Citation: 2005TCC702
Date: 20051110
Docket: 2005-1104(IT)I
BETWEEN:
GRAHAM LUPTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant, Graham Lupton, is appealing from reassessments for the 1998-2001 taxation years whereby the Minister of National Revenue determined that he had understated his income and imposed gross negligence penalties in respect of the unreported amounts. Mr. Lupton had not filed tax returns for the years in question; after an audit and net worth assessment, the Minister issued the reassessments from which Mr. Lupton is appealing. The relevant assumptions are set out in paragraph 11 of the Reply to the Notice of Appeal:
...
(c) in reporting his income for the 1998, 1999, 2000 and 2001 taxation years, the Appellant failed to report any income he earned from the business activities;
(d) the Appellant failed to maintain adequate books and records pertaining to his involvement with the business activities;
...
(f) in reporting his income for the 1998, 1999, 2000 and 2001 taxation years, the Appellant understated his total income by $19,300, $12,159, $16,584 and $13,479 respectively;
...
(h) the value of the Appellant's total assets at the end of the 1997, 1998, 1999, 2000 and 2001 taxations years was $205,350, $212,700, $212,750, $214,800 and $214,850 respectively, as more particularly described in Schedule "A";
(i) the Appellant's total liabilities at the end of the 1997, 1998, 1999, 2000 and 2001 taxation years was $123,088, $118,775, $114,199, $109,328 and $104,178 respectively, as more particularly described in Schedule "A";
(j) in addition to the net increase in assets described above, the Appellant personally expended $19,034, $19,082, $21,137 and $20,429 in the 1998, 1999, 2000 and 2001 taxation years respectively, as more particularly described in Schedule "A";
(k) all source (sic) of non-taxable income received by the Appellant have been fully accounted for in the net worth statement;
...
(m) the Appellant was knowledgeable about the profitability of the business activities. [Emphasis added.]
[2] Mr. Lupton denies that he was engaged in any "business activities" and asserts that he reported fully his income from all sources for 1998-2001. He submits that when making the net worth assessment, the Minister failed to take into account his non-taxable gambling winnings and the financial assistance he received from his girlfriend and parents.
[3] The net worth method of assessment is used as a last resort, often - as is the case here - because the taxpayer has failed to file income tax returns or keep adequate books and records. In such circumstances where the taxpayer disagrees with the Minister's assessment, he faces a difficult task. In Bigayan v. The Queen[1], Bowman, T.C.J. as he then was, offered this advice:
[3] The best method of challenging a net worth assessment is to put forth evidence of what the taxpayer's income actually is. A less satisfactory, but nonetheless acceptable method is described by Cameron, J. in Chernenkoff v. Minister of National Revenue, 49 DTC 680 at 683:
In the absence of records, the alternative course open to the appellant was to prove on a proper and complete "net worth" basis the assessments were wrong.
[4] Mr. Lupton has the burden of demolishing the Minister's assumptions and of satisfying this Court, on a balance of probabilities, that his account is the correct one. In addition to giving his own testimony, Mr. Lupton called his girlfriend Tara and his tenant/employer Vince Kitching, all of whom were credible in the presentation of their evidence.
[5] Since at least 1991, Mr. Lupton has been gambling regularly, most recently in "underground" games of Texas Hold 'Em. He describes himself as a "professional gambler" by which he means that he hopes someday to make his living by gambling. He has had no training other than what he has managed to pick up at the gaming tables. He has never kept any records of his wins and losses, believing gambling winnings to be tax free. He leads a modest lifestyle, he does not drink and has few recreational pursuits other than gambling.
[6] For the reasons set out in greater detail below, I am satisfied that Mr. Lupton has successfully applied the advice in Bigayan first, by putting forward credible evidence that the only income "actually" earned in the taxation years was, as reported, from rental property and employment; and secondly, by showing that the net worth assessment was "wrong" in that it improperly included notional income from non-existent "business activities" and gave insufficient value to funds available to Mr. Lupton from third party contributions and his gambling winnings.
Income from Rental Property
[7] Mr. Lupton owns jointly with his parents a house which was purchased in 1997. A portion of Mr. Lupton's share of the down payment of $68,000 came from a substantial (but never repeated) win at the gambling table. His parents contributed $14,000 and, in all relevant years, paid the property taxes and maintenance costs of the residence.
[8] Mr. Lupton and his girlfriend Tara have been together since 1992. Prior to the house purchase in 1997, they had been living in rental accommodations where Tara was solely responsible for the payment of the rent of $750 per month. This amount was duly reported on her income tax returns for those years. When they moved to Mr. Lupton's house, she continued to pay and report in her income tax returns rent of $750 per month (though she was in reality paying closer to $900 each month). Her pay cheque was deposited in their joint account; rather than paying the rent to Mr. Lupton, she had this amount applied directly to his monthly mortgage payment. Tara's earnings also covered the hydro and telephone bills and various other household expenses. While this strikes me as a somewhat lopsided arrangement, her testimony gave me no reason to doubt that she paid these amounts.
[9] The other source of rental income was Mr. Kitching, Mr. Lupton's employer. Mr. Kitching paid $200 per month in cash. His rent was less than Tara's as he had only one room and was often absent.
[10] Thus, in each of the taxation years, rent from Mr. Lupton's tenants effectively covered his annual mortgage payments of just over $11,000. The rental amounts and related expenses were properly reported in Mr. Lupton's returns.
Income from Employment
[11] Mr. Lupton's other income came from part-time employment delivering flyers for Mr. Kitching approximately 35 - 40 days in each year. He was paid in cash and did not keep any books for this casual work. These amounts were duly reported in his returns.
Third Party Contributions and Gambling Winnings
[12] Mr. Lupton has been very successful at inspiring others to pay his bills. He has been less successful in making a living at the gambling table. While correct in his belief that "gambling winnings" are non-taxable, if he ever does realize his goal of earning income from gambling to the extent that he is in the "business of gambling", his winnings will be taxable. In such circumstances, he will not only need to report his income, but will also be required by the Act to keep books and records to support the claims made in his returns. In the years 1998-2001 however, he was not in the gambling (or any other) business. His winnings - though small - were, together with the contributions of friends and family, sufficient to meet his rather modest needs.
Conclusion
[13] I am satisfied on a balance of probabilities that Mr. Lupton did not understate his income, and accordingly, there is no basis for increasing his taxable income or for the imposition of gross negligence penalties. In reaching this conclusion, I am influenced not only by the credible evidence adduced in support of Mr. Lupton's position but also by the lack of reliable evidence for the Respondent. The only witness called by the Crown was Paul Williamson, the Appeals Officer who reviewed his objection. Mr. Williamson had no personal knowledge of the reassessments, the net worth assessment or the audit. The auditor, Ms. Bird, who dealt directly with Mr. Lupton and whose report was relied upon by Mr. Williamson, was not called. It would have been helpful to the Court to have had Ms. Bird available to address all the issues stemming from the conduct of the audit and the net worth assessment.
[14] The appeals are allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that Mr. Lupton's income for 1998, 1999, 2000 and 2001 is to be assessed as filed in 2003 for each taxation year. All penalties are to be deleted.
Signed at Ottawa, Canada, this 10th day of November, 2005.
"G. Sheridan"
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