COURT FILE NO.: CR-20-140-MO
DATE: 20210705
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HER MAJESTY THE QUEEN
– and –
K.K. and P.Z.
Defendants/Applicants
Bhavna Bhangu for the Crown
Carson Hurley for K.K. and Peter Thorning for P.Z.
HEARD: June 14, 15 and 18, 2021
ruling on s. 462.34(1) application
C. Boswell j.
overview
[1] The applicants, along with two co-accused[^1], are charged with multiple counts of trafficking in persons, receiving a benefit from human trafficking, participation in the activities of a criminal organization and possession of property obtained by crime.
[2] In a nutshell, the applicants are alleged to have run a human trafficking operation through a numbered company, 9542701 Canada Inc., which carried on business as “RTL Services”. They purportedly recruited Mexican immigrants to Barrie on the promise of learning English and securing work. Instead the workers were allegedly exploited by the applicants. When they arrived in Toronto on visitor visas they were allegedly taken to homes designated for workers of RTL. They were put to work doing cleaning and janitorial tasks. They were paid less than minimum wage and threatened with deportation if the applicants’ instructions were not followed. They were forced to live in sub-standard conditions in over-crowded homes.
[3] A police investigation began when some of the RTL workers attended at the Barrie Police Service station and registered a complaint.
[4] Charges were laid against the applicants and the co-accused on May 22, 2019. A preliminary hearing is scheduled to begin on July 19, 2021 and is expected to last twenty days.
The Restrained Funds
[5] RTL had a current account at the Toronto Dominion Bank. The Crown applied, ex parte, for an order restraining (freezing) the proceeds in the account on the basis that they constitute proceeds of crime. That application came before me in writing on October 2, 2019 and on that same date I issued the order sought. More specifically, I issued a restraint order under s. 462.33(3) of the Criminal Code prohibiting any person from dealing with any money held in an account at the Toronto Dominion Bank in the name of 9542701 Canada Inc., o/a RTL Services.
[6] At the time the account was frozen, it held roughly $133,000.
[7] The applicants now apply to gain access to the restrained funds primarily for the purpose of funding the defence of the charges against them, but also to assist in covering the medical expenses of P.Z. and her daughters.
[8] The Crown opposes the application and urges the court to dismiss it in its entirety.
The Issues
[9] This is not a simple application. Its outcome turns on the court’s determination of the following issues:
(i) As I noted, the restrained funds are in RTL’s current account. RTL is a corporation. K.K. is the sole director, officer and shareholder of the company. P.Z. is not a director, officer, shareholder or employee of the company. The court must consider what, if any, interest each of the applicants has in the funds in the corporation’s bank account;
(ii) If the court is satisfied that an applicant has an interest in the restrained funds, the court must assess what needs that applicant has in terms of living expenses and legal fees and any resources the applicant has to meet those needs; and,
(iii) Whether any other party, apart from the applicants, has a legal interest in the restrained funds. In this case, the Crown asserts that the exploited workers of RTL may have a valid claim to an interest in the funds. RTL also owes a significant sum to the Canada Revenue Agency (“CRA”) for unremitted HST. The court must decide how, if at all, these third party interests affect the applicants’ requests for access to the restrained funds.
[10] The determination of the live issues involves the application of a statutory framework of analysis. I will take a moment to review that framework and the principles associated with it.
THE GOVERNING PRINCIPLES
[11] In Canada we are fortunate to live in a reasonably safe and secure society. Our leaders govern by the rule of law. We have a citizenry who are overwhelmingly respectful of the law and each other. And for those who are not so respectful of the law, we have a robust criminal justice system.
[12] The old adage, “crime doesn’t pay” is generally true in Canada. For the most part that adage, which captures the notion that the pros associated with criminal activity are rarely worth the cons, is a sufficient deterrent. For some individuals, however, the risk of detection and punishment are not sufficient to deter them from the commission of crimes that offer potentially lucrative returns. Some may even be prepared to accept some measure of punishment as a cost of doing business.
[13] In an effort to further deter those who may believe the returns on criminal activity are worth the risk and to deprive criminals of their “ill-gotten gains”, Parliament added a suite of provisions to the Criminal Code in January 1989 (now Part XII.2) that enable agents of the state to search for, seize and detain proceeds of crime. The seized proceeds are held, pending a forfeiture application, should the accused person be convicted.
[14] Justice Doherty described the purpose behind Part XII.2 of the Code in R. v. Wilson (1993), 86 O.R. (3d) 464, at para. 10, where he said the following:
The purpose of Part XII.2 is clear. It is intended to give effect to the age old adage that crime does not pay. It is now recognized that some crime is big business, and that massive profits, both direct and indirect, can be made from criminal activity. Part XII.2 is a response to that realization and provides a comprehensive scheme whereby those direct and indirect profits may be located, seized and eventually forfeited to the Crown. (internal citations omitted).
