BETWEEN:
and
____________________________________________________________________
Appeals heard on April 24, 25, 26 and 27, 2006, at Toronto, Ontario
Before: The Honourable Justice Campbell J. Miller
Appearances:
____________________________________________________________________
JUDGMENT
The appeals from assessments made under the Income Tax Act for the 1995, 1996, 1997 and 1998 taxation years are allowed and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment on the limited basis set forth in Appendix "A" attached to these Reasons for Judgment. The Respondent is entitled to costs.
Signed at Ottawa, Canada, this 5th day of June, 2006.
BETWEEN:
ALBERT ROSS DEEP,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] Dr. Albert Deep is a cardiologist. Over the past couple of decades his ability to carry on a full medical practice has been significantly impeded by a persistent preoccupation with litigation of every variety. A major issue in this case is the deductibility of over $1 million of interest claimed during the years 1994 to 1997, a claim which stems from a lengthy legal battle between Dr. Deep and the Bank of Montreal (BMO). For the relevant periods, Dr. Deep also seeks to deduct legal costs of $84,300 of which the Minister of National Revenue allowed $29,135, automobile expenses of $32,017 of which the Minister allowed $1,801 and office expenses of $313,794, of which the Minister allowed $43,457. The Minister also alleges that Dr. Deep underreported his 1997 income by approximately $200,000.
[2] Concurrently with this matter in the Tax Court of Canada, Dr. Deep has brought an action for damages against Canada Revenue Agency (CRA) in the Ontario Superior Court of Justice. That matter has been stayed pending the outcome of this case. Dr. Deep also filed a Notice of Constitutional Questions[1] seeking a remedy under subsection 24(1) of the Canadian Charter of Rights and Freedoms (the Charter) claiming unreasonable search and seizure, a breach of section 7 of the Charter, a breach of section 6 of the Charter and a breach of "equality rights guaranteed by section 15 of the Charter".
[3] I summarize the issues as follows:
(i) Are any of the taxation years in question (1994-1997) statute-barred?
(ii) Did Dr. Deep incur any deductible interest expenses in the years in question?
(iii) Did Dr. Deep incur any deductible interest expenses in prior years that created a non-capital loss eligible for carry-forward to the years in question?
(iv) What were Dr. Deep's deductible legal, automobile and office expenses in the taxation years 1994 to 1997?
(v) Did Dr. Deep underreport his income in 1997, and, if so, by how much?
(vi) Did Dr. Deep knowingly or under circumstances amounting to gross negligence make false statements or omissions in reporting taxable income in the relevant years, justifying the imposition of penalties pursuant to subsection 163(2) of the Act?
(vii) Have any of Dr. Deep's Charter rights been infringed or denied justifying a remedy pursuant to section 24 of the Charter? If so, what remedy is appropriate?
Facts
[4] Dr. Deep is a sole practitioner cardiologist in Toronto. He has worked from an office on St. Clair Avenue West for many years. He employs no staff. He looks after all his own appointments, books and records and filing requirements, including tax returns. He conducts no hospital rounds. A Torontonewspaper reported that Dr. Deep had been charged with fraud in 1997. Mr. Ralbosky, an auditor with CRA, acknowledged that it was this article that triggered the audit. He contacted Dr. Deep in July 1998 and arranged to meet him at Dr. Deep's office. He advised Dr. Deep that he was there because of the article. Mr. Ralbosky and his team leader spent a morning at Dr. Deep's office. Mr. Ralbosky advised Dr. Deep that this was a civil matter. At a meeting one week and a half later, Mr. Ralbosky requested the books and records from Dr. Deep so he could take them back for review at CRA's office. Dr. Deep cooperated and provided the documents.
Facts Related to Interest Expenses
[5] In the late 1970s, Dr. Deep arranged a USline of credit with BMO for approximately $600,000. He borrowed against this line to acquire Government of Canada Bonds, Noranda shares, an Income Averaging Annuity Contract, Canada Savings Bonds and various other stock. From the proceeds of the sale of a home, Dr. Deep also acquired German Deutschmark term deposits of approximately $84,000. He was actively interested in stock trading at this time, being the late 1970s and early 1980s. He sought to acquire more Noranda stock, but the Bank would not release the German term deposits to finalize this transaction. Without getting into further detail, what resulted was a lengthy lawsuit between Dr. Deep and the Bank of Montreal extending from 1980 to 1988. In the early 1980s the Bank applied proceeds from the sale of Dr. Deep's bonds ($142,000), Deutschmark deposits ($83,000) and Noranda shares ($143,000) towards Dr. Deep's debt. In 1988, Justice Ewaschuk of the Supreme Court of Ontario, issued a judgment against Dr. Deep in favour of the BMO for principal of US$249,442 along with pre-judgment interest of US$277,883, or approximately C$331,062. Dr. Deep's appeal from this judgment was dismissed by the Ontario Court of Appeal in February 1991.
[6] From late 1991 until the fall of 1992, through a number of garnishments and seizures, BMO was paid $208,648 by Dr. Deep ($96,226 in 1991 and $112,422 in 1992). Other creditors were paid approximately $40,000 through these collection procedures. Given that the amount of the claims increased from the first garnishment in 1991 to the last garnishment in 1992, I conclude that all of the payments went towards interest owed to the creditors.
[7] In April 1993, BMO issued a Satisfaction Piece,[2] upon payment by Dr. Deep of C$545,000 to satisfy the judgment of US$525,325, and post-judgment interest and costs. Dr. Deep estimated that the interest from the date of judgment to the date of payment, at 15%, was approximately $224,498. To finance the $545,000 payment to BMO, Dr. Deep took out mortgages with the Mutual Group of approximately $350,000. An annual mortgage statement from Mutual Group indicated that interest in 1994 was paid in the amount of $26,542.
[8] Dr. Deep calculated the total interest he believed he paid over the years, an amount which he maintains is deductible in the years 1994 to 1997. His approach varied from the time he filed his returns for the years in question, to the time of trial. Originally, he claimed $1,021,145 of interest expense based on an opening balance of $339,923 in 1994, to which he added the $545,000 1993 payment to BMO, approximately $56,000 to other creditors, approximately $29,706 for secondary financing with Mutual Group and $48,480 for what he referred to as a social contract. Dr. Deep filed his returns deducting the total of $1,021,145 by deducting interest expense of $265,179 in 1994, $235,000 in 1995A,[3] and $332,960 in 1995B, bringing his taxable income in each year to 0. He deducted the balance of $187,773 in 1996, leaving some taxable income in 1996. Only $211 was deducted in 1997.
[9] At trial, Dr. Deep adjusted his numbers upwards by starting with interest of $331,062 from the 1988 BMO judgment, and adding interest from 1988 to 1993 of $219,754. To this he then added all amounts garnisheed or seized in 1991 and 1992, as well as all proceeds BMO took in the 1970s and early 1980s from the sale of stock, bonds and Deutschmark term deposits. He also estimated that the secondary financing cost was $77,336. His revised estimate was in excess of $1.4 million of interest, being what he referred to as "the total interest eligible for deduction from professional income seven years forward". This, he stated, did not include an amount of $238,066, which CRA advised him in June 1993 by Notice of Assessment, was a cumulative net investment loss. He acknowledged he had no idea what this pertained to.
[10] Prior to CRA's September 2000 reassessment of Dr. Deep's 1994 to 1997 returns, Dr. Deep had written to Mr. Kenneth Shand at CRA on July 22, 2000 stating:[4]
... Since I had a substantial counterclaim against BMO nothing was owing to BMO until dismissal of the application for leave to appeal to the Supreme Court of Canada, circa 1992 or 1991. Judgment was pronounced on June 7, 1988 and the matter was before the Court of Appeal in 1991. The time for claiming the non capital losses (interest or debt servicing charges) commenced with the final judgment of 1991 or 1992 and therefore claims of 1994 through 1997 are well within the 7 year time frame.
The fact that I referred to these amounts as interest deductions available prospectively from income received rather than "non capital losses" is a technicality (based upon my lack of knowledge in that particular area) and ought not prevent these interest claims from being allowed in full.
[11] Dr. Deep maintains that a CRA official, Ms. Sharma, approved of his interest claim back in August 1993. Ms. Sharma was not called, as she was no longer working at CRA, and Dr. Deep indicated that he could not obtain her address from CRA.
Facts Related to Office Expenses
[12] For the taxation years 1994, 1995A, 1995B, 1996 and 1997, Dr. Deep filed a "Statement of Professional Activities" as part of his returns, indicating "Physician - Cardiologist" as his main service. In each of his returns for the relevant years, Dr. Deep claimed business taxes, licenses, etc. and rent, all of which were allowed in full by the Minister. He also claimed interest, motor vehicle expenses, office expenses and legal expenses, all of which are the subject of this dispute between Dr. Deep and the Minister. With respect to office expenses, the following is a summary of what was claimed and allowed:
|
|
|
* |
|
|
|
|
Claimed |
Moved to car expense |
Actual claim |
Amount Allowed
|
|
1994 |
41,626 |
9,381 |
32,245 |
12,168 |
|
1995a |
75,518 |
14,321 |
61,197 |
6,277 |
|
1995b |
9,903 |
9,903 |
0 |
467 |
|
1996 |
104,016 |
7,781 |
96,235 |
14,212 |
|
1997 |
82,731 |
6,920 |
75,811 |
10,333 |
* Though filed as office expense, Dr. Deep acknowledges that these amounts were more properly claimed as motor vehicle expenses.
[13] Dr. Deep testified that as well as his medical practice he carried on three other types of business activities during the relevant period. First, he claimed to invest to such an extent in the market that he considered himself actively to be carrying on the business of trading. In this regard he required televisions, and satellite hook-ups to ensure he could carefully follow the markets. He also testified that for the years in question that most of this trading was within his Registered Retirement Savings Plan (RRSP). To substantiate his trading activities for this period, he provided several Nesbitt Burns portfolio evaluations and statements. By way of example, the statements for 1994 showed trading activity on approximately 20 days of the year, and such activity was limited.
[14] In reviewing his tax returns, there was no reporting of business income from trading. Dr. Deep suggested this was included in his statement of professional activities, but the only income I could discern from such statements related solely to his medical practice. There was interest income reported each year as follows: $2,140 in 1994, $8,262 in 1995A, and $4,431 in 1996; and dividend income of $807 was reported in 1997.
[15] Dr. Deep stated that he would research the market both at home, and after acquiring the Port Carling cottage property in late 1996, also at that cottage.
[16] The second business-related activity Dr. Deep referred to was his ongoing handling of legal matters. Prior to the years in issue, he had his lengthy legal contest with BMO. Subsequent to the years in issue, he had to deal with a December 1997 criminal charge, these tax issues, a suit against CRA and its auditor (currently held in abeyance), actions against OHIP and the Collegeof Physicians and Surgeons and the actions of former patients for malpractice and his countersuit for libel. However, during the years from 1994 to 1997 it appears there was a relative calm on the litigation front.
[17] The third business activity Dr. Deep contends he engaged in was the business of renting property in 1996 and 1997. His evidence was that he acquired a property in Port Carling in the fall of 1996, with the intention of renting it out. He showed me a number of photos of this waterfront cottage property on Mirror Lake, near Muskoka Lake. It appears to consist of a large main four-bedroom cottage, a small cottage with a collapsed roof, two storage buildings and a workshop. Dr. Deep spent many of his weekends at the cottage from the time he acquired it throughout 1997. He took no steps to rent it until 2002, as he felt it was not adequately furnished for rental until then. He referred to the cottage as his personal professional retreat. In 1996 and 1997, he estimated that he spent $50,000 in equipping the cottage including bedding, lawnmower, art, furniture, china, satellite dish etc. all of which he claimed as office or business expenses. Dr. Deep had an office in the cottage, which he indicated was satisfactory for seeing the occasional patient. He testified that he saw four or five patients from October 1996 to the end of 1997.
[18] The auditor attempted to break down the office expense between the commercial office and the home office and the cottage office in each year. In 1994, of the $32,245 office expense claimed by Dr. Deep, $18,096 was, according to the auditor, not supported by vouchers. The auditor however allowed 25% of such expenditures as pertaining to the business office. Dr. Deep challenged this allocation claiming the auditor never delved further into these expenditures by seeking more information from him. Dr. Deep provided no supporting materials at trial.
[19] With respect to 1994 home office expenses, which Dr. Deep claimed in total were $28,843, the auditor could only substantiate $8,254. He then allowed a percentage of this amount based on the use of a 12' x 12' space for business storage, out of the total square footage of the home of 3,333 square feet. This resulted in a $356 home office expense. As part of the $8,254, the auditor again only allowed 25% of Dr. Deep's unsubstantiated portion of household expenses of $16,149. The auditor also did not include in allowable household expenses costs of a stove, roof, eavestrough, vacuum, boat trailer and boat. Dr. Deep testified that the boat and boat trailer ($1,487) was payment he made to a tradesman for carpentry work on the house.
[20] With respect to 1995A, the auditor followed a similar approach allowing 25% of unsubstantiated expenses listed by Dr. Deep as connected to his commercial office, and disallowing items such as Holt's payments. With respect to the home office, he used the same percentage to apply against household expenditures as in 1994, and also reduced Dr. Deep's household expenditures by deleting costs for china, over $20,000 for furnishings from the Art Shoppe, while including heating costs, electrical costs, home insurance and property taxes.
[21] Again, the auditor followed a similar course in 1996 and 1997, though in those years Dr. Deep claimed a number of expenses in connection with his newly acquired Port Carling property; for example, prime time cable ($5,461) so he could monitor stock with the satellite dish, bedding ($3,375) and a snowblower ($2,704). In each of these years, Dr. Deep also submitted claims for three-quarters of his grocery bills from Pusateri's Grocery Store in Toronto($8,474 in 1996 and $10,514 in 1997). He also claimed an amount of $7,730 in each year as payment of his son's Canadastudent loan: he acknowledged that the second year was claimed in error. He justified the payments of the student loan on the basis that he sought stock trading advice from his son. In 1997, the auditor disallowed a $3,345 payment to the Ontario Ministry of Finance, which Dr. Deep explained was a form of provincial employer health insurance premium.
Facts Related to Legal Expenses
[22] Dr. Deep claimed the following legal costs: $500 in 1994, $550 in 1995A, $13,250 in 1996 and $70,000 in 1997. The Minister allowed $500 in 1994, $250 in 1995A, nothing in 1996 and $28,388 in 1997. The $300 disallowed in 1995 related to a title search of a lakeside property in Bala, Muskoka. Dr. Deep looked into acquiring this property, though the sale did not proceed and he eventually acquired the cottage and property in Port Carling. Dr. Deep testified he intended to acquire the Bala property as a rental property.
[23] Approximately half of the $13,250 legal expense claimed and disallowed in 1996 related to costs of acquiring the Port Carling property, which Dr. Deep took possession of in the fall of 1996. The expenses included legal fees to his son James of $4,430, various searches and disbursements of another $2,000 in connection with the property. There is an additional unvouchered claim of $6,375, which Dr. Deep was unable to initially identify, but later in testimony suggested it was legal fees to his son James, though he provided no evidence as to the nature of such legal advice.
[24] For 1997, Dr. Deep filed his return claiming $70,000 of legal expenses, but indicated on his return "with provisions". This amount arose from a conversation Dr. Deep had with a lawyer, Mr. Penney, who Dr. Deep consulted in late 1997. Dr. Deep had been charged in December 1997 with a criminal offence of defrauding OHIP of approximately $58,404, and he sought legal advice. He was advised that it would cost approximately $70,000 to go to a preliminary inquiry. This advice was confirmed by correspondence in May 1998. Dr. Deep proceeded to handle the criminal matter himself. He believed he could claim the $70,000 in 1997 as this was money he would inevitably have to spend in defending himself.
[25] The Minister allowed $28,385 representing vouchered claims from lawyers of amounts actually paid in 1997.
Facts Related to Automobile expenses
[26] Dr. Deep's work habit was to drive to his office each morning (a seven-minute drive) returning home for lunch. At home, he would review ECG's over his lunch hour. He would return to the office for the afternoon. He would have to make occasional trips to his bank and broker.
[27] Once he acquired his Port Carling property in late 1996, he would also travel most weekends to that property. He made frequent trips to Ottawato visit family. He would occasionally provide medical assistance to his ex-wife, who lived in Ottawa.
[28] He recalled CRA allowing 80% of his automobile expenses, as far back as 1987. He relied on this position in making subsequent years' car expense claims.
[29] Dr. Deep claimed some significant car expenses as office expenses. The CRA auditor re-designated such expenses as automobile expenses. The auditor then, based on Dr. Deep's total mileage over a seven-year period, as provided by Dr. Deep, made an estimate of average annual kilometres of approximately 53,000, to which Dr. Deep took no exception. The auditor then calculated business kilometres based on trips in connection with Dr. Deep's banking, investing and legal actions. This represented approximately 1,500 kilometres of the 53,000 annual kilometres. The auditor then used that percentage applied against the total car expenses of $14,753 in 1994, $18,816 in 1995A, $9,020 in 1995B, $14,064 in 1996 and $18,016 in 1997, yielding approximately $300-$400 in each year as allowable deductible automobile expenses.
Facts Related to Underreported Income in 1997
[30] In his 1997 tax return, Dr. Deep reported his professional fees income as $219,600. He arrived at this figure by recognizing his gross professional income of $412,813, but then deducted three amounts from this total. First, due to the allegations by the Torontopolice in late 1997 that Dr. Deep had defrauded $58,404 from OHIP, he deducted that amount, on the basis he would eventually have that money taken away. Second, OHIP had a policy of capping doctor's fees, and only paying a certain percentage over $400,000 in fees; so, for example, any billings over $450,000 a year would only be paid out to a doctor at 25%. Dr. Deep considered the 75% not paid by OHIP ($55,547) as a form of social contract between the physician and the province. Notwithstanding this amount was never paid, and never included in income, Dr. Deep believed it was a form of gift to the Crown and therefore deductible.
[31] Third, due to the police charges in late 1997, OHIP stopped payment to Dr. Deep for the months of December 1997, and January to March 1998, which amounted to $105,648. As Dr. Deep felt he would never recover this amount , he believed he could deduct it against his 1997 professional fees that he had actually received. He intended to deduct the total of these three amounts ($219,600), from his fees, leaving $193,213 as income, but accidentally reversed the figures and included income of $219,600. He believes he has over-reported his 1997 income.
Analysis
(i) Are any of the taxation years 1994 to 1997 statute-barred?
[32] Subparagraph 152(4)(a)(i) of the Act reads:
152(4) Subject to subsection (5), the Minister may at any time assess tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, and may
(a) at any time, if the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
[33] Other than Dr. Deep's 1997 taxation year, all years at issue were beyond the normal reassessment period. The issue is whether Dr. Deep made any misrepresentation in those years attributable to neglect, carelessness or wilful default or has committed any fraud.
[34] I find there are many misrepresentations by Dr. Deep in his returns: claiming interest as though interest was paid in the years in question, filing 100% of automobile expenses as business related and filing personal expenses (for example, groceries, housewares, clothing, student loan) as business expenses.
[35] Were these misrepresentations attributable to neglect, carelessness or wilful default? In the case of Venne v. The Queen,[5] Justice Strayer set the standard for this issue by stating:[6]
... 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 law of tort.
I have no difficulty concluding that Dr. Deep did not exercise reasonable care. First, with respect to his interest expense claims he knew he did not incur such expenses in the years in question, and acknowledged that he may have put such expenses in the wrong place on his income tax return. He was aware of the concept of non-capital losses, and wished to describe his filing of these interest expenses as a filing of non-capital losses. I will have more to say on that issue later. With the exercise of some minimal effort, it would have been easily determined by Dr. Deep that what he considered interest expenses of well over $1 million, could not be claimed as such in the years in which they were not incurred. This is not a matter of a few hundred dollars - this is a large amount of money. In an area where he confesses he has no expertise it was at best careless not to get advice. Dr. Deep argues that he exercised reasonable care by relying on the advice of an officer of CRA. Such officer did not testify, nor did Dr. Deep provide any written evidence of such advice. He has not established that he exercised reasonable care in making this misrepresentation.
[36] With respect to automobile expenses, Dr. Deep again relies on past contact with CRA to establish his reasonable care in filing on the basis that all of his automobile expenses were work-related. Dr. Deep states that in the past CRA officials allowed him 80% of automobile expenses. I did not have before me those officials nor their reports. I do not have details of Dr. Deep's activities in those other years. I do know that for the years in question he travelled to and from his office twice a day, he travelled to see family in Ottawa many times a year, and in late 1996 and in 1997 he travelled to his cottage, which he maintains was acquired for rental purposes. From these travels he concluded that all automobile expenses were business-related and he filed accordingly. He gave no evidence of seeking advice, or reviewing the Income Tax Act or law in connection with automobile expenses. He believed that because he received a generous deduction for such expenses in the past, he was entitled to claim all such expenses for the years in question. This is not the behaviour of a taxpayer acting with reasonable care.
[37] The same can be said for Dr. Deep's approach to office expenses. He defends his claim for personal expenses in connection with his home (for example, a stove) on the basis that he had always been allowed 2/9 or 3/9 of home expenses in the past. What he did not factor in was that such home expenses must bear some relation to the business activities. Many of his claims for home office expenses during the years he maintains are statute-barred, bear no such relationship: they are entirely personal. I find no reasonable care was exercised by Dr. Deep in making such claims.
[38] I conclude that it was appropriate for the Minister in these circumstances to reassess Dr. Deep beyond the normal reassessment period.
(ii) Did Dr. Deep incur any deductible interest expense in the years in question?
[39] The only evidence of interest expense incurred in taxation years 1994 to 1997 inclusive was the amount of $26,542 paid to Mutual Group in 1994, as evidenced in their annual mortgage statement. Dr. Deep's calculation of $77,336 of interest paid to Mutual Group is not supportable. The question is whether interest paid on this loan, which was taken out to make the settlement payment of $545,000 to the BMO in 1993, is deductible. The Respondent argues that there is no source of income to which the interest relates. I agree.
[40] Paragraph 20(1)(c) of the Act reads:
20(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(c) an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income), pursuant to a legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy),
[41] In the Supreme Court of Canada decision of Moufarrège v. Quebec[7] the Court stated:
3 Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, established that it is the current rather than the original use that is relevant in assessing the deductibility of interest payments (see to the same effect: Tennant v. M.N.R., [1996] 1 S.C.R. 305; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62).
