Citation: 2010 TCC 348
Date: 20100622
Docket: 2009-2964(IT)I
BETWEEN:
GYE-SUN CHOI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris J.
[1] The Appellant was
the subject of a net worth audit by the Minister of National Revenue (Minister)
which led to reassessments for unreported income of $49,849.10 in 2003 and
$22,152.49 in 2004. Penalties under subsection 163(2) of the Income Tax Act (the
Act) were also imposed in respect of the unreported amounts.
[2] The Appellant is
appealing the reassessments on the basis that she had received substantial
loans totalling $47,000 from her sister-in-law in those years and the net worth
calculation failed to take into account her liability to repay the loans. She
also takes the position that the remaining increase to her net worth in those
years as calculated by the Minister was minimal compared to her total assets, and
should be disregarded.
[3] The Appellant
carried on a business selling picture framing products and services under the
trade names “Framing Factory” and “Master Framers Gallery”. Another trade name,
“Good Frames”, also appears in the documents submitted to the Court, but the
Appellant said that this name was part of the “Framing Factory” operation. The
business was operated out of three rental locations in the Metropolitan Toronto
area in 2003 and 2004. The Appellant’s husband, Wang Soo Choi, was employed by
her to operate one of the stores and also he handled all of the financial
affairs for the business. It also appeared that he took care of the Appellant’s
personal finances.
[4] The Appellant
testified that she had no idea how much money the business made in 2003 and
2004 or in any prior years. All she could say was that business was bad and had
been bad for many years. She also had no knowledge of the expenses for the
business, including her husband’s salary.
[5] According to the
financial statements, the business reported a profit of $1,798 in 2003 and
$7,018 in 2004. The Appellant’s husband was paid $6,500 each year.
[6] The evidence showed
that the business was the Appellant’s only source of income in 2003 and 2004,
and that the Appellant’s husband’s employment in it was his only source of
income in those years as well. For the purposes of the audit, the Appellant estimated
her and her husband’s personal expenditures at approximately $57,000 annually.
She did not take issue with these figures at the hearing. Included in these
expenses were the payments on the mortgage of approximately $350,000 on the
family residence which had been purchased for $425,000 in about 2002.
[7] Given the apparent
discrepancy between the Appellant’s reported income and her lifestyle, the
Minister decided to perform a net worth audit. The audit disclosed increases in
the Appellant’s net worth that could not be attributed to any disclosed source
of income, and the Minister assumed that they resulted from unreported business
income.
[8] The Appellant’s
representative contended that the Appellant had borrowed $28,000 in 2003 and
$18,000 in 2004 from her husband’s sister, In Soo Kim. However, at the hearing,
the Appellant testified that she did not borrow money from Kim. She said that
her husband had borrowed money from Kim, but she could not give any details of the
loans, only that she deposited money he borrowed into her bank account. She
stated that her husband repaid the loans when he sold a property on Annette Street in Toronto. This property was
purchased in 1992 and sold in 2005. The top two floors of the property had been
occupied by Ms. Kim and her family, and the main floor was used for one of the
Appellant’s framing stores. Ms. Kim worked in that store fulltime for a number
of years before the building was sold.
[9] The Appellant’s
husband testified that although he was on title as the sole owner of the Annette Street property, Ms. Kim in
fact had a 50% interest in it. He produced an agreement with Ms. Kim purportedly
signed in 1992, stating that Kim had previously contributed $40,000 towards the
purchase of another property at 38 Broadleaf Road (a house apparently owned by
the Appellant and her husband), and that in recognition of this contribution
she would have a 50% interest in the Annette Street property. According to the
agreement, she was to occupy the second and third floors, and was to pay $700
per month towards the mortgage, the Appellant’s husband was to pay $1,574 for
his share of the mortgage, and any other expenses were to be split between them.
[10] The Appellant’s
husband explained that in 1992, Ms. Kim had refugee status in Canada, and he wished to help
her become a landed immigrant. He suggested that they buy the Annette Street property together, but
a lawyer told them it would be difficult for her to do so because of her
refugee status and that they should record her interest in a separate “side”
agreement.
[11] The Appellant’s
husband said that at some point around 2002, it was decided that the property
would be sold because the Appellant’s business was so slow. Once the decision
to sell was made, he said he began borrowing money from Ms. Kim in the
Appellant’s name, on the understanding that Ms. Kim would be repaid when the
property sold. He borrowed amounts ranging from up to $2,500, always in cash.
