Date: 20010826
Docket: 2000-260-IT-I
BETWEEN:
MAHER AZIZ ISHAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
(delivered orally from the bench on
March 13, 2001, at Montreal, Quebec,
and amended for greater clarity)
Pierre Archambault, J.T.C.C.
[1]
Mr. Maher Aziz Ishak is contesting reassessments for the 1994 and
1995 taxation years. The Minister of National Revenue
(Minister) included in Mr. Ishak's income an
amount of $34,351.45 resulting from the forgiveness of a debt
arising out of advances made to him by A.C. Leslie Steel Inc.
(LSI). The reassessment for the 1994 taxation year took
place more than three years after the original assessment and
Mr. Ishak claims that the Minister did not have the right to
reassess him under subsection 152(4) of the Income Tax
Act (Act) because he did not make in filing his tax
return any misrepresentation that is attributable to neglect,
carelessness or wilful default. Basically, Mr. Ishak claims
that he did not believe that he owed any money to LSI when he
filed his tax return. Furthermore, the Minister refused the
deduction of a $12,036.19 non-capital loss carried over
from the 1994 taxation year in computing Mr. Ishak's
taxable income for the 1995 taxation year. It was admitted during
the course of the hearing that the result for the 1995 taxation
year wholly depended upon the outcome of the appeal for the 1994
taxation year.
[2]
In reassessing Mr. Ishak for the 1994 and 1995 taxation
years, the Minister made the following assumptions of fact:
a)
the Appellant, through his holding company, was issued a 55%
controlling interest in A.C. Leslie Steel Inc. (the
"Company");
b)
the Appellant was also named director and president of the
Company;
c)
on December 7, 1993, the Appellant signed the financial
statements of the Company and the T-2 return for the 1993
taxation year;
d)
the 1993 balance sheet of the Company showed an amount identified
as "Loan receivable from directors";
e)
on December 6, 1994, the Appellant's holding company sold its
shares of the Company and the Appellant tendered his resignation
as a director and officer of the Company;
f)
on December 6, 1994, the Company directors and remaining
shareholders signed a document, releasing the Appellant and
holding him harmless from any claims, either at or prior to that
date. There was no indication in the said document of any
outstanding advances, or other amounts owing to the Company;
g)
since the Appellant's outstanding debt of $34,351, was
extinguished on December 6, 1994, the deemed value of the benefit
received by the Appellant, was the amount forgiven;
h)
as a result of an audit of the books and records of A.C. Leslie
Steel Inc., it was established that the account "loan
receivable from directors" had an outstanding balance for
the 1993 taxation year, and the Appellant's share of that
loan was $34,351.45;
i)
during the 1994 taxation year, the Company made a journal entry
on its books, indicating that all shareholder advances were
written off as bonuses, for which the Appellant did not receive a
T-4 from the Company;
j)
in reporting his income for the 1994 taxation year, the Appellant
did not include this bonus of $34,351 in his income for that
year;
k)
in filing his return of income and in supplying any information
under the Income Tax Act (the "Act")
for the 1994 taxation year, relative to his income, the Appellant
has omitted to report as income from the company
" A.C. Leslie Steel Inc. " the amount of
$34,351, and has made a misrepresentation that is attributable to
neglect, carelessness or willful default.
Mr. Ishak's representative admitted all of these
facts except those set out in subparagraphs g), h), j) and
k).
Facts
[3]
Mr. Ishak has a degree in electrical engineering. He has
been employed in a long series of positions in many corporations,
including publicly traded corporations. In 1991, Mr. Ishak
was approached by an accountant from the firm of Schwartz
Levitsky Feldman (SLF) to invest in LSI, a corporation that
had gone bankrupt. A group of its employees wanted to buy that
corporation. Mr. Ishak hired SFL to draw up a new business
plan for LSI, for which he said he paid $5,600 in professional
fees (including taxes) out of his own pocket.
[4]
He also negotiated financing arrangements for LSI with certain
financial institutions. At the end of 1991, he approached RoyNat
to provide the financing. That institution was paid a commitment
fee of $7,500 that Mr. Ishak claims he paid. Under a
gentleman's agreement entered into between the key new
shareholders of LSI, the pre-acquisition costs
(pre-acquisition costs), including SLF's and
RoyNat's fees, were eventually to be reimbursed to
Mr. Ishak when LSI's financial situation improved.
[5]
The closing for the acquisition of LSI took place in
July 1992. Mr. Ishak invested $550,000 and obtained a
55% interest in LSI. The original plan was that no one
shareholder would control the corporation. However, the other
shareholders could not invest all the funds that they had
committed. Given that he was the wealthiest of the group of
investors, Mr. Ishak had to put up more money and provide
the bank with personal guarantees of up to $500,000 in order to
complete the LSI acquisition. Mr. Ishak said that it was on
the recommendation of his lawyer that he insisted on getting
control, given the substantial investment that he was going to
make in the corporation.
[6] A
few months later, the three most senior executives and the
shareholders of LSI, Messrs. Ishak, Eddy Hakim and Normand
Lepage, realized that the successful operation of LSI would prove
more difficult than anticipated. LSI had lost a lot of clients as
a result of its bankruptcy and the three executives had to come
up with an expense reduction plan.
[7]
During his testimony, Mr. Hakim stated that sometime early
in 1993 he proposed to LSI's employees a 25% reduction in
their salaries and he proposed as well that the executives forego
their salaries. Mr. Ishak was apparently quite prepared to
do so. However, the other two executives needed their salaries to
meet their domestic needs. Therefore it was agreed that LSI would
make advances to the three senior executives against their future
earnings. The amount of the advances would equal their net
salary. Even though he stated that he was quite prepared to
forego his "salary advance", Mr. Ishak received
advances just like the other two executives, according to
Mr. Hakim. Mr. Ishak's gross monthly salary was
roughly $10,000 and he received three $5,000 advances — two
in February and one in March 1993 — but they were
considered by Mr. Ishak as reimbursements of expenses.
[8]
From August 1992 to June 1993, Mr. Ishak filed monthly
reports (Exhibit A-5) for expenses that he incurred as
president of LSI. In that capacity, he also approved the
reimbursement of those expenses. He stated that, having
previously held senior management positions, he was well aware of
the distinction between business and personal expenses. He stated
that he only claimed business expenses. Accompanying the expense
reports are either forms that he used in claiming his
reimbursements or statements from credit card companies. These
documents detail his expenses. All the expenses appearing in the
monthly reports aggregate $18,588.07. When cross-examined
by counsel for the respondent, Mr. Ishak stated that he had
attached the relevant invoices to the monthly expense reports but
had kept only a copy of the reports.
[9]
It seems that in the middle of 1993, the relationship between
Mr. Ishak and the other two executives and shareholders
soured. Apparently, Mr. Hakim was resentful that
Mr. Ishak had acquired control of LSI contrary to the
original agreement. In addition, Mr. Ishak's health was
not very good, so he decided to spend six weeks in July and
August 1993 in Egypt, his country of origin. When he returned,
Mr. Ishak did not feel wanted. He did not spend much time at
the office during the months of September and October, having
been told basically to stay home. In October, the other two
shareholders insisted that they approve any important decision
such as the hiring of personnel. Mr. Ishak did not want to
accept any such conditions given that he had control of LSI. He
then offered to sell his shares in LSI to the other shareholders
and to help them find the necessary financing.
[10] Although
he was not very much involved in the management of LSI,
Mr. Ishak was asked on December 7, 1993 to sign
LSI's audited financial statements and its tax return for the
fiscal period ending on August 31, 1993. Those financial
statements showed that the "loans receivable from
directors" amounted to $66,842. Mr. Ishak claims that
he raised some concerns about this item on the balance sheet
given that he was entitled to reimbursement of expenses,
including the pre-acquisition costs. Apparently, he was told that
this would be taken care of after financial arrangements had been
put in place for the purpose of carrying out the sale of his
shares to his fellow shareholders. Mr. Ishak said he did not
know what his share of the "loan receivable from
directors" would have been.
[11] In a
memorandum of agreement dated April 7, 1994 (April
Agreement), Messrs. Hakim, Lepage and Liebovitch
undertook to purchase Mr. Ishak's shares through a
holding corporation. In that agreement, we find clause 2.4,
which reads as follows:
The parties confirm and instruct the Company's accountants
at the time of the execution of this Agreement that all
outstanding loans and/or advances and/or expenses paid by the
Company to the Vendor and/or Ishak and/or on their behalf, as
well as all outstanding loans and/or advances and/or expenses
paid by the Company to Messrs. Normand Lepage
("Lepage") and Eddie Hakim ("Hakim") and/or
on their behalf, whether directly or indirectly, for his benefit
and/or the Vendor and/or any related party to them represent just
and fair compensation to Ishak, Lepage and Hakim for their
services rendered to the Company as the case may be and
constitute bona fide expenses incurred either by Ishak, Lepage or
Hakim and/or the Vendor on behalf and for the Company.
[12]
Mr. Ishak acknowledged that he had drafted this clause
without the assistance of a lawyer. An earlier draft referred
only to his advances and expenses. He explains as follows his
reasons for including such a clause. After his return from Egypt
the year before, Mr. Hakim had voiced doubts about the
legitimacy of expenses aggregating $67,000 and appearing on the
LSI credit card used by Mr. Ishak. Mr. Hakim did not
believe that that amount could have been incurred for business
reasons and for the benefit of LSI. He strenuously contested
Mr. Ishak's right to be reimbursed for those expenses.
He also went over the expenses claimed by Mr. Ishak prior to
that period and concluded that many of them constituted personal
expenses of Mr. Ishak. Given this position taken by
Mr. Hakim, Mr. Ishak wanted to protect himself by
having his fellow shareholders agree that the expenses that he
had claimed in the past constituted bona fide expenses. In his
testimony, Mr. Hakim confirmed that Mr. Ishak was
concerned about being sued for reimbursement of improperly
claimed expenses. It seems that Mr. Hakim had even taken
some steps — namely consulting his accountant and his
lawyer — with a view to recovering certain expenses.
[13] In a
letter dated October 28, 1994 addressed to the eventual
purchasers of his shares, who were asking for an extension of the
closing date, Mr. Ishak asked for reimbursement of SLF's
$5,600 fees and payment of an amount of $25,000 over and above
the amount due pursuant to the April Agreement. Mr. Ishak
said he made no reference to the RoyNat commitment fees because
he had forgotten about them. At the time, Mr. Ishak still
considered that he had incurred more out-of-pocket
expenses than the amount of his share of "loans receivable
from directors".
[14] In the
end, no legal action was brought. The closing for the sale of his
shares took place on December 6, 1994. Clause 2.4
of the April Agreement does not appear in the agreement signed at
the closing. However, a general release was signed the same day
in a separate document: LSI, Mr. Lepage and Mr. Hakim
together with other parties released Mr. Ishak, his wife and
two other corporations from any liabilities. There is no specific
reference to the "loans receivable from directors".
Mr. Ishak was concerned about the deletion of his
clause 2.4, however his lawyer satisfied him that the
general release would cover that aspect.
[15]
Mr. Ishak acknowledged that he reviewed his 1994 tax return
before signing and filing it. He stated that he did not provide
any information with respect to the advances he had received
because he believed that he did not owe anything to LSI prior to
December 6, 1994.
[16] During
his testimony, the auditor for the Minister confirmed that he was
aware that the burden of proof was on the Minister because the
assessment took place outside the normal reassessment period. In
his view, Mr. Ishak had made misrepresentations with respect
to the forgiven loans and the auditor relied on the fact that the
amount forgiven was quite substantial. Based on his own
experience, a taxpayer could not forget such a substantial
debt.
[17] With
respect to the existence of the outstanding loans, the auditor
relied on a schedule apparently prepared by SLF (Exhibit
A-3) (1994 SLF Schedule) entitled "A.C.
Leslie, Advances Receivable, August 31, 1994". It seems to
be dated December 12, 1994 (12/9/94).[1] The closing balance of this
"Advances Receivable" account as of August 31, 1993 is
$66,842 and Mr. Ishak's share is shown as being $33,051.
During the 1994 fiscal period, an addition of $1,300 is made to
Mr. Ishak's column thus producing a balance of
$34,351.45 as of August 31, 1994, before that amount was written
off as a bonus. The outstanding amounts owing by the other two
directors are $26,708.49 for Mr. Lepage and $28,845.45 for
Mr. Hakim, for a total of $81,905.39.
[18] The
above-mentioned schedule shows an adjustment entry
recording a write-off of all the advances owing by
Messrs. Ishak, Hakim and Lepage, and treating them as
bonuses. Mr. Ishak claims that he was never informed about
that adjustment entry. He never received any T4 slip showing the
bonus as employment income.[2] Mr. Hakim acknowledged in his testimony
that he had not informed Mr. Ishak that the advances had
been converted into bonuses.[3]
[19]
Mr. Ishak stated that the Minister's auditor asked him
in the fall of 1998 for information about a loan of $34,351.45
that had been written off. Apparently the auditor had not been
able to obtain such information from the company. Given that at
that particular time he was no longer connected in any way with
LSI, Mr. Ishak did not see how he could get any more
information than the Minister's tax auditor. The only
information that Mr. Ishak was able to obtain was faxed to
him on March 22, 1999 by LSI's controller.
