Citation: 2009TCC158
Date: 20090323
Dockets: 2008-2734(IT)I
2008-2735(GST)I
BETWEEN:
RESHAD OMER O/A KABUL
AUTO SELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The Appellant carries on a used
car dealership business as a sole proprietorship in Toronto. For
his 2004 and 2005 taxation years, the Appellant was reassessed to include
additional income from this business in his income as determined for the
purposes of the Income Tax Act (the “Act”) based on a net worth
analysis that was completed for his family. This also resulted in a
reassessment for additional net tax under the Excise Tax Act (the “ETA”)
for the period from January 1, 2004 to December 31, 2005 (the “Period”).
Also included in the reassessment issued under the ETA was a denial of
input tax credits that had been claimed in the amount of $1,743 in 2004 and
$8,994 in 2005 ($10,737 in total). Prior to the commencement of the hearing the
parties met to review the receipts that the Appellant and his Agent had brought
to the hearing. Following this meeting, the Agent for the Appellant stated that
the Appellant was no longer appealing the denial of the input tax credits of
$10,737.
[2]
As a result, the only issue in
this case is whether the Appellant had the amount of unreported income as
determined by the Respondent based on the net worth analysis. The only issue
raised by the Appellant in relation to the net worth analysis is related to the
amounts determined for the personal expenditures. The analysis of the assets
and liabilities had only disclosed an increase in the net worth of the Appellant
of $3,052.59 for 2004 and $10,763.27 for 2005. The amount of personal
expenditures that had been determined by the Respondent was $39,770 for 2004
and $38,293 for 2005.
[3]
In the Appellant’s tax return for
2004 and 2005, the following amounts were reported as his gross income and net
income from his used car dealership business:
|
Taxation Year
|
Gross Income
|
Net Income
|
|
2004
|
$ 55,550
|
$1,341
|
|
2005
|
$171,710
|
$3,488
|
[4]
The Canada
Revenue Agency (the “CRA”) reassessed the Appellant based on a net worth
analysis and included the following amounts in his income as unreported income
and assessed the following penalties pursuant to subsection 163 (2) of the Act:
|
Taxation Year
|
Amount Added as Unreported Income
|
Penalties
|
|
2004
|
$19,962
|
$1,962
|
|
2005
|
$15,694
|
$2,156
|
[5]
In addition to
the amounts included in the Appellant’s income for the purposes of the Act,
the Appellant was also reassessed under the ETA to increase his net tax
payable for the Period by $2,496 based on the above unreported income amounts
and assessed penalties under section 285 of the ETA of $624 on this
additional net tax. A penalty was also assessed under section 280 of the ETA.
[6]
Justice Bowman (as he then was) made
the following comments on the net worth method of determining a taxpayer’s
income in Bigayan v. The Queen, [2000] 1 C.T.C. 2229, 2000 DTC
1619:
2 The
net worth method, as observed in Ramey v. R. (1993), 93 D.T.C. 791
(T.C.C.), is a last resort to be used when all else fails. Frequently it is
used when a taxpayer has failed to file income tax returns or has kept no
records. It is a blunt instrument, accurate within a range of indeterminate
magnitude. It is based on an assumption that if one subtracts a taxpayer's net
worth at the beginning of a year from that at the end, adds the taxpayer's expenditures
in the year, deletes non-taxable receipts and accretions to value of existing
assets, the net result, less any amount declared by the taxpayer, must be
attributable to unreported income earned in the year, unless the taxpayer can
demonstrate otherwise. It is at best an unsatisfactory method, arbitrary and
inaccurate but sometimes it is the only means of approximating the income of a
taxpayer.
3 The
best method of challenging a net worth assessment is to put forth evidence of
what the taxpayer's income actually is. A less satisfactory, but nonetheless
acceptable method is described by Cameron J. in Chernenkoff v. Minister of
National Revenue (1949), 4 D.T.C. 680 (Can. Ex. Ct.) at 683:
In the
absence of records, the alternative course open to the appellant was to prove
that even on a proper and complete “net worth” basis the assessments were
wrong.
4 This
method of challenging a net worth assessment is accepted, but even after the
adjustments have been completed one is left with the uneasy feeling that the
truth has not been fully uncovered. Tinkering with an inherently flawed and
imperfect vehicle is not likely to perfect it.
[7]
During the
hearing the parties agreed that certain adjustments should be made to some of
the amounts included as personal expenditures. The following adjustments were
agreed upon by the parties:
2004
|
Item:
|
Amount included in the Reassessment
|
Amount Agreed Upon
|
Deduction re Net Worth Analysis
|
|
Water, fuel
& electricity
|
$1,945
|
$ 0
|
$1,945
|
|
Recreational vehicles
& boats
|
$ 527
|
$ 0
|
$ 527
|
|
Home
entertainment (radio, TV, VCR etc.)
|
$ 766
|
$406
|
$ 360
|
|
Total:
|
|
|
$2,832
|
2005
|
Item:
|
Amount included in the
Reassessment
|
Amount Agreed Upon
|
Deduction re Net Worth
Analysis
|
|
Recreational vehicles & boats
|
$527
|
$ 0
|
$527
|
|
Home entertainment (radio, TV, VCR etc.)
|
$766
|
$406
|
$360
|
|
Total:
|
|
|
$887
|
[8]
The amounts
used by the CRA for personal expenditures were taken from reports from
Statistics Canada on personal expenditures for a family of three, unless the
amount proposed by the Appellant was accepted. In this case the Appellant lived
with his wife and their first child who was born in March 2004. The Appellant’s
wife was working in a dental office for parts of 2004 and 2005 and her income
for these years was included in the net worth analysis. There were some amounts
for personal expenditures that were not contested by the Appellant. The
following is a list of the amounts included for personal expenditures that were
contested by the Appellant with the amount used to determine the Appellant’s
unreported income and the amount proposed by the Appellant:
2004
|
Item
|
Amount included in the Reassessment
|
Amount Proposed by the Appellant
|
|
Food from
restaurants
|
$1,969.60
|
$0
|
|
Shelter – other
quarters – traveller accommodation
|
$ 228.26
|
$0
|
|
Telephone
|
$ 914.20
|
$396
|
|
Child care
|
$ 851.85
|
$360
|
|
Cleaning
supplies
|
$ 340.03
|
$120
|
|
Paper, plastic
& foil supplies
|
$ 365.92
|
$180
|
|
Clothing –
women’s wear
|
$1,347.19
|
$180
|
|
Men’s wear
|
$ 896.56
|
$240
|
|
Clothing
material, notions, laundry
|
$ 234.14
|
$100
|
|
Automotive fuels
|
$1,737.81
|
$960
|
|
Maintenance
& repair
|
$ 580.05
|
$120
|
|
Medical &
pharmaceutical
|
$ 267.08
|
$0
|
|
Eye care goods
& services
|
$ 162.37
|
$0
|
|
Dental care
|
$ 217.67
|
$0
|
|
Private &
public health insurance
|
$ 329.44
|
$0
|
|
Personal care
supplies & equipment
|
$ 810.66
|
$100
|
|
Hair cutting,
washing, styling
|
$ 378.86
|
$120
|
|
Sporting &
athletic equipment
|
$ 180.02
|
$0
|
|
Toys, games,
computer, hobby equipment, etc.
|
$ 694.18
|
$0
|
|
Photographic
goods & services
|
$ 189.43
|
$0
|
|
Recreation services
(spectator entertainment, recreation & sport facilities, package tour,
etc.)
|
$ 1,043.63
|
$0
|
|
Reading material
|
$ 307.09
|
$0
|
|
Education
|
$ 585.94
|
$0
|
|
Money gifts
& contributions
|
$ 811.84
|
$0
|
|
Gifts - Other
(flowers, toys etc.)
|
$ 536.52
|
$0
|
|
Gifts &
Contributions - Religious organizations
|
$ 171.78
|
$120
|
|
Gifts &
Contributions - Other charitable organizations
|
$ 131.78
|
$0
|
|
Government pool
& lottery tickets
|
$ 194.14
|
$0
|
|
|
$16,478.04
|
$2,996.00
|
2005
|
Item
|
Amount included in the Reassessment
|
Amount Proposed by the Appellant
|
|
Food from
restaurants
|
$1,969.60
|
$0
|
|
Shelter – other
quarters – traveller accommodation
|
$ 228.26
|
$0
|
|
Telephone
|
$ 914.20
|
$396
|
|
Child care
|
$ 851.85
|
$480
|
|
Cleaning
supplies
|
$ 340.03
|
$120
|
|
Paper, plastic
& foil supplies
|
$ 365.92
|
$180
|
|
Clothing –
women’s wear
|
$ 1,347.19
|
$240
|
|
Men’s wear
|
$ 896.56
|
$240
|
|
Clothing
material, notions, laundry
|
$ 234.14
|
$100
|
|
Automotive fuels
|
$ 1,737.81
|
$ 1,260
|
|
Maintenance
& repair
|
$ 580.05
|
$120
|
|
Medical &
pharmaceutical
|
$ 267.08
|
$0
|
|
Eye care goods
& services
|
$ 162.37
|
$0
|
|
Dental care
|
$ 217.67
|
$0
|
|
Private &
public health insurance
|
$ 329.44
|
$0
|
|
Personal care
supplies & equipment
|
$ 810.66
|
$100
|
|
Hair cutting,
washing, styling
|
$ 378.86
|
$120
|
|
Sporting &
athletic equipment
|
$ 180.02
|
$0
|
|
Toys, games,
computer, hobby equipment, etc.
|
$ 694.18
|
$0
|
|
Photographic
goods & services
|
$ 189.43
|
$0
|
|
Recreation
services (spectator entertainment, recreation & sport facilities, package
tour, etc.)
|
$ 1,043.63
|
$0
|
|
Reading material
|
$ 307.09
|
$0
|
|
Education
|
$ 585.94
|
$0
|
|
Money gifts
& contributions
|
$ 811.84
|
$0
|
|
Gifts - Other
(flowers, toys etc.)
|
$ 536.52
|
$0
|
|
Gifts &
Contributions - Religious organizations
|
$ 171.78
|
$ 200
|
|
Gifts &
Contributions - Other charitable organizations
|
$ 131.78
|
$0
|
|
Government pool
& lottery tickets
|
$ 194.14
|
$0
|
|
|
$16,478.04
|
$3,556
|
Food from restaurants
[9]
The Appellant
stated that he did not eat out at restaurants during the years under appeal.
The Appellant, in this case, is placed in the difficult position of trying to
prove a negative, i.e. that he did not spend the amount stated on restaurant
meals. The Respondent did not have receipts for any restaurant bills incurred
by the Appellant or any evidence of any amount spent by the Appellant on
restaurant meals. The amount included is only based on a Statistics Canada
average. There was no indication whether the Statistics Canada average was
based on income level. It would seem logical that families with higher incomes
would be more likely to eat at restaurants than families with lower incomes.
The Appellant’s wife’s income in each of these years was $15,974 for 2004 and
$19,326 for 2005.
[10]
In this case
the Appellant’s wife did not testify. There was no indication of whether she
would eat at restaurants when she was working in 2004 and 2005. The net worth
analysis was based on a family of three and therefore would include amounts
that the Appellant’s wife would have spent on the various items. Without
hearing from the Appellant’s wife, I am not prepared to accept that the amount
spent by the Appellant and his wife in 2004 and 2005 was nil.
Since their daughter was born in March 2004, the Appellant’s wife only worked
for part of the year in 2004 and 2005. I accept the Appellant’s testimony that
he did not eat in restaurants in 2004 and 2005. However since the net worth
analysis is also based on amounts that the Appellant’s wife would have spent,
and since she did not testify, an estimate of the amount that she would have
spent should be used. Since she only worked part of each year, the amount spent
on food in restaurants should be reduced to $250 for each year.
Shelter – other quarters – traveller accommodation
[11]
The Appellant stated
that he did not travel in 2004 or 2005 except to attend auctions to purchase
cars. These trips were just day trips and he would return home in the evening.
I accept the testimony of the Appellant and find that no amount should have
been included in this category for 2004 or 2005.
Telephone
[12]
The Appellant
stated that they had two phones – one for the home and a cell phone that was
used for the business. A schedule showing amounts paid to Bell (for the home
phone) and Rogers (for the cell phone) was
introduced. These schedules show that the cost of the home phone was
approximately $30 per month and the cost of the cell phone varied from
approximately $32 for some months to approximately $70 for one month.
[13]
In computing
his income for the purposes of the Act, the Appellant claimed $1,023 as
telephone expense for 2004 and $819 as telephone expense for 2005. It appears
that the Appellant has claimed the cost of both phones in computing his income
for the purposes of the Act. The Respondent did not reassess the
Appellant to deny a deduction for any portion of the amount claimed as
telephone expense nor did the Respondent raise any argument in relation to
this. It seems to me that once an amount has been deducted in computing a
person’s income, it is not appropriate to include that amount in the net worth
analysis. If all or a portion of that amount should not have been deducted, the
proper approach would be to reassess that person to deny the expense or that
part of the expense that is not deductible. A simple example will illustrate
this.
[14]
Assume that an
individual has the following actual and reported revenue and expenses:
|
|
Actual
|
Reported
|
|
Revenue:
|
$29,000
|
$20,000
|
|
Expenses:
|
$ 5,000
|
$12,000
|
|
Net Income:
|
$24,000
|
$ 8,000
|
[15]
In this
example, the $5,000 of actual expenses means the expenses that were incurred
for the purposes of earning income. Assume that the individual spends all of
the revenue in the year on personal expenditures of $24,000 and the business
expenses of $5,000. Assume that the $12,000 claimed as expenses by the
individual includes $7,000 of personal expenditures that were not incurred for
the purpose of earning income.
[16]
If, in
completing the net worth analysis, the amount of $24,000 is included as
personal expenditures (which would include $7,000 of personal expenditures that
had been claimed as an expense), the unreported revenue of the person would
then become:
Personal expenditures: $24,000
Subtract: Income reported: ($8,000)
Unreported revenue: $16,000
[17]
This would lead
to a conclusion that the total revenue was $36,000 (the reported revenue of
$20,000 plus the unreported revenue of $16,000). If the expenses claimed are
not adjusted (and remain at $12,000) then the net income would be correct.
However this would be a case of two wrongs trying to make a right. Both the
revenue and the expenses would be incorrect. In my opinion, this is not the
appropriate approach. The revenue amount should only be adjusted by the amount
that was not claimed as a deduction and the expenses claimed should be reduced
by the amount of the personal expenditures that were not incurred for the
purpose of earning income. If the taxpayer were to be taxed, in this example,
on the basis that his revenue was $36,000 and his expenses were $12,000 (net
income of $24,000), this could still leave open the possibility that he could
be reassessed to deny the portion of the expenses that was not incurred for the
purpose of earning income on the basis that this was not the issue in the net
worth analysis which was prepared to determine if there was any unreported
income. The amount claimed as expenses is known since the amount is stated in
the tax return and if the amount claimed was not entirely incurred for the
purpose of earning income, the taxpayer should be reassessed to deny that
portion of the expenses that were not incurred for the purpose of earning
income and not reassessed to increase his revenue to an amount greater than the
actual revenue.
[18]
In this example
the personal expenditures for the purposes of the net worth analysis would be
$24,000 minus the $7,000 included in the reported expenses or $17,000. The
expenses claimed should be reduced by the portion thereof that is not
deductible or $7,000. In the net worth analysis the following would then be the
unreported revenue:
Personal expenditures: $17,000
Subtract: Income
reported: ($8,000)
Unreported revenue: $9,000
[19]
The net income
would then be determined as follows:
Revenue reported: $20,000
Add: Unreported revenue: $9,000
Total Revenue: $29,000
Subtract: Expenses claimed: ($12,000)
Add: expenses denied: $7,000
Net income: $24,000
[20]
In this case, the
Respondent did not raise the issue of the deductibility of any portion of the
telephone expense in the Reply nor did the Respondent raise any argument in
relation to this during the hearing. If the issue of the deductibility of the
amount claimed as telephone expense would have been raised by the Respondent in
the Reply, the Appellant would have had notice of this issue and would have had
an opportunity to lead evidence with respect to whether the phone in the home
was used at all in the business. By not raising this issue in the Reply the
Appellant was not apprised of this issue. The issue in relation to the
telephone expenditure in a net worth analysis is whether the amount was
expended. The issue in relation to the deductibility of the telephone
expenditure is whether the amount was incurred for the purpose of earning
income which would require different evidence than would be presented if the
issue was only whether the expenditure had been incurred. It does not seem to
me that any adjustment should be made to the amount claimed as a deduction for telephone
expenses in computing the income of the Appellant for the purposes of the Act
in these circumstances.
[21]
As a result, no
amount should have been included for the amount spent in relation to the telephone
in the net worth analysis and no adjustment should be made to the amount
claimed as a deduction for telephone expenses in computing the income of the
Appellant for the purposes of the Act.
Child care
[22]
The Appellant
stated that his wife stayed home with their baby the first year. When his wife
went back to work, the Appellant’s sister looked after his daughter. The
Appellant stated that he did not pay his sister. I accept the Appellant’s
testimony and find that the Appellant’s estimate of $360 for 2004 and $480 for
2005 should be used for child care.
Cleaning supplies
Paper, plastic & foil supplies
Clothing material, notions, laundry
[23]
As noted above,
the net worth analysis was based on estimates of amounts that would have been
spent by the Appellant and his wife. Since the Appellant’s wife
did not testify, it is impossible to determine how much she may have spent on
these items. Although the Appellant stated that he did not accept that they had
spent the Statistics Canada average amount on these items, without hearing from
the Appellant’s wife I am not prepared to accept the Appellant’s amount and
therefore no change will be made to the amount used for these items in either
year.
Clothing – women’s wear
[24]
This category
in particular is one where it would have been very important to hear from the
Appellant’s wife. The Appellant’s estimate, which would only be $15 per month
in 2004, appears low. Without hearing from the Appellant’s wife, I am not
prepared to accept the Appellant’s amount and therefore no change will be made
to the amount used for this item in either year.
Men’s wear
[25]
The Appellant’s
estimate is that he only spent $20 per month on his clothes. I accept his
testimony that he spent less than the statistical average but it seems to me
that the $240 per year is too low. Therefore the amount will be adjusted to the
average of these two amounts or ($896.56 + $240) / 2 = $568 for each year.
Automotive fuels
Maintenance & repair
[26]
There was no
indication that any part of the amounts proposed by the Appellant had been
deducted in computing his income for the purposes of the Act nor that
any part of these amounts would be deductible in computing his income. The Appellant’s
wife was only working for part of the year in 2004 and part of the year in
2005. I accept the Appellant’s testimony that the personal amounts spent on
these items was $960 for fuel in 2004, $120 for maintenance and repairs in
2004, $1,260 for fuel in 2005 and $120 for maintenance and repairs in 2005.
Medical & pharmaceutical
Eye care goods & services
Dental care
Private & public health insurance
[27]
The Appellant
stated that he did not spend any amount on any of the items in this category.
It seems to me that the Appellant would know if he or his wife spent any amount
on eye care, dental care, or private or public health insurance. For medical
and pharmaceutical, it seems to me that some amounts would have been spent on
these. The Appellant acknowledged that Tylenol would have been bought and
without hearing from his wife, I am unable to determine the amount that she
would have spent on medical and pharmaceutical items. I accept the testimony of
the Appellant that no amounts were spent on eye care goods & services,
dental care and private and public health insurance. For medical and
pharmaceutical, the amount used should be the Statistics Canada average amount.
Personal care supplies & equipment
Hair cutting, washing, styling
[28]
The Appellant
stated his wife’s sister is a hairstylist. However, without hearing from the
Appellant’s wife it is not possible to determine whether his wife would pay her
sister to cut her hair. As noted above, the amounts included are for amounts
spent by both the Appellant and his wife, not just the Appellant. Without
hearing from the Appellant’s wife, the amount for personal care supplies &
equipment will be the average of the amounts used by CRA and the amount
proposed by the Appellant (($810.66 + $100) / 2 = $455).
The amount that should be used for hair cutting, washing and styling should be
less than the Statistics Canada amount because the Appellant’s sister-in-law is
a hairstylist. The amount that will be used for hair cutting, washing and
styling is $240.
Sporting & athletic equipment
Recreation services (spectator entertainment,
recreation & sport facilities, package tour, etc.)
[29]
The Appellant
stated that he did not spend any amount on any of these items. I accept the
Appellant’s testimony in relation to these items and the amount for these
should be reduced to nil.
Toys, games, computer, hobby equipment, etc.
Photographic goods & services
[30]
The Appellant
stated that he did not spend any amount on any of these items despite the fact
that their first child was born in 2004. Without hearing from the Appellant’s
wife, I do not accept that the Appellant and his wife did not
spend any amounts on these items in 2004 or 2005. No change will be made to
these items.
Reading material
[31]
The Appellant
stated that he did not spend any amount on reading material. Again, however,
without hearing from his wife I am not prepared to accept that neither one of
them spent any amount on reading material. The amount that will be used is
$150.
Education
[32]
The Appellant
stated that no amount was spent on education. I accept the Appellant’s
testimony in relation to this as he presumably would know if he or his wife
took any courses. The amount for education is reduced to nil.
Money gifts & contributions
Other (flowers, toys etc.)
[33]
The Appellant stated
that he did not spend any amount on any of these items. The Appellant stated that
they had received a lot of gifts when the baby was born. It does not seem
logical that the Appellant and his wife would receive a lot of gifts from
family and friends but neither the Appellant nor his spouse spent any money at
all on any gifts for any family or friends in 2004 or 2005. As well, without
hearing from his wife, it is impossible to determine what her answer would have
been to the question of how much they spent on gifts. I accept his testimony
that they would have spent less than the Statistics Canada amounts (which as
noted above, do not appear to take into account income levels). Therefore the
amount that is to be used for each of these categories should be one-half of
the Statistics Canada average ($406 for money gifts and contributions and $268
for other (flowers, toys etc.)).
Religious organizations
[34]
For one year,
the amount used by the CRA was greater than the amount proposed by the
Appellant and for the other it was less than the amount proposed by the
Appellant. I accept the Appellant’s testimony that he gave $120 to his church
in 2004 and therefore this is the amount that should be used for 2004. No
change should be made to the amount used for 2005 as the Respondent was not
proposing to increase the amount that was used.
Other charitable organizations
Government pool & lottery tickets
[35]
I accept the
Appellant’s testimony that no amount was spent on either of these items in 2004
or 2005 and therefore the amounts used for these will be reduced to nil.
[36]
As a result the
following is a summary of the adjustments to be made to the income of the
Appellant for each of these years:
2004
|
Item
|
Amount included in
the Reassessment
|
Revised Amount
|
Adjustment
|
|
Food from restaurants
|
$1,970
|
$250
|
$1,720
|
|
Shelter – other quarters – traveller accommodation
|
$228
|
$0
|
$228
|
|
Telephone
|
$914
|
$0
|
$914
|
|
Child care
|
$852
|
$360
|
$492
|
|
Cleaning
supplies
|
$ 340
|
$ 340
|
$ 0
|
|
Paper, plastic
& foil supplies
|
$ 366
|
$ 366
|
$ 0
|
|
Clothing –
women’s wear
|
$ 1,347
|
$1,347
|
$ 0
|
|
Men’s wear
|
$ 897
|
$ 568
|
$ 329
|
|
Clothing
material, notions, laundry
|
$ 234
|
$ 234
|
$ 0
|
|
Automotive fuels
|
$ 1,738
|
$ 960
|
$ 778
|
|
Maintenance
& repair
|
$ 580
|
$ 120
|
$ 460
|
|
Medical &
pharmaceutical
|
$ 267
|
$ 267
|
$ 0
|
|
Eye care goods
& services
|
$ 162
|
$ 0
|
$ 162
|
|
Dental care
|
$ 218
|
$ 0
|
$ 218
|
|
Private &
public health insurance
|
$ 329
|
$ 0
|
$ 329
|
|
Personal care
supplies & equipment
|
$ 811
|
$ 455
|
$ 356
|
|
Hair cutting,
washing, styling
|
$ 379
|
$ 240
|
$ 139
|
|
Sporting &
athletic equipment
|
$ 180
|
$ 0
|
$ 180
|
|
Toys, games,
computer, hobby equipment, etc.
|
$ 694
|
$ 694
|
$ 0
|
|
Photographic
goods & services
|
$ 189
|
$ 189
|
$ 0
|
|
Recreation
services (spectator entertainment, recreation & sport facilities, package
tour, etc.)
|
$ 1,044
|
$ 0
|
$1,044
|
|
Reading material
|
$ 307
|
$ 150
|
$ 157
|
|
Education
|
$ 586
|
$ 0
|
$ 586
|
|
Money gifts
& contributions
|
$ 812
|
$ 406
|
$ 406
|
|
Other (flowers, toys
etc.)
|
$ 537
|
$ 268
|
$ 269
|
|
Religious
organizations
|
$ 172
|
$ 120
|
$ 52
|
|
Other charitable
organizations
|
$ 132
|
$ 0
|
$ 132
|
|
Government pool
& lottery tickets
|
$ 194
|
$ 0
|
$ 194
|
|
|
$16,479
|
$7,334
|
$9,145
|
2005
|
Item
|
Amount included in
the Reassessment
|
Revised Amount
|
Adjustment
|
|
Food from
restaurants
|
$ 1,970
|
$250
|
$1,720
|
|
Shelter – other
quarters – traveller accommodation
|
$ 228
|
$0
|
$ 228
|
|
Telephone
|
$ 914
|
$0
|
$ 914
|
|
Child care
|
$ 852
|
$480
|
$ 372
|
|
Cleaning
supplies
|
$ 340
|
$340
|
$ 0
|
|
Paper, plastic
& foil supplies
|
$ 366
|
$366
|
$ 0
|
|
Clothing –
women’s wear
|
$ 1,347
|
$1,347
|
$ 0
|
|
Men’s wear
|
$ 897
|
$568
|
$ 329
|
|
Clothing
material, notions, laundry
|
$ 234
|
$234
|
$ 0
|
|
Automotive fuels
|
$ 1,738
|
$1,260
|
$ 478
|
|
Maintenance
& repair
|
$ 580
|
$ 120
|
$ 460
|
|
Medical &
pharmaceutical
|
$ 267
|
$ 267
|
$ 0
|
|
Eye care goods
& services
|
$ 162
|
$ 0
|
$ 162
|
|
Dental care
|
$ 218
|
$ 0
|
$ 218
|
|
Private &
public health insurance
|
$ 329
|
$ 0
|
$ 329
|
|
Personal care
supplies & equipment
|
$ 811
|
$ 455
|
$ 356
|
|
Hair cutting
washing styling
|
$ 379
|
$ 240
|
$ 139
|
|
Sporting &
athletic equipment
|
$ 180
|
$ 0
|
$ 180
|
|
Toys, games,
computer, hobby equipment, etc.
|
$ 694
|
$ 694
|
$ 0
|
|
Photographic
goods & services
|
$ 189
|
$ 189
|
$ 0
|
|
Recreation services (spectator entertainment,
recreation & sport facilities, package tour, etc.)
|
$ 1,044
|
$ 0
|
$1,044
|
|
Reading material
|
$ 307
|
$ 150
|
$ 157
|
|
Education
|
$ 586
|
$ 0
|
$ 586
|
|
Money gifts
& contributions
|
$ 812
|
$ 406
|
$ 406
|
|
Other (flowers,
toys etc.)
|
$ 537
|
$ 268
|
$ 269
|
|
Religious
organizations
|
$ 172
|
$ 172
|
$ 0
|
|
Other charitable
organizations
|
$ 132
|
$ 0
|
$ 132
|
|
Government pool
& lottery tickets
|
$ 194
|
$ 0
|
$ 194
|
|
|
$16,479
|
$7,806
|
$8,673
|
[37]
In addition to
these adjustments, the adjustments that had been agreed upon by the parties
must also be taken into account. Therefore the total adjustments are as
follows:
|
|
2004
|
2005
|
|
Adjustments
agreed upon by the parties
|
$ 2,832
|
$ 887
|
|
Adjustments
as determined herein
|
$ 9,145
|
$8,673
|
|
Total
Adjustments
|
$11,977
|
$9,560
|
[38]
These adjustments
reduce the unreported income before the GST is deducted therefrom. In this case
the amounts that were determined as the unreported income before the GST is
deducted therefrom in reassessing the Appellant were $21,359 for 2004 and
$16,793 for 2005. The unreported business income that was reassessed for the
purposes of the Act was determined as follows:
2004
Unreported business
revenue (based on the net worth analysis): $21,359
Subtract: GST to be remitted (7/107
x $21,359): ($1,397)
Unreported business income for the
purposes of the Act: $19,962
2005
Unreported business
revenue (based on the net worth analysis): $16,793
Subtract: GST to be
remitted (7/107 x $16,793): ($1,099)
Unreported business
income for the purposes of the Act: $15,694
[39]
To reflect the
above adjustments to the personal expenditure amounts, the revised unreported
business income for the purposes of the Act will be as follows:
2004
Unreported business revenue (based
on the net worth analysis): $21,359
Subtract: adjustments as set out
herein: ($11,977)
Revised unreported business
revenue: $9,382
Subtract: GST to be remitted (7/107
x $9,382): ($614)
Unreported business income for the
purposes of the Act: $8,768
2005
Unreported business revenue (based
on the net worth analysis): $16,793
Subtract: adjustments as set out
herein: ($9,560)
Revised unreported business
revenue: $7,233
Subtract: GST to be remitted (7/107
x $7,233): ($473)
Unreported business income for the
purposes of the Act: $6,760
[40]
This will mean
the following adjustments to the amount of unreported income included in the
reassessments issued under the Act and the following adjustment to the
net tax payable as reassessed under the ETA:
Act
|
|
2004
|
2005
|
|
Unreported income that was reassessed:
|
$19,962
|
$15,694
|
|
Unreported income as determined herein:
|
$ 8,768
|
$ 6,760
|
|
Adjustment:
|
($11,194)
|
($8,934)
|
ETA
|
GST included in unreported income as reassessed ($1,397 +
$1,099):
|
$2,496
|
|
GST included in unreported income as determined herein
($614 + $473):
|
$1,087
|
|
Adjustment:
|
($1,409)
|
Penalties
[41]
Penalties were
imposed under subsection 163(2) of the Act, and sections 280 and
285 of the ETA. The penalties imposed under subsection 163(2) of the Act
and section 285 of the ETA require a finding that the Appellant “knowingly or under circumstances amounting to gross
negligence” made false statements in filing his returns under the Act and
his returns under the ETA when the Appellant failed to report the
additional income as determined by applying the net worth analysis and failed
to report the additional GST collected thereon. The assessment of penalties
under section 280 of the ETA are subject to a defence of due diligence (Pillar
Oilfield Projects Ltd. v. The Queen, [1993] G.S.T.C. 49).
[42]
Justice Strayer of the Federal Court
Trial Division, in Venne v. The Queen, [1984] C.T.C. 223, 84 DTC
6247, made the following comments on the meaning of gross negligence for the
purposes of penalties imposed under subsection 163(2) of the Act:
“Gross
negligence” must be taken to involve greater neglect than simply a failure to
use reasonable care. It must involve a high degree of negligence tantamount to
intentional acting, an indifference as to whether the law is complied with or
not.
[43]
In Maltais v. The Queen,
[1991] 2 C.T.C. 2651, 91 DTC 1385, Justice Bowman (as he then was) in
dealing with a penalty imposed pursuant to subsection 163(1) of the Act
stated as follows:
7. …Mr.
Ghan on behalf of the respondent contended that subsection 163(1) in the form
which is applied to 1989 did not require that there be a wilful intention to
evade tax. In support of this position he pointed to the wording of the former
163(1) which referred to “Every person who wilfully attempts to evade the
payment of tax payable by him” and to the wording of subsection 163(2)
which uses the expression “knowingly or under circumstances amounting to gross
negligence”. These provisions require a mens rea of intent or of recklessness.
(emphasis
added)
[44]
While the comments of Justice
Bowman (as he then was) in relation to subsection 163(2) of the Act were
obiter in that case, these comments were adopted by Justice Hamlyn in Dunleavy
v. The Queen, [1993] 1 C.T.C. 2648, 93 DTC 417.
[45]
In Boileau v. The
Minister of National Revenue, [1989] 2 C.T.C. 2001, 89 DTC 247,
Justice Lamarre Proulx stated that
20. …It
is true that by virtue of subsection 163(2), there is no accused nor is there a
criminal charge. It would thus appear that it is not, as such, a criminal
proceeding and that it remains a civil proceeding. However, the
application of that subsection requires the evidence of mens rea or culpable
conduct
(emphasis
added)
[46]
The onus rests
with the Respondent to prove the facts required to establish that the Appellant
“knowingly or under circumstances
amounting to gross negligence” made false statements in filing his returns
under the Act and his returns under the ETA when the Appellant
failed to report the additional income as determined by applying the net worth
analysis and failed to report the additional GST collected thereon. In relation to this the
Respondent called the auditor and the appeals officer to testify. The auditor
stated that when he first met with the Appellant in relation to the proposed
audit of the Appellant, the Appellant produced his receipts and records in
three shopping bags. The documents were unorganized and there were no worksheets
and no reconciliations.
[47]
The appeals
officer testified that in reviewing the file she discovered that the Appellant
also had incurred the following amounts in relation to repairs and maintenance
of the vehicles that he held for resale:
|
Taxation Year
|
Repairs and
Maintenance
|
|
2004
|
$51,631
|
|
2005
|
$54,105
|
[48]
The Appellant
had not claimed any amount as an expense in relation to these expenditures nor
were these amounts added to the cost of the inventory. Since these amounts were
incurred in relation to the Appellant’s business they would be relevant in
determining his net income. While the Respondent was suggesting that the
Appellant had even more additional unreported income, the Respondent could not
include any additional amount in the income of the Appellant since the Minister
cannot appeal his own assessment (Valdis v. The Queen,
[2001] 1 C.T.C. 2827). As well, since these amounts were not
deducted in computing his income for the purposes of the Act and would
be relevant in determining his income, it would not be appropriate to include
these in his income without also adjusting his expenses.
[49]
However, instead of
suggesting that the Appellant had any intent or was reckless, this suggests that
the Appellant simply did not keep proper records. Failing to include in income
an amount that would be offset by a deduction or added to inventory cannot be
used to support a finding of culpable conduct on the part of the Appellant.
[50]
In this case,
unreported income amounts as a percentage of the total revised gross income
amounts would be as follows:
|
Taxation Year
|
Gross Income
|
Unreported Income
|
Total Revised Gross Income
|
Unreported Amount (%)
|
|
2004
|
$ 55,550
|
$8,768
|
$ 64,318
|
14%
|
|
2005
|
$171,710
|
$6,760
|
$178,470
|
4%
|
[51]
In Seto v.
The Queen, 2007 TCC 489, 2007 DTC 1647 (Eng.), [2007] G.S.T.C. 116, [2008] 2 C.T.C. 2364,
Justice Campbell made the following comments:
29 An
interesting question arises when a taxpayer is unsuccessful in challenging the
Minister's net worth assessment: Is the taxpayer liable for gross negligence
penalties where amounts are determined to be unreported income? In Wajsfeld v. R.,
[2005] 4 C.T.C. 2341 (T.C.C. [General Procedure]), Justice Rip dealt with the
issue and concluded that the Crown must satisfy the onus necessary to impose
gross negligence penalties despite finding that the unreported amounts were to
be included in the taxpayer's income. At paragraph 56 he stated:
... The Minister must do more than simply rely on
the failure of the taxpayer to rebut a net worth assessment and point to as
high amount of unreported income to meet the burden under subsection 163(3) ...
There is no doubt that the mens rea or the gross negligence may be established
by circumstantial evidence, as either can seldom be established by direct proof
of the taxpayer's intention. However, that evidence should be clear and
convincing ... I am of the view that in the present case, the Minister did not
adequately discharge his burden of proof in that he relied almost exclusively
on the fact that the Appellant was unable to reverse the net worth assessments.
In effect, subsection 163(3) requires evidence of the intent of gross
negligence of the contravenor. This, in my view, should be done in a
structured, clear and convincing manner.
30 The case of Wajsfeld
clearly demonstrates that the Crown maintains the onus to prove gross
negligence even where the assessment is based on the net worth method. In these
appeals, the Crown presented no evidence regarding the Appellant's alleged acts
of gross negligence. The Crown did not point to any specific evidence or
circumstances that amounted to gross negligence other than the difference
resulting from the net worth assessment. The sole basis of the Crown's argument
for imposing penalties, under subsection 163(2), is the fact that the net worth
assessment indicates that there was unreported income on the respective
personal and corporate returns. If the Minister is going to assess gross
negligence penalties, the Crown bears the onus and must do more than refer to
the unreported amounts which have been added to the taxpayer's income. In the
present appeals, the Crown simply asserted that the “substantial difference”
between the net worth assessment and the net amount actually reported on the
returns are indicative of gross negligence. The relevant jurisprudence requires
more. Further, when the adjustments are made to include the Appellant's parents
income, the difference is no longer substantial.
[52]
In this case,
the unreported income amount, as a percentage of the total revised income
amount is only 4% in 2005 and the amounts of unreported income are only $8,768
in 2004 and $6,760 in 2005. In my opinion the Minister has failed to prove that
the Appellant has “knowingly or under
circumstances amounting to gross negligence” made false statements in filing
his returns under the Act and his returns under the ETA when the
Appellant failed to report the additional income as determined by applying the
net worth analysis and failed to report the additional GST collected thereon.
As a result the penalties imposed pursuant or subsection 163(2) of the Act
and section 285 of the ETA are deleted.
[53]
The Appellant
has, however, failed to establish that he acted with due diligence. The state
of the records maintained by the Appellant do not support a finding that the
Appellant acted with due diligence to ensure that he was complying with the
provisions of the ETA. In relation to this issue there are also the
input tax credits of $10,737 that were claimed and then denied by the CRA (and
which were accepted by the Appellant as not being properly claimed). Therefore
the penalties imposed pursuant to subsection 280(1) of the ETA are
confirmed but are reduced to reflect the
revised net tax payable for the Period.
Conclusion
[54]
As a result the
appeal under the Act is allowed, in part, with costs, and the matter is
referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that:
(a) the net business income of the Appellant for
each of these years was as follows:
|
|
2004
|
2005
|
|
Net Business Income as reported on the Appellant’s
tax returns
|
$ 1,341
|
$ 3,488
|
|
Amount Reassessed as Unreported Business Income
|
$19,962
|
$15,694
|
|
Adjustments to be made pursuant to this Judgment
|
($11,194)
|
($ 8,934)
|
|
Revised
Net Business Income:
|
$10,109
|
$10,248
|
(b) The penalties imposed under subsection 163 (2) of the Act
are deleted.
[55]
The appeal
under the ETA for the Period is
allowed in part, without costs, and the matter is referred back to the Minister
of National Revenue for reconsideration and reassessment on the basis that:
(a)
the net tax payable by the Appellant for the
Period is reduced by the amount of $1,409;
(b)
The penalties imposed under section 285 of the ETA
are deleted; and
(c)
The penalties imposed under section 280 of the ETA
are reduced to reflect the revised net tax payable for the Period but are
otherwise confirmed.
Signed
at Halifax, Nova Scotia, this 23rd
day of March 2009.
“Wyman W. Webb”
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