Canada: "Money For Nothing" Scheme Lands De-Taxer In Federal Penitentiary For Six Years

Last Updated: August 30 2016
Article by John Sorensen

In R v. Watts (2016 ONSC 4843) ("Watts"), Lawrence Watts, the promoter of a "money for nothing" tax scheme ("Scheme"), was sentenced to six years in a federal penitentiary for fraud perpetrated on the Government of Canada. Bale J of the Ontario Superior Court of Justice sent a resounding message that subjective disbelief in the taxation powers of the federal government does not lessen a jail sentence on conviction for defrauding the public. Instead, it may extend it. Mr. Watts promoted his Scheme through a business called "Fiscal Arbitrators". He advised on reporting non-existent business losses for his clients' non-existent businesses, which extinguished his clients' tax liability for the current and three previous years. This allowed Mr. Watts' clients to get refunds of their tax paid in the three prior years and on the tax withheld by their employers in the current year – or at least the Scheme enabled refunds until the CRA caught on and stopped assessing Scheme clients' tax filings. Despite reprimanding the taxpayer clients for their naiveté, Bale J brought the full brunt of his condemnation to bear on Mr. Watts.

At jury trial, Mr. Watts was found guilty of one count of fraud in an amount exceeding $5,000, contrary to paragraph 380(1)(a) of the Criminal Code ("Code"). Scheme participants reported a total of $64,253,889 in non-existent losses, although the actual amount paid out in federal tax refunds before the CRA became aware of the Scheme was $2,750,288. Fiscal Arbitrators netted $545,401 from the Scheme, with a personal benefit to Mr. Watts of $149,128. The duration of the fraud and the amount of the federal revenue Mr. Watts put at risk (which Bale J determined to be $10,507,131) were crucial factors in determining the sentence. Bale J also looked to sentences in fraud cases to determine the term of imprisonment, rather than only considering cases decided under the Income Tax Act (Canada). Ultimately, Bale J settled on a range of four to eight years as an appropriate sentence. In determining the precise term of imprisonment, Bale J considered both aggravating circumstances and mitigating factors.

Under subsection 380.1(1) of the Code, Bale J considered the magnitude, complexity, duration and degree of planning of Mr. Watts' fraud. Regarding the magnitude of the fraud, the Court found that Mr. Watts intended to put at risk $10,507,131 of federal tax revenue. Bale J's choice of this figure enabled him to consider subsection 380.1(1.1) of the Code, which provides that a Court shall consider the fact that the value of the fraud committed exceeded one million dollars. This sends a clear message that even if a fraudster's financial benefit from a tax scheme is relatively low, a Court will assess magnitude based on its potential harm to the victim. Although the Scheme itself was not complex, Bale J noted that the degree of planning was significant, since it involved seminars, power point presentations, agents and promoters. Mr. Watts' defense that he was providing "customized educational resources" to his clients certainly weighed against him with respect to this factor. Bale J found the ongoing nature of the fraud, the fact that it ended only after Mr. Watts' subsequent arrest and Mr. Watts' expansion plans for the Scheme to be more significant than the strict duration of the fraud.

Bale J also delved into the motivating factors behind the Scheme, such as a distrust of authority and anti-establishment views of the economic and social principles of society. On one hand, this is a charitable description of Fiscal Arbitrators' motivation for fraudulent advising, which was never anything more than tax protestor arguments coated with a very thin veneer. The Tax Court of Canada ("TCC") has chastised Fiscal Arbitrators' type of tax advice as "nefarious", "ridiculous", "pure nonsense", "gobbledegook" and "twaddle, jargon, drivel and babble". On the other hand, being mistrustful of authority or anti-establishment is not unlawful and, respectfully, the judge's reasons referencing Mr. Watts' beliefs may cause a reader to infer that the sentence was intended to deter those beliefs instead of the criminal act of fraud.

Any mitigating factors adduced in defense of the Scheme held no sway over the Court. Instead, Bale J essentially determined that Mr. Watts was wilfully blind because he did not consult the CRA or an accountant about the legality of his Scheme.

Bale J did not seem swayed by the Crown's argument that Mr. Watts caused emotional and financial devastation for most of his clients, stating that they were blameworthy for participating in a Scheme that was too good to be true and further stating that he was not satisfied beyond a reasonable doubt that Mr. Watts was responsible for the bankruptcies of many of his clients. However, with respect, tax counsel who have followed the TCC civil penalties cases associated with fictitious losses, or who have counselled participants in these kinds of schemes, would likely agree that the clients of Mr. Watts and his ilk were largely unwitting dupes who have suffered incredible hardships.

Finally, Bale J noted that in cases of large-scale commercial fraud, "the predominant factor in determining the length of sentence is general deterrence." Mr. Watts perpetrated a large-scale fraud on the Canadian public and threatened the fisc with substantial losses. Nevertheless, the Court settled on a sentence in the middle of the four to eight year range for like cases, sending a strong message that the Court will take a firm but even-handed approach to sentencing these crimes.

This article was written with assistance from summer student Josiah Davis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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