Date: 20000918
Docket: 98-2426-IT-G
BETWEEN:
RABAH ABDERRAHMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 98-2381-IT-G
BETWEEN:
RESTAURANT KERKENNAH INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence. Net worth assessments were made against the individual appellant for the 1991, 1992 and 1993 taxation years. Additional income of $22,863, $22,579 and $22,424 respectively was added to his income for the years at issue, and penalties of $2,938.35, $2,898.53 and $1,846.27 respectively were assessed under subsection 163(2) of the Income Tax Act ("the Act"). According to the Minister of National Revenue ("the Minister"), the same amounts must be added to the corporate appellant's income since the individual appellant has no known sources of income other than the corporate appellant's restaurant and he is the sole shareholder of the corporate appellant. However, in view of certain minor adjustments that are not at issue, the amounts added are $23,478, $23,210 and $22,424 respectively. The penalties are $1,507.28, $1,466.97 and $1,439.62.
[2] The individual appellant's net worth was established by Revenue Quebec officials.
[3] At the start of the hearing, counsel for the appellants told the Court which points the appellants wished to elaborate on.
[4] With regard to the individual appellant, counsel argued that $17,000 should be deducted from the income added for 1991. Counsel stated that, at the objection stage in Quebec, $17,000 was added to the individual appellant's assets for the year ending on December 31, 1990. A difference of $6,478 would therefore remain for 1991. For 1992, counsel endeavoured to show that a gift of $30,000 was made to the individual appellant by his mother that year. That gift was also said to have been acknowledged by Revenue Quebec. For 1992, there would thus be no difference. For 1993, the $22,424 in added income is not being contested. For that year, the only dispute concerns the penalties. As Exhibit A-12, counsel for the appellants filed a working paper containing a table showing these calculations.
[5] The penalties are being contested for both appellants for the various years at issue on the basis that the Minister may not delegate his discretion to assess penalties.
[6] With respect to the corporate appellant, counsel argued that the restaurant's accounting was satisfactory and that its reported income was its real income. The net worth method cannot be used when a person's accounting is adequate. In any event, counsel for the corporate appellant argued that the individual appellant's income was from a source other than the restaurant, namely the tips received by his spouse.
[7] At the start of the hearing, counsel for the respondent told the Court that, since the corporate appellant's fiscal year ends at the end of August, the Minister is now of the opinion that only a prorated share of the income not reported by the individual appellant for 1991 must be added to its income, namely an amount of $7,825 rather than $23,478. The penalties will be adjusted accordingly.
[8] The individual appellant, his mother, Fatma Ben Salah Elmekki, and his wife, Souad Abderrahman, testified for the appellants. Réjean Michaud and Anne Frenette testified for the respondent.
Testimony of the individual appellant
[9] The individual appellant is a Canadian citizen who was born in Tunisia. He arrived in Canada in 1967 for Expo to take part in presenting his country's cuisine. He began working in Canada in 1968 in the restaurant business. He opened the corporate appellant's restaurant in 1974. It seats 40 and serves Tunisian specialties. Two people worked there during the years at issue, namely the individual appellant and his wife, Souad Abderrahman. The individual appellant is responsible for going to the market and doing the cooking, while his wife takes care of the tables and the cash register. She is the one who sees to the bookkeeping. She gives the information to the accountant, a Mr. Weiser, once a month. It is he who keeps the books, in computerized form, and these were filed as Exhibit A-7. It is also the accountant who determines the amounts to be paid to the government authorities. The individual appellant and his wife write the appropriate cheques.
[10] The books were given to the Revenue Quebec auditor, Mr. Michaud, when he came. He apparently conducted his audit at the accountant's office. He also obtained the sales invoices, cash register tapes and other documents. He then asked to see the personal bank accounts of the individual appellant and his wife. Powers of attorney were granted by both of them and were filed as Exhibits I-1 and I-8.
[11] According to the individual appellant, his mother does not speak or understand French. She never went to school. She comes from Kerkennah Island. She is 84 years old. The individual appellant's father worked in Sfax, a large city near Kerkennah.
[12] Exhibit A-13 is a photocopy of an ownership certificate for a Canada savings bond. According to the individual appellant, it was a $7,000 bond and he cashed it in on May 1, 1990. The $7,000 was deposited in a safety deposit box at the Caisse St-Paul-de-la-Croix. Interest in the amount of $367.50 was deposited in his personal account (number 9671), as confirmed by Exhibit A-14, which is a computerized bank statement. Exhibit A-15 is a $10,000 Canada savings bond. It was cashed on November 1, 1990, and the money was also deposited in the safety deposit box. According to the individual appellant, the above amounts, which totalled $17,000, were still in the safety deposit box at the start of 1991.
[13] The individual appellant explained that his mother gave him $30,000 in 1992 so that he could purchase a motor home. That amount was kept in the safety deposit box.
[14] Those two amounts were accepted by Revenue Quebec. Exhibit A-16 is a settlement proposal made by the Revenue Canada appeals officer offering the same settlement basis as had been granted by Revenue Quebec. In that letter, which is dated September 15, 1997, the signatory explained to the appellants' representative that, if the offer was not accepted, Revenue Quebec's files would be requested and Revenue Canada's decision might then not be as favourable as Revenue Quebec's. Counsel for the respondent objected to the filing of that proposal on grounds of relevance. The proposal was as follows:
[TRANSLATION]
. . .
Subject Your notices of objection for the 1991-92-93 taxation years
Rabah Abderrahman S.I.N. 230-722-530
Restaurant Kerkennah Inc. Corp. # 103061297RC
Dear Sir:
Further to our telephone conversation of September 11, 1997, this is to confirm our settlement offer concerning the objections for the above-mentioned taxpayers.
Since the Government of Quebec has conducted the audit and the regional objections directorate has revised its assessments to the following amounts, it seemed fair to us to make you the same settlement offer as the provincial government, namely the following amounts:
1991 1992 1993
Rabah Abderrahman $17,538 $4,770 $22,424
Restaurant Kerkennah Inc. $5,552 $0 $22,424
Since you are not in agreement, at the federal level, with the amounts proposed, we must get the files concerned from the provincial government so that we can analyse the claims you make in your notices of objection.
If the new settlement offer is not to your advantage, we will not be able to return to the above-mentioned offer and we will have to assess on the basis of the new results.
[15] According to the individual appellant, his representative did not inform him of that offer.
[16] On cross-examination, the individual appellant said that he does not receive a salary from the restaurant. He has rental income and that is what he reports. He thinks that his wife earns about $12,000 a year for her work at the restaurant, although he suggested that the accountant should be asked about the amount of her salary, since he himself was not sure. He said that that is not his field, that his field is cooking. He signs a cheque for his wife each month. The amount of the cheque varies, but it is a little more than $1,000 a month.
[17] Taking Exhibit A-12, the calculations in which are described in paragraph 4 of these Reasons, counsel for the respondent asked the individual appellant to explain his assertion that the differences in income came from his wife's tips and not from the restaurant. In 1991, total sales were $109,720 according to the combined statement of income and retained earnings that is part of Exhibit A-1. With respect to that amount, the tips were allegedly $6,478. In 1992, sales amounted to $101,946 (Exhibit A-2), and the tips received were allegedly $6,790. In 1993, sales amounted to $89,963 (Exhibit A-3), and the tips were allegedly $22,424.
[18] The individual appellant also said that his mother might spend three months in Canada and nine months in Tunisia but sometimes she stayed in Canada longer. His mother has permanent resident status. She has filed income tax returns in Canada. In 1990, she filed a return in which she reported $5,000 in employment income. In 1991 and 1992, the individual appellant claimed his mother as a dependant and his father as a dependant with a disability.
[19] He said that, after the death of a second brother, his mother told him to [TRANSLATION] "make the most of life". She gives him money in amounts sometimes of $1,000 and sometimes of $2,000. She brings it over in Canadian currency. His mother is very well off in Tunisia. She has houses that she rents. She has lands that she farms. She sells produce. She earns income.
[20] The individual appellant's notice of appeal to Revenue Quebec was filed as Exhibit I-5. His then counsel therein explained the source of the $30,000 as follows:
[TRANSLATION]
(d) as a result of litigation, the objector received $30,000.00 in full and final settlement, and that amount cannot be considered income under any circumstances.
[21] Counsel for the respondent asked the individual appellant which version was correct. He answered that he did not even know what "litigation" meant. In redirect examination, he claimed that his counsel had not given him the document to read.
Testimony of the appellant's mother
[22] Fatma Ben Salah Elmekki is a farmer. She grows grapevines and fig trees. She is very busy. She lives with her three sons, Mohamed, Rabah and Gemma, who are all in Canada. At the moment she is staying with Mohamed, who lives in Laval. In Tunisia, she lived in Sfax. She has a house there and two in Kerkennah. She lives in Tunisia more often because she has business there. She cannot read or write. She does not even know how to count Canadian money. Her husband worked in a hotel in Sfax. She has been giving her son money for 21 years. How much money did she give Rabah? $30,000. She gave that money to him and not the others because he is going to let the others use his motor home. She took out money until he told her it was enough. She gave him the money personally. She does not remember getting a certificate from a Tunisian bank dated March 25, 1996 (Exhibit A-18) stating that she kept a considerable amount of money there. She said that she withdrew her money from all banks 12 or 13 years ago, after a trip to Mecca, because, according to her, the Muslim religion does not allow interest to be made on one's capital.
[23] Exhibit I-7 is a sworn statement dated July 5, 1995, to the effect that she gave the appellant $30,000 on May 16, 1992, [TRANSLATION] "as a [gift] when I travelled to Canada upon the death of my son Hassan, who also lived in Canada". In that statement, she identified herself by her Canadian passport. Yet Exhibit I-6, which is her passport, shows that she arrived in Carthage on May 13, 1992.
Testimony of the individual appellant's spouse
[24] Souad Abderrahman has been living in Canada for 23 years. She is Tunisian and is from Kerkennah Island. She was born in Sfax. She is the one who looks after the restaurant's accounting: the sales, the cash register, the invoices. Her husband's role is in the kitchen and making purchases. He prepares and signs cheques at her request. She prepares the invoices to be paid.
[25] She balances the cash every Monday. At the end of each month, the cash register tapes, the invoices, including those paid in cash, and the take from the cash register are put in an envelope and sent to the accountant, Mr. Weiser. At the same time, she fills out a form noting the purchases made for the kitchen as well as sales, meals, wine and taxes.
[26] As Exhibit A-21, Souad Abderrahman filed a cash report with invoices attached. That report is prepared once a month and sent to the accountant.
[27] It was not Mr. Weiser who met with Mr. Michaud, the Minister's auditor. It was Rached Ghanem. During the audit, the invoices and cash register tapes were brought to the accountant at his request. When Mr. Michaud went to the restaurant with Rached Ghanem, neither the witness nor her husband sat down with them.
[28] She said that her tips might amount to about $4,000 a year. She set the rate at eight to ten percent of sales. She gives the tips to her husband.
[29] She was the one who cashed the $7,000 bond on May 1, 1990. She put the money in her safety deposit box at the Caisse populaire St-Paul-de-la-Croix. She deposited the interest in her husband's account. It was also she who cashed the bond that was Exhibit A-15, on November 1, 1990, and put the money in the safety deposit box.
[30] Exhibit A-17 is made up of photocopies of signatures of the person authorized to have access to the safety deposit box. Mrs. Abderrahman claimed that she took cash out each time to pay for the motor homes. Exhibit I-3 is a document evidencing the purchase of the first motor home, while Exhibit I-4 is for the second. The first document is dated August 7, 1992 and the delivery date was August 14, 1992. She went to the safety deposit box on August 7, 1992. The document indicates that a $32,000 cash deposit was made on August 10, 1992. The second purchase contract is dated August 17, 1993. Thirty thousand dollars in cash was paid on September 21, 1993. Mrs. Abderrahman went to her safety deposit box on September 20, 1993.
