Expofoods (Canada) Limited v. Minister of National Revenue, [1985] 1 CTC 2026, 85 DTC 42

Taylor, TCJ:—This is an appeal heard in Montreal, Quebec, on October 16, 1984 against income tax assessments for the years 1976 and 1977 in which the Minister of National Revenue disallowed as deductions alleged expenses claimed as follows:

The Notice of Appeal filed on behalf of the appellant, by Blauer, Fridell & Co, Chartered Accountants, stated:

We wish to appeal the Minister’s decision on the grounds that the Brokerage fees referred to in the original notice of objection have already been added back to income. The Minister’s action in this case would disallow the expense twice. In addition, travel and entertainment expenses were incurred to earn income and should not have been disallowed.

The respondent relied, inter alia upon sections 3, 9, 18(l)(a) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended;

In reassessing the Appellant for its 1976 and 1977 taxation years, the Respondent relied, inter alia, upon the following assumptions of fact:

The above-mentioned amount of $33,000.00 has not been paid on account of brokerage fees and has neither been paid for the purpose of gaining or producing income from the Appellant’s business;

The Appellant has not paid the above-mentioned professional fees of $1,240.00 for the purpose of gaining or producing income from its business;

The Appellant has not paid the above-mentioned amounts of $2,378.00 and $16,582.00 and, in any event, such amounts have not been paid for the purpose of gaining or producing income from the Appellant’s business.

Mr Chodakowski, president of the appellant, described the operations of the company as dealing in fish and fish products. During the relevant period, according to the witness, the company had been in the process of changing its main source of supply from Poland to South America, and inducements of various kinds — gifts, dinners, small amounts of cash (indicated as $100 or $200 occasionally), etc were part of the expectational environment in which the company operated. As he understood the financial statements, the amount above described as “Travel and Entertainment” arose out of this procedure. Mr Chodakowski made no reference to the $1,240 alleged professional fees. He did, however, state that in his opinion, the $33,000 brokerage fees had been in the nature of commissions paid to a company called Expofoods (UK) Ltd (“Expofoods (UK)”) owned by the same shareholders who owned the appellant corporation. Expofoods (UK) acted as agent for Expofoods (Canada) in dealing particularly with the European market according to Mr Chodakowski.

When called upon by counsel for the respondent to provide some physical evidence of these expenditures, Mr Chodakowski submitted his expense account for the year 1977 which did show the following as cash payments allegedly to certain individuals whose names were indicated thereon:

During further cross-examination of Mr Chodakowski, counsel for the respondent introduced a document (Exhibit R-2) which appeared to be a form of “invoice” (in this case for interest charges) for Expofoods (UK) to Expofoods (Canada). Mr Chodakowski agreed there was no such “invoice” to support the disputed and alleged brokerage fees of $33,000. In addition counsel for the respondent introduced a copy of the financial statement of Expofoods (UK) for the period January 1, 1975 to December 31, 1977 in which there was no reference made to the $33,000 account as income, and in addition the following note appeared:

PRINCIPAL ACTIVITIES

The company did not trade between 1st January 1975 and 31st August 1977. On 1st September 1977 the company resumed its former activity of importing and wholesaling Fish Products.

Mr Chodakowski provided no explanation for that situation which appeared to contradict the position of the appellant in this matter.

A further witness for the appellant, Mr Haskell Blauer, CA explained that, in his opinion Expofoods (Canada) and Expofoods (UK) were really one and the same operation for income tax purposes, and he introduced Exhibit A-7, copies of telexes to and from Expofoods (UK) on the subject:

JUNE 1/79

IN DECEMBER 1976 EXPOFOODS (CANADA) LTD PAID TO EXPOFOODS

(UK) LTD BROKERAGE OF 23,000.00 AND 10,000.00

HOW WAS IT REFLECTED IN UK BOOKS?

NOTE:

1) WE DONT SEE IT AS INCOME HAVING BEEN SHOWN

2) IT MAY HAVE BEEN ENTERED UN (Sic) UK IN 1977

6TH JUNE 1979

THE WHOLE OF THE 33,000 DOLLARS WAS SET AGAINST THE BALANCE DUE FROM EXPOFOODS LTD.

On the matter of the “cash payments”, Mr Blauer stated that Mr Chodakowski had discussed the expectations of inducements in the off-shores operations with him, before the payments in the expense account submitted had occurred, and since it appeared to Mr Blauer that receipts could not be expected, Mr Chada- kowski should do as he did — note them with names and amounts, and that this should be acceptable to Revenue Canada.

In argument counsel for the appellant relied heavily on the proposition that Expofoods (Canada) (the appellant), and Expofoods (UK) were indistinguishable for income tax purposes, and he gratuitously introduced a copy of a letter from the law firm Verchère, Noël & Eddy, Place Ville-Marie, Montreal, Canada, with respect to Expofoods (Canada) Ltd setting out that situation with regard to an income tax dispute for the years 1978, 1979 and 1980. Counsel relied on the jurisprudence quoted therein.* [1]

Counsel adopted the fundamental position outlined in the letter:

Based on the above facts, we submit that Revenue Canada should disregard the apparent existence of Expofoods (UK) Ltd and allow the taxpayer to deduct the above- mentioned trading loss which was inappropriately claimed as a bad debt.

Counsel for the respondent noted the virtual lack of any proof with regard to the items in dispute, except for the minimal references to only a part of the “Travel and Entertainment”, as noted in the expense accounts submitted and signed by Mr Chodakowski, but as far as could be determined, not even approved by anyone else. Counsel referred the Court to: MNR v Eldridge, [1964] CTC 545; 64 DTC 5338; Muller’s Meats Ltd v MNR, [1969] CTC 171; 69 DTC 172; Moshe Schwarz v MNR, [1981] CTC 2147; 81 DTC 93; Marchand Estate v MNR, [1982] CTC 2128; 82 DTC 1097.

The Court notes the discrepancy, in fact conflict, between Mr Chodakowski’s original description of the cash payments ($100 or $200 occasionally) and his Own expense account record of these amounts. Also while these amounts do not add up to the total disputed of $16,852 for 1977, supra, there was not even any similar record for 1976. The deductibility of these amounts could probably be rejected on the grounds of this dichotomy alone, since much of this case depends on credibility. However, I am faced with the testimony of Mr Blauer, that the procedures used by Mr Chodakowski — including the cash paid amounts in his expense accounts — had been prescribed by him as the company auditor since it was the best the company could do under the circumstances, and that this should be acceptable to Revenue Canada. I am certainly of the opinion that Mr Blauer gave Mr Chodakowski this advice in good faith, and in an effort to do the best possible in the situation facing Mr Chodakowski — as it was explained to Mr Blauer.

First, however, I should like to turn to the question of the $33,000 brokerage fees, (and by analogy the $1,240 professional fees since no explanation other than the interrelationship of the appellant and Expofoods (UK) was proffered for it). The proposition by either Mr Blauer or Mr Leiter that the separate existence and function of Expofoods (Canada) and Expofoods (UK) can somehow be ignored, and that would warrant or justify the deduction of an alleged $33,000 brokerage fees or $1,240 professional fees, is unacceptable. Expofoods (UK) may well have acted as agent for Expofoods (Canada) and in that capacity there could be amounts (perhaps even losses incurred) properly deductible from the income of the appellant. But that is not what happened here. Whether as the agent for the appellant or not, there is no indication in the records of Expofoods

(UK) of a treatment of the. $33,000 (let alone the $1,240) which could reflect that arrangement. One document submitted, (Exhibit R-3), would tend to indicate that there was no business activity in Expofoods (UK) for which the appellant could have paid $33,000 as “brokerage” fees — even commission of some kind. Other documents submitted and the exchange of telexes would indicate that if indeed $33,000 had been received by Expofoods (UK) it was not considered there as “income” of any description. Certainly if it was considered a deductible expense to the appellant in Canada, setting it off against some “balance” owing from Expofoods (Canada) would not have the effect of including it as part of income in UK — an essential ingredient if the ‘‘one entity” tax proposition of Mr Blauer and Mr Leiter is to be entertained. Since control and direction of both the appellant corporation and Expofoods (UK) was in the hands of Mr Chodakowski, it would appear to me that Expofoods (UK) could be expected to provide a more informative response regarding the $33,000 under the circumstances when its deductibility was being questioned by Revenue Canada. As I see the situation, no realistic efforts have been made to satisfy the requirements of the Minister of National Revenue with regard to either the amount of $33,000 or the $1,240.

Turning to the other question, which may be phrased — “should the Minister of National Revenue allow deduction of off-shore business inducement payments for which the only supporting evidence, is the sworn testimony of the party allegedly paying them — albeit based on a form of chronological expense account record?”, I am inclined to accept the general proposition of Mr Chodakowski (notwithstanding the contradictions inherent in his testimony) that some payments, gifts, inducements, entertainment, etc were provided by the appellant corporation for which it was either impractical, or impossible to obtain normal evidentiary documentation. But even giving full weight to the testimony of Mr Chodakowski and the professional advice provided to him by Mr Blauer, it would appear to me that it would seriously damage the principles upon which the Minister must assess tax if such were admitted as adequate support for the deductions claimed in this matter. I can think of no reason why the Minister should insist on proper supporting evidence (as he regularly does), when the alleged recipient parties are territorially available in Canada, while not obtaining the same level of proof with regard to off-shore payments under similar circumstances. For the Court to accept as adequate the information (basically the sworn testimony) provided at this hearing would leave unanswered a series of questions, some of which are:

1. Were the alleged payments ever made?

2. If made, were the amounts which were recorded as paid accurate?

3. If made, were they made to the parties indicated?

4. If made, were they for the purposes indicated (business) or for some entirely different purposes?

5. If made, were they necessary?

6. If made, did they accomplish any purpose, or could some lesser

amount (perhaps none at all) have gained the same result?

I have even given consideration to the prospect that in open Court, appellants such as this corporation, would not wish to be too explicit in detailing the alleged payments, and that the Court should consider that in reviewing the weight to be given to testimony in particular. As I see it, however, that is looking at the issue from the wrong side. If indeed, certain restraints impinged on this taxpayer in attempting to claim the unvouchered deductions sought for “Travel and Entertainment”, it would appear to me that given the alleged delicacy of the situation, an appropriate confidential format was readily available to the taxpayer at the assessment or reassessment stage of proceedings within which the officials of Revenue Canada could have been satisfied regarding the amounts involved, if such satisfaction could be provided. When that has not occurred, it is difficult for the Court to adopt a position which would overlook this lack of effort on the part of the taxpayer.

In the end, the jurisprudence leaves little doubt as to the onus on a taxpayer under such circumstances. I would quote certain passages from the celebrated case of MNR v Eldridge, supra, to be found at 555-6 [5344-5]:

. . . I have not been presented with evidence which would enable me to determine if any such amounts were paid and, even if any such amounts were paid, precisely how much was so paid. The appellant, by reason of her failure to keep proper records, has been unable to show to my satisfaction that the Minister erred in not crediting these amounts as an expense in her business.

. . . Again, such vague generalities as were introduced in evidence are not adequate to discharge the onus on the respondent. That onus can only be discharged by precise and definite evidence. The respondent has not satisfied me by adequate evidence that any such amount was expended and, if so, of the amount so expended.

. . . While the respondent hinted that she knew the recipients of these payments, she refused to identify such persons because, as she stated, she feared for the safety of the lives of her children and her own life if she made such disclosures. I must assume that the law enforcement officers are conscientious in the exercise of their duties and are incorruptible and such assumption can only be rebutted by convincing evidence to the contrary. The evidence which I received was not of this nature and accordingly I have not been satisfied that payments for protection were made.

. . . The respondent, at one stage of her testimony, said she caused to be delivered a case of high quality whiskey once a week, but during her examination for discovery she stated deliveries were made once a month. I have not been convinced that these gifts were, in fact, made and even if they were made, no evidence has been adduced from which I could ascertain the number of such gifts and so compute their value.

And in dealing with a somewhat similar situation, it was noted at 3009 [1724] of Latta et al v MNR, [1978] CTC 3003; 78 DTC 1719, as follows:

. . . Except in the most unusual circumstances (which in my mind might not include simply neglecting to obtain or retain receipts, records, journals, note books, or daily expense sheets), how else would anyone determine with any certainty the characteristics in the expenditures which should be a prerequisite for deductibility? I doubt that the Board has “a right to expect a certain standard with respect to such claimed expenses” (quotation from counsel) which is greater or different than that which is expected by the Minister from all taxpayers. It may be, however, that the requirement to demonstrate proof is simply more apparent before the Board. It should be noted in this connection that in the voluntary system of income declaration administered by the Department of National Revenue, only the taxpayer can decide for himself the extent to which his record keeping for business or personal purposes will also be adequate, if needed, in the determination of income tax liability for departmental purposes.

I am not as ready as counsel for the respondent to concede the universal applicability of the siren song in Information Circular 76-4R quoted by the agent for the appellants:

Small amounts of unvouchered cash payments may be allowable provided it can be established that the total of such expenditures is reasonable in the circumstances and that they have been incurred for the purposes of gaining or producing income.

The word “unvouchered" does not necessarily mean “unsubstantiated” or “unsupported”. I can visualize several ways in which some reasonable evidence of such payments could be maintained and provided which would not be “receipts” (vouchers) in the familiar sense of the word. Without anything it appears to me that a taxpayer has set himself a difficult chore indeed to prove the expenses claimed were “reasonable” and “for the purpose of gaining or producing income”. To claim a deduction, a taxpayer must first meet the criteria in section 18(l)(a) “incurred by the taxpayer for the purpose of gaining or producing income” before relying on the “reasonable” qualification to be found in section 67. That latter section only comes into play when the “amount is otherwise deductible”, and the only clause allowing for such possible deductibility is the afore-mentioned 18(1)(a). The Board is asked to simply accept the statement of the President Latta that he is satisfied the employee Latta spent the allowance on behalf of the Company, and the purpose was to gain or produce income. The Board respects the President’s confidence in his employee and regards this alleged disposition as quite possible but that does not fulfill in any way the onus placed upon the appellant to displace the Minister’s assumptions when called upon so to do. The basic decision of the Company not to require regular confirmation from the employee regarding the nature and the extent of the expenditures was a conscious, deliberate one, even if taken to simplify business procedures and record keeping. That decision, however, is now the genesis of the difficulty which the appellant Active brings before the Board, and it cannot be overlooked in the circumstances. That appeal on behalf of the Company will be dismissed.

In addition to the amplification above regarding the word “unvouchered” I would also note that I do not consider the amounts at issue in this appeal as “small”.

The appeal is dismissed.

Appeal dismissed.