Tax Court of Canada Judgments

Date: 20011108

Docket: 1999-277-IT-G

BETWEEN:

WILLIAM GOSSE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Sarchuk J.

[1]            These are appeals by William Gosse from assessments of tax with respect to his 1986 to 1994 taxation years. Three aspects of the foregoing assessments are in issue being the inclusion of additional rental income, the disallowance of interest expenses, and the imposition of penalties and interest.

[2]            Paragraph 4 of the Reply to the Notice of Appeal sets out the assumptions relied upon by the Minister. The relevant portions thereof read:

a)              Rental Income

                during the 1986 through 1994 taxation years, inclusive, the Appellant rented out rooms in his house and in doing so earned net rental income as follows during those years:

1986	1987	1988	1989	1990	1991	1992	1993	1994
$4,357	$6,713	$12,527	$12,479	$12,326	$18,175	$18,073	$13,861	$13,775

b)             in the course of earning income from his rental operation during the 1986 through 1994 taxation years, the Appellant received gross rents and incurred expenditures as follows:

	1986	1987	1988	1989	1990	1991	1992	1993	1994
Gross rents	$10,800	$12,150	$16,200	$16,200	$16,200	$22,200	$22,200	$18,000	$18,000
Less: Audit Adjustment	(4,800)	(3,600)
Revised Gross Rents	$6,000	8,550	$16,200	$16,200	$16,200	$22,200	$22,200	$18,000	$18,000
Less:
Ppty. Taxes	1,244	1,344	1,444	1,544	1,776	1,858	1,954	2,051	2,151
Utilities	2,364	2,414	2,464	2,514	2,564	2,902	2,902	2,632	2,684
Insurance	540	540	540	540	540	336	336	545	559
Mtge. interest	2,293	2,906	1,867	1,800	1,780	1,825	1,904	1,888	1,870
Total expenses	6,441	7,204	6,315	6,398	6,660	6,921	7,096	7,116	7,264
Personal exps.	(4,798)	(5,367)	(2,642)	(2,677)	(2,786)	(2,896)	(2,969)	(2,977)	(3,039)
Deductible expenses	1,643	1,837	3,673	3,721	3,874	4,025	4,127	4,139	4,225
Net Rental Income	$4,357	$6,713	$12,527	$12,479	$12,326	$18,175	$18,073	$13,861	$13,775

Interest Expenses

c)              during the 1986 through 1994 taxation years, the Appellant incurred and is entitled to deduct interest expense in relation to money borrowed for the purpose of earning income for his rental operation as follows:

	1986	1987	1988	1989	1990	1991	1992	1993	1994
CIBC 12.5%	$1,016	$774	$48	NIL	NIL	NIL	NIL	NIL	NIL
Household Trust 12.5%	1,278	909	NIL	NIL	NIL	NIL	NIL	NIL	NIL
Onorio Colucci	NIL	NIL	NIL	NIL	NIL	798	1,904	1,888	1,870
Scotia Mortgage	NIL	1,222	1,818	1,800	1,780	1,027	NIL	NIL	NIL
Total amount allowed	$2,293	$2,906	$1,866	$1,800	$1,780	$1,825	$1,904	$1,888	$1,870

d)             no amount, in excess of the amounts already allowed to the Appellant, was incurred by him as an obligation to pay interest on borrowed money used for the purpose of earning income from a business or property and therefore, no amount is deductible on account of interest expense in computing the Appellant's income for the 1986 through 1994 taxation years, inclusive, in excess of the amounts allowed and set out in subparagraph (e) above;

Penalties

e)              in filing his returns of income for the 1987 through 1993 taxation years in response to demands by the Minister, the Appellant failed to report any amount on account of rental income;

f)              in fact, during the 1986 through 1994 taxation years, the Appellant received and failed to report the following amounts in rental income, reporting only net income as set out below:

Taxation year	Unreported Rental Income	Reported Net Income
1986	$4,357	$27,541
1987	6,713	22,979
1988	12,527	20,608
1989	12,479	3,231
1990	12,326	NIL
1991	18,175	NIL
1992	18,073	NIL
1993	13,861	NIL
1994	3,954	9,821

g)             the Appellant is liable to a penalty in respect of his 1986 through 1994 taxation years, inclusive, on the basis that he knowingly, or under circumstances amounting to gross negligence assented to or acquiesced in the making of a false statement or omission in returns of income in respect of those years on the basis that the tax payable under subparagraph 163(2)(a)(i) exceeds the tax that would have been payable if computed under subparagraph 163(2)(a)(ii) by the following amounts:

1986	1987	1988	1989	1990	1991	1992	1993	1994
$1,091.41	$1,627.69	$2,644.85	$2,777.52	$2,200.19	$3,244.24	$3,210.66	$2,427.06	$692.33

h)             as a consequence, the Appellant is liable for penalties in the following amounts:

1986	1987	1988	1989	1990	1991	1992	1993	1994
$545.71	$813.85	$1,322.43	$1,388.76	$1,100.10	$1,622.12	$1,605.33	$1,213.53	$346.16

Interest

i)               the Appellant failed to pay tax as and when required under the Act for the 1986 through 1994 taxation years and as a consequence, interest is exigible as prescribed in section 161.

[3]            The Appellant was not represented by counsel but was to a limited extent, with the Court's permission, assisted by Timothy J. Millard, an accountant. In addition to the Appellant's testimony, evidence on his behalf was adduced from Wayne Wilkinson, a certified general accountant, who, from approximately 1990 attended to the books of Global Stationary Limited (Global), a company owned solely by the Appellant, and from the Appellant's children, Darlene J. Allen and Bruce W. Gosse.

[4]            At some point of time while in the process of auditing Global, Revenue Canada discovered that the Appellant had not filed his income tax returns for the 1986 to 1993 taxation years, inclusive. In response to formal demands served on him pursuant to the provisions of subsection 150(2) of the Income Tax Act (the "Act"), returns for the 1986-1993 taxation years were filed on May 25, 1994.[1] The return for the 1994 taxation year was filed on November 3, 1995.[2] Assessments with respect to all of these years were made by the Minister of National Revenue in March 1997.

Unreported Rental Income

[5]            The income in issue relates to a property located at 338 Lorne Avenue, Newmarket, Ontario, which at all relevant times was the Appellant's residence. He described the property as a split three-bedroom bungalow approximately twelve hundred square feet in size with a finished two-bedroom apartment in the lower basement level. The Appellant maintains that during the years in issue, portions of the residence had been rented on only three occasions covering a period of approximately two years (1993 and 1994) and that all income received therefrom had been reported.[3] He did say that for a period of time during the previous years in issue, his daughter and her husband and child occupied the basement suite and that his son and sundry other non-paying relatives from Newfoundland had lived there at various times. He maintained he had absolutely no knowledge regarding the source of the rental figures produced to the Revenue Canada auditor (with the exception of the 1993-1994 tenants). According to Gosse, the accountant Wilkinson, was responsible for the preparation of the rental income and expense statements submitted and told him that the amounts so reported were not actual rents but "meant what the rent would have been if it were rented".

[6]            Wilkinson was retained by the Appellant in late 1990 or 1991 to attend to the corporate books, but was not responsible for the Appellant's personal returns. The fact that no returns had been filed for a number of years first came to his attention when Revenue Canada made a formal demand for them on the Appellant late in 1993. Based on information provided by his client, Wilkinson prepared and filed returns for the 1986 to 1993 taxation years in which no rental income was reported. Shortly thereafter, at a meeting which took place in the early stages of the corporate audit, the Appellant was asked how he lived during those periods of time with no income. Wilkinson's recollection is that the Appellant said he took shareholder's draws and had family members and relatives staying with him to defray the costs. This discussion led Wilkinson and Gosse to collate certain information and ultimately provide a series of rental statements for all of the years 1986 to 1994, inclusive.[4] These statements were based on information provided by Gosse who, according to Wilkinson, "gave me the dates and the people that were probably staying there at the time to the best of his knowledge". According to Wilkinson, he then measured the interior of the residence following which he "reconstructed" the rent charged to any particular tenant for the space occupied based on "what the average value was at that time in the Newmarket area" for the equivalent space "in square footage". He said no other method was available since records had not been kept by Gosse. A similar approach was taken with respect to the expenses which, in Wilkinson's words were also "our best estimates".

[7]            William Careen was the Revenue Canada officer assigned to audit the Appellant's corporation, Global, for the years 1990-1994. Shortly after the audit commenced, Careen discovered that no salaries or significant drawings had been paid to Gosse and as a result, he asked the Appellant "what he was living on" and was told "that his means of obtaining his expenses was that he was renting rooms and a basement apartment in his house". Careen made reference to a note recorded by him on March 1, 1995 which reads:

Taxpayer says no lease agreements and that the rent income was not deposited to the bank, and he said that he didn't have bank statements. He says he used the money to pay his living expenses. He said he remembered that the tenants' names and the rent charged and could prepare a financial statement or a rental income statement. He mentioned at the time the Murrin brothers, Jim and Susan Snow, Bruce and Laurie Gosse, Claire and Sandra Durant, and Kevin Wilson.

