Irving Kott v. Minister of National Revenue, [1984] CTC 2936

St-Onge, TCJ [TRANSLATION OF ORAL JUDGMENT]:—The appeal of Mr Irving Kott was heard in the city of Montréal, Quebec on April 3, 1984.

It must be determined whether the appellant repaid moneys loaned to him by two of his companies during the 1973 and 1974 taxation years.

In assessing the appellant, the respondent relied on the facts stated in subparagraphs 3(a) to (h) of the reply to the notice of appeal, which read as follows:

3. In assessing the appellant for his 1973 and 1974 taxation years, the respondent Minister of National Revenue relied, inter alia, on the following facts:

(a) The appellant filed no tax returns for the 1973 and 1974 taxation years;

(b) During these years the appellant was the majority shareholder and director of Onyx Investments Ltd and Ingriv Investments Ltd;

(c) Onyx Investments Inc granted the appellant loans totaling $115,755.12 and $40,818.58 during 1973 and 1974 respectively;

(d) Ingriv Investments Ltd granted the appellant loans totalling $240,322.38 during 1974;

(e) The appellant has not shown that these amounts were repaid within the time provided for in section 15(2)(b) of the Income Tax Act, SC 1970-71-72, c 63, as amended;

(f) The loans mentioned in subparagraphs (c) and (d) were not covered by the exceptions provided for in section 15(2)(a) of the Income Tax Act;

(g) The appellant has provided no acceptable evidence of losses he claims to have incurred in Venezuela and Halifax;

(h) Moreover, the appellant has not established the nature and purpose of the amounts he allegedly invested in these places and he has not established the amount and nature of his loss, if any.

In paragraphs 5 to 12 inclusive of the notice of appeal the appellant submitted that he made the following repayments:

5. For the 1973 taxation year the respondent refused to allow the sum of $140,000.00 paid by the appellant in satisfaction of the loans from Onyx Investments Ltd. This amount was paid for and on behalf of Onyx to the following: Centennial Investments Ltd $120,000.00 and International Banking Trust $20,000.00. This amount was paid by the appellant for and on behalf of Onyx Investments Ltd.

6. The respondent further refused to allow the payment by the appellant of a sum of $12,500.00 to Continental Financial Corporation on behalf of Onyx Investments Ltd.

7. The amounts mentioned in paragraphs 6 and 7 above should be deducted from the amount of the appellant’s loan from Onyx. Therefore, the amount to be taxed in the appellant’s hands should be reduced by the amount of the repayments made by the appellant during the year.

8. For the 1974 taxation year the respondent refused to allow the sum of $197,326.75 as a business loss. This sum represents the appellant’s investment in International Portfolio Management, a company intending to establish a brokers’ office in Venezuela. Since the appellant was in the same kind of business and earned his income from carrying on business as a broker, the said losses should be treated as business losses and deductible as such from his income.

9. The respondent refused to allow $240,000.00 to be credited to the appellant’s loan account with Ingriv Investments Ltd. This sum of $240,000.00 represents loans made by the appellant to Cinevision on behalf of Ingriv Investments.

10. The respondent further refused to credit the appellant’s loan account with Onyx Investments Ltd with two deposits to the Onyx Investments account, one dated March 27, 1974 for $30,000 and the other dated March 25, 1974 for $50,000.

11. The respondent further refused to allow the appellant credit for three payments of $6,250.00 for a total of $18,750.00 by the appellant to Continental Financing Corporation. This sum represents payment of three months’ interest on behalf of Onyx Investments Ltd and the appellant’s loan account should be credited with these amounts.

12. The appellant submits further that the respondent should allow a business loss of $1,108,000.00 for 1974. This loss represents loans made by the appellant to L J Forget & Co Inc, which made an assignment of its property in 1974. The said amounts were loaned when the appellant was carrying on a business. The appellant was not able to claim this loss in 1974 because it was not legally recognized until the judgment of François Auclair JSC, Bankruptcy Division, dated April 10, 1980.

