Citation: 2011 TCC 236
Date: 20110503
Dockets: 2009-553(IT)G
2009-554(GST)G
BETWEEN:
AZIM M. VIRANI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered from the Bench on April 14, 2011
at Vancouver, British Columbia)
Hershfield J.
[1] The appeals heard on April 11, 2011 were
under the Excise Tax Act (GST Portion) (the “ETA”) and the Income
Tax Act (the “ITA”). They were heard on common evidence. I will deal
firstly with the appeals under the ITA.
[2] The Appellant appeals assessments made in
respect of his 2003, 2004 and 2005 taxation years. They were essentially net
worth assessments triggered after invocation of an audit by the Enforcement
Division of the Vancouver Tax Services Office. The audit was conducted without
notifying the Appellant. Information was obtained by issuing requirements to
provide banking records of the Appellant. The requirements were served on two
banks known to the Enforcement Division as having accounts for the Appellant.
Requirements were also served to obtain the banking records of the Appellant’s
mother. A realty company and a car company’s finance arm were also issued
requirements to provide information. I have to assume that the requirements
were authorized under section 231.2 of the ITA. The assessments were
done with minimal or no contact with the Appellant. No full explanation was
offered as to why this manner of proceeding was adopted although the Appellant
obtained, through Access To Information, a Canada Revenue Agency (“CRA”)
internal memorandum setting out some of the background. There is no need to
review it. I bring it up, at this point, only to note that that document
confirms that the subject assessments were tied to other issues not presently raised
in the present appeals, issues such as not reporting a capital gain on the
disposition of a property in 2005. Related to that disposition was yet another
separate matter under the ETA where a September 2005 assessment denied a
new housing rebate application. The Appellant appealed that assessment and the
case was heard in February, 2008. Justice Campbell allowed the appeal in her
Judgment signed in March, 2008.
[3] Turning back to the subject assessments
under the ITA, the first assessment was issued on August 21, 2006. That
assessment was replaced with a second issued on October 16, 2007. That
reassessment added over $23,000 of unreported business income to his 2003
taxation year in respect of which he had reported only some $20,000. It added
some $9,000 to his reported $18,500 for the 2004 taxation year and $68,000 to
his reported $17,000 for the 2005 taxation year. Further, it added an
unreported taxable portion of a capital gain of some $90,000 and assessed gross
negligence penalties on all the additional assessed income.
[4] On November 21, 2008, following objections
by the taxpayer, the Minister of National Revenue (the “Minister”) confirmed
the assessments and penalties for the three years in question except that the
inclusion of the taxable portion of the asserted unreported capital gain of
$90,000 was dropped in respect of the 2005 year. This is noteworthy as the CRA
internal memorandum, referred to above appears, to some extent at least, to
have relied upon this unreported gain to justify proceeding with the audit in
the manner that it did. The reason for abandoning the inclusion was Justice
Campbell’s March, 2008 decision on the ETA new housing rebate issue which
concerned the same capital property. She found that the property was or was
intended to be his primary place of residence which in the context of the
current appeal suggests that the subject capital property qualified as a principal
residence. As such, the disposition of the property was not a taxable
transaction. There was no unreported capital gain. That left the unreported
business income to be dealt with.
[5] The Notice of Appeal was filed on February
16, 2009. Lists of Documents were filed and Examinations for Discovery were
held. The Appellant represented himself throughout the appeal process. At the
hearing, the Crown presented a revised assessing position. The 2003 unreported business
income was reduced from some $23,000 to some $5,300. The 2004 unreported business
income was reduced from some $9,000 to approximately $4,400 and the 2005
unreported business income was reduced from some $68,000 to $24,900. All the
adjustments were made as a result of information provided by the Appellant
after the litigation process started. That is, after the appeal was filed.
[6] At this point, I will provide just a few
details on the net worth assessing approach employed for the assessments as
revised for the hearing. It started with a net worth calculated for the 2002
taxation year based on the information compiled from information collected from
the requirements issued. That net worth was measured against the net worth
calculations for the next year which in turn were compared with the net worth
calculations for the next succeeding year. The assessing approach showed little
if any net worth growth for 2003 and 2004 but it showed a net worth increase of
over $142,000 for 2005. It then examined personal living expenses and came up
with $25,800 for 2005 and assumed the amounts for both 2003 and 2004. These
were obtained from a 2005 bank statement analysis where most withdrawals were
pegged as representing personal living expenses. Further personal expenses were
added, as well, based on other documentation obtained from the audit, including
an additional $21,000 of rental expense for 2003.
[7] The revised
assessing position, amongst other things, reduced the 2003 personal rental
expense to $6,000 and the 2005
taxable sources by almost $53,000 based on a verified accessed line of credit
provided by his mother on a new house purchase in 2005. As noted above, as a
result of the revisions we end up with the 2003 unreported business income being
some $5,300, the 2004 unreported business income being $4,400 and the 2005
unreported business income being $24,900.
[8] I am only now at
the stage of considering the evidence adduced at trial to deal with the post revised assessing
position. Once that evidence was in, with all but a few questions yet to
be asked of the auditor who appeared on behalf of the Crown, Respondent’s
counsel conceded that the Crown was abandoning the assessment in respect of
2003 and 2004 and was abandoning its position regarding the gross negligence
penalties for all three years. For this, I do offer some praise to counsel. Too
many lawyers watch their case evaporate and hold their ground, nonetheless. The
assessing approach for 2003 and 2004 was clearly flawed.
[9] I will mention the flaws only briefly. Some
$5,000 of furniture purchases in 2005 had been assumed to be personal
expenditures in 2003 and 2004 when it was clear no such purchases would likely
have occurred. Indeed, almost all the 2005 bank withdrawal amounts that were
assumed to be personal living expense amounts in 2005 were assumed to be
personal living expense amounts in 2003 and 2004 on a theory that lifestyles
would be the same and that that theory was necessary to apply as the banking
records for 2003 and 2004 were inadequate to do a comparable reconstruction.
Attempts to deny the theory made the crown witness look somewhat sheepish when
faced with a transcript of his examination of discovery. Given that theory, his
assessing position made virtually no sense in light of a record of the totally
different living circumstances that arose in 2005. This pretty much undermined
the validity of the 2003 and 2004 assessments; hence the Respondent’s
concession for these years.
[10] For 2005, the Appellant established that
$5,000 had in all likelihood been double counted. In addition, he established that
the unreported income amount had ignored deductible expenses related to an
amount that the Respondent’s witness confirmed would be included in that
unreported income amount. That brought the unreported income to under $10,000
(subject to some GST adjustments arising from corresponding adjustments that
would have to be made to the GST assessments). Based on this evidence, the Respondent
also conceded to such a revised number for 2005.
[11] However, the Appellant had additional
evidence that the Crown was not so willing to accept. His mother testified she
gave him $20,000 from the sale of her motor vehicle to put down on her son’s
purchase of a car in 2005. This deposit had been included in his unreported
income amount for 2005. As well, she testified she advanced him over $30,000 in
loans/gifts in 2005. Her negotiated cheques in favour of her son were in
evidence. This is over $50,000 of non-taxable sources to off-set less than $10,000
of unreported income.
[12] The Crown would not concede these non-taxable
sources. The testimony of the Appellant’s mother as to the $20,000 was
essentially uncorroborated and was weak since she could not recall if she got
cash on the sale of her vehicle or whether it would have been a cheque. There
was no banking record of such a deposit. I agree her testimony was weak and if the
demeanour of a witness ever told a story, I would have to say she was less than
convincing on this point.
[13] As to the $30,000 in cheques to her son in
2005, her testimony was corroborated and further if the demeanour of a witness
ever told a story, I would have to say she was quite convincing on this point.
Her son always needed money and she always gave him money. You could call them
loans, she said, but she almost laughed when the question of repayment was
raised.
[14] In spite of this evidence that the entire
net worth assessment had to be vacated, the Crown revealed its concern in not accepting
the $30,000 in loan/gifts. There was no evidence of what he did with the money.
He was the payee of negotiated cheques in respect of which there were no
deposits into his known bank accounts. Whatever the suspicions were that caused
the audit, lingered.
[15] The Appellant is a sharp young man and I
too am left wondering if I have heard the whole story, but suspicions here are
not sufficient to deny the appeals. The Appellant has met the burden of proof
imposed on him. The assessment, using a blunt instrument approach, is difficult
to defend but it was shown to be flawed in major ways in this case. Further, the
Appellant’s access to what appears to be non- taxable funds in 2005 has
been proven beyond a simple probability. The appeals must be allowed.
[16] As to the GST assessment, it flowed from
the income tax assessments. Unreported income was assumed to be from taxable
supplies. Once the unreported business income is reduced to nil, the GST
assessment is similarly reduced to nil. Accordingly, the GST appeals are
allowed.
[17] As to costs, the Crown relies on the fact
that the Appellant’s victory, and more particularly on the fact that concessions
made to the Appellant, were based on evidence produced after the litigation
process started. Early disclosure would have resulted in earlier concessions.
The Appellant argues that the need for litigation was entirely the fault of the
CRA’s unwarranted, undisclosed audit process.
[18] In fact, the assessments were open for
answer long before the litigation started. The reassessments were issued October
16, 2007. The confirmation was November 21, 2008 and the appeal was filed
February 16, 2009. The objection period alone was over a year. While that is
not a lot of time and there was a lot going on considering he represented
himself at his hearing before Justice Campbell, in February 2008, I agree
that the Appellant might have done more in the way of providing the CRA with
more evidence earlier. Still, costs for the Appellant are warranted. I am
fixing those costs at $425.00 in respect of the appeals under the ITA
and an additional $425.00 in respect of the appeals under the ETA. Judgment
will be signed accordingly.
Signed
at Ottawa, Canada this 3rd day of May 2011.
"J.E. Hershfield"
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