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Citation: 2010 TCC 291
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Date: 20100531
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Docket: 2009-3942(IT)I
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BETWEEN:
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PAUL LUBEGA-MATOVU,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
(Edited from the transcript of Reasons for Judgment
delivered orally from the Bench on April 30, 2010 in Toronto, Ontario)
Campbell J.
[1] These appeals are in
respect to the Appellant's 2004 and 2005 taxation years. In computing income in
these years, the Appellant deducted both rental expenses and business expenses.
The rental expenses were deducted in respect to a property located at 3909 Rippleton Lane in Mississauga, which he purchased in
1999. He resided in this property with an individual by the name of Rose,
together with her young son.
[2] According to the Appellant, Rose assisted him with
his business activities, as she was otherwise unemployed. He stated that she
rented a room contained within the property for $350 monthly and, eventually,
her son had his own small room within the property for which the Appellant charged
Rose an additional $100 monthly.
[3] According to the Appellant, he allowed Rose, in some
months, to offset the rent against the hours she worked for his businesses,
although, like much of his evidence, it was unclear how he tracked her hours. Rose
was not called as a witness.
[4] In respect to the business
activities, the Appellant, although not incorporated, engaged in five different
business endeavours for which he claimed business expenses.
[5] With respect to the first business activity, Panelform
Technology, the Appellant, together with Rose and her son, travelled to Uganda in
2004 respecting start-up activities. This business was involved with obtaining
contracts with government and builders in various African regions for the sale
of panels for building houses. This activity was commenced in 2003 and, to
date, the business has earned no income.
[6] The Appellant's evidence again was vague respecting
his use of an agent or agents in Africa. At the end of the day, it remained unclear how
many people the Appellant actually employed, how they were paid or how he
tracked their activities. He alluded to receiving reports over the Internet but
made no effort to show how those were tracked, what the contents were, who they
were from or how much, if any, compensation would be paid for such reports.
[7] In the second business venture, the
Appellant made attempts to sell generators in Uganda to provide electricity. According to the Appellant, his
travel to Uganda was at the request of the company
that supplied these generators. He stated that he travelled to Uganda in 2003 and 2004 to acquire an
agent to work on his behalf in the sale of the generators.
[8] Again, the evidence was unclear but in respect to
one or both of these business ventures, Panelform Technology and the generator
sales, the Appellant claimed that he refinanced his home and took out a second
mortgage. There was, however, no paper trail or evidence that supported or
linked these mortgage funds to either of these business ventures.
[9] The third business
venture involved the sale of vitamin and mineral products in liquid form. These
products were supplied by a company called Market America. The Appellant
submitted a folder containing various communications, invoices and shipping
orders between himself and Market America in both 2004 and 2005. However, none of these
documents contained any invoices, shipping orders or other documentation to
support that any of these products were in fact sold by the Appellant to
customers. Although the auditor requested that the Appellant provide a customer
list, he never did provide one to her, nor did he produce one at the hearing of
his appeal.
[10] The fourth business venture,
Midtown Market, involved the sale of hip-hop clothing. According to the Appellant,
he rented a stall at a flea market but was unsuccessful in selling the
clothing, either at the flea market or to retail stores. According to the
auditor, the only evidence of a clothing sale was a $30 receipt and, based
solely on this, the Appellant apparently ordered a second shipment of clothes.
[11] The final venture which the Appellant
pursued in these years involved the sale of insurance, as an agent for a
company called Primerica. Again, it was difficult to piece together the entire
story based on what the Appellant told me. With respect to the expenses claimed
in this business activity, he testified in cross-examination that he kept all
of his expense documentation in a shoebox and that he did not allocate expenses
properly among the various businesses. He also claimed approximately $17,000 in
commission losses in 2004, but stated that they would not necessarily be
related to Primerica and the sale of insurance because his practice was to
simply allocate expenses from the shoebox seemingly randomly to the various
business activities.
