Citation: 2009 TCC 28
Date: 20090113
Docket: 2006-3505(GST)I
2007-836(IT)G
BETWEEN:
DOUGLAS L. BROWN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
For the Appellant: The Appellant himself
Counsel for the
Respondent: Justin Kutyan
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Toronto, Ontario, on August 20, 2008)
Bowie J.
[1] The Appellant brings these appeals from assessments by
the Minister of National Revenue under the Income Tax Act for the
taxation years 1998, 1999, 2000 and 2001, and under the Excise Tax Act
in respect of unremitted goods and services tax for that four‑year
period. All of these assessments carry with them interest, of course, and gross
negligence penalties have been assessed as well.
[2] The Appellant's
business consisted of arranging for accommodation in various resorts, and later,
for accommodation on cruise ships as well, for people employed in the travel
industry. It was described in the evidence as a niche market which he began to
fill around the 1990s, and apparently filled very successfully, judging by his
revenues over the years. He made arrangements for travel for people first by
himself, and later assisted by as many as three people operating out of their
homes and communicating by telephone, and by a franchisee operating in Montreal. I do
not propose to go into a great deal of detail about the business. It is not
necessary to do so.
[3] The amounts
involved in the assessments are very substantial. In the four years in question
the Appellant, in filing his income tax returns, declared income from the
business in 1998 of $3,086, in 1999, $4,673, and in 2000 and 2001 he declared
net losses of $6,630 and $5,953. The assessments that are now contested
increased the revenues of the business in the four years in question, and
disallowed substantial expenses that had been claimed. The understated revenues
that were assessed for the four years were approximately $45,316, $34,122,
$72,300 and $101,300. The disallowed expenses for those four years were
$12,822, $17,100, $20,600 and $10,700. The net understatement of income for the
four years respectively comes to $58,000, $51,000, $93,000 and $112,000 for a
grand total of $314,000. These numbers are somewhat rounded, but that is the
magnitude of the errors and omissions.
[4] The Appellant
was prosecuted and pleaded guilty to one count each of evasion of income tax
and of goods and services tax and paid total fines in the amount of $100,000 on
those counts. In the appeals before me today he did not dispute at all the
understatement of the revenues of the business. The reassessments for the 1998
and 1999 taxation years were made beyond the normal reassessment periods, but
there is no question that the Appellant made material misstatements that were
either willful or negligent in those returns, thereby justifying the Minister's
reopening of those years. That was demonstrated from the evidence of the
Appellant himself, who, as I have said, did not contest the underreporting of
his income.
[5] The onus of proof
in respect of those two years shifted to the Appellant and he had the onus from
the beginning in respect of the 2000 and 2001 taxation years to show the
assessments to be incorrect. I think it is fair to say that he presented no
meaningful evidence whatsoever to discharge the onus in respect of any of the
assessments. Indeed he, in effect, confined himself to a few criticisms of the
assessments. For example, at tabs 5, 6 and 7 of Exhibit R‑1A is an
invoice which is for $11,371.18, and an invoice from Interline Discount Travel
for the period March 28 to April 9, 1999 for $1,200 and for September 16 to 17,
1999 for $1,200. The Appellant in his evidence, and in cross‑examining
the appeals officer who reviewed the initial reassessments and issued
subsequent reassessments, took the position that these were amounts for which
he had not had credit in the computation of the amount of unreported income. In
each of these, he was quite wrong.
[6] The first
invoice of $11,371 was for the lease of computers which were used in the
Appellant's business or more accurately I should say for the sale of computers
which were leased for use in the Appellant's business. The invoice in question
is from the vendor of the computers to New Corp. Leasing from whom the
Appellant leased the computers. It would appear that a copy of this invoice
found its way into his records as the computers as is shown on the invoice,
were delivered directly to him as the lessee from the purchaser, but it is
clear that he did not pay the purchase price that was paid by New Corp. Leasing,
but did pay the price of leasing the equipment for the four years in question,
and did get credit in the reassessments for those lease payments.
[7] The two invoices
from Interline Discount Travel, it appears from the evidence, were, in fact,
invoices from one of the people who was hired by Mr. Brown to assist him
in his business by taking orders for reservations and making reservations to
fill those orders. This individual, as with the other individuals who worked
for him, was paid what he described as a salary, but it was paid in the form of
what might be described as fees to an independent contractor. Without getting
into the legal description of employees and contractors, it is quite clear that
he paid those individuals gross amounts from which he made no deductions for
income tax, for Employment Insurance premiums nor for Canada Pension Plan
contributions, nor did he collect and remit GST. In the computation of his
income as it was assessed and reassessed again by the Minister, he clearly got
credit for the payment of those, and the other invoices as well, from his
employees, helpers or however they may be described. I am quite satisfied that
his complaints in respect of those three documents are quite unfounded.
[8] Mr. Brown also
took issue with the Minister's treatment of expenses that he claimed in respect
of what he referred to as familiarization cruises that he took part in
accompanied by his wife. Familiarization cruises, as I understand it, are
cruises taken by people such as Mr. Brown who are in effect selling cruise
bookings, so that they will know what it is that they are selling and will be
able to describe it in suitably glowing terms to the people who are being
booked on future cruises. Mr. Brown, I think, got some preferred rate when
he took the familiarization cruises, but he certainly had to pay something for
them. He deducted those amounts in the computation of his income, and the
Minister has never disputed his right to deduct the amounts that he paid in
respect of his own attendance on those cruises. The issue that arose was as to
his right to deduct amounts paid in respect of his wife's attendance on the
cruises, given the fact that his wife was in no way involved in the business,
but simply went along, as it were, for the ride.
[9] The Appellant's
explanation of why he should deduct the whole amount came down to this: if you
book a cruise for two people traveling together, you get a rate for double
occupancy that is less than twice the rate charged to somebody who travels on a
single occupancy basis on the same cruise. I can probably take judicial notice
that single occupancy costs more than half of double occupancy on these
cruises. What I cannot take judicial notice of is the ratio of one to the
other. There is no evidence before me, and I have no knowledge as to how much
the Appellant would have had to pay on a single occupancy basis for the cruises
that he and his wife enjoyed on a double occupancy basis.
[10] While the
evidence seemed to indicate that perhaps he had been allowed only 60% of the
amount paid for those cruises, if I understood Ms. Shah's evidence correctly,
the cruises were booked and paid for on an American Express card. The amounts
were allowed without the production of any receipts and may well have included
all of the cruise amounts, it is impossible to say from the evidence. However,
I am not satisfied that the Appellant was entitled to any greater deduction
that he in fact got in respect of the payments for those cruises. There is
ample case law that makes it clear that where spouses enjoy a cruise together
which for one of them is a business item and for the other is not, the marginal
cost for the cruise for two over the cost for one is a taxable benefit. By
analogy, the right to deduct, when it is paid by the taxpayer who is operating
a business as a sole proprietor must surely be limited in the same way.
[11] The Appellant
took issue as well with the treatment of his claim for automobile expenses, but
quite unjustifiably in my view. It seems to me that the Appellant totally
failed in his evidence to explain why he claimed 90% of the use of his
automobile for business, although he maintained no log of automobile use. On
his returns for each year there are lines on the automobile expense portion of
the income tax return for taxpayers to fill in the total automobile mileage for
the year and the amount of business mileage for the year, from which is
computed the percentage of business use. On the returns filed by the Appellant,
what is shown is 100 kilometers of use each year and the claim in one year for
100 kilometers of business use and for the other three years 90 kilometers of
business use. I think it is patently obvious that the business use was not
properly described, nor was the total use properly described in the returns,
and I would expect that this arose from the person who prepared the forms for
the Appellant mistakenly putting 100 and 90 as the claimed percentages of business
use, but it leaves me in the position that I have no idea how much the
automobile was used in each year. I am asked to believe on faith that it was
used 90% for business, which strikes me as highly unlikely, even though the
Appellant did testify that his wife had a separate automobile. Absent any
cogent evidence from the Appellant, I am not persuaded that he was allowed less
than the amount he was entitled to for automobile use.
[12] Ms. Shah
testified at some length as to the manner in which she reviewed the initial
reassessments of the Appellant as part of the objection process. It is quite
clear that she received inputs from a Mr. Posner, an accountant who was
representing the Appellant in the objection process, and it is apparent from
her evidence that she took much of what Mr. Posner submitted to her in respect
of expenses at face value.
[13] The Appellant
produced four schedules of his expenses for the years in question which he said
he had prepared from the original receipts that were in his possession at the
time; receipts which he said were later lost in a move. Given the Appellant's
quite evident understatement of his income and quite evident overstatement of
his expenses, given his guilty plea to charges of evasion of substantial
amounts, and given the absence of material to back up those summaries that are
Exhibits A‑1, A‑2, A‑3 and A‑4, I much prefer the
evidence of Ms. Shah to the evidence of Mr. Brown in respect of the established
expenses of the business. Indeed, my impression is that Ms. Shah gave the
Appellant the benefit of the doubt in quite a number of areas relating to the
computation of his business expenses.
[14] Turning to the goods
and services tax assessments, the Appellant's approach to GST in the early
years, after it was brought into the Canadian world of taxation in the
beginning of the 1990s, was to ignore it. On November 11, 2002, after some
discussion with somebody in Calgary whom I think the Appellant was describing as an
employee of the government of Canada, the Appellant decided to file GST returns for the
period from January 1, 1998 to December 31, 2001. He filed those on the basis
of the gross sales of the business which he had earlier understated, thereby
understating the base for tax. He was unaware, I think, of the different
treatment for GST of domestic and foreign sales, and thereby overstated the base
by including all of the understated sales. He clearly overstated his
entitlement to input tax credits. I think it is fair to say that in some
respects he understated the input tax credits, and in many respects, he
overstated them. The largest errors in respect of input tax credits being a
claim for input tax credits in respect of the amounts paid by way of salary, as
Mr. Brown expressed it, or fees, to the people working for him, which were not
the subject of GST collected and remitted, and therefore could not properly be the
subject of input tax credits.
[15] Ms. Madsen who
was the appeals officer reviewing the GST assessments, testified at some length
and in detail as to the manner in which those assessments were raised and
reviewed by her. It is clear from her evidence that the Appellant was, in a
number of respects, given the benefit of the doubt. For example, in the
assessments, sales made by way of bookings for non‑residents of Canada were, of
course, not subject to GST, and the assessor made a division between domestic
and foreign sales. Mr. Posner, the accountant acting for the Appellant,
apparently produced the schedule of domestic versus foreign clients, which Ms.
Madsen took at face value, and from which she determined that the domestic
sales appeared to be something in the order of 66% of total sales. The assessor
used a lower percentage and in the assessments under appeal 53.4% was used to
represent domestic sales. I would think from the evidence that that
percentage is on the low side and thereby gives the benefit of doubt to Mr.
Brown.
[16] With respect to
the input tax credits, it is apparent that in the assessments care was taken by
the assessor and Ms. Madsen to make sure that payments for insurance and other
supplies not subject to GST were not the subject of input tax credits, but to
ensure that those supplies on which GST should have been paid were taken into
account in determining the input tax credits applied in the assessments. This
was done notwithstanding that no evidence was presented to the Minister at any
stage, as I understand it, that those input tax credits were, in fact, paid. So
that again, Mr. Brown was given the benefit of the doubt in respect of the
computation of the input tax credits to which he was entitled.
