Citation: 2011 TCC 466
Date: 20111003
Docket: 2009-2243(IT)I
BETWEEN:
ALTAF KHANDWALA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
Altaf Khandwala was assessed under
the Income Tax Act to include in his income amounts deposited in one of
his bank accounts (“Deposits”). Gross negligence penalties were also imposed.
The taxation years at issue are 2004 and 2005.
[2]
Mr. Khandwala resides in the Toronto area
and owns a corporation that operates a travel agency business. Both he and his
wife are involved in the business.
[3]
In 2007, the Canada Revenue Agency
commenced an audit because the income reported on Mr. Khandwala’s tax returns
was low. In 2004 and 2005 he reported income of $12,500 and $10,069, mostly in
respect of the travel agency.
[4]
The results of the audit were that
Mr. Khandwala had properly reported his income from the travel agency, but the
CRA were not satisfied that he had reported all his income. The source of the
concern was the Deposits, which were made to a US currency bank account with TD
Canada Trust.
[5]
Assessments were issued bringing
the Canadian dollar equivalent of the Deposits into income, with penalties. The
amounts added to income were $28,665 and $34,944 for the 2004 and 2005 years,
respectively. The penalties were $2,477.45 and $2,655.35.
[6]
Mr. Khandwala submits that the
funds generally represent proceeds from the sale of businesses when he lived in
Chicago until October 2001. There were also repayments of loans that were
given to friends, it is submitted. None of money deposited was income, it is
submitted.
[7]
The Crown submits that Mr.
Khandwala has not provided sufficient reliable evidence in support, and in
particular, it is submitted that Mr. Khandwala was not a credible witness.
[8]
I agree with the Crown’s position.
[9]
As for documentary evidence, Mr.
Khandwala introduced documents relating to three businesses, a gas station and
convenience store, a wholesale business, and a taxi license. However, none of
the documents provide clear support of Mr. Khandwala’s position, as discussed
below.
[10]
Mr. Khandwala testified that he
sold an interest in a gas station and convenience store in Chicago for
US$50,000. Two cheques were introduced in support from a company called Wala
Wala Inc. in an aggregate amount of US$19,000. They are the source of two of
the Deposits at issue. Mr. Khandwala submits that these two deposits represent
sale proceeds from this business.
[11]
The problem with this submission
is that there is insufficient evidence linking these cheques to proceeds from a
sale of business. I would also note that the word “bonus” is written on the
bottom of each of the cheques, which suggests that the cheques are not part of
sale proceeds. In addition, there are no documents that show that Mr. Khandwala
had an ownership interest in this business.
[12]
The evidence as a whole is
insufficient to establish a link between a sale of a gas station and
convenience store and the Deposits.
[13]
Mr. Khandwala also testified that
he sold an interest in a wholesale business. A letter was introduced in support
purportedly signed by the president of DT Distributors Inc. It supported Mr. Khandwala’s
testimony that he sold an interest in this business in 2001 for US$92,500 and
that the sale price was paid over time. The letter looks to have been prepared
in support of the audit.
[14]
There are three problems with the
evidence relating to the wholesale business. First, the author of the letter
was not present in Court and could not be cross-examined on the letter. Very
little weight can be attached to it. Second, there are no contemporaneous
documents relating to this business. Third, other than the letter, there is no
evidence other than Mr. Khandwala’s self-interested testimony which links the Deposits
and this business.
[15]
The evidence as a whole is not
sufficient to link sale proceeds from a wholesale business to the Deposits.
[16]
Mr. Khandwala also testified that
he sold a taxi licence in Chicago in 2000 for about $60,000. Documents were introduced
in relation to this sale. I accept that a taxi licence was sold by Mr.
Khandwala in 2000 but no link has been established between the sale proceeds
and the Deposits which were made a few years later.
[17]
According to Mr. Khandwala’s
testimony, these businesses are the source of most of the money deposited. As
for loans from friends, Mr. Khandwala provided very little detail, and no
supporting evidence.
[18]
I would also note that one of the
Deposits (US$27,000) was a transfer from a bank account that Mr. Khandwala had
in Chicago. Notwithstanding that bank statements were requested by the auditor,
statements from this bank were never produced, either during the audit or at
the hearing of the appeal.
[19]
In addition to the problem of
insufficient supporting documentation, there are also problems with Mr.
Khandwala’s testimony. Mr. Khandwala testified that he moved to Canada shortly
after the September 11, 2001 attack. However, the Crown introduced evidence
that Mr. Khandwala started filing income tax returns as a Canadian resident in
1997. No satisfactory explanation was provided for this. I would also note that
no sale proceeds were reported on any of the Canadian returns.
[20]
A further problem is that Mr.
Khandwala made no mention of Wala Wala Inc. during the audit. He testified that
he forgot about it until he saw the cheques in 2009. That is not a plausible
explanation.
[21]
Overall, the evidence was entirely
unsatisfactory to rebut the Crown’s assumption that the source of the Deposits
was income that is subject to tax in 2004 and 2005.
[22]
The penalties should also be
upheld. The Crown has the burden which has been discharged by producing evidence
of the Deposits and by cross-examination of Mr. Khandwala. It is reasonable to
conclude based on the evidence as whole that the amount of the Deposits was
knowingly omitted by Mr. Khandwala from the income tax returns.
[23]
I will now address some of the
arguments made by the representative for Mr. Khandwala.
[24]
Mr. Dewshi submits that the
deposit method is not the best method of determining income. That may be true
in some cases, but in this particular case it was reasonable for the Crown to
assess based on the Deposits. There was very little activity in the US currency
bank account and most of the amounts assessed relate to three large deposits.
The deposit approach was reasonable in the circumstances.
[25]
The representative also submits
that Mr. Khandwala’s position is supported by the audit of his income from the
travel agency, which the auditor found to be proper. I do not agree. The
auditor found that the profits from the travel agency business were small. Very
little tax was paid. It is not logical to make the inference that there are no
other sources of income.
[26]
In addition, the following
question is asked by the representative: “How does one prove no income?” I do
not find this argument to be persuasive. Taxpayers who come before this Court
routinely are able to prove their case by detailed and cogent testimony,
supported by other evidence. In this case, I would note, for example, that Mr.
Khandwala never did submit bank statements from his bank account in Chicago.
[27]
The representative also suggests
that if the Deposits were income, there would be a regular pattern to them.
That may be a reasonable argument if there were some other reliable evidence
indicating what the source of the Deposits was. The problem here is that there
was very little, if any, reliable evidence.
[28]
It is argued that Mr. Khandwala’s
prior accountant did not handle the appeal properly. It may be that the
accountant did not do a proper job, but it seems to me that many of the
problems in this case can be traced to Mr. Khandwala himself.
[29]
Lastly it is argued that, if Mr.
Khandwala were deceitful, he would not have brought funds from the United
States into Canada. I do not accept this submission. It may have been
that Mr. Khandwala was not expecting that the CRA would review his bank
accounts.
[30]
The appeal will be dismissed in
its entirety. Each party shall bear their own costs.
Signed at Toronto, Ontario this 3rd
day of October 2011.
“J. M. Woods”
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