In an incredulous move Joan Blackwell and her partner in crime fight Revenue Canada to avoid being assessed tax penalties for not declaring their stolen windfall from their criminal activity.
You can read the whole ruling here. https://www.canlii.org/en/ca/tcc/doc/2007/2007tcc695/2007tcc695.html
The question to be decided in these appeals is whether the appellants are required to include in their income amounts for which they were convicted of fraud. The assessments relate to the 1989 and 1990 taxation years.
The appeals were heard together, with Michael Jenkinson representing himself and Joan Blackwell being represented by counsel.
In the fall of 1994, the appellants were tried and convicted by an Ontario court on 13 counts of fraud. They were sentenced to four and one-half years in prison, and ordered to pay restitution to the victims in a total amount of $1,858,000. None of this had been paid when these appeals were heard.
A Canada Revenue Agency auditor was an observer at the trial and she commenced an audit in relation to these transactions shortly after the trial was completed. The assessments which are under appeal resulted from that audit and were issued in 1998.
For purposes of assessing, the Minister took the view that the amount of the restitution order should be included in the income of the appellants as business income under section 9 of the Income Tax Act. The total amount, $1,858,000, was divided equally between the appellants, and it was included in their income for either the 1989 or 1990 taxation years depending on when the amounts were received. In addition, the Canada Revenue Agency informed the appellants that a deduction would be allowed if the restitution order was later satisfied.
The appellants were also assessed penalties under subsection 163(2) of the Act for failing to report this amount in their income tax returns. No penalty was imposed for Michael Jenkinson’s 1990 taxation year, however, because the Minister believed that he had not filed an income tax return for that year. It seems a little odd that taxpayers who file tax returns should be penalized more heavily than taxpayers who do not, but nothing turns on this.
During discoveries, Ms. Blackwell provided the Crown with nine bound volumes of financial records and other documents that had been used at the criminal trial. A review of these documents ultimately led the Crown to concede that the appellants should not be taxed on the entire restitution order, but only on a much lower figure.
There was considerable confusion at the commencement of the hearing as to exactly what the Crown’s revised position was. Was the Crown changing the basis of the income inclusion from business income to the receipt of shareholder benefits? What were the revised amounts that were now being proposed to be brought into income?
It is unfortunate that the pleadings were not amended to make the Crown’s position clear prior to the hearing, especially because Mr. Jenkinson was self- represented and Ms. Blackwell’s counsel did not appear to be a tax specialist. From what I can gather, the focus of attention prior to the hearing had been on settlement discussions, and these discussions had led the appellants to believe that the Crown’s case was shifting to a shareholder benefit analysis. As important as settlement discussions are, they do not alleviate the need to clearly set out the essential facts and issues in the pleadings.
Matters were partly clarified by counsel for the Crown during his opening, but needless to say this gave the appellants no time to shift gears. Counsel stated that he would not attempt to argue that there were shareholder benefits because the pleadings had not been amended. The amounts at issue, however, could not be clarified. Counsel informed me that he had provided the appellants with a draft proposal but he said that the amounts had not been finalized. The draft may have assisted the appellants in preparing their case but I was left a bit in the dark as to exactly how the new position differed from the old.
The Crown’s position became clear when the appeals officer took the witness stand, which was after the appellants had testified. The Crown based its argument on net amounts received by the appellants which could not be traced to business uses.
Factual background
[12] The only witnesses at the hearing were the appellants themselves and the appeals officer from the Canada Revenue Agency who had reviewed the objections. This oral testimony did not shed much light as to the circumstances which led to the convictions, but the judge in the criminal proceeding had provided extensive reasons. Many of the following findings of fact are based on these.
[13] The appellants met in 1987 while attending a mortgage brokers’ course and decided to form a business partnership. Each of the appellants had a background in real estate, and the business concept was to create several businesses that had a real estate connection in one way or another. Joan Blackwell had a background in banking and mortgages. Although Michael Jenkinson had been a police officer, he was also a real estate investor.
[14] In short order, the appellants had incorporated a large number of companies, each carrying on a separate business. The transactions which are the focus of these appeals centre on three of these: a horse breeding operation (Cholderton Farms), a mortgage business (Ansdel Mortgage), and an office condominium development (Meadowvale Project).
[15] All of the businesses operated extensively on credit, and the whole enterprise quickly became in desperate financial condition. As described by the trial judge in the criminal proceeding, the appellants then embarked on an aggressive scheme to raise money from individual investors.
[16] It appears that most of the investors provided cheques to the appellants or their companies and were given promissory notes in return, upon promises that their money would be invested in a particular manner, such as to acquire a joint venture interest in the office condominium development or to acquire a mortgage on the farm properties used in Cholderton Farms. It appears that most, if not all, of the investments were lost. The largest restitution order was granted to a couple who ran the horse breeding operation. They had owned a farm property that lost its value when it was used to raise money by way of mortgages.
[17] In the criminal proceeding, the Crown had engaged a forensic accountant to trace the funds provided by the investors. Some of it could be traced, but it was impossible to track it all. Part of the reason for the difficulty was that the money was often deposited into Mr. Jenkinson’s personal bank account, and the companies’ bookkeeper presumably had no way to keep track of it.
[18] When the investors’ money could be traced, it was sometimes traced to the specific use intended by the investor, and in other cases the money was diverted to other uses, often being used to pay down whatever bank overdraft was at its limit.
[19] The appellants were convicted on all counts of fraud that were brought, 13 in all.
[20] It is relevant for these appeals that the fraud convictions were not always dependent on a finding that the funds had been diverted to a use not intended by the investor. In many cases the investors had been defrauded by misrepresentations as to the financial state of the businesses that were being invested in. In these cases, the fraud consisted of the misrepresentations, not the diversion of funds.
[21] It is also relevant that not all investors sought restitution in the criminal proceeding. It appears that other investors likely lost money, but the circumstances of their losses were not extensively discussed by the trial judge.
[22] During the criminal trial, the appellants attempted to defend themselves by testifying that none of the investors had been deceived. According to their testimony, each of the investors knew exactly how their money was being used.
[23] All of this testimony was rejected out of hand by the judge in the criminal proceeding. At times his comments were scathing, as illustrated by the following excerpt from his oral reasons:
[...] I not only reject that evidence as a lie, but it illustrates the blatant audacity with which the accused expect to mislead and bamboozle whomever they deem fit to listen to them.
In the result, the appeals will be allowed in their entirety. The assessments will be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the full amount of the restitution order should be excluded from the appellants’ income, as well as the related penalties. The appellants are also awarded costs.