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Citation: 2003TCC707
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Date: 20031020
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Dockets: 2001-1769(IT)G
2001-1771(GST)I
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BETWEEN:
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ANATOLY EPEL,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell, J.
[1] These appeals were heard together
on common evidence. They are in respect to the taxation years
1992 to 1998 inclusive and involve both the Excise Tax Act
and the Income Tax Act.
[2] In 1998 the Appellant was audited
in respect to his 1992 to 1995 filed tax returns, on the basis of
a net worth assessment. The Minister added the additional amounts
of $71,351.00 for 1992, $70,817.00 for 1993, $56,713.00 for 1994,
and $58,481.00 for 1995 to the Appellant's income in each of
these years using the net worth method. The Appellant did not
file returns for the 1996, 1997 and 1998 taxation years. For
these years, the Minister prepared an arbitrary assessment,
instead of a net worth assessment, and added $50,000.00 as income
in each of these three taxation years. Penalties were imposed for
the taxation years 1992, 1993, 1994 and 1995 in respect to the
Appellant's understatement of his income in those years.
[3] The Appellant was also reassessed
for GST for the reporting periods from September 1, 1991 through
to August 31, 1995 in connection with the unreported business
income arising out of the Minister's net worth assessment for
this period. Penalties and interest were also imposed. The
decision in the net worth assessment made under the Income Tax
Act will of course determine this GST issue. It was also
agreed between counsel in their opening remarks that my treatment
of the taxation years 1996 to 1998 would follow my conclusions in
the net worth assessment for the taxation years 1992 to 1995.
Facts and Evidence:
[4] The Appellant came to Canada with
his wife and son from Russia in 1979. He was a shoemaker in his
native country and in 1983 opened a shoe repair business in
Canada. During the periods at issue in these appeals, he was the
sole proprietor of this business, which was known as "Bells
Corner Shoe Repair".
[5] The Appellant has little formal
education and cannot read or write. He has a very basic working
knowledge of the English language, which he acquired after his
arrival in this country. However he is not proficient in the
language and speaks with a heavy Russian accent. In fact he
referred to his own mastery of English as follows: "... I
can talk English a bit, as best what I can".
[6] The Appellant filed personal tax
returns in 1992, 1993, 1994 and 1995 reporting income from his
sole proprietorship. Because Mr. Epel could not read or write he
stated that he kept "... each paper, each ticket and
everything" and gave all these business items on a monthly
basis to his bookkeeper to complete his records. He testified
that he would not know if the record keeping was correct or not.
He did not file returns in 1996, 1997 and 1998, although those
returns have now been prepared by Mr. Epel's accountant and
filed as representing his income from his shoe repair business
for those years.
[7] According to the Appellant's
evidence he started gambling in 1987 when he accompanied friends
to a private casino in Hull, which was owned by John Turmel.
Throughout the years in question he was gambling at various
private establishments owned by Turmel in the Hull and Ottawa
areas. John Turmel introduced Mr. Epel to the game of Texas
Holding poker and taught him how to play. He played four to five
times per week, Monday through Friday after 6:00 p.m., when
his business closed. He stated that he was winning most of the
time and that his earnings would average $300.00 - $400.00 per
day. Generally he received his winnings in cash but occasionally
he was paid by cheque.
[8] He testified that sometimes his
winnings would be greater than $300.00 - $400.00,
and sometimes, less but that he did not keep track of these
winnings or of his occasional losses. He described himself as a
casual drinker and that most players at a table would be drinking
socially. At several different casino locations, the individuals
who were gambling brought their own food and liquor, while at
other locations they gave money to the dealer to purchase food
and liquor at an outside restaurant.
[9] The Appellant's evidence was
that he was winning much more frequently than he was losing at
the game. He stated he used his winnings to pay his business and
personal debts. He frequented the casinos to have fun, meet
different people and drink with these people.
[10] While Mr. Epel's gambling efforts
proved fruitful, his business endeavours were not as successful.
