Auto Maculate Inc. v. The Queen

Auto Maculate Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-09-18
Neutral citation
2020 TCC 105
File numbers
2017-1005(IT)I, 2017-1330(IT)I, 2017-1331(IT)I, 2017-2850(IT)I, 2017-4959(GST)I, 2017-4985(GST)I
Judges and Taxing Officers
Siobhan Monaghan
Subjects
Income Tax Act
Notes
Decision Content
Dockets: 2017-1005(IT)I
2017-2850(IT)I
2017-4985(GST)I
BETWEEN:
AUTO MACULATE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Dockets: 2017-1330(IT)I
2017-4959(GST)I
AND BETWEEN:
PHILIP WAHAB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2017-1331(IT)I
AND BETWEEN:
STEPHANIE WAHAB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard, on common evidence, on December 4, 2018; February 11, 2019; June 12 and 13, 2019; and September 18, 19 and 20, 2019 at Hamilton, Ontario
Before: The Honourable Justice K.A. Siobhan Monaghan
Appearances:
Agent for the Appellants,
Auto Maculate Inc. and Stephanie Wahab:
Philip Wahab
For the Appellant, Philip Wahab:
The Appellant himself
Counsel for the Respondent:
Kevin Hong
JUDGMENT
In accordance with the attached Reasons for Judgment:
(a) Philip Wahab’s appeal made under the Excise Tax Act of the reassessment of the GST/HST reporting period ended December 31, 2008 (Court File No. 2017-4959(GST)I), and Auto Maculate Inc.’s appeal made under the Excise Tax Act of the reassessment of its GST/HST reporting period ended December 31, 2010 (Court File No. 2017-4985(GST)I) are allowed and the reassessments are referred back to the Minister of National Revenue for reassessment on the basis that the unreported sales for GST/HST purposes are the same as their unreported income under their income tax assessments for the 2008 and 2010 taxation years, respectively;
(b) Philip Wahab’s appeal under the Excise Tax Act of the reassessment of the GST/HST reporting period ended December 31, 2009 (Court File No. 2017-4959(GST)I) and Auto Maculate Inc.’s appeal made under the Excise Tax Act of the GST/HST reporting period ended December 31, 2009 (Court File No. 2017-4985(GST)I) are dismissed;
(c) Philip Wahab’s income tax appeal (Court File No. 2017-1330(IT)I) is disposed of as follows:
i) his appeal from reassessments made under the Income Tax Act for his 2008 and 2010 taxation years is dismissed; and
ii) in accordance with subsection 171(2) of the Income Tax Act, and Mr. Wahab’s agreement made pursuant to section 146.1 of the Tax Court of Canada Rules (General Procedure), his appeal from the reassessment made under the Income Tax Act for his 2009 taxation year is dismissed insofar as the appeal relates to the unreported business income and the arrangements with North American Financial Group;
(d) Stephanie Wahab’s appeal from reassessments made under the Income Tax Act for her 2009 and 2010 taxation years (Court File No. 2017-1331(IT)I) is dismissed;
(e) Auto Maculate Inc.’s appeals made under the Income Tax Act for the taxation year ended December 31, 2009 (Court File No. 2017-2850(IT)I) and for the taxation year ended December 31, 2010 (Court File No. 2017-1005(IT)I) are dismissed; and
(f) The Respondent shall have 30 days from the date of this Judgment to make submissions on costs, and shall send a copy of those submissions to the Appellants immediately after they are filed with the Court. The Appellants shall have 30 days thereafter to make submissions on costs if they wish to do so. If the Respondent chooses not make submissions, no costs shall be awarded to any party.
Signed at Ottawa, Canada, this 18th day of September 2020.
“K.A. Siobhan Monaghan”
Monaghan J.
Citation: 2020 TCC 105
Date: 20200918
Dockets: 2017-1005(IT)I
2017-2850(IT)I
2017-4985(GST)I
BETWEEN:
AUTO MACULATE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Dockets: 2017-1330(IT)I
2017-4959(GST)I
AND BETWEEN:
PHILIP WAHAB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2017-1331(IT)I
AND BETWEEN:
STEPHANIE WAHAB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Monaghan J.
I. THE REASESSMENTS AND APPEALS
[1] Philip and Stephanie Wahab (“the Wahabs”) and Auto Maculate Inc. (“Inc.”), a corporation jointly owned by the Wahabs, were reassessed based on a net worth assessment. The Minister’s position is that the Auto Maculate [1] business, initially operated by Philip Wahab as a sole proprietor, and later operated by Inc., did not report all of the income earned.
[2] The reassessments under appeal include the 2008, 2009 and 2010 taxation years for Mr. Wahab, the 2008 and 2009 reporting periods for Mr. Wahab, the 2009 and 2010 taxation years for Mrs. Wahab, and the 2009 and 2010 taxation years and reporting periods for Inc.
[3] The Minister added unreported business income from the sole proprietorship to Mr. Wahab’s income in 2008 and 2009. Because the Auto Maculate business was transferred to Inc. in October 2009, the Minister added unreported business income to Inc.’s income in 2009 and 2010. (The unreported business income for 2009 was allocated as to 75% to Mr. Wahab and as to 25% to Inc. based on the part of 2009 they carried on the Auto Maculate business.).
[4] Because the Wahabs each own 50% of Inc.’s shares, one-half of Inc.’s unreported income was also added to the income of each of the Wahabs in 2009 and 2010 on the assumption that they used the resulting funds for personal expenses.
[5] The reassessments under the Excise Tax Act (Canada) (the “ETA”) seek HST on the unreported business income that the Minister assessed to Mr. Wahab in 2008 and 2009 and to Inc. in 2009 and 2010.
[6] Neither party put the reassessments under appeal in evidence. However, based on the Reply:
Philip Wahab’s income tax reassessment is dated December 23, 2016, and was issued following his objections to assessments dated March 18, 2013;
Stephanie Wahab’s income tax reassessment is dated November 2, 2016 and was issued following an objection to a reassessment dated March 14, 2013;
Inc.’s 2009 income tax reassessment is dated March 6, 2013 and was confirmed on April 4, 2017 following Inc.’s objection;
Inc.’s 2010 income tax reassessment is dated December 5, 2016 and was issued following Inc.’s objection to a reassessment dated March 6, 2013; and
the reassessments under the ETA were issued in 2013 to Mr. Wahab and Inc.
[7] The income tax reassessments under appeal include the following amounts of unreported income:
Philip Wahab: 2008 - $25,265 2009 - $11,727 2010 - $17,954
Stephanie Wahab: 2009 - $1,675 2010 - $17,955
Auto Maculate Inc.: 2009 - $3,351 2010 - $35,909
[8] Although the Wahabs and Inc. were reassessed for income tax purposes in 2016, no new reassessments of HST were issued. Thus, the HST appeals are from the 2013 reassessments.
[9] The Respondent has conceded that the income tax reassessment of Mr. Wahab’s 2008 taxation year was issued beyond the normal reassessment period but contends that the reassessment is valid because Mr. Wahab’s 2008 return included misrepresentations attributable to carelessness, neglect or wilful default.
[10] The reassessment of Mr. Wahab’s 2009 taxation year includes an assessment related to charitable donation tax credits. However, that aspect of Mr. Wahab’s appeal is governed by an agreement Mr. Wahab made pursuant to Rule 146.1 of the Tax Court of Canada Rules (General Procedure) (the “Rules”) to be bound by the lead case. Accordingly, for his 2009 taxation year, this decision deals only with Mr. Wahab’s other issues related to the appeal of his 2009 income tax reassessment.
[11] Finally, the Appellants have each been assessed penalties under subsection 163(2) of the Income Tax Act (the “Act”) and Mr. Wahab and Inc. have been assessed penalties under section 285 of the ETA.
II. CONCESSIONS ON HST ASSESSMENTS
[12] In 2013, the Minister reassessed Philip Wahab and Inc. in respect of unremitted HST on unreported business income. The reassessments increased Philip Wahab’s taxable sales in 2008 and 2009 by the same amount as he was assessed for unreported business income in those years under the income tax reassessments. Similarly, the reassessments increased Inc.’s taxable sales in 2009 and 2010 by the amount added to Inc.’s income as unreported business income in those years under the income tax reassessments.
[13] The Minister’s 2016 income tax reassessments reduced Mr. Wahab’s unreported business income in 2008 and Inc.’s unreported business income in 2010. However, new HST reassessments were not issued in 2016.
[14] On the 5th day of the hearing of the appeals, Respondent’s counsel conceded that the HST reassessments under appeal had not been updated to take into account changes made to the income tax reassessments following the objections. In particular, the Respondent concedes that Mr. Wahab’s 2008 HST reassessment should be adjusted by reducing the unreported sales in the period ended December 31, 2008 from $412,986 to $378,212. This $34,774 reduction matches the reduction in Mr. Wahab’s unreported income for income tax purposes for 2008 following objection, and is reflected in his 2008 income tax reassessment under appeal.
[15] Similarly, the Respondent concedes that the 2010 HST reassessment of Inc. should be adjusted by reducing the unreported sales in the period ended December 31, 2010 by $2,070. This $2,070 reduction matches the reduction in Inc.’s unreported income for income tax purposes for 2010 following objection, and is reflected in Inc.’s 2010 income tax reassessment under appeal.
[16] Accordingly Mr. Wahab’s appeal of the reassessment of his HST reporting period ended December 31, 2008 and Inc.’s appeal of the reassessment of its reporting period ended December 31, 2010 will be allowed to the extent of the Respondent’s concessions.
III. ASSUMPTIONS OF FACT IN THE REPLIES
[17] In reassessing the Wahabs and Inc., the Minister made a number of assumptions common to all of the reassessments. Many of the assumptions were not controversial and were accepted by the Wahabs explicitly. No evidence was led to contradict certain other assumptions and accordingly I have accepted them as proven.
[18] Most notably, the Appellants did not dispute the Respondent’s assumptions regarding the fair market value of their assets or liabilities as at the end of each of the 2007, 2008, 2009 or 2010 taxation years, or the increase in their net worth, except in very limited ways as described in more detail below.
[19] The Minister’s assumptions regarding assets and liabilities may be summarized as follows:
As of December 31, 2007
As of December 31, 2008
As of December 31, 2009
As of December 31, 2010
Assets
$423,736.88
$627,898.78
$1,131,535.78
$1,129,180.06
Liabilities
$156,845.85
$153,135.73
$519,538.80
$428,776.60
Net Worth
$266,891.03
$474,763.05
$611,996.98
$700,403.46
Net Worth Prior Year
$266,891.03
$474,763.05
$611,996.98
Increase in Net Worth
$207,872.02
$137,233.93
$88,406.48
[20] The Wahabs’ only quarrel with the increases in net worth related to additional assets at the end of 2007 that they assert were not taken into account, resulting in an overstatement of the increase in net worth over the course of 2008.
[21] The primary focus of the Appellants’ appeals was to explain the increases in net worth by identifying i) additional non-taxable sources of cash and ii) lower personal expenditures than those assumed by the Minister.
[22] The Minister assumed the Wahabs’ personal expenditures in 2008, 2009 and 2010 were $28,202.54, $23,002.49 and $43,350.18, respectively. [2] The assumption regarding personal expenditures that the Appellants contested with vigour was the amount spent on food at grocery stores.
[23] The Minister’s income tax assessments assume that the Wahabs’ personal expenditures on food (other than in restaurants) in 2008, 2009 and 2010 were $5,420, $5,430 and $5,561, respectively. The Wahabs contend they spent significantly less.
[24] The Wahabs also argued that some expenses the Minister treated as personal were not personal expenditures, but rather related to income-earning activities.
IV. BACKGROUND FACTS
[25] Stephanie and Philip Wahab married in the summer of 2007, following which Stephanie moved from her parents’ home in Ohio to Canada. In the spring of that same year, Philip had started Auto Maculate as a sole proprietorship.
[26] Once Stephanie Wahab moved to Canada, she became an employee of the sole proprietorship and, following the incorporation of the Auto Maculate business in late 2009, an employee of Inc. Accordingly, she had employment income in 2007, 2008, 2009 and 2010. Philip Wahab reported business income until the sole proprietorship was incorporated in October 2009. Thereafter Inc. reported business income and the Wahabs reported income as employees of Inc. Stephanie and Philip Wahab are equal shareholders of Inc.
[27] The Auto Maculate business was described as the business of touch-up cleaning of cars for dealerships with a focus on used cars in dealership lots. Philip Wahab said he came up with the idea after visiting a franchise show in late 2006. Once a car has been cleaned and detailed by the dealership, Auto Maculate is responsible for any touch-up cleaning and to maintain the cleanliness it places plastic masking over the car floormats below the front seats. Mr. Wahab visits the dealerships weekly to determine whether new used cars on the lot need cleaning and whether the masking on other cars needs replacing, for example because of intervening test drives.
