Date: 20000823
Dockets: 1999-2824-IT-I; 1999-2825-IT-I
BETWEEN:
CHUNG JA HUH, HUN HUH,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Teskey, J.T.C.C.
[1] Both Appellants, Chung Ja Huh ("Grace") and Hun Huh ("David"), who are wife and husband, elected in their Notices of Appeal wherein they appealed their reassessment of income tax for the years 1991, 1992 and 1993, the informal procedure.
[2] These appeals were heard on common evidence.
The Assessment
[3] The Minister of National Revenue (the "Minister") assessed each Appellant identically.
[4] In so assessing each Appellant for the 1991 and 1992 taxation years, the Minister increased both Appellant's total income by including the amounts of $25,857 and $25,897 and $23,508, respectively, imposed penalties pursuant to subsection 163(2) of the Income Tax Act (the "Act") and assessed contributions in respect of self-employed earnings pursuant to the Canada Pension Plan (the "Plan") in the amounts of $1,235.92 and $1,392, respectively.
[5] In reassessing each Appellant for the 1993 taxation year, Notice of Reassessment thereof mailed March 6, 1997, the Minister increased both Appellant's total income by including the amount of $23,508, imposed a penalty pursuant to subsection 163(2) of the Act and assessed contributions in respect of self-employed earnings pursuant to the Plan in the amount of $1,175.32.
Issues before the Court
[6] The first issue is to determine the residency of both Appellants for the three years in question
[7] If the Court finds that the Appellants were in any or all of the years in question resident in Canada for the purposes of the Act, then the second issue of penalties pursuant to subsection 163(2) of the Act has to be decided, that is : Did the Appellants, knowingly or under circumstances amounting to gross negligence, file false income tax returns?
Appellants' position
[8] The Appellants both claim that they were not resident of Canada in the years in question and therefore no tax was payable in Canada and obviously if the Court does so find, the penalties are wiped out. They claim that they were residents in the United States (the "U.S.") in the years in question, therefore all income would be taxable in the U.S. and there was no legal duty to file a tax return in Canada.
[9] The Appellants do not challenge the amounts of the assessment and conceed that if the Court finds the Appellants are residents of Canada in the years in question that the penalties pursuant to subsection 163(2) were properly assessed.
[10] The Minister when making the assessments made certain assumptions of fact that were reproduced in paragraph 10 of the Replies to the Notices of Appeal. The following were either confirmed by the evidence or not challenged in any way :
(a) in the 1991, 1992 and 1993 taxation years, the Appellants in partnership, operated a business known as Sam's Variety Store ("Sam's"), located at 128 Queen Street South, Streetsville, Ontario;
(b) at all material times, the Appellants were equal partners in Sam's;
(c) at all material times, the fiscal year end of Sam's ended on March 31;
(d) for their 1991, 1992 and 1993 taxation years, the Appellants filed income tax returns indicating their province of residence was Ontario and their province of self-employment was Ontario;
(e) in the 1991, 1992 and 1993 taxation years, the Appellants continued to operate Sam's in Canada ... ;
...
(g) in conducting an audit of the records of Sam's for the 1991, 1992 and 1993 taxation years, the Minister found the records to be inadequate to determine taxable income;
(h) at all relevant times, the Minister determined the Appellant's income by using the net worth method;
[11] Facts as adduced at the hearing :
The Appellants have 4 children namely :
Name Birth date
Christine November 1965
Janet August 1967
Joseph May 1969
John May 1971
[12] The Appellants and their children immigrated to Canada from Korea in 1976. They became Canadian citizens in 1980.
[13] The Appellants opened and started from scratch Sam's Variety at 128 Queen Street, Mississauga, Ontario in 1983, as well as buying a house known as 4442 Shelby Crescent, in Mississauga.
[14] Sam's Variety is a typical variety store selling all the usual items found therein as well as having a license from Canada Post to operate a substation. The location of 128 Queen Street is in a one-storey strip mall.
[15] Prior to 1987, both Appellants were very active in a Korean Presbyterian Church in Toronto. Pastor Chung, a Korean ordained minister, obviously executed a great deal of religious influence over the Appellants.
[16] Pastor Chung, in 1987, had the opportunity to go to a much larger church in New York as the then existing Pastor, a friend, wanted to continue with further religious studies.
[17] Three families all parishioners of Pastor Chung went to New York so that their religious lives would remain under his guidance.
[18] Pastor Chung returned to Toronto in 1989 and started-up a new church.
[19] The testimony given by Grace is of very little help, she simply said that anything she signed was at David's request without explanation and she cannot read English.
[20] David's testimony was quite long and detailed. I accept as factual those parts of his testimony that have been confirmed by documentation and I reject those portions that could easily be confirmed by documentation .
[21] Both Appellants still own and operate Sam's Variety to this day at 128 Queen Street in Mississauga.
[22] Then in August 1987, they sold their residence municipally known as 4442 Shelby Crescent and went to the New York City area.
[23] Janet, who was enrolled at University of Toronto, did not accompany her parents to New York as did the other three siblings. The two boys were in highschool and went to highschool in New York.
[24] The Appellants did not apply for a U.S. green card or for U.S. citizenship. They did not give any evidence whatsoever that they applied for any type of work permit or for landed immigrant status. I therefore find that they would be classified as visitors to the U.S.
[25] The Appellants lived in rented accommodations in New York: No written leases were produced, I therefore find that the tenancies at the three residences were month to month.
[26] They only took some small items to New York.
[27] Although both Appellants claim their intention was to stay permanently in the U.S., I reject this allegation as nothing was shown to the Court that they were anything more than visitors to the U.S. I believe they represented themselves as visitors each time they entered the U.S.
[28] David says that they operated a greeting card business at the intersection of Broad and Beaver Streets in New York, through a Corporation known as Broad & Beaver Enterprises Inc.
[29] The only document that backs up the existence of a corporation is a general ledger which was produced. David said he had never seen this general ledger until he was leaving New York and the bookkeeper gave it to him and he kept the same as a souvenir.
[30] He never produced any written document to demonstrate that he was a director or shareholder of this company or who the incorporators were or if it was incorporated by a nominee.
[31] Although both David and Grace claim they were residents of New York from September 1987 to mid 1994, neither produced copies of any U.S. income tax returns for these years. Since he had more than ample time from the time of his Notice of Appeal to this hearing to apply to the U.S. Internal Revenue Service for copies of his U.S. tax returns, I reject this testimony and find that none existed.
[32] I accept that David purchased a used Cadillac in November 1990 as his Canadian motor vehicle had been stolen and that both Appellants obtained New York State drivers licenses.
[33] The two sons moved back to Canada in winter 1989 and the Appellants purchased a three-bedroom condo unit in Etobicoke, known as 366 The East Mall, Unit 138 in March of that year. The three youngest children occupied this unit.
[34] The Appellants did produce a written agreement of sale of Sam's Variety dated September 4, 1990. The oral testimony is in conflict with the written agreement. I reject the oral testimony and find that the agreement was a conditional agreement and was terminated.
[35] In January of 1993, a $404,000 house was purchased in Mississauga by the Appellants and used as the family residence when they moved back into Canada in October of 1994. The house was used by Grace's mother and Janet on occasion until the Appellants return.
[36] Although David said he had a personal bank account with Chase Manhattan Bank in New York, I reject this, as nothing was adduced to confirm this allegation, such as copies of bank statements or a confirming letter from the bank, all of which could easily have been produced.
[37] In the three years in question I find that the Appellants visited the Toronto area at least once a month and stayed with their three children in the Etobicoke condo and attended at Sam's Variety Store. While visiting I accept they attended Pastor Chung's church.
[38] The audit of the Appellants' Canadian business and personal bank accounts showed large unexplained deposits. David, at the conclusion of the audit, agreed with the unreported income for years 1992 and 1993, but not with 1991.
[39] On June 27, 1994, some four months before their furniture was shipped by North American Van Lines back to Canada, the Appellants both filed T1 Tax Returns for 1991 and 1992. Grace also filed a tax return for 1993 on July 7, 1994.
[40] All five returns indicate that they were residents of Ontario at December 31 in the years in issue and that they were self-employed in Ontario in those years.
[41] David's 1992 T1 Tax Return contains a T5 issued by Korea Exchange Bank of Canada showing interest from Canadian sources of $1,400.69 and his address therein as 366 The East Mall, number 138, the address for the condo unit in Etobicoke purchased in 1989.
[42] Also in the return is an official receipt for income tax purposes issued by the Korean Hallelujah Church of Willowdale, Ontario for $1,750. Pastor Chung said he considered the Appellants members of his congregation.
[43] During the period 1987 to 1994, David considered his doctor to be Dr. Moogo of Mississauga, Ontario.
[44] Neither Appellants turned back their health cards to Ontario Health Insurance Plan ("O.H.I.P.") and remained covered. Neither took any type of health insurance in the U.S.
[45] David claims that he did not read or discuss with anyone the two T1 Tax Returns that his bookkeeper prepared and that he just signed them.
[46] David claimed they belonged to a church in New York but no receipts for donations were produced.
The Statute
[47] The relevant provisions of the Act are:
2(1). Tax Payable by Persons Resident in Canada - An income tax shall be paid, as required hereinafter, upon the taxable income for each taxation year of every person resident in Canada at any time in the year.
3. Income for Taxation Year - The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:
(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;
...
250(1) Extended Meaning of Resident - For the purposes of this Act, a person shall, subject to subsection (2), be deemed to have been resident in Canada throughout a taxation year if
(a) he sojourned in Canada in the year for a period of, or periods the aggregate of which is, 183 days or more,
...
250(3) Ordinary Resident - In this Act, a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada.
Case Law
[48] The leading authority on the question of residence is Thomson v. M.N.R., 2 DTC 812, a decision of the Supreme Court of Canada. Estey J. said in the left column on page 813:
... one is "ordinarily resident" in the place where in the settled routine of his life he regularly, normally or customarily lives. One "sojourns" at a place where he unusually, casually or intermittently visits or stays. In the former the element of permanence; in the latter that of the temporary predominates. The difference cannot be stated in precise and definite terms, but each case must be determined after all of the relevant factors are taken into consideration, but the foregoing indicates in a general way the essential difference. It is not the length of the visit or stay that determines the question. ...
In the right column of the same page, he said:
... a person may have more than one residence ...
Mr. Justice Rand, in the right column of page 815 and the left column of page 816 said:
The graduation of degrees of time, object, intention, continuity and other relevant circumstances, shows, I think, that in common parlance "residing" is not a term of invariable elements, all of which must be satisfied in each instance. It is quite impossible to give it a precise and inclusive definition. It is highly flexible, and its many shades of meaning vary not only in the contexts of different matters, but also in different aspects of the same matter. In one case it is satisfied by certain elements, in another by others, some common, some new.
...
For the purpose of income tax legislation, it must be assumed that every person has at all times a residence. It is not necessary to this that he should have a home or a particular place of abode or even a shelter. He may sleep in the open. It is important only to ascertain the spatial bounds within which he spends his life or to which his ordered or customary living is related. Ordinary residence can best be appreciated by considering its antithesis, occasional or casual or deviatory residence. The latter would seem clearly to be not only temporary in time and exceptional in circumstances, but also accompanied by a sense of transitoriness and of return.
But in the different situations of so-called "permanent residence", "temporary residence", "ordinary residence", "principal residence" and the like, the adjectives do not affect the fact that there is in all cases residence; and that quality is chiefly a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living, with its accessories in social relations, interests and conveniences at or in the place in question. It may be limited in time from the outset, or it may be indefinite, or so far as it is thought of, unlimited. On the lower level, the expressions involving residence should be distinguished, as I think they are in ordinary speech, from the field of "stay" or "visit".
...
[49] The question of residency is one of fact and depends on the specific facts of each case. The following is a list of some of the indicia relevant in determining whether an individual is resident in Canada for Canadian income tax purposes. It should be noted that no one or any group of two or three items will in themselves establish that the individual is resident of a country or countries. However, a number of factors considered together could establish that the individual is a resident of Canada for Canadian income tax purposes:
- past and present habits of life;
- regularity and length of visits in the jurisdiction asserting residence;
- ties within the jurisdiction;
- ties elsewhere;
- permanence or otherwise of purposes of stay;
- ownership of a dwelling in Canada or rental of a dwelling on a long-term basis (for example, a lease for one or more years);
- residence of spouse, children and other dependent family members in a dwelling maintained by the individual in Canada;
- membership with Canadian churches or synagogues, recreational and social clubs, unions and professional organisations;
- registration and maintenance of automobiles, boats and airplanes in Canada;
- holding credit cards issued by Canadian financial institutions and other commercial entities including stores, car rental agencies, etc.;
- local newspaper subscriptions sent to a Canadian address;
- rental of Canadian safe deposit box or post office box;
- subscriptions for life or general insurance including health insurance through a Canadian insurance company;
- mailing address in Canada;
- telephone listing in Canada;
- stationary including business cards showing a Canadian address;
- magazine and other periodical subscriptions sent to a Canadian address;
- Canadian bank accounts other than a non-resident bank account;
- active securities accounts with Canadian brokers;
- Canadian driver's licence;
- membership in a Canadian pension plan;
- holding directorships of Canadian corporations;
- membership in Canadian partnerships;
- frequent visits to Canada for social or business purposes;
- burial plot in Canada;
- will prepared in Canada;
- legal documentation indicating Canadian residence;
- filing a Canadian income tax return as a Canadian resident;
- ownership of a Canadian vacation property;
- active involvement in business activities in Canada;
- employment in Canada;
- maintenance or storage in Canada of personal belongings including clothing, furniture, family pets, etc.;
- obtaining landed immigrant status or appropriate work permits in Canada;
- severing substantially all ties with former country of residence;
[50] Iacobucci J., writing the judgment of the Supreme Court of Canada in Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802, said in paragraph 46 thereof:
[46] At this point in the analysis, it is important to take a step backwards and isolate exactly whom the Convention was intended to benefit. The target group are Canadians working in the United States (or vice versa) and Canadian companies operating in the United States (again, or vice versa). It was deemed important, in order to promote international trade between Canada and the U.S., to spare such individuals and corporations double taxation (consequently promoting the equitable allocation of profits of enterprises doing business in both countries): see Preamble to the Convention; see also Utah Mines Ltd. v. The Queen, 92 DTC 6194 (F.C.A.), and U.S. Senate (Foreign Relations Committee), Tax Convention and Proposed Protocols with Canada, at p. 2: "The principal purposes of the proposed income tax treaty between the United States and Canada are to reduce or eliminate double taxation of income earned by citizens and residents of either country from sources within the other country, and to prevent avoidance or evasion of income taxes of the two countries." An ancillary goal would also be to mitigate the administrative complexities occasioned by having to file simultaneously income tax returns in two unco-ordinated taxation systems.
[51] My colleague Bowie, in Sanchez v. The Queen, 2000 DTC 2151, noted that the appellant therein, a citizen of Canada who moved to the U.S., had to return to Canada to renew her work permit for the U.S., which had to be renewed every six months from outside the U.S.
[52] Herein, neither Appellant applied for a U.S. green card and or a work permit in the U.S. I therefore conclude that they entered the U.S. each time as visitors.
Conclusion
[53] With all the facts set out above, I am satisfied that both Appellants during the years in question were residents of Canada. Their ties to Canada far outweigh their ties to the U.S. Although they ran an incorporated business, they have not satisfied me that the incorporation showed them as the owners or directors. They have not demonstrated they had personal U.S. bank accounts. They lived in rented accommodation from month to month. They did not take out medical insurance and held onto their O.H.I.P. cards. They did not establish a doctor-patient relationship with any U.S. doctors over the period. They did not file U.S. tax returns during the period which a U.S. resident would have been required to file a tax return by law. Their mailing address for a Canadian investment in 1992 was the condo in Etobicoke.
[54] Their status in the U.S. was as visitors. I believe the Appellants did not establish residency in the U.S. and were only sojourning there.
Canada and U.S. Tax Treaty
[55] The preamble to the Canadian and U.S. Tax Treaty (the "Convention") reads as follows:
Canada and the United States of America, desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, have agreed as follows:
Article IV, under the heading "Residence", contains what is considered the tie breaker rules in paragraph number 2, which reads:
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State, of which he is a citizen; and
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
[56] Notwithstanding that the Appellants had many more ties to Canada, and even though I do not find that they actually became residents in the U.S., if I had decided that they were also residents of the U.S. in the years in question, then paragraph 2(a) of the Convention places them as residents of Canada for income tax purposes, as the condo in the East Mall in Etobicoke would be a permanent home available to both of them.
Subsection 163(2)
[57] Although the Appellants did not argue the penalties, it is sufficient to say that a taxpayer who does not look at a T1 Tax Return and just signs the same, without regard to its content, is guilty of gross negligence and so is the taxpayer who cannot read English and signs a T1 Tax Return without having someone interpret it for him/her prior to signing.
[58] The appeals are dismissed.
Signed at Ottawa, Canada on the 23rd day of August 2000.
"Gordon Teskey"
J.T.C.C.