Date: 20000914
Dockets: 1999-4502-IT-I; 1999-4505-IT-I
BETWEEN:
KEVIN ISNOR, RONALD ISNOR,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
(Delivered orally from the Bench on September 12, 2000, at Toronto, Ontario.)
Bowie J.T.C.C.
[1] These appeals under the Income Tax Act are brought by Ronald Isnor and Kevin Isnor, who are father and son, and the two shareholders and the two employees of a company called Isnor Construction. The appeals are for the years 1990, 1991, and 1992 in both cases, and Ronald Isnor also has an appeal for the 1993 taxation year.
[2] This group of appeals arises out of the fact that when Messrs. Isnor, father and son, carried on business through their company, Isnor Construction, they retained the services of a chartered accountant who had been recommended to them to do their bookkeeping, and whatever other financial matters, such as the preparation of statements, were necessary for the purposes of the corporation, and also to prepare their personal income tax returns.
[3] It is abundantly clear from the evidence before me that the chartered accountant was either dishonest or incompetent or both. Indeed, she must have been dishonest to some extent, because I was advised that when her activities on behalf of these clients and some others, came to light, she was prosecuted and she is presently incarcerated as a result of her activities.
[4] The two Appellants testified before me, and they stated quite candidly in their evidence that during the years under appeal they wrote cheques to themselves for the amount of their pay from the company, which they then cashed at the bank, and they passed the cheque stubs and the cancelled cheques, like all the other cheque stubs and cancelled cheques, on to the accountant to make the appropriate entries in the books, and they were available to her as well to prepare their personal tax returns. The amounts that they told me they took from the bank varied but were usually $300 or $400 per week, and indeed the schedules before me that are marked Exhibits A-1 to A-8 inclusive make it clear that it was very frequently $400; sometimes it would be more and sometimes less, but it was very frequently $400.
[5] Despite these substantial and repeated withdrawals of cash, the Appellants signed income tax returns prepared by the accountant for the years 1990, 1991, and 1992 which show their incomes to be nil. When the dishonesty of their accountant came to light, they volunteered information to the Minister of National Revenue which led to reassessments made against them for the years now under appeal. All of those reassessments, with the single exception of the reassessment of Ronald Isnor for the 1993 taxation year, have been made beyond the normal reassessment period. The first question which I must answer, therefore, is whether the Minister has satisfied the onus of showing, under subparagraph 152(4)(a)(i) of the Income Tax Act, that the Appellants have "... made any misrepresentation that is attributable to neglect, carelessness or wilful default ... in supplying any information", which in this case specifically means in filing the returns that they have filed.
[6] The evidence before me with respect to that is principally the evidence of the two Appellants, which, insofar as the returns for the statute-barred years are concerned, is, as I have said, that they withdrew substantial amounts of cash, probably averaging $400 per week throughout the year, occasionally more, occasionally less. Sometimes, when funds were not available, they may not have been able to withdraw anything, but I am satisfied on the evidence that those were relatively rare occasions. The evidence was that the accountant prepared their returns and they signed them. Neither of the Appellants, on my assessment of their evidence, is a sophisticated individual with any great amount of understanding of commercial, or accounting, or certainly income tax matters. Their business is construction, and I am sure that they understand that and do it very well, but there is no doubt in my mind that they relied very heavily on their chartered accountant to look after all of the details of their business. Nevertheless, I am not persuaded that they did not understand, when filing income tax returns for three successive years in which they stated that they had no income whatsoever, that they were misrepresenting the situation.
[7] Mr. Ronald Isnor testified that he had asked the chartered accountant about this at some point during the period and was told not to worry about it, and that she knew what she was doing. Notwithstanding their reliance on her, and specifically upon her advice with respect to the personal income tax returns, I find that both of the Appellants understood that they were signing forms which said that they had no income whatsoever during each of the three years from 1990 to 1992, in circumstances when they were making the substantial withdrawals in cash to which I have referred to. They must have known that to some extent they were misrepresenting their income.
[8] I note particularly the words of Bowman J., as he then was, of this Court, in Snowball v. The Queen, 97 DTC, page 512, where he said at paragraph 18:
In any event, even if Mr. Cockburn was negligent it is no answer to an otherwise statute-barred assessment under subparagraph 152(4)(a)(i). It is quite true that the negligence of an accountant may be a defence to a penalty under subsection 163(2). Subparagraph 152(4)(a)(i) is not a penal provision. It serves an altogether different purpose from subsection 163(2). Negligence in the preparation of an income tax return retains its consequences under subparagraph 152(4)(a)(i) whether it is the negligence of the taxpayer personally or that of the accountant or other tax return preparer who is his or her agent.
Bowman J. refers as well to the case of Nesbitt v. The Queen, 96 DTC 6045 where Heald J. held:
... that a taxpayer could not shield himself from the effect of subparagraph 152(4)(a)(i) by blaming his accountant. ...
[9] There may well be circumstances in which misrepresentations are made in reliance upon the advice of an accountant or other professional where it was reasonable to do so and where the negligence of that professional advisor does not have the effect of establishing misrepresentation for the purposes of subsection 152(4). I am satisfied, however, that this is not such a case, given the substantial cash withdrawals and the failure in all of the statute-barred years to declare so much as one dollar of income. I find, therefore, that the Minister was entitled to raise the assessments, notwithstanding the passage of time.
[10] I turn now to the question of the correctness of the assessments. It became quite clear during the course of the evidence that the assessor had a difficult task simply because of the inappropriate bookkeeping that had been done by the accountant for the Appellants. It also became apparent that the original assessment done by that assessor, who is no longer employed by the Minister and who did not give evidence at the trial, was fraught with a number of errors, some of principle, and some simply relating to misstating either the amount of a cheque on the schedules prepared to support the reassessments, or failure to see from the available cheques and cheque stubs that certain of the amounts that were included in income by these reassessments were in fact corporate expenses, and so not attributable as income to either of the Appellants.
[11] A number of these errors were corrected at the objection stage by the appeals officer, Ms. Husack, who did give evidence. I am satisfied by Ms. Husack's evidence that she had made every effort to deal appropriately with the objections that were brought to her attention at that time. She said in her evidence that certain matters to which the Appellants objected in relation to the reassessments had been included in income due to an agreement entered into between the assessor and the accountant -- not the accountant to whom I have previously referred who was convicted of criminal conduct, but a subsequent accountant -- as to what may be described as pragmatic solutions to certain intractable difficulties arising out of the state in which the books and records of the company and the two Appellants had been kept.
[12] That said, there are certain items which were established by the evidence of the Appellants today to have been improperly included in the reassessments, and as to which no adjustment was made by Ms. Husack, principally because they were not matters that were raised with her at the objection stage. A number of these are expenditures for corporate expenses which did not represent either wages or shareholder benefits to the two Appellants, and should be removed from their income. I will deal first with the appeals of Mr. Ron Isnor in that regard.
[13] There are matters in each of the four years under appeal in respect of Mr. Ron Isnor that require rectification, and for that reason all four of his appeals will be allowed and the assessments will be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that follows.
[14] First, in respect of all of the years under appeal, to the extent that the amounts that have been included in his personal income represents payments made upon the Visa credit card issued in the name of Isnor Construction, they should be deleted from Mr. Isnor's personal income. His evidence, which was not contested by the Crown, was that that Visa card was used only for expenses of the corporation and not for personal expenditures.
[15] Secondly, there is an item included in his income for the year 1992 in the amount of $8,480 in respect of a loan from the Ford Credit Corporation. Neither counsel for the Minister nor Ms. Husack was able to explain to my satisfaction, or to explain at all, why such an amount had been included in income. That amount should be removed from Mr. Isnor's 1992 income. In addition, there are the following smaller amounts that should be removed from his income: in 1990, cheque no. 637 for $281 should be removed from his income; in 1992, cheque no. 293 was a payment to Visa, which is covered in what I said a moment ago; in addition, there is cheque no. 283 in the amount of $1,000 payable to the Ford Credit Corporation that should be removed from Mr. Isnor's income; in the year 1993, cheque no. 394 is an amount of $112.35, which according to Mr. Isnor's evidence, was an amount paid for advertising or public relations purposes of the corporation, and that should be removed from Mr. Isnor's income for that year.
[16] I turn now to Mr. Kevin Isnor's appeals. In 1990, cheque no. 746, is for an amount of $463; I have no explanation before me as to what that item in fact is for. Mr. Isnor's evidence was that it would not be an amount that was paid to him in cash, because he would not have taken such an uneven amount from the bank in cash. It is not possible at this point to inspect either the cheque or the cheque stub, and under more normal circumstances, perhaps one might conclude that Mr. Isnor had failed to discharge the onus of proof in respect of this item. However, the evidence before me was to the effect that the Appellants turned over to the Department of National Revenue, at the outset of this audit, a very large volume of records which had been obtained from their accountants, and that at the end of the proceedings a much smaller amount was returned to them. Some of the schedules of the unreported income that have been provided have attached to them the cancelled cheques and cheque stubs which support those schedules; some of them do not. Both Appellants raised with me the fact that it is very difficult for them to resist these assessments without having access to these cheque stubs and the cancelled cheques which they say they turned over to Revenue Canada and which were not, they say, returned to them.
[17] The vast majority of the items making up the schedules for which no cheques or cheque stubs are available in the evidence are for round numbers, most frequently $400, often $500, often $300, sometimes $200 or $250. From the evidence that I have heard today, I draw the inference that, absent some other explanation, those are cash withdrawals. But in the case of cheque no. 746 in the amount of $463, I am satisfied that it is not a cash withdrawal. I am satisfied that the inability of Mr. Isnor to explain what it is is more likely attributable to the assessor or some other person in Revenue Canada, than to Mr. Isnor. I believe he would have produced that cancelled cheque today if he were able to do so. So I draw the inference that it ought not to have been included in his income for 1990. His appeal is therefore allowed for 1990 and the assessment referred back for reconsideration and reassessment on the basis that that amount of $463 is to be removed from his income. There appears to be no item with which he takes specific objection, as opposed to the general objection I referred to a moment ago, in respect of 1991, and that appeal will therefore be dismissed.
[18] In respect of the 1992 taxation year, the only specific objection raised by Mr. Kevin Isnor is in respect of an amount of $8,480, which, like the amount included in Mr. Ronald Isnor's income to which I referred a moment ago, relates to the loan made by the Ford Credit Company to enable the purchase for the corporation of a vehicle. As was the case with Mr. Ronald Isnor, no possible reason to include this amount was offered to me by counsel or the witness for the Crown, and so Mr. Kevin Isnor's appeal for the 1992 taxation year will be allowed and the assessment referred back to the Minister for reconsideration and reassessment on the basis that that $8,480 is to be removed from his income.
[19] Mr. Kevin Isnor also raised in his evidence two items which he said were incorrectly assessed in respect of the year 1993. However, his notice of appeal is quite clearly restricted to the years 1990, 1991, and 1992, so there being no appeal for 1993 before me, I cannot deal with those other items.
[20] In summary then, the appeal of Ronald Isnor is allowed for each of the years 1990, 1991, 1992, and 1993, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that I have outlined in these reasons. For Mr. Kevin Isnor, the appeals for 1990 and 1992 are allowed, and the assessments are referred back to the Minister for National Revenue for reconsideration and reassessment on the basis that I have outlined. The appeal for the 1991 taxation year of Mr. Kevin Isnor is dismissed.
[21] Upon reading the transcript of these Reasons for Judgment I realized that I failed to deal with one point raised by Mr. Ron Isnor. Isnor Construction had its yard and premises on the same land used by Ron Isnor for his residence. The utilities and the taxes in respect of this land were apparently billed globally, that is to say without reference to the dual use of the land. The bills were paid by cheques drawn on the account of Isnor Construction. In reassessing the Appellant, the Minister has included in his income, as a shareholder benefit, a portion of the utilities and taxes. I was given no explanation of how the assessor made the apportionment. Nor was I given any evidence from the Appellant tending to show that there would have been a more appropriate basis on which to apportion these payments. Clearly, the Appellant received a significant benefit from these payments, and he has not shown the apportionment to be incorrect or unreasonable. This ground of appeal therefore fails.
Signed at Ottawa, Canada, this 14th day of September, 2000
"E.A. Bowie"
J.T.C.C.