http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/126845/index.do
Centrepoint Foods Corporation v. The Queen (November 25, 2015 – 2015 TCC 296, Graham J.).
Précis: This case involved income tax appeals by both Centrepoint Foods Corporation (“Centrepoint”) and its principal shareholder as well as a GST appeal by Centrepoint. The assessments turned on alleged under-reported sales and over-stated expenses from a Saint Cinnamon franchise in a shopping mall in Kingston, Ontario. In a nutshell the taxpayers were represented by an agent who claimed to have documentation to support the taxpayer’s position on expenses which he actually displayed to the Court but never introduced into evidence. The Court dismissed all of the appeals but vacated the gross negligence penalties on the disallowed expenses (both for income tax and GST purposes) and on the shareholder benefits. Essentially the Court held that the taxpayers’ agent did not know what he was supposed to do with the documents he had brought to Court. The Court upheld the gross negligence penalties on additional sales computed based on CRA’s comparison of equivalent franchise operations. Since these were all informal procedure appeals there was no order as to costs.
Decision: The nub of this case is that the taxpayers were represented by an agent who did not seem to know what he should be doing:
[7] The primary argument put forward by the Respondent for upholding the penalties was the lack of documentation to support the expenses. Centrepoint’s general ledger was not entered as an exhibit at trial. While some of the accountant’s working papers were filed as exhibits, no witness explained them. Mr. Melka testified that he had reviewed the working papers the evening before trial and that the information contained therein did not provide sufficient verification for him to change his mind on denying the expenses. In any event, the working papers were somewhat meaningless without the underlying general ledger as it was not possible to see what entries the adjusting journal entries in the working papers were adjusting and whether those adjustments had, in fact, been made. No invoices or receipts were filed as exhibits nor were they explained. Other than the cheques relating to the expenses classified as personal expenses that the Respondent entered into evidence, no cancelled cheques were entered into evidence nor were the nature of the expenses that were paid by cheque explained. During the trial, the agent for Centrepoint referred on numerous occasions to the fact that he had documentary evidence to support each expense that had been claimed. At least twice he held up what appeared to be a sample bundle of receipts or invoices. However, despite my clear instructions to him that he needed to introduce into evidence any documents that he wanted me to rely upon in reaching my decision, he introduced none of those documents.
[8] The Respondent would like me to draw an adverse inference from Centrepoint’s failure to introduce documents at trial and conclude that the relevant documents would not have supported Centrepoint’s position. I am unwilling to do so. The strong impression that I received during the trial was that the reason that the documents were not introduced was not because there was a conscious decision on the part of Centrepoint not to introduce them, but rather because the Appellants’ agent simply did not appreciate that it was essential to do so.
[Footnote omitted]
Footnote 1 is quite instructive:
1. In essence, the agent, who was a former CRA auditor, conducted the Appellants' case as if he were still working for the Minister and could sit back and rely on the other side's lack of evidence to win.
While all of the appeals were dismissed the Court did vacate the gross negligence penalties in connection with disallowed expenses (for both income tax and GST purposes) and shareholder benefits. The gross negligence penalties were upheld in the case of on additional sales computed based on CRA’s comparison of equivalent franchise operations. Since these were all informal procedure appeals there was no order as to costs.
Comment: This decision is somewhat of a cautionary tale about reliance upon former CRA auditors acting as agents before the Tax Court.