Citation:2005TCC815
Date: 20051228
Docket: 2005-1048(GST)I
BETWEEN:
MOHAMMAD ZACHARIYA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal
pursuant to the Informal Procedure was heard at Vancouver, British Columbia on December 13
and 15, 2005. The Appellant testified and called his former accountant, Thobias
Emmanuel. The Respondent called Robert Light who at the material times was
employed by Bee-Clean Building Maintenance Incorporated (“Bee-Clean”) in the
metropolitan Vancouver area to solicit business for it.
[2] The matters in
dispute are set out in paragraphs 2 to 15 inclusive of the Reply to the Notice
of Appeal. They read:
2. In computing
income for the 1996, 1997, 1998, 1999, 2000 and 2001 taxation years, the
Appellant declared the following amounts of business income on his income tax
returns, as follows:
|
Taxation Year
|
Gross
Business Income
|
|
1996
|
$37,800
|
|
1997
|
$82,596
|
|
1998
|
$86,359
|
|
1999
|
$141,898
|
|
2000
|
$156,588
|
|
2001
|
$191,315
|
3. The Appellant did not file Goods and
Services Tax (“GST”) returns for the years ending December 31, 1996, 1997, 1998, 1999, 2000
and 2001. The Appellant’s GST reporting history is detailed in the attached
Schedule “A”.
4. On January 29, 2003, the Appellant applied
to be registered under Part IX of the Excise Tax Act, R.S.C. 1985, c.
E-15, as amended (the “Act”), and was assigned Registration number 86124
0950 RT0001.
5. By the Assessment, the Minister of
National Revenue (the “Minister”) assessed the Appellant net tax of $54,977.99,
penalty of $22,314.32 and interest of $4,672.97, respecting GST returns for the
period from January 1, 1999 to
December 31, 2001 (the “Assessment Period”), as detailed in the attached
Schedule “B”. The penalty amount includes a gross negligence penalty of
$13,744.50 assessed under section 285 of the Act.
6. By Notice of Objection dated December 24, 2003, the Appellant objected to the
Assessment.
7. By Notice of Reassessment number 11GU
GL0402 1151 8503, dated January 13, 2005, the Minister reassessed the Appellant
to decrease net tax to $50,139.91, penalty to $20,399.78 and interest to
$4,308.18, respecting GST returns for the Assessment Period, as detailed in the
attached Schedule “B”. The penalty amount includes a gross negligence penalty
of $12,534.96 assessed under section 285 of the Act.
8. In so reassessing the Appellant, the
Minister relied on the following assumptions of fact:
a) the Appellant operates a
janitorial service business;
b) all or substantially all of the
Appellant’s janitorial service business is subcontracted through Bee-Clean
Building Maintenance Incorporated (“Bee-Clean”);
c) at all material times, all or
substantially all the Appellant’s supplies and services were taxable at the
rate of 7 percent;
d) at all material times, the Appellant’s
business revenue exceeded the $30,000 small supplier threshold.
e) the Appellant was therefore required to be
registered for the purposes of section 240 of the Act, effective February 1, 1997;
f) at all material times, the Appellant
collected or was required to collect GST on its taxable supplies and services
provided;
g) the Appellant reported business income on
his 1996, 1997, 1998, 1999, 2000 and 2001 income tax returns, as follows:
|
Taxation Year
|
Gross Business Income
|
|
1996
|
$37,800
|
|
1997
|
$82,596
|
|
1998
|
$86,359
|
|
1999
|
$141,898
|
|
2000
|
$156,588
|
|
2001
|
$191,315
|
h) the Appellant was registered under the Act
effective January 1, 1999;
i) the Appellant was required to file GST
returns and make remittances on an annual basis;
j) the Appellant understated taxable
supplies by a total of $748,165.29 respecting the Assessment Period;
k) the Appellant understated GST of
$52,371.57 respecting the Assessment Period;
l) the Appellant was required to remit net
tax of $50,139.91 for the Assessment Period;
m) the Appellant did not remit any net tax
respecting the Assessment Period;
n) the Appellant did not keep records in such
form or containing such information as would enable the determination of the
Appellant’s liabilities and obligations as required by section 286 of the Act;
and
o) the Appellant did not maintain or provide
sufficient documentation to substantiate any further ITC’s for the Assessment
Period.
9. In levying the gross negligence penalties,
the Minister relied on the foregoing assumptions of fact and the following
assumptions of fact:
a) the Appellant failed to report GST of
$52,371.57 for the Assessment Period and the net GST was a material
understatement;
b) the Appellant’s accountant advised the
Appellant that he was required to collect GST on the taxable supplies provided
to Bee-Clean;
c) the Appellant did not collect or remit GST
on his taxable supplies to Bee-Clean; and
d) the Appellant knew or reasonably ought to
have known, that he omitted to file GST returns, and he was grossly negligent
in not reporting the amounts of GST collected.
B. ISSUES TO BE DECIDED
10. The issue is whether the Minister has
properly assessed the Appellant for net GST, penalties and interest respecting
the Assessment Period.
C. STATUTORY PROVISIONS RELIED ON
11. He relies on sections 123, 148, 165, 221,
222, 225, 228, 240, 280, 285 and 296 of the Act and the Input Tax
Credit Information Regulations (SOR/91-45) to the Act (the “Regulations”).
D. GROUNDS RELIED ON AND RELIEF SOUGHT
12. He respectfully submits that the Minister
properly assessed the Appellant for net GST under section 228 of the Act as
the Appellant underreported that amount by $50,139.91 during the Assessment
Period.
13. He submits that the Appellant did not keep
records in such form or containing such information as would enable the
determination of the Appellant’s liabilities and obligations as required by
section 286 of the Act.
14. He submits that the Appellant is not
entitled to ITCs in excess of the amounts allowed by the Minister during the
Assessment Period because the Appellant neither maintained nor provided
sufficient documentation to support further ITCs, as required by subsection
169(4) of the Act and the Regulations.
15. He submits that the Minister correctly
levied a penalty under section 285 of the Act, on the basis that the
Appellant knowingly, or under circumstances amounting to gross negligence in
carrying out his duties or obligations imposed by the Act, omitted to
file his returns with the Minister respecting the Assessment Period.
[3] Only assumption 8
(g) was refuted in paragraph 8. The Respondent filed copies of the Appellant’s
1999 and 2000 (Exhibit R-5) and 1998 and 2002 (Exhibit R-6) income tax returns.
In them the Appellant reported approximately one-half of the income he received
from Bee-Clean as employment income and the remainder as business income.
Bee-Clean was his only source of income. There were no T-4’s issued or
enclosed, but the Appellant did have Mr. Light sign a T-2200 form, which the
Appellant filled out, for the 1999 and 1998 years (Exhibits R-3 and R-4).
Bee-Clean did not make any withholdings from the Appellant’s income.
[4] None of the
assumptions in paragraph 9 of the Reply were refuted.
[5] The entire issue in
this hearing was one of credibility on important points, each witness testified
divergently. However the most disinterested witness was Mr. Emmanuel and parts
of his testimony were confirmed by the Appellant, as a result of which his
testimony is accepted as the truth of the matter.
[6] The Appellant
operated a cleaning business as a subcontractor for Bee-Clean in a “zone” in
metropolitan Vancouver. He cleaned eight or nine Royal Bank branches, one casino and some other
business premises. Essentially he hired and supervised several people at times
to do the actual cleaning. Bee-Clean supplied him with a van, specialized
cleaning equipment, and some specialized cleaning fluids. The Appellant hired
and fired workers, bought supplies, supervised the cleaning and corrected
problems or mistakes at his own expense. He subcontracted from Bee-Clean at his
own expense. He subcontracted at a fixed price from Bee-Clean although
Bee-Clean did supply some specialized cleaning fluids and cleaning equipment
and the van. The Appellant paid and deducted some expenses on the van and also
used his own vehicle in the business.
[7] When the Appellant
went to Mr. Emmanuel for his income tax returns, Mr. Emmanuel asked him, in
essence, “what about GST?” The Appellant said that he went to Mr. Light who
said the Appellant was an employee and signed the T-2200. Mr. Light denies the
conversation but he did sign two T-2200s which Mr. Zackariya had filled
out. Mr. Emmanuel did Mr. Zackariya’s income tax returns showing large business
income and expenses and still had the GST problem on the portion that was
business income. Mr. Emmanuel is believed when he testified that Mr. Zackariya
then said that he would pay it.
[8] In particular, the
Court finds that the Appellant is, and was, not as illiterate or ignorant as he
portrayed himself in Court. There are a number of reasons for this:
1. At
the pertinent time he was employing a number of people and operating a
successful subcontract in bank and casino premises where meticulous and
responsible work was required.
2. He knew about GST
from his accountant; he knew he was showing business income and expenses and
yet he ignored the GST problem. He testified that he thought that the $30,000
non-GST level was for net income, but Mr. Emmanuel is believed respecting his
version of this exchange.
3. His income tax
returns show other investments which are somewhat sophisticated.
4. He filed out the
T-2200s which are well done for his purposes.
5. The Appellant did
not do any withholdings respecting the cleaning staff that he hired and fired.
[9] Using the tests
described in Wiebe
Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553, the Court finds:
1. Control
The Appellant subcontracted from Bee-Clean
at a fixed price plus specialized equipment, supplies and supplied material and
staff to clean various business premises during the years in question.
Bee-Clean paid him regular monthly amounts and some special fixed amounts. The
Appellant hired and fired his employees, cleaned contracted premises and
corrected mistakes at his own expense.
2. Tools
Specialized tools were supplied by
Bee-Clean. The Appellant supplied his own vehicle and various other equipment.
He deducted business expenses and employees’ pay, depreciated and claimed
expenses for his own vehicle used in the business and paid for other supplies,
all as shown in his income tax returns.
3. Risk of Profit or Loss
The Appellant had a chance of profit or
loss. He recorded a modest profit from his reported business income (as
distinct from his allegation of additional “employment income”) in each year in
which his income tax returns are exhibited.
4. Integration
The Appellant’s
business was not integrated into Bee-Clean’s. He was a formally contracted
subcontractor operating his own business for himself pursuant to his agreement
with Bee-Clean.
[10] The appeal of the
assessment for GST is dismissed.
[11] The assessment of
the penalty under Section 285 of the Excise Tax Act as described in
paragraphs 14 and 15 of the Reply is also upheld. The Appellant knowingly
omitted to file GST returns. He was advised of his GST duties by
Mr. Emmanuel from the beginning. He told Mr. Emmanuel that he would pay
the GST on the business income he reported. The Court finds that he knew that
he did not receive any employment income from Bee-Clean. He would not have
reported part of it as business income if it had been employment income. The
Appellant was an active participant and instigator respecting his income tax
returns. And he knowingly chose not to file or pay GST.
[12] The Respondent has fulfilled
the onus on it respecting the assessment of penalties. The appeal of the levy
of penalties is dismissed.
Signed at Saskatoon, Saskatchewan, this 28th day of December 2005.
"D.W. Beaubier"
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