During the hearing the appellant dealt with only four items:

1. A repayment of $140,000;

2. The loss of $97,326.75;

3. The repayment of $80,000 made by his wife;

4. The loss of $1,000,000.

He declined to adduce evidence concerning the other items.

The appellant called seven witnesses:

1. Mr Denis Duquette, an officer of the Royal Canadian Mounted Police;

2. Mr Ross McPhee, a chartered accountant and Vice-President of L J Forget & Co Inc;

3. Mr Josuah Millman, a chartered accountant who has acted for the appellant since 1974;

4. Mrs Rhoda Kott, the appellant’s wife;

5. Mr François Attendu, auditor at the Montreal Stock Exchange since 1977;

6. Mr Irving Kott, the appellant himself;

7. Mr Roger Maisonneuve, representing Raymond,Chabot, Fafard, Gagnon Inc, Trustees in Bankruptcy.

Mr Duquette explained that Mr Millman had on seven or eight occasions consulted documents of the appellant that had been seized in April 1973. He was able to consult them and obtain photocopies, which occasionally took some time, but in the last year no request of this kind had been made by the appellant or his accountant.

Mr Ross McPhee testified that Mr Kott was the most interesting client of L J Forget & Co Inc, that he had persuaded up to ten companies to do business with this company and that the said company specialized at first primarily as a stockbroker in penny stocks.

In 1973 they wished to change the name of L J Forget & Co Inc but certain influential persons prevented this. It was claimed that the company did not have the necessary capital to continue operations and that it was dealing in shares, the purchase and sale of which were not recommended, or what are referred to in English as “hot stocks’’.

In 1973 the witness, the appellant and other persons were charged with issuing or conspiring to issue a false prospectus. The company had first been required to provide capital in the following way: In December 1972 a discount of $150,000 by means of high-risk unsecured loans. In January 1973 an injection of capital in an amount of $300,000 by the same means was demanded. In February 1973 Michel Bélanger of the Montreal Stock Exchange demanded $1,000,000. At that time the witness turned to the appellant, who personally loaned him the said amount of $1,000,000 by means of a high-risk unsecured loan, which sum was paid to L J Forget & Co Inc.

Mr Ross McPhee became the principal creditor for an amount in excess of $2,000,000.

In April 1973 there was a further demand that the capital of L J Forget & Co Inc be increased by $5,000,000 or its licence would be suspended. This last demand led to the company’s bankruptcy and the witness never repaid the loan he obtained from the appellant. Mr Ross McPhee filed a letter addressed to the appellant dated April 4, 1973, acknowledging that he owed him $1,000,000.

All the creditors of L J Forget & Co Inc were repaid in full, except for Mr McPhee, who received $188,000 on a debt of $2,000,065, and the appellant, who received $129,000.

Mr Millman became the appellant’s accountant in 1974, when the appellant was assessed by the Minister of National Revenue. He testified that the appellant had no documents since they had all been seized by the Royal Canadian Mounted Police, and that it was very difficult to prepare financial statements.

Mrs Kott filed two cheques signed by her at her husband’s request:

1. A cheque for $500,000 made out to Onyx Investments Ltd;

2. A cheque for $30,000 made out to the appellant.

According to her testimony, she never borrowed from or made loans to Onyx Investments Ltd. She was the President of Onyx Securities Ltd, together with which she was convicted on several occasions of not providing the Minister of National Revenue on request with tax returns, financial statements, balance sheets and capital reconciliations.

Mrs Kott has seven convictions and six cases pending. Her company, Onyx Securities Ltd, has seven convictions and seven cases pending.

Mr Francois Attendu merely filed the instruments relating to a subordinated loan in force at the Montreal Stock Exchange up to January 1, 1974.

Mr Kott is a promoter of private companies wishing to expand, go public and accordingly obtain the capital necessary for this purpose. He is paid by receiving warrants or shares in the said companies. He negotiated deals in this way for some seven or eight companies for a total of $19,000,000. He had confidence in L J Forget & Co Inc and had he not loaned it $1,000,000, his own position would have been in jeopardy.

When the appellant filed his claim in bankruptcy for $1,108,360, it was refused by the trustee, who believed that Mr McPhee was the creditor. As a result of court proceedings, however, the appellant was declared to be a creditor in the said bankruptcy and received the sum of $129,000. He corroborated his wife’s testimony concerning the two cheques she had given him.

As regards the loss of $97,326.75 claimed by him for his business in Venezuela, he explained that he had spent $100,000 to incorporate International Portfolio Management and obtain a lease and telephone service, although he did not file any vouchers to support these expenditures.

Because of the seizure in Canada and certain information they had, the authorities in Venezuela prevented him from carrying on his brokerage business. He accordingly claimed to have incurred a loss of $97,000.

On cross-examination he admitted that he had been fined $500,000 in Toronto in 1976 for fraud involving promotion of stock exchange transactions.

The respondent filed Exhibits 1-3 and I-4 to show his unsuccessful efforts to obtain information to enable him to assess net worth. The appellant and his company Onyx Investments Ltd always refused to file tax returns, balance sheets and capital reconciliations.

Onyx Investments Ltd: 11 convictions

8 cases pending

In his notice of objection for 1974 the appellant did not claim his loss of $1,000,000. He did not know how long he had had in his possession a photocopy of a letter from a bank in Zurich stating that another letter was sent to the appellant showing that he paid for and on behalf of Onyx Investments Ltd:

(a) $120,000 to Centennial Investments Ltd; and

(b) $20,000 to International Banking Trust.

He concluded his testimony by stating that:

1. the amount of $1,000,000 loaned to L J Forget & Co Inc was his personal money;

2. he hoped to be repaid from Forget’s accounts receivable;

3. it was he who carried on the business of Onyx Securities for his wife;

4, he did not know on what date International Portfolio began operations in Venezuela;

5. the sum of $100,000 had contributed to the purchase of shares of International Portfolio.

Mr Roger Maisonneuve merely stated that all the ordinary creditors of L J Forget & Co Inc had been paid in full by the trustee whereas the appellant had received $129,000 and Mr McPhee $128,000 as high-risk unsecured creditors.

The respondent called only one witness, Mr Raymond Dugré, an auditor in the employ of the Department of National Revenue. He filed tables as Exhibits I-7, 1-8 and 1-9 to prove accurately the sums of money loaned by Onyx Investments Ltd to Irving Kott. Then, using a photocopy of a sheet from a company ledger (Exhibit I-10), he showed that prior to December 1973 there was no mention of repayment of a sum of $120,000, whereas the letter from Zurich was dated September 1973.

Concerning the $80,000 he filed a balance sheet (Exhibit 1-12) showing that Mrs Kott had loaned $106,706 to Onyx Investments Ltd and that in a document entitled “Onyx Investments Ltd — Operating Costs — August 1974’’, which was examined at the office of the RCMP and filed as Exhibit I-11, it is stated that a sum of $30,000 came from Mrs Kott, but there is no mention of a repayment of $50,000.

On cross-examination he admitted that he had audited the books at the premises of the RCMP and that no ledger sheet indicated a loan account in Mrs Kott’s name.

Counsel for the appellant admitted the evidence of the respondent concerning the loans made to the appellant by these two companies, but he argued that the evidence of repayment of $80,000 by two cheques signed by Mrs Kott was clear, since the cheque for $30,000 was endorsed by the appellant and deposited to Onyx Investments Ltd. The amount came from Mrs Kott, who did not have a loan account. As for the $50,000 cheque, it was payable to Onyx Investments Ltd and endorsed.

Concerning the payment of $140,000 on behalf of the two companies, he had adduced the best evidence in the circumstances: the testimony of the appellant and the letter from Zurich. There was no evidence that Onyx Investments Ltd was indebted to these two companies, although this amount could be a loan by the appellant to these two companies.

Was the loss in Venezuela a capital or an income loss? He referred the court, inter alia, to Paco Corporation v The Queen, [1980] CTC 409, 80 DTC 6215.

