Date: 20020319
Docket: 1999-4002-IT-G
BETWEEN:
ROBERT COX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
These appeals are from net worth assessments for the taxation
years 1991 to 1997 inclusive.
[2]
The appellant did not file returns for 1995, 1996 and 1997. After
being requested by the Minister of National Revenue to file
returns for 1991, 1992, 1993 and 1994 he filed returns which were
prepared by "volunteers" from Revenue Canada or CCRA. I
am not entirely sure what role these volunteers have —
whether they are employees of the CCRA or are public spirited
individuals who donate their time for no remuneration. At all
events they assisted the appellant to file his returns based on
information he supplied to them.
[3]
The assessments were made by Mr. Euclide Michaud, an auditor
with Revenue Canada (now CCRA). I found Mr. Michaud an
impressive witness and he performed the audit with meticulous
thoroughness and although I propose to make certain adjustments
to the amounts assessed this is no reflection on Mr. Michaud
or the appeals officer Ms. Paquette, both of whom were
credible and conscientious witnesses.
[4] I
shall begin these reasons by a brief description of the
appellant. He is 37 years old and suffers from paranoid
schizophrenia and has been so diagnosed. I refused to permit the
appellant to put in two letters from the appellant's family
doctor and his psychiatrist without calling them. However the
appellant's brother, Donald Cox, a graduate psychologist with
extensive experience in the field, testified. He described the
appellant's behaviour and symptoms and he has all of the
classic symptoms traditionally associated with schizophrenia
— learning disability, anxiety disorder, inability to
retain information, hallucinations and delusions, very
disorganized, inability to follow anything through, very
withdrawn, poor social skills, hears voices, has suicidal
thoughts, very forgetful.
[5]
The appellant graduated from high school but dropped out of a
community college. He has since then worked for a minimum wage as
a dishwasher or janitor. The appellant's description of
himself was essentially the same as his brother's (who was
excluded from the courtroom during the appellant's
testimony). Moreover, I had ample opportunity to observe the
appellant. His answers to questions were monosyllabic and without
elaboration. He appeared to have no interest in the proceedings
either when testifying or when sitting at the back of the
courtroom. He kept his eyes on the floor in front of him. In
short he gave every appearance of being out of touch with
reality, and not caring.
[6]
During the years in question he was not taking any medication for
his schizophrenia. Now he takes several medications —
Olzapine, Paxil and Diazapin. During the years in question he saw
his family doctor, Dr. Birosh, once every two months, and
his psychiatrist, Dr. Doyle, every month. His appearance in
court was of a person with no regard for his own personal
appearance and hygiene. The contrast with his clean-cut and
articulate brother could not have been more striking.
[7]
His counsel, Mr. Alpert, stated in opening that the
appellant was of limited intelligence. Although I set out a
fairly detailed psychological profile of Mr. Cox I would not
say that it leads conclusively to a finding of low intelligence.
Intelligence is something that is not readily susceptible of
either definition or measurement (see Radage v. The Queen,
96 DTC 1615).
[8]
The appellant may or may not be of limited intelligence, whatever
that means. He has, however, severe psychiatric problems. I have
described them in some detail because they are relevant to a
number of matters raised in this case — for example the
penalties and the extreme difficulty that Mr. Michaud had in
extracting information from the appellant as well as the
appellant's inability to dispute some of the assumptions upon
which Mr. Michaud based his conclusions, or at all events
his apparent lack of interest in doing so.
[9]
The net worth method of assessing tax is described in some detail
in Ramey v. The Queen, 93 DTC 791, and in
Bigayan v. The Queen, 2000 DTC 1619.
[10] In
Bigayan the following was said.
[2]
The net worth method, as observed in Ramey v. The Queen,
93 DTC 791, 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, deleted non-taxable
receipts and accretions to value of existing assets, the net
results, 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, 49 DTC 680 at page 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.
[11] This was
the method used by Mr. Michaud and I can find no fault with
it. Nonetheless, there are a number of facts that were
established in evidence that warrant adjustments to some of the
figures used in the net worth statement. I should preface my
examination of the evidence and the assessments with one
preliminary observation. The assessments are, as stated, based on
the net worth method and they were carried out with meticulous
observance of the rules. Nonetheless, a disinterested observer
cannot avoid a disquieting concern that the numbers may be
significantly wrong simply because the appellant's mental
state prevented his contesting some of the inferences the
assessor drew. I say this not as a basis for changing the
assessments so much as indicating the need to proceed with
extreme caution when evaluating an assessment made against a
person who does not seem to have the normal instincts or
abilities of self-preservation.
[12] The net
worth statement starts with 1990 as the base year on the
assumption that the appellant had no net assets at the end of
that year — in fact a minus net worth of $4,900. The
appellant testified that he had $75,000 in a bank account at the
beginning of 1990. I have seen no evidence that would
substantiate this assertion. All of his of bank accounts were
opened after January 1, 1991.
[13] The net
worth statement proceeds on the assumption that the appellant
received nothing from the estate of his father. I find as a fact
that his brother Robert paid him $21,600 for his share of the
family home. This may explain in part the rather surprising
increase in net worth in 1991 of $71,326.23.
[14] The net
worth statement proceeds on the assumption that the
appellant's personal living expenditures are as set out in
Schedule B to the net worth statement. This schedule is over
three pages of figures consisting of an attempt to determine the
appellant's personal living expenses. A very large part of
these expenses are based on Statistics Canada's
("StatsCan") estimates of what it costs two people to
live, reduced by ½. These figures suffer from the same
unreliability as those in Bigayan, where I said
[14] I am faced
here with two sets of unreliable numbers. The Department of
National Revenue in many instances used figures taken from
Statistics Canada ("StatsCan") for the expenditures
made by a family consisting of a husband and wife and three
children. No one from StatsCan was called, nor was the assessor
who used them. The appellant's counsel had therefore no
opportunity to cross-examine on the figures used. I was given no
evidence of the way the StatsCan figures are arrived at. Both
counsel agreed that the StatsCan figures are a "national
average", whatever that may mean. What figures go into the
determination of that average, what methodology is used, what
areas were taken as representative, whether any weighting was
done by reference to the area from which the figures were taken
- all these and many other questions remain unanswered.
[15] In that
case I declined to make any adjustments to the figures based on
StatsCan numbers, notwithstanding their inherent unreliability,
because I was not provided with any more reliable figures. Here I
have some basis for a small downward adjustment because I have an
idea of how the appellant lived. It was said that he lived
frugally. That is not a word I would have used. The appellant
compulsively put money into mutual funds and a large part of his
unreported income was attributable to capital gains realized from
them. Apart from that his lifestyle was meagre and does not
conform to the average StatsCan norm. If the appellant were the
norm the living conditions of average Canadians would be pretty
abysmal.
[16] The total
annual personal expenses of the appellant assumed in the net
worth statement were something over $11,000. I think they should
be reduced as follows:
(a)
Food: The amounts for food should be reduced by 25% based on my
observations of the appellant and his style of living.
(b)
Shelter: There should be no change. These are the appellant's
own figures.
(c)
Household operations including cleaning and household supplies.
The telephone expense should stand but the cost of household
supplies and cleaning of $324.50 per year should be reduced to
$100 per year. This may be high, but I cannot imagine, from
looking at the appellant, that he spends more than a minimal
amount on keeping the house clean.
(d)
Clothing. The assessor assumed that each year the appellant spent
$750 on clothing and $147.50 on dry cleaning. It may be that the
StatsCan average person does but I cannot believe that the
appellant who turned up on both days in court wearing the same
stained and dirty T shirt and jeans spends anywhere near that
amount. I suppose there is a possibility that his T shirts and
jeans wear out but I would consider $150 per year for both
clothing and cleaning to be a maximum.
(e)
Public Transportation. I see no reason for reducing these
amounts.
(f)
Health care. I would leave these as assessed.
(g)
Personal care, including supplies, washing and haircutting. The
appellant's personal hygiene is dreadful. His hair was long,
unkempt and unwashed. The annual figure of $292 plus $120 ($412)
is high. It should be reduced to a maximum of $100.
(h)
Recreation (sports, toys, TV, etc.). I think that the notion that
this person with severe psychiatric problems spends $1,044 per
year on these recreational activities and products is wholly
unrealistic and inconsistent with my observation of him. $200 per
year is more realistic.
(i)
Reading material, $148 per year. This figure is high. The
appellant can no doubt read but I do not think he does. This
should be reduced to a maximum of $50 per year.
(j)
Gifts and contributions (flowers, toys, gifts to religious
organizations and charitable organizations). Here, the assessment
assumes that each year the appellant made gifts of one sort or
another totalling $584.50. This may be the type of largesse that
the average StatsCan normal person spreads around but it is
wholly inconsistent with the sort of person that I saw in court
over two days. This figure should be reduced to zero.
[17] I do not
criticize Mr. Michaud for making his estimates on the basis
of StatsCan norms but we are dealing here with a person who is
entirely abnormal. He does not fit into a StatsCan norm.
[18] The next
item is the alleged gifts to the appellant over these years by
his girlfriend Nancy Brown. Although the appellant and Nancy
Brown did not live together their relationship extended over the
period 1985 to 2001 when they broke up and she went back to
London from North Bay. She was a schizophrenic as well and she
came from a rich family and was given money by her widowed
mother. Both the appellant and his brother testified that Nancy
Brown gave the appellant money. The appellant said she gave him
amounts each year ranging from $9,360 to $10,800. The
appellant's brother testified that the appellant received
about $10,000 per year. Since the amounts were paid in cash I
have some difficulty in determining the precise amount. The
appellant testified that Nancy Brown received between $700 and
$1,200 monthly from her mother. If this, plus a disability
pension that she received, was the only source of her gifts,
$10,000 per year is high. I cannot justify ignoring the gifts
completely because I find as a fact that the girlfriend was
fairly generous with the appellant, although the extent of her
largesse is hard to quantify. Since the net worth assessment is
to a large extent based on estimates and given the fact that the
appellant's psychiatric condition puts him at a disadvantage
in being able to rebut the presumption of correctness of the
assessments my best estimate of the amounts received from the
girlfriend is $7,000 per year.
[19] The
respondent concedes that the appellant received $1,568 in 1991
when he cashed in an insurance policy. Also, I find as a fact
that he sold some furniture and stereo and TV equipment for
$1,200. These amounts should reduce the amounts included in
income in his net worth statement.
[20] I shall
mention briefly the variety store business that he bought from
his brother in about 1995. On this point the evidence is clear.
It was a failure, and, from my observation of the appellant, I
can see why. There was a suspicion on the part of the CCRA that
the appellant was engaged in selling stolen goods. It was no more
than a suspicion and it was never substantiated by the
respondent.
[21] Subject
to the adjustments I have mentioned above there is really very
little I can do for the appellant. We are faced with one
ineluctable fact that over the years 1991 to 1997 the appellant
amassed a rather substantial fortune in mutual funds. The
appellant's increase in net worth is not fully accounted for
so the assessments must stand subject to the reductions outlined
above.
[22] Finally
there is the matter of the penalties under subsection 163(2)
of the Income Tax Act imposed in the years in which he
filed returns.
[23] For a
penalty to be imposed under subsection 163(2) two elements
must be present: a misstatement or omission in a return and a
requisite mental state. The first element is obviously present.
But can it be said that a person who suffers from the type of
paranoid schizophrenia that I have described above, who has
hallucinations, hears voices, and is divorced from reality for a
large part of the time, can have the requisite mental state to
justify a penalty under subsection 163(2)? Perhaps. But then
again, perhaps not. From my observation of the appellant I think
the better view is that he did not. Others might see it
differently and I would respect that view. It would not be
without merit. He was after all smart enough to make money from
his investments. He did also have the wit to defraud the welfare
authorities for which he went to jail. He subsequently made full
restitution. Where, however, the court has such doubt I think the
safer course is to give the benefit of that doubt to the
appellant.
[24] There are
cogent arguments in favour of upholding the
subsection 163(2) penalties but in my view it would be
dangerous to sanction their imposition against this
psychiatrically disturbed individual.
[25] The
appeals are allowed and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment
in accordance with these reasons.
[26] Success
is divided and so there will be no order for costs.
Signed at Toronto, Canada, this 19th day of March 2002.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
1999-4002(IT)G
STYLE OF
CAUSE:
Between Robert Cox and
Her Majesty The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
February 28 and March 1, 2002
REASONS FOR JUDGMENT BY: The
Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
March 19, 2002
APPEARANCES:
Counsel for the Appellant: Howard J. Alpert, Esq.
Counsel for the
Respondent:
Catherine Letellier de St-Just
COUNSEL OF RECORD:
For the
Appellant:
Name:
Howard J. Albert, Esq.
Firm:
Alpert Law Firm
Toronto, Ontario
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-4002(IT)G
BETWEEN:
ROBERT COX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on February 28 and March 1, 2002
at Toronto, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
Counsel for the
Appellant: Howard
J. Alpert, Esq.
Counsel for the Respondent: Catherine
Letellier de St-Just
JUDGMENT
It is
ordered that the appeals from assessments made under the
Income Tax Act for the 1991, 1992, 1993, 1994, 1995, 1996
and 1997 taxation years be allowed and the assessments be
referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the reasons
for judgment.
There
will be no order for costs.
Signed at Toronto, Canada, this 19th day of March 2002.
A.C.J.
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