Citation: 2008TCC559
Date: 20081002
Docket: 2008-1672(IT)I
BETWEEN:
DENNIS TERRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The issue in this case is whether
the Appellant had additional unreported income from his automotive repair
business in 2005. The Appellant carried on this business as a sole proprietor. The
Appellant was reassessed to increase his income for 2005 by $22,166, which was
calculated as follows:
|
|
As reported by the Appellant
|
As determined by the Auditor for the Canada Revenue
Agency
|
Adjustment
|
|
Gross
Income:
|
$217,468
|
$243,946
|
$26,478
|
|
Purchases:
|
$108,102
|
$116,627
|
($8,525)
|
|
|
|
|
$17,953
|
|
Vehicle
Expenses:
|
$11,235
|
$7,021
|
$4,213
|
|
Total
Change to taxable income:
|
|
|
$22,166
|
[2]
The adjustment made to the gross
income of the Appellant is based on an analysis of the bank account statements
that were provided to the auditor for the Canada Revenue Agency (“CRA”). The
auditor reviewed the bank account statements to determine whether the deposits
to the account could be reconciled with the revenue as reported. Since the
auditor determined that the total amount of the deposits to the bank account
exceeded the amount reported as revenue (after adjusting for HST and other
amounts), an amount was added to the income of the Appellant. This amount was
determined as follows:
|
Month
|
Deposits as
per the Bank Statements (1)
|
Non-revenue
Deposits (2)
|
Total Revenue
Deposits (1) – (2)
|
|
January
|
$17,852.90
|
$2,402.98
|
$15,449.92
|
|
February
|
$20,372.74
|
$393.76
|
$19,978.98
|
|
March
|
$20,965.74
|
0
|
$20,965.74
|
|
April
|
$28,925.37
|
$485.34
|
$28,440.03
|
|
May
|
$31,030.13
|
$43.77
|
$30,986.36
|
|
June
|
$29,117.82
|
$78.94
|
$29,038.88
|
|
July
|
$27,300.97
|
$22.37
|
$27,278.60
|
|
August
|
$25,071.65
|
$2,011.50
|
$23,060.15
|
|
September
|
$25,395.26
|
$596.13
|
$24,799.13
|
|
October
|
$21,658.71
|
$243.92
|
$21,414.79
|
|
November
|
$23,926.63
|
$230.00
|
$23,696.63
|
|
December
|
$15,578.21
|
$149.50
|
$15,428.71
|
|
Total Revenue and HST
deposited:
|
$280,537.92
|
|
Minus HST included in the
above (15/115):
|
($36,591.90)
|
|
Gross revenue:
|
$243,946.02
|
|
Amount reported by the
Appellant as gross revenue:
|
$217,468.00
|
|
Adjustment
– additional revenue:
|
$26,478.02
|
[3]
As noted above, an adjustment was
also made to the amount claimed for vehicle expenses. The auditor determined
that the percentage of business use of the Appellant’s two vehicles was 62.5%
and not 100% as claimed by the Appellant. The Appellant did not testify during
the hearing. He was present during the hearing, but the only witness who
testified for the Appellant was the Appellant’s father. His father did not
dispute the personal and business use percentages of the vehicle as proposed by
the Respondent and therefore no adjustment will be made to the vehicle expenses
as proposed by the Respondent.
[4]
The evidence of the Appellant in
this case related to the unreported revenue.
[5]
During the hearing, the auditor
for the CRA acknowledged that an incorrect amount was used for the deposits for
March 2005. The amount that the auditor had used for the deposits for the month
of March 2005 was $20,965.74. However the actual amount of deposits made to the
bank account in March 2005 was $20,695.74. The six and the nine were transposed.
As a result, the amount of the deposits that should be used to determine the
unreported revenue should be reduced by $270.
[6]
There are several arguments made
by the Appellant in relation to this matter. The Appellant had submitted that:
-
Amounts were included as
additional deposits that were reimbursements for parts sold to family members.
-
Deposits were made to the bank
account to reimburse the Appellant for Combined Insurance premiums that were
paid by the Appellant.
-
The account was not only used for
the business but also personally by the Appellant’s parents, Jerome and Loretta
Terry.
-
The Appellant's father had
prepared his own analysis of the bank deposits and determined the amount that
he identified as non-revenue deposits.
-
The Appellant had requested that
the CRA allocate the discrepancy in income equally among Jerome Terry, Loretta
Terry and the Appellant and T1 adjustment requests were submitted in relation
to this.
Reimbursement for Parts
[7]
The Appellant’s father stated that
they would be approached by family members to purchase parts that these family
members needed for their vehicles. In those situations, the part would be
purchased by the Appellant and the family member would simply reimburse the
Appellant for the cost of the part plus HST. Neither the amount received for
the part nor the cost of the part itself was used by the Appellant in
determining his income. Two adjustments were made in relation to this by the
auditor for CRA - one was an increase in the gross revenue related to the
deposits received from the family members and the second was an additional
amount that was allowed as an expense for the parts that were purchased. The
net result of these two would not affect the net income of the Appellant.
[8]
For example, assume that a family
member wanted a part that cost $100 plus $15 HST or $115 in total. The amount
that the Appellant would receive from the family member would be $115. Neither
the $100, (the amount received for the purchase of the part not including HST)
would be included by the Appellant in revenue nor would the purchase price of
the part, $100 (not including the HST) be included by the Appellant as an
expense. It would appear that the Appellant did not maintain any inventory, and
therefore the cost of the parts acquired would be an expense as the opening and
closing balances for inventory would be nil or an insignificant amount.
[9]
By increasing the Appellant's
revenue by $100 to reflect the amount of the deposit to the bank account for
the amount received from the family member, but also increasing the expenses by
$100, the Appellant’s net income is not changed since the increase in revenue
is offset by the corresponding increase in expenses. Therefore whether the
amount received from a family member is included as revenue with a
corresponding increase in expenses for the amount of the part or it is treated
as an agency relationship whereby the Appellant was acting as the agent for the
family member in acquiring the part, it will not have any impact on the net
income of the Appellant.
[10]
The Appellant’s father stated that
he amounts involved in relation to this issue are reflected in the additional
amount allowed for parts, $8,525. Therefore, even though the revenues were
increased by $8,525 to reflect the amounts received from family members for
parts purchased for them, since the purchases were also increased by $8,525 there
was no change to the net income of the Appellant arising from these two
adjustments and therefore no adjustment will be made to the change in the taxable
income of the Appellant as reflected in the reassessment of the Appellant.
Combined Insurance Premiums
[11]
The Appellant’s father stated that
there was a Combined Insurance plan that was in place for the employees. The
premiums for this were paid from the account and the employees would reimburse
the Appellant for the Combined Insurance premiums. The Appellant’s father had prepared
a schedule that indicated that the amount of the Combined Insurance premiums
that had been collected from the employees was $3,152.64. This appears to be
calculated based on the assumption that the same amount of premiums were
charged for each month. There were two separate amounts identified in the bank
statements as Combined Insurance – one that was withdrawn around the 7th
of each month and the other around the 27th of each month. The amount
determined by the Appellant’s father is equal to 12 times $208.65 plus 12 times
$54.07. However the actual total amount of the Combined Insurance premiums deducted
from the account was as follows:
|
Date
|
Amount of the
Premium
|
Date
|
Amount of the
Premium
|
|
January
10
|
$51.50
|
January
27
|
$206.07
|
|
February
7
|
$51.50
|
February
25
|
$208.65
|
|
March
7
|
$54.07
|
March
28
|
$208.65
|
|
April
7
|
$54.07
|
April
27
|
$208.65
|
|
May
9
|
$54.07
|
May
27
|
$208.65
|
|
June
7
|
$54.07
|
June
27
|
$208.65
|
|
July
7
|
$54.07
|
July
27
|
$208.65
|
|
August
8
|
$54.07
|
August
26
|
$208.65
|
|
September
7
|
$54.07
|
September
27
|
$208.65
|
|
October
11
|
$54.07
|
October
28
|
$160.15
|
|
November
7
|
$54.07
|
November
25
|
$160.15
|
|
December
7
|
$54.07
|
December
23
|
$160.15
|
|
Total:
|
$643.70
|
|
$2,355.72
|
|
Total
amount of the Combined Insurance Premiums:
|
$2,999.42
|
[12]
I accept the evidence of the
Appellant’s father that the Appellant was reimbursed for these Combined
Insurance premiums (and therefore the deposits would have included the amounts
received as reimbursements of these amounts). However the amount that should be
used to reduce the amount of the deposits used to determine the gross revenue
should be $2,999.42 and not $3,152.64.
Personal Use of the Account
[13]
The bank account in question was
opened before 2005 and was an existing account that the Appellant started using
when he took over the business on January 1, 2005. The account is
identified as a “business account” on the bank statements and the name on the
account is “Autocare”.
[14] The Appellant’s father stated, however, that he and
his wife would use this account for personal reasons. They were in financial
difficulty and unable to obtain credit cards. They would withdraw sums of money
that they would need to cover expenses when they were traveling and then
re-deposit the money that was not needed back into the account when they
returned. Jerome Terry’s mother was living in Springdale and she was not well.
Jerome Terry and Loretta Terry would travel to visit her. The Appellant stated
that approximately $5,000 to $6,000 would be amounts that were re-deposited into
the bank account in 2005 in relation to this.
[15]
There are deposits to the bank
account of amounts that are multiples of $20 and therefore could be re-deposited
cash and not revenue. The Appellant’s business was automotive repair and
therefore his labour and the parts that he sold would be subject to HST which
would make it very unlikely that a charge for labour and parts would result in
a number that is a simple multiple of $20. It is more likely than not that the
charges for labour, parts and HST of 15% would result in a number that is not a
round number and not a number that is a multiple of an integer and $20.
Therefore the deposits of $240 on January 13, $220 on January 20, $200 on
February 8 etc. would support the Appellant’s position that cash was being
re-deposited into the bank account by Jerome and Loretta Terry.
[16]
I accept the testimony of the
Appellant’s father and I will allow an adjustment of $5,500 (to reflect amounts
re-deposited into the bank account by Jerome and Loretta Terry) in determining
the amount of the deposits that should be considered as revenue before the HST
is deducted.
Non-Revenue Deposits
[17]
The Appellant's father had
prepared a schedule in which he compared the bank deposits as determined by the
auditor with the bank deposits as he determined from the bank statements. The
bank deposits as used by the auditor were taken from the monthly bank
statements and were simply the monthly total of all deposits made to the
account. The auditor, as noted in the table above, deducted from the amount of
the deposits, certain amounts identified as “non-revenue deposits”. Not all of
the amounts deducted as “non-revenue deposits” were identified by the auditor.
The auditor indicated that included in the non-revenue deposits were the
following amounts:
-
a $1,000 deposit made in January
as a loan and $1,402.48 deposited in January that represented sales from a
prior year (which would total the non‑revenue deposits identified for
January if the sales amount was $0.50 more or $1,402.98 instead of $1,402.48.
This appears to be a typographical error in the note to the table in the
auditor’s memorandum and I assume that the amount that should be stated in the
note for the sales from the prior year should be $1,402.98)
-
Two deposits of $1,000 each made
in August that were from the line of credit
[18]
The auditor stated that the other
amounts were determined based on a review of the bank statements and discussions
with the Appellant’s father. In particular he would include in non-revenue
deposits any amounts that were deposited as a result of a point of sale refund,
which would be a refund for a part that was returned to a supplier.
[19]
The Appellant’s father contended
that there were amounts that were shown in the bank statements as
deposits/credits that were not deposits and in particular that the point of
sale refund amounts should not have been included as deposits.
[20]
The following table shows the bank
deposits as used by the auditor (before any deduction for non-revenue deposits
as determined by the auditor), the bank deposits as determined by the
Appellant's father, the difference between these two amounts, the amount
deducted by the auditor as non-revenue deposits (excluding the amounts
identified as loans and the sales for the prior year) and the amounts of the point
of sale refunds as determined from the bank account statements:
|
Month
|
Bank Deposits
(auditor)
|
Bank Deposits
(Appellant)
|
Difference
|
Non-revenue
Deposits (excluding loans and prior years sales) (auditor)
|
Point of Sale
Refunds (from the bank statements)
|
|
Jan.
|
$17,852.90
|
$17,746.37
|
$106.53
|
$0.00
|
$106.93
|
|
Feb.
|
$20,372.74
|
$20,148.31
|
$224.43
|
$393.76
|
$224.43
|
|
Mar.
|
$20,965.74
|
$20,695.74
|
$270.00
|
$0.00
|
$0.00
|
|
Apr.
|
$28,925.37
|
$28,440.03
|
$485.34
|
$485.34
|
$485.34
|
|
May
|
$31,030.13
|
$30,986.36
|
$43.77
|
$43.77
|
$43.77
|
|
June
|
$29,117.82
|
$28,895.10
|
$222.72
|
$78.94
|
$222.69
|
|
July
|
$27,300.97
|
$27,278.60
|
$22.37
|
$22.37
|
$22.37
|
|
Aug.
|
$25,071.65
|
$25,060.15
|
$11.50
|
$11.50
|
$11.50
|
|
Sept.
|
$25,395.26
|
$24,899.13
|
$496.13
|
$596.13
|
$496.13
|
|
Oct.
|
$21,658.71
|
$21,414.79
|
$243.92
|
$243.92
|
$243.92
|
|
Nov.
|
$23,926.63
|
$23,696.56
|
$230.07
|
$230.00
|
$230.00
|
|
Dec.
|
$15,578.21
|
$15,428.71
|
$149.50
|
$149.50
|
$149.50
|
|
Total:
|
$287,196.13
|
$284,689.85
|
$2506.28
|
$2255.23
|
$2236.58
|
[21]
For nine of the twelve months
(January, February, April, May, July, August, September, October and December)
the difference between the total deposits based on the bank statements and the
amounts identified by the Appellant’s father as the “deposits” is exactly equal
to the total of the point of sale refunds for those months. For two of the
other months (June and November) the difference is three cents and seven cents.
As noted above, there was an error in March in the amount used by the auditor
for the bank deposits and this would explain the difference of $270 for that
month. Therefore it seems obvious that the Appellant’s father determined the
“deposits” by simply not including the point of sale refunds as “deposits”.
[22]
It also appears obvious from the
above table that for most of the months (March, April, May, July, August,
October, November and December) the point of sale refund amounts were deducted
by the auditor as non-revenue deposits and therefore for these months, no
further adjustment should be made.
[23]
For the month of January no
deductions were made for any point of sale refunds yet there were two such
amounts – one on January 14 for $20.68 and the other on January 28 for $86.25.
These amounts should have been included in the amount determined as the
non-revenue deposits.
[24]
For February and September, the
amount included as non-revenue deposits by the auditor exceeded the point of
sale refunds. No explanation was provided by the auditor for this and therefore
the amount used by the auditor will remain.
[25]
For June, $78.94 was deducted by
the auditor as a non-revenue deposit. There was a point of sale refund on June
21 for $78.94; however there was also another point of sale refund for $143.75
on June 17 that should have been included in the non-revenue deposits amount.
[26] As a result the following are the only adjustments
that should be made to the deposit amount used to determine the revenue for the
Appellant in relation to this issue:
-
a deduction of $106.93 for the
point of sale refunds for January and
-
a deduction of $143.75 for an
additional point of sale refund for June
Salary - Jerome and Loretta Terry
[27]
The Appellant’s father had
requested that the unreported income amount as determined by the auditor be
allocated equally among the Appellant, the Appellant’s father, and Loretta
Terry, the Appellant’s mother. This request was denied by the appeals officer.
However, notwithstanding this rejection by the appeals officer, the accountant
for the Appellant prepared and filed a T1 Adjustment request that is dated
2007/02/05 to reduce the Appellant's income by $14,777.42. The explanation
provided was as follows:
The original
statement of business income does not include salaries to two employees for
$7,388.71 each. Total adjustment is $14,777.42. The two employees are filing
2005 T1’s to include the salaries of $7,388.71.
[28]
A copy of the 2005 Reassessment
for the Appellant’s father and the Appellant’s mother, as printed from the
internet, was introduced to show that they had been reassessed to include the
additional amount of $7,388 each in their incomes for 2005.
[29]
The issue in this case, however,
is whether the Appellant is entitled to any deduction for these amounts
identified as salaries in the Appellant’s T1 adjustment request. Subsection
78(4) of the Income Tax Act provides as follows:
(4) Where
an amount in respect of a taxpayer's expense that is a superannuation
or pension benefit, a retiring allowance, salary, wages or other
remuneration (other than reasonable vacation or holiday pay or a deferred
amount under a salary deferral arrangement) in respect of an
office or employment is unpaid on the day that is 180 days after the
end of the taxation year in which the expense was incurred, for the
purposes of this Act other than this subsection, the amount shall be
deemed not to have been incurred as an expense in the year and shall be deemed
to be incurred as an expense in the taxation year in which the amount is paid.
(emphasis
added)
[30]
Since there was no indication that
these amounts, identified as salary in the T1 adjustment request, were paid as
salaries by the Appellant to Jerome Terry and Loretta Terry within 180 days
after the end of 2005, the Appellant is not entitled to a deduction for these
amounts. This was an additional issue raised by the Appellant and was not part
of the basis for the reassessment and was not even raised by the Appellant
until his father raised this issue with the appeal’s officer. The T1 Adjustment
request was not completed until 2007. No adjustment will therefore be made to
the Appellant’s income based on the proposed adjustment for salaries for the
Appellant’s father and mother.
Summary
[31]
As a result, the following
adjustments should be made to the deposit amount that was used to adjust the
income of the Appellant and to the taxable income of the Appellant for 2005:
|
Item
|
Amount
|
|
Total
Revenue and HST deposited as determined by the auditor:
|
$280,537.92
|
|
Less:
Error made for the deposits in March:
|
($270.00)
|
|
Less:
Amounts deposited as reimbursements for the Combined Insurance premiums:
|
($2,999.42)
|
|
Less:
Amounts re-deposited by Jerome and Loretta Terry:
|
($5,500.00)
|
|
Less:
Additional non-revenue deposits (points of sale refunds of $106.93 +
$143.75):
|
($250.68)
|
|
Revised
revenue and HST deposited:
|
$271,517.82
|
|
Minus
HST included in the above (15/115):
|
($35,415.37)
|
|
Gross
revenue:
|
$236,102.45
|
|
Amount
reported by the Appellant as gross revenue:
|
$217,468.00
|
|
Unreported
revenue:
|
$18,634.45
|
|
Additional
Purchases:
|
($8,525.00)
|
|
Reduction
in Vehicle Expenses:
|
$4,213.00
|
|
Total
change to taxable income:
|
$14,322.45
|
[32] The appeal is allowed, in part, without costs, and the
matter is referred back to the Minister of National Revenue for reconsideration
and reassessment on the basis that the total amount of additional taxable
income of the Appellant for 2005 should be reduced from $22,166 to $14,322.
Signed at Halifax, Nova Scotia, this 2nd day of October 2008.
“Wyman W. Webb”
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