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Citation: 2005TCC28 |
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Date:20050201 |
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Docket: 2004-2301(IT)I
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BETWEEN:
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QING HUA ZHOU, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
For the Appellant: The Appellant herself
Counsel for the Respondent: Simon Petit
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Montreal, Quebec, on December 16, 2004)
McArthur J.
[1] These appeals are from assessments for the Appellant's 1999, 2000 and 2001 taxation years. The issue is whether the Appellant can deduct, in computing her income for 1999 and 2001, the amounts of $18,212 and $25,723 as carrying charges and interest expenses, and the amounts of $6,276 and $15,975 as other employment expenses; and for the year 2000, the deduction of $45,085 as other employment expenses.
[2] The Appellant, Qing Hua Zhou, during the taxation years in dispute, was an employee of the company Francis Enviro Biotek Inc. At all relevant times, this corporation was controlled by her. She owned the majority of the shares at some time during the period and during part of the period, she transferred 50% of the shares to a relative. Taken for the most part from the Reply to the Notice of Appeal, the Respondent relied primarily on the following assumptions and conclusions.
[3] In 1999, 2000 and 2001, the Appellant declared income of $48,500, $84,000 and $62,900, respectively. Also, the Minister of National Revenue broke down her claim for employment expenses in the years in issue as follows:
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1999 |
2000 |
2001
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Advertising and promotion |
$1,083 |
Nil |
$1,877 |
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Food, beverage, entertainment expenses |
50 |
50 |
75 |
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Lodging and travel |
1,095 |
nil |
12,548 |
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Assistants - substitutes |
2,848 |
16,620 |
12,548 |
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Rent |
1,200 |
1,200 |
1,200 |
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Supplies |
Nil |
279 |
195
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Total |
$6,276 |
$18,149 |
$15,975 |
Further, in the 2000 taxation year, the Appellant claimed $26,936 as carrying charges and interest expenses.
[4] The Minister disallowed the carrying charges and interest expenses claimed for various reasons. For example, salaries to assistants claimed by the Appellant were also claimed by Biotek in 1999 and 2000. The Minister added the rent expense claimed by the Appellant to the shareholder's loan in Biotek and determined it to be a personal expense. The Minister rejected all other expenses of the Appellant because she submitted contradictory versions of the facts.
[5] Much of the Appellant's evidence was directed at criticizing Canada Revenue Agency and its officers over the years in their handling of her personal and the corporation's books and records. She stated on pages 4 and 5 of her Notice of Appeal, under the heading "Requirements":
After the auditor's report was distributed by someone from CCRA to different departments of CCRA and the Ministere du Revenu du Québec, we have to deal with more than 18 peoples (sic) from the departments because they reopened my files in different divisions to change the figures related to the auditor report. Sometimes, we worked 4 hrs in the day and night for their questions. Then our health, reputation, spirit and energy were seriously damaged. We not only make this notice of appeal to the Tax Court of Canada, but also for the compensation for the damage. We hope that the few people from CCRA will not repeat these problems again. One CCRA officer said that even if he lost the case, he still can have his job, so why not. The public servant should know that his or her wrong decision may result in serious damage in the company and the taxpayers. I hope the Tax Court of Canada can solve these problems.
[6] The Appellant testified at the hearing, as well as two CRA auditors on behalf of the Respondent. As stated, there were inconsistencies in her books and records and her evidence, leaving me sceptical with respect to all her evidence. In OrlyAutomobiles Inc. v. the Queen, [2004] T.C.J. No. 204, Bowman J. stated in part:
The fact that some aspects of a witness' testimony are not satisfactory does not mean that the testimony is to be rejected in its entirety. In a case such as this, where the evidence is both complex and contradictory, the trier of fact must endeavour to reach conclusions on the evidence as a whole. This will involve, obviously, observation of the demeanour of the witnesses and plausibility or implausibility of the testimony in the light of other evidence. ...
In this case, I have attempted to reach conclusions on the evidence as a whole, much of which was irrelevant.
[7] The facts very briefly are these. The Appellant is a research scientist and has a science-related Ph.D. At all relevant times, she was an employee and the controlling mind of Francis Enviro Biotek Inc., which conducted research and development (R & D) in bio-technology, micro-biology and environmental engineering. During the relevant years, the corporation had no sales and survived on modest R & D grants, but primarily on advances from family members, the Appellant personally, and possibly from bank loans. The bank loans remain a mystery. I believe the Appellant testified that she or the corporation had borrowed just over $100,000 from the Royal Bank of Canada without signing promissory notes, contracts or paper of any kind.
[8] The evidence with respect to the corporation's operating capital was unclear and no documentation whatsoever was presented. This has no effect on the judgment itself other than confirming the difficulties that the auditors encountered and the somewhat mysterious nature of the Appellant's evidence and bookkeeping.
[9] The Appellant had the corporation pay her salary. She in turn paid some of her salary back to the corporation. The only motivation for this manoeuvre was an hypothesis presented by a CRA auditor who stated that she wanted to establish that the corporation had a scientist on the payroll and paid a salary for the purposes of obtaining R & D funding. For the most part, the motivation for the financial and contractual juggling between the corporation and the Appellant eludes me. The Appellant felt that the Minister's auditors should have assisted her in rearranging her financial affairs to her best advantage. The auditors, of course, reported on the books and records as they found them and as she changed them from time to time as the process of the appeals proceeded.
[10] In any event, we are left with a situation where the Appellant and relatives advanced capital to the corporation from which the corporation paid her a salary, much of which she returned to the corporation and she is assessed tax personally on the salary which originated from her and her family from the outset. This is an unsettling situation.
[11] Counsel for the Respondent stated that she made her own bed and must lie in it and in Bronfman Trust .v Canada, [1987] 1 S.C.R. 32, the Supreme Court of Canada stated that "a Court must look at what the taxpayer actually did and not at what she or he ought to have done". Counsel for the Respondent referred further to the often-cited case of Canada v. Friedberg, 92 DTC 6031, where Linden J. stated:
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax. If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.
Justice Linden could have been inspired by the present situation to have written this paragraph which is of relevance in this appeal.
[12] I will first deal with the Appellant's claim for interest expense deductions. A revealing statement of the Appellant is contained in Exhibit R-8, of the Respondent's book of documents where in a letter of December 18, 2002, writing auditor Danielle Picard, she stated:
(1) $18,212 for 1999, $26,936 for 2000 and $25,723 for 2001 will be claimed as bad debts, which were claimed as carrying charges and interest expenses before by the suggestion of the tax agents from both level governments. Now we would like to make an election as bad debts. Also this year, I would suggest that these amount should be claimed as bad debts by our tax technicians. Nearly all of my money including some of my family and friends money was used to operate the company. If we did not put money to company, it might have closed.
This is one of many instances where she changes her mind about the nature of payments. She refers to "our tax technicians", but no such persons were presented. And the accounting and related documents, were certainly not prepared by professionals, most likely, she prepared all the documentation, personal and corporate, herself. The Appellant made the auditors' work very difficult. They made numerous demands of proof of payments and other supporting documentation without success. There was no support for her statement that "the tax agents from both levels of government" suggested she claim "carrying charges and interest expenses".
[13] For the reasons that follow, I agree for the most part with the Respondent's position ably presented by counsel. I can offer the Appellant very little relief. Given her financial manipulations, I believe she was the author of her own misfortune. Her position with respect to the interest deduction claim, appears to be based on the following hypothesis. Had she invested the money she advanced to the corporation in, for example, investment certificates with a financial institution, she would have earned interest. She earned no interest from the corporation on the money she advanced, so she claimed a bad debt for an amount she might have received. In her 1999 return, which is the Respondent's Exhibit R-24, she stated in a letter attached to her tax return dated July 18, 2000:
$18,212 as a loss of interest for personal loan to the company without interest and $6,276 is moved to other employment expenses on line 229 of my income tax return.
[14] It was not until 2004, in Exhibit R-14, did the corporation state that it received interest. This is another manoeuvring of position or inconsistency to suit her present-day needs. The corporation's returns for 1999 and 2000 (Exhibits R-5 and R-6) do not refer to interest. On the corporation's balance sheet as of December 31, 2000, there is an indication of a shareholder's loan of approximately $368,000 and loan interest of $26,936.
[15] The Appellant prepared three promissory notes (Exhibit R-2) wherein she promises to pay the corporation interest on money it purportedly advanced to her. I find that these are works of fiction. There is unsatisfactory evidence that she received the principal amounts referred to and one of these promissory notes as of December 31, 1999 reads:
For value received, I promise to pay FRANCIS ENVIRO BIOTEK INC. the sum of ($18,212) Dollar (hereinafter called the "Principal Sum" interest) as interest thereon at the rate of (10.5)% per annum based on the Principal Sum ($173,447), calculated monthly, as well after maturity as before maturity ...
