Citation: 2011 TCC 207
Date: 20110429
Docket: 2007-3896(IT)G
BETWEEN:
MOHAMED BARKAOUI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers, J.
[1]
On October 31, 2005,
the Minister of National Revenue (the Minister) made reassessments for the
appellant's 2002 and 2003 taxation years adding the following amounts to his
income:
|
|
2002
$
|
2003
$
|
|
Other income
Unreported net
professional income
|
6,619
6,000
|
33,724
32,000
|
[2]
In addition, the
Minister imposed penalties under subsection 163(2) of the Income Tax Act
(the Act) for the unreported net professional income of $6,000 and $32,000.
[3]
After receiving the appellant's
notice of objection, on June 21, 2007, the Minister confirmed the appellant's
reassessment for the 2002 taxation year and made a reassessment for the 2003
taxation year, reducing by $6,619 the amount that had been added to the
appellant's income earlier under the "Other income" item. The
appellant is appealing from these reassessments.
[4]
The "Other
income" item for the 2002 and 2003 taxation years shows reductions, which
the Minister considered unjustified, with respect to a long‑term loan made
to the appellant by the company 9075-1017 Québec Inc. (9075) as it appeared in
assets on 9075's balance sheet for the two years at issue.
[5]
This case commenced
following an audit of 9075, which was incorporated on March 10, 1999, and
for which the appellant is the sole shareholder, director and president. The
company's main activity is information technology consulting. Its fiscal year
ends on October 31.
[6]
At the time of her
audit, the auditor noted in regard to the internal control of 9075 that the
appellant:
(a) performed all routine tasks at the
company;
(b) planned for and hired
sub-contractors;
(c) took care of purchases, invoicing and
banking;
(d) submitted his expense
invoices, invoices and bank documents to his accountant at the end of each year.
In regard to income, the appellant submitted
to his accountant sheets on which were written the amounts of original
contracts obtained. The accountant calculated the income by adding up the
overall amount for contracts and subtracting expenses on the basis of
supporting documents. He did no double-entry bookkeeping; thus, there was no
account follow-up. According to the auditor, as a practical matter, no
accounting was done at 9075. The appellant kept a synoptic journal but no
ledger or book of original entry. A simple sheet of paper showed a summary of
9075's income.
[7]
The appellant admitted
the following facts in the Reply to the Notice of Appeal with respect to the
analysis done by the auditor under the [Translation]
"Owed by the shareholder" item:
(i) The balance of the [Translation] "Owed by the
shareholder" account, appearing on the Corporation's balance sheets for
the 2000, 2001, 2002 and 2003 taxation years, was as follows:
|
Year
|
Amount
|
|
2000
2001
2002
2003
|
$46,884
$79,481
$77,583
$40,718
|
(j)
Note 4 on the Corporation’s balance sheet at
October 31, 2003, showed a loan of $79,481 for 25 years with 4% interest,
renewable after 5 years, with monthly payments of $418.09.
(k)
The appellant signed the Corporation's financial
statements produced for its 2000 and 2001 fiscal years.
(l)
Following her analysis, the auditor noticed
unjustified decreases of $6,618.92 and $33,723.93 in the [Translation] "Owed by the shareholder" account for the 2002 and 2003
taxation years respectively.
(m) The auditor therefore added to the appellant's income $6,618.92 and
$33,723.93 for the 2002 and 2003 taxation years respectively, as benefits
conferred on him by the Corporation.
(n)
The objections officer decreased by $6,619 the
amount of the benefit that had been conferred on the appellant for the 2003
taxation year in order to take into account the decrease in the opening balance
of the [Translation] "Owed by the shareholder" account in calculating the
fluctuation of that account for that taxation year.
As for unreported income, the appellant
admitted the following facts:
(o) The auditor audited the appellant's bank
accounts for the 2002 and 2003 taxation years;
(p) During the audit, the auditor noted two deposits
described below:
|
Date
|
Amount
|
|
2002-09-03
2003-09-10
|
$6,000.00
$32,000.00
|
(q) Those deposits were made by cheques payable to
the appellant from a company called RTAN;
(r) The September 10, 2003, deposit was made up of
three cheques ($15,500, $15,000 and $1,500).
(s)
Based on the Minister's records, during the
taxation years at issue, RTAN was physically located at 5–2435 Laurier Blvd, Sillery, Quebec.
(u) The auditor therefore added $6,000.00 and
$32,000.00 as net professional income for the appellant's 2002 and 2003
taxation years respectively.
Shareholder benefits
[8]
In order to understand
the decrease in the [Translation]
"Owed by the shareholder" account or the loan based on the financial
statements, the auditor asked the accountant for 9075 to provide explanations
susceptible of justifying the decrease, but the accountant was unable to
provide her with anything that justified the situation. On July 12, 2005, the
appellant provided his own calculations to the auditor but those calculations
did not show a detailed analysis of the account. After several formal requests,
the auditor never received anything but an incomprehensible reply from the
accountant. She was also never informed that there had been errors on the
balance sheet and that adjustments had been made.
[9]
Since she had the bank
records, the auditor reconstructed the owing to the shareholder account and
that was how she obtained the unjustified decrease in the shareholder's loan of
$6,619 for the 2002 taxation year and $33,724 for the 2003 taxation year
thus creating a shareholder benefit under subsection 15(1) of the Act. All
calculations can be found at tab 2 of Exhibit A-1.
[10]
The auditor presented
her calculations to the appellant. She received no explanation from the
appellant's accountant but the appellant provided her with his own calculations
found in Exhibits I-7 and I-8. However, he failed to provide the relevant supporting
documents. The calculations in Exhibits I-7 and I-8 are not the same. The
difference between the auditor's and the appellant's calculations lies mainly in
the loan’s opening balance used in the calculations. The auditor used an
opening balance of $79,481, while the appellant used $46,884, which was the
loan balance as of 2000. The auditor refused to modify the opening balance
because it was the amount indicated in 9075's financial statements, which the
appellant had signed and submitted with 9075's tax returns and which are also
found in the agreement on corollary relief for the marital breakdown signed by
the appellant and his spouse on January 14, 2003. That agreement refers to
a loan of $77,000 associated with a residence (Exhibit A-1, tab 13). The
auditor never saw the loan contract between the appellant and 9075.
[11]
The appellant came to Canada in 1995 and became a Canadian citizen in 2001. Since
he had no accounting knowledge, a friend recommended that he hire the
accountant Serge Simoneau to do the business’s accounting. As admitted, he
brought all documents associated with 9075 to the accountant. He saw the
accountant three times per year: in November to drop off the documents, in
December to pick them up and in April to fill out his personal tax return. The
appellant admitted that he had signed financial statements but without looking
at them or asking his accountant questions because he had trusted him.
[12]
The appellant married
Ines Ayadi in Tunisia on July 24, 1999. When they returned to Canada, their marriage was short-lived: they separated on
March 1, 2002. According to the appellant, it was when he settled with his
spouse on January 14, 2003, that he noticed that the balance of a loan connected
with his residence was $77,000.
[13]
The residence in
question was purchased by the appellant alone on July 28, 2000, for
$87,000. To finance that purchase, the appellant obtained a hypothecary loan of
$62,000 from the Caisse populaire de l'Université Laval. Ms. Ayadi did not
undertake to repay the hypothecary loan and her signature on the document only
authorized the appellant to encumber the family's principal residence with a
hypothec. The appellant claims to have made a personal down payment of $25,578
combined with other expenses for a total of $27,500. Exhibit A-6 is a cheque
from 9075 payable to the appellant dated July 26, 2000, in the amount of
$27,000. Nothing is written on the cheque that could shed some light on its
destination, and the appellant claims that it pertains to a loan that his
company granted him to help him with the down payment for the purchase of his
residence. The appellant also maintains that he had borrowed money from 9075
before he purchased his residence and after to repay the hypothec with the
Caisse populaire. However, the appellant provided no details on the loans made
to him by 9075 and no contract or note confirming the amount, conditions of
repayment or interest rate. On that point, the appellant stated that he had
trusted his accountant and that he had repaid the loan on the basis of the
calculations provided by the accountant in the financial statements of 9075. He
noted a large number of errors made by the accountant at the time of the audit.
