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Date: 20030130
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Docket: 2000-3334(IT)G
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BETWEEN:
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MICHAEL S. CHOMICA,
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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
Bowman, A.C.J.
[1] This appeal is
from an assessment for the appellant's 1994 taxation year,
for which the appellant did not file an income tax return. By
that assessment the Minister of National Revenue added the sum of
$184,175 to the appellant's income being the total of $159
interest income (which the appellant does not contest) and
$184,016 as "unreported commission income" (which he
does contest). $184,016 is the Canadian dollar equivalent of
$134,712 US which the Minister assumed was received by the
appellant as commissions from a company, Hi-Tech Trading
Corporation, from his participation in a scheme to defraud
American investors by enticing them into transactions involving
the metals indium and germanium. The Minister also assumed that
the appellant participated in the scheme under a false name,
Michael Colby.
[2] The disposition
of this case depends solely upon the evidence and involves a
consideration of principles relating to onus of proof in civil
cases, and specifically in income tax appeals. Since the
respondent has put the appellant's credibility in issue a
brief description of the background facts is in order.
[3] The
appellant's counsel described him as a racing tout - a person
who earns his living betting on horses. He is 46 years of
age and left school before completing grade 10. He went to
work at the Ontario Jockey Club as a mutual teller for about
11 years at racetracks in Ontario such as Old Greenwood,
Garden City, Mohawk and Woodbine. The circumstances of his
leaving his employment were not disclosed in the evidence. For
about three years after leaving his employment he devoted himself
full time to gambling, but, apparently, not too successfully. He
became indebted and decided that staying around Toronto might be
injurious to his health. His creditors, it seems, were not
gentlemen.
[4] He went to
Amsterdam in April 1986 and met some Canadians in a nightclub who
offered him a job selling shares by telephone. His employer was a
company called Regent Capital Corporation. He was given a list of
potential customers who lived all over the world. His job was to
contact them by telephone and persuade them to buy stocks listed
on the Alberta Stock Exchange. He had no training in selling
stocks and if a licence to sell stocks in Holland was required he
had none. He was paid a commission in cash and a living
allowance.
[5] In October he
left Amsterdam and went to Geneva, Switzerland, where he worked
at the same sort of thing for a company known as Falcon Trust
Financial/Equity Management Services. The stocks sold from Geneva
were not listed on any stock exchange. In May 1987 he left Geneva
and went to Madrid where he engaged in the same sort of activity
for a company, International Investment Consultants. In his
forays into the murky world of international telephone peddling
of stocks he did not use his real name. He used such names as
Michael Preston, Michael Wainright and Michael Philips. He stated
that he did not know why his employers told him to do so.
[6] He says that he
was able to save about $150,000 US when he was working in
Europe which he brought back to Canada in December 1987.
[7] On his return to
Canada he paid off his debts and resumed gambling, which involved
betting on harness racing.
[8] In June 1992 he
incorporated a company called Crown Capital Management
Corporation ("CCMC"). He was the sole shareholder and
director. He stated that his reason for incorporating it was to
create a business structure but what that business structure was
to be is unclear.
[9] In 1994 he was
introduced by somebody called Walter to a shadowy character who
went under the name of Sean in a Pat & Mario's
restaurant. He never did learn Sean's last name. He and Sean
entered into an oral arrangement whereby his company CCMC rented
space at 250 King Street East, Toronto in June or early
July. It was above a store and consisted of three rooms plus a
living room, a kitchenette and a shower. He had four phone lines
installed in the name of CCMC.
[10] The appellant's
evidence was that he did not know the names of the people who
used the phone lines. His job was to keep the place clean and
take out the garbage.
[11] He says that he was
generally aware that some sort of telemarketing operation was
going on. The names he did know were Sean (last name not known),
Walter Fantin and Michael Colby who, he says, was often drunk. He
admits that he occasionally helped Michael Colby to prepare fax
cover sheets. He admits that it is his handwriting on two fax
cover sheets on the letterhead of Hi-Tech Trading
Corporation.
[12] The appellant says he
was paid cash by Sean in the amount of about $400 or $500 per
week, plus expenses plus 5%.
[13] The amounts of the
phone bills in respect of the four phone lines came to CCMC at
250 King Street East, Toronto and he says were paid to him
in cash by Sean and he paid the telephone company in cash. The
bills were very large and were mostly for calls to the United
States. Some were to Nassau to the number of Hi-Tech Trading
Corporation. There were also calls to the United Kingdom and
other European countries and Hong Kong. Clearly, the
telemarketing scheme was extensive. It lasted a few months at the
King Street location and the lease was terminated in October
1994.
[14] The assessment is
based on the assumption that the appellant earned
$134,712 US as commission for his participation in the
scheme.
[15] The appellant denies
that he was operating under the name of Michael Colby or that he
was involved in the telemarketing scheme except to the extent of
renting 250 King Street East, paying the phone bills and
taking care of the property or that he received commissions in
the amount assessed or at all.
[16] I start from the
observation that in my view the whole business smells to high
heaven. It was operated by unsavoury characters who, if they were
lucky, managed to keep one jump ahead of the law and, if they
were not, got caught. However just because I have or happen to
dislike and distrust people who are involved in these schemes
does not mean that I can totally ignore the rules of evidence and
base my decision on visceral instincts and inadmissible
evidence.
[17] The fundamental rule
in income tax appeals and that is that the taxpayer has the onus
of demonstrating that the factual assumptions upon which the
assessment is based are wrong or do not support the assessment.
This rule is well settled and I need not repeat the usual
authorities that are traditionally cited in support of it.
However the standard of proof is a civil one and a prima
facie case, if unrebutted, will entitle a taxpayer to
succeed.
[18] The law has been
refined somewhat since Johnston v. M.N.R., [1948]
S.C.R. 486, and specifically in Hickman Motors Limited v.
The Queen, 97 DTC 5363 (S.C.C.), where
L'Heureux-Dubé J. said at pages 5376-7:
K. Onus of Proof
As I have noted, the appellant adduced clear,
uncontradicted evidence, while the respondent did not adduce any
evidence whatsoever. In my view, the law on that point is well
settled, and the respondent failed to discharge its burden of
proof for the following reasons.
It is trite law that in taxation the standard
of proof is the civil balance of probabilities: Dobieco v.
M.N.R., [1966] S.C.R. 95, and that within balance of
probabilities, there can be varying degrees of proof required in
order to discharge the onus, depending on the subject matter:
Continental Insurance v. Dalton Cartage, [1982] 1 S.C.R.
164; Pallan v. M.N.R., 90 DTC 1102 (T.C.C.) at p. 1106.
The Minister, in making assessments, proceeds on assumptions
(Bayridge Estates v. M.N.R., 59 DTC 1098 (Ex. Ct.), at p.
1101) and the initial onus is on the taxpayer to
"demolish" the Minister's assumptions in the
assessment (Johnston v. M.N.R., [1948] S.C.R. 486;
Kennedy v. M.N.R., 73 DTC 5359 (F.C.A.), at p. 5361). The
initial burden is only to "demolish" the exact
assumptions made by the Minister but no more: First
Fund Genesis v. The Queen, 90 DTC 6337 (F.C.T.D.), at p.
6340.
This initial onus of "demolishing"
the Minister's exact assumptions is met where the appellant
makes out at least a prima facie case: Kamin v.
M.N.R., 93 DTC 62 (T.C.C.); Goodwyn v. M.N.R., 82 DTC
1679 (T.R.B.). In the case at bar, the appellant adduced evidence
which met not only a prima facie standard, but also, in my view,
even a higher one. In my view, the appellant
"demolished" the following assumptions as follows: (a)
the assumption of "two businesses", by adducing clear
evidence of only one business; (b) the assumption of "no
income", by adducing clear evidence of income. The law is
settled that unchallenged and uncontradicted evidence
"demolishes" the Minister's assumptions: see for
example MacIsaac v. M.N.R., 74 DTC 6380 (F.C.A.), at p.
6381; Zink v. M.N.R., 87 DTC 652 (T.C.C.). As stated
above, all of the appellant's evidence in the case at bar
remained unchallenged and uncontradicted. Accordingly, in my
view, the assumptions of "two businesses" and "no
income" have been "demolished" by the
appellant.
Where the Minister's assumptions have
been "demolished" by the appellant, "the onus
shifts to the Minister to rebut the prima facie case"
made out by the appellant and to prove the assumptions: Maglib
Development Corp. v. The Queen, 87 DTC 5012 (F.C.T.D.), at p.
5018. Hence, in the case at bar, the onus has shifted to the
Minister to prove its assumptions that there are "two
businesses" and "no income".
