Souhiel Saikely v. Minister of National Revenue, [1993] 1 CTC 2673, 93 DTC 397

Hamlyn, T.C.CJ. (orally):—In the matter of Souhiel Saikely and the Minister of National Revenue, this is an appeal filed on November 7, 1988, with respect of the 1981, 1982 and 1983 taxation years.

From the reply that was filed to notice of appeal by the respondent, paragraph 4:

4. In his returns of income for the 1981, 1982 and 1983 taxation years, the appellant declared total income as follows:

			Total
Taxation	Family	Other	Income
Year	Allowance	Income	Declared
1981	$ 862.56	$35,000	$35,862.56
1982	$1,291.68	$30,000	$31,291.68
1983	$1,369.00	$35,000	$36,369.00

Paragraph 5:

5. In reassessing the appellant for his 1981, 1982 and 1983 taxation years, the Minister of National Revenue increased the appellant's total income by the following amounts:

Taxation Year	Increase in Total Income
1981	$ 55,410.66
1982	$ 39,916.49
1983	$354,505.55
TOTAL 1981-1983	$449,832.70

The main issue is whether the reassessments made by the Minister for the 1981, 1982 and 1983 taxation years, on the basis of the net worth method, adding to the computation of his income already reported the sums of $55,410.66, $39,916.49 and $354,505.55, respectively, are justified.

The Court must also decide whether or not the penalties are justified.

The Minister's position is that in reassessing the appellant for his 1981, 1982 and 1983 taxation years, the Minister increased the appellant's total income on the basis of the net worth assessed. The Minister argues that the appellant did not include all the income received by him and that he tried to understate his income by $449,832.70.

The Minister argues that he is not bound by a return or information supplied by or on behalf of the appellant, in accordance with subsection 152(7) of the Act, and he therefore submits that the net worth used in determining the appellant's income accurately determined the appellant's income for the said taxation years.

The Minister further submits that the appellant knowingly or under circumstances amounting to gross negligence, assented to or acquiesced in the making of a statement or omission in his income tax returns filed for the 1981, 1982 and 1983 taxation years. As a consequence, the Minister levied the following penalties against the appellant under paragraph 163(2) of the Act:

The taxpayer's position

The taxpayer submits that he was engaged in a business of real estate development and horse racing, that is from his pleadings. The taxpayer asserted that the reassessments made by the Minister on a net worth basis, were wrong for two reasons: that the Minister failed to consider some substantial cash losses incurred from his horse racing business, and that, the Minister failed to consider a loan of $250,000, — at trial, this amount became $300,000 — received from a Lebanon resident, Mr. Nazim Ayoub, by the appellant for the purpose of his real estate and horse racing business.

The relevant legislation

Subsection 152(7) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") provides:

The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.

Subsection 163(3) of the Income Tax Act provides:

The burden of proof in respect of penalties. Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

Issues

The points in issue are as follows:

Has the appellant discharged the burden which lies upon him, that of showing that the inclusion of the amount of $449,832.70 in his income was unjustified ?

Has the Minister discharged his burden of proof which lies upon him, that of showing that the penalties in the amount of $37,626.83 should be upheld?

And has it been proven that there were “ circumstances amounting to gross negligence"?

The jurisprudence

In relation to the burden of proof and the onus:

In an appeal against an assessment for tax assessed on a net worth basis, the onus lies on the appellant and he must establish affirmatively that his taxable income was not that for each of the taxation years for which he is being assessed. The taxpayer must establish his income or prove that even on a proper and complete net worth basis, the assessments were wrong.

A taxpayer who disagrees with a net worth assessment may appeal the assessment however notwithstanding that the assessed tax may have been calculated on the basis of estimated income, the taxpayer still has the onus of demolishing the basic fact on which the taxation rested. If the taxpayer fails to discharge the onus to rebut the net worth assessment, the assessment remains in force.

From Morrow v. M.N.R., [1992] 2 C.T.C. 110, 92 D.T.C. 6380, the Federal Court of Appeal reviews the effect of subsection 152(7) at page 112 (D.T.C. 6381):

The effect of the section is that when the Minister makes an assessment under the section there is a presumption of validity in its favour [sic] which is not rebuttable by proof that its amount is different from that shown on the taxpayer's return or information supplied by or for him or that no return has been made. The power is in the interests of adequate administration of the Act. It extends to the case of every taxpayer and is conferred so that there shall be no gap in the Minister's administrative power of assessment of every person and the determination of the amount of such assessment so that every one may be made subject to liability for the amount of tax he ought to pay and no one be able to confine the amount of his liability to that which he has himself stated or supplied or to escape liability by not making a return.

