Gee v. R., [1997] 1 CTC 2100 (Informal Procedure)

O’Connor J.T.C.C.: — These appeals were heard in Vancouver, British Columbia on September 18, 1996.

The Appellant was the only person to testify and several exhibits were filed.

Issue

The issue is whether the Appellant is entitled to deduct from income certain claimed management fees amounting to $17,000 in 1991, $15,500 in 1992 and $13,500 in 1993.

Before summarizing my findings of fact, it is worthwhile to consider what an Appellant must prove in cases of this nature. As was stated by Margeson J.T.C.C. in Bronson Homes Ltd. v. Minister of National Revenue, [1993] 2 C.T.C. 2060, 93 D.T.C. 710, at page 2073 (D.T.C. 719):

the burden is on the Appellant to satisfy me on a balance of probabilities that he has met all the requirements which I referred to. One, that the expenses were made; two, that the expenses were made for the purposes of earning income; and three, that the expenses have been proven; and four, that the expenses were reasonable under the circumstances under section 67.

Facts

The Appellant alleges that the management fees were paid to his former business partner and previous school friend, Mr. Han Wah Low (“Mr. Low”), with respect to a retail clothing store operation carried on in China by a corporation. The Appellant claims he acquired 50% of the shares of that corporation in early 1991 and that the other 50% of the shares belonged to Mr. Low.

Receipts were submitted as Exhibits A-1, A-2 and R-1. The first receipt, Exhibit A-l, is dated July 22, 1991 and indicates that Mr. Low received from the Appellant a sum of $17,000. The second receipt, Exhibit A-2, is dated December 3, 1992 and indicates that Mr. Low received from the Appellant $15,500. The third receipt, Exhibit R-l, is dated January 20, 1993 and indicates that Mr. Low received $13,500 from the Appellant. All of the receipts are, for the most part, in the Chinese language. The Appellant confirmed that a rough English translation prepared by the Revenue Canada auditor (Exhibit R-5) was a correct translation with respect to all three receipts. The receipts do not demonstrate what they relate to but the Appellant asserts that they represent management fees.

The Appellant was asked if he had bank records which would correlate with the amounts paid to Mr. Low. The Appellant produced five bank statements. These were examined by counsel for the Respondent and filed as Exhibits R-6 through R-10. The Appellant explained that whenever monies were required in the Chinese operation for taxes, rent or other expenses he would arrange to withdraw amounts in cash and remit cash by registered mail to Mr. Low. No written proof of the registered mailings was submitted.

Exhibit R-7 is a statement of the Royal Bank at 1025 West Georgia Street, Vancouver (“Royal Bank”) covering the period October 15, 1991 to January 7, 1992. It shows various deposits and withdrawals but there is no apparent correlation between the withdrawals and the amount of the management fees claimed in 1991. Moreover, the receipt from Mr. Low is dated July 22, 1991, a date prior to the period covered by the Royal Bank statement. Exhibit R-6 is a statement of City Bank Canada, 612 Main Street, Vancouver. It covers the period August 21, 1992 to September 20, 1992. It shows various deposits and cheques and one withdrawal on September 17 to close the account. Again there is no apparent correlation between the withdrawals and the management fees claimed in 1992. Exhibit R-8 is statement of the Royal Bank. It covers the periods September 17, 1992 to December 31, 1992 and January 1, 1993 to March 15, 1993. It shows various deposits and withdrawals but there is no apparent correlation between the amounts withdrawn and the fees claimed in 1992 and 1993. Exhibit R-9 from the Royal Bank covers the period from March 16, 1993 to September 2, 1993 and Exhibit R-10 from the Royal Bank, but related to a different account than Exhibit R-9, covers the period from March 30, 1993 to November 15, 1993. Once again, numerous deposits and withdrawals are shown but again there is no apparent correlation between amounts withdrawn and the management fees claimed in 1993. Also, the receipt (Exhibit R-l) relative to the management fees claimed in 1993 of $13,500 is dated January 20, 1993 and, according to the bank statements, there were no cash withdrawals prior to that date.

