Citation: 2009 TCC 367
Date: 20090716
Dockets: 2008-1543(GST)I
2008-1546(IT)I
BETWEEN:
GREGORY J. GOOCH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
These are appeals filed
under the informal procedure against assessments of tax under the Income Tax
Act (ITA) for the taxation years 1993, 1996 and 1997 and under the Excise
Tax Act (ETA) with respect to the period from January 1, 1991
to December 31, 1997.
Assessments under ITA
1993
[2]
The appellant reported
total gross income of $188,230.50 for that year (Exhibit A-1, Statement of Income
and Expenses from a Professional Practice). The gross income consists of
management consulting income of $161,230.50 and commissions of $27,000. Against
that gross income, the appellant claimed expenses totalling $104,498.18, and so
reported a net income for 1993 of $83,732.32. Among those expenses are
professional fees of $75,000, which were disallowed by the Minister of National
Revenue (Minister). This is the amount at issue before me for 1993.
[3]
The appellant explained
in court that he was the president and a minority shareholder of Petrox Energy
& Minerals Corp. (Petrox), for which a certain Steve Davis, a
third-party supplier of services based in Florida in the USA, did consulting work on what was referred to as the
“Oil Spill Project”. It appears that Mr. Davis billed Petrox under the
name of Veritas Capital (Veritas) for the amount of $75,000. It also
appears that Petrox did not have the money to pay Veritas and that the
appellant, in his capacity as president of Petrox, decided to pay that debt
himself. He first thought that Veritas could be paid with shares to be issued
by Petrox. However, it seems that Petrox shares were delisted by the Ontario
Securities Commission and thus none could be issued. The appellant therefore took
it upon himself to transfer the shares that he owned in Venga Aerospace Corp (Venga)
to Veritas in payment of the $75,000 bill, and it seems that Veritas was
satisfied with that (Exhibit A-2).
[4]
The Minister disallowed
the expense on the basis that it was not a business expense incurred
by the appellant but was in fact incurred by Petrox, which is true.
[5]
The appellant advanced
the money to Petrox, which was consequently then indebted to the appellant
instead of being indebted to Veritas. However, the appellant explained that in
computing his gross income for 1993 he included all the expenses he incurred
for Petrox, including the $75,000 for which he expected to be reimbursed. He
then deducted all the said expenses from the aforementioned gross income. The
appellant said that he was told afterwards by his accountants that this was not
the proper way to report his income. This is evidenced by his tax returns filed
for 1996 and 1997 (Exhibits A-4 and A-7) in which he reported gross income much
lower than that reported for 1993.
[6]
Therefore, even though
the $75,000 was not an expense incurred by the appellant to earn personal
professional income, and therefore was not deductible from his own income, it
should not have been included in his gross income for 1993 in the first place,
as it was not income for him but was a loan to Petrox. As a result, his gross
income should in any event be reduced by $75,000.
[7]
In conclusion, the
assessment for 1993 will be sent back to the Minister to have the appellant’s
professional income reduced by $75,000.
1996 and 1997
[8]
The appellant reported
gross professional income of $28,182 and net professional income of $24,371 for
1996 (Exhibit A-4, Statement of Business Activities). However, he produced an
invoice for that same year showing commissions earned from Petrox in the amount
of $24,000 and fees of $56,000 for 112 days of work (Exhibit A-6). He also
billed Petrox on that same invoice for expenses (travel, office, computers and
office equipment and other miscellaneous expenses) totalling $20,432. According
to that invoice, he only received $56,320 on that bill and he also assumed the $35,000
debt owed by Petrox to Veritas in that year. He therefore claimed a loss of
$75,000 for that year.
[9]
The Minister reassessed
the appellant to include in income the total amount invoiced to Petrox for
commissions, fees and expenses, that is, $100,432 (Exhibit A‑6). The
Minister, however, allowed the deduction of an amount of $20,432 for the
expenses and the deduction of the loss of $75,000 as a bad debt against the
business income (see form T7W-C for 1996, Exhibit A‑13).
[10]
I note that the bad
debt of $75,000 as calculated by the appellant in Exhibit A-6 already
includes the expenses of $20,432. The appellant was therefore allowed the
amount of $20,432 twice. The appellant argues that the Minister should not have
included the amount of $100,432 in his gross income at all. He said that the
invoice filed as Exhibit A-6 was not a real invoice. It was prepared at the
suggestion of his accountant during the Minister’s audit in order to provide
information on the time and effort he put into Petrox without remuneration and that
would entitle him to a future share in the profits of that corporation. He said
that he did not expect to be paid in that year for his services.
[11]
If I understand the
appellant’s argument correctly, he says that the commissions and fees earned
are not income but rather a capital investment that would give him a right to
share in any Petrox profits that would be distributed in the future. If such
was the case, the appellant had the burden of proving it. For example, the
existence of his investment could be shown by the issuance of Petrox share
certificates in his name in consideration for the services rendered without remuneration.
There could also have been a promissory note issued by the corporation. Yet nothing
was given to the Minister or provided in Court, apart from the invoice filed as
Exhibit A-6, which shows, rather, that the amount in question was income earned
by the appellant in 1996. The appellant filed a letter dated October 1, 1994
that was sent by him to the board of directors of Petrox and which had the
agreement of the two other directors of Petrox, one of whom was Mr. Davis
(Exhibit A-5, second page). However, this letter states only that the appellant
did not want to incur any tax liability with respect to the services he
provided in directing and managing the company. It does not say how he planned to
avoid such liability, nor does it say that his remuneration for his services was
anything other than what appears in Exhibit A-6.
[12]
The other letter dated
October 1, 1994, sent to “Steve and Graham”, the two other directors of Petrox,
is not co-signed by the two other directors (Exhibit A-5, first page). In this
letter, the appellant says that the work done for Petrox for which he was not
paid represents his share of the future profits of the corporation. He also
seems to be saying that he reported his income on a cash basis rather than on
an accrual basis, as he reported as income the amount he was actually paid.
[13]
I note that this letter
is signed only by the appellant and does not seem to have been approved by the other
directors. Furthermore, according to the invoice filed as Exhibit A-8 for 1997, there was a balance owing from 1996 of $19,012,
which could give the impression that the appellant was in fact paid for most of
his services in 1996. However, a bad debt of
$75,000 was accepted by the Minister for that same year 1996, which leads me to
believe that the appellant has shown that he was not in fact paid. Finally,
in Exhibit A-6, it is stated that the appellant received at least $56,320 in
1996. If we deduct therefrom $20,432 in expenses, it leaves $35,888 as income
for his services, and the appellant reported gross income of only $28,182 for
that year in his tax return.
[14]
For 1997, the appellant
reported gross income of $14,200 and net income of $11,551.38 (Exhibit A-7, Statement
of Business Activities). He also reported a loss of $117,000. On the invoice
filed as Exhibit A‑8, he declared commission income of $15,930, $93,500
in fees for 187 days of work and expenses totalling $15,641. He received a
payment of $48,657 in that year. He also assumed the Veritas debt amounting to
$115,084.
[15]
In reassessing the
appellant for 1997, the Minister included in his income the amount of commissions,
fees and expenses, which totalled $125,071 (Exhibit A-8) and allowed a
deduction of $15,641 for those expenses and the deduction of the loss of
$117,000 as a bad debt against business income (Exhibit A-13, form T7W-C
for 1997). Again, the amount of $15,641 had already been included by the
appellant in the calculation of his loss of $117,000. The appellant was thus allowed
the deduction of $15,641 twice.
[16]
I find the appellant’s
evidence very confusing. Even if I accept the fact that the appellant wished to
report his income on a cash basis (as he was entitled
to do if that method yielded an accurate picture of his profit for the year, pursuant
to the decision of the Supreme Court of Canada in Canderel Ltd v.
R., 1998 CarswellNat 80, [1998] 1 S.C.R. 47), it is difficult
to establish adequately, with the documents in hand, the exact income of
the appellant. In the end, the appellant failed to convince me that the
Minister was wrong in assessing his professional income on the basis of the
invoices provided in Exhibits A-6 and A-8. The appellant was even allowed more
deductions than he should have. Furthermore, the appellant was allowed bad debt
deductions to take into account the fact that he was not paid in full.
[17]
The assessments made
under the ITA for the 1996 and 1997 taxation years are therefore confirmed.
GST assessments: January 1, 1991 to December 31, 1997
[18]
The appellant did not
register for GST purposes under the ETA as he believed that he was a small
supplier because he did not exceed the $30,000 income threshold prescribed by
the ETA (Exhibit A-12).
[19]
For 1991, 1992 and
1993, the Minister assessed the GST collectible on the gross income reported by
the appellant, which was $112,140 in 1991, $147,066 in 1992 and $188,230 in
1993 (Exhibit A-9). The appellant did not produce any evidence to contradict
his gross income figures for 1991 and 1992. As for 1993, I have already
indicated that his gross income of $188,230 was overstated by $75,000 because
this was the amount of the Veritas debt paid by the appellant in Petrox’s place.
That $75,000 was not income for him. The gross income for 1993 should therefore
be reduced to $113,230, on which amount GST was collectible.
[20]
However, for 1993, the Minister
allowed a bad debt deduction of $130,000 against the appellant’s business
income (Exhibit A-13, Form T7W-C for 1993). For 1996, the bad debt accepted by
the Minister was $75,000.
[21]
For 1997, the bad debt
amount accepted by the Minister was $117,000. For 1995, the bad debt amount was
$115,000 (Exhibit A-11).
[22]
For 1994, I cannot see
from the document filed as Exhibit A-10 whether a bad debt was claimed. For
1991 and 1992, there is no documentation at all. It is my understanding,
however, that there were bad debts for those years, but the figures could not
be made available to the Court because of the time elapsed between those years
and the audit. If the appellant can establish the amounts of such bad debts, they
should be deducted from his professional income that is subject to GST.
[23]
I therefore conclude
that the amounts of bad debts incurred by the appellant are to be deducted from
the income on which GST is collectible, pursuant to section 231 of the ETA.
[24]
The appellant also put
forward the argument that the commissions earned were in relation to the raising
of funds for the corporation. He therefore argues that this is a financial
service, which is an exempt supply.
[25]
The evidence is far
from being sufficient to establish that the appellant provided to Petrox during
the period at issue financial services within the meaning of subsection 123(1)
of the ETA. The appellant alluded to the fact that part of his job was raising
funds for the partnership units that had an interest in Petrox. Nothing more
was said and no documentation was filed with regard to the exact duties
performed by the appellant for Petrox. The appellant did not raise this point
in his pleadings but presented it as a new argument in his written submissions.
In my view, the evidence does not support that argument.
[26]
With respect to the
input tax credits (ITCs), it is my understanding that the expenses are
already included in the bad debts. Nothing more was provided in court which
could permit me to allow ITCs beyond those already received.
Decision
[27]
The appeal from the
assessment made under the ITA for the 1993 taxation year is allowed and the
assessment is referred back to the Minister on the basis that the appellant’s
professional income shall be reduced by $75,000. The appeals from the
assessments made under the ITA for the 1996 and 1997 taxation years are
dismissed.
[28]
The appeal from the
assessment made under the ETA for the period from January 1, 1991 to December
31, 1997 is allowed to take into account the following:
§
for the year 1993,
gross income is reduced by $75,000;
§
for the years 1993, 1995,
1996 and 1997, the gross income subject to GST must be reduced by allowing the
deduction , pursuant to section 231 of the ETA, of the bad debts accepted by
the Minister or established by the appellant as follows:
1993 $130,000
1995 $115,000
1996 $75,000
1997 $117,000
§
for the years 1991,
1992, and 1994, the gross income subject to GST shall be reduced by allowing
the deduction of bad debts, if any.
Signed at Ottawa, Canada, this 16th day of July 2009.
"Lucie Lamarre"
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