Gee v. R., [1997] 2 CTC 2168

Margeson T . C.J.:

These appeals are from the reassessments for the 1991, 1992 and 1993 taxation years. In these years, in computing income, the Appellant deducted the amounts of $19,000, $8,000 and $16,750 respectively as management and safe custody fees. The Minister disallowed the deductions.

The Appellant testified that he was told by Revenue Canada that the amounts were not deductible. He explained to Revenue Canada that the claimed amounts represented maintenance fees. Each year he filled out his returns and each year they asked for receipts for those amounts.

The Appellant’s position was that if the government had set out in the income tax forms what was required, then he has complied already. He was told that what he had forwarded to Revenue Canada was insufficient. He said that Revenue Canada wanted him to provide tax returns from his partner in China for the company. He told them that these returns could not be released from China.

The Appellant said that he had prepared his returns for 1991, 1992 and 1993 and that Revenue Canada had accepted them. It is unfair for them now to tell him that the returns are incorrect. His position was that the fees paid to his partner in China should be deductible.

In cross-examination he identified Exhibits R-l, R-2 and R-3 as his 1991, 1992 and 1993 income tax returns. The amounts claimed in Schedule V are in dispute but they were accurate when the returns were completed. He referred to these figures as management and custody fees.

He introduced Exhibit R-4 by consent which was a paper written in Chinese. He referred to it as a receipt. He said that it was for the usage of the company in China. It was dated January 18, 1993 and contained his name and the figures for $16,750, which he said represented the amount in Canadian dollars. The form also contained the name of his partner but did not refer to a company.

His explanation was that in China they do not have company names for small businesses.

He introduced Exhibits R-5 and R-6 which were alleged to have been other receipts. Exhibit R-5 was dated December 2, 1992 in the amount of $8,000 and Exhibit R-6 was dated July 23, 1991 in the amount of $19,000. Both figures were in Canadian dollars.

The Appellant said that he received these documents sometime in July. The numbers on the receipts were not in sequential order since the receipt numbers for 1991 and 1992 were higher than the receipt numbers for 1993.

The Appellant’s evidence was that he sent cash by registered mail to his partner in China and then he received a telephone call from his partner confirming that he had received the money. He then discarded the registered mail receipts. He was unable to remember how much he sent at a time but he normally sent $1,000 in $500 nominations.

He testified that his partner would call him and would tell him how much to send. The Appellant had no banking records to support his contentions.

In the years 1991 to 1993, the Appellant said that he had withdrawn money from his R.R.S.P.’s and that his grandfather had left him $100,000 in cash. He was asked about his grandfather’s will but did not give any answer to that question.

He admitted that he used the services of banks sometimes but he said that he normally sent cash to China. The money would have to be converted to Chinese dollars but it was too difficult for him to do that. He had no records of the conversions in China. The Appellant said that the company in China was a small taxi enterprise. He did not know its income but said that his partner owned a larger share than the Appellant did of the business. He did not ask his partner how much income the business earned each year. The Appellant’s share of the business was 49% but the company did not actually issue shares. It was just a mutual agreement between himself and his partner.

In June of 1991 he sent $12,000 and the partner kept a 51% share of the business. In total, in the year 1991 he said that he sent $31,000 to China.

He was asked about telephone records and he said that he destroyed them. He never asked for financial statements and was not in the habit of asking for them since it was his first business venture. He relied on the verbal agreement that he had with his partner.

He indicated that $12,000 represented the partnership fee and the rest of the expenditures were for rent, management fees and maintenance fees.

When asked where the capital came from he replied:

My partner raised it himself.

It was suggested to the Appellant that if he sent any money to Mr. Wong it was going to him personally, but he said:

I paid it to him to manage my investment. I paid him management fees when he required them each year.

He said that the amount required varied in accordance with the amount of business that was done. The more business that the company did, the less need there was for his infusion of money, the less business that the company did, the more the need for his infusion of money.

Exhibit R-7 was admitted into evidence over the objection of counsel for the Respondent. This was a photocopy of three T4 Supplementaries in the name of Herbert Gee for 1991, 1992 and 1993. The employer was shown as the Appellant. The Appellant said that he had sent copies of this exhibit to Revenue Canada. He confirmed that the amounts referred to in the documents were paid to Herbert Gee.

The Appellant said that he also supported his mother, brother and was married. His wife had income of over $3,000 in 1992 but zero income in 1993.

The Appellant remembered meeting Miss Connie Chan from Revenue Canada and admitted that he had told her that he had obtained the money from credit cards, cash machines and R.R.S.P. withdrawals, but he added that he also told her that he received some money from his grandfather.

He was unable to tell how long it took to receive something in China that was sent from Canada. He could not remember how long after he sent the money that his partner would call and verify its receipt. He said:

It was a very long time ago, I can’t remember.

He said that he had sent money in 1993 before Exhibit R-4 was issued (this Exhibit was dated January 18, 1993). He did not send any money after January 1993, he received no money from his business. There was no profit and it ceased operations in January 1994.

In re-direct examination the Appellant said that Revenue Canada asked him for receipts and cancelled cheques but he could not obtain them. He could not understand why Revenue Canada was asking him for these records and cancelled cheques.

The Court asked the Appellant as to the origin of the term “safe custody fees” which appeared on his expense claims. The Appellant believed that the term might have come from some documentation that he received from Revenue Canada.

The Respondent called Connie Chan who was an appeals officer with Revenue Canada. She was familiar with the Appellant’s file. She met with the Appellant, took notes and wrote down the information immediately. She tendered Exhibit R-8 into evidence which contained handwritten notes of the meeting with the Appellant on December 12, 1995.

She also entered into evidence Exhibit R-9, her typewritten notes.

The interview was requested by the Appellant. He would not give a telephone number. She was told that the funds came from R.R.S.P.’s, bank machines and bank cards. The matter of the inheritance did not come up. The Appellant said that he did not keep any records, he lived in a small house and that there was too much paper work. The interview was conducted in Cantonese at the request of the Appellant.

The witness said that her mother still sends money orders to China and to the knowledge of the witness it takes one to two weeks for something to be sent from Canada and received in China. In China college graduates earn about $150 to $300 Chinese money per month or $25 to $30 to $50 Canadian. Her aunt and cousin still live in China. She never sends cash to China herself.

The business in question was Huangs (wongs) Taxi Cab Company Limited according to information that was provided by the Appellant. The Appellant provided no receipts except Exhibit R-4, dated January 18, 1993.

In cross-examination the witness said that the exchange rate fluctuates but insofar as she was concerned the figures she gave were accurate. She relied upon her travelling experience in China and the knowledge that she had of her husband’s business dealings with companies in China. These sources, she said, supported her position. Her husband is a buyer with the Hudson’s Bay Company group.

The witness read papers, dealt with business people and travelled in China. She was not an expert.

It was suggested to this witness that salaries in China have increased since earlier days and that her figures were not accurate presently. She said that she gave an average salary.

She did not write down irrelevant information. That is, if she asked a question and the Appellant talked about something entirely irrelevant, she did not write it down.

Her position was that she leaned over backwards to assist the Appellant, she was not prejudiced and she had not made up her mind in advance.

She said that company records can be received from China because her colleague in Revenue Canada has reviewed such records to her knowledge.

She said that the book that she read about carrying on business in China referred to large businesses and small businesses as well.

Argument of the Respondent

In argument counsel said that during the 1992 taxation year there was a nil assessment and therefore the appeal with respect to that year should be dismissed.

She said that the Appellant has argued that Revenue Canada should have told him earlier about these problems. However, subsection 152(4) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act) gives the Minister the right to assess at any time up to three years after the date of the original assessment. Counsel agreed that there might be an argument made about the year 1991 being Statute barred on the evidence but 1993 poses no problem in that regard and in 1992 there was a nil assessment so that the argument did not apply to that year. Counsel took the position that the claimed amounts were not deductible as expenses because they were capital in nature and are prohibited by subparagraph 18(1)(b) of the Act. Further, they are not deductible under paragraph 18(l)(a) because they have not been shown to have been expenses.

Counsel relied upon the case of Bronson Homes Ltd. v. Minister of National Revenue, [1993] 2 C.T.C. 2060, 93 D.T.C. 710 (T.C.C.) where three criteria were set out as being required to be proven nor for the amounts in question to be deductible.

(1) That the fees were paid;

(2) the fees that were paid were paid for the purposes of gaining or producing income from its business in the years in question;

(3) the fees that were paid were reasonable under all the circumstances and that it was a reasonable amount to set off against the income which was sought to be earned as a result of the expenses.

On the first question counsel argued that the taxpayer must keep receipts under section 230 of the Act which would allow the Minister of National Revenue to determine what amounts might be deducted. This was not done.

Counsel relied upon Zalzalah v. R., (sub nom. Zalzalah v. Canada) [1995] 2 C.T.C. 368(D), 95 D.T.C. 5498 (F.C.T.D.) at 5499 where the Court quoted subsection 230(1) and stated that:

230(1) Every person carrying on business and every person who is required by or pursuant to this Act to pay or collect taxes or other amounts shall keep records and books of account ... in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.

The plaintiff frankly acknowledged that he did not keep any books or records during the taxation years here under review. This matter was also raised in the proceedings before the Tax Court of Canada where Lamarre Proulx, TCJ stated:

The Minister cannot and should not allow business deductions that cannot be proven by documentary evidence. That would bring the administration of the Income Tax Act in the sphere or arbitrariness.

Further, the learned Justice of the Federal Court, Trial Division, said:

Unfortunately for this plaintiff, he has not filed documentation which supports the expenses claimed. This is a clear breach of subsection 230(1), supra, which leaves the Minister with no alternative but to disallow the amounts claimed.

In the case at bar the three invoices produced show no company name. They do not show what the amounts represent. They show just the amount, name of the alleged partner and the date.

With respect to Exhibit R-4, that receipt could not have been sent by the date referred to in it because there was not enough time to send the money out and have the receipt dated by that time in that year.

When the Appellant was speaking to Ms. Chan, he did not mention the inheritance as a source of funds. He did not establish that he had sufficient funds to pay all the monies that he claimed to have sent to China. He had no financial records. His answers were not forthright.

Counsel referred to the case of Gee v. R., [1997] 1 C.T.C. 2100, Tax Court of Canada dated September 27, 1996 and said that the dates in the receipts in that case and the case at bar bear a remarkable resemblance although they are not identical amounts.

Counsel pointed out that there were no corroborating records. Why would the Appellant withdraw funds from his R.R.S.P.’s if he had cash at home? Why re-deposit it to his R.R.S.P.’s later on?

If the Appellant made these payments to China he would be in a deficit position without even taking into account his living expenses.

In the case of Gee, supra, there was more evidence before O’Connor, T.C.J. and he did not allow the expenses.

The evidence here showed that financial statements were available from China and the Appellants claim that records could not be obtained should be rejected.

There is also the question as to whether the amounts in question were on account of capital. The evidence was that the company stopped business in 1994, therefore, any capital loss could not be claimed until after the years in question.

The appeal should be dismissed.

Argument of the Appellant

It was the position of the Appellant that if he had not filed his returns properly he should have been told earlier. It was unfair to reassess him later on and tell him that he was wrong. There was not enough evidence presented by the Respondent to show that the Appellant could have obtained further documents from China.

Why should Revenue Canada tax persons who have businesses abroad and make them pay taxes if the taxpayers cannot claim the expenses?

Ms. Chan had no idea as to the real business life in China. If the documents in question were sent out of the country his partner’s life may have been endangered. He and his partner had agreed before the business started that these documents could not be released. Business in China is conducted by oral agreements, there is nothing in writing.

Revenue Canada should have provided him with more information so that he would have known that he required more receipts.

His evidence was true and the appeal should be allowed.

Analysis and Decision

The Court is in agreement with the position of counsel for the Respondent that there was a nil assessment in the year 1992 and therefore the appeal in respect to that year is dismissed.

With respect to the 1993 taxation year, there is no problem with respect to the assessment being Statute barred and that ground of appeal is not well- founded. The Appellant can only succeed if he can show that the expenses met the requirements as set out in Bronson Homes Ltd., supra, and if they were non capital expenditures.

In the year 1991, the Appellant may succeed if the assessment was Statute barred or if the amounts claimed met the requirements as set out above in Bronson Homes Ltd., supra, and were non capital expenditures.

The Court is satisfied that the Appellant has failed to show that the amounts in question were expended in the years in question, that they were expended for the purposes of producing income or that they were reasonable under all of the circumstances. Because of the unsatisfactory nature of the evidence the Court is unable to conclude that the amounts are not capital in nature and they might very well have been.

As in the case of Herbert C. Gee, supra, there was no satisfactory evidence that the so-called management fees were what they were purported to be. These so-called receipts were absolutely devoid of any identifying symbols to establish the nature of the payment. The receipts were signed by an individual and not by the so-called business. The dates on the so-called receipts raise a real issue as to when the money might have been received or sent or when the receipts were actually made out.

The inability of the Appellant to corroborate in any way by means of a postal receipt evidencing the mailing of the letter and his inability to produce any evidence of a bank withdrawal together with his inability to corroborate in any way his own evidence as to the source of the funds create a substantial suspicion as to the authenticity of the claim that the monies were in the amounts indicated or that the monies, if sent, were intended for any use that would create a valid expense for the taxpayer during the years in question. Indeed, there remains a distinct possibility that the amounts in question were never sent.

The general nature of the evidence given by the Appellant was completely unsatisfactory. He was combative and uncooperative throughout and in any case where the evidence might give rise to an inference unfavourable to the Appellant, the Court must draw such an inference.

The appeals for the 1992 and 1993 taxation years are dismissed.

That leaves only the issue as to whether or not the 1991 taxation year was Statute barred.

The Court has received written submission from counsel for the Respondent with respect to the outstanding issue for the taxation year 1991. The Court has also received the written submission from the Appellant but it failed to direct itself to this issue. In general it was an argument by the Appellant as to why the appeal for all three years should be allowed based upon the evidence led on behalf of the Appellant and based upon the submission by the Appellant that evidence given on behalf of the Respondent was not credible.

The Court has considered the written submissions where applicable and it has concluded that in respect to the 1991 taxation year, as with respect to the other years, the duty of the Appellant is to satisfy the Court on the balance of probabilities that the assessments in question are not valid.

The Court accepts the submission of counsel for the Respondent that there was no evidence, before this Court, with respect to the Appellant’s 1991 taxation year, which could satisfy the Court on the balance of probabilities that the Minister’s reassessment of the Appellant was Statute barred.

The Court is satisfied that there is no burden upon the Minister under the circumstances to lead evidence in that regard and the Court finds that the 1991 taxation year was not Statute barred.

The appeal for the taxation year 1991 is dismissed.

Appeal dismissed.