July 20, 2016
Today was the start of three scheduled days of a voir dire instigated by Lawson. This is how Wikipedia explains a voir dire;
In the United Kingdom (except Scotland), Cyprus, Hong Kong, Ireland, Australia, New Zealand, and Canada (and sometimes in the United States of America) it refers to a "trial within a trial". It is a hearing to determine the admissibility of evidence, or the competency of a witness or juror.[2] As the subject matter of the voir dire often relates to evidence, competence or other matters that may lead to bias on behalf of the jury, the jury may be removed from the court for the voir dire.
The term has thus been broadened in Australian jurisdictions to include any hearing during a trial where the jury is removed. The High Court of Australia has noted that the voir dire is an appropriate forum for the trial judge to reprimand counsel or for counsel to make submissions as to the running of the court to the trial judge.[3]
In Canada the case of Erven v. The Queen holds that testimony on a voir dire cannot influence the trial itself. This remains true even if the judge ruled against the accused in the voir dire. The judge is assumed to ignore what they heard during voir dire.[5] The jury is never present during a voir dire.
https://en.wikipedia.org/wiki/Voir_dire
Lawson was complaining about abuse of process and he wanted a stay of proceedings and damages against the Crown as a result of the mistreatment he'd received at the hands of CRA Investigations. Unfortunately for Keith there is no automatic right to a voir dire, the Crown may make what is called a Vukelich Application, named after this case;
R. v. Vukelich, 1996 CanLII 1005
http://canlii.ca/t/1f0d7
Which set the standard, at least in British Columbia, that a voir dire applicant has to meet before getting court approval. So the Crown was contesting Lawson's application on the grounds, I assume, that there was no merit in his application. They had made a written submission to the court and today was Lawson's opportunity to defend his position. Not to actually go into the voir dire itself but to only show that he had grounds to get his application accepted by the judge.
A warning. He spent the whole day talking. Endlessly, incessantly, obsessively. And, most significantly, repetitively. The same arguments over and over again ad infinitum. So I'll boil it down here to the salient points that I think he was making. His complaint was in respect to the preliminary inquiry that was held when the CRA entered charges against him. This is how a Preliminary Inquiry is defined in Canada;
Where the accused is charged with an indictable offence, the Crown must prove a prima facie case before a judge of a provincial court. This process must be requested by the defence or the Crown.[9] The presiding judge must determine whether there is sufficient evidence for a jury, acting reasonably and judicially, to convict the accused. The judge may neither weigh the evidence nor determine whether the evidence is admissible. If the judge determines there is sufficient evidence for a jury acting reasonably and judicially to convict the accused, the judge must commit the accused to stand trial. If not, the judge must discharge the accused and the proceedings end. However, if at a later date the Crown tenders further evidence, the Crown may recommence the proceedings. A discharge at a preliminary inquiry does not constitute double jeopardy.
There is no appeal from an order of a judge. However, either party may seek leave to review the order in the superior court.
If the accused is charged with an offence punishable by summary conviction or if the Crown elects to proceed by summary conviction if the accused is charged with a hybrid offence, the accused is not entitled to a preliminary inquiry and is immediately committed to trial.
Section 536(4) of the Criminal Code, proclaimed in force in 2004, indicates a preliminary inquiry is no longer automatic after an accused elects to be tried in a superior court. The Attorney General may also, in rare cases, bypass the preliminary inquiry and issue a direct indictment. This may occur even where the accused has requested a preliminary inquiry, or even when the accused has been discharged by a preliminary inquiry.[10]
https://en.wikipedia.org/wiki/Criminal_ ... ry_inquiry
The barrier at a Preliminary Inquiry is low. It is not to determine guilty or innocence or even weigh the evidence, those are trial responsibilities. A preliminary inquiry just decided if there is enough evidence to support a possible guilty conviction. If so a trial is ordered.
Lawson had his Preliminary Inquiry and the judge determined there was adequate information to justify a trial. His position in this application is that the Crown was guilty of abuse of process in the manner in which they gathered and presented the evidence at the inquiry. His specific complaint seemed to be in respect to the CRA investigator who was in control of his file and who gathered the evidence and testified at the inquiry. The examples of abuse of process that he cited were;
1 - The investigator wasn't trained properly.
2 - The investigator didn't know what income was and had no understanding of tax law.
3 - The investigator, and others in the investigation, did not take adequate notes of their internal processes, meetings, and decisions.
4 - If they did take notes they have hidden them from the Crown counsel and the court.
5 - He sent the investigator a letter saying he was innocent of tax evasion and explained why but they did not stop the investigation.
6 - They investigated on the basis of the presumption of his guilt but did not investigate him on the presumption that he was innocent,
7 - The Supreme Court of Canada had stated in a landmark decision that Canadian taxpayers have the option of categorizing their income as being derived from either a business or a hobby. If they declare their income to be derived from a hobby they cannot be reassessed or audited by the CRA. He told Investigations that his Paradigm work was a hobby and therefore not taxable but they ignored this and charged him anyhow. He was obsessed with this point because he had the Supreme Court case which clearly backed him up.
