Date: 19990614
Docket: 97-3818(IT)I
BETWEEN:
DIMITRI SHERBAKOV,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Watson, D.J.T.C.C.
[1] This appeal was
heard in Edmonton, Alberta on June 1, 1999, under the Informal
Procedure.
[2] In filing his
income tax returns for 1992, 1993 and 1994, the Appellant
declared a total income of $15,303, $16,259 and $24,876
respectively. In reassessing the Appellant for these years, the
Minister of National Revenue (the "Minister") increased
the total as follows:
"Schedule A
Dimitri Sherbakov
Net Worth Discrepancy:
1992
1993
1994_____
Adjusted Net Worth Discrepancy per
Schedule
B2
$ 71,087.06 $ 13,455.37
$ 75,831.15
Less amounts received as a result of
expenses
reimbursed by Trak Reforestation
Inc.
12,300.00
4,800.00
4,800.00
Less capital outlays for farm, previously
expensed
7,622.00
321.00
-
Unexplained Net Worth Discrepancy as a
result of employment/self-employment,
as
determined by the
auditor
51,165.06
8,334.37 71,031.15
Decrease to Total Income as agreed upon
during review of the first Notice of
Objection,
as per Schedule
B3
(24,973.01)
(4,477.00)
(17,884.03)
Revised Increase to Total Income, as
agreed during review of the original
Notice of
Objection
26,192.05
3,857.37 53,147.12
Total Income Reported as
filed
15,303.00
16,259.00 24,876.00
Total Income from all
sources
41,495.05 20,116.37
78,023.12
Income inclusion due to expenses
reimbursed
by Trak Reforestation
Inc.
12,300.00
4,800.00 4,800.00
Add back capital outlays to farming
operation
7,622.00
321.00
-
Total amount added to
Income
19,922.00
5,121.00 4,800.00
Revised Total
Income
$61,417.05 $25,237.37
$82,823.12"
[3] In so reassessing
the Appellant, the Minister made the following assumptions of
fact:
"(a)
at all relevant times, the Appellant owned 50% of the shares of
Trak Reforestation Inc. ("Trak");
(b)
at all relevant times, Trak was engaged in logging
operations;
(c)
at all relevant times, the Appellant was an employee of Trak;
(d)
in the 1992, 1993 and 1994 taxation years, the Appellant received
reimbursements from Trak for amounts paid by the Appellant on
behalf of Trak (the "Reimbursements");
(e)
the Reimbursements were deducted by Trak against its income as
automotive and travel expenses;
(f) the expenses
of Trak in respect of the Reimbursements were also deducted by
the Appellant against his income from self-employment;
(g)
in the 1992, 1993 and 1994 taxation years, the Reimbursements
from Trak were $12,300, $4,800 and $4,800 respectively;
(h)
Trak was the source of the self-employment income reported by the
Appellant in the 1992, 1993 and 1994 taxation years;
(i) in receiving
the Reimbursements, and then deducting those same amounts from
self-employment income, the Appellant received benefits from Trak
in the amounts stated in subparagraph (g) herein (the
"Benefits"), in his capacity as a shareholder of Trak,
or alternatively, in his capacity as an employee of Trak;
(j) in reporting
his income for the 1992, 1993 and 1994 taxation years, the
Appellant failed to report the Benefits;
(k)
in the 1992, 1993 and 1994 taxation years, the Appellant owned
and operated a farm in the vicinity of Plamondon, Alberta;
(l) in reporting
income for the 1992 and 1993 taxation years, the Appellant
deducted amounts totalling $7,622 and $321 respectively arising
from capital outlays (the "Capital Outlays") with
respect to the farm operation;
(m) the
Minister disallowed the deduction of the Capital Outlays from
farming income;
(n)
the Minister added the cost of the Capital Outlays to the capital
cost of farming assets used by the Appellant to earn farming
income;
(o)
the Minister adjusted capital cost allowance in the 1992, 1993
and 1994 taxation years as a result of reclassifying the Capital
Outlays, as shown in Schedule C;
`(p) the income
of the Appellant, from all sources, for the 1992, 1993 and 1994
taxation years was understated by the amounts of $26,192.05,
$3,857.37 and $53,147.12 respectively;
(q)
the income of the Appellant in the 1992, 1993 and 1994 taxation
years from all sources was $41,495.05, $20,116.37 and $78,023.12
respectively;
(r)
in reporting income for the 1992, 1993 and 1994 taxation years
the Appellant did not include all of the income received in those
years;
(s)
at all relevant times, the Appellant failed to maintain proper
books and records for the farming and logging operations; and
(t) the
understated amounts referred to in subparagraph 6(p) herein were
determined by the net worth method (a copy of the Statement of
Personal Net Worth is attached as Schedules "B1 to
B3")."
[4] At the hearing of
the appeal, the agent for the Appellant admitted paragraphs (a),
(d) to (g), (k) to (o), (s) and (t) and denied paragraphs (b),
(c), (h) to (j) and (p) to (r). The Minister relies on section 3,
subsections 9(1), 15(1), 152(4) and 152(7), paragraphs
6(1)(a), 18(1)(b) and 20(1)(a) of the
Income Tax Act (the "Act") and on Parts
XI and XVII of the Income Tax Regulations (the
"Regulations") and submits from the Reply to
Notice of Appeal:
"9. ... that, in
the 1992, 1993 and 1994 taxation years, the Appellant, in his
capacity as shareholder of Trak, received the Benefits from Trak,
and that these Benefits were properly included in his income by
the Minister pursuant to section 3 and subsection 15(1) of the
Act.
10. In
the alternative, he submits that the Benefits were received in
the Appellant's capacity as employee of Trak in the 1992,
1993 and 1994 taxation years and that the Benefits were properly
included in his income pursuant to section 3 and paragraph
6(1)(a) of the Act.
11. He
further submits that the Appellant understated his income from
farming in the 1992 and 1993 taxation years by deducting Capital
Outlays from his income, which amounts are not deductible
pursuant to paragraph 18(1)(b) of the Act, but form
part of the basis for the calculation of capital cost allowance
pursuant to paragraph 20(1)(a) of the Act and
Parts XI and XVII of the Regulations.
12. He
further submits that the Appellant understated his income from
all sources for the 1992, 1993 and 1994 taxation years by the
amounts of $26,192.05, $3,857.37, and $53,147.12 respectively, as
determined by the net worth method and shown in the attached
Schedules. He submits that these amounts were properly included
in the income of the Appellant in the 1992, 1993 and 1994
taxation years pursuant to section 3 and subsections 9(1), 152(4)
and 152(7) of the Act."
[5] The issues to be
decided from paragraph 7 of the Reply to Notice of Appeal
are:
"(a)
whether the Appellant received the Benefits in his capacity as
shareholder of Trak, or, alternatively, in his capacity as
employee of Trak, in the 1992, 1993 and 1994 taxation years;
(b)
whether the Capital Outlays are deductible, or expenditures or
outlays on account of capital in the 1992 and 1993 taxation
years; and,
(c)
whether the Appellant's income, from all sources, for the
1992, 1993 and 1994 taxation years was understated by the amounts
of $26,192.05, $3,857.37 and $53,147.12 respectively."
[6] The Appellant has
the onus of establishing on a balance of probabilities that the
Minister's reassessment is ill-founded in fact and in law; he
must adduce sufficient or reliable evidence justifying a
conclusion that he has, on a balance of probabilities, shown an
error on the part of the Minister.
[7] Bowman, J. of
this Court, in the case of Anthony A. Ramey v. The Queen,
93 D.T.C. 791 at p. 793 stated as follows:
"...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 the year."
[8] In the case of
Luay Zalzalah v. The Queen, 95 DTC 5498, Heald, D.J.
states at p. 5499:
"The plaintiff frankly acknowledged that he did not keep any
books or records during the taxation years here under review.
This matter was also raised in the proceedings before the Tax
Court of Canada where Lamarre Proulx, TCJ stated[1]
The Minister cannot and should not allow business deductions that
cannot be proven by documentary evidence. That would bring the
administration of the Income Tax Act in the sphere of
arbitrariness.
I agree with that view of the matter. Likewise, in the case of
Holotnak v. The Queen,[2] Cullen, J. considered the requirements of
section 230 and stated as follows:
Section 230 of the Act requires taxpayers to keep adequate books
and records."Adequate" is not defined but it would
seem that these records should support whatever the taxpayer is
claiming for tax purposes.
The onus of proof that the expenses were incurred for the purpose
of earning income is on the taxpayer (Wellington Hotel
Holdings Limited v. M.N.R. 73 DTC 5391). Specifically, with
regard to assessments, the onus is on the taxpayer to prove that
the Minister's assumptions and assessments are wrong
(Strayer, J. in Schwarz v. The Queen,
87 DTC 5274) quoting from Johnston v. M.N.R., [3
DTC 1182] [1948] S.C.R. 486). The Schwarz case
(supra) also involved a situation where the
plaintiff's purchases were not supported by vouchers. As
Strayer, J. points out, the onus is on the taxpayer to prove
wrong the M.N.R.'s reassessment as the taxpayer is in a
better position to prove what actually happened."
[9] The Appellant had
three sources of income in the years at issue as follows: Trak a
small family owned enterprise, co-owned by himself and
Feoktist Semerikov, his brother-in-law, which operated on a
seasonal basis from May 1 to mid-November planting and spacing
trees on reforestation contracts for the Government; a logging
operation from mid-November to April, carried on in partnership
with his father and two brothers; and his 100 acre farm located
in a small religious community approximately eight miles from
Plamondon, Alberta.
[10] The Appellant left
school at the age of 14 to work on the family farm; because of
his limited education, he left all the books, records and
accounts with his accountants. There were two separate
accountants, one looking after Trak and the other, his personal
finances and his partnership dealings. He would keep notes when
he spent his own personal funds on Trak or partnership matters
and hand them over to the accountants; he kept no records or
documents himself.
[11] Insofar as Trak was
concerned, both he and Feoktist would frequently inject personal
funds into the company to cover its expenses and then rely on
later being reimbursed; any notes taken were handed over to the
accountant. This happened frequently because Trak operated in
isolated areas and had from 10 to 30 employees at any given time.
Both of them drew funds from the Company's bank account as
needed to cover both business expenses and personal living
expenses for himself and family.
[12] Insofar as the
partnership's logging business was concerned, all four drew
funds from the partnership's bank account and advanced
personal funds into the business when received. Again, the
Appellant would make note of this and hand them over to the other
accountant. The Appellant kept no personal record or documents
relating to the amounts advanced to the partnership or the
amounts spent on business or personal expenses.
[13] In late 1995 or early
1996, when the Appellant was audited by Revenue Canada, he
referred the auditor to his accountants for the information they
needed. Later on, he changed accountants to Equity Tax Management
in Edmonton, Alberta. At the hearing, there was no evidence from
the previous accountants, books, ledgers or other supporting
documentation provided by the Appellant. The testimony of the
Appellant and his brother Platon was based on their memory of
what happened in the three years at issue and, understandably, it
was mostly vague and incomplete rather than reliable.
[14] Taking into
consideration all of the circumstances, including the testimony
of the Appellant, his brother and Revenue Canada auditor, the
admissions and documentary evidence provided by the Respondent in
the light of the well established case law, I am satisfied that
the Appellant has failed in his onus of establishing on a balance
of probabilities that the Minister was ill-founded in fact and in
law in his reassessment.
[15] Accordingly the appeal
is dismissed.
Signed at Ottawa, Canada, this 14th day of
June 1999.
D.J.T.C.C.
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