Citation:
2017 TCC 85
Date: 20170519
Docket: 2014-2607(IT)G
BETWEEN:
VICTOR
GOREV,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1]
These Reasons pertain to Appeals instituted by
Victor Gorev in respect of various reassessments and assessments under Parts I
and XIII respectively of the Income Tax Act (the “ITA”),
which were issued by the Canada Revenue Agency (the “CRA”)
on behalf of the Minister of National Revenue (the “Minister”).
II. BACKGROUND
A. Facts
[2]
Before emigrating from Russia to Canada in 2001,
Mr. Gorev had been a successful businessman in Novosibirsk, Russia. In
anticipation of his emigration, he sold his business assets and realized an
amount in excess of US$4,500,000.
Mr. Gorev has been a resident of Canada since 2003. In Canada, Mr. Gorev
established a rental business, which he carried on through a Canadian
corporation, Vigor Investment Inc. (“Vigor”).
[3]
In 2006, 2007 and 2008 Mr. Gorev received
significant amounts of money, which he claimed were repayments of various loans
that he had advanced to friends and business associates. As well, although the
evidence was not entirely clear, it is my understanding that in those taxation
years Mr. Gorev was also continuing to receive money representing instalments
of the sale prices of various assets sold in Russia, or, as Mr. Gorev put it,
“at that moment money was still arriving from Russia.” The CRA took the position that
many of those cash receipts represented income earned by Mr. Gorev. Certain of
the cash receipts, which are the subject of these Appeals, were allegedly repayments
made to Mr. Gorev by one of his friends, Iouri Kardachov, to whom Mr.
Gorev had allegedly loaned at least an aggregate amount of $78,000 (or possibly $78,500), in
various advances from time to time in 2006 and 2007.
[4]
In July 2006, Mr. Gorev borrowed US$650,000 from
Kerswell Industrial Ltd. (“Kerswell”), which was
a corporation apparently resident in Belize and which was a non-resident of
Canada for the purposes of the ITA. Mr. Gorev stated that his cousin,
Nikolai Gorev, paid US$650,000 to Kerswell in 2008 to fully satisfy and
discharge that loan. Mr. Gorev did not pay or credit any amount to Kerswell in
respect of interest on the loan. The CRA took the position that the loan bore
interest at the rate of 7% and that interest in the amounts of $30,752 and $60,283
were credited by Mr. Gorev to Kerswell in 2007 and 2008 respectively.
B. Audit and Assessment History
(1) Part
I Tax
[5]
The CRA, on behalf of the Minister, issued the
initial Notices of Assessment under Part I of the ITA for Mr. Gorev’s
2006, 2007 and 2008 taxation years on May 10, 2007, August 25, 2008 and May 11,
2009 respectively.
In May 2010, the CRA commenced an audit of those three taxation years. In the
course of the audit, the CRA undertook a bank deposit analysis in respect of
Mr. Gorev’s bank accounts and identified a number of bank deposits which, in
the view of the CRA (as set out in a proposal letter dated January 26, 2012), represented unreported income,
as follows:
|
Table 1
|
|
Year
|
Amount
|
|
2006
|
$355,482.00
|
|
2007
|
859,755.00
|
|
2008
|
139,185.00
|
|
|
$1,354,422.00
|
[6]
After receiving the CRA’s proposal letter, Mr.
Gorev and his accountant provided documents and submissions to the CRA to show
that many of the bank deposits identified by the CRA had a non-taxable source.
After receiving those documents and submissions, the CRA issued a revised
proposal letter on May 16, 2012,
which showed the following reduced amounts as supposedly being unreported
income:
|
Table 2
|
|
Year
|
Amount
|
|
2006
|
$281,982.00
|
|
2007
|
119,800.00
|
|
2008
|
139,185.00
|
|
|
$540,967.00
|
[7]
After receiving the revised proposal letter, Mr.
Gorev, his accountant and his lawyer provided additional documents and
submissions to the CRA, which led to further reductions in the amounts that the
CRA viewed as unreported income. In a schedule attached to a letter dated
November 23, 2012,
the CRA advised Mr. Gorev that it considered the following amounts to be
unreported income:
Table 3
|
|
Year
|
Amount
|
|
2006
|
$35,711.30
|
|
2007
|
21,800.00
|
|
2008
|
41,500.00
|
|
|
$99,011.30
|
[8]
On December 31, 2012, the CRA, on behalf of the
Minister, issued Notices of Reassessment (the “Initial
Notices of Reassessment”) for 2006, 2007 and 2008, which increased Mr. Gorev’s
income for those taxation years by the amounts set out in Table 3. The Initial
Notices of Reassessment also imposed penalties under subsection 163(2) of
the ITA for making a false statement knowingly or in circumstances
amounting to gross negligence and penalties under subsection 162(7) of the ITA
for failure to file Form T1135, being a Foreign Income Verification Statement,
for each of those taxation years.
[9]
Mr. Gorev and his advisors objected to the
Initial Notices of Reassessment and made further submissions to the CRA’s
Appeals Division. In April or June 2014, the Minister confirmed the 2007 reassessment. The Appeals Division accepted
some of the submissions made by Mr. Gorev and his advisors in respect of 2006
and 2008. Accordingly, on June 12, 2014, the CRA, on behalf of the Minister,
issued new Notices of Reassessment (the “New Notices of
Reassessment”) for 2006 and 2008.
Thus, the position ultimately taken by the CRA in respect of the amount of
Mr. Gorev’s unreported income, as set out in the reassessments represented
by the New Notices of Reassessment for 2006 and 2008 and the Initial Notice of
Reassessment for 2007 (collectively, the “Disputed
Reassessments”), may be summarized as follows:
|
Table 4
|
|
Year
|
Amount
|
|
2006
|
$11,903.80
|
|
2007
|
21,800.00
|
|
2008
|
29,500.00
|
|
|
$63,203.80
|
[10]
As indicated in footnote 11 above, the CRA’s
Appeals Division prepared a schedule showing the respective amounts that the
Audit Division and the Appeals Division considered to be Mr. Gorev’s unreported
income for 2006, 2007 and 2008. As well, the Appeals Division prepared three
additional schedules,
which itemized, on a year-by-year basis, the various bank deposits that had
been treated as unreported income in the Initial Notices of Reassessment, and which
identified the bank deposits that the Appeals Division considered to have a
taxable source or a non-taxable source, as the case may be. All of the bank
deposits (the “Subject Deposits”) that are
contemplated by Table 4, and that, in the view of the CRA, had a taxable source,
pertained to amounts that Mr. Gorev claimed in his Notice of Appeal were loan
repayments by Mr. Kardachov. However, at the hearing, Mr. Gorev suggested that
some of the Subject Deposits may have been derived from loan repayments by
other borrowers or from other non-taxable sources. Thus, two of the questions
for resolution are whether Mr. Kardachov or other individuals borrowed and
subsequently repaid the amounts represented by some or all of the Subject Deposits,
and whether some of the Subject Deposits were derived from other non-taxable
sources.
(2) Part
XIII Tax
[11]
On December 5, 2012, the CRA, on behalf of the
Minister, issued Notices of Assessment under Part XIII of the ITA to Mr.
Gorev, so as to assess tax under subsection 215(6) of the ITA, in the amounts
of $7,688 and $15,071 for 2007 and 2008 respectively. As well, those Notices of
Assessment imposed penalties pursuant to subsection 227(8) of the ITA.
[12]
At the commencement of the hearing, counsel for
the Crown advised the Court that the Crown had abandoned its position in
respect of the Part XIII assessments.
Accordingly, Mr. Gorev is entitled to succeed in the Appeals insofar as they pertain
to the Part XIII assessments.
III.
ISSUES
[13]
The three issues for consideration in these
Appeals are:
a) whether the Subject Deposits, as summarized in Table 4, were derived
from loan repayments or other non-taxable sources or were derived from unreported
income;
b) whether the Minister properly reassessed Mr. Gorev after his normal
reassessment periods in respect of the 2006, 2007 and 2008 taxation years; and
c) whether Mr. Gorev is liable to penalties pursuant to subsection
163(2) of the ITA.
IV. WITNESSES
[14]
Mr. Gorev and Mr. Kardachov were the only
witnesses at the hearing of these Appeals. The Crown did not call any
witnesses.
[15]
Mr. Gorev and Mr. Kardachov testified in
Russian, and their answers (as well as the questions put to them) were translated
by an interpreter. It was my impression that, even though an interpreter was
used, Mr. Gorev may not have fully understood all of the concepts that were
discussed during the hearing. This possible lack of understanding is
illustrated by the following exchange during Mr. Gorev’s cross-examination:
Q. Do you agree that you
initially filed your tax return reporting $17,075 of total income, is that
right?
A. Well, I would like to answer the following. As I had money
and I had the money to leave home plus at that moment money was still arriving
from Russia. I couldn’t – I was able not to fill out the tax return, but since
I had considered myself, at the time, a resident of Canada I considered it was
necessary to pay taxes, at least, this one.
Q. Mr. Gorev, you’re a permanent resident of Canada, is that
right?
A. Unfortunately, because of my bad English I don’t have
passport.
Q. Oh, that’s fine. I wasn’t asking if you had a passport.
A. I have permanent resident.
While Mr. Gorev
seemed to catch the gist of the questions that were put to him about the amount
of total income reported on his tax return and his permanent resident status, I
am concerned that he may not have understood the full import of those
questions.
[16]
Another exchange that troubled me during Mr.
Gorev’s cross-examination is the following:
Q. Yes, and that’s listed under 2008, do you see that?
A. What year are we talking about now?
Q. Now I’m talking about 2008.
A. And what is the amount?
Q. Seventy-five hundred dollars was assessed by [A]udit for
two thousand and eight not two thousand and six.
A. I didn’t understand anything. So we are talking about 2006
or 2008?
Q. We’re actually talking about both.
A. Okay, let’s make clear with one year and then we’ll
transfer to the other one.
Q. Sure. Let me put it to you directly.
A. Maybe it will give me some kind of recollection.
Q. Sure. Let me put it to you directly. I’m suggesting to you
that [A]udit assessed you for $7500 of unreported income in 2008 and yet the
answer to that question is being provided for 2006. How do you respond to that?
A. What do you mean assessed? Was it claimed against me?
Q. Assessed by the minister.
A. Does it mean that I deposited this amount by cash?
Based on the
above excerpt from Mr. Gorev’s testimony, it seems that he did not understand
the concept of an assessment. There may have been other technical elements of
the subject matter of the hearing that he similarly did not understand.
[17]
On one occasion, it was necessary for Mr.
Gorev’s counsel to use the interpreter to obtain instructions from Mr. Gorev.[16]
[18]
In view of the above concerns, I have
endeavoured to be liberal and generous in my reading of the transcript of the
evidence given by Mr. Gorev at the hearing.
V. ANALYSIS
[19]
It is significant that, in the early stages of
the CRA’s audit, the auditor identified bank deposits totalling $1,354,422 that
appeared to the CRA to represent unreported income (as set out in Table 1). As
a result of various documents and submissions presented by Mr. Gorev and his
advisors to the CRA over the next two-and-a-half years, the aggregate amount
that the CRA considered to be unreported income was significantly reduced to
$63,203.80 (as set out in Table 4). The fact that there was such a dramatic
reduction in alleged unreported income causes me to wonder whether all $1,354,422
of the questionable bank deposits initially identified by the CRA may have been
derived from loan repayments or other non-taxable sources. Perhaps Mr. Gorev was
unable to satisfy the CRA of the non-taxable character of the Subject Deposits
(in the amount of $63,203.80) merely because the requisite documents had been
lost or misplaced. However, such conjecture is insufficient to satisfy Mr.
Gorev’s evidentiary obligation. As Mr. Gorev has the burden of proving that the
Subject Deposits did not represent unreported income, I must analyze the Subject
Deposits and the evidence pertaining to those deposits to determine whether
that burden has been satisfied.
A. Loans to Mr. Kardachov
[20]
Mr. Gorev testified that in December 2005 he
began to loan money to Mr. Kardachov. There were no formal terms of the
loans, which were interest free and were advanced and repaid in cash
denominated in Canadian currency.
Mr. Gorev stated that he had a safe in his home, in which he regularly kept significant
amounts of cash (on one occasion $40,000). Mr. Gorev testified that many of the
loans he advanced to Mr. Kardachov came from the cash in the safe. Mr. Gorev and Mr. Kardachov
did not prepare any formal documentation, such as receipts, promissory notes or
written agreements, in respect of those loans.
However, after each loan advance or repayment, once Mr. Kardachov had left Mr.
Gorev’s home, Mr. Gorev made entries in his day planner in order to keep track
of the money that he was lending to Mr. Kardachov. It is regrettable that
Mr. Gorev did not produce his day planner at the hearing of these Appeals,
as it may have corroborated his oral testimony.
B. Mr. Kardachov’s Document
[21]
During his cross-examination, Mr. Kardachov
identified a document (the “Paid-Back Document”)
that begins with the phrase, “I (Iouri Kardachov) paid
back to Victor Gorev,” and that was dated and signed by him on November 28,
2013, more than five years after the last alleged repayment. Below the phrase
quoted in the previous sentence, the Paid-Back Document sets out a table that was
prepared by Mr. Gorev and Mr. Kardachov and that shows the amounts of the
loan repayments (in Canadian currency) that Mr. Kardachov claims to have made
to Mr. Gorev in 2006, 2007 and 2008.
The dates and amounts of those alleged repayments, as set out in the Paid-Back
Document, are as follows:
|
Table 5
|
|
Date
|
Amount
|
|
October 12, 2006
|
$14,500.00
|
|
January 4, 2007
|
7,000.00
|
|
August 15, 2008
[sic]
|
5,000.00
|
|
August 19, 2008
[sic]
|
6,750.00
|
|
September 6, 2007
|
4,000.00
|
|
October 30, 2007
|
6,250.00
|
|
January 31, 2008
|
4,500.00
|
|
April 28, 2008
|
6,000.00
|
|
May 12, 2008
|
5,000.00
|
|
June 27, 2008
|
4,000.00
|
|
July 9, 2008
|
5,000.00
|
|
August 13, 2008
|
5,000.00
|
|
November 25,
2008
|
5,500.00
|
|
|
|
The actual total
of the alleged repayments, as set out in Table 5, should be $78,500 (and not
$78,000, as set out in the Paid-Back Document).
[22]
Based on the layout of the table in the
Paid-Back Document, it seems that perhaps the third and fourth repayments
listed above in Table 5 should have been dated August 15, 2007 and August 19,
2007 respectively (rather than August 15, 2008 and August 19, 2008).
Unfortunately, notwithstanding the efforts of counsel for the Crown to clarify
this point, Mr. Kardachov did not provide any clarification.
[23]
During his cross-examination, when Mr. Kardachov
was asked how he knew that he had made loan repayments on the dates set out in the
Paid-Back Document, he stated that he probably repaid the amounts before those
dates. He then acknowledged that he probably did not make the repayments on the
precise dates stated in the Paid-Back Document.
[24]
During Mr. Kardachov’s direct examination, he
testified that he kept track of the money that he owed to Mr. Gorev by making
notes for himself.
During his cross-examination, Mr. Kardachov confirmed that he “put notes at [his] papers” when he repaid an amount
to Mr. Gorev.
He stated that he probably had those notes in 2013, when Mr. Gorev and he
prepared the Paid-Back Document, and he may even have had the notes in 2014.
When asked if he had the notes on the date of the hearing (May 5, 2016), Mr.
Kardachov said that he did not, and then in the two subsequent answers he indicated
initially that maybe he destroyed them, and then that he probably destroyed
them.
When further asked if he had kept the notes from 2006 all the way to 2013, but
then got rid of them in 2014, he backtracked and said that he probably
destroyed them before 2013.
If Mr. Kardachov’s notes had not been destroyed, they might have
corroborated the Paid-Back Document.
[25]
During the period that Mr. Gorev was loaning
money to Mr. Kardachov, the latter was in difficult financial circumstances. In particular,
Mr. Kardachov was experiencing difficulty in his business, prompting him
to borrow money from Mr. Gorev for the business. Eventually, Mr. Kardachov
filed for bankruptcy on October 1, 2008.
Table 5 above indicates that in the period from April 28, 2008 to the date of
Mr. Kardachov’s bankruptcy (a period of approximately five months), Mr. Kardachov
made loan repayments totalling $25,000.
The final payment set out in Table 5 was in the amount of $5,500 and was made
on November 25, 2008, almost two months after Mr. Kardachov became a bankrupt.
He testified that he obtained the $5,500 from his brother in Russia, and he
acknowledged that he did not advise his trustee in bankruptcy about receiving the
money from Russia or paying it to Mr. Gorev.
[26]
In view of the involvement of Mr. Gorev, as
well as Mr. Kardachov, in the preparation of the Paid-Back Document, the
uncertainty concerning the dates of the alleged repayments, the five-year delay
between the last repayment and the preparation of that document, the destroyed notes
and Mr. Kardachov’s bankruptcy, I question the reliability of that document.
C. Borrowers
[27]
In his Notice of Appeal, Mr. Gorev alleged that
in 2006 and 2007 he lent an aggregate amount of $78,000 to Mr. Kardachov. In
the Notice of Appeal, Mr. Gorev also alleged that all of the Subject Deposits
were derived from loan repayments made by Mr. Kardachov. At one point in Mr.
Gorev’s direct examination, he said, “I can swear that all the money came from
his [Mr. Kardachaov’s] return of the debts.” Elsewhere in his testimony,
Mr. Gorev expanded his explanation, by indicating that not only Mr. Kardachov,
but also Evgeny Sluzkiy and other unnamed individuals, owed him money and made
loan repayments in 2006, 2007 and 2008, such that the Subject Deposits may have
been derived from repayments by any of those individuals. Although the Notice of Appeal
states that Mr. Gorev loaned $78,000 to Mr. Kardachov, Mr. Gorev
testified that the amount actually loaned was significantly greater than
$78,000, but he refused to advise the Court of the actual amount loaned. Since
the loaned amount set out in the Notice of Appeal, i.e., $78,000, was greater
than the amounts of the Disputed Reassessments, Mr. Gorev decided to ask only
Mr. Kardachov to appear as a witness at the hearing of these Appeals, rather
than calling the other individuals as witnesses as well. Given that Mr. Gorev
testified that some of the Subject Deposits may have been made by individuals
other than Mr. Kardachov, and given that those other individuals were not
called as witnesses, there is a lack of corroboration.
D. Family Banking Arrangements
[28]
During his testimony, Mr. Gorev provided an
additional explanation for some of the Subject Deposits. Mr. Gorev’s
common-law spouse, Yulia Cherenkova, managed the family finances. From
time to time, Mr. Gorev took cash from his safe or from a recent loan repayment
and gave that money to Ms. Cherenkova to enable her to pay the household
expenses, including the mortgage, utilities, educational costs and recreational
expenses for their children.
Ms. Cherenkova typically deposited that cash into their joint bank account.
[29]
Mr. Gorev testified that Ms. Cherenkova took
care of the management of the plaza (as he called it), or rental property, that
was owned and rented by Vigor. Her salary from Vigor was $2,500 per month,
which was paid to her by cheque.
According to Mr. Gorev, some of the Subject Deposits may have been made with
money earned by Ms. Cherenkova.
E. Subject Deposits
[30]
The Subject Deposits are summarized as follows:
|
Table 6
|
|
|
Bank
|
Date
|
Amount
|
(1)
|
BMO
|
June 27, 2008
November 25, 2008
|
$3,500.00
$4,000.00
|
|
(2)
|
Scotiabank
|
October 12, 2006
|
US$7,000.00
|
|
(3)
|
Scotiabank
|
October 12, 2006
|
$2,225.00
|
|
(4)
|
Scotiabank
|
October 18, 2006
|
$1,678.00
|
|
(5)
|
Scotiabank
|
December 12, 2006
|
$1,000.00
|
|
(6)
|
Scotiabank
(2007 and 2008)
|
April 2, 2007
April 25, 2007
August 15, 2007
|
$1,000.00
$5,500.00
$4,000.00
|
|
|
|
August 20, 2007
September 6, 2007
October 30, 2007
January 31, 2008
April 15, 2008
April 29, 2008
May 3, 2008
May 12, 2008
July 9, 2008
August 13, 2008
|
$4,000.00
$2,300.00
$5,000.00
$1,000.00
$2,500.00
$4,000.00
$1,500.00
$5,000.00
$4,000.00
$4,000.00
|
(1)
BMO Deposits
[31]
The CRA identified two deposits, in the amounts
of $3,500 and $4,000, that were deposited into Mr. Gorev’s Canadian-dollar account
at the Bank of Montreal (“BMO”). There was some
confusion as to the dates of those deposits. The CRA’s initial proposal letter,
dated January 26, 2012, showed the amounts of $3,500 and $4,000 as being
deposited on June 27, 2008 and November 25, 2008 respectively. The monthly statements for that
account similarly showed deposits of $3,500 and $4,000 as having been made on
June 27, 2008 and November 25, 2008 respectively.
[32]
On March 9, 2012, Mr. Gorev’s accountant,
Raymond Leydier, sent a letter to the CRA’s audit division, in response to the
CRA’s proposal letter of January 26, 2012. On the fourth page of that letter, Mr. Leydier discussed the
deposits to Mr. Gorev’s BMO Canadian-dollar account. The heading for that
discussion suggests that the deposits were made in 2008. As well, Mr. Leydier
attached copies of various documents to his letter and referred to them as
Exhibit #9. One of those documents is the customer copy of the transaction
record for a deposit in the amount of $3,500 on June 27, 2008 to Mr. Gorev’s
account.
Mr. Leydier did not provide a customer copy of the transaction record for the
$4,000 deposit.
[33]
It appears that the confusion began when Yasha
Bushuev, an accountant who was engaged by Mr. Gorev and who apparently replaced
Mr. Leydier, faxed a number of schedules to Pierre Pageaut of the Appeals
Division. One of those schedules showed the questionable deposits made to Mr.
Gorev’s BMO Canadian-dollar account in the amounts of $3,500 and $4,000. The year set out near the top
of that schedule was 2008; however, the dates listed in the schedule for the
two deposits were shown as 08/31/2006 and 09/18/2006. When Mr. Pageaut
prepared the Appeals Division’s Schedule 2, he seems to have used the dates
provided by Mr. Bushuev and showed the amounts of $3,500 and $4,000 as being
deposited on August 31, 2006 and September 18, 2006 respectively. However, the
composite table (showing all three years) in the Appeals Division’s Schedule 1
showed those deposits as having been made in 2008.
[34]
In paragraph 12 of his Notice of Appeal, Mr.
Gorev stated that the amounts were deposited on August 31, 2006 and September
18, 2006. However, it appears that, in paragraph 21(e) of the Crown’s Reply,
the two amounts were assumed to be included in income in 2008, rather than in 2006.
[35]
Not only is there confusion concerning the dates
of the deposits of $3,500 and $4,000, but there is also confusion concerning
the source of the funds that were deposited. That confusion is summarized
below:
a) In Mr. Leydier’s letter of March 9, 2012 to the CRA, he stated that
the deposits to Mr. Gorev’s BMO account were not income, but were “funds withdrawn from the client’s accounts.”This statement is contrary to the submission
made by Mr. Gorev in his Notice of Appeal that the $3,500 deposit and the
$4,000 deposit represented loan repayments by Mr. Kardachov.
b) During his direct examination, Mr. Gorev stated that the amounts
were probably loan repayments from somebody, but he could not recall the source
of the repayments. He asserted that it was not his income. During his cross-examination,
Mr. Gorev stated that the amounts of $3,500 and $4,000 came from his debtors,
including Mr. Kardachov.
c) Later in his cross-examination, Mr. Gorev stated that he was in
Russia when the two BMO deposits were made, and that he knew that Mr. Kardachov
would not have made any loan repayments while he (Mr. Gorev) was in
Russia. Therefore, Mr. Gorev changed his previous explanation and suggested
that the amounts of $3,500 and $4,000 were either taken by Ms. Cherenkova
from his safe or were earned by her.
Similarly, in his letter of March 9, 2012, Mr. Leydier stated that the amounts
were deposited by Ms. Cherenkova, as Mr. Gorev was in Russia from
May 17, 2008 to July 14, 2008, and again from October 2, 2008 to December
1, 2008.
d) During his direct examination, Mr. Gorev stated that the deposit of $3,500
(which Mr. Gorev understood was made on August 31, 2006, but was actually made
on June 27, 2008) was used for household expenses, such as the mortgage
payment, utilities and maintenance.
However, the customer copy of the transaction record for that deposit shows that
immediately after the deposit of $3,500 in cash was made, a Canadian bank draft
in the same amount was issued, using funds from the same account and leaving a
balance in that account of $226.84.
Therefore, the $3,500 was not left in the account to pay household expenses.
However, perhaps the bank draft was used to pay those expenses.
[36]
Based on the bank statements and the customer
copy of the transaction record for the $3,500 deposit, I find that the deposits
of $3,500 and $4,000 were made on June 27, 2008 and November 25, 2008
respectively, and not on August 31, 2006 and September 18, 2006. Given the
inconsistencies between Mr. Gorev’s testimony and the documentary
evidence, I do not accept Mr. Gorev’s assertion that the amounts of
$3,500 and $4,000 deposited to Mr. Gorev’s BMO Canadian-dollar account were
derived from non-taxable sources. Mr. Gorev has failed to prove, on a balance
of probabilities, that those amounts did not represent income earned in 2008.
(2) Scotiabank
US$7,000 Deposit on October 12, 2006
[37]
On October 12, 2006, Mr. Gorev, or someone
acting on his behalf (such as Ms. Cherenkova), deposited US$7,000 in cash into
Mr. Gorev’s Scotiabank US-dollar account.
In his letter of March 9, 2012 to the CRA, Mr. Leydier, stated that he had been
told by Mr. Gorev that the US$7,000 deposit on October 12, 2006 had been derived
from a repayment by Igor Nikitenko of a debt that was outstanding from the sale
of Mr. Gorev’s assets before becoming a resident of Canada. During his cross-examination,
when Mr. Gorev was asked about Mr. Leydier’s explanation that the
US$7,000 deposit on October 12, 2006 came from a debt repayment by Mr.
Nikitenko, Mr. Gorev replied, “I cannot understand
how Mr. Nikitenko is related to 7,000 cash.” Thus, Mr. Gorev’s testimony
was inconsistent with the explanation that he gave to Mr. Leydier.
[38]
Mr. Gorev stated in his Notice of Appeal that the
US$7,000 deposited on October 12, 2006 was derived from a loan repayment made
by Mr. Kardachov. He reiterated that position during his testimony, although (as
noted above) he expanded that position to suggest that some of the unexplained
deposits may have come from money repaid by borrowers other than Mr. Kardachov. However, during his
cross-examination, in offering another explanation, Mr. Gorev stated that the
US$7,000 deposited on October 12, 2006 was money left over at the conclusion of
one his trips to various gun shows and antique shows.
[39]
During his testimony, Mr. Gorev stated several
times that all of the loan advances that he made to Mr. Kardachov and all of
the loan repayments made by Mr. Kardachov were in Canadian currency. Given that the cash deposited
in the Scotiabank US-dollar account on October 12, 2006 was in US currency, it
does not appear that this was a loan repayment by Mr. Kardachov.
(3) Scotiabank
$2,225 Deposit on October 12, 2006
[40]
In his Notice of Appeal, Mr. Gorev indicated
that the deposit of $2,225 to his Scotiabank Canadian-dollar account on October
12, 2006 was derived from a loan repayment made to him by Mr. Kardachov. It appears
that Mr. Gorev gave the same explanation to the Appeals Division, as the
Appeals Division’s Schedule 4 indicates that Mr. Kardachov was the
source of the funds for this deposit. A copy of the customer receipt for the
deposit, which was entered into evidence, shows that the currency and the amount
of the cash received by the bank in respect of this deposit was US$2,000 and
that, applying the applicable exchange rate, the amount of the foreign exchange
was $225, with the result that the Canadian-currency equivalent of the deposit
was $2,225.
