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Citation: 2004TCC722
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Date: 20041029
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Dockets: 2000-3470(IT)G
2001-2873(GST)I
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BETWEEN:
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BARRY KATZMAN,
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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
Campbell J.
Introduction:
[1] These appeals, under the Excise
Tax Act and the Income Tax Act, were heard together on
common evidence. In reassessing the Appellant for the 1995 and
1996 taxation years, the Minister of National Revenue (the
"Minister") determined that the Appellant understated
his income and consequently the Minister included business income
earned by the Appellant in those years. By Notice of Assessment
for the period September 15, 1995 to December 31, 1996 the
Appellant was also assessed net tax plus penalty and interest
under the Excise Tax Act for a failure to collect and
remit Goods and Services Tax ("GST") during this
period.
[2] The Appellant was initially
assessed in respect to activities involving a particular event
held during and in conjunction with the annual Niagara Grape and
Wine Festival ("the Festival") called "Event in
the Tent" ("the Event"). This Event was held
inside a large tent and involved entertainment including live
concerts and shows. The Event was licensed to sell beer and wine
and eventually food. An audit of the Event was conducted in
1998.
The Appellant's Position:
[3] The Appellant alleges that the
Event operated as an unincorporated
"not-for-profit" arrangement or
association, run by a committee of volunteers, like himself,
"whose interests were limited to the success of the Festival
itself". The Appellant also argues that in those years when
the Event generated profit, the profit was distributed to the
Festival or to local charitable organizations in accordance with
the committee's mandate and that none of the volunteer
committee members, including the Appellant, personally profited
from the Event.
The Respondent's Position:
[4] The Appellant operated the Event
as a sole proprietorship and personal business, such that income
from the Event was income of the Appellant. The Minister contends
that the Appellant sold tickets to the Event, sold beer and wine
inside the tent, that these sales were paid for in cash, that the
Appellant used a bank account in his name, personally obtained a
loan in respect to this Event, that he was responsible for
payment of expenses and that he received the funds from the Event
transactions. In addition the Minister alleges that the Appellant
was required to be registered pursuant to the Excise Tax
Act and was liable to collect and remit GST during these
years.
Issues:
(1) Whether the Event was an activity of a
not-for-profit association, as contended by the Appellant, or a
for-profit proprietorship operated by the Appellant as his
business, as contended by the Respondent.
(2) Whether the expenses associated with
insurance, security, entertainment and the erection and
dismantling of the tent were actually incurred and therefore
properly deductible expenses.
(3) Whether the Appellant is liable to
collect and remit GST and whether the Appellant is entitled to
claim Input Tax Credits ("ITCs") beyond those
allowed.
Neither counsel specifically addressed this last issue except
to contend it would be resolved and flow from a decision in the
first two issues.
The Evidence:
[5] The Appellant called three
witnesses: Raymond Howe, who arranged the assembly and
dismantling of the tent; Allan Dupuis, one of the Event
volunteers; and the Appellant. The Respondent called the
investigating officer, Heike Laumann, Canada Revenue Agency
("CRA").
The Evidence of Raymond Howe:
[6] Mr. Howe was a member of the
committee that operated the Event from the early 1990's to
1996. During these years, the Event was held at the premises of
the Parkway Hotel in St. Catharines. He described the Event as an
entertainment venue to raise money for local charities. He stated
that he received no money as a result of being a committee
member, and that he would have had no interest in committing
himself to volunteer for the Event if it was a business operated
personally by the Appellant. He recalled there were 12 to 15
committee members but hundreds of volunteers were actually
required to put the Event together. The tent that housed the
Event was a portable structure and between 25,000 and 35,000
square feet in size.
[7] Mr. Howe owned Regal Productions,
a company which was in the business of renting tents of this size
to major events. Mr. Howe stated that he agreed to donate the
tent for this Event provided the Event paid the expenses incurred
in assembly and dismantling of the tent. He stated he would not
have donated the tent under this arrangement if the Event had not
been operated for charitable purposes. The expenses to erect the
tent included equipment such as a crane to lift tent parts into
place, buckets to lift labourers into the air to work on the tent
and move around the structure, jackhammers, generators, rental of
flat bed trucks to haul materials to the site, and the
individuals necessary to put the tent together at the outset of
the Event and dismantle it at the end. He sold Regal Productions
in 1995 but continued to donate the tent because one of the
conditions of this sale was that the tent would be available to
him for this purpose for approximately three years after the
sale.
[8] He identified correspondence he
authored, at Tab 16 of Exhibit A-1, which he wrote in respect to
an inquiry from the Appellant's accountant. In this
correspondence he stated that the average expenses for erecting
and dismantling the tent would be $36,550.00. Although the labour
costs referenced in this correspondence appeared high, Mr. Howe
testified that the costs could even be higher, as approximately
15 men were required to install arches which, he explained, are
lifted one at a time to help create this structure, to unload the
trucks, sort material, and assemble the frame or base plates on
the ground to which each leg of the arch connected. Due to the
weight of the materials approximately 15 men were required to
lift materials. Jackhammers were required to drive the stakes
into the concrete while generators were required for the
operation of small hand tools. Miscellaneous expense items
referred to in his correspondence included ladders, extension
cords and replacement for broken drill bits.
[9] As a committee member, his
responsibility was to ensure the tent was erected and eventually
dismantled and that the expenses for its use were paid. The
procedure was for invoices for these expenses to come to his
attention, that he provided these to the Appellant who in most
cases gave cash to Mr. Howe so he could pay the expense
invoices. He stated he was generally paid in cash because there
was usually a great deal of cash on hand from ticket sales.
[10] On cross-examination he stated that no
one received remuneration for sitting as a member of the
committee that organized the Event. He stated that although he
and the Appellant had signing authority for cheques, his
involvement was confined to the establishment of the tent and
that he was not directly involved in the finances for the
Event.
[11] On re-direct, Mr. Howe confirmed that
the cost to rent this tent, including expenses, would generally
be $70,000.00 to $85,000.00.
The Evidence of Allan Dupuis:
[12] Mr. Dupuis has been involved as a
volunteer with the Event for a number of years. He stated he was
not a permanent member of the committee for the Event but that he
went to committee meetings in his capacity as a regular
volunteer. He received no reimbursement for his activities and
the only incentive for his involvement was that this Event
assisted local charities. His perception of the Event was that it
had always existed to raise money for various charitable
organizations in the community and that it was not a business
belonging to the Appellant. He stated that he would not have
volunteered over the years if the Appellant was operating the
Event as his own business. On cross-examination he stated that
erection of the tent was not something volunteers could complete
because of the size of the structure.
The Evidence of the Appellant:
[13] Mr. Katzman outlined how the Festival
lost one of its three sponsors in the 1980s and eventually became
a money-losing venture. For years Mr. Katzman's family
operated a business encompassing bowling allies, restaurant and
hotel in St. Catharines. When the Appellant was appointed to the
Board of Directors of the Festival, he felt that his family's
hospitality business could assist in re-establishing the
Festival as a successful activity. The family business and in
particular the Parkway Hotel premises became very involved in
promoting the Festival. The Hotel hosted the Royal Ball and
provided accommodation for individuals attending the
Festival.
[14] The Appellant was one of the founding
members of an entertainment event held in conjunction with the
Festival called "Event in the Tent". It began as a
small event held on the Parkway Hotel premises and grew in
popularity each year with the support of the Festival. The
Appellant testified that the Event had no particular strategy for
growth but it was simply driven by the people and volunteers in
the community. The Appellant described the organizers of this
Event as a group of people who met informally sometimes over
lunch. As the Event grew so did its reliance on volunteers. He
stated that if there was residual profit, the Event donated it to
the Festival or to charitable organizations.
[15] In 1994 the Parkway Hotel went into
Receivership and for the next three years, the future of the
Event was uncertain. Until 1994, Parkway Hotel had assumed
responsibility for some of the Event expenses such as adding a
rider to its own policy to provide insurance coverage for the
Event, providing hotel accommodation for Event entertainers and
providing electrical installation. In 1995 the Event was held on
the Parkway premises, but the Appellant testified that the
Receivers had little interest in the success of the Event and did
not assist as the Parkway owners had previously done. In 1996,
the Event was moved to the parking lot adjacent to the hotel. The
Appellant stated that because of security issues and a smaller
space for the venue, the Event incurred additional expenses.
[16] The Appellant explained that because
the Event operated with the sanction of the Festival, the Event
paid fees including advertising fees to the Festival. Generally
the Festival retained these fees from ticket sales at its ticket
outlet.
[17] In 1997 the Receiver sold the Parkway
Hotel to a local Niagara based family who approached the
Appellant to bring the Event back to the Parkway Hotel premises
under the direction of the Appellant. After 1997 the future of
the Event was again in jeopardy as the new owners of the Parkway
did not want to continue to host the Event on its premises.
[18] The St. Catharines Downtown Business
Association decided to get involved and expand this Event and
hold it in the downtown core. The intention was to operate the
Event with a larger budget, for 10 days instead of three and with
promoters hired to entice bigger name bands. The Downtown
Association approached the Appellant to stage this Event. The
Appellant testified that the nature of the Event had expanded so
much in respect to budget and promotion, that he was reluctant to
volunteer his time but was persuaded to enter into a consulting
contract for $15,000.00 in exchange for his services in
overseeing the Event. By the year 2000 the Downtown Association
asked the Appellant to become more involved in the Event. The
City was no longer interested in hosting the Event but wanted its
continuity ensured. It was at this point that the Appellant, with
the consent of the City, assumed the operation of this Event and
ran it as a business.
[19] The Appellant testified that CRA had
permitted some of the disputed expenses. Of those items now in
dispute is the major expense related to the erection of the tent
in each year. The Appellant stated that the everyday volunteers
could not supervise the cranes, jackhammers and other equipment
essential to erect and dismantle a tent of this size. Individuals
had to be paid. The Appellant confirmed Howe's evidence that
the Event paid for only the costs of erecting this tent and that
Regal Productions did not charge the Event a rental fee.
[20] The Appellant confirmed that Howe
oversaw the erection of the tent and the payment of the
associated expenses. He stated that Howe would show him the
invoices for tent expenses that had to be paid from time to time.
Generally he gave Howe cash to pay the invoices even though some
of the totals were for very large amounts. Occasionally he paid
Howe by cheque. Howe would then pay the various invoices.
[21] The Appellant stated that the Event
maintained insurance each year but that in the beginning Parkway
Hotel simply added a rider to its already existing policy and the
Event reimbursed the Hotel. After the 1994 Receivership, the
Event had to obtain stand-alone insurance, which was more
difficult to obtain. He stated the Receivership firm no longer
existed and no supporting documents for this expense can be
found.
[22] In respect to the security expense, the
Appellant stated that the Event volunteers did some work here
such as watching the fire exits and checking identification. The
Event also paid off-duty police officers on an hourly rate by
cheque and these expenses were allowed. He also had a Mr. Jake
Turner recruit various club bouncers to work the Event. The
Appellant stated he was unable to locate Mr. Turner or any of
these individuals and that he had no records as they were paid in
cash.
[23] The entertainment expense related to
payment of local entertainers and performers at the Event. The
Appellant stated that the general practice was to pay the band in
cash at the end of the night. He had no records and could not
locate these performers due to the transient nature of that
business.
[24] The Appellant disagreed with the
methodology employed by the investigating officer in calculating
ticket sale revenue to arrive at the expenses for the
"Children's Night in the Tent" event. He stated
that approximately 800 tickets were complimentary to family
members and social workers. He testified that he did not agree
that ticket sales at the Festival ticket outlet alone would
necessarily be indicative of sales at other outlets.
[25] The Appellant testified that the
committee members did not place much emphasis on proper record
keeping. He admitted that it was much easier when Parkway Hotel
assisted with the Event.
[26] On cross-examination he testified that
he oversaw the finances respecting the Event but that he received
no income or other remuneration from the Event.
[27] A credit loan application for the Event
(Exhibit R-2) dated July 31, 1997 was signed and submitted by the
Appellant. He also agreed to guarantee the loan.
[28] Respondent counsel also questioned the
Appellant with respect to the contents of various banking
documents (Tab 24 of Exhibit R-1). He stated that withdrawals
were made to pay expenses but he was unable to link the
withdrawal to a particular expense. He also testified that he
generally paid Howe by cash in respect to the tent expenses,
which comprised the major component of all expenses claimed. The
cash would be available while the Event was ongoing through
ticket sales revenue plus float money. The Appellant was also
referred to Tabs 25 through 63 of Exhibit R-1, which were
comprised of documents evidencing the various expenses paid by
the Event. None of these related to the erection of the tent
although Howe testified there were invoices for these expenses.
The Appellant stated that he trusted Howe completely with the
tent expenses and did not believe that supporting documentation
was required because of the nature of the Event and the manner in
which it operated.
The Evidence of Heike Laumann:
[29] Ms. Laumann, a CRA investigator, was
referred on direct examination to attachments to her
correspondence to the Appellant dated May 28, 1999, which
included a summary of expenses for the Event, a net income
projection and an income projection for the 1995 and 1996
taxation years. She explained the method she utilized in
calculating ticket sales for each night of the Event and in
particular the Children's Night in the Tent. She confirmed
through the printing company that 3,000 tickets were printed for
the children's night. She then deducted 860 tickets which
were complimentary and multiplied the resulting figure by the
price of each ticket. For the other nights of the Event she took
the total number of tickets printed, reviewed the Festival ticket
outlet and determined the percentage of ticket sales at that
outlet in relation to total tickets printed, then rounded off the
percentage to be multiplied by the price per ticket and in
rounding off the percentage she always chose a lower percentage.
On Saturday night, when the evidence suggested that all tickets
printed were sold, she applied a 75% figure and not 100% in
determining the total ticket sales for that night in each of 1995
and 1996.
[30] She also reviewed her method for
determining and allowing security expenses, entertainment,
insurance and the tent costs. Those security expenses that she
allowed were supported by cancelled cheques, invoices or in one
instance a letter supporting the expenses. All others were
denied. Some entertainment expenses relating to media advertising
and the costs of one band were permitted as she was able to
connect them via invoices, cheque stubs, contracts, statements
and quotes. All others were denied if they could not be supported
by documentary evidence. She allowed approximately $1,900.00
respecting insurance premiums in 1996. No amount was permitted in
1995 as she found no documentation to support the payment of
insurance premiums. She stated it might have been paid by Parkway
Hotel and not the Event.
[31] Some of the tent expenses in 1995 and
1996 were allowed based on cancelled cheques to Ray Howe. She
stated there was no evidence of expenses relating to cranes,
generators and other equipment. She rejected the contents of
Howe's letter dated October 16, 1998 (Tab 33 of Exhibit R-1)
because she felt, as stated in the correspondence, that the
figures were estimates. Howe provided her with the names of the
companies he employed to get the tent erected but there were no
invoices, contrary to his testimony that he had invoices and
showed them to or provided them to the Appellant to get the money
to pay them. At the end of the day, Ms. Laumann concluded that
the Appellant was the owner of the Event and operated it as his
business. She talked to Festival people, firemen, City Hall
people and other individuals involved with the Event and based on
this information together with the loan document where the
Appellant applied for a loan for the Event and guaranteed it, Ms.
Laumann formulated her conclusions that the Event was the
business of the Appellant.
Analysis:
[32] The determination of whether this Event
was the Appellant's business or a not-for-profit
association is a question of fact. The primary focus in dealing
with this issue is whether the Event was organized and operated
for a purpose other than profit.
[33] The Appellant was credible and
straightforward in giving his testimony. He characterized the
Event as a group of volunteers who organized and staged the Event
for a number of years for the benefit of the community. He
described himself as the "face" of the Event although
it was supported by many volunteers. He was one of the founding
members to spearhead the Event. It is not surprising that when
Heike Laumann, the investigating officer, talked to various
individuals involved with this Event, including Festival
organizers and city officials, they identified the Appellant as
the contact person for the Event and the person in charge of the
Event finances. The facts here support my finding that the Event
was a loose association of which the Appellant was a member and
sometime Chairman. In L.I.U.N.A. Local 527 Members'
Training Trust Fund v. The Queen, 92 DTC 2365, Justice
Bowman, now Associate Chief Justice, stated that the term
"association" is an elastic term implying a
relationship between two or more persons for a common purpose,
and he referred to the Oxford English Dictionary, 2nd
Edition, which defines the term as follows:
A body of persons who have combined to execute a common purpose
or advance a common cause; the whole organization which they form
to effect their purpose ...
[34] The Appellant's evidence that a
body of persons existed which organized and operated this Event
is also supported by the evidence of Raymond Howe and Allan
Dupuis. All three witnesses gave unchallenged evidence that the
Event was not the Appellant's business. There was no
independent evidence that the Appellant profited in any way from
this Event. The Respondent recognized that money was paid to
charitable organizations. There is no evidence to suggest that
all of the profit did not find its way to charities. The goal of
the Event was not to make a profit in and of itself but simply to
make a profit to assist the Festival and community charities.
There was an account opened in the Appellant's name which he
stated was used for the Event. He also obtained a loan for the
Event and provided his own guarantee. Although this could be
characterized as the exception to the norm, I believe these
actions simply flowed in the natural course of events because of
the manner in which the Event evolved and operated. There was no
particular strategy for growth. It was a community driven Event
organized and operated by a group of people who got together
informally over coffee or lunch. The Appellant, as one of the
founders, who was the member in charge of finances, was the most
logical individual in these circumstances to step forward and
assume responsibility for negotiating with the Bank. It was so
loosely organized that there appeared from the facts to be no
other method of obtaining operating funds. The Appellant and his
family have a long history of community involvement and it does
not appear in these facts to be unusual for the Appellant to
assist in this manner.
[35] The second issue concerns the
calculation of expenses. The largest expense was in respect to
the tent assembly. I conclude that the Appellant has met the
onus, which is upon him, of providing sufficient evidence to
support that the tent expenses were in fact incurred as part of
the Event.
[36] To deny this expense as a legitimate
Event expense I would have to reject both the Appellant's
evidence together with the corroborating testimony of Raymond
Howe. Mr. Howe dealt at arm's length with the Appellant. The
Event relied on him to supply the tent, obtain qualified people
to erect and dismantle a tent of this size and oversee the entire
operation. He owned the company that rented these tents to major
events, generally at a cost of $70,000.00 to $85,000.00. As one
of the Event volunteers, he donated the tent provided the Event
paid the associated expenses. When he sold his company, he
ensured the tent would be available to the Event in the same
manner for a period of three years after the sale. The average or
medium expense, provided in correspondence at Tab 16 of Exhibit
A-1, was in line with the tent expenses incurred by the Event. He
stated there were invoices which were provided to Mr. Howe
personally. These were then shown to the Appellant who provided
Mr. Howe with cash to pay these expense invoices. Mr. Howe
confirmed that he then paid these expenses. I would have no
reason to reject Mr. Howe's evidence even if it was not
supported by that of the Appellant. The expenses were denied
because they were a portion of the expenses that could not be
supported by invoices or other documentary evidence. Although it
is preferable such expenses have supporting documentation there
may be those exceptional cases where other evidence may suffice.
I have the independent credible testimony of Mr. Howe who
confirmed that these expenses were incurred, were reasonable,
that there were invoices and that he personally paid these
invoices. He also confirmed the Appellant's evidence that the
Event was by its nature a cash driven activity and that he
generally received cash from the Appellant to pay these invoices.
I am therefore prepared to allow the expenses associated with the
tent.
[37] With respect to the balance of the
expenses, I accept that the method, employed by Ms. Laumann to
calculate the revenue and expenses incurred for the
Children's Night in the Tent, was both reasonable and
reliable in the absence of documentary evidence to the contrary.
Ms. Laumann allowed those security expenses that could be
supported by documentary evidence. The balance of security
expenses was denied because of lack of documents. There was no
independent evidence to support the Appellant's claim that
bouncers were employed and paid cash. This was also true for the
remaining expenses, including insurance and entertainment. Except
for the tent expenses, I agree with the Minister's denial of
these expenses. In so finding I impute no wrongdoing in respect
to the Appellant. But the onus is on the taxpayer in a
self-assessing system to keep accurate books and records. Even
though this was a loose association of volunteers, the same
standard applies. In his direct examination, the Appellant did
agree that he did not keep supporting documentation because he
did not think he needed to. However if the organizers of such an
Event expect to deduct expenses, it is a prerequisite that they
keep and maintain accurate records.
[38] In light of my finding pursuant to the
Income Tax Act, that the Event was operated as a
not-for-profit association with any profit channelled to
charitable organizations, the appeal under the Excise Tax
Act is allowed and referred back to the Minister for
reconsideration and reassessment on the basis that the Appellant
is not the proper person to be assessed with respect to the tent
expense and that the expenses associated with the assembly and
disassembly of the tent be permitted with credit for the
appropriate Input Tax Credits.
[39] As success is divided, I make no order
as to costs.
Signed at Ottawa, Canada this 29th day of October 2004.
Campbell J.
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