Merhi v. The Queen, docket 2000-1081-IT-I (Informal Procedure)

Date: 20010403

Dockets: 2000-1081-IT-I; 2000-1082-IT-I; 2000-1848-IT-I; 2000-366-IT-I

BETWEEN:

ROGER MERHI, ELIE MERHI, REINE HELOU, ANTOINE MACHALANI,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Lamarre, J.T.C.C.

[1]            These are appeals from assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") in which the Minister denied the appellants charitable donations credits for charitable gifts to the Ordre Antonien libanais des Maronites (the "Order"). In Roger Merhi's case, gifts of $4,370 and $2,900 were disallowed for the 1990 and 1991 taxation years respectively. As for Elie Merhi, Roger Merhi's cousin, the amounts of disallowed gifts were $3,300 for the 1991 taxation year and $2,200 for 1992. Lastly, in the case of Reine Helou, Roger Merhi's spouse, an amount of $2,800 was not allowed as a gift for 1990 only. The three appellants were also assessed penalties under subsection 163(2) of the Act.

[2]            In all three cases, the Minister reassessed outside the normal reassessment period. The onus is therefore on the Minister to show on a balance of probabilities that the appellants made a misrepresentation that was attributable to neglect, carelessness or wilful default or committed some fraud with respect to these charitable gifts, as required by subsection 152(4) of the Act (see M.N.R. v. Taylor, [1961] C.T.C. 211 (Ex. Ct.)). The respondent claims that the appellants obtained false receipts for charitable gifts from the Order and that, in this respect, there was a misrepresentation attributable to wilful default or fraud.

[3]            I also heard the appeal of Antoine Machalani, who disputes the assessment made with respect to him for the 1994 taxation year, by which the Minister disallowed a charitable gift of $6,000 on the ground that Mr. Machalani had also obtained a false receipt. He was also assessed a penalty under subsection 163(2) of the Act. In his case, the Minister reassessed within the normal reassessment period and the onus is thus on Mr. Machalani to show on a balance of probabilities that the assessment is incorrect with respect to the disallowed gift. However, it is the Minister who must show according to the same standard of proof that the penalty is justified (subsection 163(3) of the Act).

[4]            Before describing the evidence as to the merits, it is important to note that Elie Merhi was absent from the hearing and that various versions were given as to the delivery to Elie Merhi of a subpoena which the respondent allegedly had served on him.

[5]            According to the service reports filed as Exhibits I-1 and I-4, process server Jean Caron served a subpoena duces tecum on Elie Merhi and Roger Merhi on March 12, 2001, at 7:35 a.m., handing the document to each addressee personally at his domicile or residence.

[6]            According to the service report filed as Exhibit I-2, the same process server served a subpoena duces tecum on Reine Helou on March 14, 2001, at 2:35 p.m., handing the document to its addressee personally at her home or residence.

[7]            These three subpoenas were served at the following address: 898 Rue Hocquart, Montréal, Quebec, which is the home address of Roger Merhi and Reine Helou. The three subpoenas required the presence of the three appellants at the Tax Court of Canada on the days set for the hearing, namely March 21 and 22, 2001.

[8]            Reine Helou and Roger Merhi testified that the former received the two subpoenas addressed to Roger and Elie Merhi. They said that their seven-year-old son had found the subpoena addressed to Reine Helou on the floor near the entrance. According to these two witnesses, Elie Merhi is 11 years younger than Roger Merhi. He left Canada at least five years ago and was not at their home to receive the subpoena. They claimed he now lives in Florida, in the United States, although Roger Merhi said he had spoken with Elie Merhi on the telephone. Elie Merhi apparently gave his agent, Elie Hani, an oral power of attorney to represent him in Court.

[9]            Process server Jean Caron's version was that he handed the first two subpoenas personally to first two men who did not deny that their names were Roger and Elie Merhi. Mr. Caron testified that Elie Merhi looked older than Roger Merhi. Mr. Caron also said that he had personally given Reine Helou the subpoena addressed to her two days after having served the other two.

[10]          In view of these two different versions, I cannot say with certainty that Elie Merhi received the subpoena that was addressed to him. However, since, according to Roger Merhi, Elie Merhi had authorized his agent to represent him and was informed of the date of the hearing by both Roger Merhi and his agent, Elie Hani, I agree to hear his appeal on common evidence with the appeals of Roger Merhi and Reine Helou. I therefore allow the respondent to enter in Elie Merhi's appeal file all documents relating to that appeal so as to be able to make her case—the burden of proof being on her—just as in the case of the other two appellants.

[11]          With respect to Antoine Machalani's appeal, it was agreed that only the evidence relating to the respondent's witnesses in the other three appeals would be entered in his file.

Facts

[12]          Roger Merhi, who is of Lebanese origin, immigrated to Canada in 1988. He admits that he belongs to Montréal's Lebanese and Maronite community and says he is still a churchgoer. He returned to Lebanon to marry Reine Helou in 1989 and both came to Montréal to set up their home. They have since had three children, born in 1990, 1993 and 2000.

[13]          When he arrived in Canada, Roger Merhi had no money of his own and was received and housed free of charge at the monastery of the Order. He stayed there for 10 months and, after his marriage, moved to a new home with his wife. Upon his arrival in Canada, Roger Merhi found full-time employment with the McDonald's restaurant chain, then with a clothing business. In 1991, Mr. Merhi opened his own restaurant business under the name of Cocktail Antabli on Boulevard de l'Acadie in Montréal. His business is operated through a business corporation of which he is the majority shareholder and it is frequented in large part by the Lebanese community.

[14]          According to a table prepared by Colette Langelier, who acted as an auditor for Revenue Canada in the cases under appeal (Exhibit I-20), Roger Merhi reported wage income of $21,838 in 1989, $21,522 in 1990 and $730 in 1991, in addition to unemployment insurance benefits of $13,690 which he received for 1991. Mr. Merhi also reported family allowance income of $85 in 1990 and $260 in 1991.

[15]          In 1992, Roger Merhi reported only interest income of $134. In 1993 and 1994, he reported wage income of $1,800 and $6,400 respectively.

[16]          Reine Helou began working as a supermarket cashier a few months after arriving in Canada in June 1989. Unlike her husband, she apparently arrived here with a small amount of capital of approximately $8,000. According to another table prepared by Colette Langelier (Exhibit I-22), Reine Helou reported wage income of $3,411 in 1989 and $11,611 in 1990, the year in which her first child was born. She received unemployment insurance benefits of $2,506 in 1990 and $7,289 in 1991 and reported wage income of $15,346 in 1992, $4,621 in 1993 and $1,764 in 1994. According to the same table, the net disposable family income for Roger Merhi and Reine Helou (after deducting the amounts invested in a Registered Retirement Savings Plan ("RRSP"), various employee contributions, tax payments, medical expenses and tuition fees) amounted to $19,301 in 1989, $27,252 in 1990, $15,853 in 1991, $10,244 in 1992, $14,719 in 1993 and $11,597 in 1994.

[17]          Reine Helou also mentioned that she had received money from her parents when they came to visit her in Canada. She said they had come five times and had given her amounts between $4,000 and $7,000.

[18]          Roger Merhi and Reine Helou had rent to pay, which they put at $400 a month, excluding electricity and heating expenses. They had only one car, a Chevrolet Cavalier, which Roger Merhi said he had purchased used for $1,200 in 1988. He said he kept this car until 1995 or 1996. Roger Merhi says he travelled to Lebanon in 1992 and Reine Helou went in 1993 after the birth of their second child. Reine Helou testified that Roger Merhi's mother arrived in Canada shortly after her, in 1990, with her husband's sister. At first, they both lived with the couple and contributed in part to the household expenses. Colette Langelier testified that Roger Merhi's mother, Elena Merhi, did not come to reside in Canada until 1992 and obtained her Canadian citizenship on February 10, 1996. In 1999, Elena Merhi's only sources of income were old age security benefits and a guaranteed supplement from the federal government.

[19]          With respect to the gifts made to the Order, Roger Merhi contends that he gave $2,500 in 1989, for which he requested no receipt for that year. In 1990, he obtained a receipt from the Order for charitable gifts of $4,370. That receipt is dated December 31, 1990. Roger Merhi says that this amount includes the sum of $2,500 which he had given the previous year and that the difference corresponds to the amount he gave in 1990. In 1991, he claims, he gave $2,900, for which he obtained a first receipt for $1,770 on April 10, 1991, and a second, for $1,130, dated December 31, 1991. Roger Merhi says that he always gave cash amounts (never cheques) varying between $100 and $350 throughout the year. He put these amounts in an envelope, which he either handed directly to the priest at the church or deposited in the collection basket during mass. He says his name was marked on the inside of the envelope. He kept no record of the amounts he gave nor has he kept any bankbook. He relied on the priests at the monastery and believed that the amounts indicated on the receipts corresponded to the amounts he had given during the year. Paradoxically, during her investigation in 1994, Colette Langelier asked the priests representing the Order to show her an example of the envelopes used for making the donations. She was told that the envelopes were discarded immediately after the receipts were issued. The same priests were unable to provide her with examples of such envelopes for the year during which the investigation was conducted, that is, 1994.

[20]          Colette Langelier also traced a cheque for $1,770 dated April 10, 1991, and signed by Roger Merhi, for which he had apparently obtained a receipt. In addition, Ms. Langelier traced seven other cheques made out by Roger Merhi to the Order: three in April 1991 for a total of $3,250, one in November 1991 for $450, two in February 1992 for $900 each, one in March 1992 for $250 and one in May 1992 for $350. While Roger Merhi stated in his examination-in-chief that he had never written cheques to the Order, he explained in cross-examination that one of those cheques, for $450, had been made out to the Order in payment for a social event at the monastery. He said the amount had been partly refunded to him by the participants in the event. He also explained that the other cheques traced by Colette Langelier that had been deposited to the Order's account had been used to pay for furniture left to the monastery by a Lebanese family that had returned to Lebanon. As he had little or no furniture when he moved into his new home in 1989, Father Joseph Khamar gave him permission to take that furniture. In 1991, Father Khamar requested payment of the amount owed for the furniture. Roger Merhi said that he thereupon handed Father Khamar a series of postdated cheques in payment of the furniture. He said that when Father Joseph had requested payment in 1991 he could not afford to pay. He therefore signed seven postdated cheques, including the cheque for $1,770, for which he obtained a receipt. Roger Merhi tried to explain the issuing of this receipt by saying that it was likely an error on the Order's part. He explained in his examination-in-chief that he had gone to the monastery in April 1991 to find out how much he had given to that point. He said he was told at that time that the amount was $1,770. In cross-examination, he said that, as he could no longer remember the amounts of the cheques he had written for the purchase of the furniture (including the cheque for $1,770), he had accepted the receipt for charitable gifts for that same amount, believing that it corresponded to the amounts that he had given in cash in April 1991. However, he now says that the receipt for $1,770 corresponded in fact to a cheque which he had made out to the Order for the furniture purchase.

