Citation: 2013TCC265
Date: 20130917
Docket: 2010-682(IT)G
BETWEEN:
CARMELA RAPOSO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Paris J.
[1]
Ms. Raposo is appealing
reassessments of her 2004 and 2005 taxation years. The Minister of National
Revenue included an additional $59,867 and $40,291 in her income for her 2004
and 2005 taxation years, respectively, as proceeds of a fraud she carried out
against her former employer, Buzz Seating Ltd., (“Buzz”) and imposed penalties
under subsection 163(2) of the Income Tax Act, R. S. C., 1985 c. 1
(5th Supp.) (ITA).
[2]
Ms. Raposo denies
having defrauded Buzz of any funds or property. However, she admits that, on
April 21, 2008 she pled guilty to the charge that between February 1,
2005 and May 30, 2005 she defrauded Buzz by misappropriating funds,
contrary to paragraph 380(1)(a) of the Criminal Code of Canada,
R.S.C., 1985, c. C-46 (Exhibit R-1, tab 14). As part of the sentence that was
imposed on her, she was ordered to pay restitution of $40,000 to Buzz. She also
admits that in June 2008 she settled a civil suit brought against her by
Buzz to recover misappropriated company funds by agreeing to pay $20,000 to
Buzz.
[3]
Paragraph 380(1)(a)
of the Criminal Code applies to cases of fraud involving over $5,000 or
frauds involving testamentary instruments. It reads:
380. (1) Every
one who, by deceit, falsehood or other fraudulent means, whether or not it is a
false pretence within the meaning of this Act, defrauds the public or any
person, whether ascertained or not, of any property, money or valuable security
or any service,
(a) is guilty of an indictable offence and
liable to a term of imprisonment not exceeding fourteen years, where the
subject-matter of the offence is a testamentary instrument or the value of the
subject-matter of the offence exceeds five thousand dollars;
[4]
A the hearing before
me, Ms. Raposo said that she pled guilty to the charge against her and agreed to
settle with Buzz because it would have cost her substantially more to proceed
to trial and she could not afford it, and because she wished to move on with
her life. She denied having taken anything from Buzz that she was not entitled
to, and said that everything she received from Buzz consisted of salary or
reimbursement of expenses she paid on behalf of the company.
[5]
Prior to working at
Buzz, Ms. Raposo was a manager at two companies (related to each other) that
manufactured office furniture. While working at
those companies, she became acquainted with Daniel O’Hara (O’Hara) who
worked at one of the companies as a saleman. In 2003, O’Hara left to start
Buzz. He persuaded Ms. Raposo to come to work for Buzz in late 2003 as its
general manager.
[6]
Ms. Raposo said that O’Hara
was an American citizen, and that he resided in the U.S. During the time that
the business was starting up, O’Hara would come to Canada and stay with Ms.
Raposo and her family at her home. Buzz’s office was also at her home. Ms.
Raposo said she paid all of the company’s initial expenses with her credit
card, and employees were paid in cash. When the company set up a bank account
at some point in 2003 she was made the sole signatory on it. It appears that
funds provided by investors were deposited in the account to fund the
activities of Buzz. By late 2004, the company set up a manufacturing plant in Cambridge, Ontario. Ms. Raposo said that some of the equipment and supplies for the plant
were paid for with cash to get a better price, and that she withdrew cash from
the company bank account to make these purchases. She provided a copy of a
letter from one equipment supplier stating that she had been paid in cash by
O’Hara for the equipment. (Exhibit A-1). Ms. Raposo also said she paid other company
expenses herself and reimbursed herself from company funds for those payments. She
testified that she was not always reimbursed. She produced copies of receipts
for some stamps and office supplies that showed these items were paid for in
cash or with a debit card. (Exhibit A-5 and A-6) She also produced a copy
of an invoice dated December 7, 2004 for chair parts and a cheque on her
personal account used to pay the invoice. (Exhibit A-2) Finally she
produced copies of her personal cell phone bills and her original home phone
bills to show that they were used extensively for calls relating to Buzz’s
business. (Exhibits A-7 and A-8). Ms. Raposo said that these were the only
records she had of expenses she paid on behalf of Buzz.
[7]
According to Ms.
