Citation: 2011 TCC 299
Date: 20110622
Docket: 2007-3748(IT)G
BETWEEN:
RICHARD ROY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] Mr. Roy appeals from his reassessments
under the Income Tax Act
(the Act) for the 2000, 2001 and 2002 taxation years. In each of those
years he filed a return in which he claimed to have sustained substantial
losses from a business carried on by him in partnership with two other
individuals. He was initially assessed as filed, with his claimed losses set
off against his other income. In March 2004, however, he was reassessed and the
claimed business losses were disallowed and gross negligence penalties were
assessed. It is from these reassessments that these appeals are brought.
[2] The losses reported by Mr. Roy were arrived at in
this way:
|
Taxation year
|
2000
|
2001
|
2002
|
|
Gross partnership
income
|
$42,455
|
$42,385
|
$36,995
|
|
Expenses
claimed
|
102,804
|
100,048
|
95,180
|
|
Total business
loss
|
60,349
|
57,663
|
58,185
|
|
Mr. Roy’s
partnership interest
|
80%
|
80%
|
89.1%
|
|
Mr. Roy’s claimed
loss
|
48,279
|
46,130
|
51,842
|
On reassessment the Minister took the
position that the total expenses incurred by the partnership in each year were
equal to the gross income declared, so that the partnership had neither a
profit nor a loss in each year. The Minister’s assumptions on assessing, as
pleaded by the Deputy Attorney General, specifically accept that the appellant
was a member of a partnership, but allege that the partnership “did not incur
business losses in excess of nil in the 2000, 2001 and 2002 taxation years.” It is trite that in order to
succeed in his appeals from the assessments of tax Mr. Roy must discharge the
burden of proving by cogent evidence that this fact, assumed by the Minister in
reassessing him, is incorrect. That is what the Supreme Court of Canada decided
in 1924,
and has reiterated several times since.
[3] The Reply to the Notice of Appeal goes on
to assert in paragraph 13, although not as an assumption made by the Minister,
that “the Partnership did not operate a boat charter business in the 2000, 2001
or 2002 taxation years”. It is difficult to see how the respondent could
advance such a plea; if the partnership did not operate a boat charter business
in those years then it simply could not be a partnership at all, as there is no
evidence of it operating any other kind of business, and without a business
being carried on with a view to profit there cannot be a partnership: see Backman
v. Canada.
The appellant filed his tax returns on the basis that he was a member of a
partnership, that the boat was partnership property, and that the partnership
carried on a bareboat charter business. The Minister assessed him, and
reassessed him, on that basis. There was evidence that the boat was advertised
on a website as being available for charter. I shall therefore consider his
appeal on the assumption that there was such a business. The only issues, then,
are whether the appellant has overcome the Minister’s assumption that the
partnership did not incur losses in the three years in issue, and whether the
Minister has discharged the onus that subsection 163(3) imposes on him “… of
establishing the facts justifying the assessment of the penalty…” for each of
the years under appeal.
[4] Mr. Roy gave evidence. Generally I accept his
evidence as being truthful, but it suffered from the fact that much of what he
had to say was hearsay, and while I am satisfied that he told the truth as he
understood it, much of it was necessarily based on what he had been told by his
friend Mr. Jarvis. Most important for purposes of these appeals is the absence
of any firsthand evidence of the partnership’s financial transactions, and the
absence of any partnership books and records. These were not available to the
accountant who prepared the income tax returns filed by Mr. Roy and the other
partners, they were not available to the Minister’s assessor who performed the
audit for tax purposes, and they are not available to the court. As a result,
it is simply not possible to know what the revenues and expenses of the charter
operation were during the years in issue.
[5] Mr. Roy is a military pilot. During his training
for that occupation he met and became friendly with Bruce Jarvis. They saw a
great deal of each other during the 1990s when they were both stationed at
Greenwood in Nova Scotia working as instructors. During this period
they had many discussions about the possibility of going into business
together. In 1996 Mr. Jarvis became a civilian pilot with Cathay Pacific
airline and was stationed in Vancouver. It was soon after that they took the
initial steps towards realizing their ambition to develop a yacht charter
business. Mr. Jarvis was an accomplished sailor, qualified to captain a fifty
foot sailing vessel. He had another former military friend, Sean Dunn, who also
lived in Vancouver and was a capable sailor. The plan was
that the three of them would acquire a 50 foot Beneteau sailboat, to be located
in Vancouver, where Mr. Jarvis and Mr. Dunn would
operate it as a vessel available for bareboat charter. Mr. Jarvis was
apparently the driving force behind the plan. As the most experienced sailor,
he would assess the ability of prospective charterers and take charge of the
day-to-day running of the business. Mr. Dunn would assist him in looking after
the care and maintenance of the boat. Mr. Roy, stationed on the other coast,
would not be in a position to take part in the daily operations, but would
contribute to the acquisition cost of the vessel.
[6] It does not appear to me from the evidence that
any of the participants had substantial liquid resources with which to buy a
high quality 50 foot sailboat. Certainly Mr. Roy did not. Mr. Dunn was employed
in Vancouver as a bus driver, and it seems unlikely
that he had much capital to contribute. Mr. Roy testified that he did not know
exactly what Mr. Jarvis contributed to the purchase price, but apparently he
owned some land on Vancouver
Island that he put up as
collateral to secure a loan from the CIBC. With the proceeds of this loan Bruce
Jarvis and Sean Dunn were able to order the boat sometime around the end of
1998. The evidence does not reveal either the original amount of the CIBC loan
or the price paid to the builder of the vessel. However the income tax return
filed by Mr. Roy for the 2001 taxation year shows the undepreciated capital
cost of the vessel as $577,590, and correspondence from CIBC indicates that the
interest paid on the loan during the year 2000 was $39,472.50. Mr. Roy did
testify that he, Bruce Jarvis and Sean Dunn all signed the CIBC loan agreement,
and that the boat was ordered to be delivered to them in Vancouver. It was at this point that things began to go very
wrong.
[7] At some time after the boat had been ordered, and
before it was delivered, Cathay Pacific relocated Mr. Jarvis from Vancouver to Hong Kong. Mr. Jarvis then, without consulting Mr. Roy,
instructed the builder to deliver the boat to him in Hong Kong, which it did.
From this point on the relationship between Mr. Roy and Mr. Jarvis seems to
have become strained, at best, and Mr. Roy’s input to the decision-making
process was greatly diminished. His evidence as to the subsequent events is
simply hearsay based upon what Mr. Jarvis chose to tell him from time to time.
According to Mr. Roy’s evidence, Mr. Jarvis did manage to produce some revenue
from charters in Hong Kong, but not enough to cover costs. At some
point Mr. Dunn went to Hong Kong, and he and Mr. Jarvis attempted to sail the
vessel to Vancouver, but they encountered a typhoon and had to
abandon the attempt. By the time of the trial the boat was moored in Thailand and advertised for sale there.
[8] Documents entered into evidence at the trial
reveal the following facts about the partnership and the ownership of the
vessel. The name “Offshore Adventures” was registered under the Business
Names Act of Ontario as the name of a general partnership, the partners of
which are shown as Barbara Jarvis of Etobicoke, Ontario and Richard A. Roy of
North Alton, Nova Scotia. Barbara Jarvis is the mother of Bruce Jarvis. Mr.
Roy’s income tax returns for 2000 and 2001 state that Mr Roy owns an 80%
interest and Barbara Jarvis and Sean Dunn each own a 10% interest in the
partnership “Offshore Adventures”. By 2002 Mr. Dunn had become bankrupt, and
Mr. Roy’s return shows his interest as 89%, with no particulars as to the other
partners.
[9] The other significant document in evidence is the
registration of the vessel “Trionos” under the Canada Shipping Act.
It is shown to be a 14.3 m, 23.37t Beneteau pleasure craft, the ownership of
which is shown to be:
Sean Patrick Dunn - 10
shares (15.625%)
Bruce Robert Jarvis - 2
shares (3.125%)
Richard Allan Roy - 52
shares (81.25%)
Nothing in the evidence explains either the relative
contributions of the owners to the purchase price, or the manner in which they
decided upon the division of the shares in the vessel as registered. Nor is
there any explanation of the fact that Bruce Jarvis is an owner of the
vessel, but it is his mother who is a partner in “Offshore Adventures”.
[10] The partnership of which Mr. Roy claims to be a
partner has no partnership agreement, no bank account, and he has not been able
to produce any books or records from which its financial transactions could be
verified. Mr. Roy said in his evidence that he may have met Mrs. Jarvis on one
occasion, but clearly they have never discussed the business of Offshore
Adventures with each other or, apparently, with Mr. Dunn.
[11] Mr Kenneth Bower is a Certified General
Accountant. He prepared Mr. Roy’s income tax returns for the years that
are under appeal, and those of the other partners, Mr. Dunn and Ms. Jarvis. His
evidence was that he prepared the returns from summary information as to
revenues and expenses that was provided by Mr. Jarvis from Hong Kong where he
was carrying on whatever charter business existed. Neither he nor Mr. Roy nor
anyone else who gave evidence had any significant amount of firsthand knowledge
of the partnership’s affairs. The major items that make up the claimed expenses
of the partnership business, of course, are interest on the CIBC loan and
capital cost allowance on the vessel. There are letters from CIBC in evidence
that establish the interest paid on the loan as $39,472.50 for the year 2000,
and $31,688.29 for the year 2001. At some point the payments fell into arrears
and CIBC began an action in the Supreme Court of British Columbia against Mr.
Jarvis, Mr. Roy and Mr. Dunn for the outstanding balance. Mr. Bower testified
that he had not seen the invoice for the vessel. He had seen a few receipts,
but almost all the information that he used to prepare the returns came in
summary form from Mr. Jarvis.
[12] Were it not for
the fact that the respondent in her pleading accepts that there was a
partnership, of which the appellant, Sean Dunn and Barbara Jarvis were the
partners, I would find that no partnership ever existed in this case. There is
no written partnership agreement, and it is difficult to see how there could
have been an oral agreement among them as Mr. Roy could tell us nothing of any
business discussion that he ever had with either Mr. Dunn or Ms. Jarvis. There
is simply no evidence to suggest that the three of them, or any two of them,
ever discussed the charter business or the use of the Trionos. Nor is
there any evidence of activities in connection with the vessel being carried on
“in accordance with objective standards of businesslike behaviour.” With no business plan, no bank
account, no lines of authority and the vessel in the de facto possession
and control of Mr. Jarvis in Hong Kong, the test for a business as elucidated
by the Supreme Court in the Stewart
case simply could not be met. In view of the state of the pleadings, however, I
shall not decide the case on that basis.
[13] The case pleaded
by the respondent is that the partnership did not have expenses greater than
the gross income in any of the three years in issue. With the singular
exception of the loan interest, none of the expenses claimed by the appellant
to have been incurred by the partnership have been proved. Such records as
there may be, and there may be none, are apparently in the possession of Mr.
Jarvis in Hong
Kong. Neither
Mr. Roy nor Mr. Bower had seen the invoice for the vessel, but there is some
evidence of its cost in a letter written by the assessor, Wayne Chiasson to Mr.
Roy on January 5, 2004. He lists in that letter “… the information provided to
us by Mr. Bower’s office on October 29 …” One of the items listed is
described as:
A December 19, 1998 order contract SM 0361,
showing basic boat plus modifications of F2,121,868 in French Francs (FF),
freight and shipping charges of F289,809FF with a destination of Vancouver,
Canada. It also states name and address of purchaser as Offshore Adventures, 59 Waterford Drive, Etobicoke, Ontario, Canada M9R 2N7. This receipt names Sean Dunn as the purchaser.
At the then current
rate of exchange that would suggest a capital cost for the vessel of about
$590,000 CAD.
[14] With no evidence at all as to
the partnership revenue, and only scant evidence as to its expenses, the
appellant has not been able to discharge the onus upon him to displace the
Minister's assumption that the partnership did not suffer a loss in any of the
three years under appeal.
[15] Mr. Roy also argued that as
Mr. Dunn and Ms. Jarvis had not been reassessed to disallow their shares of the
claimed losses, it would be unfair to let the reassessment in respect of
himself stand. This point was addressed in evidence by Mr. Chiasson, the
Minister’s auditor. The other two partners were not reassessed, he said,
because their relatively small shares of the claimed losses did not warrant the
cost of auditing them. The appellant’s argument is without merit. It is well
settled that a taxpayer does not become entitled to relief simply because another
taxpayer similarly situated was assessed differently: see Ludmer v. Canada and Sinclair v. Canada.
[16] I turn now
to the penalty issue. The Minister assessed gross negligence penalties under
subsection 163(2). Subsection 163(3) says this:
163(3) Where, in an appeal under this Act, a penalty assessed
by the Minister under this section or section 163.2 is in issue, the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
I have already found that the appellant
has failed to discharge the burden of proving that the partnership suffered the
losses of which he claimed to be entitled to deduct his share from his other
income. The necessary evidence is with Mr. Jarvis in Hong Kong. For the
same reason the Minister has been unable to satisfy the burden on him to
establish that the losses claimed were not suffered, as he is required to do in
order to justify the penalties: see James v. M.N.R.
The penalties must therefore be vacated.
[17] The appeals will be allowed
and the reassessments will be varied to delete the penalties. It is a case in
which the parties should each bear their own costs.
Signed at Ottawa, Canada, this 22nd day of June, 2011.
“E.A. Bowie”
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