Date: 20020125
Docket: 2001-1833-IT-I
BETWEEN:
JOANNE CLINE-SCHUIT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________ Agent for the Appellant: Bernard Schuit
Counsel for the Respondent: J. Michelle Farrell
____________________________________________
Reasonsfor Judgment
(Delivered orally from the Bench at London, Ontario, on September 20, 2001)
Bowie J.T.C.C.
[1] These appeals are brought from reassessments for income tax for the 1995 and 1996 taxation years. They were conducted under the informal procedure of the Court.
[2] The Appellant operated a business known as "the TaxMan". Its first year of operation was 1995. She reported gross income of $24,800 in 1995 and $24,215 in 1996, and expenses of $38,225.02 and $31,169.67 for these two years in connection with that business. She apparently reported losses of $8,726.26 and $4,520.00 respectively for the two years. As the business was a wholly-owned proprietorship, it is not obvious why she did not claim greater losses. In any event, she was reassessed to include unreported revenue from the business, and to disallow claimed expenses as follows:
1995 1996
Unreported revenue $55,354.00 $65,875.00
Disallowed expenses $21,842.00 $18,528.87
[3] These reassessments also disallowed losses that she had claimed in connection with a rental property amounting to $8,407 in 1995, and $5,622 in 1996, and reclassified her gains arising out of the sale of two residential properties which she held in partnership with another person. One of these properties was sold in 1995 and one in 1996. She declared the gains as capital gains; the Minister reassessed her on the basis that they were the profits of a business. These reassessments also disallowed her claim for what is sometimes called an equivalent to spousal credit under paragraph 118(1)(b) of the Income Tax Act (the Act) in 1996. Finally, she was assessed penalties of $7,523.77 and $8,071.85 for 1995 and 1996 in respect of the under-reporting of income.
[4] The Appellant filed objections to these reassessments, and in due course she was reassessed again, pursuant to subsection 165(3), on February 26, 2001. The changes made by these reassessments were:
(a) She was allowed rental losses of $2,460 and $3,321 for 1995 and 1996, respectively;
(b) Her unreported revenue from the TaxMan business was reduced in the amounts of $48,445 and $60,640 for 1995 and 1996; and
(c) Penalties were reduced by $7,423.77 for 1995 and $7,358.13 for 1996, to $100.00 and $713.12 respectively.
[5] The gains arising out of the real estate sales, the disallowed expenses of the TaxMan business and the disallowance of the paragraph 118(1)(b) credit in 1996 remained unaffected by these reassessments. It is from these two reassessments that the present appeals are brought.
issues
[6] The issues I have to decide are:
(a) Were the gains from the sales of the two houses on income or capital account?
(b) What, if anything, was the extent of the rental losses sustained by the Appellant?
(c) Was the Appellant separated from her spouse in 1996, and so entitled to the equivalent to married credit?
(d) What was the Appellant's income from the TaxMan business in each of the years? This involves issues as to unreported revenues and as to the appropriateness of claimed expenses in each year; and
(e) Is the Appellant liable to penalties for failure to report all of her TaxMan income?
the evidence
[7] The Appellant gave evidence, as did Mr. Bernard Schuit. Mr. Schuit also acted as representative for the Appellant in the presentation of her appeals. The Appellant and Mr. Schuit were married some years ago, and they have four children. Their evidence was to the effect that they separated in or about 1989. There has not been a divorce, nor do they have a written separation agreement. The Appellant lives with the four children in what I understand to have been their matrimonial home at 14 County Road 45, St. Thomas, Ontario. Mr. Schuit testified that he is a consultant, and that he runs his business from an office which is located in the basement of that house. From time to time he sleeps on a couch in that office. They share occasional meals, for example Sunday dinner. At other times he has stayed with a brother, or at another house in which the Appellant had an interest. He produced a record of his various addresses since 1984 obtained from the Ontario Department of Transport (Exhibit A-8). It showed him to have been registered with the department as living at a variety of addresses:
L2 14 County Rd 45, St. Thomas, N5R 5T5
14 County Rd 45, St. Thomas, N5R 5T5
49 Fifth Ave, St. Thomas, N5R 4C7
8 Henry
7 Cypress St, St. Thomas, N5R 1N2
NPTL 15 C6 Apt 3, St. Thomas R5, N5P 3S9
NPTL
15 Naama St, St. Thomas, N5R 1X3
77 East St, St. Thomas, N5P 2R4
77 East St, Apt 8, St. Thomas, N5P 2R4
[8] Both the Appellant and Mr. Schuit testified that they had not been conjugally intimate since at least 1989. Contrary evidence was given by Paul Andres, the Canada Customs and Revenue Agency (CCRA) assessor. He testified as to a conversation that he had had with the Appellant in which she spoke of taking a joint vacation with Mr. Schuit in 1996, during which they were intimate. This evidence referred to a trip taken to Thunder Bay by the Appellant, Mr. Schuit, and their children, where their daughter was to enter university. Ms. Cline-Schuit testified that they took the trip in separate vehicles, that they had separate accommodation, and that no intimacy took place. Mr. Schuit's evidence was to the same effect. Their joint interests are obvious. Exhibit A-8 shows that the Ministry of Transportation recorded the Appellant as living at Cypress Street in St. Thomas in January 1996, and at three other addresses later in that year, all in St. Thomas. This, of course, reflects only what Mr. Schuit has filed with the Ministry, but it must carry some weight, as it is no doubt an offence to give a false address.
[9] In my view, however, the fact that the Appellant and Mr. Schuit have not entered into a written separation agreement, and the evidence that he works and sometimes sleeps in the basement of the Appellant's house, calls for some independent evidence to corroborate that of the Appellant. The Appellant said that her husband sometimes stayed with a brother, and that he lived from time to time at three other addresses shown on Exhibit A-8. His evidence on this issue was extremely vague, as was all his evidence, and all the Appellant's own evidence. I did not consider them to be at all credible witnesses. They were both vague in their evidence-in-chief, and they were evasive on cross-examination. I do not accept their evidence, to the extent that it is self-serving, without corroboration.
[10] It would have been a simple matter to call a neighbour, a relative or a friend to corroborate their evidence as to residence. No one was called, and I infer that it was because it would not have assisted the Appellant's case to do so. I find that the assumption that they lived at the same address has not been displaced.
[11] I turn now to the Appellant's gains arising out of the sale of real property. She characterizes them as being on capital account. The Minister has assessed on the basis that these gains are in the nature of income.
[12] Before dealing with the evidence I must comment on the Respondent's pleading on this issue. The "assumptions of fact" pleaded by the Deputy Attorney General of Canada on this issue are:
(a) at all material times, the Appellant had 50% interest in J & K Enterprises (the 'Partnership'). The other partner was Katheryn Collier;
(b) the Partnership was in the business of buying and selling real estate;
(c) gains from the Partnership received in the amounts of $5,533.00 and $2,726.26 in the 1995 and 1996 taxation years respectively from sale of properties were on account of income;
The third of these is quite evidently not a fact at all, but the legal conclusion reached by the Minister's representatives, which the Deputy Attorney General would now like to have this Court affirm. I have in the past criticized this practice, to which the Deputy Attorney General so frequently resorts, of pleading conclusions of law as though they were facts that the Minister had assumed. Other judges of this Court have been critical of the practice as well. The jurisprudence has given a special status to assumptions made by the Minister in assessing: see Hickman Motors[1] and the cases there cited. It is important, therefore, that the pleading of assumptions said to have been made by the Minister in assessing be done with care, both to ensure that what is pleaded is confined to facts, and to ensure that what is pleaded to have been assumed by the Minister really was assumed, and is not a creation of the drafter. Pleadings such as the one before me tend to raise doubts as to the reliability of the Replies filed by the Deputy Attorney General.
[13] The Appellant testified that she entered into a partnership with Katheryn Collier, the object of which was to purchase real property which would be rented to produce a retirement income for them. She said that she financed her interest by way of $34,000 in cash from the proceeds of a $60,000 mortgage which she placed on her home. The partners purchased two houses, and resold them at a profit. They bought a house on Barwick Street in 1994 or 1995, which they sold in 1995. They bought a house on Cyprus Street in 1995 or 1996 which they sold in 1996. Both houses required repair or renovation; some work was done on them before they were sold. The Appellant testified that her partner refused to rent the houses, and forced her to sell her interest. How she forced her to do so was not made clear. What is clear is that the houses were sold within a year or two of their purchase, they were never rented, but were improved in value before resale. The Appellant specifically stated that they looked for houses that were rundown and could be fixed up.
[14] It is trite that the subjective evidence of the taxpayer does not carry much weight when the issue is whether a property is bought on capital or income account. Added to that, as I have said above, are the facts that the Appellant's evidence-in-chief was extremely vague, and that she was generally evasive on cross-examination. This, combined with her demeanour when giving evidence, leads me to conclude that her evidence is not reliable.
[15] The Appellant's partner was not called to testify, nor was the partnership agreement entered as an exhibit. One would expect that if the Appellant's evidence were true, then her partner would be able to corroborate it. When people enter into a written partnership agreement, it is common that they state in it the nature of their business. The absence of this document, and of testimony from Ms. Collier, causes me to believe that they would not assist the Appellant's case.
[16] The two houses were held for a very short time, which is in itself some indication that they were not bought to rent, but to resell. Finally, the fact that the houses were never rented weighs heavily against the Appellant's position. I conclude that these two properties were in fact purchased as inventory, to be improved and resold. The appeals fail as to this issue.
rental losses on 49 5th Avenue Triplex
[17] The Appellant claimed to deduct, in computing her income under section 3 of the Act, certain losses sustained in connection with a rental property. The losses were $8,407 and $5,622 in 1995 and 1996, respectively. On the evidence of the Appellant and her husband, it is clear that Mr. Schuit and a Mr. Don Perry owned the house at 49 5th Avenue, St. Thomas, in equal shares. The house was rented, and the rents were apparently less than the expenses each year. The evidence of the Appellant and her husband was to the effect that when they separated, he gave to her his interest in the house. However, it emerged in cross-examination of the Appellant that Mr. Schuit's agreement with Mr. Perry precluded Mr. Schuit from transferring this property without Mr. Perry's consent, and that Mr. Perry refused to give that consent. The Appellant stated that she took over the running of the property, making repairs, collecting the rent, and doing all the things necessary for a landlord to do. She may have done so, but this does not make her the owner, entitled to profit and liable to loss. She at no time acquired title to the property, or a share of it. Nor did she become a partner with Mr. Perry in ownership of the house. On this issue, too, I disbelieve the Appellant. Her evidence was conflicting, and Mr. Perry was not called to corroborate it. The appeals fail as to this issue.
[18] I turn now to the matter of the income of the Appellant's TaxMan business. Both the Appellant and her husband, who assisted her in setting up this business, admitted in their evidence that the TaxMan financial records were inadequate in 1995 and 1996. Of this there can be no doubt. As I understand the Minister's approach to estimating the gross income, it was to take CCRA's record of the clients for whom returns were e-filed by the Appellant, and to add to that each of the names on the Appellant's deposit books as having paid amounts which were deposited at the bank, and for whom no e-filed return was recorded - the assumption being that they were manually filed. The assessor then applied an average fee per return to arrive at a figure for gross sales. In the absence of any proper books and records, I know of no better way for the Minister of National Revenue to proceed.
[19] The Appellant's representative said that all returns done by the TaxMan business were e-filed, but that is obviously not so. Two documents were produced by the Appellant which were given to the auditor early in his audit to show the gross income of this business. They are simply scribbles of numbers on the page. The Appellant testified that she was not experienced in business in 1995 and 1996; clearly she had no training in how to keep books. Her husband apparently attempted to set up some kind of record keeping system, or at least so he said in his evidence. However, for the years in issue no sales journal was kept, nor was there an accounts receivable ledger, although at least some of the business was done on credit rather than for cash.
[20] The Appellant and Mr. Schuit were clearly uncooperative with the assessor. They resisted producing what few records existed. As the audit proceeded, and later in negotiation with the CCRA appeal's officer, they appear to have produced some information derived from the Appellant's records. No original books or records were put in evidence on the hearing of the appeals however. One book was produced, which the Appellant's agent submitted should lead me to conclude that the Appellant had declared more gross income than she received in 1995, and only slightly less in 1996. This book was prepared, he said, by a clerical person from the copies of original invoices kept on file by the Appellant at some time during the year 2000. The invoices were not entered as exhibits, nor was the clerk in question called to verify the entries in the book. It apparently was given some credence during the Appellant's negotiations with Revenue Canada. Unproven as it is, however, I find it to be of no probative value.
[21] Much of the debate over the gross revenues of the TaxMan business centred on the question of the number of people and businesses for whom returns were prepared in 1995 and 1996. The Appellant in those years was occupied largely with other work, and with her family responsibility. The business was, for the most part, carried out by other people, whom she referred to as subcontractors. There was no system of double entry bookkeeping in place, and few of the normal business records one might expect to find were kept. There is no documentary evidence, no records kept contemporaneously, and no credible oral evidence before me which could, on even a generous interpretation, displace the Minister's assumptions as to the gross income. Had there been proper records, then it would have been an easy matter to ascertain the year's gross sales. As it was the auditor, faced with virtually no reliable records and little or no cooperation, made an estimate of the sales, which he admitted in evidence that he knew to be high. That this is so is borne out by the very substantial reductions to the unreported income which were made by the second reassessments on February 26, 2001. The Minister at that time assessed on the assumption that the Appellant had failed to report $6,909 in sales for 1995, and $5,235 for 1996. The Appellant's representative attempted to argue that the Minister had included sales in 1995 that did not take place until 1996, and that there were receivables that were never collected.
[22] Turning now to the expenses disallowed, the Appellant testified, with refreshing candour, that she did charge personal expenses against the income of the TaxMan business, even though she knew that she ought not to do so. The expenses disallowed were $21,842 in 1995 and $18,528 in 1996. The Appellant made no attempt to justify these as business expenses, except as to interest charges. The interest disallowed in 1995 was $9,239, and in 1996 it was $6,858.
[23] No documentary evidence at all was introduced to support the claimed interest expense. The Appellant testified that she borrowed $60,000 by mortgaging her home, and that $34,000 of it was used as her contribution to the partnership with Ms. Collier, and some unspecified amount to put an addition on her house which was used for the TaxMan business, and for Mr. Schuit's consulting business. There is no evidence of the terms of the mortgage or the amount of interest paid on it. A substantial amount of the claimed interest expense was in fact credit card interest on credit card accounts used for personal purchases. Again, the Appellant has led no evidence from which even an educated guess might be made as to how much interest, if any, was paid in respect of borrowed money used for the purpose of gaining or producing income. The appeals fail on the issue of disallowed expenses.
[24] The final item to be dealt with is the penalties. These were reduced, following the objection, to relatively modest amounts. The Minister seeks to support them on the basis that the Appellant was grossly negligent in understating her sales for each year under appeal. The Appellant is well educated, and is certainly not naive. She entered into a business wherein she holds herself out to the public as being capable of giving advice in tax matters, and of completing income tax returns for customers. She conducted this business without any proper system of bookkeeping in place from which to compute her own income. She admitted on cross-examination that her records were inadequate. Clearly, she must have known that her returns, prepared without proper records, were unlikely to be accurate. The returns, she said, were prepared by members of her staff, and she herself reviewed them before they were filed. She knew that there were personal expenses that had been charged against her business income, and I draw the inference from this fact, and from the absence of proper records, that she was reckless, at best, in signing and filing her returns. Her conduct certainly amounts to gross negligence within the well-known meaning of that phrase as it has been interpreted in Venne v. The Queen,[2] and many other cases.
[25] The Appellant's representative attempted to argue before me that the Appellant is entitled to carry forward certain non-capital losses from prior years to the years under appeal. Exhibit A-7 is yet another handwritten document, which is said to be the Appellant's calculation leading to the conclusion that she has a loss carry-forward balance of $25,624.53 as at the end of 1994. Once again, there is no credible evidence that has been adduced to support this assertion, and I can make no finding as to the balance, if any, available to the Appellant.
[26] I cannot leave this case without commenting that much of the Appellant's difficulty in respect of these assessments obviously derives from her misplaced reliance on her husband and representative, Mr. Schuit. By his own admission, he was responsible to a very large extent for the absence of any sensible system of record keeping for the TaxMan business. People in business who do not keep the records that section 265 of the Act requires must expect to be greeted with some scepticism when they attempt to explain in oral evidence matters that should be properly recorded in books of account. This difficulty was compounded for the Appellant when she chose to have Mr. Schuit represent her as her agent before the Court. As the hearing progressed, it became more and more obvious that he has neither the knowledge nor the skills required to represent people in legal proceedings. His performance embodied the adage that a little knowledge is a dangerous thing; a fortiori, a very little knowledge is a very dangerous thing. None of this, however, relieves the Appellant of her responsibility to keep proper records and file honest and accurate returns.
[27] The appeals for 1995 and 1996 are dismissed.
Signed at Ottawa, Canada, this 25th day of January, 2002.
"E.A. Bowie"
J.T.C.C.
COURT FILE NO.: 2001-1833(IT)I
STYLE OF CAUSE: Joanne Cline-Schuit and
Her Majesty the Queen
PLACE OF HEARING: London, Ontario
DATE OF HEARING: September 18, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge E.A. Bowie
DATE OF JUDGMENT: September 24, 2001
APPEARANCES:
Agent for the Appellant: Bernard Schuit
Counsel for the Respondent: J. Michelle Farrell
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada