Date: 20011107
Docket: 97-3792-IT-G
BETWEEN:
WALLACE GORDON ROBSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AND
Docket: 97-3793-IT-G
BETWEEN:
378733 ONTARIO LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
These appeals are from assessments for the 1990, 1991, 1992 and
1993 taxation years of 378733 Ontario Limited ("378733"
or "the company") and for the 1988, 1989, 1990, 1991
and 1992 taxation years of Wallace Gordon Robson. The company is
a corporation whose shareholders at the relevant time were
Wallace Robson, his wife Carol Ann Robson and the Robson Family
Trust. Mr. Wallace also had appeals to this court which at
his request were heard separately from these appeals although his
testimony in the company's appeals was, on consent, made
applicable to his personal appeals.
[2]
An initial objection was taken to the company's appeal for
1990 on the basis that the appeal was from a nil assessment. No
appeal lies from a nil assessment and so the appeal for 1990 must
be quashed. This, of course, is not fatal. Absent a binding loss
determination from which no objection and appeal have been taken,
a taxpayer can put in issue the amount of loss incurred in the
year for which nil tax is assessed as part of an appeal for a
year in which the amount of taxable income is affected by the
loss carry forward or back from the loss year (Aallcann Wood
Suppliers Inc. v. The Queen, 94 DTC 1475). That is
the basis upon which I heard evidence about the loss alleged to
have been incurred in 1990.
[3]
For 1990 the appeal (or purported appeal) had to do with the
income or loss of the company from a financial consulting
business, Anderdon Financial Services ("Anderdon"), of
which it was the sole proprietor. For 1991, 1992 and 1993 the
company alleged that it was a member of a partnership known as
Anderdon of which other persons were also partners. It was
alleged that the business of Anderdon was transferred by the
company to a partnership with the same name.
[4]
The company's fiscal period ended on February 28 in each
year. Anderdon's fiscal period ended on July 31. Thus,
assuming the company was a partner in Anderdon, the income or
loss of Anderdon, to the extent of the company's partnership
interest, for the fiscal period of Anderdon ending July 31,
1991, for example, would fall into the company's fiscal
period ending February 28, 1992.
[5]
Many of the expenses claimed by the company in 1990 and claimed
by the partnership Anderdon in 1991 and 1992 were disallowed.
These expenses claimed by Anderdon were allocated in their
entirety to 378733 and added to its income for 1991, 1992 and
1993.
[6]
One or two further observations before I go through the tedious
task of examining the expenses in detail. This case should not
have come this far. It should have been settled either at the
audit level or at the objection level. Mr. Brown, a senior
technical advisor in the CCRA, — and, if I may say so, an
extraordinarily impressive witness — described the
difficulty in obtaining responses from Mr. Robson, an
officer and shareholder of the company. Mr. Robson was a
chartered accountant and, with the permission of the court,
represented the company although he was not a member of the bar.
Mr. Robson should have met with the officials of the Agency
and worked out some type of settlement. Instead the Agency was
left largely in the dark about the nature of the expenses. This
case is very reminiscent of the situation with which I was
confronted in Merchant v. The Queen,
98 DTC 1734, aff'd 2001 DTC 5245
(F.C.A.). The result is that the court was obliged to perform all
of the functions of the revenue auditor who initially reviews the
file. The court must examine the vouchers, decide the myriad of
questions that are relevant to deductibility, such as whether the
expense was incurred, whether it is reasonable, whether some
other provision of the Income Tax Act prevents its
deduction, whether it is on capital account, and so forth. In a
case where the audit and objection procedures have not been
short-circuited or frustrated most of these issues would have
been resolved and the court would have been left with a couple of
well-defined questions to deal with. Here, everything is at
large. Nor in my view has the taxpayer satisfied any onus by
dumping a disorganized mass of receipts, vouchers and computer
print-outs on the court and saying "Here are my receipts
— you sort them out". They should be presented with
schedules in an organized and coherent way. In Merchant I
said at pages 1735-6:
[7]
Where a large number of documents, such as invoices, have to be
proved it is a waste of the court's time to put them in
evidence seriatim. The approach set out in Wigmore on
Evidence (3rd Ed.) Vol IV. at s. 1230 commends itself:
s. 1230(11): ... Where a fact could be ascertained only by the
inspection of a large number of documents made up of very
numerous detailed statements — as, the net balance
resulting from a year's vouchers of a treasurer or a
year's accounts in a bank-ledger — it is obvious that
it would often be practically out of the question to apply the
present principle by requiring the production of the entire mass
of documents and entries to be perused by the jury or read aloud
to them. The convenience of trials demands that other evidence be
allowed to be offered, in the shape of the testimony of a
competent witness who has perused the entire mass and will state
summarily the net result. Such a practice is well-established to
be proper.
[8]
This passage was cited with approval by Wakeling, J.A. in
Sunnyside Nursing Home v. Builders Contract Management Ltd. et
al., (1990) 75 S.R. 1 at p. 24 (Sask. C.A.) and by
MacPherson, J. in R. v. Fichter, Kauffmann et al., 37 S.R.
128 (Sask. Q.B.) at p. 129. In am in respectful agreement.
[7]
If the appellants end up being short-changed on some aspects of
their cases they have only themselves to blame.
[8]
As a final preliminary matter there is the question of
credibility. At the beginning of Mr. Robson's
cross-examination, counsel for the respondent asked him about a
conviction for income tax evasion under section 239 of the
Income Tax Act. It was, I am informed, in fact
paragraph 239(1)(c) of the Act —
acquiescing in, assenting to making of false or deceptive
statements. However neither the information (or indictment) nor
the certificate of conviction was put in evidence. The tax evaded
was not Mr. Robson's but that of one of his clients.
Mr. Robson testified that he was convicted although his
client was acquitted.
[9]
Section 12 of the Canada Evidence Act reads
12(1) A witness may be
questioned as to whether the witness has been convicted of any
offence, excluding any offence designated as a contravention
under the Contraventions Act, but including such an
offence where the conviction was entered after a trial on an
indictment.
(1.1) If the witness
either denies the fact or refuses to answer, the opposite party
may prove the conviction.
(2) A
conviction may be proved by producing
(a)
a certificate containing the substance and effect only, omitting
the formal part, of the indictment and conviction, if it is for
an indictable offence, or a copy of the summary conviction, if it
is for an offence punishable on summary conviction, purporting to
be signed by the clerk of the court or other officer having the
custody of the records of the court in which the conviction, if
on indictment, was had, or to which the conviction, if summary,
was returned; and
(b)
proof of identity.
[10] On the
authority of that section I permitted the question over
Mr. Robson's objection and he admitted that he had
indeed been convicted. However beyond that admission I am
completely in the dark about the nature of the charge or the
conviction. I do not know whether the trial was before a judge
alone or a judge and jury, whether it was by way of summary
conviction or indictment. The apparent purpose of putting prior
convictions to a witness is to impeach his or her credibility. If
the offence is not one that involves moral turpitude or tends to
indicate that a witness is not believable, it is difficult to see
how such evidence is in any way probative. A prior conviction for
perjury or embezzlement or income tax fraud is one thing. A
conviction for shooting ducks out of season is another.
[11] I have
assumed that the sole purpose of putting a prior conviction to a
witness in cross-examination is to impeach credibility. If the
purpose is to show a tendency to commit similar acts or to show
bad character, then such evidence is inadmissible. I do not think
that section 12 of the Canada Evidence Act can be
used as a basis for adducing evidence that is otherwise
inadmissible.
[12] The
leading case on section 12 of the Canada Evidence Act
is R. v. Corbett, [1988] 1 S.C.R. 670. There may
be circumstances, according to the Supreme Court of Canada in
Corbett, that would entitle a judge to refuse to allow
questions on a prior conviction for example where the prejudice
outweighs the probative value. Section 12 is fairly clear in
its direction that a witness may be questioned about prior
convictions. If he or she denies a prior conviction it may be
proved and this would certainly go to credibility. If, as here,
the witness admits the conviction, that is the end of the matter
and the judge may or may not choose to draw any adverse inference
about the witness' credibility. I regard a prior conviction,
standing by itself, as neutral. For one thing not all offences
carry with them a connotation of moral turpitude. For another the
witness may have been wrongly convicted. I prefer to base
findings of credibility on my observation of the witness, not on
whether some other judge in another court may have seen fit to
disbelieve him or her.
[13] I shall
deal first with the appeals of 378733 and I start with a fairly
major problem about the assessments.
[14]
Subparagraphs c), d) and e) of paragraph 14 of the
reply read as follows.
c)
at all relevant times, the Appellant was a partner in Anderdon
Financial Services partnership;
d)
at all relevant times, the Appellant reported income and expenses
form Anderdon Financial Services partnership;
e)
the expenses of Anderdon Financial Services have been properly
allocated to the Appellant.
[15] The
company was not put on notice that the existence of the
partnership was an issue. It was entitled to accept the
respondent's admission that it was a partner in the Anderdon
partnership. The admission that the company was a partner coupled
with the bald assertion that the expenses of the partnership were
properly allocated to it is insufficient to cast any onus on the
appellant. The CCRA seems content to tax the appellant and the
other two partners — the Robson Family Trust and 44740
Ontario Limited — on any income, but to allocate to the
company not all of the expenses but only those that were
disallowed.
[16] If the
respondent wanted to ignore the partnership or allocate part of
its income or loss to the company it should have pleaded
either
(a)
that the partnership did not exist or was a sham, or
(b)
that the facts necessary to support a reallocation of profits or
losses under section 103 of the Income Tax Act
existed.
[17] Neither
of these courses was followed. Without eliminating the
partnership or applying section 103, the addition to one
partner's income of all disallowed expenses claimed by the
partnership runs counter to logic and law.
[18]
Therefore, whatever expenses are disallowed the disallowance
should be reflected in the company's income only to the
extent of its partnership interest.
[19] Under the
Partnership Act of Ontario it is presumed that partners
share equally, in the absence of any agreement to the contrary.
This would mean that the company had a one-third interest.
Mr. Robson stated that it had a 50% interest. This admission
is against the company's interest in this litigation. I will
give effect to it.
[20] It
follows that whatever expenses are disallowed in the partnership,
only 50% should be added to the company's income. Whatever
reservations I may entertain about the substance of the Anderdon
partnership, the present state of the pleadings and of the
evidence does not permit me to visit those reservations on the
company or allow them to redound to its detriment.
[21] The
specific expenses disallowed are set out in Schedule A to
the reply to the notice of appeal. It reads
SCHEDULE "A"
2.28.90
2.28.91
2.28.92
2.28.93
378733 Ontario Limited
general
expense
29,099
property
RR#3
4,556
property
#24
7,545
150
interest
expense
3,440
professional
fees
7,440
10,000
medical,
etc.
1,500
life
insurance
2,989
1,590
2,335
auto
2,813
entertainment
901
cca
41,684
bank
charges
21
gain on sale (good
will)
5,000
______
______
______
______
Total -
378733
$106,988
$1,740
$12,335
0
Anderdon Financial
general
expenses
2,744
13,748
5,300
auto
4,690
5,627
14,137
office
3,300
4,500
4,328
medical,
etc.
869
1,043
computer
hardware
1,235
3,445
professional
fees
2,062
2,000
depreciation
1,021
wages
1,380
cca
1,327
discounts
59,000
(13,313)
66,473
_______
______
______
Total - Anderdon
Financial
$73,686
$15,547
$95,683
Total Expenses
Disallowed
$106,988
$75,426
$27,882
$95,683
378733 Ontario Limited
T2S(1) net income
adjustment
$15,037
Total
Adjustments
$106,988
$75,426
$27,882
$110,720
[22] In the
period ending February 28, 1990 the expenses were claimed by
the company directly. In the periods ending February 28,
1991, 1992 and 1993 the expenses were claimed by Anderdon in its
fiscal period ended July 31 in each year. As I noted above
the company's fiscal period was February 28 in each year
and so the income or loss from the Anderdon partnership for its
fiscal period ending July 31 falls into the company's
fiscal period in which the partnership fiscal period ends.
[23] This is
complicated but it is not beyond the ken of a competent
accountant to figure it out. However two additional factors make
things even more difficult for any judge trying to make sense of
this fiscal and accounting mishmash. The first is, as noted
above, the allocation of the partnership's disallowed
expenses in their entirety to the company, thereby in effect
adding the disallowed expenses to the company's income even
though the partnership's existence is acknowledged. However
it gets worse. After increasing the company's income by the
full amount of the partnership's disallowed expenses, the
CCRA has taken most of those same amounts and added them to the
income of the individual W.G. Robson.
[24] There is
a departmental mindset, enshrouded in the euphemistic rubric of
fiscal symmetry, that says that if you disallow an expense to a
corporation you must simultaneously find a shareholder on whom to
visit a parallel and matching tax consequence under
section 15 of the Income Tax Act. The premise on
which this practice of double taxation is based is evidently some
misplaced sense of moral rectitude that, so the argument goes,
justifies the imposition of an additional punishment on the
shareholders for allowing their company to incur disallowable
expenses. In this case it is particularly inappropriate because
the Crown has admitted that the appellant, Carol Ann Robson and
the Robson Family Trust were all shareholders of 378733 Ontario
Limited. Even if there were some justification for adding a
disallowed corporate expense to a shareholder's income under
section 15 of the Income Tax Act, unless there is
some cogent reason for targeting one shareholder and excluding
others, the benefit should be spread equally among all of the
shareholders in accordance with their respective interests in the
company. I developed this view in Erb et al. v. The Queen,
2000 DTC 1401 at 1405-1406, in which I followed the
decision of Dumoulin J. in Minister of National Revenue
v. Bronfman, [1966] Ex.C.R. 172.
[25] I have
some sympathy for the departmental officials trying to make some
sense out of the appellants' fiscal affairs. Their enquiries
met with obfuscation, stonewalling, prevarication, gamesmanship
and unresponsiveness. I found parts of Mr. Robson's
evidence unbelievable as I suspect the departmental auditors did
as well, and, in frustration, they threw the book at him. This
may explain some of the extreme assessing actions outlined above.
In throwing the book at someone you have to gauge with some
nicety the size and weight of the book to throw. Here the CCRA
got a little carried away. No one, regardless of how exasperating
his or her behaviour may appear to the Agency, should have to pay
a penny more tax than the law requires.
[26] The
following is Schedule A to the respondent's reply to
Mr. Robson's appeals, in which the adjustments to the
income of Mr. Robson are set out. If one compares the
figures in this schedule to those in the schedule to the reply in
the company's case, two things stand out: the similarity in
the numbers and the fact that the numbers in the two cases fall
into different years.
SCHEDULE "A"
1990
1991
1992
378733 Ontario Ltd.
general
expense
29,099
property
RR#3
4,556
property
#24
7,545
interest
expense
3,440
professional
fees
7,440
10,000
medical,
etc.
1,500
life
insurance
2,989
2,335
auto
2,813
entertainment
901
loss on asset
disposal
41,684
______
______
Total 378733
Ont.
$110,967
$10,000
$2,335
Anderdon
Financial Services
general
expenses
2,744
13,748
5,300
medical
869
auto
4,690
5,627
14,137
rent & office
facilities
4,500
professional
fees
2,062
2,000
computer
hardware
1,235
3,445
wages
1,380
discounts
59,000
(13,313)
66,473
life
insurance
1,590
Total
Anderdon
$74,255
$14,220
$95,683
TOTAL
$176,222
$24,220
$98,018
[27] To be
perfectly clear, I repeat two principles upon which the new
reassessments must be made.
(a)
Only one half of the partnership's disallowed expenses should
be allocated to 378733.
(b)
If any of the disallowed expenses in 378733 can also be treated
as shareholder benefits, only one-third should be taxed in the
hands of Mr. Robson. I say one-third because I do not have
any more accurate evidence. Mr. Robson said he owned only
special shares and that his wife owned 20% of the common shares
and the Robson Family Trust owned 80%. This might warrant a
different allocation of any section 15 benefits but no one
has given me any concrete basis for doing so.