[15] The state’s power to locate and seize an accused person’s assets prior to a determination of guilt is, of course, not without its conceptual difficulties. For one thing, it does not sit comfortably with the so-called “golden thread” of the criminal justice system – the presumption of innocence. For another, the exercise of that power can be oppressive. In particular, it can – and regularly does – result in situations where persons charged by the state with serious criminality have their ability to retain counsel and mount a defence severely if not irreparably impaired. The ability of accused persons to retain counsel to defend themselves in criminal proceedings is a fundamental tenet of the criminal justice system. See R. v. Rafilovich, 2019 SCC 51, at para. 44.
[16] As Doherty J.A. expressed in R. v. Wilson, as above at para. 42, “the state should not be allowed to beggar a person who will often need to retain the assistance of counsel in order to defend himself or herself against state action directed at depriving that person of their property and liberty.” He further noted that the need for counsel has a constitutional underpinning as part of the right of an accused to make full answer and defence and must be given due weight.
[17] Parliament has attempted to attenuate some of the serious difficulties that the seizure of an accused person’s assets may create in terms of their ability to meet their day-to-day living expenses and to retain counsel to respond to the state’s accusations. Section 462.34 of the Code provides a mechanism by which a person whose property has been seized or restrained may apply to the court for an order granting access to that property for the purpose of covering reasonable living expenses or legal fees. That section is directly in play on this application, so I will set out its relevant parts in full:
462.34(1) Any person who has an interest in property that was seized under a warrant issued pursuant to section 462.32 or in respect of which a restraint order was made under subsection 462.33(3) may, at any time, apply to a judge
(a) For an order under subsection (4);
(4) On an application made to a judge under paragraph (1)(a) in respect of any property and after hearing the applicant and the Attorney General and any other person to whom notice was given pursuant to paragraph (2)(b), the judge may order that the property or a part thereof be returned to the applicant or, in the case of a restraint order made under subsection 462.33(3), revoke the order, vary the order to exclude the property or any interest in the property or part thereof from the application of the order or make the order subject to such reasonable conditions as the judge thinks fit,
(c) for the purpose of,
(i) meeting the reasonable living expenses of the person who was in possession of the property at the time the warrant was executed or the order was made or any person who, in the opinion of the judge, has a valid interest in the property and of the dependants of that person,
(ii) meeting the reasonable business and legal expenses of a person referred to in subparagraph (i),
if the judge is satisfied that the applicant has no other assets or means available for the purposes set out in this paragraph and that no other person appears to be the lawful owner of or lawfully entitled to possession of the property.
[18] Justice Martin summarized the purpose of s. 462.34(4), within the context of Part XII.2 generally, at para. 49 of Rafilovich as follows:
…[W]hile Parliament was clearly motivated by the desire to remove the financial incentive from certain crimes, it also wanted to ensure that accused persons would have access to legal representation and that the presumption of innocence would be protected, in order to maintain a procedure that is fair to the accused. These purposes constrain the pursuit of the primary objective. Judicial interpretation should foster, not frustrate, the balance of rights and interests in this part of the Code. In my view, the correct interpretation does not ignore or minimize the secondary purposes in order to achieve the primary goal of ensuring crime does not pay. Rather, all parts of Parliament's scheme and its multiple objectives must be read together, "construed as a whole, each portion throwing light, if need be, on the rest" (Greenshields v. The Queen, 1958 CanLII 36 (SCC), [1958] S.C.R. 216, at p. 225).
[19] Martin J. went on to observe that “Parliament crafted its proceeds of crime regime to establish fair safeguards for the accused, notably the opportunity to pay legal expenses out of seized or restrained property when necessary.” (Rafilovich, para. 50).
[20] Counsel are agreed that an application under section 462.34(4) engages a three-part test. The applicant must establish, on a balance of probabilities, that:
(a) He or she has an interest in the funds (section 462.34(1));
(b) He or she has no other assets or means available for the purpose of meeting his or her reasonable living or legal expenses (section 462.34(4)(c)); and,
(c) No other person appears to be the lawful owner of or lawfully entitled to possession of the funds (section 462.34(4)(c)).
See, for instance, R. v. Granger, 2012 ONSC 6169 at para. 24.
[21] The language of section 462.34(4) is permissive. Where the statutory preconditions are met, a judge may grant the order requested, subject to any reasonable conditions the judge considers fit in the circumstances.
[22] The discretionary nature of the provision engages the court in a balancing exercise. As I indicated, the primary purpose of Part XII.2 of the Code is to ensure that offenders convicted of designated offences do not benefit from the proceeds of their illegal activities. The court must, in the result, balance the applicants’ need for legal assistance against the chance that the proceeds will eventually be found to have been proceeds of crime and to have benefitted a person who acquired them through criminal activity. See R. v. Wilson, as above, at para. 47.
[23] In R. v. Murtaza, 2011 ONSC 7577, at para. 10, Hill J. listed a series of factors to be considered by the court in the balancing of interests under s. 462.34. They include, he said:
(a) the presumption of innocence;
(b) though restrained from use, control and enjoyment the seized funds remain the property of the accused person until they are ordered forfeited. In a very real sense, the accused person is seeking access to restrained funds in order to pay for legal fees with his or her own money;
(c) the state’s contingent interest in the restrained funds and the potential for forfeiture;
(d) the general rule that representation by legal counsel is necessary for most complex criminal trials and that an accused has, with limited exceptions, a right to select counsel of his or her choosing; and,
(e) the state should not be permitted to drive an accused, who is without means beyond his or her seized property, into poverty where resort can be had to the seized property as a resource to retain counsel.
