Criminal Prosecution For Tax Evasion And Failure To File

Early one morning, Mansour, the owner of Pizza Prosciutto (not the real names) was in his restaurant when two men in dark suits walked in and asked if he had a moment to speak. They were from the CRA and had a few questions.

One of them assured him that they were simply verifying a number of items on his tax return, and that there would be no trouble if he co-operated with them. 

“You will have to speak to my accountant and my lawyer,” he said. “I will ask them to help answer your questions.”

He gave the agents the names and telephone numbers of his lawyer and his accountant, and the meeting was over. 

As soon as the agents had left, Mansour called Bill, the chartered accountant who had done his taxes for many years. 

“Two men from the CRA were just at my restaurant,” he said. “They were asking a lot of funny questions.”

Quick fact: Did you know that tax fraud, tax avoidance (tax evasion) and concealing income are all serious crimes and if caught can lead to you being criminally prosecuted by the CRA?

Bill asked about the questions, and then thought for a moment. “Sounds like a routine field audit,” he said. “It happens a lot to restaurants. I guess it’s just your turn. I’ll call and see what’s up.”

Mansour said fine, but he was also going to speak to his business lawyer. So he hung up and dialed Chuck at the law firm who had helped him negotiate his leases and incorporate his business. Chuck said the same thing; it sounded like a routine audit and not to worry.

Bill, the CA, and Chuck, the lawyer, met with the tax agents several times over the following weeks, co-operating by providing copies of bank statements and business records, expense receipts and anything else they thought would answer their questions.

But the CRA was insatiable, asking for more and more. Then one day, Bill was surprised by a visit from the police and the CRA auditor, who arrived at his office with a warrant to conduct a search and seizure. Similar visits were made to Mansour’s home and his restaurant. 

As soon as Bill saw the warrant, he knew the matter was serious, and he called Chuck, Mansour’s lawyer. Chuck advised that he should co-operate, because there was nothing to hide. He could see no harm in the CRA taking away Mansour’s accounting records. Mansour’s tax returns were clean. Bill agreed. Thus Mansour was advised to co-operate with the authorities, and the CRA took possession of all the records they could find.

After the seizures, Bill and Chuck requested a meeting with the tax agents. The meeting was arranged, and this time there was a surprise. One of the tax agent’s, who had not said much during previous meetings, introduced himself as a Criminal Investigator from CRA Enforcement (ie. the tax police). 

Chuck and Bill were stunned. Chuck asked why a Criminal Investigator was involved in a routine field audit. 

“You told me that the purpose of your audit was to review the assessment for the restaurant,” Chuck said. “We’ve been talking about a civil assessment here. This is the first time you’ve mentioned anything that could result in criminal prosecution.”

Later, during the trial, both Chuck and Bill testified that they had co-operated with the tax agents on the understanding that, if any irregularities were found, Mansour would, at worst, only face a revised civil assessment, with applicable interest and civil penalties. Unfortunately, neither the accountant nor the lawyer had been cautious enough to request this assurance in writing. 

Even if they had thought to ask, the CRA would not have provided such an assurance. Once it has built a case for criminal prosecution, they won’t agree to drop the case for a civil settlement. In other words, you can’t buy your way out of a criminal prosecution by agreeing to pay tax, penalties and interest on the civil side.

Quick fact: When taxpayers are convicted of tax evasion, they must still repay the full amount of taxes owing, plus interest and any civil penalties assessed by the CRA. In addition, the courts may fine them up to 200% of the taxes evaded and impose a jail term of up to five years. (Courtesy of the CRA)

At this point, Chuck and Bill realized the matter was beyond their ability to manage, and they warned Mansour to prepare for the worst.

In due course, Mansour was served with a criminal subpoena. The CRA had reviewed his tax returns, investigated his business, and used all the information gleaned from their conversations with Mansour and his professional advisors, and their searches and seizures, to prepare a net worth (lifestyle) assessment of Mansour’s income. According to CRA, during a 4-year period Mansour had not reported over $275,000 in taxable income. Mansour was charged with tax evasion and, if convicted, not only would he be branded a criminal, but the civil and criminal penalties would be huge. He could easily lose his business and end up in jail.

To make matters worse, his lawyer and his accountant now said they could no longer represent him. By inadvertently providing the Taxman with evidence against Mansour, they were both in a possible conflict of interest situation.

The CRA had trapped Mansour and his advisors into co-operating with them, and then turned the admissions into the basis for a criminal prosecution. 

Round Two – Committing Tax Evasion?!

Mansour was wise enough to seek criminal tax counsel to defend him, and thus he retained us.

We opened with a plea of not guilty, and focused on obtaining full disclosure of the prosecution’s case. The auditors’ working papers showed the methodology they used in the net worth assessment, and how the CRA had come up with a figure of $275,000 in unreported income. 

The disclosure also showed that the criminal investigator had, very early on, posed as a simple auditor. Gotcha! We had the basis for our defense.

In court, we alleged entrapment and moved to exclude all documents and information obtained through the search and seizure at the accountant’s office, and at Mansour’s home and business. The submission was that our client’s right against self-incrimination under the Canadian Charter of Rights and Freedoms had been breached. 

During argument, we provided to the criminal court judge a precedent-setting case, at the time still awaiting a decision by the Federal Court, that dealt with a similar set of facts. In that case, the tax agents had also misled a taxpayer into believing he was dealing only with civil tax agents, rather than a criminal investigation. Since it was being heard in a higher court, the decision, when eventually handed down, would be binding on the judge hearing our case. 

The criminal court judge reserved her judgment on the possible Charter breach until the decision of the Federal Court was rendered. We were then instructed by Her Honour to proceed with the rest of the case dealing with the net worth audit.

THE NET WORTH

The criminal court judge reserved her judgment on the possible Charter breach until the decision of the Federal Court was rendered. We were then instructed by Her Honour to proceed with the rest of the case dealing with the net worth audit.

In a net worth audit, an investigator/auditor adds up all of your assets and deducts all of your liabilities at the start and end of the tax years under audit. If there was an increase in your net worth, that is, what you own minus what you owe, without an increase in declared income from the previous tax year, you may be suspected of tax fraud.

There could, however, be legitimate explanations for how your net worth increased that don’t involve taxable, and therefore unreported, income.

As part of Mansour’s defense, we did our own net worth using the same records as the CRA. Our analysis showed that the CRA had used a series of dubious assumptions to reach a figure of $275,000 in unreported income. It became obvious to us that they were using the old trick of “highballing”. Ie. They increase the amount of undeclared income to a high level so as to try and get a guilty plea to a lower amount from the client of an inexperienced defence counsel.

Our net worth analysis showed that Mansour had reported 100% of his income from taxable sources. Therefore, we argued, no tax had been evaded. Given that this was a criminal case, the onus of proof was on the prosecution. 

Then we moved to our evidence in support of the Charter challenge. We called both Mansour’s lawyer, Chuck, and Bill, his chartered accountant, as our witnesses. They were asked why they had co-operated with the tax authorities even after knowing that one of them was from the tax police and criminal charges could possibly be laid.

Mansour’s lawyer was a senior litigator, but he did not do any tax work. This was his first, and probably last, foray into the tax world, and he was very believable. 

“I’m not stupid,” he testified. “I was never specifically told that there would be no criminal charges laid against my client, but the criminal investigator acted in such a way as to lead me to believe that, if we gave him the information, no charges would be laid.” 

On the stand, Bill said essentially the same thing.

But the judge was still skeptical so we called our “angel” witness to explain where almost $100,000 in non-taxable cash came from and bring our case over the top.

A Divine Intervention

Mansour had told us that his grandfather, before his decease, had given him over $95,000 in cash. Unfortunately, there was no paper trail to confirm his statement. Only the family knew the facts, and they would be suspect in court as self-serving witnesses. It then came to light that the grandfather’s spiritual confessor was still alive and living in the United States. He remembered being told by the grandfather that he had given almost $100,000 in a cash gift to Mansour because he was his favourite grandson. 

We contacted the old priest, and he agreed to come to court to testify on Mansour’s behalf.

On the stand Father John was a magnificent witness and corroborated that Mansour’s grandfather had indeed gifted this large amount of money to Mansour. The prosecutor was caught flatfooted. This, together with provable insurance payouts, cash on hand and loans, allowed us to shoot a massive hole into the CRA’s undeclared income figure.

To add icing to the cake, the Federal Court decision came out and was favourable. As a result, the Court accepted our Charter argument.

Now the shoe was on the other foot.

This was a criminal proceeding, and the prosecution was required to prove its case against Mansour beyond a reasonable doubt. They had not done so, therefore, we argued, Mansour must be found not guilty of all charges of tax evasion. 

In the face of the foregoing the judge agreed. All charges against Mansour were dismissed.

As an added bonus, the civil tax assessments were later also withdrawn.

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Brigitte DioGuardi

B.A., LL.B

Brigitte obtained her Law Degree from the University of Sheffield in the United Kingdom. Upon her return, she qualified for the Bar and was called to the Law Society of Ontario (formerly the Law Society of Upper Canada) in 2002. She was also a member of the Bar of British Columbia and headed up the Vancouver office of DioGuardi Tax Law.  Fluently bilingual in English and French, Brigitte has broad experience in the areas of:

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Joyce Bruno

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Joyce Bruno has worked as executive legal assistant to Paul Dioguardi for 35 years and continues to offer her expertise and experience to the Dioguardi Law firm. Joyce’s role has evolved over the years and has acquired and developed many skills. She is an invaluable asset in case management and ensures the smooth running of our office.

Paul DioGuardi

B.A., LL.B, Queen’s Counsel

Paul obtained his Law Degree from Queen’s University in 1964.  He is a member of the Bars of Ontario, British Columbia and the Turks and Caicos Islands, a British tax free territory in the West Indies. He has over 50 years of experience and was trained at the Ottawa head offices of Revenue Canada and the Tax Litigation Section at the Department of Justice. Paul has had and continues with an extensive career in various areas of law such as:

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