Citation: 2015 TCC 51
Date: 20150227
Docket: 2013-2647(IT)I
BETWEEN:
DIETER
BACHMANN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket:
2013-2652(IT)I
AND BETWEEN:
ALFONS
BACHMANN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2013-2773(IT)I
AND BETWEEN:
BACHMANN
AUTOMOTIVE LIMITED,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
These are appeals of assessments made under the Income Tax Act concerning
alleged unreported income. For the most part, the assessments are based on a
bank deposit analysis.
[2]
The appellants are two brothers, Dieter and
Alfons Bachmann, and a corporation wholly-owned by them, Bachmann Automotive
Limited. The assessments relate to the 2007 and 2008 taxation years.
[3]
In the bank deposit analysis, the appellants’
bank deposits were compared with the gross income reported by the corporation.
To the extent that the deposits were not explained to the satisfaction of the
Canada Revenue Agency (CRA), the amounts were added to the corporation’s income
on the assumption that the source of the funds was revenue from the
corporation’s business. In addition to assessing the corporation, the
shareholders were assessed on the assumption that unexplained deposits in the
shareholders’ personal bank accounts were benefits received by the shareholders
from the corporation.
[4]
The assessments also included relatively small
amounts that were added to the shareholders’ income on the assumption that benefits
were received as a result of incorrect accounting entries to the shareholders’
loan accounts.
[5]
The Minister also assessed gross negligence
penalties with respect to all of the amounts added to income.
[6]
The main submission of the appellants is that they
had reported all business income and that the deposits were from personal
sources such as savings and proceeds from the sale of personal assets.
[7]
For ease of reference, in these reasons Bachmann
Automotive Limited will be referred to as the “Corporation,” and Dieter and
Alfons Bachmann will be referred to as “Dieter,” “Alfons,” and collectively, the “Shareholders.”
Background
[8]
In the relevant period, the Corporation’s
business consisted of auto repairs and used car sales in Caledonia, Ontario. The Shareholders formed the Corporation in 2003 as equal shareholders.
[9]
The Shareholders were the only persons working
in the business and they were both active. Dieter was the president of the
Corporation and part of his duties involved doing the banking. A significant amount
of the Corporation’s business was transacted in cash.
[10]
The financial records for the Corporation were
prepared by third parties. Once a month, a bookkeeper prepared a general ledger
based on invoices and receipts provided by the Shareholders. Once a year, the
financial statements were prepared by a certified general accountant who also
prepared income tax returns for all three appellants.
The assessments
[11]
This section describes the amounts added to
income by the Minister as well as the income reported in the income tax returns
by the appellants.
[12]
With respect to the Corporation’s income, for
the 2007 and 2008 taxation years the Corporation reported gross business income
of $82,388 and $87,024 and net business income of $2,165 and $1,203, respectively.
[13]
In the assessments, the Minister assumed that
the gross and net income of the Corporation were each under-reported by $44,440
and $39,504 for the 2007 and 2008 taxation years, respectively, and these
amounts were added to income pursuant to section 9 of the Act.
[14]
As for the Shareholders, their income tax
returns did not report any income from the Corporation. However, the returns
did report income from a partnership involved in scrap sales. Each
Shareholder’s share of the partnership income was reported to be $3,000 and
$3,500 for the 2007 and 2008 taxation years, respectively.
[15]
The assessments issued to Dieter assumed that he
received shareholder benefits in the amounts of $20,529 and $15,255 for the
2007 and 2008 taxation years, respectively. The bulk of these amounts represent
deposits that were not explained to the satisfaction of the CRA and amounts
incorrectly added to a shareholder’s loan account in the amounts of $2,507 and
$2,206, respectively.
[16]
The assessments issued to Alfons assumed that he
received shareholder benefits in the amounts of $22,412 and $25,968,
respectively. As with Dieter, the bulk of these amounts represent deposits that
were not explained to the satisfaction of the CRA and amounts incorrectly added
to a shareholder’s loan account in the amounts of $2,507 and $2,206,
respectively.
[17]
All of these amounts were added to the
Shareholders’ income pursuant to subsection 15(1) of the Act.
[18]
I am not aware of the amount of penalties that
were assessed. The Reply indicates that gross negligence penalties were
assessed pursuant to subsection 163(2) of the Act with respect to all of the amounts
that were added to income.
Discussion re
unreported income
[19]
The general basis for the assessments was a bank
deposit analysis. In the relevant taxation years, each of the appellants had
made bank deposits which were not explained to the satisfaction of the CRA and
the CRA assumed that these deposits (as well as some expenses paid with cash)
were sourced from revenue from the Corporation’s business.
[20]
This Court has recognized that in an appropriate
case a bank deposit analysis is an acceptable method to compute income. In this
case, there is a large discrepancy between the gross income reported by the
Corporation and the amounts added to income pursuant to the bank deposit
analysis. I accept that it was appropriate to use this method in this case.
[21]
The unexplained deposits in the Corporation’s
bank account are relatively small, $5,147.67 for the 2007 taxation year and
$1,877 for the 2008 taxation year (includes a deposit prepared but not
deposited).
[22]
The unexplained deposits in the Shareholders’ personal
bank accounts make up the majority of the amounts assessed. Deposits were
generally made by the Shareholders once a month or more.
[23]
The appellants submit that there was no business
income that was not reported.
[24]
The Shareholders testified that the so-called
unexplained deposits were sourced from an accumulation of savings and sales of
personal assets over the years. Alfons stated that the Corporation went through
tough times during the well-publicized aboriginal dispute in Caledonia and that
he had to sell personal assets that were accumulated during many years of
employment. Each Shareholder provided a rough handwritten list of personal
assets that were sold and they provided evidence of significant RRSP
withdrawals in 2003. In addition, Dieter introduced evidence of a $6,000
insurance payment that was received in 2005 relating to a stolen vehicle.
[25]
The appellants have the burden to establish a prima facie
case. That burden has not been met.
[26]
In order for the appellants to succeed, I would
have to accept that the Shareholders kept substantial amounts of cash on hand
over the years and deposited it into bank accounts in later years. Alfons
testified that the deposits were made when funds were needed to pay bills.
[27]
On its face, the Shareholders’ testimony is
far-fetched and defies common sense. I find it extremely unlikely that the
Shareholders would acquire significant amounts of cash and keep it on hand, sometimes
for several years, until needed for expenses.
[28]
In addition, the testimony was not sufficiently
detailed to be believable and there is no reliable supporting evidence to link
the deposits to a source of funds.
[29]
Based on the evidence as a whole, I find that
the appellants have failed to satisfy the burden of proof.
[30]
The appellants made several arguments in support
of their position. They submitted that taxpayers are not required to keep
receipts of sales of personal assets. I accept that taxpayers often do not keep
receipts for sales of personal assets. However, the lack of reliable supporting
evidence is just one factor in these appeals. There are other reasons for my
conclusion that the appellants’ evidence is not believable.
[31]
The appellants also submit that the bank deposit
analysis uses faulty methodology in that the Minister failed to adjust a
variance in the 2007 taxation year of the Corporation that was offset in the
subsequent year. I accept the respondent’s explanation of this point. Counsel
noted that the 2008 variance was credited against the Shareholder deposits for
the 2008 taxation year. It would be double counting to make a further
adjustment for 2007.
[32]
The appellants further submit that a supporting
calculation undertaken by the Minister, called “Rough Source and Application of
Funds” is misleading because it uses Statistics Canada information as to
expenses rather than using actual figures. As I understand it, this calculation
was used to provide additional information, and it was not the primary basis
for the assessments which was the bank deposit analysis. Accordingly, any
deficiencies with the supplementary method do not justify vacating the
assessments.
[33]
Before leaving this issue, it is appropriate to
consider whether the Minister correctly characterized the Shareholder deposits
as “benefits” that should be added to income. This issue was not addressed by
the parties.
[34]
There is case law to the effect that amounts
appropriated by shareholders are not necessarily benefits when there are
outstanding amounts owed by a corporation to the shareholders. This case law is
relevant in these appeals because the financial statements of the Corporation
indicate that substantial amounts are owed to the Shareholders.
[35]
This case law would be applicable if the
appropriations by the Shareholders were due to inadvertence: The Queen v. Franklin, 2002 FCA 38. However, in Franklin, Rothstein J.A. pointed
out that the decision was not to be interpreted to condone negligent
record-keeping or deliberate actions (at para. 8). This exception is applicable
in this case, because the evidence as a whole suggests that the failure to report
the income was deliberate. Accordingly, I would conclude that the
appropriations by the Shareholders determined by the bank deposit analysis are
“benefits” which are to be included in income pursuant to subsection 15(1) of
the Act.
