Citation: 2007TCC226
Date: 20070523
Docket: 2006-276(IT)I
BETWEEN:
NICOLA BRIZZI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal
of the assessment for the appellant's 2001 taxation year. The minister of
National Revenue (the "Minister") assessed the appellant using the
net worth method to determine his income and accordingly included an
amount of $69,232 as other income for the taxation year under appeal. The
parties filed an Agreed Statement of Facts and the only issue before this Court
is whether the amount of $33,698 used by the appellant to acquire shares he held
in the Royal Bank of Canada should be included in the appellant's net income.
The Agreed Statement of Facts reads as follows:
. . .
AGREED
STATEMENT OF FACTS
The parties hereto agree that, for the
purposes of the present appeal, the facts as set out in the present document
are accurate;
FACTS
1. In the year 2000 the appellant
was under investigation by the RCMP.
2. The 5th
of November 2001, following the Investigation, the Appellant pleaded guilty to
the following accusations:
- Conspiracy to import
a designated substance: haschisch [sic] (section 465(1)(c)
of the Criminal Code and section 5 of the Controlled Drugs and Substances
Act);
- Conspiracy for
trafficking in a substance: haschisch [sic] (section 465(1)(c)
of the Criminal Code and section 5 of the Controlled Drugs and Substances
Act);
- Conspiracy to
launder proceeds of crime (section 465(1)(c) of the Criminal Code
and section 9 of the Controlled Drugs and Substances Act);
3. The 14th
of November 2001, an Order of forfeiture of property on conviction was issued
(Court #: 500-73-001541-016) with respect to the following property belonging
to Nicolas [sic] Brizzi, as the property constituted "proceeds
of crime":
- Shares held at the
Royal Bank of Canada, account number 6824064817 in Canadian currency:
200 srs Intel Corp.
2000 srs Covad Communciations Group Inc.
400 srs Cosco Systems Inc.
400 srs Nortel Networks Corp.
100 srs Bank of America Corp.
1000 srs Loudeloud Inc.
- Shares
held at the Royal Bank of Canada, account number 6824064817 in American
currency:
500 srs Nortel Networks
Corp.
250 srs Intel Corp.
100 srs Pfizer Inc.
100 srs Nokia Corp‑Sponsored Adr.
100 srs Claco Systems Inc.
300 srs Worlddoom Inc.
1500 srs 360 Networks Inc.
4. The above‑mentioned
property was sold by the RCMP in 2002.
5. During 2004,
the Appellant was under investigation by the Canada Revenue Agency.
6. The auditor,
Mr. Yvon Talbot, proceeded to audit the Appellant for the 2000, 2001 and 2002
taxation years using the net worth method.
7. Although the
taxation years 2001 and 2002 were assessed by the Canada Revenue Agency, only
the 2001 taxation year is disputed in the present appeal.
8. The only
question at issue for the 2001 taxation year is the inclusion of the amount of
33 698 $ (16 171 $ for the Can shares and
17 527 $ for the US shares) used to acquire the shares held in the
Royal Bank of Canada and seized by the RCMP in the net income of the Appellant.
(Mentioned in paragraph 3 of the present agreement). As for the remainder
of the assessment, no other point will be disputed during the hearing, as the
other points are not contested by the Appellant.
9. Concerning the
shares mentioned in the previous paragraph, it is not disputed that the shares
were purchased with unreported income.
10. The value of the
shares in the Canadian currency account and in the American currency account is
not disputed by the Appellant. What is disputed is the fact that these amounts
have been included in the calculation of the Appellant's net worth.
MONTREAL, March 13, 2007
. . .
[2] The added income in
the amount of $69,232 was reduced to $65,813 as a result of modified calculations
submitted by the respondent at the beginning of the trial. The only issue
remaining concerns the amount used to purchase the shares that were seized by
the RCMP.
[3] The appellant's
position is that drug trafficking is a business and forfeiture of assets is
part of that business. Therefore the forfeited shares should be considered a
business‑related expense and not be included in his net worth. He pursues
his point by arguing that, since income from illegal activities is taxed,
expenses relating to such activities should be deductible. The appellant
submits that forfeiture, under the provisions of the Criminal Code can
be considered as an expense because expenses are incident to carrying on a business
and an order of forfeiture is a risk in this particular kind of business. The
appellant also argues that it is double jeopardy to deny him the deduction of
the amount of the forfeited shares in that he is paying taxes on their value even
though they have been forfeited. He suggests that it is unfair to deny him the
deduction when he is paying taxes on the income. He claims that he has already
paid his debt to society.
[4] The respondent
submits that the forfeiture does not constitute a business expense because it is
not an expense incurred for the purpose of gaining or producing income from a
business. The shares were actually bought as a personal asset and not as a
business asset and thus their forfeiture cannot constitute a business expense.
The respondent argues that the forfeiture constitutes rather involuntary
disposition of income.
[5] It is important to
mention that the tax authorities are not concerned with the legality of an
activity (see Canada (M.N.R.) v. Eldridge, [1965] 1 Ex. C.R. 758
(QL), at par. 25, and 65302 British Columbia Ltd. v. Canada,
[1999] 3 S.C.R. 804, at par. 56). It is accepted that if a
taxpayer's income from an illegal business is taxable, that taxpayer should be
allowed the benefits of the Income Tax Act (the "Act")
in terms of deductions. It is also important to mention that this Court is only
concerned with determining the validity of an assessment after considering all
relevant facts and with ascertaining whether the assessment is in compliance
with the Act. Equitable considerations are not within our jurisdiction.
[6] That being said, I
will now refer to subsection 18(1) of the Act, which sets out
the limitations on the deductions one can make from business income.
18(1) General
Limitation
(a) General
limitation — an outlay or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing income from
the business or property;
(b)
Capital outlay or loss — an outlay, loss or replacement of capital, a
payment on account of capital or an allowance in respect of depreciation,
obsolescence or depletion except as expressly permitted by this part.
[7] For the deduction
of an expense to be allowed, the expense must have been made or incurred for
the purpose of producing income from a business or property and it must not be
a capital expense. In this instance, I agree with counsel for the respondent
when she states that the shares that were forfeited were bought as a personal
asset and not in the course of the appellant's illegal activities. One can only
assume that the money used by the appellant to purchase the forfeited shares
was from the net income derived from his illegal business activities. The loss
incurred through the forfeiture is in my opinion a consequence of carrying an
illegal business activity and therefore certainly not an expense that assisted
or resulted in producing income.
[8] Counsel for the
appellant cited 65302 British Columbia referred to above, in which the
Court allowed an over‑quota levy to be deducted on the basis that the
levy was incurred as part of the appellant's day‑to‑day operations
of carrying on a poultry farm business, that the decision to produce over quota
was a business decision made in order to realize income, and that the deduction
should not be disallowed for reasons of public policy. That case is
distinguishable from the present one in that the levy was incurred in order to
realize more income while here it cannot be said that the forfeiture allowed
the appellant to realize more income. It is a loss that occurred as a result
and consequence of carrying an illegal activity and therefore was not incurred
to gain income.
[9] The appeal is allowed in order to correct the amount of added income from $69,232 to $65,813. The
assessment is valid in all other respects.
Signed at Ottawa, Canada, this 23rd
day of May 2007.
“François Angers”
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