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Citation: 2005TCC28
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Date:20050201
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Docket: 2004-2301(IT)I
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BETWEEN:
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QING HUA ZHOU,
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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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____________________________________________________________________
For the Appellant: The Appellant herself
Counsel for the Respondent: Simon Petit
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Montreal, Quebec, on December 16,
2004)
McArthur J.
[1] These appeals are from assessments
for the Appellant's 1999, 2000 and 2001 taxation years. The
issue is whether the Appellant can deduct, in computing her
income for 1999 and 2001, the amounts of $18,212 and $25,723 as
carrying charges and interest expenses, and the amounts of $6,276
and $15,975 as other employment expenses; and for the year 2000,
the deduction of $45,085 as other employment expenses.
[2] The Appellant, Qing Hua Zhou,
during the taxation years in dispute, was an employee of the
company Francis Enviro Biotek Inc. At all relevant times, this
corporation was controlled by her. She owned the majority of the
shares at some time during the period and during part of the
period, she transferred 50% of the shares to a relative. Taken
for the most part from the Reply to the Notice of Appeal, the
Respondent relied primarily on the following assumptions and
conclusions.
[3] In 1999, 2000 and 2001, the
Appellant declared income of $48,500, $84,000 and $62,900,
respectively. Also, the Minister of National Revenue broke down
her claim for employment expenses in the years in issue as
follows:
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1999
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2000
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2001
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Advertising and promotion
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$1,083
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Nil
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$1,877
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Food, beverage, entertainment expenses
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50
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50
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75
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Lodging and travel
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1,095
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nil
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12,548
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Assistants - substitutes
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2,848
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16,620
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12,548
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Rent
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1,200
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1,200
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1,200
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Supplies
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Nil
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279
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195
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Total
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$6,276
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$18,149
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$15,975
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Further, in the 2000 taxation year, the Appellant claimed
$26,936 as carrying charges and interest expenses.
[4] The Minister disallowed the
carrying charges and interest expenses claimed for various
reasons. For example, salaries to assistants claimed by the
Appellant were also claimed by Biotek in 1999 and 2000. The
Minister added the rent expense claimed by the Appellant to the
shareholder's loan in Biotek and determined it to be a
personal expense. The Minister rejected all other expenses of the
Appellant because she submitted contradictory versions of the
facts.
[5] Much of the Appellant's
evidence was directed at criticizing Canada Revenue Agency and
its officers over the years in their handling of her personal and
the corporation's books and records. She stated on pages 4
and 5 of her Notice of Appeal, under the heading
"Requirements":
After the auditor's report was distributed by someone from
CCRA to different departments of CCRA and the Ministere du Revenu
du Québec, we have to deal with more than 18 peoples
(sic) from the departments because they reopened my files
in different divisions to change the figures related to the
auditor report. Sometimes, we worked 4 hrs in the day and night
for their questions. Then our health, reputation, spirit and
energy were seriously damaged. We not only make this notice of
appeal to the Tax Court of Canada, but also for the compensation
for the damage. We hope that the few people from CCRA will not
repeat these problems again. One CCRA officer said that even if
he lost the case, he still can have his job, so why not. The
public servant should know that his or her wrong decision may
result in serious damage in the company and the taxpayers. I hope
the Tax Court of Canada can solve these problems.
[6] The Appellant testified at the
hearing, as well as two CRA auditors on behalf of the Respondent.
As stated, there were inconsistencies in her books and records
and her evidence, leaving me sceptical with respect to all her
evidence. In OrlyAutomobiles Inc. v. the Queen,
[2004] T.C.J. No. 204, Bowman J. stated in part:
The fact that some aspects of a witness' testimony are not
satisfactory does not mean that the testimony is to be rejected
in its entirety. In a case such as this, where the evidence is
both complex and contradictory, the trier of fact must endeavour
to reach conclusions on the evidence as a whole. This will
involve, obviously, observation of the demeanour of the witnesses
and plausibility or implausibility of the testimony in the light
of other evidence. ...
In this case, I have attempted to reach conclusions on the
evidence as a whole, much of which was irrelevant.
[7] The facts very briefly are these.
The Appellant is a research scientist and has a science-related
Ph.D. At all relevant times, she was an employee and the
controlling mind of Francis Enviro Biotek Inc., which conducted
research and development (R & D) in bio-technology,
micro-biology and environmental engineering. During the relevant
years, the corporation had no sales and survived on modest
R & D grants, but primarily on advances from family members,
the Appellant personally, and possibly from bank loans. The bank
loans remain a mystery. I believe the Appellant testified that
she or the corporation had borrowed just over $100,000 from the
Royal Bank of Canada without signing promissory notes, contracts
or paper of any kind.
[8] The evidence with respect to the
corporation's operating capital was unclear and no
documentation whatsoever was presented. This has no effect on the
judgment itself other than confirming the difficulties that the
auditors encountered and the somewhat mysterious nature of the
Appellant's evidence and bookkeeping.
[9] The Appellant had the corporation
pay her salary. She in turn paid some of her salary back to the
corporation. The only motivation for this manoeuvre was an
hypothesis presented by a CRA auditor who stated that she wanted
to establish that the corporation had a scientist on the payroll
and paid a salary for the purposes of obtaining R & D funding.
For the most part, the motivation for the financial and
contractual juggling between the corporation and the Appellant
eludes me. The Appellant felt that the Minister's auditors
should have assisted her in rearranging her financial affairs to
her best advantage. The auditors, of course, reported on the
books and records as they found them and as she changed them from
time to time as the process of the appeals proceeded.
[10] In any event, we are left with a
situation where the Appellant and relatives advanced capital to
the corporation from which the corporation paid her a salary,
much of which she returned to the corporation and she is assessed
tax personally on the salary which originated from her and her
family from the outset. This is an unsettling situation.
[11] Counsel for the Respondent stated that
she made her own bed and must lie in it and in Bronfman Trust
.v Canada, [1987] 1 S.C.R. 32, the Supreme Court of Canada
stated that "a Court must look at what the taxpayer actually
did and not at what she or he ought to have done". Counsel
for the Respondent referred further to the often-cited case of
Canada v. Friedberg, 92 DTC 6031, where Linden J.
stated:
In tax law, form matters. A mere subjective intention, here as
elsewhere in the tax field, is not by itself sufficient to alter
the characterization of a transaction for tax purposes. If a
taxpayer arranges his affairs in certain formal ways, enormous
tax advantages can be obtained, even though the main reason for
these arrangements may be to save tax. If a taxpayer fails to
take the correct formal steps, however, tax may have to be paid.
If this were not so, Revenue Canada and the courts would be
engaged in endless exercises to determine the true intentions
behind certain transactions. Taxpayers and the Crown would seek
to restructure dealings after the fact so as to take advantage of
the tax law or to make taxpayers pay tax that they might
otherwise not have to pay. While evidence of intention may be
used by the Courts on occasion to clarify dealings, it is rarely
determinative. In sum, evidence of subjective intention cannot be
used to "correct" documents which clearly point in a
particular direction.
Justice Linden could have been inspired by the present
situation to have written this paragraph which is of relevance in
this appeal.
[12] I will first deal with the
Appellant's claim for interest expense deductions. A
revealing statement of the Appellant is contained in Exhibit R-8,
of the Respondent's book of documents where in a letter of
December 18, 2002, writing auditor Danielle Picard, she
stated:
(1) $18,212 for
1999, $26,936 for 2000 and $25,723 for 2001 will be claimed as
bad debts, which were claimed as carrying charges and interest
expenses before by the suggestion of the tax agents from both
level governments. Now we would like to make an election as bad
debts. Also this year, I would suggest that these amount
should be claimed as bad debts by our tax technicians. Nearly all
of my money including some of my family and friends money was
used to operate the company. If we did not put money to company,
it might have closed.
This is one of many instances where she changes her mind about
the nature of payments. She refers to "our tax
technicians", but no such persons were presented. And the
accounting and related documents, were certainly not prepared by
professionals, most likely, she prepared all the documentation,
personal and corporate, herself. The Appellant made the
auditors' work very difficult. They made numerous demands of
proof of payments and other supporting documentation without
success. There was no support for her statement that "the
tax agents from both levels of government" suggested she
claim "carrying charges and interest expenses".
[13] For the reasons that follow, I agree
for the most part with the Respondent's position ably
presented by counsel. I can offer the Appellant very little
relief. Given her financial manipulations, I believe she was the
author of her own misfortune. Her position with respect to the
interest deduction claim, appears to be based on the following
hypothesis. Had she invested the money she advanced to the
corporation in, for example, investment certificates with a
financial institution, she would have earned interest. She earned
no interest from the corporation on the money she advanced, so
she claimed a bad debt for an amount she might have received. In
her 1999 return, which is the Respondent's Exhibit R-24, she
stated in a letter attached to her tax return dated July 18,
2000:
$18,212 as a loss of interest for personal loan to the company
without interest and $6,276 is moved to other employment expenses
on line 229 of my income tax return.
[14] It was not until 2004, in Exhibit R-14,
did the corporation state that it received interest. This is
another manoeuvring of position or inconsistency to suit her
present-day needs. The corporation's returns for 1999 and
2000 (Exhibits R-5 and R-6) do not refer to interest. On the
corporation's balance sheet as of December 31, 2000, there is
an indication of a shareholder's loan of approximately
$368,000 and loan interest of $26,936.
[15] The Appellant prepared three promissory
notes (Exhibit R-2) wherein she promises to pay the corporation
interest on money it purportedly advanced to her. I find
that these are works of fiction. There is unsatisfactory evidence
that she received the principal amounts referred to and one of
these promissory notes as of December 31, 1999 reads:
For value received, I promise to pay FRANCIS ENVIRO BIOTEK
INC. the sum of ($18,212) Dollar (hereinafter called the
"Principal Sum" interest) as interest thereon at the rate of
(10.5)% per annum based on the Principal Sum ($173,447),
calculated monthly, as well after maturity as before maturity
...
It is signed by the Appellant on her personal behalf and by
the Appellant on the corporation's behalf. I give no weight
to that documentation and I find the Minister correctly
disallowed the interest expenses of $18,212, $26,936 and $25,723
for the three years.
[16] I will now turn to the Appellant's
claimed employment expenses of $6,276, $18,149 and $15,975 in the
three years in issue. To make such deductions, the expense must
be expressly allowed under section 8 of the Income Tax Act
and in this regard, I refer to the decision of the Supreme Court
of Canada in Gifford v. Canada, [2004] 1 S.C.R. 411, where
Major J. stated in paragraphs 11 and 12:
11 ... it is
useful to review the general scheme for allowing deductions under
the Act. The appellant taxpayer here earned income from
employment and under the Act could only make deductions,
as a result of s. 8(2), if the deduction was expressly allowed
under s. 8.
12 If an employee
meets the requirements of s. 8(1)(f)(i) to (iv), he is
then allowed to deduct any expense made for the purpose of
"earning the income from the employment". If the
expense is a payment "on account of capital", s.
8(1)(f)(v) removes it from the scope of expenses that can
be deducted.
The greatest portion of the employment expenses was for
payment of assistants for the corporation which she stated were
paid personally by her of about $2,848, $16,620 and $12,546 for
1999, 2000 and 2001, respectively.
[17] The only expense that I am prepared to
allow the Appellant is the cost of two airline tickets to China.
I am not clear from the Notice of Appeal when those were paid and
precisely what amount, but to simplify the situation, I am
prepared to give her a deduction of $1,000 in 1999 and $1,000 in
the year 2000 for the cost of two trips to Beijing. She went
there twice in the three years. She said she needed to keep up
with the scientific developments in other parts of the world. I
find these payments meet the criteria in
paragraph 8(1)(h). She paid these expenses herself.
All other expenses for the Beijingtrips were paid by the
corporation.
[18] There were other instances of
inconsistencies where the Appellant changed her mind. Exhibit
R-27 is a bundle of cheques from the corporation to the
Appellant. In the margin, she wrote that in accordance with
employment conditions, 20% of her salary has to be paid back to
the company and she took 20% of the salaries paid to her and she
paid it back to the corporation. Or at least she says she paid it
back to the corporation. Yet, in Exhibit A-12, page 7, she gave a
breakdown of the expense of $16,620 stating it included her
payment for Biotek telephone costs and for Biotek assistants. In
evidence, she stated that she had not paid the assistants herself
personally. Exhibit R-28 was the original filing of her return
for that year and Exhibit A-12 was submitted at the appeal stage.
I find the Appellant did not actually incur these expenses
personally.
[19] Subparagraph 8(1)(i)(ii) of the
Act reads in part:
8(1) In computing a
taxpayer's income for a taxation year from an office or
employment, there may be deducted such of the following amounts
as are wholly applicable to that source or such part of the
following amounts as may reasonably be regarded as applicable
thereto:
(i)
amounts paid by the taxpayer in the year as
(i)
...
(ii) office rent, or
salary to an assistant or substitute, the payment of which by the
officer or employee was required by the contract of
employment,
I find that the contracts of employment were prepared by the
Appellant after the fact and are retroactive tax planning to
which I give no weight. I find she did not in fact pay the
assistants, the corporation did. As set out in Exhibit R-22, the
assistants invoiced the corporation and not the Appellant.
Exhibit R-23 contains cheques payable to the assistants drawn on
the corporation's account. The Appellant did not personally
pay the assistants and her claim for these expenses is not
allowed.
[20] I agree with the Respondent that it is
impossible to reconcile the whole picture. The amounts referred
to in the employment conditions agreement and other agreements
could not possibly have been known prior to the expenditures of
those amounts that are set out in these documents.
[21] In conclusion, the appeals are allowed
only for 1999 and 2000 to permit the deduction of $1,000 in each
year representing two flight tickets to China, and the appeal for
2001 is dismissed.
Signed at Ottawa, Canada, this 1st day of February, 2005.
McArthur J.
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