REASONS
FOR JUDGMENT
Lafleur J.
A. OVERVIEW
[1]
This appeal relates to net worth assessments
issued to Chien Chung Tang by the Minister of National Revenue (the “Minister”) under
the Income Tax Act (the “Act”) for the 2005, 2006, and 2007 taxation years. During the taxation
years in question, Mr. Tang’s activity consisted in the purchase and sale
of real estate and the leasing of properties.
[2]
Mr. Tang represented himself at the
hearing. Although he was represented by counsel until shortly before his first
scheduled hearing, he dismissed his counsel and did not find it convenient to
retain a new attorney. At the initial hearing in March 2016, Mr. Tang
seemed confused as to his legal burden with respect to the case he had to meet.
To ensure that the case was decided on the merits, I adjourned the
hearing. A new hearing date was set for May 2017, over one year later, and
I urged Mr. Tang, given the rigours of this Court’s General Procedure
process, to retain a new counsel so as to receive adequate representation.
Mr. Tang nonetheless insisted on representing himself. To accommodate Mr. Tang’s
wishes, this Court scheduled two trial management conference calls in order to
ensure that Mr. Tang understood the General Procedure process and his
obligations with respect to disproving the Minister’s assumptions.
[3]
Mr. Tang came to Canada through the
business immigration program in 1994, but he is no longer a resident in Canada.
Under the business immigration program, Mr. Tang could not be an employee
but rather had to create his own business. He invested in real estate properties
to derive rental income, and he also bought and sold properties. Mr. Tang
supported his community, making an important donation to his local YMCA and
gave financial assistance to a theater company in Amherst, Nova Scotia. Mr. Tang
noted that his fluency in English had declined since he left Canada in late
2009. I allowed Mr. Tang’s son, Chia‑Hao Tang, to be seated
beside his father at the counsel’s table and to assist his father during the
hearing. However, I did not allow Mr. Tang’s son to address the Court
directly, otherwise than as a witness.
[4]
At trial, Mr. Tang and his son, Chia-Hao,
testified in support of the Appellant’s position. Chris Coghlin, an
auditor from the Canada Revenue Agency (“CRA”), testified on behalf of the
Minister.
[5]
On the basis of a net worth analysis, Mr. Tang
was reassessed to include additional income for the 2005 to 2007 taxation years
in the amounts of $122,100, $291,663, and $74,943, respectively. Gross
negligence penalties for each of the taxation years at issue were also assessed
under subsection 163(2) of the Act.
B. THE ISSUES
[6]
The issues arising from this appeal are as
follows: (1) has income been properly determined?
(2) was the 2005 taxation year properly reassessed beyond the normal
reassessment period pursuant to subparagraph 152(4)(a)(i) of the
Act? and (3) were gross negligence penalties properly assessed?
C. THE POSITION OF THE PARTIES
1.
The Appellant’s position
[7]
According to Mr. Tang, the Minister’s
calculations are wrong as the Minister did not take into account various loans
he had received from family members, including Mr. Tang’s share of his
father’s inheritance received by way of loan and various amounts received from
a corporation called Neostar Technologies Co. Ltd. Furthermore, Mr. Tang
submits that the amount of the Shareholders’ loan balance in Tang Dynasty
Investments Limited as of December 31, 2004, has been understated and
the amount of the personal expenditures indicated in Schedule D to the Reply
were clearly overstated. Mr. Tang also pointed out that he had sold
various properties over the years and used the proceeds to pay his family’s
living expenses.
2.
The Respondent’s position
[8]
According to the Respondent, the answers given
by Mr. Tang on the written examination for discovery questions indicate
that the sole issue before me relates to the 2005 taxation year and, more
specifically, to loans from family members in the aggregate amount of $385,288
and the amount of the opening balance of the Shareholders’ loan in Tang Dynasty
Investments Limited as of December 31, 2004. As Mr. Tang has
indicated in his answers in discovery, he was to advise if he had any other
issue with the Minister’s net worth calculations but Mr. Tang did not. For
that reason, according to the Respondent, I should not entertain any other
issue in this appeal. I will discuss this matter further below.
D. DISCUSSION
1.
The net worth method and the burden of proof
[9]
The net worth method “is based on an assumption that if one subtracts a taxpayer’s net
worth at the beginning of a year from that at the end, adds the taxpayer's
expenditures in the year, deletes non-taxable receipts and accretions to value
of existing assets, the net result, less any amount declared by the taxpayer,
must be attributable to unreported income earned in the year, unless the taxpayer
can demonstrate otherwise. It is at best an unsatisfactory method, arbitrary
and inaccurate but sometimes it is the only means of approximating the income
of a taxpayer” (Bigayan
v R (1999), [2000] 1 CTC 2229, 2000 DTC 1619 at
para 2 [Bigayan]).
[10]
In order to successfully challenge these
assessments, Mr. Tang must present detailed and cogent testimony, and
supporting evidence where possible, to explain the apparent increases in net
worth. Mr. Tang can succeed in his appeal provided the evidence given by him
constitutes a prima facie rebuttal of the assumptions made by the
Minister. For example, he can succeed either by establishing on a balance of
probabilities new facts not considered by the Minister showing that he did not
earn the alleged unreported income, or by demonstrating that the Minister’s
assumptions of fact are wrong. Once a prima facie case is made out, the
burden of proof shifts back to the Minister, who must then establish, on a
balance of probabilities, the facts required to support the reassessments.
[11]
This process was described in Hickman Motors
Ltd v Canada, [1997] 2 SCR 336 at paras 92–93,
97 DTC 5363, where the Supreme Court noted that:
92 The
Minister, in making assessments, proceeds on assumptions and the initial onus
is on the taxpayer to “demolish” the Minister’s assumptions in the assessment. The
initial burden is only to “demolish” the exact assumptions made by the
Minister but no more.
93 This
initial onus of “demolishing” the Minister’s exact assumptions is met
where the appellant makes out at least a prima facie case. ... The
law is settled that unchallenged and uncontradicted evidence “demolishes” the
Minister’s assumptions....
[Citations
omitted; emphasis in the original.]
[12]
As stated by the Federal Court of Appeal in Lacroix
v Canada, 2008 FCA 241 at para 20, 2009 DTC 5029,
the application of the net worth method does not change this standard of proof:
20 Where
the Minister presumes that the income detected using the net worth method is
taxable income, the onus is on the taxpayer to demolish this presumption. If
the taxpayer presents credible evidence that the amount in question is not
income, the Minister must then go beyond these assumptions of fact and file
evidence proving the existence of this income.
[13]
In addition to providing evidence to rebut the
Minister’s assumptions, there is a second way to rebut a net worth
assessment—namely, to show that it is somehow inherently flawed. As Justice Bowman,
as he then was, explained it in Bigayan (supra at paras 3–4):
3 The
best method of challenging a net worth assessment is to put forth evidence of
what the taxpayer's income actually is. A less satisfactory, but nonetheless
acceptable method is described by Cameron J. in Chernenkoff v. Minister of
National Revenue, 49 DTC 680 at page 683:
In the absence of records, the
alternative course open to the appellant was to prove that even on a proper and
complete “net worth” basis the assessments were wrong.
4 This
method of challenging a net worth assessment is accepted, but even after the
adjustments have been completed one is left with the uneasy feeling that the
truth has not been fully uncovered. Tinkering with an inherently flawed and
imperfect vehicle is not likely to perfect it. The appellant chose to use the
second method.
[14]
Thus, Mr. Tang’s credibility and his
evidence will be determinative (Landry v The Queen, 2009 TCC 399 at para 47, 2009 DTC 1359 [Landry]; Roy v The
Queen, 2006 TCC 226, 2008 DTC 3224). This Court, however, may also consider the overall reasonableness
of the net worth assessment in its determination of whether to allow the
appeal.
[15]
Although the foregoing shows that Mr. Tang
will generally bear the burden to disprove the Minister’s assumptions, the
Minister will have the burden of proving her assumptions, on a balance of probabilities,
with respect to gross negligence penalties and any statute-barred years. I will
discuss these issues following an analysis of Mr. Tang’s arguments and the
substance of the net worth assessment.
2.
Preliminary issue: Objections to documents
[16]
As a preliminary issue, the Respondent objected
to Mr. Tang’s translated documents being admitted into evidence. In
particular, the Respondent argues that, because counsel did not have an
opportunity to examine the translator of the documents, they should not be admitted.
[17]
Prior to the hearing, Mr. Tang, through
counsel, sent numerous translated foreign financial documents, with copies of
the originals, to the Minister’s counsel at the Department of Justice (Exhibit A-1).
These documents were sent as part of settlement discussions between the
parties.
[18]
At trial, Mr. Tang offered the foreign
financial documents originally sent to the Department of Justice in evidence (Exhibit A-1). Mr. Tang also
offered additional foreign financial and tax documents in support of his position
(Exhibits A-2 through A-9).
[19]
All of Mr. Tang’s foreign financial documents
were translated by T‑United Translation Service, and were authenticated
by Yuan-Sun Chao of the Notary Public Office of the Taiwan Taipei District
Court. The affidavit from T‑United Translation Service attached to each
document reads “I certify that this
translation, to the best of my knowledge and belief, is a true and correct
English version of the attached original.” The
affidavit is signed, dated, stamped, and sealed by the translator. The Notary
Public’s stamp notes that “the
signature(s)/seal(s) of translator in this document is/are authentic. This
translated version is hereby certified to be true to the meaning of the
attached original.” [Emphasis added.] The Notary
Public’s stamp is signed, sealed, and dated.
