REASONS
FOR JUDGMENT
Favreau J.
[1]
This is an appeal from reassessments dated June
10, 2014 made under the Income Tax Act, R.S.C. 1985, c.1 (5th
Supp.), as amended (the “Act”) by the
Minister of National Revenue (the “Minister”) with respect to the appellant’s
2006, 2007, 2008 and 2009 taxation years.
[2]
By way of the reassessments, the appellant’s net
income was increased as follows:
2006:
$16,039
2007:
$21,686
2008:
$16,810
2009: $19,767
[3]
As a result of the reassessments, the net tax
increases and penalties were as follows:
|
2006
2007
2008
2009
|
Federal Tax
(net)
$2,041.55
$2,716.01
$2,105.00
$2,475.50
|
Penalty under
subsection 163(2)
$1,257.78
$1,600.01
$1,273.93
$1,461.18
|
[4]
In order to establish the reassessments at
issue, the Minister relied on the following assumptions of fact, as set out in
paragraph 15 of the Reply to the Notice of Appeal:
a.
In her income tax returns for the taxation years
under appeal, the Appellant declared the following income:
|
|
2006
|
2007
|
2008
|
2009
|
|
T4 Earnings (from
Valsol)
|
−
|
$6,500
|
$12,800
|
$19,600
|
|
Interest income
|
−
|
−
|
$ 105
|
−
|
|
Employment
insurance benefits
|
$ 413
|
−
|
−
|
−
|
|
Other income
|
$ 11,500
|
$ 7,850
|
−
|
−
|
|
|
|
|
|
|
b.
At all times during the taxation years at issue,
the Appellant was the sole shareholder of 9119-5594 Québec inc. (hereinafter,
“Valsol”), which operated under the name “Valsol”;
c.
Valsol’s commercial activities consisted mainly
in the importation and the wholesale of chemical products, primarily barrels of
perchloroethylene, as well as the wholesale of various construction materials;
d.
During the taxation years under appeal, Valsol
had only two employees: the Appellant and her spouse, Mr. Valentine Brinza;
e.
The Appellant was in charge of creating
invoices, paying suppliers and preparing deposit slips;
f.
The Appellant performed these limited tasks from
her personal residence, where she also received Valsol’s mail;
g.
The use of the Appellant’s residence for business
purposes was negligible;
h.
All of Valsol’s accounting was performed by the
company’s accountant;
i.
Mr. Brinza was a salesperson for Valsol;
j.
Valsol did the vast majority of its business
with a limited number of customers: Excellent Plastique/Les Emballages Driathi,
Suprême Cintres et Produits, and Groulx-Robertson Ltée.;
k.
During the taxation years under appeal, Valsol’s
inventory was warehoused at “Transport Piché” in Anjou, Québec;
l.
“Transport Piché” also performed Valsol’s
inventory periodically;
m.
All of the inventory acquired by Valsol was
shipped directly to its warehouse;
n.
All of the inventory sold by Valsol was either
picked up by its customers at its warehouse or shipped by “Transport Piché”;
o.
Valsol claimed the following expenses, which
were disallowed following an audit of Valsol and confirmed on objection:
|
Taxation
year ended
|
2006-12-31
|
2007-12-31
|
2008-12-31
|
2009-12-31
|
|
Vehicle expenses
|
$3,428
|
$5,443
|
$7,290
|
$9,354
|
|
Telephone and
communications
|
$2,100
|
$2,125
|
$1,974
|
$2,837
|
|
Office expenses
|
$2,925
|
$2,381
|
$ 515
|
$1,832
|
|
Utilities
|
$1,059
|
$1,149
|
$1,131
|
$1,315
|
|
Business taxes,
licenses and memberships
|
$1,709
|
$6,792
|
$5,499
|
$3,435
|
|
Repairs and
maintenance
|
$1,579
|
$1,090
|
$ 401
|
$ 993
|
|
Rental expenses
|
$3,240
|
−
|
−
|
−
|
|
Travel expenses
|
−
|
$2,706
|
−
|
−
|
|
|
|
|
|
|
p.
All of the amounts listed above, and which were
disallowed to Valsol represent personal expenses of the Appellant which were
paid for by Valsol;
q.
The majority of the expenses to Valsol were
related to the Appellant’s personal residence located at 478 de Courchevel
Street, in Laval, Quebec;
r.
The Appellant purchased said residence on June
4, 2004 and sold it on December 23, 2008;
s.
The Appellant contracted a hypothec on said
residence, and made weekly mortgage payments of $258.20, or approximately
$13,426 per year;
t.
The Appellant had renovations performed on her
home in 2006, 2007 and 2008;
u.
For Valsol’s years ended December 31, 2006,
2007, 2008 and 2009, Valsol’s balance sheet did not reflect any due to
individual shareholders;
Vehicle expenses
v.
With respect to expenses claimed by Valsol as
vehicle expenses, the vast majority of the journal entries in Valsol’s books
represent payments to various credit cards which were used for personal
purchases;
w.
One entry in Valsol’s books under vehicle
expenses for 2006 is for a cheque in the amount of $2,000 made out to the
Appellant;
x.
The other expenses claimed as vehicle expenses
pertain to three vehicles: a 2002 Toyota Camry, a 1998 Honda Civic and a 2006
Volvo S40, which were not used by Valsol for the purposes of gaining income;
y.
Valsol did not require the use of a motor
vehicle to generate income from its business;
z.
Valsol, the Appellant, or Mr. Brinza did not
keep log books pertaining to the use of their vehicles;
Telephone expenses
aa.
With regards to telephone expenses, Valsol
claimed as expenses all of the Appellant’s residential telephone charges and
long distance calls, and all of Mr. Brinza’s personal cellular telephone bills;
Office expenses
bb.
Office expenses claimed by Valsol include, inter
alia, credit card payments, purchases made at the Société des alcools du
Québec, Wal-Mart, Home Depot, Future Shop, grocery stores, and for a
subscription to Time magazine;
Utilities
cc.
The amounts claimed by Valsol as utilities
expenses represent the full amount of the Appellant’s Hydro-Québec residential
electric bills for the home located at 478 de Courchevel Street;
Business taxes, licenses and memberships
dd.
The amounts claimed by Valsol under Business
taxes, licenses and memberships included, inter alia, personal insurance
premiums, municipal and school taxes on the Appellant’s personal residence,
payments made to the Société d’assurance automobile du Québec, a $5,000 expense
described as a ‘US fund purchase’ in 2007, and several unexplained payments to
credit cards in 2008 and 2009;
Repair and maintenance
ee.
The amounts claimed by Valsol under Repair and
maintenance expenses represent personal expenses for repairs and maintenance on
the Appellant’s residence, and other personal expenses;
Rental expenses and travel expenses
ff.
Rental expenses claimed by Valsol in 2006, and
travel expenses claimed by Valsol in 2007 were not incurred to generate
business income and benefited the Appellant personally.
[5]
In assessing the penalty provided for in
subsection 163(2) of the Act for the appellant’s 2006, 2007, 2008 and
2009 taxation years and in reassessing the appellant beyond the normal
reassessment period for the appellant’s 2006 taxation year, the Minister
considered the following facts:
a.
The facts set out in paragraph 15 of this Reply:
b.
The Appellant’s declared income for the taxation
years under appeal was clearly insufficient to pay for her basic living
expenses, let alone her mortgage payments;
c.
With the exception of her mortgage payments,
most if not all of the expenses related to the Appellant’s personal residence
were paid by Valsol;
d.
The Appellant was closely implicated in Valsol’s
affairs;
e.
The Appellant could not possibly ignore that her
personal expenses were paid for and expensed by Valsol;
f.
The Appellant deliberately omitted to include
these benefits received from Valsol in her reported income;
g.
The amounts of shareholder benefits received by
the Appellant are substantial and represent 133% of her declared total income
in 2006, 150% in 2007, 129% in 2008, and 100% in 2009;
h.
The Appellant is well-educated and holds a
graduate degree in chemical engineering.
[6]
The appellant provided the following written
answers to the Minister’s Reply to her Notice of Appeal:
1. She admits the facts alleged in paragraph 15 (a-e) of the
Reply to the Notice of Appeal.
2. She denies the facts alleged in paragraph
15(f). The Respondent’s “Assumptions of fact”, are sorrowfully, most of them,
just “assumptions”. Talking about “limited tasks performed from her personal
residence”, the Respondent would not consider, inter alia, the amount of
time spent on:
▪
ongoing research of new materials suitable for
import into Canada,
▪
finding overseas manufactures and preparing
purchase offers,
▪
preparing written conversation and legal paper
while contracting new suppliers,
▪
preparing official letters for asking samples
preparation and delivery,
▪
contacting and ongoing verbal or written
conversation with freight companies,
▪
preparing advertising flyers for the company
products on sale and/or the list of new available products,
▪
preparing mandatory Environment’s Canada reports
on commercializing dangerous solvents,
▪
researching chemical warehouse tools (i.e.
peristaltic pumps with debit meter),
▪
preparing MSDS (Material Safety Data Sheets) on
each load supplied, for Valsol’s clients,
▪
preparing the Chemical Analysis Report on each
load supplied, for Valsol’s clients,
▪
preparing lists of potential new clients by
researching different databases,
▪
preparing Valsol’s stickers – to replace the
manufacturer’s label apposed on chemical drums,
▪
preparing and up-dating the company’s logo,
business cards, envelopes and web site, etc.
3. She denies the facts alleged in paragraph 15 (g). Not only
both the Appellant and her spouse, Mr. Brinza, had each one office in the principal
place of business, but also the premise’s garage was used as business storage.
Mr. Brinza was “a salesperson for Valsol” – as referred to in paragraph 15(i)
of your Reply to the Notice of Appeal.
