Mahmud Ghadban v. Minister of National Revenue, [1981] CTC 2651, 81 DTC 622

The Chairman:—The appeals of Mahmud Ghadban, with respect to the 1972, 1973, 1974 and 1976 taxation years, are from assessments based on the computation of the appellant’s income on a net worth basis for the period of 1971 to 1976 and as a result of which the Minister of National Revenue added to the appellant’s returns certain alleged unreported income and also levied penalties.

Before going into the details of the appellant’s net worth assessment, it is first necessary to dispose of two related issues. The first is the appellant’s contention that the Minister is statute-barred from assessing the appellant for the 1972 taxation year. The second issue has to do with the procedure followed with respect to the burden of proof when the Minister has levied penalties under subsection 163(2) of the Income Tax Act.

At the hearing, both the appellant and the respondent adduced evidence in order to satisfy what was considered to be their respective burden of proof: the appellant, to establish the facts proving that the Minister’s assumptions on which he based his net worth assessment are wrong, subsection 152(8) of the Act, Johnston v MNR, [1948] CTC 195; [1948] SCR 486; 3 DTC 1182; the respondent to establish those facts which would bring the appellant under subsection 163(2) of the Act and justify the imposition of penalties (subsection 163(3) of the Act).

Notwithstanding the interesting points raised by the Assistant Chairman, Mr F J Dubrule and by our colleague, Mr M J Bonner in I Waxstein v MNR, [1980] CTC 2398; 80 DTC 1348; and W Taylor v MNR, [1980] CTC 3003; 81 DTC 3, respectively, I do not believe, on the facts of this appeal which are distinguishable from those of the cases cited above, that the procedure followed at the trial was legally wrong or was prejudicial to either party. The Board was indeed given the opportunity of weighing all the evidence, both with respect to the appellant’s opposition to the Minister’s net worth assessment which, in my view, remains the principal issue as well as to the Minister’s reasons for levying penalties.

In the circumstances of this appeal, the question of a possible shifting of the burden of proof raised no problems in the determination of both issues in the appeal.

With respect to the statute-barred year 1972 and the imposition of penalties, it is difficult for the Board on the basis of evidence to conclude that there was not, on the part of the appellant, misrepresentation of income attributable, at the very least, to neglect or carelessness. The appellant, a Lebanese immigrant, has been in Canada for 21 years and, although it is alleged that he cannot write nor read English, has no knowledge of accounting and is completely unfamiliar with tax legislation, he was nevertheless able to carry on transactions, particularly in the restaurant business and in rental income properties. The appellant was capable of dealing effectively with purchasers and vendors, with contractors and sub-contractors and fully understood the purport of al the contracts he signed; he was also capable of appreciating his rights and obligations in all the transactions to which he was a party.

As a knowledgeable businessman with considerable experience, he cannot, in my opinion, but have been aware of the necessity of keeping proper and accurate records and of reporting income earned in each taxation year, which the evidence shows he failed to do. I must conclude that the errors, Omissions or misrepresentations found in the appellant’s pertinent tax returns can, under the circumstances, only be attributable to neglect or carelessness and the Minister was justified, pursuant to subsection 152(4) of the Act, in reopening the appellant’s 1972 taxation year.

The penalties assessed by the Minister under subsection 163(2) of the Act were also justified. Not only did the appellant fail to keep proper records, knowing he should do so, but he also knew the consequences of not keeping such records. The appellant was subject to two prior net worth assessments revealing unreported income. The first concerned the period from 1964 to 1967 and the second covered the period of 1968 to 1971 (Exhibits R-22 and R-20 respectively). The instant net worth assessment covers the period from 1971 to 1976.

By letter dated October 4, 1972 (Exhibit R-23), the appellant undertook to keep proper records and again failed to do so, with the result that the instant net worth assessment again revealed an unreported income of $30,000 in 1973 alone. It was also necessary for the Minister to issue demands for the appellant’s 1973 and 1974 tax returns (Exhibits R-24 and R-25 respectively).