4 Stewart v. Canada, [2002] 2 S.C.R. 645, 2002 SCC 46, did not alter the principle that when a reasonable expectation of income disappears, so does the right to a deduction. In that decision, the Court stated that "the deductibility of expenses presupposes the existence of a source of income" (para. 57).
5 In the instant case, once the properties were sold, the source of income ceased to exist and the loan was no longer being used to earn income from property in accordance with ss. 128 and 160. With regard to the shares, the company in question is bankrupt, and nothing in the record indicates a possibility of a resumption of activities, so here too the source of income has disappeared even though the company has not been dissolved.
[42] Many years prior to 1994, Dr. Deep had disposed of the property (securities) for which the original BMO loan was taken out. While he maintained he was so active in the market that it constituted a business, as opposed to simply constituting income from property, the evidence does not support he was carrying on such a business in 1994 to 1997. In 1994 he had no source of income, either business or property, to which the interest expense related. The amount paid in 1994 to Mutual Group is not deductible.
(iii) Did Dr. Deep incur any deductible interest expense in prior years that created a non-capital loss eligible for carry forward to the years in question?
[43] There is no question Dr. Deep expended enormous amounts of money in his dealing with BMO over the years; voluntarily (1994 - $545,000) and involuntarily (garnishment, seizure etc. - $249,000). Had he obtained professional accounting and tax advice, a deductible portion of such amounts may have been determined, and attributed to an appropriate taxation year in which he may have been carrying on the business of dealing in securities. This may have resulted in losses for particular years, which may have been available to carry forward to the years in question. Dr. Deep now wants me to sort that all out for him on the basis that he put numbers in the wrong place on his income tax form, but generally he was following the advice of CRA.
[44] I do not accept that he was following advice from CRA. Without Ms. Sharma's evidence, for whatever reason, and with no corroborating written evidence, I am unable to find that Ms. Sharma advised Dr. Deep that his numbers were accurate, that interest was deductible and that he could proceed to file as he did.
[45] Dr. Deep has not provided me with any evidence of his income for the years prior to 1993. Even if there was any evidence that he had a source of income to which his borrowings related, I simply do not know how much interest from years prior to 1993 had been claimed against how much income, to determine what his business losses might have been that could have been carried forward.
[46] I do know he paid $545,000 to BMO in calendar 1993. I also find that none of the $545,000 was deducted by Dr. Deep prior to his 1994 return, a return that included his professional income for the period January 23, 1993 to January 22, 1994. Even if I found that all $545,000 represented interest paid to BMO, Dr. Deep still faces the hurdle as to its deductibility due to the fact that the source of income had long since ceased to exist. He no longer owned the property to which the BMO loan related, nor was there any sufficient evidence to suggest he was carrying on business in 1993 in trading. With respect to 1994 to 1997 his evidence was that trading activity was within his RRSP. There was nothing to indicate that replacement properties had been acquired. The evidence was that the proceeds from the disposition of the property initially acquired went to pay down the debt to BMO, not to acquire replacement properties.
[47] Considerable time at trial was taken by Dr. Deep in outlining his calculation of the interest paid over the years. It is unnecessary to review those calculations given my findings.
[48] In summary, Dr. Deep has not established that he had any source of income in 1994-1997 for which any interest expense was incurred. Further, he has not proven that any part of the $545,000 paid in 1993, or interest amounts paid in the seven preceding years, were deductible, for the same reason. Even had he established the deductibility of prior years' interest, he provided no evidence as to the determination of the non-capital losses for such prior years that might have flowed from such deductions.
(iv) What were Dr. Deep's deductible legal, automobile and office expenses in the taxation years 1994 to 1997?
[49] I will deal first with office expenses. There are three categories of office expenses at issue: those incurred in connection with Dr. Deep's commercial office; those incurred in connection with his Toronto home office; and those incurred in connection with his cottage office.
[50] With respect to expenses claimed in connection with the Port Carling cottage, Dr. Deep took two approaches to such expenses. First, that he carried on his medical practice and stock trading business from his cottage; second, that he acquired this property as a rental property.
[51] With respect to carrying on any business at the Port Carling cottage, I find that in 1996 and 1997 Dr. Deep was not engaged in the business of trading in stock or financial instruments. He provided no evidence of any extensive trading activity in those years, nor do his tax returns reflect any level of activity that would constitute trading as a business. Even his own testimony was that the trading he carried on was within his RRSP. This is not the carrying on of a business.
[52] As far as the medical practice goes, I accept he may have seen a handful of patients and done some occasional professional reading or review of charts. This limited activity is sufficient to justify a limited allowance for home office expenses. While I do not have the square footage of the cottage, I am satisfied that its use was primarily as a cottage, as a retreat; that is, a personal use. Any incidental business use was just that - incidental. I would roughly gauge, based on Dr. Deep's evidence of time spent on weekends, that a rough percentage of its business use would have been 5%. So, utility expenses, property taxes, property insurance, and similar such expenses are allowed to the extent of 5%. Yet, in reviewing the cottage property expenses claimed by Dr. Deep in 1996, I can find nothing relating to such expenses: most pertained to bedding, furniture, artwork, satellite dish, china and the like. These are not the types of expenses any percentage of which can be attributed to use as a medical professional.
[53] With respect to 1997, the only expense to which I can apply the 5% is the property taxes of $3,691. I therefore allow $184.
[54] With respect to Dr. Deep's claim that he intended to buy Port Carling as a rental property, this is simply not borne out by his actions or words. For example, he claims he did not look to rent the property until 2002 as he needed to outfit it for rental. Yet, he claimed over $50,000 worth of furnishings in 1996 and 1997, several years prior to 2002, which I find is some significant outfitting. Nothing suggests these acquisitions were for the purpose of renting it out. He used the cottage as his personal retreat. He had no business plan. I conclude that in 1996 and 1997 he had no intention that this property be anything other than what it was - a cottage for his personal use.
