Hammill v. Minister of National Revenue, 2005 FCA 252

• Judge: Létourneau, Noël and Nadon, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: July 07, 2005
• Jurisdiction: Canada (Federal)
• Citations: 2005 FCA 252;(2005), 338 N.R. 162 (FCA)

Hammill v. MNR (2005), 338 N.R. 162 (FCA)

MLB headnote and full text

Temp. Cite: [2005] N.R. TBEd. JL.033

William Hammill (appellant) v. Her Majesty The Queen (respondent)

(A-507-04; 2005 FCA 252)

Indexed As: Hammill v. Minister of National Revenue

Federal Court of Appeal

Létourneau, Noël and Nadon, JJ.A.

July 7, 2005.

Summary:

Hammill decided to get out of the business of buying precious gems for resale. Hammill was targeted and defrauded by a selling agent who promised huge profits. As well as losing the gems, Hammill paid the agent $1,651,766 for expenses relating to five fic­ti­tious purchase offers. The Minister per­mitted a business loss deduction for the value of the stolen gems, but disallowed a deduction for the $1,651,766 paid under the fraudulent scheme. The Minister's position was that the expenses could not be incurred for the pur­pose of earning business income (Income Tax Act, s. 18(1)(a)), because Hammill could not have been involved in a business where he was the victim of a fraud­ulent scheme from the beginning (i.e., even Ham­mill's initial purchases for resale part of the scheme). Further, the expenses were not "rea­sonable", as required by s. 67. Hammill appealed.

The Tax Court of Canada, in a judgment re­ported 2004 D.T.C. 3271, dismissed the appeal, affirming the Minister's decision. Hammill appealed.

The Federal Court of Appeal dismissed the appeal. The expense was not incurred for the purpose of earning income from a business (s. 18(1)(a)).

Income Tax - Topic 1061

Income from a business or property - In­come from business - Carrying on a busi­ness - What constitutes - Hammill was in the business of buying precious gems for re­sale (no secondary market) - Hammill was targeted and defrauded by a selling agent who promised huge profits - As well as losing the gems (original purchase part of the scheme), Hammill paid the agent $1,651,766 for expenses relating to five fictitious purchase offers - The Minister permitted a business loss deduction for the value of the stolen gems, but disallowed a deduction for the $1,651,766 paid under the fraudulent scheme - The Minister's posi­tion was that the expenses could not be in­curred for the purpose of earning busi­ness income (Income Tax Act, s. 18(1)(a)), be­cause Hammill could not have been in­volved in a business where he was the vic­tim of a fraudulent scheme from the be­ginning (i.e., even Hammill's initial pur­chases for resale were part of the scheme) - The Tax Court of Canada dis­missed Ham­mill's appeal - The Federal Court of Appeal dismissed Hammill's appeal from the decision of the Tax Court of Canada affirming the Minister's deci­sion - The court agreed that the expense was not in­curred for the purpose of earning income from a business (s. 18(1)(a)) - The finding that Hammill was a fraud victim from be­ginning to end, which was sup­ported by the evidence, precluded the existence of a business - The fraudulent scheme could not give rise to income, so there was no busi­ness - See paragraphs 1 to 39.

Income Tax - Topic 1126.2

Income from a business or property - De­duc­­tions - General - Reasonableness of ex­pense - Section 67 of the Income Tax Act provided that no deduction could be made for an expense that was otherwise deduct­ible, except to the extent that the expense was reasonable in the circum­stances - The Federal Court of Appeal opined that s. 67 applied only to the rea­sonableness of the quantum of the expense - It did not apply to question the reason­ableness of incurring the expense in the first instance - See par­agraphs 48 to 54.

Cases Noticed:

Stewart v. Minister of National Revenue (2002), 288 N.R. 297; 2002 D.T.C. 6969 (S.C.C.), refd to. [para. 20].

Parkland Operations Ltd. v. Minister of National Revenue (1990), 38 F.T.R. 145; 90 D.T.C. 6676 (T.D.), dist. [para. 22].

Cassidy's Ltd. v. Minister of National Revenue (1989), 89 D.T.C. 686 (T.C.C.), dist. [para. 22].

Agnew v. R. (2002), 2002 D.T.C. 2155 (T.C.C.), dist. [para. 22].

Mohammad v. Minister of National Rev­enue (1997), 216 N.R. 303; 97 D.T.C. 5503 (F.C.A.), refd to. [para. 24].

Tonn et al. v. Minister of National Rev­enue (1995), 191 N.R. 182; 96 D.T.C. 6001 (F.C.A.), refd to. [para. 27].

Urquhart v. Butterfield (1887), 37 Ch. D. 357 (C.A.), dist. [para. 29].

Copp v. Clancy (1957), 16 D.L.R.(2d) 415 (N.B.C.A.), dist. [para. 29].

Pedwell v. Minister of National Revenue (2000), 257 N.R. 148; 2000 D.T.C. 6405 (F.C.A.), refd to. [para. 33].

Minister of National Revenue v. Anchor Pointe Energy Ltd. (2003), 308 N.R. 125; 2003 D.T.C. 5512 (F.C.A.), refd to. [para. 33].

Garbco Ltd. v. Minister of National Rev­enue (1968), 68 D.T.C. 5210 (Ex. Ct.), refd to. [para. 50].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 18(1)(a), sect. 67 [para. 14].

Authors and Works Noticed:

Krishna, Vern, The Fundamentals of Cana­dian Income Tax (3rd Ed.), p. 312 [para. 50].

Sopinka, John, Lederman, Sidney N., and Bryant, Alan W., The Law of Evidence in Canada (2nd Ed. 1999), p. 1051 [para. 29].

Counsel:

Craig C. Sturrock and George Voisin, for the appellant;

Roger Leclaire and Justine Malone, for the respondent.

Solicitors of Record:

Thorsteinssons Tax Lawyers, LLP, Van­couver, B.C., and Vosin Lubczuk Law Firm, Kitchener, Ontario, for the appel­lant;

John H. Sims, Q.C., Deputy Attorney General of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard on June 28, 2005, at Ottawa, Ontario, before Létourneau, Noël and Nadon, JJ.A., of the Federal Court of Appeal.

On July 7, 2005, Noël, J.A., delivered the following judgment for the Court of Appeal.