Date: 20010826
Docket: 2000-260-IT-I
BETWEEN:
MAHER AZIZ ISHAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
(delivered orally from the bench on
March 13, 2001, at Montreal, Quebec,
and amended for greater clarity)
Pierre Archambault, J.T.C.C.
[1] Mr. Maher Aziz Ishak is contesting reassessments for the 1994 and 1995 taxation years. The Minister of National Revenue (Minister) included in Mr. Ishak's income an amount of $34,351.45 resulting from the forgiveness of a debt arising out of advances made to him by A.C. Leslie Steel Inc. (LSI). The reassessment for the 1994 taxation year took place more than three years after the original assessment and Mr. Ishak claims that the Minister did not have the right to reassess him under subsection 152(4) of the Income Tax Act (Act) because he did not make in filing his tax return any misrepresentation that is attributable to neglect, carelessness or wilful default. Basically, Mr. Ishak claims that he did not believe that he owed any money to LSI when he filed his tax return. Furthermore, the Minister refused the deduction of a $12,036.19 non-capital loss carried over from the 1994 taxation year in computing Mr. Ishak's taxable income for the 1995 taxation year. It was admitted during the course of the hearing that the result for the 1995 taxation year wholly depended upon the outcome of the appeal for the 1994 taxation year.
[2] In reassessing Mr. Ishak for the 1994 and 1995 taxation years, the Minister made the following assumptions of fact:
a) the Appellant, through his holding company, was issued a 55% controlling interest in A.C. Leslie Steel Inc. (the "Company");
b) the Appellant was also named director and president of the Company;
c) on December 7, 1993, the Appellant signed the financial statements of the Company and the T-2 return for the 1993 taxation year;
d) the 1993 balance sheet of the Company showed an amount identified as "Loan receivable from directors";
e) on December 6, 1994, the Appellant's holding company sold its shares of the Company and the Appellant tendered his resignation as a director and officer of the Company;
f) on December 6, 1994, the Company directors and remaining shareholders signed a document, releasing the Appellant and holding him harmless from any claims, either at or prior to that date. There was no indication in the said document of any outstanding advances, or other amounts owing to the Company;
g) since the Appellant's outstanding debt of $34,351, was extinguished on December 6, 1994, the deemed value of the benefit received by the Appellant, was the amount forgiven;
h) as a result of an audit of the books and records of A.C. Leslie Steel Inc., it was established that the account "loan receivable from directors" had an outstanding balance for the 1993 taxation year, and the Appellant's share of that loan was $34,351.45;
i) during the 1994 taxation year, the Company made a journal entry on its books, indicating that all shareholder advances were written off as bonuses, for which the Appellant did not receive a T-4 from the Company;
j) in reporting his income for the 1994 taxation year, the Appellant did not include this bonus of $34,351 in his income for that year;
k) in filing his return of income and in supplying any information under the Income Tax Act (the "Act") for the 1994 taxation year, relative to his income, the Appellant has omitted to report as income from the company " A.C. Leslie Steel Inc. " the amount of $34,351, and has made a misrepresentation that is attributable to neglect, carelessness or willful default.
Mr. Ishak's representative admitted all of these facts except those set out in subparagraphs g), h), j) and k).
Facts
[3] Mr. Ishak has a degree in electrical engineering. He has been employed in a long series of positions in many corporations, including publicly traded corporations. In 1991, Mr. Ishak was approached by an accountant from the firm of Schwartz Levitsky Feldman (SLF) to invest in LSI, a corporation that had gone bankrupt. A group of its employees wanted to buy that corporation. Mr. Ishak hired SFL to draw up a new business plan for LSI, for which he said he paid $5,600 in professional fees (including taxes) out of his own pocket.
[4] He also negotiated financing arrangements for LSI with certain financial institutions. At the end of 1991, he approached RoyNat to provide the financing. That institution was paid a commitment fee of $7,500 that Mr. Ishak claims he paid. Under a gentleman's agreement entered into between the key new shareholders of LSI, the pre-acquisition costs (pre-acquisition costs), including SLF's and RoyNat's fees, were eventually to be reimbursed to Mr. Ishak when LSI's financial situation improved.
[5] The closing for the acquisition of LSI took place in July 1992. Mr. Ishak invested $550,000 and obtained a 55% interest in LSI. The original plan was that no one shareholder would control the corporation. However, the other shareholders could not invest all the funds that they had committed. Given that he was the wealthiest of the group of investors, Mr. Ishak had to put up more money and provide the bank with personal guarantees of up to $500,000 in order to complete the LSI acquisition. Mr. Ishak said that it was on the recommendation of his lawyer that he insisted on getting control, given the substantial investment that he was going to make in the corporation.
