Hackiman Lakha v. Minister of National Revenue, [1986] 1 CTC 2001

Rip, T.C.J.:—The appellant, Mrs. Hackiman Lakha, appeals against income tax assessments for 1977 and 1978 which were prepared as a result of the Minister of National Revenue, Taxation, (“Minister”) adding to her income the amounts of $11,077.75 and $25,803.81 respectively; the Minister determined Mrs. Lakha’s income for 1977 and 1978 by appraising the net worth of her assets as at July 31, 1976, 1977 and 1978. A schedule of increases in her net worth prepared by the Minister was attached to the respondent's reply to notice of appeal. Penalties were also assessed against Mrs. Lakha pursuant to subsection 163(2) of the Income Tax Act (“Act”).

Mrs. Lakha moved to Canada in late 1975 from the Republic of Guyana. For a short while she was in Toronto where her daughters were attending school but in January 1976 she took up residence in Montreal. Her husband remained in Guyana until recently. In Guyana she had carried on an exportimport business which she sold prior to leaving that country.

The agreement of sale and purchase of the business sold by her in Guyana was dated December 1, 1975 and was executed by Mrs. Lakha, as vendor, and one Gobind Hukmatrai Ailani, as purchaser, and was witnessed by two persons. The purchase price for the business was originally set down in the agreement at 65,000 Guyana dollars (“G$”)* [1] of which G$5,000 was for goodwill and G$60,000 was for stock in trade, “as per inventory hereto attached.” The amount was to be paid as to G$10,000 on December 10, 1975 and G$5,000 per month on the last day of the following next ten months, the last payment to be made on October 31, 1976.

In March 1976 Mrs. Lakha returned to Guyana and with the purchaser amended the purchase price of the stock in trade of the business from G$60,000 to G$120,000. The agreement was amended by the parties striking out reference to G$60,000 and marking in its place in both figures and writing G$120,000; the additional G$60,000 was “to be paid in the same manner” as the original G$60,000. The purchaser doubled the monthly payment to G$10,000. Mrs. Lakha testified the amended portions of the agreement were initiated by her and the purchaser at the end of March 1976 but she was not sure of the precise date. The increase in purchase price, according to Mrs. Lakha, was due to the fact that an inventory taken after December 1, 1975 showed the value of the stock in trade to be worth G$120,000 and not G$60,000.

Mrs. Lakha then returned to Montreal. The purchaser made payments in Guyana to Mr. Lakha who from time to time sent the proceeds of the sale as well as other funds to Mrs. Lakha. In the years under appeal Guyana had currency legislation restricting removal of funds from the country. Mr. Lakha testified it took him two and one-half years to send the proceeds of sale to Mrs. Lakha in Canada; money was sent through letters, in false books, in parcels, through students who were permitted to take out of the country an allowance to a maximum sum, and through relatives and friends going to Canada. Mr. Lakha stated he sent Mrs. Lakha approximately G$50,000 a year.

Mrs. Lakha testified that in August 1976 she purchased a convenience store in Montréal for $20,000,f [2] payable $7,000 in cash on execution of the agreement of purchase and sale, $3,000 on August 30,1976 and the balance over three years with interest on the outstanding balance at the rate of 12 per cent per annum. Mrs. Lakha said she paid $10,000 to the vendor of the convenience store in August 1976. Mrs. Lakha testified her only source of income in Canada was from the convenience store. Mrs. Lakha testified she had $7,000 with her on her arrival in Canada which she applied to the acquisition of the business.

The fiscal year end of the business is July 31.

Mrs. Lakha also stated that while in Guyana she had made loans totalling approximately $14,000* [3] to nephews who had repaid her in Canadian currency in the years under appeal since at the time of payment they resided in Canada; she said she also held funds in trust for a family friend who gave her cash to hold when this friend, who was studying in Montreal, returned to Guyana; on his return from Guyana to Canada Mrs. Lakha repaid this person by cheque. She stated she had no record of repayments received from her nephews.

In 1978 Mrs. Lakha purchased a home in a Montreal suburb for $40,000 (including legal costs); the purchase price was made by payment of $4,000 in cash to the vendor on closing and by an assumption of a mortgage of $34,340. She also purchased an automobile, which she said was used for the business since she herself did not drive, in 1978; the purchase price for the car was $6,831 and was financed by General Motors Acceptance Corporation (“GMAC”). Revenue Canada allocated 75 per cent of the automobile to personal use and 25 per cent to business.

Revenue Canada prepared a list showing stock in trade used by Mrs. Lakha personally and cheques drawn from the business bank account for Mrs. Lakha’s personal use in the amounts of $14,628.95 in 1977 and $22,577.78 in 1978. The list shows payments to GMAC, for house rent, telephone, electricity, cablevision, life insurance, cash drawings, hospitals and retail outlets and also cheques through personal accounts; an amount of $1,170 was also paid to one Pooran Jaiharan. Revenue Canada also determined from a review of Mrs. Lakha’s books of business that persons other than the nephews referred to above owed her $10,400; the nephews were indebted to her only in the amounts of $600 and $424 respectively according to the taxing authorities.

