Date: 20020125
Docket: 2001-1833-IT-I
BETWEEN:
JOANNE CLINE-SCHUIT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________
Agent for the Appellant: Bernard Schuit
Counsel for the Respondent: J. Michelle
Farrell
____________________________________________
Reasonsfor
Judgment
(Delivered orally from the Bench at London,
Ontario, on September 20, 2001)
Bowie J.T.C.C.
[1]
These appeals are brought from reassessments for income tax for
the 1995 and 1996 taxation years. They were conducted under the
informal procedure of the Court.
[2]
The Appellant operated a business known as "the
TaxMan". Its first year of operation was 1995. She reported
gross income of $24,800 in 1995 and $24,215 in 1996, and expenses
of $38,225.02 and $31,169.67 for these two years in connection
with that business. She apparently reported losses of $8,726.26
and $4,520.00 respectively for the two years. As the business was
a wholly-owned proprietorship, it is not obvious why she did not
claim greater losses. In any event, she was reassessed to include
unreported revenue from the business, and to disallow claimed
expenses as follows:
1995
1996
Unreported
revenue
$55,354.00
$65,875.00
Disallowed
expenses
$21,842.00
$18,528.87
[3]
These reassessments also disallowed losses that she had claimed
in connection with a rental property amounting to $8,407 in 1995,
and $5,622 in 1996, and reclassified her gains arising out of the
sale of two residential properties which she held in partnership
with another person. One of these properties was sold in 1995 and
one in 1996. She declared the gains as capital gains; the
Minister reassessed her on the basis that they were the profits
of a business. These reassessments also disallowed her claim for
what is sometimes called an equivalent to spousal credit under
paragraph 118(1)(b) of the Income Tax Act (the
Act) in 1996. Finally, she was assessed penalties of
$7,523.77 and $8,071.85 for 1995 and 1996 in respect of the
under-reporting of income.
[4]
The Appellant filed objections to these reassessments, and in due
course she was reassessed again, pursuant to subsection 165(3),
on February 26, 2001. The changes made by these reassessments
were:
(a)
She was allowed rental losses of $2,460 and $3,321 for 1995 and
1996, respectively;
(b)
Her unreported revenue from the TaxMan business was reduced in
the amounts of $48,445 and $60,640 for 1995 and 1996; and
(c)
Penalties were reduced by $7,423.77 for 1995 and $7,358.13 for
1996, to $100.00 and $713.12 respectively.
[5]
The gains arising out of the real estate sales, the disallowed
expenses of the TaxMan business and the disallowance of the
paragraph 118(1)(b) credit in 1996 remained unaffected by
these reassessments. It is from these two reassessments that the
present appeals are brought.
issues
[6]
The issues I have to decide are:
(a)
Were the gains from the sales of the two houses on income or
capital account?
(b)
What, if anything, was the extent of the rental losses sustained
by the Appellant?
(c)
Was the Appellant separated from her spouse in 1996, and so
entitled to the equivalent to married credit?
(d)
What was the Appellant's income from the TaxMan business in
each of the years? This involves issues as to unreported revenues
and as to the
appropriateness of claimed expenses in each year; and
(e)
Is the Appellant liable to penalties for failure to report all of
her
TaxMan income?
the evidence
[7]
The Appellant gave evidence, as did Mr. Bernard Schuit.
Mr. Schuit also acted as representative for the Appellant in
the presentation of her appeals. The Appellant and
Mr. Schuit were married some years ago, and they have four
children. Their evidence was to the effect that they separated in
or about 1989. There has not been a divorce, nor do they have a
written separation agreement. The Appellant lives with the four
children in what I understand to have been their matrimonial home
at 14 County Road 45, St. Thomas, Ontario. Mr. Schuit
testified that he is a consultant, and that he runs his business
from an office which is located in the basement of that house.
From time to time he sleeps on a couch in that office. They share
occasional meals, for example Sunday dinner. At other times he
has stayed with a brother, or at another house in which the
Appellant had an interest. He produced a record of his various
addresses since 1984 obtained from the Ontario Department of
Transport (Exhibit A-8). It showed him to have been
registered with the department as living at a variety of
addresses:
L2 14 County Rd 45, St. Thomas, N5R 5T5
14 County Rd 45, St. Thomas, N5R 5T5
49 Fifth Ave, St. Thomas, N5R 4C7
8 Henry
7 Cypress St, St. Thomas, N5R 1N2
NPTL 15 C6 Apt 3, St. Thomas R5, N5P 3S9
NPTL
15 Naama St, St. Thomas, N5R 1X3
77 East St, St. Thomas, N5P 2R4
77 East St, Apt 8, St. Thomas, N5P 2R4
[8]
Both the Appellant and Mr. Schuit testified that they had
not been conjugally intimate since at least 1989. Contrary
evidence was given by Paul Andres, the Canada Customs and
Revenue Agency (CCRA) assessor. He testified as to a conversation
that he had had with the Appellant in which she spoke of taking a
joint vacation with Mr. Schuit in 1996, during which they
were intimate. This evidence referred to a trip taken to Thunder
Bay by the Appellant, Mr. Schuit, and their children, where
their daughter was to enter university.
Ms. Cline-Schuit testified that they took the trip in
separate vehicles, that they had separate accommodation, and that
no intimacy took place. Mr. Schuit's evidence was to the
same effect. Their joint interests are obvious. Exhibit A-8
shows that the Ministry of Transportation recorded the Appellant
as living at Cypress Street in St. Thomas in January 1996, and at
three other addresses later in that year, all in St. Thomas.
This, of course, reflects only what Mr. Schuit has filed
with the Ministry, but it must carry some weight, as it is no
doubt an offence to give a false address.
[9]
In my view, however, the fact that the Appellant and
Mr. Schuit have not entered into a written separation
agreement, and the evidence that he works and sometimes sleeps in
the basement of the Appellant's house, calls for some
independent evidence to corroborate that of the Appellant. The
Appellant said that her husband sometimes stayed with a brother,
and that he lived from time to time at three other addresses
shown on Exhibit A-8. His evidence on this issue was
extremely vague, as was all his evidence, and all the
Appellant's own evidence. I did not consider them to be at
all credible witnesses. They were both vague in their
evidence-in-chief, and they were evasive on
cross-examination. I do not accept their evidence, to the
extent that it is self-serving, without corroboration.
[10] It would
have been a simple matter to call a neighbour, a relative or a
friend to corroborate their evidence as to residence. No one was
called, and I infer that it was because it would not have
assisted the Appellant's case to do so. I find that the
assumption that they lived at the same address has not been
displaced.
[11] I turn
now to the Appellant's gains arising out of the sale of real
property. She characterizes them as being on capital account. The
Minister has assessed on the basis that these gains are in the
nature of income.
[12] Before
dealing with the evidence I must comment on the Respondent's
pleading on this issue. The "assumptions of fact"
pleaded by the Deputy Attorney General of Canada on this issue
are:
(a)
at all material times, the Appellant had 50% interest in J &
K Enterprises (the 'Partnership'). The other partner was
Katheryn Collier;
(b)
the Partnership was in the business of buying and selling real
estate;
(c)
gains from the Partnership received in the amounts of $5,533.00
and $2,726.26 in the 1995 and 1996 taxation years respectively
from sale of properties were on account of income;
The third of these is quite evidently not a fact at all, but
the legal conclusion reached by the Minister's
representatives, which the Deputy Attorney General would now like
to have this Court affirm. I have in the past criticized this
practice, to which the Deputy Attorney General so frequently
resorts, of pleading conclusions of law as though they were facts
that the Minister had assumed. Other judges of this Court have
been critical of the practice as well. The jurisprudence has
given a special status to assumptions made by the Minister in
assessing: see Hickman Motors[1] and the cases there cited. It is important,
therefore, that the pleading of assumptions said to have been
made by the Minister in assessing be done with care, both to
ensure that what is pleaded is confined to facts, and to ensure
that what is pleaded to have been assumed by the Minister really
was assumed, and is not a creation of the drafter. Pleadings such
as the one before me tend to raise doubts as to the reliability
of the Replies filed by the Deputy Attorney General.
[13] The
Appellant testified that she entered into a partnership with
Katheryn Collier, the object of which was to purchase real
property which would be rented to produce a retirement income for
them. She said that she financed her interest by way of $34,000
in cash from the proceeds of a $60,000 mortgage which she placed
on her home. The partners purchased two houses, and resold them
at a profit. They bought a house on Barwick Street in 1994 or
1995, which they sold in 1995. They bought a house on Cyprus
Street in 1995 or 1996 which they sold in 1996. Both houses
required repair or renovation; some work was done on them before
they were sold. The Appellant testified that her partner refused
to rent the houses, and forced her to sell her interest. How she
forced her to do so was not made clear. What is clear is that the
houses were sold within a year or two of their purchase, they
were never rented, but were improved in value before resale. The
Appellant specifically stated that they looked for houses that
were rundown and could be fixed up.
[14] It is
trite that the subjective evidence of the taxpayer does not carry
much weight when the issue is whether a property is bought on
capital or income account. Added to that, as I have said above,
are the facts that the Appellant's evidence-in-chief was
extremely vague, and that she was generally evasive on
cross-examination. This, combined with her demeanour when
giving evidence, leads me to conclude that her evidence is not
reliable.
[15] The
Appellant's partner was not called to testify, nor was the
partnership agreement entered as an exhibit. One would expect
that if the Appellant's evidence were true, then her partner
would be able to corroborate it. When people enter into a written
partnership agreement, it is common that they state in it the
nature of their business. The absence of this document, and of
testimony from Ms. Collier, causes me to believe that they
would not assist the Appellant's case.
[16] The two
houses were held for a very short time, which is in itself some
indication that they were not bought to rent, but to resell.
Finally, the fact that the houses were never rented weighs
heavily against the Appellant's position. I conclude that
these two properties were in fact purchased as inventory, to be
improved and resold. The appeals fail as to this issue.
rental losses on 49 5th Avenue Triplex
[17] The
Appellant claimed to deduct, in computing her income under
section 3 of the Act, certain losses sustained in
connection with a rental property. The losses were $8,407 and
$5,622 in 1995 and 1996, respectively. On the evidence of the
Appellant and her husband, it is clear that Mr. Schuit and a
Mr. Don Perry owned the house at 49 5th Avenue, St. Thomas,
in equal shares. The house was rented, and the rents were
apparently less than the expenses each year. The evidence of the
Appellant and her husband was to the effect that when they
separated, he gave to her his interest in the house. However, it
emerged in cross-examination of the Appellant that
Mr. Schuit's agreement with Mr. Perry precluded
Mr. Schuit from transferring this property without
Mr. Perry's consent, and that Mr. Perry refused to
give that consent. The Appellant stated that she took over the
running of the property, making repairs, collecting the rent, and
doing all the things necessary for a landlord to do. She may have
done so, but this does not make her the owner, entitled to profit
and liable to loss. She at no time acquired title to the
property, or a share of it. Nor did she become a partner with
Mr. Perry in ownership of the house. On this issue, too, I
disbelieve the Appellant. Her evidence was conflicting, and
Mr. Perry was not called to corroborate it. The appeals fail
as to this issue.
[18] I turn
now to the matter of the income of the Appellant's TaxMan
business. Both the Appellant and her husband, who assisted her in
setting up this business, admitted in their evidence that the
TaxMan financial records were inadequate in 1995 and 1996. Of
this there can be no doubt. As I understand the Minister's
approach to estimating the gross income, it was to take
CCRA's record of the clients for whom returns were
e-filed by the Appellant, and to add to that each of the
names on the Appellant's deposit books as having paid amounts
which were deposited at the bank, and for whom no e-filed
return was recorded - the assumption being that they were
manually filed. The assessor then applied an average fee per
return to arrive at a figure for gross sales. In the absence of
any proper books and records, I know of no better way for the
Minister of National Revenue to proceed.
[19] The
Appellant's representative said that all returns done by the
TaxMan business were e-filed, but that is obviously not so.
Two documents were produced by the Appellant which were given to
the auditor early in his audit to show the gross income of this
business. They are simply scribbles of numbers on the page. The
Appellant testified that she was not experienced in business in
1995 and 1996; clearly she had no training in how to keep books.
Her husband apparently attempted to set up some kind of record
keeping system, or at least so he said in his evidence. However,
for the years in issue no sales journal was kept, nor was there
an accounts receivable ledger, although at least some of the
business was done on credit rather than for cash.
[20] The
Appellant and Mr. Schuit were clearly uncooperative with the
assessor. They resisted producing what few records existed. As
the audit proceeded, and later in negotiation with the CCRA
appeal's officer, they appear to have produced some
information derived from the Appellant's records. No original
books or records were put in evidence on the hearing of the
appeals however. One book was produced, which the Appellant's
agent submitted should lead me to conclude that the Appellant had
declared more gross income than she received in 1995, and only
slightly less in 1996. This book was prepared, he said, by a
clerical person from the copies of original invoices kept on file
by the Appellant at some time during the year 2000. The invoices
were not entered as exhibits, nor was the clerk in question
called to verify the entries in the book. It apparently was given
some credence during the Appellant's negotiations with
Revenue Canada. Unproven as it is, however, I find it to be of no
probative value.
[21] Much of
the debate over the gross revenues of the TaxMan business centred
on the question of the number of people and businesses for whom
returns were prepared in 1995 and 1996. The Appellant in those
years was occupied largely with other work, and with her family
responsibility. The business was, for the most part, carried out
by other people, whom she referred to as subcontractors. There
was no system of double entry bookkeeping in place, and few of
the normal business records one might expect to find were kept.
There is no documentary evidence, no records kept
contemporaneously, and no credible oral evidence before me which
could, on even a generous interpretation, displace the
Minister's assumptions as to the gross income. Had there been
proper records, then it would have been an easy matter to
ascertain the year's gross sales. As it was the auditor,
faced with virtually no reliable records and little or no
cooperation, made an estimate of the sales, which he admitted in
evidence that he knew to be high. That this is so is borne out by
the very substantial reductions to the unreported income which
were made by the second reassessments on February 26, 2001. The
Minister at that time assessed on the assumption that the
Appellant had failed to report $6,909 in sales for 1995, and
$5,235 for 1996. The Appellant's representative attempted to
argue that the Minister had included sales in 1995 that did not
take place until 1996, and that there were receivables that were
never collected.
[22] Turning
now to the expenses disallowed, the Appellant testified, with
refreshing candour, that she did charge personal expenses against
the income of the TaxMan business, even though she knew that she
ought not to do so. The expenses disallowed were $21,842 in 1995
and $18,528 in 1996. The Appellant made no attempt to justify
these as business expenses, except as to interest charges. The
interest disallowed in 1995 was $9,239, and in 1996 it was
$6,858.
[23] No
documentary evidence at all was introduced to support the claimed
interest expense. The Appellant testified that she borrowed
$60,000 by mortgaging her home, and that $34,000 of it was used
as her contribution to the partnership with Ms. Collier, and
some unspecified amount to put an addition on her house which was
used for the TaxMan business, and for Mr. Schuit's
consulting business. There is no evidence of the terms of the
mortgage or the amount of interest paid on it. A substantial
amount of the claimed interest expense was in fact credit card
interest on credit card accounts used for personal purchases.
Again, the Appellant has led no evidence from which even an
educated guess might be made as to how much interest, if any, was
paid in respect of borrowed money used for the purpose of gaining
or producing income. The appeals fail on the issue of disallowed
expenses.
[24] The final
item to be dealt with is the penalties. These were reduced,
following the objection, to relatively modest amounts. The
Minister seeks to support them on the basis that the Appellant
was grossly negligent in understating her sales for each year
under appeal. The Appellant is well educated, and is certainly
not naive. She entered into a business wherein she holds herself
out to the public as being capable of giving advice in tax
matters, and of completing income tax returns for customers. She
conducted this business without any proper system of bookkeeping
in place from which to compute her own income. She admitted on
cross-examination that her records were inadequate.
Clearly, she must have known that her returns, prepared without
proper records, were unlikely to be accurate. The returns, she
said, were prepared by members of her staff, and she herself
reviewed them before they were filed. She knew that there were
personal expenses that had been charged against her business
income, and I draw the inference from this fact, and from the
absence of proper records, that she was reckless, at best, in
signing and filing her returns. Her conduct certainly amounts to
gross negligence within the well-known meaning of that
phrase as it has been interpreted in Venne v. The Queen,[2] and many other
cases.
[25] The
Appellant's representative attempted to argue before me that
the Appellant is entitled to carry forward certain
non-capital losses from prior years to the years under
appeal. Exhibit A-7 is yet another handwritten document,
which is said to be the Appellant's calculation leading to
the conclusion that she has a loss carry-forward balance of
$25,624.53 as at the end of 1994. Once again, there is no
credible evidence that has been adduced to support this
assertion, and I can make no finding as to the balance, if any,
available to the Appellant.
[26] I cannot
leave this case without commenting that much of the
Appellant's difficulty in respect of these assessments
obviously derives from her misplaced reliance on her husband and
representative, Mr. Schuit. By his own admission, he was
responsible to a very large extent for the absence of any
sensible system of record keeping for the TaxMan business. People
in business who do not keep the records that section 265 of the
Act requires must expect to be greeted with some
scepticism when they attempt to explain in oral evidence matters
that should be properly recorded in books of account. This
difficulty was compounded for the Appellant when she chose to
have Mr. Schuit represent her as her agent before the Court.
As the hearing progressed, it became more and more obvious that
he has neither the knowledge nor the skills required to represent
people in legal proceedings. His performance embodied the adage
that a little knowledge is a dangerous thing; a fortiori,
a very little knowledge is a very dangerous thing. None of this,
however, relieves the Appellant of her responsibility to keep
proper records and file honest and accurate returns.
[27] The
appeals for 1995 and 1996 are dismissed.
Signed at Ottawa, Canada, this 25th day of January, 2002.
"E.A. Bowie"
J.T.C.C.
COURT FILE
NO.:
2001-1833(IT)I
STYLE OF
CAUSE:
Joanne Cline-Schuit and
Her Majesty the Queen
PLACE OF
HEARING:
London, Ontario
DATE OF
HEARING:
September 18, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge E.A. Bowie
DATE OF
JUDGMENT:
September 24, 2001
APPEARANCES:
Agent for the
Appellant:
Bernard Schuit
Counsel for the
Respondent:
J. Michelle Farrell
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
Email this Content