Date: 20010821
Docket: 2000-2625-IT-I
BETWEEN:
ILONA ZSOLDOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2000-2626-IT-I
BETWEEN:
GABOR L. ZSOLDOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] These appeals pursuant to the Informal Procedure were heard together on common evidence by consent of the parties at Toronto, Ontario on July 18, 19, 20 and 21, 2001. The Appellants are husband and wife. Both Appellants testified and called their chartered accountant, John William Morgan of Toronto, who advised them respecting their income tax returns from April 1993 until April 1995.
[2] The Respondent called David Browne, an office auditor with Canada Customs and Revenue Agency ("CCRA") in Toronto.
[3] Ilona was employed by Ault Foods Ltd. as a full time employee at all material times. She has appealed reassessments for 1992, 1993, 1994, 1995, 1996 and 1997. Her assessments for 1992 to 1994 inclusive were made outside of the statutory periods. At the opening of the hearing the Respondent withdrew the assessment of penalties for the years 1992 and 1993.
[4] Paragraphs 11 to 21 inclusive of the Reply to Ilona's Notice of Appeal read:
11. In computing income the Appellant claimed business losses in the amounts of $23,062.00, $9,811.00, $12,923.00, $11,015.00, $15,421.00 and $13,829.00 for the 1992, 1993, 1994, 1995, 1996 and 1997 taxation years, respectively.
12. The Minister assessed the Appellant as filed for the 1992, 1993, 1994, 1995, 1996 and 1997 taxation years, Notices of Assessment thereof were dated June 22, 1993, June 23, 1994, March 30, 1995, May 9, 1996, April 21, 1997 and September 4, 1998, respectively.
13. In reassessing the Appellant for the 1992, 1993, 1994, 1995, 1996 and 1997 taxation years, concurrent Notices of Reassessment dated April 14, 1999, the Minister disallowed the Appellant's claimed business losses and imposed a federal penalty pursuant to subsection 163(2) of the Income Tax Act (the "Act").
14. In so reassessing the Appellant, the Minister made the following assumptions of fact:
a) the facts hereinbefore admitted or stated;
b) the Appellant was, at all material time, employed by Parmalat Food Inc.;
c) the Appellant registered an entity known as "G & I Management Service" as a sole proprietorship on April 23, 1993;
d) for the taxation years at issue, the Appellant reported gross business income and net business losses as follows:
|
Taxation Year |
Business Income |
Net Losses |
|
1992 |
$38,782.00 |
$23,062.00 |
|
1993 |
$11,389.00 |
$ 9,811.00 |
|
1994 |
$17,714.00 |
$12,923.00 |
|
1995 |
$10,222.00 |
$11,015.00 |
|
1996 |
$21,032.00 |
$15,421.00 |
|
1997 |
$11,000.00 |
$13,829.00 |
e) for the taxation years at issue, the reported business income of G & I Management Services was related only to the activity of the Appellant's spouse, Gabor Zsoldos, who was an architect;
f) Gabor Zsoldos invoiced his clients directly for his consulting services under the entity named "Gabor L. Zsoldos Architect";
g) payments from Gabor Zsoldos' clients were made directly to "Gabor L. Zsoldos";
h) the claimed expenses were not made or incurred by the Appellant or G & I Management Services, or if made or incurred, were not made or incurred for the purposes of gaining or producing income from a business or property;
i) the Appellant did not carry on a business in the taxation years at issue;
j) the Appellant knowingly, or under circumstances amounting to gross negligence, in the carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omission in the income tax returns filed by her for the 1922 [sic], 1993, 1994, 1995, 1996 and 1997 taxation years, as a result of which the federal tax that would have been payable by her for the said taxation years, if the tax had been assessed on the basis of the information provided in her income tax returns was less than the tax in fact payable.
B. ISSUES TO BE DECIDED
15. The issues are:
a) whether the Appellant carried on business for the taxation years at issue;
b) whether the Appellant is entitled to deduct the claimed expenditures relating to the purported business for the taxation years at issue;
c) in the alternative, whether the Appellant incurred the expenses for the purposes of earning income from business or property;
d) whether the business expenses, if any, were reasonable in the circumstances;
e) whether the Minister properly assessed penalties pursuant to subsection 163(2) of the Act for the Appellant's for the taxation years at issue;
f) whether the Minister was entitled to assess the Appellant for the 1992, 1993, 1994 and 1995 taxation years pursuant to subsection 152(4) of the Act.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
16. He relies on sections 3, 9 and 67, subsections 152(4), 163(2) and 248(1) and paragraphs 18(1)(a) and 18(1)(h) of the Act as amended for the 1992, 1993, 1994, 1995, 1996 and 1997 taxation years.
17. He submits that for the taxation years at issue the Appellant did not carry on a business and, therefore, there was no business loss.
18. He submits that the expenses were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act.
19. In the alternative, he submits that deduction for the claimed expenses for the business for the taxation years at issue are prohibited by section 67 of the Act as they were unreasonable in the circumstances.
20. He further submits that the penalties assessed for the taxation years at issue were correctly assessed in accordance with subsection 163(2) of the Act because the Appellant knowingly, or under circumstances amounting to gross negligence in carrying out a duty of obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of a false statements or omission in the income tax returns filed by her for the taxation years at issue, a result of which the federal tax that would have been payable by her for the said taxation years, if the tax had been assessed on the basis of the information provided in he income tax returns, was less than the federal tax in a fact payable within the meaning of subsection 163(2) of the Act.
21. He further submits that the Minister is entitled to assess beyond the three year limit with respect to the Appellant's 1992, 1993 1994 and 1995 returns of income in accordance with the provisions of subsection 152(4) of the Act.
[5] Assumptions 14(a) to 14(g) inclusive, excepting 14(f), were not refuted, except that Ilona's T-4's for employment income read Ault Foods Ltd. The invoices described have as part of their headings in 1995, 1996 and 1997, the words "INVOICE STATEMENT BY G & I M.S." in comparatively small print. In addition, respecting assumption 13(c), the registration uses the word "Services" with an "s" and occurred on April 22, 1993 and not on April 23. The evidence is that Gabor filled out the registration form for G & I Management Services to carry on the business of "project and property management", Ilona signed it as sole proprietor and Gabor took it and registered it on April 22, 1993 (Exhibit R-3). The remaining assumptions are in dispute.
[6] Gabor and Ilona were married in 1972. They immigrated to Canada in 1973. Gabor had graduated as an architect in Hungary. He worked on the design and construction of major buildings and complexes in downtown Toronto and qualified as an architect in Canada. In 1986 he began practising on his own from his home. In 1990 he entered into a design and construction project with Meldrums for a home. This led to a complaint to the Ontario Architectural Association, two disciplinary proceedings, court appeals and an application by Gabor to the Supreme Court of Canada which was denied in the spring of 2001. He retained a number of lawyers until he ran out of funds and then continued proceedings by himself. This all-engrossing process was well under way when the Appellants first retained Mr. Morgan in April 1993, for the price of $100.00, to prepare their 1992 income tax returns. They had a one-hour meeting among the three of them during which Mr. Morgan advised them. Then Mr. Morgan completed a financial statement for Ilona and filled out their income tax returns in his handwriting. They filed them for their 1992 taxation years.
[7] Gabor has appealed reassessments for his 1995, 1996 and 1997 taxation years. The reassessment for his 1995 taxation year was made outside of the statutory period.
[8] Paragraphs 10 to 18 inclusive of the Reply to Gabor's Notice of Appeal read:
10. In computing income the Appellant reported gross and net business income in the amounts of $9,000.00, $9,000.00 and $8,000.00 for the 1995, 1996 and 1997 taxation years, respectively.
11. The Minister assessed the Appellant as filed for the 1995, 1996 and 1997 taxation years, Notices of Assessment thereof were dated March 21, 1996, March 27, 1997 and June 4, 1998, respectively.
12. In reassessing the Appellant for the 1995, 1996 and 1997 taxation years, concurrent Notices of Reassessment dated April 9, 1999, the Minister included additional business income in the amounts of $1,043.00, $11,238.00 and 10,643.00, respectively and imposed a federal penalty pursuant to subsection 163(2) of the Income Tax Act (the "Act").
13. In so reassessing the Appellant, the Minister made the following assumptions of fact:
a) the facts hereinbefore admitted or stated;
b) during the taxation years at issue the Appellant was a self-employed architect;
c) for the taxation years at issue, the Appellant invoiced his clients directly for his consulting services under the entity named "Gabor L. Zsoldos Architect";
d) payments from Gabor Zsoldos clients were made directly to "Gabor Zsoldos";
e) Appellant's business activities for the taxation years at issue were as follows:
|
1995 |
1996 |
1997 |
|
|
Gross Income |
$10,222. |
$21,032. |
$18,763. |
|
Expenses |
|||
|
Interest |
$71. |
$ 24. |
-0- |
|
Supplies (office) |
108. |
774. |
120. |
|
Total Expenses |
179 |
794. |
120. |
|
Net Business Income |
$10,043. |
$20,238. |
$18,643. |
f) the Appellant understated his business income for the 1995, 1996 and 1997 taxation years in the amounts of $1,043.00, $11,238.00 and $10,643.00, respectively;
g) the Appellant knowingly, or under circumstances amounting to gross negligence, in the carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omission in the income tax returns filed by him for the 1995, 1996 and 1997 taxation years, as a result of which the federal tax that would have been payable by her for the said taxation years, if the tax had been assessed on the basis of the information provided in his income tax returns was less than the tax in fact payable.