The business revenue during these years fluctuated from a high,
before expenses, of $96,000.00 in 1992 to a low of $39,500.00 in
1994.
[11] After completion of the audit by CCRA,
Mr. Epel was informed he owed money and he changed bookkeepers
and hired Gary Phomin, an accountant.
[12] During Mr. Epel's testimony, he
indicated possible other sources of revenue during these periods,
in addition to the winnings from the gambling activities. These
included money from the sale of his condominium in Russia, money
received from family members upon their arrival in Canada,
repayment of a loan from a Mr. Vladimir Baker and settlement
funds from a car accident. These other sources of
non-taxable income became an issue during the hearing when
Respondent counsel advised me that he was not able to review
these particular sources at discovery proceedings as the notice
of appeal disclosed gambling as the sole issue. Respondent
counsel requested and received an adjournment to conduct further
discovery in respect to these potential additional sources.
Appellant counsel made it clear that he was not attempting to
rely on exact dollar amounts from those other sources to
"whittle down" the net worth assessment but simply to
show that the Appellant received other unaccounted for revenue,
in addition to gambling wins.
[13] On cross-examination, the Appellant
testified that during the audit he was positive that he advised
the auditor that he gambled and made a little money. He stated
that his wins in gambling one year were about $20,000.00 but he
was never sure how much he made, as he paid his bills with his
winnings. He was unsure whether he told the auditor about all
other sources of non-taxable income, which he claimed he received
in those years. He stated that he received the money from his
family in cash when they came into Canada, as cheques were not
used in Russia. An account was opened jointly with his father and
another account with his mother, prior to their arrival in
Canada. When questioned about his loan to Vladimir Baker, the
Appellant testified that he had known Baker's family for 45
years and that he made the loan to him in 1987 while visiting
Russia. It was loaned in rubles but repaid in U.S. currency.
Beyond that he was unsure of the original amount of the loan and
stated that the repayment amount might have been $5,000.00 U.S.
or $6,000.00 to $7,000.00 U.S. There was evidence in the bank
statements (Exhibit R-2) of an amount deposited to the
Appellant's account about the time of the car accident,
although the amount is several thousand dollars less than the
Appellant stated that he received.
[14] Diana Livshits and John Turmel both
gave evidence on behalf of the Appellant. Ms. Livshits testified
that her family has known the Appellant for approximately 20
years, as he is well known throughout the Russian community. She
frequented the same casinos operated by John Turmel and it was
there that she saw the Appellant throughout the years in
question. She generally attended the casinos two to three times
per week with her husband. She stated that she saw Mr. Epel at
the casinos almost every time she was there and that he played
poker. She recalled that her husband was paid primarily in cash,
which confirmed the Appellant's evidence with respect to his
winnings. She recalled Mr. Epel winning as he "... can be
quite loud" referring to those times when he won.
[15] On cross-examination Ms. Livshits gave
conflicting evidence to that of the Appellant and Turmel in
respect to the various casino locations and the dates when they
opened and closed.
[16] John Turmel gave evidence that he was
in the business of earning his income through his gambling
activities. Although he is an engineer, he referred to himself as
a professional gambler, as his wins are taxed.
[17] In his last university year in
engineering, he took a course in gambling. When he realized he
had a knack for this and could make more money than in the
engineering field, he decided to become a professional gambler
and according to his evidence completed an honours thesis in
gambling. He claimed that seven courts have accepted him as a
gambling expert and that he is affectionately referred to in
gambling circles as the "Taj Mahal" of gambling. He
therefore never expected someone with Epel's background, who
could neither read nor write, to "keep up with me".
Turmel, who has gambled since 1974, stated that Epel was one of
the toughest players he has ever played against. He explained
that Epel was very lucky at gambling for a few years and that
this accounted for his many wins. Now that luck has abandoned
him, Epel no longer gambles.
