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Citation: 2003TCC408
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Date: 20030617
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Docket: 2002-4803(IT)I
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BETWEEN:
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ROBERT MADLENER,
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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
Miller J.
[1] Mr. Madlener filed nil returns in
1993 and 1994, and reported $290 of interest income in 1995. As a
result of an investigation by Canada Customs and Revenue Agency
(CCRA) of Mr. Madlener's and his father's affairs, the
Minister of National Revenue (the Minister) ultimately reassessed
net business income/(loss) in the amount of ($1,224), $19,271 and
$28,787, respectively, for Mr. Madlener's 1993, 1994 and 1995
taxation years. The Minister also assessed penalties pursuant to
subsection 163(2) of the Income Tax Act (the Act).
Mr. Madlener appeals the reassessments by way of the
informal procedure, maintaining he had no business income in the
years in question. Mr. Madlener was unable to prove that he
had no business income.
[2] Mr. Madlener clearly had what
might commonly be called a "run-in" with CCRA. He spent
the first hour of his testimony describing in considerable detail
the many encounters with CCRA, starting in 1998 (three years
after the years in issue), with representatives of CCRA, Mr.
Wayne Culp in particular. The seizure of his records by several
CCRA officials, escorted by the Royal Canadian Mounted Police,
was an unsettling initial exposure to CCRA. The length of time it
took for him to retrieve his records from CCRA was also clearly
an annoyance to Mr. Madlener. While it is not difficult to
imagine how a taxpayer might react negatively to an
investigation, such subsequent events, in this particular case,
were of no probative value regarding the issues before me. Mr.
Madlener did eventually get all his records back. Now, with those
records, he is still unable to prove he had no business
income.
[3] Mr. Madlener had been a small
business operator for some years prior to 1993. He had dabbled in
a number of enterprises. During the years in question he was
involved with three businesses; first, a disc jockey service (DJ)
known as Twilight Sounds; second, a security services business in
connection with his father's company, Door & Jamb
Security Can Ltd. (Door & Jamb); and third, the sale of
computer-related items. In connection with the DJ business,
Mr. Madlener maintained that it was carried on by his
numbered company. The registration of the trade name, Twilight
Sounds, was in Mr. Madlener's name personally. No
corporate records were provided in the form of invoices,
receipts, ledgers, financial statements or anything at all to
support a corporate involvement.
[4] With respect to the security
systems business, the evidence was unclear as to exactly how Mr.
Madlener operated. He was involved with the sale of a product
known as Bolt Buddies, though the exact relationship with Door
& Jamb was sketchy, especially as to how Mr. Madlener was
paid. There was sufficient evidence to conclude however that
some, if not all, payments in connection with this business were
received by Mr. Madlener personally. He maintained the payments
were also made on a corporate basis, though again no ledgers or
records were provided to support this contention.
[5] Mr. Culp, the CCRA investigator,
shed some light on Mr. Madlener's activities. CCRA's
review of Door & Jamb's officers, along with a review of
Mr. Madlener's books, which Mr. Culp described as
inadequate, led him to the conclusion that sales were simply not
accounted for. According to Mr. Culp,
Mr. Madlener's general ledger for Twilight Sounds,
reflected accurately invoices in and out of Twilight Sounds'
bank account, yet Mr. Madlener had several other bank
accounts whose activities were not reflected in any ledger.
Twilights Sounds' ledger was not produced.
[6] CCRA ultimately made a proposal to
Mr. Madlener in February 1999, reflecting an inclusion in income
of unreported sales over the three years in question. No
agreement was reached, and Mr. Madlener was assessed on the basis
of revenue and expenses as set forth in Schedules 'A',
'B' and 'C' attached.
[7] Mr. Madlener provided a summary
sheet at trial refuting several of CCRA's calculations. He
specifically made 10 claims:
First:
$12,561.87 of what CCRA included in unreported income,
Mr. Madlener claimed was a loan from the Royal Bank. Mr.
Culp confirmed that such amount had not been included in Mr.
Madlener's income.
Second: $19,544.95
represented insurance claims, according to Mr. Madlener. He
provided a list of the various claims over the three years. Mr.
Culp confirmed that approximately $17,000 of that total was
acknowledged to have been insurance claims and had not been
included in income. The balance had not been proven by receipts
or other supporting documentation. No further documentation in
support of this difference was produced at trial.
Third:
Mr. Madlener claimed there had been a family loan of $6,000, of
which CCRA had only acknowledged $3,000. Mr. Culp confirmed that
none of the full $6,000 had been included in income.
Fourth: Mr.
Madlener claimed agent payments of approximately $36,000. This
was in connection with the sale of Bolt Buddies, the security
system business in Door & Jamb. Mr. Culp confirmed that
wherever CCRA could match payments with Mr. Madlener's
records, credit was given to such payments, even though there was
no further corroboration.
Fifth:
Mr. Madlener calculated there were $7,811 worth of legitimate
expenses that were disallowed. He provided a listing of such
expenses. Mr. Culp went through the list and confirmed the
expenses had in fact been allowed, notwithstanding the lack, in
some cases, of supporting materials.
Sixth:
Mr. Madlener indicated that $9,165 of receipted expenses were
similarly not allowed. It appeared these expenses were related to
a potential Bed and Breakfast venture, in which Mr.
Madlener's wife had some involvement. Mr. Madlener provided
correspondence from a law firm in 1993 confirming their advice
had been sought by Mr. Madlener in regards to a development
permit. No further evidence was given as to the actual operation
of the Bed and Breakfast.
Seventh: Mr.
Madlener produced a summary of bank interest, municipal taxes and
legal expenses totalling $35,244. It was unclear exactly what
this related to, although there was some suggestion it was in
connection with the Bed and Breakfast.
Eighth:
With respect to telephone expenses, Mr. Madlener claimed he was
not given recognition for $1,462 of expenses. Mr. Culp explained
that credit was given for all telephone expenses in the name
Twilight Sounds, but none in Mr. Madlener's personal
name.
Ninth:
Mr. Madlener claimed there were discrepancies of $1,794, which he
simply referred to as Mr. Culp's mistakes. This appears to
pertain to the doubling up of invoices for Mr. Madlener's
disc jockey business. Mr. Madlener maintained that he would
record phone messages in his receipt book about an upcoming gig,
indicating his fee, but then would issue the actual fee receipt
later. Mr. Culp viewed these receipts as representing the
down payment and final payment. According to Mr. Madlener
this resulted in the doubling up.
Tenth:
Mr. Madlener claimed computer expenses of $2,648. These were
denied, as Mr. Culp indicated they appeared to pertain more to
the reasonable costs of a home computer than in connection with
any business of computer-related sales.
[8] Mr. Madlener's evidence was
that he did not prepare his own tax returns but simply took his
ledger to his accountant to do the returns. The only returns in
evidence were Mr. Madlener's personal returns for 1993, 1994
and 1995. In two of those years, the only entries were nil
entries leading to a nil return. In one return, interest income
of $290 was recorded. Mr. Madlener signed all three returns.
There was no evidence of any corporate returns.
[9] This case is simply driven by its
facts. The first question to be determined is whether Mr.
Madlener carried on business personally, or through the auspices
of a corporate entity in 1993, 1994 and 1995. I was presented
with no evidence of corporate books or accounts, no corporate
financial statements, no corporate tax returns. Some receipted
expenses that were allowed to Mr. Madlener, were in the name
of Door & Jamb, Mr. Madlener's father's company. Mr.
Madlener made no suggestion that he carried on business under
that corporate entity. While Mr. Madlener stated that Twilight
Sounds was a trade name of his numbered company, the only
evidence was that the registration of the trade name was in his
name personally. I have not been persuaded by Mr. Madlener
that any business carried on by him in 1993, 1994 and 1995 was
other than carried on personally.
[10] The next question to address is what
were Mr. Madlener's business income and losses for 1993, 1994
and 1995. The Respondent states, as set forth in Schedules
'A, 'B' and 'C', that the income and losses
were ($1,224.46), $19,271.91 and $28,787.54, respectively. Mr.
Madlener says the income and losses were zero, though his
assertion in that regard was based on his view that a company
carried on the business. Yet, as already indicated, he provided
no information to show any corporate income or losses. Indeed, he
provided a "Summary of Non-Income and Expenses" in
which no mention was made of a company, and in which Mr. Madlener
attempted to justify his assertions of no income or loss. These
were the ten items alluded to earlier. I accept completely Mr.
Culp's explanation of items 1, 2, 3, 4, 5, 8, 9 and 10. These
are all items for which Mr. Madlener had already been given
credit or for which Mr. Culp's explanation was a full,
reasonable and acceptable explanation.
[11] With respect to item 6, which appeared
to be expenses related to a possible Bed and Breakfast venture,
Mr. Madlener offered no credible explanation of whether that
operation was carried on in 1993, 1994 and 1995. The evidence he
tendered suggested it might be a possibility, but nothing more.
There was no evidence of income, let alone the production of any
plan or anything at all that might suggest he was operating a Bed
and Breakfast business personally in 1993, 1994 and 1995.
[12] With respect to item 7, Mr. Madlener
presented a summary of tax, interest and legal costs. No
supporting material was presented to confirm these numbers, and
further no adequate explanation was given as to which business,
if any, they related. I do not accept they represent legitimate
business expenses.
[13] Mr. Madlener's evidence was not
credible. He professed to being a small businessman for many
years, but purported to not understand the significance of filing
in nil income tax returns. He claimed to have run businesses
through a corporation, yet provided no evidence whatsoever of a
corporate operation. He was indignant about his treatment at the
hands of CCRA after 1998, and apparently bewildered that I could
be more interested in his income in 1993, 1994 and 1995. His
actions and his words do not support his contentions. This leads
to a consideration of the penalties imposed pursuant to
subsection 163(2).
[14] Subsection 163(2) reads, in part, as
follows:
163(2) 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 of the greater of $100
and 50% of the total of
(a) ...
[15] In filing nil returns, did Mr. Madlener
know the statements therein were false? I am satisfied the Crown
has proven that Mr. Madlener did know the statements were false.
He was in business in 1993, 1994 and 1995 - he knew he had
business revenues. He professed to some belief, though I am not
convinced even on this point, that his expenses may have exceeded
those revenues. However, the tax returns are very clear that
gross and net income are to be reported. He did neither. He knew
what he was doing. In filing the returns as he did, he is clearly
caught by subsection 163(2).
[16] For these reasons, I dismiss Mr.
Madlener's appeals.
Signed at Ottawa, Canada, this 17th day of June, 2003.
J.T.C.C.
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