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Citation: 2004TCC56
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Date: 20040115
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Docket: 2003-1654(IT)I
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BETWEEN:
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JOSEPH THOMAS TOTH,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Lamarre Proulx, J.
[1] This appeal was heard pursuant to
the Informal Procedure. It concerns the 1999 taxation year. The
question at issue is whether an amount forfeited pursuant to the
Criminal Code may be deducted in the calculation of income
for the year 1999.
[2] The facts relied on by the
Minister of National Revenue (the "Minister") to
deny the deduction of the amount forfeited are described in
paragraphs 2 and 5 of the Reply to the Notice of Appeal
(the "Reply"):
2. Following
the initial assessment for the 1999 taxation year the appellant
submitted to the Minister of National Revenue
(the "Minister") a request for a reassessment to
allow an amount of $30,000 as a reduction from the net business
income for the business known as Crystal Star.
...
5. In order to
establish the assessment the Minister relied on the following
assumption of facts:
a) During the
1999 taxation year the appellant operated a "placement
agency" known as Crystal Star.
b) The
appellant declared a gross business income in the amount of
$114,897.35 and a net business income in the amount of
$37,225.
c) The
reduction to the net business income requested by the appellant
was for funds seized from the appellant by the Government of
Quebec, following legal proceedings on the business operated by
the appellant.
[3] The Appellant testified. He
related that the placement agency was an escort agency. There was
otherwise no dispute as to the facts of this case.
[4] The Appellant produced as
Exhibit A-1, an "Ordonnance de Blocage suivant
les articles 462.33 et suivants du Code Criminel". The
property concerned is Item 5 of this "ordonnance".
This item 5 reads as follows:
Toutes sommes d'argent et autres valeurs se trouvant
contenues et/ou rattachées au compte portant le
numéro 223-14 de la Banque Scotia, située au
3064, rue St-Charles à Kirkland, ledit compte étant
enregistré au nom de Crystal Star Creation.
[5] This order is dated
February 16, 2001.
[6] The Appellant produced as
Exhibit A-2, a judgment of Judge Michel Mercier,
a Judge of the Quebec Court, dated May 29, 2003. From this
judgment, it is of interest to quote paragraphs 12, part of
55, 56, 57, 58, 66 and part of the "Conclusion Finale"
(at page 17 of the judgment):
[12] Il est plus
qu'évident que l'ordonnance de confiscation des
produits de la criminalité comme ici, d'avoir
vécu des fruits de la prostitution, (article 212), fait
partie de la sentence à imposer.
L'article 462.37(3) et (4) édicte que dans
certains cas prévus, une amende doit être
infligée et purgée après toute autre
peine.
[55] ... Que leur
reste-t-il?
[56] La preuve est plutôt
faible puisqu'on n'a pas voulu faire la liste de ce que
l'on a effectivement bloqué dans des comptes multiples
contrôlés par les accusés.
[57] La poursuite s'est
contentée de fournir un projet d'ordonnance de
confiscation en vertu des paragraphes 462.37.
[58] Le Tribunal n'a pas de
difficulté à confisquer les comptes de banque
où la preuve révèle que ces comptes
n'ont existé que pour déposer des argents du
commerce illégal, et ce, peu importe le contenu.
...
[66] Ces biens pour certains
immeubles et meubles sont bien décrits; quant aux comptes
de banque, la preuve ne révèle pas le contenu.
...
CONCLUSION FINALE
...
1)
AU CHAPITRE DES FRAIS JUDICIAIRES
ORDONNE que la somme de 30,000.00$ soit payée
dans les trente jours de ce jour à l'Étude
Légale Grey et Casgrain, à prendre à
même les premiers argents liquides des présentes
confiscations ou à défaut lors de la liquidation
des biens immeubles à charge du Procureur
Général du Québec.
...
3)
AU CHAPITRE DE LA CONFISCATION DES BIENS
...
ORDONNE la confiscation de toutes sommes d'argent
et autres valeurs se trouvant contenues et/ou rattachées
aux comptes portant les numéros 36263-26, 00538-80,
01502-23, 00117-89 et 12476-89, 223-14, ce dernier compte
étant enregistré au nom de Crystal Star Creation de
la Banque Scotia, située au 3064, rue St-Charles,
à Kirkland.
ORDONNE à la Banque Scotia, citée au
paragraphe précédent de verses sans délai au
Procureur Général du Québec toutes sommes
confisquées audits comptes;
...
Pour éviter toute confusion, aucune suramende ne sera
rajoutée;
Arguments
[7] The Appellant argued that it was
double jeopardy to deny him the deduction of the amount of the
monies forfeited in the business bank account. It was not just to
deny him the deduction of this amount where he paid tax on the
income from the escort business.
[8] Counsel for the Respondent
referred herself to section 462.37(1) of the Criminal
Code, which reads as follows:
Forfeiture of Proceeds of Crime
462.37(1) [Order of forfeiture of property on
conviction]Subject to this section and sections 462.39 to
462.41, where an offender is convicted, or discharged under
section 730, of a designated offence and the court imposing
sentence on the offender, on application of the Attorney General,
is satisfied, on a balance of probabilities, that any property is
proceeds of crime and that the designated offence was committed
in relation to that property, the court shall order that the
property be forfeited to Her majesty to be disposed of as the
Attorney General directs or otherwise dealt with in accordance
with the law.
[9] She also referred to a decision of
this Court in Neeb v. Canada, [1997] T.C.J. No. 13
(Q.L.), a decision rendered on January 9, 1997. She quoted
part of paragraph 29 of this decision:
2. The seizure of cash. Apart from
considerations of public policy there is, however a further
reason for denying the deduction. This is simply a
disposition of income, albeit involuntary, after it had been
earned. The principle is well
settled: Mersey Docks and Harbour Board v.
Lucas (1883) 8 App. Cas. 891, followed in Fourth
Conservancy Board v. IRC [1931] A.C. 540 and in
Woodward's Pension Society v. M.N.R., 59 D.T.C. 1253
at 1261, aff'd 62 D.T.C. 1002 at 1004.
Analysis and conclusion
[10] We have to consider the first part of
the aforementioned paragraph 29 of the Neeb decision
(supra). It reads as follows:
29 The question of avoidability
is not germane here. Mr. Neeb did get caught and his marihuana
and hashish were seized. I can see no reason why the
Canadian public should be expected to subsidize a drug
dealer's loss through forfeiture of illegal drugs, by
allowing him to write-off the cost of drugs so forfeited, even if
that cost had been established. If public policy has any role in
fiscal matters it must deny such a claim.
[11] As can be read, the Neeb
decision took into account the notion of public policy. This
decision was rendered before the decision of the Supreme Court of
Canada in 65302 British Columbia Ltd. v. The Queen,
[1999] S.C.R. Vol. 3, 804, which decided that the notion of
public policy to prevent a taxpayer to deduct fines or penalties
did not apply in the Income Tax Act.
[12] I quote paragraphs 56, 64, 65, 66
and 69 of that decision :
[56] In this connection, I note
that in calculating income, it is well established that the
deduction of expenses incurred to earn income generated from
illegal acts is allowed. For example, not only is the income of a
person living from the avails of prostitution liable to tax, but
the expenses incurred to earn this income are also deductible:
M.N.R. v. Eldridge, [1964] C.T.C. 545 (Exch. Ct.). See
also Espie Printing Co. v. M.N.R., [1960] Ex. C.R. 422.
Allowing a taxpayer to deduct expenses for a crime would appear
to frustrate the Criminal Code; however, tax authorities are not
concerned with the legal nature of an activity. Thus, in my
opinion, the same principles should apply to the deduction of
fines incurred for the purpose of gaining income because
prohibiting the deductibility of fines and penalties is
inconsistent with the practice of allowing the deduction of
expenses incurred to earn illegal income.
[64] These provisions in the Act
also reduce the force of the argument that allowing the deduction
of fines and penalties permits the taxpayer to profit from his or
her own wrongdoing. This line of reasoning is often traced to the
statement of Lord Atkin in Beresford v. Royal Insurance
Co., [1938] 2 All E.R. 602 (H. L.), at p. 607: "the
absolute rule is that the Courts will not recognize a benefit
accruing to a criminal from his crime." However, as several
commentators note, Beresford involved a payment under an
insurance policy where the insured had committed suicide, at a
time when suicide was characterized as a heinous crime. See E.
Krasa, "The Deductibility of Fines, Penalties, Damages, and
Contract Termination Payments" (1990) 38 Can. Tax J. 1399,
at p. 1417 and Krishna, supra, at pp. 31-32. There is therefore
little authority to extend Lord Atkin's statement more
generally, especially when one considers the clear authority, as
mentioned above, to the effect that expenses incurred in the
pursuit of illegal activities are deductible expenses.
[65] Moreover, given that
Parliament has expressly turned its mind to the deduction of
expenses associated with certain activities that are offences
under the Criminal Code, outlined in s. 67.5 of the
Act, I do not find a legitimate role for judicial
amendment on the general question of deductibility of fines and
penalties. Since the Act is not silent on the issue of
restricting the deduction of some expenses incurred for the
purpose of gaining income, this is a strong indication that
Parliament did direct its attention to the question and that
where it wished to limit the deduction of expenses or payments of
fines and penalties, it did so expressly. I am also sceptical
that the deduction of fines and penalties provides the taxpayer
with a "benefit" or "profit" -
indeed, their purpose is to calculate the taxpayer's profit,
which is then taxed.
(3) Conclusion Regarding s. 18(1)(a)
[66] I therefore cannot agree
with the argument that the deduction of fines and penalties
should be disallowed as being contrary to public policy. First
and foremost, on its face, fines and penalties are capable of
falling within the broad and clear language of
s. 18(1)(a). For courts to intervene in the name of
public policy would only introduce uncertainty, as it would be
unclear what public policy was to be followed, whether a
particular fine or penalty was to be characterized as deterrent
in nature, and whether the body imposing the fine intended it to
be deductible. Moreover, allowing the deduction of fines and
penalties is consistent with the tax policy goals of neutrality
and equity. Although it may be said that the deduction of such
fines and penalties "dilutes" the impact of the
sanction, I do not view this effect as introducing a sufficient
degree of disharmony so as to lead this Court to disregard the
ordinary meaning of s. 18(1)(a) when that ordinary meaning
is harmonious with the scheme and object of the Act. When
Parliament has chosen to prohibit the deduction of otherwise
allowable expenses on the grounds of public policy, then it has
done so explicitly.
[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 ss.
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. It is conceivable that a
breach could be so egregious or repulsive that the fine
subsequently imposed could not be justified as being incurred for
the purpose of producing income. However, such a situation would
likely be rare and requires no further consideration in the
context of this case, especially given that Parliament itself may
choose to delineate such fines and penalties, as it has with
fines imposed by the Income Tax Act. To repeat, Parliament may
well be motivated to respond promptly and comprehensively to
prohibit clearly and directly the deduction of all such fines and
penalties, if Parliament so chooses.
Conclusion
[13] My first comment from reading the
judgment (Exhibit A-2), is that the exact amount of money left in
the bank account of the escort business at the time the account
was frozen is not known. This amount should be ascertained. It
should also be verified whether these monies were not those used
to pay the legal fees referred to in the "Conclusion
finale" in the "Chapitre des frais
judiciaires".
[14] My second comment is that the judgment
(Exhibit A-2) specifically mentioned at paragraph 12 that
"l'ordonnance de confiscation ... fait partie de la
sentence à imposer." I would say that the nature of a
forfeiture as to whether it is a fine or penalty or whether it is
similar in nature remains to be determined.
[15] My third comment is that the amount was
forfeited in the year 2003. It is in that year that the deduction
should receive its appropriate fiscal treatment and in that year
that it should be determined whether the taxpayer is entitled to
deduct the forfeited amount.
[16] In view of my last comment, this appeal
shall be dismissed.
Signed at Ottawa, Canada this 15th day of January 2004.
Lamarre Proulx, J.
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