Anand L. Thawani, New Progress Construction Ltd., New Townhouse Owners Ltd. v. Minister of National Revenue, [1986] 1 CTC 2039, 85 DTC 754

Brulé, T.C.J.:—

Issue

These appeals were heard by the Court together, and often on common evidence, as the appellant Anand L. Thawani was also the principal in the two corporations appealing, namely, New Progress Construction Ltd. and New Townhouse Owners Ltd. The appeals for Mr. Thawani were in respect of the 1973-1979 inclusive taxation years, for New Progress Construction Ltd. for the taxation years 1975-1980 inclusive and for New Townhouse Owners Ltd. for the taxation years 1976,1977 and 1978.

The problems involved in these appeals are best set by referring in each case to the relevant paragraphs in the replies to the notices of appeal which in part set out as follows:

Anand L. Thawani

5 (a) At all material times the Appellant was an engineer, and was an officer,

director and majority shareholder in the following corporations: Pioneer Apartment Owners Limited (“Pioneer”), New Townhouse Owners Limited (“Townhouse”), and New Progress Construction Limited (“Progress”).

(b) The Appellant worked for Manitoba Hydro until the fall of 1969. He then approached the Manitoba Housing and Renewal Corporation (“MHRC”) for funds to build a condominium to supply public housing.

(c) MHRC agreed to supply the funds and lease the land for the condominium. In October 1970, the Appellant incorporated Pioneer to handle the funds and the development.

(d) The condominium, which was first owned by Pioneer, was erected at 1975 Corydon Avenue, Winnipeg. The Appellant has had use and benefit of suite 20G of the condominium, without paying rent and common element expenses, since 1972.

(e) In 1973, the Appellant appropriated funds or property in the total amount

of at least $20,085.88 from Pioneer in his capacity as a shareholder of Pioneer.

(f) In 1974, the Appellant appropriated funds or property in the amount of at

least $10,000 from Pioneer in his capacity as a shareholder of Pioneer.

(g) On 31 December 1971, the Appellant owned real property at 233 Wellington Crescent, Winnipeg, which had a fair market value of not more than $50,000. In 1974 he elected to roll-over this property to Progress for $60,584, and he did not report a capital gain.

(h) In July 1974, the Appellant took back a mortgage on 233 Wellington Crescent in the amount of $50,000. From this mortgage he earned interest income in the amount of $2,728.76 in 1974 and in the amount of $6,000 each year from 1975 to 1979. None of this interest income was reported by the Appellant in his returns of income for those years.

(i) In 1977, Progress paid personal travel expenses of the Appellant in the amount of $10,635.78. A benefit in the amount of $10,635.78 was conferred on the Appellant by Progress in his capacity as a shareholder of Progress.

(j) The Appellant earned professional income in the amount of $30,000 in 1978 and professional income in the amount of $30,000 in 1979 which he did not report in his returns of income fot those years.

(k) The Appellant knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Income Tax Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in his returns filed in respect of the 1973 to 1977 taxation years.

(l) The tax for the-1973 to 1977 taxation years that would be payable by the Appellant under the Income Tax Act if his taxable income for those years were computed by adding to the taxable income reported by him in his returns for those years that portion of his understatement of income for those years that is reasonably attributable to the false statements or omissions exceeds the tax that would have been payable by him under the Income Tax Act had his tax for those years been assessed on the basis of the information provided in his returns for those years.

(m) The Appellant made misrepresentations attributable to neglect, carelessness or wilful default or committed fraud in filing his returns for the 1973 to 1975 taxation years.

New Progress Construction Ltd.

3(a) In computing its income, the Appellant deducted expenses in the follow- ing amounts:

	1975	7976	7977
Appliances	$ 225.69	—	—
Maintenance	2,564.94	$1,991.47	$ 307.36
Legal	1,691.37	461.50	—
Miscellaneous	136.03	555.92	584.27
Appraisal	150.00	—	—
Property Taxes	—	1,000.00	4,000.00
Advertising	—	344.48	431.88
	$4,768.03	$4,353.37	$5,323.51

(b) The expenses referred to in paragraph 3(a) were not incurred by the Appellant

for the purpose of gaining income from a business or property.

(c) The expenses referred to in paragraph 3(a) were not reasonable in the circumstances.

(d) On reassessment, the Respondent allowed expenses in the amounts of $7,333.61, $6,748.54, and $6,458.77 for the 1975, 1976 and 1977 taxation years respectively. The Appellant did not incur any expenses in excess of those amounts.

(e) On 31 July 1975, the Appellant acquired real property at 120 Niakwa Road, Winnipeg (the “property”).

(f) The Appellant acquired the property from New Townhouse Owners Ltd., a corporation with which it did not deal at arm’s length.

(g) The Appellant stated that the acquisition price of the property was $325,000.

(h) New Townhouse Owners Ltd. had acquired the property on 13 July 1974 for $250,000.

(i) On 31 July 1975, the fair market value of the property was not more than $281,000.

(j) The Appellant sold the property during its 1977 taxation year.

(k) The Appellant earned active business income in the amount of $100,000 each year during its 1978, 1979 and 1980 taxation years.

(l) The Appellant had not filed returns of income for the 1978, 1979 and 1980 taxation years before the date of reassessment. The Appellant filed returns for those years on 31 July 1981, but failed to report any of the income referred to in paragraph 3(k).

8. He further submits that the Tax Court of Canada lacks jurisdiction over the appeals for the 1976 and 1977 taxation years because the reassessments of 5 May 1981 were nil assessments.

New Townhouse Owners Ltd.

3(a) In computing its income, the Appellant deducted expenses in the follow- ing amounts:

	1976"	1977 1978 1978
Architect and engineering fees	$7,085.00	$	-	$	—
Legal and accounting fees	8,962.00	3,775.00			—
Automobile	730.00		660.00		620.00
Telephone	445.81		328.69		—
Interest	4,832.44		445.25	5,821,22
Repairs and maintenance	—		—		578.20
Miscellaneous	—		—		183.85
	$22,055.25	$5,208.94		$7,203.27

(b) The expenses referred to in paragraph 3(a) were not incurred by the Appellant fot the purpose of gaining or producing income from a business or property.

(c) The expenses referred to in paragraph 3(a) were not reasonable in the circumstances.

(d) On 13 July 1974, the Appellant purchased vacant land at 120 Niakwa Road, Winnipeg (the “property”) for $250,000.

(e) The Appellant purchased the property speculatively, and one of the motivating factors that induced it to make the purchase was the possibility of turning the property to account at the first reasonable opportunity and selling it at a profit.

(f) During its 1976 taxation year, the Appellant sold the property for a profit of $8,314.91 on 31 July 1975.

(g) The transaction referred to in paragraph 3(f) was on income account, not capital account.

7. He further submits that the Tax Court of Canada lacks jurisdiction over the appeal for the 1977 taxation year because the reassessment of 5 May 1981 was a nil assessment.

Before dealing with each of the above matters individually I would like to dispose of the pleading that there should be no appeals in New Progress Construction Ltd. for the years 1976 and 1977 and in New Townhouse Owners Ltd. for 1977 on the basis that for these companies in the years mentioned there were nil assessments. Counsel for the Minister in his argument cited as authority for this the case of The Queen v. Garry Bowl Ltd., [1974] C.T.C. 457; 74 D.T.C. 6401. Mr. Thawani did not oppose this position and as a result there are no appeals for these companies in the years specifically involved.

Attempting to analyse the allegations as set out in the replies to the notices of appeal has not been an easy task. The function of this Court is not to perform an audit of an appellant's affairs, but this is precisely what took place. From the evidence given representatives of Revenue Canada received little co-operation from Mr. Thawani. He did not make himself or his records available and when records were presented they were often unsorted and all grouped together. Mr. Thawani asked for adjournments, made promises to produce records which he did not keep, left on business trips and even caused this hearing to be held in two sessions, two months apart. Even then one morning he did not appear, pleading other pressing business.

As a result it was very difficult to have factual evidence presented in support of these appeals. Mr. Thawani did, however, produce certain information which was accepted by counsel for the Minister and additional information which was accepted by the Court.

Dealing then with each individual entity represented in these appeals and the items under appeal, the Court finds as follows:

With respect to A. L. Thawani:

1. For the 1973 taxation year there is allowed the sum of $410.20 from the rental and common element expenses as a voucher was provided.

2. The amount assessed in 1974 as funds appropriated from Pioneer Apartment Owners Limited in the sum of $10,000 is allowed.

3. With respect to the personal travel expenses assessed in the 1977 taxation year there is allowed $2,669.47 for vouchered expenses plus the sum of $2,900 for unvouchered expenses for a total allowance of $5,569.47.

With respect to New Townhouse Owners Ltd.:

1. In the 1976 taxation year the sum of $980 is allowed for architect and engineering fees and a telephone expense of $445.81 is also allowed.

2. From the expenses claimed in the 1978 taxation year there is allowed the sum of $23.86 from the miscellaneous amount claimed.

With respect to New Progress Construction Ltd.:

1. For the 1975 taxation year there is allowed for expenses claimed, maintenance of $1,224.81, and miscellaneous of $32.40.

2. In 1981 when the appellant filed its return for 1978 certain expenses were claimed. From these and by agreement with counsel for the respondent there is allowed the following:

3. In the 1979 taxation year the following expenses are allowed based on the filing in 1981:

4. In the 1980 taxation year the following expenses are allowed based on the filing in 1981 :

In addition to the above, the penalties imposed by Revenue Canada are proper, subject to being adjusted in accordance with any allowance hereinbefore made by the Court. The evidence presented, which was not seriously challenged, justifies these penalties and the Minister has discharged his onus under subsection 163(2) of the Income Tax Act.

Mr. Thawani has failed in most instances to rebut or explain the allegations and assumptions in the various replies to the notices of appeal. Some explanations such as the proceeds of a $50,000 mortgage still pointed to Mr. Thawani receiving some benefit and improper records for the balance. In the circumstances there was no option but to levy taxes as the various assessments show. The increase in the net worth of the taxpayer was explained by the fact that Mr. Thawani had borrowed some $300,000 from friends and relatives, but he would not divulge the amounts, the terms and from whom the funds came. In the absence of a satisfactory explanation the assessments were correct.

The end result is that except as set out above all the appeals are dismissed and the matters will be referred back to the Minister for reconsideration and reassessment in accordance with the allowances as contained herein. There will be no order as to costs.

Appeals allowed in part.