AMENDED
REASONS FOR JUDGMENT
Bédard J.
[1]
These appeals were heard on common evidence. The
appellants own a web design business which operates under the names S‑Design
and Abeillex. When filing their 2008 and 2009 tax returns, both appellants
deducted host server fees as well as programming and licensing fees of $90,100
and $55,650, representing each one’s percentage (50%) of the total partnership
amounts of $180,200 and $111,300 for those taxation years respectively. By Notices
of Reassessment dated December 28, 2011, the Minister of National Revenue
(the “Minister”) disallowed the amounts of $90,100
and $55,650 as not being proper expenses for each appellant’s 2008 and 2009
taxation years respectively. On February 20, 2012, the Minister received
from each appellant a Notice of Objection with regard to the December 28,
2011 reassessments for the 2008 and 2009 taxation years. On April 5, 2013, the
Minister partially confirmed each appellant’s reassessment dated
December 28, 2011 for the 2008 and 2009 taxation years, as follows:
|
Year
|
Additional Other Business
Expenses Allowed
|
|
2008
|
$9,188
|
|
2009
|
$8,363
|
The appellants have
appealed from these reassessments.
[2]
In so reassessing Mr. Susumu Soshiroda, the
Minister relied on the following assumptions of fact (in reassessing Ms. Atsuko
Okamoto, the Minister relied, mutatis mutandis, on the same assumptions
of fact):
a)
at all times, the Appellant held 50% of the
business partnership and his wife held the other half;
b)
the expenses claimed as “other expenses” were
for host server costs as well as programming and licensing fees;
c)
several differing versions of the supporting
documents were provided during the audit and objection review. These receipts
did not give a detailed breakdown of the services rendered;
d)
no contract was provided to support the services
rendered and the amounts paid;
e)
substantial weekly amounts were charged to the
Appellants by Heat Systems Inc. for taxation years 2008 and 2009 however, given
that the receipts submitted did not give a detailed breakdown of the services
rendered, it was impossible to confirm whether or not these expenses were
incurred for the purpose of gaining or producing business income;
f)
it is likely however, that the business did
incur some expenses for host server fees. An amount was determined by
conducting a price comparison for seven (7) companies which averaged $1,096 per
month for host server fees; this amount was then applied to the Appellant’s
business, rounding it to $14,000 for each of the taxation years under review;
g)
the Appellant’s share of this expense is $7,000
for each of the taxation years 2008 and 2009 — his wife was allowed the
other half;
h)
given the information submitted in the file,
there was insufficient detail to allow the same analysis for programming and
licensing fees;
i)
a reasonable amount for programming and
licensing fees was nevertheless allowed, using the pro‑rata calculation
obtained in the determination of allowable host server fees, which amounts to
approximately 10.2% of the amounts originally claimed by the Appellant in 2008
and 16% in 2009;
j)
this resulted in allowing the business an
expense for programming and licensing fees, totalling $4,375 and $3,726 for
taxation years 2008 and 2009 respectively;
k)
the Appellant’s share of the programming and
licensing fees is $2,188 and $1,863 for taxation years 2008 and 2009
respectively – his wife was allowed the other half.
[3]
The issue to be decided is whether the appellants
are entitled to deduct host server fees as well as programming and licensing
fees in excess of the amounts allowed by the Minister, the amounts disallowed
for the 2008 and 2009 taxation years having been so disallowed on the double premise
that:
a)
they were not incurred for the purpose of
gaining or producing income from the business;
b)
they were personal or living expenses.
The Evidence Submitted by the Appellants
[4]
In assessing the evidence presented by the appellants,
the Court must comment on the failure to call certain persons as witnesses and
to provide documentary evidence that could have confirmed the statements of the
appellants. In Huneault v. Canada, [1998] T.C.J. No. 103 (QL), 98
DTC 1488 (Fr.), my colleague Judge Lamarre referred, at paragraph 25 (page
1491 DTC), to remarks made by Sopinka and Lederman in The Law of Evidence in
Civil Cases, which were cited by Judge Sarchuk of this Court in Enns v.
M.N.R., 87 DTC 208, at page 210:
In The Law of
Evidence in Civil Cases, by Sopinka and Lederman, the authors comment on
the effect of failure to call a witness and I quote:
In Blatch v. Archer, (1774), 1
Cowp. 63, at p. 65, Lord Mansfield stated:
“It is
certainly a maxim that all evidence is to be weighed according to the proof
which it was in the power of one side to have produced, and in the power of the
other to have contradicted.”
The application of this maxim has led to
a well‑recognized rule that the failure of a party or a witness to give
evidence, which it was in the power of the party or witness to give and by
which the facts might have been elucidated, justifies the court in drawing the
inference that the evidence of the party or witness would have been
unfavourable to the party to whom the failure was attributed.
In the case of a plaintiff who has the
evidentiary burden of establishing an issue, the effect of such an inference
may be that the evidence led will be insufficient to discharge the burden. (Lévesque
et al. v. Comeau et al., [1970] S.C.R. 1010, (1971), 16 D.L.R. (3d) 425.)
[5]
In the instant cases, Ms. Atsuko Okamoto was the
only person to testify in support of the appeals of each appellant. The appellants’
only documentary evidence consisted of emails (Exhibit A‑1) in
Japanese from Mr. Hiroshi Miyadera (XXXXXXXX), all dated
June 25, 2012, all listed under the heading: Reissued Invoice, and all sent
to XXXXXXXXXXX.
[6]
In the instant cases, it is useful to make
certain comments on the credibility of Ms. Okamoto, who, I repeat, was the
only person to testify in support of the appeals of both appellants. I
emphasize that the appellants filed nothing other than Japanese emails
(Exhibit A‑1) in support of their position. In my view, it would be
hazardous to give Ms. Okamoto’s testimony any credence without any
conclusive corroborating evidence in the form of sound documentation or
testimony by credible witnesses.
[7]
Ms. Okamoto’s answers were generally vague,
imprecise and ambiguous. In fact, her testimony can be summarized as follows:
we were billed by Heat Systems Inc. for host server fees as well as programming
and licensing fees; the host server fees were paid directly to Heat Systems Inc.
but the programming fees were paid directly to Mr. Miyadera. She never
explained what the digital content was or what their costs were. Her testimony
was also silent regarding Heat Systems Inc.’s server (what kind of server was
it? what was the data transfer speed?) Her testimony was likewise silent
regarding the basis on which the programming fees were charged by Heat Systems Inc.
and paid to Mr. Miyadera. All too often, she was unable to provide any
valid explanation of how their business operated. In this regard, she was
unable to explain why all the programming and licensing fees that were billed
by Heat Systems Inc. were paid directly to Mr. Miyadera. She was also
unable to explain the inconsistencies between the several versions of the
supporting documents that were provided during the audit and during the review
following the objection. In addition, the evidence showed that in 2010 the appellants
switched to another provider (Hurricane Electric LLC). Ms. Okamoto was
unable as well to explain why Hurricane’s host server fees were much less
expensive than those of Heat Systems Inc. The evidence further showed that the appellants
had declared to the CRA’s auditor that the owner of Heat Systems Inc. was Mr. Miyadera.
In this regard, the evidence (Exhibit R‑1) proves the contrary. Ms. Okamoto
again was unable to explain the contradiction. Finally, the evidence also
showed that the appellants never informed the tax auditor that they themselves
had prepared the first set of invoices filed with him. This also added to my
doubts regarding Ms. Okamoto’s credibility. For these reasons, I attached
little probative value to her testimony.
Conclusion
[8]
The onus was on the appellants to prove that the
reassessments were erroneous. No reliable proof of any kind was provided by the
appellants to support their claims. The documentary evidence filed by them was
not sound. The probative value I attached to Ms. Okamoto’s testimony was slight.
The appellants could have submitted documents in evidence (certified English
translations of the original invoices). This they did not do. I infer from this
that such evidence would not have been favourable to them. The appellants could
also have called Mr. Miyadera or another representative of Heat Systems Inc.
Mr. Miyadera’s testimony could have confirmed Ms. Okamoto’s
statements. Yet they did not call him as a witness, from which I infer that his
evidence would not have been favourable to the appellants either.
[9]
The income tax system is based on self‑reporting,
and as a matter of public policy the burden of proving deductions and claims
properly rests with the taxpayer. The appellants must maintain and have
available detailed information and documentation in support of the claims they
make. They are responsible for documenting their personal affairs in a
reasonable manner. Self‑written receipts and assertions without proof are
not sufficient.
[10]
For these reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 1st day of October 2014.
These Amended Reasons for Judgment
are issued in substitution of the Reasons for Judgment dated August 26, 2014.
“Paul Bédard”
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