Citation: 2010 TCC 367
Date: 20100714
Docket: 2007-3451(IT)G
BETWEEN:
VICTOR CANTORE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
Introduction
[1]
By notices of
reassessment dated May 10, 2007, the Minister of National Revenue (the “Minister”)
increased the income tax liability of the Appellant for the 2001, 2002 and 2003
taxation years through the addition of undeclared income. The Minister used the
deposit method to add $98,261, $83,107 and $55,411 of undeclared income to the
Appellant’s income for the 2001, 2002 and 2003 taxation years respectively.
[2]
The issues to be
determined in this appeal are as follows:
(a) Is the Appellant
liable for the additional income tax determined by the Minister on unreported
income in the amounts of $98,261, $83,107 and $55,411 for the 2001, 2002 and
2003 taxation years respectively?
(b) Is the Appellant
liable, pursuant to subsection 163(2) of the Income Tax Act (the “ITA”),
to penalties for the relevant taxation years?
Factual Background
[3]
From 1992 to 2000, the
Appellant was a registered investment advisor with RBC Dominion Securities (“RBC
Securities”). In early 2000, the Appellant left RBC Securities to join a
technology company. Following the bursting of the so‑called “dot com”
bubble, the Appellant set out to launch his own venture capital company called
Cantore Capital Inc. (“Cantore Capital”).
[4]
The business of Cantore
Capital was to raise capital for small- and medium‑sized corporations
from sophisticated or accredited investors. Generally speaking, issuers paid
Cantore Capital a commission equal to 10% of the capital that it raised for
them.
[5]
The Appellant testified
that he received disconcerting news concerning his health in November 2001; he
was diagnosed with a malignant melanoma, which is one of the few types of skin
cancer that can cause death. His physician told him that his prognosis for full
recovery was not good and that he had a 75% mortality risk over the next seven
years. Around the same time, the Appellant was separated from his wife. This
culminated in a divorce in 2003. The Appellant explained that he became
severely depressed as a result of these two events. The Appellant wound
down his venture capital activities to focus on fighting his cancer and
maintaining closer relations with his children. As a result, the Appellant
claims, he and Cantore Capital earned little or no income in 2002 and 2003. According
to the Appellant, fiscal year 2001 was Cantore Capital’s first year of operation;
it made a modest profit in that year.
[6]
The evidence shows that
the Appellant filed a personal income tax return for his 2001 taxation year. In
that return, he reported net rental income from two rental properties he owned
and a gross salary of $50,000 paid to him by Cantore Capital. He did not file
personal tax returns for the 2002 and 2003 taxation years because of his health
and marital problems. This led to an audit by the Canada Revenue Agency (the
“CRA”) of the Appellant’s 2001, 2002 and 2003 taxation years.
[7]
At the initial
reassessment stage, the auditor used the deposit method to determine that the
Appellant had failed to declare the following income:
|
|
2001
|
2002
|
2003
|
|
Declared net
income
|
$52,488
|
—
|
—
|
|
Undeclared
income
|
$482,533
|
$250,299
|
$117,616
|
|
Net income
|
$535,021
|
$250,299
|
$117,616
|
[8]
The auditor examined
only one of the Appellant’s personal bank accounts and assumed that each
deposit represented a source of undeclared income.
[9]
The evidence shows that
the deposit method produced an unreliable picture of the Appellant’s income at
the initial reassessment stage. The Appellant filed a notice of objection to
the reassessments. Following representations made on his behalf, the
Appellant’s undeclared income was revised downwards as follows:
|
|
2001
|
2002
|
2003
|
|
Declared net
income
|
$52,488
|
—
|
—
|
|
Undeclared income
|
$98,261
|
$83,107
|
$55,411
|
|
Net income
|
$150,749
|
$83,107
|
$55,411
|
[10]
The Appellant’s
undeclared income was thus decreased by approximately 80% or $384,272 for his
2001 taxation year, approximately 67% or $167,192 for his 2002 taxation
year and, finally, approximately 52% or $62,205 for his 2003 taxation year.
