Citation: 2010 TCC 413
Date: August 9, 2010
Docket: 2006-1395(IT)G
BETWEEN:
ANDREW BENNETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. FACTS
[1] The Appellant resides in Surrey, British
Columbia.
[2] When the Appellant filed
his Income Tax Return for the 2004 taxation year, he claimed a deduction in the
amount of $51,787.00.
[3] The Respondent’s Reply
states that after the Appellant filed his 2004 Income Tax Return, he was
requested by Canada Revenue Agency (the “CRA”) to support the claim of $51,787.00.
The Appellant did not file the documentation that was requested by officials of
the CRA and the claim of $51,787.00 was denied.
[4] On the 12th day of
September 2005, the Appellant filed a Notice of Objection.
[5] On the 13th day of February
2006, the Minister of National Revenue (the “Minister”) issued a Notification
of Confirmation.
[6] The Appellant filed a
Notice of Appeal on the 12th day of May, 2006.
B. ISSUE
[7] Is the Appellant allowed to
deduct the amount of $51,787.00 in determining his income for the 2004 taxation
year?
C. ANALYSIS AND DECISION
[8] The facts presented at the
hearing indicate that the Appellant claimed the following amounts in his 2004
Income Tax Return:
|
Canadian Exploration Expense (“CEE”)
|
$20,000.00
|
|
Canadian Development Expense (“CDE”)
|
$ 5,959.89
|
|
Remuneration
|
$30,000.00
|
(Exhibit A-1, Tab 2)
(Note: The Appellant later supplied
the CRA with a statement which indicated that the amount of $30,000.00
previously stated to be an amount in respect of remuneration was represented to
be “other amounts” paid by him to Zelon Enterprises Ltd.)
[9] In his argument, counsel
for the Appellant said,
Mr. Drove: … the [A]ppellant
relies upon Section 66.1(3) of the Income Tax Act. That’s the section under
which he claims the deduction of the $50,000 …
(Transcript, page 140,
lines 18-20)
[10] At page 146 of the
transcript, Mr. Drove said,
Mr. Drove: … So we
are just dealing with the $50,000 of Canadian exploration expense, which the [A]ppellant
has claimed in full in the 2004 taxation [year], …
(Transcript, page 146,
lines 23-25)
[11] In his argument, counsel
for the Appellant said that the deduction for the CDE should be disallowed.
Counsel for the Appellant referred to CDE and said:
Mr. Drove: But, in
my submission, the [A]ppellant hasn’t proved that he incurred that expenditure.
[…] So I take that off the table. …
(Transcript, page 146,
lines 18-22)
[12] The phrase, ‘Canadian
Exploration Expense’ (“CEE”), is defined in section 66.1(6) of the Income
Tax Act (the “Act”). The definition reads, in part, as follows:
“Canadian exploration expense” – “Canadian
exploration expense” of a taxpayer means any expense incurred after May 6, 1974
that is
…
(f) any expense incurred by the
taxpayer […] for the purpose of determining the existence, location, extent or quality
of a mineral resource in Canada including any expense incurred in the course of
…
[13] The Appellant testified
that he had made an oral agreement with John H. Hajek. (Note:
During cross examination, counsel for the Respondent asked Mr. Hajek when he
entered into the oral agreement with the Appellant. Mr. Hajek said:
A.
I cannot recall.
Ms. Akey: You have no recollection
of that?
A. No.
Ms. Akey: You have no recollection
of the oral agreement in 2003 either?
A.
No, how could I?
(Transcript, page 87,
lines 6-11))
[14] Mr. Hajek testified that he
graduated as a chemist from a university in Paris, France.
[15] Mr. Hajek said that he has
worked for forty-five years in the mining exploration trade. He said that he
works as a consultant, specializing in geochemistry.
[16] Mr. Hajek said that he and
his wife formed two companies: Zelon Chemicals Ltd. in 1973 and Zelon
Enterprises Ltd. in 1976.
[17] Mr. Hajek said that Zelon
Chemicals Ltd. is involved in holding assets and Zelon Enterprises Ltd. is his
consulting firm which takes most of the risk.
[18] Mr. Hajek said that Zelon
Chemicals Ltd. and Zelon Enterprises Ltd. were carrying out exploration work in
the Cariboo Region of British Columbia.
[19] At page 83 of the
transcript, Mr. Hajek said:
A. … both company Enterprise and Chemical, and they have already a residual
investment. I don’t recall the right number but I think $8 million have [sic]
been spent.
(Transcript, page 83,
lines 6-9)
[20] Mr. Hajak was asked by counsel
for the Respondent (Ms. Akey) about bank statements or cancelled cheques or any
supporting documents to show this amount (i.e. the invoices) was paid.
Mr. Hajek said:
A. No, because those are inside
between the two companies and with general project that means the expense on
this project is only part of the general expense.
(Transcript, page 91,
lines 15-18)
[21] Ms. Akey also
asked Mr. Hajek to explain the meaning of residual interest. Ms. Akey referred
to the letter dated November 28, 2004, where it says that Mr. Bennett has paid
the sum of $30,000 for mineral exploration expense. Ms. Akey asked the
following question:
Ms. Akey: Nowhere
in the document does it say he’ll receive a residual interest.
A. Well, it’s
understood.
Ms. Akey: It’s understood by you.
A. No,
it’s a normal mining practice. You put X amount of dollar in a venture, you
have an interest proportional to that money, unless specified otherwise.
(Transcript, page 87,
lines 16-23)
[22] The Appellant was unable to
indicate what his alleged interest in the mining claims would be, or how his
interest would be computed.
[23] I have concluded that the
expenses claimed by the Appellant did not qualify as CEE for the following
reasons:
(a) The
Appellant did not incur any CEE or carry on any mineral exploration activities
on his own. The Appellant said that he was purely an investor;
(Transcript,
page 11, line 23-24);
(b) The
Appellant was not a member of a partnership with Mr. Hajek or Zelon Enterprises
Ltd. or Zelon Chemicals Ltd.;
(Transcript,
page 102, lines 2‑9)
(c) The
Appellant was not a participant in a joint venture with Mr. Hajek or Zelon
Enterprises Ltd. or Zelon Chemicals Ltd.;
(Transcript,
page 102, lines 10-12)
(d) The
Appellant did not own any flow-through shares issued by either Zelon Enterprises
Ltd. or Zelon Chemicals Ltd.;
(Transcript,
page 107, lines 13-16)
(e) No
original documentation, such a general ledger, was provided by the Appellant to
establish that the amount of money provided by the Appellant was ever received by
Zelon Chemicals Ltd. or Zelon Enterprises Ltd.;
(f) No
evidence was produced to establish that the cheques provided by the Appellant
were cashed by the recipient. The original cheques and bank drafts were not produced
and no bank statements have been produced to establish that the amounts were
paid by the Appellant or received by the two Zelon companies. Rather than
providing original corroborating documents to the Court, the Appellant and Mr.
Hajek provided documents that they had prepared;
(g) The
evidence provided by Mr. Hajek is very confusing. For example, in the documents
filed, there is a continual mixing of payments made by Zelon Chemicals
Ltd., Zelon Enterprises Ltd. and Mr. Hajek’s personal credit card;
(h) The
evidence provided by the Appellant and Mr. Hajek to the Court was not of the
type that one would expect from an accounting or business point of view. To
illustrate the unusual and unsatisfactory bookkeeping and record keeping, I
cite the following question:
Ms. Akey: So
somewhere you have list of investors and a list of accepted - -
A. No, no, not a list
of investors. That’s - -
(Transcript,
page 84, lines 6-9)
(i) Mr.
Hajek produced a number of invoices from the parties with no cancelled cheques,
no bank statements, no general ledgers or anything to show that the various
amounts were paid.
(Transcript,
page 92, lines 17-19);
(j) Counsel
for the Respondent referred to several handwritten invoices that had been filed
with the Court and asked Mr. Hajek the following question:
Ms. Akey: … Where
does it show that it’s paid? Where is the bank statement, general ledger,
cancelled cheque, anything that shows that those amounts were actually paid by
that company?
A. I cannot recall.
(Transcript,
page 91, line 24 to page 92, line 2)
(k) As
noted above, Mr. Hajek said that the Appellant would receive an interest in the
property proportional to the amount invested. However, the interest to be
received by the Appellant was not properly documented;
(l) In
addition, Mr. Hajek stated that $8,000,000 was spent on exploration programs in
the property. It is not clear how the interest of the Appellant in the property
would be determined, i.e., would the Appellant’s interest in the claims be
determined in proportion to the amount paid by the other investors in the
claims?
[24] I also emphasize that the
Appellant’s “agreement” with Mr. Hajek was an “oral” agreement made at a
time that Mr. Hajek said that he cannot identify. I do not believe that a
businessman would enter into an oral agreement with a mining promoter for
the purpose of establishing a claim for CEE.
[25] I also agree with counsel
for the Respondent when she referred to the decision of the Federal Court of
Appeal in The Queen v. Friedberg, 92 D.T.C. 6031. The
following statement from Friedberg is applicable in this situation:
In tax law, form matters. A mere
subjective intention, here as elsewhere in the tax field, is not by itself
sufficient to alter the characterization of a transaction for tax purposes. If
a taxpayer arranges his affairs in certain formal ways, enormous tax advantages
can be obtained, … If a taxpayer fails to take the correct formal steps,
however, tax may have to be paid. … In sum, evidence of a subjective intention
cannot be used to “correct” documents which clearly point in a particular
direction.
[26] In my opinion, the evidence
and documentation presented by the Appellant and by Mr. Hajek was vague,
uncertain, inadequate and not prepared in a normal businesslike manner. Because
of the lack of acceptable evidence, I am not able to conclude that the
Appellant had incurred any Canadian Exploration Expenses in the 2004 taxation year.
[27] The appeal is dismissed,
with costs.
Signed at Vancouver, British
Columbia,
this 9th day of August 2010.
“L.M. Little”
Email this Content