Joseph A. Trentadue v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2752

Hamlyn, J.T.C.C.:—The essence of these appeals is whether the appellant or a corporation associated with the appellant carried on business for the taxation years in question and whether the appellant was part of the ownership of a condominium leased out for rental income.

The appeals were heard under the informal procedure. They are appeals for the 1987, 1988 and 1989 taxation years. The Minister of National Revenue (the "Minister") pleads in 1987 the appellant understated business income by $3,427 and deducted the amount of $6,250 as carrying charges, in 1988, the appellant deducted business losses amounting to $2,490.50 and failed to report rental income of $732 and business income of $10,398 and in 1989, the appellant deducted business losses amounting to $2,133.52 and failed to report rental income of $2,479 and business income of $6,746.

In reassessing the appellant for the 1987 taxation year, the Minister disallowed the deduction of carrying charges in the amount of $6,250 and added business income in the amount of $3,247. For the 1988 taxation year, the Minister disallowed the deduction of business losses, added business income of $10,398, added rental income of $732 and allowed additional capital cost allowance of the rental property in the amount of $732. For the 1989 taxation year, the Minister disallowed the deduction of business losses, added business income of $6,746, added rental income of $2,479, allowed capital cost allowance for the rental property in the amount of $2,479 and allowed carrying charges in the amount of $889.

The appellant's position

From the notice of appeal:

My objection is firstly, to the assumption that any business carried out by Trent-x Electronic Accounting Services duly registered and owned by 742267 Ontario Inc. (documents attached) [not reproduced] is to be treated as a that of a SOLE PROPRIETOR instead of that of the Corporation named in the registration and named in the banking resolutions namely “742267 Ontario Inc.” registered October 29/87.

In reassessing the appellant, the Minister made certain assumptions of fact. These assumptions were accepted by the appellant at the first day of trial (June 30, 1993):

—the appellant operated an unincorporated business under the names of Trent-x Electronic Accounting Systems/Services, Trentx Management and Trentx Consulting as a sole proprietorship (the "sole proprietorship”)

—the address of the sole proprietorship was the appellant's residence;

—the appellant described his business activity as supplying/installing minicomputer systems, bookkeeping, investment consulting and preparation of tax returns;

—the appellant's business income from the sole proprietorship for 1987, 1988 and 1989 was $8,489.99, $10,397.85 and $6,746.21 respectively;

—the appellant incorporated 742267 Ontario Ltd. (the "corporation") on October 29, 1987; and

—the assets of the sole proprietorship were neither transferred nor rented to the corporation.

Certain other matters flowed from the evidence on the second day of trial (March 3, 1994) that confirmed other assumptions:

—accounting records were not maintained for the corporation;

—the income statements for the sole proprietorship submitted with the appellant's T1 returns covered the 12-month period from January 1 to December 31 of the years in question;

—the first and only T2 return for the corporation was filed on December 9, 1989 for a purported 16-month period ended March 31, 1989, reporting gross revenue of $7,000 and a loss of $8; and

—the rental income from 50 Scarborough Golf Club Road for the 1988 and 1989 taxation years amounted to $732 and $2,479 respectively.

At the hearing of the appeal the appellant raised the issue of the ownership of the rental premises. In the notice of appeal the appellant stated the ownership was joint ownership:

The third objection is with the mortgage interest on a townhouse rented to produce income. Jointly owned by my spouse and I, we lived there until June 1, 1988.

Issues

The issues at trial addressed the following:

—was the appellant or was the corporation carrying on business for the years in question; and

—in relation to the rental income — who was the landlord of the rental premises, that is, was it the appellant, the appellant’s wife or the appellant and his wife.

Legislation

Taxation year

Subsection 249(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") reads as follows:

249 (1) For the purpose of this Act, a “taxation year” is

(a) in the case of a corporation, a fiscal period, and

(b) in the case of an individual, a calendar year,

and when a taxation year is referred to by reference to a calendar year the reference is to the taxation year or years coinciding with, or ending in, that year.

Fiscal period

Subsection 248(1) of the Act reads as follows:

"fiscal period" means the period for which the accounts of the business of the taxpayer have been ordinarily made up and accepted for purposes of assessment under this Act and, in the absence of an established practice, the fiscal period is that adopted by the taxpayer (but no fiscal period may exceed

(a) in the case of a corporation, 53 weeks, and

(b) in the case of any other taxpayer, 12 months,

and no change in a usual and accepted fiscal period may be made for the purposes of this Act without the concurrence of the Minister).

Books and records

Subsection 230(1) of the Act reads as follows:

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 his 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.

Evidence analysis — Was the corporation or the sole proprietorship carrying on business

With slight variation, the overall evidence impression was the business was that of the appellant as a proprietorship and not the corporation.

No separate accounting records were kept for the corporation. The corporation did not appear to have any assets. Corporation tax returns were not filed except for the return of December 9, 1989 and the validity of the contents of that return is questionable. The business appeared to operate under several names including Trent-X, Trentax, Trentx Management, Trent-X Electronic Accounting Services, Trent-X Electronic Accounting Systems, Trent-X Accounting Systems/Services, Tentx Consulting, Trent-X Systems, Tren-Tax, Trent-X Inc. and Trentax Accounting Services. The statements filed with the individual returns of the appellant and the one questionable corporation return were not supported with the records kept. Bank deposits did not correspond with revenues stated.

In particular, for the questionable corporate return that was filed, the appellant could not show any record to support the stated revenue or the stated expenditures. Moreover, with respect to that return the corporation did not obtain permission in accordance with the Act to change its year end and more particularly, and in any event, the tax year of the corporation as claimed by the corporation was beyond the scope of the Act. It is of significance, at the audit stage the appellant told the auditor the filing was done in error.

The tax auditor from Revenue Canada, who gave his evidence in a clear forth right manner said he spent considerable time and effort going over all the appellant’s business affairs and he could not find anything in terms of financial records to show that the corporation had carried on business, as alleged. Outside the documentation filed (i.e., the incorporation papers, two provincial filing declarations, a letter from the Toronto-Dominion Bank and the disputed T2 filing) all other documentation including a trust declaration and agreement from the National Trust and cancelled cheques indicate the business was that of the appellant and not the corporation.

As a conclusion, I am of the opinion the business activity was that of the appellant and not the corporation.

Evidence analysis — rental property: Was it a sole proprietorship or joint proprietorship?

All the registered documentation supported the ownership of the rental property as being in the joint ownership of the appellant and his wife. The appellant’s wife was not called to give evidence although the appellant did file a letter from his wife indicating she was the sole owner of the property. This letter, in the absence of any other supporting documentation or other supporting evidence, was given very little weight.

I conclude the condominium rental business was a joint operation of the appellant and his wife.

Conclusion

This Court concludes the appellant and not the corporation for the taxation years in question carried on the business under review and the Minister was correct in his assessments of the appellant for the 1987, 1988 and 1989 taxation years.

This Court further concludes in relation to the rental income the source of income (the condominium) was owned and operated equally by both the appellant and his wife for the 1989 taxation year.

Decision

The appeals are dismissed.

Appeals dismissed.