Coombs v. R. - TCC: Tax Court rejects alleged losses

Précis: This case was a real mixed bag. Three appeals were heard together. John Coombs appealed his 2003 and 2004 taxation years...
Coombs v. R. - TCC:  Tax Court rejects alleged losses

Coombs v. The Queen (June 15, 2015 – 2015 TCC 148, Hogan, J.).

:   This case was a real mixed bag.  Three appeals were heard together. 

John Coombs appealed his 2003 and 2004 taxation years:

[2]             In the appeals of John Coombs, the Minister of National Revenue (the “Minister”) disallowed allowable business investment losses (“ABILs”) claimed for the 2003 and 2004 taxation years in respect of the alleged disposition of shares; the Minister did so on the grounds that the Appellant never owned the shares in question. The Minister also disallowed a business loss claimed by the Appellant in connection with a business, JFC Consulting, that the Minister says he did not actually operate. Finally, the Minister disallowed, on the grounds that the Appellant was not an employee of Select in those years, a credit for taxes purportedly withheld at source by Select Travel Inc. (“Select”) in connection with employment income purportedly earned by the Appellant in 2004 and 2005. The Minister alleges that any taxes that were remitted on the Appellant’s behalf were paid for the sole purpose of allowing him to claim a credit on his tax return.

He was subpoenaed to attend but did not appear in response the subpoena.  

Sun-Air Travel Inc. (“Sun-Air”) was assessed for 2002 to 2006 for unreported income, personal expenses and overstated expenses.

Select Travel Inc. (“Select”) was reassessed for 2001 to 2007.  The reassessments included excess expenses and the disallowance of non-capital losses on the shares of Sun-Air.

In the case of all three taxpayer the Minister opened up statute-barred years and imposed gross negligence penalties.

All taxpayers were represent by Harold Coombs, the brother of John Coombs, and an accountant with both a CGA and CPA designation.  Part of the Crown’s allegations was that Harold Coombs in fact controlled both Sun-Air and Select.  He was called as a witness by the Crown.  The Court did not accept the evidence of Harold Coombs and dismissed all three appeals.  No costs were awarded because the three appeals were heard under Informal Procedure Rules.

Decision:   There is not much to be said about this case.  Essentially the Court did not accept the evidence of Harold Coombs, found that he controlled both Sun-Air and Select and drew a negative inference from the failure of John Coombs to appear in response to a subpoena:

[18]        There were other notable inconsistencies which undermined Harold Coombs’ credibility. For example, he acknowledged that Sun Air had given up its licence as a travel agency in 2002 and therefore could not provide services to the public after that date, and that he had written to Sun Air’s shareholders in 2003 to tell them that Sun Air was insolvent. Despite this, Sun Air expended significant amounts as salaries in 2004 and 2005. Jeff Russell purportedly received $21,345 in 2004, when he was employed elsewhere. T4 information slips were prepared, but no withholdings or remittances were made with respect to payroll taxes. When questioned on this particular expense, Harold Coombs first said that Mr. Russell provided sales services. When it was pointed out that Sun Air was no longer registered as a travel agency, he said he could not recall what sales services Mr. Russell may have provided or whether he brought in any sales at all, despite Mr. Russell’s purported salary being the highest of any Sun Air employee for the year. When questioned on the fact that Mr. Russell claimed he was not an employee and the Respondent’s allegation that the book entries were made to allow Sun Air to claim a fictitious expense and to allow Mr. Russell to claim a credit for fictitious withholding taxes, Harold Coombs explained that Sun Air may have paid the expense in shares.

[19]        Considering Mr. Coombs’ testimony as a whole, I did not find him to be a credible witness.

[21]        Ms. Watson [of CRA] prepared comprehensive T20 audit reports and also penalty reports with respect to each item in dispute in these appeals. In painstaking detail, she presented the financial, accounting and shareholder information which she relied on to disallow the expenses, losses and/or credits at issue in the matters at bar. Ms. Watson’s testimony was not contradicted on cross examination. I could discern no errors, discrepancies or inconsistencies in her presentation of her audit and penalty reports. Her theory was that Harold Coombs was once again engaged in the fabrication of fictitious tax benefits to advantage himself directly or indirectly. As observed by Ms. Watson, the incorrect book entries and corporate documents were prepared by Harold Coombs with little care for detail. For example, he claimed that Sun Air commenced its winding up in 2003, yet, in correspondence earlier that year, he advised shareholders that Sun Air was insolvent. He then continued to record expenses for Sun Air in 2003 and 2004. He appears to have taken the position that Sun Air’s shares were all owned by Select in 2003, yet none of the share transfer registers in the corporate documents allow one to arrive at that conclusion.

[22]        The evidence shows that Harold Coombs was the directing mind of the two corporate Appellants. Therefore, his actions are properly imputable to the corporate Appellants.

[23]        John Coombs appears to have conveniently avoided receipt of a subpoena to testify as an adverse witness in his own appeal. There is not a shred of reliable evidence supporting the credits and expenses claimed by John Coombs. On the contrary, there is considerable reliable evidence to show that he was not entitled to the deductions, losses and credits disallowed by the Minister. The paperwork was so poorly done that I can properly infer that Mr. John Coombs knew that misrepresentations attributable to gross negligence were made in his tax returns with respect to the amounts disallowed by the Minister.

[25]        In the appeals of John Coombs, I find that the Minister correctly disallowed the ABILs, business loss, and employment credits claimed by the Appellant. In the appeals of Select, I find that the Minister correctly disallowed the excess expenses and non-capital losses.  In the appeals of Sun-Air, I find that the Minister correctly disallowed the overclaimed expenses and personal expenses (as set out in the chart in paragraph 6 above), and that the Minister correctly included in income the unreported revenue. With respect to the unreported revenue, I note that the Minister relied on journal entries purportedly transferring funds from Select and Travelsphere to Sun Air. While such journal entries on their own would not always be sufficient to establish actual income flowing into Sun Air, I accept the argument made by the Respondent’s counsel that in this case, where there are multiple instances of fraud and fabrication, and where the preparer of the entries could not give any explanation as to their purpose, the journal entries are sufficient to establish the existence of unreported revenue.

[26]        For all these reasons, the appeals are dismissed and the reassessments are confirmed.