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Citation: 2006TCC268
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Date: 20060503
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Docket: 2001-3338(IT)G
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BETWEEN:
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ORMAND W. BRAISHER
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
McArthur J.
[1] These appeals are with respect to the Appellant's 1992, 1993, 1994, 1995 and 1996 taxation years. The issues include whether the Appellant received unreported benefits from O.W. Braisher Contracting Ltd. (the Company) in the years in question pursuant to subsection 15(1) of the Income Tax Act; and whether the Minister was statute-barred from issuing reassessments for those years. In addition, whether the Appellant is liable to pay penalties pursuant to subsection 163(2) of the Act. The relevant sections of the Act state:
15(1) Where at any time in a taxation year a benefit is conferred on a shareholder, ...
the amount shall be included in computing the income of the shareholder for the year.
163(2) Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total of ...
[2] The parties have accepted the following Agreed Statement of Facts:
1. The Appellant is an individual residing in the Province of British Columbia.
2. The Appellant was born on February 1, 1945.
3. The Appellant is married to Kathleen Margaret Braisher.
4. During the years under appeal:
(a) the Appellant was an employee, sole director, president, major shareholder and directing mind of O.W. Braisher Contracting Ltd. (the "Company");
(b) the Company earned income from a logging, road building and grading business;
(c) the Company maintained three bank accounts, one at the Canadian Imperial Bank of Commerce, one at the Bank of Montreal and one at the Edgewater Credit Union;
(d) the Company deposited payments for services rendered into the three accounts; and
(e) the Company in computing and reporting its income did not include the amounts that were deposited (the "Unreported Amounts") in the Bank of Montreal and Edgewater Credit Union accounts (the "Undisclosed Accounts").
5. The Unreported Amounts for the 1993 to 1997 taxation years totalled $807,143.94.
6. Sometime at the end of 1999, prosecution proceedings were commenced against the Company and the Appellant in relation to amounts deposited and withdrawn from the Undisclosed Accounts.
7. On June 27, 2000, as part of a plea arrangement, a superseding information was sworn and the Company was charged with having committed the following offences:
(a) Wilfully evading or attempting to evade the payment of income taxes by failing to report income of $677,884.84 deposited into the Undisclosed Accounts between August 31, 1993 and November 22, 1996, contrary to paragraph 239(1)(d) of the Act ("Count 1");
(b) Wilfully evading the remittance of $18,301 in GST collected on taxable revenues deposited into the Undisclosed Accounts between August 31, 1992 and June 1, 1996, contrary to paragraph 327(1)(c) of the Act (Count 2); and
(c) Wilfully obtaining or attempting to obtain refunds of $11,613.56 under the Act to which it was not entitled between August 31, 1992 and June 1, 1996 contrary to paragraph 327(1)(c) of the Excise Tax Act (Count 3).
8. As a result of the plea arrangement, the charges against the Appellant were dropped.
9. On August 9, 2000, the Company through the Appellant, plead guilty to Count 1, Count 2 and Count 3.
10. The Company was sentenced to pay a fine of $282,974 which represented 150% of the federal tax and GST payable on the Unreported Amounts.
11. The fine was paid in full.
12. By Notices of Reassessment dated January 11, 2000, the Minister of National Revenue (the "Minister") assessed the Company for its 1993 to 1997 taxation years for;
(a) income tax on the Unreported Amounts; and
(b) federal gross penalties totalling $87,091.17.
13. By Notices of Reassessment dated December 16, 1999, the Minister assessed the Company for Goods and Services Tax ("GST") in the amount of $57,635.76 in relation to $481,592.80 of the Unreported Amounts that constituted taxable supplies. The Minister also assessed the Company with penalties in relation to the GST payable pursuant to subsection 280(1) and section 285 of the Excise Tax Act in the aggregate of $27,887.53.
14. As a result of the income tax and GST Notices of Reassessment with respect to the Company, the additional federal income taxes, provincial income taxes, GST and penalties payable by the Company approximately totals $583,369.29. This amount will be adjusted by the Consents to Judgment described in paragraph 17 of this Statement of Agreed Facts.
15. The Minister has also assessed the Company to interest in respect of the additional taxes and penalties.
16. The Company appealed the income tax and GST Notices of Reassessment to the Tax Court of Canada (the Company's Appeals").
