REASONS FOR JUDGMENT
Tardif J.
[1]
This matter involves three appeals that were
heard on common evidence at the request of the parties. The facts that gave
rise to the notices of assessment are relatively simple and few in number.
[2]
The two appellants are from Cambodia. They both arrived in Canada in the early 1980s; they immigrated to Canada because the war in their country of origin was threatening their safety.
[3]
When they arrived in Canada, neither of them had
any knowledge of Canadian language or culture. They settled in the Greater
Montréal Area with their respective families on different dates.
[4]
They were hard‑working and immersed themselves
completely in low‑paying work. Since they were very family-oriented and
wanted to work as many hours as possible, they quickly accumulated patrimonies that
enabled them to improve their circumstances considerably, notably by purchasing
a home.
[5]
In addition to these qualities, the appellants and
their spouses proved to be daring and determined people by quickly becoming
entrepreneurs themselves in relatively difficult economic activity sectors, namely,
making various types of apparel. Later, as they became impatient about the
growth of their patrimony, they made investments by operating highly profitable
but illegal businesses, i.e. money laundering through currency exchanges.
[6]
It is relevant to provide a chronology of their time
in Canada from their arrival to 2007, the year to which pertain the assessments
that are now under appeal.
1980 to 2006
[7]
Mr. Kang immigrated to Canada with his family on January 16, 1980.
[8]
Mr. Tang immigrated to Canada in October 1980.
[9]
Mr. Tang’s spouse, Shu Xian Zhang, joined her
spouse in 1987.
[10]
In 1984, just four years after arriving in Canada, a company called Création Yong Ang Meer was created. This company, which
manufactured apparel, was operated until 1989.
[11]
In 1989, the company 171283 Canada inc. was
created; the company’s name was Mode NSTD and its business essentially
consisted of continuing the manufacturing operations of Création Yong Ang Meer,
which had been established in 1984. This company was in operation from 1989 to
1996.
[12]
On January 28, 1997, the appellants Kang and
Tang created a new company called Bijouterie Yong Meer Inc. (Jewellery Store), which
was a jewellery business, namely, diamonds.
[13]
In the context of creating this new legal entity,
the appellants each invested $120,000 from their respective savings.
[14]
Part of the premises of the Jewellery Store was
quickly set up as a currency exchange to satisfy Mr. Tang’s interest in this
type of economic activity, which is highly lucrative but illegal when the transactions
involve money laundering.
[15]
Serious disagreements quickly arose between the
appellants, the only two shareholders of the Jewellery Store; the entire
situation resulted in a break‑up such that the association lasted just
over three months.
[16]
On May 15, 1997, a few months after the creation
of the company that was operating the Jewellery Store, Mr. Tang created a new
legal entity, 3374335 Canada inc., known and identified as BCC, whose business
essentially consisted of operating a currency exchange. At the time of the break‑up,
Mr. Tang had recovered the $120,000 he had invested in the Jewellery Store.
[17]
Between 1997 and 2002, the appellants Tang and
Kang operated the business in which they held all of the shares, i.e. the
Jewellery Store in the case of Mr. Kang and the currency exchange in the case
of Mr. Tang, under the same roof and at the same address, 6951 St-Denis Street in
Montréal.
[18]
In 2002, the disagreement resurfaced; Mr. Tang
therefore decided to continue the activities of his currency exchange on Jean-Talon Street, still operating under the company name Saint-Denis BCC.
[19]
Following Mr. Tang’s departure in 2002, Mr. Kang
in turn changed the business operations of the Jewellery Store by adding a currency
exchange, such that as of 2002, the appellants Tang and Kang each owned a
currency exchange; Mr. Kang’s was located on St-Denis Street while Mr. Tang’s
was located on Jean‑Talon Street.
[20]
Between 2002 and 2006, Messrs. Tang and Kang
each operated their own business and did so primarily as the owner of a
currency exchange.
[21]
In 2006, Mr. Kang informed his brother-in-law, Mr.
Tang, that he had decided to retire. As luck would have it, since the lease on
Mr. Tang’s currency exchange had just expired, the appellants quickly reached
an agreement, and Mr. Tang moved his currency exchange located on Jean-Talon Street to the Jewellery Store premises on St-Denis Street, where there already was
a currency exchange.
[22]
Mr. Tang purchased the Jewellery Store, which
had primarily become a currency exchange, for $300,000. Mr. Kang, the vendor of
the Jewellery Store, stated that at the time there was $300,000 in cash hidden
on the premises; for his part, Mr. Tang, the purchaser, said that he moved
between $300,000 and $350,000 in cash to the Jewellery Store from his exchange on
Jean-Talon or from Saint‑Denis BCC.
[23]
Following a major investigation by the Service
de police de la Ville de Montréal (SPVM) aimed
at compiling a list of all currency exchanges likely to be involved in the
illegal business of money laundering, the currency exchange on the Jewellery
Store premises was targeted as one business that was potentially involved in
money laundering in Montréal, because the police had seen a drug trafficker going
there periodically.
[24]
After noting that this was possibly an illegal
operation that was at least partially involved in money laundering, the SPVM mandated
an undercover agent to conduct a more detailed investigation.
[25]
The officer went several times to exchange
currency. In general, the amounts increased from time to time.
[26]
At a particular point in time, during a large
transaction, the officer told the appellants that he was trying to recruit
clients to buy drugs, which would effectively increase his sales and his
exchange operations. The scenario was presented as being very advantageous for both
parties; the appellants did not express any disapproval; however, they did not
provide the name of any potential client.
[27]
On the basis of this offer and the solicitation for
new clients looking for drugs and in the light of the tacit or complete
indifference regarding the source of the funds that the appellants agreed to
exchange, the authorities at the SPVM concluded that their suspicions were justified
and that the business was actually a currency exchange involved in the illegal
business of money laundering.
[28]
The SPVM then set up a large‑scale police
operation to collect and seize anything that could be used to demonstrate the validity
of potential charges under the Criminal Code of Canada for money laundering.
[29]
On April 17, 2007, the officer went to the
appellants’ place of business on St. Denis Street to exchange Can$800,000,
corresponding to approximately US$690,000.
[30]
Mr. Tang stated that he needed a deposit of
$20,000 and about three hours to get that amount of money in US$100 bills.
[31]
The officer left the premises, and a few minutes
later the appellants also left to go to their respective personal residences.
[32]
Since the appellants were being followed, police
authorities were able to very accurately establish the time, the route taken
and the duration of each person's visit to their respective homes.
[33]
Mr. Tang left his home holding a relatively
small plastic bag, while Mr. Kang was not holding anything when he left
his home. They both returned to the Jewellery Store, and the undercover officer
arrived shortly thereafter to finalize the exchange of Can$800,000 for
approximately US$690,000.
[34]
After the transaction was completed, and once
the officer had left the premises with the American currency from the Jewellery
Store where the currency exchange was located, a large number of police
officers descended on the store and proceeded to seize everything that appeared
to them to be relevant for filing possible criminal charges.
[35]
During these searches on April 17, 2007, large
amounts of cash were seized as per the details provided below:
|
A - Residence of Mr.
Kang
Can$339,500
US$39,530
TOTAL
|
Can$339,500
Can$44,645
Can$384,145
|
|
B – Residence of
Mr. Tang
Can$450,000
US$52,600
TOTAL
|
Can$450,000
Can$59,406
Can$509,406
|
|
C – On the premises of Bijouterie Yong Meer inc.
Can$61,840
US$703,422
EUROS 18,700
TOTAL
|
Can$61,840
Can$794,445
Can$28,656
Can$884,941
Can$778,902
Can$1,663,843
|
[36]
The amount of $884,941 does not include the Can$800,000
that the undercover officer gave to the appellants.
[37]
However, the consideration for the undercover
officer’s transaction, i.e. US$689,660, equivalent to Can$778,902, was also
seized.
[38]
Consequently, the total amount seized from the
Jewellery Store amounted to $778,902 plus $884,941, which totaled $1,663,843.
[39]
In February 2009, i.e. almost two years later, the
SPVM informed the Canada Revenue Agency (CRA) about the cash that was seized
from the three appellants.
[40]
An auditor, Micheline Bélanger, was then mandated
to conduct the necessary audits in order to determine (a) the source of these
substantial amounts of money and (b) whether reassessments should be made.
[41]
As part of her investigation, Ms. Bélanger tried
to obtain the maximum information and number of documents that would enable her
to complete her task properly and diligently.
[42]
Other than learning from the appellants that the
money seized came exclusively from the accumulation of personal savings and
that the money seized at the Jewellery Store represented operating revenue, she
was not able to obtain anything that would enable her to do the work she would
have liked to do under the circumstances.
[43]
The Minister therefore taxed Mr. Tang on the
amounts seized at his home, i.e. $509,406, as well as on part of the funds
seized at the Jewellery Store, i.e. $428,142.50.
[44]
The Minister taxed Mr. Kang on the amounts
seized at his home, i.e. $384,145, as well as on part of the funds seized at
the Jewellery Store, i.e. $428,142.50.
[45]
The Minister taxed the Jewellery Store on the
amounts seized at its place of business.
[46]
The Minister taxed the appellants for the 2007 taxation
year because earlier years did not offer any explanation for the accumulation of
these amounts. Following criminal proceedings with respect to money laundering
operations, Mr. Tang pleaded guilty to the charge of “money laundering” and
agreed to the confiscation of US$422,053 by the authorities.
OWNERSHIP OF AMOUNT SEIZED AT MR. KANG’S HOME–
$384,145
[47]
Mr. Kang began working in Canada in 1981. The evidence and the testimony provided by Mr. Kang lead to the conclusion
that he arrived in Canada without any assets and did not receive any lottery or
casino winnings, gifts or inheritance.
[48]
Mr. Kang’s sole source of income was his salary.
Mr. Kang did not receive any dividends.
[49]
In his notice of objection, Mr. Kang initially
claimed that the funds seized at his home belonged to the Jewellery Store. He
later claimed instead that they represented savings he had accumulated since
his arrival in Canada. He therefore acknowledged that the funds belonged to him.
[50]
During the hearing, the respondent explained
that it was impossible for Mr. Kang to have accumulated $384,145 since his
arrival in Canada.
[51]
Mr. Kang and his wife had after-tax cumulative income
of $1,010,566 from the time of their arrival in Canada until 2006. This amount represents
the income available to the Kangs without consideration of any expenses.
[52]
Assuming the minimum amount of expenses
established by Statistics Canada for two persons (without considering Mr.
Kang’s two daughters), the balance available to accumulate assets was $590,047.
[53]
The couple would therefore have had $590,047. However,
their expenses amounted to $801,781 (according to the accumulated assets and
investments made). At first glance, it does not make any sense that Mr. Kang
could have spent more than he earned. When the amount seized at his home is
added, there is a shortfall of $595,879.
[54]
Moreover, Mr. Kang testified that he had made
several trips to Cambodia or China with his wife between 1980 and 2006. The respondent
did not consider these types of expenses (which would have increased the
shortfall).
[55]
Therefore, the income earned and declared by Mr.
Kang does not explain or enable us to understand how Mr. Kang could have saved
$384,145, which was the amount seized at his home.
OWNERSHIP OF AMOUNT SEIZED AT MR. TANG’S HOME–$509,406
[56]
Mr. Tang arrived in Canada in 1980 with no
assets. The evidence and the testimony provided by Mr. Tang showed that he did
not receive any lottery or casino winnings, gifts or inheritance.
[57]
Mr. Tang stated several times that the amounts
seized at his home were savings. During his testimony, he also stated that he did
not keep any funds belonging to the company in his home.
[58]
At the hearing, the respondent explained that it
was impossible for Mr. Tang to have accumulated $509,406 since arriving in Canada.
[59]
Mr. Tang and his wife had after-tax cumulative income
of $889,016 from the time of their arrival in Canada until 2006. This amount
represents the income reported and available to the couple without consideration
of any type of expense.
[60]
Considering the minimum amount of expenses
established by Statistics Canada, the balance available to accumulate assets
was $460,637.
[61]
The Tangs would therefore have had $460,637 but
had expenses amounting to $570,128 (according to the accumulated assets and
investments made). It is therefore impossible to explain how Mr. Tang could have
spent more than he earned. The shortfall amounts to $109,491.
[62]
When the amount seized at Mr. Tang’s home is
added, the shortfall is $618,897. It is therefore completely implausible that Mr.
Tang could have saved $509,406.
[63]
Moreover, Ms. Bélanger, the auditor, explained
that she had not only taken into consideration statistics that were
advantageous to Messrs. Tang and Kang but that she had also reduced the amount
established by the statistics by 20% to reflect the very modest lifestyle of
the appellants, according to what they had told her.
OWNERSHIP OF AMOUNTS SEIZED
AT THE JEWELLERY STORE – $1,663,843
[64]
Several explanations were provided to justify
the source of the funds seized at the Jewellery Store.
[65]
The initial notice of appeal of the Jewellery
Store referred to three sources: amounts accumulated since the incorporation in
1997; amounts advanced by the shareholders (but Messrs. Kang and Tang did not mention
this in their notice of appeal) and amounts from Saint-Denis BCC (3374335
Canada Inc.).
[66]
The Jewellery Store’s amended notice of appeal refers
to amounts from loans obtained from unidentified third parties who did not
testify and who could not be properly identified. Even more mysteriously, these
three loans, totalling US$800,000, materialized for the first time on January 6
2012; I believe it is important to remember that the seizures occurred on April
17, 2007.
[67]
At the hearing, the appellants stated that only
$300,000 of the amounts seized at the Jewellery Store actually belonged to the
Jewellery Store. Based on their claims, approximately $300,000 came from
Saint-Denis BCC or 3374335 Canada inc., and $800,000 came from loans from three
unknown third parties.
Revenue of the Jewellery
Store
[68]
From 2005 to 2007, the Jewellery Store reported
the following revenue:
|
2005
|
Total Revenue
Gross Profit
Net Profit
|
$131,178
$66,639
$35,672
|
|
2006
|
Total Revenue
Gross Profit
Net Profit
|
$117,451
$30,143
$2,090
|
|
2007
|
Total Revenue
Gross Profit
Net Profit
|
$98,926
$16,020
$-17 097
|
[69]
It is completely impossible that the company
identified as the Jewellery Store could have accumulated $1,000,000. Even accumulating
$300,000 was impossible in view of the revenue reported for the 2005, 2006 and
2007 taxation years. The company barely had a net profit. The complete lack of consistency
is neither a perception nor an interpretation; it stems primarily from the
explanations provided by the appellants themselves and their accountant.
[70]
The evidence shows that the books and statements
were not maintained or prepared in a diligent and serious manner. For example,
the salaries paid by the Jewellery Store do not correspond to the salaries
received by Messrs. Tang and Kang, specifically for 2007:
|
|
Salaries reported by
the Jewellery Store
|
Salary received by Tang
|
Salary received by Kang
|
|
2005
|
$61,954
|
-
|
$62,400
|
|
2006
|
$67,413
|
-
|
$62,400
|
|
2007
|
$66,429
|
$0
|
$15,600
|
[71]
Moreover, Messrs. Tang and Kang did not receive
any dividends from 2005 to 2007. Most of the relevant and even essential documents
relating to the management of the company that operated the Jewellery Store is inconsistent,
confusing and incomplete; one thing is certain: neither the documents, nor the explanations
are reliable or credible.
[72]
At the time of the transaction with the
undercover officer in 2007, the cash on hand, according to the balance sheet
for the Jewellery Store, was $342,224. However, the respondent took this cash
on hand amount into consideration to make the necessary adjustments to the
assessments. The amount of the assessment for the Jewellery Store was therefore
reduced accordingly.
[73]
However, the Jewellery Store’s revenue and books
fail to explain how $1,663,843 could have been accumulated.
[74]
Since the appellants maintain that an amount of
over $1,000,000 did not belong to the Jewellery Store, it would be appropriate
to analyze whether their explanations regarding the respective amounts of $800,000
and $300,000 are plausible, rational and credible.
Loans totalling $800,000 from unknown lenders
[75]
With respect to the loans totalling $800,000 from
three anonymous lenders, Mr. Tang claims that he borrowed the money because he
did not have enough US$100 bills to complete the Can$800,000 transaction with
the undercover officer. Mr. Tang provided these explanations a number of times.
He stated that the Jewellery Store had enough cash to complete the $800,000
transaction; however, most of the notes were in denominations smaller than $100.
[76]
Both Messrs. Tang and Kang went to their
respective homes prior to the exchange with the undercover officer. Mr. Tang left
with a six-by-eight white paper bag; Mr. Kang had nothing in his hands. The
appellants could have gone to get the missing $100 bills; however, there is no
evidence to confirm the amount that may have been transferred from the appellants’
homes to the Jewellery Store.
[77]
For his part, Mr. Tang stated that he had
approached three different third parties in order to obtain the requisite
amount of US$ 800,000 by means of three loans, even though a smaller amount was
required, since the transaction involved exchanging Can $800,000 into US currency, which amounted to over $100,000 less in US dollars.
[78]
Mr. Tang was not able to provide the actual
names of the three lenders and referred only to their nicknames. No record or
document was signed to attest to the loans. The lenders never came forward to
contest the seizure of the funds or to claim what was owed to them in subsequent
years.
[79]
The appellants maintained that they never repaid
any amount whatsoever; for their part, the lenders never initiated any proceedings
to recover the amounts owed to them, and, at the time of the trial, more than
seven years had elapsed since the loans.
[80]
If this simply involved a paltry amount, the
appellants could conceivably have forgotten to mention it at the time of the
seizures. However, given the size of the amount and especially the highly
significant tax consequences, the information concerning the ownership of this
amount should have been disclosed within a number of hours following the
seizures.
[81]
Not only did this not happen, but a very long
period of time elapsed before the explanation was provided; moreover, the appellants
were accompanied by legal representatives the day after the seizures, and there
was never any reference to this amount of $800,000, which had a huge impact on
their assessments.
[82]
The existence of these loans totaling $800,000 emerged
shortly before the trial, specifically on January 6, 2012.
[83]
Moreover, the evidence demonstrated that the appellants
did not need these loans to complete the transaction with the police officer;
they had the money.
[84]
Instead of borrowing to exchange the currency, they
simply needed to exchange smaller denominations for $100 notes in their
possession in order to satisfy the police officer client, the undercover
officer.
[85]
Mr. Tang also claimed that he had to pay several
thousand dollars for these loans. Mr. Kang, for his part, did not seem to have
any knowledge of these three loans totaling US$800,000 on his examination for
discovery.
[86]
As stated by the Court at the hearing, the
explanations concerning the three loans totaling $800,000 to justify a
substantial portion of the funds seized from the Jewellery Store premises are neither
credible nor reasonable.
[87]
In their notice of appeal, the appellants submitted
that they are very thrifty people, to the point that they keep their savings at
home to avoid bank fees and the cost of gasoline to go to the bank.
[88]
It is difficult if not impossible to reconcile this
concern to reduce certain marginal expenses to a minimum with the prohibitive
fees that the appellants would have paid to borrow US$800,000, an amount that,
in addition, was not necessary.
[89]
Indeed, Mr. Tang confirmed that he borrowed
US$800,000 when the amount actually needed was US$690,000. On the one hand, the
appellants had access to the requisite amounts from their own assets, and on
the other hand, these loans would have cost them several thousand dollars in
fees and interest.
[90]
Lastly, why did the disclosure of these three
loans occur in January 2012 when the appellants would have had an interest in referring
to them in the hours following the seizures in April 2007?
Money from Saint-Denis BCC
[91]
The other explanation for the cash seized at the
Jewellery Store was that part of this money, i.e. between $300,000 and $350,000,
had come from Saint-Denis BCC.
[92]
There was never any reference to a loan between Saint-Denis
BCC and the Jewellery Store. Moreover, nothing in the financial statements
suggests that such a loan or transfer occurred.
[93]
The books of Saint-Denis BCC do not reflect the alleged
transfer to the Jewellery Store of between $300,000 and $350,000, and this
explanation is completely irreconcilable with the explanations of the
accountant.
[94]
Indeed, the various accounting documents prepared
by the accountant, which are highly questionable, completely belie the claims made
by Mr. Tang regarding the availability of between $300,000 and $350,000 that he
allegedly brought to the Jewellery Store:
|
2005
|
Total Revenue
Gross Profit
Net Profit
|
$87,139
$22,504
$-17,522
|
|
2006
|
Total Revenue
Gross Profit
Net Profit
|
$71,677
$-7,035
$-40,123
|
|
2007
|
Total Revenue
Gross Profit
Net Profit
|
$0
$0
$-180
|
[95]
It is therefore implausible that Saint-Denis BCC
accumulated that much cash when it did not make a profit.
[96]
In addition, the company’s balance sheet for
2007 reflects cash assets of $30,343. Moreover, the company’s cash assets fell
in 2005 and 2006 from $239,880 to $54,670.
[97]
A similar decrease was also posted under “Due to shareholder” (from $209,371 to $57,073). The
accountant tried unsuccessfully to demonstrate some kind of consistency.
However, the explanations provided were so confusing that ultimately none of
them were credible.
[98]
All information concerning Saint-Denis BCC is nebulous
and inconsistent. Moreover, no income tax return was filed for a number of
years. The income tax returns were no doubt completed shortly before the trial,
and the accountant failed spectacularly in trying to camouflage the documents.
[99]
Mr. Tang stated that he had brought between
$300,000 and $350,000 with him from Saint-Denis BCC. However, his counsel reported
an amount of $265,000 further to undertaking No. 5, which was made after the examination
for discovery; he therefore had all the time needed for a serious and
responsible audit. Despite this, Mr. Tang stated and reiterated that he had brought
between $300,000 and $350,000 to the store.
[100] Typically, someone living a modest lifestyle, as Mr. Tang claimed, would
know exactly how much money they were carrying from one place to another at a
particular point in time.
[101] The amount of $300,000 to $350,000 that was taken to the Jewellery Store
when Mr. Tang returned to the former premises was an amount he attributed to
himself.
[102] The company was revived solely for the purpose of attempting to
establish a certain consistency. The evidence should have been convincing and, above
all, credible. However, the evidence adduced is based on documents that were
clearly prepared a number of years after the legal deadlines and that make
reference to incomplete, often contradictory data characterized by numerous
inconsistencies.
[103] It seemed clear to me that the accountant had at least tacitly
agreed to be complicit in the attempt to make explanations that do not hold up
seem reasonable. First, the income tax returns existed, then they did not, and
then they reappeared shortly before the trial, with a number of inconsistencies.
[104] Two fundamental questions must be addressed to dispose of the
appeals.
[105] The first is whether the audit was done correctly and professionally,
while giving the appellants an opportunity to provide all information, explanations
and useful, necessary and relevant documents.
[106] The second question consists in determining the credibility of all the
persons concerned directly or indirectly by the assessments under appeal.
[107] In addition to these questions, there is the issue of the burden of
proof.
[108] In presenting their respective cases to highlight all the relevant facts
and evidence, the parties took diametrically opposed positions.
[109] Through the auditor, the respondent vigorously maintains that she
did everything and spared no effort to produce accurate notices of assessment.
[110] For their part, the appellants accuse the respondent of producing cursory,
botched and completely unacceptable work. They add that submitting prima
facie evidence regarding the grounds used to justify the assessments
shifted the burden of proof demonstrating the validity of the assessments onto
the respondent’s shoulders.
[111] The significant gap between the positions of the parties is neither
a perception nor an interpretation; it is clear from the very words used by counsel
themselves in their written arguments.
[112] In her written representations, the respondent makes the following
submissions:
[translation]
44. Following the preparation
of the three reassessments of February 27, 2009, Ms. Bélanger continued to wait
for explanations, specifically concerning how to correctly attribute the
ownership of the amounts seized at the Jewellery Store (January 23, 2014, p.
99, 1.2 to 7).
45. However, as we saw earlier, Ms. Bélanger
noted that she had forgotten to account for two amounts of cash seized: EUR
18,700 seized at the Jewellery Store, and US$689,660 seized by the undercover
officer (January 23, 2014, p. 101, 1.5 to 9).
46. On March 2, 2009, before making the
supplementary assessment of July 16, 2009, she returned to see Mr. Tang to try
to obtain additional explanations, specifically regarding the amounts she had forgotten
(January 23, 2014, p. 101, 1.10 to 14). This time, Mr. Tang refused to give her
any information and referred her to his counsel (January 23, 2014, p. 102, 1.1
to 4).
47. In accordance with Mr. Tang’s instructions, Ms.
Bélanger telephoned counsel for the appellants on March 19, 2009, April 7,
2009, April 14, 2009, April 27, 2009, May 20, 2009, May 21, 2009 and July 8,
2009. Bélanger also met with counsel on March 25, 2009, May 25, 2009, June 4,
2009 and July 6, 2009 (January 23 [2014], p. 100, 1.9 to 14).
48. Counsel for the appellants did not provide
any explanation or justification concerning the amounts seized. He simply tried
to settle the matter for a lump sum of Can$250,000 (January 23, 2014, p. 100,
1.9 to 28; p. 102, 1.9 to 17).
49. Under the circumstances, on July 16, 2009,
Ms. Bélanger made the second reassessment against the Jewellery Store, adding
the amounts that had been seized but forgotten (I-1, tab 2).
50. It is noteworthy that despite
the meeting with Mr. Kang, the two meetings with Mr. Tang, and the multiple
meetings and conversations with their counsel, at no time was the existence of
a loan mentioned to Ms. Bélanger during the audit/assessment process. Also, at
no time was the corporate name, “Saint-Denis BCC” (“BCC”) mentioned.
[Emphasis in the original.]
[113] These numerous factors established by the respondent’s evidence are
such that the conduct of the appellants certainly does not meet the definition of
the word “collaboration”.
[114] These facts and events occurred before the assessments under appeal
were issued. When an assessment is made and is subsequently appealed from, it
is common for the parties to communicate with each other in order to exchange
useful and relevant information so that an assessment that better reflects the
revenue statement can be calculated, especially where an assessment has been made
on the basis of an arbitrary method.
[115] In this regard, the very clear preponderance of evidence shows not
only that the appellants were uncooperative, but that they provided
contradictory explanations and even took the liberty of adding completely new
elements several years after the assessments were issued. Moreover, these were
not secondary details but very important facts that could have a significant
impact on the assessments in all three cases.
[116] In their reply to the respondent’s written representations, the
appellants state the following:
4. The respondent also submits that the appellants
demonstrated a lack of cooperation and that, in the absence of any credible
explanation about the source of the amounts seized, the auditor had no choice
but to assess all the amounts seized in the 2007 taxation year, for appellants
Tang and Kang, and in the fiscal year ended March 31, 2007, for the Jewellery Store.
5. However, the facts show that the appellants
offered their full cooperation and assistance to the auditor and to the Minster’s
representatives. Despite this cooperation, the auditor, for reasons completely
independent from the conduct of the appellants or the explanations they
provided, conducted a hasty and superficial audit.
6. Indeed, the auditor started her audit on or
about February 12, 2009, even though the disputed assessments were issued on
February 27, 2009, just two weeks later.
7. Four days before the disputed assessments
were issued, on February 23, 2009, the auditor met with Messrs. Tank and Kang.
8. Knowing that the meeting of February 23,
2009, lasted only about 45 minutes, and considering the size of the amounts
seized, it is difficult to understand the auditor’s expectations with respect
to the meeting or, at the very least, what she would have considered
sufficiently credible explanations to warrant some investigative work being
undertaken. At the very least, if the auditor was expecting to obtain some
documents, she never requested any.
9. Given the alleged lack of cooperation by the
appellants and the absence of a credible explanation, the auditor had no choice
but to issue the disputed assessments four days later in which add the
following unreported income was added to the taxpayers ‘income for a single taxation
and fiscal year:
. . .
11. From the time they were issued, the Minister
was aware of the flaws of the disputed assessments, specifically:
(a) the flaws
respecting multiple taxation of certain amounts;
(b) the flaws respecting
time-related inconsistencies due to the very short period of time during which
the so-called unreported income was allegedly generated.
12. The appellants were always open to submitting
all the necessary documents to the Minister so that he could correct the
disputed assessments. The issue therefore is as follows: which documents and
information did the appellants have in their possession, that they should have
submitted, that would have enabled the Minister to consider that the appellants
had adequately cooperated with the audit?
13. At the
examinations for discovery, the Minister, through his representatives, made
numerous requests for documents and information, which the appellants duly
provided. Specifically, the appellants responded to all the following undertakings,
thereby providing the Minister with the existing documentation to support their
explanations about the source of the so-called unreported assessed income and
the period of time during which it was generated: . . .
[117] The trial, which lasted over a week, without taking into account the
written arguments of the parties which had been preceded by the examinations
for discovery, produced a very large amount of information and details which
facilitated the assessment of credibility.
[118] First, I believe that it is important to stress that the information
and justifications provided have gone through numerous changes, particularly
with respect to the amounts seized at the Jewellery Store.
[119] Messrs. Tang and Kang maintained that they owned the amounts seized at
their respective residences, i.e. $509,406 in the case of Mr. Tang and $384,145
in the case of Mr. Kang.
[120] With respect to the $1,663,843 seized from the premises of the Jewellery
Store, they contended that it belonged to the company identified as the
Jewellery Store.
[121] With respect to the amounts seized from their personal residences, the
appellants repeatedly stated and insisted that they were essentially their
personal savings accumulated over the years from all reported income since their
arrival in Canada.
[122] The funds from the Jewellery Store were operating revenues, from
which had to be subtracted money coming from another company, Saint‑Denis
BCC, and the amount of US$800,000, which was supposedly the property of three
different lenders as a result of two amounts of US$200,000 and one amount of US$400,000.
[123] Mr. Casella, the accountant, testified at length. Throughout his
testimony, he was clearly nervous, uncomfortable, hesitant and even confused on
a number of occasions. The witness also benefitted from a language advantage.
[124] He testified in English, and the translation gave him much more time
because clearly he understood French very well. The poor quality of his
testimony and the numerous inconsistencies were undoubtedly the reason for his
discomfort and nervousness.
[125] He admitted to making several errors. Clearly, Mr. Casella willingly
agreed to arrange the financial and corporate documents of Saint-Denis BCC in
order to make them coherent; he failed spectacularly in this regard.
[126] This testimony has no credibility and cannot be used to demonstrate
anything. The file for which he had received a mandate from Mr. Tang turned out
to be a mess reconstructed at the last minute.
[127] This file is neither reliable nor credible. In addition, I am
convinced that the information it contains does not correspond to reality. After
initially stating that he had all the copies of the returns, Mt. Tang claimed that he could no longer find them and then was finally able to produce copies,
the originals of which had never been submitted to the CRA.
[128] This portion of the evidence demonstrates the level of Mr. Tang’s
reluctance to present a serious and documented case with plausible information.
[129] The testimony provided by the appellants was riddled with
contradictions, inconsistencies and improbabilities. Most of their assertions
and justifications must be rejected for the simple reason that they are unreasonable
on the basis of a simple and elementary mathematical exercise.
[130] With respect to the companies that the appellants were associated
with, i.e. the Jewellery Store and Saint-Denis BCC, the few documents available
simply do not reflect the explanations provided and are so inconsistent that there
is good reason to question the role that the companies actually played in their
financial activities.
[131] Given the almost total lack of credible and reliable information
provided by the appellants and the poor quality of the available documents, which
were very often contradicted by the appellants themselves, the Minister made
the assessments under appeal by calculating the gap in the net worth for the
appellants.
[132] With respect to the appellant company, the Minister used the
selective method based on points by comparing the presumed revenue in the form
of cash or bank deposits versus the revenue reported during the same fiscal year.
[133] Both cases involve an indirect method, which produces a necessarily
imperfect result.
[134] Moreover, the responsible auditor herself admitted to making a
number of errors.
[135] The final result is clearly also imperfect in that certain income is
attributed to the three appellants. Could the auditor have taken a different
approach?
[136] The answer to this question is essentially based on the available documents
and the information provided by the appellants themselves. In this regard, the
auditor did not strictly receive anything that would have enabled her to take a
different approach. In other words, the appellants reaped the result that they
themselves had sought by completely refusing to cooperate.
[137] However, the evidence established that the auditor had favoured the appellants
in terms of some of the choices she had made. This was the case for the minimal
living expenses that a family must incur annually and for other amounts that
the appellants attributed to members of their respective families.
Investments identified
by the auditor for the Tangs:
|
Personal residence
|
$240,200
|
|
Bank deposit
|
$154,528
|
|
Investment in a grocery
store
|
$91,496
|
|
RRSP
|
$84,104
|
|
Amount kept at the
residence
|
$509,406
|
|
|
|
Investments
identified by the auditor for the Kangs:
|
RRSP
|
$280,000
|
|
Investment in a
grocery store
|
$90,000
|
|
Personal residence
|
$220,000
|
|
Amount kept at the
residence
|
$300,000
|
|
US currency in their home
|
$40,000
|
|
Investment in the
Jewellery Store
|
$300,000
|
|
Toyota Camry
|
$28,685
|
|
Mercedes
|
$40,000
|
|
|
|
[138]
For example, the auditor did not account for the
two amounts totaling $36,000, which, according to Mr. Kang, did not belong to
him.
[139] The appellants claimed that they acquired the property described
above from their reported income because they had a very modest lifestyle.
[140] Since they were unable to explain how they had been able to
accumulate such assets, the appellants tried to ridicule the respondent’s
choices, most notably by arguing that it made no sense whatsoever to claim that
they had accumulated such significant assets during the 2007 taxation year
alone. However, they were careful not to explain how the averaging could have
been done. At no point and in no way did the appellants submit or try to show
an averaging with respect to the evolution of their assets noted at the time of
the seizures.
[141] The respondent took the available information into account (income reported
every year since their arrival in Canada), then subtracted the expenses determined
on the basis of available statistics, and did so to the benefit of the
appellants. The result mathematically demonstrates the absurdity of the claims
of the appellants regarding the extent of the assets revealed by the seizures.
[142] Throughout the trial, the appellants maintained and reiterated that
their assets had been accumulated from income reported annually since their
arrival in Canada. A simple and elementary mathematical calculation calls for
the outright rejection of these claims.
[143] The appellants’ obstinacy in trying to maintain and reiterate this
position shows how sparing Messrs. Tang and Kang were with their explanations; moreover,
their behavior even demonstrates bad faith and a complete and particularly
willful lack of cooperation with the auditor, Ms. Bélanger.
[144] Given the attitude and conduct of the appellants and the available
facts, including the substantial amount of the funds seized, the location of
the funds and the absurd and contradictory explanations provided by the
appellants, the CRA was justified in using the estimated and arbitrary net
worth assessment method. Moreover, on the basis of the evidence provided, it was
completely impossible to proceed otherwise.
[145] I believe it is appropriate to reproduce the following excerpt from
the case law cited by the respondent:
363 . . .
29 Net worth assessments are a method
of last resort, commonly utilized in cases where the taxpayer refuses to file a
tax return, has filed a return which is grossly inaccurate or refuses to
furnish documentation which would enable Revenue Canada to verify the return
(V. Krishna, The Fundamentals of Canadian Income Tax Law, 5th ed.
(Toronto: Carswell, 1995) at 1089). The net worth method is premised on the
assumption that an appreciation of a taxpayer's wealth over a period of time
can be imputed as income for that period unless the taxpayer demonstrates
otherwise (Bigayan, supra, at 1619).. (…)
Hsu v. Canada, [2001] F.C.J. No. 1174 ( Desjardins, Isaac and Malone JJ.A.)
appeal dismissed by the SCC: Hsu v. Canada, [2001] S.C.C.A. No. 503
[146] Are the appellants credible? In general, this not an easy exercise. In
this case, the appellants provided farfetched explanations that were often inconsistent,
contradictory and absurd. It is very easy to conclude that their version of
events and all their evidence are neither credible nor reliable and that this
also applies to the explanations provided for all the funds seized.
[147] Why did they tell the undercover officer that there were enough
US$100 notes and that he would have to come back later?
[148] Why leave the premises a few minutes later to go to their respective
residences?
[149] Why did one of the appellants emerge from his residence with a
plastic bag?
[150] Why did they hide the alleged loans totalling US$800,000 from
unknown persons, who did not testify, for several years?
[151] Why pay prohibitive fees to borrow funds when these same individuals
were hiding substantial amounts of money in their homes? Was this really to
avoid the requisite gas costs to go to the bank and to avoid paying bank
charges?
[152] Why borrow more than US $100,000 more than needed to complete the
foreign exchange transaction with the undercover officer?
[153] One thing that is striking, and even surprising, is the fact that
the appellants extensively criticized the respondent for using assumptions that
were neither valid nor reliable.
[154] Who, other than the appellants themselves, should have information and
reliable and credible documents? In this regard, the evidence did not enable
the Court to take cognizance of or consider these types of fundamental elements
that were in the unique and sole custody of the appellants.
[155] Moreover, the appellants criticize the respondent for quickly and
arbitrarily botching the process that led to making the assessments; they also refer
to ambiguity and a lack of details and information. They allege that Ms. Bélanger
did not make much of an effort and lacked initiative in preparing the notices
of assessment. (that she did not make much of an effort or take initiative)
[156] To illustrate this argument, the appellants state the following in
their written submissions:
[translation]
22. It is important
to note that the appellants were criticized for their lack of cooperation
during the audit and, in particular, for not providing the requested
information.
23. However, Ms.
Bélanger herself admits that she never made such a request in writing.
24. It is therefore
in this highly unusual context that the audit of the appellants took place.
25. After a 45-minute meeting with the
appellants, the auditor chose to issue notices of reassessment totaling over
$4,500,000 of unreported income.
[157] For their part, the appellants often showed that they had little respect
for accuracy, clarity and ultimately, for the truth.
[158] Indeed, no mention was ever made of the loans totalling $800,000
before January 2012. Not only did almost six years elapse, but all explanations
concerning these loans were confusing, absurd and contradictory.
[159] Moreover, I concluded at the time of the hearing that obviously these
loans are fictitious and false.
[160] The appellants raised the issue of the burden of proof a number of
times.
[161] In this regard, I believe it is relevant to reproduce certain
excerpts of the case law that I completely agree with:
363 ...
4 Once the Ministère establishes on
the basis of reliable information that there is a discrepancy, and a
substantial one in the case at bar, between a taxpayer's assets and his
expenses, and that discrepancy continues to be unexplained and inexplicable,
the Ministère has discharged its burden of proof. It is then for the taxpayer
to identify the source of his income and show that it is not taxable..
Molenaar v. Canada, [2004] F.C.J. No. 1731 (Décary, Létourneau and Nadon,
JJ.A.)
. . .
377 . . .
24 This reasoning in no way places an
unfair burden on the taxpayer. The taxpayer is aware of the facts and has the
means to prove them. It would be most unrealistic to have the Minister bear the
onus of uncovering a source of income whose existence can be detected only
indirectly, that is, using the net worth method
Lacroix v. Canada, [2008] F.C.J. No. 1092 (Nadon, Pelletier and Trudel
JJ.A)
. . .
381 [translation It
should be noted that the appellants are basing their argument regarding the
inconsistency of the assessments on a body of case law that does not contain
any decision about assessments made using indirect audit methods, in cases
dealing with the appearance of large amounts of cash knowingly hidden by
taxpayers, without leaving any trace, and discovered in the context of a
seizure by state authorities.
. . .
383 [translation] However,
the most significant weakness in the appellants’ argument is their position
that the contradiction arising from considering a single amount for the three taxpayers
reversed the burden of proof in their favour.
384 [translation] Even
if it is accepted that there was a clear contradiction, which is denied,
how can the argument of the appellants be accepted? . . .
385 . . .
30 By its very nature, a net worth
assessment is an arbitrary and imprecise approximation of a taxpayer's income.
Any perceived unfairness relating to this type of assessment is resolved by
recognizing that the taxpayer is in the best position to know his or her own
taxable income. Where the factual basis of the Minister's estimation is
inaccurate, it should be a simple matter for the taxpayer to correct the Minister's
error to the satisfaction of the Court. (our emphasis)
Hsu v. The Queen, [2001] F.C.J. No. 1174 (Desjardins, Isaac and Malone JJ.A),
appeal dismissed by the SCC: Hsu v. The Queen, [2001] S.C.C.A No 503
386 . . .
4 . . . In an appeal from an
assessment of income tax, the onus is on the taxpayer to establish on the
balance of probabilities that the assessment is too high having regard to the
law and the relevant facts. It is not enough for the taxpayer to show that
the assessment might conceivably be too high. He must adduce credible
evidence showing that on a proper and complete net worth his income is lower
than the Minister founded to be. Where a taxpayer has placed himself in a
position in which a direct and accurate measurement of income is impossible he
can hardly complain in the course of an appeal from a net worth assessment of
the inaccuracies inherent in that method . . . (our emphasis)
Fletcher v. Canada, [1994] T.C.J. No. 837 (Bonner J.)
. . .
388 [translation] Tang and
Kang provide two types of explanations against the Minister’s analysis: part of
the amounts seized was savings put away until 2006 and part of the amounts
seized did not belong to them or to the Jewellery Store.
389 [translation] The respondent
submits that Part I hereof clearly demonstrates that the appellants never
cooperated sufficiently or provided credible, coherent or consistent
information, either during the audit process or thereafter. However, such
cooperation is critical:
8 The bases or foundations of the
calculations done in a net worth assessment depend largely on information
provided by the taxpayer who is the subject of the audit.
9 The quality, plausibility and
reasonableness of that information therefore take on absolutely fundamental
importance
Bastille v. The Queen, [1998] T.C.J. No. 1080 (Tardif J.)
. . .
391 . . .
27 Where there are no records and books
of account to speak of, a taxpayer's mere assertion that the discrepancy
identified by the net worth method results from the use of cash savings
accumulated by the taxpayer over the course of previous years is markedly
insufficient to constitute the evidence necessary to establish on a balance of
probabilities that the assessments are erroneous.
Roy v. The Queen, [2006] T.C.J. No. 189 (Dussault J.)
[Emphasis in the original.]
[162] The appellants submit that the respondent issued the notices of assessment
arbitrarily, hypothetically, illogically and unreasonably. They also maintain
that these assumptions facilitated the appellant’s work with respect to their
burden of proof; they submit that their only obligation was to adduce prima
facie evidence that the factual assumptions made by the respondent were not
reliable or reasonable but purely speculative. They asserted and reiterated
that they had submitted prima facie evidence, such that the burden
shifted onto the shoulders of the respondent.
[163] Accepting the appellant’s interpretation concerning the burden of
proof would mean that it is possible to contradict the arbitrary with the
arbitrary, the unreasonable with the unreasonable and the speculative with the
speculative.
[164] The parties completely disagree on the respondent’s right to issue
an assessment for a particular year. The appellants submit that the respondent
has a duty to determine the specific period of enrichment by using the net
asset method such that any identified enrichment can be allocated over a long
period of time rather than attributing it to a single taxation year.
[165] I believe that this would be appropriate and correct if it were
possible to determine the beginning and the end of the period concerned by a
possible reassessment. However in the cases at bar, it was completely
impossible to do so, specifically because the appellants systematically refused
to cooperate. They did absolutely nothing to explain or justify any
distribution whatsoever.
[166] It is the appellants alone who could have contributed to an exercise
that would have helped establish and define the assessed periods; not only did
they not cooperate, but they also provided incomplete, inconsistent and
unreliable information that could not be used to develop a scenario that
differed from the one that was selected and that, under the circumstances, was
reasonable, logical and appropriate.
[167] All the appellants’ arguments are based on an assessment that is
absolutely not consistent with the evidence. Indeed, contrary to the
appellants’ assessment that they had provided credible evidence and offered
exemplary cooperation, the evidence shows a completely different reality.
[168] First, they never cooperated. The quality of the evidence submitted confirms
this assessment. I am particularly referring to the significant revelation, which
is obviously false, regarding the $800,000 loans. If these loans had actually taken
place, they would have been reported much earlier. On the one hand, the
appellants’ legal representatives provided the opposing party with information that
the appellants themselves contradicted at the hearing. It is possible that the
appellants did not cooperate with their own representatives.
[169] On the other hand, the appellants themselves discredited the quality
of their own evidence by providing testimony that was so inconsistent and by
making implausible assumptions, including that they had saved such substantial
amounts from their reported income.
[170] Lastly, when testifying for the corporate appellant, their claims
were either contradicted by the few available documents or were irreconcilable.
[171] The arbitrary part that provided the foundation for the correctness
of the assessments in the three cases is essentially and exclusively explained
and justified by a total lack of cooperation from the appellants.
[172] Second, the main elements underlying the assessments under appeal
were formally admitted by the appellants themselves; indeed, none of the
amounts seized was challenged except for the $800,000, which the appellants
attempted to define as loans. This claim was rejected since the explanations
provided to substantiate it were completely implausible.
[173] With respect to the burden of proof, I am satisfied with the
evidence provided by the respondent under the circumstances and in the context
of the files. When faced with objective and compelling data as well as dates,
amounts, illegal commercial activities and the exclusive use of cash, the
appellants responded with a profusion of explanations that were false, absurd,
inconsistent, and sometimes borderline ridiculous; this is certainly not enough
to claim that a prima facie burden of proof was met.
[174] Consequently, the appellants sowed confusion, inconsistencies and
lack of logic and yet want to reap precision.
[175] Lastly, subscribing to the appellants’ arguments and positions would
encourage taxpayers to maintain as much confusion as possible so that it is
almost impossible to conduct a tax audit.
[176] Despite the evidence, counsel for the appellants made the following
arguments:
(a)
The assessments were the result of work that was
done in a hurry and was botched and baseless.
(b)
The assets were assessed for a single taxation
year, thereby making the exercise ridiculous, unreasonable and completely
arbitrary.
(c)
The respondent was unable or failed in its
obligation to adequately justify the correctness of the assessments by taking
factual assumptions into consideration that had been refuted by the appellants.
[177] In order to bolster their arguments, the appellants presented all
sorts of hypotheses to discredit the validity of the assessments. They are
therefore arguing that something cannot be black and white at the same time.
[178] In a system where self-assessment is the rule, it is essential and
absolutely critical that the quality of tax accountability that occurs at the
end of each year can be verified at any time.
[179] In Canada, our tax system is based on self-assessment.
Self-assessment means that all taxpayers have a duty to report their income
established on the basis of and pursuant to the relevant tax laws.
[180] Ignorance of the law, language, culture, traditions and customs are
not acceptable or relevant excuses to diminish or reduce anyone’s tax burden.
[181] Self-assessment is an exercise in accountability that every natural
or legal person is required to carry out every year for the tax authorities,
who have the right to question and verify the quality of data that informed the
accountability reporting.
[182] Taxpayers often believe that the onus is on the tax authorities to
prove the merits of an assessment beyond a reasonable doubt. On the basis of this
false and erroneous perception or interpretation, they offer little explanation
about their assets and often go so far as to refuse to answer any questions or
respond to justified requests from the tax authorities.
[183] As a result of their attitude and/or conduct, they are often
disappointed when notices of assessment appear.
[184] In my opinion, the respondent’s approach seems to have been
reasonable and was even advantageous to the appellants.
[185] The appellants deliberately chose to conceal substantial amounts of
income, undoubtedly on the ground that it was derived from illegal economic
activities.
[186] Subscribing to the arguments of the appellants would effectively
reward them for deliberately choosing to disregard the basic rules required for
calculating their income so that the accountability process is adequate and
reliable.
[187] At paragraphs 188 and 190 of their written submissions, the
appellants wrote the following:
[translation]
188. The appellants submit that the respondent did
not establish the validity of her factual assumptions through conclusive
evidence..
. . .
190. On the contrary, the appellants emphasize that
the Minister’s factual assumptions are not based on any concrete evidence and
that, on their face, these assumptions are devoid of any logic.
[188] At paragraph 189, the appellants wrote the following:
[translation]:
189. In other words, the respondent failed to
demonstrate that the existence of these factual assumptions is more probable
than its non-existence
[189] At paragraph 16 of page 7 of their reply to the respondent’s
arguments, the appellants wrote the following:
[translation]
16.
The appellants are not complaining about the
assessments in dispute; they are challenging them
on the basis of legislation and case law established not only to
guarantee the government’s right to collect taxes in a system based on
self-reporting but also to protect taxpayers from the state’s substantial
powers to make assessments.
[My emphasis.]
[190] On the basis of the evidence adduced, the appellants failed to
demonstrate that the factual assumptions taken into consideration by the
respondent were without merit. On the contrary, the evidence confirmed the bases
of the assessments under appeal.
[191] In essence, the appellants put forward three explanations to seek
the cancellation of the assessments.
[192] First, the amounts seized from the residences of the appellants resulted
from the accumulation of their savings based on their reported income since
their arrival in Canada. This initial explanation must be rejected on the basis
of a simple mathematical calculation.
[193] Second, three unknown persons with no known addresses allegedly
loaned the appellants $800,000. Here again, the explanation is implausible for
the reasons already listed above. Lastly, Mr. Tang reportedly obtained and
transported between $300,000 and $350,000 from the BCC currency exchange that
he operated on Jean-Talon Street to the Jewellery Store.
[194] This explanation is illogical and implausible; it is also
contradicted by the documents that were undoubtedly prepared by Mr. Casella in
the months preceding the trial; his testimony in particular showed that he had
tried to render the file, which had been hidden from the tax authorities, consistent.
Indeed, no income tax return had been filed for the ten previous years.
[195] Moreover, the reconstructed financial statements showed losses for
the years preceding the year in which the seizures took place. However, Mr.
Tang’s business appears to have been booming in the months prior to his move to
the Jewellery Store.
[196] The evidence showed that the auditor made a number of errors.
However, the errors attributable to the auditor’s work are not sufficient to
discredit the bases of the assessments.
[197] The urgency, the lack of information and the other constraints that
the auditor had to deal with could have affected the quality and perhaps the
outcome of her work, even assuming the irreproachable cooperation of the persons
concerned by the possible assessments.
[198] However, such was not the case here because the appellants
themselves did everything within their power to shift the focus of the audit to
other areas, notably in terms of the ownership of the amounts taken into
consideration to prepare the assessments.
[199] I therefore conclude that the position submitted by counsel for the
respondent appears to me to be fair, reasonable and appropriate, particularly
since it is clearly confirmed by a preponderance of the evidence.
[200] In other words, the assessments under appeal were made in an
appropriate manner; the few small errors identified and acknowledged by the
auditor can be explained by the total lack of cooperation of the appellants,
and indeed, their bad faith.
[201] The method used, the quality of the work and the result obtained,
given the context in which the reassessments were made, fail to justify any of
the concerns raised by the appellants.
[202] The evidence supports a finding that the approach, the work and the
results are within the bounds of reasonableness. The same evidence also supports
a finding that the respondent could not have proceeded differently.
PENALTIES
[203] In tax matters, as in all other matters, laws must always be applied
in the same manner; in other words, everyone is equal before the law.
[204] Language, culture, origins, education, training, etc. are certainly
factors that may be taken into account in the severity of a sanction but can in
no way afford an excuse for non-compliance with the law.
[205] In this case, the appellants immigrated to Canada from a war-torn country. It was therefore reasonable to believe that they may have been
distrustful, especially since they were not familiar with the language or the
customs and conventions of their new host country.
[206] Of course, hiding substantial amounts of money at one’s home or the place
of business one is associated with is not sufficient to justify the imposition
of penalties under subsection 163(2) of the Income Tax Act.
[207] Indeed, this may be a question of distrust or culture. However, this
is clearly inadequate to justify the lack of reliable, credible documents and
accounting records that would explain the evolution of the enrichment.
[208] “[K]nowingly or under circumstances amounting to gross negligence”
is a test that requires a degree of gravity that is more significant than a
simple error, forgetfulness, lack of knowledge or even certain cultural
practices. Knowingly implies planning, orchestration, voluntarily setting up a
system and/or process to cause confusion and make it very difficult, if not
impossible, to conduct an audit based on conventional methods consistent with accepted
practices.
[209] Although not conclusive in itself with respect to the imposition of
penalties, the almost exclusive use of cash is, however, an element that gives
rise to a certain degree of suspicion.
[210] The use of cash is one thing, but when this cash does not go through
any financial institution, is not reflected in any accounting entry or any
entry whatsoever and explanations regarding this money discovered by the tax
authorities are non-existent, inconsistent or simply false, I believe that these
are highly relevant factors justifying the imposition of penalties.
[211] This matter does not involve one or just a few isolated
transactions; it was the standard and common way of operating. Of course, it
involved a business activity where cash is omnipresent. That is one more reason
to put a system or process in place to enhance the reliability of the accountability
process at the end of each fiscal year. In this case, the appellants did
everything they could to hide their income.
[212] In addition, throughout the process that resulted in the preparation
of the assessments, the appellants, contrary to the rather specific
interpretation of their representative, acted in a manner that was completely
unacceptable by refusing to cooperate.
[213] Moreover, the attempt by the appellants to show that the assessments
were made on the basis of an unacceptable and unreasonable process is not
justified in any way; on the contrary, the approach and the history of the cases
under appeal can be explained essentially and exclusively by the attitude and
behaviour of the appellants. Faced with this situation, the auditor had no
other option.
[214] Other than all these highly relevant factors that justify the imposition
of penalties, it also seems appropriate to point out that the assessments were initiated
in the wake of police operations that resulted in criminal proceedings, which led
to a guilty plea and the agreement that a substantial amount would be
confiscated.
[215] In view of the police operations, it became obvious that the tax
authorities would eventually intervene. Why didn’t the appellants prepare their
respective cases? Why didn’t they garner information and collect documents for the
proper preparation of their case? Not only were they passive but they also
provided very general information that was not confirmed, or simply refused to
respond; they even changed their version of key segments of their case on
several occasions.
[216] Given the significant amounts involved and given that they
essentially consisted of cash hidden in secret locations in their respective
residences and at the Jewellery Store, it is completely unreasonable to think
or conclude that the appellants did not knowingly and deliberately fail to report
this income.
[217] The explanations provided are not credible, reasonable or consistent;
they must be completely rejected, and only the elements adduced into evidence
and admitted by the appellants must be taken into account, i.e. the amount of cash
seized, the location of the seizures and the circumstances surrounding the
discovery of the amounts in question. The accounting for the Jewellery Store
was deficient and misleading in several respects.
[218] Indeed, the Jewellery Store never presented or submitted accounting
records or adequate and reliable books; there is also some ambiguity as to when
the Jewellery Store was transferred, the consideration and the date when the
consideration was paid.
[219] Moreover, the accountant’s testimony was inconsistent; he clearly
and deliberately disguised certain documents and statements, thereby failing to
comply with the clear demands of the subpoena duces tecum that he was
served with.
[220] A clear preponderance of evidence leads to the conclusion that Mr.
Casella prepared all the returns for roughly 10 years on August 12, 2013, i.e.
after the trial began on May 30, 2013, and did so without informing the
respondent.
[221] In justifying the imposition of penalties for tax matters, the facts
and context that must be taken into account generally pre-date the
establishment of the tax debt. However, certain tax debtors, including the
appellants in this case, provide testimony that confirms and validates that
they clearly acted in bad faith before the reassessments were made. In other
words, the appellants acted in bad faith at all times by knowingly taking
actions to avoid their tax obligations and responsibilities.
[222] Not only did the appellants knowingly hide very substantial amounts
of income, but they did everything in their power after the seizures to fabricate
various scenarios and clearly did so with the ultimate goal of hiding
considerable amounts of income, which was corroborated by the size of the
amounts seized.
[223] For all these reasons, the imposition of penalties was entirely in
keeping with the provisions of the Income Tax Act; the amount of the
penalties will have to be revised in the light of the reassessments that will
be made further to this judgment.
[224] Messrs. Tang and Kang knowingly and secretly operated an illegal money
laundering business; they, therefore, avoided the banking system at all costs
as that would have left traces and enabled the tax authorities to prepare
notices of assessment that were undoubtedly more “concrete”.
[225] The amounts seized amounted to over $2,000,000. The audit started on
February 12, 2009. During the very long interval between the two events in
question, where were the appellants? Was it not highly foreseeable and even
obvious that they would eventually have to account to the CRA?
[226] The evidence submitted by both parties does not make it possible to
clearly identify the party who should be taxed for the various amounts seized
by the police.
[227] The breakdown must be based on a balance of probabilities.
[228] One of the very real and highly relevant facts is the total of the
substantial amounts seized as well as the location of these amounts at the time
of the various seizures—key facts that were admitted by the appellants.
[229] In order to determine or relate the ownership of property to a
natural or legal person, it is essential to have access to the relevant
testimony and documentary information, otherwise any conclusion is based on assumptions
and/or speculation.
[230] The lack of such evidence does not necessarily negate the merits of
an assessment. If that were the case, it would mean or would have the effect of
encouraging taxpayers to not cooperate and to primarily engage in cash
transactions; in other words, it could become highly beneficial to not have
accounting records and avoid using banks, to not cooperate during a tax audit,
etc.
[231] The appellants understood and put the following formula into
practice: “written materials leave traces”. The
few available documents are not consistent or credible; they are often
contradictory and completely irreconcilable with the testimony of the
appellants. The appellants deliberately chose ambiguity and confusion and have
the audacity to want to benefit from it.
[232] The seizures took place in 2007, the assessments were issued in 2009,
and the trial started in May 2013 and continued in January 2014. If my math is
correct, we are talking about a period of approximately seven years.
[233] The appellants are not intellectually- or financially-challenged.
Throughout the process, they were accompanied by resource people whose
competence is not in any doubt.
[234] Despite the length of the trial, the evidence of the parties and the
written notes that followed, which were carefully prepared on the basis of
transcripts and parallel reflections, it was completely impossible to know precisely
who was the real owner of the amounts seized from the Jewellery Store, which
the appellants operated together.
[235] According to the preponderance of evidence, it is clear that the
appellants did nothing to clarify the situation; instead, they refrained from
providing reasonable and credible explanations, completely fabricated certain
explanations, provided vague and confusing explanations and changed their story
at different points in the progression of their case; these are the
characteristics of their entire testimony, which constitutes the main evidence
that they adduced.
[236] In the face of such evidence, I must consider the objective,
uncontested factors, i.e. the amounts involved and the place where they were
seized.
[237] With respect to Messrs. Tang and Kang, it is also clear that, in
addition to the funds seized at their personal residences, they also owned a
major portion of the money seized from the premises of the Jewellery Store.
[238] Indeed, Mr. Kang stated that he had approximately $300,000 at the
Jewellery Store when Mr. Tang arrived. For his part, Mr. Tang said that he had brought
between $300,000 and $350,000 from the currency exchange that he operated on Jean-Talon Street.
[239] Other than these two somewhat similar amounts, I am satisfied that
the appellants, who went to their personal residences shortly after the visit
from the undercover officer, did so in order to obtain some if not all of the
currency needed to complete the transaction with the undercover officer.
[240] Despite the amount of energy invested in trying to obtain details,
the exercise did not yield any reliable information. Under these circumstances,
I must accept the argument put forward by the respondent as being reasonable,
plausible and appropriate, particularly since it is clearly corroborated by a preponderance
of the evidence. Their case is set out in the following paragraphs of the
respondent’s written submissions:
[translation]
407 . . .
a. Tang’s
net worth, excluding the amounts seized, but including reported income should
amount to (Can$43,630) – TAB 1
b. Kang’s
net worth, excluding the amounts seized, but including the reported income and
the admitted adjustments, should amount to Can$4,810 – TAB 2
408 . . .
c. The amounts seized from the Tang
residence, Can$509,406 and the Kang residence, Can$384,145 constitute assets that
Mr. Tang and Mr. Kang have admitted to owning and that must be maintained
as such by these two parties at the end of their 2007 taxation year since they
were found on April 17, 2007. Tang and Kang did not demonstrate that these
amounts constitute savings.
. . .
410 . . .
d. However,
since only the amounts of Can$794,445 and Can$61,840 that were seized at the
Jewellery Store were initially considered in calculating the net worth differential
of Mr. Tang and Mr. Kang, only 50% of the total of these amounts
(Can$794,445 + Can$61,840 /2), i.e. Can$428,142,50 should be maintained
in calculating the difference in net worth of Mr. Tang and Mr. Kang. This is
provided that the Court accepts the theory that Mr. Tang and Mr. Kang each own
50% of the funds at the Jewellery Store.
. . .
419 . . .
e.
Consequently, the indirect audit method of
analyzing deposits/selective method by points must take into account the objective
appearance of this amount by attributing it to the last active fiscal year,
which increases the appellant’s income by Can$1,357,969 for his fiscal year ending
March 30, 2007, as indicated by I-9, rather than Can$1,734,696 as indicated by
Appendix I of the response to the notice of appeal in the Jewellery Store’s case.
[241] The Court completely agrees with this submission and confirms it as
the judgment of this Court in the three appeals as being the reassessments to
be made, to which the resulting penalties are to be added.
[242] For all these reasons, the appeals are allowed in that the files are
to be reassessed on the basis that the unreported income is established as
follows:
(a)
Jewellery Store (Docket 2010-3917(IT)G), for the
fiscal year ended March 31, 2007: $1,357,969,
(b)
Mr. Tang (Docket 2010-3915(IT)G), for the 2007 taxation
year: $893,918.50,
(c)
Mr. Kang (Docket 2010-3913(IT)G, for the 2007 taxation
year: $817,097.50.
[243]The penalties are warranted and are consequently confirmed; they
must however be amended on the basis of the amounts established as unreported.
[244] All with costs in favour of the respondent, to be established, however,
on the basis of two dockets only, i.e. costs equivalent to a single docket for the
two appellants, Chhang Ang Kang (2010-3913(IT)G) and Uy
Keak Tang (2010-3915(IT)G), and a second with respect
to the docket of the corporate appellant, Bijouterie Yong Meer Inc. (2010-3917(IT)G).
Signed at Ottawa, Canada, this 27th day of January 2015.
“Alain Tardif”
Translation certified true
On this 1st day of October 2015
François Brunet, Revisor
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