Docket: 2008-2163(IT)G
BETWEEN:
JOHN MCEWEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals
heard on common evidence with the appeal of
John McEwen (2008-2180(GST)G)) on December 13, 2011 at
Prince George, British Columbia
Before: The Honourable
Justice Wyman W. Webb
Appearances:
|
Counsel for the Appellant:
|
Terrence
P. Matte
|
|
Counsel for the Respondent:
|
Sara Fairbridge
|
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act (the
"ITA") for the 2003 and 2004 taxation years are allowed in
part, and the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that:
(a)
for 2003
(i)
the Appellant’s unreported revenue from his sole
proprietorship business that he was carrying on as John’s Moving (the
“Business”) was $93,538.57 and not $113,102.16 as assessed (a reduction of
$19,563.59);
(ii)
the Appellant’s expenses related to the Business
totalled $50,365.61 and not $45,823.65 as assessed (an increase of $4,541.96);
(iii)
additional non-capital losses of $61,897 (in
addition to the non-capital losses of $29,166 that the Appellant had claimed
when he filed his tax return for 2003) that had previously been incurred by the
Appellant shall be deducted in determining the taxable income of the Appellant
for 2003; and
(iv)
the penalty imposed under subsection 163(2) of
the ITA is reduced to reflect the revised tax that would be payable as a
result of the above adjustments to the unreported revenue and expenses, but is
otherwise confirmed;
(b)
for 2004:
(i)
the Appellant’s unreported revenue from the
Business was $28,896.71 and not $67,683.91 as assessed (a reduction of $38,787.20);
(ii)
the Appellant’s expenses related to the Business
totalled $37,905.51 and not $36,137.95 as assessed (an increase of $1,767.56);
(iii)
additional non-capital losses of $14,050 (in
addition to the non-capital losses of $20,888 that the Appellant had claimed
when he filed his tax return for 2004) that had previously been incurred by the
Appellant shall be deducted in determining the taxable income of the Appellant
for 2004; and
(iv)
the penalty imposed under subsection 163(2) of
the ITA is reduced to reflect the revised tax that would be payable as a
result of the above adjustments to the unreported revenue and expenses, but is
otherwise confirmed.
The Appellant shall pay
costs to the Respondent which are fixed in the amount of $1,500.
Signed at Halifax, Nova Scotia, this 30th day of January 2012.
“Wyman W. Webb”
Citation: 2012TCC31
Date: 20120130
Dockets: 2008-2163(IT)G
2008-2180(GST)G
BETWEEN:
JOHN MCEWEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The Appellant, in addition to his
job as a welder at a mill located approximately 50 to 60 miles north of Prince George,
British Columbia, also carried on a moving business as a sole proprietorship in
Prince George. For his 2003 and 2004 taxation years, the Appellant
was reassessed under the Income Tax Act (the “ITA”) to increase
his revenue and decrease his expenses. The Appellant was also assessed for
additional net tax payable under the Excise Tax Act (the “ETA”)
as a result of the changes to the Appellant’s revenue and expenses (which
changed the amount of GST collectible or collected by the Appellant and the
amount of his input tax credits). The Appellant appealed these assessments
under the ITA and ETA. Penalties were also assessed under
subsection 163(2) of the ITA and section 285 of the ETA.
[2]
Prior to the commencement of the
hearing the parties settled the issues related to the unreported revenue and
the expenses that the Appellant could claim in determining his income for the
purposes of the ITA as well as the amount of net tax payable for the
purposes of the ETA. The parties agreed that, in relation to the appeal
under the ITA:
(a) for 2003
(i)
the Appellant’s unreported revenue from his sole
proprietorship business that he was carrying on as John’s Moving (the
“Business”) was $93,538.57 and not $113,102.16 as assessed (a reduction of
$19,563.59);
(ii)
the Appellant’s expenses related to the Business
totalled $50,365.61 and not $45,823.65 as assessed (an increase of $4,541.96);
and
(iii)
additional non-capital losses of $61,897 (in
addition to the non‑capital losses of $29,166 that the Appellant had
claimed when he filed his tax return for 2003) that had previously been
incurred by the Appellant shall be deducted in determining the taxable income
of the Appellant for 2003;
(b) for 2004:
(i)
the Appellant’s unreported revenue from the
Business was $28,896.71 and not $67,683.91 as assessed (a reduction of
$38,787.20);
(ii)
the Appellant’s expenses related to the Business
totalled $37,905.51 and not $36,137.95 as assessed (an increase of $1,767.56);
and
(iii)
additional non-capital losses of $14,050 (in
addition to the non‑capital losses of $20,888 that the Appellant had
claimed when he filed his tax return for 2004) that had previously been incurred
by the Appellant shall be deducted in determining the taxable income of the
Appellant for 2004.