[36]
I now turn to the relatively small amounts that
were incorrectly added to shareholder loan accounts. The question is whether these
amounts were correctly added to income as shareholder benefits.
[37]
These amounts relate to fuel expenses paid for
by the Corporation, but were recorded in the financial statements as if they
were paid for by the Shareholders. The financial statements reflected these
amounts as due to the Shareholders.
[38]
The testimony regarding the shareholder loan
accounts was extremely brief. The Shareholders basically claimed to have no
understanding of the accounting treatment.
[39]
The Shareholders impressed me as being capable
businessmen, although not sophisticated in financial matters. When the
circumstances of this case are viewed as a whole, I find that the Shareholders
did not take sufficient care to ensure the accuracy of the shareholder loan
accounts. The incorrect entries to the shareholder loan accounts were an
appropriation of corporate funds that was made either knowingly or negligently.
In either case, the amounts were properly added to the Shareholders’ income as
a benefit.
[40]
In summary, I would conclude that none of the
appellants have satisfied the burden with respect to any of the amounts added
to income.
Discussion re
penalties
[41]
The appellants did not make a separate argument
with respect to penalties. Their main argument was that there was no unreported
income. To the extent that penalties are at issue, the Crown has the burden of
proof.
[42]
In light of my conclusion that the Shareholders’
explanation of the deposits was not credible, it follows that each of the
appellants likely knew that income was under-reported in their income tax
returns by the amounts reflected in the bank deposit analysis. I find that the
Crown has satisfied its burden in this respect.
[43]
However, it is appropriate to vacate penalties
with respect to the incorrect additions to the shareholder loan accounts. The
Crown has not provided sufficient evidence to establish gross negligence with
respect to this accounting entry. The evidence as a whole supports a finding of
negligence, but there is not sufficient evidence to support a finding of gross
negligence. I note in particular that the amounts involved are quite small. Accordingly,
the penalties assessed to the Shareholders should be vacated to the extent that
they relate to the incorrect additions to the shareholder loan accounts.
[44]
Finally, I would mention that the Crown did not
lead evidence as to the amounts of the penalties or how they were calculated. If
this had been an issue in these appeals, the Crown would not have satisfied its
burden in this respect (See Urpesz
v. The Queen, [2001] 3 C.T.C. 2256 (T.C.C.), at
para. 15).
[45]
However, the appellants did not raise this as an
issue, and therefore it was not necessary for the Crown to lead any evidence in
this respect.
Other submissions
[46]
At the commencement of the hearing, the
appellants submitted that the assessments should be reversed because of the lack
of due process by the CRA and lack of cooperation by the Department of Justice.
It was mentioned that a judge of this Court at an earlier hearing suggested to
the parties that they try to settle, but the Department of Justice were not
interested in pursuing this.
[47]
It is well-established that misconduct on the
part of the CRA during the audit and objection stages, even if proven, is not
grounds for giving relief in this Court: Ereiser v. The Queen, 2013 FCA
20. This submission is therefore rejected.
[48]
As for the lack of interest by the Department of
Justice in pursuing settlement, settlement discussions are generally encouraged
by this Court. However, if the Department of Justice chose not to discuss
settlement in this case, I see nothing wrong with this decision on the facts of
these particular appeals.
[49]
The appellants also submit that it is unfair for
the Court to rely on assumptions made by the Minister. I do not agree. The
burden of proof that is imposed on taxpayers to refute assumptions made by the
Minister reflects the reality that it is usually the taxpayer, and not the
Minister, who knows the relevant facts. It is fair for the burden to be imposed
on the taxpayer in these circumstances. The role of pleaded assumptions in a
tax appeal is designed to assist the taxpayer because it informs the taxpayer
of the case that it has to meet in order to succeed in the appeal.
Conclusion
[50]
In the result, the appeal of the Corporation
will be dismissed and the appeals of the Shareholders will be allowed only to
delete the penalties with respect to the incorrect additions to the
shareholders loan accounts.
[51]
The parties shall bear their own costs.
Signed at
Toronto, Ontario this 27th day of February 2015.
“J.M. Woods”
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