Citation: 2010 TCC 435
Date: 20100819
Docket: 2009-3521(IT)I
BETWEEN:
WIESLAW WEGLINSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2009-3523(IT)I
AND BETWEEN:
JAN WEGLINSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2009-3524(IT)I
AND BETWEEN:
LECH BIENASZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson, J.
[1]
It was agreed that all
of these cases would proceed on common evidence.
[2]
The Minister of
National Revenue (the “Minister”) reassessed Jan Weglinski on April 7, 2008,
for tax liability to include income in the amounts of $38,901 and $38,334 for
the 2004 and 2005 taxation years, respectively.
[3]
The Minister reassessed
Wieslaw Weglinski on April 7, 2008, for tax liability to include in income the
amounts of $34,916 and $37,523 for the 2004 and 2005 taxation years,
respectively.
[4]
The Minister reassessed
Lech Bienasz on April 7, 2008, to include income in the amounts of $34,100 and
$36,390 for the 2004 and 2005 taxation years, respectively.
[5]
The Minister levied
penalties pursuant to subsection 163(2) of the Income Tax Act (the
“Act”) in the amounts of $4,150 and $1,181 against Lech Bienasz,
$4,523 and $2,505 against Wieslaw Weglinski and $3,962 and $1,279 against Jan
Weglinski for the same taxation years.
[6]
All three taxpayers filed
appeals to this Court against these reassessments.
Evidence
[7]
Jan Weglinski
testified that the Minister reassessed him for hydro expenses that he claimed
for his garage and for his business for the years in issue.
[8]
The Minister also
reassessed him for expenses of $570 that he claimed for gasoline and hotel
expenses incurred in travelling to Nova Scotia while
searching for work. No contract for work was ever concluded and the trip was
not worthwhile. He said that he fixed his own toilet in his office and claimed
$299 for these expenses. He had to buy supplies.
[9]
Exhibit A-1 was
admitted by consent, subject to weight and argument. It was a
recapitulation completed by the agent for the three Appellants of the disputed
amounts.
[10]
Jan Weglinski said that
he reported everything. He received $41,900 in 2004 and $50,790 in 2005 as
income from 4233247 Canada Inc. (the “Corporation”).
[11]
In cross-examination,
he admitted that he was a shareholder in the Corporation. He was in charge of
the books and the cheques, and the other partners were also involved. The
furnace oil expense claimed was for the Corporation although it was delivered
to his residence. He identified the receipt for $444.63 as an expense for
diesel fuel for the forklift. It was admitted as Exhibit R-1.
[12]
He had no receipts for
the hydro expenses. He claimed $1,180 as the business portion of the expenses
claimed for an office in his home.
[13]
He had no receipts for
the plumbing expenses. He could not remember the name of the person he went to
see in Nova Scotia while seeking work. His accountant
gave him his income tax return and he signed it.
[14]
He did not prepare
Exhibit A-1 and did not know what it really was. He gave the cheques to his
accountant and he deposited them to his bank account.
[15]
In re-direct, he said
that he had only one business account.
[16]
Lech Bienasz testified
that Exhibit A-1 was correct. He agreed that he had under-reported his income
in 2004 and 2005.
[17]
In cross-examination,
he said that he was a shareholder of the Corporation. He just gave his
accountant his papers and signed his income tax return.
[18]
Exhibit R-2, the
Corporation’s cheques, was admitted by consent.
[19]
He said that the
cheques were issued by the Corporation to the named persons. He deposited the
cheques issued to him to his bank account. His accountant prepared his
income tax returns for the 2004 and 2005 taxation years. He looked at them but
did not review them.
[20]
His return for 2005 was
admitted as Exhibit R-3. He did not know if he under-reported his income. Then
he said that he reported everything. He only received income from the
Corporation.
[21]
Jan Weglinski was
recalled. Exhibit A-2, a revised schedule of the Appellants’ disputed amounts,
was admitted into evidence, subject to weight.
[22]
Exhibit R-2 contained
all the cheques issued by the Corporation. He was present when the accountant prepared
Exhibit A-2.
[23]
He said that $3,500,
the amount of the repayment on the shareholders’ loans, was reasonable, and the
adjustment of $5,000 to the shareholders loan account was reasonable.
[24]
In cross-examination,
he said that Exhibit A-2 was correct. He identified his 2004 income tax return
which was admitted as Exhibit R-4.
[25]
The Respondent called
Wieslaw Weglinski. He said that he was a shareholder of the Corporation in 2004
and 2005 and he received payments from that Corporation during those years. He
identified his 2005 tax return which was admitted as Exhibit R-5. He only
received income from the Corporation in 2004 and 2005.
[26]
In cross-examination,
he said that all of the shareholders had an office in their homes. Thirty-five
hundred dollars ($3,500) was a reasonable amount to claim for expenses of a
home office.
[27]
Michelle Goldstone has
been employed by the Canada Revenue Agency (“CRA”) since 2004. She was the
auditor in these cases. This was a full-scope audit of the Corporation
including income, expenses, salaries, wages and management fees. She met with
the parties and made adjustments to the shareholders’ accounts.
[28]
She considered the
expenses for the Bank of Montreal, hydro and plumbing to be personal expenses
of Jan Weglinski. She was referred to her letter to Jan Weglinski dated
March 28, 2008. It was admitted by consent as Exhibit R-6. The expenses claimed
were allowed to the Corporation and not to him. She added $6,500 as
unreported income to him in 2005.
[29]
Exhibit R-7 was the auditor’s
working papers and was admitted by consent. Each shareholder received $27,600
in management fees and did not report them. She traced the management fees and
they were claimed as an expense to the Corporation.
[30]
The entries in the
Corporation’s general ledger were made by Jan Weglinski and they reconciled
with all amounts claimed by the Corporation.
[31]
Exhibit R-8 was
admitted by consent. It was a letter to Wieslaw Weglinski from CRA dated March
28, 2008. It referred to claimed dental expenses which were paid by the
Corporation. These were a benefit to this taxpayer. It also referred to
unreported salaries, wages and management fees.
[32]
Similarly, Exhibit R-9,
a letter to Lech Bienasz from CRA dated March 28, 2008, admitted by consent,
referred to unreported salaries, wages, unreported management fees and a
shareholder benefit in 2005.
[33]
The Corporation claimed
subcontract fees as an expense. None were shown as paid to shareholders and
should have been reported as a shareholders’ benefit but were not reported by
the shareholder. There were no amounts owing to the shareholders. There was no
shareholders’ loan account maintained.
[34]
The auditor applied
penalties but not on the amounts owing to shareholders.
[35]
In cross-examination,
Ms. Goldstone said that the accountant told her that there were no loan
accounts maintained.
Argument on Behalf of the Appellants
[36]
The agent merely stated
that the correct amounts that are in dispute should be those set out in the
revised schedule, Exhibit A-2, and not those assessed by the Minister.
Argument on Behalf of the Respondent
[37]
Counsel argued that the
issues are with respect to shareholders benefits, unreported income, and the
matter of gross negligence penalties.
[38]
There was no evidence
to support the expenses claimed. There was no business purpose shown for the
expenses.
[39]
There was no evidence
of how the hydro expenses were allocated. There were no receipts or
invoices for the plumbing expenses. The presumptions should stand.
[40]
Wieslaw Weglinski
admitted that the expenses were personal. This constitutes a benefit to
the shareholder. He referred to the case of Varcoe v. Canada, 2005 TCC 620, 2005 DTC 1319, in the Tax Court of
Canada, at page 10 as authority for that proposition. It was upheld by the
Federal Court of Appeal in Varcoe v. Canada, 2007 FCA 159, 2007 DTC 5357
(F.C.A.), where the Court would not interfere with the finding of fact made by
the trial judge upon an assessment of the taxpayer’s credibility.
[41]
All of the taxpayers
under-reported their salaries and wages by $6,500. The auditor merely
added up the total amounts in the cheques issued to the shareholders. The
management fees were paid to each of the Appellants in both years in dispute as
shown by the cheques. Subcontract fees were not claimed. The information
about subcontract fees comes from the balance sheet and shows them as due to
shareholders. However, there were no amounts owing to shareholders. Therefore,
this amount should be added to their income.
[42]
With respect to the gross
negligence penalties, the Minister did not levy penalties on the due to
shareholders amounts.
[43]
However, with respect
to the other unreported amounts, they were large and there were no special
calculations that had to be made. The taxpayers all received cheques for their
amounts, and all signed their returns.
[44]
With respect to Wieslaw
Weglinski, the unreported amounts were equal to 81% of his income in 2004 and
46% of his income in 2005.
[45]
With respect to Jan
Weglinski, they amounted to 81% in 2004 and 40% in 2005.
[46]
In respect to Lech
Bienasz, they amounted to 81% of his income in 2004 and 45% of his income in
2005.
[47]
The payments were made
on an almost weekly basis and there was no explanation given as to why they did
not report the payments. It amounted to wilful blindness on their part. The
Appellants said that they did not know, yet they received the cheques and they
cashed them. They should have inquired as to what the cheques were for. They did
not. The appeals should be dismissed.
[48]
In reply, the agent
said that the Appellants were not wilfully blind or grossly negligent.
Analysis and Decision
[49]
The evidence of all
Appellants was woefully weak in every respect. They said that they
reported all of their income and then said that they did not.
[50]
They all admitted to
having signed their returns, to having received the cheques and to having
cashed them, and obviously they used the funds. As indicated by counsel
for the Respondent, the cheques were issued almost weekly and so it was not
just a mere oversight of one cheque or the amount. The evidence of the auditor
shows that she was able to trace the amounts through the Corporation’s books
and obviously the Corporation claimed the expenses. Further, it was not just
failing to report one form of income but several, i.e., unclaimed salaries and
wages; subcontract fees claimed by the Corporation; personal expenses paid by
the Corporation; unreported management fees and shareholder benefits.
[51]
The Corporation’s books
were adequate to enable the Corporation to claim its expenses, so there is no
reason why they were not adequate to keep track of the amounts paid to its
shareholders and to report those amounts to CRA.
[52]
There was a real
dilemma between the evidence of the taxpayers and the position taken by their
agent. The taxpayers at times claimed that they had reported all of their
income, which they obviously did not, and the agent’s position throughout was
that they had not, although he took the position that the amounts due to CRA
were lower than those claimed.
[53]
The Court attaches no
weight to Exhibit A-2. There is no backup material to support those figures and
they are obviously at odds with the evidence of the auditor and the corporate
records.
[54]
The Appellants have not
dislodged any of the presumptions contained in the Replies and they must stand.
[55]
The appeals are
dismissed and the Minister’s reassessments are confirmed.
[56]
Regarding the
penalties, the Court is satisfied that the Appellants were either grossly
negligent or their actions were deliberate in not reporting the income and in
making the claims for deductions that they did in spite of their knowledge of
the Corporation, its workings and the advice that was available to them through
their accountant.
[57]
The Minister was
entitled to levy the penalties as he did under subsection 163(2) of the Act.
Signed at New
Glasgow, Nova Scotia, this 19th day of August 2010.
“T.E. Margeson”
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