Citation: 2013 TCC 213
Date: 20130709
Docket: 2012-1829(IT)I
BETWEEN:
DONATO LONGO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1]
Donato Longo deducted
various business expenses when he filed his tax returns for his 2007 and 2008
taxation years. Mr. Longo takes the position that those expenses were related
to a consulting business.
[2]
The Minister of
National Revenue denied the deduction of most of those expenses. The Respondent
submits that all of the expenses should have been denied but that, due to an
error, $1,590 in expenses were allowed. The Respondent acknowledges that the
amount of the assessment cannot be increased on appeal and thus is not seeking
to have those expenses denied.
[3]
In reassessing Mr.
Longo, the Minister applied gross negligence penalties pursuant to subsection
163(2) of the Income Tax Act (the “Act”).
[4]
The key issues in this
case are whether the denied expenses should be allowed and, to the extent they
are not allowed, whether gross negligence penalties should be applied to the
disallowed expenses.
Consulting Business
[5]
When he filed his 2007
tax return, Mr. Longo reported that he had $2,000 in gross professional income
and $17,154 in expenses for a loss of $15,154 related to a business under the
name Donato’s Consulting Services.
[6]
When he filed his 2008
tax return, Mr. Longo reported a loss from the same activity but this time he
reported it as a loss from a business rather than a loss from a profession. He
reported no gross business income and $12,190 in expenses for a loss of
$12,190.
[7]
Mr. Longo was
represented at trial by an agent named Rudolfo Terracina. Mr. Longo testified
that Mr. Terracina was the sole client of Mr. Longo’s consulting business. Mr.
Terracina operates a business under the name Agemo Tax Services. It was unclear
whether the business was incorporated or not. Mr. Longo referred to both Mr.
Terracina and Agemo in his testimony. As nothing turns on this, I will refer to
the business as if it was Mr. Terracina’s sole proprietorship.
[8]
Mr. Longo stated that
his consulting business consisted of introducing prospective clients to Mr.
Terracina as well as providing chauffeur services to Mr. Terracina such as
driving Mr. Terracina from his house outside of London, Ontario to meet with
prospective clients that Mr. Longo was introducing or to meet with Mr.
Terracina’s existing clients. Mr. Longo stated that he had known Mr. Terracina
since 2003 and while he had been trying to refer prospective clients to Mr.
Terracina from 2003 until now, he had engaged in that activity in a more
serious manner during 2007 and 2008.
[9]
Mr. Longo testified
that he did “not exactly” have an agreement with Mr. Terracina about how
he would be paid for introducing prospective clients. Mr. Longo stated
that he “hoped” that if he referred a client with a tax dispute to Mr.
Terracina and Mr. Terracina won the case then Mr. Terracina would take a
percentage of the winnings that he collected from the client and pay them to
Mr. Longo. However, he testified that he and Mr. Terracina had not agreed
to a certain percentage that would be paid and clarified that Mr. Terracina
has, in fact, never paid anything to him. When he was asked about the $2,000
that he reported as gross income from the consulting business on his 2007 tax
return, Mr. Longo was unable to reconcile that supposed revenue with the fact
that he had not been paid anything by Mr. Terracina. He had no recollection of
why that revenue appeared on his tax return.
[10]
Mr. Longo testified
that he did not charge Mr. Terracina for driving him places because he was
hoping to earn money through commissions and to learn from Mr. Terracina.
[11]
Mr. Longo provided the
Court with a list of 18 individuals and companies that he said he had referred
to Mr. Terracina as prospective clients. The list was prepared approximately 2
weeks before trial. Mr. Longo testified that he sat down with Mr. Terracina and
came up with this list. No list of prospective clients had previously been
provided to the Minister. It is clear to me from the wording that the list was
written by Mr. Terracina. The list contained not just the names of the
prospective clients but also details about what did or did not happen with the
clients. I warned Mr. Terracina that I would accept the list as an exhibit but
that I was not going to consider any statements on it to be evidence unless Mr.
Longo himself testified to them. I raise this because the list indicates that
Mr. Longo was paid in respect of the first two prospective clients on the list.
In his testimony, Mr. Longo was clear that Mr. Terracina did not pay him
anything. The second prospective client on the list was Mr. Longo’s brother’s
company, Longo Custom Kitchens. Mr. Longo stated that his brother gave him some
building materials because he was grateful for Mr. Longo referring him to Mr.
Terracina but Mr. Longo was clear that he did not receive any payments
from Mr. Terracina for the referral.
[12]
The Minister made an
assumption of fact that Mr. Longo “did not operate any business activity
providing consulting services”. The only evidence that was provided to demolish
that assumption was Mr. Longo’s testimony. There was no contemporaneous documentary
evidence that supported the existence of the business and no other witnesses
were called to testify on Mr. Longo’s behalf.
[13]
While a taxpayer’s oral
testimony may be sufficient to demolish an assumption (House v. The Queen, 2011 FCA 234, 2011 DTC 5142),
I did not find Mr. Longo to be a
credible witness. He had a reasonable recollection of events from 2007 and 2008
outside of his alleged business and answered the questions in respect of those
events in a straightforward manner. However, when faced with questions that
went to the core of his case, he would often pause for long periods of time as
if he was searching for an acceptable answer and then simply reply that he
could not recall. The clear impression that I was left with was not that Mr.
Longo did not recall the answer but either that he recalled the answer and did
not wish to give it or, more likely, there was no answer to give because the business
in question was fictitious. Mr. Longo’s credibility was not enhanced by his
willingness to be lead in his evidence by Mr. Terracina. In addition to the
foregoing, my views of Mr. Longo’s credibility were significantly influenced by
the fact that he claimed expenses on his tax return for which he had no
explanation whatsoever. Those claims are described in more detail below.
[14]
Mr. Terracina did not
testify. He could presumably have provided evidence regarding whether Mr. Longo
did, in fact, provide his services to him, what his expectations were regarding
payment for those services, what his dealings were with the clients on the list
and whether he ultimately paid Mr. Longo anything for his services. I draw an
adverse inference from Mr. Terracina’s failure to testify.
[15]
Most of the purported potential
clients of the consulting business were individuals that Mr. Longo indicated
were his friends, acquaintances or contacts from a kitchen cabinet installation
business that Mr. Longo operated through a numbered company. Half of them
resided in the London area. Presumably one or more of these individuals could have
provided evidence regarding whether Mr. Longo did, in fact, try to
convince the individual to retain Mr. Terracina’s services, whether the
individual did retain those services and whether the individual paid Mr.
Terracina for those services. I draw an adverse inference from the failure of
Mr. Longo to call any of these people as witnesses.
[16]
The Respondent called
the auditor, Tyler Heslop, as the Respondent’s only witness. I found Mr. Heslop
to be credible. Mr. Heslop testified that when he initiated his audit of Mr.
Longo he made what he described as a “cold call” to Mr. Longo to advise
him that he was under audit. Mr. Heslop stated that in that phone call he asked
Mr. Longo about his consulting business and Mr. Longo was unable to recall what
the business was.
[17]
Based on all of the
foregoing, I find that Mr. Longo has failed to make a prima facie case
demolishing the Minister’s assumption that he “did not operate any business
activity providing consulting services”.
Stewart Test
[18]
Counsel for the Respondent directed me to the Supreme
Court of Canada decision in Stewart v. The Queen, 2002 SCC 46,
2002 DTC 6969 and urged me to find that Mr. Longo did not have a source of
income from the purported consulting business. In my view, it is not necessary
for me to consider Stewart. At paragraph 50 of Stewart, the
Court describes the test as follows:
It
is clear that in order to apply s. 9, the taxpayer must first determine whether
he or she has a source of either business or property income. As has been
pointed out, a commercial activity which falls short of being a business,
may nevertheless be a source of property income. As well, it is clear that some
taxpayer endeavours are neither businesses, nor sources of property income, but
are mere personal activities. As such, the following two-stage approach
with respect to the source question can be employed:
(i)
Is the activity of the taxpayer
undertaken in pursuit of profit, or is it a personal endeavour?
(ii)
If it is not a personal endeavour, is the source
of the income a business or property?
[emphasis added]
[19]
The test in Stewart
presupposes that there is an “activity” occurring. As explained above, Mr.
Longo has not demolished the Respondent’s assumption that no activity existed.
Therefore there is no activity to which the Stewart test can be applied.
[20]
If I am wrong and there
was an activity occurring, then I find that it was a business activity as I am
unable to see what personal element there could have been to the purported
activity.
Expenses
[21]
If I am wrong, and Mr.
Longo did have a consulting business in 2007 and 2008 which was a source of
income to him, then I find that he either did not incur the expenses that he
claimed in respect of that business or did not incur them for the purpose of
gaining or producing income from that business.
