Minister of National Revenue v. Johnson, (2012) 435 N.R. 361 (FCA)

• Judge: Blais, C.J., Sharlow and Trudel, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: September 13, 2012
• Jurisdiction: Canada (Federal)
• Citations: (2012), 435 N.R. 361 (FCA);2012 FCA 253

MNR v. Johnson (2012), 435 N.R. 361 (FCA)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

Temp. Cite: [2012] N.R. TBEd. OC.010

Her Majesty the Queen (appellant) v. Donna M. Johnson (respondent)

(A-491-11; 2012 FCA 253; 2012 CAF 253)

Indexed As: Minister of National Revenue v. Johnson

Federal Court of Appeal

Blais, C.J., Sharlow and Trudel, JJ.A.

October 4, 2012.

Summary:

Johnson appealed reassessments under the Income Tax Act for 2002 and 2003. The issue was whether she required to pay income tax on certain payments she received in 2002 and 2003 from Lech. Johnson believed the payments represented her share of the after-tax profit derived from option trading transactions engaged in by a trust managed by Lech. In fact, and unknown to Johnson, Lech was paying her from money he had obtained fraudulently from the victims of a Ponzi scheme he was operating.

The Tax Court of Canada, in a decision reported at 2011 TCC 540, allowed the appeal and vacated the reassessments. The Crown appealed.

The Federal Court of Appeal allowed the appeal and held that the reassessments were valid.

Income Tax - Topic 10

General - Income - What constitutes - Johnson appealed reassessments under the Income Tax Act for 2002 and 2003 - The issue was whether she required to pay income tax on certain payments she received in 2002 and 2003 from Lech - Johnson believed the payments represented her share of the after-tax profit derived from option trading transactions engaged in by a trust managed by Lech - In fact, and unknown to Johnson, Lech was paying her from money he had obtained fraudulently from the victims of a Ponzi scheme he was operating - A Tax Court judge allowed her appeal and vacated the reassessments on the basis that the payments were not taxable in her hands because the Ponzi scheme could not be a source of income to her - The Federal Court of Appeal allowed the Crown's appeal and held that the reassessments were valid - The payments were income from a source (Income Tax Act, s. 3(a)) - Johnson entered into a series of agreements with Lech to receive a profit on her investments with him, and she received what she bargained for - The fact that Lech used the proceeds of his unlawful Ponzi scheme to fund the profits he was contractually obliged to pay Johnson was not relevant in determining the income tax consequences to Johnson of her transactions with Lech - See paragraphs 23 to 49.

Income Tax - Topic 1110

Income from business or property - Income - General - Proceeds from illegal or illicit business - [See Income Tax - Topic 10 ].

Income Tax - Topic 7845

Assessments and reassessments - Time for - Johnson appealed reassessments under the Income Tax Act for 2002 and 2003 - The issue was whether she required to pay income tax on certain payments she received in 2002 and 2003 from Lech - Johnson believed the payments represented her share of the after-tax profit derived from option trading transactions engaged in by a trust managed by Lech - In fact, and unknown to Johnson, Lech was paying her from money he had obtained fraudulently from the victims of a Ponzi scheme he was operating - Johnson argued, inter alia, that the reassessments were invalid because they were outside the normal three year reassessment period - A Tax Court judge held that the reassessment for 2003 was valid, but not the reassessment for 2002 - The Federal Court of Appeal allowed the Crown's appeal - The late reassessments were permitted under s. 152(4)(a)(i) of the Income Tax Act - Johnson was careless in omitting to include the payments in her income in 2002 and 2003 - She failed to seek independent advice as any reasonable person in her position would have done - She could not claim to have considered the matter thoughtfully, deliberately and carefully as a wise and prudent person would have done - See paragraphs 50 to 60.

Cases Noticed:

Titan Investments Limited Partnership, Re (2005), 383 A.R. 323; 2005 ABQB 637, refd to. [para. 16].

Den Haag Capital LLC v. Correia et al., [2010] O.T.C. Uned. 5339; 2010 ONSC 5339, refd to. [para. 16].

Stewart v. Minister of National Revenue, [2002] 2 S.C.R. 645; 288 N.R. 297; 2002 SCC 46, refd to. [para. 29].

R. v. Cranswick, [1982] 1 F.C. 813; 40 N.R. 296 (F.C.A.), refd to. [para. 33].

Federal Farms Ltd. v. Minister of National Revenue, [1959] Ex. C.R. 91, refd to. [para. 34].

Hammill v. Minister of National Revenue (2005), 338 N.R. 162; 2005 FCA 252, dist. [para. 48].

Regina Shoppers Mall Ltd. v. Minister of National Revenue (1990), 36 F.T.R. 161; 90 D.T.C. 5427 (F.C.T.D.), affd. (1991), 126 N.R. 141; 91 D.T.C. 5101 (F.C.A.), refd to. [para. 55].

Counsel:

Justine Malone and Suzanie Chua, for the appellant;

Ryan Morris, for the respondent.

Solicitors of Record:

Myles J. Kirvan, Deputy Attorney General of Canada, Ottawa, Ontario, for the appellant;

McMillan LLP, Toronto, Ontario, for the respondent.

This appeal was heard at Toronto, Ontario, on September 13, 2012, before Blais, C.J., Sharlow and Trudel, JJ.A., of the Federal Court of Appeal. The reasons for judgment of the court were delivered by Sharlow, J.A., on October 4, 2012.