Citation: 2013 TCC 298
Date: 20130926
Docket: 2011-249(IT)G
BETWEEN:
GLEN HARVEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1]
Glen Harvey is a
prominent Winnipeg real estate agent. Mr. Harvey works with Re/Max Real Estate
Inc. (“Re/Max”) and has done so for approximately 30 years. When he filed his
income tax returns for his 2003 and 2004 taxation years he reported commission
revenue and expenses related to his activities as a real estate agent. Mr. Harvey
understated his commission revenue by $44,596 in 2003 and $26,641 in 2004. The
Minister of National Revenue reassessed those taxation years to include these
amounts in Mr. Harvey’s income. The Minister also imposed gross negligence
penalties under subsection 163(2) of the Income Tax Act (the “Act”)
on the unreported revenue. Finally, the Minister denied a number of expenses
that Mr. Harvey had claimed in respect of his commission income. Mr.
Harvey has appealed the gross negligence penalties and the denial of the
expenses to this Court. Mr. Harvey has not appealed the addition of the
unreported revenue.
Issues:
[2]
The appeal can be
reduced to two overriding issues. The first issue is whether the Respondent has
met her onus of proving that Mr. Harvey knowingly or in circumstances amounting
to gross negligence failed to fully report his revenue. The second issue is
whether Mr. Harvey has met his onus of demolishing the Minister’s assumption
that he did not incur various expenses for the purpose of earning income.
Concessions:
[3]
On the first day of
trial, Mr. Harvey conceded that $2,651.51 in vehicle lease payments, $910.36 in
traffic fines and $196.90 in vehicle insurance were not properly deductible in
his 2003 taxation year.
Witnesses:
[4]
Mr. Harvey testified on
his own behalf. For the reasons set out in more detail below, I did not find
him to be credible and have not accepted his evidence on many points.
[5]
Pat Button testified
for the Respondent. Ms. Button is the Chief Financial Officer and Manager of Accounting
at Re/Max in Winnipeg. I found Ms. Button to be a credible witness.
[6]
Brenda Davis also testified
for the Respondent. Ms. Davis is currently an audit team leader at the Canada
Revenue Agency but, in the relevant period, was an investigator in CRA’s
Enforcement Division. I found Ms. Davis to be a credible witness.
The Business:
[7]
Mr. Harvey testified at
length about the nature of his business. He explained that he had been a
realtor for 38 years. He described himself as one of the top 3 agents in
Winnipeg and the number one Re/Max agent in Manitoba. Approximately 5% of Mr.
Harvey’s business involves acting for individual purchasers and vendors of
residential homes. The balance of Mr. Harvey’s business relates to the condo
market. Over a period of approximately 20 years Mr. Harvey has focused on
arranging the purchase of apartment buildings for his clients, working with
those clients to convert the buildings into condos and then marketing and
selling those condos to individuals on behalf of those clients. He estimates
that he handles approximately 75% of all apartment-to-condo conversion work in Winnipeg.
In a typical year, Mr. Harvey is involved in approximately 200 transactions. He
has several agents who work for him.
[8]
Mr. Harvey testified
that very few realtors survive in the business as long as he has. He emphasized
that it was essential for him to constantly be in contact with his clients. He
believed that each current client would lead to a referral to one or more
future clients. He also knew that his biggest clients were constantly being
wooed by his competitors and that he therefore had to fight to keep their business.
[9]
Mr. Harvey explained
that Re/Max is a “100% house” which means that he pays Re/Max various fees
(e.g. a desk fee, a promotional fee, a head office fee, an institutional
advertising fee) and, in return, he gets to keep 100% of the commissions on his
sales. He explained that, among other things, the fees he pays entitle him to a
desk and computer in a shared office at Re/Max’s office. However, he stated
that he makes very little use of the office space as both he and his clients
dislike the lack of privacy. Mr. Harvey clarified that he is not reimbursed by
Re/Max for any expenses that he incurs personally in the course of his
business.
[10]
I accept Mr. Harvey’s
testimony on all of the above points.
[11]
Mr. Harvey described
his typical week as follows. On weekdays, he works from 7:00 a.m. to 11:00 p.m.
He has an office in his house where he starts work every morning. There he
checks his emails and reviews the new listings for the day. He then meets with
the agents that work with him and makes his to-do lists for the day. Then he
meets with his larger clients to review strategies, marketing plans and other
issues. All of the foregoing occurs in his home office. Between 3:00 p.m. and
7:00 or 8:00 p.m. he works on-site at his clients’ condo sales sites. If he is
successful in making a sale, he works later than that to complete the
paperwork. When he is finished at the sales sites, he generally takes clients
out for dinner or drinks. On weekends, Mr. Harvey typically sees clients in the
morning and then does condo sales from 1:00 to 5:00 p.m. Again, he takes
clients out for dinner or drinks in the evening. In addition to the above, Mr.
Harvey takes clients to football games and golfing.
[12]
I am prepared to accept
much of Mr. Harvey’s testimony regarding his typical week. However, I feel that
the frequency of some of the activities that he describes has been exaggerated.
Where that is the case, I have stated so explicitly under my analysis of the
individual expenses. That said, I accept the basic premise that Mr. Harvey
works very long days, that the vast majority of each weekday is devoted to his
business, that his business is based out of his home office, that he regularly
meets with clients in that home office and that he regularly takes clients to
football games, golfing or out for meals or drinks.
Accounting and Preparation of Tax Returns:
[13]
In the years in
question, Mr. Harvey reported his business income using a fiscal year end of
August 31. Thus, his 2003 income should have included his revenues and expenses
from September 1, 2002 to August 31, 2003 and his 2004 income should have included
his revenues and expenses from September 1, 2003 to August 31, 2004. The
parties advised me that this was an acceptable method for an individual to
report business income in those years and that the method was not in issue.
[14]
Mr. Harvey used an
accountant named Mr. Osato to prepare his tax returns. Mr. Harvey described Mr.
Osato as being a certified accountant who had previously worked for CRA. He
explained that he gave Mr. Osato all of the documents that Mr. Osato needed to
prepare his tax returns each year and that Mr. Osato would then put the
returns together for Mr. Harvey’s signature.
Criminal Charges and Conviction:
[15]
As set out above, Mr.
Harvey is not disputing the fact that he underreported his revenue by $44,596
in 2003 and $26,641 in 2004. The auditor reviewing Mr. Harvey’s 2003 and
2004 taxation years was sufficiently concerned about this underreported revenue
that he referred the matter to CRA’s Enforcement Division. The Enforcement
Division ultimately recommended to the Crown that criminal charges be laid
against Mr. Harvey under subsection 239(1) of the Act. The charges were
based on Mr. Harvey’s unreported revenue from his 2003 and 2004 taxation years
as well as some other alleged unreported income from his 2000 taxation year
that is not in issue in this Appeal.
[16]
Mr. Harvey ultimately
entered into a plea agreement with the Crown whereby he pled guilty to Count 3
of the Information (Exhibit R-13) and the remaining counts were stayed. The
relevant portions of Count 3 read as follows:
Glen
Harvey … did unlawfully make, or participate in, assent to or acquiesce in the
making of false or deceptive statements in his T-1 Return of Income for the
taxation year 2003 … by understating his taxable income in the amount of
$44,596.87 in the said T-1 Return of Income, and did thereby commit an offence
under Paragraph 239(1)(a) of the said Act.
[17]
As a result of his
guilty plea, Mr. Harvey was sentenced to a fine of $6,700. Mr. Harvey’s counsel
advised me that an Agreed Statement of Facts was not filed with the Court as
part of the plea.
Unreported Revenue and Gross Negligence Penalties:
[18]
Mr. Harvey submits that
he should not be subject to gross negligence penalties under subsection 163(2)
for underreporting his revenues. The classic test for the application of gross
negligence penalties is set out in Venne v. The Queen, 84 DTC 6247, a Federal
Court Trial Division decision that was affirmed by the Federal Court of Appeal in
Findlay v. The Queen, 2000 DTC 6345.
… ‘Gross
negligence’ must be taken to involve greater neglect than simply a failure to
use reasonable care. It must involve a high degree of negligence tantamount to
intentional acting, an indifference as to whether the law is complied with or
not.
[19]
Mr. Harvey pled guilty
to an offence in respect of his 2003 unreported revenue. Mr. Harvey does not
dispute that the unreported revenue in respect of which he pled guilty is the
same unreported revenue in respect of which the penalties have been applied.
[20]
Throughout his
testimony Mr. Harvey frequently referred to having “acquiesced” to pleading
guilty to filing a false tax return. It was clear that Mr. Harvey believed
that it was important to his case that he had “acquiesced” to something as he
used that word frequently in his testimony. It was also clear that he wanted me
to believe that the unreported revenue was all his accountant’s fault, that that
fact had been accepted by the Court when he pled guilty, that he had pled
guilty simply because he recognized that he had signed the return and was
therefore responsible for it and that his understanding was that he was not
admitting to have knowingly done anything wrong. In submissions, Mr. Harvey’s
counsel shed some light on this issue. Counsel submitted that paragraph 239(1)(a)
is a strict liability offence and that in pleading guilty all that Mr. Harvey did
was to agree that he had negligently acquiesced in the making of a false
statement in his return. Counsel therefore argued that, since Mr. Harvey had
merely admitted to negligence, he had not met what counsel described as the
much higher standard of gross negligence that is required to impose penalties
under subsection 163(2). Counsel was unable to direct me to any supporting case
law.
[21]
I do not accept this
position. To do so would be to accept that Parliament drafted the Act in
such a way that mere negligence would give rise to criminal fines or
imprisonment while gross negligence would be required to impose a civil
penalty. This is simply not logical.
[22]
Paragraph 239(1)(a)
is not a strict liability offence. It is a specific intent offence. The accused
must have knowingly committed the act in question or must have been wilfully
blind to its commission. Mere negligence is not enough. The Alberta Court
of Appeal provided a clear summary of the law on this point in R. v.
Breakell, 2009 ABCA 173 at paragraphs 17 and 18:
The
trial judge understood that offences under ss. 239(1)(a) and (d) are true
criminal offences: Knox Contracting Ltd. v. R., [1990] 2 S.C.R. 338
(S.C.C.), at 346-50, (1990), 73 D.L.R. (4th) 110 (S.C.C.). He recognized that
to satisfy the mens rea requirement under s. 239(1)(a), the false
statement must be made knowingly and intentionally: R. v. Derose, 2001
ABPC 146, 297 A.R. 51 (Alta. Prov. Ct.) at para. 157. … As the trial judge
correctly concluded … “[A]ll six charges before me are specific intent offences
for which negligence, in any of its forms, is not the standard to support a
conviction.”
The
trial judge also noted that for charges under both ss. 239(1)(a) and (d),
specific intent may be inferred from an accused’s wilful blindness. His
conclusion on this point too is correct in law …
[23]
Assuming for the sake
of argument that Mr. Harvey acquiesced in making of the false statement in his
2003 return rather than actually making the false statement, he has pled guilty,
not to negligently acquiescing in making the false statement, but rather to
knowingly acquiescing in making the false statement or being wilfully blind to
having done so. Doing something with knowledge or wilful blindness involves a
greater level of mens rea than gross negligence.
[24]
Justice Paris recently
had the occasion to consider the effect of a guilty plea to a criminal offence on
gross negligence penalties. At paragraphs 14 and 15 of Raposo v. The Queen,
2013 TCC 265 he stated:
A
criminal conviction is admissible as prima facie evidence of the
material facts underlying the conviction: Re Del Core and Ontario College
of Pharmacists (1985), 51 O.R. (2d) 1 (Ont. C.A.). Even greater weight may
be accorded to a prior criminal conviction where there has been a full trial
leading to the conviction: Ali et 124558 Canada inc v Cie d’assurance
Guardian du Canada et Cie d’assurance Royale du Canada, 1999 CanLII 13177
(QCCA).
In
this case, given that the conviction was recorded as a result of the
appellant’s guilty pleas, rather than after a trial, it is more appropriate to
treat the conviction as prima facie proof of the fraud by the appellant
against [his employer].
[25]
Based on the foregoing,
I therefore find that there is prima facie proof that Mr. Harvey was grossly
negligent in not reporting all of his revenues in his 2003 taxation year. If
Mr. Harvey wishes to avoid the penalties, he will have to introduce sufficient
evidence to overcome that prima facie proof.
[26]
My understanding is
that Mr. Harvey’s counsel at trial was the same as his counsel in the criminal
proceeding. It is therefore possible that Mr. Harvey’s understanding of what he
was pleading guilty to was informed by the view of the law put forward by his
counsel at trial. If that is the case, then Mr. Harvey may have honestly
believed that he was pleading guilty to negligently acquiescing in making a
false statement. However, I do not need to decide whether an honestly held but
mistaken belief of one’s guilt is sufficient to overcome the prima facie
proof of gross negligence arising from a guilty plea. This is because for the
reasons set out below, I find there is more than enough other evidence to
satisfy me that the Respondent has proven that Mr. Harvey was grossly
negligent.
[27]
Mr. Harvey did not
plead guilty in respect of his 2004 taxation year. Accordingly, the Respondent
must prove that gross negligence penalties should apply to that year. For the
reasons set out below, I find that the Respondent has succeeded in doing so.
[28]
Mr. Harvey testified
that he received a T4A and a statement of commission income (also referred to
as a “payroll summary”) from Re/Max each year. The T4A and statement of
commission income were prepared by Re/Max on a calendar year basis. Ms. Button
confirmed Mr. Harvey’s testimony on these points.
[29]
Mr. Harvey testified
that he would give his T4A and statement of commission income to Mr. Osato each
year when it was time to prepare his tax return. Since the T4A and statement of
commission income were based on a calendar year end, Mr. Harvey explained that
Mr. Osato would have to refer both to the current set of documents and those
for the previous calendar year when preparing Mr. Harvey’s tax return.
[30]
Ms. Button testified
that Re/Max would sometimes print custom statements of commission income for
realtors who did not have calendar year ends. Those custom statements of
commission income would show the commission income earned in that particular
realtor’s fiscal year. While Ms. Button recalled printing such custom statements
for a number of different realtors, she could not recall whether Mr. Harvey was
one of them. Mr. Harvey both denies receiving such a statement from Re/Max or
giving such a statement to Mr. Osato.
[31]
There are 5 key
documents relating to the unreported revenue:
Exhibit R-9: This is a custom statement of commission income for
Mr. Harvey’s fiscal period from September 1, 2002 to August 31, 2003. Ms. Button
testified that it was generated by Re/Max in 2007 at the request of CRA after
the audit began and was given to the auditor and that it shows all of Mr.
Harvey’s revenues for the period. At the top of the document is a summary of
those revenues. Mr. Harvey denies ever receiving a statement like this from
Re/Max.
Exhibit R-11: This custom statement of commission income is
identical to the statement in Exhibit R-9 except that it does not show the date
on which it was created and it has been altered to remove both the revenue
summary at the top of the document and all commission revenue earned from June
26 to August 31, 2003. The commission revenue shown on this altered document
matches the revenue reported by Mr. Harvey on his 2003 tax return. The revenue that
has been removed by the alterations matches the unreported revenue in respect
of which Mr. Harvey pled guilty. Ms. Button testified that Re/Max could not
have produced a statement in this format. Mr. Harvey admits that the
handwritten figure showing total revenue might be in his handwriting but denies
altering this statement or giving this statement to Mr. Osato. Ms. Davis
testified that she received this document from the auditor.
Exhibit R-10: This is a custom statement of commission income for
Mr. Harvey’s fiscal period from September 1, 2003 to August 31, 2004. Ms.
Button testified that it was generated by Re/Max in 2007 at the request of CRA
after the audit began and was given to the auditor and that it shows all of Mr.
Harvey’s revenues for the period. At the top of the document is a summary of
those revenues. Mr. Harvey denies ever receiving a statement like this from
Re/Max.
Exhibit R-12: This custom statement of commission income is
identical to the statement in Exhibit R-10 except that it does not show the
date on which it was created and it has been altered to remove both the revenue
summary at the top of the document and all commission revenue earned from
August 5 to 31, 2004. The commission revenue shown on this altered document
matches the revenue reported by Mr. Harvey on his 2004 tax return. The
revenue that has been removed by the alterations matches the unreported revenue
in respect of which Mr. Harvey was charged for 2004 prior to those charges
being stayed as part of the plea agreement. Ms. Button testified that Re/Max
could not have produced a statement in this format. Mr. Harvey admits that
the handwritten figure showing total revenue is in his handwriting but denies
altering this statement or giving this statement to Mr. Osato. Ms. Davis
testified that she received this document from the auditor.
Exhibit R-2: This is a handwritten document prepared by Mr. Harvey.
It lists various revenues, expenses and other amounts related to the
preparation of his 2003, 2004 and 2006 tax returns. The amount of revenue shown
on the 2003 and 2004 sheets is identical to the revenue ultimately reported in
Mr. Harvey’s 2003 and 2004 tax returns respectively. Mr. Harvey denies giving
this document to Mr. Osato but Ms. Davis testified that Mr. Osato gave this
document to her.
[32]
The parties have very
different views of the above documents and of how Mr. Harvey’s unreported
revenue came to be unreported.
[33]
The Respondent’s theory
is that Mr. Harvey obtained commission statements similar to those shown in Exhibits
R-9 and R-11 from Re/Max, altered those documents to remove some of the revenue
(thus becoming Exhibits R-10 and R-12) and gave those altered documents to Mr.
Osato for the purpose of preparing Mr. Harvey’s 2003 and 2004 tax returns.
The Respondent believes that Mr. Harvey did not give Mr. Osato either the
T4As or the calendar year statements of commission income that Mr. Harvey
received from Re/Max. The Respondent also believes that Mr. Harvey gave Mr.
Osato the handwritten summaries of revenue, expenses and other items for 2003
and 2004 contained in Exhibit R-2 as part of the preparation of his 2003 and
2004 tax returns.
[34]
The Respondent’s theory
is supported by the following:
•
Ms. Button testified
that the altered commission statements could not have been produced in their
altered state by Re/Max’s computer system.
•
Ms. Davis testified
that Mr. Osato gave the handwritten list of revenues and expenses to her.
Therefore, Mr. Osato must have had that document in his possession.
•
Ms. Davis testified
that she received the altered commission statements from the auditor.
Therefore, the auditor must have had those statements in his possession. The
auditor no longer works at CRA and was not called to testify. This left a gap
in the evidence as to how the altered commission statements came into his
possession. However, I think it is reasonable to infer in the circumstances
that since he did not receive them from Re/Max, he must have received them from
either Mr. Osato or Mr. Harvey.
[35]
Mr. Harvey places all
of the blame for the unreported revenue on Mr. Osato. He claims that he gave
Mr. Osato the documents that Mr. Osato needed to correctly report his income
and that Mr. Osato failed to do so. I do not find Mr. Harvey’s evidence
credible for the simple reason that it defies logic. Mr. Harvey would have
me believe:
•
that he gave Mr. Osato
his T4As and calendar year statements of commission income and asked him to
correctly calculate his income;
•
that the calendar year
statements of commission income that Mr. Harvey gave to Mr. Osato have
since been lost by either Mr. Osato or the CRA;
•
that, using those
statements, Mr. Osato somehow incorrectly calculated Mr. Harvey’s revenues;
•
that Mr. Harvey did not
obtain custom commission income statements from Re/Max for his fiscal year;
•
that presumably Re/Max
therefore issued custom commission income statements showing Mr. Harvey’s
income to someone other than Mr. Harvey;
•
that someone other than
Mr. Harvey altered those statements to hide the true amount of revenue that Mr.
Harvey had received and then gave those altered statements to the auditor;
•
that the amount of
income shown on the altered statements coincidentally equals the amount of
income incorrectly calculated by Mr. Osato;
•
that the handwritten
revenue totals that appear on the top of the altered commission income
statements (that Mr. Harvey has admitted in one case is his handwriting and in
the other case might be his handwriting) were added after those altered
statements came into his possession during the audit process;
•
that the handwritten
list of revenues and expenses in Exhibit R-2 was prepared by Mr. Harvey as his
own working papers not as instructions to Mr. Osato and that the revenue
figures thereon (that are the same as those on the altered commission income
statements) were not placed there by him as an instruction to Mr. Osato but
rather were added by him after Mr. Osato told him what the proper revenue
figures were;
•
that he does not think
he gave those handwritten records to Mr. Osato but that somehow Mr. Osato had them
in his possession to give to Ms. Davis;
•
that the failure to
properly report his revenue was entirely Mr. Osato’s fault; and
•
that despite everything
that has occurred, Mr. Osato never told Mr. Harvey how he arrived at the
incorrect revenue totals and Mr. Harvey still does not know what error Mr.
Osato made.
[36]
The Respondent’s theory
is clean, logical and supported both by the testimony of Ms. Button and Ms.
Davis and by the documents. By contrast, Mr. Harvey’s explanation defies
belief.
[37]
The simple fact is that
someone altered the custom commission income statements. Re/Max did not do it.
I have no reason to think, nor evidence to suggest, that the CRA did it.
Therefore there are only two people left who could have made the alterations:
Mr. Harvey and Mr. Osato. There is no evidence to suggest that Mr. Osato
made the alterations. Of the two of them, only Mr. Harvey would stand to gain
from making the alterations.
[38]
Mr. Osato was not called
as a witness. Given the strength of the Respondent’s case, I see no reason for
the Respondent to call Mr. Osato as a witness. On the other hand, if Mr.
Harvey’s story were true, Mr. Osato would have provided invaluable testimony in
support of Mr. Harvey’s position. I draw an adverse inference from Mr. Harvey’s
failure to call Mr. Osato.
[39]
Mr. Harvey pled guilty
in respect of his 2003 taxation year. The altered document which gave rise to
the charges for that year is the same type of altered document that gives rise
to the unreported income in the 2004 taxation year. Mr. Harvey did not
provide any explanation of how what happened in 2004 was any different for tax
purposes than what happened in 2003.