[20] On that
fax (LSI Fax), filed as Exhibit A-4, appears the
following information:
Advances
Date
Entry
Mr. Ishak
Oct.
92
j764
1,000.00
Nov.
92
j1287
(1,000.00)
Dec.
92
j1957
2,000.00
j2053
1,500.00
Jan.
93
j2719
(2,000.00)
j2720
(1,500.00)
Feb.
93
j2913
5,000.00
j2915
(2,188.26)
j2919
(54.83)
j3149
5,000.00
Mar.
93
j3888
5,000.00
Jun.
93
j5360
300.00
j5437
500.00
13,556.91
reallocate
909.10
diff
18,585.44*
per SLF schedule Aug 93
33,051.45
Oct.
93
j447
1,300.00
Mar.
94
j1633
3,000.00
j1838
(3,000.00)[4]
1,300.00
per SLF schedule Aug 94
34,351.45
*These were expenses that were disallowed by the
company at the end of the year. According to Eddie, these related
to expenses included during your trip to Egypt, etc.
[21] This LSI
fax attempts to reconstruct the Advances Receivable account for
the year ended on August 31, 1993, the worksheet for which was
never filed in Court. It lists net disbursements of $13,556.91,
an amount representing total advances of $20,300 minus
reimbursements of $6,743.09. In his testimony, Mr. Hakim
acknowledged that he had not seen the LSI fax before it was sent
to Mr. Ishak.
[22] With
respect to the $18,585 shown on the LSI fax as expenses for which
reimbursement was refused by LSI, Mr. Ishak states that he
never requested any reimbursement for expenses relating to his
trip to Egypt. Mr. Ishak also filed his own reconciliation
sheet (Exhibit A-6), which provides a list of monthly
expenses which he incurred from August 1992 to June 1993 on
behalf of LSI. They total $18,588.07. The reconciliation sheet
shows total reimbursements of $6,798.87 and advances of $23,600.
It was prepared mostly from the information appearing on the
monthly reports filed as Exhibit A-5. That information
is as follows:
Reimbursements
Expenses
Cheques
Advances
Aug-92
2,692.75
1,000.00 (not on schedule)
Sep-92
2,294.50
1,000.00 (not on schedule)
Oct-92
2,092.02
1,000.00
4,079.27
Nov-92 2,188.26
Dec-92
3,554.83
2,000.00
1,500.00
Jan-93
1,839.78
Feb-93
1,206.33
5,000.00
5,000.00
Mar-93
5,000.00
Apr-93
688.58 688.58
May-93 797.16 797.16
Jun-93
1,233.86 1,233.86 300.00
500.00
Oct-93
1,300.00
Mar-94 ________________________________
18,588.07
6,798.87 23,600.00
[23] If we add
all the amounts that Mr. Ishak received either as advances
or as reimbursements of expenses, they total $30,399. Subtracting
from this amount the $18,588 of expenses shown in the expenses
report leaves a balance of $11,811 which is not accounted for.
Mr. Ishak claims that this amount of $11,811 was offset by
his pre-acquisition expenses. Those expenses include SLF's
fees of $5,600 for the business plan and RoyNat's fees of
$7,500 and thus total at least $13,100. As that amount exceeds
the amount not accounted for of $11,811, Mr. Ishak argues
that he did not owe any more money to LSI on December 6, 1994. He
insists that the amount of $13,100 represented only a portion of
all the pre-acquisition expenses that he had incurred on behalf
of LSI from the fall of 1991 to mid-summer 1992.
Analysis
[24] The issue
raised in this appeal is a factual one: Was there an outstanding
amount of $34,351.45 owed by Mr. Ishak on a loan from LSI
that was forgiven, as the respondent submits, in the 1994
calendar year (which is the relevant taxation year for
Mr. Ishak)? If any such outstanding loan was completely
offset by amounts that were owed by LSI to Mr. Ishak, then
no portion of the outstanding loan could be considered to have
been forgiven so as to confer a benefit on him.
[25] I find it
quite unsatisfactory that the only basis for determining the
existence of Mr. Ishak's share of the "loans
receivable from directors" was the 1994 SLF schedule
introduced without the testimony of the accountant who had
prepared it. In addition, we do not have the equivalent schedule
for the 1993 taxation year. No copy of the appropriate journal
describing in detail all the amounts paid to Mr. Ishak as
advances was produced at the hearing. When Mr. Ishak asked
for details about what he owed LSI, the controller only provided
the LSI fax which shows advances to Mr. Ishak aggregating $20,300
and reimbursements of $6,743.09, with the appropriate journal
entry numbers. No explanation was offered with respect to those
journal entries. Nor was any given concerning the item described
as "reallocate 909.10". Finally, the amount of $18,585
shown as "diff" seems to have been determined by
subtracting from the amount appearing on the 1994 SLF schedule as
the opening balance for Mr. Ishak the aggregate of the net
amount of $13,556.91 and the "reallocate" amount of
$909.10.
[26] I believe
that the evidence introduced as Exhibits A-5 and
A-6 by Mr. Ishak has more weight with respect to the
advances amounting to $23,600 made to him, the expenses of
$18,588 claimed by Mr. Ishak and the reimbursements
totalling $6,798.87 made by LSI. The expenses of $18,585 (shown
on the LSI fax) could not represent expenses for a trip to Egypt
because those expenses ($18,588 according to the reconciliation
sheet of Mr. Ishak and the expense reports) were incurred
between February 1992 and June of 1993 while the trip to Egypt
took place in July and August 1993. Mr. Ishak also stated
that he never claimed any expenses relating to his trip to Egypt.
Therefore, it is very doubtful that the description appearing in
the LSI fax is accurate.[5]
[27] When
Mr. Ishak testified, Mr. Hakim was in the room and he
heard Mr. Ishak's explanation that he had incurred
expenses prior to the acquisition of LSI. When Mr. Hakim
testified, he never contradicted Mr. Ishak's testimony
on that particular aspect. Furthermore, Mr. Hakim never
stated that the claim for SLF's $5,600 fees made in the
October 28, 1994 letter was frivolous. Therefore, I accept
Mr. Ishak's testimony that he incurred at least $13,100
of pre-acquisition expenses that were not reimbursed.
[28] I also
accept Mr. Ishak's evidence that he received from LSI only
$30,399 (that is, $23,600 in advances and $6,799 in
reimbursements) and that he incurred on behalf of LSI $18,588 in
expenses that were not reimbursed to him. Therefore, those
expenses could be considered to have been paid by being set off
against a portion of the advances. This would leave an amount of
$11,811 of advances unaccounted for. Given that the
pre-acquisition expenses represent at least $13,100, in 1994
Mr. Ishak would not have owed any debt to LSI that could
have been forgiven. Therefore no benefit would have been
conferred to him on 1994.
[29] Even if
the outstanding loans really amounted to $34,351 (and not
$30,399), the unaccounted for balance of the outstanding loan
amount would represent $2,673 ($34,351 - $18,588 - $13,100).
Given this small unaccounted for amount, I would be prepared to
accept Mr. Ishak's testimony that he had incurred at
least an extra $2,673 of expenses during the pre-acquisition
negotiations.
[30] So
overall, I conclude on a balance of probabilities that
Mr. Ishak did not owe any money to LSI in 1994. Whatever he
may have owed was offset by business expenses incurred in the
1993 fiscal period and by pre-acquisition costs.
[31] For all
these reasons, the appeals of Mr. Ishak are allowed and the
assessments for the 1994 and 1995 taxation years are referred
back to the Minister for reassessment on the basis that the
amount of $34,351.45 is to be excluded from his income for the
1994 taxation year.
Signed at Montréal, Quebec, this 26th day of August
2001.
"Pierre Archambault"
J.T.C.C.
COURT FILE
NO.:
2000-260(IT)I
STYLE OF
CAUSE:
MAHER AZIZ ISHAK
and Her Majesty the Queen
PLACE OF
HEARING:
Montreal, Quebec
DATE OF
HEARING:
December 1st, 2000
REASONS FOR JUDGMENT BY: The
Honourable Judge Pierre Archambault
DATE OF
JUDGMENT:
March 15, 2001
APPEARANCES:
Agent for the
Appellant:
David Wilkenfeld
Counsel for the
Respondent:
Sophie Alain
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1349(IT)I
BETWEEN:
EVELYN ELLEN WILSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 11, 2001 at Toronto,
Ontario, by
the Honourable Judge T.E. Margeson
Appearances
Counsel for the
Appellant:
John David Buote
Counsel for the
Respondent:
Meghan Castle
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1996 taxation year is allowed and referred back to the
Minister of National Revenue for reconsideration and reassessment
in order for the Minister to reconsider any proper receipts in
support of any allowable medical expenses in support of this
claim when they are presented.
In all other respects, the appeal is dismissed and the
Minister's assessment is confirmed, in accordance with the
attached Reasons for Judgment.
Signed at Ottawa, Canada, this 10th day of September 2001.
J.T.C.C.
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