Citation: 2005TCC463
Date: 20051209
Docket: 2003-500(IT)I
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BETWEEN:
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NICK POUSHINSKY,
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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
(Delivered orally from the Bench at
Vancouver, British Columbia on May 14, 2003)
Margeson J.
[1] The questions
before the Court are whether or not the Appellant should have been assessed a
benefit in the taxation year 2000, allegedly a benefit conferred on him by the
company and, secondly, if there was a benefit, was the Appellant liable for the
penalties assessed to him. The benefit was assessed under subsection 15(1)
of the Income Tax Act ("Act"), allegedly received from
Mattanda. Further, in the year 2000 did the Appellant knowingly under
circumstances amounting to gross negligence make or participate in, assent to
or acquiesce in the making of false statements or omissions in failing to
report the alleged benefit in his income for the 2000 taxation year.
[2] The Appellant, Nick
Poushinsky, said that in the 2000 taxation year in issue, his company,
Mattanda, was in business. He was the only shareholder. He was a director.
There was some issue as to whether or not he was an employee. That is not
relevant here. He said he was now.
[3] In essence, the
company provided a management consulting service to a wide range of clientele,
including in this particular case one of the ministries of the Government of
British Columbia.
[4] What is significant
is the Appellant's background. The Appellant said that he has a Ph.D. from York University. He taught at Dalhousie University. He also
taught at Rutger University and at the University of Victoria in British Columbia. He was also in the
public service. He was a Deputy Minster for Mines in the Yukon and a Deputy Minister
of Social Services there.
[5] Mattanda was
incorporated in the Yukon.
The stated purpose of this company was to provide consulting services to
clientele such as the Ministry, in this particular case. What they were doing
in this particular case was conducting a review of the mental health office, or
at least that was one of the services that they were reviewing.
[6] Even though the
Appellant signed the agreement himself personally, the contract work was on
behalf of the company. The company was entitled to the benefit of the money that
was paid, even though the cheques were made out into his own name as a result
of some problem with Workers' Compensation. The Court is more than satisfied
that it was the company that was doing the work and any monies that the
Appellant received were obviously monies of the company.
[7] The Appellant said that
the work was finally completed in 2001. He was very confused about the
circumstances and the Court has some problem with why he should have been so
confused. There were not a great many facts involved. Although he did not seem
to remember it, the evidence satisfied the Court that there were two cheques
issued and the Ministry was told that they were lost or stolen. Two other
cheques were issued to replace them.
[8] It would seem only
reasonable that the Appellant, before coming here today and being the major
player in this case would have known what the factual situation was regarding
these cheques. He looked at the back of the cheques that were put before him,
but the Court is satisfied that he should have been much more aware and much
more forthright in saying what the cheques represented and should have known
what they represented. It would be unreasonable for the Court to conclude that
he would not have known the circumstances under which the cheques were issued,
when they were cashed, when they were deposited and when the money was taken
out. It is unreasonable for him not to have been better aware of what the
actual factual situation was.
[9] There is no doubt
that there were two cheques issued and that they were for $13,000 each. The
money belonged to the company and by the Appellant's own evidence, $13,000 of
it went into the company account and $13,000 of it did not. By his own evidence
the other $13,000 went into his own account and he used it for his own personal
purposes.
[10] He did say that it
was a distressful time for him and he was not exactly sure as to what happened
after that and did not know when the cheques were issued. As a matter of fact
he did not even seem to know that the cheques were actually recalled. He gave
no evidence about that. That came out in the evidence of the witness who was
presented on behalf of the Respondent.
[11] He did say that his
wife had fallen and was having pains in her arms. In the panic that ensued he
said, "I inadvertently deposited the money into my account". That was
the statement out of his own mouth.
[12] He said that the
Mattanda year was August 1, 2000 to July 31, 2001. He indicated who his
accountants were. His financial statements were not prepared by him, they were
prepared by accountants who were representing him here today. These returns
were filed quite late. He was not a good manager according to him. He got his
papers ready to present to his accountants who would at the end of the day make
up the financial statements. He said that he prepared the documents at least a
year after he deposited the money into his account. So that, again, was part of
his explanation as to why he would have been confused about what had actually
taken place.
[13] He did not inform
the accountants about the money. "I had clearly forgotten about it. I am
the sole director." He did admit that he reviewed the financial statements
when they were prepared. He did not realize that the company's income was understated
by $13,000. He did not know until about a year later when someone from Revenue Canada called him and told him
about it. He had no problems with Revenue Canada before that date. That was his
evidence in direct.
[14] In cross-examination
he said that he had a Ph.D. in sociology. He operates a consulting business
through Mattanda and has been operating it since 1992. In 2000 he was the sole
shareholder and director of Mattanda. He did not report any salary or other
income in 2000 from Mattanda. All of his income came from KPMG; he was employed
there. From January 1, 2000 to December 31, 2000 his sole income was from KPMG.
He may have been owed money by Mattanda by way of a shareholder loan and this
may have been repaid but he was not quite sure about that. From time to time he
did take money out of the company and he wrote cheques to himself. This would
appear to have been by way of shareholder loan repayments.
[15] He said, "I
don't know if I made draws to myself during 2000. If I did they were a loan payment."
The contract with the British Columbia government was signed in 1999, the 7th of November.
This is the service contract. Exhibit R-1 was admitted by consent. The reason
why it was in his name was more than just because there was a problem with the
company being registered in the Yukon and operating in British Columbia. It had to do with Workers'
Compensation and some problem with Workers' Compensation. But he said, "I
did the contract in Mattanda's name. I always did it through the company".
There can be no doubt on the evidence that it was not his work he was doing,
the remuneration was obviously not going to be his, it was going to belong to
the company and he knew it.
[16] He said, "I
understood it to be Mattanda's". He received the $13,000 in December of
1999. That is the $13,000 in dispute. He thought that he received it in 1999
and put it in the bank but the evidence later on would seem to indicate that
the cheques were issued but then they were lost and they were reissued, and
that did not get into the account until January of 2000.
[17] The Court did note
at this time in the giving of the evidence that he seemed to be very uncertain
about matters that he should have been more aware of and this has some effect
certainly on the Court's view of his evidence. He did not really start getting
ready for this case until a short time ago, according to his evidence. He may
not have reviewed the necessary documentation and certainly that would have
affected the way he gave his evidence.
[18] He recognized one of
the cheques and not the other. He said "My honest recollection is that I
recall one cheque in December of 1999". He said, "I think that that
one was pulled back. I honestly don't know". That was the only indication
that he had that there might have been a reissued cheque.
[19] He said, "I
have not been able to track down the December 1999 cheque". He was
not certain about whether the December cheque was cancelled and another one was
reissued in January. A question arose that if both went in on the same date how
did he get one registered to the company's name and the other not?" That
was the question that was put to him but he said that the $13,000 did not get
registered in Mattanda's account.
[20] He was asked if he
was suggesting that the $13,000 was a repayment of a shareholder's loan and,
after some consideration on it, he said, no, it was not. At the end of the day
the Court concludes that it was not in his mind that he was actually getting
repayment of a shareholder's loan. He said that the $13,000 that went into his
account went in there in "confusion". It was not believed to be a
repayment of a shareholder's loan. The $13,000 was never put into Mattanda's
account is what he said. Then he was asked what he did with the $13,000 and he
said that he did not know although there can be no doubt that he used it for
his own personal purposes.
[21] Exhibit R-2 was
admitted by consent. Those were the financial statements. He reviewed the
financial statements of the company for the period August 1999 to July 31,
2000, and these were identified. He referred to a copy of the revenue statement
as well. He referred to the figure of $13,000, which was included in the
statement and he said that that was one of the cheques or one of the amounts
that was part of the $26,000, the other $13,000 being in issue. He said,
"I never noticed that it was not recorded in Mattanda's books when I
reviewed them".
[22] He said that he had
15 to 20 clients, some smaller and some larger. He never noticed that the
$13,000 was unrecorded until Revenue Canada contacted him. He admitted that he was responsible
for recording the income, reporting it and making the deposits. He did not
compare the entries in the deposits to the contracts that the company had
entered into, that is in the sense that he did not take a deposit and say,
well, that is related to contract A, that is related to contract B and so
on. He did not take any steps to verify the $13,000 entry on January 31, 2000.
It was the B. C. Ministry's cheque. He said that he would not know how to do
it.
[23] In redirect he said,
"I do not know when I received the cheques. I don't recall keeping a
journal," being a journal of cheques, or a synopsis of the cheques or a
record of the cheques that he received.
[24] The Respondent
called Kim Dow, who is an auditor with Canada Customs and Revenue Agency
("CCRA"), who had 18 years of education in a Catholic seminary
before he came to Canada in 1965. He has been working with CCRA since 1991, or its predecessor. He
has a degree in philosophy and then he studied French. He studied accounting in
Canada. He has been an auditor
since 1999. He was the auditor on this file.
[25] His purpose for
doing the audit was to audit unreported income. He was trying to determine
whether the contract was valid, how much was reported and how much was not reported.
He found that of the $26,000, $13,000 was reported. The accountant could not
provide the documents but he said that he did not report it.
[26] Exhibit R-1 was
entered by consent. This was the contract that he audited and to which he
earlier referred. Exhibit R-2 was a copy of the document provided by the
accountant. He recognized that. He was asked what steps he took to determine
what amount was paid and he explained that he contracted the accountant and he
also contracted the Appellant himself. Apparently he spoke with him on two or
three occasions, although the majority of his records were restricted to one of
those interviews. He believed that he had interviewed the Appellant two to
three times, or at least talked to him.
[27] When he spoke to the
accountant he did not get the answers. He contacted the Ministry and he
received copies of the cheques made out to the Appellant. The replacement
cheques were issued to replace two cheques that were lost or stolen. They were
deposited on January 31, made payable to Dr. Poushinsky both in the amounts of
$13,000 dated January 27.
[28] Exhibit R-3 was
introduced by consent. These referred to the replacement cheques. Two earlier
cheques were replaced. They were referred to as having been lost or stolen.
[29] Exhibit R-4 was
introduced by consent. This was a replacement cheque request, which was given
to him by the Ministry. He was referred to Exhibit R-1 and identified the first
cheque as being dated December 31, 1999. The payee was Dr. Poushinsky for
$13,000. This was replaced as having been lost or stolen.
[30] The second cheque
dated January 31 for $13,000 was reported lost or stolen. Payment was stopped
on it on January 24. That was replaced on January 31. He also identified
the summary, which was in reference to the two cheques which were reported lost
or stolen. There was no information that he had that showed that any of this
information was incorrect. He was not told that any adjustment was made to the
shareholder's loan account and he did not go into it any further so he did not
know whether it was or was not.
[31] In cross-examination
he said that the Appellant did not explain why the $13,000 was not picked up.
By that he meant why the Appellant did not know at some later time that the
$13,000 had not been recorded in the company's income. The Appellant admitted
that the funds were Mattanda's and that he did not record it anywhere. He did
not record it in their income.
[32] At this point the Appellant
said that he had reported the $26,000 in the income for Mattanda but this could
not be verified. The Appellant satisfied him that he knew that he had not
reported the income into the name of the company.
[33] In redirect he said
that the Appellant's income was adjusted to include the $13,000 benefit to the
company. After the Court's questions, he said that he had been told that the
income had been reported and that he was not wrong on that. What he had said
earlier was correct.
Argument on Behalf of the Appellant
[34] In argument the
agent for the Appellant said that Mr. Poushinsky does not remember the
dates. This was merely an error of bookkeeping. The reason that it was an error
and that it happened was because there was a significant period of time between
the money being received and when the year-end documents were prepared. Because
of the amount of the money involved and the total amount of money which the company
had as income in that year, even though the amount might have been significant
with respect to other deposits, when you look at the total income of the
company it was not a significant amount. Therefore, it would not have stood
out. If it stood out they would have said, look, there is something wrong here.
It was a bookkeeping error, and according to the case law it is his position
that such errors do not always result in a benefit being applied to the
taxpayer, to the shareholder.
[35] He referred to Tab 2
of his Authorities which was the case of Chopp v. The Queen,
95 DTC 527. He relied upon that. This was a decision of Mogan J. where at page
529 he said:
It has been held on many occasions that a
benefit will be taxable under subsection 15(1) of the Income Tax Act
... only if it is conferred on a shareholder in his capacity as a shareholder. ...The
relationship between a corporation and its shareholders is based on invested
capital. That relationship is not, by itself, incidental to or connected
with any business carried on by the corporation. Indeed, a corporation may
not carry on a business or, if it does, the shareholders may not be involved in
the business.
He went on to indicate that in his
belief:
A shareholder benefit is more like a
dividend and less like a business expense. Therefore, a benefit
taxed under subsection 15(1) will usually result in some form of double
taxation because the shareholder will be taxed on an amount which has not been
deducted in computing the income of the corporation. In appropriate
circumstances, this will be a harsh but necessary result.
Now, in this case argued by the
agent for the Appellant he referred to a decision of Judge Rowe, being quoted
by Mogan J. which went a bit further than Mogan was prepared to adopt. Mogan J.
said:
I would not go as far as Judge Rowe in
stating that the words used in subsection 15(1) refer to some form of
action with a strong component of intent. I think a benefit may be
conferred within the meaning of subsection 15(1) without any intent or actual
knowledge on the part of the shareholder or the corporation if the
circumstances are such that the shareholder or corporation ought to have known
...
And I agree with that,
... that a benefit was
conferred and did nothing to reverse the benefit if it was not intended.
And again, he says:
Shareholders should not be encouraged to
see how close they can sail to the wind under subsection 15(1) and then plead
relief on the basis of no proven intent or knowledge.
[36] In that case he
accepted the Appellant's argument based upon "the unqualified credibility
of all four witnesses in the appeal as the most relevant factor". Then he
went on to allow the appeal.
[37] The agent for the
Appellant referred to Tab 7, which was the case of Long v. Canada, 98
DTC 1420, and he equated the present case to the type of errors that existed in
that case, bookkeeping errors he referred to them as, and indicated that these
do not amount to benefits according to the position that he took. At paragraph
11 of the decision the learned trial judge, Bowman J. said:
I do not see how it can be said that a
bookkeeping error of which the sole shareholder was not aware and which he did
not sanction and that was not in accordance with the company's established
practices constitutes "in reality a method, arrangement or device for
conferring a benefit or advantage on the shareholder qua
shareholder".
The agent says that that is
basically what we have here.
[38] More importantly the
Appellant referred to Tab 3 in his Book of Authorities, the case of The
Queen v. Chopp, 98 DTC 6014. This was the Federal Court of Appeal
decision, and the Court said:
In our view, Judge Mogan properly assessed
the facts when he concluded that it was through the taxpayer's "ignorance
and innocence ...
Which is what the agent is arguing
here,
... in not knowing that an error had been
made when the amount of $28,490 was posted" as a corporate expense when it
should have been debited to the shareholder's loan account.
[39] In that case there
was the issue of the shareholder's loan account, and obviously the Court
accepted at the Trial Division level that the taxpayer thought it was a shareholder's
loan account that was debited. It was not debited, and, therefore, he did not
have the intention to do anything wrong and it was not gross negligence. The Appeal Court would not overturn that
finding of fact. The Court said that there was nothing in Judge Mogan's
findings that was not reasonably supported by the evidence before him so they
upheld what he had to say.
[40] At Tab 5 the agent
referred to her The Queen v. David Robinson, 2000 DTC 6176. His
argument was that there must be strong evidence of intent and not just an
honest error. In that particular case, which dismissed the Crown's appeal, the
Court held:
There was no evidence
that the taxpayer had the knowledge to appreciate the significance of the
increased shareholder's loan account in the Company's financial statements when
he signed its corporate tax return for 1986. ... the fact that the taxpayer had
received no money from the Company resulting from the misclassification error.
And finally, the taxpayer was unaware of the error, and his credibility was not
in issue. In light of all of the foregoing, the $64,022.19 in issue was not
required to be included in taxpayer's income. The Minister was ordered to
reassess accordingly.
And the Court in the context of the
decision said at page 3:
At all material times
the Defendant was in a credit balance in his shareholder loan account in the Company.
... The Defendant never drew on the Balance,
That is different, of course, from the
present case because we have no evidence at all which is sufficient for the
Court to decide what the balance of the shareholder's loan account was. There
can be no doubt anyway in the Court's mind that the Appellant was not putting
forth as a reason for his actions the fact that he believed that he was
receiving a repayment of his shareholder loan account.
[41] The Court in David
Robinson, supra, referred to Judge Rowe's decision and said:
In the Tax Court of
Canada, Judge Rowe concluded that the accountant's error in misclassifying the
payment ... on its books and records, as a credit to the defendant's
shareholder loan account rather than as a sale, did not constitute an
appropriation within the meaning of subsection 15(1) of the Income Tax
Act.
[42] The Court would not
overturn that finding. In essence, the Court decided on the evidence before it
that the Defendant could not have known when he signed his return that that
amount had been erroneously credited to his shareholder account. The Court further
held that the Defendant received no money from his company as a result of the
misclassification. That was acknowledged by the Defendant in any event. The
credibility of the Defendant was not in issue. That case is considerably
different from the case at bar on all of those points.
[43] On the issue of
intent, the agent said that there was no intent. There was ignorance. It was an
error based upon the same principle as is found in the cases earlier cited.
[44] On the issue of
subsection 163(2) "knowingly or in circumstances amounting to gross
negligence" the evidence of the Appellant was that he did not know. In Sommers
v. M.N.R., 91 DTC 656, the taxpayer was a reasonably successful businessman
with a professional firm of accountants to assist him in preparing his returns.
In his 1977 return he had specifically reported certain small amounts of income
while ignoring a significant sum of $21,446.35, which comprised a substantial
portion of his gross earnings for 1977. That is not the case here, according to
the agent.
[45] Further, there was
no history of any Income Tax Act violations by the Appellant. He had no
history of doing this kind of thing so nothing can be drawn from that. He also
referred to Venne v. The Queen, 84 DTC 6247, particularly at page 12 of
that decision. He relied upon quotations such as the following regarding the
definition of gross negligence:
"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 our
not.
In that particular case, the Court
said:
In other words the
errors in business income, small in some years but very substantial in others,
would not necessarily have "sprung out" at a person with the
taxpayer's background and abilities. While it may have been naive for him to
trust his bookkeeper as knowing more about such measures than he did, I do not
think it was gross negligence for him to fail to challenge the bookkeeper with
respect to the business computations. However egregious the errors committed by
the bookkeeper in this respect, it is quite conceivable that they were not in
fact noticed by the plaintiff and his neglect in not noticing them fell short
of constituting gross negligence.
[46] In so far as this
Court is concerned that case is not like the case at bar. That situation did
not take place here. If there were bookkeeping errors, which the Appellant
could not be reasonably expected to have noticed, then, yes, that is the type
of case we are talking about, but we do not have that case here. As a matter of
fact any actions that took place were not the actions of the bookkeeper at all.
Any egregious actions were the actions of the Appellant himself. The bookkeeper
was not told about the money and it was not included in the returns. As a
matter of fact when he was asked about it by the auditor he referred him back
to the Appellant himself and he said he did not have any knowledge about that.
[47] The agent said that
the Respondent has not proved the penalties and has not met the burden on him
to prove that the penalties should be levied. That is a burden that is on the
Respondent from the beginning to end. He has not established on the balance of
probabilities that the Appellant has run afoul of subsection 163(2) and that
penalties should not be assessed.
Argument on Behalf of the
Respondent
[48] In argument on
behalf of the Respondent counsel said there were two issues: one, was there a
benefit conferred in the years in question and, if there was, were the
penalties properly assessed? Counsel referred to subsection 15(1) at Tab
1, and, of course, that is the section we are dealing with, which says:
Where at any time in a
taxation year a benefit is conferred on a shareholder, or on a person in
contemplation of the person becoming a shareholder, by a corporation otherwise
than by ...
And the exceptions do not apply, so
that is the section we are dealing with, whether or not there was a benefit. If
he got the money, then there was a benefit and, if he converted it to his use,
then certainly there was a benefit. There is no doubt that the exceptions set
out in section 15 do not apply. Then subsection 163(2) says:
Every person who,
knowingly, or under circumstances amounting to gross negligence, has made or
has participated in, assented to or acquiesced in the making of, a false
statement or omission in a return, form, certificate, statement or answer (in
this section referred to as a "return") filed or made in respect of a
taxation year for the purposes of this Act, is liable to a penalty ...
And so on. So that is the question.
That is the second issue.
[49] Counsel took the
position that a shareholder in a corporation, particularly in a small closely
held corporation as here, is in a very special position. They are in a position
where they can draw funds out of the corporation without much difficulty. They
can write cheques to themselves, and, indeed, the evidence here indicated that
cheques were written to the Appellant. Consequently, the Court has to take into
account that very close relationship that exists.
[50] He referred to Chopp,
supra, in support of his position, particularly at pages 529 and 530,
which requires that the benefits be conferred only on a shareholder in his
capacity as a shareholder. There is no doubt in this particular case that if it
was conferred; it was conferred on him in his capacity as a shareholder.
[51] And then he went on
to quote the very underlying part that the Court already referred to in its
earlier statements. Suffice it to say that he argues that in light of this
close relationship the Court must pay particular attention to that
relationship.
[52] He particularly
relied upon the statements at page 532 in the Chopp, supra, decision,
again, which I have already referred to where Mogan J. was talking about Judge
Rowe's decision, and he would not go as far as Rowe J. in saying that there had
to be a strong component of intent. Suffice it to say that he obviously decided
that there need only be something less than that. I have already indicated that
what he was thinking about were circumstances where the shareholder ought to
have known that a benefit was conferred and did nothing about it.
[53] Counsel said that
when you take those general principles into account and apply it to the facts
of the situation here, then the answer is that there was a benefit conferred
and the Appellant knew about it or should have known about it.
[54] With respect to
penalties under subsection 163(2), counsel said that it is very significant
that two cheques came in on the same date and that one was deposited and one
was not deposited. This is evidence of intention to use the money and not to
report it, but if it was not evidence of intention it was at least evidence
that there was a gross error on behalf of the Appellant or that the actions of
the Appellant amounted to gross negligence as contemplated by the subsection
163(2).
[55] He said that there
is sufficient evidence before the Court to find that the Appellant
intentionally did not record the money and did not include it in the books of
the company but took it and used it, but he is relying more on the second part,
in other words, that there was gross negligence, that his actions at least
amounted to gross negligence or he made a grossly negligent omission.
[56] Counsel referred to Findlay v The Queen, 2000 DTC 6345. That is a
case where this Court decided that the Appellant was grossly negligent and the Appeal Court overturned it. However
the significant part of that case was the gross negligence definition where
Isaac, J.A. said:
"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.
[57] According to Isaac J.A.
this definition is consistent with the jurisprudence on the subject and they
adopted it.
[58] Counsel for the
Respondent said that that is what existed in the present case. The Appellant
here was an educated person. He had long experience in acting in companies. The
companies had acted in this type of endeavour providing services to governments
and other clients over a period of six years. He knew that the money was the
company's. He did not take proper care to ensure that the money was recorded in
the books of the company. He used the money for his own purposes.
[59] It is significant,
he says, that this was the second largest deposit in the company's books of
accounts for the year in question and that should have sprung out at the
Appellant. At least it should have been sufficient warning for him that
something was not being done that should have been done and that the money
should have been reported.
[60] He reported one part
of the income and did not report the other. There was no explanation for that.
The appeal should be dismissed. There was not a reasonable explanation given
and there was no corroboration for the testimony of the Appellant.
Analysis and Decision
[61] As this Court may
have indicated in its comments during the trial, even though the Minister may
have told the Appellant's agents what he considered to be the two most
significant cases and factors to be considered in deciding whether or not there
was a benefit and whether or not there was gross negligence, this Court is not
bound by that. That is just what the Minister believed, but this Court has gone
over all of the cases that have been referred to here and cited at length from
them, and those are the cases that it must use in order to make its decision.
It is not conclusive what the Minister thought were the most important reasons.
[62] The Court does agree
that there are two issues: one, was there a benefit conferred on the
corporation to the shareholder under subsection 15(1) and, if there was a
benefit conferred, should the penalties have been assessed under subsection
163(2)?
[63] On the first issue
there can be no doubt in the Court's mind that there was a benefit conferred.
We have the evidence out of the mouth of the Appellant himself. He said himself
that he received the money, that it was not his money, it belonged to the
company, that he received it because he was a shareholder in the company, and,
as Chopp, supra, indicates, he was very close to the corporation, was
able to write cheques to himself. There is no doubt that he took the money out.
That was his evidence.
[64] There can be no
doubt that he used the money for his own purposes. There can be no doubt that
the money was not his, it was the company's, and it was sent over to him
because of his own actions and he used it. There can be no doubt in the Court's
mind whatsoever that on his own evidence there was a benefit conferred upon
him.
[65] There can be no
doubt in the Court's mind that the Appellant was not really seriously
contending that the money that he received was a repayment for a loan that he
had made to the company. There can be no doubt that he made loans to the company,
but, first of all, the Court does not conclude that the Appellant was even
arguing that it was a repayment of a loan at the time that he took the money
and used it for his own purposes. Even if he were taking that position, there
is nothing in the records to indicate that there was ever any adjustment made
to the corporate loan documents to indicate in any way whatsoever what the loan
balances were, that the loan balance was sufficient to use up this amount of
money, or that the Appellant ever intended that this money be considered to be
a repayment of a loan.
[66] Even if that
argument were made, the Court does not accept it as a valid argument because
there is nothing to support it. There was no corroboration of that position at
all. The Appellant received the money all right, it was the company's money, he
used it for his own purposes, so he definitely received a benefit.
[67] With respect to
whether this was an error or not, or whether the Appellant knew that it was
being done and it was a mere bookkeeping error, once he gets the benefit the
Appellant has to explain why he got the benefit and, in this particular case,
he was unable to do so. He merely said that it was an error. He did not say, "it
was my money, I was entitled to it", but he said "I got it in error.
It was just confusion on my part. I was in a bad state of affairs. My wife was
injured. I was not a good bookkeeper. I did not keep a chequing journal. I did
not keep an income journal. I did not realize that it was happening until I
went to get my year-end financial statements done, which was some considerable
time after the money had come out" consequently, it was merely an error
that he should not be held responsible for.
[68] That argument does
not hold water as far as the Court is concerned. The Court is satisfied on the
evidence that the Appellant knew what he had done. He knew that the money was
the company's. He knew when the money was received. There is no explanation as
to why he had any confusion about the cheques when they came in, and the Court
is surprised that he was not able to explain to the Court exactly what the
process was, when the cheques came in and when the cheques were recalled and why
he was issued two new cheques.
[69] There can be no
doubt that when he received the money he must have known that it was the
company's money. He must have known that the money should have been deposited
to the company's account. He must have known that he was not putting it in the
company's account, that he was putting it into his own account. He continued on
until the end of the whole process, even today, and made no corresponding
adjustment in the books of the company at any point in time to show that this,
indeed, was an error, a mere bookkeeping error. In other words, he did nothing which
would show that he acted consistently with his avowed belief that this was an
error and that he did not know this had taken place.
[70] The Court is
satisfied beyond any doubt that he knew exactly what was going on and that when
the money was put into his own account he knew what he was doing. He put part
of the money into his own account and part into the company's account. He must
have known at that point in time that this was not correct. The Court does not
know what was in his mind when he was doing it. The Court is not attributing
any other motive to him, whether he needed the money or whether there was some
other reason why he did it, but the point remains clear that he did it. He must
have known that he was doing it and when he did it he knew that he was taking
money that belonged to the company and was using it for his own purposes. At
that there can be no doubt.
[71] If there was any
doubt about that, the fact that two cheques were deposited at the same time and
one amount was put in the company's account and one was not, dispels that. That
cannot be put down to mere carelessness, lack of knowledge, or lack of
bookkeeping skills or advice given by accountants.
[72] The actions which
gave rise to this case here were not the actions of the accountant as in Findlay, supra. In Findlay, it was the
bookkeeper's fault as the facts disclose. It was not Mr. Findlay's fault. The
Trial Court, at that particular time, found that the actions of the bookkeeper
amounted to gross negligence, and the Court attributed those grossly negligent
actions to the Appellant himself, the taxpayer, but the Appeal Court said that under the
circumstances, that gross negligence of the accountant was not that of the
taxpayer.
[73] In this particular
case we do not have that at all. Nobody is arguing that the bookkeepers did
anything wrong. As a matter of fact the Appellant himself when he was on the
stand said that the bookkeepers did not do anything wrong, they did not know
about it. He was not trying to cast blame on the accountant or saying that he
was at fault for all of this. He was merely saying that it was due to his
personal problems at the time and due to the fact that he was unsophisticated
in bookkeeping matters, that he was a little slack in what he was doing and that
he did not pay enough attention to what he was doing. That was his explanation.
[74] The Court agrees
with counsel for the Respondent that each case must be decided on its own
facts. In this particular case when you look back at Chopp, supra
and cases of that nature, those were cases where the taxpayer did not really
have the necessary knowledge. In Findlay, supra, where the bookkeeper made the
error the Court was not prepared to attribute the error of the bookkeeper to
the taxpayer. Sometimes if the error is so glaring and the amount is so large
in relation to the amount of money earned by the corporation, or the facts are
of such a nature that it would be almost impossible for the Appellant not to
know that the bookkeeper made a mistake, the gross negligence of the bookkeeper
can become the gross negligence of the taxpayer. But that is not the case here.
This case is entirely different.
[75] It is significant
that in the present case only the Appellant himself, Dr. Poushinsky,
handled the cheques. He was the one that deposited them. He was the one that
saw them. He was the one who knew what they were about. He was the one that
knew that one of the cheques was deposited in the company's accountant and one
was not. He was the one that knew that he used the money for his own purposes.
He was the one that did not tell the bookkeepers about it. He was the one that
signed the financial statements at the appropriate period of time without
advising the bookkeepers that these amounts were improperly not included in the
company's income. He is the one that at the end of the day, and even up to
today, took no corrective action whatsoever to set the record straight.
[76] The Court can only
conclude that he knew exactly what he was doing and, if he did not know, then
he should have known what he was doing. It is satisfied that he actually knew
what he was doing at the time when he used that money and put the money in his
own account.
[77] Both cheques were
issued at the same date. Both cheques were deposited the same date. He knew
that the money that was coming in was money which was owing on a contract,
which was owned actually by the corporation even though he had signed it
himself. He knew that was the company's work and he knew that was the company's
money. His explanation is insufficient as far as the Court is concerned.
[78] With respect to the
benefit, of course, the Court has said that there is no doubt that he had a
benefit. He received the benefit himself. The Court is satisfied with that,
that he knew that he received a benefit and he used the money for his own
purposes so that the Court is satisfied that during the year in question the
Minister was right to add the amount to the Appellant's income as a benefit
conferred by the company.
[79] With respect to the
question of gross negligence, the Court looks at the definition of gross
negligence, which was set out in Findlay, supra, and applying that
definition to the factual situation in the case at bar, the Court is satisfied
that the Minister was right to apply the penalties, that the actions of the
Appellant in this case did amount to gross negligence.
[80] The Court is
satisfied that the actions of the Appellant in this case must be taken to have
involved greater neglect than simply a failure to use reasonable care. It is
satisfied that it involved a high degree of negligence tantamount to
intentional acting or at least a wilful indifference as to whether or not the
law was complied with. The Court can come to no other conclusion based upon the
evidence than that the Appellant knew what he was doing when he did what he did
and he was not even himself trying to pass the blame on to anybody else when he
acted as he did. The Court is satisfied that his actions did amount to gross
negligence under the circumstances and that the Minister was entitled to apply
the penalties.
[81] Consequently, the
Court will dismiss the appeal and confirm the Minister's assessments.
[82] The Court is
satisfied that the Minister had the duty of establishing on the balance of probabilities
that these penalties should be applied, and the Court is satisfied that the
evidence taken in total, including the evidence of the Appellant himself and
the other evidence, is more than sufficient for the Court to conclude that the
Minister has met this burden. The appeal is dismissed and the Minister's
assessment is confirmed.
Signed at New Glasgow, Nova Scotia this 9th
day of December 2005.
Margeson
J.