[40]
My views of Mr.
Harvey’s credibility in respect of the unreported revenue are not enhanced by
his inconsistent explanations of what happened. On cross‑examination, he
testified that he did not know what error Mr. Osato made. However, in a
handwritten statement that Mr. Harvey previously made to CRA Appeals (Exhibit
R-5), Mr. Harvey stated that Mr. Osato had mistakenly treated Mr. Harvey as
having an August 1 fiscal year end rather than an August 31 fiscal year end in
both 2003 and 2004. This explanation is not only inconsistent with Mr. Harvey’s
statement at trial, it also makes no sense as it would not explain how the
revenues for July 2003 were missed and the revenues for August 4, 2004 were
included nor would it explain how, having mistakenly identified the fiscal year
end in 2003, Mr. Osato would not have picked up the missing August 2003 income
when he prepared the 2004 tax return. On cross-examination, counsel for the
Respondent presented another handwritten document to Mr. Harvey (Exhibit R-8).
Mr. Harvey acknowledged that it was his handwriting. The document reads:
Annual
Income
Sept 1/02 – Aug 31/03
I
took the summer off in 03 to go to the lake with my kids for July 1 – Aug 31/03
There is what appears to be part of Mr. Harvey’s
signature at the bottom of the document. Counsel for the Respondent suggested
to Mr. Harvey that Mr. Harvey had given this document to the auditor for the
purpose of explaining why the altered statement of commission income did not
show any commissions being paid in the summer of 2003. Mr. Harvey denied this.
I do not find his denial to be credible. I cannot imagine any other reason that
he would have prepared this document. In addition, Mr. Harvey’s explanation in
this document that he did not work in the summer of 2003 is further
contradicted by his subsequent submission to CRA Appeals where, in discussing
his use of a vehicle in the summer of 2003, he stated:
I
only go to the lake some times [sic] in the summer for weekends etc. … My work
does not just stop because I go to the lake for a few days here & there
thats [sic] unreasonable.
The impression that I am left with is that Mr. Harvey
tried one explanation on for size with the auditor, then a different one with
CRA Appeals and, having failed on both prior attempts, finally decided to feign
ignorance at trial.
[41]
For all of the reasons
set out above, I find that the Respondent has successfully introduced
sufficient evidence to prove that Mr. Harvey was grossly negligent in
underreporting his 2003 and 2004 revenues.
Expenses in General:
[42]
I will now turn to the
various expenses in dispute. Many of Mr. Harvey’s expenses are not backed by
receipts. They either have no documentary support or the only support that they
have is in the form of bank or credit card statements instead of actual
receipts.
[43]
Mr. Harvey testified
that each year he would sort his business receipts by type of expense, prepare
an adding tape totalling each type of expense and then put those documents in
folders and give them to Mr. Osato. He stated that Mr. Osato would review the
receipts and advise Mr. Harvey which items he could and could not deduct.
[44]
Mr. Harvey filed 6
books of receipts, bank statements and credit card statements (Exhibits A-1 to
A-6). He explained that he did not have receipts for some categories of
expenses or did not have all of the receipts for a given category of expenses
because those documents had been lost either by Mr. Osato or the CRA. He stated
that he had given all of the documents to Mr. Osato when Mr. Osato
prepared his returns, retrieved the documents from Mr. Osato and given them to
CRA when the audit commenced and ultimately received the documents back from
the CRA when the investigation was completed. He stated that the documents were
in a different order when he received them back and that there were many
documents missing.
[45]
I am not able to accept
Mr. Harvey’s explanation for the missing documents for a number of reasons. If
he had truly provided all of the documents in question to Mr. Osato, then why
did Mr. Harvey not call Mr. Osato as a witness to verify that. In
addition, while I could accept that the CRA or Mr. Osato might have lost an
entire category of receipts, I find it difficult to accept that they lost only
some receipts within a given category. Finally, Mr. Harvey has a history
of not keeping adequate books and records. He has previously been audited on at
least two occasions and has been warned by the CRA in writing in detail that
his records were inadequate and the types of records that he needed to maintain
in the future (Exhibit R-1). I find it far more likely that Mr. Harvey
continued to keep poor records than that he began keeping excellent records and
someone else lost them.
[46]
Counsel for Mr. Harvey
submitted that the fact that Mr. Harvey specifically admitted that two
categories of expenses were estimates should enhance his credibility and the
fact that all of the expenses had been calculated down to the penny was an
indication that Mr. Harvey had not just made the figures up. I agree that Mr.
Harvey’s admission that his parking and taxi expenses were estimates was
forthright of him. That is reflected in my decision in respect of those amounts
below. I do not consider the fact that the expenses were not round numbers to
be of any significance. I have already concluded that Mr. Harvey provided
altered commission income statements to Mr. Osato in order to hide his income.
If he is capable of that level of deceit, I can hardly be expected to find that
the fact that expenses are stated in non-round figures enhances his
credibility.
[47]
While it is not always
necessary for a taxpayer to have receipts to support his or her expenses, a
taxpayer like Mr. Harvey who has otherwise been found to lack credibility and
whose expenses involve things such as automobiles, cell phones, home offices
and meals and entertainment that could also be personal in nature, is going to
have difficulty overcoming the Minister’s assumptions without such receipts.
[48]
I will now turn to the
individual categories of expenses that are in dispute.
Home Office Expenses:
[49]
Mr. Harvey claimed
$4,546.87 in home office expenses in each of 2003 and 2004. He testified that
he had calculated the square footage of his home office to be 12.5% of the home
and had multiplied that percentage by this house costs to arrive at the cost of
his home office. He provided very few receipts to support these house costs. The
receipts were among the ones he claimed had been lost.