[28] In
dealing with the various items I am not going to do the
arithmetic, nor am I going to concern myself with years except
for identification purposes. Amounts were disallowed in the
fiscal year of the partnership, bounced into a different period
for the company, and taxed in a different fiscal period (the
calendar year) for Mr. Robson. For me to try to reconcile
these years would only clutter up the record more than it already
is and add to the confusion.
[29] I start
then with the appeals of 378733.
[30] Under the
column 2.28.90, $106,988 was disallowed.
$29,099 general expense. This represents an
agreement to indemnify Mr. and Mrs. Robson for their paying
of a guarantee of a partnership in which Mr. Robson was a
partner with a number of other persons. It is not clear if it has
been paid, but in any event it has nothing to do with the earning
of income by the company and is not an allowable deduction.
$4,556 - property RR#3 and $7,545 - property
#24. These have not been shown to have been incurred to
earn the company's income.
$3,440 Interest expense. This amount is
deductible.
Professional fees $7,440. These legal fees have
been proved and are deductible.
Life insurance $2,989. This was key man life
insurance owned by the company and is deductible.
Auto $2,813. This was not established as
relating to the business and the amount is not proved. Therefore
it is disallowed.
Entertainment $901. This amount has not been
proved. It is disallowed.
Medical expenses $1,500. These were not laid out
to earn income.
CCA $41,684. This was claimed as a terminal loss
on the sale of a rental property. The amount of the loss has not
been proved nor has the reasonableness of the allocation to land
and building. It is therefore not allowed.
Bank charges $21. Allowed.
Gain on sale $5,000. This has been reported
already and should be deleted.
[31]
Column 2.28.91
378733 Ontario Limited
Property #24 $150. This amount has not been
proved. It is disallowed.
Life insurance $1,590. Allowed
Anderdon
General expenses $2,744. This amount has not
been proved. It is disallowed.
Auto $4,690. This amount was not proved. It is
disallowed.
Office $3,300. This amount was proved and is
allowed.
Medical expenses $869 and Professional fees
$2,062. These have not been shown to have been laid out
to earn income. They are disallowed.
Depreciation $1,021. Presumably Mr. Robson,
as a chartered accountant, knows the difference between
depreciation and accounting. Depreciation is not allowable in
computing income.
Discounts $59,000. I shall deal with the item of
"discounts" in all three years. The following year a
credit of $13,313 was allowed and in the following year $66,473
was disallowed.
[32] It is not
surprising that the Minister treated these amounts as he did.
They were not discounts at all. They were a claim for bad or
doubtful debts. With one exception they were not proved to be bad
or doubtful debts. Mr. Robson claimed any debt that went for
over 90 days to be bad or doubtful. The only one that has
been proved is one owing by a client, Jean Fortier.
Mr. Robson billed him about $42,000 and was paid $22,000. A
bad debt of $20,000 should be allowed.
[33] It is not
clear how the bad or doubtful debt allowance works out in
practice here. In the period 2.28.92 a credit of $13,313 was
given. If the result of my allowing this aspect of the appeals
means that the $13,313 should not have been allowed as a credit I
do not think that there can be an upward adjustment. (See
Harris v. M.N.R., 64 DTC 5332 at 5337.)
[34]
Columns 2.28.92 and 2.28.93
378733 Ontario Limited
Professional fees $10,000. I have no idea what
these were for or if they were incurred.
Life insurance $2,335. I am prepared to allow
the life insurance as above.
Anderdon
General expenses - $13,348 and $5,300. These
amounts have not been established.
Auto $5,627 and $14,137. The evidence here is
that no log was kept and that the expenses may have been those
relating to Mr. Robson's son's car. The evidence
here is too unreliable to justify any allowance.
Office $4,500 and $4,328. These are offices in
Mr. Robson's son's home. These expenses have not
been proved.
Computer hardware $1,235 and $3,445. These are
legitimate expenses of purchasing computer hardware that was sold
to clients and should be allowed.
Medical expenses $1,043. These have not been
established as being incurred to earn income.
Professional fees $2,000. This amount has not
been proved.
Wages $1,380. These were for unspecified duties
of Mr. Robson's son's wife. They have not been
proved.
CCA $1,327. This is properly deductible.
T2S(1) net income adjustment $15,037. The
appellant does not challenge this disallowance.
[35]
Schedule B to the reply to the notice of appeal in 378733
sets out the non-capital losses claimed and allowed and the
amounts the respondent says were allowed in error. If by this the
respondent is asking me to order that the amounts allegedly
allowed in error should be disallowed I respectfully decline to
do so if it involves ordering a reassessment of more tax. This
would be contrary to the well-established principle stated by
Thurlow J. in Harris (supra).
[36] If the
changes I have ordered above, however, have any bearing on the
treatment of loss carry forwards the figures in Schedule B
will need to be adjusted to give effect to those changes.
[37] I turn
now to Mr. Robson's appeals.
[38] I begin
with the penalties. In 1988 and 1989 the appellant failed to
report substantial amounts of income from his former partnership,
Thorne Ernst & Whinney. The Minister assessed him on $286,547
and $282,303 based on information about the value per unit of the
partnership income. This was not accurate. The correct figures
were $346,575 and $282,303 respectively. After the Agency started
to make enquiries the appellant concocted a none-too-subtle and,
if I may say so, rather obvious and foolish scheme to make it
look as if he had filed an amended return showing all of the
income in 1988. He prepared an amended return showing all the
income in 1988 and claimed huge and unjustified expenses to bring
the 1988 income down to exactly what he had originally declared.
He then wrote a letter in which he tried to make it look as if he
had filed the amended return before the enquiries had
started.
[39] I do not
believe him. The scheme did not work. The penalties are
confirmed. The appellant should thank his lucky stars that the
assessments of tax and the penalties were based on the
Minister's figures and not the actual figures which, for
1988, were about $60,000 higher than those used on assessing. As
a result of this act of ministerial forbearance or largesse this
amount seems to have floated off into some sort of fiscal
never-never land.
[40] I am
aware that in the case of penalties the Crown has the onus of
proof. It has fully satisfied that onus. Moreover the Minister
was entirely justified in opening up these otherwise statute
barred years.
[41] A number
of expenses claimed by Mr. Robson personally were
disallowed, as follows:
1989
1990
1991
1992
accounting,
legal
$22,872
$28,790
$122,736
interest, bank
charges
38,852
$51,721
37,727
34,522
management
fees
20,500
meals and
entertainment
5,538
16,543
21,260
24,465
rent
2,400
other (per
ledger)
34,383
automobile
7,343
_______
_______
_______
_______
TOTAL
$131,888
$68,264
$87,777
$181,723
[42] I shall
deal with each of these items separately.
[43]
Accounting, legal. Among the amounts claimed are
two amounts of $7,243 and $8,470 allegedly paid to Ian Dantzer of
Lerner & Associates in 1991 and 1992 and $100,000 allegedly
paid to one Donald H. Tait, Q.C. The letters purporting to
justify these expenditures read as follows.
To whom it may concern:
From: Mr. Ian Dantzer, Lerner & Associates
To: Wallace G. Robson
Please be advised we received $7,243 during 1991 and $8,470
during 1992 for legal fees for representations made on Mr.
Robson's behalf related to the Thorne Ernst Whinney
accounting firm, Hong Kong Bank of Canada and a former employee
of the accounting firms in which Mr. Robson was involved over the
years.
_____________________
February ___, 1994
Mr. Ian Dantzer
To whom it may concern:
From: Donald H.Tait, QC
To: Wallace G. Robson
Please be advised I received $100,000 during 1992 for legal
fees for representations made on Mr. Robson's behalf at a
preliminary hearing into an income tax prosecution of Mr. Robson
related to a former accounting firm client.
_________________________
February ___, 1994
Donald H. Tait, QC
[44] These are
dated February __, 1994. They appear to have been typed on
the same typewriter and are unsigned. Mr. Robson admitted
that he "may" have typed them himself. I interpret
"may" as "certainly did". The letters are not
on letterhead. Exhibit A-77 was put in by the appellant. It
purports to have been signed by Mr. Tait. The copy given to
the CCRA was not signed.
[45] No
cancelled cheques were put in evidence and the purported
recipients were not called.
[46] I do not
accept the authenticity of the letters and I do not think there
is any credible evidence that these amounts were paid.
[47] There is
a receipt dated March 28, 1991 from R. Bruck Easton, a
Windsor lawyer for $15,760.71 and another one dated
March 31, 1992 for $1,717.49 and two from a law firm
Moorhouse, Wright dated October 9, 1992 for $1,508.87 and
$1,179.57.
[48] In 1989
there are also accounts of $7,536.57 from O'Brien, Jacklin
and O'Brien, $2,100 from R. Bruck Easton and $10,622 from
Lerner & Associates.
[49] These
amounts have been proved and are related to the earning of
income. Only these amounts are allowable.
[50]
Interest and bank charges - $38,852, $51,721, $37,727,
$34,522. These amounts relate in large measure to moneys
borrowed to invest in Thorne Ernst & Whinney. The premise of
the disallowance seems to have been the interest ceased to be
deductible when Mr. Robson left Thorne Ernst & Whinney.
He had ongoing litigation against that firm during these years
and so the factual premise upon which the disallowance was based,
that the "source" was gone, is incorrect. It is
questionable, whether in light of Tennant v. The Queen,
96 DTC 6121 (S.C.C.), the case of Emerson v. The
Queen, 86 DTC 6184 (F.C.A.), was rightly decided.
It is moreover impossible to see how the disallowance of interest
here can possibly be maintained in light of the two recent cases
of the Supreme Court of Canada in Singleton v. Canada,
[2001] S.C.J. No. 59; and Ludco Enterprises Ltd. v.
Canada, [2001] S.C.J. No. 58.
[51]
Management fees $20,500. It has not been
established that this amount was paid, or why. It is
disallowed.
[52]
Meals and entertainment $5,538, $16,543, $21,260,
$24,465. Mr. Robson admitted these are unreasonable.
Moreover, they have not been proved with any degree of precision.
Even using the most relaxed laisser-faire standards of
proof a few pencilled notes on the back of an envelope containing
a few receipts that have nothing to do with the amounts claimed
can scarcely be taken as adequate proof of allowable expenses
totalling over $67,000.
[53]
Rent $2,400. This was said to have been paid to the
appellant's wife (or perhaps his mother-in-law — the
evidence is not too clear). I suppose there is nothing wrong with
paying rent to your wife or mother-in-law — it may even be
a very worthwhile thing to do. But if you expect to deduct it you
would do well to come up with some pretty good business reasons.
The appellant has not done so.
[54]
Other (per ledger). $34,383. These have not been
proved. However one adjustment must be made. The appellant seems
to have thought that the amount of $34,283 claimed was excessive
and so he brought $15,000 into income to offset what he
considered to be an excessive claim. Moreover, the figure of
$34,383 is wrong. In his 1989 return the figure was $34,283.
Therefore the disallowance should be reduced by $15,100.
[55]
Mr. Robson has abandoned the claim to deduct automobile
expenses of $7,343.
[56] In
paragraph 19k) of the reply reference is made to a loss from
a partnership, King's Landing Tavern, in which the appellant
had a 76.2% interest. The revenue auditor reduced the loss to
which the appellant was entitled to $165,800, as follows.
terminal loss
reduction
$160,049
CCA
disallowed
- class
3
46,244
- class 6, 8, 17,
29
132,819
proceeds overstated (50,000)
land - capital
loss
32,000
expenses disallowed 80,862
________
TOTAL
$401,974
Loss per financial
statements
(619,560)
Revised
loss
(217,586)
Allocated to Appellant
(76.2%)
$(165,800)
[57] The
terminal loss reduction resulted from a downward valuation of the
building from $453,000 to $268,000. The CCRA took the position
that the original transfer to the partnership at $770,000 was
non-arm's length, and the price should, under
section 69, have been $538,575. I shall not try to reconcile
the figures. At one point Mr. Robson testified that the
price on closing was $805,000. The short answer is that the
appellant had the onus of proof and no acceptable evidence,
either by way of documents or by way of expert valuation, was put
in that would have rebutted the presumption of correctness of the
calculation in paragraph 19k).
[58] Finally,
I come to the shareholder benefits of $176,222, $24,220 and
$98,018 set out in Schedule A to the reply to
Mr. Robson's notice of appeal.
[59] All of
these amounts should be deleted from the appellant's income.
In addition to what I said in paragraph [24], my reasons can
be stated briefly.
[60] The
expenses of $110,967 disallowed to 378733 in 1990 were in part
allowed by this judgment, but those expenses that continued to be
disallowed do not constitute a benefit to the appellant. There
must be some evidence of an intent by the corporation to confer a
benefit on the shareholder and of an actual benefit being
conferred. The disallowed expenses were not benefits to the
appellant. Even if on some tortured reasoning they could be
construed as benefits, for the reasons set out above and
developed in Erb they should be allocated to all of the
shareholders.
[61] So far as
the disallowed expenses of Anderdon are concerned the logic of
the departmental position becomes even more tenuous. Here I have
held that the disallowed expenses of the partnership should be
attributed to 378733 only to the extent of 50%. Even if one
followed the Agency's reasoning that all expenses disallowed
to a corporation should be taxed in the shareholders' hands,
they should be allocated to all shareholders.
[62] Thus, for
example, even accepting the premise that disallowed corporate
expenses somehow become section 15 benefits to the
shareholders, of a $1,000 disallowed expense in Anderdon there
would be added to the corporate partner's income $500 and of
this amount there should be taxed in Mr. Robson's hands
$166.67. I have gone through this exercise to demonstrate the
sheer illogic of the respondent's position.
[63] The
appeals of the appellant 378733 Ontario Limited are allowed and
the assessments for 1991, 1992 and 1993 are referred back to the
Minister of National Revenue for reconsideration and reassessment
in accordance with these reasons.
[64] The
appeal from the nil assessment for 1990 is quashed but the
non-capital loss for that year determined in accordance with
these reasons may be applied to the years 1991, 1992 and 1993 to
the extent permitted by section 111 of the Income Tax
Act.
[65] The
appeals of the appellant Wallace Gordon Robson are allowed and
the assessments are referred back to the Minister of National
Revenue for reconsideration and reassessment in accordance with
these reasons.
[66] In light
of Mr. Robson's behaviour I considered doing what I did
in Merchant and awarding costs against him. However he has
achieved a measure of success despite his conduct, probably due
to good luck rather than good management, and some of the
CCRA's positions have been rather extreme. The fairest thing
seems to be to make no order for costs.
Signed at Ottawa, Canada, this 7th day of November 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NOS.:
97-3793(IT)G, 97-3792(IT)G
STYLE OF
CAUSE:
Between 378733 Ontario Limited and
Her Majesty The Queen AND
Between Wallace Gordon Robson and
Her Majesty The Queen
PLACE OF
HEARING:
Windsor, Ontario
DATE OF
HEARING:
378733 Ontario Limited: September 18 and 19, 2001
Wallace Gordon Robson: September 19 and 20, 2001
REASONS FOR JUDGMENT
BY:
The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
November 7, 2001
APPEARANCES:
For the
Appellants:
Wallace Gordon Robson
Counsel for the
Respondent:
Roger Leclaire, Esq.
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
97-3792(IT)G
BETWEEN:
WALLACE GORDON ROBSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on September 19 and 20, 2001, at
Windsor, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Roger
Leclaire, Esq.
JUDGMENT
It is
ordered that the appeals from assessments made under the
Income Tax Act for the 1988, 1989, 1990, 1991 and 1992
taxation years be allowed and the assessments be referred back to
the Minister of National Revenue for reconsideration and
reassessment in accordance with the reasons for judgment.
There
will be no order for costs.
Signed at Ottawa, Canada, this 7th day of November 2001.
A.C.J.
Email this Content