Citation: 2011 TCC 1
Date: 20110106
Dockets: 2008-3574(GST)I, 2008-3575(IT)I
BETWEEN:
WALDEMAR MISIAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2008-3578(IT)I
INDEPENDENT CONSTRUCTION BUSINESS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Hogan J.
[1]
The Appellant Waldemar
Misiak operated a business as a sole proprietorship in the construction
industry. He installed tiles on floors and walls as an independent
subcontractor. He worked alone in the business. On October 16, 2001, Mr. Misiak
incorporated the sole proprietorship under the name Independent Construction
Business Inc. (the “Corporation”). The Corporation’s fiscal year ends on
September 30.
[2]
Following the discovery
of a discrepancy between the income reported by the Corporation for its
2002 taxation year and the income paid by general contractors to the
Corporation for its installation subcontracts in that year, the Canada Revenue
Agency (the “CRA”) undertook a full-scale audits of Mr. Misiak’s 2001,
2002 and 2003 taxation years and the Corporation’s 2002 and 2003 taxation
years.
[3]
Following the audits
and after taking into account certain of the taxpayers’ representations made following
the filing of notices of objection, the Minister of National Revenue (the
“Minister”) reassessed the taxpayers as follows:
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2001
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2002
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2003
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|
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|
|
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Mr. Misiak
2008-3575(IT)I
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Unreported income
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$25,810.90
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$23,206.00
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$5,935.26
|
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Gross negligence penalties
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$1,048.48
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$1,078.90
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—
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The Corporation
2008-3578(IT)I
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Unreported net income
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—
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$30,234.00
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$5,935.26
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Disallowed business expenses
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―
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$10,454.00
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$5,236.00
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January 1, 2001 to December 31, 2003
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|
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Mr. Misiak
2008-3574(GST)I
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Net GST
|
$10,630.51
$5,429.39
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|
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Penalties and interest
|
[4]
The appeals were heard
on common evidence.
[5]
The reassessments
issued against Mr. Misiak were based on the net worth method. The CRA’s
net worth calculation reveals a large discrepancy between Mr. Misiak’s
reported income and the income estimated to be needed to support his family.
Mr. Misiak’s 2001 taxation year can only be reopened if the Respondent
demonstrates that Mr. Misiak has misrepresented the amount of income earned
in that year and that this misrepresentation is attributable to neglect,
carelessness or wilful default on his part. Since Mr. Misiak admitted that
he had no income other than that earned indirectly by the Corporation, the
Respondent alleges that Mr. Misiak must have appropriated the
Corporation’s income to cover the excess of his estimated personal living
expenses over his declared income. The Respondent’s estimates of
Mr. Misiak’s personal living expenses were determined by reference to the
national averages of living expenses calculated by Statistics Canada
(“StatsCan”) for a family of five or more persons living in Canada.
[6]
At trial, counsel for
the Respondent abandoned for the period from October 16, 2001 to
December 31, 2003 the contestation of the appeal filed by Mr. Misiak against
the assessment issued under Part IX of the Excise Tax Act (the “ETA”),
as the business was carried on by the Corporation and not Mr. Misiak during
that period. The goods and services tax assessment remains in dispute for the
period from January 1, 2001 to October 15, 2001. The Respondent also
conceded that Mr. Misiak and the Corporation did not have unreported
income for the 2003 taxation year. Only the disputed business expenses remain
an issue for that year.
[7]
The issues for
consideration in this appeal, as stated in the Respondent’s written argument, are
whether:
(a) the Minister properly reassessed the appellant Misiak beyond the
appellant’s normal reassessment period in respect of his 2001 taxation year pursuant
to subparagraph 152(4)(a)(i) of the Income Tax Act and
paragraph 298(4)(a) of the Excise Tax Act;
(b) the appellant, Misiak, understated his income by the amounts of
$25,810, and $23,206 in his 2001 and 2002 taxation years respectively;
(c) the Minister properly reassessed the appellant, Misiak,
penalties in the amount of $1,048.48 and $1,078.90 for the 2001 and 2002
taxation years pursuant to subsection 163(2) of the Income Tax Act
R.S.C. 1985 c. 1, as amended (the “Act”);
(d) the Minister properly reassessed the appellant, Misiak,
penalties for the period between January 1, 2001 to October 16, 2001
pursuant to section 285 of the Excise Tax Act, R.S., 1985, c. E-15, as
amended (the “Excise Tax Act”);
(e) the Business unreported[sic] its income by $30,234 for
the 2002 taxation year;
(f) the Minister properly reassessed the Business, penalties in the
amount of $1,048.48, for the 2002 taxation year pursuant to subsection 163(2)
of the Act;
(g) the disallowed expenses for the 2002 and 2003 taxation years in
the amounts of $10,454 and $5,236 respectively were made or incurred by the
Business; and
(h) the expenses for the 2002 and 2003 taxation year[s] were made or
incurred for the purpose of gaining or producing income from a business or
property.