Among the inventory stored in the garage
there were: received liquid or solid chemical samples identified with stickers
and MSDS (material safety data sheets); tools for drums weighting (i.e.
analytical balances), special ordered tools for liquid solvents transferring
(i.e. pumps) stored on special hermetic boxes, samples of different sizes (40L
– 100L) Environmental Canada’s chlorinated solvents mandatory drums, rolls of
electrical wire; boxes of electrical brackets; etc.
To calculate the deductible part, a
reasonable basis was used:
a.
Work space area: including two offices and the
garage (400 sq. ft.),
b.
Residential home total area: (1100 sq. ft).
giving an
estimated 35% of “business-use-of-home”.
4. With respect to paragraph 15(k) – Valsol’s
inventory was warehoused at two locations:
a. “Transport Piché” – located at 8550, Ernest Cormier Street,
Anjou, Québec, H1J 1B4;
b. “RPM Transport” – located at 12705, du Parc
Street, in Mirabel, Québec, J7J 1P3.
While the warehouse located in Anjou was
used for chemical material and construction supplies storage, the warehouse in
Mirabel was exclusively used for the construction materials storage.
5. With respect to paragraph 15(1, m and n) –
the Respondent wrote on paragraph 15(c), “Valsol’s commercial activities
consisted in the importation of chemical products (…) as well as the wholesale
of various construction materials”. However, all the above-cited
paragraphs referred only to chemical product’s inventory, and omitted
completely the activities related to the construction materials inventory.
6. She denies the facts alleged in paragraph
15(o and p). The amounts listed in the prepared table were all copied by the
audit officer from the Chartered Accountant’s ledgers. All these amounts were
deducted by the accountant as “Administration expenses”.
For the audited years
2006 and 2007, the Appellant’s accountant explanation is as follows: The total
amount of all the cheques written and withdrawn under the Appellant and her
partner’s names in 2006 was: $18,500.00. Out of this amount, the accountant
applied small portions into different accounts since the business was operated
from the personal residence. The balance was debited to the loan the company
owed. Please find below the accountant’s detailed brake-down (sic):
|
Rent
|
3,240.00*
|
|
Repair and
maintenance
|
1,579.00*
|
|
Licenses and
taxes
|
1,709.00*
|
|
Selling adv.
|
1,000.00
|
|
Office
|
1,566.00*
|
|
Telephone
|
1,488.00*
|
|
Utilities
|
650.00*
|
|
Loans
|
7,268.00
|
|
|
|
Table 1:
Administration account brake-down (sic) for 2006
Note: the amounts marked with * - represent the amounts refused by the
auditor and by the opposition officer.
The exact amounts
refused by the auditors were further calculated, starting from Table 1,
as follows:
|
|
Table 1
|
DR
|
|
|
Rent
|
3,240.00
|
|
3,240.00
|
|
Repair and
maintenance
|
1,579.00
|
|
1,579.00
|
|
Licenses and
taxes
|
1,709.00
|
|
1,709.00
|
|
Selling adv.
|
1,000.00
|
|
|
|
Office
|
1,566.00
|
1,360.00
|
2,926.00
|
|
Telephone
|
1,488.00
|
672.00
|
2,160.00
|
|
Utilities
|
650.00
|
409.00
|
1,059.00
|
|
Vehicle expenses
|
|
|
3,428.00
|
|
|
|
|
|
Table 3:
Audit officer’s “Administration account” brake-down (sic) for 2006
The amounts deducted from the commercial
bank account are: $1360 – credit cards purchases, $672 – telephone invoices,
and $449 – Hydro Quebec bills.
The same technique was applied for 2007.
The total amount deducted on the “Administration expenses” account was $2,800,
and small portions out of this amount were divided, by the company’s
accountant, into three accounts, as follows:
|
Telephone
|
1,200.00
|
|
Utilities
Repair and maintenance
|
510.00
1,090.00*
|
|
|
|
Table
2: Administration account brake-down (sic)
for 2007
Note: the amounts marked with * - represent the amounts refused by the
auditor and by the opposition officer.
Thus, for the 2006 and 2007 above
described expenses, the Appellant can not provide written proofs for the
deductions, since there (sic) were not based on real bank account
withdrawals. As previously stated, the company’s chartered accountant applied
small fractions of the total amount deducted, against each above-cited account.
7. She denies
the fact alleged at paragraph 15(u). The appellant’s position is presented,
along with written copies of the deposits, on paragraph 20 of this document –
under the chapter: “Offsetting of shareholder loan account against benefits”.
Vehicle expenses
8. She denies
the facts alleged in paragraph 15(v). The commercial credit cards were
primarily used for gas/diesel purchase and were considered under the “vehicle
expenses” category of the journal entries. Moreover, if the commercial credit
cards purchases were considered as intended for personal purposes, the balance
was paid out from personal accounts (Exhibit A).
For 2006, the amount refused in “Vehicle account” (i.e.
$3,428) represent the sum of four expenses:
a.
One cheque of $2,000 (i.e., erroneous entry) –
please find below the explanation (Paragraph 10);
b.
The balance, $1,428, represent three credit card
payments: gas/diesel purchase, “Meals and entertainment”, “Business gifts” and
“Repair and maintenance” accounts (Exhibit B). Please note the merchandise
purchased at Reno-Depot was returned and reimbursed.
9. For the subsequent audited years, a close examination of
the accountant’s ledgers shows also, besides the commercial credit cards (sic)
amounts, others (sic) entries as: car maintenance/repair, and/or
erroneous entries (Exhibit B).
|
|
2007
|
2008
|
2009
|
|
Automobil
Paille
Mecanique
Edmond
|
439.85
681.99
|
|
|
|
JT
BB Automobile
JT
BB Automobile
Expedex
Transport
Mecanique
Jean Talon
|
|
358.17
139.86
88.49
665.96
|
|
|
Reicar
Inc.
Minister
of Revenue
Minister
of Revenue
Airplane
ticket
International
C
|
|
|
573.18
405.07**
100.08**
1754.68**
41.54
|
|
|
|
|
|
Table 4: “Car and truck expenses” entries – from the accountant’s ledgers
Note: ** - represent erroneous entry
All
previous explanations could be gathered in the following table:
|
Taxation year ended
|
2006
|
2007
|
2008
|
2009
|
|
Vehicle expenses (CRA)
|
$ 3,428
|
$ 5,443
|
$ 7,290
|
$ 9,354
|
|
Erroneous entry
|
($ 2,000)
($
1,290)
|
($ 2,066)
|
($ 2,882)
|
($4,535)
|
|
Car repair and maintenance
|
|
$ 1,121
|
$ 1,252
|
$ 614.72
|
|
Gas/Diesel
|
$ 138
|
$ 2,255
|
$ 3,155
|
$ 4,205
|
Table 5: Amount spent yearly on gas purchased by
two Valsol’s salespersons
Moreover, considering that about 2/3 of “Vehicle
expenses” were encountered by Mr. Brinza and 1/3 of them by Mrs. Cocos, the
calculation would give for the taxation year 2008, under $2000 for Mr. Brinza
and under $1100 for Mrs. Cocos. Moreover, considering that the amount was
claimed for the entire year, the monthly calculation would be around $160 – for
Mr. Brinza and about $100 – for Mrs. Cocos. Finally, considering the average
annual gas price in 2008 being $1.188 (Source: Statistics Canada) that
would give an average of 135 litters (sic) of gasoline bought monthly by
Mr. Brinza and about 85 litters (sic) of gasoline bought monthly by Mrs.
Cocos.
Considering the amount of sales the company made
through the objected taxation years, and considering that both the Appellant
and his partner were salespersons, it is obvious that the deducted expenses
represent only a minimal fraction of the total amount they disbursed with the
intention to generate income for the business.
In fact, if the commercial credit cards purchases were
considered as intended for personal purposes, the balance was paid out from the
personal accounts (Exhibit B).
10. With respect to paragraph 15(w), a
copy of the mentioned cheque is attached (Exhibit C). Please find also
attached a copy of the accountant’s ledgers for 2006. This will explain a
manual error entry: the $2,000 amount should have been added, by the
accountant, in the next column of the charter, along with all the cheques
written on the shareholders (sic) names.
11. Over the cited taxation years, the
company and the (sic) its two employees used only one car (i.e. the 1998
Honda Civic – in 2008, and the 2006 Volvo – in 2009) or two different cars, but
never three cars as stated in paragraph 15(x).
12. She denies the facts alleged in
paragraph 15(y). Valsol’s commercial activities consisted in wholesales (sic)
of chemical and construction products. Both the Appellant and Mr. Brinza were
salespersons. Their activities consisted, inter alia, in reaching new
clients for presenting written lists of products and/or identifying products on
demand, in contacted (sic) the established clients for samples
collection or for financial issues, tools repair and calibration, chemical
samples pick-up and transporting to laboratory for properties analyzing.
In fact, Canada Revenue Agency file entitled “Documenting
the use of a vehicle” states as follows:
The fact that a viable business exists is usually a
strong indicator that a person incurred vehicle expenses, because it is
extremely difficult to carry on a business without doing at least some
driving. Claims for a very low amount of business use do not require extensive
records to demonstrate business travel.
Telephone expenses
13. She denies the facts alleged in
paragraph 15(aa). Please find attached (Exhibit D) an example of the telephone
expenses claimed in “Telephone and Communication” account. Since the Canadian
Revenue Agency’s website didn’t, and still does not, provide straight
explanations regarding the allowed deductions of the businesses’ telephone
expenses, the calculus was based on various information regarding accepted
percentages for this deductions (sic). However, the information
retained by the Appellant is that the internet and the cellular bills should
have been under the corporation’s name.
Office expenses
14. She denies the facts alleged in
paragraph 15(bb).
a. The majority of Société des
alcools and WalMart expenses were made around the Christmas time, and on
suppliers, customers and/or bank representatives’ birthdays. On these
occasions, Valsol prepared gift baskets (i.e. bottles of wine, gourmet
chocolates and biscuits) presented with greeting cards. All these gifts
intended (sic) for a particular person or group of people within the
company should be deducted, by the company’s chartered accountant, in a
different account (i.e. “Business gifts”). A list of contacts who received
such gifts is attached (Exhibit E). Few purchases (Exhibit E) at WalMart store
represent office supplies – correct (sic) deducted in the “Office
expenses” account.
b. Future Shop purchases represent only
office expenses as: fax machine, internet modem, computer software (i.e. MS
Office), ink cartridges, etc.
c. Very low amounts were disbursed on
groceries purchases for lunches whenever the warehouse’s job required a large
amount of time spent on the premises. Both the Appellant and his (sic)
husband were actively involved in warehouse’s activities including:
▪ periodic products record and placement storage,
▪ 20 ft containers arrival check-in and barrels
downloading from containers,
▪ sampling and analyzing the chemical product properties,
▪ original stickers removal and Valsol’s stickers
applied,
▪ different capacity barrels filing,
▪ loading and unloading the construction materials,
transport and handling of the construction materials,
▪ loading the empty chemical barrels for depositing them
in recycling sites,
▪ set-up/repair/calibration of tools, etc.
Utilities
15. She denies the facts
alleged in paragraph 15(cc). The amount claimed for Hydro-Quebec as utilities
expenses represent $408.51 in 2006 and $638.95 in 2007.
Business taxes, licenses and memberships
16. Regarding the paragraph 15(dd),
please find below two paragraphs from a document saved in Valsol’s computer,
files named “Les revenues d’entreprise et de professions” published in
2008 by the provincial government:
▪
6.12.5 Primes
supplémentaires d’assurance
Vous
pouvez déduire la totalité des frais reliés à l’assurance supplémentaire pour
le véhicule à moteur que vous utilisez dans l’exercice de votre activité.
▪
6.17 Impôts fonciers
(taxes municipales et scolaires)
Vous pouvez déduire les impôts fonciers relatifs aux
biens (terrain et bâtiment) que vous utilisez pour exploiter une entreprise.
Ils comprennent les taxes municipales et les taxes scolaires, à l’exclusion de toute
partie remboursable de ces taxes. Les taxes municipales comprennent, entre
autres, les taxes d’eau, d’égout, de voirie et d’enlèvement des ordures, les
taxes propres à un secteur pour les installations ou les services publics et
les taxes de financement des municipalités ou des communautés urbaines, mais
elles ne comprennent pas les droits de mutation.
Regarding the $5,000 expense the explanation is as
follows: Valsol paid the majority of its suppliers in US funds. This $5,000
expense represents again, an erroneous entry, since this amount should have
been added in a different column of the 2007 accountant’s charter. Please find
attached the 2007 charter file (Exhibit F) for confirmation.
Explications sur les calculs du comptable – Annexe F
Repair and maintenance
17. Regarding “Repair and maintenance” expenses,
for 2006 and 2007 the Appellant can not provide any written proof, since, as
explained in paragraph 3, these deductions were not based on real bank
account withdrawals.
For 2008 (i.e. $401.00) and 2009
(i.e. $993.00), copies of the issued cheques are provided (Exhibit G).
Rental expenses and travel expenses
18. Regarding the paragraph 15(ff):
a. As explained in paragraph 4 of this
document, and as shown in Table 3, the Appellant can not provide written proofs
for this account, since these deductions were not based on real bank account
withdrawals.
Travel expenses
Even though all Valsol’s suppliers were located abroad
(i.e. Romania, Russian Federation, United States of America, etc.) only two
airplane expenses were claimed: first one in 2007 and the second in 2009. No
voyage expenses were claimed or deducted in 2005 – the year the company started
dealing and importing chemical material, or in 2008 and 2009 – when the company
added new suppliers, despite the fact that both partners visited the premises
located overseas. Moreover, no other travel expenses (bus, train, taxi fares),
lodging (hotel) or food was ever claimed or deducted. Complete written proofs
for the 2009 airplane e-tickets are presented (Exhibit H).
Offsetting of shareholder loan account
against benefits
19. She denies the facts alleged in
paragraph 15(u). In fact, having all the Financial Statements in his hands,
and presumably after assessing them, in this paragraph the Counselor for the
Respondent stated:
“For Valsol’s years ended December 31, 2006, 2007,
2008 and 2009, Valsol’s balance sheet did not reflect any due to
individual shareholders;”
20. All the disputed amounts could be
deducted from the amount the company owned to its shareholder (i.e. $497,792) –
under “Loans payable” from the most recent audited Financial Statement
of the company. All through the audited years, the Appellant injected more
than $75,000 from her personal bank account. Proofs of the amounts debited
from the Appellant’s personal bank account and proofs of the same amounts
credited to the commercial bank account and/or wire transfers from her personal
bank account to supplier’s commercial bank accounts are also attached (Exhibit
I).
