Citation: 2010 TCC 389
Date: 20100719
Docket: 2007-3727(IT)G
BETWEEN:
SANDY KOZAR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
The Issues:
[1]
The
Appellant appeals from reassessments issued by the Minister of National Revenue
(the “Minister”) for unreported income regarding the 2001 and 2002 taxation
years totalling $220,595 and $135,488 respectively. The Appellant also
appeals the Minister’s right to reassess the Appellant with respect to the 2001
taxation year, being an otherwise statute-barred year, pursuant to subsection 152(4)
of the Income Tax Act (the “Act”) and further appeals the
Minister’s assessment of penalties pursuant to subsection 163(2) of the Act
for the 2001 and 2002 years, totalling $29,936 and $17,135 respectively for
those years.
Background:
[2]
The
Appellant was a registered nurse during the years in question and reported
income in her income tax returns of $44,659 for 2001 and $42,403 for 2002, representing
employment income from the Windsor-Essex County Health Unit for whom she has worked
for the past eleven years. The Minister initially assessed the Appellant’s tax
liability for the years in question by notices of assessment dated April 15, 2002
and March 24, 2003 respectively based on her income from her nursing employment
as reported. By notices of reassessment dated October 11, 2005, the
Minister reassessed the Appellant’s tax liability by increasing the Appellant’s
income substantially and assessing gross negligence penalties on the basis of
net worth assessments pursuant to subsections 152(7) and (8) of the Act and,
after the filing of notices of objection by the Appellant on December 19,
2005, the Minister reassessed the Appellant’s total income and penalties to
those stated in the first paragraph of this decision above.
[3]
The
Appellant, now a single mother of two, reconnected with her high school
boyfriend, Sang Nguyen, in the year 2000 and became engaged to him in 2001. On
August 10, 2002, the Appellant married Mr. Nguyen. During the years in question
until failure of the business in May 2002 (resulting in the appointment of
receivers), Mr. Nguyen operated a satellite receiver decoding business, known
as Pirate Satellite Receivers, first in partnership with a Mr. P. Reid, then in
proprietorship, and then in incorporated form after October 2001. The Appellant
was neither a partner, nor a shareholder, officer or director of her spouse’s
satellite business and the Respondent pleaded that the Appellant’s fiancé was
the sole shareholder of the business when it was operated in corporate form.
The Appellant and her husband separated in August of 2009, after which her
husband returned to Vietnam for the balance of the year and returned in the following year. The evidence
of the Appellant is that she and her husband are not in contact, with the
husband only sparingly phoning to speak with his children, and that she has no
address for him nor would he agree to testify at this trial.
[4]
The Canada
Revenue Agency (“CRA”) audited Pirate Satellite Receivers and expanded their
inquiries to the Appellant as a result of investigating her husband’s business.
Due to several unexplained bank deposits into the Appellant’s accounts and
those the Respondent alleges were the Appellant’s accounts, and due to the
CRA’s allegation that the Appellant was not cooperative throughout the audit,
an allegation strongly disputed by the Appellant, in addition to the cash
nature of the satellite business which placed it in a higher risk category, the
CRA’s Special Investigations Branch audited and assessed the Appellant on a net
worth basis. The Respondent’s net worth assessment is based on the
assumption of facts contained in paragraph 13 of the Amended Reply, and in
particular the following paragraphs:
a) in all relevant
years, the Appellant and her spouse were involved in the programming and
selling of satellite receivers;
…
f) at all
material times, the Appellant was an employee of business;
g) the Appellant’s
tasks involved the programming of satellite receivers’ cards;
h) the Appellant
was remunerated for her work by cash and cheques;
i) during the
2001 and 2002 taxation years, the Appellant was paid at least $220,595 and
$135,488 respectively for her work;
…
m) the understated amounts
were determined by the net worth method (a copy of the Statement of Personal
Net Worth is attached as Schedule “I”);
n) during the 2001
and 2002 taxation years, the Appellant’s personal expenses were equal or
superior to the amounts of $16,086 and $108,248 respectively.
Position of the Parties:
[5]
The
Appellant’s position is that she was not an employee of the business and never
received any remuneration of any kind in such capacity, directly or indirectly,
and that she was not very computer savvy, had very little to do with her then-fiancé’s
business, rarely attending at the store location, and at best only answered the
phone once and passed the line to another party or may have helped distribute
the satellite cards on a few extremely busy days. Her testimony is that she was
a full-time registered nurse working 8:30 a.m. to 4:30 p.m. shifts and had no
time to take other employment, and hence, was never an employee of the business
nor received compensation from the business as assumed by the Respondent. She
advised never having attended at the business location when it was located on Shephard Street and only recalls ever
having attended several times when at the newer location on Howard Street.
[6]
The
Respondent’s position is that the Appellant was involved in the programming and
sale of satellite receivers and was at all times an employee of the business
who was paid by cash or cheque the entire amount of income, directly or
indirectly, that the Respondent alleges was unreported income calculated using the
net worth reassessment method.
The Burden of Proof and Order of
Presentation:
[7]
There
is no dispute between the parties as to which party bears the burden of proof
with respect to the issues to be decided. The Respondent bears the burden of
proving that the taxpayer has made any representation that is attributable to
neglect, carelessness or wilful default or has committed any fraud in filing a
return as required under subsection 152(4) of the Act in opening up a
statute-barred year, namely the 2001 taxation year of the Appellant. The onus
is on the taxpayer to demolish the assumptions made by the Minister in assessing
the taxpayer pursuant to the section 152 reassessment. Finally, the onus is on
the Respondent to establish the facts justifying the assessment of the
penalties under subsection 163(2). While I will make reference to the onus
applicable to the issues in the context of the law and evidence shortly, it
should be noted that due to the fact the Respondent has the onus to prove a
misrepresentation contemplated under subsection 152(4), the Appellant sought at
the beginning of the hearing, by way of motion, to have the Respondent present
his evidence of misrepresentation with respect to the 2001 statute-barred year
first, which motion was opposed by the Respondent. I dismissed the motion
of the Appellant by oral decision at the commencement of the hearing on the
basis I would provide more detailed reasoning within the judgment on this
matter and now propose to provide such more detailed reasons.
Reasons for Dismissing the
Preliminary Motion:
[8]
Rule
135(2) of the Tax Court of Canada Rules (General Procedure) reads as
follows:
135(2) Unless the judge
directs otherwise, the parties shall put in their respective cases by evidence
or by putting before the Court the facts on which they rely, in the following
order,
(a) the
appellant,
(b)
the respondent,
and
(c) the appellant in respect of rebuttal evidence.
[9]
The
Appellant in effect asked this Court to “otherwise decide” and require the
Respondent to lead evidence of the misrepresentation alleged on the basis of
both case law argued and in the interests of practicality.
[10]
The
Appellant relied on the case of Minister of National Revenue v.
Maurice Taylor, 61 DTC 1139 (Exch Ct), which required the Respondent to
proceed first and on 943372 Ontario Inc. v. Canada, 2007 TCC 294, 2007
DTC 1051. Re Maurice Taylor only dealt with the issue of
misrepresentation with no underlying dispute as to an assessment so it would
make sense for the Crown to proceed first in those circumstances as there was
only one onus of proof involved and it was on the Crown. The Respondent
referred to paragraph 11 of former Chief Justice Bowman’s decision in 943372
Ontario Inc. where he simply stated:
11 Since the initial burden lies upon
the Crown to justify the statute-barred assessments and the penalties, counsel
for the respondent opened …
[11]
Unfortunately,
the former Chief Justice Bowman undertook no detailed review of the law that would
be of assistance to this Court in deciding the issue and dealt with a non-suit
motion that was adjourned for further argument, and accordingly such case is of
little assistance here.
[12]
On
the other hand, the precedents relied upon by the Respondent in my view support
the Respondent’s position as a more acceptable view of the law on this matter.
In The Queen v. Wellington Taylor, 84 DTC 6459 (F.C.T.D.), Rouleau J.
decided that in the case of an assessment of taxes in dispute with subsection
163(2) penalties also assessed, the taxpayer should proceed first and stated at
page 6463:
Where there is an onus on each party, the
taxpayer shall begin first. …
[13]
Rouleau
J. reasoned at page 6461 that:
… On an appeal, the burden is on the
taxpayer to overturn the assessment. It is deemed valid because of subsection
152(8) of the Act; it is the taxpayer’s appeal and he must therefore
show that the impeached assessment is an assessment which ought not to have
been made; …
[14]
While
one might argue that Re Wellington Taylor did not deal with the issue of
a statute-barred year, in the case of Levy v. The Queen, 89 DTC 5385
(F.C.T.D.), a case similar to the one before us in that it did deal with a
statute‑barred year, a disputed assessment and an issue of unreported
income and penalties under subsection 163(2), Teitelbaum J. stated at page 5389:
After the procedural issue was raised, I
decided that notwithstanding that the onus to prove misrepresentation is on the
Crown for the 1976 and 1977 taxation years, the taxpayer who has the onus to
prove an assessment for income tax invalid must proceed first. The issue of
“statute-barred” is a secondary issue.
[15]
That
Court too found that a reassessment under subsection 152(8) is deemed valid
notwithstanding an error, defect or omission until the taxpayer proves he does
not owe the tax.
[16]
It
should be noted that Rouleau J., in Can-Am Realty Limited v. The Queen,
94 DTC 6069 (F.C.T.D.), at page 6070 relied on Re Wellington Taylor and Re
Levy as correct statements of the law and the Federal Court of Appeal in Pompa
v. Canada, 94 DTC 6630 (F.C.A.) confirmed same in paragraph 17 wherein it
stated:
17 … the applicable rules as to
the Minister’s burden of proof in cases of a penalty and when s. 163 of the Income
Tax Act is in question were correctly stated by Rouleau J. in The Queen
v. Taylor, 84 D.T.C. 6459, …”
[17]
The
above cases confirm in my view that due to the validity of assessments of the
Minister under subsection 152(8) of the Act, the main issue in all such
appeals also containing issues of statute-barred years and penalties will still
be whether the underlying assessment is valid. It should be noted that
assessments for statute-barred years where the Minister relies on subsection
152(4) are assessments “under this part” pursuant to subsection 152(8), and
accordingly, are deemed valid until found otherwise, as reasoned by Teitelbaum
J. in Re Levy above.
[18]
Notwithstanding
that a taxpayer may fail to meet the onus to rebut the assumptions of the
Minister in a section 152 assessment, the possibility is still open that due to
the onus on the Minister under subsections 152(4) and (4.01) or subsection
163(3) that the taxpayer may still succeed in not having a statute‑barred
year opened for reassessment or not being assessed the gross negligence
penalties. The Court still has a duty to decide whether the Minister has met
his onus in both situations. Moreover, the onus with respect to the underlying
assessment in a section 152 assessment is a shifting onus as made clear in Dick
v. Canada (Minister of National Revenue – M.N.R.), [1991] 2 C.T.C.
2034, 91 DTC 811, also a case of a net worth assessment with no admission as to
unreported income, where it may fall to the Crown to prove his assumptions
where the Appellant can provide evidence regarding a source of funds different
than the Crown’s.
[19]
I
should also make reference to the case of Farm Business Consultants Inc. v.
Her Majesty the Queen, 95 DTC 200, brought to the Court’s attention by the
Respondent, and in which former Chief Justice Bowman, after considering Re Wellington
Taylor and Re Levy above, found for the Appellant and ordered the
Respondent to proceed with his case first. As Counsel for the Respondent noted,
that case is also distinguishable from the case at hand, and from the above
cases themselves in that there was no issue as to unreported income in that
case, but rather a dispute as to the value of goodwill. Moreover, the former Chief Justice Bowman
relied on Re Maurice Taylor, which as stated above was a case that dealt
only with the issue of misrepresentation where no competing onus regarding the
underlying assessment was in issue and which was found in Re Wellington
Taylor and Re Levy to not be applicable in cases where each of the
parties has a different onus to deal with.
[20]
The
Appellant’s secondary argument for the motion brought was that practicalities
would favour the Crown proceeding first. The Appellant argued firstly, to know
the Crown’s evidence first would assist the Appellant in knowing the case it
has to meet rather than simply try to prove a negative; secondly, would expedite
the case since the Appellant, if successful, would not need to call all its
witnesses; and thirdly, would leave the option open to exercise a motion of
non-suit if the Crown failed to establish evidence of misrepresentation.
[21]
In
the case at hand, the source of income alleged by the Respondent was pleaded.
In fact, on a motion by the Appellant before Justice Webb of this Court, the
Respondent was ordered to amend its Reply to identify such source. Moreover,
the parties have had discoveries in this case. I do not accept that the
Appellant does not know the case it must meet.
[22]
I
also do not consider this to be a case where the Appellant must, as stated by
her counsel, prove a negative. The Appellant must demolish the assumptions of
the Respondent, particularly that the Appellant received employment income, by
cash or cheque, being the source of income for the entire amount of the alleged
unreported income. The Appellant need only establish, on the balance of
probabilities, that she received such funds from other non-taxable sources or
that there were no sources for all or part of the funds. The onus, as earlier
referred to in Re Dick, then shifts to the Crown to prove otherwise. The
Appellant has in fact pleaded that the sources of the income were loans or gifts,
or property that did not belong to her or incorrect assumptions on personal
expenditures by the Crown. I do not see this as having to prove a negative in
the sense argued.
[23]
From
a practical perspective, the Court must hear all the evidence dealing with the issue
of income for the statute-barred year in order to determine both the amount and
source of income for the 2002 year and whether the issue becomes redundant or
not and to determine whether the different onuses were met. It is, as referred
to in the above cases, still possible that the Appellant may not satisfy its
onus to rebut the assumptions on which the reassessments were made, but still
not be liable for penalties or still have the statute-barred year reassessment
vacated. This Court has a duty to and is able to deal with the different
onuses in its judgment.
[24]
As
for the Appellant’s concern that she would be deprived of her ability to motion
for non-suit if the Crown is not required to go first, an Appellant is always
free to motion before submitting any evidence if it feels appropriate having
regard to the pleadings or evidence on discovery or after it submits its
evidence. In any event, such issue would have existed in any of the above cases
cited which dealt with the issue of who goes first and were decided despite
such expressed potential procedural matter.
[25]
In Lennox
v. Arbor Memorial Services Inc., (2001) 56 O.R. (3d) 795 (C.A.), 2001 O.J. No.
4725 (C.A.) (QL), the Court held at
paragraph 13 that:
13. A trial judge is expected and
entitled to take reasonable steps to ensure that the issues are clear, that
evidence is presented in an organized and efficient manner and that the trial
runs smoothly and proceeds in a timely manner. …
[26]
All
the issues in this case are, to put it simply, interconnected and in my view
the most efficient and fairest way to deal with these appeals is to have the Appellant
follow the ordinary rules of the Tax Court of Canada and go first and deal with
the primary issue of the underlying assessment.
2001 and 2002 Reassessments:
Burden of Proof
[27]
As I
stated above and as confirmed by the Supreme Court of Canada in Hickman
Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, relying on its decision in Johnston
v. Canada (Minister of National Revenue – M.N.R.), [1948] S.C.R. 486, the
onus is on the Appellant to demolish all the exact assumptions made by the
Minister in supporting the reassessments and no more and such initial onus is
met where the Appellant makes out at least a prima facie case. As the
Appellant pointed out in F.H. v. McDougall, 2008 SCC 53, [2008] 3
S.C.R. 41, the Supreme Court of Canada confirmed that there is only one standard
of proof in civil cases and that is proof on a balance of probabilities, the
standard of proof necessary to establish a prima facie case. In
paragraph 49 of such decision, Justice Rothstein went on to say:
49 … In all civil cases, the trial
judge must scrutinize the relevant evidence with care to determine whether it
is more likely than not that an alleged event occurred.
[28]
As
confirmed in paragraph 94 of Re Hickman Motors above, the onus is a
shifting onus:
94 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: …
[29]
There
is no dispute between the parties as to the application of the above law
pertaining to the burden and standard of proof as relates to the 2002 taxation
year. With respect to the 2001 taxation year however, the Respondent takes the position
that in light of the fact the onus is on the Respondent to prove a
misrepresentation by the Appellant in order to meet the requirements of subsection
152(4) in order to assess outside the normal assessment period, the onus is on
the Respondent first to prove the Appellant’s source of income was from
employment as pleaded and not on the Appellant to demolish the assumptions of
the Minister. There is no dispute the 2001 reassessment was outside the normal
reassessment period defined in subsection 152(3.1) of the Act.
[30]
With
respect to the Appellant, to some extent, this goes back to the same chicken
and egg issue the Appellant raised on the preliminary motion at the start of
this hearing for which my reasons were given above, as well as before Justice Margeson
on a pre-trial motion. For my same reasons above, it is not necessary that I
first must find a misrepresentation as proven by the Respondent before
considering the validity of the assessment based on a net worth analysis
pursuant to subsection 152(7) of the Act, from which the Minister
derives his power to assess on a net worth basis and which is not disputed by
the parties. As stated in my earlier reasons dealing with the motion
brought at the beginning of this trial, subsection 152(8) presumes that an
assessment, including one under subsection 152(7) which is under the same part,
is deemed to be valid and binding notwithstanding any error, defect or omission
in the assessment until found otherwise and as per Re Wellington and Re
Levy above, the issue of statute‑barred is a secondary issue to the
first issue of whether the assessment is valid, hence I am not required to
address the statute-barred issue first as a matter of order as earlier
explained.
[31]
As
to whether the onus shifts when dealing with a statute-barred year, I am
satisfied the onus is on the Appellant to demolish the assumptions made by the
Minister, even in cases where the net worth assessment is the basis for
calculating the assessment. This has been confirmed by the Federal Court of
Appeal in Lacroix v. Canada, 2008 FCA 241, 2009 DTC 5029 (F.C.A.), where
Pelletier J.A., who relied on Re Hickman Motors and Re Johnson
above, stated in paragraph 18 thereof:
18 In my view, this jurisprudence
does not establish a rule to the effect that the Minister may not use the net
worth method to add unreported income to a taxpayer’s income unless the
Minister can establish the source of the unreported income. Our tax collection
system is based on the taxpayer’s self-reporting of the income he or she has
earned during a taxation year. Should the Minister doubt, for whatever reason,
the accuracy of the taxpayer’s return, the Minister may conduct an
investigation in such manner as deemed necessary. The Minister may then make a
reassessment. If the taxpayer appeals the reassessment, the Minister does not
have to prove the facts giving rise to the reassessment. In the reply to the
notice of appeal, the Minister need only set out the presumptions of fact used
in the reassessment. The onus is on the taxpayer, who knows everything there is
to know about his or her own affairs, to “demolish” the Minister’s assumptions;
otherwise, they are presumed to be true.
[32]
The
Court in Re Lacroix above adopted the reasoning of Létourneau J.A. of
the Federal Court of Appeal in Molenaar v. Canada, 2004 FCA 349,
2005 DTC 5307 (F.C.A.) where for statute-barred years, counsel for the
Appellant submitted that in a net worth method assessment the Minister should
have the burden of proving the source of income was from taxable income. Létourneau
J.A. responded to the position in paragraphs 2 to 4 of his judgment as follows:
2 … In other words, in order to
limit the application of the net worth method, there would be a presumption in
the taxpayer’s favour that unreported and unexplained “cash in” comes from
non-taxable income.
3 With respect, such a
presumption would make the net worth method useless and inapplicable for all
practical purposes. Additionally, it would undermine the very basis of our
taxation system, which is founded on voluntary reporting, since it would amount
to favouring a crafty taxpayer who is best able, most effectively and for the
longest time, to conceal his or her income and his or her failure to report it.
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.
[33]
This
approach was also considered by the Federal Court of Appeal in Hsu v. Canada,
2001 FCA 240, 2001 DTC 5459 (F.C.A.) where Desjardins J.A. in paragraph 29
states:
29 … The net worth method is
premised on the assumption that an appreciation of a taxpayer’s wealth over a
period of time can be imputed as income for that period unless the taxpayer
demonstrates otherwise (Bigayan, supra, at 1619). Its purpose is to
relieve the Minister of his ordinary burden of proving a taxable source of
income. The Minister is only required to show that the taxpayer’s net worth has
increased between two points in time. In other words, a net worth assessment is
not concerned with identifying the source or nature of the taxpayer’s
appreciation in wealth. Once an increase is demonstrated, the onus lay entirely
with the taxpayer to separate his or her taxable income from gains resulting
from non-taxable sources. …
[34]
There
is ample evidence and admission by both parties that the Minister established
the discrepancy in net worth between the years in issue through examination and
use of the information provided by the Appellant and her bankers under Requests
for Information issued by the Minister, all of which are clearly reliable
information for the purposes of so doing.
[35]
In
order to determine whether the Appellant successfully discharges her onus, the
Court in Re Hsu, at paragraph 35, effectively explained that this burden
can be satisfied in three ways:
35 …
(a) challenging the
Minister’s allegation that he did assume those facts;
(b) assuming the
onus of showing that one or more of the assumptions were wrong; and
(c) contending
that, even if the assumptions were justified, they do not of themselves support
the assessment.
Facts:
[36]
As
stated above, the Respondent takes the position the Appellant was an employee
of Pirate Satellite Receivers and, as assumed by the Minister, received
$220,595 in 2001 and $135,488 in 2002 as remuneration for her work by cash or
cheque, either directly or indirectly through payments made to her parents. The aforesaid
figures in the Minister’s assumptions are based on the net worth analysis of
the Minister, and according to the audit report and the testimony of the Respondent’s
witness, the audit officer, it was unexplained deposits into the Appellant’s
bank accounts of $76,640.50 in 2001 and $10,969.52 in 2002 discovered on the
bank deposit analysis conducted by the Minister that gave rise to the Minister
proceeding with a net worth analysis.
[37]
It
should be noted, as will be examined later, that the Minister conceded that
with respect to the 2002 unexplained bank deposits of $10,969.52, $9,900 was a
money order representing a wedding gift, and accordingly there seems little to
explain in respect to the 2002 taxation year. There is also evidence of cash
gifts from the Appellant’s parents that would certainly account for the
difference and there was absolutely no evidence whatsoever linking the balance
to any amount received from Pirate Satellite Receivers. In fact, the business
ceased operating in early 2002.
[38]
With
respect to the 2001 year, deposits totalling $23,475 were deposit activities
into a TD Canada Trust bank account No. 526177 which was in the name of the
Appellant’s mother and the Appellant jointly.
[39]
The
position of the Respondent was that these funds belonged to the Appellant and
not to her mother and hence could not be a gift or loan. The Respondent
based its position on the fact there were three unexplained cash deposits into
that bank account by the Appellant’s fiancé to the Appellant’s mother,
totalling $15,000 as alluded to earlier and that there were further deposits
and almost immediate withdrawals by the Appellant both totalling $8,475, for a
total of $23,475. In addition, there were two transfers of $30,000 and $35,000
respectively for a total of $65,000 from the Appellant’s parents’ joint bank
account to this bank account, which the Respondent suggested were initially
“parked” into the parents’ joint bank account since the Appellant failed to prove
the parent’s initial source of such funds.
[40]
The
evidence was that this account was opened in 1994 and was in joint names only
for estate planning reasons, to enable the Appellant to assist her mother with
financial matters and allow ownership to pass on her death. The Appellant
tendered evidence that her T4s were issued in at least five years to her mother
and that her mother’s SIN appeared on all T4s for all years except one. She
also submitted evidence her mother claimed all interest income from this
account when filing taxes. Moreover, the evidence is that the majority of funds
in this account, namely the $65,000 representing the two transfers above, came
from a different bank account owned by the Appellant’s parents jointly and I
fail to see why the Appellant should have to explain her parents’ source of
funds in this regard although a satisfactory explanation was provided in
paragraph 65 hereof. There is evidence the Appellant’s fiancé gave the Appellant’s
mother funds for the $5,000 deposits which the Respondent contends is proof it
was not the mother’s account. However, this was explained by the Appellant as
contributions her fiancé wished to make towards the purchase of the lot which
was to be funded by her parents and I see no reason why this is not a credible
explanation in the circumstances of two young people about to get married and
build their home. When one considers that the Respondent’s pleadings themselves
evidence that the Appellant’s fiancé earned $160,966.39 in 2001, it certainly
seems credible he would have been in a position to make a contribution towards
the lot. As for the deposits made into the account totalling $8,475 made by the
Appellant, the Appellant explained that these funds were deposited in error
into the joint account by the bank and immediately taken out of the account and
deposited into her own personal account on discovery of the error, almost
immediately. The Appellant has explained the source of funds in the mother’s
account and the questionable deposits, if one can even call them that, to the
satisfaction of this Court and the Respondent gave no evidence whatsoever to
contradict or disprove these explanations. In my view, the Appellant has
explained to this Court’s satisfaction that this account belonged to her mother
and satisfactorily explained the so-called unexplained deposits.
[41]
As
for the balance of the deposits, the sum of $36,970 represents deposits into
the Appellant’s TD Canada Trust account No. 531661 and the sum of $16,195.50 into the Appellant’s
CIBC account No. 67229169.
