Citation: 2011 TCC 72
Date: 20110207
Docket: 2009-667(IT)I
BETWEEN:
HI TRUONG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
This appeal relates to net worth
assessments issued to Hi Truong under the Income Tax Act for the 2002,
2003, 2004 and 2005 taxation years. The questions to be decided are: (1)
whether income has been properly determined, (2) whether the assessments for
the 2002 and 2003 taxation years are statute-barred, and (3) whether gross
negligence penalties are appropriate.
[2]
Mr. Truong represented himself at
the hearing, with the assistance of an interpreter, and he provided the only
testimony on his own behalf. Guy LeBlanc, an auditor from the Canada Revenue
Agency (CRA), testified on behalf of the respondent.
[3]
During the relevant period, the
appellant was employed on a full-time basis as a casting inspector with Ancast
Industries, at an annual remuneration of approximately $40,000.
[4]
An audit of the appellant’s
affairs was commenced by the CRA after they received a tip that the appellant
was living beyond his means. During the course of their investigation, the CRA
determined that the appellant had been arrested in 2005 and convicted of
possession for the purpose of trafficking in marijuana. No income had been
reported from this activity.
[5]
Based on a net worth analysis of
the appellant and his girlfriend, Thua Tran, the appellant was reassessed to
include additional income for the 2002 to 2005 taxation years in the amounts of
$22,100, $20,504, $30,968, and $10,967, respectively. Federal gross negligence
penalties in the amounts of $2,431, $2,324, $3,445, and $1,206 were also
assessed.
Analysis
[6]
I will begin with the observation
that it was reasonable for the Minister to undertake a net worth analysis in
this case. In light of the drug-related conviction, it is reasonable to expect
that the appellant may have earned income that was unreported.
[7]
I would also comment that the
CRA’s net worth analysis appears to be conservative and thorough. Unlike many
net worth analyzes undertaken by the CRA, estimates were not used to determine
personal expenditures. Actual transactions were analyzed based on financial
records and land titles searches. The methodology is by no means full proof,
but the analysis appears to be meticulous.
[8]
In order to successfully challenge
these assessments, the appellant must present detailed and cogent testimony,
and supporting evidence where possible, to explain the apparent increases in
net worth.
[9]
The same is true for issues on
which the Minister bears the burden (penalties and potentially statute-barred
years) since it is reasonable to assume that the appellant had unreported
income: Lacroix v. The Queen, 2008 FCA 241, 2009 DTC 5029.
[10]
The appellant challenged several
aspects of the assessments: (1) the inclusion of his girlfriend’s net worth,
(2) the assumption that a property at 1313
Selkirk Ave. was a rental property, (3)
the assumption that a property at 6 Cirrus Close was a rental property, (4) the
exclusion of loans from relatives, and (5) the exclusion of casino gains.
[11]
Each of these items is considered
separately below.
[12]
Before doing so, I would first
make a general comment about the appellant’s testimony. Overall, the
explanations provided by the appellant were extremely brief, and there was a
lack of supporting evidence. In addition, at times the appellant’s testimony
was not truthful. For instance, the following excerpt from the transcript reveals
that the appellant denied his criminal conviction until he was faced with
proof.
Q […]
And I understand, Mr. Truong, that you pled guilty to the
possession charge, the 5(2) charge, possession for the purposes of trafficking,
is that correct?
A No.
[…]
Q You’re saying you did not plead guilty to that charge?
A (IN ENGLISH) No.
Q I’m going to show you a copy of a disposition sheet. I’m
looking at the second page of that sheet that I have handed you, Mr. Truong.
You would agree with me that you pled guilty to the, to possessing for the
purposes of trafficking and the Crown stayed the charge under the 7(1) for
producing marijuana, is that correct?
A (IN ENGLISH) Yes.
[13]
Turning to the issues raised by
the appellant, the first issue concerns Ms. Tran, the appellant’s girlfriend.
The appellant submits that the net worth analysis should exclude Ms. Tran
because they were not married and did not live together for much of the
assessment period.
[14]
I do not agree.
[15]
First, regardless of whether the
appellant and Ms. Tran lived apart or not, they had close connections. Ms. Tran
had two daughters, and the appellant admitted that he was the father of at
least one of them.
[16]
Second, there was no reasonable
explanation as to how Ms. Tran supported herself and her children. The income
that she had reported for tax purposes was very modest, less than $50,000 in
aggregate for the four taxation years at issue. The appellant only admitted
paying for a down payment on their home. There was no explanation given as to how
Ms. Tran financed her other personal expenditures.
[17]
In the absence of better evidence
explaining how Ms. Tran and her daughters were supported, it is appropriate to
include Ms. Tran in the net worth analysis.
[18]
The second issue concerns a
property at 1313 Selkirk Avenue, which was registered in the name of Ms. Tran.
[19]
In making the assessments, the
Minister assumed that in 2002 the appellant purchased this property as a rental
property with a down payment of $15,394 and that in 2005 he sold it at a gain
of $8,345.
[20]
The appellant submits that the
Selkirk property was Ms. Tran’s home and not a rental property. The appellant
admits that he paid the down payment on the property but he testified that he
did not pay the mortgage payments or any other expenses associated with the
property.
[21]
The evidence as a whole does not
convince me that the Minister’s assumptions with respect to the Selkirk
property are incorrect.
[22]
First, the evidence presented by
the appellant concerning the Selkirk property was very brief. In addition, Ms.
Tran had not listed 1313 Selkirk as her address in a 2003 credit application (R-3,
Tab 18). Instead, she listed her address as Burrows
Avenue (the appellant’s home). Further, as
mentioned earlier Ms. Tran’s income does not appear to be sufficient to support
herself and her two children in the Selkirk home.
[23]
The next issue concerns a property
at 6 Cirrus Close.
[24]
The Minister assumed that this
property was held during the audit period as a rental property and that it was
sold at a loss of $33,000 in 2004.
[25]
The appellant submits that this
property should be excluded from the net worth analysis because he was only
holding title to the property and the related mortgage on behalf of a friend
who did not have the financial resources to undertake the transaction. He said
that he did not pay any of the costs in relation to this property.
[26]
There is some supporting evidence for
this testimony.
[27]
In particular, the appellant
submitted the solicitor’s reporting letter on the sale of 6 Cirrus Close which
provides some support that the property was transferred for consideration equal
to the balance outstanding on the mortgage. In addition, I would note that the
mailing address for the mortgage statements is 6 Cirrus Close. This supports
the appellant’s testimony that the beneficial owners took care of the mortgage
payments.
[28]
Although the supporting evidence
could be stronger, it is sufficient in my view in the context of an appeal
under the informal procedure. Accordingly, the appellant’s version of events in
relation to 6 Cirrus Close will be accepted.
[29]
The remaining issue is how this
will affect the net worth calculations. The appellant did not make submissions
with respect to this.
[30]
The net worth calculations are
fairly complex and are contained in two binders comprising 42 tabs. It would be
appropriate to make approximate adjustments to the net worth analysis in these
circumstances. I did give some thought to referring this matter back to the
Minister for recalculation, but I have decided against this in favour of
expediency.
[31]
The adjustment that I will make is
to reduce income by the amount of the loss that the Minister assumed was
incurred on the sale of the property in 2004. This amount, $33,000, was taken
into account in the net worth calculations as a personal expenditure in 2004.
As such it would have increased the appellant’s income in that year (R-2, Tab
5).
[32]
The next issue relates to loans
from relatives. The appellant testified that he received loans from an aunt, uncle
and a cousin to assist him with the acquisition of a principal residence at 38 Desna Place.
[33]
There was support provided for the
loans from the uncle and aunt in the form of bank drafts issued in 2004 in the
amount of $12,000. As for the loan from the cousin, the appellant attempted to
introduce a letter from the cousin but I refused to enter it into evidence due
to its unreliability.
[34]
I will accept the appellant’s
testimony with respect to the bank drafts. The appellant’s income will be
reduced by the amount of $12,000.
[35]
The adjustments relating to 6
Cirrus Close and the bank drafts are in aggregate $45,000. Both of these
adjustments relate to the 2004 taxation year, in which income was increased by
the Minister by only $30,968. Since the adjustments exceed the increase in
income, I propose that the balance be applied against the 2005 increase in
income in the amount of $10,967. In the result, the additions to income for
2004 and 2005 will be reversed in their entirety. The penalties will also be
deleted for those years.
[36]
The appellant also testified that
he had gambling wins but he was not able to say how much he won on a net basis.
No corroborating evidence was given for this and there is no reasonable basis
on which I could conclude that this evidence was reliable. No adjustment will
be made to the assessments relating to gambling wins.
[37]
As for the gross negligence
penalties and the statute bar issue for 2002 and 2003, I would conclude that
the assessments were properly made since no income had been reported from the
criminal activity and no satisfactory explanation was provided at the hearing
for the increases in net worth in those years.
[38]
In the result, the appeal for the
2002 and 2003 taxation years will be dismissed and the appeal for the 2004 and
2005 taxation years will be allowed.
[39]
The parties shall bear their own
costs.
Signed at Ottawa,
Canada this 7th day of February 2011.
“J. M. Woods”
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