http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110059/index.do
Mosly v. The Queen (June 4, 2015 – 2015 TCC 136, Graham J.).
Précis: Mr. Mosly was assessed for 1999 for $460,000 stolen from a business client. The Court did not accept his explanations and dismissed his appeal. He was also assessed for 2003 and 2004 in respect of amounts he allegedly embezzled from two companies of which he was a 50% shareholder along with a former friend with whom he became involved in messy litigation. The Court allowed his appeals for 2003 and 2004 since the T5018 slips describing the alleged amounts embezzled were not issued until 2010, did not include Mr. Mosly’s address and were not otherwise supported by the evidence. Given the mixed success, no costs were awarded.
Decision: The taxpayer was found by the BC Supreme Court to have fraudulently converted funds in the amount of $460,000 in 1999:
[5] The parties agree on the following key facts. In 1999, BSA borrowed $550,000 from a bank using Gang Ranch’s property as security. The proceeds of that loan were deposited in BSA’s bank account. Of those proceeds, $460,000 was immediately transferred to SACBC’s bank account. SACBC then immediately transferred the same funds to a brokerage account in its name. The funds were used to acquire shares in Apple Inc. BSA defaulted on the original loan and there were insufficient assets left in SACBC to repay it. BSA sued Mr. Mosly, SACBC and BSA’s lawyers in respect of these lost funds. The BC Supreme Court found that Mr. Mosly had fraudulently taken the funds and that the lawyers were negligent in failing to ensure that the appropriate authorization had been obtained for the borrowing.
The Tax Court made it clear that it was not bound by the BS Supreme Court decision:
[13] I want to be clear that, in reaching the above conclusion, I am not influenced by the BC Supreme Court decision against Mr. Mosly. The Crown was not a party to that lawsuit so issue estoppel cannot apply. Mr. Mosly attended the hearing for that lawsuit and cross-examined some of the witnesses but chose not to testify himself. Not surprisingly, the Court drew a negative inference from that fact. Mr. Mosly offered a number of different explanations for his decision not to testify. I do not think it is relevant whether I accept those explanations or not. The simple fact is that I am not prepared to rely upon the findings of fact made by a different court in a case involving different parties, than the ones before me, where the key party before me did not, for whatever reason, testify and where I have not heard the testimony of the parties who were adverse in interest to that party. There was nothing wrong with the Minister relying on the judgment in making assumptions of fact, but I do not think that it would be appropriate for me to rely on the judgment in determining whether those assumptions have been demolished. I reached my conclusion that Mr. Mosly had not demolished the assumptions based on the implausibility of his story, not based on the judgment of the BC Supreme Court.
The Court simply did not accept Mr. Mosly’s evidence attempting to rebut the Crown’s assumptions:
[8] Mr. Mosly takes the position that he did not steal $460,000 from BSA. He asserts that his contact at BSA told him to arrange for BSA to borrow the money, told him to move $460,000 to SACBC, told him to invest it in Apple shares and ultimately told him to borrow money against those shares. Mr. Mosly argues that BSA’s lawyers were aware of the transactions and, in fact, prepared all of the legal documents for the loan. He explains that the money that SACBC borrowed against the Apple shares was used to reimburse SACBC for expenses that it had incurred on behalf of Gang Ranch.
[9] I do not accept Mr. Mosly’s testimony on these points. The story that he presents simply makes no logical sense. He provided no explanation of why, if BSA wanted to buy Apple shares using a loan, it would not have simply bought them in its own name or Gang Ranch’s name instead of borrowing the money and then giving it to SACBC and having SACBC buy the shares. He testified that BSA had auditors and accountants who would have noticed if things were out of place but he did not provide any evidence that would indicate that those auditors or accountants had been aware of and accounted for an investment in Apple shares being made by BSA or the corresponding borrowing nor did he provide financial statements for SACBC showing how it had treated the shares.
On the alleged thefts in 2003 and 2004, however, the fact situation presented was quite different:
[16] Mr. Mosly was a 50% shareholder of two companies: Morgan Crest Estates Ltd. (“Morgan Crest”) and 660092 BC Ltd. (“BCCo”). The other 50% shareholder was a friend of his named Jose Hilario. The companies were in the business of buying raw land, building houses and selling those houses.
[17] Mr. Mosly and Mr. Hilario had a falling out. It appears that there was actually a falling out with a significant number of people connected to the companies and the houses. Mr. Hilario sued Mr. Mosly. Mr. Hilario alleged that Mr. Mosly had embezzled significant sums of money from Morgan Crest and BCCo in 2003 and 2004. My understanding is that, at some point, Mr. Hilario’s lawsuit against Mr. Mosly was discontinued. Mr. Mosly did not file any documents evidencing the basis upon which it was discontinued but he described signing what sounded to me like a mutual release. It is clear that the matter did not proceed to court. Mr. Mosly did not indicate that any payments were made as part of the discontinuation of the lawsuit.
[18] Morgan Crest and BCCo issued T5018 slips to Mr. Mosly reporting that he had the following income in the following years:
| |
2003
|
2004 |
| Morgan Crest |
$38,638
|
$91,342
|
| BCCo |
$25,112 |
$8,485 |
| Total |
$63,750
|
$99,827
|
The Court found that this evidence was tainted by the animus between Mr. Mosly and his former partner, Mr. Hilario, and hence unreliable:
[20] In so reassessing, the Minister assumed that Mr. Mosly had unreported business income as a contractor or subcontractor of Morgan Crest and BCCo. I find that Mr. Mosly has demolished that assumption. To the extent that Mr. Mosly had unreported income, it was from appropriating funds from Morgan Crest and BCCo, not from compensation for services that he performed as a contractor or subcontractor of those companies. I reach this conclusion based primarily on the fact that I believe that the T5018 slips were not issued in good faith. They were prepared by Morgan Crest’s and BCCo’s accountants presumably on the instructions of Mr. Hilario. As stated above, Mr. Hilario and Mr. Mosly were in a bitter legal dispute. I think it is fair to assume that Mr. Hilario had his own best interests in mind when the T5018 slips were issued. It appears to me from the evidence that those slips were not issued until 2010, well after the years in question. The fact that they were not issued contemporaneously suggests to me that they are less reliable. Most importantly, the amounts appear to have been calculated based on an analysis that a firm of forensic accountants hired by Mr. Hilario performed for the purpose of calculating how much money Mr. Mosly had “embezzled” from Morgan Crest and BCCo. When a 50% shareholder improperly takes money from a company, he or she is taxed under subsection 15(1) with appropriating those funds. The company who lost the money does not get a deduction for them. T5018 slips are issued to people who have performed work pursuant to a contract. Payments to such individuals are deductible by the payor. It appears to me that Mr. Hilario determined that Mr. Mosly had embezzled funds from the companies but Mr. Hilario wanted to be able to claim a deduction for the amounts taken so he decided to treat them as contract payments and arranged for T5018 slips to be issued to Mr. Mosly. The slips did not contain Mr. Mosly’s address which, conveniently, ensured that Mr. Mosly was unaware that they had been issued and was not in a position to immediately dispute them. In these circumstances, I am unable to place any reliance on the accuracy of the T5018 slips. Since the Minister’s assumptions of fact were based on those slips, I find that Mr. Mosly has successfully demolished them.
[21] The onus is therefore on the Respondent to prove that Mr. Mosly had unreported income. Counsel for the Respondent correctly recognized that the Respondent could not rely on the report prepared by the forensic accountants since those accountants were not called as witnesses. The Respondent did not have any additional evidence upon which she could rely.
[Footnote omitted]
Thus Mr. Mosly was unsuccessful in his 1999 appeal (except to the extent of the Crown’s concession dropping gross negligence penalties). His appeals for 2003 and 2004 were allowed. In light of the mixed success no costs were awarded.