Citation: 2007TCC746
Date: 20071221
Docket: 2006-1932(IT)I
BETWEEN:
MITESH ANJARIA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered
orally from the Bench
at Hamilton, Ontario on December 5, 2007)
V.A. Miller, J.
[1] The Appellant was in the business of selling
illicit drugs. On May 4, 2000, the amount of $33,974 was seized from him as the
proceeds from crime. In either 2000 or 2001, the Appellant was convicted of
“possession for the purposes of trafficking” and “conspiracy to traffic” in an
illegal substance. The Appellant does not remember the date of his conviction;
however, on the date of his conviction the amount of $33,974 was forfeited to
the Crown. The Minister of National Revenue (the “Minister”) by Notice of
Reassessment dated January 24, 2005 included the forfeited amount in the
Appellant’s income for the 2000 taxation year and assessed subsection 163(2)
penalties.
[2] The issues raised by the Appellant in this appeal
are whether he is entitled to deduct the forfeited amount as an expense of
doing business and whether the subsection 163(2) penalties were properly
assessed.
THE FORFEITED AMOUNT
[3] The Appellant was represented by an agent, Janet
Thompson, CA. The Appellant and Harald Mattson, a lawyer who practised criminal
law, appeared as witnesses at the hearing of this appeal. The Appellant’s
position is that “funds forfeited as proceeds of crime are deductible as an
expense since there was an income-earning purpose to the act that resulted in
the loss to the taxpayer”. The agent stated that forfeiture is punitive in
nature and is similar to a penalty or fine. The Appellant’s act was selling
drugs and that act resulted in a penalty. The forfeiture was directly related
to the Appellant’s act of selling drugs. The agent then relied on the decision
from the Supreme Court of Canada in 65302 British Columbia Ltd. v. R., [2000]
1 C.T.C. 57 to support the Appellant’s position that expenses incurred to earn
income from illegal acts are deductible.
[4] The Respondent’s position was that the forfeiture
did not constitute a business expense. The amount forfeited was in fact the
Appellant’s profit or net income from selling drugs and the forfeiture was not
incurred to earn income from business. In 65302 British Columbia Ltd. v. R.,
at paragraph 69 Justice Iacobucci stated:
69 Finally,
at para. 17, my colleague states that penal fines are not, in the legal sense,
incurred for the purpose of gaining income. It is true that s. 18(1)(a)
expressly authorizes the deduction of expenses incurred for the purpose of
gaining or producing income from that business. But it is equally true
that if the taxpayer cannot establish that the fine was in fact incurred for
the purpose of gaining or producing income, then the fine or penalty cannot be
deducted and the analysis stops here.
[5] Paragraph
18(1)(a) of the Income Tax Act (the “Act”) sets out the limitations on
the deductions that can be made from business income as follows:
SECTION 18:
General limitations.
(1) In computing
the income of a taxpayer from a business or property no deduction shall be made
in respect of
(a) General
limitation - an outlay or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing income from
the business or property;
[6] When I ask the
question whether the forfeiture of the amount of $33,974 was an outlay made by the Appellant for the
purpose of gaining or producing income from his business of selling drugs, the
unequivocal answer is no. First of all, the forfeiture of the proceeds of crime
was not an expense or outlay incurred by the Appellant. The proceeds of crime
were the profits or net income earned by the Appellant. The forfeiture was not
incurred to gain or produce income from business and did not assist the
Appellant in producing income from his business of selling drugs. Justice
Angers recently decided the appeal of Brizzi v. R., [2007] 4
C.T.C. 2334, an appeal where the facts were very similar to those in the
present appeal. I agree with his decision and especially in paragraph 7 when he
stated the following:
… The loss
incurred through the forfeiture is in my opinion a consequence of carrying on
an illegal business activity and therefore certainly not an expense that assisted
or resulted in producing income.
[7] The Appellant is not
entitled to deduct the amount of $33,974 which was forfeited to the Crown as
proceeds of crime.
SUBSECTION
163(2) PENALTIES
[8] In order to sustain
the imposition of penalties under subsection 163(2) of the Act the
Minister has the burden of establishing that the Appellant made a false
statement or omission in his return “knowingly or under circumstances amounting
to gross negligence”.
[9] The only evidence
tendered by the Minister to support the subsection 163(2) penalties was
affidavit evidence of Denis Desloges, a Litigation Officer with the Canada Revenue
Agency (“CRA”) in Ottawa. His evidence was that the Appellant had filed his
2000 tax return reporting nil income.
[10] The Appellant stated
that his income tax returns have always been prepared by his father. The
Appellant did not tell his father that he earned income in 2000 and his return
was filed indicating nil income. The Appellant was not aware that income from
an illegal business was taxable. In 2000, the Appellant was 22 years old. There
was no evidence of the Appellant’s level of education.
[11] I find that the
Appellant made an omission in his 2000 return. However, I also find that the
Respondent has not met its burden of establishing that the omission was made
under circumstances amounting to gross negligence.
[12] In conclusion, the
appeal is allowed only to the extent of deleting the penalty.
Signed at Halifax, Nova Scotia this 21st day of December,
2007.
"V.A.
Miller"
CITATION: 2007TCC746
COURT FILE NO.: 2006-1932(IT)I
STYLE OF CAUSE: Mitesh Anjaria v. The Queen
PLACE OF HEARING: Hamilton, Ontario
DATE OF HEARING: December 5, 2007
REASONS FOR
JUDGEMENT BY: The Honourable Justice Valerie Miller
DATE OF JUDGMENT: December 21, 2007
APPEARANCES:
|
Agent for the Appellant:
|
Janet
C. Thompson
|
|
Counsel for the Respondent:
|
Laurent Bartleman
|
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent: John H. Sims, Q.C.
Deputy
Attorney General of Canada
Ottawa,
Canada
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