Nabil T. Nesrallah v. Her Majesty the Queen, [1986] 1 CTC 11, 85 DTC 5585

Reed, J.:—This is an appeal from a decision of the Tax Court of Canada finding the claimant liable for unpaid income taxes for the years 1978, 1979, 1980 and 1981. The unpaid tax liability arises out of net worth assessments prepared by the Minister of National Revenue with respect to the plaintiffs asset position for those years. The only dispute in issue is whether the assessments should have been determined on the basis that the plaintiff had, at the beginning of the audit period, savings of $113,000 as opposed to $48,000.

The Minister’s assessment was based on the latter figure and resulted in a finding that the taxpayer had failed to report business income of: $17,816.35 for 1978; $13,300.03 for 1979; $14,633.10 for 1980; and $17,599.88 for 1981. Thus unpaid taxes were assessed at: $3,642.28 for 1978; $2,699.56 for 1979; $2,745.90 for 1980; and $3,323.60 for 1981. To this were added (pursuant to subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148) penalties of: $910.57 for 1978; $674.89 for 1979; $686.47 for 1980: and $830.90 for 1981.

The plaintiff’s evidence was that he worked at various jobs between 1961 and 1976 (ie: prior to the time that he first opened his business in Ottawa); that he lived very frugally during that period of time and saved $113,000. (The plaintiff started in 1961 with $14,000 which was a gift from his father and which the plaintiff brought with him from Lebanon). Unfortunately there is no documentary evidence of these savings, apart from the $48,000 which the Minister took into account. The $48,000 comprised a certified cheque for $30,000 and $18,000 in cash. Both of these were deposited by the plaintiff in his Ottawa bank account when he arrived here in 1976. The $30,000 cheque was one which he and his wife received when they left the Community Farm of the Brethren, a religious community in Brighton, Ontario, just prior to moving to Ottawa. The plaintiff contends that he had an additional $65,000 in cash which he kept at home. He contends that he did not deposit this in the bank because of his Christian conviction that charging usurious interest rates is unethical. In his words, such rates “depress the poor".

He subsequently, however, became concerned about theft and the safety of the money and began depositing it into his bank account. He did so, he contends, on a gradual basis, $1,200 or $1,500 at a time, over the course of the years to which the net worth assessment relates. The last deposit was made in 1982. His reason for depositing the sum gradually, rather than all at once he says was the result of an experience he once had in depositing $10,000. A gambler friend who carried considerable sums of money as a float asked the plaintiff to keep $10,000 for him for a short period of time (one month). Being concerned about the safety of the money the plaintiff deposited it in the bank. He found that this attracted considerable atten- tion; the tellers counted the money five or six times. The plaintiff described it as being old money and as consisting of small bills. He found the experience embarrassing and thus resolved never to deposit so large a sum in a similar way again.

What then of the plaintiffs explanation of the discrepancy between the net worth assessments and his reported income for the years in question. The Minister has determined an increase in the assets of the taxpayer during those years which is indicative of undeclared income. The burden of proof is on the plaintiff to show that the money was not income, but a Capital asset (savings) held by him at the beginning of the audit period.

The applicable principles were set out by the Supreme Court of Canada in Anderson Logging Company v. The King, [1925] S.C.R. 45 at 50; [1917-27] C.T.C. 198 at 202:

... he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference.

. . . it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellants cognizance .. .

While the plaintiff’s explanation is somewhat unusual, it has, as told by him, a certain plausibility. The explanation however must be assessed in the light of all the evidence, and that evidence is replete with contradictions and inconsistencies. Most of these are clearly of the plaintiff’s own making.

First, the evidence concerning the amount of money saved prior to 1976 is most contradictory. The plaintiff and his wife assert with some degree of positiveness that the sum was $83,000 (that is $113,000 including the $30,000 certified cheque). Yet the plaintiff when first interviewed by Mr. Ellis, the auditor for the Minister of National Revenue, stated that he had $50,000 when he moved to Ottawa in 1978 (i.e.: the $48,000 which is clearly documented). He also indicated that his confectionery business did not generate enough income to support his family and that additional income was obtained from gambling. After Mr. Ellis had prepared a first draft of a net worth statement which showed discrepancies in reported income of the order of the amount now in issue and had shown these to the plaintiff, the plaintiff stated that he had had $86,000 in savings when he come to Ottawa, not $50,000 and that the remaining discrepancy in his reported income for the years 1978-1981 was due to his gambling gains. Mr. Ellis prepared a second net worth assessment on the basis of $86,000 having been savings. This resulted in income discrepancies for the years in question of approximately one half the amount previously calculated. When this was shown to the plaintiff he asserted that his 1976 savings were still too low; that they in fact had been $113,000. Both the plaintiff and his wife testified before me that they were sure of the amount saved because they counted it together in 1976 in Ottawa. Yet the plaintiffs wife in giving evidence before the Tax Court said:

Q. Okay. You answered one of the first questions put to you, if you were aware of the amount of money that you and your husband brought to Ottawa in 1976. Now maybe I didn’t understand you correctly. My note said that outside the cheque you didn’t know exactly what you had. Is that correct or —?

A. Well, I wasn’t exactly sure at that point, no. Later we calculated how much it was.

Q. When later?

A. I couldn’t say for sure.

Q. Well, in what year?

A. He was taking care of that and I didn’t, you know, really have that much to do with it. I knew how much we got from the Community —

Q. Yes?

A. — because we had to redeposit that to make a downpayment on the house and the store. The 18 that he had drawn and that to the bank in Kitchener That was recorded. But the other, I can’t remember exactly how much he had.

Q. But you did say a while ago — you did mention $83,000?

A. Yes.

Q. Was that what your husband told you?

A. Well, yes. He was the one that had it. I didn’t count it.

The plaintiff’s first explanation to the Department of National Revenue in a letter dated May 6, 1983 had been that:

. . . I was able to save money until we came to Ottawa in 1976. We did not keep any record of the amount we brought with us, except for the amount we banked on our arrival in Ottawa. It never ocurred to us that our savings will come into question. Part of this money includes winnings from playing cards as a hobby, lotteries and gifts etc.

Secondly, there was a certain vagueness about where the money had been kept. Before the Tax Court it was said to have been kept in a closet. Before me it was said to have been kept in a small leather bag in a large wooden trunk in the laundry room. The plaintiff attempted to explain this discrepancy by saying that prior to 1976, in Kitchener, the money had been kept in the closet while in Ottawa it had been kept where he now asserts. This is not a convincing explanation of the change in the story. The issue before the Tax Court and before this Court is the same — the credibility of the explanation that $65,000 was kept as cash on hand between 1978 and 1981, in Ottawa. The location is not a detail one is likely to forget, regardless of how poor one’s memory is. The plaintiff was clearly reluctant to say exactly where the money had been kept.

Thirdly, the plaintiff’s actions in purchasing his home and business in 1976 seem, in part, inconsistent with his having had available at that time an additional $65,000 in cash. He purchased the property for $87,000 of which $30,000 was paid immediately, a five-year mortgage for the remaining $57,000 being assumed. Also, the plaintiff borrowed twice during that period, $12,000 in 1977 and $20,000 in 1981 (These loans are not inconsistent with his assertion that he had cash savings because they were borrowed from the Community of the Brethren and no interest was paid on them.)

Fourthly, one must ask whether the plaintiff’s actions were consistent with the reasons he now gives for his way of dealing with the money. He asserts that he did not put the $65,000 in the bank because of his Christian conviction that charging others interest was wrong. Yet when he arrived in Ottawa in 1976 he did deposit $18,000 ($30,000 from the original $48,000 was paid out as part of the purchase price for the house, as noted above). What is more, prior to coming to Ottawa he had had the $18,000 in a bank account in Kitchener. The plaintiff tried to explain away his wife’s evidence in this regard by saying she was confused, had a poor memory and was not really acquainted with the facts. I simply do not believe him in this respect. His wife appeared to me to have a very good memory and to be much less confused than the plaintiff himself.

Despite all of this, however, the plaintiff's explanation is supported by one factor, the evidence of two bank employees: Alice Nass and Frances Mannarino. Mrs. Nass is presently a customer services representative with the Bank of Montreal (Sparks Street branch). From September 1979 to March 1980 she worked as a typist in the Beechwood branch (where the plaintiff did his banking). She worked as a teller in that branch for part of 1981 and 1982. In response to a request from the plaintiff, after the Tax Court hearing of, and decision on, his appeal, Alice Mass provided the plaintiff with the following letter:

To whom it may concern:

I wish to advise that I remember that during the late seventies and early eighties, Mr. Nabil Nesrallah frequently deposited currency that was obviously old and worn that we could not re-circulate to other customers.

Alice Nass

Teller/

Customer Service Rep.

Her evidence was that she had personal knowledge of the plaintiff having brought old money into the bank on one occasion and had heard the "other girls" talking about other instances. The money was apparently musty smelling so that the tellers had to wash their hands after dealing with it. The money of which she had first hand knowledge was musty, faded, torn and did not have the distinctive colouring added to Canadian paper currency in the late 1960s and early 19705.

Mrs. Mannarino was a teller supervisor at the Beechwood branch of the Bank of Montreal from July 1980 until August 1983. She remembers Mr. Nesrallah depositing used musty money approximately once a month during the first year she worked at the bank (1980-81). She is less certain as to whether these deposits continued after that time. Her acquaintance with the plaintiffs deposits arose from that aspect of her job which required her to train tellers. She remembers that the deposits were fairly large ones ($500 to $1,000) but can’t remember precisely. An incapability to be precise is to be expected after so long a period of time. That the deposits were fairly large she does remember, however, because it was unusual to get so much money, that had to be withdrawn from circulation all at one time from one depositor. She does not remember whether the money was old in the sense of having been printed prior to the late sixties and therefore "uncoloured". (This is not too significant in any event since old money was not automatically withdrawn from circulation merely because of age.)

The major difficulty in assessing the evidence in this case is the unreliability of much of what the plaintiff says. It is not credible that he was concerned about banks charging other interest on money he deposited with them but was not concerned about the ethics of gambling. He seems to answer questions by reference to what seems the most expedient reply at the moment, or in the manner he assumes people are expecting, without any regard to the truth or falsity of the statement. Of particular concern in this regard is his statement that the $10,000 he deposited for his friend, before he started depositing his own savings, was old money. If this is true there would be no reason to think that the money the plaintiff deposited in 1978-1981 was old money that had been hidden away by him rather than being in circulation. In any event, I have concluded that his evidence, describing the friend's money as old, was one of those answers given by reference to what seemed expedient or expected at the time, without regard to its truth.

Looking at the evidence as a whole I conclude that: Mr. Nesrallah had money which he kept hidden at home at the beginning of the audit period and during the years in question; there was no record of how much money was kept in this fashion; the amount kept at home and deposited over the years in question was significant and of the order of that by which the plaintiff's income had been reassessed for the 1978-81 taxation years.

Accordingly, the plaintiff's appeal is allowed and the Minister's reassessment vacated.

Appeal allowed.