B. ISSUES TO BE DECIDED
14. The issues are:
a) whether the Appellant's income for the 1995, 1996 and 1997 taxation years were understated;
b) whether the Minister properly assessed penalties pursuant to subsection 163(2) of the Act for the Appellant's for the taxation years at issue;
c) whether the Minister was entitled to assess the Appellant for the 1995 taxation year pursuant to subsection 152(4) of the Act.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
15. He relies on sections 3, 9 and 67, subsections 152(4), 163(2) and 248(1) and paragraphs 18(1)(a) and 18(1)(h) of the Act as amended for the 1995, 1996 and 1997 taxation years.
16. He submits that the Appellant understated his income for the 1995, 1996 and 1997 taxation years and, those amounts were properly included in the computation of income for the taxation years at issue pursuant to section 3 and 9 of the Act.
17. He further submits that the penalties assessed for the taxation years at issue were correctly assessed in accordance with subsection 163(2) of the Act because the Appellant knowingly, or under circumstances amounting to gross negligence in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of a false statements or omission in the income tax returns filed by him for the taxation years at issue, as a result of which the federal tax that would have been payable by him for the said taxation years, if the tax had been assessed on the basis of the information provided in his income tax returns, was less than the federal tax in fact payable within the meaning of subsection 163(2) of the Act.
18. He further submits that the Minister is entitled to assess beyond the three year limit with respect to the Appellant's 1995 return of income in accordance with the provisions of subsection 152(4) of the Act.
[9] Assumptions 13(a) to (d) inclusive were not refuted. Respecting assumption 13(b), Gabor was suspended from practising as an architect for four months, from November 21, 1993 (Exhibit A-5, Tab 9). Then in September 1998 he was suspended and conditions were imposed with which he has been unable to comply to this date (Exhibit A-5, Tab 10). His invoices described in assumption 13(c) contained a heading "INVOICE STATEMENT BY G & I M.S." in small print to one side of the large print title describing Gabor as an architect. Upon reading the form of these invoices it is obvious that the average recipient of such an invoice would believe that the invoice had come from Gabor as an architect and not from G & I M.S. Indeed the fact is that all of the payments for the years in appeal made on account of these invoices were made to "Gabor L. Zsoldos, Architect" and not to G & I.
[10] William Morgan, C.A. testified that in April 1993, based on his interviews with the two Appellants and a previous discussion with Gabor, the possibility of these professional difficulties was foreseeable. Upon seeing and hearing the Zsoldos, the Court accepts and believes Mr. Morgan's testimony on this point. It was on this basis that Mr. Morgan advised them then and in the following years and proceeded as he did.
[11] Throughout 1992 Gabor had practised as a licensed architect, although the Meldrum disciplinary proceedings were then underway. That continued to be the case when the Zsoldos met with Mr. Morgan in April 1993. Mr. Morgan testified that his professional advice is, and was, that if one married spouse is in a business or profession and the other is at home or unemployed, then he will try to make their incomes as even as possible to minimize the tax on the family unit.
[12] In meeting with the two Appellants in April 1993 he suggested that Ilona register "G & I Management Services" ("G & I") since he "assumed that both were actively involved in what each of them are doing" because they were a married couple. In Mr. Morgan's opinion, Ilona was providing the money for Gabor's business, she was supporting the family unit and the business was depending on Ilona's employment income to keep going. Therefore Mr. Morgan intended, as much as possible, to evenly distribute income between Ilona and Gabor for tax purposes. Mr. Morgan testified clearly that G & I was not to be an architectural firm. Rather it was set up to manage projects and to do non-architectural tasks since it was not a licensed architect. Gabor was the architect, although his licence was in jeopardy. Ilona testified that in their 1993 interview she questioned Mr. Morgan about the legality of what was being done and proposed. Mr. Morgan told her that this was legal and a normal practice for married couples such as the Zsoldos. The Court accepts Ilona's testimony of this conversation with Mr. Morgan because his testimony confirmed what Ilona stated.
[13] By 1992 Gabor had in excess of $30,000.00 in losses from his business to carry forward which he would lose forever if steps were not taken. Therefore, Mr. Morgan placed G & I in Ilona's name and drew up an "Income Statement" in his own handwriting which listed expenses which Gabor had given him and added a salary of $34,000.00 to Gabor in order to take advantage of Gabor's previous losses (Exhibit A-1, Tab 2). Ilona then claimed a "business loss" from G & I of $23,062.00 for 1992 (Exhibit A-2, Tab 2). Gabor reported "professional income" of $34,000.00 and carried forward losses of $26,000.00 (Exhibit A-2, Tab 3). Mr. Morgan's intention was to keep Ilona's income under $30,000.00, keep Gabor's income high enough to get the property tax credit, take advantage of Gabor's losses and minimize the tax on the family unit. Gabor and Ilona agreed to this and signed the income tax returns for 1992 that Mr. Morgan filled out in his own handwriting. For 1993 and 1994, Mr. Morgan prepared income tax returns for the Zsoldos on the same basis. They signed and filed them in 1993. In 1994 Gabor added to the "business rent" figure deducted by G & I, which Mr. Morgan wrote, and changed it from $2,762.00 to $5,535.00 unbeknownst to Mr. Morgan. Then Ilona signed it and the Zsoldos filed Ilona's 1994 income tax return claiming a higher loss.
