Kareem Besharah v. Minister of National Revenue, [1979] CTC 2660, 79 DTC 612

The Chairman:—The appeals of Kareem Besharah are from an assessment dated December 3, 1976 in respect of the 1972 taxation year and from reassessments dated July 21, 1978 in respect of the 1973 and 1974 taxation years.

Issues

The three distinct issues to be determined are:

1. whether the amounts of $18,000, $45,000 and $36,040 were properly added to the appellant’s income by the respondent for each of the taxation years 1972, 1973 and 1974 respectively;

2. whether certain unvouchered business expenses claimed in the 1973 and 1974 taxation years should be allowed; and

3. whether the capital gain realized by the appellant from the disposition of the Bell Tavern Steak House was properly calculated and assessed in the amount of $87,592.50.

Summary of Facts

The appellant was born in Lebanon and came to Canada in 1950. In 1958, the appellant’s father died and it is alleged that he left to the appellant and two brothers, a farm and a flour mill. The appellant stated that the value of the property was $390,000 and that his share was $130,000. The appellant claims to have sold his share of his father’s estate to his brother and nephew in August 1972, and that the term payments made thereon constitute the source of the amounts included by the respondent as income for the appellant’s 1972, 1973 and 1974 taxation years.

It is my understanding that the appellant rented the Bell Tavern Steak House in May of 1966 and purchased it in 1969. He then proceeded to make substantial additions and renovations. The restaurant was operated successfully by the appellant and his wife until marital difficulties arose which led to a divorce (Exhibit A-19). It is alleged that the business deteriorated to the point where it had to be sold. In November of 1973 the sale of the restaurant to Halim Saikali was closed at a price of $700,000 (Exhibit A-3).

Findings of Facts

The First I sue:

Although counsel for the respondent objected on various grounds to the production of documents originating in Lebanon, on the basis of Exhibit A-15 and the testimony of Monsignor George Kazaka, who served as Parish Priest in the appellant’s native village and who knew both the appellant and his father, I accept that the appellant’s father did own a farm and a flour mill in Lebanon. I will also accept that transactions are carried out otherwise than through banks and that cash transactions are not uncommon in Lebanon. However, Exhibit A-15 would indicate that though the procedure may differ from ours, transactions are indeed recorded. The passing of the father’s considerable estate to his sons in 1958 would certainly have been recorded and would be as available as was a document dated October 20, 1958 (Exhibit A-15). The appellant did not produce a will or any document which would corroborate his statement that he owned one-third of his father’s estate. The affidavit, dated August 1972 and produced as Exhibit A-20 attesting that the appellant sold his property to his brother and to Fouad Barake, bears only the appellant’s signature. Neither of the purchasers appear on that document nor on any other document as having acquired the appellant’s share of the estate or having agreed to pay the appellant any amount of money.

The onus of establishing that the amounts added to the appellant’s income in each of the years 1972, 1973 and 1974 were not income from a business, of course, rests on the appellant and no number of character witnesses can change that obligation. This is particularly true when dealing in non-arm’s length transactions such as, in this instance, an alleged sale of property to the appellant’s brother and nephew, and loans alleged to have been made to thé appellant by his mother. It would have been relatively easy to obtain some documentation from the appellant’s brother and nephew and some indication that they, in fact, paid the appellant the stated amounts. This the appellant failed to do. The only evidence of such payments are certain vague book entries made in the appellant’s financial Statements filed with his returns.

Counsel for the appellant referred several times to the Notices of Reassessment which referred to the above-stated amounts as “bank deposits which should have been included in the appellant’s income but were not’’. Counsel claims that he and the appellant had in vain sought to have the Department advise the appellant which bank deposits were referred to in the assessments and that its failure to do so made the appellant’s task of rebutting the Minister’s assumptions most difficult. The wording in the assessments may not perhaps be as accurate as one might wish, since no bank deposits in the specific amounts stated in the assessments can be found. However, it appears that what was clearly in issue were figures in the Bell Tavern Steak House financial statements for 1972, 1973 and 1974 which exceeded the reported yearly income from the business by the amounts stated in the assessments. The source of these amounts is questioned by the Department of National Revenue, particularly since the financial statements of the restaurant would indicate that the appellant’s business dropped drastically from 1971 to 1974. The inclusion of the amounts contained in the Minister’s assessment as being income from the business would have placed the appellant’s operation in its normal profit position.

