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Citation: 2003TCC153
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Date: 20030609
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Docket: 2000-4466(IT)I
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BETWEEN:
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VICTORIEN ROUSSEL,
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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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[OFFICIAL ENGLISH TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] By Notices of
Assessment dated July 5, 1999, the appeals in the case at bar concern the 1995,
1996 and 1997 taxation years. The Minister of National Revenue (the “Minister”)
increased the appellant’s net business income by $46,435, $8,715 and $2,865
respectively. He also assessed a penalty under subsection 163(2) of the Income
Tax Act (the "Act") on the unreported business income for
the years at issue. On July 21, 2000, a reassessment for the 1995 taxation year
reduced the appellant’s net business income by $15,840, which automatically
resulted in a reduction of the penalty. The net amount of unreported income for
1995 is accordingly $30,595. The assessments for the 1996 and 1997 taxation
years are unchanged.
[2] The Minister
based the reassessments on the following facts, which were admitted or denied
by the appellant as is indicated:
[TRANSLATION]
(a) during
the years at issue, the appellant rented rooms located in the basement of his
residence and operated a business known by the name of “Variétés Nord-Sud”,
located at 1484 Jacques-Cartier in Mont-Joli; (admitted)
(b) the
business included a tobacco shop and a video centre, and the appellant was its
sole proprietor during the years at issue; (admitted)
(c) at
all material times, the appellant kept his own books and records for his
business and recorded his rental income himself; (admitted)
(d) during
the years at issue, the appellant worked more than 80 hours a week in his
business and kept track of nearly all of the cash receipts and disbursements;
(admitted)
(e) the
appellant recorded his income in a sales register and prepared the compilation
of deposits himself; in short, he kept track of every aspect of his business;
(admitted)
(f) a
third person prepared his tax returns on the basis of the information and
documents that the appellant provided him with; (admitted)
(g) for
the years at issue, the appellant reported the following income:
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DESCRIPTION
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1995
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1996
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1997
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Investment
income
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$1,752
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$7,017
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$10,986
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Net
rental income
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$999
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($320)
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$729
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Net
business income
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$1,742
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$1,113
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($2,287)
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Total income
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$4,493
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$7,810
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$9,427
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less:
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RRSP
contributions
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$4,000
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$4,000
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Net income
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$4,493
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$3,810
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$5,427
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(admitted)
(h) the
appellant’s gross business income for the years at issue was:
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30/09/1995
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$277,038
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31/12/1995
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$67,682
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31/12/1996
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$252,884
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31/12/1997
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$229,393
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(admitted)
(i) in
view of the non-existent internal controls, the lack of a fact-based audit
trail and the basic records and background documents that were unavailable or
incomprehensible, the audit of the appellant’s tax returns for the years at issue
was made according to the “net worth” method; (denied)
(j) initially,
the additional income for each year at issue, established according to the “net
worth” method, was itemized as follows:
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30/09/1995
(12 months)
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$30,968
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31/12/95
(3 months)
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$15,467
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31/12/1996
(12 months)
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$8,715
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31/12/1997
(12 months)
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$2,865
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(denied)
(an
analysis of the change using the “net worth” method is found under the heading
entitled “Schedule”)
(k) at
the objections stage, the additional income calculated by the “net worth”
method for the period ending on 30/09/1995 was reduced to $15,128; therefore,
an adjustment of $15,840 to the inventory balance of 01/10/1994 was reflected;
(admitted)
(l) the
inventory balance of 01/10/1994, overstated by the appellant by an amount
estimated at $15,840, was adjusted twice at the time of the audit; the error
was therefore corrected at the objections stage; (admitted)
(m) as
a result of the adjustment, the additional income calculated according to the
“net worth” method for the 1995 taxation year is therefore $30,595, that is,
$15,128 for the period ending on 30/09/1995 and $15,467 for the period ending
on 31/12/1995; (admitted)
(n) for
the 1995 taxation year, the penalty was calculated on $14,755 instead of
$30,595 since a portion of the difference, namely $15,840, can be attributed to
the overstatement of the inventory as at 01/10/1994; (admitted)
(o) this
is not the appellant’s first “net worth” audit since the 1991, 1992 and 1993
years were audited according to that method; (admitted)
the appellant
did not, however, improve his accounting system or his bookkeeping; (denied)
(p) the
appellant 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 the returns filed for the taxation years at issue,
with the result that the tax that he would have had to pay according to the
information provided in the income tax returns filed for those years was
$1,777.50 less than the amount of tax payable for the 1995 taxation year; $841
less for the 1996 taxation year; and $261.64 less for the 1997 taxation year;
(denied)
(q) consequently,
on the Notice of Reassessment dated July 5, 1999, for the 1996 and 1997
taxation years, and dated July 21, 2000, for the 1995 taxation year, the
Minister assessed the appellant a penalty under subsection 163(2) of the Act
of $888.79 for 1995, $420.50 for 1996, and $100 for 1997; (denied)
(r) in
addition, having received the appellant’s tax return for the 1997 taxation year
on June 19, 1998, the Minister assessed him a penalty of $13.08 for late filing
under subsection 162(1) of the Act. (admitted)
[3] It is not
necessary to reproduce the Schedule attached to the Reply to the Notice of
Appeal or the amended version of the Schedule, which was adduced at the
hearing. It will suffice for me to refer to it, if necessary, in order to
illustrate the evidence presented. The appeals were heard in two stages and it
was when the hearing resumed that the respondent filed in evidence a corrected
version of the Schedule attached to his Reply to the Notice of Appeal, which
version reflected and considered some information adduced by the appellant in
the first stage of the trial.
[4] The facts set out
in the Reply to the Notice of Appeal that the appellant admitted provide a good
summary of the appellant’s business operations and there is no need to revisit
them. Annie Primard, a tax auditor with the respondent, was put in charge
of auditing the appellant’s tax returns. She contacted the appellant on April
21, 1998, and, because of the appellant’s special circumstances at the time,
she postponed the audit to October 1998 and finally to December 1998.
[5] Ms. Primard
testified that the accounting records in the case at bar seemed to be adequate,
but there was no internal control of the deposits and withdrawals. She noted
that the appellant’s net income was very low compared to his gross business
income from his activities and that, despite this, there was investment income.
She therefore decided to conduct the audit by the “net worth” method. She
testified that she had a great deal of difficulty obtaining the appellant’s
cooperation. A request for a bank authorization dated December 14, 1998, was
sent to the appellant, but the authorization was not provided until April 7,
1999. The appellant refused to talk to Ms. Primard on the telephone and, when he did
talk to her, what he said was not always favourable. Ms. Primard tried to
meet with him on a number of occasions to talk to him about some adjustments
because the appellant was in the best position to explain things to her. The
appellant was never available. Ms. Primard accordingly had to
spend about seventy-five additional hours on the appellant’s audit because of
his lack of cooperation.
[6] She testified
that, in the light of the information provided by the appellant in his
testimony at the first stage of the hearing, she made adjustments to the
calculations found in the Schedule attached to the Reply to the Notice of Appeal.
For instance, for the financial year ending on September 30, 1994, she
increased the amount indicated as the appellant’s investment in Les
Mutuellistes by $15,000, which favoured the appellant. Later in my Reasons, I
will return to the other evidence adduced by the appellant.
[7] The principles
that apply in cases involving assessments based on “net worth” were summarized
by Judge Bowman in Bigayan v. The Queen, [1999] T.C.J. 778; 2000
DTC 1619, where he says at paragraphs 2 to 4:
[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.
[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 page 683:
In the
absence of records, the alternative course open to the appellant was to prove
that even on a proper and complete "net worth" basis the assessments
were wrong.
[4] This method of
challenging a net worth assessment is accepted, but even after the adjustments
have been completed one is left with the uneasy feeling that the truth has not
been fully uncovered. Tinkering with an inherently flawed and imperfect vehicle
is not likely to perfect it.…
Judge Bowman also said in Martin v. Canada,
[1999] T.C.J. No. 781 (Q.L.), at paragraph 3:
It is not necessary for
me to repeat what has been said about net worth assessments in other cases. The
statutory basis is found in subsections 152(4) and 152(7) of the Income Tax
Act. The effect of subsection 152(7) has been articulated in Dezura v. Minister
of National Revenue, [1948] Ex. C.R. 10; Morrow v. The Queen, 92
D.T.C. 6380; Kerr v. The Queen, 89 D.T.C. 5348; Chernenkoff v. Minister of
National Revenue, 49 D.T.C. 680 and Ramey v. The Queen, 93 D.T.C. 791. The means of determining a
taxpayer's income by the net worth method is necessarily somewhat arbitrary and
imprecise and it is used only as a last resort.
[8] In the case at
bar, the calculations of net worth were made according to the information that
the auditor obtained in the context of the investigation that she undoubtedly
conducted and that was necessary given that the appellant’s bookkeeping was
inadequate and he did not want to cooperate with the auditor or explain things
to her.
[9] In his testimony,
the appellant contented himself with indicating some errors that he had found
in the auditor’s calculations. In support of his position, he filed a number of
vouchers, some and even many of which were accepted by the auditor. Examination
of the evidence filed by the appellant, moreover, allowed the auditor to adjust
her calculations and file them when the hearing resumed. The appellant did not
prove, however, that his real income was what he had reported in his returns.
[10] Based on the net
worth calculations and the evidence provided by the appellant, Exhibit I-1
became the basis on which the government increased the appellant’s net worth.
In her testimony, the auditor was careful to review each of the points advanced
by the appellant and supported by vouchers, and she made changes that were
favourable to the appellant.
[11] Some of the points
raised by the appellant could not be considered by reason of the principles
applicable to the calculations used in determining net worth, which is
essentially a comparison of a situation existing on two given dates. This
explains the difference between the value of the inventory at September 30 and
at October 1, 1994. At September 30, 1994, the value of the appellant’s
inventory was $10,000 according to his tax returns, and the purchases of videos
for his business were made the following day. However, the value of the
inventory at the beginning of a financial year should be the same as at the end
of the preceding financial year.
[12] According to the
appellant, the bank accounts referred to in the auditor’s calculations included
his RRSPs. The auditor based her calculations on an examination of the Caisse
Populaire’s microfiches and, since the appellant made withdrawals from his
accounts without receiving T4RSPs and did not report the withdrawals in his
income, the auditor concluded that the bank accounts in question did not
include any investments in RRSPs.
[13] The auditor,
furthermore, analysed the supporting evidence relating to the appellant’s
accounts payable. In her amended calculations she grossed up the accounts
payable on the basis of the evidence the appellant had adduced at the hearing.
She explained that during the audit, the appellant had never provided her with
his list of accounts payable. She had made her initial calculations on the
basis of invoices that she had found by searching through the boxes the
appellant had given her. However, according to the auditor’s calculations, some
other points raised by the appellant were correct. This was the case, inter
alia, for the figures concerning the amounts of GST and QST owing.
[14] Under the
circumstances and having regard to the auditor’s testimony, I am satisfied that
she did everything in her power to ensure that the net worth calculation was
reasonable. As Judge Bowman emphasized, it is at best an unsatisfactory method,
arbitrary and inaccurate, but sometimes it is the only means of approximating
the income of a taxpayer. Taking into account in her adjusted calculations the
evidence adduced by the appellant, the auditor gave him what could be given,
despite the difficulties that she had and the lack of information available to
her.
[15] The appellant is
the one who was in the best position to establish the amount of his income. It
fell to him to prove on a balance of probabilities that the income reported for
the three years at issue was accurate. The necessary evidence was not given,
except with regard to the adjustments made in calculating the appellant’s
income according to the net worth method and, in this case, it involved
evidence that was largely reflected in the adjusted calculations.
[16] Concerning the
penalties assessed under subsection 163(2) of the Act, I shall refer to
the decision in Venne v. The Queen, [1984] F.C.J. No. 314;
84 DTC 6247, at page 6256, where Judge Strayer analysed gross
negligence in the following terms:
… "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.…
[17] Former Chief
Justice Couture of this Court stated in Morin v. M.N.R., 88 DTC
1592, at page 1597:
To escape the penalties
provided in subsection 163(2) of the Act, it is necessary, in my opinion, that
the taxpayer's attitude and general behaviour be such that no doubt can
seriously be entertained as to his good faith and credibility throughout the
entire period covered by the assessment, ….
[18] Analysis both of
the appellant’s behaviour during the audit and of the evidence, particularly
the evidence relating to the impossibility of keeping track of the deposits
and withdrawals from the business and adequately auditing the accounting
records, reveals an attitude that reflects a certain indifference on the
appellant’s part with respect to his fiscal obligations. As Judge Bowman noted
in Ramey v. The Queen, [1993] T.C.J. No. 142;
93 DTC 791, at page 793:
… 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.…
[19] I am satisfied
that, on a balance of probabilities, the respondent was justified in assessing
penalties for the years at issue in the case at bar.
[20] For these reasons,
the appeals are allowed and the assessments are referred back to the Minister
for rectification by including in the appellant’s income for his 1995 taxation
year the amount of $30,595; for his 1996 year, the amount of $8,715; and
for his 1997 year, the amount of $139. The penalties will have to be
recalculated on the basis of the unreported business income for each of the
taxation years at issue.
Signed at Ottawa, Canada, this 9th day
of June 2003.
J.T.C.C.
Translation certified true
on this 12th day of May 2004.
Sophie Debbané, Revisor
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