Citation: 2012 TCC 56
Date: 20120216
Docket: 2009-1160(IT)G
BETWEEN:
AZIZULLAH HAFIZY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2009-1159(IT)G
AND BETWEEN:
FOROOZAN HONARI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2009-1148(IT)G
AND BETWEEN:
MELANIE TACANAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
Introduction
[1]
The Appellants, Azizullah Hafizy,
Foroozan Honari and Melanie Tacanay, are appealing the reassessments of the Minister
of National Revenue under the Income Tax Act of their 2003 and 2004
taxation years disallowing various expenses claimed in respect of their real
estate business. The main basis for the Minister’s decision was the
insufficiency of supporting documentation and the dubious quality of such documents
as were eventually produced by the Appellants at the audit and objection stage.
[2]
The appeals were heard together on
common evidence. The Appellants agreed that, as the person responsible for the
management of the business, Mr. Hafizy would give evidence on behalf of all
three Appellants, subject to the right of Ms. Honari and Ms. Tacanay to add
their own evidence at the conclusion of his testimony. Ms. Tacanay ultimately
declined to do so but Ms. Honari testified briefly to provide some additional
information in respect of certain points raised in Mr. Hafizy’s testimony. More
will be said about their evidence below.
Analysis
[3]
All three Appellants claimed various
amounts in respect of the following categories of expenses: advertising,
professional dues, phone, parking, client incentives, gifts for referrals,
client meals and office supplies. Mr. Hafizy also claimed amounts for
management/third party costs and a capital cost allowance; Ms. Honari, third
party costs only.
[4]
At the commencement of the
hearing, counsel for the Respondent conceded that the following amounts ought
to be allowed for each of the Appellants in the 2003 and 2004 taxation years in
respect of the categories set out below:
|
MR. HAFIZY
|
|
|
|
EXPENSE
|
2003
|
2004
|
|
Advertising
|
$18,630
|
$14,583
|
|
Professional Dues
|
$2,390
|
$2,490
|
|
Phone
|
$2,615
|
$2,346
|
|
3rd
Party Payments
|
$602
|
$567
|
|
Meals
|
$5,200
|
$5,200
|
|
Supplies
|
$2,400
|
$2,400
|
|
Parking
|
$640
|
$640
|
|
|
|
|
|
MS. HONARI
|
|
|
|
EXPENSE
|
2003
|
2004
|
|
Advertising
|
$25,017
|
$15,054
|
|
Phone
|
$2,417
|
$2,027
|
|
3rd
Party Payments
|
$571
|
$516
|
|
Meals
|
$5,200
|
$5,200
|
|
Supplies
|
$2,400
|
$2,400
|
|
Parking
|
$640
|
$640
|
|
|
|
|
|
MS.
TACANAY
|
|
|
|
EXPENSE
|
2003
|
2004
|
|
Advertising
|
$8,941
|
$16,022
|
|
Phone
|
$ 0
|
$ 887
|
|
3rd Party Payments
|
$1,020
|
$1,219
|
|
Supplies
|
$1,200
|
$0
|
[5]
For the reasons set out below, the
Appellants have not persuaded me that they are entitled to more than the
amounts conceded by the Minister. Accordingly, the appeals are allowed and the
reassessments referred back to the Minister for reconsideration and
reassessment only to give effect to the above concessions.
[6]
As was explained at the hearing,
the onus was on the Appellants to show that they had incurred the expenses
claimed and that such expenditures had a business purpose. Before itemizing
some of the weaknesses of their evidence, I would note the following positive
elements flowing from their testimony: I accept that Mr. Hafizy worked hard to
establish his business and that he is a man who ensures his business creditors
are paid. I also believe Ms. Honari’s evidence that she and Ms. Tacanay find
him to be a respectful and fair person and that they enjoy a good working
relationship with him.
[7]
The difficulty is, however, that the
Appellants’ failure to keep proper books and records coupled with their
practice of dealing in cash has made it impossible for them to prove their
claims. No explanation was given for not having kept records. As for the
numerous cash transactions, Mr. Hafizy testified that certain suppliers
insisted on cash before they would give him a ‘discount’ on the amount due. He
did not expand on the nature of such a discount. Both Mr. Hafizy and Ms. Honari
also tried to justify their cash dealings by explaining that in their
particular niche of the real estate market, they were expected to offer
incentives to their clients, for example, paying for such client costs as moving
expenses, legal fees, home staging, house cleaning, new appliances or other
gifts for the new home. Mr. Hafizy said they were also expected to reward
individuals who referred clients to them. The client incentives were almost
always in cash; the referral rewards were paid in cash and sometimes by cheque.
[8]
In the recent Federal Court of
Appeal decision, House v. Canada, [2011] F.C.J. No. 1220, the Court noted at paragraph
80:
80 … that,
depending on the circumstances of the case, a taxpayer may be required, in
addition to his oral testimony, to adduce supporting documents to prove a given
point. In both Njenga and Scragg [discussed by the Court in the preceeding
paragraphs], the Court was not satisfied with the taxpayer’s credibility. In Redrupp,
the Tax Court Judge was of the view that the nature of the claims being made by
the taxpayer required supporting documents.
[9]
Here, I would not go so far as to
say Mr. Hafizy and Ms. Honari were not credible but their testimony was not
strong enough to make their case without supporting documentation. Their
practice of dealing in cash and not keeping records left too many gaps and
unanswered questions in their evidence.
[10]
Mr. Hafizy was cross-examined in
his capacity as the member of the business responsible for paying the bills and
managing the bank accounts of the business. In support of the Minister’s
contention regarding the unreliability of the materials produced by the
Appellants, counsel for the Respondent took him carefully through some of the Appellants’
exhibits; following the hearing, I made my own review of the documents filed by
the Appellants. In my view, the testimony of Mr. Hafizy and Ms. Honari did not
serve to correct or justify the various irregularities identified in the Appellants’
documentary evidence:
1.
For some invoices, there are no
cheques or other proof of payment of any kind (Exhibit A-5, Ms.
Tacanay’s 2003 expenses). Mr. Hafizy’s explanation was it must have been
paid in cash but he had no receipts for such payments.
2.
In many cases, there is a lack of
correspondence between the amount shown in the invoice and the amounts in the
cheques attached thereto (Exhibit A-7, “Afghan Hindara”). Mr. Hafizy’s
explanation was that the balance must have been paid in cash. He had no
receipts and also admitted there would be no corresponding cash withdrawal from
his bank account because he often took out an amount well in excess of the
amount due in a particular invoice to distribute among other suppliers and/or
clients.
3.
Many of the invoices are not dated
and rather than showing a specific billing date for the supply or service
rendered, indicate a global billing period, generally, the full year (Exhibit
A-7, “Resale Homes”; Exhibits A-1 and A-4, “Zarnegaar” for 2003 and 2004,
respectively). Over the course of Mr. Hafizy’s cross-examination, it finally
came out that having no records of his own, to comply with the Canada Revenue
Agency’s demand for documentation he had to request invoices from suppliers
after the fact. While there is nothing wrong, in principle, with going to a
secondary source, to be reliable, such documents ought to be copies of the
actual invoices originally sent to the taxpayer on a certain date for a
specific billing period, not a newly created summarizing invoice.
4.
In some cases, the cheques
produced as proof of payment of certain invoices are dated prior to the date on
the invoice (Exhibit A-7, “Likha”; Exhibit A-2, “Taliba”). Mr. Hafizy’s
explanation was that he sometimes paid amounts in advance of the invoice, a
kind of payment on account of what he knew would be billed later. In other
cases, he would be late in paying invoices but his suppliers knew him well
enough to know they would ultimately be paid.
5.
Some of the cheques attached to
the invoices were for the wrong year or had been paid on Ms. Honari’s account
instead of Mr. Hafizy’s account (Exhibit A-3). Some were made out to
individuals instead of the company name on the invoice (Exhibit A-3,
“Communications Depot”, “Philippine Reporter”; Exhibit A-1, “Balita”). Mr.
Hafizy’s explanation was that these were the owners of the companies; he had
simply made the cheques payable to them rather than using the business name.
6.
Also included among the Appellants’
documents were a bundle of photocopied cheques payable to various individuals
(Exhibit A-14). Mr. Hafizy’s evidence was that these were to third parties for
client referrals or incentives. However, he did not identify the payees as
being related to any particular real estate transactions and had no records
that could provide such information. Furthermore, with the exception of cheque
#088 to “Jessica Topaz” bearing the vague memo “for the house for Melanie”,
there is nothing in the cheques themselves to link them to a business purpose.
In these circumstances, there is no way of verifying that the amounts paid to
these individuals had anything to do with the Appellants’ business.
7.
Finally, Exhibit A-17 contained
copies of cheques made out to ‘cash’ ranging in amount from $350 to $4,000.
Again, there is no way to connect any of these cheques to a particular business
expense.
[11]
Considered against this backdrop,
it seems to me that the concessions presented by the Minister at the hearing
are more than fair. In her testimony, the Appeals Officer in charge of the
Appellants’ files stated that given the lack of documentation in general and
the discrepancies in the various documents produced by the Appellants from time
to time, she could only estimate what expenses ought to be allowed on the best
information available. In doing so, she reviewed the copies of all cancelled
cheques and the credit card statements. All amounts that, on the face of it,
could reasonably be attributed to business-related creditors (for example,
advertising or office supplies) were accepted. In the absence of documentation,
she relied on averages from Statistics Canada, the auditors’ conclusions and/or
her own judgment of what was reasonable based on her 9 years’ experience as an
Appeals Officer. She was further guided by the desire of the Canada Revenue
Agency to reach a reasonable settlement with the Appellants.
[12]
Even leaving aside the methodology
and motivations of the Appeals Officer, the Appellants have failed to meet
their onus of showing that they are entitled to any amounts in excess of those
conceded by the Minister at the hearing. Accordingly, the appeals of each
Appellant are allowed, without costs, but only to the extent contemplated by
the Minister’s concessions as set out above.
Signed
at Ottawa, Canada this 16th day of February
2012.
“G. A. Sheridan”
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