Markakis v. MNR, 86 DTC 1237, [1986] 1 CTC 2318 (TCC)

Rip, T.C.J.:—Dimitrios Markakis, the appellant, appeals against notices of reassessment for 1974, 1975, 1976, 1977, 1978 and 1979 issued against him by the Minister of National Revenue, the respondent.* [1]

All assessments appealed from were prepared on a net worth basis, that is, the appellant’s income for each year was determined by adding the increase in his net worth to his estimated non-deductible expenditures and deducting the increase in value in capital assets and non-taxable receipts. The net worth of the appellant as at the end of 1973 was determined first by the Minister of National Revenue. The amounts of income declared by Mr. Markakis and added by the Minister for each subsequent year were as follows:

The Minister also assessed Mr. Markakis penalties for all years under appeal pursuant to subsection 163(2) of the Income Tax Act (“Act”).

Mr. Markakis immigrated to Canada from Greece in 1969. He worked as a cook in various restaurants in the Montreal area until 1978 when he acquired a 50 per cent interest in a corporation incorporated for the purpose of purchasing a restaurant.

The notices of assessment for the first three years, 1974, 1975 and 1976, were assessed four years after the dates of the respective original notices of assessment. Therefore, the notices of reassessment for these years can only stand if the Minister first can establish that Mr. Markakis has made a misrepresentation in each of the three years that is attributable to neglect, carelessness or wilful default or committed a fraud in filing his return for the year or in supplying any information under the Act (vide subsection 152(4) of the Act.? [2]

The trial in this matter took place in 1985 in two parts. The first part related solely to the Minister of National Revenue presenting evidence to meet the onus of subsection 152(4). The second part, relating to the other years, took place later on in the year.

Mr. Pierre Soucy, employed by the respondent as an auditor, testified on behalf of the Minister of National Revenue. Mr. Soucy commenced working on Mr. Markakis" file in 1980 to verify the source of funds Mr. Markakis used for the purchase of the restaurant. Mr. Soucy verified the records of the corporation which owns the restaurant but most of his efforts were devoted to reviewing the records of banks and a trust company where Mr. Markakis kept his several savings accounts.

I have no doubt Mr. Soucy endeavoured to do a thorough job. He traced a multitude of deposits and withdrawals in the bank accounts the appellant had with the Canadian Imperial Bank of Commerce, the Montreal and City District Savings Bank and the Hellenic Canadian Trust. He also traced mortgage advances and balance of payment on closing of real estate transactions as well as personal expenses of Mr. Markakis. However in respect of the reassessments for the 1974 and 1975 taxation years Mr. Soucy was working under a severe handicap.

The Minister of National Revenue had destroyed Mr. Markakis" income tax returns for 1974 and 1975. The information used by the Minister for those years was information gleaned from a computer; the computer was purported to contain information identical to that contained in the returns of income. However there is no proof that this is so. The computer operator who transmitted the information from the returns to the computer was not called to testify and it is doubtful whether he or she would have recalled such information in a manner satisfactory to the Court. Neither section 244 of the Act nor any other provision of the Act or other relevant statute I am aware of renders the information contained in the computer print-out of a taxpayer's income tax returns to be proper evidence a Court may accept as prima facie evidence of its contents. The information in the computer conceivably may contain errors; it is hearsay. I am therefore of the view that it would not be possible to find that Mr. Markakis made a misrepresentation in filing his 1974 and 1975 tax returns since these documents are simply not available.

In respect of 1976 both the Canadian Imperial Bank of Commerce and the Hellenic Canadian Trust destroyed partial records of Mr. Markakis’ savings accounts. Mr. Soucy testified that the Canadian Imperial Bank of Commerce records for 1975 and for six months of 1976 are missing. Records from the Hellenic Canadian Trust for 1973 and 1974 were also missing: the missing documents are presumed to have been destroyed by the bank and trust company. It also appears that all records from an account of the Montreal and City District Savings Bank also disappeared. Mr. Soucy, in other words, was not working from complete records in making the assessment for 1976, as well as 1974 and 1975.

The amounts added to Mr. Markakis’ taxable income for 1976 were amounts traced by Mr. Soucy in the various bank accounts from admittedly incomplete records. The amounts of deposits were in excess of Mr. Markakis" employment income. Mr. Soucy testified that Mr. Markakis advised the source of these excess funds were loans made to him by his brothers who earlier had immigrated to Argentina and the United States of America. Mr. Markakis told him he wished to open a restaurant one day and was told that in order to obtain a bank loan in Canada one had to build up a credit rating. He was building up a credit rating toward the day when he would require a loan from the bank in order to acquire a restaurant. Thus, explained Mr. Markakis to Mr. Soucy, he would regularly deposit money in his bank accounts from funds loaned to him by his brothers and thus demonstrate to the bank his ability to save. Mr. Soucy testified that Mr. Markakis could not supply the respondent with what the respondent considered satisfactory proof of the existence of the loans. Thus the amounts of the various deposits made to the bank accounts held by Mr. Markakis in 1976 were considered by the respondent to be income from a source and included in his income.

The question I must first deal with in respect of the 1976 tax assessment is whether the respondent has met the onus of establishing that Mr. Markakis made misrepresentation attributable to neglect, carelessness or wilful default in filing his 1976 income tax return. It is sufficient for the Minister to show that a taxpayer is negligent if he has not exercised reasonable care: Lucien Venne v. The Queen, [1984] C.T.C. 223 at 228; 84 D.T.C. 6247 at 6251.

For the Minister to show the taxpayer has not exercised reasonable care requires, in my view, something more than simply submitting evidence that the taxpayer has made deposits to his bank accounts in amounts greater than his employment income and advising the Court that he, the Minister, does not accept the taxpayer's explanation of the source of funds. In Gladys Balsillie v. M.N.R., [1985] 2 C.T.C. 2367; 85 D.T.C. 652, this Court found that in light of the respondent's evidence and the totally unacceptable evidence of the appellant the unidentified deposits were income for tax purposes and the discrepancies between the amounts of the unidentified deposits and reported income in the years was sufficient to establish misrepresentation that was attributable to neglect and carelessness on the part of Miss Balsillie. This is not the case at the appeal at bar. Mr. Markakis’ explanation to Mr. Soucy as to the origin of unexplained deposits is not without some plausibility; it is not uncommon for an immigrant family to help its members. Mr. Markakis did not testify to rebut any of Mr. Soucy's evidence in respect of the assessments for 1974, 1975 and 1976 and accordingly Mr. Markakis was not examined on events affecting these assessments; the only evidence was that of Mr. Soucy.

To assess beyond the four-year limit as set out in subsection 152(4) the Minister must establish that a taxpayer made a misrepresentation that is attributable to neglect, carelessness or wilful default, or that the taxpayer committed a fraud in filing his income tax return. It is not enough to suggest misrepresentation or fraud. The Minister’s evidence was not sufficient to meet his onus under subsection 152(4) and consequently I must find that Mr. Markakis cannot be said to have made a misrepresentation in 1976.

The notices of reassessment for 1974, 1975 and 1976 must therefore be vacated.

On the other hand the notice of assessment for 1977 and the notices of reassessment for 1978 and 1979 are presumed to be correct and Mr. Markakis has the burden of proving that the Minister erred in making these notices.

Mr. Soucy was called as a witness for Mr. Markakis. He testified that during the assessment process he prepared three different statements of assets and liabilities of Mr. Markakis as at December 31 of each year under appeal. The first statement was prepared in December 1980, and a second in Febru ary 1981, after he received further information from Mr. Markakis; the third statement, eventually used in preparing the assessments, was completed on September 15, 1981 and its preparation provides an interesting commentary on relations between the appellant and respondent.

Mr. Markakis appears to have been willing to accept the statement of assets for the years under appeal as prepared by the Minister in February 1981. But in Mr. Markakis" view the statement of liabilities determined by the Minister did not provide for loans he claims he made from various family members; also, he says he received $10,800 in 1977 from the sale of two properties he inherited in Greece. The Minister agreed to recognize loans made to him by his mother-in-law, Mrs. Chrysoul Tsimiklis, in the amount of $3,000 in 1977 and another loan of $2,000 in 1978. However the Minister at first was not prepared to recognize loans of $18,000 in 1976 from Mr. Markakis" brother, Andreas, who resides in Greece, $4,500 in 1978 from his brother-in-law, Mr. George Giannoukos, who lives in Montreal and $7,000 in 1978 from his brother, George, of Chicago, Illinois. Mr. Markakis also testified that in 1978 he borrowed $26,000 from his uncle Vasilios Markakis, of Buenos Aires in Argentina and that in 1979 he borrowed $30,000 from another brother, Panagiotis, of Buenos Aires.

After negotiations between the two parties Mr. Soucy prepared the third statement of assets and liabilities of Mr. Markakis. The attitude of the Minister was that if he accepted the loans that were made to Mr. Markakis by his brothers, Andreas and George, and his brother-in-law, and that if he sold property in Greece, then his assets should increase to the extent of the loans, and thus the third statement of assets and liabilities contained a new asset, cash on hand; the amount of cash on hand approximated the aggregate of the purported loans from his brothers, Andreas and George, and his brother-in-law and the proceeds from the purported sales of property in Greece; liabilities equal to these purported loans were added to the list of liabilities. The so-called acceptance of the existence of the loans and disposition of the properties was offset by the addition of cash on hand. The effect of the third statement of assets and liabilities is not much different from the second such statement.

It was the portions of the loans and disposition of the properties in Greece, said Mr. Markakis, that represented deposits to his bank accounts during the years 1977, 1978 and 1979.

Mr. Markakis’ father died in Greece in 1977. Mr. Markakis testified that at the time of his father's death his mother-in-law was visiting Greece. He authorized her to enter into an agreement as his mandatary to transfer to his brother in Greece interest in two properties left to him by his deceased father. Mr. Markakis produced into evidence a photostatic copy of a Memorandum of Agreement of Transfer of Immovables in the Greek language and an English translation of that document. The Memorandum appears to be executed by Mrs. Tsimiklis, as Mr. Markakis’ mandatary, and Andreas Athenase Markakis, Mr. Markakis’ brother, as purchaser. His mother-in-law was given money in Greek currency which she brought to him in Montreal. He says he received advice from Hellenic Trust in Montreal to go to Chicago to have the money exchanged into Canadian currency. The amount of money in question was $10,800. Mr. Markakis testified that he tried to deposit the money slowly in an account at Hellenic Trust so as to build up his credit for use when he would one day purchase a restaurant. The Minister denies the existence of the inheritance and the proceeds of disposition.

Mr. Markakis acknowledged he did not file an income tax return for 1977 because he did not receive any T-4 forms from his employers. He admits he was employed by two restaurants during 1977.

In 1977 Mr. Markakis and a Mr. Velkoff agreed to purchase a restaurant in partnership. After looking at various restaurants available for sale they agreed to acquire a restaurant in 1978. They agreed to incorporate a corporation for the purpose of acquiring this restaurant. The transaction of purchase and sale closed on February 9, 1978 but they entered into possession on January 9, 1978. The corporation (“restaurant corporation”) had not yet been incorporated and funds required for the purchase were placed in a bank account in Mr. Markakis’ name. Mr. Markakis testified the money used to fund his interest in the restaurant corporation came by way of loans from his brothers in Argentina and Chicago, as indicated earlier.

The Minister refused to acknowledge the existence of the loans between Mr. Markakis and his brothers, his uncle and his brother-in-law because in his view there was no evidence of the loans. In Court Mr. Markakis produced various acknowledgements of debt in respect of the loans from his brothers, George and Panagiotis, his uncle and his brother-in-law. The acknowledgements of debt by themselves are in my view self-serving and I ordinarily would not have given them any weight in considering the evidence before me. However, the acknowledgement of debt to his brother- in-law also appears in a copy of a Memorandum of Agreement dated February 1, 1983 between the appellant and Mr. Giannoukos in which Mr. Markakis sells his interest in the corporation which was incorporated to acquire the restaurant to his brother-in-law. The consideration for the shares includes a release and discharge of all sums owing to Mr. Giannoukos by Mr. Markakis; the Agreement also provides that Mr. Giannoukos shall assume payment of the loans of $30,000 and $26,000 made to Mr. Markakis by his brother and uncle in Argentina.

In 1979 Mr. Markakis was considering renovating the restaurant and on his request Vasilios Markakis sent to the appellant’s brother in Chicago, for the appellant, a bank draft in pesos. Mr. Markakis says he went to Chicago to pick up the draft from his brother and in Chicago converted the draft from pesos to $30,000 in Canadian currency. He brought the money to Montreal in cash.

Mr. Markakis testified that whenever he needed money he would telephone his family for assistance. He would use the money for his restaurant and for personal requirements.

There were no renovations to the restaurant for which he had borrowed $30,000, but Mr. Markakis did not return the money to his brother. He felt free to deal with the funds as he wished and at one point considered buying out his partner. In the meantime he says he put some of the money into the bank and in 1980 he repaid his brother, Andreas, the $18,000 loaned to him in 1976.

The restaurant business was not working out as Mr. Markakis had hoped and in 1983 he sold the shares to his brother-in-law, Mr. Giannoukos, in accordance with the Agreement of Purchase and Sale referred to earlier.

Neither Mrs. Tsimiklis nor Mr. Giannoukos, both of whom live in Montreal, were called to testify on behalf of Mr. Markakis, although counsel for Mr. Markakis indicated at one point during the trial that Mr. Giannoukos may be called as a witness.

The evidence of Mrs. Tsimiklis would have been of assistance to the Court. No signatory to the purported Memorandum of Agreement of Transfer of Immovables gave evidence. Mrs. Tsimiklis was a signatory. She lives in Montreal and the only reason counsel for the defendant gave as to why she was not called is that she does not speak either French or English. This I cannot accept: there are translators available if need be. Any doubt as to Mr. Markakis receiving $10,800 as proceeds of disposition of two properties in Greece in 1977 could easily have been disposed of by Mrs. Tsimiklis" testimony. I have difficulty in accepting Mr. Markakis’ evidence that he had to go to Chicago to convert Greek funds to Canadian currency, and the absence of Mrs. Tsimiklis" testimony in respect of the $10,800 leads me to infer that her evidence would have been unfavourable to Mr. Markakis. (Vide Levesque et al. v. Comeau et al., [1970] S.C.R. 1010, per Pigeon, J. at 1012-13; Murray v. Saskatoon, [1952] 2 D.L.R. 499 at 505-6.)

Mr. Markakis has not convinced me that Revenue Canada has erroneously added $10,800 to his income in 1977.

Mr. Giannoukos was not called as a witness, and this too has caused me some concern. However Mr. Markakis produced a copy of Memorandum of Agreement dated February 1, 1983 whereby he sells his shares in the restaurant corporation to Mr. Giannoukos. The consideration for the shares was $10,000 plus a discharge of all sums owing to Mr. Giannoukos by Mr. Markakis “in virtue of the Acknowledgement of Debt Agreement entered into by the parties on the 4th day of May 1981"". That acknowledgement states that on or about February 15, 1978 Mr. Markakis borrowed from Mr. Giannoukos the sum of $4,500. A further condition of the Agreement of Purchase and Sale is that Mr. Giannoukos agrees to assume payment of $30,000 and $26,000 borrowed by Mr. Markakis from Panagiotis Markakis and Vasilios Markakis respectively, which loans are referred to in two separate “Acknowledgement of Debt Agreements"", dated May 23, 1979. By these “Acknowledgement of Debt Agreements"" Mr. Markakis undertakes to repay Vasilios Markakis $26,000 which he borrowed on or about July 10, 1978 and Panagiotis Markakis $30,000 which he borrowed on or about January 22, 1979.

Revenue Canada has not denied that Mr. Markakis sold the shares in the restaurant corporation in 1983. Mr. Markakis has testified that the terms and conditions of the sale are set out in the Memorandum of Agreement. There is nothing in his evidence in chief or cross-examination which gives me reason to question Mr. Markakis’ evidence on this matter, notwithstanding the failure of Mr. Giannoukos to testify. Therefore I accept Mr. Markakis" evidence in respect of the loans from Vasilios Markakis and Panagiotis Markakis. As I have already stated the “Acknowledgement of Debt Agreements"" executed by Mr. Markakis are self-serving and add nothing to his evidence. But taken together with the memorandum of Agreement for the sale of the shares which sets out the Acknowledgement of Debt Agreements, the existence of which appears to be acknowledged by a third party, Mr. Giannoukos, they support Mr. Markakis’ testimony that he did incur liabilities by way of loans from these relatives in 1978 and 1979.

I am reluctant to accept Mr. Markakis’ testimony in respect of his other liabilities in 1977, 1978 and 1979, namely the loans of $18,000 from Andreas Athenase Markakis and $7,000 from George Markakis. During trial some of his statements were not probable or reasonable; for example the need to travel to Chicago to exchange Greek currency into Canadian currency is not probable in my view. I am not convinced that the exchange could not have taken place in Montreal, and if not Montreal then Toronto or New York. The officer of Hellenic Trust who first gave Mr. Markakis advice to go to Chicago or any other employee of the trust company, was not called as a witness. Also, his excuse for his failure to file his 1977 income tax return because he had not received his T-4 forms, knowing he had earned taxable income in 1977, is unreasonable. During 1977, 1978 and 1979 Mr. Markakis was making regular cash deposits to his bank accounts. His explanation for the source of the funds is not unusual, but he has not satisfied the onus on him that all of the moneys deposited in his bank accounts were from his reported earnings or loans.

Counsel for Mr. Markakis agreed that the penalties assessed Mr. Markakis for 1977, 1978 and 1979 should be maintained if the Court maintains the assessments. To the extent the assessments of income are reduced, however, the penalties assessed must also be reduced.

In the circumstances I shall dismiss the appeal for 1977 and allow the appeal for 1978 and 1979 in accordance with these reasons. I have already indicated that the assessments for the three previous years are to be vacated. Mr. Markakis shall have the right to 75 per cent of his party and party costs.

Appeal allowed in part.