[22]
Mr. Longo claimed the
following expenses on his 2007 and 2008 tax returns.
|
Expense
|
2007
|
2008
|
|
Advertising
|
$670
|
$860
|
|
Business Tax, Fees, Licenses, etc.
|
$314
|
$490
|
|
Meals and Entertainment
|
$580
|
$600
|
|
Motor Vehicle
|
$7,964
|
$3,660
|
|
Office
|
$1,280
|
$720
|
|
Travel
|
|
$290
|
|
Supplies
|
$280
|
$1,490
|
|
Legal, Accounting and Other Professional Fees
|
$1,200
|
$1,200
|
|
Telephone and Utilities
|
$876
|
$480
|
|
Other Expenses – Courses
|
$2,400
|
|
|
Management and Administration Fees
|
|
$2,400
|
|
Capital Cost Allowance
|
$1,590
|
|
|
Total
|
$17,154
|
$12,190
|
[23]
Mr. Longo testified that
all of the above expenses related wholly to his alleged consulting business.
[24]
During portions of 2007
and 2008, Mr. Longo was employed as a truck driver by a company based in
London, Ontario. Mr. Longo was clear in his testimony that the above expenses
did not relate to that employment.
[25]
Mr. Longo incorporated
a company named 1690478 Ontario Limited in 2006. During 2007 and 2008, that
company was involved in the business of installing kitchen cabinets. Mr. Longo
was clear in his testimony that the above expenses did not relate to either the
company’s expenses or his work with the company.
[26]
I will review each of
the categories of expenses in turn:
a.
Advertising: Mr. Longo testified that he did not
engage in any advertising for his alleged consulting business other than
placing some pamphlets that Mr. Terracina had given him in the showroom for his
brother’s company’s kitchen cabinet business. Mr. Longo stated that he did not
pay Mr. Terracina for those pamphlets. Mr. Longo was unable to explain why he
had claimed advertising expenses.
b.
Business Tax, Fees,
Licences, etc: Mr. Longo
was unable to recall any expenses that he had incurred that would fall into
this category.
c.
Meals and
Entertainment: Mr. Longo
testified that he sometimes took prospective clients out for coffee or lunch.
He could not recall whether he paid for the coffee or lunch for those
prospective clients or whether he had simply paid for his own food. As Mr.
Longo testified that the prospective contacts were all friends, acquaintances
or contacts from the kitchen installation business, I am not convinced that the
purpose of these meals would have been to gain or produce income from the
consulting business.
d.
Motor Vehicle: The motor vehicle expense calculation
was included in Mr. Longo’s 2007 tax return but that page was missing from the
copy of the 2008 tax return that was filed as an exhibit. The 2007 tax return
indicated that almost 95% of Mr. Longo’s use of his vehicle had been claimed for
business purposes. Mr. Longo did not keep a log of his vehicle usage. Given
that Mr. Longo had a full time job for at least 6 months of 2007 which he would
have had to drive to and from and given that he presumably used his vehicle for
personal purposes as well, the idea that almost 95% of the vehicle’s use was
for business purposes is simply not believable. When confronted with this fact
on cross‑examination, Mr. Longo suggested that an error must have been
made in the tax return. However, he did not suggest what an appropriate amount
of business use would have been. A handwritten document that was prepared by
Mr. Terracina during a meeting among two CRA auditors and Mr. Longo was entered
into evidence. That document indicated that Mr. Longo had, in fact, driven
almost 50% more kilometers for business purposes in 2007 than he had claimed on
his tax return. If the statement on the return had truly been a simple error,
then it is hard to understand why Mr. Longo would have compounded that error by
exaggerating his business use of the vehicle even further in this meeting with
the auditor.
e.
Office: There was no evidence to indicate that
Mr. Longo had an office in 2007 or 2008. Mr. Longo testified that Mr. Terracina
began using an area of Mr. Longo’s basement as an office but that did not occur
until 2009.
f.
Travel: There was no evidence that Mr. Longo
incurred any travel expenses separate from his purported vehicle expenses.
g.
Supplies: Mr. Longo testified that when he started
working with Mr. Terracina, Mr. Terracina was not in a good financial
position so Mr. Longo would pay for Mr. Terracina’s office expenses such as
printer paper and ink cartridges. I find this extremely unlikely.
h.
Legal, Accounting
and Other Professional Fees:
Mr. Longo could not recall who he had paid these fees to. Given his description
of his business, I cannot imagine who he would have paid professional fees to
other than Mr. Terracina. If Mr. Terracina had been the recipient of those
fees, surely he could have testified or provided a copy of the invoices in
question to Mr. Longo.
i.
Telephone and
Utilities: Mr. Longo
indicated that he made a couple of phone calls a month on his cell phone for
business purposes. He did not provide any other evidence of telephone or
utility expenses. I cannot accept that a couple of phone calls a month would
amount to expenses of $876 and $480 respectively in Mr. Longo’s 2007 and 2008
tax years.
j.
Other Expenses
(Courses): Mr. Longo
could not recall what course he had spent $2,400 on in respect of his consulting
business in 2007.
k.
Management and
Administration Fees: Mr.
Longo could not recall who he had paid $2,400 in management and administration
fees to in 2008. Given the nature of his business, I cannot imagine why he
would have incurred any such fees. There was simply nothing to manage or
administer.
l.
Capital Cost
Allowance: Mr. Longo did
not provide any evidence regarding his claim for capital cost allowance in 2007
or why a similar claim was not made in 2008. The capital cost allowance claim
of $1,590 is the amount that was erroneously allowed by the Minister in
reassessing Mr. Longo.
[27]
No documentary evidence
supporting any of the expenses was produced in Court. Mr. Longo provided some
credit card statements and receipts to the auditors but those were not filed as
exhibits. While it is not always necessary for taxpayers to produce receipts,
in a case such as this where the taxpayer has little, if any, recollection of
what the supposed expenses related to, it is, in my view, essential to do so.
[28]
Mr. Longo testified
that Mr. Terracina prepared his tax returns. He indicated that he would take a
large file folder of documents to Mr. Terracina and that Mr. Terracina
would then use the documents in the folder to put together the return. If this
is the case, then Mr. Terracina could presumably have provided valuable
evidence to explain how the various figures that appear in the tax returns were
calculated. I draw an adverse inference from the fact that Mr. Terracina was
not called to testify as to this point.
[29]
In conclusion, if Mr.
Longo had a consulting business, I am not convinced that the vast majority of
the above expenses were incurred at all. The only expenses which I believe may
have been incurred were the vehicle and meals and entertainment expenses.
However, to the extent that Mr. Longo did incur vehicle and meals and
entertainment expenses, I am not convinced that he did so for the purpose of
earning income and, in any event, I have no reliable evidence upon which I
could determine the amount of those expenses.
Reasonableness
[30]
As a further
alternative argument, the Respondent submitted that, to the extent Mr. Longo
had incurred the expenses that he claimed for the purpose of gaining or
producing income, those expenses were not reasonable. In light of my conclusions
above, it is not necessary to consider this position.
Gross Negligence
Penalties
[31]
Mr. Longo was assessed
gross negligence penalties pursuant to subsection 163(2) of the Act.
The classic test for the application of gross negligence penalties is set out
in Venne v. The Queen, 84 DTC 6247, a Federal Court Trial
Division decision that was adopted by the Federal Court of Appeal in Findlay
v. The Queen, 2000 DTC 6345 at paragraph 21:
… ‘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.
[32]
The burden of proving
any facts necessary to support gross negligence penalties falls on the
Respondent. In this Appeal, the Respondent can meet its burden either by
proving that the purported consulting business did not exist or that the
expenses were not incurred for the purpose of gaining or producing income.
[33]
Because the Respondent
cannot rely on its assumptions of fact to meet its burden, it cannot support
gross negligence penalties in respect of the non-existence of the purported
consulting business. I have found above that that business did not exist
because Mr. Longo has not demolished the Minister’s assumption on that point. Without
that assumption, the Respondent does not have sufficient evidence of the
non-existence of the business to prove that gross negligence penalties should
be applied.
[34]
The same is not true
for Mr. Longo’s expenses. The Respondent is able to meet its burden in respect
of the expenses. Mr. Longo admitted that he signed his tax returns, that he
reviewed them before signing them and that he knew that in signing them he was
declaring that the information contained in them was true. There was no
credible explanation that would indicate that any of the amounts that Mr. Longo
reported on his tax returns in respect of his purported consulting business
were incurred for the purpose of gaining or producing income. At best, I
believe that Mr. Longo was indifferent as to whether the expenses that he claimed
on his tax return were accurate or not. More likely, I believe that Mr. Longo
knew that the expenses he claimed on his returns were false yet claimed them
anyway.
[35]
Based on all of the
foregoing, this Appeal is dismissed.
Signed at Winnipeg, Manitoba, this 9th of
July 2013.
“David E. Graham”
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