Date:
20020924
Docket:
2000-3173-IT-G
BETWEEN:
ALEX
POLYCHRONOPOULOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
O'Connor, J.T.C.C.
[1]
The basic facts of these appeals are set forth in the Reply to
the Notice of Appeal as follows:
4.
In computing income for the 1993 taxation year, the Appellant
reported the following income:
|
Net
Business Income
|
$13,852
|
|
|
|
5.
In computing income for the 1994 taxation year, the Appellant
reported the following income:
|
Net
Business Income
|
$10,649
|
|
|
|
6.
The Minister reassessed the Appellant for the 1993 and 1994
taxation years, concurrent notices thereof dated
July 8, 1997, to include in his income the amounts of
$62,493.86 and $162,560.05, respectively, in respect of the
illegal use of credit cards. The Minister also assessed federal
penalties pursuant to subsection 163(2) of the Income Tax
Act in the amounts of $8,505.12 and $23,376.84,
respectively.
7.
The Appellant late filed his income tax return for the
1995 taxation year. The Minister assessed the Appellant for
his 1995 taxation year, notice thereof dated August 7, 1997, to
include in his income the amount of $42,719.55 and assessed a
late filing penalty pursuant to subsection 162(1) of the
Income Tax Act in the amount of $2,280.78.
8.
In so reassessing the Appellant, the Minister made, inter alia,
the following assumptions or findings of fact:
a)
the facts admitted or stated hereinbefore;
b)
the Appellant received income of $62,493.86, $162,560.05 and
$42,719.55 in his 1993, 1994 and 1995 taxation years,
respectively, in respect of his illegal use of credit
cards;
c)
in January of 1996 the Appellant was arrested and charged with an
attempt to obtain credit cards by fraud and
impersonation;
d)
in October of 1996 the Appellant was convicted, following a
guilty plea, by the Ontario Court of defrauding the public, for
possession and illegal use of stolen credit cards (the
"credit card scheme");
e)
as a result of the credit card scheme, the Appellant was in
receipt of income, which he failed to report in his returns, in
the amounts of $62,493.86, $162,560.05 and $42,179.55 for the
1993, 1994 and 1995 taxation years, respectively;
f)
the Appellant has not repaid any of the amounts stated in
subparagraph 8(e) herein pursuant to the compensation order
issued by the Ontario Court;
g)
the Appellant knowingly, or under circumstances amounting to
gross negligence, failed to report the income indicated in
subparagraph 8(b) herein when filing his returns of income for
the 1993 and 1994 taxation years, thereby making or participating
in, assenting to or acquiescing in the making of a false
statement or omission in his returns for those years.
Consequently, the Appellant is liable to a federal penalty in
each of the years as set out below:
|
Taxation Year
|
Penalty
|
|
1993
|
$8,505.12
|
|
1994
|
$23,376.84
|
h)
the amount of federal tax payable on the basis of the facts
supplied by the Appellant in his returns of income for the 1993
and 1994 taxation years is $1,202.05 and $668.81, respectively,
and that the amount of tax payable by him on the true facts is
$17,010.23 and $46,753.68, respectively;
i)
the Appellant's return of income for the 1995 taxation year
was required to be filed with the Minister on or before April 30,
1996;
j)
the Appellant's return of income for the 1995 taxation year
was filed on June 17, 1997; and,
k)
the Appellant late filed his return of income for the
1995 taxation year and, consequently is liable to a late
filing penalty in the amount of $2,280.78.
B.
ISSUES TO BE DECIDED
9.
The issues are:
a)
whether the Appellant was in receipt of income in the amounts of
$62,493.86, $162,560.05 and $42,719.55 for the 1993, 1994 and
1995 taxation years;
b)
whether the Appellant knowingly, or under circumstances amounting
to gross negligence, made or participated in, assented to or
acquiesced in the making of a false statement or omission by
failing to report the above amounts in his 1993 and 1994 returns
of income, and whether the Minister properly assessed penalties
pursuant to subsection 163(2) of the Income Tax Act for
those years; and,
c)
whether the Minister properly assessed penalties pursuant to
subsection 162(1) of the Income Tax Act for the
1995 taxation year as a result of the Appellant's
failure to file his tax return of income for that year as
required by subsection 150(1) of the Income Tax
Act.
[2]
Further facts are as follows. At the hearing counsel for the
Respondent filed at Tabs 7 through 12 of Exhibit "R-1"
Compensation for Loss of Property Orders all dated October 4,
1996 and related to losses suffered by six different
banks.
[3]
The defrauded amounts set forth in paragraph 8(e) of the Reply
are not contested by the Appellant.
POSITION OF THE APPELLANT
[4]
The Appellant's basic position is that since the Ontario
Court ordered him to make restitution of all of the defrauded
amounts he should not have to pay income tax in respect of
same.
[5]
The Appellant also contends that he should not be liable for
penalties and more particularly, should not be liable for
penalties for late filing his 1995 return because he was, at the
time for filing the return, detained in prison and was not really
able to file his return on time.
POSITION OF COUNSEL FOR THE RESPONDENT
[6]
Respondent's counsel's submission is that there are
numerous authorities establishing that proceeds received by a
fraud operation are income from a business and are included in
the defrauder's income and subject to tax.
[7]
The Respondent's submission with respect to penalties is that
the penalties for the 1993 and 1994 years are clearly provided
for in s. 163(2) of the Income Tax Act, (the
"Act"). With respect to 1995 late filing,
counsel for the Respondent quoted from the examination for
discovery of the Appellant held on June 25, 2002 as
follows:
63.
Q.
On page 2 of your Notice of Appeal you state that your failure to
file your T1 in 1995 was due to your incarceration between
January 9, 1996 and December 23, 1996 in the Don Jail, and later
in Millhaven, during which time the Don Jail's prison guards
were on strike and there were prison riots in Millhaven.
That's correct.
A.
That is correct.
64.
Q.
During the time spent in the Don Jail, did family or friends
visit you?
A.
Yes.
65.
Q.
And who visited you?
A.
Brother, girlfriend, that's it, lawyer.
66.
Q.
That's January 9, 1996 to December 23, 1996 that you were in
the Don Jail?
A.
Yes, that entire amount of time.
67.
Q.
And with what frequency did you receive visitors?
A.
Once a month maybe. A lot of times visitors weren't allow
because of the strike.
68.
Q.
So between January 9, 1996 until April 30, 1996, you did receive
visitors at the prison.
A.
Yes.
69.
Q.
And you were allowed to contact whomever you wished by
telephone.
A.
Yes.
70.
Q.
And you could have done that on a daily basis if you had wished
to.
A.
I would say almost a daily basis. Phones were there,
yes.
71.
Q.
To the best of your recollection, the Don Jail's guard strike
started when?
A.
February, I would say, of that year.
72.
Q.
And what was the effect of the strike on the
prisoners?
A.
Oh we couldn't shower, you were locked in your cell, three to
a cell, all day, like 24 hours a day, and not in the range part
but the actual jail, the actual cubicle where you sleep with the
bars. There's other bars in the other areas, but that little
cubicle and there's three people in there that was designed
for one.
73.
Q.
And to the best of your recollection, when did the Don Jail's
guard strike end?
A.
I would say May sometime.
...
85.
Q.
So since you had visitors and you could make phone calls during
your time at Don Jail, isn't it correct that you could have
filed your tax return if you had wished to do so?
A.
Good question. Did I have the opportunity? Not really.
86.
Q.
You had the link with someone.
A.
I had the link with my brother, but I don't think he would
have, you know....
87.
Q.
But you didn't try.
A.
To be honest with you, I don't even recall whether I did or
not. At that time with me it wasn't an issue to file my
income tax, just in total honesty, so even if it crossed my mind,
I probably wouldn't have done it. So both answers, I guess,
are correct. No, I did not. It may have crossed my mind and I did
not do it due to my predicament.
[8]
Counsel for the Respondent also referred to certain decided cases
which support her submission that the penalties were properly
imposed.
[9]
With respect to the remaining issue as to whether the proceeds of
fraud or crime are to be included in income and taxed, counsel
for the Respondent referred to Buckman v. The Minister of
National Revenue, 91 DTC 1249, a decision dated September 17,
1991 of the late Sobier, T.C.J. Also in
Svidal v. Canada, [1994] T.C.J. No. 1190,
Bowman, T.C.J., as he then was stated at paragraph 24:
It is
settled law that proceeds from criminal activities are taxable
income. I can think of no circumstances in which such income
cannot be characterized as income from a business.
Bowman, T.C.J.
further states at paragraph 24(e):
...
One of the
most ingenious and intriguing arguments was that relating to the
effect on the appellant's 1984 and 1985 taxation years of the
compensation order made by the Alberta Court in 1991, whereby the
appellant and his co-accused were ordered to pay to Coopers and
Lybrand Limited the sum of $10,075,735.55. The contention is that
this amount should, in the computation of the appellant's
income from the business, characterized by the Crown as the
business of fraud, be allowed as a deduction. The argument, if I
understand it correctly, is that the obligation to repay the
amounts was crystallized by the compensation order of 1991 but
that since it relates to the business carried on in 1984 and 1985
it should be allowed as a deduction in those years.
The
argument raises more problems then I am prepared to discuss here.
Implicit in it is the theory that income from crime is to be
computed on an accrual basis - a proposition in respect of which
I have heard neither legal authority nor expert accounting
testimony. Also it implies that as soon as a crime is committed
there arises an inchoate liability of which is only fixed if
after conviction the accused is ordered to make a compensation
payment or restitution. Also, it raises the question of whether
such payments should be allowed as deductions as a matter of
public policy. As noted above the appellant has made no payments
under the compensation order and there is no evidence that he
ever will. The argument seems not dissimilar to that
unsuccessfully advanced in the Queen v. Poynton, 72 D.T.C. 6329
(Ontario C.A.)
Interesting as it might be to pursue these theoretical
questions is sufficient to dispose of the point to say that the
compensation order was made in 1991 and can have no effect on the
appellant's 1984 and 1985 income. Our fiscal system does not,
except in specific circumstances set out in the Income Tax Act,
permit the reopening of prior years to take into account events
occurring in later years: M.N.R. v. Benaby Realties Limited, 67
D.T.C. 5275.
[10] Towards
the end of the hearing in this matter Interpretation Bulletin
IT 256R, dated August 27, 1979 was mentioned to the
Appellant. It reads as follows:
1.
The treatment of losses from theft, defalcation or embezzlement
are dealt with in IT-185R. This bulletin deals with the treatment
of those amounts in the hands of the recipient, and also covers
cash or property received as a result of extortion, blackmail,
bribery or other similar acts.
2.
These funds or property are income from a source and as such are
taxable in the hands of the recipient. The cash or fair market
value of property received will be added into the recipient's
income in the year of receipt.
3.
Taxpayers who receive such funds or property may be subject to a
penalty under subsection 163(2) for each year that they were
taken and not reported.
4.
It is the Department's practice that when amounts that were
added to a taxpayer's income under 2 above are repaid, there
will normally be a deduction allowed in respect of such repaid
amounts for the taxation year in which the repayments are made
unless the taxpayer was...(not applicable)
[11] It is
clear from the foregoing that the proceeds received as a result
of the fraud constituted taxable income. It is also clear that
the penalties were properly imposed. Consequently the appeals are
dismissed with costs.
Signed at
Ottawa, Canada, this 24th day of September, 2002.
J.T.C.C.COURT
FILE
NO.:
2000-3173(IT)G
STYLE OF
CAUSE:
Alex Polychronopoulos v. The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
September 13, 2002
REASONS FOR
JUDGMENT
BY:
The Honourable Judge O'Connor
DATE OF
JUDGMENT:
September 24, 2002
APPEARANCES:
Counsel for
the
Appellant:
The Appellant himself
Counsel for
the
Respondent:
Catherine Letellier de St-Just
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3173(IT)G
BETWEEN:
ALEX
POLYCHRONOPOULOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on September 13, 2002 at Toronto, Ontario, by
the
Honourable Judge Terrence O'Connor
Appearances
For the
Appellant:
The Appellant himself
Counsel for
the
Respondent:
Catherine Letellier de St-Just
JUDGMENT
The appeals from the reassessments made under the Income Tax
Act for the 1993, 1994 and 1995 taxation years are dismissed,
with costs, in accordance with the attached Reasons for
Judgment.
Signed at
Ottawa, Canada, this 24th day of September, 2002.
J.T.C.C.
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