Citation: 2009TCC120
Date: 20090226
Docket: 2008-1769(IT)I
BETWEEN:
LARISSA MIKHAILOVA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The Appellant was reassessed to
include an additional amount of $50,000 in her income in 2003 and the same
amount in her income for 2004. The issue in this appeal is whether these
amounts should be included in her income in these years.
[2]
The Appellant was the sole
shareholder of a numbered company (the “Corporation”) that was carrying on
business under the name Back to Work Rehabilitation Center in Hamilton, Ontario. The Corporation operated a physiotherapy clinic.
Prior to forming a corporation, the business had been operated as a
partnership.
[3]
A trust examiner with the Canada
Revenue Agency testified during the hearing. He indicated that the Canada Revenue
Agency had received a complaint from a person who was working at the clinic while
it was being operated as a partnership. The person complained that no source
deductions had been taken from their paycheck. The trust examiner indicated
that he had difficulty in obtaining the payroll records for the partnership.
[4]
Following the transfer of the
business to the Corporation, the Corporation was selected for a review of its
payroll account. The reason that the examination was done was that no remittances
were being made in relation to the payroll account of the Corporation. The
examination was referred to the same trust examiner who had dealt with the
complaint while the business was operated as a partnership. He made several
calls to the clinic and left messages, but his phone calls were not returned. The
trust examiner reviewed the tax returns for the Corporation. For the fiscal
year ending July 31, 2003 the Corporation had claimed management and
administration fees of $50,000 and for the fiscal year ending July 31, 2004 the
Corporation had claimed management salaries of $45,000.
[5]
Since the trust examiner was not
receiving any response from the Corporation with respect to his enquiries about
the payroll account, he decided to raise an arbitrary assessment and to issue
T4 slips for 2003 and 2004 each in the amount of $50,000 and each in the name
of the Appellant. It is the Appellant’s position that she did not receive these
amounts.
[6]
At the commencement of the hearing
the Respondent brought a motion to amend the Reply to include an assumption
that the Appellant had received $50,000 from the Corporation in 2003 and
$50,000 in 2004. The agent for the Appellant did not oppose the Motion. Since
the Respondent had issued the T4 slips and since employees would only be
required to report income on amounts received (which would be reflected in a T4
slip) it seems obvious that the Respondent must have assumed that the Appellant
received these amounts in these years and the omission of this assumption was
simply an oversight. As a result the Reply was amended to include this
assumption.
[7]
In Hickman Motors Ltd. v. Her
Majesty the Queen, [1997] S.C.J. No. 62, Justice L’Heureux-Dubé of
the Supreme Court of Canada made the following comments in relation to an
Appellant's onus of “demolishing” the Minister’s assumptions:
92 It is trite law that in taxation the
standard of proof is the civil balance of probabilities: Dobieco Ltd. v.
Minister of National Revenue, [1966] S.C.R. 95 (S.C.C.), and that within
balance of probabilities, there can be varying degrees of proof required in
order to discharge the onus, depending on the subject matter: Continental
Insurance Co. v. Dalton Cartage Ltd., [1982] 1 S.C.R. 164 (S.C.C.); Pallan
v. Minister of National Revenue (1989), 90 D.T.C. 1102 (T.C.C.) at
p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge
Estates Ltd. v. Minister of National Revenue (1959), 59 D.T.C. 1098
(Can. Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to
“demolish” the Minister's assumptions in the assessment (Johnston v. Minister
of National Revenue, [1948] S.C.R. 486 (S.C.C.); Kennedy v. Minister
of National Revenue (1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The
initial burden is only to “demolish” the exact assumptions made by the Minister
but no more:First Fund Genesis Corp. v. R. (1990), 90 D.T.C. 6337
(Fed. T.D.), at p. 6340.
93 This initial onus of “demolishing” the
Minister's exact assumptions is met where the Appellant makes out at least a
prima facie case: Kamin v. Minister of National Revenue (1992),
93 D.T.C. 62 (T.C.C.); Goodwin v. Minister of National Revenue
(1982), 82 D.T.C. 1679 (T.R.B.). In the case at bar, the Appellant adduced
evidence which met not only a prima facie standard, but also, in my view, even
a higher one. In my view, the Appellant “demolished” the following assumptions
as follows: (a) the assumption of “two businesses”, by adducing clear evidence
of only one business; (b) the assumption of “no income”, by adducing clear
evidence of income. The law is settled that unchallenged and uncontradicted
evidence “demolishes” the Minister's assumptions: see for example MacIsaac
v. Minister of National Revenue (1974), 74 D.T.C. 6380 (Fed. C.A.), at
p. 6381; Zink v. Minister of National Revenue (1987), 87 D.T.C.
652 (T.C.C.). As stated above, all of the Appellant's evidence in the case at
bar remained unchallenged and uncontradicted. Accordingly, in my view, the
assumptions of “two businesses” and “no income” have been “demolished” by the
Appellant.
94 Where the Minister's assumptions have
been “demolished” by the Appellant, “the onus shifts to the Minister to rebut
the prima facie case” made out by the Appellant and to prove the assumptions: Magilb
Development Corp. v. Minister of National Revenue (1986), 87 D.T.C.
5012 (Fed. T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted
to the Minister to prove its assumptions that there are “two businesses” and
“no income”.
95 Where the burden has shifted to the
Minister, and the Minister adduces no evidence whatsoever, the taxpayer is
entitled to succeed: see for example MacIsaac, supra, where the Federal
Court of Appeal set aside the judgment of the Trial Division, on the grounds
that (at pp. 6381-2) the “evidence was not challenged or contradicted and no
objection of any kind was taken thereto”. See also Waxstein v. Minister
of National Revenue (1980), 80 D.T.C. 1348 (T.R.B.); Roselawn
Investments Ltd. v. Minister of National Revenue (1980), 80 D.T.C.
1271 (T.R.B.). Refer also to Zink v. Minister of National Revenue,
supra, at p. 653, where, even if the evidence contained “gaps in logic,
chronology and substance”, the taxpayer's appeal was allowed as the Minster
failed to present any evidence as to the source of income. I note that, in the
case at bar, the evidence contains no such “gaps”. Therefore, in the case at bar,
since the Minister adduced no evidence whatsoever, and no question of
credibility was ever raised by anyone, the Appellant is entitled to succeed.
96 In the present case, without any
evidence, both the Trial Division and the Court of Appeal purported to
transform the Minister's unsubstantiated and unproven assumptions into “factual
findings”, thus making errors of law on the onus of proof. My colleague
Iacobucci J. defers to these so-called “concurrent findings” of the courts
below, but, while I fully agree in general with the principle of deference, in
this case two wrongs cannot make a right. Even with “concurrent findings”,
unchallenged and uncontradicted evidence positively rebuts the Minister's
assumptions: MacIsaac, supra. As Rip T.C.J., stated in Gelber
v. Minister of National Revenue (1991), 91 D.T.C. 1030 (T.C.C.), at p.
1033, “[the Minister] is not the arbiter of what is right or wrong in tax law”.
As Brulé T.C.J., stated in Kamin, supra, at p. 64:
the Minister should be able to rebut such [prima facie] evidence and
bring forth some foundation for his assumptions.
…
The Minister
does not have a carte blanche in terms of setting out any assumption which
suits his convenience. On being challenged by evidence in chief he must be
expected to present something more concrete than a simple assumption.
[Emphasis added by Justice L’Heureux Dubé]
[8]
Two accountants testified for the Appellant.
Edward Hiutin CGA, prepared the financial statements for the Corporation for
the year ended July 31, 2003 and Rita Zelikman CA, prepared the financial
statements for the Corporation for the years ended July 31, 2004 and July 31,
2005.
[9]
Edward Hiutin stated that an entry
was made as of the year-end July 31, 2003 to show management fees payable of
$50,000 for that year. This was deducted in computing the income of the Corporation
for that year and credited to the shareholders loan account.
[10]
Edward Hiutin had made a hand
written note indicating that his instructions from the Appellant were that $29,975
of this amount was to be allocated to the Appellant and the balance was to be
allocated between two other individuals, Alexander Mikhailova and Ivan Terziev.
However the amount to be allocated to each of these two other individuals was
not specified. Alexander Mikhailova is the Appellant’s son. Ivan Terziev was an
individual with whom the Appellant worked.
[11]
Edward Hiutin clearly stated that
he prepared the Appellant's tax return for 2003, and that he reported the $29,975
in her income for that year. He stated as follows in relation to the $50,000
claimed by the Corporation as management fees for its fiscal year ending July
31, 2003:
A:… That was management fees, basically elimination of corporate
profits and paying of management fees to be allocated, okay? -- to people who
were involved in the management activities. At that time, as per instruction
of Larissa Mikhailova, I allocated $29,975 in management fees to her to be
claimed on her 2003 T1 which I prepared also and I gave it to her to be
submitted to Revenue Canada at
the time.
The two other -- and the balance she said she was
going to allocate because I didn't do the other people's income taxes. She
said they want to allocate it, and whatever.
So all I can say is the $29,975 was included in her
personal 2003 T1, her personal income tax, and which I prepared. The balance,
I don't know how it was reported or allocated.
…
Q. Did you prepare the personal tax return of Ivan?
A. No. No, no, no. I said before, I just said it two
minutes ago, that I prepared Larissa Mikhailova's T1 which I gave it to her to
be signed and to remit it to Canada Revenue. The other two, she said that they
are going to -- you know, she going to let them know and they going to report
it, whatever. I don't know what happened with the balance.
Q. You don't really know how the $50,000 has been reported?
A. I don’t. I didn't prepare the T3s, no. And I don't know
who reported them.
[12]
A copy of the Appellant’s 2003 tax
return was introduced as an exhibit. The only amounts included in her income
for 2003 were, however, $15,878.41 of other employment income and $19.90 of net
rental income. The T4A slips attached to the Appellant’s 2003 tax return show
that $878.41 was not income from the Corporation which would only leave $15,000
as the amount that could be income from the Corporation. The Appellant stated
that the $15,000 balance was the income that she was reporting from the
Corporation. The Appellant’s only explanation of this discrepancy between the
amount that Edward Hiutin indicated was reported in her 2003 tax return and the
$15,000 that she actually reported was as follows:
Q. Mr. Hiutin indicated that he had allocated
$29,975 to you, but you only report $15,000.
A. Yes, because we were equally, the three of us
was equally involved in the business and we divide to -- to split it in three
of us.
Q. I see. So if we add up the income reported by
Larissa, Alex and Ivan, it will come to $50,000?
A. I guess so.
[13]
If the $50,000 would have been
divided equally among the Appellant, Alexander Mikhailova and Ivan Terziev,
then each would have had income of $16,667 not $15,000. This does not explain
why the Appellant only reported $15,000 in 2003. Her response of “I guess so”
to the direct question of whether the total amount reported by the Appellant,
Alexander Mikhailova and Ivan Terziev would add up to $50,000, leaves room for
doubt about the amounts reported by Alexander Mikhailova and Ivan Terziev.
[14]
Rita Zelikman is the accountant who
prepared the financial statements for the Corporation for the years ending July
31, 2004 and July 31, 2005. She also prepared a shareholders loan account statement
for the Corporation showing the debits and credits made to that account for the
period from August 1, 2003 to July 31, 2004. The statement shows an opening
balance of $0. The shareholders loan statement prepared by Edward Hiutin shows
a balance as of July 31, 2003 of
-$83,457.74 (which would indicate that the Corporation owed the Appellant this
amount as of July 31, 2003). No explanation was provided to explain this
discrepancy between the closing balance of -$83,457.74 as determined by Edward
Hiutin as of July 31, 2003 and the opening balance of $0 as determined by Rita
Zelikman as of August 1, 2003.
[15]
The shareholder loan statement
prepared by Rita Zelikman shows that the balance as of July 31, 2004 was -$5,438.87.
However the financial statements prepared by her indicate that the Advances
from shareholders as of July 31, 2004 were $50,128. No explanation was provided
to explain this discrepancy between the shareholders loan account ledger
(showing a balance of -$5,438.87 as of July 31, 2004) and the balance sheet
(showing Advances from shareholders of $50,128 as of July 31, 2004).
[16]
In VanNieuwkerk v.
The Queen, 2003 TCC 670, [2004] 1 C.T.C. 2577, Associate Chief Justice
Bowman (as he then was) stated that:
6 Part of the confusion stems from the
accounting records which show either no transfer, or a transfer on December 31,
1998 or January 1, 1998 depending on which version you look at. It has been said
on many occasions in this Court that accounting entries do not create reality.
They simply reflect reality. There must be an underlying reality that exists
independently of the accounting entries. I accept Mr. Goeres' explanation
that adjusting entries, such as entries reflecting the transaction involved
here or capital cost allowance, are all shown in the general ledger on December
31. That may well be so, but it does underline how unreliable accounting
records are in determining when a transaction has taken place.
[17]
The significant discrepancies in
the accounting records make it very difficult to determine the underlying
realty in this case.
[18]
While copies of the 2004 tax
returns for Alexander Mikhailova and Ivan Terziev were introduced as exhibits,
copies of their 2003 tax returns were not introduced. Rita Zelikman had not
prepared the tax returns for Alexander Mikhailova and Ivan Terziev for 2003 and
neither had Edward Hiutin. Therefore neither accountant could comment on what Alexander
Mikhailova and Ivan Terziev had reported in their 2003 tax returns. Neither Alexander
Mikhailova nor Ivan Terziev testified during the hearing and no explanation was
provided to explain why neither individual testified or why copies of the 2003
tax returns for these individuals were not available but copies of their 2004
tax returns were available. It raises question about what was or was not
included in their 2003 tax returns.
[19]
In the Law
of Evidence in Canada, second edition, by Sopinka, Lederman and
Bryant, it is stated at p. 297 that:
In civil cases, an unfavourable inference can be
drawn when, in the absence of an explanation, a party litigant does not
testify, or fails to provide affidavit evidence on an application, or fails to
call a witness who would have knowledge of the facts and would be assumed to be
willing to assist that party.
[20]
Since Alexander Mikhailova is the
Appellant’s son and since Ivan Terziev is a person who was working with the
Appellant and who lived at the Appellant’s house for a period of time, it seems
that it could be assumed that these individuals would be willing to assist the
Appellant if they could. As well Rita Zelikman stated that Ivan Terziev had
contacted her to request a copy of his 2004 tax return (which was the copy that
was introduced during the hearing) so he certainly was willing to assist with
respect to the amounts paid in 2004.
[21]
Since it was the Appellant’s
position from the beginning that $50,000 for 2003 (and $45,000 for 2004) had
been paid to herself, Alexander Mikhailova and Ivan Terziev and since the
Appellant introduced Alexander Mikhailova’s and Ivan Terziev’s 2004 income tax
returns to show that each of them had reported their share of the 2004 amounts,
it seems to me that an unfavourable inference should be drawn from the fact
that neither Alexander Mikhailova nor Ivan Terziev testified and that the
Appellant did not otherwise try to introduce their 2003 tax returns.
[22]
There are also other factors that
are relevant in relation to the amount for 2003. Whenever the Appellant was
questioned with respect to any amounts that the Corporation had paid to her or
to the other individuals she consistently stated that she did not understand
the numbers and any questions with respect to the amounts that had been paid should
be referred to her accountant. Her accountant, Rita Zelikman, prepared the shareholders
loan account statement for the period from August 1, 2003 to July 31, 2004.
There are two entries that are notable. There is a debit entry dated August 19,
2003 which indicates that the Appellant was paid $30,000 and there is an
additional debit entry dated September 24, 2003 indicating that the Appellant received
$20,000. These two debits indicate that payments totaling $50,000 were made to
the Appellant shortly after the year ending July 31, 2003 and still in the
calendar year 2003. As well the $30,000 amount is only $25 more than the
$29,975 amount (and is this amount rounded to the nearest $100) that Edward
Hiutin had indicated was to be allocated to the Appellant.
[23]
Since there was no evidence with
respect to the amounts that Alexander Mikhailova or Ivan Terziev had reported
in their 2003 tax returns, since Edward Hiutin clearly stated that the amount
to be allocated to the Appellant from the $50,000 management fees for 2003 was
$29,975 and that this amount had been included in her tax return for 2003,
since the Appellant provided contradictory statements that the $50,000 was to
allocated equally among the three individuals (which would mean $16,667 each)
but she only reported $15,000 in her tax return, and since the shareholders
loan account ledger indicates that $30,000 was paid to the Appellant in August
of 2003 and $20,000 was paid to the Appellant in September of 2003, I find that
the Appellant has not demolished the assumptions made by the Respondent that
the Appellant received $50,000 in 2003. However since the Appellant did report
$15,000 in her 2003 income tax return, the amount by which her income should be
increased for 2003 should be $35,000.
[24]
Rita Zelikman testified that the
$45,000 that was claimed by the Corporation as management salaries in its
fiscal year ending July 31, 2004 was allocated equally among the Appellant, her
son Alexander Mikhailova and Ivan Terziev. The 2004 income tax returns for each
of the Appellant, Alexander Mikhailova and Ivan Terziev were introduced as
exhibits. Rita Zelikman had prepared these returns. For each of Alexander Mikhailova
and Ivan Terziev the $15,000 that was allocated to them was reported as gross
business income. The amount allocated to the Appellant was also included in her
tax return as part of her gross business income.
[25]
I accept the testimony of Rita
Zelikman and I find, on a balance of probabilities, that the $45,000 of
management salaries claimed by the Corporation for 2004, was included in the
income of the Appellant, Alexander Mikhailova and Ivan Terziev for 2004
($15,000 each) and therefore no additional amount should have been included in
the income of the Appellant for 2004. In this case, there was no contradictory
evidence introduced by the Respondent and the assumption that $50,000 was paid
to the Appellant in 2004 was just that - an assumption. It was based on a
deduction of $45,000 claimed by the Corporation and therefore the amount that
was assumed to be paid was $5,000 more than the deduction claimed.
[26]
The agent for the Appellant had
argued that the amounts had not been paid to the Appellant because the amounts
were simply entered in the shareholders loan account as a credit. His argument
was that because the Corporation was indebted to the Appellant in the amount of
$50,128 as of July 31, 2004 and $89,980 as of July 31, 2005, that simply adding
more amounts to this debt did not mean that she was paid. The Corporation has
ceased operations and presumably has no means to repay the Appellant.
[27]
However in this case that argument
has no merit. As noted above, the appeal is allowed for 2004 without even
considering this argument. Therefore the only relevance of this argument, if
any, is in relation to 2003. The opening balance as of August 1, 2003 as shown
on the shareholders loan account ledger that was prepared by Rita Zelikman was
zero. If the balance of -$83,457.74 as of July 31, 2003 as shown on the
shareholders loan account schedule prepared by Edward Hiutin is carried forward
to this account, the account is still in a debit balance by December 31, 2003
as the balance in this account as of December 31, 2003 (as determined by Rita
Zelikman who started with a zero balance as of August 1, 2003) was $132,157.32.
This would mean that the $50,000 that was credited to the account by Edward
Hiutin as of July 31, 2003 was paid out by December 31, 2003. The $50,000 did
not simply increase the debt of the Corporation to the Appellant - it was
actually paid out.
[28]
The income that the Appellant
received from the Corporation was reported as gross business income in 2004
(and as other employment income in 2003). The issue before me is whether the
additional amounts should be included in her income. The appeal is from a
reassessment which is an assessment of the tax liability of the Appellant under
the Act. Since the tax rate applicable to income from employment would
be the same rate applicable to income from a business, the distinction between
whether the income is from employment or a business is not material in this
case. If the dispute would have been related to the amounts claimed as
expenses, then the distinction would have been important as employees are
restricted to the types of expenses that they can claim pursuant to section 8
of the Act and subsection 8(2) of the Act provides that no
deduction may be claimed by an employee unless the deduction is permitted by
section 8. It does, however, seem to me that when an individual is providing
services to his or her own company that such individual is providing these
services as an employee and not as an independent contractor.[1]
[29]
As a result, the appeal from the
reassessment of the Appellant’s liability under the Act for 2003 is
allowed and the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the additional income of the
Appellant for 2003 should be $35,000 and not $50,000. The appeal from the
reassessment of the Appellant’s liability under the Act for 2004 is
allowed, with costs, and this reassessment is vacated.
Signed at Toronto, Ontario, this 26th day of February 2009.
“Wyman W. Webb”
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