He said that Ms. Kim kept a record of the amounts he borrowed, but that she
destroyed it when the loan was repaid. He attempted to reconstruct the amounts
from deposits to his and the Appellant’s bank accounts in 2003 and 2004 and he
prepared a list showing loans of $66,270 during those years.
[12] In a letter
purportedly written by Ms. Kim and provided to the auditor, she sets out the
details of her half ownership of the Annette Street property and says:
When we decided to sell this property,
Gye Sun Choi, my sister-in-law, asked to borrow money from me under the
condition that she would pay me back after the sale of this property.
[13] Ms. Kim was not
called as a witness at the hearing. The Appellant said that she had not had any
contact with her since September 2006. The Appellant’s husband said that he had
only contacted her in September 2006 to write the letter to the auditor. He
also said that Ms. Kim was afraid to come to Court.
[14] As proof of
repayment of the loans from Ms. Kim, the Appellant’s husband presented a copy
of the statement of adjustments for the sale of the Annette Street property which showed that
$140,000 of the net proceeds of $200,000 was paid by the lawyer to “Kim
purchase”. He said that Ms. Kim and her husband used the money from the Annette Street sale to purchase a
condominium, and he produced a letter from a law firm to Mr. and Ms. Kim
confirming the receipt of $140,000 towards their purchase.
[15] The Appellant’s
husband referred to a document prepared by the Appellant’s representative, Mr.
Nighswander, which gave an accounting for the proceeds from the sale of the
property. It indicated that he and Ms. Kim were each entitled to net proceeds
of $100,372 after payment of the outstanding mortgage, taxes, real estate
commission and legal fees. The document states that Ms. Kim received $140,000
of the sale proceeds, and that she was owed a total of $172,500 made up of the
following amounts:
|
Proceeds of sale of Annette
|
$100,372
|
|
Loans 2003 per Kim
|
28,000
|
|
2004 per Kim
|
19,000
|
|
Loans 2005 and 2002
|
25,182
|
[16] In addition to the
$140,000 from the sale of the Annette Street property, the Appellant’s husband said that he paid
Ms. Kim an additional $25,000 by way of two cheques. One he said was made
out to Ms. Kim’s son who needed the money, and the other he said he thought was
made out to Ms. Kim’s husband. No copies of the cheques were provided. He said
that the final $7,500 of the $172,500 owing to Ms. Kim was held back to cover
possible taxes payable.
Appellant’s position
[17] The Appellant’s
representative submitted that the Appellant had provided sufficient proof of
both the loans received from Ms. Kim and the repayment of those loans out of
the proceeds from the sale of the Annette Street property. He stated that the
Appellant was an unsophisticated taxpayer and while her bookkeeping was less
than perfect, there should not be a high standard of recordkeeping required for
personal transactions such as the loans in this case.
[18] The remainder of the
increase in the Appellant’s net worth over 2003 and 2004, after deducting the
loans of $47,000, would be approximately $25,000, which the Appellant’s representative
suggested was small compared to her net worth, and could be considered a
“rounding error”.
[19] He contended that
there was nothing to show that the Appellant had knowingly underreported her
income, or that she had been grossly negligent in her returns. He said that she
had made every effort to file her returns correctly and no penalties were
warranted.
Analysis
[20] I am not satisfied that
the Appellant has met the onus on her to show that she received loans from Ms.
Kim during the years under appeal.
[21] Firstly, she did not
call Ms. Kim as a witness to testify as to the existence of the alleged loans.
It is a well-recognized rule that:
[i]n civil cases, an unfavourable
inference can be drawn when, in the absence of an explanation, a party …fails
to call a witness who would have knowledge of the facts and would be assumed to
be willing to assist that party. …Such failure amounts to an implied admission
that the evidence of the absent witness would be contrary to the party’s case,
or at least would not support it.
There was nothing to suggest that
any reluctance to testify on Ms. Kim’s part could not have been overcome by a subpoena.
In light of the failure to call her, I draw the inference that her evidence
would not have been favourable to the Appellant.
[22] I am mindful of the
letters that were produced by the Appellant that were apparently signed by Ms.
Kim stating that loans were made. However, in the absence of any opportunity
for counsel for the Respondent to cross-examine her on the contents of the
letters, I attach little weight to them.
[23] Furthermore, a key
statement made by Ms. Kim in one of these letters was contradicted by the
testimony of the Appellant. While Ms. Kim stated that the Appellant asked to
borrow from her, the Appellant said she never borrowed money from her
sister-in-law.
[24] I do not accept the
explanation given by the Appellant’s husband that he borrowed money from Ms.
Kim in the Appellant’s name. I think it is highly unlikely that close family
members would introduce such a formality into their dealings. The explanation also
rings false because the parties stated that the repayment was to come from the
sale of the Annette Street property, in which the Appellant did not have an interest.
[25] I also note that in
the first set of representations made on the Appellant’s behalf to Canada
Revenue Agency (CRA) by her representative,
on June 15, 2006, reference is only made to loans having been received and
deposited to the Appellant’s bank account in 2004, despite the fact that the
bank deposits in issue at the time had occurred in 2003 as well as 2004. The
Appellant signed this letter but she said that her husband prepared it. The
Appellant’s husband said that he had no involvement in drafting this letter and
that their accountant probably wrote it.
[26] While the
Appellant’s accountant may have written the letter, I think it highly unlikely
that the Appellant’s husband had no input into it. It appeared quite clear from
the whole of the evidence that he handled all of the family’s financial affairs
and that he, rather than the Appellant, would have been providing information
of this nature to the accountant.
[27] The Appellant’s
husband’s evidence is problematic in other respects as well. At the appeals
stage, he prepared a list of deposits to the Appellant’s personal bank account and
to his own account that he said were from funds loaned by his sister. These
deposits totalled $66,270 for 2003 and 2004. However, further investigation
carried out by the CRA showed that of these deposits, $16,400 was in fact
transferred by cheque from the Appellant s business account. The Appellant’s
husband attempts to explain that the loans from Ms. Kim in those cases
were deposited first to the Appellant’s business account and then transferred
to either of the personal accounts, but no records of large cash deposits to
the business accounts were provided.
[28] In addition, proof
of deposits to the Appellant’s husband’s accounts (amounting to $33,100) would
not be relevant since those funds would not have been taken into account by the
auditor in conducting the net worth audit of the Appellant.
[29] I have serious doubts
about the evidence given by the Appellant’s husband that he did not keep a
record of money he received from his sister as loans. In light of the
substantial amounts supposedly borrowed in many instalments over four years, I
find it highly unlikely that he would not keep track of the debt.
[30] Finally, it is hard
to accept, without some corroborating evidence, that Ms. Kim had accumulated
cash of more than $50,000 and that she kept this money at home, or that she had
the means to acquire the half-interest in the Annette Street property. The statement
in the side agreement that she had contributed $40,000 towards the purchase of
an earlier property on Broadleaf Street was contradicted on two occasions by the
Appellant’s husband. When asked if his sister gave him money while they were
living on Broadleaf
Road, he
said that she maybe gave him two or three hundred dollars a month for food.
Then he said that her contribution towards the Broadleaf Road property was $15,000 by
the time the Annette Street property was purchased.
[31] Overall, I find the explanation
provided by the Appellant and her husband for the increase in her net worth to
be implausible and unsupported by any credible or reliable evidence.
[32] I am also satisfied
that the penalties under subsection 163(2) of the Act have been shown by
the Respondent to be properly imposed. That provision provides for a penalty
where the taxpayer has knowingly or under circumstances amounting to gross negligence
made a misrepresentation or omission in his or her tax return. The onus is on
the Respondent to prove the facts of a misrepresentation and that it was made
knowingly or as a result of gross negligence. The Federal Court of Appeal in Lacroix
v. The Queen made
the following comments with respect to this onus:
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) (sic).
[33] It has been shown
that the Appellant had a large amount of income in 2003 and 2004 that was not
reported by her, and she has not provided a credible explanation for it. She
had very little reported income and large expenditures, and many cash deposits
to her personal bank accounts in those years. In the absence of a believable
explanation, the only conclusion to be drawn was that she had substantial
unreported income from business, and that the failure to report the income was
due, at a minimum, to gross negligence on her part.
[34] For these reasons,
the appeals are dismissed.
Signed at Ottawa, Canada, this 22nd day of June, 2010.
“Brent Paris”
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