Matthys v. R., 86 DTC 6385, [1986] 2 CTC 307 (Ont. D. Ct.)

McDermid, D.CJ.:—This is an appeal by Albert Matthys from a conviction registered in the Provincial Court (Criminal Division) at London on February 18, 1986. The appellant was convicted of two counts of tax evasion contrary to paragraph 239(1 )(d) of the Income Tax Act, R.S.C. 1952, chapter 148, as amended.

The counts set forth in the information read as follows:

That Albert Matthys, . . .

1. Between the 30th day of April, 1978 and the 29th day of March 1984, at the Village of Mount Brydges, in the Township of Caradoc, in the County of Middlesex, or elsewhere in the Province of Ontario, unlawfully did willfully evade or attempt to evade the payment of $36,362.04 in taxes imposed by the Income Tax Act by failing to report and declare in his Federal and Ontario Individual Income Tax Returns filed, his share of net partnership income of $130,629.53 which amount represents one half of an understatement of total partnership income in the sum of $240,251.95 and one half of an overstatement of partnership interest expenses of $21,007.10 in the taxation years 1979, 1980, 1981, 1982 and 1983 and did thereby commit an offence contrary to Paragraph 239(1)(d) of the Income Tax Act, R.S.C. 1952, Chapter 148, as amended.

2. Between the 30th day of April, 1978 and the 29th day of March 1984, at the Village of Mount Brydges, in the Township of Caradoc, in the County of Middlesex, or elsewhere in the Province of Ontario, unlawfully did willfully evade or attempt to evade the payment of $36,321.30 in taxes imposed by the Income Tax Act by failing to report and declare net partnership income of $130,629.52, which amount represents one half of an understatement of total partnership income in the sum of $240,251.95 and one half of an overstatement of partnership interest expenses of $21,007.10, attributable to LUCIENNE MATTHYS for the taxation years 1979, 1980, 1981, 1982 and 1983, in the Federal and Ontario Individual Income Tax Returns, filed by LUCIENNE MATTHYS, as required by the Income Tax Act, R.S.C. 1952, Chapter 148, as amended, contrary to Paragraph 239(1)(d) of the said Act.

At trial the appellant admitted that he had failed to report almost all of the income alleged in the information and pleaded guilty to that extent. He pleaded not guilty to failing to report $72,680.75 of income in the 1983 taxation year which would have attracted tax of $20,333.56. The trial was confined to the issue of whether or not the appellant failed to report $72,680.75 as charged and thereby evaded tax in the sum of $20,333.56.

Counsel agreed upon an eight page statement of facts which was filed as Exhibit #2 at the trial. Attached to it were many schedules and exhibits. Oral evidence was also adduced.

The appellant’s principal occupation was that of a tobacco farmer. Schedules 1 to 5 attached to Exhibit #2 set out the appellant’s revenue for the years 1979 to 1983 inclusive. Those schedules revealed that the appellant earned the following income from tobacco quota rent which he failed to report as follows:

1. 1979 — $ 7,000.00

2. 1980 — $ 7,338.25

3. 1981 — $10,000.00

4, 1982 — $14,611.24

5. 1983 — $72,680.75

Mr. Matthys operated the tobacco farming business in partnership with his wife. Profits were computed on a cash basis and were divided equally between them. The tobacco farming business operated with a fiscal year end on April 30th of each year. The investment income earned by Mr. and Mrs. Matthys was divided equally between them on a calendar year basis. The $72,680.75 in issue was received by Mr. Matthys between May 25, 1983 and October 1, 1983.

The principal grounds of appeal were:

1. The trial judge erred in finding there was an intent on the part of the accused to evade a payment of tax on the income of $72,680.75;

2. The trial judge erred in law and in finding that the acts or omissions of the accused were sufficient to constitute the actus reus of the offence.

The position taken by the appellant both at trial and on appeal was that he had the option of reporting the income in question either in his tax return for the 1983 taxation year or in his tax return for the 1984 taxation year. In fact, he did report the income in question in the return filed for his 1984 taxation year which was filed within the time prescribed by the Act.

Paragraph 239(1)(d), laeaving out those words which do not apply, reads as follows:

(1) Every person who has . . .

(d) wilfully, in any manner, evaded or attempted to evade, compliance with this Act, . . .

is guilty of an offence . . .

As with any other offence, in order to secure a conviction against an accused, the Crown must prove beyond a reasonable doubt both the actus reus and the mens rea of the offence. From an examination of paragraph 239(1)(d) and the information itself, I conclude that the actus reus alleged in this matter was the appellant's failure to report and declare in his 1983 income tax return the sum of $72,680.75 “of net partnership income." The mens rea in question is an intention wilfully to evade or to attempt to evade the payment of income tax.

I believe the first step that should be taken in determining whether an accused is guilty or not guilty is to decide whether the actus reus has been proved beyond a reasonable doubt. Only after the court is satisfied on this point, should it go on to consider whether or not the act was done with the requisite intent.

