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“Suspicious Conduct” Not Enough for Tax Evasion

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When a corporation finds itself in the midst of huge potential tax liability, that is often not the end of the story for the various parties involved. Directors may find themselves pursued for civil director’s liability for any taxes, interest or penalties remaining unpaid by the corporation, and directors, officers, employees and other involved parties may also find themselves being pursued by the CRA for possible criminal offences, and being charged criminally pursuant to section 327(1)(c) of the Excise Tax Act (the “ETA”). Criminal charges will generally follow any situation where the CRA is of the view that the corporation by dishonest means, sought to evade payment or remittance of the GST/HST and/or repurposed the funds to serve its own uses. In these instances, the CRA will be looking to the operating minds of the corporation, and any other persons (e.g., directors, officers, employees, agents, aiding and abetting parties) having a hand in the criminal activities (the “Underlying Parties”).

If convicted, the Underlying Parties are subject to their own fines, and could also face both a fine and imprisonment.

While the CRA often has a very low threshold for what it considers “criminal activity”, a recent Nova Scotia Provincial Court (the “NSPC”) decision appears to confirm that a person’s “suspicious conduct” alone may be insufficient to ground a criminal conviction for “tax evasion”.

In R. v. Spears (2017 NSPC 53), Mr. Spears (“S”) was the sole director, and his three (3) companies (which came into existence sequentially) were charged, among others, under section 327(1)(c) of the ETA for GST/HST evasion. The Crown alleged that S sought to evade payment of the tax and repurposed the money to serve his own uses. The CRA had found that S’s conduct in managing his business was suspicious (he, for example, had formed new companies to carry on the same business and not told CRA explicitly about the new companies, divesting his assets and spent money on discretionary items). S testified that he fully understood his liability as a director, and admitted that his companies did not remit GST/HST but that he and his companies were simply struggling to keep the business afloat in difficult financial circumstances so that the business could ultimately satisfy the tax obligations.

In considering whether the Crown had proven beyond a reasonable doubt that S and his companies were engaged in fraud and GST/HST evasion, the NSPC accepted the principle established in R. v. Ming, which found that there had to be “something more” to establish the offence of tax evasion than simply the failure to remit. The NSPC found that the actions of S, including registering his companies, naming himself as the director, maintaining accurate records and a paper trail of payments from project work, engaging a qualified accountant, etc. were actually inconsistent with an intention to evade the payment of the tax.

In the end, even though the NSPC found the conduct of S in running his business could be described as “suspicious”, it ruled that his conduct fell below the standard of proof required in order to convict. In short, there was a reasonable doubt that tax evasion was in fact taking place.

By way of commentary, and as perhaps reflected in the case, the bar for the CRA to secure a criminal conviction is pretty high. Yet, directors cannot take their corporation’s tax collection and/or remittance obligations lightly, even when their corporation faces financial difficulties, as even apart from tax evasion charges, the CRA is still able to pursue directors for possible director’s liability under section 323(1) of the ETA, where the corporation’s debts to CRA remain unpaid.

That all said, this case remains a good template for business owners attempting to explain their continued business activities in the face of GST/HST collections and remittance obligations, especially where there is an on-going dispute with the CRA on real issues.

Do you require assistance in this area?  If so, contact us here.

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