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Citation: 2004TCC725
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Date: 20041214
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Docket: 2002-1737(IT)G
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BETWEEN:
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CENTRAL INTERIOR INCORPORATED,
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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
Teskey, J.
[1] The Appellant appeals its
assessments of income tax for fiscal years ending August 31,
1994 and August 31, 1995, both made in April of 2001.
Issues
[2] The first issue is that since the
assessments were more than three years after the original Notices
of Assessments, can the Respondent satisfy the Court that the
Appellant has made misrepresentations in its August 31, 1994
and August 31, 1995 tax returns that are attributable to
neglect, carelessness or wilful default, pursuant to
paragraph 152(4)(a)(i) of the Income Tax Act
(the "Act")?
[3] If the Court finds in favour of
the Respondent on the above issue, the appeals will be disposed
of. However, should I find that the Respondent has failed to show
that the misrepresentations are attributable to neglect,
carelessness or wilful default, then a second issue arises with
regards to the fiscal year ending August 31, 1995 concerning
a waiver signed on January 10, 2000, at a time when the
Appellant was dissolved and prior to articles of revival.
Facts
[4] Evidence on behalf of the
Appellant was given by Savino Placentile ("Sam"),
the sole shareholder, director and officer of the Appellant,
Paul Babber ("Babber"), a self professed
accountant and tax consultant, Paul Malik
("Malik"), a bookkeeper and Donald Scott
("Scott") a chartered accountant.
[5] Evidence on behalf of the
Respondent, was given by David Fisher ("Fisher"),
the Canada Customs and Revenue Agency ("CCRA") tax
auditor. With regards to the evidence given by both Sam and
Babber, there are areas of their testimonies that I cannot
accept. On the other hand, there are parts of both testimonies
that can readily be accepted. Anywhere there is a conflict in
their testimony, I accept Babber's evidence.
[6] I accept the testimony of both
Scott and Fisher without hesitation.
[7] Sam, a cabinet maker with very
limited education, immigrated to Canada in 1968 from Italy. He
had various jobs using his skills and eventually started a
business in 1988 with a partner and went on his own in 1991, when
he incorporated the predecessor to the Appellant.
[8] The Appellant's charter was
cancelled on June 25, 1994 by the Companies Branch of the
Minister of Consumer and Commercial Relations, for failure to
file a "Special Notice".
[9] Sam applied for and received
Articles of Revival, which were issued on July 19, 2001,
because he had been advised that the assets of the Appellant
could go to the province.
[10] Sam claims he was unaware of the
dissolution until he received a letter from the Ontario Ministry
of Finance in January 2001. However, part of the Respondent's
Book of Documents contains a letter from Revenue Canada to the
Appellant, dated October 11, 1995, and date stamped for
receipt purposes October 28, 1995. I do not believe
Sam's evidence on this point. I find that he received the
Revenue Canada's correspondence and since the Appellant in
September 1995 was dormant, he just ignored the letter and forgot
about it. Sam obviously did not bother to read this letter nor
seek advice on its contents. It is noted that the fiscal year
ending August 31, 1995 had just ended.
[11] Babber acted as an accountant for Sam
and his corporations since 1988, when he went into business,
preparing financial statements and tax returns. In 1990, he
started to prepare, and did so right up to the spring of 1995,
the required quarterly GST returns, which Sam signed and attached
a cheque for the required amounts and mailed out the returns.
[12] Sam claimed that he would give Babber
what he called his cashbook, monthly bank statements, the deposit
book and cancelled cheques. I find this statement false for the
reasons set forth in the next paragraph.
[13] Babber claims that he received the
monthly bank statements, the deposit book, the cancelled cheques
and a list of accounts payable and a list of accounts receivable
and may have seen the cashbook. I find this as a fact, that lists
of accounts receivable and payables were prepared and delivered
to Babber. The tax return for the year ending August 31,
1994, prepared by Babber, contains a balance sheet, statement of
retained earnings, statement of income, a note to financial
statements and tax schedules. The balance sheet shows accounts
receivable and accounts payable.
[14] Sam, who has very little education,
basically said "I do not know anything about bookkeeping and
or nothing about the accrual accounting system" and that he
worked on a cash basis. This, I do not totally accept. He is a
good manager/owner of a flourishing business, who prepares his
own bids for work and knows his costs of doing the work. He also
provided part of the necessary documents to Babber so that he
could prepare accrual financial statements and tax returns.
However, neither he nor Babber ever took into consideration work
in progress or any allowance for bad debts.
[15] Babber claimed that he prepared all
financial statements on the accrual method. However, I accept
Scott's testimony that Babber thought he was using the
accrual method, when he actually was using a hybrid method, as no
allowance was made for bad debts or work in progress.
[16] Scott very quickly looked at a list of
receivables and identified four separate invoices, all dated
September 1, 1994 (which would be the first day of fiscal
year ending August 31, 1995) totalling some $137,211. I draw
the conclusion that Sam deliberately held off those invoices over
the year-end to September 1st, as he knew he had had a
good profitable year that had just ended on August 31, 1994
and to put the income into the next year as he believed income is
received when an invoice is paid.
[17] Sam claims that he believed that there
was no connection between taxable income and income for GST
purposes. This may be true, but there is a very definite
connection between gross business income and income that a
taxpayer collects GST on, as these are the same figures. Sam,
having signed each and every GST return, would have good round
figures in his head of the amount of gross income he received
that year; perhaps not within $10,000 or $20,000. I find that
even the most cursory look at the August 31, 1994 tax
return, Sam would have been able to discover that the revenue was
understated by $100,000, more or less and the expenses were
overstated by approximately the same amount.
[18] Sam incorporated another company called
Central Interior Corporation on September 24, 1994 and
started using it as the active business company in
December 1994.
[19] Sam said that in August 1994, he was
threatened with litigation and that is why he incorporated the
new company.
[20] The only difference in name being the
Appellant's last word "Corporation" instead of
"Incorporated", this would be done to gain and
keep all his built up goodwill, but also had the advantage that
many people would never know the difference and probably did so
to pass the new corporation off as the old one.
[21] The Appellant was audited by someone
for either corporate income tax or GST in 1993. Sam had nothing
to do with the auditor and when advised that there was apparently
$2,300 in tax owing, he just paid it. I believe a normal
reasonable taxpayer would be demanding how this liability arose,
and would be at his accountant's office demanding what went
wrong, and how can the problem be fixed. I find that Sam just did
not care. This demonstrates a blasé attitude on the part
of Sam and that he did not care, if the records were exactly
right. Mathematics is an exact science. The 1993 audit should
have set off warning bells and Sam's ignoring of the problem
is negligence and making no attempt to determine the cause of the
problem and rectifying the same, is again, negligence on
Sam's part. Thus, continuing the same bookkeeping system was
also negligent. Babber claimed the audit only resulted in a minor
adjustment of less than $10,000 tax owing.
[22] Babber said, and I accept his
statement, that after doing the financial statements ending
August 31, 1994 and the tax return of the Appellant, he did
not do anything for the Appellant but did the same work for the
new company for September 31, 1995, and, did nothing, for
the Appellant until he was asked in September 1996 to prepare and
file a tax return for the year ending August 31, 1995, which
should have been filed within six months of the fiscal
year-end.
[23] I find that the only reason a tax
return for August 31, 1995 was filed, was that the Appellant
received a demand for the return to be filed and that Sam advised
Babber that the Appellant was inactive and had losses. Without
documents, Babber prepared the August 31, 1995 tax return as
"nil".
[24] I accept Babber's testimony with
regards to discussions with Sam concerning profits. He stated
that Sam knew his business was quite profitable, but was always
asking to make it look as if the Appellant was losing money and
not as Sam alleges, that he could not understand why the year
ending August 31, 1994 produced a loss. Yet, the cash book
in the first six months of fiscal year August 31, 1995 shows
deposits of $1,067,713 and Scott identified a revenue of
$1,093,357. At the very least, Sam's instructions to Babber
shows "a negligent set of instructions" or "a
deliberate misstatement" about a million dollars of gross
business income.
[25] The CCRA started an income tax and GST
audit of the Appellant as the GST returns were showing a large
volume of sales, yet the income tax return for August 31,
1995 showed no sales.
[26] The auditors very soon found that there
were many problems.
[27] The Appellant, because of this, hired
two different accountants in succession who were not comfortable
with the Appellant's records, so the Appellant hired Scott to
prepare what was necessary to get to the bottom of the problems.
Scott prepared financial statements for the Appellant for the
fiscal year ending August 31, 1994 and each subsequent year
until August 31, 2000.
[28] Scott was given the cashbooks, deposit
books, bank statements, lists of the accounts receivable and
payable and the cancelled cheques. Over a three month period, he
spent some 75 to 80 hours assembling the documents.
[29] Scott did not believe that the 1993
financial statements were correct, but since that year was
statute-barred and since he had to have a starting point,
he accepted the August 31, 1993 financial statements as
correct. He said that the records were a mess and nothing tied
into anything. From this, I find that the books and records of
the Appellant were not adequate and were negligently kept.
