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Citation: 2007TCC13
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Date: 20070110
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Docket: 2006-903(IT)I
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BETWEEN:
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KIMBERLEY TODD THIBAULT,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS
[1] The Appellant resides in the City of Winnipeg.
[2] When the Appellant filed his income tax return for the 2002 taxation year he reported income in the amount of $6,342.00 from contract labour. The Appellant also reported income in the amount of $6,931.00 from the sale of hair extensions and photography.
[3] When the Appellant filed his income tax return for the 2003 taxation year he reported employment income in the amount of $4,444.00.
[4] The Minister of National Revenue (the "Minister") issued Notices of Assessment for the 2002 and 2003 taxation years on July 24, 2003 and June 14, 2004 respectively and the income tax returns were assessed as filed.
[5] Officials of the Minister carried out an audit of the Appellant's tax position and on May 5, 2005 Notices of Reassessment were issued for the 2002 and 2003 taxation years.
[6] In the Notices of Reassessment the Minister made the following additions:
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2002
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2003
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- Income from Hair Extension Business
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$7,298.00
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- Deposits to Personal Bank Account
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10,446.00
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5,196.00
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- Deposits to accounts for which Appellant had power of attorney
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1,953.00
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________
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Additional Income
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$19,697.00
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$5,196.00
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[7] The Minister also imposed penalties under subsection 163(2) of the Income Tax Act (the "Act").
B. ISSUES
[8] The issues are:
(a) Did the Appellant understate his net business income by $19,697.00 and $5,196.00 in the 2002 and 2003 taxation years respectively as determined by the Minister?
(b) Did the Minister properly assess penalties pursuant to subsection 163(2) of the Act?
C. ANALYSIS AND DECISION
I. Income from Hair Extensions
[9] The Appellant testified that he calculated the income that he had received from the sale of hair extensions and this amount as determined by him was reported by his accountant as income.
[10] In preparing the Reassessments the Auditor from the Canada Revenue Agency (the "CRA") determined how many bags of hair were purchased by the Appellant. The Auditor was advised that two bags of hair were required to produce one hair extension. The Auditor then calculated the number of hair extensions that were sold by the Appellant. The Auditor multiplied the number of hair extensions produced by the Appellant by $350.00 to calculate the revenue generated from this activity. (Note: The Appellant said that it sometimes takes more than two bags of hair to produce one hair extension.)
[11] The Auditor concluded that the Appellant sold 40 hair extensions at a price of $350.00 each for total revenue of 40 x $350.00 or $14,000.00. (Note: The Appellant said that he only operated this business in 2002.)
[12] The Appellant said that the cost of the hair plus miscellaneous expenses would be approximately $200.00 per extension, making his expenses approximately $8,000.00. The Appellant said that he reported $6,200.00 as income.
II. Deposits to personal bank account
2002 2003
$10,446.00 $5,196.00
[13] The Appellant stated that in 2002 he tried to establish a business that consisted of him taking photos of models and sending the photos to various magazines in the United States.
[14] The Appellant said that if the U.S. based magazines used the photos of the models they would send him a cheque. The Appellant would then deposit the cheque in his bank account and give one-half of the amount that he received to the model.
[15] The Auditor determined that in the 2002 taxation year the Appellant deposited cheques totalling $10,446.00 in his personal bank account.
[16] The Auditor determined that in the 2003 taxation year the Appellant deposited $5,196.00 in his personal bank account.
III. Deposits to bank accounts for which the Appellant had a power of attorney
[17] The Appellant said that when he was taking photos of the models he would have the models sign a power of attorney so that he could deposit the money received from the U.S. magazines in his bank account. The Appellant said that pursuant to the arrangement with the models he would retain 50% of what was received and send 50% of the payment to the model. The Appellant said that the models were frequently travelling and he would send one-half of the receipt to the model who was working outside of Winnipeg.
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[18] In my opinion Mr. Justice Rothstein (then a Judge of the Federal Court of Appeal) in Hayes v. Canada, 2005 DTC 5373 properly commented on the role of a Judge of the Tax Court. Justice Rothstein said at paragraph 38:
The customary role of the Court is to find the facts, to interpret the law and to apply the law to the facts. The interpretation of legislation is to be guided by the often-quoted excerpt from E.A. Driedger, Construction of Statutes, 2nd ed. 1983, at page 87:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
[19] I have carefully considered the evidence before me and the argument by the Appellant and Counsel for the Crown. I have come to the following conclusions:
1. Re: Income from hair extensions - $7,298.00
[20] I am not convinced that the Auditor was correct in the calculation of the income realized by the Appellant from the manufacture and sale of hair extensions. For example, the Auditor does not appear to have properly recognized the expenses incurred by the Appellant on the purchase of bags of hair. Based on the Appellant's sworn and uncontradicted testimony, I will allow the appeal on this issue.
2. Deposits to personal bank account 2002 - $10,446.00
2003 - $5,196.00
[21] The Appellant said that in the years under appeal he did not make enough money to pay his bills and he therefore received financial support from his mother. The Appellant produced cheques from his mother totalling $6,900.00. (Exhibit A-2). Counsel for the Respondent stated that with the exception of a cheque in the amount of $750.00 from his mother, none of the deposits in the Appellant's bank account matched the cheques that the Appellant received from his mother. (Note: The cheque in the amount of $750.00 from his mother was not included by the Auditor in the Reassessment.) The Appellant stated that a number of the cheques from his mother were used by him to pay his landlord - the Balmoral Hotel. The Appellant also testified that some of the cheques in the bank account came from payments received from the U.S. magazines.
[22] Based on the Appellant's testimony I am not satisfied that the Appellant completely discharged the onus to prove that the Auditor was wrong. I have concluded that the Appellant is required to include 50% of the amounts as determined by the Auditor in his income:
Additional Income
2002 - 50% of $10,446.00 or $5,223.00 $5,223.00
2003 - 50% of $5,196.00 or $2,598.00 $2,598.00
[23] In reaching this conclusion I note that the Appellant admitted that he did not keep proper records. I also note that the Appellant testified that he had various business records on his computer and that the computer crashed and he lost the records.
3. Deposits to bank accounts for which the Appellant had power of attorney - $1,953.00
[24] As noted above, the Appellant said that he gave 50% of the amount received from the U.S. magazines to the models. In addition the Appellant said that he incurred expenses on this activity.
[25] I will accept the Appellant's evidence on this point.
[26] As I have noted above, the Appellant admitted that he did not maintain proper books, records and receipts. I have concluded that penalties should be imposed under subsection 163(2) of the Act with respect to the additional income as determined above.
[27] The appeal is allowed, without costs, and the Minister is to make the adjustments referred to above.
Signed at Vancouver, British Columbia, this 10th day of January 2007.
Little J.
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