I am satisfied that the appellant was not prejudiced by the wording of the assessments and that he knew exactly what was in issue and, indeed, proceeded to explain the discrepancy of certain figures in the Bell Tavern Steak House financial statement as of 1972 as money originating from a sale of land in Lebanon, a sale of two cars, and a loan from his mother. The appellant relied greatly on unaudited financial statements to establish the receipt of money from Lebanon from the disposal of his property there.

The accountant’s comments in each of the letters accompanying the financial statements of Bell Tavern Steak House read as follows:

We have prepared the balance sheet of Bell Tavern as at May 31, 1973 and the statements of earnings and of capital for the year then ended from the books and records and other information which we have obtained.

We did not perform an audit of all of the accounts and accordingly, we do not express an opinion on these financial statements.

On cross-examination Mr Vezina, the appellant’s accountant who filed the appellant’s tax return for the pertinent taxation years, with reference to the accountant’s comments in the above letter, states:

Q. Am I correct in saying that you were expressing an opinion that the financial statements present fairly the financial position of Mr Besharah as at the end of each fiscal year?

A. I do not say that. (Vezina)

Q. So you are not expressing an opinion here or there on that?

A. That is right.

On further questioning the accountant for the appellant states:

Q. Now, did you verify each journal entry you made by supporting evidence which I take would be normal in the accounting field? You verified your journal entries with evidence?

A. Verified is not the right word. We made the general entries at the end of the year and Mr Besharah did not have a competent accountant on the place. He had a bookkeeper, so we came in at the end of the year, once a year and we worked up the books and we wrote up the books and based on the daily sheets that were submitted to us and the cheques and the bank deposits.

Q. But you didn’t verify, when you made a journal entry did you verify it by evidence other than what Mr Besharah had told you?

A. Well, some of it. It was from Mr Besharah’s words, others were from actual documents submitted.

The credibility of the financial statements is further shaken by Mr Vezina:

Q. But you would make journal entries in your book for the mortgage, the sale of land in Lebanon you would make journal entries in your book for the proposed sale to James Toal; is that correct, because Mr Besharah testified that all of his money was put into his business account so you would have to make journal entries?

A. It would be a debit to clearing account and not a credit.

Q. I apologize, you have got me on accounting terms. You have to credit instead of debit, because if you didn’t debit cash clearing that figure which would be in cash clearing could well be seen by someone in and looking at the books as business income, because it is coming from—

A. It would have to be explained.

Q. Exactly, it would have to be explained, that is what brought us here and that is what we are here today fighting about, isn't it?

A. That is right.

Q. And, that is basically the issue before us today, isn't it?

A. Yes.

Q. So, what you did then perhaps in 1973 and 1974 is you credited from this debited cash clearing and you credited in 1974 $18,040 to mortgage, is that correct?

A. That is right.

Q. And you credited $8,500 to sale of car?

A. That is right.

Q. And what evidence did you use or why did you make that journal entry? Mr Besharah told you to or you asked him about it and he told you to?

A. Mr Besharah did not tell me to make the entry.

Q. But you asked him?

A. He told me that he received money from Lebanon.

Q. So he told you?

A. Yes.

Q. So for the $8,500 for sale of car to James Toal, why did you make that journal entry?

A. Mr Besharah told me.

Q. Now, am I or am I not correct and perhaps we could produce the journal entries to this effect, that at the end of making all of these credits and debits to cash clearing, in 1974 we still had sitting in cash clearing $2,000; is that correct?

A. Yes, well, —

Q. Is that correct? Show me the journal if it is not.

A. Okay.

Q. So prima facie we have got at the end of 1974 $2,000 sitting in cash clearing that has been up until today unaccounted for; is that correct?

A. Yes.

The evidence also showed that in 1972 an error in the amount of a loan from a Mr Kelly Moore showed him as having loaned $5,000 more than he, in fact, had loaned. The $5,000 discrepancy in that loan account was later conveniently recorded as being a loan from his mother, without there existing a deposit or cheque or any document to establish that the appellant had received the amount by way of loan from his mother. Two cheques dated June 7,1973, and August 2,1973, for $5,500 and $2,000 respectively from the appellant’s mother are endorsed by the appellant, however, were produced. (Exhibit A-18).

The appellant also produced an undated receipt in the amount of $8,500 allegedly for a car he sold to Mr Toal and which was recorded by the accountant in the financial statement of Bell Tavern Steak House on the appellant’s instruction. A document signed by Isabel Teasdale in which she claims to have purchased a station wagon for $2,500 was also produced. Both documents constitute Exhibit A-17.

In the circumstances of this appeal, neither one of these documents represent sufficient evidence that the appellant, in fact, received the amounts as the result of the sale of cars. It would have been quite possible and simple for the appellant to have obtained adequate evidence substantiating the sale of these two vehicles. In my opinion, both these documents should have been rejected. However, since the respondent, who may have other information unknown to the Board in respect of the alleged sale of the station wagon to Mrs Teasdale, has not contested that item, I will accept the evidence on that sale.

Summarizing my findings in the first issue, and based on evidence adduced, the appellant did not succeed in proving by oral or written evidence that:

1. the amounts of $18,000, $45,000 and $36, 040 added to the appellant’s 1972, 1973 and 1974 incomes respectively, were from a source other than from his business and were, therefore, properly added to the appellant’s income in those years;

2. the amount of $5,000 which was wrongly recorded in 1972 as part of loans from Kelly Moore and subsequently recorded as a loan from his mother in another year without any supporting documents, cannot be taken into account and must be ignored. I will, however, accept as valid the cheques from his mother endorsed by the appellant for the total amount of $7,500 as loans from his mother (Exhibit A-18). The amount of $7,500 is therefore allowed; and,

3. the receipt of $8,500 by the appellant in consideration of the alleged sale of a car has no probative value and will be ignored, but the receipt of $2,500 for the sale of the station wagon to Teasdale is accepted (Exhibit A-17). The amount of $2,500 is therefore allowed.

The Second Issue:

The second issue is the deductibility of business expenses in the amount of $1,993.50 for the 1973 taxation year and an amount of $1,838.17 for the 1974 taxation year, and whether an amount of $300 paid to the Solarium of Lebanon, Children’s Hospital is a business or a personal expense.

By letter of August 16, 1976, the Business File Audit Section of the Department of National Revenue advised the appellant, among other things, of unvouchered expense claims in his tax returns for 1973 and 1974 and it would appear that some vouchers were subsequently produced by the appellant, leaving a balance of unvouchered expenses in the above- mentioned amounts (Exhibit R-3). At the hearing, additional vouchers were produced for 1973 (Exhibits A-6, A-8, A-9, A-11 and A-12). Counsel for the respondent did not contest the validity of the vouchers produced nor did she raise the possibility that they may already have been taken into account in the respondent’s calculations so I am prepared to accept that the amount of $1,993.50 claimed was for business expenses incurred by the appellant in 1973. In argument, counsel for the appellant alleges to have accounted for part of the expenses included in the amount of $1,838.17 for 1974, but no vouchers were produced, my notes do not reflect that fact and I am not prepared to allow the alleged expenses on the ground that they should be considered as reasonable expenses as suggested by the appellant. Although in certain circumstances, expenses have been allowed on the ground of reasonableness when vouchers could not, for valid reasons, be produced. The lack of a proper system of recording and accounting in a business such as a restaurant, cannot be accepted as an excuse for claim- ing expenses without producing to the Department of National Revenue the Supporting vouchers, no matter how large the taxpayer’s expenditures may have been. Taxpayers cannot rightly expect Members of the Board to act as assessors and to decide on the validity of a series of loose vouchers without having before them the proper books and records and without knowing if the vouchers have not already been calculated by the assessor. That, in my opinion, is not the role of the Board. I must, therefore, conclude that the appellant did not establish that the amount of $1,838.17 claimed in 1974 was for business expenses. As to the $300 paid by the appellant to the Solarium of Lebanon and which is described on the receipt as a donation (Exhibit A-13), I will accept the appellant’s explanation that the amount was contributed as a means of publicity to attract the Lebanese population to his restaurant and consider the amount of $300 to have been a deductible business expense.

To summarize my findings on the second issue, therefore, I consider that the expenses in the amounts of $1,993.50 for 1973, and $300 for 1974, are business expenses and should be allowed. The other expenses claimed in this issue are disallowed.

The Third Issue:

The third issue is whether the taxable capital gain realized by the appellant on the disposition of the Bell Tavern Steak House was properly assessed in the amount of $87,592.

In the Agreement of Purchase and Sale dated March 16, 1973 (Exhibit A-3), the purchase price of the property of $700,000 was allocated as follows:

The appellant retained Mr Gaëtan Roy, an accredited appraiser with Pigeon-Roy whose qualifications are set out at page 25 of his appraisal report (Exhibit A-1), to establish the fair market value of the property as of December 31,1971. The respondent relied on Mr Bernard Murphy, the Senior Real Estate Appraiser for the Department of National Revenue, to establish the V-Day value of the property and whose qualifications are included in Exhibit ‘B’ of his appraisal report (Exhibit R-2). Both appraisers were accepted by the Board as expert witnesses. For purposes of establishing the fair market value of Bell Tavern Steak House as of December 31, 1971, a comparison of the figures reached by each of the appraisers may prove useful in summary form.

Based on the market approach in estimating the value of the land and using some identical comparable sales, both appraisers arrived at almost the same figure for the V-Day value of the land. Although Mr Roy relied on figures established by Rene Goulet Construction Limited, a contractor, to arrive at a value of the building and Mr Murphy relied principally on the cost approach to establish the value of the building as of December 31,1971, the disparity between values attributed to the building by each of the appraisers is relatively small. (Mr Murphy withdrew the income approach calculations included in his report as confirmation of his appraisal as a result of an objection raised by counsel for the appellant.) That disparity becomes even smaller on the basis of the evidence that Mr Roy or Mr Goulet, on whose figures Mr Roy relied, had not taken into account that part of the basement which was unexcavated and that the excavated part of the basement was divided into a finished and an unfinished section. The cost per square foot had been calculated by Mr Goulet as though all of the basement was excavated and finished. The replacement cost value as found by Mr Goulet and adopted by Mr Roy was stated by Mr Murphy to be from $20,000 to $25,000 higher than it should be. This evidence was not contradicted by Mr Roy nor was the amount involved in the error disputed. The difference, therefore, between Mr Roy’s and Mr Murphy’s appraised values of the building on V-Day would be within $10,000.

Since both appraisals were so close, I do not feel it necessary, for purposes of this appeal, to go into the details of the methods used by each appraiser in arriving at their appraised values and which are included in their respective reports.

The problem of valuation in this appeal lies in Mr Roy’s final conclusion to be found on page 22 of his report. Having calculated an estimated value of $461,000 as the fair market value of the property as of December 31,1971, Mr Roy then adds to that value a $100,000 premium and concludes that the adjusted market value of the property at that date is $561,000.

At page 22 of his report, Mr Roy states:

FINAL CONCLUSION

The Appraiser is aware that the subject property was sold on March 16, 1973 for the total consideration of $700,000 and it is his opinion as a real estate broker and a real estate appraiser that, since the subject property located in Bell’s Corners, is a unique site with an historical building partly built in 1870, an experienced purchaser in the restaurant or tavern business would have paid either as of December 31,1971 or November 13, 1973, a very special premium for acquiring such a property with a great potential; based on my general experience, an amount as much as $100,000 would have been a realistic and fair investment.

Therefore, the adjusted market value as of:

— December 31,1971 is	$561,000
— November 13,1973 is	$690,000

It was established that the site on which the Bell Tavern Steak House is built has a history dating back to 1836 as being used as a tavern, hotel, inn, etc. Somewhat less than half of the building as it stood in 1971 was strongly and well-built in the late 1870’s with cut stone and in the architectural style of that period (Exhibit R-1; refer to photos in both reports).

In support of the $100,000 premium which Mr Roy added to the mathematical calculation of the value of the property on the basis that it was ‘‘a unique site with an historical building”, counsel for the appellant called Mr Rolf Latté, an architect with the Heritage Office of the National Capital Commission. Mr Latté testified that the Bell Tavern Steak House property had been listed with the Heritage Office of the National Capital Commission. He stated that although the building was interesting, no offer was made by NCC to acquire the property. Mr Latté deplored the additions that were made to the building in 1969 and referred to them as “desecrations”. He explained that NCC can cooperate with municipalities or individuals in restoring heritage properties with technical and, at times, financial assistance, but that nothing had been done in respect of the Bell Tavern Steak House. He explained that there were original farm houses, now owned by NCC, in the area but that there was no concentration of heritage buildings on the commercial strip of Richmond Road where the Bell Tavern Steak House was located and there was no community effort to maintain or restore the property.

Mr Latté deplored the fact that many owners of heritage buildings either destroyed or transformed them for commercial purposes and resent any suggestions or efforts made to preserve or restore the building as it was historically. The additions made to the original building built in the 1870’s did nothing to retain the historical value of the building and would have to be destroyed to restore the building as a heritage property. Mr Latte readily admitted that he was an architect and had no qualifications as a land or real estate appraiser.

The evidence was that there was no heritage zoning in the area and that the subject land was zoned M-1, allowing the operation of a restaurant. The value of the land which was arrived at by both appraisers through the market comparison method, took into account all pertinent factors and the appraised values of the land by each appraiser differed by only $4,000.

Both Mr Roy and Mr Murphy took into account the superior construction of the original building by giving to that part of the Bell Tavern Steak House, a higher replacement cost than they did for the additions that were made in 1969.

It is my understanding that the appellant rented the Bell Tavern Steak House from 1966 to 1969. In 1969, the evidence is that when the appellant purchased the building, no premium for the historical aspect of the building or for the site was paid even though the original building was free of any detracting constructions.

In cross-examination Mr Roy was unclear as to exactly on what he justified his $100,000 premium, although he claimed in his report that the premium is based on a unique site with an historical building on it. In giving evidence, he stated at one point that he did not attribute the premium to the building. Later, he claimed that it was partly based on the land, partly based on the building, and partly based on the site. All these pertinent adjustment factors had already been made in his appraisal of the property prior to adding on his $100,000 premium.

Mr Roy states in his report that he knew that $700,000 was paid for the property in March, 1973, and included in his report a fair market value of the property as of November 13, 1973, at $690,000 by adding the $100,000 premium.

Mr Manse Berry, a real estate broker who was instrumental in selling the Bell Tavern Steak House in March of 1973 for $700,000, testified that he had listed the property for sale at $900,000 in 1972 (Exhibit A-4). He alleges he had received a verbal offer of $825,000 from Michael’s Restaurant but the sale did not go through because of the impossibility of transferring the liquor license. A letter from Mr Manse Berry dated March 29, 1974 (Exhibit A-5) states his opinion of the market value of the business, buildings, land and equipment and chattels necessary to operate the Bell Tavern Steak House.

However interesting these facts may be, they are not, in my opinion, germane to the issue in this appeal which is not to determine the value of the business on which no evidence was led, but is to determine the value of the land and the building of Bell Tavern Steak House as of December 31, 1971.

On the basis of the evidence, I see no justification to add a $100,000 premium to the appraisal made by Mr Roy for the value of the property as of December 31, 1971. Relying on the information contained in the appraisal reports (without the premium) and on the oral evidence given, I consider that the fair value of the property as of December 31, 1971, is as follows:

A fourth issue was raised by the appellant at the outset of the hearing and during argument. In each of the taxation years 1972, 1973 and 1974, the respondent assessed a penalty under subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, in the amounts of $2,654.75, $6,626.12, and $6,180.02, respectively. The appellant, in his Notices of Objection, did not object to the imposition of penalties for any of the years under review. In his Notices of Appeal, the appellant made no mention of the penalties imposed for the pertinent taxation years and the respondent did not refer to the penalties in the Reply. Counsel for the appellant sought Clarification as to what happens to the penalties under such circumstances.

The penalties, in my opinion, are an integral part of the Minister’s assessments and should be objected to by the appellant at both the objection and the appeal stages. Once the appellant has done so, the onus of establishing that the taxpayer knowingly omitted to report income as stated in subsection 163(2) of the Act normally reverts to the respondent. In this instance, since the penalties were not objected to in the appellant’s pleadings and notwithstanding that the Minister did not establish that the taxpayer knowingly omitted to report income, the Minister’s imposition of penalties in his assessments is presumed to be correct until and unless the Minister’s assessments are proven by the taxpayer to be wrong. (R W S Johnston v MNR, [1948] 195; 3 DTC 1182.) If the decision on the issues on which the penalties were imposed was to allow the appeal, the penalties would be waived; otherwise, it would appear to me that the penalties stand as part of the assessments. Counsel for the appellant also raised the question of interest charges on taxes payable. Interest is charged the moment the taxes become payable. When an appeal from an assessment is allowed, either in whole or in part, it is referred back to the Minister for reassessment. Interest charges on taxes payable are then adjusted according to the decision rendered and from the time the taxes were payable, if any. I do not find that the taxpayer was in any way prejudices at any stage of the appeal procedure.

In summary, therefore, the appeal is allowed in part and the matter referred back to the Minister for reassessment on the bases:

1. that the amounts of $18,000, $45,000 and $36,040 were properly added to the appellant’s 1972, 1973 and 1974 incomes respectively, and are disallowed;

2. the amount of $7,500 as a loan from the appellant’s mother in 1973 is allowed;

3. the amount of $2,500 received in 1973 from the sale of the station wagon is allowed;

4. the amount of $1,993.50 for 1973 and $300 for the 1974 taxation years as business expenses/are allowed;

5. the fair market value of the Bell Tavern Steak House as of December 31, 1971, is as follows:

6. Penalties in the amounts of $2,654.75, $6,626.12, and $6,180.02 for each of the 1972, 1973 and 1974 taxation years respectively, are maintained.

The appeal in all other respects is dismissed.

Appeal allowed in part.