Citation: 2012 TCC 371
Date: 20121019
Docket: 2011-3871(IT)I
BETWEEN:
HASSAN YAZDANI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
These are appeals under
the informal procedure from reassessments made under the Income Tax Act,
R.S.C. 1985, c. 1. (5th Supp.), as amended (the "Act"),
by the Minister of National Revenue (the "Minister") with regard to
the Appellant’s 2002 and 2003 taxation years.
[2]
The issues are:
(a) whether the Appellant is entitled to claim with
respect to an investment called the investment in RTI (the "Investment")
deductions in the amounts of $27,510 and $8,873 for the 2002 and 2003 taxation
years respectively;
(b) whether the Appellant, in reporting his income and
expenses and in filing his income tax returns for the 2002 and 2003 taxation
years, made a misrepresentation attributable to neglect, carelessness or wilful
default with respect to those years.
Background information
[3]
In filing his income
tax returns for 2002 and 2003, the Appellant claimed on the income and expense
statements submitted for the Investment deductions in the amounts of $27,510
and $8,873 respectively. More specifically:
a) on April 14, 2003, the Appellant filed an unsigned
2002 personal income tax return claiming a refund in the amount of $13,480.45;
and
b) on March 9, 2004, the Appellant filed a signed 2003
personal income tax return claiming a refund in the amount of $12,525.97.
[4]
The Minister initially
assessed the Appellant’s 2002 and 2003 income tax returns as filed and allowed
the deduction claimed with respect to the Investment by notices dated May 5,
2003 and April 14, 2004 respectively.
[5]
The Appellant was reassessed
on October 7, 2010 (the "October 2010 Reassessments") for the 2002
and 2003 taxation years. The reassessments disallowed the deduction claimed for
the Investment.
[6]
The 2002 and 2003
taxation years were reassessed beyond the normal reassessment period.
[7]
The Appellant objected
to the October 2010 reassessments by serving a Notice of Objection postmarked
on December 8, 2010 and received by the Minister on December 9, 2010.
[8]
The Minister negotiated
a settlement with the Appellant, and on September 22, 2011:
a) with agreement, the Minister varied the
reassessment for the 2003 taxation year, allowing a capital loss of $25,250 and
an allowable net capital loss of $12,625; and
b) the Minister issued a notification of confirmation
for the 2002 taxation year.
Assumptions of fact made by the Minister
[9]
In determining the Appellant’s
liability for the 2002 and 2003 taxation years, the Minister relied on the
following assumptions of fact set out in paragraph 8 of the Reply to the
Notice of Appeal:
In
determining the Appellant’s tax liability for the 2002 and 2003 taxation years,
the Minister made the following assumptions of fact:
a) the
facts as stated and admitted above;
The Appellant
b) the
Appellant’s professional background is that of a machinist;
c) during 2002 and 2003, the Appellant received $62,518 and
$58,135, respectively, from an employer named Richmond Machine Works Ltd.
("Machine Works");
The Self-Employed Business
d) during 2002 and 2003, the Appellant operated a sole
proprietorship under the business name Yazdani Enterprises ("Enterprises"),
providing services to clients in the greater Vancouver, British Columbia lower
mainland area;
e) the
stated nature of Enterprises was machining;
f) Enterprises was operated:
i) after the Appellant completed his regular employment
duties with Machine Works; and
ii) from the Appellant’s principal residence, located in Coquitlam, British Columbia;
g) Enterprises operated from January 1 to December 31, in
both 2002 and 2003;
Gross Business Income
h) the Appellant earned gross business income from
Enterprises of $12,692 and $10,481 in 2002 and 2003, respectively;
Enterprises Expenses
i) the Appellant incurred
cost of goods sold and business expenses in the amounts of $24,704 and $42,224
in 2002 and 2003, respectively, as detailed in the attached Schedules "A"
and "B";
j) the expenses claimed in excess of those allowed by the
Minister for 2002 and 2003 in respect of Enterprises, as detailed in the
attached Schedules "A" and "B", respectively, were not
incurred or if they were incurred, they were not incurred to earn business
income or were capital expenditures;
The Actual RTI Investment
k) during 2001, the Appellant paid his former accountant,
Samir Fawaz ("Fawaz") a total of $31,000 for the Investment;
l) the invested amount was forwarded to Sawaz [sic] for
an interest in either a:
i) tax
cab leasing business; and/or
ii) training
school;
m) the
Investment was known as:
i) Regions
Co of Shipping;
ii) Regions
Company of Shipping Transport & Clearing;
iii) Regions
Training Institute; and
iv) RTI;
n) during the 2001, 2002 and 2003 taxation years, the
Appellant was not directly involved with the operations of Regions;
o) during the 2002 taxation year, the Appellant received
back from Regions the following payments on the following dates:
i) $1,750
on January 7, 2002;
ii) $2,000
on June 7, 2002;
iii) $2,000
on September 30, 2002; and
iv) $1,200
on December 19, 2002;
p) in total, the Appellant received back $6,950 from his
investment in Regions;
q) the residual amount not returned by either Regions or by
Sawaz [sic], during the 2002 or the 2003 taxation year was $24,050;
r) the Minister, in error, determined that the residual
amount not returned was $25,250 (the "Loss");
s) the Appellant had not previously included the Loss as a
source of business income in either the 2002 or 2003 taxation years or in other
years;
t) the
Loss was not a bad debt; and
u) the
Loss was on account of capital.
