Reasons
for Judgment
Bowie
J.
[1]
These three appeals from reassessments made under the Income
Tax Act (the Act) were the subject of preliminary
objections to the Court's jurisdiction to hear them at all. In
May 2000, Mogan J. held that these objections were without
foundation. An appeal from his
decision was taken, and then abandoned. When the matters then
came on before me to be heard on their merits, the parties agreed
that the appeals should be heard together on common evidence. The
appeals of all the Appellants for the 1992 taxation year concern
the amount of salary or wages that was paid to them by Carnel
Accounting Ltd. (Carnel) in that year. Oscar Aragon and Nelia
Aragon also appeal from reassessments for the years 1993 and
1994. Those reassessments disallowed their claims to deduct from
their other income the losses sustained by them in connection
with a rental property that they owned jointly at that time. At
the opening of the hearing, counsel for the Respondent conceded
that they are entitled to succeed in those appeals. The appeals
of Oscar Aragon and Nelia Aragon for the 1993 and 1994 taxation
years will therefore be allowed, and the reassessments will be
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellants
are entitled to deduct their losses incurred in connection with
their rental property in the computation of their incomes for
those years.
[2]
The Appellants own and operate Carnel, a company that carries on
the business of bookkeeping and accounting. Mr. Oscar Aragon and
his wife Nelia each own 41% of the issued shares, and their son
Roderic owns the remaining 18%. All of them work in the business
as employees, as well as being the shareholders and directors.
Oscar Aragon is the person who in fact makes the business
decisions, however. He obtained a B. Comm. degree in the
Philippines. Since coming to Canada, he has engaged in self-study
to improve his knowledge of accounting. In his evidence, he said
that in addition to the ordinary accounting functions, he gives
tax planning advice to his customers. The issues that remain in
dispute are the correct determination of the salary or wages paid
by Carnel to each of the Appellants in 1992, and the related
issue of their liability for penalties. The penalties were
imposed under subsection 163(2) of the Act. The Minister
alleges that the Appellants, either knowingly or as a result of
gross negligence, failed to declare all of their incomes for the
1992 taxation year. As to this issue, of course, the Minister has
the onus of proof.
[3]
In reporting their personal incomes for 1992 from Carnel, Oscar
Aragon, Nelia Aragon and Roderic Aragon reported salary or wages
in the amounts of $24,000, $24,000 and $14,000, respectively.
They contend that these are the correct amounts, and that they
were fixed by resolution of the directors of Carnel, who of
course are themselves. The Minister's position is that, in
addition to these amounts, Oscar Aragon received a further
$18,082.24, Nelia Aragon received a further $16,047.82, and
Roderic Aragon received a further $10,007.68, all by way of
additional salary, wages or other remuneration from Carnel in
1992. They have all been reassessed to include these amounts in
their 1992 income, and it is on these amounts that the penalties
are based.
[4]
The only witness for the Appellants was Oscar Aragon. From his
evidence, it appeared that in addition to making the majority of
the corporate decisions for Carnel, he also made the bookkeeping
entries by which the company recorded its payments to the
Appellants that are the subject of these appeals. He said that
each of the Appellants drew $1,500 from the company each month.
Although it was not entirely clear, I understood him to mean that
this was so not only in the year 1992, but also in previous
years. He said that from March to June, 1992 he charged these
drawings to the salary and wages expense account, and he made the
appropriate deductions for income tax withholdings and for Canada
Pension Plan contributions ("statutory deductions"), and that
these amounts were remitted to the Receiver General as required.
He went on to say that in June he realized that he had made a
mistake charging these amounts to salary and wages, because they
were to be loans and not remuneration. Remuneration, he said, was
a matter to be dealt with by the directors at Carnel's year end,
which is February 28. He therefore reversed all the entries that
he had made for wages between March and June, crediting the
salary and wages account and instead charging the amounts drawn
by them as debits to their shareholder loan accounts instead. For
the remainder of the year, and up to March of the following year,
he charged their drawings against their shareholder loan accounts
each month. During this period, however, he continued to make the
statutory deductions for income tax and CPP in respect of the
amounts of their drawings each month, and to remit those amounts
to the Receiver General. Mr. Aragon's explanation for the fact
that these deductions were made and remitted was that he had
telephoned someone at Revenue Canada to ask if he should do this,
and he had been told that he should. He did not know the name of
the person to whom he spoke, nor could he say exactly how he
phrased the question. Carnel issued T4 forms to the Appellants in
the amounts that they subsequently declared.
[5]
At Carnel's fiscal year end, February 28, 1992, and again on
February 28, 1993, the three Appellants, as Carnel's directors,
adopted Resolutions to declare the salaries of each of them. The
operative words of these Resolutions are identical:
NOW THEREFORE be it
resolved that the Company pay wages to the shareholders as
follows:
OSCAR B.
ARAGON-
$24,000.00
NELIA C.
ARAGON-
24,000.00
RODERIC C.
ARAGON-
14,300.00
In the Resolution
adopted on February 28, 1993 the wages for Roderic Aragon are
stated to be $14,000.00; otherwise the Resolutions are identical.
It is important to note that neither of these Resolutions is
specific as to the period for which the salaries specified are to
be paid, or if it is additional to any salary already paid to the
three directors during fiscal 1993.
[6]
The Appellants entered extracts from the general ledger of Carnel
as exhibits, and they confirm Mr. Aragon's evidence as to the
manner in which he accounted for the drawings of the Appellants,
and that income tax and CPP contributions were deducted and
remitted each month. The Appellants argue that they were entitled
to defer the matter of their compensation for the year 1991 until
the 1992 year end of Carnel, and that for 1992 until the 1993
year end of Carnel, thereby deferring their own liability to pay
income tax. Their right to do that was not put in issue by the
Minister. The Minister's position is simply that they did not in
fact do that, because the true character of the Appellants'
drawings throughout the year was income and not
borrowing.
[7]
The assessor, Norman Espenell, gave evidence for the Respondent.
He said that he looked at the payments that had been made to the
Appellants throughout 1992, and he considered them to be salary
or wages, and so he added them to their declared incomes. He
reached this conclusion, he said, for two reasons. For the first
three months of the year, the payments were charged to the salary
and wages account; nothing indicated to him that their character
had changed. Moreover, when Mr. Aragon reversed the entries for
the period between March and June, and subsequently, when he
charged the drawings to the loan accounts, he continued to deduct
and remit income tax and CPP contributions, including the
employer contributions. Mr. Espenell considered that this
indicated that the payments were in fact salary and not
loans.
[8]
Counsel for the Appellants argued that it is permissible for
taxpayers in the position of controlling a family corporation to
defer their incomes by drawing against their loan accounts and
then fixing their salaries at year end; the income does not go
undeclared, but is simply deferred until the following year. I
did not understand counsel for the Respondent to take issue with
that proposition. Her position was that in this case that was not
what was done. The drawings, initially charged to wages and then
later recorded as loan advances, and those made after June 1992
which were recorded initially by a debit to the loan accounts,
were in fact not loan transactions, but wages or salary, and that
is not changed by the way in which Mr. Aragon chose to reflect
them in Carnel's books.
[9]
It is trite that entries in the accounts do not create reality.
The purpose of books of account is to record transactions, but
those transactions acquire their real character from the events
that actually take place. Their character cannot be changed by
the manner in which the person maintaining the accounts chooses
to record them. In the present case, I find it highly improbable
that Mr. Aragon made the entries that he did between March and
June by mistake. He is trained in business administration; his
business is bookkeeping and accounting. I find that he recorded
the payments that he and his wife and son received during this
period as salary because that is what in fact it was. Moreover,
the amounts that they drew on a regular basis for the remainder
of 1992 were also in the nature of salary. If they were not,
there would have been no reason to deduct and remit income tax
and CPP contributions thereon, nor to remit the employer's CPP
contribution. Exhibit A-1 includes the Statements of Income and
Expenses of Carnel for the months between March and November
1992, and it is quite clear from those that the employer
contributions were charged as expenses of the corporation
throughout that period. As part of his business, Mr. Aragon
advises individuals with respect to income tax matters. I find it
most unlikely that if he believed that the amounts in question
were really on loan account he would have felt it necessary to
seek advice from a nameless employee of Revenue Canada. Without a
very specific statement of the question that he said he asked the
Revenue Canada employee on the telephone, I am not inclined to
give any weight to that conversation. The objective evidence is
not overcome by Mr. Aragon's very vague evidence as to the advice
he says that he was given. I find the drawings to be income. The
case was presented on the basis that either Mr. Aragon or
the assessor was correct. No issue was raised as to the accuracy
of the computation of the amount added to income by Mr. Espenell.
The appeals from the assessment of tax must fail.
[10] I turn now
to the issue of the penalties. I find that Mr. Aragon has a level
of training and expertise in accounting, and in matters
pertaining to personal income tax, such that he would have been
well aware that the drawings in question were income, and
taxable. His appeal with respect to the penalty must fail as
well.
[11] Neither
Nelia Aragon nor Roderic Aragon gave evidence. Mr. Aragon
testified that they worked in the business. His wife did clerical
work of some unspecified sort. There was no evidence at all as to
the work done by Roderic Aragon. It appears to me from Mr.
Aragon's evidence that they left matters as to remuneration in
his hands. In saying this, I have not overlooked the fact that
they signed the directors' Resolutions of February 1992 and 1993.
I have no evidence as to the level of training, knowledge or
sophistication of either of them. I cannot say that it would have
been unreasonable for them to leave it to the head of the family
to deal not only with the matter of their drawings and the way in
which they were accounted for, but also their income tax
implications. There is no evidence that they knew, as he did,
that income tax and CPP were being remitted monthly on these
amounts. I find that the Respondent has not discharged the onus
of showing that Nelia Aragon and Roderic Aragon acted either
knowingly, or with careless disregard for the true character of
the amounts that they drew.
[12]
The appeal of Oscar Aragon for 1992
is dismissed. The appeals of Nelia Aragon and Roderic Aragon for
1992 are allowed and the assessments are referred back to the
Minister for reconsideration and reassessment on the basis that
their incomes have been assessed correctly, but they are not
liable for the penalties assessed. The appeals of Oscar Aragon
and Nelia Aragon for 1993 and 1994 are allowed and the
assessments are referred back to the Minister for reconsideration
and reassessment on the basis that they are entitled to take into
account their losses in connection with the rental property in
the computation of their incomes.
[13] Since the
Respondent did not consent to judgment in respect of the rental
losses claimed by Oscar Aragon and Nelia Aragon until the day of
the hearing, and since Nelia Aragon and Roderic Aragon are
successful in respect of the penalty issue, the parties shall
each bear their own costs.
Signed at
Ottawa, Canada, this 13th day of January, 2003.
J.T.C.C.
|
COURT FILE
NO.:
|
97-3445(IT)I,
97-3446(IT)I and 97-3448(IT)I
|
|
STYLE OF
CAUSE:
|
Nelia Aragon, Oscar
Aragon and Roderic Aragon and Her Majesty the
Queen
|
|
PLACE OF
HEARING
|
Regina,
Saskatchewan
|
|
DATE OF
HEARING
|
October 24,
2002
|
|
REASONS FOR
JUDGMENT BY:
|
The Honourable
Judge E.A. Bowie
|
|
DATE OF
JUDGMENT
|
January 13,
2003
|
|
Counsel for the
Appellant:
|
Daniel A.
Kwochka
|
|
Counsel for the
Respondent:
|
Tracey
Harwood-Jones
|
|
Firm:
|
McKercher McKercher
& Whitmore
|
|
For the
Respondent:
|
Morris
Rosenberg
Deputy Attorney
General of Canada
Ottawa,
Canada
|
|
|
|
Date:
20020113
|
|
Docket:
97-3445(IT)I
|
|
BETWEEN:
|
|
NELIA
ARAGON,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE
QUEEN,
|
|
Respondent.
|
_______________________________________________________________
Appeals called for
hearing on October 22, 2002, and heard on October 24, 2002, on
common evidence with the appeals of Oscar Aragon
(97-3446(IT)I) and Roderic Aragon (97-3448(IT)I),
at Regina,
Saskatchewan,
|
Before : The
Honourable Judge E.A. Bowie
|
|
|
|
|
Appearances:
|
|
|
|
|
|
Counsel for the
Appellant:
|
Daniel A.
Kwochka
|
|
|
|
|
|
Counsel for the
Respondent:
|
Tracey
Harwood-Jones
|
|
|
|
|
_______________________________________________________________
JUDGMENT
The appeals
from assessments of tax made under the Income Tax Act for
the 1992, 1993 and 1994 taxation years are allowed and the
assessments are referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that in
computing income:
1.
For 1992, additional employment income in the amount of
$16,047.82 has been correctly assessed and will be included in
the Appellant's income but the Appellant is not liable for
the penalties assessed; and
2.
Upon consent of the Respondent, for 1993 and 1994, the Appellant
is entitled to claim rental losses in the amount of $3,894.57 and
$2,631.93, respectively, for the property located at 3695 Hazel
Grove, Regina Saskatchewan.
There will be no order as to costs.
Signed at Ottawa, Canada,
this 13th day of January, 2003.
J.T.C.C.
|
|
|
Date:
20020113
|
|
Docket:
97-3446-IT-I
|
|
BETWEEN:
|
|
OSCAR
ARAGON,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE
QUEEN,
|
|
Respondent.
|
_______________________________________________________________
Appeals called for
hearing on October 22, 2002, and heard on October 24, 2002, on
common evidence with the appeals of Nelia Aragon
(97-3445(IT)I) and Roderic Aragon (97-3448(IT)I),
at Regina,
Saskatchewan,
|
Before : The
Honourable Judge E.A. Bowie
|
|
|
|
|
Appearances:
|
|
|
|
|
|
Counsel for the
Appellant:
|
Daniel A.
Kwochka
|
|
|
|
|
|
Counsel for the
Respondent:
|
Tracey
Harwood-Jones
|
|
|
|
|
_______________________________________________________________
JUDGMENT
The appeal
from the assessment of tax made under the Income Tax Act
for the 1992 taxation year is dismissed.
Upon
consent of the Respondent, the appeals from assessments of tax
made under the Act for the 1993 and 1994 taxation years
are allowed and the assessments are referred back to the Minister
of National Revenue for reconsideration and reassessment on the
basis that in computing income, the Appellant is entitled to
claim rental losses in the amount of $3,894.57 and $2,631.93,
respectively, for the property located at 3695 Hazel Grove,
Regina Saskatchewan.
There will be no order as to costs.
Signed at Ottawa, Canada,
this 13th day of January, 2003.
J.T.C.C.
|
|
|
Date:
20020113
|
|
Docket:
97-3448(IT)I
|
|
BETWEEN:
|
|
RODERIC
ARAGON,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE
QUEEN,
|
|
Respondent.
|
_______________________________________________________________
Appeal called for
hearing on October 22, 2002, and heard on October 24, 2002, on
common evidence with the appeals of Nelia Aragon
(97-3445(IT)I) and Oscar Aragon (97-3446(IT)I),
at Regina, Saskatchewan,
|
Before : The
Honourable Judge E.A. Bowie
|
|
|
|
|
Appearances:
|
|
|
|
|
|
Counsel for the
Appellant:
|
Daniel A.
Kwochka
|
|
|
|
|
|
Counsel for the
Respondent:
|
Tracey
Harwood-Jones
|
|
|
|
|
_______________________________________________________________
JUDGMENT
The appeal
from assessments of tax made under the Income Tax Act for
the 1992 taxation year is allowed and the assessment is referred
back to the Minister of National Revenue for reconsideration and
reassessment on the basis that in computing income, additional
employment income in the amount of $10,007.68 has been correctly
assessed and will be included in the Appellant's income but
the Appellant is not liable for the penalties
assessed.
There will
be no order as to costs.
Signed at Ottawa, Canada,
this 13th day of January, 2003.
J.T.C.C.
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