[21]          Reine Helou contends that she gave $2,800, in amounts of $400 to $500 at a time, during 1990, following the same procedure as that used by her husband. She says she obtained a receipt for that amount dated December 31, 1990. In 1991 and 1992, she says, she gave total amounts of $450 and $500 respectively.

[22]          According to the table prepared by Colette Langelier (Exhibit I-22), the combined gifts which Roger Merhi and Reine Helou allegedly made correspond to 26 percent of net disposable family income in 1990 and 21 percent in 1991.

[23]          Roger Merhi testified that he was asked by fathers Antoine Sleiman and Joseph Khamar to make gifts in gratitude for the assistance he had been given on his arrival in Canada. He was under the impression that the gifts were used to pay the monastery's fixed costs (mortgage and electricity). He said he gave according to what his budget would allow. It is perhaps useful to emphasize here that the amounts shown on the charitable donation receipts for the years in issue for both Roger Merhi and Reine Helou are very close to the maximum amounts allowed under the Act as a charitable donations credit (20 percent of net income) (see Colette Langelier's table, Exhibits I-20 and I-22). It is also helpful to point out that the numbered receipts given to the appellants came from a receipt book which, according to Colette Langelier, was used for amounts given after the end of the year. In other words, one might think, based on the receipt numbers, that the money given to the Order was given not during the year for which the gift was claimed, but in the following year when the returns of income for the previous year were being prepared. This is what led Colette Langelier to believe that the appellants, like the other donors, had obtained backdated receipts in order to maximize the amount of the credit. Both Roger Merhi and Reine Helou contend that they had no knowledge of a scheme set up by the Order to provide receipts for amounts greater than the actual gift prior to 1995.

[24]          Elie Merhi is Roger Merhi's cousin and, according to the testimony of Roger Merhi and Reine Helou, came to live with them on a part-time basis in 1991 after spending a month at the monastery. Elie Merhi also made cash gifts: $3,300 in 1991 and $2,200 in 1992. He reported wage income of $14,096 and unemployment insurance benefits of $2,850 in 1991 and unemployment insurance benefits of $11,400 in 1992. These gifts represent approximately 25 percent of his net disposable income (Exhibit I-24). He apparently left Canada approximately five years ago.

[25]          Lastly, Antoine Machalani testified. Mr. Machalani said he gave $6,000 in cash in 1994 and $5,000 in 1993. In both cases, he obtained a receipt from the Order dated December 31 of the year in question. In 1993 and 1994, he reported wage income of $60,313 and $55,579 respectively. According to a table prepared by Colette Langelier (Exhibit R-4), his disposable net income (after deduction of RRSP contributions, employee contributions, tax payments, medical expenses and child care expenses) for those two years was $39,665 in 1993 and $32,062 in 1994. The gifts correspond to an average of approximately 15 percent of his disposable net income but are well below the limit of 20 percent of net income established by the Act. Mr. Machalani also said that he put the money into an envelope which he then placed in the collection basket at church. When doing his returns of income, he said, he contacted someone from the Order and asked that person to prepare the receipts, which he would afterwards pick up. He explained that, in 1993, he had just divorced and had returned to live with his parents with his child. He did not have a lot of expenses and could afford to give to the Order. He was born in Canada, but his father was a founder of the Order. It was at his father's request that he had agreed to contribute to the Order by making gifts. He attended church two or three times a month and quite regularly gave amounts that could vary between $100 and $350. Mr. Machalani kept no record of these gifts and no bank statement. He says he learned that the Order had given false receipts in 1995 and that he had learned this from hearing people talk about it and from an article published in the newspaper The Gazette in January 1996 (Exhibit I-27). He stopped making gifts to the Order in 1995 because of all these problems. So, he began going again to his old Greek Melchite parish on Gouin Boulevard in Montréal, which is also linked to a Lebanese organization. Starting in 1995, he made gifts of approximately $10,000 a year to that parish, always proceeding in the same fashion (making cash gifts throughout the year for which he obtained receipts from the parish). It does not appear that these gifts were disputed by the Canada Customs and Revenue Agency.

[26]          The respondent called as witnesses certain persons who said they had been asked by their accountant to give cash amounts to the Order in exchange for a receipt showing amounts four or five times that of the gift. This occurred in 1991, 1992 and 1993. One of those witnesses, Marcel Thibodeau, testified that he had contributed to this scheme through his accountant Jean-Maurice Labelle. Mr. Labelle had apparently put Mr. Thibodeau in touch with a certain Roger Antabli in 1992. Roger Antabli's telephone number was in fact the telephone number of the appellant Roger Merhi's personal residence. Mr. Thibodeau contacted Mr. Antabli, who arranged to meet him, once at the end of 1993, and another time at the end of 1994, at a restaurant called Cocktail Antabli (in fact, the appellant Roger Merhi's restaurant). Mr. Thibodeau handed over a sum of money to this Mr. Antabli, behind the counter, in exchange for a receipt showing an amount four times greater than the amount actually given. Mr. Thibodeau also stated that he had made the gift in March 1993 to obtain a receipt for 1992. For 1993 and 1994, the gift was made at the end of each year. Mr. Thibodeau testified that the man called Roger Antabli had asked him each time what amount he wanted on the receipt. As matters now stand, Mr. Thibodeau, who was also reassessed, has paid his debt to the Canada Customs and Revenue Agency.

[27]          In rebuttal, Roger Merhi said that he remembered Mr. Thibodeau very clearly because, the first year he came to his restaurant, Father Joseph Khamar had asked him to withdraw from his kitchen so that he could meet with Mr. Thibodeau. Roger Merhi said he had been frustrated by the situation and that Father Joseph had emerged from the kitchen a few minutes later telling him that he would henceforth go by the name of Roger Antabli. Roger Merhi also said he remembered the presence of the accountant Labelle at his restaurant, which presence he characterized as undesirable. Mr. Merhi said he did not remember Mr. Thibodeau's second visit and that he had not been aware of the various dealings that had gone on at his restaurant without his knowledge.

[28]          However, according to Colette Langelier's testimony, Father Joseph Khamar left Canada at the end of 1992 (see Isabelle Mercier's affidavit in Exhibit I-15, Appendix I, paragraph 8, which forms part of Colette Langelier's written testimony accepted in evidence by counsel for the appellants). Although Isabelle Mercier was not present at the hearing and could not be cross-examined on this point, this statement seems to be confirmed by the bank reconciliation prepared by Ms. Langelier showing the Order's bank deposits and withdrawals. It may be seen from the reconciliation that Father Joseph's name appears for the last time in the Order's records in early 1992 (Exhibit I-19, page 25). In addition, his name no longer appears as an officer and director of the Order as of November 1992 (see T-3010 returns, Exhibit I-18). Thus, Father Joseph was very likely no longer in Canada at the end of 1993 when Mr. Thibodeau went to Roger Merhi's restaurant. When confronted over this fact, Mr. Merhi stated in rebuttal that the man who had entered his kitchen with Father Joseph might not have been Mr. Thibodeau. It must be emphasized here that Mr. Thibodeau did not recognize Roger Merhi at the hearing. However, he stated that he was at the restaurant Cocktail Antabli for only a very short time and that it had been more than seven years earlier.

[29]          The respondent also called as witnesses four other persons who admitted that they had been solicited either by their accountant (one of these persons, who also had Mr. Labelle as his accountant, said he had picked up his income tax receipt at a restaurant on Boulevard de l'Acadie, opposite the Central Market, from a person who might have been of Arab origin) or by friends they saw at the Order's monastery for donations to the Order, in return for which they would be given receipts showing amounts four or five times greater than the amount of the actual donation. All were reassessed and agreed to pay their assessments. One of them also said that he had made the donation in the year following that for which he had obtained a receipt. None of these witnesses knew Roger Merhi or had previously met him.

[30]          Through the audit she conducted in September and October 1994, Colette Langelier was able to discover the existence of three tax evasion schemes used by the Order. First there were the donations made by cheque to the Order, which, after cashing those cheques, returned 80 percent of the donation to the donor by making bank account withdrawals by means of a cheque payable to "cash". Fathers Antoine Sleiman and Joseph Khamar were among those who made the withdrawals. Professionals with high incomes were mainly involved in this scheme. Second, there were the donations made by cheque representing 20 percent to 25 percent of the amount appearing on the official receipt. Most of the donors in this category were employees or retirees with lower incomes and they received backdated receipts. Lastly, there were the donations for which there was no tangible proof other than the official receipt (which donations the taxpayers say they made in cash). A number of these donations, if they were in fact made, appear to have been made in the year following the year for which the receipt was prepared.

[31]          Ms. Langelier testified that the four appellants fall into the third class. No trace of their donations was found, with the exception of a single receipt which was made out to Roger Merhi for an amount of $1,770 paid by cheque dated April 10, 1991, and deposited to the Order's bank account.

[32]          Ms. Langelier moreover explained that, in acting as they did, the taxpayers who took part in this scheme derived a benefit from the transaction. According to a calculation she had made, a taxpayer who gave only 20 percent or 25 percent of the amount indicated on the receipt not only recovered the sum invested through his donation, but also derived a benefit through the charitable donation tax credit (see Exhibit I-21). Ms. Langelier also explained that the charitable donation tax credit is a non-refundable credit if there is no tax payable by an individual. Thus, in Reine Helou's case, if she had contributed more than $450 and $500 in 1991 and 1992 respectively, she would not have been entitled to an additional tax credit since, by virtue of the amount of these two donations, there was no federal income tax payable. However, Reine Helou was not reassessed for 1991 and 1992 because the Minister's policy was not to reassess with respect to donations of less than $1,000.

[33]          Ms. Langelier concluded that the cash donations had not actually been made or, if amounts had been paid, they did not represent the total appearing on the receipts. The reasons for her so concluding are as follows. First, she had been told at the Order that these sums of money were deposited in a safe or sent to Lebanon and that a daily record of the donations was maintained in Arabic and this record was kept in Lebanon. However, she was unable to track down any sum of money in the safe or to discover any evidence that money had been sent to Lebanon. The copy of the record kept in Arabic which was sent to her contained only a global year-end entry and did not at all constitute a daily record. Second, although the people who said they had contributed in cash supposedly gave the money in envelopes identified with their name on the inside, no example could be provided to Ms. Langelier during her audit. Lastly, the balance sheet in the Order's financial statements to December 31, 1989, 1990, 1991 and 1992 showed no accounts receivable and no cash on hand corresponding to the total of the sums indicated on all the receipts dated December 31 of each of those years. Thus, according to the financial statements, the Order did not receive in cash, by cheque or in any other form the money which it indicates it had in its coffers based on its official receipts for charitable donations.

[34]          Lastly, the respondent called as a witness Gaëtan Ouellette, an investigator with the special investigations section of the Canada Customs and Revenue Agency. Mr. Ouellette had seized a document entitled "Bibliorec" on the Order's premises. This document contains information regarding a consecutive series of more than 350 receipts prepared by the Order for 1993. That information includes, among other things, the names of certain donors, the percentage of the donation that was actually made and the name of the intermediary with whom the recipients of the receipts dealt in order to obtain a receipt from the Order. The name Roger thus appears as such an intermediary. Although this "Roger" was not positively identified, Mr. Ouellette realized during his investigation that the taxpayers who were dealing with "Roger" went to a restaurant to meet him. Mr. Ouellette said he was even able in certain instances to make a connection with the restaurant Cocktail Antabli belonging to Roger Merhi. Mr. Ouellette also emphasized that, at one point in the investigation, he had a photograph taken of "Roger". It was at that time that the Order entered a plea of guilty and the investigation ended. The said photo was destroyed. It should be emphasized here that, during her audit, Ms. Langelier did not track down any individual entered in the system under the name of Roger Antabli. Nor was Mr. Ouellette able to establish "Roger's" family name through Bibliorec.

[35]          Lastly, Mr. Ouellette explained that Antoine Machalani was not reassessed for 1993 with respect to a donation of $5,000 because the receipt had been made out to "Tony" Machalani at a different address and it had not been realized during the investigation that this was the same person.

[36]          In rebuttal, Roger Merhi admitted that he had received telephone calls at his home from people wanting to speak to Roger Antabli. He said that Father Joseph Khamar had given out his telephone number without his knowledge and was implicated, along with the accountant Jean-Maurice Labelle, in this entire affair. Moreover, with regard to the furniture which he claims to have paid for by cheque, he was unable to say whether he had made out the cheques to the Order. He stated that he had written cheques postdated to various dates and for various amounts, which he explained by saying that there was no reason to write cheques for equal amounts. He also had made no note of the amounts thus paid to the Order. In cross-examination, he explained that he had been able to write two cheques for $900 each and one for $250 in 1992, for a total of $2,050, despite reported income of $134 that year. He said that his wife was quite capable of contributing to the household expenses with her income of approximately $16,000 that same year and the money she brought with her when she arrived in Canada.

Respondent's Argument

[37]          Counsel for the respondent said that she intended to prove by circumstantial evidence that the appellants took part in the tax scheme with regard to which the Order pleaded guilty. The admissibility of presumptive evidence is established in civil law. In Canadian Titanium Pigments Ltd. v. Fratelli D'Amico Armatori, [1979] F.C.J. No. 206 (QL), Marceau J. of the Federal Court of Appeal wrote:

13.            There is certainly no need to emphasize that evidence demonstrating the existence of a fact through presumptions is admissible: in practice, it is even a means of proof which, in an area such as civil liability, can often be more effective than any other. . . .

14.     It is well recognized that in order to win its case plaintiff must put forward presumptions that command acceptance in number as well as in weight, in the exactness of their application and their concurring effect—here I adopt concepts used by commentators and the courts in Quebec and derived from Art 1353 of the French Code . . . . However, we should not forget that this acceptance does not need to be based on incontrovertible evidence: such a level of certainty goes beyond the requirements of the civil law; it will be based merely on a relative conviction, derived from a rational deduction from the facts and circumstances. . . .

I must therefore examine these facts and circumstances, disclosed by the hearing, and consider whether sufficiently convincing evidence can be rationally deduced from them of the truth of the two propositions on which the action is based.

[38]          The respondent contends in the instant appeals that the appellants were not only aware of the tax scheme concocted by the members of the Order but also took part in it. Roger Merhi and Reine Helou were solicited by fathers Sleiman and Joseph Khamar, and it appears from the evidence that these two fathers were the originators of the scheme. Both signed the receipts and, according to the bank reconciliation prepared by Colette Langelier, both made withdrawals from the Order's account. According to the testimony of Ms. Langelier and Mr. Ouellette those withdrawals were used to repay the donors an amount equal to approximately 80 percent of the gift. The evidence also shows that many taxpayers who took part in the scheme dealt with Father Joseph.

[39]          Counsel for the respondent further contends that Roger Merhi is not credible in stating that everything took place in his restaurant without his knowledge. Indeed, there is evidence that Father Joseph Khamar left Canada around the end of 1992. This is corroborated by the fact that his name no longer appears as an officer and director of the Order as of November 1992 (see T-3010 returns, Exhibit I-18), nor does it appear in the bank reconciliation after 1992, and the receipts signed in the name of Father Joseph Khamar in 1992 no longer bear the same signature as in the previous years. (This is particularly apparent on the receipts given to Reine Helou, which appear at tab 4, Exhibit I-10.) How, counsel for the respondent asks, can Roger Merhi claim that in 1993 people dealt with Father Joseph at his restaurant when Father Joseph was no longer living in Canada? In counsel's view, it is more than mere coincidence that certain donors who took part in this fraudulent scheme had Roger Merhi's telephone number for when they wanted to speak to Roger Antabli. Roger Antabli does not exist. Receipts were handed over to some people at the restaurant Cocktail Antabli, which belongs to Roger Merhi. Counsel concludes from this that Roger Antabli is in fact Roger Merhi and that he not only was aware of the fraud but also recruited people to take part in it.

[40]          Counsel for the respondent emphasizes that Roger Merhi's testimony should be given little credence. In his examination-in-chief, he denied making any cheques out to the Order, which was contradicted by the testimony of Ms. Langelier and Mr. Ouellette, who traced a number of cheques made out by him to the Order. Roger Merhi's subsequent explanation that these cheques had been made out to the Order to pay for furniture makes no sense considering Roger Merhi's low income in 1991 and 1992 and the way that furniture was allegedly paid for. Roger Merhi admits that he wrote the cheques on various dates and for various amounts without keeping any record of those payments. He further admits that one of the cheques corresponds to the amount shown on a charitable donation receipt (that of April 10, 1991, Exhibit I-5, tab 4) but maintains that that money was used to pay for furniture.

[41]          Counsel for the respondent argues that Reine Helou's testimony was no more credible than Roger Merhi's. First, doubt is cast on it by the fact that she denies having personally received a subpoena addressed to her, when the process server recognized Reine Helou at the hearing and swore on his oath of office that he had handed to her personally the said subpoena. As to the amounts of the donations claimed, counsel for the respondent emphasizes the fact that, in 1991 and 1992, Reine Helou limited her donations to the amount needed to reduce her federal tax to nil. In 1990, she apparently went to the limit permitted by the Act. In fact, she claimed the maximum possible refund based on her income.

[42]          Counsel also submits that it is unlikely Roger Mehri and Reine Helou actually gave what they claim to have given, considering their combined disposable net income and their household expenses.

[43]          Counsel infers that Elie Merhi took part in the scheme since he was living with Roger Merhi and Reine Helou. Roger Merhi prepared Elie Merhi's returns of income. In addition, if Roger Merhi was selling receipts, as counsel for the respondent claims, it is highly likely that Elie Merhi was solicited and, having made donations, that he took part in the scheme. This may also be inferred from the fact that Elie Merhi obtained receipts bearing numbers following consecutively those of Roger Merhi and Reine Helou.

[44]          As for Antoine Machalani, the onus is on him to prove that he actually made a donation of the amount indicated on the receipt. He kept no record of his donations. Counsel for the respondent contends moreover that his credibility is also tainted. Among other things, he stated that he had heard about the fraudulent scheme in 1995 when an article appeared in The Gazette. However, that article was published in January 1996. In addition, he says he stopped making gifts in 1995 when he learned of the fraud. If that is the case, it supports the argument that he too was making donations in the year following the year for which a receipt was issued, that is to say that he received backdated receipts in order to maximize his credit. In fact, this is the conclusion to which Ms. Langelier came when she observed that the numbers of the receipts given to Antoine Machalani for the 1993 and 1994 taxation years were part of books of receipts issued for donations made in the year following that shown on the receipt (see Exhibits R-5 and I-19).

[45]          Furthermore, asserts counsel for the respondent, Antoine Machalani was a friend of Roger Merhi's. It is hard to believe that he was not aware of the fraudulent scheme, particularly since he went to the monastery regularly, as it was during those visits that he handed over amounts of money in an envelope. According to the testimony of Bachar Hajjar (a witness for the respondent who admitted having taken part in the fraud), he had learned from friends who frequented the monastery that he could obtain receipts for larger amounts. According to this witness, he paid 20 percent of the amount of the receipt and this was all done at the monastery itself.

[46]          In addition, Antoine Machalani says he gave $6,000 in cash in 1994. However, the Revenue Canada audit was conducted in 1994, and Ms. Langelier was provided with no evidence by the Order establishing that such an amount had been received. Mr. Machalani says that he handed over the money in an envelope. Yet none of these envelopes showing the source and the amount of the donation was traced at the Order, which also did not keep a daily record of the donations that were made.

[47]          Counsel for the respondent therefore concludes that there is a preponderance of evidence that none of the appellants made donations in the amounts indicated on the receipts which were issued to them. According to her, each appellant's aim was not only to be compensated for the amount paid to the Order but also to make a profit through the tax credit obtained.

