Date: 20010131
Docket: 2000-3276-IT-I
BETWEEN:
LEO DUCHESNE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1]
These appeals are from assessments made under the Income Tax
Act for the 1995, 1996 and 1997 taxation years. A related
appeal under the Excise Tax Act was allowed on
consent.
[2]
The income tax assessments were made on the basis of the net
worth method. I had occasion to consider the net worth method of
determining income in Bigayan v. The Queen, [2000]
1 C.T.C. 2229, 2000 DTC 1619. It may be useful to
repeat what was said there.
[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. The appellant chose to use
the second method.
[3]
Mr. Duchesne in the years in question carried on business of
auto repairs, tow truck services and the sale of auto parts and
tires under the name Duchesne Tire and Auto Parts.
[4]
His practice was to give his bookkeeper, Mr. R.C. Wood, all
invoices showing his sales and purchases and Mr. Wood would
prepare the profit and loss statement for the business.
[5]
The appellant's 1995 T-1 and 1997 T-1 income tax returns were
put in evidence by the respondent. Mr. Duchesne did not
bring his copies to court and as a result the 1996 return was not
in evidence. Evidently the respondent could not find it.
[6]
The 1995 return shows that the business had gross sales of
$328,075 and a cost of sales of $226,025 for a gross profit of
$103,002.37. The operating expenses in 1995 were $109,796 for a
loss of $6,793. In 1997 the business had gross sales of $508,120
and a loss of $22,672. I do not have similar figures for 1996 but
the business showed a loss of $7,964.
[7]
On November 23, 1998 the Minister reassessed the appellant
for 1995, 1996 and 1997 and added for those years $25,017,
$25,894 and $32,199 respectively, resulting in a revised income
of $19,309, $17,930 and $9,594. On objection he reassessed on
January 24, 2000 and varied these figures.
[8]
The amounts added were $23,729, $18,416 and $35,936, with the
result that the final income as assessed was $18,021, $10,453 and
$13,332 for those years. Schedules to the reply to the notice of
appeal set out in some detail the way in which these figures were
developed.
[9]
Ms. Schlaepfer, the auditor of CCRA, testified that the
initial step in the net worth audit was a comparison of the
appellant's balance sheet at the beginning and the end of the
year. This showed a decrease each year of $1,265, $3,055 and
$4,400 respectively. She then added what were assumed to be his
personal expenditures in each year of $25,000, based on national
averages determined by Statistics Canada. In Bigayan I
expressed doubts about the reliability of using Statistics
Canada's figures in net worth calculations and I continue to
doubt their reliability. Nonetheless they are often all we have
to go on. In this case however, the point is moot because at the
objection level the CCRA used actual drawings to determine the
personal living expenses of the appellant and his wife.
Exhibit A-1 lists the appellant's drawings for 1995 and
1996. There were no similar figures put in for 1997.
[10] For 1995
the drawings were $21,341 and for 1996 they were $17,733. The use
of the actual drawings is reflected in the reassessments made on
January 24, 2000 in which the assumed personal expenditures
were reduced to $21,000, $17,000 and $21,000 for the three
years.
[11] Several
points should be noted.
(a)
Mr. Duchesne stated that his personal expenditures for
living expenses did not exceed $15,000 per year. Although I
accept that he and his wife had a very frugal lifestyle I do not
think that a ballpark guesstimate of this sort can carry much
weight.
(b)
The drawings were not deducted in computing income.
(c)
Mr. Duchesne stated that he often took his tow truck home
and worked from his home and that therefore some of the costs of
his home should be treated as a business expense. The evidence
does not permit me to make any finding in this respect.
(d)
Both business and personal expenses were made out of the business
account. This exacerbates the difficulty of reconstructing the
true income of the business, particularly given the fact that the
books and records were in a somewhat chaotic state to begin
with.
[12] As was
said in Bigayan, piecemeal tinkering with a net worth
assessment is inherently unsatisfactory. It is like doing a minor
tune up to an automobile that is missing a timing belt, if I may
use an analogy that will be familiar to Mr. Duchesne.
Nonetheless, where flaws are obvious they should be
corrected.
[13] There are
two adjustments that I think should be made to the net worth
assessment.
[14]
Mr. Duchesne stated that all of the Visa accounts were for
business expenses and that personal expenses were put on
Mastercard. He struck me as a thoroughly honest man and I accept
his testimony. Indeed he was not challenged or cross-examined on
this point (see Browne v. Dunn, [1894] 6 R 67 at
70-71 (H.L.).[1] It
would follow that these payments should not have been included in
his personal expenditures for the purposes of determining his
income on the net worth method.
[15] The total
of the Visa payments for 1995 by my calculation is $6,152.76 and
for 1996 $6,981.19. I do not have similar figures for 1997 but
they are no doubt readily ascertainable. The Visa payments should
be deleted from the appellant's personal expenditures for
1995, 1996 and 1997 for the purpose of calculating his income
using the net worth method.
[16] One other
minor adjustment should be made. In 1997 there was added $2,250
identified as loss on sale of a Buick. This was not explained but
prima facie it is difficult to see how a loss on the sale
of an automobile can constitute an addition to one's net
worth and therefore to one's income. In the absence of any
explanation, I would delete this amount.
[17] The
appeals are allowed and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment
with these reasons. There will be no order for costs.
Signed at Ottawa, Canada, this 31st day of January 2001.
"D.G.H. Bowman"
A.C.J.
Email this Content