In my opinion, the appellant’s whole attitude since 1964 goes well beyond neglect or carelessness and can readily be seen as consistent gross negligence for which no valid reason was given and for which there can be no excuse. Counsel for the respondent has indeed satisfied the burden which was on him of establishing gross negligence on the part of the appellant, thus justifying the assessment of penalties under subsection 163(2) of the Act.

The remaining issue is whether or not the Minister’s assessment of the appellant on a net worth basis is correct.

At the trial, there were admissions of errors, and changes were made in the Minister’s net worth assessment (Exhibit A-1 ) to which I shall refer later.

In the appellant’s written submissions, he limited the various points of contention to the following:

A. Bank indebtedness at the end of various periods;

B. The Thorton mortgage receivable;

C. The cost of Merivale Road renovations;

D. Personal living expenses;

E. Capital gains on the sale of pre-1972 capital properties;

F. Business use of the taxpayer’s automobile;

G. The capital loss following the abortive sale of the Mayfair Restaurant.

The taxation years in issue are 1972, 1973, 1974 and 1976.

For the sake of clarity and brevity, I will deal with each of the above matters for the pertinent taxation years in the order the contentious items were presented by the appellant.

A. Bank Liabilities and Loans

It is the appellant’s submission that his liabilities relative to the Bank of Nova Scotia for the 1974 taxation year are $46,000 rather than $21,000, as set out in the Minister’s assessment. The evidence confirms the appellant’s claim and the respondent admits that the amount of $46,000 does represent the appellant’s bank liabilities for the 1974 taxation year. The appellant also claims that his liability for the 1975 taxation year is $39,275.94 plus $2,000. Since the 1975 taxation year is not in issue in this appeal, the Board cannot consider the appellant’s claims for either his bank liabilities or for relative accrued interest for 1975.

In his submissions, the appellant also claims that the accrued interest for liabilities in the amount of $121.79 for 1973 and $187.15 for 1974 should have been taken into account in the Minister’s net worth assessment.

The respondent contends that it is not clear from a letter from the Bank of Nova Scotia dated June 10, 1980 (Exhibit A-11-1) as to whether the amounts were paid or were payable and submits that adjustment for accrued interest should not be made until it has been established that the appellant’s accounting methods with respect to accrued interest for his other liabilities or assets are consistent.

In the absence of any evidence in those respects, it appears to me to be likely that the appellant could be on the accrual method of accounting and his claims for accrued interest charges, which should have been claimed when they were paid or became payable, are in the circumstances ill- founded and were rightly not included in the computation of the appellant’s net worth assessment. Summarizing this portion of the appellant’s claims, the Board finds that the appellant’s bank liabilities in 1974 were $46,000 and the net worth should be corrected to reflect this finding. The Board dismisses the appellant’s other claims in the bank liabilities and loans section.

B. The Thorton Mortgage Receivable

1. The evidence is clear and the respondent agrees that the mortgage receivable in the amount of $19,705.22 in 1974 and $18,705.22 in 1975 with respect to the sale of the Thorton property was not the property of the taxpayer and should be deleted from the net worth assessment (Exhibit A-1).

2. The respondent also agrees with the appellant’s submission that there should be deleted from the list of mortgages an amount of $10,643.69 recorded as being payable to Mr Levine in 1975 and that the name of Mr Levine should be substituted for that of Mr Yves Parisien in Exhibit A-1. These changes should therefore be reflected in the net worth.

C. The Cost of Merivale Road Renovations

It is the appellant’s contention that all of the renovations on the Michael- angelo Restaurant on Merivale Road were, for purposes of capital cost allowances, included by the Minister in Class 3 and that the resulting figure of $51,248 in undepreciated capital cost is incorrect. The respondent, who claims that the appellant did not discharge the onus on this point, contends that the figure was taken from the appellant’s own financial statements. Since the appellant’s submissions affect only the 1975 taxation year which is not under appeal, the Board need not determine the issue.

D. Personal Living Expenses

The appellant submits that his living expenses, as assessed by the Minister in 1972, are accurate but that they reflect expenses incurred in travelling abroad. He contends that in 1973 the figure used is excessive by only $500, which he alleges was sent to his parents abroad. The appellant claims that the personal expenses which the Minister assessed for the 1974 and 1975 taxation years are excessive and should be reduced by $3,000 for each year. It is to be noted that the assessor testified that he based his personal expenses figures on information received from the appellant himself.

The credibility of the witness in respect to living expenses can be questioned. The appellant’s family comprised, during the pertinent taxation years, two adults and five dependent children. Even if one were to accept that the family generally ate the food surpluses from the restaurant and were clothed from the neighbourhood social services, as claimed by the appellant, I cannot conceive that a family of seven can live on $6,000 or $7,000 a year, no matter how frugal each member of the family may be. Nor can I accept that the appellant could take a 45-day trip to Lebanon in 1973 for $500, as claimed by the appellant.

There is evidence that the appellant made a gift to his parents in 1972 of $1,100 (Exhibit R-2, page 6). The amount estimated by the respondent for the appellant’s trip to Lebanon at $1,500 is, in my view, low but much more realistic than the $500 claimed by the appellant and I am prepared to accept the higher figure.

Since these additional amounts were not considered in the Minister’s original estimates, it is reasonable that they should be added to the appellant’s personal living expenses for 1972-1973. I have been given no reason to change the respondent’s estimate of the appellant’s personal expenses for 1974 or 1975. At the hearing, the appellant’s appearance, his dress and his wearing of a large diamond ring do not support allegations of his extreme frugality. The personal expenditure figures in the net worth should therefore be increased to $8,150.91 and $9,815.63 for the 1972-1973 taxation years respectively.

E. Capital Gains on the Sale of Pre-1972 Capital Properties

Although there were no written evaluation reports of the V-Day value of the Carlyle, Edgar and Thorton properties, the respondent generally accepted the appellant’s figures and agreed that:

(a) 1972—the taxable capital gain from the Carlyle and Edgar properties should be reduced from $3,301.28 to $525;

(b) 1974— capital gains from the Thorton property should be increased from $3,500 to $13,500:

1974—taxable capital gain from Thorton should be increased from $391.18 to $2,600.

These changes should therefore be made to the net worth.

F. Business Use of Taxpayer’s Automobile

The appellant stated in evidence that he informed his bookkeeper of all income and expenses. Notwithstanding that no automobile expenses were claimed by the appellant, relative to the operation of his business from 1972 to 1975 (Exhibits R-2, R-1, R-3 and R-4 respectively), the appellant testified at the hearing that the automobile was used exclusively for business. In his written submissions, the appellant contends that the automobile was used at least 50% for business and that 50% of the allowable capital cost should therefore be allowed, and the appropriate adjustments made to the value of the assets for 1972, 1973, 1974 and 1975.

I find it very difficult to accept that the appellant, with six dependants, would use the automobile exclusively or even 50% of the time for business purposes. The facts that the appellant’s business during the years under review was principally the operation of restaurants and rental income properties; that no automobile business expenses were claimed by the appellant in that period of time; that no evidence was adduced to establish the reason for the appellant’s belated claims for 50% business use of his automobile and the contradictions in the appellant’s evidence relative to the use of his automobile do not justify my changing the respondent’s assessment in that respect.

G. The Capital Loss Following the Abortive Sale

of the Mayfair Restaurant

The appellant submitted that the actual cost in repairing the Mayfair Restaurant was $17,964 (Exhibit A-17-2) and not the $12,000 used by the respondent. He concludes that the difference between these two figures, ie $5,964, should be added to the capital loss of $13,252.35 for a total capital loss of $19,216.35.

In explaining his computation on that item, the assessor stated that in 1974 the appellant had a mortgage receivable as a result of the sale of the Mayfair Restaurant. The assessor admits that the appellant sustained a loss on the disposition of the property but states that the loss in 1974 can only be the amount of the mortgage receivable less the amount of the fire insurance received.

