Atheneon Travel Services LTD v. Minister of National Revenue, [1985] 1 CTC 2092, 85 DTC 91

Sarchuk, TCJ:—The appellant is a British Columbia corporation engaged in business as a travel agency. In computing its income for the 1976, 1977 and 1978 taxation years certain promotional, legal and wage expenses were deducted.

The respondent:

(a) By way of assessments dated June 6, 1983, disallowed expenses claimed in the amounts of $1,652.15, $3,422.86 and $4,488.47 for the 1976, 1977 and 1978 taxation years respectively;

(b) Levied penalties:

(i) for the 1976 taxation year on $657.85 of the disallowed expenses;

(ii) for the 1977 taxation year on $3,072.21 of the disallowed expenses;

(iii) for the 1978 taxation year on $1,244.37 of the disallowed expenses;

and

(c) By way of assessments dated October 28, 1980, disallowed the deduction of wage expenses in the sum of $8,632.53 for the 1977 taxation year and $9,362 for the 1978 taxation year.

The appellant appealed from these assessments on the ground that all the expenses were made or incurred for the purpose of gaining or producing income from the appellant’s business and were therefore deductible in accordance with the provisions of the Income Tax Act.

A brief analysis of the expenses deducted by the appellant in the taxation years is in order. Andry Sofocleous, who described herself as a travel agent, is the principal shareholder of the appellant. In addition to being employed in that capacity by the appellant she carried on two other businesses, the first, an accounting service providing basic bookkeeping facilities to small local businesses and the second a Greek radio service.

In the appellant’s return of income filed for the 1977 taxation year wage expenses of $8,632.53 were claimed, of which the sum of $6,972.53 was paid to John Neophytou (Andry Sofocleous’ brother) and $1,660 to a Mrs Panyiotou. In the 1978 taxation year of the sum claimed as a wage expense $6,962 was paid to Mrs Panyiotou and $2,400 was paid to Evie Sofocleous (Andry Sofocleous’ daughter).

The employment arrangements are significant. John Neophytou came to Canada as a refugee from Cyprus and was given work in the travel agency by his sister. Mrs. Panayiotou was a non-resident and her employment was arranged by Mrs Sofocleous through the Department of Manpower and Immigration. A work permit had to be obtained and the “confirmation of offer of employment” signed by Mrs Sofocleous discloses that Mrs Panayiotou was hired as an ac- counting clerk (Exhibit R-4). During these years Mrs Sofocleous and her husband were also employed by the appellant. It is significant that in two of the taxation years the appellant had gross commission incomes of $29,776.34 and $33,760.17.

Initially Mrs Sofocleous maintained that both her brother and Mrs Panayio- tou worked exclusively for the appellant and that if they assisted her in the bookkeeping and radio business it was only on a casual and voluntary basis when they had time. Her evidence was not persuasive. The confirmation of employment (Exhibit R-4) described the employment offered to Mrs Panayiotou as “accounting clerk for the accounting office” and the appellant’s business was described therein as “Travel Agency and Accounting Office”. The description of job duties in this document reads:

Payroll, Synoptic journal, general ledger. All the clients for the accounting office are Greeks very important for the lady who is working for me to speak Greek, and English also for writing for both language. From Mrs Panayiotou I am very pleased.

I am satisfied that John Sofocleous and Mrs Panayiotou both performed their duties at Mrs Sofocleous’ direction and that such duties were not restricted to the appellant, but included Mrs Sofocleous’ other businesses.

In cross-examination Mrs Sofocleous reluctantly conceded that services were rendered by both employees to her personally. When counsel sought to obtain from her some factual basis upon which an allocation of wages might conceivably be made, her evidence was imprecise and unsatisfactory. The appellant provided no documents, records or other means of verifying what part of the claimed wage expenditure can properly be attributed to duties performed on behalf of the appellant.

Because of the flawed testimony given by Mrs Sofocleous it is not possible to do anything but reject the appellant’s claim with respect to these wages. While I am not suggesting that absolute detail and precision is necessary, I hold the view that vague estimates and generalities by the taxpayer with regard to expenses claimed, particularly in the circumstances of the present appeals, are unsatisfactory and unacceptable.

The second item in the 1978 taxation year relates to payments totalling $2,400 made to Evie Sofocleous. Mrs Sofocleous testified that Evie was “fifteen, almost sixteen” at the relevant time and that her responsibility was to look after promotional mailings. Her duties were to stuff, address and post travel brochures to the appellant’s clients, to act as a runner and to provide routine “office girl” services to the appellant. In cross-examination it was disclosed that Evie was twelve years old, not fifteen. This inconsistency was glossed over as being the result of “confusion”. I do not accept Mrs Sofocleous’ explanation. Her evidence-in-chief left the impression, deliberately and consciously in my view, that Evie had been employed throughout the whole of the year. Cross- examination disclosed that Evie received seven cheques between March 11th and June 30th, the first in the sum of $600, and the remaining six for $300 each. No explanation was forthcoming. Several cheques were endorsed by Evie and either Mrs Sofocleous or her husband. Others were endorsed only by one of the parents. All cheques were cashed immediately and the moneys placed in Mrs Sofocleous’ safety deposit box where they remained under her exclusive control. There was no evidence to suggest that these funds were being held by Mrs Sofocleous in trust for Evie, or that they were, in any sense of the word a loan from Evie to Mrs Sofocleous.

I conclude that the appellant and Mrs Sofocleous acted in concert to create an artificial expense for the appellant for the purpose of placing funds in Mrs Sofocleous’ hands without attracting tax. I find that the sum of $2,400 was not wages paid to the child Evie.

The third issue relates to penalties which the Minister levied pursuant to subsection 163(2) of the ITA on the basis that the appellant knowingly or under circumstances amounting to gross negligence improperly deducted expense amounts in its returns of income for the taxation years in question.

On behalf of the appellant it was submitted that the amounts of expense were properly deducted or alternatively that if certain minor expense items were improperly allocated to the appellant rather than to Mrs Sofocleous such allocations resulted from inadvertent errors and did not constitute gross negligence.

While the items of expense upon which penalties were levied are numerous they can be grouped into three categories:

1. Legal expenses incurred on behalf of Mr Sofocleous.

2. Items of personal expense.

3. Advertising and promotion.

Legal expenses: These costs were clearly and unequivocally incurred by Mr Sofocleous in his personal capacity. Although a lawsuit launched by the Canadian Imperial Bank of Commerce against Mr Sofocleous may have had its genesis in earlier business transactions in which the appellant was involved, the simple fact of the matter is that he was sued in his personal capacity, and the appellant was not at risk. Mrs Sofocleous operates a business that provides bookkeeping and accounting services. She is not untutored and unskilled in this field. Her convoluted explanation of the basis upon which the appellant deducted the legal fees as a business expense has no foundation in fact or in law and is simply not acceptable.

Personal expenses: The penalties levied with respect to these expenses relate to a number of items charged to the appellant but which were for the personal use of Mrs Sofocleous. None of these items were debited, as one might have expected, to the appropriate shareholder’s account. The explanation offered by Mrs Sofocleous in relation to these expenses and the manner in which they were entered on the appellant’s records is not credible. Items of personal use were recorded in the appellant’s synoptic as office supplies; a gift of a shot-gun to her accountant was written up in the books in part as an office expense and in part as a promotion expense. Another item penalized was an expense incurred to furnish John Sofocleous’ apartment. The appellant’s synoptic recorded this disbursement as automobile expenses. A purchase of lamps for Mrs Sofocleous’ residence was recorded as automobile expenses.

No credible explanation was forthcoming as to the treatment of these expenses in the appellant’s books of account, nor was any acceptable reason advanced to support the appellant’s claim that it was entitled to deduct these expenses from its income.

Promotion and advertising: Mrs Sofocleous claimed that the items represented amounts expended by her on behalf of the appellant for promotion and entertainment. Her evidence was not credible and failed to support that contention.

In 1981, Mrs Sofocleous was convicted of evading the payment of taxes on the sum of $88,500 appropriated by her from the appellant during the course of several years including the taxation years in issue. Her conviction is not evidence against the appellant. It is however, evidence directly affecting her credibility. It is patently inconsistent for her to concede that certain items in issue in these appeals were appropriations by her from the appellant, (and were amounts in respect of which a wilful attempt was made by her to evade the payment of taxes), and on the other hand to state that these items constituted a proper business expense for the appellant. For example, it was her evidence in chief that a sum of $1,417 (in respect of which a penalty had been levied) had been paid to AD Designs for a “Greek Day” promotion. When cross-examined she conceded that this amount formed part of the $88,500 appropriated by her from the appellant and clearly could not have been paid to a third party as alleged.

In my opinion the Minister was correct in levying the penalties. There was, at the very least gross negligence on the part of the appellant in relation to the items penalized. Nor do I find any merit in the appellant’s submission that some of these deductions were oversights and were the result of mere bookkeeping errors.

Other expenses disallowed: There were, in addition to the expenses which were the subject of penalties a number of other expense items disallowed by the Minister. The appellant reviewed each and every one of these items. Some were conceded by it to have been properly disallowed. With respect to others explanations were advanced by Mrs Sofocleous, in most instances unsupported by any receipts or vouchers or other independent evidence. If the appellant is to succeed it would be necessary to accept Mrs Sofocleous’ word that the numerous cash advances taken by her from the appellant were in all cases disbursed by her on behalf of the appellant for promotional and entertainment expenses. The appellant provided no means of verifying these expenditures and the evidence of Mrs Sofocleous is, to say the least, not of sufficient probative value to convince the Court that the disallowances by the Minister were erroneous.

These appeals are dismissed.

Appeals dismissed.