Citation: 2009 TCC 525
Date: 20091016
Dockets: 2008-1421(IT)I
2008-3792(GST)I
BETWEEN:
SUSANNE STERLING-ROSS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
SUSANNE STERLING-ROSS and PAUL FAUBERT,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] These are appeals with respect to assessments made under
the Income Tax Act and the Excise Tax Act.
Income tax appeal
[2] Susanne Sterling-Ross appeals in respect of assessments
made under the Income Tax Act for the 1998, 1999, 2000, 2001, 2002 and
2003 taxation years.
[3] According to the Minister’s reply, Ms. Ross was
reassessed for these years to disallow net business losses claimed in respect
of a partnership between her and Paul Faubert, her former common-law partner.
The annual amounts disallowed to Ms. Ross vary from $1,480 to $8,880. Gross
negligence penalties were also levied for all years. The reply also references
a potential statute bar issue for the 1998, 1999 and 2000 taxation years.
[4] At the opening of the hearing, I asked counsel for the
respondent to clarify how business losses had been allocated between Ms. Ross
and Mr. Faubert.
[5] In
response, after conferring with a witness from the Canada Revenue Agency (CRA),
counsel informed me that the income tax
appeal would be conceded in its entirety. He stated that there was no tax assessed
for any of the relevant taxation years except 2002. The business losses claimed
for all years except 2002 only affected loss carryforwards, I was informed.
[6] The response was a surprise because it was not
mentioned in the reply.
[7] The
hearing then proceeded to deal with the GST appeal, with Ms. Ross being
informed that the income tax matter was conceded in its entirety.
[8] After the
hearing, I was left to figure out how the concession should be implemented.
[9] The
concession clearly applies to the gross negligence penalties for all years.
According to the notice of confirmation attached to the notice of appeal, a
gross negligence penalty in the amount of $200 was assessed for each year
except for 2002, when the penalty was $1,653.
[10] It is not
as clear how the concession applies to business losses. It clearly applies to
the business loss claimed for 2002 in the amount of $2,431, but it is not clear
whether it applies to business losses for years in which penalties have been
assessed but for which no tax has been assessed.
[11] I am not
aware of any judicial precedent that is exactly on point, but the relevant
principles were recently discussed by Noel J. in The Queen v. Interior
Savings Credit Union, 2007 FCA 151, 2007 DTC 5342.
[12] Based on
this jurisprudence, I am inclined to the view that the Court has no
jurisdiction to determine losses unless the determination could affect an
amount of tax assessed. There was no argument before me on this issue, however,
and it is a point of law that would be best considered after arguments from
counsel.
[13] If this
appeal had been under the general procedure, it may have been appropriate to
reopen the case to hear argument on the issue. As it was under the informal
procedure, however, I have decided to deal with it as best I can.
[14] In the
circumstances of this case, there clearly would be an injustice if the Court
declined to determine losses for lack of jurisdiction. It appears that the
respondent has consistently maintained throughout the objection and appeal
stages that the issue to be determined is whether the business losses should be
allowed. Further, after the respondent’s concession, the appellant was informed
that her income tax appeal had been conceded in its entirety.
[15] In these
circumstances, the appellant has every right to expect that the business losses
will be allowed.
[16] Allowing
the losses is only possible, however, if the Court has jurisdiction. In light of the uncertainty as to this issue, I have
decided to provide the relief sought by the appellant by considering that the
Minister has made a determination of loss under subsection 152(1.1) of the Income
Tax Act. This brings the issue within the jurisdiction of the Court.
[17] In the result,
the appeal with respect to assessments and determinations of loss made under
the Income Tax Act will be allowed, and the assessments and
determinations will be referred back to the Minister of National Revenue for
reconsideration, reassessment and redetermination on the basis that the
business losses claimed by the appellant are deductible and the gross
negligence penalties should be vacated.
GST appeal
Introduction
[18] Ms. Ross also appeals with respect to two GST assessments
issued under the Excise Tax Act. According to the reply, the periods at
issue are from October 1, 1996 to December 31, 2002, and from October 1, 2002
to June 30, 2003. There is a three month overlap in the assessment periods that
was not mentioned at the hearing.
