Citation: 2011 TCC 224
Date: 20110421
Dockets: 2008-3646(IT)G
2008-3647(GST)G
BETWEEN:
ILYAS MALIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(As prepared for delivery from the Bench
on March 23, 2011 at Toronto, Ontario)
Hershfield J.
[1] The Appellant was
assessed under the Income Tax Act (the “ITA”) for unreported
income for the years 2004 and 2005. He was also assessed under the Excise
Tax Act (GST Portions) (the “ETA”) in respect of the period January 1,
2002 to December 31, 2005. All such assessments are being appealed and were
heard on common evidence.
[2] Regarding the
reassessments under the ITA, the gross income reported in 2004 was
$80,030. The amount reassessed under the ITA was $116,623 reflecting an
adjustment of $36,594. The Appellant also claimed business expenses of $67,457
which were reduced by the reassessment to $37,525 reflecting an adjustment of
$29,930. The expenses disallowed related to motor vehicle expenses, travel
expenses, telephone and utilities and capital cost allowance. The taxpayer
claimed rental expenses of $6,800 as well which were reduced to $4,000
reflecting an adjustment of $2,800.
[3] In respect of 2005,
reported gross income of $71,024 was reassessed under the ITA and increased
by $76,042 to $147,066. As well, adjustments in the same business expense
categories as mentioned in respect of the 2004 taxation year were made for 2005
disallowing $35,954 of the $49,585 claimed. Adjustments were also made to
rental expenses in the amount of $11,009.
[4] Assessments under
the ETA were on the basis that the Appellant was a GST registrant and as
such was required to collect and remit GST. It is not disputed that the
Appellant neither collected nor remitted GST claiming his supplies were zero
rated or that his taxable supplies were under $30,000. As a registrant, however,
he claimed investment tax credits (ITCs) for the years 2002, 2003 and 2004. The
Appellant was assessed for GST remittable on the basis of taxable supplies being
the full amount of his gross income as reassessed in respect of the 2004 and
2005 taxation years. With respect to the period from January 1, 2002 to
December 31, 2003 adjusted gross business income was determined to be $85,443
for the 2002 calendar year and $98,130 for the 2003 calendar year. Although
there were no income tax reassessments for those two years, Respondent’s
witness at the hearing, the auditor on the reassessment file, gave evidence
that the reported income in 2002 was $88,383 and in 2003 it was $73,260.
[5] The Appellant
operated a business under the business name Ilyas Enterprises which was assumed
to be, and which he testified to be, operated as a sole proprietorship. However,
he also testified that he was actually a partner in a partnership formed in Pakistan which carried on
business through it agents or partners abroad such as himself in Canada and the
father of one of the partners in Pakistan who represented the partnership in the United States.
[6] The principals in
Pakistan obtained manufactured leather goods from manufacturers in Pakistan and sought markets for
such goods in Canada, United States and elsewhere. The Appellant’s testimony was to the
effect that his role in Canada was to seek orders from potential Canadian retailers and
wholesalers. He would approach potential customers personally, some of which
would be local flea market dealers and others would be just potential customers
taken from lists generated in Pakistan of persons or entities in Canada who were buyers of leather goods
and whose business might be sought by offering similar goods at better prices.
To this end, the Appellant testified that he would take business trips to
places like Ottawa and Vancouver to show samples and generate sales.
[7] At this point, I
note that the Appellant also testified that only 10% or 15% of his sales were
Canadian. He testified that the balance of his sales were to the United States
and Japan. While it seems
credible that the partnership’s business might have only consisted of 10% or
15% in Canada, it is simply not
credible that the Appellant personally did business anywhere other than in Canada to Canadian customers.
To say that his sales were mostly in the United States undermines everything he
said about the way he conducted business in Canada and the way the partnership did
business in the United States through its representative there.
[8] Here I note, as
well, that the assumptions in the Reply to the GST Notice of Appeal reflected what
the auditor was told during initial audits namely that the Appellant’s
customers were located in Canada, the United States and Japan. I do not believe the Appellant’s
testimony supports this factual assumption. That is not to say that I find the
auditor’s testimony as not being believable but rather my finding speaks to the
Appellant’s disregard for telling things as they are.
[9] Indeed, my general
impression of the Appellant’s testimony is that it is for the most part unreliable.
When he needed to make a particular assertion to support what he believed would
be a self-serving purpose, his story would frequently change accordingly. On
the other hand, where he saw no obvious self-serving purpose, much of his
testimony painted a picture of his business that was quite probable, if not
entirely true.
[10] For example, after
acknowledging that there were several partnerships in Pakistan all tied to the same business, he
was asked why so many. His answer suggested was that there was really only one
partnership or one business and that the partners in Pakistan simply managed all the accounting amongst
different partnerships in such a way as would enable the best banking
arrangements and the best tax results. That is to say that his income
allocations may well have been somewhat arbitrary or formulistic based on considerations
other than sales in Canada.
[11] Indeed, his first
story to the auditor was that the unaccounted for receipts that the auditor
eventually included as unreported income were all money from the Pakistan business. He then said
in his Notice of Appeal that such amounts were gifts from family members. Then
at trial, he presented evidence that they were loans from family members in Pakistan. The evidence produced
was attested to certified statements from family members in Pakistan who acknowledged giving
loans in the subject years that happened to equal in total each year the amount
assessed as unreported income for that year. As well, the wording of each was
such as to reflect that they were dictated to each for signature. “I paid --
(such and such) -- as borrowed -- Because he got difficult time in Canada and he is living with
family”. That same quotation appears in all three exhibits.
[12] When it was
suggested that the evidence that he was producing in respect of loans from family
in Pakistan were prepared for the purposes of the trial and prepared much later
than when the loans were actually made, the Appellant testified that there was
correspondence at the time the loans were made in letters he sent that
confirmed monies were being lent to him but that the family members in Pakistan would have those
letters, not him. It is noteworthy that none of the certified acknowledgements
referred to any such letters.
[13] When confronted with
the assertions in the Notice of Appeal that they were gifts, he then said that
they were really gifts at the beginning but that there was always an
understanding that they could ask for the money back later and they did ask for
the money back some years later and it was eventually repaid this last year. It
is hard to guess what story he would conjure up to explain the inconsistency of
his testimony as it pertained to the letters he asserted he wrote documenting
that they were loans at the outset. His counsel offered the explanation that
this reflected the way family support was extended in Pakistan, however, that explanation has not
impressed me given my general distrust of the Appellant’s testimony.
[14] That is not to say, however,
that I would not make allowances for misunderstandings when it comes to
questions and answers in a litigation context, particularly in a case such as
this, where the Appellant’s English was such that he often relied on the
interpreter engaged by the Court for that purpose. For example, the Appellant
testified that he did all of his business at home. That is, he took
orders and filled orders by telephone and the like all out of the home office.
He also testified that he would go to flea markets on weekends to deal with
retailers there, as well as testifying that he would take samples on sales trips
to places like Vancouver and Ottawa. I accept the likelihood that he intended all answers to
accurately describe how he carried on business. He just did not relate the need
to elaborate on his answers to the questions first posed. Yet, if it were not for
follow-up questions as to how he carried on his business, the answers to the
original questions on the home office would have left a completely wrong
impression of how the Appellant carried on the business. That said, while being
sensitive to such communication difficulties, I remain distrustful of much of
the Appellant’s testimony.
[15] Returning for a moment
to the exhibits of certified acknowledgments of loans, I note that Respondent’s
counsel objected to the admission of these exhibits as hearsay suggesting that
there are ways to put in evidence from witnesses abroad that would permit
cross-examination. While he is correct that the evidence is hearsay and could
not be given any weight as to the truth of their content, I reserved my finding
to admit those exhibits in order that I could assess their relevance in the
context of all the evidence presented at the hearing. Considering that context,
I eventually denied the objection and allowed the exhibits to be entered as
tendered including an exhibit which was Mr Malik’s own affidavit respecting the
so-called loans. That affidavit did not correspond with his testimony at the
hearing given under affirmation. At the hearing he said the loan in 2005 came
from one person – a friend. The affidavit says the loans came from two
relatives.
[16] Returning now to the
reassessments, it is important to deal with the methodology employed by the
auditor in quantifying the unreported income. The assessments were done using
what was referred to as a bank deposit methodology. The Appellant maintained
several bank accounts. Essentially, there were two accounts that made up almost
100% of the income reconciliation done by the auditor. There was a business
account and a personal chequing account. The auditor included all deposits from
both of these accounts as business income. She did this on the basis that the
Appellant had told her that he did not deposit all business receipts into the
business account but made such deposits in either account and further that the
income from Pakistan was put into the personal account. A read-in from discoveries also
confirmed an admission by the Appellant that partnership distributions from
Pakistan were deposited in his accounts in Canada.
[17] Admittedly, it is
difficult to defend against such methodology but the Appellant is a victim of
his own wonton disregard for acceptable business and accounting practises. He
said he relied on what he was told by people and on an accounting service
operated by a person who was not a professional accountant.