Factual Background
[8]
Mr. Misiak
testified that he received his work from general contractors. He generally
worked six days a week and was paid on a square footage basis. He claims that
he was always paid by cheque.
[9]
Mr. Misiak has
five boys and lived with his wife at the family home in Mississauga, Ontario, until sometime in 2003, when he moved out
to live on his own following a marital breakdown.
[10]
Mr. Misiak
explained that he arrived in Canada from Poland
in 1999. Life had been difficult in Poland. Mr. Misiak
claims that he and his family learned to live frugally. He testified that they
purchased second-hand clothes and furniture from local Goodwill stores in the
area where they lived. They rarely ate out, and if they did so, it was at
McDonald’s. The family spent money only on essential goods and services.
According to Mr. Misiak, his family was able to live on the approximately
$28,000 of income that he and his wife earned annually plus the child tax
benefits of between $9,000 and $10,000 received each year.
[11]
For the purposes of the
net worth analysis, the CRA assumed that Mr. Misiak’s personal living
expenses were $52,907 and $57,633.19 for the 2001 and 2002 taxation years
respectively. Mr. Misiak claims that his living expenses were
substantially lower than the national averages calculated by StatsCan for a
similarly/sized family. In his testimony, he claimed that for the 2001 and
2002 taxation years respectively his personal living expenses were at
least $8,000 and $11,500 lower than the amounts determined by the CRA.
Analysis
[12]
Subparagraph 152(4)(a)(i)
of the Income Tax Act (the “ITA”), which governs time limits for
assessments, reads as follows:
(4) Assessment and reassessment [limitation period] ― The Minister may at any time make an assessment, reassessment or
additional assessment of tax for a taxation year, interest or penalties, if
any, payable under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that no tax is
payable for the year, except that an assessment, reassessment or additional
assessment may be made after the taxpayer’s normal reassessment period in
respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to
neglect, carelessness or wilful default or has committed any fraud in
filing the return or in supplying any information under this Act, or . . .
.
[Emphasis added.]
[13]
The reassessment issued
in relation to the 2001 taxation year was issued after the expiration of the
normal reassessment period. Pursuant to subparagraph 152(4)(a)(i), where
the Minister issues a reassessment in relation to a taxation year after the
expiration of the normal reassessment period, the Minister has the onus of
establishing that the taxpayer has made a misrepresentation and that that
misrepresentation was attributable to neglect, carelessness or wilful default or
that the taxpayer has committed fraud in filing his tax return or in supplying
information under the ITA in relation to that taxation year.
[14]
Mr. Misiak’s position
is that the Minister cannot reopen the 2001 taxation year solely on the basis of
his net worth analysis. Mr. Misiak relies on the decision of Bowman C.J. in 943372
Ontario Inc. v. The Queen
in support of his position. In that case the Minister assessed the corporate
taxpayer on alleged unreported sales of about $697,000. The individual appellant
was the manager of the corporate taxpayer, which was owned by the individual appellant’s
daughter. The individual appellant was reassessed on the $697,000 of alleged
unreported sales made by the corporate taxpayer, the reassessment being based
on the results of a net worth analysis.
[15]
Owing to his discomfort
with the net worth assessment, Bowman C.J. decided the case in favour of the
appellant and made the following observations:
10 There is one other problem about the Crown’s case against
Valerie Sr. that I find somewhat troubling. The 2001 assessments against
Valerie Sr. are statute-barred and can only be salvaged
if the conditions in subsections 152(4) and 152(4.01) are met. The 2001 assessments against Valerie Sr. are net worth assessments. They are
arbitrary assessments not specifically based on any particular sources of
income. How can a net worth assessment ever meet the conditions set out in
subsection 152(4.01)? To conform to subsection 152(4.01) a reassessment under
subsection 152(4) must be limited by the words in subsection 152(4.01) “... to
the extent that, but only to the extent that, it [the reassessment] can
reasonably be regarded as relating to a misrepresentation attributable to
neglect, carelessness or wilful default or any fraud ...”. . . .