In relation to penalties and the onus

On the other hand, in order to maintain the penalties imposed, the Minister must show that the appellant has committed gross negligence in filing his tax returns incorrectly.

The obligation results from section 163 of the Income Tax Act.

Subsection 163(3) imposes on the Minister the onus of establishing the facts justifying the assessment of the penalty under subsection 163(1) or (2). The onus on the Minister in respect of the penalty should be no different from the onus placed on a taxpayer who appeals from an assessment of tax. Consequently, when a taxpayer appeals an assessment of penalty, the Minister must establish, on a balance of probabilities, the facts justifying the assessment. A fact which must be established is the understatement of income for the year since the amount of additional tax on which the penalty is calculated can only be determined once the understatement of the income for the year is known.

Significant evidence

In terms of the evidence before the Court, I will review what I consider to be significant evidence.

The appellant, Mr. Saikely, was his own chief witness. He acknowledged the financial schedules as constructed by the respondent annexed to the reply of the respondent were substantially correct, save and except the income conclusion. These schedules are now incorporated and I make them part of this judgment and are to be so inserted in any reproduction of this judgment at this point. The appellant’s major focus was to explain the sources of the moneys that he contended were not income. In 1981, he said that the discrepancy in funds came from his in-laws in Lebanon, and in 1982, he said the discrepancy in funds came from his in-laws in Lebanon. But for 1983, his explanation was that the discrepancies arose from two sources: his in-laws and Mr. Nazim Ayoub. Those two groups, his in-laws and Mr. Nazim Ayoub, resided at that time in Lebanon.

In relation to his in-laws, he said he received sums of money from time to time but he could not be exact or precise as to how much, when or how received.

In relation to Mr. Ayoub, he said he had an agreement that Mr. Ayoub would provide the sums and these sums would be invested in real estate and horse racing in Canada and all profits would be divided equally between himself and Mr. Ayoub. He further stated that the funds from Mr. Ayoub came from a Swiss bank account.

To support his position, Mr. Saikely filed a purported affidavit in Arabic supposedly from Mr. Ayoub with an alleged translation annexed. There was evidence tendered by a Mr. Koury who said he saw Mr. Ayoub sign the purported affidavit. However, this document was challenged by the Crown counsel. This document dated in 1988 without the presence of the deponent at this hearing as presented has little or no weight in terms of evidentiary value.

The appellant also filed with the Court another document dated in the late eighties between two companies apparently controlled by the appellant and the same Mr. Ayoub that reflected a relationship between these companies and Mr. Ayoub. However, this document did not specifically relate to the taxpayer as such before the Court nor did the evidence reveal that it related to the tax years in question, nor to the specific alleged transaction under review.

The taxpayer complained throughout that his lack of details was from a bad memory and the time lapse between the years in question and now. However the evidence clearly reveals that the tax issues arose as early as 1985 and that there were meetings between himself, his advisors and Revenue Canada beginning in 1986. Moreover, from the date of the appeal, November 8, 1988, to the date of trial, August 19, 1992, considerable time passed to allow the appellant to prepare his appeal, yet he appeared at trial ill prepared in terms of detail, facts, records and documentation.

The taxpayer was able to reveal in some detail his horse racing activities but when pressed for specific dates or sums, he once again was unable to be precise; save and except certain horse maintenance expenditures that were accepted by Revenue Canada in the reassessments before the Court.

The appellant also presented to the Court a statement of adjustments, dated February 1991, in relation to a particular real estate transaction in the city of Ottawa. The transaction involved a purchaser and certain numbered companies apparently controlled by the appellant. This transaction involved over $2,000,000 and certain sums on closing were sent to a Swiss Bank. It was alleged by the appellant that this was related to his activities with Mr. Ayoub in 1983; however the documentation does not confirm this. The case on this point, at the hearing of this matter, for the appellant was reopened on August 20, 1992 prior to counsel’s submissions and the appellant tendered a copy of a letter to the Union Bank of Switzerland. In that letter, the appellant's solicitor enclosed a cheque for $316,000 to be deposited to the credit of the account of Nazim Ayoub. On direct questioning by the Court, the appellant stated these funds were paid to Mr. Nazim Ayoub as a return for part of the money advanced to Mr. Saikely over the years, but once again, without any specificity.

The in-laws of Mr. Saikely also gave evidence and they stated they were in a financial position to assist their daughter, that is Mr. Saikely's wife, and that they did so. Mr. Saikely's father-in-law stated he was a postman in Lebanon and that during the relevant period, he had an income of $10,000 per month. He also indicated he was involved in his father’s roofing business and had a substantial inheritance from an uncle who lived most of his life in Brazil. In the absence of further evidence about the post office wages in Lebanon, the evidence about the postman wages is somewhat difficult to accept.

Both the father and the mother-in-law confirmed that they loaned or lent to Mrs. Saikely $184,785 in 1983, and this was accepted by Revenue Canada as a loan in the net worth assessment of Mr. Saikely. Beyond that however, other advances or loans to the daughter were not precise or clear and what sums reached Mr. Saikely is also unclear. Mr. Saikely’s father-in-law stated he gave his daughter over several years $72,000 without any specificity as to when or how. The mother-in-law of Mr. Saikely stated she and her husband gave their daughter $104,000 without any specificity, save that one amount was $14,000 and an other amount was $30,000. No details, once again, however as to when or how.

An essential witness to this appeal, it is clear, in relation to the evidence would be Mrs. Mona Saikely, the wife of the appellant and the daughter of Mr. Saikelys in-laws. She, however, did not give evidence.

The evaluation of the evidence presented by the appellant and an analysis

In his evidence, the witness said that he had a bad memory when it came to sums expended, sums received, and how sums were received and when sums were received.

He could not identify the sources of his income that were declared on his respective tax returns, nor could he advise the Court as to why the figures were in round numbers for each of the years in question. He asserted in his evidence that he was questioned at customs about the sum of $50,000 he brought in to the country, Canada, from either Switzerland or Lebanon. He was unsure where he was coming from at that time. He also asserted he had to surrender the moneys and pay tax and then recover the moneys at a later date. While this may have well happened, the witness could not advise as to dates or be precise in any exact details. He was unable to distinguish between moneys allegedly advanced by his in-laws as gifts or loans. He stated that he had been involved in several businesses throughout the years, including an ice cream shop and fruit market; yet during the years in question, he asserted that he was not engaged in business other than horse racing. In terms of racing, he could not advise if the horse racing activities were operated by himself, or operated by his wife, or operated by an incorporated company or any combination thereof. Apparently during the audit, the sums expended from Switzerland were not detailed or identified clearly. However at trial, he indicated the larger sums were used for horse purposes and the other sums may have been used for gambling purposes. Once again, however, the evidence was without precision, records or acceptable documentation.

When asked why Mr. Ayoub was not before the Court, Mr. Saikely said he could not afford to go to Lebanon and bring him back to Canada to court. When asked why was it necessary for him to bring him back, he said he would have to talk to him first. Notwithstanding the amounts involved and the acknowledgement from the appellant through the pleadings, as well as the matters leading up to the setting of a prior trial date as to the importance of Mr. Ayoub's direct evidence, he was essential but he was not presented to the Court and did not give evidence.

And as I've indicated and was previously reviewed, Mrs. Saikely’s evidence was needed, among other things, to show the connection between the moneys from her parents and her husband.

The taxpayer may attack the assessments in various ways. A taxpayer may prove that some of his increase arose from non-taxable receipts, such as inheritances or gambling; that his net worth at the beginning of the period was undervalued or that his assets at the end were overvalued; that liabilities existing at the end were omitted or undervalued; that the money had been borrowed or that income losses were greater than assessed. Whatever is alleged by the taxpayer must be proved by him; a mere statement is not enough. Moreover, cogent evidence is required to disprove a net worth assessment.

The lack of precision, the lack of connection, the lack of records, the lack of documentation, the absence of essential witnesses and, quite frankly, the general evasiveness of the appellant's testimony leads this Court to the conclusion that the appellant has not discharged the onus placed upon him.

In relation to penalties

The respondent levied penalties against the appellant for the 1981, 1982 and 1983 taxation years and alleged that the appellant knowingly or under circumstances amounting to gross negligence assented to or acquiesced in the making of a statement or omission in his income tax returns filed for the 1981, 1982 and 1983 taxation years resulting in less tax being paid than should have been paid. The burden is on the respondent to establish that the facts justify the assessment of a penalty.

In this case, the respondent's actions were explained by two Revenue Canada officials. These officials stated that the records and books of account of the appellant were not adequate to do an audit. They asked for information but little was forthcoming. They further stated that the returns of the appellant appeared to be estimated amounts where income was reported in round numbers. They requested detail and the basis behind the taxpayers returns but nothing was forthcoming. As such, they did a net worth assessment. From the assessment, they found that the appellant appeared to live far beyond his means of reported income, that is his basic living expenses far exceeded his income, and that in other taxation years, the appellant was involved in penalty impositions and for the taxation years in question, penalties were imposed because of late filing.

Counsel for the appellant has suggested to the Court that the Minister had an onus that was not carried out before the Court. Recently, in Kerr v. Canada, [1989] 2 C.T.C. 112, 89 D.T.C. 5348 (F.C.T.D.), Martin, J. stated in relation to a penalty issue at page 121 (D.T.C. 5354):

It is sufficient that the Minister establishes that there has been gross negligence or circumstances amounting to gross negligence in making a false statement in an income tax return.

I conclude that the respondent has discharged the onus to justify the penalties.

The conclusion

The totality of the evidence before the Court is that the appellant has not satisfied the Court that the net worth assessment was wrong. With the evi- dence presented, I do not accept his explanation about the discrepancies. In relation to the penalties, the Minister has shown that there was a clear liability for tax that was not declared and that the appellant omitted to report income as required under the Act, that the appellant was fully aware of the omission and that his income that was stated was an estimate only and could not be substantiated. Moreover, the failure to keep books and records in relation to the alleged source of income from horse racing and the failure to report the discrepancies as identified in the net worth assessment leads this Court to the conclusion that the omissions of the appellant are attributed to gross negligence by the appellant.

Ancillary submissions by the appellant given at the end of trial

After the evidence was in, the appellant's counsel submitted that the Court had no jurisdiction to hear the appeal as the reassessments were made more than four years after the assessments. No evidence was tendered before the Court as to the dates of the original assessments. While counsel did admit he did not know when the original assessments were, he stated that the Court could assume that the reassessments were after the time period. The Court cannot agree with this submission.

The appellant has the burden of proof to adduce the evidence to justify the appeal. No evidence was tendered on this point and nothing was pled in relation to this point, thus the appellant cannot succeed on this point.

Also the appellant referred to reassessments as being in error in each notice of assessment, save the last notice of reassessment for the 1983 taxation year. In the reassessments that are referred to, the revised taxable income in the box provided states "as declared”, whereas the annexed 17W form to the notice of assessment referred to the revised taxable income as the sum ascertained after the net worth discrepancies, among other things, was taken into account. Each notice of reassessment clearly delineated the tax owing as a result of the reassessment and each notice of reassessment clearly incorporated the T7W form annexed. There is no ambiguity in the notice of reassessment and no ambiguity as to the result of the reassessment.

Subsection 152(8) of the Income Tax Act reads:

An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission therein or in any proceeding under this Act relating thereto.

In Stephens Estate v. The Queen, [1984] C.T.C. 111, 84 D.T.C. 6114 (F.C.T.D.); [1987] 1 C.T.C. 88, 87 D.T.C. 5024 (F.C.A.), and in Attorney General of Canada v. Théorêt (1988), 99 N.R. 81, 61 D.L.R. (4th) 289, the Federal Court of Appeal of Canada has distinguished between substantial errors and minimal errors in the form of the notice of reassessment.

Judge Rip in Leung v. M.N.R., [1991] 2 C.T.C. 2268, 91 D.T.C. 1020, at page 2277 (D.T.C. 1027), considered what must appear in a notice of reassessment and I quote:

. . .when a taxpayer receives a notice of assessment he is entitled to know the amount assessed, under what legislation he is being assessed and the reason for the assessment. . . .

In the case before the Court, all these essentials matters are ascertainable from the notice of reassessment and the incorporated accompanying documentation. As such, the appellant cannot succeed on this last point.

The decision in this matter is that the appeals for all the taxation years in question are dismissed.

Thank you.

Appeal dismissed.