January 27, 2012

William Hammill v. Her Majesty the Queen

2005 DTC 5397
Neutral Citation: 2005 FCA 252
Federal Court of Appeal
Date: July 7, 2005

Court File No. A-507-04

Deductions — Business expenses — Whether amounts paid by taxpayer to fraudulent agent in attempt to sell precious-gem collection at a profit were incurred to earn income from a business, and were reasonable in amount — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, ss. 18(1)(a), 67.

Facts: The taxpayer incurred expenses of $1,651,766 in an attempt to sell his precious gems, at a profit, through what he discovered to be a fraudulent agent. In assessing the taxpayer for 1994, 1995, and 1996, the Minister disallowed the deduction of the $1,651,766. In dismissing the taxpayer’s appeal (2004 DTC 3271), the Tax Court of Canada concluded that: (a) the taxpayer was a victim of fraud from the beginning, and hence, could not have been involved in any business; (b) the amount in dispute, therefore, was not incurred to earn income from a business; and (c) the amount was not reasonable anyway. The taxpayer appealed to the Federal Court of Appeal.

Held: The taxpayer’s appeal was dismissed. A fraudulent scheme from the beginning cannot give rise to a source of income. The conclusions reached by the Tax Court judge were open to him on the evidence. Also, parties to a tax appeal cannot dictate the outcome. Hence, the Tax Court judge was not bound by the Minister’s concession that the taxpayer had been involved in an adventure in the nature of trade; nor was the Tax Court judge precluded from reaching his conclusions merely because the reassessment period had expired when his judgment was rendered. The $1,651,766 in dispute was not deductible. The Minister’s assessments were affirmed accordingly.