REASONS
FOR JUDGMENT
Woods J.
I. Background
[1]
Paul Lubega-Matovu and Rose Lukwago appeal with
respect to reassessments made under the Income Tax Act for the 2006,
2007 and 2008 taxation years. The reassessments disallowed deductions for
business losses claimed by both appellants, disallowed rental losses claimed by
Mr. Lubega‑Matovu, and imposed gross negligence penalties on
Mr. Lubega‑Matovu.
[2]
Mr. Lubega-Matovu is a retired auditor with the
Canada Revenue Agency (CRA), and in the taxation years at issue he had a senior
position with the CRA with responsibility for auditing large corporations. His
employment income in these years, as disclosed in his income tax returns, was
in the neighbourhood of $70,000 to $80,000.
[3]
Against this income, Mr. Lubega-Matovu deducted
the following aggregate business and rental losses: $52,748 for 2006, $61,625
for 2007, and $67,768 for 2008.
[4]
As for Ms. Lukwago, she reported a small amount
of income from carrying on business in the taxation years at issue. She also deducted
business losses from a purported business carried on in common with Mr. Lubega‑Matovu.
According to the Reply, the losses that Ms. Lukwago reported were approximately
$3,846 in 2006, $3,336 in 2007, and $11,188 in 2008.
[5]
The Minister denied the losses claimed by the
appellants in their entirety with the result that the appellants’ net income
from each activity was nil. In addition, the Minister imposed gross negligence
penalties on Mr. Lubega-Matovu in respect of all the disallowed amounts.
[6]
It is worth noting that reassessments similar to
these had been issued to Mr. Lubega-Matovu for the previous two taxation years,
2004 and 2005. He appealed these reassessments to the Tax Court of Canada (2010
TCC 291) which dismissed the appeals for lack of reliable supporting evidence.
A further appeal to the Federal Court of Appeal (2011 FCA 265) upheld the
decision except for penalties which were deleted for technical reasons. The
findings of Justice Campbell in the Tax Court are encapsulated in the
following excerpt:
[18] The
present hearing lasted a full day and I must confess that, at the end of the
hearing, I was left with the impression that I had only partial truths,
conflicting evidence and still not a particle of proof from the Appellant to
substantiate that these expenditures were actually related to his business
activities.
[7]
The activities that are at issue in these appeals
were also at issue in the prior appeal. It appears that Justice Campbell was
not happy with the length of the earlier proceeding, which lasted a full day.
These appeals also lasted far too long at 5½ days, mainly due to disorganization
on the part of Mr. Lubega‑Matovu who represented both appellants.
[8]
At this hearing, a large volume of documentary
evidence was introduced on behalf of the appellants. In addition, I heard oral
testimony from the appellants and two business acquaintances, John Clark and
Eric Alexander. For the Crown, the only witness was the appeals officer, Karol
Maar.
[9]
I would comment in particular about the
reliability of the testimony of the witnesses. I found the testimony of Mr.
Lubega-Matovu and Ms. Lukwago to be so vague and conflicting as to be unreliable
except to the extent the testimony was supported by other evidence. I found the
testimony of the other witnesses to be generally reliable, but the questions
asked of Mr. Clark and Mr. Alexander by Mr. Lubega-Matovu did little if
anything to support the losses that were claimed.
[10]
Notwithstanding that a large amount of evidence
was presented at this hearing, my conclusion is similar to that of Justice Campbell
in the prior appeal.
II. PanelForm International Ltd.
[11]
Mr. Lubega-Matovu claimed significant losses from
an arrangement with PanelForm International Ltd. (“PanelForm”). PanelForm was a
Canadian corporation that was attempting to sell equipment that would manufacture
panels to be used for low cost housing. PanelForm’s owner, Murray Harder, used
to work for a corporation that was in the same business.
[12]
Mr. Lubega-Matovu’s testimony regarding
PanelForm was vague and confusing. As far as I could tell, PanelForm’s business
was in its infancy and it was exploring potential markets in various parts of
the world. As far as the evidence reveals, PanelForm’s business never really
got off the ground.
[13]
Mr. Lubega-Matovu had a commission arrangement
with PanelForm to market its product in Africa for a 10 percent commission.
Based on the testimony of Mr. Clark, who had been a sales manager for
PanelForm, Mr. Lubega‑Matovu’s role was to provide contacts in Africa that PanelForm could pursue. He also said that Mr. Lubega-Matovu could contribute
his accounting expertise to the business.
[14]
It is not clear from the evidence how extensive
Mr. Lubega‑Matovu’s marketing activity was. It is clear from Mr.
Clark’s testimony that Mr. Lubega‑Matovu was in Africa more than
once, but it is not clear whether these trips were undertaken solely to promote
PanelForm, or whether Mr. Lubega-Matovu travelled primarily for personal
or other business reasons. Mr. Lubega-Matovu’s testimony as to his substantial
efforts on behalf of PanelForm, which included paying significant amounts to
agents, was not at all convincing. There clearly was some activity on the part
of Mr. Lubega-Matovu, but I am not satisfied that it was extensive.
[15]
As for supporting documentation, this consisted
of a large amount of disorganized primary source documents as well as accounting
records. None of this documentation convinced me that significant expenditures
were incurred by Mr. Lubega-Matovu for this business.
[16]
I would comment in particular about supporting
documentation from purported agents. None of this evidence was convincing and
the third parties did not testify. If genuine expenditures had been incurred,
it should have been possible for Mr. Lubega-Matovu to obtain reliable
supporting documentation.
[17]
In addition, there was evidence of genuine expenditures
such as moneygrams, but these documents did not corroborate that the expenditures
were incurred by Mr. Lubega-Matovu in relation to PanelForm.
[18]
As for the accounting records introduced into
evidence, in order to give these records weight, I would have to conclude that
Mr. Lubega-Matovu’s self-serving testimony regarding the preparation of these
records was truthful. The impression that I had was just the opposite.
[19]
Mr. Lubega-Matovu also called two supporting
witnesses who also had an arrangement with PanelForm to market its product.
[20]
Mr. Alexander was a friend of the owner of
PanelForm, Murray Harder. Mr. Alexander traveled for business in developing
countries and during these trips he was able to pursue PanelForm’s business at
the same time without incurring much expense. His testimony did not provide
corroboration of expenses incurred by Mr. Lubega-Matovu.
[21]
Mr. Clark was the sales manager for PanelForm
for a time, with his financial participation to be negotiated down the road.
Mr. Clark understood the product from a technical perspective and he also had
significant business experience.
[22]
For the most part, I found the testimony of Mr.
Alexander and Mr. Clark to be truthful, but it did not provide corroboration
that Mr. Lubega-Matovu incurred specific expenditures attributable to PanelForm
in the taxation years at issue.
[23]
For example, Mr. Lubega-Matovu asked Mr. Clark
how many trips he took to Africa. It was not clear what year these trips were
taken and in what capacity Mr. Clark was acting. It was revealed in
cross-examination of Mr. Clark that he left PanelForm to pursue a similar
technology that he himself developed. It was often impossible to determine
whether Mr. Clark’s activities were in connection with PanelForm or his own business.
I would note in particular that there is evidence that Mr. Clark’s business was
in operation by August, 2008 (Ex. A-20).
[24]
Mr. Clark did testify that he made a first trip
to Africa where the costs were shared with Mr. Lubega-Matovu. This testimony was
simply too general to provide support for a deduction for particular
expenditures in the taxation years at issue.
[25]
It is possible that Mr. Lubega-Matovu did incur
some expenses in relation to PanelForm, but I am not satisfied that significant
amounts were involved. In addition, the evidence was not satisfactory to
establish any particular expenditures made in the taxation years at issue.
[26]
I would also comment concerning Mr.
Lubega-Matovu’s claim that he paid Ms. Lukwago $5,000 per year for
administrative services in relation to this business. Ms. Lukwago also
testified that she was quite busy doing administrative work such as answering
the phone.
[27]
I was not convinced by the evidence as a whole that
these fees were ever paid to Ms. Lukwago or that she had performed significant
services in relation to PanelForm. Mr. Clark testified that Ms. Lukwago
provided input, but this testimony was not detailed enough to support
remuneration being paid.
[28]
The conclusion that I have reached with respect
to PanelForm is that the losses that were claimed have not been substantiated.
III. Market America
[29]
Mr. Lubega-Matovu and Ms. Lukwago reported losses
as 80/20 partners in a partnership that was a distributor of nutritional
products for a business called Market America. The business model for Market America was a typical pyramid selling arrangement. Mr. Lubega-Matovu testified that they
would earn money from selling products and also from managing others.
[30]
The evidence with respect to Market America suffered the same problem as with PanelForm. On the whole, the self-serving
testimony of Mr. Lubega‑Matovu and Ms. Lukwago was too vague and not
supported by reliable corroborating evidence.
[31]
Although the evidence suggests that Mr.
Lubega-Matovu was involved in purchases of products by other persons, the
evidence did not establish what business losses, if any, were actually
incurred.
[32]
I would comment in particular that the
accounting records presented with respect to Market America were unreliable for
the same reason as the PanelForm records. Further, Mr. Lubega-Matovu testified
that the partnership paid Ms. Lukwago a fee of $5,000 per year. I am not
satisfied that such a fee was ever paid.
IV. Rental losses
[33]
Mr. Lubega-Matovu claimed losses from purported
rentals of a portion of his principal residence. Again, there was a lack of
cogent, detailed evidence to support these losses. I would note that one of the
purported tenants was Ms. Lukwago. The evidence as a whole suggests that
she was not a tenant but a common law partner of Mr. Lubega-Matovu in the years
at issue. The evidence regarding other tenants, Lucy and/or Rita, was simply
too vague to support losses being claimed.
V. Administration fee to Ms. Lukwago
[34]
Ms. Lukwago seeks a reduction of her income in the
event that the $5,000 fees purportedly paid to her by Mr. Lubega-Matovu were
disallowed. It is not appropriate to make this adjustment because I am not
satisfied that these amounts were reported as income by Ms. Lukwago.
VI. Gross negligence penalties
[35]
The imposition of gross negligence penalties
against Mr. Lubega‑Matovu is appropriate. The evidence as a whole
suggests that the losses that were claimed were manufactured to offset
employment income. It is hard to imagine a stronger case for gross negligence
penalties than this which involves a senior CRA auditor who would have been
very knowledgeable about proper support for business expenditures.
VII. Conclusion
[36]
In conclusion, the appeals by Mr. Lubega-Matovu
and Ms. Lukwago will be dismissed in their entirety.
[37]
The respondent has asked to make submissions on
costs. Submissions may be filed by the respondent no later than June 30, 2015.
Reply submissions by the appellants may be filed no later than July 15, 2015.
The submissions shall not exceed 5 pages in length.
Signed at
Toronto, Ontario this 12th day of June 2015.
“J.M. Woods”