http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/180707/index.do
Osaduke v. The Queen (September 23, 2016 – 2016 TCC 209, Paris J.).
Précis: The taxpayer was audited and the auditor by means of examining bank deposits concluded that he had unreported income in both 2008 and 2009 from the sale of metal and coins and from eBay sales. The Tax Court reduced the unreported income from $62,111 and $46,008 in 2008 and 2009 respectively to $39,488 and $44,425 respectively however it sustained gross negligence penalties on the reduced amounts. There was no award of costs since this was an informal procedure appeal.
Decision: The Court rejected the taxpayer’s explanations for the unexplained bank deposits:
[20] I find it highly implausible that the Appellant and his wife sold $27,000 worth of figurines and collectibles, as they say they did in 2008 and 2009. The reason given for the sales was that they were in financial difficulty after the Appellant declared bankruptcy. However, the bankruptcy occurred in 2005, at least two years before the alleged sales began. I note, too, that the Appellant purchased a house in late 2009, which does not support the allegation of financial difficulties around that time. Also, the evidence of the Appellant and his spouse that the items were sold in 2008 and 2009 at flea markets and to friends conflicts with the statements by Jean Osaduke to the CRA in 2012 that the sales began in early 2006 and were sold in part through an auction house. In her testimony in Court, Jean Osaduke said she didn’t recall selling any of the items through the auction house but offered no explanation for her earlier statement to the CRA. As well, I find it unlikely that sales of the collectibles would have been done largely at flea markets if the Appellant and his spouse wished to obtain the best price for them. I believe it is more likely that they would have used the same online sale method that the Appellant used to sell coins if they were disposing of the items. Also there was no corroboration of the sales allegedly made to friends.
[21] I also find the evidence regarding cash gifts from the Appellant’s father as well as that relating to gambling winnings unconvincing. While the Appellant now says he and his spouse received substantial amounts from his father for Christmas each year and to assist with the purchase of the house in 2009, this source of funds was never brought to the attention of the auditor. The testimony of the Appellant and his spouse concerning the gambling winnings is, in my view, implausible. On the one hand, they say they were in very difficult financial circumstances in 2008 and 2009, but on the other that they went gambling a couple of times a week. As well, on the basis of the contradictions, inconsistencies and implausibilities in their testimony on other points, I find they were not credible witnesses.
However the Court accepted counsel’s argument that there was some double-counting in the amounts assessed:
[23] I do accept, however, the submission of the Appellant’s counsel that there is likely a double counting of income in 2008 because both the unidentified deposits and the revenue from the eBay and in-store sales were added separately to income. It is reasonable to assume that at least a portion of the unidentified deposits came from the eBay and in-store sales. The evidence shows that a portion of the revenue from these sales was not deposited to the account but instead used to make cash purchases of additional inventory. The bank records confirm that little cash was withdrawn in 2008 and 2009. The amount allowed for cash purchases of inventory was $44,532 in 2008, a figure supplied by the Appellant himself. The excess of revenue from eBay and in-store sales (net of eBay expenses and eBay refunds) over the cash purchases is $22,285. By taking into account the likelihood of this amount being double counted, the unreported business income would be reduced from $62,111 to $39,488 in 2008.
Nevertheless the Court sustained gross negligence penalties on the reduced amounts of income:
[25] On the question of penalties, the evidence is clear that the Appellant chose not to report his business income in his 2008 and 2009 tax returns. He filed those returns without including the business income because he said he had lost his records that were maintained on a computer that stopped working. I do not accept this version of events because I find that a computer malfunction in or around May of 2009 would not have prevented the Appellant from reconstructing his sales and purchases (which according to Steven Osaduke is eventually what was done.) This task would have been easier for the 2009 year return because only four months of records would have been lost. On the other hand, if the data necessary to determine business income was in fact retrieved from the computer hard drive (as the Appellant says), there is no reason this could not have been done before the returns were filed. There is also no satisfactory explanation why, if the records had been lost, nothing was done about it until the CRA auditor arrived in 2012. In any event, I highly doubt the Appellant had the business records he said he did, given the discrepancy between his testimony and that of his son concerning who did the day-to-day bookkeeping for the Appellant.
[26] Section 163(2) of the Act provides for a penalty where a “person knowingly or in circumstances amounting to gross negligence has made…a false statement or omission in a return…”
[27] I am satisfied that the Respondent has met the onus of proving that the Appellant knowingly omitted to report his business income in both years. I am also satisfied that the Respondent has shown that at least $39,488 of business income was not declared by the Appellant in his 2008 return and $44,425 of business income was not declared by him in his 2009 return. As these amounts are lower than what was reassessed the penalties must be adjusted.
There was no award of costs since this was an informal procedure appeal.