Citation: 2010 TCC 591
DALE V. HAMILTON,
HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
These informal income
tax and harmonized sales tax (“HST”) appeals were heard together in Halifax.
They involved a net worth assessment of the taxpayer’s 2005 taxation year.
Mr. Hamilton is a self‑employed business operator so this resulted
in the reassessment of income tax for 2005 and the assessment of additional HST
for 2004 and 2005, together with penalties in respect of both the underreported
income and the HST.
I. Concessions by the Parties
At the opening of trial
the respondent made the following concessions to the amounts under appeal:
The business assets
should be adjusted by $1,000 to reflect that the land in question sold for
$23,000 not $22,000;
There was a $1,265 misstated
increase in liability in respect of a Farm Credit loan;
In 2004 there should be
additional HST input tax credits (“ITCs”) allowed in the amount of $3,123.37 as
satisfactory receipts had been produced pre‑trial;
In 2005 there should be
additional HST ITCs allowed in the amount of $2,814.86 as satisfactory receipts
had been produced pre‑trial; and
Penalties and interest
to be adjusted in respect of 1) through 4) above.
During the course of
the trial, the Crown conceded that the business use of part of the home issue
was not relevant.
During the course of
the trial, the taxpayer conceded the ITC issue associated with the Volvo truck.
Mr. Hamilton was
engaged in the logging business on his own account. In addition he occasionally
hauled gravel. (He was not involved in gravel sales or welding repair
activities in the years in question.) In his logging activities,
Mr. Hamilton generally took care of everything himself, starting with
standing trees and ending with logs delivered to the mills. He would also haul
other people’s logs for sales to the mills. The larger mills paid by cheque.
Mr. Hamilton would at times employ log cutters to fell trees on his
Mr. Hamilton is an
HST registrant. Mr. Hamilton uses both an outside accountant and an
outside bookkeeper in connection with his businesses and their tax compliance.
Mr. Hamilton was
audited for 2004 and 2005, in part because he was reporting business losses
that were significant compared to his modest investment income resulting in
losses in the tens of thousands of dollars. Also, it was apparent that he was
in a business where many of his receipts and expenses were in cash.
At the outset of the
audit, the Canada Revenue Agency (“CRA”) auditor, Ms. Amanda Dawn Stright,
had an initial meeting with Mr. Hamilton’s accountant at the accountant’s
office. She also attended on the bookkeeper to locate books and records. She
then attended at Mr. Hamilton’s residence to look at his books and his business
assets. That meeting was relatively short. She was asked to leave at the point
where she inquired for his books and records and expressed an interest in how
he carried on financially if he lost money from his business activities and had
no other source of income. She left before being given access to his records.
In her words she was asked to leave. In Mr. Hamilton’s words, when she
began inquiring about justifying his reported losses, he pointed to the door
and told the auditors they could walk through it or be thrown through it and
that they would not be getting the records without a court order.
denied access to records, returned to the office and, based upon the financial
information and records she had from the tax filings, the accountant and the
bookkeeper, completed a net worth assessment. She issued a net worth assessment
in a seemingly outrageous amount that sounded prima facie unreasonable
given what she knew of Mr. Hamilton’s business activities and his standard
of living. I have no doubt that she did it in compliance with the CRA’s
guidelines and policies however, even though she may have had the right to
reassess at that level, I doubt that it was the right thing to do. My sense of
this is confirmed by the fact that on objection, the appeals officer promptly reduced
the amounts by over two‑thirds.
As it turns out,
Mr. Hamilton in fact kept lots of records associated with his revenues and
his expenses even though some of his revenues were in cash and most of his
expenses, business and personal, were paid in cash. By the time of hearing, the
taxpayer had been able to explain to the CRA’s satisfaction approximately 90%
of his cash withdrawals against receipted expenses. Hence, to a considerable
extent Mr. Hamilton is the author of his own tax misfortune and most of
his complaints reflect back on him. He certainly behaved very poorly at the
initial audit level in his refusal to provide books and records adequate to
substantiate his tax filings.
The principal components
of the HST assessments involves whether HST was chargeable in respect of a sale
by Mr. Hamilton of a piece of land and his failure to have the necessary
HST registration number of some of his suppliers, principally his subcontracted
In Hsu v. The Queen,
2001 FCA 240, 2001 DTC 5459, the Federal Court of Appeal
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, 5th 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. The Queen,
 1 C.T.C. 253 at 256 (F.C.T.D.)).
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.
I gave a detailed
outline of the structure of net worth assessment in Altimimi v. The Queen,
2007 TCC 553,  2 C.T.C. 2001.
In challenging a net
worth assessment, taxpayers have two available approaches. The first is to
demonstrate that the taxpayer did keep adequate books and records which allow
his income or loss to be adequately determined to the Court’s satisfaction. The
alternative is to dispute on appeal particular components of the net worth
assessment. In this case, although Mr. Hamilton kept a lot of records and
receipts, they did not in total substantiate his reported loss and he had
significant cash revenues and expenses which could not be fully corroborated by
the records produced. The taxpayer’s approach was therefore to challenge
particular elements of the net worth assessment.
The law relating to the
corroborating documentation and information required to substantiate input tax
credits for HST purposes, and the absolute requirement that the GST/HST
registration number of a supplier be known in order to qualify for an ITC, in
accordance with paragraph 169(4)(a) of the GST/HST legislation and
section 3 of the Input Tax Credit Information (GST/HST) Regulations, has
been fully described by the Federal Court of Appeal in Systematix Technology
Consultants Inc. v. Canada, 2007 FCA 226,  G.S.T.C. 74,
and in this Court’s decision in Comtronic Computer Inc. v. The Queen,
2010 TCC 55,  G.S.T.C. 13.
IV. Legal and Survey Fees
The evidence satisfies
me that the legal fees and survey costs associated with the land sale in 2005
were expenditures made by Mr. Hamilton in 2005 and should therefore be
reflected in the 2005 net worth assessment computation and schedules. These are
in the amount of $2,619.
V. Farm Credit Loan
After the hearing, submissions
were received from appellant’s counsel raising a new argument in respect of a
possible interpretation of one page in each of two of the documents put into
evidence. Each of these is in the respondent’s book of exhibits. Taxpayer’s
counsel seeks to use these two documents, one prepared as a schedule by the CRA
to the net worth computation and the other having been prepared by Farm Credit
Canada, to show that the CRA wrongly characterized an $18,000 Farm Credit
advance as a 2004 advance when the advance was actually received by
Mr. Hamilton in 2005. In addition counsel seeks to enter new evidence to support
Neither the taxpayer
nor the appellant’s counsel were able to remember this Farm Credit loan when
asked at the trial on more than one occasion if there was a loan received in
2005 that might explain the reported loss.
This is not a case in
which the evidence should be reopened to allow further evidence. If new
evidence were accepted it would require a further hearing date be set aside to
deal with matters that are already in the evidence, albeit inconsistently and
albeit the taxpayer and his counsel did not seek to rely upon the document that
is arguably favourable to them in evidence or in argument, in order to permit
the CRA to introduce new rebuttal evidence regarding how the CRA schedule was
prepared. This appears to be a case of an appellant seeking to infill a case
after the hearing ended. This would add costs and delay to everyone involved to
deal with a point that could have been raised in argument based upon the evidence
before the Court. I am not at all satisfied that this would be a proper case to
allow additional evidence to be entered and I am therefore
not considering the additional document submitted by taxpayer’s counsel.
With respect to the new
argument that the two documents are inconsistent, I see no reason in this
case to give the benefit of the doubt to the interpretation favourable to the
taxpayer. The inconsistency was identifiable at the time of the trial and
consideration should have been given to introducing more evidence, oral or documentary,
to clarify the point. In fact, quite the contrary, neither the taxpayer nor his
counsel could either remember or had identified this possible receipt of the
cash advance under a 2004 loan in 2005 despite the extensive bank record
reconciliations that clearly had been undertaken in preparation for trial.
I am not satisfied on
the evidence before the Court that any change needs to be made to the net worth
assessments to reflect this particular Farm Credit loan.
I am also cognisant of
the fact that, if the loan amount had been advanced in 2005 instead of 2004,
this would have had an equivalent effect in the opposite direction for the 2004
income tax audit which was also completed on a net worth basis which in turn
would have had an impact on the 2004 HST issues which are before this Court.
VI. ITCs and HST Registration Numbers
There is nothing this
Court can do to permit Mr. Hamilton ITCs in respect of any supplies where
he could not meet the mandated statutory requirements for information in respect
of the supplier, including its GST/HST registration number. This is clear from
the interpretation given to this part of the GST/HST legislation by the Federal
Court of Appeal in Systematix, above. This information is required under
paragraph 169(4)(a) of the GST/HST legislation and section 3
of the Input Tax Credit Information (GST/HST) Regulations.
VII. ITCs on Land Sale
I find on the evidence
that it is clear that the house on the land sold satisfies the definition of
residential unit in section 123 of the GST/HST legislation by virtue of
being a detached house that, at the time of sale, was vacant but was last
occupied as a place of residence for individuals. The house and the land
therefore constitute a residential complex as defined in that section. The
portion of the lot that he sold together with the house was attributable to the
use of the house and was reasonably necessary for its use and enjoyment as a
place of residence for individuals. For that reason it was an exempt supply by
virtue of the rules in Schedule V‑I‑2 of the GST/HST
legislation in respect of used residential properties. No HST is payable in
respect of exempt supplies as it is excluded from the definition of commercial
activity and hence from the definition of taxable supply, both in subsection 123(1).
VIII. No Other Income Tax or HST Changes
Based upon the evidence,
I am not satisfied that there is any need for any other changes to the income
tax and HST assessed. The taxpayer has not satisfied the Court with
satisfactory credible evidence to otherwise challenge his cash flows and
changes in net worth. He has not put forward a reasonable and credible
challenge to any other aspects of the net worth assessment’s underlying figures
and computations. In common sense terms, he has not been able to explain away
his reported losses as a period during which he either lived partly off past
savings or new loans.
penalties were assessed in respect of both the income tax and HST assessments.
The respondent has the
burden of establishing the facts justifying the imposition of these penalties.
The standard of proof required is a balance of probabilities. There is no
greater standard of proof applicable because a penalty assessment is involved.
In order for the penalties
to be upheld, the respondent must show that Mr. Hamilton made false
statements or omissions either knowingly or under circumstances amounting to
gross negligence. Gross negligence involves a high degree of negligence
tantamount to intentional acting, an indifference to whether the law is
complied with or not: Venne v. The Queen, 84 DTC 6247 (FCTD). Generally,
the Minister will not be considered to have met this standard of proof if a
taxpayer’s conduct is consistent with two viable and reasonable hypotheses, one
justifying the penalty and one not: see the Federal Court of Appeal in Panini
v. Canada, 2006 FCA 224, 2006 DTC 6450, and the Tax
Court of Canada in Farm Business Consultants Inc. v. The Queen,
 T.C.J. 760, 95 DTC 200, and Harris v. The Queen,
2005 TCC 501, 2005 DTC 1179.
With respect to the remaining
penalties on the underreported amounts for income tax purposes, the taxpayer
has not put forward a viable and reasonable hypothesis which would explain
them. These are not insignificant amounts. The taxpayer knew he was dealing
with large amounts of cash revenues and expenditures, and, importantly, he
remained unable to explain how he survived losses from his income‑producing
activities without either depleting investment assets or going into greater
debt. Mr. Hamilton was at least grossly negligent with respect to the
unreported revenue‑generating activities and transactions. For these
reasons the penalties thereon are upheld.
With respect to the HST
penalties, these can be broken down into two for purposes of analysing whether
they were properly assessed. First, to the extent the HST penalties assessed
relate to the underreported income for tax purposes, those penalties were
appropriately assessed for the same reason as Mr. Hamilton’s failure to
report the income. The transactions involved in the underreported income had
direct HST consequences.
Second, with respect to
the HST penalties in respect of the ITCs on supplies to him that are documented
with invoices, receipts or records confirming payment to the payee and the
nature of the services, which ITCs were disallowed solely by virtue of the
absence of the supplier’s GST/HST registration number, the strict approach to
the interpretation of these provisions in Systematix can result in unfairness
to a purchaser who pays the HST in good faith. However, the HST remains
payable. I do not think that Mr. Hamilton was either intentional or
grossly negligent to the extent of having to pay the assessed penalties for the
sole reason that he claimed ITCs on some of his invoiced supplies where those
invoices did not include a valid GST/HST registration number. That could easily
happen on occasion in Canadian businesses without constituting gross
negligence. The respondent did not put the CRA penalty report in evidence nor
did respondent’s counsel ask any substantive questions in chief of the CRA
auditor who assessed the penalties while she was on the stand. In respect of
these amounts only, the respondent has not satisfied its burden of proof to
establish that the penalties assessed were warranted.
The appeal is allowed
in part only as detailed above. In the circumstances, there will be no order as
Signed at Ottawa, Canada, this 17th day of November