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Citation: 2004TCC797
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Date: 20041217
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Docket: 2004-1149(IT)I
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BETWEEN:
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MANDALINE PERRINO,
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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 from assessments
for the 1997 and 1998 taxation years. The issue is whether the
Appellant has substantiated expenses denied her by the Minister
of National Revenue and whether the Appellant made
misrepresentations that are attributable to neglect, carelessness
or wilful default justifying the penalties under subsection
163(2) of the Income Tax Act.
[2] The Appellant was a cook in a
hostel in the Toronto area in the years in issue. Her
father-in-law, Emilio Pellegrino,[1] is a painting contractor who in 1997 was
recovering from an earlier bankruptcy. To assist him the
Appellant presented herself as operating Auburn Painting which
primarily had one client, Magnum Homes, a builder of homes in new
subdivisions.
[3] The Appellant was represented by
Mr. Basharat Butt, an accountant. Her original returns filed for
1997 and 1998 taxation years were prepared by a representative of
TB Tax Services from the information she provided. She reported
income from her fulltime employment which is not contested. In
the same returns, she reported for Auburn Painting gross revenue
of $7,000 and $18,000 in 1997 and 1998, respectively.
[4] In reassessing the Appellant, the
Minister included unreported revenue of $8,551 in 1997 and
$28,255 in 1998 and disallowed expenses of $7,393 in 1997 and
$13,360 in 1998 and imposed penalties of $953 in 1997 and $4,556
in 1998 pursuant to subsection 163(2) of the Act. The
Minister's amounts for unreported revenue were taken from the
general ledger of Magnum Homes which had paid Auburn Painting.
Also, there was an amount of $240 representing revenue from
Torino Drywall.
[5] Subsequent to the Minister's
audit, Auburn Painting retained Mr. Butt. He, in effect,
performed his own audit. He, painstakingly, uncovered every
income and expense receipt he could. He had Mr. Pellegrino
approach several subcontractors who signed invoices that had not
previously existed. In conclusion, he agreed with the
Minister's gross income total of $61,800 for the two years,
except for about $780.[2]
[6] The two issues to be decided are:
(i) the amount of expenses of Auburn Painting; and (ii) the
imposition of the penalties. I will first deal with the expenses.
In her original income tax returns, the Appellant claimed total
expenses in 1997 and 1998 in the aggregate amount of $27,570 and
the Minister disallowed $20,753, allowing approximately
$7,000.
[7] After an extensive accounting
review by Mr. Butt and after several revisions, the Appellant
claimed total expenses in 1997 of $20,506 and $40,820 in 1998.[3] These amounts
differ from those contained in the Notice of Appeal and are the
final amounts reviewed by Jack Batth, the auditor for the
Minister. The Minister allowed expenses of $3,291 in 1997 and
$6,784 in 1998. The disallowed expenses are $17,215 and $34,036,
respectively. For the reasons that follow, I am prepared to allow
a total of $9,552 and $12,325 in expenses for 1997 and 1998,
respectively. In summary, the Appellant requested a total
deduction of $61,326, the Minister allowed $10,075 and I am
allowing a total of $21,877.
[8] An updated General Ledger was
submitted by Mr. Butt a few weeks before trial and it was
reviewed by the Minister's auditor, Mr. Batth. He accepted
some reported payments but rejected most. Mr. Butt revised all of
the Appellant's accounting using vouchers, many of which were
prepared shortly before his revision. In cross-examination, Mr.
Butt asked Mr. Batth if he had examined these revised accounts
adding that it was "all the proof you needed and today also
we have presented it in Court. Aren't they genuine
documents?" Mr. Batth answered to the effect that they
examined the documents but found them unsatisfactory because
there were no corresponding cheques or names of persons who
reported the payments. Mr. Batth's own words included:
"Genuine, I don't know. In my eyes, to show that these
individuals did receive these payments. Normally, when one pays
somebody, they report the same amounts. If you did have a cheque
or something like that, then we could ... But that's
where it stands".
[9] Most of the expenses disallowed by
the Minister were subcontracting payments. In addition to the
oral testimony of Mr. Pellegrino, the claim for subcontracting
payments was supported by letters or invoices that he obtained
from different subcontractors. These acknowledgements were
obtained by Mr. Pellegrino well after the audit. In
addition, he filed a note purportedly signed by Nicolina Luong
stating:[4]
To Whom It May Concern
I Nicolina Luong rented out rental units to Auburn Painting in
1997 & 1998. The total cost of the rental units for these 2
years was $9600.00.
Sincerely,
"Nicolina Luong"
[10] Mr. Butt provided vouchers (no
cancelled cheques) to the Minister's auditor who disallowed
all of them. The largest amounts are from subcontractors who did
the actual painting. They include:
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(i)
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Mamaca Painting
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$4,158
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(ii)
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Painting & Decorating
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$7,000
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(iii)
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Mamaca Painting
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$4,963
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(iv)
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Painting & Decorating
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$3,885
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(v)
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Daniel La Course
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$7,867
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(vi)
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Daniel La Course
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$9,052
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An example of a voucher prepared and signed after the audit,
reads as follows:
To Whom It May Concern
I Daniel Lacourse worked for Auburn Painting as a
subcontractor in 1997 & 1998. The income that I earned during
this time was $16,920.00.
Sincerely,
"Daniel Lacourse"
[11] We have the evidence of two honest
accountants. Each has an opposing interest and of course are not
considered to be expert or independent witnesses.
[12] The Appellant's accountant had made
an extraordinary effort to obtain invoices and other proof of
payments. His documents are purportedly signed by subcontractors
or paint suppliers. Some look authentic, some are dubious.
[13] The Minister's accountant has
rejected most of the expenses unless cancelled cheques or other
proof of payment were produced. The Minister was unable to find
that the subcontractors had valid GST numbers and could find no
records of their having included the amounts claimed to have been
paid to them in their taxable incomes. The same is true for the
rent purportedly paid to Nicolina Luong of $9,600 over the two
years in issue for the use of her garage for storage.
[14] In 1997, the Appellant claimed $20,500
in expenses and the Minister allowed $3,291. Of the disallowed
amounts, I am prepared to allow: (i) Sherwin Williams Paint in
the amount of $500. Although there is no cancelled cheque, the
invoice appears to be authentic; and (ii) Daniel Lacourse's
invoice in the amount of $9,052 - there is no supporting
documentation or evidence other than the evidence of Emillio
Pellegrino, yet I am satisfied that the Appellant used contract
painters and he is the only one claimed in 1997. The following
are disallowed: The Ultra Comfort invoice for $1,398 appears to
be a personal expenditure; and the Regal Crest invoice of $2,340
refers to work done in Newmarket and is not allowed because it
does not appear to relate to a Magnum Homes' project and no
corroboration of any nature was provided, as in the situation of
Emilio Painting.
[15] In addition, I do not accept the
claimed expenditures of $9,600 purportedly for rent paid to
Nicolina Luong. I do not believe the evidence of Mr. Pellegrino
to the effect that he needed garage rental space to the tune of
$9,600 in two years given the nature of the operation. For the
most part he used independent painters who would normally provide
their own tools. In conclusion, for 1997 an additional $9,552 in
expenses is allowed.
[16] For the 1998 taxation year, I accept
the invoice from Daniel Lacourse of $7,867, Mamaca Painting of
$4,158 and the hydro payment of $300. The Mamaca receipt of
August 4, 1998 appears to be authentic, listing specific amounts
for painting homes on specific lots for 1998. The receipt
prepared and signed for Mamaca shortly before trial is vague and
combines 1997 and 1998 and the amounts are not reconcilable with
the August 4, 1998 voucher.
[17] The Daniel Lacourse voucher is
consistent with 1997. I accept the $300 hydro payment because Mr.
Batth appears to have changed his mind. On page 22 of the
transcript of his evidence there was this exchange with respect
to a cancelled cheque to hydro for $300:
Q. Which expense
does this refer to?
A. This is for the
hydro, the payment that is for the garage, for the - it's
just a place for the tools or the equipment.
Q. And did you
consider that expense to be personal?
A. I did consider it
to be personal, but that was, you know, before what was presented
today, so I'm not sure.
The remaining 1998 expenses claimed by the Appellant are
rejected for reasons given by Mr. Batth. The largest ones are
those of Painting & Decorating, being invoice A0001 which is
dated December 7, 1998. I am sceptical because the invoice which
is first in time is numbered A0002 and dated September 9, 1998,
some three months earlier than the invoice numbered A0001. This
enigma was left unexplained. Further there were no cancelled
cheques or other proof of payment.
[18] I agree with the Respondent's
rejection of the other invoices. They do not inspire a conclusion
of authenticity particularly the ones prepared on behalf of the
Appellant only months prior to trial on plain bond paper and
purportedly signed by unknown persons. It would be stretching my
credibility too far to accept these without further corroboration
such as cancelled cheques or the testimony of the signatories. To
conclude, in the 1998 taxation year, the Appellant is entitled to
deduct the further sum of $12,325.
Penalty
[19] The Appellant was a fulltime cook and
knew very little about the painting business yet she held herself
out as a painting contractor. She was trying to assist her
father-in-law but must be responsible for her actions. She
clearly presented herself as the sole owner of Auburn Painting
for its books and records and income tax filings. Auburn's
bookkeeping was almost non-existent before Mr. Butt took
over after the Minister's audit. His task was a very
difficult one because there were very few books and records. To
put the pieces together he had to turn to the man who had created
the mess in the first place. Mr. Pellegrino found some
receipts but for the most part he provided the Court with
self-prepared acknowledgments purportedly signed by
subcontractors. These were not supported by cancelled cheques for
proof of payment or direct evidence from the subcontractors. The
Minister's auditor was unable to trace GST numbers nor income
tax returns for the named subcontractors where they included
payments from the Appellant in their income. She assumed the
responsibility of Auburn. She knew that the books and records
were inadequate. She had to know that the original figures she
provided TB Tax Services were casual estimates by her
father-in-law. Her actions were a "high degree of negligence
tantamount to intentionally acting" as referred to in
Venne v. The Queen.[5]
[20] Obviously, the evidence is
unsatisfactory yet I am still faced with a situation where on a
balance of probabilities, the Appellant had more business
expenses than she is credited with.
[21] I found the evidence of Mr. Butt
credible. The evidence of the Appellant was of little assistance.
Mr. Pellegrino's testimony was an effort both consciously and
unconsciously to see past events in the light of his present-day
interests. The Minister's auditor made a scrupulous effort to
review each an every entry submitted by Mr. Butt. For the most
part he was strict in his requirement for corroborating evidence
before acknowledging an expenditure.
[22] In conclusion, the appeals are allowed
and the matter is referred back to the Minister of National
Revenue for reconsideration and reassessment to allow the
Appellant to claim total expenses of $12,843 and $19,109 for 1997
and 1998, respectively. The penalties pursuant to subsection
163(2) of the Act shall be adjusted to reflect the
expenses allowed.
Signed at Ottawa, Canada, this 17th day of December, 2004.
McArthur J.
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