Tindall v. The Queen, docket 98-1306-IT-G

Date: 20000519

Docket: 98-1306-IT-G

BETWEEN:

PAUL TINDALL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Margeson, J.T.C.C.

[1] In computing income for the 1992 and 1993 taxation years, the Appellant deducted the amounts of $356,900.00 and $465,290.00 respectively, identified in his return as “Management and Administrative Fees” as business expenses. In reassessing the Appellant for the 1992 and 1993 taxation years, the Minister of National Revenue (the “Minister”) disallowed the amounts claimed and also imposed late filing penalties in the amounts of $6,359.94 and $26,278.73 in respect of the 1992 and 1993 taxation years respectively, pursuant to subsection 162(1) of the Income Tax Act (the “Act”).

[2] The Appellant appealed this assessment on the basis that the expenses were deductible and that penalties should not have been levied.

[3] Exhibits A-1 and A-2 were introduced by consent with the exception of Tab 8 in Exhibit A-1 which was to be disregarded. All of the documents were subject to weight.

[4] Clifford Paul Tindall was a management consultant and a pilot. He was appealing the 1992 and 1993 taxation years. He identified Tab 7 of Exhibit A-1 as his T1 general income tax return for 1992, as filed. He identified the statement of income found in the same exhibit and indicated that he claimed expenses of $711,833.04. In that amount was the sum of $356,900.00 as management and administrative fees. This amount was in issue in this case.

[5] In the year 1992 he was a financial advisor involved in marketing to prospective clients and existing clients in the mutual fund and stock fields. He was also involved in real estate investments. He marketed to clients through seminars, meetings and quarterly reviews. Most of his investors were attracted through seminars that he held. With respect to the real estate portion of his business, it mostly involved selling units in these projects to investors.

[6] He said that Tim Clark structured the investments and made representations to his clients. In other words, he tried to convince people to invest through the Appellant.

[7] The Appellant learned about Tim Clark through an article that he read. He believed that it would be a good idea to get Tim Clark involved in assisting him in selling his real estate projects. He said, “We were basically partners. It was a good fit.” He paid Tim Clark the fees in issue. Tim Clark also helped him sell by meeting with him and his clients.

[8] He referred to an invoice at Tab 2 of Exhibit A-1. This was an invoice from Tim Clark’s company. The figure amounted to $280,000.00 U.S. or $356,900.00 Cnd. Tim Clark provided services through this company and he was told that by Mr. Clark. He was referred to a company by the name of Mountainside Cypress Hills I Investments, Inc. referred to at Tab 3 of Exhibit A-1. He recognized the lawyer’s name. Tim Clark was a director of this company.

[9] The fees were related to investments that the Appellant sold to his Canadian clients. These services were provided to him personally. He said, “Tindall Group Inc. was my trustee and the name was used to separate my bookkeeping functions.”

[10] He was referred to Exhibit A-1 Tab 4 and he said that he paid out these amounts. He identified the Promissory Note at Tab 5 and said that this was a payment to Zeitec Financial Corp. for Tim Clark. He was told by Tim Clark to pay this invoice. He was personally liable to pay it. If he did not pay it, Tim Clark would have sued him. Tim Clark knows that this amount has been paid.

[11] The same issue was involved in the 1993 taxation year. He identified his 1993 taxation return as found in Exhibit A-1 at Tab 1. The amount of management and administrative fees in issue in that year was $465,290.00. This amount was expended with respect to his financial services and real estate business in that year. Again, he said that Tim Clark assisted him in making sales. These were fees paid to Tim Clark for services rendered.

[12] He was asked how the amounts were calculated and he said that they were based on the size of the investment. They represented a percentage of the project that Tim Clark helped him sell. If he had not used the services of Tim Clark he would not have been able to market his services and they would not have had the results that they enjoyed.

[13] Tab 9 of Exhibit A-1 was a certified cheque for the fees in question to Tim Clark in the amount of $465,290.00. This cheque was made out to one of Tim Clark’s company, Meadows Resources Limited. The witness said that he paid this fee through Tindall Group Inc. He admitted that Tindall Group Inc. had no sales. This amount was paid by him and he merely used this account to pay the fee.

[14] He identified the document at Tab 11 of Exhibit A-1 as the result of a corporate search on this entity. It showed Timothy Clark as a director of the company.

[15] Tab 12 of the same exhibit was his bank statement showing the amount of $465,290.00 deposited by way of certified cheque. This was deposited to the Tindall Group Inc. account.

[16] Again he said that the amounts paid in 1992 and 1993 were for services provided by Tim Clark to him to assist him in developing his business. If he had not obtained these services he could not have produced the income that he reported on his returns.

