Date: 19980720
Docket: 97-2104-IT-I
BETWEEN:
PATRICK NG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered orally from the Bench at Toronto, Ontario, on June 4, 1998)
Mogan, J.T.C.C.
[1] This is an appeal under the Income Tax Act for the Appellant’s 1991 and 1992 taxation years. The Appellant has elected the informal procedure. The assessment under appeal for 1991 was issued outside the three-year limitation period referred to in subsection 152(4) of the Act, and the Respondent admits that the Minister of National Revenue has the burden of proving that he is entitled to reopen the 1991 taxation year in accordance with the terms of that subsection. The Minister imposed penalties under subsection 163(2) of the Act for both 1991 and 1992 and, in accordance with subsection 163(3), the Minister has the burden of proving that those penalties are justified.
[2] The adjustments to the Appellant’s reported income which are made in the assessments under appeal are not in dispute. Therefore, the only issues before the Court are whether the Minister was justified in imposing the penalties for 1991 and 1992, and whether the Minister was entitled to reopen the 1991 taxation year. As stated, the Respondent accepted the burden of proving the necessary facts on those two issues and the only evidence in this appeal was provided by Rita Benko, an auditor with Revenue Canada.
[3] In the years under appeal, the Appellant was the sales manager for Rowland Lincoln Mercury, a franchised Ford dealer in the Metropolitan Toronto area. Most of his income was earned from commissions on the sales of automobiles. It was generous in the sense that in 1991, his commission income exceeded $110,000 and in 1992, exceeded $80,000. The Appellant is in a highly competitive business, selling a product with a high cost to the retail purchaser. The evidence was that the Appellant had eight salesmen answering to him.
[4] In reporting his income for 1991, the Appellant deducted expenses of $44,600 from his commission earnings and, in 1992, he deducted expenses of $41,328. Upon performing an audit for Revenue Canada, Ms. Benko, made a determination that she would allow expenses in 1991 of only $4,907 and disallow $39,693; and she issued a reassessment for 1991 on those terms. Similarly for 1992, she determined that she would allow expenses of only $4,904 and disallow $36,424; and she issued a reassessment for 1992 on those terms. Those two reassessments are the subject of this appeal.
[5] The Appellant specifically does not dispute the disallowance of expenses of $39,693 in 1991 or $36,424 in 1992. What the Appellant disputes is the imposition of penalties in both 1991 and 1992 under subsection 163(2) of the Income Tax Act, and the fact that the Minister reopened the 1991 taxation year after the three-year limitation period. The taxation year 1991 is, therefore, a more complex year because there are two issues involved. I propose to deal with the 1992 taxation year first because the only issue is whether the Minister was justified in imposing a penalty under subsection 163(2). The opening words of subsection 163(2) are:
163(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50% of the total of ...
[6] The items disallowed in the reassessment for 1992 are set out in Exhibit R-4 and also in Schedule “A” to the Respondent’s Reply to the Notice of Appeal. The Appellant knew, in disputing this case, precisely what items he had claimed, what portion if any of those items had been allowed, and the amount that had been disallowed. I shall review some of the items listed in Exhibit R-4 and the amounts which have been claimed and allowed or disallowed, as follows:
|
Item |
Claimed |
Allowed |
Disallowed |
|
Auto/Travel |
5,962 |
$0 |
$5,962 |
|
Gifts |
4,984 |
0 |
4,984 |
|
Meals/Entertainment |
5,941 |
3,600 |
2,341 |
|
Telephone |
3,617 |
600 |
3,017 |
|
Office/General |
3,482 |
175 |
3,307 |
|
Advertising/Promotion |
3,168 |
0 |
3,168 |
|
Home Office Expense |
4,200 |
0 |
4,200 |
|
Casual Help Depreciation - Auto |
4,945 4,500 |
0 0 |
4,945 4,500 |
With regard to the above items, the amount claimed by the Appellant for meals and entertainment as listed in Exhibit R-4 was $3,617 when in fact the amount should have been $5,941. This corrected amount was verified and assented to by both counsel for the Respondent and the agent for the Appellant. Also, Exhibit R-4 contained the wrong amount claimed for telephone and it was confirmed by both parties to be $3,617.
[7] I have not identified every item for 1992 but have selected the larger amounts which were either totally or significantly disallowed. The item for which there was the most specific evidence was advertising and promotion of $3,168. The Appellant gave to Ms. Benko a schedule in his own handwriting (Exhibit R-8) listing four amounts of $4,473.81, $3,097, $320 and $2,363.25. He identified the last amount as “ADV-Prom” which is advertising and promotion.
[8] For many of these claimed expenses, the Appellant provided some form of receipt. Frequently, according to Ms. Benko, he provided the “customer copy” of a credit card charge, whether it was Visa or American Express or some other company. When Ms. Benko asked him about the advertising and promotion amount of $2,363.25 in Exhibit R-8, he produced an American Express credit card charge in that exact amount. He told her that it was for a party he had hosted for customers. Ms. Benko explained that although the four amounts and the designation to the left of each amount in Exhibit R-8 was written in the Appellant’s handwriting, the title “Summary of Receipts Submitted by Taxpayer in 1992” was in Ms. Benko’s handwriting.
[9] Upon a further review of the Appellant’s records, Ms. Benko found that there was a retail invoice to the Appellant dated April 14, 1992, from “Cerruti 1881” in Hazelton Lanes which appears to be a men’s clothing store. The invoice was for precisely the same amount of $2,363.25 and it is indicated that the invoice was paid by the Appellant’s American Express credit card. Both the American Express customer copy and the retail invoice from Cerruti 1881 appear in Exhibit R-9. The retail invoice from Cerruti 1881 shows a sports jacket for $695 and two suits for $660 and $630 making a total of approximately $2,000 plus sales taxes, adding up to $2,363.25.
[10] Ms. Benko concluded that this amount of $2,363.25 was clearly not expenses for a party for customers. The Appellant did not provide a further or better explanation to Ms. Benko, nor did he come to Court to do so. Therefore, Ms. Benko concluded, in my opinion reasonably, that the Appellant had not been truthful because the American Express amount was not for a party for customers, but was for a purchase of clothing for himself. Ms. Benko’s clear evidence in this regard (Exhibits R-8 and R-9) indicates that the Appellant was not just mistaken but, in my opinion, he was positively untruthful and was attempting to deceive Revenue Canada by submitting false expenses.
[11] Another significant item in the 1992 taxation year is “casual help” which also appears in the 1991 taxation year. The Appellant claimed $4,945 in 1992 and $5,125 in 1991. Both amounts were disallowed. When he was asked by Ms. Benko what the “casual help” was, he said that he hired high school students to mail birthday and other greeting cards to his customers to maintain his goodwill. According to Ms. Benko, he had no receipts for this casual help, no names of the students who were alleged to have been paid to do this and no documentation to support it. If he were going to hire high school students to maintain the goodwill of customers, he should have had a list of his clients with their current addresses. He should have been able to say to Ms. Benko: “I can’t tell you who the students are but these are the people whose names and addresses I gave them, and also here are the kinds of cards I sent or here are the cards I purchased”. There is no paper trail whatsoever and yet, I am dealing with two significant alleged expenses in the range of $5,000 each of which was disallowed. The Appellant does not even dispute the disallowance. That to me is evidence of negligence. I will address later whether it is gross negligence. It is certainly negligent for a man who has the business sophistication to be the sales manager of an automobile dealership to claim expenses in the range of $5,000 and have nothing to back them up.
[12] I now turn to the expense of $4,984 claimed for gifts in 1992. It was 100% disallowed. The Appellant did not come to Court to say: “Oh yes, I gave those gifts and here is how I can link them to my business”. He accepts the disallowance of the $4,984 for gifts but claims that he should not be penalized for attempting to get this one by Revenue Canada. Ms. Benko said that she was provided with many customer copies from credit card charges but that she could not tie them down in any way to the Appellant’s business. There was no identification on the customer copies as to what they were for. Credit cards have been in common use in Canada for so many decades that it is impossible for me to accept the idea that a person can use credit cards to purchase significant items and not note on his own customer copy what the expense is for if he wants to deduct it for business purposes. It has become, in my view, a common practice when entertaining clients or buying gifts for them to note on the credit card customer copy the date, the place and the purpose of the expense. If a businessman like the Appellant took two clients to lunch, I would expect him to write on the credit card voucher “lunch, date, place and the names of the clients”. He could throw that voucher in a box but still determine two weeks, two months, two years later precisely where he was on that date and who he entertained and how much it cost. To claim expenses of this magnitude for gifts of $4,984 and not be able to identify a paper trail which would justify them as business expenses is at least negligence. Again, I will later consider whether it is gross negligence.
[13] The same applies to the Appellant’s auto and travel amounts. He claimed he owned a courtesy car which he made available to customers when they had their cars serviced. He did not, however, prove any ownership to Ms. Benko and she was put to the trouble of doing a search through the motor vehicle registration branch. He claimed he had a Porsche of his own and that he was provided with a Lincoln by his employer. Ms. Benko produced in evidence her motor vehicle search which was entered as Exhibit R-7. According to her, the search turned up the fact that the Porsche was registered in the name of the Appellant’s wife. Ms. Benko also determined that the costs of operating his car were borne entirely by the Appellant’s employer, the car dealer engaged in selling cars. Therefore, the auto travel amount of $5,962 which the Appellant claimed for 1992 was totally disallowed. However, the Appellant does not come to Court claiming that even one penny of the auto claim is justifiable. He might have attended to say: “I should be allowed to deduct part of this”, but he accepts the 100% disallowance and yet claims that he should not be penalized.
[14] Two cases were brought to my attention which I shall rely on. Venne v. The Queen, 84 DTC 6247, was a decision of the Federal Court Trial Division, The issues were opening a statute-barred year and penalties under subsection 163(2) of the Act. Mr. Justice Strayer of the Trial Division (as he then was) comments on both provisions of the Act. At page 6251 he stated:
I am satisfied that it is sufficient for the Minister, in order to invoke the power under subparagraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the word ‘misrepresentation that is attributable to neglect’ must mean, particularly when combined with other grounds such as ‘carelessness’ or ‘wilful default’ which refer to a higher degree of negligence or to intentional misconduct. Unless these words are superfluous in the section, which I am not able to assume, the term ‘neglect’ involves a lesser standard of deficiency akin to that used in other fields of law such as the law of tort.
The above passage deals with only negligence or the failure to exercise reasonable care in connection with opening a statute-barred year. At page 6256, Strayer J. continued with respect to “gross negligence” as contained in subsection 163(2):
... Gross negligence must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentionally acting, an indifference as to whether the law is complied with or not. ...
[15] I view the Appellant’s conduct in 1992 as meeting the above standard in that he was indifferent as to whether he complied with the law. He simply threw together a pile of expenses and, having regard to his failure to defend any of them in Court, the total is outrageously high at $41,328. When $36,424 is disallowed and he is allowed only $4,904, he does not dispute the disallowance. He did not even appear in Court. In other words, for all practical purposes, 90% of his claimed expenses were disallowed but he does not contest the disallowance. That in itself is an indication of an indifference as to whether or not the law is complied with.
[16] In argument, the agent for the Appellant made the point that unreported revenue was much more serious in terms of misrepresentation or gross negligence than expenses which are not identified or not vouchered. That is an interesting argument. There may be some validity to it if we are considering a proprietor operating a business who fails to record revenue. That is a most serious act on the part of a taxpayer in terms of gross negligence or even fraud. The Appellant, however, is of necessity an employee and, therefore, in receipt of a T4. He has no control over measuring the revenue he must report because his employer is required to record his salary and commissions. The only way he can cheat (to use a kind of slang word) if he wants to reduce his income and get it down to a lower amount to pay less tax, is to claim expenses outrageously high with an indifference as to whether or not he is complying with the law. I find that that is what the Appellant did. For those reasons, I will uphold the penalty for 1992.
[17] For 1991, the Minister has opened a statute-barred year. There is a different standard here. Curiously, it is a lower standard. My colleague, Bowman J. referred to it in Farm Business Consultants Inc. v. The Queen, 95 DTC 200 where he had to consider both the reopening of a statute-barred year and the imposition of penalties. Judge Bowman stated at 205:
A court must be extremely cautious in sanctioning the imposition of penalties under subsection 163(2). Conduct that warrants reopening a statute-barred year does not automatically justify a penalty and the routine imposition of penalties by the Minister is to be discouraged. Conduct of the type contemplated in paragraph 152(4)(a)(i) may in some circumstances also be used as the basis of a penalty under subsection 163(2), which involves the penalizing of conduct that requires a higher degree of reprehensibility. In such a case a court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established. Moreover, where a penalty is imposed under subsection 163(2) although a civil standard of proof is required, if a taxpayer’s conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted. ...
[18] The agent for the Appellant argued that there were two viable and reasonable hypotheses. He argued that the Appellant thought in good faith that these expenses were related to his business. By putting them to Revenue Canada, he could be taken to have satisfied the reasonable test because, in the words of the Appellant’s agent: “the Appellant was not possessed of knowledge of the intricacies of the Income Tax Act”. It is the first time he has been penalized. In my view, a person does not have to possess knowledge of the intricacies of the Income Tax Act. All he has to know is whether an amount he wants to claim as an expense is connected with his business; and the fact that he has never been penalized before is no reason not to uphold the penalty in this case.
[19] Whether certain conduct is negligent to a level which would permit the reopening of a statute-barred year depends upon the business sophistication of the taxpayer, the way he files his return, the way his income is computed and the way his expenses are deducted. There seems to be a general attitude with respect to expenses that people can “write it off” or it is “deductible”. In my view, some individuals have taken those notions to the extreme where they simply load in all kinds of expenses without regard to whether they can be linked to a business. As I have said in relation to the 1992 taxation year, the Appellant must be a sophisticated person. We do not know if he is sophisticated because he did not come to Court. Having regard to the office he held in the years under appeal, I cannot believe that he could not have noted on each credit card voucher the purpose of the expense so that, at a later date, he could go over them and identify the place, the date and the customer for whom the expense was incurred if it was incurred for a customer, or if it was incurred at all.
[20] From the evidence of Ms. Benko, I conclude that there were some expenses for which there were no receipts at all such as for casual help of $4,945 in 1992 and $5,125 in 1991. Simply no receipts, no names of people who worked as casual help, nothing. The same applies to gifts. If there were vouchers, there was no way of linking them with any named customer and if the gifts were personal, if he was buying children’s clothes for his own children or, if he was buying gifts for friends or family, then they are domestic gifts and not business-oriented. In cross-examining the auditor, the Appellant’s agent suggested that a certain expense could have been for a gift, a dinner on a weekend could have been for business purposes. Ms. Benko acknowledged that they could have been but that was not her burden. Once she proved that the Appellant had been untruthful with respect to certain expenses, and that other substantial amounts had no supporting receipts, the onus was on the Appellant to prove that the various credit card vouchers had a connection with the Appellant’s business. She found an absence of a paper trail and, in many cases, an absence of receipts altogether to the point where she disallowed approximately 90% of his claimed expenses in both years and yet, he did not come to Court to dispute that.
[21] In conclusion, I would remind the Appellant that while the burden was on the Minister to prove gross negligence with respect to the penalties and negligence with respect to the reopening of the 1991 taxation year, that is only a civil burden and not a criminal burden of proof beyond a reasonable doubt. I am satisfied on Ms. Benko’s evidence and the Respondent’s exhibits that the Minister has met both of those burdens. There was then a burden on the Appellant (if he wanted), to come to Court, to listen to the case made against him and, if he was advised that the Minister had met the burden of proof, to come forward and make his own case.
[22] The Appellant seems to think that this is like a criminal matter in which he can wait for the Crown to prove its case beyond a reasonable doubt. It is only a civil burden of proof and, in my view, taking the manner in which the Appellant claimed these expenses, the extent to which they were disallowed, the evidence of Ms. Benko who says that there were shockingly few receipts that could connect any of these expenses with the business and in many items (such as the casual help and the office expenses), no receipts at all, I find that the case is made for the reassessments. The appeals are dismissed. In my opinion, the penalties are justified; and the Minister has satisfied the burden for reopening the 1991 taxation year.
Signed at Ottawa, Canada, this 20th day of July, 1998.
"M.A. Mogan"
J.T.C.C.