Citation: 2013 TCC 382
Date: 20131202
Docket: 2010-757(IT)G
BETWEEN:
LARRY GORDON SCHAFER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2010-672(IT)G
AND BETWEEN:
AMISK INVESTMENTS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
[1]
Amisk Investments Limited and Larry
G. Schafer are appealing the reassessments by the Minister of National Revenue (the
“Minister”) of their 2005 taxation years.
[2]
In 2005, Mr. Schafer was
practicing law from his home-based office in Cranbrook, British Columbia. The
legal practice was incorporated as Amisk Investments Limited (“Amisk”). Mr. Schafer
was the sole director of the company; he and his spouse were equal shareholders.
Mrs. Schafer looked after the administrative side of the law practice.
[3]
In April 2006, Mr. John
Aam, an auditor with the Canada Revenue Agency (the “Auditor”) commenced an audit
of Amisk’s 2005 taxation year which led, ultimately,
to the reassessment of both Amisk’s and Mr. Schafer’s 2005 taxation years. The respective
details of each are set out below.
Amisk Reassessment
[4]
The Minister included in Amisk’s
2005 income unreported income of $214,770 assumed to have been generated from
Mr. Schafer’s legal practice. The $214,770 comprised $179,825 in legal fees and
interest thereon of $18,627 (“$Fees & Interest”) and $16,318 in
unidentified deposits to Mr. Schafer’s personal account (“Unidentified
Deposits”). Gross negligence penalties were also imposed under subsection
163(2) of the Act.
[5]
In its Notice of Appeal, Amisk
admitted that the Fees & Interest were not reported when the company
initially filed its 2005 income tax return in February 2006. As for the Unidentified
Deposits, at paragraph 3 of its Notice of Appeal Amisk alleged that of that
$16,318:
a)
$3,596 was income that Amisk had
inadvertently not reported;
b)
$3,560 ($2,000, $560, and $1,000) was income that Amisk
reported; and
c)
the remaining balance of $9,162
was not income to Amisk.
[6]
At the hearing of its appeal, however,
Mr. Schafer submitted on behalf of Amisk that the only issue before the Court
was whether the imposition of gross negligence penalties was justified. Briefly stated, Amisk
contends that penalties are not justified because its failure to report was
inadvertent and quickly remedied. Upon learning of the impending audit, Amisk
immediately conducted a review of its books and records, identified its error
and filed an amended return including the Fees & Interest in income and
paying the tax thereon. As for the Unidentified Deposits, Amisk says gross
negligence penalties ought not to apply because the failure to report was
inadvertent and the amounts “nominal”.
Mr.
Schafer’s Reassessment
[7]
As a result of the Amisk
reassessment, Mr. Schafer’s 2005 taxation year was also reassessed to include additional
income of $241,088 assumed to have been appropriated by Mr. Schafer from
Amisk’s business income. The Minister treated the appropriation as a
shareholder benefit received by Mr. Schafer under subsection 15(1) of the Income
Tax Act. The $241,088 consisted of:
a)
$223,628 being the $214,770 Fees & Interest together with amounts
equivalent to the GST and PST payable thereon (“$223,628 Payment”); and
b)
$17,460 comprising the
Unidentified Deposits together with GST thereon of $1,142 (“Unidentified
Deposits & GST”).
[8]
Regarding the $223,628 Payment, Mr.
Schafer contends that he received that amount from Amisk as a shareholder loan
which he subsequently repaid in full in May 2006, within one year of Amisk’s
December 31 year end. In these circumstances, he says the $223,628 Payment was
not income to him in 2005. No tax ought to have been assessed and therefore, no
penalties apply.
[9]
As for the $17,460 comprising the
Unidentified Deposits & GST, Mr. Schafer admits that individual amounts of
$4,100, $2,000, $560 and $1,000 were dividend income that he had inadvertently
not reported in 2005. The remaining balance was not properly included in
income because $1,500 of that amount consisted of cash gifts from his father
and the rest ($5,000, $1,000 and $2,300) were amounts “set aside” for his sons’
university expenses from his employment income from Amisk. Mr. Schafer contends
that gross negligence penalties are not justified because any failure to report
was inadvertent and the amounts “nominal”.
Analysis
[10]
At the hearing, Mr. Schafer
submitted on behalf of Amisk that the only issue in Amisk’s appeal is whether
gross negligence penalties were justified. That matter will be dealt with below
along with the penalties imposed under Mr. Schafer’s reassessment.
