Date: 20000814
Docket: 1999-3424(IT)I
BETWEEN:
WESLEY TRELA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
1999-3425(IT)I
AND BETWEEN:
KRYSTYNA TRELA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench at Toronto,
Ontario,
on July 21, 2000)
BOWIE J.T.C.C.
[1] These are my reasons for judgment
in the appeals of Wesley Trela and Krystyna Trela. They appeal
assessments for income tax for the years 1992, 1993, 1994 and
1995.
[2] Krystyna Trela and her son Wesley
Trela, during the relevant period of time, were partners
operating a business called Chris's Restaurant. It appears
that theirs was a 50/50 partnership. It also appears that in
operating the business they did not fulfil the duty that is cast
on people carrying on business by section 230 of the Income
Tax Act, which provides that every person carrying on
business is required to keep books of account at that place of
business, such that the amount of tax for which they are liable
can be computed.
[3] The evidence given by the assessor
in this case was that the restaurant had no cash register in it,
and that there were no cash register tapes available when she
went to conduct her audit. The Appellants' evidence,
specifically the Appellant Krystyna Trela, was that she gave all
her receipts and all the records that she had in connection with
the business to an accountant by the name of Barbara at a firm by
the name of Pagett's Accounting. She was very vague both as
to the identity of the person, and as to what records she gave to
her. From whatever records she had, this accountant prepared some
income statements for Chris's Restaurant for the years 1991,
1992, 1993 and 1994, but on the evidence of the assessor, which I
accept, they were not only unaudited statements, but they were
statements which could not be verified from the records
available. She therefore proceeded to make a net worth assessment
applicable to the two partners, Krystyna and Wesley Trela.
[4] I find that this is a case in
which the assessor was quite justified in taking the net worth
approach to income. Indeed, when taxpayers do not keep proper
records, auditors have no other choice but to apply the net worth
method of assessing. As Bowman J. said in the case of A.A.
Ramey v. Canada, which is reported at [1993] 2 C.T.C. 2119 at
2122:
... 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. ...
It is certainly true of the present case that the Appellants
find themselves in the unfortunate position of having to dispute
net worth assessments for four years solely by reason of their
failure to have available accurate records.
[5] No issue was taken by the
Appellants with the fact that some of the years, or at least one
of them, under appeal was statute-barred at the time of the
reassessment; nor could issue be taken with that, given the
absence of recordkeeping. In addition to Bowman J.'s brief
description of how the net worth assessing process works, I
should point out, because it becomes relevant in this case, that
in addition to taking into account the changes from year to year
in the assets minus the liabilities of the taxpayers, and the
personal expenditures for each year, it is also necessary to take
into account any changes in the taxpayer's assets that may
arise, for example, through loans, or otherwise, which are
increased or decreased during the period. If, for example, a
taxpayer borrows money, then that reflects on the balance sheet,
and when the taxpayer repays the money, that reflects on the
balance sheet as well.
[6] Finally, it must be taken into
account, in moving from the income as assessed by the net worth
method that the taxpayer has, in most cases, declared some
income, and it is only the difference between income as computed
by the net worth method and the income declared by the taxpayer
that becomes a discrepancy to be added to the taxpayer's
income.
[7] In the present cases the assessor
had to contend with two additional facts, one being that the two
taxpayers were in business together as partners; and the other
being that, as well as the two taxpayers, the husband of Krystyna
Trela, who is the father of Wesley Trela, and Wesley Trela's
two brothers also lived in the household, and thereby caused
household expenditures to be increased. These are all factors
which the assessor had to, and did, take into account.
[8] The Appellants' attack on the
net worth assessments is a limited one, but before I get to it I
should indicate that the results of the reassessments were to add
to the income of each of the Appellants $27,063 in the 1992
taxation year; $19,160 in 1993; $25,435 in 1994; and $23,749 in
1995. The specific challenges made to these by the Appellants I
shall deal with in turn. First, the Appellants say that when the
assessor removed from the income statements prepared for
Chris's Restaurant in each year, the amount shown as an
expense for interest and bank charges and then placed that amount
into the personal expenses of the household, that in effect it
was to charge it twice against the Appellants. This submission,
however, ignores the fact that the income statement, being an
unreliable document which cannot be substantiated, plays no part
in the determination of income by the net worth method. In fact,
the assessor in this case was assessing both income tax and goods
and services tax, and she therefore had to use the income
statement, such as it was, in an attempt to ascertain the
liability of the partnership in respect of goods and services
tax. It is for that reason only that the income statement had
some relevance to her.
[9] There is no appeal before me in
relation to the goods and services tax and the income statements,
which were admitted into evidence as Exhibit A-2, have no
relevance in connection with determining the accuracy or lack of
it, of the net worth determinations of income of the two
partners. The fact is that the Appellant Krystyna Trela did in
fact make payments on the mortgage on the house in which she and
her three sons and her husband lived. She said in her evidence
that she made mortgage payments of $2,800 per month, and those
are consistent with the amounts of $33,878 for the first of the
years in question and reduced to slightly under $26,000 for the
last of the years. These amounts, having been paid by her, have
to come out of her income or some other source of funds, and are
therefore properly taken into account by the assessor in the net
worth assessment. I find that the first contention of the
Appellants has no merit.
[10] The next contention advanced on behalf
of the Appellants was that while there are only two partners in
this business and two persons being assessed in respect of the
unrecorded and unreported income, the expenses of five people
living in the household were taken into account. The reason for
this, quite simply, is twofold. First, that it is impossible, or
next to impossible, to determine the household expenses and
living expenses of two only, out of a household of five members.
Secondly, Krystyna Trela said in her evidence, and this is
corroborated as well by the evidence of Wesley Trela, that the
majority of the household expenses were paid by Krystyna out of
the proceeds of the restaurant business. There is no doubt that
some contributions to household expenses were made by Krystyna
Trela's husband, and by the other two sons, all of whom
worked casually at one time or another in the restaurant
business. However, it is clear that the restaurant business was
the main contributor in paying the household expenses.
[11] Furthermore, the assessor, having made
her ascertainment of the unreported income on the basis, as she
freely admits, of household expenditures that are attributable to
all five members of the household, then arrived at the increase
to be made, or the adjustments to be made, to the income as
reported of the two Appellants, and in doing so she took into
account the income that had been earned and reported by Tadeusz
Trela, the husband of Krystyna, and by her other two sons, John
and Adam. By removing these amounts from the adjusted net worth,
as she did at the lower part of Schedule 3 of her working papers,
she effectively gave credit for the contributions of those three
individuals to household expenses, so there is not, as counsel
for the Appellants contends, charged against the two Appellants
the contributions to household expenses of the other three
members of the household. This point too, therefore, has no
merit.
[12] The next contention that arises is that
there was a source of funds that did not get taken into account
in the course of these assessments. The Appellant
Krystyna Trela said in her evidence that in 1993 she
borrowed $8,000 from a Mr. Bonchuk of which she repaid
$6,000 in 1994, and of which $2,000 remained outstanding. It was
not brought out in her evidence for how long it remained
outstanding, but I take it that she meant it remained outstanding
after the period covered by these assessments. The evidence was
not corroborated in any way. Mr. Bonchuck did not appear to
substantiate what Ms. Trela had to say about this loan, nor
were there any cancelled cheques indicating a repayment of it.
Nevertheless, that evidence was not challenged by counsel for the
Crown and she does not ask me to disbelieve it. The effect of
this, then, is that $8,000 in 1993 of the total amount making up
the aggregate increment of net worth and household expenses came
not from income, but from Mr. Bonchuck, and $6,000 went to
repay that in 1994, and the net worth assessments should be
adjusted on that account.
[13] That brings me to the final item in
dispute, and that is that the Appellants say that the personal
expenses attributed to the family by the assessor are too high.
It appears from the assessor's evidence, and from Exhibit
A-2, that the assessor, in approaching the subject of
personal expenditures, looked first to the Appellants for an
estimate of their personal expenditures and, to some extent,
estimates were forthcoming. The evidence of the Appellants was to
the effect that to the extent that the assessor was given
estimates they were given by the accountant and not by the
Appellants personally. It is evident from Exhibit A-4 that
there are more of the items as to which personal expenditures
were taken into account for which no estimates were given than
those for which estimates were given. Both of the Appellants in
their evidence went through the amounts for personal expenditure
that had been used by the assessor, and they took issue with a
total of 16 different items as they were enumerated for the year
1991.
[14] It was contended by the Appellants in
their evidence that there would be no significant difference in
personal expenditures for the 1992 year and subsequent years from
those for the year 1991, and consequently all of the evidence was
directed to that one year. I find that, to some extent, the
amounts are overstated. In saying this, I make no criticism of
the assessor because she appears to have followed a reasonable
procedure, having requested estimates from the Appellants, and
when she was given estimates she appears to have used those
estimates. When she was not given estimates she used average data
obtained from Statistics Canada documents suitable for a family
of five. However, it is obvious that not all families of five
have identical expenses, and there were certain items which, on
the basis of the evidence, I think should be reduced.
[15] The first category of expenditures was
food, and that was not challenged by the Appellants. The second
is shelter, and it was suggested by the Appellants in their
evidence that it was approximately $200 too high and that the
sub-item of $403 for travel or accommodation should be
reduced to $200. I am not going to direct any adjustment to that
item. It came out in the evidence that the Appellant
Krystyna Trela had travelled on one occasion to Florida for
a week and on another occasion she travelled to Calgary. The
Appellants' $200 estimate was nothing better than a guess,
and that item stands. Under household operations, the Appellants
contend that the amount is approximately $200 too high. The
specific item with which issue is taken is pet expenses, and I am
satisfied that the pet expenses, and therefore the subtotal for
household operations, should be reduced by $200.
[16] The next category is clothing, and
Krystyna Trela gave evidence that her expenditures on clothing
would be about $1,000, rather than the $2,142 attributed, and
there is also an item for boy's wear of $170, which counsel
for the Crown agreed would be unlikely in a family comprised only
of adults. The clothing subtotal should be reduced by $1,100.
Under transportation, amounts of $470 for commuter transportation
and $801 for intercity transportation, including air travel are
challenged. I am of the view that this category should be reduced
by a total of $700. It is clear that the family does some travel
by public transport and some intercity travel.
[17] Under health care, the items challenged
are $224 for eye care and $453 for private and public health
insurance. Mr. Trela testified that nobody in the family
during those years needed eye care and that the family had no
health insurance and, accordingly, this category should be
reduced by $677. The next sub-category is personal care,
and an amount of $881 taken from the Statistics Canada data was
challenged, it being suggested that $200 would be more
appropriate. I found the evidence on this item to be extremely
vague, and I doubt very much that the appropriate number is as
low as $200. That item I direct no adjustment to. The next
sub-category is recreation, and a number of items within
that were challenged. The item is made up of such things as toys,
games, photographic goods and services, recreational vehicles and
boats and the like. It would include cable TV, and the evidence
was that the family has cable TV at home and on the restaurant
premises, so there is some significant expenditure there, but I
do believe from the evidence that this family is probably
somewhat below average in its expenditures, probably a good deal
below average in its expenditures on recreation, and I direct
that that item should be reduced by $1,000. The other two items
challenged were under gifts and contributions where the amount
attributed was $460. It was suggested by the Appellants that this
should be reduced to $200, and, again, I find the evidence
sufficiently vague that I would not direct any adjustment
there.
[18] Finally, under the category of
miscellaneous, the item challenged is union and professional
dues, which have been included at $208, and Mr. Trela's
evidence was that there were no union dues payable at that time,
so the personal expenses should be reduced by that $208.
[19] In summary, therefore, the personal
expenditures in each year should be reduced by a total of $3,885.
The appeals are therefore allowed; the reassessments referred
back to the Minister of National Revenue for reconsideration and
reassessment in accordance with these reasons.
Signed
at Ottawa, Canada, this 14th day of August, 2000.
J.T.C.C.
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