Citation: 2010TCC427
Date: 20100908
Docket: 2004-3464(GST)G
BETWEEN:
IPAX CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2004-4526(IT)G
BETWEEN:
DOREEN CRAWFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2004-4527(IT)G
BETWEEN:
GARFIELD CRAWFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
The income tax
liability for Doreen Crawford and Garfield Crawford for the 1995, 1996, 1997,
1998, 1999 and 2000 taxation years was reassessed on a net worth basis to
include the following amounts in income:
|
Year
|
Garfield Crawford
|
Doreen Crawford
|
|
|
|
|
|
1995
|
$30,328
|
$21,229
|
|
1996
|
$16,119
|
$11,283
|
|
1997
|
$29,734
|
$20,814
|
|
1998
|
$32,345
|
$22,641
|
|
1999
|
$29,355
|
$20,549
|
|
2000
|
$40,495
|
$28,347
|
The Minister of National Revenue (the
“Minister”) relied on subsection 152(4) of the Income Tax Act (the “Act”) to reassess Doreen
Crawford and Garfield Crawford’s 1995 taxation year beyond the statutory
limitation period. The Minister relied on subsection 152(7) to assess the
individual Appellants’ tax liability for the 2000 taxation year. Penalties pursuant
to section 162 and subsection 163(2) of the Act were assessed for each
of the individual Appellants.
[2]
The Appellant IPAX
Canada Limited (“IPAX”) was reassessed for the period May 1, 1994 to April 30,
2001 to increase GST collectible from $244,948.78, which was the amount
reported by IPAX, to $347,117.03. The Minister relied on subsection 298(4) of
the Excise Tax Act (the “ETA”) to assess the quarterly reporting
periods from May 1, 1994 to July 31, 1998 beyond the statutory limitation
period. The Minister also assessed penalties pursuant to subsection 280(1) of
the ETA.
[3]
IPAX was incorporated
in 1979 with Garfield Crawford as sole shareholder, director and President of
the company. It operated in Brampton, Ontario and was in the business of
selling and servicing Beam central vacuum systems, security systems, skylights
and garage doors. 1087847 Ontario Ltd. (“Beam of Barrie”) was incorporated in
1995 with Doreen and Garfield Crawford as equal shareholders. It carried on the
same type of business as IPAX and it operated under the name Beam of Barrie.
[4]
The assessments for
IPAX arose when the Minister found that there was a discrepancy between the
sales reported by IPAX on its income tax returns and the sales reported on its
GST returns. The evidence showed that the Canada Revenue Agency (“CRA”)
contacted Mr. Crawford by telephone and letter on several occasions to arrange
a meeting with him or his representative so that the books and records of IPAX
could be reviewed. Mr. Crawford was totally uncooperative. He gave no
information to Kirnal Matharu, the first auditor who worked on these files, or
to Shawn Marshall, the auditor who produced the net worth statements for the
individual Appellants.
[5]
Shawn Marshall stated
that the first auditor who had worked on these files had obtained an Equifax
credit report on Doreen Crawford which showed that she had various credit
cards. He sent out requirements for information to American Express, the
Toronto Dominion Bank and the Royal Bank of Canada in Brampton. On the basis of
the information he received, Mr. Marshall wrote to Mr. and Mrs. Crawford on
March 13, 2002 that they had understated their income for the years 1990 to
1995 and had failed to report income from 1996 to 2000 as their income tax
returns had not been filed. On March 18, 2002, Garfield Crawford telephoned Mr.
Marshall to say that his and his wife’s income tax returns for 1996 to 1999 had
been filed. However, the evidence showed that the 1996, 1997, 1998 and 1999
income tax returns for Garfield Crawford and Doreen Crawford were only filed
after the Appellants had been directed to file their returns. These returns
were filed with the CRA on April 3, 2002.
[6]
The individual
Appellants reported the following income:
|
Year
|
Garfield Crawford
|
Doreen Crawford
|
|
|
|
|
|
1995
|
$1
|
$1
|
|
1996
|
$10,000
|
$7,000
|
|
1997
|
$10,000
|
$7,000
|
|
1998
|
$10,000
|
$7,000
|
|
1999
|
$11,000
|
$7,500
|
[7]
Garfield Crawford
stated that IPAX monitored alarm systems and it was the money which IPAX
received for this service that he took as his income. He shared the money with
his wife Doreen. In cross examination, he stated that he and Doreen received
the following income:
|
Year
|
Doreen & Garfield Crawford
|
|
|
|
|
1995
|
$19,975
|
|
1996
|
$17,922
|
|
1997
|
$25,050
|
|
1998
|
$25,350
|
|
1999
|
$35,675
|
However, they did not report the entire amounts on
their income tax returns because they felt that they, as shareholders, had
loaned so much money to IPAX[1]
that they did not owe income taxes. They reported the income shown on their
returns because CRA requested that they file income tax returns.
