Citation: 2013 TCC 48
Date: 20130212
Docket: 2011-3996(IT)I
BETWEEN:
LJUPKO ZELJKOVIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
Docket: 2012-310(IT)I
SLADJANA ZELJKOVIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Masse D.J.
[1]
These appeals were heard together
in Hamilton, Ontario on November 29th and 30th, 2012.
[2]
The Appellants are appealing
income tax reassessments for their 2006 and 2007 taxation years. The reassessments,
dated October 11, 2011, for Ljupko Zeljkovic, and November 8, 2011, for
Sladjana Zeljkovic, are with respect to allegedly unreported income and
disallowed business deductions for those years. There are two trucking
partnerships involved as will be explained later.
[3]
Originally, there were quite a few
items in dispute between the Appellants and the Respondent. However, as a
result of lengthy discussions between Mr. Cenic, agent for the Appellants,
and Mr. Omisade, counsel for the Respondent, the total number of items in
dispute has been narrowed down to six. This has been of great assistance to the
Court and I am thankful to both Mr. Cenic and Mr. Omisade for their
cooperation.
Legislation
[4]
The relevant provisions of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) are the following:
9. (1) Subject to this Part,
a taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property for the year.
. . .
12. (1) There
shall be included in computing the income of a taxpayer for a taxation year as
income from a business or property such of the following amounts as are
applicable
. . .
(x) any particular amount (other than a
prescribed amount) received by the taxpayer in the year, in the course of earning
income from a business or property, from
(i) a person or partnership (in this paragraph
referred to as the “payer”) who pays the particular amount
(A) in the course of earning
income from a business or property,
. . .
(iv) as a refund, reimbursement, contribution or
allowance or as assistance, whether as a grant, subsidy, forgivable loan,
deduction from tax, allowance or any other form of assistance, in respect of
(A) an amount included in, or deducted as, the cost of property, or
(B) an outlay or expense,
to the extent that the particular amount
(v) was not otherwise included in computing the
taxpayer’s income, or deducted in computing, for the purposes of this Act, any
balance of undeducted outlays, expenses or other amounts, for the year or a
preceding taxation year,
. .
.
96. (1) Where a taxpayer is a
member of a partnership, the taxpayer’s income … if any, for a taxation year,
or the taxpayer’s taxable income earned in Canada for a taxation year, as the
case may be, shall be computed as if
(a) the partnership were a separate person
resident in Canada;
(b) the taxation year of the partnership
were its fiscal period;
(c) each partnership activity (including the
ownership of property) were carried on by the partnership as a separate person,
and a computation were made of the amount of
. . .
(ii) each income and loss of the partnership from
each other source or from sources in a particular place,
for each taxation year of the partnership;
. .
.
230. (1) Every
person carrying on business and every person who is required, by or pursuant to
this Act, to pay or collect taxes or other amounts shall keep records and books
of account (including an annual inventory kept in prescribed manner) at the
person’s place of business or residence in Canada or at such other place as may
be designated by the Minister, in such form and containing such information as
will enable the taxes payable under this Act or the taxes or other amounts that
should have been deducted, withheld or collected to be determined.
Factual Context
[5]
The Appellants, Ljupko Zeljkovic
(“the Husband”), and Sladjana Zeljkovic (“the Wife”) are married to each other.
The Husband operates a trucking business in partnership with another person
named Bogdan Jovicic under the business name Red Star Trucking (“Red Star”).
The Husband owns 50% of this partnership. The Husband and the Wife are also
partners together in another trucking business known as S & B Trucking (so
named after their two children and hereinafter called “S & B”). The Husband
has an 80% interest in this partnership and the Wife has a 20% interest.
[6]
As I have already indicated, at
the beginning of this hearing, the agent for the Appellants and counsel for the
Respondent engaged in discussions which were very helpful in narrowing the
items in dispute. There are only six items in dispute; they are set out and
highlighted in the following table:
|
|
Red Star
|
S & B
|
|
Adjustment
|
2006
|
2007
|
Husband’s Share (50%)
|
2006
|
Husband’s Share (80%)
|
Wife’s Share (20%)
|
|
Unreported Income
Overstated Expenses
Fuel
Rent/Lease
|
$8,749
$15,627
|
$6,623
$2,178
|
$7,686
$8,902
|
$3117
$7,665
|
$2,494
$6.132
|
$623
$1,533
|
|
Totals
|
$24,376
|
$8,801
|
$16,588
|
$10,782
|
$8,626
|
$2,156
|
[7]
It cannot be doubted that the
Appellants are honest and hard-working people who are doing their best to earn
a living in a very competitive and demanding business. They have been at all
times very cooperative with the Canada Revenue Agency (the “CRA”) during the
audit process. They have provided whatever documentation they could in support
of their contention that they have not underreported their income and have not
overstated their expenses. In essence, it is the sufficiency of their
documentation as provided to the CRA that is in issue in this case. They have
produced to the Court a series of documents in support of their contentions and
these have been filed as Exhibits A-1 through A-7. Reference will be made to
these documents as required.
[8]
Ms. Hongbo (Alice) Zhang is an
auditor with the CRA. She is the auditor responsible for the reassessments of
the Appellants. She came to Court with all of her working papers to assist the
Court to understand how she arrived at her conclusions. These working papers
(Exhibit R-2) are very detailed and they demonstrate that she has made a very
comprehensive analysis of the financial records of the Appellants in arriving
at her conclusions. The testimony of Ms. Zhang, buttressed by her working
papers, provides very compelling evidence of the correctness of the
Respondent’s position.
[9]
I will review the evidence of the
Respondent in relation to each partnership.
S & B Trucking
1) Unreported Income
[10]
Ms. Zhang performed a bank deposit
analysis, which permitted her to compare bank deposits to the income that was
reported by the Appellants. She identified two deposits: one for $1,488.14 on
September 25, 2006; and the other for $1,831.47 on September 28, 2006. These
totaled $3,319.61. When she deducted the GST associated with this amount, the
result was $3,117 net of GST. It is her position that this was unreported
income. She enquired of the Appellants what this was and they responded that it
was for reimbursement of the truck maintenance warranty. The Appellants
provided her with a statement from HSBC to prove the payment to Expressway Truck,
Waterloo, for Invoice No. 112692 (Exhibit A-2). The Appellants indicated to
her that they had never claimed the cost of the maintenance warranty as an
expense and therefore should not have to claim it as income when the unexpired
portion of the warranty expenditure was reimbursed. However, Ms. Zhang
determined that the warranty expenditure had already been included as
maintenance expense as indicated in the Appellants’ General Ledger Journal
Entry #78 (page 2, working paper #1001, Tab 9, Exhibit R-2; item 1, page 1,
working paper #84, Tab 8, Exhibit R-2 and Exhibit R-3). Since the expense was
originally expensed, then any reimbursement would have to be brought back into
income; which is what she did.
2) Fuel Expenses
[11]
With respect to the fuel costs of
$7,665.00, Ms. Zhang added up all of the receipts for fuel (original source
documents) that were provided by the Appellants and they added up to
$77.640.30. However, the Appellants claimed $85,305.29 for fuel expenses – a
difference of $7,664.99 (item 2, working paper #7050, Tab 15 Exhibit R-2).
The Appellants then provided her with additional receipts in support of their
claim (Exhibit A-1; and item 2, working paper #84, Tab 8, Exhibit R-2). She
cross-referenced these receipts against their truck log to see where the truck
was at the time fuel for the truck was purchased and she determined that the
vehicle in question was not where the fuel was purchased but, was in fact, in
the U.S.A. or off‑duty. A review of the truck logbook indicated the pump
times and locations on the fuel receipts did not correspond to the time and
location in the truck log. For example, a fuel receipt indicating fuel was
purchased in Milton at 22:25 on August 22, 2006, yet the truck was in Illinois, U. S.A. at that time and date. Consequently, she disallowed the amount of $7,665
claimed as fuel expenses since the amount could not be verified with the documentation
that had been provided. She could not be satisfied that the claimed expenses
were specific to S & B Trucking.
Red
Star Trucking
1) 2006 unreported income
[12]
For the 2006 taxation year, Ms.
Zhang assessed the amount of $8,749 as unreported income. The Husband’s share
of that is $4,375. Again, she performed a bank deposit analysis in order to
determine this amount. Her calculations are shown at working paper #1001, Tab
9, Exhibit R-2. She compared each deposit for this partnership business account
and she found an unidentified deposit in the amount of $9,317.40, or $8,749 net
of GST. The Husband advised her that this was a warranty reimbursement from
Express Trucking Company. She determined that in September 2006, the business
returned an old truck, because repairs and maintenance for this truck was just
too expensive. They then obtained a new truck. She determined that warranty payments
were being paid as part of the monthly lease payments for the old truck and so
these were deducted as business expenses. When the old truck was turned in for
a new one, the warranty was not automatically transferable to the new unit, so
the truck company reimbursed the warranty and thus the warranty reimbursement
should now be included as income. Consequently, the amount of unreported income
is $8,749 and this amount was assessed by her accordingly.
2) 2007 unreported income
[13]
The same kind of analysis was done
for 2007 and again, the bank deposit analysis revealed unreported income of
$6,623. This was in relation to two pay‑cheques received from a trucking
company for trucking services provided by Red Star. One pay-cheque deposited on
April 4, 2007 was for $2,432.93 and the other on April 12, 2007 was for
$4,190.09. This gives a total of $6,623.02. These two deposits were neglected
to be included in income. Details of this can be found on page 6, working paper
#1001, Tab-9, Exhibit R-2.
3) 2006 rent/lease deductions
[14]
Ms. Zhang then detailed for the
Court why she disallowed the sum of $15,627 (the Husband’s share being $7,814)
on account of rent and lease deductions for 2006. The details of this are found
at pages 3 and 4, working paper #7050, Tab-15 of Exhibit R-2. Reference is also
made to page 10, working paper #84, Tab-8 of Exhibit R-2. She conducted a bank
withdrawal statement analysis. In 2006, Red Star claimed $46,252.73 for
rental/lease payments. Ms. Zhang totaled up the lease payments made net of GST
and came up with $30,626.10, which was allowed as a proper deduction, leaving
$15,627 unaccounted for. She explains that there were two lease agreements for
the year; January to August for the first truck (this lease was terminated
early) and another for August to December for the second truck. In August 2006,
Red Star terminated the first lease early and entered into a new lease
agreement for the second truck. No lease payments were made for April and
August, however, two payments were made in May (the May 1st payment
is attributed to the month of April). In addition, when the old truck was
turned in, Red Star obtained a lease credit of $11,330 that was not included in
income. The Appellants contend that they had paid this as a down payment, but
Ms. Zhang could find no evidence of any disbursement of this amount in her
audit. She asked the Appellants to provide some evidence of an actual cash
payout, but the Appellants did not provide any satisfactory evidence that they
in fact paid this amount. In conclusion, the lease payments were overstated by
$15,627.
4) 2007 rent/lease deductions
[15]
For the 2007 taxation year, Ms.
Zhang disallowed deductions of $2,178 for rent and lease expenses. Again, she
conducted an analysis by examining bank withdrawals and cross-referencing these
with payments claimed to be made. The total rent/lease payments claimed was
$25,584.92; however, an examination of bank records could only confirm payment
of $23,406.96, thus leaving a variance of $2,178 which was disallowed. This is shown
on pages 8, 9 and 10 of working paper No. 7,050, Tab-15, Exhibit R-2.
Analysis
[16]
The Supreme Court of Canada
instructs us in its decision of Hickman Motors Ltd. v. Canada, [1997] 2
S.C.R. 336, that the Minister uses assumptions to make assessments and the
taxpayer has the initial burden of demolishing the Minister's assumptions. This
burden is met when the taxpayer makes out a prima facie case that
demolishes the Minister's assumptions. Then, after the taxpayer has met the
initial burden, the onus shifts to the Minister to rebut the prima facie
case made out by the taxpayer and to prove the assumptions. A prima facie
case is established where there is evidence that establishes a fact until the
contrary is proved. In Stewart v. Canada (Minister of National Revenue –
M.N.R., [2000] T.C.J. No. 53, Cain J. stated at paragraph 23 that “A prima
facie case is one supported by evidence which raises such a degree of
probability in its favour that it must be accepted if believed by the Court
unless it is rebutted or the contrary is proved. …” In Orly Automobiles Inc.
v. Canada, 2005 FCA 425, [2005] F.C.J. No. 2116, the Federal
Court of Appeal stated at paragraph 20 that “… the burden of proof put on the
taxpayer is not to be lightly, capriciously or casually shifted. …” considering
“… It is the taxpayer's business. …” The Court also stated in the same decision
that it is the taxpayer who “… knows how and why it is run in a particular
fashion rather than in some other ways. … He has information within his
reach and under his control. …”
[17]
In a self-monitoring taxation
system such as we have in Canada, it is incumbent on a taxpayer to maintain
records in such form and containing such
information as will enable revenue, deductions and the taxes payable to be
determined. This much is mandated by section 230 of the Income Tax Act. Where
an audit is performed on a business by the CRA, it is up to the business being
audited to be able to justify to the auditor, and ultimately to this Court, the
revenue earned as well as any deductions that are claimed against that revenue.
This can only be done by keeping detailed records, including all source
documents, of income earned and expenses incurred. A cautionary tale can
certainly be seen in the case of Njenga
v. The Queen, 96 D.T.C. 6593, [1997]
2 C.T.C. 8 (F.C.A.). In that case, the taxpayer claimed deductions that were
disallowed on reassessment. The Tax Court Judge held that the taxpayer was
required to maintain documentation in support of her claims. He found that the
receipts she presented were a “sorry lot” (at paragraph 2). He also found that
the taxpayer’s testimony was not credible and she was sufficiently aware of
income tax requirements to be responsible for documentation. Justice MacDonald
in a brief oral judgment stated as follows at paragraph 3:
The Income tax system is based on self monitoring. As a public policy matter
the burden of proof of deductions and claims properly rests with the taxpayer.
The Tax Court Judge held that persons such as the Appellant must maintain and
have available detailed information and documentation in support of the claims
they make. We agree with that finding. Ms. Njenga as the Taxpayer is
responsible for documenting her own personal affairs in a reasonable manner.
Self written receipts and assertions without proof are not sufficient.
Therefore,
where the taxpayer cannot substantiate by means of documentary evidence the
revenue earned and the expenses claimed against that revenue, the taxpayer’s
tax liability will be assessed accordingly.
[18]
In the case at bar, the
Appellants have not supplied satisfactory documentary evidence to refute the
conclusions arrived at by Ms. Zhang. The conclusions of underreported income
and disallowed deductions have not been successfully challenged by cogent and
reliable documentary evidence. The Appellants have not discharged the burden of
proof that is incumbent upon them.
Conclusion
[19]
In conclusion, having considered
all of the evidence and the applicable principles to be applied, I am not
satisfied that the Appellants have discharged the burden of proof that is
incumbent upon them. Even if the evidence was sufficient to discharge the
initial burden that is incumbent upon them, then I come to the conclusion that
the evidence supplied by the Respondent is more than adequate to support its
position.
[20]
Consequently, both of these
appeals are dismissed.
Signed at Montréal, Québec, this 12th day of February 2013.
"Rommel G. Masse"
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