Korkemaz v. The Queen, docket 1999-4682-IT-I (Informal Procedure)

Date: 20001107

Docket: 1999-4682-IT-I

BETWEEN:

ADEL KORKEMAZ,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

(Delivered orally from the bench on September 29, 2000, at Montréal, Quebec, and amended at Ottawa, Ontario, on November 7, 2000.)

Lamarre, J.T.C.C.

[1]            These are appeals from assessments made by the Minister of National Revenue (the "Minister") under the Income Tax Act (the "Act"). Those assessments disallowed credits for charitable donations of $2,000, $2,000, $3,500, $5,000 and $4,000 for the 1989, 1990, 1991, 1992 and 1993 taxation years respectively.

[2]            The assessments in question were all made outside the normal reassessment periods. The Minister must therefore show on a balance of probabilities that the appellant made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed some fraud with respect to these charitable donations, as required by subsection 152(4) of the Act. The Minister also assessed penalties under subsection 163(2) of the Act.

[3]            The appellant, who is of Lebanese origin, testified that he had made cash donations during the years at issue to the Lebanese Antonine Maronite Order (the "Order"). He said that he learned of the Order's existence from his mother who lived in Lebanon during those years. She occupied the family house in Lebanon next to the orphanage run by the Order. He said she asked him to make donations, through the Order, for the benefit of this orphanage, which took care of war orphans. So it was, according to the appellant, that he contacted the Order here in Montréal, meeting with some priests, either in the congregation's offices on Ducharme Street in Outremont, or at the Adonis Market on Acadie Boulevard in Montréal. In 1989, the appellant said, he gave a total of $2,000 in seven cash payments during the year. He said he gave the same amount in 1990 in nine cash payments made during the year. He said that in 1991 he gave $3,500 in one payment made on July 5 and another $5,000 in cash on September 4. In 1993, he gave $4,000 in a single cash payment on August 6, he said.

[4]            In support of his claims, the appellant produced his bank statements for all those years, which show withdrawals in those amounts.

[5]            The appellant explained that he would meet Father Jean or Father Joseph by chance in the Adonis Market and would give them the sums of money in question. He sometimes also contacted them in advance to arrange to meet them.

[6]                 According to his testimony, when he gave larger amounts, the priest would give him a receipt for the amount given postdated to December 31 of the year in which the donation was made, with the exception of the $5,000 payment made in September 1991, for which the receipt was postdated to December 31, 1992. When he gave smaller amounts, as in 1989 and 1990, he was given a receipt at the end of the year, dated December 31 of that year, for the total amount that he had paid during the year.

[7]            The appellant is an engineer and during the years at issue he worked for the Société immobilière du Québec. He said his gross salary rose from approximately $48,000 in 1989 to $58,523 in 1993. His net income was on the order of $20,000 in 1989 and went to $41,680 in 1993.

[8]            The whole of the respondent's evidence shows that the Order was involved in a tax scheme that allowed donors to avoid paying tax. The Order admitted that false receipts had been issued in the donors' names. According to the respondent's evidence, on average, the donors made donations representing 20 percent of the value indicated on the receipts provided to them. Either the donors would issue cheques for the amount of the receipts and in the following days were given back 80 percent of the amount written on the cheque, or they just wrote a cheque for 20 percent of the amount shown on the receipt given to them. Some obtained a receipt without so much as a penny coming out of their pocket. Many donors admitted to this fraud and reached an agreement with the Minister to pay the income tax owed. In some cases, the penalty was cancelled by the Minister. Many witnesses said they had become involved in the scheme out of ignorance of the law and on the advice of their accountants or friends.

[9]            The appellant claims he was ignorant of the entire fraud. He lives in Ste-Scholastique and said he did not frequent the Maronite community of Montréal. There are several facts, however, that cause me to doubt whether the appellant was ignorant of the existence of the tax scheme. He said he dealt with Father Jean or Father Joseph. In one of her letters given to Mr. Ouellette, a tax inspector, one of the donors, Carole Martin, who admitted her participation in the tax scheme (Exhibit I-6, Tab 11, at page 17), said that she had dealt with Father Joseph. This would seem to indicate that, if Father Joseph was involved, it would be a safe bet that he made the appellant aware of the fabricated receipts scheme.

[10]          In addition, the tax audit of the receipts issued by the Order was begun in 1994 following a denunciation by Isabelle Mercier, who had herself been dragged into the tax scheme by her former spouse. In 1994, the appellant stopped making gifts to the Order. He said that he preferred to send the money directly to Lebanon through his mother. It is quite plausible that the appellant, having been made aware of the audit by Revenue Canada at the time, decided not to deal with the Order any more.

[11]          Also, the appellant said he knew Dr. Fadi Basil who, according to Ms. Mercier, was one of the first to participate in the tax scheme. The appellant said he saw Dr. Basil for the last time in 1987 and received a letter from him in 1997 asking him to help the Maronite community pay lawyer's costs. The appellant then contacted Mr. Gagnon, a lawyer to whom he had been referred by Dr. Basil, and asked his advice regarding his own notice of appeal. This, again, is a fact that could lead one to believe that the appellant might have been aware of the tax scheme.

[12]          Lastly, the appellant said that he had no contact with the Maronite community since he lived in Ste-Scholastique. However, he did not hesitate to travel to Montréal to go to the Adonis Market, where he would meet the Maronite priests representing the Order.

[13]          It is true that the appellant made withdrawals from his bank accounts that could have been for donations. Moreover, it can be seen that, despite his rather low salary for the amount of charitable donations that he said he had made, there was a series of unexplained deposits in his bank account, from which it may be supposed that the appellant had other sources of income or at least some accumulated capital. It is thus possible that he made the donations. However, the evidence does not show the source of the deposits. It could also be the case that the deposits were merely a part of the withdrawals redeposited in the bank account.

[14]          In order to assess outside the reassessment periods, the Minister must prove that the appellant has made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed some fraud in filing his income tax return.

[15]          Since she could not produce direct evidence, as the investigation turned up no records concerning the cash donations, the respondent had to proceed on circumstantial evidence. She had to show, on a balance of probabilities, that it was more likely than not that the appellant did not really make the monetary donations in question or that, if he did, their amounts were less than what was shown on the receipts.

[16]          The respondent relies on the fact that the existence of the tax scheme was a matter of public knowledge. The respondent also maintains that Exhibit I-7, which contains the reconciliation for all the deposits and withdrawals made by the Order, shows that the receipts issued to the appellant were not postdated but, in all likelihood, backdated. Lastly, the respondent argues that the appellant's testimony is hardly credible when he says that he was unaware of the entire tax fraud. The respondent submits as well that the evidence showed that the appellant's wife made gifts to the Order of $4,000 in 1990, $5,000 in 1991 and $4,000 in 1993. Although the appellant indicated in his tax returns that he was separated, he did not have much to say in that regard.

[17]          It is with some hesitation, but taking into account the facts brought out above, that I find that the appellant could have been aware of the tax scheme devised by the Order. In addition, I cannot pass over in silence the fact that the appellant said he had given $5,000 in 1991 but asked for a receipt for 1992.

[18]          Having reached the above-stated conclusion, there is also the fact that the respondent has satisfied me on a balance of probabilities that the appellant no doubt benefited from the same tax scheme as the other donors. The fact that the appellant ceased making gifts to the Order in 1994, the year of the audit, in my view tilts the scales in favour of the respondent's argument. Why make donations directly to Lebanon in 1994 and not in the previous years?

[19]          In finding that it is more than likely that the appellant took part in the tax scheme involving the Order and its donors, I must also conclude that the respondent showed that the appellant made a misrepresentation that is attributable to neglect, carelessness or wilful default. The Minister could thus reassess outside the normal reassessment periods.

[20]                 However, I am not satisfied that the appellant did not donate any money at all. The respondent maintains that there is no donation if the appellant purchased a receipt for tax purposes from the Order. The evidence shows that the Minister settled with a number of donors, giving them a credit for the actual donations they made. Having been unable to track down anything on the cash donations, the Minister had already proposed giving the appellant a credit for charitable donations of 20 percent of the value indicated on the receipt and cancelling the penalty for the 1989 and 1990 taxation years.

[21]          Given that it was on a balance of probabilities, without direct evidence and with some hesitation that I agreed to reconsider the years in issue, I would be inclined to grant the treatment already proposed to the appellant by the Minister, namely to give him a credit for charitable donations equal to 20 percent of the value indicated on the receipt, since it is highly probable on the evidence that this was the amount that would have actually been donated by the appellant during the years in issue.

[22]                 Furthermore, the facts brought out in evidence with regard to the appellant do not support a finding of gross negligence by the appellant. According to the testimony, many people were solicited by the Order and agreed to participate in the scheme without clearly grasping the significance of their actions. The Minister moreover cancelled the penalty in a number of cases. I am not satisfied here that the appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in filing his tax returns. Subsection 163(2) of the Act is a penal provision. If there is any doubt, the appellant should have the benefit of that doubt, and the penalty cannot be upheld (see Farm Business Consultants Inc. v. The Queen, 95 DTC 200 (T.C.C.), conf. 96 DTC 6085 (F.C.A.)). In the instant case, I am of the view that the penalties should be cancelled.

[23]          The appeals are therefore allowed on the following basis: the appellant is entitled to a credit for charitable donations of 20 percent of the value indicated on the receipts for each of the 1989 to 1993 taxation years. The penalties are cancelled.

Signed at Ottawa, Canada, this 7th day of November 2000.

"Lucie Lamarre"

    J.T.C.C.

Translation certified true on this 28th day of December 2001.

[OFFICIAL ENGLISH TRANSLATION]

Erich Klein, Revisor