Tax Court of Canada Judgments

Docket: 2004-1149(IT)I

BETWEEN:

MANDALINE PERRINO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on September 8 and 10, 2004, at Toronto, Ontario, by

The Honourable Justice C.H. McArthur
Appearances:
Agent for the Appellant:	Basharat Butt
Counsel for the Respondent:	Craig Maw

____________________________________________________________________

JUDGMENT

          The appeals from reassessments of tax made under the Income Tax Act for the 1997 and 1998 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant is entitled to claim expenses in the amounts of $12,843 and $19,109 for the 1997 and 1998 taxation years, respectively.

Signed at Ottawa, Canada, this 17th day of December, 2004.

"C.H. McArthur"

McArthur J.

Citation: 2004TCC797

Date: 20041217

Docket: 2004-1149(IT)I

BETWEEN:

MANDALINE PERRINO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

McArthur J.

[1]      These appeals are from assessments for the 1997 and 1998 taxation years. The issue is whether the Appellant has substantiated expenses denied her by the Minister of National Revenue and whether the Appellant made misrepresentations that are attributable to neglect, carelessness or wilful default justifying the penalties under subsection 163(2) of the Income Tax Act.

[2]      The Appellant was a cook in a hostel in the Toronto area in the years in issue. Her father-in-law, Emilio Pellegrino,[1] is a painting contractor who in 1997 was recovering from an earlier bankruptcy. To assist him the Appellant presented herself as operating Auburn Painting which primarily had one client, Magnum Homes, a builder of homes in new subdivisions.

[3]      The Appellant was represented by Mr. Basharat Butt, an accountant. Her original returns filed for 1997 and 1998 taxation years were prepared by a representative of TB Tax Services from the information she provided. She reported income from her fulltime employment which is not contested. In the same returns, she reported for Auburn Painting gross revenue of $7,000 and $18,000 in 1997 and 1998, respectively.

[4]      In reassessing the Appellant, the Minister included unreported revenue of $8,551 in 1997 and $28,255 in 1998 and disallowed expenses of $7,393 in 1997 and $13,360 in 1998 and imposed penalties of $953 in 1997 and $4,556 in 1998 pursuant to subsection 163(2) of the Act. The Minister's amounts for unreported revenue were taken from the general ledger of Magnum Homes which had paid Auburn Painting. Also, there was an amount of $240 representing revenue from Torino Drywall.

[5]      Subsequent to the Minister's audit, Auburn Painting retained Mr. Butt. He, in effect, performed his own audit. He, painstakingly, uncovered every income and expense receipt he could. He had Mr. Pellegrino approach several subcontractors who signed invoices that had not previously existed. In conclusion, he agreed with the Minister's gross income total of $61,800 for the two years, except for about $780.[2]

[6]      The two issues to be decided are: (i) the amount of expenses of Auburn Painting; and (ii) the imposition of the penalties. I will first deal with the expenses. In her original income tax returns, the Appellant claimed total expenses in 1997 and 1998 in the aggregate amount of $27,570 and the Minister disallowed $20,753, allowing approximately $7,000.

[7]      After an extensive accounting review by Mr. Butt and after several revisions, the Appellant claimed total expenses in 1997 of $20,506 and $40,820 in 1998.[3] These amounts differ from those contained in the Notice of Appeal and are the final amounts reviewed by Jack Batth, the auditor for the Minister. The Minister allowed expenses of $3,291 in 1997 and $6,784 in 1998. The disallowed expenses are $17,215 and $34,036, respectively. For the reasons that follow, I am prepared to allow a total of $9,552 and $12,325 in expenses for 1997 and 1998, respectively. In summary, the Appellant requested a total deduction of $61,326, the Minister allowed $10,075 and I am allowing a total of $21,877.

[8]      An updated General Ledger was submitted by Mr. Butt a few weeks before trial and it was reviewed by the Minister's auditor, Mr. Batth. He accepted some reported payments but rejected most. Mr. Butt revised all of the Appellant's accounting using vouchers, many of which were prepared shortly before his revision. In cross-examination, Mr. Butt asked Mr. Batth if he had examined these revised accounts adding that it was "all the proof you needed and today also we have presented it in Court. Aren't they genuine documents?" Mr. Batth answered to the effect that they examined the documents but found them unsatisfactory because there were no corresponding cheques or names of persons who reported the payments. Mr. Batth's own words included: "Genuine, I don't know. In my eyes, to show that these individuals did receive these payments. Normally, when one pays somebody, they report the same amounts. If you did have a cheque or something like that, then we could ... But that's where it stands".

[9]      Most of the expenses disallowed by the Minister were subcontracting payments. In addition to the oral testimony of Mr. Pellegrino, the claim for subcontracting payments was supported by letters or invoices that he obtained from different subcontractors. These acknowledgements were obtained by Mr. Pellegrino well after the audit. In addition, he filed a note purportedly signed by Nicolina Luong stating:[4]

To Whom It May Concern

I Nicolina Luong rented out rental units to Auburn Painting in 1997 & 1998. The total cost of the rental units for these 2 years was $9600.00.

Sincerely,

"Nicolina Luong"

[10]     Mr. Butt provided vouchers (no cancelled cheques) to the Minister's auditor who disallowed all of them. The largest amounts are from subcontractors who did the actual painting. They include:

(i)	Mamaca Painting	$4,158
(ii)	Painting & Decorating	$7,000
(iii)	Mamaca Painting	$4,963
(iv)	Painting & Decorating	$3,885
(v)	Daniel La Course	$7,867
(vi)	Daniel La Course	$9,052

An example of a voucher prepared and signed after the audit, reads as follows:

To Whom It May Concern

I Daniel Lacourse worked for Auburn Painting as a subcontractor in 1997 & 1998. The income that I earned during this time was $16,920.00.

Sincerely,

"Daniel Lacourse"

[11]     We have the evidence of two honest accountants. Each has an opposing interest and of course are not considered to be expert or independent witnesses.

[12]     The Appellant's accountant had made an extraordinary effort to obtain invoices and other proof of payments. His documents are purportedly signed by subcontractors or paint suppliers. Some look authentic, some are dubious.

[13]     The Minister's accountant has rejected most of the expenses unless cancelled cheques or other proof of payment were produced. The Minister was unable to find that the subcontractors had valid GST numbers and could find no records of their having included the amounts claimed to have been paid to them in their taxable incomes. The same is true for the rent purportedly paid to Nicolina Luong of $9,600 over the two years in issue for the use of her garage for storage.

[14]     In 1997, the Appellant claimed $20,500 in expenses and the Minister allowed $3,291. Of the disallowed amounts, I am prepared to allow: (i) Sherwin Williams Paint in the amount of $500. Although there is no cancelled cheque, the invoice appears to be authentic; and (ii) Daniel Lacourse's invoice in the amount of $9,052 - there is no supporting documentation or evidence other than the evidence of Emillio Pellegrino, yet I am satisfied that the Appellant used contract painters and he is the only one claimed in 1997. The following are disallowed: The Ultra Comfort invoice for $1,398 appears to be a personal expenditure; and the Regal Crest invoice of $2,340 refers to work done in Newmarket and is not allowed because it does not appear to relate to a Magnum Homes' project and no corroboration of any nature was provided, as in the situation of Emilio Painting.

[15]     In addition, I do not accept the claimed expenditures of $9,600 purportedly for rent paid to Nicolina Luong. I do not believe the evidence of Mr. Pellegrino to the effect that he needed garage rental space to the tune of $9,600 in two years given the nature of the operation. For the most part he used independent painters who would normally provide their own tools. In conclusion, for 1997 an additional $9,552 in expenses is allowed.