[6] A few months later, the three most senior executives and the shareholders of LSI, Messrs. Ishak, Eddy Hakim and Normand Lepage, realized that the successful operation of LSI would prove more difficult than anticipated. LSI had lost a lot of clients as a result of its bankruptcy and the three executives had to come up with an expense reduction plan.
[7] During his testimony, Mr. Hakim stated that sometime early in 1993 he proposed to LSI's employees a 25% reduction in their salaries and he proposed as well that the executives forego their salaries. Mr. Ishak was apparently quite prepared to do so. However, the other two executives needed their salaries to meet their domestic needs. Therefore it was agreed that LSI would make advances to the three senior executives against their future earnings. The amount of the advances would equal their net salary. Even though he stated that he was quite prepared to forego his "salary advance", Mr. Ishak received advances just like the other two executives, according to Mr. Hakim. Mr. Ishak's gross monthly salary was roughly $10,000 and he received three $5,000 advances — two in February and one in March 1993 — but they were considered by Mr. Ishak as reimbursements of expenses.
[8] From August 1992 to June 1993, Mr. Ishak filed monthly reports (Exhibit A-5) for expenses that he incurred as president of LSI. In that capacity, he also approved the reimbursement of those expenses. He stated that, having previously held senior management positions, he was well aware of the distinction between business and personal expenses. He stated that he only claimed business expenses. Accompanying the expense reports are either forms that he used in claiming his reimbursements or statements from credit card companies. These documents detail his expenses. All the expenses appearing in the monthly reports aggregate $18,588.07. When cross-examined by counsel for the respondent, Mr. Ishak stated that he had attached the relevant invoices to the monthly expense reports but had kept only a copy of the reports.
[9] It seems that in the middle of 1993, the relationship between Mr. Ishak and the other two executives and shareholders soured. Apparently, Mr. Hakim was resentful that Mr. Ishak had acquired control of LSI contrary to the original agreement. In addition, Mr. Ishak's health was not very good, so he decided to spend six weeks in July and August 1993 in Egypt, his country of origin. When he returned, Mr. Ishak did not feel wanted. He did not spend much time at the office during the months of September and October, having been told basically to stay home. In October, the other two shareholders insisted that they approve any important decision such as the hiring of personnel. Mr. Ishak did not want to accept any such conditions given that he had control of LSI. He then offered to sell his shares in LSI to the other shareholders and to help them find the necessary financing.
[10] Although he was not very much involved in the management of LSI, Mr. Ishak was asked on December 7, 1993 to sign LSI's audited financial statements and its tax return for the fiscal period ending on August 31, 1993. Those financial statements showed that the "loans receivable from directors" amounted to $66,842. Mr. Ishak claims that he raised some concerns about this item on the balance sheet given that he was entitled to reimbursement of expenses, including the pre-acquisition costs. Apparently, he was told that this would be taken care of after financial arrangements had been put in place for the purpose of carrying out the sale of his shares to his fellow shareholders. Mr. Ishak said he did not know what his share of the "loan receivable from directors" would have been.
[11] In a memorandum of agreement dated April 7, 1994 (April Agreement), Messrs. Hakim, Lepage and Liebovitch undertook to purchase Mr. Ishak's shares through a holding corporation. In that agreement, we find clause 2.4, which reads as follows:
The parties confirm and instruct the Company's accountants at the time of the execution of this Agreement that all outstanding loans and/or advances and/or expenses paid by the Company to the Vendor and/or Ishak and/or on their behalf, as well as all outstanding loans and/or advances and/or expenses paid by the Company to Messrs. Normand Lepage ("Lepage") and Eddie Hakim ("Hakim") and/or on their behalf, whether directly or indirectly, for his benefit and/or the Vendor and/or any related party to them represent just and fair compensation to Ishak, Lepage and Hakim for their services rendered to the Company as the case may be and constitute bona fide expenses incurred either by Ishak, Lepage or Hakim and/or the Vendor on behalf and for the Company.
[12] Mr. Ishak acknowledged that he had drafted this clause without the assistance of a lawyer. An earlier draft referred only to his advances and expenses. He explains as follows his reasons for including such a clause. After his return from Egypt the year before, Mr. Hakim had voiced doubts about the legitimacy of expenses aggregating $67,000 and appearing on the LSI credit card used by Mr. Ishak. Mr. Hakim did not believe that that amount could have been incurred for business reasons and for the benefit of LSI. He strenuously contested Mr. Ishak's right to be reimbursed for those expenses. He also went over the expenses claimed by Mr. Ishak prior to that period and concluded that many of them constituted personal expenses of Mr. Ishak. Given this position taken by Mr. Hakim, Mr. Ishak wanted to protect himself by having his fellow shareholders agree that the expenses that he had claimed in the past constituted bona fide expenses. In his testimony, Mr. Hakim confirmed that Mr. Ishak was concerned about being sued for reimbursement of improperly claimed expenses. It seems that Mr. Hakim had even taken some steps — namely consulting his accountant and his lawyer — with a view to recovering certain expenses.
[13] In a letter dated October 28, 1994 addressed to the eventual purchasers of his shares, who were asking for an extension of the closing date, Mr. Ishak asked for reimbursement of SLF's $5,600 fees and payment of an amount of $25,000 over and above the amount due pursuant to the April Agreement. Mr. Ishak said he made no reference to the RoyNat commitment fees because he had forgotten about them. At the time, Mr. Ishak still considered that he had incurred more out-of-pocket expenses than the amount of his share of "loans receivable from directors".
[14] In the end, no legal action was brought. The closing for the sale of his shares took place on December 6, 1994. Clause 2.4 of the April Agreement does not appear in the agreement signed at the closing. However, a general release was signed the same day in a separate document: LSI, Mr. Lepage and Mr. Hakim together with other parties released Mr. Ishak, his wife and two other corporations from any liabilities. There is no specific reference to the "loans receivable from directors". Mr. Ishak was concerned about the deletion of his clause 2.4, however his lawyer satisfied him that the general release would cover that aspect.
[15] Mr. Ishak acknowledged that he reviewed his 1994 tax return before signing and filing it. He stated that he did not provide any information with respect to the advances he had received because he believed that he did not owe anything to LSI prior to December 6, 1994.
[16] During his testimony, the auditor for the Minister confirmed that he was aware that the burden of proof was on the Minister because the assessment took place outside the normal reassessment period. In his view, Mr. Ishak had made misrepresentations with respect to the forgiven loans and the auditor relied on the fact that the amount forgiven was quite substantial. Based on his own experience, a taxpayer could not forget such a substantial debt.
[17] With respect to the existence of the outstanding loans, the auditor relied on a schedule apparently prepared by SLF (Exhibit A-3) (1994 SLF Schedule) entitled "A.C. Leslie, Advances Receivable, August 31, 1994". It seems to be dated December 12, 1994 (12/9/94).[1] The closing balance of this "Advances Receivable" account as of August 31, 1993 is $66,842 and Mr. Ishak's share is shown as being $33,051. During the 1994 fiscal period, an addition of $1,300 is made to Mr. Ishak's column thus producing a balance of $34,351.45 as of August 31, 1994, before that amount was written off as a bonus. The outstanding amounts owing by the other two directors are $26,708.49 for Mr. Lepage and $28,845.45 for Mr. Hakim, for a total of $81,905.39.
[18] The above-mentioned schedule shows an adjustment entry recording a write-off of all the advances owing by Messrs. Ishak, Hakim and Lepage, and treating them as bonuses. Mr. Ishak claims that he was never informed about that adjustment entry. He never received any T4 slip showing the bonus as employment income.[2] Mr. Hakim acknowledged in his testimony that he had not informed Mr. Ishak that the advances had been converted into bonuses.[3]
[19] Mr. Ishak stated that the Minister's auditor asked him in the fall of 1998 for information about a loan of $34,351.45 that had been written off. Apparently the auditor had not been able to obtain such information from the company. Given that at that particular time he was no longer connected in any way with LSI, Mr. Ishak did not see how he could get any more information than the Minister's tax auditor. The only information that Mr. Ishak was able to obtain was faxed to him on March 22, 1999 by LSI's controller.
[20] On that fax (LSI Fax), filed as Exhibit A-4, appears the following information:
Advances
Date Entry Mr. Ishak
Oct. 92 j764 1,000.00
Nov. 92 j1287 (1,000.00)
Dec. 92 j1957 2,000.00
j2053 1,500.00
Jan. 93 j2719 (2,000.00)
j2720 (1,500.00)
Feb. 93 j2913 5,000.00
j2915 (2,188.26)
j2919 (54.83)
j3149 5,000.00
Mar. 93 j3888 5,000.00
Jun. 93 j5360 300.00
j5437 500.00
13,556.91
reallocate 909.10
diff 18,585.44*
per SLF schedule Aug 93 33,051.45
Oct. 93 j447 1,300.00
Mar. 94 j1633 3,000.00
j1838 (3,000.00)[4]
1,300.00
per SLF schedule Aug 94 34,351.45
*These were expenses that were disallowed by the company at the end of the year. According to Eddie, these related to expenses included during your trip to Egypt, etc.
[21] This LSI fax attempts to reconstruct the Advances Receivable account for the year ended on August 31, 1993, the worksheet for which was never filed in Court. It lists net disbursements of $13,556.91, an amount representing total advances of $20,300 minus reimbursements of $6,743.09. In his testimony, Mr. Hakim acknowledged that he had not seen the LSI fax before it was sent to Mr. Ishak.
[22] With respect to the $18,585 shown on the LSI fax as expenses for which reimbursement was refused by LSI, Mr. Ishak states that he never requested any reimbursement for expenses relating to his trip to Egypt. Mr. Ishak also filed his own reconciliation sheet (Exhibit A-6), which provides a list of monthly expenses which he incurred from August 1992 to June 1993 on behalf of LSI. They total $18,588.07. The reconciliation sheet shows total reimbursements of $6,798.87 and advances of $23,600. It was prepared mostly from the information appearing on the monthly reports filed as Exhibit A-5. That information is as follows:
Reimbursements
Expenses Cheques Advances
Aug-92 2,692.75 1,000.00 (not on schedule)
Sep-92 2,294.50 1,000.00 (not on schedule)
Oct-92 2,092.02 1,000.00
4,079.27
Nov-92 2,188.26
Dec-92 3,554.83 2,000.00
1,500.00
Jan-93 1,839.78
Feb-93 1,206.33 5,000.00
5,000.00
Mar-93 5,000.00
Apr-93 688.58 688.58
May-93 797.16 797.16
Jun-93 1,233.86 1,233.86 300.00
500.00
Oct-93 1,300.00
Mar-94 ________________________________
18,588.07 6,798.87 23,600.00
[23] If we add all the amounts that Mr. Ishak received either as advances or as reimbursements of expenses, they total $30,399. Subtracting from this amount the $18,588 of expenses shown in the expenses report leaves a balance of $11,811 which is not accounted for. Mr. Ishak claims that this amount of $11,811 was offset by his pre-acquisition expenses. Those expenses include SLF's fees of $5,600 for the business plan and RoyNat's fees of $7,500 and thus total at least $13,100. As that amount exceeds the amount not accounted for of $11,811, Mr. Ishak argues that he did not owe any more money to LSI on December 6, 1994. He insists that the amount of $13,100 represented only a portion of all the pre-acquisition expenses that he had incurred on behalf of LSI from the fall of 1991 to mid-summer 1992.
Analysis
[24] The issue raised in this appeal is a factual one: Was there an outstanding amount of $34,351.45 owed by Mr. Ishak on a loan from LSI that was forgiven, as the respondent submits, in the 1994 calendar year (which is the relevant taxation year for Mr. Ishak)? If any such outstanding loan was completely offset by amounts that were owed by LSI to Mr. Ishak, then no portion of the outstanding loan could be considered to have been forgiven so as to confer a benefit on him.
[25] I find it quite unsatisfactory that the only basis for determining the existence of Mr. Ishak's share of the "loans receivable from directors" was the 1994 SLF schedule introduced without the testimony of the accountant who had prepared it. In addition, we do not have the equivalent schedule for the 1993 taxation year. No copy of the appropriate journal describing in detail all the amounts paid to Mr. Ishak as advances was produced at the hearing. When Mr. Ishak asked for details about what he owed LSI, the controller only provided the LSI fax which shows advances to Mr. Ishak aggregating $20,300 and reimbursements of $6,743.09, with the appropriate journal entry numbers. No explanation was offered with respect to those journal entries. Nor was any given concerning the item described as "reallocate 909.10". Finally, the amount of $18,585 shown as "diff" seems to have been determined by subtracting from the amount appearing on the 1994 SLF schedule as the opening balance for Mr. Ishak the aggregate of the net amount of $13,556.91 and the "reallocate" amount of $909.10.
[26] I believe that the evidence introduced as Exhibits A-5 and A-6 by Mr. Ishak has more weight with respect to the advances amounting to $23,600 made to him, the expenses of $18,588 claimed by Mr. Ishak and the reimbursements totalling $6,798.87 made by LSI. The expenses of $18,585 (shown on the LSI fax) could not represent expenses for a trip to Egypt because those expenses ($18,588 according to the reconciliation sheet of Mr. Ishak and the expense reports) were incurred between February 1992 and June of 1993 while the trip to Egypt took place in July and August 1993. Mr. Ishak also stated that he never claimed any expenses relating to his trip to Egypt. Therefore, it is very doubtful that the description appearing in the LSI fax is accurate.[5]
[27] When Mr. Ishak testified, Mr. Hakim was in the room and he heard Mr. Ishak's explanation that he had incurred expenses prior to the acquisition of LSI. When Mr. Hakim testified, he never contradicted Mr. Ishak's testimony on that particular aspect. Furthermore, Mr. Hakim never stated that the claim for SLF's $5,600 fees made in the October 28, 1994 letter was frivolous. Therefore, I accept Mr. Ishak's testimony that he incurred at least $13,100 of pre-acquisition expenses that were not reimbursed.
[28] I also accept Mr. Ishak's evidence that he received from LSI only $30,399 (that is, $23,600 in advances and $6,799 in reimbursements) and that he incurred on behalf of LSI $18,588 in expenses that were not reimbursed to him. Therefore, those expenses could be considered to have been paid by being set off against a portion of the advances. This would leave an amount of $11,811 of advances unaccounted for. Given that the pre-acquisition expenses represent at least $13,100, in 1994 Mr. Ishak would not have owed any debt to LSI that could have been forgiven. Therefore no benefit would have been conferred to him on 1994.
[29] Even if the outstanding loans really amounted to $34,351 (and not $30,399), the unaccounted for balance of the outstanding loan amount would represent $2,673 ($34,351 - $18,588 - $13,100). Given this small unaccounted for amount, I would be prepared to accept Mr. Ishak's testimony that he had incurred at least an extra $2,673 of expenses during the pre-acquisition negotiations.
[30] So overall, I conclude on a balance of probabilities that Mr. Ishak did not owe any money to LSI in 1994. Whatever he may have owed was offset by business expenses incurred in the 1993 fiscal period and by pre-acquisition costs.
[31] For all these reasons, the appeals of Mr. Ishak are allowed and the assessments for the 1994 and 1995 taxation years are referred back to the Minister for reassessment on the basis that the amount of $34,351.45 is to be excluded from his income for the 1994 taxation year.
Signed at Montréal, Quebec, this 26th day of August 2001.
"Pierre Archambault"
J.T.C.C.
COURT FILE NO.: 2000-260(IT)I
STYLE OF CAUSE: MAHER AZIZ ISHAK
and Her Majesty the Queen
PLACE OF HEARING: Montreal, Quebec
DATE OF HEARING: December 1st, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge Pierre Archambault
DATE OF JUDGMENT: March 15, 2001
APPEARANCES:
Agent for the Appellant: David Wilkenfeld
Counsel for the Respondent: Sophie Alain
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1349(IT)I
BETWEEN:
EVELYN ELLEN WILSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 11, 2001 at Toronto, Ontario, by
the Honourable Judge T.E. Margeson
Appearances
Counsel for the Appellant: John David Buote
Counsel for the Respondent: Meghan Castle
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1996 taxation year is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment in order for the Minister to reconsider any proper receipts in support of any allowable medical expenses in support of this claim when they are presented.
In all other respects, the appeal is dismissed and the Minister's assessment is confirmed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 10th day of September 2001.
|
"T.E. Margeson" |
J.T.C.C.
[1] Mr. Hakim acknowledged that the advances were written off by SLF after the 1994 year-end.
[2] It should be noted that Mr. Ishak's tax return was not filed by the respondent. It seems that it may have been destroyed because even the Minister's notice of reassessment is a reconstructed copy of the original.
[3] Messrs. Hakim and Lepage did not include in their income their "bonus" resulting from the write-off of their advances either because SLF had not included that bonus in their T4s. When notified however by the Minister's auditor, both those executives agreed to pay their taxes on the bonus amount.
[4] This entry looks like the reversal of the previous one.
[5] It should be stressed that the statement appearing as a footnote in the LSI fax was written by a person who did not testify and is based on a statement made by another person, apparently Mr. Hakim, who acknowledged that he had not seen the fax before it was sent to Mr. Ishak.