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Citation: 2004TCC613
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Date: 20040910
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Docket: 2002-2194(IT)I
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BETWEEN:
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BERND MASSEG,
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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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Docket: 2003-3166(IT)I
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AND BETWEEN:
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STABER ENTERPRISES LTD.,
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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
Rip, J.
[1] Bernd Masseg and Staber
Enterprises Ltd. ("Staber") have appealed income tax
assessments for 1998 and 1999. Staber's fiscal year-end
is August 31. Staber's appeal for 1998 was quashed by
Order of this Court dated January 7, 2004. The appeals
remaining were heard together on common evidence. Due to the
apparent inexperience of the appellant's agent in preparing
and prosecuting the appeal, the issues varied during the course
of the trial of the appeals.
[2] According to the appellants'
notices of appeal the issues in appeal were:
(a) with respect to Mr. Masseg,
how to treat management fees paid to him by Staber and
"inadvertently" not included in his 1998 and 1999 tax
returns; the appellant requested that Mr. Masseg "be charged
an interest expense on this loan..."
(b) with respect to Staber, whether
certain expenses it claimed were made by Staber for the purpose
of earning income from a business or a property.
[3] According to the respondent's
replies to the notices of appeal for 1998 and 1999, the issues
were:
(a) With respect to Mr. Masseg,
whether the Minister of National Revenue properly included in his
income shareholder benefits of $4,526 and $7,759[1], respectively and management
bonuses of $30,000 and $22,500, respectively, and
(b) With respect to the 1999 appeal by
Staber, whether the expenses claimed by Staber are deductible in
computing its income for the year.
[4] The notices of appeal were
prepared by Mr. Noel M. Porter, a chartered accountant, who also
represented the appellants and testified on their behalf during
the first day of the hearing. Documents attached to Mr.
Masseg's notice of appeal include a letter from Mr. Porter to
the Fairness Committee of Canada Customs and Revenue Agency
("CCRA"). From this and other documentation attached to
the notice of appeal it appears that one of the issues in Mr.
Masseg's appeal is whether Staber purchased a time share
property in Mexico for the purpose of earning income from a
property. The Minister of National Revenue ("Minister")
says there was no income earning purpose for this property. The
shareholder benefits assessed Mr. Masseg pursuant to subsection
15(1) of the Income Tax Act
("Act") relate to his use of the time share
property.
[5] The Minister also claims that
management bonuses declared and deducted by Staber in computing
its income in 1998 and 1999 were credited to
Mr. Masseg's loan account with Staber and that he did
not include the bonuses in computing his income for 1998 and
1999.
[6] With respect to Staber, the
Minister denied Staber advertising and promotion expenses in
excess of $4,575.79, expenses for supplies in excess of $9,409.76
and interest expenses for the time share in Mexico.
[7] The appeals were originally set
down for hearing on January 27, 2004. At the time both
Mr. Porter and Mr. Masseg testified. Mr. Porter was beyond his
depth in representing the appellants and in giving evidence. He
was not organized and had no idea what he had to prove or how to
prove it. At my suggestion, Mr. Masseg replaced him in the
witness box so that the issues could be addressed and documents
could be produced.
[8] Mr. Masseg is the shareholder,
sole director and president of Staber. I posed questions to
Mr. Masseg in the hope that the issues would be clarified.
Mr. Masseg did not fare much better than Mr. Porter.
[9] Mr. Masseg produced a bundle of
documents, Exhibit A-1, which included two invoices to Staber and
two cheques on Staber's account in payment of the amounts so
invoiced, owner's financial statements showing a distribution
of funds to non-resident owners of a rental property
managed by Staber, correspondence from the purported
administrator of the time share property and documents relating
to the property, copies of cheques payable to credit card
companies drawn on the bank accounts of both appellants and lists
of expenses purportedly incurred by Staber in 1997, 1998 and
1999; apparently much of this material had been submitted to CCRA
earlier. The cover page of the bundle appears to be a note
explaining that "the management fees set up to clear the
debit balance in the shareholder's loan were done so in
error", the appellant claiming only two "deposits"
totalling $10,500 "can be classified as shareholder's
loan"; other deposits totalling $29,000 "were made to
cover cash flow shortages in [Staber] and are loans from credit
card accounts in [Masseg's] name made to [Staber]". This
was an accounting mistake, according to Messrs Masseg and
Porter.
[10] Staber carries on the business of
janitorial contracting and property management. Some of the
properties it manages are owned by non-residents of Canada.
Staber also owns Professional Stone Floor Care Incorporated,
carrying on business as "Brite Clean", which is in the
business of polishing marble.
[11] Included in Exhibit A-1 were an invoice
and cheque in payment dated in 1997, not a year in appeal. Also
included were an invoice and cheque in payment dated prior to
August 31, 1998, a taxation year that has been quashed. These
items are not subject matters of Staber's appeal for
1999.
[12] Mr. Masseg said he tried to rent the
time share property for the regular weeks of the time share
available to him but was unsuccessful, in particular after
September 11, 2001. Attempts to sell the time share are
also proving unsuccessful. He claims the expenses on the time
share are deductible since the time share is a rental property.
He explained that he purchased the time share because he
thought that he would eventually sell Staber and "if I buy a
little time share" and put it in Staber "it would be
more attractive for someone to buy my business".
[13] Mr. Masseg made personal use of the
time share on three or four occasions. He explained that as owner
of the time share "you get two regular weeks" and a
bonus week each year. He used the bonus week, the regular weeks
were for rent. Mr. Masseg did not pay Staber for his personal use
of the time share since he only used the bonus week, he
explained. He does not consider the bonus week as a time share.
"It's private ... private use, okay. You don't have
to pay any rent to the company. It's a private use. The time
share is separate, with its regular two weeks a year ... If I
would use a regular week I would have to pay Staber."
[14] With respect to the cheques included in
Exhibit A-1, which were payable to Mastercard, Amex and Visa, Mr.
Masseg explained he charged amounts on his personal credit cards
for the benefit of Staber and, in return, Staber paid the credit
card companies.
[15] Mr. Masseg recalled that a
break-in at Staber's office took place in September or
October 1998 and many documents were destroyed; the computer
"disappeared". A water cooler was "pushed
over", papers were thrown all over the floor. He complained
that much of Staber's records were rendered useless. As a
result only a portion of the records was recoverable. He
indicated that as a result of records being destroyed, Mr. Porter
treated the cheques as deposits to a shareholder's loan
"but they were only made ... to cover cash flow shortages
and the payments showed how I made these payments back. It's
about $27,000." Mr. Masseg said the amounts were
"... like a loan from a bank to the company, ... for ... an
operating loan".
[16] Mr. Masseg insisted he did not lend
money to the company, only that his credit made it possible for
Staber to obtain the money.
[17] Later in the evidence Mr. Masseg stated
that some of the credit cards were Staber's. The Amex card
belonged to Staber, for example. However, Mr. Masseg could
not identify which credit cards were his and which ones were in
Staber's name. In the meantime I could not identify the
relevance of the credit card payments to the issues before me and
Mr. Masseg, notwithstanding his efforts, could not help me.
[18] I was not clear as to what, exactly,
Mr. Masseg was attempting to prove. Apparently, according to
Crown counsel, Mr. Masseg's original argument with CCRA was
that although Staber paid a management bonus to him in each of
1998 and 1999, he had paid a certain amount to credit card
corporations for Staber's benefit. However, these amounts
were already taken into account by the auditor for CCRA when
assessing. Mr. Masseg did not acknowledge that this was in fact
the case. In his notice of appeal Mr. Masseg acknowledged that
Staber paid a management bonus in each of 1998 and 1999 and his
failure to include the bonus in the relevant tax returns. He is
disputing the amount of the management bonuses, if I understood
him correctly.
[19] Mr. Masseg replied that it was not he,
but Mr. Porter, who prepared the Notices of Appeal and Mr. Porter
was ill and "doesn't look very competent". Mr.
Masseg emphasized he relied on Mr. Porter to prepare his books.
During the first day of the appeal Mr. Porter stated he
failed to include the management bonuses in preparing
Mr. Masseg's income tax return because of the
destruction of the documents during the break-in at
Staber's office. He simply did not have the required
information.
[20] After further discussion with Mr.
Masseg and counsel for the Crown, I adjourned the hearing of
these appeals to give the parties another opportunity to discuss
the issues in these appeals and an attempt to settle the
matter.
[21] Unfortunately the matters were not
settled and the appeals were continued on August 3, 2004. The
time between hearings was not put to any good use.
Mr. Masseg's testimony was uncertain and erratic. The
following is one example of the problem faced by Mr. Masseg:
JUSTICE:
Now just -- please, I'm trying to understand you.
MR.
MASSEG:
Yes.
JUSTICE:
The 263,000 you said went to the owners.
MR.
MASSEG:
No, still stated here that --
JUSTICE:
You just told me they went to the owners.
MR.
MASSEG:
Yeah, that's what I said, but when -- but that's
wrong.
JUSTICE:
Well, how could I under- -- how can I accept your evidence when
you say something and five minutes later you say it's
wrong?
MR.
MASSEG:
Well, because I'm not an accountant, so --
JUSTICE:
Well, look.
MR.
MASSEG:
-- I make mistakes, yes, I realize --
JUSTICE:
I have to understand what's happening. And if you make
mistakes, how am I supposed to decide what happened? Can you tell
me?
MR.
MASSEG:
Well, you have to decide by me telling you, and --
JUSTICE:
And if you tell me --
MR.
MASSEG:
-- make up your mind, right.
JUSTICE:
And if you tell me two different things what am I supposed to
do?
MR.
MASSEG:
Well then, you know, you have a problem and I have a problem.
[22] Mr. Masseg informed me of Mr.
Porter's illness with amyotrophic lateral sclerosis and the
unwillingness of counsel for the Crown to help him. He complained
that the respondent gave him no information respecting the
disallowed expenses. Much, if not all, of this information is set
out in the Reply to the Notice of Appeal. Further, counsel stated
that the list of expenses, disputed and not disputed, is
contained in a proposed settlement offer that was sent to
Mr. Masseg.
[23] Mr. Masseg explained his position with
respect to the management bonuses. He testified that in 1998 he
received cheques from Staber aggregating $11,350[2]. However it appears from Exhibit
A-4 that in 1998 Staber credited Mr. Masseg salary of $5,000
per month for nine months. Staber remitted to the Receiver
General for Canada income tax and Canada Pension Plan
contributions purportedly withheld from the monthly salary of
$5,000. The net amount credited to Mr. Masseg's account
in 1998 as a result of these monthly amounts was $30,210.78.
[24] In 1999 Mr. Masseg said he received
cheques from Staber aggregating only $5,950. Again, he was
credited with $5,000 per month for nine months and statutory
amounts were remitted to the Receiver General. The net amount he
was credited was $30,531.41. Staber sent T-4 slips that Mr.
Masseg's annual salary was $45,000.
[25] Mr. Masseg claims he never took the
amounts of $30,210.78 and $30,531.41 out of the company, only the
amounts of $11,350 and $5,950. When I asked him why Staber would
withhold and remit tax to the Receiver General on the basis he
was paid an annual salary in each year of $45,000 when, according
to him, he received only $11,350 and $5,950, respectively, he
replied:
"Because at the end of the year, I did not want to end up
paying high taxes, so I asked my accountant how is the best way
of doing this. So he says, by law, I have to send in monthly
income. So we used a $5,000 a month income claiming, and we sent
in income tax money accordingly."
[26] Ms. Susan Chen, an auditor with CCRA
who audited Mr. Masseg and Staber, testified for the respondent.
She explained that when she audited Staber she saw some
management bonuses that were declared in 1998 and 1999; the
normal procedure, she said, was to check if the shareholder
reported the bonuses in his income. In the case at bar, the
bonuses were not declared.
[27] Ms. Chen reviewed pages from
Staber's general ledger for 1998 and 1999; the management
bonuses of $30,000 and $22,500, respectively, were debited as an
expense and the shareholder account was credited with the amount
of the bonus in each year. The management bonuses, explained Ms.
Chen, were included as part of the wages expense and reflected in
the financial statements as wages and benefits.
[28] Ms. Chen also explained that the
journal recorded any personal amounts paid by Mr. Masseg as well
as his wages for each year. In 1999, for example, there is a
credit for personal paid expenses of $38,776.67 and a credit for
wages to Mr. Masseg of $30,531. The $45,000 Mr. Masseg
claims he did not receive is also recorded as a debit in his
shareholder's account for 1999 as is the $30,000, which he
said he did not receive, and is debited as a wage expense in
1998.
[29] The journal entries confirm the
correctness by the Minister in including the management bonus in
Mr. Masseg's income and answered the concerns of
Mr. Masseg with respect to the inclusion of salary of
$30,000 and $45,000 in 1998 and 1999 respectively.
[30] The respondent concedes that Staber
owns the time share property in Mexico but did not acquire it for
the purpose of earning income. It was purchased to make the
corporation more attractive to any potential purchaser of Staber.
This was Mr. Masseg's evidence. If the property was not
acquired for the purpose of earning income but for some other
reason, Staber is not permitted to deduct expenses related to the
property including mortgage interest; subsection 18(1) and
paragraph 20(1)(c) of the Act. Mr. Masseg also used
the time share for his personal enjoyment. It is irrelevant
whether Mr. Masseg used the regular weeks or the bonus weeks.
Both regular and bonus weeks were property of Staber, not Mr.
Masseg. Weeks available to Staber were used by Mr. Masseg;
this is a benefit.
[31] I am not satisfied that Staber acquired
the time share property for rental purposes. There were apparent
efforts by Emren, who I assume was a rental agent, to rent the
property through the internet and agencies in Canada and the
United States of America. Emren did not guarantee rental of the
unit. These efforts, in my view, did not alter the "raison
d'être" for the purchase of the time share,
which had nothing to do with earning income. Mr. Masseg believed
the time share would attract a buyer for Staber.
[32] Mr. Masseg raised several other issues
not mentioned in Staber's notice of objection and notice of
appeal. Staber managed a rental property in Vancouver that was
owned by non-residents of Canada. He distributed the rental
income to the non-residents and, he says, withheld and
remitted 25 per cent non-resident tax to the
Receiver General for Canada. He complained that Staber was not
permitted to deduct from its income the 25 per cent
non-resident tax so remitted. Mr. Masseg also
questioned the disallowance of some $59,000 in expenses claimed
by Staber.
[33] Note 1(c) to Staber's financial
statements for the year ending August 31, 1999 states
that:
The Company receives revenues from janitorial service and
property management and rental revenue received is recorded as
"Gross Rentals", (not just the management fees it
receives from such rentals). In the "Rental
Disbursements", the Company includes the net rental paid to
the owners of the rental properties.
[34] Staber reported "property
income" of $281,693 and rental disbursements of $263,776. It
does not appear that the tax authority questioned these
items.
[35] As far as the 25 per cent
non-resident withholding tax is concerned, I assume it is
included in the rental disbursements of $263,776. When a payor
withholds and remits the non-resident tax to the Receiver
General, the payor is sent the tax to the government on behalf of
the non-resident, not the payor. The 25 per cent
withholding tax is a tax paid for the non-resident owner of
the property, not for Staber.
[36] Mr. Masseg also complained that Staber
was not permitted to deduct any goods and services tax
("GST") it paid in the course of its business. Ms. Chen
did not have any information relating to the GST (and the
non-resident tax) since this was a new issue to her. I have
asked her to review the files of the fisc to determine whether
Staber received the proper tax treatment with respect to these
matters and if not, to make the necessary corrections.
[37] Also, with respect to other disallowed
expenses to Staber, Mr. Masseg, again, referred to the
break-in at Staber's office in 1998 and the destruction
of invoices and receipts. Ms. Chen testified that, at her
request, Mr. Masseg produced to her various receipts and invoices
to establish the expenses. The personal and business expenses
were eventually separated. She noticed "a lot of expenses or
receipts [were] dated prior to the audit years". Ms. Chen
asked Mr. Masseg to organize the expenses "because it
is just a whole pile of expenses and there's no way I can
look at them and then tally it up". Mr. Masseg used a
register tape and added all the expenses for 1998 and 1999.
Ms. Chen said she allowed "every single expense that he put
on that tape" and disallowed the difference between what was
claimed on the financial statement and what was on the tape.
Among the expenses allowed by Ms. Chen were 50 per cent of
entertainment expenses.
[38] On the evidence before me I cannot
disturb the assessments, except for the reduction in shareholder
benefits agreed to by the Crown. Mr. Masseg's appeals will
therefore be allowed but only to reduce the amounts of
shareholders benefits. In all other respects his appeals will be
dismissed. Staber's appeal is dismissed. There will be no
orders as to costs.
Signed at Ottawa, Canada, this 10th day of
September 2004.
Rip J.
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