Semerikov v. R., [1999] 4 CTC 2080 (Informal Procedure)

Watson DJ. T.C.:

These appeals relate to the Appellant, Tatiana Semerikov’s 1992 and 1994 taxation years and to the Appellant, Feoktist Semerikov’s 1992, 1993 and 1994 taxation years. They are husband and wife. The appeals were heard on common evidence in Edmonton, Alberta on June 3, 1999 under the informal procedure. In reassessing Feoktist Semerikov for these years, the Minister of National Revenue (the “Minister”) revised his taxable income as follows:

In reassessing Tatiana Semerikov, the Minister advised her that she was in receipt of a Child Tax Benefit (“CTB”) overpayment in the amount of $2,149.75 for the base taxation year 1992 and $3,004.92 for the base taxation year 1994 because of the revised family net income.

The reassessment in relation to Feoktist was made applying the “net worth” method under section 152(7) of the Income Tax Act (the “Act”). It provides:

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.

In so reassessing Feoktist, the Minister made the following assumptions of fact:

(a) in the 1992, 1993, and 1994 taxation years, the Appellant owned and operated a farm in the vicinity of Plamondon, Alberta;

(b) the 1992, 1993, and 1994 taxation years, the Appellant owned a 50% share of Trak Reforestation Inc. (“Trak”);

(c) the 1992, 1993, and 1994 taxation years, the Appellant earned business income from a logging operation;

(d) in the 1992 and 1993 taxation years, the Appellant received benefits from Trak in the amounts of $8,027.00 and $2,000.00 respectively (the “Benefits”);

(e) the Benefits were made up of amounts reimbursed by Trak for travel and automobile expenses that were deducted by Trak and by the Appellant against his business income from the logging operation;

(f) in reporting income for the 1992 and 1993 taxation years, the Appellant failed to report the Benefits;

(g) the income of the Appellant, from all sources, for the 1992 and 1994 taxation years was understated by the amounts of $31,384.67 and $81,071.37 respectively;

(h) the understated amounts referred to in subparagraph 6(g) herein were determined by the net worth method (a copy of the Statement of Personal Net Worth is attached as Schedule “A”);

(i) as a result of the net worth determination method referred to above, the Appellant’s income for the 1993 taxation year was reduced by $656.43, as shown in the attached Schedule A; and,

(j) as a result of the net worth determination method referred to above, the Appellant’s income for the 1992 and 1994 taxation years was increased by $39,411.67 and $81,071.37 respectively, as shown in the attached Schedule A.

At the hearing of the appeals, the agent for the Appellants admitted paragraphs (a) to (c) and (h) to (j) and denied paragraphs (d) to (g).

The issues to be decided are:

(a) whether Feoktist’s income from all sources for the 1992 and 1994 taxation years was understated by the amounts of $31,384.67 and $81,071.37, as calculated by the net worth method;

(b) whether Feoktist received the Benefits in his capacity as a shareholder of Trak or, alternatively, in his capacity as an employee of Trak in the 1992 and 1993 taxation years; and

(c) whether Tatiana is entitled to Child Tax Benefit payments in excess of the amount allowed by the Minister for the 1992 and 1994 taxation years.

The Appellants have the onus of establishing on a balance of probabilities that the Minister’s reassessments were ill-founded in fact and in daw; they must adduce sufficient or reliable evidence justifying a conclusion that they have, on a balance of probabilities, shown an error on the part of the Minister.

Bowman, J. of this Court, in the case of Ramey v. R. (1993), 93 D.T.C. 791 (T.C.C.), at page 793, stated as follows:

The net worth method of estimating income is an unsatisfactory and imprecise way of determining a taxpayer’s income for the year. It is a blunt instrument of which the Minister must avail himself as a last resort. A net worth assessment involves a comparison of a taxpayer’s net worth, i.e., the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary. Such assessments may be inaccurate within a range of indeterminate magnitude but unless they are shown to be wrong they stand. It is almost impossible to challenge such assessments piecemeal. The only truly effective way of disputing them is by means of a complete reconstruction of a taxpayer’s income for a year.

In the case of Zalzalah v. R. (1994), 95 D.T.C. 5498 (Fed. T.D.), Heald, D. J. states at page 5499:

The plaintiff frankly acknowledged that he did not keep any books or records during the taxation years here under review. This matter was also raised in the proceedings before the Tax Court of Canada where Lamarre Proulx, TCJ stated

The Minister cannot and should not allow business deductions that cannot be proven by documentary evidence. That would bring the administration of the Income Tax Act in the sphere of arbitrariness.

I agree with that view of the matter. Likewise, in the case of Holotnak v. The Queen, Cullen, J. considered the requirements of section 230 and stated as follows:

Section 230 of the Act requires taxpayers to keep adequate books and records. “Adequate” is not defined but it would seem that these records should support whatever the taxpayer is claiming for tax purposes.

The onus of proof that the expenses were incurred for the purpose of earning income is on the taxpayer (Wellington Hotel Holdings Limited v. M.N.R., 73 D.T.C. 5391). Specifically, with regard to assessments, the onus is on the taxpayer to prove that the Minister’s assumptions and assessments are wrong (Strayer, J. in Schwarz v. The Queen, 87 D.T.C. 5274) quoting from Johnston v. M.N.R., [3 DTC 1182] [1948] S.C.R. 486). The Schwarz case (supra) also involved a situation where the plaintiff’s purchases were not supported by vouchers. As Strayer, J. points out, the onus is on the taxpayer to prove wrong the M.N.R.’s reassessment as the taxpayer is in a better position to prove what actually happened.

Feoktist had two sources of income in the years at issue as follows: the small family owned enterprise, Trak, co-owned by himself and Dimitri Scherbakov, his brother-in-law, which operated on a seasonal basis from May to November and a logging operation from November to April carried on by himself alone.

Feoktist is unable to read English, so he left all the accounts, records and books with his two accountants; there were two separate accountants, one looking after the Trak operation, the other his logging and personal accounts. He signed his income tax returns but was unable to read them before doing so.

In the operation of Trak, both he and his brother-in-law used personal funds when in need, for the purposes of Trak’s expenses, especially during the periods in the bush, looking after Trak’s 10 to 20 employees. As he explained in his testimony, he and Dimitri Scherbakov worked as “partners”.

In late 1995 or early 1996, when the Appellants were audited by Revenue Canada, he referred the auditors to his two accountants. At the hearing there was no evidence from the two accountants, books, ledgers or other supporting documentation provided by the Appellants. The only witness was Feoktist, one of the Appellants; he relied on his memory for the details of what went on during the years 1992, 1993 and 1994 and understandably his testimony was mostly vague and incomplete rather than reliable.

Taking into consideration all of the circumstances, including the testimony of the Appellant and the Revenue Canada auditor, the admissions and documentary evidence provided by the Respondent, in the light of the well- established case law, I am satisfied that the Appellants have failed in their onus of establishing on a balance of probabilities that the Minister was ill- founded in fact and in law in his reassessments.

Accordingly, the appeals are dismissed.

Appeal dismissed.