|
Citation: 2005TCC774
|
|
Date: 20051205
|
|
Docket: 2003-1224(IT)G
|
|
BETWEEN:
|
|
HSIEN JUNG LAI,
|
|
Appellant,
|
|
And
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
CampbellJ.
[1] This appeal is in respect to the Appellant's 1999 and 2000 taxation years. The Appellant declared total income of $6,344.14 and $4,449.95 for the 1999 and 2000 taxation years. During an audit of the Appellant, his financial records were found to be incomplete and inadequate. Consequently, the Minister of National Revenue (the "Minister") revised the statements to establish the Appellant's income using a net worth assessment. The Appellant's total income was determined to be understated by $99,475.43 for the 1999 taxation year and by $62,362.60 for the 2000 taxation year. In addition the Minister assessed the Appellant for penalties pursuant to subsection 163(2) of the Income Tax Act (the "Act") in each taxation year on the amounts of understated income.
[2] The issues are whether the Appellant's reported income for the 1999 and 2000 taxation years was understated and whether penalties have been properly assessed.
The Evidence:
[3] Both the Appellant and his brother, Chiang Han Lai, gave their evidence through an interpreter. The Respondent relied on the evidence of the auditor, Jenna Lee.
The Appellant, Hsien Jung Lai:
[4] The Appellant testified that he obtained a degree from the Chinese Cultural University in Taiwan and that, before immigrating to this country, he worked as a horticultural engineer. Although he was accepted into Canada in the skilled worker category, since his arrival to this country in 1995, he has worked for only a couple of brief periods in 1999 exporting lumber to Mainland China. In his 1999 tax return (Tab 1 of Exhibit R-1), he reported income of $1,588.89 from these employment endeavours and agreed that this is the only income he has earned since coming to Canada in 1995.
[5] The Appellant's main premise is that the amounts, by which his income was increased in each year, were personal loan repayments from the Appellant's brother, Chiang Han Lai, who lives in Taiwan. The Appellant's evidence was that these amounts originated from the sale of his land in Taiwan in 1995 and he then loaned some of these sale proceeds to his brother. He stated that this elder brother in Taiwan looked after the sale of the land after he and his family came to Canada in 1995. Since he was "unable to control the process" the sale proceeds were placed in his brother's hands. Because his brother was never a Canadian citizen or immigrant here, his argument was that this money should be considered to be money that his brother borrowed from the Appellant and that when it was wired to the Appellant in Canada it was debt repayment. The unreported deposits in the years under appeal were therefore actually loan repayments wired by the Appellant's brother from Taiwan. The Appellant argued that he was unfairly assessed pursuant to the net worth method for two reasons:
(a) his brother is a foreigner, not a citizen or immigrant to Canada, and therefore the property of his brother is not within the administration of the Canadian government; and
(b) his brother's banking records respecting the land proceeds could not be provided because he did not deposit the funds in a bank account but instead kept the money at his home.
[6] The Appellant referred to his brother's handwritten statement (Exhibit A-2 and also Tab 5 of Exhibit A-3) which contained a list of money transfers, loans to others and tax payments made by the Appellant's brother between January 1998 and December 2000 from the sale proceeds. He argued that this statement was proof that loan repayments and transfers of money had been made to the Appellant. This statement was in Chinese but had been translated to English by the Appellant.
[7] When cross-examined about the loan to his brother, the Appellant stated that in June or July 1995, just prior to coming to Canada, his wife arranged a loan of six million in Taiwanese currency for a friend but that individual disappeared. When the friend ran away, the Appellant took over the loan that had been arranged. When asked how all of this related to the loan to his brother, he said that when he decided to immigrate to Canada, he requested his brother to pay this debt when his land sold. At another point he made some reference to his brother having to borrow money on his behalf in respect to this debt.
[8] The Appellant initially stated that his property sold in January 1995 for 28 million in Taiwanese currency. He later testified that he thought that it was instead probably December 1995 that the property sold. He was also unsure if the sale price was correct even though he used some of the proceeds wired to him at the end of December 1995 to purchase a one-half million dollar home in British Columbia. Although his brother did not ask the Appellant for a loan, he stated that because he was no longer residing in Taiwan, his brother was afraid that the Appellant would be "framed" again or that he would "mismanage" these funds and so the brother retained the money for the Appellant. He agreed, on cross-examination, that he was entitled to this money because it was from the sale of his property but that, because he was not living in Taiwan, he had no actual control over the funds. He testified that the terms of repayment of this loan to the brother was that if the brother loaned the money to "others" he would charge six percent interest. When asked if this could truly be termed a loan to his brother, the Appellant was adamant that it was a loan to him. Since 1995 he has received most or all of the sale proceeds in the amount of $1.2 million.
[9] Since the initial amount of $555,000.00 was wired in December 1995 to enable the Appellant to purchase a house, five additional amounts have been wired to the Appellant for a total sum of $950,000.00. The last payment was wired on August 27, 2000. The balance of the sale proceeds, of approximately $387,000.00, was an amount loaned to the Appellant's brother.
[10] Other than Exhibit A-2, the Appellant had no supporting documentation for this so-called loan to the brother or for the $6 million loan to a friend or for any of the loans to "others" listed in Exhibit A-2.
[11] In respect to the wiring documentation for funds wired from Taiwan to Canada in the years under appeal (Tab 6 of Exhibit R-1), the Appellant agreed that $69,990.00 was wired in February 1999, $75,000.00 was wired in March 2000 and $40,000.00 was wired in August 2000. The Appellant identified the individual whose name was listed as the ordering customer in the 1999 documentation as his oldest sister's daughter. She would have attended at the bank and wired the money on his brother's instructions. The purpose of this remittance was listed in the 1999 documents as "overseas study expense". The Appellant stated that, although the purpose of the remittance is listed as educational, the amount was still a loan repayment. According to his evidence, the banks' accountants use this term on a regular basis and it is a commonly accepted and used purpose on such forms. At this time, the Appellant's children were in public high school and therefore the money was not required to educate them. The Appellant admitted these funds were not for the listed purpose on the document, but that it was simply a bank title attached to the money transfer. The two wire transfers in 2000 listed the same educational purpose on the bank forms as the 1999 remittance form had included. The wire transfer in March 2000 lists the Appellant's niece as the ordering customer. The wire transfer in August 2000 lists the son of the Appellant's brother as the ordering customer.
[12] When the Appellant left Taiwan for Canada in 1995, he closed all his bank accounts. In November 2004 he opened an account in Taiwan so that his tenant who started to pay rent for his home in Taiwan could deposit the money directly to this account. He did not charge this individual any rent prior to 2005 because the Appellant thought he might require this home if he returned to live in Taiwan. Also in 1999 the area suffered an earthquake and the tenant was helping with renovations in lieu of rent payments.
[13] Respondent counsel referred the Appellant to Tab 18 of Exhibit R-1, his application documents for permanent residency status in this country, where he listed the amount of $5,263.16 as current savings and $242,105.00 as fixed deposits. He agreed these documents did not disclose that he owned property, stocks or investments or that debts were owed to him, as he now claims.
[14] Respondent counsel also referred the Appellant to his return for the 2000 taxation year (Tab 2 of Exhibit R-1), where he claimed interest from Taiwan in the amount of $1,375.00, which amount was then split between the Appellant and his wife. He stated that this interest was received from his brother in respect to funds that the brother invested, which he then clarified to mean interest on the money which he loaned to his brother.
[15] Respondent counsel referred the Appellant to Forms T1135, foreign income verification statements (Tabs 9 and 10 of Exhibit R-1), which are to be filed with a return when the total cost amount of all specified foreign property, which a taxpayer owns or holds a beneficial interest in, is over $100,000.00. In 2000, although he received two wire transfers of $75,000.00 and $40,000.00 which he claims are loan repayments, he testified that he mistakenly reported indebtedness owed by non-residents as less than $100,000.00. According to this form, the value listed of real property owned outside Canada was over $1 million. In addition to the property the Appellant sold in 1995, he owned other foreign property, including his home in Taiwan. The total value of these properties exceeded $8 million. However, when he completed his net worth statement for his application for entry to this country, he agreed that he did not list these real property holdings because he left the completion of these documents in the hands of immigration consultants who, according to the Appellant, advised him to report only his cash on hand plus fixed deposits, as these amounts would satisfy the Canadian immigration rules.
[16] The Appellant acknowledged that his Statement of Assets and Liabilities for 1995-2000 (Tab 12 of Exhibit R-1) which he prepared, listed liabilities in the amount of $500,000.00 or 10 million in Taiwanese currency in 1995 but that by the end of 1998, the statement listed liabilities at nil. In responding to how these liabilities were satisfied, he stated that, based on his brother's information contained in Exhibit A-2, they were repaid by his brother in December 1995 when his property sold.
The Brother, Chiang Han Lai:
[17] Mr. Lai is a retired teacher who lives in Taiwan. He identified Exhibit A-2 as a copy of his handwritten notes which had been translated to English by the Appellant. He stated that the Appellant had loans in Taiwan of six million before immigrating to Canada. According to his evidence, he looked after the property sale on behalf of the Appellant. He did not put the balance of the proceeds in his bank account because of tax issues so he kept the money in his home because the Appellant no longer had bank accounts in Taiwan. He stated he could not open an account under a trustee name so the money was kept at his house. He testified that, in Taiwan, income must be reported for tax purposes and that if he deposited the money into an account it could be traced back and included in income. Because the Appellant owed so much money, Mr. Lai stated that he was concerned about his brother's finances and decided he should be responsible for the Appellant's money in Taiwan.
[18] On cross-examination, Mr. Lai stated that he had a power of attorney to handle the Appellant's property sale. He personally received the funds of 28 million in Taiwanese currency in three different instalments on three different dates in 1995, although his notes were silent respecting these dates. No lawyer assisted either the vendor or the purchaser. A notary public completed the conveyancing documentation but the funds did not go through his office. Mr. Lai testified that all three instalments were paid in cash to him at the purchaser's residence. He used a zippered canvas bag, approximately two feet by two feet in size, to carry the money back to his house on each occasion. According to his evidence, this would be a normal manner of completing a property transaction in Taiwan. A "middle man" oversees the money transaction. He could not recall his name but stated that the Appellant dealt with this individual before leaving Taiwan. Initially Mr. Lai stated that he and three cousins drove to the purchaser's residence to pick up the money because the cousins were also involved in separate transactions and deals with the same purchaser. They attended at the purchaser's residence, on each of the three separate occasions, to receive money at the same time. Mr. Lai stated that they always travelled in his car. However, later in his testimony Mr. Lai changed his evidence and stated that although the cousins were at the purchaser's residence at the same time, they did not travel in his car with him and that on each of the three occasions he was alone in the car. Each time he received some of the money, he drove back to his house and stored the money inside one of his bedroom closets. The money was not stored in the bag because the bag was used each time Mr. Lai picked up the money. To protect such a large amount of money, he thought it would be sufficient to lock the house when he left. Except for cash of 28 million, he had kept only petty cash at his home. He had one bank account in Taiwan and in addition he opened an additional account that was used to remit money to Canada.
[19] Mr. Lai stated that it was his decision not to send all of the money to the Appellant in Canada. When he informed his brother of this decision, the Appellant apparently expressed no opinion one way or the other. When the Appellant requested cash, Mr. Lai would forward it to him by telex remittance. It was Mr. Lai's son who took the cash of $555,000.00 to wire to Canada for the Appellant's house purchase in 1995. Because he was teaching he asked relatives, including his son and a niece, to carry the cash to the bank to wire to the Appellant. When his niece completed a wire transfer, he gave her the cash at his home with written instructions on what to do. She returned copies of the telex receipts to him. He did not provide instructions to his niece on how to complete the forms as he felt she would know how to complete them without being told. He stated that his niece never asked the purpose of sending the money.
[20] In respect to the indebtedness which the Appellant stated he had to repay from the property sale proceeds, Mr. Lai said the Appellant told him that he owed six million in Taiwanese currency. According to Mr. Lai, it was a loan owed to an elder cousin's sister and that the Appellant had borrowed this money to pay off her friend's debt, although he knew nothing more about the loan or who this friend was. There was no written documentation respecting this loan.
[21] When questioned about the stated purpose of the loan (educational expenses) on each of the wire documents he said that it was a banking regulation that funds cannot be forwarded to repay a loan. He testified that he did not instruct his niece or his son on how to complete the bank forms or more specifically what information should be included under the heading "purpose of the transfer". The educational expense purpose would be the most common way to complete this blank space on the forms.
The Auditor, Jenna Lee:
[22] Ms. Lee conducted an interview with both the Appellant and his wife after a review of their personal tax returns for these two years revealed only interest and investment income reported but no business or employment income. Child tax benefits and personal GST credits were claimed because of the lower reported combined family income of approximately $11,000.00 in each year.
[23] Ms. Lee reviewed her net worth statement and analysis, which was attached as a schedule to the Reply to the Notice of Appeal. This analysis contained a personal expenditure worksheet for 1999 and 2000 and a list of bank accounts, property, investments in 1998, 1999 and 2000 together with a list of accounts payable/credit cards for these three years. These results were then incorporated into personal and business balance sheets before the final summary or result of the net worth assessment was completed (which was contained at the first two pages of this schedule). Ms. Lee stated that, because she could not determine how much cash the Appellant had in either Canadian or Taiwanese currency, she included only the amount of $1.00 which in the end did not affect the net worth assessments. The Appellant did not initially disclose a CIBC bank account but advised the auditor of this account after the proposal letter was forwarded. The statements were revised to include this account. The property list includes land in both Canada and Taiwan. Although Ms. Lee requested confirmation of his land holdings in Taiwan, the Appellant never provided them. She used the figures provided to her by the Appellant to place a value on these properties. She explained that she accepted the property values which the Appellant gave her for two reasons. Firstly, these figures remained the same throughout and did not change the net worth assessment and secondly, she included them so that the Appellant would realize that he had an obligation to report the sale of property in Taiwan in the future. According to the net worth analysis, the total expenditures in 2000 were $36,773.77 and in 1999 they were $47,449.91. Using the base year of 1998, Ms. Lee determined that there were increases in net worth of $70,105.79 in 1999 and $43,634.44 in 2000, as reflected in the personal balance sheet. She completed a withdrawal analysis and reviewed Statistics Canada figures for expenditures for a family of four. She used the estimates provided by the Appellant, which were lower than the Statistics Canada figures, based on the withdrawal analysis from the credit card and bank statements and because he did not make mortgage payments.
[24] During the audit, Ms. Lee asked the Appellant to provide documentary evidence regarding the funds which the Appellant's brother managed in Taiwan. The Appellant provided only some handwritten notes which were not accepted. He informed Ms. Lee that the source of his funds originated from loan repayments from his brother in Taiwan. At the time the Appellant did not provide her with documentation concerning the wiring of these funds although she identified those amounts in his Canadian bank account. She testified that she was not provided the wiring documentation (Tab 6 of Exhibit R-1) until after the audit had been completed.
[25] Ms. Lee stated that Forms T1135, foreign income verification statements, were not filed in either of the Appellant's returns. They were eventually faxed by the Appellant's accountant on March 8, 2002. The 1999 form was dated April 18, 2000 and the 2000 form was dated April 24, 2001. Although the payments wired in 1999 and 2000 totalled $185,000.00, Ms. Lee testified that this information was not consistent with the information on the T1135 forms, which indicated that the loan indebtedness or repayment was less than $100,000.00. In addition, the stated purpose, of tuition expenses as contained in the bank's wiring documentation, was inconsistent with the foreign indebtedness information the Appellant told Ms. Lee during the audit. Ms. Lee also requested supporting documentation for the small amount of interest income declared in each year as being earned in Taiwan but again the Appellant did not comply with this request.
[26] The decision was made to assess penalties for several reasons: information inconsistencies and misstatements between the Appellant's statements and the information contained in the foreign income verification statements and the immigration application documentation; detailed Canadian banking records supplied but similar documentation not produced to verify the Taiwan property transaction or to show how his brother managed his funds in Taiwan; no rental income ever reported from the property he owned in Taiwan which was valued in 1999 at $1 million; Canadian investment income, reported in 1999 and 2000, indicated that he understood as a Canadian resident that non-Canadian investment income should also be reported; and the amounts of unreported income in each year were significant in relation to the reported income.
Analysis:
[27] The Appellant's income tax returns for the 1999 and 2000 taxation years reported very low incomes for a family of four. Consequently an audit was commenced of the Appellant's financial affairs. Because of a lack of or inadequate records, the Minister revised the statements based on a net worth assessment starting with 1998 as the base year.
[28] A net worth assessment is a method of last resort when there is no reasonable alternative method to assess an Appellant. Justice Bowman (now Chief Justice Bowman) of this Court described this method in Bigayan v. The Queen, 2000 DTC 1619, at paragraph 2 as follows:
2 The net worth method, as observed in Ramey v. The Queen, 93 DTC 791, is a last resort to be used when all else fails. Frequently it is used when a taxpayer has failed to file income tax returns or has kept no records. It is a blunt instrument, accurate within a range of indeterminate magnitude. It is based on an assumption that if one subtracts a taxpayer's net worth at the beginning of a year from that at the end, adds the taxpayer's expenditures in the year, deletes non-taxable receipts and accretions to value of existing assets, the net result, less any amount declared by the taxpayer, must be attributable to unreported income earned in the year, unless the taxpayer can demonstrate otherwise. It is at best an unsatisfactory method, arbitrary and inaccurate but sometimes it is the only means of approximating the income of a taxpayer.
[29] An assessment based on a net worth analysis is presumed valid unless the Appellant can establish that the Minister's calculations are incorrect and that the assumptions, upon which the Minister relies, do not support the assessment. As stated in the decision of Pal v. Canada, [2004] T.C.J. No. 641 (T.C.C.) at paragraph 10:
. . . there must be some credible evidence showing error in the result in order to discharge the onus.
The Appellant's best method of challenging such an assessment would have been to produce the relevant records and documentation. In this case the Appellant has simply failed to do so although he had an opportunity during the net worth assessment and again at this hearing to submit records. In the absence of such records, it was open to the Appellant:
. . . to prove that even on a proper and complete "net worth" basis the assessments were wrong. (Chernenkoff v. M.N.R., 49 DTC 680, at page 683 (Ex. Ct.)
However the Appellant has also failed to demolish the assumptions by this method.
[30] At the heart of the issue is a determination of the source of three deposits of $69,990.00 in 1999 and $75,000.00 and $40,000.00 in 2000 which were deposited to the Appellant's Toronto-Dominion bank account. The Appellant's evidence suggests that these funds originated from the sale in 1995 of property owned by the Appellant in Taiwan and that these funds were then loaned to the brother. The three wired amounts, according to the Appellant, are repayments from this non-resident brother and are therefore not taxable income.
[31] The circumstances surrounding the loan transactions remain a mystery, despite almost two days of evidence. The Appellant's brother testified that he had no information on the first six million Taiwanese loan, which the Appellant claimed he made, except that it involved a friend of a relative. With respect to the Appellant's alleged loan to the brother, the Appellant's brother never did state that it was a loan that the Appellant made to him. His perception of these funds was completely different than the Appellant's characterization. Instead he stated that he decided to take control of the Appellant's money from the property sale because the Appellant somehow ended up owing six million in Taiwanese currency in respect to a relative's loan. If I believed the brother's testimony that there was no loan to him as claimed by the Appellant, then I must reject the Appellant's evidence on this point. If I believed the Appellant's evidence then how do I reconcile it to the brother's evidence that he managed the funds on behalf of the Appellant. According to Exhibit A-2 the brother may have loaned some of these funds to other individuals as that document refers to "loans to others". However I have difficulty placing any reliance on Exhibit A-2 because it was not independently translated and certified and in addition it is tainted by the very fact that it was the Appellant himself who did the translation. Except for the statements contained in Exhibit A-2, I have no supporting documentation regarding any loans, if in fact they did exist. I simply cannot accept any of the evidence on this point. The only conclusion that I can make is that the facts, names and dates, or lack thereof, are so vague or non-existent that the loan, if it did exist, remains wrapped in a cloak of secrecy. It was only the Appellant and his brother who could have unravelled that mystery and they simply avoided doing so. I therefore cannot accept the Appellant's submissions that I should treat this as loan repayments from his non-resident brother. In addition the taxation years before me are 1999 and 2000 and I have no way of identifying or linking up those funds which were wired from Taiwan in those years to the funds, which according to the Appellant, originated with the sale of property in 1995. The funds could be from any number of sources from various other transactions and dealings between 1995 and 1999. The Appellant's estimated net worth when he came to Canada was about $10 million, which included, in addition to the property which he apparently sold in 1995, additional parcels of land and a home that he recently rented. In fact, I have no documentation before me that would allow me to conclude that a property sale did in fact occur in 1995. At minimum, conveyancing documentation or information from Taiwan could have been provided. The Appellant's brother did state that a notary public, although not involved in the money aspect, completed the transfer documentation at the time of sale. I just have no evidence, documentary or otherwise, to identify the source of these funds. The Appellant did offer the bank's wiring documentation as proof but all of these records referred to the purpose of the transfers of money as being for educational overseas tuition expenses. Various reasons were offered as to why the purpose of the transfers would be incorrectly stated on these documents. I simply do not buy any of them. When I compare the information contained in the Appellant's immigration documents with the Appellant's testimony, these documents also contained discrepancies concerning his property holdings. He blamed the inadequate reporting of his assets in his application for Canadian immigrant status on immigration consultants, much the same as he had done with the wiring documentation, where he blamed misstatements either on the bank or the individuals who took the funds to the bank for transfer. In addition, these immigration papers, which the Appellant executed confirming the information was complete and true, state that the Appellant's indebtedness was nil. This clearly contradicts the oral testimony. Likewise, the Appellant admitted that the foreign income verification statements (Forms T1135) contain statements concerning indebtedness owed by non-residents, which contradict his oral testimony. If any sense can be made from the oral evidence adduced at the hearing, it appears that, if there ever was a loan, it was not to the brother, as the Appellant would have me believe but based on the brother's testimony, it was held by him as a trustee and perhaps loaned out to others as the brother saw fit.
[32] The brother's testimony is that on three different occasions he carried money from the property sale totalling $1 million from the purchaser's home to his home, where three other relatives were also completing different deals with this same purchaser and picking up cash. Instead of depositing the large cash amounts into a bank account or even a safety deposit box, he kept the cash in his bedroom closet without safeguarding it in any way except to lock the door to his home when he left. According to his evidence, he transferred the cash to the Appellant in various amounts over time when the Appellant requested money. On these occasions, he entrusted large amounts of cash to a son or a niece, with no instructions except to go to the bank to complete a transfer to the Appellant and with no steps taken to safeguard the transport of such large sums of money. In the end, I reject the evidence of both the Appellant and his brother. During the hearing, I formed an unfavourable opinion in respect to the credibility of both of them as their improbable stories were simply filled with too many inconsistencies and omissions to be believable.
[33] As inherently unreliable as net worth assessments may be, the Appellant has not provided me with any basis upon which the Minister's assessment might be challenged. The auditor's evidence was straightforward. She reviewed the methodology she used to arrive at her assessment and her approach was reasonable in these circumstances. In fact she gave the Appellant the benefit of the doubt when using the Statistics Canada figures.
[34] Finally, there is the matter of the penalties imposed pursuant to subsection 163(2) of the Act. The onus is upon the Minister to show that there is a misstatement or omission in a return and that the requisite mental state is present. The auditor explained in detail why she imposed the penalties on the underreported income in each year and those reasons are supported by the evidence.
[35] The Appellant's evidence respecting the reasons for those misstatements and omissions in the various documents are simply unacceptable. He is an educated man who had an estimated net worth of over $10 million when he immigrated to Canada. He had detailed information of Canadian transactions but was unable or unwilling to provide anything concrete respecting his transactions in Taiwan. There are compelling arguments supporting the imposition of penalties under subsection 163(2) in this case and the penalties will therefore remain as assessed.
[36] The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 5th day of December 2005.
Campbell J.
Email this Content