THE CIRCUMSTANCES OF THE APPLICANTS
[24] The applicants are husband and wife. Each is 56 years old. They married in Mexico in 2004. K.K. is a Canadian citizen. P.Z. is a Mexican citizen. P.Z. has two daughters from a prior relationship, now ages 25 and 21. Her daughters have lived with her and K.K. since their marriage.
[25] From 2004 to 2014 the applicants lived together in Mexico. They moved to Canada, along with P.Z.’s daughters, in 2014 and settled in Barrie, Ontario in 2015.
[26] In October 2017, P.Z. and her daughters submitted an application for permanent resident status. Their application is presently on hold. None of them have any legal immigration status in Canada at present. All have had to surrender their passports to the police. None had valid Canadian work permits between 2015 and 2019 when the charged offences are alleged to have occurred.
RTL Services
[27] K.K. incorporated RTL in December 2015. He is the sole officer, director and shareholder of the company.
[28] RTL provided cleaning and janitorial services on contracts with businesses throughout Simcoe County, including hotels and resorts. Their labour force appears to have been made up almost entirely of Mexican nationals.
[29] Apparently P.Z. and her daughters provided services to RTL, the nature and extent of which are not clear in the evidentiary record. All of their work was carried on “off the books”, given their lack of legal status in Canada. According to K.K.’s testimony given during the hearing of this application, he and P.Z. jointly ran RTL.
[30] RTL appears to have enjoyed significant success. Pamela Morley is an accountant. She is certified in financial forensics and is also a certified fraud examiner. She works in the Forensic Accounting Management Group of Public Services and Procurement Canada. At the request of the Ontario Provincial Police she conducted an analysis of a number of accounts held by RTL and the accused during the period December 12, 2015 to February 6, 2019. She concluded that during that period of analysis – slightly over three years – there were total deposits of $2,541,606.
[31] The applicants were charged with the index offences on May 22, 2019. At that time, RTL was in full operation, although its business went downhill precipitously after the charges were laid.
[32] In fact, the decline began on February 5, 2019. On that date, the police executed search warrants that enabled them to determine where RTL was doing its banking.
[33] RTL conducted its day-to-day banking at the Bank of Nova Scotia (“BNS”) until April 26, 2019. Following the execution of the search warrant in early February, BNS asked RTL to move its accounts to another financial institution. On April 26, 2019 RTL withdrew all of its funds on deposit at BNS and moved them to the Toronto Dominion Bank (“TD”). The total on deposit at that time was $270,091.82.
[34] Bank records reveal that on May 31, 2019, RTL had $267,401.81 on deposit at TD. When TD was served with the restraint order in early October 2019, the balance on deposit was $133,065.57.
[35] Notably, K.K. withdrew $40,000 from the RTL account on June 13, 2019 which he deposited into a bank account in his mother’s name. On July 2, 2019 he withdrew another $25,000 from RTL’s account and, similarly, deposited it into an account in his mother’s name. He explained, under cross-examination, that he had heard that the RTL account could be frozen. He wanted to be safe. He was, in his view, protecting his money – or at least some of it – from seizure by the state.
[36] K.K. testified that all of the money he diverted to his mother’s account has now been spent. He was able to identify a number of transactions that add up to $38,500, which include a draft for $20,000 he put into a current account for a new business he started in late October 2019.
[37] K.K. continued to operate RTL until the restraint order was issued in October 2019. According to K.K., business began to die off within a week of the story of the criminal charges hitting the news. That said, K.K. also testified that in October 2019 RTL had a workforce of 30-40 people.
[38] K.K. and his family moved from Barrie to Etobicoke a short time after the charges were laid. They now live in a rented condominium in Etobicoke by Lake Ontario. The rent was initially $3,050 per month. P.Z. testified, however, that the landlord dropped the rent to $2,400 per month because they could not afford to continue to pay $3,050.
[39] Once RTL was shuttered, K.K. began to work installing gutter guards. The evidentiary record is not clear about how long he worked in that capacity or what kind of income he earned.
[40] At some point, he incorporated a new company – 27221185 Ontario Inc. – which carries on business under the name, Quality and Speed Services (“QSS”).
Quality and Speed Services
[41] QSS is an employment agency, providing temporary employees for construction projects.
[42] The record is not clear on when exactly QSS got up and running. K.K. testified, as I noted, that he transitioned from RTL into installing gutter guards. He later got into the business of supplying and installing commercial patio umbrellas. He appears to have continued with this latter enterprise until May 2021 when he somehow injured his shoulder.
[43] At any rate, QSS clearly was operating in 2020. Under cross-examination, K.K. indicated that he reported business income for 2020 in the range of $300,000 to $500,000, though he admittedly lacked confidence in that estimate.
[44] Crown counsel cross-examined K.K. fairly extensively on the most current activities of QSS by reference to its May 2021 banking records.
