On August 7, 2020, the British Columbia Court of Appeal (the “Court”) upheld a lower court decision that convicted a real estate designer and developer for willfully evading Goods and Sales Tax (“GST”). The case addresses “deliberation” of a taxpayer in tax matters such that, in a case like this, it may be concluded that the taxpayer was a tax “evader”, which brings a criminal sanction, rather than a tax “avoider”, which may generate civil tax consequences on a reassessment by the tax authorities but does not entail the disapprobation associated with “tax evasion”.
Mr. Schouw, as the sole shareholder and director of a real estate company, Grace, executed two “paper transactions” in 2009, where Grace sold two lots to Mr. Schouw himself. The transitions triggered GST collectible by Grace from Mr. Schouw, to be remitted to the CRA.
Grace was registered as a monthly GST filer. No GST was collected and remitted. As a result of difficulty in securing financing, Mr. Schouw subsequently lost the two lots to foreclosure. Mr. Schouw was charged with evading the remittance of GST with respect to the two Grace lot sales to himself in 2009.
The issue in front of the Court is whether the trial judge erred by applying an objective test, as opposed to a subjective one required by the law, to the mens rea component of tax evasion. In other words, the question concerns the kind of deliberate conduct by the taxpayer required to conclude the kind of malice in that conduct which underlies tax “evasion” contrasted with “avoidance”. The case focused on the former, but it does offer a reference point for this comparison – a recurring issue in taxation.
To establish the tax evasion charge, the Crown was required to prove beyond a reasonable doubt that Mr. Schouw: i) did something or engaged in a course of conduct that avoided or attempted to avoid the payment of tax imposed by the ETA; ii) knew there was tax imposed by the ETA; and iii) engaged in the conduct for the purpose of avoiding or attempting to avoid the payment of tax imposed by the ETA or knowing that avoiding payment of tax imposed by the Act was a virtually certain consequence of his actions.
Consistent with the language of the test, a subjective standard applies. But as the court reasoned, this test, as so stated, does not speak for itself. The underlying but possibly less obvious question concerns the reference points for subjectivity in this context, which the court explains involves an evidence based objective examination of a taxpayer’s circumstances and conduct.
The court held that the trial judge rightly applied the law, i.e. the subjective test. Language in the trial court decision, however, did not draw such a clear line: It appeared to apply a subjective test in some parts, exemplified by language such as “Mr. Schouw by then was well aware of the credit issues”[1], and yet in other parts, the test seemed to be objective. Mr. Schouw challenged that language such as “it would have been patently obvious to him in May, 2009 that his course of conduct was virtually certain to result in the non-payment of GST” erroneously imports an objective test.
The court of appeal stressed that the trial judge’s decision has to be read in the context and interpreted the lower court decision to have accurately applied the subjective test for mens rea. Both courts seemed to be saying that the mere undertaking of an act in a deliberate and intentional fashion reflects “subjective”, i.e., purposive action. Therefore, establishing subjective intent is the result of a reasonable consideration of evidence about that state of mind of the taxpayer in the circumstances. And, there is more to discovering that state of mind than simply the taxpayer’s motive; that is, inferences drawn from the convergence of various objective factors inform an understanding of a taxpayer’s subjective intention. Where a court has undergone such an analysis, language used in explaining it is not open to alternative interpretation.
Also note that timing is quite important in this case. In conjunction with the fact that Grace had to file GST monthly, other circumstantial evidence unambiguously points to Mr. Schouw’s subjective state of mind at the time – Mr. Schouw knew at the time GST was due and that his inaction as director of Grace in collecting GST was virtually certain to result in non-payment of the tax.
It seems that subjective versus objective intention is a perennial source of confusion for not just first-year criminal law students but taxpayers as well. Take home message? Play safe and pay GST as it is due.
- Baiqing Luo (JD Candidate, OHLS Class of '21)
[1] R. v. Schouw, Vancouver Docket 931-1, para 45.