[14] On this evidence it is clear that Ilona had no business whatsoever in 1992 and that her income tax return for 1992 was clearly false to her knowledge. G & I was a fiction made up by Mr. Morgan and the Zsoldos in April of 1993. On this basis the Minister was entitled to assess Ilona's 1992 return of income in accordance with the provisions of subsection 152(4) of the Income Tax Act. Ilona's appeal for 1992 is dismissed.
[15] When the G & I name was registered in April 1993 as a business it was also a fiction. Gabor was practising on his own. Ilona testified that she believed she financed the business; however it is evident that she did not have that belief until she met with Mr. Morgan. The Court finds that she in fact continued to finance the household after the April meeting of 1993, just as she had before that meeting. Ilona also testified that she added up the figures that Gabor assembled for income tax purposes, and this is believed. Ilona testified that they went to the bank together to borrow money and the Court believes that this certainly happened on occasions because only Ilona had borrowing power and she put a second mortgage on the home she purchased in 1993 and in addition put an encumbrance on her Corolla. However these monies were used to finance the home and household purchases. There is no clear evidence that the proceeds of these borrowings were used to finance Gabor's business or the alleged G & I business. Both Ilona and Gabor had signing authority on the G & I bank account. However all of the income alleged to be G & I income was in fact billed out by "Gabor L. Zsoldos, Architect" and deposited into Gabor's architect firm's bank account upon which Gabor had sole signing authority. Ilona's testimony that she prepared food for and helped to entertain business clients in their home is accepted as true; however this is the normal household practice of a spouse of a professional person with a small practice. Ilona also made the payments for the household mortgage, for the insurance, utilities and taxes for the home which she owned. After the home was purchased in July 1993, Gabor's business was situated there and the alleged G & I business was also situated there. Ilona owned the home from which the business was operated after they ceased renting and moved into the home which she purchased on July 28, 1993.
[16] Throughout the years 1992 through 1997, Gabor continued to operate his business under the name "Gabor L. Zsoldos, Architect". He made the contacts and contracts; he did the office and field work; he did all purchases and sales; he kept the business bank account in his sole name; he made all deposits; he wrote all cheques; he did the sketches, drawings and models; he compiled all the figures and reports; he appears to have done all of the correspondence and he prepared all the invoices, collected the fees, and decided upon any write-offs. There is no accepted evidence that anything changed from 1992 through 1994 except that the income tax statement was filed by Ilona under the registered name of G & I. There is not even any evidence that the bills or the letterhead of the architectural practice changed in that time. After 1994 the invoices contained the side reference "INVOICE STATEMENT BY G & I M.S.". However that appears to be the only change after 1994.
[17] Gabor prepared the statements of expenses for the business at all times material to these actions and Ilona added the numbers up for him. In 1992-4 he gave them to Mr. Morgan and they were dealt with in the manner already described. Mr. Morgan accepted Gabor's statements and then calculated Gabor's fee from G & I based upon Ilona and Gabor's income tax liabilities and upon Gabor's use of his previous losses for tax purposes. After 1994 Gabor and Ilona did the numbers as described and Gabor decided his own business fee based upon what he had seen Mr. Morgan do and what G & I could afford. In each year Ilona accepted that, checked her income tax return, signed it and filed it.
[18] In April 1995 Mr. Morgan prepared the 1994 G & I financial statement and income tax return for Ilona. However before Ilona signed it Gabor changed the G & I financial statement. Gabour added the sum of $2,773.00 to the "rent" expenses as written by Mr. Morgan for 1994 in his draft (Exhibit A-12). As a result of Gabor's insertion, Ilona had a greater loss in G & I for 1994 than Mr. Morgan had determined (Exhibit A-1, Tab 6). Ilona denied having any knowledge about this, although she had already testified that she added up the figures for the sheets submitted to Mr. Morgan for G & I and she also checked her own income tax returns before she filed them. If she had done both of these things for the 1994 income tax return, she would have identified the discrepancy of $2,773.00. Gabor testified that the difference had been inserted by him to make up for litigation that he had lost to their former landlord respecting rent claimed by the landlord for 1993 and respecting a property tax adjustment in 1993 on account of Ilona's purchase of the home effective July 28, 1993 (Exhibit -26) in which G & I's office was situated. Thus, in April 1995 when Ilona's 1994 income tax return was prepared and filed, we have evidence that both Gabor and Ilona were not relying on Mr. Morgan's advice and, at least in the case of the 1993 property tax adjustment, were putting a 1993 claim into G & I's 1994 "income statement". This resulted in a greater tax refund to Ilona than Mr. Morgan had calculated. Moreover it was done after Revenue Canada had refused to adjust what appears to be Gabor's 1993 income tax return respecting this matter by its letter dated March 7, 1995 and contained in Exhibit A-26. In the Court's view these events establish that, respecting the 1994 income tax returns of both Ilona and Gabor, neither of them were relying on Mr. Morgan or his suggestions and they did not rely on him after that. In particular, the insertion of the 1993 property tax adjustment figures into Ilona's 1994 G & I Management Services' statement and the resultant additional refund in her 1994 income tax return constitutes a knowing and wilful act by both Gabor and Ilona which, on the evidence before the Court, each of them knew to be false at the time and each of them did wilfully and with full knowledge. They knew that this act would result in a greater refund of income tax for 1994 to Ilona than would otherwise have been the case and it did.
[19] It should also be noted that Mr. Morgan testified that in his discussions in April 1993 with Ilona and Gabor he made it clear to them that G & I was not to be involved in the architectural profession. Rather it was to carry on project management exactly in the manner in which it was registered. No architectural services were to be invoiced for and no architectural income was to be reported as income. Similarly no architectural expenses were to be deducted by G & I. This is pointed out because in a very detailed examination-in-chief of Gabor respecting G & I's 1997 "Statement of Professional Activities" contained on the appropriate Revenue Canada form T-2032E(97), Gabor testified that G & I deducted claims for his Ontario Architect's Association membership and his real estate license in the total amount of $1,940.00 and for legal fees paid on account of his architectural discipline matter with the Ontario Architect's Association of $6,844.00. These were never intended to be part of G & I's activities and it was specifically formed not to conduct architectural activities. These claims indicate that Ilona and Gabor were not following the advice which Mr. Morgan gave to them in April of 1993. Moreover these claims were similar to those made from 1992 through 1997 as was confirmed by both Ilona and Gabor in their testimony. The evidence is that Gabor assembled these numbers, Ilona added them up, Gabor inserted them into an information sheet under the appropriate income tax form headings which did not identify the Ontario Architectural Association relationships and simply gave them to Mr. Morgan without further comment. These activities by both Ilona and Gabor indicate that the business was in fact Gabor's and that they were knowingly and wilfully deceiving Mr. Morgan respecting the 1992, 1993 and 1994 income tax returns.
[20] Other abuses were identified by Gabor respecting the 1997 income tax return and the other returns in question in that various household expenses were claimed as part of the G & I "Statement of Professional Activities". All automobile expenses whatsoever were claimed respecting both automobiles owned by the couple from 1992 to 1997 inclusive. For example, the 1997 automobile expense claim of $5,050.00 contains what might be called residual capital cost allowance charge for the 1991 Corolla which Gabor presented in his testimony in chief without any historical record of capital cost allowance previously claimed or any mathematical relationship of the claim to the kind of capital cost allowance normally allowed for such a vehicle. The testimony of both Ilona and Gabor is that these calculations were done by Ilona; therefore Ilona had to know what was being done respecting the 1991 Corolla and the expenses claimed for both cars. Moreover Gabor's specific testimony concerning certain tow charges indicated clearly that he was not using the 1991 Corolla in the business. Rather he was using a 1986 Prelude and this was confirmed by Ilona's own testimony that Gabor used the Prelude except on long trips. There is no evidence of any long vehicle trips by Gabor at any time. This testimony by Gabor, the majority of which was done in chief under the guidance of his own counsel did not contain any breakdown of vehicle use, did not contain any correct description of a calculation of capital cost allowance claimed, and did not contain any acceptable allocation of personal versus business expenses. The claim put forward was for the whole amount of $5,050.00 for 1997 and Gabor and Ilona confirmed that the same procedures were adopted by them for each year in question. Such a claim in these circumstances is incredible. It confirms the lack of credibility contained in the entire testimony of Gabor and Ilona in this case.
[21] In Lucien Venne v. The Queen, [1984] CarswellNat 210, Strayer, J. (now of the Federal Court of Appeal) dealt succinctly with the matters of opening up statute-barred years and of the requirements imposed upon Revenue Canada respecting penalty assessments. Respecting the opening of statute-barred years he said in paragraph 16:
16 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 words "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. ...
Respecting the imposition of penalties he stated in paragraphs 34 and 37 of the same judgment:
34 (4) Imposition of penalties - As noted earlier, in order for the defendant to levy penalties under subsection 163(2) of the Income Tax Act it is necessary that the taxpayer have "knowingly, or under circumstances amounting to gross negligence ... participated in, assented to or acquiesced in the making of" a false statement in a return, etc. The similar language of subsection 56(2) of the former Income Tax Act was interpreted by Cattanach, J. in Udell v MNR, [1969] C.T.C. 704, 70 D.T.C. 6019. In that case a farmer had retained a certified public accountant to prepare his income tax returns. The accountant made several errors in different taxation years in the process of transposing figures from the taxpayer's account books to his working papers. In some of the years in question the accountant signed the returns on behalf of the taxpayer before they were seen by the later and in other years the taxpayer reviewed them first and then signed them. He apparently did not notice any errors. The Minister of National Revenue assessed penalties with respect to these errors. In interpreting the language now found in subsection 163(2) of the present Income Tax Act, Cattanach, J said, at 713-4 [6025-25]:
Accordingly there remains the question of whether or not section 56(2) contemplates that the gross negligence of the appellant's agent, the professional accountant, can be attributed to the appellant. Each of the verbs in the language "participate in, assented to or acquiesced in" connotes an element of knowledge on the part of the principal and that there must be concurrence of the principal's will to the act or omission of his agent, or a tacit and silent concurrence therein. The other verb used in section 56(2) is "has made". The question, therefore, is whether the ordinary principles of agency would apply, that is, that what one does by an agent, one does by himself, and the principal is liable for the actions of his agent purporting to act in the scope of his authority even though no express command or privity of the principal be proved.
In my view the use of the verb "made" in the context in which it is used also involved a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of this case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation.
I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.
In coming to this interpretation the learned judge had regard to the fact that the subsection in question is a penal provision and it must be interpreted restrictively so that if there is a reasonable interpretation which will avoid the penalty in a particular case that construction should be adopted. He concluded that the erroneous information in the returns was not included with the knowledge of the taxpayer nor could the gross negligence of the accountant be attributed to him.
...
37. With respect to the possibility of gross negligence, I have with some difficulty come to the conclusion that this has not been established either. "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 intentional acting, an indifference as to whether the law is complied with or not. I do not find that high degree of negligence in connection with the misstatements of business income. To be sure, the plaintiff did not exercise the care of a reasonable man and, as I have noted earlier, should have at least reviewed his tax returns before signing them. A reasonable man in doing so, having regard to other information available to him, would have been led to believe that something was amiss and would have pursued the matter further with his bookkeeper.
[22] In his testimony, David Browne stated that in his view the actions of the Appellants on account of their income tax returns under appeal constituted wilful default. When pressed, he added that the wilful default, in large measure, consisted of the fact that the practice or business was Gabor's, and that Ilona had described it as her own for the purpose of reducing her taxes. His finding was that Ilona had no business activity whatsoever.
[23] This Court finds that Mr. Browne was right in his determination. The actions of both Appellants were wilful default and constituted intentional misconduct on their parts throughout the years in question. Ilona's excuse was that she questioned Mr. Morgan and Mr. Morgan reassured her; Mr. Morgan confirmed that. However Mr. Morgan also stated that G & I Management Services was specifically set up by them not to be conducting the practice of architecture. This was confirmed by Gabor's testimony respecting his drawings and models which he distinguished as not constituting architectural work. Despite this, throughout all of the years 1992 to 1997 inclusive, both Ilona and Gabor knew that the expense sheets which they presented for legal fees and membership fees contained large amounts which related to Gabor's architecture profession; that the automobile expenses were for 100% of the costs incurred on account of both automobiles and that any "plug-in figure" for capital cost allowance related to the Corolla which was not the car used by Gabor in the course of business. Based upon Gabor's evidence, business in-home expenses were used to create a loss for Ilona in all years. Indeed, upon Gabor's testimony respecting the 1997 expenses claimed under the G & I heading, it appears that they inserted items to adjust the incomes without any regard to their legitimacy. Gabor testified that he telephoned a number of chartered accountants before he settled upon Mr. Morgan. From the evidence it would appear that he settled upon Mr. Morgan because he expected, for $100.00, to get exactly what he and Ilona received, namely a cursory compilation of an income tax return based upon an income and expense statement which was accepted without question. For these reasons the Court finds that the Respondent properly re-opened the statute-barred years respecting both Appellants.
[24] The next question is whether or not the penalties were properly imposed. During the years in question Gabor was a professional architect who had practiced on his own since 1986 and filed business income tax returns through various accountants and also by himself. Ilona had post-high school training in accounting and had worked as an accountant for Ault Foods Ltd. for all of her working life in Canada, except two or three early years. She had been promoted by Ault Foods Ltd. in the receivables department. While at present she is ill, she is also an intelligent woman who, as she and others testified, has kept the household going and at the same time performed a full-time accounting job in the receivables department of Ault Foods Ltd. Both are educated and are knowledgeable in bookkeeping and accounting. Mr. Morgan's testimony respecting the limitations of the G & I business was understood and accepted by Gabor when he filled out the application to register G & I and by Ilona when she signed it in April 1993.
[25] Despite this, Gabor and Ilona knew in April of 1993 that they were giving Mr. Morgan expense statements containing claims to deduct architectural fees and legal fees associated with Gabor's architectural practice. They also knew that they were claiming to deduct all of their vehicle expenses and, in addition, household expenses in order to claim a loss by Ilona so as to obtain a tax refund. Accepting Mr. Morgan's restrictions on what they were to claim, it is clear that Mr. Morgan advised them not to claim any architectural expenses or to include any architectural income in the G & I statement. Nonetheless, they did both at the time and continued to do so throughout all of the years in question. All of this amounted to intentional acting on their part and a careless disregard as to the kind of expenses claimed, who the expenses truly belonged to, and whether or not the Income Tax Act was complied with. They did the same thing in each year with respect to the interest claimed; it constituted all of the interest charged on account of all of their credit cards. The alleged "salary" paid to Gabor, which Gabor reported in different years as either professional or business income, was never paid by Ilona in any of the years in question or at the time the income tax returns were prepared. In his testimony, Gabor admitted that the 1996 claim for bad debts was not true and had no substance at all. The "insurance" expenses claimed in all years related to the Ontario Architect Association membership of Gabor. In 1997 maintenance and repair claims related to their home and helped to create a loss. In 1997 no travel expense was proved and, given the lack of credibility of Gabor, his allegations in particular respecting a trip to Hungary for business purposes in 1995 are not accepted since he had personal relationships in Hungary at the time. Similarly, there was only one telephone in the home which therefore had to have had some personal use respecting every monthly bill. The same applies to a title described as "other expenses" and, given the lack of credibility, without them being confirmed with receipts or invoices, they cannot be accepted. Throughout all of the years, the losses which Ilona claimed are large in relation to her true income and, on the other side, the income which Gabor reported is small in relation to his true gross business income which consisted of the amounts assessed.
[26] Mr. Browne's finding that the business was Gabor's is confirmed by the evidence and by the lack of credibility of the Appellants respecting the matters presented to the Court. Using the tests described in Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025 (F.C.A.) the business services were provided by Gabor, the tools were his (except the home office premises), the profits or losses were his; the control was his; Gabor did everything and without him there was no business. In fact the business was Gabor's throughout the years from 1992 through to 1997. For these reasons the Court finds that Ilona did not carry on business for the taxation years at issue and she was not entitled to deduct the claimed expenditures relating to the purported business for the taxation years at issue. Moreover the Minister properly assessed penalties pursuant to subsection 163(2) of the Income Tax Act for Ilona's taxation years in issue and the Minister was entitled to assess Ilona for the 1992, 1993, 1994 and 1995 taxation years pursuant to subsection 152(4) of the Income Tax Act. Ilona knowingly, falsely and wilfully reported losses from a business that was not hers and false expenses from that business for all of her years under appeal. In these circumstances the Court finds that assumptions 14(h), (i) and (j) of the Reply to Ilona's Notice of Appeal are correct. Therefore her appeals are dismissed in their entirety excepting only that for 1992 and 1993, the penalties are not imposed since they were withdrawn by the Respondent's counsel at the opening of the hearing.
[27] Respecting Gabor Zsoldos and based upon the facts found herein and the lack of credibility of the Appellants, the Court finds that assumptions 13(e), (f) and (g) are confirmed by the evidence and are correct. Gabor knowingly, falsely and wilfully understated his income for those years and the Minister of National Revenue properly assessed penalties pursuant to subsection 163(2) of the Income Tax Act for those years. Moreover the Minister was entitled to assess the Appellant for the 1995 taxation year pursuant to subsection 152(4) of the Income Tax Act.
[28] Since the Court finds that G & I was Gabor's architectural business, he is entitled to deduct the following expenses which he proved for 1997 from the "Net Business Income" as assumed in subparagraph 13(e) of the assumptions in the Reply to Gabor's Notice of Appeal as quoted in paragraph [8] hereof:
(1) "Bad debts $500" - Gabor was only able to prove one item satisfactorily:
$423.72
(2) "Business tax, fees, licences, memberships and subscriptions $1,940.00" - Gabor established that these were claims for his membership in the Ontario Architect's Association ("OAA") and for his Real Estate licence. He stated that these helped him do competitive bids and estimates for G & I and maintained his standing with clients. The Court accepts this as true and these are allowed.
$1,940.00
(3) "Insurance $478" - This relates to Gabor's OAA membership. It is allowed.
$478.00
(4) "Interest $1,569" - This is interest on credit cards which Gabor testified consisted 95% of all of the family's gasoline and auto repair purchases. 95% appeared to be roughly correct. For the reasons described in paragraph [20] these are not allowed, except as they are already allowed in subparagraph 13(e) of the assumptions in the Reply to Gabor's Notice of Appeal.
Nil
(5) "Maintenance and repairs $340" - These were heating and plumbing repairs to the Zsoldos' home and should properly be included in the "Calculation of business-use-of-home expenses". They are not allowed:
Nil
(6) "Meals and entertainment $679" - These occurred when Gabor and Ilona entertained clients at meals. They are limited in use by the Income Tax Act. Therefore they are allowed to the extent that such claims are permitted by the Act.
$339.50
(7) "Motor vehicle expenses (not including capital cost allowance) $5,050". These are not allowed for the reasons described in paragraph [20].
Nil
(8) "Office expenses $430" - These were established:
$430.00
(9) "Supplies $73" - These were established:
$73.00
(Taken together (8) and (9) hereof replace the $120 allowed in assumption 13(e) in the Reply to Gabor's Notice of Appeal.)
(10) "Legal, accounting, and other professional fees $6,844" - All of these are legal fees related to Gabor's professional architectural disciplinary matter with the OAA. These disciplinary matters resulted in Gabor being suspended as an architect until he complied with the orders of the disciplinary board. He was fined various sums which he cannot afford to pay and, as a result, he is still under suspension. The legal fees paid and which were deducted by G & I in 1995, 1996 and 1997 were paid to his lawyers respecting the disciplinary matters. They were expended for the purpose of Gabor continuing to earn income as an architect which is the business he was conducting in 1995, 1996 and 1997, as found herein. Therefore these fees are deductible to Gabor. (See Vango v. Canada, [1995] T.C.J. No. 659.)
$6,844.00
(11) "Property taxes $2,887" - These related to their home. As previously stated, they are not allowed:
Nil
(12) "Salaries, wages and benefits including employees contributions $8,000.00"
- This expense is now included in Gabor's income. Therefore it is not allowed.
Nil
(13) "Travel $100" - This was not proved as an expense. It appears to be a figure that Gabor threw in. It is not allowed:
Nil
(14) "Telephone and utilities $389" - This relates only to telephone bills. They had one telephone which was in their home. Gabor provided a number of months' bills, from which it appears that the $389.00 represents the total of the telephone bills, including the home. Gabor is entitled to 50% of the bills:
$194.50
(15) "Other expenses $479" - The material to which Gabor referred to proves this item was scanty and also included items already claimed, such as "supplies". Therefore, this claim is not allowed:
Nil
[29] Based on the foregoing headings and calculations of expenses for 1997, Gabor is allowed the following:
|
(1) |
$ 423.72 |
|
(2) |
1,940.00 |
|
(3) |
478.00 |
|
(6) |
339.50 |
|
(8) |
430.00 |
|
(9) |
73.00 |
|
(10) |
6,844.00 |
|
(14) |
194.50 |
|
Subtotal |
$10,722.72 |
|
Less $120.00 as described in [28] (8) and (9) |
120.00 |
|
TOTAL ALLOWED |
$10,602.72 |
[30] In his testimony in chief Gabor stated that his testimony for 1997 would also apply to 1996 and 1995, except that for 1996 G & I's bad debt claim was entirely false. In 1995 his "travel" expenses claimed as described in paragraph [25], are not accepted. Ilona also stated that her testimony applied to 1995, 1996 and 1997 in the same way. These positions were not refuted on cross examination and therefore, using the heading numbers adopted in paragraph [29], the following expenses are allowed to Gabor for 1995 and 1996:
|
1995 |
1996 |
||
|
(1) |
Bad debts |
No claim |
Not allowed |
|
(2) |
Business tax, fees, licences, memberships and subscriptions |
$1,913.00 |
$1,537.00 |
|
(3) |
Insurance |
$1,173.00 |
$ 468.00 |
|
(6) |
Meals and entertainment at 50% as per Income Tax Act |
No claim |
$ 631.00 |
|
(8) |
Office expenses |
No claim |
$ 160.00 |
|
(9) |
Supplies as per Reply |
(Allowed in assumption 13(e) of Gabor's Reply) |
(Allowed in assumption 13(e) of Gabor's Reply) |
|
(10) |
Legal accounting and other professional fees |
$1,076.00 |
$12,687.00 |
|
(14) |
Telephone and utilities (50%) |
$143.00 |
$185.50 |
|
Total Allowed |
$4,405.00 |
$15,668.50 |
[31] These appeals are referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
Signed at Prince Rupert, British Columbia, this 21st day of August, 2001.
"D. W. Beaubier"
J.T.C.C.
COURT FILE NO.: 2000-2625(IT)I and 2000-2626(IT)I
STYLE OF CAUSE: Ilona Zsoldos and The Queen
Gabor L. Zsoldos and The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: July 18, 19 and 20, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge D.W. Beaubier
DATE OF JUDGMENT: August 21, 2001
APPEARANCES:
Counsel for the Appellant: Steven Novoselac
Counsel for the Respondent: Suzanne M. Bruce
COUNSEL OF RECORD:
For the Appellant:
Name: Steven Novoselac
Firm: Cassels, Brock & Blackwell
Toronto, Ontario
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada