Date: 20030120
Docket: 2002-2115-IT-I
BETWEEN:
LARRY CHAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.
[1] Mr. Larry Chan appeals income tax assessments for the 1994, 1995 and 1996 taxation years in which the Minister of National Revenue ("Minister") included in his income benefits purportedly conferred on him by 777387 Ontario Limited ("Ontario"), the corporation in which he was a shareholder, in accordance with subsection 15(1) of the Income Tax Act ("Act"). The Minister also assessed Mr. Chan penalties pursuant to subsection 163(2) of the Act on the basis he knowingly, or under circumstances amounting to gross negligence, made an omission in each of his returns of income for 1994, 1995 and 1996. Mr. Chan denies he received any benefit from Ontario and ought not be assessed any penalty.
[2] In 1993 Ontario purchased a Select Sandwich franchise restaurant. Mr. Chan was involved in the daily operation of the restaurant, primarily in the kitchen as cook. The restaurant was open five days a week. Mr. Chan said he regularly would purchase inventory and supplies for the restaurant from cash and carry retailers evenings during the week and on Saturdays. Ontario sold the business in 1996.
[3] At no time when Ontario operated the restaurant was Mr. Chan paid wages. Apparently he had a shareholder loan advance from Ontario. His sole income from Ontario was interest - approximately $700 - on the shareholder loan that Ontario paid him monthly. He reported the interest income on his income tax returns. Mr. Chan explained that since he lived with his mother and his wife worked, he did not need more than $700 a month on which to live.
[4] Mr. Chan made cash deposits to his personal bank account totalling $27,700, $29,200 and $6,700 in 1994, 1995 and 1996 respectively. Mr. Chan does not deny he made the cash deposits to his bank account. Bank deposit slips confirm the deposits. In his notice of appeal he suggests that these amounts represented repayment of the shareholder advances. "If there were discrepancies in the tax returns, they were simply withdrawals from my investment...".
[5] At trial, however, he insisted that since the corporate bank account did not pay interest, he would deposit corporate funds in his personal bank account where interest was paid. He said he would use this money to purchase supplies for the restaurant. Since the bank where Ontario had its account closed at 3:00 p.m. during the week and was closed on Saturdays, it was convenient to have corporate funds in his personal account at a bank that had evening hours and was open on Saturdays when he required money to purchase restaurant supplies. Any funds in excess of that required for purchases were deposited in the corporate account.
[6] Mr. Chan maintained no financial records and was unable to produce any documentation reflecting the cash withdrawals from Ontario. There is no record of adjustments to Mr. Chan's shareholder's loan account to reflect any withdrawals or payments to him by Ontario. The balance of his shareholder's loan account at January 31, 1993 was $125,952 which increased to $232,741 at January 31, 1994, the fiscal year it acquired the restaurant. The balance remained at $232,741 at January 31, 1995. In its 1996 fiscal year, when Ontario sold the restaurant, Ontario repaid Mr. Chan $135,000 in three payments: $20,000 on April 4, 1995, $95,000 on January 12, 1996 and $20,000 on January 31, 1996. These amounts came out of the proceeds of sale. As a point of interest, I note that Mr. Chan's brother was also a shareholder who had advanced money to Ontario during the year Ontario acquired the restaurant. The latter shareholder's loan account was also not reduced until the year of sale of the restaurant.
[7] There is also no record of petty cash or other withdrawals used to purchase supplies. Mr. Chan did not keep track of money taken from the cash register of Ontario; he estimated how much he required and withdrew that amount from the register, he stated.
[8] Mr. Chan never informed his accountant of the deposits to his personal bank account and never instructed the accountant to reduce his shareholder's loan balance as a result of the withdrawals from Ontario to his personal bank account. There is no evidence any money was ever returned by Mr. Chan to Ontario, although Mr. Chan testified he gave all receipts to the auditor for the Canada Customs and Revenue Agency ("CCRA"). Mr. Chan, himself, could not explain what actually transpired, suggesting the confusion was due to the CCRA not auditing him properly.
[9] Mr. Chan produced a copy of the CCRA file, consisting of 324 pages, leading to these appeals. Included in the file was a copy of the financial statements of Ontario for its January 31, 1996 fiscal period, which includes the time when the restaurant was sold. According to Ontario's statement of income for 1996, the corporation had sales of $558,981 and purchased inventory in the amount of $225,510. In its 1995 fiscal year, Ontario had sales of $649,577 and purchased $256,768 of inventory, according to the 1996 financial statements. There was no evidence that the purchases of inventory recorded in the corporation's books of account were not reasonable in the circumstances and ought to be increased to the extent of the approximate amounts of cash deposited in 1994 and 1995 calendar years to Mr. Chan's personal bank account.
[10] The first CCRA auditor to receive Mr. Chan's file was Mr. Marc Wentzel. Mr. Wentzel was transferred during the audit which began in mid-1997 and was completed in early 2001. In April 2000, the file was assigned to Mr. Gary Groman who testified on behalf of the respondent. Mr. Groman stated he "checked documents" in a box and found Mr. Chan's personal deposit slips, interest cheques and use of automobile calculations. He did not find any receipts. He spoke to Mr. Chan who told him that the cash deposits to his personal bank account represented repayments of the loan by Ontario.
[11] Mr. Chan, who immigrated to Canada in 1987, acknowledged under cross-examination that notwithstanding that he spent most of his time in the kitchen during the time the restaurant was open for business, he did have experience in business. However, he pointed out that in a franchise business "everything is laid out by the purchaser". The books of Ontario were prepared by Mr. Chan's wife or another relative. He did not review the books of account. He signed the cheques.
[12] I have reviewed the CCRA file produced by Mr. Chan. Mr. Chan did not produce any evidence to confirm, or even suggest, the probability of the truth of either of his two versions why he deposited Ontario's property, cash, to his personal bank account. Ontario never adjusted the shareholder loan balance of Mr. Chan to reflect any cash withdrawals and there is not even a modicum of paper trail to suggest Mr. Chan used the cash to purchase supplies. He blamed the CCRA for his difficulties, but he was the author of his own misfortune. He was prudent in ensuring he received the precise amount of interest from Ontario each month but ignored recording, or having his wife or relative record, cash withdrawals.
[13] After conclusion of the evidence and at the end of argument I asked Mr. Chan to produce any evidence he had, but did not bring to Court, to the agent for the respondent for further review. I was reluctant to dismiss the appeal if Mr. Chan had evidence that supported his position. I told the parties I would reconvene the hearing in the future.
[14] Mr. Chan submitted to the respondent documents that included tax returns, cash register stubs and receipts. Mr. Groman of the CCRA reviewed the material. The material was forwarded to the Court and was produced at trial.
[15] Mr. Groman reviewed the material sent by Mr. Chan after the first day of trial. He described the documents and explained his conclusion that Mr. Chan did not make any purchases for the business with funds from his personal bank account. The money for these expenses came from Ontario's bank account. Documents supporting his conclusion were produced.
[16] Also, according to Mr. Groman's review of bank documents, the balances in Mr. Chan's personal bank accounts were modest, approximately $5,000; however, Ontario's bank account had balances in January 1995, that fluctuated between $71,671 and $89,538. Thus, Mr. Groman concluded, no funds were being held in Mr. Chan's personal bank account to earn a higher rate of interest that would be earned in Ontario's account, as Mr. Chan claimed earlier at trial.
[17] Apparently, there were settlement discussions between Mr. Chan and the CCRA. The parties did not settle this matter and I cannot consider any concession either party may have proposed to effect a settlement.
[18] In the circumstances I see no reason to disturb the assessments. While Mr. Chan may not have been the most sophisticated of businessmen, I have no doubt from observing him at trial that he knew what he was doing was wrong, that the cash deposits were not repayments of his loan account and they were not used to purchase goods for Ontario.
[19] The appeals are dismissed.
Signed at Ottawa, Canada, this 20th day of January 2003.
|
"Gerald J. Rip" |
J.T.C.C.COURT FILE NO.: 2002-2115(IT)I
STYLE OF CAUSE: Larry Chan and Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: October 3, 2002 & January 13, 2003
REASONS FOR JUDGMENT BY: the Honourable Judge Gerald J. Rip
DATE OF JUDGMENT: January 20, 2003.
APPEARANCES:
For the Appellant: The Appellant himself
Agent for the Respondent: Jason Mitschele (Student-At-Law)
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-2115(IT)I
BETWEEN:
LARRY CHAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on October 3, 2002 and on January 13, 2003,
at Toronto, Ontario, by
the Honourable Judge Gerald J. Rip
Appearances
For the Appellant: The Appellant himself
Agent for the Respondent: Jason Mitschele
(Student-at-Law)
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1994, 1995 and 1996 taxation years are dismissed.
Signed at Ottawa, Canada, this 20th day of January 2003.
|
"Gerald J. Rip" |
J.T.C.C.