Dalton Black v. Her Majesty the Queen, [1994] 1 CTC 2750, 94 DTC 1464

Brulé, J.T.C.C.:— These appeals involve the 1986, 1987 and 1988 taxation years of the appellant. The Minister of National Revenue ("Minister") in these years assessed and reassessed the appellant on a net worth basis. In addition the Minister assessed penalties to the appellant under subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the three taxation years involved.

Facts

For the three years the appellant filed income tax returns and declared income as follows:

The Minister increased the appellant’s income by the following amounts:

Issues

There are two issues involved in these appeals:

(a) whether the appellant’s income for the taxation years 1986, 1987 and 1988 was understated; and

(b) whether the Minister properly assessed penalties pursuant to subsection 163(2) of the Act in these years.

Analysis

Subsection 152(7) of the Act states that the Minister is not bound by the taxpayer's tax return and may assess the amount of tax payable using whatever method he thinks is appropriate in the circumstances. In the case at bar, the Minister used the net worth method. This method is explained by Professor Krishna in his book, The Fundamentals of Canadian Income Tax, 4th ed. (Toronto: Carswell, 1992) at page 1198:

This method involves determining the taxpayer's worth at the beginning and at the end of the taxation years in question. Income for the period is calculated by adding the taxpayer's non-deductible expenditures to the increase of his or her "net worth” and deducting therefrom any appreciation in the value of his or her capital assets. Having determined the total increase in the taxpayer's "net worth" between two points in time, the Minister allocates, equally or otherwise, the estimated net income between the taxation years in question.

There is a presumption of validity of the assessment. Therefore unless the taxpayer can prove that the assessment is erroneous, it is valid and binding. As

President Thorson explained in Dezura v. [1947] C.T.C. 375, 3 D.T.C. 1101 (Ex. Ct.), at page 378 (D.T.C. 1102):

The effect of the section [section 47 of the Income War Tax Act, now subsection 152(7)] is that when the Minister makes an assessment under the section there is a presumption of validity in its favour which is not rebuttable by proof that its amount is different from that shown on the taxpayer's return or information supplied by or for him or that no return has been made.

Since the net worth is deemed to be valid, in order to set it aside the appellant has the burden of showing that the basis of the Minister's assessment is wrong or there are errors in certain items of the assessment. It is noteworthy that if certain items are found to be incorrect, the assessment will still stand except for the items that the Court finds to be incorrect.

If the appellant is not successful in setting the assessment aside, the Minister then has the onus of proof in establishing that the appellant acted knowingly or in circumstances that amounted to gross negligence in the understatement of his income and that the assessment of penalties is justified.

In the present appeals it was obvious that the appellant did not understand the net worth approach to a reassessment. The fact that he did not have able assis- tance at the trial cannot be held against the Minister, nor does it excuse the appellant not being able to refute the contents of the net worth statement. The appellant was not to be believed on many items in the statement and it was quite clear that he used devious methods to arrange his affairs, believing these would avoid tax applicable to him.

The one item which the Court was convinced that there had been impropriety by the Minister was in placing a value on the Braeside residence. Using an insurance value which is based on replacement is not valid if an explanation is given. The evidence of the appellant, not otherwise refuted, was that the residence costs some $76,000. To increase this to $131,000 is not an income approach to be justified. Accordingly the 1988 total income per the net worth statement will be reduced by $55,000 to $45,069.57. There were no other satisfactory explanations for the other additions.

Subsection 163(2) of the Act, being a penal section, it is necessary for a penalty to be imposed under that subsection that there is some element of intentional or deliberate fault on the part of the taxpayer. As Mr. Justice Cattanach explained in Udell v. M.N.R., [1969] C.T.C. 704, 70 D.T.C. 6019 (Ex. Ct.), at pages 713-14 (D.T.C. 6025-26):

There is no doubt that subsection 56(2) [now subsection 163(2)] is a penal section. In construing a penal section there is the unimpeachable authority of Lora Esher in Tuck & Sons v. Priester (1887), 19 Q.B.D. 629, to the effect that if the words of a penal section are capable or an interpretation that would, and one that would not, inflict the penalty, the latter must prevail.

In my view the use of the verb “made” in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of this case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation.

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

Conclusion

Based on the evidence presented to the Court it is held that the net worth statement is to be applied except for the item set out above. Penalties are justified.

These appeals are allowed on the basis that the net worth income for the 1988 taxation year is hereby reduced to $45,069.57 and the penalties imposed to be reduced accordingly. The remainder of the reassessment by the Minister stands. The matter is referred back to the Minister for reconsideration and reassessment.

Appeal allowed in part.