[17] The other item
that Mr. Brown has contested is the penalties imposed on him under the Excise
Tax Act. He has been subjected to late filing penalties under section 280
and also to the gross negligence penalties. The income tax assessments include
gross negligence penalties as well. There has been a considerable amount
written over the years in respect of gross negligence penalties dealing with
such matters as what is gross negligence. According to the Court of Appeal, it means
negligence of a substantial character or words to that effect. Considerations that
ought to be taken into account in imposing gross negligence penalties include
such things as the background, intelligence and general business acumen of the
taxpayer involved, whether the amounts of income understated, or other tax
understated, would be oversight or something greater than oversight, the
magnitude of the amounts involved, the amount of attention paid by the taxpayer
to disclosure and so on. This is not what I would call a close case in respect
of the application of gross negligence penalties. The Appellant has a high
school education. He did not have an accounting background nor post‑secondary
education, but he is certainly a person of some intelligence and business
acumen who was able to begin and to operate, apparently quite successfully, a
business which produced very substantial revenues for him.
[18] The magnitude of
his underdeclaring of revenues and of his overstatement of expenses is, to say
the least, substantial. It would be difficult, I think, to characterize as mere
oversight, the filing of an income tax return that declares a business loss of
something close to $6,000, when the true profit of the business was $112,000. Those
are the kinds of magnitude certainly that applied in 2000 and 2001. In the
first two years, 1998 and 1999, the actual income as assessed is in the order
of $50,000 to $60,000 and that declared in the order of $4,000 to $5,000, so we
are talking of a ratio even in those years of something like $1 declared for
every $10 profit. This is, as I say, not mere oversight, nor can it be
attributed simply to sloppy bookkeeping.
[19] I am satisfied from the totality of the evidence that what we have, at
least in the four years under appeal (and, of course, I have no evidence before
me as to other years) is a pattern of understating the profit of the business
quite deliberately, and on an escalating basis. Both the income tax and the goods
and services tax rely on self‑reporting to a very large extent. The
reason that those statutes provide for fairly severe penalties for people who
deliberately, or even through negligence of a serious nature, understate their
income is because a self‑reporting system must have some discipline to
it. So it is no unimportant matter when an audit turns up deliberate evasion of
the magnitude that we have here.
[20] Quite apart from
all of that, in respect of the gross negligence penalties under the Income
Tax Act, the Appellant in his own evidence early on made it clear that he
signed his returns for each of the four years under appeal without having paid
the least attention to what income was included in them and what expenses were claimed
in them. He said that he kept the records that he kept, prepared spreadsheets from
them and gave them to a tax preparer who, in each year, prepared the returns
for him based on the material that he gave her. We did not hear from her on
that, but taking that statement at its face value, it still leaves the
Appellant with an onus to look at the completed return before signing it and
filing it with the Minister. The declaration that the taxpayer makes when he
signs that form is,
I certify that
the information given on this return and in any documents attached is correct,
complete and fully discloses all my income.
To
sign an income tax return and make that certification without having even
glanced at the contents of the return, because that is what I understood his
evidence to be is of itself, in my view, gross negligence that justifies the
penalties.
[21] In respect of the
GST returns, the Appellant, in my view, quite deliberately misstated the sales
in those returns. I am satisfied that he knew that the gross income that he had
declared was less than the true gross income of the business. It may be that
his claiming of input tax credits in respect of the very substantial amounts
paid to his employees for these very services was the result of ignorance
rather than deliberate evasion, although, I am inclined to think on a balance
of probabilities that it was the latter because he must surely have known that
he did not, in fact, collect and remit GST from those people when he paid their
accounts, so it is difficult to see how he could have thought that there was an
input tax credit to which he was entitled in respect of any of those amounts. Even
accepting at face value his statement, which is probably correct, that he did not
understand the way in which the Act worked, clearly he should have
obtained some advice from somebody who did understand how the Act worked
and he should have filed returns on a regular basis, properly stating his sales
and properly stating the GST that he had paid.
[22] For all of those
reasons, the appeals for 1998, 1999, 2000 and 2001 are dismissed. And the
appeals under the Excise Tax Act for GST are dismissed.
Signed at Ottawa, Canada, 13th this day of January,
2009.
“E.A. Bowie”
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