Tax Court of Canada


Income tax

Business and property income

Taxpayer knowingly misrepresenting reported income or grossly negligent subject to penalties

Corporate taxpayer had four shareholders and was in business of importing and exporting textile products manufactured in Pakistan by non-arm’s length entity NE. Manufactured products were shipped directly from Pakistan to taxpayer’s customers. Taxpayer maintained account where it recorded invoices received from NE, payments made to NE by taxpayer, and payments received by NE directly from customers. Taxpayer claimed overseas management expenses, incurred pursuant to service and funding agreement between taxpayer and NE, in tax returns. In reassessments for two taxation years, Minister of National Revenue disallowed claimed business expenses on basis that expenses did not relate to distribution or shipment of merchandise to customers and that taxpayer did not pay expenses to earn business income. Minister applied gross negligence penalties. Taxpayer appealed. Appeal dismissed. Books and records maintained by taxpayer were deficient. Taxpayer did not provide documentation to substantiate amounts in each category of expenses in “other expenses” claim and did not explain how they were incurred for purpose of earning income from its business. Minister established that taxpayer’s misrepresentation was attributable to taxpayer’s neglect or carelessness. Taxpayer operated international trade business and used accountant to prepare financial statements and tax returns. Taxpayer knowingly misrepresented its reported income or had been grossly negligent by not paying attention to claimed expenses. Amounts subject to penalty were material to reported income.

Celeste Resources Canada Inc. v. The Queen (2017), 2017 CarswellNat 6439, 2017 CarswellNat 6726, 2017 TCC 200, 2017 CCI 200, Réal Favreau J. (T.C.C. [Informal Procedure]).

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