Date: 20001213
Docket: 98-2787-IT-G
BETWEEN:
LOUIS WONG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur, J.
[1] These appeals are from assessments of tax for the 1988, 1990 and 1994 taxation years. The Minister of National Revenue (the Minister) disallowed the Appellant's claim of a non-capital loss of $168,975 in the 1990 taxation year. For 1988, the Minister disallowed a loss carryback of $44,903 and a loss of $72,535 carry forward to 1994. The Appellant's original claim was for an allowable business investment loss (ABIL). He now claims a non-capital loss for the 1990 taxation year of $113,605.
[2] The issues include (i) did the Appellant suffer a business loss of $113,605 in 1990; in short, do I accept his numbers or those submitted by the Crown; and (ii) if I find that the Appellant suffered a loss in 1990, is it on account of capital or income.
[3] The Appellant immigrated to Canada around 1977 as a student. In the early 1980's, he began buying used automobiles and selling them at a profit. He described this activity as a hobby and did not file income tax returns. In 1990, he entered into a business of buying and selling used vehicles with a sole proprietorship, Brabus Autosport (Brabus) owned by Michael James Ching. Either, Brabus or the Appellant would find a car to purchase and the Appellant would pay 50% of the cost. Once the vehicle was sold, the Appellant was entitled to 50% of the net proceeds. Both parties were active in the sale of these automobiles.
[4] In November 1990, Mr. Ching declared bankruptcy and some of the vehicles purchased by Brabus were seized. In his pleadings, the Appellant states that he suffered a loss of $168,975. The solicitors, McCarthy Tétrault, prepared the Notice of Appeal but subsequently removed themselves from the record. The law firm Fraser Milner Casgrain represented the Appellant at the hearing of these appeals. The amount of the Appellant's claimed loss has been reduced by his present counsel to $113,605.
[5] The issue concerns the Appellant's income from the business for the 1990 taxation year. When filing his return for that taxation year, a voluntary disclosure, the Appellant reported gross income of $242,420 from the business and deducted from it the amount of $218,440 as costs of sales, which resulted in business gross profit of $23,980. He then deducted expenses in the amount of $267.50, from the $23,980, for a result of a business net income in the amount of $23,712.50. The Appellant reported half of that amount ($11,856.25) as his share of the business income. From that amount, he then deducted $10,254 as bad debts which he described to be his share of the profit that Brabus did not pay him for that year. Therefore, the Appellant declared his net share of the business income as an amount of $1,601.75.
[6] The Appellant submitted that the business was conducted as a joint venture. In his Notice of Appeal, he asserted that he suffered as a result of Mr. Ching's bankruptcy, a loss in the amount of $168,975. Since his accountant was assuming at that time that Brabus was a corporation, the Appellant contended that his loss qualified as an ABIL in the amount of $119,040.38 (3/4 of $168,975). He deducted an amount of $1,601.75 from his income for the 1990 taxation year and carried over the remaining part in the amounts of $44,903.28 and $72,535.35 against his income for the 1988 and 1994 taxation years, respectively.
[7] It is the contention of the Minister that the Appellant did not suffer any loss in 1990. The Minister asserted that the Appellant's share of the business income for that year was in the amount of $94,215 less $71,432, which was one-half the cost to the partnership of the six cars that were either seized or repossessed. Thus, the Minister concluded that the Appellant's net share of the business income for that year was in the amount of $22,783. The Minister, therefore, assessed the Appellant for an unreported income from the business in the amount of $21,181 for the 1990 taxation year.
[8] Alternatively, the Minister contended that the business was conducted as a partnership rather than as a joint venture. Consequently, he argued that even if the Appellant had suffered any loss in 1990 in relation to Mr. Ching's personal bankruptcy, this loss would have been in the nature of an appropriation of the partnership's assets by a partner. It is the contention of the Minister that, therefore, this loss would have been capital in nature. Based on this reasoning, the Minister contended that in any event, no loss would have been deductible against the Appellant's income.
[9] At the time of the trial, the Appellant did not submit that he suffered an ABIL in the amount of $168,975; rather he asserted that he suffered a business loss in the amount of $113,605. Since Brabus was not a corporation, the loss incurred by the Appellant, if there was any, could not be qualified as an ABIL. In any event, if the Appellant had incurred a loss that qualifies as a business loss, he would nevertheless be entitled to carry over this loss as he did for the alleged ABIL, pursuant to paragraph 111(1)(a) of the Act.
[10] Up to February 1991 when he made a voluntary disclosure, the Appellant had never filed income tax returns and by this time he had been in the automobile business for almost eight years. The Respondent's assumptions of fact included the following:
11(f) ... at the time of Ching's bankruptcy, the partnership had 13 cars, of which four were seized by the trustee in bankruptcy and two were repossessed by the vendors of the cars;
11(g) for his 1990 taxation year, the Appellant's share of income from the partnership was $94,215 less half the cost to the partnership of the six cars that were either seized or repossessed or $71,432, for a net share of partnership income of $22,783;
[11] The Appellant's accountant Mr. Woo testified. The source for his financial analysis and the resulting income tax returns was from a ledger book prepared by the Appellant. Mr. Woo obviously had difficulty interpreting the Appellant's entries. For example, he originally proceeded on the basis that Brabus was a corporation and claimed an ABIL. He reversed this position after the Minister revealed that Brabus was not a corporation. His original figures were amended to reflect a loss of $113,605 and not $168,975.
[12] I agree with counsel for the Appellant who states that the crucial issue is the numbers. Whose figures are accurate? Respondent's counsel says the Appellant earned a profit of $22,783. The Appellant states he lost $113,605.
Appellant's position
[13] The Appellant's amended numbers are accurate. He did not have a $168,975 ABIL but had a $113,605 income loss in 1990; and there was no partnership – if there was, it is irrelevant and the loss would have been on account of income and not capital.
Respondent's position
[14] The Appellant had no loss in 1990 but had a net income of $22,783; and there was a partnership between the Appellant and Brabus. If there was a loss it was a capital loss.
[15] The Appellant, his accountant Mr. Woo, and a Revenue Canada auditor, Lynn M. Watson, testified.
[16] The first and primary issue involves the variety of numbers. The Appellant presents that the difference of $134,786 between his numbers and those submitted by the Minister result from certain expenses he incurred which were not taken into account by the Minister. The largest amount disallowed by the Minister is his one-half share paid by the Appellant to Brabus for the six cars seized upon Brabus' bankruptcy. The Appellant contends that he lost $109,974 in respect of this unrecovered cost of inventory.
[17] The Minister maintains that if there were any amounts that Brabus owed the Appellant in respect to inventory or unpaid profit, these amounts were extinguished by unexplained payments and transfer of property in 1990. The Minister referred to an unexplained deposit of $78,000 into the Appellant's bank account and an unexplained transfer of property from Brabus to the Appellant of more than $97,000 during the time of Mr. Ching's bankruptcy in November 1990.
[18] The Appellant's evidence with respect to the accuracy of his figures consisted of the ledgers prepared by him. The accountant's calculations were based on the accuracy of the numbers in these ledgers. The issue narrows down to whether or not I accept the accuracy of the Appellant's ledger pages.
[19] The initial burden of proof is on the Appellant to demolish the Minister's assumptions. I find that the Appellant has made a prima facie case although to say he has demolished the Minister's assumptions is using language stronger than his evidence deserves. The onus then shifts to the Minister to rebut the prima facie case and to prove the assumptions made in the Reply to the Notice of Appeal.[1] For the reasons that follow, I find that the Minister has done that. The credibility of the Appellant is in question. The Appellant's counsel states that the Minister has a great deal of suspicion, but no factual basis for disbelieving the amounts submitted by the Appellant. Dealing with the Appellant's credibility, his counsel presented the following:
(a) the Appellant made a voluntary disclosure;
(b) his accountant, Mr. Woo, confirmed the Appellant's testimony with respect to the disclosure;
(c) the Appellant acknowledged he made a mistake; and
(d) he has shown up at trial and obviously thinks he has a bona fide claim.
[20] With regard to the Appellant's credibility the Minister introduced the following in evidence which I accept. The Appellant was in the business of buying and selling cars for seven or eight years without filing income tax returns. The Appellant's explanation that he believed this activity to be a hobby is ridiculous and not credible. The Appellant purchased a condominium with a cash down payment of $77,300 in 1988. The source of the funds was not revealed by the Appellant and presumably came from car sale profits. The Appellant still maintains that his buying and selling of automobiles throughout most of the 1980's was a non-taxable hobby yet it was his only source of income and he had accumulated at least $77,300; (e) the Appellant was untruthful in an affidavit filed in civil suit against him. He stated he was simply an employee of Brabus when he knew differently. Ms. Loretta Lau had sued him with respect to a car he sold to her. In an affidavit the Appellant stated that Brabus sold the car to Miss Lau and he was incorrectly named as a party to the action because he was an employee and not a partner of Mr. Ching. The Minister's witness explained that originally the Appellant reported 1990 taxable income of $1,660 and after reviewing the calculations, noted that there was $22,181 of unreported taxable income. The revised taxable income was $22,782. There was an unexplained transfer of property in November 1990 of more than $97,000 from Brabus to the Appellant. The property included body kits and tires. The Appellant states that he received this property from Brabus Inc.[2] There was no documentary evidence to support the Appellant's statement. In a letter from Mr. Woo to Revenue Canada dated February 11, 1995, he states:
5. Body kits and tires.
Enclosed with my letter dated October 28, 1994 was a detailed inventory list as well as an invoice from Brabus. These items were accepted by Mr. Wong as partial repayment of amount owing by Brabus to him.
[21] The Appellant originally claimed a loss of $160,000 in his submission[3] to the trustee in bankruptcy for Mr. Ching. He now reduces that figure to $113,000. (i) The Appellant originally, in his 1990 income tax return claimed an ABIL based on the assumption that Brabus was a corporation and the amount of his loss was $160,000. (j) The Appellant changed the amount of his loss several times. (k) The Appellant purchased a condominium in 1987 or 1988 with a cash payment of $77,300. The only source from which he could have received this sum was from his activity of buying and selling automobiles during a period from about 1983 to 1988. (l) In a mortgage application signed May 5, 1989, the Appellant stated that he was employed by Fifth Avenue Auto Leasing Ltd. and had been for three years at an annual salary of $85,000. Later he stated he worked only six months for Fifth Avenue. He apparently showed no income from Fifth Avenue in his voluntary returns. These are more than unfounded suspicions. With this accumulation of errors and deceptions I have no difficulty accepting Ms. Watson's evidence over that of the Appellant.
[22] I was impressed with the evidence of the Minister's business auditor, Lynn M. Watson. She thoroughly reviewed the Appellant's ledger pages, tapes, invoices and cheques. She found unexplained deposits into the Appellant's bank accounts and abandoned a net worth attempt because she did not have access to all of the Appellant's banks because the banks could not provide the information she required. Under Tab 34 of Exhibit R-1 she could not trace the apparent receipt by the Appellant of $33,427 from Brabus. She had difficulty following the entries of the Appellant and Brabus and could not rely on the numbers and what they represented. She concluded that the Appellant was paid "in kind" upon the transfer to him of the auto kits and related equipment for which, apparently, the Appellant received $78,000.
[23] I do not accept the figures presented by the Appellant. I accept the evidence of the Minister's auditor over that of the Appellant. With this conclusion there is no need to examine the nature of any loss. The appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 13th day of December, 2000.
"C.H. McArthur"
J.T.C.C.