Tax Court of Canada Judgments

Docket: 2002-2194(IT)I

BETWEEN:

BERND MASSEG,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on common evidence with the appeal of

Staber Enterprises Ltd. (2003-3166(IT)I) on August 3, 2004

at Vancouver, British Columbia

Before: The Honourable Justice Gerald J. Rip
Appearances:
Agents for the appellant:	Noel M. Porter and Bernd Masseg
Counsel for the respondent:	Bruce Senkpiel

____________________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1998 and 1999 taxation years are allowed, without costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that shareholder benefits added to the appellant's income for 1998 be reduced to $2,688.87 and for 1999 they be reduced to $2,693.83.

The appellant is not entitled to any further relief.

Signed at Ottawa, Canada, this 10^th day of September 2004.

"Gerald J. Rip"

Rip J.

Docket: 2003-3166(IT)I

BETWEEN:

STABER ENTERPRISES LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeals of

Bernd Masseg (2002-2194(IT)I) on August 3, 2004

at Vancouver, British Columbia

Before: The Honourable Justice Gerald J. Rip
Appearances:
Agents for the appellant:	Noel M. Porter and Bernd Masseg
Counsel for the respondent:	Bruce Senkpiel

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is dismissed.

Signed at Ottawa, Canada, this 10^th day of September 2004.

"Gerald J. Rip"

Rip J.

Citation: 2004TCC613

Date: 20040910

Docket: 2002-2194(IT)I

BETWEEN:

BERND MASSEG,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

Docket: 2003-3166(IT)I

AND BETWEEN:

STABER ENTERPRISES LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Rip, J.

[1]      Bernd Masseg and Staber Enterprises Ltd. ("Staber") have appealed income tax assessments for 1998 and 1999. Staber's fiscal year-end is August 31. Staber's appeal for 1998 was quashed by Order of this Court dated January 7, 2004. The appeals remaining were heard together on common evidence. Due to the apparent inexperience of the appellant's agent in preparing and prosecuting the appeal, the issues varied during the course of the trial of the appeals.

[2]      According to the appellants' notices of appeal the issues in appeal were:

(a)       with respect to Mr. Masseg, how to treat management fees paid to him by Staber and "inadvertently" not included in his 1998 and 1999 tax returns; the appellant requested that Mr. Masseg "be charged an interest expense on this loan..."

(b)      with respect to Staber, whether certain expenses it claimed were made by Staber for the purpose of earning income from a business or a property.

[3]      According to the respondent's replies to the notices of appeal for 1998 and 1999, the issues were:

(a)       With respect to Mr. Masseg, whether the Minister of National Revenue properly included in his income shareholder benefits of $4,526 and $7,759[1], respectively and management bonuses of $30,000 and $22,500, respectively, and

(b)      With respect to the 1999 appeal by Staber, whether the expenses claimed by Staber are deductible in computing its income for the year.

[4]      The notices of appeal were prepared by Mr. Noel M. Porter, a chartered accountant, who also represented the appellants and testified on their behalf during the first day of the hearing. Documents attached to Mr. Masseg's notice of appeal include a letter from Mr. Porter to the Fairness Committee of Canada Customs and Revenue Agency ("CCRA"). From this and other documentation attached to the notice of appeal it appears that one of the issues in Mr. Masseg's appeal is whether Staber purchased a time share property in Mexico for the purpose of earning income from a property. The Minister of National Revenue ("Minister") says there was no income earning purpose for this property. The shareholder benefits assessed Mr. Masseg pursuant to subsection 15(1) of the Income Tax Act ("Act") relate to his use of the time share property.

[5]      The Minister also claims that management bonuses declared and deducted by Staber in computing its income in 1998 and 1999 were credited to Mr. Masseg's loan account with Staber and that he did not include the bonuses in computing his income for 1998 and 1999.

[6]      With respect to Staber, the Minister denied Staber advertising and promotion expenses in excess of $4,575.79, expenses for supplies in excess of $9,409.76 and interest expenses for the time share in Mexico.

[7]      The appeals were originally set down for hearing on January 27, 2004. At the time both Mr. Porter and Mr. Masseg testified. Mr. Porter was beyond his depth in representing the appellants and in giving evidence. He was not organized and had no idea what he had to prove or how to prove it. At my suggestion, Mr. Masseg replaced him in the witness box so that the issues could be addressed and documents could be produced.

[8]      Mr. Masseg is the shareholder, sole director and president of Staber. I posed questions to Mr. Masseg in the hope that the issues would be clarified. Mr. Masseg did not fare much better than Mr. Porter.

[9]      Mr. Masseg produced a bundle of documents, Exhibit A-1, which included two invoices to Staber and two cheques on Staber's account in payment of the amounts so invoiced, owner's financial statements showing a distribution of funds to non-resident owners of a rental property managed by Staber, correspondence from the purported administrator of the time share property and documents relating to the property, copies of cheques payable to credit card companies drawn on the bank accounts of both appellants and lists of expenses purportedly incurred by Staber in 1997, 1998 and 1999; apparently much of this material had been submitted to CCRA earlier. The cover page of the bundle appears to be a note explaining that "the management fees set up to clear the debit balance in the shareholder's loan were done so in error", the appellant claiming only two "deposits" totalling $10,500 "can be classified as shareholder's loan"; other deposits totalling $29,000 "were made to cover cash flow shortages in [Staber] and are loans from credit card accounts in [Masseg's] name made to [Staber]". This was an accounting mistake, according to Messrs Masseg and Porter.

[10]     Staber carries on the business of janitorial contracting and property management. Some of the properties it manages are owned by non-residents of Canada. Staber also owns Professional Stone Floor Care Incorporated, carrying on business as "Brite Clean", which is in the business of polishing marble.

[11]     Included in Exhibit A-1 were an invoice and cheque in payment dated in 1997, not a year in appeal. Also included were an invoice and cheque in payment dated prior to August 31, 1998, a taxation year that has been quashed. These items are not subject matters of Staber's appeal for 1999.

[12]     Mr. Masseg said he tried to rent the time share property for the regular weeks of the time share available to him but was unsuccessful, in particular after September 11, 2001. Attempts to sell the time share are also proving unsuccessful. He claims the expenses on the time share are deductible since the time share is a rental property. He explained that he purchased the time share because he thought that he would eventually sell Staber and "if I buy a little time share" and put it in Staber "it would be more attractive for someone to buy my business".

[13]     Mr. Masseg made personal use of the time share on three or four occasions. He explained that as owner of the time share "you get two regular weeks" and a bonus week each year. He used the bonus week, the regular weeks were for rent. Mr. Masseg did not pay Staber for his personal use of the time share since he only used the bonus week, he explained. He does not consider the bonus week as a time share. "It's private ... private use, okay. You don't have to pay any rent to the company. It's a private use. The time share is separate, with its regular two weeks a year ... If I would use a regular week I would have to pay Staber."

[14]     With respect to the cheques included in Exhibit A-1, which were payable to Mastercard, Amex and Visa, Mr. Masseg explained he charged amounts on his personal credit cards for the benefit of Staber and, in return, Staber paid the credit card companies.

[15]     Mr. Masseg recalled that a break-in at Staber's office took place in September or October 1998 and many documents were destroyed; the computer "disappeared". A water cooler was "pushed over", papers were thrown all over the floor. He complained that much of Staber's records were rendered useless. As a result only a portion of the records was recoverable. He indicated that as a result of records being destroyed, Mr. Porter treated the cheques as deposits to a shareholder's loan "but they were only made ... to cover cash flow shortages and the payments showed how I made these payments back. It's about $27,000." Mr. Masseg said the amounts were "... like a loan from a bank to the company, ... for ... an operating loan".

[16]     Mr. Masseg insisted he did not lend money to the company, only that his credit made it possible for Staber to obtain the money.

[17]     Later in the evidence Mr. Masseg stated that some of the credit cards were Staber's. The Amex card belonged to Staber, for example. However, Mr. Masseg could not identify which credit cards were his and which ones were in Staber's name. In the meantime I could not identify the relevance of the credit card payments to the issues before me and Mr. Masseg, notwithstanding his efforts, could not help me.

[18]     I was not clear as to what, exactly, Mr. Masseg was attempting to prove. Apparently, according to Crown counsel, Mr. Masseg's original argument with CCRA was that although Staber paid a management bonus to him in each of 1998 and 1999, he had paid a certain amount to credit card corporations for Staber's benefit. However, these amounts were already taken into account by the auditor for CCRA when assessing. Mr. Masseg did not acknowledge that this was in fact the case. In his notice of appeal Mr. Masseg acknowledged that Staber paid a management bonus in each of 1998 and 1999 and his failure to include the bonus in the relevant tax returns. He is disputing the amount of the management bonuses, if I understood him correctly.

[19]     Mr. Masseg replied that it was not he, but Mr. Porter, who prepared the Notices of Appeal and Mr. Porter was ill and "doesn't look very competent". Mr. Masseg emphasized he relied on Mr. Porter to prepare his books. During the first day of the appeal Mr. Porter stated he failed to include the management bonuses in preparing Mr. Masseg's income tax return because of the destruction of the documents during the break-in at Staber's office. He simply did not have the required information.

[20]     After further discussion with Mr. Masseg and counsel for the Crown, I adjourned the hearing of these appeals to give the parties another opportunity to discuss the issues in these appeals and an attempt to settle the matter.

[21]     Unfortunately the matters were not settled and the appeals were continued on August 3, 2004. The time between hearings was not put to any good use. Mr. Masseg's testimony was uncertain and erratic. The following is one example of the problem faced by Mr. Masseg:

JUSTICE:                     Now just -- please, I'm trying to understand you.

MR. MASSEG:             Yes.

JUSTICE:                     The 263,000 you said went to the owners.

MR. MASSEG:             No, still stated here that --

JUSTICE:                     You just told me they went to the owners.

MR. MASSEG:             Yeah, that's what I said, but when -- but that's wrong.

JUSTICE:                     Well, how could I under- -- how can I accept your evidence when you say something and five minutes later you say it's wrong?

MR. MASSEG:             Well, because I'm not an accountant, so --

JUSTICE:                     Well, look.

MR. MASSEG:             -- I make mistakes, yes, I realize --

JUSTICE:                     I have to understand what's happening. And if you make mistakes, how am I supposed to decide what happened? Can you tell me?

MR. MASSEG:             Well, you have to decide by me telling you, and --

JUSTICE:                     And if you tell me --

MR. MASSEG:             -- make up your mind, right.

JUSTICE:                     And if you tell me two different things what am I supposed to do?

MR. MASSEG:             Well then, you know, you have a problem and I have a problem.

[22]     Mr. Masseg informed me of Mr. Porter's illness with amyotrophic lateral sclerosis and the unwillingness of counsel for the Crown to help him. He complained that the respondent gave him no information respecting the disallowed expenses. Much, if not all, of this information is set out in the Reply to the Notice of Appeal. Further, counsel stated that the list of expenses, disputed and not disputed, is contained in a proposed settlement offer that was sent to Mr. Masseg.

[23]     Mr. Masseg explained his position with respect to the management bonuses. He testified that in 1998 he received cheques from Staber aggregating $11,350[2]. However it appears from Exhibit A-4 that in 1998 Staber credited Mr. Masseg salary of $5,000 per month for nine months. Staber remitted to the Receiver General for Canada income tax and Canada Pension Plan contributions purportedly withheld from the monthly salary of $5,000. The net amount credited to Mr. Masseg's account in 1998 as a result of these monthly amounts was $30,210.78.

[24]     In 1999 Mr. Masseg said he received cheques from Staber aggregating only $5,950. Again, he was credited with $5,000 per month for nine months and statutory amounts were remitted to the Receiver General. The net amount he was credited was $30,531.41. Staber sent T-4 slips that Mr. Masseg's annual salary was $45,000.

[25]     Mr. Masseg claims he never took the amounts of $30,210.78 and $30,531.41 out of the company, only the amounts of $11,350 and $5,950. When I asked him why Staber would withhold and remit tax to the Receiver General on the basis he was paid an annual salary in each year of $45,000 when, according to him, he received only $11,350 and $5,950, respectively, he replied:

"Because at the end of the year, I did not want to end up paying high taxes, so I asked my accountant how is the best way of doing this. So he says, by law, I have to send in monthly income. So we used a $5,000 a month income claiming, and we sent in income tax money accordingly."

[26]     Ms. Susan Chen, an auditor with CCRA who audited Mr. Masseg and Staber, testified for the respondent. She explained that when she audited Staber she saw some management bonuses that were declared in 1998 and 1999; the normal procedure, she said, was to check if the shareholder reported the bonuses in his income. In the case at bar, the bonuses were not declared.

[27]     Ms. Chen reviewed pages from Staber's general ledger for 1998 and 1999; the management bonuses of $30,000 and $22,500, respectively, were debited as an expense and the shareholder account was credited with the amount of the bonus in each year. The management bonuses, explained Ms. Chen, were included as part of the wages expense and reflected in the financial statements as wages and benefits.

[28]     Ms. Chen also explained that the journal recorded any personal amounts paid by Mr. Masseg as well as his wages for each year. In 1999, for example, there is a credit for personal paid expenses of $38,776.67 and a credit for wages to Mr. Masseg of $30,531. The $45,000 Mr. Masseg claims he did not receive is also recorded as a debit in his shareholder's account for 1999 as is the $30,000, which he said he did not receive, and is debited as a wage expense in 1998.

[29]     The journal entries confirm the correctness by the Minister in including the management bonus in Mr. Masseg's income and answered the concerns of Mr. Masseg with respect to the inclusion of salary of $30,000 and $45,000 in 1998 and 1999 respectively.

[30]     The respondent concedes that Staber owns the time share property in Mexico but did not acquire it for the purpose of earning income. It was purchased to make the corporation more attractive to any potential purchaser of Staber. This was Mr. Masseg's evidence. If the property was not acquired for the purpose of earning income but for some other reason, Staber is not permitted to deduct expenses related to the property including mortgage interest; subsection 18(1) and paragraph 20(1)(c) of the Act. Mr. Masseg also used the time share for his personal enjoyment. It is irrelevant whether Mr. Masseg used the regular weeks or the bonus weeks. Both regular and bonus weeks were property of Staber, not Mr. Masseg. Weeks available to Staber were used by Mr. Masseg; this is a benefit.

[31]     I am not satisfied that Staber acquired the time share property for rental purposes. There were apparent efforts by Emren, who I assume was a rental agent, to rent the property through the internet and agencies in Canada and the United States of America. Emren did not guarantee rental of the unit. These efforts, in my view, did not alter the "raison d'être" for the purchase of the time share, which had nothing to do with earning income. Mr. Masseg believed the time share would attract a buyer for Staber.

[32]     Mr. Masseg raised several other issues not mentioned in Staber's notice of objection and notice of appeal. Staber managed a rental property in Vancouver that was owned by non-residents of Canada. He distributed the rental income to the non-residents and, he says, withheld and remitted 25 per cent non-resident tax to the Receiver General for Canada. He complained that Staber was not permitted to deduct from its income the 25 per cent non-resident tax so remitted. Mr. Masseg also questioned the disallowance of some $59,000 in expenses claimed by Staber.

[33]     Note 1(c) to Staber's financial statements for the year ending August 31, 1999 states that:

The Company receives revenues from janitorial service and property management and rental revenue received is recorded as "Gross Rentals", (not just the management fees it receives from such rentals). In the "Rental Disbursements", the Company includes the net rental paid to the owners of the rental properties.

[34]     Staber reported "property income" of $281,693 and rental disbursements of $263,776. It does not appear that the tax authority questioned these items.

[35]     As far as the 25 per cent non-resident withholding tax is concerned, I assume it is included in the rental disbursements of $263,776. When a payor withholds and remits the non-resident tax to the Receiver General, the payor is sent the tax to the government on behalf of the non-resident, not the payor. The 25 per cent withholding tax is a tax paid for the non-resident owner of the property, not for Staber.

[36]     Mr. Masseg also complained that Staber was not permitted to deduct any goods and services tax ("GST") it paid in the course of its business. Ms. Chen did not have any information relating to the GST (and the non-resident tax) since this was a new issue to her. I have asked her to review the files of the fisc to determine whether Staber received the proper tax treatment with respect to these matters and if not, to make the necessary corrections.

[37]     Also, with respect to other disallowed expenses to Staber, Mr. Masseg, again, referred to the break-in at Staber's office in 1998 and the destruction of invoices and receipts. Ms. Chen testified that, at her request, Mr. Masseg produced to her various receipts and invoices to establish the expenses. The personal and business expenses were eventually separated. She noticed "a lot of expenses or receipts [were] dated prior to the audit years". Ms. Chen asked Mr. Masseg to organize the expenses "because it is just a whole pile of expenses and there's no way I can look at them and then tally it up". Mr. Masseg used a register tape and added all the expenses for 1998 and 1999. Ms. Chen said she allowed "every single expense that he put on that tape" and disallowed the difference between what was claimed on the financial statement and what was on the tape. Among the expenses allowed by Ms. Chen were 50 per cent of entertainment expenses.

[38]     On the evidence before me I cannot disturb the assessments, except for the reduction in shareholder benefits agreed to by the Crown. Mr. Masseg's appeals will therefore be allowed but only to reduce the amounts of shareholders benefits. In all other respects his appeals will be dismissed. Staber's appeal is dismissed. There will be no orders as to costs.

Signed at Ottawa, Canada, this 10^th day of September 2004.

"Gerald J. Rip"

Rip J.

CITATION:

2004TCC613

COURT FILE NOS.:

2002-2194(IT)I & 2003-3166(IT)I

STYLE OF CAUSE:

Bernd Masseg v. The Queen Staber Enterprises Ltd. v. The Queen

PLACE OF HEARING:

Vancouver, British Columbia

DATE OF HEARING:

August 3, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice Gerald J. Rip

DATE OF JUDGMENT:

September 10, 2004

APPEARANCES:

Agents for the appellants:

Bernd Masseg and Noel M. Porter

Counsel for the Respondent:

Bruce Senkpiel

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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