Citation: 2010 TCC 3
Date: 20100107
Docket: 2006-1747(IT)G
BETWEEN:
MAN KIT TERRENCE CHAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] Man Kit Terrence Chan appeals in respect of an
assessment made under the Income Tax Act.
[2] For the 1999 taxation year, the Minister of National
Revenue added an amount of $200,000 to the appellant’s income on the assumption
that it constituted profit from the appellant’s involvement in a cocaine
trafficking organization. A 50 percent penalty was also imposed under subsection
163(2) of the Act.
[3] The appellant submits that the assessment is in error
for the reasons below.
(a)
The assessment was not issued in a
timely manner, and therefore is invalid pursuant to subsection 152(4) of the Act.
(b)
Alternatively, subsection 152(4)
bars the assessment because there was no misrepresentation due to neglect,
carelessness, willful default or fraud in filing the tax return or supplying
information under the Act.
(c)
The appellant is entitled to a
deduction for the loss of the profit in a seizure.
(d)
The appellant is entitled to a
deduction for legal fees incurred in connection with a related criminal
prosecution.
(e)
The penalty imposed under
subsection 163(2) should be vacated because the failure to report the income
was not done knowingly and does not amount to gross negligence.
Factual background
[4] There is limited evidence before me. The only witness
was an officer from the Canada Revenue Agency (CRA) who testified on behalf of
the respondent.
[5] By way of factual background, then, I will reproduce
certain statements of fact from the notice of appeal. They are not in dispute.
2.
On approximately September 24, 1999, some 35 persons, including the
Appellant, were arrested pursuant to a massive joint operation of the Edmonton
Police Service and Royal Canadian Mounted Police named “Project Kachou”. On
this date, the police also seized a number of documents from the Appellant’s
apartment, one of which evidenced the existence of a safety deposit box in the
Appellant’s name at a branch of the Royal Bank of Canada.
3.
On September 28, 1999, the police seized and searched the safety deposit
box pursuant to a search warrant and found that the box contained two hundred
$1,000 bills, or $200,000 in cash (the “moneys”).
5.
The Appellant filed his Income Tax Return for the 1999 taxation year on
June 27, 2000. […]
8.
The date of mailing of the Appellant’s Notice of Assessment for the 1999
taxation year was July 24, 2000. […]
9.
On July 24, 2003, the three year limitation period prescribed by s.
152(3.1) of the Income Tax Act for the issuance of a Notice of
Reassessment expired. […]
10.
Nearly two years after the expiration of the applicable limitation
period, the Appellant was served with a Notice of Reassessment dated July 14,
2005. […]
12.
The Appellant and most of the other persons arrested on September 28,
1999, were subsequently charged with various criminal offences including
conspiracy to traffic in cocaine and participating in the affairs of a criminal
organization.
13. Certain other members of the alleged criminal organization
were also charged with offences pertaining to the possession of proceeds of
crime. The Appellant was not charged with this offence.
17.
By operation of previous Orders and Consent Orders granted by the Hon.
Justice M. Binder and the Hon. Justice D. Sulyma, the Crown was had been [sic] obligated
to pay the Appellant’s legal fees in any event.
18.
By operation of a judicial stay entered by Madame Justice D. Sulyma on
April 30, 2002, the Appellant was acquitted on all the charges he faced.
19.
The criminal prosecutions against all the other persons arrested
pursuant to Project Kachou also collapsed as a result of withdrawn charges,
Crown stays and judicial stays.
[6] The statements in paragraphs 17 and 18 above are not
entirely consistent with the evidence. To the extent that this is relevant to
my conclusion, it will be discussed below.
Is assessment invalid by
reason of delay?
[7] The notice of assessment that is at issue is dated
July 14, 2005. This is almost two years after the normal reassessment period
had expired.
[8] The appellant submits that the Minister should have
issued the notice of assessment much earlier when the Minister first became
aware of the matter. This would have either been in 1999 when the funds were
seized, or in 2001 when by a court order the appellant was permitted to use
part or all of the seized funds to pay his legal expenses.
[9] There is no doubt that the CRA knew of these events
because the CRA officer who had issued the assessment, Terry Willisko, had been
seconded to the RCMP in 1998 and was involved in Project Kachou.
[10] According to the testimony of Mr. Willisko, when these
events transpired he held off considering assessment action until the criminal
proceedings against all of the accused in Project Kachou had been completed. He
testified that this was in accordance with CRA policy in light of the
differences in investigative powers in civil and criminal proceedings.
[11] The
appellant submits that an assessment is invalid if it is not issued in a timely
manner pursuant to subsection 152(4). I
do not agree with this submission.
[12] The relevant legislative provisions, subsections
152(1) and (4), provide in part:
(1)
Assessment. The Minister shall, with all due dispatch, examine a
taxpayer’s return of income for a taxation year, assess the tax for the year,
the interest and penalties, if any, payable and determine
(a) the amount of refund, if any, to which the
taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the
year; […]
(4)
Assessment and reassessment. The Minister may at any time make an
assessment, reassessment or additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a taxpayer or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s normal
reassessment period in respect of the year only if
(a)
the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to
neglect, carelessness or wilful default or has committed any
fraud in filing the return or in supplying any information
under this
Act, […]
[13] Subsection 152(4) provides that an assessment cannot
be made after the expiry of the normal reassessment period unless the taxpayer
has made a misrepresentation attributable to neglect, carelessness or willful
default.
[14] The
position of the appellant is that a time requirement should be read in or
implied under s. 152(4). The appellant
refers by analogy to the due dispatch requirement in s. 152(1). As I understand
it, the appellant does not suggest that s. 152(1) applies in these circumstances.
Rather, it is suggested that a similar due dispatch requirement should be read
into s. 152(4).
[15] In my view, it would not be appropriate to read an
assessing time limit into s. 152(4). If Parliament had intended a time limit,
one would have been specifically provided for. To the contrary, s. 152(4)
provides that an assessment can be made “at any time.”
[16] The intention of subsection 152(4) is clear, in my
view, to permit the Minister to assess at any time if there has been a
misrepresentation due to neglect, carelessness or willful default. This may
appear to be a harsh result but it seems to be clearly what Parliament had
intended.
[17] I would mention that s. 152(4) is not the only instance
in which the Minister has been provided an unlimited time to assess. Another
example is section 160, in which the harshness of an open-ended assessment
period was considered by the Supreme Court of Canada in The Queen et al v.
Addison & Leyen Ltd., 2007 SCC 33, 2007 DTC 5365, p. 9-10.
Was misrepresentation due
to neglect, carelessness or willful default?
[18] The appellant submits that the assessment is
nevertheless out of time under s. 152(4) because the omission of the $200,000
profit from his income tax return was not attributable to neglect, carelessness
or willful default.
[19] The basis for the submission is that the funds “had
been seized by the Crown with the knowledge and participation of the CRA”
(Appellant’s Written Submissions, para. 30).
[20] There
seems to be two parts to the submission.
First, the appellant seems to suggest that it is not careless to omit profit
from income where the profit has been seized. Second, the appellant suggests
that there has been no misrepresentation if the CRA is aware of the profit.
[21] I will deal the second part first. I fail to see how
the knowledge of the CRA would be relevant to the application of s. 152(4). A
misrepresentation occurred when the appellant failed to report this amount as income
in his income tax return.
[22] In the Canadian Oxford Dictionary (2001 edition), the
term “misrepresentation” is defined as follows:
Represent
wrongly; give a false or misleading account or idea of.
[23] The failure to include this amount in the income tax
return clearly gave a false account of the appellant’s income. The
misrepresentation is not excused if the CRA is aware of the income.
[24] The appellant also submits that there is no
carelessness or negligence in circumstances where the funds had been seized
before the income tax return was filed.
[25] The seizure, which took place on September 28, 1999,
occurred several months before the relevant income tax return was filed on June
27, 2000.
