Date: 19981207

Dockets: 96-3925-IT-G; 96-3926-IT-G

BETWEEN:

KARL KYLING,

GARY HEINZ KYLING,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

(Delivered orally from the Bench at Montréal, Quebec on September 29, 1998 and revised in Ottawa, Ontario on December 7th, 1998)

Lamarre, J.T.C.C.

[1] These appeals were heard on common evidence. The Minister of National Revenue (the "Minister") reassessed the Appellants on a net worth basis. In the case of Gary Kyling, the Minister increased his total income by $11,363 in 1989, $52,053 in 1990 and $113,677 in 1991. In the case of Karl Kyling, the Minister increased his total income by $121,456 in 1990, and $45,179 in 1991. The Minister also assessed penalties pursuant to subsection 163(2) of the Income Tax Act (the "Act") in each case. Both the Appellants are appealing these assessments.

[2] A copy of the revised reconciliation of net worth for each year, which was attached to the Replies to Notice of Appeal, is reproduced herein:

GARY HEINZ KYLING 13 Des Pommes Frelighsburg, (Qc)
					Schedule A
CALCULATION OF DISCREPANCY PER NET WORTH
		1989	1990		1991
Net worth at the end of the year (see Table II)		$23,341.00	$66,619.00		$173,408.00
Less:
Net worth at the beginning of the year (see Table II)		20645	23341		66619
Increase (decrease) in Net Worth		$2,696.00	$43,278.00		$106,789.00
ADJUSTMENTS
ADD:
Personal expenditures (see Table EXP)		$14,427.00	$15,375.00		$15,588.00
Subtotal	$14,427.00			$15,375.00		15,588.00
DEDUCT Income of spouse Employment expense deduction
Subtotal	$.00			$.00		$.00
TOTAL INCOME PER NET WORTH	$17,123.00			$58,653.00		$122,377.00
TOTAL INCOME REPORTED	5760.00			6600.00		8700.00
DISCREPANCY PER NET WORTH	$11,363.00			$52,053.00		$113,677.00

STATEMENT OF ASSETS AND LIABILITIES

		31/12/88		31/12/89		31/12/90		31/12/91
ASSETS
CURRENT ASSETS
Cash on hand		.00		.00		.00		.00
Caisse Populaire (see Table CAI)		.00		.00		.00		.00
Bank (see Table CAI)		1222.00		1350.00		1350.00		169.00
Accounts receivable (see Table AR)		.00		.00		.00		.00
Total current assets		$1,222.00		$1,350.00		$1 350.00		$169.00
INVESTMENTS (see Table INVT)		$.00		$.00		$.00		$.00
FIXED ASSETS (see Table FXD)		$69,723.00		$162,291.00		$205,569.00		$313,539.00
TOTAL ASSETS		$70,945.00		$163,641.00		$206,919.00		$313,708.00
LIABILITIES
CURRENT LIABILITIES
Accounts payable (see Table AP)	$300.00			$300.00		$300.00			$300.00
Total current liabilities	$300.00			$300.00		$300.00			$300.00
LONG TERM LIABILITIES
Bank loan (see Table LOAN)	$50,000.00			$140,000.00		$140,000.00			$140,000.00
Mortgages (see Table LOAN)	.00			.00		.00			.00
Subtotal	$50,000.00			$140,000.00		$140,000.00			$140,000.00
Total liabilities	$50,300.00			$140,300.00		$140,300.00			$140,300.00
NET WORTH	$20,645.00			$23,341.00		$66,619.00			$173,408.00
TOTAL LIABILITIES AND NET WORTH	$70,945.00			$163,641.00		$206,919.00			$313,708.00
			31/12/88		31/12/89		31/12/90			31/12/91
CAISSE POPULAIRE
BANK
Royal Bank			$.00		$1,350.00		$1,350.00			$169.00
C.I.B.C.			1222.00		.00		.00			.00
Total			$1222.00		$1350.00		$1350.00			$169.00

	31/12/88	31/12/89	31/12/90	31/12/91
FIXED ASSETS
Furniture	.00	.00	15000.00	15000.00
Construction materials on hand	44900.00	.00	.00	.00
Residential property	.00	126422.00	154700.00	231700.00
Land, Frelighsburg-Ptie 292	.00	4650.00	4650.00	4650.00
Land, Frelighsburg-Ptie 292	.00	2850.00	2850.00	2850.00
Land, Frelighsburg-Ptie 289 et 290	.00	500.00	500.00	500.00
Motorcycle	2600.00	2600.00	2600.00	2600.00
Truck Chevrolet 1988	22223.00	22223.00	22223.00	22223.00
Truck Ford 1991	.00	.00	.00	30970.00
Snow mobil[SIC}	.00	3046.00	3046.00	3046.00
Total fixed assets	69723.00	162291.00	205569.00	313539.00

	31/12/88	31/12/89	31/12/90		31/12/91
PERSONAL LOANS
Loan payable – Pamela Lindras	50000.00	50000.00	50000.00		50000.00
Loan payable – Raymond Kyling	.00	15000.00	15000.00		15000.00
Loan payable – Werner Kyling	.00	75000.00	75000.00		75000.00
Total	50,000.00	140,000.00	140,000.00		140,000.00

TABLE OF PERSONAL EXPENDITURES
	1989	1990	1991
Food	4867.00	5083.00	5100.00
Clothing	2026.00	2115.00	2220.00
Travel & entertainment	1759.00	1837.00	1900.00
Automobile
Insurance	1475.00	1475.00	1475.00
Gasoline, maintenance	500.00	500.00	500.00
Residence
Taxes	2000.00	2000.00	2000.00
Insurance	.00	465.00	358.00
Heat & light	1550.00	1650.00	1785.00
Telephone	250.00	250.00	250.00
Total	$14,427.00	$15,375.00	$15,588.00

	31/12/88	31/12/89	31/12/90	31/12/91
ACCOUNTS PAYABLE
Miscellaneous payables	300.00	300.00	300.00	300.00
Total	300.00	300.00	300.00	300.00

KARL KYLING 187 Pinacle Road Frelighsburg, (Qc)
					Schedule A
CALCULATION OF DISCREPANCY PER NET WORTH
		1990	1991
Net worth at the end of the year (see Table II)		$233,568.00	$273,707.00
Less:
Net worth at the beginning of the year (see Table II)		119,042.00	233,568.00
Increase (decrease) in Net Worth		$114,526.00	$40,139.00
ADJUSTMENTS
ADD:
Personal expenditures (see Table EXP)		$14,130.00	$14,323.00
Subtotal	$14,130.00			$14,323.00
DEDUCT: Social Welfare Income reported A. Theriault Income Tax refund A.Theriault Subtotal: TOTAL INCOME PER NET WORTH	7200.00 00 00 7200.00 121,456.00			7400.00 816.00 1067.00 9283.00 45,179.00
TOTAL INCOME REPORTED	00			00
DISCREPANCY PER NET WORTH	$121,456.00			$45,179.00

STATEMENT OF ASSETS AND LIABILITIES

		31/12/89	31/12/90	31/12/91
ASSETS
CURRENT ASSETS
Cash on hand		.00	.00	.00
Caisse Populaire (see Table CAI)		.00	.00	.00
Bank (see Table CAI)		222.00	1473.00	1612.00
Accounts receivable (see Table AR)		.00	.00	.00
Total current assets		$222.00	$1473.00	$1612.00
INVESTMENTS (see Table INVT)		$4500.00	$4500.00	$.00
FIXED ASSETS (see Table FXD)		$154,420.00	$276,195.00	$320,695.00
TOTAL ASSETS		$159,142.00	$282,168.00	$322,307.00
LIABILITIES
CURRENT LIABILITIES
Accounts payable (see Table AP)	$100.00		$100.00	$100.00
Total current liabilities	$100.00		$100.00	$100.00
LONG TERM LIABILITIES
Bank loan (see Table LOAN)	$40,000.00		$48,500.00	$48,500.00
Mortgages (see Table LOAN)	.00		.00	.00
Subtotal	$40,000.00		$48,500.00	$48,500.00
Total liabilities	$40,100.00		$48,600.00	$48,600.00
NET WORTH	$119,042.00		$233,568.00	$273,707.00
TOTAL LIABILITIES AND NET WORTH	$159,142.00		$282,168.00	$322,307.00
CAISSE POPULAIRE
BANK
Royal Bank	$222.00		$1,473.00		$1,612.00
C.I.B.C.
Total	$222.00		$1473.00		$1612.00

INVESTMENTS:

Balance of Sale receivable $4,500 $4,500 00

	31/12/89	31/12/90	31/12/9l
FIXED ASSETS
Residential property	114,000.00	200,000.00	200,000.00
Land, Frelighsburg-Ptie 93	00	00	4500.00
Wharehouse			30,000.00
Swimming Pool and fence			10,000.00
Toronado 1990	39,720.00	39,720.00	39,720.00
Oldsmobile 1972	700.00	700.00	700.00
Corvette	.00	.00	.00
Chevrolet truck	.00	28,414.00	28,414.00
Trailer	.00	7361.00	7361.00
Total fixed assets	154,420.00	276,195.00	320,695.00

	31/12/89	31/12/98	31/12/91
PERSONAL LOANS
Loan payable – Raymond Kyling	40000.00	40000.00	40000.00
Loan payable – Andre Beauregard	.00	8500.00	8500.00
Total	$40,000.00	$48,500.00	$48,500.00

	31/12/89	31/12/98	31/12/91
ACCOUNTS PAYABLE
Miscellaneous payables	100.00	100.00	100.00
Total	100	100	100

[3] In the case of Gary Kyling, there are three items in the net worth assessments that are contested. The Appellant submits that the cost of residential property as shown under fixed assets in the net worth reconciliation is not accurate. He further submits that the 1991 Ford truck should not appear under fixed assets for 1991, as it did not belong to him. Finally, he does not accept the figures set out in the table of personal expenditures.

[4] In the case of Karl Kyling, the cost of residential property, the warehouse and the swimming pool and fence are in issue under fixed assets. Karl Kyling also submits that the Chevrolet truck included in his fixed assets for 1990 does not belong to him. He also disagrees with the cost of living figures in the net worth assessments.

Gary Kyling: Ford Truck and Personal Expenditures

A. Evidence

[5] Concerning the 1991 Ford truck, Gary Kyling said that it belonged not to him but to his wife. Mr. Ronald Boom Howard and his wife Ardlene Boom Howard, Gary's father-in-law and mother-in-law, both testified on this point. Mrs. Ardlene Boom Howard did not remember much of this transaction, although she did recall the price of the truck, which was, according to her, $32,000. She also said that she was the registered owner and that she paid cash. She said that the truck was bought for her daughter (Gary's wife) and that her daughter was not there at the time of the purchase. Mrs. Boom Howard added that she paid for the insurance on the truck and for the gas. At the same time, she testified that except for a small income from house cleaning, she had no earned income during the years in issue. However, she said she was looking after her husband's money.

[6] Mr. Ronald Boom Howard testified that he earns between $25,000 and $50,000 per year as a machinist. He has been working for 29 years and he said that it was with his savings that he and his wife bought a truck for their daughter. According to Mr. Jean-Pierre Paquette, investigating officer for Revenue Canada, Mr. Boom Howard did not file a tax return in 1988 and declared $21,583 in income in 1989, $15,427 in 1990, $23,397 in 1991 and no income from 1992 to 1995.

[7] Mr. Paquette said that during his audit, he went to the garage where the truck was bought and was told that Gary Kyling negotiated the purchase of the truck and that two women were with him when it was bought. The sales contract indicates that the purchaser was Ardlene Boom Howard and that the truck was paid for by cheque.

[8] Regarding the personal expenditures, Mrs. Boom Howard and her husband testified that their daughter and Gary Kyling ate all their meals at Mrs. Boom Howard's home during the years when Gary's house was under construction (the years in issue).

[9] Gary Kyling testified that he bought no clothes and spent nothing on entertainment during the years in issue. He said that the phone was registered in his wife's name and that she paid the bills. Concerning municipal taxes, he testified that the tax amount was not $2,000 during those years. However, he did not provide statements showing the exact amount of property taxes.

B. Analysis

[10] I find it hard to believe the testimony of the Boom Howards. First, there were contradictions. Second, I do not see how, with the earnings declared by the couple from 1988 to 1995, they could afford to buy a brand new truck at $30,000 while they already owned two other cars, pay the insurance and gas on it, and pay for all the food for four people with no financial help from either their daughter or Gary Kyling.

[11] Mr. Boom Howard said that his father-in-law died leaving to Mrs. Boom Howard an inheritance of approximately $15,000 to $20,000. However, Mrs. Boom Howard made no reference to that inheritance during her testimony. In the circumstances, I cannot give any credibility to these witnesses. Even though the truck was registered in Mrs. Boom Howard's name, Gary Kyling has not convinced me on a balance of probabilities that she was not acting only as an agent. I therefore conclude that he was the real owner of the vehicle or at least that he paid for it.

[12] With regard to Gary's cost of living, the Minister relied on figures given by Statistics Canada to establish it, as the Appellant did not cooperate by giving any figures. Considering that the Appellant produced no evidence to prove that he did not spend that amount of money on his cost of living, I find that he has not discharged his burden of showing on a balance of probabilities that the Minister was wrong.

Karl Kyling: Chevrolet Truck and Personal Expenditures

A. Evidence

[13] Concerning the Chevrolet truck that was included in Karl's assets, his evidence is that he already had three cars and that the truck was bought by his girlfriend, Annick Thériault, with money from her mother. Ms. Thériault was not present at the hearing to testify. According to the sales contract, Ms. Thériault was the purchaser. The purchase price was $28,414. The total amount payable was apparently $14,600 as another car was apparently traded in as part of the transaction. Mr. Paquette testified that Ms. Thériault was on welfare at that time. Karl Kyling was on welfare during 1990 and 1991, receiving about $7,200 per year in benefits.

[14] With regard to Karl's personal expenditures, the figures set out in the net worth assessment are slightly lower than those for Gary. While the table of detailed expenditures is missing from Karl's net worth statement, Mr. Paquette said that the figures used came from Statistics Canada. Karl said that he had a garden, that he did not buy himself any clothes as his son Gary gave him his old clothes, and that he was working all the time on his house. He was living on welfare benefits. He said the phone bills were paid by his girlfriend.

B. Analysis

[15] I find it hard to believe this testimony. I will discuss the cost of Karl's house later on in my judgment, but it is hard to believe that someone who lives in a house worth around $200,000 has a cost of living lower than $15,000 per year (as established in the net worth statement). Karl Kyling has not convinced me on a balance of probabilities that the Minister was wrong on this item. Nor has he convinced me that Annick Thériault, who was not at the hearing to be cross-examined, was not acting only as an agent when the truck was purchased, or that the price he paid for the truck was not the price stated by the Minister.

Gary Kyling's and Karl Kyling's residences

A. Gary Kyling's Residence

[16] The Minister based the cost of Gary's residence in 1989, i.e. $126,422, on a balance sheet received from Gary Kyling himself, (see exhibit A-1, Tab 9). For 1990 and 1991, the Minister relied on the municipal assessment to raise the cost of the house. Mr. Paquette testified that he was asked to audit both the Appellants by the RCMP, who had reasons to believe that they were involved in illegal activities. Mr. Paquette said that he did not receive much cooperation from the Appellants themselves. I also understand from his testimony that it was not recommended for his own or others' safety to go on site to appraise the value of both Gary's and Karl's houses.

[17] Counsel for the Appellants is of the opinion that the figures on which the Minister relied represent the value of the property and not the cost. He supports his argument with the municipal assessments on Gary's house (filed in evidence as Exhibit I-1, Tabs 10 and 11), as for each assessment, the municipality added up the total fixed costs of the property. These costs were $45,762 in 1990 and $68,537 in 1991, and the municipality applied an economic conversion factor to them to give, according to counsel, the market value.

[18] Counsel also relied on the testimony of Glen Whitehead who, as a general contractor, testified that the hard cost of a building is approximately thirty percent (30%) of the total value.

[19] Furthermore, Gary Kyling submits that it did not cost him a penny to make the improvements to the house in 1990 and 1991. He said that in 1989, he hired someone to lay the cement at a cost of $13,000. He also said that he hired someone to put on the roof, although he did not indicate in which year. Apart from these two contracts, Gary Kyling, who said that he is a carpenter and mechanical labourer and has been trained in woodworking, testified that he did all the work himself with the help of his father, Karl, and his cousin. As for the materials, he said that he had been gradually accumulating materials to build the house since 1980. In fact, his balance sheet for 1988 contained an item entitled "construction materials on hand" in the amount of $44,900 and this had disappeared from the balance sheet in 1989. The Minister took this amount into account in the net worth assessments.

[20] Gary Kyling also testified that he bought materials from Arthur Ditchum for $30,000 but never paid him. He said that the real value of the materials bought was $60,000. Incidentally, Ditchum was charged for fraudulent bankruptcy in 1987 in relation to materials worth millions of dollars that were alleged to have been acquired illegally.

[21] The balance of the cost of the house was apparently paid out of loans received from Gary's two uncles and a woman named Pamela Lindras. The Minister took these loans into account in the net worth assessments.

B. Karl Kyling's Residence

[22] In the case of Karl Kyling, the Appellant testified that his father gave him his house in 1972. In 1982, he sold the property for $4,500 to his brother Raymond, who needed assets to give as collateral to start a new business. Raymond never paid him for it. The property was transferred back to Karl in November 1991 for the same amount, which was never paid. According to Karl, Raymond paid all the bills during the years he was registered as the owner of the house except for the telephone bills, which were in the name of Karl's girlfriend. According to Mr. Paquette, Karl always lived there, even when Raymond was the registered owner.

[23] In 1989, Karl added an extension to his house. He said that he did it all by himself and that he got all the materials from Ditchum, including cement, foaming, doors, windows, tiles, gyproc and insulation, for only $30,000. That amount was never paid. He said that a huge quantity of lumber was unloaded on his property without an invoice. It was all seized by the police when he was arrested in 1987, along with Ditchum. According to an article, filed as Exhibit A-1, which appeared in the "Allo Police" newspaper in April 1987, the Kyling brothers were arrested in relation to a major fraud case concerning stolen materials worth approximately two million dollars. Mr. Ditchum turned himself in to the police and was charged with fraudulent bankruptcy. He was sentenced to weekends in jail. Karl testified that the charge against him was withdrawn.

[24] The testimony of both Ditchum and Karl Kyling was quite vague regarding the delivery of the lumber. According to Karl, the police offered to let him take back the lumber that had been seized on his property. He used it to build the warehouse, the fence and the addition to the house. As for the pool, Karl said that it is an outside pool worth about $800. He did not file an invoice for it.

[25] Mr. Paquette testified that the cost attributable to Karl's house in 1989, i.e. $140,000, was taken from the municipal assessment while the cost of $200,000 in 1990 was taken from the amount given by the Appellant to the insurance company to insure the house. The price of the warehouse comes from information given in an application to the municipality for a construction permit, which was filed by Raymond and Karl Kyling. The cost indicated therein was $30,000.

C. Analysis

[26] In both appeals, two questions are raised: first, what is the cost of the two houses, and second, is it true that the Appellants did not have to disburse one penny to make all the improvements they made to their property?

[27] Concerning the cost of the houses, I have on the one hand the municipal assessment of a brand new house in the case of Gary and the cost of the house for insurance purposes in the case of Karl. On the other hand, I have the testimony of the Appellants and of Glen Whitehead.

[28] In my opinion, the Minister was right in his assessment of the cost of the houses in both appeals. First, Gary Kyling himself established the initial cost of the house, on which construction began in 1989, at $126,422. I do not see how it is then possible to say that the cost of the house was only $45,762 in 1990 and $68,537 in 1991.

[29] Second, Gary Kyling also said that when the people from the municipality came in 1990 to assess the house, they decided to come back the following year as the house was still under construction. He said that the house was built in two years. In 1991, the municipality made the final assessment. According to Mr. Paquette, these assessments of the property's value (which in the present case is close to the cost as it had just been built) were made by municipal officials after they had seen with their own eyes the improvements made on the house up until 1991.

[30] Third, I will not give much weight to the testimony of Mr. Whitehead as he went on site not in 1991 but only two weeks before the trial. In the circumstances, I would prefer to rely on the municipal assessment of the property, which was made at the relevant time.

[31] Furthermore, at the time the assessments were made by the municipality, the Appellants did not contest them. They did not bring any vouchers or documents showing that the cost of building the house or the cost of the improvements was lower than the amount established by the municipality.

[32] As to how much money the Appellants actually spent on their houses, it is possible that the Appellants built themselves their houses, warehouse and fence. However, in light of their suspected past activities and the contradictions in the testimony of their own witnesses, I cannot but conclude that their testimony was nothing more than self-serving evidence that was not corroborated by any other valuable evidence.

[33] In the circumstances, the Appellants have not convinced me that the costs of building the houses and of all improvements were not as determined by the Minister. Nor am I convinced that the materials were all given to the Appellants. In compiling the net worth assessments, the Minister took into account all the loans and all construction materials on hand at the beginning of the assessment period. Even so, there is a gap during the years in issue. I can only conclude that the Appellants had other sources of income. The Appellants have not convinced me and have not shown on a balance of probabilities that the additional income assessed by the Minister was not income from a taxable source of income.

[34] I also find that the penalties are justified in the circumstances pursuant to subsection 163(2) of the Act. Indeed, I am satisfied that the Appellants have knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in their tax returns for the taxation years in issue.

Decision

[35] For these reasons the appeals are dismissed with costs.

Signed at Ottawa, Canada, this 7th day of December 1998.

    "Lucie Lamarre"

J.T.C.C.