[55] With respect to his commercial office expenses, Dr. Deep argued that the amounts allowed by the Minister did not reflect norms in the medical professional. Yet, Dr. Deep, in making this assertion, ignored the fact that the Minister allowed all rental costs. Dr. Deep also did not detail what was included in an average practitioner's expenses; for example, whether the cost of a receptionist and a nurse might be the norm. All to say, I am not at all swayed by Dr. Deep's comparative analysis.
[56] Dr. Deep also objected to the auditor's limiting the unvouchered or unidentified business office expenses to 25% of the amount claimed. Dr. Deep did not provide to me any explanation as to the nature of the unvouchered or unidentified expenses. The auditor allowed this 25% based on a rough equivalent percentage of vouchered expenses allowed. I have not been convinced by Dr. Deep that the 25% figure should be altered.
[57] There are however some office expenses which the Minister disallowed, which I have been satisfied did relate to Dr. Deep's business. They are $3,088 in 1996, which Dr. Deep identified as medical public liability insurance and $3,045 in 1997, which Dr. Deep identified as Employers Health Insurance payment to the Ontario Minister of Finance.
[58] With respect to home office expenses, Dr. Deep objects to the use of a square footage percentage of 144 square feet (being the 12' x 12' space allowed by the Minister as relating to Dr. Deep's business storage) to a total 3,333 square feet. Dr. Deep argued that in prior years he had been allowed two-ninths or three-ninths of his home expenses based on two or three rooms out of nine rooms being used for business purposes. To reiterate, the only business activity in the years in question that I find Dr. Deep carried on from home related to his medical practice. I have not been satisfied more than one room was necessary in this regard, though I am prepared to allow one room out of 9, as opposed to the Minister's 144 feet out of 3,333 square feet approach.
[59] In applying this greater percentage I again accept the auditor's inclusion of 25% of unvouchered or unidentified home expenses as being reasonable. I have no evidence to suggest this percentage should be increased. The increased home office expenses therefore are as follows:
|
|
1994 |
1995A |
1995B |
1996 |
1997 |
|
|
|
|
|
|
|
|
Allowable home office expense |
8,254 |
13,631 |
N/A |
16,735 |
12,129 |
|
Multiplied by 1/9 |
917 |
1,515 |
|
1,859 |
1,348 |
|
Amount allowed by Minister |
356 |
589 |
|
723 |
524 |
|
Increased allowance |
561 |
926 |
|
1,136 |
824 |
[60] Dr. Deep argued that certain capital items were deductible; for example, the costs for roofing and for a central vacuum system. Such items are capital expenditures and properly not included in the above calculation. Also, items such as a stove, mattresses and artwork are properly categorized as entirely personal.
[61] In 1995, Dr. Deep deducted $2,586 for a television and a VCR. His evidence was that he required this for reading medical charts. He provided no definitive evidence as to the percentage use for this business purpose. Given his evidence of noontime work at home, and given some consistency of a 25% allowed to claimed factor, I am prepared to allow 25% of this cost in 1995A as a legitimate deductible business expense ($646).
[62] With respect to legal expenses, I find the Minister was correct in his assessments, with the exception of the expenses which relate to the cottage property, for which I am prepared to allow 5%.
[63] The $250 in 1995A related to a title search on a property which I find was similar in nature to the cottage property bought by Dr. Deep, in that it was primarily of a personal and not of a business nature. To be consistent, however, I allow 5% of that $250, or $12.50. With respect to the $13,250 legal fees in 1996, approximately half ($6,875) of this amount related to the Port Carling cottage property and again I attribute 5% as of a business nature and therefore deductible ($343.75). The balance of the $13,250 was unvouchered, though Dr. Deep maintains it was legal fees to his son. I have not been convinced, on balance, such fees related to any business activity that would justify their deductibility.
[64] Finally, with respect to the $70,000 legal fees claimed by Dr. Deep in 1997, such funds were never incurred in 1997. As Dr. Deep testified, this was simply an estimate of what one law firm suggested it would cost Dr. Deep to defend the criminal charges against him. There is no basis upon which this "estimate" is deductible in 1997. Adding the words "with provisions" on his 1997 tax return, while highlighting to CRA that there may be something unusual about the claim, it does not convert an estimate into a deductible expense.
[65] I will now address Dr. Deep's claim for automobile expenses. He does not question the quantum of expenses relied upon by CRA, but objects to the percentage of business versus personal use, being 1,500 kilometres of 53,000 annual kilometres in one year. His position is that travel to his cottage, to Ottawa, between work and home and indeed every kilometre travelled is in connection with some business activity. He is not correct. Travel to Ottawawas not for business purposes - it was to see family. Travel between work and home is not business travel - it is considered personal travel, except for those trips home at mid-day to work. I estimate a seven-minute drive in Torontowould at best be three or four kilometres, so I find a return trip to be seven kilometres. Even affording Dr. Deep a generous interpretation of his claim that he worked on charts at home over the noon hour every working day (presumably 230 working days) this would yield 1,610 kilometres of travel that could be construed as business related. Also, recognizing the small percentage attributable to business at the cottage, I will also allow 5% of travel to and from the cottage (round trip of approximately of 400 kilometres). Assuming 10 trips in 1996 and 50 trips in 1997, this would add another 200 kilometres in 1996 and 1,000 kilometres in 1997. So, for the years in question, the business kilometres would be increased from those allowed by the auditor by 1,610 in all years, and in addition to that another 200 kilometres in 1996 and 1,000 kilometres in 1997. This would yield the following:
|
|
1994 |
1995A |
1995B |
1996 |
1997 |
|
|
|
|
|
|
|
|
Business kilometres |
3,066 |
2,674 |
2,674 |
2,874 |
3,674 |
|
Total kilometres |
53,082 |
53,082 |
53,082 |
53,082 |
53,082 |
|
Car expenses |
$14,753 |
$18,816 |
$9,020 |
$14,064 |
$18,016 |
|
Deductible car expenses |
$852 |
$948 |
$454 |
$761 |
$1,247 |
|
Expenses allowed by Minister |
$405 |
$377 |
$377 |
$281 |
$360 |
|
Increased allowance |
$447 |
$571 |
$77 |
$480 |
$887 |
I have summarized the additional allowable expenses in Appendix "A" attached to my reasons.
(v) Did Dr. Deep underreport his income in 1997, and if so, by how much?
[66] As set out in the facts (paragraphs 30 and 31) there were three major omissions from Dr. Deep's professional income in 1997 of $412,813:
(i) $58,404 representing amounts he allegedly defrauded from OHIP
(ii) $55,547 representing amounts he referred to as his social contract with the Government of Ontario; and
(iii) $105,648 representing amounts withheld by OHIP.
None of these amounts are properly deductible from Dr. Deep's 1997 professional income. He reported his income as $219,600. His income was $412,813. He has underreported his 1997 income by $193,213.
[67] The $58,404 amount was never returned by Dr. Deep to OHIP, as the charges against him were ultimately stayed. The possibility of having to return these funds is no basis for deducting such amount from fees actually received.
[68] The $55,547 amount was never included in Dr. Deep's income. He views it as a gift to the Ontario Government. Had he received the additional fees and then returned them to the Government, maybe then he could have characterized them as a gift. But his arrangement with OHIP was that he would receive fees in accordance with a certain formula. He received $412,813 of fees in 1997 in accordance with that arrangement. The fact that the formula did not entitle him to more in no way renders that "excess amount" deductible from the fees received.
[69] The $105,648 likewise is an amount that was not paid to Dr. Deep in 1997. It was simply withheld by OHIP: it was never reported in Dr. Deep's 1997 income. It consequently is not an amount deductible from his 1997 fees received.
(vi) Is Dr. Deep liable for penalties pursuant to section 163(2) of the Act?
[70] Dr. Deep believed he could manage an office without the help of staff, maintain books and records without the help of bookkeeping or accounting assistance, interpret tax laws without the help of tax specialists and conduct all manner of legal proceedings without the help of lawyers. It is certainly open to him to follow this course, but he does so at his own peril. Having now heard evidence of Dr. Deep's numerous lawsuits, I can only shudder to think of the enormous cost expended by him in money, time and stress that could so readily have been alleviated by relying on professionals trained to deal with accounting, tax and legal matters. He expresses a deep conviction of improper treatment at the hands of CRA, primarily due to the triggering of the audit by a newspaper article. I can understand his annoyance at such a triggering event, especially given the fact that the charges described in the article were ultimately stayed. Yet, once his taxation years are opened to reassessment, and I have found they are, it is Dr. Deep's actions, his preparation of his tax returns and his claims that yield adverse tax consequences. Yes, the auditor was new to income tax audits, and yes there are areas I have found in which the auditor might have been more generous in his allowances, but there were blatant misrepresentations in Dr. Deep's returns, for which only he is responsible, and these misrepresentations were not innocent.
[71] Subsection 163(2) 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 of the greater of $100 and 50% of the aggregate of
[72] The degree of negligence required to impose penalties under subsection 163(2) is one of gross negligence, a higher degree than required under subsection 152(4). This degree has been described as an indifference as to whether the law is complied with or not.[8] This aptly describes Dr. Deep's treatment of his expense claims. He showed a blatant disregard for well-established principles of deductibility such as reasonableness and of a business rather than personal nature.
[73] The reporting of the large interest expenses in each of the years in question on the basis that interest was incurred in each of those years, in and of itself is sufficient to find subsection 163(2) applies. Dr. Deep casually dismisses this error on the basis that he may have reported it in the wrong place on the income tax form - that what he really was doing was applying non-capital losses from previous years. He also attempts to substantiate this approach by saying an officer of CRA advised him he could do this. He did not call the officer nor did he provide any written evidence of this advice. I conclude Dr. Deep was interpreting tax laws to his benefit, with no regard to the correct way of handling these matters. He knew he did not incur such large interest expenses in the years in question. Presuming he could simply deduct the full amounts of interest as non-capital losses, with no calculation of actual non-capital losses from prior years, was reckless to the point of being grossly negligent.
[74] If any further evidence is necessary to find Dr. Deep is subject to subsection 163(2) it can be found in his claim for office expenses. What Dr. Deep claimed on these fronts is so unreasonable that I conclude, notwithstanding his sentiment to the contrary, that he knew he was making false statements; with a minimum amount of enquiry or investigation of those knowledgeable in the area, such expenditure claims would have been significantly rolled back. Without going through the numerous examples, I will just raise one or two from each year in support of my findings:
1994 - $1,322 for the cost of a new stove in his principal residence;
1995 - $842 for the purchase from William Ashley china shop;
1996 - $3,375 for feather down quilts for the Port Carling cottage; and
1997 - $150 for dental work and $7,886 for groceries.
[75] No plausible explanation was provided by Dr. Deep as to why such expenditures, and many more like them, could be considered office expenses. Similarly, deducting 100% of automobile expenses shows a complete disregard for the law. Travel to and from work, to the cottage and to visit family in Ottawa is so clearly personal, it is grossly negligent of Dr. Deep to claim otherwise. His approach to claiming expenses generally was to claim most everything incurred at work, home and at the cottage, including costs clearly of a personal nature.
[76] Finally, his reasons for underreporting his 1997 income lack any merit and display no understanding of the concept of taxable income, to the extent I find reporting on that basis was grossly negligent.
[77] I am somewhat puzzled by a man clearly of high intelligence, who steadfastly clings to untenable positions. The conclusion I have reached is that Dr. Deep has dealt with his tax responsibilities on the basis of what he believes tax laws logically should be, with no reasonable effort to determine what they really are. His purported reliance on an officer of CRA, who did not testify, does not save him in this regard. It was clear to me, from his summary of the Respondent's counsel's argument for example, that Dr. Deep hears only what he wants to hear. I do not accept his evidence that an officer of CRA suggested he could file the way he did.
[78] I conclude that Dr. Deep knew he was making false statements with respect to interest and with respect to his other expenses, in that they were personal and not business expenses, under circumstances amounting to gross negligence. He is liable for penalties.
(vii) Have any of Dr. Deep's Charter right been infringed or denied justifying a remedy pursuant to section 24 of the Charter?
[79] Dr. Deep argued that the auditor's approach to him in July 1998 constituted an unreasonable search and seizure contrary to section 8 of the Charter, because the approach was triggered solely by a newspaper article, and further, because the auditor indicated to Dr. Deep at the first meeting that this was a "civil action against you". Based on Dr. Deep's explanation of his meetings with Mr. Ralbosky, confirmed by Mr. Ralbosky, I can find nothing unreasonable in the approach by Mr. Ralbosky. Dr. Deep voluntarily provided the information for an investigation dealing with his civil responsibility to pay taxes. I find no personal rights to privacy have been violated.
[80] Dr. Deep invoked section 7 of the Charter on the basis that the Respondent concocted an unreasonable claim against him, primarily by disallowing substantial losses, and that this deprived him of his right to life, liberty and security of the person. Dr. Deep's fundamental premise is flawed. The disallowance of substantial losses, as Dr. Deep put it, was not a fanciful concoction of the Government. I find that the Respondent assessed Dr. Deep correctly in connection with the significant interest expense claims made by Dr. Deep. The reason for Dr. Deep being unable to claim interest expenses in the years in question has nothing to do with any wrongdoing on the part of the Respondent, and everything to do with how Dr. Deep has handled his own reporting responsibilities over the years.
[81] Dr. Deep invoked section 6 of the Charter on the basis that the Respondent's actions have impinged his right to leave the country. This point was not argued vigorously by Dr. Deep. I find no provision of the Act, nor the Respondent's actions resulting in the assessments arising from administering the Act, restrict in any way Dr. Deep's mobility rights as contemplated by section 6 of the Charter.
[82] Finally, Dr. Deep called into play the equality provisions of section 15 of the Charter on the basis, as I understood his argument at trial, that his profession, the medical profession, was the only profession audited by the auditor in this case, Mr. Ralbosky. Dr. Deep's notice of Constitutional Questions however, addressed his section 15 argument somewhat differently by claiming "No other physician has been subjected to the ignorance and inexperience and incompetence of auditor J. Ralbosky since he admits that he had never ever previously audited a physician's accounts. This discrimination is beyond the enumerated factors of section 15 Charter rights."
[83] Dr. Deep has not questioned the validity of any particular law in claiming discrimination. It appears he feels he has suffered the misfortunes of being audited by an auditor who he feels is not competent. These are simply not circumstances to which section 15 applies. I find it is unnecessary to go through a detailed Charter analysis on such a claim.
[84] The Respondent cited the Federal Court of Appeal decision in Main Rehabilitation Co. v. R.[9] in which it was confirmed that the Tax Court of Canada does not have the jurisdiction to set aside an assessment on the basis of an abuse of process at common law or in breach of section 7 of the Charter. Dr. Deep appears to have recognized this, as he has sought his remedy elsewhere in this regard.
[85] I conclude that none of Dr. Deep's Charter rights have been infringed or denied.
Conclusion
[86] In conclusion, I allow the appeals and refer the matters back to the Minister for reconsideration and reassessment on the limited basis as set forth in Appendix "A" attached to these Reasons. The Respondent is entitled to costs.
Signed at Ottawa, Canada, this 5th day of June, 2006.
"Campbell J. Miller"
Miller J.
APPENDIX "A"
ADDITIONAL DEDUCTIBLE EXPENSES
|
|
1994 |
1995A |
1995B |
1996 |
1997 |
|
|
|
|
|
|
|
|
Automobile |
$447 |
$571 |
$77 |
$480 |
$887 |
|
Home office |
$561 |
$926 |
0 |
$1,136 |
$824 |
|
Other office |
|
(TV) $646
|
|
$3,088 (insurance) |
$3,345 (provincial payment) |
|
|
|
|
|
|
$184 (Property tax) |
|
Legal |
______ |
$12.50 |
_____ |
__$344 |
________ |
|
Total |
$1,008 |
$2,155.50 |
$77 |
$5,048 |
$5,240 |
COURT FILE NO.: 2002-2009(IT)G
STYLE OF CAUSE: Albert Ross Deep and The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 24, 25, 26 and 27, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice Campbell J. Miller
DATE OF JUDGMENT: June 5, 2006
APPEARANCES:
|
For the Appellant: |
The Appellant himself |
|
Counsel for the Respondent: |
H. Annette Evans |
COUNSEL OF RECORD:
Firm: N/A
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada
[1] Exhibit A-17.
[2] Exhibit A-1, Tab 22.
[3] Up until 1995, Dr. Deep reported his professional practice income based on a taxation year end of January 22. In 1995 he moved to a calendar year end, resulting in one year end January 22, 1995 (1995A) and the second year end December 31, 1995 (1995B).
[4] Exhibit A-19.
[5] 84 DTC 6247.
[6] Supra, at page 6251.
[7] [2005] 2 S.C.R. 598.
[8] See for example Venne.
[9] 2004 DTC 6763.