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FROM: SEP-OCT 2008 ISSUE | BY DON GOODISON
Can losses that result from being defrauded be claimed for tax purposes? That is the issue the Tax Court of Canada was called upon to decide in Dwayne Heppner v Her Majesty the Queen; Tax Court of Canada 2003-4552 (IT)G; 2008 DTC 2001. Heppner, a financial advisor, was approached in 1998 by a friend and business associate who had received a fax from a person claiming to be Dr. Mike Ibe of the Federal Republic of Nigeria.
In the fax, Ibe stated that a corporation named Mantua International Services Inc. was owed $30,960,000 US from a contract that it had entered into with the government of Nigeria. Ibe claimed that, while the Nigerian government acknowledged that the amount was owed, the bureaucracy was delaying payment. Ibe offered the appellant’s friend 30 per cent of the funds if he would assist in obtaining payment. The friend contacted several sources who represented themselves as officials of the Nigerian government and decided that this was a legitimate offer. He approached Heppner and offered him 10 per cent of the contract amount in exchange for his assistance.
They incorporated a company in the Bahamas under the name of Mantua International Services. Mantua then took an assignment of the contract amount and became the payee. In 1999, they received a number of requests for payments that were supposedly required in order to facilitate the payment. The requests started at $10,000 for legal fees, $25,000 for a certificate from the Nigerian Drug Law Enforcement Agency, and finally, $340,560 as a transfer fee. Heppner and his friend paid these amounts and were advised that the contract amount was to be paid on February 23, 1999. When it wasn’t paid, Heppner and friend were advised that the Foreign Payment Panel had held up the payment. They travelled to London and met with persons representing themselves as members of the Foreign Payment Panel. They were told they would have to pay an additional $400,000 in order for the funds to be released. When further investigation revealed that they were the victims of a fraud, they refused to pay and contacted Scotland Yard.
Heppner attempted to claim his share of the “loss” on his 1999 and 2000 income tax returns. When the Minister disallowed the claim on the grounds that the losses were not incurred from a genuine business, he appealed to the Tax Court of Canada. Heppner argued that the transaction started out as a legitimate business venture that went sour. He pointed out that, prior to participating, his friend had undertaken due diligence and everything seemed to be in order. He also argued that it was a part of his ordinary business and he was required to share his profits from the venture 50/50 with his employer.
The Court dismissed his appeal stating that the evidence did not support his submissions, and held that the sources for the due diligence were actually participants in the fraud, and not independent sources. The evidence, when viewed as a whole, was indicative of a scam, with no legitimacy whatsoever.
Over the years, I have received a number of emails and faxes from people purporting to have access to millions of dollars they want to share with me. I find it hard to believe anyone could fall for that scam, let alone supposedly sophisticated businessmen. Obviously some do, but should they be allowed to mitigate their losses by claiming them as tax deductions? The courts have held that taxpayers should not be penalized because they made bad business decisions, and have allowed taxpayers to claim losses previously denied by the Minister. But the key here is that it has to be a business decision. Participating in this scam was a bad decision, but not a business decision.
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