Analysis
[11]
It is a
well-established principle of Canadian tax law that the Minister may use
alternative methods to determine a taxpayer’s income when a taxpayer fails to
file tax returns or maintain or keep reliable books and records that can be
reviewed during the course of an audit undertaken by the CRA. 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.
[13]
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 then 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.]
[14]
In the case at bar, the
tax auditor failed to examine all of the Appellant’s bank accounts notwithstanding
the fact that the bank records for the account that she did examine showed that
the Appellant often transferred funds between his various bank accounts. This
led to a serious deficiency whereby transfers of funds into the account examined
by the auditor from other accounts of the Appellant and from bank borrowings by
him were treated as gross revenue by the auditor. I pointed out at trial that a
more reliable estimate of the taxpayer’s income would have been obtained had
the auditor used the net worth method or considered all of the deposits in all
of the bank accounts of the Appellant and ignored inter-account transfers and
bank borrowings. As regards the latter, this would have ensured that the
deposit method captured only transactions between the Appellant and third
parties. The auditor did not testify at trial and I am unable to determine
whether there were reasons justifying the shortcut that she took.
[15]
Nonetheless, the method
used by the CRA does not affect the legal burden that must be met by the
Appellant in this case. In tax appeals, the
onus is on the taxpayer to disprove an assessment and is one of proof on the balance
of probabilities. This
initial onus of “demolishing” the Minister’s exact assumptions is met where the
appellant makes out at least a prima facie case: Kamin v. Canada, [1992] T.C.J.
No. 714 (QL); Goodwin v. M.N.R., 82 DTC 1679 (TRB). The
law is settled that unchallenged and uncontradicted evidence “demolishes” the
Minister’s assumptions. Where the Minister’s assumptions have been “demolished”
by the appellant, the onus shifts to the Minister to rebut the prima facie case made out by the appellant and to
prove the assumptions. Where the burden has shifted to the Minister, and the
Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed.
[16]
The fundamental principle to be
taken from Hickman is that all that is required in order for a taxpayer
to rebut a ministerial assumption is a prima facie case. That is
achieved where the taxpayer puts forward credible, uncontradicted evidence on
the particular point. When the appellant does so, the Minister must lead
rebuttal evidence, otherwise he will lose.
[17]
In “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.
[18]
Here, the Appellant
must either make a prima facie case that demolishes the assumptions
relied on by the Minister in making the reassessments, thereby shifting the
onus of proof to the Minister, or establish on a balance of probabilities that the
deposits treated as gross revenue by the Minister were not from a source of
income, including capital gains. However, when the auditor takes a blatant
shortcut for reasons that remain unexplained in Court, that will affect the
type of evidence that must be brought by the Appellant to meet his legal
burden. In the present case, the Respondent failed to examine all of the
Appellant’s bank accounts so as to eliminate inter-account transfers. Therefore,
it is sufficient for the taxpayer to demonstrate that deposits made to the
particular bank account analyzed by the CRA were made by way of an inter-account
transfer of funds. The reason for this is tied to the nature of the Minister’s
assumptions. In the case at bar, the Minister assumed that all deposits made in
the sole bank account of the taxpayer that the Minister chose to analyze originated
from an external revenue source. The taxpayer can demonstrate otherwise by
showing that a particular deposit was made from funds held in another bank
account. A transfer of funds between a taxpayer’s bank accounts cannot,
generally speaking, give rise to income. In this case, proof of such a transfer
would be sufficient to constitute a prima facie case that demolishes the
Minister’s assumption that the particular deposit constitutes gross revenue.
The onus would then shift back to the Minister who would be required to present
evidence to show that the funds transferred from the other account originated
from undeclared gross revenue. Had the Minister analyzed all of the Appellant’s
accounts and eliminated all deposits traceable to a transfer of funds between
the taxpayer’s bank accounts, the Appellant would then have had to show that
the deposits did not originate from a revenue source.