[19] Ms. Ross appeals on behalf of herself and Mr. Faubert,
since they registered for GST purposes as a partnership.
[20] Mr. Faubert is now a discharged bankrupt, following
bankruptcy proceedings in which the Minister filed a proof of claim in respect
of these assessments.
[21] Ms. Ross submits that she operates a land development
business that has been operated in partnership since around 1993. From 1993 to
1995, her partner was her father. Beginning in 1995, Mr. Faubert was the
purported partner.
[22] The plan was to subdivide and sell a five acre parcel
of vacant land in Port Lambton, Ontario that Ms. Ross had inherited. From 1993 until now, 11
lots have been disposed of and 12 remain unsold.
[23] Ms. Ross made substantial ITC claims during the
assessment periods relating to this business and received refunds in the
aggregate of $69,763.16.
[24] The Minister in the assessments disallowed all but
about one percent of the claims. The aggregate amount of ITCs at issue is $72,089.83.
One of the assessments also includes an amount of $4,239.26 for GST collected
or collectible.
[25] The total
amounts assessed are summarized in a
schedule attached to the reply. The relevant items are stated as follows: (1)
net tax in the amount of $76,329.09, (2) interest in the amount of $17,689.43,
(3) a section 280 penalty in the amount of $31,289.28, and (4) a section 285
penalty in the amount of $19,082.17.
[26] At the commencement of the hearing, counsel for the Minister
conceded that the “net tax” assessed should be reduced by $4,239.26. This
amount does not relate to ITCs but to an item relating to GST collectible. The
facts assumed by the Minister in assessing this item were not stated in the
reply.
Factual
background
[27] The background to this matter was provided in testimony
from two officials of the Canada Revenue Agency: Scott Arner, who performed the
GST audit, and John Possmayer, who subsequently performed an investigation that
led to criminal charges being laid against the appellants in connection with
the ITC claims.
[28] Mr. Arner explained that during the audit Ms. Ross had
provided two boxes of accounting records and related documentation to support
the ITC claims. His reproduction of the ledgers prepared by Ms. Ross, with his
comments added, was introduced into evidence as Exhibit R-13.
[29] Mr. Arner testified that, after a fairly lengthy
review of the material presented, he had concluded that the vast majority of
the claims were for personal items that were unconnected with a land
development business and that some of the claims appear to have been fabricated
or inflated. He stated that in total he allowed only a very small portion of
the ITCs claimed, approximately $750. In this regard, he stated that he gave
the appellants the benefit of the doubt with respect to items such as telephone
bills. Essentially, though, there was little if any indication that an active
business was being carried on during the assessment periods.
[30] Because of the large amounts involved, an investigator
was brought in who reviewed Mr. Arner’s findings and agreed with them.
[31] Criminal charges under s. 327(1) of the Excise Tax
Act were levied and came before a judge of the Ontario Court of Justice in
2006. In a plea bargain negotiated by Ms. Ross’ lawyer, Ms. Ross pleaded guilty
with respect to a smaller assessment period.
[32] In the plea bargain, Ms. Ross admitted through her
lawyer that she had wrongly claimed, in circumstances amounting to willful
blindness, ITCs of approximately $30,000. A penalty in the amount of 125 percent
was agreed to, which seems to be the mid-point between the minimum and maximum
penalty. The charges against Mr. Faubert were withdrawn.
[33] At the criminal hearing, it was acknowledged that
civil proceedings were underway in connection with the assessments as well.
[34] It is useful to reproduce some of the facts that were
stated by Crown counsel at the criminal hearing and which were agreed to by Ms.
Ross’ counsel at that hearing (except for the reference below to U.S. purchases
and any culpability beyond willful blindness) (Exhibit R-12, p. 4):
[…] As a
consequence of the audit and subsequent investigation it was determined that
Ms. Sterling-Ross had knowingly in circumstances amounting to willful blindness
claimed such personal items as payments made to her fitness club, payments for
stereo equipment, docking fees for a boat, veterinary services, a fireplace
installation in her home, carpet cleaning for her home, liquor purchases, fast
food take-out and numerous other personal expenditures as being items for
G.S.T. refund purposes applicable to the vacant land in Port Lambton. And in
circumstances amounting to willful blindness, Sterling-Ross often intentionally
inflated the amount of many of her claim [sic] G.S.T. payments for I.T.C.
purposes by using the gross amount paid out on an invoice rather than the
actual G.S.T. amount paid. Consequently, the amount of the refund claimed for
G.S.T. was also inflated. Again, in circumstances amounting to willful
blindness, Sterling-Ross also claimed G.S.T. paid on gross invoice amounts for
I.T.C. purposes that resulted in G.S.T. refunds on personal items that were
purchased outside of Canada in the State of Michigan. There’s obviously no G.S.T.
in the U.S.A. Those are the essential facts the Crown’s relying on.
[35] The Minister also called as witnesses two accountants
who had prepared income tax returns for Ms. Ross. They testified that they had
no involvement with the GST returns.
[36] The main focus
of Ms. Ross’ testimony was in showing that she had actively engaged in subdividing and selling lots on a parcel of vacant
land in Port Lambton, Ontario. She also introduced many documents going back to
1993 which corroborate that testimony.
[37] I accept that Ms. Ross had an intent to sell serviced
lots on the inherited property, but this does not assist in this case. I am not
satisfied that any substantial amount of work was done or relevant expenses
incurred during the relevant assessment periods. Most of the development work appears
to have been done prior to that time.
[38] Ms. Ross
introduced evidence that supports that expenses
were incurred prior to the assessment periods at issue. I do not think that
this assists Ms. Ross in this appeal. For one thing, I have no way of knowing
whether these expenses were claimed in prior GST returns. One of the CRA
officials testified that GST returns had been filed by Ms. Ross for earlier
years. There is no reasonable basis to allow ITCs on the prior period expenses in
this appeal.
[39] Turning
to the expenses that were the subject of the audit, Ms. Ross tried to provide a rationale for her ITC
claims but her explanations were not at all convincing. She stated that she
believed that the GST would “equal out” when all the lots were sold. That might
be the case if the ITC claims related to proper business expenses but there is
no reliable evidence that they did.
[40] My impression of Ms. Ross from the evidence as a whole
is that she is an intelligent, if inexperienced, businesswoman. In my view, Ms.
Ross knew that she was filing for substantial ITC claims for which she and Mr. Faubert
were not entitled. Any other conclusion defies total common sense on the
evidence before me. The appeal should be dismissed, except for the item
conceded by the Minister.
[41] Before concluding, I would mention that Ms. Ross
brought into court four boxes of documents that I declined to enter into
evidence.
[42] Ms. Ross stated that her lawyer in the criminal
proceeding had given the boxes to her and that she had kept them in her garage.
She had not looked at the contents of the boxes in preparation for this hearing
and could not tell me what documents would be relevant for the appeal.
[43] Over the lunch break, counsel for the Minister
reviewed the material in the boxes. He informed me that based on his review
some of the documents could be relevant to the appeal but he thought that they
would be immaterial.
[44] In this particular case, I do not think that it would
be an appropriate use of court resources to sort through boxes of documents
that had not even been reviewed by Ms. Ross in preparation for this appeal.
[45] Unless a self-represented taxpayer makes a reasonable
attempt to provide the Court with relevant documents, it would be an
inappropriate use of court resources to enter into evidence a large number of
unsorted documents.
[46] As a
result of the foregoing, the following orders will be made with respect to the
GST appeal:
(1) the appeal with respect to the assessment for the period from October
1, 1996 to December 31, 2002 will be allowed, and the assessment will be
referred back to the Minister of National Revenue for reconsideration and
reassessment on the basis that: (a) the item identified in Schedule A of the
reply as “GST assessed” in the amount of $4,239.26 should be excluded from the
amount assessed; and (b) adjustments that are consequential as a result of the
exclusion in (a) should be made to interest and penalties; and
(2) the appeal with respect to the assessment for the
period from October 1, 2002 to June 30, 2003 will be dismissed.
[47] Each party shall bear their own costs in respect of
the appeals under both statutes.
Signed at Toronto, Ontario this 16th day of October 2009.
“J. M. Woods”
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