Citation: 2007TCC667
Date: 20071102
Docket: 2003-4552(IT)G
BETWEEN:
DWAYNE HEPPNER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] This appeal concerns the deductibility of
approximately $300,000 that was purportedly lost by Dwayne Heppner in a
transaction emanating from Nigeria.
[2] Although the
notice of appeal raised other issues, the appellant indicated at the
commencement of the hearing that he was only disputing this issue. The
assessments relate to the 1999 and 2000 taxation years.
[3] The appellant,
who represented himself at the hearing, has a law degree but is not a
practicing lawyer.
[4] The position of
the Crown is that there is no source of income from which the appellant can
claim a deduction because the money was lost in a fraudulent scheme.
[5] The legal principle
that the Crown relies on is not in dispute, and has been articulated by the
Federal Court of Appeal in several recent decisions: Hammill v. The Queen,
2005 D.T.C. 5397; Vankerk v. Canada, [2006] 3 C.T.C. 53; and The
Queen v. Nunn, 2007 D.T.C. 5111.
[6] In Hammill, the
general principle is described by Noël J.A. as follows:
27 This
finding by the Tax Court Judge that the appellant was the victim of a fraud
from beginning to end, if supported by the evidence, is incompatible with the
existence of a business under the Act. This is not a case where the Court must
have regard to the taxpayer's state of mind, or the extent of a personal
element in order to determine whether a certain activity gives rise to a source
of income under the Act (Stewart, supra, Tonn v. The Queen, 96 DTC 6001,
etc.). Nor is this a defalcation case of the type described in Parkland
Operations, supra; Cassidy's Limited, supra; Agnew,
supra; and IT-185R, where a business is defrauded by an employee or a
third party, and the issue becomes whether the resulting loss is reasonably
incidental to the income-earning activities.
28 A
fraudulent scheme from beginning to end or a sting operation, if that be the
case, cannot give rise to a source of income from the victim's point of view
and hence cannot be considered as a business under any definition. […]
[7] For the appellant to succeed in this appeal, then, it
must be established that the losses were incurred in the course of a bona
fide business. He submits that they were.
[8] I
will begin by reproducing the relevant parts of the statement of facts in the
appellant’s notice of appeal.
3. The
Appellant was the unwitting victim of a sophisticated fraud, commonly known as
the Nigerian Advance Fee Fraud.
4. At
all material times, the Appellant carried on business as a financial advisor,
broker, and Vice-President Corporate Finance for a Toronto Stock Exchange
member firm in the greater Toronto area.
5. Edwin
Kroeker ("Kroeker") is a Toronto area businessman.
6. Kroeker
was a trusted friend and business associate of the Appellant’s.
7. In
or about 1998 Kroeker received a facsimile transmission from a person
purporting to be Dr. Mike Ibe of the Federal Republic of Nigeria ("Ibe").
Ibe represented to Kroeker that a corporation named Mantua International
Services Inc. ("Mantua") was owed US $30,960,000.00 (the
"Contract Amount") by the government of Nigeria. Ibe claimed that the
unpaid amount was on account of fees owing for a contract of supply between
Mantua and the government of Nigeria.
8. Ibe
further represented that the Nigerian government acknowledged that the Contract
Amount was due and payable, but that there were certain bureaucratic obstacles
delaying payment.
9. Ibe
requested Kroeker’s assistance in obtaining payment of the Contract Amount in
return for a 30 percent share of the said amount upon receipt.
10. Kroeker
contacted various persons who represented themselves as Nigerian government
officials and became convinced that the representations made by Ibe were
truthful.
11. In
or about autumn of 1998 Kroeker approached the Appellant with respect to the
above-described business opportunity. Kroeker arranged for the Appellant to
receive a ten percent share of the Contract Amount in consideration of the
Appellant providing Kroeker, Ibe and Ibe’s associates C.J. Nnaemeka, and Alhaji
M.S. Aliyu with assistance in obtaining the Contract Amount and investment
advice with respect to any amounts received.
12. Kroeker
caused a company to be incorporated under the laws of the Bahamas and named
Mantua International Services Inc. ("Mantua Bahamas"). Mantua Bahamas
took an assignment of the Contract Amount from Mantua and purported to stand in
the shoes of Mantua as payee of the Contract Amount.
13. Kroeker
was president of Mantua Bahamas.
14. On
or about December 4, 1998 the Appellant, Ibe, C.J. Nnaemeka, Alhaji M.S. Aliyu,
and Kroeker as president of Mantua Bahamas, entered into a formal agreement
with respect to the division of the Contract Amount (the
"Agreement"). The Agreement provided for ten percent of the Contract
Amount to be paid to the Appellant upon receipt by Mantua Bahamas.
15. During
the course of 1999 Mantua received correspondence demanding various requests
for payments that were purportedly necessary in order to facilitate the payment
of the Contract Amount. These demands for payment escalated in amount as time
went on. The first major demand for payment was in December 1998 for US $10,000
to hire Nigerian legal counsel to complete necessary documentation. This was followed
that in January 1999 with a request for US $25,000 for a certificate from
the Nigerian Drug Law Enforcement Agency certifying that the Contract Amount
was not proceeds of crime. The Appellant and Kroeker were advised that the
Nigerian members paid for these amounts out of their personal funds.
16. Also
in January of 1999 Kroeker received correspondence claiming that the Contract
Amount had been transferred from the Central Bank of Nigeria to an account at
Deutsche Bank, which was administered by the Nigerian Foreign Payment Panel,
operating out of London, England. Kroeker claimed to have confirmed this
information with a Deutsche Bank official.
17. On
or about February 16, 1999 the Foreign Payment Panel wrote to Kroeker, in his
capacity as president of Mantua Bahamas, advising that the application for
payment of the Contract Amount had been approved, but also requiring an
immediate payment of US $340,560.00 as a cost of transfer fee.
18. On
or about February 18, 1999 the Appellant and Kroeker entered into a loan
agreement with Cal-West Holding Inc. ("Cal-West") whereby the
Appellant and Kroeker personally borrowed US $355,000.00 from Cal-West with
interest at 3.0% per month. Pursuant to the terms of the loan agreement both
Kroeker and the Appellant are borrowers and are both jointly and severally
liable for repayment of principal and interest.
19. On
or about February 18, 1999 the Appellant personally received the loan proceeds
from Cal-West and paid US $340,560.00 to the Foreign Payment Panel by way of a
wire transfer from the Appellant’s personal bank account to a bank account in
the name of the Foreign Payment Panel’s nominee, Walford Asia Limited, at the
Standard Chartered Bank in Hong Kong.
20. On
or about February 19, 1999 the Foreign Payment Panel wrote to Kroeker, in his
capacity as president of Mantua Bahamas, advising that the amount of US
$340,560.00 had been received and that the Contract Amount was scheduled to be
paid on February 23, 1999 by wire transfer.
21. The
Contract Amount was not in fact paid on February 23, 1999 or at all.
22. In
late February 1999 Kroeker advised the Appellant that he had received a
telephone call from the Foreign Payment Panel indicating that there were
unspecified problems with the payment of the Contract Amount.
23. The
Appellant and Kroeker made arrangements to meet with representatives of the
Foreign Payment Panel in London, England during the week of March 13 to March
20, 1999.
24. The
Appellant and Kroeker travelled to London. While they spoke with persons
identifying themselves as representatives of the Foreign Payment Panel, they
were unable to arrange a meeting.
25. The
alleged Foreign Payment Panel representatives indicated that an additional US
$400,000.00 was required for an insurance certificate before the
Contract Amount could be released.
26. While in London, the Appellant and Kroeker contacted
Deutsche Bank in an attempt to confirm the advise of the Foreign Payment Panel.
It became apparent that all correspondence from Deutsche Bank was fraudulent,
and the Appellant and Kroeker both refused to pay the newly requested US
$400,000.
27. Following
this refusal, neither the Appellant nor Kroeker were able to contact Ibe nor
Ibe’s associates C.J. Nnaemeka, and Alhaji M.S. Aliyu as the telephone numbers
previously used by those individuals had been disconnected.
28. The
Appellant and Kroeker contacted and met local authorities of Scotland Yard
advising of the fraudulent transaction. The Appellant and Kroeker made numerous
attempts to recover the funds they had expended in the enterprise but were
wholly unsuccessful.
[9] Based on the reply, it is apparent that the Minister
was not convinced that the appellant actually incurred any losses. This is
understandable because Mr. Heppner and Mr. Kroeker appear to be
sophisticated businessmen and it is difficult to understand how they could be
duped by a Nigerian fraud scheme.
[10] Nevertheless, at
the hearing the Crown did not press the argument that there were no losses, and
instead relied solely on the argument that the losses had no connection with an
actual business.
[11] The appellant submits that there were actually two
business connections. First, he suggests
that the Nigerian transaction started out as a bona fide business
venture. He suggests that it was legitimate at the start and that at some point
it went sour. He also suggests that the transaction was part of his ordinary
business, and that he was required to share the profits from the venture with
his employer on a 50/50 basis.
[12] For the reasons that follow, I have concluded that neither
of these submissions is supported by the evidence.
[13] First, I would note as a general comment that there is
no reliable evidence that corroborates the appellant’s testimony as it relates
to these two arguments. Mr. Kroeker also testified, but because he also
purportedly lost money in this scheme, his evidence was as self-interested as
Mr. Heppner’s was.
[14] As for the appellant’s argument that the Nigerian
transaction started out as a legitimate venture, the documentation introduced
into evidence, as well as the notice of appeal, gives no hint whatsoever of any
element of bona fides.
[15] The appellant’s position is based on logical inferences
that should be made, it is argued, from due diligence purportedly performed by
Mr. Kroeker. The fact that due diligence was undertaken, and that
everything seemed to be in order, is suggestive that this was a legitimate venture
at some point, it is argued.
[16] According to the
testimony, due diligence was first undertaken before the appellant and Mr.
Kroeker agreed to participate in the venture. The appellant testified that they
had retained a Nigerian law firm to do some investigation, and he suggested
that this firm was trustworthy because they had found it by doing an Internet
search.
[17] I find this
testimony to be unconvincing. It appears to be contrary to the facts as stated in
the notice of appeal and it is uncorroborated. Further, a retainer letter from
a Nigerian law firm was introduced into evidence and I do not see any
suggestion in that letter that due diligence was to be done. On its face, the
retainer letter seems more consistent with the theory that the law firm was
part of the scam, because it has the usual features of the requirement to pay
money and urgency.
[18] The appellant
also suggested that due diligence was undertaken by Mr. Kroeker just before the $500,000 fee was paid to
Walford Asia Limited. According to the testimony, Mr. Kroeker called Deutsche
Bank in London to confirm that US $31,000,000 was being held in an
account there just before the funds were transferred. This inquiry was
supposedly made on an independent basis, with the contact being made through
the Deutsche Bank switchboard.
[19] I also find this
testimony to be unconvincing. It too appears to be at odds with the notice of
appeal and is not corroborated. I note in particular that the notice of appeal
states that all correspondence with Deutsche Bank was fraudulent.
[20] The evidence
before me, when viewed as a whole, is more consistent with the entire Nigerian
transaction being a scam, with no legitimacy whatsoever. The oral testimony of
the appellant and Mr. Kroeker has not persuaded me otherwise.
[21] That is not the end of the matter, though, because the
appellant also suggests that the transaction was connected with his regular
business, which was as a financial adviser and broker. The appellant testified that he was employed as a
vice-president of IPO Capital, which at the time was a member of the Toronto Stock
Exchange. He indicated that his main responsibility with IPO Capital was to
carry out due diligence on corporations that were seeking to publicly trade
their shares.
[22] The appellant
admitted that he was an employee of IPO Capital, but he said that he also had a
business relationship with the corporation, which required that he share
profits of business ventures on a 50/50 basis. As such, he said that IPO
Capital would be entitled to one-half of his ten percent share in the Nigerian
transaction.
[23] I am not
satisfied with this testimony either. It was neither detailed nor cogent, there
was no documentation to support it, and no one from IPO Capital was called to
testify.
[24] I would also note
that there is no mention of the arrangement with the employer in the notice of
appeal. To the contrary, the notice of appeal in paragraph 30 suggests that the
appellant would earn the entire ten percent share of the Contract Amount:
30. The
Denied Expenses were all amounts expended by the Appellant in an attempt to
facilitate the payment of the Contract Amount, in order that the Appellant may
have earned the fee detailed in paragraph 14 hereof.
[25] I find that the
evidence as a whole is insufficient to establish any connection between the appellant’s
purported losses and a business venture with IPO Capital.
[26] As a result, I
conclude that the appellant has not established that there was any connection
between the purported losses and a legitimate business. The appeal is
dismissed, with costs to the respondent.
Signed at Toronto, Ontario, this 2nd day of November 2007.
"J. Woods"
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