Tax Court of Canada Judgments

2001-4016(IT)G

BETWEEN:

PATRICIA A. HAMILTON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on March 9, 10 and 11, 2005, at Toronto, Ontario,

By: The Honourable Justice E.A. Bowie
Appearances:
For the Appellant:	The Appellant herself
Counsel for the Respondent:	Brent Cuddy

____________________________________________________________________

JUDGMENT

The appeals from reassessments of tax made under the Income Tax Act for 1995, 1996 and 1997 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons.

          The parties shall each bear their own costs.

Signed at Toronto, Ontario, this 21st day of September, 2005.

"E.A Bowie"

Bowie J.

Citation: 2005TCC625

Date: 20050921

Docket: 2001-4016(IT)G

BETWEEN:

PATRICIA A. HAMILTON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

BowieJ.

[1]      Ms. Hamilton appeals from income tax reassessments for the taxation years 1995, 1996 and 1997. She is a lawyer, and has been in practice for more than 20 years, principally acting in matters of family law, criminal law and estates. Much, but certainly not all, of the work that she does is for legally-aided clients. As with all people in business, she was required by section 150 of the Income Tax Act (the Act) to file annual returns in prescribed form reporting her income for the previous year, and computing the tax payable on it. She failed to do so for each of the three years with which these appeals are concerned. As a result, the Minister of National Revenue (the Minister) has assessed her arbitrarily for each of those years, as subsection 152(7) of the Act permits him to do in such circumstances. In addition to tax, the Minister has assessed penalties for failing to file returns, and interest.

[2]      Paragraphs 5, 6 and 7 of the Reply to the Notice of Appeal set out the particulars of the assessments under appeal.

5.          By assessments, Notices thereof dated July 26, 1999, for the 1995, 1996 and 1997 taxation years, the Minister of National Revenue (the "Minister") assessed the Appellant taxes payable pursuant to subsection 152(7) of the Act.

6.          In assessing the Appellant for the 1995, 1996 and 1997 taxation years the Minister assessed the Appellant tax in the amounts of $20,890.98 $23,883.88 and $13,235.09, respectively, with applicable interest and late filing penalties.

7.          In so assessing the Appellant the Minister made, inter alia, the following assumptions:

a)                  all the facts hereinbefore admitted and stated;

b)          the Appellant was required to file her returns of income for the 1995, 1996 and 1997 taxation years with the Minister on or before April 30, 1996, April 30, 1997 and April 30, 1998, respectively;

c)          the Appellant failed to file income tax returns for the 1995, 1996 and 1997 taxation years as and when required by subsection 150(1) of the Act;

d)          during the 1995, 1996 and 1997 taxation years, the Appellant had net professional income in the amount of $63,342.00 for each taxation year, assessed as other income;

e)          during the 1995 and 1996 taxation years, the Appellant received RRSP income from the Sun Life Assurance Company of Canada and received T4-RSP slips in the amounts of $24,444.00 and $34,000.00, respectively;

f)           in respect of the 1995, 1996 and 1997 taxation years, the Appellant was allowed the basic personal amounts of $6,456.00 per year in the calculation of non-refundable tax credits;

g)          in respect of her 1995 and 1996 income tax years the Appellant was allowed the amounts of $2,444.00 and $3,400.00, respectively, for tax deducted and remitted to the Minister, which were allowed to the Appellant in the calculation of her total tax credits for the years at issue;

h)          the Appellant is not entitled to any other deduction in computing her taxable income or in computing her tax payable in respect of her 1995, 1996 and 1997 taxation years beyond the amounts allowed by the Minister;

i)           the Appellant has failed to produce any other receipts or documentation to support any deductions in computing income or in computing her tax payable for the years at issue beyond those already allowed by the Minister;

j)           the Minister correctly assessed the Appellant for interest on tax she failed to remit when required to do so for the 1995, 1996 and 1997 taxation years, in accordance with the prescribed interest rate pursuant to subsection 161(1) of the Act;

k)          the Appellant was properly assessed late filing penalties pursuant to section 162 of the Act for the years at issue.

According to the evidence, the Minister's assumption that the Appellant's net professional income for each of the years was $63,342.00 was based on her declared gross professional income for 1994, (the last year for which she had filed) from which was deducted 10% for expenses. Certainly, this method of assessing was arbitrary, but, as will be seen, the Minister had limited options, given the paucity of information available. Not only did the Appellant not file returns for the years in question, but she was unable to produce appropriate records of her billings. It is common ground that the Appellant's income during the period covered by these assessments consisted of the profit from her law practice, and certain amounts that she withdrew from a registered retirement savings plan (RRSP). During the trial, the Appellant and counsel for the Respondent were able to reach agreement as to the amounts of the RRSP withdrawals, and as to most of the expenses of the law practice. I shall deal first with the ascertainment of the Appellant's gross income from the practice of law for each of the years under appeal, then with the expenses that she may deduct in each year. Finally, I will deal with a submission made by the Appellant that certain of the exhibits entered during the trial should be subject to an Order to protect confidentiality of information contained in them.

[3]      Two witnesses were called by the Appellant, and she gave evidence herself. The first witness was a financial officer of Legal Aid Ontario, who was subpoenaed to produce a summary of the payments made by Legal Aid to the Appellant in 1995, 1996 and 1997. That document, which became exhibit A-1, records the amounts of all the payments made to the Appellant, and approximately the dates on which they were made, during the three years under appeal. The witness was not able to give any information, however, about the dates on which the bills giving rise to those payments were submitted to Legal Aid. He testified that in the mid-1990s, Legal Aid had guidelines for payment under which all accounts should have been paid within no more than 60 days of receipt, but that there sometimes were significant delays, and that those could be as long as a year in extreme cases. This evidence does not enable me to determine the Appellant's income on the accrual basis. Nor does it speak at all to her income from clients who were not eligible for legal aid.

[4]      Mr. Frank Altman testified that he had been the Appellant's accountant for some years before 1995. He was not asked, and he did not explain, why he had not prepared income tax returns for the Appellant for that year, or for the two following ones, in the normal course. What he did do, however, was to prepare in November 2004, shortly before trial, a general ledger covering the three years under appeal, trial balances for those periods, and income tax returns for each of the three years. These were prepared to comply with an interlocutory Order of this Court. He did this using information and documents given to him by the Appellant for that purpose. These consisted of her bank statements and deposit book, and her petty cash receipts and vouchers. She did not provide him with a fee journal, apparently because she did not have one. Moreover, the bank records he was given did not contain any information for the first three months of 1995. Mr. Altman did prepare the three returns that I have referred to, no doubt as best he could from this totally inadequate information. He testified that he could determine the Appellant's fee income for the periods by taking the deposits to her bank account and deducting from them the appropriate amounts for goods and services tax and for disbursements, all the while ignoring those deposits that were of a capital nature, such as loan advances from the bank and the RRSP withdrawals. In this way, he arrived at the following amounts for the gross fee income, the expenses and the net income of the Appellant from her law practice:

	Fees	Expenses	Net income
1995	$32,915	$34,062	($1,147)
1996	$62,392	$48,025	$14,367
1997	$74,916	$54,295	$20,621

[5]      It is obvious to me, and it should have been obvious to Mr. Altman, that these computations of the Appellant's gross fee income simply have no validity. They are at best an attempt to establish her income each year on the cash basis. Mr. Altman acknowledged during his evidence-in-chief that the computation of income should have been done by the accrual method, with an adjustment for the Appellant's work in progress. When the Appellant asked during examination-in-chief if he did it that way, he gave this answer:

A.            I in effect did it that way, but I didn't document it. What I did when I did the three years in question many years after the fact, that I'm understanding the method in which you billed and collected, that I determined that in your particular instance, that if I took the fees billed without having a proper fee and ... ledger in place, and not being aware of all the uncollected amounts or unbilled amounts, that the fairest way of determining your income during those years would be to record the income on an as-collected basis.

Mr. Altman placed himself in an impossible position when he undertook this assignment without having the necessary information to carry it out properly. He tried to justify his result by testifying that the only fair way to assess the Appellant's income was by using the cash method. It was not totally clear to me whether he was basing this view on the considerable delay that could occur in receiving payment from Legal Aid, or if it was based on the absence of much of the necessary information that would be required in order to form a proper conclusion. In either event, of course, he was simply wrong. The Act prescribes certain rules for the computation of income, and they must be adhered to. This is so even if the result is a departure from the fairest presentation of income: see Canderel Ltd. v. Canada.[1] Nor can a departure from the requirements of the Act be justified on the basis that it would not be fair to require compliance because the taxpayer has failed to keep the records that are necessary to effect it. The requirement of paragraph 12(1)(b) of the Act[2] is clear and unambiguous. There is no evidence before me that the Appellant has ever previously used the cash method of recording her income, or that it has been accepted that she do so. She was therefore required to include all her billed fees, whether paid or not, when computing her income for the year.

[6]      In answer to a question from me, the Appellant testified that it was her position that the returns that Mr. Altman prepared for her shortly before the trial accurately declared her income for each of the years in question. She did not, however, give any clear statement in her evidence as to her basis for that belief. It is obvious that she made this assertion without having given any real thought to the matter. If she had, then she would have been aware that when she provided Mr. Altman with her bank deposit records they did not include any records for the first three months of 1995, and without those Mr. Altman could not have computed her income accurately. Nor did I hear in the Appellant's evidence any clear statement to the effect that all of her revenues were deposited to her bank account. There was no evidence showing that that was not the case, but considering that the Appellant had the onus of proving that her income was something less than the amounts assessed, it nevertheless seems a serious omission.

[7]      I should at this stage deal with the Appellant's argument concerning the onus of proof. Her written argument contains this submission:

LACK OF PROOF OF THE EVIDENCE REFERRED TO IN THE RESPONDENT'S REPLY PLEADING

The Respondent filed a Reply in these proceedings but he has not substantiated any of the factual basis for the contents of paragraphs 5, 6 and 7 of the Reply.

The Respondent's one witness indicated to the court that the Respondent had assessed tax on the Appellant's 1995, 1996 and 1997 tax years based on her 1994 Income Tax Year. She indicated to the court that she had not viewed the Notices of Assessments given to the Appellant by the Minister for the taxation years of 1995, 1996 and 1997 tax years nor had she seen the 1994 Income Tax Return of the Appellant. The Respondent did not furnish any Notices to Admit in regards to Income Tax Return of the Appellant for the 1994 Income Tax Year. The Respondent's witness did not furnish any Notices to Admit for any Notices of Assessment for the 1995, 1996 and 1997 Taxation years in which the Minister is alleged to have assessed the Appellant taxes payable pursuant to subsection 152(7) of the Act. So, the statements of fact set forth in the Reply of the Respondent's in paragraphs 5 and 6 and 7 were never proven before the court. There is simply no evidence before the court in regards to the assessment albeit that the pleadings would appear to place an upper limit on their position by filing the Reply.

It is, of course, well settled that the law is precisely the contrary, for very good reason. In AndersonLogging v. The Queen,[3] Duff J., as he then was, speaking for a unanimous Supreme Court of Canada, said:

First, as to the contention on the point of onus. If, on an appeal to the judge of the Court of Revision, it appears that, on the true facts, the application of the pertinent enactment is doubtful, it would, on principle, seem that the Crown must fail. That seems to be necessarily involved in the principle according to which statutes imposing a burden upon the subject have, by inveterate practice, been interpreted and administered. But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must shew that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering whether this has been done it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellant's cognizance; although this last is a consideration which, for obvious reasons, must not be pressed too far.

The law has not changed since then, and indeed that principle has since been reiterated more than once by the Supreme Court of Canada.[4] Certainly this is a case in which the facts should be exclusively within the Appellant's knowledge, had she only kept proper books and records as required by section 165 of the Act. It was for the Appellant to disprove the Minister's assumptions of fact underlying the assessments, upon a balance of probabilities. She has failed to discharge that burden, because she was unable to lead reliable evidence as to the total amount of fees billed by her in any of the three years.

[8]      Ms. Hamilton argued that as an account rendered under the Ontario Legal Aid Act[5] cannot be paid until it has been settled by a Legal Accounts Officer an amount billed to the Legal Aid Plan should not be taken into income until after it is settled. There are two reasons that this submission does not assist the Appellant. The first is the deeming provision in paragraph 12(1)(b) which, of course, cannot be displaced by provincial legislation. The second is that there is no evidence before me from which I could possibly ascertain in respect of any time period what accounts rendered by the Appellant to the Legal Aid Plan had been settled. In substance, this submission is simply another way of arguing that the Appellant should be permitted to compute her income on a cash basis, notwithstanding the clear words of paragraph 12(1)(b).

[9]      I note, too, that there was practically no evidence led about the accounts rendered by the Appellant to her clients who were not legally aided. Even assuming that all of the amounts they paid were deposited to the Appellant's bank account, there is no evidence that would enable me to compute the Appellant's income from these clients except on a cash basis. Added to all these deficiencies in the Appellant's records is her admission made on cross examination that at the end of each of the years under appeal she had work in progress that was never valued and added to her income as section 34 of the Act requires, unless the Appellant elects otherwise in her income tax return. There is no evidence that she has ever made an election under that section.

[10]     My conclusion as to the Appellant's gross income from professional fees for each of the three years therefore is that it was $70,380.00. This is the amount that was assumed by the Minister, after the deduction of 10%, to be her net professional income for each of the years in question. It would certainly be preferable if I were able to arrive at some reasonable finding of fact based upon the evidence, rather than accepting the unrebutted assumptions of the Minister. It has been said that the Minister's assumptions are but a molehill to be overcome by the Appellant, but in this case the Appellant's evidence does not accomplish even that.

[11]     The matter does not end there, however. It is apparent from the evidence, and from concessions made during the course of the hearing by counsel for the Respondent, that the assessments should be reduced to reflect expenses greater than the 10% allowed by the Minister. Subject to certain specific issues that I shall deal with shortly, the parties agreed as to the expenses as follows:

1995 -         $34,836.80

1996 -         $42,693.20

1997 -         $48,427.10

The expenses as to which there was no agreement are business taxes and loan interest. For 1995, the Appellant claims additional amounts of $1,572.00 for business tax and $1,611.00 for loan interest. For 1996, she claims $2,735.00 for business tax and $1,486.00 for loan interest. For 1997, she claims $1,640.00 for business tax and $1,276.00 for loan interest.

[12]     The amounts agreed upon, as set out above, do not include any amounts for business tax. There is evidence in the form of a number of cancelled cheques that establishes that the Appellant made payments for business tax during each of the years under appeal. Common sense dictates that she must have incurred liability for business tax each year. The difficulty is to ascertain the exact amount attributable to each of the years. This is a matter that should have been susceptible of proof without much difficulty, if only the Appellant had maintained the appropriate records and been able to produce them at trial. Something as simple as a tax bill would suffice. Normally the cancelled cheques would suffice, but in this case the collection had been put in the hands of a bailiff, and the evidence is unclear as to the period to which each cheque relates. I consider that the fairest estimate I can make for the business taxes for each year is $1,500.00. The evidence also included a cancelled cheque made by the Appellant in favour of her landlord for $1,000.00 which is dated March 1, 1996 and marked as being for incremental business taxes. There was evidence that at about the time of these taxation years the municipality changed its system of business taxation to impose the collection of it upon landlords as part of their tenants' rents. I cannot, from the evidence before, me make any finding as to the fiscal period to which that $1,000.00 payment relates, which precludes me from taking it into account.