[48]          Counsel therefore argues that there was no intent to give and that donations cannot therefore be said to have been made in this case. She relies on decisions by the Federal Court in Friedberg v. Canada, [1991] F.C.J. No. 1255 (F.C.A.), and The Queen v. Burns, 88 DTC 6101 (F.C.T.D.), confirmed by 90 DTC 6335 (F.C.A.) in contending that there can be no gift where the taxpayer who claims to have made a gift derives a benefit therefrom instead of growing poorer. On the one hand, Linden J.A. wrote as follows in Friedberg, at page 2:

Thus, a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor (see Heald J. in The Queen v. Zandstra [1974] 2 F.C. 254, at p. 261.) The tax advantage which is received from gifts is not normally considered a 'benefit' within this definition, for to do so would render the charitable donations deductions unavailable to many donors.

On the other hand, Pinard J. of the Federal Court, Trial Division, stated the following in Burns, at page 6105:

                I would like to emphasize that one essential element of a gift is an intentional element that the Roman law identified as animus donandi or liberal intent (see Mazeaud, Leçon de Droit Civil, tome 4ième, 2ième volume, 4ième edition, No. 1325, page 554). The donor must be aware that he will not receive any compensation other than pure moral benefit; he must be willing to grow poorer for the benefit of the donee without receiving any such compensation.

[49]          Counsel for the respondent also contends that the receipts do not meet the requirements imposed by section 118.1 of the Act and section 3501 of the Income Tax Regulations (for example, the date on the receipt is not consistent with the actual dates of the donations and the amounts indicated are not correct).

[50]          Lastly, counsel concludes that there was gross negligence on the appellants' part and that the penalty assessed under subsection 163(2) of the Act should be maintained.

Appellants' Arguments

[51]          Counsel for the appellants contends that the appellants are being asked to prove more than 10 years after the fact the donations which they made in return for a receipt from a registered charity. He argues that all the respondent's evidence has to do with the fraud committed by the Order. There is no basis for linking the appellants to that fraud. It was not demonstrated on a balance of probabilities that a causal relationship existed. None of the respondent's witnesses recognized the appellants as having taken part in the fraud, and there is also no evidence on which to base a claim that Roger Merhi sold receipts.

[52]          As to the actions of Father Joseph Khamar, counsel argues that Roger Merhi may have been manipulated, but it cannot be concluded from the evidence that he was in bad faith. He is entitled to the benefit of any doubt arising from circumstantial evidence.

[53]          In the view of counsel for the appellants, it was not up to the taxpayers to ensure that the Order did an adequate accounting of the amounts received. The appellants were entitled to rely on the receipts issued by a duly registered charity. It is not for the appellants to answer for the Order's fraudulent acts.

[54]          Mr. Machalani did not give more than 10 percent of his net income and had no financial obligations since he was living at his parents' home with his child following his divorce.

[55]          As for Roger Merhi, it was normal that he should make donations to the community that had received and housed him in Canada for 10 months. It cannot be said that all those who associated with Father Joseph were tax evaders or in collusion with him.

Analysis

Roger Merhi, Elie Merhi and Reine Helou

[56]          With regard to the three appellants Roger and Elie Merhi and Reine Helou, to be able to asses them after the normal reassessment period, the Minister must prove that those appellants made a misrepresentation that was attributable to neglect, carelessness or wilful default or committed fraud in filing their returns of income.

[57]          Being unable to adduce any direct evidence, since no record of the cash gifts was found during the investigation, the respondent had to proceed on the basis of circumstantial evidence. She had to show on a balance of probabilities that the appellants did not actually make those cash donations or that, if they did, their amounts were less than the amounts on the receipts.

[58]          In my view, the respondent succeeded in showing on a balance of probabilities that the three aforementioned appellants not only were aware of the tax scheme, but also took part in it.

[59]          In the first place, the respondent's evidence shows that the Order participated in a tax evasion scheme and that many donors took part in it as well. It also appears that certain cash donations did not correspond with the amounts indicated on the receipts since the total amount of those gifts could not be traced in the Order's records.

[60]          In the second place, Roger Merhi's credibility is tainted by his contradictory explanations. Without going so far as to assert that he sold receipts, there is evidence pointing to the fact that the sale of receipts occurred in his own restaurant and that his telephone number was given to people who wanted receipts for larger amounts than the amount of their donations. It is therefore difficult for Roger Merhi to contend that he was not aware of the distribution of false receipts. Moreover, his credibility was largely undermined in rebuttal, when he attempted to explain that it was Father Joseph who passed himself off as Roger Antabli in 1993. In view of the obvious fact that Father Joseph was no longer in Canada in 1993, he cast doubt on his own testimony about the meeting between Mr. Thibodeau and Father Joseph in the kitchen of his restaurant. Furthermore, his explanation of the postdated cheques which he says he wrote in 1991 to pay for furniture is hard to reconcile with the rest of the evidence. How can he say that he did not have any money in 1991 to pay for furniture for his own residence and at the same time claim that he made a $2,900 donation to the Order that same year?

[61]          As for Reine Helou, she admitted that she had spent a great deal of time at her husband's restaurant. She did not convince me that she was not any more aware than Roger Merhi of the existence of false receipts and that she did not benefit from them either. She frequented the monastery with her husband and used the same procedure as he in making her donations.

[62]          In retrospect, I find it hard to believe that, on their disposable net income, Roger Merhi and Reine Helou could afford to make donations representing 26 percent of that income.

[63]          In Elie Merhi's case, his mere absence from court attests to his indifference toward his tax obligations. I infer from his absence and his ties with Roger Merhi, and from the whole of the evidence adduced before me, that he colluded in the tax scheme in question.

[64]          In view of my conclusion, I also find that none of the three appellants Roger and Elie Merhi and Reine Helou made gifts within the meaning given that term by the courts. Indeed, Ms. Langelier demonstrated that, in acting as they did, the taxpayers not only recovered their outlay, but also derived a benefit through the tax credit. They clearly derived a benefit beyond the tax benefit normally provided for by the Act.

[65]          One must therefore speak not of impoverishment but of enrichment in the circumstances. I share the respondent's view that no gifts were made in any of these three cases.

[66]          In conclusion, I find that the respondent has shown on a balance of evidence that the appellants Roger and Elie Merhi and Reine Helou made a misrepresentation attributable to neglect, carelessness or wilful default. The Minister could therefore reassess after the normal reassessment period.

[67]          I also find that they are not entitled to a charitable donations credit for the years in issue since they did not make any gifts within the meaning of section 118.1 of the Act.

[68]          Furthermore, in concluding that they took part in the tax scheme involving the Order, I also find that the Minister has shown on a balance of evidence that the appellants Roger and Elie Merhi and Reine Helou knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in their returns of income. The penalties assessed under subsection 163(2) are therefore maintained. Their appeals are dismissed.

Antoine Machalani

[69]          As for Antoine Machalani, the onus is on him to prove that he actually made cash donations. The evidence shows that the Order issued false receipts. This fact and others revealed by the respondent's evidence cast doubt on the validity of the receipt obtained by Mr. Machalani. However, I am not convinced that Antoine Machalani was aware of the existence of the false receipts in 1994. It is true that he frequented the monastery, which was at the root of the entire scheme, but, in my view, that does not prove that he took part in it. He testified that he made donations to the Order because of his father, who was the founder of the Order. It does not appear that Antoine Machalani was solicited by fathers Joseph or Sleiman. Moreover, he stated that, when he became aware of the fraud organized by the Order, he stopped making donations to the Order and returned to his former parish, to which he continued to make donations in the same manner that year, that is, 1995, and in subsequent years. In fact, the evidence shows that he gave that parish amounts totalling approximately $10,000 a year starting in 1995. I understand that this corresponded on average to 10 percent of Mr. Machalani's income, which I do not find unreasonable in view of the fact that he did not have any heavy expenses to bear. Furthermore, it cannot be presumed that all cash donations are fraudulent. I do not agree with counsel for the respondent when she attacks Mr. Machalani's credibility. It is false to claim that he stopped making donations when he read about the fraud in the newspaper. On the one hand, Mr. Machalani said that he had learned about the fraud not only from a newspaper article but also from what was being said in the community. It is therefore likely that he learned of it in 1995 since the investigation had begun in late 1994. On the other hand, although he stopped making donations to the Order, he did make donations to his former parish throughout 1995 and in subsequent years. This fact was not questioned.

[70]          As to the matter of the backdated receipts, I find that the respondent's evidence does not necessarily show that Mr. Machalani obtained such receipts. He said that he had telephoned the monastery during the period when he had to make his returns of income in order to obtain a receipt. It is quite possible that a receipt was then prepared for him, using the book of receipts available at that time, for the donations which he had made the previous year. Lastly, the fact that the Order destroyed all the envelopes containing the donations does not mean that those envelopes did not exist. Moreover, the donors were not necessarily aware of the manner in which the monastery managed its affairs.

[71]          In closing, I do not accept the evidence that Antoine Machalani was a friend of Roger Merhi's. Mr. Machalani said that he knew Roger Merhi and no more, and stated that he had cut off all contact with him after his wife left. I do not believe that this sole tie with Roger Merhi can link Mr. Machalani's case to that of Mr. Merhi. Contrary to what was the case with the testimony of Roger Merhi and Reine Helou, I have no real reason to doubt Antoine Machalani's credibility.

[72]          Accordingly, I find that it has not been shown on a balance of evidence that, in 1994, Antoine Machalani was aware of the existence of false receipts and that he requested such a receipt in exchange for a donation of a lesser amount. In view of the consistency with which Antoine Machalani has made donations from 1993 until the present, giving a reasonable percentage of his income—this despite the investigation into the fraud committed by the Order—I find that this appellant has shown on a balance of probabilities that he in fact made a donation of $6,000 to the Order in 1994 and that the fraud committed by the Order does not in itself affect the validity of his donation to it.

[73]          For these reasons, Antoine Machalani's appeal is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled, under subsection 118.1 of the Act, to a charitable donation credit for a gift of $6,000 which he made to the Order during the 1994 taxation year. The penalty assessed against him under subsection 163(2) is set aside.

Signed at Ottawa, Canada, this 3rd day of April 2001.

"Lucie Lamarre"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 31st day of May 2001.

Erich Klein, Revisor