Docket: 2010-2264(IT)G
BETWEEN:
PEI PEI
ZHENG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal
heard on March 12, 2012 at Toronto,
Ontario
Before: The Honourable
Justice J.E. Hershfield
Appearances:
|
For the Appellant:
|
The
Appellant herself
|
|
Counsel for the Respondent:
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Ernesto Caceres
|
____________________________________________________________________
JUDGMENT
In accordance with and for the
reasons set out in the attached Reasons for Judgment, the appeals from the
reassessments made under the Income Tax Act for the 2003, 2004 and 2005
taxation years are allowed, without costs, and the reassessments are referred
back to the Minister of National Revenue for reconsideration and reassessment
on the basis that:
·
with respect to 2003 the
unreported income amount shall be reduced by $16,961 to nil.
·
with
respect to 2004 the unreported income amount shall be reduced by $63,000 to $5,714.
·
with
respect to 2005 the unreported income amount shall be reduced by $54,878 to $39,284.
Signed at Ottawa, Canada this 2nd day of April 2012.
“J.E. Hershfield”
Citation: 2012 TCC 103
Date: 20120402
Docket: 2010-2264(IT)G
BETWEEN:
PEI PEI ZHENG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
[1] The Appellant
appeals assessments in respect to her 2003, 2004 and 2005 taxation years.
[2] The Appellant filed
her 2003, 2004 and 2005 T1 General income tax returns on or about May 15, 2007,
in which she reported:
|
|
2003
|
2004
|
2005
|
|
Rental Income
|
$11,496
|
$13,800
|
$21,073
|
|
Employment Income from Cara
Operations Limited
|
$8,572
|
$8,959
|
$11,441
|
|
Other Income
|
$2,709
|
$1,380
|
$2,087
|
|
Total
|
$22,776
|
$24,139
|
$34,601
|
[3] The Minister of
National Revenue (the “Minister”) reassessed the Appellant for each of these
taxation years to include unreported business income and gross negligence
penalties.
[4] The Appellant
objected to the reassessments and based on representations made to the appeal
section of the Canada Revenue Agency (the “CRA”), the Minister reassessed the
Appellant to reduce the amount of unreported income which resulted in the
following amounts being included:
·
$16,961 in 2003
·
$69,120 in 2004
·
$94,162 in 2005
Gross Negligence Penalties were also reduced accordingly.
[5] The Appellant
appeals these reassessments based on a number of asserted miscalculations and
wrong information relied on by the Minister in issuing them.
[6] The Reply to the
Notice of Appeal (“Reply”) indicates that the reassessments were based on a
methodology commonly referred to as a net worth assessment. The Minister
determined that the Appellant’s reported income could not support her
lifestyle, that she earned business income from what might be described as a
criminal activity and that she did not keep books and records showing the true
source and amount of her income in the subject years.
[7] The Reply goes on
to set out particulars of how a comparative analysis of her net assets showed increases
from 2002 (the base year) to 2003 and then to 2004 and 2005.
[8] The Appellant
testified at the hearing and, in general, on the basis of her testimony, I believe
that the methodology employed by the Minister overestimated her unreported
income. On the other hand, the absence of records and corroborating evidence in
most cases that might have supported much of her self-serving testimony has
made it difficult to quantify with any certainty the amount of unreported
income in the years in question. Still, certain adjustments are warranted.
[9] While the
jurisprudence in this area does not require the Minister to establish the
existence of an alleged business or other source of the unreported income, it is worth noting that the Appellant adamantly
denied being involved in any business or activity of the nature described in
the Reply.
[10] I accept her
testimony on this point. I believe that it is improbable that the Appellant was
in fact personally involved in the alleged activity. Further, I note that the
basis for the assumption of a criminal activity was, according to the
Respondent’s witness, nothing more than a tip that does not appear to have been
followed up in any way other than it giving rise to the assessment under appeal.
I cannot help but doubt, in this case, the reliability of such a tip. Acting on
what might be in this case, an unsupported tip, as the basis for putting a
taxpayer through the onerous and difficult task of defending against a net
worth assessment is a bit disconcerting. Still, once the assessment is made, and
the basis for calculating the unreported income is particularized, the taxpayer
is required to demonstrate errors in the methodology employed and/or errors in respect
of the calculation of itemized asset growth inclusions and specific expenditures
and/or errors in the assumption that such asset growth and such expenditures
were funded by unreported income.
[11] Accordingly,
regardless that I find that the business source alleged by the Respondent has
been refuted, that does not absolve her of the responsibility to account for
the increases in her net worth in a manner that would demonstrate that they are
not, on a balance of probability, from a taxable source. Indeed, the Appellant
does not deny that she had unreported income. Her issue with the assessment approach
is that it is filled with erroneous assumptions as to her lifestyle
expenditures and sources of funds. She testified emotionally that since coming
to this country she has worked very hard at several jobs to get ahead. Both her
mother and brother have passed away so there is little evidence that she could
produce as to their contribution to her apparent financial well being. One has
the impression from her evidence, which in general terms impressed me as
credible, that the net worth increases in wealth in this case may well have
been attributable to unreported income from long extra hours of employment, from
the pooling of family resources which may have included unreported income of
other family members and from frugal living and careful management of her
family’s affairs. Nonetheless, the burden imposed on the Appellant is not
relieved by such general impressions. It is not sufficient that the Appellant
has satisfied the Court that the assessment is likely wrong, she has to give
evidence that undermines specific assumptions and calculations.
[12] The three main areas
with which the Appellant took specific exception are as follows:
·
The 2004 purchase of a
2003 Audi for $25,000 was, although registered in the Appellant’s name,
purchased by her brother with her brother’s money.
·
$25,000 of the $33,425
spent on the purchase of a Lexus in 2005 was a loan from her brother.
·
Over the years in
question she lent considerable amounts of money to persons she identified at
the hearing. She testified that these loans were repaid and therefore should
not be included in her income. She identified a $10,000 loan to her brother, a
$12,000 loan to a friend in China, $6,000 to her friend’s cousin in Newfoundland. There were also advances to her mother and her sister
totalling some $6,400 and an additional $26,000 given to her ex-husband.
[13] With respect to the
loans and repayments, I am not satisfied on the evidence that repayments were
required to be considered as part of the net worth income calculations during the
subject years. Indeed, it appears that the asserted repayments all occurred
well after 2005. That being the case, I am not able to make any adjustments to
the assessments based on this part of the Appellant’s testimony. As well, I note
that the repayment of loans made to her ex-husband that the Appellant testified
took the form of services that he performed on rental properties owned by her
or them, could not have been included in the increases in her net worth as determined
by the Minister and therefore cannot be taken out.
[14] With respect to the source
of funds for the purchase of the 2003 Audi, I find that the $25,000 more likely
than not came from her brother and that the vehicle was only registered in the
Appellant’s name as a matter of convenience. There were insurance records that
corroborated that the car was not on the road for long stretches that coincided
with times she testified that her brother was in China. There was also evidence (albeit
somewhat confused and self-serving) that has satisfied me on a balance of
probability that the car went to her brother’s son on her brother’s death. As
well, she had her own car at the time of the purchase of the Audi that she
continued to own and use until she acquired the Lexus.
[15] On the other hand her
evidence as to her brother lending her $25,000 to buy the Lexus is wholly
uncorroborated. Indeed, it tends to contradict to some extent the Appellant’s
testimony that she had in the same year lent her brother $10,000.
[16] There are also
personal expenditures included in the net worth calculation that the Appellant
testified were excessive, however the discrepancies were minor and do not explain
the extent of the excesses she asserted in respect of the Minister’s
determinations.
[17] Contributing to the
greyness in finding a rational basis for identifying such excessive inclusions is
that the Appellant appears to be her family’s go-to person in terms of managing
everyone’s financial affairs. She had access to her mother’s money and her
brother and former husband both seem to treat her as the head of the family and
that has caused a blurring of everyone’s financial affairs.
[18] However, the extent
the family’s financial situation is blurred, is a problem for which she must
take responsibility. The Appellant is not lacking in financial sophistication.
She invested in rental properties for which she arranged financing and which
she managed. I find it hard to accept then that the lack of records that would document
her sources of funds is due to ignorance.
[19] That said, there is
a problem with the net worth determinations in this case. As suggested
earlier, the Respondent called a witness to testify as to the method of
assessment. That witness was the auditor that worked on the original
assessment. The appeals officer who worked on the actual assessment at issue
was not called to testify.
[20] The auditor’s
testimony did not give me a lot of comfort in relation to his use of Statistics
Canada information in determining the Appellant’s personal expenditures in some
categories but I have little to go on to make adjustments there. However, there
is one category of personal expenditures in each of the subject years, namely
the inclusion of loans made by the Appellant, that requires attention.
[21] The auditor admitted
to a potential flaw in respect of the methodology employed in determining the
unreported income amounts by including loans made by the Appellant as personal
expenditures. He acknowledged the possibility, if not the likelihood, of double
counting arising by virtue of that inclusion.
[22] More specifically, the
auditor acknowledged adding the following amounts as personal expenditures:
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2003
|
2004
|
2005
|
|
$26,949
|
$38,406
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$54,876
|
[23] The auditor
acknowledged that these reflected the total of amounts of withdrawals (after
adjustments by the appeals officer) that he determined to be loans made by the
Appellant based on information and records that she provided. He acknowledged that
these inclusions would be a double counting if in fact the source of those
loans was the unreported income amounts that he had already added to her income
based on the net worth increases in the subject years.
[24] Adding funds as they
go in and then again as they go out, imposes a double burden on the Appellant that
I find unacceptable. One stroke of a blunt instrument is sufficient, at least
in this case.
[25] I am relying then on
there being a flaw in the methodology that undermines the assessment in a very
significant way in this case. In 2003 the potential for double counting is
$26,949. However, the amount of the reduction in unreported income required on
account of this issue is limited to the $16,961 assessed. The amount of the
reduction in respect of the 2004 and 2005 years is not so limited. The reduction
in unreported income for 2004 is therefore $38,406 and the reduction for 2005 is
$54,876. All such reductions are based on the double counting acknowledgement
of the auditor and my acceptance in this case that the net worth assessments at
issue more likely than not far exceed the actual unreported income amounts in
each of the subject years.
[26] I will allow the
appeal on that basis. As well, as noted above, the unreported income in respect
of 2004 shall be reduced by a further $25,000 based on the 2003 Audi not being
her vehicle and not having been paid for by her.
[27] The appeals are allowed accordingly, without
costs.
Signed at Ottawa,
Canada this 2nd day of April 2012.
“J.E. Hershfield”
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