REASONS
FOR JUDGMENT
Hogan J.
I. Overview
[1]
The appeals of the three appellants were brought
under the Tax Court of Canada’s Informal Procedure and were heard on common
evidence.
(1) Appeals
of John F. Coombs
[2]
In the appeals of John Coombs, the Minister of
National Revenue (the “Minister”) disallowed allowable business investment
losses (“ABILs”) claimed for the 2003 and 2004 taxation years in respect of the
alleged disposition of shares; the Minister did so on the grounds that the
Appellant never owned the shares in question. The Minister also disallowed a
business loss claimed by the Appellant in connection with a business, JFC
Consulting, that the Minister says he did not actually operate. Finally, the
Minister disallowed, on the grounds that the Appellant was not an employee of
Select in those years, a credit for taxes purportedly withheld at source by
Select Travel Inc. (“Select”) in connection with employment income purportedly
earned by the Appellant in 2004 and 2005. The Minister alleges that any taxes
that were remitted on the Appellant’s behalf were paid for the sole purpose of
allowing him to claim a credit on his tax return.
[3]
The Respondent attempted to serve the Appellant
with a subpoena to compel him to appear as an adverse witness. Counsel for the
Respondent informed the Court that he was unable to locate the Appellant and
served the subpoena on his brother, Harold Coombs, who acted as the Appellant’s
agent in connection with his appeals. Harold Coombs is a licensed Chartered
Professional Accountant (“CPA”) and Certified General Accountant (“CGA”).
[4]
When questioned on why his brother failed to
appear, Harold Coombs informed the Court that he was under no duty to receive
the subpoena on behalf of his brother. He then stated that his communications
with his brother were infrequent.
[5]
The assessments of John Coombs were issued
beyond the normal reassessment period. Therefore, under
subparagraph 152(4)(a)(i) of the Income Tax Act (the “Act”),
the Respondent bears the onus of establishing that the Appellant claimed the
ABILs, business loss and employment credits for withheld tax in circumstances
amounting to neglect, carelessness or wilful default. The Minister also
assessed gross negligence penalties with respect to the ABILs and business
loss. Therefore, pursuant to subsection 163(2) of the Act, the Minister
also bears the onus of establishing that those amounts were claimed under
circumstances amounting to gross negligence.
(2) Appeals of Sun‑Air Travel Inc.
[6]
The Minister reassessed Sun‑Air Travel
Inc. (“Sun‑Air”) for its 2002 to 2006 taxation years in connection with
the following items:
|
ADJ
|
DESCRIPTION
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
1
|
Unreported Revenue (T2)
|
|
|
$52,588
|
$52,229
|
($4,095)
|
|
2
|
Personal expenses paid by Corporation
|
$13,514
|
$21,217
|
|
|
|
|
3
|
Overclaimed expenses
|
|
|
$6,862
|
$76,539
|
$38,302
|
[7]
The Minister alleges that Harold Coombs directed
and controlled the activities of Sun‑Air and caused it to pay personal
expenses in the amounts shown above incurred by himself and other members of
his family. The Minister also alleges that for 2004, 2005 and 2006 the
Appellant claimed deductions for expenses that it did not incur, that for 2004
and 2005 it failed to report revenue earned from services provided to Travelsphere
Inc. (“Travelsphere”) and Select, and that for 2006 it over‑reported
revenue.
[8]
The assessments were issued beyond the normal
reassessment period, and gross negligence penalties were also imposed by the
Minister. The Minister thus bears the onus of establishing the circumstances
that give rise to the application of subparagraph 152(4)(a)(i) and
subsection 163(2) of the Act.
(3) Select Travel Inc.
[9]
In the appeals of Select, the Minister
disallowed $29,503 of expenses claimed by Select with respect to its 2003
taxation year on the grounds that this amount represented expenses claimed on
Select’s 2003 T2 return in excess of the expenses reported on its financial
statements for that year (the “excess expenses”). The excess expenses consisted
of salary expenses overstated by $20,000 and other expenses overstated by
$9,503. The Minister also disallowed non‑capital losses claimed by Select
with respect to its 2001, 2002, 2004, 2005, 2006 and 2007 taxation years. The
non‑capital losses claimed in 2001 and 2002 were attributable to the
excess expenses claimed in 2003. The losses claimed in 2004, 2005, 2006 and
2007 were attributable to Sun‑Air and were claimed by Select on the basis
that Sun‑Air was wound up into Select in 2003. The Minister disallowed
these losses on the basis that, at the applicable time, Select did not own at least
90% of each class of the issued and outstanding shares of Sun‑Air,
notwithstanding the fact that Harold Coombs allegedly fabricated documents to
show otherwise. Furthermore, the Minister alleges that Harold Coombs wrote to
the shareholders of Sun‑Air to say that it was insolvent in 2003, which
would have made the winding‑up of Sun‑Air into Select impractical.
[10]
The Minister reassessed Select beyond the normal
reassessment period with respect to its 2001, 2002, 2003, 2004 and 2005
taxation years, and the Minister has the onus of establishing the circumstances
that give rise to the application of subparagraph 152(4)(a)(i) in
respect of those years. The Minister also applied a gross negligence penalty
with respect to the excess expenses, and the Minister has the onus of establishing
the circumstances which give rise to the application of subsection 163(2)
of the Act.
II. Evidence and Credibility Findings
(1) Testimony of Harold Coombs
[11]
At the start of the trial, the Appellants,
through their agent Harold Coombs, requested an adjournment on the basis that
the Minister’s representatives had refused to return documents allegedly seized
by John Legros, an investigator with the Canada Revenue Agency (CRA), on
September 20, 2006. The Appellants allege that the CRA’s refusal to return
some documents causes prejudice to their appeals.
[12]
I note that the Appellants challenged the
September 20, 2006 search and seizure in the Federal Court. The
Appellants’ applications were dismissed by the Federal Court, and appeals of
those decisions were dismissed by the Federal Court of Appeal.
[13]
The Appellants sought to compel Mr. Legros
and other CRA officials involved in underlying searches and seizures to testify
as adverse witnesses in their appeals. The Respondent brought a motion to quash
the notices of intent to call an adverse party as a witness. My colleague,
Justice Boyle, allowed the Respondent’s motion, ruling as follows:
[2] The
Appellants seek to compel the testimony of a number of CRA officials involved
in one of the many underlying search and seizures. The Respondent brought a
motion to quash the four notices of intent to call an adverse party. Mr. Coombs
maintains that some documents were taken by CRA, not inventoried, and not
returned. The Appellants seek to compel each of the 10 CRA officials at
the search site to testify in the appeals.
[3] In
addition to the affidavits of Mr. Coombs and Ms. Watson filed ahead of the
motion, the Court has had the benefit of hearing testimony from the office
manager of the enterprise that was searched, along with another employee of
that office, and from Mr. Ruan and Ms. Watson of the CRA, as well as, I should
add, Mr. Coombs himself, supplementing his affidavit.
[4] There
is no evidence that reasonably suggests to me that CRA’s inventory of documents
is not complete. Mr. Coombs could not describe with any specificity any
particular document. He and his affidavit spoke almost exclusively in broad
generalities as to types of missing documents.
[5] His
concern arises because a CRA official who was not named in the search warrant
attended and was seen carrying out boxes from the search premises to the CRA
vehicles. This evidence does not cause me to believe that the CRA document
inventory is suspect or questionable.
[6] The
evidence is that this official, John Legros, arrived between 1:50 and two in
the afternoon and left by the time the search had ended at 3:10 p.m. The search
started before 8:30 a.m. I accept the evidence of Mr. Ruan of the CRA and Mr.
Volochkov, who is both one of the Appellants and the office manager. None of
the affidavits or witnesses could place Mr. Legros reviewing any files, paper
or electronic, or placing anything in the boxes seized by CRA. The only
evidence is that he carried out boxes, at least two, near the end of the operation.
[7] I
accept the uncontradicted evidence of Mr. Ruan that before any boxes were
removed from the premises they were sealed by the individual seizing officer
who had filled the box. Mr. Legros’ involvement began when a van needed to be
rented to carry the 69 seized boxes. The evidence is 69 boxes were seized and
69 boxes’ contents were inventoried. Based on the evidence I have, I do not see
the existence of a Charter breach because of this involvement of
Mr. Legros.
[8] Since
I have no other evidence to even suggest that documents were seized that do not
appear on the CRA document inventory and that have not been returned to Mr.
Coombs or the Appellants, I do not see how allowing the Appellants to require
other CRA officials to come to testify in the appeals as to the documents they
seized and the conduct of the search and seizure operation will bring forward
any material testimony or other material evidence to help the Appellants
advance their position.
[9] In
addition to Ms. Watson’s affidavit regarding CRA’s conduct of the search and
seizure operation and the role of the CRA officials the Appellants wish to
compel, Ms. Watson testified today and was cross-examined by Mr. Coombs,
as did Mr. Ruan, one of the witnesses the Appellants wish to compel in the
hearing of the appeals. Mr. Ruan’s search notes are also in evidence.
[10] While
Mr. Coombs’ allegation of an illegal seizure is possible, the evidence does not
suggest to me that its probability is anything greater than the same mere
possibility that attaches to most anything.
[11] Mr. Coombs
would not accept the return by CRA of the 69 boxes seized, and he hasn’t
accessed them since they were seized; he has merely reviewed the inventory list
and found it deficient. It is hard to see how he could be so concerned that
documents were taken that aren’t on the inventory or in the boxes to be
returned if he hasn’t looked at the actual documents.
[12] The
Respondent’s motion is allowed. Costs are awarded in the fixed amount of $500
in the aggregate. This same issue was considered by Justice Bocock involving
this same search and one of the same Appellants who was represented by
Mr. Coombs at that hearing. Mr. Coombs advanced similar arguments
unsuccessfully in front of Justice Woods in the case of Coombs.
[14]
In the present appeals, I allowed Harold Coombs
considerable liberty to ask questions or advance arguments similar to those
dealt with by Justice Boyle in his earlier order. Oleg Volochkov, who was
called as a witness, admitted that he did not see Mr. Legros search for or
place documents in boxes used in effecting the seizure at the offices of Sun‑Air,
Select and Travelsphere (which are all at the same location). At best, as noted
by Justice Boyle, he saw Mr. Legros assist the seizing officers by carrying
out two boxes from the premises where the search and seizure was effected. He
admitted that he did not see Mr. Legros search for any documents or see
him place any documents in boxes.
[15]
What Mr. Volochkov did say is revealing. He
admitted that he was present at Sun‑Air’s and Select’s premises when the
CRA tried to return the seized documents, but was instructed by Harold Coombs
not to accept them. Considering the evidence as a whole, I believe that Harold
Coombs did not want to accept the return of the documents so that he could
concoct a defence based on his inability to recall relevant events because of
alleged missing documents. Indeed, the spurious claim that boxes of seized
documents have gone missing affords Harold Coombs a convenient excuse not to
answer questions concerning his alleged involvement in the matters at issue in
these appeals.
[16]
In this context, I understand why Harold Coombs
often answered embarrassing questions with statements such as (Transcript at p. 73): “I would not be able to recall.
Again, I don’t have all my documents”. I surmise that Harold Coombs
apprehended that he would be called as an adverse witness because of his guiding
and instrumental role in the matters at bar, including the preparation of
corporate documents underlying the transactions and the preparation of the
Appellants’ tax returns. I observe that Harold Coombs is no stranger to this
Court. He has acted as agent in a number of tax appeals that were dismissed on
evidence that false tax claims had been made that were based on fictitious
documents or incorrect book entries that he had had a hand in preparing or
making.
[17]
Although Harold Coombs repeatedly claimed to
have a poor memory of the events in question due to alleged missing documents, I
also observed that at times his ability to recollect was conveniently not
affected by the passage of time, particularly when it was advantageous to him
to remember. For example, Harold Coombs cross-examined Lynn Watson, the CRA
auditor, on her statement that John Coombs had been reassessed with respect to
donation claims. With pinpoint accuracy, Harold Coombs denied Ms. Watson’s
statement on the basis of his recollection of events that occurred many years
ago.
[18]
There were other notable inconsistencies which
undermined Harold Coombs’ credibility. For example, he acknowledged that Sun‑Air
had given up its licence as a travel agency in 2002 and therefore could not
provide services to the public after that date, and that he had written to Sun‑Air’s
shareholders in 2003 to tell them that Sun‑Air was insolvent. Despite
this, Sun‑Air expended significant amounts as salaries in 2004 and 2005.
Jeff Russell purportedly received $21,345 in 2004, when he was employed
elsewhere. T4 information slips were prepared, but no withholdings or
remittances were made with respect to payroll taxes. When questioned on this
particular expense, Harold Coombs first said that Mr. Russell provided sales
services. When it was pointed out that Sun‑Air was no longer registered
as a travel agency, he said he could not recall what sales services Mr. Russell
may have provided or whether he brought in any sales at all, despite
Mr. Russell’s purported salary being the highest of any Sun‑Air
employee for the year. When questioned on the fact that Mr. Russell
claimed he was not an employee and the Respondent’s allegation that the book
entries were made to allow Sun‑Air to claim a fictitious expense and to
allow Mr. Russell to claim a credit for fictitious withholding taxes, Harold
Coombs explained that Sun‑Air may have paid the expense in shares.
[19]
Considering Mr. Coombs’ testimony as a
whole, I did not find him to be a credible witness.
(2) Testimony of Lynn Watson
[20]
Ms. Watson, who was an investigator with
the CRA at the time of the audit of the Appellants, testified on behalf of the
Respondent. She explained that search and seizure operations had been conducted
at the offices of Travelsphere, Sun‑Air, Select and Dunwoody (“BDO”) and
also at the residences of Harold Coombs and other individuals associated with
the activities of Sun‑Air, Travelsphere and Select. No criminal charges
were ultimately laid and the CRA attempted to return all seized documents to
the persons from whom they were seized.
[21]
Ms. Watson prepared comprehensive T20 audit
reports and also penalty reports with respect to each item in dispute in these
appeals. In painstaking detail, she presented the financial, accounting and
shareholder information which she relied on to disallow the expenses, losses
and/or credits at issue in the matters at bar. Ms. Watson’s testimony was
not contradicted on cross‑examination. I could discern no errors,
discrepancies or inconsistencies in her presentation of her audit and penalty
reports. Her theory was that Harold Coombs was once again engaged in the
fabrication of fictitious tax benefits to advantage himself directly or
indirectly. As observed by Ms. Watson, the incorrect book entries and
corporate documents were prepared by Harold Coombs with little care for detail.
For example, he claimed that Sun‑Air commenced its winding‑up in
2003, yet, in correspondence earlier that year, he advised shareholders that
Sun‑Air was insolvent. He then continued to record expenses for Sun‑Air
in 2003 and 2004. He appears to have taken the position that Sun‑Air’s
shares were all owned by Select in 2003, yet none of the share transfer
registers in the corporate documents allow one to arrive at that conclusion.
III. Appropriateness of Penalties/Opening of Statute‑Barred
Years
[22]
The evidence shows that Harold Coombs was the
directing mind of the two corporate Appellants. Therefore, his actions are
properly imputable to the corporate Appellants.
[23]
John Coombs appears to have conveniently avoided
receipt of a subpoena to testify as an adverse witness in his own appeal. There
is not a shred of reliable evidence supporting the credits and expenses claimed
by John Coombs. On the contrary, there is considerable reliable evidence to
show that he was not entitled to the deductions, losses and credits disallowed
by the Minister. The paperwork was so poorly done that I can properly infer that
Mr. John Coombs knew that misrepresentations attributable to gross
negligence were made in his tax returns with respect to the amounts disallowed
by the Minister.
[24]
Therefore, the Minister has met the burden of
establishing that subparagraph 152(4)(a)(i) and
subsection 163(2) apply to justify gross negligence penalties and the
assessment of the Appellants beyond the normal reassessment period.
IV. Conclusion
[25]
In the appeals of John Coombs, I find that the
Minister correctly disallowed the ABILs, business loss, and employment credits
claimed by the Appellant. In the appeals of Select, I find that the Minister
correctly disallowed the excess expenses and non-capital losses. In the appeals
of Sun-Air, I find that the Minister correctly disallowed the overclaimed expenses
and personal expenses (as set out in the chart in paragraph 6 above), and
that the Minister correctly included in income the unreported revenue. With
respect to the unreported revenue, I note that the Minister relied on journal
entries purportedly transferring funds from Select and Travelsphere to Sun‑Air.
While such journal entries on their own would not always be sufficient to
establish actual income flowing into Sun‑Air, I accept the argument made
by the Respondent’s counsel that in this case, where there are multiple
instances of fraud and fabrication, and where the preparer of the entries could
not give any explanation as to their purpose, the journal entries are
sufficient to establish the existence of unreported revenue.
[26]
For all these reasons, the appeals are dismissed
and the reassessments are confirmed.
Signed at Ottawa, Canada, this 15th day of June 2015.
“Robert J. Hogan”
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