The Appellant undertook to provide rental statements and in October 1995, statements were produced for taxation years 1991 and 1992,[5] followed several months later by statements for taxation years 1986 to 1990.[6] Then in December 1996, a statement for taxation year 1993[7] was presented to Careen by the Appellant's accountant, Wilkinson. In January 1996, Careen met with Gosse and Wilkinson at which time he presented a proposal with respect to the corporation, Global, and sought to obtain further details with respect to Gosse's rental numbers. In particular, he asked Gosse and Wilkinson to identify the tenants (information in respect of which was lacking in the material provided), the gross rents and the periods during which the rentals took place as well as the expenses, etc. In the course of this discussion, Gosse provided a description of the house, its size, and further details as to the specific areas which were rented throughout various stages in the years in issue.[8] Careen says he sought access to the house to confirm some of the information, but permission to do so was not granted. Accordingly, he relied completely on the information provided by Gosse to allocate expenses and to assess the net unreported rentals.

Conclusion

[8]            The position advanced by Mr. Gosse is that at the request of the Revenue Canada auditor, he reported rental income that never existed calculated on the basis that it, "the income", represented the fair market value of any rent that he would have collected if the individuals residing at his premises over the years were in fact tenants. Wilkinson, who had no personal knowledge of what had transpired in the years 1986 to 1992, at one stage of his testimony indicated that he "believed" that the rentals were non-arm's length transactions which did not produce rental income. He also stated that he reviewed the years in issue with Gosse and "took a fair market value of what the rentals would be for that period, and there was enough expenses against that where it didn't seem to harm him in filing his tax returns. Because we weren't sure, basically, you know, if there was even rental income, but, you know, there wasn't any harm to it at the time the way we filed it".

[9]            I do not wish to belabour the point, but the evidence of both Gosse and Wilkinson was, to put it charitably, questionable. They contradict each other as to the source of the information relating to expenses, Wilkinson maintaining that absent records, they were estimated by him while Gosse stated "he would have absolutely have got them from me. There's no other way he could get them except me pulling out hydro bills, gas bills". The Appellant's claim that no rental income existed (except in 1993 and 1994) is contradicted by a letter dated June 20, 1996,[9] written by Wilkinson, and signed by Gosse. It contains, inter alia,the following two comments:

2.              Mr. Gosse because he did not realize he had to report rental income received from relatives and friends that stayed with him in his house, he did not keep proper records.

3.              The rental statements were filed based on Mr. Gosse's best recollections of income and expenses.

4.              Mr. Gosse assumed these amounts were received only to reduce costs and no tax would be applicable.

Gosse says that he signed the letter without reading it and implies that the statements therein are not true.

[10]          Gosse's testimony to the effect that he was not involved in providing the rental information to Revenue Canada is contradicted by Careen who says that in the course of his audit, he recorded the details of the various rentals as provided by Gosse for the whole of the period in issue. This information was sufficiently detailed to permit Careen to prepare a spreadsheet and to reconcile the incomes presented on the Appellant's net rental statements. I should also note that in the course of cross-examination, Careen was asked whether he recalled:

... being specifically told that these were rents that were actually received by Mr. Gosse in cash or were they actually presented to you as estimates of fair market value rents that could have been obtained from the space occupied by family members?

to which he responded:

They were presented to me in the context of being the rent actually received for the rentals of specific units: two of the bedrooms upstairs and the basement apartment downstairs.

[11]          On the evidence before me, I have concluded that the Appellant was in fact carrying on a rental operation during the years in question. I do not find his testimony or that of Wilkinson to be credible. I accept that in the absence of records, it is conceivable that, to his detriment, the income and expense statements provided to the auditor may have been inaccurate.[10] However, it was his responsibility not only to maintain appropriate records but also to file his returns with the appropriate information on time. His failure, in my view deliberate, to do so affords him no excuse.

[12]          The onus is on the Appellant to establish his case on a balance of probabilities. On the evidence before me, that has not been done and accordingly, the appeals with respect to the rental income issue are dismissed.

Interest Expenses

[13]          The Appellant says he is unable to explain the interest expenses having relied on the accountants for that purpose. He did say that his residence had been refinanced several times to provide him with funds needed by his companies, first, W.P. Gosse Investments Limited and then later, Global. He made specific reference to a mortgage on his property at 338 Lorne Avenue in the amount of $60,000 dated June 29, 1988 and to a cheque dated June 30, 1988 in the amount of $20,500[11] which he said was part of the proceeds of that refinancing and was advanced to his company by way of a loan to permit it to purchase the franchise. He also made reference to mortgages in the amount of $60,000 in favour of Jane Haydu[12] and one for $60,000 in favour of Household Trust. However, the Appellant conceded that there is absolutely no paper trail to indicate what amounts, if any, were advanced to his companies in circumstances which would entitle him to claim the appropriate deductions pursuant to the Act.

