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Docket: 2001-16(IT)G |
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BETWEEN: |
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GREGORY EBBINGHAUS, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on June 11, 2003 at Windsor, Ontario
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Before: The Honourable Justice Terrence O'Connor |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Jade Boucher |
____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1992 taxation year is dismissed.
The appeals from the reassessments made under the Income Tax Act for the 1994 and 1995 taxation years are allowed but only to the extent of deleting the penalties imposed in the 1994 and 1995 taxation years. For greater certainty the additional amounts to be added to the Appellant's income are $42,217 in the 1994 taxation year and $65,555 in the 1995 taxation year and the disallowed expenses are as follows, namely, $0 in the 1994 taxation year after giving effect to the Respondent's concession of allowing the previously disallowed expense of $300; and $132,276 in the 1995 taxation year after giving effect to the Respondent's concession of allowing an amount of $2,421 to be deducted from the original disallowed expense of $134,697.
The Respondent is entitled to its costs.
Signed at Ottawa, Canada, this 9th day of July 2003.
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"T. O'Connor" |
O'Connor, J.
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Citation: 2003TCC483 |
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Date: 20030709 |
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Docket: 2001-16(IT)G |
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BETWEEN: |
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GREGORY EBBINGHAUS, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
REASONS FOR JUDGMENT
O'Connor, J.
[1] This appeal was heard at Windsor, Ontario on June 11, 2003.
[2] The only testimony given was by the Appellant and by Mary Burnett, an Audit Team Leader ("Auditor") of Canada Customs and Revenue Agency ("Revenue Canada").
[3] The facts and issues are disclosed by the following extracts from the Reply to the Notice of Appeal:
...
4. In computing income for the 1994 and 1995 taxation years the Appellant claimed net business losses of $7,365 and $65,587, respectively.
5. ...
6. By Notices of Reassessment, dated July 13, 1999, for the 1994 and 1995 taxation years, the Minister included unreported income and disallowed business expenses as follows:
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Unreported Income |
Disallowed Expense |
Penalties
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1994 |
$42,217.00 |
$ 300.00 |
$8,168.77
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1995 |
$65,555.00 |
$134,697.00 |
$12,671.00 |
(The Respondent reduced the disallowed expenses to zero dollars in 1994 by conceding the amount of $300 previously disallowed and the Respondent reduced the 1995 disallowed expense to $132,276 by allowing an expense of $2,421).
7. The Minister further assessed penalties pursuant to s. 163(2) of the Income Tax Act R.S.C. 1985, c. 1 (5th Supp.), as amended ("Act") in respect of the failure of the Appellant to report income ...
8. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions:
(a) ...
(b) the Appellant operates a sole proprietorship under the name of Lunar Lights Contracting;
(c) in reporting his income for the 1994 and 1995 taxation years the Appellant did not include all of the income received in those years;
(d) the Appellant failed to report income in the amounts of $42,217 and $65,555 in respect of the 1994 and 1995 taxation years, respectively;
(e) the Minister calculated the amounts of unreported income based on the amount of sales reported by the Appellant in his Goods and Services Tax returns;
(f) the expenses disallowed by the Minister are itemized in Schedule I of the Reply and were unsubstantiated by the Appellant;
(g) the Appellant failed to provide books and records to support the amount of income earned and the amount of expenses claimed in 1994 and 1995.
(h) expenses referred to in Schedule I were not incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses of the Appellant;
(i) the Appellant knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of a false statement or omission in returns by failing to report income in the amounts of $42,217 and $65,555 in respect of the 1994 and 1995 taxation years, respectively; and
(j) there were no non-capital losses in the 1995 taxation year therefore no non-capital losses were available to be deducted in computing the Appellant's income for the 1992 taxation year.
B. ISSUES TO BE DECIDED
9. Whether the Appellant failed to report income in the amounts of $42,217 and $65,555 in respect of the 1994 and 1995 taxation years, respectively.
10. Whether the Appellant is entitled to deduct as business expenses ... in respect of the 1994 and 1995 taxation years, respectively [any amounts in excess of the amounts conceded by the Respondent].
11. Whether there were non-capital losses for the 1995 taxation year that are deductible in computing the Appellant's taxable income for the 1992 taxation year.
12. Whether the Minister properly assessed penalties pursuant to subsection 163(2) of the Act for the 1994 and 1995 taxation years.
Schedule 1 to the Reply reads as follows:
SCHEDULE 1
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1994 |
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Maintenance and repairs expense |
$300.00 |
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$300.00
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1995 |
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Purchase expense |
$78,258.00 |
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Direct wage costs |
19,569.00 |
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Other costs |
14,089.00 |
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Professional fees |
1,670.00 |
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Advertising expense |
1,635.00 |
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Automobile expense |
1,682.00 |
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Insurance expense |
4,266.00 |
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Taxes, dues expense |
8,571.00 |
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Fuel costs (except motor vehicle) |
3,443.00 |
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Mean and entertainment expense |
340.00 |
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Equipment rental expense |
1,174.00 |
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$134,694.00 |
Note that in Schedule 1 the total disallowed expense for 1995 is shown as $134,694 whereas the correct figure is $134,697.
[4] Without reviewing all of the evidence, both written and oral, I am satisfied that the figures of the Auditor are correct. Her testimony was given in a clear and concise manner and in my opinion there is no doubt that her figures with respect to undeclared income and disallowed expenses (revised as noted above) were correct. As explained the Auditor, in the absence of proper records and accounts and considering that the bank records were inadequate or incomplete, relied on the gross sales amounts disclosed by the GST filings, which were actually made by the Appellant, to arrive at the correct amount of unreported income in 1994 and 1995. With respect to the expenses disallowed, as detailed in Schedule 1 to the Reply, which is reproduced above, the Auditor explained that notwithstanding numerous requests made to the Appellant, proper receipts, books and records detailing and justifying the expenses were not submitted and where they were, she has allowed same. The calculations of the Auditor with respect to unreported income in the 1994 and 1995 years are shown in Exhibit A-3. Those with respect to disallowed expenses are shown in Exhibit R-1.
[5] The main thrust of the Appellant's evidence was that the sales for 1995, as reflected by the bank deposit records were not accurate because of what the Appellant refers to as fraudulent cheques. These fraudulent cheques totalled $137,869 and the Appellant furnished details of the amounts of the individual cheques and of the persons involved in the frauds.
[6] The Appellant referred to Exhibit A-1 which is a Judgment of the Ontario Superior Court of Justice dated July 7, 1999 in an action for damages by the Appellant and others, as Plaintiffs, against two corporations and two individuals, as Defendants, alleging damages for misappropriation of funds and loss of future business. This Judgment, referred to as an "endorsement", states that the Plaintiffs and the Defendants had merged their respective electrical businesses, which was to be pursued by a new company incorporated March 15, 1995. The merged businesses were operated out of the same premises and it was agreed that profits were to be divided equally between the merged entities. However, the Defendants locked the Plaintiffs out of the common business premises on August 13, 1995 and some of the Defendants managed to misappropriate funds from the business to themselves. The Judgment or "endorsement" found for the Plaintiffs and condemned the Defendants to pay to the Plaintiffs $1,000,000 in damages for loss of business and $280,000 for funds misappropriated. The principal Defendants and perpetrators of the fraud were the two individual Defendants. They declared bankruptcy and the damages assessed were never recovered.
The Appellant gave evidence of the individual cheques which were issued against the bank account of the business in favour principally of the two individual Defendants in the said action. As mentioned, these fraudulent cheques totalled $137,869. This figure is the correct figure notwithstanding the reference in the said Judgment to $280,000.
[7] The Appellant attempts to rely on the "fraudulent cheques" as the reason for the sales figures being inaccurate. In other words, if the total of the fraudulent cheques is removed from the total sales/deposits in the bank records the sales and therefore the unreported income would be reduced.
[8] However, counsel for the Respondent points out that the bank records indicate total deposits representing 1995 sales in an amount of $368,977 and if the total of the fraudulent cheques, namely $137,869 is deducted from that figure it results in a net sales figure of $231,108 and that this amount is still more than the amount assessed by the auditor relying on GST filings of $204,297. (See Exibit A-3). Consequently, even if the fraudulent cheques are accepted as representing the facts of the situation, the Appellant has not been prejudiced because the amount of unreported income assessed, based on the GST returns is less than that indicated by the bank deposits less the fraudulent cheques.
