REASONS FOR JUDGMENT
V.A. Miller J.
[1]
These appeals were heard on common evidence. The
only issue in each appeal is whether the Minister of National Revenue (the
“Minister”) correctly assessed gross negligence penalties against the
Appellants:
a)
In the appeal of Shelley Raymond, gross
negligence penalties were assessed against her for the 2006 and 2007 taxation
years under subsection 163(2) of the Income Tax Act (“ITA”) on
the basis that she underreported her income by $25,163 and $20,681
respectively.
b) In the appeal of Gilbert Ludlow, a gross negligence penalty was
assessed against him for the 2006 taxation year under subsection 163(2) of the ITA
on the basis that he underreported his income by $3,324.
c)
In the GST appeal, the partnership, Shelley
Raymond & Gilbert Ludlow (the “Partnership”), was assessed gross negligence
penalties pursuant to section 285 of the Excise Tax Act (“ETA”) for each quarterly period between
January 1, 2006 and September 30, 2008 inclusive. Attached to my decision is
Appendix A which shows the net tax reported by the Partnership and the net tax
reassessed by the Minister.
[2]
I have reviewed the tables in the “Report on
Objection” for each of the Appellants and it is my view that the Minister made
a mistake when he calculated the amount of income which Shelley Raymond failed
to report in 2006 and 2007. I have calculated that she underreported her income
by $13,171 in 2006 and $8,798 in 2007.
[3]
The witnesses at the hearing were the Appellants
and Lianne Durant, an appeals officer with the Canada Revenue Agency (“CRA”).
[4]
Shelley Raymond and Gilbert Ludlow are spouses
of each other.
[5]
Shelley Raymond operated the following three
businesses as a sole proprietor for the periods indicated:
a)
The Muskoka Trade Source (“Muskoka”) which, in
2006, 2007 and 2008, was an on-line and newsstand business directory for
construction companies operating in the Muskoka region.
b) Kumon franchises (“Kumon”) which were after school tutoring
programs. In 2006, she had two franchises. She sold one in 2007 and she
continued to operate her remaining franchise in 2007 and 2008.
c)
In October 2007, she became a real estate agent
and continued as such in 2008.
[6]
In 2006, 2007 and 2008, the Partnership operated
GLW Real Estate Rentals (the “Rental Operation”) and Gilbert Ludlow Woodworking
(the “Woodworking Business”). The Rental Operation consisted of one building.
The first floor of the rental building was leased to a commercial tenant and
the upper floor and the addition to the building were leased to residential
tenants. The Woodworking Business constructed and installed custom built stairs
and handrails for customers in the Muskoka region.
[7]
In each of the years the Partnership reported
the Rental Operation and the Woodworking Business as one business the income
and expenses of the business were comingled.
[8]
In 2006 and 2007, Shelley Raymond reported total
income in the amount of $29,296 and $31,557 respectively. Gilbert Ludlow
reported income of $4,172 and $8,452 in 2006 and 2007 respectively.
[9]
In an attempt to reconcile the Appellants’
lifestyle to their reported income, the Minister performed a bank deposit
analysis of their bank accounts. There were differences between the sales
reported and the deposits into the bank accounts and the Minister concluded
that the Appellants did not report all of their income. At the audit stage of
this case, the Minister increased the gross income for Muskoka for 2006 by
$6,159 and for the Woodworking Business for 2007 by $37,950. The Minister also
disallowed numerous expenses which had been claimed by the various businesses
on the basis that the Appellants were unable to provide documentation to
support the expenses and/or the expenses were personal living expenses. At the
audit stage, the Minister assessed gross negligence penalties against each of
the Appellants.
[10]
According to the appeals officer, Lianne Durant,
many of the expenses claimed by the Appellants were not supported by
documentation. She was told that many receipts were lost when there was a flood
at the Appellants’ business. However, the Appellants did give her a box of
receipts to review. Ms. Durant stated that the receipts were not organized; and
some of the receipts pertained to more than one business. It appeared that the
funds from the businesses were commingled. One example given was that the Kumon
business paid for expenses which were claimed by the Woodworking Business. Some
expenses were paid through the internet and no documentation was provided to
support which expense had been paid and whether the expense was business or
personal. Ms. Durant found that some of the expenses claimed by the
Appellants were expenses for personal items. In the final result, at the
objection stage, the Minister reduced the amount of net income which had been
assessed to the Appellants at the audit stage but maintained that gross
negligence penalties applied as indicated in paragraphs 1 and 2 above.
[11]
The final adjustments made by the Minister with
respect to the income tax appeals were as follows:
Shelley Raymond
|
2006 Net Income
|
Reported
|
Reassessed
|
|
Total Net Business Income
|
$11,529
|
$24,653
|
|
Net Rental Operation Income
|
1,548
|
8,389
|
|
Net Woodworking Business Income
|
16,219
|
9,425
|
|
|
|
|
|
2007 Net Income
|
Reported
|
Reassessed
|
|
Total Net Business Income
|
$624
|
$10,898
|
|
Net Rental Operation Income
|
(290)
|
(3,687)
|
|
Net Woodworking Business Income
|
22,747
|
26,804
|
|
T4 Earnings
|
9,239
|
9,239
|
|
Net Commission Income
|
(762)
|
(2,899)
|
|
|
|
|
Gilbert Ludlow
|
2006 Net Income
|
Reported
|
Reassessed
|
|
Net Woodworking Business Income
|
$2,624
|
$(893)
|
|
Net Rental Operation Income
|
1,548
|
8,389
|
|
|
|
|
|
2007 Net Income
|
Reported
|
Reassessed
|
|
Net Woodworking Business Income
|
$8,743
|
$11,155
|
|
Net Rental Operation Income
|
(291)
|
(3,687)
|
|
|
|
|
The Law
[12]
Subsection 163(2) of the ITA provides for
the imposition of gross negligence penalties as follows:
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 …
[13]
Pursuant to subsection 163(3) of the ITA,
“the burden of establishing the facts justifying the
assessment of the penalty is on the Minister”. The Crown must therefore
prove (1) that the Appellants made a false statement or omission in their
income tax returns, and (2) that the statement or omission was either made
knowingly, or under circumstances amounting to gross negligence.
[14]
The seminal definition of gross negligence was
given in Venne v The Queen, 84 DTC 6247 (FCTD), at page 6256, where
Strayer, J stated:
"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.
[15]
Some of the factors to be considered when
deciding whether there was gross negligence are the magnitude of the omission
in relation to the income declared; the opportunity the taxpayer had to detect
the error; and the taxpayer’s education. No single factor predominates: DeCosta
v The Queen, 2005 TCC 545.
Analysis
A. Shelley Raymond
[16]
Shelley Raymond was responsible for maintaining
the books and records for her businesses and for the Partnership. In this
regard, she engaged a bookkeeper to assist her. She stated that the bookkeeper
prepared an excel spread sheet for each month for each year during the period.
Ms. Raymond prepared a summary sheet with the total monthly expenses incurred
in each category. This summary sheet was given to the accounting firm which Ms.
Raymond engaged to prepare the income tax returns for her and her spouse. Ms.
Raymond prepared and filed the GST returns.
[17]
Ms. Raymond did not keep copies of all invoices
issued during the period. However, those that she did keep were placed in a box
with receipts in no particular order. The invoices and receipts in the box
related to all five businesses. In short, her record keeping was totally
inadequate.
[18]
At the hearing, Ms. Raymond stated that she and
her bookkeeper were responsible for maintaining the receipts and invoices for
the five businesses. With respect, Ms. Raymond cannot blame the inadequacy in
her records on the bookkeeper. She had three different bookkeepers during the
period. The ultimate state of the businesses and the records for those
businesses were Ms. Raymond’s responsibility and not the bookkeepers.
[19]
The Appellants included personal living expenses
as business expenses. Some of the items expensed included the purchase of a
large screen television and accessories for the television; iPods; home theatre
equipment; expenses for the operation of the Appellants’ hot tub; construction
of a fireplace; and, payments to the activity fund for their daughter’s school.
[20]
The magnitude of income which Ms. Raymond
underreported compared to the income reported was significant. According to my
calculations, the ratio of the underreported income to the income declared was
45% in 2006 and 28% in 2007. She failed to report 31% of her income in 2006 and
22% of her income in 2007. Ms. Raymond was in charge of maintaining the books
and records for the businesses. Her income tax returns were prepared with the
documents she gave to her accountants. She stated that she relied on the
accountants and she signed her returns without reading them. However, the
accountants could only work with the documents which she supplied to them and
their work was only as accurate as the materials they were given.
B. Gilbert Ludlow
[21]
Gilbert Ludlow stated that he is a carpenter. He
did not take care of the books and records. He collected the receipts for the
Woodworking Business and he gave them to his spouse, Ms. Raymond. When his tax
returns were prepared, he signed them but he didn’t review them.
[22]
Mr. Ludlow failed to report 44% of his income in
2006. The ratio of the income he failed to report to the income he declared was
80%. The amount of underreported income was huge when compared with the amount
of income Mr. Ludlow reported in 2006. Mr. Ludlow blindly trusted his
spouse and his accountant to prepare his books and records and his income tax
returns. He as well signed his income tax returns without reading them. It is
my view that he was totally indifferent as to whether the law was complied with
or not.
C. The Partnership
[23]
Some of the input tax credits (“ITCs”) claimed
by the Partnership were disallowed because there was no supporting
documentation while other ITCs were disallowed because they were claimed on
personal expenditures or the ITCs related to the sole proprietorships, Kumon
and Muskoka.
[24]
The Partnership claimed 29.5% more ITCs than it
was entitled to receive. It claimed that it had to pay net tax of $3,885.21
when the actual net tax was $8,818.59. The Partnership underreported its net
tax by more than 200%.
[25]
It is my opinion that the Minister has satisfied
his onus and gross negligence penalties were properly assessed against Ms.
Raymond, Mr. Ludlow and the Partnership. The appeals for Mr. Ludlow and the
Partnership are dismissed. The appeal for Ms. Raymond is referred back to the
Minister to recalculate the gross negligence penalty on the basis that she
failed to report income of $13,171 and $8,798 in 2006 and 2007 respectively.
Signed at Ottawa, Canada, this 10th day of February 2016.
“V.A. Miller”
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