Citation: 2011 TCC 498
Date: 20111026
Docket: 2008-2680(IT)I
BETWEEN:
AHMAD A. KHAN ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
The Appellant appeals
by way of the informal procedure the reassessments made under the Income Tax
Act, R.S.C. 1985 c.1 (5th Supp.), as amended (the “Act”),
dated March 16, 2006 in respect of the 2001, 2002 and 2003 taxation years. The
federal tax at issue in each year is as follows:
2001: $4,028.56
2002: $5,956.83
2003: NIL
[2]
In determining the
Appellant’s tax liability for the 2001, 2002 and 2003 taxation years, the
Minister of National Revenue (the “Minister”) assumed the following facts set
out in paragraph 9 of the Amended Reply to the Notice of Appeal:
a) in the 2001 and 2002 years, the appellant
operated an auto repair business (the “auto repair business”) as a sole
proprietorship; (admitted)
b) in the 2003 year, the Appellant did not operate
the auto repair business; (admitted)
c) in the 2003 year, the Appellant’s son began to
operate an auto repair business as a sole proprietorship at the same location
where the Appellant had operated his auto repair business; (admitted)
d) in the 2001, 2002 and 2003 years, the Appellant
operated a business providing professional paralegal services (the “paralegal
services business”); (admitted)
e) the Appellant’s books and records were
incomplete and inadequate to support the amount of reported revenues and all of
the claimed and disallowed expenses of the auto repair business and the
paralegal services business; (denied)
BUSINESS INCOME
Auto repair business – Unreported revenue
h) the Appellant reported business income in the
amounts of $108,000 and $48,191 for the 2001 and 2002 taxation years,
respectively; (admitted)
i) the Appellant’s total receipts from the auto
repair business totaled (sic) $113,954.73 ($106,850 from safety testing
and $7,104.73 from other repair work) and $84,252.49 ($76,000 from safety
testing and $8,252.49 from other repair work) in the 2001 and 2002 years,
respectively; (denied)
j) the total receipts from the auto repair business
included GST Collected/Collectible; (admitted)
k) the Appellant’s gross revenue was determined as follows:
2001
2002
Receipts $113,955 $84,252
Less: GST Collected/Collectible (7%) 7,455
5,512
Gross revenue $106,500 $78,741
(admitted) (denied)
l) the Appellant incorrectly reported his gross
revenue from the auto repair business as follows: (denied)
2001
2002
Gross revenue $106,500
$78,741
Less: Reported revenue 108,000
48,191
Unreported revenue (over-reported) (1,500) $30,549
Auto Repairs Business – Disallowed Expenses
m) any legitimate business expenses incurred in the
2003 year were not expenses of any auto repair business operated by the
Appellant but could be considered in determining the Appellant’s income from
the paralegal business; (denied as all receipts for both businesses were
provided)
Advertising
n) the Appellant claimed advertising expenses in the
amount of $1,000 for the 2001 taxation year; (admitted)
o) the Appellant did not pay or incur advertising
expenses in the 2001 taxation year; (denied)
Subcontracts
p) the Appellant claimed subcontract expenses in the
amounts of $68,512 and $32,280 for the 2001 and 2002 years, respectively;
(admitted)
q) the Appellant prepared and submitted to Canada
Revenue Agency that T4A slips showing he had a total amount of $21,795 for the
2001 taxation year as employment income to others; (admitted)
r) the Appellant did not submit any T4A slips to
Canada Revenue Agency indicating any amounts paid for the 2002 taxation year;
(admitted)
s) the Appellant incurred subcontracting expenses in
amounts no more than $21,795 and $NIL for the 2001 and 2002 taxation years,
respectively; (denied because they were incurred and paid)
Business taxes, fees etc
t) the Appellant claimed business taxes and other
fees as expenses in the amounts of $19,061 and $150 for the 2001 and 2002
years, respectively; (admitted)
u) the Appellant incurred business taxes and other
fees as expenses in amounts no more than $13,184 and $3,550 for the 2001 and
2002 taxation years, respectively; (denied)
v) the expenses incurred as business taxes and other
fees were amounts paid to, or in respect of, the Ministry of Transportation
Ontario; (admitted)
Insurance
w) the Appellant claimed insurance expenses in the
amounts of $4,172 and $2,520 for the 2001 and 2002 years, respectively;
(admitted)
x) the Appellant paid and incurred insurance expenses
in amounts no more than $3,742 and $2,169 for the 2001 and 2002 taxation years,
respectively; (denied)
Interest and bank charges
y) the Appellant claimed interest and bank charges as
expenses in the amounts of $17,031 and $24,841 for the 2001 and 2002 years,
respectively; (admitted)
z) the Appellant incurred bank charges as expenses in
amounts no more than $423 and $298 for the 2001 and 2002 taxation years respectively;
(admitted as interest expenses only)
aa) the Appellant did not incur any interest expenses
in the 2001 and 2002 years for the purpose of gaining or producing business
income; (denied)
Maintenance & Repairs
bb) the Appellant claimed and incurred maintenance
and repairs expenses in the amounts of $4,638 in the 2001 taxation year;
(admitted)
cc) the maintenance and repairs expenses incurred in
the 2001 year were with respect of monthly amounts paid to Newcourt Financial
Limited ($386.47*12); (admitted)
dd) the Appellant claimed maintenance and repairs
expenses in the amounts of $1,989 in the 2002 taxation year; (admitted)
ee) the Appellant did not incur maintenance and
repairs expenses in the 2002 taxation year; (denied)
ff) in addition to any amounts claimed as maintenance
and repair expenses for the years under appeal, the Appellant also claimed
and/or incurred various expenses under the categories of office expenses,
supplies and parts for auto repairs in those years; (admitted)
Rent
gg) the Appellant claimed rent expenses in the
amounts of $22,623 and $9,426 for the 2001 and 2002 taxation years,
respectively; (denied with respect to the amount for 2002)
hh) the Appellant incurred rent expenses in the
amounts of $21,144 and $23,343 for the 2001 and 2002 taxation years,
respectively; (admitted)
ii) in addition to the rent expenses specified in
paragraph 9hh) above, the Appellant also paid GST on the rent; (admitted)
Fuel Costs and Motor Vehicle Expenses
jj) the Appellant claimed fuel costs, and motor
vehicle expenses as follows: (admitted)
2001 2002
Fuel costs $1,655 $2,000
Motor vehicle expenses -
2,938
$1,655 $4,938
kk) for the 2001 and 2002 taxation years, the
appellant did not use his vehicle 50% of the time for business purposes;
(denied)
ll) the Appellant incurred motor vehicle expenses,
including fuel costs, for the purposes of gaining or producing business income
as follows: (denied)
2001 2002
Fuel costs $1,000 $1,000
Other motor vehicle expenses 6,134
5,159
Total motor vehicle expenses 7,134 6,159
Personal usage (50%) 50%
50%
Business usage (50%) $3,567 $3,080
Other Expenses
mm) in addition to the expense categories detailed
above, the Appellant claimed and incurred the following expenses for the 2001
and 2002 taxation years: (admitted)
|
|
2001
|
|
2002
|
|
|
|
claimed
|
incurred
|
claimed
|
incurred
|
|
Meals and entertainment (50%)
|
$ 250
|
-
|
$ 500
|
-
|
|
Management and administration
|
-
|
-
|
175
|
-
|
|
Office expenses
|
5,270
|
1,121
|
1,000
|
4,370
|
|
Supplies
|
4,194
|
1,261
|
4,809
|
-
|
|
Telephone and utilities
|
2,929
|
4,121
|
2,300
|
5,427
|
|
Other expenses
|
-
|
-
|
640
|
-
|
|
Parts for auto repairs
|
_____-
|
2,865
|
____-
|
3,328
|
|
|
$12,643
|
$9,368
|
$9,424
|
$13,125
|
nn) the claimed auto repair business expenses which were disallowed:
(denied)
i) were not paid or incurred, or if paid or
incurred, were not paid or incurred for the purpose of gaining or producing
income from employment or income from a business or property;
ii) were personal or living expenses of the Appellant; and/or
iii) were not reasonable under the circumstances.
oo) the auto repair business expenses, as claimed by
the Appellant, as revised by the Appellant, and as allowed by the Minister, for
each of the 2001 and 2002 taxation years, are as set out in Schedule “A”,
attached hereto; (denied)
Paralegal Services Business – Unreported revenue
pp) the Appellant reported professional income in
the amounts of $4,100, $4,000 and $7,000 for the 2001, 2002 and 2003 years,
respectively; (admitted)
qq) the Appellant invoiced and collected a total of
$8,190 and $9,975 for paralegal services in the 2002 and 2003 taxation years,
respectively; (admitted)
rr) the total receipts from the paralegal services
business collected included GST Collected/Collectible; (denied as no GST was
collected)
ss) the Appellant’s 2001 gross revenue from paralegal
services approximated his gross revenue from that source in the 2002 and 2003
years; (ignored)
tt) the Appellant’s gross revenue was determined as follows:
(denied)
2001
2002 2003
Receipts $ 8,001 $
8,190 $ 9,975
Less: GST Collected/Collectible (7%) 524 536
653
Gross revenue $ 7,477 $
7,654 $ 9,322
uu) the Appellant underreported his gross revenue
from the paralegal services business as follows: (denied)
2001
2002 2003
Gross revenue $ 7,477
$ 7,654 $ 9,322
Less: Reported revenue 4,100 4,000
7,000
Unreported revenue $ 3,377
$ 3,654 $ 2,322
Paralegal Services Business – Disallowed Expenses
Subcontracts
vv) the Appellant claimed subcontract expenses in
the amounts of $7,200 and $7,000 for the 2001 and 2002 years, respectively;
(admitted)
ww) the Appellant did not incur any subcontract
expenses for the purpose of gaining or producing income in the 2001 and 2002
taxation years; (denied)
Rent
xx) the Appellant claimed rent expense in the amount
of $2,400 for the 2003 year; (denied because the amount is not correct)
yy) rent was paid in the amount of $24,443 in
respect of the property from which the Appellant operated his auto repair
business in 2001 and 2002 and operated his paralegal services business in 2001,
2002 and 2003; (admitted)
Motor Vehicle Expenses
zz) the Appellant claimed motor vehicle expenses in
the amount of $5,847 for the 2003 year; (admitted)
aaa) for the 2001 and 2002 taxation years, the
appellant did not use his vehicle more than 50% of the time for business
purposes; (denied because the % of use for business exceeded 50%)
bbb) the Appellant incurred motor vehicle expenses,
including fuel costs, for the purposes of gaining or producing business income
as follows: (denied as more expenses were claimed)
2003
Fuel costs $1,000
Other motor vehicle expenses 5,831
Total motor vehicle expenses $6,831
Personal usage (50%) 50%
Business usage (50%) $3,415
Other expenses
ccc) in addition to the expense categories detailed
above, the Appellant claimed and incurred the following expense (sic)
for the 2003 taxation year: (admitted)
|
|
2003
|
|
|
claimed
|
incurred
|
|
Meals and entertainment (50%)
|
$ 250
|
-
|
|
Office expenses
|
410
|
838
|
|
Salaries and wages
|
10,000
|
|
|
Telephone and utilities
|
5,000
|
|
|
Other expenses
|
3,000
|
|
|
Bank fees
|
_____-
|
246
|
|
|
$18,660
|
$1,084
|
ddd) the claimed paralegal services business expenses which were
disallowed: (denied)
i) were not made or incurred, or if made or
incurred, were not made or incurred for the purpose of gaining or producing
income from employment or income from a business or property;
ii) were personal or living expenses of the Appellant; and/or
iii) were not reasonable under the circumstances.
[3]
In imposing penalties
for the 2001, 2002 and 2003 taxation years, the Minister relied on the
following additional facts set out in paragraph 10 of the Amended Reply to the
Notice of Appeal:
(a) in preparing his returns of income filed for
each of the years under appeal, the Appellant failed to include in income all
of the gross revenues he received in those years; (denied)
(b) in preparing his returns of income filed for
each of the years under appeal, the Appellant intentionally and knowingly
claimed business deductions for personal expenses and overstated business
expenses actually incurred in those years; (denied)
(c) by failing to include in income all of the
revenues received and by overstating legitimate business expenses, the
Appellant underreported his net business income in the years under appeal by
material amounts; (denied)
(d) the amounts of net business income that the
Appellant failed to include in his income for the years under appeal were
material both in amount and in relation to reported income; (denied)
(e) the Appellant was aware, or should have been
aware, that all of the income he received in the 2001, 2002 and 2003 taxation
years was not reported; (denied)
(f) the Appellant was aware, or should have been
aware, that all of the expenses he claimed as deductions from business income
were not incurred for the purpose of gaining or producing income from a
business; and (denied)
(g) the Appellant owed an amount of tax when he
filed his 2002 return on October 20, 2003. (denied)
[4]
The Minister also
referred to other material facts set out in paragraphs 11 and 12 of the Amended
Reply to the Notice of Appeal:
11. The Minister had intended to allow the Appellant to
deduct additional business expenses in the amounts of $2,865 and $3,328 in
respect of parts for auto repairs in the 2001 and 2002 taxation years,
respectively. Due to a calculation error, those amounts were not included in
total expenses allowed. (admitted only in part)
12. The Appellant was allowed excessive rent expenses for the 2003
taxation year as a deduction against his paralegal services business income.
The amount of $24,443 was rent paid in respect of the property from which, in
the 2003 taxation year, the Appellant provided his professional services and
his son operated an auto repair business. The full amount of the expense was
not incurred by the Appellant for the purposes of gaining or producing income
from the paralegal services business. (denied)
[5]
The Appellant testified
at the hearing and filed the following documents:
(a)
a summary of payments made by Khan Auto Repairs
in 2001 showing the T4A slips issued to:
i) Nazil Ally: $10,155
ii) Surdev Virk 8,640
iii) Sharimala Singh 3,000
Sub-total: $21,795
and the payments made by cheques to:
iv) Harnan Kular $13,376
v) Terry Singh 8,950
vi) Nazil Ally 3,500
vii) Zakir Musafir 3,200
Sub-total: $29,026
Total: $50,821.
(b)
his income tax return for 2001
(c)
his income tax return for 2002
(d)
his income tax return for 2003
(e)
a letter from the Canada Revenue Agency dated
March 31, 2005 showing the proposed adjustments to his income tax returns for
the 2001, 2002 and 2003 taxation years
(f)
a notice of objection dated June 14, 2005 filed
with the registry of Finance of the Province of Ontario
(g)
a copy of the T4A slips issued by Khan Auto
Repairs in respect of the 2001 taxation year
(h)
a copy of the cheques made by Khan Auto Repairs
in 2001 to subcontractors
(i)
a statement of expenses made by Khan Auto
Repairs in 2001
(j)
a summary of the payments made in 2001 by Khan
Auto Repairs for labour costs showing the payments made by cash and by cheques.
[6]
The Appellant explained
that his income tax returns for the 2001, 2002 and 2003 taxation years were signed
by him but were prepared by a professional tax preparer, Mr. Barrat, based upon
the information that he provided, such as the statement of expenses made by
Khan Auto Repairs in 2001 referred to in paragraph 5(i).
[7]
The Appellant pointed
out the fact that all relevant documents including the bank statements and the
cheques to the subcontractors, have been submitted to the Canada Revenue Agency
(the “CRA”) in the course of the audit conducted in 2005 and that they have
been returned to him. He also explained that he had to retain the services of
subcontractors to work in his auto repairs business because he was not able to
work as a result of a motor vehicle accident in January 2000 and hip surgery in
June 2001.
[8]
The CRA’s tax auditor, Asiya
Azim, testified at the hearing. She explained that the books and records of the
Appellant were inadequate and incomplete. She received the Appellant’s invoices
and receipts listed in Forms T2213 filed as Exhibits R-2 and R-3:
2001
-
income invoices;
-
Kahn Auto Repairs receipts from February 2001 to
December 2001;
-
bank statements
-
income tax statements
2002
-
invoices and bills
2003
-
bank statements and cancelled cheques
-
work orders.
All documents were returned to the
Appellant on April 21, 2005 after the completion of the audit.
[9]
With the information
contained in the documents referred to in the preceding paragraph, she prepared
a schedule for each type of expenses claimed by the Appellant in respect of
each business. She requested more information from the Appellant without any
success. After several calls and two or three unsuccessful attempts to schedule
a meeting with the Appellant, she prepared and sent the March 31, 2005
letter proposing the adjustments to the Appellant’s income tax returns. No
representations were made by the Appellant as a result of the proposed adjustments.
[10]
In the course of her
testimony, she made the following observations:
(a) she has conducted both the income tax
audit and the goods and services tax audit;
(b) she allowed the deduction of the
amounts for which there were T4As and had rejected the cheques to the
subcontractors because there was no evidence they were effectively cashed or
deposited and that they were not made for personal expenses. She had not made a
reconciliation of the cheques with the bank statements. No T4As and no cheques
to subcontractors for 2002 were submitted;
(c) she has not seen the statement of
expenses made by Khan Auto Repairs in 2001, nor a similar statement of expenses
in 2002;
(d) she has not seen the summary of the
payments made in 2001 by Khan Auto Repairs for labour costs nor a similar
summary for 2002.
Analysis
[11]
The evidence reveals
that the Appellant ceased to operate the auto repairs business in 2002 and that
the Appellant’s son began to operate an auto repair business in the same
location where the Appellant had operated his auto repair business. The Appellant’s
son worked in the auto repairs business of his father during the 2001 and 2002
taxation years but he was not paid for his services as he was then an
apprentice. The Appellant’s son nevertheless signed the cheques in 2001 to the
subcontractors. No T4As and no cheques to subcontractors were submitted for
2002 and no witnesses testified at the hearing to confirm that they worked for
Khan Auto Repairs during the 2001 and 2002 taxation years and that they were
effectively paid for their services. Finally, there were some discrepancies
between the amounts on the T4As and the total of amounts shown in the summary for
labour costs paid in 2001. For example, in the case of Nazil Ally, his T4A for
2001 shows self-employed commissions of $10,155 while the summary shows that he
has received a total remuneration of $11,900 in cash and by cheques. In the case
of Sharimala Singh, the T4A for 2001 shows self-employed commissions of $3,000
while the summary shows that she has received commissions of $7,665 in cash and
$7,950 by cheques respectively.
[12]
In light of the
foregoing, the summary of payments made in 2001 by Kahn Auto Repairs for labour
costs is not reliable nor corroborated by other evidence. No reasonable or
plausible explanations were given by the Appellant as to why certain subcontractors
were paid in cash only or by cheques only or by a combination of cash and
cheques and why T4As were issued only to three subcontractors and not to all of
them.
[13]
Concerning the
calculation of the unreported revenue for the auto repairs business and the
paralegal services business for the 2001, 2002 and 2003 taxation years, no viva
voce or documentary evidence has been submitted by the Appellant to destroy
the assumption of facts relied on by the Minister. Clearly, the Appellant has
not met his burden of proof. The Appellant has been assessed in accordance with
the information that he provided in the course of the audit.
[14]
The Appellant understated
his gross business and professional income for the 2001, 2002 and 2003 taxation
years by the amounts of $1,877 ($1,500 reduction from the auto repairs business
and $3,377 increase from the paralegal services business), $34,204 ($30,550
from the auto repairs business and $3,654 from the paralegal services business)
and $2,322 (from the paralegal services business) respectively.
[15]
The Minister applied a late
filing penalty pursuant to subsection 162(1) of the Act for the 2002
taxation year and penalties pursuant to section 163(2) of the Act for underreporting
business and professional income for the 2001, 2002 and 2003 taxation years.
[16]
Subsection 162(1) of
the Act imposes a penalty where a taxpayer fails to file a return as and
when required by subsection 150(1) of the Act where tax is payable in
respect of the relevant taxation year. Subsection 162(1) reads as follows:
Failure to
file return of income
162. (1) Every person who fails to file a
return of income for a taxation year as and when required by subsection 150(1)
is liable to a penalty equal to the total of
(a) an
amount equal to 5% of the person’s tax payable under this Part for the year
that was unpaid when the return was required to be filed, and
(b) the
product obtained when 1% of the person’s tax payable under this Part for the
year that was unpaid when the return was required to be filed is multiplied by
the number of complete months, not exceeding 12, from the date on which the
return was required to be filed to the date on which the return was filed.
[17]
In this instance, the
Appellant filed his income tax return for 2002 on October 20, 2003 and it was
received by the Sudbury taxation office on November 6, 2003.
As a result of the audit, the Appellant is liable to pay an amount of federal
tax in respect of the 2002 taxation year. The subsection 162(1) penalty has
been properly applied for 2002.
[18]
Subsection 163(2) of
the Act imposes a penalty where a taxpayer knowingly, or in
circumstances amounting to gross negligence, participates in or makes a false
statement for the purposes of the Act. The relevant part of subsection
163(2) reads as follows:
False statements or omissions
(2) Every person who, knowingly, or under circumstances amounting to
gross negligence, has made or has participated in, assented to or acquiesced in
the making of, a false statement or omission in a return, form, certificate,
statement or answer (in this section referred to as a “return”) filed or made
in respect of a taxation year for the purposes of this Act, is liable to a
penalty of the greater of $100 and 50% of the total of
…
[19]
In this instance, it
has been established that the Appellant made or participated in, assented to or
acquiesced in the making of false statements or omissions in filing his income
tax returns for the 2001, 2002 and 2003 taxation years, as a result of which
the tax that would have been payable, if assessed by the information provided
in the Appellant’s income tax returns filed for those years, was less than the
tax in fact payable. In so doing, the Appellant acted, knowingly or under
circumstances amounting to gross negligence, in carrying out a duty or
obligation imposed under the Act. In the circumstances, the penalties
pursuant to subsection 163(2) of the Act were properly applied for those
years.
[20]
For those reasons, the
appeals from the reassessments made under the Income Tax Act in respect
of the 2001 and 2002 taxation years are allowed and the reassessments are
referred back to the Minister for reconsideration and reassessments on the
basis that the Appellant is entitled to additional business expenses in the
amounts of $2,865 and $3,328 in respect of parts for auto repairs in the 2001
and 2002 taxation years, respectively and the penalties shall be adjusted
accordingly. The appeal from the reassessment made under the Income Tax Act
in respect of the 2003 taxation year is dismissed.
Signed at Ottawa,
Canada, this 26th day of October 2011.
"Réal Favreau"
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