Mazo v. R. - TCC: Taxpayer taxed on income from pyramid scheme, entitled to deduct costs

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/181414/index.do

Mazo v. The Queen (October 14, 2016 – 2016 TCC 232, Graham J.).

Précis:  The Taxpayer participated in a pyramid scheme known as Business In Motion International Corporation (“BIMIC”) in 2007, 2008 and 2009.  She received proceeds of roughly $90,000 in those years which CRA added to her income and imposed gross negligence penalties.  The taxpayer appealed to the Tax Court.  The Tax Court concluded that the proceeds were in fact taxable but concluded that the taxpayer should be allowed a deduction for her costs of buying into the scheme.  The gross negligence penalties were sustained.  The appeal was therefore allowed only to the extent of permitting the deduction of the taxpayer’s buy in costs.  Even though this was an informal procedure appeal the Court took the unusual step of awarding costs of $375 against the taxpayer for having wasted half a day of Court time.

Decision:  The Court held that the BIMIC pyramid scheme proceeds were income from business:

[29]        The Minister made an assumption of fact that participants did not pay to participate in a pyramid but rather bought goods or services from BIMIC for personal use. In accordance with that assumption, the Minister did not allow Ms. Mazo any deductions for the amounts she paid to join pyramids.

[30]        Ms. Mazo has succeeded in demolishing that assumption. The amounts Ms. Mazo spent to buy into pyramids are amounts she laid out to earn the revenue she earned as a sales director and are properly deductible. The only question that remains is how much she spent.

[31]        Ms. Mazo testified that she had bought into at least 10 pyramids after her initial pyramid. She stated that it was her normal practice to use some of the revenue that she received from being a director of sales to buy into a new pyramid once her old pyramid ended. The Minister introduced no evidence to show how many pyramids Ms. Mazo bought into. The Respondent knew that the Minister’s assumption of fact was not defensible in light of Justice Rennie’s decision. If the Respondent wanted me to rely on something more specific than Ms. Mazo’s recollection of what happened nine years ago, the Respondent should have introduced evidence in that regard.

The Court rejected other arguments advanced by the taxpayer including her arguments to set aside gross negligence penalties and her argument that the 2007 taxation year was statute-barred.  Accordingly it allowed the appeal only to the following extent:

[44]        Based on all of the foregoing, I find that Ms. Mazo had the following unreported business income from the scheme in the following years:

Even though this was an informal procedure appeal the Court took the unusual step of awarding costs of $375 against the taxpayer for having wasted half a day of Court time:

[52]        Ms. Mazo was originally represented by an agent named Chris Shannon. Ms. Mazo’s choice of agent and her persistence in following that agent’s advice in the face of clear indications that she should not do so led to an unnecessary delay in this matter. It caused a trial that should have taken half a day to extend not only to a full day but well into the evening and it complicated the proceedings for all involved. The Respondent should not have to bear the costs of that delay.

[53]        It is unusual for the Court to award costs against a taxpayer in an informal procedure appeal. It is even more unusual for the Court to do so when the taxpayer is partially successful. However, the Court has discretion to do so pursuant to Rules 10 and 11 of the Tax Court of Canada Rulers (Informal Procedure) if the Court finds that the actions of the appellant unduly delayed the prompt and effective resolution of the appeal.

[54]        In the circumstances, I award costs of $375 to the Respondent in respect of the half day of hearing that was wasted.