Tax Court of Canada Judgments

Date: 20030130

Docket: 2000-3334(IT)G

BETWEEN:

MICHAEL S. CHOMICA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

_______________________________________________________________

Appeal heard on January 8 and 9, 2003 at Toronto, Ontario

Before: The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances:
Counsel for the Appellant:	Graham F. Pinos, Q.C.
Counsel for the Respondent:	Suzanne M. Bruce

_______________________________________________________________

JUDGMENT

          It is ordered that the appeal from the assessment made under the Income Tax Act for the 1994 taxation year be allowed and the assessment be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant's income in 1994 was $20,159.

Signed at Ottawa, Canada, this 30th day of January 2003.

"D.G.H. Bowman"

A.C.J.

Date: 20030130

Docket: 2000-3334(IT)G

BETWEEN:

MICHAEL S. CHOMICA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Bowman, A.C.J.

[1]      This appeal is from an assessment for the appellant's 1994 taxation year, for which the appellant did not file an income tax return. By that assessment the Minister of National Revenue added the sum of $184,175 to the appellant's income being the total of $159 interest income (which the appellant does not contest) and $184,016 as "unreported commission income" (which he does contest). $184,016 is the Canadian dollar equivalent of $134,712 US which the Minister assumed was received by the appellant as commissions from a company, Hi-Tech Trading Corporation, from his participation in a scheme to defraud American investors by enticing them into transactions involving the metals indium and germanium. The Minister also assumed that the appellant participated in the scheme under a false name, Michael Colby.

[2]      The disposition of this case depends solely upon the evidence and involves a consideration of principles relating to onus of proof in civil cases, and specifically in income tax appeals. Since the respondent has put the appellant's credibility in issue a brief description of the background facts is in order.

[3]      The appellant's counsel described him as a racing tout - a person who earns his living betting on horses. He is 46 years of age and left school before completing grade 10. He went to work at the Ontario Jockey Club as a mutual teller for about 11 years at racetracks in Ontario such as Old Greenwood, Garden City, Mohawk and Woodbine. The circumstances of his leaving his employment were not disclosed in the evidence. For about three years after leaving his employment he devoted himself full time to gambling, but, apparently, not too successfully. He became indebted and decided that staying around Toronto might be injurious to his health. His creditors, it seems, were not gentlemen.

[4]      He went to Amsterdam in April 1986 and met some Canadians in a nightclub who offered him a job selling shares by telephone. His employer was a company called Regent Capital Corporation. He was given a list of potential customers who lived all over the world. His job was to contact them by telephone and persuade them to buy stocks listed on the Alberta Stock Exchange. He had no training in selling stocks and if a licence to sell stocks in Holland was required he had none. He was paid a commission in cash and a living allowance.

[5]      In October he left Amsterdam and went to Geneva, Switzerland, where he worked at the same sort of thing for a company known as Falcon Trust Financial/Equity Management Services. The stocks sold from Geneva were not listed on any stock exchange. In May 1987 he left Geneva and went to Madrid where he engaged in the same sort of activity for a company, International Investment Consultants. In his forays into the murky world of international telephone peddling of stocks he did not use his real name. He used such names as Michael Preston, Michael Wainright and Michael Philips. He stated that he did not know why his employers told him to do so.

[6]      He says that he was able to save about $150,000 US when he was working in Europe which he brought back to Canada in December 1987.

[7]      On his return to Canada he paid off his debts and resumed gambling, which involved betting on harness racing.

[8]      In June 1992 he incorporated a company called Crown Capital Management Corporation ("CCMC"). He was the sole shareholder and director. He stated that his reason for incorporating it was to create a business structure but what that business structure was to be is unclear.

[9]      In 1994 he was introduced by somebody called Walter to a shadowy character who went under the name of Sean in a Pat & Mario's restaurant. He never did learn Sean's last name. He and Sean entered into an oral arrangement whereby his company CCMC rented space at 250 King Street East, Toronto in June or early July. It was above a store and consisted of three rooms plus a living room, a kitchenette and a shower. He had four phone lines installed in the name of CCMC.

[10]     The appellant's evidence was that he did not know the names of the people who used the phone lines. His job was to keep the place clean and take out the garbage.

[11]     He says that he was generally aware that some sort of telemarketing operation was going on. The names he did know were Sean (last name not known), Walter Fantin and Michael Colby who, he says, was often drunk. He admits that he occasionally helped Michael Colby to prepare fax cover sheets. He admits that it is his handwriting on two fax cover sheets on the letterhead of Hi-Tech Trading Corporation.

[12]     The appellant says he was paid cash by Sean in the amount of about $400 or $500 per week, plus expenses plus 5%.

[13]     The amounts of the phone bills in respect of the four phone lines came to CCMC at 250 King Street East, Toronto and he says were paid to him in cash by Sean and he paid the telephone company in cash. The bills were very large and were mostly for calls to the United States. Some were to Nassau to the number of Hi-Tech Trading Corporation. There were also calls to the United Kingdom and other European countries and Hong Kong. Clearly, the telemarketing scheme was extensive. It lasted a few months at the King Street location and the lease was terminated in October 1994.

[14]     The assessment is based on the assumption that the appellant earned $134,712 US as commission for his participation in the scheme.

[15]     The appellant denies that he was operating under the name of Michael Colby or that he was involved in the telemarketing scheme except to the extent of renting 250 King Street East, paying the phone bills and taking care of the property or that he received commissions in the amount assessed or at all.

[16]     I start from the observation that in my view the whole business smells to high heaven. It was operated by unsavoury characters who, if they were lucky, managed to keep one jump ahead of the law and, if they were not, got caught. However just because I have or happen to dislike and distrust people who are involved in these schemes does not mean that I can totally ignore the rules of evidence and base my decision on visceral instincts and inadmissible evidence.

[17]     The fundamental rule in income tax appeals and that is that the taxpayer has the onus of demonstrating that the factual assumptions upon which the assessment is based are wrong or do not support the assessment. This rule is well settled and I need not repeat the usual authorities that are traditionally cited in support of it. However the standard of proof is a civil one and a prima facie case, if unrebutted, will entitle a taxpayer to succeed.

[18]     The law has been refined somewhat since Johnston v. M.N.R., [1948] S.C.R. 486, and specifically in Hickman Motors Limited v. The Queen, 97 DTC 5363 (S.C.C.), where L'Heureux-Dubé J. said at pages 5376-7:

K. Onus of Proof

As I have noted, the appellant adduced clear, uncontradicted evidence, while the respondent did not adduce any evidence whatsoever. In my view, the law on that point is well settled, and the respondent failed to discharge its burden of proof for the following reasons.

It is trite law that in taxation the standard of proof is the civil balance of probabilities: Dobieco v. M.N.R., [1966] S.C.R. 95, and that within balance of probabilities, there can be varying degrees of proof required in order to discharge the onus, depending on the subject matter: Continental Insurance v. Dalton Cartage, [1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 DTC 1102 (T.C.C.) at p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge Estates v. M.N.R., 59 DTC 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to "demolish" the Minister's assumptions in the assessment (Johnston v. M.N.R., [1948] S.C.R. 486; Kennedy v. M.N.R., 73 DTC 5359 (F.C.A.), at p. 5361). The initial burden is only to "demolish" the exact assumptions made by the Minister but no more: First Fund Genesis v. The Queen, 90 DTC 6337 (F.C.T.D.), at p. 6340.

This initial onus of "demolishing" the Minister's exact assumptions is met where the appellant makes out at least a prima facie case: Kamin v. M.N.R., 93 DTC 62 (T.C.C.); Goodwyn v. M.N.R., 82 DTC 1679 (T.R.B.). In the case at bar, the appellant adduced evidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, the appellant "demolished" the following assumptions as follows: (a) the assumption of "two businesses", by adducing clear evidence of only one business; (b) the assumption of "no income", by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence "demolishes" the Minister's assumptions: see for example MacIsaac v. M.N.R., 74 DTC 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87 DTC 652 (T.C.C.). As stated above, all of the appellant's evidence in the case at bar remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions of "two businesses" and "no income" have been "demolished" by the appellant.

Where the Minister's assumptions have been "demolished" by the appellant, "the onus shifts to the Minister to rebut the prima facie case" made out by the appellant and to prove the assumptions: Maglib Development Corp. v. The Queen, 87 DTC 5012 (F.C.T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are "two businesses" and "no income".

Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac, supra, where the Federal Court of Appeal set aside the judgment of the Trial Division, on the grounds that (at pp. 6381-2) the "evidence was not challenged or contradicted and no objection of any kind was taken thereto". See also Waxstein v. M.N.R., 80 DTC 1348 (T.R.B.); Roselawn Investments Ltd. v. M.N.R., 80 DTC 1271 (T.R.B.). Refer also to Zink v. M.N.R., supra, at p. 653, where, even if the evidence contained "gaps in logic, chronology and substance", the taxpayer's appeal was allowed as the Minster failed to present any evidence as to the source of income. I note that, in the case at bar, the evidence contains no such "gaps". Therefore, in the case at bar, since the Minister adduced no evidence whatsoever, and no question of credibility was ever raised by anyone, the appellant is entitled to succeed.

In the present case, without any evidence, both the Trial Division and the Court of Appeal purported to transform the Minister's unsubstantiated and unproven assumptions into "factual findings", thus making errors of law on the onus of proof. My colleague Iacobucci, J. defers to these so-called "concurrent findings" of the courts below, but, while I fully agree in general with the principle of deference, in this case two wrongs cannot make a right. Even with "concurrent findings", unchallenged and uncontradicted evidence positively rebuts the Minister's assumptions: MacIsaac, supra. As Rip, T.C.J., stated in Gelber v. M.N.R., 91 DTC 1030, at p. 1033, "[the Minister] is not the arbiter of what is right or wrong in tax law". As Brulé, T.C.J., stated in Kamin, supra, at p. 64:

...

the Minister should be able to rebut such [prima facie] evidence and bring forth some foundation for his assumptions.

...

The Minister does not have a carte blanche in terms of setting out any assumption which suits his convenience. On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption.

[Emphasis added.]

In my view, the above statement is apposite in the present case: the respondent, on being challenged by evidence in chief, failed to present anything more concrete than simple assumptions and failed to bring forth any foundation. The respondent chose not to rebut any of the appellant's evidence. Accordingly, the respondent failed to discharge her onus of proof.

I note that, in upholding the Minister's unproven assumptions, my colleague Iacobucci, J. may be seen as reversing the above-stated line of caselaw, without explicitly providing the rationale for doing so. With respect for the contrary opinion, in my view, changes in the jurisprudence regarding the onus of proof in tax law should be left for another day. Furthermore, on the facts of the case at bar, sanctioning the respondent's total lack of evidence could seem unreasonable and perhaps even unjust, given that the appellant complied with a well-established line of jurisprudence as regards its onus of proof.

[19]     In this case we have the appellant's testimony that he did not earn commissions of $134,712 US from Hi-Tech Trading Corporation and earned no more than about $20,000 for what he did, which did not involve selling. He was, it is true, cross-examined so that I do not think counsel for the respondent was precluded from questioning his credibility in argument on the basis of Browne v. Dunn, (1893) 6 R. 67 (H.L.) at pages 70-71, discussed at length in The Law of Evidence in Canada, second edition, (Sopinka, Lederman and Bryant) at pages 954-957. I do not think, however, that the cross-examination destroyed the prima facie made out by the appellant in his examination in chief. I may entertain some lingering doubts about the appellant's reliability as a witness but it would take more than suspicion for me to say that he was lying under oath. As I said in 1084767 Ontario Inc. (c.o.b. Celluland) v. Canada, [2002] T.C.J. No. 227:

8           The evidence of the two witnesses is diametrically opposed. I reserved judgment because I do not think findings of credibility should be made lightly or, generally speaking, given in oral judgments from the bench. The power and obligation that a trial judge has to assess credibility is one of the heaviest responsibilities that a judge has. It is a responsibility that should be exercised with care and reflection because an adverse finding of credibility implies that someone is lying under oath. It is a power that should not be misused as an excuse for expeditiously getting rid of a case. The responsibility that rests on a trial judge to exercise extreme care in making findings of credibility is particularly onerous when one considers that a finding of credibility is virtually unappealable.

[20]     Since the cross-examination by itself was insufficient to displace the prima facie case established by the appellant's own oral testimony I must look to whatever other evidence was presented.

[21]     The Crown called three witnesses, Mr. Ron Bélanger, a former RCMP officer now working for the Bank of Montreal, Mr. Angelo Villella, an employee of the CCRA and the team leader for the Special Enforcement Program, and Mr. Alan Benlolo, whose involvement in the Hi-Tech Trading telemarketing scheme will be described later in these reasons.

[22]     Mr. Bélanger and Mr. Villella were both perfectly credible and intelligent witnesses. Mr. Bélanger was a sergeant in the commercial crimes unit and was involved in the investigation of the telemarketing scheme. He investigated Alan Benlolo and received information about the operations of the telemarketing scheme, including the practice of moving from one location to another, specifically, Concord, Ontario, Champagne Drive and King Street, Toronto.

[23]     His evidence was interesting and credible but it did nothing to establish that the appellant was involved in the scheme or that he received commissions from Hi-Tech Trading. Indeed it did not connect the appellant at all to the Hi-Tech Trading operation on King Street.

[24]     The same can be said of Mr. Villella. He was a conscientious public servant who reviewed the report of Ms. Currie, the auditor. As Mr. Pinos established in cross-examination, Mr. Villella's evidence is essentially third hand hearsay. The auditor's report, and the assessment itself, seem to be based upon some memoranda which were in the respondent's book of documents as tabs A, B and C of Tab 18. They state that Michael Colby, who carried the salesman's designation # 3, was really Michael Chomica and that #3 received commissions for sales of metal from Hi-Tech Trading Corporation totalling $134,712 (presumably US).

[25]     The auditor, Ms. Currie, was not called. She was absent on sick leave. Counsel for the respondent argued that the rules relating to the admission of hearsay evidence had been expanded by the Supreme Court of Canada in a number of recent cases, notably, R. v. Smith, [1992] 2 S.C.R. 915; R. v. Khan, [1990] 2 S.C.R. 531; R. v. Finta, [1994] 1 S.C.R. 701; R. v. B. (K.G.), [1993] 1 S.C.R. 740. Some inroads had already been made in Ares v. Venner, [1970] S.C.R. 608.

[26]     I do not intend this judgment to be a discussion of the recent developments in the hearsay rule. That it is an evolving concept is unquestioned, as is obvious from the discussion in The Law of Evidence in Canada, supra, at pages 187 to 220. The rule nonetheless continues to exist and effect must be given to it. Even if I believed that I could stretch the principles stated in the recent cases, which require at least reliability and necessity, the assessor's report and the memoranda would still have to be excluded. For example, no witness was able to say who prepared the memoranda found at tabs A, B and C of Tab 18. They were said to be based on material seized by the police from files from the personal computer of Alan Benlolo by a detective.

[27]     Such material is at best unreliable and at most wholly inadmissible as evidence.

[28]     Such reports of the CCRA (T-20 and T-401 reports) may be put in evidence for the limited purpose of showing the basis on which an assessment is made but not as evidence of the truth of their contents. There can be no objection to the CCRA basing its assessments on hearsay - it must of necessity base its assessing action on such material as is available, even though such material may be hearsay.[1] However, when the respondent is called upon to justify an assessment by calling evidence it must be evidence that is admissible under the ordinary rules governing admissibility.

[29]     Not only must the rules of evidence be followed, particularly in cases governed by the General Procedure - but also, where serious allegations of fraud are made the court must scrutinize such evidence very carefully. Madam Justice L'Heureux-Dubé alluded to this in the second paragraph of her judgment in Hickman Motors which is quoted above.

[30]     In Farm Business Consultants Inc. v. The Queen, 95 DTC 200 aff'd 96 DTC 6085, the same point was made about the care with which evidence adduced to establish penalties must be scrutinized, even where the standard of proof is a civil one. We are not dealing with penalties here, but we are dealing with an allegation that the appellant participated in a fraudulent scheme. At pages 205-6 , the following was said:

            A court must be extremely cautions in sanctioning the imposition of penalties under subsection 163(2). Conduct that warrants reopening a statute-barred year does not automatically justify a penalty and the routine imposition of penalties by the Minister is to be discouraged. Conduct of the type contemplated in paragraph 152(4)a)(i) may in some circumstances also be used as the basis of a penalty under subsection 163(2), which involves the penalizing of conduct that requires a higher degree of reprehensibility. In such a case a court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established.³ Moreover, where a penalty is imposed under subsection 163(2) although a civil standard of proof is required, if a taxpayer's conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted.⁴ I think that in this case the required degree of probability has been established by the respondent, and that no hypothesis that is inconsistent with that advanced by the respondent is sustainable on the basis of the evidence adduced.

___________________

³            Cf. Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; 131 D.L.R. (3d) 559; 25 C.P.C. 72, per Laskin, C.J.C. at 168-171; D.L.R. 562-564; C.P.C. 75-77; Bater v. Bater, [1950] 2 All E.R. 458 at 459; Pallan et al. v. M.N.R., 90 DTC 1102 at 1106; W. Tatarchuk Estate v. M.N.R., [1993] 1 C.T.C. 2440 at 2443.

⁴            This is not simply an extrapolation from the rule in Hodge's Case (1838) 2 Lewin 227; 168 E.R. 1136, applicable in criminal matters such, for example, as section 239 of the Income Tax Act where proof beyond a reasonable doubt is required. It is merely an application of the principle that a penalty may be imposed only where the evidence clearly warrants it. If the evidence is consistent with both the state of mind justifying a penalty under subsection 163(2) and the absence thereof - I hesitate to use the words innocence or guilt in these circumstances - it would mean that the Crown's onus had not been satisfied.

[31]     The only other witness called by the Crown was Mr. Alan Benlolo. He was a reluctant witness and appeared under subpoena. He had been indicted and charged in Pennsylvania for his participation in the fraudulent telemarketing scheme involving the sale of indium. He pleaded guilty and was incarcerated for 18 months.

[32]     He stated that he would pack the indium and ship it from home. He said he did not remember the King Street property. He recalls a detective coming to his property with a search warrant and taking his computer.

[33]     His evidence was of no assistance to the Crown. On cross-examination he stated that he did not know the appellant and did not recognize him.

[34]     He was not a particularly cooperative witness when being examined by counsel for the respondent. Although counsel did not ask to have him declared to be a hostile witness his demeanour in examination in chief was such that Crown counsel would have been justified in asking him leading questions as permitted by subsection 144(4) of the Tax Court of Canada Rules (General Procedure).

[35]     Counsel for the respondent put to Mr. Benlolo an affidavit that he had signed on September 29, 1997. He admitted his signature but denied knowledge of its contents and said it was written by someone else and was signed by him simply to get out of prison where he was confined after his arrest before being extradited to Pennsylvania. I place no reliance on anything he said in the affidavit which was signed on the day he pleaded guilty to the charges in Pennsylvania and it in fact describes his guilty plea. In any event it says nothing about the appellant receiving commissions from Hi-Tech Trading. The only reference to the appellant (whose name was misspelt) is on page 10 of Mr. Benlolo's affidavit where he says

The following is a list of those salespeople who worked at HI-TECH TRADING and the location of the telephone rooms:

...

Room 3 (WALTER FANTIN was paid 50% of all sales made from this location).

-            WALTER FANTIN

-            MICHAIL CHOMICA

[36]     Even if one were to accept these statements at their face value they prove precisely nothing about the appellant's participation in the scheme or his remuneration.

[37]     In short, the appellant has made out a prima facie case that he did not receive commissions of $134,712 US and the Crown has not rebutted that case with any admissible evidence.

[38]     The appellant has admitted to receiving no more than $20,000 Canadian from Hi-Tech Trading as well as interest of $159. He should be taxed on $20,159 in 1994 and no more.

[39]     The appeal is allowed with costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant's income in 1994 was $20,159.

Signed at Ottawa, Canada, this 30th day of January 2003.

"D.G.H. Bowman"

A.C.J.

COURT FILE NO.:

2000-3334(IT)G

STYLE OF CAUSE:

Between Michael S. Chomica and Her Majesty The Queen

PLACE OF HEARING

Toronto, Ontario

DATE OF HEARING

January 8 and 9, 2003

REASONS FOR JUDGMENT BY:

The Honourable D.G.H. Bowman Associate Chief Judge

DATE OF JUDGMENT

January 30, 2003

APPEARANCES:

Counsel for the Appellant:

Graham F. Pinos, Q.C.

Counsel for the Respondent:

Suzanne M. Bruce

COUNSEL OF RECORD:

For the Appellant:

Name:	Graham F. Pinos, Q.C.
Firm:	Ajax, Ontario

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada