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Citation: 2003TCC124
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Date: 20030318
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Docket: 2001-3545(IT)G
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BETWEEN:
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FAIDY FOUAD NAGUIB,
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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
(Delivered orally from the Bench at
Toronto, Ontario, on February 7, 2003)
Bowie J.
[1] Mr. Naguib appeals his income
tax assessments for the 1992, 1993, 1994 and 1995 taxation years.
He was reassessed for all those years on July 4, 2001. I heard
the appeals under the General Procedure on February 3 and 4,
2003.
[2] Mr. Naguib was born and grew
up in Egypt. He obtained a Bachelor of Commerce degree there and
subsequently worked for an investment company. Between 1971 and
1976, he worked for an oil company in Saudi Arabia as an internal
auditor. He described his job as being well-paid and including
such perks as free housing and a car, large bonuses and paid
travel vacations. He became a landed immigrant of Canada and,
after leaving for some years, returned under a returning
resident's permit in 1988. Since then he has been a resident
of Canada and his world income is therefore subject to tax under
the Income Tax Act (the Act). He testified that at
that point in time he had approximately US$350,000 on deposit in
Egypt, and another US$50,000 in Saudi Arabia as well as some ten
acres of farmland that he owned in Egypt.
[3] In Canada, he took a job as an
inventory clerk with a firm of chartered accountants soon after
his return. In 1990, he lost his job and he decided to become an
immigration and business consultant. He has carried on that
business ever since. His evidence was that he advertised in Egypt
for clients for this business. Initially, he had difficulty
establishing a clientele, but he eventually made some contacts
through friends and, as he put it, by charging cheap rates he was
able to obtain more business.
[4] The Appellant testified that he
used some of his accumulated savings to fund this embryonic
business, and that its growth was slow between 1992 and 1995. The
evidence as to his actual volume of business is scant. He said
that he charged up to $2,000 per client for his services to
would-be immigrants to Canada, and that most of his clientele
were from Egypt and made their applications there, although some
applied from within Canada. He was paid, he said, either by
cheque or in cash.
[5] For the years under appeal, the
Appellant's income tax returns reported his revenues and
expenses as follows:
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Gross revenue
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(Non-office) Expenses
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Net
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Home office expenses
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Home office expense
Carry forward
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1992
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21,040
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16,499
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4,541
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8,665
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4,124
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1993
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30,210
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26,123
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4,087
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8,572
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8,609
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1994
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36,150
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31,840
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4,310
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7,933
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12,232
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1995
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16,300
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22,771
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(6,471)
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4,779
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16,542
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Those home office expenses were computed on the basis that he
used 50 per cent of his 2,700 square foot house for business
purposes. He did not elaborate on how that space was used.
[6] The Appellant was assessed on a
net worth basis. This is not surprising as he had no financial
records at all that would assist in verifying his income for the
years in question, and much of his income was received outside
Canada, and a significant amount of it was paid to him in
cash.
[7] The auditor, who made the initial
net worth assessment, included as part of his personal
expenditures some very substantial amounts which were described
in the net worth computation as unidentified withdrawals. These
were all the withdrawals from the Appellant's bank accounts
for which he was unable to produce a satisfactory explanation.
This led to the following assessments of taxable income for the
years under appeal:
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1992
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- $ 74,320.38
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1993
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- $ 72,429.21
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1994
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- $150,703.41
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1995
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- $367,200.16
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Penalties were also assessed on the unreported income under
subsection 163(2) of the Act.
[8] The Appellant objected to these
assessments and, after almost three years of correspondence, the
amounts of income assessed were reduced to:
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1992
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- $ 9,925
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1993
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- $73,618
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1994
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- $82,155
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1995
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- $25,180
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The appeals officer who generated these assessments testified
that the essential difference between the two sets of assessments
arose from the fact that he did not include all the unexplained
bank withdrawals in Mr. Naguib's income. He did say that
he did not necessarily regard it as wrong for the assessor to
have done so, but that he did not include all those amounts
because of the considerable volume of deposits and withdrawals
which, in his words, were "churned through" the
Appellant's bank accounts during the relevant period. The
penalties were maintained but reduced in accordance with the
reduction in the undeclared income.
[9] The Appellant raised four specific
grounds of appeal against these assessments.
(i) The Appellant says that during 1995
he borrowed $31,726.48 from a Mr. Tawfik Girgis Mossa, and
that he repaid this amount to Mr. Mossa in 1996.
Consequently, he says, his 1995 income, as calculated by the net
worth method, is overstated by the amount of that loan which
increased his net worth.
(ii) The Appellant says also that on
October 5, 1991, he made an interest free loan to his cousin
Mr. Hany Saba Kilta Kelada in the amount of US$100,000, and
that it was repaid by his cousin between 1993 and 1995 as
follows:
US$ 26,300 in 1993
US$ 62,100 in 1994
US$ 11,600 in 1995
with the result that his income for those years is overstated by
those amounts.
In the case of both of those loans, no liability appears in
respect of the loan from Mr. Mossa, and no asset appears in
respect of the loan owed to the Appellant by his cousin.
(iii) The Appellant's third objection to
the assessments is that, he says, he owned some ten acres of
farmland in Egypt which he sold to his brother Fathy Fouad Naguib
on February 3, 1992, receiving for it C$27,000 in 1992 and
C$39,000 in 1993. He says that these amounts were not income but
represented payment for the asset that he had disposed of in 1993
and, consequently, if that asset had been shown to have declined
in accordance with the payments made, his income as computed
would have been less by those two amounts for those two
years.
(iv) The Appellant argues that in any event if
his income was understated by him, then it was not as a result of
either wilfulness or gross negligence on his part, and so the
penalties under subsection 163(2) should be vacated.
[10] The first three issues turn on the
credibility of the Appellant and the reliability of certain
documents that he put forward. I should say at this point that,
of a book containing 24 photocopies of various documents or
groups of documents submitted by the Appellant, I excluded from
the evidence numbers 3, 9, 19, 23 and 24. Three of these are
letters written in Arabic and addressed "To Whom It May
Concern". They were accompanied by English translations.
However, the authors of the letters were not available to testify
and I excluded them on that basis. The other two documents were
both self-serving and largely irrelevant documents and
counsel did not press their admissibility. Of the copies of
documents that were admitted, a number were copies of documents
created in the Arabic language accompanied by English
translations that had been made at the Arab Cultural Centre in
Toronto. I admitted these translations over the objection of
counsel for the Respondent. The translations were made in most
cases two years ago or more, and in all cases a considerable
period before the hearing, and they had been available to the
Respondent for sufficient time to take whatever steps might be
thought necessary to verify the translations. No effort to do so
was made, and in those circumstances I accepted the
Appellant's evidence that the translations were accurate.
[11] I turn first to the Appellant's
contention that a loan from Mr. Mossa in 1995 resulted in
his income for that year being overstated in the assessments. The
Appellant testified that he held US$136,000 which had been sent
to him by the family of Mr. Makram Ramzi Gurgis from Egypt
to hold for Mr. Gurgis, who apparently was in Canada. His
evidence was that he had to pay this amount to Mr. Gurgis
and he, for reasons that went unexplained, was unable to do so,
being short by $46,000 of the amount he had to pay to
Mr. Gurgis. He, therefore, borrowed $31,726.48 from
Mr. Mossa on an interest-free basis on November 6, 1995, to
be repaid by him in 1996. There was no explanation for the odd
amount that was borrowed. However, document 15 of Exhibit
A-1 is a copy of what purports to be the Appellant's
receipt given to Mr. Mossa with a handwritten acknowledgment
of payment by the Appellant in instalments during 1996,
purporting to be signed by Mr. Mossa in November 1996.
[12] The Appellant referred to certain
entries in his bank passbooks which he said, when aggregated,
were the amounts that he received in interest for Mr. Gurgis
and the amounts repaid. Document 16 of Exhibit A-1 is a
bank transfer of $31,726.48 apparently from the account of
Mr. Mossa to that of the Appellant made on November 6, 1995.
I have no doubt that the amount of $31,726.48 was transferred by
Mr. Mossa to the Appellant on that day. However, I have
considerable doubt about the authenticity of the copy of the
receipt to which I referred earlier. It is authenticated only by
the Appellant's evidence. There was a great deal about the
Appellant's evidence that was unsatisfactory. Throughout his
evidence, he identified many deposits and withdrawals from his
several bank accounts as being from specific sources and for
specific purposes, although they took place many years ago and
there were no contemporaneous records of these transactions, or
at least no records that were produced before the Court. However,
his memory had failed him on a number of occasions on such
important matters as the year in which he said that all of his
business and financial records, with a few important exceptions,
were destroyed in a fire in his apartment in Egypt. He had no
satisfactory explanation for keeping his business records in
Egypt, as he said he did, although he claimed home office
expenses in respect of some 1,350 square feet of a house in
Mississauga. I do not accept the Appellant's uncorroborated
evidence as to the loan from Mr. Mossa. Mr. Mossa,
according to the Appellant's evidence, lives in the greater
Toronto area, and yet he was not called to corroborate the
Appellant's evidence regarding this transaction. I draw the
inference that his evidence would not have supported that of the
Appellant.
[13] I turn next to the issue of the
interest-free loan that the Appellant says he made to his cousin
in Egypt. Document 18 of Exhibit A-1 purports to be a loan
agreement entered into on October 5, 1991, between the Appellant
and his cousin Mr. Kelada, evidencing an interest-free loan
said to have been made by the Appellant to his cousin in the
amount of US$100,000. The document also purports to record on the
lower half of it repayment made by Mr. Kelada as
follows:
US$ 26,300 in 1993
USS 62,100 in 1994
US$ _11,600 in 1995
US$ 100,000
[14] Neither the assessor nor the appeals
officer accepted that Mr. Naguib was owed $100,000 by his
cousin at the beginning of the net worth period, or that the
amounts in question were received by him in 1993, 1994 and 1995
by way of reduction of the loan balance. If they had accepted
these as factual, then the net worth computation of income in
each of those years would have been reduced accordingly as the
loan balance reduced each year.
[15] The Appellant testified that his cousin
made repayments on this loan periodically during each of 1993,
1994 and 1995 and that he kept track of these in writing. This
record, he said, was kept at his apartment in Egypt; only at the
end of the year did he total these amounts and enter them on the
loan document. Exhibit A-1, number 20, is a schedule
on which the Appellant purported to explain the many deposits to
his bank accounts which, among other sources, he attributed to
these loan repayments, as well as to payments that he said he
received from his brother in payment for the ten-acre parcel of
land. It is not a contemporaneous record and, of course, it is
not corroborated.
[16] In spite of the large sums involved and
the subjective nature of the evidence, no attempt has been made
to have either the Appellant's brother or his cousin give
evidence, either by Commission under Rules 119 to 122, or
otherwise. In his evidence he referred to a great many deposits
to his bank accounts as having been amounts that he received in
Egypt from his cousin, or his brother, and brought back to Canada
to deposit in the bank. He said that when he had cheques to
deposit he often left them in a drawer for many days or even
weeks at a time before taking them to the bank. When questioned
on cross-examination about his ability to remember the
source of these many deposits he referred more than once to
records which he said he had at home. However, he offered no
explanation for why such records had not been produced and were
not available in court to refresh his memory. I think it most
unlikely that any such records exist, and I infer that if they do
exist, they would not assist the Appellant's case. If they
exist and would be helpful to him, then I have no doubt he would
have produced them long ago, and that they would have been
available at the trial.
[17] The Appellant's evidence as to the
sale of land to his brother was that the land had been left to
him by his grandmother, and that he sold it to his brother, who
paid him C$27,000 in 1992 and C$39,000 in 1993. If this is
correct, then his interest in the land would have been decreased
by those amounts and so his income would have been overstated by
those amounts. In fact, the land in Egypt was not included in the
statement of his assets used by the assessor or the appeals
officer because they rejected the Appellant's claim as to
this land. As for the Appellant's claim to have loaned
US$100,000 to his cousin, there is no persuasive corroboration in
connection with these payments. Again, the Appellant claims that
certain deposits to his bank account, that he could identify from
memory, were derived from payments made by his brother. He also
testified that a dispute arose over the title to the land which
resulted in litigation between him and his brother, and
eventually a rescission of the agreement of sale and the return
by him to his brother of the payments that he had received, but
not until after the net worth period here in question.
[18] Among the documents admitted by consent
of counsel for the Respondent is what purports to be a copy of a
receipt from the Appellant's brother stating that he had been
repaid in August 1997, after the end of the net worth period, the
amount that he had paid for the land. The receipt is dated in
1998. This receipt is written in the Arabic language, and the
brother's signature was not identified. Even accepting the
translation as accurate, I do not find this document to have any
probative value in the absence of evidence from the
Appellant's brother. The same may be said of a number of
copies of the letters in Arabic which are said to have been
written to the Appellant by his brother's lawyer in
connection with the dispute.
[19] Given my view of the credibility of the
Appellant, I do not accept his explanations with respect to
either the loan to his cousin or the sale of the farmland in
Egypt. There are many facets of the Appellant's evidence that
lead me to have no confidence in it. In addition to those that I
have already mentioned, several matters stand out. One is his
evidence that he made a certain deposit of $7,000 at a time when
he was in Egypt which was, he said, part of the sale price of the
land. When it was pointed out to him that he was in Egypt on the
date that the deposit was made, he said first that he deposited
it through a bank machine in Egypt. He then thought better of
this and said that he had mailed it to his bank from Egypt. It is
difficult to accept this, not only due to the conflicting
versions, but also when one considers that his earlier evidence
was that when he received payments in Egypt, either in cash or by
cheque, he carried them back to Canada with him, and frequently
let days or weeks go by before depositing the cheques.
[20] In connection with the fire at his
apartment in Egypt, the Appellant was again inconsistent. At
various times he said it was in 1995 or 1996, and then in 1997 or
1998 and later December 1995. He testified that he lost all of
his records due to this fire, including some, but not all, of his
clients' files. However, the agreements with his brother and
his cousin, he said, survived, although he did not explain how or
why. He also prepared and filed a return of income for 1994 in
January 1996, and one for 1995 in April 1996, in which he
reported income and expenses without any mention that his records
had been consumed by fire. He said that he had reconstructed some
of his clients' files with assistance from the clients, and
that some of them were not burned in the fire. However, he gave
no explanation at all as to how he would have determined his
expenses for those years. None of this gives me confidence in the
truth of the Appellant's evidence.
[21] I find that he has not discharged the
onus of showing that the Minister's assumptions as to his
income for the years in issue is incorrect.
[22] As to the penalties, I am not persuaded
that the Appellant's failure to report all of his income was
neither wilful nor the result of gross negligence. His counsel
attempted to paint the picture of Mr. Naguib as a simple
inventory clerk with limited understanding of English and no
understanding of matters commercial or financial. However, that
is far from the real facts. The Appellant has a Bachelor of
Commerce degree. He worked for years as an internal auditor.
While he may not have actually been engaged in bookkeeping during
that time, I cannot believe that the basic concepts of accounting
and record-keeping and the computation of profit and loss are
outside his knowledge and experience. He reported no income for
any of the years under appeal, although the income as assessed,
after it was drastically reduced by the appeals officer,
aggregated approximately $190,000 for those four years.
[23] Mr. Naguib obviously had extensive
financial dealings on his own account, and according to his
evidence he held a great deal of money for others from time to
time. If his failure to report his income in those years was not
wilful, and I believe it was, then it certainly amounted to
wilful blindness and gross negligence. Nobody could overlook the
kind of profits that he in fact generated.
[24] The appeals will, therefore, be
dismissed with costs.
Signed at Ottawa, Canada, this 18th day of March, 2003.
J.T.C.C.
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