Citation: 2008TCC675
Date: 20081218
Dockets: 2006-2529(IT)G
2006-2528(GST)G
BETWEEN:
CONG T. NGUYEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rowe, D.J.
[1] The Minister of National Revenue (the “Minister”)
assessed the Appellant, Cong Thi Nguyen (“Nguyen”) by issuing a Notice of
Assessment dated April 27, 2005 for net tax in a certain amount respecting
Goods and Services Tax (“GST”) returns for the period from January 1, 2001 to
December 31, 2003 pursuant to section 221 of the Excise Tax Act (the “Act”).
Subsequently, the Minister reassessed the Appellant decreasing the amount
payable but maintained the assertion that Nguyen had not reported the proper
sum of GST collectible during the period and had failed to remit the additional
sum of $10,536.59 as required pursuant to section 221 of the Act. The
Minister levied a penalty under section 285 of the Act on the basis the
Appellant knowingly or under circumstances amounting to gross negligence in
carrying out her duties or obligations imposed by the Act, made false
statements or omissions in the GST returns filed in respect of the period under
assessment. The amounts at issue are as follows:
|
Net tax:
|
$15,416.16
|
|
Penalty:
|
$4,149.84
|
|
Interest:
|
$630.16
|
[2] Pursuant to a reassessment dated June 1,
2006, the Minister determined the Appellant’s taxable supplies including GST
from her business were $103,202.23, $58,995.76 and $78,516.66 for the 2001,
2002 and 2003 taxation years, respectively.
[3] The Appellant filed her returns of income
for the taxation years 2001, 2002 and 2003 in which she reported business
income in the sums of $9,572.00, $6,240.00 and $11,421.00 respectively. The
Minister initially assessed the Appellant on May 27, 2003 and included into
income in each of those taxation years certain amounts. On June 28, 2006, the
Minister reassessed the Appellant with respect to each of those years and
included into her business income the following amounts:
|
2001:
|
$52,217.68
|
|
2002:
|
$44,041.22
|
|
2003:
|
$59,777.06
|
[4] Pursuant to subsection 163(2) of the Income
Tax Act (“ITA”), the Minister levied gross negligence penalties with
respect to those taxation years on the basis the Appellant knowingly or under
circumstances amounting to gross negligence in carrying out the duties or
obligations imposed by the ITA, made or participated in, assented to or
acquiesced in the making of false statements or omissions in the income tax
returns filed for those years. The amount of penalties at issue are as follows:
|
2001:
|
$4,994.54
|
|
2002:
|
$3,590.11
|
|
2003:
|
$5,649.57
|
[5] The Appellant and counsel for the Respondent
agreed both appeals could be heard on common evidence.
[6] Nguyen testified in the Vietnamese language
and the questions and answers and other aspects of the within proceeding were
interpreted and/or translated from English to Vietnamese and Vietnamese to
English by Mr. Huu Lam, a Certified Court Interpreter. Nguyen stated she agreed
with the assumptions of the Minister as set forth in the following
subparagraphs of the Reply to Notice of Appeal (“Reply”):
17.
In so assessing the Appellant, the Minister
relied on the following assumptions:
a)
during the 2001, 2002 and 2003 taxation years,
the Appellant operated a uniform sewing business (the “Business”) in
partnership with her spouse, Hai Vinh Ho, each of whom had a 50%
interest in the partnership;
b)
at all material times, the Appellant had a
subcontract with Tex-Pro Western Ltd. to supply uniforms for various
hospitals in the Vancouver, B.C. and environs;
c)
the Appellant sewed the uniforms while the
Appellant’s spouse would transport uniforms to the Appellant’s clients;
…
[7] Nguyen stated she and her former spouse –
Hai Vinh Ho (“Ho”) - had been divorced for many years prior to 2001 but started
the sewing business and worked together during the years under appeal but were
not living together in a conjugal relationship during those years nor several
years earlier. However, she and her husband are currently living together in a
common law relationship. Nguyen purchased a residence in 1999 for the sum of
$257,944.10 and the amount of financing required was $202,125.00. She and her
former spouse did not use a business name or trade name while carrying out the
business of manufacturing uniforms. Nguyen confirmed she had reported income
for 2001, 2002 and 2003 in the amounts referred to in the Reply. Nguyen stated
she understood the issue revolved around the discrepancy between the amounts
she reported as business income – which she shared on a 50-50 basis with Ho –
and the amounts the Minister had calculated that it would have required to
support her during those years as stated in the various Schedules attached to
the relevant Reply filed in respect of her appeals from assessments under both
the Act – for GST – and the ITA. Nguyen stated her mother lives
in Vietnam and had sold a valuable piece of land near Ho Chi Minh city (formerly Saigon). In 2001, she and her former
husband – Ho – went to Vietnam twice and each time received cash in US
currency from her mother which they transported back to Vancouver. Nguyen filed – as Exhibit A-1 – photocopies of
airline tickets issued in her name and that of Ho pertaining to their visits to
Vietnam in February and October, 2001 and for Ho’s
travel there in January, 2003. Their daughter – Hai-Yen Francis (“Hai-Yen”) and
her husband – Andrew Francis – travelled to Vietnam
in August or September of 2002. Nguyen stated there was a monetary limit on the
amount of US dollars one could take out of Vietnam
but from the proceeds of the property sold by her mother on December 15, 2000,
she was able to bring a total of nearly US$70,000 to Canada.
She added that the sum of $50,000 remains in Vietnam
which her mother holds in trust for her. Nguyen stated her daughter and son-in
law also went to Vietnam together and visited her mother and brought back money
to Canada. Nguyen stated the money arrived in
certain amounts in order to conform with currency export regulations in Vietnam. She stated she did not need the money all at once
because she was uncertain about whether she would remain in Canada, although she is a Canadian citizen. She used the
money from time to time for living expenses and converted the US currency at
various currency exchanges in the Vancouver area because it was convenient and
she was able to choose the ones which offered a better exchange rate than the
Royal Bank of Canada (“Royal”) where she had her accounts. She recalled that
the usual amount exchanged into Canadian currency was approximately US$500. She
did not retain any receipts pertaining to these transactions. The company –
Tex-Pro Western Ltd. (“Tex-Pro”) – paid her by cheque on delivery and all
cheques were deposited into a business account at Royal on which she had sole
signing authority. Nguyen had requested that Tex-Pro pay the sum owing for each
supply of uniforms upon delivery by issuing a separate cheque to her and to Ho,
each for 50% of the total amount due. Nguyen stated she did not maintain
business records other than to retain the stubs of the cheques issued in her
name by Tex-Pro in each of the years at issue. At the end of the year, the
amounts shown in each stub were added up by her accountant who prepared both
the GST return and the return of income for each taxation year. The uniforms
were assembled in Nguyen’s residence from material supplied by Tex-Pro, using
machines owned by Nguyen. During the years at issue, she did not purchase any
equipment or major supplies and her sole source of income was from sewing
uniforms for Tex-Pro. There were certain expenses attributable to the business,
particularly arising from the use of a vehicle – Honda Odyssey - to deliver the
uniforms, and these were calculated by her accountant – Tina Nguyen (“Tina”) (no
relation) - and deducted from business income in the course of preparing a
return of income for each year. In 2001, the total income generated by
supplying uniforms to Tex-Pro was $35,305.00. The net income was $24,142.00
which was divided equally between her and Ho before Nguyen took other personal
deductions. In 2002, total partnership income of Nguyen and Ho was $17,335.00
and in 2003 it was $26,030.00. Nguyen stated she was aware of the calculations
relied on by the Minister in the various Schedules but did not study them in
detail because she did not have the time. She pointed out that she did not pay
health care premiums – as assumed by the Minister – because her low income
entitled her to receive a subsidy but agreed the food and shelter estimates
were accurate because two of her children lived with her in 2002 and 2003 and
had contributed to household expenses. During the years under appeal, Nguyen’s
daughter - born in 1978 – worked as a nurse and her son - born in 1980 – worked
in a pizza shop. At one point, her daughter – Hai-Yen lived with her. Nguyen
stated she did not fully understand the basis of the calculations relied on by
the Minister to claim she had under-reported GST and also her business income
in 2001, 2002 and 2003 and asserted she had no other income and that her sole
source came from the supply of uniforms to Tex-Pro. She asserted that the
discrepancy between her net income and the amount she spent in each year under
appeal was attributable to the sum of approximately US$70,000 brought to Canada from Vietnam between 2001 and 2003 together with
contributions of her children and son-in-law to the household.
[8] Nguyen – was cross-examined by counsel for
the Respondent. The Appellant had been provided with all of the documents in a
binder – Tabs 1 to 24, inclusive - and agreed it should be filed as Exhibit
R-1. Nguyen stated she thought her mother’s property had been sold for about
4.2 million Dong which was about US$300,000 in late 2000. Nguyen recalled
attending an Examination for Discovery (“Discovery”) on October 1, 2007 and
that she had affirmed to tell the truth. Counsel referred the Appellant to a
transcript – page 56 – where she estimated her share of the sale proceeds was
about US$100,000 and that the sale price of her mother’s property in a resort
area called Vung Tau - was about $US800,000. Nguyen responded that she had
merely provided her best estimate of the sale price based on information
provided by her mother and that her siblings, some of whom still lived in
Vietnam received a smaller share of the proceeds because they had their own
houses and property and had already received the benefit of property that had
been in their mother’s family for generations. Counsel pointed out to Nguyen
that she testified at Discovery – page 55, question 412 – that the sale
proceeds had been divided equally into 8 parts. Counsel referred her to
testimony at Discovery – page 62, questions 466-469, inclusive – where she
stated that when she and Ho each brought money back to Canada, the sum was
limited to US$9,000 because if it had been US$10,000, it would have been
necessary to declare it to customs officials. Nguyen stated she had not been
asked by Canadian customs officials whether she was bringing currency into Canada. Nguyen agreed that according to the copy of the
airline tickets – Exhibit A-1 – that she and Ho and her daughter and son-in-law
together made 7 person-trips to Vietnam between February 15, 2001 and February
27, 2003 and that none of the money brought back to Canada had been deposited
to any account at any financial institution although some money – in amounts of
about $500.00 - was deposited after it had been converted to Canadian currency.
Nguyen stated she did not deposit the money into an account because she needed
to use it on a regular basis and in order to earn any interest she would have
been required to leave it intact for a certain period of time and any
withdrawals would have attracted a service charge. Nguyen identified the
following documents from Exhibit R-1, as follows:
·
Tab 1 – Statement of
Business Activities for 2001.
·
Tab 3 – Statement of
Business Activities for 2002.
·
Tab 4 – Personal
Account Statement Reconstruct on her Royal account for the period January 1,
2001 to December 31, 2002.
·
Tab 5 – Account
statement pertaining to the business account in the name of Cong Thi Nguyen for
the period from December 6, 2000 to January 5, 2001.
·
Tab 6 – Visa statements
issued by Royal from January 12, 2001 to May 1, 2003.
·
Tab 7 – Royal branch
history report pertaining to loan made to Nguyen.
·
Tab 8 – Royal history
report pertaining to Royal Credit Line account in the name of Nguyen.
·
Tab 9 – Mortgage
statements in respect of Royal mortgage on Nguyen residence for 2001 and 2002.
·
Tab 10 – Royal RRSP
investment account statements.
·
Tab 11 – Certificate of
Divorce issued by Court of Queen’s Bench, Province of Manitoba, certifying that as of December 28, 1990, the marriage of Nguyen
and Ho – March 26, 1975 - was dissolved.
·
Tab 12 – Copy of
purchase agreement – in joint names of Nguyen and her daughter Tran Ho (“Tran
Ho”) - for a 2001 Volkswagen which cost $23,300.00 and was financed 100%.
[9] Nguyen stated her daughter gave her money
to make the payments on the Volkswagen in addition to the sum of $500.00 for
room and board each month and the sums relating to the car payment and the
contribution to household expenses were deposited when convenient. Nguyen
stated it was difficult for her daughter to testify in Court because she lives
in Surrey and is expecting a baby soon. Nguyen
stated she did not recall the telephone interview with Baljeet Chahal
(“Chahal”) – an auditor employed by Canada Revenue Agency (“CRA”) - on July 6,
2004. Nguyen recalled an interview with Chahal and another auditor – Gurwinder
Hundle (“Hundle”) – and that her own accountant – Tina – was present
throughout. Chahal prepared typed notes – Tab 13 – and counsel referred Nguyen
to questions asked by Chahal – page C-7 – about the source of any non-taxable
funds and to the negative responses by Nguyen when asked if she had received
any inheritance, lottery winnings, gifts, money from gambling or any other
non-taxable source. Nguyen stated she understood that an inheritance required
the death of the donor and that her mother was alive. Counsel referred her to
page C-9 of the notes – where Chahal recorded a response that Nguyen received “10K”
– meaning $10,000 – in 1999 from selling property owned in Vietnam. Nguyen denied having made any such statement but
agreed she had not otherwise mentioned the source of any non-taxable funds.
With respect to monetary contributions to the household during the years under
appeal, Nguyen stated that her eldest child – Hai-Yen – lived at home only from
September 2002 to October, 2003 and paid a monthly amount when actually living
in Nguyen’s residence. Nguyen stated she asked her other children – Tien Ho
(“Tien”) and Tran Ho – to reproduce bank statements on their own accounts to
verify monthly withdrawals that they paid her for room and board but they
declined to do so because of the fee demanded by their financial institutions
to provide this service. Nguyen stated there were some deposits shown in the
statement – Tab 4 – that were in the sums of $500.00 or $1,000.00 and these
could have been attributable to room and board payments by one or more of her
children. In 2001, her son – Tien – was 19 and earned about $14,000.00 gross
income but earned only $8,698.00 in 2002. Counsel pointed out that if Tien paid
her $500.00 a month in 2002 - $6,000.00 for that year - it would have left him
with very little money for his other expenses. Nguyen stated that if Tien did
not have the money, he did not pay every month, especially when he was a
full-time student in 2003. Nguyen stated she understood that the category “Internet
payment” on the table – Tab 2 - represented the aggregate of various payments
and was not a single transaction. Nguyen stated she had reviewed the numbers
used by her accountant in preparing the GST returns in the income tax return
submitted for each year under appeal and was satisfied the information contained
therein was correct prior to signing her name on the original of each document.
The Appellant identified documents at Tab 21 - all GST returns during the relevant
period signed by her, and at Tab 22 – an unsigned copy of her 2001 T-1 General
return and at Tab 23 – an unsigned copy of her 2002 T-1 and at Tab 24 – an
unsigned copy of her 2003 T-1.
[10] Ho testified that he is self-employed and
lives in Surrey, British Columbia. He stated that during
three visits to Vietnam, Nguyen’s mother handed him the sum of
$10,000 cash in American currency which was the limit one person could take out
of that country. Most of the bills were in $100 denominations but some were $20
dollar bills. He went to Vietnam three times as documented by the airline
tickets included in Exhibit A-1. Each time, he left Vietnam
with US$10,000 but spent some money during stopovers in Taipei and Hong Kong. When he made one trip by himself, he carried the
money in his pocket and on his return to Vancouver handed the remaining amount – after some travelling expenses – to
Nguyen. He advised her to keep the cash in the house and to exchange it from
time to time as the value of the US dollar was increasing in relation to its
Canadian counterpart. He knew that Nguyen exchanged the American cash for
Canadian money as the rates increased. In his opinion, the number of
transactions required each month to provide Nguyen with money from a US dollar
bank account would have been too expensive and the banking fees to maintain
such an account would have exceeded the slight amount of interest paid on any
balance. Ho stated that even though Nguyen did not speak much English, she
could carry out banking and deal with financial matters. In his estimate, about
US$70,000 was brought into Canada – from Vietnam
– by himself, Nguyen and their daughter and son-in-law during a total of 7
trips by that group. Ho arrived in Canada as a refugee
in 1982 and knew the property owned by Nguyen’s mother near Ho Chi Minh City
(formerly Saigon) was old farmland and that it had become
valuable in recent years. He was not present at the meeting between Nguyen and
her accountant and the two CRA auditors but in his view the cash received by
and on behalf of Nguyen was not a gift in the normal sense that one would
classify presents of certain personal or luxury items. He identified the
Certificate of Divorce – Exhibit A-2 – which certified he and Nguyen were
divorced on December 28, 1990. When he worked with Nguyen in the uniform sewing
business during the years under appeal, Tex-Pro was their only customer. He
retained stubs of the pay cheques issued to him by Tex-Pro for his 50% share of
the price of product supplied. He kept Visa slips to record business-related
expenses and handed them to his accountant each year to prepare his personal
tax return. Ho stated he and Nguyen worked together until some point in 2004
and currently their status is that they “sort-of” live together.
[11] Ho was cross-examined by counsel for the Respondent.
Ho confirmed that 100% of his income from 2001 to 2003, inclusive, was from
Tex-Pro. During that period, he maintained his own bank account and played a
small role in connection with the operation of the Nguyen household. He was
aware Nguyen was using money brought to Canada from Vietnam
in order to meet her expenses. He stated it was necessary for himself and
Nguyen and their daughter and son-in-law to attend personally in Vietnam for
the purpose of taking away the maximum amount in US dollars per person – per
trip – because in order to have funds wired from Vietnam it is necessary to
have a registered business operating there which has a legitimate purpose for
sending money to another country. He stated that although he and Nguyen had
been divorced in 1990, they worked together in the sewing business, travelled
together and he stayed in her house sometimes because their children also lived
there at various times during the period at issue.
[12] Chahal testified she has been employed by
CRA as an auditor for 7 years. She performed the audit pertaining to the within
appeals and conducted the interview with Nguyen and prepared the notes at Tab
13 of Exhibit R-1. Chahal stated another auditor – Hundle - was present and
Nguyen’s accountant - Tina - participated in the discussions. Chahal stated Tina
spoke fluent English and acted as interpreter for her client – Nguyen – and was
fully aware of the purpose of the inquiry which was concerned with the
discrepancy between Nguyen’s reported income during 2001, 2002 and 2003 and the
amount she spent during that period. Chahal stated she asked Nguyen about any
money she may have received from non-taxable sources such as inheritances,
lottery and/or gambling winnings or gifts. Chahal noted Nguyen’s statement that
she received the sum of $500.00 every month from each of her three children and
had received a loan of $20,000 from her sister in 1999 – which had not been
repaid – and that she had sold a $10,000 property in Vietnam
that year. Chahal stated there was no representation made by Nguyen directly or
through her accountant that she had brought money into Canada
from Vietnam at any time during the years under audit.
Chahal stated that Nguyen – sometimes - understood the questions and answered
in English before Tina had an opportunity to interpret. Chahal stated that at
no time subsequent to that interview was any information provided to her about
the importation of funds from Vietnam. Chahal stated that in the course of
correspondence with Tina, it was apparent she understood the net worth process
and the purpose of the audit and that it was incumbent on Nguyen to disclose
the source of any non-taxable funds received during that period.
[13] The Appellant did not cross-examine.
[14] Thelma Weisser (“Weisser”) testified she is
employed by CRA as an Internal Auditor. She occupied the position of Appeals
Officer from January, 2004 to July 2006 and earlier in her career had served in
that capacity. She was the Appeals Officer assigned to Nguyen’s file and
reviewed the auditor’s working papers. Weisser stated she conducted a separate
net worth calculation and made various adjustments as shown on her working
papers in Exhibit R-1, Tab 18. On December 14, 2005, Weisser sent Nguyen a
6-page letter – Tab 16 – in which she provided a detailed description of the
adjustments she was prepared to make to the net worth schedules concerning the
income tax assessment and GST assessments. In said letter, Weisser advised
Nguyen the file would remain open until January 9, 2006 and that Nguyen could
make additional representations including by telephone to Weisser at her
office. Weisser wrote a 4-page letter – dated April 5, 2006 – to Nguyen in
which she advised there would be additional adjustments made to decrease the
net worth amounts calculated as the basis for both assessments – income tax and
GST - as a result of the representations made to her by Nguyen’s former
husband, Ho. Weisser stated she did not accept that Nguyen had received room
and board payments – as alleged or at all – from her children during the
assessment period. Weisser referred – at page 2 of her letter to Nguyen – Tab
17 – to representations made by Ho concerning the trips to Vietnam and the contention that each individual brought back
the sum of US$10,000 on his or her return. Weisser stated in said letter that
she would consider reducing the assessments if she could determine the funds
from Vietnam were deposited in her bank account at or
near the return dates of herself, Ho or other family members. Weisser stated
she had examined Nguyen’s bank statements and was unable to locate any
significant deposits that could be linked to funds brought from Vietnam. Weisser stated she based her net worth schedules on
the assumption that the opening value of Nguyen’s assets in 2000 were
$10,000.00 and made an adjustment of $18,500.00 because that sum had been
transferred into her account by Ho in 2001. She also took into account a 2001
loan - in the sum of $3,500.00 – that was repaid in 2003. Weisser stated the
net worth procedure was restricted to the income and expenditures of Nguyen
without any reference to Ho. Weisser stated she utilized actual documented
expenditures to calculate living expenses during the period under review rather
than relying on estimates or averages compiled by Statistics Canada. She
deducted car payments from the auditor’s calculations because there was a
corresponding decrease in liability on the car loan. Throughout the process of
reviewing the file, Weisser made further adjustments as explained in her
letters to Nguyen. She did not receive any representations from Nguyen or her
accountant with respect to the potential imposition of the gross negligence
penalties relating to the income tax and GST assessments. Weisser acknowledged
that the auditor did not find any other source of business income and that the
revenue received by Nguyen from Tex-Pro was easily verified and there was no
reason to question the accuracy and reliability of those sums. As a result, the
assessments issued by the Minister were based on the assumptions that the
additional money during 2001 to 2003, inclusive, must have been derived from
some taxable source other than the sewing business. Weisser stated the Minister
does not know the source of any additional income but proceeded on the basis
the discrepancy between reported income and expenditures in the absence of any
satisfactory explanation must have been attributable to the under-reporting of
both income and GST from some other taxable source. Weisser agreed that in the
Lower Mainland, it is not unusual to encounter situations where money is
brought to Canada from another country in Asia or South Asia. The difficulty she encountered was there had been no declaration to
Canada Customs of any money brought to Canada
and there was no documentation of any sort to demonstrate it had arrived in the
amounts claimed or at all.
[15] The Appellant did not cross-examine.
[16] The Appellant submitted she had not been
aware that she had an obligation to reveal the source of the funds brought from
Vietnam and had not regarded those funds as a gift
since they flowed from the disposition of property that had been in the family
for generations. The funds were not an inheritance as her mother was alive and
continued to act as trustee for the balance of her share of the sale proceeds
that remained in Vietnam under her mother’s control. In her
opinion, it was not unusual to deal in cash or to keep it in her residence.
[17] Counsel for the Respondent submitted the
assessments were based on net worth calculations which were performed correctly
in accordance with the general mechanics of a net worth assessment which was to
accept that money is spent to acquire assets, reduce liabilities and for
personal expenditures. Counsel conceded the Minister was not taking the
position that income received by Nguyen from supplying uniforms to Tex-Pro had
not been reported in full. Instead, the Minister had assumed there was
additional taxable income from some other source during the years under
assessment. He questioned the failure of Nguyen’s children to testify about
certain matters such as the amount and extent of their monetary contributions
to the household and pointed out that each time a reasonable explanation - with
supporting documentation – had been provided that Weisser was willing to make
an adjustment. Counsel referred to the discrepancy in Nguyen’s explanation at
Discovery and at trial concerning the amount of the sale proceeds from the Vietnam property and submitted it was reasonable to expect
she would have known precise details of that transaction and the large amount
of money – in relation to her annual net income – that she received as her
share. Counsel submitted the imposition of the gross negligence penalties was
justified in both instances since there was a 450% discrepancy in reported
income and the amounts ascertained by the net worth process and that the
evidence demonstrated that each assessment appealed from should be confirmed in
every aspect.
[18] The standard of proof required to demolish
the assumptions of the Minister in any net worth assessment is prima facie. In
the case of Michael S. Chomica v. Her Majesty the Queen, 2003 DTC
535, Bowman A.C.J.T.C. (as he then was) reviewed the applicable law and dealt
with recent developments in jurisprudence with respect to the onus of proof in
net worth assessment appeals. At paragraph 17, and following of his judgment, Justice
Bowman stated:
[17] The fundamental rule in income
tax appeals and that is that the taxpayer has the onus of demonstrating that
the factual assumptions upon which the assessment is based are wrong or do not
support the assessment. This rule is well settled and I need not repeat the
usual authorities that are traditionally cited in support of it. However the
standard of proof is a civil one and a prima facie case, if unrebutted,
will entitle a taxpayer to succeed.
[18] The law has been refined
somewhat since Johnston v. M.N.R. [3 DTC 1182], [1948] S.C.R. 486,
and specifically in Hickman Motors Limited v. The Queen, 97 DTC 5363
(S.C.C.), where L'Heureux-Dubé, J. said at pages 5376-7:
K. Onus of Proof
As
I have noted, the appellant adduced clear, uncontradicted evidence, while the
respondent did not adduce any evidence whatsoever. In my view, the law on that
point is well settled, and the respondent failed to discharge its burden of
proof for the following reasons.
It is trite law that in taxation the standard of proof is the
civil balance of probabilities: Dobieco v. M.N.R., [1966] S.C.R. 95,
and that within balance of probabilities, there can be varying degrees of proof
required in order to discharge the onus, depending on the subject matter: Continental
Insurance v. Dalton Cartage, [1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 DTC 1102
(T.C.C.) at p. 1106. The Minister, in making assessments, proceeds on
assumptions (Bayridge Estates v. M.N.R., 59 DTC 1098
(Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to "demolish"
the Minister's assumptions in the assessment (Johnston v. M.N.R., [1948] S.C.R.
486; Kennedy v. M.N.R., 73 DTC 5359
(F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact
assumptions made by the Minister but no more: First Fund Genesis v.
The Queen, 90 DTC 6337 (F.C.T.D.), at p. 6340.
This initial onus of “demolishing” the Minister's exact
assumptions is met where the appellant makes out at least a prima facie
case: Kamin v. M.N.R., 93 DTC 62
(T.C.C.); Goodwyn v. M.N.R., 82 DTC 1679
(T.R.B.). In the case at bar, the appellant adduced evidence which met not only
a prima facie standard, but also, in my view, even a higher one. In my
view, the appellant “demolished” the following assumptions as follows: (a) the
assumption of "two businesses", by adducing clear evidence of only
one business; (b) the assumption of
“no income”, by adducing clear evidence of income.
The law is settled that unchallenged and uncontradicted evidence “demolishes”
the Minister's assumptions: see for example MacIsaac v. M.N.R., 74 DTC 6380
(F.C.A.), at p. 6381; Zink v. M.N.R., 87 DTC 652
(T.C.C.). As stated above, all of the appellant's evidence in the case at bar
remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions
of “two businesses” and “no income” have been “demolished” by the appellant.
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: Maglib Development Corp. v. The
Queen, 87 DTC 5012 (F.C.T.D.), at p. 5018. Hence, in the case at bar, the
onus has shifted to the Minister to prove its assumptions that there are “two
businesses” and “no income”.
Where the burden has shifted to the Minister, and the Minister
adduces no evidence whatsoever, the taxpayer is entitled to succeed: see for
example MacIsaac, supra, where the Federal Court of Appeal set aside the
judgment of the Trial Division, on the grounds that (at pp. 6381-2) the “evidence
was not challenged or contradicted and no objection of any kind was taken
thereto”. See also Waxstein v. M.N.R., 80 DTC 1348
(T.R.B.); Roselawn Investments Ltd. v. M.N.R., 80 DTC 1271
(T.R.B.). Refer also to Zink v. M.N.R., supra, at p. 653, where, even if
the evidence contained “gaps in logic, chronology and substance”, the
taxpayer's appeal was allowed as the Minster failed to present any evidence as
to the source of income. I note that, in the case at bar, the evidence contains
no such “gaps”. Therefore, in the case at bar, since the Minister adduced no
evidence whatsoever, and no question of credibility was ever raised by anyone,
the appellant is entitled to succeed.
In the present case, without any evidence, both the Trial Division
and the Court of Appeal purported to transform the Minister's unsubstantiated
and unproven assumptions into “factual findings”, thus making errors of law on
the onus of proof. My colleague Iacobucci, J. defers to these so-called
“concurrent findings” of the courts below, but, while I fully agree in general
with the principle of deference, in this case two wrongs cannot make a right.
Even with "concurrent findings", unchallenged and uncontradicted
evidence positively rebuts the Minister's assumptions: MacIsaac, supra.
As Rip, T.C.J., stated in Gelber v. M.N.R., 91 DTC 1030,
at p. 1033, “[the Minister] is not the
arbiter of what is right or wrong in tax law”. As Brulé, T.C.J., stated in Kamin,
supra, at p. 64:
. . . . .
the
Minister should be able to rebut such [prima facie] evidence and bring
forth some foundation for his assumptions.
. . . . .
The
Minister does not have a carte blanche in terms of setting out any
assumption which suits his convenience. On being challenged by evidence in
chief he must be expected to present something more concrete than a simple
assumption. [Emphasis added.]
In
my view, the above statement is apposite in the present case: the respondent,
on being challenged by evidence in chief, failed to present anything more
concrete than simple assumptions and failed to bring forth any foundation. The
respondent chose not to rebut any of the appellant's evidence. Accordingly, the
respondent failed to discharge her onus of proof.
I
note that, in upholding the Minister's unproven assumptions, my colleague
Iacobucci, J. may be seen as reversing the above-stated line of caselaw,
without explicitly providing the rationale for doing so. With respect for the
contrary opinion, in my view, changes in the jurisprudence regarding the onus
of proof in tax law should be left for another day. Furthermore, on the facts
of the case at bar, sanctioning the respondent's total lack of evidence could
seem unreasonable and perhaps even unjust, given that the appellant complied
with a well-established line of jurisprudence as regards its onus of proof.
[19] With respect to the task of weighing
credibility of witnesses and the need to look at all the evidence to determine
whether a prima facie case established by the Appellant had been
rebutted, Justice Bowman – at paragraph 19 – stated:
[19] In this case we have the
appellant's testimony that he did not earn commissions of $134,712 US from
Hi-Tech Trading Corporation and earned no more than about $20,000 for what he
did, which did not involve selling. He was, it is true, cross-examined so that
I do not think counsel for the respondent was precluded from questioning his
credibility in argument on the basis of Browne v. Dunn (1893), 6 R. 67 (H.L.)
at pages 70-71, discussed at length in The Law of Evidence in Canada,
second edition, (Sopinka, Lederman and Bryant) at pages 954-957. I do not
think, however, that the cross-examination destroyed the prima facie
made out by the appellant in his examination in chief. I may entertain some
lingering doubts about the appellant's reliability as a witness but it would
take more than suspicion for me to say that he was lying under oath. As I said
in 1084767 Ontario Inc.(c.o.b. Celluland) v. Canada , [2002] T.C.J.
No. 227:
8.
The evidence of the two witnesses is diametrically opposed. I reserved judgment
because I do not think findings of credibility should be made lightly or,
generally speaking, given in oral judgments from the bench. The power and
obligation that a trial judge has to assess credibility is one of the heaviest
responsibilities that a judge has. It is a responsibility that should be
exercised with care and reflection because an adverse finding of credibility
implies that someone is lying under oath. It is a power that should not be
misused as an excuse for expeditiously getting rid of a case. The
responsibility that rests on a trial judge to exercise extreme care in making
findings of credibility is particularly onerous when one considers that a
finding of credibility is virtually unappealable.
[20] In the case of Anthony A. Ramey
v. Her Majesty the Queen, 93 DTC 791, Bowman T.C.C.J. considered an appeal
by a taxpayer who was faced with the task of challenging a net worth assessment
issued against his deceased father. At page 793, Chief Justice Bowman stated:
I am not unappreciative of the enormous, indeed virtually
insuperable, difficulties facing the appellant and his counsel in seeking to
challenge net worth assessments of a deceased taxpayer. The net worth method of
estimating income is an unsatisfactory and imprecise way of determining a
taxpayer's income for the year. It is a blunt instrument of which the Minister
must avail himself as a last resort. A net worth assessment involves a
comparison of a taxpayer's net worth, i.e., the cost of his assets less his
liabilities, at the beginning of a year, with his net worth at the end of the
year. To the difference so determined there are added his expenditures in the
year. The resulting figure is assumed to be his income unless the taxpayer
establishes the contrary. Such assessments may be inaccurate within a range of
indeterminate magnitude but unless they are shown to be wrong they stand. It is
almost impossible to challenge such assessments piecemeal. The only truly
effective way of disputing them is by means of a complete reconstruction of a
taxpayer's income for a year. A taxpayer whose business records and method of
reporting income are in such a state of disarray that a net worth assessment is
required is frequently the author of his or her own
misfortunes. Mr. Boudreau stated that Mr. Allan Ramey's records
were inadequate, that he had a history for years prior to 1981 of being
assessed on a net worth basis and that his business, that of owning coin
operated machines, such as pinball machines and slot machines of various types,
was cash based and was therefore difficult to audit. The Minister had no
alternative but to proceed as he did. While I have sympathy for someone
in the position of the appellant whose liability for his father's tax is
secondary, I can see no basis for adjusting the assessments made against his
father to any greater degree than that to which the respondent has already
agreed.
[21] The within appeals do not arise as a
consequence of non-existent or sloppy - to the point of negligence, ordinary or
gross – since the Minister is satisfied that the income earned by the Appellant
from her 50% share of revenue derived from supplying uniforms to Tex-Pro was
accurately recorded and reported in the Appellant’s income tax returns for the
years under appeal. The Minister did not quarrel with the expenses deducted and
was not alleging the Appellant had earned additional revenue from Tex-Pro and
had no evidence to support the assumption that the discrepancy between her
income and expenditures was attributable to another taxable source of income.
The facts in the within appeals are not like those in other net worth cases
where the taxpayer was operating a cash business or was able to issue a second
set of invoices to be paid to another entity or where revenue was deposited in
other locations at one or more financial institutions. Even during the last few
years when credit cards and pre-paid cards are ubiquitous and there is a
panoply of goods and services that may be obtained by using the internet, there
are still certain types of businesses that operate more or less on a cash basis
and some may have access to certain sophisticated software capable of fudging
the total of sales receipts. In those situations, it is obviously difficult for
an Appellant to demonstrate that the methodology of the Minister utilized as a
basis for the assessment is incorrect particularly if there are little or no
records maintained by the taxpayer and those that are submitted for examination
are unreliable for a variety of reasons.
[22] In the within appeals, I am aware that Nguyen
denied to the auditor that she had brought a considerable amount of money into Canada between 2001 and 2003.
[23] However, that information was presented to
the Appeals Officer who – understandably – required some proof other than a
bald assertion to that effect by Ho, the Appellant’s former business partner
and former spouse. The evidence of Nguyen that Tex-Pro was the sole source of
her income during the years under appeal was not challenged by the Minister nor
was the evidence of Ho who testified he had no other income and that the amount
received from Tex-Pro constituted the entire business revenue of Nguyen and
himself. There was a substantial discrepancy between Nguyen’s reported income
and her expenditures in the three years subject to the net worth assessments.
According to the calculations relied on by the Minister, Nguyen must have had
access to $156,035.96 during that period in order to spend the money that the
auditor and Weisser – Appeals Officer – were able to track based on hard evidence
in the form of certain documents or financial records. The evidence of Nguyen
and Ho was that they each made two trips to Vietnam
and Ho went there once by himself. On each occasion, they arrived in Vancouver
with close to US$10,000 since some was spent on their return and their daughter
and son-in-law each returned to Canada from Vietnam
with a similar sum. According to the testimony of Nguyen and Ho, it is
reasonable to find that approximately $67,000 obtained from Nguyen’s mother in
Vietnam found its way to Canada since their cash expenditures on the
return trips were modest according to the testimony of Ho. There was no
evidence presented as to the rates of exchange for American and Canadian
dollars but one can take judicial knowledge that the Canadian dollar was well
below par in relation to the US dollar during the relevant period. Following a
Google search, I was directed to a website titled “Canada/US Foreign Exchange
Rates”
and the source was the Board of Governors of the Federal Reserve System which
quoted noon buying rates in New
York City for cable transfers
payable in foreign currencies. According to the information from said source,
the US dollar was worth CDN$1.52 on February 1, 2001 and the rate on December
1, 2001 was CDN$1.57. The average rate of exchange for that 11-month period was
CDN$1.55. On January 1, 2002, the rate was CDN$1.59 – the highest for the year
– and on December 1, 2002 it was CDN$1.55. The average rate of exchange that
year was CDN$1.57. On January 1, 2003, the rate was CDN$1.54 – the highest
during that year – and on December 1, 2003 it was CDN$1.31. The average rate of
exchange over the course of 2003 was CDN$1.40. An average rate of exchange over
the course of that 3-year period – less one month – was CDN$1.50. The Appellant
exchanged money regularly in fairly small amounts and monitored the exchange
rate and to some extent relied on the advice of Ho as to the most efficient
method of dealing with the money that was brought to Canada over the course of
more than 2 years. Although there is some guesswork involved, I believe it is
reasonable to infer that the Appellant received approximately CDN$1.48– after
paying exchange commissions – for each US dollar she converted to Canadian
currency during the relevant period. Therefore, between April 7, 2001 – the
date of the return to Canada by Nguyen and Ho - and February 27, 2003 –
the date of Ho’s return from Vietnam and the ongoing expenditure of that
accumulation of money until it ran out at some point, Nguyen would have had the
benefit of between $99,000 and $101,000 Canadian dollars.
[24] On the basis of the testimony of Nguyen and
by perusing some of her bank statements, I am satisfied that at least two – and
sometimes three – of Nguyen’s children each paid her the sum of $500.00 per
month on a fairly regular basis during a substantial part of that three-year
period and these funds were available to Nguyen to operate the household or to
expend on personal items.
[25] In order to find that the gap between
reported income and expenditure must have been derived from a taxable source, I
would have to reject totally the evidence of Nguyen and Ho and to disregard the
evidence concerning the primary purpose of those 7 trips to Vietnam taken by them and their daughter and son-in-law. I do
not draw any adverse inference against the Appellant for not producing her
children as witnesses. She offered an explanation and while it appears her
children did not appreciate the seriousness of the litigation, neither did
Nguyen until the matter had proceeded to the point where she filed an appeal to
this Court against both the income tax and GST assessment. The Minister
conceded the extra money was not derived from supplying uniforms to Tex-Pro.
The CRA auditor was aware Nguyen did not have any inventory and that everything
needed to produce the uniforms was supplied by Tex-Pro except for the sewing
machines and other tools situate in the working space within the Nguyen
residence. The purchases which were the subject of Input Tax Credits (ITCs) were
mainly composed of thread and some fabric. When the auditors – Chahal and
Hundle – toured the Appellant’s premises in July, 2004, Chahal’s notes (Exhibit
R-1, Tab 13, page C-11) indicate there were no advertisements, price lists, cash
register tapes, invoices, et cetera and there was no inventory. Chahal noted
that Nguyen had 3 work stations with sewing machines in a small room comprising
about 140 square feet.
[26] The burning question is this: where did all
that extra money come from. The assumptions of the Minister are that the
business revenue of the Appellant was as stated in Schedule G, attached to the
Reply to the GST appeal. According to the calculations resulting from Weisser’s
independent analysis of all the relevant material and information, Nguyen –
personally – made taxable supplies in the sums of $144,000.15, $78,566.93 and
$75,047.86 during the taxation years 2001, 2002 and 2003, respectively. Since
the Minister accepts that she was operating the sewing business pursuant to a
50-50 partnership with Ho, those large amounts represent only her share of said
taxable supplies during that period. There is absolutely no evidence to support
such an assumption and the Minister is satisfied the money earned by supplying
uniforms to Tex-Pro was accurately reported and – it bears repeating – has no
clue as to the source of any alleged additional taxable revenue.
[27] It is often difficult for a taxpayer to
discharge the onus of establishing a prima facie case and it is nearly
impossible to prove the negative except to testify that there was no extra
source of income during the relevant period and to provide an explanation that
will serve to explain – to a varying extent depending on the circumstances of
each case – the discrepancy between income – taxable and non-taxable – and
total expenditure. Having regard to all of the evidence and the nature of the
business and the personal circumstances of Nguyen and her background, it is not
reasonable to assume that she was able to earn these substantial amounts.
Instead, it is reasonable to assume that without the financial assistance of
her children and the money received from her mother in Vietnam,
she would not have been able to live. Based on the evidence, her English is not
sufficient for her to conduct a relatively large-scale enterprise on her own
and she needed the assistance of Ho – her former spouse – to deal directly with
Tex-Pro and to deliver the uniforms.
[28] The Appeals Officer – Weisser – conducted
an extremely fair review of the matters and on each occasion when she was able
to do so - based on reliable evidence - made adjustments in favour of the Appellant.
To a large extent, the Appellant was responsible for this litigation. Her
chosen method of dealing with financial matters was such that the secrecy
surrounding the importation of the money to Canada
on several occasions – in the form of cash – and the numerous transactions to
exchange those funds to Canadian currency and the extent of her personal
spending was an invitation to serious scrutiny by CRA.
[29] Even though as noted in Chomica, supra,
by way of reference to the Zink case, there are some “gaps in logic,
chronology and substance” in the evidence adduced by the Appellant in the
within appeals, the Minister was not able to present any evidence as to another
source of her income and was unable to rebut the prima facie case made
out by her that the amounts she earned from sewing and uniforms and supplying
them to Tex-Pro constituted her sole source of business income.
[30] For the reasons, stated herein, and in
accordance with the established jurisprudence, I have concluded that neither
assessment can stand and both appeals are hereby allowed. The GST assessment
issued by way of the numbered notice described in paragraph 2 of the Reply -
pursuant to the Act is hereby vacated. The assessment issued pursuant to
the ITA is also vacated.
[31] The Appellant was self-represented and
considering that the same net worth assessing method was at issue in both
appeals, I award her costs in the fixed sum of $500.00.
Signed at Vancouver, British Columbia, this 18th day of December, 2008.
“D.W. Rowe”
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