Citation: 2012 TCC 17
Date: 20120119
Docket: 2010-105(IT)I
BETWEEN:
VINCENT KIT YAN LEE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
The Appellant, his wife
and two children immigrated to Canada from Hong Kong in 1995 under the federal
Business Immigration Program. According to the Appellant’s testimony, he had
approximately $1,000,000 of capital when he landed in Canada.
[2]
He invested
approximately $150,000 in partnership units in order to qualify under
the federal Business Immigration Program and paid $260,000 to purchase a condominium
in Vancouver, on which a $140,000 mortgage was initially taken out.
[3]
According to the
Appellant, he had difficulty finding employment in Canada and held low‑skilled
employment. To provide for his family, he found himself having to use his
capital to cover the family’s personal expenses, which quickly lead to an
erosion of that capital. As proof of this, he points out that he had to remortgage
his residence in Vancouver for $140,000.
[4]
To supplement his income,
the Appellant engaged in so‑called day trading of marketable securities,
starting in 1997 and continuing through the taxation years under review.
[5]
During the period in
question, the Appellant had two personal bank accounts (the “Personal
Accounts”) and a number of share‑trading accounts (the “Share‑Trading
Accounts”).
[6]
The Appellant claims he
incurred significant losses from the share‑trading activities, which losses,
totalling $154,508 over a 10-year period commencing in 1997, he reported on
capital account. More specifically, he reported a loss of $1,275.58 for the
2005 taxation year and $43,931.55 for the 2006 taxation year.
[7]
The Appellant alleges
that these losses, coupled with his family’s personal expenditures, have left
him with no capital and little means to support his family. According to the
Appellant, the deterioration of his net worth led to personal difficulties and
he is now estranged from his wife and children. He alleges that he presently
holds employment as a low‑paid concierge to provide some support for his
estranged family. The principal residence in Vancouver has been sold and the
Appellant’s family lives in rented premises.
[8]
The Canada Revenue
Agency (the “CRA”) first undertook an audit of the Appellant’s activities in
order to determine whether they could be subject to the goods and services tax.
The conclusion was that they could not and the CRA undertook an income tax
audit of the Appellant’s 2005 and 2006 taxation years.
[9]
Mr. Cen, a CRA
auditor with a Bachelor of Business Administration degree, oversaw the audit
and concluded that the Appellant failed to report for the 2005 and 2006
taxation years income in the amounts of $64,821 and $107,786 respectively, which
figures he based on Statistics Canada expenditure statistics for a family of
four. Mr. Cen used this methodology because he was unable to obtain the
financial and accounting information that he had requested from the Appellant.
He acknowledged, though, that the Appellant was living in Hong Kong at the time
of the audit and that he was communicating with the Appellant through the
Appellant’s son and daughter, who had difficulty dealing with the requests. The
Appellant stated that he did not have access to his financial records, as they
were in Canada and he was living in Hong Kong.
[10]
The Appellant’s
objection to the reassessments was dealt with by Mr. Leong, an appeals officer
employed with the CRA. Mr. Leong set aside the methodology used by
Mr. Cen and used a modified deposit method to reconstruct the Appellant’s
unreported income for the period in issue.
[11]
The Respondent
reassessed the Appellant for his 2005 and 2006 taxation years on the basis that
he had failed to report income. The Respondent alleged that instead of the reported
losses of $1,275.58 in 2005 and $43,931.55 in 2006, the Appellant had gains of
$4,704.87 in 2005 and $2,185.92 in 2006. The Respondent also reassessed the
Appellant for unreported income of $27,222 in 2005 ($13,143 of unexplained
deposits in the Appellant’s Personal Accounts and $14,079 of deposits in the
Appellant’s Personal Accounts from his Share‑Trading Accounts) and
$83,218 in 2006 ($13,501 of unexplained deposits in the Appellant’s Personal
Accounts and $69,717 of deposits in the Appellant’s Personal Accounts from his
Share‑Trading Accounts).
[12]
The Appellant provided
the Court with substantial documentary evidence consisting for the most part of
documents and statements listing the details of his trading transactions in
each of the years under review. These documents were not made available to the
appeals officer prior to the issuance of the new reassessments as they were
given to counsel for the Respondent at some point prior to the hearing of the
Appellant’s appeal.
[13]
Mr. Leong has had
the opportunity to review these documents and, as noted above, his detailed
calculations reveal that the Appellant had gains in the amounts of $4,704.87
and $2,185.92 for the 2005 and 2006 taxation years rather than losses, as
reported by the Appellant, of $1,275.58 and $43,931.55 for each of those years.
I. Appellant’s Position
[14]
The Appellant argues
that, according to the case law, he can succeed in his appeal provided the
evidence given by him constitutes a prima facie rebuttal of the assumptions
made by the Minister. For example, he can succeed either by establishing on a
balance of probabilities new facts not considered by the Minister showing that
he did not earn the unreported income alleged by the Respondent, or by demonstrating
that the Minister’s assumptions of fact are wrong. Once a prima facie case is
made, the burden of proof shifts back to the Minister, who must then establish
on a balance of probabilities the facts required to support his reassessments.
[15]
The Appellant maintains
that he reported all his income for the period in issue. He supports this
position by noting that he was in financial difficulty during that time. The
Appellant also alleges that the deposits into his Personal Accounts were not
income from taxable sources but transfers of capital and loan amounts from his
Share‑Trading Accounts or from his sister’s account. According to the
Appellant, he has succeeded in making out a prima facie case that demolishes
the Minister’s assumptions supporting the reassessments that are in dispute. He
notes that the Respondent’s own investigation revealed that he made very little
income from his trading activities.
[16]
While the Appellant
admits he was late in filing documents with the Minister due to circumstances
beyond his control, he did eventually provide the Minister and his counsel, before
the hearing, with all of his financial records pertaining to his trading
activities.
II. Respondent’s Position
[17]
As noted above, the
Respondent alleged that instead of the reported losses of $1,275.58 in 2005 and
$43,931.55 in 2006, the Appellant had gains of $4,704.87 in 2005 and $2,185.92
in 2006. The Respondent also reassessed the Appellant for unreported income of $27,222
in 2005 ($13,143 of unexplained deposits in the Appellant’s Personal Accounts
and $14,079 of deposits in the Appellant’s Personal Accounts from his Share‑Trading
Accounts) and $83,218 in 2006 ($13,501 of unexplained deposits in the
Appellant’s Personal Accounts and $69,717 of deposits in the Appellant’s Personal
Accounts from his Share‑Trading Accounts). In support of the
reassessments, the Respondent argues that the Appellant did not demolish the Minister’s
assumption that the unexplained deposits and the deposits from the Share‑Trading
Accounts into his Personal Accounts were taxable income.
III. Analysis
[18]
The Appellant’s tax
misfortune is due in large part to his failure to provide the CRA auditor with
the documents he requested at the audit stage. The Appellant did offer a
credible explanation for his inaction: he was in Hong Kong at the time of the
audit and the documents were at his family residence in Vancouver. His wife was
unable to deal with the requests and the Appellant had to leave the matter in
the hands of his son and daughter, who are both inexperienced when it comes to
financial records and responding to tax compliance requests. Nonetheless, it is
well‑established that the Minister may use alternative methods to
determine a taxpayer’s income when that taxpayer fails to file tax returns,
maintain or keep reliable books or records, or, as is the case here, fails to
grant the Minister access to his financial records.
[19]
In Cantore v. The
Queen,
I noted the following:
[11] . . . The two most frequently used methods
are commonly referred to as the net worth method and the deposit method. Under
the net worth method, the auditor begins with a calculation of the taxpayer’s net
assets (assets less liabilities) at the beginning of the relevant period. The
same calculation is made at the end of the relevant period. The increase in net
worth plus the estimated cost of living for the taxpayer and the taxpayer’s
dependants less the declared income of the taxpayer and the taxpayer’s partner,
if any, is assumed to be the amount of undeclared income of the taxpayer.
[12] The deposit method is based on an analysis of all deposits
made in all of the taxpayer’s bank accounts. Deposits are assumed by the
Minister to constitute taxable revenue. Net income is determined by subtracting
transfers of funds among the taxpayer’s bank accounts and also borrowings by
the taxpayer. The deposit method has been accepted by this Court as an
appropriate alternative audit technique.
[20]
In the present case, the
appeals officer used a modified deposit analysis approach. He did not exclude
the transfers that were made in the Personal Accounts from the Appellant’s Share‑Trading
Accounts as he did not have the records relating thereto for review prior to
issuing the new reassessments after consideration of the Appellant’s objection.
[21]
In “Anatomy of a Net
Worth Assessment”, David E. Graham comments that the net worth method often
produces a more reliable picture of the taxpayer’s income than the deposit
method:
Generally,
deposit analyses are not as accurate a method of calculating income as net
worth assessments. A deposit analysis may not adequately examine where the
money that was deposited into the bank accounts came from (which could result
in over taxation) and, similarly, a deposit analysis may omit money that never
enters the bank account (which could result in under taxation). Taxpayers
who are faced with a deposit analysis, should be careful to ensure that
transfers from their other bank accounts have not been treated as deposits.
[Emphasis added.]
[22]
The method used by the
CRA does not affect the legal burden that must be met by the Appellant in this
case. The Supreme Court of Canada’s decision in Hickman Motors Ltd. v.
Canada
reviews the general principles governing the burden of proof in tax appeals:
·
The burden of proof in
taxation cases is that of the balance of probabilities.
·
The taxpayer has the
initial onus of demolishing
the exact assumptions on which the Minister relies for his assessment, but no
more.
·
The taxpayer will have
met his initial onus when he has made out a prima facie case.
·
Once the taxpayer has made
out a prima facie case, the burden then shifts to the Minister, who must rebut
the taxpayer’s prima facie case by proving his assumptions on a balance of probabilities.
·
If the Minister fails
to adduce satisfactory evidence, the taxpayer will succeed.
[23]
In the article entitled
“Onus of Proof and Ministerial
Assumptions: The Role and Evolution of Burden of Proof in Income Tax Appeals”,
the authors provide what constitutes, in my opinion, an accurate summary of the
rules regarding the legal burden that must be met by taxpayers in tax appeals:
6) If the Crown alleges that the minister relied upon specific
assumptions of fact in the course of raising an assessment, the taxpayer must
either
a)
prove, on the balance of probabilities, that the minister did not rely
upon such assumptions of fact;
b)
demonstrate that the minister’s assumptions of fact are irrelevant; or
c)
demolish the minister’s assumptions of fact.
7) “Demolition” of the minister’s assumptions of fact involves nothing
more complicated than adducing a prima facie case that those assumptions are
incorrect.
. . .
9) Where a taxpayer has adduced a prima facie case rebutting the minister’s
assumptions, the onus and standard of proof revert to the normal rules of civil
procedure.
[24]
I adjourned the hearing
of this case on January 21, 2011 to allow the Respondent’s
representative to analyze the financial reports regarding the Appellant’s
trading activities and to examine the possibility of the Appellant using losses
from prior periods to offset the unreported income determined by the Minister.
Unfortunately, the parties were unable to come to an agreement on the impact of
these items on the Minister’s reassessments.
[25]
This brings me to an
examination of the evidence. First, the Appellant impressed me as a credible
witness and his testimony was corroborated by the evidence noted below. The
modified deposit method applied by the Respondent was flawed because it did not
take into account transfers of funds between the Appellant’s various accounts.
A transfer of funds between two bank accounts held by the same individual cannot
give rise to the creation of income. The CRA itself has analyzed the
Appellant’s dealings in marketable securities and has accepted the fact that his
trading activities gave rise to only nominal income in the years in question.
There is no reliable evidence suggesting that the Appellant had another source
of unreported income. Considering as a whole the evidence on the trial record,
I am of the view that the Appellant’s unreported income was only $4,704.87
and $2,185.92 for the 2005 and 2006 taxation years respectively.
IV. Conclusion
[26]
On the basis of the
conclusions noted above, the Appellant’s unreported income is determined to be
$4,704.87 and $2,185.92 for the 2005 and 2006 taxation years respectively. However,
as the amount of tax in dispute for the 2006 taxation year exceeds $12,000 and
the Appellant elected to have his appeal heard under the informal procedure,
the reduction of taxes that the Appellant is entitled to for that year cannot
exceed $12,000.
[27]
The appeal is allowed and
the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with these reasons for judgment.
Signed at Ottawa, Canada, this 19th day of January 2012.
“Robert J. Hogan”
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