Citation: 2013 TCC 41
Date: 20130228
Dockets: 2010-2655(GST)I
2010-2689(IT)G
BETWEEN:
NGHIEP MINH TRUONG and HON NGUYEN,
NGHIEP MINH TRUONG,
appellants,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
By notices of reassessment
dated April 15, 2009 the Minister of National Revenue (the “Minister”)
reassessed Nghiep Minh Truong’s tax liability for the 2004, 2005 and 2006
taxation years through the addition of undeclared income.
[2]
The Minister used the
net worth method to add $8,185, $124,709 and $133,289 of alleged undeclared business
income for Mr. Truong’s 2004, 2005 and 2006 taxation years. The Minister
also assessed gross negligence penalties under subsection 163(2) of the Income
Tax Act (the “ITA”) for the same taxation years.
[3]
In addition, the
Minister assessed Mr. Truong and his common law spouse, Hon Nguyen, for
unpaid goods and services tax (“GST”), penalties and interest totalling $41,405.47
for the reporting periods from April 1, 2005 to December 31, 2006
(the “relevant period”) on the grounds that the couple was in business together
as partners (the “partnership”) and that the partnership failed to collect and
remit the GST on its net income of $16,371.68 for 2004, $249,419.05 for 2005
and $266,579.21 for 2006.
[4]
These appeals were
heard on common evidence.
Background
[5]
At the outset of the
hearing, the respondent produced a revised net worth schedule which contained
changes based on submissions made by or on behalf of Mr. Truong and
accepted by the respondent. On the basis of this schedule, the respondent
agreed that the reassessment issued against Mr. Truong for the 2004
taxation year should be vacated and that the amount of Mr. Truong’s
alleged undeclared income should be revised to $106,679.55 and $133,740.02 for
the 2005 and 2006 taxation years. The parties agree that corresponding
adjustments should be made to the GST assessment referenced in paragraph 3
above.
[6]
The evidence shows that
the Canada Revenue Agency (the “CRA”) undertook an audit of Mr. Truong and
Ms. Nguyen after receiving a referral from the RCMP’s integrated proceeds
of crime (“IPOC”) unit.
[7]
The IPOC unit advised
the CRA that Mr. Truong and Ms. Nguyen were charged with trafficking
in marijuana and with money laundering and other related offences. The charges
were laid following searches conducted at various marijuana grow houses, and
personal residences and business locations of the parties. Ms. Nguyen and
Mr. Truong were ultimately convicted on the charges laid against them and
received prison sentences.
[8]
The net worth method of
assessment was used as Ms. Nguyen’s and Mr. Truong’s illicit
activities involved the receipt of cash payments.
[9]
The discrepancy determined
through the net worth analysis was attributed to Mr. Truong and
Ms. Nguyen on a fifty-fifty basis because both were involved together in
the production of, and in trafficking in, marijuana, and their money laundering
activities were conducted by them jointly. Mr. Truong and Ms. Nguyen
had assets in their names which were purchased with the funds from their
criminal activities.
[10]
The CRA decided not to
reassess Ms. Nguyen for income tax on her share of the undeclared income
established under the net worth analysis because she had declared bankruptcy
prior to the commencement of the audit. However, she and Mr. Truong were
both reassessed for GST and penalties with respect to the relevant period on
the undeclared income attributable to that period.
Analysis
[11]
It is well established
that a taxpayer is subject to tax on his income regardless of its source. A
taxpayer must keep reliable books and records for all of his income, including
income from illegal sources. If he does not, the Minister may issue a so‑called
arbitrary assessment using any method that is appropriate in the circumstances.
[12]
Mr. Truong claims
that the net worth analysis failed to take into account a gift of $200,000 that
he received in cash from his parents on or before October 5, 2005. According to
Mr. Truong, those funds were used to make a down payment of $100,000 on a
house located at 12 Kennedy Road, White City, Saskatchewan.
[13]
I do not accept
Mr. Truong’s testimony on this point. The evidence shows that
Mr. Truong and Ms. Nguyen used fabricated gift and employment letters
to help secure bank loans in order to acquire real estate. The proceeds from
their illegal activities were used to make down payments on the properties
equal to the amounts indicated in the false gift letters. This was done as part
of an elaborate scheme to launder or hide the proceeds earned from the sale of
the marijuana.
[14]
The Crown argues that I
should be bound by the factual findings of the trial judge in R. v. Truong, 2010
SKQB 127, a prior criminal proceeding pertaining to monies in the amount of $71,440
found to belong to the appellants herein and to Nhut Minh Truong, Nghiep Ming
Truong’s brother.
[15]
In that case, three of
the four accused, namely Nghiep Minh Truong, Hon Thi Nguyen and Nhut Minh
Truong, were charged with three offences, but only the offence based on subsection
354(1) of the Criminal Code is relevant to the matter at hand. That
provision provides that every individual commits an offence who has in his
possession any property or proceeds derived directly or indirectly as from
trafficking in a controlled substance. At their criminal hearing, the trial judge
found that $71,440 was recovered from eight separate locations related to the
offences but that there was no clear evidence as to the individual amounts
found at each location. The trial judge found that the fact that the monies
were not precisely linked to a specific location to be insignificant.
Ultimately, the trial judge held that all three accused had knowledge of, and a
measure of control over, the cash found (para. 102).
[16]
The main element of the
offence under subsection 354(1) is possession of the proceeds. Subsection 4(3)
of the Criminal Code has been interpreted as creating three types of
possession: personal possession (para. 4(3)(a)), constructive possession (subpara.
4(3)(a)(i) and (ii); and joint possession (para. 4(3)(b)) (R.
v. Pham, [2005] O.J. No. 5127 (QL) at para. 14 (Ont. C.A.). Specifically, paragraph 4(3)(b) states that where one of two or more persons, with
knowledge and consent of the rest, has anything in his custody or or
possession, it shall be deemed to be in the custody and possession of each and
all of them. Knowledge and consent, are integral elements of joint possession,
but they “cannot exist without the co‑existence of some measure of
control over the subject-matter” (R. v. Terrence, [1983] 1 S.C.R. 357 at
363, 1983 CarswellOnt 67 at para. 15, citing R. v. Colvin and Gladue,
[1943] 1 D.L.R. 20 at 25).
[17]
The meaning of
“possession” under the Criminal Code is different than the concept of
ownership in civil matters and tax matters. Black’s Law Dictionary, 9th,
ed. defines “ownership” as a “bundle of rights allowing one to use, manage and
enjoy property including the right to convey it to others . . . regardless
of any actual or constructive control”. Professor Ziff describes the nature of
ownership as including four key elements: (i) possession, management and control;
(ii) income and capital; (iii) transfer inter vivos and on death; and
(iv) protection under law (Bruce Ziff, Principles of Property Law, 5th
ed. (Toronto: Carswell, 2010) at 3). As a matter of basic property law,
ownership requires more than just mere possession and “some measure of control”
over the property.
[18]
At trial, Mr. Truong
testified that the $50,000 of the above-mentioned $71,440 belonged to his
brother-in-law, Mr. Van Hung Nguyen. This was corroborated by Mr. Nguyen, whose
testimony was that the funds, belonged solely to him. According to Mr. Nguyen,
the funds were placed in the appellant’s home for safekeeping. The $50,000 in
cash, albeit in the possession of the appellants, belonged to Mr. Nguyen. He
had the right to use, manage and enjoy the $50,000 regardless of the fact that
the appellants had it in their possession. I take note that Mr. Nguyen’s
admission is adverse to his own interest as it could prompt the CRA to reassess
him on the grounds that he earned unreported income.
[19]
The evidence shows that
approximately $71,440 in cash was found in Mr. Truong’s personal
residence. Roughly $50,000 of this amount was found in a tote bag which
contained the passport of Mr. Van Hung Nguyen, who is, as stated earlier, Mr. Truong’s
brother‑in-law.
[20]
While the evidence on
this point is not perfect, I find that the appellants have established on a
balance of probabilities that the $50,000 found in the tote bag did not belong
to them and as a result, it did not represent undeclared income of theirs.
Therefore, this amount will be excluded from the net worth calculation for the
period ending December 31, 2006.
[21]
The evidence shows that
Mr. Truong withdrew $50,000 in cash on a line of credit on August 31, 2006.
The CRA auditor who carried out the net worth analysis treated this amount as
an additional asset of the appellants for the period ending December 31,
2006. Mr. Truong contends that the amount should be excluded from the net
worth calculation because the funds were used by Ms. Nguyen to purchase a
property identified as “5 Quappelle RM 157”. The net worth analysis reflects
the fact that approximately $33,576 was used to purchase that property. Because
the couple’s personal expenditures and assets, including cash, have already
been accounted for in the net worth analysis, the CRA’s treatment of this cash
withdrawal leads to an inappropriate double counting of this amount.
[22]
In light of the above,
the income tax appeals are allowed as follows:
(a) The reassessment for the 2004
taxation year is vacated.
(b) The reassessment for
the 2005 taxation year is referred back to the Minister for reconsideration and
reassessment on the basis that Mr. Truong’s undeclared income for that
year is $106,679.59. A corresponding adjustment should be made to the gross
negligence penalties.
(c) The reassessment for
the 2006 taxation year is referred back to the Minister for reconsideration and
reassessment on the basis that Mr. Truong’s undeclared income for that
year is $83,740. This gives effect to the $100,000 adjustment, in total noted
above, half of which is allocable to Mr. Truong. A corresponding
adjustment should be made to the gross negligence penalties.
[23]
The appeal of the GST
assessment is allowed, and the matter is referred to the Minister for
reconsideration and reassessment in accordance with these reasons for judgment.
[24]
As the result is split,
each of the parties shall bear their own costs.
Signed at Calgary, Alberta, this 28th day
of February 2013.
"Robert J. Hogan"
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