[16]     For the 1998 taxation year, I accept the invoice from Daniel Lacourse of $7,867, Mamaca Painting of $4,158 and the hydro payment of $300. The Mamaca receipt of August 4, 1998 appears to be authentic, listing specific amounts for painting homes on specific lots for 1998. The receipt prepared and signed for Mamaca shortly before trial is vague and combines 1997 and 1998 and the amounts are not reconcilable with the August 4, 1998 voucher.

[17]     The Daniel Lacourse voucher is consistent with 1997. I accept the $300 hydro payment because Mr. Batth appears to have changed his mind. On page 22 of the transcript of his evidence there was this exchange with respect to a cancelled cheque to hydro for $300:

Q.         Which expense does this refer to?

A.         This is for the hydro, the payment that is for the garage, for the - it's just a place for the tools or the equipment.

Q.         And did you consider that expense to be personal?

A.         I did consider it to be personal, but that was, you know, before what was presented today, so I'm not sure.

The remaining 1998 expenses claimed by the Appellant are rejected for reasons given by Mr. Batth. The largest ones are those of Painting & Decorating, being invoice A0001 which is dated December 7, 1998. I am sceptical because the invoice which is first in time is numbered A0002 and dated September 9, 1998, some three months earlier than the invoice numbered A0001. This enigma was left unexplained. Further there were no cancelled cheques or other proof of payment.

[18]     I agree with the Respondent's rejection of the other invoices. They do not inspire a conclusion of authenticity particularly the ones prepared on behalf of the Appellant only months prior to trial on plain bond paper and purportedly signed by unknown persons. It would be stretching my credibility too far to accept these without further corroboration such as cancelled cheques or the testimony of the signatories. To conclude, in the 1998 taxation year, the Appellant is entitled to deduct the further sum of $12,325.

Penalty

[19]     The Appellant was a fulltime cook and knew very little about the painting business yet she held herself out as a painting contractor. She was trying to assist her father-in-law but must be responsible for her actions. She clearly presented herself as the sole owner of Auburn Painting for its books and records and income tax filings. Auburn's bookkeeping was almost non-existent before Mr. Butt took over after the Minister's audit. His task was a very difficult one because there were very few books and records. To put the pieces together he had to turn to the man who had created the mess in the first place. Mr. Pellegrino found some receipts but for the most part he provided the Court with self-prepared acknowledgments purportedly signed by subcontractors. These were not supported by cancelled cheques for proof of payment or direct evidence from the subcontractors. The Minister's auditor was unable to trace GST numbers nor income tax returns for the named subcontractors where they included payments from the Appellant in their income. She assumed the responsibility of Auburn. She knew that the books and records were inadequate. She had to know that the original figures she provided TB Tax Services were casual estimates by her father-in-law. Her actions were a "high degree of negligence tantamount to intentionally acting" as referred to in Venne v. The Queen.[5]

[20]     Obviously, the evidence is unsatisfactory yet I am still faced with a situation where on a balance of probabilities, the Appellant had more business expenses than she is credited with.

[21]     I found the evidence of Mr. Butt credible. The evidence of the Appellant was of little assistance. Mr. Pellegrino's testimony was an effort both consciously and unconsciously to see past events in the light of his present-day interests. The Minister's auditor made a scrupulous effort to review each an every entry submitted by Mr. Butt. For the most part he was strict in his requirement for corroborating evidence before acknowledging an expenditure.

[22]     In conclusion, the appeals are allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment to allow the Appellant to claim total expenses of $12,843 and $19,109 for 1997 and 1998, respectively. The penalties pursuant to subsection 163(2) of the Act shall be adjusted to reflect the expenses allowed.

Signed at Ottawa, Canada, this 17th day of December, 2004.

"C.H. McArthur"

McArthur J.

CITATION:

2004TCC797

COURT FILE NO.:

2004-1149(IT)I

STYLE OF CAUSE:

Mandaline Perrino and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

September 8 and 10, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice C.H. McArthur

DATE OF JUDGMENT:

December 17, 2004

APPEARANCES:

Agent for the Appellant:

Basharat Butt

Counsel for the Respondent:

Craig Maw

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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