[18] Turmel opened his first casino in the
late 1970's. His evidence was that he was raided on a regular
basis. He opened a casino in Hull in 1991. The authorities closed
it several months later. After spending one month in jail, he
re-opened another gambling establishment out of his home in
Nepean. Subsequently he operated out of a number of different
premises in the Ottawa area, at least one of which was eventually
closed by authorities.
[19] Turmel's first recollection of the
Appellant was in late 1991. He recalled the timing as it was
shortly after his first release from jail for operating a
gambling establishment. Turmel stated that his first impression
of the Appellant was that he was a Russian peasant who would be
"easy prey". After one month however the Appellant
gained the dubious distinction of being one of the top five
players in the Ottawa area. He testified that he played Epel for
hundreds of hours and that he should have quickly broken Epel but
was unable to do so. He described playing inexperienced players
or "newbes" as "wonderful" compared to the
more experienced players. However the Appellant, although
inexperienced, did not fit into this category. He described the
Appellant as a "fixture" in the establishments. Turmel
stated that he could not remember a night that Mr. Epel was not
there and more often than not he was winning. In a good week he
testified that Epel could very easily take home $4,000.00.
However Turmel did describe this as a one-time event and that
once Epel's luck ran out, he would never be that lucky again.
Turmel did state that he served only food and never liquor at his
casinos. He did not recall if he allowed his patrons to bring
their own liquor, as Epel had stated. According to his evidence,
most winnings were paid in cash but cheques were used
occasionally when there was insufficient cash.
[20] The Respondent called one witness, Mike
Murray, who has worked for CCRA since 1990 and employed as a
technical advisor for underground economy audits since 1993. When
he commenced work on the Epel file, he was special auditor in the
investigative division. Prior to his receipt of the file, another
auditor had interviewed the Appellant in October 1997 and this
first interview was limited to the shoe repair business. He did
not believe that the question of gambling winnings had been put
to Epel. After receipt of the file, he met with and interviewed
Epel in June 1998. Tab 17, Exhibit R-1 contained an undated
questionnaire. At page 7, the Appellant was asked: "Any
non-taxable sources of funds? ... inheritances/lottery
winnings/gifts/gambling". The auditor's handwritten note
as to Epel's response was: "No". Murray stated that
he would have read this question to the Appellant. He testified
that if the Appellant had indicated that he had earned a little
money from gambling, as Epel has stated, he would have attempted
to further quantify the amount. On cross-examination, Murray
stated that his practice would have been to provide an example of
a non-taxable source of funds when asking the question
contained in the questionnaire. However he did not specifically
recall how he handled this question with Epel except to state,
"I believe I would have". (given Epel an example of a
non-taxable source) Murray testified that the first five pages of
the questionnaire were not completed because he thought this
information was obtained by the other auditor in the first
interview. At page 9 of this document, Epel was asked the
following question: "Have you received any money from
family/friends, etc.? (Obtain details)". Murray's
handwritten note as to Epel's response was: no paperwork,
6-7 years - gave $10,000.00 - $12,000.00, doesn't
remember when went into bank to pay debts, brother in Russia
visits. Murray's testimony was that Epel's brother had
visited from Russia and that Epel stated he gave him this money
six to seven years ago but that Epel gave no further information
at the interview in respect to any other loans or money
received.
[21] In June of 1999, Murray made
handwritten notes (Exhibit R-1, Tab 16) respecting his
conversation with Gary Phomin, Epel's then accountant. Murray
stated that this was the first time that income, from gambling
wins, was mentioned. In addition to extensive gambling wins, this
note also indicates that Mr. Phomin notified the auditor that
additional non-taxable funds came from Russia through the
Appellant's niece in Toronto, together with additional cash
received from loan repayments.
Appellant's Position:
[22] According to the Appellant's
argument, Epel received windfall gains from his gambling
activities as a casual poker player at various establishments
operated by John Turmel in Hull and Ottawa during the periods in
question. The increases between the Appellant's net worth and
reported income were largely attributable to these non-taxable
gains from casual gambling, together (but to a lesser extent)
with other non-taxable sources of funds, such as repayment of
loans, gifts from family and car insurance proceeds. Therefore
the Minister's net worth calculations were not accurate.
Respondent's Position:
[23] The Appellant understated his income in
the taxation years 1992, 1993, 1994 and 1995 by $71,351.00,
$70,817.00, $56,713.00 and $58,481.00 respectively, which amounts
were calculated using a net worth assessment. Penalties were
properly imposed. As no returns were filed for 1996, 1997 and
1998, the Minister was correct in assessing, on an arbitrary
basis, the Appellant's taxable income at $50,000.00 in each
of these years. The Appellant was not involved in gambling to the
extent claimed by the Appellant and his gambling activities
cannot account for the amount of income determined by the net
worth audit. If the Court does accept that gambling did account
for some of his income, it cannot entirely explain the
discrepancies. In addition documentation and other evidence of
monetary gifts, loan repayments and car accident proceeds were
insufficient to account for other non-taxable sources in addition
to the gambling.
Analysis:
[24] The Appellant claims that the
difference between the net worth assessment and the reported
income is largely a result of gains from casual gambling. Casual
gambling gains are not a source of income under section 3 of the
Income Tax Act. A net worth assessment is a last resort
method when there is no reasonably alternative way to establish
an assessment. Associate Chief Justice Bowman in the case of
Bigayan v. Canada, [1999] T.C.J. No. 778 at page 1
describes this method as follows:
[2] The net worth
method, as observed in Ramey v. The Queen, 93 DTC 791, is
a last resort to be used when all else fails. Frequently it is
used when a taxpayer has failed to file income tax returns or has
kept no records. It is a blunt instrument, accurate within a
range of indeterminate magnitude. It is based on an assumption
that if one subtracts a taxpayer's net worth at the beginning
of a year from that at the end, adds the taxpayer's
expenditures in the year, deletes non-taxable receipts and
accretions to value of existing assets, the net result, less any
amount declared by the taxpayer, must be attributable to
unreported income earned in the year, unless the taxpayer can
demonstrate otherwise. It is at best an unsatisfactory method,
arbitrary and inaccurate but sometimes it is the only means of
approximating the income of a taxpayer.
[25] When the Minister resorts to a net
worth assessment, the assessment is presumed valid and the onus
of proof falls on the Appellant to disprove the Minister's
calculations (Pal v. Canada, [2002] T.C.J. No. 243 at page
2):
[11] The onus is on the
Appellant to establish on a balance of probabilities that the
Minister's calculations of income are wrong. The onus is one
which is relatively easy to discharge where the Minister has
relied on a net worth calculation because of the inherent
imprecision of the method. However, there must be some credible
evidence showing error in the result in order to discharge the
onus.
And in Chomica v. Canada, [2003] T.C.J. No. 57
Associate Chief Justice Bowman summarizes how the onus works at
paragraph 17, page 4 as follows:
[17] The fundamental rule in
income tax appeals and that is that the taxpayer has the onus of
demonstrating that the factual assumptions upon which the
assessment is based are wrong or do not support the assessment.
This rule is well settled and I need not repeat the usual
authorities that are traditionally cited in support of it.
However the standard of proof is a civil one and a prima
facie case, if unrebutted, will entitle a taxpayer to
succeed.
[26] The question is whether the Appellant
has established sufficient evidence, on a balance of
probabilities, to show that his net worth increase was largely
from gambling wins as a poker player and to a lesser extent
non-taxable sources, such as gifts and loans. If he is able to do
that and establish that his monetary wins as a poker player were
the result of casual gambling and not from the business of
gambling, then the Appellant will have sufficiently rebutted the
burden of proof which is initially upon him. If I characterize
the Appellant's gambling habits as a business operation, then
of course it could be difficult if not impossible to
mathematically formulate in any meaningful way the exact amount
of winnings. In most instances, the only record and best
available record of gambling wins is in the memory of the player.
It is therefore very difficult if not impossible to use such
winnings to offset, on a dollar-by-dollar amount, the net worth
calculations, which are themselves imprecise. In that event, the
calculations pursuant to the net worth method will stand.
[27] The Appellant's evidence is that he
gambled on a very regular basis throughout the years in question,
and that he had substantial and consistent wins. According to the
facts, these wins appear to be largely beginner's luck, which
were sustained over a lengthy period of time rather than wins
based on any type of system or background knowledge of the game
as described by John Turmel. In fact Turmel in his evidence
indicated that the Appellant was lucky for a number of years, but
described this as a one-time occurrence. It is clear from
Turmel's evidence that Epel was a regular player who
consistently won, sometimes up to $4,000.00 weekly. But he made
it clear that his winnings were not based on any type of system
such as one that Turmel might use. Ms. Livshits also corroborated
the evidence of the Appellant in respect to his very regular
playing habits. Both of these witnesses corroborate Epel's
testimony respecting his gambling habits and his wins. While some
of the evidence was vague or inconsistent in respect to casino
locations, dates of casino closings and openings and the exact
dates of Epel's wins, I do not believe these discrepancies,
on some of the more minor details, warrant that I ignore the
evidence of the Appellant, where it is corroborated by two
witnesses on the very crux of the gambling argument - his regular
attendance as a player and his consistent wins. There is no
evidence to contradict the Appellant and the other two
witnesses.
[28] The Appellant testified that he did not
attend movies or theatre productions unless they were in the
Russian language, as his knowledge of English was not sufficient
for him to enjoy these forms of entertainment. He therefore used
gambling as his entertainment. It was a hobby from which he
derived pleasure. He did not require adept language skills when
sitting in a game of poker. Although his wins were substantial,
the evidence supports that he did not view his gambling
activities as anything akin to a business operation. The evidence
does not disclose that he had any type of system or organization
to his wins. For these years in question, his wins appear to
simply be the "luck of the draw" and the excitement and
pleasure of the wins kept him returning. In the Federal Court
decision of Balanko v. M.N.R., [1988] F.C.J. No. 175 at
page 2, Justice Collier concluded that:
There is no doubt the Defendant was, and apparently still is
an inveterate gambler. That does not mean he was in the business
of gambling.
He went on to state near the end of his decision at page
3:
There can be no doubt that the Appellant freely indulged his
inordinate passion for gambling, but I cannot conclude that in
doing so he carried on a business. Counsel for the Minister
stressed that the Appellant gambled with a view to profit.
However, it must be observed that such intention is one shared by
all who gamble, and the presence of the intention to win or make
money in gambling, which is there in all who gamble, does not
lead to a conclusion that all who gamble, or even all those who
gamble frequently, are carrying on a business.
Counsel for the Minister stressed that the Appellant took
risks, and that he borrowed money in order to carry on his
gambling activities. While risk-taking is necessary in a
business, it is management or minimization of risk which is the
characteristic of business activity.
[29] In the case of Luprypa v.
Canada, [1997] T.C.J. No. 469 Justice McArthur set out
at paragraph 13 the criteria necessary to determine whether
an individual is engaged in a business of gambling. Those
are:
a) He carefully managed
the risks.
b) He was a skilled
player.
c) He played Monday
through to Friday each week.
d) He spent his afternoons
playing snooker to perfect his skills.
e) He played inebriated
opponents after 11:00 p.m. to minimize his risk.
f) He won most of
the time earning, approximately $200.00 daily.
g) He drank alcoholic
beverages only on weekends when not playing pool to give him a
sober advantage over his inebriated opponents.
h) He was calculating and
disciplined.
i) It was his
primary source of income and he relied on this steady income.
[30] With respect to these nine items, Epel
stated that he attended for the social enjoyment and that if he
was losing, he simply left. He drank socially with other players.
He did not manage his risk by identifying particularly inept
players or inebriated players. There is no evidence to suggest
that he attempted to arrange who his opponents would be so that
he would have an advantage. He did not attempt to manage or
minimize his risk through a calculated method or system. This
distinguishes Epel, the habitual (and lucky) gambler, from
someone like Turmel, the professional gambler. He was a lucky
gambler but not one who worked to perfect his skills. He
participated because he enjoyed the game and the social
interaction. Turmel testified that he certainly was a quick
learner, with a natural ability for the game, who for a time had
luck on his side. However Epel was not a skilled player whose
focus was to constantly develop and perfect his skills, as Turmel
had done. His evidence was that he still considered his business
operation to be the shoe repair business and not his gambling
activities. The facts support that the Appellant was using his
gambling as a form of social entertainment, with the added
advantage that he had regular and substantial wins. There is
certainly no evidence before me where I could find that he was in
any way conducting his gambling activities as a professional
calling. Turmel, at the other extreme, gave evidence of the
courses he studied, the papers he wrote, the systems he
established to win and the rake off portions in a game, in an
attempt to develop an edge in predicting his percentage chance of
winning any given game.
[31] In addition to the evidence respecting
gambling, the Appellant produced evidence of other revenue that
was received during this period, such as monetary gifts from his
parents, repayment of a loan and settlement funds from a car
accident. Appellant counsel argued that these amounts provided
additional explanations for non-taxable sources of income during
this period. While some of the evidence respecting these other
sources was vague and in some areas lacking in supporting
documentation, there was evidence that the Appellant did receive
additional funds in this period. There was a $10,000.00 bank
deposit in December of 1992, although a document
(Exhibit A-2) apparently signed by the Appellant's
mother confirmed a gift of a different amount of $11,000.00 U.S.
in 1992. A document, (Exhibit A-3) from the Appellant's
insurance broker, stated that Epel did receive settlement funds
from a car accident in 1994, although it confirmed little as to
the amount that Epel received. There was a bank deposit of
$11,358.00 shortly after the accident. The main argument here
revolves around the gambling issue. I accept the Appellant's
argument that there is sufficient evidence to establish the
existence of additional non-taxable sources of income during this
period, with the primary source being the consistent and
substantial windfall gains of Epel's gambling activities.
Epel's evidence was that he did indicate to the auditor that
he made money from gambling. The auditor's evidence was that
Epel never indicated this during the interview and in fact when
asked if he had other non-taxable sources of cash available to
him, the Appellant answered no. It is clear that the Appellant
has great difficulty with the English language. As I recall at
one point he stated that he understood about 50%. In addition he
is at a distinct disadvantage because he cannot read or write. I
believe he would have great difficulty understanding an
auditor's questions in an interview process. This may well
have produced incomplete or incorrect responses to interview
questions unless time was taken to fully explain what was being
asked. As well, I note that a substantial portion (the first five
pages of a 10-page questionnaire) was simply not completed. This
document purported in the bottom left hand corner to be a
"detailed initial interview". Taking into account
Mr. Epel's education and language problems, I place very
little reliance, if any at all, on a self-proclaimed
"detailed initial interview" which is about 50%
complete.
[32] The Appellant has satisfied the onus
which is upon him by demonstrating, on a balance of
probabilities, that the increase in cash during these periods was
largely attributed to non-taxable windfall gains from casual
gambling, together with other non-taxable sources of money. These
sources of money do not fall under section 3 of the
Act and are therefore not taxable. It follows that the GST
reassessment with respect to sales of taxable supplies from
September 1, 1991 to August 31, 1995 will be vacated
and that the taxation years 1996 through to 1998 are to be
assessed for income based on the returns as filed by the
Appellant. Penalties are to be deleted.
[33] The appeals are allowed, with counsel
having one set of costs.
Signed at Ottawa, Canada, this 20th day of October 2003.
Campbell, J.
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