8 - Both he and his wife were charged with tax evasion. The Crown dropped his wife's charges but didn't drop his. I think this was a point he made, he mentioned his wife's issues in fragments rather than a coherent argument and I wasn't paying a lot of attentions.
Each of these items, individually, was a breach of natural justice and an abuse of process that required that there be a stay on proceedings and damages paid to him. Although he did tell the court that he'd be willing to accept any other recompense the court decided to bestow on him.
Please note that I am stating just what I understood Lawson to argue, if it doesn't make sense to you don't blame me.
So on to my very long day. Started with the judge saying that Lawson had applied for remedy under 24(1) of the Charter. Vukelich applications usually applied to 24(2) of the Charter but the Crown had said that it applied to 24(1) also.
This is 24(1) and (2);
24. (1) Anyone whose rights or freedoms, as guaranteed by this Charter, have been infringed or denied may apply to a court of competent jurisdiction to obtain such remedy as the court considers appropriate and just in the circumstances.
(2) Where, in proceedings under subsection (1), a court concludes that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter, the evidence shall be excluded if it is established that, having regard to all the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute.
Pretty damn vague to me. We heard a lot about bringing the administration of justice into disrepute during the course of the day. Anyhow the judge explained to Lawson that it was his job to convince her that he had a valid reason to hold a voir dire on abuse of process and the Crown was going to argue that his application did not provide any reasonable basis for an application for abuse of process. He went to bat first.
I have to be able to show some merit for relief under the Charter. Judge cut in to say that Vukelich applications usually applied to 24(2) of the Charter but had said that it applied to 24(1) also. Lawson said that he had been unable to find any legal representation and went on how the court should help him. There was a shortage of caselaw on the issues he was going to raise but his points were hinted at in some cases. This case is unique. He talked about the nature of the "alledged" offenses. Since he had been convicted on all counts I don't think that alledged was the appropriate word. Judge said that he didn't understand what he was getting at. Nor did I. So she explained Vukelich yet again although it had apparently been explained to him in a pre-trial conference.
He went on about police abuse and said that this was the basis of his claim although he was making no claim that he was abused by police. During the Preliminary inquiry a CRA witness, the lead investigator in his case (I'll call her LI from now on) said that she did not understand the nature of the offenses that he was charged with so the investigation was flawed. She did not understand what income was or how to determine it. He'd objected to her testimony but was overruled and a judicial review found no error. His wife's charges were withdrawn for something relating to this. He implied that the Crown knew, when they charged her, that she had no knowledge of the charges against her. He seemed to hint that since his wife had been let off he should have been let off too. He was railroaded by improperly trained CRA employees. He brought up his attendance at Russell Porisky's trial (apparently on a day when I wasn't there) and said that the Crown had made some admission that somehow affected him. If this sounds impossibly vague that was how I heard it. LI was supposed to testify at his trial but didn't. Hinted at dark designs behind this. He'd planned to cross-examine her to show that she didn't know what income or tax evasion was to show the jury that she was incompetent. Judge interrupted to tell him that such evidence would not have been permitted at trial. LI had not testified because they had lost days of court time as a result of his illness. The judge said that evidence wasn't relevant. He went on about how his presumption of innocence had been violated by LI at his Preliminary Inquiry. Judge said that the presumption of innocence only applied after he was charged and he hadn't been charged at that time.
So on to his caselaw. Some case he said supported his application. But first he said that he wanted an award of damages in addition to a stay of proceedings. He also asked the court to tell him of other relief he was entitled too. He said that it was the court's job to provide a remedy for him if he'd missed anything.
He cited a case I didn't catch. Something about a rented locker with marijuana in it. Something about an absence, on the part of the police, of a sincere attempt to follow the Charter. Lax police procedures can't be condoned. He compared this to LI at the Preliminary Inquiry without actually explaining how they were analogous. He just said that LI hadn't given his Charter rights any thought.
Judge - What Charter rights? The cited case was about unreasonable search. What Charter rights wasn't LI mindful of? She wasn't mindful of due process. Judge - Where is that in the Charter? He said it wasn't a specific charter right but implied. Judge said that he'd eventually have to cite specific charter rights that he claimed were violated. He didn't seem to understand that Charter rights were specific, not just some undefined right that was triggered if he felt he wasn't fairly treated.
He said that R v Nixon mentioned a "residual" category his claim fell under. He talked about how the judge had the "residual" right to halt a trial for abuse of process. He started losing me when he tried to explain how this judicial residual right also meant that he had a residual charter right of some kind. Keep in mind that he talked fast, without any halts and he was very vague on details. I don't think he had any. It appeared to me that he'd just pulled a pile of cases out of CANLII or some other database using a word search. He hadn't bothered to analyze the cases as a whole but had just plucked sentences and paragraphs out of them he felt bolstered his position without reference to how they fit into the case cited.
