Citation: 2011TCC518
Date: 20111110
Docket: 2008-2034(IT)G
BETWEEN:
XIU J. GUAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
The issue under appeal
is whether the Appellant had unreported income from the sale of alcohol in each
of the 2002 to 2006 taxation years. The Minister of National Revenue (the
“Minister”) reassessed the Appellant’s 2002 to 2006 taxation years as follows:
|
Taxation
Year
|
Reported
Income
|
Unreported Net
Income
|
Gross Negligence
Penalties
|
|
2002
|
$14,500.00
|
$ 47,505.61
|
$ 4,491.00
|
|
2003
|
$28,150.00
|
$165,969.08
|
$21,950.00
|
|
2004
|
$28,150.00
|
$ 39,018.38
|
$ 3,978.00
|
|
2005
|
$0.00
|
$ 44,348.47
|
$ 2,639.00
|
|
2006
|
$0.00
|
$126,325.11
|
$12,763.00
|
The reassessment for the 2002 taxation year
was made beyond the normal reassessment period pursuant to subsection 152(4) of
the Income Tax Act (the “Act”).
[2]
It is the Minister’s
position that, during the years under appeal, the Appellant purchased alcohol
in New Brunswick and sold it in either Quebec
or Ontario for twice[1]
her purchase price. Consequently, the Minister estimated that the Appellant’s
unreported net income was equal to her purchase price for the alcohol. I note
that in the Audit Report[2],
the auditor conjectured that some of the alcohol may have been sent out of the country
to Hong Kong where the alcohol purchased by the Appellant sold for ten times
her purchase price. However, the assessment was not based on this assumption.
[3]
The witnesses at the
hearing were the Appellant; Martin Béliveau, a Sergeant Supervisor with the Sûreté
du Québec; Veronica Hatt, an audit team leader with the CRA; William Hatfield,
a former store manager with the New Brunswick Liquor Corporation; John Boise,
an assistant manager with the New Brunswick Liquor Corporation; and, Richard
Potvin, a staff sergeant with the RCMP.
[4]
As with many cases
where the issue is unreported income, the outcome in this appeal rests on a
finding of credibility. After assessing all of the evidence, I have found that
the Appellant’s evidence is not trustworthy. The evidence I received follows.
[5]
The Appellant is also
known as “Jenny” and “Hsui Kin Kwan”.
[6]
During the period under
appeal, the Appellant and Weng Sang Wong were co-owners of a Chinese take-out
restaurant located in Saint
John, New Brunswick. The restaurant was known as the Hong Kong Take-Out
Corporation (the “Restaurant”).
[7]
The Appellant worked in
the Restaurant during the period under appeal and until the Restaurant was sold
in September 2009. Her reported income in 2002, 2003 and 2004 was from the
Restaurant.
[8]
The Restaurant did not
have a licence to sell alcohol; it did not have the facility to sell alcohol;
and, it did not sell alcohol.
[9]
During an investigation
in 2004, the RCMP discovered that Weng Sang Wong had a marijuana grow operation
in a house owned by the Appellant. During the same investigation, the RCMP also
learned that the Appellant was purchasing large amounts of expensive alcohol
(mostly cognac) with large amounts of “cash”. Most of the Appellant’s purchases
were made at the New Brunswick liquor store #36 (“Store #36”) located at the
Parkway Mall in Saint John.
[10]
In 2004, the RCMP asked
the New Brunswick Liquor Corporation for copies of receipts for all sales of
alcohol to the Appellant in 2002 to 2004 from Store #36. They also requested
that the New Brunswick Liquor Corporation keep copies of receipts from all
future sales to the Appellant.
[11]
William Hatfield,
manager of Store #36 during the period under appeal, testified that he knew the
Appellant from her visits to Store #36. He had been instructed by his head
office to keep copies of the receipts from the Appellant’s purchases and he, in
turn, gave the same instructions to his employees.
[12]
Richard Potvin, an RCMP
staff sergeant who worked with the Integrated Proceeds of Crime Division, said
that, until May 2006, he received all of the requested receipts from the
manager of store #36. The RCMP could not identify a substantive offence from
the evidence they had gathered and they referred the matter to the Canada
Revenue Agency (“CRA”).
[13]
An auditor with the CRA
requested financial information from the Appellant which would allow a net
worth assessment to be made. She did not give any of the requested information
nor did she respond to a subsequent letter in which the Minister proposed to
reassess her 2001 to 2006 taxation years. In cross examination, the Appellant
stated that she did not give any bank statements because it would have cost her
$300 to receive copies of her bank statements from each of the banks where she
had accounts.
[14]
The Appellant’s
evidence disclosed that, during the period, she had two credit cards and bank
accounts at six different banks. The Minister only knew about two of the bank
accounts and the two credit cards. He received the Appellant’s bank statements
for these accounts pursuant to a Requirement to the banks.
[15]
In reassessing the
Appellant’s tax liability for the 2002 to 2006 taxation years, the Minister
assumed the facts that I have written above and the following:
h) in addition to working in the Restaurant, the
Appellant was involved in the purchase and resale of liquor;
i)
during the Period Under Appeal, the Appellant
purchased high-end liquor in New Brunswick for resale in Quebec and Ontario;
j) the Appellant transported the liquor she purchased
in New Brunswick to Quebec and Ontario;
k) the Appellant sold the liquor she purchased in New Brunswick at various locations in Quebec
and Ontario;
l) the Appellant deposited money from her liquor
sales in Quebec and Ontario
into her RBC Account via several Royal Bank of Canada branches;
m) the aforementioned deposits were made at various
Royal Bank of Canada branches
along the Appellant’s liquor transportation routes from New Brunswick to Quebec and Ontario;
n) the Appellant made several of her liquor
purchases using significant amounts of cash;
o) the Appellant purchased the majority of the
liquor from New Brunswick Liquor Corporation Store #36 located at the Parkway Mall
in Saint John, New Brunswick;
p) New Brunswick Liquor Store #36 is less than 5
kilometers from the Restaurant and less than 1 kilometer from the Royal Bank of
Canada which held the
Appellant’s RBC Account;
q) the majority of the liquor purchased by the
Appellant was Remy Martin XO, Hennessy XO, and Courvoisier;
r) the liquor purchased by the Appellant was not
for personal consumption, gifts, or collection;
s) the Appellant paid for the liquor in New Brunswick through various methods
including her RBC Account, BMO Visa Account, and cash;
t) the Appellant sold the liquor she purchased in
New Brunswick at a mark-up of 100% at various locations in Quebec and Ontario;
u) the Appellant did not report income with respect
to liquor sales in the amounts of $47,505.61, $165,969.08, $39,018.38,
$44,348.47, $126,325.11 on her income tax returns for the 2002, 2003, 2004, 2005,
and 2006 taxation years, respectively;
v) the Appellant operated her own business;
w) on October 26, 2005, the Appellant and an
associate, Dazhen Lin, were stopped while driving in Quebec by the Sûreté du
Québec and found to be in possession of 165 bottles of liquor;
x) on October 26, 2005, the Appellant was arrested
by the Sûreté du Québec and charged for transporting liquor from New Brunswick;
y) the aforementioned liquor found in the
possession of the Appellant by the Sûreté du Québec was worth $30,412.00
($16,515.56 in New Brunswick);
z) the Appellant’s deposits into her RBC Account
were significantly greater than what she earned from the Restaurant;
aa) the Appellant was aware that the deposits into
her RBC Account were significantly greater than what she earned from the
Restaurant;
bb) the Appellant used funds from the Restaurant to
purchase liquor for resale; and
cc) from December 2005 onwards, the sales and revenue
from the Restaurant were deposited into the Appellant’s personal RBC Account.
Appellant’s Evidence
[16]
The Appellant’s
evidence with respect to the Minister’s assumptions was as follows:
(a)
She agreed that she
purchased alcohol but she denied that she sold it. It was her evidence that she
purchased the alcohol for Dazhen Lin who was the manager of the Restaurant. She
was helping him and she had no idea that he would sell it. She insisted that it
was legal to purchase alcohol and she was only doing what she was told. Later
in her testimony, the Appellant stated that she ordered the alcohol from Store
#36 on behalf of other people and sometimes she went to the store to purchase
it; while on other occasions, other people went to the store to pay for it. She
stated that these other people were Vietnamese. She did not purchase the alcohol
for personal consumption but for her friends.
(b) She did not transport alcohol to
Quebec and Ontario and she has never deposited money into her
Royal Bank of Canada (RBC) account through a RBC branch in Quebec. She did occasionally deposit money into her RBC
account through RBC branches in Ontario. The reason she gave for making the
deposits in Ontario was that her mother and daughter lived
there.
(c) The Appellant agreed that some of
her purchases of alcohol were made with large amounts of cash while other
purchases were made by debit from her RBC account, by cheque and/or by her
credit card. She did purchase alcohol with $10,000 in cash but she could not
remember the frequency of the purchases with $10,000 in cash. She disagreed
that the majority of the alcohol purchased was cognac and stated that she
purchased various types of alcohol, even red wine.
(d) The Appellant denied that she was
with Dazhen Lin when he was arrested in Quebec for transporting alcohol from New Brunswick. It was her evidence that Dazhen Lin had her car but
the woman with him was his daughter and not her. She was never arrested and
charged by the Sûreté du Québec. She insisted that if she had been charged, she
would never have received her Canadian citizenship.
(e) It was impossible that the deposits into her RBC account were significantly greater than what she earned
at the Restaurant as there was very little money in her account. She only
earned approximately $25,000 each year from the Restaurant.
(f) The bank account for the
Restaurant was at the same RBC branch as her personal account but it was under
the name 510594 New Brunswick Inc. She denied that from December 2005 the
revenue from the Restaurant was deposited into her personal RBC account.
(g) She stated that her only income in
2002 to 2006 was from the Restaurant.
[17]
The Appellant tendered
three exhibits:
(a) Her Chinese passport which was issued
on March 10, 2003 and expired on March 9, 2008. She said that the passport
would demonstrate that she was not in Canada on many
occasions when the alcohol was purchased;
(b) A letter dated November 15, 2007 from
the Appellant to Store #36 asking for confirmation that:
(i) She had an account
at the store since 2002;
(ii) She, her friends
and Andrew Dazhen Lin purchased alcohol in her name using her account;
(iii) Her friends used
her account while she was not in Saint
John.
The letter had a post script which read –
“confirming this situation”. It was signed by W. Hatfield.
(c) A letter dated March 15, 2010 from the
Appellant to the CRA which basically reiterated the contents of the letter
dated November 15, 2007 which was referred to above.
[18]
The onus was on the
Appellant to show that the Minister’s assessment of income was incorrect. She
could have done this by giving evidence to demonstrate that she did not have
unreported income or that the amount assessed was too high.[3]
[19]
However, the evidence
given by the Appellant was contradicted by the documents and by other
witnesses. I found that her evidence was not credible.
[20]
She stated that she
purchased the alcohol for her friends and yet she did not ask any of her
friends to give evidence on her behalf. When asked what benefit she received
for making the purchases, she said that she did it so that she would receive
the boxes for free from the liquor store. She used the boxes for take-out
orders at the Restaurant. However, it was William Hatfield’s evidence that it
was not necessary to make a purchase in order to get the boxes from the store
and the store did not charge for empty boxes.
[21]
Both William Hatfield
and John Boise confirmed that the only receipts kept and given to the RCMP were
those from purchases made by the Appellant. William Hatfield said that he saw
the Appellant in the store with Dazhen Lin but no receipts were kept when others
purchased alcohol. John Boise did not remember anyone purchasing alcohol on
behalf of the Appellant. He said that, on occasion, people came into the store
with the Appellant but it was always the Appellant who purchased the alcohol.
[22]
It was John Boise’s
evidence that the Appellant’s purchases were predominately Remy Martin XO and
during the period 2002 to 2006, she was the only person who made purchases of
large quantities of cognac. This evidence was corroborated by William Hatfield
who stated that the majority of the Appellant’s purchases were for expensive
cognac and she was the only person who purchased cognac in bulk from Store #36.
In fact, the store did not carry a large inventory of cognac and the Appellant
called the store to order the cognac. Mr. Hatfield ordered the cognac for the
Appellant and called her when it came in.
[23]
The documentary
evidence also showed that the Appellant purchased large quantities of cognac,
especially Remy Martin XO. The number of bottles of Remy Martin XO purchased in
2002, 2003 and 2006 was 424, 1473 and 847. There was no evidence of the number
of bottles purchased in 2004 and 2005.
[24]
Mr. Hatfield stated
that the Appellant did not have an account with Store #36. Only businesses
which had a licence to sell alcohol had an account with the store. It was his
evidence that the contents of the letter dated November 15, 2007 were not true;
he doesn’t know why he signed the letter; and, at the time, he didn’t see
anything wrong with signing the letter.
[25]
I found that the
Appellant’s statement that she was not with Dazhen Lin when he was arrested in Quebec was refuted by the evidence given by Martin Béliveau,
a Sergeant Supervisor with the Sûreté du Québec. He testified that he
participated in the arrest of two people, one man and one woman, on October 26,
2005 near Quebec City on highway 20. The people had 165 bottles
of alcohol (mostly cognac) in the car and they were arrested for the
transportation of alcohol. He said that the file with respect to this matter
has since been destroyed but he still has his notes from the arrest. According
to his notes, the woman in the car was its owner who was Hsui Kin Kwan. The
man, Dazhen Lin, was charged and convicted for the transportation of alcohol.
Both of the occupants of the car were arrested but the woman was not charged
because Dazhen Lin said he was the owner of the alcohol.
[26]
I am satisfied from the
evidence that the unreported income included in the Appellant’s income did not
include any amounts for alcohol purchased by others. Likewise, I am satisfied
that the purchase price of the alcohol which was seized from Dazhen Lin was not
included in the unreported income assessed to the Appellant.
[27]
A review of the bank
statements for the Appellant’s RBC account showed that the deposits into this account
totalled $76,788.63, $51,553.29 and $23,271.45 in 2002, 2003 and 2004
respectively. Some of the deposits were made at other branches of the RBC but
there was no evidence presented with respect to the location of those branches.
As of December 2005, the sales and revenue from the Restaurant were also
deposited into the Appellant’s RBC account.
[28]
Many of the Appellant’s
answers to questions were evasive and flippant. As an example, when asked to
read the portions of her passport which were in a language other than English,
she stated that I could consult an immigration officer. The immigration stamps
which I could read showed that the Appellant made six visits to Hong Kong in
2003 and one visit to Hong
Kong in 2005. In most
instances she entered and departed from Hong Kong on the same day. In addition,
none of these entries supported the Appellant’s evidence that she was out of
the country when the purchases of alcohol were made.
[29]
My analysis of the
evidence, the Appellant’s lack of documents, the evasiveness of her evidence
and the absence of essential witnesses have lead me to the conclusion that the
Appellant has not met the onus on her.
[30]
The 2002 taxation year
was reassessed beyond the statutory time period and the onus is on the Minister
to show that the Appellant, in filing her tax return, made a misrepresentation
that is attributable to neglect, carelessness or wilful default or fraud.
[31]
In Lacroix v. R.[4], the Federal Court
of Appeal discussed how the Minister can discharge the burden of proof in a
situation where the taxpayer has been assessed on a net worth basis and beyond
the normal assessment period. Pelletier, J.A. speaking for the court stated:
30 The
facts in evidence in this case are such that the taxpayer's tax return made a
misrepresentation of facts, and the only explanation offered by the taxpayer
was found not to be credible. Clearly, there must be some other explanation for
this income. It must therefore be concluded that the taxpayer had an unreported
source of income, was aware of this source and refused to disclose it, since
the explanation he gave was found not to be credible. In those circumstances,
the conclusion that the false tax return was filed knowingly, or under
circumstances amounting to gross negligence, is inescapable. This justifies not
only a penalty, but also a reassessment beyond the statutory period.
…
32 What,
then, of the burden of proof on the Minister? How does he discharge this
burden? There may be circumstances where the Minister would be able to show
direct evidence of the taxpayer's state of mind at the time the tax return was
filed. However, in the vast majority of cases, the Minister will be limited to
undermining the taxpayer's credibility by either adducing evidence or
cross-examining the taxpayer. Insofar as the Tax Court of Canada is satisfied
that the taxpayer earned unreported income and did not provide a credible
explanation for the discrepancy between his or her reported income and his or
her net worth, the Minister has discharged the burden of proof on him within
the meaning of subparagraph 152(4)(a)(i) and subsection 162(3).
33 As
Justice Létourneau so aptly put it in Molenaar c. R., 2004 CAF 349, 2004
D.T.C. 6688 (F.C.A.), at paragraph 4:
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.
[32]
I have concluded that the
Appellant has not provided a credible explanation for the discrepancy between
her reported income and the income assessed by the Minister. The unreported
income was significantly greater than her declared income. The Appellant’s
failure to include the unreported income was not a mere oversight. She was a
business person with several years experience. She employed an accountant to
help her prepare her tax returns. There was no credible evidence to counter the
Minister’s assumptions. I am satisfied that the Appellant earned unreported
income. As a result, the Minister has discharged its burden with respect to
subparagraph 152(4)(a)(i), subsection 163(2) of the Act.
[33]
The appeal is dismissed
with costs.
Signed at Toronto,
Ontario, this 10th day of November 2011.
“V.A. Miller”
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