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Docket: 2003-1654(IT)I |
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BETWEEN: |
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JOSEPH THOMAS TOTH, |
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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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Appeal heard on January 7, 2004 at Montreal, Quebec
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Before: The Honourable Justice Louise Lamarre Proulx |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Antonia Paraherakis |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is dismissed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 15th day of January 2004.
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"Louise Lamarre Proulx" |
Lamarre Proulx, J.
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Citation: 2004TCC56 |
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Date: 20040115 |
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Docket: 2003-1654(IT)I |
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BETWEEN: |
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JOSEPH THOMAS TOTH, |
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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
Lamarre Proulx, J.
[1] This appeal was heard pursuant to the Informal Procedure. It concerns the 1999 taxation year. The question at issue is whether an amount forfeited pursuant to the Criminal Code may be deducted in the calculation of income for the year 1999.
[2] The facts relied on by the Minister of National Revenue (the "Minister") to deny the deduction of the amount forfeited are described in paragraphs 2 and 5 of the Reply to the Notice of Appeal (the "Reply"):
2. Following the initial assessment for the 1999 taxation year the appellant submitted to the Minister of National Revenue (the "Minister") a request for a reassessment to allow an amount of $30,000 as a reduction from the net business income for the business known as Crystal Star.
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5. In order to establish the assessment the Minister relied on the following assumption of facts:
a) During the 1999 taxation year the appellant operated a "placement agency" known as Crystal Star.
b) The appellant declared a gross business income in the amount of $114,897.35 and a net business income in the amount of $37,225.
c) The reduction to the net business income requested by the appellant was for funds seized from the appellant by the Government of Quebec, following legal proceedings on the business operated by the appellant.
[3] The Appellant testified. He related that the placement agency was an escort agency. There was otherwise no dispute as to the facts of this case.
[4] The Appellant produced as Exhibit A-1, an "Ordonnance de Blocage suivant les articles 462.33 et suivants du Code Criminel". The property concerned is Item 5 of this "ordonnance". This item 5 reads as follows:
Toutes sommes d'argent et autres valeurs se trouvant contenues et/ou rattachées au compte portant le numéro 223-14 de la Banque Scotia, située au 3064, rue St-Charles à Kirkland, ledit compte étant enregistré au nom de Crystal Star Creation.
[5] This order is dated February 16, 2001.
[6] The Appellant produced as Exhibit A-2, a judgment of Judge Michel Mercier, a Judge of the Quebec Court, dated May 29, 2003. From this judgment, it is of interest to quote paragraphs 12, part of 55, 56, 57, 58, 66 and part of the "Conclusion Finale" (at page 17 of the judgment):
[12] Il est plus qu'évident que l'ordonnance de confiscation des produits de la criminalité comme ici, d'avoir vécu des fruits de la prostitution, (article 212), fait partie de la sentence à imposer. L'article 462.37(3) et (4) édicte que dans certains cas prévus, une amende doit être infligée et purgée après toute autre peine.
[55] ... Que leur reste-t-il?
[56] La preuve est plutôt faible puisqu'on n'a pas voulu faire la liste de ce que l'on a effectivement bloqué dans des comptes multiples contrôlés par les accusés.
[57] La poursuite s'est contentée de fournir un projet d'ordonnance de confiscation en vertu des paragraphes 462.37.
[58] Le Tribunal n'a pas de difficulté à confisquer les comptes de banque où la preuve révèle que ces comptes n'ont existé que pour déposer des argents du commerce illégal, et ce, peu importe le contenu.
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[66] Ces biens pour certains immeubles et meubles sont bien décrits; quant aux comptes de banque, la preuve ne révèle pas le contenu.
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CONCLUSION FINALE
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1) AU CHAPITRE DES FRAIS JUDICIAIRES
ORDONNE que la somme de 30,000.00$ soit payée dans les trente jours de ce jour à l'Étude Légale Grey et Casgrain, à prendre à même les premiers argents liquides des présentes confiscations ou à défaut lors de la liquidation des biens immeubles à charge du Procureur Général du Québec.
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3) AU CHAPITRE DE LA CONFISCATION DES BIENS
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ORDONNE la confiscation de toutes sommes d'argent et autres valeurs se trouvant contenues et/ou rattachées aux comptes portant les numéros 36263-26, 00538-80, 01502-23, 00117-89 et 12476-89, 223-14, ce dernier compte étant enregistré au nom de Crystal Star Creation de la Banque Scotia, située au 3064, rue St-Charles, à Kirkland.
ORDONNE à la Banque Scotia, citée au paragraphe précédent de verses sans délai au Procureur Général du Québec toutes sommes confisquées audits comptes;
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Pour éviter toute confusion, aucune suramende ne sera rajoutée;
Arguments
[7] The Appellant argued that it was double jeopardy to deny him the deduction of the amount of the monies forfeited in the business bank account. It was not just to deny him the deduction of this amount where he paid tax on the income from the escort business.
[8] Counsel for the Respondent referred herself to section 462.37(1) of the Criminal Code, which reads as follows:
Forfeiture of Proceeds of Crime
462.37(1) [Order of forfeiture of property on conviction]Subject to this section and sections 462.39 to 462.41, where an offender is convicted, or discharged under section 730, of a designated offence and the court imposing sentence on the offender, on application of the Attorney General, is satisfied, on a balance of probabilities, that any property is proceeds of crime and that the designated offence was committed in relation to that property, the court shall order that the property be forfeited to Her majesty to be disposed of as the Attorney General directs or otherwise dealt with in accordance with the law.
[9] She also referred to a decision of this Court in Neeb v. Canada, [1997] T.C.J. No. 13 (Q.L.), a decision rendered on January 9, 1997. She quoted part of paragraph 29 of this decision:
2. The seizure of cash. Apart from considerations of public policy there is, however a further reason for denying the deduction. This is simply a disposition of income, albeit involuntary, after it had been earned. The principle is well settled: Mersey Docks and Harbour Board v. Lucas (1883) 8 App. Cas. 891, followed in Fourth Conservancy Board v. IRC [1931] A.C. 540 and in Woodward's Pension Society v. M.N.R., 59 D.T.C. 1253 at 1261, aff'd 62 D.T.C. 1002 at 1004.
Analysis and conclusion
[10] We have to consider the first part of the aforementioned paragraph 29 of the Neeb decision (supra). It reads as follows:
29 The question of avoidability is not germane here. Mr. Neeb did get caught and his marihuana and hashish were seized. I can see no reason why the Canadian public should be expected to subsidize a drug dealer's loss through forfeiture of illegal drugs, by allowing him to write-off the cost of drugs so forfeited, even if that cost had been established. If public policy has any role in fiscal matters it must deny such a claim.
[11] As can be read, the Neeb decision took into account the notion of public policy. This decision was rendered before the decision of the Supreme Court of Canada in 65302 British Columbia Ltd. v. The Queen, [1999] S.C.R. Vol. 3, 804, which decided that the notion of public policy to prevent a taxpayer to deduct fines or penalties did not apply in the Income Tax Act.
[12] I quote paragraphs 56, 64, 65, 66 and 69 of that decision :
[56] In this connection, I note that in calculating income, it is well established that the deduction of expenses incurred to earn income generated from illegal acts is allowed. For example, not only is the income of a person living from the avails of prostitution liable to tax, but the expenses incurred to earn this income are also deductible: M.N.R. v. Eldridge, [1964] C.T.C. 545 (Exch. Ct.). See also Espie Printing Co. v. M.N.R., [1960] Ex. C.R. 422. Allowing a taxpayer to deduct expenses for a crime would appear to frustrate the Criminal Code; however, tax authorities are not concerned with the legal nature of an activity. Thus, in my opinion, the same principles should apply to the deduction of fines incurred for the purpose of gaining income because prohibiting the deductibility of fines and penalties is inconsistent with the practice of allowing the deduction of expenses incurred to earn illegal income.
[64] These provisions in the Act also reduce the force of the argument that allowing the deduction of fines and penalties permits the taxpayer to profit from his or her own wrongdoing. This line of reasoning is often traced to the statement of Lord Atkin in Beresford v. Royal Insurance Co., [1938] 2 All E.R. 602 (H. L.), at p. 607: "the absolute rule is that the Courts will not recognize a benefit accruing to a criminal from his crime." However, as several commentators note, Beresford involved a payment under an insurance policy where the insured had committed suicide, at a time when suicide was characterized as a heinous crime. See E. Krasa, "The Deductibility of Fines, Penalties, Damages, and Contract Termination Payments" (1990) 38 Can. Tax J. 1399, at p. 1417 and Krishna, supra, at pp. 31-32. There is therefore little authority to extend Lord Atkin's statement more generally, especially when one considers the clear authority, as mentioned above, to the effect that expenses incurred in the pursuit of illegal activities are deductible expenses.
[65] Moreover, given that Parliament has expressly turned its mind to the deduction of expenses associated with certain activities that are offences under the Criminal Code, outlined in s. 67.5 of the Act, I do not find a legitimate role for judicial amendment on the general question of deductibility of fines and penalties. Since the Act is not silent on the issue of restricting the deduction of some expenses incurred for the purpose of gaining income, this is a strong indication that Parliament did direct its attention to the question and that where it wished to limit the deduction of expenses or payments of fines and penalties, it did so expressly. I am also sceptical that the deduction of fines and penalties provides the taxpayer with a "benefit" or "profit" - indeed, their purpose is to calculate the taxpayer's profit, which is then taxed.
(3) Conclusion Regarding s. 18(1)(a)
[66] I therefore cannot agree with the argument that the deduction of fines and penalties should be disallowed as being contrary to public policy. First and foremost, on its face, fines and penalties are capable of falling within the broad and clear language of s. 18(1)(a). For courts to intervene in the name of public policy would only introduce uncertainty, as it would be unclear what public policy was to be followed, whether a particular fine or penalty was to be characterized as deterrent in nature, and whether the body imposing the fine intended it to be deductible. Moreover, allowing the deduction of fines and penalties is consistent with the tax policy goals of neutrality and equity. Although it may be said that the deduction of such fines and penalties "dilutes" the impact of the sanction, I do not view this effect as introducing a sufficient degree of disharmony so as to lead this Court to disregard the ordinary meaning of s. 18(1)(a) when that ordinary meaning is harmonious with the scheme and object of the Act. When Parliament has chosen to prohibit the deduction of otherwise allowable expenses on the grounds of public policy, then it has done so explicitly.
[69] Finally, at para. 17, my colleague states that penal fines are not, in the legal sense, incurred for the purpose of gaining income. It is true that ss. 18(1)(a) expressly authorizes the deduction of expenses incurred for the purpose of gaining or producing income from that business. But it is equally true that if the taxpayer cannot establish that the fine was in fact incurred for the purpose of gaining or producing income, then the fine or penalty cannot be deducted and the analysis stops here. It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income. However, such a situation would likely be rare and requires no further consideration in the context of this case, especially given that Parliament itself may choose to delineate such fines and penalties, as it has with fines imposed by the Income Tax Act. To repeat, Parliament may well be motivated to respond promptly and comprehensively to prohibit clearly and directly the deduction of all such fines and penalties, if Parliament so chooses.
Conclusion
[13] My first comment from reading the judgment (Exhibit A-2), is that the exact amount of money left in the bank account of the escort business at the time the account was frozen is not known. This amount should be ascertained. It should also be verified whether these monies were not those used to pay the legal fees referred to in the "Conclusion finale" in the "Chapitre des frais judiciaires".
[14] My second comment is that the judgment (Exhibit A-2) specifically mentioned at paragraph 12 that "l'ordonnance de confiscation ... fait partie de la sentence à imposer." I would say that the nature of a forfeiture as to whether it is a fine or penalty or whether it is similar in nature remains to be determined.
[15] My third comment is that the amount was forfeited in the year 2003. It is in that year that the deduction should receive its appropriate fiscal treatment and in that year that it should be determined whether the taxpayer is entitled to deduct the forfeited amount.
[16] In view of my last comment, this appeal shall be dismissed.
Signed at Ottawa, Canada this 15th day of January 2004.
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"Louise Lamarre Proulx" |
Lamarre Proulx, J.
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CITATION: |
2004TCC56 |
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COURT FILE NO.: |
2003-1654(IT)I |
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STYLE OF CAUSE: |
Joseph Thomas Toth and Her Majesty the Queen |
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PLACE OF HEARING: |
Montreal, Quebec |
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DATE OF HEARING: |
January 7, 2004 |
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REASONS FOR JUDGMENT BY: |
The Hon. Justice Louise Lamarre Proulx |
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DATE OF JUDGMENT: |
January 15, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Antonia Paraherakis |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |