Citation: 2010 TCC 312
Date: 20100614
Dockets: 2008-488(GST)I
2008-934(IT)G
BETWEEN:
HENRYK WASSERMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1]
These appeals under the
Income Tax Act (ITA) and Excise Tax Act (ETA) are from
decisions of the Minister of National Revenue (Minister) for the Appellant’s
2003 and 2004 taxation years.
[2]
The Minister added to
the Appellant’s income the amount of $74,082 in 2003 and $46,780 in 2004 as
unreported income which the Appellant disputes. The Minister determined that a
percentage of the Appellant’s cash deposits were deemed to have been unreported
income and goods and services tax, and imposed gross negligence penalties under
subsection 163(2) of the ITA and section 285 of the ETA.
[3]
The Appellant inherited
from his parents a pet shop in Winnipeg and has successfully operated it for over
20 years. These appeals follow his first and only audit conducted by an analysis
of his bank deposits. Perhaps the common net worth method was not used because
of the Appellant’s frugal lifestyle and lack of visible assets.
[4]
This case is to be
determined primarily on its facts. The Minister’s counsel acknowledged that the
Appellant was telling the truth but, that his bookkeeping was seriously
inadequate. He pooled his personal and business money together and treated this
amount as his savings but did not keep proper records.
[5]
For the 2003 and 2004 taxation
years, the Appellant reported the following:
2003 Sales:
$389,870.60 Net Business Income: $29,326.42
2004 Sales:
$362,782.16 Net Business Income: $ 9,530.07
[6]
The Minister argues that the
Appellant failed to report additional income because deposits to the
Appellant’s business bank account were significantly higher than the amounts
reported above. The unreported amounts are $84,453 in 2003 and $53,330 in 2004.
The Minister adds that these amounts include unreported provincial sales tax
(“PST”) and unreported goods and services tax (“GST”) based on the unidentified
cash deposit amounts.
[7]
The Minister reached these
conclusions by taking the total deposited into the Appellant’s bank account and
deducting any loans made to the Appellant and transfers from any other accounts.
The net result, the Minister submits, is the unreported incomes for the years in
issue.
[8]
The Appellant’s position is that
these amounts are not unreported income but rather reported income from
previous years which he held onto as savings. He argues that since he was a
sole proprietor, he did not think that he would have to account for his sales
to anyone else. Unfortunately, he did not retain cash register receipts or any
other documentation nor keep a personal bank account separate from that of his
business.
[9]
The Minister’s counsel stated on page 3, 4 and 5 of the transcript:
... He knew
what was going in and out and he had to cover those. He just didn’t maintain
any records.
... we have a
self-reporting system, without accurate records the Minister can use other
methods to calculate income, the appellant has the onus to show the assessment
is incorrect and must do so with reliable and credible evidence, and penalties
will often result when a taxpayer’s records are in disarray or are nonexistent,
as is the case here.
[10]
The Appellant’s
position, in his own words, includes the following:
I have paid for the reassessment amount and interests $96432.00 and
also $14654.90 to the GST department. Almost the entire amount is in LOANS, ...
The biggest amounts are for deposits from my personal Savings, which
consisted of cash accumulated over 20 years of work,
...
I spent most of the day working, with no time to go and spend money.
I only travelled on trips to trade shows paid by suppliers.
...
I have lived in a small room in the back of the store, since 1994.
...
I needed to repair a furnace (boiler), but a new furnace was cheaper
than the repairs to the old boiler, needed to dip in to my savings. A roof
needed repairs, needed to repair a cracked store front window, and these
repairs also needed money from my savings.
[11]
The Minister also took
issue with some of the business expenses the Appellant claimed. He claimed 100%
of his automobile (SUV), and 100% of his television cable and internet expenses.
The Minister allowed 50%.
[12]
In presenting his
evidence, the Appellant impressed me as being open and having convinced himself
that his unorthodox methods were valid despite being very self serving. He
obviously has a frugal lifestyle, living in less than a 400 square foot space
at the back of his store. He appears to have immersed himself in his pet shop
business, having a particular interest in birds and fish.
[13]
For the most part, the
six or seven pages of assumptions of fact contained in the Minister’s Replies
to the Notices of Appeal are accurate. At page 7, paragraph 16 ee) through to uu)
the Minister stated the following:
ee) he Appellant did not maintain an accurate
inventory of the Business merchandise, rather, his statement of business
activities contains his estimates;
ff) Bank deposits were made on a regular
basis and consisted of cash deposits of a large number of 20,50 and 100 dollar
bills;
gg) the Appellant failed to report income in the following
amounts:
hh) The Appellant made unidentified cash
deposits in the amount of $79,952.63 in the 2003 taxation year of which
$70,133.89 was unreported revenue, $4,909.37 was unreported Provincial Sales
Tax (“PST”) and $4,909,37 was unreported Good and Services Tax (“GST”);
ii) The Appellant made unidentified cash
deposits in the amount of $49,118.70 in the 2004 taxation year of which
$43,086.48 was unreported revenue, $3,016.06 was unreported PST and $3,016.06
was unreported GST;
jj) In the 2003 taxation year, the Appellant
paid expenses with cash from unreported revenue in the amount of $4,501.30, of
which $3,948.51 was unreported revenue, $276.40 was unreported PST and $276.40
was unreported GST;
kk) In the 2004 taxation year, the Appellant
paid expenses with cash from unreported revenue in the amount of $4,211.37, of
which $3,694.18 was for revenue, $258.59 was unreported PST and $258.59 was
unreported GST;
ll) In the 2003 taxation year, the
Appellant’s unreported sales were in the amount of $84,453.93, of which
$74,082.39 was unreported business income, $5,5185.77 was unreported PST and
$5,5185.77 was unreported GST;
mm) In the 2004 taxation year, the Appellant’s
unreported sales were in the amount of $53,330.07 of which $46,780.76 was
unreported business income, $3,274.65 was PST and $3,274.65 was GST;
nn) The Appellant deposited $584,990.78 into
the Business bank accounts in the 2003 taxation year;
oo) No more than $13,000 of the amounts
deposited into the Business bank accounts in the 2003 taxation year were from
loans made to the Appellant;
pp) No more than $44,400 of the amounts
deposited into the Business bank accounts in the 2003 taxation year were
transferred from another Business bank account;
qq) The Appellant deposited $484,924.57 in to
the Business bank accounts in the 2004 taxation year;
rr) No more than $9,400 of the amounts deposited
into the Business bank accounts in the 2004 taxation year were from loans made
to the Appellant;
ss) No more than $9,627.50 of the amounts
deposited into the Business bank accounts in the 2004 taxation year were
transferred from another Business bank account;
tt) Purchases in the amount of $2,516.78
claimed by the Appellant in the 2003 taxation year as business expenses were
not incurred for the purpose of producing or gaining income from a business or
property;
uu) Purchases in the amount of $17,972.31
claimed by the Appellant in the 2004 taxation year as business expenses were
not incurred for the purpose of producing or gaining income from a business or
property;
[14]
The Appellant having no
documentation has to rely on his oral evidence, which consisted of generalities
to refute the assumptions.
[15]
Amongst other
authorities, the Minister cited the following from the Federal Court of Appeal
in Njenga v. The Queen:
... the
Appellant must maintain and have available detailed information and documentation
in support of the claims they make. We agree with that finding. Ms. Njenga as
the Taxpayer is responsible for documenting her personal affairs in a
reasonable manner. Self written receipts and assertions without proof are not
sufficient.
[16]
While this principle is
commonly adopted, there is authority for accepting credible oral evidence to
explain unidentified deposits. In his analysis of Njenga case, C.
Miller J. held in Fenney v. The Queen that:
I do not read Njenga as an absolute prohibition on allowing
undocumented expenses: it should be read in the light of a non-credible
witness.
With a credible witness such as Mr. Fenney I am prepared to consider
the expenses he raised at trial with a view to assessing the reasonableness of
such expenses.
[17]
Similarly, Bowie J. in Wainberg v. The Queen, commented on the
Njenga case and wrote:
Counsel for the Respondent referred me to the decision of the
Federal Court of Appeal in Njenga v. The Queen. That case held that a
taxpayer who ignores the requirement under the Act to maintain and have
available detailed information and documentation to support the claims that
they make should expect to have considerable difficulty discharging the burden
of proving those claims. The need to support oral testimony with documents is
certainly not absolute, however. If the taxpayer is a credible witness, the
case may be made simply on oral evidence, if it is sufficiently convincing ...
[18]
Mr. Wasserman did
all his own bookkeeping and accounting including GST, PST, and income tax
returns. He has up to eight employees, five of them relatives. He kept cash in safes
and had no cash register tapes except for the debit and credit card sales. He
was aware of RRSPs and having declared net incomes of $35,308, $29,326 and
$9,530, he purchased $14,000, $6,000 and $3,000 in RRSPs in each of 2002, 2003
and 2004, respectively. He was aware of claiming expenses to reduce his
business income including 100% of the cost of a large screen television in his
home. He pooled his savings with business income using some of the cash he
received for personal and business expenses without any records. Obviously, the
Minister had no other option than to analyse his bank deposits. The Appellant
had taken a bookkeeping course and had been in business for 20 years. He
knew or ought to have known that he had a silent partner in Canada Revenue
Agency.
[19]
He agrees that he
should have kept better records, but thought he had no one to report to. His
position is that all deposits were from sales of previous years. This appeal is
under the General Procedure of the our Court. The Fenney and Wainberg
cases dealt with much lower amounts and were under the Informal Procedure.
To accept oral evidence without any corroboration in this case would be too far
a stretch.
[20]
The only reasonable
concessions are with respect to the automobile business use and the gross
negligence penalties. I accept the Appellant’s evidence that he used his SUV
primarily for business and after nine years of use it has only 56,000
kilometres. It is reasonable to increase the business use of his SUV from 50%
to 80% in both years.
[21]
Dealing with penalties,
the Minister’s counsel very fairly stated:
I don’t think it’s that he is deceiving or lying. He has just
adopted a system from his parents, he said, and used that system for 20 years,
but the system doesn’t work. And once he got audited, that’s when we realized,
oh, your system doesn’t comply with the Income Tax Act.
I think that’s what is at issue here, is a misunderstanding of
Canadian tax laws.
[22]
I agree with counsel’s
insight but do not believe that the Minister has met the burden of proof in
these appeals. In the often quoted case of Venne v. R. Strayer J. wrote
the following:
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, in difference as to whether the
law is complied with or not. I do not find that high degree of negligence in
connection with the misstatements of business income. ...
[23]
The Appellant is
credible and did not intentionally fail to maintain records in an effort to
evade paying taxes. His procedure did not involve a high degree of negligence. Failing
to maintain records is careless and negligent, but it is not “grossly
negligent” so as to attract penalties pursuant to subsection 163(2) under
the ITA and under section 285 of the ETA.
[24]
There was no evidence
that the understatements were made knowingly. In Farm Business Consultants Inc.
v. The Queen,
the Federal Court of Appeal approved of the trial judge, Bowman J., who stated:
Subsection 163(2) is a penal provision and in applying it if there
is doubt as to the type of conduct to which the misrepresentation is
attributable the benefit of that doubt should be given to the taxpayer.
[25]
Without hesitation, I
find that the Minister has not proven his burden of establishing gross
negligence.
[26]
In conclusion, the
income tax appeal is allowed only to increase the automobile business use from
50% to 80% and to waive penalties imposed under subsection 163(2) of the ITA.
[27]
With respect to the GST
appeal, I find that the Appellant failed to keep adequate records to enable the
Minister to determine its liabilities, obligations and entitlements under the Act
as required by section 286 of the ETA. It was reasonable for the
Minister to rely on the bank deposits to determine the minimum amount of tax
collected or collectible by the Appellant. The GST appeal is allowed only to
waive the section 285 gross negligence penalties imposed.
Signed at Ottawa, Canada, this 14th
day of June, 2010.
“C.H. McArthur”
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