Citation: 2013 TCC 198
Date: 20130619
Docket: 2012-808(IT)I
BETWEEN:
RUI DE COUTO C/O ALCO WINDOWS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bocock J.
I. Issue
[1]
This is a personal tax
appeal of Mr. Rui De Couto as sole shareholder, officer and director of Alco
Windows Inc. (“Alco”) involving his 2004, 2005 and 2006 taxation years (the “Relevant
Years”). Taxation years 2004 and 2005 were assessed outside the normal
reassessment period under subsection 152(4) of the Income Tax Act (the “Act”).
The 2006 taxation year was originally the subject of subsection 152(7)
arbitrary assessment, but after the taxpayer filed his return, the Minister
reassessed on the basis of the filed tax return.
[2]
The three reassessments
allocated considerable shareholder benefits to Mr. De Couto, increasing his
income by some $28,791.00, $32,173.00 and $23,351.00 for each of the 2004, 2005
and 2006 taxation years, respectively. Gross negligent penalties were also imposed
for each of the three years under subsection 163(2) of the Act.
II. Facts
[3]
At the hearing, the
Appellant’s spouse, Edita Lomanta, represented the Appellant. Mr. De Couto also
testified, along with an accountant retained by the Appellant to prepare a
general ledger for the Relevant Years in anticipation of the Appeal. The
general ledger was prepared entirely from information provided by the Appellant
and Ms. Lomanta.
[4]
Aside from the general
argument that the assessments, reopening of the statute barred appeals and
imposition of penalties were arbitrary, unfair and lacking in factual foundation,
three specific arguments were offered by the Appellant, namely, that:
i)
the Appellant
shareholder was previously owed sums by his company Alco Windows Inc. (“Alco”)
relating to advances he made to Alco well in excess of the reassessed income
and the Minister failed to give credit to Mr. De Couto for such advances;
ii)
the creation, in 2012, of
a general ledger for the Relevant Years is sufficient evidence to provide a
clear delineation between personal benefits, corporate expenditures and
shareholder advances and should be relied upon by the Court for the purposes of
reconciling the shareholder’s account and benefits rather than the assessment
of the Minister; and
iii)
the Appellant made cash
payments for rent on behalf of Alco to the landlord, Ms. Lomanta, of $1,000.00
per month for each month during the Relevant Years, but Mr. De Couto has received
no offsetting credit to his shareholder’s loan account by the Minister.
[5]
To summarize, the
shareholder benefits assessed by the Minister were either: reimbursed personal
expenses of the Alco borne by Mr. De Couto; or, shareholder loan repayments of
capital initially advanced to Alco by Mr. De Couto and repaid by Alco on a tax-free
basis.
a) Nature of Business
[6]
Mr. De Couto is the
sole officer, shareholder and director of an aluminium door and window installation
business known as Alco. Alco was incorporated in 2001 and has operated continuously
during the Relevant Years largely on a cash basis.
[7]
Ms. Lomanta prepared
and kept the books and records for Alco. Mr. De Couto signed all cheques and
ran the day-to-day operations of the business.
b) Books and Records
[8]
The evidence at trial
consisted of a sampling of Amex Credit Card statements, bank account statements,
rent receipts, a vehicle purchase agreement, premises rental agreement, and a
general ledger. These were essentially the only documentary records of
expenditures. All of these cards, bank accounts and documents (with the
exception of the lease) were personally held in the name of Ms. Lomanta or Mr. De
Couto. There were no cross-references to receipts, cheques or class of expense to
the general ledger produced by the Appellant at the Hearing. In fact, it was the
Respondent who produced complete credit card statements for the Relevant
Period.
c) Bank Accounts
[9]
A sampling of the statements
for line of credit bank account held in Ms. Lomanta’s name was adduced by the
Respondent as an example of the overall confusion related to the
differentiation between business and personal expenses.
d) Nature of Receipts / Entries and
Vouchers
[10]
As to shareholder
advances, there were no cheques, receipts or a concurrently maintained
shareholder loan account ledger reflecting alleged advances. The 2012 prepared
general ledgers for the Relevant Years provided entries for debits and credits,
but no documentary evidence or cross referencing to actual sums advanced,
expended or reimbursed. Money simply flowed in all directions from and to
personal accounts, cheques to Mr De Couto, cheques to Ms. Lomanta, cash
deposits, electronic payments on personal credit cards and/or cheques for
occasional business expenses.
e) Shareholder Loan Account
[11]
Any reconciliation of a
shareholder’s loan account was rendered impossible by the absence of any ascertainable
flow of funds. Moreover, the taxpayer’s T-1 Returns, as filed by Mr. De Couto,
actually indicated that shareholder advances or loan accounts decreased in the
Relevant Period during which the Appellant claims same increased.
f) Shareholder Benefit Calculation by
the Minister
[12]
The Minister’s
calculation was straightforward. In each of the Relevant Years, the Minister
took shareholder withdrawals payable to Mr. De Couto by Alco, and deducted reported
wages claimed by the Appellant and also those allowed business expenses reimbursed
to Mr. De Couto by Alco, the amounts of which were $6,962.38, $13,980.15 and
$13,635.34 in each of the 2004, 2005 and 2006 taxation years, respectively.
[13]
Meaningful books do not
exist for Alco or the Appellant, and if they do, they were not produced at the Hearing
nor were any source documents regarding actual receipts, vouchers or invoices
relevant to specific business expenses. With the possible exception of the rent
issue described below, there was no evidence of the advance of shareholder
loans or the incurring of business expenses by Mr. De Couto beyond those
allowed by the Minister. There were no shareholder benefits declared or
referenced in the filing of the Appellant’s tax returns nor were there any
offsetting increase to the shareholder loan account for such advances. Although
this is not a case of the Appellant’s deliberately trying to deceive, it
nonetheless remains the case where no probative records, evidence or documents
could reliably identify the source, recipient or beneficiary of any moneys
paid. This is a direct result of the incessant and prolific commingling of
personal, business and other accounts, investments and assets without any
consistent or reflective record keeping of why, where or to or from whom money,
assets or credit flowed.
g) Rent Expense
[14]
The one possible
exception to this maze of accounts and inscrutable flow of funds concerned rent
paid on behalf of Alco for offices and storage at Ms. Lomanta’s residence. Written
receipts from Ms. Lomanta together with a Rental Agreement for the Relevant
Years reflect rent paid by Alco of $1,000.00 per month. More compelling perhaps
is the fact that Ms. Lomanta claimed the rental income on her tax returns and
Alco did not deduct the rent payments as an expense. These last two facts were
submitted by counsel for the Respondent. The payment received by Ms. Lomanta logically
came from someone. On the basis of the consistent testimony of Mr. De Couto,
the accountant and Ms. Lomanta on this issue, the Court finds that the
Minister’s assessment of shareholder benefits did not account for the rental
payments made by the shareholder, Mr De Couto, which were otherwise consistently
reflected by the landlord and not deducted by the named tenant. Aside from the
rental payments, the Court finds that no other documents or records could
dislodge the consistent and logical inclusions by the Minister of shareholder
benefits.
III. Statute Barred Assessments
[15]
Subparagraph 152(4)(a)(i)
of the Act requires the Respondent to discharge its onus of proving
that the taxpayer has made “a(ny) misrepresentation that is attributable to neglect,
carelessness or wilful default” . . . “in filing the return.”
[16]
The Appellant by
delegating, but nonetheless approving, the completion and submission of income
tax returns based upon such imprecise expenses, shareholder advances and
shareholder benefits committed such a misrepresentation. Even to this day, the
amounts remain inscrutable. Deductively, such omissions represented carelessness,
if not neglect, giving rise to clear and obvious misrepresentations as to the
status of personal versus business expenses, assets and benefits conferred. It
was explained by the Court to the Appellant at the Hearing that it is not
necessarily a question of honesty or deceit, but one of competence, experience,
reliable record keeping, consistent accounting and bookkeeping practice, the
absence of which can constitute misrepresentation. In this regard, the Minister
has satisfied her burden and the reassessments were properly issued outside the
usual period.
IV. Gross Negligence Penalties
[17]
The actions (or omissions)
of a taxpayer affording the Minister a subsection 154(4) reassessment outside
the normal reassessment period do not necessarily meet the threshold for the
imposition of gross negligence penalties under subsection 163(2).
[18]
As noted by Strayer J.,
in Venne v R, (1984), 84 DTC 6247 (FedTD) at pages 6256 – 6249.
[...]
“Gross negligence” must be taken to involve greater neglect than simply a
failure to use reasonable care. It must involve a high degree of negligence
tantamount to intentional acting, an indifference as to whether the law is
complied with or not [...]
[...]
By virtue of sub-section 163(3) “the burden of establishing the facts
justifying the assessment of the penalty is on the Minister”. It will be noted
that for the penalty to be applicable there appears to be a higher degree of
culpability required, involving either actual knowledge or gross negligence,
than is the case under sub-section 152(4) for reopening assessments more than
four years old where mere negligence seems to be sufficient [...]
[19]
The Appellant and his
spouse have limited business acumen, language facility, education and
managerial background. They were clearly confused and failed to understand
their obligations. This was manifest in the abysmal state of the records, their
own pleadings and their confusion at the Hearing. However, both unquestionably appeared
good faith and seemed to have learned during their own appeal process that much
more effort is required to accurately reflect accounting records, to delineate
between their personal and business expenses and to otherwise fulfill their
obligations under the Act.
[20]
Factually in this case,
the Court finds that the lack of records or accounts produced at the Hearing
did not factually appear to be the result of advertent acts or deceit, deliberate
omissions or culpable intention on the part of the Appellant. The Court is left
with the view that had records been better kept, organized and sorted, additional
shareholder advances or expenses borne by Mr. De Couto may have been decipherable.
The Appellant is likely the primary and largest victim of his own negligence
and carelessness. The recognition of this fact by the Appellant also became
apparent at the Hearing. Moreover, there is the issue of the rent paid by the
shareholder which decreases the magnitude of the amounts of the shareholder
benefits attributable by the Minister. With proper accounting advice and
support in subsequent years, the taxpayer is likely to correct the considerable
deficiencies which gave rise to the errors on the returns. This lack of culpable
intention, manifest inaugural business ignorance and the absence of any overt
act to mislead all factually distinguish this matter from many others coming
before this Court. As such, the Court does not make a finding of gross
negligence in this matter.
[21]
Therefore, the
Minister’s reassessment stands for all Relevant Years, subject to the allowance
of $12,000.00 per year on account of a shareholder advance by the Appellant related
to the payment of rent on behalf of his company. Therefore, the penalties
imposed under subsection 163(2) of the Act are rescinded.
[22]
Although there was some
success at the Hearing by the Appellant, given the state of records of the
Appellant and Alco, there shall be no order to costs. This is in recognition of
the fact that the Respondent could not possibly have resolved any part of this
matter on a principled basis without the facts being extracted at a hearing
before this Court.
Signed at Toronto, Ontario, this 19th day of June 2013.
“R.S. Bocock”
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