[9] All of the foregoing relates to 1995. For 1994 no explanation was given by the Appellant to establish that the figures used by the Auditor were wrong.
[10] The Appellant was credible but it is clear that he has not diligently attended to keeping proper books and records and has been remiss in the filing of his tax returns. Moreover, notwithstanding several requests by the Auditor, proper books, records, invoices and receipts were either missing or inadequate or were not submitted.
[11] In a self-assessing system the burden of proof to establish income and expenses is on the taxpayer and in the present case that burden of proof has not been met. It is acknowledged that verbal testimony with respect to expenses is permitted but that verbal testimony must be clear and unambiguous. As was stated in the case of Abramson v. Canada (Minister of National Revenue), [1992] T.C.J. No. 786:
The burden of proof rests on the taxpayer to establish the incorrectness of any tax assessment he opposes. The Act requires taxpayers to keep appropriate accounting records to support the computation of the taxes that they must pay.
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The Appellant comes to Court with Exhibits ..., and little else, no records, bank statements, cheque stubs, vouchers, receipts, disbursements, ledgers, corporate books, shareholder loan documentation, or anything that would support his contention.
...
Counsel's plea to this Court was to the effect that if documents cannot be provided, then the Tax Court of Canada is there to hear viva voce evidence. I totally agree. However, the evidence, must, on the balance of probabilities, be credible, clear and strong to show that the assessment was wrong. In this case, the Court concludes that there may have been expenditures, but the Court, without stronger evidence, has no way of determining what the expenditures were, when they were expended, and how they related to the matters before the Court.
[12] The decision of the Federal Court of Appeal in Njenga v. Canada, [1996] F.C.J. No. 1218 is essentially to the same effect as the said decision of the Tax Court of Canada.
[13] In conclusion I have not been convinced of any inaccuracies in the figures arrived at by the Auditor, which with respect to sales, were based on the GST filings. Moreover, in my opinion the Auditor was correct in not allowing the disallowed expenses for the reason that no proper books, records, receipts, invoices nor any written proofs were submitted and any verbal testimony relating to these expenses was inconclusive.
[14] With respect to penalties, notwithstanding the lack of attention to detail of the Appellant in verifying the accuracy of his income tax returns, in my opinion there has been no satisfactory proof that the Appellant "knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of a false statement or omission in returns by failing to report income...." The Appellant may have been remiss but I do not believe that in this case that constitutes a sufficient reason to impose penalties. The Respondent has the burden of proof on this issue and it has not been met. Consequently there shall be no penalties for either of the years, 1994 or 1995.
[15] Also there can be no carrying back of any non-capital losses from the 1995 to the 1992 taxation year, as, considering the revisions resulting from the undeclared income and the disallowed expenses for 1995 there were, in effect, no losses which could have been carried back.
[16] In conclusion, the appeal from the reassessment made under the Income Tax Act for the 1992 taxation year is dismissed. With respect to 1994 and 1995 the appeals are allowed but only to the extent of deleting the penalties imposed in the 1994 and 1995 taxation years. For greater certainty the additional amounts to be added to the Appellant's income are $42,217 in the 1994 taxation year and $65,555 in the 1995 taxation year and the disallowed expenses are as follows, namely, $0 in the 1994 taxation year after giving effect to the Respondent's concession of allowing the previously disallowed expense of $300; and $132,276 in the 1995 taxation year after giving effect to the Respondent's concession of allowing an amount of $2,421 to be deducted from the original disallowed expense of $134,697.
[12] The Respondent is entitled to its costs.
Signed at Ottawa, Canada, this 9th day of July 2003.
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"T. O'Connor" |
O'Connor, J.
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CITATION: |
2003TCC483 |
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COURT FILE NO.: |
2001-16(IT)G |
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STYLE OF CAUSE: |
Gregory Ebbinghaus v. The Queen |
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PLACE OF HEARING: |
Windsor, Ontario |
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DATE OF HEARING: |
June 11, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice O'Connor |
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DATE OF JUDGMENT: |
July 9, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Jade Boucher |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |