The Miller Thomson Foundation: Sixteen Years as a Proud Supporter of Post-Secondary Education in Canada

Since its formation in 1995, The Miller Thomson Foundation has awarded scholarships totalling $2,550,000 to 2,550 promising students pursuing post-secondary education in Canada.

Gerald Courage, Chair of Miller Thomson LLP, along with Gary G. Campbell, Q.C. and The Rt. Hon. John N. Turner, P.C., C.C., Q.C., Co-Chairs of the Board of Governors of The Miller Thomson Foundation, are pleased to announce the 200 recipients of the 2010 National Scholarships. Each of the students receive a $1,000.00 entrance scholarship from the Foundation to continue their studies this fall at the Canadian university or community college of their choice.

"Each of these young people has not only demonstrated academic excellence but a commitment to the well-being of their school and community,"said Mr. Courage. "We believe it is important to recognize their current achievements while encouraging them to reach their full leadership potential."

The judging coordinators agree that the unique feature of The Miller Thomson Foundation National Scholarship Programme is the emphasis placed on community and school involvement as well as academic work.The programme assists exceptional students who have a clear vision of their future and are motivated to grow both personally and scholastically.

The National Scholarship Programme is a long term, ongoing initiative funded by The Miller Thomson Foundation.The purpose of the National Scholarship is to encourage and promote the attainment of higher education goals for individuals in Canada who have demonstrated a high level of academic achievement and made a positive contribution to their school and their community through extracurricular and community activities.

The 2010 National Scholarship recipients are listed on the firm’s website under MT Foundation.

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The Tax Shelter Business: Big Rewards, Now Bigger Risks

David W. Chodikoff, Toronto

Tax shelters have been around for a long time. The developers and marketers of these arrangements do extremely well. For years, the Canada Revenue Agency (the “CRA”) has been trying to shut down the more undesirable tax shelter arrangements. Who doesn’t know someone that has been reassessed by the CRA for participation in a leveraged donation plan and been denied the applicable tax credit? Now, the CRA is vigorously pursuing those individuals that promoted and marketed the schemes by utilizing the third party civil penalty provisions of the Income Tax Act, R.S.C. 1985, c.1, as amended (the “Act”).

Section 163.2 empowers the Minister of National Revenue (the “Minister”) to impose civil penalties on third parties who knowingly, or in circumstances amounting to culpable conduct, make false statements or omissions in respect of another person’s tax matters. The section is designed to apply to tax planners involved in the preparation, promotion or selling of tax shelters, tax shelter-like plans and/or arrangements. The section is also squarely aimed at tax preparers and advisors that either give advice or help others in the making of a false statement or who are wilfully blind to obvious errors when preparing a filing or assisting a taxpayer in filing a tax return.

There are two different types of third party civil penalties. Subsection 163.2(2) of the Act is referred to as the “planner penalty”. This subsection provides that every person is liable to a penalty if he/she makes, furnishes, participates in the making of or causes another person to make or furnish, a “false statement” that could be used by another person for the purposes of the Act.

There are a number of factors that the CRA may consider relevant when determining whether penalties will be assessed. These considerations include: whether the position was obviously unreasonable or contrary to well established case law; whether the advisor had knowledge of the relevant subject matter and the extent of the advisor’s participation, deliberate or otherwise, in the making of false statements; the degree to which the culpable conduct represents the most aggressive and blatantly abusive behaviour; the extent to which there is a pattern of repeated abuse; and whether the reduction of taxes is significant.

The term “person” used in the language of the section includes a partnership for the purposes of the third party civil penalties. The planner penalty can also apply regardless of whether the false statement is actually used and regardless of whether the person who could use the information can be identified.

The term “false statement” is defined to include a statement that is misleading due to an omission. The CRA takes the position that a person need not have the intention to deceive to make a false statement. However, there is case law that suggests that the person making the false statement must actually know the statement is false. (see: Ste Marie v. Minister of National Revenue (1964), 36 Tax A.B.C. 129 (Tab)).

In addition to a false statement, there must also be actual knowledge, or culpable conduct on the part of the advisor in order for the third party civil penalty to apply. The Act provides a definition for culpable conduct that would appear to exclude an honest error of judgment or a failure to exercise reasonable care. Subsection 163.2(1) defines culpable conduct as an act or failure to act that:

(a) is tantamount to intentional conduct;
(b) shows indifference as to whether the Act is complied with; or
(c) shows a wilful, reckless or wanton disregard of the law.

