Badaan v. The Queen, docket 1999-733-IT-G

Date: 20001003

Docket: 1999-733-IT-G

BETWEEN:

FRANCIS BADAAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Lamarre Proulx, J.T.C.C.

[1]            These are appeals from assessments made pursuant to the net worth method for the 1991 to 1994 taxation years. The Appellant declared as income for the taxation years in question the respective amounts of $20,575, ($7,782), $22,568 and $22,005.

[2]            In reassessing the Appellant for these taxation years, the Minister of National Revenue (the "Minister") increased the Appellant's total income by the following amounts: $43,250, $36,644, $21,994 and $169,382. As a consequence of the understatement of income, the Minister assessed the Appellant penalties under subsection 163(2) of the Income Tax Act (the "Act") for the taxation years 1991 to 1993. Through inadvertence, the Minister did not assess penalties in respect of the 1994 taxation year.

[3]            The witnesses on behalf of the Appellant were the Appellant himself, Ms. Vivian Veys, Mr. Marc Langlois and Mr. Sonny Badaan, and on behalf of the Respondent, Mr. Pierre Mercier.

[4]            The Appellant's Counsel submitted as first argument that the Appellant kept proper books and records and therefore, there should not be a net worth accounting. As an alternative argument, if a net worth accounting was acceptable, the assets were existing before 1991.

[5]            The Appellant related that he was born in Nazareth, Israel, in 1949. He grew up and went to high school in Nazareth. In his adolescent years, he worked part-time in his brother's carpenter shop. Already, when he was young he had the habit of putting cash away. At the age of 19, in 1968, he came to Canada. The Appellant became a Canadian citizen on January 10, 1974. His certificate of Canadian citizenship was produced as Exhibit A-2. The Appellant stated that in the beginning he helped his brother with his "dépanneur". He worked part-time with him until 1973 and then he bought his own "dépanneur" located on Lavérendrye in Hull. He had this first "dépanneur" from 1973 to December 1976 when he sold it to purchase the "Dépanneur Mont-Bleu" at 6 Georges Bilodeau Street. He had this "dépanneur" for 20 years. He sold it at the end of January 1996. The Appellant has been a resident of the United States since August 1997.

[6]            The deed of sale of the "dépanneur" was produced as Exhibit A-1. It is dated January 19, 1996. The purchase price was $50,000 of which $25,000 was paid and the balance was financed by the vendor. The purchase price was allocated as follows: $15,000 for goodwill, $10,000 for the inventory and $25,000 for equipment. The owner of the premises is the Appellant's brother, Mr. Sonny Badaan. A lease was entered into between him and the purchaser.

The Nazareth Property

[7]            The Appellant's father, Asaad Badaan, died in 1982. However, in 1975, he had transferred his property in Nazareth to the Appellant. The documents showing the transfer were produced as Exhibits A-4 to A-6. The Appellant related that there had been a pledge between the brothers, Elias, Sonny and himself, that they would maintain their mother in their father's house. His brothers would pay the Appellant their share of the appraisal value of the house. In American money the value of the property was $241,910, in Canadian money about $340,000. The payments made by the two brothers would have been made yearly or every two years from 1975 to 1991. They paid at their convenience but they respected their pledge and made the payments, according to the Appellant, until the last two payments were made in 1991, $25,000 each. He produced to that effect Exhibit A-24. This is a hand-written document dated May 15, 1997 that says that Elias and Sonny Badaan have paid Francis Badaan a final payment of $25,000 each in 1991, by cheque. The Appellant explained that he completed the sale of the house to his mother in 1991. Exhibits A-7 to A-9 show a transfer in 1991, from Francis Badaan to Shafika Badaan.

[8]            As evidence of payments made to him by his brothers, the Appellant produced Exhibits A-11 to A-13. Exhibit A-11 is a document signed by the Appellant's brother, Elias Badaan, dated July 14, 1976 in Hull. This document was signed before a "Commissaire à l'assermentation" and it says that: "La présente est pour certifier que monsieur Elias Badaan résidant au 134-13 Nazareth, Israël, a remis un don (cadeau) de 20 000 $ à monsieur Francis Badaan." and it is signed by Mr. Elias Badaan. Exhibit A-12 is composed of five promissory notes in the amount of $4,039.80 to be paid from the year 1985 to the year 1989, by Mr. Sonny Badaan. Exhibit A-13 is an electronic transfer allegedly made by Sonny Badaan to the Appellant dated February 7, 1991 in the amount of $24,980. It is made at the request of Shafika Badaan, February 7, 1991. Although the payment is made at the request of Shafika Badaan, the Appellant stated that this payment came from his brother Sonny.

[9]            Exhibit A-14 is a letter from the Caisse populaire St-Raymond de Hull, stating that on February 7, 1991, there was a deposit made by the Appellant in the amount of $24,980 and on March 4, 1991, a deposit of $25,000 and that these sums were later on invested in term deposits.

[10]          The Appellant said that he did not keep a record of the payments made by his brothers. He cannot say how much was paid in a given year. But he knows how much was paid in total.

The Appellant's Marriage

[11]          Before his marriage the Appellant lived in the basement of his brother's house. He paid $200 monthly for room and board. He stated that he was working seven days a week and kept a low lifestyle. He used to put money away in a safe located in his bedroom. The Appellant explained that he had set a goal for himself to be in good financial position before getting married. Before his marriage the Appellant never owned a car. He stated that when he got married, he had around $150,000 in his safe. The Appellant married in the year 1984 at the age of 35. From the marriage, two children were born.

[12]          His wife, Leila Najjar, lived in Nazareth. She had been teaching for 12 years in that city. She married at the age of 32. It was the Appellant's sister who introduced him to his wife whom she knew from her school years. The Appellant stated that his wife would have gathered savings in the amount of $89,000 at the time of their marriage. Exhibit A-19 is a letter from the Caisse populaire St-Raymond de Hull, dated September 17, 1987, stating the Appellant's wife made two cash deposits, one of $50,000 on September 16, 1987 and another of $39,000 on September 18 and 21, 1987. Their house was purchased for $110,000 in 1987 in two payments, the first payment made in 1987, the second payment a year after.

[13]          Exhibit A-22 is an affidavit made by the Appellant's spouse and the spouse's mother on October 19, 1994 to the effect that a total sum of $61,000 was deposited in her bank account in Canada. This money represents her savings in Nazareth, Israel, as well as money received from her mother Victoria Najjar. The transfers of monies were made between 1984 and 1994.

Books and records

[14]          The Appellant said that he kept a daily sales report. At the end of the week, the bookkeeper, transcribed the inscriptions in a general ledger. She also prepared the weekly cash reports and the monthly cash reports. From that, she made the calculation for the sales taxes. She looked after preparing the documents to pay the suppliers. She also prepared the payroll for the employees. When it was the time for the inventory, she prepared the financial statement for the end of the year also. The Appellant made the daily deposits to the bank at the Caisse populaire on Georges Bilodeau Street.

[15]          The Appellant had the same bookkeeper as his brother Sonny, who owned the shopping centre Place Riel, on Mont-Bleu Boulevard. The Appellant kept these reports in the basement of his brother's shopping centre. In October 1995, a fire happened in the basement of the shopping centre. All the books were destroyed.

[16]          The Respondent produced two books of documents as Exhibit R-1 containing tabs 1 to 41. Counsel for the Respondent pointed to the Appellant the income statement in the income tax returns for the year 1991, which are produced at Tab 1 of Exhibit R-1. On this statement, the amount of the sales of beer is shown as being $16,678.32, where the cost of the goods sold, the purchase of the beer, is shown as being $53,091.50. The explanation given by the Appellant was that the mistake would have been made by the salesperson when punching the button. Looking at the sales of the tickets, the amount is $1,327.79 and the purchase cost of these tickets is $5,082.15. The same explanation was given as to being erroneous punching of the cash register. The statement was prepared in accordance with the records provided by the Appellant. In the year 1992, the same mistakes appear in the statement of income. The cost of the purchase of beer is $57,910.24, the sales is $13,636.46. As for the tickets, the sales is in the amount of $625 where the purchase is $3,659.64. In 1992, the "dépanneur" reported a loss of $12,739. Yet the Appellant had two children during that period.

[17]          In the statement of income for the "dépanneur" in the year 1992, there was an interest expense in the amount of $2,751.33. The question was if you had cash on hand, why would you borrow money? There was no recollection by the Appellant of having borrowed money.

Bus Passes and Tickets

[18]          The Appellant sold monthly bus passes and bus tickets for the Société de transport de l'Outaouais (STO). The passes and tickets are on a consignment basis and the vendor gets as payment one percent on the sales. Mr. Marc Langlois was the STO's agent.

[19]          The monies were put in the Appellant's personal account, bearing number 31846. The STO apparently had no problem with this as long as the account was different from the business account. He paid the STO by cheque around the 20th of each month.

[20]          In the net worth audit, the amounts for the chequing account 31846 increased from the year 1990 and 1991. At the end of the year 1990, the amount was of $2,224 and, for the year 1991, the residual amount was of $3,516. Then, at the end of the year 1992, there was an amount of $31,080, for the year 1993, $23,443, and for the year 1994, $21,399. The Appellant explained that these accounts have increased because these monies belonged to the STO.

[21]          The Appellant produced as Exhibit A-23 the list of the cheques made to the STO from 1992 to 1994. For example, for the year 1993, the last cheque made was in the amount of $14,908.41. Tab 24 of Exhibit R-1 is the entries of the chequing account 31846. At the end of the year 1993, the balance of the account was $23,443.89; this balance came after the cheque made to the STO in the amount of $14,908.41.

[22]          In the net worth statement, under the heading "Business liabilities", the trade accounts payable, increased from 1991 to 1992 from $11,947 to $32,047. For the year 1993, it was in the amount of $25,828. The Appellant affirmed that these trade accounts payable did not relate to the STO account, because it was not a business account. He was otherwise unable to explain the increase in the liability of the trade accounts receivable.

The Audit

[23]          The Appellant related that Revenue Canada first inspected his books for the years in question in August 1995. Mr. Walters did that examination for two to three weeks. He did not have to go to the basement as the Appellant had brought the books in the store. When Mr. Walters arrived, the books were taken from the store to the office of the Appellant's brother. This is where Mr. Walters worked for three weeks. He made no comments on the manner in which the books were kept. There are some of Mr. Walters's work papers at Tab 18 of Exhibit R-1. It is dated August 28, 1995. It is a reconciliation of the different revenues and expenses. It is not a report. Mr. Walters did not speak with the Appellant afterwards. The Appellant heard from Revenue Canada about ten months later, in 1996, it was Mr. Sabourin who was working on the case.

Cash on Hand

[24]          The Appellant stated that he had cash on hand in the respective amounts of $300,000, $300,000, $270,000, $250,000 and $30,000 for the years 1990 to 1994. These amounts appear in a letter written by the Appellant's Counsel dated January 27, 2000 and produced as Exhibit R-2. This letter was sent to comply with an undertaking taken at the examination for discovery. The cash on hand was much reduced in 1994 because the Appellant put money in the bank to have a source of income as he intended to sell his business. He acquired the RBC Dominion Securities shown in the net worth audit in the total amount of $170,144. In the year 1993 he had acquired RBC Dominion Securities in the amount of $22,440.

[25]          Mrs. Vivian Veys has been in the employment of the Caisse populaire St-Raymond de Hull for 25 years. She produced Exhibits A-20 and A-21. Exhibit A-20 is a statement signed by her on April 25, 1997 stating that the Appellant had made a deposit in the amount of $124,000 on May 26, 1984. Exhibit A-21 is another confirmation made on March 12, 1997 that the Appellant has a term deposit of $24,840 since December 5, 1983. Monsieur Marc Langlois, Agent à la commercialisation at the STO, confirmed the Appellant's testimony regarding the working of the selling of bus passes and tickets.

[26]          Mr. Sonny Badaan is the Appellant's brother. He was born in Nazareth and came to Canada on July 2nd, 1967. He sponsored his brother to come to study medicine at the University of Ottawa. He studied three or four years. Then the witness gave his brother a small convenience store, as a start. The Appellant began working day and night and saved his money. He did not go out. When the Appellant left to get married, the witness and his wife went to rent an apartment, furnished it and decorated it. The witness paid for that. Regarding the Nazareth property, the witness explained that his father had left three pieces of property to each of the brothers. The mother was left without a house. So the two brothers decided to purchase the house from the Appellant and let the mother inhabit the house. The payments would have been made since 1975. The house could have been paid in 25 years. Respecting Exhibit A-13, the witness did not understand why the money came from his mother through the Royal Bank of Canada. He did not have an account with that bank at that time. He stated that contrary to his brother, he believes in the banking system and does not stack cash money.

[27]          Mr. Pierre Mercier is presently employed with the Canadian Customs and Revenue Agency. He was involved in the present matter as of April 1996. The audit was initiated by auditor Robert Walters in August of 1995. Mr. Walters left the department and he took over from him. He met Mr. Badaan at least on one occasion, he had conversations over the phone with him up to the end of 1996, when the file was transferred to the Special Investigations Section ("S.I.").

[28]          When he had sufficient information to constitute the net worth statement, it was apparent that the discrepancies between the unreported income and the reported income were significant. The net worth method was used because of the lack of paper trail. There are many cash transactions and there are no invoices for the sales. There are tapes of the cash register, but the Appellant had mentioned to him that it was not properly recorded by the cashier. It is not feasible to audit something that is incorrect to start with, and in addition, cash payments that may not be recorded must also be taken into account.

[29]          Regarding the family expenses, the net worth audit took amounts that were more than half what Statistics Canada considers a family of four would spend. Regarding the two amounts of $25,000 allegedly received from the Appellant's family for the year 1991 the auditor stated that had he seen Exhibit A-13 at the time of his audit he might have deducted these amounts. Exhibit A-13 shows an electronic transfer from Shafika Badaan to Francis Badaan in the amount of $24,990. The auditor stated that the other payment of $25,000 as coming from his brothers has not been evidenced. He had also not seen Exhibit A-24 at the time of his audit. This document is signed May 15, 1997. He had seen it at the time of the examination for discovery. He questioned the credibility that he could put towards this document. Normally, he would also consider additional information as cancelled cheques. Regarding the personal account 31846 where the STO amounts were deposited, the auditor made the assumption that the trade accounts payable shown as liabilities included the STO amounts. The increase is consistent with the amounts from the STO account. He was not given any other explanation. Moreover, he mentioned that as shown by Tab 31 of Exhibit R-1, important investments had been made from monies coming from the account 31846.

Argument

[30]          Counsel for the Appellant submitted that the Appellant kept proper books and records and should not be the subject of a net worth audit. He also submitted that the additional income came from cash on hand acquired before 1991 and the last payments received in the year 1991 in the amount of $50,000 for the house in Nazareth. Respecting the substantial increase of the income of the last year, he stated that it did not make sense when one looks at the selling price of the "dépanneur" that is $50,000 as shown by Exhibit A-1.

[31]          Counsel for the Respondent submitted that no review of books and records can show the accurate income where most of the sales are made in cash and where the cash register is not properly operated. He submitted that where a net worth analysis shows a clear discrepancy between the declared income and the value of the assets acquired in the year, the Minister may establish his assessment in accordance with the net worth figures. The Act, at paragraph 152(7), stipulates clearly that the Minister is not bound by the information supplied by the taxpayer and may assess the tax payable by the taxpayer. It belongs to the taxpayer to show that the difference of income comes from a non taxable source of income.

[32]          Tab 31 of Exhibit R-1 brings forward the evidence that the account 31846 was used for other purposes than for the STO account. Moreover, no reasonable explanation has been given concerning the increase in the trade accounts. The bookkeeper did not come to testify. She could have explained what she had included in the trade accounts.

[33]          Respecting the very substantial increase of $169,382 for the year 1994, Counsel for the Respondent submitted that he had seen "dépanneurs" with gross income in the range of $500,000. He submitted that the Court should not infer without evidence that this is impossible and cannot be attained. If this relates to amounts that have not been declared in prior years, technically the Court cannot accept them. The Appellant has to convince the Court that he had this cash on hand.

[34]          Counsel for the Respondent submitted that the explanations for cash on hand were not credible. There was no evidence that money was paid in respect of the house. No one was able to explain why the payment seems to have been authorized from the Royal Bank of Canada when Sonny Badaan testified that he did not have an account at the Royal Bank of Canada until 1994 and no one was able to explain why it was Shafika Badaan who purportedly authorized this payment and not Sonny.

Conclusion

[35]          I find that the position of Counsel for the Respondent, regarding the authority of the Minister to issue assessments based on a net worth basis where there is a clear discrepancy between the declared income and the value of the assets acquired, to be in accordance with the Act. It belongs to the taxpayer to prove that the additional income comes from a non taxable source of income.

[36]          I will now take the facts year by year. For the year 1991, the point at issue is the inclusion of the amount of $50,000 as unreported income. This amount was composed of two term deposits of $25,000 each. The explanation given was that they had as source, payments made by the Appellant's brothers for a property in Nazareth. Exhibit A-24 is dated May 15, 1997. It is signed by the three brothers. It says that two final payments in the amount of $25,000 each were made in 1991 by cheque. No cheque was produced. The Appellant stated that it was a mistake to have used the word cheque in this statement. But, Mr. Sonny Badaan has testified that he uses the bank system to make his payments. It is my view that this document cannot be relied on. Exhibit A-13 that is dated February 7, 1991 appears genuine. It is surprising that it had not been shown to the auditor before the hearing. However, it adds another amount of $25,000 to the $50,000 amount mentioned in Exhibit A-24. That just makes too much money. This document shows that an amount of $24,990 was transferred in the account 31846 at the request of Shafika Badaan and that the sending bank was the Royal Bank of Canada.

[37]          The Minister's agent said that had he seen it at the time of his audit, he may not have included it in the unreported income. That position would be fine if it would be clear that the amount received is a gift or in some other way non taxable. But there is no certainty at all as to what is the exact nature of this payment. It belonged to the Appellant to determine it. He has not done so. For the year 1991, I therefore find that the Appellant has been assessed in conformity with the facts and the Act.

[38]          For the years 1992 to 1994, there is one common point in dispute. It is whether the balance of the amounts found at the end of each year in the chequing account 31846, where the proceeds from the STO bus passes and tickets were deposited, should be included in the unreported income. I find that the Minister's position on this aspect is more convincing than the Appellant's. The Appellant did not explain the parallel increase in the business liabilities related to the trade accounts payable.

[39]          For the year 1994, there is however in my view a major point. This is the increase of unreported income in the amount of $169,382 where in the other year there was an average increase of $33,962.66. (I have calculated the average increase of income for the years 1991 to 1993. For the year 1991, I have not subtracted the amount of $24,990 because there was no reasonable explanation given on the source of this amount. A taxpayer is assessed on the totality of his income). As shown at Tab 4 of Exhibit R-1, in 1994, the costs of the goods sold was of $167,621.21 and the gross sales were in the amount of $236,782.10. For the years 1991 to 1993, the increase of income appears reasonable. For the year 1994, it appears surprisingly high. It was open to the Minister to substantiate his assessment by putting forward some statistics concerning the usual mark up on the costs of the goods sold in a "dépanneur". It was also open to the Minister to make an analysis of the selling price of the "dépanneur" in relation to the income that it was supposed to generate.

[40]          I find that the evidence as adduced, has shown that the Appellant has inherited a property in 1975 which was transferred to his mother in 1991. There is some probability that the Appellant was compensated by his family for that transfer or for the previous use of the house. It is also very believable that the Appellant and his wife were careful with the management of money. I therefore find more reasonable to accept that the Appellant had some past savings that he used in the year 1994 to purchase the substantial amount of securities, than to believe that the total increase of income came from the business of his "dépanneur" or some other unreported source of income. In conclusion for the year 1994, the amount by which the income should be increased is of the above-mentioned average increase found for the years 1991 to 1993.

[41]          Nothing was mentioned by Counsel on the aspect of penalties. It is my view that in light of the rather large amount of discrepancy between the reported and the unreported income, they were assessed in accordance with the Act.

[42]          The appeals are dismissed for the years 1991 to 1993. It is allowed for the year 1994 on the basis of an increase of income in the amount of $33,962.66.

[43]          Costs are in favour of the Respondent.

Signed at Ottawa, Canada, this 13th day of October, 2000.

"Louise Lamarre Proulx"

J.T.C.C.

COURT FILE NO.:                                                 1999-733(IT)G

STYLE OF CAUSE:                                               Francis Badaan and Her Majesty the Queen

PLACE OF HEARING:                                         Ottawa (Ontario)

DATE OF HEARING:                                           June 28 and 29, 2000

REASONS FOR JUDGMENT BY:      The Honourable Louise Lamarre Proulx

DATE OF JUDGMENT:                                       October 13, 2000

APPEARANCES:

Counsel for the Appellant: Pierre McMartin

Counsel for the Respondent:              Daniel Bourgeois

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Pierre McMartin

Firm:                  Beaudry, Bertrand

                                                                                                Hull, Québec

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

1999-733(IT)G

BETWEEN:

FRANCIS BADAAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on June 28 and 29 at Ottawa (Ontario) by

the Honourable Judge Louise Lamarre Proulx

Appearances

Counsel for the Appellant:                             Pierre McMartin

Counsel for the Respondent:                         Daniel Bourgeois

JUDGMENT

          The appeals from the assessments made under the Income Tax Act (the "Act") for the 1991, 1992, 1993 taxation years are dismissed.

          The appeal from the assessment made under the Act for the 1994 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis of an increase of income in the amount of $33,962.66.

          The whole in accordance with the attached Reasons for Judgment.

          Costs are awarded to the Respondent.

Signed at Ottawa, Canada, this 13th day of October, 2000.

"Louise Lamarre Proulx"

J.T.C.C.