Garfield and Doreen Crawford
[8]
Shawn Marshall produced
the net worth statement for the Crawford household by calculating its Personal
Expenditures based on Statistics Canada data for a family of two adults. He
adjusted this data when he had additional information from cancelled cheques or
credit card statements that indicated an amount different from the Statistics
Canada amount for a specific item. In the calculation of the net worth, he
included payments that reduced the mortgages on properties held by the
Crawfords and he included the increases and decreases in the Due to Shareholder
accounts in IPAX and Beam of Barrie. The discrepancy in total income was
apportioned between Garfield and Doreen Crawford in accordance with the ratio
of income reported by them.
[9]
Garfield and Doreen
Crawford chose to challenge the net worth statement by disputing the amounts
included as Personal Expenditures, by asserting that their personal
expenditures were funded by non-taxable receipts of cash and by disputing the
amount of the mortgage interest related to their principal residence and to a
cottage property.
[10]
The Appellants
submitted Financial Schedules (exhibit A-9) for the years under appeal. These
schedules were produced by Terry Elder, a chartered accountant. Mr. Elder did
not appear as a witness at the hearing of these appeals but the Notice to
Reader contained at the beginning of these schedules reads as follows:
NOTICE TO READER
Based on information included in the documents listed in Schedule 6
and other information from Mr. and Mrs. Crawford, I have compiled the attached
financial schedules with respect to Mr. Garfield Crawford and Mrs. Doreen
Crawford for the calendar years ended 1996 to 2000.
I have not performed an audit or a review engagement in respect of
these financial schedules and, accordingly, I express no assurance thereon.
These financial schedules have been prepared specifically in
connection with a Pre-Hearing Conference at the Tax Court of Canada to be held
in February 2009 and are not to be used for any other purpose,
Personal Expenditures
[11]
One of the schedules
included in exhibit A-9 was a schedule of Personal Expenditures which compared
the amounts used by the CRA in the calculation of the net worth with amounts
now put forward by the Crawfords. The Crawfords submitted documentary evidence
to support only one of the amounts that they have used in their schedule for
Personal Expenditures. I note that in exhibit A-9, Garfield Crawford disagreed
with the amounts included in the net worth schedule for telephone expenses,
medical expenses, eye care expenses and home entertainment expenses. However,
at the examination for discovery he had agreed with the amounts used for these
expenses in the net worth statements.
[12]
During the period under
appeal, the Crawfords owned a principal residence at 74 Main Street, in Brampton, Ontario and Garfield Crawford had an interest in a cottage property. Each
property had a mortgage on it. The Crawfords disputed the amount of mortgage
interest included in the calculation of Personal Expenditures for these
properties. The auditor who produced the net worth statements included the
total mortgage interest paid on the principal residence and 75% of the mortgage
interest paid on the cottage property in his calculation of Personal
Expenditures.
[13]
It was the Crawfords’
position that the mortgage loan on their principal residence was obtained to
inject money into IPAX. They stated that prior to 1992, IPAX obtained all loans
in its own name and the loans were secured by a mortgage on their principal
residence. However, their banker told them that they could get a better
interest rate if the loans were in their personal names and they decided to
follow his advice. They mortgaged their principal residence and the funds
derived from the mortgage were loaned to IPAX.
[14]
The Appellants have
submitted sufficient documentary evidence to support their position[2] with
respect to the mortgage interest for their principal residence. The category
marked mortgage interest in Personal Expenditures is to be reduced to the
amounts of $6,734, $6,972, $5,999, $5,224, $4,993 and $5,089 for 1995, 1996,
1997, 1998, 1999 and 2000 respectively.
[15]
It was also Garfield
Crawford’s position that he owned only 25% of the cottage property and the
mortgage interest included in the Personal Expenditures schedule should be changed
to reflect this. However, Mr. Crawford’s position is not supported by the
documentary evidence. According to the mortgage document, Garfield Crawford
owned 50% of the cottage property.[3]
The amount of interest expense included in Personal Expenditures for the
cottage property is to be reduced to reflect that Garfield Crawford owned 50%
of this property.
[16]
The Crawfords have
disagreed with the majority of the amounts included in the Personal
Expenditures Schedule. The onus was on them to convince the Court that the
amounts used by the auditor for personal expenditures were incorrect. They have
been successful in this regard only with respect to the amounts used for
mortgage interest expense.
Receipts of Money
[17]
The Respondent has
conceded that Garfield Crawford received the amount of $30,000 in January 1996
from the settlement of a court action. It was also conceded that he received
insurance proceeds in the amounts of $8,267.18 and $1,953.15 in September 1996.
[18]
Garfield Crawford
presented evidence which showed that he received a pension in 1999 and 2000 from
the Workplace Safety & Insurance Board (“WSIB”). As well, he tendered a
T5007 form from the WSIB which confirmed that he received $1,455.36 in 2001. It
was his evidence that the WSIB compensation would have been in the approximate
amount of $100/month for each of the years 1995 to 2000. The documents tendered
by Mr. Crawford support his position[4].
However, contrary to Mr. Crawford’s belief, these amounts of compensation form
part of his income and are to be included in his income.
[19]
Garfield Crawford has
also stated that he had access to the pensions which were received by his
step-father and his brother. However, he has not presented any evidence to
support that these amounts were cash receipts given to him. The fact that he
and his step-father had a joint bank account does not mean that the amounts
deposited in that account belonged to Garfield Crawford. His step-father
received only pension income during the relevant years and it was used to care
for him so that he could live in his own home until 2001.
[20]
It was Garfield
Crawford’s evidence that his brother was a schizophrenic and he had power of
attorney over his brother’s affairs since 1995. His brother received a
disability pension from the Canada Pension Plan (“CPP”) which was deposited
into an account with the Bank of Montreal. The evidence showed that on November
16, 1998, Mr. Crawford wrote a cheque[5]
on his brother’s bank account for the amount of $5,000. The cheque was made
payable to IPAX. According to the passbook for this account, there were no
other withdrawals from this account. The monies in this account were not owned
by Garfield Crawford and were not non-taxable amounts received by him.
[21]
The individual
Appellants alleged that they had other non-taxable amounts of money during the
period. They were as follows:
|
|
1995
|
1996
|
1997
|
1998
|
1999
|
2000
|
|
Sale of
Art etc.
|
$3,000
|
$4,200
|
$1,500
|
|
|
|
|
Garage
Sales
|
$4,000
|
$8,000
|
$8,000
|
$8,000
|
$8,000
|
$8,000
|
|
Sale of
Cars
|
$8,500
|
$10,500
|
$3,150
|
$11,800
|
$1,500
|
$4,050
|
|
Casino
Winnings
|
|
|
|
$5,000
|
$3,200
|
|
[22]
All of the amounts
included in the table at paragraph 21 were estimates given by the individual
Appellants. There was no documentation to support that they had access to any
of these amounts. I find it totally implausible that the individual Appellants
had annual sales of $8,000 from garage sales or that they earned the amounts
they allege from the sale of cars. As well, on February 4, 2004, when Garfield
Crawford was interviewed by Mr. Liu, the appeals officer, he was asked if he
gambled. At that time he could not indicate any amount that he won as he said
that the amounts were not significant. However, in 2009, when he prepared
exhibit A-9 he could not only specify amounts that he allegedly won but he
could also specify a time frame when the amounts were won. The Crawfords’
evidence with respect to these amounts of non-taxable receipts is totally self
serving.
[23]
Based on the evidence
which was before me, I have no difficulty in reaching the conclusion that the
Minister was justified in opening the statute-barred years for Garfield
Crawford and Doreen Crawford. They made misrepresentations relating to their
income which were akin to wilful default.
[24]
I have also concluded
that the Minister has satisfied the onus with respect to the imposition of
penalties on the individual Appellants. They did not file their income tax
returns for 1996, 1997, 1998 and 1999 until requested to do so. They did not
file an income tax return for 2000. When they filed their returns for 1996 to 1999,
they reported less income than they knew they had taken from IPAX. The amounts
included in their income as a result of the net worth assessment are
significant in comparison to the amounts of income declared by the individual
Appellants.
IPAX
[25]
The Minister assessed
the GST liability for IPAX as shown in Schedule A attached to these reasons.
[26]
Clara Massara, an
appeals officer with the CRA, testified that she met with Garfield Crawford and
his accountant, Bruce Berry on December 9, 2003. Mr. Berry told her that he had
prepared the income tax returns (“T2s”) for IPAX but its GST returns were
prepared by an employee of IPAX[6].
He explained to Ms. Massara that the reason for the discrepancy between the
sales reported on the T2s and those reported on the GST returns was as a result
of inter-company sales from IPAX to Beam of Barrie. IPAX purchased all product
used by both companies and product was transferred to Beam of Barrie as it was
needed. At year end, he made an adjustment to account for these inter-company
transactions. Beam of Barrie was not charged GST on these inter-company sales.
If it had been charged GST, Beam of Barrie would have been entitled to ITCs for
the inter-company purchases. Ms. Massara stated that she suggested that the
transactions sounded like a “Wash Transaction”; the assessment would stand but
perhaps the interest and penalty could be reduced. She stated that at the end
of the meeting, she requested various documents and Mr. Berry was going to see
if Beam of Barrie could claim the offsetting ITCs.
[27]
Ms. Massara stated that
after she reviewed the financial statements filed with Beam of Barrie’s T2s and
the net tax claimed by Beam of Barrie for GST purposes, she concluded that Beam
of Barrie had claimed ITCs on all of the inter-company purchases[7]. She did
not reduce the penalty assessed to IPAX because all of IPAX’s GST returns had
been filed late.
[28]
At the hearing of these
appeals, it was the Appellants’ position that the flow of money from Beam of
Barrie to IPAX was a transfer of funds only. There was no transfer of product
between the two companies as Beam of Barrie purchased its own inventory. It was
also the Appellants’ position that some of the funds included in sales by their
former accountant, Mr. Berry[8],
were shareholder loans from Garfield Crawford.
[29]
Mr. Wayne Matheson, a
chartered accountant, testified on behalf of the Appellants. He produced
portions of the general ledger for IPAX, cheques from Beam of Barrie to IPAX
and some deposit slips for IPAX’s bank account. It was his evidence that these
documents supported the Appellants’ position and that Mr. Berry made a mistake
when he prepared the T2 returns for IPAX.
[30]
I have given no weight
to Mr. Matheson’s evidence. He relied on portions of the general ledger for
IPAX but at no time was the entire general ledger presented to the court. His
evidence was totally opinion evidence as he had no first hand knowledge of any
of the documents.
[31]
The documents given to
the CRA at the objection stage of these appeals do not support the Appellants’
position. At the objection stage of these files, Mr. Crawford gave the CRA the cheques
which Beam of Barrie had issued to IPAX. Most of these cheques from Beam of
Barrie to IPAX were marked with the notation “Re: Product”. In conclusion on
this point, the Notice of Appeal filed in IPAX’s appeal does not support the
position taken by the Appellants at the hearing of these appeals. In the Notice
of Appeal, at paragraph 10 and 12, it is admitted:
10.
The two companies conduct day to day business in
an integrated fashion. For simplicity and pragmatic reasons, IPAX purchases all
inventory, almost exclusively from the franchisor Beam of Canada Ltd. When
required by either company, the inventory was taken to the jobsite for
incorporation into the contracts underway.
…
12. IPAX purchases all inventory in its name and
claims the Input Tax Credits, “ITC”, for the GST paid to the suppliers.
[32]
I have also concluded
that Garfield Crawford did not lend any monies to IPAX beyond that shown in
IPAX’s financial statements. I have given no weight to the deposit slips
tendered as evidence of shareholder loans. It was very clear that the notation
“shareholders loan” had been written on some of the deposit slips subsequent to
the date on the slip. Because the deposit slips have been photocopied many
times, I have not been able to ascertain, with any certainty, whether any of
the notations “shareholder loan” appeared on the original deposit slips.
[33]
Based on the evidence
before me, I conclude that the Minister was justified in opening the
statute-barred period for IPAX. There was a significant difference between the
sales reported in the T2s and the GST returns. The fact that an adjusting entry
had to be made each year in order to properly calculate the sales for the
financial statements ought to have alerted the accountant or Mr. Crawford that
there would be GST implications from this journal entry.
[34]
The appeals for
Garfield Crawford and Doreen Crawford are allowed in accordance with these
reasons. The appeal for IPAX is allowed to adjust the amount included in its
revenue from the net worth calculations for the individual Appellants.
[35]
If the parties are unable to reach an agreement with
respect to costs by October 12, 2010, they may present written submissions by
October 29, 2010.
Signed at Ottawa, Canada, this 8th
day of September, 2010.
“V.A. Miller”
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