Citation: 2010TCC537
Date: 20101021
Dockets: 2009-3343(IT)I
2009-3344(GST)I
BETWEEN:
HUI PING QIAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1]
The Appellant, Hui Ping Qian, is
appealing a net worth assessment of her 2003, 2004 and 2005 taxation years under
the Income Tax Act and under the Excise Tax Act, an assessment of
net tax, together with penalties and interest, for the period January 1, 2004
to December 31, 2005.
[2]
Under the Income Tax Act,
the Minister added to her reported employment and rental income for 2003, 2004
and 2005, gross business income of $11,319, $47,832 and $50,004, respectively. Gross
negligence penalties were assessed under subsection 163(2) of the Act on
the basis that the Appellant had “… knowingly, or under circumstances amounting
to gross negligence, … made or … participated in, assented to or acquiesced in
the making of, a false statement or omission in” the income tax returns filed
for those taxation years resulting in less tax being payable than would
otherwise have been.
[3]
The Minister has the onus of
proving the conduct justifying the imposition of such penalties in 2003, 2004
and 2005. Because the 2003 and 2004 taxation years were reassessed after the
normal reassessment period, the Minister has the further onus of proving pursuant
to subsection 152(4) of the Act that in filing her returns, the
Appellant “… made any misrepresentation that is attributable to neglect,
carelessness or willful default or has committed any fraud in filing the return
or in supplying any information…” under the Act.
[4]
The Minister’s reassessment under
the Income Tax Act having been based on the assumption that the
Appellant had been operating a business during the taxation years, the Minister
went on to assess net tax, penalties and interest of $6,848 under the Excise
Tax Act for the Appellant’s failure to report and remit GST in respect of
that business. In so reassessing, the Minister took the position that in not
having kept records as required under section 286 of the Excise Tax Act,
the Appellant had failed to show due diligence.
[5]
The appeals of these reassessments
were heard together on common evidence.
[6]
In determining the Appellant’s tax
liability under the Income Tax Act for the 2003, 2004 and 2005 taxation
years, the Minister made the assumptions of fact set out in paragraph 9 of the
Reply to the Notice of Appeal:
(a) at
all material times the Appellant was separated and had one child;
(b) at all
material times, the Appellant operated a health spa business under the name of
Sandlewood Health Spa (the “health spa”), and earned income from that business;
(c) the
Appellant did not incur expenses to earn income from the health spa in the
years in issue;
(d) the
Appellant did not report in her personal returns of income for the years any of
the business income she earned from the health spa in those years;
(e) the
amounts deposited by the Appellant in her bank accounts for the years varied
significantly from income reported by her in her personal returns of income for
the years under appeal;
(f) the
discrepancy between the amount deposited in the Appellant’s bank accounts and
the income reported by her in her personal returns of income was due primarily
to the unreported business income earned by the Appellant from the health spa;
(g) the
following deposited amounts were in respect of gifts received by the Appellant
in the years as follows:
|
GIFTS
|
2003
|
2004
|
2005
|
|
|
$
|
$
|
$
|
|
Cash gifts from Luukkonen
|
1,800
|
2,190
|
3,920
|
|
Cheque gifts
|
|
600
|
500
|
|
Total gifts
|
1,800
|
2,790
|
4,420
|
(h) the
Appellant did not receive gifts from her mother in the amounts of $7,000 and
$38,000;
(i)
no mortgage payments on the second mortgage were made to Lukkonen by the
Appellant in the 2004 taxation year;
(j) the
Appellant did not receive a cash advance of $ 9,000 from Li Chen, the Appellant’s
ex-spouse, as a family advance;
(k) the
remaining amounts deposited by the Appellant into her accounts were the
business income of the Appellant;
(l)
the total income of the Appellant for the 2003, 2004 and 2005 taxation
years exceeded that which she reported, by the amounts of $11,319, $47,832 and
$50,004 respectively.
[7]
In assessing net tax under the Excise
Tax Act, the Minister made the assumptions of fact set out in paragraph 7
of the Reply to the Notice of Appeal:
(a)
the Appellant was a sole proprietor, operating a health spa under the
name of “Sandlewood Health Spa” throughout the Period;
(b)
the Appellant did not file GST returns for purposes of the Act;
(c)
the Appellant’s business activity was that of a health spa operator;
(d)
the Appellant did not maintain adequate books and records;
(e)
the Appellant’s revenues for the 2004 and 2005 taxation years are
taxable supplies for purposes of the Act and are taxable at 7%;
(f)
the Appellant earned revenues for the 2004 and 2005 taxation years from
her business activity;
(g)
the revenue reported by the Appellant for the Period was not sufficient
to support her costs of living;
(h)
the following deposited amounts were in respect of gifts received by the
Appellant in the years as follows:
|
GIFTS
|
2004
|
2005
|
|
|
$
|
$
|
|
Cash gifts from Luukkonen
|
2,190
|
3,920
|
|
Cheque gifts
|
600
|
500
|
|
Total gifts
|
2,790
|
4,420
|
(i)
the Appellant did not receive gifts from her mother in the amounts of
$7,000 and $38,000;
(j)
no mortgage payments on the second mortgage were made to Lukkonen by the
Appellant in the 2004 taxation year;
(k)
the Appellant did not receive a cash advance of $9,000 from Li Chen, the
Appellant’s ex-spouse, as a family advance;
(l)
the remaining amounts deposited by the Appellant into her accounts were
the business income of the Appellant;
(m)
the Appellant did not provide adequate documentation as required, in
relation to her commercial activities during the Period.
[8]
The Appellant was represented by
her agent, Richard Buchan, a retired Canada Revenue Agency official with some
32 years experience. The Appellant testified and also called as a witness her
friend, Victor Luukkonen.
[9]
The Appellant’s mother tongue is
Mandarin; as she had some difficulty in English, a translator was provided for
her at the hearing. I found the Appellant to be a reluctant witness. On more
than one occasion I intervened to invite the Appellant to expand on her answers
to help me understand her position but she rarely provided further explanation.
She was candid that she kept no records of her business dealings and indeed, at
one point in her testimony, wondered aloud who would do such a thing. Even
allowing for the barriers imposed by translation and the nature of the
Appellant’s work, I found her testimony to be, overall, unconvincing.
[10]
The Crown’s only witness was Susan
Duke, the auditor who did the net worth assessment. Ms. Duke was as clear and
thorough in her answers at the hearing as she was meticulous in the preparation
of the deposit analysis
of the Appellant’s records during the audit. I am satisfied that she gave the
Appellant and Mr. Luukkonen every opportunity to provide information to explain
the discrepancy between the Appellant’s reported income and her financial
records. Mr. Buchan suggested that the Appellant was more harshly assessed than
she otherwise might have been because the trigger for the audit by the Canada
Revenue Agency had been a lead received from its Special Investigation
officials following a crackdown on ‘body rub’ massage parlours. In my view, the evidence
tells a different story: one has only to look at the care taken by Ms. Duke in
her analysis and the benefit of the doubt given to the Appellant in respect of Mr.
Luukkonen’s various gifts to her. There is no evidence to suggest Ms. Duke’s
conclusions were motivated by some sort of moral judgment of the Appellant.
[11]
The Appellant’s challenge to the
Minister’s assessments may be summarized as follows: she denies that she was
ever in business for herself. From 2003 to 2005, her only sources of income were
from employment and room rental, both of which were duly and accurately
reported in a timely fashion in her 2003, 2004 and 2005 income tax returns. She
also said she received tips from clients. Mr. Buchan, on behalf of the
Appellant, submitted that the Minister had failed to take into account that
some of the amounts discovered during the audit were gifts received by the
Appellant from Mr. Luukkonen, her mother and her former spouse and further,
that the Minister had made no adjustment in respect of the fact that after
August 2003, the Appellant had ceased making payments on a $20,000 mortgage
held by Mr. Lukkonen.
Analysis
1.
Gifts and the Luukkonen Mortgage
[12]
Before considering each of the
various amounts specifically identified by the Appellant above, it bears
repeating that as in any assessment, the taxpayer has the onus of proving wrong
the assumptions upon which the Minister based his assessment. As counsel for
the Respondent noted in his thorough review of the jurisprudence, in
challenging a net worth assessment, the taxpayer’s credibility and supporting
documentation are crucial. In the present case, both were lacking.
[13]
The Appellant’s allegations in
respect of the gifts and second mortgage are effectively in response to the Minister’s
assumptions of fact in paragraphs 9(g), (h), (i) and (j) of the Reply in the Income
Tax Act appeal.
For the reasons set out below, I am not persuaded by Mr. Buchan’s arguments
that adjustments ought to be made to the Minister’s calculations.
[14]
Cash Advances from Mr. Luukkonen -
The Minister accepted, as shown in paragraph 9(g) of the Reply, that the
Appellant had received cash and cheques as gifts from Mr. Luukkonen in 2003,
2004 and 2005 totalling $1,800, $2,790 and $4,420, respectively. Additional
amounts were rejected at the audit stage because they could not be definitively
linked to the Appellant’s accounts. The same was true at the hearing. While I
found Mr. Luukkonen generally credible, he had no way of corroborating that the
amounts withdrawn from his accounts were, in fact, given to the Appellant. In
the circumstances of this case, such corroboration was essential.
[15]
Family cash advances paid by Li
Huang Chen - The Minister assumed at paragraph 9(j) that “the Appellant did not
receive a cash advance of $ 9,000 from Li Chen, the Appellant’s ex-spouse, as a
family advance”. The Appellant sought to refute this assumption by putting in
evidence a letter apparently from her former spouse to vouch for this payment.
Even under the more relaxed rules of the Informal Procedure, this
unauthenticated letter (which the Appellant herself said she could not read
because it was in English) was incapable of proving that the Appellant had
received such an amount from the individual who supposedly wrote the letter.
[16]
Cash given by the Appellant’s Mother,
Xue Mei Qian - The Minister assumed at paragraph 9(h) that “the Appellant did
not receive gifts from her mother in the amounts of $7,000 and $38,000”. The
Appellant told a convoluted story of how at a certain point, she had given her
mother a cheque for $8,000 out of gratitude for all the things her mother had
done for her over the years. Her mother deposited the cheque but then, having second
thoughts, returned the $8,000 and gave the Appellant another $6,000. The
mother’s bank book was put in evidence but it proved only that certain deposits
and withdrawals were made; there was nothing in that document to link them to
the Appellant or a payment of $14,150 the Appellant made on her mortgage.
Unfortunately, the Appellant’s mother has since died leaving the Appellant’s
testimony uncorroborated. Similarly, although the Appellant’s financial records
show various amounts going in and out of her accounts, the Appellant kept no
explanatory records of these transactions.
[17]
Non-payment of Second Mortgage to Mr.
Luukkonen - This pertains to the Minister’s assumption at paragraph 9(i) that “no
mortgage payments on the second mortgage were made to Luukkonen by the
Appellant in the 2004 taxation year”. As shown in Exhibit R-1, Tab 18, “Second
Mortgage from V.K. Luukkomen to Hui Ping Qian”, the Appellant made mortgage
payments of $395.08 to Mr. Luukkonen from June 1, 2002 to August 1, 2003,
inclusive. Although Mr. Buchan argued that the Minister failed to take this fact
into account in the net worth assessment, the net worth statement shows the
same balance outstanding at the end of 2003 and 2004. I note further that the
outstanding balance was adjusted down when the Appellant made a $5,000 lump sum
payment on the mortgage in 2005.
2.
Was the Appellant Operating a Business?
[18]
Turning, then, to whether the
Appellant was operating a business during the taxation years, Mr. Buchan
attempted to discredit Ms. Duke’s analysis by arguing that the Minister had not
proven that the Appellant was in business in 2003 and 2004. The flaw in this
argument is that it overlooks the fact that the onus is on the Appellant to explain
the discrepancies between the income reported and amounts discovered in a
subsequent audit. As the Federal Court of Appeal held in Hsu v. R.:
30 Net worth assessments are a
method of last resort, commonly utilized in cases where the taxpayer refuses to
file a tax return, has filed a return which is grossly inaccurate or refuses to
furnish documentation which would enable Revenue Canada to verify the return
(V. Krishna, The Fundamentals of Canadian Income Tax Law, 5th
ed. (Toronto: Carswell, 1995) at 1089). 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 (Gentile v. The Queen, [1988] 1 C.T.C. 253 at 256
(F.C.T.D.)).
31 By its very nature, a net worth
assessment is an arbitrary and imprecise approximation of a taxpayer's income.
Any perceived unfairness relating to this type of assessment is resolved by
recognizing that the taxpayer is in the best position to know his or her own
taxable income. Where the factual basis of the Minister's estimation is
inaccurate, it should be a simple matter for the taxpayer to correct the
Minister's error to the satisfaction of the Court.