It is signed by the Appellant on her personal behalf and by the Appellant on the corporation's behalf. I give no weight to that documentation and I find the Minister correctly disallowed the interest expenses of $18,212, $26,936 and $25,723 for the three years.
[16] I will now turn to the Appellant's claimed employment expenses of $6,276, $18,149 and $15,975 in the three years in issue. To make such deductions, the expense must be expressly allowed under section 8 of the Income Tax Act and in this regard, I refer to the decision of the Supreme Court of Canada in Gifford v. Canada, [2004] 1 S.C.R. 411, where Major J. stated in paragraphs 11 and 12:
11 ... it is useful to review the general scheme for allowing deductions under the Act. The appellant taxpayer here earned income from employment and under the Act could only make deductions, as a result of s. 8(2), if the deduction was expressly allowed under s. 8.
12 If an employee meets the requirements of s. 8(1)(f)(i) to (iv), he is then allowed to deduct any expense made for the purpose of "earning the income from the employment". If the expense is a payment "on account of capital", s. 8(1)(f)(v) removes it from the scope of expenses that can be deducted.
The greatest portion of the employment expenses was for payment of assistants for the corporation which she stated were paid personally by her of about $2,848, $16,620 and $12,546 for 1999, 2000 and 2001, respectively.
[17] The only expense that I am prepared to allow the Appellant is the cost of two airline tickets to China. I am not clear from the Notice of Appeal when those were paid and precisely what amount, but to simplify the situation, I am prepared to give her a deduction of $1,000 in 1999 and $1,000 in the year 2000 for the cost of two trips to Beijing. She went there twice in the three years. She said she needed to keep up with the scientific developments in other parts of the world. I find these payments meet the criteria in paragraph 8(1)(h). She paid these expenses herself. All other expenses for the Beijingtrips were paid by the corporation.
[18] There were other instances of inconsistencies where the Appellant changed her mind. Exhibit R-27 is a bundle of cheques from the corporation to the Appellant. In the margin, she wrote that in accordance with employment conditions, 20% of her salary has to be paid back to the company and she took 20% of the salaries paid to her and she paid it back to the corporation. Or at least she says she paid it back to the corporation. Yet, in Exhibit A-12, page 7, she gave a breakdown of the expense of $16,620 stating it included her payment for Biotek telephone costs and for Biotek assistants. In evidence, she stated that she had not paid the assistants herself personally. Exhibit R-28 was the original filing of her return for that year and Exhibit A-12 was submitted at the appeal stage. I find the Appellant did not actually incur these expenses personally.
[19] Subparagraph 8(1)(i)(ii) of the Act reads in part:
8(1) In computing a taxpayer's income for a taxation year from an office or employment, 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:
(i) amounts paid by the taxpayer in the year as
(i) ...
(ii) office rent, or salary to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment,
I find that the contracts of employment were prepared by the Appellant after the fact and are retroactive tax planning to which I give no weight. I find she did not in fact pay the assistants, the corporation did. As set out in Exhibit R-22, the assistants invoiced the corporation and not the Appellant. Exhibit R-23 contains cheques payable to the assistants drawn on the corporation's account. The Appellant did not personally pay the assistants and her claim for these expenses is not allowed.
[20] I agree with the Respondent that it is impossible to reconcile the whole picture. The amounts referred to in the employment conditions agreement and other agreements could not possibly have been known prior to the expenditures of those amounts that are set out in these documents.
[21] In conclusion, the appeals are allowed only for 1999 and 2000 to permit the deduction of $1,000 in each year representing two flight tickets to China, and the appeal for 2001 is dismissed.
Signed at Ottawa, Canada, this 1st day of February, 2005.
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"C.H. McArthur" |
McArthur J.
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CITATION: |
2005TCC28 |
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COURT FILE NO.: |
2004-2301(IT)I |
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STYLE OF CAUSE: |
Qing Hua Zhou and Her Majesty the Queen |
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PLACE OF HEARING: |
Montreal, Quebec |
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DATE OF HEARING: |
November 26 and December 14, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice C.H. McArthur |
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DATE OF JUDGMENT: |
January 4, 2005 |
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APPEARANCES: |
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For the Appellant: |
The Appellant herself |
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Counsel for the Respondent: |
Simon Petit |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |