Knittle v. The Queen

Knittle v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2006-06-07 Neutral citation 2006 TCC 393 File numbers 2004-2254(IT)I Judges and Taxing Officers Cameron Hugh McArthur Subjects Income Tax Act Decision Content Docket: 2004-2254(IT)I, BETWEEN: ANTHONY KNITTLE, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on June 3, 2005 and May 15, 2006, at Vancouver, British Columbia, with the appeals of Kim H. Knittle, 2004-2255(IT)I, and Kim Knittle o/a Data Secured, 2004-2740(GST)I, By: The Honourable Justice C.H. McArthur Appearances: Agent for the Appellant: Kim H. Knittle Counsel for the Respondent: Pavanjit Mahil ____________________________________________________________________ JUDGMENT The appeals from reassessments of tax made under the Income Tax Act for the 1999 and 2000 taxation years are dismissed. Signed at Ottawa, Canada, this 6th day of July, 2006. "C.H. McArthur" McArthur J. Docket: 2004-2255(IT)I, BETWEEN: KIM H. KNITTLE, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on June 3, 2005 and May 15, 2006, at Vancouver, British Columbia, with the appeals of Anthony Knittle, 2004-2254(IT)I, and Kim Knittle o/a Data Secured, 2004-2740(GST)I, By: The Honourable Justice C.H. McArthur Appearances: For the Appellant: The Appellant herself Counsel for the Respondent: Pavanjit Mahil ____________________________________________________________________ JUDGMENT The appeal from the reassessment of tax made under the Income Tax Act for the 2000 taxation year is dismissed. Signed at Ottawa, Canada, this 6th day of July, 2006. "C.H. McArthur" McArthur J. Docket: 2004-2545(IT)I, BETWEEN: EVERETT A. CUMMINGS, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ The Honourable Justice C.H. McArthur Signatories: For the Appellant: The Appellant himself Counsel for the Respondent: Pavanjit Mahil ____________________________________________________________________ JUDGMENT Upon reading the Consent to Judgment, filed; The appeal from the reassessment of tax made under the Income Tax Act for the 2000 taxation year is allowed and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct an additional business loss of $13,401.50, for a revised total net business loss of $20,389.50. Signed at Ottawa, Canada, this 6th day of July, 2006. "C.H. McArthur" McArthur J. Docket: 2004-2740(GST)I BETWEEN: KIM KNITTLE, o/a DATA SECURED, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on June 3, 2005 and May 15, 2006, at Vancouver, British Columbia, with the appeals of Anthony Knittle, 2004-2254(IT)I and Kim H. Knittle, 2004-2255(IT)I, By: The Honourable Justice C.H. McArthur Appearances: Agent for the Appellant: Kim H. Knittle Counsel for the Respondent: Pavanjit Mahil ____________________________________________________________________ JUDGMENT The appeal from the reassessment of tax made under the Excise Tax Act, notice of which is dated March 9, 2004, and bears number 11GU-GL032751237271, for the period January 1, 1999 to December 31, 2000, is dismissed. Signed at Ottawa, Canada, this 6th day of July, 2006. "C.H. McArthur" McArthur J. Citation: 2006TCC393 Date: 20060607 Docket: 2004-2254(IT)I, 2004-2255(IT)I 2004-2545(IT)I, 2004-2740(GST)I BETWEEN: ANTHONY KNITTLE, KIM H. KNITTLE, EVERETT A. CUMMINGS and KIM KNITTLE OP DATA SECURED, Appellants, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT McArthur J. [1] The appeals of Anthony and Kim Knittle and Data Secured were heard together, while the appeal of Everett Cummings was settled during the hearing and a Consent to Judgment filed. The two income tax appeals deal with whether the Appellants failed to report business income and are entitled to deduct expenses in excess of the amounts allowed by the Minister of National Revenue. The goods and services tax appeal of Data Secured is with respect to assessments for under-reported GST collectible and input tax credits claimed, during the period January 1, 1999 to December 31, 2000, and for the most part is largely dependent on the outcome of the income tax appeals. Anthony's appeal is with respect to the 1999 and 2000 taxation year, while Kim's appeal is for the 2000 taxation year only. Her 1999 income tax appeal was previously quashed since she had sought relief from a nil assessment, and the law is clear that there is no appeal from a nil assessment except in specific circumstances which do no exist presently. After several efforts prior to the commencement of trial to resolve the disputes, the Minister made some concessions, which were acknowledged by the Appellants including that a motor vehicle expense had been reduced to the amount of $3,514 since it had been allowed twice in error. [2] The main issue was the deductibility of expenses incurred (75% by Anthony and 25% by Kim for 2000 only) in the amounts of $58,621 and $71,922 in 1999 and 2000, respectively, of which the Minister had allowed $30,864 and $34,108 on reassessment. The hearing of the appeals commenced on June 3, 2005. After 1½ hours, it was clear that Kim, on her own behalf as well as for the other Appellants, was not properly prepared to proceed. She had no books or records but did have some receipts, cancelled cheques and bank statements, which were disorganized and confusing and without any order, separation or tabulation, with respect to the three appeals. An accountant, Fareed Raza, was ostensibly the agent for the Appellants, but he was not able to assist in unravelling the disarray. An adjournment was granted until May 15, 2006 at which time the parties informed the Court that they had met on at least two occasions within that period, with only limited concessions being agreed to. The hearing proceeded on May 15, 2006, with little having been achieved during the past 11 months. [3] Anthony and Kim are husband and wife. They operated several businesses in partnership, including Desert Country Music, which was mainly involved in promoting only one country music singer, Kim's daughter, Desiree, or Desi Kay. Everettwas the spouse of Desiree. Anthony and Kim also carried on a Data Secured franchise business, which provided computer backup services. Also, Anthony earned income from consulting work for commercial kitchen renovations. The above partnerships and business were owned by Anthony as to a 75% interest and Kim as to a 25% interest. Kim alone testified on behalf of the Appellants. Neither Anthony nor Desiree appeared to testify. [4] Kim's evidence was disjointed and lacked clarity, leaving the Court to attempt to form an opinion, without specifics nor documentation for the expenditures claimed. The Appellants failed to keep books of record and bank statements, cancelled cheques and invoices were presented in a manner which made it difficult to arrive at the conclusion intended. Apparently, there were four bank accounts, all used for the businesses with intermingled money. Desiree and Everett Cummings also had one or more accounts for the same partnership, Desert Country Music. Desiree and Everett paid some invoices and the Appellants paid others. There was no orderly arrangement or recordkeeping. Also, it was adduced in evidence that neither Anthony nor Kim were paid for their services in promoting Desiree's career. It was closer to a labour of love than that of a business. When Kim was asked in examination how she kept her business and personal expenses separate, her answer was "I just know". [5] These appeals arose from an audit conducted by the Minister in 2002. The auditor for Canada Revenue Agency, (CRA) Linda Browning, testified on behalf of the Respondent. I fully agree with her following comment with respect to the Appellant's books and records: The client does not have summarization of the expenses incurred or the revenues earned. The only documentation is folders with receipts. These folders are not usually added up or do not necessarily relate to any of the categories on the Statement of Business Activities. It was impossible to reconcile the receipts provided with the expenses claimed. After her first report to the Appellants, Linda Browning wrote to the Appeals Division of CRA on January 22, 2004, as follows: I have reviewed the documentation forwarded to me for the above taxpayer. It was difficult to determine which documentation was new. The folders and supporting documentation were not organized using the same classifications as in the original audit. This made the review time consuming. Many of the items were claimed in two places: one using the debit/charge card slip and the other using the original receipt. Also in Meals & Entertainment, Motor Vehicle Expense, Other Expenses and Travel. I have no hesitation in believing this report and can relate to her difficulties.However, she carefully went through every receipt and statement provided by Kim (after numerous requests from CRA), and for the most part allowed the recorded invoices, although she disallowed minimal receipts for clothing, and one-half of meal and liquor receipts, concluding these amounts were not expended to earn income. It appears the Minister has allowed approximately 50% of the expenses claimed. Also, I was informed that for the appeal of the 1999 taxation year of Anthony, the revenue amount is no longer an issue, and the motor vehicle amount claimed increased to $6,428. [6] With respect to the GST appeal of Data Secured, the Notice of Appeal filed and the evidence of Kim was of limited assistance. To purchase the franchise in 1995 and to provide operating capital, Kim and Anthony borrowed $123,000 which was secured by a mortgage on their home. They claimed as a business expense the interest paid, until sometime in 1998 when the mortgage was increased to $145,000, more than likely to obtain additional funds to invest in the music production business of Desert Country Music which, as mentioned above, was solely involved in promoting their daughter's career. This indebtedness was paid off in August 1999 when the home was sold for $280,000, and they purchased a two-family dwelling together with their daughter and son-in-law. At the time of purchase, they entered into a new mortgage in the amount of $285,300, bearing interest at the rate of 6½%. Exhibits A-1, A-3, A-4 and A-17 contain mortgage information. The Appellants are requesting a deduction of their share of the new home mortgage interest in effect carried over from their home in Vancouverto the two-family home in Coquitlam. Again, their documents are lacking. [7] In addition to Data Secured and Desert Country Music, at some point during the mid- to late-1990s, Anthony performed consulting work for commercial kitchen renovations. The Minister alleges that Data did not provide adequate documentation for the ITCs claimed and underreported net GST of $1,926.29. The only relief sought by the Respondent in the Data appeal is for validation of its assessment of the Appellant for unreported net tax, plus interest and penalty. [8] Again, the Appellant presented no books and records, but did place into evidence file folders and documents consisting of bank statements, cancelled cheques, invoices, handwritten accounting records, mortgage statements and the like. In her testimony, Ms. Browning stated that many deductions were disallowed because there was insufficient support documentation. I have made a serious effort to find additional allowable expenses, without success. Exhibit A-1 purportedly deals with mortgage funds borrowed to earn income, however, there are documents dated 2004 and 2005 commingled with the relevant taxation years of 1999 and 2000. The Appellants have not made my review easy. It is very difficult to discern what the expenditures were for. The folders and three or four miscellaneous documents which were produced makes it evident that the accounting was completely unreliable. In one instance, in reviewing the purported invoices, the amount claimed as an expenditure was the amount of the account, plus the deposit which had been made, as opposed to claiming the initial invoice amount. Also, it appears some expenditures have been claimed twice by use of photocopies. They have perhaps expended additional money to earn income, but their records and evidence do not reflect it. Kim and Anthony were dedicated to promoting their daughter's career and the evidence such as it is, was confusing. Also, it seems likely that Desiree's spouse, Everett, claimed some of the same amounts claimed by Anthony and Kim. [9] In reviewing the Minister's assumptions in the Replies to the Notices of Appeal, there being no evidence to the contrary, I am therefore in agreement with those assumptions. Further,it is unfortunate that Anthony, nor Desiree and Everett, did not testify to assist and corroborate Kim's evidence, which was imprecise at best. The auditor followed usual accounting procedures and her conclusions are understandable given the lack of proper records. [10] We will never know the exact amounts of relevant expenditures. The appeals that have been heard are dismissed. Signed at Ottawa, Canada, this 6th day of July 2006. "C.H. McArthur" McArthur J. CITATION: 2006TCC393 COURT FILE NO.: 2004-2254(IT)I, 2004-2255(IT)I, 2004-2545(IT)I, 2004-2740(IT)I STYLE OF CAUSE: ANTHONY KNITTLE, KIM H. KNITTLE, EVERETT A. CUMMINGS, KIM KNITTLE o/a DATA SECURED AND HER MAJESTY THE QUEEN PLACE OF HEARING: Vancouver, British Columbia DATE OF HEARING: May 15, 2006 REASONS FOR JUDGMENT BY: C.H. McArthur DATE OF JUDGMENT: July 6, 2006 APPEARANCES: Agent for the Appellant: Kim H. Knittle Counsel for the Respondent: Pavanjit Mahil COUNSEL OF RECORD: Counsel for the Appellant: Name: N/A Firm: N/A For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada