REASONS
FOR JUDGMENT
Graham J.
[1]
In 2001, 2002 and 2003, Philip Carlini worked in
the auto body business. Mr. Carlini was the president of a company named
Carlini Collision Ltd. (“Collision”) and a shareholder of a company named Carlini Bros. Body Shop Ltd.
(“Body Shop”). The Minister of National Revenue reassessed Mr. Carlini to
include substantial amounts of money in his income and to impose gross negligence
penalties.
[2]
The amounts for which Mr. Carlini was reassessed
fall into three categories: alleged unexplained deposits to Mr. Carlini’s
personal bank accounts; alleged appropriations from Body Shop; and alleged
payments by Collision of amounts owing on Mr. Carlini’s personal credit card
that related to personal expenses.
[3]
There are six key issues in this appeal:
a)
Was Body Shop carrying on business in the years
in question?
b) Should the alleged appropriations from Body Shop be included in
Mr. Carlini’s income?
c)
Should the alleged unexplained deposits in Mr.
Carlini’s personal bank accounts be included in his income?
d) Should the alleged payments of amounts owing on Mr. Carlini’s credit
card be included in his income?
e)
Do any of the other issues raised by Mr. Carlini
have any impact on his reassessments?
f)
Are gross negligence penalties justified in
respect of the above amounts of alleged unreported income?
[4]
Before turning to the issues, I would like to
make some general observations about the audit methodologies employed by the
Minister. The audit involved the tracing of money from multiple different
sources using a number of different audit methodologies. There is always a risk
of double counting when different audit methodologies are used together. A
Canada Revenue Agency appeals officer named Colette Poisson testified on behalf
of the Respondent. Ms. Poisson was the appeals officer who dealt with Mr.
Carlini’s objections. I found Ms. Poisson to be a credible witness. The overall
impression that I have is that Ms. Poisson did not simply take the auditor’s
work at face value but rather conducted a serious review of it and gave real
consideration to potential problems that could have arisen as a result of the
different methodologies the auditor employed. That analysis led to a number of
adjustments being made. I am satisfied that the adjustments made by Ms. Poisson
have ensured that the different audit methodologies employed have not resulted
in double counting.
A. Was Body Shop carrying on business?
[5]
Body Shop was incorporated in 1970. Its original
shareholders were Mr. Carlini and his four brothers. By the years in
question, three of Mr. Carlini’s brothers had passed away. Mr. Carlini and
his brother Antonio Carlini were the only remaining shareholders of Body Shop.
[6]
Collision was incorporated in 1990. Its
shareholders were Mr. Carlini’s wife, Antonio Carlini’s wife and the wives of their
three deceased brothers. None of those women was active in Collision’s
business. For ease of reference, when referring to the shareholders of
Collision, I will describe the four shareholders who were not Mr. Carlini’s
wife as the “sisters-in-law” and the three shareholders who were the widows of Mr. Carlini’s
deceased brothers as the “Widows”.
[7]
In the years in question, auto body shops were
being operated under the Carlini name at two locations in Windsor, Ontario. Mr.
Carlini takes the position that Collision and Body Shop both carried on
separate body shop businesses at both of these locations. To be clear, he is
not suggesting that Collision carried on a body shop business at one location
and Body Shop carried on a body shop business at the other location. Rather his
testimony is that Collision carried on a body shop business at both locations
and, at the same time, Body Shop carried on a body shop business at both
locations.
[8]
The Respondent takes the position that only
Collision was carrying on the body shop business. The Respondent argues that
Body Shop was inactive. I find that the Respondent’s version is the more likely
of the two.
[9]
Mr. Carlini was very evasive when testifying on
this issue. He repeatedly asserted that it was important to distinguish between
Collision and Body Shop, yet he provided no plausible means by which I could do
so. In his direct testimony he stated that the two companies were working
together. Mr. Carlini provided no explanation of how customers, revenue,
expenses, employees, equipment or physical space was shared between Collision
and Body Shop. He was very evasive when pushed on this point. Then, on the
second day of trial, Mr. Carlini suddenly introduced the idea that Collision operated
from 8:00 a.m. until 4:30 p.m. and that Body Shop operated from 4:30 p.m. until
11:00 p.m. He provided no explanation as to how this arrangement could possibly
work or why he had not mentioned it previously. It appeared to be something
that he had just invented on the spot.
[10]
Mr. Carlini’s explanations are implausible. The
five wives of the Carlini brothers were all shareholders of Collision. By
contrast, in the years in question only Mr. Carlini and Antonio were
shareholders of Body Shop. Thus, while Mr. Carlini and Antonio Carlini had
a family interest in both companies, the Widows only had an interest in
Collision. It seems very unlikely that the Widows would agree to Body Shop
operating what amounted to a competing business out of the same premises as
Collision.
[11]
Even if Mr. Carlini’s explanation had been
plausible, I would still not have accepted it as I did not find him to be a
credible witness. His testimony was full of inconsistencies, implausible
stories and evasive responses. Mr. Carlini would have needed to support his
position with documentary evidence or through other witnesses.
[12]
In appropriate circumstances, an adverse
inference may be drawn against a taxpayer who fails to call a witness to
testify as to the other side of a transaction or relationship. I draw an
adverse inference from Mr. Carlini’s failure to call the Widows as witnesses.
The Widows could have offered significant insight into the question of whether
Body Shop was carrying on business or not. Mr. Carlini and Antonio Carlini were
fired by the Widows in October 2003. Mr. Carlini did not provide any
explanation for their firing. He simply described it as a family problem,
although he later described suing Collision for wrongful dismissal. Given the
fact that the Widows fired Mr. Carlini, it is not difficult to conclude that
their testimony would not have assisted him.
[13]
Body Shop was charged with tax evasion in 1990.
The trial ended with a conviction in 1992. Collision began carrying on business
the following year. These facts strongly suggest that, in the early 1990’s,
faced with tax and criminal problems in respect of Body Shop, the five Carlini
brothers decided to move the body shop business from Body Shop to Collision and
that, from that point forward, Body Shop was inactive.
[14]
Mr. Carlini entered into evidence a handwritten
spreadsheet that he says is Body Shop’s financial statements sheet for the year
ending July 31, 1997. He relied on this document for other reasons, but it is
relevant to this issue. The financial statements are completely inconsistent
with the idea that Body Shop carried on business after Collision began its
operations. The balance sheet lists no assets other than taxes receivable and
states that Body Shop had no income or expenses in the year.
[15]
Mr. Carlini was very evasive when asked whether
Body Shop had reported income for its 2001, 2002 and 2003 tax years. He
testified repeatedly that Body Shop had reported all of its income for the
years in question but did not elaborate on what that income was. Ms. Poisson
stated that she had reviewed the CRA’s records and had determined that Body
Shop did not report any income in the years in question. I accept Ms. Poisson’s
testimony on this point over that of Mr. Carlini and find that Body Shop
did not report any income for its 2001, 2002 and 2003 tax years.
[16]
Based on all of the foregoing, I find that Body
Shop was not carrying on business in the years in question.
B. Appropriations from Body Shop
[17]
If Body Shop was not carrying on business, this
begs the question of how the money that Mr. Carlini is alleged to have
appropriated came to be in Body Shop. I do not need to answer this question. Whatever
occurred, the money ended up in Body Shop’s hands. From there, some of the money
ended up in Mr. Carlini’s hands. All that I need to decide is whether Mr.
Carlini appropriated the money he received or whether there was some other reason
why he received it.
[18]
Ms. Poisson explained that the auditor had
concluded that Mr. Carlini had appropriated significant amounts of money from
Body Shop. She explained that, during the appeals process, she had reduced the
amounts assessed in light of various explanations provided by Mr. Carlini and
her own analysis. I am satisfied that the appropriate adjustments were made.
After those adjustments were taken into account, $345,992, $285,553 and $87,824
in appropriations remained for Mr. Carlini’s 2001, 2002 and 2003 tax years
respectively.
[19]
Mr. Carlini does not deny receiving money from
Body Shop. He raises four arguments. First, he says that he was reassessed for
appropriating money from Collision, not Body Shop. Second, he says that some of
the funds the Minister believes he appropriated were not paid to him. Third, he
says that Body Shop was repaying his outstanding shareholder loan. Finally, he
says that Body Shop was reimbursing him for expenses that he incurred on its
behalf.
From where were the funds appropriated?
[20]
Mr. Carlini takes the position that he was
reassessed for appropriating money from Collision, not Body Shop. He submits
that there is no evidence that he appropriated any money from Collision and
thus the reassessment of the appropriated amounts should be reversed. He says
that he came to court expecting to dispute accusations that he appropriated
funds from Collision. Without explicitly saying so, Mr. Carlini argues that the
Minister has changed the basis of the assessment and that he was unprepared to
dispute it. I do not accept Mr. Carlini’s position. In my view, he is simply playing
games.
[21]
I find that Mr. Carlini was fully aware that the
issue was whether he appropriated funds from Body Shop. He has been dealing
with this matter for years both civilly and criminally. The Respondent provided
him with copies of all of the relevant working papers and cheques years before
the trial commenced.
[22]
The auditor reviewed Body Shop’s bank account,
totalled all of the cheques that came out of that account that he believed were
payable to or for the benefit of Mr. Carlini and assessed Mr. Carlini a benefit
on those amounts. The fact that the money came from Body Shop was not a
surprise to Mr. Carlini. He signed the cheques.
[23]
Mr. Carlini is a shareholder of Body Shop, not
Collision. Thus, of the two companies, the only one from which he could have
made a subsection 15(1) appropriation was Body Shop.
[24]
Mr. Carlini’s argument hinges on three T7W-C
forms that were issued to him following the audit. Those forms erroneously
state that he has been reassessed for appropriating funds from Collision. While
I accept that that error may have initially confused Mr. Carlini, I do not
accept that he was confused by the time he finished the objection process, let
alone by the time he got to trial. While he made a number of statements at
trial that might suggest he was confused, I think that confusion was staged for
my benefit.
[25]
Mr. Carlini clearly knew that he needed to show
that he had not appropriated funds from Body Shop. As discussed in detail
below, he focused a great deal of his testimony on trying to show that Body
Shop owed him money. The only reason to give that testimony would have been to
explain why the funds that he took from Body Shop were not appropriations.
[26]
While I can certainly see how aspects of the
Reply could have been confusing,
Mr. Carlini did not argue that the Reply confused him.
[27]
Based on all of the foregoing, I find that Mr.
Carlini was fully aware of both the issue that was in dispute and what he
needed to do to dispute that issue at trial.
Were the funds paid to Mr. Carlini?
[28]
Of the amounts that Mr. Carlini is alleged to
have appropriated in 2002, $33,400 was in respect of four cheques payable to an
individual named William Oneschuk. Mr. Carlini takes the position that this
amount should not have been included in his income. Mr. Carlini did not provide
me with any oral testimony on this issue. As a result, I do not know who Mr.
Oneschuk is.
[29]
The Reply does not contain any assumptions of
fact regarding Mr. Oneschuk. Paragraph 14(k) of the Reply states that the
Minister assumed that the appropriations were in the form of cheques payable to
Mr. Carlini or cheques payable to his CIBC Visa account. There is no mention of
cheques payable to Mr. Oneschuk.
[30]
Thus, I am left with the simple fact that Mr.
Carlini has been assessed a shareholder benefit under subsection 15(1) in
respect of a payment to Mr. Oneschuk. Absent an assumption of fact
indicating how Mr. Carlini benefited from Mr. Oneschuk receiving money, the
inescapable conclusion is that the amount has been improperly assessed. There
is no assumption for Mr. Carlini to demolish. The only evidence before me is
that the cheques were not payable to him. That is sufficient to prove on a
balance of probabilities that he did not benefit from those cheques.
Accordingly, I will remove $33,400 from Mr. Carlini’s 2002 income.
Did Mr. Carlini have an outstanding shareholder loan?
[31]
I find that Body Shop did not owe Mr. Carlini
any money in 2001, 2002 or 2003. There is simply no credible evidence of the
existence of any such debt.
[32]
As discussed above, Mr. Carlini introduced into
evidence Body Shop’s financial statements for the period ending July 31, 1997. Those
statements show that Body Shop had shareholder loans payable of $187,278. This
statement does not assist me. The loan is from a time fourteen years before the
period in question and, more importantly, the financial statements do not
indicate which of Body Shop’s shareholders this balance was owed to. As I have
not found Mr. Carlini to be credible, I am not prepared to accept his
testimony that the loan was owed entirely to him.
[33]
Mr. Carlini asserted that the lawyer who had
been retained to defend against the 1990 tax evasion charges had insisted on
being paid by Body Shop. Mr. Carlini submitted that he and his brothers
borrowed $550,000 from a cousin in Detroit and then advanced those funds to
Body Shop so that Body Shop could pay the legal fees. Mr. Carlini did not
provide any documentary evidence to support any of this. I note that the 1997
financial statements that Mr. Carlini entered into evidence do not reflect the
existence of such a loan. Furthermore, Mr. Carlini seemed to somehow believe
that he should be credited for the entire $550,000 amount despite clearly
stating that it had been borrowed by all of the brothers. Based on all of the
foregoing, I find that no such loan was made.
[34]
Mr. Carlini asserts that, shortly after he was
fired, the Widows destroyed all of the records of Body Shop. As a result, he
says that he is unable to produce documents to support his shareholder loan.
Again, I draw an adverse inference from Mr. Carlini’s failure to call the
Widows as witnesses.
[35]
I note that, despite the supposed destruction of
all of Body Shop’s records, Mr. Carlini produced documents that he claims are a
series of receipts signed by him acknowledging that each amount he received from
Body Shop was a repayment of his shareholder loan. I find it very unlikely that
these purported receipts happen to have escaped the supposed destruction of
Body Shop’s records. As a rule, people who retain records are more likely to
keep records proving that they have lent money than to keep records proving
that they have been repaid. At best these documents are self-serving. I give
these documents no weight.
[36]
Based on all of the foregoing, I find that Mr.
Carlini did not have an outstanding shareholder loan to Body Shop in the years
in question.
Did Mr. Carlini
spend money on behalf of Body Shop for which he was reimbursed?
[37]
Since I have concluded that Body Shop was not
carrying on business in the years in question, I cannot accept that any amount
that Mr. Carlini claims to have spent for Body Shop’s business purposes was
actually spent for those purposes. Therefore, I cannot accept that Body Shop
was required to reimburse him for any such expenses.
[38]
If I am wrong and Body Shop was carrying on
business in the years in question, then I still would have found, for the
reasons set out below, that there was insufficient evidence of the expenses in
question for me to reduce the alleged appropriations.
[39]
Mr. Carlini identified cheques drawn on his
personal bank account payable to an individual named Jim Skinner, who he said
worked for Body Shop. Mr. Carlini indicated, without explicitly saying so,
that Mr. Skinner wanted to be paid under the table. Mr. Carlini explained that
he therefore used his personal cheques to pay Mr. Skinner. Mr. Carlini further
explained that there was a second individual who also wanted to be paid under
the table. Mr. Carlini stated that the cheques that he gave to Mr. Skinner included
the money Body Shop owed to the second individual. I draw an adverse inference
from Mr. Carlini’s failure to call either of these individuals as witnesses. I
note that the amounts of many of the cheques are inconsistent with the types of
amounts one would expect for an under-the-table payment to two hourly employees.
Under-the-table payments are specifically made to avoid payroll taxes and thus
are unlikely to result in payments that have been calculated to the penny.
Furthermore, it seems implausible to me that someone who wants to be paid under-the-table
would accept payment by personal cheque. In light of all of the foregoing, had
I accepted that Body Shop was carrying on business, I would still have found that
these amounts were not expended for the benefit of Body Shop.
[40]
Mr. Carlini testified that he personally paid
the liability insurance for the two auto body locations. He entered two cheques
into evidence to support this assertion. The cheques appear to be payable to an
insurance company but I have no way of knowing what or who was being insured or
even who was liable to pay the insurance. For all I know these could be life
insurance payments for Mr. Carlini’s personal insurance. I am not going to
take Mr. Carlini’s word that the insurance was for business purposes. In view
of all of the foregoing, had I accepted that Body Shop was carrying on
business, I would still have found that these amounts were not expended for the
benefit of Body Shop.
[41]
Mr. Carlini also claims to have spent
significant funds on behalf of Body Shop purchasing season’s tickets and
playoff tickets for various Detroit-based professional sports teams. Mr.
Carlini’s testimony on this point was very inconsistent. He asserted that Body
Shop used these tickets for promotional purposes. However, at one point he
testified that half of the tickets had been for personal purposes. He
characterized the purchases as business purchases for which Body Shop needed to
reimburse him but, when dealing with unexplained deposits to his personal
accounts, he characterized refunds relating to those same tickets and proceeds
of sale from disposing of those tickets as being non-taxable personal deposits.
Given these inconsistencies and given my overall assessment of Mr. Carlini’s
credibility, I am unwilling to accept that these ticket purchases were business
expenses. Considering all of the foregoing, had I accepted that Body Shop was
carrying on business, I would still have found that these amounts were not
expended for the benefit of Body Shop.
[42]
Mr. Carlini testified that he took money from
Body Shop, deposited that money in his personal account and then wrote cheques
on that account to pay the sisters-in-law’s personal car insurance payments. He
testified that a previous audit of Collision had resulted in the deduction of
car insurance payments for Collision’s shareholders’ personal vehicles being
disallowed. He explained that, as a result, the sisters-in-law had demanded
that he personally pay for their personal car insurance. Even if I accepted
this as true, it is unclear to me how it would change the fact that Mr. Carlini
appropriated money from Body Shop. It seems to me that, unless he put the money
to use in Body Shop’s business, the use that he put the money to is irrelevant.
It is enough that he took it.
[43]
Mr. Carlini testified that he took $45,000 from
Body Shop and then used that money to pay some taxes that one of the
sisters-in-law owed. He offered no documentary evidence to support that fact
other than a $45,000 cheque payable to the CRA. Ms. Poisson testified that she
had reviewed the CRA’s records and had determined that $22,042 from the cheque
was used to pay Mr. Carlini’s personal taxes and the remaining $22,958 was used
to pay a long-overdue tax debt of Body Shop. She explained that one of the adjustments
that she made to Mr. Carlini’s income was to reduce his appropriations by
the amount of the Body Shop tax payment. Mr. Carlini argued that the payment
could not have been used to reduce his personal taxes because he did not owe
any personal taxes at the time. The documents he directed me to did not support
his position. They showed refunds owing to him in April 1997 and May 2002. The
payment in question was made in January 2001. Furthermore, even if I had
accepted Mr. Carlini’s position, no adjustment would have been necessary. He
would still have appropriated the money even if he had used it for his
sister-in-law’s benefit.
[44]
Mr. Carlini testified that a number of workers
had worked for Body Shop over the Christmas holidays in 2000 and he had paid
them using his own funds in 2001. He introduced a number of cancelled cheques
which he said represented these payments. Four of the cheques are dated in
December or January but one is dated in March and another is dated in July. The
March cheque is deposited to the account of a company that appears to sell
fruits and vegetables. Mr. Carlini was evasive when I asked him to clarify why
he had made these payments personally. I see no reason why I would believe any
of Mr. Carlini’s story regarding these cheques.
[45]
Based on all of the foregoing, I find that Mr.
Carlini did not spend any money on behalf of Body Shop in the years in question
for which he was not reimbursed.
C. Unexplained Deposits
[46]
The auditor conducted a bank deposit analysis of
Mr. Carlini’s personal bank accounts. A bank deposit analysis is an alternative
method of determining income that is sometimes used by the Minister when the
Minister believes that a taxpayer’s records are an inadequate means of verifying
the taxpayer’s income. A bank deposit analysis generally involves reviewing
each deposit that a taxpayer has made to his or her bank account. The Minister
asks the taxpayer to explain the source of each of those deposits. To the
extent that the taxpayer cannot explain the source, or provides an explanation
that the Minister does not believe, or admits that the source of the money is
taxable and that the income was not reported, the Minister includes the
deposits in the taxpayer’s income. If the taxpayer is able to satisfy the
Minister that the deposit comes from a non-taxable source or has already been
reported in the taxpayer’s income, the Minister ignores the deposit.
[47]
Ms. Poisson explained that she had reviewed the
unexplained deposits identified by the auditor and had made one adjustment to
back out an amount that she believed had been adequately explained by Mr.
Carlini. She further explained that, after taking that adjustment into account,
$74,311 in unexplained deposits remained for Mr. Carlini’s 2002 tax year and
$42,993 in unexplained deposits remained for his 2003 tax year. I note that none
of the amounts that Mr. Carlini is alleged to have appropriated from Body
Shop were included as income under the deposit analysis.
[48]
The assumption of fact set out in paragraph
14(i) of the Reply regarding the unexplained deposits is not well phrased. It
states that Mr. Carlini received deposits from Collision which he failed to
report as income. This suggests at first glance that the deposits were cheques
from Collision. That is not, however, how I have interpreted the assumption. As
discussed above, much of Collision’s revenue was diverted to Body Shop. It is clear
to me that the assumption made by both the auditor and Ms. Poisson was that the
unexplained deposits were funds that they believed Mr. Carlini diverted from
Collision to himself instead of to Body Shop. Read in this context, the
assumption in paragraph 14(i) makes sense.
[49]
The most common way for a taxpayer to challenge
a bank deposit analysis is to provide a credible explanation for the deposits
that the Minister has treated as income. This is the approach that Mr. Carlini
chose. I will review each of the deposits for which he provided an explanation.
[50]
The first unexplained deposit identified by the
auditor was an amount of $10,325.17. Ms. Poisson had already removed this
amount after conducting her review. However, I raise the amount because Mr.
Carlini’s testimony regarding it is an excellent example of the type of inconsistent
testimony that caused me to conclude that Mr. Carlini was not credible. In
his direct testimony Mr. Carlini testified that he had received a $10,000
cheque from this brother that he thought had been included in his income. On
cross-examination, he testified that that cheque was part of the $10,325.17
deposit. Then, later in his cross-examination, he mistakenly thought that he
had to explain the full $20,000 that had been deposited on that day. He did not
have to do so as the remaining $9,674.83 had already been accepted by the
auditor. Nonetheless, he changed his story to fit the $20,000 that he now
thought he had to explain. He testified that he remembered winning at least
$20,000 at a casino at that time and taking twenty $1,000 bills to his bank to
deposit. When he later realized that he did not have to explain the full
$20,000, he changed his story yet again and testified that he must have only
deposited ten $1,000 bills. This type of flexibility with the facts was common
throughout Mr. Carlini’s testimony. Although it does not matter because the
amount has already been removed from his income, I find that the deposit
included the $10,000 cheque from Mr. Carlini’s brother. The back of the cheque
indicates that it cleared the day after the deposit was made. I make this
finding only to clarify that the cheque does not need to be accounted for
elsewhere.
[51]
The second unexplained deposit was an amount of $9,674.83.
Mr. Carlini stated that this was a deposit of his and his wife’s paycheques. I
note that an identical amount was accepted by the auditor, with the identical
explanation, as part of the above-noted $20,000 deposit. In the circumstances,
I cannot see any reason why that explanation would not be acceptable for this
deposit. Accordingly, I will reduce Mr. Carlini’s 2002 income by $9,674.83.
[52]
The third unexplained deposit is a deposit of
$1,394.19. This cheque ties in with Mr. Carlini’s convoluted explanation regarding
the car insurance payments that he says he made for his sisters-in-law. Mr.
Carlini says that one of his sisters-in-law received a refund of her car
insurance premiums and paid it back to him. He has no documentary evidence to
support this and did not call the sister-in-law in question as a witness. I am
mindful of the fact that most of Collision’s revenue came from car insurance
companies that were paying to have their customers’ cars repaired so I am very
reluctant to accept that a deposit of a cheque from a car insurance company was
anything more than another diversion of Collision’s revenue. Accordingly, I am
not prepared to make an adjustment based solely on Mr. Carlini’s testimony.
[53]
A fourth unexplained deposit is a deposit of
$8,094.55 that Mr. Carlini says also relates to car insurance. In this
instance, Mr. Carlini explained that one of his nephews was in a car accident,
that the insurance company paid the insurance proceeds to his sister-in-law,
who gave them to him to deposit to his account so that he could combine them with
his own money to buy his nephew a replacement car. Mr. Carlini did not
introduce any documentary evidence to support this position. Again, I am
reluctant to treat a deposit of a cheque from a car insurance company as being
anything other than a diversion of Collision’s revenue. Mr. Carlini did not
call the sister-in-law or his nephew as a witness. I draw an adverse inference
from his failure to do so. I am not prepared to make an adjustment based solely
on Mr. Carlini’s testimony.
[54]
A fifth unexplained deposit is a deposit of
$16,371.84 that Mr. Carlini claims was a workers’ compensation payment. Mr.
Carlini reported $32,312 in workers’ compensation benefits in his 2002 tax return.
He testified that this $16,371.84 deposit represented half of those payments. He
did not explain how the payments were made or why approximately half of the
payment would have come as a lump sum. He provided no documentary evidence to
support his position. The auditor identified a deposit of $12,082.58 as being a
workers’ compensation payment. This indicates to me that the auditor was aware
of this issue and nonetheless concluded that the $16,371.84 was not such a
payment. I am not prepared to make this adjustment based solely on Mr.
Carlini’s word.
[55]
Mr. Carlini deposited fourteen different money
orders to his bank account in 2003. The money orders totalled $27,213.34. Mr.
Carlini testified that in late 2002 he and some friends went gambling in Niagara
Falls. He explained that one of those friends was in the produce business. Mr.
Carlini said that the friend had introduced him to one of his suppliers. Mr.
Carlini could not remember the supplier’s last name but said his first name was
Jack. Jack needed some money to continue gambling. Mr. Carlini said that he had
been having a good night and was flush with cash. He explained that, while he
would not normally lend money to a gambler that he had just met, his friend
effectively guaranteed the loan by telling him that, if Jack did not repay Mr.
Carlini, the friend would repay him out of monies that the friend’s business
owed Jack. Mr. Carlini stated that, on the strength of this assurance, he
lent Jack $25,000. He explained that the above money orders were the means by
which Jack repaid him. The money orders do not contain any description of what
they are for. They could easily be payments for work performed by Collision. He
did not explain why the repayments totalled more than $25,000. To the extent
that the extra payments might have been interest, he neither pointed out where
he had reported that interest income on his return nor conceded that he would
have been taxable on the excess. I am not prepared to accept Mr. Carlini’s explanation
without something more.
[56]
Mr. Carlini explained that a number of the
deposits related to proceeds from the sale of various tickets to sports events.
As set out above, his explanation regarding sports tickets was very inconsistent.
Mr. Carlini did not provide any documentary evidence that would have allowed me
to confirm his story. His attempts to show through cross-examination of Ms.
Poisson that these amounts were not income were unsuccessful. To put it
bluntly, I do not believe anything that Mr. Carlini has told me about sports
tickets. Accordingly I am not prepared to make the requested adjustments.
[57]
There are two unexplained deposits of cash. One
is an amount of $500 and the other is an amount of $3,000. Normally, when an
auditor performs a deposit analysis, he or she will exclude deposits smaller
than a certain amount on the basis that it is unreasonable to expect a taxpayer
to remember each small deposit. In the circumstances, the $500 deposit is small
enough that I am willing to exclude it. I am not, however, prepared to give Mr.
Carlini the benefit of the doubt on the $3,000 deposit.
[58]
Mr. Carlini asked me to remove a number of other
amounts from the list of unidentified deposits. His explanations included
explanations that the deposits were refunds of condo fees, rental revenue from
a condo in the United States and proceeds from the sale of a half interest in a
racehorse. Mr. Carlini did not offer sufficient documentary support for any of these
adjustments. Again, I am not prepared to make an adjustment based solely on Mr.
Carlini’s word.
[59]
Based on all of the foregoing, I will reduce Mr.
Carlini’s income from the unexplained deposits by $9,674.83 in 2002 and $500 in
2003.
D. Credit Card Payments
[60]
Ms. Poisson explained that the auditor
determined that Collision had made significant payments on Mr. Carlini’s
personal credit card and that he treated these payments as an employment
benefit. She explained that the auditor reviewed all of the transactions on Mr.
Carlini’s credit card and categorized those transactions either as being personal
expenses or as relating to Collision’s business. Ms. Poisson further
explained that the auditor had assessed Mr. Carlini to the extent that the
payments made by Collision exceeded the business expenses charged to the card.
She noted that, during the appeals process, she had made two types of
adjustments to correct what she saw as being potential problems with the
auditor’s approach. The adjustments that she made were, in my view, entirely
appropriate. The first adjustment was to back out any payments that Mr. Carlini
had personally made on the assumption that those amounts were to cover his
personal expenses. The second adjustment was to back out payments that Body
Shop had made as those amounts were already being taxed as appropriations and
should not be taxed a second time. After those adjustments were taken into
account, $211,818, $310,223 and $89,711 in payments remained for Mr. Carlini’s 2001,
2002 and 2003 tax years respectively.
[61]
Mr. Carlini raises a number of issues. First, he
argues that certain payments that he made against the credit card have not been
accounted for. Second, he argues that the amount assessed should be reduced to
account for money that Collision owed to him. Third, he argues that certain
charges that were incurred on the credit card were incurred for business
purposes. Finally, he argues that charges that were incurred by or for the
benefit of others should not have been treated as personal charges.
Have all payments been
accounted for?
[62]
Mr. Carlini submits that he made other personal
payments against the credit card that should have been backed out. He
identified twenty-one specific payments.
[63]
Two of those payments were supported by
duplicate cheques showing that $25,000 and $27,000 had been paid from Mr.
Carlini’s account. These payments appear on the audit working paper which
summarizes all of the transactions for the credit card. I am satisfied that those
payments were made by Mr. Carlini and should be removed from the total
assessed. As a result, I will decrease Mr. Carlini’s 2003 income by
$52,000.
[64]
I have reviewed the remaining nineteen payments
identified by Mr. Carlini. The credit card number in question ended in “8014”.
None of the payments that Mr. Carlini relies upon identifies that it is being
made against the 8014 account. They either refer to a credit card ending in
different numbers (i.e. 0013 or 4016) or they make no reference to a credit
card number. Furthermore, none of these payments appears on the audit working
paper. That indicates that they were not payments against the 8014 account. Mr.
Carlini has not provided me with any documentary evidence showing that these
payments were applied to the 8014 account. As a result, I am not prepared to
make any adjustments for these remaining nineteen payments.
Should the amount
assessed be reduced to account for money that Collision owed Mr. Carlini?
[65]
Mr. Carlini submits that Collision owed him
money in the years in question. Without explicitly saying so, Mr. Carlini is
arguing that the amounts assessed against him should be reduced by those
outstanding loans. Mr. Carlini appears to be attempting to apply the reasoning
of the Federal Court of Appeal decisions in Chopp v. The Queen and The Queen v. Franklin to employment benefits. I do
not have to decide whether the reasoning in Chopp and Franklin is
applicable to employment benefits as Mr. Carlini has failed to satisfy me that
Collision owed him money in the years in question.
[66]
Mr. Carlini testified that, as of July 31, 2003,
Collision owed him $161,054. This testimony was not supported by any
documentary evidence. I did not find Mr. Carlini to be credible so I am not
prepared to conclude that such a loan existed solely on the basis of his
testimony.
[67]
Mr. Carlini testified that he paid $11,848 of
his own money to employees of Collision, was only repaid $6,000 by Collision
and was thus owed $5,848 by Collision. Mr. Carlini entered receipts from those
employees into evidence. The receipts state that the employees were paid by
Collision. They do not say anything about Mr. Carlini. Mr. Carlini did not
direct me to any evidence of the $11,848 that he says he advanced or the $6,000
that he says he was repaid. The audit working papers show Mr. Carlini receiving
both $6,000 and $11,488 (a number similar to $11,848) from Collision in October
2003 but not any corresponding funds flowing out in September. In the
circumstances, without better documentary evidence, I am not prepared to
conclude that Mr. Carlini lent $5,848 to Collision.
[68]
Mr. Carlini testified that he deposited
$27,501.50 (being $18,000 USD) into Body Shop’s bank account in 2002. He went
into great detail about how these funds were part of $325,000 in gambling
winnings that he had in Las Vegas and about the various challenges he had in
cashing the chips in and getting the cash home. The $27,501.50 was actually
deposited to Collision’s bank account, not Body Shop’s, which is why I am
considering it in this portion of the analysis rather than in the portion
dealing with purported loans to Body Shop. The audit working papers contain no
detail about the nature of the deposit. Mr. Carlini’s gambling story was full
of holes and inconsistencies, including the fact that the win he was describing
occurred three months after this deposit was made. This is yet another example
of Mr. Carlini appearing to simply make stories up to suit his purposes. I am
not prepared conclude that Mr. Carlini lent these monies to Collision.
[69]
Mr. Carlini testified that he deposited $14,500
in Collision’s bank account in November 2002 and $30,000 (consisting of two
$15,000 deposits) in August 2003. He provided copies of the cancelled cheques.
I am satisfied that these deposits were made but I have no evidence, besides
Mr. Carlini’s oral testimony, that would show the purpose of the deposits.
Accordingly, I am not prepared to conclude that they were loans.
[70]
Mr. Carlini testified that he paid for various
petty cash items on behalf of Collision and that those amounts were credited to
his wife’s shareholder loan account. I am unclear what Mr. Carlini wants me to
do with this information. It appears that the transactions have already been accounted
for in his wife’s account and thus that they would not represent a loan made by
Mr. Carlini.
[71]
Mr. Carlini testified that his mother had lent
approximately $92,000 to Collision and that he had withdrawn those funds
shortly before being fired. I do not have any evidence of the loan being made.
Even if I accepted this testimony as true, I cannot see how it would help Mr.
Carlini. If Collision owed someone money, it was Mr. Carlini’s mother, not him.
[72]
Overall, even if I accepted that Mr. Carlini had
deposited all of the above amounts to Collision’s account, he did not provide
any financial records of Collision that would show that the company owed him
money. The funds he deposited to Collision’s account may have been loans but
they may also have been repayments of funds that Collision had advanced to him.
If they were loans, they may have remained outstanding throughout the period in
question but they may also have been repaid using other means. Furthermore,
like the petty cash referred to above, they may already have been accounted for
as part of Mr. Carlini’s wife’s shareholder loan. Without some sort of
accounting, I have no way of knowing whether Mr. Carlini had an outstanding
loan balance big enough to cover the amounts owing on the credit card or not.
[73]
Based on all of the foregoing, I will not be
reducing the employment benefit from the credit card payments to account for
any loans owing to Mr. Carlini.
Were charges identified as personal charges actually
business charges?
[74]
Mr. Carlini also made a number of submissions
regarding specific charges on the credit card which the auditor identified as
being personal but which Mr. Carlini says were business expenses.
[75]
I am not going to review each individual
expense. Over the course of the trial Mr. Carlini demonstrated a willingness to
fabricate explanations, often elaborate ones, when it suited him. My impression
is that he did exactly that when describing the credit card charges in
question. While many of his explanations seem reasonable at first glance, I am
unwilling to accept them without corroborating evidence. For example, Mr.
Carlini testified that charges for hotels in London, Ontario were incurred as a
part of business trips to meet with insurance companies located there. This
seems reasonable on its face. However, there are also many personal reasons why
someone might stay in a hotel in London. Mr. Carlini attempted to mislead me
too many times for me to be willing to give him the benefit of the doubt in
these circumstances.
[76]
Based on all of the foregoing, I will not be
making any adjustments to the amounts included in Mr. Carlini’s income with
respect to expenses he says were business expenses.
Were charges
incurred by or for the benefit of others properly treated as personal?
[77]
Mr. Carlini testified that he had a second
credit card on the same account. He stated that he gave that card to his
nephew. His nephew worked in the body shop business with him. Mr. Carlini testified
that his nephew made personal purchases using the card. He also explained that
his nephew regularly took cash advances in the amount of $1,000 and that he
believed his nephew used those cash advances to give $300 a week to each of the
Widows.
[78]
Without explicitly saying so, Mr. Carlini
appears to be arguing that his nephew and the Widows were using the credit card
as a means to appropriate funds from Collision. Mr. Carlini argues that the
Minister should have assessed his nephew or the Widows for these amounts. Again,
I draw an adverse inference from the fact that Mr. Carlini did not call his
nephew or the Widows as witnesses. I am unwilling to make any adjustment for
these amounts.
E. Other Issues
[79]
Mr. Carlini raised a number of other issues that
do not fit into the foregoing categories.
[80]
The Minister reassessed Collision to include
significant amounts of unreported revenue in its income. Mr. Carlini raised a
number of questions about how the Minister calculated that unreported revenue.
I do not need to answer those questions. Collision’s reassessments are not
before me. Whether the Minister calculated that unreported revenue correctly or
not has no bearing on the amounts that were included in Mr. Carlini’s income.
Even if none of that money should have been included in Collision’s income,
that does not change the fact that Collision paid for personal expenses incurred
on Mr. Carlini’s credit card, that Mr. Carlini appropriated funds from
Body Shop or that Mr. Carlini has not been able to explain various deposits to
his personal bank account.
[81]
Mr. Carlini testified that two of his nephews
borrowed a total of $12,000 from Collision and that he repaid their loan in
2002. He provided copies of the cancelled cheques. I do not see how this would
affect his income. What essentially happened is that he either lent $12,000 to
his nephews or he gave $12,000 to his nephews. Neither of those transactions
would have any effect on funds that he owed Collision or on his income.
F. Gross Negligence Penalties
[82]
There is no question in my mind that the
application of gross negligence penalties is appropriate in these circumstances.
Mr. Carlini failed to report more than $1.3 million in income over three years.
I am convinced that he knowingly failed to report that income. He reported less
than 9% of his income over those years.
[83]
Mr. Carlini pled guilty to tax evasion in
respect of $118,287 of unreported income in his 2003 tax year. He tried to
convince me that he did not understand what he was admitting to, did not really
care that he was sentenced to one year’s house arrest because he was unable to
leave home for health reasons at the time, and did not care about the $30,000
fine that was imposed because he was told by both his lawyer and the prosecutor
that he did not actually have to pay it. I do not believe any of this. That
said, Mr. Carlini’s conviction has not influenced my decision to uphold the
penalties. I would have upheld them even if he had not been convicted.
Conclusion
[84]
Based on all of the foregoing, the appeal of Mr.
Carlini’s 2001 tax year is dismissed. The appeals of his 2002 and 2003 tax years
are allowed and the matters referred back to the Minister for reassessment on
the basis that Mr. Carlini’s income should be reduced by $43,074.83 in 2002
and $52,500 in 2003.
Costs
[85]
Costs are awarded to the Respondent. The parties
shall have 30 days from the date hereof to reach an agreement on costs, failing
which the Respondent shall have a further 30 days to file written submissions
on costs and Mr. Carlini shall have yet a further 30 days to file a written
response. Any such submissions shall not exceed 10 pages in length. If the
parties do not advise the Court that they have reached an agreement and no
submissions are received, costs shall be awarded to the Respondent as set out
in the Tariff.
Signed at Ottawa,
Canada, this 27th day of December 2017.
“David E. Graham”
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