Date: 20130313
Docket: A-457-11
Citation: 2013 FCA 79
CORAM: BLAIS
C.J.
EVANS
J.A.
STRATAS
J.A.
BETWEEN:
MICHAEL OSTROFF
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
OF THE COURT
(Delivered
from the Bench at Toronto, Ontario, on March 13, 2013)
EVANS J.A.
[1]
Michael
Ostroff is appealing a decision by the Tax Court of Canada (2011 TCC 513) in
which Justice Favreau (Judge) dismissed his appeals from the assessments made
by the Minister of National Revenue of his income tax liability for the
taxation years 2003 to 2008 inclusive (the years in question), and from the
imposition of a penalty for failing to file returns for the years in question.
[2]
The
assessments for all six taxation years were dated May 13, 2010. Mr Ostroff
filed three separate appeals in the Tax Court: one for the years 2003 and 2004;
one for 2005 and 2006; and one for 2007 and 2008. The Tax Court heard these
appeals on common evidence under the Court’s informal procedure.
[3]
The
Judge held (at para. 17) that Mr Ostroff had provided no evidence to establish
a prima facie case that the assumptions of fact on which the Minister
had based the assessments were wrong, including those regarding his gross
income. He further found that, even on Mr Ostroff’s estimation of his net
income, tax was payable in each of the years in question, and that,
accordingly, the Minister had not erred in imposing late filing penalties under
subsection 162(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
(Act).
[4]
Because
Mr Ostroff had not filed returns for the years in question, the Minister had to
make “arbitrary” assessments under subsection 152(7) of the Act of the tax
payable. The Minister based these assessments on assumptions of fact about the
amount of the business income earned by Mr Ostroff in each of the years in
question: $56,599 for 2003; $58,700 for 2004; $58,000 for 2005; $58,700 for
2006; $60,300 for 2007; and $60,300 for 2008.
[5]
The
Minister also assumed that Mr Ostroff had no expenses related to his business
in the years in question, but allowed him the basic personal amounts and
amounts for Canada Pension Plan contributions in the calculation of
non-refundable tax credits. On this basis, the Minister assessed the total
amount of tax owing for the years in question as $57,886.54.
[6]
Mr
Ostroff testified before the Tax Court that he had been employed as a sales
representative until 2002 when his employer went out of business; he reported
net income of $46,486 for that year. He further stated that he had received
employment insurance benefits in 2002 and 2003, when he started a paralegal
business.
[7]
Mr
Ostroff estimated his net income for the years in question as follows: 2003,
$7,000; 2004, $12,000; 2005, $14-15,000; 2006, $18,000; 2007, $18,000; and
2008, $20-21,000. He stated that he had made these estimates after reviewing
his bank statements (which he did not adduce at the hearing) and after taking
into account a 75% deduction for business expenses. He adduced no evidence of
any expenses that he had incurred in those years. On the basis of Mr Ostroff’s
calculations of his net income (that is, 25% of gross) his gross income
exceeded the Minister’s assumptions of his income in at least the years 2006,
2007, and 2008: Respondent’s memorandum of fact and law, paragraph 16.
[8]
Mr
Ostroff’s principal submission at the hearing in this Court was that the Judge
erred in fining that he had not adduced prima facie evidence that the
Minister’s assumptions were wrong. Because this is a question of mixed fact and
law, Mr Ostroff must satisfy us that the Judge made a palpable and overriding
error in reaching this conclusion: Housen v. Nikolaisen, 2002 SCC 33,
[2002] 2 S.C.R. 234 at paras. 28 and 36.
[9]
We
are not persuaded that the Judge did so err. Mr Ostroff adduced no evidence: to
support his estimates of his income, which he conceded might not be accurate;
to indicate that the Minister’s assumptions were otherwise wrong; or to show
any business-related expense that he had incurred in the years in question.
[10]
He
argued that the Judge should have allowed as an expense the fee of $3,360,
evidenced by an invoice, for which he had been billed by his representative in
the Tax Court appeal. However, since this expense was incurred in 2011, that
is, outside the years in question, it cannot be taken into account in computing
his taxable income in those years.
[11]
Mr
Ostroff also argued before this Court that the Minister’s assumptions of fact
were invalid because the Minister had not disclosed the basis on which his
income for the years in question had been determined. Mr Ostroff relied on a
statement by Justice Desjardins, writing for the Court in Hsu v. The Queen,
2001 FCA 240, 202 D.L.R. (4th) 247 at para. 22, to the effect that, while subsection
152(8) deems to be valid an “arbitrary” assessment made under subsection
152(7),
… the Minister is obliged to
disclose the precise basis upon which it has been formulated … [o]therwise, the
taxpayer would be unable to discharge his or her initial burden of demolishing
the “exact assumptions made by the Minister …”.
[12]
Without
addressing this statement in his reasons, the Judge stated (at para. 16) that,
because Mr Ostroff had not produced prima facie evidence to show that
the Minister’s assumptions were wrong, “the Minister was under no obligation to
provide information concerning the manner in which the appellant’s income was
computed.”
[13]
We
need express no opinion in this case on the scope of the Minister’s duty, if
any, to disclose to a taxpayer the basis of assumptions of fact on which
assessments under subsection 152(7) were based.
[14]
This
is because Mr Ostroff was aware of the basis on which the Minister had
determined his business income. In the three Notices of Appeal that he filed to
initiate his appeals to the Tax Court, he stated (Appeal Book, pp. 13, 14, and
15) that the “CRA used Statistics Canada Averages improperly as the basis for
Assessment”. The Minister admitted in the Notices of Reply (Appeal Book, pp.
16, 23, 30) that the “CRA used Statistics Canada Averages to determine the
Appellant’s business income” for the years in question.
[15]
On
the basis of the material before us, we are not satisfied that Mr Ostroff’s
representative in the Tax Court substantiated the allegation that the Minister
“improperly” used Statistics Canada Averages. Nor did he introduce Statistics
Canada Averages as evidence to rebut the Minister’s assumption about the amount
of his business income in the years in question.
[16]
We
would also emphasize that Mr Ostroff filed no returns for the years in
question. Moreover, although Mr Ostroff was in the best position to know how
much he had earned from his business, and what expenses he had incurred to earn
it, he adduced no evidence before the Tax Court to substantiate either the
estimates that he made of his income or any business-related expenses incurred
in the years in question, or to indicate that the assumptions made by the
Minister were otherwise wrong. Further, as we have already noted, even on Mr
Ostroff’s own estimates, his gross income for at least three of the years in
question exceeded the Minister’s assumptions.
[17]
Since
Mr Ostroff did not successfully challenge the Minister’s assumptions relating
to the amount of income earned in the years in question, tax was payable in
each year. He was therefore under a duty to file a return for those years by
virtue of subsections 150(1) and (1.1) of the Act. There is thus no basis for
impugning the Judge’s decision to confirm the late filing penalties imposed by
the Minister.
[18]
In
all these circumstances, we are persuaded that Mr Ostroff was sufficiently
aware of the basis of the Minister’s assumptions to give him an effective
opportunity to attempt to rebut them, and that in dismissing the appeal the
Judge made no error of fact or law warranting our intervention.
[19]
For
these reasons, the appeal will be dismissed with costs.
“John M. Evans”
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