[45] QSS has a current account at the Bank of Montreal (“BMO”). The balance of the account on May 1, 2021 was $15,773.39. The balance on May 31, 2021 was $71,104.85. The growth in the balance is largely explained by the deposit of $60,000 in proceeds from a government sponsored pandemic relief loan. That loan aside, there were roughly $47,000 in deposits to the account throughout the month of May.
[46] It is not easy to calculate what level of income K.K. is drawing from QSS for a number of reasons including:
(a) The business is relatively new and does not have a sufficient track record upon which to confidently form any conclusions;
(b) The business appears to be in a growing phase. K.K.’s evidence is that he is working on bringing in new clients and he has confidence that the business will grow;
(c) K.K. mixes his business and personal finances. RTL’s bank statements and QSS’s bank statements both reflect the payment of personal expenses through the corporate bank account. No effort appears to have been taken to separate or distinguish personal from business expenses;
(d) K.K. has at least two credit cards that are paid for through the corporate bank account. Again, these credit cards are used for personal as well as business expenses. There is no means for me to determine the proportion of credit card expenditures that are personal. P.Z. appears to have the unfettered use of the same credit cards;
(e) K.K. did not produce copies of any of his personal income tax returns; and,
(f) K.K. does not appear to me to be an accurate recorder or reporter of either his corporate or his personal income. For instance, Pam Morley’s analysis of RTL’s banking records revealed deposits from potential customers during 2018 of $1,467,251. But RTL reported its gross income for 2018 to the CRA as $429,434. K.K. testified that he does not know what he reported to the CRA as his own personal income in 2020. He said he thinks it was $60,000. Given the way he uses the corporate account as his personal piggy bank, I think it highly unlikely that his actual earnings worked out to be a rounded number. K.K. also testified that his family has a pretty decent lifestyle. In my view, a family of four adults living in Toronto would be struggling on $60,000, not living a pretty decent lifestyle.
[47] Net of the pandemic-related loan, QSS’s gross revenues for May 2021 appear to be about $47,000. K.K. agreed that to qualify for the government loan, his business would have to show a declining income. Nevertheless, he said the income for the month of April was about half of what it was in May.
[48] From the gross income earned in May QSS would, of course, have had to pay out expenses, most notably to its workers. Cheques for payments to workers were produced with the bank statement. They total $6,823.44. K.K. testified that other workers were paid through e-transfers, but he said he would be unable to identify which transactions were e-transfers to employees. He also said he withdrew $4,500 in cash to pay workers, but there is no way to confirm that. The simple fact is, K.K.’s record-keeping in relation to who is working, when, how long, for whom and what they are paid is so poor, intentionally I suspect, that it is impossible to know how much of QSS’s gross income is actually paid out in wages.
[49] The Crown cross-examined both P.Z. and K.K. about the expenditures from QSS’s current account in May 2021. P.Z. maintained that almost every expense reflected in the account was for the workers. According to her, all of the money in that account was for the workers. She stretched the workers angle well beyond credulity. For instance:
• With respect to fast food purchases, like “Tacos Gus”? She said the workers need lunch;
• LCBO purchases? She said the workers get thirsty and need a beer;
• Hua Sheng Super Market? The workers need drinks, so sometimes they buy them.
[50] As I understand the business model of QSS, it is supplying temporary workers to third parties for construction projects. It is simply unbelievable that QSS is delivering lunch and beer to the workers working on remote job sites, none of whom they even classify as their own employees.
[51] K.K. was more realistic. He said all of the food and alcohol expenses reflected in the account were personal. Expenses at Costco could be gloves or drinks for workers, but could also be personal. Phone, internet and hydro expenses were personal, but had a home office component to them.
[52] Having reviewed the account statement in some detail, I calculate that K.K.’s income in May was roughly $9,455.38 made up of:
(a) ATM withdrawals of $5,500 (which does not include the $4,500 K.K. said was withdrawn to pay workers;
(b) Restaurant/fast food debits totalling $805.58;
(c) LCBO - $178.95;
(d) Food Markets/Grocery Stores – $1,039.42
(e) Drug store/Nutrition Plus – $148.69
(f) Costco/Walmart – 172.74
(g) Utilities - $480, which I have attributed 25% to home office use, for a net of $360;
(h) Credit card expenditures - $1,250. No credit card statements were filed on the application, leaving me to largely speculate about what they relate to. K.K. acknowledged that at least some of the expenditures on the credit card were for personal items. Clearly, he makes no effort to separate his business and personal expenses. I suspect, given the nature of K.K.’s business, that most of the credit card expenditures are for personal items incurred by him or by P.Z. For the purposes of this application, I am assuming a 50/50 split between work and personal and I suspect that is generous to the applicants.
[53] Not included in my calculation of K.K.’s income for May are the personal aspects of insurance paid through the company (including vehicle and tenants’ insurance) as well as personal vehicle fuel.
[54] I expect that K.K.’s income from the QSS will be significantly higher in June 2021 for two principle reasons:
(a) The construction season will be in full swing and, if K.K. is correct, he will be adding new clients; and,
(b) K.K. transferred himself $15,000 from the business account to his BMO savings account between June 10-11, 2021.
Personal Bank Accounts
[55] P.Z. does not have a personal bank account.
[56] K.K. has two personal bank accounts at present. The BMO account, with a balance of $15,000 and a personal account at TD with a balance of about $4,288.
[57] Neither applicant has any investment accounts or other savings.
Real Property
[58] P.Z. testified that she owns a small vacant parcel of land in a remote and hilly area of Mexico. She is unable to deal with the property, however, because (1) she lacks the proper title documents; and (2) she is unable to go to Mexico at present. She estimates it may be worth $20,000.
[59] K.K. does not own any real property.
Health Issues
[60] P.Z. and her daughters do not have health insurance. They have no legal status in Canada at present and they have no OHIP coverage.
[61] If they want or need to go to a doctor, they visit a clinic and pay a cash fee of $50.
[62] P.Z. filed an affidavit in support of this application, sworn September 17, 2020. She deposed, amongst other things, that she required a medical procedure that she was told it would cost her $3,500. The procedure was a colonoscopy. She was able to get it completed. Though the cost of the procedure was roughly $3,000, she has not been pursued for payment.
[63] Each of P.Z.’s daughters has had to attend St. Joseph’s Hospital for emergency medical procedures. The cost of those procedures has been covered in some way internally by the hospital. Going forward, however, it is expected that they will have to pay up front for any further medical care required.
[64] P.Z. testified passionately about a present health concern she has. I will not get into the details of it, but she said she is really afraid that she may have cancer. She has avoided going to a doctor because of the cost.
DISCUSSION
[65] Having reviewed the applicants’ circumstances in some detail, with reference to the evidentiary record, I propose to analyse the application in accordance with the three prongs of the test that must be met by the applicants. I will begin with the difficult issue of whether each of the applicants has established an interest in the restrained funds.
Issue One: Do the applicants have an interest in the Restrained Funds?
[66] The restrained funds are prima facie those of RTL, a federally incorporated business.
[67] K.K. confirmed in his examination in chief that the funds in the TD current account were not his personal funds; they were business funds.
[68] Our law has, since the late 19th century, recognized corporations as separate legal entities, distinct from their directors, officers and shareholders. See, for instance, Salomon v. Salomon & Co., [1897] A.C. 22, 66 L.J. Ch. 35, 75 L.T. 426, or, more recently, Yaiguaje v. Chevron Corp., 2018 ONCA 472.
[69] The court is essentially being asked on this application to treat the corporation as a fiction. In other words, to proceed as though the funds in the RTL current account are the personal funds, not only of K.K., but of P.Z. as well.
[70] Apart from the prospect that P.Z. “ran” the company with K.K., she has no legal interest in it. She is not a director, officer, shareholder or employee of RTL. If she worked for RTL she did so illegally, as she had no status to carry on gainful employment in Canada at any time during RTL’s operations.
[71] P.Z. asserts that she is the beneficial owner of the restrained funds. Her counsel relies on the doctrine of constructive trust to support that assertion.
[72] A constructive trust is a tool utilized by the court to remedy unjust enrichment. Establishing a constructive trust interest in property requires the claimant to prove three things:
(a) An enrichment. This element requires P.Z. to establish that she gave something of benefit to RTL;
(b) A corresponding deprivation. This element requires P.Z. to demonstrate that RTL was not only enriched, but that the enrichment corresponds to a deprivation she has suffered; and,
(c) The absence of a juristic reason for the enrichment. This element requires P.Z. to satisfy the court that there is no reason in law or justice for the retention by RTL of the benefit in issue.
See Kerr v. Baranow, 2011 SCC 10 at paras. 36-41.
[73] P.Z. has never actually advanced a claim against RTL for a constructive trust interest. K.K. purported to agree that she has such an interest, but that won’t cut it from my point of view.
[74] K.K., as a director and officer of RTL, has a fiduciary duty to act in the best interests of the corporation. See s. 122(1) of the Canada Business Corporations Act, R.S.C. 1985 c. C-44 (“CBCA”). The best interests of the corporation could not possibly align with the giving away of all of the company’s assets to the director’s spouse. Indeed, s. 122(1.1) of the CBCA directs that when acting with a view to the corporation’s best interests, the directors may take into account the interests of creditors, amongst others. Siphoning off all of RTL’s assets, when there are known creditors waiting in the wings, is hugely problematic. It would be truly remarkable if a corporation could divert all of its assets to a director’s spouse simply by the director agreeing that she has a valid trust interest in those assets. Established insolvency law could, for the most part, be thrown out the window.
[75] K.K.’s agreement with the constructive trust argument is a matter of simple expediency for him. It does not actually reflect the true legal state of affairs, at least as between P.Z. and RTL.
[76] At any rate, P.Z. has led no evidence to establish that RTL has been enriched by her efforts, save to suggest that the company was run by her and K.K. together. Even if that were entirely true, she has not established the corresponding deprivation. It would appear that she lived off of the income of RTL for the four or so years it was in existence. It would require a very deep dive into the flow of money through RTL and into the hands of K.K. and P.Z. over the years to get a real sense of whether P.Z. actually suffered a deprivation and, if so, to what extent.
[77] Finally, as I have noted, if P.Z. worked for RTL is was unlawful for her to do so. That is why she did not receive a wage.
[78] Having said all of that, K.K. is the sole shareholder of RTL. He is free to deal with his shares as he sees fit. If he concedes that P.Z. is the beneficial owner of 50% of his shares, then I will not stand in the way of that concession, particularly in light of the fact that the Crown is not taking the position on this application that P.Z. does not have an interest in RTL.
[79] The way the evidence and submissions evolved, I understood P.Z. to be claiming a beneficial interest, by virtue of a constructive trust, in the restrained funds. And I understood K.K. to be consenting to that claim, on behalf of the corporation. For the reasons stated, I do not believe K.K. can lawfully give that consent. But considering the parties’ submissions generously, my view is that K.K. agrees that P.Z. is the beneficial owner of one-half of his shares in RTL.
[80] I am prepared to accept K.K.’s agreement and find that K.K. and P.Z. are, together, the beneficial owners of all of the shares of RTL. In that capacity, each has at least an indirect interest in the funds in RTL’s current account. K.K. has a further interest in those funds as a director/officer/manager of RTL.
[81] While I remain troubled by the absence of an articulated mechanism by which all of the corporation’s assets could be paid out to its shareholders, I am prepared to accept that the applicants have established, on a balance of probabilities, that each has an interest in the restrained funds.
Issue Two: Do the applicants have any other means to cover their legal fees and living expenses?
[82] The second prong of the s. 462.34(1) test requires the applicants to establish, again on a balance of probabilities, that, apart from the restrained funds, they have no other assets or means available for the purpose of meeting their reasonable living or legal expenses.
[83] The court’s inquiry into the financial situation of the applicants must be “more than cursory”. The Supreme Court has directed that the inquiry be “in-depth”. See R. v. Rafilovich, as above, at para. 36.
[84] I will begin the in-depth inquiry by considering the claim to require the restrained funds for living expenses, then I will address the applicants’ needs in terms of legal expenses.
[85] I am not satisfied, on this evidentiary record, that the applicants are having any difficulty meeting their day-to-day living expenses, in terms of food, shelter, transportation and the like. In fact, the evidence is to the contrary.
[86] The one area where it is alleged that they are not able to meet their ongoing expenses is in terms of the cost of necessary health care for P.Z. and her daughters. I am not satisfied, however, that there are any pressing health care needs that they are unable to meet.
[87] I find P.Z.’s purported cancer fear to be entirely disingenuous. If it were really distressing her, if it were truly a question of life and death as she presented it, she would have gone to a specialist to have it attended to. There is more than $70,000 in K.K.’s business account. There is more than $19,000 in his personal account at BMO and another $4,200 in his personal account at TD. There is no doubt in my mind that if P.Z.’s health concerns were as dire as she presented them to the court, she would have taken steps to address them. I do not believe for a minute that she is not addressing valid health concerns as a matter of economics.
[88] In terms of her daughter’s health issues, it appears from the records I have reviewed that those concerns have been attended to. It also appears that the health facility that treated them has swallowed the costs.
[89] To the extent that the application is based on a purported need to cover living expenses, it fails.
[90] On the other hand, I accept that both of the applicants have a need in terms of funding their defence of the index charges.
[91] I conducted a brief in camera hearing regarding the fees each has incurred to date and the anticipated fees associated with the upcoming preliminary hearing. I need not get into the current state of accounts between the applicants and their counsel. But going forward, even at Legal Aid rates, there are insufficient funds in the RTL account to cover both of the applicants’ fees for preparing for and attending the preliminary hearing.
[92] I estimate those fees, at Legal Aid rates, to be almost $70,000 each. That figure is premised on 300 hours of preparation prior to the commencement of the preliminary hearing, then 6.5 hours per day court time, plus an additional 4 hours per day prep time while the preliminary hearing continues. That adds up to an additional 206 hours for a 20-day hearing. I understand the applicable Legal Aid hourly rate to be $136.74. For a total estimated 506 hours, the fees associated with the preliminary hearing are likely to be just shy of the $70,000 mark each.
[93] Each of the applicants has to be looked at individually. The applicable test requires each to establish that he or she no other assets or means of meeting his or her legal expenses. “Other means” obviously includes a consideration of his or her personal financial resources. But it is a broader concept than that. Martin J. noted in Rafilovich, at para. 65, that “other means” includes support entitlements or other sources of financial assistance, help from family members and even the applicants’ access to credit, so long as that credit is capable of being serviced.
[94] In P.Z.’s case, she has no means of funding her legal defence, apart from whatever funds K.K. shares with her. P.Z. has no bank account. She does not work and cannot legally work in Canada at present. She has no investments. She has no one she can borrow from. While I am satisfied that K.K. would wholly fund her defence if he could, I am also satisfied that he is not in a position to do so. In fact, he is not even in a position to fund his own fees in full. Although P.Z. has a small parcel of land in Mexico, she is, realistically, unable to access that resource for the reasons I have described. Finally, P.Z. would not, in my view, be a good candidate for any form of credit in her present circumstances.
[95] P.Z. testified that she applied for Legal Aid but was rejected.
[96] P.Z. has satisfied me, on a balance of probabilities, that she has no means, apart from the restrained funds, to cover her legal expenses.
[97] K.K.’s circumstances are materially different from those of P.Z. While I am satisfied, on a balance of probabilities, that K.K. does not have sufficient means available to him to cover all of his upcoming legal expenses, I am not persuaded that K.K. does not have at least some ability to cover a portion of those expenses.
[98] At the time the application was heard, K.K. was sitting on almost $20,000 in his personal savings accounts. His business appears to be on the uptick as well. I appreciate that QSS may have some outstanding payables for supplies relating to a commercial umbrella installation business. But I do not perceive those to be a significant hindrance.
[99] I am unable to say with any precision how much money K.K. realistically has available to him to assist in covering his legal expenses. That inability falls at K.K.’s feet and is largely the result of the appalling way he keeps his business records. It is also a function of a general lack of candour about precisely what is going on with his business. I believe I understand why K.K. has not been entirely forthcoming about who works for QSS, how much they make and what their method of payment is. I get that he is working more than one angle here. But his lack of complete candour tends to leave me with the impression that he has a greater ability to fund his legal fees than he lets on. Even so, I am of the view that, at best, K.K. is capable of funding only a modest portion of his legal expenses, without resort to the restrained funds.
[100] K.K. did not directly address the potential that he could obtain credit to fund his legal fees. That said, given the newness of his business, the unpredictability of his income and his lack of any collateral to secure a credit facility, I infer that obtaining credit would be difficult, if not impossible for him.
[101] K.K. testified that he too applied for Legal Aid but was similarly turned down.
[102] The jurisprudence appears to be somewhat unsettled in terms of the extent to which an applicant on a s. 462.34(1) motion must demonstrate that he or she has run the table on the Legal Aid process. Martin J. recognized, at para. 65 of Rafilovich, that “accused persons often cannot receive legal aid because the seized property is attributed to them and effectively disqualifies them from receiving assistance, even though they cannot actually access their seized property.” That appears to be what happened here.
[103] In my view, it is not necessary to resolve the Legal Aid dispute for the purposes of the disposition of this application. That issue can be left to another day. I am satisfied that the applicants applied for and were denied Legal Aid assistance.
[104] In summary, I am satisfied that P.Z. has no means whatsoever to meet her legal expenses apart from the restrained funds. In terms of K.K., I find that he has an ability to meet some of his legal costs, but that ability is modest compared with the level of costs he faces.
Issue Three: Are there any other parties who have a lawful interest in the restrained funds?
[105] The third prong of the s. 462.34(1) test requires the applicants to establish, on a balance of probabilities, that there are no other parties who are either the lawful owner of the restrained funds, or who are otherwise lawfully entitled to their possession. The reason for this requirement is obvious. The applicants ought not to be permitted to pay their legal fees with funds that rightfully belong to someone else.
[106] I come back to a point I touched on earlier. The lawful owner of the restrained funds is RTL. P.Z. and K.K. have an indirect interest in those funds, as shareholders of the company. But they are not the only parties to have a claim on them.
[107] Two other parties arguably have a legal entitlement to some portion of the funds. The first was identified by the Crown; the second is patent in the record.
[108] The thrust of the allegations against the accused is that they exploited workers they brought in from Mexico. They are alleged to have paid those workers less than minimum wage to perform cleaning services and to have forced them to live in over-crowded residences. Crown counsel said she will be seeking a restitution order to compensate the workers – possibly as many as fifty – for the wages they were short-changed.
[109] From my current vantage point the restitution claim is speculative. It is not apparent how many of the workers the Crown will be able to locate, nor how their wage claims might be established or what they might amount to. Moreover, the workers in issue were, I understand, not legally entitled to work in Canada. How that factor plays into the analysis is yet to be seen. At its highest, all I can say is that, based on the nature of the allegations, there may be a restitution order made at some point. Or there may not.
[110] More compelling in my view, on the current evidentiary record, is the significant outstanding debt owing by RTL to the CRA for unpaid HST.
[111] K.K. deposed in his affidavit sworn September 22, 2020 that his company had an outstanding HST debt of about $50,000. He swore a further affidavit on December 22, 2020 in which he deposed that his company’s debt to CRA for HST and other taxes is $90,000.
[112] When cross-examined by the Crown during the hearing of this application, K.K. produced a CRA statement of account dated May 6, 2020 showing an outstanding HST balance owing by RTL for tax year 2018 in the amount of $57,363.73. He produced a second statement of account, also dated May 6, 2020, showing an additional balance for outstanding HST of $10,358.78 for tax year 2019.
[113] CRA was not served with the applicants’ motion for access to RTL’s funds, so the court does not have their position about any entitlement they may have to the funds. P.Z.’s counsel suggested that they have not taken any steps to realize on the funds to date and that perhaps it could be inferred that they are not interested in them. Experience has shown, however, that CRA is always interested.
[114] K.K.’s counsel submitted that the CRA’s interest in the restrained funds should not be a bar to their release to the applicants. In counsel’s submission, K.K. remains personally liable to CRA for RTL’s outstanding HST. In other words, accessing the funds in RTL’s current account is not the only way for the CRA to get paid.
[115] While it is true that s. 323 of the Excise Tax Act, R.S.C., 1985, c. E-15, fixes a company’s directors and officers with personal liability for unpaid HST, that potential liability does not lessen RTL’s legal obligation to the CRA.
[116] More importantly, s. 222 of the Excise Tax Act deems unremitted HST to be held in trust by the payor for Her Majesty in right of Canada. As trust funds, the amounts owing by RTL for HST are not available to be utilized by the applicants for their legal fees.
[117] More generally, it is problematic for an officer, director or shareholder to divert all of a corporation’s funds to themselves when there are outstanding creditors.
[118] As I indicated above, as a director and officer of RTL, K.K. stands in a fiduciary position. He has a duty to act in the best interests of the company and is obliged to consider its creditors when making decisions on behalf of the company. Moreover, s. 42 of the CBCA prohibits a corporation from paying a dividend to a shareholder if the corporation would, after the payment, be insolvent. RTL would undoubtedly be insolvent if all of the restrained funds were released to the applicants in their capacities as shareholders of RTL.
[119] The applicants have failed to satisfy me, on a balance of probabilities, that there are no other parties who have a legal entitlement to at least a part of the restrained funds. In my view, the CRA, as a major creditor of RTL, has a legal interest in the funds remaining in RTL’s current account. This interest must be accounted for in the disposition of this application.
CONCLUSIONS
[120] The applicants are presumed to be innocent of the charges before the court. And they have a constitutional right to make full answer and defence. They will, in my view, be unable to do so without legal counsel. As I noted, it is a fundamental tenet of our criminal justice system that accused persons are entitled to counsel and, more particularly, counsel of their choice to defend themselves against charges levelled against them by the state.
[121] The charges faced by the applicants are very serious. The stakes are high. Their liberty is undoubtedly at risk.
[122] A preliminary hearing is scheduled to commence in two weeks. They will, realistically, be unable to conduct that hearing without counsel. Indeed, I suspect the preliminary hearing will not be able to proceed should this application be unsuccessful.
[123] I accept that the applicants have an interest in the restrained funds. As I said, I am troubled by the absence of an articulated mechanism by which the funds are proposed to be paid out of the corporation to the applicants, but I am prepared to look beyond those troubles.
[124] I appreciate that RTL was a very closely held corporation and accept that K.K. was its operating mind. Prior to the restraint order, he had unfettered access to the funds in its account. Absent the restraint order, he would have undoubtedly been able to utilize the funds to cover the applicants’ legal expenses.
[125] The applicants clearly need access to the restrained funds in order to pay their lawyers. RTL’s business went into a steep decline after the charges were laid against the applicants. The restraint order put the final nail in the coffin. K.K. has developed a new business, but it is still in its infancy. The costs of defending the index charges will be immense. Income from the new business may be sufficient to cover some portion of the costs, but it will be, in my view, a relatively modest percentage.
[126] I am not satisfied that the applicants have been entirely candid about the exact state of their financial affairs. That said, I have sufficient confidence in the evidentiary record to be satisfied that they do not have a hidden cache of money available to them should this application fail. I am satisfied that this is a bone fide application and that their need to access the restrained funds is acute.
[127] There can be no doubt that the funds in RTL’s current account may constitute the proceeds of crime. If the Crown is able to make out its case, those funds would be the profits made on the backs of exploited foreign workers, who were particularly vulnerable because of their status as undocumented workers, as well as their unfamiliarity with the culture and language. There is always the chance that, should the Crown’s case be successful, the applicants will be found to have used the proceeds of their offences for their own benefit, contrary to the aspirations of Part XII.2 of the Criminal Code.
[128] As Martin J. held in Rafilovich, however, courts should not be single-minded about Parliament’s goal of ensuring that crime does not pay. As she noted, in crafting the provisions contained in Part XII.2, Parliament also “wanted to ensure that accused persons would have access to legal representation and that the presumption of innocence would be protected, in order to maintain a procedure that is fair to the accused.”
[129] The proceedings will not be fair to the applicants in this case should they not have counsel. In my view, that concern wins the day. I am prepared, in the circumstances, to grant the application, in part.
[130] On K.K.’s evidence, the CRA is owed roughly $67,000 for outstanding and unremitted HST. Those are deemed trust funds, as I have explained. They will remain restrained for that reason.
[131] The balance, which I fix at $66,000 (the “released funds”), is to be released to the applicants, in equal shares, subject to the following provisions:
(a) One-half of the released funds shall be transferred to each of the trust accounts of Mr. Thorning and Mr. Hurley respectively;
(b) The released funds are to be used for the sole purpose of defending the applicants on the index offences;
(c) Should either defence counsel cease to be counsel of record for the applicants, or either of them, the remainder of any of the released funds held in trust by that counsel shall continue to be held in trust, pending further order of this court; and,
(d) My restraint order dated October 2, 2019 shall be and the same is varied as necessary to implement this order.
Boswell J.
Released: July 5, 2021
[^1]: The co-accused are the two adult daughters of PZ.