Tax Court of Canada Judgments

Date: 20010516

Docket: 2000-3269-IT-I

BETWEEN:

ATEF CHOUMANN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

McArthur J.

[1]            These are appeals from assessments made under the Income Tax Act by the Minister of National Revenue (the Minister) with respect to the Appellant's 1993, 1994, 1995 and 1996 taxation years. The issues to be determined are as follows:

(a)            Did the Appellant fail to report income from bookkeeping services provided by him in the 1993, 1994 and 1995 taxation years in the amounts of $5,400, $6,765 and $6,750, respectively?

(b)            Did he fail to declare mortgage interest in the amounts of $13,410, $13,188 and $11,257 in the 1994, 1995 and 1996 taxation years, respectively?

(c)            Did he misappropriate $1,000 in 1994 and $21,215 in 1995 and fail to report those amounts?

(d)            Is the Minister of National Revenue entitled to interest and penalties?

[2]            The Appellant is a native of Egypt and he retired in 1989 after over 20 years of teaching French in a Peterborough school. He invested money in an automotive business, 1097549 Ontario Ltd., carrying on business in the name of Class "A" Automotive ("Automotive")[1] from 1990 to 1995.[2] To protect his financial interest, he took control of the bookkeeping and monetary activity of Automotive which was an automobile repair business owned and operated by Mike Johnston.

[3]            On February 2, 1992, Mike Johnston personally granted a $225,000 mortgage at 13% per annum to the Appellant. That amount was advanced to Mike Johnston from the bank accounts of the Appellant and his wife. Johnston paid the Appellant and his wife interest of $23,280, $26,484 and $24,699 in the 1994, 1995 and 1996 taxation years, respectively. The Appellant's spouse reported interest of $9,869, $13,295 and $13,442 in the respective years while the Appellant reported no interest. The Minister states that the Appellant failed to declare his portion of the interest income in the amounts of $13,410, $13,188 and $11,257 in the taxation years in issue, respectively. The Appellant and his wife both stated that $100,000 of the $225,000 mortgage belonged to the Appellant's mother-in-law who lives in Egypt and not to the Appellant.

Unreported Income from Misappropriation

[4]            In 1993, the Appellant was in control of the finances of Automotive. Johnston, a licensed mechanic, looked after the auto repair work and the repair and sales side of the business. The Appellant took care of the books and the money. He recorded the cash sales of Automotive in a separate book from the other sales. The Minister assessed the Appellant on the basis that he misappropriated $1,000 in 1994 and $21,215 in 1995 from the cash sales and did not report it as income. After a Revenue Canada audit of Automotive, criminal charges were laid against the Appellant. On March 6, 1998, he pleaded guilty to evading goods and services tax and was fined $19,478. Revenue Canada's investigation confirmed that the Appellant, the business manager of his former employer, Class "A" Automotive, had complete control over most of the financial matters of the business. It was revealed that the Appellant understated the taxable sales and net GST payable shown on eleven GST returns that were filed for this business from 1992 to 1995. The net tax evaded during this time was $27,832 which relates to $397,600 in net sales.

Unreported Bookkeeping Fees

[5]            This issue was resolved by the parties but for the penalties and interest imposed by the Minister. The Appellant received employment income for his bookkeeping services which he did not declare. The parties agree that the appeal is allowed with respect to the 1993 taxation year with regard to bookkeeping fees. The appeal is dismissed with respect to the bookkeeping income for 1994 and 1995 and I find that interest and penalties are applicable on this unreported income. The Appellant clearly received $150 weekly in those years. He entered it in his special book. He altered his own hand-written employment contract. He deliberately and knowingly understated his income in 1994 and 1995 by $6,765 and $6,750.

Unreported Interest Income

[6]            The question to be determined is whether $100,000 of the $225,000 mortgage was that of the Appellant or his mother-in-law. I accept the evidence of Elizabeth Catherine Brown, the auditor from Revenue Canada. She testified that at the outset of the audit, the Appellant represented that there was a single $100,000 deposit into his bank account which was advanced to him by his mother-in-law from Egypt for investment in the Peterborough Automotive business in July 1993.

[7]            The Appellant supported this with a bank statement for account no. 1802677[3] whereon the Appellant wrote: "The $100,000 deposited to the account on 20/07/93". In evidence is a declaration[4] by his mother-in-law to the effect that she loaned her daughter, Sohair, the sum of $100,000 in July 1993. This document appears to have been signed by the Appellant's mother-in-law, Mahfouza Mohamed in Cairo, Egypt and witnessed by a lawyer with his imprinted stamp. Neither party to the document presented evidence to authenticate the declaration. The Appellant and his wife had a number of accounts into which money was deposited and withdrawn making the tracing of it very difficult. In attempting to clear up the confusion, counsel for the Appellant stated that there was no deposit of $100,000 in July 1993 and he proceeded to point out that there was a withdrawal of $100,000, I believe on October 12, 1993[5] and this $100,000 was deposited to the Appellant's cornerstone government money fund account. Therefore, we have the Appellant originally representing that he received $100,000 in July 1993 from Egypt. Then when the auditors dug more deeply and could not find $100,000 being deposited into his or his wife's accounts in July 1993, the Appellant back-tracked and submitted that the money came from Egypt in over 10 transactions in amounts of between $10,000 and $20,000. He stated this money was carried from Egypt to Canada by friends, couriers and his wife and that it was in various currencies. From his bank deposit statements, 65% of the money arrived prior to 1993. The Appellant added that a first payment of interest was made to his mother-in-law in December 1996 in the amount of $25,000.[6] At that time, the mother-in-law would have been owed over $35,000 in interest.[7]

[8]            The Appellant became aware of an audit by Revenue Canada in June 1997 and made a remittance to the Receiver General of non-resident withholding tax in July 1997. I do not accept the Appellant's explanation that he was unable to obtain guidance with respect to this tax before July 1997. Three years passed without his declaring any mortgage interest on the $100,000.00. The Appellant had the burden of proving that the funds were not his. There are too many inconsistencies to accept his explanations. I find that on the balance of probabilities, it was his money and he failed to declare the interest. In my opinion, that is gross negligence pursuant to subsection 163(2) of the Income Tax Act. I find that the amounts of $13,410, $13,188 and $11,257 were properly included by the Minister in the Appellant's income for the 1994, 1995 and 1996 taxation years in accordance with section 3 and paragraph 12(1)(c) of the Act. Also, the Minister correctly levied penalties under subsection 163(2) of the Act.

Misappropriation of Income

[9]            This is the most difficult of the issues. The Appellant pled guilty, through his counsel, to charges of making false or deceptive statements in GST returns. In his reasons for judgment, the Provincial Court Judge stated in part:

                I have before me a defendant who is 66 years of age, is retired, has no criminal record, became involved in this circumstance by reason of his investment in this corporation under this company, and there is some suggestion he may have requested and was given control over financial matters to protect his own interest in the matter, and thereby his own personal gain or to avoid loss. There was clearly a benefit to the owner of the company as well and counsel now advised that there's questionables - that's how the transcript came out - whether there was any personal gain long-term, but certainly it's a reasonable assumption that there was on the short term.

[10]          In making the false statements and evading GST payable by Automotive, the Appellant was ensuring that the mortgage to him and his wife was paid. It was a risky loan and more than likely under-secured because conventional lenders would not have granted the loan. The only relevance of the GST conviction is to demonstrate the character of the Appellant, his mindset and approach to assure the repayment of the mortgage and interest during what I believe was a difficult time for him. The Appellant's evidence is that there was no misappropriation from Automotive. Ms. Brown arrived at the conclusion that there was by adding the cash receipts from Automotive recorded by the Appellant which were deposited into his own personal bank account, and deducting the amounts which he paid back out to Automotive and adding the difference to his income.

[11]          The Appellant maintains that what Ms. Brown did not take into account were transfers of other monies from him to pay for an Automotive tow truck, hoist, alignment machine and Canpar trucks. There is a bank statement to support the Appellant's contention that he took $18,000 from his personal line of credit coinciding with the purchase of the tow truck. There was similar evidence of another $7,500 when the alignment machine and hoist were purchased. Johnston made payments in accordance with the agreements on the Appellant's line of credit starting with $624 monthly increasing to $989 monthly in September and October 1995. When the Appellant and Johnston dissolved their business relationship, the Appellant repaid the outstanding line of credit balance of $15,000 evidenced by two cheques. Johnston gave the Appellant a cheque for $1,441, leaving the amount of $13,648 owing to the Appellant. The mathematical calculations for the Canpar trucks and the hoist and alignment machine are not as clear and cannot be traced as readily.

[12]          In 1998, the Appellant commenced an action against Johnston and 1067549 Ontario Ltd. for non-payment of wages in 1993. Johnston counter-claimed for $200,000 in alleged misappropriation of funds. Upon settlement of the action, Johnston paid the Appellant $12,500, abandoned his counterclaim and made the following declaration:

1.              I am a Defendant in the within action and the owner of 1067549 Ontario Limited, operating as Class "A" Automotive, the other Defendant herein, and as such have knowledge of the matters hereinafter deposed by me.

2.              The Plaintiff, Atef Choumann, was not paid any wages for his services provided to the Defendant 1067549 Ontario Limited and myself during the years 1992 and 1993.

3.              The Plaintiff, Atef Choumann, does not owe any monies to either myself or the Defendant 1067549 Ontario Limited in respect of cash revenues realized in the Class "A" Automotive business in 1994 and 1995 and received by the Plaintiff in his capacity as financial advisor and manager of the business.

This sworn statement cannot be ignored. I do not accept Johnston's testimony that his sworn statement is not accurate. He was represented by a lawyer at the time and had been through lengthy discoveries. I do not believe that his lawyer would have permitted him to sign a false affidavit.

[13]          While I do not believe the Appellant can be said to have demolished the Minister's misappropriation assumptions, I find he has tilted the scales to a point where the Minister had the burden of proving the misappropriation. The Minister's evidence as presented from the audit, falls far short of this and the misappropriation portion of the appeal is allowed.

[14]          My findings in conclusion are as follows:

Unreported Bookkeeping Income

(a)            the appeal is allowed for the 1993 taxation year;

(b)            the appeals are dismissed for the 1994 and 1995 taxation years and the Minister correctly levied penalties under subsection 163(2);

Unreported Interest Income

The appeals for the 1994, 1995 and 1996 taxation years are dismissed and the Minister correctly levied penalties;

Misappropriation of Funds

The appeals for the 1994 and 1995 taxation years are allowed.

Signed at Ottawa, Canada, this 16th day of May, 2001.

"C.H. McArthur"

J.T.C.C.

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