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Date: 1999-589(IT)G
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Docket: 20030129
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BETWEEN:
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STEVEN ERDELYI,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Mogan J.
[1] By Notices of
Reassessment dated November 13, 1997, the Minister of National
Revenue added the following amounts to the Appellant's
reported income for the 1990 and 1991 taxation years:
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1990
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$106,200
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1991
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$971,400
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The above amounts came into the
Appellant's hands from his employer through a fraudulent
enterprise which the Appellant organized and operated. The
Appellant has appealed from those reassessments claiming that a
significant part of the above amounts was not retained by him but
was passed on to one or more other persons.
[2] During 1992, the
amount of $239,471 on deposit in a Canadian bank was seized for
the benefit of the Appellant's former employer who was the
primary victim of the fraudulent enterprise. Believing that the
amount of $239,471 was under the control of the Appellant at the
time of the seizure, and that such amount was therefore a
repayment of embezzled funds, the Minister allowed the deduction
of that amount in determining the Appellant's loss for 1992.
The Appellant has appealed from the Minister's loss
determination for the 1992 taxation year.
[3] The Appellant was
employed by J.D.S. Investments Limited (referred to herein as
"JDS") from October 1988 to May 10, 1991. The business
of JDS was developing real estate in and around Metropolitan
Toronto in the Province of Ontario. The Appellant was first
employed as projects director of JDS and later as
vice-president of development. Tibor Samu carried on
business as a landscape gardener in the Metro-Toronto area and
Mr. Samu had provided services to JDS for many years prior to
1988. The Appellant met Mr. Samu soon after October 1988
when the Appellant began to work for JDS. Mr. Samu carried on his
landscaping business under the name "Modern Garden
Services". He also had incorporated "Samu & Sons
Investments Limited" in 1982 to engage in the purchase and
sale of land.
[4] The Appellant and
Mr. Samu became friends, and they soon agreed to do some business
together. The Appellant caused 902722 Ontario Inc. to be
incorporated on November 23, 1990. About six weeks later on
January 7, 1991, the name of 902722 Ontario Inc. was changed by
Articles of Amendment to "Centont Building
Corporation". I shall herein refer to the corporation as
"Centont" without regard to whether its transactions
were done before or after the change of name on January 7, 1991.
Upon incorporation, Centont issued only 100 common shares which
were all held by Sharon Moser who was the Appellant's
fiancée at the time, and later his wife. In the summer of
1991 between June 3 and August 19, Sharon Moser transferred 51
Centont shares to Tibor Samu and donated the remaining 49 shares
back to Centont so that, after August 19, 1991, Mr. Samu was the
sole shareholder of Centont. From the time of Centont's
incorporation until August 1991 when Mr. Samu became sole
shareholder, the Appellant was the controlling mind of
Centont.
[5] The
Appellant's fraudulent enterprise was organized in the
following manner. Certain invoices for work done or materials
purchased were prepared on Centont letterhead and submitted to
JDS. The work for which JDS was invoiced by Centont was never
performed by Centont or any other person; and the materials for
which JDS was invoiced by Centont were never purchased by Centont
or any other person. The Appellant in his capacity as a senior
employee of JDS would have authorized the purported work or
purported purchase by Centont; and he approved the payment of the
invoices. JDS issued cheques to Centont in payment of the
invoices and those cheques were deposited in Centont's
account at the Royal Bank of Canada in Peterborough, Ontario. As
a consequence of this fraudulent enterprise, the following
amounts were paid by JDS to Centont on the dates shown:
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Exhibit No.
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Cheque No.
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Amount
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Date paid
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R-10
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263
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$106,200
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December 7, 1990
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R-10
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267
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11,800
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January 28, 1991
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-
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266
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405,000
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January 28, 1991
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R-10
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-
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400,140
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January 28, 1991
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R-10
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24
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65,000
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April 17, 1991
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R-10
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102
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89,460
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May 1, 1991
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[6] The Appellant and
Sharon Moser were charged with having committed fraud under
section 380 of the Criminal Code. Those criminal charges
were tried before Madame Justice German, without a jury, in the
Ontario Court of Justice (General Division). After what appears
to have been a lengthy trial, Madame Justice German delivered her
judgment on January 9, 1997. Her Reasons for Judgment are Exhibit
R-16 in this appeal. Madame Justice German found the Appellant
guilty as charged but she acquitted his wife, Sharon Moser. The
Reasons for Judgment contain the following passage at page
10:
... The total amount paid from J.D.S.
Investments Limited to Centont is $1,077,600. I reach that total
by adding the 106,200 and 11,800, the 405,000, the 400,140 the
65,000 and the 89,460.
The evidence of Mr. Lutes, the senior account
manager at the Royal Bank, 401 George Street, Peterborough, was
that on December the 7th, 1990, $106,200 was deposited in the
Centont Building Corporation account, and on January the 28th,
1991, three cheques of $11,800, $405,000 and $400,140 were
deposited in the Centont account in Peterborough. These are shown
on Exhibit 172B and D and E.
On April the 17th, 1991, a cheque for $65,000
was deposited in the Centont Building Corporation account; see
Exhibit 172M. On May the 1st, 1991, a cheque for $88,460
(sic) was deposited in the Centont Building Corporation
account; see Exhibit 172L. The total amount of these cheques was
$1,077,600. I find as a fact that all of the cheques from J.D.S.
were deposited in the Centont bank account in Peterborough. It is
not disputed that Centont was incorporated on the instructions of
Steven Erdelyi and Sharon Moser Erdelyi.
[7] The total amount
of $1,077,600 in the passage quoted above is the aggregate of the
six cheques listed in paragraph 5. The only amount paid in 1990
was the first cheque for $106,200. That is the amount which was
added to the Appellant's reported income for 1990 in one of
the reassessments under appeal. The remaining five cheques were
all paid in 1991 and the aggregate of those five cheques
($971,400) was added to the Appellant's reported income for
1991 in the other reassessment under appeal.
[8] In the criminal
proceeding, both the Appellant and Sharon Moser pleaded not
guilty. The Appellant's defence to the fraud charge is
summarized by the learned trial judge as follows in her Reasons
for Judgment:
To summarize Mr. Erdelyi's evidence, it is that the work was
done and the material purchased by Mr. Tibor Samu or a
corporation owned or controlled by him or someone acting for Mr.
Samu, and that there was no fraudulent scheme which defrauded
J.D.S.
(Exhibit R-16,
page 2)
Having regard to the Appellant's defence,
the learned trial judge made the following finding:
I am satisfied and find as a fact that Samu & Sons
Investments Limited did not do the work for J.D.S. as represented
by Exhibits 8, 9, and 10. Centont Building Corporation had no
employees at the time of Exhibit 11B, Exhibit 12, 14B, 15B, or
16, and I am satisfied and find as a fact that Centont did not do
any of the work represented by the invoices. It is inconceivable
that amount of work could be done without some evidence as to the
personnel that did the work, and the fact that there were no
expenses charged against the income is the most obvious
indication that this was a fraudulent scheme.
(Exhibit R-16, pages 16-17)
[9] During the
hearing of this case, the Appellant attempted to state more than
once that certain findings of fact made by Madame Justice German
in her Reasons for Judgment at the end of the criminal proceeding
were contrary to the evidence before her. I cautioned the
Appellant that he was not permitted to re-try during this appeal
for his taxation years 1990, 1991 and 1992 any issues of fact
which were decided by Madame Justice German following his trial
on criminal charges in 1996-1997. The Appellant's basic
attack on the assessments under appeal is his claim that a
significant part of the $1,077,600 was not received or retained
by him but was paid to or passed on to one or more other persons.
Specifically, the Appellant seemed to suggest that part of the
$1,077,600 was paid to Mr. Tibor Samu or one of Mr. Samu's
companies.
[10] The Appellant put into
evidence certain exhibits which proved that, after the fraudulent
enterprise had been uncovered, JDS commenced a civil action in
the Ontario Court (General Division) against several defendants
including the Appellant, his wife Sharon Rita Erdelyi (formerly
Sharon Moser), Tibor Samu, Centont and two of Mr. Samu's
companies. Exhibit A-2 is a copy of an Order entered in May 1997
permitting the action to continue in the name of "The
Guardian Insurance Company of Canada" as plaintiff following
the cancellation of the Certificate of Incorporation of JDS.
Exhibit A-1 is a copy of the Judgment dated December 12, 1997
ordering all of the named defendants (except the Appellant and
his wife Sharon) to pay $187,500 to the plaintiff. The Judgment
in Exhibit A-1 was granted on the "consent of the
parties".
[11] Having regard to the
fact that Mr. Samu became the sole shareholder of Centont on
August 19, 1991 (see paragraph 4 above), it appears that the
defendants who were ordered in December 1997 by Exhibit A-1 to
pay $187,500 to the plaintiff were only Mr. Samu and his
companies. There is no statement in Exhibit A-1 that the action
was discontinued against those defendants who were ordered to pay
$187,500 but, because the document is a "judgment", I
infer that the only defendants remaining after December 1997 were
the Appellant and his wife Sharon. I think that the Appellant
wants me to conclude from Exhibit A-1 that the amount $187,500
referred to therein was part of the $1,077,600 assessed in his
hands. In the absence of any other explanation, I am prepared to
draw that conclusion noting that Exhibit A-1 was signed on
December 12, 1997 eleven months after Madame Justice German
delivered her Reasons for Judgment on January 9, 1997. See
Exhibit R-16.
[12] Exhibit A-5 is a copy
of an Order dated March 27, 1997 granting leave to JDS (still the
plaintiff at that time, prior to Exhibit A-2 described in
paragraph 10 above) to file a Notice of Discontinuance against
the defendant, Steven Erdelyi. There is no evidence as to whether
the Notice of Discontinuance was ever filed but the Appellant
continued to be a named defendant in Exhibit A-2 (May 1997) and
in Exhibit A-1 (December 1997).
[13] Many cases have
established the principle that the proceeds of crime or an
illegal activity will have the character of "income"
for purposes of the Income Tax Act. This principle is
illustrated in the following circumstances: fictitious invoices
(Poynton, 72 DTC 6329); theft from an employer
(Hughes, Tax Court of Canada, May 2, 1996, Court File
95-3046-I); illegal bookmaking operation (Christensen, 83
DTC 5359); misappropriation of funds by a lawyer (Buckman,
91 DTC 1249); misappropriation of funds by treasurer of
municipality (Taylor, Tax Court of Canada, May 10, 1995,
Court File 93-238-G); illegal gratuities received by a member of
parliament (Gravel, 92 DTC 1935); and proceeds from drug
trafficking (Neeb, Tax Court of Canada, January 9, 1997,
Court File 94-260-G).
[14] At the trial of the
criminal charges in the Ontario Court, there were unequivocal
findings of fact that cheques from JDS in the aggregate amount of
$1,077,600 were deposited in the Centont bank account in
Peterborough (see paragraph 6 above) and that the Appellant was
the controlling mind of Centont. In her Reasons for Judgment,
Madame Justice German stated:
On Mr. Potts' evidence, I am satisfied and find as a fact,
that the instructions to Mr. Potts came from Mr. Erdelyi, and he
was the controlling mind of the company. As I have stated, the
evidence established that the cheques from J.D.S. were paid into
Centont's bank account at the Royal Bank in Peterborough.
...
(Exhibit R-16, page 20)
[15] The table in paragraph
5 above shows that $106,200 was paid by JDS to Centont in 1990
and that $971,400 was paid by JDS to Centont in 1991. Those are
the precise amounts which Revenue Canada added to the
Appellant's reported income for 1990 and 1991, respectively.
Andrew J. Fraser, an auditor from Revenue Canada was called as a
witness by the Appellant. Mr. Fraser explained that the
reassessments were based on banking information; on cheques going
from JDS into the Centont bank account. (See transcript, page
160, lines 10-12). Those reassessments were issued on November
13, 1997, before the consent judgment of the Ontario Court dated
December 12, 1997 (Exhibit A-1) ordering Mr. Tibor Samu and his
companies to pay $187,500 to the plaintiff (Guardian Insurance
Company in place of JDS).
[16] In paragraph 11 above,
I stated that I was prepared to conclude (in the absence of any
other explanation) that the amount $187,500 referred to in
Exhibit A-1 was part of the $1,077,600. Accordingly, I would
reduce the amount added to the Appellant's reported income
for 1991 by $187,500 on the basis that (i) the amount $187,500 in
Exhibit A-1 was part of the total $1,077,600 paid by JDS to
Centont; and (ii) the same amount $187,500 was not retained by
Centont or the Appellant but was passed on to one or more third
parties.
[17] The Appellant
attempted to demonstrate that other amounts received by Centont
were paid out to third parties. In particular, he relied on
Exhibit R-13, a Royal Bank of Canada form listing Government of
Canada Treasury Bills in the principal amount of $523,000
maturing on September 20, 1991 and referring to a "letter of
direction" from Centont. I cannot draw any conclusion
helpful to the Appellant with respect to Exhibit R-13. If that
amount was still in a Centont bank account in September 1991
after control of Centont had been transferred to Mr. Samu on
August 19, 1991 (see paragraph 4 above), how do I know whether
the Appellant received from Mr. Samu full value for the $523,000
at the time Centont was transferred to Mr. Samu?
[18] According to Madame
Justice German, Tibor Samu was the main Crown witness; and she
clearly accepted and preferred his evidence (by transcript from a
prior trial) over the viva voce evidence of the Appellant.
At the hearing of this appeal, neither Tibor Samu nor anyone
representing his group of companies testified. There is no
evidence that the Appellant or Centont paid out or passed on any
of the amounts obtained by fraud from JDS, other than the amount
of $187,500 on which I draw a conclusion favourable to the
Appellant.
[19] I will dismiss the
appeal for the 1990 taxation year. I will allow the appeal for
the 1991 taxation year only for the purpose of reducing the
amount added to the Appellant's reporting income by $187,500.
The amount to be added is therefore $783,900 and not $971,400.
For 1992, the Appellant requested a loss determination. The
Minister issued a Notice of Determination dated May 4, 1998
determining the Appellant's non-capital loss for the 1992
taxation year at $246,888. The Appellant offered no evidence to
dispute the amount of the 1992 non-capital loss as determined by
the Minister. I will therefore dismiss the appeal for the 1992
taxation year.
[20] I have allowed the
appeal, in part, for the 1991 taxation year. Accordingly, there
will be a fresh reassessment for that year. Before issuing that
fresh reassessment, I will direct the Minister to carry back from
1992 to 1991 the maximum amount of the Appellant's
non-capital loss for 1992 which may be available to reduce the
Appellant's taxable income for 1991.
[21] The appeals for 1990
and 1992 are dismissed. The appeal for 1991 is allowed, in part,
but the amount added to the Appellant's reported income is
reduced by less than 20%. The Respondent is awarded costs.
Signed at Ottawa, Canada, this 29th day of
January, 2003.
J.T.C.C.
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