Date:
20021101
Docket:
2001-2615-IT-I
BETWEEN:
GEORGIA
PANAGAKOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent,
AND
Docket:
2001-2620(IT)I
BETWEEN:
JIMMY
PANAGAKOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Lamarre Proulx,
J.T.C.C.
[1]
These appeals were heard on common evidence by way of the
informal procedure. The Appellants were assessed pursuant to a
net worth statement prepared by an auditor of the Minister of
National Revenue (the "Minister").
[2]
The assumptions of fact that the Minister took into account in
reassessing the Appellant Jimmy Panagakos are set out in
paragraph 14 of the Reply to the Notice of Appeal
(the "Reply") as follows:
a)
the Appellant and his wife, Mrs. Georgia Panagakos
(hereinafter, the "wife") owned a business called
"Fifth Avenue Restaurant Reg'd" (hereinafter, the
"business");
b)
the Appellant and his wife have shared the profit from their
business;
c)
as an estimate of the source and application of funds indicated
that the expenses exceeded income, the auditor of the Minister
requested the Appellant and his wife a personal balance
sheet;
d)
the balance sheet for the restaurant business was not accurate
with reference to the liabilities for which the Appellant and his
wife could not submit evidence of the balances;
e)
as the balance sheet for the restaurant business was not
accurate, the auditor proceeded with a Net Worth assessment (see
attached annexes);
f)
from the Net Worth assessment, the Auditor of the Minister
determined additional income in the amount of:
1997
1998
$12,705
$15,540
[3]
Paragraph 14 of the Reply for the Appellant
Georgia Panagakos is identical except for the differences
reflecting the fact that she is the wife of
Mr. Jimmy Panagakos.
[4]
At the beginning of the hearing, the Court noted with surprise
that the auditor who had prepared the net worth statement was not
present in Court. Counsel for the Respondent explained that he
felt his presence was not necessary on the basis that the burden
of proof was on the Appellants. I was to a certain extent shocked
by this absence as the auditor is usually in Court to explain to
the Court and the other party the various elements of the net
worth statement that he has prepared. At one point in the
hearing, after counsel for the Respondent had objected to the
production of a document on the basis that the signatory was not
there to be cross-examined, the Appellants' representative
asked that the net worth statement be disregarded since the
auditor was not there to be cross-examined.
[5]
On the basis of paragraph 152(8) of the Income Tax Act
(the "Act") which provides that an assessment
shall, subject to being varied or vacated on an objection or
appeal, be deemed to be valid and binding, I asked the
Appellants' representative to continue presenting evidence. I
asked counsel for the Respondent to speak to the matter of
evidence in his argument.
[6]
The two Appellants testified. The first point raised by the
Appellants' representative is found in Annex I to the
Replies. It concerns the "withdrawals from restaurant"
in the amount of $16,101 for the year 1997 and $17,277 for the
year 1998. The Appellants produced as Exhibit A-1
excerpts from the General Ledger showing these
withdrawals.
[7]
The Appellants' explanation as to the purpose of the
withdrawals was similar to that given in paragraphs 13 to 18 of
their Notice of Appeal. I will refer here to paragraphs 15 to
18:
15)
The 1996 Skylark and then later replaced by the 1996 Pontiac
Bonneville were predominately used for business purposes. Among
other business uses, they were used to purchase fresh food daily
seven days a week. Daily purchases include trips to the markets,
butchers, bakeries, Club Price, etc.
16)
Included in the 1998 drawings account were payments pertaining to
the leased vehicles. Regarding the Pontiac Bonneville, one
payment for $625.20 and eleven for $631.06 totalling $7,566.86
were made to GMAC. The payments in the drawings account were
taken directly from the bank statements and are shown as $883.15
($625.20 + $257.95) and $889.01 ($631.06 + $257.95). There was a
minor adjustment in the payments, however, it represents the same
car. The $257.95 payments pertain to the 1994 Pontiac Grand Prix,
used for personal purposes. Regarding the 1997 drawings account,
four payments for $599.37 regarding the Buick Skylark and seven
for $625.20 regarding the Pontiac Bonneville totalling $6,773.88
were also made to GMAC, (see Exhibit 4 - Lease Contracts &
Exhibit 2 - Drawings Accounts).
17)
Included in the drawings account were payments made to Gestion
D'Assurance R.B. Inc. totalling $2,939.70 for the 1998 fiscal
period. These amounts represent insurance payments regarding the
cars. Out of the total, $988 pertains to the Pontiac Bonneville.
The amount on the invoice does not match the amounts in the
drawings account as the invoice was paid by installments, (see
Exhibit 5 - Automobile Insurance & Exhibit 2 - Drawings
Accounts).
18)
Included in the drawings were payments made to Ville de Montreal
for $2,262.63 regarding the 1997 fiscal period. These amounts
represent property taxes for the triplex owned by Mr. and
Mrs. Panagakos where they reside. The amount should be
adjusted by $1,509 (2/3 x $2263) which represents the two rental
units, (see Exhibit 6 - Property Taxes & Exhibit 2 - Drawings
Accounts).
[8]
The Appellants stated that a good portion of the withdrawals was
for payments on the car leases and that those vehicles were used
in large part in their restaurant business. Counsel for the
Respondent chose not to cross-examine the Appellants on
these aspects. He explained in argument that it was his view that
whether these withdrawals were for business purposes or not was
not relevant.
[9]
The Appellants annexed to the Notice of Appeal their various
proposed adjustments to the net worth statement.
[10] According
to these adjustments, the business portion of the car lease
payments for 1997 would be $6,774 and, for 1998, $7,567. For
1998, there should be added an amount of $988 for automobile
insurance. These amounts should be deducted from the withdrawal
amounts.
[11] According
to the proposed adjustments, for the year 1997 an amount of
$1,509 determined through an apportionment of the property taxes
should also be deducted from the withdrawal amounts for the
reason mentioned in the above-cited paragraph 18 of the
Notice of Appeal, namely that this expense was incurred for the
rental business.
[12] The second
point raised by the Appellants concerned the liabilities set out
in Annex III to the Replies. They proposed that the
liabilities for the year 1998 be increased by an amount of $5,000
to reflect a loan made to them by one of their sons,
Mr. George Panagakos. A document dated July 5,
2001 and signed by Mr. George Panagakos was produced as
Exhibit A-3 for the purpose of proving that loan.
Counsel for the Respondent objected to the production of this
document as Mr. George Panagakos was not present to be
cross-examined. I accepted the document stating that I
would give it the weight that it should have depending on other
documentary evidence or other circumstances revealed by the
evidence.
[13] In the
course of their testimony, Mr. and Mrs. Panagakos stated
that their children and themselves would make loans to each other
as the restaurant was a common venture, but they also said that
the loans were usually reimbursed.
[14] The third
point raised concerned Annex IV to the Replies, in which the
personal expenses are calculated. More specifically, this point
concerned the mortgage expense in the amount of $3,540 for both
1997 and 1998. The Appellants explained that they own a triplex
of which two units are rented. Consequently, an amount of $2,360
should be deducted from the amount of $3,540 as only one third of
the mortgage payment was for personal purposes.
[15] The fourth
point raised concerned income tax paid. The amount of federal tax
was not an estimate but the amount of provincial tax was. It was
estimated to be the same as the federal tax. I will say right
away that the difference between the estimated amount and that
proposed by the Appellants without any supporting documentary
evidence is too slight to be worth discussing further.
[16] A fifth
point raised by the Appellants is that the additional income
should be split between them and their three sons because the
sons helped their parents in carrying on the restaurant business.
The sons did not file income tax returns and no salaries were
paid to them.
[17] Counsel for
the Respondent referred to the decision of Judge Bowman of
this Court in Ramey v. Canada, [1993] T.C.J. No. 142
(Q.L.), at page 4:
. . . 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.
Conclusion
[18] It is my
view that it is preferable in the interest of justice that the
auditor who has prepared a net worth statement, or another
auditor who is knowledgeable about that net worth statement,
attend the hearing to explain or clarify the document. That
document is the basis of the assessment. It is prepared not by
the appellant but by the Minister's agent. It is true that
the onus is on the appellant to prove that it is erroneous, but
if there is no one to explain the auditor's entries, the
appellant's explanation may be more easily
accepted.
[19] In the
present case, regarding the apportionment of the payments on the
car leases, I remarked to counsel for the Respondent that no
business expenses were taken into account in the net worth
assessment and that in establishing a net worth statement, it did
matter whether the expenses were for business or personal
purposes. Counsel then had me peruse the T2124 Statement of
Business Activities forms pertaining to the restaurant business,
which were filed with the Appellants' annual tax returns
(Exhibits R-1 to R-4). He showed me that there
were no car expenses included in them, which meant in his view
that there was no need of the use of a car in this
business.
[20] Those
comments are evidentiary in nature. As there were no questions
put to them regarding whether or not the cars were useful or were
used for business purposes, I accept the evidence of the
Appellants that the cars were for business purposes in the
proportion reflected by the amounts proposed in the
Appellants' adjustments.
[21] In this
regard, the adjustments proposed by the Appellants'
representative regarding the amounts paid for the car leases are
accepted. These adjustment amounts are given in paragraph 10 of
these Reasons.
[22] There did
not seem to be any dispute regarding the apportionment of the
property taxes referred to in paragraph 11 of these Reasons
or the apportionment of the mortgage payments described in
paragraph 14 of these Reasons; consequently, the amounts so
determined are accepted.
[23] Regarding
the amount of $5,000 allegedly owed to one of the sons, I am of
the view that the evidence did not reveal that it was a binding
liability. It cannot be added to the Appellants' liabilities
for the year 1998.
[24] The
splitting of the additional income with the children cannot be
accepted. The children were not the owners of the restaurant
business and they did not file income tax returns. The income tax
returns of both Appellants were produced as
exhibits R-1 to R-4. The business income was
divided half-and-half between the two Appellants. Consequently
the additional income has to be split between the two Appellants,
who are the owners of the business.
[25] The appeals
are allowed on the basis described in paragraphs 21 and 22 of
these Reasons.
Signed at
Ottawa, Canada, this 1st day of November 2002.
J.T.C.C.
COURT FILES
NOS.:
2001-2615(IT)I & 2001-2620(IT)I
STYLES OF
CAUSE:
Georgia Panagakos and The Queen
Jimmy Panagakos and The Queen
PLACE OF
HEARING:
Montreal, Québec
DATE OF
HEARING:
September 11, 2002
REASONS FOR
JUDGMENT BY: The Hon. Judge Louise
Lamarre Proulx
DATE OF
JUDGMENT:
November 1, 2002
APPEARANCES:
Agent for
the
Appellant:
Tony Soares
Counsel
for the
Respondent:
Simon Nicolas Crépin
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-2615(IT)I
BETWEEN:
GEORGIA
PANAGAKOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on common evidence with the appeals of Jimmy
Panagakos (2001-2620(IT)I) on September 11, 2002 at
Montreal, Québec by
the
Honourable Judge Louise Lamarre Proulx
Appearances
Agent for
the
Appellant:
Tony Soares
Counsel
for the
Respondent:
Simon-Nicolas Crépin
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for 1997 and 1998 taxation years are allowed and the
assessments are referred back to the Minister of National Revenue
for reconsideration and reassessment in accordance with the
attached Reasons for Judgment.
Signed at
Ottawa, Canada, this 1st day of November 2002.
J.T.C.C.
2001-2620(IT)I
BETWEEN:
JIMMY
PANAGAKOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on common evidence with the appeals of
Georgia Panagakos (2001-2615(IT)I) on
September 11, 2002 at Montreal, Québec by
the
Honourable Judge Louise Lamarre Proulx
Appearances
Agent for
the
Appellant:
Tony Soares
Counsel
for the
Respondent:
Simon-Nicolas Crépin
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for 1997 and 1998 taxation years are allowed and the
assessments are referred back to the Minister of National Revenue
for reconsideration and reassessment in accordance with the
attached Reasons for Judgment.
Signed at
Ottawa, Canada, this 1st day of November 2002.
J.T.C.C.
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