[42]
Dealing
with the TD Canada Trust account, the deposit analysis revealed the following
deposits into the Appellant’s bank account in 2001:
April 25 $9,000
Cheque issued by Pirate Satellite Receivers
April 27 $3,000
Cash deposit
June 9 $9,500
Cheque issued by Pirate Satellite Receivers
Sept. 18 $1,820
Cash deposit
Nov. 5 $13,100
Cash deposit
[43]
Dealing
with the CIBC account, the deposit analysis revealed the following deposits
into the Appellant’s bank account in 2001:
$4,800 Total
cash deposits in January deposited on three separate days; and
$11,395.50 Cheque
from Pirate Satellite Receivers
[44]
The
Appellant’s explanation for these deposits was as follows.
[45]
The
three cheques received from Pirate Satellite Receivers totalling $29,895.50
together with all the cash deposits, with the exception of $7,920 of the
November 5, 2001 cash deposit which represented a deposit of her cash engagement
shower gifts to be discussed later, were contributions by her fiancé for her to
apply towards their future expenditures in connection with creating their new
home together as a married couple including the purchase of furniture and other
home expenses. Her fiancé was the owner of the business and chose to have
cheques issued from it to her. Frankly, the Respondent admits her fiancé was
the owner of the business, first in partnership with a Mr. P. Reid, then as
sole proprietor and later as sole shareholder after October 2001 and further
admitted he had taxable income of $160,966.39 in 2001 as earlier stated. I find
nothing sinister in such transactions and find the Appellant’s explanation
credible in the circumstances of their upcoming wedding. The Respondent led no
evidence whatsoever, notwithstanding its admission that the fiancé was also
audited, to suggest these payments were to her from a taxable source but
instead admits her fiancé had sufficient income from his taxable source to be
able to give the money out. Moreover, the Respondent could have made inquiries
of the former partner, P. Reid, by way of Request for Information, but decided
not to do so, passing on an opportunity to prove otherwise once the Appellant
satisfied her onus.
[46]
I
also note that these deposits were not made over the length of the year on any
periodic payment basis nor in identical amounts to suggest payment of wages or
salary and moreover accept the Appellant’s testimony that she was employed
full-time as a registered nurse with the Windsor-Essex County Health Unit.
I do not accept that just because the Appellant visited her fiancé at his
place of business from time to time and ran errands such as picking up lunch
for her fiancé on occasions or even that she assisted in handing out programmed
cards during busy times on three occasions to be evidence of employment with
Pirate Satellite Receivers as alleged by the Respondent, and in fact found
the evidence of the Appellant and her friend and co-worker at the Windsor-Essex
County Health Unit that she was computer illiterate and had no time to work at
her fiancé’s business very credible. Moreover, the contention of the Respondent
that the Appellant knew the business hours of operation, the names of the other
employees, the name of the person who cleaned the premises, who handled the
cash payments and similar general knowledge of the business suggesting she was
an employee is simply not sufficient evidence of such status and frankly is
more consistent with information any casual observer or visitor to the business
premises could easily absorb.
[47]
I
also note that the three cheques and several deposits above alluded to are the
only payments received by the Appellant that could be said to link her to her
fiancé’s place of business and total less than 25% of the alleged wages and
salaries presumed by the Respondent to have been paid to the Appellant and all
explained by the Appellant as not relating to same.
[48]
In
the case at hand, I find that the Appellant met the onus of proving on the
balance of probabilities that she was not in the employment of Pirate Satellite
Receivers nor received any wages or salaries from it, which in and of itself
would, in my view, demolish the assumptions of the Minister who assumed
employment income to be the sole source of funding the discrepancies in her net
worth. However, she also provided evidence, beyond a balance of
probabilities, in establishing that she received such funds or assets from other
non-taxable sources, which as adjustments to the Minister’s assessment
would in my view render it bare and unsupportable. The Appellant’s evidence was
credible and logical and the Respondent led no evidence to prove otherwise.
[49]
The
Supreme Court of Canada in Re Hickman Motors, made it clear that where
the Income Tax Act does not require supporting documentation, credible
oral evidence from a taxpayer is sufficient notwithstanding the absence of
records. I do not accept the Respondent’s argument that the Appellant, in her
alleged role as employee, should be the one who should produce documentary
employment evidence. The Respondent pleaded she was an employee only and not a
director, shareholder, officer or partner of the business, so why would it be
her obligation to keep any such records? In Re Hickman Motors, the Court
also said at paragraph 48:
48 … Moreover, the respondent
adduced no evidence whatsoever that could be weighed against that of the
appellant. … Therefore, the appellant’s evidence must stand, …
And in paragraph 93:
93 … The law is settled that
unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions:
…
[50]
A similar
sentiment was echoed in Zink v. Canada (Minister of National Revenue –
M.N.R.), 87 DTC 652, quoted by the Supreme Court of Canada in Re Hickman
Motors above, where the Court held, in relation to Mr. Zink’s oral
evidence at paragraph 3:
3 … his statement under oath, …
should suffice to favour his appeal, unless that statement is appropriately
challenged and refuted by the Minister. …
[51]
It
should be noted that in Re Zink above, the Court reasoned that the
evidence of the Appellant should be accepted even where there are large gaps in
logic, chronology and substance, where the Minister fails to explain why the
amounts in issue are assessed as the type of income pleaded.
[52]
In
the case at hand, I find no large gaps in logic, chronology or substance. The
Appellant lead direct evidence as to the source of the unexplained deposits
that led to the net worth analysis and in my view proved well beyond a balance
of probabilities that she was not an employee and received no funds from
employment.
[53]
As
mentioned above, the Appellant has the onus to demolish each of the Minister’s
assumptions of fact. It is clear she has clearly demolished items 13(a), (f), (g),
(h) and (i). I would also find that since the assumption in 13(m) refers to “the
understated amounts”, which reference payments respectively for work, that she
has in fact demolished that assumption as well. However, the Respondent argued
that even if the Minister pleads a source of funds, it was not really required
to, based on the reasoning of the Lacroix, Molenaar and Hsu
cases relied on by the Respondent. I would agree that if a source of income was
not pleaded, the Minister could rely on the discrepancy in income pleaded as in
those cases, but in this case the only source of funds identified were income
from employment so it seems redundant to move to a detailed analysis of the net
worth assessment when the underlying basis for it has been demolished.
[54]
Notwithstanding
such finding however, in the event I am wrong, I will also deal with the
various adjustments resulting from the non-taxable sources or non‑sources
of income herein, many of which were conceded by the Minister during the course
of the trial in relation to the net worth assessment and the assumptions of the
Minister in relation thereto:
1. Wedding Gifts
[55]
The
Appellant claimed that she received wedding gifts from her wedding on August
10, 2002 totalling $77,725 from gifts of cash and money orders which the Minister
disputed on the basis that no evidence of bank deposits was provided for same.
The Minister only allowed her credit for $7,484.99 as these represented actual
cheques received by the Appellant and deposited into her account; which amount was
not included in the $77,725 figure still in dispute.
[56]
The
evidence of the Appellant was that there were over 400 guests at her wedding,
most of whom gave cash gifts. A list of the donors was provided to the Court
setting out the contributions of the guests. The evidence of the Appellant and
four other witnesses corroborated that it was the practice of Croatian families
to give cash gifts at events such as showers, engagement parties and weddings
and that these gifts were recorded so that in the future, the happy couple or
their families would make sure they matched such gifts when invited to the
events pertaining to the guests or their families. The Appellant produced not
only the list summarizing the gifts, but independent witnesses confirmed their
gifts were essentially as listed. The Appellant even produced the wedding cards
where the gift amounts were noted thereon. I note with interest that the CRA
auditor even went to the extent of calling the wedding hall to confirm the
number of guests who attended. The CRA auditor testified that the Appellant had
not provided this list to him until a few weeks before the trial and was
uncooperative in giving him the information when asked earlier on, which the
Appellant acknowledged, but explained it was because she feared embarrassment at
the prospect of having a CRA auditor call her wedding guests to confirm their
gifts. Frankly, I find that explanation totally understandable and have some
concerns over the extent CRA went to deal with the issue. It seems common
information that many European and Asian cultures provide cash gifts on these
occasions and events and the Crown’s solicitor even suggested he was aware this
was a well-know Italian custom but not so for Croatians. I disagree. The fact
he allowed several cheques to be counted totalling $7,484.99 as wedding gifts
certainly supports the reasonable conclusion it was a common practice in the
Croatian community, and the CRA auditor even admitted on cross-examination that
he made a sampling test of comparing some of the cheques received as presents
to the amounts recorded on the wedding cards and found they matched, which
further adds to the credibility of the Appellant’s testimony regarding the
list.
[57]
Of
the $77,725 disallowed initially, there was a money order given as a wedding
present for $9,900 from the Appellant’s mother-in-law and two aunts, which was
conceded by the Crown during the trial, and a bank draft for $20,000 from the
Appellant’s parents which the Crown still disputed on the basis that it was odd
the parents simply would not have written a cheque instead of giving a bank
draft and because there were three unexplained deposits of $5,000 each, which
were deposited into the joint bank account earlier discussed and given to her
from the Appellant’s fiancé, Sang Nguyen, who was the initial target of
the CRA investigation. The bank draft was clearly issued by the parents and
purchased just before the wedding and other funds were in the account aside
from the three unexplained deposits in issue. The Appellant explained a
bank draft was used because there were no cheques on that account and that the
three deposits were contributions by her husband-to-be to her parents who were
going to fund the purchase of their lot which was discussed earlier. The
Appellant has provided satisfactory explanations for these issues and I find
them totally acceptable as proof of a wedding gift from her parents, especially
since the Crown provided no reasonable proof to the contrary notwithstanding
its suggestion funds coming from the son-in-law-to-be must have been laundered,
without any proof whatsoever of same. The balance of the total wedding gifts amount
consisted of the individual cash gifts recorded on the wedding cards after the
wedding and listed on the list submitted as evidence and I accept this as
satisfactory and very strong, even conclusive evidence of such gifts. In
summary, I accept the Appellant received $77,725 in cash and money order wedding
gifts in 2002.
[58]
It
should also be noted that for 2002, CRA assessed the parents’ $20,000 wedding
gift as cash on hand of the Appellant and accordingly this, being a wedding
gift, must be removed from the calculation to avoid treating the gift as being
from a taxable source.
2. Engagement Shower cash
gifts
[59]
The
Appellant was thrown a wedding shower in October 2001 and claimed she received
cash gifts of $7,920. The Appellant’s maid of honor was charged with recording
the shower gift donations on the shower cards and testified she did so and a
list of shower donors and the gifts given was rendered as evidence. I accept
these as strong evidence she received those cash gifts in keeping with her
cultural background as discussed in relation to her cash wedding gifts above.
The CRA officer testified he disallowed these gifts because there was no
evidence of a deposit to her bank account of this amount and because in an
initial interview with the Appellant he advised her there was no such deposit
and she agreed. The Appellant explained that there was a cash deposit of
$13,100 deposited about one week later which included the shower gifts, with
the balance being a gift or contribution from her husband-to-be, and that at
the initial interview she could not remember depositing the cash years before
and did not have the benefit of preparing for the myriad of questions posed by
the auditor. I find her evidence collaborated by her brother, maid of honour
and aunt very credible and find she received cash shower gifts of $7,920 for
2001.
3. Wedding Shower Appliances
gifts
[60]
The
Appellant had a wedding shower on May 5, 2002 and claimed she received shower
gifts by way of appliances purchased by various family members from Essex
Appliances which were denied by the CRA to the extent of $6,155.15. The
Appellant testified she registered with Essex Appliances for shower gifts and
produced the invoice from Essex Appliances which identified four
appliances purchased by different credit card numbers and cash. The Appellant
also produced shower cards identifying such gifts and her brother and
mother-in-law testified they in fact made such shower gifts. Moreover, when the
CRA refused this evidence during the investigation, especially with respect to
the mother-in-law whom CRA suggested used a fraudulent credit card or could not
have afforded it, the Appellant produced to CRA the actual credit card
statements of her mother-in-law which listed the item. Apparently CRA still
refused to accept this as evidence and the Appellant went so far as to produce
a letter from her mother-in-law’s banker confirming the credit card was valid.
At trial, the Respondent conceded the mother-in-law’s appliance gift of
$1,804.35. In my opinion, the Appellant went far beyond what was necessary here
in establishing these gifts and I find the refusal of the strong evidence
provided to the CRA officer by the Appellant here incredulous. The Appellant
has satisfied me she received those shower appliance gifts totalling $6,155.15
above those allowed by CRA in 2002 and the Respondent had no evidence to the
contrary.
4. Loan from Parents
[61]
The
Appellant claimed that she received a loan from her parents in the amount of
$71,429.85 which she described more as a forgivable loan which was drawn by
bank cheque from a joint account with TD Canada Trust No. 526177 in the names
of the Appellant’s mother and the Appellant. The evidence is that these funds
were used to purchase a building lot on which the Appellant and her husband‑to-be
were going to construct their residence, and evidence was tendered of the
Solicitor’s trust account showing it received these funds and disbursed them
for the purpose of the lot purchase.
[62]
The
Respondent’s position was that funds from this account belonged to the
Appellant and not her mother as discussed in more detail in paragraphs 38 to 40
above.
[63]
I
note as well that the evidence of both the Appellant, her brother and her aunt
was that the Kozars, the Appellant’s parents, were hard-working people who
saved extensively throughout their lives, never spending money on themselves or
on restaurants and always being generous with their children, in fact living to
ensure their children succeeded and were attended to in life. While Mrs. Kozar
was too ill to testify and Mr. Kozar did not, not being the family member in
charge of family finances, a role occupied by Mrs. Kozar with the assistance of
her two children, I accept that such a loan or forgivable loan and hence a form
of gift would be consistent with their cultural and personal characters. In any
event, on the clear evidence at trial, I accept that the TD Canada Trust
account was the property of Mrs. Kozar and not of the Appellant and that the
lot was purchased with funds through such account. The evidence of the auditor
that Mr. Kozar earned an average between $40,000 and $50,000 per year, sometimes
up to $60,000 does not in my opinion provide any useful evidence to suggest
that the Kozars, over their lifetime, could not have accumulated the necessary
wealth to fund such generous gifts is a speculative argument at best. Accordingly,
the Appellant should be credited with a loan or gift (and I see no difference
in their characterization) of $71,429.85 in 2001. It should also be noted
that CRA included the amount of $1,605.78 in the net worth assessment in 2001
on the basis that this represented the difference in contributions to the
account and monies removed, hence were characterized as “Additional Payments to
Parents” under Personal Expenditures. Having found the account belonged to her
mother, the Appellant cannot be charged with giving her mother her own money
and such inclusion should also be removed.
[64]
Aside
from the facts of this case which led me to the above conclusion that the TD
Canada Trust account was the property of the Appellant’s mother, I also accept
the Appellant’s argument that based on the case of Madsen Estate v. Saylor,
[2007] 1 S.C.R. 838, the Supreme Court of Canada confirmed that with respect to
funds held in a joint bank account between parent and child there is a
presumption of resulting trust in favour of such funds belonging to the mother.
Accordingly, this presumptive trust would in my view also satisfy the
Appellant’s onus of making out a prima facie case such loan amount in
question was from her mother’s property, a non-taxable source. The Respondent
has not then satisfied its onus to prove otherwise.
[65]
Finally,
I wish to comment on the evidence submitted that the Appellant borrowed money
from her line of credit and paid her mother back the loan with a $100,000
payment which the Appellant explained included interest and thanks for her
generosity. The amount was subsequently returned by the mother further
evidencing the fact it was considered a gift. The explanation for the
transaction by the Appellant was that the CRA auditor explained it would be in
her favour if the funds were categorized as a loan and he would do so if she
could provide evidence of a repayment. Consequently she arranged to borrow such
funds and give it to her mother, who, she testified, was reluctant to take it
but understood it would be of assistance to her daughter. Once she sought
proper legal and accounting advice, the Appellant realized it was not necessary
and the funds were returned by her mother. The entire transaction does not
detract from the fact her mother owned the funds to begin with and loaned or
gifted them to her child and so seems redundant. The Respondent asked the
Court to draw the inference that such transaction only proves the Appellant was
manipulating her own funds but the only reasonable explanation in the
circumstances for the transaction was to act on the CRA auditor’s advice to her
benefit, which she did, and then reversed herself once she found out it simply
was not necessary. No other reasonable explanation or evidence in connection
with the matter was proffered so I accept the explanation of the Appellant in
this matter as credible. Moreover, the Respondent’s auditor’s testimony
that he was not aware of an actual repayment cheque of $100,000 having been
drawn by the Appellant to her mother, hence the reason he could not consider it
a loan, is not credible. He testified he was in charge of the file and
that any documents requested under the Access to Information process would be taken
from his file yet he knew nothing of the actual repayment cheque copy delivered
to the Appellant in respect of her Access to Information Request, a copy of
which cheque was in evidence. The evidence is also that the said auditor made a
Request for Information upon the CIBC, the Appellant’s banker, for information
regarding the CIBC account from which this cheque was written, so it seems
highly probable that the auditor must have received this cheque information as
part of that disclosure. I accept the Appellant’s testimony that she did not
provide a copy of this cheque to the auditor. While the issue of such loan
repayment is redundant to my reasoning as stated earlier, it does go to the
issue of the auditor’s credibility.
[66]
Having
found above that the funds in this joint account belonged to the Appellant’s
mother, for the reasons above explained, the Appellant should be credited with
$44,326.75 in 2001 and $19,231.76 in 2002, representing the year‑end bank
balances in this account which were treated as assets of the Appellant by the
Respondent. Likewise, there must be a reduction in the amount of $35,529.70 for
the 2000 base year list of assets, representing the year and bank balance for
such account incorrectly attributed to the Appellant.
5. RRSPs
[67]
The
Minister conceded that the Appellant was entitled to a $2,000 credit for the
purchase of AGF RRSPs in 2001.
[68]
The
Minister also conceded during the trial that the Appellant’s value of her
personal RSPs as at December 31, 2000 was $9,689 instead of $4,000, and
accordingly, she should be given credit of $5,689 in the 2000 taxation year
base assets to compensate. There is some issue as to the value of the credit
since the Appellant claims it should be $6,027 on the basis the amount of the
RSP at December 31, 2000 was $10,027. The rationale offered by the Minister for
the discrepancy is that the difference would have represented contributions
made by the Appellant in that year which would have been tax‑deductible
and hence reflected in her income for that year, which seems reasonable to
avoid double crediting that difference to the Appellant, which counsel for the
Appellant conceded.
[69]
In
total, the Appellant should be entitled to RSP credits totalling $7,689 to give
effect to the above adjustments.
6. Acura Automobile
[70]
The
Minister added the value of an Acura automobile totalling $57,500, representing
its purchase price of $50,000 plus applicable taxes, to the Appellant’s 2001
asset list on the basis she admitted during audit that the automobile was registered
in her name. The Appellant claims she felt obliged to claim his automobile as
her property in light of the fact title was registered in her name and, having
been issued a Request for Information on September 11, 2003, felt obliged to.
She adduced evidence that the automobile was purchased by her fiancé, through
his own funds, and sold in 2002 by him and that she only took title to take
advantage of better insurance rates from her insurance company. The Crown
conceded there was no evidence of any withdrawal from her bank accounts for the
purchase of the automobile or the deposit of any proceeds on its sale. The Appellant
testified that she could not drive a standard transmission automobile and that
she only attempted to drive it about three times, being times her fiancé
attempted to give her driving lessons on the standard transmission shift.
Furthermore, the Appellant testified that upon receiving professional advice
from her accountant, she agreed the automobile was held by her in trust for her
fiancé and was not beneficially hers. I accept her evidence as credible on this
matter and frankly considering there is no evidence of withdrawals from her
bank accounts to purchase same nor deposits into her bank account upon the
sale, it seems wholly consistent with her explanation. Moreover, the
Respondent’s admission that her former husband’s modus operandi was to
place assets he purchased into the names of others and the auditor’s testimony
of his suspicion the husband owned it confirmed the Appellant’s position and credibility
on this issue. Accordingly, she should be credited the sum of $57,500 as a deduction
against her 2001 assets and the sum of $21,701, representing a non‑deductible
loss on the sale of the vehicle which was added as an expense on her 2002 year,
should also be deducted from 2002 in order to neutralize the impact of
attributing the automobile and its proceeds to her.
[71]
The
Respondent was quite aggressive on cross-examination with respect to attacking the
Appellant’s credibility by suggesting she lied to her insurance company in
order to get better insurance rates for her fiancé if the car was his and hence
should not be believed with respect to ownership of the vehicle. I do not find
it strange that a couple about to be married would conduct their affairs in
such a manner as to save them both money as a couple. Moreover, the Appellant
testified she answered all the insurance company’s questions honestly and was
able to get insurance on the vehicle. Accordingly, I am not prepared to draw
the inference that she had no credibility because of her conduct since her
explanation is both credible and logical, and the Respondent submitted to
evidence proven otherwise.
7. Long-Term Investments
[72]
The
Appellant objected to the inclusion of a $50,000 CIBC GIC as her asset in 2002
on the basis it belonged to her mother and evidence of her mother’s ownership
of the investment certificate was tendered in Court. The Minister conceded this
was an asset of her mother, and accordingly, the Appellant should be credited
with $50,000 for 2002 as a deduction against the Long Term/Fixed Assets added
by the Respondent to her personal assets.
[73]
While
this was yet another item conceded by the Respondent, it is interesting to note
that this amount was not included as the Appellant’s asset in 2001, despite
evidence it belonged to her mother before that time, but was only included in
2002. The inconsistency not only adds to the evidence it never belonged to the
Appellant, but raises some real concerns as to the adequacy and credibility of
the Respondent’s net worth analysis as a whole.
8. CIBC Equities/Mutual Funds
[74]
The
Appellant was credited $50,000 and $1,000 in 2000, being the year of comparison
for the 2001 taxation year in the net worth assessment, for GTD Investment
Certificates by the Respondent which the Appellant stated should have properly
been reflected as $55,401 and $1,488 to reflect their value as at December 31, 2000.
The Respondent explained, after aggressive cross‑examination of the
auditor, that the difference in the amounts represents the increase in such
Certificate’s value since the date of initial purchase in 1996 which was
taxable as interest income to the Appellant in each and every year and hence tax
paid by the Appellant. Accordingly, such increase in value was credited to her
in the calculation for such year and could not be included again to avoid
double counting, which position I accept as sound.
[75]
The
Respondent conceded that the Appellant should receive a credit of $488 in 2000,
$801 in 2001 and $498 in 2002 with respect to the Appellant’s CIBC Mutual
Funds, which increases were not added to taxable income in previous years in
order to be consistent with their approach regarding the equities above.
9. Property Taxes
[76]
The
Respondent included an amount of $5,492.76 as property taxes expended by the
Appellant for the 2002 taxation year on the basis the amount was factually
found. The evidence is that the Appellant provided the Respondent with what I
consider conclusive evidence from the City of Windsor by way of written receipt that
taxes were only $2,449.96 for the year. This was rejected by the auditor who testified
that CRA sent their own officer to the City to confirm taxes and assessed the
larger amount as “factually found”. Such CRA officer did not testify. The
Appellant then went to the extent of obtaining a letter from the Finance
Department of the City of Windsor which also confirmed the Appellant’s amount which was
given to the CRA during the appeals process and still not accepted. During the
trial, the Respondent however conceded the Appellant should receive a credit of
$3,042 representing the difference which includes a small amount for interest
penalty. While the amount was conceded, I must add that I have some serious
difficulties with the approach of the CRA and the auditor’s credibility on this
issue as well. It seems even a tax receipt during audit and a letter from the
City of Windsor was not enough for the
auditor to concede this prior to trial. The tax receipt is clear on its face
that “Final Taxes” were $2,449.96 in 2002 and the auditor’s suggestion that the
“Current Transactions” section on such receipt listed payments from July to
December also suggested to him that the receipt was for an interim account is
inconsistent with the face of the document and should at the very least have
raised the issue in his mind to further inquire with the City. He instead
appears to have steadfastly relied on his colleague’s note that he confirmed
the taxes for “2002”, when on its face, it seems to have referred to the “2003”
year, although I agree such colleague’s writing was unclear. Faced with the
City’s tax receipt and the Appellant’s strong disagreement as to the amount,
one would have to conclude it was incumbent upon the auditor to inquire
further.
10. Honeymoon Expenses
[77]
The
Appellant objected to the cost of her honeymoon totalling $7,896 being added to
her wedding and honeymoon expenses on the grounds it was a gift from her parents.
She provided the CRA with a bank statement showing the trip was paid by cheque
from a different account that was not hers but CRA rejected this on the basis
the form did not indicate who owned the account. The Appellant then provided
the cancelled cheque to CRA, drawn on her parents’ account, who refused to
accept such evidence on the grounds the Appellant failed to provide evidence of
her parents’ source of funds. In my view, a cheque issued from an account held
by her parents jointly is strong prima facie evidence of the gift
and the taxpayer should not, in my view, be required to provide any further
evidence on that matter unless the Respondent leads evidence that the source of
funds were not that of her parents, which it did not. Frankly, short of
evidence to the contrary being led by CRA, and in the absence of specific
pleadings alleging the fact of illegality in connection with these transactions,
the Appellant should not have to prove the source of funds on gifts given by
third parties. The CRA seems to have taken this position several times
regarding her parents’ gifts to her on the occasion of her engagement, shower
and wedding, putting the Appellant to an embarrassing and unnecessary burden of
proof that is not acceptable and is rather abusive in my mind. The Appellant
should be allowed an adjustment of $7,886 for 2002 for Honeymoon Expenses.
11. Cash On Hand Expense - $56,866.50
[78]
The
Respondent included the sum of $56,866.50 as an asset of the Appellant for 2002
on the basis this amount represented all cash withdrawals from her personal bank
account with TD Canada Trust and must represent assets not otherwise included
in her net worth calculation. The Appellant argued these withdrawals were used
to pay cash to the trades constructing her new home. The Respondent argued
that none of the cash withdrawals matched any of the trades’ invoices so the
Appellant’s position is not credible. In fact, the Appellant pointed out that
the Respondent also included in her Personal Expenditures for 2002 a variance
of $84,634.20 representing the difference between her construction costs and
payments proven by cheque, consistent with the GST rebate application submitted
by the Appellant, and argues the cash withdrawals represented part of that
variance, with the balance paid from cash she had from wedding gifts so that in
fact the Respondent double counted that asset. The Appellant’s position is
logical and constitutes prima facie evidence of her position. The
Respondent led absolutely no evidence to contradict this explanation, and in
fact admitted on cross-examination that the Appellant’s explanation was a
possibility. Accordingly, I find the Appellant’s evidence acceptable as well as
credible. The Appellant should be allowed a credit against 2002 assets of $56,866.50.
12. Other Personal Expenses
[79]
There
are several expenses assumed by the Respondent to have been expended by the
Appellant in the 2001 and 2002 taxation years, many of which of course have
been estimated by CRA based on empirical data used to calculate such living
expenses for taxpayers in a net worth analysis when a factual finding is not
available or accepted. The Minister conceded that $764 and $776 in union dues
should be credited to her personal living expenses in 2001 and 2002
respectively, and also made certain concessions on appeal reflected in credits
on appeal given to the Appellant agreeing the purchase of men’s clothing of
$312 was not expended and agreeing that a $2,269 purchase of china was a gift
and should not have been included in furniture purchases. We have already
discussed the 2002 adjustment to property taxes of $3,042 above and the 2001
adjustment to loans to parents of $1,605 above which must be credited to the
personal living expenses of the Appellant in those years.
[80]
The
Appellant also argued the Respondent was incorrect in assuming she expended
$2,379.66 for food in 2001 as she lived with her parents who paid for
essentially all the living expenses including groceries, which fact was
confirmed in her evidence and that of her brother and which I accept. Likewise,
the Minister assessed her $4,456.60 for food in 2002 and the Appellant
argued she lived with her parents until August of such year and her parents
paid for all the groceries until then. Again, I accept her evidence and accept
that for 2002 she only expended $1,000 as claimed in her Personal Expenditure
worksheet. Accordingly, she should also receive a credit against personal
expenses of $2,379.66 for 2001 and $3,456.60 for 2002. While the Appellant’s
counsel did not address these items in argument, they were addressed in
examination in chief of the Appellant.
[81]
The
Appellant was also charged $4,155.46 for vacation expenses in 2001 which the
Appellant claimed was a vacation taken by her and her fiancé for which she paid
and for which she testified she received one–half reimbursement from her
fiancé. I also accept her testimony in this regard as credible as well, as was
her entire testimony during the trial and credit her the sum of $2,077.50 in
2001 against her living expenses.
[82]
While
these latter adjustments to the personal living expenses are minor in relation
to the amounts claimed to have been spent and not in dispute, they show just
how arbitrary a net worth assessment can be and the potential for abuse such a
method entails.
[83]
A
summary of the adjustments referred to in the above paragraphs is found in
Schedule “A” to this decision. As is evident, the Appellant has succeeded in
establishing that adjustments to the 2002 taxation year exceed the assessed
income of $135,488. Adjustments to the 2001 taxation year of $244,525.04 net of
increases to the Appellant’s net worth in the year 2000 of $29,352.70,
effectively reduce the Appellant’s assessed income by $215,172.34, to
approximately $5,423 before taking into consideration the conceded adjustments
for china gifts of $2,269 and other minor personal expenditures that were the
subject of disagreement between the parties. The Respondent acknowledged a net
worth analysis is an estimate and imperfect, and accordingly, the minor discrepancy
is not in my mind relevant. The Appellant has satisfied me, on more than a
balance of probabilities, that all assessed income was credibly explained as coming
from non-taxable sources. Before allowing this appeal, however, it is important
to address the arguments of credibility and good faith, or lack thereof, raised
by the parties throughout the trial.
Credibility and Good Faith:
[84]
It
is clear from the volumes of exhibits and the testimony of the Appellant and
her several witnesses just how much of an onus was placed on her resulting from
the decision of the Minister to impose a net worth assessment on her. It is
abundantly evident that the Minister in total had very little evidence from
which to proceed to a net worth analysis, making that decision, as based on the
testimony of the Respondent’s appeal officer, on the basis of several
unexplained bank deposits totalling about a quarter of the assessed income and
the Respondent’s position that the Appellant was uncooperative, a reference
found throughout the auditor’s report of August 23, 2005 who also stated that
“Sandy thought the process was an invasion of her privacy …”.
[85]
The
Appellant strongly disagreed she was uncooperative, and testified she provided
the information requested from CRA on the Statement of Assets and Liabilities
and the Personal/Living Expenses worksheet in response to the Respondent’s
Request for Information issued pursuant to paragraph 231.2(1)(a) of the Act
on September 11, 2003 and February 4, 2004 respectively, which is admitted by
the auditor in the auditor’s report and formed the basis of his rough net worth
assessment. There is also evidence in the auditor’s report suggesting her reply
did not answer the requirements, but there is also a short letter by the
auditor’s predecessor in evidence suggesting she did in fact provide all the
details. The Appellant did testify in fact that she was reluctant to provide her
guest list from her wedding at the beginning out of embarrassment and fear the
auditor would contact them or ask her parents for their bank statements; the
latter who were already issued a Request for Information from CRA. Furthermore,
she testified that when she did provide information it was never enough and
provided evidence of this on several issues. As an example, in relation to
her property tax bill discussed earlier, she provided a tax receipt from the
Finance Department of the City of Windsor which was disputed by the auditor and then obtained
a letter from the Finance Department to confirm same which was still not
acceptable to CRA. She provided balance statements of her personal GIC
investment in January of 2001 and then for December 29, 2000 confirming the
amounts for December 31, 2000 and the CRA wanted more. When she finally did
provide her wedding list, the auditor took a copy but chose not to act on it,
testifying that it was given too late, yet the evidence was that the auditor
went to the extent of calling the reception hall to confirm the number of
guests at her wedding and went to the trouble of matching the amount of some
cheques received as wedding gifts to the comments shown on the wedding cards,
which were consistent. Moreover, the evidence of the Appellant and the
Respondent’s auditor as well was that the Appellant was constantly being asked
to prove the source of funds of third parties such as her parents, her mother‑in‑law,
her wedding guests, even though she provided evidence they themselves were the
source of funds via herself. Short of pleadings addressing third party source
of funds in relation to the Appellant, CRA should have taken issue with such third
parties directly if it had a problem with their source of funds. The evidence
also discloses the CRA issued Requirements to the Appellant’s two bankers and
received detailed bank records used by the auditor to construct its deposit
analysis and the auditor’s T2020 form does not indicate he needed any further
information on such bank statements to proceed to make his calculations, so it
seems incredible that the Appellant was then asked for her bank passbooks in
the circumstances. The sheer volume of material provided by the Appellant in
the exhibits tendered by both her and the Respondent do not suggest a taxpayer
being uncooperative but perhaps one placed in the unenviable situation of being
asked to audit her source of funds, even in some cases, when the CRA was
already in the process of doing so in relation to her parents and fiancé and
mother-in-law. There is admittedly evidence of some reluctance to have
cooperated at the beginning due to the Appellant’s money concerns and counsel
for the Appellant suggested the Court should not draw a negative inference from
this as the Appellant’s right not to talk is a right conferred by the Supreme
Court of Canada in R. v. Rothman, [1981] 1 S.C.R. 640.
[86]
On
the whole, I find that the Appellant could not be said to be uncooperative, but
rather the opposite. Accordingly, I do not draw any negative inference from the
Appellant’s initial reluctance to provide information on her wedding guests or
materials in order to provide the source of funds of third parties which, as I
said, should not be the responsibility of the Appellant in the circumstances of
this case.
[87]
From
a general perspective however, I would not be prepared to say a Court cannot
ever draw a negative inference where a taxpayer invokes his or her right not to
provide information to the CRA where there is no statutory obligation to do so,
such as in the case of a Requirement served on a taxpayer under section 231.2
of the Act. There was no dispute by the Respondent of a taxpayer’s right
not to provide information to the CRA save in the case of a specific statutory
requirement as espoused in the Rothman case. I agree with counsel for
the Respondent, however, that where the onus is on a taxpayer to demolish the
assumptions of the Minister for normal tax assessments, the consequences of a
taxpayer invoking such right may mean that he has not satisfied such onus to
the satisfaction of the CRA at the audit or appeal stage and thus may find
himself or herself saddled with a costly trial that could have been avoided;
but that of course is up to the taxpayer.
[88]
In
the case at hand, however, I am satisfied the Appellant cooperated more fully
than the CRA had the right to expect or demand, especially in obtaining third
party information, which it seems CRA was not prepared to accept regardless, it
seems, of how reasonable and reliable it appeared to be. The Appellant
could not talk if the auditor was not prepared to listen.
[89]
In Norwood
v. Canada, [2001] 1 C.T.C. 299 (F.C.A.), the Federal Court of Appeal, in
addressing the actions of an auditor in taking notes from a taxpayer without
the taxpayer’s notice or permission, commented in paragraph 17 thereof upon
such auditor’s behaviour:
17 …
I believe that a more candid approach and
higher standard is expected of Revenue Canada auditors.… This is not dealing in good faith. …
[90]
I
believe the Federal Court of Appeal decision stands for the obligation of CRA
employees to act and perform their duties in good faith, and not just in the
narrow confines of the conduct complained about in Norwood.
[91]
In
the case at hand, the disposition of the auditor to label the Appellant with
criminality or illegality as the basis for assessment, amend its Reply when it could
provide no particulars of same, and refuse to listen when the Appellant actually
exercised her right to talk, all the while expecting the Appellant to prove third
party sources of funds, is, on the whole, indicative of bad faith in its
dealings with the Appellant and beyond the obligations of the Appellant at law.
[92]
It
is also important to note that CRA was proceeding on the belief the Appellant’s
source of funds was laundered or illegal money. In the auditor’s report, the
auditor states in paragraph B. I):
B. I) The auditor received
information from various other enforcement agencies (RCMP, OPP, Windsor Police,
CBSA) that Sang Nguyen [the Appellant’s fiancé] was involved in the
illegal satellite business along with other various illegal activities (alien
smuggling, money laundering and in the production and trafficking of drugs).
Sang does not own any assets in his name (See Exhibit #15L), as he uses people
close to him to sign for them as if they were their own assets. This is the
case with Sandy Kozar.
[93]
In
paragraph D. I), the auditor states:
D. 1) … Sandy Kozar was involved in a
business operation that is operated underground. Customers could only pay by
cash and it was the intention of Sandy and her spouse Sang Nguyen to not report
the income from this operation or any other illegal venture they might be
involved in. …
… In addition it seemed that Sandy was either directly or indirectly involved with
other illegal activities that also involved Cash transactions.
[94]
Even
with respect to the Appellant’s mother-in-law’s gift of appliances discussed
earlier, the auditor seemed anxious to find the Appellant’s connection to some
illegal activities. In paragraph F. 11., in discussing the Appellant’s
mother-in-law’s appliance shower gifts, which were conceded by the Respondent
during the trial, the auditor concludes:
F. …
11 …
·
… sources to the
auditor stated that the card was from a fraudulent card. In addition her
mother-in-law does not report substantial income to afford these appliances,
therefore it could be concluded the money came from her illegal dealings as she
has been charged (See Exhibit 14L). Therefore Sandy would have received assets from illegal activities. …
[95]
The
evidence of course was that the mother-in-law paid for the appliances using a
valid card, as proven by the Appellant before trial and still not accepted by
the Respondent until after the mother-in-law’s oral testimony at trial.
[96]
In
paragraph G of the audit report, the auditor reviewed the cases of Philip v.
Canada, [1996] 2 C.T.C. 2174 and Wammes v. Canada, [2001] 3 C.T.C.
2559, and concluded:
G. … In both cases Net Worth’s
were used to reassess and their source of income was from illegal activities. …
[97]
Clearly,
the auditor proceeded to assess on the assumptions of the Appellant’s source of
income being from illegal activities.
[98]
The
Respondent, in its initial pleadings, alleged the Appellant and her fiancé were
involved in the illegal satellite business and on a pre-trial motion before
this Court to provide particulars in their pleadings of the illegalities or
remove reference to it, were ordered to remove reference to such activities and
filed an Amended Reply. In fact, the evidence on such motion was that the CRTC
did not rule until the end of 1994 that such satellite business would then be
illegal. The Appellant was put to the cost and effort of forcing the CRA
to disclose the particulars or amend their pleading and the CRA obviously had
no basis for their position and amended their pleading. The parties were
advised to keep their argument within the pleading and were not allowed to deal
with the issue of any illegal activities except as they might relate to
credibility. In my view, the credibility of the Respondent is in serious
question in a proceeding when the initial basis for proceeding on a net worth
assessment in the first place is found to be lacking and the CRA proceeded
anyway. As counsel for the Appellant noted, the Respondent had muddied the
waters on its reasons.
[99]
In Re
Dick above, Taylor J. expressed his concerns on the abusive potential of a
net worth assessment when there is no linkage established between the net worth
analysis provided in support of the assessment of tax, and the alleged source
of income, as follows at page 814:
A “net worth” assessment is at best only
an approximation, it may also be a frustration for all concerned. It is
virtually a “last resort” method available in dealing with complex, poorly
documented or highly contested financial situations. The task facing a taxpayer
in dealing with any assessment of the Respondent is challenging enough - the
onus of proof is on that taxpayer. But in a “net worth” assessment where there
is a clear conflict between the parties regarding the “source” of discrepancies,
then a major factor in the determination of the issue might be any
substantiation provided by the respective parties in support of each of the
alternative “sources”.
[100] In quoting from the Tax
Court of Canada in Shlien v. The Minister of National Revenue, 88 DTC
1152, at page 1155, Taylor J. went on to say:
Admittedly the Respondent is vested with
wide powers under the Act … His right to determine a taxpayer’s income
for a taxation year on the basis of a net worth analysis cannot be denied, but
the exercise of such a determination must be in compliance with the provisions
of the Act and in accordance with the principles laid out in the
jurisprudence. To issue an assessment knowingly which does not meet this test
amounts to abusing the application of the pronouncement of the Supreme Court of
Canada referred to above that the onus of challenging the validity of an assessment
rests with the Appellant.
[101] In the case at hand, the
linkage initially established by the Respondent to a source of funds was an
illegal source from her husband’s activities, which was revoked in the Amended
Reply and replaced by a simple assertion the source was from employment with
his business, which I found was strongly successfully rebutted by the
Appellant. The Minister commenced its attack under one pretence and continued
under another, without any direct or sound evidence of same. Accordingly, I
also find that the Appellant has also succeeded in challenging, on a prima
facie basis, that the Respondent’s underlying assumptions in its
Amended Reply could not be said to be those facts relied upon and assumed
by the Minister. The Minister initially proceeded and reassessed on the basis
of the source of funds being from illegal activities, not employment, which would
be sufficient for the Appellant to have discharged its onus according to the first
method or doing so under Re Hsu above.
Statute-barred Year and Penalties:
[102] Having found that the
Appellant has met the onus of rebutting the Minister’s assumptions above and
that the Minister provided no satisfactory proof to the contrary, it stands to
reason that the Appellant did not make any misrepresentations as to her income
for the years in dispute, and accordingly the 2001 year must by default be
considered statute barred under subsection 152(4) of the Act. There
would also obviously be no penalties under subsection 163(2) of the Act either.
[103] The Respondent did not
lead any evidence to substantiate their alleged source of funds from employment
or any other taxable source, illegal or otherwise, and made no credible documented
challenge to the Appellant’s evidence. Accordingly, I find for the Appellant
and the appeals are allowed. The Appellant shall be entitled to costs on a
solicitor and client basis.
Signed at Ottawa, Canada, this 19th day of July 2010.
“F.J. Pizzitelli”
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