Moore v. The Queen, docket 1999-2164(IT)G

Date: 20011220

Docket: 1999-2164-IT-G

BETWEEN:

GERRI MOORE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

O'Connor, J.T.C.C.

[1]            These appeals were heard at Edmonton, Alberta on October 29, 30 and 31, 2001.

[2]            There are essentially seven issues, namely:

1.              Were the reassessments in question for the years 1991, 1992 and 1993 statute-barred as contemplated in subsection 152(4) of the Income Tax Act ("Act"); they will be statute-barred unless the taxpayer or person filing the returns in question made any misrepresentation attributable to neglect, carelessness or wilful default or has committed any fraud in filing the returns or supplying information under the Act.

In my opinion, the Respondent bears the onus of establishing that the Appellant has made a misrepresentation as contemplated in subsection 152(4) or committed a fraud. It is my opinion, that that onus has been discharged at least to the extent of establishing misrepresentation. The Appellant may have been naive in following the advice of her bookkeeper but nevertheless there was misrepresentation and consequently the reassessments in question were not statute-barred.

2.              The second issue is whether the Minister was correct in imposing penalties as contemplated in subsection 163(2) of the Act. Under that subsection a person who knowingly or under circumstances amounting to gross negligence has made or has participated in, assented to or acquiesced in the making of a false statement or omission in a return is liable for penalties. The onus, once again, is on the Respondent and, in my opinion, that onus was not met. I am of the view that the Appellant was not grossly negligent nor did she otherwise fit the conditions contemplated in subsection 163(2). The result is that the penalties were wrongly levied, and are to be deleted from the reassessments.

3.              The third issue is whether the Appellant carried on her film production operations and her media services as an independent contractor with the Saskatchewan Council of Cultural Organizations ("SCCO") and Sask Film in partnership with her husband, Steve Moore, in 1992 and 1993 or as a sole proprietor. In 1991, the Appellant did not treat her husband as her partner but rather paid him as a subcontractor carrying out TV and film production operations. The Appellant explained she did not fully appreciate the relationship in 1991 but realized the extent of her husband's participation in 1992 and 1993 and determined it constituted a partnership.

Having considered all of the evidence, I am satisfied that the Appellant's income in 1992 and 1993 was earned by the partnership carried on between her husband and herself. It was the evidence of the Appellant that in the 1991 and 1992 years all her income was derived from her media consulting services as an independent contactor with SCCO and Sask Film. However her husband contributed to this source of income by carrying out certain managerial duties away from the premises of these entities. The husband was also responsible for much of the paperwork that went into the business, the preparation of returns and in fact he incurred most of the expenses throughout the years in question relative to the film and TV production operation. He travelled frequently in efforts to get business and make the production operation successful. It was also established that a small amount of income in 1993 derived from the TV and film production ventures of the Appellant and her husband. Considerable evidence was led on the nature and scope of these production ventures but I do not consider it necessary to review that in detail. Suffice it to say that during the years in question the Appellant had her income mainly from SCCO and Sask Film in her role as an independent contractor but at the same time she was carrying on with her husband these various production ventures and incurring considerable expense in attempting to bring the ventures to a profitable state.

4.              The fourth issue concerns whether the Appellant had a reasonable expectation of profit, which involves an analysis of whether, in the years in question, she had a source of income via the alleged partnership.

On the issue of reasonable expectation of profit and source of income although the Appellant was furnished with an office at the premises of SCCO and Sask Films and was entitled to reimbursement of certain expenses, precise details of the expenses reimbursed were not presented in any detail. On balance although two separate businesses were being carried on, they were carried on by the Appellant in partnership with her husband under the name "Moonstar Productions" and, in my opinion, the Appellant in 1991 and the partnership in 1992 and 1993 had a reasonable expectation of profit. Reference is made to the agreement between Sask Film and Moonstar Productions at Tab 9 of Exhibit A-1.

5.              The fifth issue is whether all of the expenses claimed were actually incurred for the businesses and were reasonable in the circumstances.

As to that issue, the Appellant had the onus and, in my opinion, not all of the expenses claimed were adequately proven. In particular, I was not satisfied with the explanation given as to the cost of goods sold in 1992 and 1993 in the amounts of $12,011.44 in 1992 and $12,611.00 in 1993. The Appellant and the partnership were not producing and selling goods. Consequently the total allowable expenses are to be reduced by $12,011.44 in 1992 and $12,611.00 in 1993.

6.              The sixth issue is whether there was a rental loss incurred in 1993 of $14,850.14 and was it properly deductible.

With respect to this, I am satisfied that it should not be allowed as the Appellant was not carrying on a rental operation. She was a co-owner of the property in question with one Maria Campbell, which they originally acquired in 1970 at a total cost of $25,000.00 for purposes of putting on shows. However, in 1994 the said Maria Campbell essentially took over possession of the property as her own residence and did not pay the Appellant as her co-owner any rent. This is an unfortunate circumstance but in my opinion clearly leads to the conclusion that there was no rental operation being carried on in that year. In fact there was no lease agreed upon.

7.              The seventh issue relates to the numerous other expenses claimed and the lack of vouchers in several cases. Further were the expenses reasonable? The evidence given by the Appellant's husband with respect to certain expenses was incomplete and not convincing. The Appellant's husband was questioned on two large ledgers which taken together contain records measuring five inches thick. One ledger contains details of numerous expenses. The other ledger contains diary records. The Appellant's husband selected some expenses and attempted to match the expenses with what went on in the diary records, thus attempting to correlate the two. Only certain expenses were selected as it would have been impossible to review every expense and match it with the diary records. The auditor presumably reviewed most expenses and his unfavourable comments ("fictitious", "overstated", "not vouchered", etc.) are contained at Tab 7 of Exhibit A-1.

                Notwithstanding the foregoing difficulties the auditor was nevertheless satisfied to disallow only certain expenses and I believe it correct to follow that approach.

[3]            Consequently the appeals are allowed and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment on the following bases:

1.              The reassessments for 1991, 1992 and 1993 were not statute-barred pursuant to subsection 152(4) of the Act.

2.              The Appellant is not liable for penalties pursuant to subsection 163(2) of the Act.

3.              The various operations, although consisting of separate activities were carried out by the Appellant and her husband in partnership in 1992 and 1993.

4.              There was a reasonable expectation of profit.

5.              With respect to Schedule A of the Reply re 1991, audit correctly allowed expenses of $5,298.94 to arrive at net income of $56,951.06.

6.              With respect to Schedule B to the Reply re 1992 the cost of goods sold, $12,011.40, was correctly disallowed making gross profit $64,416. Audit allowed expenses of $3,833.40 and business use of home of $1,332.01 to correctly arrive at net income after adjustment of $59,250.59 which is to be divided equally between the Appellant and her husband, Steve Moore.

7.              With respect to Schedule C to the Reply re 1993 the cost of goods sold, $12,611 was correctly disallowed making gross profit $70,418. Audit allowed expenses of $6,030.36 and business use of home of $1,500 to arrive at net income after adjustment of $62,887.74 which is to be divided equally between the Appellant and her husband, Steve Moore.

8.              The claim for a $14,850.14 rental loss is denied for the reasons set forth above.

[4]            Considering the divided results there shall be no costs.

                Signed at Ottawa, Canada, this 20^th day of December, 2001.

"T. O'Connor"

J.T.C.C.

COURT FILE NO.:                                                 1999-2164(IT)G

STYLE OF CAUSE:                                               Gerri Moore v. The Queen

PLACE OF HEARING:                                         Edmonton, Alberta

DATE OF HEARING:                                           October 29, 30 and 31, 2001

REASONS FOR JUDGMENT BY:                      The Honourable Judge T. O'Connor

DATE OF JUDGMENT:                                       December 20, 2001.

APPEARANCES:

Counsel for the Appellant:                  R. Tim Hay

Counsel for the Respondent:              R. Scott McDougall

COUNSEL OF RECORD:

For the Appellant:                

Name:                Jon D. Gilbert

Firm:                  Felesky Flynn

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

1999-2164(IT)G

BETWEEN:

GERRI MOORE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on October 29, 30 and 31, 2001 at Edmonton, Alberta by

the Honourable Judge Terrence O'Connor

Appearances

Counsel for the Appellant:                             R. Tim Hay

Counsel for the Respondent:                         R. Scott McDougall

JUDGMENT

          The appeals from the reassessments made under the Income Tax Act for the 1991, 1992 and 1993 taxation years are allowed, and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 20^th day of December, 2001.

"T. O'Connor"

J.T.C.C.