[14]          I am prepared to accept that over the years in issue the Appellant did on occasion borrow funds and that one of the purposes for the borrowing was to advance monies to his corporations. Having said that, it is not possible on the evidence to determine what amounts had been advanced or in what taxation years. Careen testified that he was unable to trace the flow of monies received from any of these borrowings other than it appeared that the Household Trust mortgage was utilized in part to pay out a previous mortgage taken out in May 1982. During this period, Gosse was attempting to settle his divorce dispute and it was necessary for him to, as Careen put it, "buy out the house from his wife ... and I allowed him - even though it's not documented - but from the Land Registry Office I was able to trace that much and allow him interest on $35,000 approximately". It is fair to say that Careen went to great lengths to attempt to apportion as much of the interest as an expense deductible to the Appellant as possible. However, not much assistance was received from the Appellant and indeed, Careen observed "it would have been much easier if he could have given me documentation and let me trace the funds. If I had been able to trace the funds, I would have been able to allow him the expense ...".

Conclusion - Interest Expenses

[15]          With respect to the interest claims, given the absence of evidence either documentary or oral from which it would be possible to trace the funds to the point of disbursement there is no basis upon which I can conclude that the Appellant has established a claim to any interest expense deduction beyond that allowed by the assessment. Accordingly, the Appellant cannot succeed with respect to this ground of appeal.

Penalties

[16]          The Minister assessed penalties pursuant to the provisions of subsection 163(2) of the Act which reads:

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 ...

Subsection 163(3) states:

163(3)      Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

[17]          It is settled law that the provisions of this section are to be construed so as to give the party sought to be penalized the benefit of the doubt. In De Graaf v. The Queen,[13] Strayer J. stated as follows:

                In essence, for a taxpayer to be liable to a penalty under subsection 163(2) he must have been responsible for a misstatement or omission n his return, made by or for him knowingly or through his gross negligence. As I have noted elsewhere, the jurisprudence seems to recognize an element of subjectivity in the application of these tests, even to the point of accepting ignorance of the law as excusing misstatements in income tax returns: see Venne v. The Queen, supra. It must also be kept in mind, as noted above, that the Minister has the onus of proof in establishing that the requisite statement of mind existed to justify the imposition of penalties.

I am satisfied that the Minister has established that the imposition of penalties in this case was appropriate and justified.

[18]          A number of factors all of which were taken into account by the Minister, lead me to that conclusion. First, the Appellant failed to file his returns for his 1986 to 1993 taxation years, inclusive, and probably would have continued to ignore the requirement to do so had it not been for the audit of his company. In the 1986, 1987 and 1988 taxation years, the Appellant was a salaried employee.[14] No acceptable explanation for the failure to file his returns and pay the tax, if necessary, has been provided. Furthermore, his deliberate and consistent failure to keep any records is tantamount to intentional acting and coupled with the other factors I have referred to amount to a complete indifference as to whether the law was complied with. I point out that the auditor Careen in his testimony, detailed the various factors which he considered before recommending the imposition of penalty and in addition to those mentioned above, specifically considered the fact that the Appellant is a businessman who has successfully operated a stationery store and a courier service through a corporation since 1988.

[19]          In dealing with the imposition of penalties, Strayer J. in Lucien Venne v. The Queen,[15] made the following observation:

... "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. ...

That is the case here. I am satisfied that the Appellant's conduct was conscious and deliberate and justified the imposition of the penalties.

[20]          The appeals are dismissed, with costs.

Signed at Toronto, Ontario, this 8th day of November, 2001.

"A.A. Sarchuk"

J.T.C.C.

COURT FILE NO.:                                                 1999-277(IT)G

STYLE OF CAUSE:                                               William Gosse and Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           September 20, 2001

REASONS FOR JUDGMENT BY:                      The Honourable Judge A.A. Sarchuk

DATE OF JUDGMENT:                                       November 8, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Carol Shirtliff-Hinds

COUNSEL OF RECORD:

For the Appellant:                

Name:                N/A

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

1999-277(IT)G

BETWEEN:

WILLIAM GOSSE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on September 20, 2001, at Toronto, Ontario, by

the Honourable Judge A.A. Sarchuk

Appearances

For the Appellant:                                The Appellant himself

Counsel for the Respondent:                Carol Shirtliff-Hinds

JUDGMENT

          The appeals from assessments of tax made under the Income Tax Act for the 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993 and 1994 taxation years are dismissed, with costs.

Signed at Toronto, Ontario, this 8th day of November, 2001.

"A.A. Sarchuk"

J.T.C.C.

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