REASONS
FOR JUDGMENT
Graham J.
[1]
The Minister of National Revenue reassessed Adel
Mosly’s 1999 tax year to include in income an amount that the Minister believes
Mr. Mosly obtained through fraud. The Minister also reassessed Mr. Mosly’s 2003
and 2004 taxation years to include income amounts that the Minister believes
were earned by Mr. Mosly as a contractor or subcontractor in those years. The
Minister applied gross negligence penalties in respect of some of the alleged
unreported income in the 1999 tax year and all of the alleged unreported income
in the 2003 and 2004 tax years. Mr. Mosly appealed those reassessments in two
separate appeals. His appeals were heard on common evidence.
[2]
The key issue in both appeals is whether Mr.
Mosly has succeeded in demolishing the Minister’s assumptions of fact.
[3]
The amounts included in the 1999 tax year are
unrelated to the amounts included in the 2003 and 2004 tax years. The amounts
included in the 2003 and 2004 tax years are related to each other. I will deal
first with 1999 and then deal with 2003 and 2004 together.
1999 Tax Year
[4]
Mr. Mosly was a shareholder of a BC company
known as Saudi Arabian‑Canadian Business Corporation (“SACBC”). SACBC was hired to provide
various services for the benefit of a company named Gang Ranch Limited (“Gang Ranch”) which operated a
ranch in British Columbia. SACBC was hired by Gang Ranch’s parent company, BSA
Investors Ltd. (“BSA”). BSA was, in turn, owned by a man from Saudi Arabia named Sheik
Ibrahim Afandi.
[5]
The parties agree on the following key facts. In
1999, BSA borrowed $550,000 from a bank using Gang Ranch’s property as
security. The proceeds of that loan were deposited in BSA’s bank account. Of
those proceeds, $460,000 was immediately transferred to SACBC’s bank account. SACBC
then immediately transferred the same funds to a brokerage account in its name.
The funds were used to acquire shares in Apple Inc. BSA defaulted on the
original loan and there were insufficient assets left in SACBC to repay it. BSA
sued Mr. Mosly, SACBC and BSA’s lawyers in respect of these lost funds.
The BC Supreme Court found that Mr. Mosly had fraudulently taken the funds and
that the lawyers were negligent in failing to ensure that the appropriate
authorization had been obtained for the borrowing.
[6]
The parties disagree as to some additional
transactions that occurred. At some point either before, after, or both before
and after, BSA defaulted on its loan, a series of smaller amounts were borrowed
from the brokerage using the Apple shares as security. The Respondent assumed
that the amounts were borrowed by Mr. Mosly. Mr. Mosly testified that the
amounts were borrowed by SACBC. Given my findings below, nothing turns on this
question.
[7]
The Minister included net loan proceeds of
$491,475 in Mr. Mosly’s income as income from fraud. At the beginning of the
trial, counsel for the Respondent conceded that only the $460,000 in loan
proceeds that were removed from BSA’s account should have been included in Mr.
Mosly’s income.
[8]
Mr. Mosly takes the position that he did not
steal $460,000 from BSA. He asserts that his contact at BSA told him to arrange
for BSA to borrow the money, told him to move $460,000 to SACBC, told him to
invest it in Apple shares and ultimately told him to borrow money against those
shares. Mr. Mosly argues that BSA’s lawyers were aware of the transactions and,
in fact, prepared all of the legal documents for the loan. He explains that the
money that SACBC borrowed against the Apple shares was used to reimburse SACBC
for expenses that it had incurred on behalf of Gang Ranch.
[9]
I do not accept Mr. Mosly’s testimony on these
points. The story that he presents simply makes no logical sense. He provided
no explanation of why, if BSA wanted to buy Apple shares using a loan, it would
not have simply bought them in its own name or Gang Ranch’s name instead of borrowing
the money and then giving it to SACBC and having SACBC buy the shares. He
testified that BSA had auditors and accountants who would have noticed if
things were out of place but he did not provide any evidence that would
indicate that those auditors or accountants had been aware of and accounted for
an investment in Apple shares being made by BSA or the corresponding borrowing
nor did he provide financial statements for SACBC showing how it had treated
the shares.
[10]
Mr. Mosly was fixated on the idea that he could
not have done anything wrong because BSA’s lawyers prepared all of the loan
documents. In essence, he was arguing that anything inappropriate that happened
was their fault. This argument is illogical. It is like a bank robber blaming
the teller who gave him the money for failing to press the alarm soon enough
for him to be caught. Clearly the lawyers received instructions from Mr. Mosly.
Having given those instructions, Mr. Mosly cannot turn around and blame the
lawyers for following them. Even if, as the BC Supreme Court found, the lawyers
failed to take the necessary steps to ensure that the loan was properly
authorized by BSA, that does not change the fact that it was Mr. Mosly who was
giving them instructions and Mr. Mosly who took the money.
[11]
Mr. Mosly also appeared to be arguing that he
should not be assessed as the money ended up in SACBC not in his own hands. I
agree that the money ended up in SACBC but it got there because Mr. Mosly,
having personally taken it from BSA, directed that it be placed there. SACBC
did not sign the loan documents, Mr. Mosly did. SACBC was not a director of
BSA, Mr. Mosly was. It was in his personal role as a director of BSA that Mr.
Mosly arranged for the loan and directed the proceeds to be paid to SACBC.
[12]
Based on all of the foregoing, I find that Mr.
Mosly has failed to demolish the Minister’s assumptions of fact and that those
assumptions clearly indicate that Mr. Mosly stole $460,000 from BSA in 1999 and
thus should have included that amount in his income as income from theft.
[13]
I want to be clear that, in reaching the above
conclusion, I am not influenced by the BC Supreme Court decision against Mr.
Mosly. The Crown was not a party to that lawsuit so issue estoppel cannot
apply. Mr. Mosly attended the hearing for that lawsuit and cross-examined some
of the witnesses but chose not to testify himself. Not surprisingly, the Court
drew a negative inference from that fact. Mr. Mosly offered a number of
different explanations for his decision not to testify. I do not think it is
relevant whether I accept those explanations or not. The simple fact is that I
am not prepared to rely upon the findings of fact made by a different court in
a case involving different parties, than the ones before me, where the key
party before me did not, for whatever reason, testify and where I have not
heard the testimony of the parties who were adverse in interest to that party. There
was nothing wrong with the Minister relying on the judgment in making
assumptions of fact, but I do not think that it would be appropriate for me to
rely on the judgment in determining whether those assumptions have been
demolished. I reached my conclusion that Mr. Mosly had not demolished the
assumptions based on the implausibility of his story, not based on the judgment
of the BC Supreme Court.
[14]
The Crown had originally assessed Mr. Mosly for
an additional $37,000 of alleged unreported income and applied gross negligence
penalties thereon in 1999. At the beginning of the hearing, counsel for the
Respondent conceded that Mr. Mosly should be reassessed to reverse these
amounts.
[15]
Based on all of the foregoing, I conclude that
Mr. Mosly’s 1999 tax year should be reassessed to give effect to the two
concessions made by the Respondent at trial.
2003 and 2004
[16]
Mr. Mosly was a 50% shareholder of two companies:
Morgan Crest Estates Ltd. (“Morgan Crest”) and 660092 BC Ltd. (“BCCo”). The other 50% shareholder was a friend of his named Jose Hilario.
The companies were in the business of buying raw land, building houses and selling
those houses.
[17]
Mr. Mosly and Mr. Hilario had a falling out. It
appears that there was actually a falling out with a significant number of
people connected to the companies and the houses. Mr. Hilario sued Mr. Mosly. Mr.
Hilario alleged that Mr. Mosly had embezzled significant sums of money from
Morgan Crest and BCCo in 2003 and 2004. My understanding is that, at some
point, Mr. Hilario’s lawsuit against Mr. Mosly was discontinued. Mr. Mosly did
not file any documents evidencing the basis upon which it was discontinued but
he described signing what sounded to me like a mutual release. It is clear that
the matter did not proceed to court. Mr. Mosly did not indicate that any
payments were made as part of the discontinuation of the lawsuit.
[18]
Morgan Crest and BCCo issued T5018 slips to Mr.
Mosly reporting that he had the following income in the following years:
|
|
2003
|
2004
|
|
Morgan Crest
|
$38,638
|
$91,342
|
|
BCCo
|
$25,112
|
$8,485
|
|
|
|
|
[19]
The Minister determined that Mr. Mosly had not
reported that income on his 2003 or 2004 tax returns and, accordingly,
reassessed him to include that income and to apply gross negligence penalties.
[20]
In so reassessing, the Minister assumed that Mr.
Mosly had unreported business income as a contractor or subcontractor of Morgan
Crest and BCCo.
I find that Mr. Mosly has demolished that assumption. To the extent that Mr. Mosly
had unreported income, it was from appropriating funds from Morgan Crest and
BCCo, not from compensation for services that he performed as a contractor or
subcontractor of those companies. I reach this conclusion based primarily on
the fact that I believe that the T5018 slips were not issued in good faith.
They were prepared by Morgan Crest’s and BCCo’s accountants presumably on the
instructions of Mr. Hilario. As stated above, Mr. Hilario and Mr. Mosly were in
a bitter legal dispute. I think it is fair to assume that Mr. Hilario had
his own best interests in mind when the T5018 slips were issued. It appears to
me from the evidence that those slips were not issued until 2010, well after
the years in question. The fact that they were not issued contemporaneously
suggests to me that they are less reliable. Most importantly, the amounts
appear to have been calculated based on an analysis that a firm of forensic
accountants hired by Mr. Hilario performed for the purpose of calculating how
much money Mr. Mosly had “embezzled” from Morgan Crest and BCCo. When a 50%
shareholder improperly takes money from a company, he or she is taxed under
subsection 15(1) with appropriating those funds. The company who lost the money
does not get a deduction for them. T5018 slips are issued to people who have
performed work pursuant to a contract. Payments to such individuals are
deductible by the payor. It appears to me that Mr. Hilario determined that Mr.
Mosly had embezzled funds from the companies but Mr. Hilario wanted to be
able to claim a deduction for the amounts taken so he decided to treat them as
contract payments and arranged for T5018 slips to be issued to Mr. Mosly. The
slips did not contain Mr. Mosly’s address which, conveniently, ensured that Mr.
Mosly was unaware that they had been issued and was not in a position to
immediately dispute them. In these circumstances, I am unable to place any
reliance on the accuracy of the T5018 slips. Since the Minister’s assumptions
of fact were based on those slips, I find that Mr. Mosly has successfully
demolished them.
[21]
The onus is therefore on the Respondent to prove
that Mr. Mosly had unreported income. Counsel for the Respondent correctly
recognized that the Respondent could not rely on the report prepared by the
forensic accountants since those accountants were not called as witnesses. The
Respondent did not have any additional evidence upon which she could rely.
[22]
Based on all of the foregoing, the reassessment
of Mr. Mosly’s 2003 and 2004 tax years must be reversed.
Conclusion
[23]
The appeal of Mr. Mosly’s 1999 tax year is
allowed and the matter is referred back to the Minister for reconsideration and
reassessment on the basis that Mr. Mosly had net business income of $460,000 in
1999 and that, in accordance with the Respondent’s concessions, no gross
negligence penalties should be applied to that amount. The appeal of Mr. Mosly’s
2003 and 2004 tax years is allowed.
[24]
Given the parties’ mixed success on these
matters, I will not be awarding costs.
Signed
at Vancouver, Canada this 4th day of June 2015.
“David E. Graham”
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