[18] Notwithstanding language and cultural issues here,
which may have influenced the Appellant’s conduct in terms of how he carried on
business, who he relied on for accounting and tax advice and how he dealt with
the auditor and the appeal process, I am not satisfied that at the end of the
day he can be given any latitude in respect of these appeals. The Canadian tax
system is based on a self-reporting system. This applies to new Canadians, who
venture into new business activities in Canada, as much as it applies to seasoned
business persons. The lack of proper accounting records and supporting
documents, in this case, has not only made it impossible to determine with any
degree of certainty the actual business income of the Appellant but it is
further blurred by an organizational structure emanating in Pakistan. Such
arrangements must be documented in such a way so as to identify with certainty
the legal nature of the relationships of the parties as well as their income
entitlements so as to permit consistent and legally effective income and
expense allocations amongst the various jurisdictions in which these
enterprises operate.
[19] Mr. Malik testified
that his income in Pakistan was reported in Pakistan not
Canada. On being confronted with
inconsistencies in respect of that testimony, Mr. Malik said it was not him
that would have reported any income in Pakistan. It would have been the
partnership that would have reported it. Needless to say, he did not indicate
which of the several partnerships, that he had testified existed, reported the
income. I have the distinct impression that he would not know the answer to
that nor do I trust that there was any reliable reporting done in Pakistan.
[20] In any event, as a
resident of Canada he is liable to report his world wide income in Canada and the lack of records
is unacceptable. It is the taxpayer’s task, in order to be successful, to take me
out of the cloud in which I find myself in this case. The lack of a legal
format, the extent of cash dealings, and the wanton disregard for recordkeeping
simply makes it nearly impossible to do more than what the auditor did, namely,
look to the bank deposits. In this regard, the Appellant’s counsel submitted
evidence that the auditor had done a net worth assessment, as well, which
established under that approach that there would be much lower unreported
income than that assessed using only the bank deposit approach. Indeed, he
pointed out that the net worth approach determined that there was no under-reporting
of income in 2004 and only some $20,000 of unreported income in 2005. The
Appellant’s counsel sought justification for the methodology used when it was
clear that a net worth approach would have yielded a completely different
result.
[21] The auditor’s answer
to this was two-fold. Firstly, she said that the net worth that had been shown
to the Appellant and tendered as an exhibit was only a rough draft and could
simply not be relied on. Secondly, and I think more importantly, she did the
assessment on a bank deposit basis because of what Mr. Malik had told her in
their initial interviews. That is that the deposits came from his business
arrangement in Pakistan and that money was put directly into both his business and personal
accounts.
[22] As well, I note here
that in yet another exhibit, tendered to explain other sources of money, there
is translated correspondence relating to a sale of property in Pakistan showing that proceeds were
to be applied against a loan. On the other hand, it was pointed out on
cross-examination, that Mr. Malik had purchased property in 2006 in Pakistan and the inference of
that question was that he still had the proceeds from the earlier sale to apply
to further real property purchases in Pakistan. Mr. Malik’s response was that this was an
occurrence every year that he bought and sold property in Pakistan for a profit.
[23] Needless to say,
there is no explanation as to why these profits on sales of property in Pakistan on a yearly basis are
not shown in the two returns submitted as exhibits at the hearing. Perhaps, if
these transactions had been disclosed to the auditor, a net worth assessment
might have had a different result but, regardless of that, I have little
confidence that Mr. Malik has made any effort to find out what his
responsibilities are in Canada as a Canadian resident in respect of his tax obligations.
[24] That takes me to
comment on the expense denials in respect of the income tax assessments. In
cases like this, I often consider the possibility of doing what even the
Appellant’s counsel in this case did not ask me to do which is to give better
recognition to expenses that would obviously have to have been incurred. An
example of this would be expenses in relation to the automobile. The Appellant
did testify that he had two vehicles and that one was used 100% for business. However,
he kept no logs or other records that would assist in the determination of the
extent of business use. On the other hand, to allow no business use in the face
of testimony accepted by me would be something I might attempt to avoid. It is after
all credible that there was business use of his vehicle in the Toronto area such as, for
example, visits on weekends to flea markets. However, he did not describe the
distance travelled to any flea markets or the frequency of such visits to flea
markets. He did not provide records that would indicate mileage at the
beginning of the year versus mileage at the end of the year so that total
distance travelled in a year might be assessed against the likely distances
travelled to places like the flea markets. While such evidence is not of the
type generally preferred, compared to detailed mileage logs, it is,
nonetheless, possible to reconstruct with some degree of accuracy some
percentage of business use for an automobile. Sometimes even an appointment
book, which obviously was not maintained in this case, might be of some
assistance in this regard.
[25] Still, recognizing
that such expenses are inevitable in the business accepted by me as having been
performed in Canada should logically allow for some recognition. Indeed, I have in the past
on occasion dispensed rough justice based on simple logic and have encouraged
agreements amongst the parties on that basis as well. I maintain the
correctness of that position in spite of the Crown’s reliance on Haniff v.
The Queen, a
February 2011 decision of Justice Boyle who cited a decision of the former
Chief Justice Bowman who in essence said that it is not for a judge who is only
left with a vague suspicion that assessments may be somewhat in error, to
redress such error when it is clear that the taxpayer is unable to provide any
degree of specificity in respect of the required treatment. While that rings
entirely true in this case in respect of the income inclusions, I am not so
convinced of its application in this case as to the allowance of certain
expenses.
[26] However, in that
regard, my hands are still essentially tied. It appears that the auditor
already allowed, for example, for 10% of the automobile expenses and a good
portion of the telephone expenses presumably incurred by the use of the phone
in his home office. I have no basis to increase the allowable portion of these
expenses or to allow other unclaimed home office expenses.
[27] The only other
expense that was dealt with at the hearing was the travel expense where the
Appellant testified that the travel expense of his wife and son to go to
Pakistan should have been allowed as a business expense since they went there
to conduct some business on his behalf when he was under some travel
restrictions at the time. I do not find this testimony which is anything but
disinterested very reliable. I am of the view that business in Pakistan was run
by a Pakistan partnership in respect
of which his wife and son, in all probability, would have little to do with. Accordingly,
I make no adjustments to the assessments as they relate to allowable expense
deductions except in respect of the 2005 expenses related to the rental income
in that year which allowance the Respondent has conceded.
[28] As well, at the
hearing, the auditor testifying for the Respondent acknowledged an
overstatement of gross income of $5,000 for the 2004 year and accordingly that
amount should be reduced from the assessed amount.
[29] That takes me lastly
to deal with the GST assessment. As a registrant the Appellant is required to
collect and remit GST on all transactions. His assertion that his transactions
would be zero-rated under Part V of Schedule VI of the ETA as supplies
for export, have not been proven. As I have indicated, I do not find it
credible that his business included any foreign sales except to the extent that
he was allocated a share of income from the Pakistan partnerships. However, to the
extent that income is properly considered as income by virtue of it being
received as such from a Pakistan partnership source, it is not income in respect of which
GST can be presumed to be assessed. While I could, of course, adopt the
practice enunciated in Haniff namely where there is no specificity, then
there is no tax break, I cannot in good conscious do that in this case. The
auditor herself formulated her assessment methodology on the basis that the
unreported income was coming from Pakistan. It was the theory of the Canada Revenue Agency’s
approach. It is wholly inconsistent with that theory to assess GST on such
gross income as if it reflected sales in Canada. Further, it cannot be a
coincidence that I have formed the exact same view of this case. Acknowledging
that there is inevitably some degree of arbitrariness in accepting reported
gross sales as Canadian business and accepting unreported receipts, as
evidenced simply by bank deposits, as not reflecting taxable supplies, I am
still satisfied that the evidence viewed in the light of the assessing theory,
demands my accepting such approach to the quantification of the Appellant’s
liability under the ETA for the subject period. There is no pretence
here, in any event, that the assessments are accurate – they ignore the cash
transactions that never reached the bank accounts that the Appellant admitted
to – they do not account for real estate sales in Pakistan and they may, in
fact, have included some as business receipts but, at the end of the day, except
as allowed here, the Appellant has not satisfied the burden placed on him to
prove that the assessments are wrong.
[30] As to the ITC denials
under the assessments under the ETA, no evidence was tendered as to any
entitlement to the credits claimed by the Appellant. It is unlikely that he
paid GST in respect of any of his purchases.
[31] One last comment on
the reporting obligations and the bank deposit methodology used in this case lest
the Appellant has not learned something in the course of these assessments and
the prosecution of his appeals. Two things should be obvious from this Judgment.
One is that both the Appellant’s domestic and foreign business arrangements
need to be organized and structured, in a legal manner, with appropriate
documentation in place to support the filing position arising from that legal
structure. Secondly, a bookkeeper or accountant is going to sooner or later
have to show the Appellant that business bank accounts need be segregated to
account for all business transactions and that each and every bank entry
requires a support ledger that indicates the nature of the entry and the
background to it. Behind that ledger are the physical documents that support or
evidence the explanation of the entry. Without the latter supporting
documentation, ledgers will become questionable and will lose their value in
supporting a particular treatment in respect of bank statement entries.
[32] Finally then to
summarize my findings, the 2004 appeal of the reassessment under the ITA
is allowed by reducing the reassessed business income by $5,000 from $116,623
to $111,623. The 2005 appeal of the reassessment under the ITA is
allowed by increasing the allowable expense in respect of the rental property
by $11,009. The appeal in respect of the assessment under ETA is allowed
by reducing the taxable supplies as follows: for the 2003 calendar year to $73,260;
for the 2004 calendar year to $80,030; and for 2005 calendar year to $71,024
[33] Costs are awarded to
the Respondent on the basis of a single Class A appeal.
Signed with minor edits at Winnipeg, Manitoba this 21st day of April 2011.
"J.E. Hershfield"
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