[10]
In determining that the
Appellant made a misrepresentation attributable to neglect, carelessness or
wilful default or fraud in filing his returns for the 2002 and 2003 taxation
years, the Minister relied on the following facts set out in paragraph 9
of the Reply to the Notice of Appeal:
a) the
facts already stated and admitted in this Reply;
b) when interviewed by Yang and a second investigator on
January 4, 2010, the Appellant could not recall making the Investment;
c) the Appellant testified in detail about Regions with
respect to his wife’s Tax Court of Canada appeals, which are Court Numbers
2007-2655(EI) and 2007-2656(CPP);
d) the
Appellant knew that Regions had a cash flow problem; and
e) the Appellant’s claimed losses of $27,510 in 2002 and
$8,873 [in 2003] from the Investment represented 44 percent and 18 percent,
respectively, of his before tax income in those taxation years and were,
therefore, material.
[11]
The Appellant testified
at the hearing and he confirmed that his tax returns for the 2002 and 2003
taxation years were prepared by his former accountant, Fawaz, who was using
fraudulent practices to obtain investments from his clients. The Appellant told
the Court that Fawaz had used his business numbers to qualify another person
for employment insurance.
[12]
The Appellant was first
contacted on April 29, 2009 by Ms. Jane Yang of the Canada Revenue Agency
("CRA"), who was conducting a criminal investigation into the tax
affairs of Fawaz, and in a letter dated May 1, 2009, she asked the
Appellant to submit to an interview, on a voluntary basis, because she had
reason to believe that he might have information that would assist in the
investigation. Although Ms. Yang clearly stated in that letter that the
Appellant and his company were not under audit or investigation, the points for
discussion specifically referred to were the following: (i) the Investment,
as claimed in his 2002 and 2003 tax returns; (ii) the payments made to or
received from Fawaz and/or his companies; and (iii) the Appellant’s business
dealings with Fawaz and/or his companies. At the interview, which took place on
January 4, 2010, the Appellant informed the CRA's investigators that (i) he
trusted his accountant and did not read his income tax returns, (ii) he
did not remember making the Investment, (iii) he never bought losses from
Fawaz or from his companies, and (iv) he had never been involved in any of
Fawaz's businesses. In addition, the Appellant undertook to check his records
to provide explanations concerning the losses that he had claimed.
[13]
In his testimony, the
Appellant stated that he was cheated by the CRA and by his former accountant.
He never agreed to the September 22, 2011 settlement with the CRA whereby
his business losses for 2002 and 2003 were disallowed and a capital loss of
$25,250 was allowed for 2003, without any gross negligence penalty. He also asserted
that he had made no misrepresentation in his tax returns for the 2002 and 2003
taxation years.
[14]
Ms. Yang also
testified at the hearing, explaining that she gave the Appellant eight months
to provide any documents explaining the Investment. She never received such
documents from him, and in September 2010, a final letter was sent to the
Appellant disallowing the losses. Subsequently, the Appellant called her and
said that he could not provide the documents because the CRA had seized all his
records for the purposes of the Fawaz investigation. Ms. Yang informed the
Appellant that the documents seized were not related to his 2002 and 2003
taxation years and that they contained no evidence that would suggest that he had
made payments to RTI.
[15]
In her testimony, Ms. Yang
told the Court that the Appellant’s spouse, Sherry Pai, worked for Regions from
May 6 to October 18, 2002 and that the Appellant had testified in
detail about Regions in his spouse’s Tax Court of Canada appeals
(2008 TCC 456). Considering his testimony in those appeals, the
Appellant knew that Regions had a cash flow problem, and he could not explain
why he made additional investments in RTI in those circumstances.
[16]
The documents regarding
the Investment were submitted to the CRA on June 2, 2011 during the review
of the Appellant’s notices of objection. Among those documents were two
agreements, namely:
(a)
a "lease agreement
of four airport cabs" dated March 23, 2001 entered into between
Regions Company for Shipping Transport & Clearing and the Appellant and his
spouse, and involving an investment of $11,391.10; and
(b)
a loan agreement dated
October 12, 2001 between the Appellant and Fawaz relating to an investment
in Regions Training Institute of $35,000.00, which represented 9% of the
business. The loan was to be repaid in monthly amounts of $1,750.00 starting in
December 2001, and the agreement could be cancelled on sixty days’ written
notice by either party. No interest rate was specified in the agreement.
[17]
The loan agreement was
in effect a consolidation of all the investments made by the Appellant, as the
airport cab leasing venture was not doing well, but the total amount of the
investments made was limited to $31,000.00.
Analysis
[18]
The provisions of the Act
that are relevant in these appeals are paragraphs 3(a) and (b),
subparagraph 20(1)(p)(i), paragraphs 38(a) and (b),
paragraph 50(1)(a), and subparagraphs 152(4)(a)(i) and
152(4.01)(a)(i). Those provisions read as follows:
3.
Income for taxation year -- The income of a
taxpayer for a taxation year for the purposes of this Part is the taxpayer's
income for the year determined by the following rules:
(a) determine the total of all amounts each of
which is the taxpayer's income for the year (other than a taxable capital gain
from the disposition of a property) from a source inside or outside Canada,
including, without restricting the generality of the foregoing, the taxpayer's
income for the year from each office, employment, business and property,
(b)
determine the amount, if any, by which
(i)
the total of
(A)
all of the taxpayer's taxable capital gains for the year from dispositions of
property other than listed personal property, and
(B)
the taxpayer's taxable net gain for the year from dispositions of listed
personal property,
exceeds
(ii)
the amount, if any, by which the taxpayer's allowable capital losses for the
year from dispositions of property other than listed personal property exceed
the taxpayer's allowable business investment losses for the year,
20 (1) Deductions permitted in computing
income from business or property -- Notwithstanding
paragraphs 18(1)(a), (b) and (h), in computing a
taxpayer's income for a taxation year from a business or property, there may be
deducted such of the following amounts as are wholly applicable to that source
or such part of the following amounts as may reasonably be regarded as
applicable thereto:
. . .
(p)
Bad debts -- the total of
(i)
all debts owing to the taxpayer that are established by the taxpayer to have
become bad debts in the year and that have been included in computing the
taxpayer's income for the year or a preceding taxation year, and
38.
Taxable capital gain and allowable capital loss --
For the purposes of this Act,
(a) [taxable capital gain—general] -- subject to paragraphs (a.1)
and (a.2), a taxpayer's taxable capital gain for a taxation year from
the disposition of any property is 1/2 of the taxpayer's capital gain for the
year from the disposition of the property;
. . .
(b)
[allowable capital loss] -- a taxpayer's allowable capital loss for a taxation
year from the disposition of any property is 1/2 of the taxpayer's capital loss
for the year from the disposition of that property; and
50. (1) Debts
established to be bad debts and shares of bankrupt corporation ‑‑ For the purposes of this subdivision, where
(a)
a debt owing to a taxpayer at the end of a taxation year (other than a debt
owing to the taxpayer in respect of the disposition of personal-use property)
is established by the taxpayer to have become a bad debt in the year, or
152. (4)
Assessment and reassessment [limitation period] --
The Minister may at any time make an assessment, reassessment or additional
assessment of tax for a taxation year, interest or penalties, if any, payable
under this Part by a taxpayer or notify in writing any person by whom a return
of income for a taxation year has been filed that no tax is `ayable for the
year, except that an assessment, reassessment or additional assessment may be
made after the taxpayer's normal reassessment period in respect of the year
only if
(a)
the taxpayer or person filing the return
(i)
has made any misrepresentation that is attributable to neglect, carelessness or
wilful default or has committed any fraud in filing the return or in supplying
any information under this Act, or
. . .
(4.01)
Assessment to which par. 152(4)(a) or (b) applies -- Notwithstanding subsections (4) and (5), an assessment,
reassessment or additional assessment to which paragraph (4)(a) or (b)
applies in respect of a taxpayer for a taxation year may be made after the
taxpayer's normal reassessment period in respect of the year to the extent
that, but only to the extent that, it can reasonably be regarded as relating
to,
(a)
where paragraph (4)(a) applies to the assessment, reassessment or
additional assessment,
(i)
any misrepresentation made by the taxpayer or a person who filed the taxpayer's
return of income for the year that is attributable to neglect, carelessness or
wilful default or any fraud committed by the taxpayer or that person in filing
the return or supplying any information under this Act, or
. . .
[19]
The evidence reveals
that only $6,950 has been recovered by the Appellant on his $31,000 investment,
and there is no indication as to whether or not the amount of $6,950 represents
interest or capital or a combination of interest and capital. The documents
submitted by the Appellant as evidence of his investment do not appear to be
genuine as they contain numerous deficiencies and inconsistencies. Fawaz was
charged with income tax evasion and criminal fraud for allegedly selling
business losses to individual taxpayers.
[20]
On the other hand, the
Appellant convinced the CRA that he really did make the $31,000 investment in
Fawaz’s business, and that explains why the CRA has allowed a capital loss of
$25,250 for the 2003 taxation year pursuant to paragraph 50(1)(a)
of the Act. The Appellant has not been able to recover the balance of
his investment because Fawaz declared bankruptcy.
[21]
The Appellant was not
entitled, in computing his income for the taxation year from a business, to
deduct the amount of his loss pursuant to subparagraph 20(1)(p)(i)
of the Act because he was not carrying on a money‑lending business.
The loss was therefore on account of capital. Furthermore, the loss incurred by
the Appellant was not a bad debt that was included in computing his income for
the year or a preceding taxation year, as required by subparagraph 20(1)(p)(i)
of the Act.
[22]
Concerning the power of
the Minister to reassess with respect to the 2002 and 2003 taxation years of
the Appellant, I have concluded that the Appellant made in filing his returns
of income for the 2002 and 2003 taxation years and in supplying information under
the Act, a misrepresentation that was attributable to neglect,
carelessness or wilful default, and that it was open to the Minister to
reassess the Appellant’s tax for those taxation years.
[23]
During the
January 4, 2010 interview with the CRA’s investigators, the Appellant said
that he did not recall making any investment in Fawaz’s alleged businesses.
This was clearly false information considering the documents that were
subsequently provided by the Appellant’s counsel and the Appellant’s testimony
in his spouse’s appeals to the Tax Court of Canada.
[24]
During his testimony
herein, the Appellant clearly stated that he signed papers without reading them;
thus, he necessarily did so without verifying the information in them. The
Appellant did not sign his 2002 return, but he did sign his 2003 return.
[25]
The loss of $27,510
claimed by the Appellant in respect of the Investment in his tax return for
2002 represents 44% of his income before tax for that year and the loss of
$8,873 claimed by the Appellant in respect of the Investment in his tax return
for 2003 represents 18% of his income before tax for that year. The losses
claimed were substantial in the circumstances.
[26]
In light of the
evidence, I am satisfied that the Appellant was negligent in filing his tax
returns for the 2002 and 2003 taxation years and in supplying relevant
information under the Act to the CRA’s investigators. In arriving at
that conclusion I applied the following statement made by Justice Strayer in Venne
v. The Queen, 84 DTC 6247 at page 6251:
I
am satisfied that it is sufficient for the Minister, in order to invoke the
power under sub-paragraph 152(4)(a)(i) of the Act to show that, with
respect to any one or more aspects of his income tax return for a given year, a
taxpayer has been negligent. Such negligence is established if it is shown that
the taxpayer has not exercised reasonable care. This is surely what the word[s]
“misrepresentation that is attributable to neglect” must mean, particularly
when combined with other grounds such as "carelessness" or
"wilful default" which refer to a higher degree of negligence or to
intentional misconduct. . . .
[27]
For the foregoing
reasons, the appeals from the reassessments made under the Act for the
2002 and 2003 taxation years are dismissed.
Signed at Ottawa, Canada, this 19th day of October
2012.
"Réal Favreau"
Email this Content