The damage to the restaurant occurred after the appellant had sold the property and the amounts expended by the appellant in refurbishing the restaurant, which he subsequently reacquired, though a capital expenditure, cannot be retroactively included in the computation of his capital loss at the time he disposed of the property. I find that, on the basis of the evidence, the appellant’s claim in respect to this claim is unfounded. However, the respondent admits that one half of the $13,252.35, in relation to the Mayfair mortgage is an allowable capital loss and an adjustment of $6,626.17 was made to the respondent’s final net worth assessment.

In counsel for the respondent’s well-presented written submissions, which must have required considerable time in preparing, he refers to further corrections to his original net worth assessment.

As a result of evidence given by the assessor, the appellant’s reported income for the 1972 taxation year was increased by $679.27 and taken into account in his corrections of the net worth.

This correction, as well as others made during the hearing, had the effect of increasing the negative discrepancy of the original net worth assessment (Exhibit A-1). Both parties agree that the discrepancies in 1972 and 1974 are negative.

It is the respondent’s submission however that the appellant is wrong in his contention that these negative discrepancies can be applied against other incomes as allowable income losses, deductible against income of other years, which could reduce income below zero as in 1974, or against the amount by which income is overreported, where total income would nevertheless remain positive as in 1972.

The respondent contends that for the appellant to succeed in deducting losses, he must prove that the negative discrepancies stemmed from either allowable business losses, allowable property income losses or allowable capital losses which had not been considered in the net worth. He submits that the appellant did not prove any of the above and rejects the appellant’s claim that on applying the negative discrepancies of the net worth to income for other years, the appellant is not liable for any tax.

It appears to me that the source of the appellant’s whole problem is his failure to keep proper records and to provide adequate information in his returns. Although some of the evidence adduced by the appellant at the hearing was admitted by the Minister and gave rise to changes in the quantum of the discrepancies in the net worth, the appellant did not succeed in satisfying his principal onus of demolishing the Minister’s assumption that the appellant failed to report certin income. In spite of the voluminous details brought out by the appellant, he was unable to establish that he had properly reported all his income in the period under review. Indeed, in the reconciliation made by the appellant on the basis of his own figures, the total discrepancies admitted by the appellant and which are set out in his written submissions are ($1,943.28), $29,798.09, ($72,673.87) and ($16,193.93) for 1972, 1973, 1974 and 1975 respectively.

For several reasons, I give no weight to the appellant’s allegations that he received no cooperation from the respondent after the assessment and prior to the trial. What is of particular concern to the Board is that the appellant was given at the trial full opportunity to place before the Board all the evidence he felt would support his allegations. I found at the hearing that there was on the part of counsel for the respondent a genuine concern to deal fairly with the various issues in order to arrive at a solution that was as accurate and as reasonable as possible under circumstances which rendered difficult issues more complex by the appellant’s failure to keep proper records.

On the basis of the evidence, I do not feel that the Board would be justified in making further changes to the net worth other than those to which reference has already been made. The net effect of the reconciliation, taking these changes into account, results in total discrepancies of ($1,156.55), $30,730.88, ($28,466.67) and $35,643.69, as calculated in the amended comparative statement of net worth attached to the respondent’s written Submissions.

I hold therefore that the appeals for 1972 and 1973 should be dismissed and that the penalty assessed for the 1972 taxation year be sustained.

The appeal for the 1974 taxation year is allowed and the matter referred back to the Minister for reassessment on the following basis:

(i) that the appellant’s total income should be $4,586.17;

(ii) that the income interest deduction of $1,000 be allowed;

(iii) that penalties in accordance with subsection 163(2) of the Act should be levied against an amount of $1,550 of unreported income.

The appeal for 1976 is allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the appellant should receive the benefit of general averaging provision, if any, resulting from the reassessment of the 1974 taxation year.

Appeal allowed in part.