Karmali v. R., [1997] 1 CTC 2140 (Informal Procedure)

Watson D.J.T.C.C.: — This appeal was heard in Vancouver, British Columbia, on September 25, 1996, under the Informal Procedure.

The Minister of National Revenue (the “Minister”) by Notices of Assessment dated August 3, 1995, assessed the Appellant in respect of the 1991, 1992, 1993 and 1994 taxation years pursuant to subsection 152(7) of the Income Tax Act (the “Act”). In so assessing the Appellant, the Minister included in the Appellant’s income management fees from Khalfiz Investments Inc. (“Khalfiz”) in the amounts of $12,000, $12,000, $18,000 and $18,000 respectively and assessed penalties for repeated failure to file a return of income for the 1991 and 1992 taxation years, late-filing penalties in respect of the 1993 and 1994 taxation years and arrears of interest as follows: $913.60 and $871.56 for 1991; $892.75 and $543.18 for 1992, $707.15 and $563.90 for 1993; and $326.67 and $145.99 for 1994.

In assessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant is the sole shareholder of Khalfiz Investments Inc. (“Khalfiz”);

(b) Khalfiz is in the business of operating a variety store;

(c) Khalfiz filed with the Minister returns of income for the 1986 to 1990 taxation years and did not file returns of income for any taxation years subsequent to the 1990 taxation year;

(d) the Appellant filed with the Minister income tax returns for the 1988, 1989 and 1990 taxation years in which he reported management fee income from Khalfiz in the amounts of $10,000 in each taxation year;

(e) the Appellant received management fee income from Khalfiz in the 1991, 1992, 1993 and 1994 taxation years in amounts that were not less than $12,000, $12,000, $18,000 and $18,000, respectively;

(f) the Minister, by Notice of Assessment dated December 29, 1989 in respect of the 1988 taxation year, assessed a late-filing penalty pursuant to subsection 162(1) of the Act in the amount of $5.61 ;

(g) the Appellant’s returns of income for the 1991, 1992, 1993 and 1994 taxation years were required to be filed on or before April 30, 1992, April 30, 1993, April 30, 1994 and April 30, 1995 (the “Filing Due Dates”), respectively;

(h) on March 10, 1994, the Minister sent to the Appellant by Registered mail a demand to file the Appellant’s 1991 and 1992 returns of income;

(i) on July 11, 1995, the Minister sent to the Appellant by Registered mail a demand to file the Appellant’s 1994 return of income;

(j) the Appellant failed to comply with the demands and did not file the returns of income for the 1991, 1992, 1993 and 1994 taxation years as requested;

(k) the amount of tax that was unpaid on the Filing Due Dates was not less than $1,827.20, $1,785.50, $4,159.71 and $4,666.76 (the “Unpaid Amounts”), respectively;

(l) prescribed interest on the Unpaid Amounts was as follows:

Taxation	Interes Penod	Prescnibed
		Interest
Year
1991	Apri 30, 1992 to August 3,	371.56
	1995
1992	April 30, 1993 to August 3,	$543.18
	1995
1993	April 30, 1994 to August 3,	$563.90
	1995
1994	April 30, 1995 to August 3,	$145.99
	1995

(m) a penalty in the amount of $913.60 for repeated failure to file a return of income for the 1991 taxation year was correctly calculated as 50% of $1,827.20 and was correctly assessed pursuant to the provisions of subsection of 162(2) of the Act; (n) a penalty in the amount of $892.75 for repeated failure to file a return of income for the 1992 taxation year was correctly calculated as 50% of $1,785.50 and was correctly assessed pursuant to the provisions of subsection of 162(2) of the Act;

(o) a penalty in the amount of $707.15 for failure to file a return of income for the 1993 taxation year as and when required by subsection 150(1) of the Act was correctly calculated as 17% of $4,159.71 and was correctly assessed pursuant to the provisions of subsection 162(1) of the Act;

(p) a penalty in the amount of $326.67 for failure to file a return of income for the 1994 taxation year as and when required by subsection 150(1) of the Act was correctly calculated as 7% of $4,666.76 and was correctly assessed pursuant to the provisions of subsection 162(1) of the Act.

At the hearing, the Appellant admitted paragraphs (a) to (d) and (f) to (j); he denied paragraphs (e) and (k) to (p).

The Appellant in his testimony stated that he had always paid his taxes on time with no trouble up to 1990. In 1991 and 1992, he sent the appropriate material to his accountant and he was unaware until later that the accountant had not submitted his income tax returns because of outstanding amounts due from the Appellant for the previous work done. The Appellant then hired a new accountant but he was unable to obtain his records from the previous accountant. When he received visits and telephone calls from Revenue Canada officials, he referred them to this new accountant. The 1991 income tax return was submitted in 1994 and stated that he had no income for the four years in issue because Khalfiz, the company that operated a convenience store, had operated at a loss. The 1992 and 1993 income tax returns were submitted recently on September 23, 1996 and the 1994 and 1995 income tax returns are in the process of being filed.

When the Appellant was questioned by counsel for the Minister, the Appellant and Khalfiz income tax returns for 1988, 1989 and 1990 were produced as exhibits confirming the allegation set out in paragraph (d) above. The GST files of Khalfiz revealed taxable supplies (sales and other revenue) totalling approximately $243,000 in 1991, $244,000 in 1992, $200,000 in 1993 and $100,000 in 1994; when asked to explain these figures, the Appellant insisted that he was only able to continue operations during those years by means of personal contributions from his own funds and loans from his family.

In the 1989 taxation year, Khalfiz had revenues of $163,172.81 and the Appellant was paid approximately $10,000, but the Appellant claimed that with increases in rent and expenses and the move of a large business employing many persons in the premises adjoining the store, there was no profit; however, the Appellant was unable to provide documentary evidence to support this contention.

The Appellant stated that he is married with three children aged 17, 15 and 9 and has lived with his family in a house that he owned until 1994; in September 1994, he transferred the title of the house to his wife. He recalled receiving correspondence from Revenue Canada and having telephone conversations with some officials. Documentary evidence was produced showing that the Appellant filed his 1991, 1992, 1993 and 1994 income tax returns on November 1st, 1995 showing a nil income for the four-year period. The Appellant could not recall whether he had told Revenue Canada officials in his conversations with them that he had a nil income during the four years in spite of the company’s GST records mentioned above.

In July 1992, the Appellant stated that he obtained a mortgage on his house in the amount of $191,000 with monthly payments of $1,519.15; the Appellant claimed that the bank loaned him the funds even though he had no income because when he was questioned about this, he showed the bank false documents and stated falsely that he was in receipt of income. He further claimed the mortgage payments were made by his wife who owns a lottery kiosk; his 1990 income tax return indicated his wife’s income for the year as $618.75. He claimed that his wife provided funds from her earnings for the store’s operations, but he had not mentioned this to the Revenue Canada officials. When he made the various income tax returns he had no idea of his earnings, preferring to rely on the documents available that were passed on to the accountant. He and his family relied on his line of credit for living expenses, but he provided no documentation to support this claim.

The two witnesses heard on behalf of the Respondent had worked on the Appellant’s file and were familiar with the details leading up to the assessments of August 3, 1995 and relied on detailed notes taken at the time of the conversations with the Appellant in September 1994. In their testimony, they provided the following information: at no time did the Appellant mention that he had a nil income during the period in issue; the Appellant informed them of his troubles with his first accountant and referred them to the second accountant; an inspection of the company’s books and records at the accountant’s office indicated missing bank statements and that amounts of between $1,000 and $1,500 had been withdrawn with the name of the Appellant written under the amounts which appeared to be a shareholder draw or payment; the accountant had incomplete documentation so they conducted a background check on the Appellant’s lifestyle, including the mortgage on the house, the expenses for food, utilities, clothing for his three children, general household necessities and then prepared the assessments in the amounts set out above pursuant to subsection 152(7) of the Act. A further check of his wife’s income for 1992, 1993 and 1994 indicated net income of $19,542, $7,901 and $12,259 respectively; they were of the view that his wife’s income could not sustain the lifestyle and household expenses of an estimated $2,000 per month. On reviewing the Appellant’s income in prior years of between $10,000 and $12,000, they arrived at the amounts of $1,000 per month for the years 1991 and 1992 and $1,500 per month for 1993 and 1994.

Taking into consideration all of the circumstances, including the testimony, admissions and documentary evidence and the absence of evidence showing that the amounts determined by the Minister were ill-founded in fact or in law, I am of the view that the assessments issued pursuant to subsection 152(7) of the Act were based on the best information that could be gathered under the circumstances. The two Revenue Canada officials asked the Appellant to file his income tax returns, yet the Appellant took no action and did not even mention that he had a nil revenue in 1991, 1992, 1993 and 1994. The documents examined by the two officials indicated drawings by the Appellant from the company of between $1,000 and $1,500 per month and no explanation was offered by the Appellant; these documents and the Appellant’s lifestyle that included mortgage payments of $1,500 per month indicate monthly expenses of approximately $2,000. Based on the results of the investigation, the Minister assessed the Appellant at a monthly income of $1,000 in 1991, 1992 and $1,500 in 1993 and 1994.

The effect of subsection 152(7) is set out in the case of Dezura v. Minister of National Revenue, 3 D.T.C. 1101 as follows:

... The effect of the section is that when the Minister makes an assessment under the section there is a presumption of validity in its favour which is not rebuttable by proof that its amount is different from that shown on the taxpayer’s return or information supplied by or for him or that no return has been made. The power is in the interests of adequate administration of the Act. It extends to the case of every taxpayer and is conferred so that there shall be no gap in the Minister’s administrative power of assessment of every person and the determination of the amount of such assessment so that every one may be made subject to liability for the amount of tax he ought to pay and no one be able to confine the amount of his liability to that which he has himself stated or supplied or to escape liability by not making a return.

Subsection 152(7) of the Act reads as follows:

(7) Assessment not dependent on return or information. The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.

The Appellant had the onus of establishing on a balance of probabilities that the assessments were ill-founded and, in my view, he has failed to do so. Accordingly, the appeal is dismissed.

Appeal dismissed.