http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/143342/index.do
David v. The Queen (April 5, 2016 – 2016 TCC 79, Visser J.).
Précis: Mr. David was one of thousands of Canadians involved in a pyramid scheme known as Treasure Traders International (“TTI”). CRA reassessed him for 2004 for $21,000 of unreported commission income from TTI and imposed gross negligence penalties. His position was that the business was carried on by his company, M.S.J Services Ltd. (“MSJ”), and that the expenses of the business exceeded any commission income earned. The Tax Court accepted his evidence that the business was carried on by MSJ, vacated the penalties and allowed the appeal.
Decision: Mr. David was caught up in a pyramid scheme:
[1] John David is a retired businessman living in Bathurst, New Brunswick, and is one of approximately 19,000 individuals and corporations in Canada who were enticed into being distributors in a pyramid scheme known as Treasure Traders International (“TTI”). The Minister of National Revenue (the “Minister”) alleges that Mr. David earned $21,000 of commission income from his involvement with TTI as a distributor which he failed to report in his 2004 taxation year, and reassessed him accordingly, together with gross negligence penalties. Mr. David argues that he earned substantially less, and in fact incurred a loss from his involvement in TTI when his expenses are factored in. He also argues that he did not carry on his TTI operations personally, but that they were carried on through his company, M.S.J Services Ltd. (“MSJ”). Mr. David has appealed the Minister’s reassessment to this Court.
[Footnote omitted]
CRA relied heavily upon records seized from TTI. The Tax Court preferred the evidence of Mr. David:
[15] The Minister relied substantially on information obtained from TTIC’s CFO in raising its reassessment of the Appellant. The CFO had taken these records from TTIC shortly before it ceased operations in January 2006 or thereabouts. The Appellant, however, argued that TTIC was a corrupt organization operating an illegal pyramid scheme and that its records should not be relied on. In support of his position, the Appellant submitted evidence relating to TTIC, Alan Kippax and BIM, a similar pyramid scheme operated by Alan Kippax at or about the same time as TTI. Included in this evidence was a copy of the CRA’s position paper on income relating to TTI, which the Appellant obtained in July 2014. This paper indicates that the CRA “. . . decided to undertake audit activity with respect to this organization in February of 2006 due to the existence of many risk indicators including non-compliance with respect to filing both GST and Income Tax (T2) returns.” The Appellant thus argues that TTIC’s records, obtained from a third party after TTIC had ceased operations, should not be relied on, and indeed notes that the CRA itself points out the many risk factors associated with TTIC.
[16] In considering the evidence presented by both parties, I note that the Respondent relies on the references to “John David” in the spreadsheets obtained from the CFO relating to both the certificate sales and the TTI Moncton Fleet Port franchise. As the originals or copies of these documents were not submitted as evidence in court, and the CFO did not testify, the Appellant did not have an opportunity to review or directly challenge the accuracy of these documents. The Appellant argued that TTIC’s business records, obtained from a third party, should not be considered reliable given the nature of TTIC’s allegedly illegal operations and the serious allegations and charges made against TTIC and Alan Kippax, as set out in the evidence he submitted. I note that the CRA in its TTI position paper acknowledged the significant risk factors associated with TTI. I also note that the evidence submitted by the Appellant supports his position that MSJ carried on his TTI operations. For example, the December 12, 2004 letter sent to TTI requesting that TTI correct its business records to properly reflect MSJ on the certificates corroborates his testimony and indicates that TTIC’s business records were incorrect in referring to sales being made by “John David”. In addition, the November 18, 2004 receipt issued by TTI to MSJ for the $7,000 franchise fee corroborates the Appellant’s testimony and clearly contradicts the Respondent’s evidence on this issue. I also note that the Appellant’s testimony, MSJ’s accounting records and the other financial documentation submitted by the Appellant clearly establish that it was the Appellant’s intention to carry on the TTI operations in MSJ, and that they were in fact carried on in MSJ.
[Footnote omitted]
As a result the penalties were vacated and the appeal allowed. There was no order as to costs since this was an informal procedure appeal.