Two city men get five years for sophisticated tax fraud

Categorizing it as a “large scale, continuing, complex commercial crime,” a judge has sentenced two Calgary businessmen to prison for five years for defrauding the federal government of millions in taxes that should have been paid on registered retirement savings plans.

Court of Queen’s Bench Justice Peter McIntyre said Steven Kendall, 58, and Christopher Houston, 57, instead used the money for offshore investments to defraud the public purse of some $11.7 million in taxes between Jan. 1, 1999, and Dec. 31, 2006.

“This was a large-scale fraud, touching 500 RRSP contributors investing $48 million from RRSP accounts,” said the judge.

“The fraud was complex, with a high degree of planning and was a full-time job for Kendall and Houston. They used many offshore companies and used trust companies to hide their real plans. They employed many accountants, lawyers, small business persons and their staff — many of whom fell under suspicion because of the fraud.”

Crown prosecutor Barb Mercier, who had sought eight years and $750,000 in restitution for each offender on one count of fraud, was nevertheless satisfied the prison sentence will have a profound deterrence.

“When white collar criminals go to prison, it’s usually has a lot more effect,” Mercier said outside court. “They usually are businessmen who come from upper class or middle class families and neighbourhoods and, to go to jail, it hits them harder.”

Defence lawyer Balfour Der, who argued for a conditional sentence of two years less a day to be served in the community, said they had no prior criminal records and there was no need to send them to jail.

McIntyre disagreed, saying the range of penalty for such a crime is four to seven years. He originally said the taxes lost in the scheme was $14.1 million, but revised that to $11.7 million after the Crown consulted with the Canadian Revenue Agency. Of that total, he said, $1.4 million can never be collected.

He did not order restitution as he had no information on the offenders’ net worth and part of restitution requires a means to repay. So that would have to be left up to the civil courts.

McIntyre called it an RRSP strip scheme, designed to allow contributors to invest offshore without paying withholding tax to Her Majesty in right of Canada.

“Kendall and Houston used this strip scheme to make it look as though they were Canadian investments by contributors when they were not,” he said. “The transactions were shams, designed to look like one thing but in fact were another.”

The judge said Milowe Brost was the main character who worked with Kendall and Houston in the fraud, but the Crown stayed his charges. Brost was subsequently sentenced to 27 months already served in pre-trial custody for tax evasion. He also faces sentencing along with Gary Sorenson for a massive Ponzi scheme that bilked investors of up to $200 million.

McIntyre said in his ruling in March that trust companies were obliged to follow the requirements of Canadian legislation.

However, through the scheme, he said, the accused represented to the trust companies that the contributors had paid a certain amount for shares and debentures when they had not. He said the contributors retained control of most of the money “paid.”

McIntyre said RRSPs were one of the primary targets for this scheme. Contributors were earning little in Canada, and RRSPs were “low-hanging fruit for investment opportunity.”

To obtain the high returns that would induce investment, the withholding tax that would ordinarily be payable could not come into play, he added.

However, withdrawing money from an RRSP for offshore investment would attract withholding tax, unless it could be made to appear that it was not an offshore investment.

Court heard most of the investments ended up in Honduras and other Central American countries.

McIntyre said Kendall and Houston were essential to the scheme and they allied with Brost to make the scheme work.

One of the main ways they did so, he continued, was to use existing companies to induce the trust companies to release funds to “pay” for the shares or debenture units “purchased” by the contributors.

Brost and Sorenson were convicted earlier this year following a five-month jury trial that ended on two counts of fraud involving an elaborate Ponzi scheme. Brost was also convicted of two counts of fraud and one count of money laundering in the Ponzi scheme.

It was one of the longest criminal jury trials in Calgary’s history.