Citation: 2013TCC329
Date: 20131024
Docket: 2010-1910(IT)G
BETWEEN:
BERNARD VICARS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1911(IT)G
AND BETWEEN:
JANICE VICARS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1912(IT)G
AND BETWEEN:
BERNIE’S SERVICE BAY LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1913(GST)I
AND BETWEEN:
BERNIE’S SERVICE BAY LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
These appeals were
heard on common evidence. Bernard and Janice Vicars are husband and wife and
they each owned 50% of the shares of Bernie’s Service Bay Limited (the “Company”).
The appeals for each of the Appellants relate to the 2002 to 2006 taxation
years inclusive.
[2]
During an audit of the
Company, its records were found to be unreliable and in disarray. The auditor,
Amanda Langdon, performed a net worth analysis of Bernard and Janice Vicars and
concluded that they had appropriated income from the Company. The result of the
audit was that the appropriations were included in their income and the Company
was reassessed to include the total appropriations in its income. The Minister
of National Revenue (the “Minister”) made other adjustments to the Appellants’
income and those adjustments are summarized in the charts which follow.
[3]
The following amounts
were added to the income of Bernard Vicars and the income of Janice Vicars:
|
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
Shareholder
Appropriations
Per Net Worth
Analysis
|
$38,896
|
$16,584
|
$18,384
|
|
|
|
Income
Inclusion 15(2)
|
|
|
$16,117
|
$18,488
|
$15,214
|
|
Total
|
$38,896
|
$16,584
|
$34,501
|
$18,488
|
$15,214
|
[4]
The Minister also
determined that Janice Vicars had received a benefit from her use and operation
of an automobile owned by the Company and he included a stand by charge in the
amount of $7,053 in her income in the 2003, 2004 and 2005 taxation years
pursuant to subsection 15(5) of the Income Tax Act (“ITA”).
[5]
The Company has a July
31 year end. For income tax purposes, the Minister reassessed the Company to
include the following amounts in its income and to disallow capital cost
allowance which it had claimed on a Chevrolet Cavalier:
|
|
2002
|
2003
|
2004
|
2005
|
|
Unreported Revenue
Per Net Worth
Analysis
|
$39,460
|
$45,010
|
$30,631
|
$13,296
|
|
Unreported Investment
Income
|
$75,560
|
|
|
|
|
Capital Cost Allowance
Disallowed
|
|
$2,783
|
$4,732
|
$3,312
|
|
Unreported Revenue
Per Shareholder
Loan
|
$32,063
|
$8,696
|
|
|
|
Total
|
$147,083
|
$56,489
|
$35,363
|
$16,608
|
[6]
With respect to the
Excise Tax appeal, the Minister increased the Company’s HST collectible by
$10,728.54, $8,922.07, $5,460.89 and $2,860.52 for the periods ending July 31,
2002, July 31, 2003, July 31, 2004 and July 31, 2005 respectively. The Minister
also disallowed the input tax credit claimed by the Company for the period
ending March 31, 2003 on the purchase of a Chevrolet Cavalier.
[7]
The Minister assessed
gross negligence penalties pursuant to the ITA against each of the
Appellants and gross negligence penalties against the Company pursuant to the Excise
Tax Act (the “ETA”). Each Appellant was reassessed beyond the
limitation period for the 2002, 2003 and 2004 taxation years.
[8]
The witnesses at the
hearing were Bernard and Janice Vicars and their daughter Tara Vicars. The
Appellants also relied on the testimony of Bruce Jones, a Certified Management
Accountant, Sherry Sceviour, an accounting clerk, and Peter Collens, a
Certified Accountant. Amanda Langdon, an auditor with the Canada Revenue Agency
(“CRA”), gave evidence on behalf of the Respondent.
[9]
Mr. Jones had been the
Appellants’ accountant during the relevant period. He prepared monthly
summaries, the monthly HST returns, the financial statements and income tax
returns for the Company. He also prepared the income tax returns for Bernard
and Janice Vicars. Sherry Sceviour worked for Mr. Jones. Mr. Collens
represented the Appellants at the audit and objections stage of this case.
Facts
[10]
Bernard Vicars operated
a vehicle repair business and a gasoline station as a sole proprietor from 1991
until 1996.The Company was incorporated in 1996 and it stopped selling gasoline
in 1997. Bernard and Janice Vicars testified that the Company only carried on
the business of repairing and maintaining vehicles; providing snow removal
services; and, towing services. Although they both denied that the Company sold
used vehicles as part of its business, I have concluded that it did. My
conclusion is based on prior statements made by both Bernard Vicars and his
accountant, Mr. Jones, to Amanda Langdon. Bernard Vicars told Amanda Langdon on
April 24, 2006 that the Company sold used vehicles and his statement was
confirmed by Bruce Jones in a letter to the auditor on October 20, 2006.
[11]
The roles of Bernard
and Janice Vicars in the Company’s business were described as follows:
(a)
Bernard Vicars is a
trained mechanic and he is employed by the Company. During the period 2002 to
2006, the Company also employed two other mechanics in its business.
(b)
Bernard Vicars was the
only employee who handled sales for the Company.
(c)
Each evening, Bernard
Vicars placed the credit card receipts, cheques, cash and cash register tapes
in a bag and took it home to Janice Vicars.
(d)
Only Janice and Bernard
Vicars handled the cash from the Company.
(e)
Weekly or twice a week,
Janice Vicars deposited the cash into the Company’s bank account and she
prepared the weekly sales summaries on a sheet which had been provided to her by
the accountant, Bruce Jones. She prepared the payroll for the Company. Each
month she compiled the weekly sales summaries, the light, phone and cell phone
bills for the Company, the receipts for materials purchased for the Company,
the Visa and Mastercard statements and the Company’s bank statements and she
took these documents to the accountant so that he could prepare the HST return.
[12]
During the period,
Janice Vicars was employed by Wal-Mart and had been so employed since 1994.
[13]
The Company had its own
bank account but it did not have a credit card in its name. Bernard Vicars had
two credit cards in his name and he used them to purchase supplies for the
Company. Janice Vicars also had a credit card in her name which she used for
both business and personal expenditures. She stated that she purchased items
for the Company from Wal-Mart on her credit card. Each month she analyzed her
credit card statement and paid personal purchases out of her bank account and
business purchases out of the Company account.
Analysis
[14]
In Hsu v R,
2001 FCA 240, the Court described net worth assessments and the onus on a
taxpayer. It stated:
30 Net worth assessments are a method of last resort, commonly
utilized in cases where the taxpayer refuses to file a tax return, has filed a return
which is grossly inaccurate or refuses to furnish documentation which would
enable Revenue Canada to verify the return (V. Krishna, The Fundamentals of
Canadian Income Tax Law, 5 th ed. (Toronto: Carswell, 1995) at
1089). The net worth method is premised on the assumption that an appreciation
of a taxpayer's wealth over a period of time can be imputed as income for that
period unless the taxpayer demonstrates otherwise ( Bigayan, supra , at 1619). Its
purpose is to relieve the Minister of his ordinary burden of proving a taxable
source of income. The Minister is only required to show that the taxpayer's net
worth has increased between two points in time. In other words, a net worth
assessment is not concerned with identifying the source or nature of the
taxpayer's appreciation in wealth. Once an increase is demonstrated, the onus
lay entirely with the taxpayer to separate his or her taxable income from gains
resulting from non-taxable sources ( Gentile v. R., [1988]
1 C.T.C. 253 (Fed. T.D.), at 256).
31
By its very nature, a net worth assessment is an arbitrary and imprecise
approximation of a taxpayer's income. Any perceived unfairness relating to this
type of assessment is resolved by recognizing that the taxpayer is in the best
position to know his or her own taxable income. Where the factual basis of the
Minister's estimation is inaccurate, it should be a simple matter for the
taxpayer to correct the Minister's error to the satisfaction of the Court.
[15]
In these appeals the
Appellants presented none of the source documents for the Company. They chose
to challenge the assessments on the following bases which I will discuss below.
(a) It was not necessary to perform a net worth
analysis
[16]
It was the Appellant’s
position that the Company’s records were complete, organized and adequate for
the CRA to perform an audit and it was not necessary in the circumstances of
these appeals for Amanda Langdon to perform a net worth analysis of Bernard and
Janice Vicars.
[17]
I disagree. There was
evidence that the weekly sales summaries prepared by Janice Vicars were
inaccurate as they did not include all revenue. The accountant had to adjust
the summaries and estimate sales. He had to make year end adjustments because
of the lack of records. The records which Amanda Langdon received from Bruce
Jones were totally unreliable.
[18]
When she asked Bernard
Vicars for the Company records, Amanda Langdon was given a garbage bag and a
box of documents. The documents in the garbage bag were not organized and the
documents in the box were contaminated with mice droppings. Some of the
documents in the box had been shredded by the mice. Even if the documents had
been in good condition, there were no source documents given so that the
revenue reported could not have been reconciled.
[19]
Given the state of the
Company’s records, Amanda Langdon was correct to conduct a net worth analysis
of Bernard and Janice Vicars. It is my view that, even if the records had been
complete but were contaminated with mice droppings, Amanda Langdon was not
obligated to handle the records and risk her health.
[20]
Although the Appellants
spoke to the completeness of the Company records, none were submitted as
evidence until I asked if any of the records would be made exhibits. Ten
monthly summaries were made exhibits. These summaries showed that there was a
discrepancy between the recorded sales and the revenue for every day shown on
each of the summaries.
(b) The Company had insufficient cash
sales to support the unreported income
[21]
It was also the
Appellants’ position that the Company’s sales were mostly credit card sales and
it earned insufficient cash sales to have the amount of unreported income which
the auditor had included in the Appellants’ income. It is my view that this
position is not supported by the evidence.
[22]
None of the amounts
used in the net worth analysis were estimates or based on Statistics Canada
data. All amounts for assets, liabilities and expenditures in the net worth
analysis were taken from documents and the personal expenditure worksheet provided
by the Appellants.
[23]
According to the
monthly summaries which were tendered, the Company had cash sales of $9,632.23,
$8,119.60, $7,175.68, $10,828.41, $5,903.39, $6,472.03, and $10,744.41 in
January 2002, July 2002, March 2003, June 2003, December 2003, May 2004, and
November 2004. These summaries represented only six months of the thirty-six
covered by the net worth analysis. There was also evidence that there was more
cash deposited into the Company’s bank account than was reported on the monthly
summaries.
[24]
Bernard and Janice
Vicars had $62,225.30 in cash to pay off their mortgage in 2002. In 2001,
Bernard and Janice Vicars had a mortgage payable of $60,751 on their principal
residence. They made cash payments of $43,866.65 and $18,358.65 in 2002 so that
the mortgage principal and interest were paid in full. Janice Vicars earned T4
income and she reported insufficient income to have made those payments in
2002. The only other declared source of revenue was the Company.
[25]
At the audit stage of
this case, there was no explanation given with respect to the source of the
funds to pay off the mortgage. Neither Bernard Vicars nor Janice Vicars told
the auditor that they had cash on hand either prior to or at the start of the
net worth period. In cross examination, Janice Vicars could not explain the
source of the funds used to pay off the mortgage. However, Bernard Vicars
stated that he had received $20,000 from the sale of gasoline in 1997 and
$7,000 from the sale of an automobile in 1996 or 1997 and he kept this money in
a safe in the floor of the garage. It was this money which he said he used to
pay off the mortgage. However, even this explanation does not account for the
total amounts used to pay out the mortgage and I find Bernard Vicars’
explanation unconvincing.
[26]
Finally, Peter Collens,
Bernard Vicars and Janice Vicars agree that the Shareholder Loan Account
contained unreported revenue for the Company.
[27]
According to the income
tax returns filed by the Company, the credit in the Shareholder Loan Account was
as follows:
|
2001
|
2002
|
2003
|
2004
|
|
$107,164
|
$186,255
|
$204,378
|
$176,372
|
[28]
Both Bernard and Janice
Vicars testified that they did not invest funds in the Company during the audit
period. Peter Collens stated that Bruce Jones had incorrectly recorded unknown
deposits in the Company’s bank account as a credit to the shareholder loan
account when these amounts actually represented unreported revenue for the
Company. Mr. Collens opined that instead of performing a net worth analysis in
this case, the auditor should have reduced the credits to the Shareholder Loan
Account and included these amounts in income for the Company. However, he did
not know the amount of credits to the Shareholder Loan Account which represented
unreported income for the Company as he had never seen any of the source
documents.
(c) Shareholder Benefit
[29]
As a result of the
Appellants’ and Mr. Collens’ representations, the auditor removed the
Shareholder Loan Account from the assets in the net worth calculation. She made
adjustments relating to the Shareholder Loan Account for 2002 to 2006 on a
factual basis. She reduced the opening balance for this account to zero and
requested shareholder loan information for 2005 and 2006. The Appellants did not
submit any information and the auditor calculated a subsection 15(2) benefit
which was included in their income.
[30]
At the hearing, counsel
for the Appellants questioned whether the Shareholder Loan Account was entirely
incorrect and whether its opening balance should have been reduced to zero.
However, the onus was on the Appellants to produce documents or testimony to
show the correct balance for the Shareholder Loan Account. This they failed to
do. They gave no documents with respect to the Shareholder Loan Account.
[31]
Mr. Collens opined that
a shareholder benefit should not have been included in Bernard and Janice
Vicars’ income; that a stand by charge should not have been included in Janice
Vicars’ income; and, that the expenses from one of the Vicars’ rental
properties were included in the calculation of their personal expenditures in
the net worth statements. I have given no weight to these opinions expressed by
Mr. Collens. He was not called as an expert witness but as a factual witness.
He saw no source documents. His knowledge of the file consisted of things he
had been told by Bruce Jones and his review of the net worth documents produced
by the CRA.
(d) Chevrolet Cavalier
[32]
The Company had
included a 2003 Chevrolet Cavalier (“Cavalier”) in its capital cost allowance
schedule. The auditor disallowed the claim for capital cost allowance on the
basis that the Cavalier was used 100% by Tara Vicars. The cost and loan balance
for the Cavalier was included in the net worth calculation for Bernard and
Janice Vicars. Although they told the auditor that Tara Vicars made the
payments on the Cavalier, the Appellants did not give her any documents to
support their position. It was only at the hearing of these appeals that Tara
Vicars’ bank statements were submitted which showed that an automatic monthly
payment of $435.08 was taken from her account to pay for the Cavalier.
[33]
As a result of these
bank account statements and Tara Vicars’ evidence, I have concluded that the
Cavalier should be deleted from the Personal Assets and Personal Liabilities in
the net worth calculation.
(e) Unreported Investment Income
[34]
The unreported
investments included in the Company’s income in 2002 must be reduced by $56,227
as this amount represented investments for 2001.
(f) Statute Barred Years and Gross
Negligence Penalties
[35]
The reassessments for
the 2002, 2003 and 2004 taxation years were made beyond the normal reassessment
period in each of the appeals before the Court and the onus is on the
Respondent to show that the Appellants made a misrepresentation that is
attributable to neglect, carelessness, wilful default or fraud in filing their
returns.
[36]
The Appellants reported
the following income when they filed their tax returns:
|
|
2002
|
2003
|
2004
|
|
Janice Vicars
|
$24,919
|
$27,221
|
$29,517
|
|
Bernard Vicars
|
$36,811
|
$23,575
|
$21,302
|
|
The Company
Net income
|
($4,458)
|
($1,187)
|
$4,307
|
[37]
It is my view that the
Minister was justified in opening the three statute-barred years for each of
the Appellants. I have found that Bernard and Janice Vicars appropriated funds
from the Company. Bernie Vicars was the only person who handled the sales for
the Company and only he and Janice Vicars handled the cash from the Company. I
have concluded that many of their answers were implausible and it is my view
that they were not credible. They have not provided any convincing explanation
for the major portion of the discrepancy between the income reported on the
Company’s and their 2002, 2003 and 2004 income tax returns and the income as
shown by the net worth analysis and that discrepancy was substantial. It is my
view that the misrepresentations made by the Appellants in filing their income
tax returns were attributable to wilful default. In 2002, they had $62,225.30
in cash to pay off the mortgage on their principal residence and they were not
able to give a credible explanation for their receipt of this cash. They knew
that their credit in the Shareholders Loan Account was increasing each year; they
knew that they did not invest any money in the Company; they said that they did
not understand the credit in the Shareholder Loan Account and yet they did not
ask Mr. Jones any questions.
[38]
In each of the appeals,
the Minister assessed gross negligence penalties against the Appellants. Gross
negligence penalties are defined in Venne v The Queen, 84 DTC
6247 (FCTD) as:
“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.
[39]
In deciding whether the
Minister has established that gross negligence penalties should be applied, a
number of factors have to be considered. They include: the magnitude of the
omission in relation to the income declared; the opportunity the taxpayer had
to detect the error; the taxpayer’s education and apparent intelligence: DeCosta
v The Queen, 2005 TCC 545 at paragraph 11.
[40]
I have concluded that the
Company earned unreported income which the individual Appellants appropriated
for their own use. The unreported income for each Appellant is significant when
compared to the income reported by the Appellants. Only the individual
Appellants controlled the cash earned by the Company. Although they prepared
monthly sales summaries for the Company which they gave to their accountant,
these summaries were inaccurate and they did not include all of the cash earned
by the Company. They had their accountant prepare their returns but they
controlled the information they gave him. In these circumstances, I am
satisfied that the Minister was correct to impose gross negligence penalties.
[41]
The appeals are
allowed.
[42]
The parties asked for
an opportunity to address costs and they have sixty days from the date of the
Judgments to file their written representations with the Court.
Signed at Ottawa, Canada, this 24th
day of October 2013.
“V.A. Miller”
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