[30] Scott said that in the long run, it did
not matter if the Appellant was using the cash method as opposed
to the accrual method. He also said that Babber believed he was
using the accrual method when he was actually using the cash
method, even though he had the lists of accounts receivable and
payable.
[31] Scott said he had the sales figures
from actual invoices and that these sale figures were accurate,
but in regards to the expenses he could only use his best
estimate by looking at the net worth of the company as of
August 31, 1993 and each year thereafter, and that the
expense figures are just plugged in figures. This, again,
demonstrates that the Appellant's bookkeeping was less than
adequate and could not be relied upon.
[32] Scott's figures were accepted by
the Appellant and sent to the CCRA that accepted them and issued
the appealed assessments.
[33] The amended statements for fiscal year
ending August 31, 1994 increased the sales by $114,236 and
decreased the expenses by $101,828, thus turning a loss of
$56,276 into a net profit of $187,296.
[34] The amended statements for fiscal year
ending August 31, 1995 has sales of $1,053,357, with a net
income of $137,146, whereas the original return filed
September 25, 1996 showed no sales, no income and just
carried forward a loss of $57,302.
[35] Thus, the Appellant in its two original
returns for the fiscal years ending August 31, 1994 and
August 31, 1995, made substantial misrepresentations.
[36] I believe that part of the reason for
the new company to have a name so similar was to confuse the CCRA
with the hope that the $1,053,357 sales, with a net income of
$137,146, would be simply overlooked. Sam knew that the Appellant
continued to operate in the fall of 1994 and knew that he billed
out on September 1st, 1995, four invoices totalling $137,211
and on the first of that month, a further invoice for $120,000
and that in the period September 1, 1994 to
mid-December, the Appellant had sales in excess of one
million dollars, yet he did not ask Babber to do financial
statements or tax returns for the Appellant until a request
arrived from CCRA. He then does not turn over the books to Babber
as usual, just advises him to prepare a "nil" statement
and advised Babber that the Appellant was inactive.
[37] Babber said that the Appellant always
had a bookkeeper. Sam said his wife did the books from 1990 to
1996, when Paul Malik took over. According to Sam, his wife
had no formal bookkeeping experience and she did sign up for a
night school bookkeeping course, which she never finished.
[38] Sam said that his wife did the
cashbooks and that he shared with his wife the duties of writing
cheques and filling out the deposit books.
[39] Having found the obvious fact that both
the August 31, 1994 and August 31, 1995 tax returns had
noticeable misrepresentations, the question remains were these
misrepresentations attributable to neglect, carelessness or
wilful default or had the Appellant committed any fraud in filing
the return or in supplying any information under the Act,
all as set forth in subparagraph 152(4)(a)(i) of the
Act?
The Existing Jurisprudence
[40] Although the Appellant referred the
Court to several decisions dealing with subsection 163(2),
which deals with gross negligence, it does not help in this case,
gross negligence penalties had been waived by the Respondent
prior to the hearing.
[41] Mr. Justice Strayer, as he
then was, in Venne v. The Queen, 84 DTC 6247, a
Federal Court - Trial Division decision which dealt with
both subsections 152(4) and 163(2) said at page 6151
thereof:
I am satisfied that it is sufficient for the Minister, in
order to invoke the power under subparagraph 152(4)(a)(i)
of the Act to show that, with respect to any one or more
aspects of his income tax return for a given year, a taxpayer has
been negligent. Such negligence is established if it is
shown that the taxpayer has not exercised reasonable
care. This is surely what the words "misrepresentation
that is attributable to neglects" must mean, particularly
when combined with other grounds such as "carelessness"
or "wilful default" which refer to a higher degree of
negligence or to intentional misconduct. Unless these words are
superfluous in the section, which I am not able to assume, the
term "neglect" involves a lesser standard of deficiency
akin to that used in other fields of law such as the law of
tort. See Jet Metal Products Limited v. The Minister of
National Revenue (1979) 79 DTC 624 at 636-37
(T.R.B.).
and at page 6253:
It is admitted by the plaintiff (see Exhibit D-44) that there
were these substantial misrepresentations of income during the
years 1972-1975 and indeed thereafter in 1976 and 1977. I am
satisfied that these misrepresentations were attributable to
neglect on the part of the plaintiff within the meaning of
subparagraph 152(4)(a)(i) of the Income Tax
Act because the plaintiff did not make any effort to question
and supervise aspects of his income tax returns which he was
clearly able to do. He ignored the deficiencies in those
returns which would have been obvious to him had he made a
serious effort to ensure their accuracy. I therefore
find that it was open to the Minister by his re-assessment of
September 3, 1980, to reassess the plaintiff's income
tax for the years 1972-1975.
(Underline added.)
[42] This decision was applied in the
Federal Court of Appeal's decision in Findlayv.
The Queen, 2000 DTC 6345.
[43] Prior to the Venne decision, the
Federal Court - Trial Division's decision of
Pratte J., dealing with a predecessor to
subsection 152(4), said in M.N.R. v. Bisson,
72 DTC 6374, at page 6380 thereof:
... I therefore conclude that a taxpayer who, without any
negligence on his part, commits an error in declaring his income,
does not make a misrepresentation within the meaning of
s. 46(4)(a)(i). When the Minister seeks to rely on
this provision to proceed with a re-assessment after four years,
he must therefore not only show that the taxpayer committed an
error in declaring his income but also that that error is
attributable to negligence on his part.
[44] Muldoon J., of the Federal
Court - Trial Division, said in Reilly Estate v.
The Queen, 84 DTC 6001, at page 6018 thereof, when
dealing with subsection 152(4) :
... the standard of care is that of a wise and prudent person,
it must be understood that wisdom is not infallibility and
prudence is not perfection.
[45] Then, the Federal Court of Appeal in
Boucher v. The Queen, 2004 DTC 6084, affirmed at
page 6085 that:
... There must be in addition to misrepresentation, a finding
that the misrepresentation is attributable to neglect,
carelessness or wilful default in supplying the incorrect
information.
[46] In the Federal Court - Trial
Division's decision of Nesbitt v. The Queen,
96 DTC 6045, which was affirmed by the Federal Court of
Appeal, reported at 96 DTC 6589, and an application for
leave to appeal to the Supreme Court of Canada, was dismissed,
reported at 1996 SCCA 610, Heald, J. said, at
page 6049:
In my view, the Plaintiff's actions do not establish that
he exercised reasonable care in the completion of his return.
[See Note 16 below] The Plaintiff, like all other taxpayers
under the Income Tax Act, is required to sign the income
tax return after certifying "... that the information given
in this return and in any documents attached is true, correct and
complete in every respect and fully discloses my income from all
sources". It is no answer for a taxpayer to blame any
miscalculations or errors on the preparer of his income tax
return. In my view, this record establishes that the
Plaintiff was neglectful in respect of the preparation and filing
of his 1981 tax return.
[47] I said, in Palardy v.
The Queen, 97 DTC 1043, at page 1046:
A taxpayer must take responsibility for the tax
returns. Even if a taxpayer is relying heavily on his
or her tax return preparer, there is a duty to make enquiries,
ask questions and review in detail all documents prepared by the
tax return preparer.
Analysis
[48] The Appellant argues that Sam's
wife, the bookkeeper, was not well trained, yet she was not
called as a witness nor was any explanation given for her absence
at the hearing. Yet, the Appellant called Paul Malik, the
1996, 1997 and 1998 bookkeeper for Central Interior Corporation,
whose evidence added nothing to the hearing. Counsel asked this
Court to draw an adverse conclusion that her testimony would have
been adverse to the Appellant's appeal. I draw such a
conclusion.
[49] Based on Scott's comments that the
Appellant's records were in a mess and nothing tied into
anything, I find that the keeping of records in this fashion was
negligence.
[50] Thus, the maintaining of and use of
these types of records produced the errors discussed above. I
find that the major problem was in keeping proper records of the
Appellant's expenses which resulted them being mistaken by
Babber and required Scott to work out a ballpark figure using a
net worth technique.
[51] The large deposits in the first
16 days of September were known by Sam, who when questioned,
went to the wrong records. Scott's evidence leads me to
believe that Sam knew that fiscal year ending August 31,
1994 was a good year with profit and that he was trying to delay
income into the August 31, 1995 taxation year and I find
that Sam was instructing Babber all along to try and create a
loss. One quick look at his records demonstrates that no loss
occurred for fiscal years August 31, 1994 or August 31,
1995.
[52] It should be noted that Sam knew his
companies' tax returns and very quickly identified the copies
in Exhibit Book A as not being complete copies, so that
the actual filed tax returns were produced as
Exhibit R-1 and R-2.
[53] The Respondent having withdrawn the
subsection 163(2) gross negligence penalties, thus even
though the Appellant has failed completely at this hearing, the
appeal is allowed and the assessment is referred back to the
Minister of National Revenue for reconsideration and reassessment
on the basis that the subsection 163(2) gross negligence
penalties be removed from the assessment. The Respondent to have
the usual party and party costs.
Signed at Calgary, Alberta, this 14th day of December,
2004.
Teskey, J.
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