Hadi Sarraf and Ozra Sarraf v. Her Majesty the Queen, [1994] 1 CTC 2519, 94 DTC 1506

Bowman, J.T.C.C.:— Mr. Hadi Sarraf appeals from assessments for 1980 and 1981 and his wife, Mrs. Ozra Sarraf, appeals from two assessments made on April 6, 1989 under section 160 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The appeals were heard together.

Originally Mr. Sarraf appealed as well from an assessment for 1982 dated January 31, 1985 under which approximately $188,000 in tax, interest and penalties was assessed against him. A motion was brought to quash that appeal on the ground that the Minister had not confirmed the assessment and 180 days had not elapsed since the filing of the objection, as required by paragraph 169(1)(b) of the Income Tax Act. Judge Bell of this Court quashed the appeal on the basis that the appeal was premature.

Also, a motion to quash Mr. Sarraf's appeals for 1980 and 1981 was brought by the Crown on the ground that Mr. Sarraf had been convicted under subsection 239(1) of the Income Tax Act in respect of all amounts in issue in those appeals except $5,473.05. It was contended before Judge Bell that the appellant was estopped from proceeding with his appeals, based on the decision of the Federal Court of Appeal in Van Rooy v. M.N.R., [1988] 2 C.T.C. 78, 88 D.T.C. 6323. Judge Bell held that the appellant was estopped from proceeding with the appeals for 1980 and 1981 except in respect to $5,473.05. Mr. Sarraf had been convicted of tax evasion in respect of his 1982 taxation year as well, but a motion based on estoppel was abandoned in respect of the appeal for that year, presumably because the technical defect in the appeal under paragraph 169(1 )(b) resulted its being quashed.

On January 31, 1985, Mr. Sarraf was assessed federal and provincial tax and penalties and interest for 1980, 1981 and 1982 as follows:

Included in the federal and provincial tax assessed were substantial penalties under subsection 163(2) of the Income Tax Act and subsection 18(1) of the Ontario Income Tax Act.

Mr. Hadi Sarraf presented his own case as well as that of his wife, Mrs. Ozra Sarraf. Although he had purported to subpoena 18 witnesses, including Ms. Boris and Mr. Hajecek, counsel for the respondent, only four witnesses ultimately testified — Mr. and Mrs. Sarraf and Mr. Ronald Grodecki and Mr. Antonius Plas. Mr. Grodecki and Mr. Plas were assessors in the Hamilton District Office of the Department of National Revenue and were familiar with the assessments that had been made.

The basis of the assessments against Mr. Sarraf is that he appropriated from 374594 Ontario Ltd., ("374594"), a company owned and controlled by him, $38,594.13 in 1980 and $346,872.56 in 1981. In addition, he was assessed for 1981 on an amount of $5,700 allegedly appropriated from 495187 Ontario Ltd. ("495187") another company owned and controlled by him, and on $1,211.01 in unreported interest income. For 1982 he was assessed on a further $301,501.87 allegedly earned from March 22, 1982 to December 31, 1982 as unreported commissions and interest income.

It appears that the source of these substantial funds was commissions paid to Mr. Sarraf's company 374594 by Canron Inc. in respect of contracts to export conduit pipe to Iraq. On March 22, 1982, 374594 was dissolved. The payments purportedly made to it by Canron after that date in the amount of $301,501.87 were considered by the Department to have been made directly to Mr. Sarraf, the sole shareholder, and were assessed accordingly in his hands. Of these amounts the only amount remaining in issue after the orders made by Judge Bell was $5,473.05 in respect of Mr. Sarraf’s 1980 taxation year. This was an amount in respect of which he was not prosecuted.

It is possible to deal reasonably quickly with Mr. Sarraf's own appeals. He adduced no evidence to establish that the amount of $5,473.05 was not properly included in his income for 1980. Evidently it formed part of the larger amounts that were assessed in his hands. The only evidence of the nature of this amount is set out in an affidavit of Mr. Plas which Mr. Sarraf put in evidence through him as Exhibit A-61. That affidavit had previously been used in the motion before Judge Bell. On page 17 of his affidavit Mr. Plas testified that, of the amount of $35,604.13 for which Mr. Sarraf had been assessed, he was convicted in respect of $30,131. The difference of $5,473.05 consisted of $3,473.05, representing the purchase of a bank draft on July 17, 1980, an authorized debit of $1,000 on January 4,1980 and further debits totalling $1,000.

I think that this evidence, which was adduced by Mr. Sarraf through his own witness was prima facie proof that these amounts were income to Mr. Sarraf that had not been declared by him.

Mr. Sarraf contends, however, that the reassessment is ‘’statute- barred" i.e., that it is made beyond the normal reassessment period. A brief review of the rules relating to the making of reassessments after the normal reassessment period may be worthwhile:

(a) where a taxpayer wishes to attack an assessment as having been made beyond the normal reassessment period (defined in subsection 152(3.1) — generally, in the case of an individual, three years (or four years with respect to taxation years prior to 1983) from the date of mailing the original assessment for the year or of the notification that no tax is payable), the basis of challenge should be pleaded and it is for the taxpayer to establish a prima facie case that the reassessment has indeed been made beyond that period, unless the date of the original assessment is obvious from the material before the court;

(b) if a taxpayer has, in a return of income, made a misrepresentation that is attributable to neglect, carelessness, or wilful default or has committed a fraud in filing the return the Minister is entitled under subsection 152(4) of the Income Tax Act to assess beyond the normal reassessment period. The Minister's entitlement to reassess beyond the normal reassessment period must be established by proving the existence of any of the elements set out in subparagraph 152(4)(a)(i). It is up to the Minister to do so;

(c) if those elements are established the onus shifts back to the taxpayer under paragraph 152(5)(b) to establish that the failure to include in the return an amount included in a reassessment beyond the normal reassessment period did not result from any misrepresentation that is attributable to negligence, carelessness or wilful default.

In each case the shifting onus is a civil one and may be satisfied by making out a prima facie case which, if unrefuted by the opposing party, stands.

In applying these rules to the facts of this case, I do not think Mr. Sarraf has established that the reassessment for 1980 was made beyond the normal reassessment period. The date of the original assessment for 1980 was not proved. Even if he had done so — and one might reasonably assume that an original assessment for 1980 would in the normal course probably have been made some time in 1981 — I think the existence of some or all of the elements in subparagraph 152(4)(a)(i) has been established. Mr. Sarraf, through his witness Mr. Plas, proved the fact of his conviction for income tax evasion in respect of 1980. If I applied, as Judge Bell did, the principles of issue estoppel enunciated in Van Rooy, supra, it would not be open to Mr. Sarraf in these proceedings to challenge the conclusion of Judge Robinson of the Provincial Court. In any event he did not do so. Unless some principle of the law of evidence — and I know of none — requires that I ignore Mr. Sarraf’s conviction for income tax evasion in respect of income for 1980 — a conviction that he himself proved — it is clear on the evidence that he did commit a misrepresentation in filing his 1980 income tax return. Therefore the onus shifted back to Mr. Sarraf to establish exoneration under paragraph 152(5)(b). He did not do so.

Accordingly Mr. Sarraf’s appeals for 1980 and 1981 are dismissed.

Mrs. Ozra Sarraf’s assessments under section 160 involve a somewhat more complex set of facts as well as a number of submissions of law made by Mr. Sarraf. Here the assessments are based upon the following allegations, which are set out in the reply to Mrs. Sarraf’s notice of appeal:

(a) at all material times, the appellant was the spouse of Hadi Sarraf;

(b) at all material times, Hadi Sarraf was liable to pay under the Income Tax Act, R.S.C. 1952, c.148 as amended for the 1982 taxation year the sum of $142,502.13;

(c) on or about January 23, 1984, Hadi Sarraf transferred ownership of a 1982 Buick Electra automobile ("the Buick") from himself to the appellant for no consideration;

(d) the fair market value of the Buick at the time of transfer was not less than $15,500;

(e) on or about February 4, 1983, Hadi Sarraf transferred $150,000 to 495652 Ontario Ltd., a corporation of which he was the sole shareholder, for no consideration;

(f) on or about May 18, 1984, a certified cheque in the amount of $100,000 was issued by 495652 Ontario Ltd. to the appellant for no consideration;

(g) the transfer of $100,000 from 495652 Ontario Ltd. to the appellant was an indirect transfer of property from Hadi Sarraf.

Where section 160 of the Income Tax Act is invoked by the Minister the joint and several liability of the transferee is a secondary or derivative one. An assessment under section 160 may be challenged on a number of grounds, including the following:

(a) that the transferee gave consideration equal to the fair market value of the property transferred;

(b) that the liability of the transferor at the date of transfer was less than that assumed by the Minister. It is of course open to the transferee to challenge the correctness of the assessment against the transferor even if the transferor has failed to do so, or is, as is the case here, precluded from doing so: Thorsteinson v. M.N.R., [1980] C.T.C. 2415, 80 D.T.C. 1369 (T.R.B.); Ramey v. Canada, [1993] 2 C.T.C. 2119, 93 D.T.C. 791 (T.C.C.);

(c) that the person who transferred the property was not the taxpayer having the primary liability for tax;

(d) that the liability of the transferor has been reduced or extinguished at any time following the transfer;

(e) that the property transferred had a value less than that assumed by the Minister.

Mr. Sarraf's position on behalf of Mrs. Sarraf was as follows:

(a) He argued that he was not the original transferor, but rather that 495187 was and that the brief passage of the cheque for $150,000 through his personal bank account with the Toronto Dominion Bank was an error on the part of an employee of the bank and was done without his knowledge or authorization. The sequence of events, which Mr. Sarraf established through Mr. Plas, was that on February 4, 1983 a cheque was drawn on account number 487522 at the Toronto Dominion Bank in Burlington. That account was in the name of 495187 Ontario Ltd. The cheque (Exhibit A-36) was made payable to cash and was signed by Mr. Sarraf. Across the face of the cheque was written Mr. Sarraf's account number 261303. The cheque went into his account and then was deposited to account 493921 in the same branch, an account of 495652 Ontario Ltd., another company owned and controlled by Mr. Sarraf. Mr. Sarraf alleges that the transfer to his account which preceded the transfer to 495652 Ontario Ltd. was an unauthorized detour performed by someone at the bank and that it was his intention that the funds be transferred directly from 495187 Ontario Ltd. to 495652 Ontario Ltd.

On May 18, 1984 a certified cheque for $100,000 was drawn on the account of 495652 in favour of Mrs. Sarraf who took the money to Munich, Germany where, she testified, she gave it to Mr. Sarraf's brother.

Even if I accepted the theory that the money passed through Mr. Sarraf's account without his authority the fact remains that when he issued a cheque for cash in the amount of $150,000 drawn on the account of 495187 he had complete control of the money and it was his to do with as he saw fit. The deposit into the account of 495652 and the subsequent payment to Mrs. Sarraf was in my opinion precisely the type of indirect transfer at which sectionl 60 is aimed.

Mr. Sarraf also argued that the money transferred from 495187 represented in reality his brother's snare of the profits and that Mrs. Sarraf was merely an agent. He also argued that 495652 Ontario Ltd. was his brother's company. At the trial for tax evasion in the Provincial Court he contended that 495187 was his brother's company. This contention was not accepted by Judge Robinson and before this court Mr. Sarraf accepted that 495187 was his own company. I mention this point merely to emphasize that there seems to be a certain fluidity to some of the positions taken by him.

I do not think, on this branch of the case, that on the facts the position taken by Mr. Sarraf has been made out.

(b) Mr. Sarraf argued secondly that the section 160 assessments against Mrs. Sarraf were statute-barred. It is true that they were made beyond the normal reassessment period within which the Minister could reassess Mrs. Sarraf's personal income tax for the years in which the transfers took place. I do not, however, think that subsection 160(3) can be construed to mean that the normal reassessment period for a section 160 assessment starts running with the original assessment of the transferee's own personal income tax for a year. I am in respectful agreement on this point with the decision of Lamarre Proulx, J. in Dupuis v. Canada, [1993] 2 C.T.C. 2032, 93 D.T.C. 723 (T.C.C.), at page 2035 (D.T.C. 725). See also Payette v. M.N.R., [1979] C.T.C. 2052, 79 D.T.C. 81 (T.R.B.).

(c) Mr. Sarraf argued that the two assessments under section 160 against Mrs. Sarraf were not validly issued because they were delivered by hand to her rather than being mailed. Subsection 152(2), which, by reason of subsection 160(3), applies mutatis mutandis to a section 160 assessment, requires that the Minister "send" an assessment to the person. Mr. Sarraf argues that the reference in subsection 165(1) to the date of mailing implies that "send" means send by mail. Even if this argument might conceivably be available to a taxpayer who failed to file an objection within 90 days from the date shown on a hand delivered assessment, it does not in my opinion affect the validity of the assessment. I can see no reason to interpret the ordinary English word "send" as being restricted to the use of Her Majesty's postal services.

(d) Mr. Sarraf argues that the Minister’s position that at the date of transfer he owed at least $142,000 under the 1982 assessment was wrong. This is based on the fact that on January 12, 1984 he was assessed $188,014.58 for 1982 and on January 31, 1985 he was assessed an even larger amount of tax, interest and penalties for that year. He contends that since the January 31, 1985 assessment superseded the January 12, 1984 assessment the liability for 1982, based on the earlier assessment, disappeared and was retroactively erased as of the date of transfer by the later assessment.

With respect, I do not think that this proposition is sound. All that the later assessment did was to increase his assessed liability. It did not extinguish the preexisting liability. Liability for tax does not depend upon the issuance of an assessment. That liability exists independently of an assessment (subsection 152(3)). An assessment, of which a notice of assessment is merely evidence, is only the Minister’s summation of the various components that make up a taxpayer's liability under the Income Tax Act.

(e) Mr. Sarraf argued that, after Judge Goetz in a consent judgment reduced the liability of 495187 Ontario Ltd. from $262,155.33 to $20,000, moneys seized from the Toronto Dominion Bank in the amount of $301,000 in satisfaction of that company's liability should have been applied against his (Mr. Sarraf's) tax liability and, if so applied, might have extinguished it, thereby satisfying the liability for which Mrs. Sarraf was assessed under section 160.

The point would be a valid one if the facts supported the contention, but they do not. Mr. Sarraf alleges that about $142,000 has been misapplied or been lost or has somehow evaporated into thin air. That was not the evidence of Mr. Plas.

I will say this, however. This Court has not the power to order the Minister to ive Mr. Sarraf a full accounting of the funds seized from the bank. There are other forums where such a remedy can be pursued. There is in my opinion, however, no question that he is clearly entitled to such an accounting. The fact that he has been convicted of tax evasion is no excuse for departmental stonewalling, if that is in fact what has been happening.

(f) Mr. Sarraf argued that there was no evidence that the Buick that he transferred to his wife was worth $15,500, as assumed by the Minister. It was for the appellant to show that it was worth less than that amount and that has not been done.

(g) Mr. Sarraf argued that the imposition of direct taxation by the federal government was beyond the legislative competence of Parliament since, under subsection 92(2) of the Constitution Act, 1987, the provinces have exclusive power over direct taxation within the province. Therefore, he reasons, direct taxation is carved out of the powers granted to Parliament under section 91. While I must give Mr. Sarraf credit for both the ingenuity and, indeed, the boldness of this argument, I cannot accept it. Parliament's taxing powers under subsection 91(3) are, subject of course to the Charter, unlimited.

Mr. Sarraf has presented his and his wife’s cases with considerable skill and has raised a number of novel, ingenious and interesting points. I am, however, unable to give effect to them and the appeals must therefore be dismissed.

Appeals dismissed.