As the cash that was presented to Scotiabank was in US currency, and as Mr.
Gorev testified that Mr. Kardachov always made his loan repayments in
Canadian currency,
this deposit could not have derived from a loan repayment made by Mr. Kardachov.
(4) Scotiabank
$1,678.80 Deposit on October 18, 2006
[41]
In his Notice of Appeal, Mr. Gorev indicated
that the deposit of $1,678.80 to his Scotiabank Canadian-dollar account on
October 18, 2006 was derived from a loan repayment made to him by Mr.
Kardachov. A comment in the Appeals Division’s Schedule 4 in respect of the $1,678.80
deposit to Mr. Gorev’s Scotiabank Canadian-dollar account on October 13, 2006 states
the following:
Kardachov $1,400 US - $1,504.85 plus $173.95
CRA
I was unable to
find any indication of the source of the information on which the above comment
was based. If the deposit derived primarily from cash in the amount of US$1,400,
given that Mr. Gorev testified that Mr. Kardachov made loan repayments only in
Canadian currency, it follows that the deposit of $1,678.80 did not derive from
a loan repayment made by Mr. Kardachov.
[42]
This is confirmed by Mr. Gorev’s testimony. During
his direct examination, Mr. Gorev stated that the deposit of $1,678.80 to his
Scotiabank Canadian-dollar account on October 18, 2006 derived from a loan
repayment made to him by Mr. Kardachov or another borrower. During his cross-examination,
Mr. Gorev stated that, because the amount of the deposit was not an even round
number, it probably was not a loan repayment by Mr. Kardachov.
(5) Scotiabank
$1,000 Deposit on December 12, 2006
[43]
In his Notice of Appeal, Mr. Gorev indicated
that the deposit of $1,000 to his Scotiabank Canadian-dollar account on
December 12, 2006 was derived from a loan repayment made to him by Mr.
Kardachov. During both his direct examination and his cross-examination, Mr.
Gorev testified that the deposit of $1,000 to his Scotiabank Canadian-dollar
account on December 12, 2006, derived from a loan repayment by Mr.
Kardachov or one of the other borrowers.
In particular, in describing this deposit, Mr. Gorev stated during
cross-examination:
… this money
including all the money which we’ll be talking about they were deposited from
the money which were returned including by all others including Kardachov.
There are other options.
Thus, Mr. Gorev
was not certain that the $1,000 deposit derived from a loan repayment by Mr.
Kardachov.
(6) Scotiabank
Deposits in 2007 and 2008
[44]
The CRA identified 13 deposits that were made to
Mr. Gorev’s Scotiabank Canadian-dollar account in 2007 and 2008 and that were,
in the view of the CRA, derived from unreported income, as follows:
|
Table 7
|
|
|
Date
|
Amount
|
|
2007
|
April 2, 2007
|
$1,000.00
|
|
April 25, 2007
|
5,500.00
|
|
August 15, 2007
|
4,000.00
|
|
August 20, 2007
|
4,000.00
|
|
September 6, 2007
|
2,300.00
|
|
October 30, 2007
|
5,000.00
|
|
2007 Total
|
$21,800.00
|
|
|
|
|
|
2008
|
January 31, 2008
|
$1,000.00
|
|
April 15, 2008
|
2,500.00
|
|
April 29, 2008
|
4,000.00
|
|
May 3, 2008
|
1,500.00
|
|
May 12, 2008
|
5,000.00
|
|
July 9, 2008
|
4,000.00
|
|
August 13, 2008
|
4,000.00
|
|
2008 Total
|
$22,000.00
|
[45]
The deposits made in 2007 and 2008 were not the
subject of specific questioning by either counsel of either witness. Therefore,
the only information to which I was directed in respect of those deposits is:
a) the pleading in the Notice of Appeal to the effect that all of the
Subject Deposits were derived from loan repayments made by Mr. Kardachov;
b) the general statements made by Mr. Gorev that the Subject Deposits
represented loan repayments made by Mr. Kardachov or other borrowers,
money left over at the end of a trip abroad, or money deposited by Ms. Cherenkova
from cash given to her by Mr. Gorev or from remuneration earned by her for
managing Vigor’s rental property; and
c) Mr. Kardachov’s statement that he made various repayments to Mr. Gorev,
as itemized in the Paid-Back Document,
the substance of which is reproduced in Table 5 above.
[46]
In order to determine the plausibility of Mr.
Gorev using Mr. Kardachov’s alleged repayments to make the Subject
Deposits, I have combined Tables 5 and 7, so as to set out a chronological
sequence showing the repayments and the deposits in 2007 and 2008, as follows:
|
Table 8
|
|
|
Date
|
Alleged Repayment
|
Subject Deposit
|
|
January 4, 2007
|
$7,000
|
|
|
April 2, 2007
|
|
$1,000
|
|
April 25, 2007
|
|
5,500
|
|
August 15, 2007
|
5,000
|
4,000
|
|
August 19, 2007
|
6,750
|
|
|
August 20, 2007
|
|
4,000
|
|
September 6, 2007
|
4,000
|
2,300
|
|
October 30, 2007
|
6,250
|
5,000
|
|
Total for 2007
|
$29,000
|
$21,800
|
|
|
|
|
|
|
January 31, 2008
|
$4,500
|
$1,000
|
|
April 15, 2008
|
|
2,500
|
|
April 28, 2008
|
6,000
|
|
|
Date
|
Alleged Repayment
|
Subject Deposit
|
|
April 29, 2008
|
|
4,000
|
|
May 3, 2008
|
|
1,500
|
|
May 12, 2008
|
5,000
|
5,000
|
|
June 27, 2008
|
4,000
|
|
|
July 9, 2008
|
5,000
|
4,000
|
|
August 13, 2008
|
5,000
|
4,000
|
|
November 25, 2008
|
5,500
|
_____
|
|
Total for 2008
|
$35,000
|
$22,000
|
Mr. Gorev testified that, when receiving loan repayments, he
sometimes spent part of the money on himself, gave part of the money to Ms.
Cherenkova or kept part of the money in the safe at his home, and then, as
needed, would deposit some of the money into a bank account. The dates and amounts of the
alleged repayments and the Subject Deposits, as set out in Table 8, are
consistent with Mr. Gorev’s explanation as to the source of those deposits.
[47]
The information concerning the alleged
repayments set out in Table 8 is taken from the Paid-Back Document. As
explained in paragraphs 23 to 26 above, I question the reliability of that
document. Accordingly, the mere fact that the dates and the amounts of the
alleged repayments and the Subject Deposits set out in Table 8 are consistent
with Mr. Gorev’s explanation as to the source of those deposits is not
sufficient to prove on a balance of probabilities that the Subject Deposits were
not derived from taxable sources.
(7) Summary
[48]
Given the concerns and observations noted above
in respect of the deposits made in 2006 (particularly the inconsistencies and
confusion in the evidence pertaining to some of those deposits) and the
questionable reliability of the Paid-Back Document, I am of the view that
the evidence provided by Mr. Gorev and Mr. Kardachov was not adequately corroborated
and was not sufficient to satisfy Mr. Gorev’s evidentiary burden. Mr. Gorev’s
and Mr. Kardachov’s testimonies could possibly have been corroborated if:
a) Mr. Gorev had produced the day planner in which he kept a record of
the advances to, and the repayments by, Mr. Kardachov;
b) Mr. Kardachov had not destroyed and had produced the notes that he
compiled to keep track of the money borrowed by him from Mr. Gorev; and
c) Mr. Gorev had called Ms. Cherenkova, Mr. Sluzkiy and the other
borrowers to testify.
[49]
I acknowledge that some or all of the Subject
Deposits may possibly have been derived from the non-taxable sources described
by Mr. Gorev. In other words, I am not convinced that the Subject Deposits were
derived from taxable sources. However, Mr. Gorev has not produced reliable
evidence sufficient to demolish the assumptions of fact made by the Minister as
set out in paragraph 21 of the Reply, or to prove on a balance of probabilities
that the Subject Deposits were not derived from taxable sources.
F. Reassessment after Normal
Reassessment Period
[50]
Subparagraph 152(4)(a)(i) of the ITA
provides that the Minister may make a reassessment of tax, interest or
penalties for a taxation year after a taxpayer’s normal reassessment period in
respect of the year if the taxpayer has made a misrepresentation that is
attributable to neglect, carelessness or wilful default or has committed any
fraud in filing the tax return for that year. The burden is on the Crown to
prove that Mr. Gorev made a misrepresentation and that the
misrepresentation was attributable to neglect, carelessness, wilful default or
fraud.
In explaining this burden, the Federal Court of Appeal stated the following:
Although the
Minister has the benefit of the assumptions of fact underlying the
reassessment, he does not enjoy any similar advantage with regard to proving
the facts justifying a reassessment beyond the statutory period, or those facts
justifying the assessment of a penalty for the taxpayer’s misconduct in filing
his tax return. The Minister is undeniably required to adduce facts justifying
these exceptional measures.
Accordingly, Mr.
Gorev is not subject to an evidentiary burden requiring him to demolish the
assumptions of fact made by the Minister as set out in paragraph 22 of the
Reply.
[51]
During his cross-examination of Mr. Gorev,
counsel for the Crown established that Mr. Gorev did not include in his income
the amounts that were represented by the Subject Deposits. Accordingly, there is a discrepancy
between the amounts of Mr. Gorev’s income as reported in his tax returns for
2006, 2007 and 2008 and the amounts of his income computed by reference to the
Subject Deposits (as well as the reported amounts). In Yunus, Lamarre
ACJ stated:
… I consider that the discrepancy between the income determined
according to the cash flows and the income reported is sufficient to conclude
that there was misrepresentation.
Similarly, I am
of the view that the discrepancy between the income reported on Mr. Gorev’s tax
returns and the income determined by reference to the Subject Deposits (as well
as the tax returns) is sufficient for me to conclude that there was a
misrepresentation for the purposes of subparagraph 152(4)(a)(i) of the
ITA.
[52]
Turning to the question of whether the
misrepresentation was attributable to neglect or carelessness, the question to
ask is whether the care exercised by Mr. Gorev, in filing his tax returns for
2006, 2007 and 2008, was that of a wise and prudent person. There was relatively little
evidence presented as to whether the misrepresentation was attributable to
neglect or carelessness.
While the evidence was not precisely clear, it appears that Mr. Gorev used an
accountant to prepare his tax returns and that Ms. Cherenkova instructed and
provided documents to the accountant. Mr. Gorev stated in cross-examination
that Ms. Cherenkova made several mistakes in respect of the tax returns.
He also seemed to indicate that he signed the returns without first reviewing
them.
A wise and prudent person would review his or her tax return before signing it.
In other words, a failure to review a tax return before signing it may
constitute neglect or carelessness for the purposes of subparagraph 152(4)(a)(i)
of the ITA.
[53]
Accordingly, I find that the Crown has satisfied
the burden of proving that Mr. Gorev made a misrepresentation attributable to
neglect or carelessness, with the result that the Disputed Reassessments were properly
issued after Mr. Gorev’s normal reassessment periods in respect of the
taxation years in question.
G. Gross Negligence Penalties
[54]
Although I have found that the Minister had the
right to reassess Mr. Gorev for the 2006, 2007 and 2008 taxation years
after his normal reassessment periods for those years, that finding is not
determinative of whether the gross negligence penalties assessed against Mr.
Gorev may be sustained. As stated by Lamarre ACJ:
Moreover, the law
is well settled: the type of conduct by a taxpayer that justifies the Minister
reopening statute-barred years, under subparagraph 152(4)(a)(i) of the
ITA, does not necessarily justify the imposing of penalties under subsection
163(2) of the ITA. In fact, the provisions of subsection 163(2) are penal in
nature and call for a higher degree of culpability.
The above
statement is consistent with the observation by the Federal Court in Venne:
It will be noted
that for the penalty [under subsection 163(2)] to be applicable there appears
to be a higher degree of culpability required, involving either actual knowledge
or gross negligence, than is the case under subsection 152(4) for reopening
assessments more than four [now three] years old where mere negligence seems to
be sufficient.
[55]
The established jurisprudence makes it clear
that the burden imposed on the Minister by subsection 163(3) of the ITA
is meaningful. In Boileau Proulx J stated:
Indeed, the
Appellant was unable to contradict the basic elements of the net worth
assessments. However, in my view, this is not sufficient for discharging the
burden of proof which lies on the Minister. To decide otherwise would be to
remove any purpose to subsection 163(3) by reverting the Minister’s burden of
proof back onto the Appellant….
I am of the view
that in the present case, the Respondent did not adequately discharge his
burden of proof in that he relied almost exclusively on the fact that the
Appellant was unable to reverse the net worth assessments. In effect,
subsection 163(3) requires evidence of the intent or gross negligence of the
contravenor. This, in my view, should be done in a structured, clear and
convincing manner. I do not find that the evidence was adequate in this respect
and therefore, the penalties cannot be maintained.
As indicated in
the passage quoted from Lacroix in paragraph 50 above, the Minister does
not have the benefit of the assumptions of fact with regard to proving the
facts justifying the assessment of a penalty for misconduct in filing a tax
return.
Therefore, Mr. Gorev is not subject to an evidentiary burden requiring him to
demolish the assumptions of fact made by the Minister as set out in paragraph
23 of the Reply.
[56]
The jurisprudence also indicates that caution
should be exercised in approving the imposition of penalties under subsection
163(2):
A court must be
extremely cautious in sanctioning the imposition of penalties under subsection
163(2). Conduct that warrants reopening a statute-barred year does not
automatically justify a penalty and the routine imposition of penalties by the
Minister is to be discouraged. Conduct of the type contemplated in paragraph
152(4)(a)(i) may in some circumstances also be used as the basis of a
penalty under subsection 163(2), which involves the penalizing of conduct that
requires a higher degree reprehensibility. In such a case a court must, even in
applying a civil standard of proof, scrutinize the evidence with great care and
look for a higher degree of probability than would be expected where
allegations of a less serious nature are sought to be established. Moreover,
where a penalty is imposed under subsection 163(2) although a civil standard of
proof is required, if a taxpayer’s conduct is consistent with two viable and
reasonable hypotheses, one justifying the penalty and one not, the benefit of
the doubt must be given to the taxpayer and the penalty must be deleted. [footnotes omitted]
Thus, it is
necessary to determine whether there is a viable and reasonable hypothesis that
could lead me to give Mr. Gorev the benefit of the doubt.
[57]
The explanation put forward by Mr. Gorev is that
the Subject Deposits were derived from a combination of the following:
a) loan repayments made by Mr. Kardachov;
b) loan or debt repayments made by Mr. Sluzkiy and other individuals,
including some of the purchasers of some of the assets sold by Mr. Gorev while
he was still living in Russia;
c) cash (particularly US currency) left over when Mr. Gorev returned
from trips abroad;
d) remuneration earned by Ms. Cherenkova; and
e) cash kept by Mr. Gorev in the safe in his home (some or all of this
cash may have been derived from the first three sources listed above).
As indicated
above, Mr. Gorev did not provide sufficient evidence to prove on a balance of
probabilities that the Subject Deposits were not derived from taxable sources.
However, while Mr. Gorev failed to meet his burden of proof, I am not satisfied
that he earned unreported income.
The evidence was sufficient to persuade me that the explanation summarized in
subparagraphs a) through e) above is a viable and reasonable hypothesis
concerning the source of the Subject Deposits, which leads me, for the purposes
of subsection 163(2) of the ITA, to give Mr. Gorev the benefit of the
doubt.
[58]
The neglect or carelessness discussed in
paragraph 52 above for the purposes of subparagraph 152(4)(a)(i) of
the ITA does not rise to the level of gross negligence for the purposes of
subsection 163(2) of the ITA. Accordingly, the Crown has failed to meet its
burden of proof, and the penalties assessed against Mr. Gorev under subsection
163(2) of the ITA are not justified.
VI. CONCLUSION
[59]
These Appeals are disposed of as follows:
a) the Appeals in respect of the Disputed Reassessments (as set out in
the Notice of Reassessment issued on December 31, 2012 in respect of the 2007
taxation year and the Notices of Reassessment issued on June 12, 2014 in
respect of the 2006 and 2008 taxation years) are allowed, and the Disputed Reassessments
are referred back to the Minister for reconsideration and reassessment on the
basis that the penalties imposed under subsection 163(2) of the ITA are
not justified;
b) in all other respects the Disputed Reassessments are confirmed; and
c)
the Appeals in respect of the assessments under
Part XIII of the ITA (as set out in the Notices of Assessment issued on
December 5, 2012), in respect of the 2007 and 2008 taxation years, are allowed,
and those assessments are vacated.
[60]
As success has been divided, I am not making any
award as to costs.
Signed at Ottawa,
Canada, this 19th day of May 2017.
“Don R. Sommerfeldt”
Email this Content