[12] In respect to these businesses, he
claimed large amounts of vehicle expenses. He applied 70 per cent in 2004 and
approximately 66 per cent in 2005 for business use of the Camry vehicle. As I
understand his evidence, he totalled all gas receipts and applied these
percentages to all gas and other related vehicle expenses. He provided
supporting documentation that he incurred these expenses, but he did not go the
step further to make any attempt to show that the vehicle business use was
between 66 and 70 per cent in these years. There was no customer list for his
insurance customers or the customers for whom he purchased vitamin products, or
the locations and dates on which he travelled to meet the customers or to attend
meetings, except some reconstructed summaries. Without any of these pieces of
the puzzle, I cannot come to a conclusion with respect to even the
reasonableness of the percentages he chose for business use of his vehicle.
[13] The auditor, Nellie Cheng,
testified that in completing the audit she did not dispute that the Appellant
spent the amounts he claimed or that he drove the number of kilometres that he
claimed. However, she was unable to discern the exact amounts that would be
related to the business activities. Although CRA made requests, the Appellant
never provided customer lists to assist in supporting his claims that he had
meetings with a client base.
[14] In addition, although he provided
accounts or bills, he would not provide proof of payment. Instead, he gave the
auditor an explanation or a story behind the expense but nothing further to
support the story that the expenditures related to a business activity.
[15] For example, in respect to the
hip-hop clothing venture, the Appellant did not supply proof of payment of the
shipments of the clothing and, in fact, the shipment documentation supplied did
not contain the Appellant's name.
[16] In addition, the Appellant
never provided specific rental information on the flea market stall he supposedly
rented and, as he seemed inclined to do with much of his evidence, he instead
supplied general promotional information on the cost to rent a stall.
[17] The type of issues in this appeal
are generally straightforward; they are certainly not complicated legal issues.
Such appeals generally involve a taxpayer providing the documentation they have
in their possession to support the expenses they are claiming. When there are
missing links in the documentation, the taxpayer may provide oral testimony to
substantiate the claims.
[18] The present hearing lasted a full
day and I must confess that, at the end of the hearing, I was left with the
impression that I had only partial truths, conflicting evidence and still not a
particle of proof from the Appellant to substantiate that these expenditures
were actually related to his business activities.
[19] The Appellant's tendency on
cross-examination was to provide a lengthy response when he was asked an “either/or”
question. The more questions that the Appellant was asked, the greater the
likelihood became that the response differed from an earlier one. The Appellant's
attempts to establish his expenses consisted primarily of introducing very
general promotional material, communications and proof of payment of various
general expenses but without any evidence on what portions belonged to the
businesses, as opposed to personal, and to which of the five businesses they in
fact belonged.
[20] In addition, the Appellant had
little, if any, specific knowledge concerning how the expenses would be incurred
for business activities. The recordkeeping consisted literally of a shoebox. By
the Appellant's own admission, he was lazy about keeping records. While he was
attempting to get five different businesses off the ground, he did not even
maintain five different shoeboxes. Instead, he thought it sufficient to fire
whatever he had into one box and hand it over to CRA, which the auditor
referred to as a “jumble of documents”. When asked how he tracked his business
activities, he responded that he had a “scheme in his head”.
[21] If there was some sort of scheme or
structure to this whole mess, it actually did not translate into the evidence
he provided which, instead of clarifying some of the expenses, simply
contributed to muddying the waters a little further.
[22] The Appellant told me he could not
afford to have an expensive accounting system to track his business activities.
However, a simple journal for each business, tracking customers' names, dates
of meetings, sales, kilometres travelled, et cetera, would have sufficed.
Instead, the Appellant kept no records and could not provide credible testimony
respecting any of this, when he did get to Court.
[23] The lack of records, coupled with
the Appellant's blasé attitude toward his activities, is appalling enough, but
the situation only gets bleaker when I view all of this in light of his
educational background and his full-time career. The Appellant has not only
been an accountant with advanced training for many years, but he has been a CRA
auditor for the last twenty-five. As Respondent counsel pointed out, the Appellant
works for the very government entity entrusted with the proper administration
of the Income Tax Act.
[24] It is difficult to believe that an
auditor would approach his own business activities in this manner when the very
information I expect him to provide to me is what he would be looking for in
auditing other taxpayers conducting business activities in this country.
[25] He did state that, and I quote:
"We don’t do business the way you do," referring, I believe, to the
activities conducted in Africa. I do not even pretend to understand this statement,
particularly when the Appellant should have first-hand knowledge of the precise
requirements of the Act. He resides in Canada, he was conducting business from this country and he was
attempting to deduct expenses under the Income Tax Act in this country. I
cannot comprehend how he expects some type of allowance in accordance with such
a preposterous statement.
[26] I was referred to a number of cases
by the Respondent, the leading case being the Supreme Court decision in Stewart
v. Canada, 2002 D.T.C. 6979, which set aside the test of
reasonable expectation of profit and replaced it with a multifaceted inquiry. The
Stewart decision refers to the use of objective factors listed by Justice
Dickson in Moldowan, that is:
1) the profit and loss experience in
prior years;
2) the
taxpayer's training;
3) the taxpayer's
intended course of action; and
4) the
capability of the venture to show a profit.
[27] At paragraph 54 of the Stewart
decision, the Supreme Court nevertheless still makes reference to the
subjective intent to profit, coupled with these objective factors. In other
words, where there is a subjective intent to make a profit from an activity,
there must be evidence, having reference to the Moldowan objective
factors, to support the taxpayer's subjective intent.
[28] There is no doubt the Appellant
intends and wants to turn a profit with these activities, but he has failed to
meet the objective criteria because the evidence does not support that his
activities have been carried out in a businesslike manner, applying what
Justice Bowman in Kaye referred to as "commercial common
sense."
[29] I have evidence, explanations and
stories, much of which is contradictory and which is not sufficiently coherent for
me to draw conclusions; I have intermingling of five business ventures; I have
lack of relevant documentation and general lack of straightforward, coherent
and forthcoming testimony, none of which support a conclusion that the Appellant
was conducting his business affairs as one would expect a businessperson to do.
[30] With respect to the rental
expenses, the potential corroborating evidence of Rose would have assisted the Appellant.
Without it, I am left with the lack of commerciality in this so-called “arrangement”
between the Appellant and Rose.
[31] Applying factors established in the
Stewart and Moldowan decisions, the evidence does not support
that the Appellant intended to earn a profit from the rent charged to Rose. In
fact, in some months where she could not pay the rent, she worked it off by
assisting the Appellant with his business activities.
[32] Finally, with respect to penalties,
I believe the Respondent has met the onus which is upon the Minister pursuant
to 163(2) of the Act, of establishing gross negligence as opposed to
ordinary negligence. The imposition of penalties is supported by:
1) the magnitude of the omission by
the Appellant;
2) his
educational background;
3) his knowledge
of the importance of proper recordkeeping because, as an auditor, he himself
applies these very same principles to other taxpayers; and
4) armed with
this knowledge, he should have been aware of the potential problems a lack of
such recordkeeping would cause him.
[33] In summary, we live in a
self-monitoring system in which each taxpayer has an obligation to account for
expenditures if he expects to make a claim for these. A taxpayer cannot come to
this Court with incomplete records, intermingling of records and vague and
unconvincing testimony in respect to the specifics of the alleged expenses and
expect to be successful.
[34] In addition, this Appellant's
educational background as an accountant and CRA auditor are very relevant
factors in looking at the approach he took towards his own recordkeeping.
[35] For all of
these reasons, the appeals are dismissed without costs.
Signed at Ottawa, Canada, this 31st day of May 2010.
“Diane Campbell”
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