Testimony of the auditor
[31] Réjean Michaud is now an objections officer for Revenue Quebec. At the time of the audit, according to his report (Exhibit I-9), he was working for the audits and investigations branch. He explained that a decision to use the net worth method is made following a brief analysis at the office based on a comparison of the assets acquired and the income reported The assets in this case were the bank investments, the motor vehicles and the immovable property. The auditor then met with the individual taxpayer and asked him whether he had any non-taxable sources of income. In this connection, the individual appellant asked the auditor to meet with Alain Brisebois, his accountant. Mr. Brisebois answered the question in the negative.
[32] According to the auditor, the type of business involved is one in which there are many cash transactions, which makes it more difficult to validate reported income using accounting records. As well, the corporation is one with a sole shareholder.
[33] In drawing up the balance sheet as at December 31, 1990, the auditor did not take into account the cashing of a $7,000 savings bond on May 1, 1990. That investment no longer existed on December 31, 1990, because it had been cashed in May 1990. The money may still have existed on December 31, 1990, but it could very well have been in the substantial bank account balances or the other assets found on the opening balance sheet. As for the $10,000 bond allegedly cashed in November 1990 (Tab 20), it could not be determined whether a bond had been cashed or when. No mention was ever made to him of a gift of $30,000 during his investigation. Nor was a safety deposit box ever referred to during the audit.
[34] The auditor concluded that the unreported income came from the restaurant because there was no indication of any other source of income.
[35] The proposed assessment was submitted to Serge Racine. The auditor later met with Mr. Ghanem, who made representations to him. That meeting took place at the restaurant. The individual appellant was at the meeting. During the meeting, Mr. Ghanem agreed with almost every point except the matter of the unexplained Canada savings bond withdrawals of $10,000 in 1992 and $12,000 in 1993 referred to in Schedule A to the Reply to the Notice of Appeal concerning the individual appellant. There was no explanation of how those withdrawals had been used. The withdrawals were accepted at the objection stage and are not in dispute.
[36] On cross-examination, Mr. Michaud said that he did not think that Mr. Brisebois worked for Mr. Weiser, the accountant. He worked alone in the basement of his home. Mr. Michaud examined the restaurant's books and gave them a satisfactory rating in his report. The restaurant's accounting system was complete. With regard to sales, there were the cash register tapes. Outlays could be made by cheque. The reported income was established through the bank deposits. The financial reports had been prepared by Mr. Weiser. Mr. Michaud never had any contact with that accountant, who had not checked the accounting.
[37] On cross-examination, Mr. Michaud admitted that, in net worth auditing, it is almost impossible to identify the source of unreported income with absolute certainty. There was never any business discussion with Mr. Abderrahman. Income from tips was not mentioned during his audit.
[38] Anne Frenette is an objections officer at the Canada Customs and Revenue Agency. Her reports were filed as Exhibits I-10 and I-11. She had to discuss the appellants' files with Raymond Tremblay, an accountant, who represented the individual taxpayer at the objection stage. She refused to take the $30,000 gift into account because there was too much confusion about the circumstances of the gift to give credence to the contention that there was a gift. The accountant said that Ms. Elmekki lived in Canada or was a resident of Canada. Mr. Abderrahman said that his mother had not lived in the country for 10 years. However, in his tax returns, he claimed his parents as dependants. Ms. Elmekki had a social insurance number in Canada and filed tax returns in 1991 and 1992. Based on those returns, she seemed to be living in Canada at the same address as the individual appellant. There were years when she filed returns and others when she did not. She filed a $1 return each year.
[39] Ms. Frenette did not take the $17,000 into account either. According to Mr. Tremblay, that $17,000 was money in hand that had been put in a safety deposit box at the bank. This aspect of the case had never been mentioned prior to the notice of objection stage. Moreover, since she could not find out the amounts in the safety deposit box for the subsequent years, she did not allow the amount for the first year.
[40] The objections officer said that she was never given any explanation concerning the tips. The notice of objection stated that the money in question was accumulated personal savings.
Argument of counsel for the appellants
[41] As regards the penalties, counsel argued that the Minister cannot rely on an audit done by Revenue Quebec to discharge his burden of proof.
[42] With regard to the corporate appellant, counsel for the appellants argued that the net worth method cannot be used where there is satisfactory accounting. He relied on decisions explaining that recourse to the net worth method is not the rule and that it is to be used exceptionally, in cases where adequate accounts have not been kept.
[43] Counsel realized that the net worth method was used not against the restaurant but against the individual appellant. The Minister added income amounts of the individual appellant as coming from the restaurant because, in his view, there was no other plausible explanation of the source of the additional amounts. Yet there is no evidence showing that the individual appellant or his wife appropriated the corporation's income. There is no evidence that the restaurant could have generated additional income. According to counsel for the corporate appellant, the tips earned by his wife are the source of the individual appellant's additional income, in addition to the amounts of $17,000 and $30,000 referred to.
[44] As regards the individual appellant, counsel's working paper (Exhibit A-12) explains the changes he argues should be made to the net worth established by the Minister. For 1991, $17,000 should be deducted, resulting in an adjusted additional income of $6,478. For 1992, there would be no additional income given the $30,000 gift from the individual appellant's mother. The individual appellant is not contesting anything with respect to 1993. The source of the balances remaining is the tips earned by the individual appellant's wife.
[45] With respect to the $30,000, counsel for the respondent argued that the evidence did not show when in 1992 that amount was given. There is no information on that. Moreover, the gift was never mentioned during the audit. It was mentioned for the first time to Revenue Quebec at the objection stage, and according to the document filed, the individual taxpayer's representative referred to a settlement of litigation, which settlement Mr. Abderrahman has denied. Nothing certain can be taken from the testimony of the individual appellant's mother. She said that she does not deal with banks, yet there was entered in evidence a bank certificate from the Société tunisienne des banques (Exhibit A-18). As for the sworn statement, it was the individual appellant who prepared the document and asked her to sign it. Although she allegedly made the gift in Canada on May 16, 1992, her passport shows that she arrived at the Tunis Carla airport on May 13, 1992. She was therefore in Tunisia and not Canada on May 16, 1992.
[46] As regards the corporate appellant, counsel for the respondent argued that there is no plausible source of income other than the restaurant. She also argued that the income from tips was never reported by either Mr. or Mrs. Abderrahman. Mrs. Abderrahman said that her income totalled $4,000 a year.
Conclusion
[47] The settlement offer filed as Exhibit A-16 was objected to by the respondent on the ground that it was not relevant to the legal debate, as mentioned in paragraph 14 of these Reasons. Privilege was not raised. I will therefore decide on the basis of relevance. Counsel for the appellants argued that the offer was relevant because the audit was done by Revenue Quebec and everything allowed by Revenue Quebec should also be allowed by the Minister. It is my view that the document may have been relevant if the amounts allowed had been allowed for reasons related to the facts or the Act that were explained in the offer or another attached document. The amounts were allowed solely to settle the dispute, and that was also why they were proposed to the individual taxpayer. That offer is therefore of no use to the debate herein and in that sense it is not relevant. The individual appellant said that his representative did not tell him of the offer. This is therefore a matter between him and his representative.
[48] The inclusion of the $17,000 in the individual appellant's assets as at December 31, 1990, was denied for various reasons: the amount from the cashing of two bonds could have been used to acquire or increase the assets already taken into account; there was no documentary evidence that the second bond, in the amount of $10,000, had been cashed; if there was $17,000 in cash in the safety deposit box at some point, this was customary behaviour—there are amounts each year and they must be reported; the individual appellant did not provide these details for the other years. In my view, these reasons for the denial are reasonable.
[49] The inclusion of the $30,000 gift in non-taxable income was denied for the year ending on December 31, 1992, on the ground that there was no consistent evidence on this: the notice of appeal to Revenue Quebec dated September 26, 1995, states that the amount was received in final settlement of litigation; the individual appellant was unable to explain that allegation; the evidence showed that the individual appellant's mother is a woman of considerable financial means, yet he claimed her as a dependant in his income tax returns. In the testimony given by the various witnesses, reference was made to gifts of a thousand dollars at a time over the years, but also to an amount of exactly $30,000 given all at once; at the audit stage, no one mentioned the $30,000 gift. In my opinion, the weight of the evidence is not such as to enable me to conclude that a gift of $30,000 was made in 1992.
[50] Does the individual appellant's unreported income come from the operation of the corporate appellant's restaurant? The individual appellant has suggested the tips received by his wife as another plausible source of income. It is true that net worth takes account of family income, that is, in this case, the individual appellant's income and his wife's income. This is agreed on by both parties. However, the wife did not report tips as a source of income. The income taken into account in the individual appellant's net worth is the income reported by him and his wife. Thus, with regard to the individual appellant, the income from tips cannot reduce the difference between the reported and the unreported income.
[51] Given the significant differences between the reported and the unreported income, it is my view that the penalties assessed under subsection 163(2) of the Act were correctly assessed. Counsel for the appellants' initial argument that the Minister was not the one who had exercised his discretion in assessing the penalties was not really discussed in depth since the evidence showed that it was the Minister's own officials, and not those of Revenue Quebec, who considered the assessment of penalties and then assessed them.
[52] Counsel for the corporate appellant argued that that appellant kept satisfactory accounts and that no assessment should be made against it on the basis of the net worth established with respect to its shareholder. However, I can only note that there was no definite evidence that the income reported by the corporate appellant was its only income. Its accounting was not analysed exhaustively. As suggested by the respondent, there is also a possibility in this type of business that cash sales are not all reported. With such a business, where the principal shareholder has not reported all of his or her income and has no explanation of the source of that income, the Minister is entitled to assess the business as being the source of the income in question. On this point, see, inter alia, Fortis et al. v. Minister of National Revenue, 86 DTC 1795; Chicken Tandoor Limited and Monahar Lal Ahir v. Minister of National Revenue, 87 DTC 487; Maison Funéraire Robichaud Ltée and Camille Robichaud v. The Queen, 97 DTC 491; and Luso Construction Ltd. v. Canada, [1999] T.C.J. No. 323.
[53] It was therefore up to the individual appellant to give a reasonable explanation of the source of the unreported income. He did so in part by referring to the tips. His wife calculated that she might have received $4,000 in tips in those years, which I consider plausible. In my opinion, that is another plausible source of income. As for the balance, there is no reasonably acceptable explanation other than that the income came from the restaurant. Accordingly, the additional income added by the Minister, aside from the $4,000 amounts mentioned above, was correctly added as unreported income to the corporate appellant's reported income.
[54] The penalties must be upheld for the same reasons as were given with respect to the individual appellant.
[55] The individual appellant's appeals are dismissed with costs. The corporate appellant's appeals are allowed, without costs, on the basis of what is stated in paragraphs 53 and 54 of these Reasons and the respondent's admission as set out in paragraph 7 of these Reasons.
Signed at Ottawa, Canada, this 18th day of September 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
[OFFICIAL ENGLISH TRANSLATION]
98-2426(IT)G
BETWEEN:
RABAH ABDERRAHMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Restaurant Kerkennah
Inc. (98-2381(IT)G) on May 29 and 30, 2000, at Montréal, Quebec, by the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Yves Ouellette
Reno Vaillancourt
Counsel for the Respondent Anne-Marie Boutin
Mounes Ayadi
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1991, 1992 and 1993 taxation years are dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 18th day of September 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
98-2381(IT)G
BETWEEN:
RESTAURANT KERKENNAH INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Rabah Abderrahman (98-2426(IT)G) on May 29 and 30, 2000, at Montréal, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Yves Ouellette
Reno Vaillancourt
Counsel for the Respondent: Anne-Marie Boutin
Mounes Ayadi
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1991, 1992 and 1993 taxation years are allowed, without costs, on the basis of what is stated in paragraphs 53 and 54 of the attached Reasons for Judgment and the respondent's admission as set out in paragraph 7 of those Reasons.
Signed at Ottawa, Canada, this 18th day of September 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.