REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal under the
informal procedure from reassessments made by the Minister of National Revenue
(the Minister) under the Income Tax Act, R.S.C. 1985 c. 1 (5th Supp.),
as amended (the Act), dated April 4, 2011, and February 28, 2013,
concerning the 2005, 2006, 2007, 2008 and 2009 taxation years.
[2]
In the reassessments dated April 4, 2011, the
following adjustments were made to the appellant’s tax returns:
|
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
Unreported income
|
$25,747
|
$11,475
|
$21,876
|
$32,070
|
$98,928
|
|
Amount subject to penalty under subsection 163(2)
|
$25,747
|
$11,475
|
$21,876
|
$32,070
|
$98,928
|
|
Penalty imposed under subsection 163(2)
|
$1,959.01
|
$730.85
|
$1,152.36
|
$1,476.41
|
$12,056.07
|
[3]
In the reassessment dated
February 28, 2013, the following adjustments were made in respect of the 2008
and 2009 taxation years following the objection filed by the appellant:
|
|
2008
|
2009
|
|
Reduction to unreported
income
|
$6,825
|
$39,682
|
|
Revised amount subject to penalty under subsection 163(2)
|
$25,245
|
$59,246
|
|
Revised penalty under subsection 163(2)
|
$915
|
$5,482.88
|
[4]
The issues are as follows:
(a) For the 2005 and 2006
taxation years, was the Minister authorized to reassess after the normal
reassessment period?
(b) Was the Minister justified
in adding to the appellant's income the respective amounts of $25,747, $11,475,
$21,876, $25,245 and $59,246 for the 2005, 2006, 2007, 2008 and 2009 taxation
years?
(c) Was the Minister
justified in applying the penalty set out in subsection 163(2) of the Act
to the amounts added to the appellant's income for the 2005 to 2009 taxation
years inclusively?
[5]
In establishing the tax payable by the
appellant, the Minister relied on the following assumptions
and findings of fact as stated at paragraph 7 of the Reply to the Notice
of Appeal:
[Translation]
(a) The appellant worked as a real estate agent
in Quebec;
(b) The appellant owned 14 condos in the Dominican Republic, which she used to rent out and which she sold during the years at
issue;
(c) The appellant rents out a rental unit, which
is in the basement of her principal residence, and sometimes she rents out a
room;
(d) When filing her tax returns for the 2005,
2006, 2007, 2008 and 2009 taxation years, the appellant reported total income
of $15,650, $15,562, $6,125, $5,816 and $17,313 respectively.
(e) During the audit, an analysis by means of
the deposit method made it possible to show some discrepancies between the appellant’s
deposits and the income she had reported;
(f) The Minister thus conducted an indirect
verification of income using the net worth method;
(g) Personal expenses were established by the
appellant and consolidated by statements of immovable rentals, credit card statements
and bank accounts.
(h) The net worth calculations are attached
hereto, making them an integral part hereof (see Appendix for details);
(i) At the objection stage, the appellant filed
new supporting documents for the amounts of $6,825 and $39,681 thus making it
possible to revise the unreported income to $25,245 for the 2008 taxation year
and $59,246 for the 2009 taxation year.
[6]
In imposing the
penalty provided for in subsection 163(2) of the Act on the appellant, the
Minister relied on the following facts set out in paragraph 8 of the Reply
to the Notice of Appeal:
[Translation]
(a) The facts set out
at paragraph 7;
(b) The appellant adds up her income and
expenses, and her accountant files the tax returns based on the information she
receives from the appellant;
(c) The appellant knew the importance of filing
appropriate returns since she has been audited in previous years. Additional income was added and a penalty
under subsection 163(2) of the Act had been imposed.
(d) The adjustments are significant because they
represent respectively 165%, 74%, 357%, 434% and 342% of the income initially
reported by the appellant;
(e) The income reported by the appellant is insufficient
to cover her personal expenses.
[7]
The appellant testified at
the hearing. She was a real estate agent for 15 years,
that is, from 1979 to 1994. She first visited
the Dominican Republic in 1987 after she was mandated to sell a condominium
unit. She bought the condominium unit in question with her spouse and remained
active in the Dominican Republic for about 20 years while still keeping her
principal residence in Quebec.
[8]
In 1987, the appellant
concluded a five-year contract for the administration of a building complex
comprising 27 condominium units, built by people from Quebec. To obtain the management contract, the
appellant apparently agreed to pay $400,000 in instalments spread out over five
years. During the first year of operating the
complex, the appellant's gross income was only $25,000, which was clearly
insufficient. To maximize the return on her
investment, the appellant began buying condominium units when owners put them
up for sale. She allegedly bought 14 units in
this way. The condo unit purchases were
apparently made through a company incorporated in the Dominican Republic. No documentary evidence concerning the
condo unit purchases was filed at the hearing. The appellant filed no title registrations
for the condo units in the company's name, no financial statements for the company,
no minute book for the company, no bank account statements for the company from
Scotia Bank in the Dominican Republic and no sale contract for the condo units.
[9]
According
to the appellant, the condo units were all sold for $25,000 in 2003 and 2004. No documentary evidence of those sales was
filed at the hearing. However, the appellant stated
that there was $100,000 in the company's bank account when she closed it to put
the money in the bank's safety deposit box. According
to the appellant, the money was brought to Canada in $10,000 instalments each
time she returned to the Dominican Republic.
[10]
As the income reported by
the appellant was insufficient to justify her lifestyle, the appellant was
audited by Quebec tax authorities. The appellant's 1993 to 1997 taxation years were assessed
following an indirect verification of the appellant's income through the net
worth method. The income generated through the
appellant's activities in the Dominican Republic was never reported to the
Canadian and Quebec tax authorities. Following Revenu Québec's assessments, the
appellant declared bankruptcy in 1998 or 1999. She was discharged from bankruptcy
in 2001 following her undertaking to pay a penalty of $100,000, which she is still
paying in instalments of $250 per month. The
money the appellant had in the bank account in the Dominican Republic was not
reported to the trustee in bankruptcy.
[11]
During the audit by the
Canada Revenue Agency (CRA), the appellant filed an adjustment request
concerning the 2005 taxation year, to add to her income rent of about $100 per
week for a room in the basement of her residence; the tenant received room and
board. In addition to the
basement room, the appellant also rents out a one‑bedroom apartment in
the basement of her residence. The rental
income from that apartment was correctly reported by the appellant.
[12]
The appellant's accountant,
Michèle Emond also testified at the hearing. She was the appellant's representative at the objection
stage, and she explained that her mandate was limited at that time to
determining the appellant's income. Following
the adjustments made in the assessment dated February 28, 2013, Ms. Emond
reviewed the appellant's assets and liabilities and indicated to the Court the
duplications and expenses paid by cheques that she had traced in the net worth.
Following the submissions of the appellant's
accountant, the respondent agreed to make the following adjustments:
|
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
Reduction of unreported income
|
$2,143
|
$8,788
|
$3,954
|
$3,683
|
$15,965
|
|
Revised amount subject to penalty under subsection 163(2)
|
$23,604
|
$2,687
|
$17,922
|
$21,562
|
$43,281
|
[13]
After these adjustments, the
assets and liabilities in the net worth are no longer disputed. The only issue lies therefore with the
appellant's personal expenses.
[14]
Marie-Josée Tardif, auditor
with CRA, also testified at the hearing and she mainly revealed the following
contradiction in the appellant's testimony. Contrary to the appellant's testimony, she had not sold all
of her condominium units in 2003 and 2004. As
part of the audit, the appellant acknowledged that in 2005 and 2006, she was
still in operation and continued to rent out the condo units in the Dominican Republic. At the hearing, the appellant
acknowledged that she should have reported all of her income from the Dominican Republic.
[15]
The auditor also explained
that the appellant's cost of living was determined based on the appellant's
initial interview questionnaire, an analysis of purchases and withdrawals made
using the appellant's bank accounts and an analysis of purchases made with the
appellant's credit cards. Below is a summary of the appellant's personal expenses for each of the taxation
years at issue:
|
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
Personal expenses
|
$31,472.37
|
$36,489.06
|
$29,931.44
|
$33,631.18
|
$52,218.95
|
[16]
To help in weighing the
analysis of the appellant's personal expenses, the following facts should be
kept in mind:
- The appellant was the sole owner of her residence;
- The appellant took two trips to the Dominican Republic in 2007 to bring back $10,000 in cash.
- The appellant owned a 10-metre motor boat named
"Saxeaufun" and a 2002 Ford Taurus vehicle; and
- The appellant owned a condominium in Florida,
purchased in 2009, for $36,000, paid in cash.
[17]
During Ms. Tardif's
testimony, the respondent filed the audit report, report for the re-opening of
2005 and 2006, and report on the penalty under subsection 163(2) of the
Act.
Applicable statutory provisions
[18]
The legislative provisions
applicable to this appeal are as follows:
9(1) Income. Subject to this Part, a taxpayer’s
income for a taxation year from a business or property is the taxpayer’s profit
from that business or property for the year.
152(4) Assessment and reassessment
[limitation period]. The
Minister may at any time make an assessment, reassessment or additional
assessment of tax for a taxation year, interest or penalties, if any, payable
under this Part by a taxpayer or notify in writing any person by whom a return
of income for a taxation year has been filed that no tax is payable for the
year, except that an assessment, reassessment or additional assessment may be
made after the taxpayer’s normal reassessment period in respect of the year
only if
(a) the
taxpayer or person filing the return
(i) has made any misrepresentation that is
attributable to neglect, carelessness or wilful default or has committed any
fraud in filing the return or in supplying any information under this Act, or
152(7) Assessment not dependent
on return or information. The
Minister is not bound by a return or information supplied by or on behalf of a
taxpayer and, in making an assessment, may, notwithstanding a return or
information so supplied or if no return has been filed, assess the tax payable
under this Part.
152(8) Assessment deemed valid
and binding. An assessment shall, subject to being varied or vacated on
an objection or appeal under this Part and subject to a reassessment, be deemed
to be valid and binding notwithstanding any error, defect or omission in the
assessment or in any proceeding under this Act relating thereto.
163(2) False
statements or omissions. Every person who, knowingly, or under circumstances
amounting to gross negligence, has made or has participated in, assented to or
acquiesced in the making of, a false statement or omission in a return, form,
certificate, statement or answer (in this section referred to as a “return”)
filed or made in respect of a taxation year for the purposes of this Act, is
liable to a penalty of the greater of $100 and 50% of the total of
. . .
Analysis
[19]
The onus is on the
respondent to establish for each of the statute-barred years, in this case,
2005 and 2006, that the appellant has made a misrepresentation of fact that is
attributable to neglect, carelessness or wilful default and that the penalties
set out in subsection 163(2) of the Act were imposed correctly for each of the
taxation years at issue.
[20]
In light of the facts of
this appeal, I am of the view that the respondent has discharged her burden of
proof. The appellant also
specifically admitted during the hearing that she had not reported, in the 2005
and 2006 taxation years, the income generated by her activities in the Dominican Republic and that she should have reported it. Because
of this, the Minister was justified in making reassessments for said taxation
years after the normal reassessment period and in imposing penalties for gross
negligence under subsection 163(2) of the Act.
[21]
The Minister had to use the
net worth method to determine the appellant's income because the appellant made
various transactions in cash; her books, records and other documents were
insufficient and incomplete; and she did her own bookkeeping.
[22]
The net worth calculations
made by the Minister showed significant discrepancies between the appellant's
reported income and the income established through the net worth method.
Evidently, the income reported by the appellant, namely, $15,650, $15,564,
$6,125, $5,816 and $17,313 for 2005 to 2009 respectively was clearly insufficient
to meet her needs.
[23]
The net worth calculations
made by the Minister were very thoroughly examined by the appellant's
accountant, and, for that reason, two sets of adjustments were made to them. The only dispute that remains concerns
the appellant's personal expenses.
[24]
The appellant claims that
she lived on her [Translation] "old
earnings" and that she had access to $100,000 in cash from her activities
in the Dominican Republic.
[25]
Counsel for the respondent
stated that the capital accumulated before the audit period should have
appeared in the assets at the beginning of the period and that, in any case, no
evidence showing the existence of the $100,000 was filed.
[26]
The amounts of personal
expenses used as part of the net worth assessment seem reasonable to me in the
circumstances, considering the appellant's lifestyle: residence in Quebec, condominium in Florida, pleasure craft in Quebec, etc.
[27]
The fact that adjustments
were made to the appellant's net worth does not mean that the net worth was calculated
incorrectly or botched. The
net worth method to reconstruct the increase in a taxpayer's net assets is an
alternative method whose results are sometimes imperfect but still sufficiently
reliable when it is done rigorously like in this case.
[28]
With regard to the penalty
under subsection 163(2) of the Act for the 2005, 2006, 2007, 2008 and 2009
taxation years, the respondent has also discharged her burden of proof.
Significant discrepancies were identified between the appellant’s reported and
unreported income. The
appellant knew that her income was underestimated because she gave the numbers
to her accountant at the end of each year so that she could prepare her income
tax returns. In proceeding in that way, the
appellant was negligent in not reporting all of her income. The appellant had sufficient knowledge to know that she
should report all of her foreign income. The
appellant was the subject of criminal proceedings because she had not reported
all of her income for the 1993 to 1997 taxation years. Therefore, she knew the consequences of not reporting all
of her income.
[29]
Given the concessions made by
the respondent at the hearing, Ms. Gobeil's appeal is allowed and the
reassessments are referred back to the Minister for reconsideration and
reassessment in order to give effect to those concessions. The penalties must be adjusted
accordingly.
Signed at Ottawa, Canada, this 5th day of December 2014.
"Réal
Favreau"
Translation certified true
On this 19th day of January 2015
Margarita
Gorbounova, Translator
Email this Content