Zaven Mesrobian v. Minister of National Revenue, [1981] CTC 2364, 81 DTC 317

M J Bonner:—The appellant appeals from assessments of income tax for the 1974, 1975, 1976 and 1977 taxation years. The assessments in question were made on a rather peculiar basis. The additions to declared income, all of which were in dispute, were computed by deducting from funds deposited in accounts at three different banks certain amounts which the respondent accepted were either income already declared, such as salary, or receipts of a non-income nature, such as income tax refund cheques. The difference arrived at for each year, described in the notices of reassessment as “unaccounted funds arising from net worth discrepancies” was assumed by the respondent to be income and was added to declared income by the assessments in question. Penalties were levied under subsection 163(2) of the Income Tax Act.

At the commencement of the hearing counsel for the respondent, apparently with a view to escaping the burden imposed by subsection 163(3) of the Act, consented to judgment deleting the penalties.

It was the appellant’s contention that the so-called “unaccounted funds” fell into three broad categories:

(a) moneys received from his employer as reimbursement of business travel expenses, together with miscellaneous receipts of a non-income nature from various sources;

(b) moneys received from his sister for the renovation of an apartment in Toronto acquired by the sister; and

(c) moneys received from a friend of long standing which were, as to part, invested for her and, as to the remainder, borrowed by the appellant.

I will deal first with the second category. The apartment was purchased by the appellant for his sister in 1973. Title was registered in the name of the sister. The sister, Mrs Sylva Kouyoumdjian, was married to a man who carried on business in an unstable African country. She lived, for the most part, in Paris. She and her husband wished to have a place of refuge in case events in Africa made it impossible to stay there and in case events in France made it an undesirable place of residence for them. The evidence, including a copy of a notice to the appellant from his bank advising him of the deposit in his account of funds transferred from his sister, established that the sister was the source of $11,782.80 ($12,000 U.S.) deposited in one of the appellant’s accounts in 1974. The evidence of Mrs Kouyoumdjian was that she sent it to the appellant to repay him for funds expended in refurbishing the apartment and to fund further work which was planned to be done.

The appellant’s work required his to travel frequently to Europe and to South America. When in South America he usually visited Mrs Anne Hlebni- kian. The appellant and Mrs Hlebnikian had been friends since childhood, being the children of parents who also were friends.

Mrs Hlebnikian was a resident of Buenos Aires. She and her family were disquieted by political events in Argentina in the early 1970’s. They contemplated emigrating to Canada. The family was wealthy and none of them worked. They made enquiries as to immigration requirements and were told that it would be necessary to demonstrate that they held sufficient assets that they would not be likely to become public charges after arriving in Canada. Accordingly, Mrs Hlebnikian arranged for the transfer of funds to the appellant in Canada for investment by him.

The appellant used the funds to purchase shares in a Canadian company and also to make term deposits. As well, some of the funds were used by the appellant on the instructions of Mrs Hlebnikian in part by the appellant and in part by his sister, Mrs Kouyoumdjian, under an arrangement similar to a trust.

Part of the funds sent to Canada by Mrs Hlebnikian were borrowed by the appellant from time to time. Both the appellant and Mrs Hlebnikian had signing authority for the bank account opened by the appellant in Mrs Hleb- nikian’s name and operated by the appellant on her behalf. Thus, it was easy for the appellant to draw down, from time to time, portions of the total sum which Mrs Hlebnikian had agreed to lend. Each time money was borrowed the appellant prepared an informal written acknowledgment of indebtedness and undertaking to repay with interest which he either delivered to Mrs Hlebnikian in South America or left in a safety deposit box to which both he and Mrs Hlebnikian had access.

Turning next to the first category of deposits, the appellant produced copies of his records of cheques issued and deposits made. In support of his contention that some of the deposits were cheques paid to him by his employer as reimbursement of travelling expenses the appellant produced an affidavit of a financial clerk and cashier employed by the same company. The affidavit listed the dates and amounts of cheques so paid. The affidavit supported the evidence given by the appellant to the effect that such reimbursement accounted for some of the so-called “unaccounted funds”. A number of other deposits in two of the appellant’s accounts were shown to be proceeds of bank loans to the appellant.

The evidence given by the appellant as to the transactions involving Mrs Kouyoumdjian was corroborated not only by her evidence, but also in part by copies of bank documents and powers of attorney. The evidence given by the appellant as to the transactions involving Mrs Hlebnikian was corroborated not only by her evidence, but also by copies of bank records, by informal records which has been made by Mrs Hlebnikian and which were produced by her at the hearing and, finally, by copies of acknowledgments of indebtedness signed by the appellant and delivered to Mrs Hlebnikian. The evidence of the appellant as to miscellaneous deposits, that is to say, deposits of moneys received neither from Mrs Hlebnikian nor Mrs Kouyoumdjian, was not inherently incredible. In part it was corroborated by the affidavit previously mentioned. Substantial areas of evidence were untested by cross-examination. There is no basis whatever in evidence for the suggestion made by counsel for the respondent that many of the documents relied on by the appellant were fabrications. The respondent’s counsel suggested that Mrs Hlebnikian’s testimony that the funds sent by her to the appellant were her funds was inadequate to discharge the onus. I can find no such inadequacy. Not only was the testimony of both the appellant and Mrs Hlebnikian to that effect entirely persuasive, there was no basis in evidence for any other conclusion.

I have no hesitation whatever in concluding that none of the additions to declared income can stand. The only aspect of this case that puzzles me is why it was not resolved at an earlier stage. It would appear that the respondent’s officials believed that neither Mrs Kouyoumdjian nor Mrs Hlebnikian existed, that all funds deposited were the property of the appellant and that such funds were income from undisclosed sources. Some of the cross examination of the assessor was apparently intended to show that he ignored evidence tendered after the assessments were made, which evidence demonstrated that the assessments were wrong, at least in part. On the other hand it would appear that some of the documentary evidence tendered by the appellant was not offered to the respondent at an earlier stage, quite possibly because at least some of it was in the possession of Mrs Hlebnikian in Buenos Aires. Whether this case reached trial as a result of intransigence on the part of one or the other or both parties I cannot say. Any exploration of that topic by this board is pointless. In an appeal from an assessment of tax the fundamental question is whether that assessment is too high. The manner in which the respondent’s officials discharged their duties in making the assessment and in dealing with the objection is, except in rare cases, irrelevant. Moreover, the Board has no power to award costs or otherwise ensure that the appellant is recompensed for the great expense involved in bringing this appeal to trial.

The appeals are therefore allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis that the following so-called “unaccounted funds arising from net worth discrepancies”: (a) $40,693.87 for 1974; (b) $16,625.76 for 1975; (c) $86,052.14 for 1976; and (d) $203,838.03 for 1977; form no part of the appellant’s income and on the further basis that the appellant is not liable to the penalties assessed.

Appeal allowed.