Raposo, in May 2005, O’Hara told her that he needed all of the company records
that she kept at home for a meeting with an auditor from the Canada Revenue
Agency (CRA). Ms. Raposo was aware that the company was having financial
problems, that it was behind on its remittances of employee source deductions
and that the CRA was conducting an audit. However, three days after O’Hara took
the records, she was dismissed on the grounds that she had misappropriated
company funds. She said she attempted to meet with O’Hara to demonstrate that
everything she received from the company was either salary or a reimbursement
of expenses, but he refused. She also said she has not had access to the
records of the company since then and that those records included a log of all
expenses paid by her personally.
[8]
Criminal charges were
laid against her and she retained counsel. However, she said that it would have
been too expensive for her to go to trial, which she was told would cost
$100,000. Instead, under an agreement reached with the Crown, she pleaded
guilty and received a sentence of two years less one day to be served in the
community, and was ordered to pay $40,000 restitution. A civil suit brought against
her by Buzz to recover the stolen funds was settled at around the same time for
$20,000. Ms. Raposo said that she took these steps because she wanted to put an
end to the whole matter so that she and her family could move on.
[9]
Ms. Raposo testified
that she ran and managed the company single-handedly throughout the time she
worked there except during the times O’Hara came up from the U.S. She said she was “pulled in all directions” and that she asked O’Hara many times to
hire someone to do the accounting for the company but that he refused because
there was not enough money available. She insisted though that sufficient
records existed to show that she did not use any company funds for personal
purposes.
[10]
According to the
schedule attached to the Reply to the Notice of Appeal, the amounts taken by
Ms. Raposo from the company consisted of “duplicate” payments of salary she
paid herself from the company bank account, other cheques she wrote to herself
from the company or that she wrote to “cash” and endorsed to herself and cashed,
cash withdrawals from the company’s account, use of the company’s debit card
for personal expenses and payment of personal phone utility bills by company
cheque. The amounts and dates of these misappropriations are set out in the
schedules, which are based on a list of misappropriated amounts prepared by
Buzz. (Exhibit R-1, tab 7)
[11]
In cross-examination,
Ms. Raposo admitted that she received all of the amounts listed in the
schedules to the Reply but did not agree with the characterization of the
amounts. She explained that the purported “duplicate” salary cheques were in
fact payments of salary, and that the total salary she received, including
those amounts, did not exceed the salary to which she was entitled, which she
said was $80,000 per year. The other cheques and withdrawals were either to
obtain cash to make payments to workers or suppliers or to reimburse herself
for amounts she paid from her personal funds for the company, and all of the
debit card purchases were on behalf of the company. One expenditure was for
patio furniture for her home. She explained that O’Hara told her to purchase it
and to charge it to the company as a gift from him. She said that she left it
up to the accountants to decide how to treat these amounts in the company’s
books. She also said that the patio furniture was used partly for office
functions at her home, but gave no details of who attended them or when they
were held.
Position of the
Appellant
[12]
Ms. Raposo maintained
that the evidence she adduced was sufficient to show that all of the amounts set
in Schedule A and B to the Reply to Notice of Appeal were either employment
income which she reported on her tax returns for 2004 and 2005 or were
reimbursements of expenses she had paid personally on the company’s behalf and
were non-taxable receipts. She took the position that her conviction for fraud
is not determinative of any facts in this case because she entered a guilty
plea for financial reasons only. She also submitted that it was implausible
that she misappropriated funds from the company, since she chose to leave a
good job that she had worked at for ten years in order to work at Buzz. She
said it didn’t make sense that within two months of starting at Buzz that she
would begin taking money she was not entitled to. Ms. Raposo also argued that
there was no evidence that her lifestyle or assets reflected any illegal
unreported income. She also submitted that information provided by O’Hara was
unreliable. She said he had an interest in under-reporting her salary on the
T-4 slips issued to her by Buzz, in order to reduce the amount of employee
source deductions that the company was required to remit to the CRA and that he
underreported income earned by the company and used furniture designs and
copyrights of the company’s competitors without permission or authorization.
Ms. Raposo also argued that it had not been shown what the calculation of the
misappropriated amounts was based on, since none of the company’s records had
been produced.
Analysis
[13]
While the appellant
maintained that I should disregard her criminal conviction for fraud against
Buzz, this position runs contrary to statute and the existing jurisprudence
concerning the use of prior criminal convictions in civil actions. Proof of
prior convictions are admissible in Ontario pursuant to section 22.1 of
the Ontario Evidence Act, R.S.O. 1990, c. E.23 which reads as
follows:
22.1 (1) Proof that a
person has been convicted or discharged anywhere in Canada of a crime is proof,
in the absence of evidence to the contrary, that the crime was committed by the
person, if,
(a) no appeal of the conviction
or discharge was taken and the time for an appeal has expired; or
(b) an appeal of the conviction
or discharge was taken but was dismissed or abandoned and no further appeal is
available. 1995, c. 6, s. 6 (3).
[14]
A criminal conviction
is admissible as prima facie evidence of the material facts underlying
the conviction: Re Del Core and Ontario College of Pharmacists (1985), 51
O.R. (2d) 1 (Ont. C.A.). Even greater weight may be accorded to a prior
criminal conviction where there has been a full trial leading to the
conviction: Ali et 124558 Canada inc v
Cie d’assurance Guardian du Canada et Cie d’assurance Royale du Canada, 1999 CanLII 13177 (QCCA).
[15]
In this case, given that the
conviction was recorded as a result of the appellant’s guilty pleas, rather
than after a trial, it is more appropriate to treat the conviction as prima
facie proof of the fraud by the appellant against Buzz.
[16]
In any event, the assumptions
relied upon by the Minister in reassessing the appellant, set out in paragraph
7 of the Reply to Notice of Appeal, include that she obtained $59,867 in 2004
and $40,291 from Buzz by fraudulent means. The details of the amounts are set out
in Schedules A and B to the Reply. Those schedules consist of a list of the
amounts misappropriated by the appellant from Buzz and show how the payments
were recorded in Buzz’s books and records.
[17]
Therefore, both as a result of the
proof of the appellant’s criminal conviction for fraud and as a result of the
assumptions upon which the Minister based the reassessments in issue, the
appellant bears the onus to show that she did not defraud Buzz of the amounts
in her income for her 2004 and 2005 taxation years. However, the respondent
bears the onus of proof with respect to the establishment of the gross
negligence penalties.
[18]
For the reasons that follow, I
find that the appellant has not shown that she did not defraud Buzz of the
amounts that have been included in her income except in one minor respect. I
also find that the respondent has shown that the penalties were properly
imposed in accordance with subsection 163(2) of the Act on
$37,347.41 of unreported income in her 2005 taxation year.
[19]
I find the appellant’s evidence to
be generally unconvincing, especially concerning the amounts referred to as “duplicate
payroll cheques” which she issued to herself.
[20]
The cheques referred to as the
“duplicate payroll cheques” were made out by the appellant to herself on Buzz’s
bank account in amounts that were identical (or on one instance very close) to
the amount of her payroll cheques between June 2004 and April 2005. The
“duplicate” cheques amounted to $15,304.68 in 2004 and $9,741.29 in 2005.
[21]
The appellant maintains that all
of these cheques were in fact payroll cheques to which she was entitled.
[22]
The evidence concerning the amount
of the appellant’s salary is confusing. O’Hara stated in a letter written in April 2004 that
her annual salary at Buzz was $80,000 and that she was also appointed as a
director and given 10% of the shares of the company. However, in other correspondence from O’Hara to Buzz’s
lawyer, the appellant’s salary is shown as $60,000 per annum, which was reduced
by $15,000 to $45,000 to offset the purchase of 5% interest in the company by
the appellant (Exhibit R-1, tab 10).
[23]
While the appellant
said that her annual salary at Buzz was $80,000, she only reported employment
income of $47,841.00 from Buzz on her 2004 T-1 income tax return. She said that
the first T-4 slip she had received from Buzz for her 2004 tax year before she
was dismissed showed total employment
income of $80,938.04. After she was dismissed she said that she received two revised T-4 slips, one prepared by the CRA showing employment income of
$60,000 and a final one from Buzz showing employment income of $47,841.00. She said that she
believed she had no choice but to accept the final figure because it would have
been impossible for her to get a further amended T-4 slip from the company
showing her true earnings. However, in cross-examination, the appellant said she could not in fact say how much
salary she received in 2004 from Buzz and that “it was difficult to reconcile”
what her income was that year.
[24]
The accounting treatment in Buzz’s
books for the alleged duplicate payroll cheques leads me to question the
appellant’s assertion that all of the cheques were legitimate salary payments
to her. From February to June 2004, the appellant wrote out payroll cheques to
herself roughly every two weeks, in amounts ranging from $1,242.99 to
$1,286.93. Those amounts were charged to Buzz’s payroll account. Beginning in
June 2004, the appellant began writing cheques to herself in the same amount as
ones charged to Buzz’s payroll account for her salary. These cheques were
charged to various other accounts, including general expenses, supplier
expenses and telephone expenses, or were simply not recorded in Buzz’s books at
all. During the same period the bi-weekly payroll cheques the appellant made
out to herself were recorded in Buzz’s payroll account. In other words, the
additional cheques in the same amount as the cheques recorded as the
appellant’s salary were not recorded as salary. They appear to have been
disguised as payments of other kinds of expenses or to have not been recorded
in Buzz’s accounts at all. The appellant admitted that she made most of the
bookkeeping entries in Buzz’s records, except for some that may have been made
by a part-time worker. I infer that the appellant would have directed the
worker to make the entries, given her position at Buzz during that time. The
accounting treatment of the “duplicate payroll cheques” leads me to disbelieve
the appellant’s claim that all of these amounts were salary to her. If they had
been salary, why did the appellant not account for them in that manner?
Furthermore many were dated only a few days before or after ones that were
recorded as payroll. There was no explanation why salary cheques would have
been written for identical or very similar amounts within days of each other on
an ongoing basis after June 2004.
[25]
Overall I find the evidence
concerning the appellant’s actual salary received from Buzz supports the
repondent’s position that the amounts described as “duplicate payroll cheques”
were misappropriations by the appellant. While the unexplained revisions of the
T-4 slips and the inconsistent representations by O’Hara as to the appellant’s
salary are confusing, the way in which the appellant accounted in Buzz’s books for
many of those payments as other kinds of expenses and did not account at all
for other of those payments leads me to conclude that she was not entitled to
those payments as salary. I also find the appellant’s explanation for the
discrepancy between what she said her salary was and what she reported on her
tax return to be unconvincing. Since her salary was paid by cheque, it seems to
me that it would have been easy for her to determine from her own bank records
what amount she received in 2004 in order to correctly report it on her return.
[26]
The next series of amounts
included in the appellant’s income by the Minister relate to cheques written by
the appellant to herself or to “cash” on Buzz’s bank account or cash
withdrawals from that account together. These items totaled $36,895.88 in 2004
and $26,138.50 in 2005. The appellant maintained that she used the cash from
these cheques and withdrawals for purchases of equipment and supplies for
Buzz’s business, or to reimburse herself for puchases she made for the business
out of her bank account or with her credit or debit card. In support of her
position the appellant produced a copy of a cheque written by her on her
personal bank account to a Buzz supplier. The amount of the cheque corresponded
to a cheque she made out to cash on Buzz’s account. However, this was not one
of the cheques that was included in the fraud charge or that the Minister
treated as unreported income. The appellant also testified that she used some
of the cash from other cheques to purchase equipment for Buzz. She provided a
letter from one supplier indicating that certain equipment had been purchased
in cash by O’Hara. Once again, however, a cheque to cash for $3,500 that was
recorded in Buzz’s books on account of that supplier was not included in the
fraud charge or in the unreported income.
[27]
The appellant did not call any
witnesses from any other suppliers to collaborate her testimony that she paid them
cash for any other items sold to Buzz. Nor did she provide any details of what
equipment she purchased with the cash.
[28]
The appellant did testify that
some of the cash was used for office supplies and postage for company mail, and
some was used to reimburse herself for supplies and purchases for the company
that she paid for with her personal debit card. The appellant produced a series
of receipts from a variety of stores such as Staples, Shoppers, Best Buy and
Home Depot for miscellaneous supplies. Some receipts identify the item
purchased and some simply show the price charged. Some identify the method of
payment while others do not. The receipts for supplies for the period from
December 27, 2003 to April 2, 2005 total $1,559.70. The receipts for postage
for roughly the same period total $376.64. The appellant also estimated an
additional amount for postage she said she would have paid for the company.
[29]
Unfortunately, there is no way of
knowing whether the cash taken by the appellant from the company’s bank account
was used to pay any of these amounts or whether the appellant was already
reimbursed for them in some other manner. The appellant maintained that she
kept a log of the expenses (including receipts) that she incurred on behalf of
the company to which she was denied access after she was dismissed. I find it
implausible, though, that she would have regularly paid cash or used her
personal debit card to pay company expenses when she was given a debit card on
the company account and also had authority to write cheques on behalf of the
company. It makes no sense to me why she would have preferred to pay company
expenses out of her own funds when it would have been as easy to use the
company’s debit card or cheques and would have made accounting for the
purchases far simpler.
[30]
The cash withdrawals included in
the appellant’s income also included a $400 U.S. withdrawal but the appellant
did not address this amount in her testimony.
[31]
The remainder of the items in
issue relate to payments made by cheque by the appellant out of Buzz’s bank
account. In 2004 and 2005 she wrote cheques to Bell Mobility to pay her personal
cell phone bill, to Bell World to pay her home phone bill, to Rona, Home Depot,
Best Buy, Zellers and Dominion for unspecified items, to the Province of
Ontario for traffic fines, to Canadian Tire and Citi Financial to pay her
credit card bills and to Dot Patio to pay for patio furniture.
[32]
The appellant produced her cell
phone and home phone bills for the relevant period which showed a significant
amount of long distance calls to the U.S. and Southern Ontario which the
appellant identified as relating to the company’s business. The appellant said
that she used company funds to make payments on these accounts because of this
business use. In light of the detailed telephone receipts presented by the
appellant which support her testimony, I am prepared to accept that the
payments to Bell Mobility and Bell World should be removed from the unreported
income assessed to her. This totals $3,476.07 in 2004 and $2,943.59 in 2005.
[33]
The appellant also claimed that
the payment to Dot Patio was to pay for patio furniture for her home which
O’Hara gave her as a gift from the company. She said it was to thank her for
allowing him to stay with her at her home while he was in Canada on company business. This would clearly be a taxable benefit to the appellant and
was correctly included in her income.
[34]
With respect to the remainder of
the payments made by cheque to third parties on behalf of the appellant, no
evidence was presented to corroborate her testimony that these were for company
expenses. For this reason, and because of the lack of detail in the appellant’s
testimony concerning these payments, I am not satisfied that she has shown that
they were not payments of personal expenses.
[35]
The appellant argued that it made
no sense that she would leave a good job to begin to work for Buzz and then
begin to take money from the company, but without more detailed and convincing
evidence that she did not defraud the company, I must accept the Minister’s
assumption that she did, whether or not a motive has been made out. In addition
I have some difficulty accepting her assertion that she pled guilty because she
could not afford the expense of a trial, since her plea bargain required her to
pay $40,000 restitution and she also agreed to settle Buzz’s civil suit against
her for $20,000. According to the evidence, the appellant paid both amounts at
the time of her conviction or shortly thereafter.
[36]
I turn now to the question of the
gross negligence penalties. The onus of course is on the respondent to prove
that the appellant made misrepresentations in reporting her income for 2004 and
2005 and that the misrepresentations were willful or due to gross negligence.
The respondent called no witnesses, and relied on the proof of the appellant’s
criminal conviction.
[37]
As I stated earlier, the criminal
conviction is prima facie proof of the facts underlying the conviction.
Here the indictment against the appellant only refers to the 2005 year and does
not set out the actual amount she misappropriated from Buzz. However, the
record shows that $40,000 restitution was ordered. In my view the record can be
relied on to support the position that there was a misappropriation of $40,000
by the appellant in 2005. This amount would have included those cheques totaling
$2,943.59 written on Buzz’s account in 2005 to pay the appellant’s phone bills,
which I found not to have been misappropriated by the appellant. For the
purpose of applying the gross negligence penalties, the respondent has shown
that the appellant misappropriated $37,056.41 from Buzz. The appellant admitted
that she did not report any of the amounts included by the Minister in her
income. I find, therefore, that the appellant deliberately underreported her
income $37,056.41 in her 2005 taxation year. I would adopt the position taken
by Bowman C.J. in Biros v Canada, 2007 TCC 248, that where the
respondent has proved that a taxpayer has received funds from a fraudulent
scheme, the failure to report the income from the fraud is more likely part of
the overall fraud than due to inadvertence by the taxpayer.
[38]
For these reasons, the appeals are
allowed in part and the matter is referred back to the Minister for
reassessment on the basis that the unreported income be reduced by $3,476.07 in
2004 and $2,943.59 in 2005. The gross negligence penalty be deleted for the
2004 taxation year and be recalculated for the 2005 taxation year on the
basis of an intentional failure to report income of $37,347.41.
[39]
Given that the appellant has had
some success in these appeals, I decline to make any award of costs.
Signed at Ottawa, Canada, this 25th day of September 2013.
“B.Paris”