[26] This is not a sufficient justification for failing to
report the income. The circumstances of this case suggest that the appellant was
willfully blind as to the tax-reporting obligation with respect to this profit.
[27] Until fairly recently, the appellant maintained that
the funds did not belong to him. This is reflected in the CRA’s audit report
(Ex. R-1) prepared in June 2005. Under “Client Representations,” the report
provides:
MR. WHITLING [lawyer for the appellant] faxed a letter to the auditors’
attention on January 11, 2005, wherein he requested disclosure of all documents
in possession of the Crown relating to Mr. Chan’s involvement in the RCMP
Project Kachou. He further claimed that Mr. CHAN did not have control or
beneficial ownership of the $200,000 Cash and that Mr. CHAN could have faced
reprisal from other members of the alleged criminal organization if had [sic]
used the money towards payment of his income taxes.
[28] A similar position is implied by the notice of appeal,
where the following statement of fact is made by the appellant:
On the Crown’s own theory of its prosecution, the moneys were in fact
“owned” and controlled by the leaders of the organization. The Appellant had no
practical right or ability to spend the moneys for his own benefit, nor to pay
a portion of these moneys as income tax.
[29] The above statement in the notice of appeal, which was
filed by the appellant’s lawyer, appears to have been carefully worded. It merely
implies that the $200,000 is not beneficially owned by the appellant, and stops
short of stating this as a fact. This is not surprising because the appellant
had previously testified in another court proceeding that the money did belong
to him.
[30] The prior testimony had been given in a proceeding
before the Alberta Court of Queen’s Bench in 2001 as part of an application by
the appellant to access the seized funds in order to pay his legal bills. The
following is a portion of the transcript of this testimony:
Q And Mr. Chan, you claim an interest in the monies that were seized
from the safety deposit box; is that correct?
A Yes
Q Are you the owner of these monies?
A Yes
[…]
Q Mr. Chan, to your knowledge, does any other party, be it an
individual person or a corporation, have any interest in the $200,000 that was
seized from your safety deposit box?
THE INTERPRETER: No other party. I am the only owner.
[31] It is useful to note that the respondent did not have
access to this testimony until a sealing order was lifted by the Alberta Court
of Queen’s Bench pursuant to an application by the respondent. The order was
granted by Justice Binder on September 11, 2007 (Canada v. Chan, 2007
ABQB 554), and an appeal from that decision was denied on jurisdictional
grounds on October 3, 2008 (R. v. Chan, 2008 ABCA 330).
[32] After the disclosure of the transcript, the appellant
no longer denied that the funds belonged to him.
[33] Further, at an examination for discovery of the
appellant held on January 29, 2009, the following exchange took place
(Transcript, page 2):
Q And for the record, you’re not contesting that the $200,000 was
taxable income for the year 1999?
A Yes
Q And that this income was profit?
A I’m sorry?
Q This income constituted a profit?
MR. WHITLING: That’s correct.
[34] In this context, it is fairly clear that the appellant
had no intention of admitting that the funds were his until the respondent was
able to access the testimony from the prior proceeding.
[35] I conclude that the failure to report this amount on
an income tax return amounts to willful blindness.
Does seizure give rise to
a deduction?
[36] The appellant further suggests that the seizure of the
funds entitles him to a deduction in computing income.
[37] The appellant referred to a number of judicial
decisions. Although these decisions do not rule out that a forfeiture of
proceeds of crime could give rise to a deduction, they also do not support the
appellant’s position that a deduction is available.
[38] The respondent referred to three decisions of this
Court which denied a deduction for a forfeiture of proceeds of crime: Neeb
v. The Queen, 97 DTC 895 (TCC); Brizzi v. The Queen, 2007 TCC 226,
2007 DTC 896 (upheld on appeal on other grounds); Anjaria v. The Queen,
2007 TCC 746, 2008 DTC 2306. The last two cases were heard under the informal
procedure.
[39] In Neeb, by Bowman J. (as he then was) stated
the applicable principle, in obiter at page 902:
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 DTC 1253 at 1261, aff’d 62 DTC
1002 at 1004.
[40] It is not necessary on the facts of this case to
consider the decisions cited by counsel for the respondent.
[41] The main problem with the appellant’s position is that
the seized funds never ceased to be beneficially owned by the appellant. Unlike
in the above decisions, the seized funds in this case were never forfeited and
did not give rise to an expense that may be deducted.
[42] The difference between a seizure and a forfeiture was
noted in Toth v. The Queen, 2004 DTC 2192. In that case, a deduction was
sought in respect of a seizure of funds earned in an illegal business. At para.
15, Lamarre Proulx J. commented as follows:
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.
[43] The funds seized from the appellant were never
forfeited to the Crown. In 2001 the appellant made a successful application to
the Alberta Court of Queen’s Bench for a release of funds to pay his legal
fees. Further, in 2002 the criminal proceedings were withdrawn, ending any
right that the Crown had to apply for forfeiture.
[44] In the circumstances, the appellant never lost ownership
of the funds. A seizure by itself does not give rise to a deduction because it
is not an expense.
[45] Finally, I would comment briefly concerning the
statement in the notice of appeal that the Crown was obligated to pay the appellant’s
legal fees. As I understand it, no order was issued that required the Crown to
pay the appellant’s legal fees. The appellant was able to access the seized
funds so that he could pay his own legal fees.
Are legal fees deductible?
[46] The appellant submits that he is entitled to a
deduction for the legal fees paid to his lawyer in 1999.
[47] There is no reliable evidence as to how much the legal
expenses were and when they were incurred.[1]
The implication from the appellant’s argument seems to be that legal expenses
of least $200,000 were incurred in 1999. As the respondent did not dispute
this, at least in the pleadings, I will not base my conclusion on a failure to
establish how much the legal expenses were and when they were incurred.
[48] As for
whether such expenses are deductible, a similar
issue was considered in Neeb. In a similar fact scenario, former Chief
Justice Bowman concluded that legal fees were not deductible. At para. 35:
Although one might, on one view of the matter, say that legal defence
costs are a necessary incident of carrying on an illegal business, I prefer to
put my decision on a different basis. Mr. Neeb defended the narcotics charge
not because he intended to carry on the illegal narcotics business, but because
he wanted to stay out of jail, or at least avoid going to jail for any longer
than he had to. He was not defending his business or his business practices.
[49] I agree with this approach, and conclude that it is
appropriate to apply the same reasoning here. I would also comment that the
appellant provided the following testimony in his examination on discovery (Ex.
R-11, page 14):
Q Why
did you want a lawyer, do you remember?
A I
want a lawyer to protect my interests.
Q To
protect your interests?
A Yes.
Q You’re worried about going to jail for longer than you
needed to or going to jail at all?
A Yes.
[50] During argument, counsel for the appellant submitted
that an expense incurred to avoid going to jail was a business-related expense
because it enabled the appellant to earn additional income. There is not a
sufficient factual foundation to support this argument, but even if there were
I would view the personal element of the expense to be the dominant aspect.
Are gross negligence
penalties appropriate?
[51] The appellant did not challenge the penalties in the
notice of appeal but the respondent did not object to submissions being made at
the hearing.
[52] Counsel submitted that gross negligence penalties are
not appropriate because the appellant was not hiding anything since the monies
had already been seized by the police by the time that the 1999 tax return was
filed.
[53] For the reasons discussed above concerning the
application of s. 152(4), I disagree that the appellant was not hiding anything
at the time that the tax return was filed. It appears that the appellant denied
that the $200,000 was his own money until 2008 when the respondent was able to
obtain a transcript of the appellant’s testimony in his application for a
return of the seized funds to pay his legal fees.
Disposition
[54] In the result, the appeal will be dismissed, with
costs to the respondent.
Signed at Toronto, Ontario this 7th day of January 2010.
“J. M. Woods”
Email this Content