REASONS FOR JUDGMENT
Russell J.
I.
Introduction:
[1]
These two informal procedure appeals were heard on common evidence. The individual Appellant, Mohammed Umar Quraishi (Mr. Q), appeals five reassessments each raised September 9, 2016 under the federal Income Tax Act (Act) for his 2010, 2011, 2012, 2013 and 2014 taxation years respectively. The corporate Appellant, Al Shaafi Inc. (AS Inc.), as well appeals five reassessments, raised August 22, 2016 under the Act respectively for its 2010, 2011, 2012, 2013 and 2014 fiscal periods (taxation years) ending December 31.
[2]
By way of evidentiary background, Mr. Q is a 51% common shareholder of AS Inc., which was incorporated in 1999. Mr. Q’s spouse, Husna Quraishi (Mrs. Q) owns the remaining 49% of the AS Inc. common shares. At all material times AS Inc. owned and operated a retail pharmacy business called The Medicine Shoppe, located in Stoney Creek, Ontario. Mr. Q is a licensed pharmacist. He has a baccalaureate degree in pharmacy. During the period 2010 through 2014 Mr. and Mrs. Q were the two senior-most employees of AS Inc., running the drugstore with the assistance at any given time of several full-time and part-time employees. The business catered primarily to seniors and sought to compete with near-by large chain drugstores through enhanced customer service, including home delivery of medicines and associated devices such as inhalers, and home calls to assist with issues such as optimal operation of inhalers and the like.
[3]
During part or all of the relevant 2010 - 2014 period AS Inc. accepted near-cash incentives from each of two of its pharmaceutical suppliers, without reporting these receipts as income. The value of these incentives that were periodically received would be determined in accordance with the volume of pharmaceuticals AS Inc. had shortly previously purchased from these pharmaceutical suppliers. Mr. Q said that he was told by these suppliers that these near-cash receipts to AS Inc., with quantum determined on the basis of volume of AS Inc.’s pharmaceutical purchases, were gifts and hence not reportable to the Minister of National Revenue (Minister).
[4]
AS Inc.’s appealed reassessments reflect unreported income and denied deductions for purported bonus payments to employees. Mr. Q’s appealed reassessments reflect shareholder benefits assessed fully to him rather than being divided between him and Mrs. Q as joint shareholders of AS Inc., and also assessment of automobile stand-by charges. For both Appellants the 2010, 2011 and 2012 taxation years are presumptively statute-barred for having been reassessed beyond the applicable normal reassessment periods.
II.
Issues:
[5]
The Appellants raise five issues:
- what value of incentives did AS Inc. receive during the 2010 to 2014 period? The Respondent’s position is approximately $82,000 more than the Appellants’.
- is AS Inc. entitled to deductions for alleged bonuses paid to some employees?
- what is the value of shareholder benefits received by Mr. Q? Is approximately half of the shareholder benefits assessed to him rightly those of Mrs. Q instead?
- are the reassessments for each Appellant for the 2010, 2011 and 2012 taxation years statute-barred for, in each instance, having been raised beyond the applicable normal reassessment period?
- is the automobile stand-by charge assessed to Mr. Q correct?
III.
A. What quantum of incentives did AS Inc. receive?
[6]
Mr. Q testified that in 2010 he met with Ms. M. Pereira representing a pharmaceutical supply company that was a predecessor of Actavis Inc. (Actavis). She offered that Actavis would provide American Express travellers’ cheques to AS Inc. with dollar quantum based on volume of AS Inc. purchases from Actavis, and that these AmEx travellers’ cheques were gifts, and as such not taxable and so no reportable. Nothing was provided in writing. The AmEx travellers’ cheques began to arrive by special delivery to AS Inc., approximately monthly. The delivered envelope would each time contain several such travellers cheques in varying denominations - $20, $50, $100 and $500.
[7]
Mr. and Mrs. Q. kept no record of the received AmEx travellers’ cheques. They separately testified that these cheques would be cashed at a nearby TD bank branch where they had their own personal joint chequing account, and that the cashed - in amounts always would be paid into their joint account. They testified that they spent some of the money for personal purchases, used some of the money to buy items such as a printer for the pharmacy and also used the funds to pay cash bonuses to AS Inc. employees including themselves. No record was kept of purported purchases for the pharmacy and there is a document (Ex. A-22, p.78) that purportedly reflects a list of bonuses paid for the taxation years 2012 and 2013. AS Inc. did not report the cash bonuses as deductions.
[8]
These AmEx travellers’ cheque payments continued only into 2013 per Mr. Q, and into 2014 per the Respondent.
[9]
As well, in or about 2012 Mr. Q met with a representative of another pharmaceutical supplier, identified as “Ranbaxy”
. This resulted in additional near-cash incentives being periodically tendered to AS Inc. via Mr. and Mrs. Q with dollar value based on volume of AS Inc.’s purchases from Ranbaxy. The incentives in this instance took the form of pre-loaded Visa cards, also referred to as “gift cards”. Mr. Q testified that in this case too he was told by the Ranbaxy representatives and accepted that these cards were gifts rather than income, and thus were non-reportable. Again Mr. and Mrs. Q kept no records of the dollar quantum of AS Inc.’s periodic receipt of these Visa cards. Mrs. Q testified she would keep the received Visa cards in a bedroom drawer, of which some slight dollar amount was expended for personal items and otherwise they were used for payment of bonuses to AS Inc. employees. She says she recalls that for 2012 she had $4,000 of these cards and for 2013 $6,000 - and none for any other of the taxation years in dispute.
[10]
By letter dated August 31, 2015 (Ex. A-8) Canada Revenue Agency (CRA) advised AS Inc. that CRA had information that AS Inc. had received incentives from generic pharmaceutical manufacturers and that as they were received in connection with a business undertaking, these receipts were reportable as business income, regardless of payment format. CRA requested that AS Inc. report within 60 days the value of incentive amounts it had received, and that otherwise civil penalties might be applied.
[11]
In response, by letter dated October 30, 2015, AS Inc. per Mr. Q reported to CRA (Ex. A-9) “incentives/gifts”
receipts of $25,570 (2010), $28,750 (2011), $26,880 (2012), $9,910 (2013) and $5,360 (2014). My understanding from the rather scant evidence on this point is that these amounts were based at least in part on information Mr. Q and or AS Inc.’s accountant (a friend of Mr. Q) is said to have obtained from Actavis.
[12]
For himself, Mr. Q reported by way of T1 adjustment requests dated November 27, 2015 and signed by him (Ex. A-11), “other income”
of $25,754 (2010), $28,750 (2011), $26,880 (2012), $9,910 (2013) and $5,360 (2014). These are identical figures to those AS Inc. reported in its above-referenced October 30, 2015 letter.
[13]
Mr. Q was reassessed December 7, 2015 for his 2012 and 2013 taxation years (Ex. A-19), and December 24, 2015 for his 2014 taxation year (Ex. A-21).
[14]
Subsequently, Mr. Q requested of TD Bank that it review his and Mrs. Q’s joint checking account for all transactions in which AmEx travellers’ cheques were cashed for deposit into that account. The Bank responded May 16, 2016 (Ex. A-10), advising as requested and also noting that five cheques (whether or not AmEx travellers’ cheques) deposited into this joint account within the period 2010 - 2014, in the amounts of $8,750, $2,000, $10,600, $5,000 and $2,000 (totalling $28,550), could not be located. Mr. Q maintains that these could not be individual AmEx travellers’ cheques as the denominations of such cheques that he and Mrs. Q had received did not extend beyond $500, and that likely these larger amounts were salary cheques issued to him by AS Inc. Of note, no AS Inc. payroll records corroborating this proposition were entered in evidence.
[15]
The Respondent’s position is that the amounts of incentives paid to AS Inc. by Actavis and Ranbaxy are as reflected in a working paper of CRA auditor C. Loquet dated March 31, 2016 (Ex. A-32). This document states its “Objective”
as being, “To reconcile the incentives/rebates submitted by the taxpayer in accordance with the information submitted to CRA by Generic Pharmaceutical Manufacturers”
. It shows amounts received from Actavis by way of AmEx travellers’ cheques for each of a number of dates ranging from 2010-02-17 to 2013-04-15, and also amounts received from Ranbaxy for various dates ranging from 2012-08-01 to 2013-10-01. At the hearing the Respondent called no witnesses.
[16]
Notably the AmEx travellers’ cheque payments listed in Ex. A-32 are shown as totalled amounts for each mentioned date, e.g., for 2010-02-17 the amount of $4,800 and for 2010-06-14 the amount of $21,220.
[17]
Identically in both Replies - (para. 12(n) of the Reply in the AS Inc. appeal and para. 13(p) of the Reply in the Mr. Q appeal) - is expressed the Minister’s assumption that AS Inc. received rebates it did not report as income totalling for each subject year as follows:
(a) 2010 - $59,520 (AmEx);
(b) 2011 - $32,750 (AmEx);
(c) 2012 - $35,285 (AmEx and Visa);
(d) 2013 - $35,285 (AmEx and Visa); and
(e)2014, $5,360 (AmEx).
[18]
Mr. Q and AS Inc. assert that considerably less incentives than the above totals assumed by the Minister were received by AS Inc. - for 2010, $10,840 received (AmEx $48,680 less); for 2011, $22,090 received (AmEx $10,660 less); for 2012, $24,900 received (AmEx $5,980 less and Visa $4,405 less); for 2013, $15,910 received (AmEx nil less and Visa $7,330 less); and for 2014, nil received (AmEx $5,360 less). The total discrepancy between the Respondent’s total of incentives received by AS Inc. is of the order of $82,000 greater than what AS Inc. claims it received.
[19]
Which party’s position, if either, is correct? The starting principle is that a ministerial assumption is presumed correct unless the taxpayer appellant has put forward at least a prima facie case establishing otherwise. See House v. R., 2011 FCA 234, paras. 30-32.
[20]
Additionally, the two Appellants submit that the Minister rather than either of them carries the onus of calling evidence from Actavis and Ranbaxy as to what quantum of incentives they provided. I will address that submission here. In my view the Minister carries the onus of proof only with respect to pleaded assumed facts that are “particularly within the knowledge of one of the parties” –i.e. here the Minister (Redash Trading Inc. v. The Queen, 2004 TCC 446, para 22).
[21]
But that is not the case here. While the Minister may well have knowledge she acquired as to quantum of incentives provided by Actavis and Ranbaxy, that knowledge is not particular to the Minister. It is knowledge that the Appellants not unreasonably could be expected to acquire in the usual way; that is by service of subpoenas duces tecum upon the said suppliers, to best assure attendance in court together with relevant books and records. And that is not to assume that such compelled witnesses would not be willing to simply sit down and discuss their evidence beforehand with the Appellants, in the wish that that might lead to the matter being resolved without necessitating court attendance.
[22]
Also and in any event, one should not consider that obtaining information from the suppliers is the only way to prove quantum of incentives. Had AS Inc. maintained usual books and records as to its ongoing receipt of these incentives through the relevant period, rather than taking the quite questionable route of keeping no such records at all - taxable or not - then AS Inc. now would have a normal and acceptable method to prove quantum of received incentives. Instead, AS Inc. maintained no records of these payments, while now claiming, after these payments have come to the attention of CRA, that it is the Minister that should prove the quantum that AS Inc. received.
[23]
I now turn to whether a prima facie case has been established showing that the Minister’s assumption noted above as to quantum of received incentives is wrong. A prima facie case is one that on a balance of probabilities (i.e. more likely than not) establishes, upon consideration of all the evidence, a factual conclusion at variance with one or more pleaded ministerial assumptions of fact.
[24]
AS Inc.’s evidence that the quantum of received AmEx incentives was as it has asserted and not as the Minister has assumed is, as indicated above, not derived from either of the “normal” methods, being testimonial and/or documentary evidence from the suppliers, and/or evidence from contemporaneously kept books and records, as AS Inc. kept no such books and records. What AS Inc. does have is a letter from TD Bank (Ex. A-10), setting out all AmEx travellers’ cheques transactions occurring at the same branch where Mr. and Mrs. Q have their joint account, with the resultant cash then being deposited into that account. But this would not include cash obtained from any of these AmEx travellers’ cheques being negotiated anywhere else, or perhaps even in the same TD branch but with the resultant cash simply being pocketed by Mr. or Mrs. Q rather than being deposited into their joint account. All we have to the contrary of either of those obvious scenarios is Mr. and Mrs. Q’s assertions that proceeds of all cashed AmEx travellers’ cheques were first deposited into their joint account.
[25]
As well, the TD branch letter notes that certain deposited cheques in specified amounts could not be located. Mr. and Mrs. Q say that these would not have been AmEx cheques as the specified amounts of these missing cheques are greater than what appears to be the largest $500 denomination of the AmEx travellers’ cheques. They are explained as likely being salary payments to Mr. Q.
[26]
But what makes that unlikely or remains unexplained is that of the five amounts mentioned (see above) three are evenly divisible by 1000, one by 100 and the remaining one by 50. A salary cheque could well be in gross amount a figure evenly divisible by 1000, 100 or 50 - but the amount after deduction of payroll remittances would typically result in a very specific figure most likely down to an uneven number of cents. As well, I do not think the evidence forecloses the thought that perhaps some AmEx travellers’ cheques were recorded as being deposited cumulatively. After all, the amounts of AmEx travellers’ cheques are expressed in Ex. A-32 cumulatively for each of the specified receipt dates.
[27]
All in all I cannot say that either Appellant has established a prima facie case that on a balance of probabilities the AS Inc. numbers are right, thus negating the Minister’s assumptions as to quantum of AmEx travellers’ cheques and Ranboxy Visa gift cards received.
[28]
There is one exception to this - being in respect of the 2014 taxation year for which the Respondent asserts that AS Inc. received $5,360 of incentives. I can see where the Respondent got this - from the above-referenced letter from AS Inc. per Mr. Q to CRA dated October 30, 2015 (Ex. A-9) which included a notification by AS Inc. to CRA that, inter alia, in the 2014 taxation year AS Inc. had received $5,360 as “incentive/gifts”
. The evidence at the hearing was slight as to why AS Inc. subsequently departed from this and like positions for the other subject years expressed under cover of that October 30, 2015 letter.
[29]
However, by the time of the hearing AS Inc. per Mr.Q was adamant that it had received no incentives whatsoever in 2014. Of course as already noted several times, AS Inc. had kept no contemporaneous records of its own that could have corroborated this (i.e., by such records showing receipts in prior years while showing none for 2014).
[30]
But, at the same time the above-discussed CRA working paper Ex. A-32 listing receipts from Actavis and Ranbaxy itself shows no receipts whatsoever for the 2014 taxation year. The Respondent called no evidence to further explain its seemingly contradictory evidence.
[31]
After due deliberation I conclude I cannot ignore the Ex. A-9 evidence of a signed letter to CRA from AS Inc. per Mr. Q enclosing for filing a statement on form T2 SCH 125 entitled “General Index of Financial Information (GIFI)”
that AS Inc. had received incentive/gifts in 2014 of $5,360. Simply renouncing such a statement on the basis the CRA did not give the Appellants an opportunity for full consideration of it does not make the filed statement go away; all the more so, absent any evidence that should have been available from books and records contemporaneously maintained by AS Inc. corroborating that the statement was a mistake. In argument regarding AS Inc.’s 2014 taxation year, Appellants’ counsel made little if any reference to this Ex. A-9 filed statement.
[32]
Accordingly I conclude on this first issue that the quantum of incentives received by AS Inc. was as determined by the Respondent for each of the subject taxation years. This is a finding on a balance of probabilities based on such evidence as was adduced at the hearing.
IV.
B. Is AS Inc. entitled to deductions for alleged bonuses paid to some employees?
[33]
The two Appellants maintain that AS Inc. paid bonuses to certain employees of the pharmacy owned by AS Inc. including (per Ex. A-22 at pg.78), Mr. Q - $4,225 (2012) and $2,560 (2013); Mrs. Q - $2,740 (2012) and $4,100 (2013); Syed Abdul Hadi - $12,680 (2012) and $6,845 (2013); Sumeen Umar Quraishi - $5,255 (2012) and Mehreen Hadi - $2,405 (2013). There was no evidence of these bonuses having been reported by AS Inc. on T4s it issued to these employees and CRA. The said payments were confirmed by these employees through testimony and signed letters sent under cover of a letter to the auditor C. Lorquet dated May 25, 2016. The bonuses were paid partly in cash from AmEx travellers’ cheques deposited into Mr. and Mrs. Q’s joint account and partly by near cash prepaid Visa cards from Ranbaxy.
[34]
The bonuses are pleaded in the two Notices of Appeal but went unmentioned in the respective Replies other than to be denied. The Respondent called no evidence regarding this issue at the hearing. On a balance of probabilities I find that these bonuses were paid and thus AS Inc. is entitled to deduct these amounts, totalling $22,900 in 2012 and $15,910 in 2013. The amounts were significant enough to be well beyond being simply cash gifts.
V.
C. What is the value of shareholder benefits received by Mr. Q? Is approximately half of the shareholder benefits assessed to him rightly those of Mrs. Q instead?
[35]
In the Replies appear ministerial assumptions that Mr. Q is the 100% shareholder of AS Inc. The evidence adduced at the hearing by the Appellants was that he owned 51% of the common shares and Mrs. Q owned the other 49%. Copies of two share certificates (Ex. A-2, and Ex. A-3) appearing to be authentic were filed corroborating the divided ownership. The Respondent called no evidence to refute. As well the evidence was that Mrs. Q was active in opening the envelopes conveying the incentive payments and banking (AmEx travellers’ cheques proceeds) or storing in a bedroom drawer the gift Visa cards.
[36]
On the basis of this evidence I find that 49% of the shareholder benefits assessed per subsection 15(1) of the Act to Mr. Q over the years at issue should be deleted from his appealed reassessments, on account that he was not the sole shareholder as assumed by the Minister but rather he was a 51% shareholder and the other 49% of shares were all held by Mrs. Q, and she was active with Mr. Q in receiving and dealing with the subject incentive payments during the years in issue.
VI.
D. Are the reassessments for the each Appellant for the 2010, 2011 and 2012 taxation years statute-barred?
[37]
Both Appellants concede that there was some quantum of unreported income (AS Inc.) and resultant shareholder benefits (Mr. Q) for the said taxation years of 2010, 2011 and 2012. These years are presumptively statute-barred insofar as the appealed reassessments were raised beyond the applicable normal reassessment periods.
[38]
The Minister reassessed for those years, relying on subparagraph 152(4)(a)(i) of the Act, which permits reassessment at any time where, as asserted here, the particular taxpayer had made a misrepresentation to the Minister attributable inter alia to carelessness, neglect or wilful default. Here the misrepresentations are said to be the complete omissions at time of initial filings for the subject taxation years in reporting receipts of near-cash pharmaceutical purchase incentives as income (AS Inc.) or as shareholder benefits (Mr. Q). These misstatements were to my mind attributable at the least to carelessness, in failing to report these incentives. The fact that there was no substantial defence of the non-reporting after CRA advised AS Inc. that these receipts were reportable - nor any substantial defence from Mr. Q as to report-ability of shareholder benefits - is to me significantly indicative that the non-reporting was not a bona fide position taken with due care and consideration by either of Mr.Q and AS Inc. Further and in any event the basic fact that near-cash as being received as part of a commercial relationship (near-cash receipts being based on volume of purchases) virtually speaks for itself in terms of likely having income tax repercussions.
[39]
Thus per paragraph 152(4(a)(i) of the Act I find the Minister was entitled to reassess each of the two Appellants respectively for their otherwise statute-barred taxation years of 2010, 2011 and 2012.
VII.
E. Is the automobile stand-by charge assessed to Mr. Q correct?
[40]
The Minister assessed Mr. Q an automobile stand-by charge for each of his 2012 and 2013 taxation years, in the respective amounts of $23,302 and $23,972. The vehicle in question was a used luxury model automobile purchased by AS Inc. in 2011. It was utilized for home deliveries and customer visits for the pharmacy business owned by AS Inc. The vehicle was also used for personal purposes including a substantial commute from Mr. & Mrs. Q’s residence to the pharmacy location and return daily. The vehicle was kept at the Quraishi residence nightly. No log book was contemporaneously kept that would have provided an acceptably accurate record as to percentages of personal and business usage. At the hearing Mr. Q presented calculations done several years after the relevant years, prepared for use at the hearing, intended to support his position that the automobile was used more for business usage than the Minister had recognized in raising the relevant appealed reassessments.
[41]
I am unable to give these calculations (Ex. A-33 and Ex. A-7) significant evidentiary weight. They were prepared well after the fact and not based on contemporaneous evidence as to actual numbers of home visits made and where and business kilometres travelled. I am concerned with potential for lack of objectivity of that evidence. If someone chooses not to keep contemporaneously a travel log for a vehicle used both personally and for business, that person should anticipate having a difficult time in subsequently proving business use versus personal use.
[42]
As well, we heard some evidence that the used vehicle’s value at time of purchase - which value had been provided by Mr. Q or his adult nephew - was actually wrong and was a lower value. That figure was relevant to calculation of the stand-by charge. But there was little if any objective evidence put forth to support that either. Accordingly, I decline to interfere with the Minister’s assessments of the stand-by charges.
[43]
Having now dealt with the five issues before me in this appeal, the appeal of AS Inc. will be allowed and the AS Inc. reassessments for the 2012 and 2013 taxation years being referred back to the Minister for reconsideration and reassessment on the basis that the claimed bonuses totaling $24,900 (2012) and $15,900 (2013) were paid and so are deductible to AS Inc. The appeal of Mr. Q will be allowed with his five appealed reassessments being referred back to the Minister for reconsideration and reassessment on the sole basis that the subsection 15(1) shareholder benefits assessed to him are to be reduced by 49% for each of the five taxation years. The whole will be without costs, noting divided success of the parties in these two informal procedure appeals heard jointly.
Signed at Ottawa, Canada, this 29th day of November 2019.
“B.Russell”
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