[Emphasis added.]
[16]
For taxation years that
are not statute-barred, a taxpayer has the burden of demonstrating that his
income was less than that determined by a net worth assessment. The taxpayer
can discharge his evidentiary burden by showing that he received non-taxable amounts
or borrowed money that was not accounted for in the net worth analysis
calculations. He can prove that his net assets in the base year were
higher than the net assets determined by the Minister for that year. The
taxpayer can lead convincing evidence to reconstruct his income. However, when
the proverbial shoe is on the other foot and the year is otherwise
statute-barred, the Minister faces the very same evidentiary burden: the
Minister must lead reliable evidence to establish on a balance of probabilities
that the taxpayer has understated his income as a result of neglect,
carelessness or wilful default on his part.
[17]
The evidence presented
by the Minister in the present situation does not meet this standard. The
whole of the Respondent’s case rests on the narrow premise that the net
worth analysis establishes a significant discrepancy between Mr. Misiak’s
and his wife’s reported income and an estimate of their family’s personal
living expenses for the 2001 taxation year. The estimate was established by
reference to figures from StatsCan for a family consisting of a husband and
wife and three or more children. No one was called to explain how these
figures were established. Counsel for the Respondent acknowledges that the
figures are national averages. No evidence was led to establish how those
averages were determined or to show how they may relate to Mr. Misiak’s earning
power in the tile installation trade and his family’s lifestyle in 2001. When a
taxation year is statute-barred, the Minister cannot simply assume a figure for
a taxpayer’s living expenses and claim victory if the taxpayer does not
demolish his assumption. The Minister can only do this if the reassessment has
been issued within the normal reassessment period. The ITA does not
require taxpayers to keep records of their personal expenditures.
[18]
I can appreciate that
Mr. Misiak would have difficulty reconstructing his personal living
expenses many years after the fact. However, the burden was on the Minister
to lead reliable evidence regarding Mr. Misiak’s personal living expenses.
The Respondent failed to do so and, as a result, the 2001 taxation year remains
statute-barred.
[19]
I reach an altogether
different conclusion with respect to all of the other issues that are in
dispute in the present cases. Mr. Misiak admits that the Corporation
underreported its income for the 2002 taxation year. The CRA auditor believes
that Mr. Misiak appropriated the unreported income to fund his personal
living expenses. She relies on the net worth analysis to draw this conclusion.
Mr. Misiak has the burden of showing that his personal living expenses
were less than those assumed by the Minister because that year is not statute-barred.
He and his agent could have put into evidence the books and records of the
Corporation to show that no funds were appropriated by Mr. Misiak for his
personal benefit. A balance sheet and details concerning the Corporation’s cash
flow over the relevant period could have been introduced into evidence by
Mr. Misiak to show that all of the Corporation’s net earnings were
reinvested in its business. This was not done and I draw a negative inference
from that fact. No reliable evidence was led by the Corporation to show that
the expenses that were disallowed for the 2002 and 2003 taxation years
were expenses incurred for the purpose of earning income from the operation of
its business.
[20]
For all these reasons,
the appeals are to be dealt with as follows:
1. Mr. Misiak’s
appeal from the reassessment issued under Part IX of the ETA for the
period from January 1, 2001 to December 31, 2003 is allowed and the
reassessment is vacated.
2. Mr. Misiak’s
appeal from the reassessment issued under the ITA for the 2001 taxation
year is allowed and the reassessment is vacated.
3. Mr. Misiak’s
appeal from the reassessment issued under the ITA for the 2002 taxation
year is dismissed.
4. Mr. Misiak’s
appeal from the reassessment issued under the ITA for the 2003 taxation
year is dismissed.
5. The Corporation’s
appeal from the reassessment issued under the ITA for the 2002 taxation
year is allowed and sent back for reconsideration and reassessment to
reduce the amount of unreported income from $53,440 to $30,234.
6. The Corporation’s
appeal from the reassessment issued under the ITA for the 2003 taxation
year is dismissed.
These Amended Reasons for Judgment are issued
in substitution of the Reasons for Judgment dated January 6, 2011.
Signed at Ottawa, Canada, this 12th day
of December 2011.
"Robert J. Hogan"
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