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Date: 20030129 |
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Docket: 1999-589(IT)G |
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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. |
_______________________________________________________________
Appeals heard on February 14, 2002, at Toronto, Ontario,
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By: The Honourable Judge M.A. Mogan |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
John R. Shipley & Ginette Souligny |
_______________________________________________________________
JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 1990 taxation year is dismissed.
The appeal from the determination of loss made under the Act for the 1992 taxation year is dismissed.
The appeal from the assessment of tax made under the Act for the 1991 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. the amount obtained by fraud from J.D.S. Investments Limited in 1991 was $783,900 and not $971,400;
2. the Appellant is permitted to carry back from his 1992 taxation year the maximum amount of his non-capital loss which is available at law to be applied in the computation of his taxable income for 1991; and
3. any penalties assessed with respect to the 1991 taxation year will be adjusted in accordance with the result of this judgment.
Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 29th day of January, 2003.
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"M.A. Mogan" |
J.T.C.C.
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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. |
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 |
$106,200 |
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1991 |
$971,400 |
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. |
Cheque No. |
Amount |
Date paid
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R-10 |
263 |
$106,200 |
December 7, 1990 |
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R-10 |
267 |
11,800 |
January 28, 1991 |
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- |
266 |
405,000 |
January 28, 1991 |
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R-10 |
- |
400,140 |
January 28, 1991 |
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R-10 |
24 |
65,000 |
April 17, 1991 |
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R-10 |
102 |
89,460 |
May 1, 1991 |
[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.
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"M.A. Mogan" |
J.T.C.C.
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COURT FILE NO.: |
1999-589(IT)G |
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STYLE OF CAUSE: |
Steven Erdelyi and Her Majesty the Queen |
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PLACE OF HEARING |
Toronto, Ontario |
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DATE OF HEARING |
February 14, 2002 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge M.A. Mogan |
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DATE OF JUDGMENT |
January 29, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
John R. Shipley and Ginette Souligny |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |