Citation: 2010 TCC 310
Date: 20100623
Docket: 2007-3161(IT)G
BETWEEN:
JDI 2000 TRANSPORT LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Woods J.
[1] JDI 2000 Transport Ltd. operates a trucking business specializing
in the transport of mail. It is wholly-owned by Mr. Inderjit Dhillon. At issue
in this appeal is the deductibility of certain expenditures made by this
corporation and whether gross negligence penalties were properly assessed.
[2] Assessments were issued under the Income Tax Act
which disallowed deductions totaling $306,693 for the 2003 taxation year and
$423,039 for the 2004 taxation year.
[3] The appellant has raised four issues:
(1)
whether a deduction may be taken
for personal items purchased for the Dhillon family,
(2)
whether a deduction may be claimed
for expenditures made in relation to the business of related companies,
(3)
whether the auditor wrongly
concluded that amounts were deducted twice, and
(4)
whether penalties under subsection
163(2) of the Act are appropriate.
[4] Testimony on behalf of the appellant was provided by Mr.
Dhillon and Mr. Lawrence Sammy, who was employed as the bookkeeper of the
appellant and other companies owned by Mr. Dhillon. Testimony on behalf of the
respondent was provided by Mr. Dal Jawandha, an auditor with the Canada Revenue
Agency.
Personal items
[5] Mr. Dhillon, his wife and daughter made extensive
purchases with a number of credit cards. Some of the items were
business-related but a large number were personal expenditures of the family.
It does not appear that the spouse or daughter worked in the business.
[6] During the years at issue, Mr. Dhillon gave the credit
card statements to the bookkeeper, Mr. Sammy, for the purpose of arranging
payment by the appellant.
[7] Mr. Sammy recorded the payments on the credit cards in
journal entries under either “repairs and maintenance” or “travel.” Only the
total from each credit card statement was recorded and not each individual
purchase. There were approximately nine credit cards in total.
[8] Mr. Sammy did not suggest that this bookkeeping was
proper, but he testified that he simply recorded the amount paid on each
statement in the corporate account to which the majority of the expenses
related.
[9] The auditor, Mr. Jawandha, asked for back up of the
journal entries during the audit. Upon being provided with the credit card
statements, the auditor disallowed a portion of the deductions on the basis
that they represented personal items for the family and were not business
related. Mr. Jawandha testified that he gave the appellant the benefit of the
doubt with respect to many items. For example, all meals over $50 were treated
as business expenses.
[10] The total amounts on account of personal expenditures
that were disallowed were $155,271 for the 2003 taxation year and $143,241 for
the 2004 taxation year. Most of the items related to the credit card purchases
but the disallowance also included expenses relating to an automobile used by
Mr. Dhillon for personal purposes and life insurance premiums.
[11] In addition to assessing the appellant, the Minister
also assessed Mr. Dhillon to include these amounts in his income as shareholder
benefits pursuant to subsection 15(1) of the Act.
[12] The appellant does not dispute that these amounts were
properly included in Mr. Dhillon’s income, but it is suggested that the
appellant should be entitled to a deduction to avoid double taxation.
[13] The avoidance of harsh tax consequences is not a
sufficient justification for a deduction. If the expenditures are
appropriations by Mr. Dhillon in his capacity as a shareholder, the legislation
does not permit their deduction as they are not laid out for the purpose of
earning income.
[14] The deduction is prohibited by paragraph 18(1)(a)
which provides:
18(1)
In computing the income of a taxpayer from a business or property no deduction
shall be made in respect of
[…]
(a) an outlay or expense except to the extent that it was made
or incurred by the taxpayer for the purpose of gaining or producing income from
the business or property;
[15] A payment made, not in the course of the business, but
as an appropriation by a shareholder is subject to the above prohibition. The
fact that the result is harsh is something that is clearly contemplated by the
legislation, presumably to discourage abuse.
[16] If the personal expenses had been paid, not as
shareholder appropriations, but as compensation for services rendered, the
expenditures could be deducted as business expenses subject to considerations
of reasonableness.
[17] I did not understand this to be the appellant’s
position, however. The only argument seemed to be the avoidance of double tax.
[18] In any event, the evidence does not support a conclusion
that these amounts were intended to be paid as compensation for services
rendered. The evidence as a whole suggests that there was no intention on the
part of the appellant or Mr. Dhillon to treat these amounts as compensation.
[19] The amounts were very large in relation to Mr.
Dhillon’s other income. If Mr. Dhillon had intended that these amounts be paid
as compensation, he would have taken steps to provide for this and include the
amounts in his income.
[20] Instead, Mr. Dhillon did not report the amounts as
income and Mr. Sammy falsely recorded the amounts in the appellant’s books and
records. I find it extremely unlikely that Mr. Sammy acted on his own in this
regard, notwithstanding the evidence of both Mr. Sammy and Mr. Dhillon to the
contrary.
[21] The reasonable inference that should be drawn from the
evidence is that Mr. Dhillon had no intention of treating these amounts as
compensation on which he would have to pay tax. His intention was to extract
these funds for the benefit of himself and his family without having to pay tax
on them. Quite simply, he got caught.
[22] Mr. Sammy and Mr. Dhillon testified that they had not
discussed how these amounts should be recorded in the financial statements. I
did not find their vague testimony to be convincing.
[23] It defies common sense that a bookkeeper would falsely
record expenses of this nature without the involvement of the business owner.
Mr. Sammy testified that he recorded the credit card payments on corporate
accounts to which the majority of the purchases related. This makes no sense in
the context of credit cards used by Mr. Dhillon’s family. It also appears
contrary to the credit card statements that were entered into evidence (R-1).
[24] Counsel for the appellant submitted that Mr. Sammy’s
evidence should be accepted because it was not self-interested. I disagree. Mr.
Sammy is employed as a bookkeeper for corporations wholly-owned by Mr. Dhillon.
He was involved in making false journal entries, for no apparent reason other
than to assist Mr. Dhillon to avoid paying tax on these amounts. There is good
reason to view Mr. Sammy’s testimony with suspicion.
Related company expenses
[25] As mentioned above, some of the credit card purchases
were business-related. On the credit card statements, Mr. Dhillon had recorded
the names of other wholly-owned companies beside some of the entries. It was
acknowledged that these items were purchased for the other companies and that
the appellant paid for them.
[26] The assessments disallowed these items on the basis
that they were not laid out for the purpose of earning income by the appellant.
[27] The amount that was disallowed is not clear to me but
it appears to be in excess of $150,000 for the two years at issue. This is
based on the total amount of credit card expenses that were disallowed in
excess of personal expenditures included in Mr. Dhillon’s income (Ex. R-1, Tab
2, 3).
[28] The appellant submits that the expenditures are
deductible because the related companies provided offsetting services to the
appellant, such as truck maintenance by a business called Apple Autobody. No
other payment was made for these services, it was suggested.
[29] Mr. Sammy testified that he kept an informal tally to
keep track of this barter arrangement. These records were not retained.
[30] I was not satisfied with Mr. Sammy’s vague testimony
that he tracked goods and services provided by each of these corporations. If
Mr. Sammy was diligent enough to keep such records, he likely would have been
diligent enough to retain them.
[31] There may well have been services provided by the
related companies to the appellant, but the value of these services cannot be
determined without some type of records being retained. There is no reliable
evidence on which I could make a determination as to the reasonableness of the
expenses claimed by the appellant. As often stated by judges of this Court, if
this result is harsh, the appellant has only itself to blame for not keeping
adequate records.
Duplicate expenditures
[32] Mr. Sammy testified that he did not record expenses on
a contemporaneous basis and that the books and records were only updated on a
periodic basis.
[33] The auditor discovered a number of expenditures that
were recorded twice resulting in duplicate deductions. The auditor disallowed
the double entries.
[34] The total amounts disallowed as a result of
duplications were $19,556 for the 2003 taxation year and $186,892 for the 2004
taxation year.
[35] The appellant does not dispute that there were
duplications but it is submitted that adjusting entries for both years were
made on December 31, 2004 when Mr. Sammy realized that the duplicate entries
had been made.
[36] I was not satisfied with this explanation. First, the
purported adjusting entries do not appear on their face to relate to this
problem (Ex. A-1, Tab 3, loose pages). Further, according to the auditor’s
notes, no explanation was provided to him during the audit concerning the
duplicate entries. I reject Mr. Sammy’s testimony that he made appropriate
adjusting entries for these duplicate items. These amounts were properly
disallowed.
Penalties
[37] The appellant was assessed penalties in relation to
the credit card payments that had been disallowed. The amounts total $273,784 for
the 2003 taxation year and $208,368 for the 2004 taxation year. These amounts
include the personal expenditures of the Dhillon family and purchases for the
related companies.
[38] The relevant part of subsection 163(2) is set out
below:
163(2) Every person
who, knowingly, or under circumstances amounting to gross negligence, has made
or has participated in, assented to or acquiesced in the making of, a false
statement or omission in a return, form, certificate, statement or answer (in
this section referred to as a “return”) filed or made in respect of a taxation
year for the purposes of this Act, is liable to a penalty of the greater of
$100 and 50% of the total of
(a) the amount, if any, by which
(i) the amount, if any, by which
(A) the tax for the year that would be
payable by the person under this Act
exceeds
(B) the amounts that would be deemed by
subsections 120(2) and (2.2) to have been paid on account of the person’s tax
for the year
if the person’s taxable income for the year were computed
by adding to the taxable income reported by the person in the person’s return
for the year that portion of the person’s understatement of income for the year
that is reasonably attributable to the false statement or omission and if the
person’s tax payable for the year were computed by subtracting from the
deductions from the tax otherwise payable by the person for the year such
portion of any such deduction as may reasonably be attributable to the false
statement or omission
exceeds
(ii) the amount, if any, by which
(A) the tax for the year that would have
been payable by the person under this Act
exceeds
(B) the amounts that would be deemed by
subsections 120(2) and (2.2) to have been paid on account of the person’s tax
for the year
had the person’s tax payable for the year been assessed on
the basis of the information provided in the person’s return for the year,
[39] Subsection 163(3) places the burden of proof on the
respondent. This provision reads:
163(3)
Where, in an appeal under this Act, a penalty assessed by the Minister under
this section or section 163.2 is in issue, the burden of establishing the facts
justifying the assessment of the penalty is on the Minister.
[40] There are several elements to the penalty provision
that are potentially relevant here. First, there must be a false statement or
omission in a return, form, certificate, statement or answer. Second, the
appellant must have made or participated in the false statement or omission
either knowingly or in circumstances amounting to gross negligence. Third, the
amount of the penalty is based on the understatement of income reasonably
attributable to the false statement or omission. The minimum amount is $100.
[41] In my view, a reduction in the amount of the penalties
is justified in this case.
[42] A portion of the penalties were based on the related
company expenses. Based on the evidence presented, it is quite possible that these
errors were a matter of sloppy bookkeeping. If so, it would constitute
negligence but it would not elevate to the level of knowledge or gross
negligence as required by s. 163(2).
[43] I would note, for example, that Mr. Dhillon went to
the effort to note on the credit card statements which company the purchases
related to. On its face, it appears that he intended the expenditures to be
recorded to the proper company. The fact that the bookkeeper did not do this
does not amount to knowledge or gross negligence on the part of the appellant.
[44] The respondent suggested that Mr. Dhillon’s companies
may have achieved a tax reduction by having the expenses claimed by the
appellant. The implication was that this may have been motivated by tax
avoidance rather than simply sloppy bookkeeping. The auditor mentioned in his
testimony that the other companies may have also claimed the same deductions,
or that the companies may have claimed excessive small business deductions.
[45] The concerns that were expressed by the auditor may
well be justified in the circumstances of this case. However, no evidence was
brought in support of these concerns and the respondent has not satisfied the
burden of proof in my view.
[46] Turning to the personal expenditures of the Dhillon
family, I have concluded that penalties are appropriate. The deduction of these
items as “repairs and maintenance” and “travel” was admittedly falsely made.
Given the large amounts involved, the false claims were made either knowingly
or under circumstances amounting to gross negligence in the sense of willful
blindness.
[47] Further,
claiming deductions for expenditures as repairs and travel when they clearly
were not resulted in an understatement of
the appellant’s income which is reasonably attributable to the false
statements.
[48] All the elements for the imposition of the penalty
relating to the personal expenditures of the Dhillon family have been
established.
[49] This
conclusion is supported by a number of judicial decisions that were brought to
my attention by counsel for the respondent: 2622-4121 Quebec Inc. v. The
Queen, 2005 TCC 238, 2008 DTC 3296; 2960-0731
Quebec Inc. v. The Queen, 2006 TCC 270, 2008 DTC 3854; Vialink Inc. v.
The Queen, 2009 TCC 117, 2009 DTC 1093; Harland Associates
02 Inc. v. The Queen, 2010 TCC 105.
Disposition
[50] In the result, the appeal is allowed only with respect
to the gross negligence penalties on expenditures for related companies. In
other respects the appeal is dismissed. Since the respondent has largely been
successful in the appeal, it will be entitled to its costs.
These Amended
Reasons for Judgment are issued in substitution for the Reasons for Judgment
dated June 4, 2010.
Signed at Edmonton, Alberta
this 23rd day of June 2010.
“J. M. Woods”
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