are the ongoing nature of the fraud, and the fact that it only came to an end as a result of the execution of a search warrant, and Watts subsequent arrest. This is evident from the expansion plans included in the documents seized.
[27] Crown counsel submits that in committing this crime, Mr. Watts abused a position of trust or authority in relation to the victim (Government of Canada), within the meaning of section 718.2 of the Code. While I don’t agree that Watts’ actions constituted a breach of trust in the usual sense, as contemplated by section 718.2, he did commit a breach of the public trust which, in my view, is no less blameworthy.
[28] Crown counsel argued that Mr. Watts has caused immense emotional and financial devastation for the majority of his clients, including sixty-five personal bankruptcies, resulting from their liability to repay the refunds received, and to pay administrative penalties. While I can accept that many of his clients are devastated, they must shoulder a large portion of the blame: it was a “money for nothing” scheme that was just too good to be true. Also, although CRA records show that sixty-five of Watts’ former clients filed either an assignment in bankruptcy, or a bankruptcy proposal, there is insufficient evidence to satisfy me, beyond a reasonable doubt, that he is responsible for those bankruptcies. At the same time, however, I reject his argument that CRA is responsible for the bankruptcies, as a result of its failure to relieve his clients of the administrative penalties that were applied.
[29] Crown counsel argues that the motivation for the crime was “pure greed”. Mr. Watts disagrees. He says that the desire to earn a livelihood is not greed, and that what he was doing was providing “customized educational resources” to his clients, a defence rejected by the jury at trial. Watts was motivated by greed, in the sense that he broke the law, in order to obtain a greater share of wealth than he was legally entitled to, based upon his actions. However, his motivation was not pure greed. He was also motivated by a distrust of authority, and his anti-establishment views of the economic and social principles of our society. It was a combination of these factors that led him commit the crime for which he was convicted.
Mitigating Factors
[30] Mr. Watts testified at the sentence hearing. He said that he accepts “complete, full and unconditional responsibility” for the amounts stated in the tax returns. However, he maintains that he believed the statements made in the returns to have been true, and in a convoluted argument, went into great detail as to what he referred to as his “due diligence” in attempting to comply with the law.
[31] The non-existent business losses claimed in the tax returns resulted from the reporting of non-existent business expenses. Mr. Watts theory as to why the statements made in the returns were true (as set out in his “Assumptions Regarding the Amounts and Items on the Statement of Business Activities (T2125) and the Statement of Agent Activities) is nonsense, and nothing more need be said about it. I don’t know whether Watts actually believes in the theory; however, if he does, his actions are no less blameworthy. He free to believe whatever he wants, but still must comply with the law.
[32] I don’t believe that Mr. Watts’ primary concern was to comply with the law. Rather, he believed that he could justify the filing of the tax returns in the way that he did, based upon his theory and assumptions. Following his arrest, he began to research the law, in a further attempt to justify his actions. Unfortunately for him, he was unable to do so.
[33] The fact that Mr. Watts’ primary concern was to justify his scheme, rather than to comply with the law, became clear in his evidence at trial. On cross-examination, Crown counsel asked him whether he had consulted an accountant, or the CRA, about the legality of his scheme. In a somewhat contemptuous and biting tone, Watts responded: “Why would I do that?” Of course the better question is “Why wouldn’t he ?”, and the answer is that he knew that he wouldn’t get the answers that he was looking for.
[34] Relying upon the pre-sentence report, Mr. Watts argues, as mitigating factors, that he has good family support, and is a first-time offender. I agree.
[35] Mr. Watts also argues that I should consider, as mitigating factors, the stigma and financial losses that have resulted from his arrest and conviction, and the difficulty that he will have obtaining employment in the financial services industry. However, I am not persuaded that these are mitigating factors, given that they are the normal consequences flowing from a conviction for fraud.
Restrictive Bail Conditions
[36] Mr. Watts argues that his bail conditions have been equivalent to house arrest. His main complaint is that there were approximately 1,900 people on the list of persons with whom he was prohibited from communicating, most of whom he wouldn’t know, if he saw them. This, he said, created a paranoia, and prevented him from finding a job, because he was always looking over his shoulder. I don’t dispute his paranoia – it was evident from the fact that he accused CRA of trying to set him up to breach his bail conditions, by scheduling his Tax Court appeal, at the same time as the appeals of persons with whom he was prohibited from communicating. However, I have reviewed his bail conditions, as they existed from time to time, and don’t find them to have been an infringement of liberty, comparable to pre-trial detention.
Fine in Lieu of Forfeiture
[37] Mr. Watts’ share of the revenue generated by Fiscal Arbitrators was paid into Bank of Montreal account number 1530-895. In September of 2009, he and his wife bought a house in Thornhill which became their matrimonial home. Title to the home was registered in Mrs. Watts’ name. The purchase price of the home was $520,000. Both the deposit of $20,000, and the down payment of $118,550, were paid from BMO account number 1530-895.
[38] In September of 2013, the home was sold for $800,001. The solicitor acting for Mr. and Mrs. Watts on the sale was a Mr. Peddle. A judicial interim release order dated September 30, 2013 contained the following provision: “$100,000 being held in trust by counsel Mr. Peddle shall be operated by Mr. Peddle and not released without further order of the court.”
[39] Prior to the commencement of the sentence hearing, Crown counsel served notice on Mr. Watts that she would be asking the court to make a forfeiture order, in relation to the money held in trust by Mr. Peddle. Because the house had been registered in the name of Miriam Watts, I ordered that she be served with notice of the Crown’s application. At Mr. Watts’ request, the balance of the sentence hearing was heard first, and a separate date was scheduled for a forfeiture hearing.
[40] On March 31, 2016, Mr. and Mrs Watts attended for the forfeiture hearing, and requested an adjournment to allow them to argue that the forfeiture provisions of the Criminal Code were unconstitutional. I informed them of the necessity of serving the attorneys general of Canada and Ontario with notice of the constitutional question, advised them to obtain legal advice, and adjourned the sentence hearing to May 10, 2016. The Crown’s position at that time was that the $100,000 held by Mr. Peddle should be forfeited, and that there should be a fine in lieu of forfeiture, in the amount of $49,128.11, being the balance of the amount by which Mr. Watts had admitted he had benefitted.
[41] On May 10, 2016, Mr. Watts, but not Mrs. Watts, attended in court. Mr. Watts advised that Mrs Watts had obtained legal advice, and that she had been advised to “pull her bail”, which she did, resulting in his arrest. A bail hearing then took place, the existing release order with the provision relating to the money in Mr. Peddle’s trust account was cancelled, and a new release order, without the provision, was made. Following the cancellation of the existing release order, the $100,000 in Peddle’s trust account was released to Mrs. Watts.
[42] In these circumstances, Crown counsel withdrew her application for forfeiture of the money in Mr. Peddle’s account, and requested a fine of $149,128.11 in lieu of forfeiture, with $100,000 to be paid immediately, and the balance within two to three years.
[43] Mr. Watts argues that there is no property in relation to which an order of forfeiture could be made within the meaning of section 462.37(3) of the Code, and that therefore there is no basis for ordering a fine in lieu of forfeiture. I disagree. He admitted at trial that he had received $149,129.11 of the money refunded to his clients, as a result of the fraud. That money constituted “proceeds of the crime” within the meaning of section 462.3(1) of the Code, and under section 462.37(1) of the Code, was subject to forfeiture. Under section 462.37(3) of the Code, where such property cannot be located, has been transferred to a third party, has been substantially diminished in value or rendered worthless, or has been commingled with other property that cannot be divided without difficulty, the court may, instead of ordering the property to be forfeited, order the offender to pay a fine in an amount equal to the value of the property.
[44] Mr. Watts argues that the $100,000 released to Mrs. Watts from Mr. Peddle’s trust account was part of the increase in value of the home, over the time that it was owned, and not the money used to pay for the home in the first place. Accordingly, he says, the money was never subject to forfeiture. I disagree. Money obtained by fraud and invested in property must be repaid to the victim first, before any other money is paid from the proceeds of the sale of the property.
[45] Mr. Watts argues that the $100,000 released to Mrs. Watts from Mr. Peddle’s trust account is not available to him to pay a fine, because the home was registered in her name, and the money is therefore hers. He says that he has no money to pay a fine, and that in the event that he is sentenced to a prison term, he will have no ability to pay a fine, at least until after his release. Again, I disagree. Based upon the evidence given by Frank Menniti at the sentence hearing, I am satisfied, beyond a reasonable doubt, that the home purchased by Mr. and Mrs. Watts, and registered in her name, was purchased with proceed of crime. Mr. Watts says that he gave his wife a gift of the money, and that she then bought the house. It doesn’t matter. She has no right to keep the money, and it is available to him to pay a fine. In addition, it is money in respect of which the court could have made an order of forfeiture under section 462.37(2) of the Code.
[46] In the result, there will be an order that Mr. Watts pay a fine in lieu of forfeiture in the amount of $149,129.11. Of that amount, $100,000 will be payable no later than June 16, 2016, and the balance will be payable no later than June 6, 2019.
[47] Pursuant to section 462.37(4)(a)(v) of the Code, where the court orders an offender to pay a fine in lieu of forfeiture, the court is required to impose, in default of payment of the fine, a term of imprisonment, of not less than two years, and not exceeding three years, where the amount of the fine exceeds one hundred thousand dollars, but does not exceed $250,000. In this case, the term of imprisonment, in default of payment of the fine, will be two years, and as required by section 462.37(4)(b) of the Code, the two-year term will be served consecutively to any other term of imprisonment imposed on him, or that he is then serving.
[48] As explained to Mr. Watts at the forfeiture hearing, in the event that he is unable to pay the balance of $49,129.11 as a result of incarceration or other cause, the Crown will have to exercise its discretion as to whether to seek a warrant of committal, or not, and that if the Crown does seek a warrant of committal, he will have an opportunity under section 734.7 of the Code to demonstrate that he has a reasonable excuse for failure to pay the balance of the fine in the time provided.
Disposition
Mr. Watts, will you stand please:
Lawrence Watts – you were found guilty, by a jury, of defrauding the Government of Canada, in an amount exceeding $5,000. On that conviction, and for the reasons given, I sentence you to serve six years in federal penitentiary. In addition, you will pay a fine in lieu of forfeiture, in the amount of $149,129.11, of which $100,000 will be paid no later than June 16, 2016, and the remaining $49,129.11 will be paid no later than June 6, 2019. In default of payment of the fine, you will serve an additional two years, to be served consecutively to the six-year term, and to any other term of imprisonment that you are then serving.
You may be seated.
“Bale J.”
Released: June 6, 2016