[17] In cross-examination he said that his business was to offer tax and planning advice to his clients. He was also registered with the Ontario Securities Commission to sell investments. There was over 100 million dollars in investment money entrusted to him. He was also one of the top producers according to Fortune Financial Corporation Report. He admitted that in the year 1992 he had gross business income.

[18] He identified the document at Tab 5 of Exhibit R-1 showing income of $711,833.04. He also identified the financial statements for his business. He indicated in the financial statements that he paid management and administrative fees of $356,900.00 which was approximately 50% of the gross for the year 1992. It showed total expenses of $859,602.83. He admitted that the claimed management and administrative fees for the year 1993 represented about two thirds of his gross income.

[19] Tim Clark directed him as to which company he was to pay the management and administrative fees. He directed him where to pay them and they went to companies controlled by him.

[20] It was not common practice to have these expenses shared by the investors. There are fees that clients pay but these expenses are not part of those fees.

[21] In support of his claims he produced the invoice found at Tab 2 of Exhibit R-1, which was an invoice from Mountainside Cypress Hills I Investments, Inc. He also identified the letter at Tab 3 and the note at Tab 4. The liability was to him. He only used Tindall Group Inc. “to separate the accounts”.

[22] He did not pay the Promissory Note in 1992 and he has nothing to show that it was paid. He produced the cheque found in Exhibit A-1 at Tab 9 in support of his claim for the deductions. Tab 10 was the debit notice to the bank account for the same amount. Tab 12 was in reference to The Toronto-Dominion account for Tindall Group Inc. showing a deposit of $465,290.00 and he said that he deposited this amount to the account but he did not have any documents with reference to it.

[23] He identified the document at Tab 6 of Exhibit R-1 as a request for information from Revenue Canada. Further, the document at Tab 8 of Exhibit R-1 was a further request for information. He did not respond to the earlier request contained in this letter. He said that, “I thought we responded later.”

[24] Counsel for the Respondent suggested to him that no information was given until two weeks before the trial that Tindall Group Inc. was a bare trustee. The Appellant said that he did not think that one of the requests was for information relative to Tindall Group Inc. and its bare trustee status. He admitted that there was nothing in the Notice of Appeal or the Amended Notice of Appeal about this.

[25] Again he was referred to Exhibit R-1 Tab 5 which was the 1992 income tax return. He was asked if there was any mention of Tindall Group Inc. in this return including the financial statements and he said that there was not. Again he identified the 1993 income tax return at Tab 1 of Exhibit R-1 and again confirmed that there was no mention of this company in it.

[26] In response to the Court’s question he said that he did not provide any further evidence about the payments except that he paid the invoice in question. He admitted that there was sloppy bookkeeping involved on his part even though he had an accountant.

Argument on behalf of the Appellant

[27] Counsel stated that the only issue in this case is the proof of the payment and on that matter we have the evidence of the taxpayer which was acceptable and that should be sufficient to meet the burden in this case. He referred to the case of Hickman Motors Limited v. The Queen, 97 DTC 5363 in support of his position that the Appellant had produced sufficient evidence to demolish the Minister’s assumptions. Just because documentary evidence is not available does not mean that the expenditure was not proved. The Minister did nothing to demolish the credibility of this witness. No one could find any documents at one point in time.

[28] Counsel argued that too much weight was placed upon the flow of funds. Mr. Tindall made substantial income and is entitled to the deductions which he claimed. Without the expertise of Tim Clark the Appellant would not have been able to make the income that he did. Counsel did not believe that the promissory note was of much significance. The debt was payable and in the end is deductible in the year that it is claimed since the Appellant was doing his accounting on the accrual method.

[29] Counsel argued that the Appellant made the payments, he claimed the expenses, his income was significant, he had the obligation to pay the amounts in question and he did pay these amounts. The Respondent has not introduced any evidence to show that the Appellant was not a truthful witness.

[30] The appeal should be allowed with costs.

Argument on behalf of the Respondent

[31] Counsel for the Respondent indicated that initially there were three issues but the only issue before the Court at this time is that of the deductibility of the administration fees. The first two issues have been abandoned.

[32] The Notice of Appeal was filed in May 1998 and the Appellant’s counsel had sufficient time to obtain all of the documentation.

[33] The corporation is a different entity from the individual in question here. All documents that were produced showed that all of the invoices were issued to Tindall Group Inc. There was nothing to show what the note was for. The Appellant only reported income for Paul Tindall and not from Tindall Group Inc. It is insufficient for him to say that at the end of the day the company was only a bare trustee for the Appellant. The returns for the Appellant were filed in July of 1993 and July of 1994 and the request by the Minister for further information was made in April of 1996. At that time the Appellant said that he had no knowledge of any documents in anyone’s hands. However, they should have been available.

[34] The Appellant has produced no evidence to show what the liability was for. The invoice was for one lump sum and did not set out the period that it was referrable to. In any event payment was from a company account and not from the Appellant. Further, no evidence was given with respect to the transfer of the funds. Why did he use his company’s bank account? The Minister’s assumptions were not discharged.

[35] The amounts in question should not be allowed to be deducted and the appeal should be dismissed, with costs.

Analysis and Decision

[36] In reassessing the Appellant by disallowing the expenses claimed, the Minister assumed, according to 8(d) of the Reply as follows:

these Management and Administrative fees were not incurred or, if incurred were not incurred for the purpose of gaining or producing income from a business or property

In light of that assumption it is the duty of the Appellant to establish on a balance of probabilities on evidence acceptable to the Court that the amounts alleged to have been spent were indeed spent and that the amounts so spent were spent for the purposes of gaining or producing income from a business or property.

[37] Subsection 230(1) of the Act states as follows:

Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at his place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.

It is fundamental, from even the most casual wording of this section that the duty is upon the Appellant to keep the necessary books and records which will allow the Minister to determine, in this case, whether the amounts claimed were indeed expended and whether such amounts were expended for the purposes alleged which would allow the deduction to be taken by the Appellant in the years in question.

[38] Perhaps the reason why neither counsel in their presentation or in the argument referred to this section is that it is so fundamental to the operation of the Act that the duty that it imposes upon any taxpayer is so fundamental that it need not have been referred to. However, the duty imposed upon every taxpayer by this section is to keep sufficient records so that the Minister is able to determine in any case what the extent of the income of the taxpayer is and in any case whether or not a deduction which is being sought is a proper deduction under the Act. At the end of the day the section establishes a means by which the Appellant can meet its required burden of showing that the assessment is incorrect and that the deduction sought is allowed by the statute. This section is applicable not only to corporate bodies but also to individual taxpayers such as the Appellant.

[39] The evidence makes it clear in this case that the Appellant had accounting advice and in response to questions put to the Appellant by the Court, it is clear that he was aware of this requirement. Counsel for the Appellant in his argument made this clear as well when he pointed out that the Appellant was doing his accounting on the accrual method. Further, there can be no question that the Appellant himself was conscious of the shortcomings of the bookkeeping and record keeping actions of his business be it of the facts surrounding these particular issues only or be it for his business in general.

[40] The amounts in issue in the years in question were very substantial amounts. It is almost unimaginable that a business involving the magnitude of alleged expenses and income as in this case would have been conducted without the Appellant being able to show a clear paper trail not only of what was expended, but when the amounts were expended, what they were expended for, and the basis for the expenditures so that at the end of the day the Minister would not be merely guessing as to whether the amounts sought to be deducted were proper under all of the circumstances.

[41] At the time of the assessment in this case, it is obvious that that was the position that the Minister would have found himself in and this is clearly illustrated in the letter from Revenue Canada to the Appellant on April 30, 1996 where the Minister asks pointed and specific questions with respect to the “management and administration fees”, when the Minister was reviewing the income tax returns of the Appellant for the years 1992, 1993 and 1994. There was no appropriate response to this letter and on November 26, 1996, Revenue Canada again wrote to the Appellant with respect to the management and administration fees and indicated that the Appellant had not provided sufficient details regarding the alleged deductions. Because of his failure to forward that requisite information the department indicated that it was going to refuse to allow the deductions of the amounts in issue.

[42] In that letter the department referred specifically to the fact that the Appellant had not provided any information on the payment by Paul Tindall to the Tindall Group Inc. for that company to make the payments on behalf of Mr. Tindall and that the Appellant had not provided any other evidence to support the position that the payments were in fact made.

[43] The Court is satisfied that the Minister was entitled to receive the information that he was seeking and in the absence of receiving that information the Minister was correct in making the assessment that he did at that time.

[44] In spite of the fact that the Appellant had not provided the necessary information to the Minister when requested to do so, he could still be successful at the time of trial by introducing sufficient evidence to show that the payments were made and what the payments represented. Indeed, there is no other way that the Appellant could hope to claim the deductions unless he has satisfied these two outstanding issues.

[45] The only evidence presented before the Court was the evidence of the Appellant himself, who in essence indicated that the amounts sought to be deducted were indeed paid as management fees. His evidence was that they were paid to one Tim Clark as fees for “consulting services”. The same wording is used in the invoice for these fees submitted by the company in which Tim Clark was a director. In each case the invoices were directed to the Tindall Group Inc. and not to the Appellant himself. The evidence of the Appellant was that he was directed by Mr. Clark to pay the amounts to companies named by him.

[46] During the years in question the Appellant was operating under his own name and it is under his own name that he is claiming the deductions. However, the evidence showed that it was not the Appellant who was invoiced. Further, the consulting fees were allegedly supplied to the Appellant by Paul Tindall but the invoices were not from Paul Tindall but were from companies in which Paul Tindall had an alleged interest.

[47] Further, the invoices when allegedly paid, were paid through a bank account in the name of Tindall Group Inc. and not by the Appellant himself. Again the debit notice in the account at The Toronto-Dominion Bank was in the name of Tindall Group Inc. and not the Appellant.

[48] At the time of trial the Appellant sought to explain these discrepancies by saying that the amount was paid by him but he merely used this account to pay the fees and that, “Tindall Group Inc. was my trustee and the name was used to separate my bookkeeping functions.” No further explanation was given to the Court as to what this meant and no further questions were asked about it. Therefore, those statements must stand by themselves for whatever light they may shed upon the issues involved here.

[49] Again with respect to why the amounts were paid, not to the alleged consultant, but to other entities, the Appellant’s only evidence was that they were so paid because he was directed by Tim Clark to pay them that way.

[50] As counsel for the Respondent pointed out the question of Tindall Group Inc. acting as bare trustee for the Appellant was not referred to in the Notice of Appeal nor at any time during the information seeking process.

[51] At no time during the trial was any evidence introduced to show the nature of the consultation services that were provided, there were no contracts or agreements introduced between the consultant and the Appellant to show what the fees were expended for, what was the nature of the consulting services, what was the breakdown as to the amounts expended and when during the years in question the consulting services were actually provided. Indeed, during the trial it was clear from the evidence of the Appellant himself that no such records were available and he merely put it down to “sloppy bookkeeping”.

[52] Counsel for the Appellant relied intrinsically upon the decision in Hickman Motors Limited, supra. In particular, counsel for the Appellant argued that in that case, as in the case at bar, the Appellant introduced evidence which “demolished the requisite Minister’s assumptions.” In essence counsel argued that the Appellant through his testimony proved that he had the obligation to pay the amounts in question, that he did pay these amounts and that these amounts were deductible. He took some consolation in the fact that the Respondent had not introduced any evidence to show that the Appellant was not a truthful witness.

[53] However, the issue of credibility is only one of the issues in this case. The more important issue is whether or not there was sufficient evidence introduced to satisfy the Court that the Minister’s requisite presumptions, as indicated earlier in these reasons for judgment, were demolished so that at the end of the day the Court could say that the Appellant had satisfied it on a balance of probabilities that the expenditures were made and that they were deductible under the Act.

[54] This Court is not satisfied that the case of Hickman Motors Limited, supra, offers much consolation to the position taken by counsel for the Appellant. In that case the Court was satisfied that:

...the appellant adduced evidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, the appellant “demolished” the following assumptions as follows: (a) the assumption of “two businesses”, by adducing clear evidence of only one business; (b) the assumption of “no income”, by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions: see for example MacIsaac v. M.N.R., 74 DTC 6380 (F.C.A.), at p.6381; Zink v. M.N.R., 87 DTC 652 (T.C.C.). As stated above, all of the appellant’s evidence in the case at bar remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions of “two businesses” and “no income” have been “demolished” by the appellant.

[55] In that case the Court was satisfied that since the assumptions had been “demolished” then the burden shifted to the Minister to prove that the assumptions were correct. However, in the case at bar there was no such evidence introduced by the Appellant which met this prima facie standard and certainly no evidence which met even a higher one. On the essential issues of whether or not the funds were expended and whether or not the deductions were allowable there was only the evidence of the Appellant himself which, even if it were accepted completely, would only have shown that the expenses were paid. However, due to the confusing way in which the payments were made, accompanied by any lack of believable evidence as to the true relationship between the Appellant, the Appellant’s company, the Appellant and Mr. Tim Clark and the Appellant and Mr. Clark’s companies, the Court is unable to satisfy itself on a balance of probabilities that these amounts were indeed paid.

[56] Again that is only one half of the equation and in order for the Appellant to be successful the Court would have to be satisfied on a balance of probabilities that the amounts were paid for the provision of services which were expended for the purpose of gaining or producing income from a business. To do that the Appellant would have had to introduce a paper trail showing what services were provided, when they were provided and to which projects they were actually related, in order for the Court to conclude whether or not all of them or any part of them were deductible.

[57] The same problem faced the Minister at the time that the Appellant was reassessed and the Minister gave to the Appellant all opportunity to provide the necessary information from its books and records and this was not provided. Neither was such information provided by way of books, records or any other evidence during the course of this trial.

[58] This Court is not satisfied that the Appellant has met its burden in this case.

[59] The appeals are dismissed with costs and the Minister’s assessments are confirmed.

Signed at Ottawa, Canada, this 19^th day of May 2000

"T.E. Margeson"

J.T.C.C.