Assessing the penalties
21. No Penalty
Recommendation Report was issued by the auditor. Pursuant to the
provisions of subsection 163(2) of the Income Tax Act, the Minister of National
Revenue may only impose penalties on taxpayers who knowingly or under
circumstances amounting to gross negligence make, participate in, assent
to, or acquiesce in the making of a false statement or omission in a tax
return, form, certificate, statement or answer filed or made in respect to a
taxation year.
22. Regarding proving “gross
negligence”, the burden of proof shifted to the Minister on statute-barred
year, namely 2006;
23. The Appellant denies the facts
alleged in paragraph 16(b). The Respondent should consider that during all the
audited taxation years the Appellant was married and living together with her
spouse. Moreover, when the Respondent wrote: “her income (…) was clearly
insufficient to pay for her basic living expenses” he should also consider the
proofs that the Appellant already gave to the auditors – explaining all the
amounts that she received all through the audited years from her parents.
24. At all relevant time, the
Appellant’s bookkeeper made the journal entries and the chartered accountant
reviewed the entries and made several adjusting entries. It is the Appellant
position that she had a system in place to keep proper records and that she did
not knowingly make a false statement in either her income tax returns or those
of the Corporation.
25. As noted by Strayer J., in Venne
v R, (1984), 84 DTC 6247 (FedTD) at pages 6256 – 6249 (sic).
[. . .] “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 [. . .]
[. . .] By virtue of sub-section 163(3) “the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister”. It will be noted that for the penalty to be applicable there
appears to be a higher degree of cuplability required, involving either actual
knowldege or gross negligence, than is the case under subsection 152(4) for
reopening assessments more than four years old where mere negligence seems to
be sufficient [. . .]
CONCLUSIONS
26. Although Valsol’s sales around
$200,000.00 or more yearly, the Deputy Attorney General of Canada believed that
the company didn’t need neither a principal place of business, as stated
in paragraph 15(g), nor a motor vehicle, as stated in paragraphe15(y).
The company and its salespersons didn’t need neither telephones nor
internet connection – as decided by disallowing Telephone and
Communication Expenses. All through the reply to the Notice of Appeal, the
Respondent tried to minimize the Appellant (sic) activities believing
that she performed “limited tasks” – paragraph 15(f), with a “limited number of
customers” – paragraph 15(j).
27. The CRA’S auditors, opposition
officers and appeal lawyers agreed to refuse not only parts but
the whole amount deducted in the Financial Statements, and this, for 7
(seven) or 8 (eight) types of expenses. Taking into consideration that the
Valsol’s yearly Financial Statements include a total of 10 (ten) expenses, CRA
refused a total of 80% of the entire claimed expenses.
28. According to Dun & Bradstreet
reports, “Businesses with fewer than 20 employees have only a 37% chance
of surviving four years of business. Valsol started the importation and
commercialization of products in January 2005 and was actively in business
prior (sic) the Canada Revenue Agency audit started in July 2010.
29. The business expenses were directly
incurred for earning the Appellant’s income. All the company chartered
accountant’s claims are reasonable and consistent with the type of slated
wholesales (sic) business (i.e. “vehicle expenses”, “telephone
expenses”, and “business-use-of-home expenses”). In addition, not all the
expenses incurred by Valsol were claimed or deducted, but were entirely
financed by two partners.
30. Few purchases among the credit
cards payments should probably have been deducted in different accounts as:
“Business start-up costs”, “Meals and entertainment”, “Prepaid expenses”,
“Travel”, etc. – witch (sic) does not exist in the Valsol’s accountant (sic)
ledgers. In fact, out of 26 (twenty-six) accounts listed by the Canada Revenue
Agency (Exhibit J) under chapter “Business expenses” Valsol deducted all its
purchases using only 9 (nine) or, starting (sic) 2007, 10 (ten)
accounts. A more exhaustive distribution of all the expenses would surely have
given a more accurate and realistic image of the disbursements made by the
company.
[7]
Mrs. Cocos testified at the hearing and she
filed as Exhibit A-1 her Answers to the Reply to the Notice of Appeal. She
holds a master’s degree in chemical engineering (environment) from l’École
Polytechnique de l’Université de Montréal and she is now completing a Ph.D.
During the years under appeal, she was married to Mr. Valentine Brinza and she
was the sole shareholder of 9119-5594 Quebec Inc., a company operating under
the name of Valsol (“Valsol”). Valsol’s commercial activities began in 2005 and
consisted mainly in the importation and the wholesale of chemical products as
well as the wholesale of various construction materials. Valsol had only two
employees, the appellant and her spouse. Valsol’s principal place of business
was at the appellant’s personal residence located at 478, De Courchevel Street
in Laval, Quebec, which was purchased on June 4, 2004 and sold on December 23,
2008. In 2009, the appellant purchased another residence located at 2929 Apple
Hill Street, Baie D’Urfé, Quebec, which then became Valsol’s principal
place of business. In 2011, she separated from her spouse and Valsol ceased its
operations.
[8]
Mrs. Cocos stated that she contracted a loan and
was granted an hypothec on her Laval residence which required weekly mortgage
payments of $258.20, or approximately $13,426 per year. Her spouse’s net income
for 2006 to 2009 taxation years was as follows:
2006: $12,766
2007: $15,929
2008: $11,400
2009: $24,600
[9]
Mrs. Cocos alleged that she received money from
her father amounting to $8,000 to $9,000 per year to help her to meet her
mortgage payments.
[10]
At the objection level, the appellant’s
representative submitted a bundle of invoices which included credit card
statements, cell phone statements, internet, cable, charges for public services
such as Hydro-Québec, municipal and school taxes, insurance, plane tickets for
two trips to Romania. No allocation was made for the personal component of
these expenses. All the expenses were claimed as a deduction at the corporation
level.
The relevant provisions of the Act
[11]
The following provisions of the Act are
relevant for the purpose of this appeal:
15(1) Benefit conferred on shareholder.
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
.
. .
the amount or value
thereof shall, except to the extent that it is deemed by section 84 to be a
dividend, be included in computing the income of the shareholder for the year.
152(4) Assessment
and reassessment. The Minister may at any time make
an assessment, reassessment or additional assessment of tax for a taxation
year, interest or penalties, if any, payable under this Part by a taxpayer or
notify in writing any person by whom a return of income for a taxation year has
been filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s normal
reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is
attributable to neglect, carelessness or wilful default or has committed any
fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within
the normal reassessment period for the taxpayer in respect of the year; or
. . .
152(4.01) Assessment
to which par. 152(4)(a) or (b) applies. Notwithstanding subsections (4) and
(5), an assessment, reassessment or additional assessment to which paragraph
(4)(a) or (b) applies in respect of a taxpayer for a taxation
year may be made after the taxpayer’s normal reassessment period in respect of
the year to the extent that, but only to the extent that, it can reasonably be
regarded as relating to,
(a) where paragraph (4)(a) applies to the
assessment, reassessment or additional assessment,
(i) any misrepresentation made by the taxpayer or a person who
filed the taxpayer’s return of income for the year that is attributable to
neglect, carelessness or wilful default or any fraud committed by the taxpayer
or that person in filing the return or supplying any information under this
act, or
(ii) a matter specified in a waiver filed with the Minister in respect
of the year, and
163(2) False
statements or omissions. 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
. . .
Analysis
[12]
The only issue in this appeal is to determine
the portion, if any, of the disallowed expenses claimed by Valsol that were
incurred for business purposes. The problem results from a deficiency in the
manner in which books and records of Valsol were maintained by the company’s
accountant who was responsible for the preparation of the financial statements,
the income tax returns and the goods and services tax reports.
[13]
All the disallowed expenses listed in paragraph
(o) of the Reply to the Notice of Appeal were deducted by the accountant as “administration expenses” without making any adjustment for the personal component of these
expenses despite the fact that many expenses were related to the appellant’s
personal residence, trips to Romania and use of vehicles. As explained by Mrs.
Cocos, Valso’s accountant’s practice was to take the total amount of all the
cheques written and withdrawn by her and her spouse and to apply a portion of
the total amount to different expense accounts. The balance was then debited to
the loan that Valsol owed to her.
Business Use-of-Home
[14]
I do not agree with the CRA’s auditor that only
limited tasks were performed from Mrs. Cocos’ personal residence. I do not
think that the appellant used her personal residence as simply a mailing address
for Valsol. The appellant had her office therein as well as her spouse who was
a salesperson for Valsol. Furthermore, the garage was used to store liquid and
solid chemical samples, analytical balances, pumps, rolls of electrical wires
and boxes of electrical brackets. The proposed allocation of 35% of
business-use-of-home appears to me to be reasonable in the circumstances (400
sq. ft. over the residential home total area of 1100 sq. ft.)
[15]
Consequently, Valsol is entitled to deduct 35%
of the utility expenses (Hydro-Québec residential electricity bills, the
municipal and school taxes and the residential insurance premiums). The $5,000
expense described as a “US funds
purchase” in 2007 is deductible as Valsol paid
its suppliers in U.S. funds.
[16]
Concerning the repairs and maintenance on the
residential property, no amount is deductible as the appellant did not provide
any information on the exact nature of the repairs and maintenance work done on
the residential property.
Telephone Expenses
[17]
Valsol claimed as expenses the appellant’s entire
residential telephone charges including long distance calls as well as Mr. Brinza’s
personal cellular telephone bills. As a portion of the telephone and
communications expenses were necessarily incurred for business purposes, I
consider that 35% of the expenses are deductible by Valsol since no
representations were made by the appellant to justify a greater percentage.
Office Expenses
[18]
Office expenses claimed by Valsol include credit
card payments, purchases made at the Société des alcools du Québec, Walmart,
Home Depot, Future Shop, grocery stores and for a subscription to Time
magazine. The appellant explained that the majority of the Société des alcools
and Walmart expenses were made around Christmas time for business gifts to
suppliers, customers and bank representatives. The appellant provided a list of
people who supposedly received such gifts but nobody from this list appeared in
Court to confirm receipt of the gifts. For that reason, no amount is deductible
on that account.
[19]
The Future Shop purchases represent only office
supplies which should, in principle, be deductible as a business expense but
because no precise amount of these purchases was presented in Court, no
deduction is allowed for these expenses.
[20]
With respect to the groceries purchased for
lunches at the warehouse by the appellant and her spouse, no expense is
deductible as no record in terms of cost and frequency of such lunches were
kept.
[21]
Finally, the appellant did not explain why the
subscription to Time magazine was made and is therefore not deductible.
Rental Expenses and Travel Expenses
[22]
The rental expenses were claimed by Valsol in
2006 and the travel expenses were claimed by Valsol in 2007. The appellant
recognized that she could not provide any information concerning these
deductions as they were not based on real bank account withdrawals. In the
circumstances, these expenses are not deductible.
The Vehicle Expenses
[23]
Considering the nature of the business carried
on by Valsol, it is reasonable to consider that a portion of the vehicle
expenses claimed were in fact incurred for business purposes. For example,
trips to the warehouses, trips to meet with clients and trips to the banks to
make deposits and to purchase U.S. funds are perfectly legitimate. The problem
here is that Valsol, the appellant and her spouse did not keep log books
pertaining to the use of their vehicles and that there is no allocation for
personal use of the vehicles.
[24]
Based on the “Car and Truck expenses” entries
from the accountant’s ledgers, I accept that the following expenses for car
repairs and maintenance be deductible:
2006: nil
2007: $1,121
2008: $1,252
2009: $61,472
[25]
Concerning the Gas/Diesel, the appellant filed an
estimate of the monthly business mileage made by her and her spouse for the
2006 to 2008 period from their Laval residence and for the 2009 year from their
Baie D’Urfé residence to the warehouses, the banks, the accountant’s office and
to potential and established clients’ offices. Her estimate was supposedly based
on the gas purchases made during each year. For the 2006 to 2008 period, the
estimated kilometers made for business trips by the appellant and her spouse
amounted to 2,424 kilometers per month. For 2009, the estimated monthly
kilometers were 3,403. The details of the calculation of the estimated
kilometers were not submitted for the Court’s consideration. The monthly gas
purchases paid by Valsol were not computed and the gas consumption by each
vehicle was not provided. The estimated kilometers computed by the appellant is
not a reliable source of information. For that reason, no amount can be
deducted under that heading.
[26]
The amounts for erroneous entries made each year
by the accountant are not deductible as no clear explanation was given as to
why they were included in this particular account and in what account they
should have been included.
The 2006
Reassessment and the Gross Negligence Penalty
[27]
The reassessment for the 2006 taxation year was
beyond the normal reassessment period and the Minister imposed gross negligence
penalties in respect of each year under appeal.
[28]
The evidence shows that the appellant was
closely involved in Valsol’s affairs and that she could not possibly ignore
that her personal expenses were paid for and expensed by Valsol. With the
exception of her mortgage payments, almost all of the expenses related to the
appellant’s personal residence were paid by Valsol. The income declared by the
appellant and her spouse for the taxation years under appeal was clearly
insufficient to pay for the basic living expenses of the household. The
appellant’s allegation that she received financial assistance from her father
has not been corroborated.
[29]
The benefits received by the appellant from
Valsol are substantial when compared to her declared income and the appellant
deliberately omitted to include these benefits in her reported income. I can
properly infer from the way books and records of Valsol were kept that the
appellant knew or ought to have known that misrepresentations attributable to
gross negligence were made in her tax returns with respect to the amounts
disallowed by the Minister. Based on the tax returns filed by Valsol for the
2006, 2007, 2008 and 2009 taxation years, there was no entry in its balance
sheet for amounts due to the shareholder.
[30]
Therefore, the Minister has met the burden of
establishing that subparagraph 152(4)(a)(i) and subsection 163(2) of the
Act should apply, to justify the gross negligence penalties and the
assessment of the appellant beyond the normal reassessment period.
[31]
For all these reasons, the appeal is allowed and
the reassessments are referred back to the Minister of National Revenue for
reconsideration and reassessments on the basis that the following expenses are
deductible by 9119‑5594 Québec Inc. and shall be excluded from the
appellant’s income:
|
[32]
|
2006
|
2007
|
2008
|
2009
|
|
Utilities
|
$ 370,65
|
$ 402.15
|
$ 395.85
|
$ 460.25
|
|
Business taxes,
licenses and memberships
|
$ 598.15
|
$5,627.20
|
$1,924.65
|
$1,202.25
|
|
Telephone and
communications
|
$ 735.00
|
$ 743.75
|
$ 690.90
|
$ 992.95
|
|
Vehicle expenses
|
−
|
$1,121.00
|
$1,252.00
|
$ 614.72
|
|
|
|
|
|
|
The penalties
shall be adjusted accordingly.
Signed at Ottawa,
Canada, this 5th day of May 2016.
“Réal Favreau”
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