Hermann A. Honig v. Her Majesty the Queen, [1991] 2 CTC 279, 91 DTC 5612

Strayer J.: —

Relief Requested

These four appeals were heard together, being appeals by the plaintiff as taxpayer in respect of reassessments by the Minister of his income for taxation years 1977, 1978, 1979, and 1980. The notices of reassessment were all dated July 15, 1985. During a previous appeal to the Tax Court of Canada the Minister conceded that certain items for the years 1977 and 1980 ought not to be included in income and those reductions were confirmed by the Tax Court in a decision of January 8, 1987 which otherwise dismissed the plaintiff's appeals to that Court.

Facts

During the years in question the plaintiff resided in the municipality of Surrey, British Columbia. By his own description in his statements of claim he carried on the business of buying and selling used equipment and vehicles under the name of H & H Installations of which he was the sole proprietor. According to the evidence he also owned and controlled the corporation H & H Installations Ltd. The respective roles of the corporation and the sole proprietorship were not really clarified during the trial before me.

It is clear from the evidence that the plaintiff kept no adequate financial records, and intermixed his personal and "company" (it was rarely clear when this word was used in evidence whether it referred to the sole proprietorship or the corporation) funds and transactions in his record books and his bank accounts. According to the evidence of Ms. Stasiewski, the Revenue Canada auditor who carried out an investigation and assessment of his income, his records were in a "mess". He had synoptic record books for each year, one for himself and one for his company, except for the year 1978. According to Ms. Stasiewski these books were not reconciled with the bank accounts. They frequently did not indicate the purpose of expenditures or the source of revenues, and often lacked precise dates. Often no payee was identified in connection with an expenditure. While the plaintiff asserted that he was regularly owed substantial amounts of money by his company, in only one year was a loan from a shareholder reflected in the books of the company.

The plaintiff did file returns for the tax years 1977,1978 and 1979, reporting net business losses of $8,161.38 for 1977 and $64.23 for 1978, and a net business income of $3,264.22 for 1979. He has never filed any return for 1980.

In 1981 or 1982 Revenue Canada undertook a "factual audit" to attempt to establish his income during the period in question. According to the auditor, whose evidence I accept, the inadequacy of the plaintiff's records and his inability to provide information on a variety of matters made a factual audit impossible, the result being that Revenue Canada then undertook a net worth assessment to establish his income for the four years in question. The notices of reassessment dated July 15, 1985, referred to above, found the following discrepancies between income based on Revenue Canada's net worth assessment and the lesser amounts reported by the taxpayer on his returns: 1977 $24,059.24; 1978 $36,579.61; and 1979 $8,997.48. With respect to 1980, the year for which the plaintiff had filed no return, the 1985 notice of assessment determined the plaintiff's net business income to have been $29,018.89. As noted earlier, in respect of 1977 and 1980 the Minister has since conceded that certain amounts should not have been included in income, the result being that as confirmed by the Tax Court of Canada the reassessments for these two years are amended so that for 1977 the total income discrepancy is reduced to $17,534.24 and for 1980 the total business income is reduced to $15,938.89.

The Minister has also assessed penalties under subsection 163(2), such penalties totalling nearly $2,900.

Issues

In this appeal there are three issues to be determined. Firstly, has the plaintiff demonstrated that the Minister's assessments or reassessments are incorrect? Secondly, was the Minister entitled to reassess income for tax years more than four years prior to the reassessment? Thirdly, was the Minister entitled to impose penalties pursuant to subsection 163(2)?

Conclusions

With respect to the first issue, the onus is on the taxpayer to demonstrate that the Minister's assessment is wrong. The plaintiff in this case has completely failed to do so. As has been noted before, (Kerr v. Canada, [1989] 2 C.T.C. 112; 89 D.T.C. 5345 at 116 (D.T.C. 5350-51)) when a taxpayer is faced with a reassessment based on a net worth calculation, he can either try to present evidence to enable the Court to determine his real net income or he can seek to prove that the net worth assessment is wrong. In this case the taxpayer has done neither. Much of his evidence and that of his witnesses was apparently designed to demonstrate that he actually made little or no cash income during the years in question. But that evidence was so fragmentary and imprecise as to be of no value. It was not supported by any documentary evidence whatever, even though the plaintiff, who represented himself, conceded that he should have known after his experience before the Tax Court that documentation was extremely important. Nor did the plaintiff demonstrate any clear errors in the net worth assessment prepared by Revenue Canada: parts of it he conceded were correct while he was not sure about other parts of it. If I understood his evidence correctly, he felt that some estimates were incorrect, yet he was unable to provide better estimates. In going over the various elements of the net worth statement, Ms. Stasiewski provided a clear and reasonable explanation for her conclusions. I am satisfied from her evidence that she carried out the assessment fairly and that she frequently accepted the taxpayer's explanations for expenditures where the payee or purpose were not indicated by any documentation. I therefore conclude that the plaintiff has not demonstrated that the reassessments of his income dated July 15, 1985 are incorrect, subject of course to the modifications conceded by the Minister at the Tax Court hearing with respect to the years 1977 and 1980.

With respect to the second issue, namely whether the reassessments were time-barred, I am satisfied that the Minister has demonstrated his entitlement to make the reassessments when he did. It was not argued as to whether or how the limitation periods for reassessments as set out in subsection 152(4) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the 'Act") would potentially apply to this situation. If they do otherwise apply, however, by paragraph 152(4)(a) they would not prevent a reassessment if the taxpayer

. . . made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information . . . .

I have no doubt that negligence has been established in the way that the taxpayer has misstated his income because of the negligent way in which he has maintained, or failed to maintained, his records.

With respect to the third issue concerning the penalties assessed by the Minister, subsection 163(2) provides in part as follows:

163.(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty . . . .

By subsection 163(3) the burden is clearly put on the Minister to establish the facts justifying the assessment of the penalty. Counsel for the Minister made clear that ne was not contending that the plaintiff had knowingly made false statements or omissions in his returns or answers but contended instead that the plaintiff's conduct amounted to gross negligence. Gross negligence involves a very high degree of negligence, amounting to an indifference as to whether the law is obeyed or not, but a court is entitled to take into account subjective factors such as the capacities of the individual taxpayer in question (Venne v. Canada, [1984] C.T.C. 223; 84 D.T.C. 6247 at 235-36 (D.T.C. 6256-58)). The taxpayer here testified before me at length and in effect demonstrated to me a profound lack of understanding of business accounting. While I believe he has been very delinquent in keeping track of his affairs, not only for income tax purposes but for his own sake, I am not satisfied that the Minister has established gross negligence. The plaintiff while having some experience as a foreman ana in other employment positions, did not seemingly have much if any experience as a business manager before engaging in the business in question. Further, it is not disputed that he was suffering from the results of one or two accidents and from serious illness during various parts of these taxation years. I am not satisfied that his conduct, though falling far short of that of a reasonable businessman, has been proven to be grossly negligent in the sense of a complete indifference to legal requirements. One must always keep in mind the strict burden of proof placed on the Minister in the imposition of penalties.

Disposition

The appeal will therefore be dismissed except with respect to the penalties assessed by the Minister which are quashed. With respect to costs, while the plaintiff has succeeded on one issue the bulk of this appeal was patently unwarranted because he was seemingly unable to produce any more specific information than he provided at the trial in the Tax Court. Therefore no costs are awarded.

Appeal dismissed in the main.