Date: 20020408
Docket: 2001-2409-GST-I
BETWEEN:
KWOK KEN LOUIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
McArthur J.
[1]
This appeal is from an assessment under the Excise Tax Act
with respect to outstanding goods and services tax (GST), the
denial of input tax credits (ITCs) and the imposition of interest
and penalties. The appeal is for the reporting period from
January 1, 1996 to December 31, 1997.
[2]
The Appellant was a self-employed construction worker who
operated his own business alone. While a skilled handyman, his
bookkeeping skills were very limited and his accounting records
were in disarray. The Minister of National Revenue (the Minister)
assessed GST on cash and cheques of an unsubstantiated nature
deposited to the Appellant's bank accounts of $24,248 in 1996
and $63,544 in 1997 and did not allow ITCs in respect of certain
expenses.
[3]
The Appellant did not register under Part IX of the Act
until November 1998 when he was registered by an officer of
the Minister after completion of an audit. The GST registration
number assigned to the Appellant was effective January 1, 1996.
The Appellant was not a small supplier as defined in the
Act and was, therefore, required to collect GST on his
taxable supplies but he failed to do so.
[4]
After the audit, the Minister determined the following:
m)
in respect of his commercial activities for the period from
January 1, 1996 to December 31, 1997, (the "Assessment
Period") the Appellant did not report total taxable supplies
of $188,323.13, as detailed in the attached Schedule
"A";
n)
during the Assessment Period, the Appellant under-reported GST
collectible in the amount of $13,182.62, as detailed in the
attached Schedule "A";
o)
during the Assessment Period, the Appellant reported on his T1
Income Tax Returns business expenses of $58,606.42, as detailed
in the attached Schedule "B";
p)
business expenses of $22,551.13, as detailed in the attached
Schedule "B", were denied for the following
reasons:
i)
they were not incurred for the purpose of gaining or producing
income from a business, but were personal or living expenses
within the meaning of paragraph 18(1)(h) of the Income
Tax Act.
ii)
the recipient of the supplies were persons other than the
Appellant, and
iii)
the Appellant could not substantiate that the purchases were
incurred.
q)
during the Assessment Period, the Appellant was allowed input tax
credits ("ITCs") of $2,358.75, as detailed in the
attached Schedule "B";
r)
the Appellant failed to provide sufficient documentation to
substantiate the amount of GST collected or collectible as being
any less than that calculated by the Minister for the Assessment
Period;
s)
the Appellant failed to provide sufficient documentation to
substantiate any eligible ITCs beyond those allowed by the
Minister for the Assessment Period;
t)
ITCs were disallowed on the basis that the Appellant was not the
recipient of certain supplies and that certain supplies were in
respect of the construction of his personal residence located at
7122 Clarendon Street, Vancouver, British Columbia; and
u)
the Appellant did not exercise due diligence in ensuring that the
correct amount of net tax was reported and remitted to the
Receiver General.
[5]
The Minister assessed the Appellant for unreported net tax of
$10,823, interest of $1,308 and penalty of $1,766. The Appellant
was represented by Ms. Mirada Tam of Yu-Te Chang and
Company, certified general accountant. The agent for the
Appellant stated the following in a letter dated June 25,
2001 attached to the Notice of Appeal:
The Appellant claims that, in computing the amount of GST
collectible for the reporting period from January 1, 1996 to
December 31, 1997, the addition of unreported deposits totalling
$24,248.68 in 1996 and $63,544.45 in 1997 should not be included.
Reasons are as follows:
(1)
the unreported deposits in 1996 and 1997 were not business income
for income tax purposes;
(2)
portion of the unreported deposits was personal loan repayments
and payments;
(3)
portion of the unreported deposits was reimbursement by an
architect company, Polyland Investment & Consultants Inc.,
for payments to subcontractors by the Appellant.
The amount of the appeal is $10,823.87 (net tax assessed).
The Appellant also claims that all up-to-date arrears interest
and/or penalties for the GST reporting period from January 1,
1996 to December 31, 1997 should be waived.
[6]
The Appellant claimed that previously unexplained deposits
consisted of personal loans and the repayment of loans.
Ms. Tam, on the Appellant's behalf, admitted that the
Appellant "has no idea of the proper way to do bookkeeping,
so he's not a very organized person ... he agrees that this
is actually a very good lesson for him, so we wish this case will
be dealt with in a lenient way".
Analysis
[7]
The following statements of Bowman J. in 620247 Ontario Ltd.
v. The Queen[1]
apply to the present case:
... In a case involving a challenge to a GST assessment the
onus of proof is the same as in an income tax appeal. Where
the issue is one of fact, as it is here, the appellant has the
onus of establishing on a balance of probabilities that the
assessment is wrong. No question of law is raised in this
case and it is of course inappropriate to speak of onus of proof
where the issue is one of law. Where penalties are imposed
under section 280 by reason of an underpayment of tax, the
respondent's onus is satisfied by establishing such
underpayment and the amount thereof. Such strict, as opposed
to absolute liability, penalties are susceptible of a defence of
due diligence: Pillar Oilfield Projects Ltd. v. The
Queen [1993]
G.S.T.C. 49 (T.C.C.). The appellant has the onus of
establishing due diligence.
...
The assessment is based upon the assumption that the bank
deposits are about as accurate an indication of the sales as one
is likely to get, given that the appellant kept no books and its
only record of sales was the sales slips, which were incomplete
and essentially in an unsatisfactory state. It may be a fair
surmise that some of the bank deposits came from sources other
than sales but the evidence simply does not establish how
much. In a case of this type, which involves an attempt by
the Department of National Revenue to make a detailed
reconstruction of the taxpayer's business, it is incumbent
upon the taxpayer who challenges the accuracy of the
Department's conclusions to do so with a reasonable degree of
specificity. That was not done here. A bald assertion
that the sales could not have been that high, or that some
unspecified portion of the bank deposits came from other sources
is insufficient. ...
[8]
The Minister conducted an audit of the Appellant's business
affairs and the assessment is based on unexplained bank deposits
taken to be proceeds of sales. It is the best evidence the
Minister had because the Appellant kept unsatisfactory records.
The Appellant claimed that these bank deposits came from sources
other than sales. This may be so, but the evidence does not
establish it. If the taxpayer wishes to challenge the accuracy of
the Minister's assessments, he must do so with more specific
evidence than presented here. It is not sufficient to state that
some of the bank deposit sources were from the corporation,
Polyland Investments & Consultants Inc., and some deposits
were from relatives repaying loans. The Appellant provided
several signed statements acknowledging loans owed to him. Two of
these were conflicting. There were no corroborating witnesses.
The Appellant was the only one to testify.
[9]
An auditor with Canada Customs and Revenue Agency testified on
behalf of the Respondent. Upon reviewing the Appellant's
income tax accounts, he recognized that the Appellant should have
been registered for GST and was not. The auditor reviewed the
bank account deposits, eliminated term deposits, GICs, child tax
benefits and interest. Apparently, the Appellant gave him several
conflicting explanations for the unidentified deposits. There was
no corroborative evidence. At the hearing of this appeal, the
Appellant's agent produced several promissory notes from
relatives which were of little assistance. Polyland Investments
was not mentioned by the Appellant until shortly before the
hearing and I do not accept this explanation.
[10]
Section 240 of the Excise Tax Act requires
registration for the purposes of GST.
[11] At the
audit stage, the Appellant explained that there were two $20,000
loans which made up the deposit variances. Further, after
obtaining a second accountant, he stated there was an additional
amount of $50,000 he received from his father. Then, just prior
to trial, he stated he received money from Polyland. There was no
corroborating evidence and his evidence was inconsistent. The
Appellant has not met the burden of satisfactorily explaining the
deposits in question.
Penalties
[12]
Section 280 of the Act imposes interest and penalties
where a taxpayer fails to pay an amount on time. The auditor
found that the Appellant never filed GST returns. As held in
Pillar Oil Fields, supra, section 280 penalties are
subject to a defence of due diligence. The Appellant has not
established this defence. He had not registered as required by
section 240 and his bookkeeping was almost non-existent. He
did not make a sincere and demonstrable attempt that a reasonable
person in similar circumstances could be expected to make to
comply with the law. I recognize that GST accounting is complex
and the Appellant has little formal education and probably does
not read or write English. He gave evidence through an
interpreter.
[13]
Compliance with the GST legislation is somewhat difficult and
beyond the reach of many Canadians, let alone the Appellant, but
here the Appellant made no effort whatsoever. He did not seek
advice. Surely, to satisfy due diligence, his minimal requirement
would be to speak to an accountant in the Vancouver Chinese
community. He did not do this until he was audited. In fact, he
did nothing. He kept no or inadequate records and did not seek
advice or register. He appears to have had a busy construction
business and must have been made aware of the existence of GST
and income tax requirements. One cannot simply ignore legislation
because it is confusing.
[14] The
appeal is dismissed.
Signed at Ottawa, Canada, this 8th day of April, 2002.
"C.H. McArthur"
J.T.C.C.
COURT FILE
NO.:
2001-2409(GST)I
STYLE OF
CAUSE:
Kwok Ken Louie and
Her Majesty the Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
January 24, 2002
REASONS FOR JUDGMENT BY: The
Honourable Judge C.H. McArthur
DATE OF
JUDGMENT:
April 8, 2002
APPEARANCES:
Agent for the
Appellant:
Mirada Tam
Counsel for the
Respondent:
Jasmine Sidhu
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-2409(GST)I
BETWEEN:
KWOK KEN LOUIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 24, 2002, at Vancouver,
British Columbia, by
the Honourable Judge C.H. McArthur
Appearances
Agent for the
Appellant:
Mirada Tam
Counsel for the Respondent: Jasmine
Sidhu
JUDGMENT
The
appeal from the assessment made under the Excise Tax Act,
notice of which is dated March 29, 2000, and bears number
11BU0600893 for the reporting period January 1, 1996 to December
31, 1997 is dismissed.
Signed at Ottawa, Canada, this 8th day of April, 2002.
J.T.C.C.
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