Mrs. Lakha herself was indebted to Household Finance Corporation in the amount of $415 on July 31, 1977 and $1,667.93 in July 1978.

Mr. R. Tremblay, an auditor for Revenue Canada, testified he audited Mrs. Lakha’s affairs in 1979 and prepared the schedule referred to earlier. He obtained a list of Mrs. Lakha’s debtors and traced various cheques she issued from cash or cheques she may have received. In his view the $4,000 paid on closing for the home was from a $3,500 cheque drawn on her bank account, the source of which, she advised him, was from Guyana. He was unable to trace the $500 difference. Mr. Tremblay said he visited Mrs. Lakha's place of business and in his view the automobile was used only occasionally for delivery made to customers and for pick-up of merchandise; consequently he allocated only 25 per cent of the use of the car to business.

Mr. Tremblay audited Mrs. Lakha’s affairs only to July 31, 1978. He acknowledged that Mrs. Lakha had money in Guyana but he could not determine the quantum. Also, he was not prepared to accept the amended purchase price in the agreement of sale and purchase since it was not an “official document” but was written in the form of a private agreement. Further, in determining the sum of money Mrs. Lakha received from Guyana in the years under appeal he reduced the amount of G$65,000 for the sale of her business by 25 per cent because he was of the view the persons carrying the money from Guyana to Canada were receiving a fee for their services from Mrs. Lakha. Accordingly, Mr. Tremblay deducted $6,275.75 from his determination of the aggregate Mrs. Lakha’s increase in capital and her personal expenses during the twelve months ending on July 31, 1977 and $14,218.75 for the 12 months ending on July 31, 1978.

As far as cheques drawn from the business account, but used personally, were concerned, Mrs. Lakha testified that $2,000 was a cheque paid to A.E. Lepage as a deposit toward the purchase of a property; the proposed purchase was aborted and the money was returned, she said. Because Mr. Tremblay only examined her affairs to the end of July 1978 he could not say whether the cheque was in fact returned after that date. Also in 1978 a cheque was paid to a firm of notaries for $500; this too, said Mrs. Lakha, was returned.

Mr. Manahur Prasab testified on behalf of Mrs. Lakha as well. Mr. Prasab is also from Guyana and during the years under appeal was a commerce student at Concordia University in Montreal. He lived in Montreal with Mrs. Lakha and her daughters and worked in the store and took care of the books of the business. He stated that $2,500 sent to him in 1978 was really money belonging to Mrs. Lakha; he had not used his full student allowance and therefore was in a position to help Mr. Lakha send money to his wife.

After the evidence of Mr. Tremblay, Mr. Prasab was recalled. He testified Mrs. Lakha contributed capital to the business and that was reflected in the general ledger He said her drawings set out in the capital account include personal expenses absorbed by the business. For the period ending July 31, 1977, Mrs. Lakha took stock in trade from the business for personal use in the amount of $13,148.28 and for the fiscal period ending July 31, 1978, $17,606.65. The capital account ledger was produced in evidence.

Sergeant G. Chouinard of the Royal Canadian Mounted Police (“R.C.M.P.”) was also called to testify on behalf of Mrs. Lakha. In 1978 Sgt. Chouinard worked in the counterfeit section of the R.C.M.P. In that year the Department of National Revenue, Customs and Excise, (“Canada Customs”) reported to the police force that $2,000 in U.S. funds having origin outside of Canada, was found in a book for delivery to Mrs. Lakha. Thinking the money may be counterfeit, Canada Customs requested the police force to verify if the money was authentic or not. The money was found to be authentic and was returned to Mrs. Lakha.

Mrs. Lakha also produced copies of a series of bank drafts drawn on the Royal Bank of Canada in Guyana payable to her in Canadian currency in 1977 and 1978 as well as a similar bank draft from Barclays Bank International Limited. Copies of notices of deposits of funds from other banks were also produced. The aggregate of the amounts was less than $10,000. However evidence of both Mr. and Mrs. Lakha was that the cash was also being sent to her, and this was corroborated by Sgt. Chouinard.

As previously mentioned, in making a calculation of discrepancy in income reported and income purportedly received by Mrs. Lakha, Mr. Tremblay deducted $6,275.75 and $14,218.75, the aggregate of the increases in her capital and personal expenses during the twelve-month periods July 31, 1977 and July 31, 1978 respectively, because he was of the view the amended agreement of sale and purchase was not in proper form and the amendment ought to be ignored. Counsel for the respondent submitted that Mr. Tremblay's position was correct and the Court should ignore any amendment to the agreement.

I cannot agree with counsel. A private writing avails as a private writing if it has been signed by all the parties (Quebec Civil Code, Article 1221). Mrs. Lakha testified the purchase price was amended and the reason for the amendment. She stated the amended portions of the agreement were initialed by the two parties to the agreement. Her reason for the amendment is plausible and her evidence that both she and Mr. Ailani initialed the changes was not seriously questioned during the trial. If the respondent is of the view the agreement was altered without Mr. Ailani’s knowledge or consent there is recourse he can take before another court. But there was no suggestion during the trial of any misconduct by Mrs. Lakha; the Minister's prime concern was that the amendment, at least, was not an authentic writing and therefore ought not to be considered by the Court. In my view a private writing avails as a valid writing in these circumstances; the amendment was binding upon the parties and the respondent cannot deny its existence.

Mr. Lakha, as well as his wife, denied any fee was paid to couriers taking money out of Guyana. The assumption by Mr. Tremblay that a fee was paid in these circumstances was not unreasonable, but the evidence demonstrated the opposite. Therefore no reduction ought to have been made by Mr. Tremblay in respect of the money received from Guyana. Also he ought to have considered the agreement, as amended.

On the evidence of Sgt. Chouinard the inference is clear that not only bank drafts but also cash was sent to Mrs. Lakha from Guyana. However the amount of cash sent to her in Canada is uncertain. But is this really relevant? The real question is not how much money was sent to Mrs. Lakha in Canada, but how much money she received in Guyana during the years under appeal. In preparing a net worth statement one must consider Mrs. Lakha’s world assets and liabilities, not only her Canadian assets and liabilities. As at August 1, 1976 Mrs. Lakha had an asset, an amount receivable under the terms of the amended contract of sale and purchase of her business in Guyana. Also Mr. Lakha testified that he received money for the account of his wife and because of foreign exchange restrictions it took him two and one-half years to send the proceeds of sale to his wife in Canada. In all, he said, he sent her approximately G$50,000 per year.

Counsel for Mrs. Lakha has submitted that in 1977 Mrs. Lakha received not $6,275.75, as stated by the Minister, but $16,090.92, and in 1978 the amount received by Mrs. Lakha, he submits, was $36,458.33; and that is $9,815.92 more than acknowledged by the Minister for 1977 and $22,239.58 more than acknowledged by the Minister for 1978. On the basis of the evidence I must conclude that counsel's conclusion is reasonable and these amounts were forwarded to her as a result of payments reducing the amount receivable under the amended contract of sale and purchase.

In respect of the automobile, Mrs. Lakha has not satisfied me that the Minister's allocation is wrong. There was no evidence concerning the number of miles driven or costs. The evidence concerning loans to her nephews was also incomplete; Mrs. Lakha admitted she kept no written records in respect of payments to her nephews or their repayments.

Mr. Tremblay stated he did not verify Mrs. Lakha's records after July 31, 1978 because he was not concerned with events subsequent to that date. Mrs. Lakha testified that sometime in 1978 she attended at the offices of A.E. Lepage to collect the cheque in the amount of $2,000. Also, a cheque from her notary in the amount of $500 was returned to her in 1978. But Mrs. Lakha could not say when these cheques were returned. Her counsel suggested it was after July 31, 1978 and thus Mr. Tremblay could not verify the return. No independent evidence was produced to indicate the date the cheques were returned although I would suggest such evidence would not have been difficult for Mrs. Lakha to obtain. In the circumstances Mrs. Lakha has not satisfied her onus.

The capital account ledger of Mrs. Lakha for 1976 and 1977 indicates capital contribution and drawings by Mrs. Lakha. In the 1976 fiscal year she withdrew $13,148.28 and in the 1977 fiscal year she withdrew $17,606.65. Mr. Prasab testified the drawings include amounts she took out of the business for personal use of stock. Mr. Prasab was not cross-examined on this evidence. Personal use of stock from the business was determined by the Minister, after review of Mrs. Lakha’s records, to be $6,091.80 in 1977 and $6,250 in 1978. These amounts should therefore be deducted from personal expenses in the Minister's calculation of discrepancy of income.

In assessing a penalty pursuant to subsection 163(2) of the Act the Minister must establish that portion of the taxpayer's understatement of income in the year that is reasonably attributable to a false statement or omission. In the absence of the exact amount of the understatement of income it is impossible for the Court to determine whether any particular penalty was in an amount authorized by subsection 163(2). See Elchuk v. M.N.R., [1970] C.T.C. 326 at 329; 70 D.T.C. 6235 at 6237. Where, in an appeal, a penalty assessed by the Minister under subsection 163(2) is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister (subsection 163(3)).

Mrs. Lakha has shown the Minister has erred in calculating her income for the years under appeal. However the Minister has not shown the amount of understatement of income by Mrs. Lakha or that any such understatement is reasonably attributable to a false statement or omission in any of Mrs. Lakha's income tax returns. The Court is therefore unable to determine whether any penalty was an amount authorized by subsection 163(2).

The appeal will therefore be allowed and the assessments referred back to the Minister for reconsideration and reassessment in accordance with these reasons. Mrs. Lakha will be entitled to her party and party costs.

Appeal allowed.