Lawson went on about abuse of process but hadn't, as yet, given any specifics about any abuse he'd suffered. He said the court is condoning investigations that are not well-founded and not following proper procedures. Judge said that not following internal procedures are not an abuse of process so Lawson went back to how LI and how her purported errors were not innocent mistakes. Dark hints of conspiracy.
Judge - The prosecutorial process did not meet fundamental notions of justice under section 7 of the Charter. Is that what you are arguing? This is section 7;
7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.
It's not a good thing when even the judge is confused about what you are fundamentally arguing. I essentially no longer had a clue where Lawson was going. Lawson replied yes but I don't know what I want or what I'm entitled too.
All this took less than the first hour and Lawson, as I saw it, had presented absolutely nothing except a wish that the judge would find some charter breach for him because he couldn't cite any. On to more irrelevant cases. Then he talked about damages for his unjust conviction and incarceration. Incarceration? He hasn't even been sentenced yet. On again about how the CRA investigators had some undefined duty to him. He wanted their notes to show abuse of process. Since they did not provide notes the CRA was in trouble because of their failure to document the process. That was also apparently a Charter violation.
A note at this point. What he meant, as I understood it, was that the CRA had a duty to him to take notes of anything that happened internally at the CRA in respect to his prosecution. Every meeting, every phone call, every discussion or decision. He claimed some unsubstantiated obligation that the CRA had to do this and they had failed That meant his charges should be stayed. However it has already been determined in court that the CRA has no such obligation. They have an obligation to preserve noted if they make them but no obligation whatever to make any in the first place. The only relevant issue at his Preliminary Investigation was whether there was enough evidence to proceed to trial. It was not the mandate of the presiding judge to dredge through the CRA's decision process that lead to the Preliminary Inquiry.
Lawson asked for an early morning break because he planned to go into his next submission and he expected it would take some time. At this point, after less than an hour, I had four pages of notes in an 8X11 lined notebook. I'd have many more by day's end. As far as I could tell Lawson had not yet said anything to point.
He started after break by going on again about how he is entitled to undefined residual Charter rights. Judge told him no, there are no secret undefined rights. "What you have said does not support any Charter right breach so far." "I have interrupted to ensure that we stay on track." The judge said that there was a duty of the court to unrepresented parties but, "it is not sufficient to put facts and law before the court and tell the court where to find where your Charter breaches are. You need to formulate what the breach was and specify what Charter right was violated."
If he understood what the judge was saying he didn't act on it. He cited the McCartie case which we have already discussed on Quatloos.
R. v. McCartie and McCartie, 2015 BCPC 69
http://canlii.ca/t/gh1k2
viewtopic.php?f=50&t=9390
Lawson's concern was about note-taking by the CRA while they were investigating him. As far as I could tell he meant internal notes and records of all meetings, discussions, decisions etc made by any CRA employee engaged in investigating his tax affairs. He was complaining that the CRA did not take sufficient notes for him to follow the internal process that led to his Preliminary Inquiry. Lawson said that the McCartie decision cited above resulted in some relief to the McCarties based on the lack of notes and records. The case showed that the CRA had a duty to keep notes. Which was entirely wrong. What the McCartie decision said was that the CRA had no duty to take notes but if they did take them they had a duty to safeguard them and produce them on request. The judge imposed sanctions against the CRA, not because they didn't keep records, but because they lost the ones they made. In this case Crown has said that all notes made in the Lawson investigation were provided to him so the McCartie decision in no way supported Lawson's contention about a requirement to note every little thing that happened in an investigation. I said in Quatloos;
There are two parts to the issue of the lost notes, the notes themselves and the claim, by the McCarties, that their charter rights were violated by notes that were not lost because they had never been taken in the first place. The McCarties claimed that the CRA staff had a duty to note everything that they did on the file and record all conversations held between each other so that the McCarties could review all the reasons for the various decisions made by the CRA.
OMISSION TO MAKE NOTES
[49] Mr. & Ms. McCartie say that the omission by Mr. Brown, Mr. Lidster, Ms. Etches and Mr. Chan to make notes of their communications is a breach of Mr. & Ms. McCartie’s rights under sections 7 and 11 of the Charter. During argument, the parties characterized this issue as raising the question whether those individuals had a duty to make notes in the circumstances pertaining. Mr. & Ms. McCartie also complained of the failure of Mr. McLachlan to make notes. However, I consider that to be of no significance because the question is CRA’s motive or intention in December, 2008, when notices were delivered to compel disclosure of the bank documents, and Mr. McLachlan had no role in the case until the spring of 2009.
[50] Mr. & Ms. McCartie say that the duty to make notes arises from two sources:
a. They say that there is a legal duty, of general application, on police officers to make notes, and the same duty should apply to CRA investigators.
b. They refer to many entries in CRA policy manuals and training materials, which instruct CRA investigators to make and retain detailed notes.
[51] In support of the first proposition, they rely on Wood vs Schaeffer 2013 SCC 71 (CanLII), [2013] 3 SCR 1053. However, I note that Wood vs Schaeffer was concerned with the application of a particular Ontario regulation, having the force of statute, which expressly imposed specific obligations on Ontario police officers to make notes in specific circumstances. I was referred to no statute which imposes a similar obligation on CRA staff. In the absence of such a statute, I think that the legal position was correctly stated in Regina vs Davidoff 2013 ABQB 244 (CanLII); i.e. note-taking is a prudent and responsible police practice, but not a legal obligation.
[52] I do consider CRA’s policies and training manuals to be of significance. I discuss that issue in paragraphs 60 - 61, below. However, they do not create legal duties: Hewko vs British Columbia 2006 BCSC 1638 (CanLII); [2006] BCJ #2877 @ paragraphs 313 – 318.
[53] I conclude that the CRA staff were under no legal obligation to make notes.
So while it might be regrettable that the CRA didn't slavishly recorded every "good morning Harry" and "see you tomorrow George" while they worked on the file they had no duty, legally or constitutionally, to do so. However the McCarties had a win in respect to the notes actually made then claimed lost. Apparently, while the CRA had no duty to actually make notes, if notes were actually made they had a duty to retain them;
[66] The only alternative remedy suggested by Mr. McFadgen is the possibility that, when assessing the credibility of Mr. Brown, Ms. Etches and Mr. Chan, I should take into account the loss of Ms. Coles’ notes and the omission of the others to make notes. In my view, that remedy would be inadequate to address the prejudice to Mr. & Ms. McCartie. They carry the onus of proving CRA’s motive and intentions. That onus can be discharged only by affirmative evidence. An adverse inference may assist in corroborating or reinforcing affirmative evidence, but is not a substitute for affirmative evidence. For that reason, it has been held that “…an adverse inference will not be drawn where the effect of drawing such an inference is to reverse the onus of proof …”: McIlvenna vs Viebeg 2012 BCSC 218 (CanLII); [2012] BCJ #292 @ paragraph 70. At present, the only affirmative evidence of CRA’s motive and intentions consists of: (i) Mr. Brown’s notes, quoted in paragraphs 6, 10, above; and (ii) the notable circumstance that Mr. Brown proposed the second audit of Mr. & Ms. McCartie’s returns, in the course of which the bank documents were procured, within a month or so of his return to the Audit Department from the Investigations Department. Coupled with an adverse inference, that evidence might support a conclusion that the hypothesis advanced by Mr. & Ms. McCartie is correct, but it is not a strong case for the defence. By comparison, if Ms. Etches and Mr. Chan had kept notes, and if they had expressed themselves in a manner similar to Mr. Brown, the notes might have presented a compelling case for the McCartie hypothesis.
[67] However, I do not think that a judicial stay of the prosecution is necessary. The prejudice to Mr. & Ms. McCartie can be remedied by excluding from evidence all documents procured by CRA by the exercise of its statutory powers during the second audit. If the Crown can prove its case without those documents, it should do so.
viewtopic.php?f=50&t=9390#p172549
Our judge picked up on this too and said that the omission to make notes wasn't culpable. "They were under no obligation to make them. This case (McCartie) does not establish your argument that there was a duty to make notes. Your point is that their omission to take notes hindered their rights to a fair trial". Lawson - They are not free to do what they want. There has to be some standard. He's apparently invented a standard of conduct for the CRA in respect to note-taking even though, as McCartie showed, there is no legal obligation to take them.
He brought up another case that seemed totally irrelevant. It somehow, in his mind, bolstered his argument that CRA auditors have to follow all of the Agency's internal manuals exactly and fully or his rights are violated. Apparently he thinks they didn't in his case although he hasn't provided any evidence to prove this requirement exists or that the CRA investigators on his case didn't follow the manuals, whatever they might be. As with McCartie the cited decision went against the argument he was making but he said that it somehow supported him on principle. Then he rambled through a number of decisions giving no details at all. What little he pointed out had nothing to do with whatever arguments he was making.
Back to notes. Why were no notes taken? There should have been in principle of fairness! Judge - Are you quoting? Lawson - No, discussing my case. We were all getting confused by his intermingling of personal comments with case quotes. He said courts should be flexible to cover different possibilities. He couldn't find a case to support him to point on the notes but he said that there were enough principles in the cases to show that he was a victim of abuse of process.
Apparently the abuse was in charging him in the first place. He said that the Crown (Crown lawyers) abused the process by joining in the cover-up of the flimsy investigation that led to his charges. Apparently Investigations cooked the whole thing up to railroad him and somehow succeeded. He kept going on about implied duties that the CRA and Crown had. Dark hints about a conspiracy against him and how he needed to do a root and branch investigation of Investigations to uncover it.
Then a case about somebody burning leaves in their yard. Where does he get them? His point seemed to be that inadequate training of the police in this case was abuse of process so inadequate training of CRA staff was abuse too. Note that he hasn't demonstrated that any inadequate training of CRA staff existed, just bald statements about it. He seemed to be implying that had Investigations done a proper trained job they would have seen that he was acting within the law and not charged him. In any case the decision in the leaf-burning case was against the point he was making because police training was irrelevant to the decision.
Then some cases that even he said he couldn't explain how they supported his argument. But they might, he didn't know.
Apparently Investigations only investigated whether he was potentially guilty. They did not investigate whether he was possibly innocent. He went on and on how the investigators did not know the law (tax law) so they shouldn't have charged him. He did not say why they did not know the law, I assume because they did not agree with his legal analysis that he owed no tax.
All of his arguments relate to the Preliminary Inquiry. He and his wife had sent notes to Investigations when they knew that they were being investigated explaining why they had not done anything criminal but Investigations ignored them and laid charges. Apparently that was a Charter breach.
The judge cut into his ramblings. "You can't go on a fishing expedition on bald statements. If this is a fishing expedition to find out there is undisclosed evidence this is not permitted. A fishing expedition to find if there is undisclosed evidence is not a basis for a voir dire. "
He agreed but said that the fact that there were no Investigation notes, even if there was no duty to make them, showed that there was a conspiracy. Why were there no notes in a case this complex?
He went on about Porisky, Debbie Anderson, Operation Fable, he was making no comments to point now. He just went on in an unstoppable but measured flood, more stream of consciousness than a thought out presentation. Repetitions, diversions, more repetition. Then he said "I think I'm off the track. Where was I going?" Who knows? I assume that Crown and the judge were as lost as I was regarding what he was getting at regarding his claimed Charter breaches. He asked for a break before he finished his cases so lunch called and back at 2:00. Note that, at this point, I'm at page 9 of the Word document I'm writing this on and he's been talking less than two hours.
After lunch immediate rambling that left me behind quickly. I was losing focus. He provided an eight page Application for constitutional remedy. He focused on the failure of Investigations to have a reasonable basis to believe that he was guilty. This breached fundamental justice. If this seems familiar get used to it. Apart from his hobby claims to come the afternoon was really a repeat of the morning. Investigations did not consider a presumption of innocence. Apparently his presumption of innocence was violated by Investigations laying charges against him. Judge said that they laying of charges does not undermine the presumption of innocence. Back to the lack of understanding of law from the investigators. Then, like picking at a scab, back to LI and her lack of knowledge of tax law. Auditors have to have had at least a basic understanding of the income Tax Act if they investigated him. The community expects this and would be very concerned to find out that Investigations does not know the law. I'll make a wild guess here. He is claiming that the Investigations staff were clueless about tax law because they did not agree with the letter he sent them telling them why they were wrong in their interpretaion of law and because they didn't agree that he wasn't taxable on his Paradigm income.
He gave a handy checklist of questions he'd asked LI on the stand at his Preliminary Inquiry;
1 - How do you determine if money is taxable? You receive the profit.
2 - Investigators did not realize that his Paradigm activities were a hobby and therefore not taxable. There are categories of money received which are not taxable. He cited the Stewart case. Note - I'll get into Stewart in a minute.
3 - GST and Excise Tax Act. He'd asked LI about the basis of GST requirements. She didn't seem familiar with them. Then on about natural persons and how Investigations wouldn't recognize him as a natural person.
A long pointless argument how Investigations registered him for GST purposes without telling him. He went on and on about this until I was in a stupor. He seemed indignant that even though he'd actually gone to the CRA and told them he wasn't taxable they continued anyhow. All that money he made was just a hobby. He made 0ver $200,000 of unreported taxable (not gross) income in five years, this was his only income in that period. Why was it a hobby? Because he said so. Why aren't hobbies taxable? Because he said so. What did he have to back this up? A Supreme Court of Canada case that he claimed said that taxpayers were allowed the option of choosing to call their income as being earned from either a hobby or a business. If they chose to call it a hobby the income from it magically became tax-free. Businesses were taxable. So, like a law-abiding taxpayer, he chose the hobby option as authorized by the Supreme court of Canada.
We're now about to get into and almost endless repetition of Lawson's complaint regarding how he was abused and his rights denied by the CRA because they didn't allow him the entirely legal option to declare that his Paradigm income was all derived from a tax-free hobby. The case he was citing was
Stewart v, Canada. So time for a digression to actually analyze
Stewart and its predecessor
Moldowan v. The Queen to see if they support his claim. Here are the cases.
Moldowan v. The Queen, [1978] 1 SCR 480, 1977 CanLII 5 (SCC)
http://canlii.ca/t/1mk9m
Stewart v. Canada, [2002] 2 SCR 645, 2002 SCC 46
http://canlii.ca/t/51sg
The issue in both
Muldowan and
Stewart was not whether certain income was taxable but whether taxpayers could claim what were personal expenses or expenses from hopeless business ventures against other income. As an example here is a very recent case where a taxpayer was claiming the costs of his food, clothes, and trips to Florida and Hawaii against his employment income at Bell Canada. I see dozens like this every year.
Pakzad v. The Queen, 2016 TCC 144
http://canlii.ca/t/gsczs
Note paragraphs 35 of that decision;
[35] The test for determining whether a taxpayer’s activities constitute a source of business or property income was set out by the Supreme Court of Canada in
Stewart v. Canada, [2002] 2. S.C.R. 645; [2002] S.C.J. No (QL). 46. In
Stewart, the Court held that the “reasonable expectation of profit” test (“REOP”) for determining if a taxpayer had a source of income from a business could no longer be maintained as a stand-alone independent source test. The REOP test should not be blindly accepted as the correct approach to the “source of income” determination. The Court established a new test. Justices Iacobucci and Bastarache set out the broad principle in paragraph 5:
[
5] It is undisputed that the concept of a “source of income” is fundamental to the Canadian tax system; however, any test which assesses the existence of a source must be firmly based on the words and scheme of the Act. As such, in order to determine whether a particular activity constitutes a source of income, the taxpayer must show that he or she intends to carry on that activity in pursuit of profit and support that intention with evidence. The purpose of this test is to distinguish between commercial and personal activities, and where there is no personal or hobby element to a venture undertaken with a view to profit, the activity is commercial, and the taxpayer’s pursuit of profit is established. However, where there is a suspicion that the taxpayer’s activity is a hobby or personal endeavor rather than a business, the taxpayer’s so-called reasonable expectation of profit is a factor, among others, which can be examined to ascertain whether the taxpayer has a commercial intent.
We'll get into
Stewart in a moment.
Moldowan, a Supreme Court of Canada case, set the standard of review on the issue back in 1978. The court set the notorious REOP (Reasonable Expectation of Profit) test. If a venture had a reasonable expectation of profit, even if it was losing money, the expenses were deductible against other income. If there was no reasonable expectation of profit they weren't. As you can tell this is a very subjective test. How do you determine a reasonable expectation of profit and who determines it? The CRA of course! The CRA used this as carte blanche to disallow any expenses from any venture losing money that an auditor thought had no chance of profit. This standard held for over twenty years until the Supreme court decided to revisit the issue in 2002 with their
Stewart decision. This is the Supreme Court's summary of
Stewart;
Held: The appeal should be allowed.
The “reasonable expectation of profit” test should not be accepted as the test to determine whether a taxpayer’s activities constitute a source of income for the purposes of s. 9 of the Income Tax Act. In recent years, this test has become a broad-based tool used by both the Minister and courts independently of provisions of the Act to second-guess bona fide commercial decisions of the taxpayer and therefore runs afoul of the principle that courts should avoid judicial rule�making in tax law. The test is problematic owing to its vagueness and uncertainty of application; this results in unfair and arbitrary treatment of taxpayers.
The following two-stage approach should be employed to determine whether a taxpayer’s activities constitute a source of business or property income: (i) Is the taxpayer’s activity undertaken in pursuit of profit, or is it a personal endeavour? (ii) If it is not a personal endeavour, is the source of the income a business or property? The first stage of the test is only relevant when there is some personal or hobby element to the activity. Where the nature of an activity is clearly commercial, the taxpayer’s pursuit of profit is established. There is no need to take the inquiry any further by analyzing the taxpayer’s business decisions. However, where the nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit, the venture will be considered a source of income only if it is undertaken in a sufficiently commercial manner. In order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of businesslike behaviour which supports that intention. Reasonable expectation of profit is no more than a single factor, among others, to be considered at this stage.
The deductibility of expenses, which presupposes the existence of a source of income, should not be confused with the preliminary source inquiry. Once it has been determined that an activity has a sufficient degree of commerciality to be considered a source of income, the deductibility inquiry is undertaken according to whether the expense in question falls within the words of the relevant deduction provision(s) of the Act. To deny the deduction of losses on the simple ground that the losses signify that no business (or property) source exists is contrary to the words and scheme of the Act. Whether or not a business exists is a separate question from the deductibility of expenses. To disallow deductions based on a reasonable expectation of profit analysis would amount to a case law stop loss rule which would be contrary to established principles of interpretation which are applicable to the Act. As well, unlike many statutory stop-loss rules, once deductions are disallowed under the “reasonable expectation of profit” test, the taxpayer cannot carry forward such losses to apply to future income in the event the activity becomes profitable.
In sum, whether a taxpayer has a source of income from a particular activity is determined by considering whether the taxpayer intends to carry on the activity for profit, and whether there is evidence to support that intention. In this case, the taxpayer purchased four rental properties which he rented to arm’s length parties in order to obtain rental income. A property rental activity which, as here, lacks any element of personal use or benefit to the taxpayer is clearly a commercial activity. As a result, the appellant satisfies the test for source of income and is entitled to deduct his rental losses. Section 20(1)(c)(i) of the Income Tax Act, which permits the deduction of interest on borrowed money for the purpose of earning income from a business or property, is not a tax avoidance mechanism and, in light of the specific anti-avoidance provisions in the Act, courts should not be quick to embellish provisions of the Act in response to tax avoidance concerns. In addition, since a tax motivation does not affect the validity of transactions for tax purposes, the appellant’s hope of realizing an eventual capital gain and expectation of deducting interest expenses do not detract from the commercial nature of his rental operation or its characterization as a source of income.
Mr. Steward ran a perennially money losing operation owning and renting apartments. He knew it would lose money from the start because of the mortgage expenses but considered it would be eventually profitable. He deducted the excess expenses against his other income and the CRA disallowed them on the basis that his venture did not have a reasonable expectation of profit.
This eventually wound its way up to the Supreme Court which decided it was time to revisit
Moldowan. The Supreme Court decided that REOP had to go;
47 To summarize, in recent years the Moldova REOP test has become a broad-based tool used by both the Minister and courts in any manner of situation where the view is taken that the taxpayer does not have a reasonable expectation of profiting from the activity in question. From this it is inferred that the taxpayer has no source of income, and thus no basis from which to deduct losses and expenses relating to the activity. The REOP test has been applied independently of provisions of the Act to second-guess bona fide commercial decisions of the taxpayer and therefore runs afoul of the principle that courts should avoid judicial rule-making in tax law: see Ludco, supra; Royal Bank of Canada v. Sparrow Electric Corp., 1997 CanLII 377 (SCC), [1997] 1 S.C.R. 411; Canderel, supra; Shell Canada Ltd. v. Canada, 1999 CanLII 647 (SCC), [1999] 3 S.C.R. 622. As well, the REOP test is problematic owing to its vagueness and uncertainty of application; this results in unfair and arbitrary treatment of taxpayers. As a result, “reasonable expectation of profit” should not be accepted as the test to determine whether a taxpayer’s activities constitute a source of income.
But the court needed something to put in its place. Which brings Lawson's comments about hobbies into play. But note paragraphs 52 and 53. He kept away from them but the judge didn't.
49 The Act divides a taxpayer’s income into various sources. Under the basic rules for computing income in s. 3, the Act states:
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:
(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year ... from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property; [Emphasis added.]
With respect to business and property sources, the basic computation rule is found in s. 9:
9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.
(2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.
50 It is clear that in order to apply s. 9, the taxpayer must first determine whether he or she has a source of either business or property income. As has been pointed out, a commercial activity which falls short of being a business, may nevertheless be a source of property income. As well, it is clear that some taxpayer endeavours are neither businesses, nor sources of property income, but are mere personal activities. As such, the following two-stage approach with respect to the source question can be employed:
(i) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour, is the source of the income a business or property?
The first stage of the test assesses the general question of whether or not a source of income exists; the second stage categorizes the source as either business or property.
51 Equating “source of income” with an activity undertaken “in pursuit of profit” accords with the traditional common law definition of “business”, i.e., “anything which occupies the time and attention and labour of a man for the purpose of profit”: Smith, supra, at p. 258; Terminal Dock, supra. As well, business income is generally distinguished from property income on the basis that a business requires an additional level of taxpayer activity: see Krishna, supra, at p. 240. As such, it is logical to conclude that an activity undertaken in pursuit of profit, regardless of the level of taxpayer activity, will be either a business or property source of income.
52 The purpose of this first stage of the test is simply to distinguish between commercial and personal activities, and, as discussed above, it has been pointed out that this may well have been the original intention of Dickson J.’s reference to “reasonable expectation of profit” in Moldowan. Viewed in this light, the criteria listed by Dickson J. are an attempt to provide an objective list of factors for determining whether the activity in question is of a commercial or personal nature. These factors are what Bowman J.T.C.C. has referred to as “indicia of commerciality” or “badges of trade”: Nichol, supra, at p. 1218. Thus, where the nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit, but the venture is undertaken in a sufficiently commercial manner, the venture will be considered a source of income for the purposes of the Act.
53 We emphasize that this “pursuit of profit” source test will only require analysis in situations where there is some personal or hobby element to the activity in question. With respect, in our view, courts have erred in the past in applying the REOP test to activities such as law practices and restaurants where there exists no such personal element: see, for example, Landry, supra; Sirois, supra; Engler v. The Queen, 94 D.T.C. 6280 (F.C.T.D.). Where the nature of an activity is clearly commercial, there is no need to analyze the taxpayer’s business decisions. Such endeavours necessarily involve the pursuit of profit. As such, a source of income by definition exists, and there is no need to take the inquiry any further.