[11]
In Mr. Schafer’s appeal, the key
question is whether, as a matter of fact, he received the $223,628 Payment from
Amisk as a shareholder loan. There is also the issue of what portion, if any,
of the Unidentified Deposits & GST ought to be included in Mr. Schafer’s
2005 income.
[12]
Mr. Schafer was the only witness
to testify on the Appellants’ behalf. He devoted a good portion of his testimony
to his legal background and the nature of his practice. He began his legal
career in Vancouver in 1980 as a litigator with a large Vancouver firm and then
as in-house counsel for a large heavy industrial contractor. In 1986, he moved
to London, England to pursue a Master’s degree in corporate and commercial law.
In 1988, he returned to Canada where he was employed as in-house counsel for a
large pipeline company in Edmonton.
[13]
In 1994, he decided to throw off
the shackles of employment in favour of solo practice. One of his goals in
making this change was to have sufficient control over his earnings to fund his
plans for early retirement in Mexico. He moved his family to Cranbrook, British Columbia where he set about establishing himself in family law litigation.
[14]
Because he had little
understanding of the “business” of law and, in any case, preferred to devote
himself to the practice of law, Mr. Schafer delegated the administrative and
fiscal aspects of the practice to others: Mrs. Schafer ran the legal office and
had sole responsibility for reception, office management, banking, billing and
bookkeeping. The Appellants’ accountant (the “Accountant”) prepared their
financial statements and tax returns based on the information that Mrs. Schafer
provided to him at tax time. Mr. Schafer acknowledged this as a “shortcoming”
for which he took full responsibility and which contributed to the Appellants’
problems with the Canada Revenue Agency.
[15]
Mr. Schafer then turned
his focus to certain billing procedures he
had devised to suit the needs of the practice’s clientele. Describing Cranbrook as a “blue-collar community”, Mr. Schafer went on to say that some of his clients
lacked the means to pay for his services until the matter was resolved and the
assets distributed. In such circumstances, Mr. Schafer would make a special
arrangement with the client whereby, upon completion of the file, an invoice
would be issued but payment would be deferred pending the client’s ability to
pay. The client would sign an agreement to pay off the debt at some unspecified
future time, together with interest on the outstanding amount, and pledging
property to secure the debt. Mr. Schafer described it this way:
… there was an
understanding that this wouldn’t go on indefinitely, but those issues were left
on understanding as opposed to specific commitments, but that was the general
understanding that it wouldn’t go on forever and ever but that I wouldn’t be
the instigator saying, come on, let’s get going, I want my money. I was getting
interest, and that’s – that was to be my compensation. So in that sense I
really had no real idea as to when I would get paid, and it was essentially up
to the client to determine the circumstances in which he was prepared to either
sell his property or to finance to pay me, but the ball was in the client’s
court, and that was fine with me.
…
… the bills were
rendered. The security was taken. That’s about the last thought I gave to the
case. I just moved on to the rest of my practice, thought what I’d done was
prudent and proper, and I was comfortable with it, and basically I gave that
case no more thought. I just left it in my client’s hands and thought, well,
it’ll work itself out in due course.
[16]
Typical of these special billing
arrangements were two large amounts received in 2005, one in February for $99,882
and a second in May for $112,500, together with interest thereon. These two
amounts
represented the lion’s share of the Fees & Interest. Mr. Schafer could not
say exactly when these amounts had been invoiced but said the work had been
done “quite a bit earlier”
and billed to the clients “a long time earlier”,
at least five years, and “quite possibly longer” before payment was finally
received.
[17]
In any case, Mr. Schafer had given
them no more thought until shortly after April 26, 2006 when Amisk received
notice
that an audit was to be conducted of its 2005 taxation year. Mr. Schafer’s
reaction to this news was swift:
[a]lmost immediately
upon receiving that notice, I caused a review to be done of all my records
and tax filings for the years 2004 and 2005. The purpose of that review was
to confirm that all of my filings were in order and, if not, to locate any …
errors apparent or otherwise. That was the goal, and upon the completion of
that internal review, a number of apparent errors were, in fact, identified. [Emphasis added.].
