Citation: 2013 TCC 19
Date: 20130118
Docket: 2012-1675(IT)I
BETWEEN:
WEN ZHANG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
Wen Zhang appeals assessments made
under the Income Tax Act in which Mr. Zhang’s income was determined by
what was referred to as an application of funds method. Under this method, the
Minister assumed that Mr. Zhang’s personal expenditures were funded from unreported
income to the extent that the expenditures exceeded other known sources of
funds. Mr. Zhang submits that the assessed amounts were loans and not
unreported income.
[2]
The assessments relate to the
2006, 2007 and 2008 taxation years. There are two issues: (1) Are the amounts
that have been assessed loans or income? and (2) Is the assessment for the 2006
taxation year statute barred?
Background
[3]
Mr. Zhang was educated as an
engineer in China and immigrated to Canada in 2001. He currently lives in Nanaimo, British Columbia with his wife and three children and is employed as a taxi
driver.
[4]
In the relevant period, Mr. Zhang earned
income as a consultant by providing assistance for a business operated by his
brother and sister in China. The dispute in this appeal centres on the amount
of income Mr. Zhang earned from this activity.
[5]
Mr. Zhang testified
that when his brother and sister lost
their jobs in China, he suggested that they start a business of selling crystal
minerals on eBay. Apparently the brother and sister lived in an area where this
mineral could be sourced locally.
[6]
Mr. Zhang stated that his brother
and sister were reluctant to start the business as they did not know English
and had no internet knowledge. Accordingly, Mr. Zhang offered his assistance
and this was apparently accepted. He taught the brother and sister how to sell on
eBay and he opened eBay and PayPal accounts for them. He also agreed to deal
with the English speaking customers as a majority of the customers were in the United States.
[7]
Mr. Zhang testified that he did
not want compensation for providing this assistance. However, the brother and
sister wanted Mr. Zhang to earn a commission, which was initially settled at 5
percent (excluding shipping costs) and was subsequently changed to 3 percent
(including shipping costs) in order to simplify the calculations.
[8]
Mr. Zhang testified that the eBay
business did very well. As a result, the brother and sister agreed to help him
financially upon the completion of his schooling as he would no longer be receiving
student loans. He said that he did not have a record of the actual amount
borrowed but that it was in the neighbourhood of $70,000. He also stated that
the brother and sister kept track of the amount that he borrowed as he would
advise them when money was withdrawn from the accounts. He stated that the
brother and sister also helped out other relatives and that they were motivated
to make the loans partially because they wanted to keep money in Canada for various personal reasons.
[9]
The eBay business earned annual
revenues in the neighbourhood of $1,000,000 during the period at issue.
[10]
In his personal income tax
returns, Mr. Zhang reported income from this source in the amounts of $23,768,
$36,974 and $28,828 for the 2006, 2007 and 2008 taxation years, respectively.
[11]
The Canada Revenue
Agency (CRA) became aware that Mr. Zhang
had eBay accounts, and they contacted him for further information. In the
initial call Mr. Zhang denied having eBay or PayPal accounts, but he
acknowledged the accounts in a subsequent conversation. After further
investigation, the CRA determined that Mr. Zhang had approximately 40 bank
accounts associated with the eBay business to which significant deposits were
made.
[12]
The CRA was not provided with any
business records to verify the reported income. Accordingly, income was
determined using the “application of funds” method. The starting
point was a determination of Mr. Zhang’s actual personal expenditures. These
amounts were then reduced by known sources of funds, and the balance was
assumed to be unreported income from the consulting business.
[13]
Assessments were issued on the basis that Mr. Zhang
failed to report additional income from the consulting business in the amounts
of $25,737, $20,425 and $23,304 for the 2006, 2007 and 2008 taxation years,
respectively.
[14]
Mr. Zhang does not dispute that he
received these amounts by making withdrawals from the bank accounts containing
the revenues from the eBay business. He submits, though, that these amounts
were loans from his brother and sister and not income.
[15]
None of the money has been repaid
to date. Mr. Zhang testified that it would be difficult to repay the money at
the present time because his income as a taxi driver is very low. He stated
that he was hoping to obtain a better-paying job in the future given his
qualifications as a civil engineer in China and having taken computer training
in Canada.
Analysis
[16]
The first issue is whether the
assessed amounts are income or loans.
[17]
One of the major difficulties that
I have with Mr. Zhang’s position is that it depends largely on his own
self-interested testimony. No business records were provided for either the
eBay business or Mr. Zhang’s consulting business, and there was no
contemporaneous supporting documentation regarding either the commissions or
the loans.
[18]
This is not necessarily fatal to
Mr. Zhang’s appeal, but in such a case his testimony regarding the relevant
circumstances needs to be detailed, cogent and straightforward. I did not find
it to be so.
[19]
First, Mr. Zhang did not provide
detailed testimony as to the assistance that he provided for the eBay business.
For example, in the notice of appeal Mr. Zhang stated that he taught the
brother and sister how to sell on eBay and that he opened eBay and PayPal
accounts for them. However, it came out in cross-examination that Mr. Zhang
opened a great many bank accounts for the business and managed the funds. This
suggests that Mr. Zhang may have been quite involved in the day‑to-day business
activity and may have earned more than the modest commission that was reported
in the income tax returns.
[20]
Second, there was no clear
reconciliation between what Mr. Zhang said he earned as commission and what was
reported in the income tax returns. Mr. Zhang provided some explanations but
the explanations seem to raise more questions than answers. For example, Mr.
Zhang provided an after-the-fact calculation of the commission but it does not
correspond with the amounts reported in the income tax returns. In addition,
Mr. Zhang’s calculation does not add up to 3 percent. The calculation suggests
that 97 percent of the funds were transferred to the brother and sister and 3
percent was split between the commission and the wire transfer fee to send the
97 percent to China. Nothing seems to add up.
[21]
Mr. Zhang explained that in two
of the income tax returns he reported more than the amount earned in order to satisfy
Canadian immigration officials that a visa should be issued to his
parents-in-law. It seems strange that reporting a few thousand dollars more in
income would assist in obtaining a visa.
[22]
Further, if Mr. Zhang owed money
to his sister and brother I find it implausible that he would not keep a record
of these amounts.
[23]
The lack of contemporaneous
documentation is a serious problem in this case because there is nothing to
corroborate Mr. Zhang’s self-interested testimony. Taxpayers are required to
keep satisfactory records so that their income can be verified.
[24]
Finally, I would comment that it
does not assist Mr. Zhang’s case that he acknowledged that he misled the CRA by
telling them that he did not have eBay or PayPal accounts. He also testified
that he over-reported his income in order to mislead immigration officials.
Even if I accept Mr. Zhang’s explanations for making these false statements, it
does not encourage me to find that his testimony at this hearing is reliable.
[25]
Upon consideration of the evidence
as a whole, I have concluded that the assessed amounts were unreported income
and not loans.
[26]
A second issue concerns the
assessment for the 2006 taxation year which was made beyond the normal
reassessment period. The Crown submits that the assessment was properly made
under s. 152(4) of the Act because the under‑reporting of income
was willful.
[27]
The Crown bears the burden to
establish that the failure to report income was careless, negligent or willful.
It has met this burden by establishing that Mr. Zhang withdrew more from the
eBay business than what was reported, and that he attempted to hide this source
of income from the CRA. A credible case has been made that Mr. Zhang
knowingly under-reported the income, and Mr. Zhang has failed to provide
reliable evidence to rebut this finding. I would conclude that the assessment
for the 2006 taxation year is not statute barred.
[28]
The appeal will be dismissed.
Signed at Ottawa, Ontario this 18th day of January
2013.
“J. M. Woods”
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