Soberano v. The Queen, docket 2001-756(IT)I (Informal Procedure)

Date: 20020125

Docket: 2001-756-IT-I

BETWEEN:

DAVID SOBERANO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Teskey J.

[1]            The Appellant in his Notice of Appeal wherein he appealed his reassessment of income tax for the years 1994, 1995 and 1996 elected the Informal Procedure.

Issues

[2]            The issues in these appeals are as follow:

(i)             Are the assessments for the years 1994 and 1995 statute-barred;

(ii)            Where the claimed charitable donations made by the Appellant to Or Hamaarav Sephardic Congregation (the "Congregation") or to Abarbanel S. Learning Centre (the "Learning Centre") made in full according to various receipts;

(iii)           if the answer is yes to issue (ii) above, do the receipts conform to the provisions of Regulation 3501 of the Income Tax Act Regulations (the "Regulations"); and

(iv)           Where the penalties imposed by the Minister of National Revenue (the "Minister"), pursuant to the provisions of subsection 163(2) properly assessed.

[3]            It was agreed that the evidence adduced in this hearing would also apply to the appeal of Anna Soberano (2001-754(IT)I) ("Anna") and a judgment issued in the appeal of David Soberano will be identical in the appeal of Anna Soberano, except in regards to penalties, which were argued separately and will be dealt with herein.

Issue (i)

[4]            Neither the Appellant nor Anna raised in their Notices of Appeal the issue of the assessments for years 1994 to 1995 as being statute-barred.

[5]            This issue was raised for the first time by the Appellant's agent in his reply argument, obviously after all evidence had been adduced and the Appellant's argument and the Respondent's argument had been completed.

[6]            Subsection 152(4) of the Income Tax Act (the "Act") reads as follows:

(4)            Assessment and reassessment - The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if

(a)            the taxpayer or person filing the return

(i)             has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii)            has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year; or

...

[7]            I am satisfied that the above provision places no limitation period on the Minister to reassess a taxpayer where a taxpayer makes a representation that is attributable to neglect, carelessness or wilful default or where the taxpayer commits a fraud in connection with his or her tax return.

[8]            If this issue had been raised in the Notice of Appeal or at the commencement of the hearing, I would have pointed out that the Respondent had the burden of proof to show that the taxpayers fit within the provision of subparagraph 152(4)(a)(i).

[9]            As all the evidence is before me for the reasons dealt with later herein, I conclude that the Respondent, on a balance of probabilities, has established that the limitation period should be set aside. Since I am satisfied of this, the onus has reverted to the Appellant to show that the assessments were incorrect.

[10]          In any event, the onus was on the Appellant in the 1996 appeal to establish that the assessment was incorrect.

[11]          Fraud means a false representation that is made knowingly or without belief in its truth, or recklessly, or without care as to whether it is true or false.

[12]          The Respondent, in paragraphs 4, 5, 6, 7, 8 and 9 of the Reply to the Notice of Appeal, placed the remaining issues before the Court and they read:

4.              In computing income for the 1994, 1995 and 1996 taxation years, the Appellant claimed non-refundable tax credits in respect of charitable donations in the amounts of $2,938.60, $3,463.98 and $3,642 respectively.

5.              The Minister assessed the Appellant for the 1994, 1995 and 1996 taxation years by Notices of Assessment mailed on June 8, 1995, June 10, 1996 and August 18, 1997 respectively.

6.              In reassessing the Appellant for the 1994, 1995 and 1996 taxation years, by concurrent Notices of Reassessment mailed on February 16, 2000, the Minister disallowed the Appellant's claim for non-refundable tax credits in respect of charitable donation amounts of $2,174, $3,463 and $3,000 respectively, and imposed a penalty pursuant to subsection 163(2) of the Act in respect of the Appellant's claim of non-refundable tax credits for these amounts.