In his reasons for judgment, the trial judge mentioned the main thrust of the defence, namely, that the appellant had an option to report the income in question either in the 1983 or 1984 taxation year. However, it appears from his reasons that he never decided whether the actus reus had in fact been established beyond a reasonable doubt. He referred to the fact that the accused had pleaded guilty to charges of evading tax by failing to report as income, tobacco quota rentals received in the years 1979, 1980, 1981 and 1982. He then stated, "And the Crown's position is that, at least with respect to the income earned on those quotas in 1983, the accused was intending to, and, did in fact attempt to avoid paying tax on the income on those quotas in 1983, which is the $72,680.75." The trial judge then went on to consider other evidence with respect to the issue of the accused's intention. He concluded, after reviewing the evidence of the accused's conduct relating to his intention, that the accused had the intent to evade payment of tax. He concluded by stating, "I am satisfied beyond a reasonable doubt that the accused did intend and attempt to evade the payment of tax on $72,680.75 . . ."

From a careful reading of the trial judge's reasons, I conclude that although he referred to the accused's main defence, i.e. that the actus reus had not been made out, he did not decide that issue. Instead, he concluded that the accused had the intention to evade payment of tax and found him guilty.

Should I decide the issue or order a new trial? A great number of facts were agreed upon by counsel and incorporated in an agreed statement of facts. The resolution of the issue does not seem to turn upon an assessment of the credibility of any witness who testified at trial. The trial judge did not decide whether the appellant had the option, at law, to defer the reporting of the income in question to his 1984 taxation year. Therefore, I believe that I am in a position to do so.

The position of Mr. McLeish for the appellant was, of course, that, as a matter of law, he had the option to defer the reporting of the income in question to his 1984 taxation year and was not required to report it in his 1983 taxation year. He also submitted that that income was partnership income and that the partnership had always reported on a fiscal year basis. Since the rental income was received after April 30, 1983, it was quite proper and lawful for the appellant to include that income in the return for his 1984 taxation year. In this connection, he relied upon paragraph 96(1)(f) of the Income Tax Act which, leaving out those words which do not apply, reads as follows:

(1) Where a taxpayer is a member of a partnership, his income . . . for a taxation year . . . shall be computed as if . ..

(f) the amount of the income of the partnership for a taxation year from any source . . . were the income of the taxpayer from that source . . . for the taxation year of the taxpayer in which the partnership's taxation year ends, to the extent of the taxpayer’s share thereof . . .

In other words, the appellant had the option of reporting the income in question in the tax return for his 1984 taxation year.

Mr. Handelman, for the Crown, conceded that general principle, but submitted that the appellant was in fact engaged in two partnerships. The first one received income from the farming business and had a fiscal year ending April 30th each year. The other partnership earned investment income which was dealt with on a calendar year basis. He also submitted that the income from the tobacco quota rental fell into the latter category since it was income from “property” as defined by section 248 of the Act. Therefore, he submitted that for those two reasons the tobacco quota rental income in question had to to be reported on a calendar year basis and should have been included in the return for the appellant’s 1983 taxation year.

On the other hand, Mr. McLeish relied upon Exhibit #18, an Interpretation Bulletin issued by Revenue Canada, Taxation, on the subject of “Miscellaneous Farm Income” as number I.T.-425. Paragraph 7 of that bulletin reads as follows:

7. An amount received or receivable (depending upon the method regularly followed in computing income) by a taxpayer for granting the farmer permission to use the taxpayer’s marketing quota (for example, tobacco, egg, milk or grain) is considered to be income and will be treated as income from farming if the taxpayer is engaged in a farming business. The sale of the actual quota by a farmer would be considered to be the disposition of an eligible capital property.

Mr. McLeish submitted that the effect of paragraph 7 was to permit the rental income from the tobacco quota to be treated as farm income and therefore, to be reported on a fiscal year end basis rather than on a calendar year end basis. In such a case, the appellant would have the option of declaring that income in his 1984 taxation year.

However, Mr. Handelman referred to paragraph 1 of the bulletins which reads as follows:

1. This bulletin discusses miscellaneous income of a taxpayer from the business of farming.

While conceding that the appellant was engaged in a farming business, it was his position that the income from the rental of tobacco quota was not “miscellaneous income’' because in the year in question, it formed a substantial part of his income, whereas in previous years it had been a minor part of his income. In other words, he submitted that the word “miscellaneous" meant a minor part of the over-all income of the farmer.

At trial, William Gordon Rumball, a certified general accountant employed by Revenue Canada, testified for the Crown. He was asked certain questions about Exhibit #18. In particular, he was asked for his understanding of the term “miscellaneous". In his examination-in-chief he said it was “secondary, ancillary to or perhaps you might say a small amount". He did not believe that the income from the tobacco quota rental was miscellaneous income in the case of the appellant because in 1983 he “rented out" his entire quota rights and the income from them as a percentage of his total income from all sources in 1983 was “too material to be labelled miscellaneous".

On cross-examination he admitted that the Act contained no definition of the word “miscellaneous". He was referred to two dictionary definitions. The first was from the Collins Dictionary of the English Language as follows:

Composed of or containing a variety of things, mixed, varied. Having varied capabilities, sides.

The second definition was from a pocketbook version of the Miriam Webster Dictionary as follows:

Consisting of diverse things or members, having various traits, dealing with or interested in diverse subjects.

On cross-examination, Mr. Rumball also agreed, at page 66 of the transcript, that income from the tobacco marketing quota was one of the miscellaneous forms of income discussed in I.T.-425. He agreed further that the words “received or receivable" in paragraph 7 of that bulletin referred to the method that farmers have of reporting income either on an accrual or cash basis. Also, he agreed that the cash from the rental of the tobacco quota was received during the appellant’s 1984 fiscal year. Finally, he agreed that the appellant was in the farming business.

An examination of the bulletin itself showed that it contained various headings relating to different types of income apart from income received from the sale of crops or animals. I must conclude that the word “miscellaneous," therefore, refers to a variety of types of income but does not refer to the proportion of income generated by one source compared to other sources of income for the farmer. Therefore, I conclude that the appellant’s income from tobacco quota rental was miscellaneous income within the meaning of Interpretation Bulletin I.T.-425. Consequently, he would be entitled to treat it as income from farming and to report it on a fiscal year end basis.

However, Mr. Handelman submitted further that the appellant had never declared any income from tobacco quota rentals prior to the return filed for his 1984 taxation year. He has been assessed on a calendar year basis for tobacco quota rentals in the 1979, 1980, 1981, 1982 and 1983 taxation years and, in addition, the statement of agreed facts shows that income on a calendar year basis. On the basis of Mr. Rumball’s evidence, Mr. Handel- man submitted that once a taxpayer elects to report the income on either a calendar year or fiscal year basis he is bound to continue with that mode of reporting. However, on cross-examination, Mr. Rumball conceded that the appellant had not yet had an opportunity to oppose the Department's assessments because the Department insists upon having criminal charges disposed of before assessment appeals are dealt with. Mr. Handelman conceded that a taxpayer is not bound by an assessment of the Department in so far as determining which year end he must use and further conceded that the appellant had not reported this income from tobacco quota rentals prior to his 1984 taxation year. On the other hand, Mr. McLeish submitted there was no evidence before the court that the appellant had not reported income from tobacco quota rentals for years prior to 1979 and there was evidence that he had in fact been farming since 1967. His position was that the Crown had failed to prove whether any prior election had been made and therefore could not assert that there had never been such an election made by the appellant.

In this regard, Mr. Handelman submitted that the income from tobacco quota rental, being “income from property" would normally have to be reported on a calendar year end basis. Therefore, the appellant would have to elect to report the income on a fiscal year end basis. It was Mr. Handel- man’s submission that the right to elect to report income from tobacco quota rental on a fiscal year end basis arose and had to be exercised during the first year in which such income was earned as opposed to the first year in which it was reported. However, he was unable to refer to any authority to support that proposition.

Nor was there any evidence that 1979 was the first year in which the appellant earned such income. There was no evidence that the appellant had not reported income from tobacco quota rental before 1979 on a fiscal year end basis. In fact, there was no evidence as to whether he had such income before 1979 or not. Therefore, there was no evidence that he would be bound by a prior method of reporting to report the income in question on a calendar year end basis. In other words, there was no evidence that he was not entitled to rely upon the provisions of I.T.-425 and to report that income on a fiscal year end basis. Although there was no evidence as to the history of I.T.-425, it is interesting to note that it is dated February 5, 1979. I conclude that the appellant was entitled to rely upon I.T.-425 and to report the income in question on a fiscal year end basis.

This is not a case where the appellant learned after he had filed his income tax return for the 1983 taxation year that he had a right to defer the income in question to his 1984 taxation year. To the contrary, his accountant, Mr. McGeoch, testified, at pages 13 and 14 of the transcript, that when he was preparing the appellant’s income tax return for the 1983 taxation year in 1984, he told the appellant he had the right to defer the income in question to his 1984 taxation year, which in fact the appellant did. Therefore, I conclude that the appellant had the option to declare the income in question on a fiscal year end basis and to defer the reporting of it to his 1984 taxation year.

Mr. Handelman submitted that the charge was not only one of evading but attempting to evade tax. However, since the charge reads,

. . . unlawfully did willfully evade or attempt to evade the payment of . . . taxes imposed by the Income Tax Act by failing to report and declare in his . . . income tax return filed . ..,

the actus reus remains the failure to report. Therefore, the same analysis applies with the same result.

I conclude the Crown has failed to prove the actus reus of the offence beyond a reasonable doubt. Therefore, I order that the conviction be quashed and direct a verdict of acquittal be entered on the issue of the appellant evading or attempting to evade the payment of $20,333.56 in taxes imposed by the Income Tax Act by failing to report income of $72,680.75 in the taxation year 1983.

Appeal allowed.