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Taxation, Valuation
& Investment Strategies
in Volatile Markets

EDITED BY
David W. Chodikoff & James L. Horvath
䉷 2010 Thomson Reuters Canada Limited
NOTICE AND DISCLAIMER: All rights reserved. No part of this publication
may be reproduced, stored in a retrieval system, or transmitted, in any form or
by any means, electronic, mechanical, photocopying, recording or otherwise,
without the prior written consent of the publisher (Carswell).
Carswell and all persons involved in the preparation and sale of this publication
disclaim any warranty as to accuracy or currency of the publication. This publi-
cation is provided on the understanding and basis that none of Carswell, the
author/s or other persons involved in the creation of this publication shall be
responsible for the accuracy or currency of the contents, or for the results of
any action taken on the basis of the information contained in this publication,
or for any errors or omissions contained herein.
No one involved in this publication is attempting herein to render legal, ac-
counting or other professional advice. If legal advice or other expert assistance
is required, the services of a competent professional should be sought. The
analysis contained herein should in no way be construed as being either official
or unofficial policy of any governmental body.
This book reflects the personal views of the authors and not necessarily the
opinion of the firms they work for. The authors are not liable for any damage
arising from any viewpoint, application of theory, or any other material pre-
sented in this book.

A cataloguing record for this publication is available from Library and

Archives Canada.

ISBN 978-0-7798-2797-8

Composition: Computer Composition of Canada Inc.

Printed in the United States by Thomson Reuters.

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Table of Contents

ACKNOWLEDGEMENTS ....................................................................... ix
FOREWORD ...................................................................................... xi
PREFACE BY DAVID W. CHODIKOFF AND JAMES L. HORVATH ................. xiii
DEDICATION .................................................................................. xvii
INTRODUCTION
1. Volatile Times: Challenges and Opportunities
James L. Horvath ............................................................ 1
TAXATION
2. Tax Litigation in Today’s Economy
The Honourable Chief Justice Gerald J. Rip .......................... 11
3. Debt Collection
David W. Chodikoff & Andrew D. Valentine ........................ 23
4. Estate Freezing and Re-Freezing in an Economic
Downturn
Martin J. Rochwerg & Krystle A. Ng-A-Mann ....................... 51
5. Utilization and Preservation of Losses Within an
Affiliated Group
Gerald D. Courage, James A. Hutchinson & James A. Fraser .... 91
6. R&D Credits: Reducing the Cost of Innovation in Volatile
Times
Anil Chawla & David Douglas .......................................... 113
7. GST in Hard Times: What To Do
Dalton J. Albrecht ............................................................ 139
8. The UBS Scandal, The LGT Affair, and The Unfolding
HSBC Story: Hard Times Ahead For Canadian Taxpayers
Who Hold Secret Bank Accounts
David W. Chodikoff ......................................................... 163
9. Life Insurance Viewed as a Financial Derivative
George H.R. Goldsmith .................................................... 177
10. Tax Strategies for the Owner Manager
John Doma .................................................................... 195
11. Forgiveness of Debt in Financially Troubled Companies
Claudio R. Saverino & Mustafa Nazarali ............................ 205
iv Table of Contents

12. An Unforgivable Proposal: Insolvent Debtors Caught in

the Complex Web of Debt Forgiveness Under the Income
Tax Act
Craig Mills .................................................................... 215
13. Loan Losses to Foreign Affiliates Previously Considered
Capital Losses now Re-characterized as Deductible
Expenses
Nick Sauro & Dominic C. Belley ........................................ 239
VALUATION
14. Conventional Valuation Methodologies in
Unconventional Markets
James L. Horvath & Vince Conte ....................................... 247
15. The Use of the Market Approach to Valuation in Volatile
Markets
Carl Leung & Jeff Horvath ............................................... 325
16. Valuation of Intellectual Property in a Distressed
Economy
Robert F. Reilly (USA) ..................................................... 337
17. Finding the Invisible Trail: The Valuation of Technology
James L. Horvath & Paul Gill ........................................... 393
18. Equity Risk Premium and Volatility: A European
Perspective
Péter Harbula (Paris, France) ............................................ 487
19. Valuation During Periods of High Volatility
John Barton (USA) .......................................................... 517
20. Critical Changes in the Playing Field Affecting Valuation
Richard M. Wise ............................................................. 529
21. Valuing Distressed Companies
James L. Horvath & Farouk Mohamed ................................ 547
22. Valuation Issues Under IFRS
George Gadkowski & Christophe Bergeron (Australia) ............ 565
23. Valuation of Businesses in Central and Eastern Europe
Tomasz Ochrymowicz & Malgorzata Stambrowska (Warsaw,
Poland) ......................................................................... 577
24. Valuation Issues During Argentina’s 2002 Financial Crisis
Miguel A. Molfino & Guido Dalla Bona (Argentina) ............. 591
25. Business Valuation: Practices and Challenges in China
Professor Jiang Wei (Shenyang, China) ................................ 601
26. Valuing Businesses in Emerging Markets: Opportunities
and Challenges
James L. Horvath & Monty Bhardwaj ................................. 611
 Table of Contents v

27. The IVSC: The Challenge of Developing Global Valuation

Standards
Carlos Arenillas Lorente (Spain) ........................................ 651
28. The Value of an Idea
James L. Horvath & Jennifer Lee ........................................ 661
29. Appraisal in Delaware: Recent Cases and Considerations
Richard De Rose (USA) .................................................... 683
30. Dealing With the Lost Tax Shield
Steve Z. Ranot ................................................................ 711
31. Transfer Pricing in Times of Volatility
Jennifer Boundy & Dr. Muris Dujsic ................................... 719
32. Migrating Intangibles in Troubled Economic Times
Jamal Hejazi, Dale Hill & Mark Kirkey .............................. 727
33. Transfer Pricing and Valuations in Asia
Steven Tseng (Shanghai, China) ........................................ 737
34. Business Valuation Experts on Trial: A Canadian
Perspective
David W. Chodikoff & Tarsem Basraon .............................. 747
35. Tips, Thoughts, and Observations
James L. Horvath & Robert Low ........................................ 761
36. Valuation Insights ........................................................ 811
• Valuing Businesses in Volatile Markets, Stamos Nicholas
& Carla Iavarone (USA) ............................................ 811
• New Risks Emerge During Economic Downturns,
Russell L. Parr (USA) ................................................ 815
• Personal vs. Enterprise Goodwill: Four Examples From
My Recent Practice, Shannon Pratt (USA) ................... 818
• Fair Market Value Definition: Canada vs. USA, Zareer
N. Pavri .................................................................. 823
• Challenges of Valuation Using the Market Approach in
China, Duncan McPherson, (Hong Kong & China) ......... 825
• Valuation Standards in China, Minghai Chen (Beijing,
China) & Edwina Tam (Hong Kong & China) .............. 830
• Market Efficiency in the Middle East? Ben Moore &
Fahad Khan (Dubai, United Arab Emirates) ................... 834
• Valuation Insights – Indonesia, B. Sridhar Rao (Jakarta,
Indonesia) ............................................................... 838
37. The Valuation of Infrastructure Assets in Volatile
Markets
Richard K. Ellsworth (USA) .............................................. 853
38. Valuing Real Estate in an Unstable Market
James L. Horvath & Ian Haigh ......................................... 879
39. Valuing Machinery in a Depressed Manufacturing Market
Greg Miocic (USA) .......................................................... 887
vi Table of Contents

40. Valuation Questionnaire

James L. Horvath & Alex Lourie ........................................ 895
INVESTMENT STRATEGIES
41. M&A in Volatile Markets: Challenges and Solutions
Doug McDonald & Michael Morrow ................................... 957
42. Investment Strategies and Risk
Denis Kouroussis & Les Trojniak ....................................... 975
43. Guarantees in Uncertain Times
Ronald Rodgers & John Kimpton ....................................... 989
44. Real Estate: The Other Asset Class
Peter Jarman .................................................................. 1005
45. New Realities of Formal and Informal Restructuring
Ryan Brain & Huey Lee .................................................. 1029
46. Creating Value Through Management of Your Asset Mix
Shaun R. Darchiville ....................................................... 1051
47. Inside the Black Box: Clear Thinking About the Financial
Crisis
Maneesh Mehta .............................................................. 1065
48. Psychological Diversity and Economic Health
Jacob B. Hirsh & Maneesh Mehta ....................................... 1081
49. Effective Tax Strategies for the Individual Investor
Stanley M. Tepner ........................................................... 1091
50. Commercial Real Estate in Today’s Environment –
Surviving the Perfect Storm/Commercial Real Estate
Development — A Profession or a Style of Activity?
Eli Swirsky & Sam Cohen ................................................. 1115
51. Entrepreneurial Spirit in the Face of Uncertainty
William (Bill) Zinger ....................................................... 1127
52. Hedge Fund Investing: Success in any Market
Environment
Greg Knudsen ................................................................ 1143
53. Still Profitable: Strategies for Corporations With Excess
Capital
Jordan Waldman ............................................................ 1177
54. Optimizing Human Capital
Jon G.E. Cooper .............................................................. 1191
CORPORATE FRAUD
55. Conducting International Business in Volatile Markets:
Corruption Risk and the Bottom Line
James M. Klotz ............................................................... 1205
56. Fraud Detection for Business Valuators in an
Increasingly Complex World
Gary Moulton & Peter Dent .............................................. 1225
 Table of Contents vii

Contributors ............................................................................. 1235

Index ........................................................................................ 1261
Other Books By ........................................................................... 1301
Acknowledgements

Since coming to the world of the private practice of law five years ago, David
has been fortunate to have the exceptional assistance of Filomena Men-
donca. Filomena, or “Fil” as she prefers to be called, has already endured
the pressures of captaining the administrative work involved in bringing a
major book to publication. As our “Chief of Staff”, Fil played a pivotal role
in bringing about the publication of our previous work, Taxation and Valu-
ation of Technology (2008). Once again, Fil has played a key role in the
administration and co-ordination of bringing about this publication. We are
truly indebted to Fil for her sense of humour and outstanding level of
professionalism. We also thank Pat Barnes and Savio Dias of Deloitte &
Touche LLP for their many hours of assistance on this and past book pro-
jects.
In a book of this complexity and size, there are lots of people to thank. Many
work in different departments at Miller Thomson LLP. For the constant
support of research and verification, we are sincerely grateful to our entire
Miller Thomson library staff: Ines Freeman, Arlene Mazur, Erin Murphy,
Dian Galita, Julia Luke, Jennifer Bonomo, Elizabeth Szmit, and Fernanda
Leite.
We are equally indebted to an unrivalled, dedicated group of readers who
assisted us in our editorial functions. We would have stumbled far worse,
without the outstanding and able assistance of Brittany Benning. The com-
mentary and input from Sabina Mexis of Torkin Manes LLP, Andrew Val-
entine, Tarsem Basraon and Patrick Déziel, all of Miller Thomson LLP, and
Kimberly Horvath of Deloitte & Touche LLP were always insightful and of
great value. To all of our drafts and proofs readers, our sincere gratitude
for your contributions.
Speaking of contributions, this book would not have been possible without
the unselfish efforts of our many contributors. We thank them for the quality
of their individual efforts and the patience that they have demonstrated
throughout the production process.
As some of our readers would know from our previous works, and this book
is no exception, all proceeds from the contributors’ portion of this book
will be donated to the Canadian Cancer Society.
x

We also want to thank the staff at Thomson Reuters and, in particular, the
editorial assistance of Emma Dobell, the leadership of Fred Glady, and the
technical support of Heather Cant.
To our many business colleagues and friends, we also give our thanks for
your unwavering support.

David W. Chodikoff
James L. Horvath
June, 2010
Foreword

A year ago, the Oracle of Omaha, Warren Buffett, told us that the economy
had fallen off a cliff. Real estate in some regions of the United States and
stock markets around the world were in free fall. The Dow Jones Industrial
Average and the S&P/TSX Composite hit their lows in March of 2009, falling
some 50 per cent from their highs of a year earlier. But the Oracle is also
reputed to have said, “Be fearful when others are greedy and greedy when
others are fearful”. As of the time that I write this foreword, the same indexes
have since rebounded by about 50 per cent (albeit from a lower base). We
live in a time of volatile markets.

It is hard to think of a work that could be more timely than Taxation,

Valuation & Investment Strategies in Volatile Markets. This has been an enor-
mous project covering a vast array of topics. The articles are contributed
from Canadian experts and those from a number of other countries and
continents. Insights are provided from a global perspective, which again is
timely in today’s globalized economy.

After the Introduction, the Taxation section of the work consists of 12

chapters commencing with a judicial perspective of tax litigation in current
times. The section then goes on to deal with tax planning. Estate freezes
assume asset values will continuously increase. How can you preserve losses
within affiliated companies? What are the tax implications of debt forgive-
ness? These are a few of the issues outlined in this section that arise in an
economic downturn and that have tax implications.

The Valuation section of the volume consists of 27 chapters. Market based

approaches to valuation are canvassed. The difficult questions of valuing
intellectual property and technology are explored. Canadian, American,
European, South American, Chinese and other experiences and approaches
to valuations are then undertaken. The thorny issue of transfer pricing is
examined. And coming back to today’s economy, valuation difficulties in
falling and volatile markets are addressed. It is difficult to conceive that
anything has been left out.

The third section of the book is entitled, “Investment Strategies” and con-
sists of 14 chapters. The importance of understanding and assessing risk
and developing investment strategies commensurate with the investor’s
xii

tolerance for risk is all the more important in turbulent financial times.
Relying on portfolio theory, asset allocation strategies, and approaches to
investment tax planning, the chapters in this section offer a sober assessment
of the current state of markets and a number of basic investment strategies.

The last section deals with Corporate Fraud. International business is vul-
nerable to corruption in certain parts of the world. Evaluating this risk is
considered in the first chapter of this section, while fraud detection for
business valuators is addressed in the second. These are vitally important
matters in a globalized economy.

Taxation, Valuation & Investment Strategies in Volatile Markets will make a

most important and up-to-date contribution to the existing literature in
these transformative economic times.

The authors who have participated in this effort are a jurist, practitioners,
and academics with expertise and experience in their respective fields and
their work will be of great value to all who have an interest in these subjects.

I want to express my thanks to those who have contributed to this important

work for sharing their insights with us. I commend the co-editors for once
again producing a work of immense value. The time and effort expended
by the authors and co-editors is obvious and all readers owe them a debt of
gratitude.

Justice Marshall Rothstein

Ottawa
January, 2010
Preface

In today’s global marketplace, the opportunity for price volatility has in-
creased exponentially. Sometimes financial or other crises affect a specific
industry, country, or region and sometimes have an impact that is global in
scope. The volatile markets of today result from a variety of factors, includ-
ing increased financial market integration, rapid transaction execution, de-
signer investments, and complicated models designed to measure, mitigate,
manage, and make “mainstreet” all forms of risks. The current situation is
exacerbated by a massive U.S. consumer debt burden and rapidly increasing
government deficits and debt designed to shore up the demand side of the
price equation and provide market order in an environment of inconsistent
liquidity. The current volatility and the crisis of confidence spread quickly
around the world.
For years, market pundits have been warning of a day of reckoning when
the credit bubble would pop and there would be both financial chaos and
ruin. Now into the second year of the worst financial crisis of our generation
(and somewhat similar to the Great Depression), some see hope on the
horizon as the billions of dollars pumped into the global economy by gov-
ernments around the world over the past year seems to have temporarily, if
not permanently, stopped the spiral into the economic abyss. The fact re-
mains that no one knows whether we are in the midst of a “V”, “W”, or “”
shaped recovery or something else. There is only one truth: the markets are
volatile and serious damage that will take years to recover from has been
inflicted upon us all.
The markets are hoping for a recovery in 2010-2011 but it is more likely that
the world will experience at least several years of slow, grinding, sporadic,
and uncertain growth. As in earlier financial crises, the stock markets have
been extremely unpredictable, with violent price swings (the worst to date
being the US$1-trillion May 6, 2010 “flash crash” when the Dow Jones In-
dustrial Average dropped almost 1000 points (approximately a 10% drop)
intraday, the majority of which occurred over a five-minute period) chal-
lenging the conventional methodologies used in business valuations of both
publicly-traded and private companies. The importance of liquidity in es-
tablishing “fair value” has been laid bare. For many companies, projections
are made with limited visibility and certainty. When the ability to identify,
measure, and effectively forecast revenue and earnings is combined with
xiv

fluid and difficult to quantify risks, and taking place in an environment of

sporadic and unreliable liquidity, the presence of significant volatility should
be of no real surprise.
Market volatility and economic declines and rebounds can be times of sig-
nificant opportunity. Faced with declining and unpredictable revenues,
many firms survive by becoming lean and efficient. Such markets often
present significant wealth-building opportunities, especially for those who
see the value inherent in underpriced and sometimes distressed assets and
are in a position to select the best opportunities to add value as they arise.
This is also a time of heightened need for due diligence because of the risk
that dead or damaged assets will linger on the books longer than is justifiable.
We want to thank the various experts gathered in this book for their will-
ingness to share their thoughts about issues, opportunities, and possible
solutions to business valuation challenges faced during times of volatile
markets, and for providing their professional insights and advice as applied
to the current financial market scenarios or to some as-yet-unforeseen vol-
atile market.
This is our third book project as co-editors. We are proud of the talent that
we have amassed to give the reader something to think about. What im-
presses us about all of our contributors is their willingness to share some
thoughts about what you can do, or at least think about, during these volatile
times. This book reflects the personal views of the authors and not neces-
sarily the opinion of the firms they work for. The authors are not liable for
any damage arising from any viewpoint, application of theory, or any other
material presented in this book.
The subjects of the chapters are divided into four primary categories: sub-
stantive tax issues, valuation topics of interest in a global economy experi-
encing a downturn, investment ideas or strategies in volatile markets, and
two chapters on the important and growing problem of corporate fraud.
We are certain that you will find some valuable information contained in
the pages of this book.
Finally, we are indeed indebted to all of our contributors because, as with
our previous works Taxation and Valuation of Technology (Irwin Law, 2008)
and Advocacy and Taxation in Canada (Irwin Law, 2004), they have each
graciously agreed to donate their share of the royalties to the Canadian
Cancer Society.
 xv

As we continue to work on publications, we welcome any comments, sug-

gestions, and observations you might have. You can contact us either by
email or phone at:
David Chodikoff: [email protected] ⫹1 (416) 595-8626
Jim Horvath: [email protected] ⫹1 (416) 844-4422

David W. Chodikoff
James L. Horvath
June 2010
 DEDICATION

To my best friend and wife, Tanya, and my son, Daniel, the loves of my life.
David W. Chodikoff

In loving memory of Dad, Eugene Horvath.

