2005-3516(IT)I
BETWEEN:
and
REASONS FOR JUDGMENT
(Delivered orally from the bench on March 23, 2006,
in Vancouver, British Columbia, and modified for accuracy and clarity.)
Archambault J.
[1] Mr. Balint Vasarhelyi is appealing assessments issued by the Minister of National Revenue (Minister) under the Income Tax Act (ITA) for the 2001 and 2002 taxation years and under the Excise Tax Act (ETA) with respect to the period from January 1, 2001, to December 31, 2002. The facts on which the various assessments are based are essentially the same, and that is why all the appeals were heard on common evidence.
[2] By assessments under the ITA, the Minister added to the income of Mr. Vasarhelyi as unreported business income an amount of $33,906.14 for the 2001 taxation year, and $31,038.55 for the 2002 taxation year. In addition to adding this unreported income, the Minister disallowed business expenses of $13,817.72 for the 2001 taxation year and $19,935.44 for the 2002 taxation year. Finally, the Minister assessed penalties pursuant to subsection 163(2) ITA, but only in respect of the unreported business income.
[3] With respect to the ETA assessment, the Minister added to the taxable supplies declared by Mr. Vasarhelyi amounts equivalent to the unreported business income mentioned above, and he also disallowed input tax credits (ITCs) claimed by Mr. Vasarhelyi with respect to any expenses that were not properly supported by invoices containing the prescribed information.
[4] At the beginning of the hearing, Mr. Vasarhelyi admitted the following facts which the Minister had relied on in issuing its ITA assessments:
11. [...]
a) the Appellant operates a proprietorship business (the "Business") as an owner-operator of a taxicab (the "Vehicle") with Black Top Cabs (the "Company");
b) the Appellant is licensed to operate in Vancouver;
c) the Appellant holds one share in the Company which entitles him to work one twelve-hour shift, from 5:00 p.m. to 5:00 a.m., for seven days a week;
d) the Appellant co-owns the Vehicle with another driver whose shift is from 5:00 a.m. to 5:00 p.m.;
[...]
Business income
h) in 2001 and 2002, the Appellant did not have any other sources of income other than income from the Business[1];
i) in 2001 and 2002, the Appellant made monthly mortgage payments of $1,670.88 for his personal residence at 124 East Windsor Road in North Vancouver;
j) the Appellant's reported net business income of $2,725.45 in 2001 and his claimed net business loss of $272.50 in 2002 [...]
k) the Appellant co-mingled [sic] the Business funds with his personal funds;
[...]
Salaries and wages
[...]
u) the Appellant remitted the Deductions[2] to the Receiver General of Canada;
[...]
12 In addition to the above assumptions, in concluding that the Appellant knowingly, or under circumstances amounting to gross negligence, in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in his 2001 and 2002 income tax returns, the Minister relied on the following facts:
a) the Appellant has been in the Business since 1989 when he purchased his one share of the Company;
b) the Appellant was personally involved in the daily operations of the Business as the owner-operator of the Vehicle;
c) the Appellant did not have a separate bank account for the Business;
[...]
e) the amount of cash deposits was substantial and exceeded the reported income;
[...]
g) the Appellant's net business income of $2,725.45 reported in 2001 and his net business loss of $272.50 claimed in 2002 were unreasonable based on his ability to pay for his personal and living expenses in addition to his mortgage payments; and
[...]
[5] With regard to the ETA assessment, Mr. Vasarhelyi admitted the following facts:
7. [...]
a) the Appellant is an individual operating a taxi business;
b) the Appellant co-owns a taxi (the "Taxi") with another driver;
c) at all material times, the Appellant made taxable supplies;
d) at all material times, the Appellant collected or was required to collect GST at the standard rate of 7% on the taxable supplies;
e) the Appellant registered under Part IX of the Act, effective January 1, 1991, and was assigned GST registration number 123269391RT;
f) the Appellant was required to file its GST returns on [a] quarterly basis;
[...]
h) at the material times, the Appellant [was] entitled to drive the Taxi on a twelve hour shift, from 5 P.M. to 5 A.M., seven days a week;
[...]
l) at the material times, the Appellant did not have any other sources of income;
m) in 1998, the Appellant purchased his personal residence at 124 East Windsor Road in North Vancouver, British Columbia;
n) during the Assessment Period, the Appellant made monthly mortgage payment [sic] of $1,670.88 for his personal residence;
[...]
p) the Appellant's reported incomes were not sufficient to support his mortgage payments and his personal and living expenses during the Assessment Period;
[...]
8. In addition to the facts assumed by the Minister in paragraph 7 above, the Deputy Attorney General relies on the following facts in support of the assessment of gross negligence penalties under section 285 of the Act:
[...]
b) the Appellant was personally involved in the daily operations of business activities.
Factual background
[6] Mr. Vasarhelyi has been carrying on a taxi business since at least 1989. At that time, he bought a share in a company called Black Top Cabs (BT) at a cost of $50,000, which was fully paid within five or six years.
[7] The Minister's auditor limited his audit to the 2001 and 2002 taxation years, although it was his understanding that the annual income declared by Mr. Vasarhelyi for the previous years was not in excess of $5,000. As mentioned above, the amount reported as his net business income for 2001 was $2,725.45, and a net business loss of $272.50 was reported for 2002. However, Mr. Vasarhelyi filed with the Minister amended tax returns in which the amount shown as his net business income was increased to $4,658 for 2001 and $1,535 for 2002 as a result of lower expense claims[3].
[8] Given that the net income declared by Mr. Vasarhelyi did not seem to be consistent with his standard of living - including his personal residence, on which he had to make monthly mortgage payments of $1,670.88 - the auditor believed that Mr. Vasarhelyi did not declare all of his income, so he requested that Mr. Vasarhelyi provide his bank account records. A review of Mr. Vasarhelyi's three bank accounts revealed a pattern of frequent and generally regular deposits of money. The amounts usually varied from $100 to $300 or $400. Occasionally, there were also more substantial deposits, which seem to be consistent with the fact that they were made after a long period without regular deposits. For example, $4,440 was deposited on August 29, 2001. The previous two deposits were dated July 7, 2001, and consisted of one $290 deposit and another of $160.
[9] The Minister's auditor assumed that these deposits represented the cash portion of the fares that Mr. Vasarhelyi collected when carrying on his taxi business in 2001 and 2002. The details of the auditor's computations of undeclared income are set out in Exhibit R-9. He was careful not to include in the income column either amounts that represented a transfer from one bank account to another or amounts that represented chequesreceived by Mr. Vasarhelyi corresponding to amounts paid by BT and which are shown in Exhibit R-10. These amounts correspond to the amounts of credit card, debit card and charge account fare payments collected by BT. From these funds collected by BT were deducted expenses that had been incurred by Mr. Vasarhelyi in respect of services provided by BT, such as car repairs, or in respect of some other expenses paid by BT for the benefit of Mr. Vasarhelyi, such as insurance premiums. All these expenses deducted by BT from the cab fares that it collected appear in Exhibit R-10 and ITCs were granted by the Minister in respect of these expenses.
[10] The auditor was quick to admit a mistake I pointed out to him that he had made in computing Mr. Vasarhelyi's undeclared income for the 2002 taxation year. An amount of $504.35 was counted twice and so should be removed from Mr. Vasarhelyi's unreported income for that year and from the taxable supplies for the relevant period.
Analysis
[11] In his testimony, Mr. Vasarhelyi offered various explanations for the above-mentioned deposits. Unfortunately, they were too vague. For instance, he stated that some of that money could have been deposits made by other persons or entities, such as non-profit organizations, because he said that he was involved in such activities as badminton and theatre. He also declared that his sister lived with him part of the year and that she contributed to the payment of household expenses. However, he could not identify which of his deposits corresponded to money contributed by other persons or entities or by his sister. He even declined to state his sister's name. He declined also to indicate when and how these payments were made, and whether there was any obligation to reimburse any of the amounts involved. So the Court is unclear as to the scope of these alleged arrangements.
[12] With respect to the evidence presented by Mr. Vasarhelyi relating to his expenses, counsel for the Minister was agreeable to some of these being allowed, among them salary and wage expenses of $6,033.66 for 2001 and $6,967.57 for 2002. The Minister also agreed that the office expenses should be increased by $1,000 for the 2001 taxation year. Moreover, it was admitted that the auditor reduced the maintenance and repair expense amount by $578 for 2001 and $2,473 for 2002, and these amounts represent Canadian Natural Gas rebates that were deducted twice, so the maintenance and repair expenses should be increased by corresponding amounts.
[13] With respect to the other disallowed maintenance and repair expenses, much of the evidence introduced by Mr. Vasarhelyi at the hearing related to expenses which appear on the BT statements and these expenses had already been allowed by the Minister's auditor. To the extent that the claims for other similar expenses are not supported by invoices, the Court concludes that the evidence is insufficient. No other maintenance and repair expenses should therefore be allowed.
[14] With respect to the meal and entertainment expenses, Mr. Vasarhelyi indicated that he held three parties during the course of the 2001 taxation year, which were attended by friends of his and his girlfriend. Mr. Vasarhelyi stated that some of these guests were also people who used his taxi services. In my view, these expenses were more of a personal than a business nature. I do not believe that they were incurred for the purpose of earning income from Mr. Vasarhelyi's taxi operations. These expenses are therefore not deductible.
[15] The statements of income and expenses appearing in Schedules A and B attached to the reply to the notice of appeal in respect of the appeals under the ITA show $2,823.65 in other expenses for 2001 and $2,925.03 for 2002. In a letter addressed to the Minister, Mr. Vasarhelyi acknowledged that he had made computation errors in the tax returns he filed, and that these expenses should be reduced to $890 for 2001 and $1,027 for 2002. With respect to the remaining expenses that he was still claiming, Mr. Vasarhelyi's explanations were as follows. First, some of these expenses represent a notional charge of interest for the fact that there was a delay in receiving payment from BT with respect to fares collected through credit cards and he claimed an arbitrary amount for this. He did not describe how he computed it, but he did admit during his testimony that he had not paid any interest to anyone and had not received any interest income from anyone either.
[16] The balance of his expenses relates to such items as car-seat covers, car washes, floor mats and a cable. However, he did not provide any invoices or any other documentary support for these claims. Furthermore, there is no breakdown between the notional interest charges and these other expenses. The Court is thus not in a position to grant any of these expense claims.
[17] The most important remaining issues are whether the deposits calculated by the auditor represent income in the hands of Mr. Vasarhelyi and whether the Minister has been successful in discharging his burden of proving that Mr. Vasarhelyi knowingly, or under circumstances amounting to gross negligence, made a false statement in his income tax returns and his GST returns.
[18] With respect to the unreported income, I accept the argument put forward by counsel for the Minister that these amounts represent income. Not only were the explanations offered by Mr. Vasarhelyi to the Court vague, but they were not corroborated by any convincing evidence such as documents or the testimony of another witness. The evidence provided by Mr. Vasarhelyi was not sufficiently probative to convince the Court.
[19] The strategy Mr. Vasarhelyi adopted was to raise the possibility that his bank deposits were not income under the ITA. This is not sufficient to discharge Mr. Vasarhelyi's burden of proving that these deposits do not represent income. With respect to the penalties, the burden of proof was on the Minister. Each party's burden of proof is that normally applied in civil matters, that is, proof on a balance of probabilities; it is not the burden applied in criminal matters, which requires proof beyond any reasonable doubt. In a criminal matter, it would be sufficient in order for Mr. Vasarhelyi to rebut the Minister's evidence in support of the assessment of the penalties that I have a reasonable doubt that the deposits were money from taxi fares paid in cash; but this is not a criminal matter. The issue here is whether these deposits were, on a balance of probabilities, unreported income. For the reasons given by counsel for the Minister, I have come to the conclusion that they do represent unreported income.
[20] With regard to the penalties, I conclude on a balance of probabilities that Mr. Vasarhelyi knowingly, or under circumstances amounting to gross negligence, made a false statement in his tax returns. The evidence has disclosed that he signed his tax returns, that he had direct control over the collection of his income, and that he knew that all the fares collected from his clients had to be reported. On a balance of probabilities, I believe that he underreported his income by $33,906 for 2001 and $30,534.20 for 2002. I believe also that he knowingly, or at least under circumstances amounting to gross negligence, failed to disclose these amounts in his tax returns. Therefore, I find that the penalties are well founded. Obviously the penalties will have to be reduced to take into account the fact that the unreported income amount has been decreased from $31,038.55 to $30,534.20 for 2002.
[21] Regarding the GST assessment, for the same reasons I have come to the conclusion that the taxable supplies should be increased by the amounts of the unreported income. With respect to the ITCs that were disallowed by the Minister, the ETA is very clear. Subsection 169(4) of that Act and section 3 of the Input Tax Credit Information (GST/HST) Regulations require that a registrant have the prescribed information before requesting input tax credits in GST returns. This information includes an invoice on which the registration number and the name of the supplier must appear.
[22] Given the fact that no evidence was introduced to show that this relevant information was provided in connection with the ITCs refused by the Minister, I see no reason to modify the ETA assessments as far as the ITCs are concerned.
[23] For all these reasons, the appeals from the assessments made under the ITA are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the underreported business income should be reduced by $504.35 for the 2002 taxation year and the penalty for gross negligence should be reduced accordingly, and the appellant is entitled to claim additional expenses in the amounts of $578 for maintenance and repairs, $1,000 for office expenses and $6,033.66 for salaries and wages for the 2001 taxation year, and $2,473 for maintenance and repairs and $6,967.56 for salaries and wages for the 2002 taxation year.
[24] The appeal from the assessment made under the ETA is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant's unreported taxable supplies for January 2002 should be reduced by $504.35. The penalties should be reduced accordingly.
Signed at Ottawa, Canada, this 3rd day of August 2006.
COURT FILE NOS.: 2005-3515(GST)I
2005-3516(IT)I
STYLE OF CAUSE: BALINT VASARHELYI v. THE QUEEN
PLACE OF HEARING: Vancouver, British Columbia
DATES OF HEARING: March 22 and 23, 2006
REASONS FOR JUDGEMENT BY: The Hon. Justice Pierre Archambault
DATE OF JUDGMENT: March 29, 2006
JUDGMENT DELIVERED
ORALLY : March 23, 2006
REASONS FOR JUDGMENT: August 3, 2006
APPEARANCES:
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada