Citation: 2009 TCC 577
Date: 20091116
Docket: 2008-2822(IT)I
BETWEEN:
ROBERT LUST,
Appellant,
and
HER MAJESTY THE QUEEN,
Agent for the Appellant: Donald Lust
Counsel for the Respondent: Whitney Dunn
REASONS FOR JUDGMENT
(Delivered
orally by teleconference on September 4, 2009,
at Vancouver , British Columbia)
McArthur J.
[1]
This appeal is from a reassessment
by the Minister of National Revenue for the 2005 taxation year which added
$7,000 to the Appellant's income together with a gross negligence penalty of
approximately $770.
[2]
Briefly the facts include the
following. Extrac Minerals Inc., a corporation I believe now situate, or at
least in 2005 was situate in Osoyoos, B.C. was managed by the Appellant's
father, Donald Lust, whom I shall refer to as Mr. Lust. The corporation paid
the following amounts to the Appellant:
October 28, 2005, by money order for $1,000;
November 15, 2005, cheque number 287 for $1,500, which
cheque had noted on the Re: line “Contract for Hire”;
November 25, 2005, cheque number 288 for $1,500; and
December 29th, '05, cheque number 294 for
$3,000, which also indicates on the Re: line “Contract for Hire”.
[3]
The amount was paid from a
contract of services between the Appellant and Extrac but, according to the
Minister position, the Appellant failed to report that income in 2005. Mr.
Lust, who described his occupation as researcher, now retired, stated that the
wording "Contract for Hire" meant a private contract and not an
employment contract. However, this explanation contradicts the ordinary meaning
of the phrase and the Canadian Oxford Dictionary defines
"hire" as "employ a person for wages or fee".
[4]
The only evidence presented was
from the Minister's auditor, Michael LeBlanc, who was the Appellant's subpoenaed
witness, and from Donald Lust, the Appellant's father, who also acted as agent.
The Appellant was present throughout the hearing, but did not testify. I informed
Mr. Lust that I may infer an adverse interest, and that is, in this instance
that his son did not testify because his evidence may have been adverse or
contrary to his own best interest. In other words, it may hurt rather than
advance his position. I believe Mr. Lust clearly understood this and took that
risk. He mentioned he did not want to submit his son to a “vigorous"
cross-examination by the Respondent.
[5]
Mr. LeBlanc was examined in-chief
by Mr. Lust who was preoccupied with what he believes is the unsatisfactory
manner in which CRA in general, and Mr. LeBlanc, in particular, handled dealings
with the Appellant. On Mr. LeBlanc's part, he testified that the Appellant was
not forthcoming and perhaps evasive. Mr. LeBlanc, concluded that the three
cheques and a money order were payment by Extrac for services rendered by the Appellant
to that company, either as an employee or an independent contractor.
[6]
Two of the three cheques totally
$4,500, stated "Contract for Hire". The four amounts were dated from
October 28th through to December 29th, 2005 and Mr. Lust explained that he had
been ill and/or in Medicine Hat during this period and his son helped out with his
duties. During 2005, the Appellant also received approximately $53,037
employment income from BJ Services Company Canada.
[7]
Mr. Lust issued the payments to
his son on behalf of Extrac Minerals, whose head office, according to the
government filings, was Medicine Hat, Alberta, although Mr. Lust stated that in 2005, the original
company had been allowed to die, and the new company out of Osoyoos had arisen.
[8]
He complained about the lack of information
received from CRA and Mr. LeBlanc. That may be accurate, but on the other
side of the coin, he and the Appellant were extremely secretive and withheld
much of the specifics with respect to the $7,000. I was just left to guess with
respect to details.
[9]
In a letter under the Appellant's
exhibit in tab 8 I believe, there is a copy of a letter written by an appeals
officer to the Appellant, in Osoyoos, B.C. clearly setting out the Minister's
position. In effect, the letter says to Robert:
You received 7,000 from Extrac,
if it wasn't income, then what was it? Please explain.
[10]
Unfortunately and perhaps sadly,
the Appellant goes on about what it was not, and what it could have been. He
received a clear, straight question, no subterfuge, no tricks, no other
meaning. The Minister was looking for an honest answer. What he received from
the Appellant was what might be described as smoke and mirrors, and in that
regard, I refer to Exhibit A-1, Tab 9. In that letter, the Appellant wrote the
appeals officer, in part thanking him or her for the letter of April 8th and
stating:
As stated
before these amounts could not have been income as Extrac does not have, nor
has ever had, any employees.
[11]
And my comment to that is, well,
that may be so, but it did not have to be paid to the Appellant as an employee
to be taxable income in his hands. The explanation offered by the Appellant was
that he received no remuneration for his services, the payments were to
reimburse him for material purchase for the company and other expenses. For the
most part, these expenses were totaling $6,300, while the expenses referred to
by the Appellant totaled the whole $7,000. But $6,327 of those expenses in two
amounts, $3,420 and $2,907, apparently represented a chemical with a special
formula, perhaps shipped by a Panamanian corporation, Salmo Research Inc. All
other details are left unexplained. The two invoices from Salmo lack detail and
clarity.
[12]
The tax, as indicated on these Salmo
invoices is 7%, from which one might infer was GST. But Salmo apparently was
not a GST registrant, and I presume that the tax was never paid to the Respondent.
No cancelled cheque from the Appellant to Salmo was produced, nor was there any
evidence that the Appellant had withdrawn these relatively large amounts from
his bank account to pay the amounts in cash as stated. We are left with hardly
a smidgeon of direct evidence. No bills of lading, no details with respect to
who Salmo was, no evidence on behalf of Salmo, and no quantity or aspects of
the chemicals used were forthcoming, although it may have been a secret formula
and I understand that if it was. No corroboration, just general statements
which Mr. Lust gave, which are hearsay at best as he was not there because he
was either ill, or and in Medicine Hat, as far as I understood.
[13]
There were other expenses,
receipts in Exhibit A-1, Tab 2 that are not helpful, for example, Bel-Air Motel
in Medicine Hat; a bill to Extrac; Smitty's Pancake House, Fernie, B.C.; and a
restaurant in Penticton; an Osoyoos hardware store.
[14]
Tab 3 of Exhibit A-3 contains a
two ledger handwritten pages totaling $2,400 for supplies, parts, lab. Again,
no invoice receipts, no details, no indication who paid the amounts, how much
and to whom or why. Tab 3 also includes a bank statement for Robert and Donald
Lust with an Osoyoos address. This was submitted, I believe, to indicate
various cash withdrawals in October, November and December 2005. These are of
little assistance to corroborate that Robert paid Extrac expenses of $7,000 in
cash. The cash withdrawals cannot be reconciled, or at least I could not, and
do not corroborate the cash payments to Salmo. The cash withdrawals are equally
consistent with the day-to-day, week-to-week, month-to-month normal cost of
living expenses of both parties.
[15]
The purchase orders in Exhibit A-4
were prepared by Mr. Lust. They are vague, self-serving and of very little
evidentiary value. As stated earlier, the Appellant was more focused on
establishing improper treatment by CRA than dealing with the simple issue of
whether he received $7,000 in unreported income in 2005, well evidenced by
three cheques and a money order from Extrac.
[16]
The Appellant suggested in his
letter under Tab 9 of Exhibit A-1 that the cheques he received could have been
for any number of reasons, and he lists six, but they are prefaced with
"could have been". I am asked to guess. He states that Extrac books
of records are held at the foundation headquarters, unavailable in the
timeframe requested. Well, they were still unavailable at trial.
[17]
Another mystery is I believe Mr.
Lust had been the sole director and shareholder of Extrac, which was
incorporated in Alberta with a head office in Medicine Hat. He now states that
the company no longer exists in that form, but now is perhaps owned and
operated by a foundation, which is no more than a phantom without relevant
details, nobody appearing on behalf of the foundation. Again, Tab 8 clearly
sets out the Minister's position. The Minister is saying "Please provide
an explanation for why the money was paid to you." This is clear and
unambiguous. Rather than providing an explanation the Appellant saw fit to
write a very vague reply.
[18]
Contrary to the Appellant's
understanding of the issues, again the question boils down to whether the $7,000
received by the Appellant was used by him to pay for materials and other
extract related expenses. We know from Mr. Lust's testimony, that at in
October, November and December 2005, Robert took over his father's position as
manager of Extrac. We know as a fact that the Appellant Robert was paid a total
of $7,000 with at least $4,500 in cheques noted "Contract for Hire". We
also know that hire means to employ a person for wages. The Appellant did not
testify, and I infer that there was evidence that he did not wish to divulge. Finally,
the obvious conclusion at this point is that the $7,000 was income.
[19]
To counter this, the Appellant's
agent set out to establish that the $7,000 was a repayment to the Appellant for
the money he expended on Extrac's behalf. He, the Appellant, had the onus of
establishing this, and failed to do so. The explanations put forward are not
plausible. The largest expenditures totaling $6,327 were presented by Mr.
Lust's evidence of two Salmo invoices. The oral evidence was uncorroborated and
unconvincing. The Appellant, the only one apparently with the personal
knowledge, did not come forward and testify giving the details of the cash
purchases of the chemicals, how, when, where, why and how much. The invoices
are again without details: no description of the goods purchased; no address or
telephone for Salmo; the tax referred to is suspect without corroboration.
[20]
I do not accept these vouchers as
being authentic. I could not reconcile the amounts of the lesser expenditures
referred to in Tabs 2 and 3, and do not accept their relevancy.
[21]
For these reasons I conclude that
the Appellant has not met the burden of reversing the Minister's assumption
that the $7,000 was and is taxable income.
[22]
With regard to penalties, again,
the Appellant did not testify. The Minister had the burden of proving that in
the 2005 taxation year, in accordance with subsection 163(2) of the Act,
the Appellant knowingly or under circumstances amounting to gross negligence,
made a false statement in his return of income for that taxation year by not
reporting the amount.
[23]
The onus was on the Minister to
prove gross negligence, and the onus is a stronger one than the onus on the Appellant
with regard to the assumptions. The onus is greater than on a balance of probabilities,
and closer to the criminal onus under the Criminal Code than it is to a balance
of probabilities.
[24]
The appeal is allowed only to
delete the imposition of penalties. The Minister shall add the additional sum
of $7,000 to the Appellant's taxable income for the taxation year 2005 as
previously assessed.
Signed at Ottawa, Canada, this 16th day of November, 2009.
“C.H. McArthur”
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