[19]
The Appellant testified that in
all years, she was an employee yet could not remember how many spas she had
worked in nor did she provide names or addresses of the spas or explain, in
even a general way, what her duties might have been. I found such vagueness at
odds with the Appellant’s marshalling of her financial affairs during the same
period: she filed income tax returns for her employment income; rented rooms
and reported the income earned; maintained two chequing accounts, acquired
three concurrent credit cards with a total credit limit of $13,500; established
two lines of credit (the most recent with a $50,000 limit); arranged for
financing of $20,000 for the purchase of a new car; purchased a house with a
mortgage of approximately $160,000; and got a second mortgage of $20,000 from
her friend Mr. Luukkonen.
The records obtained by the Minister from the various financial institutions
involved show numerous and frequent cash deposits and
withdrawals and money being moved from one account to another. These are not
the actions of an unsophisticated person. It seems to me that the Appellant’s
practice of not keeping records had more to do concealing the true nature of
her income-generating activities than a lack of understanding of its
importance. In all the circumstances, the Appellant has failed to rebut the
Minister’s assumption that she was in business on her own account in 2003, 2004
or 2005.
[20]
The Appellant’s testimony that she
was an employee is also inconsistent with other answers given during her direct
examination. Her evidence was that in 2005 she had been involved in a ‘spa’
business as equal partners with one Yin Hua Jin. However, the Appellant had
also described Jin in her application for a VISA credit card dated October 2005
as her “employer”.
In any event, she testified that she gave Jin advances to pay for the purchase
of equipment; such purchases were all in cash and the Appellant had no receipts
for any of them. Some of the advances were reimbursed by Jin but the Appellant also
said that she repaid amounts taken from her line of credit with money earned in
the business with Jin. The Appellant also used her credit card to pay for advertising
costs in certain newspapers.
[21]
According to the Appellant, Jin
had been responsible for the books and records. Jin had also paid all the taxes
but on this latter point, the Appellant also said that she did not know if Jin
had paid the GST for which the Appellant had been assessed. In any case, by November
2005, the pair had fallen out and Jin had sold the business. The Appellant
first said she received no share of the sales proceeds but later said Jin had
given her “some” money. As of the date of the hearing, the Appellant had no
idea where Jin might be found.
[22]
In the event that I found that the
Appellant had been operating a business in 2005, Mr. Buchan submitted that the
Appellant ought to be allowed a business expense of $4,391 for advertising. Notwithstanding all of the inconsistencies in the
Appellant’s story, it seems to me be that this is a legitimate claim. Because
the $4,391 was paid to the Toronto Sun and certain Chinese-language newspapers, the
Minister entered the amount in the standard form net worth work sheet under the
heading “reading materials”. When the Appellant was asked about her
expenditures for “reading materials”, she seemed puzzled and said something
about taking only “free Chinese newspapers”, an answer that is consistent with the
relatively small amounts shown for “reading materials” in earlier years. On the
other hand, she later said in her direct evidence that she had paid for
advertising on her credit card, one of the few straight answers provided during
her testimony and one that is borne out by the documentation. I also accept her
evidence that she did not recoup all of the advances she had made. In all the
circumstances, including the Minister’s assumption that the Appellant was in
business in 2005, I am satisfied on a balance of probabilities that the
Appellant incurred an advertising expense of $4,391 in respect of her business
in that year.
3.
Assessment Beyond the Normal Reassessment Period; Imposition of Penalties
[23]
Notwithstanding her limitations in
English, the Appellant has demonstrated a certain level of financial
sophistication and a deliberate unwillingness to keep proper records of her
income from all sources. Her testimony was riddled with inconsistencies and
contradictions. The discrepancies between her reported income and the amounts
identified in the audit are significant and were not convincingly explained by
the Appellant. On the other hand, Ms. Duke’s analysis was thorough and
persuasive. While gross negligence penalties ought not to be imposed lightly, I am satisfied that the
Minister has met the higher onus of proof required for their imposition under
subsection 163(2) and was justified in assessing the 2003 and 2004 taxation
years beyond the normal reassessment period under subsection 152(4) of the Income
Tax Act. This same behaviour constitutes a lack of due diligence for the purposes
of the Excise Tax Act.
[24]
For the reasons set out above, the
appeals under the Income Tax Act of the 2003 and 2004 taxation years and
under the Excise Tax Act for the period January 1, 2004 to December 31,
2005 are dismissed. The appeal under the Income Tax Act of the 2005
taxation year is allowed and referred back to the Minister for reconsideration
and reassessment on the basis that the Appellant incurred a business expense of
$4,391.
Signed at Ottawa, Canada, this 21st
day of October, 2010.
“G. A. Sheridan”
Email this Content