Citation: 2013 TCC 93
Date: 20130328
Docket: 2012-1623(IT)I
BETWEEN:
SELECT TRAVEL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2012-1614(IT)I
AND BETWEEN:
TRAVELSPHERE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bocock J.
[1]
These two appeals
brought under the Tax Court of Canada Rules (Informal Procedure) became
highly procedural owing to certain preliminary matters raised by the Appellants’
agent. The Appellant’s agent was Mr. Harold Coombs (“Mr. Coombs”), an officer
and director of both Appellants.
I. Introduction
[2]
The two appeals
effectively consisted of a day of hearing and were largely concerned with three
preliminary issues, namely: the Respondent’s motion to quash the Appellant’s
Notice of Intent to call an adverse party as witness; a very brief motion by
the Appellants to adjourn the hearing in order to amend their pleadings; and, lastly,
a motion by the Appellants to amend Notices of Appeal at the Hearing. Any
transcript of the proceeding will reveal that the relative time spent by the
Court in hearing the substance of the Appellants’ appeals is comparatively short
when contrasted with the time spent by the Appellants, and concordantly the
Respondent, in replying to the Appellants’ first two preliminary matters and
lastly, the Appellants’ requests to amend Notices of Appeal to include a breach
of both Appellants’ Charter rights under section 8 of the Canadian Charter
of Rights and Freedoms, Part I of the Constitution Act, 1982, Schedule
B to the Canada Act 1982 (U.K.), 1982, c.11 (“Charter”).
II. Preliminary
Motions
[3]
For this reason, any
Reasons for Judgment which do not appropriately address the preliminary motions
in these appeals would not accurately reflect the Hearing before the Court.
[4]
Additional materials (although
not necessarily relevant nor properly produced at the Hearing by the Appellants)
were, with the consent of the Respondent, received and considered by the Court
subsequent to the Hearing. These documents consisted of letters written by the Appellants’
agent to the Canada Revenue Agency (“CRA”), the then Minister of National
Revenue (“Minister”), a list of inventory of documents seized pursuant to a
search warrant (referenced herein), the copy of the actual search warrant
seizing the documents and, lastly, two applications of the CRA pursuant to
subsection 490(3) of the Criminal Code, R.S.C., 1985, c.C-46 for “the further
detention of things seized under warrants issued pursuant to section 487 of the
Criminal Code”.
a) Appellants’ Motion to Quash Notice of Intent
to Call Adverse Witness
[5]
At the outset of the
proceedings, the Respondent, pursuant to materials filed in advance of the Hearing,
sought to quash the Appellants’ Notices of Intent to call an adverse party as
witness. The Appellants sought to call one Ms. Danis of the CRA as a witness.
The Affidavit evidence of the Respondent before the Court was provided by Ms. Lynn
Watson who was the CRA investigator and party in charge of seizing and
retaining the appropriate records related to the reassessments in issue and the
primary investigator in relation to the assessments as well.
[6]
Pursuant to the
Affidavit, Ms. Danis’ involvement related to the final approval of the reports
generated by Ms. Watson in pursuance of Ms. Watson’s investigation of the appeals
before the Court. Ms. Watson indicated pursuant to her knowledge and based on advice
from Ms. Danis that Ms. Danis had no personal knowledge relating to the
reassessment of Travelsphere Inc. (“Travelsphere”) or Select Travel Inc.
(“Select”).
[7]
In argument, the
Respondent indicated that Ms. Deborah Danis had no additional relevant or
significant testimony to offer on the appeals before the Court and, accordingly,
should not be compelled to testify. Respondent’s counsel indicated that there
were originally three Notices of Intent to Call an Adverse Party as witness. The
Respondent made available two of the three witnesses as requested. The
Respondent took the view that given the issues before the Court one of the two
witnesses would testify as an adverse witness on issues which were likely not
be necessarily significant nor relevant. Nonetheless, that witness was made
available and the Notice of Intent to Call that Adverse Party as witness was
not challenged.
[8]
As to the test of
whether the testimony of the contested Adverse Party was relevant and
significant, Appellants’ agent asserted that all evidence is relevant. Further
Mr. Coombs stated that he had difficulty in determining whether any of the
evidence to be given by the contested adverse witness would be material. In
fact, Mr. Coombs indicated that it would be difficult for him to say exactly
what evidence the witness in question would have. Therefore, the test was
simply for him to ascertain that there was evidence and subsection 146(1) of the
Tax Court of Canada Rules (General Procedure) would provide authority
and direction to the Court to compel the witness to attend on the basis that it
was within the Appellants’ procedural and legal rights to do so. Further, in
the absence of enforcing that Rule, the Court would lack jurisdiction to render
judgment and, therefore, should adjourn the Hearing or undertake some other
action that was just. The Appellants’ agent asserted that he did not
necessarily know what form that just outcome would take.
[9]
As documentary evidence
of the relevance of the Adverse Witness testimony, the Appellants’ agent
attempted to introduce a single copy of a letter from one, Mr. Traer, of the
CRA. Mr. Traer was not present in the Court nor available to testify since he
was retired from the CRA and out of the country during the Hearing.
Notwithstanding that, Mr. Coombs did not have a copy of this letter for the
Court. During an adjournment, a copy of the letter was made and the Court
examined it. After considering the motion of the Respondent to quash the Notice
to call an Adverse Witness, the Court granted it on the basis that the
assertions of the Appellants lacked any indication that the adverse witness in
question had little, if any, knowledge of the evidence relevant to the issues
before the Court. The Court observed that the only evidence before the Court regarding
the issuance of the subpoena for Ms. Danis was the Affidavit of Ms. Watson and
the letter produced by Mr. Coombs from Mr. Traer. The Affidavit of Ms. Watson clearly
indicated that Ms. Danis had no material or significant knowledge in relation
to the matters before the Court and that Ms. Watson was the witness with the
best and accurate evidence with respect to the matters. Similarly, the letter
of Mr. Traer revealed, by its very contents, that it directed the Appellants to
raise any queries with Ms. Watson (the very person whom the Respondent
indicated had the specific relevant knowledge). It was noted by the Court that
Ms. Watson was the primary witness produced by the Respondent for the purposes
of allowing Mr. Coombs to conduct an examination of her as an adverse party.
[10]
In granting the motion
to quash, the Court did note that if during the Hearing it became obvious that
witnesses testifying were to indicate that some material evidence was within
the knowledge of Ms. Danis or Mr. Traer, then the Court would grant an
adjournment and issue a subpoena for one or both of those parties to come forth
and give evidence as a witness at any subsequent reconvening of the Hearing.
The issue of costs in respect of that motion was reserved during the Hearing.
It is dealt with at the conclusion of this judgment.
b) Appellants’ Motion for Adjournment
[11]
Having received the
judgment of the Court in respect of granting the motion to quash, the Appellants
requested an adjournment of the Hearing in order to amend their pleadings. Mr.
Coombs, upon query by the Court as to what amendments to the pleadings might be
made, was bemused and requested clarification as to whether he need indicate to
the Court what the amendments to his pleadings might be. The Court advised
that, in the absence of providing the Court with an indication as what the
nature of any amendments might be, the Hearing would proceed without them. Mr.
Coombs indicated with certainty that the Court generally grants adjournments
right up to the date of the Hearing and even during Hearing. It was on this
basis that he was making the request.
c) Appellant’s Motion to Amend Pleadings at
Hearing
[12]
After providing Mr.
Coombs with assurance that he was incorrect on his general impression regarding
the granting of adjournments by the Tax Court on the day of Hearing, Mr. Coombs
then indicated that he wished to bring a motion to amend the Appellants’ pleadings
at the Hearing by adding to both Notices of Appeal the following basis for
appeal:
The Respondent has violated the rights of both Appellants in respect of
Section 8 of the Charter and placed the Appellants at a disadvantage.
[13]
The basis of the
Appellant’s motion was that the search warrant under which documents were
seized at the Appellant’s business premises was not complied with. The
non-compliance of that warrant arose as a result of unnamed persons in the
warrant being present at the business premises and having assisted in the
execution of the search warrant issued under section 487 of the Criminal
Code. The Appellant argued that the lead investigator, Ms. Watson, and the
CRA by implication, violated the Criminal Code and, presumably the Charter,
by allowing unnamed employees to participate in executing the search
warrant. No submission was made by Mr. Coombs that, during the course of the
execution of the search warrant, no one named in the search warrant was present
on the premises at all times. It was solely the presence of unnamed assistants
that created the violation.
[14]
The Respondent’s argument
in respect of this particular amendment had three grounds. The first was that
the Appellants or related parties had been before the Court previously and
ought to have amended their pleadings prior to the day of the Hearing.
Secondly, since the pleading of any violation of any Charter right
required Notice to the Attorney General of Canada and the relevant Attorneys
General of the provinces, it was not possible to provide such notice and hear
the matter on the day of hearing. Lastly, the Respondent asserted that in any
event, apart from the procedural issues, there was case law before the Court
which indicated that the utilization of other employees of an agency to assist
in the execution of a search warrant did not invalidate the warrant nor violate
the Charter. Accordingly, there was no likelihood at law that the Charter
challenge would succeed.
[15]
Aside from other case
law cited by the Respondent, a case involving Mr. Coombs himself, was placed
before the Court, namely, the case of Coombs et al. v. The Queen, 2008
TCC 289, 2008 DTC 4004. In that case, the Tax Court of Canada determined that
there was no violation of the Charter by the utilization of assistants to
conduct the actual search. Similarly, the Respondent argued that the case of R.
v. Strachan, [1988] 2 S.C.R. 980 held that a search warrant obtained under section
10 of the Narcotic Control Act, R.S.C. 1985, c. N-1, as rep. by Controlled
Drugs & Substances Act, S.C. 1996, c. 19 (“Narcotic Control Act”)
was also not invalid as a result of the utilization of assistants not otherwise
named in the warrant to provide support during the execution of a search
warrant.
[16]
The Respondent
concluded by indicating that apart from the procedural issues related to the
Appellants’ request to amend at this stage in the Hearing, there was no bona
fide Charter issue to be heard before the Court and therefore the
motion to amend should be dismissed.
[17]
In reply, Mr. Coombs
indicated that the Court should distinguish Strachan on the basis that
it related to the section 10 of the Narcotic Control Act and not the Criminal
Code. Similarly, Mr. Coombs did not address the issue of his own case
previously before the Court.
[18]
In deciding this
procedural matter, the Court considered the arguments of the parties and
indicated its strong inclination that the request for the amendment to insert
the section 8 Charter violation arose primarily due to the negligence of
the Appellants’ agent in preparing his Notice of Appeal. This was admitted by Mr.
Coombs and was noted by the Court since the Appellants and agent had not only
been before the Court previously in a related appeal, but litigated this very
issue (presumably with the proper notice having been given). This highlighted
the prior knowledge of the Appellants to include these grounds in these appeals;
not simply at the time of filing their Notices of Appeal, but at any moment up
to and including the conclusion of the hearing of the first preliminary matter at
Hearing. In these matters, the Appellants had utterly failed to do so.
[19]
Quite apart from the
merits of the Charter argument, Mr. Coombs well knew of these rights and
the opportunity to raise same, in order to have done so prior to the date of Hearing.
Substantively, this issue had been litigated before this very Court, and by
analogy before the Supreme Court of Canada. It has been held that assistance
provided by other employees of an agency in the execution of a search warrant does
not per se violate the Charter of Rights of a citizen or, in this case,
a corporation. On the basis of the lack of timely request for amendment and the
clear authority established by the Supreme Court of Canada, the motion to amend
the pleadings was denied.
III. Appeal
Proper
a)
Select Travel
[20]
The nature of the
appeal regarding Select relates to payroll remittances. The Minister assessed
Select:
(a) in the amount of $4,291.68 in
respect of unremitted source deductions for the 2004 taxation year; and
(b) the amount of $515.71 in respect of
unremitted source deductions in respect of the 2008 taxation year.
[21]
In addition the
Minister assessed penalties in respect of 2004 and 2005 in respect of the
Appellant’s failure to remit the 2004 source deductions as and when required
(the “Penalties”).
[22]
The factual background
of the assessment by the Minister was that the T4 summary in respect of the
2004 taxation year included employment remittances in respect of a Mr. John
Coombs, but failed to include amounts in respect of a Mrs. Joan Coombs (spouse
of Harold Coombs). The 2008 assessment appears to have related to a simple
mathematical error in the calculation and remittance of source deductions.
b) Travelsphere
[23]
In respect of
Travelsphere, the assertions of the Minister regarding the reassessments were
as follows:
a) the denial of a non capital loss
in the 2003 taxation year in the amount of $10,425.00 (the “Non Capital Loss Disallowance”);
b)
the disallowance of salary
expenses in 2003 in the amount of $20,373.00 (the “Salary Expense Disallowance”);
c)
that as a result of
subsection 152(4) of the Income Tax Act (“Act”), the Minister was
allowed to assess outside the normal reassessment period; and
d)
the imposition of penalties
under subsection 163(2) of the Act.
c)
Evidence
Generally
i) Select Travel
[24]
Notwithstanding the
ruling of the Court on the preliminary issue of the corporation’s Charter
rights regarding the execution of the search warrant and the parties present,
the bulk of Mr. Coombs’ examination of adverse witnesses centered on whether or
not all CRA employees taking part were specifically named in the search warrant.
As well, there was a bald assertion by Mr. Coombs that documents which had been
seized had been lost or not returned to him. During the course of the Hearing,
it became clear that many of these documents were not returned because Mr.
Coombs, himself, refused to take redelivery.
[25]
With respect to the
evidence of the issues in question, Ms. Watson credibly led the Court through
the various documentary evidence seized by the CRA both at the residence of Mr.
Coombs (in respect of which it should be noted that no Charter right
violation was claimed) and the business premises of Select and Travelsphere.
[26]
Specifically, Ms.
Watson led the Court through an examination of a copy of a T4 summary and
accompanying T4s issued to employees Select and corresponding general entries
and summaries of payroll for the year ending December 31, 2004. Select was the
Appellant, as between the two, which operated payroll services for employees of
both Appellants. There were also copies of cheques processed and paid from
Select to Joan Coombs and a copy of a print out of T4 information from that
same alleged employee. In addition, the CRA conducted a payroll audit of the
payroll for Select and prepared a calculation of payroll remittances for Select
Travel arising therefrom. This included a reconciliation of both the T4 income prepared
by Select for John Coombs and its readjustment and inclusion of the T4 information
for Joan Coombs.
[27]
The uncontroverted
evidence before the Court in respect of these particular documents was that
John Coombs, a relative of the principal Mr. Coombs, provided no service to
either Appellant. Neither the CRA payroll and investigative audit nor the
records of either Appellant indicated that any service, usual or otherwise, was
provided to the Appellants by John Coombs. In addition, Mr. Coombs provided no
documentary or viva voce evidence to rebut the assumptions or suggest
otherwise. On the other hand, it was clear that Joan Coombs was likely an
employee of Select and/or Travelsphere and certainly, herself, based upon
documentary evidence before the Court undertook all steps to report such income
and otherwise pay taxes thereon in her personal tax returns.
[28]
Accordingly, given the
absence of any evidence provided by the Appellant in respect of the payroll
audit and the issues concerning payroll, the Court easily concluded that the readjustments
made by the Minister to allow the inclusion of deductions paid in respect of
Joan Coombs and appropriate readjustment made to discard the business expense
or salary paid to John Coombs were completely reasonable and accurate. The
Minister, in reassessing on this basis, will be required to determine the proper
calculation of the net source deductions due. Similarly, no evidence was
tendered by the Appellant regarding the calculation of the 2008 reassessment.
ii)
Travelsphere
[29]
With respect to the
Travelsphere Non Capital Loss Allowance, and the Salary Expense Disallowance,
the evidence provided at trial included an unaudited statement of operations
and deficit for Travelsphere prepared by Travelsphere’s accountants for the year
ended December 31, 2004, a reconstructed copy of the T2 tax returns and the
journal entries concerning the reallocation of various expenses between the Appellants.
a) Non Capital Loss Disallowance
[30]
In respect of the Non Capital
Loss Disallowance there was no evidence produced by the Appellant, Travelsphere,
as to what event or occurrence gave rise to the claimed capital loss of
$10,425.00. It was also clear based upon evidence provided to the Court that
Mr. Coombs had a general aversion to paying tax which would otherwise occur in
any given year. This was clearly indicated from a memorandum dated November 24,
2004 from “Harold” to other employees regarding Select’s corporate income
taxes. In such memorandum, Mr. Coombs indicated corporate taxes for Select had
been paid in the amount of $2,992.97 and his lack of “thrill” in paying this
money. He further indicated that his completion of the 2003 tax return for Select
would provide that he would obtain the whole $2,992.97 back from “CRA”.
b) Salary Expense Disallowance
[31]
Testimony for the
Respondent regarding the Salary Expense Disallowance was provided by the CRA
investigator and lead auditor, Ms. Watson. Simply put, Ms. Watson testified
that the salary and wage expense of Travelsphere was overstated by $29,614.00.
The T4’s summaries and financial statements relevant to the Appellant for Tax
Year 2003 disclosed a salary expense of $20,373.00 (“Source Document Amount”). The
Corporate Tax Return (T-2) included a claimed salary expense of $49,987 (the
“Claimed Amount”). The difference between the Source Document Amount and the
Claimed Amount, namely, $29,614.00, was the precise amount of the Salary
Expense Disallowance.
[32]
Mr. Coombs in response
to examination regarding this documentation indicated generically that he could
not recall much of the information in respect of the Payroll Issue, the Non Capital
Loss Allowance or the Salary Expense Disallowance.
[33]
In argument, the
Respondent indicated that the Minister relied upon the amount expended for
salary and wages in 2003 as being $20,373.00 (that is the Source Document
Amount) as submitted and prepared pursuant to the financial statements prepared
by the corporations’ accountants. However, when Travelsphere filed its T-2 income
tax return for that same year, it reported the claimed amount of $49,987.00, in
expenses for salary and wages. The Appellant had no explanation or documentary
evidence to reconcile the salary and wage amount reported in the financial
statements as opposed to the number in Travelsphere’s corporate tax return. In
the line item “Other Items affecting Retained Earnings” line of the 2004 Travelsphere
T-2 Return, an amount of $29,614.00 (being the difference between the
accountant reported income on the financial statements (Source Document Amount)
and the T2 reported income)(the Claimed Amount) was utilized to reduce net
income and reconcile the difference in the subsequent year. The motivation of
the Appellant in utilizing this particular line item was to effectively remove
the inflated salary expense from the previous tax year in order to reconcile the
accounting in Travelsphere’s subsequent tax returns and financial statements.
Similarly, with respect to the Non Capital Loss claimed in the amount of
$10,425.00 in the 2003 taxation year, this amount was utilized solely for the
purposes of generating a refund of 2002 corporate taxes.
[34]
As to credibility, the
Court acknowledges that Mr. Coombs admitted that he was the directing mind of
Select and Travelsphere, prepared all income tax returns, oversaw the payroll
and was otherwise charged with the task of maintaining, preparing and
summarizing the books and records of the Appellants. Mr. Coombs is a certified
general accountant. Mr. Coombs can remember with precise detail the number of
persons named on the search warrant which was executed in 2002. By comparison, Mr.
Coombs had difficulty in recalling any detail in relation to the documents
which were partially the subject of the seizure under that very same search
warrant. The search warrant was prepared by the CRA. The documents Mr. Coombs
failed to recall were documents what were largely prepared, reviewed and
otherwise executed by Mr. Coombs himself.
c) and d) Reopening Assessments and Penalties
[35]
Whether the Respondent fraudulently
made misrepresentations in respect of the overstatement of business expenses or
in the creation of a loss that could be carried back to extinguish tax
liability is not required to be determined. What is clear from the evidence led
by the Respondent and the weak responses of Mr. Coombs during his own testimony
is that Mr. Coombs, as the corporate officer, director and person charged with
the preparation of all accounting documents was, at the very least, grossly negligent
in his actions in allowing the creation of misrepresentations which otherwise
reduced the tax liability of the corporations by the filing of false returns.
[36]
What was particularly
genuine in Mr. Coombs’ testimony is the precision and detail with which he could
recollect instances where the Minister had possibly not given credit for comparatively
small amounts which may have otherwise been remitted by the Appellants or by
Mr. Coombs’ spouse. Generally, these pinpoint recollections are so inconsistent
with Mr. Coombs’ otherwise overall memory failure that they belie Mr. Coombs’
testimony when he fails to recollect or remember other more critical and
substantive details. On this basis, after careful scrutiny of the evidence, it
is clear to the Court that the imposition of the Penalties and the rendering of
reassessments after what otherwise would have been a statuted barred event are
fully and completely justified.
[37]
Accordingly, the
appeals are dismissed, save and except to the extent that the Court accepts
that Joan Coombs was an employee of Select. Accordingly, that matter will be
referred back to the Minister in accordance with these Reasons for Judgment for
reconsideration and reassessment, if any.
[38]
As to the issue of
costs, since this matter was an informal procedure there shall be no order as
to costs against the Appellants.
Signed at Ottawa, Canada, this 28th day
of March 2013.
“R.S. Bocock”
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