[13]     The expense amounts agreed on, as set out above, include loan interest in the amounts of $1,068.00 for 1996 and $916.00 for 1997. The Appellant says that she is entitled to further loan interest deductions of $1,486.00 and $1,276.00 respectively for these two years. Again, the Appellant's problem is one of record-keeping. Instead of two chequing accounts, she had one for both her business and her personal transactions. She had one line of credit against which she borrowed from time to time. She maintained that all her borrowing was for business purposes, but I am not persuaded that this was so. As was pointed out by Dickson C.J.C. in The Queen v. Bronfman Trust,[6] where a taxpayer commingles funds used for a variety of purposes, only some of which are purposes for which a deduction for interest would be available, no deduction will be allowed unless the taxpayer can discharge the onus of tracing the borrowed funds to an eligible use. The Appellant made no effort to trace the borrowed funds at all. On the evidence before me she is not entitled to any deduction for interest at all. She does, however, have the benefit of the concession made by counsel for the Respondent during the hearing.

[14]     In her submissions, the Appellant took great exception to the evidence of the witness Hilda Anyison, a Canada Revenue Agency assessor. Ms. Anyison was not the assessor who raised the assessments that are under appeal. Nor did she audit the Appellant's records. In fact, no one audited the Appellant's records, because she filed no returns and produced no records. When the Appellant gave the completed returns and the trial balances prepared by Mr. Altman, as well as some other financial documents, to the Respondent's counsel shortly before the trial, Ms. Anyison was asked by counsel to attempt to reconcile the income shown on the returns with the other documents produced. She was not able to do so. Given the state of the Appellant's records, this does not surprise me. Ms. Anyison was not asked to make an estimate of the Appellant's income for the years in issue, nor did she purport to do so. Her evidence was not particularly useful, but that is not her fault.

[15]     I find that the Appellant's net professional income for the three years was as follows:

                                          1995                   1996                        1997

Gross fee income             $70,380                  $70,380                  $70,380

Expenses                         36,337                  44,193                  49,927

Net income                      $34,043                  $26,187                  $20,453

To these amounts must be added the RRSP withdrawals, the amounts of which are not in dispute. The late filing penalties were properly imposed. The Appellant admitted her failure to file returns for each of 1995, 1996 and 1997 during the trial. The appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment in accordance with these Reasons for Judgment, including adjustments to the quantum of the penalties resulting from the reductions in the assessed income.

[16]     The Appellant requested that I make a confidentiality Order with respect to those exhibits entered at trial that bear the names of her former or present clients. This information is subject to solicitor and client privilege. Although it is the Appellant who caused it to be divulged, the privilege is that of her clients, and I have no reason to believe that they have waived it. If my judgment is not appealed then all these exhibits will be returned to the parties who tendered them at the expiry of the appeal period. If the judgment is appealed then all of the exhibits will be sent by the Registrar to the Registrar of the Federal Court of Appeal. If there is a request to view the exhibits between now and then it will be referred to me by the Registrar, and I will give directions that will effectively prevent the disclosure of the name of a client of the Appellant.

[17]     Both parties have asked for costs. Success is divided. The trial took place over three days, followed by written argument. It is a case that should never have had to go to trial. Had the Appellant maintained the books and records that the Act requires her to maintain, and had she produced them to the Minister in a timely way, there would have been no litigation. Had the Minister's arbitrary assessments allowed the Appellant expenses based on her expenses for the year 1994 instead of simply 10 per cent of the assumed gross income for each year, they would likely have been much closer to the mark. The Appellant's conduct of the appeals, both at the interlocutory stages and at trial did her no credit. She failed to fulfil her obligations to produce documents until the eve of trial, although ordered to do so. She came one-half hour late to Court on the first day of the trial, and was not properly prepared. It is a case in which the parties should each bear their own costs.

Signed at Ottawa, Canada, this 21st day of September , 2005.

"E.A. Bowie"

Bowie J.

CITATION:

2005TCC625

COURT FILE NOS.:

2001-4016(IT)G

STYLE OF CAUSE:

Patricia A. Hamilton and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

March 9, 10 and 11, 2005

REASONS FOR JUDGMENT BY:

The Honourable Justice E.A. Bowie

DATE OF JUDGMENT:

September 21, 2005

APPEARANCES:

For the Appellant:

The Appellant herself

Counsel for the Respondent:

Brent Cuddy

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada

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