Guncer Kesebi v. Minister of National Revenue, [1992] 2 CTC 2045

Sarchuk, T.C.C J.:—This is the appeal of Mr. Guncer Kesebi with respect to assessments of taxation for his 1985, 1986 and 1987 taxation years. The issue arises as follows: the respondent issued notices of reassessment dated June 19, 1989, notifying Mr. Kesebi that his income tax liability for those years had been reassessed to include unreported income calculated on a net worth basis in the following amounts: $40,399.26 in 1985; $8,171.15 in 1986; and $17,039.11 in 1987. In so reassessing those years and those income tax liabilities, the respondent relied on certain findings and assumptions of fact as follows:

(a) the appellant, at all material times, was the majority shareholder of ATIK Furnishings (1982) Ltd. ("ATIK"), a company engaged in the business of furniture upholstery;

(b) the appellant kept poor and inadequate records which were insufficient for the proper determination of his income;

(c) in making the reassessments the respondent computed the income of the appellant on the “net worth” basis following generally accepted procedures, relying upon such records as were available, and giving due consideration to all the surrounding circumstances so as not to arrive at an arbitrary result;

(d) in making the reassessments using the net worth method, the respondent calculated the net worth of the appellant (the balance of assets less liabilities) at the beginning and at the end of each taxation year;

(e) the increase in the net worth of the appellant in each taxation year was added to the amounts expended as personal or living expenses less the spouse's income and the Child Tax Credit claimed in the year, the sum of which represents the income of the appellant for each taxation year;

(f) the respondent prepared a schedule of the appellant's net worth for the 1984, 1985, 1986 and 1987 taxation years which is attached hereto as Schedule "A";

(g) the appellant recorded a 1984 withdrawal of $19,661 of ATIK funds as salary in 1985, contributing thereby to the 1985 income discrepancy of $40,399.26;

(h) the respondent determined the appellant's personal expenditures to be as described in Schedule"B" attached hereto.

The appellant's position is that the assessment was wrong for the following reasons: the estimates of his personal living expenditure used in the calculation of his income are overstated; the respondent's estimates of the appellant's liabilities used in the calculation of his net worth are understated and/or not fully included in the calculation, and, thirdly, certain transactions between the appellant and ATIK Furnishings Ltd. were incorrectly recorded and therefore led to a wrong calculation or an erroneous calculation of the appellant's net worth.

The appellant testified and further evidence was adduced on his behalf from Mr. Hickson, his bookkeeper during the taxation years in issue. Evidence was also given on behalf of the respondent by Messrs. Gillis and MacLean, both auditors with Revenue Canada and both of whom were directly involved in the audit and the assessment.

To keep matters relatively straightforward I propose to deal with the specific items raised by the appellant in each of the three categories seriatim. The first category is personal living expenses as shown in Schedule B to the Minister's Reply. According to Mr. Gillis, excluding such matters as loan and mortgage interest, the information contained in that schedule was essentially obtained from Mr. and Mrs. Kesebi during an interview with them on September 8, 1988. This information was recorded by him on a questionnaire form he used and was subsequently incorporated by Mr. Gillis into Schedule B. He added that on this and other occasions Mr. Kesebi was urged to provide some current—that would be 1987 or 1988—information regarding personal expenses, with particular emphasis on such items as heating costs, power, utilities, etc., which were capable of being verified at that time by way of statements from the companies. No such information was ever produced.

Mr. Kesebi in his testimony stated as a general or overall observation that his furniture repair business, ATIK, was not doing well and that he could not accept the amount of living expenses shown on Schedule B as accurate because it was, in his view, not realistic given the poor shape of the business. I turn to some specific items which are challenged by him. In considering these matters, it seems appropriate to bear in mind the fact that the family unit consisted of the appellant, his wife and five daughters, one of whom was in university. The wife's income over the three years averaged approximately $3,500. Two daughters may have worked part-time. If they did, their exact earnings are unknown and were no doubt, for all practical purposes, marginal. As well the personal living expenses as calculated by Mr. Gillis, reflecting the highest total in any of the three years, came to $26,787, of which almost $10,000 reflected mortgage and loan interest and insurance costs. I note that fact to indicate that we are not dealing with an estimate of personal expenses which is markedly high.

Turning now to specific items: (1) Entertainment—Mr. Kesebi maintained there should be no expenses in this category whatsoever. Mr. Gillis stated this item included miscellaneous matters such as cigarettes, newspapers and so forth, purchases of which were conceded by Kesebi; (2) Gifts—Mr. Kesebi denied expending any funds at all. Mr. Gillis testified that the appellant's wife estimated the amount of $750 was spent in 1987 and that was the norm; (3) Telephone costs—these amounted to some $1,800. Mr. Kesebi said that was extremely high. Mr. Gillis said that the appellant's wife produced a monthly statement for $125, and he, somewhat surprised at the amount, asked her if that was normal. Her response was affirmative and it was explained as a cost incurred relative to long-distance calls to family in Turkey; (4) Heating oil—Mr. Kesebi maintained the figures, which once again were provided by his wife, were on the high side. Mr. MacLean, who is the appeals officer in this matter, met with Kesebi and his bookkeeper, Hickson. They reviewed Schedule B, among other things, and MacLean recalls that one of the three issues concerning Kesebi was this item. He stated that he urged both Kesebi and Hickson to obtain records from the oil company and to submit them for readjustments if warranted. He never heard from them again with respect to this matter.

Those items were specifically referred to by Mr. Kesebi. The rest of the items in the personal expense schedule, excepting one, were generally dealt with by comments such as, ”I could not have spent that amount of money. I never earned that kind of money."

I reject the appellant's contention that the Minister overstated the personal expenses. Mr. Kesebi failed to adduce any evidence to support that assertion, although with respect to many of the items he questioned it was completely within his power to have obtained actual bills and actual documentation. Secondly, he said that he did not buy any gifts, for example, but later conceded that his wife bought gifts for the children. At another stage he added that he did not do any of the following things; he did not pay any household accounts and he did not buy the groceries. He conceded that he provided money to his wife for these purposes and that his wife attended to those matters. All of that has the effect of negating the value of his evidence almost completely.

Finally, the one person who, even absent any documentation might have shed some light on the subject was Mrs. Kesebi and she was not called. At one stage Mr. Harris argued that the bill she presented to Gillis with respect to telephones was for one month only and should not be taken as establishing a regular monthly pattern of costs. With respect, it is not sufficient for counsel to simply suggest that Mr. Gillis might have confused Mrs. Kesebi's comments with respect to the overseas telephone calls. Other evidence being available, it was incumbent upon the appellant to produce it, failing which the Court may draw a negative inference.

One further item in Schedule B was questioned. It is somewhat different in nature than the other personal expense items and warrants specific comment. In 1985 the appellant wrote a cheque to Carleton University for $1,025, apparently in payment of his daughter's tuition fee. He concedes that was the case, but explained it by saying that his daughter had obtained a student loan which he proceeded to borrow and used in his company. He further stated that he repaid her by paying her tuition. All of this obviously would have had to have happened within a short span of time.

Mr. Gillis stated that the cheque was produced at his meeting with the Kesebis. He said that Mr. Kesebi did not dispute the payment to the University nor the purpose but Mr. Gillis maintained that there was no comment whatsoever regarding any borrowing of a student loan advance from the daughter.

I have concluded that the appellant's evidence on this point is unsafe to rely on. It strikes me that his failure to recall the loan during the interview, more appropriately his claimed failure to recall the loan during the interview, is less than plausible. Furthermore, after the audit was completed, Mr. Gillis forwarded a proposal to Kesebi and his bookkeeper which included this very item and asked for their comments. In October, 1988 he sent a follow-up letter. The only response was from Hickson, asking for a little bit more time. Gillis agreed ana after some delay made several telephone calls to Hickson, with no response. The assessment followed shortly thereafter. Surely a singular transaction such as the one that Mr. Kesebi alleges, if not remembered initially, would have been revived in his memory during the reviews of the schedules by Hickson and Kesebi. Finally, I again comment on the failure to call evidence easily available, that of the daughter, and the inference which might flow therefrom.

The second general ground advanced by the appellant is that certain estimates of his liabilities are understated or improperly included. The first item is what I will call the "Mrs. Lowe loan". The appellant alleges that at some point of time, because he was behind in his mortgage, he borrowed $1,500 from a customer, who I believe he said was a resident of the United States. He thinks this loan occurred in 1986 or 1987 and was repaid in 1989 or later. No other information was provided, none whatsoever. No documentation of any nature was presented. Nothing is known about Mrs. Lowe except her name. I will leave that loan for a moment.

The second loan is one Mr. Kesebi alleges he obtained from his sister-in-law in the amount of $2,200. He was not certain when it was made, other than to say it was while he was at 261 Pleasant Street, his place of business for a number of years. This loan as well is not documented in any manner. There is no evidence of any payments or of any arrangement for payments and there was no evidence from the sister-in-law.

Very quickly, with respect to these two loans the evidence put forward is quite simply inadequate to meet the balance of probability test. I make no further comment regarding the availability of other evidence. That point has been made.

The third category raised by the appellant relates to certain transactions between Mr. Kesebi and his company which were allegedly incorrectly recorded. In this category I put first the transaction which can be described as the “Awchi loan”. The appellant says he borrowed $5,000 in 1984 from relatives. This item shows up as a personal liability in the net worth statement in that year. The loan was paid personally by Mr. Kesebi in stages, ending in 1987. He now maintains that the funds were borrowed for his business, indeed borrowed by his business.

Mr. Gillis testified that during the course of a meeting with Kesebi he received an explanation to the effect that while the appellant repaid the loans the moneys had in fact been advanced to ATIK which, as I have indicated, is Kesebi's company. Mr. Gillis reviewed the 1984 financial statement of ATIK which accompanied its income tax return for that year. This financial statement had been prepared by a firm of chartered accountants based no doubt upon information available to them. The appellant, incidentally, is the sole shareholder. In the shareholder's account statement he found that Mr. Kesebi had advanced to ATIK the amount of $7,109. Mr. Gillis, in my view quite properly, assumed that this amount, if indeed obtained from Mr. Kesebi for corporate purposes, formed part of the $7,109 advanced by him to the corporation as shown in the financial statements. No evidence to rebut this conclusion was presented. This item, in my view, was properly recorded by the Minister in the net worth calculations. I further note that Mr. MacLean, in the course of his meetings with Hickson and Kesebi, reviewed this transaction. His conclusion was that even if the $5,000 did not form part of the $7,109 shareholder advance the adjustments to the net worth schedule to reflect that conclusion would produce no net effect. I assume by that he meant no net change. His explanation seemed reasonable and was not disturbed in cross-examination. With respect to this loan, the evidence fails to satisfy me that the item was improperly included in the net worth statement as it was.

I turn now to the last and largest item. Schedule A of the net worth statement discloses a liability of $19,661 under the head "Due to ATIK Furnishings Ltd.”, that is, due from Mr. Kesebi to ATIK Furnishings Ltd. In 1985 Hickson, a bookkeeper with no professional designation and no professional training, was retained to look after ATIK's and Mr. Kesebi's accounting and income tax returns and so forth. He says that the records available were very poor, and that virtually no journals or diaries were maintained. He states that he was required to work with such invoices, accounts receivable, bank statements and cheques as were available and to record them as best he could. He reviewed the financial statements previously prepared by the firm of chartered accountants and sought to obtain their working papers for a better understanding of them but was not successful. He therefore used the 1984 financial statement of ATIK to prepare an opening balance sheet for 1985. ATIK's balance sheet as of December 31, 1984 disclosed as an asset the amount of $19,661 due from the appellant. Hickson, for whatever reasons, assumed that was a receivable from the shareholder due to drawings. Therefore, in 1985 he included it in the wage expense of the company by way of a journal entry. According to Hickson the total wage expenses claimed by ATIK in its tax return were $48,000—I am rounding that amount off—and included the amount in issue. Mr. Hickson, who prepared the 1985 income tax return for both ATIK and Kesebi, and agreed that ATIK claimed that amount as a wage expense in 1985 on the basis that it was salary paid to Kesebi. He conceded that it was presented to Revenue Canada as a payment of salary with no indication that it was an unusual item. He further conceded that the effect of his attribution of this amount to salary negated the balance of the shareholder loan due to ATIK. Hickson also said that he prepared Kesebi's personal returns for 1985, in which drawings from ATIK were reported as $10,000 even though the financial statements he prepared suggested that the proper amount was $11,000. (Whether this was a typographical error or otherwise, no explanation was forthcoming.) What is of interest is that the $10,000 reported as drawings did not form part of the $19,661 and the latter amount was not included by Mr. Kesebi in his income, nor was any T4 issued for it. Hickson explained this on the basis that it was income which should have been reported in the 1984 taxation year but no amended return was filed or contemplated. Mr. Hickson was asked about the net worth prepared by Revenue Canada. He said that it was possible that it was presented to him for comment, as well as to Mr. Kesebi. He said it was also possible that he may have told Revenue Canada that collaterally, Kesebi had his shareholder's loan negated.

The arguments advanced by counsel for the appellant are two-fold. The first is that Hickson acted correctly in assuming there was an error in the 1984 financial statements regarding the shareholder’s account, that it was in fact a wage expense that should have been so treated in that year, and that therefore he corrected it. With respect, this argument is untenable. It is premised on the existence of an error in a financial statement prepared by a firm of chartered accountants based on information in their possession and no doubt on information obtained from the taxpayer. There is absolutely no factual basis for Hickson's assumption of error in that financial statement.

The second argument advanced is that subsection 15(2) should have been applied by the Minister of National Revenue to include the amount of $19,661 in the 1984 taxation year. Counsel argued that failure to do so leads to a double liability to tax, the first in 1984 by virtue of what he calls the mandatory operation of subsection 15(2), and the second in 1985 by virtue of the net worth calculations and subsequent assessment. That, he argues, is clearly inappropriate.

The respondent's position is that the appellant recorded a 1984 withdrawal of funds as salary in 1985 and that this contributed to the 1985 income discrepancy set out in Schedule A. Counsel argued that ATIK treated the amount as wages paid by it to the appellant, the sole shareholder. It gained the benefit of a deduction, did not hesitate to obtain the tax advantage on the theory that the amount was actually paid in 1985.

In my view, it ill behooves the appellant to now say that the amount should have been attributed to his income in 1984. On the basis of the facts presented to the Minister by Mr. Kesebi in his returns and in the returns of the corporation of which he was the sole shareholder, no other assessments in 1985, 1986 and 1987 are possible. He signed these tax returns and the Minister acted upon them. Hickson does little to assist the appellant. Both his evidence and that of Kesebi is at odds with the information contained therein and in my view the appellant is bound thereby.

In concluding, I adopt the remarks of Cameron, J. in the case of Cher- nenkoff v. M.N.R., [1949] C.T.C. 369, 49 D.T.C. 680, at pages 374-75 (D.T.C. 683) where he said :

In effect, the appellant agrees that the" net worth" computation of her income is a satisfactory basis for arriving at her taxable income, but that some of the items—those which I have indicated—are wrong. When these are corrected in accordance with the evidence adduced—so she states—the result is that there is no taxable income for any of the years in question.

My opinion is that the appellant must do far more than she has attempted to do here if her appeal is to be successful. There can be no question that the onus lies on the appellant and that, in my view, means that she must establish affirmatively that her taxable income was not that for each of the years for which she was assessed. Two courses were open to her, the first being to establish her income with proper deductions and allowances, and that course could quite readily have been followed

In the absence of records, the alternative course open to the appellant was to prove that even on a proper and complete” net worth” basis the assessments were wrong. But that also she has failed to do. She submits that all she needs to do is to establish certain inaccuracies in the amounts and that these items must be adjusted accordingly. But it will be kept in mind that the “net worth” increase was established on her own statements and it was amply proven at the trial that these statements were most inaccurate and incomplete.

I also adopt with no hesitation the comments of Strayer, J. in Honig (H.A.) v. Canada, [1991] 2 C.T.C. 279, 91 D.T.C. 5612, at page 281 (D.T.C. 5613):

With respect to the first issue, the onus is on the taxpayer to demonstrate that the Minister's assessment is wrong. The plaintiff in this case has completely failed to do so. As has been noted before, when a taxpayer is faced with a reassessment based on a net worth calculation, he can either try to present evidence to enable the Court to determine his real net income or he can seek to prove that the net worth assessment is wrong. In this case the taxpayer has done neither. Much of his evidence and that of his witnesses was apparently designed to demonstrate that he actually made little or no cash income during the years in question. But that evidence was so fragmentary and imprecise as to be of no value. It was not supported by any documentary evidence whatever, even though the plaintiff, who represented himself, conceded that he should have known after his experience before the Tax Court that documentation was extremely important. Nor did the plaintiff demonstrate any clear errors in the net worth assessment prepared by Revenue Canada: parts of it he conceded were correct while he was not sure about other parts of it. If I understood his evidence correctly, he felt that some estimates were incorrect, yet he was unable to provide better estimates. In going over the various elements of the net worth statement, Ms. Stasiewski provided a clear and reasonable explanation for her conclusions. I am satisfied from her evidence that she carried out the assessment fairly and that she frequently accepted the taxpayer's explanations for expenditures where the payee or purpose were not indicated by any documentation.

In my view these comments apply in the appropriate context to the matter before me. For the reasons I have expressed, therefore, the appeals of Mr. Kesebi for the three years in issue are dismissed.

Mr. Russell: Your Honour, may I seek clarification of two brief points?

His Honour: Excuse me, the appeals must be allowed because there were some small items dealt with and conceded. Thank you, Mr. Russell. You triggered my recollection of that matter. There were three items I believe conceded by the Minister at the outset, three small adjustments. Do all these items fall into 1987?

Mr. Russell: That is my recollection, Your Honour.

His Honour: Because if they are in 1987—we are dealing here with three appeals—we run into a rather odd situation. Yes. One of them is the adjustment to the wedding expenses in 1987. As well three other loans are acknowledged in the amounts of $980, $600 and $1,500. I have a note here that it was 1987, but I am not sure that necessarily is correct. Can you shed any light on that, Mr. Russell?

Mr. Russell: I am sorry, sir, other than to say that that is my general recollection as well. I cannot be more specific than that.

His Honour: What I will do then is I will dismiss the appeals for the 1985 and 1986 years. I will allow the appeal for 1987 to the extent of permitting these four amounts. They add up, if I calculate this correctly, to $3,315. I will check my addition. I have $235 personal expenses, three loans—one for $980, one for $600 and one for $1,500.

Mr. Russell: Thank you, Your Honour. I think the $235 amount was actually agreed at $236.

His Honour: All right.

Mr. Russell: So whatever the arithmetic is, though, Your Honour, that would be it.

His Honour: All right. You might speak to Mr. Harris and let me know if these all reflect 1987 borrowings and should reflect in the loans, whether they should be reflected in the 1987 liabilities.

Mr. Russell: Yes.

His Honour: And the adjustment to personal expenses would be clearly in 1987 because that is where the wedding expense shows up.

Mr. Russell: Yes. Your Honour, may I suggest that Mr. Harris’ associate be asked that if Mr. Harris has a problem with that, that Mr. Harris communicate with me?

His Honour: The reason I asked you perhaps to—well, it does not matter. I do not care who does it.

Mr. Russell: Okay.

His Honour: It is just that you understand what we are talking about and Mr. Baxter has just been foisted—hoisted on us, I guess, is not a fair way of putting it.

Mr. Russell: All right. I will check with Mr. Harris.

His Honour: I will feel more comfortable if I get an answer from both you and Mr. Harris saying,"Yes, that is 1987."

Mr. Russell: All right.

His Honour: And then what I will do is I will allow 1987 to make those adjustments.

Mr. Russell: Fine. And the matter of costs, Your Honour, for the 1987 year?

His Honour: No, there will be no costs.

Mr. Russell: And lastly, sir, I believe you mentioned Carleton University in connection with the daughter and I think you probably meant to say "Dalhousie University”.

His Honour: Dalhousie? All right. It was a university, whatever.

Mr. Russell: Yes, it was. Thank you.

His Honour: Very well.

Appeal allowed in part.