Elbadawi v. T. – TCC: Court sustains benefit assessments against principal shareholder but not wife and only partially against son

Bill Innes on Current Tax Cases

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/73271/index.do New Window

Elbadawi v. The Queen (August 27, 2014 – 2014 TCC 259) is a somewhat lengthy (65 paragraph) decision arising out of a ten day trail where the principal appellant conducted the case personally both for himself and his wife and son.

In essence all three taxpayers were assessed for unreported income in connection with a construction business run by the father:

[21] For all three Appellants, the CRA concluded that they had each received unreported business income from these companies and that they had received unreported benefits from the companies by virtue of their roles as employees or officers or shareholders. Consequently, Mr. and Mrs. Elbadawi were each assessed unreported income, in respect to construction contracts completed by 526 Ontario, of $14,610, $128,477 and $78,322 in 2000, 2001 and 2002, while Waleed Elbadawi was assessed unreported income of $13,375 and $169,793 in 2002 and 2003, respectively. Notices of Reassessment were issued on August 19, 2005. On March 5, 2008, Mohammed Elbadawi, as director of 526 Ontario and Tacona, pleaded guilty to criminal charges of tax evasion for not reporting GST/HST on the houses which the companies constructed. Charges pursuant to the ITA were dropped, as were the charges against Waleed Elbadawi and Mobilsa.

The Issues

[22] The issues to be decided are twofold:

(1) Is the unreported income that has been assessed to each Appellant legally attributable to that Appellant?

(2) Is the quantum of the income attributed to each Appellant correct?

Not to put too fine a point on it, the court simply did not accept Mr. Elbadawi’s evidence and affirmed the assessments against him:

[29] Mohammed Elbadawi is a well-educated individual who was highly successful in the construction industry in the Toronto area for many years. He retained lawyers and accountants yet he never appeared to grasp the principle that corporations are, in law, separate and distinct entities from their shareholders. If a corporation is to retain this separate status, given to it by statute, it must act as a separate entity from those who possess effective control and be treated as such by those same individuals. Mundane as it may seem, maintaining proper books and records will be of utmost importance. Form does matter. To retain the separate personality of 526 Ontario, so that the assets of the company remain those of the company and are not conferred as benefits upon its shareholders and controlling owners, then 526 Ontario had a legal responsibility to maintain records that would support the Appellant’s position that the unreported income remained an asset of the corporation and never found its way to the Appellant’s back pocket as the sole shareholder.

[30] I have only the Appellant’s self-serving testimony, and very little else, that would support the Appellant’s allegation that the revenue earned by 526 Ontario did not pass directly to Mohammed Elbadawi. In these circumstances, the Respondent has met the onus which reverted to the Crown to establish that the Minister’s assessment is correct. Without convincing evidence, Mohammed Elbadawi was unable to demolish the assumptions of fact, as inadequate as they were, that the revenue earned by 526 Ontario flowed directly through the company to him in his capacity as a shareholder. Fifty percent of that income will therefore be attributed to him personally as assessed by the Minister.

While Mr. Elbadawi’s appeal was unsuccessful, in the case of his wife and son the court held that the Crown’s pleading of assumptions was largely inadequate and that the Crown had not made out any affirmative case against the wife and was only partially successful against the son:

[63] The appeals of Mohammed Elbadawi are dismissed. He has been properly assessed 50 percent of the unreported income of 526 Ontario as he received benefits as a shareholder, pursuant to subsection 15(1). In accordance with the Respondent’s request, I am providing the Respondent and the Appellant, Mohammed Elbadawi, 60 days from the date of the within Reasons to provide written submissions on the issue of costs in respect to his appeals.

[64] The appeals of Hanni Elbadawi are allowed, with costs. Assumptions of fact were inadequate. The Appellant was not an employee or a shareholder or controlling mind of 526 Ontario and there was no evidence provided that benefits were conferred on her as a director. There was no evidence that she received benefits personally from 526 Ontario.

[65] The appeals of Waleed Elbadawi are allowed in part. Since there was no evidence of the existence of the alleged trust agreement respecting the Malabar property and since the Appellant dealt with the purchase and sale personally and never as an agent or trustee of Mobilsa, the net income is that of the Appellant personally. However, with respect to the Blithfield property, because he was not a shareholder of Mobilsa, but only its director, because the assumptions of fact neglected to sufficiently detail how and when Mobilsa conferred the alleged benefits upon the Appellant and because the Respondent failed to establish evidence that would support that Waleed Elbadawi received benefits from the corporation, as an employee or director, the net income Mobilsa earned from the sale of Blithfield is that of Mobilsa and not the Appellant. The Appellant, much the same as his mother, held the office of director in name only while Mohammed Elbadawi continued to be the directing mind of the corporation.