Subsection 163.2(4) is referred to as the “preparer penalty”. It is virtually identical to the penalty for false statements in tax planning schemes in subsection 163.2(2) except that it strictly applies to statements that are “to, or by or on behalf of another person”. This means that there must be an actual taxpayer who can be identified. For subsection 163.2(2) to apply, there must be a “false statement” that is made either knowingly or in circumstances amounting to culpable conduct. Subsection 163.2(4) also applies to third parties who assent to or acquiesce in the making of a false statement.  Therefore, from the CRA’s point of view, tax preparers could be liable for this penalty in circumstances where the preparer does nothing, if he/she knew or would reasonably be expected to have known that their client made a false statement.

The penalty provisions are harsh and the dollar amounts can be incredibly high.

In connection with the imposition of third party civil penalties, the CRA is using its powers under sections 231.1 and 231.2 in order to obtain the necessary evidence to support the penalties.  In brief, section 231.1 of the Act confers on the Minister broad powers of audit and inspection of a taxpayer’s books and records. In accordance with subsection 231.2(1) of the Act, the Minister can by notice served personally or by registered or certified mail require that any person provide, within such reasonable time as is stipulated in the notice, information or additional information, including a return of income or supplementary return; or any document.

Fortunately, there is a good faith defence built into the statutory framework for this civil penalty section. In accordance with subsection 163.2(6), penalties will not apply, where the advisor relied in good faith on information provided by or on behalf of the person for whom he/she acted. The good faith defence also applies where the advisor did not verify, investigate, or correct information.

In the event that you and/or your client are served with a Requirement, the optimal course of action is to discuss the specifics of the Requirement and the appropriate response with tax counsel. These are “treacherous waters” and a sailor that knows how to navigate through this difficult passage will save the inexperienced from disaster.

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Government Bill Proposes Mandatory Sentences for Serious Frauds

Emily Cole, Toronto

Justice Minister Rob Nicholson stated that proposed amendments to the sentencing provisions of the Criminal Code, which were reintroduced in Parliament on May 3, 2010, were designed “to ensure that people who devise and carry out serious fraud offences receive tougher sentences”. The Government also promised that the amendments would make the justice system more responsive to victims of serious frauds and improve Canadians’ confidence in the justice system. Yet the Canadian Bar Association does not recommend that Bill C-21 be passed into law. ¹

Bill C-21 proposes the following five changes:

1. Mandatory Two Year Jail Sentences for Frauds over $1 million
2. Additional Statutory Aggravating Factors for Sentencing
3. Discretionary Prohibition Orders against having Authority over Money
4. Mandatory Consideration of Restitution for Victims of Fraud
5. Community Impact Statements

1. Mandatory Two Year Jail Sentences for Frauds over $1 million

The current maximum sentence for fraud over $5000 is 14 years imprisonment. This is the maximum penalty available in the Criminal Code, short of life imprisonment.

The proposed amendments would impose a mandatory sentence of two years imprisonment for fraud over $1 million.

2. Additional Statutory Aggravating Factors for Sentencing

The Criminal Code currently requires the court to consider the following statutory aggravating factors: whether the value of the fraud exceeds $1 million, its potential or actual impact on the economy, the financial markets or confidence in those markets, whether the fraud involved a large number of victims and whether the offender took advantage of the high regard with which the offender was held in the community.

The proposed amendments would require the court to consider whether the magnitude, complexity, direction or degree of planning of the fraud committed was significant, whether the impact on the victim was significant given their personal circumstances including age, health and financial situation, failure to comply with licensing requirements or professional standards and concealing or destruction of evidence relating to the fraud or proceeds of the crime.

The proposed amendments would also require the court to state in the record the aggravating and mitigating circumstances that it took into account when determining the sentence. The Criminal Code currently requires the court to state the terms of the sentence imposed and the reasons for it and to enter those terms and reasons in the record.

3  Discretionary Prohibition Orders against having Authority over Money

The Criminal Code currently provides the court with the discretion to make prohibition orders. Specific authority is granted to make orders against possessing firearms and other weapons and orders against sex offenders from being at prohibited locations.

The proposed amendments would give the court specific authority to make an order prohibiting the offender from seeking, obtaining or continuing employment, or becoming a volunteer in any capacity, that involves having authority over the real property, money or valuable security of another person.

4.  Mandatory Consideration of Restitution for Victims of Fraud

The Criminal Code currently provides the court with the discretion to make a restitution order.

The proposed amendments would require the court to consider making a restitution order for victims of fraud.

5. Community Impact Statements

The Criminal Code currently requires the court to consider victim impact statements in determining the sentence to be imposed on an offender. The court also has the discretion to consider any evidence about the victim for the purpose of determining sentence.

The proposed amendments provide that the court may consider community impact statements describing the harm done to or losses suffered by a community as a result of the offence. The community impact statements will give investors who have suffered harm a voice, particularly those who have been victims of an affinity fraud where fraudsters prey on members of identifiable groups such as religious, ethnic or professional groups. This could be helpful given the recent rise in affinity fraud e.g. the Weizhen Tang, Oversea Chinese Fund LP and Gordon Driver, Axcess Fund LP cases.

Will Bill C-21 result in tougher sentences?

Bill C-21 is the result of intense lobbying from victims groups, particularly investors who lost their life savings and assets to Montreal money manager Earl Jones. Yet, the proposed legislation would not have affected the jail sentence in the Earl Jones case or other recent high profile securities related fraud cases including the Stan Grmovsek and Vincent Lacroix cases.

In February 2010, Earl Jones was sentenced to 11 years after pleading guilty to two counts of fraud. 150 investors were defrauded of $50 million in a Ponzi scheme orchestrated by Jones that spanned more than 20 years.

In January 2010, Stan Grmovsek was sentenced to 39 months imprisonment after pleading guilty to fraud, illegal insider trading and money laundering. The jail sentence is consistent with Canadian jail sentences for large scale frauds involving breach of trust and the US sentencing guidelines. In addition to the jail sentence, Stan Grmovsek agreed to disgorgement orders totaling $8.5 million. The offences spanned a 14 year period, but the trading was generally conducted in two - four year time periods.

In October 2009, Vincent Lacroix, former President and Chief Executive officer of Norbourg Asset Management Inc. was sentenced to 13 years after pleading guilty to more than 200 counts of fraud, conspiracy to defraud, conspiracy to commit forgery, fabricating documents and money laundering under the Criminal Code. The court ordered Vincent Lacroix to serve that sentence consecutive to the five year sentence that he received for Securities Act violations. The offences occurred over a five year period during which 9,200 investors were defrauded of $115 million.

The Canadian Bar Association position

The CBA recommended that Bill C-21 not be passed into law. The CBA stated that the proposed amendments would treat all acts of or attempts at fraud more harshly even if the hallmarks of serious “white collar crime” are lacking. It also noted that Bill C-21 limits judicial discretion to address the individual circumstances of each case and would add another mandatory minimum penalty to the Criminal Code.

Bill C-21 must go through Second Reading, a Committee Report and Third Reading before it becomes law.

Emily Cole recently joined Miller Thomson as Associate Counsel after several years as Senior Litigation Counsel in the Enforcement Branch of the Ontario Securities Commission. She practices securities litigation and regulation and white-collar defence. Ms Cole is admitted to practice in both Ontario and New York and has extensive experience in trans-border investigations, defence and prosecution.   

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¹  Bill C- 52 the predecessor bill to Bill C-21 was originally introduced in October 2009 but died on the order paper. It had First Reading on October 21,  2009 and Second Reading on October 26, 2009. It was referred to the Committee on Justice and Human Rights, where it was discussed at several meetings during November and December 2009.  The committee did not report back to Parliament before the session was prorogued.

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The Crown Duty to Disclose in Criminal Proceedings: R v McNeill

Bryan J. Buttigieg, Toronto

In the year that has passed since the Supreme Court of Canada decision in R v Neill, the extent of the impact of decision on the Crown obligation to disclose has become clearer. Crowns, defence lawyers, witnesses and accused have all been affected by the principles set out in this decision which also serves as a useful reminder of the Crown’s obligations to provide full disclosure to the accused.

Background

In R v Mcneill, the accused was charged with a drug related offense. The accused learned that the arresting officer, who was the Crown’s main witness, was engaged in drug related misconduct that had led to both internal disciplinary proceedings under the Ontario Police Services Act and to criminal charges.  The accused wanted production of all documents relating to the arresting officer’s misconduct on the grounds that the information could assist in his defense.

