Citation: 2011 TCC 7
Date: 20110107
Docket: 2010-908(GST)I and 2010-909(IT)I
BETWEEN:
STANISLAO CALANDRA
o/a CALANDRA HAIR STUDIO
and STANISLAO CALANDRA,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris J.
[1] These are appeals
from reassessments of the Appellant’s 2002, 2003 and 2004 taxation years under
the Income Tax Act, and from assessments of goods and services tax (GST)
under the Excise Tax Act for the Appellant’s reporting periods ending
December 31, 2002, December 31, 2003 and December 31, 2004. The assessments and
reassessments resulted from a net worth audit by which the Minister of National
Revenue determined that the Appellant had unreported business income of
$33,550.98 in 2002, $30,900.14 in 2003 and $36,485.19 in 2004. Gross negligence
penalties were levied in respect of the unreported income. The Minster also
assessed the Appellant for GST of $9,801.70 on the basis that the unreported business
income was from making taxable supplies and that he had failed to remit GST
collected on those supplies. Interest and penalties for late filing and gross negligence
penalties were also included in the GST assessments.
[2] In his income tax
returns, the Appellant reported losses from two businesses in 2002, a small
amount of income from one business in 2003 and from two businesses in 2004. He
reported a loss of $3,193 from all sources in 2002, and taxable income of
$1,345.70 in 2003 and $238.88 in 2004. His spouse's reported taxable income was
$12,085 in 2002, $14,544 in 2003 and $10,875 in 2004.
[3] The auditor with
Canada Revenue Agency assigned to the Appellant’s file was concerned that the
income reported by him and his spouse was not sufficient to support themselves
and their three children, and attempted to do an audit of the Appellant’s
business income. However, the Appellant failed to respond to her requests for
his books and records. In the absence of any records, she said the only option
left to her was to perform a net worth audit.
[4] Given the
Appellant’s lack of cooperation, the auditor had limited materials upon which
she could complete the net worth audit. Since she had no information about the
Appellant’s assets and liabilities for the years in question, she assumed that
there was no change to either during the three-year period. The auditor then
calculated the Appellant’s personal expenditures using figures from Statistics
Canada for national average expenditures for a family consisting of two adults
and three children. She adjusted those figures in a few instances where she was
able to obtain information about an expenditure, such as mortgage interest or
property taxes that were paid by the Appellant.
[5] The auditor
deducted income received by the Appellant or his spouse from non‑taxable sources,
and deducted amounts of income that were reported on their returns. These
calculations revealed a discrepancy between the Appellant’s apparent income and
his reported income in those years. This discrepancy was assumed by the auditor
to be unreported business income, plus GST that had been collected on taxable
supplies made by the Appellant. The amount remaining after the deduction of the
GST was assumed by the auditor to be unreported income from business. A summary
of the net worth calculation and resulting unreported income and GST
collectible is found in Appendix “A” to the each of the Replies to the Notices
of Appeal and is reproduced here:
|
Additions:
|
2002
|
2003
|
2004
|
|
Personal Expenditures
|
$57,715.71
|
$58,909.68
|
$59,865.47
|
|
Deductions:
|
|
|
|
|
Income Tax Refund- Self
|
932.07
|
888.50
|
814.11
|
|
Income Tax Refund – Spouse
|
|
|
182.60
|
|
GST/HST Credit Refund
Received
|
751.50
|
381.00
|
|
|
Child Tax Benefit
|
7,201.65
|
7,575.80
|
7,937.63
|
|
Income Per Net Worth
|
48,830.49
|
50,064.38
|
50,931.13
|
|
Less
Income Reported – Self
|
|
1,345.00
|
239.00
|
|
Income Reported – Spouse
|
12,085.00
|
14,544.00
|
10,875.00
|
|
Unreported Business
Revenue (GST included)
|
36,745.49
|
34,175.38
|
39,817.13
|
|
Less:
GST/HSY Collected
|
3,194.51
|
3,275.24
|
3,331.94
|
|
Unreported Business Income
|
$33,550.98
|
$30,900.14
|
$36,485.19
|
[6] The auditor sent
the results of her audit and the details of the proposed reassessments to the
Appellant in a letter, and gave him 30 days to submit any information or
provide any explanation he wished the auditor to consider. The Appellant did not
respond.
[7] The Appellant filed
a Notice of Objection to the assessments and reassessments. However, the Appellant’s
representative refused to provide any information or documents to the CRA
appeals officer. The representative, who was also the person who had prepared
the Appellant’s tax returns, said that he was upset because the appeals officer
refused to meet with him, and so he chose not to deal with the appeals officer.
However, the Appellant’s representative admitted having received a letter from
the appeals division at CRA asking him to submit any documents he had to
support the Appellant’s position, and advising that once they had been received
it would be determined whether a meeting with the appeals officer was
warranted.
[8] A succinct
description of the net worth audit is found in Bigayan v. The Queen. At paragraph 2, Bowman
J. (as he then was) said:
The net worth
method, as observed in Ramey v. R. (1993), 93 D.T.C. 791 (T.C.C.), is a last resort to be used
when all else fails. Frequently it is used when a taxpayer has failed to file
income tax returns or has kept no records. It is a blunt instrument, accurate
within a range of indeterminate magnitude. It is based on an assumption that if
one subtracts a taxpayer's net worth at the beginning of a year from that at
the end, adds the taxpayer's expenditures in the year, deletes non-taxable
receipts and accretions to value of existing assets, the net result, less any
amount declared by the taxpayer, must be attributable to unreported income
earned in the year, unless the taxpayer can demonstrate otherwise. It is at
best an unsatisfactory method, arbitrary and inaccurate but sometimes it is the
only means of approximating the income of a taxpayer.
In Bigayan ,
Bowman J. also set out the ways in which a taxpayer could seek to overturn a
net worth assessment. At paragraphs 3 and 4 of that decision, he said:
[3]
The best method of challenging a net worth assessment is to put forth evidence
of what the taxpayer's income actually is. A less satisfactory, but nonetheless
acceptable method is described by Cameron J. in Chernenkoff v. Minister of
National Revenue (1949), 49 D.T.C. 680 (Can. Ex. Ct.) at 683:
In
the absence of records, the alternative course open to the appellant was to
prove that even on a proper and complete "net worth" basis the
assessments were wrong.
[4]
This method of challenging a net worth assessment is accepted, but even after
the adjustments have been completed one is left with the uneasy feeling that
the truth has not been fully uncovered. Tinkering with an inherently flawed and
imperfect vehicle is not likely to perfect it. …
In this case, the
Appellant chose to challenge the net worth assessments on the basis that the
Statistics Canada estimates of personal expenditures used by the auditor were
incorrect.
[9] The Statistics Canada figures were broken
down into subcategories for food, shelter, clothing, gifts, health care and
other types of personal expenses. The Appellant was asked by his
representative to say what he thought he had spent in 2002, 2003 and 2004 on
each of the categories of expenditures listed by Statistics Canada. For the
most part, the Appellant was unable to say with any certainty what he and his
spouse had spent on the various subcategories but offered numbers that he felt
were reasonable. In several instances the Appellant stated that it was a long
time ago, he could not say and then provided a number. I would characterize
these figures given by him in his testimony to be guesses as much as anything
and I found his evidence unconvincing.
[10] I am also troubled
by the Appellant’s refusal to cooperate with the auditor, or to insist that his
representative provide information to the appeals officer. The Appellant had no
explanation for his lack of cooperation, and his failure to challenge the
amounts used by the auditor for his personal expenditures when he was given a
number of opportunities to do so causes me to doubt the Appellant’s efforts to
quantify his expenditures at the hearing. Furthermore, except in one instance with
which I will deal shortly, the Appellant did not present any corroborating
evidence for the years in issue, either in documentary form, or through
testimony of any other witnesses, such as his spouse. Also, the evidence showed
that the Appellant and his spouse had at least one credit card during the years
in issue, but no credit card statements were provided. Those statements would
have possibly provided some indication of the Appellant’s spending in the years
in issue.
[11] At the hearing, the
Appellant presented what he said were printouts of the transactions on a
personal bank account and on a line of credit for the period from January 1,
2000 to December 31, 2004. They purported to show amounts owing at the end of
2002, 2003 and 2004 on the line of credit and small balances in the personal
accounts. However, as pointed out by counsel for the Respondent, there was
nothing on the printouts to tie the accounts to the Appellant, or to identify
at which bank the accounts were held. In the absence of such identification, I
attach no weight to this evidence.
[12] The Appellant also
produced a letter from President’s Choice Financial setting out the details of
the mortgage against the family home and the amount of the monthly mortgage payments.
It showed that in 2002 and 2003, the Appellant and his spouse paid $348.55 per
month (or $4,182.60 per year) which was $6,593.40 less than the figure used by the
auditor. Another mortgage statement for 2005 showed that the monthly payments
had dropped by $35.07 starting on October 1, 2004, which would mean that the
total payments for 2004 were $4,077.48 and therefore the auditor’s figure for 2004
should be reduced by $6,698.52. The Respondent did not challenge this evidence
and I accept that the statements set out the actual mortgage payments made.
[13] I believe two other
adjustments to the personal expenditures are in order. Firstly, the Statistics
Canada figures include an amount for Employment Insurance premiums
estimated to have been paid by the notional family of five each year. Those
amounts appear to be too high because they exceed the required EI contributions
on the employment income earned by the Appellant and his spouse in 2002, 2003
and 2004. Firstly, the unreported amounts the Minister included in the
Appellant’s income were assumed to have been income from business (see Appendix
A to the Reply to Notice of Appeal 2010-909(IT)I) and so no EI premiums would
have been payable by him on those amounts. In 2002, the Appellant reported
employment income of $13,000 but did not claim any deduction for EI premiums at
line 312 of his return. In 2003 and 2004, he did not report any employment
income. The Appellant’s spouse’s income from employment was $12,085 in 2002,
$14,544.00 in 2003 and $10,875.00 in 2004. The employee premium rate for EI
was 2.2% in 2002, 2.1% in 2003 and 1.98% in 2004. The EI premiums on the
Appellant’s spouse’s employment income would have been as follows:
|
|
EI
|
|
2002
|
$265.87
|
|
2003
|
$305.43
|
|
2004
|
$215.32
|
The EI premium amounts
in the Statistics Canada estimates were $1,229.33 for 2002, $1,263.42 in 2003
and $1,287.18 in 2004. The discrepancy between these estimates and the
required premiums on the Appellant’s spouses employment income was $947.62 in
2002, $957.99 in 2003 and $1,071.86 in 2004.
[14] Secondly, the Appellant
testified and I accept that he and his family spent nothing on haircuts because
the Appellant, a former hairdresser, cut his family’s hair, and the Appellant’s
father, also a hairdresser, cut his hair. The evidence showed that the
Appellant had operated a hair salon in past years
[15] In summary, the
reduction to the personal expenditures should be as follows:
|
|
2002
|
2003
|
2004
|
|
Shelter
|
$6,593.40
|
$6,593.40
|
$6,698.52
|
|
Haircutting
|
382.06
|
392.65
|
400.04
|
|
EI premiums
|
963.46
|
957.99
|
1,071.860
|
|
TOTAL
|
$7,923.08
|
7,944.04
|
$8,170.42
|
[16] The Appellant argued
that a major source of funds used to pay the personal expenditures was his line
of credit, which was a non-taxable source of funds. I have already indicated
that I can place no weight on the alleged account printouts, but there are
additional reasons to reject this argument. Firstly, even if the Appellant did
draw funds from a line of credit, there is no way of knowing whether those
funds were used for personal expenditures or for other purposes including the
acquisition of assets that would affect the determination of his net worth. An
investigation into these issues would have been possible if the information had
been provided to the auditor, or perhaps even the appeals officer in a timely
fashion, but in the absence of any assurance that the Appellant has made a full
disclosure of all his assets and liabilities to this Court, evidence of
liabilities alone (had such evidence been accepted) is not sufficient to show
that there is any error in the net worth audit. Secondly, if one were to accept
this Appellant’s evidence regarding borrowings from the line of credit, along
with his evidence concerning his expenses, even by his representative’s
calculation, he would have over-reported his income by $15,561 in 2002, $22,403
in 2003 and $6,364 in 2004. The Appellant did not offer any explanation how he
could have over-reported his income for those years.
[17] The Appellant also
challenged the Minister’s right to reassess his 2002 taxation year outside the
normal reassessment period. On this point, I agree with the Appellant. In order
to reopen a statute-barred year, the Respondent must prove that the Appellant
made a misrepresentation attributable to neglect, carelessness or wilful
default in filing his 2002 tax return. The allegation that the Appellant
misrepresented his income is based on a net worth audit in which the great
majority of the figures used were not verified by the auditor because the
Appellant did not cooperate. Without any direct evidence of the Appellant’s
expenditures or of any increase to his assets during the years in issue, and in
the absence of any admissions by the Appellant as to his expenditures or
assets, there is no proof of a discrepancy between his actual and reported
income such as is required to reopen a statute-barred year. The assumptions
made by the auditor in reassessing cannot be relied upon by the Respondent for the
purpose of meeting the onus to prove a misrepresentation. This point was made
by the Federal Court of Appeal in Lacroix v. The Queen at paragraph 26:
26 Although
the Minister has the benefit of the assumptions of fact underlying the
reassessment, he does not enjoy any similar advantage with regard to proving
the facts justifying a reassessment beyond the statutory period, or those facts
justifying the assessment of a penalty for the taxpayer's misconduct in filing
his tax return. The Minister is undeniably required to adduce facts justifying
these exceptional measures.
It may have been
possible for the Minister, during the audit, to obtain such evidence, if it
existed, by issuing requirements to the Appellant and third parties, but for
whatever reason, this was not done. Without something more than the assumptions
pleaded in the Reply, the income tax reassessment for the 2002 taxation year
cannot stand.
[18] The situation in
this case can be distinguished from that in both Molenaar v. The Queen, and Lacroix, both net worth
cases, in which the Federal Court of Appeal found that the Minister had met the
onus of proving that the taxpayers had misrepresented their income and
therefore that the Minister was entitled to assess beyond the normal
reassessment period and to impose gross negligence penalties. In deciding that
the Respondent had met the onus of proving misrepresentation, the Court in Molenaar
said:
4. Once the Ministère establishes on the
basis of reliable information that there is a discrepancy, and a substantial
one in the case at bar, between a taxpayer's assets and his expenses, and that
discrepancy continues to be unexplained and inexplicable, the Ministère has
discharged its burden of proof. It is then for the taxpayer to identify the
source of his income and show that it is not taxable.
[19] In Lacroix
and Molenaar, the Minister had established on the basis of reliable
information that there was a discrepancy between the taxpayers’ assets and
expenses which was not accounted for by the taxpayer’s reported income. In Lacroix,
the taxpayer himself provided the information concerning his assets and
expenses, and in Molenaar, the information was obtained from the
taxpayer and third parties. Here, almost none of the Appellant’s expenses were
verified and the Appellant provided no information. The auditor relied on
Statistics Canada figures which were not proven in Court by calling the person
who compiled the figures. Having failed to do so, the Minister is unable to
establish the expenses for the purpose of proving a discrepancy between those
expenses and the Appellant’s reported income.
[20] The same would apply
to the gross negligence penalties imposed under subsection 163(2) of the Income
Tax Act. The gross negligence penalties will therefore be reversed.
With respect to the gross negligence penalties assessed under section 285
of the Excise Tax Act, the Respondent has failed to show any
misrepresentation or omission was made in the Appellant’s GST returns for those
reporting periods for the simple reason that the Appellant did not file any
returns for those periods. This fact is set out in paragraph 6(e) of the GST Reply.
Those penalties shall be reversed as well.
[21] The Appellant’s
representative also argued that the GST assessments should be vacated because
they were processed under a GST registration number that the Appellant had
cancelled a number of years before. The auditor said that she was unable to
locate an active GST registration number for the Appellant, so when she went to
put through the assessments, she reopened an account he had used in the past.
[22] Since, at the time
the Appellant was assessed for GST, the old GST number had been reactivated I do
not think that it can be said that the number was incorrect. However, even if
it were, the use of an old or incorrect GST registration number would not have
any effect on the Appellant’s GST liability. According to paragraph 96(1)(a)
of the ETA, “the Minister may assess the net tax of a person under
Division V for a reporting period”, and net tax of a person is calculated under
subsection 225(1). “Person” is defined in subsection 123(1) to include an
individual. Therefore, GST liability falls upon a person rather than on an
account or registration number, and any error in the latter cannot have the
effect of negating tax liability. I would also refer to subsection 299(2) if
the ETA which provides that liability for tax “is not affected by an
incorrect or incomplete assessment or by the fact that no assessment has been
made”.
[23] I have determined,
however, that there is an error in the calculation of GST on the taxable
supplies assumed to have been made by the Appellant which gave rise to the
unreported business income. In order to explain this error, it is helpful to
reproduce the summary of the net worth calculation and resulting unreported
business income and GST collectible:
|
Additions:
|
2002
|
2003
|
2004
|
|
Personal Expenditures
|
$57,715.71
|
$58,909.68
|
$59,865.47
|
|
Deductions:
|
|
|
|
|
Income Tax Refund- Self
|
932.07
|
888.50
|
814.11
|
|
Income Tax Refund – Spouse
|
|
|
182.60
|
|
GST/HST Credit Refund
Received
|
751.50
|
381.00
|
|
|
Child Tax Benefit
|
7,201.65
|
7,575.80
|
7,937.63
|
|
Income Per Net Worth
|
48,830.49
|
50,064.38
|
50,931.13
|
|
Less
Income Reported – Self
|
|
1,345.00
|
239.00
|
|
Income Reported – Spouse
|
12,085.00
|
14,544.00
|
10,875.00
|
|
Unreported Business
Revenue (GST included)
|
36,745.49
|
34,175.38
|
39,817.13
|
|
Less:
GST/HSY Collected
|
3,194.51
|
3,275.24
|
3,331.94
|
|
Unreported Business Income
|
$33,550.98
|
$30,900.14
|
$36,485.19
|
[24] It can be seen from
the summary that the auditor proceeded on the basis that the Appellant’s “Unreported
Business Revenue (GST included)” was $36,745.49 in 2002, $34,175.38 in 2003 and
$39,817.13 in 2004. The GST included would be 7/107 of these amounts, which
equals $2,403.92 in 2002, $2,235.84 in 2003 and $2,604.86 in 2004. The amounts
determined by the auditor were $3,194.51, $3,275.24, and $3,331.94
respectively. It appears to me that the auditor calculated the GST using the
figures shown for “Income per Net Worth” as the total of the Appellant’s
taxable supplies and GST rather than the amounts of “Unreported Business
Revenue (GST included)” because the GST calculated for each period is 7/107 of
the “Income per Net Worth” amount. This would be wrong, because the “Income
per Net Worth” amounts for each year were adjusted to account for income that
had been reported by the Appellant and his spouse for the years in issue. By
using the figures she did, the auditor has in effect assessed the Appellant for
GST on the amount of his spouse’s income each year.
[25] Since I have found
that the Appellant’s personal expenditures were lower than what the auditor
determined, this will reduce the Appellant’s unreported business revenue (GST
included) by the same amount, which in turn will reduce the amount of GST which
the Appellant failed to remit for each of the reporting periods, and, again in
turn, will reduce the amount of his unreported business income as follows:
Revised unreported
business revenue (GST included):
2002: $36,745.49 –$ 7,923.08=
$28,822.41
2003: $34,176.38 – $7,944.04=
$26,232.34
2004: $39,817.13-$8,170.42=
$31,646.71
GST
2002: $28,822.41 x
7/107= $1,885.58
2003: $26,232.34 x
7/107= $1,716.13
2004: $31,646.71 x
7/107= $2,070.35
Unreported business
income
2002: $28,822.41 - $1,885.58=
$26,936.83
2003: $26,232.34 - $1,716.13=
$24,516.21
2004: $31,646.71- $2,070.35=
$29,576.36
[26] For the above reasons, the appeals are allowed. The income tax
reassessment for the 2002 taxation year is vacated and the income tax
reassessments for the 2003 and 2004 taxation years are referred back to the
Minister for reassessment on the basis that the Appellant’s unreported income was
$24,516.21 in 2003 and $29,576.36 in 2004, and the gross negligence penalties
should be deleted. The GST assessments shall be referred back to the Minister
for reassessment on the basis that the Appellant failed to remit GST of
$1,885.58 for the reporting period ending December 31, 2002, $1,716.13 for the
reporting period ending December 31, 2003 and $2,070.35 for the reporting
period ending December 31, 2004 and the gross negligence penalties should
be deleted.
Signed at Ottawa, Canada, this 7th day of January, 2011.
“B. Paris”
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