[18]
Among the “apparent errors”
identified was Amisk’s failure to report the payments received on the two
long-outstanding accounts along with some other smaller fees received over the
course of 2005. He explained that at the time of filing Amisk’s 2005 return, it
was his understanding that the two large payments had been “… declared as
income years before, taxes paid on it and, therefore, that it was not income to
[Amisk]….
However, his review disclosed that these amounts had, in fact, been “recorded”
as bad debts:
… That was a factual
error on my part, and it was also an error on my part simply by way of …
prudent business practice. I mean the amounts were significant, and I should
not have relied on my memory, particularly with respect to an understanding
that had gathered an awful lot of dust, but I didn’t. I didn’t check when [the
two large payments] came in. I thought that that’s what had been done, and when
we reviewed the matter, it became apparent that those two amounts had, in fact,
been at some point recorded as bad debts, and therefore upon receipt,
they should have been declared as income, and that’s what [the Accountant]
attended to directly, and hence the $40,000 plus in tax that was owing as a
result of those two large, albeit late, payments that were made. [Emphasis
added.]
[19]
Thus it was on May 9, 2006, within
two weeks of learning of the impending audit, Mr. Schafer wrote to the Accountant instructing him to file an
amended return to include the Fees & Interest in Amisk’s 2005 income and to
amend the company’s financial statements to show a corresponding shareholder
loan to him in 2005 of $223,628. Attached to that letter was a schedule Mr. Schafer
had prepared setting out the dates and amounts of the shareholder loan advances,
the corresponding Fees & Interest and the taxes payable thereon:
Amendments
to 2005 Corporate Tax Return
|
|
Date
(2005)
|
Shareholders
Loan
|
Interest
Income
|
Fee Income
|
PST
|
GST
|
|
1.
|
Jan 12
|
500.00
|
|
438.60
|
30.70
|
30.7
|
|
2.
|
Jan 18
|
2,000.00
|
|
1,754.40
|
122.80
|
122.80
|
|
3.
|
Feb 1
|
2,643.71
|
|
2,319.05
|
162.33
|
162.33
|
|
4.
|
Feb 4
|
5,052.00
|
|
4,431.58
|
310.21
|
310.21
|
|
5.
|
Feb 7
|
112,500.00
|
12,500.00
|
87,719.30
|
6,140.35
|
6,140.35
|
|
6.
|
Apr 6
|
250.00
|
|
219.30
|
15.35
|
15.35
|
|
7.
|
May 1
|
99,882.27
|
6,127.08
|
82,241.39
|
5,756.90
|
5,756.90
|
|
8.
|
July 15
|
800.00
|
|
701.76
|
49.12
|
49.12
|
|
|
Total:
|
223,627.98
|
18,627.08
|
179,825.38
|
12,587.76
|
12,587.76
|
[20]
When cross-examined about how he
had come up with these revised numbers, Mr. Schafer had this to say:
Q
And -- and what did you look at to get to those amounts? How did you
determine that those amounts had been in error included or not included in the
corporate income?
A
I don't know. I -- I didn't physically look at the documents, at our accounting
bookkeeping records. I wouldn't be able to make sense of them, but my wife did,
brought matters to my attention, and then between the two of us, we went
through it, and I asked questions and she gave answers, and we thought -- it
appeared to us that we had a problem, so then we discussed it with [the
Accountant].
Q And
-- and is your wife here today with you?
A No.
Q No?
And so you've explained that in that schedule where there is an amount for
interest income, that was as per an arrangement made with a particular client
to pay interest because they hadn't paid their bill on time; is that correct?
A They
-- they hadn't paid it when rendered, and it was -- yes. Yes on both counts.
Q
And -- and so you say you came to find these amounts with your wife's
help, correct?
A Yes.
Q
I think in your direct testimony, you had stated that with regard
especially to the bigger amounts that you recalled the clients -- you recalled
the situation of the clients. Did you bring with you today the invoice that you rendered to
those clients to show that amount was owing?
A
You mean the -- the initial amount or the security document that would
have provided for interest or both?
Q Did
you bring either of those?
A No.
Q You
don't have those with you today.
A No.
Q
But you -- you recalled in great detail exactly who these clients were and
the arrangements you made, correct?
A Yes,
most certainly.
Q
And am I to understand, then, that you would have looked at those records
in coming to the schedule amounts that you provided in this letter to your
accountant? Did you look at the invoices, the bills you rendered for these
clients?
A No.
No.
[21]
In spite of having undertaken the review in anticipation of the
audit and unearthed the records necessary to identify and correct Amisk’s
reporting errors, Mr. Schafer made no mention of this to the Auditor. Nor did he
tell him that he had instructed the Accountant to amend the company’s 2005 return
and shareholder loan records. Yet this was not for lack of opportunity. On the
very day Mr. Schafer sent instructions to the Accountant, he also penned a
letter to the Auditor
seeking to postpone their first meeting scheduled for May 29, 2006 to early
July 2006. When asked about this behaviour on cross-examination he offered the
following explanation:
Q
Well -- but surely you have to agree with me that you are now in correspondence
with an auditor who's going to review the corporate tax return for … 2005. You
have just communicated to your accountant to make changes to the corporate tax
return for 2005. Why wouldn't you have just picked up the phone and phoned the
auditor and said, oh, by the way, I've asked my accountant to look at some
changes for the corporate tax return because I think I've made some errors in
what was included in income? Why -- why didn't you just pick up the
phone?
A
Because that would have served, in my view, no -- no useful purpose. He
would have said presumably what errors or what are you doing, and I would have
been saying you'll get it all in detail from [the Accountant] once he's got it
done.
Q
Did you ask [the Accountant] in the letter that you sent to him to ensure
that the auditor was informed of these changes?
A
I don't believe I asked him in the letter, but I certainly knew that it
would be brought to his attention.
Q
You knew how?
A That
was the whole purpose in doing it.
Q The
whole purpose in doing what, the changes to the corporate return?
A
All of that would have been part of the audit, yes. He was going to come
across material that was in error and that -- it was not only in error but that
steps were being taken to deal with that, and he was -- all of that was going
to be reviewed with him.
Q And
-- and is [the Accountant] going to be giving testimony today?
A No.
[22]
What the Accountant did do was follow Mr. Schafer’s instructions.
On May 17, 2006
he replied to Mr. Schafer’s letter of May 9, 2006 advising that the amended
return was ready for signature, suggesting the amendment and filing of GST/PST
returns and showing the calculation of interest of 3% on the shareholder loan
advances. Amisk’s amended return was received by the Canada Revenue Agency on
May 19, 2006.
The Canada Revenue Agency forwarded the amended return to the Auditor sometime
before the meeting with Mr. Schafer scheduled for May 29, 2006.
[23]
When asked why he would not have
told the Auditor before that time about his efforts to get Amisk’s affairs in
order, Mr. Schafer explained:
A I
don't know. I -- I understood my – my job with the auditor was to answer his
questions. It wasn't to play accountant and try to tell him what was going on. That
was for others. I was to answer his questions, provide his documents, and it
would go from there.
Q But
wasn't his questions going to be directed to you about the corporation?
A Certainly
they would be.
Q And
wasn't it his -- the commencement of his audit that galvanized you to review
the books and records of the 2004/2005 years of the corporation?
A Certainly.
Q So
isn't that relevant to the audit that's begun?
A
I assume it -- I assume it would be, and I would assume that if it was
relevant to him, he would ask me questions about it.
Q Well,
how could he ask you questions about it if he didn't know that you had amended
your return?
A He
did. We've already gone over that. [The Accountant] was advising him of that.
Q He
certainly didn't in May.
A I
don't know when he did.
Q Not
at the time you did it. We've agreed to that, right?
A I
-- I didn't amend the return on May 9th. I simply sent information to [the Accountant],
and [the Accountant] advised [the Auditor], … when he did so I don't know.
[24]
In any case, the audit went ahead.
In reviewing whatever books and records the Appellants provided, the Auditor
noticed that the Fees & Interest along with the Unidentified Deposits had
been deposited into Mr. Schafer’s personal account rather than Amisk’s and
further, that that account was one he held jointly with his college-aged son.
Unsatisfied with the responses to his inquiries in respect of these amounts,
the Auditor ultimately recommended the reassessments currently under appeal.
[25]
At the hearing, Mr. Schafer acknowledged
that the Fees & Interest and some of the Unidentified Deposits ought to
have gone into Amisk’s account. However, he said there was a simple explanation
for how they had ended up in a joint personal account instead of Amisk’s. According
to Mr. Schafer, the Fees & Interest were part of a shareholder loan totalling
$233,628 he received from Amisk in 2005 (already referred to herein as the
“$223,628 Payment”).
[26]
The purpose of the shareholder
loan was to help him realize his long-held objective of early retirement to a
permanent residence in Mexico. The timing of the retirement move had always
been “fluid”, he said, but the unexpected receipt in 2005 of the two large
payments comprising the bulk of the $223,628 Payment crystallized his plan. Suddenly
he had the means to bridge finance the purchase of a house in Mexico pending the sale of the family home in Cranbrook. That is why “… these two payments that were
received by me were treated as a shareholder’s loan when they came in.” Apart from having used
these amounts for his personal benefit, Mr. Schafer offered no details as to
how he had “treated” these amounts as a shareholder loan “when they came in”.
[27]
Mr. Schafer then shifted his focus
to why the $223,628 Payment had been deposited into an account held jointly
with his son. He prefaced his remarks by posing the following question: “Why
not just leave the money in the corporate account, and when you
get ready to write a cheque for the house in Mexico just write the cheque and
treat it as a shareholder’s loan at that time?” [Emphasis added.].
[28]
Before turning to his answer, it is
worth noting how Mr. Schafer framed the above question. By asking why not “leave”
the money in the corporate account”, he gives the impression that the $223,628
Payment had initially been deposited in Amisk’s account which is, of course,
not true. He admits it went directly into his own joint account. The reason for
that, he said, was that he was fearful that he and his wife might die before
they could complete the purchase of a retirement home in Mexico, thus leaving
his two sons penniless while their estate “through the corporation” of some $2 million was
probated. By putting the $223,628 Payment directly into the joint account in
2005, he could ensure that should anything befall their parents, his sons would
have access to the funds required to permit them to carry on their studies. It
would have the additional benefit, Mr. Schafer said, of providing the executor
of the estate (Mr. Schafer’s brother) with an opportunity to assess their ability
to handle large amounts of money before advancing the entire estate to them.
[29]
There ended Mr. Schafer’s testimony. Portions of it
have been quoted at length in these Reasons for Judgment to give a sense of the
implausible nature of many of his answers, prime among them the account set out
directly above. The transcripts also reveal a certain evasiveness: key
questions about why or how certain things had been done went unanswered, his
justification being his lack of involvement in the business side of the
practice. Yet, in spite of acknowledging this “shortcoming” and having gone to
some pains to inform the Court of his extensive legal background, Mr. Schafer
chose not to call those to whom he had delegated these tasks. He offered no
explanation as to why he had not called Mrs. Schafer or the Accountant, leaving
the impression that their absence was more litigation strategy than amateur
oversight. In all the circumstances, I accept the submission of counsel for the
Respondent that the Court ought to draw a negative inference from the
Appellants’ failure to call Mrs. Schafer and/or the Accountant to answer
questions that Mr. Schafer insisted he could not.
[30]
Another significant weakness of
Mr. Schafer’s evidence was the lack of supporting documentation. In House v.
Her Majesty the Queen,
the Federal Court of Appeal applied the principle established in Hickman
Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 that a taxpayer’s credible
oral evidence does not necessarily need the support of source documents:
[72]
The [trial judge] appears to have elevated the judicial requirement that
supporting documents may be required for a taxpayer to establish his or her
claims and deductions to an authoritative principle that documents will always
be required for a taxpayer to establish his or her case. There is, in my
respectful view, no principle to the effect that oral evidence must necessarily
be supported by source documents. Whether documents are required to establish a
point will depend on the particular circumstances of the case. However, whether
documents are required or not, a judge must nonetheless assess the oral
evidence and determine whether it is credible. The requirement for documents,
or not, will often turn on such an assessment.
[31]
Applying this test to the present
matter, given Mr. Schafer’s lack of credibility and his repeated reference to
the importance of his pre-audit review, corroborating documents were crucial to
the success of the Appellants’ appeals. They were necessary to bolster Mr. Schafer’s
testimony that the discoveries made during the review of Amisk’s books and
records provided a reasonable explanation for the reporting errors leading to
the reassessments. Not only were the source documents not in evidence but also
Mr. Schafer was equivocal as to exactly what documents he had examined.
Although having emphasized the significance of the special client billing
arrangements, in the same breath, he said it had not been necessary to look at the
client files pertaining to the two large payments received in 2005, claiming
that because of their size, he still had clear memory of the billing details
when he conducted his review in May 2006. Yet, in February 2006 when he filed Amisk’s
return, those same sizeable amounts completely slipped his mind – even though
they had just brought about the realization of his retirement dream.
[32]
What is particularly
troubling about the Appellants’ lack of documentation is that the kinds of documents Mr. Schafer referred to – client
invoices, agreements, financial statements, income tax returns - are all those
which a law practice would typically maintain. Indeed, he volunteered during
cross-examination that, as of the time of the hearing, they were “probably”
still in his possession. He also acknowledged that any original documents
provided to the Canada Revenue Agency during the audit had been returned to
him. In spite of that, Mr. Schafer offered no explanation for having chosen not
to bring documents with him – except to say somewhat testily on redirect that
as he had provided information to the Canada Revenue Agency during the audit
and documents to the Crown in the Lists of Documents and on Examination for
Discovery, it was ‘inappropriate” for counsel for the Respondent to invite the
Court to draw a negative inference from his failure to tender supporting
documents at the hearing.
[33]
That reaction might be
understandable coming from a self-represented taxpayer with no legal
background. Coming from Mr. Schafer’s mouth, it fell a little flat. In my
experience, a taxpayer with documents available to justify his claims is
usually eager to present them, shoebox and all. It defies belief that a man of
Mr. Schafer’s intelligence, education and litigation experience would not think
to do so. The more likely scenario is either that corroborating documents do
not exist or that whatever documents are available do not say what Mr. Schafer
would have the Court believe.
[34]
The great weakness of
Mr. Schafer’s testimony was its overall lack of credibility. His entire course of conduct upon learning of the audit
cast an aura of suspicion over his true motives in revising Amisk’s books and
records and amending the company’s 2005 return. In my view, what lay behind his
actions was an attempt to retool the company’s decision not to report the Fee
& Interest Payments and Unidentified Deposits and to divert them directly
to Mr. Schafer’s account; the strategy included the recharacterization of the $223,628
Payment appropriated by Mr. Schafer as a shareholder loan.
[35]
In this way, his behaviour is
similar to that of the taxpayer in Tymchuk v. R., 2003 TCC 699,
another case of an unsuccessful attempt to reclassify amounts that the Court
found were shareholder benefits. Dealing with the penalty issue in the appeal,
McArthur, J. described the taxpayer’s conduct at paragraph 12:
[12] … Donald
was his own bookkeeper and I believe he was a certified general accountant. He
had no intention of entering the amounts as shareholder loans or anything else
until they were revealed in the audit. He had the opportunity and obligation to
accurately record the corporation’s payments. Having been caught by the audit,
he now asks that he be permitted to do some retroactive tax planning … .
[36]
Similarly, Mr. Schafer, acting on
his own and Amisk’s behalf, was motivated to amend the records and returns to
avoid the consequences that he knew an audit was bound to unleash. In his
submissions, Mr. Schafer noted that in a closely held corporation it is “not
uncommon” for a shareholder to take advances from the company throughout the
year and to classify them as bonuses, dividends or shareholder loans “sometime
into the calendar year following such advances, that being normally at the time
the financial statements and ultimately the tax return are prepared for the
corporation”.
He then went on to say that Amisk had classified the $223,628 Payment as
a shareholder loan in 2006; in support, he pointed to the schedule attached to
his letter of instruction to the Accountant dated May 9, 2006. What this explanation glosses
over is first, that the classification was not done in anticipation of filing
Amisk’s 2005 return; it occurred only after he received notice of the impending
audit. It does not address why, if these amounts were treated when received as
a shareholder loan ‘when they came in”, they were not classified as such sometime
before Amisk filed its return in February 2006 when, according to Mr. Schafer,
such adjustments are “normally” made. In the same vein, he did not say why he
suddenly decided to repay the alleged shareholder loan in May 2006 rather than
waiting until closer to Amisk’s year end. This sudden flurry of activity
occurred between receiving notice of the audit on April 26, 2006 and the
meeting with the Auditor scheduled for May 29, 2006. These steps, along with
his efforts to keep the Auditor in the dark, were taken in the hope of passing
off deliberate omissions as inadvertent errors later discovered thanks to Mr. Schafer’s
due diligence.
[37]
The upshot of Mr. Schafer’s lack
of credibility and failure to provide supporting documentation is that the
Appellants have not demolished the assumptions underpinning the reassessments.
[38]
Based on the evidence before me, I
find that Mr. Schafer did not receive the $223,628 Payment as a shareholder
loan in 2005; it is far more likely that that amount was received from the
company as a shareholder benefit within the meaning of subsection 15(1) of the Income
Tax Act.
[39]
As for the Unidentified Deposits
& GST, I am not persuaded by Mr. Schafer’s testimony that these amounts
were not properly included in income. Nor do I see them as “nominal”, except if
used as a comparator for the $223,628 Payment he also appropriated from Amisk. Given
his lack of credibility, I cannot accept at face value his contention that the
$1,500 was a cash gift. Nor do I understand what he meant by having “set aside”
$8,300 from Amisk for his sons’ education; without credible testimony or some
kind of supporting documentation, it is just another term for appropriation. As
for Amisk, it admitted it did not report $214,770 but in the event that some
portion of the Unidentified Deposits remains in dispute, I am not satisfied
that Amisk demolished the assumptions underpinning their assessment.
Penalties
[40]
The only remaining issue is
whether penalties ought to be imposed in respect of the Appellants’
reassessments under subsection 163(2) of the Income Tax Act. The
Minister has the onus of justifying the imposition of penalties. In Lacroix
v. Canada, 2008 FCA 241, a net worth appeal, the Federal Court of Appeal
considered how the Minister is to discharge this burden:
32 … 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 either by 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 …
subsection 162(3) (sic).
[41]
Here, the facts underpinning the
Minister’s imposition of penalties were duly pleaded in the Replies to the
Notice of Appeal. In my view, it is clear from Mr. Schafer’s direct testimony
and his answers on cross-examination that he, both in his personal capacity and
as the directing mind of Amisk, conducted himself in a manner that justifies
the imposition of penalties under subsection 163(2).
[42]
Mr. Schafer’s own evidence was
that he is a well-educated litigation lawyer with extensive experience in
corporate and commercial law. Nothing in his conduct at the hearing is
consistent with his portrayal of himself as a man adrift in an administrative and
financial morass. Despite his stated lack of involvement in the administrative
side of his practice, he was somehow able to plan for and achieve early
retirement with some $2 million in assets. He admitted that two of the payments
comprising the Fees & Interest were large amounts in relation to his usual
billings, so significant that he could recall with clarity the details of their
billing long after the fact. On cross-examination, he did not contradict the Respondent’s
contention that there was a material difference in the Appellants’ respective
reported and unreported incomes: in Amisk’s case, $114,348 versus $214,770; for
Mr. Schafer, $39,640 versus $241,088.
[43]
Notwithstanding the above, he would
have the Court believe that his failure to report or accurately record these
amounts was the unintended consequence of sloppy business practices. He
attributed the errors, in part, to the fact that most of the Fees &
Interest was for legal services invoiced several years before. In spite of
that, when initially filing Amisk’s 2005 return, Mr. Schafer chose to rely on
his memory rather than verify how these two large payments had been recorded
and treated for tax purposes - even though at all times up to and including the
hearing of these appeals the relevant client files, invoices, security
agreements and tax records were available for his review. As for the smaller
amounts making up the Fees & Interest received 2005, he did not provide a
credible explanation for how these amounts had been inadvertently not reported.
[44]
In my view, Mr. Schafer in his
personal capacity and as the directing mind of Amisk was at best, indifferent
to complying with the requirements of the Income Tax Act in failing to
keep proper books and records, to report the Fees & Interest and Unidentified
Deposits in the Amisk’s 2005 return, and to include in income the $223,628
Payment appropriated from Amisk for his own benefit. It was only when faced
with the prospect of an audit that the Appellants took steps to amend the
existing documentation to conform with the more palatable version of events Mr.
Schafer planned to present to the Canada Revenue Agency during the audit. This
brings his conduct within the definition of “gross negligence” established in Venne
v. Canada (1984), 84 D.T.C. 6247: “a high degree of negligence tantamount
to intentional acting, an indifference as to whether the law is complied with
or not”. In all the circumstances, the Minister was justified in imposing
penalties in respect of the reassessments of Amisk’s and Mr. Schafer’s 2005
taxation years.
[45]
For the reasons set out above, the
appeals are dismissed, with costs to the Respondent.
Signed at Ottawa, Canada this 2nd day of December 2013.
“G. A. Sheridan”
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