Disclosure from “First” and “Third” Parties

In every criminal proceeding, the Crown has a duty to disclose all facts in its possession relevant to the case regardless of whether the information assists the Crown or the accused. However given the pervasiveness of the state in an individual’s day to day affairs, it quickly becomes apparent that the scope of this duty can not be properly understood without a clearer understanding of the definition of “Crown” in this context. In McNeill for instance, did “Crown” apply only to the prosecuting department (which would not normally have information related to disciplinary proceedings that might involve a witness) or would it also extend to the investigating Police department? In any Criminal Prosecution, is the “Crown” the Attorney General? Does it include every other Ministry and Agency of the Federal Crown? Should it also include the Provincial and perhaps municipal levels?

The Supreme Court in McNeill attempted to deal with this issue by making it clear that “Crown” could not possibly mean all departments of the State in every prosecution because this would be impractical and make it impossible for any Crown to ever satisfy its disclosure obligation in a timely manner. However, the court also made it clear that in the right context, any department, agency or institution, even if considered to be a “third party” for disclosure purposes, could be subject to the Crown’s disclosure obligation:

“the procedure set out in O’Connor provides a general mechanism at common law for ordering production of any record beyond the possession or control of the prosecuting Crown.”

(The O’Connor decision sets out an established procedure for obtaining documents from third parties which are required by the accused to assist in conducting the defence.)

The decision in McNeill is somewhat complicated by the fact that  while normally, the investigating Police Agency is so inextricably bound to the prosecuting Crown in a prosecution that although distinct and independent from the Crown at law, it is not a third party. Rather, it acts on the same first party footing as the Crown. This puts the onus on the Police to provide Records relating to findings of serious misconduct by police officers involved in the investigation against the accused where the police misconduct is either related to the investigation, or the finding of misconduct could reasonably impact on the case against the accused.

Implications of McNeill

The decision can be of great significance in the context of specialised prosecutorial institutions where the investigating and prosecuting bodies fall within the same legal entity. This could include Securities Agencies, Provincial Ministries of the Environment and Labour, Tax Prosecutors and many other similar bodies. In such cases, it is impossible to argue that the investigating officer is part of a “third party” entity.

For such institutions, a simple request of the Crown for production of any such records will suffice to trigger the Crown’s disclosure obligation. Similarly, as long as the request is well founded, any request for information from a Third Party will also oblige the Crown to take steps to obtain the requested information:

“When disclosure is demanded or requested, Crown counsel have a duty to make reasonable inquiries of other Crown agencies or departments that could reasonably be considered to be in possession of evidence. Counsel cannot be excused for any failure to make reasonable inquiries when to the knowledge of the prosecutor or the police there has been another Crown agency involved in the investigation. Relevancy cannot be left to be determined by the uninitiated. If Crown counsel is denied access to another agency’s file, then this should be disclosed to the defence so that the defence may pursue whatever course is deemed to be in the best interests of the accused. This also applies to cases where the accused or defendant, as the case may be, is unrepresented”

The key therefore is to make the relevant request. Of course, the principles set out in McNeil do not only apply to potential disciplinary proceedings against investigating officers:

The same duty to inquire applies when the Crown is informed of potentially relevant evidence pertaining to the credibility or reliability of the witnesses in a case.

Highlighting the breadth of the obligation under discussions, the Court cited favourably the principles set out in the Ferguson report which recommended:

The automatic disclosure by the police upon request by the Crown of the following information regarding acts of misconduct by a member of the Toronto Police Service who may be a witness or who was otherwise involved in a case before the court

a. Any conviction or finding of guil[t] under the Canadian Criminal Code or under the Controlled Drugs and Substances Act [for which a pardon has not been granted.]

b. Any outstanding charges under the Canadian Criminal Code or the Controlled
Drugs and Substances Act.

c. Any conviction or finding of guilt under any other federal or provincial statute.

d. Any finding of guilt for misconduct after a hearing under the Police Services Act
or its predecessor Act.

e. Any current charge of misconduct under the Police Services Act for which a Notice of Hearing has been issued.

Anyone involved in the defence of Provincial or Federal prosecutions would be well served to consider the principles set out in McNeill in carefully fashioning a disclosure request that will best allow the defence to meet the case against it.
 

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