Citation: 2010TCC497
Date: 20101007
Docket: 2007-4687(IT)G
BETWEEN:
HENRY SZTERN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1]
The Appellant, Henry
Sztern, is appealing the assessment of his 2001 taxation year in which the Minister
of National Revenue disallowed certain deductions claimed for bad debts and
business expenses.
Facts
[2]
The Appellant represented himself
and testified on his own behalf. I regret to say that I found his testimony
often difficult to follow and not always credible.
[3]
More convincing were the
Respondent’s witnesses Corina Stoica, the auditor, and Mark Toner, the Appeals
Officer. Both were able to explain the steps taken in conducting their analysis
of the material provided by the Appellant and the basis for their conclusions.
[4]
The onus is on the taxpayer to justify
the deductions claimed. Here, the Appellant’s oral and documentary evidence was
insufficient to rebut the assumptions upon which the Minister’s assessment was
based or to outweigh the evidence of the Respondent’s officials. Accordingly,
the appeal is dismissed, with costs, for the reasons set out below.
Background
[5]
In the 2001 taxation year, the
Appellant was a chartered accountant and, for at least some part of that year,
a licenced trustee under the Bankruptcy and Insolvency Act (“BIA”).
[6]
He was also the majority
shareholder of Henry Sztern & Associés Inc. (“Henry Sztern Inc.”),
a licenced corporate trustee under the BIA. The business address of
Henry Sztern Inc. was 50, Place Crémazie Ouest, Montreal.
[7]
The Appellant also had a sole
proprietorship which operated under the strikingly similar name of Henry Sztern
& Associés Registered (“Henry Sztern Registered”). According to the
business registration records, Henry Sztern Registered was located at 500, Place
d’Armes, Montreal and was in the business of providing management
consultant services (“Bureaux de conseillers en gestion”).
[8]
The Appellant described himself,
in his capacity as Henry Sztern Registered, as the “administrator” of Henry
Sztern Inc., but whether by that term he meant he was a sort of manager of the corporation’s
business, as opposed to an “administrator” under the BIA, was not made clear.
He was adamant in his testimony, however, that only the corporate trustee,
Henry Sztern Inc., was engaged in the business of acting as a trustee in
bankruptcy and accordingly, responsible for and authorized to manage the
estates of the bankrupts and more particularly, their estate trust accounts.
[9]
The estate trust accounts were
maintained at the same bank as what was apparently the Appellant’s sole
proprietorship business account. I say “apparently” because it is not clear on
the face of the cheques whose account it was: firstly, the account holder is
shown on the cheques as “H. Sztern & Associés”, a name which corresponds with
neither the business name of the corporate trustee, Henry Sztern & Associés
Inc., or the Appellant’s personal business which he distinguished throughout
his testimony as “Henry Sztern & Associés Registered”. Further confusing
matters is the fact that the address on the cheques is “50 Place Crémazie
Ouest, Montreal”, the business address of Henry Sztern Inc. Such
details are important in the present case because of the overlap between the
business operations, the onus on the Appellant to link the claims made with the
appropriate entity and his general lack of credibility.
[10]
The Appellant was candid that he
had not been as careful as he might have been in keeping banking and business records
for each entity. Even more troubling, at various times, he moved amounts from the
H. Sztern & Associés account to the trust accounts (which he said were under
the exclusive control of the corporate trustee, Henry Sztern Inc.) with little
regard to the ethics or legality of such conduct. To cite only one example, I
accept Ms. Stoica’s evidence that during the audit, she discovered that a GST
refund cheque properly belonging to an estate had been deposited in the
Appellant’s business account; it was later withdrawn and apparently, never
deposited into the appropriate trust account.
[11]
This persistent intermingling of
the two business operations lies at the heart of the Appellant’s difficulties.
The Minister rejected the amounts claimed for bad debts and business expenses
partly because the Appellant was unable to provide records to trace them to his
personal business. While during his testimony and in argument the Appellant
repeatedly underscored the legal distinction between Henry Sztern Registered
and Henry Sztern Inc., he was less successful at maintaining that distinction
in practice.
Bad Debts
[12]
Turning first to the bad debt
deduction, the Appellant claimed approximately $400,000
for amounts not recovered for work done in respect of bankrupts’ estates. His
evidence was that although a lot of time could be spent on the bankrupts’
files, there was no guarantee of payment. According to the Appellant, this is the
cost and risk of acting as a trustee in bankruptcy.
[13]
While it may have been the
Appellant (in his capacity of directing mind of the company) who actually
performed such work, his evidence was unwavering that only Henry Sztern Inc. was
engaged in the business of managing bankrupts’ estates. From this it follows
that (even assuming such bad debts could be shown to exist) any entitlement to
claim a deduction in respect of them would lie with Henry Sztern Inc., not the
Appellant. On these facts, the Appellant is unable to satisfy the criteria
under paragraph 20(1)(p) of the Income Tax Act.
Reimbursements to Estates
[14]
The Appellant also claimed an
amount for what he called “reimbursements to estates”. As I understand his
evidence, these were amounts that Henry Sztern Registered had advanced to the
bankrupts’ estates. When asked why he would have made such advances, the Appellant
said it was “… to insure that the estate itself does not … default”. He went on to say that in
many instances, he was unable to recover the amounts advanced so he deducted
them as a business expense deduction on the basis that they were a kind of
goodwill gesture, a way of drumming up new clients.
[15]
While I have no doubt that the Appellant
was moving money in and out of bankrupts’ estates, I am less convinced he had
any business purpose for doing so. The mere characterization of such advances
as “reimbursements” suggests that he had, prior to that time, taken money out
of the trust accounts, something he, in his personal capacity, had no
obligation and certainly, no authority to do. Furthermore, by the time the
“advances” were made, the bankrupts had already been discharged. In these
circumstances, I agree with counsel for the Respondent that his explanation for
having taken it upon himself to “reimburse” the trust accounts of estates makes
no sense. As the Appellant has not established a link between these amounts and
any business carried on by the Appellant, there is no justification for interfering
with the Minister’s assessment on this score.
Management Fees
[16]
The Appellant initially claimed a management
fee deduction totalling some $1.2 million, most of which was allowed. Here,
only the disallowed portion of $101,192 is in dispute: it includes claims for legal
fees incurred to defend himself against professional disciplinary proceedings, fines
levied by the Superintendent in Bankruptcy, and various bank charges and loans interest.
Each of these is dealt with under the headings below.
[17]
The Appellant was given the
opportunity, at both the audit and the objection stage, to explain the nature
of his work and to provide documentation in support of these claims. Instead of
doing that, he simply delivered a box of jumbled papers to the Canada Revenue
Agency officials for their review. Yet at the hearing, he challenged their
findings on the basis that they had no expertise in bankruptcy, did not
understand his business practices and had arbitrarily estimated his expenses
rather than going through his unsorted materials item by item.
[18]
I would have thought that the
Appellant, as a chartered accountant, would have realized that under the Income
Tax Act, a taxpayer has an obligation to maintain adequate records so that,
if ever it is necessary, he is in a position to justify his claims. Because of
the Appellant’s failure to keep good records and to provide a credible
explanation of his expenses, he was unable to satisfy the Minister’s officials
of the legitimacy of his claims. For the reasons set out below, he had been
equally unsuccessful before this Court.
A. Legal Fees
[19]
The Appellant is seeking an
additional deduction of $40,025 for legal fees. In support of his claim, he put
in evidence a copy of a list of outstanding invoices from Heenan Blaikie SRL / LLP
and copies of four cheques
made out to that firm. I do not find these documents persuasive. First of all,
the list of invoices is addressed to “Sztern & Associés” so it is not clear
whether it was in respect of services rendered to the Appellant’s sole
proprietorship or to the corporate trustee, Henry Sztern Inc., especially since
the address shown in the invoice is that of the corporation. As for the
cheques, in addition to the ambiguities already noted above, there is no direct
correlation between the amounts payable in the cheques and the invoiced amounts
listed in Exhibit A-7. Finally, it seems likely to me that the claim for these legal
fees is a duplication of an amount already taken into account by the Canada
Revenue Agency officials.
B. Fines
[20]
The Appellant put in evidence a
document entitled “Trustee Suspension Order, Corporate Trustee Limitation Order
and Payment Order Issued Under the Bankruptcy and Insolvency Act”.
Pursuant to this document, the Appellant and Henry Sztern Inc. were “jointly
and severally liable for payment to the Office of the Superintendent of
Bankruptcy of costs related to the investigation of the conduct of the trustee
and corporate trustee, in the amount of $15,000.00”. The Appellant was allowed
a deduction of $5,000 and is seeking to claim a further $10,000. In my view,
there is insufficient evidence to support his entitlement to any additional
amount. It seems equally likely that Henry Sztern Inc. paid the rest of the
fine.
C. Bank Charges and Loan
Interest
[21]
Proving bank charges and loan
interest is normally not that difficult as it is the usual practice of banks to
include such costs in their statements. For reasons not made clear to the
Court, no bank statements were put in evidence. They were before Mr. Toner,
however. I accept his evidence that when making his review, he was unable to identify
the amounts claimed in the bank statements the Appellant had provided. At the hearing, the Appellant put in evidence a bundle of cheques which, he said, were in payment of such amounts. Again, there was no
direct correlation between the “H. Sztern & Associés” cheques and his
personal business or between the amounts shown in the cheques and the
deductions claimed. In these circumstances, I can see no justification for interfering
with the Minister’s assessment.
[22]
For the reasons set out above, the
appeal of the Appellant’s 2001 taxation year is dismissed, with costs to the
Respondent.
Signed at Ottawa, Canada, this 7th day of October, 2010.
“G. A. Sheridan”
Email this Content