7.              In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a)            in his returns of income for the 1994, 1995 and 1996 taxation years, the Appellant claimed non-refundable tax credits in respect of the following purported charitable donation amounts:

                                                                                1994                         1995                         1996

Or Hamaarav Sephardic

Congregation                                      $5,000.00                    $5,000.00           $3,000.00

Magen David Sephardic

               Congregation                                            764.00                                —                        —

Canadian Friends of Aish

               Hatorah                                                             —                                 —               304.00

Various donations                                                         —                                 —               338.00

Total                                                                     $5,764.00                    $5,000.00           $3,642.00

Total claimed (20% of net                                                                                                              

income in 1994 and 1995)                                $2,938.60                  $3,463.98         $3,642.00

Amount carried forward                                  $2,825.40                  $1,536.02                    Nil

b)             the Appellant did not make charitable donations to Or Hamaarav Sephardic Congregation in the 1994, 1995 and 1996 taxation years;

c)              the receipts submitted by the Appellant to support his claim for charitable donations to Or Hamaarav Sephardic Congregation in the 1994, 1995 and 1996 taxation years are false;

d)             the Appellant knowingly, or under circumstances amounting to gross negligence, in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in the returns of income filed for the 1994, 1995 and 1996 taxation years, as a result of which the tax that would have been payable assessed on the information provided in the Appellant's returns of income filed for those years, was less than the tax in fact payable by the amounts of $630.46, $980.55 and $870.00 respectively.

B. ISSUES TO BE DECIDED

8.              The issues to be decided are:

(i)             whether the Appellant is entitled to non-refundable tax credits for the 1994, 1995 and 1996 taxation years in respect of the disallowed charitable donation amounts;

(ii)            whether the subsection 163(2) penalty of the Act was properly levied with respect to the Appellant's 1994, 1995 and 1996 taxation years.

C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT

9.              He relies on subsections 118.1(1), 118.1(2), 118.1(3), 152(4), 163(2) and 248(1) of the Act as amended for the 1994, 1995 and 1996 taxation years.

[13]          The Appellant's position is that each claimed charitable donation that he made for himself and on behalf of Anna was paid in full and on the same day that the receipts indicate. Upon a finding of this, the appeal would be allowed.

Evidence adduced at the hearing

[14]          The Appellant gave evidence on his own behalf and called as witnesses Rabbi Leon Edery ("Leon") and his wife Anna.

[15]          The Respondent produced Jacob Abecassis ("Jacob") and tendered an Agreed Statement of Facts that was filed in his criminal trial of Regina vs Jacob Abecassis and on consent, the Statement was made Exhibit R-7 and the agent for the Appellant was invited to cross-examine Jacob. The agent declined to ask any questions of Jacob. In argument, he acknowledged that the facts in this Exhibit R-7 are to be treated as facts herein. The Respondent also produced as a witness Felisa Storer ("Felisa") who was Leon's wife.

[16]          At the outset of this hearing, it was obvious that the credibility of the Appellant, Anna, Leon and Felisa would be in issue.

The evidence of the Appellant

[17]          The Appellant was born on January 28, 1963. He claimed to have met Leon at his Bar Mitzvah at 13 years of age, which would be 1976. At that time, he did not live in Leon's district. He and Anna were married sometime prior to 1989.

[18]          It is alleged that in 1994, because Anna was having problems with conceiving, the Appellant's mother suggested that he and Anna should seek spiritual help from Leon.

[19]          In 1994, the Appellant and Anna met with Leon, being the first and only time Anna met Leon and the first time that the Appellant had seen Leon since his Bar Mitzvah.

[20]          The Appellant, when asked the following question: "So then how did you establish exactly what you would pay to the synagogue for his assistance?", answered: "Well, we started discussing it. He had some ideas and we thought it was a lot of money, okay. I had discussed it with my wife and so on, back and forth, while we were there. And we settled on an amount that we would try and give him for the year, you know, during the course of the year. And basically made a commitment with him, or to him, that we would start to support his organizations in view of the fact that he had done a lot for the community and for us. And at that time we still didn't have any kids, so we felt good about what we were doing."

[21]          The Appellant claimed the donations came from rental income of $800 per month, which he claimed that he always received in cash from the basement apartment of the house where he lived, namely 27 Artreeva Boulevard, North York.

[22]          In the Appellant's T1 tax return for 1994, the statement of real estate rental for 110 Bernard does not show a co-owner. No mention of Anna being a co-owner and no mention was made of the basement apartment at 27 Artreeva.

[23]          On the T7B page of this return, the figure of $21,000 is found on line 15, which states "Estimated employment and self-employment income for 1995".

[24]          Nowhere in this return is a financial statement for a sole proprietorship or partnership. There is no indication if the $21,000 was wages from an incorporated company or dividends, the figure just appears without any justification or evidence of anything. The evidence adduced reveals that a lot of personal living expenses were expensed by the hidden business, however it was being operated.

[25]          David's return claims that in 1994, on page "T1 DON", that two charitable donations were made, namely to the Congregation, $5,000 and Magen David Sephardic Congregation, $764. There is only one receipt attached to the T1 tax return, being the Magen David Sephardic Congregation receipt, and it is made out to Mr. and Mrs. David Soberano on September 5, 1994 showing donations totalling $764. This donation is not challenged.

Dealing with the 1995 T1 Tax Returns for the Appellant and Anna

[26]          The front page of the Appellant's T1 tax return shows gross rental of $26,400 and a net rental loss of -.08 ¢ , and again, net business income of $21,000. The T776 Statement of Real Estate Rental only lists 110 Bernard, no mention is made of his co-owner Anna.

[27]          The Statement of Business Activities simply says "Sales Gross Revenue $21,000." No expenses or cost of sales are shown and it states that the Appellant has 100 % partnership interest. There are five separate donations of $1,000 each to the Congregation for a total of $5,000, but no receipts are attached to the return.

[28]          Anna's T1 Tax Return for 1995 shows Rental Gross $9,600 and a loss of $1,022.90 on line 126, and Gross Business Income of $20,000 on line 162 and net of the same amount of $20,000 on line 135. On the page with the heading "Medical Expenses and Charitable Donations", six donations of $500, for a total of $3,000 were purportedly made to the Congregation. No receipts are attached to the return. Under "Real Estate Rental", she claims to be the sole owner of 27 Arteena Boulevard., and a note attached says that the rental is for a basement apartment. She claimed only 50 % of the expenses as personal, which created the loss of $1,022.90.

[29]          Under "Statement of Business Activities", under "Sales Gross Revenue", the sum of $20,000 is shown without any explanation or expenses of any kind whatsoever, and "Partnership Interest" held by taxpayer is shown at a 100 %.

Dealing with the 1996 T1 Tax Returns for both the Appellant and Anna

[30]          The Appellants 1996 T1 Tax Returns, on page 1, show on line 121, investment income of $167.77, net rental $1,127.27, gross business income $114,000 and net of $17,844. He lists on the page for charitable donations the following:

CHARITABLE DONATIONS FOR 1996            T1-DON

Name of Organization	Amount paid
Or Hamaarav Sephardic Congregation	1,000.00
Or Hamaarav Sephardic Congregation	1,000.00
Or Hamaarav Sephardic Congregation	1,000.00
Canadian Friends of Aish Hatorah	54.00
Agudath Israel Of Toronto	36.00
Ner Israel Joseph Tannenbaum	100.00
Anshe Castilla Congregation	26.00
Chabad Lubavitch	26.00
Bikur Cholm Womens Volunteer Group	100.00
Canadian Friends of Aish Hatorah	250.00
Jewish Society For Family Sanctity	50.00
Carry-forwards of donations from the last five (5) taxation years per schedule
Total Charitable Donations (A)	3,642.00

No receipts were attached to the return, again it is only the three $1,000 claimed donations that is before the Court.

[31]          On the page entitled "Summary of Real Estate Rental", both 27 Artreeva and 110 Bernard are shown. In regards to 27 Artreeva, it shows the Appellant and Anna as co-owners, that total expenses of $20,612.00 and a personal portion of only 40 %, whereas the year before, it was split 50-50. There is no way a basement apartment should expense more than somewhere between 25 % and 30 % of the expenses. The loss is split with Anna. In regards to 110 Bernard, this shows a profit that is split 50-50 with Anna in the amount of $3,311.07.

[32]          For the first time, the Statement of Business Activities has gross sales, purchases and expenses producing a net income of $34,316.00. A partnership is claimed therein giving the Appellant 52% for $17,844.63 and Anna 48% for $16,471.69.

[33]          In Anna's T1 Tax Return for 1996, the entries on page 1 are identical to the Appellant's, the treatment of the rental as co-owner is identical and gross business income and expenses are the same. She shows four charitable donations each of $1,000 to the Learning Centre. No tax receipts were attached to the return.

[34]          It was agreed that between the Appellant and Anna, after all alleged donations, RRSP and income tax deductions as filed, that in 1994 they had approximately $13,100, in 1995 they had approximately $14,300, and in 1996 approximately $14,000 of disposable income.

[35]          Tab 5 of Exhibit A-1 has a receipt from the Congregation dated September 30, 1994 for $5,000. The validity of the date is dealt with later herein. I determine that the signature on this purported receipt is not that of Leon.

[36]          All disputed receipts were entered in as various exhibits.

[37]          The Appellant in 1997 and 1998 gave charitable donations to various organizations which were very low in amount as compared to the disputed donations.

[38]          The Appellant claimed that he got each and every receipt at the time of the donation and that all donations were in cash.

[39]          The last alleged donation to either of these two charities was November 1, 1996.

[40]          The Appellant was not informed by Revenue Canada that there was a problem with these two charities and with the alleged donations thereto until October 1998.

[41]          The Appellant claimed that he checked each and every receipt to make sure it was in the correct amount and the correct date, that is the date he made the various alleged donations in cash.

[42]          The Appellant said that he paid the donation to Magen David Sephardic in 1994 by cheque and he received the receipt in the mail. This donation is not in dispute.

[43]          When the Appellant was asked what bank account the cheque was drawn on, his answers were vague, the three answers are:

(1)            I can't remember

(2)            Possible

(3)            I don't know if I have changed banks exactly, no

[44]          The Appellant firstly swore that he paid the $5,000 cash to Felisa. Later, he swore in his testimony that he turned the money over to Leon and his wife filled out the receipt, and when questioned, he said he was aware he turned the money over to Leon. This contradicted his previous testimony, he later changed his testimony and still later, he changed his testimony back to the fact he gave the money to Felisa who then filled out the receipt and Leon signed it.

[45]          When asked about the envelope that contained the alleged cash of $5,000, his answer was "It's confusing me because I can't remember seven years ago what size envelope it was and where exactly I kept it and now she's throwingme that question."

[46]          The cash was alleged to have come from the rental of the basement apartment in their home, which was always supposedly paid in cash.

[47]          The Appellant was asked if he ever deposited this money into a bank and he answered: "It's possible, I can't remember, some of it I may, some of it I may not."

[48]          No bank statements were produced and the tenants at the Bernard property had paid their rent by post-dated cheques.

[49]          The Appellant, when asked if he had a credit card, answered: "I can't remember, but probably for the Company. I would have had one for the Company."

[50]          To the question: "No personal credit card?", he answered: "Yeah, I probably had a personal credit card, yeah."

[51]          Other then the alleged donations in dispute, the other modest donations were all to Jewish charities doing important things in the Appellant's community.

[52]          The Appellant said that he believed most of the money came from the cash from the basement apartment. When asked about "Household Expenses", he answered: "Well, the rents helped out and you have extra money left over, there plus other rents." Then, when asked: "So would that rental income then offset household expenses and things?" He answered: "Oh yeah.".

[53]          The Appellant claimed that in 1996, he was the sole owner of a limited corporation. Yet, no T4s were issued to him or to Anna. I cannot determine if there was a corporation, a sole proprietorship or a partnership.

[54]          Leon first swore that the Appellant gave the money to him personally. Then later in his testimony he said that his wife would be receiving the money sometime, but if both were available, he received the money.

[55]          Leon stated that he presigned a whole bunch of receipts and back dated receipts as much as a year. He admitted they would put whatever date the donor wanted.

[56]          When Leon was shown the September 30, 1994 receipt, compared with all the other receipts, and was asked why that one was so different. His answer was: "It is a good question your Honour, I cannot answer you that question." I am satisfied that Leon did not sign the September 30, 1994 receipt.

[57]          The Appellant as well as Anna were not creditable witnesses. When Anna was asked questions that she felt were not threatening to the Appellant's position, the answers appear forthright. When questioned about matters directly dealing with the appeal, she was not forthright or she did not recall or she hedged her answer.

[58]          She did confirm that all charitable donations made by the Appellant in his or her name were discussed and agreed upon as to the amount.

[59]          She alleged that the downstairs tenants who supposedly paid their $800 monthly rent in cash paid in bills of mostly twenties. She also acknowledged that some of the money was used for household expenses.

[60]          Anna confirmed that the household had two motor vehicles and all of the costs related thereto were paid by the business. The business also paid all credit card purchases.

[61]          When she was asked why the rent was not kept in a bank, she answered "it wasn't that much money that we would deposit."

[62]          Anna said that the downstairs rent was collected by either she or the Appellant. I conclude that she knew at all times if there was such a stock of cash and approximately how much. She acknowledged that the Appellant would go and see Leon and come home with receipts. Thus, she knew the receipts were improperly dated and for amounts far exceeding the cash taken. She also confirmed that the bills did not stack up and would be paid pretty fast.

[63]          For all bills that required payment, Anna would prepare business cheques and have the Appellant sign them.

[64]          The downstairs tenants were husband and wife. He was a carpenter working for somebody (ie, not on self-employed) and she was a school teacher. I conclude that they both would get pay cheques.

[65]          Felisa was called to the witness stand. Her passport shows that she was in Argentina between the following dates: August of 1994 to December 1994; November 3, 1995 to December 11, 1995; and January 12, 1996 to December 1996. Thus, all receipts between these dates are defective.

[66]          Felisa confirmed that all receipts were written by her. She also confirmed that she asked "if they wanted a specific date". "I will ask what date would you want the receipt?"

[67]          Leon was charged with 48 counts of issuing false charitable donation receipts in the name of Or Hamaarav Sephardic Congregation and for Abarbanel S. Learning Centre. He was convicted of all 48 counts.

[68]          Madam Justice Shami, in her written reasons, said in paragraph 3 on the last page of her reasons:

3.              The features of the scheme are common to those who dealt directly with the defendant and also those who "purchased" receipts from the middle man. In all instances the evidence is crystal clear that the defendant issued false receipts. I base my conclusion both on the testimony, as I have indicated previously and also on the copious documentation in the instances that it is relevant.

[69]          Exhibit R-7 confirms that there was a "donation program" in the community where by giving 20 %, the donor got a receipt five times larger and that the two charities were operated by Rabbi Leon Edery. It states that wealthy people donated money to these charities and did not accept receipts because they wanted to remain anonymous. This allowed the charity to write inflated donation receipts for a fee.

Analysis

[70]          From Felisa's passport, the Court has documentary proof that she was out of the country when the following donations and receipts were supposedly made:

-                the September 30, 1994 donation of $5,000

-                the November 24, 1995 donation of $1,000

-                the June 26, 1996 donation of $1,000

-                the July 15, 1996 donation of $1,000

-                the September 25, 1996 donation of $1,000

-                the October 7, 1996 donation of $1,000

-                the November 11, 1996 donation of $1,000

[71]          With this documentary evidence before me and the evidence of Felisa and Leon, I am satisfied that whatever convenient date was requested was put on the receipts. I cannot accept that any of the dates are the correct dates.

[72]          Both the Appellant and Anna claim that their downstairs tenants always paid rent in cash. I reject this outright. All teachers in Ontario are paid by cheque or direct deposit into a bank account. The carpenter who worked for someone else is almost certainly going to be paid by cheque.

[73]          Undoubtedly, some small amount of money was donated sometime or times during the years in question to these two charities, but I cannot determine that amount.

[74]          David's tax returns for 1994 and 1995 are very suspicious, and when you look at all the returns, it appears they were just arbitrarily splitting the income and expensing through the business many personal items. These two returns deliberately omitted pertinent information and deliberately contained false information.

[75]          I therefore conclude that all of the disputed receipts are false, full value was never paid nor were they properly dated.

[76]          Both the Appellant and Anna met with Rabbi Leon and they deliberately entered into the donation program. Both discussed the donations and both had knowledge.

[77]          With these finding of facts that they both took part in this fraudulent scheme, the three-year limitation period does not apply to either the Appellant or Anna and the Minister has met the onus that the penalties should stand and thereof, both appeals are dismissed.

Signed at Toronto, Ontario this 25th day of January 2002.

"Gordon Teskey"

J.T.C.C.

COURT FILE NO.:                                                 2001-756(IT)I

STYLE OF CAUSE:                                               David Soberano and Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATES OF HEARING:                                         August 9, 2001 and January 21, 2002

REASONS FOR JUDGMENT BY:                      The Honourable Judge Gordon Teskey

DATE OF JUDGMENT:                                       January 25, 2002

APPEARANCES:

Agent for the Appellant:                     George A. Ormsby

Counsel for the Respondent:              Tamara Sugunasiri

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2001-756(IT)I

BETWEEN:

DAVID SOBERANO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on August 9, 2001 and

on January 21, 2002 at Toronto, Ontario by

the Honourable Judge Gordon Teskey

Appearances

Agent for the Appellant:                                 George A. Ormsby

Counsel for the Respondent:                         Tamara Sugunasiri

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1994, 1995 and 1996 taxation years are dismissed, in accordance with the attached Reasons for Judgment.

Signed at Toronto, Ontario, this 25th day of January 2002.

"Gordon Teskey"

J.T.C.C.