REASONS
FOR JUDGMENT
Paris J.
[1]
This is an appeal from reassessments by which
the Minister of National Revenue (the “Minister”) included unreported
business income of $62,111 and $46,008 in the Appellant’s 2008 and 2009
taxation years, respectively. The Minister also imposed gross negligence
penalties under subsection 163(2) of the Income Tax Act (“ITA”)
on the unreported income.
[2]
The reassessments were based in part on an
analysis of the deposits made to the joint bank account of the Appellant and
his spouse, Jean Osaduke, during the years in question. Any deposits from
unidentified sources were presumed by the auditor to have arisen from the Appellant’s
business of selling collectible coins and bullion. The remainder of the amounts
included in income consisted of income from eBay sales which the Appellant
disclosed to the Canada Revenue Agency (“CRA”) appeals division during the
objection process.
[3]
The Appellant admits that he failed to report any
income from his business activities in his returns for the years in question,
but says that the unreported amounts were much less than what was assessed. The
Appellant says that his unreported income in 2008 was $17,123 in 2008 and
$1,583 in 2009 and that the remainder of the unidentified deposits were from
gambling winnings, gifts from his father, proceeds from the sale of personal
items and from loose change he had accumulated.
[4]
The questions before the Court are i) whether
the Appellant has met the onus upon him to show, on a balance of probabilities,
that the true amount of his business income in 2008 and 2009 was less than
assessed and ii) whether the Respondent has shown that the failure to report
the business income was done knowingly or in circumstances amounting to gross
negligence within the meaning of subsection 163(2).
[5]
The Appellant, his spouse and his son, Steven
Osaduke, testified at the hearing. The CRA auditor, Duwayne Renouf, also
testified.
[6]
The Appellant gave evidence that he operated a
coin and foreign exchange store at various locations in Kitchener up to 2005, at
which point he declared personal bankruptcy. After the bankruptcy, his son set
up a foreign exchange business which operated in Kitchener and later in
Mississauga, as well.
[7]
The Appellant worked as an employee in his son’s
business and sold coins on his own behalf from his son’s store. He also said he
began selling coins and paper money on eBay in March 2008, through an account
he and his son had used in prior years, and which was connected to a BMO bank
account in the name of his son’s company. He testified that he chose to use the
old eBay account because the vendor ratings associated with that account were
very favourable, and that it had taken some time to develop those ratings when
the account was being used in the earlier years. Vendor ratings are a system
used on eBay whereby customers of the vendor provide feedback on the quality of
service they received from the vendor and their overall satisfaction in dealing
with the vendor. Those ratings are displayed along with the items listed for
sale and presumably allow prospective purchasers to guage vendor reliability.
[8]
The Appellant testified that he was advised by
eBay that he could not change the bank account associated with the eBay account
and, since he wanted to keep that account for the reasons given, he was
required to process all of his sales through his son’s company’s bank account.
He said that his son would pay him the proceeds from the eBay sales in cash
withdrawn from the BMO account and that, he, the Appellant, deposited part of
the cash into the joint account he held with his spouse. According to the
Appellant, the remainder was used to make purchases of coins for his business.
[9]
I note that the Appellant’s explanation of the
circumstances surrounding the creation of the eBay account is not supported by
the documents submitted at the hearing unreliable. According to screen shots of
certain of the Appellant’s listings on eBay, the Appellant’s account was opened
in October 2007, rather than a number of years before, as the Appellant
suggested. Being operative for only a few months before 2008, it is unlikely it
would have built up a large number of vendor ratings. I also find it unlikely
that an eBay vendor could not change the bank account associated with the eBay
account.
[10]
The Appellant also gave evidence that his son,
Steven, did the day-to-day bookkeeping for his (the Appellant’s) business on
computer but that in April or May 2009, the hard drive failed and the business
records could not be retrieved. After that, Steven was too busy to try to
recreate the bookkeeping records and the Appellant said that the matter “just got forgotten.” He said he always intended to report the income but that “it never got done.” The 2008 tax return was filed on August 6, 2009 (Exhibit R-1) and
the 2009 return on April 24, 2010 (Exhibit R‑2). Those returns were
prepared for the Appellant by a professional accountant.
[11]
After the audit and just before the Appellant
filed the Notice of Objection to the reassessments, he said he and Steven found
an old archived copy of the bookkeeping data, which was used to produce income
and expense statements for the business activity.
[12]
Steven Osaduke, however, testified that he
prepared the income and expense statements from data obtained from eBay, since
the Appellant’s original computer records were lost. He also said that he did
not do the day-to-day computer bookkeeping entries for the Appellant because he
did not have time to do so. When asked to explain how he was able to include on
the statements the amounts of sales from in-store transactions conducted by his
father, Steve Osaduke said his father had handwritten notes of those sales that
he used. No such notes of sales transactions were even mentioned by the
Appellant and none were produced in Court.
[13]
In all, the explanations given by the Appellant
and his son regarding the Appellant’s record keeping, the loss of those records
and the manner in which the income and expense statements were prepared were
convoluted, confusing and inconsistent. I find that the income and expense statements
produced in evidence by the Appellant for his business are not reliable.
[14]
I also find Steven Osaduke’s testimony concerning
the payments he allegedly made to his father and out of his BMO account to be
unreliable. Steven Osaduke produced a list of what he said were cash payments
he made out of the account of money received for the Appellant’s eBay sales.
Those amounts could not be reconciled to the eBay sales spreadsheets put into
evidence by the Appellant or to the income and expense statements. Also, at one
point Steven Osaduke stated that the amounts shown on the list were in US
funds, although taken from a Canadian dollar account. He had no explanation of
how the amounts were converted to U.S. dollar figures. In addition, Steven
Osaduke did not bring any source material such as copies of his BMO account
statements or Quicken accounting records to corroborate his testimony. Finally,
I find it highly implausible that Steven Osaduke would have given these large
amounts – up to $11,000- to the Appellant in cash.
[15]
I also have difficulty believing the Appellant’s
testimony concerning the loss of his business records and his intention to
report the business income as soon as possible after filing his returns. First,
the auditor, Mr. Renouf, testified that the Appellant initially denied having
income from on-line sales and only admitted it after the auditor told him that
the CRA had records from eBay showing those sales. Next, the loss of records in
April or May 2009, would not explain why the Appellant had no records for the
remainder of 2009 to show the auditor. Finally, there was no indication that
the Appellant ever revealed the loss of records to the accountant who prepared
his returns. The accountant was not called as a witness and I draw the
inference that his evidence would not have assisted the Appellant. It would
seem likely that a person in the Appellant’s situation, having lost key
accounting records necessary for reporting income, would bring that fact to the
attention of the person preparing his return and would seek advice and
assistance in that regard.
[16]
I accept that the Appellant’s revenue and
expenses (including purchases) relating to his eBay and in-store sales for 2008
were correctly determined by the Minister as set out in Schedule A to the Reply
to the Notice of Appeal. The eBay sales figures correspond to the information
obtained by the CRA from eBay and the in‑store sales and expense figures
were those indicated by the Appellant. For 2009, the Minister also accepted the
Appellant’s eBay sales figures and expense amounts (including purchases).
[17]
With respect to eBay sales in 2008, the
Appellant maintained that approximately $5,500 was received for items belonging
to a friend, Tim Clarke, who helped him with the eBay listings. However, Mr.
Clarke was not called as a witness to corroborate this allegation and again I
draw the inference that Mr. Clarke’s testimony would not have assisted the
Appellant. I am also puzzled how the Appellant would be able to identify these
amounts since nothing in the eBay records connect the sales to Mr. Clarke.
Furthermore, there was no proof of payment of any proceeds to him. I would expect
Steven Osaduke to have obtained written receipts for any cash payments made to
Mr. Clarke if such payments had been made.
[18]
It remains to be determined whether the
Appellant has shown that the unidentified bank deposits came from non-taxable
sources.
[19]
The testimony given by the witnesses regarding
gambling wins, gifts and sales of Royal Doulton figurines and nautical
collectibles was uncorroborated by any written records or by any unrelated
parties.
[20]
I find it highly implausible that the Appellant
and his wife sold $27,000 worth of figurines and collectibles, as they say they
did in 2008 and 2009. The reason given for the sales was that they were in
financial difficulty after the Appellant declared bankruptcy. However, the
bankruptcy occurred in 2005, at least two years before the alleged sales began.
I note, too, that the Appellant purchased a house in late 2009, which does not
support the allegation of financial difficulties around that time. Also, the
evidence of the Appellant and his spouse that the items were sold in 2008 and
2009 at flea markets and to friends conflicts with the statements by Jean
Osaduke to the CRA in 2012 that the sales began in early 2006 and were sold in
part through an auction house. In her testimony in Court, Jean Osaduke said she
didn’t recall selling any of the items through the auction house but offered no
explanation for her earlier statement to the CRA. As well, I find it unlikely
that sales of the collectibles would have been done largely at flea markets if
the Appellant and his spouse wished to obtain the best price for them. I
believe it is more likely that they would have used the same online sale method
that the Appellant used to sell coins if they were disposing of the items. Also
there was no corroboration of the sales allegedly made to friends.
[21]
I also find the evidence regarding cash gifts
from the Appellant’s father as well as that relating to gambling winnings
unconvincing. While the Appellant now says he and his spouse received
substantial amounts from his father for Christmas each year and to assist with
the purchase of the house in 2009, this source of funds was never brought to
the attention of the auditor. The testimony of the Appellant and his spouse
concerning the gambling winnings is, in my view, implausible. On the one hand,
they say they were in very difficult financial circumstances in 2008 and 2009,
but on the other that they went gambling a couple of times a week. As well, on
the basis of the contradictions, inconsistencies and implausibilities in their
testimony on other points, I find they were not credible witnesses.
[22]
As a last source of non-taxable income, the
Appellant also testified that an unidentified deposit of $3,000 in August 2009
was made up of loose change that he had accumulated at home. Apart from the
fact that this amount would represent a very large quantity of coins, it is
extremely difficult to believe that the value of the loose change would add up
to the round figure of $3,000. This again is an illustration of the Appellant’s
lack of credibility.
[23]
I do accept, however, the submission of the
Appellant’s counsel that there is likely a double counting of income in 2008
because both the unidentified deposits and the revenue from the eBay and
in-store sales were added separately to income. It is reasonable to assume that
at least a portion of the unidentified deposits came from the eBay and in-store
sales. The evidence shows that a portion of the revenue from these sales was
not deposited to the account but instead used to make cash purchases of
additional inventory. The bank records confirm that little cash was withdrawn in
2008 and 2009. The amount allowed for cash purchases of inventory was $44,532
in 2008, a figure supplied by the Appellant himself. The excess of revenue from
eBay and in-store sales (net of eBay expenses and eBay refunds) over the cash
purchases is $22,285. By taking into account the likelihood of this amount
being double counted, the unreported business income would be reduced from
$62,111 to $39,488 in 2008.
[24]
In 2009, the Appellant’s eBay sales minus cash
purchases and eBay expenses were $1,583. The unreported income should be
reduced by this amount for the same reason set out above. This results in
unreported income of $44,425 in 2009.
[25]
On the question of penalties, the evidence is
clear that the Appellant chose not to report his business income in his 2008
and 2009 tax returns. He filed those returns without including the business
income because he said he had lost his records that were maintained on a
computer that stopped working. I do not accept this version of events because I
find that a computer malfunction in or around May of 2009 would not have
prevented the Appellant from reconstructing his sales and purchases (which
according to Steven Osaduke is eventually what was done.) This task would have
been easier for the 2009 year return because only four months of records would
have been lost. On the other hand, if the data necessary to determine business
income was in fact retrieved from the computer hard drive (as the Appellant
says), there is no reason this could not have been done before the returns were
filed. There is also no satisfactory explanation why, if the records had been
lost, nothing was done about it until the CRA auditor arrived in 2012. In any
event, I highly doubt the Appellant had the business records he said he did,
given the discrepancy between his testimony and that of his son concerning who
did the day-to-day bookkeeping for the Appellant.
[26]
Section 163(2) of the Act provides for a
penalty where a “person
knowingly or in circumstances amounting to gross negligence has made…a false
statement or omission in a return…”
[27]
I am satisfied that the Respondent has met the
onus of proving that the Appellant knowingly omitted to report his business
income in both years. I am also satisfied that the Respondent has shown that at
least $39,488 of business income was not declared by the Appellant in his 2008
return and $44,425 of business income was not declared by him in his 2009
return. As these amounts are lower than what was reassessed the penalties must
be adjusted.
[28]
The appeal is allowed, in part, without costs,
and the matters are referred back to the Minister for reassessment on the basis
that the unreported income and penalties be adjusted in accordance with these
reasons.
Signed at Ottawa,
Canada this 23rd day of September 2016.
“B.Paris”
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