Where the burden has shifted to the Minister,
and the Minister adduces no evidence whatsoever, the taxpayer is
entitled to succeed: see for example MacIsaac, supra,
where the Federal Court of Appeal set aside the judgment of the
Trial Division, on the grounds that (at pp. 6381-2) the
"evidence was not challenged or contradicted and no
objection of any kind was taken thereto". See also
Waxstein v. M.N.R., 80 DTC 1348 (T.R.B.); Roselawn
Investments Ltd. v. M.N.R., 80 DTC 1271 (T.R.B.). Refer also
to Zink v. M.N.R., supra, at p. 653, where, even if the
evidence contained "gaps in logic, chronology and
substance", the taxpayer's appeal was allowed as the
Minster failed to present any evidence as to the source of
income. I note that, in the case at bar, the evidence contains no
such "gaps". Therefore, in the case at bar, since the
Minister adduced no evidence whatsoever, and no question of
credibility was ever raised by anyone, the appellant is entitled
to succeed.
In the present case, without any evidence,
both the Trial Division and the Court of Appeal purported to
transform the Minister's unsubstantiated and unproven
assumptions into "factual findings", thus making errors
of law on the onus of proof. My colleague Iacobucci, J. defers to
these so-called "concurrent findings" of the courts
below, but, while I fully agree in general with the principle of
deference, in this case two wrongs cannot make a right. Even with
"concurrent findings", unchallenged and uncontradicted
evidence positively rebuts the Minister's assumptions:
MacIsaac, supra. As Rip, T.C.J., stated in Gelber v.
M.N.R., 91 DTC 1030, at p. 1033, "[the Minister] is not
the arbiter of what is right or wrong in tax law". As
Brulé, T.C.J., stated in Kamin, supra, at p.
64:
...
the Minister should be able to rebut such
[prima facie] evidence and bring forth some foundation for
his assumptions.
...
The Minister does not have a carte
blanche in terms of setting out any assumption which suits
his convenience. On being challenged by evidence in chief he
must be expected to present something more concrete than a simple
assumption.
[Emphasis added.]
In my view, the above statement is apposite
in the present case: the respondent, on being challenged by
evidence in chief, failed to present anything more concrete than
simple assumptions and failed to bring forth any foundation. The
respondent chose not to rebut any of the appellant's
evidence. Accordingly, the respondent failed to discharge her
onus of proof.
I note that, in upholding the Minister's
unproven assumptions, my colleague Iacobucci, J. may be seen as
reversing the above-stated line of caselaw, without explicitly
providing the rationale for doing so. With respect for the
contrary opinion, in my view, changes in the jurisprudence
regarding the onus of proof in tax law should be left for another
day. Furthermore, on the facts of the case at bar, sanctioning
the respondent's total lack of evidence could seem
unreasonable and perhaps even unjust, given that the appellant
complied with a well-established line of jurisprudence as regards
its onus of proof.
[19] In this case we have
the appellant's testimony that he did not earn commissions of
$134,712 US from Hi-Tech Trading Corporation and earned no
more than about $20,000 for what he did, which did not involve
selling. He was, it is true, cross-examined so that I do not
think counsel for the respondent was precluded from questioning
his credibility in argument on the basis of Browne v.
Dunn, (1893) 6 R. 67 (H.L.) at pages 70-71,
discussed at length in The Law of Evidence in Canada, second
edition, (Sopinka, Lederman and Bryant) at pages 954-957. I
do not think, however, that the cross-examination destroyed the
prima facie made out by the appellant in his examination
in chief. I may entertain some lingering doubts about the
appellant's reliability as a witness but it would take more
than suspicion for me to say that he was lying under oath. As I
said in 1084767 Ontario Inc. (c.o.b. Celluland) v. Canada,
[2002] T.C.J. No. 227:
8 The
evidence of the two witnesses is diametrically opposed. I
reserved judgment because I do not think findings of credibility
should be made lightly or, generally speaking, given in oral
judgments from the bench. The power and obligation that a trial
judge has to assess credibility is one of the heaviest
responsibilities that a judge has. It is a responsibility that
should be exercised with care and reflection because an adverse
finding of credibility implies that someone is lying under oath.
It is a power that should not be misused as an excuse for
expeditiously getting rid of a case. The responsibility that
rests on a trial judge to exercise extreme care in making
findings of credibility is particularly onerous when one
considers that a finding of credibility is virtually
unappealable.
[20] Since the
cross-examination by itself was insufficient to displace the
prima facie case established by the appellant's own
oral testimony I must look to whatever other evidence was
presented.
[21] The Crown called three
witnesses, Mr. Ron Bélanger, a former RCMP officer
now working for the Bank of Montreal, Mr. Angelo Villella,
an employee of the CCRA and the team leader for the Special
Enforcement Program, and Mr. Alan Benlolo, whose involvement
in the Hi-Tech Trading telemarketing scheme will be described
later in these reasons.
[22]
Mr. Bélanger and Mr. Villella were both
perfectly credible and intelligent witnesses.
Mr. Bélanger was a sergeant in the commercial crimes
unit and was involved in the investigation of the telemarketing
scheme. He investigated Alan Benlolo and received information
about the operations of the telemarketing scheme, including the
practice of moving from one location to another, specifically,
Concord, Ontario, Champagne Drive and King Street, Toronto.
[23] His evidence was
interesting and credible but it did nothing to establish that the
appellant was involved in the scheme or that he received
commissions from Hi-Tech Trading. Indeed it did not connect the
appellant at all to the Hi-Tech Trading operation on King
Street.
[24] The same can be said
of Mr. Villella. He was a conscientious public servant who
reviewed the report of Ms. Currie, the auditor. As
Mr. Pinos established in cross-examination,
Mr. Villella's evidence is essentially third hand
hearsay. The auditor's report, and the assessment itself,
seem to be based upon some memoranda which were in the
respondent's book of documents as tabs A, B and C of
Tab 18. They state that Michael Colby, who carried the
salesman's designation # 3, was really Michael Chomica
and that #3 received commissions for sales of metal from Hi-Tech
Trading Corporation totalling $134,712 (presumably US).
[25] The auditor,
Ms. Currie, was not called. She was absent on sick leave.
Counsel for the respondent argued that the rules relating to the
admission of hearsay evidence had been expanded by the Supreme
Court of Canada in a number of recent cases, notably, R. v.
Smith, [1992] 2 S.C.R. 915; R. v. Khan,
[1990] 2 S.C.R. 531; R. v. Finta, [1994]
1 S.C.R. 701; R. v. B. (K.G.), [1993]
1 S.C.R. 740. Some inroads had already been made in
Ares v. Venner, [1970] S.C.R. 608.
[26] I do not intend this
judgment to be a discussion of the recent developments in the
hearsay rule. That it is an evolving concept is unquestioned, as
is obvious from the discussion in The Law of Evidence in Canada,
supra, at pages 187 to 220. The rule nonetheless
continues to exist and effect must be given to it. Even if I
believed that I could stretch the principles stated in the recent
cases, which require at least reliability and necessity, the
assessor's report and the memoranda would still have to be
excluded. For example, no witness was able to say who prepared
the memoranda found at tabs A, B and C of Tab 18. They
were said to be based on material seized by the police from files
from the personal computer of Alan Benlolo by a detective.
[27] Such material is at
best unreliable and at most wholly inadmissible as evidence.
[28] Such reports of the
CCRA (T-20 and T-401 reports) may be put in evidence for the
limited purpose of showing the basis on which an assessment is
made but not as evidence of the truth of their contents. There
can be no objection to the CCRA basing its assessments on hearsay
- it must of necessity base its assessing action on such material
as is available, even though such material may be hearsay.[1] However, when the
respondent is called upon to justify an assessment by calling
evidence it must be evidence that is admissible under the
ordinary rules governing admissibility.
[29] Not only must the
rules of evidence be followed, particularly in cases governed by
the General Procedure - but also, where serious allegations of
fraud are made the court must scrutinize such evidence very
carefully. Madam Justice L'Heureux-Dubé alluded
to this in the second paragraph of her judgment in Hickman
Motors which is quoted above.
[30] In Farm Business
Consultants Inc. v. The Queen, 95 DTC 200 aff'd
96 DTC 6085, the same point was made about the care
with which evidence adduced to establish penalties must be
scrutinized, even where the standard of proof is a civil one. We
are not dealing with penalties here, but we are dealing with an
allegation that the appellant participated in a fraudulent
scheme. At pages 205-6 , the following was said:
A court must be extremely cautions in sanctioning the imposition
of penalties under subsection 163(2). Conduct that warrants
reopening a statute-barred year does not automatically justify a
penalty and the routine imposition of penalties by the Minister
is to be discouraged. Conduct of the type contemplated in
paragraph 152(4)a)(i) may in some circumstances also be
used as the basis of a penalty under subsection 163(2), which
involves the penalizing of conduct that requires a higher degree
of reprehensibility. In such a case a court must, even in
applying a civil standard of proof, scrutinize the evidence with
great care and look for a higher degree of probability than would
be expected where allegations of a less serious nature are sought
to be established.3 Moreover, where a penalty is
imposed under subsection 163(2) although a civil standard of
proof is required, if a taxpayer's conduct is consistent with
two viable and reasonable hypotheses, one justifying the penalty
and one not, the benefit of the doubt must be given to the
taxpayer and the penalty must be deleted.4 I think
that in this case the required degree of probability has been
established by the respondent, and that no hypothesis that is
inconsistent with that advanced by the respondent is sustainable
on the basis of the evidence adduced.
___________________
3
Cf. Continental Insurance Co. v. Dalton Cartage Co.,
[1982] 1 S.C.R. 164; 131 D.L.R. (3d) 559; 25 C.P.C. 72, per
Laskin, C.J.C. at 168-171; D.L.R. 562-564; C.P.C. 75-77; Bater
v. Bater, [1950] 2 All E.R. 458 at 459; Pallan et al. v.
M.N.R., 90 DTC 1102 at 1106; W. Tatarchuk Estate v.
M.N.R., [1993] 1 C.T.C. 2440 at 2443.
4
This is not simply an extrapolation from the rule in
Hodge's Case (1838) 2 Lewin 227; 168 E.R. 1136,
applicable in criminal matters such, for example, as section 239
of the Income Tax Act where proof beyond a reasonable
doubt is required. It is merely an application of the principle
that a penalty may be imposed only where the evidence clearly
warrants it. If the evidence is consistent with both the state of
mind justifying a penalty under subsection 163(2) and the absence
thereof - I hesitate to use the words innocence or guilt in these
circumstances - it would mean that the Crown's onus had not
been satisfied.
[31] The only other witness
called by the Crown was Mr. Alan Benlolo. He was a reluctant
witness and appeared under subpoena. He had been indicted and
charged in Pennsylvania for his participation in the fraudulent
telemarketing scheme involving the sale of indium. He pleaded
guilty and was incarcerated for 18 months.
[32] He stated that he
would pack the indium and ship it from home. He said he did not
remember the King Street property. He recalls a detective coming
to his property with a search warrant and taking his
computer.
[33] His evidence was of no
assistance to the Crown. On cross-examination he stated that he
did not know the appellant and did not recognize him.
[34] He was not a
particularly cooperative witness when being examined by counsel
for the respondent. Although counsel did not ask to have him
declared to be a hostile witness his demeanour in examination in
chief was such that Crown counsel would have been justified in
asking him leading questions as permitted by
subsection 144(4) of the Tax Court of Canada Rules
(General Procedure).
[35] Counsel for the
respondent put to Mr. Benlolo an affidavit that he had
signed on September 29, 1997. He admitted his signature but
denied knowledge of its contents and said it was written by
someone else and was signed by him simply to get out of prison
where he was confined after his arrest before being extradited to
Pennsylvania. I place no reliance on anything he said in the
affidavit which was signed on the day he pleaded guilty to the
charges in Pennsylvania and it in fact describes his guilty plea.
In any event it says nothing about the appellant receiving
commissions from Hi-Tech Trading. The only reference to the
appellant (whose name was misspelt) is on page 10 of
Mr. Benlolo's affidavit where he says
The following is a list of those salespeople
who worked at HI-TECH TRADING and the location of the telephone
rooms:
...
Room 3 (WALTER FANTIN was paid 50% of all
sales made from this location).
-
WALTER FANTIN
-
MICHAIL CHOMICA
[36] Even if one were to
accept these statements at their face value they prove precisely
nothing about the appellant's participation in the scheme or
his remuneration.
[37] In short, the
appellant has made out a prima facie case that he did not
receive commissions of $134,712 US and the Crown has not
rebutted that case with any admissible evidence.
[38] The appellant has
admitted to receiving no more than $20,000 Canadian from Hi-Tech
Trading as well as interest of $159. He should be taxed on
$20,159 in 1994 and no more.
[39] The appeal is allowed
with costs and the assessment is referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that the appellant's income in 1994 was $20,159.
Signed at Ottawa, Canada, this 30th day of
January 2003.
A.C.J.
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