|
|
|
Date: 20020113 |
|
Docket: 97-3445-IT-I, 97-3446-IT-I, 97-3448-IT-I |
|
BETWEEN: |
|
NELIA ARAGON, OSCAR ARAGON, and RODERIC ARAGON, |
|
Appellants, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
Reasons for Judgment
Bowie J.
[1] These three appeals from reassessments made under the Income Tax Act (the Act) were the subject of preliminary objections to the Court's jurisdiction to hear them at all. In May 2000, Mogan J. held that these objections were without foundation[1]. An appeal from his decision was taken, and then abandoned. When the matters then came on before me to be heard on their merits, the parties agreed that the appeals should be heard together on common evidence. The appeals of all the Appellants for the 1992 taxation year concern the amount of salary or wages that was paid to them by Carnel Accounting Ltd. (Carnel) in that year. Oscar Aragon and Nelia Aragon also appeal from reassessments for the years 1993 and 1994. Those reassessments disallowed their claims to deduct from their other income the losses sustained by them in connection with a rental property that they owned jointly at that time. At the opening of the hearing, counsel for the Respondent conceded that they are entitled to succeed in those appeals. The appeals of Oscar Aragon and Nelia Aragon for the 1993 and 1994 taxation years will therefore be allowed, and the reassessments will be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellants are entitled to deduct their losses incurred in connection with their rental property in the computation of their incomes for those years.
[2] The Appellants own and operate Carnel, a company that carries on the business of bookkeeping and accounting. Mr. Oscar Aragon and his wife Nelia each own 41% of the issued shares, and their son Roderic owns the remaining 18%. All of them work in the business as employees, as well as being the shareholders and directors. Oscar Aragon is the person who in fact makes the business decisions, however. He obtained a B. Comm. degree in the Philippines. Since coming to Canada, he has engaged in self-study to improve his knowledge of accounting. In his evidence, he said that in addition to the ordinary accounting functions, he gives tax planning advice to his customers. The issues that remain in dispute are the correct determination of the salary or wages paid by Carnel to each of the Appellants in 1992, and the related issue of their liability for penalties. The penalties were imposed under subsection 163(2) of the Act. The Minister alleges that the Appellants, either knowingly or as a result of gross negligence, failed to declare all of their incomes for the 1992 taxation year. As to this issue, of course, the Minister has the onus of proof.
[3] In reporting their personal incomes for 1992 from Carnel, Oscar Aragon, Nelia Aragon and Roderic Aragon reported salary or wages in the amounts of $24,000, $24,000 and $14,000, respectively. They contend that these are the correct amounts, and that they were fixed by resolution of the directors of Carnel, who of course are themselves. The Minister's position is that, in addition to these amounts, Oscar Aragon received a further $18,082.24, Nelia Aragon received a further $16,047.82, and Roderic Aragon received a further $10,007.68, all by way of additional salary, wages or other remuneration from Carnel in 1992. They have all been reassessed to include these amounts in their 1992 income, and it is on these amounts that the penalties are based.
[4] The only witness for the Appellants was Oscar Aragon. From his evidence, it appeared that in addition to making the majority of the corporate decisions for Carnel, he also made the bookkeeping entries by which the company recorded its payments to the Appellants that are the subject of these appeals. He said that each of the Appellants drew $1,500 from the company each month. Although it was not entirely clear, I understood him to mean that this was so not only in the year 1992, but also in previous years. He said that from March to June, 1992 he charged these drawings to the salary and wages expense account, and he made the appropriate deductions for income tax withholdings and for Canada Pension Plan contributions ("statutory deductions"), and that these amounts were remitted to the Receiver General as required. He went on to say that in June he realized that he had made a mistake charging these amounts to salary and wages, because they were to be loans and not remuneration. Remuneration, he said, was a matter to be dealt with by the directors at Carnel's year end, which is February 28. He therefore reversed all the entries that he had made for wages between March and June, crediting the salary and wages account and instead charging the amounts drawn by them as debits to their shareholder loan accounts instead. For the remainder of the year, and up to March of the following year, he charged their drawings against their shareholder loan accounts each month. During this period, however, he continued to make the statutory deductions for income tax and CPP in respect of the amounts of their drawings each month, and to remit those amounts to the Receiver General. Mr. Aragon's explanation for the fact that these deductions were made and remitted was that he had telephoned someone at Revenue Canada to ask if he should do this, and he had been told that he should. He did not know the name of the person to whom he spoke, nor could he say exactly how he phrased the question. Carnel issued T4 forms to the Appellants in the amounts that they subsequently declared.
[5] At Carnel's fiscal year end, February 28, 1992, and again on February 28, 1993, the three Appellants, as Carnel's directors, adopted Resolutions to declare the salaries of each of them. The operative words of these Resolutions are identical:[2]
NOW THEREFORE be it resolved that the Company pay wages to the shareholders as follows:
OSCAR B. ARAGON- $24,000.00
NELIA C. ARAGON- 24,000.00
RODERIC C. ARAGON- 14,300.00
In the Resolution adopted on February 28, 1993 the wages for Roderic Aragon are stated to be $14,000.00; otherwise the Resolutions are identical. It is important to note that neither of these Resolutions is specific as to the period for which the salaries specified are to be paid, or if it is additional to any salary already paid to the three directors during fiscal 1993.
[6] The Appellants entered extracts from the general ledger of Carnel as exhibits, and they confirm Mr. Aragon's evidence as to the manner in which he accounted for the drawings of the Appellants, and that income tax and CPP contributions were deducted and remitted each month. The Appellants argue that they were entitled to defer the matter of their compensation for the year 1991 until the 1992 year end of Carnel, and that for 1992 until the 1993 year end of Carnel, thereby deferring their own liability to pay income tax. Their right to do that was not put in issue by the Minister. The Minister's position is simply that they did not in fact do that, because the true character of the Appellants' drawings throughout the year was income and not borrowing.
[7] The assessor, Norman Espenell, gave evidence for the Respondent. He said that he looked at the payments that had been made to the Appellants throughout 1992, and he considered them to be salary or wages, and so he added them to their declared incomes. He reached this conclusion, he said, for two reasons. For the first three months of the year, the payments were charged to the salary and wages account; nothing indicated to him that their character had changed. Moreover, when Mr. Aragon reversed the entries for the period between March and June, and subsequently, when he charged the drawings to the loan accounts, he continued to deduct and remit income tax and CPP contributions, including the employer contributions. Mr. Espenell considered that this indicated that the payments were in fact salary and not loans.
[8] Counsel for the Appellants argued that it is permissible for taxpayers in the position of controlling a family corporation to defer their incomes by drawing against their loan accounts and then fixing their salaries at year end; the income does not go undeclared, but is simply deferred until the following year. I did not understand counsel for the Respondent to take issue with that proposition. Her position was that in this case that was not what was done. The drawings, initially charged to wages and then later recorded as loan advances, and those made after June 1992 which were recorded initially by a debit to the loan accounts, were in fact not loan transactions, but wages or salary, and that is not changed by the way in which Mr. Aragon chose to reflect them in Carnel's books.
[9] It is trite that entries in the accounts do not create reality. The purpose of books of account is to record transactions, but those transactions acquire their real character from the events that actually take place. Their character cannot be changed by the manner in which the person maintaining the accounts chooses to record them. In the present case, I find it highly improbable that Mr. Aragon made the entries that he did between March and June by mistake. He is trained in business administration; his business is bookkeeping and accounting. I find that he recorded the payments that he and his wife and son received during this period as salary because that is what in fact it was. Moreover, the amounts that they drew on a regular basis for the remainder of 1992 were also in the nature of salary. If they were not, there would have been no reason to deduct and remit income tax and CPP contributions thereon, nor to remit the employer's CPP contribution. Exhibit A-1 includes the Statements of Income and Expenses of Carnel for the months between March and November 1992, and it is quite clear from those that the employer contributions were charged as expenses of the corporation throughout that period. As part of his business, Mr. Aragon advises individuals with respect to income tax matters. I find it most unlikely that if he believed that the amounts in question were really on loan account he would have felt it necessary to seek advice from a nameless employee of Revenue Canada. Without a very specific statement of the question that he said he asked the Revenue Canada employee on the telephone, I am not inclined to give any weight to that conversation. The objective evidence is not overcome by Mr. Aragon's very vague evidence as to the advice he says that he was given. I find the drawings to be income. The case was presented on the basis that either Mr. Aragon or the assessor was correct. No issue was raised as to the accuracy of the computation of the amount added to income by Mr. Espenell. The appeals from the assessment of tax must fail.
[10] I turn now to the issue of the penalties. I find that Mr. Aragon has a level of training and expertise in accounting, and in matters pertaining to personal income tax, such that he would have been well aware that the drawings in question were income, and taxable. His appeal with respect to the penalty must fail as well.
[11] Neither Nelia Aragon nor Roderic Aragon gave evidence. Mr. Aragon testified that they worked in the business. His wife did clerical work of some unspecified sort. There was no evidence at all as to the work done by Roderic Aragon. It appears to me from Mr. Aragon's evidence that they left matters as to remuneration in his hands. In saying this, I have not overlooked the fact that they signed the directors' Resolutions of February 1992 and 1993. I have no evidence as to the level of training, knowledge or sophistication of either of them. I cannot say that it would have been unreasonable for them to leave it to the head of the family to deal not only with the matter of their drawings and the way in which they were accounted for, but also their income tax implications. There is no evidence that they knew, as he did, that income tax and CPP were being remitted monthly on these amounts. I find that the Respondent has not discharged the onus of showing that Nelia Aragon and Roderic Aragon acted either knowingly, or with careless disregard for the true character of the amounts that they drew.
[12] The appeal of Oscar Aragon for 1992 is dismissed. The appeals of Nelia Aragon and Roderic Aragon for 1992 are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that their incomes have been assessed correctly, but they are not liable for the penalties assessed. The appeals of Oscar Aragon and Nelia Aragon for 1993 and 1994 are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that they are entitled to take into account their losses in connection with the rental property in the computation of their incomes.
[13] Since the Respondent did not consent to judgment in respect of the rental losses claimed by Oscar Aragon and Nelia Aragon until the day of the hearing, and since Nelia Aragon and Roderic Aragon are successful in respect of the penalty issue, the parties shall each bear their own costs.
Signed at Ottawa, Canada, this 13th day of January, 2003.
|
"E.A. Bowie" |
J.T.C.C.
|
COURT FILE NO.: |
97-3445(IT)I, 97-3446(IT)I and 97-3448(IT)I |
|
STYLE OF CAUSE: |
Nelia Aragon, Oscar Aragon and Roderic Aragon and Her Majesty the Queen |
|
PLACE OF HEARING |
Regina, Saskatchewan |
|
DATE OF HEARING |
October 24, 2002 |
|
REASONS FOR JUDGMENT BY: |
The Honourable Judge E.A. Bowie |
|
DATE OF JUDGMENT |
January 13, 2003 |
|
APPEARANCES: |
|
Counsel for the Appellant: |
Daniel A. Kwochka |
|
Counsel for the Respondent: |
Tracey Harwood-Jones |
|
COUNSEL OF RECORD: |
|
For the Appellant: |
|
Name: |
Daniel A. Kwochka |
|
Firm: |
McKercher McKercher & Whitmore |
|
For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |
|
|
|
Date: 20020113 |
|
Docket: 97-3445(IT)I |
|
BETWEEN: |
|
NELIA ARAGON, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
_______________________________________________________________
Appeals called for hearing on October 22, 2002, and heard on October 24, 2002, on common evidence with the appeals of Oscar Aragon (97-3446(IT)I) and Roderic Aragon (97-3448(IT)I), at Regina, Saskatchewan,
|
Before : The Honourable Judge E.A. Bowie |
||
|
|
||
|
|
Appearances: |
|
|
|
|
|
|
|
Counsel for the Appellant: |
Daniel A. Kwochka |
|
|
|
|
|
|
Counsel for the Respondent: |
Tracey Harwood-Jones |
_______________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1992, 1993 and 1994 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income:
1. For 1992, additional employment income in the amount of $16,047.82 has been correctly assessed and will be included in the Appellant's income but the Appellant is not liable for the penalties assessed; and
2. Upon consent of the Respondent, for 1993 and 1994, the Appellant is entitled to claim rental losses in the amount of $3,894.57 and $2,631.93, respectively, for the property located at 3695 Hazel Grove, Regina Saskatchewan.
There will be no order as to costs.
Signed at Ottawa, Canada, this 13th day of January, 2003.
|
"E.A. Bowie" |
J.T.C.C.
|
|
|
Date: 20020113 |
|
Docket: 97-3446-IT-I |
|
BETWEEN: |
|
OSCAR ARAGON, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
_______________________________________________________________
Appeals called for hearing on October 22, 2002, and heard on October 24, 2002, on common evidence with the appeals of Nelia Aragon (97-3445(IT)I) and Roderic Aragon (97-3448(IT)I), at Regina, Saskatchewan,
|
Before : The Honourable Judge E.A. Bowie |
||
|
|
||
|
|
Appearances: |
|
|
|
|
|
|
|
Counsel for the Appellant: |
Daniel A. Kwochka |
|
|
|
|
|
|
Counsel for the Respondent: |
Tracey Harwood-Jones |
_______________________________________________________________
JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 1992 taxation year is dismissed.
Upon consent of the Respondent, the appeals from assessments of tax made under the Act for the 1993 and 1994 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant is entitled to claim rental losses in the amount of $3,894.57 and $2,631.93, respectively, for the property located at 3695 Hazel Grove, Regina Saskatchewan.
There will be no order as to costs.
Signed at Ottawa, Canada, this 13th day of January, 2003.
|
"E.A. Bowie" |
|
J.T.C.C.
|
|
|
Date: 20020113 |
|
Docket: 97-3448(IT)I |
|
BETWEEN: |
|
RODERIC ARAGON, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
_______________________________________________________________
Appeal called for hearing on October 22, 2002, and heard on October 24, 2002, on common evidence with the appeals of Nelia Aragon (97-3445(IT)I) and Oscar Aragon (97-3446(IT)I), at Regina, Saskatchewan,
|
Before : The Honourable Judge E.A. Bowie |
||
|
|
||
|
|
Appearances: |
|
|
|
|
|
|
|
Counsel for the Appellant: |
Daniel A. Kwochka |
|
|
|
|
|
|
Counsel for the Respondent: |
Tracey Harwood-Jones |
_______________________________________________________________
JUDGMENT
The appeal from assessments of tax made under the Income Tax Act for the 1992 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, additional employment income in the amount of $10,007.68 has been correctly assessed and will be included in the Appellant's income but the Appellant is not liable for the penalties assessed.
There will be no order as to costs.
Signed at Ottawa, Canada, this 13th day of January, 2003.
|
"E.A. Bowie" |
|
J.T.C.C.