Date: 20010516
Docket: 2000-3269-IT-I
BETWEEN:
ATEF CHOUMANN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur J.
[1]
These are appeals from assessments made under the Income Tax
Act by the Minister of National Revenue (the Minister) with
respect to the Appellant's 1993, 1994, 1995 and 1996 taxation
years. The issues to be determined are as follows:
(a)
Did the Appellant fail to report income from bookkeeping services
provided by him in the 1993, 1994 and 1995 taxation years in the
amounts of $5,400, $6,765 and $6,750, respectively?
(b)
Did he fail to declare mortgage interest in the amounts of
$13,410, $13,188 and $11,257 in the 1994, 1995 and 1996 taxation
years, respectively?
(c)
Did he misappropriate $1,000 in 1994 and $21,215 in 1995 and fail
to report those amounts?
(d)
Is the Minister of National Revenue entitled to interest and
penalties?
[2]
The Appellant is a native of Egypt and he retired in 1989 after
over 20 years of teaching French in a Peterborough school. He
invested money in an automotive business, 1097549 Ontario Ltd.,
carrying on business in the name of Class "A"
Automotive ("Automotive")[1] from 1990 to 1995.[2] To protect his financial
interest, he took control of the bookkeeping and monetary
activity of Automotive which was an automobile repair business
owned and operated by Mike Johnston.
[3]
On February 2, 1992, Mike Johnston personally granted a $225,000
mortgage at 13% per annum to the Appellant. That amount was
advanced to Mike Johnston from the bank accounts of the Appellant
and his wife. Johnston paid the Appellant and his wife interest
of $23,280, $26,484 and $24,699 in the 1994, 1995 and 1996
taxation years, respectively. The Appellant's spouse reported
interest of $9,869, $13,295 and $13,442 in the respective years
while the Appellant reported no interest. The Minister states
that the Appellant failed to declare his portion of the interest
income in the amounts of $13,410, $13,188 and $11,257 in the
taxation years in issue, respectively. The Appellant and his wife
both stated that $100,000 of the $225,000 mortgage belonged to
the Appellant's mother-in-law who lives in Egypt
and not to the Appellant.
Unreported Income from Misappropriation
[4]
In 1993, the Appellant was in control of the finances of
Automotive. Johnston, a licensed mechanic, looked after the auto
repair work and the repair and sales side of the business. The
Appellant took care of the books and the money. He recorded the
cash sales of Automotive in a separate book from the other sales.
The Minister assessed the Appellant on the basis that he
misappropriated $1,000 in 1994 and $21,215 in 1995 from the cash
sales and did not report it as income. After a Revenue Canada
audit of Automotive, criminal charges were laid against the
Appellant. On March 6, 1998, he pleaded guilty to evading goods
and services tax and was fined $19,478. Revenue Canada's
investigation confirmed that the Appellant, the business manager
of his former employer, Class "A" Automotive, had
complete control over most of the financial matters of the
business. It was revealed that the Appellant understated the
taxable sales and net GST payable shown on eleven GST returns
that were filed for this business from 1992 to 1995. The net tax
evaded during this time was $27,832 which relates to $397,600 in
net sales.
Unreported Bookkeeping Fees
[5]
This issue was resolved by the parties but for the penalties and
interest imposed by the Minister. The Appellant received
employment income for his bookkeeping services which he did not
declare. The parties agree that the appeal is allowed with
respect to the 1993 taxation year with regard to bookkeeping
fees. The appeal is dismissed with respect to the bookkeeping
income for 1994 and 1995 and I find that interest and penalties
are applicable on this unreported income. The Appellant clearly
received $150 weekly in those years. He entered it in his special
book. He altered his own hand-written employment contract. He
deliberately and knowingly understated his income in 1994 and
1995 by $6,765 and $6,750.
Unreported Interest Income
[6]
The question to be determined is whether $100,000 of the $225,000
mortgage was that of the Appellant or his mother-in-law. I accept
the evidence of Elizabeth Catherine Brown, the auditor from
Revenue Canada. She testified that at the outset of the audit,
the Appellant represented that there was a single $100,000
deposit into his bank account which was advanced to him by his
mother-in-law from Egypt for investment in the
Peterborough Automotive business in July 1993.
[7]
The Appellant supported this with a bank statement for account
no. 1802677[3]
whereon the Appellant wrote: "The $100,000 deposited to the
account on 20/07/93". In evidence is a declaration[4] by his mother-in-law to
the effect that she loaned her daughter, Sohair, the sum of
$100,000 in July 1993. This document appears to have been signed
by the Appellant's mother-in-law, Mahfouza Mohamed in Cairo,
Egypt and witnessed by a lawyer with his imprinted stamp. Neither
party to the document presented evidence to authenticate the
declaration. The Appellant and his wife had a number of accounts
into which money was deposited and withdrawn making the tracing
of it very difficult. In attempting to clear up the confusion,
counsel for the Appellant stated that there was no deposit of
$100,000 in July 1993 and he proceeded to point out that there
was a withdrawal of $100,000, I believe on October 12, 1993[5] and this $100,000
was deposited to the Appellant's cornerstone government money
fund account. Therefore, we have the Appellant originally
representing that he received $100,000 in July 1993 from Egypt.
Then when the auditors dug more deeply and could not find
$100,000 being deposited into his or his wife's accounts in
July 1993, the Appellant back-tracked and submitted that the
money came from Egypt in over 10 transactions in amounts of
between $10,000 and $20,000. He stated this money was carried
from Egypt to Canada by friends, couriers and his wife and that
it was in various currencies. From his bank deposit statements,
65% of the money arrived prior to 1993. The Appellant added that
a first payment of interest was made to his mother-in-law in
December 1996 in the amount of $25,000.[6] At that time, the mother-in-law would
have been owed over $35,000 in interest.[7]
[8]
The Appellant became aware of an audit by Revenue Canada in June
1997 and made a remittance to the Receiver General of
non-resident withholding tax in July 1997. I do not accept the
Appellant's explanation that he was unable to obtain guidance
with respect to this tax before July 1997. Three years passed
without his declaring any mortgage interest on the $100,000.00.
The Appellant had the burden of proving that the funds were not
his. There are too many inconsistencies to accept his
explanations. I find that on the balance of probabilities, it was
his money and he failed to declare the interest. In my opinion,
that is gross negligence pursuant to subsection 163(2) of the
Income Tax Act. I find that the amounts of $13,410,
$13,188 and $11,257 were properly included by the Minister in the
Appellant's income for the 1994, 1995 and 1996 taxation years
in accordance with section 3 and paragraph 12(1)(c) of the
Act. Also, the Minister correctly levied penalties under
subsection 163(2) of the Act.
Misappropriation of Income
[9]
This is the most difficult of the issues. The Appellant pled
guilty, through his counsel, to charges of making false or
deceptive statements in GST returns. In his reasons for judgment,
the Provincial Court Judge stated in part:
I have before me a defendant who is 66 years of age, is retired,
has no criminal record, became involved in this circumstance by
reason of his investment in this corporation under this company,
and there is some suggestion he may have requested and was given
control over financial matters to protect his own interest in the
matter, and thereby his own personal gain or to avoid loss. There
was clearly a benefit to the owner of the company as well and
counsel now advised that there's questionables -
that's how the transcript came out - whether there was
any personal gain long-term, but certainly it's a reasonable
assumption that there was on the short term.
[10] In making
the false statements and evading GST payable by Automotive, the
Appellant was ensuring that the mortgage to him and his wife was
paid. It was a risky loan and more than likely under-secured
because conventional lenders would not have granted the loan. The
only relevance of the GST conviction is to demonstrate the
character of the Appellant, his mindset and approach to assure
the repayment of the mortgage and interest during what I believe
was a difficult time for him. The Appellant's evidence is
that there was no misappropriation from Automotive. Ms. Brown
arrived at the conclusion that there was by adding the cash
receipts from Automotive recorded by the Appellant which were
deposited into his own personal bank account, and deducting the
amounts which he paid back out to Automotive and adding the
difference to his income.
[11] The
Appellant maintains that what Ms. Brown did not take into account
were transfers of other monies from him to pay for an Automotive
tow truck, hoist, alignment machine and Canpar trucks. There is a
bank statement to support the Appellant's contention that he
took $18,000 from his personal line of credit coinciding with the
purchase of the tow truck. There was similar evidence of another
$7,500 when the alignment machine and hoist were purchased.
Johnston made payments in accordance with the agreements on the
Appellant's line of credit starting with $624 monthly
increasing to $989 monthly in September and October 1995. When
the Appellant and Johnston dissolved their business relationship,
the Appellant repaid the outstanding line of credit balance of
$15,000 evidenced by two cheques. Johnston gave the Appellant a
cheque for $1,441, leaving the amount of $13,648 owing to the
Appellant. The mathematical calculations for the Canpar trucks
and the hoist and alignment machine are not as clear and cannot
be traced as readily.
[12] In 1998,
the Appellant commenced an action against Johnston and 1067549
Ontario Ltd. for non-payment of wages in 1993. Johnston
counter-claimed for $200,000 in alleged misappropriation of
funds. Upon settlement of the action, Johnston paid the Appellant
$12,500, abandoned his counterclaim and made the following
declaration:
1.
I am a Defendant in the within action and the owner of 1067549
Ontario Limited, operating as Class "A" Automotive, the
other Defendant herein, and as such have knowledge of the matters
hereinafter deposed by me.
2.
The Plaintiff, Atef Choumann, was not paid any wages for his
services provided to the Defendant 1067549 Ontario Limited and
myself during the years 1992 and 1993.
3.
The Plaintiff, Atef Choumann, does not owe any monies to either
myself or the Defendant 1067549 Ontario Limited in respect of
cash revenues realized in the Class "A" Automotive
business in 1994 and 1995 and received by the Plaintiff in his
capacity as financial advisor and manager of the business.
This sworn statement cannot be ignored. I do not accept
Johnston's testimony that his sworn statement is not
accurate. He was represented by a lawyer at the time and had been
through lengthy discoveries. I do not believe that his lawyer
would have permitted him to sign a false affidavit.
[13] While I
do not believe the Appellant can be said to have demolished the
Minister's misappropriation assumptions, I find he has tilted
the scales to a point where the Minister had the burden of
proving the misappropriation. The Minister's evidence as
presented from the audit, falls far short of this and the
misappropriation portion of the appeal is allowed.
[14] My
findings in conclusion are as follows:
Unreported Bookkeeping Income
(a)
the appeal is allowed for the 1993 taxation year;
(b)
the appeals are dismissed for the 1994 and 1995 taxation years
and the Minister correctly levied penalties under subsection
163(2);
Unreported Interest Income
The appeals for the 1994, 1995 and 1996 taxation years are
dismissed and the Minister correctly levied penalties;
Misappropriation of Funds
The appeals for the 1994 and 1995 taxation years are
allowed.
Signed at Ottawa, Canada, this 16th day of May, 2001.
"C.H. McArthur"
J.T.C.C.
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