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Citation: 2007TCC489
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Date: 20070828
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Dockets: 2006-2914(IT)I
2006-2916(IT)I
2006-2918(GST)I
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BETWEEN:
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DON WAI CHEN SETO,
DELICIOUS SINO-EURO-COMBO FOOD LIMITED,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] The Appellant, Don
Wai Chen Seto, appeals from reassessments in respect to the 2000, 2001 and 2002
taxation years in which the Minister of National Revenue (the “Minister”) added
amounts to his income using the net worth method and assessed gross negligence
penalties on those amounts. The Minister also reassessed the Appellant,
Delicious Sino‑Euro‑Combo Food Limited, by adding to its income,
amounts appropriated by the shareholder, Mr. Seto and by varying the original
HST assessment for the period January 1, 2000 to December 31, 2002 and assessing
a net tax on unreported sales plus interest. Gross negligence penalties were
also applied.
[2] Since coming to Canada
from China in 1979, the Appellant
has always resided with his parents. When he married, his wife moved into this
household. Eventually, the Appellant’s parents looked after the children while
the Appellant and his wife operated a restaurant, known as Dragon City. They purchased the
restaurant in 1996. The Appellant testified that he and his wife worked in the
restaurant from eleven o’clock in the morning until midnight or later, on every
day of the year except Christmas Day, when the restaurant closed. Mr. Seto’s
accountant, James Peter Flemming, confirmed in his evidence that the
Appellant and his wife worked long hours for 364 days of the year at the
restaurant with the Appellant sometimes sleeping on a cot at the back of the
restaurant. During this period, Mr. Flemming completed the quarterly HST
returns for the business together with the yearly financial statements and returns.
[3] Both of the Appellant’s
parents testified that they all resided in the same household, that the parents
shopped for groceries and clothing, looked after the Appellant’s children
because of the long hours devoted to the restaurant and contributed all of
their combined incomes to the family unit. They had provided the down payment
for the house in which they all resided and eventually helped to pay off the
mortgage. They used the bus system as they had no vehicle.
[4] The Reply to the Notice
of Appeal contained several relevant assumptions of fact upon which the
Minister relied in reassessing the Appellant’s tax liability. These assumptions
related specifically to the importance of the role of the Appellant’s parents
in calculating the net worth assessment. The relevant assumptions contained in
paragraph 18 are as follows:
…
g) the Appellant lived with his spouse, his four
children and his parents, Kei Seto and Hung C. Seto;
h) the financial affairs of the Appellant and his
spouse and his father and mother were so intertwined that it was necessary to
consider them together in making the net worth calculation;
…
j) the Appellant and his spouse and his parents
reported total income for the period under appeal in the amounts indicated in
Schedule A‑3;
k) The Appellant, his spouse’s and his parents’
total income reported were less than that necessary to support their lifestyle;
(Emphasis mine)
[5] Also at paragraph 19 of
the Reply, in reassessing the Appellant for the 2000 taxation year, the
following assumption stated:
e) the Appellant was aware of the fact that the income
reported on his income tax returns and his spouse’s and parents’ incomes
for the period under appeal did not support the purchase of the assets and
personal expenditures for these years; (Emphasis mine)
[6] The adjustments,
however, contained in Schedule “A”, which are referred to and attached to the
Reply, do not include or reference the income of the Appellant’s parents, Mr
Kei Seto and Mrs. Hung Seto. This is so, even though the above referenced
assumptions clearly indicate that the parents were considered to be an integral
part of the net worth assessment. Mr. David Dalton, the Appeals Officer,
testified that he disagreed with the assumptions at paragraphs 18 (h), (j), (k)
and 19 (e). He in fact made a contrary assumption and reduced the personal
expenditures by removing the parents’ income from the net worth calculation.
Respondent counsel submitted that, although these assumptions, which referenced
the parents’ income, were inconsistent with Schedule A, it was the calculations
contained in Schedule A which I should accept as being the true depiction of
the net worth assessment. She characterized the references, to the parents’
income contained in the assumptions of fact, as simply “errors”. However, she
did not address this issue until it was brought up in the cross examination of
her witness, Mr. Dalton, at which point I asked for her comments. She argued
that the onus is upon an Appellant in a net worth assessment and that the amounts
will be assumed to be correct unless an Appellant can produce evidence to
disprove them.
[7] The issues arising from
these appeals are therefore as follows:
(1) In the case of a net worth assessment, where the
Minister makes an assumption that benefits the Appellant and then bases the
assessment on a contrary fact, who bears the onus or burden of proof;
(2) Should the parents’ income be accounted for in the
net worth assessment;
(3) In determining whether the Appellants understated
their income for the 2000, 2001 and 2002 taxation years, are there any other
aspects of the net worth calculations that should be adjusted based on the
evidence;
(4) Is the Appellant, Mr. Seto, liable to include
standby charges of $4,455.64 for a company vehicle made available to him during
the 2002 taxation year;
(5) Whether the 2000 taxation year was properly
reassessed beyond the normal reassessment period pursuant to paragraph 152(4)(a)
of the Income Tax Act in respect to the Appellant, Delicious Sino‑Euro-Combo
Food Limited;
(6) Whether the company is entitled to a reduction of
the amount of assessed GST/HST collectible;
(7) Whether the gross negligence penalties were properly
assessed.
Analysis
[8] A net worth assessment
is a method of last resort which entitles the Minister, when assessing, to
estimate a taxpayer’s income based on the best available evidence and
information. However, there remains a duty upon the Minister to disclose to the
taxpayer the basis of the computation of the taxpayer’s income, including all
assumptions made at the time of the assessment. Because the assessment is made
on an arbitrary basis, the Minister may make a computation without full
knowledge of all the facts. The onus is therefore upon the taxpayer to make
full disclosure of all sources of income.
[9] In these appeals there
were several assumptions of fact that were diametrically opposed to the
calculation of the net worth assessment found in Schedule A-3 of the Minister’s
Reply. The fact that these assumptions greatly benefit the taxpayer makes this
case unique.
[10] According to the
evidence, it appears that it was the auditor that originally relied on the
assumptions at paragraphs 18(h), (j), (k) and 19 (e) of the Reply. This
conclusion is supported by the fact that the original audit calculation of
personal expenditures apparently contemplated the expenses of the Appellant’s
parents because the Statistics Canada figures used by the auditor (“Family of
five or more with at least three members over 20 years of age”) accounted for
the parents. However, contrary to the relevant assumptions, the parents’ income
was never included in the net worth assessment. In addition Mr. Dalton, the appeals
officer, testified that he changed the audit figures for personal expenditures
from a family of five or more, with at least three members over 20 years old,
to a family of five members with only two over 20 years of age.
[11] During the objection
stage, Mr. Dalton disagreed with the assumptions concerning the parents’ income
and proceeded on the basis that the parents were not an integral part of the
family’s income calculation. It is arguable that because of this change, the
Minister should have disclosed the new revised basis for the net worth
assessment calculation in the Reply by advancing a new assumption or alleging
those facts under the "other material facts"
section. However, this was not done and the Minister relied upon those original
assumptions in the Reply.
[12] I did not have the benefit of hearing from the auditor.
When Mr. Dalton, on re-direct, was asked what element of the parents’
income the auditor considered, he stated: “I believe he allowed $1,000
for gifts from family, mother and father.” (Transcript p. 77) [Emphasis added].
Yet the appeals officer acknowledged that the auditor had relied on Statistics
Canada figures for a family of five with three or more adults in the household
in respect to the expense aspect.
[13] During the hearing,
Respondent counsel represented these as “mere errors” and sought to amend the pleadings.
Of course, I denied this request as it constitutes far more than an “error”
which I consider to be more in line with a typographical error. In fact
Mr. Dalton testified that these assumptions were simply incorrect. The
bottom line is that this type of amendment at such a late date in the course of
the hearing would be highly prejudicial to the Appellant. It was most
surprising that the Respondent counsel would make such a last minute request
and only in response to my queries concerning this issue. I consider this
behaviour reprehensible for an officer of the Court and a flagrant abuse of the
processes of this Court. It is the main reason I have decided to award $500.00
costs to the Appellants in these appeals.
[14] Some of the comments of Chief Justice Bowman, in Bowens
v. The Queen, 94 DTC 1853, are equally applicable to these appeals.
At paragraph 23 he stated:
…If a new basis of
upholding the assessment is conceived after the assessment is made and is
advanced at trial and the original assumptions are inconsistent with that
new basis they must nonetheless be disclosed in the reply and the Crown
must undertake the task of establishing that the original assumptions were
wrong. It would be inappropriate if the Crown were to obtain a tactical
advantage by failing to disclose in its reply assumptions that are embarrassing
or irrelevant to its new theory of the case or, as is the case here,
inconsistent with that new theory.
[Emphasis
added]
[15] This passage confirms
that the relevant assumptions in these appeals were properly included in the
Reply. Although it appeared that the inclusion of these assumptions in the
Reply was an oversight on the part of the Crown, it is the Crown that must now
assume the burden of proving that the assumptions are wrong.
[16] Although the Crown did
not plead the assumption that the parents’ income was not an integral
part of the net worth assessment, it was an essential fact upon which the
validity of the assessment depended. However, a contrary assumption was
included in the Reply. The Crown should have pleaded the new facts in the Reply
to emphasize the changed assumption and assumed the burden of proving the fact
that the parents did not substantially contribute to the household. This
follows the general rule that the Crown may plead any assumptions as facts
provided that the onus of proving those facts remains with the Crown.
[17] This was the conclusion
reached in the case of Holm v. The Queen, 2003 DTC 755, where
at paragraph 21 it was stated:
(a) To plead as an
assumption a fact that was undoubtedly assumed when the assessment was
confirmed but arguably not when the assessment was issued may reflect an
erroneous interpretation of the words "the findings or assumptions of fact
made by the Minister when making the assessment" as used in the rules of
this court, but it is not an egregious or flagrant abuse of this court's
process. To conjure up "assumptions" that were never made at any time
until the reply was drafted is of course a much more serious breach of the
Crown's responsibilities and calls for a more severe remedy.
[18] In summary, the Minister
included assumptions in the pleadings that were favourable to the Appellants but
contrary to the basis of the net worth assessment. When the Minister’s
assessment is based on inconsistent assumptions introduced at the objection
stage, the Minister bears the onus of proving that the Appellant’s parents were
not an essential component to the net worth assessment. The fact that the
Minister neither pleaded nor disclosed the contrary assumption further supports
that the Crown bears the onus of proof. The Crown did not lead any evidence
that the parents did not make the contribution of their incomes to the family
unit. The Appellant’s evidence in this regard was corroborated by the testimony
of both Kei Seto, the father, and Hung Seto, the mother. The evidence of all
three individuals supports the assumed facts in the Reply. As the Respondent
counsel failed to produce any contrary evidence, she failed to discharge the
onus. As a result, all of the parents’ available income will be incorporated
into the net worth assessments, under the Deductions section of Schedule A-3 of
the Reply, and adjustments made to the assessment for their living expenses.
This will result in the removal of the family gift of $1,000.00 for each
taxation year in the Deduction section. The Personal Expenditures for the
family unit should be increased to reflect the inclusion of the parents in the
net worth calculation.
[19] In addition to the
contribution of the parents’ income, the Appellant also disputed various other
amounts. The most significant were: food costs, the Market Bill Trading charge
of $5,903.99, included in the MasterCard expenses and the cheque for $2,000.00
to the Appellant’s father-in-law. With respect to the food costs, the Appellant
stated that they should be reduced based upon the fact that the cost of rice,
their primary food item, was minimal. However, Mr. Dalton’s evidence
indicated that the food expenditure had already been reduced by $2,000.00 in
each year to account for cultural differences. This is reasonable and without
further evidence, I am not prepared to alter the total food expenditures. The
Appellant asserts that some personal expenditures have been double counted
because they were included in Schedule A-3 (“Personal Living Expenses on the
MasterCard not considered in personal expenditures section”) and would also be factored
into total personal expenditures. The first of these is the charge for the 2001
taxation year, detailed as “Market Bill Trading”. The Appellant argued that
this amount was for the purchase of food, the total cost of which he shared
with his uncle. The uncle reimbursed the Appellant 50% of this total charge.
The Appellant also disputed $2,000.00 of the $4,455.00 addition for the 2001
taxation year under the adjustment heading “cheque written on personal bank
accounts: Bank of Montreal per schedule”. The Appellant stated that this cheque
was given to his father-in-law to purchase clothing in China for the family. I have only the
Appellant’s oral evidence respecting both of these expenditures, as well as
other disputed items. These other items included the purchase of a computer,
interest charges and a Sun Life refund cheque. Since I have no documentary
evidence or corroborating evidence of any type to assist me in sorting through
those expenditures, I must conclude that the Minister was reasonable in these
remaining calculations, respecting the other disputed adjustments.
[20] With respect to the
fourth issue in this appeal, the inclusion of the standby charge in the Appellant’s
income in the 2002 taxation year, the Appellant’s position is that the only
personal use of this vehicle was the travel to and from the restaurant and his
home. The Appellant’s residence is 2.5 kilometres from the restaurant and the
Appellant contended that he used the vehicle solely for business purposes, with
the exception of the trip to his work in the morning and his return at night
(2.5 km x 2 trips/day). There is no question that the business made the vehicle
available to the Appellant during this period and thus he is liable to pay a
reasonable standby charge pursuant to paragraph 6(1)(e) of the Income
Tax Act. He used the vehicle to pick up supplies and make deliveries during
the day. Mr. Dalton used 308 days (313 days being the days from the date of
purchase of the vehicle in 2002 until the end of the year, less 5 days for
holidays) as the number of days the Appellant used the vehicle to drive back
and forth between his home and the restaurant in 2002. This meant that 1,540 km
(308 days x 5 km/daily) was the personal use distance in 2002. This amount
is well below the maximum 12,000 km (1,000 per month) necessary to qualify for
the reduced standby charge. However, when the personal use distance is compared
to the total distance (5,000 km assumed for 2002) the resulting proportion of
personal use is calculated to be 31%. As a result, the Appellant’s request for
a reduced standby charge was denied. To obtain the reduced standby charge, the
Appellant must satisfy sub clauses A (a) and A (d) of subsection
6(2). That is, he must be required by the business to use the vehicle in
connection, with or in the course of the employment, and all or substantially
all of the distance travelled by the vehicle is to be in connection with or in
the course of the office or employment. CRA’s administrative position on the
availability of a reduced standby charge is reviewed in IT-63R5, August 12,
1995. The Canada Tax Service commentary on this position provides:
Note
that for the 1988 to 2002 taxation years, the standby charge could only be
reduced where substantially all (90 per cent) of the distance travelled was
employment related and only to the extent that personal use averaged less than
1,000 kilometres per month.
[21] Although subsection 6(2)
was amended in 2003 to change the test in clause A from the “all or
substantially all” test of the distance travelled to “primarily in connection
with” employment, because the standby charges occurred in 2002, the “all or
substantially all” test applies here. While the business use of the automobile
was only 69% and does not satisfy the 90% threshold, this may not be fatal to
the Appellant’s claim. At paragraph 20, Justice Sheridan in Keefe v. R, 2003
TCC 791 stated:
The 90% value does
not appear in the legislation itself. Further, the case law is very clear that
what constitutes "all or substantially all" is a question of fact
depending on the circumstances of each case.
[22] And at paragraph 21 she
quoted from McDonald v. R. [1998] T.C.J. 621 as follows:
These dictionary
definitions confirm that the word "substantially", as Bowman,
J.T.C.C. remarked in Ruhl v. Canada [See Note 6 below], is elastic and
an unsatisfactory medium for conveying the concept of an ascertainable
proportion of the whole. The words "substantially all" in the context
of paragraph 6(2)(d) need not be interpreted as 90% or more but may be a lesser
proportion of the whole depending on the facts.
[23] Although the Appellant
does not satisfy the 90% guideline, the jurisprudence indicates that all of the
facts and circumstances must be taken into account. Both the Appellant’s
evidence and the Minister’s calculation of the charge support that the only
personal use of the vehicle was the travel between his home and the restaurant.
The Appellant’s evidence also indicated that he frequently picked up supplies
in the morning on the way to the restaurant. It can be argued that many of the
2.5 km trips to the restaurant involved a mix of the personal element (getting
to work) and employment related element (picking up supplies). While it would
be inappropriate to consider this distance as purely employment related, thus
removing it from the determination under clause A, it can be properly
considered in determining whether substantially all of the vehicle’s use was
related to employment. It is unfair to disqualify the Appellant’s claim merely
because the total kilometres on the vehicle was low in 2002 (5,000 km) and
resulted in a percentage of personal use greater than 10%.
[24] In Keith v. R.
2004 TCC 793, Justice Miller at paragraph 14 stated:
Mr.
Keith’s percentages are just short of the 90% mark, but viewing his use of the
business vehicle in context of what he did for the company … I am satisfied
that some minimal commuting travel does not detract from the position that the
car was used substantially all in connection with his employment.
[Emphasis
added]
[25] In addition, the
Appellant testified that he owned a second vehicle during much of the 2002
taxation year. Mr. Dalton, in direct examination in responding to the question
“And what indication did you have that the vehicle would have been used for the
Appellant’s personal use?”, stated “It was my understanding that there was one
vehicle for the family …” This was an incorrect assumption upon which the
appeals officer based his conclusions. The evidence also indicated that the
vehicle in question was not used for leisure activities or holidays, as he and
his wife worked every day of the year except Christmas Day. His parents
testified that they completed many of the household chores, including grocery
shopping and caring for the Appellant’s children. Mr. Flemming, their
accountant, who sometimes ate at the restaurant, also corroborated the Appellant’s
evidence. He testified that because the Appellant and his wife “… lived at the
restaurant basically” they had “… no opportunity to use the car for anything
else but business basically” (Transcript p. 47). Although the Appellant did not
maintain a vehicle log, I do not consider this to be fatal to his claim. There
was clear and explicit evidence presented respecting the use of this vehicle by
three or four witnesses and I am satisfied that the facts in their entirety
support my conclusion that substantially all of the distance travelled was the
result of employment related activities. The Appellant will therefore be
entitled to a reduced calculation of the vehicle standby charge pursuant to
clause A as follows:
A/B
x [2% x (210,461.9)]
1,540/10,000
x [2% x (210,461.9)]
=
$648.22
[26] The next issue deals
with the statute barred year of 2000. In most instances the normal reassessment
period pursuant to subsection 152(3) of the Income Tax Act is three
years. This makes the reassessment for the 2000 taxation year statute barred
unless the Minister can rely upon paragraph 152(4)(a). This provision
permits the Minister to reassess beyond the normal reassessment period if the
taxpayer has made any misrepresentation attributable to neglect, carelessness
or wilful default or committed any fraud in filing the return or supplying
information. Respondent counsel submitted that the Appellant’s lack of record
keeping, as required under the Act, indicates that he and his company
acted with neglect or carelessness which resulted in income not being reported.
Although the Appellant never really addressed this issue, the evidence
suggested that he was heavily involved in the day‑to‑day operations
of the business; he maintained and tracked the daily records before submitting
them to his accountant; he wrote the cheques for the company and he maintained
personal investments. Although Mr. Flemming testified that he believed the
Appellant’s records were well kept and that “things balanced”, I have little
else to assist me. I therefore conclude that the 2000 taxation year was
properly reassessed by the Minister pursuant to paragraph 152(4)(a).
There were certainly no intentional actions taken to mislead, or to portray a
picture different from what existed, but I do believe the Appellant did not
exercise reasonable care in the completion of his returns.
[27] One of the last issues
is the company’s entitlement to a reduction of the amount of assessed GST/HST
collectible. Based on the impact of the adjustments, which have been made to
the net worth assessment, a corresponding adjustment will be made, where applicable,
to the amount of assessed GST/HST collectible by the company.
[28] Finally, in addition to
the net worth discrepancies, gross negligence penalties were assessed pursuant
to subsection 163(2) of the Act. While the negligence sufficient to
trigger paragraph 152(4)(a) is a failure to use reasonable care,
subsection 163(2) requires more – it requires gross negligence. In Venne
v. R., 1984 CTC 223, the Court stated at paragraph 37:
"Gross
negligence" must be taken to involve greater neglect than simply a failure
to use reasonable care. It must involve a high degree of negligence tantamount
to intentional acting, an indifference as to whether the law is complied with
or not.
Courts have therefore
limited the application of this provision to circumstances “where there is a
high degree of blameworthiness involving knowing or reckless misconduct” (Venne
at paragraph 40).
[29] An interesting question
arises when a taxpayer is unsuccessful in challenging the Minister’s net worth
assessment: Is the taxpayer liable for gross negligence penalties where amounts
are determined to be unreported income? In Wajsfeld v. R.,
2005, 4 C.T.C. 2341, Justice Rip dealt with the issue and concluded that the
Crown must satisfy the onus necessary to impose gross negligence penalties
despite finding that the unreported amounts were to be included in the
taxpayer’s income. At paragraph 56 he stated:
…
The Minister must do more than simply rely on the failure of the taxpayer to rebut
a net worth assessment and point to as high amount of unreported income to meet
the burden under subsection 163(3) … There is no doubt that the mens rea
or the gross negligence may be established by circumstantial evidence, as
either can seldom be established by direct proof of the taxpayer’s intention. However,
that
evidence should be clear and convincing … I am of the view that in the present
case, the Minister did not adequately discharge his burden of proof in that he
relied almost exclusively on the fact that the Appellant was unable to reverse
the net worth assessments. In effect, subsection 163(3) requires evidence of
the intent of gross negligence of the contravenor. This, in my view, should be
done in a structured, clear and convincing manner.
[30] The case of Wajsfeld
clearly demonstrates that the Crown maintains the onus to prove gross negligence
even where the assessment is based on the net worth method. In these appeals,
the Crown presented no evidence regarding the Appellant’s alleged acts of gross
negligence. The Crown did not point to any specific evidence or circumstances
that amounted to gross negligence other than the difference resulting from the
net worth assessment. The sole basis of the Crown’s argument for imposing
penalties, under subsection 163(2), is the fact that the net worth assessment
indicates that there was unreported income on the respective personal and
corporate returns. If the Minister is going to assess gross negligence
penalties, the Crown bears the onus and must do more than refer to the
unreported amounts which have been added to the taxpayer’s income. In the
present appeals, the Crown simply asserted that the “substantial difference”
between the net worth assessment and the net amount actually reported on the
returns are indicative of gross negligence. The relevant jurisprudence requires
more. Further, when the adjustments are made to include the Appellant’s parents
income, the difference is no longer substantial.
[31] In summary, the appeals
are allowed, with costs of $500.00 to the Appellants, to make the following
adjustments to the net worth assessment:
1.
All
of the parents’ available income will be reflected in the Appellant’s net worth
assessment, thereby reducing the discrepancy resulting from the assessment.
Adjustments for their living expenses should also be made.
2.
The
Appellant will be entitled to a reduced vehicle standby charge calculated in
accordance with my reasons for judgment.
3.
Corresponding
adjustments will be made, where applicable, to the amounts of assessed GST/HST
collectible by the company.
4.
Gross
negligence penalties will be deleted.
Signed at Summerside,
Prince Edward Island, this 28th day of August 2007.
Campbell J.
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