Osinski v. The Queen

Osinski v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-02-27
Neutral citation
2013 TCC 71
File numbers
2010-3246(IT)G
Judges and Taxing Officers
Frank J. Pizzitelli
Subjects
Income Tax Act
Decision Content
Docket: 2010-3246(IT)G
BETWEEN:
JAN OSINSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on August 20, 21, 22 and 23, 2012, and
January 22, 23, 24 and 25, 2013, at Toronto, Ontario.
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Yan David Payne and Richard Yasny
Counsel for the Respondent:
Elizabeth Chasson and Jenna L. Clark
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 2001 and 2002 taxation years are allowed, and the reassessment dated August 9, 2010, is vacated.
Costs are awarded to the Appellant.
Signed at Ottawa, Canada, this 27th day of February 2013.
“F.J. Pizzitelli”
Pizzitelli J.
Citation: 2013 TCC 71
Date: 20130227
Docket: 2010-3246(IT)G
BETWEEN:
JAN OSINSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
[1] The Appellant was assessed unreported income of $2,697,914 and $55,059 and gross negligence penalties of $390,049 and $7,983 for the 2001 and 2002 taxation years respectively pursuant to reassessments dated August 9, 2010, on the basis he received a shareholder appropriation pursuant to subsection 15(1) of the Income Tax Act (the “Act”) or, in the alternative, on the basis these sums were employment income from 1457223 Ontario Limited operating as Impact Services (“145”) or were benefits conferred on him by another person pursuant to subsection 246(1) of the Act.
[2] The issues to be decided in this matter are whether the Appellant was properly assessed the income and gross negligence penalties above and whether the reassessments dated August 25, 2008, as amended after the Objection stage on August 9, 2010 against him for the 2001 and 2002 taxation years are statute barred under the Act pursuant to subsection 152(4).
[3] The facts not in dispute or clear from the evidence are the following applicable to the taxation years in dispute. The Appellant was a resident of Toronto and married to one Barbara Osinski who was at least a 50% shareholder of 145 although it is in dispute as to whether she was the sole shareholder or not and whether the Appellant was a shareholder or not. The Appellant was the sole director and officer of 145, an Ontario corporation amalgamated on January 2, 2001 by articles of amalgamation pursuant to which four corporations were amalgamated; namely Impact Demolition & Restoration Management Inc., Planland Contracting Limited, Plan A Services Inc. and Impact Demolition Services Limited (the “Predecessor Corporations”).
[4] 145 carried on business at a location municipally known as 89 Shorncliffe Road in the Etobicoke area of Toronto (the “Premises”), which was owned by Barbara Osinski. Of the four offices located at the Premises, Barbara Osinski occupied the largest office, J.M., the office manager of 145 another office, A.G., an engineer and Vice-President who assisted Barbara with estimating, another office and the fourth by the Appellant although it is in dispute as to whether others also shared his office and the one desk located within it. An office without a door in the rear section of the building was also constructed and used by the son of the Appellant and Barbara Osinski, one N., starting in 2002.
[5] An audit was conducted by the Workplace Safety and Insurance Board (“WSIB”) under the Workplace Safety and Insurance Act of Ontario relating to the periods 2001 and 2002 pursuant to which 145 and the Appellant as its director were charged with various violations of such Act including several charges relating to a failure to disclose the full extent of 145’s payroll, in effect in the amount of $5,844,425 for the period from March 1, 2001 to January 7, 2003, as effectively admitted by the Appellant in an Agreed Statement of Facts signed as part of a plea bargain with the WSIB. Based on the WSIB audit and plea bargain, the Canada Revenue Agency (“CRA”) audited 145 and concluded, mainly relying upon the WSIB unreported payroll assessment and on a “Profit Sharing Analyses” document seized during the WSIB audit that led them to conclude unreported sales of two of the Predecessor Corporations which continued to operate were deposited into accounts as a scheme to hide 145’s unreported income and were appropriated or found their way into the Appellant’s hands thus resulting in the reassessments against the Appellant being appealed in this matter.
[6] It should be noted that only the Appellant and not his spouse was reassessed as having received the shareholder benefits or income from the unreported sales of 145 and that 145 did not object to or pursue an appeal of the assessment against it for unreported income and penalties.
[7] For greater certainty, it should be noted that the Appellant was reassessed unreported income of $5,372,074 for 2001 and $104,815 for 2002 with interest and penalties on those amounts which reassessment was amended after the Appellant filed a notice of objection so as to reassess the Appellant’s unreported income of $2,697,914 and $55,059 and gross negligence penalties of $390,049 and $7,983 for the 2001 and 2002 taxation years on the basis that 145 should have been treated as reporting the unreported sales net of the Cost of Sales for the labour assessed as unreported payroll. In effect, CRA gave the Appellant credit for the amount of the payroll it says 145 failed to report as a deduction from the unreported sales it had assessed 145 and no other amounts, the sufficiency of which is also in issue between the parties.
[8] As suggested in the above summary of facts, it is clear that there was substantial disagreement between the parties as to many of the facts assumed by the Respondent in its Reply to the Amended Notice of Appeal (the “Reply”), including whether the Appellant was a shareholder, whether the difference between the unreported sales and unreported payroll of 145 was correctly calculated as this is the basis for the amounts assessed against the Appellant and whether they were in fact the sales of 145 or other entities, whether the Appellant was in charge of the financial and administrative functions of 145 and hence the role of the Appellant and his spouse in 145, and whether in fact any funds were in fact appropriated by or for the benefit of the Appellant or his spouse, Barbara Osinski. There was a large amount of contradictory evidence in connection with these matters heard in this appeal and the credibility of many of the witnesses are in issue, although it is safe to say that many of the witnesses had credibility problems on at least some of the issues but not all. All of these issues relating to the assumptions made by the Minister of National Revenue (the “Minister”) in its Reply filed as part of the pleadings in this matter must be determined to the extent necessary and will be addressed in the analyses of the facts as they relate to the applicable law in this matter. I will first discuss the applicable law in this matter including the issue of who has the burden of proof relative to the issues in dispute.
The Law
1. Appropriation of Funds
[9] The Minister relies on subsection 15(1) as the basis for its shareholder appropriations argument, sections 3, 5, 6 and 9 as the basis for its income from office or employment argument and subsection 246(1) as the basis for its conferred taxable benefit argument which provisions are set out below:
Benefit conferred on shareholder
15. (1) Where at any time in a taxation year a benefit is conferred on a shareholder, or on a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by
(a) the reduction of the paid-up capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or on the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,
(b) the payment of a dividend or a stock dividend,
(c) conferring, on all owners of common shares of the capital stock of the corporation at that time, a right in respect of each common share, that is identical to every other right conferred at that time in respect of each other such share, to acquire additional shares of the capital stock of the corporation, and, for the purpose of this paragraph,
(i) where
(A) the voting rights attached to a particular class of common shares of the capital stock of a corporation differ from the voting rights attached to another class of common shares of the capital stock of the corporation, and
(B) there are no other differences between the terms and conditions of the classes of shares that could cause the fair market value of a share of the particular class to differ materially from the fair market value of a share of the other class,
the shares of the particular class shall be deemed to be property that is identical to the shares of the other class, and
(ii) rights are not considered identical if the cost of acquiring the rights differs, or
(d) an action described in paragraph 84(1)(c.1), 84(1)(c.2) or 84(1)(c.3),
the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of the shareholder for the year.
Income for taxation year
3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s income for the year determined by the following rules:
(a) determine the total of all amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property,
(b) determine the amount, if any, by which
(i) the total of
(A) all of the taxpayer’s taxable capital gains for the year from dispositions of property other than listed personal property, and
(B) the taxpayer’s taxable net gain for the year from dispositions of listed personal property,
Exceeds
(ii) the amount, if any, by which the taxpayer’s allowable capital losses for the year from dispositions of property other than listed personal property exceed the taxpayer’s allowable business investment losses for the year,
(c) determine the amount, if any, by which the total determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the total of the deductions permitted by subdivision e in computing the taxpayer’s income for the year (except to the extent that those deductions, if any, have been taken into account in determining the total referred to in paragraph (a), and
(d) determine the amount, if any, by which the amount determined under paragraph (c) exceeds the total of all amounts each of which is the taxpayer’s loss for the year from an office, employment, business or property or the taxpayer’s allowable business investment loss for the year,
and for the purposes of this Part,
(e) where an amount is determined under paragraph (d) for the year in respect of the taxpayer, the taxpayer’s income for the year is the amount so determined, and
(f) in any other case, the taxpayer shall be deemed to have income for the year in an amount equal to zero.
