REASONS
FOR JUDGMENT
Graham J.
[1]
The Minister of National Revenue reassessed John
Barbieri’s 2006, 2007 and 2008 taxation years and assessed his GST reporting
periods from January 1, 2007 to December 31, 2008 using the net worth method.
Mr. Barbieri has appealed the results of those reassessments and that
assessment.
Issues Raised
by the Appellant:
[2]
Mr. Barbieri raised issues concerning:
(a) approximately $80,000 in cash held
by him in a safety deposit box;
(b) an $18,000 gift that he made to his
son, Marco Barbieri;
(c) a $20,000 loan that he made to his
ex-girlfriend;
(d) $40,000 that he borrowed from his
brother;
(e) the valuation of a property located
in Surrey;
(f) the valuation of a property located
in Port Moody;
(g) the
amount of personal expenditures included in the net worth calculation;
(h) whether
his 2006, 2007 and 2008 taxation years were statute barred; and
(i) the ownership of three residential
properties.
Safety Deposit
Box
[3]
Mr. Barbieri testified that, on December 31,
2005 he held approximately $40,000 in cash in a safety deposit box and that that cash increased throughout the years in question (due
to his success betting on horse races) such that, by December 31, 2005, he held
approximately $80,000 in cash in the safety deposit box. Mr. Barbieri clearly
testified that, once he deposited cash to the safety deposit box, he did not
remove it.
[4]
Even if I were to accept Mr. Barbieri’s
testimony at face value, no adjustment to the net worth calculation would be
required. The $40,000 in cash held on December 31, 2005 was held continuously
until at least December 31, 2008. Thus, adding it as an asset would have no
effect on Mr. Barbieri’s change in net worth from year to year. The additional
$40,000 deposited to the safety deposit box during the years in question should
have been added to Mr. Barbieri’s assets when it was deposited but the
resulting increase in unreported income would have been completely offset by a
corresponding adjustment made to account for the fact that the income had come
from a non-taxable source. Furthermore, since, once deposited, that additional
$40,000 was held continuously until at least December 31, 2008, adding it as an
asset would have had no ongoing effect on Mr. Barbieri’s change in net
worth.
[5]
If any change were required as a result of Mr.
Barbieri’s testimony it would have been to increase Mr. Barbieri’s personal
expenditures in the net worth calculation by the amount of money that he spent
making bets since, by his own admission, those funds did not come from the
safety deposit box. The Respondent did not pursue an upwards adjustment of the
net worth calculation in respect of this issue.
$18,000 Gift to Marco
[6]
The Minister recorded an $18,000 loan that the
Minister believed Mr. Barbieri made to Marco in 2008 as an asset that Mr.
Barbieri acquired in his 2008 taxation year. Mr. Barbieri acknowledges that he
transferred $18,000 to Marco but submits that it was a gift, not a loan.
Whether the money was a loan or a gift makes no difference to the amount of Mr.
Barbieri’s unreported income. If it was a gift, the result would simply be to
remove the $18,000 from the assets section of the net worth calculation and add
it to the personal expenditures section. Accordingly, no change in the net
worth calculation is required as a result of this issue.
$20,000 Loan to Ex-Girlfriend
[7]
The Minister recorded a $20,000 loan that Mr.
Barbieri made to his ex‑girlfriend as an asset that he had acquired in
his 2008 taxation year. Mr. Barbieri acknowledges making the loan.
However, he argues that, because his girlfriend declared bankruptcy in 2010,
the loan was worthless by the time the audit was conducted and thus should not
have been included in the net worth calculation. A net worth calculation does
not require the determination of the fair market value of an asset either when
the asset is acquired or at any time thereafter including the time that the
audit was conducted. All that is necessary is to determine the adjusted cost
base of the asset. In Mr. Barbieri’s case, the adjusted cost base of the loan
was $20,000. Accordingly, no change in the net worth calculation is required as
a result of this issue.
$40,000 Loan
From Brother
[8]
Mr. Barbieri testified that he borrowed $20,000
from his brother in 2004 and a further $20,000 in 2005. Although his testimony
on the point was somewhat vague, it appears that he began repaying the first
loan in 2004 and the second loan in 2005 and that both loans were repaid in
full sometime between 2005 and 2008. These loans and their repayment were not reflected
in the net worth calculation.
[9]
Even if I were to accept Mr. Barbieri’s evidence
regarding these loans, it would not help him. I would have to add the
outstanding value of the loans as a liability on December 31, 2005 and then
reduce the amount of that liability as the loans were repaid over the course of
the years in question. Doing so would increase the amount of Mr. Barbieri’s
unreported income, not decrease it. The Crown did not pursue an upwards
adjustment in the net worth calculation as a result of this issue. Accordingly,
no change in the net worth calculation is required as a result of this issue.
Valuation of
Surrey Property
[10]
At the end of 2005, Mr. Barbieri owned a
property in Surrey, British Columbia. He disposed of the property in 2006
at a profit and reported the capital gain on this tax return. The Minister
included the property as an opening asset in the net worth calculation. The
Minister listed the property at its adjusted cost base. Mr. Barbieri argues
that the property should have been listed at its fair market value. Mr.
Barbieri also submits that he already reported the gain when he filed his tax
return so he should not be taxed on it again.
[11]
Mr. Barbieri’s concerns are unfounded. As set
out above, in a net worth calculation, assets are listed at their adjusted cost
base, not their fair market value. Thus, the Minister correctly listed the
Surrey property at its adjusted cost base.
[12]
Furthermore, Mr. Barbieri is only being taxed
once in respect of the Surrey property. Net worth calculations are designed to
determine unreported income. A key step in that determination is the deduction
of the income already reported by the taxpayer. In Mr. Barbieri’s case, the
Minister deducted the income that Mr. Barbieri already declared and accounted for
the fact that Mr. Barbieri was only taxable on 50% of his capital gain on
the property. Accordingly, no change in the net worth calculation is required
as a result of this issue.
Valuation of
Port Moody Property
[13]
Mr. Barbieri owned a property in Port Moody,
British Columbia throughout the period in question. He expressed concerns that
the property was listed in the net worth calculation at too low a value. I
explained to Mr. Barbieri that the determination of unreported income in a net
worth assessment is not affected by the value of any asset that is owned
throughout the period. He appeared to accept that explanation but, in the
interests of completeness, I am reiterating the point here. No change in the
net worth calculation is required as a result of this issue.
Personal
Expenditures
[14]
At the beginning of trial Mr. Barbieri stated
that he disputed the amounts that the Minister had included in the net worth
calculation as personal expenditures. Mr. Barbieri did not provide any specific
details as to which amounts in particular he disputed. The Appeals Officer
testified on behalf of the Respondent. She explained how Mr. Barbieri’s
personal expenditures had been determined. I am satisfied with the methodology
that was employed. Absent any explanation (either legal or evidentiary) as to
why this methodology used by the Minister was incorrect, I find no reason to
vary the personal expenditures other than as described below in respect of
mortgage interest.
Ownership of
Residential Properties
[15]
The legal titles to a property located in
Mission, British Columbia and another property located in Maple Ridge, British
Columbia show that Mr. Barbieri owned the properties in joint tenancy with
Marco in the years in question. Mr. Barbieri is also listed as a joint tenant
on Marco’s home in Burnaby, British Columbia. Mr. Barbieri is a co-borrower on
the mortgages on all three of these properties.
[16]
The Minister prepared the net worth calculation
on the basis that the beneficial ownership of these three properties was the
same as their legal title. Thus the Minister included 50% of the adjusted cost
base of the properties in the assets section of the net worth calculation and
50% of the mortgages in the liabilities section. The Minister also included 50%
of the balances of various joint bank accounts that Mr. Barbieri held with
Marco related to the properties in the assets section of the net worth
calculation and included various payments related to the properties in the
personal expenditures section of the net worth calculation.
[17]
Mr. Barbieri testified that he held his interest
in these properties in trust for Marco and that the only reason that he was on
title and was a co-borrower was that the banks would not lend money to Marco
alone. Mr. Barbieri admits that he funded the down payments on the properties
and paid various expenses relating to the properties including various mortgage
payments. He submits that he made these payments because he wanted to help
Marco to establish himself financially, not because he was a beneficial owner.
Marco reported all of the rental income from the Mission and Maple Ridge
properties on his tax returns. Mr. Barbieri testified that, when the properties
were ultimately sold, Marco reported the relevant capital gains and received
all of the proceeds. Trust deeds indicating that Mr. Barbieri held his interest
in the properties in trust for Marco were entered into evidence for all three
properties.
[18]
The question that I must determine is whether
Mr. Barbieri was misleading the banks into believing that he was a beneficial
owner of the properties or whether he was trying to mislead the Minister into
believing that he was not a beneficial owner of the properties. The evidence is
capable of supporting either conclusion. I take little comfort from the fact
that Marco reported the rental income on the Mission and Maple Ridge properties
as he had no other income to speak of in the years in question and thus the
cost of his reporting the rental income was relatively minor.
[19]
Marco was not called as a witness. Counsel for
the Respondent asked me to draw an adverse inference from that fact. I am not
willing to do so. Mr. Barbieri’s 2006, 2007 and 2008 taxation years are
statute barred unless the Respondent can demonstrate that Mr. Barbieri made a
misrepresentation. The onus to show the misrepresentation is on the Respondent.
Therefore, if the Respondent believed that Marco would have provided evidence
that contradicted Mr. Barbieri’s evidence, it is the Respondent, not Mr.
Barbieri, who should have called Marco as a witness.
[20]
Based on all of the foregoing, I am not
satisfied that the Respondent has shown that Mr. Barbieri made a
misrepresentation in failing to report rental income from the Mission and Maple
Ridge properties or in claiming that he was not a beneficial owner of those
properties.
[21]
I want to be clear. I have not made a finding of
fact that Mr. Barbieri holds these properties in trust for Marco. I have merely
concluded that the Respondent has not met its onus of showing that Mr. Barbieri
was a joint beneficial owner of these properties. The effect is the same for
the purposes of this Appeal, but Mr. Barbieri would be wise not to rely on
my decision in this Appeal when dealing with these properties in the future.
[22]
A number of adjustments need to be made to the
net worth assessment as a result of my conclusion that the Respondent has not
met its onus. Some of these adjustments will have little effect on the ultimate
determination of unreported income. The following are the adjustments:
(a) The
Burnaby, Mission and Maple Ridge properties must be removed from the assets
portion of the net worth calculation.
(b) The
bank accounts that Mr. Barbieri held jointly with Marco must be removed from
the assets portion of the net worth calculation.
(c) The
mortgages related to the Burnaby, Mission and Maple Ridge properties must be
removed from the liabilities portion of the net worth calculation.
(d) The
$36,000 down payment that Mr. Barbieri made in respect of the Mission property
must be added to the personal expenditures portion of the net worth calculation
in his 2006 taxation year in accordance with his testimony that he gifted that
amount to Marco.
(e) The
$13,554.75, $10,914.14 and $1,560.47 in expenditures made in 2006, 2007 and
2008 respectively from the joint bank account with an account number ending in
4103 (the “4103 Account”) must be removed from Mr. Barbieri’s personal
expenditures.
(f) The
$3,258.21 and $2,355.97 in mortgage interest paid in 2006 and 2007 respectively
from the 4103 Account in respect of the Burnaby property must be removed from
Mr. Barbieri’s personal expenditures.
(g) The
$1,991.18 and $3,303.04 in mortgage interest paid in 2006 and 2007 respectively
from the 4103 Account in respect of the Mission property must be removed from
Mr. Barbieri’s personal expenditures.
(h) During
submissions, counsel for the Respondent conceded that the personal expenditures
in Mr. Barbieri’s 2006, 2007 and 2008 taxation years should be reduced by
mortgage interest payments totalling $12,149.08, $14,581.38 and $13,991.66 respectively
in respect of the Mission, Maple Ridge and Port Moody properties to account for
the fact that those payments were in respect of rental properties and were thus
business expenses, not personal expenses. In light of my conclusion as to
whether the Respondent has met the onus of showing that Mr. Barbieri had a
beneficial interest in the Mission and Maple Ridge properties, that concession
is no longer valid in respect of those properties. The concession would now
only apply to a reduction of $5,497.82, $5,168.07 and $5,084.66 in respect of
the Port Moody property in 2006, 2007 and 2008 respectively.
[23]
While there should also be an adjustment in the
Minister’s favour in respect of certain principal payments that Mr. Barbieri
made on the mortgages on one or more of the Burnaby, Mission and Maple Ridge
properties, counsel for the Respondent indicated during submissions that the
Respondent would not be pursuing that adjustment if I ruled in Mr. Barbieri’s
favour.
[24]
During submissions, I raised a concern with counsel
for the Respondent that some of the GST assessed against Mr. Barbieri appeared
to relate to the exempt supply of residential rent since the Mission and Maple
Ridge properties were both residential rental properties. Counsel agreed that,
to the extent the unreported income was residential rental income, GST should
not apply. In light of my conclusion that the Respondent has not proven that
Mr. Barbieri had an interest in the Mission or Maple Ridge properties, there is
no need to account for any exempt supplies in the GST assessment.
Statute Barred
Years
[25]
I have addressed the statute barred years as
they relate to the Burnaby, Mission and Maple Ridge properties. The net worth
calculation shows adjustments in excess of those related to the properties. I find
that the Respondent has demonstrated that the remaining unexplained income is
sufficiently significant for me to conclude that Mr. Barbieri made
misrepresentations in reporting his income and that those misrepresentations
were attributable to carelessness, neglect or wilful default.
Conclusion
[26]
Based on all of the foregoing:
(a) the
Appeal in respect of the income tax reassessments is allowed and the matter
referred back to the Minister for reconsideration and reassessment on the basis
that the Appellant’s taxable income as determined by the net worth calculation
will be adjusted on the following basis provided that the taxable income for
any year shall not be increased above that already reassessed in respect of
that year:
(i) the
Burnaby, Mission and Maple Ridge properties will be removed from the assets
portion of the net worth calculation;
(ii) the
bank accounts that Mr. Barbieri held jointly with Marco will be removed from
the assets portion of the net worth calculation;
(iii) the
mortgages related to the Burnaby, Mission and Maple Ridge properties will be
removed from the liabilities portion of the net worth calculation;
(iv)
the personal expenditures portion of the net
worth calculation for his 2006 taxation year will be increased by $11,698.04[4]; and
(v) the
personal expenditures portion of the net worth calculation for his 2007 and
2008 taxation years will be reduced by $21,741.22[5] and $6,645.13[6] respectively; and
(b) the
Appeal in respect of the GST assessment is allowed and the matter referred back
to the Minister for reconsideration and reassessment on the basis that the
amount of unremitted GST should be recalculated in accordance with the
adjustments made to the calculation of Mr. Barbieri’s unreported income
provided that the net tax assessed for any reporting period shall not be
increased above that already assessed for that reporting period.
Costs
[27]
Given the parties’ mixed success and in light of
the Respondent’s decision not to pursue a number of upwards adjustments that
should have been made to Mr. Barbieri’s income, I will not be awarding
costs.
Signed at Ottawa, Canada, this 22nd day of January
2015.
“David E. Graham”
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