Zoric v. R., [1998] 2 C.T.C. 3257

Bowie T.C.J.:

1 These appeals are brought from reassessments for income tax for the taxation years 1991, 1992 and 1993. The reassessments were made on what is known as a net worth basis, whereby the assessor estimates the net worth of the taxpayer at the beginning and the end of each taxation year in issue, and the taxpayer's living expenses for the year. The living expenses plus any increase, or minus any decrease, in the net worth is adjusted to take account of any amounts of a non-income nature received during the year, and the result is considered to be the taxpayer's income for the year. This method of assessing is used in cases where the taxpayer has not maintained records to establish the revenues and expenses, and thereby the income, of his business in the conventional way. This is such a case.

2 During the years under appeal the Appellant operated a small painting business under the name Zoric Painting. He said in his evidence that his wife, who worked for Revenue Canada for many years, kept his books. According to the evidence of Ms. Henderson, the assessor, he produced to her detailed summaries of all his expenditures, both business and personal, and he told her that he had similar summaries of his revenues which he would provide to her, but he never did in fact produce those. For that reason she resorted to the net worth method of assessment. By that method she produced reassessments which reflected the following variations from the initial assessments, which were based upon the information provided by the Appellant in his returns for the years in issue, and she imposed the following penalties:

	1991	1992	1993
Unreported revenue added	$20,455.00	$14,164.00	$16,815.00
Disallowed business use of home	1,203.00	2,016.00	2,413.00
Disallowed business use of vehicles	1,003.00	964.00
Total increase to business income	$22,661.00	$17,144.00	$19,228.00
Penalty - subsection 163(2) of the Act	$3,185.73	$1,889.03	$1,761.53
Provincial penalty - section 18	1,360.46	232.93	212.00
Total penalties	$4,546.19	$2,121.96	$1,973.53

3 The Appellant filed an objection to these reassessments, and, after review by an appeals officer, further reassessments were issued which varied them slightly, in the Appellant's favour, as follows:

	1991	1992	1993
Unreported revenue added	$19,226.00	$ 9,501.00	$12,916.00
Disallowed business use of home	352.00	1,184.00	1,336.00
Disallowed business use of vehicles	1,003.00	964.00
Total increase to business income	$20,581.00	$11,649.00	$14,252.00
Penalty - subsection 163(2) of the Act	$2,121.66	$824.20	$ 961.00
Provincial penalty - section 18	1,276.76	116.49	142.53
Total penalties	$3,398.42	$940.69	$1,103.53

4 The Appellant admitted in the course of his evidence that his bookkeeping left something to be desired. Certainly that is the view of Ms. Henderson, who spent four days with the Appellant and his wife, at their house, trying to construct an accurate picture of his revenues and expenses for the years in question. According to her evidence, which I accept as being accurate and truthful, Mr. Zoric did not produce to her any summary records of his revenues as he said he would, and her examination of his banking records revealed numerous unexplained deposits to his personal bank account. She based her estimates of the net worth of the Appellant at the relevant points in time, and of his living expenses for the three years in question, with some minor exceptions which I will deal with later, upon documents which she obtained during the audit, and upon the information which he gave to her during the interview.

5 The assessments were reviewed by the Appeals Branch of Revenue Canada as a result of the Appellant's objection. Ms. Bonnie Power, the appeals officer, gave evidence. As a result of the submissions made to her by the Appellant and his accountant she reduced the personal expenditures by about 10%, because she accepted the Appellant's submission that his family's food bill was less than average, both because he raised vegetables in a large garden, and because he buys meat wholesale and cuts it himself. Clearly the Appellant is of the view that this increase was inadequate, but he provided no specifics, and certainly no evidence, of any more accurate estimate that might be applied.

6 Ms. Power also increased the deduction allowed to the Appellant for use of the home in his business from 6% to 10%. The assessor had allowed 6% for the use of a small area in a back hall off the laundry room where there was a desk that was used for paperwork pertaining to the painting business. The incremental 4% was to make allowance for the fact, apparently first made known at the objection stage, that the Appellant did some painting of doors in an unfinished family room area within the house. In his evidence, and apparently in filing his returns, the Appellant took the position that he was entitled to charge 25% to his business. The percentages used by the assessor and the appeals officer are, of necessity, somewhat arbitrary, but no evidence of the area used for business, or the total area of the house, was put before me. Nor was there evidence of the proportion of time for which these parts of the house were used for business as opposed to personal activities. I have no reason to vary the amounts which have been allowed.

7 The third change made by Ms. Power was to increase the amount allowed for business use of the telephone. The Appellant's house has only one telephone line, and it was his contention that more than half the calls made on it were for business purposes. She explained that she increased the amount allowed from 25% to 50% for the 1991 and 1993 taxation years in response to his submissions, but she did not make any increase for 1992, because the Appellant had his brother's children from Croatia staying with him for a substantial part of that year, which would have considerably increased the proportion of personal use. I did not understand the Appellant to take issue with this reasoning, but he did assert an entitlement to more than 50% for business in 1991 and 1993. He had no records to support any such claim, nor did he even put forward any exact estimate in his evidence. I have no doubt that the appeals officer treated him fairly with respect to this item as well. Certainly he has not provided any evidence upon which I could reach a different conclusion.

8 The Appellant asserted that the reassessments were incorrect as to four specific matters. The first of these relates to three withdrawals made from his wife's RRSP during the period in question. She withdrew $2,000 in 1990, $2,250 in 1991, and $4,000 in 1992. The Appellant argued that these were not taken into account, and that if they had been then the estimate of his income for the three years would have been less as a result. Ms. Henderson testified that she did in fact take them into account, and that is apparent from an examination of Schedule III of the Net Worth Statement[FN1: <p>Exhibit R-4.</p>] prepared by her. This ground of attack is without merit.

9 Mr. Zoric testified that his father lived with him for some period in 1992, and that he received $2,500 from him, which was not taken into account. He also claimed to have received $3,000 from his wife's parents in 1992, and to have received a loan of $2,000 from his brother, neither of which was taken into account. The assessor made an adjustment of $1,000 for a contribution from the Appellant's father in 1992, based upon what was told to her by the Appellant during the interview. There is no corroborating evidence as to any greater amount received from his father, nor as to any amount from his wife's parents or his brother. The Appellant's recollection as to these amount was likely better at the time of the assessment than at the time of trial. In the absence of corroboration I do not accept the Appellant's evidence on these points.

10 The Appellant gave evidence that his sister had given him $500 in November 1991 and a further $500 in January 1992. He produced cancelled cheques. Having for the first time had these cheques produced, counsel for the Crown conceded that these amounts had been received by the Appellant, and that the net worth statement should be amended accordingly.

11 The Appellant also challenged the assessments on the basis that he had not been given an adequate deduction for the use of his vehicles for business purposes. If I understood him correctly he owned, in addition to an automobile and a van, an old truck which he said was used entirely for business purposes. As to this, Ms. Power's evidence was that the assessments were based upon 50% business use, because that was the proportion used by the Appellant in his returns for the purpose of claiming capital cost allowance on the vehicles. It appears to have been used by his accountant, a Mr. Davis, in his working papers. Those working papers were not made available to me. Ms. Power's evidence was that she did not make any change to this item because the Appellant had no documentation of any kind to establish the proportion of business to pleasure use for the vehicles. No corroborating evidence was presented to me at the hearing of the appeals, and once again the Appellant was not even able to advance any very specific claim, far less proof of it.

12 Apart from these items, the Appellant's attack on the assessments was no more than an unsubstantiated general assertion that the amounts of the assessments were too high. It is trite that the onus to demolish the assumptions underlying an assessment rests with the Appellant. There is no evidence at all before me which convincingly contests those assumptions in this case, except as to the two items conceded by the Respondent during the hearing.

13 There remains the matter of the penalties, as to which the onus rests upon the Crown. The relevant part of subsection 163(2) reads 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 of...

14 During the hearing the Appellant asserted that he had maintained a summary of his revenues similar to that regarding his expenditures. He did not produce it, but stated that he had given it to Ms. Henderson. In response to a question from me he said that he did not suggest that she, or anyone else at Revenue Canada, had suppressed this document. Nevertheless, it was not produced. I accept the evidence of Ms. Henderson that no such document was produced to her.

15 The statement which is generally accepted as defining gross negligence, in the context of the Income Tax Act (the “Act”), is that of Strayer J., as he then was, who said in Venne v. R.:[FN2: <p>(1984), 84 D.T.C. 6247 (Fed. T.D.)at 6256.</p>]

...“Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

16 The appeals for the taxation years 1991 and 1992 are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the unreported revenue for each of those years shall be reduced by $500. The appeal for 1993 is dismissed.