Citation: 2007TCC553
Date: 20070913
Docket: 2006-3716(IT)I
BETWEEN:
MUNIR ALTAMIMI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1] In the years in
question, the taxpayer operated a barber shop. The Canada Revenue Agency believed
he had under-reported his income from his business. CRA was not satisfied it
could conduct an audit of the business based upon the business records produced
and so proceeded with what is commonly referred to as a net worth assessment.
[2] This informal appeal
gives rise to three issues:
1) Are the net worth assessments correct?
2) If the taxpayer’s income was under-reported, was the
assessment of penalties by CRA appropriate or did the taxpayer exercise “due
diligence” to try to properly report and comply; and
3) The reassessment for the 2000 taxation year was beyond
the normal reassessment period and will only be valid if the taxpayer made a
misrepresentation in reporting his income that is attributable to neglect, carelessness
or wilful default.
[3] The Court
acknowledges both the correctness and the fairness of Crown counsel in raising
items 2 and 3 above even though they do not appear to have been raised directly
by the taxpayer in his notice of appeal.
Onus/burden of proof:
[4] The onus or burden of
proof to satisfy the Court that the amounts assessed under the net worth method
are incorrect is on the taxpayer. This is like the onus with respect to any
other assessment challenged by a taxpayer. The onus or burden of proof to
satisfy the Court that the taxpayer’s original reporting of his income warrants
the assessments of penalties, and entitled the CRA to reassess the 2000 year
after the normal reassessment period had expired, is on the Crown.
The reassessments:
[5] The additional income
reassessed in each of the years 2000, 2001 and 2002 is $17,079, $19,094 and
$30,129 respectively. This is a total of $66,302 of income. In addition to the
tax, penalties for each of those three years in the amounts of $1,627, $1,530
and $1,800, for a total of $4,957 were assessed. The amounts originally
reported by the taxpayer as his net income from the barber shop business was
$372 in 2000, being his first part year in business and $5,891 in 2001. It is impossible
to determine from the information in the documents before the Court what the
2002 net income originally reported was although the gross income reported was
$10,000. The CRA “Option C” printouts for the taxpayer’s taxation years do not
clearly provide this information and, when the CRA auditor was asked to
explain, clarify or reconcile these numbers, it was clear that the
reassessments were not summarized in a consistent fashion in the Option Cs for
these three years.
The taxpayer:
[6] The taxpayer had
recently immigrated to Canada as a refugee in the period prior to the years in
question. He had arrived in Canada in 1995 with virtually no personal possessions or
household goods. There was no testimony as to whether he had financial assets
or resources at the time he immigrated to Canada.
[7] The CRA auditor
testified that both the taxpayer and his spouse were cooperative with his audit
from the outset and throughout. The taxpayer and his spouse testified that
their home was very sparsely furnished, largely with other people’s cast-offs
with the exception of an apartment-sized washer/dryer unit and a microwave that
they had purchased new. They did not have couches in their living areas.
Instead, they had mattresses on the floor which doubled as beds for themselves,
their three children, the taxpayer’s mother who was ailing and resided with
them and one or more of the taxpayer’s brothers who also shared the home at
various times during the period in question and before. The taxpayer and his
spouse received social assistance and attended at community food banks in the
years in question. Their home was subsidized social housing.
[8] The evidence of the
considerable sparseness of their home furnishings was corroborated by the
evidence of a friend of the taxpayer and his spouse who had known them
throughout that period, and had visited their home. She was also, coincidentally,
an employee of the Canada Revenue Agency. This is also consistent with the
taxpayer and his spouse having invited the CRA auditor to their home when he
commenced the audit and again when he decided to proceed to a net worth audit
review. The CRA auditor did attend their home and, when asked in
cross-examination, could not contradict the evidence regarding the home’s
furnishings.
[9] The taxpayer
testified that his barber shop business was very slow in the years in question
and he called the successor barber in that location as a witness to testify
that the business continues to be slow. Haircuts are $9 apiece. The taxpayer’s
witness and friend who worked at CRA also confirmed that she was outside the
barber shop numerous times in the years in question, usually around 3:30 to 4:30
as her bus stop was nearby. It was her testimony that the barber shop appeared
very quiet.
[10] The taxpayer testified
that, in order to comply with his income tax reporting obligations, he retained
and paid a tax return preparation service in each of the years in question to whom
he provided what he believed were adequate books and records to prepare an
income computation for his barber shop business. From the testimony it sounded
like the records were more in the nature of sales receipts and receipts for
expenses than any formal books, schedules or ledgers. The taxpayer said his tax
return preparer, who held himself out as somewhat knowledgeable and experienced
in the business, told him to simply estimate the total amount of his revenue
and the total amount of his expenses in 2001 and 2002. The taxpayer did receive
back from the tax return preparer his sales and expense receipts that he had
provided but did not receive a copy of any schedule or other information
assembled by the tax return preparer.
[11] According to the CRA’s
witness, its records are that a paper return was filed in 2000 whereas an
electronic return was filed 2001 and 2002. The taxpayer testified that his tax
return preparer had since gone out of business and was unable or unwilling to
provide him with any information or documentation requested from his files for
those years. CRA confirmed it had received a profit and loss statement for the
2000 year and that it would not expect to have and did not receive one for the
later years which were electronically filed. Neither party provided the Court
with a copy of the 2000 profit and loss statement. Neither party provided the
Court with a copy of any detailed information or summary or actual copies of
any sales receipts or expense receipts.
[12] The taxpayer testified
that he provided to his tax return preparer each year the same financial
records that he provided to the CRA auditor and that, in the taxpayer’s view,
these records were such that they both could and should have enabled the tax
return preparer to compute his income from the barber shop and enabled the CRA
to properly audit his income reported.
[13] It can be observed that
at $9 per haircut, in order for the taxpayer to have earned an additional
$66,000 of income from his barber shop business in the three years in question,
an additional 7,000 haircuts would have had to have been performed and not
reported. This would be more than 2,400 haircuts each year which translates to
approximately 50 a week or 10 a day. Assuming each haircut takes about a half-an
hour, this would have required the taxpayer to have his cash register turned
off and his shop full for an additional five hours each week day. This strikes
me as unlikely given the evidence of low activity in what was described as a “plain
old barber shop”. The barber shop’s low level of activity was corroborated by the
taxpayer and all three of his witnesses, the barber who worked with him and now
operates the business, his wife and his friend the CRA employee. The CRA
auditor had also attended at the barber shop and could not, when asked in
cross-examination, provide any evidence or recollection to the contrary.
CRA auditor’s testimony:
[14]The CRA auditor testified
that the taxpayer was very cooperative throughout the audit. When he commenced his
audit, he asked for a copy of the books and records to allow him to audit the
income reported from the barber shop business. Since the taxpayer could not
obtain any records from the tax return preparer he had used, he did provide the
auditor with what were described as two grocery bags of sales and expense
records. The auditor told the taxpayer it was not his job to assemble books and
records and income statements from such supporting documents, it was the
taxpayer’s responsibility. The taxpayer’s position appeared to be that those
were his books and records, that is what was used and that is therefore what
should be audited. If that involved additional work, that formed part of the
CRA’s audit. The taxpayer did agree with the auditor to put the records
together better but the auditor remained unsatisfied. The auditor did review
the records provided to the extent of totalling the sales receipts and
identifying discrepancies in each of the years in question between the gross
revenue reported by the taxpayer in his returns and the sales receipts totals as
computed by him from the taxpayer’s daily sales book. In 2000 this discrepancy
was an over-reporting of gross income of less than $150 which CRA concluded was
immaterial. The discrepancy for 2001 was slightly in excess of $4,000 and for
2002 was slightly in excess of $2,300. There was no evidence from the CRA
auditor that he tried to otherwise test or identify gross revenues. There was
virtually no evidence that he audited or attempted to audit the expenses or
expense receipts. If he did deal with them to any greater extent, that was not adequately
brought out in his testimony. I am sympathetic to CRA auditors’ frustrations
when faced with books and records kept in shoeboxes or grocery bags and not
assembled into schedules or ledgers or statements. However, if they are not
dealt with by CRA at the audit stage, they move on to have to be dealt with by
CRA appeals officers, Department of Justice lawyers, and, too often, this
Court.
[15] The CRA auditor testified
that, having identified the material discrepancies between the gross sales
reported and the sales based on the taxpayer’s working papers, he concluded
that the books and records maintained by the taxpayer did not permit him to
audit the business and proceeded to a net worth assessment of the taxpayer.
Net worth assessments:
[16] Net worth assessments are
necessarily default processes relied on in circumstances where, due to the state
of the taxpayer’s books and records, or otherwise, the income reported by a taxpayer
cannot be audited in the ordinary course. Net worth audits and assessments are
probably by definition unsatisfactory and are undoubtedly imprecise tools for
measuring income. They have been described as “a last ditch attempt to
establish a fair basis on which to assess in the absence of acceptable bookkeeping
records” in Urchyshyn v. MNR, 71 DTC 234 (T.A.B.), as being “in reality
a makeshift method” in Zagumeny v. MNR, 63 DTC 718 (T.A.B), and as a
“blunt instrument” of last resort in Ramey v. MNR, 93 DTC 791 (TCC). Nonetheless,
they may prove necessary and CRA may assess taxes on that basis. Once assessed
on a net worth basis, it is open to the taxpayer to proceed to CRA Appeals and
this Court with a view to either (i) establishing what the income from the
business or other source was based upon acceptable evidence, or (ii) challenging
the components and inputs and the related assumptions used by CRA in making its
net worth calculations to support the assessments in question: Fortis v. MNR,
86 DTC 1795 (TCC).
[17] Described simply, the
methodology followed by CRA in preparing a net worth assessment involves
several steps for a particular taxation year. Firstly, CRA has to determine
what the taxpayer’s net worth was at the end of the immediately preceding year.
In the taxpayer’s case, this necessitated CRA to determine his net worth at the
end of 1999. CRA then goes on to determine the taxpayer’s net worth at the end
of the relevant taxation years, in this case 2000, 2001 and 2002. This allows
CRA to determine the increase in net worth of the taxpayer in the years in
question which is presumed to have come from the taxpayer’s sources of income used
in its broadest sense, reported or otherwise, taxable or not. The CRA
calculates the net worth at the end of each year by assembling a balance sheet
that reflects the known and identified assets and liabilities of the taxpayer,
both business and personal. This is shown in Schedules I and II of Exhibit
R-4 which is CRA’s calculations of the taxpayer’s increase or decrease in net
worth over the periods in question.
[18] In this case, CRA’s
calculation of the taxpayer’s increase in net worth over the three years was $1,750.80
in 2000, $1,882.70 in 2001 and $7,679.78 in 2002. (One has to question the use
of the cents columns in net worth assessments). Much of this could be
attributable to the fact that $6,300 of “household assets” are listed by CRA in
his 2000 and subsequent personal assets but were not listed in his 1999 year-end
personal assets. These “household assets” or furnishings were acquired in 1999
according to the taxpayer. The balance is explained by the taxpayer’s evidence
as liabilities in the form of debts that CRA’s schedules do not reflect including
student loan debt, credit card debt, bank debt and borrowings from family
members.
[19] The second step in computing
a net worth assessment involves the CRA determining the total personal spending
of the taxpayer, or himself and his household, on the assumption those
expenditures were also funded by the taxpayer and his family members out of his
sources of income broadly defined, reported and unreported, taxable or not. The
initial inputs to assemble this are prepared by taxpayers using CRA’s Personal
Expenditure Worksheet which asks taxpayers to identify by various categories of
food, shelter, transportation and clothing, etc. what amounts they are
spending. This Worksheet is Exhibit R-3. CRA then reviews this Worksheet and
prepares its own Summary of Personal Expenditure, which is Schedule IV of
Exhibit R-4, making revisions the CRA auditor feels appropriate based on his
audit.
[20] In this case, the
initial Personal Expenditures Worksheet (Exhibit R-3) was prepared at the
request of the CRA auditor. The taxpayer’s wife filled it out. She testified
that she had been told by the CRA auditor that in completing this form “the
more the better” and that approach would help her husband’s case. It was clear
from her testimony that she understood this to mean the greater the amount
estimated the better the results would be. She did not understand that the
greater the amount estimated the greater her husband’s problems would be. While
he did not testify to this point, although he was asked in cross-examination,
the CRA auditor must have meant to convey that the more information
provided the better. In any event, the taxpayer insisted that this entire
worksheet was prepared incorrectly by her because of her incorrect
understanding.
[21] In terms of specifics,
she was able to point to the annual expenditure on telephones of $3,000 and on
tobacco of $2,640 as being significantly overestimated. Her testimony was that
she only smoked one-half pack per day and her husband testified he did not
smoke. Mrs. Altamimi also testified that she had overstated the telephone
in the initial worksheet at $3,000 per annum and that it would more accurately have
been estimated to have been in the range of $50 to $60 per month. There was no
corroborating evidence on the telephone expenditures. The information the CRA auditor
obtained from Statistics Canada (Exhibit R-7) for an average Canadian family of
five had approximately $1,000 per year for telephone.
[22] The taxpayer and his
wife also disputed several other revisions made by the CRA auditor in revising
the information provided by the taxpayer’s wife in the Personal Expenditures
Worksheet for purposes of Schedule IV of his net worth assessment papers. There
were three items specifically disputed.
[23] Firstly, the CRA
auditor increased their 2001 gifts and contributions by the amount of $1,129 on
the basis that it was an additional gift they had made to a relative. The auditor’s
testimony was unclear although he referred to his records. His testimony was
very confused as to whether he was dealing with a gift received by the taxpayer
or a gift made by the taxpayer. The taxpayer and his wife testified consistently
that this related to the repayment of a loan her grandfather had advanced them.
[24] Secondly, the taxpayer
and his spouse disagreed with the increase in their 2000 and 2002
transportation amounts from the $6,600 estimated in their worksheet. These were
increased by $1,620 by the CRA auditor for 2000 and $715 for 2002. The taxpayer
and his spouse testified that the 2002 amount represented a repayment to her
grandfather of monies borrowed to repay the debt owing to the Government of
Canada for the taxpayer’s airfare upon immigration to Canada and that the 2000
amount related to the repayment of a Zellers card debt for earlier air travel
in a prior year. Since both of these would, on this view, represent the
repayment of debt for transportation expenses incurred in prior years, they
should not have been reflected in the annual summary of personal expenditures for
the years in question (although they perhaps should have been reflected in the Schedule
III liabilities).
[25] Lastly, the taxpayer
disputes the addition by the CRA auditor of $2,650 in each of 2001 and 2002 for
student loan repayments of principal and interest. Firstly, such amount is at
odds with the amount of $500 which they listed under miscellaneous/interest on
their Personal Expenditures Worksheet. The testimony of the taxpayer’s wife was
that they paid $50 a month, which would be $600 a year. The CRA auditor’s
testimony was that he did not put the student loan on the balance sheet in
Schedule II because he was unaware of it at the time he prepared that portion.
He instead put the principal and the interest through as an adjustment to the
personal expenditures. By adding it to the Summary of Personal Expenditures
Schedule IV, the CRA auditor is acknowledging that there was a student loan. He
testified that he did confirm with the financial institution that it was only
taken out in 2001 and for that reason he reduced the 2000 estimate of $500 from
the taxpayer’s worksheet to zero for 2000 to the taxpayer’s benefit.
[26] The next step in issuing
a net worth assessment involves adding (i) the increase in net worth,
(ii) the personal expenditures and (iii) expenditures by the taxpayer
and his contributing family members, in this case his spouse, on Canada Pension
Plan, employment insurance and income tax paid. This total provides an estimate
of the income or cash spent by the taxpayer and his contributing family members
in each year in question.
[27] The next step, also on
Schedule III of Exhibit R-4, involves deducting all of the known and reported
sources of income that would have been available to the taxpayer and his spouse
to meet their spending in the years in question. In addition to the taxpayer’s
reported income and the spouse’s reported income, are added income tax refunds,
GST credits, child tax benefits, gifts from family members, etc. In this case,
the only family member contributing to his family’s household expenses that was
accepted by CRA was his spouse. He did not document for CRA any sources of
income to his mother from which she could have contributed, nor did he document
any gifts or contributions from his mother. The same was the case with respect
to his brothers who at times lived with them. The taxpayer did not bring any
evidence of any such sources of income from his mother or brothers to Court.
[28] In cross-examination,
Crown counsel put to the taxpayer’s wife a revised Personal Expenditure Worksheet
(Exhibit R-9) which she had prepared subsequent to the one relied upon by the
CRA auditor showing significantly reduced numbers. This had been prepared
during the course of the taxpayer’s administrative objection process with the
CRA. The Crown did not use this schedule to directly challenge her on
credibility nor did he do so in argument. She explained that the revised
worksheet more accurately estimated their expenditures in the years in
question. Indeed, it appears to me that it would have eliminated the net worth
assessments for 2000 and 2001 and would have reduced 2002 to about $6,000 of
under-reported income. She also explained that the appeals officer had heard
her explanation of misunderstanding what the CRA auditor had meant by “the more
the better” and had asked her to prepare this. She also testified that,
following his review of this schedule and their objection, the appeals officer
proposed a reassessment that would have reduced the under‑reported income
for the years in question by approximately one-half.
[29] In the net worth computations,
Schedule III showed the spouse’s reported income at $1,563, $392 and $8,217 in
the years 2000, 2001 and 2002, respectively. The CRA auditor testified that
these amounts came out of CRA’s summary information available to him in the
CRA’s Option Cs for the spouse (Exhibit R‑8). However, in
cross-examination, Crown counsel brought out from the spouse that those amounts
were significantly less than her actual income in 2000 and 2001 by
approximately $1,500 in 2000 and by approximately $5,600 in 2001. She deferred
to him as having the best information available of her tax years with answers to
the effect of “you say so” and “you’re CRA”. The Crown carried on looking for
confirmation or corroborative evidence that her income in those two years was
greater. Having refreshed her memory with a review of some of the papers at her
counsel table, she testified that the higher numbers Crown counsel put to her appeared
correct. Whatever she looked at was not put in evidence by either party. It is
not entirely clear to me why the Crown brought out this evidence as he did not
challenge her credibility in argument although, on this point, his questioning
of her appeared to challenge her credibility. He was perhaps responding to
numbers put to the CRA auditor in cross-examination by the taxpayer. In any
event, if her income in any of the years in question was in fact higher than
that used by the CRA auditor in his Schedule III, this would have the effect of
further reducing the net worth assessments for under-reported income.
[30] There were several
shortcomings in the evidence before the Court. Most notably, the taxpayer did
not provide the Court with any documents corroborating his version of any of
the items he took issue with. This may well have caused him to lose this appeal
entirely had CRA’s evidence gone in better or had he not called credible
corroborating witnesses. Nonetheless, it has made the Court’s deliberations
more difficult than perhaps they needed to be.
[31] Further, the
differences between the amounts estimated by the taxpayer’s spouse in her first
and second Personal Expenditures Worksheets are so large that I must conclude
that, in at least one of them, she did not attempt to make reasonable estimates
but gave in to temptation and wishful thinking.
[32] There was also
significant confusion or errors in the Crown’s evidence. Key concerns are:
(i)
The
auditor admitted in cross-examination that he had made a $21,000 mistake on the
Withdrawal Analysis portion of his net worth audit;
(ii)
The
confusion and uncertainty concerning the adjustment appropriate for gifts
received versus gifts made was almost inexplicable;
(iii)
The
auditor’s explanations of the Option C forms, if correct, mean the forms are
quite misleading. Of particular relevance is that the witness’ explanation of Line
150 Total Income of the taxpayer’s Option C is this was really net after-tax income,
not total income reported on a tax return. Yet both the CRA auditor and the
Crown sought to use Line 150 Total Income from Mrs. Altamimi’s Option Cs
as her total income reported on her tax returns;
(iv)
Entirely
unsatisfactory reasons were given for the Canada Student Loan debts not being
shown as liabilities on CRA’s net worth assessment balance sheet Schedule II
and for the principal and interest repayments instead being added to the
Summary of Personal Expenditures Schedule IV; and
(v)
The
evidence of what adjustments would be needed and what the impact would be if
the $6,300 of furnishings had been purchased in the base year 1999 was
unsatisfactory.
Analysis:
[33] The first issue that
needs to be decided is whether the reassessment of the taxpayer’s 2000 year
after the expiry of the normal reassessment period should be upheld. It can
only be upheld according to subsection 152(4) if Mr. Altamimi “has made
any misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing a return or in supplying any
information under this Act”.
[34] I am satisfied that the
taxpayer misrepresented his income from his barber shop in the years in
question. However, to the extent he did so in 2000, I am not satisfied that his
misrepresentation was attributable to neglect, carelessness or wilful default.
The Crown has not alleged any fraud. The evidence is that the taxpayer chose a
tax return preparation business to prepare his 2000 returns and that he gave
him the sales and expense receipts and records with which he could have and
should have done so. It appears, at least with hindsight, that his choice of
tax preparation service provider was unwise. The taxpayer was a recent
immigrant to Canada at that time. If his tax advisor told him that the appropriate method was
followed, I do not believe that in his first year in business in Canada that
would, in these particular circumstances, constitute neglect, carelessness or
wilful default. In the circumstances, I do not find that the Crown has
satisfied its burden of proof to reassess the taxpayer’s 2000 taxation year. The
taxpayer’s appeal for his 2000 taxation year will be allowed in full.
[35] With respect to the
taxpayer’s 2001 and 2002 taxation years, I am satisfied that the taxpayer did
under-report his income from his barber shop business. However, for the reasons
given, I am not satisfied that the amounts reassessed for those years by the
Minister using the net worth calculations in question estimate those
understatements with reasonable accuracy. Specifically, I believe the taxpayer
has satisfied the burden on him to show that those calculations are, in some
specific respects, incorrect and need to be further revised.
[36] With respect to the
Schedule I balance sheet of business and personal assets, I am satisfied that
it was incorrect of the CRA to assume that all of the taxpayer’s household
assets (totalling $6,336.81) were acquired in the year 2000 and that he and his
family had nil household assets in 1999. The evidence is that the only
household assets of material value acquired in the years 2000 and 2002 were an
apartment-sized washer and dryer and a microwave acquired from Leon’s. The computer
acquired in 2002 is listed separately and is not disputed. The taxpayer’s 1999
household assets should reflect $5,000. This would reduce the taxpayer’s 2000
assessment by a corresponding amount and will not affect the 2001 or 2002
assessment. However, as I have already concluded, the 2000 year reassessment
cannot be supported at all because it is statute-barred.
[37] With respect to the Schedule
IV Summary of Personal Expenditures, I am satisfied that, to the extent the
initial inputs were based upon the first Personal Expenditures Worksheet
prepared by the taxpayer’s wife, she tended to overstate some of the
categories. Specifically, I am satisfied that Line 11 for tobacco and alcohol
should be reduced to $1,000 for each of the years. This will have no effect for
2000 and will reduce the assessments by $1,640 for 2001 and $1,140 for 2002.
[38] Similarly, Line 3 household
operations should be reduced to reflect telephone at $1,200 per year instead of
$3,000. This will not affect 2000 and will reduce each of 2001 and 2002 by an
additional $1,800.
[39] I accept the testimony
of the taxpayer and his spouse that the additional amount of $1,620 of
transportation expenses that the CRA auditor added to their estimate for 2000
related to the repayment of debt in 2000 for travel incurred in 1999. Debt
repayments affect the balance sheet portion of a net worth calculation and
should not also be shown as a current personal expenditure. However, because the
2000 reassessment is statute-barred, this will have no effect. I am also
satisfied with their evidence that the additional $715.39 of transportation
expenses added by the CRA auditor to 2002 income related to repayment of debt
in 2002 for travel in an earlier year. This will have the effect of reducing
the 2002 reassessment by a like amount.
[40] With respect to Line 12
of Schedule IV for gifts and contributions, I am satisfied with the evidence of
the taxpayer and his wife that the correct number should be the $200 set forth
in their initial worksheet. The additional $1,129 added by the CRA auditor
could not be explained satisfactorily by CRA. Even in his direct examination, the
CRA auditor was very confused between whether the $1,129 was a gift received or
a gift made by the taxpayer. I did not find the CRA’s evidence or explanation satisfactory.
The taxpayer and his spouse on the other hand were clear that a payment of that
order of magnitude had been made to a relative in repayment of a loan. This
will have the effect of reducing the 2001 reassessment by a like amount of
$1,129.
[41] The final adjustment in
favour of the taxpayer on the Schedule IV Summary of Personal Expenditures will
be in respect of his Canada Student Loan. The Altamimis showed student loan as
one of the loans reported under Heading 14 Interest on Personal Loans for
a total of $500 in each of the three years. The CRA auditor had determined that
the student loans were only taken out in 2001 and therefore reduced their
interest on personal loans to $0 for that year, which appears to be
inconsistent with the fact they had other personal debt. More troubling however
is that, when he became aware of them, instead of going back and adding the
student loans to Schedule II as a personal liability, he ran the principal as
well as the interest through the summary of personal expenditures, directly
contrary to CRA’s own forms. That strongly calls into question CRA’s treatment
on this point and I am left with the evidence of the taxpayer and his wife,
although otherwise uncorroborated, that their student loan payments were $50 a
month. This adjustment will have the effect of reducing each of the 2001 and
2002 assessments by $2,050.
[42] I have dealt with the
revisions I feel are needed to CRA’s Schedule IV Summary of Personal Expenditures
to the extent specific categories which were adjusted from the worksheet
initially prepared by the taxpayer’s spouse were challenged in the evidence of
the taxpayer and his spouse. There remains the troubling question of the second
personal expenditure worksheet put in evidence by the Crown in cross-examining
the taxpayer’s spouse. I am not satisfied that either attempt at reconstruction
does, or could ever, accurately reflect reality years later. I am mindful of
the fact that the CRA auditor testified that the Statistics Canada personal
expenditure average for a family of five in Canada is in the range of $60,000 a
year. He provided a detailed exhibit in support of this. He accepted their
family expenditures should be lower based on their circumstances but he was not
asked nor did he offer how much lower beyond saying he accepted the numbers in
his Schedule IV Summary of Personal Expenditures which were in the $42,000-$44,000
range. What is the significance of this later worksheet that the taxpayer’s
spouse who prepared both said was more accurate and was prepared once she
properly understood what she was being asked?
[43] One thing is clear from
the evidence. These were not average income Canadians. The taxpayer was a recent
immigrant who had arrived with little or no household goods. He and his family
were on social assistance. They lived in subsidized housing. Their home was at
best sparsely furnished in the years in question. The taxpayer’s witness who
was a friend and CRA employee confirmed that they had mattresses on the floor
which doubled as couches as there were no couches in the living rooms. They
also cared for an ailing mother. CRA accepted their household personal
expenditures were as computed in the first schedule prepared, with some
increases, most of which have already been discussed. This number was at 70% or
higher of the Statistics Canada $60,000 number. The second worksheet prepared
came in at about one-third of the Statistics Canada numbers. Once the
adjustments described above are made to the taxpayer’s 2001 and 2002
reassessments, the Schedule IV personal expenditures as revised will be approximately
60% of that or $36,000. Based upon the evidence of all of the witnesses in this
case, including this second personal expenditures worksheet, I find a further
reduction of $3,000 each year is needed to the Schedule IV Summary of Personal
Expenditures used by CRA in issuing the 2001 and 2002 net worth assessments.
[44] The final adjustment to
the income inclusions is in respect of the Schedule III Total Income
reported by spouse. For 2001, CRA used the amount of $392 which it took from
the Option Cs for Mrs. Altamimi at Exhibit R-8. As mentioned above, I
found CRA’s explanation of the Total Income line of the Option C forms
completely contradictory to it being total pre-tax income reported. I am
therefore left with the evidence of the taxpayer’s spouse that her income for
2001 was $6,135.30. Given that she checked this against documents she had with
her and that she said were T4s, and given that Crown counsel did not challenge
that description or put the documents into evidence, I find it credible. The
2001 income inclusion should be reduced by a further $5,743.
[45] This leaves the issue
of penalties for the 2001 and 2002 years. The Crown’s assessment of penalties
under subsection 163(2) requires the Crown to satisfy the Court that the
taxpayer 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 a return. This is a higher standard than that required under
subsection 152(4) to open an otherwise statute-barred year after the expiration
of the normal reassessment period. It is the Crown’s position for the purposes
of subsection 163(2) that the taxpayer, at least under circumstances that amounted
to gross negligence, assented to the omissions in his return which resulted
from his providing estimates of gross income and net income. I am satisfied on
the evidence that the taxpayer participated in or assented to such an omission.
I am also satisfied that under-reporting income earned from a business in these
circumstances is also a false statement for purposes of subsection 163(2). However,
the important question is whether the Crown has, through the evidence, proven
on a balance of probability that the omission or false statement was made
knowingly or under circumstances amounting to gross negligence in each of the
years 2001 and 2002. In essence, the question becomes whether it was reasonable
for Mr. Altamimi to rely on his tax return preparer who advised Mr. Altamimi
to provide estimates to him of the business’ gross income and its net income,
together with the income and expense receipts and slips provided, which estimates
were ultimately used on the taxpayer’s return. As set out above, with respect
to the issue of the 2000 year’s normal reassessment period, I have concluded
that it was not unreasonable for the taxpayer, a recent immigrant, to rely upon
the advice of a paid Canadian tax return preparer in seeking to comply with
Canadian reporting requirements in his first year of business. For 2000, Mr. Altamimi
had provided the sales and expense receipts and slips to his tax return
preparer and reported a specific number for gross income detailed to the dollar.
It appears from the evidence that it was the years 2001 and 2002 in respect of
which the taxpayer was advised by his tax return preparer to estimate. In my
view, it was not clearly unreasonable for Mr. Altamimi to rely on that
advice for 2001, being the first year he was asked to provide an estimate of
income from a business he was identifying and reporting in his return. I
conclude that for 2002 it no longer remained reasonable for him to credibly
rely on that advice, especially since the estimate he provided for 2002 was
identical to the gross revenue estimated by him in his prior year. That
confirms to me that for 2002 his estimate could not likely have been made with
any reasonable degree of accuracy intended. For that reason, I am upholding the
assessment of penalties for the 2002 taxation year.
Conclusion:
[46] The taxpayer’s appeal for
2000 is allowed in full because it is outside the normal reassessment period
and the Crown could not satisfy the Court that it had the right to reassess
outside that period.
[47] The taxpayer’s appeal
for 2001 is allowed only to the extent of reducing the income inclusion from
$19,094 to $3,732 and vacating the penalty.
[48] The taxpayer’s appeal for
2002 is also allowed, but only to the extent of reducing the income inclusion
from $30,129 to $21,424.
[49] No costs will be awarded
in the circumstances.
Signed at Ottawa, Canada, this 13th day of September 2007.
"Patrick Boyle"
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