[20]
On the whole, Mr. Tang’s translated
documents comply with section 89 of the Tax Court of Canada Rules
(General Procedure) (“Rule 89”) and sections 52–54 of the Canada Evidence Act, and
should, therefore, be admitted. All translated documents that I accepted
as evidence at the hearing appeared on Mr. Tang’s list of documents (Appellant’s List of documents (Partial Disclosure) at items 19–20, 27–53). The Minister’s objection is
out of place to the extent that it is not based on a demonstrable concern about
the quality of the translations. Such a demonstrable concern could be shown
with either expert evidence or an alternative translation.
[21]
Under Rule 89, the Tax Court judge has discretion
with respect to which documents to admit. It begins with the words “Unless the Court otherwise directs,” and then sets out the general criteria for admission as evidence;
namely, reference in a pleading or a list, production in examination for
discovery, or production by a witness who is not under the control of one of
the parties. It reads as follows:
|
89. Use
at Hearing — (1) Unless the Court otherwise directs, except with the consent in writing of
the other party or where discovery of documents has been waived by the other
party, no document shall be used in evidence by a party unless
(a) reference to it appears in the pleadings, or in a list or an affidavit filed
and served by a party to the proceeding,
(b) it has been produced by one of the parties, or some person being examined
on behalf of one of the parties, at the examination for discovery, or
(c) it has been produced by a witness who is not, in the opinion of
the Court, under the control of the party.
(2) Unless the Court otherwise directs,
subsection (1) does not apply to a document that is used solely as a
foundation for or as part of a question in cross-examination or
re-examination.
|
89 Utilisation des documents à l’audience — (1) Sauf directive contraire de la Cour, ou sauf si les autres
parties ont renoncé au droit d’obtenir communication de documents ou ont
consenti par écrit à ce que des documents soient utilisés en preuve, aucun
document ne doit être utilisé en preuve par une partie à moins, selon le
cas :
a) qu’il ne soit mentionné dans les actes de procédure, ou dans
une liste ou une déclaration sous serment déposée et signifiée par une partie
à l’instance;
b) qu’il n’ait été produit par l’une des parties, ou par
quelques personnes interrogées pour le compte de l’une des parties, au cours
d’un interrogatoire préalable;
c) qu’il n’ait été produit par un témoin qui n’est pas, de
l’avis de la Cour, sous le contrôle de la partie.
(2) Sauf directive contraire de la Cour, le paragraphe (1)
ne s’applique pas au document utilisé uniquement comme fondement ou comme
partie d’une question dans un contre-interrogatoire ou en réinterrogatoire.
|
[22]
Under the opening words of Rule 89, “Unless the Court otherwise directs,” the Tax Court judge has discretion concerning the admissibility of
evidence. The philosophy of the rule is to ensure the flexibility necessary to
admit evidence based on its relevance at the trial. The standard of relevance
was affirmed most recently by the Supreme Court in Globe and Mail v Canada
(AG), 2010 SCC 41 at para 56,
[2010] 2 SCR 592 [Globe and Mail]:
56 [I]n
civil litigation proceedings, the presumption is that all relevant evidence is
admissible and that all those called to testify with respect to relevant
evidence are compellable....
[23]
Globe and Mail, supra,
follows the principles set out in Mitchell v MNR, 2001 SCC 33 at para 30, [2001] 1 SCR 911; it was noted
that the rules of evidence should facilitate justice, not hinder it. The
Supreme Court set out three factors for evaluating the admissibility of
evidence; namely, 1) that
it must be useful and relevant, 2) that it must be reasonably reliable, and 3) that it may nonetheless be excluded if it hinders the search for truth.
[24]
That being said, the translated documents
provided by Mr. Tang do not require this Court to exercise any discretion
since these documents already meet the requirements set out by Rule 89.
[25]
First, I have only admitted documents that
appeared on Mr. Tang’s list of documents. At trial, several documents,
translated or otherwise, were excluded, precisely because they did not appear
on Mr. Tang’s list of documents. In addition, Mr. Tang produced some
of the translated documents as part of the discovery process, as evidenced by
Exhibit A-1 as well as Exhibits A-4 to A-7. In view of these two
factors, the translated documents meet the threshold for admission set out in
Rule 89.
[26]
One could argue that the fact that Mr. Tang’s
documents are translated could taint the general standard for admission found
in Rule 89. This taint would arguably apply if the opposing party were taken
by surprise by the production of translated documents and therefore prejudiced
by it.
[27]
This concern, however, seems quite absent in
this case. The list of documents clearly indicated that some of Mr. Tang’s
documents appeared in translated form. The Minister was made aware of the
translation issue prior to the hearing.
[28]
If the Minister had a problem with the
translation, this issue should have been brought up in a trial management
conference call, such as the ones held on March 21 and April 28, 2017.
Further, even if the Minister had an opportunity to cross examine Mr. Tang’s
translator, it is unclear what, absent additional expert evidence or testimony,
such an examination could prove, as the Crown counsel did not have any knowledge
of Mandarin.
[29]
In other words, an opportunity to examine Mr. Tang’s
translator would, without expert evidence or an alternative translation, have
had no impact on the admissibility of the translated documents. The objection,
therefore, seems not to address any real underlying concern, but rather seems
to be made merely for the sake of objecting.
[30]
I further note that sections 52–54 of
the Canada Evidence Act provides for a presumption of authenticity with
respect to the official nature of the notarization or declaration of
documentary evidence in certain cases. Paragraph 52(e) of the Canada
Evidence Act designates “judicial
officials in a foreign country in respect of oaths, affidavits, solemn
affirmations, declarations or similar documents that the official is authorized
to administer, take or receive” as a specific class
of persons; and section 53 then deems that the documents authorized by
that class “are as valid and effectual
and are of the like force and effect to all intents and purposes as if they had
been administered, taken or received in Canada by a person authorized”. Subsection 54(2) of the Canada Evidence Act provides
for a presumption of authenticity with respect to the official nature of the
notarization or declaration by noting that an “affidavit, solemn affirmation, declaration or other similar
statement taken or received in a foreign country by an official referred to in
paragraph 52(e) shall be admitted in evidence without proof of the
signature or official character of the official appearing to have signed the
affidavit, solemn affirmation, declaration or other statement.”
[31]
The British Columbia Court of Appeal has noted
that the definition of “judicial official” is not restricted to judges alone,
but rather extends to any person who has the legal capacity of a person to
administer an oath or similar function under the relevant domestic law (R v Jahanrakhshan, 2013 BCCA 128 at para 19,
[2013] BCJ No 521 (QL)). The notarial
seal on Mr. Tang’s documents is from a “Notary Public Office of Taiwan Taipei District Court,” and I find that this meets the standard of “judicial official”.
[32]
Thus, having ruled that Rule 89 is no
obstacle to the admission of Mr. Tang’s documents, subsection 54(2)
of the Canada Evidence Act allows me to accept the official character of
the signing notary public. I note that the Notary Public’s stamp attests
to the authenticity of the signature and the seal of the translator, as well as
certifying that the translated version of Mr. Tang’s document is “certified to be true to the meaning of the
attached original.”
[33]
When viewed as a whole, and without the Crown
presenting an alternative translation or expert testimony, there is no question
that Mr. Tang’s documents should be admitted into evidence.
3.
Net worth assessment
[34]
The net worth assessment, which imputed income
on both Mr. Tang and his former spouse (whose income is not at issue in
this appeal), showed income calculated under the net worth method as $244,200,
$583,326 and $149,886 for the 2005, 2006 and 2007 taxation years respectively.
That makes for a combined total alleged unreported income of $977,412 for both
Mr. Tang and his former spouse. Mr. Tang’s share of that combined
total alleged unreported income is 50% or $488,706.
[35]
Mr. Tang submits that any apparent increase
in net worth is due to a series of loans that were either omitted from, or
understated in, the net worth assessment. Mr. Tang also argues that the
CRA’s net worth assessment is fundamentally flawed and thus undermines its
credibility.
[36]
In terms of the loans, Mr. Tang submits that
he received loans totalling $385,288 from his aunt on his mother’s side (and
her family), a loan of $439,216 from his family in Taiwan (which is part of his
father’s inheritance), and a loan of $125,000 from Neostar Technologies Co. Ltd.
[37]
Furthermore, Mr. Tang also submits that the
Shareholders’ loan balance in Tang Dynasty Investments Limited for $325,362 as
of December 31, 2004, was undervalued due to an accounting error, and
should instead be recorded as a loan for $558,610.89.
[38]
When assessing credibility of a witness, I can
consider inconsistencies, the attitude and demeanour of the witness, motives to
fabricate evidence, and the overall sense of the evidence. Justice Valerie Miller
in Nichols v The Queen, 2009 TCC 334, 2009 DTC 1203,
stated at para 23:
23 In
assessing credibility I can consider inconsistencies or weaknesses in the
evidence of witnesses, including internal inconsistencies (that is, whether the
testimony changed while on the stand or from that given at discovery), prior
inconsistent statements, and external inconsistencies (that is, whether the
evidence of the witness is inconsistent with independent evidence which has
been accepted by me). Second, I can assess the attitude and demeanour of the
witness. Third, I can assess whether the witness has a motive to fabricate
evidence or to mislead the court. Finally, I can consider the overall sense of
the evidence. That is, when common sense is applied to the testimony, does it
suggest that the evidence is impossible or highly improbable.
[39]
Overall, I found Mr. Tang’s testimony,
although often unclear, to be credible. Given the credibility of Mr. Tang’s
testimony and the evidence that he provided, I find that he made out a prima
facie rebuttal of the Minister’s assumptions with respect to the loan of
$385,288 from his aunt (and aunt’s family) and the loan of $439,216 from his
family. As with the net worth assessment, where Mr. Tang was assigned half
of the additional income, Mr. Tang’s share of these loans would again be
50%—$192,644 for the loans from his aunt and $219,608 for the loan from his
family, giving a total of $412,252. These amounts would reduce Mr. Tang’s
additional income as per the net worth assessment by approximately 84%.
Concerning these loans, the Crown did not produce sufficient evidence or
argument to refute Mr. Tang’s prima facie rebuttal. However, I find
that Mr. Tang did not make out a prima facie case with respect to
the various loans from Neostar Technologies Co. Ltd., the opening balance of
the Shareholders’ loan in Tang Dynasty Investments Limited and in respect of
Schedule D of the Reply.
[40]
Net worth assessments are frequently vacated
when, on the basis of viva voce or documentary evidence, the taxpayer
succeeds in discharging his burden (Morneau v Canada, 2003 FCA 472, 2006 DTC 6635, and Landry,
supra at para 50). Applying the aforementioned criteria to the evidence before me,
I have concluded that the Mr. Tang produced the evidence required to
challenge the net worth assessment under appeal. By demolishing the Minister’s
assumptions with respect to loans related to approximately 84% of the allegedly
unreported income, Mr. Tang has discharged his burden to that extent.
(1) loans from Mr. Tang’s
aunt (and her family)
[41]
For the loans totalling $385,288 from Mr. Tang’s
aunt, Ms. Liao Li Shou Chon, as well as other members of Ms. Liao’s
family, Mr. Tang presented a series of bank transfer documents and personal
loan agreements (Exhibit A-1) all dated as of 2005. While the bank
transfer documents included under Exhibit A-1 did not show direct evidence
of the transfer between Mr. Tang’s aunt and Mr. Tang, they did
corroborate the amounts at issue. Mr. Tang explained to the Court that the
transfers were made from his aunt’s accounts (as well as other members of Ms. Liao’s
family; that is, Mr. Tang’s uncle and cousin) to his bank account in
Taiwan and then transferred from his bank account in Taiwan to Canada.
Mr. Tang’s brother acted for Mr. Tang in Taiwan under a power of
attorney, having authority to act on his behalf for banking purposes. The Crown
suggested that the personal loan agreements were created in preparation for the
audit, and were therefore of little value. Mr. Tang and his son, however,
noted that Taiwanese cultural practices would not normally require a written
loan document for an inter-family loan, and that the drafting of this written
version of the agreement to embody their understanding was therefore
appropriate, even if that was done after the fact. Mr. Tang was also able
to produce a document from the Taipei International Commercial Bank showing a
transfer from Ms. Liao Li Shou Chon to Mr. Tang (Exhibit A-7),
as well as documents showing transfers from Mr. Tang’s cousin and uncle to
Mr. Tang (Exhibits A-4, A-5 & A-6). Mr. Tang explained that
the transfers from Mr. Tang’s cousin and uncle were made on behalf of his
aunt, and these transfers conformed to his family’s practices of sharing money.
(2) loan from Mr. Tang’s
family (father’s inheritance)
[42]
Concerning the loan of $439,216 from his family
in Taiwan, Mr. Tang produced two documents, entitled “IOUs”,
corroborating the amount of the loan (Exhibit A-2). Mr. Tang explained
in great detail that this loan was made against property that he had inherited
when his father passed away, and set out the parameters of how the inheritance
property was used by his family and how the loan was effectuated. Mr. Tang
testified that he received 20% of his father’s estate, which provided
collateral for the loan, and he used said loan amounts to pay for personal
expenditures. According to Mr. Tang’s son, his father and uncles did not
have to work to earn their living because they had sufficient resources from
his grandfather’s inheritance.
[43]
The Crown questioned the relevancy of these
documents as they show a loan to Mr. Tang’s mother and not to Mr. Tang
himself. While the translated name of these documents is the informal “IOU”, they appear
to be fully considered and properly set out loan agreement documents. The
documents set out the terms of the agreement in some detail, and also identify
the parties by name, seal, and address. Mr. Tang is described as a joint
guarantor in one document and a collateral provider, as well as joint guarantor
and joint debtor in another document. I am of the view that these
documents are relevant for the purposes of Mr. Tang’s appeal and tend to give
credibility to Mr. Tang’s assertions that he received money as a loan.
[44]
However, as mentioned above, at the hearing, the
Crown objected that I consider that issue given the answers provided by
Mr. Tang on the written examination for discovery questions indicating
that the sole issue Mr. Tang has under the net worth calculation, unless
he was to advise otherwise, relates to loans from family members in the
aggregate amount of $385,288 (loan from his aunt) and the amount of the opening
balance of the Shareholders’ loan in Tang Dynasty Investments Limited as of
December 31, 2004. I do not agree with the Crown and I am
of the view that I should examine that issue, for the reasons set out
below.
[45]
In Apotex Inc v Merck
& Co, 2003 FCA 438 at para 14, [2003] FCJ No 1725 (QL), the Federal Court of Appeal stated that “[o]ne of the purposes of discovery is to simplify proof at trial
and another is to narrow the issues which remain in dispute”. More recently, in Canada v Lehigh Cement
Limited, 2011 FCA 120, 2011 DTC 5069,
the Federal Court of Appeal stated:
30 First,
I believe that the general purpose of oral discovery has not changed. Justice Hugessen
described that purpose in the following terms in Montana Band v. Canada, [2000]
1 F.C. 267 (T.D.) at paragraph 5:
The
general purpose of examination for discovery is to render the trial process
fairer and more efficient by allowing each party to inform itself fully prior
to trial of the precise nature of all other parties’ positions so as to define
fully the issues between them. It is in the interest of justice that each party
should be as well informed as possible about the positions of the other parties
and should not be put at a disadvantage by being taken by surprise at trial....
[46]
I recognized that Mr. Tang was
represented by counsel during that period. However, Mr. Tang testified
that he did not understand that he was limiting the issues at the discovery
process. He explained that, as he was out of the country, that made the whole
process very difficult. After March 2016, Mr. Tang was a self-represented
litigant and decided to represent himself at the hearing.
Further, I also note that,
during the trial management conference calls held prior to the hearing, Mr. Tang made reference to the fact that, in
his opinion, there were many errors in the net worth calculation and he said
that he would offer evidence at trial in that respect. Prior to the hearing,
Mr. Tang also sent documents
to the Crown. According to the Crown, the format of said documents did not
allow copies to be made and it was not possible to make sense of the documents.
It is not possible to determine which documents were sent by Mr. Tang. Finally, I note that the Notice of Appeal refers to the inheritance that Mr. Tang received from his father, which
further supports the notion that the Crown had full and ample notice of the
issue. I am of the view that
the Crown had not been “put at a
disadvantage by being taken by surprise at trial” (Montana
Band, supra).
[47]
In addition, the Crown asks me to conclude that the
reason why the CRA was never provided a copy of said loan documents was because
if the father’s inheritance and the income-earning assets owned in Taiwan as
shown in the Taiwanese income tax returns, filed as Exhibits A-3, A-8, and A-9, would have been taken
into consideration in the net worth calculation, the results would have been
unfavourable to Mr. Tang. I am of the view that it is far from being clear
that the results would not have been favourable to Mr. Tang. First, the income reported in the Taiwanese tax returns is not
very substantial (less than $20,000 annually for 2006 and 2007). Also, I have to take into account that Mr. Tang left Canada in 2009 and that he was
not represented during the audit period but sought representation only at the
objection stage.
(3) loan from Neostar Technologies Co. Ltd.
[48]
With respect to the $125,000 loan from Neostar
Technologies Co. Ltd., I did not accept any evidence related to this loan,
and accordingly, I do not have to rule on the Crown’s objection to the
examination, by this Court, of that issue given the answer to the written
examination for discovery questions. Neostar Technologies Co. Ltd. apparently
acts as an agent for Mr. Tang with respect to the transfer of personal
loan amounts from his family members. The documents concerning this loan,
however, did not appear in either party’s list of documents, and were not adduced
at discovery. Further, Mr. Tang is neither a director nor a shareholder of
Neostar Technologies Co. Ltd., and thus could not speak personally to the
accuracy or context of such documents. Had I admitted these documents, the
Crown would have been at an unfair disadvantage as it would have had no prior
notice of such documents and would not have been able to cross-examine a person
who could speak to the relevance and nature of the documents. I note that
Mr. Coghlin, the CRA auditor, testified that he had allowed a portion of
that amount in the calculation of the net worth.
(4) Shareholders’ loan balance in Tang Dynasty Investments Limited
[49]
As regards the Shareholders’ loan balance in
Tang Dynasty Investments Limited for $325,362, which appears in Schedule B
to the Reply, Mr. Tang submits that this loan was undervalued due to an
accounting error, and should instead be recorded as a loan for $558,610.89. In
support of his position, Mr. Tang has produced financial statements from
Tang Dynasty Investments Limited, which shows an amount of $558,610.89
(Exhibit R-1, Tab 78). Mr. Coghlin, the CRA auditor, noted that
the lower amount came from Tang Dynasty Investments Limited’s T2 corporate tax
return. Unfortunately, Mr. Tang was unable to have Mr. Darrell Jessome,
the accountant who prepared both the financial statements and T2 corporate tax
return, to testify in order to explain the context and reasons for this
discrepancy. Accordingly, given the absence of evidence submitted by Mr. Tang
on this issue and Mr. Coghlin’s evidence, I find that the amount of
the opening Shareholders’ loan balance in Tang Dynasty Investments Limited was
equal to $325,362 as of December 31, 2004.
(5) personal expenditures calculations in the net worth assessment (Schedule
D of the Reply)
[50]
Finally, Mr. Tang has argued that the net
worth assessment shows indications of haphazard preparation. In particular, in
Schedule D of the Reply, Mr. Tang noted that the amounts for water,
fuel, and electricity fluctuate dramatically, from over $42,000 in 2004, to
$6600 and $4553 in 2005 and 2006 respectively. In addition, Mr. Tang
observed that his communications expenses seemed unreasonably high and also
fluctuated a great deal, with $18,222 in 2004, $10,605 in 2005, and $14,967 in
2006. Mr. Coghlin, the CRA auditor, testified that all the amounts
indicated on Schedule D of the Reply are not estimates and can all be
traced back to either bank statements or credit card statements. I am not
convinced that Mr. Tang, on the basis of the inaccuracy of the amounts
listed in Schedule D of the Reply, has made out a prima facie
rebuttal of the Minister’s assumptions. Furthermore, I find that the Crown
produced sufficient evidence or argument to refute the concerns raised by Mr. Tang
with respect to the accuracy of Schedule D, which forms part of the net
worth assessment.
4.
Gross negligence penalties
[51]
Subsection 163(2) of the Act provides that “[e]very person
who, knowingly, or under circumstances amounting to gross negligence, has
made ... a false statement or omission in a return” is liable to a penalty.
[52]
The burden of establishing the facts justifying
the assessment of the penalty is on the Minister, under subsection 163(3)
of the Act.
[53]
According to the very wording of
subsection 163(2) of the Act, two elements are required for a penalty to
apply: (1) a mental element (“knowingly,
or under circumstances amounting to gross negligence”) and (2) a material element (“has made ... a false statement or omission in a return”).
[54]
Regarding the material element, the case law
holds that an incorrect statement in an income tax return amounts to a
misrepresentation (Nesbitt v The Queen, 96 DTC 6045,
[1996] FCJ No 19 (FCTD) (QL); D’Andrea v The Queen, 2011 TCC 298,
2011 DTC 1234, para 35).
[55]
Regarding the mental element, two possible
scenarios have to be examined for penalties to apply: did Mr. Tang knowingly make a false
statement or omission or did he make a false statement under circumstances
amounting to gross negligence?
[56]
In Can-Am Realty Ltd v Canada,
[1994] 1 CTC 336, 94 DTC 6293, the Tax Court described
the type of conduct that would be required to support a gross negligence ruling
as “exceptional” and “flagrant” conduct. In Venne v The Queen, 84 DTC 6247 at 6256,
[1984] FCJ No 314 (FCTD) (QL), Justice Strayer noted that
gross negligence “must involve a high
degree of negligence tantamount to intentional acting, an indifference as to
whether the law is complied with or not.”
[57]
In Strachan v The Queen,
2015 FCA 60, 2015 DTC 5044, the Federal Court of Appeal
ruled that gross negligence could also result from the wilful blindness of the
taxpayer.
[58]
The penalties assessed under subsection 163(2)
of the Act must be imposed only where the evidence clearly justifies it. If the
evidence leaves any doubt that the gross negligence penalties should be applied
in the circumstances of the appeal, then the only fair conclusion is that the
taxpayer must receive the benefit of the doubt in those circumstances.
[59]
As I have concluded above, Mr. Tang
has rebutted the net worth assessment to the extent of 84% of the additional
income assessed. I further note that the Crown did not show sufficient
evidence for me to find such exceptional or flagrant conduct worthy of being labeled
gross negligence. Also, the Crown did not show sufficient evidence for me to
find that Mr. Tang knowingly made a false statement or omission.
[60]
For the foregoing reasons, the gross negligence
penalties should not apply.
5.
Statute-barred year: 2005 taxation year
[61]
The three taxation years at issues in this
appeal—2005, 2006, and 2007—were reassessed on November 29, 2010. Mr. Tang’s
2005 taxation year was initially assessed on October 2, 2006, and was
not reassessed until November 29, 2010. The delay is greater than the
three-year limit applicable to Mr. Tang, which is defined in paragraph 152(3.1)(b)
of the Act as the normal reassessment period.
[62]
Where the Minister issues a reassessment in
relation to a taxation year after the expiration of the normal reassessment
period, the Minister, pursuant to subparagraph 152(4)(a)(i) of the
Act, has the onus of establishing that the taxpayer has made a
misrepresentation and that that misrepresentation was attributable to neglect,
carelessness, or wilful default, or that the taxpayer has committed fraud in
filing his tax return or in supplying information under the Act in relation to
that taxation year.
[63]
The Crown submits that I should restrict my
examination to the issues still subsisting after discovery, i.e. the loans from
Mr. Tang’s aunt and amounts of the Shareholders’ loan balance in Tang
Dynasty Investments Limited, and not inquire as to whether the reassessment
pertaining to the 2005 taxation year was statute‑barred. I disagree.
[64]
Mr. Tang’s Notice of Appeal, as I read
it, appears to put the entire net worth assessment at issue. The Crown
explicitly cites subsection 152(4) of the Act in paragraph 12 of its
Reply, thus anticipating this issue. Further, the written examination for
discovery did not consider the issue of statute-barred years, and, perhaps most
importantly, I have no evidence before me that Mr. Tang had signed a
waiver as contemplated by subparagraph 152(4)(a)(ii) of the Act.
The limitation periods provided for in the Act offer a kind of procedural
protection to taxpayers. Absent an explicit waiver or an agreement of the parties,
I cannot disregard them.
[65]
The Crown also argued that assessments relating
to a loss taxation year were unaffected by the three-year limitation. However,
subsection 152(1.1) of the Act, concerning the requirement for a
determination of losses to start the prescription clock, cannot apply when the
taxpayer already has a valid initial assessment. Because Mr. Tang had a
valid assessment as of October 2, 2006, according to paragraph 5
of the Reply, the requirement for a loss determination is inapplicable. The
Minister therefore has the burden of showing that there was misrepresentation
attributable to neglect, carelessness, or wilful default, as set out in subparagraph 152(4)(a)(i)
of the Act.
[66]
I have found that Mr. Tang has
rebutted the net worth assessment to the extent of 84% of the additional income;
nonetheless, I find that the Crown has successfully showed
misrepresentation: I am of the view that Mr. Tang did not exercise reasonable care in the completion of his
returns. The evidence showed that Mr. Tang was involved in the day-to-day management of the business and
that he and his former spouse were responsible for their banking activities. I am of the view that Mr. Tang acted with carelessness in filing
his income tax returns.
[67]
The Minister has met her burden in that regard and
Mr. Tang’s 2005 taxation year is thus not statute-barred.
E. CONCLUSION
1.
The Act
[68]
The Minister has met her burden to show that Mr. Tang
has made a misrepresentation that met the standard set out in
subparagraph 152(4)(a)(i) of the Act and, therefore, the 2005
taxation year is not statute-barred.
[69]
In respect of the reassessments for the 2005,
2006 and 2007 taxation years, since the Minister presented no evidence showing
that Mr. Tang’s behaviour met the standard set out in subsection 163(2)
of the Act, the gross negligence penalties will be deleted.
[70]
Mr. Tang has given reasonable explanations
with respect to how he maintained his lifestyle during the 2005, 2006 and 2007
taxation years, taking into consideration the loans from his aunt and the loans
from his family, which account for approximately 84% of additional income
assessed under the net worth assessment. Therefore, these loans will be
reflected in the net worth assessment and the additional income assessed under
the net worth method for each taxation year will be reduced by 84%. In other
words, only 16% of the additional income calculated under the net worth method
will be assessed.
[71]
The appeal for the 2005, 2006 and 2007 taxation
years is accordingly allowed, and the reassessments for those years are
referred back to the Minister for reconsideration and reassessment on that
foregoing basis.
2.
Costs
[72]
As a general rule, a successful litigant is
entitled to party and party costs in accordance with the Tariff. In awarding
costs, however, this Court has broad discretion under section 147 of the Tax
Court of Canada Rules (General Procedure) and section 18.26 of the Tax
Court of Canada Act.
[73]
While Mr. Tang’s position has mostly
prevailed in this appeal, his lack of adequate preparation required the
adjournment of the originally scheduled hearing and, generally, delayed the
proceedings.
[74]
The parties shall accordingly bear their own
costs, subject to either party’s
right to make further submissions within 30 days of the date of this judgment.
Signed at Ottawa, Canada, this 7th day
of September 2017.
“Dominique
Lafleur”
Email this Content