[50]
The claim for house
costs included such items as interest, property taxes, gas, hydro, water and
insurance which vary each year yet the figure claimed by Mr. Harvey was
identical in both 2003 and 2004 and was used again by him on his handwritten
sheet for 2006. This indicates that Mr. Harvey did not actually calculate a
figure each year.
[51]
Counsel for Mr. Harvey
drew my attention to a listing of the house costs that Mr. Harvey had given to
CRA Appeals. That list included $742 for cable television and $3,600 for office
equipment. Mr. Harvey had previously testified that no office equipment was
included in his claim for home office expenses. I also cannot see why cable
television would be a home office expense when Mr. Harvey has separately made a
claim for an internet connection.
[52]
While I do not accept
the figure put forward for home office use by Mr. Harvey, I do accept that
he had a home office that would qualify as a deduction. Accordingly, I will
allow Mr. Harvey a deduction of $2,000 per year for his home office. I suspect
that this figure is a low estimate of Mr. Harvey’s actual costs but, in the
absence of any supporting documents, I am not prepared to reward Mr. Harvey’s
poor record keeping by using a middle or high estimate.
Travel Expenses:
[53]
Mr. Harvey claimed
$2,160.82 in travel expenses in 2003 and $2,818.62 in travel expenses in 2004.
He did not provide any receipts to support these travel costs. Those receipts
were among the ones he claimed had been lost.
[54]
Mr. Harvey testified
that in 2003 he travelled to Victoria for a Re/Max awards conference and in
2004 he travelled to Victoria for a Re/Max marketing seminar and to Toronto to
meet with some realtors for one day. He explained that his trip to Toronto was
a stopover on a family vacation to the Dominican Republic and that he only
expensed the Toronto portion of the trip.
[55]
Mr. Harvey testified
that he had a very detailed calendar which tracked all of his activities each
day. Such a document would have been very useful to confirm his travel
expenses. He claims, however, that he gave his calendar to the auditor and
never received it back.
[56]
On cross-examination,
Mr. Harvey was asked about his debit and credit cards. He testified that his
wife (from whom he was separated in the periods in question), his teenage
daughters and his assistant would all have had access to his debit and credit
cards. However, he was very careful to specify that there were strict rules
about how the cards were to be used. He stated that the cards could not be used
without his explicit permission each time and then that they were only to be
used for business expenses. He explained that whoever needed to use his cards
would have had to phone him first to get that permission. He stated that this
only occurred on rare occasions and that the total charges incurred by all of
these individuals in any given year would have been less than $300.
[57]
Later in
cross-examination, counsel for the Respondent drew Mr. Harvey’s attention to
the fact that during the period that he claimed to have been in Victoria in
2003 numerous charges were incurred on his bank account that would indicate
that he was, in fact, in Winnipeg. Mr. Harvey explained that the charges must
have been incurred by his assistant. The charges in question include the
purchase of a $307 printer, two purchases of gas, a $38.60 purchase at
McDiarmid Lumber, a car wash and a number of meals. This level of use of Mr.
Harvey’s debit card and the types of expenses it is being used for do not match
Mr. Harvey’s evidence of the rare circumstances in which his assistant would be
permitted to use his card. In addition, the charges incurred over this 5 day
period exceed the $300 amount that Mr. Harvey stated would have been spent on both
his debit and credit cards in the entire year. Based on the foregoing, I do not
accept Mr. Harvey’s evidence that he was in Victoria in 2003.
[58]
Given my overall view
of Mr. Harvey’s credibility, my specific view of his credibility in respect of
the alleged 2003 trip to Victoria, the lack of any documentation supporting the
2003 and 2004 travel expenses, the lack of any documentary evidence of the
existence of the conferences or seminars and the connection between the Toronto
stopover and a family vacation, I am not prepared to allow Mr. Harvey any
travel expenses.
Meals & Entertainment Expenses:
[59]
Mr. Harvey claimed
$4,575.70 in meals and entertainment expenses in 2003 and $6,390.80 in meals
and entertainment expenses in 2004. Both of these figures are the amounts
calculated after the 50% reduction in subsection 67.1(1).
[60]
Mr. Harvey provided
copies of receipts for some of these expenses and bank and credit card
statements in support of others. Some of the receipts that were provided had
the names of the individuals that Mr. Harvey said he entertained. He testified
that some of these names were written on the receipts contemporaneously while
others were written on the receipts prior to giving them to the auditor. He
claimed that the names that were written prior to the receipts being given to
the auditor were gathered from his now missing calendar.
[61]
As stated above, I
accept that Mr. Harvey regularly takes clients out to football games, for a
game of golf or for meals or drinks. Mr. Harvey testified that he virtually
always pays for the clients when he does so and that this is an essential part
of his business. I accept that testimony. I do not, however, accept that Mr. Harvey
takes clients out as frequently as he claims to have nor do I accept that all
of the amounts that Mr. Harvey claims to have spent entertaining clients were
in fact spent entertaining clients.
[62]
The very first receipt
in the Book of Documents is for $8.28 in take-out food from McDonalds and
includes the purchase of what appears to be a Happy Meal. The third receipt in the
book is also for take-out food from McDonalds although it is only for $7.50 and
no child appears to have been present for this meal. Throughout the documents
there are numerous receipts for amounts under $8 at Subway. Mr. Harvey went to
great lengths to explain how important it was to maintain his image as a
successful realtor and to entertain his clients in style. With no disrespect to
McDonalds and Subway, I have a hard time accepting that Mr. Harvey was enhancing
his image by treating his clients to take-out fast food. The foregoing harms
Mr. Harvey’s already weak credibility further. It suggests that Mr. Harvey has
no qualms about including personal meals in his claims for business expenses.
This casts significant doubt on whether the many expensive drinks and meals
that he has claimed were also personal.
[63]
Golf expenses made up a
significant portion of Mr. Harvey’s meals and entertainment claim in both
years. To the extent that they were incurred for business purposes, paragraph
18(1)(l) would deny Mr. Harvey’s golf expenses in any event.
[64]
While I do not accept
the figures put forward for meals and entertainment by Mr. Harvey, I do accept
that he spent a great deal of time entertaining his clients. Accordingly, I
will allow Mr. Harvey a deduction of $1,200 per year for meals and
entertainment. In reaching this figure I have already applied the 50% deduction
in subsection 67.1(1). I suspect that this figure is a low estimate of Mr.
Harvey’s actual costs but, given his lack of credibility both in terms of the
documents provided and in general, I am not prepared to reward Mr. Harvey’s
poor record keeping by using a middle or high estimate.
Motor Vehicle Expenses:
[65]
Mr. Harvey claimed
$22,357 in motor vehicle costs in 2003. The Minister allowed the deduction of
$11,699. Mr. Harvey claimed $32,529 in motor vehicle costs in 2004. The
Minister allowed the deduction of $8,527. The vehicle costs consisted of gas,
car washes, a licence fee, parking, repairs and leasing costs. There was also a
claim for taxi costs and a category described as “unallocated” costs. Mr.
Harvey provided some receipts and supported other amounts with bank or credit
card statements.
[66]
Mr. Harvey admitted
that the taxi expense in 2003 was simply an estimate of $100 per month. He
explained that he did not drink and drive and, since he regularly had drinks
with clients, he would take a taxi home. He stated that he paid cash and did
not receive receipts. The Minister did not allow Mr. Harvey any deduction in
respect of these taxi costs. Having looked at Mr. Harvey’s meals and
entertainment receipts, I acknowledge that a significant number of them
involved the purchase of alcohol. I accept Mr. Harvey’s evidence that he drank
with clients, took taxis home, paid cash and did not receive receipts. However,
given Mr. Harvey’s general lack of credibility, I am not prepared to
simply accept his word that he spent $100 a month on taxis. I will accordingly
allow a deduction of $600 in 2003.
[67]
Mr. Harvey also
admitted that the parking expense in 2003 was simply an estimate of $100 per
month. The Minister did not allow Mr. Harvey any deduction in respect of these
parking costs. Mr. Harvey explained that he frequently parked in downtown
Winnipeg at metered parking spots where he would not receive receipts. I accept
Mr. Harvey’s testimony on this point. If he parked 5 days a week, 4 weeks a
month that would only amount to $5.00 in parking per day. This amount seems
reasonable to me and I can hardly fault Mr. Harvey for not providing receipts
from parking meters that, at the time, did not produce receipts. I will
accordingly allow the full $1,200 deduction claimed by Mr. Harvey.
[68]
Mr. Harvey drove a
Jeep. He claimed 90% of its use was for business purposes. The Minister
reviewed Mr. Harvey’s expenses and allowed various amounts for gas, car washes,
licence fees and unallocated expenses based on the Minister’s assessment of the
documents and Mr. Harvey’s use of the vehicle. I have not seen or heard any
evidence that would convince me that the Minister’s conclusions were incorrect.
[69]
The only vehicle issue
that remains is the repair ($15,326.66) and lease ($2,897.28) expenses from
2004. Mr. Harvey testified that one night in 2004, Mr. Harvey’s daughter
and a group of her friends took Mr. Harvey’s Jeep from his garage without his
knowledge or permission. None of the girls had a driver’s license. Mr. Harvey
does not know which girl was driving. The Jeep was in an accident and suffered
very significant damage. Mr. Harvey’s insurer refused to cover the cost of
repairing the Jeep on the basis that it was being operated by an unlicensed
driver at the time of the accident. The Jeep took months to repair. It was a
leased vehicle, pursuant to the terms of the lease, Mr. Harvey both had to
repair the vehicle and continue paying the lease while the vehicle was being
repaired. Mr. Harvey bought a Jaguar to use while the Jeep was being
repaired. He never used the Jeep for business purposes again. I accept Mr.
Harvey’s evidence on these points. I cannot imagine that he would have allowed
his unlicensed daughter and her unlicensed friends to drive his Jeep. Mr.
Harvey deducted 90% of the costs of repairing the Jeep and the lease payments.
The Minister denied the deduction of both amounts on the basis that they were
not incurred for the purpose of gaining or producing business income. There is
no dispute that the expenses were incurred.
[70]
This issue raises a
number of interesting questions. I was not directed to any case law
specifically on point. I will deal with the repair expenses first. Had the
repair expenses arisen as a result of an accident that Mr. Harvey had had while
driving for business purposes, those expenses would have been fully deductible.
On the other hand, had the repair expenses arisen as a result of an accident
that Mr. Harvey had had while driving for personal purposes, none of those
expenses would have been deductible. However, since Mr. Harvey was not
operating the vehicle at the time of the accident, it is not as simple to
determine whether the vehicle was being used for business or personal purposes.
[71]
Counsel for the
Respondent submitted that the fact that the vehicle was taken by Mr. Harvey’s
daughter makes the use of the vehicle at the time of the accident personal. Had
Mr. Harvey allowed his daughter to use the vehicle, then I would have
considered the vehicle to have been being used for personal purposes at the
time of the accident and not allowed the repair expenses to be claimed.
