Date: 20010515
Docket: 94-2224-IT-I
BETWEEN:
LINDA DIANNE ARDITO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1]
Linda Dianne Ardito appeals income tax assessments for 1989 and
1990 in which the Minister of National Revenue
("Minister") disallowed business expenses claimed by
Mrs. Ardito on the basis she did not carry on a business in 1989
and 1990 and imposed penalties of $2,220.10 and $1,978.15,
respectively pursuant to subsection 163(2) of the Income Tax
Act ("Act").
[2]
The appellant, ably represented by counsel, did not lead any
direct evidence with respect to the deductibility of expenses.
She was called by the Crown to testify since the Crown had the
burden of establishing the facts justifying the assessments of
the penalties: subsection 163(3).
[3]
Mrs. Ardito purported to start a secretarial and typing business
in 1989 to help students. She would type papers and essays at
first for her daughter's friends and later, by word of
mouth, for other high school and university students. (In 1989
her daughter was completing high school and in 1990 she was
studying at McMaster University). Mrs. Ardito also recalled
having non-student clients: Country Wide Glass, Black Tie
Furnishings, Southbrooke Retirement Home, Lane Appliances and
House of Braemar.
[4]
Mrs. Ardito has a grade 13 Ontario high school education. She
operated the business out of her home and had a computer and
printer. By 1990 her office also included bookshelves and office
furniture.
[5]
Because she did not have any accounting background Mrs. Ardito
engaged the services of one Lenore Job to prepare her income tax
returns for 1989, 1990 and 1991. She had heard of Ms. Job through
her husband and friends. She discussed her activities with Ms.
Job and provided her with information, including a bundle of
receipts. When the returns were completed and ready for her
signature, Mrs. Ardito "did not sit down" with
someone at Ms. Job's firm to review the returns. She looked
over the 1989 return but it "meant nothing to me".
The appellant never questioned Ms. Job's ability to prepare
the returns.
[6]
Respondent's counsel questioned the appellant's
Statement of Income and Expenses included with her 1989 tax
return.
[7]
Mrs. Ardito reported income of $2,527. She said she kept a book
recording her sales but did not know where the book was.
Apparently Revenue Canada, at the time, seized documents from Ms.
Job's premises and if any of the documents were those of
Mrs. Ardito, they were not returned to her before trial, counsel
advised. In his submissions, appellant's counsel
acknowledged that it is plausible that Ms. Job's firm was
remiss in its duties to keep records in order. However, there is
no evidence that Mrs. Ardito's salesbooks were in the
custody of the Crown at time of trial.
[8]
Expenses aggregating $21,021 were claimed by Mrs. Ardito for
1989. The amount of expenses "did not catch [her]
attention" when she signed her 1989 tax return. She was not
curious why she was entitled to a tax refund of $6,623.
[9]
The appellant could not recollect what her advertising expenses
of $2,893 represented. Her advertising consisted of flyers and
word of mouth.
[10]
Automobile expenses by Mrs. Ardito in 1989 were $7,587. This
amount "did not catch my eye" since, she said, she
was not a bookkeeper. She did not know the reason the use of the
automobile was allocated as to 53 per cent personal and the
balance for business.
[11]
Mrs. Ardito used her personal bank account for the business
in 1989 and claimed bank charges of $296.48.
[12]
Mrs. Ardito could not recall expenses of $2,796 for repairs
and maintenance, although she believes she might have purchased a
new printer, a capital expense, and upgraded her computer.
[13] No person
was employed by Mrs. Ardito in 1989 but she claimed salary
and wage expenses of $1,800. She purchased supplies when she
started the business but could not justify the claim for $2,998,
more than her income for the year.
[14] Similar
claims were made for 1990. On sales of $2,980, Mrs. Ardito
claimed a loss of $16,418. She claimed "purchases" of
$1,812, but did not know what the purchases represented, other
than paper and folders. Advertising and promotion expenses were
$3,766. She stated the distribution of flyers was "more
extensive" than in 1989; she not only had students as
customers but commercial customers as well.
[15]
Mrs. Ardito claimed an insurance expense of $1,657 in 1990,
but could not recall the nature of the insurance. She
acknowledged she did not have insurance for the business.
[16] The
automobile expenses of $3,387 claimed by Mrs. Ardito in 1990
did not include an additional expense for the automobile of
$3,738 for depreciation. She used the car for delivery and
attending at various businesses. She also deducted $457.41 for
"work clothing", $1,511 as office expenses and
$686.67 for supplies. She was unable to recollect what the office
expenses represented.
[17] In reply
to respondent's counsel, Mrs. Ardito stated that she
did not believe the figures on her income tax return for 1990
were "untoward at the time" she signed the return.
She relied on Ms. Job; she, herself, did not understand financial
statements.
[18] Mr.
William Stark, a tax auditor with the Canada Customs and Revenue
Agency ("CCRA"), the successor to Revenue Canada,
stated that Mrs. Ardito was assessed penalties because she
claimed losses on a business that did not exist. The expenses
claimed were "planted"; she claimed personal expenses
as business expenses.
[19] Revenue
Canada found no evidence of revenue by Mrs. Ardito during
the years in appeal. There was no evidence of sales.
Mr. Stark explained that usually Revenue Canada (or the
CCRA) expects to see sales invoices including description of
services provided and the fee, as well bank deposit slips and a
sales journal. None of this was available from Mrs. Ardito.
Revenue Canada authorities performed an audit at Ms. Job's
office and "she provided what she had to us". She did
not provide anything to verify sales for 1989 and 1990. Nor did
she provide any documents to support the expenses claimed for
1989, although "some" documents were provided for
1990.
[20] According
to Mr. Stark, Mrs. Ardito was advised at a meeting in
October 1992 that Revenue Canada recommended assessments based on
the information taken from Ms. Job. In reply to questions by
Revenue Canada officers, Mrs. Ardito indicated she was not
aware how figures were calculated in her tax returns; she said
she gave everything to Ms. Job. She could not advise what
documents, if any, were missing.
[21] Mrs.
Ardito's situation is unlike that of
Mr. Cyrus Udell[1] who was assessed a similar penalty due to the apparent
gross negligence of his accountant. Mr. Udell, unlike Mrs.
Ardito, recorded his transactions meticulously in an account book
and all errors in his tax return were those of the accountant.
Mr. Udell assumed the losses were due to capital cost
allowances. Mrs. Ardito's records were apparently
deficient. Upon reviewing her tax returns before signing them
- if she reviewed them - she chose to ignore even
inordinately large amounts of specific expenses. One need not
have any accounting experience to acknowledge to one's self
what one may have reasonably spent over the year for advertising
or repairs and maintenance or salary or supplies or insurance, if
one had insurance, for example. Mrs. Ardito chose not to
question the questionable. She was privy to the errors of the
accountant.[2] She
relied on her accountant because she liked the result, a tax
refund.
[22] Mrs.
Ardito's neglect in reviewing her tax returns, including
the failure to have proper or even basic records for the
accountant, discussing the returns with the accountant and
observing what was entered on the returns constituted a greater
neglect than the failure to use reasonable care as described by
Strayer J. (as he then was) in Venne v. The Queen[3]. It involved a high
degree of negligence tantamount to intentional acting. She was
indifferent as to whether she complied with the law or not. She
was grossly negligent and the penalties are well founded.
[23] The
appeals are dismissed.
Signed at Ottawa, Canada, this 15th day of May
2001.
"Gerald J. Rip"
J.T.C.C.
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