Citation: 2010TCC635
Date: 20101210
Docket: 2008-3795(IT)G
BETWEEN:
ARTHUR W. WALFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1]
The Appellant, Arthur
Walford, is appealing the reassessment of the Minister of National Revenue of
his 2002, 2003 and 2004 taxation years.
[2]
The Appellant was
employed in the Office of Budget and Taxation (“OBT”) of the Ontario Ministry
of Finance from 1981 to 2005. While he
had an office at the OBT, the Appellant was also authorized to work from home
where he maintained an office.
[3]
The Appellant worked his way up in the department and at
all times relevant to this appeal, was working as an information technology manager. As such, his duties were to acquire and test
emerging technologies and to test and provide a technology platform for the OBT
offices. To fulfill the technology acquisition portion of his job description,
the Appellant was issued and authorized to use four purchasing credit cards (“P‑cards”).
[4]
Although as a P-cardholder the
Appellant did not need pre‑authorization for any of his purchases, he was
bound by the terms and conditions of the P-card issuer; in particular, that the
P-card would be used only for purchases consistent with the types of services
and materials authorized by OBT management and that it would not be used for
personal purchases. As a public service employee P‑cardholder, the
Appellant was also subject to the Procurement Directive for Goods and
Services which contained similar restrictions. In addition, P-cards were to
be used only for purchases from merchants designated from time to time by the
Government of Ontario and the P-cardholder was to advise the merchant at the
time of purchase that the transaction was GST exempt. Receipts were to be kept
for all purchases and reconciled against the P-card issuer’s monthly statements.
[5]
In September 2004, Internal Audit
Services conducted a review of the use of P-cards in a number of Ontario
government branches. One of the cardholders ultimately selected for detailed review
was the Appellant. Internal Audit Services reviewed purchases made by the
Appellant between 1997 and 2004 totalling some $837,853 and concluded that
certain items valued at $83,656 had been purchased either for personal use or
were not consistent with the types of services and materials authorized by
management (“Non-OTB Purpose Items”) contrary to both the P-card issuers’ terms
and conditions of use and the Procurement Directive. Furthermore, the
Appellant had failed to keep receipts for all but approximately 10% of the
value of the Non-OBT Purpose Items. Invoices ultimately recovered from various
merchants also revealed that the Appellant had paid GST on the items, leading
to the conclusion that he had not informed the merchants that the purchases
were made on behalf of the Government of Ontario and were therefore, GST
exempt.
[6]
In June 2005, Internal Audit Services
produced a report of its findings entitled Special Review of Inappropriate
Use of Purchasing Cards by Cardholder X in the Office of Budget and Taxation[1] (“Internal Audit Report”). The upshot was that the
Appellant was dismissed from his employment; he was also charged and pled
guilty to breach of trust.
[7]
The police sent a copy of the Internal
Audit Report to the Special Enforcement Division of the Canada Revenue Agency
thereby triggering the audit which gave rise to the reassessments under appeal.
Canada Revenue Agency auditor Darlene Bird was assigned to review the
Appellant’s 2002 to 2004 taxation years. Ms. Bird testified for the Respondent
and was very thorough and precise in the explanation of how the reassessed
amounts were determined. Although interviewed by Ms. Bird and invited to
provide information to support his claim that the Non-OBT Purpose Items had
been legitimate purchases and/or returned to the OBT, the Appellant did not
avail himself of that opportunity. Unable to obtain the Appellant’s file
directly from the OBT or the Appellant’s consent for its release, Ms. Bird
ultimately based the reassessments solely on the Internal Audit Report’s
findings in respect of the Appellant’s Non-OBT Purpose Items[2].
[8]
As a result, the Minister assessed the
Appellant under subsection 3(a) and paragraph 6(1)(a) of the Income
Tax Act for additional income equal to the purchase price of items obtained
with the P-cards of $12,056, $26,565.50 and $12,782.59 in 2002, 2003 and 2004,
respectively:
3. Income
for taxation year.
The income of a taxpayer for a taxation year for the purposes of this
Part is the taxpayer’s income for the year determined by the following rules:
(a) determine
the total of all amounts each of which is the taxpayer’s income for the year
(other than a taxable capital gain from the disposition of a property) from a
source inside or outside Canada, including, without restricting the generality
of the foregoing, the taxpayer’s income for the year from each office,
employment, business and property
6. (1) Amounts
to be included as income from office or employment. There shall be included
in computing the income of a taxpayer for a taxation year as income from an
office or employment such of the following amounts as are applicable:
(a) Value of benefits - the value of board, lodging and
other benefits of any kind whatever received or enjoyed by the taxpayer in the
year in respect of, in the course of, or by virtue of an office or employment, …
[9]
The kinds of items identified in
the Internal Audit Report as Non-OBT Purpose Items included several cameras and
photographic equipment, computer gaming equipment, including a Playstation, an
X-box and various games; stereo equipment and numerous CDs and DVDs.; cell
phones used by the Appellant’s wife and daughters; building materials
purportedly to be used to renovate a room on the OBT premises; a Maytag fridge
which somehow found itself in the Appellant’s kitchen; various consumables such
as bottled water, snacks and candies; and two window air‑conditioning
units. Some of these items were returned to the OBT after the Internal Audit
Services review began in September 2004. Although the Minister allowed a
reduction of $13,082 in the Appellant’s 2005 income tax return for certain
other items returned in that year, no reduction was allowed for the value of
any of the Non-OBT Purpose Items returned in 2004.
Appellant’s
Position
[10]
While acknowledging that he had
not been “perfect” in his use of the P‑cards, the Appellant rejected the
notion that the value of the Non-OBT Purpose Items had been properly included
in his income: first, he argued that the Internal Audit Report had wrongly
categorized certain legitimate purchases as Non-OBT Purpose Items. He argued
further that, in any event, the income assessed ought to be reduced to reflect
the value of the Non-OBT Purpose Items that he had returned to the Ministry.
Respondent’s
Position
[11]
Counsel for the Respondent
reminded the Court that the Appellant had the onus of proving wrong the basis
of the Minister’s assessment and argued that the evidence presented fell far
short of that mark. Counsel invited the Court to draw a negative inference from
the fact that although having challenged both the bona fides and the
accuracy of the Internal Audit Report, the Appellant had not subpoenaed the
officials responsible for the Internal Audit Report to challenge its findings.
As for a reduction for the Non‑OBT Purpose Items returned, counsel
contended that in the absence of any evidence as to the value of the items at
the time of their return, no such reduction was warranted.
Analysis
[12]
Under paragraph 6(1)(a) of
the Income Tax Act, benefits of any kind whatever received or enjoyed by
a taxpayer in a taxation year “in respect of, in the course of, or by virtue of
an office or employment” are required to be included in a taxpayer’s income
under subsection 3(a). The phrase "benefits of any kind
whatever" is so broad that generally, only benefits specifically exempted
by the legislation can escape its ambit. Further, an employee’s lack of
authorization for a purchase does not remove the benefit received from the
notion of “income” as the proceeds wrongfully realized constitute income from
an independent, albeit illegal, source rather than income from employment.[3] The jurisprudence shows that “many cases have
established the principle that the proceeds of crime or an illegal activity
will have the character of “income” for the purposes of the Income Tax Act.”[4] In R. v. Poynton, the Ontario Court of
Appeal affirmed that the benefits sought to be taxed did not accrue to the
taxpayer nor were they conferred upon him as an employee of the company, but as
a thief.[5]
[13]
Given the wording of the
legislation and its interpretation in the jurisprudence, the Appellant faced a
particularly heavy evidentiary burden. In my view, he failed to provide
sufficient evidence to establish that the findings of the Internal Audit
Report, the document upon which the Minister based his reassessments, were
incorrect. He did not show that the Non-OBT Purpose Items were purchased as
part of his authorized employment duties rather than for his own personal
benefit and did not prove the value of Non-OBT Purpose Items ultimately returned
to the OBT after the Internal Audit Services investigation began.
[14]
The Appellant’s case rested on his
own testimony and that of three former colleagues he had subpoenaed, supervisor
Tom Sweeting and two co-workers, Christina Soleman and Brenda Kershaw.
[15]
Turning first to the testimony of
the subpoenaed witnesses, their evidence, while generally credible, did not
support the Appellant’s allegations of inaccuracy in the Internal Audit Report
or that the Non-OBT Purpose Items had been purchased for legitimate OBT use.
While acknowledging that many at OBT, himself included, were guilty of not
having respected the government’s P-card usage policies, Mr. Sweeting confirmed
that he had been consulted by officials during the Internal Audit Services review
and that he did not dispute the findings regarding the Non-OBT Purpose Items.
He also rejected the Appellant’s suggestion that its findings were the result
of political or departmental interference.
[16]
As for Ms. Soleman and Ms.
Kershaw, they corroborated the Appellant’s testimony that he was not the only
one that had misused his P-cards, that there was poor control of OBT inventory,
that items often “went missing” and that snacks were often provided for the IT
employees. However, when it came to the issues under appeal, they had no
personal knowledge of the circumstances under which the Appellant purchased the
Non-OBT Purpose Items or once obtained, what he did with them.
[17]
The weakest link in the
evidentiary chain, however, was the Appellant himself. Given that he did not
call any of the officials involved in the Internal Audit Report to challenge
the finding underpinning the reassessments, proving his allegations of
inaccuracy in the Internal Audit Report depended largely on his personal
credibility. I regret to say I did not find the Appellant particularly believable.
In addition to being generally evasive and self-serving in his testimony, the
Appellant did not seem to grasp the essential wrongfulness of his misuse of the
P‑cards. In saying this I am mindful of the fact that the issue before me
is the correctness of the Minister’s assessment, not a reconsideration of the
criminal charges against him. My point is that the force of his evidence in
respect of the kinds of items he purchased, their intended use, what ultimately
became of them and their value upon their return to the OBT was significantly
weakened by his tendency to blame his own misconduct on the failure of his
supervisors to keep a closer eye on him, to impute improper motives to the
Internal Audit Report officials and to attribute inconsistencies in his
responses during the Internal Audit by citing health problems and stress.
[18]
There were numerous discrepancies
between the Appellant’s evidence and the findings in the Internal Audit Report.
For example, the Appellant testified that many Non-OBT Purpose Items had actually
been used at the OBT office for training or experimental IT purposes; according
to the Internal Audit Report, however, they had been found at the Appellant’s
home when the Ministry sent a moving van to retrieve them, including Stinger
Speakers/Farad Capacitors; a Sony 27” TV; a Bose Radio (the Appellant said it
had been kept under his desk in his OBT office from its time of purchase March
2003; the Internal Audit Report states it had been located in the Appellant’s
home from date of purchase until December 2004, three months after the Internal
Audit had begun, and does not list it as an item later collected from his
Appellant); a Panasonic 14” LCD TV; a Polk Surround Sound Speaker System; a JVC
DVD/VCR Unit (as with many items, however, there are no serial number on the
receipt making it impossible to confirm that the item purchased was the exact
item returned); four Sony Walkmans; a Harman/Kardon Receiver; Mission Speakers;
Nakamichi Speakers; Pioneer DVD Recorder; and several DVD’s. The nature of the
items, their number and duplication looks highly suspicious. Equally dubious,
the Appellant’s justification for keeping such items at his home: “for security
reasons” given the poor inventory control at the OBT and the tendency of things
to go missing.
[19]
Often, his explanations simply
defied belief; for example, his story of having purchased materials at Home
Depot for the purpose of renovating a storage room located in the OBT building
for IT use. Anyone with even a passing knowledge of government operations would
be skeptical of the Appellant’s assertion that he personally and without
authorization from the department responsible would be permitted to renovate a
portion of a government building. According to his version of events, his
intentions were good; he hoped to save the $50,000 cost estimated by government
officials by doing the work himself for only $3,000 or $4,000; his actions,
however, fell short of the mark. Notwithstanding his original estimate, the
Appellant ended up spending $8,000 of taxpayers’ money to acquire materials,
including hardwood flooring, which ultimately “went missing”. He admitted no
renovations were ever made to the storage room.
[20]
Equally incredible was his
justification for having bought several thousand dollars’ worth of computer
gaming equipment and games, supposedly for the purpose of researching the
technology for the OBT. As silly, his story of having to acquire and maintain a
vast library of movies for departmental use, including such stellar titles as Cheech
and Chong and Jackass. It is also difficult to reconcile the
Appellant’s justification for their purchase that such items were intended to
be available to officials who had to travel in their work with his admission
that the movies made their way back to the OBT only after the Internal Audit
Services investigation located them in his home.
[21]
All in all, the Appellant failed
to convince me that any of the Non-OBT Purpose Items were properly purchased
within the scope of his employment duties. Whatever his intentions when
purchasing them, the evidence points to the conclusion that they ultimately
ended up in his possession where he benefited from their use. The Internal
Audit Report was prepared shortly after the investigation by officials who, on
the face of it, would have no reason to fabricate their findings. There was no
evidence that the Internal Audit Report was unreliable.
[22]
There remains, then, the question
of whether the Appellant is entitled to a reduction of the income assessed in
respect of certain Non-OBT Purpose Items returned to the Ministry. It is clear
from the Appendices to the Internal Audit Report that some of the Non-OBT
Purpose Items were returned. The problem is, however, that the Appellant failed
to provide sufficient evidence of the value of these goods at the time of their
return. He made no estimate of their value in his direct evidence. He did not
call an expert to testify to their value. Had he been more credible and had he
provided details of their use and its duration, I might have been able to
estimate a value based on the original purchase prices set out in the Internal
Audit Report balanced against the nature of the item and the length of its use
by the Appellant. As it is, I do not think such an approach would be appropriate.
I note as well that in justifying passing on government-purchased cell phones
to his family members and keeping digital cameras purchased with his P‑cards
for his own use, the Appellant testified, on more than one occasion, that such
items were outdated within six months to a year. If I take the Appellant at his
word, then such things would have been equally without value when returned to
the OBT. As for the returned video games, CDs and DVDs often cited by the
Appellant, two minutes at a garage sale will provide a pretty accurate
assessment of the worthlessness of such items once used.
[23]
For the reasons set out above, the
Appellant has failed to rebut the assumptions upon which the Minister based his
reassessments. Whether as benefits acquired by virtue of his employment or as income
from an illegal source, the amounts assessed by the Minister were properly
included in his 2002, 2003 and 2004 taxation years. The appeals from the
reassessments are dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 10th day of December, 2010.
“G. A. Sheridan”
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