Citation: 2010 TCC 264
Date: 20100514
Docket: 2008-2725(IT)G
BETWEEN:
AWNI SHAIR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
These are appeals from
reassessments made by the Minister of National Revenue (Minister) under
the Income Tax Act (ITA) for the appellant’s 1998, 1999 and 2000
taxation years. The Minister used the net worth method to include unreported
income totalling $93,451.65 in 1998, $60,548.71 in 1999 and $54,845.51 in 2000 and
to impose penalties pursuant to subsection 163(2) of the ITA.
[2]
The appellant was the
sole shareholder of A&C Auto Repairs Ltd (A&C). He and his
corporation had previously been reassessed under the net worth method (for the
years 1994 to 1997 in the case of the appellant and for the years 1994 to 1998
in the case of A&C). The audit process was still under way for those years
when the Minister started a new audit for the appellant’s 1998, 1999 and 2000
taxation years. The Minister invoked the same reasons for starting the new
audit, namely that the appellant operated a mainly cash business and that he
did not keep adequate books and records, which the appellant denies.
[3]
The reassessments
issued by the Minister following the first audit were appealed before this
Court. At that time, there remained in issue only the reassessments for the
appellant’s 1996 and 1997 taxation years and A&C’s 1996, 1997 and 1998 taxation
years. In a judgment delivered on May 10, 2006, McArthur J. of this
Court allowed the appellant’s appeals only to the extent of deleting the
penalties; he left unchanged the reassessed unreported income of $14,882 in
1996 and $20,909 in 1997 assumed to have come from A&C and Shair
Investments Ltd. (Exhibit R-1). In the present appeals, counsel for the
appellant began his argument by stating that there were huge disparities along
the continuum of amounts reassessed for the years in issue.
[4]
Mr. Joseph Martins, the
auditor for the Canada Revenue Agency (CRA) testified that he was
assigned the goods and services tax (GST) portion of the previous tax audit
(1994 to 1997) and was instructed to audit three more years (1998 to 2000) for
the purpose of determining the appellant’s income through the net worth method.
Mr. Martins said that the appellant had not changed his bookkeeping and
record-keeping methods but acknowledged that the appellant may not have had the
chance to do so since the first audit was still going on when he himself
started the second audit. However, Mr. Martins had to issue requirements to the
appellant’s banks in order to obtain information on the appellant’s assets as
the appellant did not provide that information voluntarily.
[5]
Mr. Martins testified
that he analysed each of the years 1998, 1999 and 2000 independently without
relying on the previous audit. This statement appears to be contradicted,
however, by numerous remarks in his working papers making reference to the
previous audit (Exhibit A-2). Mr. Martins acknowledged that it was one of his
first net worth audits with the CRA.
[6]
In doing the net worth
assessments, he included the appellant’s wife and mother in the household, and
took into account the income reported by all three.
1. Term deposits
[7]
The first item which is
disputed by the appellant is the term deposits of $33,400 in 1997, $71,172.66
in 1998, $74,286.46 in 1999 and $77,703.64 in 2000 that were included in his
assets (see Exhibit A-2, working paper 8811).
[8]
The appellant contended
that these term deposits belonged to his brother Adel Shair. Adel Shair signed
an affidavit, and gave testimony in Court, confirming this. Although these term
deposits were either solely in the appellant’s name or in both Adel and Awni
Shair’s names, it was Adel who reported the interest income in his tax returns
for all those years (Exhibit A-1, Tab 1).
[9]
Mr. Martins did not
accept the term deposits as belonging to Adel, considering the low income reported
by Adel and his family for tax purposes. Adel’s income for the years 1986 to
2001 totalled $391,176, which represents an average annual income of $26,000. Taking
into account as well the fact that it had been accepted in the first audit that
he had loaned $107,000 to the appellant in 1994, Mr. Martins considered that
Adel did not have the means to acquire investments totalling $77,000 between 1997
and 2000. Mr. Martins determined that Adel and his family had made barely
enough over the previous 20 years to support their personal lifestyle and the
purchase of a home valued at $185,000 (see Exhibit A-2, working paper 8816).
[10]
In fact, Mr. Martins
noticed that some $49,000 of the term deposits was initially drawn from the
appellant’s personal bank account at the CIBC. In Mr. Martins’ opinion, if
the term deposits were subsequently put under Adel’s name, it was either
because the appellant was reimbursing the $107,000 loan to his brother or because
he wanted to hide personal assets on account of large income tax assessments issued
against him and A&C. He did not accept Adel’s explanation that he put the term
deposits in the appellant’s name because he (Adel) did not want his wife to
have access to the money.
[11]
The appellant provided
documentation showing that Adel Shair invested $81,645 in his own name on January
24, 2003, that he withdrew an amount of $22,251 on June 25, 2003, and that, on
that same day, he withdrew an amount of $44,338 in order to pay his lawyer,
Neil Boyko, in trust, an amount of $44,200 for the purchase of a property (see
Exhibit A-1, Tab 1).
[12]
The appellant also
filed a receipt (Exhibit A-4) showing that his brother gave him $40,000 on
April 19, 1995. The appellant testified that with this money he was able to make
the $33,000 term deposit at the CIBC in 1997. However, in cross-examination,
counsel for the respondent produced an extract from an expert report, which had
been tendered at trial before McArthur J., concerning the 1994 through 1997
reassessments. In that report, reference was made to the same receipt
(Exhibit A-4) and it was stated that the amount of $40,000 shown thereon
was used by the appellant to pay down his PowerLine line of credit balance
(Exhibit R-2, page 7).
[13]
Considering Adel’s
income over the years and the fact that it was accepted that he had loaned an
amount of $107,000 to the appellant in 1994, I agree with the auditor that it would
appear that the term deposits for which the funds were initially drawn from the
appellant’s CIBC personal account belonged to the appellant and that the money
was invested in Adel’s name in repayment of the previous loan. Furthermore, the
appellant gave two different versions with respect to the $40,000 (Exhibit A-4).
Under those circumstances, the appellant failed to satisfy me on the balance of
probabilities that Adel had the means to invest another $77,000 of his own
during the years at issue before me. Although Adel testified that he had held
the same job for 20 years, and that he received a settlement amount of $33,000
in 1995 or thereabouts, the low income he reported does not demonstrate that he
could afford to accumulate an amount of $77,000 in term deposits on top of the
$107,000 that he had loaned to the appellant in 1994. The fact that he declared
the interest income in his tax returns is not sufficient, in my view, to
reverse the onus of proving that he himself provided the amounts invested in
the term deposits. In fact, because his low income, Adel paid less tax on the
interest income than the appellant, with his higher income, would have paid. I
therefore accept the inclusion of the term deposits in the assets of the
appellant in the years at issue.
2. Personal expenditures
[14]
Counsel for the
appellant asserted that the appellant was asked to fill in a schedule of his
personal expenditures without being told why he had to do so. The schedule for
each of the years at issue is found in Exhibit A-1, Tab 5. For some items,
Mr. Martins did not find the numbers given by the appellant reasonable and
so preferred to use the Statistics Canada figures.
[15]
According to counsel
for the appellant, the appellant and his wife are immigrants with little
education and live a very frugal life with the help of their siblings. The
appellant and his wife testified that they do not go out, that they eat at
home, that they do not drink nor smoke, that they do not buy flowers and toys, that
they do not buy plastic and foil, and that they do not have a car as the
appellant owns a garage where he does all the mechanical work. They live very
close to the garage and use clients’ cars once in a while. The appellant’s wife
is an aesthetician and she helps her husband in the garage. They do not go to
the hairdresser as she takes care of their hairdressing needs herself. They ask
me to accept their figures, even though, for example, the appellant stated that
he sometimes overestimated their expenses (for instance, the cost of women’s
clothing, estimated at approximately $1,600 per year).
[16]
The appellant is also
asking me to subtract the $1,500 home entertainment expense for 2000 as it has
already been included elsewhere in the net worth calculation, which is conceded
by the respondent.
[17]
The appellant also
testified that the $13,276 expense in 2000 for his mother’s funeral was not all
paid by him. As a matter of fact, an amount of $9,428.07 from a life insurance
policy was used to pay those expenses. That amount has however, already been taken
into account by the auditor as a deduction from net worth (Exhibit A-2,
working paper 8814). The appellant and Adel testified that Adel paid $2,500 and
that their three sisters together paid $600 toward the funeral expenses. This
would mean that the appellant would have paid approximately $750.
[18]
While I am prepared to
accept the appellant’s and his wife’s versions that they do not go out, they in
turn must admit that the CRA’s estimate of the cost of food purchased from
stores, based on Statistics Canada figures, is not too high and, if they always
stay at home, they must accept as well the CRA’s estimate of the cost of
cleaning supplies, which seems to be a reasonable one.
[19]
With respect to the
mother’s funeral, I am prepared to accept that the sisters together paid $600,
but I do not see why Adel would have paid $2,500 and the appellant only $750. Considering
the vagueness of their testimony on this point, I find it more reasonable to conclude
that the two brothers shared equally the balance of the cost of their mother’s
funeral.
[20]
I will therefore reduce
the personal expenditures to reflect the fact that I accept the appellant’s
figures for the following items:
|
|
1998
|
1999
|
2000
|
|
Food from restaurants
|
$500
|
$550
|
$600
|
|
Paper, plastic & foil
|
$60
|
$70
|
$80
|
|
Clothing (men’s)
|
$225
|
$250
|
$270
|
|
Laundry
|
NIL
|
NIL
|
NIL
|
|
Auto operation (gas)
|
$300
|
$330
|
$360
|
|
Auto maintenance & repairs
|
NIL
|
NIL
|
NIL
|
|
Auto insurance premiums
|
NIL
|
NIL
|
NIL
|
|
Hair cuts, etc.
|
$80
|
$80
|
$80
|
|
Recreation, etc.
|
$165
|
NIL
|
NIL
|
|
Flowers & toys
|
NIL
|
NIL
|
NIL
|
|
Home entertainment
|
$300
|
$300
|
NIL
|
|
Mother’s funeral
|
NIL
|
NIL
|
$11,052
|
3. Cash advance from MBNA
[21]
This is an amount of
$11,477.75 that was added to the appellant’s income in the 1999 taxation year
(Exhibit A-2, working paper 8800). It is my understanding that the amount was
borrowed by the appellant to make a $10,000 term deposit for his brother-in-law,
who needed that amount for immigration purposes. The term deposit was cashed
and the money reimbursed within the same year. The respondent conceded that
this amount should be removed from the total additions to net worth for that
year.
4. Receipt for Save-a-Center: $6,108.15 (Exhibit A-2,
working paper 8800)
[22]
The appellant and his
wife testified that in 1998 they borrowed that amount of money on their CIBC Visa
card to send to the appellant’s brother-in-law, who needed it for personal
purposes. His brother-in-law repaid that loan a few weeks later, but the amount
repaid was only $5,690 (Exhibit A-1, Tab 3). The respondent is prepared to
concede that $5,690 should be excluded. The balance ($418) will still be
included in additional expenses for the purpose of establishing the undeclared
income.
5. Large periodic payments (Exhibit A-2, working paper
8814) (also referred to by the auditor as “other expenditures” in Exhibit A-2,
working paper 8800)
[23]
The amounts of $2,957,
$2,958 and $5,031 were added to the appellant’s net worth in the years 1998,
1999 and 2000 respectively.
[24]
Mr. Martins, on his
worksheets, stated that these were large periodic payments that had not already
been included in personal expenditures. Those payments of expenses were made
out of the appellant’s wife’s account, the appellant’s mother’s account and the
appellant’s account. One of these expenses is a $1,000 “Payment made to
Freddie” in 2000. The appellant said that this was a wedding gift and that it
was already accounted for in personal expenditures. The same applies to the
insurance item, a portion of which has apparently already been accounted for in
personal expenditures. I am prepared to reduce the large periodic payment
amounts by the amounts that have already been included in personal
expenditures. I will therefore delete the $1,000 for the payment to Freddie in
2000 and I will reduce the amounts for insurance by half for 1998 and 1999.
[25]
Thus, the large
periodic payments will be reduced by $315 for 1998, giving a total of $2,642, by
$508 for 1999, giving a total of $2,450, and by $1000 for 2000, giving a total
of $4,031.
6. Receivable from A&C: $26,040 in 2000 (Exhibit
A-2, working paper 8811)
[26]
Mr. Martins explained
that this amount was recorded as shareholder’s advances on A&C’s balance
sheet as at February 28, 2001. The amount was $31,697 as at March 31, 2000
(Exhibit A-1, Tab 8, page 40). Mr. Martins said that since the appellant was
the sole shareholder of A&C, the amount was considered as being an asset to
him. Ms. Maureen McCullough, CA, the appellant’s ex-wife, testified that this
amount should be nil because A&C had ceased its operations in 2000 and
there were no more assets in A&C with which the appellant could recoup his
investment.
[27]
Mr. Martins’s response
to that was that A&C did not go out of business in 2000, as can be seen from
the financial statements showing sales as at February 28, 2001 of
$134,362 and gross income of $87,228 before operating expenses were subtracted (Exhibit A-1,
Tab 8, page 41). The financial statements state that the business closed permanently
on February 28, 2001 (Exhibit A-1, Tab 8, page 42). Mr. Martins said
that it was up to the appellant to claim a business loss in 2001, but that 2001
is not in issue here.
[28]
I agree with Mr.
Martins that the evidence does not reveal that A&C was out of business in
2000 and Ms. McCullough’s assertion that the value of the receivable was nil as
at December 31, 2000 has not been verified. I will therefore not modify the net
worth in this regard.
7. $10,000 payment from account 594866 to Shair
Investments in 2000 (Exhibit A‑2, working paper 8800) and cost of
Shair Investments Ltd.: $293,319 (Exhibit A-2, working paper 8811)
[29]
The payment of $10,000
is from the appellant’s wife’s account, and Mr. Martins was told by the
appellant that it was a payment to Shair Investments. Nothing significant having
been added in evidence with regard to that payment, I will leave that amount in.
[30]
With respect to the
cost of Shair Investments Ltd, Mr. Martins was told during his audit that the
appellant had purchased a building in 1994 and transferred it to Shair
Investments Ltd. The purchase price was $293,319. In Court, Mr. Martins
said that this figure was substantiated by the previous audit and he kept it as
a constant figure over the years at issue. As he was not provided with Shair
Investment’s financial statements, he was not able to decrease the balance over
the years.
[31]
Ms. McCullough provided
that corporation’s balance sheet and said that the shareholder’s advances
declined from $278,366 in 1998 to $269,489 in 2000 (Exhibit A-3, Tab G). She
said that this decline was not recognized by the assessor.
[32]
I am prepared to accept
that the amount of $293,319 shown in the net worth calculation be reduced to
$282,368 in 1997, $278,366 in 1998, $269,384 in 1999 and $269,489 in 2000, as
reflected on the balance sheet provided.
8. Net expenditures not included in shareholder account
(Exhibit A-2, working paper 8814)
a) Transfer of account
payable as at March 31, 1999 to shareholder account: $18,000.
[33]
Mr. Martins included
this amount as an additional expenditure of the appellant because it was an
account payable by A&C as at March 31, 1999, and Mr. Martins was told that
the appellant was paying on behalf of A&C and that it should have been
reflected in the shareholder’s loan account, which it was not.
[34]
Ms. McCullough
testified that sufficient advances were made by the appellant as a shareholder
to settle the corporation’s trade payables. She said that in November 1999 the
appellant borrowed $25,000 (Exhibit A-1, Tab 8, page 31), which he advanced to
A&C (Exhibit A-1, Tab 8, page 33, and Tab 9, page 43), a fact that was
ignored by the assessor.
[35]
On this point, I must
disagree with Ms. McCullough. In fact, Mr. Martins deducted an amount of $27,066
in establishing the net worth for 1999 (Exhibit A-2, working paper 8811),
which is the exact amount found in the PowerLine monthly statement (Exhibit
A-1, Tab 8, page 31) referred to by Ms. McCullough.
[36]
Ms. McCullough said
that the shareholder’s loan balance of $31,697 reflected in A&C’s books as
at March 31, 2000 (Exhibit A-1, Tab 9) already included the company’s debt of
$18,000, and therefore this latter amount should not be added back into the
appellant’s net worth. In my view, there is no evidence of such inclusion.
Ms. McCullough has not pinpointed on what basis I should draw the
conclusion sought. Furthermore, the $18,000 account payable related to
A&C’s year ended March 31, 1999, and for that year the shareholder’s loan
account balance in A&C’s books was only $8,627. As a consequence, I am not
in a position to challenge Mr. Martins’ treatment of A&C’s $18,000 account
payable in including it in the shareholder’s loan account. I will therefore change
nothing with regard thereto.
b) Management fees:
$20,000 in 1998
$28,000
in 2000
[37]
Mr. Martins considered
the difference between the management fees that were supposed to be paid to the
appellant by A&C and what was actually paid ‑ that is, a difference
of $11,000 in 1998 and $17,657 in 2000 ‑ as amounts owed by the company
that had to be included in the shareholder’s loan account (Exhibit A-2, working
papers 8800 and 8814).
[38]
Ms. McCullough said
that these amounts should not be included in the assets of the appellant as they
are income items that were reported by the appellant. Indeed, the appellant did
report income of $20,000 in 1998 and $28,000 in 2000.
[39]
However, I accept Mr.
Martins’ explanation that the amounts not paid to the appellant are amounts
owed to him, which must be recorded in the shareholder’s loan account. No
evidence was given to substantiate that A&C did pay the totality of the
management fees, as claimed by Ms. McCullough. The amount reported by the
appellant was applied in reduction of the unreported income.
9. Penalties pursuant to subsection 163(2) of the ITA
[40]
In view of the fact
that I will be reducing the reassessments by modifying the net worth
calculations, and considering that Mr. Martins himself recognized that the
second audit started while the first was not yet finished and that the
appellant did not have time to reorganize his books and records in a manner satisfactory
to the CRA, I will delete the penalties.
Decision
[41]
The appeals will be
allowed and the reassessments referred back to the Minister for reconsideration
and reassessment on the basis that the unreported income of the appellant shall
be reduced to take into account the following changes in the net worth as
determined in Exhibit A-2:
Working paper 8811:
1) the personal
expenditures are modified as indicated in paragraph 20 of these reasons;
2) the cash advance from
MBNA in the amount of $11,477 for 1999 shall be deleted;
3) the Save-a-Center item shall
be reduced from $6,108 to $418;
4) the “other expenditures”
(referred to as “large periodic payments” in working paper 8814) shall be modified
as indicated in paragraph 25 of these reasons;
Working paper 8814:
5) the cost of Shair
Investments for the years 1997, 1998, 1999 and 2000 shall be reduced as indicated
in paragraph 32 of these reasons;
and that the penalties assessed shall be deleted.
Each party will bear its own costs.
Signed at Ottawa, Canada, this 14th
day of May 2010.
"Lucie Lamarre"
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