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Citation: 2003TCC24
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Date: 20030206
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Docket: 2002-730(IT)I
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BETWEEN:
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MARC KADOCH,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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AND
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2000-782(IT)I
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BETWEEN:
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JUDITH KADOCH,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip, J.T.C.C.
[1] Marc Kadoch and
his wife Judith Kadoch appeal income tax assessments for 1994 and
1996 claiming that they made donations to certain registered
charities and that they are entitled to the tax credits referable
to the donations calculated in accordance with subsection
118.1(3) of the Income Tax Act ("Act").
The appellants also state that in any event, the assessments for
1994 and 1996 are not valid since they were made more than three
years after the dates of the original assessments for the years:
subsection 152(4). The appellants also appeal penalties
assessed pursuant to subsection 163(2) of the Act.
[2] Mr. Kadoch also
appeals assessments for 1997 and 1998 for the same reasons: he
made donations to certain registered charities in those years and
is entitled to the tax credits and he ought not be assessed
penalties pursuant to subsection 163(2) of the
Act.
[3] The Minister of
National Revenue ("Minister") denied the tax credits on
the basis that the appellants did not make donations to the
registered charities and filed fraudulent receipts in support of
their claims for charitable donations. In filing tax returns for
1994 and 1996 the appellants made misrepresentations that were
attributable to neglect, carelessness or wilful default and
therefore the Minister is not restricted from reassessing after
the statutory period set out in subsection 152(4) of the
Act. Also, the appellants knowingly, or under
circumstances amounting to gross negligence, in carrying out
their duties or obligation under the Act made or
participated in, assented to or acquiesced in the making of false
statements or omissions in their respective tax returns filed for
the years under appeal and are therefore liable for penalties in
accordance with subsection 163(2) of the Act.
[4] The appeals were
heard on common evidence. Mr. Kadoch represented
Mrs. Kadoch and was the sole witness for the appellants.
[5] These appeals
have their genesis in the activities of a
Rabbi Leon Edery. Rabbi Edery arrived in Toronto
in 1967 and soon led a small Sephardic Congregation on Bathurst
Avenue. In 1971 he received a provincial charter for
Or Hamaarav Sephardic Congregation ("Or
Hamaarav"). Rabbi Edery testified that at the time he
was also teaching and raising funds for Morrocan Jewish families
immigrating to Toronto and for the education of their children.
He also arranged to distribute clothing, books and other items to
recent immigrants.
[6] Rabbi Edery
started a day-care centre in 1983 under the name Abarbanel
Sephardic Learning Centre ("Abarbanel"). He raised
money for Abarbanel as well. The day-care was in the building
owned and occupied by Or Hamaarav. Or Hamaarav
defaulted on its mortgage in 1985 and lost the building.
[7] Rabbi Edery
continued to raise money for his various works. Or Hamaarav
and Abarbanel continued to exist but Rabbi Edery discovered
it was getting difficult to get donations. As he said,
"People don't want to give money to a loser".
[8] Rabbi Edery
or a business associate − the evidence is not clear −
then presented a marketing scheme to potential donors that they
would get a charitable receipt for (generally) ten times the
amount of the actual donation, that is, the amount actually
donated would represent 10 per cent of the face amount of the
receipt. Rabbi Edery testified this was the "only way
to raise money". In some cases the donor would write a
cheque and Rabbi Edery would return to them
90 per cent of the amount of the cheque in cash and a
receipt for the full amount. Thus a cheque for $1,000 would get
the donor "cash back" of $900 plus a receipt for
$1,000, which he would claim in his tax return. Sometimes the
donor got back more or less than 90 per cent of the
receipt amount. In other cases a donor would give cash equal to
10 per cent of the receipt. Rabbi Edery did acknowledge that
"two or three" people did give donations and did not
ask for "cash back". Mr. and Mrs. Kaboch were
not the "two or three" people, according to
Rabbi Edery.
[9] In 1996 or 1997
Rabbi Edery, formed another charity, Mincha Gedolah
Synagogue ("Gedolah"), to assist immigrants from
Russia.
[10] In his income tax
returns Mr. Kadoch claimed to have made donations in the
amounts of $7,500 and $1,500 to Or Hamaarav in 1994 and
1996, respectively, $7,500 to Gedolah in 1997 and $5,000 to
Abarbanel in 1998. Mrs. Kadoch claims to have donated $2,300
and $2,500 in 1994 and 1996, respectively, to Or Hamaarav.
[11] During the time he
operated the charities and sought contributions, Rabbi Edery
stated, he gave a commission, usually 5 to 10 per cent of the
actual amount donated, to persons who referred donors to him or
who brought him money from donors. The names of
Rabbi Edery's agents are on lists seized by officials of
Revenue Canada at the time. Mr. Kadoch's name appears on
such a list. Mr. Kadoch denied ever receiving a commission.
Rabbi Edery declared "the whole community" knew
about the commissions.
[12] Rabbi Edery
explained that he would cash a cheque within several days of
receipt. He said he never lost a cheque. "We kept good
records. We never lost anything." Thus, if Mr. Kadoch
gave him a cheque on December 28, 1998, he would cash it at the
end of 1998 or early January 1999; he would not wait until May
1999, for example. A receipt would be issued sometimes
immediately, sometimes days after the donation. The "cash
back" would wait until the cheque cleared the bank, unless
the cheque were certified. Rabbi Edery admitted that he did
not always issue timely receipts. He would agree to backdate
receipts to a year prior to the year in which the donation was
made.
[13] The only person
authorized to issue receipts for all three charities was
Rabbi Edery, according to him. All receipts issued to Mr.
and Mrs. Kadoch were signed by Rabbi Edery. The rabbi stated
that for a period of time an unauthorized person was issuing
forged receipts.
[14] The three charitable
organizations ceased operation in 2001. Rabbi Edery
acknowledged he was found guilty of tax evasion and other
offences under the Act and was sentenced to 12 months
house arrest, community service and a "penalty" of
$32,229.
[15] Mr. Kadoch
insisted that he and Mrs. Kadoch made the donations they
said they did and they did not receive any "cash back"
nor did they obtain any receipt for an amount greater than the
amount each actually contributed. Mr. Kadoch declared he had
no reason to get any money back from the charities. He said he
"gives lot of money as donations". "Last
year", he asserted, he gave donations aggregating $22,000.
His annual income is approximately $140,000.
[16] Or Hamaarav was
situated across the street from Mr. Kadoch's residence
and Mr. Kadoch attended services there. He even served as
cantor. Mr. Kadoch has known Rabbi Edery for over 30
years. He was aware of Rabbi Edery's organizations.
Mr. Kadoch recalled he had relatives who were helped by
Rabbi Edery. He described Rabbi Edery as a "person
of integrity" who helped "lots of families in
Toronto". Mr. Kadoch contributed to Rabbi Edery's
charities because the rabbi was "beneficial to the
community" and was active in "good causes". He did
not suspect Rabbi Edery may have been involved in fraud,
although in 1996 or 1997 Rabbi Edery told him fraudulent
receipts were being issued in the name of his organizations.
[17] During the early
years, Mr. Kadoch recalled, he gave cash contributions;
later, when Rabbi Edery said fraudulent receipts were being
issued, Mr. Kadoch was requested to give cheques.
Mr. Kadoch recalled that he would put cash in an envelope
and then get a telephone call that receipts were available for
him.
[18] Mr. Kadoch was
cross-examined with respect to two cheques he issued, one dated
December 31, 1997, payable to Gedolah and presented for payment
on February 5, 1998, the other cheque, dated December 28, 1998,
was payable to Abarbanel and was presented for payment on May 25,
1999. The respective receipts were dated December 31, 1997 and
December 28, 1998. The former cheque apparently represented
donations made during 1997 although Mr. Kadoch could not
explain the late date the cheque was presented for payment. The
latter cheque was made to replace an earlier cheque made in 1998
that was lost by Rabbi Edery, he explained. I note that this
evidence is contrary to that given by Rabbi Edery who took
pride in declaring he never lost a cheque.
[19] At no time did he
receive money in consideration of services performed by him,
Mr. Kadoch insisted. He never solicited funds for
Rabbi Edery's organizations, except from family members.
He gave of his time freely when performing cantorial
services.
[20] Mr. Kadoch
testified that Mrs. Kadoch was not involved in making any
donations. He acted for his wife; he made the contributions for
his wife in cash; he prepared his wife's income tax
returns.
[21] An investigator for
the Canada Customs and Revenue Agency ("CCRA"),
Mr. Frank Menniti, testified that the scheme practiced
by Rabbi Edery was concocted by a tax preparer named Jacob
Abacassis. Revenue Canada, the predecessor to the CCRA, was
attracted to Mr. Abacassis' clients because they claimed
large business losses and receipts for substantial donations from
charities under the control of Rabbi Edery. Search warrants
were executed against Or Hamaarav and Abarbanel. Many
contributors informed the CCRA they obtained receipts for
payments equal to 10 to 20 per cent of the amount of the receipt.
The CCRA seized carbon copies of donation receipts, donor lists
and bank records of the charities.
[22] Mr. Menniti was
able to trace large amounts of money deposited into the relevant
bank accounts and large withdrawals by way of cash or draft. He
concluded that money did go to the charities but about 90 per
cent of the donations were withdrawn and given back to the
donors.
[23] Mr. Menniti
testified that there was a great disparity between what the
organization reported to Revenue Canada and what they received.
For example, Abarbanel reported on its tax return for 1994 that
it received $285,967 but the total amount of the receipts issued
for the year, as taken from the carbon copies seized, was
$758,807. The $285,967 was "close to the amount that
actually went into the bank", according to Mr. Menniti.
But the CCRA today has no idea how much money was actually
collected. According to Mr. Menniti records of the charities
do not indicate where the funds withdrawn from the bank accounts
were going, that is, to help needy families or for some other
purpose.
[24] Exhibit R-10 is a list
of contributors with family names starting with the letter
'K'. Mr. Kadoch's name appears in the margin
beside one name (other than his and his wife's) on that list.
According to Mr. Menniti, Mr. Kadoch was responsible
for that donation. Mr. Menniti also went through other lists
of names and found Mr. Kadoch's name was in the margin
opposite eight donors' names. Most of these contributors
resided on the island of Montreal. Mr. Kadoch stated these
people were related to him. Two contributors, Mr. and
Mrs. Laffredo, told Mr. Menniti they paid
Mr. Kadoch the full amount indicated on their receipts.
[25] These appeals are
determined on who is more or less credible, Rabbi Edery or
Mr. Kadoch. Rabbi Edery acknowledged that he was
convicted of several charges under the Act as well as the
penal sanction against him. He explained clearly his
participation and guilt in the scheme he caused Or Hamaarav,
Abarbanel and Gedolah to participate in. He has served his
sentence and he has nothing to gain in giving coloured or false
testimony. Although I am confident from observing him that
Rabbi Edery would not hesitate to colour his evidence if it
would assist him, there is nothing in his evidence in these
appeals that causes me to suspect any significant portion of
it.
[26] On the other hand,
Mr. Kadoch's evidence was self-serving and questionable.
For example, he explained a late receipt was due to
Rabbi Edery losing one of his cheques. Rabbi Edery
stated that his records were immaculate and that he never lost
any cheque. At the same time he was prepared to antedate
receipts. There is no reason for Mr. Kadoch's name to
appear opposite those of several donors, except for the reasons
given by Rabbi Edery. In his cross-examination by
Mr. Kadoch, Rabbi Edery was not hesitant in declaring
that he gave cash back to Mr. Kadoch. Based on what was seized
from Rabbi Edery's premises, according to
Mr. Menniti, and Rabbi Edery's practice of issuing
receipts, I prefer his evidence over that of Mr. Kadoch. I
also find that Mr. Kadoch knew of the scheme and willingly
participated in it. I have no doubt, however, that
Mr. Kadoch did make donations to the three charities, but
not in the amounts he says.
[27] Mr. Kadoch
referred me to the reasons for judgment in Bentolila et al. v.
The Queen.[1]
Those appeals were also concerned with claims for
non-refundable tax credits for donations made to Or
Hamaarav and Abarbanel. The evidence led in those appeals differ
from the evidence before me. The appellants in Bentolila
did not testify. Miller J. was not prepared to extend the normal
reassessment period in subsection 152(4) or confirm penalties
assessed under subsection 163(2) simply because the appellants
failed to testify. This is not the case at bar.
[28] I have concluded that
Mr. Kadoch made donations to the three charities with the
expectation that he would get cash back or obtain a receipt for
an amount in excess of the amount he gave to the charity. He knew
of Rabbi Edery's so-called marketing program. Thus, as
far as Mr. Kadoch is concerned he made a misrepresentation in his
income tax returns for 1994 and 1996 that was attributable to
neglect, carelessness or wilful default or committed fraud in
filing the returns: subsection 152(4). The Minister may therefore
assess beyond the normal reassessment period.
[29] I find that since Mr.
Kadoch was aware of Rabbi Edery's scheme and participated in
obtaining receipts that he knew were excessive, he knowingly or
under circumstances amounting to gross negligence participated
in, assented to or acquiesced in the making of a false statement
in his tax returns for 1994, 1996, 1997 and 1998 and is therefore
liable to the penalty set out in subsection 163(2) of the
Act.
[30] As far as Mrs. Kadoch
is concerned the evidence is that her husband made the donations
on her behalf, received the false receipts on her behalf and
prepared and filed her 1994 and 1996 tax returns. While she
appears to have relied on her husband to do all this, there is no
evidence before me that she personally signed her tax returns or
that she knew what was going on. Her tax returns were not
produced. Mrs. Kadoch was present during the trial of the
appeals. Even though she was not called as a witness by her
husband, the respondent could have called on her to testify.
There is no evidence suggesting that I should attach
Mr. Kadoch's knowledge of Rabbi Edery's scheme
to his wife. There is no evidence that Mrs. Kadoch knew of
her husband's participation in the scheme or that she made
any representation of any kind in her tax returns. On the
evidence before me the Minister did not have the right to assess
Mrs. Kadoch beyond the normal reassessment period.
[31] The respondent also
had the burden of establishing the facts justifying the
assessments of the penalty against Mrs. Kadoch pursuant to
subsection 163(2) and did not do so.
[32] Therefore, the appeals
of Mr. Kadoch from assessments for 1994, 1996, 1997 and 1998 are
dismissed and the appeals of Mrs. Kadoch from assessments
for 1994 and 1996 are allowed and the assessments are
vacated.
Signed at Ottawa, Canada, this 6th day of
February 2003.
J.T.C.C.
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