Citation: 2008TCC292
Date: 20080513
Docket: 2005-585(IT)G
BETWEEN:
RICHARD LORNE JANZEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1] This is an appeal from Notices of Reassessment
dated September 5, 2003 for the Appellant’s 2000 and 2001 taxation years
wherein the Minister of National Revenue (“Minister”) included the amounts of
$164,969 and $2,997 respectively as unreported income. The Appellant had
reported $0 and $1,161 as income in his 2000 and 2001 income tax returns
respectively.
[2] Prior to the hearing of this appeal the
Respondent notified the Court that it had reviewed documents which were
provided by the Appellant after the Notice of Appeal was filed. As a result of
that review the Respondent conceded that in the 2000 taxation year the amount
of $48,562.79 should be removed from the Appellant’s income as it represented
amounts that the Appellant paid for expenses of Powernet Concepts Inc. (“Powernet”)
and these amounts were subsequently reimbursed to him. As well, the Respondent
conceded that in the 2000 and 2001 taxation years the Appellant incurred the
amount of $6,000 as expenses for work-space in the home.
[3] At the hearing the Appellant represented
himself. Donald Zolc, Craig Peturson, an appeals officer with the Canada
Revenue Agency (“CRA”), and Kelly Storrier, a complex case officer with CRA
gave evidence on behalf of the Respondent.
[4] It was the Respondent’s position that the
Appellant was an employee of Powernet; he withdrew monies from Powernet when he
needed it; and he did not report these amounts as income. It was the
Appellant’s position that in 2000 all revenue deposited into Powernet’s bank
account was his revenue from the sale of his shares. As a result, any amount
that he withdrew from Powernet’s bank account was his own money. He submitted
that in the alternative, if the Court found that he had failed to report income
in 2000 and 2001, then he is a Métis and his income is not taxable in
accordance with the decision in R. v. Powley, 2003 SCC 43.
[5] In 1999, the Appellant and Donald Zolc (“Zolc”)
began to work together to develop a software program. Their intent was to sell
this software program to the public through distributors. The software program
was eventually called “the Personal Growth Series” and I will refer to it as
such.
[6] The Appellant decided that the business was best
carried on in a corporate form. As he and his spouse already owned all the
shares in Powernet, the Appellant decided to use it rather than incur the costs
of incorporating another company. As the original idea for the Personal Growth
Series was Zolc’s, the Appellant promised to give Zolc 50 percent of the shares
in Powernet. The evidence disclosed that in 1999, Zolc only received 30 percent
of the shares in Powernet but that he was aware of this.
[7] The Appellant was the President, CEO and account
manager of Powernet.
[8] In 1999 and part of 2000, Powernet raised funds
by selling licences to the right to distribute the Personal Growth Series. (The
Appellant and Zolc could not agree on the exact time that Powernet ceased to
raise money by the sale of licences.) The licences ranged in price from $2,500
to $30,000 and depended on the size of the territory associated with it. It was
Zolc’s recollection that he sold 22 licences. The Appellant did not give
evidence on the number of licences that he sold. Both the Appellant and Zolc
had hoped that if they sold enough licences, Powernet would have sufficient
funds to finish the software program and market it.
[9] In April 2000, the Appellant started to raise
funds by selling Powernet shares. The evidence disclosed that the Appellant
increased the number of shares in Powernet from 1000 in 1999 to 1,100,000 in
2000 to 10,000,000 in 2001. In 1999 and up to April 2000, the Appellant and his
spouse held 60 percent of the shares in Powernet. According to the Corporate
Registry Profile Report as of September 11, 2001, the Appellant held 51 percent
of the shares in Powernet.
[10] There were several sales of shares. The Corporate
Registry Profile Report as of September 11, 2001 listed eight shareholders in
addition to the Appellant and Zolc. However, the evidence disclosed that there
was one other shareholder at this time whose name was not recorded in the
Corporate Registry.
[11] The evidence showed that the Appellant sold
10,000 of his shares to Richard Dielschneider on April 26, 2001 for $15,000.
All other Share Purchase Agreements that were tendered as Exhibits were sales
by Powernet of its treasury shares. The proceeds from those sales were revenue
to Powernet.
[12] Only the Appellant and his spouse had signing
authority on Powernet’s bank account.
[13] The Appellant and his spouse had debit cards to
access Powernet’s bank account. In 1999, Zolc was given one of the debit cards
so that he had access to the bank account when he was travelling throughout
Western Canada to sell distributorships for the program Personal Growth Series.
[14] I found that Zolc was credible and I accept his
evidence. Zolc testified that when he was on
the road he used the debit card on a daily basis to pay expenses. He also went
to the bank on a regular basis to take funds out of Powernet’s bank account. He
said that in 2000 he saw the amount of $80,000 deposited into the bank account
and “almost as quickly” it was withdrawn from the bank account. He questioned
the Appellant on this transaction and was told that the amount of $80,000 was
from the sale of shares to Ronald Driscoll.
[15] Zolc’s evidence is supported by the Exhibits.
Exhibit A-6 showed that Powernet sold 110,000 shares to C.I.R. Holdings Ltd. on
April 4, 2000 for $80,000. Ronald Driscoll and Carolyn Driscoll signed the
Share Purchase Agreement on behalf of C.I.R. Holdings Ltd. The bank statement (Exhibit
R-7) disclosed that $80,400 was deposited into Powernet’s bank account on April 7, 2000
and through three transactions on April 10, 2000, $80,000 was withdrawn by
“Touchtone Transfer”.
[16] It was Zolc’s evidence that he returned the debit
card to the Appellant sometime in 2000 when he was no longer on the road for
Powernet. He stated that this would have occurred shortly after he saw the
transaction described in paragraph 15 above. I note that in the General Ledger
dated December 31, 2000 (Exhibit R-6) the last debit machine withdrawal
recorded for Zolc occurred on May 26, 2000. Consequently, I find that Zolc
returned the debit card to the Appellant shortly after May 26, 2000.
[17] In 2000, the software program was not finished.
Zolc and the Appellant decided that it would be difficult to continue to sell
distributorships. It was decided that Zolc would stop travelling and that he
and the Appellant would concentrate on finishing the software program as they
were programmers.
[18] In 2000 and 2001, Powernet operated out of the
Appellant’s home. The Appellant used 46.5 percent of his home as an office for
Powernet.
[19] The Appellant made all decisions with respect to
Powernet’s business. There was no evidence that there were any meetings of the board
of directors in 1999 and 2000.
[20] According to the Appellant, his duties for
Powernet included “pretty much everything”. He assisted with the development
and programming of the Personal Growth Series. He made decisions on who would
be hired to assist with the development of the Personal Growth Series. He made
decisions on money, time frames and priorities. He worked at least 14 hours a
day, six days a week.
[21] In early 2000, the directors and shareholders of
Powernet asked the Appellant for an accounting. They wanted to see Powernet’s
books and financial statements. No books had ever been created. In October 2001,
the directors had a board meeting. The Appellant had been invited to this meeting
but he did not attend. The result of the meeting was that the board hired a
lawyer who was able to get copies of Powernet’s bank statements from the bank.
[22] The board of directors hired an accountant who
prepared a General Ledger for Powernet for the periods ending December 31,
1999, December 31, 2000 and December 31, 2001. These ledgers were produced
using the bank statements, Zolc’s receipts and input from Zolc and some of the
other directors. It was Zolc’s evidence that he sat with the accountant and
told him from his recollection which debits in the bank statements should be
attributed to him and which should be attributed to the Appellant.
[23] Powernet issued a T4A slip to the Appellant in the
amount of $164,969 for the 2000 taxation year. The CRA completed an Employer
Compliance Audit and T4 slips were prepared in the Appellant’s name in the
amounts of $164,969 and $2,997 for the 2000 and 2001 taxation years
respectively.
[24] The evidence disclosed that the Appellant failed
to recognize that Powernet was a separate entity from himself. He treated
Powernet’s bank account as if it were his own personal bank account. He treated
Powernet’s treasury shares as if they were his own personal shares. The
following excerpt from the transcript was typical of his attitude. While
questioning Zolc the Appellant stated:
Buddy, I was
the board. I was the majority shareholder. Don’t be telling me about the board.
I made—I had all the decisions. I paid all the bills. I invited you guys …
[25] Overall, the Appellant gave no explanation for the
amounts attributed to him in the General Ledgers prepared by the accountant. He
spoke in generalities.
[26] The Appellant stated that he had made a
shareholder loan to Powernet in 1999 for the amount of $11,000. The loan
document was dated May 3, 1999 and was signed only by the Appellant. The bank
statement for 1999 did not support the Appellant’s statement.
[27] Only the Appellant and his spouse had signing
authority on Powernet’s bank account. The evidence disclosed that in 2000 the
Appellant or his spouse used the telephone to transfer $109,310 out of
Powernet’s bank account. The Appellant gave no explanation for the transfer of
funds.
[28] At the hearing the Respondent noticed errors in
the General Ledger for year end December 31, 2000. There were transactions that
were attributed to Zolc and yet they were included in the Appellant’s income.
As a result, the Respondent conceded that additional amounts should be deleted
from the income assessed to the Appellant in 2000. However, as stated below, I
have increased the additional amounts which should be deleted from the
Appellant’s income for the 2000 taxation year.
[29] It was Zolc’s evidence that he had access to
Powernet’s bank account by way of a debit card. It was also his evidence that
he used the debit card to pay for expenses and to withdraw cash while he was
travelling to obtain distributors for Powernet. According to the General Ledger
for December 31, 2000, the last debit transaction by Zolc occurred on May 26,
2000 in Vancouver. As a result, the only amounts of debit
withdrawals, transfers and purchases that are definitely the Appellant’s and
should be included in the Appellant’s income are those that occur after May 26,
2000. Consequently the amount of “ABM Transfer” included in the Appellant’s
income should be $300.00 and not $1,350.00; the amount of “ABM Withdrawals”
included in the Appellant’s income should be $670 and not $9,012.22; the amount
of “Personal Amounts” included in the Appellant’s income should be $1,595.30
and not $3,455.45.
[30] I am also satisfied that the money the Appellant
received from Powernet was income to the Appellant. As stated by Justice Teskey
in Palardy v. Canada, [1997] T.C.J. No. 111 at paragraph 21:
21 … Money coming out of a corporation can only be:
(1) income to the recipient;
(2) a dividend duly declared;
(3) a loan duly documented;
(4) a withdrawal of capital duly documented.
There was no documentation to show that the Appellant
was being repaid for any loans he may have made to the corporation or that he
was receiving a loan from the corporation. There was never a dividend declared
by Powernet. The money the Appellant received from Powernet was income to him.
[31] The Appellant had also argued in the alternative
that any income he received was not taxable in accordance with the decision in R.
v. Powley. This decision does not stand for the proposition that income
earned by Métis is not subject to taxation. Rather this decision deals with the
Métis aboriginal right to hunt for food in the vicinity of Sault Ste. Marie.
[32] The appeal is allowed, without costs, on the basis
that the Appellant’s income for the 2000 taxation year should be recalculated
in accordance with paragraph 29 herein. As well, the amount of $48,562.79
should be deleted from the Appellant’s income as conceded by the Respondent at
the start of the hearing as this amount was based on a review of cheques,
receipts and visa statements presented by the Appellant to CRA. The Appellant
is also entitled to deduct the amount of $6,000 as expenses incurred for the
office in his home in the years 2000 and 2001. However, the home expenses for
the 2001 taxation year cannot exceed the Appellant’s net income in accordance
with paragraph 8(13)(b) of the Income Tax Act (“the Act”).
Signed
at Ottawa, Canada this 13th day of May, 2008.
V.A.
Miller, J.
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