[14]
As mentioned above, it
was when he signed the agreement for corollary relief when he separated from
his spouse on January 14, 2003, that the appellant realized that there was an
error in the balance of the loan connected with his residence. He asked his
accountant to give him the calculations for the balance so that he could determine
the value of his patrimony. When it was confirmed that the balance of the loan made
to him by 9075 as it appeared in 9075's financial statements at October 31,
2002, was $77,583, he asked his accountant to change that amount. According to
the appellant, the amount of the loan that he owed to 9075 in January 2003 was
only around $40,000. The financial statements at October 31, 2003, show a
loan of $40,718, that is, the amount corrected by the accountant at the
appellant's request. However, note 4 of those same financial statements for
9075 still shows that 9075 granted a loan of $79,481 to the appellant.
[15]
9075's financial
statements from previous years had not been corrected. Thus, it is noted that,
at October 31, 2002, the amount of the appellant's loan was $77,583, as
mentioned above. There is a reference to note 4, but there is no note 4 in
those financial statements. As for 9075's financial statements at October 31,
2001, the appellant's loan was $79,481 on the date of the balance sheet. In the
financial statements from the previous year, the loan in question was only
$46,884. Note 4 in the financial statements at October 31, 2001, states
that 9075 granted a loan of $79,481 to the appellant and the loan conditions
provided for a 25‑year term, a fixed interest rate renewable after 5
years, which was at 4% at that time with monthly payments of $418.09. As for
9075's financial statements ending October 31, 2000, they indicate that
the loan was $46,884, and note 4 indicates that 9075 made a loan of $47,000 to
the appellant. The loan conditions provide for a 25-year term and a fixed
interest rate of 7% renewable after 5 years. The financial statements for 9075
show a loan to the shareholder of $24,613. According to the appellant, it is an
error just like the one with respect to the income because, according to him,
in 1999, there was nothing under that item. The accountant allegedly entered
the amount of a contract instead of the payment that had actually been
received.
[16]
The appellant did not
take the time to ask his lawyer to correct the agreement on corollary relief
for the marital breakdown, which he and his spouse signed on January 14,
2003. He argues that he did not have time because Ms. Ayadi left Canada very quickly. The agreement still stipulates that the
balance of a loan connected with the residence is $77,000. It is strange that
the agreement stipulates that the appellant would assume the balance of the
loan connected with residence alone. Yet, his spouse had no obligation with respect
to the repayment of the hypothec, given that she had simply authorized her
spouse to encumber the property identified as being the family's principal
residence with a hypothec.
[17]
At the objection stage
and at the trial, the appellant produced tabs 4, 5, 6 and 7 of Exhibit
A-1. He redid the accountant's work, and those tabs contain his version of the
facts. The tabs in question show 9075's revenues and expenses from the time it
was incorporated until 2003, and each balance at the end of the fiscal year
shows the amount of his loan. The numbers used by the appellant match those of
the auditor except for the balance of the loan at the beginning of the fiscal
year ending on October 31, 2000, as stated above.
[18]
According to the
appellant, his business made him the first loan when he bought his residence in
July 2000. It made other loans to him in the following years, namely, loans on
which he had made payments. He stated that he had also borrowed money from
other sources in order to repay the Caisse faster, more specifically, some
$30,000 from his friends, but he did not produce any supporting documents to
back up his statements.
[19]
In cross-examination,
the appellant stated that he had documents concerning 9075's loans, but he did
not file them in evidence. The appellant repaid his loans in accordance with
his accountant's instructions. He was repaying the loan with the Caisse, and he
wanted to have only one loan with the company. No details regarding the
repayment of the loan with the Caisse were provided at the hearing.
[20]
The version of the
facts presented by the appellant to justify the decrease in the owed by the
shareholder account has many contradictions as well as statements that were not
confirmed by supporting documents or testimony.
[21]
The first difficulty
arises from the fact that the appellant stated under oath that he had documents
supporting the loans made to him by 9075 and then failed to produce them in
evidence at the trial, which leads the Court to believe that those documents do
not exist.
[22]
The second difficulty
that I note concerns the fact that the appellant stated that he had provided
information that enabled the accountant to prepare the financial statements and
that the error originated in 9075's financial statements for 1999 and was then
reproduced. However, the appellant signed and accepted each of 9075's financial
statements for the following years up to October 31, 2003, as well as all of
9075's income tax returns. The appellant stated that he had asked the accountant
to correct the financial statements when he had signed the separation agreement
with his spouse, but only the financial statements dated October 31, 2003,
had been corrected, and the copy filed in evidence does not mention the supposed
error in note 4 of the statements. The previous financial statements were not
corrected nor was the separation agreement with his spouse. However, according
to the appellant, the error was made in 1999. The changes made by the
accountant to correct the supposed error have not been filed in evidence. I
cannot ignore the fact that the accountant did not testify and corroborate the
appellant's statements or explain the errors. From this, I conclude that his
testimony would not have been favourable to the appellant.
[23]
According to the
appellant, he realized that the supposed error had been made only at the time when
he signed the agreement on corollary relief for the marital breakdown with his spouse
on January 14, 2003. The appellant signed the document in the presence of his
lawyer. Who gave the lawyer the information that was used to draft that
agreement? How did the appellant notice the error only when he was signing the
document and not trouble to correct it immediately, especially since the
document had to be attached as an agreement on corollary relief as part of a
petition for divorce (Exhibit A-1, tab 13, paragraph 15), which became official
on May 20, 2003? In fact, the correction was made only at the end of
9075's fiscal year at October 31, 2003, although the appellant stated that
he had informed his accountant of the error as soon as he had found out that
the amount was exaggerated. According to Ms. Valois, she was not informed of
this correction during her audit.
[24]
It is difficult to
believe that the appellant could rely on his accountant for all those years, especially
in repaying his loan according to the calculations made by the accountant based
on 9075's financial statements, and be unaware of the errors the accountant had
made.
[25]
The evidence was
insufficient; therefore, I find that the decreases in the loan were unfounded
or that the loan amount is incorrect. Consequently, the Minister was entitled
to conclude that the decreases in the loan to the shareholder were unjustified
and to add those benefits in computing the appellant's income under subsection 15(1)
of the Act.
Unreported income
[26]
The appellant was
assessed for $6,000 and $32,000 in unreported income for the 2002 and 2003
taxation years respectively. It is known that those amounts correspond to two deposits
made in cheques payable to the appellant drawn up by the company RTAN. The
cheque for $6,000 is dated September 3, 2002. The amount of $32,000 was paid in
three cheques: $15,500, $15,000 and $1,500, all signed on September 10, 2003.
[27]
RTAN was incorporated
on May 17, 2002, and it is active in the field of research and technology
solutions. Its director and shareholder is Jaouhar Fattahi, a friend of
the appellant. Although RTAN was incorporated only on May 17, 2002, it had become
active in January 2002. It worked for the Department of National Defence as a
sub-contractor of 9075 on a project called Karma and also for other companies. The
contracts under which RTAN was sub‑contracted by the appellant are in
Exhibit A-1, tab 3.
[28]
According to Mr.
Fattahi, RTAN was overloaded with work at the time and that was why it retained
the services of Ines Ayadi, the appellant's spouse, to verify programs made up
of several modules mainly to find errors. Mr. Fattahi himself drafted the
employment contract for Ms. Ayadi, which can be found in Exhibit A‑1, tab
17. The copy in evidence is not signed, but it is dated May 1, 2002. It had
apparently been given to the appellant and the auditor by Mr. Fattahi. In his
testimony, Mr. Fattahi acknowledged that the contract may not have been signed.
When the appellant received the contract, he forwarded it to his brother in Tunisia, who allegedly asked Ms. Ayadi to certify it, which
explains why the date of December 24, 2005, is stamped on the contract.
[29]
According to the
contract, Ms. Ayadi's work had to be done between May 1, 2002, and April
30, 2005. The conditions of payment were described as follows:
[Translation]
Subject to the contractor's satisfactorily carrying out all her obligations under the
contract, the contractor will be paid a firm price of $60,000. Payment shall be
made after delivery and acceptance of the work.
[30]
Notwithstanding that
clause, Mr. Fattahi stated that the contract price was based on an hourly rate
of $10 spread over three years, that is, about $20,000 per year. He had chosen
Ms. Ayadi because he believed that she had the skills required to do the work
and because he could pay her later. He stated that Ms. Ayadi did her work in Tunisia and communicated with him via e-mail. He believes
that she, in fact, worked 40 hours per week and that he could monitor her hours
by verifying the work she had done. Mr. Fattahi was not certain if Ms. Ayadi
sent him invoices and repeated that he had chosen her because things were not
complicated with her and paying her could wait.
[31]
In regard to that, the
appellant stated directly in his testimony and in a letter that he forwarded to
the Appeals Division following the audit (Exhibit A-1, tab 7, page 6) that
Ms. Ayadi was paid $10.25 per hour. In cross-examination, he admitted that he
did not know Ms. Ayadi's hourly rate and that it was only an estimation. He
also stated that Ms. Ayadi had done the work from Tunisia.
In my opinion, the appellant is not in a position to be making such statements.
[32]
The cheque for $6,000
dated September 2, 2002 (Exhibit A-2) thus apparently represented part of Ms.
Ayadi's wages at that time and it was allegedly given to the appellant at Ms.
Ayadi's request. According to Mr. Fattahi, that request was made of him by
e-mail but he had not saved a copy of that e-mail. Mr. Fattahi added that
he also felt that he was protected because Ms. Ayadi had informed him of the
existence of an agreement on corollary relief for the repayment of debt that
Ms. Ayadi had signed with the appellant on May 4, 2002 (Exhibit A-1, tab 27)
and in which she acknowledged that she owed the appellant $43,500, which
represented all of Ms. Ayadi's expenses paid by the appellant since her arrival
in Canada in August 1999.
[33]
With respect to the
three cheques dated September 10, 2003 (Exhibit A-2), together with the one for
$6,000 dated 2002, they represent the total amount owed to Ms. Ayadi under her
contract with RTAN. According to Mr. Fattahi, there was no follow-up with
National Defence in 2003, and Project Karma was abandoned. The three cheques
correspond to the three portions of the tasks that Ms. Ayadi had to complete
and constitute a subjective evaluation of the value of her work.
[34]
In cross-examination,
Mr. Fattahi confirmed that all of Ms. Ayadi's work had been done from Tunisia. He testified that she had worked from May 1, 2002,
to September 2003, except during her divorce, which lasted two and a half to
three months at the end of 2002. He explained that Ms. Ayadi did not receive
any money for a year simply because she did not insist that he pay her. According
to him, the same goes for the rest of the contract, that is, the difference
between the debt of $60,000 and the amount of $38,000 that had been paid. He
said that Ms. Ayadi was a friend, and that, morally, she would not institute
proceedings against him. However, he added that he did not know what her
intentions were.
[35]
Mr Fattahi and RTAN have
the same accountant as the appellant. Mr. Fattahi acknowledged that, in
RTAN's financial statements for 2003, the payment of $32,000, which was made to
the appellant as a result of Ms. Ayadi's contract, was not included in
that company's expenditures. Just like the appellant, Mr. Fattahi blames
the accountant for that error and has allegedly asked him to correct it.
[36]
For his part, the appellant
explained that when he purchased the residence in July 2000, he made an
agreement with his spouse that she would repay him half of $87,000 paid to
purchase it, that is, $43,500, when she started working. That was the reason
why Ms. Ayadi agreed that RTAN pay her salary directly to the appellant and why
she and the appellant signed the agreement dated May 4, 2002 (Exhibit A-1,
tab 27). Thus, the appellant received a first cheque for $6,000 from RTAN on
September 2, 2002, while Ms. Ayadi was in Tunisia.
The appellant added that he had sent that money to Ms. Ayadi after their
separation. In reality, he gave her $5,000, an airplane ticket for $895 and the
equivalent of the price of travel between Québec and Montréal in January 2003,
following the signing of their separation agreement on January 14 (Exhibit A-1,
tab 13). Under the heading [Translation]
"Waiver of support", the agreement stipulates that, at the time of
signing the agreement, the male spouse will pay the female spouse, for herself,
a lump sum of $5,000, receipt of which will be given by her on that day. Other
relevant stipulations, in my opinion, were those specifying that Ms. Ayadi
would return to live with her family in Tunisia within a week, where she would
provide for her own needs in her country, that Ms. Ayadi waived the right to
any spousal support, that the male spouse would keep the family residence and
assume alone the remainder of the loan on the residence, that they gave each
other complete and final mutual release and that the male spouse would repay
any government aid received by Ms. Ayadi, specifically, that provided by the
Quebec government as last resort assistance benefits received between October
24, 2002, and January 10, 2003, which amounted to around $1,500. In the preamble,
it is indicated that at that time Ms. Ayadi had no employment income.
[37]
Concerning unreported
income for the 2003 taxation year, the appellant testified that, after Ms.
Ayadi left Canada on January 17, 2003, she asked him to
advance her the money. Through his father, he apparently advanced to Ms. Ayadi
around $29,000 between February and September 2003 using the money he had in Tunisia. He is now claiming that it was to repay him for those
advances that RTAN gave him the three cheques totalling $32,000 on September
10, 2003, for the contract that Ms. Ayadi had with RTAN (Exhibit A-1, tab 17). In
cross‑examination, the appellant added that Ms. Ayadi had told him that
she would have no money until September 2003 without providing any more
details.
[38]
According to the
judgment of divorce (Exhibit I-1), Ms. Ayadi left the appellant on March 1,
2002, and went to live in a shelter. According to the appellant, she stayed in Tunisia in January and February 2002 and came back to Canada at the end of February. In May 2002, she went back to
Tunisia and returned to Canada in October 2002. It was at that time that
she received social assistance benefits.
[39]
After Ms. Ayadi
returned from Tunisia in January 2003, the appellant had direct
contact with her during the year. Later on, he communicated with her in
December 2005 through his brother. The contact information for
Ms. Ayadi that he provided to the appeals officer on March 21, 2007, did
not make it possible for the Canada Revenue Agency to contact Ms. Ayadi directly.
It was also in that document (Exhibit A-1, tab 6, page 2) that the appellant
informed the appeals officer that the debt of $43,500 represented Ms. Ayadi's
part of their house bought in July 2000. He added that Ms. Ayadi and he had
made the decision to purchase a house and to share the purchase price, which
was $87,000. They had agreed that she would pay her share when she started
working.
[40]
In cross-examination,
the appellant acknowledged that, in his first few meetings with the auditor, he
had not provided her with any details on the debt that Ms. Ayadi owed him. He
submitted to her the agreement on measures to repay the debt (Exhibit A-1, tab
27) and told her that the $43,500 were Ms. Ayadi's expenses. He added that,
even though the $43,500 represented half of the price of the family residence,
that amount constituted the total of all of Ms. Ayadi's expenses since her
arrival in Canada in August 1999 and the wording of the
agreement indicated that there was no other debt. At the objection stage, the
appellant had simply referred to Ms. Ayadi's debt to him without providing
further details (see tab 4 of Exhibit A-1).
[41]
It must therefore be determined
whether the income not reported by the appellant in respect of the 2002 and
2003 taxation years was actually a repayment of debt by Ms. Ayadi to the
appellant, which was done by RTAN with Ms. Ayadi's consent directly to the
appellant using Ms. Ayadi's salary.
[42]
To show this, the appellant
presented evidence that, in my view, is based on numerous contradictions, especially
in his testimony and that of Mr. Fattahi and in the documentation submitted. It
is also quite astonishing to note the number of errors found in various
documents, whether they be 9075's financial statements, which were blamed on
the accountant, or the various agreements submitted that do not correspond to
the testimony.
[43]
According to the
evidence presented, Ms. Ayadi was hired by RTAN on May 1, 2002, to work
from May 1, 2002, until April 30, 2005, under a very simple one‑page
contract, which seems to have been based on a one-time payment of $60,000 after
delivery and acceptance of the work. It seems that the contract was not signed.
It did not stipulate that the work could be done in Tunisia.
However, according to the evidence, Ms. Ayadi left Canada
for Tunisia in May 2002.
[44]
Mr. Fattahi told us in
his testimony that, notwithstanding the contract, Ms. Ayadi was paid $10
per hour for 40-hour weeks and that he monitored her time by verifying the
amount of work that she completed and sent to him. He told us that he liked
doing business with Ms. Ayadi because she did not have an urgent need to get
paid for her work and that she could wait. It is surprising hearing such
remarks from this witness, considering the fact that the contract mentions an
amount of $60,000 upon delivery and acceptance of the work and that he issued
advances to the appellant. It is still more surprising that he paid the
appellant $6,000 on Ms. Ayadi's behalf in September 2002, when she received
social assistance benefits in October, November and December 2002 and even stated
in the agreement on corollary relief for the marital breakdown (Exhibit A-1,
tab 13) dated January 14, 2003, that she had no employment income.
[45]
Just as surprising is the
fact that the appellant knew the details of this supposed employment contract
and could specify the hourly rate, the number of hours worked per week and the
fact that the work was done from Tunisia. As for Mr. Fattahi, he had been
unable to produce any evidence confirming that Ms. Ayadi had done any work
for RTAN.
[46]
Next, there is the
agreement on the repayment of the debt dated May 4, 2002 (Exhibit A-1, tab
27), in which Ms. Ayadi acknowledged that she owed the appellant $43,500. According
to the agreement, it was the total of all of Ms. Ayadi's expenses since
her arrival in Canada in August 1999, which had been paid by the
appellant. In his testimony, the appellant explained that it was the value of
half of the purchase price of the family residence, which was $87,000. However,
the sale contract for the family residence (Exhibit A-1, tab 28) clearly
indicates that the appellant was the only purchaser of that property and the
deed of hypothec (Exhibit A-1, tab 29) identified the appellant as the
borrower. The only role played by Ms. Ayadi was to authorize her spouse to encumber
the residence in question by a hypothec. If Ms. Ayadi had to, indeed, repay
the appellant the price of half of the house, how is it that the agreement on
repaying the debt (Exhibit A‑1, tab 27) does not state that Ms. Ayadi
purchased half of the family residence?
[47]
Furthermore, the agreement
on corollary relief for the marital breakdown (Exhibit A-1, tab 13) does
not mention the debt of $43,500. Ms. Ayadi and the appellant released each
other, and, although the appellant released Ms Ayadi from having to pay the
balance of the loan on the residence, it must be recalled that she had never
undertaken an obligation to the hypothecary creditor.
[48]
The appellant also
alluded to Ms. Ayadi's debt that was incurred after the signing of the
agreement on corollary relief for the marital breakdown. More specifically, the
advances he allegedly made to Ms. Ayadi in January and September 2003 through
his father in Tunisia. It was money that the appellant was
holding in a bank account in Tunisia. It seem strange to me that Ms. Ayadi
would have needed the appellant's financial help. She had just waived spousal
support, according to Exhibit A-1, tab 13, and she was working full time
for RTAN, which had allegedly already advanced her some money, specifically, $6,000,
in September 2002. Why would Ms. Ayadi then say to the appellant that she
would have no money before September 2003? According to Mr. Fattahi, he
had never refused to pay her and he was merely happy that she was not asking
him for anything.
[49]
Neither the appellant's
father nor Ms. Ayadi testified at the hearing. No evidence concerning the
appellant's bank accounts in Tunisia or the acknowledgement of debt for
advances made by the appellant to Ms. Ayadi was produced.
[50]
It is surprising to
learn that the first time the appellant decided to reveal that debt to the
Canada Revenue Agency was in 2007 (Exhibit A-1, tab 5) in a letter in which he
stated that he had lent Ms. Ayadi the equivalent of $32,000 in Tunisian dinars.
In his testimony at the trial, he spoke of an advance of $29,000.
[51]
The appellant's and Mr.
Fattahi's testimony are completely unreliable. Those two witnesses leave us
with the impression that they are prepared to say anything to support their
versions, and, if they are contradicted, it is always someone else's fault or
the documents are riddled with errors. They both blame the accountant. In Mr. Fattahi's
case, one wonders how a businessman who spent $32,000 in 2003 does not think it
useful to account for that expenditure in his financial statements.
[52]
All these
contradictions and inconsistencies in the versions presented by these two
witnesses make it impossible for me to accept the appellant's position.
Penalty
[53]
The Minister had the
burden of proving, on the balance of probabilities, that the circumstances of
this case justified the assessment of a penalty under subsection 163(2) of
the Act. The penalties were applied in respect of the additional income of
$6,000 and $32,000 for the two taxation years at issue respectively.
[54]
Subsection 163(2) provides
that a taxpayer who, knowingly, or under circumstances amounting to gross
negligence, makes a false statement or omission in a return is liable to a
penalty.
[55]
In this case, it is
clear that I will not accept the appellant's version of the facts and that I
consider his explanations not to be credible. Accordingly, I will follow Lacroix
v. R., [2008] F.C.J. No. 1092, a Federal Court of Appeal decision, where it
is stated:
29 . . . In the case at bar, the Minister found undeclared
income and asked the taxpayer to justify it. The taxpayer provided an
explanation that neither the Minister nor the Tax Court of Canada found to be
credible. Accordingly, there is no viable and reasonable hypothesis that could
lead the decision-maker to give the taxpayer the benefit of the doubt. The only
hypothesis offered was deemed not to be credible.
30 The facts in evidence in this case are such that the
taxpayer’s tax return made a misrepresentation of facts, and the only
explanation offered by the taxpayer was found not to be credible. Clearly,
there must be some other explanation for this income. It must therefore be
concluded that the taxpayer had an unreported source of income, was aware of
this source and refused to disclose it, since the explanations he gave were
found not to be credible. In my view, given such circumstances, one must come
to the inevitable conclusion that the false tax return was filed knowingly, or
under circumstances amounting to gross negligence. This justifies not only a
penalty, but also a reassessment beyond the statutory period.
[56]
In these circumstances,
I rule that the Minister was justified in assessing the penalties in question.
The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 29th day of April 2011.
"François Angers"
on this 22nd day of July 2011
François Brunet,
Revisor
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