No written management contract existed between the Appellant and Mr. Low.

The Appellant explained that it was impossible for him to furnish better proof of the payment of the management fees claimed because of the rigid government regime in China which the Appellant indicated prohibits per- sons or corporations in China from furnishing the required data to persons outside of China. In support of this position Exhibits R-l 1 and R-12 were submitted. These are two newspaper articles dated December 14, 1995 and January 17, 1996 which describe China’s rigid position in two separate instances. The article of December 14, 1995 relates that a Chinese court imposed a 14 year jail sentence on a person whom the court found guilty of conspiring to subvert the government by certain actions and publications. The January 17, 1996 article described China’s tough stand with respect to controls on foreign news services, threatening to punish any that jeopardize the country’s interest

The China operation never showed a profit and the business ceased in November of 1993. The Appellant never received back any of his funds or any monies from the Chinese operation.

Analysis

The receipts appear to be the best written evidence of the monies having been paid. However there is no indication on the receipts that they relate to management fees. Moreover, the date of January 20, 1993 on the receipt for the 1993 year, a date prior to any cash withdrawals, casts considerable doubt on its authenticity. To some extent this also applies to the receipt dated July 22, 1991. The only real proof that the Appellant paid monies as management fees was his own testimony.

With respect to the adequacy of the records kept by the Appellant, reference should be made to the decision of the Federal Court, Trial Division in Zalzalah v. /?., (sub nom. nom Zalzalah v. Canada) [1995] 2 C.T.C. 368 (headnote only), 95 D.T.C. 5498, at page D.T.C. 5499. The court stated:

However, insofar as assumption (b) is concerned, the Minister’s position is unanswerable. Subsection 230(1) of the Income Tax 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...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.

The plaintiff frankly acknowledged that he did not keep any books or records during the taxation years here under review. This matter was also raised in the proceedings before the Tax Court of Canada where Lamarre Proulx J.T.C.C. stated

The Minister cannot and should not allow business deductions that cannot be proven by documentary evidence. That would bring the administration of the Income Tax Act in the sphere of arbitrariness.

I agree with that view of the matter. Likewise, in the case of Holotnak v. The Queen, Cullen J. considered the requirements of section 230 and stated as follows:

Section 230 of the Act requires taxpayers to keep adequate books and records. “Adequate” is not defined but it would seem that these records should support whatever the taxpayer is claiming for tax purposes.

The onus of proof that the expenses were incurred for the purpose of earning income is on the taxpayer (Wellington Hotel Holdings Ltd. v. Minister of National Revenue 73 D.T.C. 5391). Specifically, with regard to assessments, the onus is on the taxpayer to prove that the Minister’s assumptions and assessments are wrong (Strayer, J. in Schwarz v. R., 87 D.T.C. 5274) quoting from Johnston v. Minister of National Revenue, (3 D.T.C. 1182 [1948] S.C.R. 486). The Schwarz case (supra) also involved a situation where the plaintiff’s purchases were not supported by vouchers. As Strayer J. points out, the onus is on the taxpayer to prove wrong the M.N.R.’s reassessment as the taxpayer is in a better position to prove what actually happened.

In my opinion it is evident that the Appellant has failed to discharge the burden of proof. The receipts do not describe to what they relate. The two dates mentioned above cast doubt on their authenticity. The bank statements submitted do not correlate with the amounts claimed as management fees. The newspaper articles do not establish that China would not permit Mr. Low to furnish documents that would establish management fees had been paid.

It may be that the Appellant, in good faith, did remit certain sums to the Chinese operation but, in my opinion, this fact, on a balance of probabilities, has not been proven.

Moreover, it is clear that if any monies were sent to the China operation, they were sent to meet expenses of the business and not as management fees. If anything, they may have been in the nature of advances which the Appellant made to the business to keep it afloat. In any event, it is clear that they certainly have not been proven to be management fees.

Consequently, for all of the above reasons, the appeals are dismissed.

Appeal dismissed.