Citation: 2012 TCC 349
Date: 20121030
Docket: 2011-3624(IT)I
BETWEEN:
AMY LE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Favreau J.
[1]
These appeals
heard under the informal procedure concern the Appellant's 2004, 2005 and 2006
taxation years, the Appellant's Canada Child Tax Benefit ("CCTB") for
the 2004, 2005 and 2006 base taxation years and the Goods and Services Tax
Credit ("GSTC") for the 2003, 2004, 2005, 2006, 2007, 2008 and 2009
base taxation years. The appeals with respect to the GSTC for the 2003 and 2004
base taxation years were quashed at the commencement of the hearing as no determinations
with respect to the 2003 and 2004 base taxation years were issued by the
Minister of National Revenue (the "Minister"). With respect to the
Appellant's entitlement to the CCTB and to the GSTC, the Minister conceded that
the Appellant was single rather than married from March 5, 2006 onward and that
her entitlement to the CCTB for the 2006 base taxation year and to the GSTC for
the 2005 to 2009 base taxation years should be redetermined accordingly.
[2]
The points at issue concerning
the 2004, 2005 and 2006 taxation years are:
(a)
whether the Appellant
earned and failed to report incomes of $24,643, $5,960 and $31,271 for the
2004, 2005 and 2006 taxation years, respectively; and
(b)
whether the Minister
properly assessed gross negligence penalties for the 2004, 2005 and 2006
taxation years.
[3]
By reassessments dated
November 8, 2010, made under the Income Tax Act, R.S.C. 1985,
c. 1 (5th Supp.), as amended (the “Act”), the Minister
included unreported business income of $24,643, $5,960 and $31,271 for the Appellant’s
2004, 2005 and 2006 taxation years respectively and assessed gross negligence
penalties on the above unreported amounts. The reassessments for the 2004, 2005
and 2006 taxation years were made beyond the normal reassessment period.
[4]
The Appellant reported
the following sources of income in computing her income for the 2004, 2005 and
2006 taxation years:
|
|
2004
|
2005
|
2006
|
|
Other income
|
|
$7,050.00
|
|
|
Universal child care benefit
|
|
|
$600.00
|
|
Interest income
|
|
|
$101.00
|
|
Total income
|
$0.00
|
$7,050.00
|
$701.00
|
[5]
In determining the
Appellant’s tax liabilities for the 2004, 2005 and 2006 taxation years, the
Minister made the following assumptions of fact, described in
paragraphs 33(a) to (cc) of the reply to the notice of appeal:
2004,
2005 and 2006 Net Worth
a)
Hung owned a business under the name VN
Gardening and Landscape (“VN Gardening”);
b)
Hung commenced operations of VN Gardening in
June 2003;
c)
the Appellant and Hung were involved in an
illegal marijuana grow operation in the Regina, Saskatchewan area (the “Grow-op”)
during the 2004, 2005 and 2006 taxation years;
d)
the Appellant and Hung were in receipt of
business income earned from the Grow-op;
e)
the Appellant and Hung did not report any income
from the Grow-op on their personal income tax returns for the 2004, 2005 and
2006 taxation years;
f)
the Appellant and Hung operated the Grow-op
together and each were entitled to 50% of the income from the Grow-op;
g)
the Grow-op ceased operations after a Royal
Canadian Mounted Police search was conducted on 12 properties involved in the
Grow-op on November 15, 2006 (the “Search”);
h)
the Search included:
i)
an acreage property near Kronau, Saskatchewan, owned by Hung (the “Kronau Property”)
ii)
a property located at 5730 168th Street,
Surrey, British Columbia, owned by Hung (the “Surrey Property”); and
iii)
a property located at 2238 Elderkin Drive East, Regina, Saskatchewan owned by the Appellant (the “Regina Property”);
i)
cash was seized from the Regina Property during
the Search;
j)
the Appellant purchased the Regina Property in
2005;
k)
the Appellant’s mother did not give her any
funds to purchase the Regina Property;
l)
the Appellant pled guilty to marijuana
production, possession of crime proceeds, fraud and conspiracy;
m)
Hung pled guilty to marijuana production,
possession of proceeds of crime, money laundering and fraud;
n)
at all material times, the Appellant did not
keep or provide records in such form or containing such information as would
enable the determination of the Appellant’s tax liabilities and obligations;
o)
the Appellant and Hung owned the assets as set
out in the attached Schedule A as of December 31st of each
year listed;
p)
the Appellant and Hung owed the liabilities as
set out in the attached Schedule B as of December 31st of
each year listed;
q)
the Appellant and Hung realized the decreases
and increases to their net worth as of December 31st of each
year listed as calculated in the attached Schedule C;
r)
the Appellant and Hung had and paid the yearly
personal living expenditures as set out in the attached Schedule D;
s)
in 2004, 2005 and 2006, the Appellant and Hung
funded their yearly changes in net worth and personal living expenditures, less
reported incomes, by unreported business income that the Appellant and Hung
earned;
t)
in 2004, 2005 and 2006, the Appellant earned and
failed to report respective business income of $24,643.00, $5,960.00 and
$31,271.00, as set out in Schedule E;
Marital
status
u)
the Appellant and Hung have children in common;
v)
the Appellant and Hung’s marital status as at
December 31st of each year, as reported on their respective
personal income tax returns, was as follows:
|
Year
|
Appellant
|
Hung
|
|
2003
|
married to Hung
|
married to Appellant
|
|
2004
|
married to Hung
|
married to Appellant
|
|
2005
|
single
|
married to Appellant
|
|
2006
|
single
|
separated
|
|
2007
|
single
|
married to someone other than the Appellant
|
|
2008
|
single
|
separated
|
|
2009
|
single
|
has not yet filed his personal T1 tax return
|
|
2010
|
single
|
has not yet filed his personal T1 tax return
|
w)
at the time of the Search, the Appellant, Hung
and their children were residing together at the Kronau Property;
x)
the Appellant and Hung’s personal belongings
were found at the Surrey Property during the Search;
y)
the Appellant’s marital status as at
December 31, 2004 was married or common‑law partner to Hung;
z)
the Appellant’s marital status as at
December 31, 2005 was married or common‑law partner to Hung;
aa)
on March 26, 2007, the Appellant notified
the Minister of a change to her marital status to separated effective
March 5, 2006;
bb)
the Appellant’s marital status was separated
effective March 5, 2006;
cc)
the Appellant’s marital status as at
December 31, 2006 was married or common‑law partner to Hung.
[6]
In determining that the
Appellant was liable for penalties under subsection 163(2) of the Act
for the 2004, 2005 and 2006 taxation years, the Minister relied on the
following facts described in paragraph 34 of the reply to the notice of
appeal:
a) the facts stated in paragraphs 33 a) to 33 cc) above;
b) the unreported incomes for the 2004, 2005 and 2006
taxation years were material;
c) the Appellant knew or ought to have known that her income
was underreported for the 2004, 2005 and 2006 taxation years;
d) the Appellant was aware of the reporting requirements
with respect to legitimate sources of income;
e) the Appellant did not maintain books and records in
respect of the Grow‑op;
f) the Appellant’s lifestyle was not supported by the income
reported by the Appellant;
g) the Appellant’s reported income did not support her
ability to purchase assets;
h) the Appellant should have been aware that most of her income
was from illegal activities;
i) the Appellant choose not to report her income from the
illegal activities;
j) the Appellant made or participated in, assented to or
acquiesced in the making of, false statements or omissions in her 2004, 2005
and 2006 income tax returns by failing to report business income of $24,643.00,
$5,960.00 and $31,271.00, respectively; and
k) those false statements or omissions were made by the
Appellant knowingly or under circumstances amounting to gross negligence.
[7]
The Appellant testified
at the hearing and explained that, from March 5, 2006, she lived separately
from Hung but that, from September 2006 to March 2007, she lived with Hung
on a temporary basis in an attempt to reconcile.
[8]
During her testimony,
the Appellant denied to have been involved in the marijuana operation and she
said that she pled guilty to the charges to get a reduced sentence in order to
be able to stay with her children. The Appellant received a two-year
conditional sentence, with the first six months spent on electronic monitoring.
Other conditions were also imposed such as the requirement to provide a DNA
sample, a ten-year firearm prohibition and the forfeiture of items seized on
the property where the couple lived at the time of the search.
[9]
The Appellant said she
disagreed with the fact that she has to pay half of the amounts that have been
reassessed for the 2004, 2005 and 2006 taxation years because during those
years, she was a stay-at-home mom. She maintained that during the 2004 and 2005
taxation years, she earned no business income at all. Her former spouse paid
for everything for their two children and all the family assets were his.
[10]
During
cross-examination, the Appellant was not able to identify the source of a
deposit in the amount of $21,407.36 made in her personal bank account on July
28, 2006. She could not remember if the money came from her former spouse.
[11]
On August 14, 2005, the
Appellant signed an offer to purchase a residential property having the civic
address of 2238 Elderkin Drive East, Regina, Saskatchewan. The purchase price
of the property was $192,500, to be paid by a $5,000 deposit payable by cheque,
a new mortgage of $144,375 and the balance in cash of approximately $43,125.
The Appellant maintained that the cash portion came from her bank account in
which Government cheques received for the support of her children were
deposited. At the hearing, the Appellant did not say that the $40,000 down
payment was a gift from her mother. The Appellant obtained from Crown Mortgage
Services Inc., a mortgage in the amount of $146,250, to buy that property. The
said mortgage was obtained by the Appellant as a result of a fraudulent letter
dated August 25, 2005, from Regina Investments Holdings Inc. The Appellant
pleaded guilty to the fraud charge.
[12]
The Appellant did not
recognize her implications in the marijuana growth operation and she challenged
the Canada Revenue Agency’s (“CRA”) net worth analysis. The Appellant revised
the CRA'S net worth and she submitted her own proposals. The Appellant now
wants to change the 50/50 allocation made by the CRA despite the fact that
during the audit she never raised that point.
[13]
Mr. Lyle Bohay, an
appeals officer with the CRA who was, at the time of the audit, a member of the
Special Enforcement Program, testified at the hearing. He explained that the
audit of the Appellant and of her former spouse began after a referral from the
Royal Canadian Mounted Police (the “R.C.M.P.”) advising that they were part of
a drug investigation. The net worth audit was based on financial information
obtained from the Regina Integrated Proceeds of Crime Section of the R.C.M.P.
The net worth analysis revealed a significant discrepancy between the couple’s reported
income and their lifestyle expenditures. The source of the unexplained funds
could not be related to a non-taxable transaction and the funds were therefore considered
to be taxable income as the most likely source was to be from the sale of
narcotics. The taxable income was divided equally between the Appellant and her
former spouse as the couple’s funds were intermingled.
[14]
According to Mr. Bohay,
the Appellant made, during the course of the audit, representation that the
cash seized in the amount of $7,030 did not belong to her nor to her former
spouse and this amount was removed from the net worth. The Appellant also made
a representation regarding the expenditure amounts used for the purpose of the
net worth but when confronted with factual amounts of expenditures, she
accepted the net worth figure. The Appellant did not dispute at the time of the
audit the 50/50 allocation of undeclared income.
[15]
Mr. Bohay pointed out
that during the course of the net worth audit, the Appellant submitted no
records showing that the assets under her name, representing approximately 50%
of the assets of the couple, did not belong to her and she made no
representation concerning a $40,000 gift obtained from her mother to buy the
residential property located at 2238 Ederkin Drive East in Regina.
Analysis
[16]
I should first mention
that the reassessments for the 2004, 2005 and 2006 taxation years were made beyond
the normal reassessment period which normally mean that the onus is on the
Respondent to establish misrepresentation attributable to neglect,
carelessness, wilful default or fraud for the purposes of subparagraph 152(4)(a)(i)
of the Act. Since this point was not raised by the Appellant in her
notice of appeal, the Respondent was not put on notice that such an onus had to
be met (Bigayan v. Canada, [2000] 1 C.T.C. 29). With respect to the
penalties imposed under subsection 163(2) of the Act, the onus is
clearly on the Respondent to justify them.
[17]
A net worth assessment
is a method of last resort used by the CRA to verify the income tax returns of
a taxpayer. A net worth assessment is, by its very nature, an arbitrary and
imprecise approximation of a taxpayer's income. 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. Once an increase is demonstrated, the onus is
shifted to the taxpayer who has to identify the non-taxable sources of his
appreciation in wealth (Hsu v. Canada, [2001] 4 C.T.C. 1 at paras. 30 and
31).
[18]
In the case at bar, the
net worth assessment revealed a significant discrepancy in the unreported
incomes of the Appellant based on the financial information and assets obtained
from the R.C.M.P. A residential property was acquired by the Appellant in 2005
while very little income was declared for income tax purposes.
[19]
No records were
provided by the Appellant to demolish the Minister's assumptions. The Appellant
challenged the Minister’s net worth assessment based on an expenditures chart
done by memory only rather than with receipts six years after the litigious
years. The Appellant's memory does not appear to be reliable considering the
fact that she cannot remember the source of the $21,407.36 deposited in her
bank account in 2005.
[20]
Based on the evidence,
I have come to the conclusion that the Appellant has not succeeded in showing
that one or more of the Minister's assumptions were wrong.
[21]
Gross negligence
penalties were assessed for each of the 2004, 2005 and 2006 taxation years
under subsection 163(2) of the Act which reads as follows:
Every
person who, knowingly, or
under circumstances amounting to gross negligence, has made or has participated
in, assented to or acquiesced in the making of, a false statement or omission
in a return, form, certificate, statement or answer (in this
section referred to as a “return”) filed or made in respect of a taxation
year for the purposes of this Act, is liable to a penalty of the
greater of $100 and 50% of the total of . . .
[22]
Subsection 163(3) of
the Act specifies that the burden of proof is on the Minister to
establish the facts justifying the assessment of the penalty. Subsection 163(3)
of the Act reads as follows:
Where, in an appeal under this Act, a penalty
assessed by the Minister under this section or section 163.2 is in issue, the
burden of establishing the facts justifying the assessment of the penalty
is on the Minister.
[23]
To establish the facts
justifying the assessment of the penalty means that the Minister has to prove
that the Appellant made a false statement or omission in a tax return and that
the false statement or omission was made knowingly or under circumstances
amounting to gross negligence.
[24]
In Venne v. Canada,
84 DTC 6247, [1984] F.C.J. No. 314 (QL), Strayer J. defined “gross
negligence” as follows:
. . . '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. . . .
[25]
The evidence provided
indicates that the probable source of the unreported income was from unlawful
activities in which the Appellant was engaged and convicted of. The Appellant
admitted that she pleaded guilty to marijuana production, possessing crime
proceeds, fraud and conspiracy. Considering the amounts of unreported income,
as determined by the net worth assessment, I conclude that the Appellant has
made a false statement or an omission in filing her tax returns and that the
false statement or omission was attributable to gross negligence.
[26]
Having concluded that
the Appellant has made a false statement or an omission in filing her tax
returns that was attributable to gross negligence, the Minister was entitled to
reassess the Appellant for the 2004, 2005 and 2006 taxation years beyond the
normal reassessment period by virtue of subparagraph 152(4)(a)(i) of the
Act which reads as follows:
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 . . .
[27]
For these reasons, the
appeals concerning the 2004, 2005 and 2006 taxation years are dismissed.
[28]
The appeals from
the redeterminations of the Appellant's entitlement to the CCTB for the 2006
base taxation year and to the GSTC for the 2005, 2006, 2007, 2008 and 2009 base
taxation years are allowed and the matter is referred back to the Minister for
reconsideration and redeterminations of the Appellant's entitlement to the CCTB
for the 2006 base taxation year and to the GSTC for the 2005 to 2009 base
taxation years. The appeals from the redeterminations of the Appellant's
entitlement to the CCTB for the 2004 and 2005 base taxation years are
dismissed.
[29]
These Amended Reasons for Judgment are issued in
substitution of the Reasons for Judgment dated October 17, 2012.
Signed at Ottawa, Canada, this 30th day of October
2012.
"Réal Favreau"
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