Adolf Dziwenka v. Minister of National Revenue, [1981] CTC 2772, 81 DTC 657

Dubrule, F J:—In November 1966, Adolf Dziwenka (the appellant) purchased a hardware business as a going concern in the town of Thorhild in the province of Alberta. The appellant’s income tax returns for the years 1966 to 1976 were prepared, as they had been for some previous years, by his wife, Mrs Dziwenka, who incidentally had never had any bookkeeping experience, let alone any training in accounting. She stated in her evidence that for each year from 1966 on, after having prepared her husband’s income tax return, she had attended the Edmonton income tax office of the Department of National Revenue and had asked a member of that office to check the return to ascertain whether or not there were any errors. By errors she meant, whether there were any arithmetical errors or whether she had charged something which she was not entitled to. She continued that they apparently used an adding machine to check her additions. The income tax returns were given back to her with no correction and then a cheque was prepared and the return mailed as required.She stated that this occurred every year from 1967 to 1977.

The income tax returns for the years under appeal (1973 to 1976 inclusive) clearly show that they were prepared on what is commonly called the “cash basis”. Until after the 1976 return was filed there was never any comment on the returns as filed or even an audit of the books and records of the appellant. Then in 1977 an assessor visited the appellant’s place of business to examine the books and records for the years 1973 to 1976. As a result of that audit the appellant was “purportedly” assessed for those years on the so- called “net worth basis”. However, total assets and liabilities on the opening net worth were not included. While the evidence showed that on January 1, 1973 there was an inventory on hand of $26,000 and accounts receivable of $2,000, these were ignored on the purported opening balance sheet. Rather the amount shown for both of those assets was “—” (nil). Following objection, the accountant for the appellant, Mr Wickman, chartered accountant of the Price Waterhouse firm in Edmonton (who only became the appellant’s accountant after the reassessments in question) interviewed an appeals officer in connection with the assessments and received from her a “net worth” statement for the same years, 1973 to 1976, which showed amounts for inventory and accounts receivable opening as $26,000 and $2,000 respectively rather than nil. However, rather than receiving reassessments based on this net worth, the assessments objected to were confirmed. The appellant then appealed to this board for all of those years.

Counsel for the appellant, in opening his case, stated the only issue was the exclusion of those two assets at the stated value from the opening balance sheet. The effect was that the dispute was only with respect to the quantum of income and resulting tax for the 1973 year. There was no dispute with respect to the income and tax assessed for the other years as the opening inventory and accounts receivable as well as accounts payable were considered. While Mr Wickman did not say so, based on the evidence he gave with respect to the 1973 year, I am sure he would say, in the words of Mr Justice Cameron in the case of Chernenkoff v MNR, [1950] Ex CR 15 at 22 [1949] CTC 369; 49 DTC 680, that the net worth for 1974,1975 and 1976 was “proper and complete”, which is something he could not say for the 1973 “net worth”. The result is, counsel for the appellant consented to the appeals for the 1974, 1975 and 1976 taxation years being dismissed. There was really no dispute on the facts as presented by the appellant. There was no suggestion that, from 1966 until after the 1976 income tax return was filed, the alleged improper method of reporting the business income was brought to the appellant’s attention. Not only was there no evidence given that an assessor had visited the appellant’s business premises prior to the 1977 visit, but also there was no evidence that a letter was sent or a telephone call made to the appellant drawing to his attention the incorrect computation of income. The profit and loss statements clearly do not show a figure for inventory nor is there a balance sheet showing accounts receivable or payable. It would appear that anyone who knew anything about the accrual basis of reporting would only need to look at any one of the income tax returns for a minute or two to say that the return was not reporting on the accrual basis.

The effect of the computation of income for 1973, on the basis made by the Minister, was that it included not only all profit for 1973 but also all profit for all prior years, even if it existed back to 1966. Mr Wickman stated a net worth is essentially a balance sheet and if something (asset or liability) is omitted, the net worth is not correct, and fin his professional opinion the 1973 net worth was incorrect. He continued that he had never seen a net worth which left off assets or liabilities. Counsel submitted in effect that the Minister, by doing what he did with respect to the 1973 taxation year, has assessed income relating to statute-barred years without actually assessing those years and bearing the onus of having to show the right to reassess. An additional effect is that, because of graduated rates of tax, the appellant has been assessed more actual tax for 1973 than he would have been assessed on the income for that and prior years. It is true that, had he been assessed for earlier years (and the Minister had established his right to reassess), the appellant would have been called on to pay interest.

Counsel for the Minister stated that subsection 10(2) of the Income Tax Act after tax reform gave the Minister the right to value the inventory at nil. It would appear that, in some circumstances, the section would give such a right to the Minister. It was pointed out that the opening inventory had been paid for in previous years and undoubtedly to give an opening inventory value now the effect would be to decrease the appellant’s overall income. Subsection 10(2) reads as follows:

10. (2) Notwithstanding subsection (1), for the purpose of computing income for a taxation year from a business, the property described in an inventory at the commencement of the year shall be valued at the same amount as the amount at which it was valued at the end of the immediately preceding -year for the purpose of computing income for that preceding year.

The pleadings are clear that the respondent assessed the appellant for the 1973 year on a net worth basis. The authority for making such an assessment would appear to be subsection 152(7). There is no doubt that the assessment purported to be on a net worth basis and, as previously stated, that it was so made, but in addition the schedule forming the basis for the assessment was attached to the Reply to the Notice of Appeal and it was

captioned as follows: “A Dziwenka — Net Worth”. Had the Minister commenced his net worth on January 1, 1972, using subsection 10(2) and giving a nil opening inventory and a nil opening accounts receivable, virtually all the increase would have had to be assessed in 1972. The increase by a “proper and complete” net worth for 1973 would have been around $28,000 less than that assessed. At the time the appellant was reassessed for the 1973 to 1976 years inclusive, a reassessment for 1972 was, in ordinary parlance, statute-barred; that is, before such an assessment is valid, if appealed, the Minister must satisfy the requirements of subsection 152(4). That section reads as follows:

152. (4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has 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 under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

It appears that the use of subsection 10(2), in the circumstances, permits the Minister not only to assess some income in one year which is actually income of another, but also to avoid subsection 152(4). The assessment does not say directly that the profit on a sale in 1969 (for example) will be assessed in 1973, but the effect is the same and, in addition, the Minister does not have to satisfy a court that he had the right to reassess; that is, satisfy a court that the requirements of subsection 152(4) were met.

As I view the case, the Minister in effect wants the best of two worlds. He wants to levy the tax which should have been levied against the appellant (which is not only the Minister’s right, but it is his duty), and also it seems he wants to avoid, by assessing as he did, having such responsibility as he has when assessing tax on income relating to a year which is prima facie statute-barred according to subsection 152(4).

The Minister purported to assess the appellant for 1973 on a “net worth” basis. He did not. He, in effect, stated he would start on a net worth basis but use any section of the Act which would be to his advantage (subsection 10(2) to in effect avoid another section, subsection 152(4)). Had he assessed 1972 on this purported basis, of course there would have been no appeal for 1973 and of course the Minister would have had to establish the right to reassess 1972, if appealed. As I see the matter, the Minister has the right to assess on a net worth basis pursuant to subsection 152(7), and he purported to do so and said he did, but in my opinion he did not. The assessment was not an opening balance sheet and a closing balance sheet as it should have been to be a net worth assessment, but was some assets and liabilities on opening and all assets and liabilities (a balance sheet) on closing. As I view subsection 152(7), the Minister is authorized to arbitrarily assess tax. This he could have done, but in court it might be easily rebutted by an appellant if the appellant has not been told the basis of fact and law upon which the assessment was based — Johnston v MNR, [1948] SCR 486; [1948] CTC 195; 3 DTC 1182.

The Minister purported to assess on a net worth basis. He did not. Starting out on that basis he applies subsection 10(2) which negated a net worth start. Since he purported to assess on a net worth basis, he should assess on a net worth basis and ignore subsection 10(2). It should be noted that the comments have been on “inventory” which is defined in section 248. Really, no mention was made of “accounts receivable’. Assuming, and I do not agree, that in the circumstances of this case subsection 10(2) permits one to value inventory at zero, no authority has been suggested to authorize the ignoring of or leaving out of accounts receivable on the opening balance sheet. It too must be considered as an asset.

In the result, judgment will go allowing the appeal for 1973 and remitting the assessment to the respondent for reassessment to include as opening assets, accounts receivable of $2,000 and inventory of $26,000 on his reassessment on a net worth basis.

Appeal allowed in part.