[3]
The parties
also agreed that, in relation to the appeal under the ETA:
(a)
for the reporting period of October 1, 2003 to
December 31, 2003:
(i)
the Appellant’s unreported goods and services
tax (“GST”) collectible was $5,894.80 and not $7,264.23 as assessed (a
reduction of $1,369.43); and
(ii)
the Appellant is entitled to additional input
tax credits (“ITCs”) totalling $61.84;
(b)
for the reporting period of October 1, 2004 to
December 31, 2004:
(i) the Appellant’s unreported GST collectible was
$1,611.19 and not $4,326.29 as assessed (a reduction of $2,715.10); and
(ii)
the Appellant is entitled to additional ITCs
totalling $100.76.
[4]
As a result,
the only issue remaining for the hearing was the imposition of penalties under
subsection 163(2) of the ITA and section 285 of the ETA.
Penalties will be applicable under these provisions if a person “knowingly, or
under circumstances amounting to gross negligence, makes or participates in,
assents to or acquiesces in the making of a false statement or omission in a
return”.
[5]
The Appellant
started his moving business in 1990 or 1991. He acquired a small cube van so
that his sons could work moving furniture. After his sons moved on to other
jobs he hired other people that he knew to continue to operate the business.
[6]
The Appellant
had been audited previously and he had been advised to maintain better records.
However, it is obvious that the Appellant’s record keeping was inadequate. The
Appellant kept a box for his receipts and he would put receipts in the box
regardless of whether the receipt was for a personal expenditure or a business
expenditure. It also appears that invoices for significant amounts of revenue
were not included in the invoices provided to the Appellant’s accountant. The
Appellant had retained an accountant and he assumed that his accountant would
sort out his revenue and expenditures. However, it appears that the Appellant
did not provide much (if any) assistance to his accountant in determining
whether receipts were for personal expenditures or business expenditures. The
accountant would also not be able to accurately determine the Appellant’s
revenue if all of the invoices for the services provided in carrying on the
Appellant’s business were not delivered to the accountant.
[7]
The Appellant’s
income as reported and his income based on the amounts that the parties settled
upon as his revenue and expenses are as follows:
|
|
2003
|
2004
|
|
Revenue as reported:
|
$39,759
|
$27,306
|
|
Expenses as reported:
|
$58,482
|
$50,365
|
|
Income (Loss) as reported:
|
($18,724)
|
($23,059)
|
|
Unreported Revenue:
|
$93,539
|
$28,897
|
|
Expenses Disallowed:
|
$8,116
|
$12,459
|
|
Revised Income:
|
$82,931
|
$18,297
|
[8]
The Appellant
had originally claimed a loss from his business in 2003 and 2004 but as a
result of the adjustments made to his revenue and expenses he had a profit of
$82,931 in 2003 and $18,297 in 2004. The increase in his income for 2003 was
$101,655 and for 2004 was $41,356. The unreported revenue of $93,539 for 2003
was 70% of his total revenue for 2003 of $133,298 ($39,759 + $93,539) and 2.35
times the amount of revenue that he did report.
[9]
There were
missing invoices in relation to the services provided in carrying on the
Appellant’s business. The Appellant did not report any revenue in relation to
any local moves although it would appear that local moves were part of the
business in 2003 and 2004. The Appellant had no explanation for the missing
invoices or the failure to include any revenue in relation to local moves. He
did not prepare any reconciliation of the amount he was reporting as revenue to
the amount he was depositing in the bank. He simply told his employees to put
everything in the box and it appears that the Appellant did not check to see
what was being put in the box.
[10]
With respect to
the expenses claimed there were a number of problems that were identified. Included
among the expenses claimed was an amount paid to The Coast Inn of the North in Prince George for a “Jacuzzi package”. The
Appellant did not provide any explanation for this claim or how this was
related to his business.
[11]
The Appellant
also included claims for amounts paid to Ticketmaster (for an unspecified
event), Batnuni Lake Resort (for two nights camping) and Days Inn Medicine Hat
(for one night’s stay). There was no evidence provided by the Appellant to
explain how any of these related to his business.
[12]
The Appellant
claimed an amount of $9,777.90 (which included GST of $639.68) in relation to a
significant amount of work performed on the truck. The date on the invoice is
September 8, 2003 and the Appellant stated that he paid for the work with a
cheque drawn on his visa account. A copy of the cheque was introduced into
evidence. A photocopy of the visa statement for the Appellant dated September
19, 2003 with the same account number as appeared on the cheque was also
introduced into evidence. The original statement was not introduced and the
Appellant indicated that he did not know where the original statement was
located. Both parties agreed that this visa statement had been altered. It
seems clear that the following entry was added:
|
DATE OF TRANS.
|
REF. NO.
|
DEBITS/
CREDITS(-)
|
TRANSACTIONS SINCE LAST STATEMENT
|
|
09/08
|
3
|
9,977.90
|
ROCKYAUTO ELECTRIC
|
RED DEER,AB
|
[13]
The font used
for this entry is different from the font used for the other entries. The above
items do not line up with the items above and below this line in the statement.
The first digit in the amount (“9”) was written by hand. The amount of the visa
cheque was $9,777.90 and not $9,977.90 as added to the visa statement. The
province (AB) immediately follows the place (RED DEER), separated only by a
comma. For the places that are referenced in the other lines of the statement
there is no comma between the place and the province and there is a gap between
the place and the province.
[14]
Whoever altered
the document also simply changed the total new balance as shown on the
statement. As a result, the following is the financial summary as now stated on
this altered visa statement:
|
DATE OF LAST STATEMENT
|
PREVIOUS BALANCE
|
+
|
INTEREST
|
+
|
DEBITS
|
-
|
CREDITS
|
=
|
NEW BALANCE
|
|
AUG 20/03
|
2,987.24
|
|
25.27
|
|
259.56
|
|
280.00
|
|
12,765.14
|
[15]
Obviously the
arithmetic sum of the above amounts is not $12,765.14. It is not even clear how
this amount was calculated. In any event it is obvious (as agreed by the
parties) that the statement was altered. The Appellant did not have any
explanation for these alterations and did not know who altered this document.
However, there is another question (which also was not answered). It is clear
that this visa statement (in its original form) did not include the visa cheque
that the Appellant claims was used to pay for the work completed in relation to
the truck. Since the Appellant stated that he paid the invoice dated September
8, 2003 with the visa cheque on September 9, 2003 (which he stated he had to do
to get his truck back) this visa cheque should have appeared on the visa
statement dated September 19, 2003. If the Appellant had paid for this invoice
on September 9, 2003 with the visa cheque, why was this cheque not included in
the visa statement for the same visa account dated September 19, 2003? It
appears that the Respondent is not disputing that a significant amount of work
was done on the truck and that the total invoice for this work was the amount
as stated ($9,777.90 including GST). However the Respondent was questioning the
year in which the work was done and the altered visa statement does not assist
the Appellant in establishing that this work was done in 2003.
[16]
During the
hearing two copies of cheque number 1067 were also introduced. This cheque was
written by the Appellant to Rene Lozier. On one cheque there is a notation that
reads “For canopy on house” and on the other copy there is no such notation.
Counsel for the Appellant had suggested that perhaps different photocopiers had
been used. However, there were three cheques that had been written to Rene
Lozier that had been copied twice. Each sheet of paper had copies of three
cheques on it. Therefore cheque number 1067 would have been copied on the same
photocopier that would have been used to copy cheques numbered 1063 and 1120.
For each of the other two cheques the notation appears on both copies. I do not
accept that the absence of the notation on the second copy can be attributed to
a different photocopier. It appears that someone removed the notation “For
canopy on house” before cheque number 1067 was copied for the second time. In
any event the Appellant did not deny that cheque number 1067 was for the canopy
on his house nor did he provide any explanation for why he was claiming an
amount in relation to the canopy on his house in determining the net income
from his business.
[17]
The Appellant
also claimed amounts based on quotations that he had received for new tires. This
illustrates that the Appellant was indifferent with respect to what documents
were put in the box and what amounts were claimed as expenses for the purposes
of determining his income for the purposes of the ITA and what amounts
were claimed as input tax credits for the purposes of the ETA.
[18]
Justice Strayer of the Federal Court
Trial Division, in Venne v. The Queen, [1984] C.T.C. 223, 84 DTC
6247, made the following comments on the meaning of gross negligence for the
purposes of penalties imposed under subsection 163(2) of the ITA:
“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]
In Maltais v. The Queen,
[1991] 2 C.T.C. 2651, 91 DTC 1385, Justice Bowman (as he then was) in
dealing with a penalty imposed pursuant to subsection 163(1) of the ITA
stated as follows:
7. … Mr.
Ghan on behalf of the respondent contended that subsection 163(1) in the form
which is applied to 1989 did not require that there be a wilful intention to
evade tax. In support of this position he pointed to the wording of the former
163(1) which referred to “Every person who wilfully attempts to evade the
payment of tax payable by him” and to the wording of subsection 163(2)
which uses the expression “knowingly or under circumstances amounting to gross
negligence”. These provisions require a mens rea of intent or of recklessness.
(emphasis
added)
[20]
While the comments of Justice
Bowman (as he then was) in relation to subsection 163(2) of the ITA were
obiter in that case, these comments were adopted by Justice Hamlyn in Dunleavy
v. The Queen, [1993] 1 C.T.C. 2648, 93 DTC 417.
[21]
In Boileau v. The
Minister of National Revenue, [1989] 2 C.T.C. 2001, 89 DTC 247,
Justice Lamarre Proulx stated that
20. … It is true that by virtue of subsection 163(2), there is no
accused nor is there a criminal charge. It would thus appear that it is not, as
such, a criminal proceeding and that it remains a civil proceeding. However, the
application of that subsection requires the evidence of mens rea or culpable
conduct…
(emphasis
added)
[22]
It seems clear
to me that the Appellant was indifferent with respect to whether he complied
with the ITA and the ETA and that the mens rea of
recklessness has been established in this case. The Appellant was indifferent
with respect to what documents were placed in the box and whether all of the
invoices for services rendered as part of the Appellant’s business were
included. The Appellant did not check to ensure that all of the revenue was
included nor did he reconcile the amount he was reporting as revenue to what he
had collected in carrying on his business. The unreported revenue, as noted
above, for 2003 was 70% of his total revenue for 2003 of $133,298 and 2.35
times the amount of revenue that he did report. For 2004, his unreported
revenue was $28,897 which was 51% of his total revenue of $56,203 for 2004
($27,306 + $28,897) and slightly more than the revenue that he did report for
2004. These amounts are significant and establish that the Appellant had “an indifference as to whether the law is complied with
or not”.
[23]
The amounts
claimed as expenses and which were denied also confirm the indifference that
the Appellant had with respect to whether he complied with the ITA and
the ETA. The Appellant claimed expenses related to a Jacuzzi package at
The Coast Inn of the North, tickets to an unspecified event, camping, accommodation
in Medicine Hat (to which no connection to the business was provided), amounts
based on quotations for new tires and an amount for the canopy on his house.
That he claimed these amounts also indicates an indifference or recklessness.
[24]
The claim in
relation to the work done on the truck and the altered visa statement indicate
that the Appellant (or someone acting for him) was attempting to provide
misleading information with respect to when the work on the truck was
completed. It appears that it was the position of the Respondent that the work
was done in a year after 2003. If the work was done in a later year, the
Appellant could not claim any amount in 2003 under the ITA in relation
to such work nor could he claim any input tax credits for the reporting period
that included September 2003 in relation to such work for the purposes of the ETA.
[25]
As a result the
penalties imposed under subsection 163(2) of the ITA and section 285 of
the ETA are upheld. As noted by the Federal Court of Appeal in Boucher
v. The Queen, 2004 FCA 46, 2004 DTC 6084, [2004] 2 C.T.C. 179:
7 At the
hearing of the appeal, a number of questions relating to the computation of the
penalty, that had not been raised by the appellant, were raised by the Court.
In particular, the Court wished to be satisfied that a penalty may be assessed
under subsection 163(2) in respect of unreported income for a particular year
even if the unreported income is offset by preexisting losses arising in the
same year. Counsel for the Crown explained the relevant provisions in some
detail. Her explanation was challenged by the appellant. Having heard the
submissions of both parties, I agree with counsel for the Crown that, by the
combined operation of subparagraph 163(2)(a)(i) and paragraph 163(2.1)(a), a
penalty may arise even in a loss year because, in effect, the previously
recognized loss is ignored for purposes of the penalty calculation.
[26]
As a result,
even though the Appellant has non-capital losses from other years that he can
use to reduce his taxable income for 2003 and 2004, the penalty imposed under
subsection 163(2) of the ITA for 2003 and 2004 is determined based on what
his tax liability for these years would be if such losses are not used to
reduce his taxable income for these years.
[27]
The appeals from the reassessments
made under the ITA for the 2003 and 2004 taxation years are allowed in
part, and the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that:
(a) for 2003
(i)
the Appellant’s unreported revenue from his sole
proprietorship business being carried on as John’s Moving (the “Business”) was
$93,538.57 and not $113,102.16 as assessed (a reduction of $19,563.59);
(ii)
the Appellant’s expenses related to the Business
totalled $50,365.61 and not $45,823.65 as assessed (an increase of $4,541.96);
(iii)
additional non-capital losses of $61,897 (in
addition to the non-capital losses of $29,166 that the Appellant had claimed
when he filed his tax return for 2003) that had previously been incurred by the
Appellant shall be deducted in determining the taxable income of the Appellant
for 2003; and
(iv)
the penalty imposed under subsection 163(2) of
the ITA is reduced to reflect the revised tax that would be payable as a
result of the above adjustments to the unreported revenue and expenses, but is
otherwise confirmed;
(b)
for 2004:
(i)
the Appellant’s unreported revenue from the
Business was $28,896.71 and not $67,683.91 as assessed (a reduction of
$38,787.20);
(ii)
the Appellant’s expenses related to the Business
totalled $37,905.51 and not $36,137.95 as assessed (an increase of $1,767.56);
(iii)
additional non-capital losses of $14,050 (in
addition to the non-capital losses of $20,888 that the Appellant had claimed
when he filed his tax return for 2004) that had previously been incurred by the
Appellant shall be deducted in determining the taxable income of the Appellant
for 2004; and
(iv)
the penalty imposed under subsection 163(2) of
the ITA is reduced to reflect the revised tax that would be payable as a
result of the above adjustments to the unreported revenue and expenses, but is
otherwise confirmed; and
(c)
The Appellant shall
pay costs to the Respondent which are fixed in the amount of $1,500.
[28]
The appeal from the reassessments
made under the ETA for the reporting periods from January 1, 2003 and to
December 31, 2004 (the “Period”) is allowed in part, without costs, and
the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that:
(a)
for the reporting period of October 1, 2003 to
December 31, 2003:
(i)
the Appellant’s unreported goods and services
tax (“GST”) collectible was $5,894.80 and not $7,264.23 as assessed (a
reduction of $1,369.43);
(ii)
the Appellant is entitled to additional input
tax credits (“ITCs”) totalling $61.84; and
(iii)
the penalty imposed under subsection 285 of the ETA
is reduced to reflect the revised net tax payable for this reporting period
but is otherwise confirmed;
(b)
for the reporting period of October 1, 2004 to
December 31, 2004:
(i)
the Appellant’s unreported GST collectible was
$1,611.19 and not $4,326.29 as assessed (a reduction of $2,715.10);
(ii)
the Appellant is entitled to additional ITCs
totalling $100.76; and
(iii)
the penalty imposed under subsection 285 of the ETA
is reduced to reflect the revised net tax payable for this reporting period
but is otherwise confirmed.
Signed at Halifax, Nova Scotia, this 30th day of January 2012.
“Wyman W. Webb”
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