These
appeals
were
heard
at
Ottawa,
Ontario
on
January
14,
1999
pursuant
to
the
Informal
Procedure
of
this
Court.
The
most
expedient
method
of
summarizing
the
facts,
issues
and
relevant
provisions
of
the
Income
Tax
Act
(“Act”)
is
to
quote
the
Appellant’s
Notice
of
Appeal
and
the
Reply
to
the
Notice
of
Appeal.
These
documents
(as
corrected
at
the
hearing
with
respect
to
the
Reply)
read
as
follows:
Ascenzo
Vitti
1625
Walton
Street
Cornwall,
Ontario
K6H
7B9
December
30,
1997
The
Tax
Court
of
Canada
200
Kent
Street
Ottawa,
Ontario
KIA
OMI
Re:
Informal
Procedure
133375
Canada
Inc.
Acc.
#
8575
8472
Ascenzo
Vitti
Acc.
#
214
685
638
Sir/Madame
1
want
to
appeal
the
above
reassessments
and
elect
to
do
so
by
informal
procedure.
I
am
presently
living
on
social
assistance.
I
have
exausted
my
RRSP
and
cannot
find
work.
In
the
present
situation
there
is
no
way
that
1
can
pay
any
amount
of
money.
I
believe
there
must
have
been
a
mistake
somewhere
in
the
process.
The
business
made
all
tax
obligations
while
operating.
I
would
like
you
to
help
me
put
an
end
to
this
depressing
situation.
Sincerely,
“A.
Vitti”
Ascenzo
Vitti
Reply
to
the
Notice
of
Appeal
In
reply
to
the
Notice
of
Appeal
for
the
1992,
1993
and
1994
taxation
years,
filed
on
December
31,
1997,
the
Deputy
Attorney
General
of
Canada
says:
A.
Statement
of
Facts
I.
He
does
not
discern
any
facts
in
the
Notice
of
Appeal
to
admit
or
deny.
2.
The
Appellant
filed
income
tax
returns
for
the
1992,
1993
and
1994
taxation
years
and
declared
total
income
in
the
amounts
of
$13,162,
$7,528
and
nil.
3.
By
Notices
of
Assessment
dated
June
4,
1993,
May
12,
1994
and
May
11,
1995,
the
Minister
of
National
Revenue
(the
“Minister”)
initially
assessed
the
Appellant’s
1992,
1993
and
1994
taxation
years.
4.
On
May
13,
1996,
the
Appellant
signed
a
Waiver
in
respect
of
the
normal
reassessment
period
for
the
1992
taxation
year.
5.
In
reassessing
the
Appellant
for
the
1992,
1993
and
1994
taxation
years,
by
Notices
of
Reassessment
dated
May
20,
1997,
the
Minister
increased
the
Appellant’s
income
as
detailed
below:
|
1992
|
1993
|
1994
|
|
Shareholder’s
benefits
|
$4,233
|
$4,274
|
$4,288
|
|
Unreported
capital
gain
|
|
$9,375
|
|
|
Subsequent
Year
capital
loss
|
|
(7,500)
|
|
|
Carrying
charges
disallowed
|
4,132
|
3,628
|
2,817
|
|
Loss
from
Hasting
Co-Tenancy
|
(14,105)
|
|
|
Unreported
income
per
Net
Worth
|
14,518
|
8,330
|
21,956
|
|
Net
Charge
|
$8,778
|
$18,107
|
$29,061
|
6.
In
so
reassessing,
federal
gross
negligence
penalties
were
levied
in
the
amount
of
$1,290.09
in
1992,
$1,289.87
in
1993
and
$1,330.76
in
1994
on
the
unreported
capital
gain
and
the
unreported
income
per
net
worth.
7.
The
Appellant
objected
to
the
said
reassessments
by
serving
on
the
Minister
a
Notice
of
Objection
dated
June
27,
1997.
8.
In
response
to
the
said
Notice
of
Objection,
the
Minister
confirmed
the
reassessments
for
the
1992,
1993
and
1994
taxation
years
by
issuing
a
Notification
of
Confirmation
dated
October
6,
1997.
9.
In
so
reassessing
the
Appellant,
the
Minister
made
the
following
assumptions
of
fact:
(a)
during
the
1992,
1993
and
1994
taxation
years,
the
Appellant
was
the
50%
shareholder
of
133375
Canada
Inc.
which
operates
a
restaurant
(the
“Restaurant”)
in
Cornwall,
Ontario.
(b)
the
Restaurant
had
a
December
31
year-end;
[The
Appellant
stated
the
year-end
was
August
31
but
this
is
not
important
in
these
appeals.]
(C)
the
Restaurant
had
a
liquor
license
and
did
deliveries;
(d)
the
assets
of
the
Restaurant
were
sold
in
November
1994;
(e)
during
the
years
under
appeal,
the
Appellant
was
married
to
Anna
Vitti
and
had
two
dependent
children;
(f)
the
books
and
records
of
the
Restaurant
business
for
the
said
taxation
years
were
not
such
as
to
permit
accurate
verification
of
the
Appellant’s
income
for
these
years;
[The
Appellant
considered
the
books
and
records
satisfactory
but
this
was
contradicted
by
Linda
Rieux,
the
Revenue
Canada
auditor.
I
(g)
the
Appellant’s
income
was
understated
by
the
amount
of
$14,518,
$8,330
and
$21,956
in
1992,
1993
and
1994
as
determined
by
the
net
worth
method,
the
details
of
which
are
shown
in
Schedule
I,
II,
111
and
IV;
(h)
during
the
years
under
appeal,
the
Appellant
ate
most
of
his
meals
at
the
Restaurant;
(1)
during
the
years
under
appeal,
the
value
of
the
personal
consumption
of
the
food
at
the
Restaurant
amounting
to
$4,233,
$4,274
and
$4,288
in
1992,
1993
and
1994;
(j)
the
value
of
the
personal
consumption
of
the
food
referred
to
in
subparagraph
(i)
above
is
a
taxable
benefit
conferred
by
133375
Canada
Inc.
to
the
Appellant;
(k)
in
computing
his
net
income
for
the
1992,
1993
and
1994
taxation
years,
the
Appellant
deducted
carrying
charges
of
$4,132,
$3,628
and
$2,817
representing
interest
paid
to
a
banking
institution
for
a
loan
received
to
purchase
his
personal
residence;
(l)
the
amount
of
interest
referred
to
in
subparagraph
(k)
above
was
not
paid
pursuant
to
a
legal
obligation
to
pay
interest
on
money
used
for
the
purpose
of
earning
income
from
a
business
or
property;
(m)
in
1993,
the
Appellant
disposed
of
a
lot
located
in
Beauharnois,
Québec,
resulting
in
a
taxable
capital
gain
calculated
as
follows:
|
Proceeds
of
disposition:
|
$27,500
|
|
Less:
Adjusted
cost
Base:
|
15,000
|
|
Capital
gain:
|
$12,500
|
|
Taxable
capital
gain:
|
$
9,375
|
(n)
The
Appellant
failed
to
report
the
capital
gain
of
$12,500
in
computing
income
for
the
1993
taxation
year:
(o)
as
a
consequence
of
the
understatement
of
income
referred
to
in
subparagraph
(g)
and
(m)
above,
the
Minister
levied
and
the
Appellant
is
liable
for
penalties
in
the
amount
of
$1,290.09
in
1992,
$1,289.87
in
1993
and
$1,330.76
in
1994
pursuant
to
subsection
163(2)
of
the
Income
Tax
Act
(the
"Act”);
and
(p)
in
so
reassessing
the
Appellant,
the
Minister
made
the
following
assumptions
of
fact
regarding
the
penalties
applied
pursuant
to
subsection
163(2)
of
the
Act,
whereby
the
Appellant
knowingly,
or
under
circumstances
amounting
to
gross
negligence
in
carrying
out
a
duty
or
obligation
imposed
under
the
Act,
made
or
participated
in,
assented
to
or
acquiesced
in
the
making
of
false
statements
or
omissions
in
the
income
tax
returns
filed
for
the
1992,
1993
and
1994
taxation
years
with
respect
to
underreported
business
income
in
the
amounts
$14,518,
$8,330
and
$21,956
respectively,
and
unreported
taxable
gain
of
$9,375
in
1993
as
a
result
of
which
the
taxes
that
would
have
been
payable
assessed
on
the
information
provided
in
the
Appellant’s
income
tax
returns
filed
for
1992,
1993
and
1994,
were
less
than
the
taxes
in
fact
payable
attributable
to
the
false
statement
or
omission
by
the
amounts
of
$2,580.18,
$2,579.74
and
$2,661.52
respectively.
B.
Issues
to
be
Decided
10.
The
issues
are:
a)
whether
the
Appellant’s
unreported
income
of
$14,518,
$8,330
and
$21,956
as
calculated
using
the
net
worth
method
for
the
1992,
1993
and
1994
taxation
years
was
properly
included
in
the
Appellant’s
income
for
these
years;
b)
whether
the
Appellant
is
entitled
to
deduct
carrying
charges
of
$4,132,
$3,628
and
$2,817
in
computing
income
for
the
1992,
1993
and
1994
taxation
years:
C)
whether
the
Appellant
received
a
taxable
benefit
of
$4,288,
$4,274
and
$4,233
in
the
1992,
1993
and
1994
taxation
years
from
133375
Canada
Inc.;
d)
whether
the
taxable
gain
of
$9,375
was
correctly
included
in
the
Appellant’s
income
for
the
1993
taxation
year;
e)
whether
the
Appellant
is
entitled
to
a
capital
gain
deduction
in
respect
to
the
unreported
taxable
capital
gain
of
$9,375
in
1993;
f)
whether
the
Minister
properly
levied
the
penalties
pursuant
to
subsection
163(2)
of
the
Act,
for
the
1992,
1993
and
1994
taxation
years.
C.
Statutory
Provisions,
Grounds
Relied
on
and
Relief
Sought
11.
He
relies
on
sections
3,
9
and
248,
subsections
15(1),
69(4),
110.6(6),
152(7),
163(2)
and
230(1),
and
paragraphs
18(1)(a),
20(1)(c),
and
38(a)
of
the
Act,
as
amended
for
the
1992,
1993
and
1994
taxation
years.
12.
He
submits
that
the
Appellant
failed
to
report
business
income
of
$14,518,
$8,330
and
$21,956,
for
the
1992,
1993
and
1994
taxation
years
respectively,
and
the
Minister
correctly
included
these
amounts
in
the
Appellant’s
income
for
these
years
using
the
net
worth
method,
in
accordance
with
subsections
9(1)
and
152(7)
of
the
Act.
13.
He
submits
that
the
value
of
the
personal
consumption
of
the
food
at
the
Restaurant
amounting
to
$4,288,
$4,274
and
$4,233
in
the
1992,
1993
and
1994
taxation
years
is
a
taxable
benefit
conferred
to
the
Appellant
by
133375
Canada
Inc
and
was
properly
included
in
the
income
of
the
appellant
pursuant
to
subsection
15(1)
of
the
Act;
14.
He
submits
that
the
carrying
charges
in
the
amount
of
$4,432,
$3,628
and
$2,817
claimed
for
the
1992,
1993
and
1994
taxation
years
were
not
paid
pursuant
to
a
legal
obligation
to
pay
interest
on
money
used
for
the
purpose
of
earning
income
from
a
business
or
property
and
were
properly
disallowed
pursuant
to
paragraphs
18(
1
)(a)
and
20(
1
)(c)
of
the
Act:
15.
He
submits
that
the
Appellant
has
realized
a
capital
gain
of
$12,500
pursuant
to
subsection
40(1)
of
the
Act
from
the
disposition
of
a
lot
located
in
Beauharnois
in
1993
and
that
the
taxable
capital
(gain)
of
$9,375
was
properly
included
in
the
income
of
the
Appellant
for
the
1993
taxation
year
pursuant
to
section
3
and
paragraph
38(a)
of
the
Act:
16.
He
submits
that
as
a
result
of
the
Appellant’s
failure
to
report
the
capital
gain
of
$12,500
in
his
return
of
income
for
the
1993
taxation
year,
no
amount
of
capital
gain
deduction
can
be
deducted
pursuant
to
subsection
110.6(6)
of
the
Act;
17.
He
further
submits
that,
as
the
Appellant
failed
to
report
the
income
referred
to
in
paragraphs
12
and
15
above,
in
his
income
tax
returns
for
the
1992,
1993
and
1994
taxation
years,
in
circumstances
and
with
the
results
described
in
subparagraph
9(p)
herein,
the
Minister
correctly
levied
penalties
under
subsection
163(2)
of
the
Act
in
the
amounts
described
in
paragraph
9(o)
herein.
18.
He
requests
that
the
appeal
be
dismissed.
The
facts
and
assumptions
set
forth
in
the
Reply
were,
by
the
evidence,
established
as
true,
save
for
the
bracketed
comments
therein
as
noted
above.
The
Appellant
offered
very
little
in
the
way
of
testimony.
His
main
complaints
appeared
to
be
that
the
reassessments
were
unfair
and
that
he
was
not
able
to
pay
the
increased
income
tax
resulting
from
the
said
reassessments.
The
Appellant
filed
no
exhibits
and
was
not
prepared
to
refute
any
of
the
assumptions
contained
in
the
net
worth
calculations
annexed
to
the
Reply.
Moreover,
the
Revenue
Canada
auditor
gave
testimony
and
thor
oughly
explained
the
procedures
adopted
in
making
the
net
worth
assessment.
15(1)
Where
at
any
time
in
a
taxation
year
a
benefit
is
conferred
on
a
shareholder,
...
otherwise
than
by
...
the
amount
or
value
thereof
shall,
except
to
the
extent
that
it
is
deemed
by
section
84
to
be
a
dividend,
be
included
in
computing
the
income
of
the
shareholder
for
the
year.
69(4)
Where
at
any
time
property
of
a
corporation
has
been
appropriated
in
any
manner
whatever
to
or
for
the
benefit
of
a
shareholder
of
the
corporation
for
no
consideration
or
for
consideration
that
is
less
than
the
property’s
fair
market
value
and
a
sale
of
the
property
at
its
fair
market
value
would
have
increased
the
corporation’s
income
or
reduced
a
loss
of
the
corporation,
the
corporation
shall
be
deemed
to
have
disposed
of
the
property,
and
to
have
received
proceeds
of
disposition
therefor
equal
to
its
fair
market
value,
at
that
time.
110.6(6)
Notwithstanding
subsections
(2)
and
(2.1),
where
an
individual
has
a
capital
gain
for
a
taxation
year
from
the
disposition
of
a
capital
property
and
knowingly
or
under
circumstances
amounting
to
gross
negligence
(a)
fails
to
file
a
return
of
the
individual’s
income
for
the
year
within
one
year
after
the
day
on
or
before
which
the
individual
is
required
to
file
a
return
of
the
individual’s
income
for
the
year
pursuant
to
section
150,
or
(b)
fails
to
report
the
capital
gain
in
the
individual’s
return
of
income
for
the
year
required
to
be
filed
pursuant
to
section
150,
no
amount
may
be
deducted
under
this
section
in
respect
of
the
capital
gain
in
computing
the
individual’s
taxable
income
for
that
or
any
subsequent
taxation
year
and
the
burden
of
establishing
the
facts
justifying
the
denial
of
such
an
amount
under
this
section
is
on
the
Minister.
152(7)
The
Minister
is
not
bound
by
a
return
or
information
supplied
by
or
on
behalf
of
a
taxpayer
and,
in
making
an
assessment,
may,
notwithstanding
a
return
or
information
so
supplied
or
if
no
return
has
been
filed,
assess
the
tax
payable
under
this
Part.
163(2)
Every
person
who,
knowingly,
or
under
circumstances
amounting
to
gross
negligence,
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
for
the
purposes
of
this
Act,
is
liable
to
a
penalty
of
the
greater
of
$100
and
50%
of
the
total
of
...
[a
formula
follows]
230(1)
Every
person
carrying
on
business
and
every
person
who
is
required,
by
or
pursuant
to
this
Act,
to
pay
or
collect
taxes
or
other
amounts
shall
keep
records
and
books
of
account
(including
an
annual
inventory
kept
in
prescribed
manner)
at
the
person’s
place
of
business
or
residence
in
Canada
or
at
such
other
place
as
may
be
designated
by
the
Minister,
in
such
form
and
containing
such
information
as
will
enable
the
taxes
payable
under
this
Act
or
the
taxes
or
other
amounts
that
should
have
been
deducted,
withheld
or
collected
to
be
determined.
20(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(c)
an
amount
paid
in
the
year
or
payable
in
respect
of
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
income),
pursuant
to
a
legal
obligation
to
pay
interest
on
(i)
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property...
(11)
an
amount
payable
for
property
acquired
for
the
purpose
of
gaining
or
producing
income
therefrom
or
for
the
purpose
of
gaining
or
producing
income
from
a
business...
38
For
the
purposes
of
this
Act,
(a)
a
taxpayer’s
taxable
capital
gain
for
a
taxation
year
from
the
disposition
of
any
property
is
/4
of
the
taxpayer’s
capital
gain
for
the
year
from
the
disposition
of
that
property;
Although
the
Court
sympathizes
with
the
Appellant’s
financial
position,
this
Court
is
not
a
court
of
equity
and
can
find
nothing
in
the
evidence
presented
to
rebut
the
facts
and
assumptions
cited
in
the
Reply
as
well
as
the
calculations
in
the
net
worth
statement.
On
the
issue
of
the
shareholder
benefits
consisting
in
meals
consumed
in
the
restaurant,
the
Revenue
Canada
auditor
explained
how
those
calculations
were
made
and
the
value
of
the
benefit
arrived
at
and
those
explanations
were
acceptable.
With
respect
to
the
unreported
capital
gain
of
$9,375
in
1993
the
Appellant
could
offer
no
reason
for
not
reporting
it,
essentially
attempting
to
pass
the
blame
on
to
his
accountant
who
prepared
the
return.
It
was
also
noted
that
the
Appellant
had
reported
capital
gains
in
earlier
years
and
was
granted
a
capital
loss
of
$7,500
in
1993.
In
other
words,
he
was
aware
of
the
obligation
to
report
capital
gains
and
losses.
Moreover,
because
of
subsection
110.6(6)
of
the
Act
the
Appellant
is
not
entitled
to
a
capital
gains
deduction.
With
respect
to
the
carrying
charges
disallowed,
namely
the
interest
amounts
of
$4,132
in
1992,
$3,628
in
1993
and
$2,817
in
1994,
it
was
es-
tablished
that
these
amounts
definitely
represented
interest
on
a
mortgage
which
the
Appellant
and
his
wife
placed
on
their
residence
at
the
time
of
its
acquisition.
As
such,
such
interest
charges
are
not
deductible.
The
Appellant
explained
that
he
could
have
used
his
own
monies
to
make
other
investments
but
he
did
not
do
so
but
chose
to
raise
the
money
by
putting
a
mortgage
($50,000)
on
the
house.
Thus,
the
mortgage
being
on
the
house,
the
interest
thereon
is
clearly
not
deductible.
As
to
the
net
worth
statement,
the
Appellant
was
unable
to
furnish
any
facts
which
would
contradict
it.
Furthermore,
the
Revenue
Canada
auditor
went
to
great
lengths
to
explain
how
the
calculations
were
done
and
these
explanations
were
precise
and
wholly
acceptable.
A
net
worth
assessment
is
permitted
to
the
Minister
by
subsection
152(7)
of
the
Act
and
was
justifiable
in
this
case
involving
a
cash
business
and
a
lack
of
adequate
books
and
records.
As
to
the
penalties
on
the
unreported
income,
no
satisfactory
explanation
was
given
for
the
failure
of
the
Appellant
to
report
the
capital
gain
in
1993
and
the
unreported
business
income
in
1992,
1993
and
1994.
In
such
circumstances
subsection
163(2)
of
the
Act
provides
for
the
imposition
of
penalties.
The
Appellant
has
the
burden
of
proof
to
prove
that
the
reassessments
were
not
correct
and
he
was
unable
to
meet
that
burden.
Consequently,
for
all
of
the
above
reasons,
the
appeals
are
dismissed.
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