R. v. Fogazzi, 93 DTC 5183, [1993] 2 CTC 319 (Ont CA)

Lacourciére, Goodman and Doherty, JJ.A.:— This is an appeal by the Crown from the acquittal of the respondent on one count of an indictment. The reasons for acquittal are now reported at R. v. Erika Fogazzi and Nereo Frank Fogazzi, [1992] 2 C.T.C. 321, 92 D.T.C. 6421.

(1) The appellant pleaded guilty to one count in a multi-count indictment (count 6). The trial judge eventually severed that count into three charges (count 6(a)(i)(ii) and 6(b)). The guilty plea as it applied to counts 6(a)(i) and (ii) was accepted and convictions were entered. They are not before the Court.

The trial judge eventually struck the guilty plea on count 6(b) and acquitted the respondent. The Crown appeals that acquittal.

(2) count 6(b) alleged that the respondent wilfully evaded payment of $120,886 of Federal Taxes by failing to report $285,264 in income tax from misappropriation of funds in his T-1 Individual Tax Return for the taxation year 1979 thereby committing an offence under paragraph 239(1)(d) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

(3) The respondent pleaded guilty on the basis of a written agreed upon statement of fact on the understanding that a joint submission with respect to sentence would be made to the presiding judge.

(4) Although the respondent had been represented by counsel at earlier stages during the proceedings, he was not represented by counsel at the time he pleaded guilty to count 6(b) inter alia.

It is clear that he was given ample opportunity to obtain counsel and that counsel would have been made available to him by Legal Aid if he provided security for repayment of the cost thereof which he refused to do even though he was able to give such security. He chose to proceed without the benefit of ‘counsel.

Counsel for the Crown was content that the Court deal with the charge in count 6(b) on the basis that the agreed statement of facts constitute the evidence in the case.

The trial judge then heard submissions from Crown counsel which for the most part related to the question whether funds, which were given to the respondent by two investors to invest on their behalf and which he converted to his own use, constituted income under the Income Tax Act.

The trial judge also considered the question whether there was evidence to prove that the alleged income was received in 1979 (the year of the receipt by the respondent of the investors’ funds) or in 1981 (the year in which the investors discovered that their funds had been converted).

In the course of the argument the trial judge did not mention or consider the question of proof or the lack thereof of mens rea or wilful evasion of taxes on the part of the respondent nor were any submissions made in that regard.

After hearing the submissions of Crown counsel he reserved his decision on May 12, 1992.

The trial judge gave his decision and reasons therefor on July 16, 1992. He struck the guilty plea of the respondent as it related to count 6(b) as amended and found the respondent not guilty on count 6(b).

He reached that conclusion on three grounds:

1. That the converted funds "did not have the quality of income so as to be income within the meaning of paragraph 3(a) of the Income Tax Act".

2. That the respondent misappropriated the money in 1981 and not in the year 1979 and accordingly was taxable for those funds only in the year 1981 and not 1979 as alleged in count 6(b). [See reasons at page 31.]

3. That there was "no evidence to support a finding that when he misappropriated such amount he wilfully evaded the payment of taxes within the meaning of paragraph 239(1)(d) of the Income Tax Act".

We are of the opinion that the trial judge erred in finding that funds misappropriated by the respondent did not constitute income in the hands of the respondent for the purposes of the Income Tax Act and were not received in 1979.

The agreed statement of facts set forth that the respondent was engaged in the real estate investment business both as an active investor and consultant in real estate investment. On January 9,1979 he received $240,000 U.S. funds from two investors for the express purpose of investing those funds ($285,264 Can.) on their behalf in North American real estate. The funds were subsequently misappropriated in 1979 by the respondent.

We are of the view that the funds in question were received by the respondent during the normal course of the operation of his investment business and that although he used the funds for a purpose not authorized by the investors, the dishonest act on his part took place in connection with the operation of his business. It related to funds provided to him by investors for the purposes of his business and the receipt and misappropriation of the business funds were inseparably connected with his investment and consulting business. The fact that the agreed statement of facts disclosed only one act of dishonesty on the part of the respondent does not in any way detract from characterizing the misappropriated funds as taxable income. They were funds received and misappropriated during the conduct of an ongoing business. We conclude that the funds constituted taxable income from a business within the meaning of subsection 9(1) of the Income Tax Act. See R. v. Poynton, [1972] C.T.C. 411, 72 D.T.C. 6329, 9 C.C.C. (2d) 32 (Ont. C.A.) per Evans, J.A. at page 418 (D.T.C. 6334, C.C.C. 41); Osler, Hammond & Nanton Ltd. v. M.N.R., [1963] S.C.R. 432, [1963] C.T.C. 164, 63 D.T.C. 1119, per Judson, J. at page 434 (C.T.C. 165, D.T.C. 1120). The trial judge erred in law in finding that the misappropriated funds did not constitute taxable income in the hands of the respondent.

The Crown also argued that even if the misappropriated funds were not income from a business source they constituted income from a non-specified source and as such came within the ambit of section 3 of the Income Tax Act. The trial judge considered and rejected this argument. In light of our conclusion that the funds were taxable as income from a business we need not and do not express any opinion on this submission.

The trial judge also erred in law in finding that the respondent received those funds in 1981. There was no evidence to support such a conclusion. Indeed, the agreed facts stated that the respondent misappropriated the funds in 1979. A finding of fact with no evidence to support it constitutes an error of law.

To the extent that the trial judge relied on these two errors in setting aside an otherwise valid guilty plea, he was in error. The guilty plea should not have been set aside.

Mens rea

As we are satisfied that the guilty plea should not have been set aside, that plea constitutes a formal admission that the respondent acted with the necessary intent and the trial judge erred in law in holding that the Crown had not proved the necessary intent. We also see no basis in the record to doubt the validity of the plea. We are of the view that the voluntary plea of guilty, in the circumstances of this case, was an admission of a wilful evasion of payment of income tax.

For these reasons the appeal is allowed, the acquittal is set aside and a finding of guilty on count 6(b) is entered.

Sentence appeal

Counsel for the Crown has requested that this Court deal with the sentencing of the respondent.

In normal circumstances we would not be disposed to deal with the sentencing of an offender against whom a conviction has been registered on an appeal. The usual practice is to refer the matter of sentencing to the trial judge.

In this case, however, it has been made to appear that the respondent is living outside of the jurisdiction of this Court, in the State of Florida. It has been necessary for the Crown to obtain orders for substitutional service of the relevant documents in this appeal upon the respondent. He has not appeared in these proceedings. The notice of appeal served upon him indicates that the Crown, as part of the relief requested, asked that this Court impose sentence, if the appeal is successful.

Having regard to the fact that he has notice of this request and having further regard to the fact, as disclosed by the record and the submission of Crown counsel, that the respondent upon entering his plea of guilty was prepared to accede to a joint submission that a total fine on all counts amounting to $115,000 be imposed, we are of the view that we should proceed to deal with the sentencing in this case.

It appears that fines totalling $16,532.33 have been imposed with respect to the counts on which findings of guilt were previously made which have not yet been paid. We impose a fine of $100,000 with respect to the offence under count 6(b) dealing with the misappropriated funds. In default of payment, the respondent shall serve a term of one year's imprisonment consecutive to any other sentence imposed or being served.

Crown's appeal allowed.