To my mother, Jeanette, and my family – Natalie, Michael, Jeffrey,

Kimberly, Edward, Janet, and Doug.

Many thanks to my colleauges John Anderson and Mark Keuleman, who

for the past 20 years have provided me with their thoughtful insights and
perspectives on valuation issues.
James L. Horvath

*****

To the many who have been afflicted with cancer and survived, thank you
for showing the rest of us the true meaning of bravery.

To the many who have lost their lives to cancer, your families and friends
have not forgotten you. You are always remembered.

To the future, we are working, each in our own way, to bring an end to this
disease.

All net royalties from the sale of this book will be donated to cancer edu-
cation and research.

David & Jim

June 2010
Volatile Times: Challenges and
Opportunities

James L. Horvath

Past Lessons

Every now and then the world is visited by one of these delusive seasons, when
the credit system, as it is called, expands to full luxuriance, everybody trusts
everybody; a bad debt is a thing unheard of; the broad way to certain and sudden
wealth lies plain and open; and men are tempted to dash forward boldly, from
the facility of borrowing.

Washington Irving
“The Great Mississippi Bubble [of 1719–1720]:
‘A Time of Unexampled Prosperity’” in The Crayon Papers
(New York: John B. Alden, 1886), p. 41.

Volatile markets pose significant challenges for businesses, accountants,

business valuators, investors and many others. Periods of extreme volatility
are not unusual. They often begin with a bursting bubble: a bubble being a
time when many investors buy at knowingly high prices in the hopes of
selling at yet even higher prices, followed by a fear-driven stock market price
drop, the quick move from certainty to uncertainty, a recessionary period,
numerous economic shocks, periods of uncertainty containing hopes of an
imminent revival, revival of investor confidence, overreaction to signs of
improvement, periods of stagnation, stock prices at times retrenching or
treading water, complacent attitudes, conflicting economic reports deflat-
ing some of the optimism, and the fear of another calamity. Sometimes they
are isolated to a certain industry, country or region. Unlike many volatile
markets or times, the current financial crisis, which began in mid- to late-

1
2 James L. Horvath

2008 and continues to date (May 2010), has had a significant global impact,
affecting almost all industries and the lives of billions of people.

In mid-April 2010, the Dow closed above 11,000, this being a significant
comeback. From a high of 14,164 on Oct. 9, 2007, the Dow declined about
54 per cent before hitting a low of 6,547 on March 9, 2009. But the volatility
continued with the Dow closing below 10,000 in May and noodling around
in June 2010. The global financial crisis has witnessed the lightning speed
at which fear and volatility spread through the global stock markets, and the
subsequent market turmoil created. This has been a period of significant
volatility which is expected to continue for years to come, albeit hopefully
at subsiding levels. However, investors are easily rattled and there are always
many events unfolding which create fear and volatility such as fraud charges
brought against Goldman Sachs, Dubai’s debt meltdown, Greece’s mush-
rooming budget deficit, the risk of nation states defaulting, the increase in
the unemployment rate, oil prices and inventory levels, changes in industrial
production, changes in housing starts, changes in retail sales, political inter-
vention, speculation, whispered earnings expectations, short selling,
changes in company earnings and expectations, and market-influencing
unexpected events.

The global financial crisis and dramatic decline in the trading value of stocks
and residential and commercial real estate in the United States have pro-
vided a challenge to the new fair value accounting rules. In late 2008 and
2009, securities regulators, accountants, and business valuators struggled to
gain consensus on the appropriate impairment tests and valuation methods
to apply. Many questioned whether they should be fair-valuing assets at
market prices in a non-market, when fear has driven transaction prices to
seemingly unrealistically low values.

This book is part of a two-book project put together largely to address a

number of taxation, valuation, investment and other financial-related issues
faced in volatile markets. The valuation related chapters of this book were
published by Thomson Carswell in 2010 in Valuing a Business in Volatile
Markets (edited by me [James L. Horvath]), which is the third book in a series
that also includes Taxation & Valuation of Technology (Chodikoff & Horvath,
eds., Irwin Law, 2008) and Advocacy and Taxation in Canada (Chodikoff &
Horvath, eds., Irwin Law, 2004).

The book is divided into four sections. The first group of chapters, being
chapters 2 through 13, covers a wide spectrum of tax issues, opportunities,
and possible strategies during turbulent times. The second covers a number
of valuation methods and issues typically faced by business valuators and
businesses requiring valuations. This section has a global reach, with a multi-
 Volatile Times 3

disciplinary group of contributors from Asia, Asia-Pacific, Europe, North

America, and South America addressing country-specific, regional, and
global valuation issues and challenges encountered in volatile markets. The
third group of chapters (41 to 54) looks at investment strategies. Certainly,
volatile markets often deliver significant wealth building opportunities. Fi-
nally, the last section (chapters 55 and 56) discusses the importance of fraud
awareness in our increasingly complex business world. During volatile and
economically depressed times, the risk and incidence of fraud are height-
ened.

In Chapter 2, the Hon. Justice Gerald Rip presents an overview of tax

litigation, particularly towards streamlining the practices and procedures to
reflect the restrictions of today’s economy. He outlines how the Tax Court
has recently amended many of its Rules and the challenges faced to continue
simplifying its methods towards affordability and efficiency.

Chapter 3 provides the reader with an overview of the Federal debt collec-
tion regime under the Income Tax Act. David Chodikoff and Andrew Val-
entine examine the steps that the CRA may take to collect on tax debts, as
well as the restrictions of their powers. They outline the fundamental op-
tions available to tax debtors in response to the enforcement actions by the
CRA. Each debt collection situation is unique. But, the authors show that
with creativity and the will to persevere, a taxpayer can survive the onslaught
of the CRA’s collection activities.

In Chapter 4, the issue of estate freezing is discussed. The authors, Martin

Rochwerg and Krystle Ng-A-Mann, explore the concept of estate freezing
and the ways in which to modify an estate freeze, such as re-freezing, melting,
and thawing. This chapter concludes with a discussion of the CRA admin-
istrative policy with respect to estate re-freezing, and an overview of the case
law affecting estate freezing.

As the economic cycles of the country move from bust to boom, tax planners
will be able to capitalize on unrealized losses within the corporate group.
The utilization and preservation of tax losses will continue to be an area
that, while fraught with many pitfalls, can yield great opportunities. Chapter
5 outlines the main loss utilization techniques and provides an overview of
strategies and challenges of how to make use of the losses within the cor-
porate group, while avoiding inefficiency and underutilization.

Chapter 6 addresses the issue of how to reduce the cost of innovation during
times of economic turbulence such as we are facing today. The chapter
covers the eligibility rules and the benefits available from various federal
and provincial incentive programs for performing research and develop-
4 James L. Horvath

ment in Canada. These incentives come in a variety of forms including

grants, tax credits, and tax credits refundable in cash. Also discussed is the
impact of corporate structuring initiatives such as acquisitions of control,
amalgamations, and windups. These transactions are reviewed to explain
the impact they may have on the value and utilization of the credits. Finally,
the international environment for research and development incentives is
reviewed. In this section, the reader is provided factors to consider when
comparing incentive programs available in many countries.

Dalton Albrecht outlines in chapter 7 the implications of GST for a company

and its partners, and how the continued collecting and remitting of GST is
crucial to a company’s financial viability in a difficult economic environ-
ment, while in Chapter 8, David Chodikoff presents a discussion of banking
secrecy laws and the financial challenges faced by Canadian taxpayers hold-
ing overseas accounts.

Chapter 9 outlines the recognition of life insurance as an asset. George

Goldsmith explains this important tool for financial planners and how it is
an essential element for consideration in any investment portfolio. Chapter
10 continues the theme of strategic financial planning, with a summary of
recommended tax strategies for owners/managers of small- to medium-
sized enterprises, which can improve cash flow and result in immediate and
significant cash flow savings to the enterprise.

Chapters 11 and 12 discuss the topic of debt forgiveness. With the current
economic downturn in the global economy, this topic is back in the fore-
front. The authors in each chapter explain how familiarity with and a full
understanding of the debt forgiveness regime under the Income Tax Act can
provide planning opportunities and help financially troubled companies
minimize tax burdens and maintain valuable tax attributes necessary for
survival.

In chapter 13, Nick Sauro and Dominic Belley provide a summary of the
Valiant Cleaning Technology case, a landmark case in jurisprudence which
now provides the circumstances where it is appropriate to claim loan losses
to a subsidiary as non-capital expenditures. Given the globalization of the
Canadian economy, this is a precedent setting case which redefines the
previously held presumption that advances to a subsidiary would only be
held on the account of capital.

Chapters 14 through Chapter 21 give an overview of general valuation

methods and issues, a discussion of intellectual property valuation issues by
Robert Reilly (in chapter 16) and specific technology valuation methods. In
chapter 18, Péter Harbula discusses the equity risk premium and how the
 Volatile Times 5

economy’s volatility should be reflected in the determination. This deter-

mination is particularly complicated in volatile markets where the emotions
of greed (e.g., investors buying shares because they believe or hope the share
price will continue to rise) and fear (investors selling in the fear that the
downward slide in share prices will continue) often cause stock prices to
fluctuate dramatically and to trade at prices significantly in excess or below
pro rata intrinsic value. For example, in late February to early March 2009,
the shares of many publicly-traded companies were trading at fear-motivated
lows. Volatile market valuation issues and critical changes affecting valua-
tions are discussed further by John Barton (in chapter 19) and Richard Wise
(chapter 20).

Economic downturns and volatile markets often create invaluable oppor-

tunities for astute investors to capitalize on the inherent intrinsic value and
reorganization potential of some distressed companies. Chapter 21 looks at
many of the issues and value drivers that should be taken into account when
valuing a financially distressed business.

In chapters 22 through chapter 27, we take a spin around the globe: Inter-
national Financial Reporting Standards (IFRS) valuation issues being faced
in Australia; the valuation of businesses in the emerging, changing, and
volatile markets in central and eastern Europe; valuation issues faced during
Argentina’s 2002 financial crisis; business valuation practices and challenges
in China; the trend toward developing international valuation standards;
and valuation considerations, issues, and methods when valuing businesses
in emerging markets.

In many cases, tomorrow’s products and services start with today’s ideas.
Business valuators are often presented with an idea that the prospective
client says is worth millions and sometimes hundreds of millions of dollars.
In my own case, I generally conclude that the idea itself has minimal fair
market value, if any. In a recessionary, volatile environment, such as in late
2008 through 2009, many investors were reverting to placing more weight
on the value of tangible assets; thus ideas were of little value per se. In chapter
28, we look at many of the major considerations valuators and businesses
face when trying to place a value on an idea and, more importantly, the
ability to create value.

In chapter 29, Richard De Rose comments on a number of appraisal cases

decided under s. 262 of the Delaware General Corporation Law. These cases
provide valuable insights as to the Delaware judiciary’s perspective on issues
of valuation methodology. De Rose offers suggestions on how the ap-
proaches to valuation employed by the Delaware courts might apply in other
contexts (e.g., the “fair price” component of the “entire fairness” standard).
6 James L. Horvath

As previously noted, when valuing business interests in volatile times, asset-

based approaches are used more often. From a Canadian perspective in
chapter 30, Steve Z. Ranot discusses the methods of valuing lost tax shields
and the importance of using the expertise of tax professionals.

Chapters 31 through chapter 33 are devoted to transfer-pricing issues.

Transfer pricing is one of the most rapidly expanding areas of valuation
analysis. The increase in globalization that has occurred over the past several
decades has resulted in an ever-increasing number of multinational entities
that maintain operations in multiple jurisdictions. The various operations
or functions of the larger corporate entity are often segregated and assigned
to a specific country. Intra-company transfers between various functions of
a larger corporate entity, and the non-arm’s length “value” assigned to these
goods and services, are classified as transfer pricing. Fundamentally, such
transfer pricing is a valuation issue. The process of measuring the appro-
priate risk/return profile of an individual tangible or intangible asset, a
grouping of assets in the form of a specialized business function or the
entire corporate entity is essentially the same; namely, determining what
cash flow is attributable to that specific investment and how much risk is
associated with its realization.

Transfer pricing is by definition a non-arm’s length transaction that assigns

value to the goods and/or services being transferred within the same cor-
poration. The measurement of this transfer value and what is considered a
market rate are a subset of the broader exercise of valuing an entire com-
pany. Normalizations or market value adjustments are central to any valu-
ation exercise, be it transfer pricing, the allocation of corporate costs or
goodwill across subsidiary operations, or adjusting related-party financings.
A business valuation will seek to adjust the entity’s operations to reflect an
arm’s length perspective from each individual transaction through to the
overall value of the corporate entity.

Fundamentally, valuations are an exercise in measuring the market value of

an asset or group of assets to reflect what they can return in the form of
production when optimally operated in an arm’s length fashion. As transfer
pricing deals with the pricing assigned to assets transferred between related
parties, it is critical that any adjustments or opinions relating to appropriate
“pricing” or “returns” vis-à-vis transfer pricing are consistent with a broader
valuation analysis of the entire corporate entity. Inconsistent measurement
of risks and value creates questions for a variety of third-party interests, such
as tax regimes from any of the company’s governing jurisdictions, current
bond holders and investors with claims to specific operations or assets or
arm’s length parties considering a possible acquisition of all or part of the
operations. Any analysis of the variables that drive the value of business
 Volatile Times 7

must be internally consistent if they are to be considered well-reasoned and

accurate.

In chapter 34, David Chodikoff and Tarsem Basraon give us the benefit of
their years of practising law, preparing experts for trial, and testing their
credibility through cross-examinations. Although the comments are given
from a Canadian court perspective, much of the advice is applicable to those
about to give evidence at a trial in any country. Chapters 35 and 36 cover a
broad range of valuation topics and issues through practice tips and essays.
Chapter 36 also has a global reach, with contributing authors from six
countries.

During recessionary times, governments often try to stimulate their econo-

mies through infrastructure spending. Shortly after the start of the current
global financial crisis, many governments implemented infrastructure
spending measures to boost their economies. Such spending generally has
a medium- to long-term impact, since the typical infrastructure project has
a three- to five-year life. In chapter 37, Rick Ellsworth discusses the invest-
ment characteristics of infrastructure assets and provides guidance on ap-
propriate valuation methods.

Chapters 38 and 39 address the valuation of real estate and machinery and
equipment. Purchase-price allocations and the adoption by most nations of
IFRS have increased the need for valuing interests in land, buildings, and
machinery and equipment. With chapter 40, the valuation section concludes
with a comprehensive business valuation questionnaire. It is designed to
assist in collecting information for analysis and upon which a value judgment
can be based. Since no two businesses are identical, it is impossible to
develop a single questionnaire or checklist that will apply in every case. It
is, however, possible to produce a general guide to the valuation process.
The questionnaire included in chapter 40 is intended as a guide and not
meant to be exhaustive. It is applicable to businesses of various sizes and
operating in a variety of industries.

Chapter 41 looks at exit strategies in volatile markets. Since it is generally

difficult to get top dollar in a recessionary climate, it is important to have a
well-developed exit strategy. Valuation analysis of transactions occurring in
recessionary markets should take into account that the transaction prices
are not necessarily indicative of fair market value but, in many cases, are
only valid in a non-market.

The focus of chapter 42 is to provide a simple strategy illustrating how an

investment may be structured to minimize losses and maximize potential
profits. The authors provide a quick overview of the origins of money,
8 James L. Horvath

fundamental investment vehicles, and various funds, before discussing port-

folio structuring, protection, and value at risk.

In chapter 43, Ronald Rodgers and John Kimpton focus on two investment
strategies, guaranteed insured annuity (GRA) and guranteed estate multi-
plier (GEM), that are vehicles for providing low risk and reasonable return
alternatives in these uncertain times. They discuss the benefits of and strat-
egies for preserving capital for the investor.

In chapter 44, Peter Jarman reviews the recent approach to real estate
investment, and the advantages and risks of including real estate in an
investment portfolio.

In recent years restructuring has become even more complex due to glob-
alization, increased capital structure sophistication (including creative, and
often opaque, financial instruments), and organizational evolution. In chap-
ter 45, Ryan Brain and Huey Lee explore these factors to explain how they
contribute to the growing complexity of both formal and informal restruc-
turing proceedings.

When Shaun Darchiville first entered the investment industry during the
summer of 1987, he didn’t realize how much would change in the following
three months and how much would continue to change over the following
22 years. In the midst of these changes, people lost sight of the core funda-
mentals that, to him, had never changed. In this chapter, Shaun notes that
the themes of market volatility, unscrupulous activity, geopolitical influ-
ences, and limited market oversight are recurring rather than one-off iso-
lated events. As part of the valuation process, the valuator looks at general
economic and industry conditions. This is especially important during vol-
atile times, when there tends to be a greater number of business-world
changes taking place – many of them previously unexpected—and a height-
ened risk of yet unimagined changes. In chapter 47 Maneesh Mehta sum-
marizes the 2008–2009 financial crisis. He provides an historical context
and understanding of this crisis and looks to our learning from past crises
and fundamental principles to provide some useful guidelines. Of particular
interest, to anyone estimating the value of a business, is the understanding
of the impact of changes on the value of a business. This value change results
largely from changes in the key value drivers, the impact on projected future
earnings, and changes in the ability to finance a business. Then, in chapter
48, Maneesh teams up with Jacob Hirsh (of the Department of Psychology,
University of Toronto) to give a perspective on how the health of a human
economy is directly linked to the diversity of roles within it. Thus, a loss of
diversity over the past 30 years has constrained our thinking and damaged
the health of the economy.
 Volatile Times 9

Chapter 49 outlines the numerous and relatively straightforward tax strat-

egies that an individual investor can use to navigate the complex investment
world and to help generate pre-tax returns to be able to meet financial goals.

Eli Swirsky and Sam Cohen (chapter 50) provide valuable insight into the
use of commercial real estate as an investment tool. They show that a dis-
ciplined approach to real estate investment, coupled with realistic and
achievable goals, can reap continued benefits for the astute investor.

In chapter 51, William Zinger presents a personal account of his experience

in the business sector. He explains how entrepreneurial spirit and a passion
for success, along with a healthy dose of optimism, can benefit any business
and enable it to profit during good times and face the challenges of an
unpredictable marketplace.

Greg Knudsen presents an in-depth analysis of the hedge fund industry in

chapter 52, and explains the strategic benefits of hedge fund investing.

In chapter 53, Jordan Waldman outlines some of the methods available for
corporate asset transfer. He explains the advantages in offsetting or elimi-
nating tax obligations on both business income and capital gains to provide
business owners with long-term, stable, and tax-deferred investment growth.

Chapter 54 explores the recent shift back to attracting and reinforcing the
human assets of a firm or business. Jon Cooper explains the importance of
strategic development initiatives with respect to human resource strategies,
in order to improve, grow, and meet the challenges ahead.

Finally, as pointed out in chapters 55 and 56, business valuators should be

alert to the possibility of fraud and that someone may be “cooking the
books”. The risk of financial statement fraud is especially high during a
slowing economy, with increased pressures on companies to meet, and even
exceed, short-term performance goals or to demonstrate that shareholder
value is improving. As pointed out by Gary Moulton and Peter Dent, despite
the stringent Sarbanes-Oxley Act (“SOX”), enacted to ensure publicly traded
companies have robust fraud prevention and detection protocols, fraud and
other business crimes continue to be a major problem and the number of
instances generally increases in a deteriorating economic environment.
Business valuators and, in particular, those also skilled in forensic account-
ing, should also do their part by being able to identify the common fraud
schemes.
Tax Litigation in Today’s Economy

The Honourable Chief Justice Gerald L. Rip*

Courts cannot ignore what is taking place outside the courtroom. Today we
are experiencing an economic recession, if not a depression, that is affecting
the economic well-being of most Canadians.

Compounded to our current economic situation is the fact that during the
past 20 years, at least, the cost of appearing in court has skyrocketed. While
wealthier Canadians can afford the costs of a lawyer and lower income
Canadians are supported, to some extent, by their provincial aid programs,
members of the large middle class often have to forego enforcing their
rights because they simply cannot afford a lawyer.

I have been told that no one should even consider engaging the services of
experienced counsel to fight a tax appeal from the objection level to court
unless the amount of tax in dispute is in six figures. As a result, we are seeing
more and more taxpayers representing themselves or represented by family
friends and laymen. In some appeals, these people are successful; in most
they are not. They are usually successful when they produce evidence no
one thought of considering before trial, either in the assessment or appeal
stages. Frequently, this type of information was thought not important by
the taxpayer and often comes to light as an afterthought by the taxpayer or
the representative or because the judge may have asked a rather obvious
question to the taxpayer that the latter never thought of. In some cases, the
taxpayer and the Canada Revenue Agency auditor may have had a person-
ality conflict and the taxpayer does not want to give any information to
anyone until he or she is in court.

*
Editor’s note: We are truly grateful for the Chief Justice’s work. It is an important contri-
bution to the literature on the subject.

11
12 The Hon. Chief Justice Gerald L. Rip

As Tax Court judges, we want to make sure that each taxpayer has been
assessed tax in accordance with the law. When a taxpayer who, from the
pleadings, appears to have a good case does not show up at trial because he
or she cannot afford the cost of a lawyer or who, in a complicated case,
appears without benefit of counsel because he or she cannot afford a lawyer,
there is obviously something wrong with the system.

Also, when the appeal from the assessment takes place, we want it to proceed
effectively without any delay. Delay means money. It appears to me that
trials are getting longer. While I may have heard, perhaps, four informal
trials in one day 20 years ago, today I would probably hear two and, if lucky,
three appeals in a day. The number of cases and the complexity of cases all
influence the delay in a taxpayer having his or her appeal heard, as well as
the overall cost of the litigation.

Statistics

It may help to note the number of appeals to the Tax Court that were filed
in 2008 and were still active (as of January 1, 2009):

Income Tax Filed Still Active

General Procedure 1188 1135
Informal Procedure 1446 1117
GST
General Procedure 185 176
Informal Procedure 286 236
Employment Insurance 429 313
Canada Pension Plan 218 176
Miscellaneous 4 2

From the time an appeal (Income Tax and GST) is filed to the time it is
heard, it takes, on the average, eight months in an Informal Procedure
appeal and 20 months for a General Procedure appeal.

In 2008, 53 General Procedure income tax appeals filed were closed by the
end of the year. Twenty-four appeals were consented to prior to hearing,
seven appeals were quashed or dismissed, and 22 appeals were withdrawn.
For the same reasons, 329 income tax appeals under the Informal Procedure
and other statutes filed in 2008 were closed before year end.
 Tax Litigation in Today’s Economy 13

During 2008, the Tax Court scheduled for hearing 902 General Procedure
appeals and 2,276 Informal Procedure appeals from income tax assess-
ments. Of those appeals, 452 were not heard either because they were settled
before hearing or were adjourned. Some parties in General Procedure
appeals requested pre-trial settlement conferences which delayed trial.

A new challenge to the Court is groups of appeals, that is, appeals by 10 or

more taxpayers concerning a single issue. For example, multiple parties may
have “invested” in a tax avoidance transaction and the fisc has disallowed
any deduction of income arising from the investment. There are approxi-
mately 44 groups of appeals currently filed. We have, for example, one
group of 466 appellants and another group of approximately 1,200 appel-
lants. Rather than hear the appeal of each taxpayer separately, the Court
would prefer to hear only one appeal and all the investors be bound by the
decision of the Court for that one trial.

The Court, the Bench and Bar, and the Rules Committee of the Court are
reviewing whether these types of cases can be heard more efficiently as class
actions. We are considering whether section 174 of the Income Tax Act can
apply to such cases.1 This review is still in its initial stage.

We are attempting to improve our services in both the Informal and General
Procedures in order to bring the Canadian public more efficient, and ideally
a less costly, court experience.

Informal Procedure

The Tax Court will be testing pre-trial conferences in Informal Procedure

appeals. The participants will include the taxpayer and his representative,
if he or she has one, and a lawyer from the Department of Justice as well as
a judge. These conferences will be in person or by conference call. Hope-
fully, this will solve three immediate problems.

Problem one is that trials often take too long. It is hoped that a pre-trial
conference could help shorten a trial. The next two problems are related to
the time it takes to hold a trial.

1
Section 174 reads as follows:
Where the Minister is of the opinion that a question of law, fact or mixed law and fact
arising out of one and the same transaction or occurrence or series of transactions or
occurrences is common to assessments or proposed assessments in respect of two or more
taxpayers, the Minister may apply to the Tax Court of Canada for a determination of the
question.
14 The Hon. Chief Justice Gerald L. Rip

The second problem is that a self-represented taxpayer frequently appears

in Court without a clue of what he or she has to prove to win the appeal.
Often the taxpayer relies on court procedure that he or she sees on television
lawyer programs. A pre-trial conference, which may be held by telephone,
will first of all permit the judge — who, of course, will not hear the particular
appeal — to determine what satisfaction the taxpayer wants from the court
and make sure that the Tax Court is the right forum for the taxpayer. Next,
the judge can explain to the taxpayer what the taxpayer must do if he or she
wants to succeed. The judge can also indicate to both parties their chances
of success and if the appeal has potential to settle. The parties then can
discuss any settlement proposals. If the case goes to trial, the judge could
inform the taxpayer what evidence may be required.

In Informal Procedure appeals, it is not infrequent for the appellant to

appear in court without documents and without the knowledge that he or
she can subpoena reluctant witnesses. Sometimes a taxpayer appeals be-
cause he or she believes — and the taxpayer may often be right — that nobody
at the Canada Revenue Agency really considered his or her position prior
to assessment or at the objection level. The taxpayer simply wants someone
— in this case a judge — to hear his or her complaint. It is not uncommon
for a taxpayer to tell a judge after a trial that even though the taxpayer lost,
at least he or she finally got a fair hearing.

A third problem it is hoped a pre-trial will solve is the late date the Canada
Revenue Agency sends the scheduled appeal files to the Department of
Justice. I understand that not infrequently the files arrive as little as two
weeks before trial. And then the file must be assigned to a lawyer to attend
at the appeal. This does not give much time to the lawyer to review the file,
determine the merits of the Minister’s position, and get in touch with the
appellant. Indeed, there is often no time to get in touch with the taxpayer
and discuss settlement. What is happening is that settlements, if they are
made, are often made at the eleventh hour. As a result of late settlements,
the settled appeals are struck from the Court docket and the judge and the
court staff are left with an empty courtroom and no appeals to hear for a
half day or longer. If the appeals were settled earlier, other appeals could
be put in their place on the docket, thus expediting appeals and saving costs
of administering justice.

A pre-trial conference in the Informal Procedure will force the Canada

Revenue Agency to forward files to the Department of Justice at a much
earlier date and permit the lawyers to deal with the files in advance of the
hearing.
 Tax Litigation in Today’s Economy 15

There is at least one other thing that can be done to improve Informal
Procedure Appeals: Crown pleadings, the reply to the notice of appeal,
ought to be drafted by lawyers and not laymen. I have seen a notice of appeal
of six or seven lines met by a reply of 10 to 15 pages. Often, these 15 pages
are full of irrelevant facts and allegations that do nothing to help the Court,
nothing to advance the case, but probably intimidate the poor unsophisti-
cated taxpayer. A competent experienced draftsman would keep the reply
simple and understandable. This is not being done now. As a result, time is
taken at trial with the judge explaining to the self-represented appellant
what the Minister’s position is, notwithstanding the verbiage of the reply;
again, a costly waste of time for the administration of justice.

General Procedure

General Procedure appeals can be made more efficient if counsel put their
minds to it. This has to do with pleadings, discovery, motions, and the trial
itself.

Pleadings

With respect to pleadings, as in the Informal Procedure, they are frequently

too long, containing a pillowcase full of facts, both relevant and irrelevant,
as well as a mixture of facts and law. This is particularly the case in replies
to notices of appeals where the assumptions contain material and immaterial
facts and then, at trial, as my colleague Bowie J. declared in Foss v. The
Queen,2 respondent’s counsel takes the position that every fact that is pleaded
to has been assumed by the Minister in assessing or confirming the assess-
ment and every conclusion of mixed fact and law included in the pleadings
as an assumption becomes a fact for purposes of trial, unless the appellant
can disprove the particular fact. This is a distortion of what was decided in
R. v. Anderson Logging Co.3 and Johnston v. M.N.R.4

Tax litigation is not unlike ordinary civil litigation. In both it is the person
who prosecutes the litigation, the appellant or the plaintiff, who, in most
circumstances, has the burden of proof. The respondent or the defendant
should recognize this and not pursue relentlessly the mantra in pleadings
and at trial that the taxpayer has the onus.

2
2007 TCC 201, 2007 CarswellNat 797, [2007] 4 C.T.C. 2024, 2007 D.T.C. 650.
3
(1924), 1924 CarswellBC 105, [1917-27] C.T.C. 198, 52 D.T.C. 1209 (S.C.C.), appeal dis-
missed (1925), 1925 CarswellBC 104, 52 D.T.C. 1215, [1917-27] C.T.C. 210 (B.C. P.C.).
4
[1948] S.C.R. 486, 3 D.T.C. 1182, [1948] C.T.C. 195, 1948 CarswellNat 26.
16 The Hon. Chief Justice Gerald L. Rip

Lawyers ought not to forget the purpose of pleadings. As my confrère Bowie

J. wrote in Foss,
the purpose of pleadings is to define the issues between the parties for the
purposes of discovery, both documentary and testamentary, and trial. That re-
quires no more than a statement of the precise findings of fact that underpin the
assessment. It is potentially prejudicial to the appellant to plead more — certainly
to plead more by way of assumptions of fact. The appellant is, of course, entitled
to particulars of the evidence that the Crown intends to lead at trial, but these
are properly obtained on discovery, not disguised as material facts as to which
the Crown at trial may claim a presumption of truth.

Motions

Litigants are making more and more motions before they get to trial. Those
include motions to strike, motions for particulars, etc. Counsel should think
before making these motions: these motions should be made only when it
is obvious that a certain allegation of fact is uncalled for and truly prejudices
one’s case. Courts are reluctant to strike pleadings or order particulars early
in the appeal process so counsel may be wasting their time and their client’s
money by acting prematurely.

Appellants, for example, may want to swallow carelessly drafted assumptions

rather than make application to strike. These assumptions may contain a
small mine of facts that, at the end of the day, help the appellant. In Gould
v. Canada,5 former Chief Justice Bowman observed:
... that the complaint that is usually made is that the Crown has not pleaded all
of the material assumptions or has not pleaded assumptions that assist the ap-
pellant. Here the reverse is true. The appellant is complaining that too many
assumptions are pleaded. It would seem to me that if an assessment is based on
assumptions that are irrelevant, contradictory or illogical, as the appellant alleges,
this could arguably form a cogent basis for attacking the assessment. If those
assumptions are removed from the Reply the appellant has deprived himself of
one of the weapons in his arsenal. Why he would wish to do so escapes me. There
is a danger that one can, in getting too engrossed in technical minutiae, lose sight
of the substantial tactical advantage of forcing the Crown to live with its own
pleadings. There is much to be said for the venerable rule about not educating
your opponent.

In General Procedure cases the parties have the benefit of discovery through
which the party examining his or her opponent may obtain particulars of
the evidence the opponent may lead a trial to prove the material facts

5
[2005] T.C.J. No. 403 (QL), 2005 CarswellNat 2707, 2005 D.T.C. 1311, [2005] 5 C.T.C.
2044, at para. 22 [T.C.J.].
 Tax Litigation in Today’s Economy 17

pleaded.6 Frequently, it might be better for counsel to wait until discovery

before making a motion for particulars and, if he or she does make such a
motion, make sure it refers to material facts raised by their opponent. And
counsel should base the motion on one of the Court’s rules.

Applications to Amend Timetable

The Tax Court is getting more and more applications to amend timetables
agreed to by the parties at a status hearing or in a letter to the Court. The
timetable is confirmed by an Order of the Court. If the discovery, for ex-
ample, is not held at the date fixed by the Order, the parties have violated
the Order and, it has been suggested by some people, may be in contempt.
If for good and unanticipated reasons the Order has to be amended, an
application to amend should be made before, not after, the fixed date for the
procedure has expired.

An amendment extending time is not a litigant’s right. Why counsel agree

to dates in an Order that they cannot observe amazes me. A convincing
submission should support any extension to change times. It may be that
discovery is taking longer than anticipated or that there are more undertak-
ings than anticipated. If the extension is sought because one of the counsel
was slow or not cooperative, for example, costs may be awarded regardless
of who is eventually successful and may be payable within days. Where an
extension is sought after the times in the order have expired, the application
for extension, contrary to past practice, may be denied, again with costs.
The moral is: counsel should agree to a timetable they can live with.

Experts

Over the years I have had the experience of hearing good and mediocre
(not so good) expert evidence. Sometimes it is a delight to hear such evi-
dence. I have heard Wayne Gretzkys, as well as those to whom Mario Lem-
ieux once referred as garage league players. At times it is quite obvious that
the expert witness is a hired gun for the person paying his bill and was
engaged for no other purpose than to advance the client’s case. It is some-
times simply annoying and offensive that two experts for opposing parties
can look at the same property, for example, and come to valuations that
bear no resemblance to each other. The comparables are different, the
highest and best use of the property is sometimes different. And a few expert
witnesses’ demeanor on the stand is based on the assumption that they know

6
Foss, para. 12.
18 The Hon. Chief Justice Gerald L. Rip

everything worth knowing about the subject and that the judge is either an
idiot or extremely naı̈ve. It is true that the judge may have absolutely no
knowledge of the area of the witness’s expertise. An expert should be called
to testify only if his or her evidence is necessary and will assist the Court.
Otherwise it is a waste of time and money. The expert witness is a teacher
and, when testifying, should avoid any condescending tone or attitude.
There have to be some improvements in the presentation of expert evi-
dence. Experts should write their reports and testify using ordinary English
or French. They should avoid professional jargon. One need not use poly-
syllables to make an impression with the judge. Indeed, the opposite is true.

In the 1990’s, Lord Woolf, a future Lord Chief Justice of England — equiv-
alent to the Chief Justice of Canada — reviewed the civil justice system in
England. Among the subjects of his report was that of expert evidence.

In his report, Lord Woolf stated that experts sometimes take on the role of
partisan advocates instead of neutral fact-finders or opinion givers. They
are, he said, being paid for a reason. There is no rule requiring an expert
witness not to be biased. Ideally, they should be neutral and objective. But
trials do take place in the real world.

Lord Woolf was concerned with access to justice, and hence with reductions
in costs, delay, and complexity. He wanted to move away from the adver-
sarial tradition.

He stated that the traditional English way of deciding a contentious expert

issue is for a judge to decide between two contrary views. He believed that
this is not necessarily the best way of achieving a just result. He explained
that the judge may not be sure that either side is right, especially if the issues
are very technical or fall within an area in which the judge has no expertise.
Nevertheless, the judge hopes to arrive at the right answer. Whether con-
sciously or not, his decision may be influenced by factors such as the appar-
ently greater authority of one side’s expert or the experts’ relative fluency
and persuasiveness in putting across their arguments. In other words, the
B.S. factor can be influential. Experience in our court is not substantially
different from England.

The expert’s function here in Canada and in the U.K., believe it or not, is
to assist the Court. As Lord Woolf states, there should be no expert evidence
at all unless it will help the Court. And the expert’s evidence should be
evidence that only an expert can give. I have presided at appeals where after
30 minutes or so a person is finally qualified as an expert in a particular field
of expertise but the person’s testimony could have been provided by a
 Tax Litigation in Today’s Economy 19

layman or, at the end of the day, the evidence is wholly useless because it is
irrelevant to the issue before the Court.

Lord Woolf wanted to foster an approach to expert evidence which empha-

sizes the expert’s duty to help the court impartially on matters within his
expertise and encourage, in his words, “a more focused use of expert evi-
dence by a variety of means”.

Several recommendations7 made by Lord Wolf are already present in the

Canada Evidence Act, for example, limiting the number of experts. There is
at least one recommendation that he makes that Canadian practitioners
should consider: that the parties’ experts meet so as to identify and reduce
areas of difference. They could meet either before or after they have ex-
changed reports. (I question whether lawyers should be present at this
meeting.) This, I believe, will reduce the time each person testifies and might
even serve to open settlement discussions.

One other thing concerning experts: a lawyer’s engagement letter to an

expert should be more specific than general. “Please provide your usual
report” is not a good request for an expert opinion. The request should be
more detailed and explicit, requiring the expert to opine on specific ques-
tions directly related to the issue in appeal. The expert witness should know
what the issue before the Court is and be confident that his or her opinion
will assist the Court in its consideration of the matter for which the opinion
has been requested.

Experts are expensive. Parties should get the best experts possible. But, as
in hiring any professional, the parties and their counsel should consider the
amount of tax in issue and what the party can afford in the circumstances.
A litigant may not want to hire the lowest bidder who may not be that
experienced in the area he or she requires expert evidence or a person who
may have a reputation or be identified as a friend of the client or the client’s
industry. One might waste time and money on a witness who may not survive
cross-examination.

Discovery

Like trials, discoveries are taking too long, sometimes longer than the trial
itself.8 It is trite to say that discoveries are not fishing expeditions. Discovery

7
For Lord Woolf’s report go to www.dca.gouv.uk/civil/reporter. Not all of Lord Woolf’s
recommendations were accepted.
8
I understand discoveries in GlaxoSmithKline Inc. v. The Queen, 2008 TCC 324, 2008
20 The Hon. Chief Justice Gerald L. Rip

is what it says it is: an effort by a litigant to discover his or her opponent’s

case, it should be added, within the confines of the pleadings and relevancy,
to narrow issues and consider the strength of one’s case for possible settle-
ment.

Discovery is often the first time opposing parties, the taxpayer, and the
auditor, meet face-to-face in the appeal process to see what the other side
really has for ammunition. Indeed, it is usually the first time the taxpayer is
in a position to ask the questions of the fisc’s representative that raised the
assessment in appeal. Discovery thus offers the opportunity to clear up
misunderstandings and litigants should not ignore this opportunity.

Pre-trial Conference

Pre-trial conferences are important. They can lead to settlement or even

abandonment of a party’s position. At the very least, they can help clarify
material facts and law and have the parties agree as to how many facts are
in dispute. But, here too, the lawyers and their clients must come to the
conference well-prepared and with an open mind, willing to cooperate. It is
a waste of time when one party — usually the fisc — refuses to compromise,
insisting any compromise goes against its own policy even if there is case
law contrary to its policy. The parties and the judge must often be creative
in trying to formulate a possible settlement.

Witnesses

Counsel should think long before he or she calls a person as a witness. Does
one really need this person? Sometimes a party’s own witness can ruin the
party’s case. This sometimes happens when the Crown calls an auditor to
testify for no good reason. Witnesses serve, or should serve, to describe to
the judge first-hand knowledge of facts in support of a party’s position. The
witness should know what he or she is testifying about and if the potential
witness is not sure of the facts, that person should not be called. For a witness
to testify that an auditor or taxpayer was uncooperative during an audit
does not bring the relevant facts to life; such a witness’s evidence is a waste
of time, unless credibility is in issue.

CarswellNat 1666, 2008 D.T.C. 3957 took 92 days; the trial took 46 days, interlocutory
motions took 12 days.
 Tax Litigation in Today’s Economy 21

Trials

At trial, lawyers should discriminate as to facts one wants to get from one’s
own witnesses and then, in argument, the law counsel wants the judge not
only to consider but also to adopt in his reasons. Witnesses should not be
asked the same question over and over. This wastes time, it grates on the
judge, and could end up being the Achilles heel of a case. Needless to say,
cases should be prepared carefully. Counsel must know what he or she has
to prove. One should not fly by the seat of one’s pants: opposing counsel
and the judge will usually see through this.

As far as case law is concerned, counsel should cite the leading cases, not
cases that have a distant relationship to one’s case or have since been distin-
guished by a respected trial judge or overturned by an appellate court.
Consider the comments of Scollin J. in a Manitoba case Unicity Taxi Ltd. v.
Manitoba Taxicab Board9:
Before closing these reasons, I must state two concerns. The first is that Unicity
has perceived that the elucidation of its case requires well over 100 pages of
written argument and some 65 case citations (as well as some texts). Given that
initial momentum, it is not surprising that the natural or fabricated complexities
of the case generated a total of nearly 230 pages of written argument, well over
100 case citations and an arm-numbing weight of more than 33 kilograms of
material. Irrespective of the merits, a review of all the circumstances and a careful
reading of all the cases has satisfied me that Unicity has sought to relieve poverty
of fact by wealth of law. Unicity’s counsel have showered a confetti of cases on a
few frail facts. Advocacy is the mastery of cogency and a measure of good advocacy
is the ability of counsel to distinguish volume from weight and length from depth.
Too often the errant knight-at-law mistakes caterpillars for dragons: something
of that sort has happened here, with little issues being dragged out and savaged
by citation. However, despite the length of Unicity’s argument and its profligate
strewing of precedent, I found no need on the facts of this case to refer to more
than half-dozen or so authorities which bear reasonably on the real issues.

Justice Scollin continued,

My second concern is related to my first. Inadequacy or frailty of fact is one thing.
Absence of fact is another. In litigation, law without fact is lunch without food.
In several instances, which I have referred to, propositions of law have been
invoked and discussed in detail without there being any real foundation in fact
to warrant any citation or analysis of cases. As a result, the application has at times
taken on the air of an academic moot court and much time, energy and money
has been squandered that could have been better used in a more worthy cause.

9
(1992), 80 Man. R. (2d) 241, 1992 CarswellMan 129, appeal dismissed (1992), 1992
CarswellMan 421, 83 Man. R. (2d) 305 (C.A.).
22 The Hon. Chief Justice Gerald L. Rip

Lawyers

There is one more thing that can help in reducing the costs of litigation —
lawyers’ fees. Is it still an appropriate law firm business model to bill for
each hour worked?10 Does hourly billing prolong litigation? It is arguably
time for new billing practices such as a negotiated fixed fee for services or
some other more creative pay structure. If lawyers are creative in designing
tax avoidance plans, surely they can create new billing practices that are
more mutually satisfactory to themselves and their clients. Lawyers better
start tackling this problem before their provincial governments do.

Conclusion

Many lawyers, in particular younger lawyers, have never experienced an

economic recession that may well affect their egos and income. When an
economic downfall affects professionals, they should avoid the temptation
of spending more time on a file than is required. Clients are also suffering
from the recession. A court must also recognize the economic problems
facing the litigants and their advisors.

In the meantime, taxpayers, for example, want to contest what they see as
unfair assessments. They may not have the money to do so. Everyone in the
judicial process – lawyers, litigants, court officials – has to search out means
to make litigation less expensive and more efficient for Canadians.

Courts may have to amend their rules and practices to accommodate the
new situation. The Tax Court has recently amended many of its Rules and
continues to study ways of simplifying its procedures and practices toward
affordability and efficiency.11 It is hoped that perhaps one or two of the
proposals expressed in this chapter will contribute to this goal.

10
Changes in billing practices have been discussed widely. See, for example, an article in
The New York Times, “Billable Hours Giving Ground at Law Firms”, by J.D. Glater, January
30, 2009, p. A-1, New York ed.
11
Published in Canada Gazette Part II on December 10, 2008: the Rules can be found at
http://www.tcc-cci.gc.ca/rules e.htm.
Debt Collection

David W. Chodikoff & Andrew D. Valentine

Introduction

Economic and stock market pundits alike have, for the most part, concluded
that we are working our collective way out of the “Great Recession”. But,
are we? For example, the net charge-offs by U.S. banks rose to 3.04 per cent
of loans. This is the worst level since 1934, which was in the midst of the
Great Depression. In the U.S., there continue to be record foreclosures. In
2009, Realty Trac reported that there was a record 2.8 million homes with
at least one foreclosure filing and it says that the number may be as high as
3 to 3.5 million in 2010.1 Coupled with the U.S. housing problem, there is
also weak loan growth. Further, if the U.S. banks are not healthy enough to
lend more, or the U.S. banks are still seeing weak loan demand, then this is
bad news for the U.S. economy. Why should we care in Canada? The answer
is simple. If the U.S. economy is unpredictable and slow to recover, so too
is the Canadian economy, as our economy is so heavily dependent on Amer-
ican fortunes. Given this situation, it is no wonder that businesses and
individuals alike must consider all options for the future including worst
case scenarios, such as going into debt and/or owing money to the Crown.
It is therefore prudent in such volatile times that average Canadians and
businesses possess some basic understanding of the subjects of tax, debt,
and collection.

In this chapter, we provide the reader with an overview of the Federal debt
collection regime under the Income Tax Act.2 We also examine the steps that
the Canada Revenue Agency (“CRA”) may take to collect on tax debts, as
well as the restrictions of their powers. Finally, we outline the fundamental

1
A. Barr, “Bank Stocks Beyond the Abyss”, Market Watch, March 5, 2010, p. 2.
2
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) [ITA or the “Act”].

23
24 David W. Chodikoff & Andrew D. Valentine

options available to tax debtors in response to enforcement actions by the

CRA.

Payments, Interest & Penalties

The term “tax debt” is defined in the ITA as “any amount payable by a
taxpayer under this Act.”3 As a consequence, the collections regime applies
not only to the principal amounts owing, but also to any penalties and
interest which may accrue pursuant to the ITA.4 It is therefore important to
review how and when amounts become payable, as well as how and when
penalties and interest accumulate on unpaid taxes.

When Are Taxes Due?

The ITA provides a deadline by which balances owing must be paid, which
varies according to the type of taxpayer: this deadline is referred to as the
“balance-due day”.5 The balance-due day for different taxpayers is as follows:
• For individual taxpayers (including individuals who have died on
or before October 31st in the previous taxation year), April 30
in the following taxation year;6
• For individuals who have died after October 31st in the previous
year, but before May of the next year, six months after the day
of death;7
• For trusts, 90 days after the end of the year;8
• For corporations, two months after the fiscal year end of the
corporation,9 unless the corporation meets certain conditions,
in which case the balance-due day is three months after the cor-
poration’s fiscal year end.10

3
ITA, ss. 222(1) “tax debt”.
4
As discussed below, “tax debt” also includes any costs incurred by the CRA in taking
collection action which must also be borne by the tax debtor and which are subject to the
same collections regime: ITA, s. 222.1.
5
ITA, ss. 248(1) “balance-due day”.
6
ITA, ss. 248(1)(c) “balance-due day”.
7
ITA, ss. 248(1)(b) “balance-due day”.
8
ITA, ss. 248(1)(a) “balance-due day”.
9
ITA, ss. 248(1)(d)(ii) “balance-due day”.
10
ITA, ss. 248(1)(d)(i) “balance-due day”. The corporation must meet three conditions to
qualify for the 3-month balance-due day. The corporation must have claimed a small
business deduction pursuant to s. 125, the corporation must qualify as a Canadian-con-
trolled private corporation, and its taxable income (either alone or in combination with
any associated corporations) must not exceed its business limit for the preceding taxation
year.
 Debt Collection 25

Most corporations11 and individuals12 are required to make instalment pay-

ments throughout the year. Interest and other penalties accrue on late
payments of instalments, as well as late payments of tax owing on the balance-
due day.

For individuals, taxes are deemed paid on the date that they are mailed by
first class mail.13 In the case of corporations, the ITA deems taxes to have
been paid on the day they are received by the Receiver General.14 This latter
requirement also applies to remittances of amounts deducted or withheld.
Therefore, it is essential that the taxpayer ensure that the payment is re-
ceived by the CRA to ensure that no penalties or interest accrue on the
payments.

Interest

Section 161 of the ITA provides for interest on all unpaid instalment pay-
ments,15 as well as all amounts due but unpaid on the balance-due day.16
This applies to both full and partial non-payment. Interest will be charged
on any portion of unpaid tax until it is paid.

Interest is charged at a rate equal to the average equivalent yield (rounded

to the nearest whole percent) on Government of Canada Treasury Bills
maturing three months after issue, plus 4 per cent.17 Rates of interest are
determined on a quarterly basis – interest on any non-payment will be
charged at the rate determined for the quarter in which the payment was

11
Under ss. 157(1), corporations whose income exceeds $3,000 must pay monthly instal-
ments of tax (according to one of the formulae provided in the section), unless the
corporation qualifies as an eligible Canadian-controlled private corporation, in which case
it may make quarterly instalments (ss. 157(1.1) and (1.2)). On corporate instalment pay-
ments generally, see CRA Guide T7B Corp. (E), Corporate Instalment Guide 2009 (released
November 19, 2008).
12
Most individuals whose net tax owing for the year will exceed $3,000 ($1,800 for residents
of Quebec) must make quarterly instalments of tax throughout the year. The instalment
payment requirements for individuals are set out in s. 156. Note that a different instalment
payment system is used for individuals whose main source of income is farming or fishing:
s. 155. On payment of tax by instalments for individuals, see CRA Pamphlet P110, Paying
Your Income Tax by Instalments (released November 4, 2008).
13
ITA, ss. 248(7)(a).
14
ITA, ss. 248(7)(b).
15
ITA, ss. 161(2). Interest under this section is computed only until the balance-due date, at
which point the interest is computed under ss. 161(1).
16
ITA, ss. 161(1).
17
Regulation 4301(a).
26 David W. Chodikoff & Andrew D. Valentine

outstanding. The interest is compounded daily, including on any unpaid

interest.18

Certain provisions in s. 161 provide some means by which the taxpayer may
reduce interest owing on unpaid taxes. Section 161(2.2), sometimes referred
to as “contra” interest, reduces the accumulated interest for a year on any
late instalment payments to the extent that any other instalment payments
for the year were made prior to the month-end deadline.19 Section 161(7)
provides rules permitting some reduction of interest on late or unpaid taxes
to the extent that the taxpayer carries back any deductions or exclusions in
subsequent taxation years.

Courts have held that interest accrues from the date on which the debt
becomes payable, rather than the date on which the CRA sends (or the
taxpayer receives) a Notice of Assessment or Reassessment.20 Interest also
accrues on any penalties imposed under the Act, from the date the penalty
becomes payable until the date on which it is paid.21

Penalties

In addition to interest on late or deficient payments of income tax, which

accumulates daily from the date the payment was due, the ITA provides for
additional penalties on certain late or deficient payments.

Section 162(1) provides a general penalty for failure to file a return of

income pursuant to ss. 150(1). The amount of the penalty is 5 per cent of
any unpaid tax payable on the filing deadline, plus an additional 1 per cent
of such unpaid tax for each complete month (not exceeding twelve) that
elapses after the return was required to be filed. For repeat failures to file
within three years of a previous failure to file, the amount of the penalty is
increased to 10 per cent of any unpaid tax owed on the filing deadline, plus
2 per cent of the unpaid tax for each complete month between the filing

18
ITA, ss. 248(11); in the 1st quarter of 2010, the CRA charges 5% on unpaid amounts.
19
In other words, although the Minister will not pay interest outright on instalment payments
made prior to the deadline, it will allow the taxpayer to deduct from the interest owing
the value of such interest that would accrue on any pre-payment or overpayment of
instalments in the year: ss. 161(2.2).
20
Whent v. The Queen (1999), [2000] 1 C.T.C. 329 (Fed. C.A.), leave to appeal refused (2000),
2000 CarswellNat 2397 (S.C.C.).
21
ITA, ss. 161(11).
 Debt Collection 27

deadline and the actual filing of the return by the taxpayer.22 The maximum
number of months on which the additional 2 per cent will be charged is
increased to 20 for repeat failures to file.23 The penalty is assessed on tax
payable as of the date on which the filing was due; thus, it applies notwith-
standing that a subsequent loss carry-back reduces or eliminates the tax
owing for that year.24

A penalty is also imposed on late or deficient instalment payments.25 The

penalty is 50 per cent of the amount by which the interest payable on
instalments under s. 161 exceeds the greater of $1,000 and 25 per cent of
the interest that would have been payable had no instalment been made for
the year.

Additional penalties are also imposed for various other forms of late or
deficient payments, or failure to file returns, under the Act. These include:
• an additional penalty for non-resident corporations that fail to
file returns;26
• small penalties for trustees who fail to file a return as required
under ss. 150(3);27
• penalties for failure to make partnership information returns;28
• penalties for failure to collect and remit withholding taxes.29

22
ITA, ss. 162(2). For the increased penalties to apply under this provision, it is necessary
that the taxpayer fail to file a return as required by ss. 150(1), that the Minister have served
a demand for a return for the year under ss. 150(2), and that the taxpayer have incurred
penalties for failure to file a return under ss. 162(1) in respect of any of the previous three
years’ returns.
23
ITA, ss. 162(2)(e).
24
ITA, ss. 162(11). See also Reemark Chelsea Terraces Project Ltd. v. The Queen (1993), 93 D.T.C.
469 (T.C.C.); Yang v. R., [2004] 3 C.T.C. 2408 (T.C.C. [Informal Procedure]).
25
ITA, s. 163.1.
26
ITA, ss. 162(2.1). The additional penalty for non-resident corporations that fail to file is
$25 per day (up to a maximum of 100 days) for each day that passes after the return was
required to be filed. This penalty is in addition to the penalty for failure to file imposed
by ss. 162(1) or (2).
27
ITA, ss. 162(3). The penalty is $10 for each day of default, but not exceeding $50.
28
ITA, ss. 162(7.1).
29
ITA, ss. 227(8). This section provides that a failure to deduct or withhold any amount as
required by ss. 153(1) or s. 215 of the Act results in a penalty in the amount of 10% of the
amount that should have been deducted or withheld, or 20% of the amount if the failure
to deduct or withhold was made knowingly or in circumstances amounting to gross
negligence. Ss. 227(8.3) imposes interest on such amounts. Ss. 227(9) imposes a penalty
for failure to remit any amounts required to be deducted or withheld. The amount of this
penalty is calculated as a percentage of the unpaid remittance, and depends on how late
the Receiver General receives payment. Where the failure to remit was made knowingly
or under circumstances amounting to gross negligence, the penalty is 20% of the un-
remitted deductions or withholdings.
28 David W. Chodikoff & Andrew D. Valentine

Where a taxpayer fails to include income in an information return that is

required to be included under the Act, and has similarly failed to include
all income in one of the previous three years’ returns, ss. 163(1) imposes a
penalty of 10 per cent of the amount of the omission.30

A penalty is imposed where a person knowingly, or under circumstances

amounting to gross negligence, makes, participates in making, or acquiesces
in the making of a false statement or omission in a return, form, certificate,
statement or answer that is filed or made under the Act.31 The amount of
the penalty is the greater of $100 and 50 per cent of the total of several
amounts.32

As this overview suggests, the failure to make all necessary payments of tax
when payable can result in substantial additional financial penalties. These
penalties are in addition to the interest that accrues on late or deficient
payments, and are themselves a source of additional interest obligations if
not paid immediately. Once such penalties and interest have been incurred,
they, along with the principal tax debts outstanding, can become the subject
of a wide variety of collections action by the CRA.

Collection and Enforcement Powers: What Can CRA

Do to You?

The CRA has statutory powers that enable it to collect any tax debts out-
standing, as well as any interest or additional penalties payable in respect of
those debts. These powers are best described as the CRA power to take
“actions” to enforce the payment of tax debts.33 These actions can potentially
apply to any amount payable under the Act.34

30
However, where the person liable under this section would also be liable for making a
false statement or omission under ss. 163(2), the penalties under the latter provision will
prevail: ss. 163(1).
31
ITA, ss. 163(2). This penalty is coupled with a parallel provision imposing civil penalties
on third parties who participate in the making of such false statements and omissions: s.
163.2.
32
For greater detail on penalties imposed on taxpayers for making false statements or
omissions, see C. Campbell, Administration of Income Tax 2009 (Thomson, Carswell, 2009)
at section 11.2.
33
ITA, ss. 222(1) defines “action” as “an action to collect a tax debt of a taxpayer and includes
a proceeding in a court anything done by the Minister under subsection 129(2), 131(3),
132(2) or 164(2), section 203 or any provision of [Part XV of the Act].”
34
ITA, ss. 222(1) defines “tax debt” (i.e., that to which collections action by the CRA may
apply) to mean “any amount payable by a taxpayer under this Act”.
 Debt Collection 29

In the section that follows, we review the more commonly used forms of
collection action by the CRA.

Timing Issues

Tax debts come into existence under the Act on the date that the taxpayer
earns the income giving rise to the tax.35 They become payable either on
the balance-due day or other date set out in the Act. However, before the
CRA can take legal action to enforce payment of such tax debts, it is required
to observe certain procedural steps designed to ensure administrative fair-
ness to the taxpayer in collecting on the debt.

Collection Restrictions

Section 225.1 of the Act provides for certain restrictions on collections

action by the CRA. In most cases, the CRA is prevented from commencing
action to collect on a tax debt until 90 days after the mailing of a notice of
assessment or reassessment.36 This 90-day wait period applies to most forms
of collections action by the CRA, including commencing legal proceedings
in court, certifying the amount payable under s. 223, garnisheeing amounts
owing to the taxpayer, or issuing a certificate of non-payment and directing
that the taxpayer’s goods and chattels be seized and sold.

The Minister of National Revenue (“Minister”) is required under ss. 152(1)

to examine, with all due dispatch, each taxpayer’s return of income and
assess the amount of tax payable. It is required to send a notice of assessment
to the taxpayer upon completing this review.37 Section 152(4) provides the
time limits within which the Minister may issue an assessment, reassessment,
or additional assessment of tax for a taxation year. Generally, the normal
reassessment period within which the Minister may reassess is three years
(four years in the case of mutual fund trusts and non-CCPC corporations)
from the mailing of the original Notice of Assessment.38 However, this
period is extended in certain circumstances under ss. 152(4). Section 158

35
In other words, tax debts do not depend for their existence on an assessment or reassess-
ment by the CRA. See R. v. Simard-Beaudry Inc. (1971), 71 D.T.C. 5511 (Fed. T.D.); Garland
v. Minister of National Revenue (1988), 88 D.T.C. 1271 (T.C.C.). This principle has been
affirmed in the GST context in Beaupré c. R. (2005), 2005 G.T.C. 1420 (F.C.A.).
36
ITA, ss. 225.1(1) restricts the CRA from commencing most types of collection action prior
to the “collection commencement date”. Ss. 225.1(1.1) provides that in most cases, the
collection-commencement period is 90 days from the mailing of a notice of assessment.
37
ITA, ss. 152(2).
38
ITA, ss. 152(3.1).
30 David W. Chodikoff & Andrew D. Valentine

requires taxpayers to pay any tax owing forthwith upon the mailing of a
notice of assessment.

The CRA has set out its policies with respect to collection and enforcement
of tax debts in Information Circular IC 98-1R3.39 The CRA states, consistent
with the collections restrictions in the Act, that subject to certain exceptions
it will not generally start legal action under 90 days after the CRA mails a
notice of assessment or notice of reassessment.40 However, in certain cases,
the CRA may begin collections action immediately following the mailing of
a notice of assessment.41 The CRA may begin collections action immediately
in respect of assessments of the following items:
• Certain amounts deemed to be held in trust for the purpose of
payment to the Receiver General;42
• Any amounts payable pursuant to Part VIII of the Act (scientific
research and experimental development tax credits);
• Non-resident tax;43
• Any penalties for failure to remit funds held pursuant to a
deemed trust;
• Interest payable on any of the amounts above;
• 50 per cent of the amounts assessed as payable by certain large
corporations;44
• Reassessments with the taxpayer’s consent under ss. 152(4.2);
• Reassessments after the disposition of an appeal with the consent
or writing of the taxpayer under ss. 169(3); and
• A reassessment after the waiver of penalty and/or interest under
ss. 220(3.1).

39
CRA, Information Circular IC 98-1R3, “Collections Policies” (February 12, 2008) [IC 98-
1R3].
40
IC 98-1R3 at 3.
41
ITA, ss. 225.1(6).
42
The Act deems certain amounts to be held in trust for the purpose of payment to the
Receiver General. These include any amounts deducted from employees and other indi-
viduals for income tax, Canada Pension Plan contributions, and Employment Insurance
Premiums. Also included are GST/HST collected as or on account of tax under the Excise
Tax Act, R.S.C. 1985, c. E-15 and charges collected under the Air Travellers Security Charge
Act.
43
This includes unpaid amounts payable under s. 116 of the Act, and under any regulation
made under ss. 215(4).
44
Under ss. 225.1(7), where a large corporation as defined in ss. 225.1(8) of the Act has been
assessed, the CRA may take action to collect half of the amount assessed at any time during
the first 90 days after the amount is assessed, regardless of whether an objection or appeal
has been filed. After this 90-day period, the CRA states, if there is no objection or appeal,
it may collect the outstanding balance. After the 90-day period, where an objection or
appeal has been filed, the CRA may collect on 50% of the balance under dispute and any
balance not in dispute.
 Debt Collection 31

Taxpayers should take advantage of the 90-day period following receipt of

a notice of assessment to file any notice of objection or appeal disputing the
assessment. Section 225.1 provides that in most cases, the filing of an objec-
tion or appeal prevents further collections action by the CRA until a decision
on the assessment has been issued by the adjudicative body.45 Provided that
the taxpayer commences the objection or appeal process within 90 days of
the mailing of the notice of assessment, most taxpayers will not face collec-
tion action. That process will commence after the taxpayer has exhausted
both the objection and appeal rights.

Jeopardy Orders (or “You Can’t Delay”)

Section 225.2 provides an exception to the general rule in situations where

the CRA persuades a judge46 on ex parte application that there are reasonable
grounds to believe that its ability to collect on tax assessed would be jeop-
ardized by a delay in collection. In these circumstances, the court may
authorize the CRA to immediately commence collections action.47 The CRA
may apply for a jeopardy order even before sending a notice of assessment
or reassessment to the taxpayer.48

These orders involve an ex parte application made by the CRA. Accordingly,

the CRA is required to make full and frank disclosure of all relevant facts.
Where the CRA fails to do this, the authorization may be set aside by the
court.49

45
In most cases, where a taxpayer has served a notice of objection to an assessment, the
CRA cannot begin collections action until 90 days after the Appeals Division of the CRA
has either confirmed or varied the assessment: ss. 225.1(2). Where a taxpayer has appealed
from an assessment to the Tax Court of Canada, the CRA cannot begin collections action
until a copy of the court’s decision has been mailed to the taxpayer or the day the taxpayer
discontinues the appeal: ss. 225.1(3). Where a taxpayer has agreed under ss. 173(1) to
refer a question for determination to the Tax Court of Canada (or where the taxpayer is
served with an application for the determination of a question), the CRA cannot collect
on the portion of the tax debt that will be affected by the decision until the day on which
the decision is determined in court: ss. 225.1(4).
46
ITA, ss. 225.2(1). The judge must be a local judge of either the Federal Court or a provincial
superior court.
47
ITA, ss. 225.2(2). Where authorized under this subsection, the CRA may immediately
initiate any of the collections actions set out in ss. 225.1(a) to (g) – that is, the collections
actions which are normally restricted until the collection commencement date.
48
ITA, ss. 225.2(3). Where a judge is satisfied that receipt of a notice of assessment would
jeopardize the collection of an amount, the judge may authorize immediate collection
and the subsection deems the tax debts to be amounts payable, notwithstanding the
absence of a notice of assessment.
49
Tran v. The Queen, [2008] 3 C.T.C. 209, 2008 D.T.C. 6584 (Eng.) (F.C.) [Tran].
32 David W. Chodikoff & Andrew D. Valentine

The CRA is required to serve taxpayers with a copy of the authorization

within 72 hours of the Order being granted.50 Taxpayers may review jeop-
ardy orders on six days’ notice to the CRA within 30 days of being served
with an authorization,51 though the Act provides that this limitation period
can be extended by the court where the court is satisfied that the application
for review of the authorization was made as soon as practicable.52 It can also
be extended pursuant to the court’s inherent power, provided that the
common law test for an extension of time is met.53 The limitation period
does not continue to run during settlement negotiations with the CRA.54

On applications for review of an authorization, the taxpayer first bears the

onus of establishing the following: the taxpayer must demonstrate that there
are reasonable grounds to doubt that the test required by ss. 225.2(2) has
been met – that is, the collection of all or any or any part of the amounts
assessed would be jeopardized by delay in the collection.55 If the taxpayer
succeeds, the onus shifts to the CRA, and the court must examine the
evidence upon which the jeopardy order was obtained as well as any other
evidence that would show on a balance of probabilities that the collection
would be jeopardized by delay.56

Courts have set out the principles that apply in evaluating whether a jeop-
ardy order was properly issued. In 2003, in M.N.R. v. Services M.L. Marengère
Inc.,57 Lemieux J. summarized the basis on which the Minister may justify a
jeopardy order:
The evidence must show, on a balance of probability, that it is more likely than
not that collection would be jeopardized by delay. The test is not whether the

50
ITA, ss. 225.2(5). Service must be effected by personal service on the taxpayer, or by other
method authorized by the Court: ss. 225.2(6).
51
ITA, ss. 225.2(8).
52
ITA, ss. 225.2(8)(b). See, for example, Tran, supra, which denied an application by a
taxpayer for an extension of time on the basis that that taxpayer’s counsel has waited over
a month to file the application even after knowing that they were already outside the
limitation period.
53
See Tran, supra, citing Canada (Attorney General) v. Hennelly (1999), 244 N.R. 399 (Fed.
C.A.), which set out the test for an extension of time. The applicant must establish the
following:
1. there is a continuing intention to pursue his or her application;
2. the application has some merit;
3. there would be no prejudice arising from the delay on the not moving party; and
4. there exists a reasonable explanation for the delay.
54
Minister of National Revenue v. Rudyk (1995), 96 D.T.C. 6192 (Fed. T.D.).
55
M.N.R. v. Services M.L. Marengère Inc., [2003] 1 C.T.C. 229 [Marengère].
56
144945 Canada Inc., Re, [2003] F.C.J. No. 937, [2003] 4 C.T.C. 112, (sub nom. 144945
Canada Inc. v. Minister of National Revenue) 2003 D.T.C. 5409 (Fed. T.D.).
57
Above, note 55.
Exploring the Variety of Random
Documents with Different Content
become, that I had only to say en passant, “Your handkerchief to-
morrow,” and it was duly handed to me washed and perfectly clean.
I only once was offered a treat of this kind. It was a poor black man
(I often see him about). I watched him fumbling in his chest and
eventually produce a crust; this he secreted for some minutes in his
fist, and then said, “Here, master,” and held it out to me. I can see
his look of surprise that followed my refusal; but it was kindly
meant, and though I declined the emetic, I wouldn’t have hurt his
feelings for the world. Soup that I didn’t consume I usually placed
outside the door, hoping that my regular “cleaner” would reach it in
time. In this, however, I was often disappointed, for my custom
having got known, a raid was frequently made on it by others—a
practice I determined to try and circumvent.
I was suffering at this time from liver complaint, and had on my
shelf a concoction of taraxacum and podophyllin. Of this I poured
one day about two doses into my mutton broth; and as it was
somewhat discoloured by the process, I added half a cup of
soapsuds and a handful of salt. Not long after the two thieves
arrived, and I could distinctly hear their long gulps as they
swallowed the savoury concoction. My commendable endeavour to
break them of pilfering was, however, a complete failure; and the
only remark I overheard was, “I say, Bill, it’s damned salt, ain’t it?”
The soap one received had to last a fortnight, and was not sufficient
for a thorough wash daily and the periodical bath, and I experienced
great inconvenience at first by having to economize; but when it had
got mooted about that there “was a swell as was mug enough to
swap grub for soap,” my market became literally glutted, and I was
enabled to revel in a bath every morning.
Washing one’s cell floor was not an agreeable duty. At first I puffed
and blew like a grampus, but it soon became a very simple affair,
and I became a perfect adept at the charwoman business. I heard
whilst here, from a reliable source, of some man who after leaving
the prison was staying at a West-end hotel, and who, seeing a
servant shirking her duty whilst scrubbing the doorstep, and unable
to resist the force of habit, very kindly gave her the benefit of his
experience, and stripping off his coat, proceeded to lay-to
assiduously. I should not hesitate to do the same under certain
circumstances. This “doing” one’s own apartment was the only
derogatory duty I had ever to perform; and as it was a private show,
and clearly for one’s own benefit, I never had the slightest objection
to it; the more so as the taking of my morning bath (the saucepan
on the floor) had half completed the process.
Oakum-picking cannot be called an intellectual employment. I
should say, too, it was decidedly monotonous, though I can hardly
speak from personal experience. I tried the experiment of
unravelling the rope, but it was so intensely provoking that I turned
my thoughts to evading the necessity. My turnkey and I were
friends within twenty-four hours, and I consulted him about getting
a substitute. As turnkey and prisoner had both left before I had, I
may say, without injuring anyone, that for a weekly consideration my
task was picked daily. Of a morning a bundle was mysteriously
thrown into my cell, and a few moments later I proudly descended
with “my work,” and dropped the unused rope on the stair. The
usual task that prisoners have to pick is three pounds a day, but
being a light-labour man I was only assigned one pound. I
invariably returned a portion of this modified amount unpicked,
thereby lulling the suspicions of a dense but offensively-inclined
taskmaster. Oakum is one of the most tell-tale commodities I ever
came across. If merely unravelled, it remains black and juicy; but
the more it is picked and pulled the paler it gets, till it is capable of
assuming the appearance of Turkish tobacco. An experienced eye
can at once detect the amount of labour bestowed on it, and some
of the huge bundles I saw my confrères carrying down were works
of art as regards finish. The man who actually picked my oakum
was the “cleaner,” a privileged individual with a roving commission.
His duties frequently brought him to my cell, and he told me he was
a “racing man.” I discovered, however, as we became better
acquainted, that the designation is capable of considerable
expansion, and that his peculiar talent was the “three-card trick.” He
knew every racecourse in England as well as every prison, and never
failed of a morning to inquire how I had slept, adding, that he
always slept badly the first few nights in a strange prison; and my
reply that I was not affected in a “similar way” appeared to cause
him considerable surprise. In my unravelling process I one day
chanced to come across a bit of cane. It was certainly moist from
proximity to the tar, but I carefully dried and subsequently smoked
it. I can hardly say the pleasure was unalloyed, for it bore such a
resemblance to the fragrant British Havanna that I got alarmed, and
put it out. It was the only smoke I had for months.
Exercise at Coldbath was an important institution, and considering it
was the only fresh air I at first experienced in the day, I always
looked forward to it. An hour is the regulation time, but seldom is
the boon of that duration; and if the warder is otherwise engaged,
the exercise has to give way, and thus the prisoner is deprived of a
healthy occupation to meet the convenience of a selfish turnkey.
Overlooking the exercise-yard attached to C ward were a row of
houses, and I often wondered what the lookers-on thought of the
moving mass of misery that circled round below them. To me, with
my limited facilities, there was ample room for reflection; and I often
marvelled how such various types of humanity could have been
collected, or indeed that they ever existed.
One feeble old man particularly attracted my notice. He was almost
unable to walk round from sheer old age, and appeared altogether
incapable of having qualified in any way for lodgings at Coldbath. I
asked a warder what on earth he had done.
“Well,” he said, “they say he’s a bad ’un. He’s here for violently
assaulting the police, and got six months.”
“But,” I added, “he don’t look as if he would last so long; he must be
at least a hundred!”
“Very likely,” was the reply. “The fact is, a new rule has come in
lately, and pauper prisoners are buried in the prison; so they sent
him here in hopes of starting our new cemetery.”
Another peculiarity that struck me forcibly was the apparently
universal obstruction that appeared to exist in the criminal throat. It
was absolutely epidemic, and the sounds—such as are made by an
over-wound moderator lamp—that accompanied their fruitless
endeavours to obtain relief were excessively revolting. This and the
like are the worst features of coming in contact with these dirty
wretches. Many habits usually looked upon as filthy were freely
indulged in, and anyone who instinctively abstained from
participating was looked upon as an outsider. A foolish habit I had
contracted in my youth of applying my pocket-handkerchief to its
natural use was, I fancy, specially resented. I could never shake off
these feelings, and though with them, was never “one of them.” I
always kept them at arms’ length, and invariably received some
implied recognition of my superiority. The better class of prisoners
for the most part addressed me as “Capting,” or “Sir”; and even the
lowest, if they spoke—which I never encouraged—did so with some
small degree of reserve. The neighbourhood abounds with street-
organs; indeed, it is the head-quarters where the instrumentalists for
the most part live, the consequence being that, like the lady of
Bambury Cross, we had music wherever we “goed.” About this time
a certain popular air was much in vogue, and evidently much
admired by the criminal classes. I enquired the name of this vile
music-hall ditty, but without effect; and can only describe it by the
fact that no sooner did it commence than the whole mob appeared
to cheer up, and took up a sort of gin-and-water refrain which they
buzzed out—“Ho moy littul tarling, ’ow are yew?” The wretch who
composed it deserves a month. It is impossible to describe the
monotony of these days without occupation—for my deputy did my
task—and without books. The religious tract, as a leaflet was
officially styled, had to last a fortnight; and I knew by heart all about
“The Sweet Recollections of a Sweep,” and “The Converted
Charwoman of Goswell Road.” “What Pickest Thou, you Wretch?”
and “How are your Poor Fingers, you Blackguard?” were also works
contained in this religious repertoire, and altogether of a more
thrilling description. They were generally understood to have been
the work of a local divine, as indeed their style suggested. The
library books are a very sorry lot, though probably well adapted to
the capacities of their readers. The rule, too, that permits their
change only once a fortnight is in itself a species of torture unworthy
of the system that sanctions them at all. The type for the most part
is large, and such as an educated man can read in a day. Why,
then, spoil a gracious act by limiting its very innocent scope. Such,
too, is the reckless supervision of these literary treasures that I
received no less than seven school histories of England during my
career. I felt this as almost a reflection on the Dean of W— and my
classical education generally.
There was, however, a reserve library for the special benefit of the
“serious” minded, and men of education with strict Episcopalian
proclivities. This issue, and its attendant patronage, is vested
entirely in the hands of the chaplain—a custom it is high time to
alter—and considering I had never been confirmed, it is a marvel
how I was ever included in its favoured ranks. The blessing was not,
however, an entirely unmitigated one; and “Locke’s Essay on the
Mind,” “The Theory of Sturm,” and such light reading usually fell to
my share. Happily I was independent of it all, although an amusing
and undignified squabble some months later deprived me of even
this modified clerical patronage.
I must mention one incident connected with my “three card”
acquaintance before leaving the oakum district. It was after chapel,
and he was in my cell, when, after sundry enquiries as to how I liked
the service, etc., he said—
“I calls it bad, very bad taste, the way they goes on, even in chapel,
at a chap about his work. Didn’t you hear this morning about the
oakum?”
“Oakum,” I said; “I don’t remember any allusion to it.”
“O yes you do,” he replied. “D’you mind my nudging you?” and then
I recollected receiving a dig in the ribs, which I failed to understand
at the time, as they began to sing, “O Come, let us sing,” etc. The
racing man had made a mistake in the spelling, and very properly
resented the allusion.
My transfer from this hateful district was, however, nearer than I
supposed, and an unexpected occurrence a few days after my arrival
brought about this welcome change. My door was one day suddenly
opened, and my friend the turnkey appeared in breathless agitation.
“Summat’s up,” he jerked out; “mind you tells em nothink. You’re
going to be transferred at once.”
 CHAPTER XVI.
THE VISITING JUSTICES.

Something was indeed up; a letter, in fact, that I had clandestinely

written had been intercepted. Personally I was indifferent to the
result; the worst had been done to me when I found myself in
prison. Degrees of punishment had no terrors for me, and I was
equally callous as to whether employed in a “situation of trust” or
languishing in a punishment cell. To me all appeared tarred with the
same brush, and I loathed the privileges and punishments, the
indulgences and deprivations, the spiritual comforts, and every other
contingency with the same intensity. As regards the turnkey,
however, my sympathy was enlisted. Here was a poor man, with a
wife and family, liable to dismissal, and even imprisonment, if
convicted of carrying letters. At the time I was at a loss to
understand how the traffic could possibly have been discovered. I
was confident I had not been observed writing, and had seen the
letters securely secreted in the warder’s pouch. Unless, then, he
had been guilty of some indiscretion, the discovery seemed
impossible. Such a contingency as foul play from without never
entered my head, and yet, alas, such a thing had actually occurred.
A servant in the family of one of my correspondents had lately been
detected in a series of systematic thefts from her employers,
extending over many months. The discovery naturally involved her
immediate dismissal, and by way of gratitude for their refraining
from prosecuting her, she purloined my letter, and assuming a
position of authority, called at the prison and produced the
document. Her motive was clearly revenge, but the truth (as it
always does) eventually came out, and the mystery that shrouded
the transaction for months has happily been dispelled, and the
temporary doubt (almost excusable) that associated the act with
very dear friends has given way to a regret that I could ever have
doubted their honour. As to the thieving, sneaking wretch, she
decamped with her spoils; and though her photograph has been
freely distributed in the “three ball” quarter, she has hitherto evaded
discovery. For my part I would gladly subscribe a trifle for the
present address of Mrs. Smith. With the mystery that surrounded
everything that occurred in the place, I tried in vain to ascertain
whether anything had really been discovered, but day after day
passed, and the affair had apparently blown over. This, however,
was an erroneous impression; it was only the lull that precedes the
storm, and not a stone was being left unturned to sift the matter.
The turnkey, at the time only suspected of complicity in the matter,
was carefully watched. When he left of an evening his every
footstep was dogged, and a nightly report of his rambles duly
made. A letter, too, that he foolishly posted in a neighbouring pillar-
box pointed indirectly to his connivance, and subsequent inquiries at
the district receiving office made matters possibly clearer. A close
relationship exists between such Government institutions as post-
offices, prisons, and police-stations, which affords greater facilities to
constituted authorities for unearthing mysteries than to ordinary
mortals. I was ignorant in those days of this affinity, and an easy
prey to such trumpery contingencies; but I eventually reduced the
trafficking to a science impossible of detection, and unfailing in its
results. Can it be wondered at—surrounded as one is by underpaid
officials, who begin at twenty-one shillings and twenty-three shillings
a week, with a gradual increase, after years of toil, to a possible
twenty-eight shillings, and with a prospect, after twenty years’
service, of receiving a pension of ten shillings a week—can it be
wondered at, I ask, that these worthy men are unable to resist a
bribe? I should regret to have to prove my words, but if I was in the
position again, I think I could undertake to be in daily
communication with the outer world, despite bolts and bars and the
“special” observation I was always subject to. This is no idle boast,
as subsequent events will prove; and the authorities have only
themselves to thank for exercising no discretionary power in their
treatment of prisoners, when the facts I mention prove conclusively
that a great difference does exist and always will between the
vagrant and the gentleman, even in prison, in more ways than one.
The underpaid turnkey is still more unfairly handicapped, and it
resolves itself into his choosing between my £5 and the Government
£1. What more natural than that he should elect the former, when
the most ordinary precaution will guard against detection. I don’t
think the authorities ought to begrudge the so-called gentleman this
solitary advantage. No one can deny that six months to a man of
education is an infinitely severer trial than eighteen to a
costermonger. The one has to battle with the mind, conscience,
remorse, shattered prospects, loss of caste, a blighted future, food,
clothing, surroundings, all inferior to what he has been accustomed
to; to submit, moreover, to be addressed by inferiors in a tone of
authority, besides a hundred-and-one other humiliations impossible
to remember: the other finds himself amongst friends, loses nothing
by his incarceration, is better clothed, fed, and housed than if he
were at home, and, in the case of an artizan, reverts to his every-
day employment; and yet this is seldom taken into consideration,
and justice is ladled out to gentleman and vagrant alike. I cannot
assert this as my own experience, for justice was indeed tempered
with mercy to me, and I am fully sensible of the consideration I
received, both at my trial and hereafter. Under ordinary
circumstances one would be accused of ingratitude for breaking
rules and deceiving those in authority who had treated one well, but
I never took this personal view of it. I was fighting a system that I
despised, not individuals that I respected. So I looked on it as a
game of “brag,” a kind of “French and English,” a question of bolts
and bars versus brains, where the latter had apparently the worst of
it, where undue importance was attached to watching and spying,
and nothing left to one’s parole. About a week after my transfer (I
was now in the needlework ward, and being initiated into the
mysteries of darning stockings) I received a summons to appear
before the Governor. I knew now that the letter-writing had been
discovered, or, as my friend the turnkey had expressed it, “Summat
was up.” He told me, in a few words, that it had come to his
knowledge that I had been sending out clandestine letters, and
requested me to inform him if that was the case, and who had been
my channel of communication, adding that he was prepared to take
down any statements I might feel disposed to make. The idea of
denying it never entered my head—I was perfectly indifferent as to
what might happen; I thereupon informed him that I had written, as
he alleged, three letters, and that I was quite prepared to bear the
consequences. I, however, respectfully declined to give him any
information as to my employé. I was then requested to wait
outside, and the order was given to send for Mr. B—. “Well,” I
thought, “if poor old B— tells them as much as I have he need not
fear being identified as my brother conspirator.” A moment later,
and I was recalled: a glance at the unhappy B— convinced me that
fear had robbed him of his self-possession, and that he had not
observed the salutary advice he had given me as to “telling ’em
nothink.” His face was the colour of a boiled turkey, and the keys at
his side (a sorry burlesque on authority) were rattling from tremour.
The Governor then said, “Mr. B— has admitted that he took a letter
for you, so I presume you have now no objection to admit it.” In
courtesy to the nervous donkey I asked him if that was correct, and
on his replying in the affirmative, I at once made a clean breast of
it. The poor man was thereupon suspended from duty, and a week
later summarily dismissed. I tried to make him every reparation in
my power, and shortly after I procured him a billet at thirty shillings
a week, but when I sent to his lodgings I found he had left. I heard
afterwards he had gone into the country, where I hope by this time
he has recovered his position. My case had yet to be dealt with, and
as the Governor was not qualified to adjudicate on such a serious
offence as this is considered, I was remanded to appear before the
Visiting Justices. I heard terrible rumours of these avenging Solons,
and of the floggings, solitary confinements, and other barbarities
that followed in the wake of their fortnightly visits, and was prepared
—but perfectly indifferent—for the worst. My information for the
most part was derived from brother malefactors, and consequently
likely to be considerably exaggerated. I found, indeed, that this was
the case, and when the eventful day—Black Wednesday—arrived, I
discovered that the dreaded justices were a full bench of Middlesex
magistrates, my old friends who had smashed, pulverized, and
otherwise annihilated Barnabas Amos on my representations, and
who I hoped and believed were gentlemen capable of weighing the
pros and cons of my peculiar case. My expectations were more than
verified. The punishment cells, as I had had them described, and of
which I hereafter got a bird’s-eye view—from outside—were not
inviting abodes. There are twelve of them, fitted with double doors,
warranted to preclude all sound from penetrating beyond. They
contain no furniture, except a plank and a stool, both fixed to the
floor, and the two blankets and rug that constitute the entire bed
and bedding are issued every night and removed every morning.
Water is supplied three times a day, and the food is stirabout and
dry bread, administered on homoeopathic principles. Books there
are none—indeed, the subdued light would make them superfluous;
the occupants, moreover, have no employment, the distraction of
oakum-picking even being fiendishly denied them. Men who had
undergone this punishment told me that the effect was
indescribable, this combination of gloom, idleness, and profound
silence, and their wasted appearance after a fortnight’s incarceration
fully confirmed their assertions. The penalty, as I was credibly
informed, for sending a letter out was ten days at least in the
punishment cells; and a preliminary I underwent of being carefully
weighed on the morning of the eventful day raised the betting in my
estimation to six to four on the cells. A kind friend expressed great
sympathy for me, but feared I must make up my mind to this
degrading punishment. But he was wrong; the weighing was
superfluous, and I got off with a reprimand.
The Middlesex magistrates having heard the case, which was put
before them in the kindest light by the Governor, and taking into
consideration the dastardly act, whereby the offence was in a
measure discovered, informed me through the chairman that they
knew my position and were sorry for it, pointed out the gravity of my
offence, and finished with an admonition—a treatment that only
gentlemen could have accorded to such as I. This generosity
induced me to register a mental vow that I would not abuse their
kindness. I felt indeed as if I were on my parole; but the foolish act
of an illiterate jailor—instigated, I suspect, by a vindictive snob—a
few days after, armed with the authority, but incapable of
discriminating between the treatment most likely to be deterrent to
a man like myself and that desirable with a costermonger, turned me
from my good resolutions. I saw it was a question of the “best man
wins,” that confidence was a thing that never entered their heads,
and that I had nothing to gain by passive submission. For the first
and only time in my career I felt insulted, and determined
henceforth to double my precautions, to evade every regulation, and
to lose no opportunity of bribing everything and everybody with
whom I came in contact. The act that decided me in this course
was being formally searched. A few days after my admonition I was
unexpectedly visited by two warders, and ordered to change
everything I had on for a fresh supply, which they brought in.
Meanwhile my cell was turned upside down. The salt was capsized
into the plate; my bed minutely examined; the table and stool
tapped and shaken; and matches struck and poked down the
ventilators; and when they discovered I had neither pencil nor paper,
I was left to readjust my apartment. As I said to them at the time,
nobody in his senses would have supposed that a man who had so
lately escaped a severe punishment would be such a fool as to incur
the risk of possessing contraband articles. As a fact, I had got rid of
all my combustibles a few days before; and if any of the officials can
remember a stoppage in a certain drain about that time, they can
make a pretty shrewd guess at what became of them. The above
incident may, I hope, attract the notice of someone in authority, and
be the means of giving a discretionary power to governors of prisons
as regards the treatment of a certain class of prisoners. Sauce for
the goose is not always sauce for the gander, and it’s for the
authorities to decide whether certain results cannot be attained by
tact that can never be assured by brutality.
 CHAPTER XVII.
PRISON TRADES.

A great variety of trades are represented in Coldbath Fields—such as

tailors, shoemakers, blacksmiths, tinsmiths, worsted-workers,
laundrymen, bakers, needlemen, basket-makers, mat-makers,
printers, bookbinders, carpenters, plumbers, and glaziers. Of these
mat-making and laundry-work are considered the hardest. The men
selected for following any of the above vocations are looked upon as
privileged individuals, and infinitely better off than the ordinary
oakum-picker—a task that everyone has to submit to for one month,
although many never get beyond it and its accompanying isolation
during the two years of their imprisonment. A good deal of the
comfort or otherwise with which these trades are followed depends
on the warders in charge. If the warder is a brute, the prisoners
become demoralized, crime is rampant, and reports and punishment
the natural consequence. If he happens to be reasonable and just
in his dealings, contentment reigns, the work is well done, and
insubordination is unknown. I saw and heard a great deal in support
of this assertion, and during my few months’ retirement managed to
poke my nose into a good many queer corners. The laundry bears
an unenviable notoriety, both on account of the excessive hard
labour and the brutality with which it is enforced. There are about
sixty men employed in this department, who have severally to wash
one or other of the following quantities daily:—30 shirts, 80 sheets,
200 towels, 500 pocket-handkerchiefs, 18 blankets, 250 pairs of
socks. Such quantities would tax the capacity of an expert
washerwoman; but when a novice—probably a clerk or respectable
tradesman—is put to the task, its magnitude is at first
insurmountable. Instead of 30 shirts, the poor wretch finds he
cannot manage more than 5, which next day he succeeds in bringing
up to 15. Meanwhile his hands become chafed and sore, and he
sees the doctor in hopes of getting relief; but the doctor is
powerless. A cut finger is not a serious complaint though probably a
very painful one; and he has no alternative but to send him back.
This in itself is considered as malingering; and the poor devil is
brought before the Governor for idleness and feigning sickness, and
is sentenced to one day’s bread and water as a first offence. Should
this “crime” be repeated, he gets an increased punishment, and is
either flogged or sent to the punishment cells. This is no
overcoloured description. A prisoner in such a case has neither
justice nor any means of proving the injustice. Any report, however
garbled, is necessarily believed; and if corroboration is necessary, a
dozen turnkeys, from every part of the prison, will come forward,
and emphatically endorse their comrade’s charge. The prisoner
meanwhile is not allowed to speak, and if he did would not be
believed, and, as often happens with the lower classes, is actuated
by fear, which only increases his apparent guilt.
It is not the prison authorities that can be held responsible for this
burlesque on justice, for more humane, honourable, and just men
than the Governor and Surgeon of Coldbath Fields do not exist. It is
the vile system that gives no discretionary power to these officials,
and considers that a man once overtaken in a fault ought forthwith
to be treated like a dog; and, not satisfied with this inhuman
conclusion, deputes the carrying out of their system to a set of
ignorant, cringing, underpaid warders and turnkeys—in many cases
ill-conditioned by nature, and brutal, eye-serving, and untrustworthy
by habit.
One victim of this cruel system, that was undergoing fifteen months’
imprisonment, worn out by work, constant reports, punishment, and
illness, and who was refused permission to revert to oakum-picking
in preference to remaining in the laundry, went back to his solitary
cell one Saturday night, and in sheer desperation hanged himself;
and Sunday morning found him suspended by his bed-straps from
the bell-handle, cold and stone dead. Another lad of 18, who had
been reported for talking, and sentenced to bread and water, took it
so much to heart that on his cell door being opened about 2 P.M. he
rushed past the turnkey, and threw himself over the railings. He was
picked up insensible and taken to the hospital, when, incredible as it
may appear, he was found to be absolutely uninjured, although he
had jumped from a fifth storey and landed on a stone floor. On his
dinner tin the unhappy youth had scratched, “Dear father and
mother, brothers and sisters I wish you all good-bye and have 3 days
cells and 3 days bread and water and pushed about. From A.
Burke.” The lad was thereupon brought before the visiting justices,
and in consideration of his youth only got seven days in the
punishment cells.
It cannot be denied that great malingering and deception are
practised by prisoners, which necessitates the greatest vigilance on
the part of the officials. Nothing is commoner than for them to
pretend attempted suicide; and instances are of frequent occurrence
where a man, having calculated the time to a nicety, proceeds to
hang himself as his door is being opened. These gentlemen are
almost invariably flogged.
On the other hand, it is equally certain that justice is not meted out
in the disposal of everyday offences. Discipline demands that the
warders must be supported; and even if they are known to be lying
or grossly exaggerating, “the system” necessitates their being
believed. If, therefore, this humble stratum of humanity is supposed
to be entitled to a particle of fair play, it calls for the immediate
attention of Sir Edmund Du Cane. I would suggest the advisability
of an experienced ex parte official being daily present at these
orderly-room farces, who could watch the cases and weigh the
evidence. Until this is done a prisoner has about as much prospect
of justice as had Arabi before the arrival of Mr. Broadley. In this
résumé of justice as administered at Coldbath Fields I must be
permitted to disown all reflections on the Governor, for whom I have
the profoundest respect. It is the system that I blame, and
sympathize with a conscientious man being compelled by regulation
to conform to its usages.
About eighty men are employed as tailors; of these the best
workmen are employed in the shop, the remainder doing piecework
in their respective cells. They make the entire clothing for officers
and prisoners for this and many other prisons. The work is
exceptionally good—a fact not to be wondered at, considering they
count amongst their ranks journeymen and cutters from many of the
principal West-end houses. The basket-making is exceptionally
good, and to a great extent made to the order of the leading shops;
and the specimens of neat work I have seen quite surprised me.
Mat-making is a severe type of hard labour. The daily task is one
yard, and men who have been employed at it have assured me that
it is very hard work. The mat-room is fitted with twelve looms for
the make of the best doormats. The Government has a contract
with Treloar, a shopkeeper in Ludgate; and as he is supposed to
have a large connection, it may be assumed that reputedly honest
feet are constantly being brought into contact with the work of
dishonest hands.
The bakery is worth a visit, if only to see the mountains of bread in
course of preparation. In this place about twenty-four men are
constantly employed putting in or taking out loaves from two huge
ovens. All the bread, whether white or brown, is made in separate
loaves of the average size of a penny roll; and when it is added that
some 4000 of these are consumed daily, representing a gross weight
of over half a ton, in Coldbath Fields alone (to say nothing of
Holloway Gaol and the House of Detention, which are also supplied
from here), some idea of the proportions of “our bakery” may be
arrived at. The kitchen is, if anything, still more interesting. I have
never seen anything to approach the size of the vats and utensils,
unless, perhaps, in a pantomime scene representing Gorgeybuster
the giant’s cuisine. Everything is here cooked by steam, and
excellent the cookery is. The soup, which is supplied three times a
week, is exceptionally good. It finds its way from the kitchen in
enormous tubs, and on arrival at the various wards is transferred
into greasy, half-washed tins; still it does not lose its excellence, and
I invariably enjoyed the soup. The usual amount made on soup
days is about 200 gallons, and the daily quantity of potatoes
consumed about 7 cwt. As may be supposed, certain farces and
abuses have crept into this department. Specimens of the cookery
are daily laid out for the inspection of the surgeon and Governor. If
they should, however, omit this essential form, it is amply
compensated for by the voracity of some of the head warders, who
frequently sacrifice inclination at the shrine of duty and make a
substantial meal during the tasting process. Beef-tea for the use of
the patients is also made here—a brew that would be considerably
strengthened by being doctored in the hospital kitchen instead of
where it is. A pound of beef is the liberal allowance for each pint of
beef-tea. The usual custom that prevails, however, is for the beef to
be eaten, by those who ought to know better, and for Colonial meat
to be substituted for it. I assert this advisedly, and offer it as the
possible solution of the knotty problem of why complaints are of
such frequent occurrence. Home Office papers, please copy!
Despite all the assertions to the contrary, I freely confess I never
found fault with the prison fare; and if one could keep one’s
thoughts from wandering to “Bignon’s” or the “Café Helder,” one
could thoroughly enjoy the liberal fare. I experienced this dietary,
pure and simple, for two or three months, so may be fairly
considered capable of forming an opinion.
The carpenters’ and smiths’ shops call for no special notice beyond
the custom in vogue, whereby all men are carefully searched before
returning to their cells. This is, no doubt, an essential ceremony, as
turnkeys’ scalping-knives, in the shape of chisels, might occasionally
go astray, not forgetting the modest pencil, the most treasured
possession of Her Majesty’s prisoners.
The oakum shed finds employment for about a dozen men. In it
piles of old rope are being continually chopped up, weighed, and
tied into bundles varying from one to three pounds in weight. I
have often seen van loads of this apparently worthless rope
discharging cargo at this shed, and was surprised to see the same
though quite unrecognisable rope leaving the prison a week or two
after converted into the finest oakum, to be again utilized for the
manufacture of rope.
The paper room is the most original and interesting of the various
institutions in this original and interesting place. I do not know if it
lies in the route through which visitors are conducted, but if it does
it will repay a minute inspection. Into this room the sweepings of
the Houses of Parliament and the various Government Offices in the
United Kingdom find their way. All old telegrams, after being kept
six months at the General Post Office, are sent here to be destroyed,
to say nothing of old ledgers, directories, blue books, almanacks,
etc.; in short, a heterogeneous mass of things useful and things
useless, all higgle-de-piggledy, to be sorted and torn into small
pieces, and eventually converted into paper by Alderman Waterlow
and his sons (these last named individuals do their share of the work
at home). Amongst this pile the most valuable discoveries are of
daily occurrence; and articles priceless in the estimation of a
prisoner, such as pen-knives, boxes of cigarettes, butt-ends of cigars,
writing paper, envelopes, novels, coins, pencils, and postage stamps,
are hourly exhumed. About 200 men are employed in this
department, whose duty is to tear up into small atoms a certain
amount of waste paper daily. Of the above number some 20 of the
most trustworthy (i.e., those who are the greatest adepts in the art
of secreting property about their persons) are employed in
overhauling the supply, and delivering up contraband goods—that
they may not require—before passing it to be manipulated by their
less trustworthy confrères. Great precautions are supposed to be
taken against the possibility of a prisoner appropriating any of this
“treasure trove,” and they are each and all subjected to a minute
examination before returning to their cells. That this search meets
all the requirements of the case may be gleaned from the quantities
of things that find their way into the prison. I was never without a
capital pen-knife, and when I lost mine (or when it was stolen), as I
did on more than one occasion, I never had any difficulty in
procuring another. The stationery that I used for my “private”
correspondence was invariably House of Commons paper, and,
excepting perhaps being almost imperceptibly soiled, was as good as
new. The traffic in tobacco through this agency is by no means
inconsiderable, and before I had made my personal arrangements
for a weekly supply I have frequently exchanged food for cigarettes;
but they were far from satisfactory, and I found them infinitely
better adapted for choking than chewing. Butt-ends of cigars, too,
find a ready market; but at this point I invariably drew the line, and
preferred—inveterate smoker though I am—to forego the luxury of
chewing a cigar that had been half-masticated by some scorbutic
quill-driver. The special trade that I was put to was worsted work. I
was officially described as a “needleman,” a title I had more claim to
than may appear at first sight. Needlemen are employed either in
knitting stockings, making shirts, or darning blankets, shirts, or
socks. I had the choice of any of these delectable pursuits, and
selected the latter as the most easy of evasion. Darning burglars’
stockings, I admit, sounds a humble and unsavoury vocation; but
considering they are boiled for about three days before passing into
the needlemen’s hands, any antipathy on the subject must be
attributed to sheer prejudice. Other motives also influenced me; it
was far the lightest and most elastic job, and a reserve bundle I
always kept in stock did me good service on the thimble rig
principle. The allotted task was 15 pair a day at least, but thanks to
my “reserve” (a far greater success than Mr. Cardwell’s), and
“auxiliaries” of other kinds, I found that two pair and sometimes
three a day met all the “requirements of the service.” The nature of
my work amusingly exemplified Locke’s theory of the “Association of
Ideas,” and I never took up a stocking without having vividly
presented to my mind the scene in “Faust,” where Marguerite is
bound to lame the wearer. I speak from personal knowledge, for
one afternoon I experimentalized with one of my specimen repairs
and blistered my foot for a month. I often had qualms of conscience
as I saw the numerous men that were limping round at exercise—
the number of whom appeared to increase in proportion to the
quantity of stockings I darned—and I could not help feeling that I
was the unintentional cause of all this misery. My deplorable
incapacity in the Berlin wool and fancy line was once nearly getting
me into a terrible scrape. Amongst the pedestrians that exercised at
the same time as myself was an ex-convict and desperado, who
prided himself on the recital of his past experiences, and who had
undergone penal servitude in Australia and England almost without
interruption during the past 20 years. He was a Hercules in
appearance, addicted to the use of his fists on the slightest
provocation, and about the last man whose susceptibilities one
would care to offend. On his arrival some twelve months previously
he had laid down some wholesome rules for the guidance of those
whom it might concern. “I don’t wants any ’umbug as long as I’m
’ere”—this was the burthen of his instructions. “I’ll do my work as
well as I’m able, and you’ll allus find me willing and respec’ful-like;
but if any of you attempts to bully or ’umbug me I’ll cut your throats
from ear to ear.” Conceive, then, my feelings on seeing this amiable
creature one morning struggling with his stocking. A glance
convinced me it was my handiwork. With a terrible oath, and livid
with rage, he expressed a wish that he only knew the chap that had
“fixed” his stocking. With an equally fervent but inaudible prayer I
sincerely hoped he never would.
 CHAPTER XVIII.
“THE OUTER WORLD.”

The unfortunate contretemps that had indirectly associated me with

the dismissal of a warder caused me to be looked upon for some
time by his confrères with considerable distrust; it was generally
understood, however, that I was not a man that could be bullied
with impunity, and would unhesitatingly have reported any attempt
of the kind. I attribute this diagnosis of my character to my bearing
from the first. I made it a rule to be scrupulously courteous to the
humblest turnkey if he showed an inclination to treat me civilly,
whilst I ignored the position of those who attempted to hector over
me, and convinced them by my manner that I looked on them as my
inferiors. When I reflect on the bearing of the various officials
towards other prisoners, I am at a loss to understand how I was
permitted the latitude I was. I can only attribute it to that moral and
indefinable effect certain men of birth and education, and naturally
arrogant in disposition, do and always will exercise, no matter how
temporarily circumstanced, over their inferiors. This bearing
asserted itself without my knowledge, and I had my likes and
dislikes from the highest to the lowest. Thus I liked and respected
the Governor, and ignored his deputy; I liked one chaplain, and
cordially despised the other; I liked and venerated the kind old
surgeon, which would be exaggerating my feelings regarding his
assistant. None of my antipathies could probably instance any
absolute case against me, yet they were respectively aware of my
estimate of their merits. To remove this feeling of distrust amongst
the turnkeys was by no means easy. I had to watch my opportunity
to get into conversation, and then carefully to smuggle in “a word in
season.” This necessary formula was not unattended with risk, and I
had to discover the disposition of my man and not say the wrong
word in the wrong place. My knowledge of human nature gave me
a considerable advantage in these negotiations; it was like playing
blind-man’s-buff with one eye exposed, and I soon had the measure
of every official in the prison. Some nuts I admit to have found very
difficult to crack, but they eventually yielded to treatment; others
were hopeless cases, and some I labelled “dangerous” and carefully
avoided. I had, however, attained my object; and wherever I went,
or wherever I was located, I was always within “measurable
distance” of one ministering angel, and often two. The principal
cause of my unbroken success may be attributed to my having no
confidants—my right hand literally knew not what my left was doing;
and Jones, the turnkey, who lived in fear and trembling that Brown
would suspect his trafficking with me, was a source of hourly anxiety
to Brown, who dreaded Jones getting wind of his kindly interest in
my affairs. I always assured these respective worthies that they had
nothing to fear from me if they would only exercise ordinary
discretion on their own parts, and as I was above the weakness of
carrying about a fagot of pencils or cigars, it is hardly to be
wondered at that diplomacy triumphed. Through one channel or
another I heard everything that was going on, and was on more
than one occasion amused by having repeated to me the special
cautions that were issued regarding me. The Deputy Governor was
no friend of mine; indeed I should be doing him an injustice if I
omitted to state that he disliked me as cordially as I did him. He
was of that pronounced military type associated in my mind with the
Fifth West Indian Regiment, and suggested the idea of having been
promoted from the adjutantcy of that distinguished corps to a
company in a non-purchase regiment during the Cardwellite era. A
switch, and an almost brimless pot hat, worn on one side, completed
the picture of this typical sabreur. He apparently took a considerable
interest in my affairs, and frequently asked questions, and gave
wholesome advice to the turnkeys regarding their intercourse with
me. “Have nothing to do with that man” was the burthen of his
song, all of which was invariably repeated to me. His duties
assimilated very much with those of a garrison Quarter-master, and
he was supposed to poke about and discover dirt in impossible
places; occasionally, however, they resembled those of a boatswain
in H.M. navy; as, for example, at the flogging of garrotters, and the
birching of little boys, when he counted the strokes. I had to be
careful of this individual, for I am confident he had his suspicions
about my little games; but it was the old story of the ironclad
charging the outrigger, and with all the facilities at his disposal he
was no match for me in a matter of finesse. To such a state of
perfection had I now brought my arrangements, that everything of
interest was at once known to me; and the hanging of Dr. Lamson,
Prince Leopold’s wedding, and the bombardment of Alexandria, all
assisted in their turn to relieve the monotony of my existence. Nor
was my system confined to gloomy Clerkenwell; but penetrated into
the sanctity of the more fashionable Belgravia; and conversations of
peculiar interest to me, that took place at table or in the privacy of
the closet, and that I had a motive for hearing, were repeated to me
within a day with a minuteness of detail that would astonish the
gossipers. This is no idle boast, as documents and dates in my
possession can and may testify. In short I was in telephonic
communication with the outer world (registered number 594). But a
master hand was required to keep this huge machinery in order,
which, no sooner was it removed, than it crumbled to pieces. Within
a week after my final departure, papers began to be picked up, and
a scientific elaboration, incapable of detection, was degraded to the
level and shared the same fate as the commonest pickpocket’s ruse.
The moral that is to be gleaned from all this is: If you wish a thing
done well, do it yourself. I trust the sequel to my departure above
narrated may afford a melancholy satisfaction to those interested,
and convince them that no extra precautions are necessary to
prevent the repetition of these innovations; the rules in force are
amply sufficient for the ordinary prisoner. But my constitution,
suffering from this severe strain, and assisted considerably by fever
and ague, began to give way, and led to a change in my everyday
life. In short I was ill, and admitted into hospital. As I ascended the
stairs that led from the worsted wards I had the consolation of
feeling I should not be forgotten. I had indeed left my mark; I had
crippled half the prison.
There are many abuses that might be changed with advantage, and
which I cannot do better than point out, in hopes that somebody in
authority will read, mark, and inwardly digest them. On each cell
door is a card setting forth your name, sentence, and full
particulars. This placarding of one’s name is surely useless, as one
is never called by it, and the only object it appears to serve is to
enable prisoners to discover all about one another. My cell was once
situated on the high road to the chapel, and every malefactor en
route to worship made it his business to master my history. This
surely is unfair, and hardly contemplated by the authorities. If it is
absolutely essential that one’s name is to be placarded, why not
inside instead of outside the door, as was the custom before the
Government took over the prisons?
Too much at present is left to the turnkeys. They are, indeed, the
channel of communication and the only official with whom the
ordinary prisoner comes in contact. The chief warder deputes
details to the principal warders of divisions, who in their turn confide
them to the warders of wards, who again leave the carrying out to
the turnkeys of flights. It is not fair that so much should be left to
these assistants—which, despite any assertion to the contrary, is the
case—and who, though counting in their ranks many highly
respectable men, have also some desperate rascals—vindictive,
deceitful, and utterly unfit for any discretionary powers, and who
would stick at no degree of brutality if capable of being indulged in
with impunity.
The use of the same baths by prisoners and men previous to
medical examination cannot be too strongly deprecated. That a
clean man should be compelled to risk contagion with one suffering
from itch or covered with vermin is as filthy as it is disgraceful. With
all the space at their disposal the wonder is a swimming bath has
never commended itself.
Every warder in charge of a ward has a prisoner allotted to him, who
performs such necessary duties as cleaning his office and assisting
him in his multifarious returns. These men are generally selected
from the clerk or tradesman class, and have great facilities for
knowing everything that passes through the office. I have found,
indeed, that they know and hear a great deal too much.
Thus a descriptive return containing every particular about one from
one’s youth up, and supposed to be a confidential document, is
carefully studied by these cleaners, and facts likely to be of general
interest—especially about “celebrities”—go the round of the prison.
These documents should either not be in the warders’ charge, or if
so, should be carefully locked up. In my opinion they would be
more appropriately assigned to the care of the principal warders of
divisions. These cleaners, if dishonestly or greedily inclined,
appropriate considerably more than their share of the daily rations.
In one ward I seldom, or ever, got my supply of Monday bacon,
which had either been filched or bitten in half; and as the original
supply does not exceed the proportions of a postage stamp, it can ill
afford this wholesale reduction.
I cannot leave the subject of “warders” without bearing my
testimony to their excellency as a class—I specially refer to those in
charge of wards, and not to their washerwomen and plumbers and
glaziers confrères. The multiplicity of returns they have to render
daily, the alterations, however trivial, that are constantly occurring
and have to be noted, and the serious consequences attending the
slightest error or omission, all combine to make their duties and
responsibilities more arduous than any class of men I have seen.
Their pay for this, moreover, is so small—29s. a week, with a gradual
rise—that many otherwise excellent men shrink from accepting
promotion. The colour-sergeants of the army might learn a lesson
from these warders, and if the “descriptive return” in use, and which
supplies every information, was substituted for the ponderous
ledgers, small books, defaulter sheets, etc., as used in the army, it
would come like the Waverley pen—
As a blessing and boon to sergeants and men.
 CHAPTER XIX.
“THE CONVALESCENT WARD.”

On my admission into hospital I was at first sent to the convalescent

ward, a huge room devoted to light and unpronounced cases. It
accommodates 40 patients, and the entire furniture may be roughly
estimated as consisting of 40 beds, 40 tables, 40 chairs, one shovel
and tongs, and one thermometer. The beds are ranged round the
entire room, the tables and chairs a yard apart forming two rows
down the centre; the thermometer is suspended from a beam, the
shovel is chained to one fire-place, and the tongs to the other. A
high desk and a still higher stool complete the furniture of this
singular room. The fixtures are of a more unique kind; at one end
are the cabinets, at the other the lavatories. These are simply
boarded partitions, extending only about three feet from the ground
—so constructed as to make it absolutely impossible to conceal more
than one-third of the body, however engaged; thus admirably
adapted for observation, but utterly regardless of privacy or decency,
and revolting in their proximity to a room devoted to convalescents.
Along the walls here and there are chains hanging. These are the
alarm bells for communicating with the outer yard in case of fire,
mutiny, or other emergency. At each corner are the padded cells—
grim, sombre constructions—admirably adapted for deadening
sound, and fitted with every appliance for the restraint of violent and
demented criminals. The proximity of these cells is very awful, and
the shrieks that occasionally emanate from them, and the sights I
have seen, would have filled me with horror six months previously.
The treatment of convalescents is as original as can well be
conceived. The day is mapped out into the following portions, which
are observed with a punctuality seldom attained except by
chronometers:—

6 A.M. Rise, and roll up your bed.

6.30 ,, Breakfast.
11 ,, Visit by surgeon.
12 (noon) Dinner.
3 to 4 P.M. Exercise.
5 ,, Supper.
6 ,, Bed.

The dietary is the simple prison fare, although many (I amongst

others) are on what is known as ordinary diet—i.e., cocoa, mutton
broth, and a chop—and others on low diet, consisting of tea, bread-
and-butter, beef-tea, rice pudding, etc. Discipline is little or nothing
relaxed here; indeed the general system is evidently based on what
is considered applicable to confirmed patients not suffering from any
acute disease, and lunatics real and pretended. Shortly after rising a
shout of “Physic!” causes a rush to get the first pull at one’s
respective medicines; and as the same mug does duty for
everything, and as time is an object, it has been found that a dose
of hop mixture is not improved if augmented by the dregs of the
black draught left by one’s predecessor. Being always up and
washed whilst my brother-reprobates were still dozing, I was
invariably the first to benefit by a clean mug, and devoted the next
few minutes to watching the frowsy cluster of depravity, half
dressed, half awake, and just out of bed, drink or throw away their
doses as opportunity permitted. Although strictly prohibited, many
of these wretches usually turned in with their stockings on, and in
some instances with their trowsers; and on rising, having previously
assumed boots and vest, proceeded to wash. I minutely watched
this ceremony, and seldom detected the slightest desire to do more
than make clean the extreme outer rim of their cups and platters,
extending—humanly speaking—from the hand to the elbow, and
from the chin to the ear. Although in many respects preferable to
the prison proper, this convalescent ward was one of the severest
ordeals I had to undergo. I would not have missed it for the world,
nevertheless, to sleep, live, move, and have one’s being amongst
thirty or forty pickpockets, idiots, burglars, and lunatics, implies an
experience that baffles description. At 6.30 the advent of two wash-
tubs, containing respectively cocoa and gruel, announces breakfast,
which, being carefully measured into tins, is consumed in an
incredibly short time, and devoured with the voracity never to be
seen except in menageries or prisons. It must be remembered that
the room contains specimens of some of the sharpest pickpockets in
London, and experts at every dodge for the deceiving of their
fellows, compelled by circumstances to be huddled together, and
relieved from the isolation of separate cells that makes them
comparatively powerless for mischief. It cannot be wondered at,
then, that the rules require, if anything, to be more stringent; but all
the vigilance of the sharpest warder is powerless, and no two eyes
capable of seeing or preventing the wholesale exchange of food that
now begins. If the warder is looking this way, a loaf will change
hands for a mug of gruel in the twinkling of an eye; if he suddenly
turns round, advantage is taken of it to swap something on the
other side; and at dinner hour especially, I have seen bread,
potatoes, and lumps of meat flying about with a rapidity, precision of
aim, and a profound silence, only disturbed by the “flop, flop,” as
they reached the various hands, that would have done credit to the
most expert Oriental-Whitechapel juggler. After breakfast everyone
is supposed to remain at his table without interruption the entire
day, except during exercise, and time is only to be beguiled by
reading such wholesome literature as “The Converted Burglar, and
how he did it,” as the chaplain may be graciously pleased to supply.
At the side of each table is considerately placed a handful of fibre,
which is purely optional whether picked or no. I attribute its
presence indeed to the association that invariably exists in official
minds between hospitals, chapels, and mortuaries, and only capable
of being dealt with on the principle that a certain old gentleman
“finds some mischief still for convalescent hands to do.”
Happily no one really is ill in the convalescent ward (he would then
be removed to the hospital), or it would be absolutely impossible to
bear the incessant fuss from officials and filth from the prisoners
that never cease day or night. Not twenty minutes elapse during the
twenty-four hours that someone is not passing through; and as
every approach is barricaded and double locked, the rattle of keys,
the hobnailed boots of head warders pounding over the floor, and
the shouting and yelling, and the necessity of “sitting up” to your
table as they pass through, make it almost unbearable for even a
convalescent. In addition to this is the absolute necessity of keeping
one’s eye on one’s next-tabled neighbour. If you turn round during a
meal, a piece of food disappears, and any trifle you may happen to
possess cannot be considered your own from one moment to
another. I had a worsted needle that I prized considerably; it
fulfilled the duties of a toothpick, and had been my constant
companion and comforter for weeks. It was, indeed, my most
cherished possession. I usually kept it inside my cap, and my cap
outside my head; here at least it was safe, but one day, in a fit of
absence, I crossed over the room. On my return I discovered that
my cap had been rifled and the needle gone.
An old man (though only one of many) added considerably to my
burthen. He took a great fancy to me—or my food—and seldom lost
a chance of persecuting me. He was never without a pocket-
handkerchief stuffed full of crusts, chop bones, suet pudding, or any
garbage he could find, firmly clutched by day, and placed under his
pillow at night. He was by way of being a gentleman, and said, with
some degree of truth, that he was a general officer (he was at
present undergoing three months’ retirement for stealing a sovereign
from a sixpenny lodging-house keeper). He approached one with
the blandest smile, hoped you were not seriously ill, and asked how
your appetite was. This, indeed, was the burthen of his song:—If
you told him it was bad, he begged you to kindly reserve your
fragments for him; if you said it was good, he stole what he could.
The result was consequently the same; and so to get rid of him I
promised to help him when I could. This nasty old man slept two
beds from me, and often during the night, “when everything was
still,” I have watched him unpack his treasure, and, selecting certain
of the stalest pieces for immediate use, carefully tie up and restore
the bundle to beneath his pillow or mattress.
This hoarding and stealing of food was by no means confined to the
“General”; it was, indeed, so much in vogue that periodical raids
were made on the beds, and even inside the shirts men were
wearing, which invariably resulted in the exhumation of sundry
delicacies. So strong was the ruling passion that one wretch with
half a lung, who was allowed extras which he never consumed,
rather than part with a crumb, would hide chops and even rice
pudding in his pocket-handkerchief and towel, or secrete them in his
bedding or about his person.
That food was a drug in the market may be reasonably assumed;
and if further proof was wanting, the reckless waste that took place
after meals would amply provide it. The supplies of soup, porridge,
cocoa, and gruel were invariably in excess of the regulation personal
allowance. Discipline, however, demanded that so much and no
more should be given to each man; and I have seen gallons of
capital soup and cocoa thrown down the sink daily that many a
starving wretch outside would gratefully have devoured. I do not
blame the hospital warders for this custom so much as the kitchen
officials for either sending too much or adding too much water, for
experience had taught them that it was equally dangerous to give
more or less than the regulation allowance, and that they would
probably be reported by one thief, if another thief got more than
himself; and it was a common occurrence for vagrants who had
never heard of arrowroot before coming to Coldbath to complain of
the thinness of their nightly allowance as “unfit to be eaten.” I once
suggested to the head hospital warder (but my proposal was never
carried out) that the staple food of discontented vagrant invalids
should be treacle and brimstone, and that if they complained of their
diet, the treacle should be omitted by way of variety.
I don’t know what is the annual expense of food, fuel, and gas in
the various prisons, but I confidently assert that an immense saving
would result if the coal at present issued ad lib. for the use of the
warders was as carefully weighed as the prisoners’ various
allowances. These turnkeys, whose supply of coal at home is
probably limited to half a hundred a week, cannot here do without
fires banked up a foot high night and day in the various corridors;
and I have often been awakened in various parts of the prison by
the shovelling and piling on of coals on even temperate nights. I
should like no better billet than to be appointed contractor for the
coal and potatoes used and wasted in Her Majesty’s prisons.
Another means of keeping down the present excessive expenses
connected with prisoners’ keep and warders’ coals would be the
adoption of the sensible course pursued in France, whereby the
clothes of murdered men and the instruments with which the
murders have been committed, if not claimed within three months,
are sold by public auction. This might be supplemented by the sale
of the articles found in cabs and elsewhere, often comprising objects
of considerable value, and at present taken to Scotland Yard and
never claimed. It will possibly be urged that all this would be
opposed to English tastes and ideas; and yet it is an incontrovertible
fact that the principal purchasers at these “art” sales in Paris are
English and Americans, that the price of articles which have
belonged to notorious criminals generally rules very high, and that
the ghastly relics for the most part find their way to England.
Exercise was a most ridiculous ceremony; the tables were pushed
back, and everyone proceeded round and round in two rings. A
scene I once saw at some theatre, representing the “casual ward” of
a workhouse, more nearly resembles it than anything I can think of.
Amongst my numerous companions in this delectable sport was a
celebrated pickpocket; who was good enough on my invitation to
show me “how it’s done.” My request, indeed, appeared to flatter
his vanity so much that on more than one occasion, when I was not
thinking of his particular talent, he has removed my pocket-
handkerchief, and politely returned it as if pretending to pick it up. I
once saw him bring his science to bear on a thoughtless warder,
who, through ignorance probably of his special talent, had asked him
to brush him down. A wink from the thief drew my attention to his
movements, and I watched him with profound interest. For some
seconds he confined himself to the legitimate brushing, but as he
worked round and the arm of his victim was slightly raised, with the
unemployed hand he deliberately opened the warder’s pouch, took
out a piece of tobacco, and then quietly re-buttoned it; with another
smudge of the brush and “I think that’ll do, sir,” he resumed his
place. I wouldn’t have betrayed him for the world; indeed, I gave
him some bread for the exhibition.
It was pretty generally known that I was very green, and that I was
anxious to see everything; indeed, I never lost an opportunity of
conversing with everyone capable of telling me an adventure; so
that one way and another I heard a lot, much of which I shall
hereafter narrate.
Another oddity with whom I was associated was a kleptomaniac.
Nothing was safe from him, and his eye was as quick as his hand.
He might be seen at all hours sneaking about, thrusting his arm
between mattresses and occasionally into people’s pockets. He was
undergoing two years’ imprisonment for stealing two ounces of
tobacco. So impossible was it for him to keep his hands from
picking and stealing that it was frequently necessary to lock him into
a separate cell for weeks at a time, only to be released after piteous
appeals and promises not to offend again, which were invariably
broken on the first opportunity. He was as nimble as a cat, and
occasionally gave an acrobatic performance on the sly. The poor
wretch was admittedly an imbecile, and it seems inexplicable how he
ever incurred the punishment he received, though he was probably
happier at Coldbath than he was ever likely to be elsewhere. One
day he could not be found, and after the hue-and-cry had been
raised and the prison and grounds scoured, he was found concealed
in a tank on a portion of the roof. What he could have wanted there
is beyond comprehension, for he dreaded the water and never
washed unless compelled.
I’ve heard a great deal of prisoners escaping, and from the penal
establishments it is unquestionably practicable. At a prison
conducted, however, on the Coldbath Fields’ principle such an idea is
simply absurd. I do not refer to the impediments of locks and doors
so much as to the full blaze of light system along the corridors. The
constant countings, too, and patrols night and day would at once
discover the truant, to say nothing of the 20-feet wall that surrounds
the building. I have occasionally read descriptions of escapes from
the Bastille, where prisoners with a yard of rope, a spare shirt, and
an oyster knife, have burrowed and scaled and got clean off. I am
not in a position to dispute these assertions, but I will willingly
undertake to provide the most expert acrobat with a sack full of
ropes, crowbars, and linen, in his cell, and stake my existence that
he does not proceed five feet beyond his premises without
detection. The escape of a notorious burglar from Millbank Convict
Prison last year gave rise at the time to considerable discussion
amongst the officials at Coldbath Fields. That a man should be able
to break through the roof of a cell during the early hours of morning
without creating a disturbance seems incredible, and had the
corridors had the same acoustic properties as those at Coldbath,
would have been simply impossible without collusion.
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