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Citation: 2004TCC170
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Date: 20040330
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Docket: 2000-4512(GST)I
2001-125(IT)I
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BETWEEN:
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GLENN SIMON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Appellant: Michael Taylor
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Nanaimo, British Columbia, on June 13, 2003)
McArthur J.
[1] These appeals are from assessments
under the Income Tax Act for 1995 and 1996 taxation years
and from an assessment of goods and services tax under the
Excise Tax Act, notice of which is dated April 16, 1999.
By the income tax assessments, the Minister of National Revenue
increased the Appellant's income by $46,654 in 1995 and
$33,416 in 1996. Also, the Minister assessed the Appellant in the
amount of $14,912 for GST for the period January 1, 1995 to
December 31, 1996, plus interest and penalties. However, at the
commencement of the hearing, counsel for the Respondent informed
the Court that the income tax assessments were being reduced by
$10,000 in each year and, therefore, the amounts in issue are
$36,600 in 1995 and $23,400 in 1996.
[2] Before commencing with the merits
of this case, I will say a few words concerning the Appellant's
request for an adjournment.
In recent weeks, the Appellant retained an accountant, Cameron
McLean, who could not attend the hearing because of another
commitment. The Appellant requested an adjournment and I agreed
to adjourn the hearing for three days to June 12, 2003, to permit
the accountant to attend. After a telephone call, the Appellant
informed that his accountant was away until June 12 and could not
be reached. This hearing had been adjourned four previous times;
I believe twice upon the Respondent's request and twice to
accommodate the Appellant. The Respondent strenuously opposed
this adjournment and the previous adjournment that was granted on
January 9, 2003. The Respondent referred to the process of the
file as torturous. Apparently, on January 9, the Appellant
advised that he had retained an accountant, Mr. McGuffie, who
could not attend. Thirteen months earlier, Judge Rowe of this
Court recommended to the Appellant that he obtain a
representative to assist him with this complex appeal. Over the
13-month period, no Appellant representative contacted the
Respondent. Therefore, the Respondent opposed another adjournment
request. In addition to the background referred to, the
Respondent's witness had come from Victoria. The Appellant
was given over a year to obtain a representative and his
adjournment request was denied.
[3] At the outset of the hearing, the
Appellant's mother, who was his bookkeeper, indicated she had
approximately 180 entries in her bluebook of advance loans she
and her husband made to the Appellant in 1995 and 1996. The
hearing was adjourned for approximately three hours to permit the
Respondent's auditor to review these entries. They had
little success. The Respondent conceded a reduction of $8,531 in
1996 and $480 in 1995. The Minister applied the net worth method
of assessment, and for reasons that follow I find that the
Minister was justified in so doing.
[4] An overview of this method is best
set out by Bowman J. in Ramey v. Canada, (1993) 2 C.T.C.
2119 at 2122, where he stated:
... The net worth method of estimating income is an
unsatisfactory and imprecise way of determining a taxpayer's
income for the year. It is a blunt instrument of which the
Minister must avail himself as a last resort. A net worth
assessment involves a comparison of a taxpayer's net worth, i.e.,
the cost of his assets less his liabilities, at the beginning of
a year, with his net worth at the end of the year. To the
difference so determined there are added his expenditures in the
year. The resulting figure is assumed to be his income unless the
taxpayer establishes the contrary. Such assessments may be
inaccurate within a range of indeterminate magnitude but, unless
they are shown to be wrong they stand. It is almost impossible to
challenge such assessments piecemeal. The only truly effective
way of disputing them is by means of a complete reconstruction of
a taxpayer's income for a year. A taxpayer whose business records
and method of reporting income are in such a state of disarray
that a net worth assessment is required is frequently the author
of his or her own misfortunes.
Facts:
[5] The Appellant operated a business
under the name of G & H Auto Wrecking which bought and sold
used cars, motorcycles and parts. He began in 1979 or 1980 after
graduating from Grade 12 and he always had an aptitude for
mechanics. Over the years, he borrowed from his parents and
conventional lending institutions to purchase motorcycles and
cars. In 1991, he purchased a tow truck. The Appellant and his
mother testified on his behalf, and an auditor for the Minister
of National Revenue testified on behalf of the Respondent. The
evidence of the Appellant and his mother was somewhat difficult
to discern. Incidents over the years that the Appellant had been
in business tended to blend together. It was and is primarily a
cash business and inadequate records were kept of the cash
transactions.
[6] I believe during the years in
question, the Appellant purchased a $75,000 property to carry on
his business, without a down payment but by way of a $75,000
mortgage back to the vendor. At some later point, he refinanced
to obtain an additional $10,000 or $15,000. He later lost the
business through foreclosure. Also, at some point, he purchased a
one-third interest in his parent's home, without cash, and
refinanced that property, obtaining money for his business.
[7] In addition to borrowing from his
parents, he borrowed through several credit cards that were, to
use his expression, "always maxed out". He borrowed over $10,000
from a Canada Trust Powerline and that loan went into collection
procedures. I believe Canada Trust obtained a $21,000 judgment
against him during the relevant years. Canadian Tire took
collection action to recover over $3,000 and his parents paid
that debt. To stay in business, he borrowed from Avco Finance and
his parents also paid that loan.
[8] His mother testified that in 1995
and 1996, she and her husband advanced $46,000 and $42,000 to the
Appellant, respectively. He and his business were obviously
insolvent. He lived very frugally at his parent's home.
The thrust of the Appellant's position is that the increase
reflected in the equity of his assets is as a result of unpaid
loans or advances from his parents, again over $40,000 in each
year. The Minister did not have much choice other than taking the
net worth approach to determine the Appellant's income. The
auditor could not trace the cash flowing in and out of the
business. There were no ledgers with double entry. The onus was
on the Appellant to keep proper books and records, and I refer to
section 30 of the Income Tax Act.
[9] The Appellant's attempt to
challenge the assessments on a piecemeal basis was without
success. He aggressively attacked the auditor's inclusion as a
personal expenditure, $7,900 for vehicle expenses in 1995,
without establishing a lower amount, general statements to the
effect that the amount is too high or insufficient. I make no
adjustments in respect of the personal expenditures. The
Minister's assumptions are the best we have. I find the auditor
was very fair with the amounts she attributed for personal
expenditures, $16,600 in 1995 and $12,185 in 1996. I see no need
to review her amounts in any detail. The auditor used the
Appellant's opening inventory in his income tax returns to arrive
at his net worth for 1994, 1995 and 1996. These adjusted amounts
appear to be $211,000, $255,000 and $283,000. Deducting the 1994
amount from the 1995 amount, and the 1995 amount from 1996, she
arrived at an increase in net worth.
[10] The Appellant attempted to recreate his
records by entering photocopies of cheques written by his mother,
Dorothy Simon, on her joint bank account with her husband Helmut.
These totalled $46,742 in 1995, and $41,991 in 1996. There were
about 19 cheques in 1995, and 15 in 1996, payable predominantly
to the Appellant or to ICBC Salvage which is an auto insurance
company from where the Appellant purchased most of his salvaged
vehicles. Attached to these cheques were the bank statements of
Dorothy and Helmut to demonstrate that the amounts of the cheques
were withdrawn from their accounts.
[11] The Appellant apparently repaid only
$1,200 of the $80,000 advanced in 1995 and 1996 by his parents.
Counsel for the Respondent submitted that this evidence was
inadequate stating: "We don't know if particular amounts payable
to the Appellant were used for his business". With his cash
business, the Minister added: "We don't know if he paid his
parents back in cash". Further, Dorothy testified that over
approximately 10 years, she and her husband advanced over
$447,000 to Glenn for his business and that amount has not been
repaid. Counsel for the Respondent submitted that it is highly
unlikely that they had $447,000 to advance, knowing what has been
reported in their income tax returns over the years. Dorothy
stated that she came from money, her husband was a welder of over
40 years and they sold timber from the land abutting their
residence. The Respondent's evidence included that their income
tax returns showed farm losses in each year.
[12] We appear to be left with this. First,
the Appellant had a predominantly cash business, kept inadequate
records, and the Minister correctly conducted a net worth
assessment. Second, the Minister added to the Appellant's
income the amount of $46,600 in 1995 and $33,400 in 1996, and
also assessed him $12,728 for underreported GST. Third, Dorothy
and Helmut Simon advanced at least $40,000 in each of the
relevant years to the Appellant. There is no direct evidence of
repayment of these funds in 1995 or 1996, other than $1,200. I am
left with a great deal of uneasiness, if not suspicion, with
respect to the Appellant's position that only $1,200 was repaid.
This arises mostly because his parents did not appear to have a
means to support themselves, their son and his business, no
matter how generous they might have been.
[13] There was evidence that Glenn purchased
an interest in the family home without cash payment. The reason
for this is difficult to understand. His parents appear to have
made most of the mortgage payments. The Appellant spoke in
generalities of refinancing the home to insert funds into the
business. I
accept that the Appellant was insolvent in 1995 and 1996, and
there is no evidence of inordinate personal spending. If he hid
cash, where did it go? His lifestyle was extremely modest.
No evidence was advanced with respect to the penalties, and the
relevant statutory provisions were not referred to in the
Minister's Reply.
[14] If I accept the Appellant's submission
that his parents loaned him over $40,000 each year, we would end
up with a minus amount of net income each year even though the
Appellant declared income in 1995 of $8,149 and $454 in 1996. The
following statement of Hamlyn J. in Saikely v. M. N. R.,
93 DTC 397, applies equally to the present situation.
... the evidence was without precision, records, or
acceptable documentation.
The taxpayer may attack the assessments in various ways. A
taxpayer may prove the sum of his increase arose from non-taxable
receipts, such as inheritance or gambling, that his net worth at
the beginning of the period was undervalued, or that his assets
at the end were overvalued, that liabilities existing in the end
were admitted or undervalued, that the money had been borrowed or
the income losses were greater than assessed. Whatever is alleged
by the taxpayer must be proved by him. A mere statement is not
enough; more cogent evidence is required to disprove a net worth
assessment.
The lack of precision, the lack of connection, the lack of
records, the lack of documentation, the absence of an essential
witness or witnesses and, quite frankly, the general evasiveness
of the Appellant's testimony leads this Court to the conclusion
that the Appellant has not discharged the onus placed upon
him.
Much of the foregoing also applies to the GST, obviously.
Also, the following comment by Tardif J. in Entrepreneur
Peintre J.L. Incorporated v. The Queen, [1999] T.C.J. No.
253, is also relevant to the Appellant's GST appeal:
[11] The burden of proof was on
Mr. Labranche. He had to prove, on the balance of evidence, the
validity of his argument that he had never done work subject to
the Goods and Services Tax; he also had to show that the
applicable taxes had been collected and remitted. Based on those
two facts, he had to justify the differences observed by the
respondent by giving plausible, probable and reasonable
explanations.
[12] The best way of proving
this would have been to adduce extensive documentary evidence
showing the consistency and accuracy of the financial data. The
exceptional quality of the testimony of one or more witnesses
could perhaps have minimized certain omissions and made up for
certain flaws or weaknesses attributable to the passing of time
or to the inexperience of the individuals subject to the
obligations set out in the Act.
[13] In this regard, I consider
it important to point out and stress the obligation that Mr.
Labranche had to have such documentation in his possession in
order to account for his management of government funds. As an
agent, he had to collect the tax and remit it to the respondent
in accordance with the procedures expressly set out in the
Act. In other words, he had to account for his management
by showing that all of the taxes had been collected and remitted
in accordance with the Act's provisions.
[15] As stated, the Appellant did not have
effective documentary evidence. He could not establish that he
was eligible for further GST input tax credits. The Appellant
submitted no evidence to permit a reduction in GST assessment.
The Minister's review of the Appellant's business affairs has
been continuing for years. There were no surprises presented at
the hearing. The Appellant bought and sold, primarily with cash.
He had a duty to keep adequate records to permit that cash to be
traced. Notwithstanding all of this, it is clear that his family
advanced him substantial funds and he did not have excess funds
on hand during 1995 and 1996, evidenced by his frugal lifestyle,
his overdue credit cards, the judgment, the foreclosure and his
borrowing from five or six different sources. I am satisfied that
there was no saved, hidden cash.
[16] With this in mind, the appeals are
allowed only to the extent that they are referred back to the
Minister to make such adjustments resulting from the concessions
made by counsel for the Respondent at the outset of the hearing
to reduce the income tax assessments by $10,000 in 1995 from
$46,600 to $36,600, and in 1996 from $33,400 to $23,400. The GST
appeal is dismissed. No penalties are assessed and no costs
are granted.
Signed at Ottawa, Canada, this 30th day of March, 2004.
McArthur J.
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