[28] At the outset, Auto Maculate’s business did not detail or “deep clean” cars. The dealerships did that. Auto Maculate then tidied them up, placing the plastic masking over the floormats and, in some cases, added a “carpet” with the relevant dealership’s logo over the masking. However, this changed in 2008 when Auto Maculate assumed the relevant detailing staff of a large client and took on responsibility for detailing cars. Mr. Wahab described the Auto Maculate business as taking off in 2008, securing this client being an important driver of the increase in revenues.
[29] The Auto Maculate business reported modest revenues in 2007 but revenues increased significantly in 2008, with 2008 having the highest reported revenues of any of the years under appeal. In 2007, reported revenues were $33,098, but in 2008 they exceeded $320,000. Mr. Wahab said revenues fell in 2009 and 2010 ($192,238 reported) with the downturn in the economy and the loss of a significant customer part way through 2009.
[30] Mr. Wahab purchased his first house (the Andros Property) at the end of 2006, [3] initially as a property to be rented out but later to live in as their personal residence. By the time he purchased it, he had met Stephanie Wahab but they were not yet married or engaged. The Wahabs moved into the Andros Property as their first home about a month following their wedding. Both lived with their parents before that. They rented the lower level to a tenant. [4]
[31] In December 2009, the Wahabs purchased a second property in Mississauga (the Yarrow Property) which became their home. They did not sell the Andros Property but found tenants for the upper level where the Wahabs had resided. The lower level of the Yarrow Property was also rented to tenants. Thus, in each of the years in issue, the Wahabs reported rental income for income tax purposes.
[32] The Wahabs had two children in the tax years under appeal, their first in 2008 and the second in 2009. Mrs. Wahab described her pregnancies as very difficult in the sense that she was very ill and unable to do very much. She said her tasks with Auto Maculate were undertaken at home and might be described as clerical or administrative. She completed these tasks sitting in a living room chair or on the sofa. She described herself as too ill to go out and too ill to eat very much.
[33] Prior to marriage, Mr. Wahab said he spent approximately two years doing missionary work, which took him to Europe, the Middle East, and the United States. His tax returns indicate very modest taxable income in those years – less than $20,000 in each of 2005, 2006 and 2007.
[34] Prior to this missionary work, Mr. Wahab worked as a financial analyst for approximately two years with a company known as Deluxe Laboratories. He said his salary during this time was about $45,000 annually. He also said that it was during his tenure at Deluxe Laboratories, and with their encouragement and support, that he obtained his certified management accountant (CMA) designation. Although Mr. Wahab said he had other full-time employment before this position with Deluxe Laboratories, he did not provide any details as to the nature of that work or his remuneration.
[35] Mr. Wahab described his post-secondary education as being three years in a college program in general business administration, which he applied towards a university degree which he was awarded after six months, and later courses associated with his CMA designation.
[36] Mrs. Wahab grew up in an Amish/Mennonite community in Ohio. She lived with her parents until she married and described their lifestyle in Ohio as a simple country life. She lived on a farm with goats; they grew some of their own food. She was home schooled and did not attend post secondary school. Prior to her marriage, Mrs. Wahab did voluntary work as a teacher’s helper and then voluntary mission ministry work. It was through the mission that she met Mr. Wahab in 2006. The only remunerative work she spoke about before marriage was making and trying to sell candles with her mother and sister.
V. POSITIONS OF THE PARTIES
[37] The Minister’s position is that the income reported by the Wahabs was not sufficient to support their lifestyle. As a result, the Minister asserts that the Wahabs had additional unreported income which explains the annual increase in net worth.
[38] The Wahabs state they had no unreported income and that they in fact over‑reported their income. They contend their personal expenditures are very low, and in particular their expenditures on groceries, clothing and household items are very modest. They also contend that the Respondent made many errors in the net worth assessment.
VI. EVIDENCE
[39] These appeals were heard over seven days commencing in December 2018 and ending in September 2019.
[40] Unlike some net worth assessments, these appeals were not ones in which the Appellants came to the Court without documentation. Four volumes of documents were produced by the Wahabs. However, the quantity of the documents has no bearing on the appeal. What is key is the quality of the documents and the facts established by those documents and the oral evidence. In this case, the quality of the documents leaves much to be desired.
[41] Many of the documents were irrelevant to the appeals, their focus being to criticize what the Appellants perceive as delays and errors on the part of the Canada Revenue Agency (“CRA”) in the course of the audit [5] and following their notices of objection to the initial reassessments.
[42] The Appellants had documents Mr. Wahab created for purposes of persuading the auditor [6] or for purposes of the appeals, rather than the original documents he claimed to have used to create those documents. [7] The Appellants also tended to be selective about the parts of documents they brought to the Court, often omitting pages. [8] Emails were missing attachments notwithstanding that they were submitted to establish that the attachments had been sent to the person to whom the email was addressed. [9] Email chains also excluded some of the emails in the chain. [10] Documents were signed only by the Appellants and not by the other parties. [11] The Appellants produced many photographs of items they suggest may be purchased at salvage stores and garage sales or obtained from church ministries. [12] But, there is no evidence the photographs were taken in the years under appeal. Moreover, these photographs only establish that these sources of food and goods exist, not that the Appellants used those sources to the extent they claimed. The same comment applies to the sample grocery receipt, which was from 2016. [13] A receipt for car batteries appears to be in Mr. Wahab’s handwriting although it purports to be from Crosstown Battery Sales, presumably a business that would have preprinted invoices and receipts. [14]
[43] As a result, I give little weight to most of the documents the Appellants provided.
[44] Three witnesses appeared for the Appellants, Philip and Stephanie Wahab, and Philip Wahab’s brother, Roy Wahab. The Respondent’s only witness was Amanda Yuan, the principal auditor for the audit leading to the reassessments of the three Appellants.
VII. INSTITUTION OF THE AUDIT AND AUDIT HISTORY
[45] Ms. Yuan conceded that the audit arose as a result of a referral from an unidentified source. Mr. Wahab sought to discredit the audit for that reason, suggesting that the referral came from a source who knows nothing about the Auto Maculate business but had another reason for seeking “revenge” on the Wahabs. The source was not identified by Ms. Yuan, and Mr. Wahab may well have his suspicions. But, he could not prove his proposition and in any case, as I explained to him, even if he could establish that were true, that is not a sufficient basis to allow the appeals.
[46] Mr. Wahab also complained about the size of the initial reassessment proposal put to the Appellants and that the auditor and CRA Appeals had not accepted all of the arguments the Appellants themselves, and an accounting firm they engaged to assist them, put to the CRA. However, Mr. Wahab concedes that the reassessments under appeal reflect significantly less income than had been initially proposed by the auditor, and less than the amounts in the 2013 reassessments, which assessed less income than the auditor had initially proposed.
[47] It is clear that only the final assessment can be the subject of the appeal. Interim assessments, proposals, or opinions expressed by the auditors or the appeals division of CRA cannot be relied upon to establish the invalidity of the final reassessment. [15]
[48] Ms. Yuan testified that the audit had taken approximately 18 months and that she had some difficulty obtaining certain documents from the Wahabs. While she agreed that she received many documents from the Wahabs, the documents were incomplete, unorganized and, in her view, did not constitute adequate books and records.
[49] Mr. Wahab said that the books and records they maintained consisted of summary excel spreadsheets, invoices, credit card statements and bank account statements. [16] Unfortunately, with the exception of some bank statements, Paypal statements and some invoices, [17] he did not bring any of the other records he described to the Court.
[50] Mr. Wahab also attempted to discredit the validity of the assessment by pointing out that matters that Ms. Yuan had identified as “red flags” should not have been viewed as such, even though those “red flags” did not themselves affect the amount of unreported income assessed.
[51] Ms. Yuan said she thought the Wahabs’ answers to her questions evolved over time.
[52] Ms. Yuan testified her bank account analysis indicated bank deposits exceeded reported income in 2007, 2008 and 2009. [18] Cash withdrawals from bank accounts declined significantly over the audit period. The documentation relating to the arrangement with Mr. Voung [19] raised questions because while she saw a copy of a cheque payable to Mr. Voung, the invoice for services apparently rendered by Mr. Voung was an Auto Maculate invoice.
[53] Ms. Yuan stated that the sum of all withdrawals from the Wahabs’ bank accounts [20] and all amounts charged to their credit cards in 2008 was approximately $24,000 less than the amount claimed as expenses in computing business income and rental income. In other words, income-earning expenses deducted in 2008 exceeded all bank and credit card expenditures in 2008 by approximately $24,000. [21] Ms. Yuan viewed this as a “red flag” because this discrepancy existed without taking into account any personal expenditures which only would have increased the discrepancy. Throughout the appeal, this was referred to as the $24,000 issue.
(a) The $24,000 Issue
[54] Mr. Wahab spent considerable time on this issue although it did not affect the amount of the assessment. He said that part of this discrepancy was explained by expenses deducted in computing 2008 income but not paid until 2009. The primary example was payroll-related expenses. [22]
[55] But faced with the explanation that the $24,000 discrepancy did not take into account any personal expenditures, Mr. Wahab tended to pick out numbers from the auditor’s 2009 working papers and suggest that they also were 2008 business or rental expenses deducted in 2008 but not paid until 2009, more than ten years after the relevant event. For example, he claimed that a cheque that cleared the bank account in March 2009 related to a vehicle purchased in 2008. I am skeptical the seller would wait until March 2009 to cash a cheque for a vehicle purchased in December 2008, but in any event the cost of a vehicle would not be a deductible expense in the tax return and so would not be part of the discrepancy. Similarly, Mr. Wahab found a reference to a cheque for $1,181 that cleared the bank account in January 2009. Mr. Wahab said that related to replacing the tenant’s garage door in 2008. How would he remember that more than a decade later? Is it clear this amount was deducted as a repair rather than capitalized as a replacement? Mr. Wahab had no other evidence supporting these claims.
[56] I, of course, accept that some of the expenditures identified by Mr. Wahab as relating to 2008 were paid in 2009. But, that presumably would have been true every year. However, even if I accept all of the amounts he alleged fell into this category, and ignored any similar 2007 expenses that might have been paid in 2008 [23] , that is not enough to fully explain the discrepancy because it accounts for no personal expenditures. [24]
[57] Moreover, this analysis does not directly impact the quantity of the assessed income under the net worth assessment. Each of these items were “red flags” Ms. Yuan identified in the course of her audit. I do not see anything inappropriate in that characterization by Ms. Yuan.
VIII. CREDIBILITY
[58] Net worth assessments often rest on the credibility of the appellants and the other witnesses. While in these appeals a lot of documentary evidence was produced, most of it was not of a quality sufficient to rebut the Minister’s assumptions. Accordingly, in this appeal, the credibility of the witnesses plays a critical role.
[59] Nichols v The Queen [25] contains a useful description of some of the factors that should be considered in assessing credibility:
In assessing credibility I can consider inconsistencies or weaknesses in the evidence of witnesses, including internal inconsistencies (that is, whether the testimony changed while on the stand or from that given at discovery), prior inconsistent statements, and external inconsistencies (that is, whether the evidence of the witness is inconsistent with independent evidence which has been accepted by me). Second, I can assess the attitude and demeanour of the witness. Third, I can assess whether the witness has a motive to fabricate evidence or to mislead the court. Finally, I can consider the overall sense of the evidence. That is, when common sense is applied to the testimony, does it suggest that the evidence is impossible or highly improbable. [26]
[60] Applying those criteria to the evidence before me, I did not find Stephanie and Philip Wahab to be particularly credible witnesses. My impression of them is that they are more sophisticated, clever and knowledgeable than they sought to appear.
[61] While claiming to be people with modest means, great generosity, simple tastes, a very frugal lifestyle and a certain naiveté regarding business matters, the evidence suggests otherwise. Indeed, the Wahabs do not dispute that their net worth grew significantly (by more than $415,000) in three years. [27]
[62] Ms. Yuan, the auditor and the only witness for the Respondent, was not a perfect witness, but I found her testimony more credible than that of the Wahabs. Ms. Yuan explained that following the referral she looked at the Wahabs’ tax files, sought an Equifax credit check, and conducted a property search to determine whether an audit was warranted. She then sought records from the Wahabs. While they sent her three boxes of documents, the documents were incomplete and unorganized. Because of this, the CRA decided to proceed with a net worth audit.
[63] Information requests were issued to the Canadian banks, but could not be issued to US financial institutions. Ms. Yuan explained what she reviewed. She summarized more than 6,000 transactions over the four-year audit period. [28] She completed a bank deposit analysis and observed that the deposits exceeded reported income. [29] She dealt with several rebuttals from the Wahabs and their accountants.
[64] Ms. Yuan said she accepted any expenditures claimed on the income tax returns for the rental properties and business, although in some cases she was not provided with supporting documentation. She said she also gave the Wahabs the benefit of the doubt [30] even though their answers to some of her questions changed over time [31] and some of the documentation Mr. Wahab provided to her did not make sense in the context of what he told her it was intended to substantiate, one example being documentation related to arrangements with Mr. Voung. [32] Ms. Yuan described these documents as adding to her concerns about the taxpayers’ books and records. Ms. Yuan also claimed she never received all bank, credit card and Paypal statements and, had she had them, she would have increased income.
[65] Aspects of Ms. Yuan’s testimony that were not disputed by the Appellants include the following:
1. During the audit period the Appellants had at least 16 Canadian bank accounts, two US bank accounts, eight investment accounts, six Canadian credit cards and four U.S. credit cards;
2. Cash withdrawals from their bank accounts decreased over the audit period. In 2007 they withdrew $7,655, in 2008 $6,282, and in 2009 $4,525. In 2010, only $150 was withdrawn in cash by the Wahabs from all of their bank accounts;
They purchased two homes, one in 2006 and one in 2009; [33] and
They made personal investments of approximately $134,000 in 2008, $225,000 in 2009 and $24,000 in 2010.
[66] Before I provide some specific examples of matters that undermine the credibility of the Appellants’ evidence, some general observations may be made. The Appellants’ evidence was not internally consistent. Mr. Wahab’s statements regarding certain key matters were sufficiently different from Mrs. Wahab’s statements as to cast their testimony into doubt.
[67] Mr. Wahab tended to change or add gloss to his own testimony over the course of the appeals. He tended to characterize documents in a particular manner, emphasizing parts that supported his testimony while ignoring parts that clearly suggest something else. [34] This approach leads me to infer that when Mr. Wahab chose to bring only parts of documents, or chose to bring summaries of documents, rather than copies of the original documents, the missing parts or original documents would undermine his evidence concerning the documents.
[68] Mr. Wahab in particular tended to want to provide answers to questions. This led him to contradict himself several times, or to provide answers that simply were not plausible. [35]
[69] Mr. Wahab’s attitude and demeanor changed under cross-examination. He became defensive, seeming to take offence to several questions, none of which were inappropriate, in my view. He also often avoided answering the question posed and talked around it, leaving me with the impression he was searching for an answer. Moreover, while he often said he could not remember things from a decade earlier (understandably), other items he insisted he could recall. And, yet there was nothing particularly remarkable about the matters he said he recalled [36] compared to matters one might think he would recall. [37]
[70] Mrs. Wahab’s direct testimony generally was consistent with Mr. Wahab’s testimony when it came to a description of their lifestyle. However, Mrs. Wahab frequently claimed she did not remember details or simply had no knowledge of the key relevant facts: she did not know her income; she did not know how much money or what investments they had; she did not know the cost of groceries or other household items; and she rarely shopped or used her credit card relying instead on $10 cash in her wallet.
[71] However, their testimony did differ in some key respects. On the one hand, Mrs. Wahab testified her only roles with Auto Maculate were to copy type Mr. Wahab’s handwritten invoices and help set up a website. In her words it was no more than “copy and paste”. She would “look, see, type what I saw”. On the other hand, Mr. Wahab described her as working with spreadsheets, emailing customers, following up on invoices, doing research for him on dealerships, and maintaining an up-to-date list of outstanding invoices.
[72] She also provided assistance with documents in the course of the appeal, identifying quickly for Mr. Wahab items he was seeking to find in his volumes of documents. I do not believe Mrs. Wahab is as naïve and unsophisticated about financial matters as she tried to suggest in her testimony.
[73] The Wahabs claim Mrs. Wahab was too sick to leave the house for most of 2008 and 2009, and that Mr. Wahab was working night and day getting his business going, and running the rental properties. Yet, they claim they had time to go to garage sales every weekend from mid-May to mid-September, that they could find parking right in front of the garage sale so Mrs. Wahab would not have to get out of the car, Mr. Wahab had time to volunteer with food ministries and to source food from those ministries that would otherwise be thrown away, and they had time to travel to Ohio to visit Mrs. Wahab’s parents and buy food at salvage stores.
[74] In my view, when common sense is applied to the testimony and the evidence, it is highly improbable that the Wahabs spent as little as they claim to have spent or that they were able to acquire and sell as many items as they say they could at garage sales, or through other sources they identified.
[75] Let me turn to some specific examples that have led me to conclude that Philip and Stephanie Wahab were not credible witnesses.
(a) Credit Cards
[76] Over the relevant taxation years the Wahabs had some sixteen credit cards. One of the explanations for the number of credit cards was a stated desire to keep the credit cards for business, rental and personal expenditures separate. A second explanation was an identity fraud that Mr. Wahab said occurred during the relevant taxation years causing them to stop using particular credit cards and to apply for new cards.
[77] While Mr. Wahab and Mrs. Wahab had separate credit cards, many of them were companion cards. For example, Mr. and Mrs. Wahab had companion BMO Mastercards (Canadian) and Capital One Mastercards (US). In 2009 and 2010 there were four BMO credit cards, two in each of Mr. and Mrs. Wahab’s name.
[78] Mrs. Wahab claimed that any credit cards she had were companion (or as she called them shared) cards. She suggested she never used the credit cards except to purchase gas or in an emergency situation, or perhaps occasionally to pick up something at the grocery store when she was out with her children. And yet, Mrs. Wahab had a credit card before she was married, so she must have had experience with and a previous need or desire for a credit card. Moreover, many of the charges at fast food restaurants were on her cards. [38]
[79] Mrs. Wahab suggested any credit card in her name was for personal purposes only; that is, she said one of the ways they distinguished personal expenditures from expenditures related to the rental properties or the business was to use the card in her name for personal expenditures. While this explanation has some appeal and could be consistent with her testimony that she never used credit cards, [39] the documentary evidence does not support her testimony. Many charges on the credit cards in Mr. Wahab’s name were clearly personal. Most of the expenditures on her credit cards - and virtually all of the significant ones - were clearly business-related. [40] While both Wahabs stated one or more times that Mrs. Wahab did not have a business credit card, Mr. Wahab later said Mrs. Wahab’s companion BMO card ending in 0087 was a business card.
[80] Mr. and Mrs. Wahab had three rental properties over the three-year period covered by these appeals. Mr. Wahab explained that they decided to restrict the Canadian Tire credit card to the rental properties. Although Mr. Wahab said he could not be certain when they adopted that practice, he thought it was in 2009. Yet in 2009 and 2010 there are many charges on that credit card that clearly have nothing to do with the rental property and some of which are clearly personal including charges at restaurants, grocery stores, [41] chiropractic clinics, maternity clothing stores, and charities (donations).
(b) Mrs. Wahab’s Experience with Financial Matters and the Business
[81] Mrs. Wahab asserted that she knows nothing about and had no interest in numbers or finances. “I am very bad with numbers and spreadsheets and how that all goes together.” [42] She claimed she did not know what salary she was paid in any of the years in question. She described her tasks with Auto Maculate as purely administrative. She said she suffered significantly with sickness during her pregnancies, was largely housebound and resting on a sofa or in an armchair in 2008 and 2009, and did what she could to assist Mr. Wahab by preparing Auto Maculate invoices. She described this work as not involving any computations but rather being limited to typing the handwritten notes Mr. Wahab gave her onto an invoice. In her words “it was as close to copying and pasting as you could get.”
[82] However, Mr. Wahab described Mrs. Wahab’s role with Auto Maculate more expansively. He described training her in excel spreadsheets. He said she was responsible for noting which invoices were paid in the excel record they maintained and following up on unpaid invoices. When he described how they kept track of invoices, he said the excel spread sheet had a column with an x indicating the invoice was unpaid, and when it was paid, the x would be removed. Yet, Mr. Wahab also testified that invoices would be in similar amounts because Auto Maculate had a fixed fee for each vehicle. He said that dealerships would sometimes pay more than one invoice with a single cheque, pay older invoices after newer invoices or pay only part of an invoice. If this is all true, then matching cheques to invoices and updating the excel spreadsheet does not seem like something that could be done by someone with absolutely no affinity for or interest in numbers.
(c) Tax Returns
[83] In Mrs. Wahab’s direct testimony, Mr. Wahab asked what involvement she had in preparing her tax returns during the audit years. She replied “you would prepare them for me, and briefly show them to me, and I would sign them.” [43] On cross‑examination, she agreed that Mr. Wahab completed her tax return and showed it to her but she didn’t understand it even though she said he tried to help her understand it. She said “I just trust that he’s filling them out, and I sign them”. [44]
[84] Yet under cross-examination when Mr. Wahab was presented with Mrs. Wahab’s 2009 tax return he admitted that he did not prepare it and became quite defensive. Although reluctant to do so, when pressed, he