[19]
The Appellant testified
that he was the sole employee of Cantore Capital. The company would raise funds
for its clients by targeting high net worth individuals deemed to be
sophisticated investors by virtue of the fact that they could afford to invest
$150,000 or more in private placement offerings. Cantore Capital was a small
operation with no reputation in the venture capital world in 2001. It had to
prove to its prospective clients that it was able to raise funds. It did so by
agreeing to advance funds that would be repaid out of the proceeds of the private
placement offering that it would be making on behalf of the issuer. The
Appellant explained that he had to advance the funds to Cantore Capital out of
personal savings held in the form of marketable securities in order to provide
it with sufficient working capital to fund its initial advances. When the
private placement closed, Cantore Capital would recover its advance and repay
the Appellant’s shareholder advance.
[20]
The Appellant produced
statements from his investment advisor that show that he owned $361,152 worth of
marketable securities at the beginning of 2001. Those statements also show that
the amount of marketable securities held by the Appellant in his accounts was
reduced to approximately $75,256 at the end of 2003. This evidence corroborates
the Appellant’s testimony that he was forced to use his personal savings both to
cover the working capital needs of Cantore Capital during its start-up phase
and to finance his personal expenses in the 2001 and 2002 fiscal years after
suffering health and marital problems.
[21]
The Appellant produced
other evidence to corroborate his testimony on this point. He produced
unaudited financial statements for Cantore Capital and documents that analyze
the activity in the shareholder’s advances account over the relevant period. For
example, those documents show that funds were credited to Cantore Capital’s
shareholder’s advances account on three occasions in the 2001 fiscal year, and
that those amounts totalled $128,553.40. Funds totalling $72,129.98 were
withdrawn from that account, leaving a net balance owing to the Appellant of
$56,423.42 at the end of the 2001 taxation year.
[22]
The Appellant produced
similar corroborating documentary evidence for his 2002 taxation year. That
evidence shows that Cantore Capital’s shareholder’s advances account was
reduced from $56,423.42 at the end of 2001 to $6,953.63 at the end of 2002, for
a total reduction of $49,469.79 in 2002. In other words, the Appellant was
repaid $49,469.79 by Cantore Capital, which was reflected by a reduction in its
shareholder’s advances account.
[23]
Counsel for the
Respondent argues that little weight should be given to Cantore Capital’s
financial statements and tax returns because those documents were produced late
and were not audited by the CRA. While it is true that both types of documents
were prepared long after the filing due date for Cantore Capital’s tax returns,
the evidence shows that the CRA had had access to those documents since March
2009. I suspended the hearing of this case on November 26, 2009 in order to
allow the CRA time to review the financial statements and tax returns and to
see whether the parties could reach an understanding on the impact of the activity
in Cantore Capital’s shareholder’s advances account over the relevant period
and on the probative value of the statements that show a decline in the amount
of marketable securities held by the Appellant. The hearing resumed on March
19, 2010. Altogether, the CRA had 12 months to audit the statements
produced by the Appellant.
[24]
The Respondent led no
evidence to cast doubt on the probative value of the documents in question or
to challenge the testimony of the Appellant. As a result, although the evidence
is not perfect on this point, I conclude that the Appellant has established on
a balance of probabilities that $69,000 of the deposits in his personal bank
account during his 2001 taxation year was attributable to the repayment of
shareholder’s loans by Cantore Capital. Similarly, I find that Cantore Capital
paid the Appellant $48,000 in 2002 in reimbursement of shareholder’s advances. As
a result, the amount of undeclared income determined by the CRA was, in this
regard, overstated by $69,000 and $48,000 for the Appellant’s 2001 and 2002
taxation years respectively.
[25]
The Appellant led credible
testimonial evidence to show that he received a cheque in the amount of $6,000
from Stéphane Chouinard in repayment of a loan. He deposited that cheque in his
personal bank account in 2001. The Respondent did not rebut this evidence.
Therefore, the Appellant’s undeclared income for the 2001 taxation year has
been overstated by $6,000 in this regard.
[26]
Nadia Brenhouse
testified that she loaned the Appellant, who is a close personal and family
friend, a total of $15,000 during 2002. The Appellant corroborated that this
amount was deposited in his personal bank account in 2002. I found Ms. Brenhouse to be a very credible witness.
Therefore, I conclude that the CRA overstated the Appellant’s 2002 income by
$15,000 in this regard.
[27]
The evidence also shows
that the Appellant received a loan of $6,000 from Carlo Borrelli in 2002, which
was erroneously treated by the CRA as a source of undeclared income.
[28]
Finally, the Appellant
led evidence to show that the CRA’s reassessments failed to take into account
the fact that the following amounts deposited in his bank account over the
relevant period were non-taxable transfers from his credit card and from his other
bank accounts:
|
2001 taxation year
|
|
|
|
|
Transfer from U.S. dollar account
|
$14,775.36
|
|
Telephone banking fund transfer
|
$7,813.00
|
|
|
|
|
TOTAL
|
$22,588.36
|
|
2002 taxation year
|
|
|
|
|
Transfer from
brokerage account
|
$5,240.00
|
|
2003 taxation year
|
|
|
|
|
Cash advance
credit card withdrawal
|
$5,000.00
|
|
Citibank credit
card advance
|
$7,000.00
|
|
Transfer from
U.S. dollar account
|
$6,914.00
|
|
Telephone
banking fund transfer
|
$9,571.10
|
|
Transfer from
bank account
|
$1,000.00
|
|
Telephone
banking fund transfer
|
$1,326.40
|
|
Telephone
banking fund transfer
|
$6,604.00
|
|
|
|
|
TOTAL
|
$37,415.50
|
[29]
In addition, at the
outset of the trial, the Respondent admitted that the Appellant’s income had
been overstated by $1,508.80 for 2002 and by $2,800.94 for 2003 with respect to
a number of small deposits.
[30]
The Appellant failed to
establish on a balance of probabilities that he was entitled to adjustments other
than those described above with respect to his 2001, 2002 and 2003 taxation
years.
[31]
After taking into
account all of the adjustments determined above, the Appellant’s undeclared
income is as follows:
|
|
2001
|
2002
|
2003
|
|
|
|
|
|
|
Alleged additional income per reassessment
|
$98,261.00
|
$83,107.00
|
$55,411.00
|
|
Repayment of shareholder’s advances
|
($69,000.00)
|
($48,000.00)
|
|
|
Repayment of loan — S. Chouinard
|
($6,000.00)
|
|
|
|
Loan — N. Brenhouse
|
|
($15,000.00)
|
|
|
Loan — C. Borrelli
|
|
($6,000.00)
|
|
|
Interbank transfers and credit card advances
|
($22,588.36)
|
($5,240.00)
|
($37,415.50)
|
|
Adjustments admitted by the CRA
|
_________
|
($1,508.80)
|
($2,800.94)
|
|
|
|
|
|
|
Undeclared income per year
|
$672.64
|
$7,358.20
|
$15,194.56
|
[32]
Finally, in light of
the significant amount of adjustments that I have allowed to the undeclared
income determined by the CRA, I conclude that the Respondent has failed to
establish on a balance of probabilities the existence of circumstances that
would justify the imposition of penalties under subsection 163(2) of the ITA.
Conclusion
[33]
For these reasons, the
appeal is allowed, with costs to the Appellant, and the matter is referred back
to the Minister for reconsideration and reassessment in accordance with these
reasons.
Signed at Ottawa, Canada, this 14th day of July 2010.
"Robert J. Hogan"
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