17. On February 6, 2006, Consents to Judgment were filed with the Tax Court of Canada with respects to the Company's Appeals. ...
18. The Minister commenced an audit into the Appellant's financial affairs in 1998.
19. By Notices of Reassessment dated January 5, 2000 (the "Reassessments"), the Minister assessed the Appellant to tax for each of his 1992, 1993, 1994 and 1995 taxation years (the "Reassessed Years"). The Reassessments with respect to the 1992, 1993, 1994 and 1995 taxation years were made beyond the normal reassessment period set out in paragraph 152(4)(b) of the Act.
20. The Minister added the following amounts to the Appellant's total income previously assessed for the Reassessed Years. These amounts were determined by the Minister to be unreported shareholder appropriations (the "Appropriations"), pursuant to subsection 15(1) of the Income Tax Act (the "Act"), in relation to the Company's Unreported Amounts:
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1992
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$8,156
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1993
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160,028
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1994
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131,530
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1995
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87,232
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1996
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423,765
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Total
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$810,711
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21. Pursuant to the Reassessments in relation to the Appellant's 1995 and 1996 taxation years, the Minister assessed the Appellant to tax in respect of the following amounts determined to be unreported income from a business:
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1995
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$16,493
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1996
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15,833
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Total
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$32,326
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22. Pursuant to the Reassessments, the Appellant was also assessed with provincial and federal gross negligence penalties (the "Penalties") in each of the Reassessed Years in the following aggregate amounts:
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1992
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$1,659
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1993
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40,817
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1994
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34,803
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1995
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28,008
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1996
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119,019
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Total
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$224,306
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23. As a result of the Reassessments, the additional federal and provincial taxes and the Penalties payable by the Appellant totals approximately $672,922.
24. The Minister has also assessed the Appellant to interest in respect of the additional taxes and the Penalties.
25. The Appellant admits that:
(a) In computing his income for his 1995 and 1996 taxation years, he did not include the amounts in paragraph 21 above; and
(b) he withdrew amounts totalling the Appropriations ($810,711) from the Undisclosed Accounts.
26. Schedule B attached hereto shows amounts that were withdrawn from the Undisclosed Accounts and used for the benefit of Horns Peak Ranch. [Schedule B is set out below].
27. The last withdrawal by the Appellant from the Undisclosed Accounts was in December 10, 1996. The Undisclosed Accounts have been inactive since December of 1996.
28 The Respondent admits that the Reassessments in relation to the Appellant's 1993 and 1994 taxation years should be decreased by the following amounts which were incorrectly included in the Appropriations:
(a) $28,000 in the 1993 taxation year; and
(b) $21,000 in the 1994 taxation year.
SCHEDULE B
HORNS PEAK RANCH
JANUARY 1, 1993 to DECEMBER 31, 1996
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Date
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Bank account
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Payee
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Expenses
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Capital Asset
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Cash
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May 12, 1993
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Bank of Montreal
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Horns Peak Ranch
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$15,000.00
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Aug. 6, 1993
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Bank of Montreal
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Radium Building
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$755.78
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Aug. 17, 1993
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Bank of Montreal
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Harold Mandwill
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1,200.00
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Nov. 25, 1993
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Bank of Montreal
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Horns Peak Ranch
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20,000.00
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Dec. 8, 1993
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Bank of Montreal
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McBain Plumbing
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2,053.70
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Dec. 9, 1993
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Bank of Montreal
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Golden Hardware
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1,047.02
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Dec. 17, 1993
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Bank of Montreal
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Horns Peak Ranch
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20,000.00
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Total for 1993
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$5,056.50
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$55,000.00
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Jan. 3, 1994
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Bank of Montreal
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Horns Peak Ranch
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20,000.00
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Apr. 7, 1994
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Bank of Montreal
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Golden Hardware
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811.03
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Apr. 18, 1994
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Bank of Montreal
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Horns Peak Ranch
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10,000.00
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May 11, 1994
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Bank of Montreal
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Dawson Seed Co.
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1,964.29
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July 5, 1994
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Bank of Montreal
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Radium Building
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2,458.50
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July 7, 1994
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Bank of Montreal
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Golden Hardware
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3,104.31
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Total for 1994
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$8,338.13
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$30,000.00
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May 29, 1995
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Bank of Montreal
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Horns Peak Ranch
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2,000.00
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May 29, 1995
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Bank of Montreal
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Golden Hardware
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733.34
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Total for 1995
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$733.34
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$2,000.00
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May 2, 1996
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Bank of Montreal
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Hutchinson Fertilizer
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5,261.25
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May 4, 1996
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Edgewater Credit Union
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Trescher property
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200,000.00
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May 7, 1996
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Bank of Montreal
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Horns Peak Ranch
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2,000.00
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May 23, 1996
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Edgewater Credit Union
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Trescher property
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190,000.00
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Dec. 6, 1996
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Bank of Montreal
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Horns Peak Ranch
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3,000.00
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Total for 1996
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$5,261.25
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$390,000.00
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$5,000.00
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Total **
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$18,655.88[1]
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$390,000.00
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$90,000.00
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** The total amounts for Expense and Cash did not include the amounts for 1995. Therefore, the total amount for Expense should be $19,389.22 and for Cash should be $92,000.00
At least $400,000 of the Edgewater bank account was used to pay for the purchase of land and buildings known as the Trescher property. The $100,000 which remained of the $500,000 in question, was also advanced for the benefit of Horns Peak.
[3] The 61 year old Appellant has operated a successful business personally starting in the early 1970s, and through the Company since 1982, in the Kootenay area of British Columbia. During the relevant years, the Company grossed over a million dollars annually.
[4] The main thrust of the Appellant's submission is contained in paragraph 18 of his Amended Notice of Appeal, which states:
18. In 1996, amounts were withdrawn from the Company's bank account at Edgewater Credit Union to fund the acquisition of certain real estate property in the Kootenay area of British Columbia. The amounts withdrawn were capital contributions by the Company to a partnership to which the Company has a partnership interest.
The Appellant's Book of Documents[2] includes the Appellant's version, as prepared by his accountant and lawyer, of how funds were distributed from the undisclosed bank accounts. Schedule B above is also found in Tab 4 of Exhibit A-1.
[5] The Appellant argues that Horns Peak Ranch was in effect owned and operated by a partnership consisting of himself and his wife Kathleen, son Bud and his wife, Alison, and the Company. The Appellant relies primarily on his own testimony to the effect that the Company participated in the Horns Peak Ranch partnership and advanced funds to it.
[6] The Appellant's primary submission that approximately $500,000 in 1996 was paid by the Company out of its capital contributions as a partnership participant in Horns Peak Ranch and that this amount was not subject to taxation under subsection 15(1) of the Act. These payments are identified in Schedule B to the Agreed Statement of Facts reproduced above. The Appellant readily admits that subsection 15(1) applies to approximately $307,144, being part of the $807,144 undisclosed corporate revenue.
[7] Secondly, the Appellant represents that should I find that the Horns Peak Ranch payments are subject to subsection 15(1) appropriations, then the Minister's assessments are statute-barred under subsection 152(3.1) of the Act.
[8] The final issue is whether subsection 163(2) penalties apply. (As stated, the most significant issue is whether a partnership existed in which the Company was a participant.) The Appellant admits to placing Company money in two undisclosed accounts to evade corporate tax. His plan was certainly unsophisticated. He took some Company cheques totalling about $807,144 and deposited them into accounts at two nearby banks.
[9] The subsection 15(1) issue can only be resolved after a review of all the relevant facts. The Appellant has been operating a business of logging, road-building, and grading for over 35 years. He caused the Company to be incorporated in 1982 and it has continued the same business to the present. The Horns Peak Ranch partnership appears to have been operating since 1992 when the Appellant's son Bud came home to Canada after spending time working on ranches in New Zealand. At this point, the facts are far from crystal clear. I believe Bud was the catalyst in the formation of a partnership with his father and his mother, and perhaps, with his wife. A number of properties were contributed to the partnership by the Appellant and his wife and the Company.
[10] The following is a summary of the facts as I find them. The Company was highly successful. The Appellant set out, in 1992, to evade corporate income tax in an unsophisticated and simplistic manner. In addition to the Company's main bank account with CIBC, the Appellant opened two other accounts at separate banks, but in the same small community. In the CIBC account, he deposited revenues in excess of $1 million annually over a five-year period. This revenue he revealed to his accountant and CRA. He deposited over $807,144 into two other accounts which accounts were kept from the accountant, CRA and everyone else. The Company was audited and his scheme unravelled. The Company has paid a serious fine of $282,974 and is paying the income tax it should have paid of over $1 million, which includes interest and penalties.
[11] The Minister has now turned to the Appellant personally, who states that his personal assessments, interest and penalties exceed $1,000,000. The Appellant has retained able counsel who, together with an accountant, portray a Horns Peak partnership which includes the Company, the Appellant and his family. The Appellant contends that of the $807,144, the approximate amount of $500,000 was invested by the Company in the partnership, Horns Peak Ranch, and should not be subject to subsection 15(1) shareholder benefits. He concedes that the remaining amount is subject to tax under subsection 15(1).
[12] The answer to the question whether the Company was part of the Horns Peak Ranch partnership is primarily a question of fact. For the most part, the facts were provided by the Appellant. It is not in dispute that there was a partnership between the Appellant and Bud and perhaps their spouses, carrying on a ranching business named Horns Peak Ranch, although monetary details, for the most part, are somewhat left to conjecture. The Appellant's appeal is dependent on establishing that the Company made capital contributions to Horns Peak as an active participating partner and those payments are therefore not subject to the provisions of subsection 15(1).
[13] The simple definition of partnership for tax purposes is as stated by Justice Bastarache in Continental Bank Leasing Corp. v. The Queen.[3] A partnership is a relation which subsists between two or more persons[4] carrying on business in common, with a view to making a profit.
[14] The Respondent's position is that the Company did not participate in the Horns Peak partnership in common with a view of profit.
Facts
[15] Partnership arrangements, mainly between the Appellant and his son Bud, were made randomly as the necessity arose. There was never a grand scale discussion or meeting of the minds as to who was to participate and how, other than the basic arrangement between the Appellant and Bud. There was nothing in writing. There was no business plan or budget. It was a family effort to operate a farming and ranching business. As his counsel stated several times, Mr. Braisher was unsophisticated in his approach to the partnership arrangements, yet he obviously had business ability to operate a very successful company in what is, I believe, a competitive market.
[16] Exhibit A-1 is a document created by the Appellant's accountant (who did not testify) with 20-20 hindsight. It is designed to reflect economic consequences that may have resulted if the Company was a contributing partner, and that the Appellant and his wife contributed property to the partnership. It is common ground that Bud was the day-to-day manager. The Appellant had a Company to manage, but assisted with the Ranch when he could. The Company advanced capital to purchase a property which was not registered in its name, but in the names of the Appellant and his spouse and Bud. The only way that the Company may have profited was that it removed timber and gravel from the lands. Unfortunately, the most active partner, Bud, was away in New Zealand, presumably on holidays, and did not testify. A date for the hearing had been set by joint application on August 11, 2005, over five months before the scheduled hearing. I am given little option than to infer that the absence of Bud, the most active partner, was deliberate. The only witness to attempt to establish the existence of a partnership was the Appellant. There was not only a lack of corroborating documentation, the documents presented, for the most part, supported the Respondent's position.
[17] In Backman v. Canada,[5] Justices Iacobucci and Bastarache stated the following with respect to the approach to determining whether a partnership exists:
(b) The Approach to Determining Whether a Partnership Exists
25 As adopted in Continental Bank, supra, at para. 23, and stated in Lindley & Banks on Partnership, supra, at p. 73: "in determining the existence of a partnership ... regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case". In other words, to ascertain the existence of a partnership the courts must inquire into whether the objective, documentary evidence and the surrounding facts, including what the parties actually did, are consistent with a subjective intention to carry on business in common with a view to profit.
26 Courts must be pragmatic in their approach to the three essential ingredients of partnership. Whether a partnership has been established in a particular case will depend on an analysis and weighing of the relevant factors in the context of all the surrounding circumstances. That the alleged partnership must be considered in the totality of the circumstances prevents the mechanical application of a checklist or a test with more precisely defined parameters.
[18] Application of the Facts
(a) There was no written documentation, or other documentation, to indicate that it was intended that the Company be a partner in Horns Peak.
(b) About $500,000 was removed by the Appellant from undisclosed Company bank accounts to purchase land for use by Horns Peak. The Company received no written acknowledgement that it had advanced the funds. The most significant purchase with Company funds from the undisclosed accounts was the purchase of property from Trescher for $400,000, and registered in the personal names of the Appellant, his spouse and Bud.
(c) The Appellant used the Company funds as his own.
(d) The Company did not share in any profits or losses of the partnership.
(e) The Company was not shown as a partner in any financial statements. Obviously, it could not because it was not revealing to its accountant the existence of its secret bank accounts.
(f) The only evidence to the effect that the Company was a partner in Horns Peak was the uncorroborated self-serving testimony of the Appellant. That is not sufficient.
(g) The Appellant was uncertain as to what the profit sharing arrangements were with his son. He was vague with respect to Bud's salary and as to what the profit sharing threshold was. In fact, he did not know what the profit sharing arrangement was, if any.
(h) Before he presented the partnership argument, he took a conflicting position that the $500,000 was a shareholder loan to him.
(i) The corporate tax returns of the Company do not refer to the participation of the Company in Horns Peak.
[19] All of the above cannot be ignored. The Appellant was not certain of necessary details including how the Company was to benefit from advancing $500,000 and other details as referred to. I do not accept his position in paragraph 18 of the Notice of Appeal that:
18. In 1996, amounts were withdrawn from the Company's bank account at Edgewater Credit Union to fund the acquisition of certain real estate property in the Kootenay area of British Columbia. The amounts were capital contributions by the Company to a partnership to which the Company has a partnership interest.
[20] Counsel for the Appellant was straightforward. With the Appellant's accountant, he sought to characterize the Appellant's withdrawals from the secret accounts as capital contributions by the Company to Horns Peak. This is more wishful thinking and retroactive tax planning than reality. The Appellant treated the Company's secret accounts as his own personal funds without regard to the Company being involved in the Horns Peak partnership.
[21] Subsection 15(1) of the Act provides that a taxpayer must include in his income any benefit a Company conferred on him in his capacity as a shareholder. I find as a fact that the Company conferred a benefit on the Appellant equal to the total in the two secret accounts. He knew tax should have been paid on the $807,144 and he did nothing until the audit and reassessments.
[22] Further, no statute bar applies to the 1992, 1993, 1994 and 1995 taxation years. The Appellant made misrepresentations attributable to neglect, carelessness, wilful default or fraud in filing his income tax return for those years (subparagraph 152(4)(a)(ii)). He made a conscious effort to avoid reporting the proceeds of secret bank accounts that he appropriated for his own use.
[23] I now turn to the question of penalty. As mentioned above, subsection 163(2) of the Act, reads in part as follows:
163(2) Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total of ...
There is no doubt that the Appellant made false statements or omissions in his relevant returns.
[24] Counsel for the Appellant submitted that the Appellant admitted that he knowingly evaded corporate tax, the Company paid a fine of $282,924 and was assessed penalties under subsection 163(2). He continues that the economic effect of imposing an additional penalty together with taxable income pursuant to subsection 15(1) should be taken into account. In support of his argument, he specifically referred to Villeneuve v. The Queen.[6] He adds that there are two taxpayers, the Company and the Appellant. The Company pled guilty and the Appellant's charges were dropped. The Appellant was unsophisticated in accounting and tax matters and he should be punished through the Company, but not personally, and that his actions were not of the reprehensible nature referred to by Justice Bowman in Farm Business Consultants Inc. v. The Queen.[7]
[25] For reasons that follow, I accept the position of counsel for the Respondent. The Appellant intentionally avoided reporting appropriations. He knew or ought to have known from his tax returns that he had to pay tax on money he took out of the Company either through salary or dividends.
[26] There is nothing in the Act, or specifically subsection 163(2), that refers to taking into account the economic impact of the penalty. His actions were done wilfully, with the hope that they would not be uncovered. The gross negligence penalties arise from the operation of subsection 163(2) which cannot simply be ignored. The Appellant is not being taxed twice. There are two separate taxpayers. The Company was taxed and penalized for its actions, and the Appellant is being taxed and penalized for false statements and omissions.
[27] The appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 3rd day of May, 2006.
McArthur J.
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