Lawson also forgot to cite paragraph 60;
60 In summary, the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income. However, to deny the deduction of losses on the simple ground that the losses signify that no business (or property) source exists is contrary to the words and scheme of the Act. Whether or not a business exists is a separate question from the deductibility of expenses. As suggested by the appellant, to disallow deductions based on a reasonable expectation of profit analysis would amount to a case law stop-loss rule which would be contrary to established principles of interpretation, mentioned above, which are applicable to the Act. As well, unlike many statutory stop-loss rules, once deductions are disallowed under the REOP test, the taxpayer cannot carry forward such losses to apply to future income in the event the activity becomes profitable. As stated by Bowman J.T.C.C. in Bélec, supra, at p. 123: “It would be ... unacceptable to permit the Minister [to say] to the taxpayer ‘The fact that you lost money ... proves that you did not have a reasonable expectation of profit, but as soon as you earn some money, it proves that you now have such an expectation.’”
Lawson, as is his habit, grabbed on to a few convenient quotes from
Stewart while ignoring the case as a whole. Read it for yourselves and see if it supports Lawson's interpretation. Feel free to show me the part where it says you can say that your income source is a hobby and, if you do, the income becomes totally tax free. The purpose of the case wasn't to determine if income from a hobby was taxable but to determine if expenses from what might be a personal activity were deductible. The conclusion was that if an endeavor was run in a business-like manner with no personal component then, even if it lost money the expenses were deductible. It was not up to the courts to second-guess whether an activity was a business by using REOP.
So if you have a hobby, like a travel lust that you partly finance by claiming the expenses as a business expense, tough. It has none of the hallmarks of a business and your costs are not deductible. If you are a Paradigm promoter and you give courses for a fee, give private instruction for a fee, and sell educational material for a fee and profit from it this fits into the business-like activity of paragraph 60. Call it a hobby if you want but the Crown and the court will characterize it otherwise. Lawson evaded tax on $213,213 of taxable income during a five year period. His claim that this was from a hobby is, quite frankly, preposterous, particularly since this was his sole source of income in these years.
Back to our courtroom.
After Lawson gave his discourse on how
Stewart allowed him to live tax free the judge stopped him. She said that her interpretation of
Stewart differed from his regarding paragraphs 52 and 53. "Your interpretation of
Stewart is not in accordance with those passages. The fact that you disagreed with the investigator doesn't mean that she was wrong." He started arguing with the judge about the meaning of
Stewart. Apparently the judge doesn't understand law either. No doubt we'll see that in his inevitable appeal.
Judge said that paragraph 61 of
Stewart said that there was no need to seek further,
Stewart supports the Crown's position. The case isn't magic. The issue is the knowledge of law not the knowledge of a case.
Lawson - These people weren't trained! It wasn't a good investigation. They didn't have a sufficient basis to bring charges. Then he asked the judge what she wanted him to talk about. He gave her a menu of topics. She told him that it was up to him. So back to his favorites.
Stewart and how all of his Paradigm activities were a tax-free hobby. How poorly the auditors were trained. He was caught in a loop and seemed incapable of getting out. So we went around the block again on topics he'd already beaten to death. He wrote them a letter telling them that it was a hobby but they ignored it! LI did not investigate his potential innocence! Then the point he couldn't leave. He said that the taxpayer was the only one qualified to determine if he was engaged in a hobby or a business and the taxpayer had the option to chose which.
He cited paragraph 54 of
Stewart;
54 It should also be noted that the source of income assessment is not a purely subjective inquiry. Although in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit, in addition, as stated in Moldowan, this determination should be made by looking at a variety of objective factors. Thus, in expanded form, the first stage of the above test can be restated as follows: “Does the taxpayer intend to carry on an activity for profit and is there evidence to support that intention?” This requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour.
He had no intention of making a profit! He just enjoyed doing it.
Stewart supported him by saying that he could call it a hobby.
Judge - It is important that you understand that paragraphs 52 and 53 are at odds with your interpretation. And paragraph 61 is too. So I will leave you with the thought that there is more to
Stewart than your view of it.
He argued that there were some activities that were affected by these paragraphs but not his hobby. He'd told audit this and they didn't care. Time for break.
After break he said that he wanted to try and wrap up. He entered an exhibit into evidence. An affidavit he's made on October 24, 2011 and given to Investigations before they brought the charges. He had a similar letter from his wife. Lawson and I have different ideas about relevance. I can't see entering self-serving statements into evidence is going to help him but it's his case. Then back to argument that the CRA staff wasn't trained enough to charge him. Then back, yet again, to his hobby. Everything he did to make money was a hobby. Investigations said that he was running a business when he told them he was running a hobby. Investigations was neglectful on issue of note-taking. LI wasn't trained and she failed to take due care and attention in her work. He wouldn't have had a problem if he'd been investigated by a well trained investigator who was knowledgeable about her obligations in law.
Judge told him that this was a Vukelich application to persuade her to approve a voir dire. "Tomorrow the Crown will try to persuade me not to hold a voir dire." And so the day finally ended with the Crown at bat in the morning.
This application is doomed. Tomorrow the Crown will eviscerate him in about twenty minutes and the judge will give the post-mortem.