Citation: 2007TCC504
Date: 20070823
Docket: 2006-3033(IT)I
BETWEEN:
CHRIS OSUALA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant,
Chris Osuala, is appealing the assessments of the Minister of National Revenue
of his 2001 and 2002 taxation years. At that time, he was the sole shareholder
of NNCO Global Inc., a Montreal company
selling prepaid telephone calling cards and exporting for sale used computer
equipment. His reported income in each of these years was approximately $18,000[1]. Following a payroll audit of NNCO Global, the
auditor determined that the Appellant had made numerous bank machine cash and
cheque withdrawals from NNCO Global's business account totalling $37,621 and
$44,000 for 2001 and 2002, respectively. He was the only
person authorized to make such withdrawals. In the absence of any documentary
proof that these amounts had been used for business purposes, the Minister
assumed them to have been for the Appellant's personal benefit and added these
amounts to his income. The Minister also assessed gross negligence penalties
for 2002.
[2] The Appellant
was represented by his agent, Mr. Frank Dike of InHOUSE Trust'n Tax, who had
also prepared the Notice of Appeal. In that document, the Appellant alleged
that in 2001, the $37,621 withdrawn from NNCO Global had been used for auction
purchases of inventory; and that in 2002, the $44,000 was used to repay a
business loan to one Edward Farhood.
[3] As in all tax
appeals, the taxpayer has the onus of proving the assessments wrong. The
Appellant was the only witness to testify on his behalf. I regret to say I did
not find his testimony at all convincing.
His answers were vague and sometimes, inconsistent with his earlier testimony,
his pleadings and/or his earlier statements to the auditor. His credibility was
not helped by his inability to recall the business purpose of various
withdrawals totalling $37,621 between April and December 2001 and a single
withdrawal of $40,000 in January 2002. These are large amounts, the $40,000 withdrawal
being more than double his reported income for 2002. By contrast, he had a very
clear recollection of a much smaller withdrawal, in October 2001 of $11,500.
Not only did he immediately and clearly recall its use as a down payment on his
house, the Appellant also provided the Court with details of the provincial housing
rebate program under which he had been able to recoup over half of that amount.
This reveals both the selectiveness of the Appellant's memory as well as a certain
level of sophistication in financial dealings.
[4] As for the $37,621
in unexplained cash or cheque withdrawals in 2001, the Appellant was unable to recall
their purpose suggesting that, possibly, they had been used for auction
purchases or business renovations. As was the case during the audit, the
Appellant did not have receipts to support either claim. According to the
Appellant, many of his records had been lost in a fire that, in December 2001
destroyed the building where NNCO Global carried on business. While this may
account, in part, for the lack of supporting documentation, the fact is the
Appellant did not keep anything close to adequate books and records[4] for either himself or his solely held company.
Although I accept his evidence that sellers of used equipment often do not
provide receipts, that did not excuse him from the obligation to keep his own
records. Nor did they have to be complicated. He could, for example, have noted
the purchase on the ATM receipt or kept a simple log of his purchases in a
notebook. When a business chooses to operate on a cash basis, it must also
accept the responsibility of maintaining such records.
[5] Equally troubling was the Appellant's explanation for
his withdrawal of $40,000 in 2002. It was
his evidence that in 2001, the company had received a start-up loan of $56,000
from Edward Farhood, a business man and consultant with whom he had been
friends for over 10 years. Despite the Appellant's description of him as a "good"
friend and the length of their friendship, when shown during cross-examination
a copy of decree dated February 12, 2002 awarding the Appellant sole custody of
his daughter and in which appeared the signature and seal of an “Edward
Farhood” as a Judicial Commissioner of the Superior Court of Quebec, the
Appellant said he was unaware that Mr. Farhood had held that office. However,
he did not deny that the individual named was his Mr. Farhood. In any case, the
Appellant testified that in January 2002, he withdrew the $40,000 from the
company to put towards the repayment of the Farhood loan. Yet only 6 months
later, in June 2002, when asked about the $40,000 by the auditor, he made no
mention of the Farhood loan and at that time, said he could not recall the
purpose of the withdrawal. For the reasons set out below, I accept the auditor's
evidence that, in spite of his promise to do so, the Appellant never did
provide an explanation to him. At the hearing, the Appellant was unable to
provide any corroborative evidence of the loan. The Appellant mentioned in
passing that Mr. Farhood is now deceased. Despite the size of the loan, no
formal loan agreement (or written document of any kind) had been made setting
out the amount borrowed or the repayment terms.
[6] The auditor in
question was Mr. Christian Boutin. He became involved in the Appellant's file
in 2002 in his (then) capacity as a payroll auditor charged with verifying the
authenticity of certain T-4's for 1998, 1999 and 2000 in which NNCO Global was
shown as employer and the Appellant, as employee. This was a puzzle as Mr.
Boutin's inquiries would later reveal that NNCO Global had not even been
incorporated until April 2001. When asked about the T-4's, the Appellant
explained that he had tried to buy some property in 2001 and his real estate
agent (apparently on his own hook) had given false T-4's to the bank in support
of a loan application for the purchase funds. Discovering that the company was
non-existent at the time and that, indeed, it had no T-4 account, Mr. Boutin
set one up and cancelled the bogus T‑4's for 1998, 1999 and 2000. His
review of the company's banking records brought to light the Appellant's
withdrawals from NNCO Global's account which, in the absence of any other
explanation, were then included in revised T-4's for the Appellant as personal
income from NNCO Global.
[7] I found Mr.
Boutin to be entirely credible, providing a clear description of the procedures
he was required to follow as well as the actual steps he took in dealing with
the Appellant, in his personal capacity and as the principal of NNCO Global. Mr.
Boutin met with the Appellant to review what few documents he had, mainly the
company's bank statements, some cancelled cheques and "small"
financial statements. I accept his evidence that although the Appellant was "co‑operative"
(in that he did not challenge the auditor's conclusion that revised T‑4's
would have to be filed showing the additional income the Appellant had received
from NNCO Global), the Appellant ultimately failed to provide him with any
explanation for the withdrawals.
[8] Although the Appellant's
evidentiary onus was explained to him on more than one occasion, in his
cross-examination of Mr. Boutin, Mr. Dike focussed on challenging the auditor's
motivations and procedures, rather than his substantive findings. Though not
strictly speaking relevant, for the record, nothing in Mr. Boutin's
testimony supports the conclusion that he conducted himself in anything other
than a professional (and I would add, helpful) manner in dealing with the
Appellant. As explained to Mr. Dike at the hearing, even if the auditor
had behaved badly, such malfeasance is beyond the jurisdiction of the Tax Court
of Canada. The following passage is typical of Mr. Dike's bullying attempts to
shore up the Appellant's position by impugning the auditor's actions:
Q. In other
words, Mr. Osuala and NNCO didn't have a payroll account?
A. No,
they didn't.
Q. And
therefore you opened it?
A. Yes,
because I had three T4's to be treated.
Q. It's
O.K. The three T4's that you said that you have to treat ...
A. Yes.
Q. ...
were something related to 1998, 1999 and 2000, correct?
A. That's
right.
Q. O.K.
When was the company Global NNCO opened?
A. In
2001.
Q. Did
you verify that information?
A. According
to the bank statement, when the company ... when the bank statement was opened
and when the activity started in the company account ... bank account, that was
in 2001.
Q. So
you verified with it the bank information?
A. That
Mr. Osuala provided me.
Q. O.K.
Are you aware that when you incorporate a company, it's not done at the bank?
A. I
know.
Q. O.K.
So why didn't you verify it from where it's incorporated?
A. Because
in order to pay salaries you'd have to go through the bank account, so that's
why our first step is to request a bank statement.
Q. No,
that's not the question.
A. I'm
sorry.
Q. The
question is are you aware that the bank doesn't incorporate a company, yes or
no?
A. Yes,
I do.
...
Q. O.K.
So you're aware the corporation incorporated in Canada could have been done by
the Registrar of companies?
A. Yes,
it's not done at the bank.
Q. O.K.
So did you verify this information before ...
A. The
chart [incorporation documents] of the company?
Q. Yes.
A. Yes,
I actually ...
Q. So
...
A. ...
did request the chart.
Q. ...
why was it difficult for you to determine that this company couldn't have had
employees in 1998, 99 and 2000 and you went ahead to audit a company that
didn't exist?
A. I
didn't have any choice to audit the company because even though I did have
three T4's I still had to go and contact the administrator of the company to
validate whether or not these were true T4's ...
Q. And
did you validate it?
A. Excuse
me?
Q. Did
you validate it?
A. With
Mr. Osuala and with the help ...
Q. No,
no ...
A. ...
of the bank statement.
Q. ...
did you validate the T4 of 1998, 99 and 2000?
A. My
conclusions were that there were no such salaries paid during that period
because there was no bank account opened during that period.
Q. In
other words the company didn't exist?
A. That's
right.
Q. And the
company wasn't incorporated?
A. It
wasn't.
Q. O.K.
So that doesn't have anything to do with Global NNCO?
A. What
doesn't have anything to do?
Q. The
T4's you are talking about in 1998, 99 and 2000, did they have anything to do
with Global Inc.?
A. Well,
actually the T4's were ... they had the name NNCO GLobal Inc. on it.
Q. The
T4 ....
A. And
the name of Mr. Osuala ....
Q. ...
did you verify that it doesn't come from that company?
A. It's
not that it doesn't come from that company it's that the T4 was titled with the
name of that particular company and my mandate was basically to validate
whether or not these T4's were true with the name of the employer. My
conclusions were that they weren't ...
Q. The
were not true?
A. No,
they were not.
Q. O.K.
So basically you started an audit based on false information, you went to Mr.
Osuala's house at a point in time ... were you aware that the company was
already burned down?
A. When
I first met Mr. Osuala?
Q. Yes,
were you aware that the company already burned down?
A. Well,
yes because prior to going to his house to leave him a visit card I went to the
company premises and that's when I saw that the company had burned down.
[9] The Appellant
did not challenge the Minister's assumption that in just over a year, between May
2001 and June 2002, he withdrew some $81,000 from his solely owned company. Even
if his evidence, as presented, had been entirely credible, it left unanswered
too many important questions. His evidence was that the December 2001 fire
significantly reduced NNCO Global's earning power. Yet its bank account was
solvent enough to permit withdrawals of $44,000 in the six months following the
fire. As for the Appellant, he said he survived in these difficult times by
relying on loans from "family and friends", none of whom were
identified beyond that vague description. In his cross‑examination of the
auditor, Mr. Dike made much of the fact that the auditor had refused to accept
the Appellant's offer to provide him with a "letter" from friends
stating that they had given him the money. I share the auditor's view that such
a document in itself would not be sufficient to prove the non‑personal
nature or the business use of the Appellant's withdrawals from the company
account. Nor is there any explanation as to why such funds would be run through
the company's bank account. As a result, the Appellant's evidence failed to
show how the cash withdrawals had been used to pay expenses and liabilities of
NNCO Global Inc., nor did it demonstrate that the funds had not been used for the
Appellant's personal benefit. In these circumstances, I can only conclude on a
balance of probabilities that the $37,621 and $44,000 were properly included in
his income for 2001 and 2002.
[10] The Minister also
assessed gross negligence penalties in 2002 pursuant to subsection 163(2) of
the Income Tax Act, on the basis that the Appellant "… knowingly …
made or has participated in, assented to or acquiesced in the making of, a
false statement or omission in a return, form, certificate…". Referring
the Court to the Federal Court of Appeal decision, Villeneuve v. Canada,
counsel for the Respondent submitted that in certain circumstances, "willful
blindness" can amount to gross negligence:
With respect,
I think the judge failed to consider the concept of gross negligence that may
result from the wrongdoer's willful blindness. Even a wrongful intent, which
often takes the form of knowledge of one or more of the ingredients of the
alleged act, may be established through proof of willful blindness. In such
cases, the wrongdoer, while he may not have actual knowledge of the alleged
ingredient, will be deemed to have that knowledge.
[11] The term "gross
negligence" was defined by the Federal Court of Appeal in Venne v.
Canada:
"Gross
negligence" must be taken to involve greater neglect than simply a failure
to use reasonable care. It must involve a high degree of negligence tantamount
to intentional acting, an indifference as to whether the law is complied with
or not.
[12] In my view, the word
"indifference" accurately describes the Appellant's conduct in
relation to his obligations under the Act. The Appellant was reasonably
knowledgeable in fiscal matters; the unaccounted-for amounts were significantly
higher than his reported income; the business of NNCO Global was relatively
simple; and the level of records keeping necessary to provide him with an
accurate picture of his personal and the company's financial situation was not
onerous. At all times and in all matters relevant to these appeals, the
Appellant played a dual role, in his personal capacity and as the principal of
NNCO Global. As such, he had full and exclusive access to the company's sales
information, its banking and other financial documents, the funds in the company's
bank account and to all information necessary to the proper reporting of his
and the company's income. Without going so far as to say he deliberately kept
his dealings vague, I am satisfied that he demonstrated a level of "indifference"
tantamount to the "gross negligence" contemplated by Villeneuve and
Venne. In these circumstances, the Respondent has made its case for the
imposition of gross negligence penalties for 2002.
[13] The appeals are
dismissed.
Signed at Ottawa,
Canada, this 23rd day of August, 2007.
"G. A. Sheridan"
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