…
Income from office or employment
5. (1) Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year.
Loss from office or employment
(2) A taxpayer’s loss for a taxation year from an office or employment is the amount of the taxpayer’s loss, if any, for the taxation year from that source computed by applying, with such modifications as the circumstances require, the provisions of this Act respecting the computation of income from that source.
Amounts to be included as income from office
6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable
Value of benefits
(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit
(i) derived from the contributions of the taxpayer’s employer to or under a deferred profit sharing plan, an employee life and health trust, a group sickness or accident insurance plan, a group term life insurance policy, a pooled registered pension plan, a private health services plan, a registered pension plan or a supplementary unemployment benefit plan,
(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust,
(iii) that was a benefit in respect of the use of an automobile,
(iv) derived from counselling services in respect of
(A) the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies, or
(B) the re-employment or retirement of the taxpayer, or
(v) under a salary deferral arrangement, except to the extent that the benefit is included under this paragraph because of subsection 6(11);
[none of the exceptions apply]
Personal or living expenses
(b) all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except
[none of the exceptions apply]
…
Director’s or other fees
(c) director’s or other fees received by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment;
[none of the remaining provisions were argued so are not included]
…
Income
9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.
Loss
(2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of the taxpayer’s loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source with such modifications as the circumstances require.
Gains and losses not included
(3) In this Act, “income from a property” does not include any capital gain from the disposition of that property and “loss from a property” does not include any capital loss from the disposition of that property.
…
Benefit conferred on a person
246.(1) Where at any time a person confers a benefit, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit shall, to the extent that it is not otherwise included in the taxpayer’s income or taxable income earned in Canada under Part I and would be included in the taxpayer’s income if the amount of the benefit were a payment made directly by the person to the taxpayer and if the taxpayer were resident in Canada, be
(a) included in computing the taxpayer’s income or taxable income earned in Canada under Part I for the taxation year that includes that time; or
(b) where the taxpayer is a non-resident person, deemed for the purposes of Part XIII to be a payment made at that time to the taxpayer in respect of property, services or otherwise, depending on the nature of the benefit.
[10] The following provisions of the Act are relevant to the issues of whether the reassessments are statute barred and the issue of penalties assessed.
Assessment and reassessment
152.(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year;
(b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and
(i) is required pursuant to subsection 152(6) or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein,
(ii) is made as a consequence of the assessment or reassessment pursuant to this paragraph or subsection 152(6) of tax payable by another taxpayer,
(iii) is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length,
(iii.1) is made, if the taxpayer is non-resident and carries on a business in Canada, as a consequence of
(A) an allocation by the taxpayer of revenues or expenses as amounts in respect of the Canadian business (other than revenues and expenses that relate solely to the Canadian business, that are recorded in the books of account of the Canadian business, and the documentation in support of which is kept in Canada), or
(B) a notional transaction between the taxpayer and its Canadian business, where the transaction is recognized for the purposes of the computation of an amount under this Act or an applicable tax treaty.
(iv) is made as a consequence of a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada or a government of a state, province or other political subdivision of any such country,
(v) is made as a consequence of a reduction under subsection 66(12.73) of an amount purported to be renounced under section 66, or
(vi) is made in order to give effect to the application of subsection 118.1(15) or 118.1(16);
(c) the taxpayer or person filing the return has filed with the Minister a waiver in prescribed form within the additional 3-year period referred to in paragraph (b); or
(d) as a consequence of a change in the allocation of the taxpayer’s taxable income earned in a province as determined under the law of a province that provides rules similar to those prescribed for the purposes of section 124, an assessment, reassessment or additional assessment of tax for a taxation year payable by a corporation under a law of a province that imposes on the corporation a tax similar to the tax imposed under this Part (in this paragraph referred to as a “provincial reassessment”) is made, and as a consequence of the provincial reassessment, an assessment, reassessment or additional assessment is made on or before the day that is one year after the later of
(i) the day on which the Minister is advised of the provincial reassessment, and
(ii) the day that is 90 days after the day of sending of a notice of the provincial reassessment.
…
Alternative basis for assessment
152.(9) The Minister may advance an alternative argument in support of an assessment at any time after the normal reassessment period unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.
…
False statements or omissions
163.(2) Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total of
(a) the amount, if any, by which
(i) the amount, if any, by which
(A) the tax for the year that would be payable by the person under this Act
exceeds
(B) the amounts that would be deemed by subsections 120(2) and (2.2) to have been paid on account of the person’s tax for the year
if the person’s taxable income for the year were computed by adding to the taxable income reported by the person in the person’s return for the year that portion of the person’s understatement of income for the year that is reasonably attributable to the false statement or omission and if the person’s tax payable for the year were computed by subtracting from the deductions from the tax otherwise payable by the person for the year such portion of any such deduction as may reasonably be attributable to the false statement or omission
exceeds
(ii) the amount, if any, by which
(A) the tax for the year that would have been payable by the person under this Act
exceeds
(B) the amounts that would be deemed by subsections 120(2) and (2.2) to have been paid on account of the person’s tax for the year
had the person’s tax payable for the year been assessed on the basis of the information provided in the person’s return for the year,
(b) [Repealed, 1994, c. 7, Sch. VII, s. 17(1)]
(c) the total of all amounts each of which is the amount, if any, by which
(i) the amount that would be deemed by subsection 122.61(1) to be an overpayment on account of the person’s liability under this Part for the year that arose during a particular month or, where that person is a cohabiting spouse or common-law partner (within the meaning assigned by section 122.6) of an individual at the end of the year and at the beginning of the particular month, of that individual’s liability under this Part for the year that arose during the particular month, as the case may be, if that total were calculated by reference to the information provided
exceeds
(ii) the amount that is deemed by subsection 122.61(1) to be an overpayment on account of the liability of that person or that individual, as the case may be, under this Part for the year that arose during the particular month,
(c.1) the amount, if any, by which
(i) the total of all amounts each of which is an amount that would be deemed by section 122.5 to be paid by that person during a month specified for the year or, where that person is a qualified relation of an individual for the year (within the meaning assigned by subsection 122.5(1)), by that individual, as the case may be, if that total were calculated by reference to the information provided in the prescribed form filed for the year under section 122.5
exceeds
(ii) the total of all amounts each of which is an amount that is deemed under section 122.5 to be paid by that person or that qualified relation during a month specified for the year,
(c.2) the amount, if any, by which
(i) the amount that would be deemed under subsection 122.51(2) to be paid on account of the person’s tax payable under this Part for the year if the amount were calculated by reference to the information provided in the return
exceeds
(ii) the amount that is deemed under subsection 122.51(2) to be paid on account of the person’s tax payable under this Part for the year,
(c.3) the amount, if any, by which
(i) the total of all amounts each of which is an amount that would be deemed by subsection 122.7(2) or (3) to be a payment on account of the person’s tax payable under this Part or another person’s tax payable under this Part for the year if those amounts were calculated by reference to the information provided in the return
exceeds
(ii) the total of all amounts each of which is an amount that is deemed by subsection 122.7(2) or (3) to be a payment on account of the person’s tax payable under this Part and, where applicable, the other person’s tax payable under this Part for the year,
(d) the amount, if any, by which
(i) the amount that would be deemed by subsection 127.1(1) to be paid for the year by the person if that amount were calculated by reference to the information provided in the return or form filed for the year pursuant to that subsection
exceeds
(ii) the amount that is deemed by that subsection to be paid for the year by the person,
(e) the amount, if any, by which
(i) the amount that would be deemed by subsection 127.41(3) to have been paid for the year by the person if that amount were calculated by reference to the person’s claim for the year under that subsection
exceeds
(ii) the maximum amount that the person is entitled to claim for the year under subsection 127.41(3),
(f) the amount, if any, by which
(i) the amount that would be deemed by subsection 125.4(3) to have been paid for the year by the person if that amount were calculated by reference to the information provided in the return filed for the year pursuant to that subsection
exceeds
(ii) the amount that is deemed by that subsection to be paid for the year by the person and
(g) the amount, if any, by which
(i) the amount that would be deemed by subsection 125.5(3) to have been paid for the year by the person if that amount were calculated by reference to the information provided in the return filed for the year pursuant to that subsection
exceeds
(ii) the amount that is deemed by that subsection to be paid for the year by the person.
…
Burden of proof in respect of penalties
162.(3) Where, in an appeal under this Act, a penalty assessed by the Minister under this section or section 163.2 is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.
[11] Subsection 15(1) taxes a person who is a shareholder of a corporation and has a benefit conferred on him by the corporation. The Appellant argues that both these requirements have not been met for the subsection to apply.
[12] Sections 3, 5 and 6 are general taxing provisions that require a taxpayer to include any income for the year (section 3), including income from office or employment which is salary, wages and other remuneration (section 5) and specific amounts from office or employment as set out in section 6 which include in paragraph (b) all amounts received by the taxpayer in the year as an allowance for personal or living expenses or for any other purpose not excepted therein and in paragraph (c) directors fees or other fees received by the taxpayer by virtue of an office or employment. Although section 6 refers to other more specific items that would be included in amounts received from office or employment, no specific arguments were made by the Respondent in this regard and any arguments made were in the general sense captured by the above paragraphs.
[13] Subsection 9 includes into income a taxpayer’s income from a business or property for the year, presumably to cover the possibility that the Appellant may have been in business for his own account in respect to the assessed amounts.
[14] Subsection 246(1) is a catch‑all provision that basically provides that if the taxpayer receives a benefit conferred by another person, directly or indirectly, that was not otherwise included in his income or taxable income pursuant to other provisions of the Act, then such amount is included in the taxpayer’s income if it would be had he received it directly from the person. In effect, the Minister says that if the Corporation made payments to or conferred other benefits on the Appellant that would not be included as a shareholder benefit pursuant to subsection 15(1) above nor as income from an office or employment or business pursuant to sections 3, 5, 6 or 9 above, then they are caught by subsection 246(1).
[15] Subsections 152(4) and (9) are the basis for permitting the CRA to reassess the Appellant beyond the normal three-year period of the initial assessment and there is no dispute the onus is on the Minister to prove the Appellant made a representation that is attributable to neglect, carelessness or wilful default or has committed a fraud in filing his return or supplying information.
[16] Subsection 163(2) contains the gross negligence penalty provisions relied upon by the Minister to effectively assess a 50% penalty on the amount of tax that would have additionally been charged had the unreported amount been reported but was not and the person knowingly made or due to gross negligence was involved in making a false statement or omission in a return. The onus of establishing that such person knowingly or under circumstances amounting to gross negligence was so involved is on the Minister pursuant to subsection 163(3).
2. Burden and Standard of Proof
[17] There is really no dispute as to who bears the burden of proof in the issues in dispute in this matter although there is disagreement as to what constitutes sufficient evidence to meet the standard of proof related to such burden.
[18] With respect to the main issue of whether the reassessment against the Appellant is correct or not, both sides have relied on the established case law set out by the Supreme Court of Canada in Hickman Motors Limited v. Canada, 97 DTC 5363 (S.C.C.) which has been relied upon by the Federal Court of Appeal decisions in House v. Canada, 2011 FCA 234, [2012] 1 C.T.C. 13 (F.C.A.) and McMillan v. Canada, 2012 FCA 126, 2012 DTC 5105 (F.C.A.), argued by the Appellant and which I had cause to summarize in Sandy Kozar v. Her Majesty the Queen, 2010 TCC 389, 2010 DTC 1251, relied upon by the Respondent at paragraphs 27 and 28:
[27] As I stated above and as confirmed by the Supreme Court of Canada in Hickman Motors Ltd. v. Canada, [97 DTC 5363] [1997] 2 S.C.R. 336, relying on its decision in Johnston v. Canada (Minister of National Revenue - M.N.R.), [3 DTC 1182] [1948] S.C.R. 486, the onus is on the Appellant to demolish all the exact assumptions made by the Minister in supporting the reassessments and no more and such initial onus is met where the Appellant makes out at least a prima facie case. As the Appellant pointed out in F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41, the Supreme Court of Canada confirmed that there is only one standard of proof in civil cases and that is proof on a balance of probabilities, the standard of proof necessary to establish a prima facie case. In paragraph 49 of such decision, Justice Rothstein went on to say:
49 … In all civil cases, the trial judge must scrutinize the relevant evidence with care to determine whether it is more likely than not than an alleged event occurred.
[28] As confirmed in paragraph 94 of Re Hickman Motors above, the onus is a shifting onus:
94 Where the Minister’s assumptions have been “demolished” by the appellant, “the onus shifts to the Minister to rebut the prima facie case” made out by the appellant and to prove the assumptions: …
[19] The Appellant argues that in the case at hand, where the Appellant is effectively being asked to prove a negative – that it did not receive funds or a benefit from 145 - that the Appellant’s oral evidence denying same should be sufficient to meet that standard of proof relying on the House decision above of the Federal Court of Appeal, where at paragraph 60 thereof, the Court held that the Court must look to evidence on the part of the Appellant demolishing the Minister’s assumptions, not for positive evidence that the Appellant had not received the funds. The Respondent argues that a mere denial is not sufficient and that the Appellant must tender credible evidence to support a position that he did not appropriate funds from 145.
[20] With respect to both parties, the law in my opinion is simply as stated in F.H. v. McDougall above by Justice Rothstein in paragraph 49 and I repeat, “the trial judge must scrutinize the relevant evidence with care to determine whether it is more likely than not that an alleged event occurred”.
[21] All relevant evidence must be scrutinized including oral evidence not necessarily supported by other documentation. In House, the Court was clear that oral evidence cannot be presumed to be of insufficient quality where a finding of credibility was not made as to the witnesses’ testimony. The Court specifically found at paragraph 62 that the trial judge erred in that “… the appellant had offered evidence which, unless disbelieved or rebutted, was capable of establishing a prima facie case ‘demolishing’ the Minister’s assumptions”.
[22] Accordingly, the Appellant is correct is taking the view that credible oral evidence is sufficient to demolish the Minister’s assumptions and in fact the Respondent agreed with this position in paragraph 16 of its written submissions wherein it stated:
16. … The appellant must tender credible evidence to support a position that he did not appropriate funds from 1457223 Ontario Limited. …
[23] Clearly the law is clear that credible evidence, whether oral or documentary, is required and that is why, as Justice Rothstein stated in F.H. v. McDougall above, the judge “must scrutinize the relevant evidence to determine whether it is more likely than not that an alleged event occurred”. The parties are not in my view stating different understandings of the standard of proof, only their different views as to the credibility of the evidence offered, which of course is my role to scrutinize.
[24] With respect to the issues as to whether the assessment against the Appellant is statute barred, there is no dispute that the onus of proving that the taxpayer made any representation that is attributable to neglect, carelessness or wilful default or fraud as contemplated under subsection 152(4) is on the Minister. Likewise, under subsection 163(3) of the Act, the onus is on the Minister to establish the facts necessary to justify the assessment of penalties under subsection 163(2).
[25] In considering the fact the onus falls on different parties for different issues above, it is clear that even if the taxpayer fails to meet the onus to rebut the assumptions of the Minister in relation to the correctness of the reassessment against the Appellant in issue here that the possibility is still open to find that the Appellant may still succeed in not having statute-barred years opened for reassessment or not being assessed gross negligence penalties. In the case at hand, however, as the Respondent has argued, the facts are all intertwined between the issues and due to the nature of the assumptions that the Appellant failed to report income he is assumed to have appropriated from 145 through the scheme described, the onus of the Minister with respect to the statute-barred years and gross negligence penalties will realistically be met or not depending on whether the Appellant is found to have appropriated the funds and not reported them.
Position of the Parties
[26] The Appellant takes the position the Appellant’s spouse was the sole shareholder of 145 and hence he cannot be assessed a shareholder benefit under subsection 15(1) of the Act and that he never received any additional income from 145 or to which 145 was entitled that is employment income to him other than the income reported in his tax returns of $42,192 in 2001 and $110,249 in 2002 (the latter year which included some dividend income). In addition, the Appellant denies that 145 had unreported sales as well as the amount of the unreported net income assessed against 145 being the underlying basis for the amount of the Appellant’s misappropriations reassessment. Accordingly, the penalties should not be assessed and there being no misrepresentation or fraud by the Appellant, the Minister should be barred from reassessing the 2001 and 2002 taxation years of the Appellant outside the normal three-year assessment period and no penalties are appropriate.
[27] The Respondent takes the position the Appellant received the reassessed amounts and hence is subject to both the gross negligence penalties under subsection 163(2) as well as subject to reassessment outside the normal assessment period for his misrepresentation and fraud in not reporting such income. The Respondent also takes the position that 145 was credited, as deductible expenses, the full amounts paid to its subcontractors in respect of which the WSIB allocated as payroll of 145 for the purposes of determining its underreported payroll for the purposes of the Workplace Safety and Insurance Act, 1997 (“WSIA”), which amounts were treated by the Minister as increasing the Cost of Sales of 145 by an amount of the difference between the cost of sales actually reported and the cost of sales determined to be ultimately expended by the Appellant, but that, notwithstanding such increased deduction there was still unreported net income. Accordingly, the Respondent says the amount assessed as income to the Appellant was net income; i.e., net of the deductions for amounts paid to all these subcontractors, to clarify its position that there is no double counting in the amounts assessed against the Appellant.
Analyses
1. Issue of Whether the Appellant was a shareholder
[28] The assumptions of the Minister relevant to this issue are found in paragraphs 11(a), (b), (cc), (ee), (ff) and (gg) of the Minister’s Reply, a copy of which is attached as a Schedule to this decision and which particular paragraphs are also listed below for convenience.
11. In determining the Appellant’s tax liability for the 2001 and 2002 taxation years, the Minister made the following assumptions of fact:
a) The Appellant was a shareholder of four corporations, Plan A Services Inc., Impact Demolition & Restoration Management Inc., Planland Contracting Limited, and Impact Demolition Services Limited (the “Predecessor Corporations”);
b) On January 2, 2001 the four Predecessor Corporations amalgamated to form 1457223 Ontario Ltd., operating as Impact Services (“Impact Services”);
…
Appellant Was Shareholder of Impact Services
cc) The Appellant reported dividend income from Impact Services in 2002;
…
ee) the Appellant and his spouse Barbara Osinski were each 50% shareholders of Impact Services at the date of its incorporation;
ff) Impact Services reported that the Appellant was a 50% shareholder in its T2 returns for the taxation periods ending June 30, 2001 and June 30, 2002;
gg) in December of 2001 the Appellant transferred his shares to his spouse Barbara Osinski;
[29] There is no dispute that the Appellant was at least a shareholder of some of the Predecessor Corporations prior to their amalgamation as set out in paragraphs 11(a) and (b) of the Reply. Frankly, the evidence of both the Appellant and his spouse supports these assumptions as well, in that they both testified the businesses were family-owned businesses and that based on the advice of legal counsel prior to the amalgamation of the Predecessor Corporations into 145, they decided that the assets of the family would be put in the name of Barbara Osinski and that Jan Osinski would be the sole officer and director and hence take responsibility for the liabilities as part of their creditor-proofing plan.
[30] Notwithstanding the above, the Appellant takes the position that Barbara Osinski was the sole shareholder during the years in question, partly due to their agreement on the creditor-proofing plan above, but also because of her subsequent assertions that she was the sole shareholder. In furtherance of the creditor-proofing arrangement, the Appellant argues that notwithstanding the fact that his shares, representing 50% of the issued shares of 145, were not formally transferred to Barbara Osinski until December 1, 2001, that he