However, Mr. Harvey did not allow his daughter to use the vehicle. The vehicle
was taken without his permission or knowledge. In those circumstances, I do not
consider the fact that his daughter was among those who stole his car to be
relevant.
[72]
What I must do is to
determine what use was being made of the vehicle when it was stolen, not when
it was actually in the accident. Mr. Harvey uses the vehicle for both business
and personal purposes. He also uses his house for both business and personal
purposes. Therefore it is not possible to state with any certainty that the
vehicle, while parked at his house, was being used for either business or
personal purposes. The better argument is that it was simply sitting idle,
being used for neither purpose. In the circumstances, I feel that the method
chosen by Mr. Harvey of allocating the expense based on his percentage business
use of the vehicle was appropriate.
[73]
Mr. Harvey claimed that
he used his vehicle 90% for business purposes. Given his description of the
general nature of his business, I am prepared to accept that he had a very high
business use of the vehicle. However, he has not satisfied me that he used his
vehicle 90% of the time for business purposes. Given Mr. Harvey’s
testimony that he would drive the vehicle to his cottage in the summer, the
fact that he lived alone during the period so there was presumably no other
person in his household who was able to travel to make domestic purchases, the
fact that he had a social life outside of work during the period which would
presumably have caused him to drive from time to time and the fact that he had
two teenage daughters during the period who he would presumably travel with
from time to time and given my general findings as to his credibility, I am
going to reduce his business use to 80%. Accordingly, I will allow $13,623.70
in additional repair expenses in 2004 (i.e. $15,326.66 / 90% x 80%).
[74]
Mr. Harvey entered into
the lease for a mix of business and personal purposes. Although he was unable
to use the vehicle during the relevant period due to the accident, since I have
concluded that the vehicle was being used for mixed business and personal
purposes at the time that it became unavailable, I therefore conclude that the
lease payments following that time were for mixed business and personal
purposes and are deductible based on 80% business use. Accordingly, I will
allow $2,575.36 in additional lease expenses in 2004 (i.e. $2,897.28 / 90% x
80%).
Insurance:
[75]
Mr. Harvey claimed
$3,178.58 in insurance costs in 2003 and $3,608.28 in insurance costs in 2004.
He did not provide any documentary support for these amounts. He stated that he
believes these amounts were for errors and omissions insurance that was
arranged through Re/Max but that he is not sure. It should have been relatively
easy for Mr. Harvey to obtain documentary evidence of these amounts from Re/Max
or at least evidence of the annual amount that is currently payable. In his
submissions to CRA Appeals (Exhibit R-5), Mr. Harvey characterized these
amounts as “long term and short term disability insurance”. Given Mr. Harvey’s
contradictory statements, in the absence of documentary evidence, I am not
prepared to allow this expense.
Telephone:
[76]
Mr. Harvey claimed
$5,594 in telephone and internet expenses in 2003. The Minister allowed the
deduction of $1,912. Mr. Harvey claimed $6,004 in telephone and internet
expenses in 2004. The Minister allowed the deduction of $3,078. Mr. Harvey
provided copies of bills in support of his expenses. It was not entirely clear
to me which amounts the Minister had allowed and which amounts had been denied.
[77]
Mr. Harvey claimed that
he required a business phone / fax line in his home, a pager and 2 cell phones.
The pager bills appeared to have a significant balance carried forward from a
prior period and to consist mostly of interest charges on that balance. He
explained that he needed two cell phones because the messages on one would
sometimes fill up. I do not accept his explanation for needing two cell phones.
A third party’s name was on one of the cell phone accounts. Mr. Harvey gave a
very convoluted explanation about the individual being someone that he had
previously worked with who had a great unlimited calling plan that lasted for
life. Apparently the individual agreed to transfer his phone to Mr. Harvey so
that Mr. Harvey could take advantage of the plan and the phone company
allowed such a transfer once but would not allow the name on the plan to be
changed. Apparently the individual dying in 2009 and the phone company then
allowed Mr. Harvey to put the phone in his own name despite the plan being for
life. Mr. Harvey’s daughter had a cell phone on one of the accounts for part of
the period. She was a teenager at the time. Mr. Harvey provided a very weak
explanation for this stating that his daughter had her own personal cell phone
but that she sometimes delivered flyers for him door to door in his
neighbourhood and needed a phone from him so that she could call him for a ride
when she was done and to tell him how many hours she had worked. This
explanation is not only ridiculous, it also contradicts a statement that Mr.
Harvey previously made to CRA Appeals where he stated “I agree the portion for
my daughter (sorry I did not notice) should be disallowed” (Exhibit R-5).
[78]
Based on Mr. Harvey’s
specific lack of credibility on this issue, his general lack of credibility and
the uncertainty about which expenses have already been allowed, I am not
prepared to make any changes to the amount of phone expenses already allowed by
the Minister.
Decision:
[79]
The appeal is allowed
and the matter is referred back to the Minister for reconsideration and
reassessment on the basis that Mr. Harvey is entitled to the following
additional deductions:
•
$2,000 in home office
expenses in each of his 2003 and 2004 taxation years;
•
$1,200 in meals and
entertainment in each of his 2003 and 2004 taxation years;
•
$600 in taxi expenses
in 2003;
•
$1,200 in parking expenses
in 2003;
•
$13,623.70 in vehicle repair
expenses in 2004; and
•
$2,575.36 in vehicle lease
expenses in 2004.
Costs:
[80]
At the end of the
hearing counsel for the Respondent requested an opportunity to make submissions
on costs. I will therefore hold off ruling on costs pending submissions from
the parties.
Signed at Ottawa,
Canada, this 26th day of September 2013.
“David E. Graham”
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