REASONS
FOR JUDGMENT
Boyle J.
[1]
Mr. Sbrollini appealed from the assessment of so
called gross negligence penalties under subsection 163(2)
of the Income Tax Act (the “Act”) in
respect of unreported income in the amount of approximately $100,000 in each of
2006 and 2007. This appeal was heard in Ottawa under the Court’s informal
procedure.
[2]
Mr. Sbrollini is not appealing the unreported
income reassessed, only the related penalties. The onus in this case is
therefore on the Minister of National Revenue (the “Minister”).
[3]
The only witness was the taxpayer, who was
called by the Crown. A Joint Book of Documents was agreed to and entered in
evidence.
Facts
[4]
Marcel Sbrollini is a sales professional. When
he left PepsiCo North America after more than a decade he was its Director of
Sales and Marketing for the Québec region with a staff of 15. He was with
Proctor & Gamble prior to Pepsi for about five years and was Unit Manager
Business Development responsible for Key Account Development when he left. After
leaving PepsiCo, Mr. Sbrollini established his own consulting business named
Step-by-Step Consulting. (It remains unclear whether this was a sole
proprietorship or an incorporated entity.) In the years since leaving PepsiCo
he also held several significant executive positions with different companies,
however the details of these other business interests and activities remain
sketchy as he acknowledged his LinkedIn profile used by Respondent’s counsel in
his questioning was intentionally unduly slanted favourably towards being
successful.
[5]
Mr. Sbrollini holds a Bachelor of Commerce
degree from Concordia University with a major in Marketing and a minor in Finance.
[6]
According to the taxpayer, he had successfully
self-directed his own investment funds and built them up to $2.1 million after
leaving PepsiCo. However, after he hired an investment broker, his investments
somehow went to zero. Within a year or two he declared personal bankruptcy.
[7]
Beginning about a year after his bankruptcy, Mr.
Sbrollini claims to have loaned $300,000 to a fireplace log venture known as
Java Logs operated by Java Products Inc. According to the taxpayer, all the
funds came from family and friends. The terms on which they advanced these
funds are entirely unclear. The loan to Java Products was documented in late
2005 after the funds had all been advanced.
[8]
According to the Appellant, he was diagnosed
with melanoma in 2006. According to the Ottawa Hospital records put in evidence,
the initial diagnosis of Stage 2b melanoma was in 2004 with the treatment
tentatively to begin in January 2005. The other Ottawa Hospital record in
evidence indicates that in October 2006 his melanoma had by then worsened to Stage
2e. It also indicates he had regular visits to the Ottawa Cancer Center Clinic
for chemotherapy, radiation treatments, doctors’ visits or procedures in 2006,
2007 and 2008. There were four dates in December 2006, 29 in 2007, and 9 in the
first seven months of 2008 (the taxpayer filed his 2006 and 2007 tax returns in
early August and late July of 2008, respectively).
[9]
In preparing his 2006 and 2007 tax returns in
mid-2008, Mr. Sbrollini provided his accountant with an estimate of $12,000 of
gross business income. This estimate was not based on any slips, sales records,
money going into his bank account, or cheques or payments received from
clients. It was simply, in his words, a number that he and his accountant came
up with.
[10]
In contrast, the taxpayer itemized a large
number of very specific amounts for expenses related to the business use of his
home and automobile in arriving at nil net income. In 2006, his total home
expenses were approximately $21,000 according to his tax return schedule (which
did not include any principal repayments) and his total car expenses were
approximately $8,500. He financed the
purchase of a new $35,000 car in 2006.
[11]
His 2006 income as reported was $174. He
indicated on his return that the income of his wife, Heather Pugh, was $200.49.
The 2007 incomes were similarly insignificant.
[12]
The taxpayer’s 2006 and 2007 years were the
subject of an audit by Canada Revenue Agency (“CRA”).
The resulting reassessments of unreported income were approximately $210,000
for 2006 and $170,000 for 2007. Additional information and submissions were
made to CRA at the objection stage, at least some of which is in evidence. The
significantly reduced reassessments in question and described at the outset
were issued by CRA Appeals.
[13]
The detailed submissions at the objection stage
to CRA Appeals indicate that Mr. Sbrollini had reported estimated taxable
income in his returns and “it was his intention to
correct the tax return once his life returned to normalcy. …” The
taxpayer’s accounting firm further confirms in that document that it has
completed a review and bank deposit analysis and has found certain deposits to
be business income of the taxpayer that was not reported. With respect to
approximately $175,000 in 2006 and 2007, the taxpayer’s submissions indicate
they are in agreement that it is unreported business income.
Law
[14]
The relevant portion of subsection 163(2) of the
Act provides as follows:
False statements or omissions
163(2) Every
person who, knowingly, or under circumstances amounting to gross negligence,
has made or has participated in, assented to or acquiesced in the making of, a
false statement or omission in a return, form, certificate, statement or answer
(in this section referred to as a "return") filed or made in respect
of a taxation year for the purposes of this Act, is liable to a penalty …
[15]
This penalty provision reflects the significance
and importance of the requirements of honesty and accuracy in the Canadian
self-reporting income tax system. Fairness to all taxpayers requires that such
penalties be payable by those unscrupulous Canadians who would seek to take
advantage of our self-reporting system and cross this line.
[16]
Such penalties are properly payable by Mr.
Sbrollini if he knowingly, or under circumstances amounting to gross
negligence, made or participated in, assented to or acquiesced in, the making
of false statements or omissions in his returns.
[17]
It is the Crown who bears the onus with respect
to penalties to establish, on a ‘balance of probabilities’/‘more likely than
not’ standard, that a false statement or omission was made, and that it was
made knowingly or under circumstances amounting to gross negligence.
[18]
Gross negligence involves a high degree of
negligence, tantamount to intentional acting, and indifference as to whether
the law is complied with or not: Venne v. Canada (Minister of National Revenue), 84 DTC 6247 (F.C.T.D.).
[19]
Wilful blindness involves a person choosing to
remain ignorant when one is aware of the need to make an inquiry on a matter,
but would prefer not to know the correct answer. Actual knowledge will be imputed
to a taxpayer where circumstances suggest an inquiry should be made with
respect to his tax situation if he does not make such an inquiry without
reasonable justification: see Panini v. Canada, 2006 FCA 224.
[20]
In Lacroix v. Canada, 2008 FCA 241, the
Federal Court of Appeal wrote the following on the Crown’s burden of proof with
respect to such penalties:
32 What, then, of
the burden of proof on the Minister? How does he discharge this burden? There
may be circumstances where the Minister would be able to show direct evidence
of the taxpayer's state of mind at the time the tax return was filed. However,
in the vast majority of cases, the Minister will be limited to undermining the
taxpayer's credibility by either adducing evidence or cross-examining the
taxpayer. Insofar as the Tax Court of Canada is satisfied that the taxpayer
earned unreported income and did not provide a credible explanation for the
discrepancy between his or her reported income and his or her net worth, the
Minister has discharged the burden of proof on him within the meaning of
subparagraph 152(4)(a)(i) and subsection 162(3).
33 As Justice
Létourneau so aptly put it in Molenaar v. Canada, 2004 FCA 349, 2004
D.T.C. 6688, at paragraph 4:
4. Once the Ministère establishes on
the basis of reliable information that there is a discrepancy, and a substantial
one in the case at bar, between a taxpayer's assets and his expenses, and that
discrepancy continues to be unexplained and inexplicable, the Ministère has
discharged its burden of proof. It is then for the taxpayer to identify the
source of his income and show that it is not taxable.
[Emphasis
added.]
[21]
According to the Federal Court of Appeal, in
circumstances where the Crown satisfies the Court on a balance of probabilities
that a taxpayer earned unreported income, the taxpayer must then provide a
credible explanation for the discrepancy between reported and actual income. It
will not be sufficient to come up with a possible or even plausible
explanation, as that would very significantly increase the Crown’s burden of
proof which is clearly no greater than a balance of probability standard. The
Crown’s standard of proof is no greater because it involves a penalty or a
degree of culpability. The taxpayer must satisfy the Court that his or her
explanation for not reporting the additional income, whatever the reason is,
was itself reasonable for the particular taxpayer in the particular
circumstances at the time of filing his or her return, on a preponderance of
the evidence relevant to his or her explanation.
Analysis
[22]
In this case the taxpayer is not taking the
position that the impact or effect of his cancer diagnosis and treatment
interfered with his abilities to reason and/or function to an extent that
justified his non-reporting any income in each of two years in which he earned
about $100,000. Rather, he maintains that he did not make any misrepresentation
or omission because he really did only earn no more than $12,000 of gross
revenue and probably substantially less. He maintains this, notwithstanding
that he is not appealing the unreported income inclusions, and notwithstanding
the written evidence of his own accountant described above. I find that, on the
evidence, it is very clearly established that his income was very significantly
under-reported at least to the extent reflected in the reassessments appealed
from. I agree with taxpayer’s counsel that the issue before me therefore
becomes whether it is credible that Mr. Sbrollini reasonably believed at the
time that he filed his returns that additional amounts he knew he had received
and spent in 2006 and 2007 were not required to be reported or reflected in any
way in his return.
[23]
Mr. Sbrollini testified that in the years in
question he was unable to service his existing Step-by-Step consultancy
clientele. In order to fulfill his obligations and maintain his clients’ goodwill
he hired other consultants to actually perform the services. He said that he
knew he received about $40,000 of revenue from those clients, but he maintains
he believed that he did not need to include it as gross business revenue because
he paid the bulk of that amount to his subcontracted consultants. I do not
accept this explanation as either reasonable or credible in the circumstances.
Mr. Sbrollini met with his accountant at the outset of getting his returns
prepared. He said he had a discussion with his accountant about how to estimate
his gross consulting revenue in his particular circumstances. He apparently
told his accountant he did not think his consulting generated any net income.
He said the accountant told him to estimate $12,000 of revenues each year in
order to show that the business was still viable. That answer frankly makes
little sense and is entirely uncorroborated. More importantly, it appears Mr.
Sbrollini did not mention the $40,000 of revenue he knew he had received or the
professional expenses he paid to others. He apparently did not question how the
$12,000 estimate accounted for or related to the $40,000 actually received. He
seemingly did not mention $40,000 of revenues to his accountant when discussing
the businesses revenues, nor did he mention the subcontractor payments when
preparing his detailed listing of expenses.
[24]
The obvious result of omitting the business’
revenue and related expenses was the omission of including this net income from
his consulting business which was instead reported as nil. That alone clearly
constitutes at the very least wilful blindness and an indifference to whether
he was complying with the law or not. That also makes his explanation neither
reasonable nor credible.
[25]
Most of the reassessed unreported income was
made up of regular monthly bank deposits of approximately $8,100 or $8,300. Mr.
Sbrollini explained that he was well aware he was receiving these amounts, but
maintains they were loan repayments from Java Products Inc. There is no
corroborating evidence to establish that was the source of the deposits. His
accounting firm’s report simply reports that they found the deposits to have
been business income and that they agree they were unreported. There was no
evidence from Mr. Sbrollini or otherwise that he raised these payments at all
or in any way with his accountant in 2008 in connection with his 2006 and 2007
returns.
[26]
The only evidence corroborating in any way the
loan to Java Products Inc. is the 2005 Operating Loan Agreement. That agreement
does provide for monthly prepayments of $8,100, and an annual minimum repayment
amount of $50,000 plus the 7% accruing interest thereon. The borrowing clearly
bears interest at 7% per annum. There is nothing to suggest the monthly payments
are to be principal repayments only and do not include the payment of accrued
current interest. At the very least, and even if one accepts Mr. Sbrollini’s
version of the source of these payments – which I do not, one would expect
someone in Mr. Sbrollini’s circumstances, aware of the loans and the provisions
of the agreement, to seek clarification or advice, or to otherwise inform
himself, on the inclusion of interest paid or, at least, on the allocation of
payments to interest on debts. Yet, it appears he did not. Again, that makes
his explanation neither reasonable nor credible in the circumstances.
[27]
Further, the Operating Loan Agreement in
evidence is between Java Products Inc. and Step-by-Step Consulting Inc. Mr.
Sbrollini confirmed he had incorporated Step-by-Step Consulting Inc. as a
corporation of which he was the sole shareholder. He confirmed that this
corporation had made the loan to Java Products Inc. and was thereby entitled to
the required loan repayments and interest. He was clear this was intended by
him at the outset and was not a mistake. Yet his evidence is also that these
amounts ended up in his personal bank account each month and that he used these
amounts for his personal living expenses as well as his business expenses.
There was no evidence to show or explain how this was accomplished. There was
no evidence of salaries, shareholder loans or repayments, or dividends,
redemptions or capital reductions. Yet he never inquired about any of this of
his accountant, nor anyone else, in preparing his tax returns. Again, this
renders his explanation neither credible nor reasonable in the circumstances he
was aware of and found himself in when filing his returns in 2008.
[28]
Mr. Sbrollini explained that notwithstanding his
minimal taxable income, he and his wife were also living in part off loans and
gifts from friends and family. There was absolutely no detail or supporting
documentation to corroborate this. When pressed, he could come up with a single
$1,000 gift or loan, relatives providing groceries and contributions to
mortgage payments at times, and that his in-laws let him and his wife live with
them for a period (which appears to pre-date the years in question). This does
not rise to the level of being a credible, reasonable explanation that is
material to the discrepancy between his reported income and his available cash
in 2006 and 2007.
[29]
The preceding reasons are sufficient to dispose of
Mr. Sbrollini’s appeal even if I accepted his version of events as factual.
However, I must add that I have significant concerns with the taxpayer’s
evidence relating to weight and overall credibility and reliability given his
testimony and the almost complete lack of corroboration, whether by way of
other witnesses or supporting documentation:
1) Mr. Sbrollini maintains that he did not dispute the unreported
income amounts as reassessed by CRA Appeals Division because he was advised (not
by his current counsel) he could not succeed without the supporting documents
or evidence he was unable to obtain. He still maintains the $12,000 estimate of
gross revenue was incorrect only because it was actually much too high. When
faced with the written findings of his own accountant described above, he blamed
the accountant and said he later fired him. In his testimony he blamed others
more than once: his accountants and other advisers (not his current counsel)
used in the course of his tax dispute, his broker for the unexplained complete
loss of his investment portfolio, his business associates for the financial
misfortunes of his other business ventures.
2) He said that he and his accountant “came up
with” his many business expense numbers despite their apparent
specificity. There was no basis described for how he and his accountant came up
with these numbers. He had earlier said that he, or probably his wife, had
actually located all the bills or receipts. He testified to the same effect
about him and his accountant “coming up with” the
$4,300 of medical and dental expenses for himself and his wife.
3) As mentioned above, he was very candid about the overall reliability
of his LinkedIn profile.
4) I saw no backup financial documentation in the form of bank
statements, cheques, invoices et cetera to corroborate or support Mr.
Sbrollini’s explanations on the flow of funds he testified to – yet I see in
evidence more than one of his bank statements provided to CRA at the objection
stage to successfully support his expense claim reimbursements from Java
Products Inc.
5) I did not see any documentation to corroborate or even summarize the
amounts received from his consulting clients or the amounts paid to the
subcontracted consultants, nor any retainer with either party. I did not hear
from any clients, nor from any subcontractors. I was not even given an estimate
of what he meant by the “bulk of” the $40,000 having been paid to his sub-consultants.
6) I did not see any documentation to corroborate the loan advances to
Java Products Inc. nor any of their repayments, nor the loans or gifts from his
family and friends to fund the Java Products loans.
7) I did not hear from his wife, his parents or his in-laws, although
they were said to be the source of the amounts loaned, nor did I see any of
their cancelled cheques or bank statements. None of his family were called to
confirm their loans or gifts, whether cash or kind. I did not hear from his
accountant regarding his discussions with the taxpayer at the time the returns
were prepared. I did not hear from anyone from Java Products about the $8,100/$8,300
regular monthly payments or the loan itself. While I am sometimes loathe to
make adverse inferences for the failure to call a witness given that either
party is free to call any witness, in this case the contents of the Notice of
Appeal would not have reasonably indicated to the Crown that anyone else’s
testimony would be relevant. The Notice of Appeal, prepared by prior counsel,
suggested the primary focus would be on the taxpayer’s health circumstances
which limited his ability to attend as closely to his financial affairs as he
would have liked and caused him to estimate his income. As already described,
that was not the major thrust of the taxpayer’s position at trial.
8) There was no corroborating documentation about Step-by-Step
Consulting Inc. At the end of this testimony, Mr. Sbrollini said that not only
did his corporation make the Java Products Inc. loan, he continued on to say
that it also carried on his consulting business and reported all the income
from both sources. He did not seem to notice this was inconsistent with him
having reported Step-by-Step Consulting income on his personal return. Again,
there is no documentation such as financial statements, tax returns or
assessments, banking records, contracts or incorporating documents to
substantiate his sudden new explanation that would mean virtually all of the
unreported income was in fact earned by his corporation. This came across as a
Hail Mary pass.
[30]
Overall, Mr. Sbrollini’s testimony – its
unsupported nature, its inconsistencies – along with his frequent evasiveness,
vagueness and deflections – leaves me entirely uninclined to accept any
material portion of Mr. Sbrollini’s testimony that is not corroborated. In the
circumstances where there is a paucity of documentary evidence and no other
witness, this does not leave me with much credible evidence at all on the
material points.
[31]
For all of the above reasons, I must dismiss
this appeal.
Signed at Ottawa,
Canada, this 10th day of July 2015.
“Patrick Boyle”
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