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Citation: 2003TCC483
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Date: 20030709
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Docket: 2001-16(IT)G
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BETWEEN:
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GREGORY EBBINGHAUS,
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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
O'Connor, J.
[1] This appeal was heard at Windsor,
Ontario on June 11, 2003.
[2] The only testimony given was by
the Appellant and by Mary Burnett, an Audit Team Leader
("Auditor") of Canada Customs and Revenue Agency
("Revenue Canada").
[3] The facts and issues are disclosed
by the following extracts from the Reply to the Notice of
Appeal:
...
4. In
computing income for the 1994 and 1995 taxation
years the Appellant
claimed net business losses of $7,365 and $65,587,
respectively.
5.
...
6. By Notices
of Reassessment, dated July 13, 1999, for the 1994 and 1995
taxation years, the Minister included unreported income and
disallowed business expenses as follows:
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Unreported Income
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Disallowed Expense
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Penalties
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1994
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$42,217.00
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$ 300.00
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$8,168.77
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1995
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$65,555.00
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$134,697.00
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$12,671.00
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(The Respondent reduced the disallowed expenses to zero
dollars in 1994 by conceding the amount of $300 previously
disallowed and the Respondent reduced the 1995 disallowed expense
to $132,276 by allowing an expense of $2,421).
7. The
Minister further assessed penalties pursuant to s. 163(2) of
the Income Tax Act R.S.C. 1985, c. 1 (5th Supp.), as
amended ("Act") in respect of the failure of the
Appellant to report income ...
8. In so
assessing the Appellant, the Minister relied on, inter
alia, the following assumptions:
(a) ...
(b) the Appellant
operates a sole proprietorship under the name of Lunar Lights
Contracting;
(c) in reporting his
income for the 1994 and 1995 taxation years the Appellant did not
include all of the income received in those years;
(d) the Appellant
failed to report income in the amounts of $42,217 and $65,555 in
respect of the 1994 and 1995 taxation years, respectively;
(e) the Minister
calculated the amounts of unreported income based on the amount
of sales reported by the Appellant in his Goods and Services Tax
returns;
(f) the
expenses disallowed by the Minister are itemized in Schedule I of
the Reply and were unsubstantiated by the Appellant;
(g) the Appellant
failed to provide books and records to support the amount of
income earned and the amount of expenses claimed in 1994 and
1995.
(h) expenses
referred to in Schedule I were not incurred for the purpose of
gaining or producing income from a business or property, but were
personal or living expenses of the Appellant;
(i) the
Appellant knowingly, or under circumstances amounting to gross
negligence, made or participated in, assented to or acquiesced in
the making of a false statement or omission in returns by failing
to report income in the amounts of $42,217 and $65,555 in respect
of the 1994 and 1995 taxation years, respectively; and
(j) there were
no non-capital losses in the 1995 taxation year therefore no
non-capital losses were available to be deducted in computing the
Appellant's income for the 1992 taxation year.
B. ISSUES
TO BE DECIDED
9. Whether the
Appellant failed to report income in the amounts of $42,217 and
$65,555 in respect of the 1994 and 1995 taxation years,
respectively.
10. Whether the Appellant
is entitled to deduct as business expenses ... in respect of
the 1994 and 1995 taxation years, respectively [any amounts in
excess of the amounts conceded by the Respondent].
11. Whether there were
non-capital losses for the 1995 taxation year that are deductible
in computing the Appellant's taxable income for the 1992
taxation year.
12. Whether the Minister
properly assessed penalties pursuant to subsection 163(2) of the
Act for the 1994 and 1995 taxation years.
Schedule 1 to the Reply reads as follows:
SCHEDULE 1
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1994
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Maintenance and repairs expense
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$300.00
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$300.00
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1995
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Purchase expense
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$78,258.00
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Direct wage costs
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19,569.00
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Other costs
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14,089.00
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Professional fees
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1,670.00
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Advertising expense
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1,635.00
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Automobile expense
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1,682.00
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Insurance expense
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4,266.00
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Taxes, dues expense
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8,571.00
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Fuel costs (except motor vehicle)
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3,443.00
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Mean and entertainment expense
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340.00
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Equipment rental expense
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1,174.00
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$134,694.00
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Note that in Schedule 1 the total disallowed expense for 1995
is shown as $134,694 whereas the correct figure is $134,697.
[4] Without reviewing all of the
evidence, both written and oral, I am satisfied that the figures
of the Auditor are correct. Her testimony was given in a clear
and concise manner and in my opinion there is no doubt that her
figures with respect to undeclared income and disallowed expenses
(revised as noted above) were correct. As explained the Auditor,
in the absence of proper records and accounts and considering
that the bank records were inadequate or incomplete, relied on
the gross sales amounts disclosed by the GST filings, which were
actually made by the Appellant, to arrive at the correct amount
of unreported income in 1994 and 1995. With respect to the
expenses disallowed, as detailed in Schedule 1 to the Reply,
which is reproduced above, the Auditor explained that
notwithstanding numerous requests made to the Appellant, proper
receipts, books and records detailing and justifying the expenses
were not submitted and where they were, she has allowed same. The
calculations of the Auditor with respect to unreported income in
the 1994 and 1995 years are shown in Exhibit A-3. Those with
respect to disallowed expenses are shown in Exhibit R-1.
[5] The main thrust of the
Appellant's evidence was that the sales for 1995, as
reflected by the bank deposit records were not accurate because
of what the Appellant refers to as fraudulent cheques. These
fraudulent cheques totalled $137,869 and the Appellant furnished
details of the amounts of the individual cheques and of the
persons involved in the frauds.
[6] The Appellant referred to Exhibit
A-1 which is a Judgment of the Ontario Superior Court of Justice
dated July 7, 1999 in an action for damages by the Appellant and
others, as Plaintiffs, against two corporations and two
individuals, as Defendants, alleging damages for misappropriation
of funds and loss of future business. This Judgment, referred to
as an "endorsement", states that the Plaintiffs and the
Defendants had merged their respective electrical businesses,
which was to be pursued by a new company incorporated March 15,
1995. The merged businesses were operated out of the same
premises and it was agreed that profits were to be divided
equally between the merged entities. However, the Defendants
locked the Plaintiffs out of the common business premises on
August 13, 1995 and some of the Defendants managed to
misappropriate funds from the business to themselves. The
Judgment or "endorsement" found for the Plaintiffs and
condemned the Defendants to pay to the Plaintiffs $1,000,000 in
damages for loss of business and $280,000 for funds
misappropriated. The principal Defendants and perpetrators of the
fraud were the two individual Defendants. They declared
bankruptcy and the damages assessed were never recovered.
The Appellant gave evidence of the individual cheques which
were issued against the bank account of the business in favour
principally of the two individual Defendants in the said action.
As mentioned, these fraudulent cheques totalled $137,869. This
figure is the correct figure notwithstanding the reference in the
said Judgment to $280,000.
[7] The Appellant attempts to rely on
the "fraudulent cheques" as the reason for the sales
figures being inaccurate. In other words, if the total of the
fraudulent cheques is removed from the total sales/deposits in
the bank records the sales and therefore the unreported income
would be reduced.
[8] However, counsel for the
Respondent points out that the bank records indicate total
deposits representing 1995 sales in an amount of $368,977 and if
the total of the fraudulent cheques, namely $137,869 is deducted
from that figure it results in a net sales figure of $231,108 and
that this amount is still more than the amount assessed by the
auditor relying on GST filings of $204,297. (See Exibit A-3).
Consequently, even if the fraudulent cheques are accepted as
representing the facts of the situation, the Appellant has not
been prejudiced because the amount of unreported income assessed,
based on the GST returns is less than that indicated by the bank
deposits less the fraudulent cheques.
[9] All of the foregoing relates to
1995. For 1994 no explanation was given by the Appellant to
establish that the figures used by the Auditor were wrong.
[10] The Appellant was credible but it is
clear that he has not diligently attended to keeping proper books
and records and has been remiss in the filing of his tax returns.
Moreover, notwithstanding several requests by the Auditor, proper
books, records, invoices and receipts were either missing or
inadequate or were not submitted.
[11] In a self-assessing system the burden
of proof to establish income and expenses is on the taxpayer and
in the present case that burden of proof has not been met. It is
acknowledged that verbal testimony with respect to expenses is
permitted but that verbal testimony must be clear and
unambiguous. As was stated in the case of Abramson v. Canada
(Minister of National Revenue), [1992] T.C.J. No. 786:
The burden of proof rests on the taxpayer to establish the
incorrectness of any tax assessment he opposes. The Act requires
taxpayers to keep appropriate accounting records to support the
computation of the taxes that they must pay.
...
The Appellant comes to Court with Exhibits ..., and
little else, no records, bank statements, cheque stubs, vouchers,
receipts, disbursements, ledgers, corporate books, shareholder
loan documentation, or anything that would support his
contention.
...
Counsel's plea to this Court was to the effect that if
documents cannot be provided, then the Tax Court of Canada is
there to hear viva voce evidence. I totally agree. However, the
evidence, must, on the balance of probabilities, be credible,
clear and strong to show that the assessment was wrong. In this
case, the Court concludes that there may have been expenditures,
but the Court, without stronger evidence, has no way of
determining what the expenditures were, when they were expended,
and how they related to the matters before the Court.
[12] The decision of the Federal Court of
Appeal in Njenga v. Canada, [1996] F.C.J. No. 1218 is
essentially to the same effect as the said decision of the Tax
Court of Canada.
[13] In conclusion I have not been convinced
of any inaccuracies in the figures arrived at by the Auditor,
which with respect to sales, were based on the GST filings.
Moreover, in my opinion the Auditor was correct in not allowing
the disallowed expenses for the reason that no proper books,
records, receipts, invoices nor any written proofs were submitted
and any verbal testimony relating to these expenses was
inconclusive.
[14] With respect to penalties,
notwithstanding the lack of attention to detail of the Appellant
in verifying the accuracy of his income tax returns, in my
opinion there has been no satisfactory proof that the Appellant
"knowingly, or under circumstances amounting to gross
negligence, made or participated in, assented to or acquiesced in
the making of a false statement or omission in returns by failing
to report income...." The Appellant may have been
remiss but I do not believe that in this case that constitutes a
sufficient reason to impose penalties. The Respondent has the
burden of proof on this issue and it has not been met.
Consequently there shall be no penalties for either of the years,
1994 or 1995.
[15] Also there can be no carrying back of
any non-capital losses from the 1995 to the 1992 taxation year,
as, considering the revisions resulting from the undeclared
income and the disallowed expenses for 1995 there were, in
effect, no losses which could have been carried back.
[16] In conclusion, the appeal from the
reassessment made under the Income Tax Act for the 1992
taxation year is dismissed. With respect to 1994 and 1995 the
appeals are allowed but only to the extent of deleting the
penalties imposed in the 1994 and 1995 taxation years. For
greater certainty the additional amounts to be added to the
Appellant's income are $42,217 in the 1994 taxation year and
$65,555 in the 1995 taxation year and the disallowed expenses are
as follows, namely, $0 in the 1994 taxation year after giving
effect to the Respondent's concession of allowing the
previously disallowed expense of $300; and $132,276 in the 1995
taxation year after giving effect to the Respondent's
concession of allowing an amount of $2,421 to be deducted from
the original disallowed expense of $134,697.
[12] The Respondent is entitled to its
costs.
Signed at Ottawa, Canada, this 9th day of July 2003.
O'Connor, J.
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