As for the business loss of $1,000,000 on the loan to L J Forget & Co Inc, he claimed that the purpose of an assessment was to determine tax payable and that this loss, which was proved, should be taken into consideration even though only the loss in Venezuela was referred to in the notice of objection.

Counsel for the respondent, on the other hand, insisted that there was only one issue to be decided: Were the loans, about which there was no dispute, repaid by the appellant. He had circumvented the self-assessment system. He, together with his wife and their company, refused to file tax returns and provide balance sheets. They had all been convicted on several occasions. The appellant reported no income but wished to benefit from large losses. His credibility was nil. Not only was he avoiding tax but also had been convicted of fraud and fined $500,000. It was the appellant who was familiar with the facts and had control over them. How, then, could he claim to be a sacrificial victim? He attempted to adduce evidence of his business but did not wish to reveal his income.

There was no evidence that the loss of $100,000 was his personal money and if he did not claim this loss in his notice of appeal, this was because he wished to avoid an audit.

With respect to the loss in Venezuela, there was no evidence of expenditures except that $100,000 was allegedly paid to purchase shares. The only evidence of a payment of $140,000 to the two companies on behalf of Onyx Investments Ltd is a letter from a Zurich bank referring to another letter written previously. Because of the appellant’s lack of credibility this evidence should not be taken into account.

The sum of $80,000 was not a repayment but a loan made by Mrs Kott to Onyx Investments Ltd. She loaned some $106,706 according to her personal balance sheet as at December 31, 1974, filed as Exhibit I-12.

The Court is in complete agreement with counsel for the respondent.

Since the loans made to the appellant by these two companies were not disputed, it must merely be decided whether the repayments were made in the time provided for in subsection 15(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended. It is accordingly not necessary to consider the various losses the appellant attempted to prove, and given his lack of co-operation the respondent could not possibly have acted differently than he did.

In the circumstances the method adopted was the only one enabling him to raise a serious assessment. It appears in fact that the appellant never wished to reveal his income, and the numerous charges and convictions provide undeniable evidence of this.

To determine whether there was a repayment, only two items need be considered:

1. The $80,000 paid by two cheques signed by Mrs Kott for $30,000 and $50,000;

2. a payment of $140,000 allegedly made on behalf of Onyx Investments Ltd to the following two companies:

(a) $120,000 to Centennial Investments Ltd;

(b) $20,000 to International Banking Trust.

Mrs Kott’s two cheques prove that she made payments amounting to $80,000 but this evidence is far from being sufficient to show that these payments constituted repayments of loans by the appellant, especially where a balance sheet of his spouse shows that she loaned $106,706 to Onyx Investments Ltd.

The appellant’s testimony is definitely not sufficient to contradict this written evidence. Moreover, the cheque for $50,000 does not even appear to have been received by Onyx Investments Ltd and that for $30,000 could well be a loan by Mrs Kott.

Thus, this evidence is far from establishing that the sum of $80,000 paid by cheque by Mrs Kott helped to repay part of the loans owed by the appellant to his two companies. The same applies to the item of $140,000. There is no evidence that both Continental Finance Corporation and International Banking Trust were indebted to Onyx Investments Ltd, and if the appellant made loans to them, which was not proved, the amounts paid to these two companies cannot in any way constitute repayments of loans by the appellant to his companies, Onyx Investments Ltd and Ingriv Investments Ltd. Moreover, the photocopy of a letter from a Zurich bank, which refers to another letter written previously, is in the circumstances far from being persuasive evidence of this transaction, especially when the conduct of the appellant and his wife is taken into consideration.

The appellant, who had the onus of proving that he had repaid the loans made to him by his two companies, has not discharged this onus pursuant to the requirements of subsection 15(2) of the Income Tax Act. As for the loss of $97,326.75 and that of $1,000,000, which was not even mentioned in the notice of objection, they cannot be taken into consideration since we do not know the appellant’s income for the years in question and they cannot in any way constitute repayments of loans.

The facts stated are more than sufficient for the Court to dismiss the appeal.

The appeal is dismissed.

Appeal dismissed.