Citation: 2011 TCC 112
Date: 20110218
Dockets: 2008-3837(IT)G
2008-3838(GST)G
BETWEEN:
SYLVIA HANIFF,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
Ms. Haniff’s appeals
of her 2002 to 2004 income tax and goods and services tax (“GST”) assessments were
heard together. In those years she was employed full‑time and, in
addition, she operated a hairdressing and aesthetician salon in Toronto. The
reassessments appealed from relate to unreported income, unsupported expenses
and the related GST thereon from her hairdressing salon activities, as well as
rental losses from renting out her basement to her mother.
[2]
At the opening of
trial, the parties agreed that the only additional expenses which should be
allowed are $1,450.97 for 2002, $379.64 for 2003 and $31.70 for 2004. Corresponding
increases to her GST input tax credits will also result. The taxpayer conceded
that 2002 was not statute-barred. The rental losses and rental expenses
disputed in the notice of appeal were dropped by the taxpayer at the opening of
the hearing. Thus, the only issues remaining for the Court to decide are the
taxpayer’s unreported income for these three years and whether gross negligence
penalties were proper in respect of the reassessed amounts.
[3]
The taxpayer’s hair
salon, Glo‑Hair House of Beauty (“Glo‑Hair”), did not have a cash
register. Ms. Haniff did not maintain any sales invoices, purchase
invoices, receipts or other contemporaneous records for the business. She
consistently reported losses from the business. In each of the years in
question, Ms. Haniff claimed business losses in the $40,000 range and
rental losses in the $10,000 range. For many years prior to those in question,
she had claimed comparable business losses and rental losses. As a result, the
Canada Revenue Agency (“CRA”) audit was based upon an indirect income
verification approach. Specifically, in order to verify revenues for 2002 and
2003, the CRA did an analysis of the deposits into the business bank account
and, given that she explained she also used her personal accounts for deposit
purposes, those personal accounts of which she made the CRA aware. However,
since banking records were not received for 2004, the CRA’s approach was to
extrapolate her revenues based upon the amount of GST collected which she
reported in one of her GST returns. This is an even more inaccurate method of
estimating one’s income and is made all the moreso by the fact that the
taxpayer’s GST reporting within each year was not consistent in that she
reported different amounts in her returns than in her income tax returns or in
her Excel spreadsheets amongst other places.
[4]
Ms. Haniff had a
day job as a computer programmer. She wrote computer programs. She had
previously been audited and reassessed by the CRA. Yet, the only record of her
businesses revenues and expenses for each of the years in question was a single‑page
Excel spreadsheet which provided monthly totals which she said she completed
contemporaneously. She testified she used those spreadsheets to prepare and
file her tax returns in respect of the business each year. I am unable to
accept that these spreadsheets were produced during the years in question and
finalized before filing each year’s tax return. This is because for one of the
three years, she managed to produce three significantly and inexplicably
different versions of the same spreadsheet, one for the CRA auditor, one for
the appeals officer, and one for the Court. Not only am I unable to accept
that these Excel spreadsheets were prepared in the years in question, I am
unable to assign the numbers in them any reliability whatsoever as a result. Further,
her testimony and spreadsheets on this undermine the overall credibility and
value of all of her testimony and cause me to carefully consider what
supporting or corroborating evidence she puts forth.
[5]
Ms. Haniff was the
only witness. She did not call her spouse to corroborate any of her testimony
even though her testimony implicated him. Her personal account was joint with
him and several of the unsubstantiated deposits she explained were his rental
receipts for a rental property that he chose to put into this joint account
which she controlled and not into one of his multiple accounts of which the
Court was given no documentary evidence. This notwithstanding that he was
present in the courtroom for the hearing. She did not call her mother who she
claimed was also a source of the unexplained deposits, nor did she produce the
cheques she said she wrote on her mother’s account to herself to pay for her mother’s
rental of the basement which generated the abandoned rental loss. Nor did she
call either of her adult children even though their regular board/rent was said
to be the source of other regular monthly cash deposits into her personal
account. I did not see a copy of a lease for the rental property though
I was given one for her mother living in her basement.
[6]
In her notice of
appeal, it is written “she used her personal account to deposit the receipts of
the business.” In her notice of appeal it also says “[f]or each of the years in
question, she delivered her records to her Accountant who prepared her
returns.” In testimony it was clear she did no such thing. She prepared the
returns herself, signed them and indicated as such. Her testimony and her returns
confirmed this.
[7]
In her tax return for
each year, she indicated that she was single. In fact, she acknowledged she
has, and had throughout the years in question, a common‑law spouse.
[8]
At trial she explained
one deposit in excess of $4,000 as perhaps being in respect of the insurance
reimbursement for a vehicle that had been involved in an accident that year.
There was no evidence to corroborate that in the form of a repair bill, an
insurance cheque or anything of that nature.
[9]
Ms. Haniff
acknowledged in cross‑examination that she had at least two other
personal bank accounts that she had not told the CRA about at the time of the
audit and that, at times, those were also used for purposes of the business.
The CRA had not made a demand for her banking records but had accepted what she
provided it for the audit. She sought to explain other deposits as having been
redemptions out of her Canada Savings Bond plan, however she provided no
corroborating evidence of the redemptions from a Canada Savings Bonds plan, nor
that she even owned such a plan. That is certainly a plausible and possible explanation
given the bank’s cryptic acronyms, however not even the bank’s schedule of
acronym definitions or terms which regularly accompanies bank statements and
passbooks was provided to confirm that. She sought to explain one deposit to
her personal account as having been a transfer from her line of credit, however
while the amounts matched up, the dates were more than a month apart and, if that
was the full explanation, the bank would have been out $5,500 for more than a
month when it posted the corresponding debit to her line of credit. This
suggests there is more to that story that was not told by the documents in
evidence or by her testimony.
[10]
It should also be noted
that the taxpayer’s business involved the receipt of significant amounts of
cash and her evidence, which she did substantiate with two receipts for which
two seemingly unrelated companies some time apart seem to have both used the
same computer program/template to generate, was that she paid some significant
business expenses in cash as well. There was however no corresponding of the
expenses reported to the cash she received from any source.
[11]
Several of the deposits
to her personal account could be explained and were accepted by the CRA at the
audit as having been clearly sourced in transfers between her accounts.
[12]
The taxpayer’s
testimony in explaining any entry in her bank records was qualified with the
words “might be”, “could be” or “may be”. This was almost invariably the case
except as regards the approximately $1,800 amount deposited relatively
regularly each month in the first ten days of the month. These, she testified
with a degree of certainty in her mind, were the rental receipts from her
spouse’s rental property. If credit is not given for these in her assessments
and they are treated as Glo‑Hair receipts, and her testimony is correct
and they are rental receipts already reported and taxed to her spouse, there is
a discomforting risk of double taxation of these amounts. However, as noted
above, I have been provided with no corroborating evidence of any sort on
this point. That was within the control of the taxpayer and her counsel, if not
her, could reasonably foresee that some corroboration would be needed.
[13]
In the case of a net
worth assessment or other indirect verification assessment, it is open to the
taxpayer to attack whether such an assessing approach is needed or is the most
appropriate method of computing the taxpayer’s income from any source. In this
case, the taxpayer is not doing that. If the taxpayer does attack whether a net
worth assessment is needed or the most appropriate, a taxpayer would need to
prove to the satisfaction of the Court with what evidence there is, what
records there are and other credible evidence, what the income of the taxpayer
is from the source or sources in question. The taxpayer has not done that nor laid
any groundwork in the evidence for that. The alternative is for the taxpayer to
challenge specific aspects of the net worth or indirect assessment calculation.
[14]
In taking the latter
approach, the burden is on the taxpayer to satisfy the Court with reasonably
consistent and corroborated credible evidence that demonstrate her explanations
are probable. To the extent that she is unable to satisfy the Court that
plausible and possible versions of events rise to the probable threshold, her
attitude towards filing returns, maintaining adequate books and records and
generally complying with the income tax laws makes her the author of her own
misfortune.
[15]
In this case, the
taxpayer challenges the following four amounts:
1. $5,531 deposited into a personal account that
was sourced in a corresponding increase to her line of credit.
[16]
I have already
spoken of this above. While it is quite possible that the line of credit was
the source of this unexplained deposit, the evidence does not establish that it
is probable. What is probable is that there is more to this story to explain
the five‑week period between the deposit to her credit and the amount
drawn on her line of credit. I do not believe I have heard the full
story regarding this. I conclude that no adjustment is warranted in
respect of this amount.
2. Rental property receipts
[17]
The taxpayer’s position
is that most of the unexplained deposits to her personal account were comprised
of the $1,800 monthly rent received in respect of her spouse’s rental property,
$600 a month received from her mother which she paid herself by cheque drawn on
her mother’s account, and $300 per month, either each or in total, from her two
adult children for room and board. She acknowledged that the children’s room
and board amounts did vary at times from month to month depending upon her
children’s financial situation. There is no corroborating evidence regarding
the amounts received from her children, much less any evidence that would tie
such receipts to any particular deposit or deposits during any month. There is
no ability to infer from the amount of particular deposits that they would
represent this amount. For this reason I am not satisfied that any
adjustment is needed to the assessments to reflect any room and board amounts
received from her children. My conclusion with respect to her mother living in the
basement is to the same effect for similar reasons. For the reasons already set
out above, I am similarly not persuaded on a balance of probabilities that
there is any adjustment warranted in respect of the rental property receipts.
3. The daughter’s in‑trust account
[18]
One of the bank
accounts in question was maintained in the name of the taxpayer and her spouse
in trust for her adult daughter. All of the deposits into that account were
included by the CRA as receipts from the Glo‑Hair business. The taxpayer
maintained that some of those deposits should reflect the fact her daughter had
a modest income at times in the years in question. That is possible but again
I have no evidence that the daughter ever used this in‑trust
account, no explanation of why this account is in the parents’ names in trust
for the daughter, or whether the daughter also had her own bank account for
depositing her earnings and paying her personal expenses (including any room
and board she in fact paid). Nor do I have any evidence of her earnings.
For these reasons, I am not persuaded that any adjustment is needed in
respect of the amounts deposited to this in‑trust account.
4. Vehicle insurance proceeds
[19]
Again, given the total
lack of any corroborating evidence whatsoever to support her testimony that a
particular deposit might have been the insurance proceeds or reimbursement for
damage to a particular vehicle owned as described above, I am not
satisfied on a balance of probabilities that any adjustment is needed in
respect of that deposit either.
[20]
In 620247 Ontario
Ltd. v. Canada, [1995] G.S.T.C. 22, Bowman J., as he then
was, wrote:
8 The assessment is based upon the assumption that the bank
deposits are about as accurate an indication of the sales as one is likely to
get, given that the appellant kept no books and its only record of sales was
the sales slips, which were incomplete and essentially in an unsatisfactory
state. It may be a fair surmise that some of the bank deposits came from
sources other than sales but the evidence simply does not establish how much.
In a case of this type, which involves an attempt by the Department of National
Revenue to make a detailed reconstruction of the taxpayer's business, it is
incumbent upon the taxpayer who challenges the accuracy of the Department's
conclusions to do so with a reasonable degree of specificity. That was not done
here. A bald assertion that the sales could not have been that high, or that
some unspecified portion of the bank deposits came from other sources is
insufficient. I am left with the vague suspicion that the chances are that the
sales figures computed by the Minister may be somewhat high, but within a range
of indeterminate magnitude. This is simply not good enough to justify the
allowing of the appeal. If I sent the matter back for reconsideration and
reassessment the same evidentiary impasse would result. I must therefore
conclude that the appellant has failed to meet the onus of showing that the
assessment is wrong.
. . .
12 . . . There may well be errors in the
Minister's calculations, but given the unsatisfactory state of the appellant's
records it is difficult to see how he could have made a different determination
and while I may not be bound to apply the same rather rigid criteria evidently
demanded by the Minister there is no evidence upon which I can arrive at a
different figure.
[21]
Similarly in Baker
v. The Queen, 2007 TCC 106, [2007] G.S.T.C. 22,
Bédard J. wrote:
24 Subsection 286(1) of the Act sets out the obligation
of every person who carries on a business to keep sufficient records to allow
the Minister to determine the obligations, liabilities and rights of the person
under Part IX. If the required information is not adequate or available, the
Act specifies at subsection 299(1) that the Minister is not bound by any
return and may make his own assessment. Since the information in the present
case was not adequate or available, the auditor, as a last resort, used the
bank deposit method to establish the appellant's sales related to the operation
of his business during the relevant period and made the necessary adjustments.
Under the circumstances, this approach was acceptable, indeed necessary.
25 In this case, the appellant had to demonstrate, on a
balance of probabilities, that the Minister’s numbers were erroneous, doing so
through the use of supporting documentation or through the testimony of
independent and credible witnesses. It is incumbent on the taxpayer to
establish, on a balance of probabilities, that the assessment is too high in
light of the applicable law and the pertinent facts. It is not enough for the
taxpayer to demonstrate that it is conceivable that the assessment is too high.
The taxpayer cannot use another, equally arbitrary method, to demonstrate that
the amount of net tax assessed by the Minister was too
high. . . .
[22]
These comments from
Bowman J. and Bédard J. are entirely applicable in this case.
[23]
I am dismissing the
taxpayer’s appeals with respect to the amount of unreported income from Glo‑Hair.
Penalties
[24]
The remaining issue is
whether the penalties assessed for income tax and GST purposes were warranted.
[25]
The classic description
of the circumstances in which so‑called gross negligence penalties are
warranted is set out by the Federal Court of Appeal in Venne v. The Queen,
84 DTC 6247:
“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.
[26]
Having heard
Ms. Haniff’s testimony, and considered the business records and other
financial records put into evidence, I am entirely satisfied that her
failure to maintain a cash register or other cash receipt books, sales
invoices, purchase invoices or virtually any other financial records for her
Glo‑Hair business was done with the specific intention of cheating on her
taxes. She could not put forward, nor could her counsel suggest, any other
reason for taking such a cavalier approach to her record‑keeping
obligations. Indeed, some Canadians may wonder why she was not prosecuted.
[27]
The taxpayer’s counsel is
correct in pointing out that the onus is on the Crown of proving gross
negligence in support of such penalties. However, as stated most aptly by
Pelletier J.A. of the Federal Court of Appeal in Lacroix v. Canada,
2008 FCA 241, 2009 DTC 5029:
29 . . . In the case at bar, the Minister
found undeclared income and asked the taxpayer to justify it. The taxpayer
provided an explanation that neither the Minister nor the Tax Court of Canada
found to be credible. Accordingly, there is no viable and reasonable hypothesis
that could lead the decision‑maker to give the taxpayer the benefit of
the doubt. The only hypothesis offered was deemed not to be credible.
30 The facts in evidence in this case are such that the
taxpayer's tax return made a misrepresentation of facts, and the only
explanation offered by the taxpayer was found not to be credible. Clearly,
there must be some other explanation for this income. It must therefore be
concluded that the taxpayer had an unreported source of income, was aware of
this source and refused to disclose it, since the explanations he gave were
found not to be credible. In my view, given such circumstances, one must come
to the inevitable conclusion that the false tax return was filed knowingly, or
under circumstances amounting to gross negligence. This justifies not only a
penalty, but also a reassessment beyond the statutory period.
. . .
32 What, then, of the burden of proof on the Minister? How
does he discharge this burden? There may be circumstances where the Minister
would be able to show direct evidence of the taxpayer's state of mind at the
time the tax return was filed. However, in the vast majority of cases, the
Minister will be limited to undermining the taxpayer's credibility by either
adducing evidence or cross‑examining the taxpayer. Insofar as the Tax
Court of Canada is satisfied that the taxpayer earned unreported income and did
not provide a credible explanation for the discrepancy between his or her
reported income and his or her net worth, the Minister has discharged the
burden of proof on him within the meaning of subparagraph 152(4)(a)(i)
and subsection 162(3).
33 As Justice Létourneau so aptly put it in Molenaar v.
Canada, 2004 FCA 349, 2004 DTC 6688, at paragraph 4:
4 Once the Ministère establishes on the basis of
reliable information that there is a discrepancy, and a substantial one in the
case at bar, between a taxpayer's assets and his expenses, and that discrepancy
continues to be unexplained and inexplicable, the Ministère has discharged its
burden of proof. It is then for the taxpayer to identify the source of his
income and show that it is not taxable.
[Emphasis added.]
[28]
The comments of Pelletier J.A.
in Lacroix and Létourneau J.A. in Molenaar are wholly
applicable in this case.
[29]
For these reasons, the
taxpayer’s appeals are dismissed except to the extent of the additional
expenses set out above that have been agreed to.
[30]
At the parties’ request,
the parties are invited to file written submissions as to an appropriate cost
award in this case within 30 days of the date hereof.
Signed at Ottawa,
Canada, this 18th day of February 2011.
"Patrick Boyle"
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