Docket: 2006-442(IT)I
BETWEEN:
ADRIAN MASTRACCI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on October 3, 2006 at Vancouver, British Columbia
Before: The Honourable
Justice G. Sheridan
Appearances:
|
For the Appellant:
|
The
Appellant himself
|
|
|
|
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Counsel for the Respondent:
|
Christa Akey
|
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made
under the Income Tax Act for the 2002 and 2003 taxation years are allowed and the reassessments are referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that:
1. payments from KCM Wealth
Management Inc. to HSBC or to the Appellant personally totalling
$19,624.09 in 2002 and $28,029.01 in 2003 were made as reimbursement of KCM
Wealth Management Inc. expenses incurred by the Appellant or in repayment of
the Appellant's shareholder loan advances to KCM;
2. payments made by KCM Wealth
Management Inc. for the Appellant's medical premiums of $1,188 in 2002 and $972
in 2003 were properly included in the Appellant's income for those years as
taxable benefits; and
3. payments made by KCM Wealth
Management Inc. for the Appellant's monthly parking fees of $2,052 in 2002 and
$2,052 in 2003 were properly included in the Appellant's income for those years
as taxable benefits,
in
accordance with the attached Reasons for Judgment.
Signed
at Ottawa,
Canada, this 6th day of November, 2006.
"G. Sheridan"
Citation: 2006TCC594
Date: 20061106
Docket: 2006-442(IT)I
BETWEEN:
ADRIAN MASTRACCI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant,
Adrian Mastracci, is appealing the reassessments of the Minister of National
Revenue of his 2002 and 2003 taxation years. The Appellant represented himself
and was the only witness to testify at the Informal Procedure hearing of these
appeals.
[2] In reassessing
the Appellant's tax liability, the Minister added amounts for unreported
employment income and unreported taxable benefits. Each of these issues is
dealt with under the headings below.
Unreported
Employment Income
[3] Since 1973, the
Appellant has worked as a financial investments advisor. In 2000, he
established KCM Wealth Management Inc. ("KCM"), a company which
provides consulting services in financial planning. To provide such services,
KCM is required to be registered with the British Columbia Securities Commission
and must file its financial statements with the Commission. The Appellant is
the sole director and shareholder of KCM.
[4] The Appellant is
also a director and shareholder of his holding company, Spectrum Financial Inc.
("Spectrum"). In 2002 and 2003, the Appellant reported income[1] earned as an employee of Spectrum. Attached to his
income tax returns were T-4's issued by his employer showing employment income
of $17,000 in 2002 and $19,500 in 2003. Why the Appellant was paid a salary
from Spectrum was not in issue at the hearing.
[5] The Appellant
did not report any employment income from KCM in either of these years; by the
same token, KCM did not claim any employee wages as business expenses in its
T-2 returns and schedule information[2]
for 2002 or 2003.
[6] In June 2004,
pursuant to a Trust Examination, the Appellant was asked to provide an official
at Canada Revenue Agency with KCM's bank statements[3] and cancelled cheques for 2002 and 2003. This he did.
Nothing more was requested and in due course, he was told he could pick up the
documents.
[7] He heard nothing more until February 25, 2005 when the Appellant received notices
of reassessment for, among other things, unreported employment income from KCM
of $19,624[4] in 2002 and $28,029[5] in 2003. These amounts represent the totals of
amounts made payable to "HSBC" or to the Appellant personally in
cheques issued by KCM.
[8] Dealing first
with the amounts payable to HSBC, KCM maintains its business account at HSBC. It
does not have and has never had its own corporate credit card; the Appellant,
in his personal capacity, has an HSBC Mastercard credit card.
[9] The Appellant
put in evidence his HSBC Mastercard statements[6] for 2002 and 2003 in which is shown the credit card
account number which is noted on the memo line of most of the KCM cheques made
payable to HSBC; these cheques are, in turn, recorded by number in KCM's bank
statements. They correspond in time with the amounts shown as due (with
appropriate adjustments for GST) in the Appellant's monthly HSBC Mastercard
statements.
[10] As for the
cheques payable to "Adrian Mastracci" personally, there were three:
in 2002, for $3,000 and $4,000; in 2003, one for $11,616.37. There is no
notation on the memo line of these cheques.
[11] The Minister's
position, as shown by the assumption in paragraph 8(f) of the Reply to the
Notice of Appeal, is that "in the 2002 and 2003 taxation years, payments
received by the Appellant from KCM were not repayments of his shareholder loan
or reimbursement of expenses he paid on behalf of KCM".
[12] The Appellant has
the onus of proving wrong this assumption. His evidence is that the amounts KCM
paid to HSBC were reimbursements in respect of business expense purchases he
had made using his personal HSBC Mastercard credit card. The reimbursement was
achieved by KCM paying directly to HSBC, the amounts due from him personally, as
shown in the HSBC Mastercard statements. In support of his position, he points
to the direct link between the amounts owing and the payments made: the KCM
cheques payable to HSBC for the corresponding amounts made on a timely basis in
accordance with the due dates in the HSBC Mastercard monthly statements. In his
testimony, he reviewed a sample of the monthly statements, explaining the
nature of the purchases which can be generally categorized as office expenses,
computer expenses, books and publications, meals and entertainment, travel,
marketing and so on. I accept the Appellant's evidence that these purchases
were duly entered in their appropriate categories in KCM's accounting journal[7]. A review of the exhibits shows the kinds of purchases
listed and their correlation to the cheques, the journal entries and the kinds
of business expenses claimed in KCM's T-2 returns. With the possible exception
of one purchase of $25.33 from a merchant called "A-Wear"[8] (which according to counsel for the Respondent is a
Vancouver clothing store), the Appellant's records support the conclusion that
these were the sort of regularly recurring expenditures typically associated
with running a business office and serving clients.
[13] Counsel for the
Respondent submitted that the Appellant's evidence was weakened by the fact
that he did not have with him receipts for each of the items shown in the HSBC
Mastercard statements. In view of the all of the other credible evidence and that
his obligation under the Income Tax Act is to maintain adequate, not
perfect, books and records, I am not persuaded that this is fatal to his
position.
[14] No doubt the
Appellant could have saved himself some trouble if he had avoided using his
personal credit card to pay for KCM's purchases. He explained that at the time
KCM was set up, a corporate credit card was not an option. In any event, it is
a mystery to me how the CRA officials who reviewed the Appellant's documents
saw these amounts as "employment income". Perhaps I would have a
better understanding of his analysis if the appeals officer had testified;
counsel for the Respondent advised the Court following the conclusion of the
Appellant's evidence that he was taken ill at the last minute and was not able
to be present. No adjournment was requested to permit him to give his evidence
at a later date. Thus, if there is more to the story, it is not in the evidence
before me. It seems to
me, however, that this matter could have been resolved much earlier had the Trust Examiner asked the Appellant not
only to provide the bank statements, but also to go through the exercise of explaining
and documenting each purchase, its purpose and amount.
[15] As for the
payments to the Appellant personally, I accept his evidence that these were in
repayment of the shareholder loan of $100,000. Between 2000 and 2002, he
advanced some $100,000 (interest free) in start up funds to KCM; from time to
time in those years, when its cash flow permitted, KCM made lump sum repayments
to the Appellant. The existence of a shareholder loan pursuant to which KCM was
indebted to the Appellant forms part of the assumption in paragraph 8(f). On
cross-examination, counsel for the Respondent reviewed with the Appellant the
T-2 returns filed by KCM and asked why, if KCM owed the Appellant some
$100,000, the amount shown as "Due to Shareholders"[9] was $118 in 2002 and $572 in 2003. I accept the
Appellant's explanation that the shareholder loan was actually shown under Item
number 3460 as a "Subordinated Debt" in 2002 as $91,223 and $100,000
in 2003. In support, the Appellant put in evidence a photocopy of a page of the
Notes to Financial Statements of KCM – May 31, 2003[10] in which the following explanation appears under the
heading "Long Term Liability":
The
non-interest bearing advance from shareholder of $100,000 is subject to a
subordination agreement, whereby the amount will not be repaid without the
permission of the B.C. Securities Commission. Accordingly, this amount has been
reflected as a long term liability in these financial statements.
Certainly,
it would have been preferable to have the original of the entire document but I
am mindful of the fact that these appeals were brought under the Informal Procedure
and that the Appellant was without legal representation. Further, there was no
suggestion that the Appellant had fabricated this, or any of the other
documents tendered.
[16] Given that KCM
had been operating for only two years in 2002 and the amount of the shareholder
loan, I find nothing untoward in the amounts repaid of $3,000 and $4,000 in
2002 and approximately $11,000 in 2003. Nor is it unusual for a small solely
held corporation to make such repayments from time to time depending on its
financial well being. For all of these reasons, I am satisfied that these
amounts were not employment income from KCM but rather, repayments of the
shareholder loan.
Unreported
Taxable Benefits
[17] The Minister
assumed and the Appellant does not dispute that in 2002 and 2003, KCM paid the
Appellant's medical premiums of $1,188 and $972. The Minister assumed
that the Appellant was an "employee" of KCM[11]; while I am not entirely convinced this is so, it was
not challenged by the Appellant. On the footing, then, that he was an employee
in 2002 and 2003, the payment of his medical premiums by KCM is clearly caught
by the broad sweep of "other benefits of any kind whatever"[12] in paragraph 6(1)(a) of the Act. Accordingly,
I find that the amounts paid by KCM for the Appellant's medical premiums were
properly included as taxable benefits in 2002 and 2003.
[18] The same logic
applies to KCM's payment on his behalf of the parking fees at the Appellant's
office. Even though the Appellant's car was used primarily for KCM's business,
the fact remains that it was his car, not that of the company. Accordingly, the
Appellant had the benefit of a free parking space in downtown Vancouver. The
value of that benefit was properly included by the Minister as a taxable
benefit in 2002 and 2003.
[19] The appeals are
allowed and in accordance with the attached Reasons for Judgment, the
reassessments are referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that:
1. payments from KCM Wealth
Management Inc. to HSBC or to the Appellant personally totalling
$19,624.09 in 2002 and $28,029.01 in 2003 were made as reimbursement of KCM
Wealth Management Inc. expenses incurred by the Appellant or in repayment of
the Appellant's shareholder loan advances to KCM;
2. payments made by KCM Wealth
Management Inc. for the Appellant's medical premiums of $1,188 in 2002 and $972
in 2003 were properly included in the Appellant's income for those years as
taxable benefits; and
3. payments made by KCM Wealth
Management Inc. for the Appellant's monthly parking fees of $2,052 in 2002 and
$2,052 in 2003 were properly included in the Appellant's income for those years
as taxable benefits.
Signed at Ottawa, Canada, this 6th day of November, 2006.
"G. Sheridan"
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