Date: 20010515
Docket: 94-2224-IT-I
BETWEEN:
LINDA DIANNE ARDITO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] Linda Dianne Ardito appeals income tax assessments for 1989 and 1990 in which the Minister of National Revenue ("Minister") disallowed business expenses claimed by Mrs. Ardito on the basis she did not carry on a business in 1989 and 1990 and imposed penalties of $2,220.10 and $1,978.15, respectively pursuant to subsection 163(2) of the Income Tax Act ("Act").
[2] The appellant, ably represented by counsel, did not lead any direct evidence with respect to the deductibility of expenses. She was called by the Crown to testify since the Crown had the burden of establishing the facts justifying the assessments of the penalties: subsection 163(3).
[3] Mrs. Ardito purported to start a secretarial and typing business in 1989 to help students. She would type papers and essays at first for her daughter's friends and later, by word of mouth, for other high school and university students. (In 1989 her daughter was completing high school and in 1990 she was studying at McMaster University). Mrs. Ardito also recalled having non-student clients: Country Wide Glass, Black Tie Furnishings, Southbrooke Retirement Home, Lane Appliances and House of Braemar.
[4] Mrs. Ardito has a grade 13 Ontario high school education. She operated the business out of her home and had a computer and printer. By 1990 her office also included bookshelves and office furniture.
[5] Because she did not have any accounting background Mrs. Ardito engaged the services of one Lenore Job to prepare her income tax returns for 1989, 1990 and 1991. She had heard of Ms. Job through her husband and friends. She discussed her activities with Ms. Job and provided her with information, including a bundle of receipts. When the returns were completed and ready for her signature, Mrs. Ardito "did not sit down" with someone at Ms. Job's firm to review the returns. She looked over the 1989 return but it "meant nothing to me". The appellant never questioned Ms. Job's ability to prepare the returns.
[6] Respondent's counsel questioned the appellant's Statement of Income and Expenses included with her 1989 tax return.
[7] Mrs. Ardito reported income of $2,527. She said she kept a book recording her sales but did not know where the book was. Apparently Revenue Canada, at the time, seized documents from Ms. Job's premises and if any of the documents were those of Mrs. Ardito, they were not returned to her before trial, counsel advised. In his submissions, appellant's counsel acknowledged that it is plausible that Ms. Job's firm was remiss in its duties to keep records in order. However, there is no evidence that Mrs. Ardito's salesbooks were in the custody of the Crown at time of trial.
[8] Expenses aggregating $21,021 were claimed by Mrs. Ardito for 1989. The amount of expenses "did not catch [her] attention" when she signed her 1989 tax return. She was not curious why she was entitled to a tax refund of $6,623.
[9] The appellant could not recollect what her advertising expenses of $2,893 represented. Her advertising consisted of flyers and word of mouth.
[10] Automobile expenses by Mrs. Ardito in 1989 were $7,587. This amount "did not catch my eye" since, she said, she was not a bookkeeper. She did not know the reason the use of the automobile was allocated as to 53 per cent personal and the balance for business.
[11] Mrs. Ardito used her personal bank account for the business in 1989 and claimed bank charges of $296.48.
[12] Mrs. Ardito could not recall expenses of $2,796 for repairs and maintenance, although she believes she might have purchased a new printer, a capital expense, and upgraded her computer.
[13] No person was employed by Mrs. Ardito in 1989 but she claimed salary and wage expenses of $1,800. She purchased supplies when she started the business but could not justify the claim for $2,998, more than her income for the year.
[14] Similar claims were made for 1990. On sales of $2,980, Mrs. Ardito claimed a loss of $16,418. She claimed "purchases" of $1,812, but did not know what the purchases represented, other than paper and folders. Advertising and promotion expenses were $3,766. She stated the distribution of flyers was "more extensive" than in 1989; she not only had students as customers but commercial customers as well.
[15] Mrs. Ardito claimed an insurance expense of $1,657 in 1990, but could not recall the nature of the insurance. She acknowledged she did not have insurance for the business.
[16] The automobile expenses of $3,387 claimed by Mrs. Ardito in 1990 did not include an additional expense for the automobile of $3,738 for depreciation. She used the car for delivery and attending at various businesses. She also deducted $457.41 for "work clothing", $1,511 as office expenses and $686.67 for supplies. She was unable to recollect what the office expenses represented.
[17] In reply to respondent's counsel, Mrs. Ardito stated that she did not believe the figures on her income tax return for 1990 were "untoward at the time" she signed the return. She relied on Ms. Job; she, herself, did not understand financial statements.
[18] Mr. William Stark, a tax auditor with the Canada Customs and Revenue Agency ("CCRA"), the successor to Revenue Canada, stated that Mrs. Ardito was assessed penalties because she claimed losses on a business that did not exist. The expenses claimed were "planted"; she claimed personal expenses as business expenses.
[19] Revenue Canada found no evidence of revenue by Mrs. Ardito during the years in appeal. There was no evidence of sales. Mr. Stark explained that usually Revenue Canada (or the CCRA) expects to see sales invoices including description of services provided and the fee, as well bank deposit slips and a sales journal. None of this was available from Mrs. Ardito. Revenue Canada authorities performed an audit at Ms. Job's office and "she provided what she had to us". She did not provide anything to verify sales for 1989 and 1990. Nor did she provide any documents to support the expenses claimed for 1989, although "some" documents were provided for 1990.
[20] According to Mr. Stark, Mrs. Ardito was advised at a meeting in October 1992 that Revenue Canada recommended assessments based on the information taken from Ms. Job. In reply to questions by Revenue Canada officers, Mrs. Ardito indicated she was not aware how figures were calculated in her tax returns; she said she gave everything to Ms. Job. She could not advise what documents, if any, were missing.
[21] Mrs. Ardito's situation is unlike that of Mr. Cyrus Udell[1] who was assessed a similar penalty due to the apparent gross negligence of his accountant. Mr. Udell, unlike Mrs. Ardito, recorded his transactions meticulously in an account book and all errors in his tax return were those of the accountant. Mr. Udell assumed the losses were due to capital cost allowances. Mrs. Ardito's records were apparently deficient. Upon reviewing her tax returns before signing them - if she reviewed them - she chose to ignore even inordinately large amounts of specific expenses. One need not have any accounting experience to acknowledge to one's self what one may have reasonably spent over the year for advertising or repairs and maintenance or salary or supplies or insurance, if one had insurance, for example. Mrs. Ardito chose not to question the questionable. She was privy to the errors of the accountant.[2] She relied on her accountant because she liked the result, a tax refund.
[22] Mrs. Ardito's neglect in reviewing her tax returns, including the failure to have proper or even basic records for the accountant, discussing the returns with the accountant and observing what was entered on the returns constituted a greater neglect than the failure to use reasonable care as described by Strayer J. (as he then was) in Venne v. The Queen[3]. It involved a high degree of negligence tantamount to intentional acting. She was indifferent as to whether she complied with the law or not. She was grossly negligent and the penalties are well founded.
[23] The appeals are dismissed.
Signed at Ottawa, Canada, this 15th day of May 2001.
"Gerald J. Rip"
J.T.C.C.