Howard Kamin v. Minister of National Revenue, [1993] 1 CTC 2052, 93 DTC 62

Brulé, T.C.C.J.:—These appeals involve the taxation years of 1978, 1979 and 1980 wherein the respondent reassessed the appellant by including amounts of $51,072.13 in 1978, $57,672.78 in 1979, and $17,625.49 in 1980. In addition penalties were added of $524.84 in 1978, $1,142.10 in 1979, and $136.48 in 1980, pursuant to subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Facts

The appellant was a businessman residing in St. Catharines, Ontario. He was involved in many endeavours, most of which are not important to these appeals. One undertaking of the appellant was the loaning of money, none of which was indicated in his income tax returns. Mr. Kamin was charged with illegal money-lending activities and in March, 1981 he pleaded guilty to certain charges and paid a nominal fine.

Subsequent to his plea Revenue Canada conducted an audit which led to reassessments for the years involved in March of 1983.

Issues

The reassessments by the Minister involved the following:

1. failure to report income from the money-lending activities;

2. not reporting bank interest of $14.80 in 1978, and $19 in 1979;

3. arrears interest resulting from a foreclosure action against a mortgagor of $8,334.02;

4. undeclared deposits in various bank accounts by the appellant;

5. the matter of penalties.

Appellant's position

By examination and various exhibits presented to the Court counsel for the appellant dealt with each of the five issues. In brief the position taken was as follows:

1. income from money lending was not reported because in addition to such being illegal the appellant had suffered only net losses;

2. no argument was presented regarding the bank interest and this was accepted by the appellant;

3. the foreclosure action on the mortgage involved a company and the appellant only received funds on behalf of the company;

4. there were no undeclared deposits which involved income which should have been reported by the appellant;

5. explanations for all were given and accordingly no penalties should be levied.

Respondent's position

The Minister’s counsel dealing with each of the five issues said:

1. the undeclared income as set out in the reply to notice of appeal came from the Court proceedings against the appellant and from an audit of his records and those of banks;

2. there is no need to discuss this as the amounts involved were admitted by the appellant;

3. the amounts included in this issue came from a deposit slip and a letter presented to the Court as Exhibit R-2. Both involved a Mr. Kurchak and were payments made to the appellant;

4. these amounts were taken from an audit of bank records and involved deposits by the appellant;

5. inasmuch as the appellant did not disclose all his income, as alleged, he should be subject to penalties.

Analysis

! will deal with each of the issues as set out above.

1. The income being added to the appellant's tax returns had been derived from his money-lending operation. This being the case I ask why are not his losses taken into consideration along with revenue? One might argue that any losses were capital losses and not deductible from income. But can it not be said in this case that the appellant was in the business of lending money? True he did not hold himself out as being a money-lender but nevertheless several people knew that the appellant engaged in such activity and from the number of transactions he delineated he could be construed as being in business.

Reference was made in the notice of appeal to money-lending activities” and in argument by counsel that perhaps the money-lending activities should have been reported on a business basis.

The definition of business is found in section 248 of the Act and reads in pan as follows:

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever. ....

Section 3 of the Act provides that income from a business be included in a tax return while section 4 speaks of profit from a business, allowing losses to be considered.

Paragraphs 1 and 2 of the Interpretation Bulletin IT-459, while not law, are helpful in this regard and read as follows:

1. It is a general principle that when a person habitually does a thing that is capable of producing a profit, then he is carrying on a trade or business notwithstanding that these activities may be quite separate and apart from his ordinary occupation. An example is that of a dentist who habitually buys and sells real estate.

2. Where such a thing is done only infrequently, or possibly only once, rather than habitually, it still is possible to hold that the person has engaged in a business transaction if, in accordance with the definition of “business” in subsection 248(1). . .

See The Queen v. Pollock Sokoloff Holdings Corp., [1974] C.T.C. 391, 74 D.T.C. 6321 (F.C.T.D.) [appeal allowed, [1976] C.T.C. 349, 76 D.T.C. 6181 (F.C.A.)] regarding the money-lending operation only being a small part of the appellant's endeavours.

The chartered accountant, a Mr. Iggulden, testified that if the losses suffered by the appellant in money-lending were considered he would have realized a tax saving. The appellant however, did not want to report his illegal activities. This does not nevertheless take the money-lending operation out of the business category. See the case of M.N.R. v. Olva Diana Eldridge, [1965] 1 Ex C.R. 758, [1964] C.T.C. 545, 64 D.T.C. 5338.

The result, the Court concludes, is that in the money-lending operation the appellant was in business, suffered losses and that the unreported income is of no consequence.

2. The appellant has conceded that he did not report bank interest of $14.80 in 1978, and $19 in 1979.

3. This issue is plagued by conflicting evidence. The appellant stated that the funds received, namely two cheques of $5,303.49 and $3,030.53 were paid to him on behalf of a company involved in a real estate transaction. The larger cheque was deposited to the appellant's bank account while the smaller one appeared on the statement of purchase and sale of the real estate transaction. As a company was involved and as some money on the statement was shown going to the company in the transaction, no satisfactory answer was given why neither cheque went to the company instead of the appellant. Accordingly it must be held that such payments were for the benefit of the appellant and were properly charged to him by the respondent.

4. As to the undisclosed deposits in various bank accounts being charged to the appellant I cannot agree with the respondent. First of all the assessor only brought in a list of these and not copies of the bank statements. Such were provided by the banks involved from their statements. Under cross- examination the witness for the respondent said that he relied on the statements, but there was no evidence that the actual deposit was income or capital.

It would seem extremely difficult to identify all items of deposit in a bank by someone as involved as the appellant was in so many different undertakings.

Normally the burden of proof to destroy the Minister's assumptions rests with the appellant, but when denied and the appellant makes out a prima facie case the Minister should be able to rebut such evidence and bring forth some foundation for his assumptions.

In the case of Miles v. M.N.R., [1970] Tax A.B.C. 151, 70 D.T.C. 1111 the chairman of the Tax Appeal Board, R.S.W. Fordham, Q. C. said at page 153 (D.T.C. 1112):

It is respondent's prerogative in issuing assessments to make reasonable assumptions, i.e. assumptions which are at least supported by a modicum of acceptable evidence. However, if the taxpayer adduces evidence to the effect that such assumptions are no longer reasonable or tenable, the onus of proof may well shift.

and at page 156 (D.T.C. 1114):

. . .in my view, at least — it is not sufficient to send to a taxpayer a mass of figures, with little more, and invite or leave him to extricate himself, if he can, from their intended effect. The assessing party should stand prepared to substantiate his figures when, as occurred here, any doubt is cast upon them, particularly when these rest largely on assumptions made. The Board should not be expected to accept figures at their face value in such circumstances. Moreover, the appellant was not only furnished with meagre particulars of the amounts charged to him, but also had no means of ascertaining at the hearing the origin of the respondent's figures. Hence, the appellant was placed in a well-nigh hopeless position at the outset.

The Minister does not have carte blanche in terms of setting out any assumption which suits his convenience. On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption.

With respect to the allegation that the unidentified bank entries were income I do not believe that sufficient evidence has been presented to accept this assumption. I must decide the issue on the evidence before me and in this instance I do not accept that the evidence is sufficient to charge the appellant.

Reference was made through a witness from Revenue Canada subpoenaed by the appellant's counsel who quoted from the department's approach for unidentified bank deposits as follows:

22(4). A net worth approach will likewise be taken when the taxpayer is unable to specifically identify the bank deposits and will not agree that the deposits are from income sources. Otherwise the assessment cannot be upheld on appeal.

Despite the good effort by counsel for the respondent to the Court this case may have been presented in a more favourable fashion to the respondent by using a net worth approach.

5. As to penalties the Minister is not entitled to impose there. With respect to items 1 and 4, the appellant has been successful. Item 2 is not allowed on the basis of the de minimis principle and with respect to item 3 while the appellant has not met the onus of proving that the items were not his income the Minister has failed to discharge the onus of proving clearly that the failure to report the amounts involved was attributable to the appellant knowingly, or under circumstances amounting to gross negligence as required by subsection 163(2) of the Act.

The appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the money-lending operation, the bank deposits and the penalties are allowed. In all other respects the appeals are dismissed.

The appellant is entitled to costs.

Appeal allowed in part.