Citation: 2011 TCC 14
Date: 20110110
Docket: 2006-2873(IT)G
BETWEEN:
SERGUEI VATCHIANTS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
I. Introduction
[1]
This is an appeal from
assessments dated March 17, 2004, in respect of the 1997, 1998, 1999 and 2001
taxation years.
[2]
The assessments result
from an estimate of the appellant's income by the Canada Revenue Agency (CRA);
the so-called net worth method was used.
[3]
The CRA added the following
amounts to the income that the appellant had previously reported, and assessed
penalties under subsection 163(2) of the Income Tax Act:
|
Year
|
Income added
|
Penalties assessed
|
|
|
|
|
|
1997
|
$345,308.25
|
$45,209.66
|
|
1998
|
$242,475.36
|
$30,402.98
|
|
1999
|
$640,054.30
|
$80,518.69
|
[4]
The issues are as
follows:
1. Was
the CRA right to add the amounts to the appellant's income? The appellant
contends that there are several mistakes in the calculation of net worth.
2. Was the CRA right to assess
penalties under subsection 163(2) of the ITA?
3. Was the CRA right to make
assessments beyond the normal three-year period?
[5]
In very large part, these
issues are questions of fact.
[6]
Sonia Sariboyajian of
the CRA testified and explained the net worth calculation that she prepared.
The appellant also testified.
[7]
Since the appellant is
not challenging the entire net worth assessment, but, rather, has limited his
challenge to certain factual aspects and some of the methodology, I will
proceed by examining the appellant's criticisms. The respondent has already
made certain concessions at the close of the case, and I will simply list those
concessions, without examining the dispute surrounding the facts that led to them.
II. Background
[8]
The appellant is a
civil engineer by training.
[9]
The appellant was a
senior state employee in the former Soviet Union. Among other things, he
was the chief executive of a company that built hospitals and clinics for the
Ministry of Health. He spent part of his career in government working abroad in
Algeria and Iran.
[10]
In 1988, shortly after
the economic liberalization of the Soviet Union began, the appellant created a
first business called Drevo.
[11]
Later, he gave 10% of
the shares of Drevo to his wife, 10% to Albert Diakonov, and 4% to his
accountant Ms. Taraskula.
[12]
Around 1990, the
appellant created another company called Drevco, which he described as a joint
venture.
Drevo owned 51% of the shares of Drevco.
[13]
Initially, the other
49% of Drevco belonged to a Swedish business and a Dutch business, but these
businesses did not make the investments they were supposed to make, and were
replaced by a British business called Cosmos Trading and an Egyptian business
called Banna Wood.
[14]
Drevco operated a lumber
and transportation business.
[15]
The foreign (British
and Egyptian) businesses, like the two businesses that preceded them, did not
meet their obligations toward Drevco and, in early 1994, everyone agreed that
they would withdraw from Drevco.
[16]
It is from this point
onward that certain events related to Drevco become relevant to this litigation.
[17]
Before examining these
events, in order to complete the context, it must be noted that the appellant
arrived in Canada as an investor immigrant in 1996 after
obtaining his visa earlier that year.
[18]
For the purposes of his
visa application, he prepared a personal balance sheet, which indicated a
significant net worth: approximately C$7,000,000.
[19]
It is worth recalling
that the late 1980s and the 1990s were a turbulent period in Russia, marked by an extremely rapid transition from a
centrally planned economy to a form of market economy, and by the end of the
Soviet Union. It is widely known that there were major economic difficulties
during these transitions.
[20]
The CRA used the net
worth method because it considered that the incomes reported by the appellant
and his wife were modest (slightly below $90,000 in total for the 1997, 1998
and 1999 taxation years) compared to the appellant's lifestyle.
[21]
The documents obtained
by the CRA include two letters addressed to General Trust of Canada in support of a credit application. The first letter,
dated October 28, 1996, and signed by the appellant, asserts that he
owns two large companies in Russia and receives a stable income of $5,000 to
$8,000 per month from those companies. The letter is written on Drevco
letterhead.
[22]
A second letter to
General Trust, this one unsigned, is from Drevco's head accountant. This
letter, dated November 11, 1996, is also written on Drevco letterhead, and
states that Drevco's annual sales exceed US$15,000,000, and that the
appellant's income is US$10,000 per month.
[23]
The CRA also obtained
notes taken by an employee of the financial institution on November 18, 1996,
with respect to a conversation that she had with the appellant. The employee's
notes say that the appellant's income was US$10,000 per month.
[24]
These documents undoubtedly
influenced the CRA's decision to make the assessments.
III. The appellant's criticisms
regarding net worth
[25]
Firstly, the appellant
submits that the net worth does not take into account a major loan which he
made, and which was partially repaid in several stages.
[26]
Secondly, the appellant
is making certain criticisms of the estimation method.
[27]
Thirdly, he has
specific criticisms apart from the first, though only one of these remains in
dispute.
A. Truck purchase financing
[28]
The evidence on this
issue was not ideal. Additional documentation on certain points would normally
be expected, even considering the amount of time between the events of 1994 and
the beginning of the audit.
The appellant's answers were not always easy to follow, though I find
that this was partly because the appellant testified in a language that is not
his mother tongue.
Consequently, I can understand why the dispute about this aspect of
the assessment has made it to this stage.
[29]
Nonetheless, as I will
explain below, I accept a very large part of the appellant's testimony on this
aspect of the instant dispute.
[30]
As we shall see, part
of the problem stems from the fact that, in the Russian legal context of 1994,
the appellant could only accomplish all his objectives if the amount of
US$1,000,000 that he was to provide for the purchase of the trucks by Drevco
was simultaneously a loan and an investment toward the purchase of shares.
Did the appellant make a US$1,000,000 loan
in 1994?
[31]
In 1994, according to
the appellant, it was decided that he would invest the equivalent of
US$1,000,000,
which he held outside Russia, to finance the purchase of ten tractors and ten trailers
(hereinafter, "the trucks") that would be used in Drevco's transportation
business.
[32]
The appellant had
several objectives: he wanted to finance the purchase of the tractors and trailers,
ensure that he could take the US$1,000,000 outside Russia
once Drevco had "paid" for the trucks, and prevent Drevco from paying
25% in customs duties upon importing the tractors and trailers.
[33]
At the time, Russian
law offered several advantages to foreign companies that invested in companies
and joint ventures in Russia. Among other things, they could remove
capital from the country under circumstances in which Russians could not.
[34]
Moreover, foreign
companies that made investments in the form of property benefited from an
import tax exemption.
[35]
To take advantage of
these benefits, the appellant incorporated Paron Transport in England in November 1994 and became the sole shareholder of
that company by purchasing one share for one pound sterling.
[36]
I accept the
appellant's testimony that he loaned US$1,000,000 to Paron.
[37]
However, for the
following reasons, I do not find that Paron or the appellant made a loan to
Drevco.
[38]
The appellant's
testimony and his other evidence on this question are in conflict. At times,
the appellant testified that a loan was involved, but his documentary evidence
shows that Paron paid for its majority interest in Drevco by contributing the
trucks purchased for the equivalent of US$1,000,000. (This was a new
company called "Drevco".)
[39]
There cannot be an
acquisition of Drevco shares by Paron in consideration for the contribution of
tractors and trailers, and, simultaneously, a US$1,000,000 loan from Paron to
Drevco.
[40]
I have no doubt that
the appellant's objective was to lend his funds to Drevco in order to enable
Drevco to purchase the trucks. I have no doubt that the appellant feels, from
both an economic and practical perspective, that he made a "loan" in
the sense that he took personal money, that this money enabled Drevco to obtain
the new trucks, and that he expected to recover the entire amount of US$1,000,000.
[41]
There is no loan
contract with Drevco for US$1,000,000.
[42]
There are references to
a loan in Drevco's minutes of January 25, 1994, at paragraphs 2 to 5, and its
minutes of December 23, 1994, at paragraphs 1 to 5. Among other
things, it stated:
[Translation from the original Russian of the minutes of January 25,
1994, tendered in evidence.]
5. The shareholders understand that S.G. Vatchiants
invests his personal money to purchase the trucks and trailers, since currently
all the funds of the Joint Venture are involved in the business activity of the
company. The shareholders agree to regard the money that S.G. Vatchiants
will pay for the trucks and trailers as well as the expenses incurred by
opening and maintaining a European company, as a loan to the Drevco company,
obtained through the new European company. The loan must be repaid to S.G.
Vatchiants as per a separate agreement or Minutes, which shall be drawn later,
when the parties will know the exact amount spent by S.G. Vatchiants on the purchase
of the trucks and trailers, as well as the maintenance of the new company.
[Emphasis added.]
[Translation from the original Russian of the minutes
of December 23, 1994, tendered in evidence.]
1. The shareholders of the
company understand and agree that Mr. S.G. Vatchiants is the sole
owner of PARON TRANSPORT LIMITED, and that the 10 Mercedes Benz trucks as
well as 10 Crona trailers, for the total amount of DM 1,710,000, placed by
PARON company as its share in the capital fund of Drevco Joint Venture, were
purchased by Mr. Vatchiants with his own money, and that the parties
consider it a loan to the Joint Venture Drevco.
[Emphasis added.]
[43]
The fact that the
parties say that they "agree to regard the money . . . as a loan to
the Drevco company" cannot, in and of itself, create a loan in the absence
of an advance of funds or property constituting the subject matter of a loan.
[44]
An examination of clause
8 of Drevco's articles of incorporation
reveals that Paron contributed the tractors and trailers in consideration for
the shares that it received.
[45]
Since Paron acquired a
majority of the shares in consideration for the trucks purchased for the sum of
US$1,000,000, it is impossible for Paron to have loaned US$1,000,000 or its
equivalent to Drevco.
[46]
Thus, the appellant loaned
US$1,000,000 to Paron, which purchased the trucks, and Paron acquired the
majority of Drevco’s shares in consideration for the trucks. There was no loan
to Drevco.
The amounts owed to Drevco which were paid to the
appellant
[47]
Various amounts that
were owed to Drevco were paid to the appellant.
[48]
The respondent's
position is that even if the appellant made a loan, there was an appropriation,
and the amounts paid to the appellant must be included in income under
subsection 15(1) or 246(1) of the ITA.
The sale of the trucks to Hilton
Construction
[49]
The largest amount is
from the sale of the trucks by Drevco to Hilton Construction for US$400,000 in
1999.
[50]
Further to Drevco's
instructions,
this amount was transferred directly from Hilton Construction to the
appellant's bank account in Montréal in 1999.
[51]
Since there was no loan
by the appellant to Drevco or from Paron to Drevco, and this was not a dividend, this was an
appropriation by Drevco.
[52]
At the time, the
appellant was the sole shareholder of Paron, and held at least 76% of the
shares of Drevo, which means that he indirectly controlled Drevco. He also
chaired Drevco's board of directors.
Therefore, he controlled all of Drevco's decisions.
[53]
Was this an
appropriation by Drevco in favour of the appellant, or an appropriation by
Drevco in favour of Paron?
[54]
Given the minutes of
December 23, 1994,
which reveal an intent to treat Paron's investment as a loan, and given the
minutes of November 28, 1998,
which state, among other things, at the bottom of the first page, that the
proceeds of the sale of the trucks [translation]
"shall be used to offset the debt to PARON" and the fact that
Paron, represented by the appellant, had already received certain amounts,
I find that the appropriation was made by Drevco in favour of Paron.
[55]
The appellant had kept
these amounts given the loan of US$1,000,000, so there was a partial setoff
between the appellant and Paron.
[56]
Under these circumstances,
there cannot have been an appropriation by Paron in favour of the appellant.
[57]
Consequently,
subsection 15(1) of the ITA cannot apply to the appellant.
[58]
The respondent also
relied on subsection 246(1)
of the ITA. One of the conditions that must be met for that subsection to apply
is that the amount of the benefit must be an amount that would be included in
the taxpayer's income only "if the amount…were a payment made directly by
the person to the taxpayer."
[59]
Even if it is assumed that
all the other conditions of subsection 246(1) are met, the fact is that if
Paron had paid the amount directly to the appellant, the US$400,000 would be a
repayment, and the amount would not be taxable.
[60]
I therefore accept the
appellant's argument that the amount must not be included in income, and the
Canadian dollar equivalent of US$400,000
(namely C$580,458.74)
must be subtracted from the appellant's 1999 income.
The other amounts owed to Drevco and paid
to the appellant
[61]
Other amounts were owed
to Drevco and paid to the appellant with a view to "repaying" the
"loan" that he had made.
Sale of equipment in 1997
[62]
Before examining the
other amounts, it is important to point out that, in his testimony, the
appellant stated that certain amounts that he was paid were not sent to Canada.
[63]
According to Drevco's
minutes of June 26, 1999,
an amount of US$260,000 was paid to the appellant following an equipment sale
that took place in 1997.
[64]
In his testimony, the
appellant said that part of this amount came to Canada,
but that another part remained in his bank account in Russia, where he used it,
among other things, to make a gift to two of his children in Russia and to make a very large advance support payment to
his first wife in Russia.
[65]
The entire amount that
remained in Russia consists of expenses, or increased assets in Russia, which the CRA did not take into account in
estimating income. These Russian expenses, or increases in Russian assets,
result in an increase of the appellant's income, but are offset
by the fact that the loan repayment is capital in nature. The net result is nil,
and any repayment that remained in Russia has no effect
on the income estimate.
[66]
The repayment in the
nature of capital can only reduce the estimated taxable income to the extent
that the repayment came to Canada.
[67]
If I understand the appellant's
argument correctly, he is not submitting that the "repayment" of
US$260,000 should reduce his taxable income. Consequently, I am not taking it
into account.
Loan to Andrey N. Skibinsky
[68]
Apart from the payment
from Hilton Construction, the repayments that the appellant claims to have
received include an amount of C$29,914.21
in 1997. The appellant testified that Drevco loaned Mr. Skibinsky the
equivalent of US$21,700 in roubles for a ten-year term, without interest. He
also testified that Mr. Skibinsky repaid that amount by sending him the
payment in accordance with Drevco's instructions. I accept that evidence.
[69]
As a result, the
appellant's income must be reduced by $29,914.21 in 1997.
Payment from LAG Holding
[70]
Lastly, I accept the
appellant's evidence that LAG Holding had, among other debts, a US$70,000 debt
to Drevco, and that Drevco instructed LAG Holding to pay this amount into
the appellant's bank account in Montréal.
This payment, which came out to C$96,257,
was received in 1997.
[71]
Consequently, the
appellant's income for the 1997 year must be reduced by $96,257.
B. The amounts conceded by the
respondent
[72]
The respondent conceded
that the following changes need to be made:
(a) The Cadillac car was
sold in 1998 in Canada and must therefore be removed from the
appellant's assets at the end of 1998 and in 1999. The effect of this
change is to reduce the increase in net worth by $65,000 in 1998, thereby
reducing the appellant's 1998 income by the same amount. There is no effect on
the appellant's 1999 income, because the net worth at the beginning and end of
the year are reduced by an equal amount.
(b) The appellant's cars
in Russia were sold in 1997, thereby reducing his
net worth by US$59,983.20 at the end of 1997 and in each subsequent year.
The effect is to reduce the appellant's 1997 income by US$59,983.20 (C$83,388.64).
There is no effect on the years 1998 and 1999.
(c) The appellant's 1998
income must be reduced by $251.50, and his 1999 income by $405.50, on account
of input tax credits not deducted.
(d) The appellant's 1999
income must be reduced by $5,584 on account of cheques to his wife.
[73]
The changes to net
worth listed above can be summarized, by taxation year, as follows (in Canadian
dollars):
(a) The appellant's 1997
income must be reduced by $209,559.85.
(b) The appellant's 1998
income must be reduced by $65,251.50.
(c) The appellant's 1999
income must be reduced by $586,448.24.
C. The critique of the methodology
[74]
The first criticism is
about the determination of the assets for the base year, 1996, in the net worth
calculation, and the fact that no value was given to certain commercial
property in Russia.
[75]
The personal balance
sheet that the appellant provided with his immigration application states that
his commercial property, his companies, had a value of $4,300,000.
[76]
The CRA excluded these
amounts on the basis that the situation prevented the appellant from recovering
this property.
[77]
Obviously, the
commercial property in Russia has value. However, the evidence clearly
shows that there were restrictions on moving capital out of the country.
[78]
It should also be
recalled that it is the changes in assets— the increases and decreases — that are important. It must also be
remembered that it is a principle of our tax system that changes in the fair
market value of property are only taken into account when the property is
realized.
[79]
Consequently, an item
of property that is held during the entire period covered by the net worth
analysis has no impact on the result, because the item does not contribute to
the change in the individual's net worth.
[80]
The result is that the
shares that the appellant held in the two companies, namely, Drevco and Drevo, have
no effect on net worth, since he owned the shares for the entire period.
[81]
The appellant also
complains that, in the calculation of net worth, certain amounts in Russia or derived from Russia
that were part of his personal assets were not tracked. These amounts
total $1,401,250 at the end of the 1996 base year.
[82]
As I have explained,
the important thing for the purpose of the estimate is the fluctuation in net
worth. If a particular asset is kept for the entire period during which net
worth is being analyzed, that asset creates no fluctuation in net worth and has
no effect on the income calculation.
[83]
The amounts totalling
$1,401,250 are found in the personal balance sheet prepared by the appellant
for his immigrant visa application.
[84]
The appellant is in a
very good position to show whether there are changes in his assets.
[85]
That is what the
appellant has done in relation to the automobiles in Russia,
and, as a result, the respondent has conceded an adjustment for the automobiles
after the evidence was submitted.
[86]
These first two
criticisms of the methodology give me no reason to conclude that the use of the
net worth method should be completely rejected.
[87]
The appellant also
criticizes the unidentified cheques or withdrawals that were included in
personal expenses.
[88]
These amounts account
for the majority of personal expenses because they range between 55% and 80% of
personal expenses, depending on the year. Some of the withdrawals in question
are quite large (e.g. $10,000, $13,000, and $16,000).
[89]
According to the net
worth, the personal expenses range from roughly $200,000 to roughly $300,000, depending
on the year.
[90]
The appellant says that
the inclusion of these unidentified cheques or withdrawals in personal expenses
poses too great a risk of mistakes.
[91]
Unidentified cheques or
withdrawals could constitute expenses
or could be used for the acquisition of an asset or the
repayment of a debt.
[92]
Their use for the
acquisition of an asset (or the repayment of a debt) would not reduce the
appellant's income unless the acquisition or repayment was already taken into
account in the net worth.
[93]
If a given asset
acquisition or debt repayment has already been taken into account, the
appellant is in the best position to show that the unidentified cheque or
withdrawal that served to acquire the asset or repay the debt has already been
taken into account.
[94]
This is especially true
when the amount is large. For example, on October 30, 1997, the
appellant withdrew $16,000 from his bank account. One would
normally expect it to be easier to remember what such an amount was used for,
and to trace the documentation pertaining to its use.
[95]
It is also important to
note that the total of these unidentified cheques or withdrawals is very large
in both relative and absolute terms.
[96]
The appellant further
submits that there could be mistakes due to movements between the appellant's
various accounts, or between the appellant and his company in Canada. However, upon examining the auditor's work sheets, we
can see that she factored in movements between accounts and between the
appellant and his company.
[97]
Once again, the
appellant is in the best position to point out mistakes. The auditor's
work in connection with the withdrawals and cheques was done on the basis of
the appellant's records.
[98]
Consequently, I am not
satisfied that an assumption that unexplained cheques or withdrawals were used
for personal expenses creates inherent methodological flaws to such an extent that
it should automatically be ruled out.
Moreover, I am not satisfied that there are reasons to completely rule
out such an assumption in this particular case.
D. Loan to AGS Taron (December 1997)
[99]
Lastly, the appellant
raised a specific question regarding the amount that he loaned to AGS Taron,
his company in Canada.
[100]
In view of errors in
the company's accounts, the auditor did a complete recalculation of the amounts
that the appellant loaned to AGS Taron.
[101]
This recalculation by
the auditor was to the appellant's advantage, because, on the basis of the
financial statements, the appellant's loan to AGS went from $0 at the end of
base year 1996, to $1,002,159 at the end of 1999. However,
according to the auditor's calculation, the appellant's loan went from $0 to
$712,287.
This difference of roughly $280,000 is to the appellant's advantage.
[102]
One of the amounts that
the auditor included in the appellant's advances to AGS Taron is a $90,000
amount from December 1997.
[103]
According to the
appellant, two unidentified deposits of $45,000 into his account in 1997
are in repayment of a $90,000 loan he made to AGS, and consequently,
his loan to AGS Taron should be reduced by $90,000 at the end of
1997, thereby reducing his income by the same amount in 1997.
[104]
The appellant submits
that this is a repayment because the company Trident Educational Services (also
known as Techtran) allegedly issued an invoice for $90,000 to AGS Taron on
October 31, 1997. Then, on December 10, 1997, the appellant
purportedly advanced $90,000 to AGS Taron. On the same day, AGS Taron
issued a $90,000 cheque to Trident, and Trident issued a $55,000 cheque to the
appellant's wife and a $45,000 cheque to Mr. Zaplatine, an employee of AGS
Taron. On that same December 10, there was also an unidentified deposit of $45,000
into the appellant's account, which the auditor thought was probably from
Mr. Zaplatine, but she had no proof to that effect. Lastly, on
December 9, 1997, one day before the other cheques, there was another
unidentified deposit of $45,000 into the appellant's bank account, which the
auditor thought was probably from the appellant's wife, although, once again,
the auditor did not have any proof to that effect.
[105]
Even if it is assumed
that the unidentified deposits made into the appellant's account on December 9
and December 10, 1997, emanated from his wife and Mr. Zaplatine,
I do not see how this series of movements of funds could constitute a $90,000
repayment by AGS Taron to the appellant. There is no evidence to explain how
these amounts might have taken on the nature of repayments, or why it was
necessary for the two amounts of $45,000 to travel such a circuitous route to
get from AGS Taron to the appellant.
[106]
Consequently, it is not
warranted to change this amount of $90,000 which the appellant loaned to AGS
Taron in December 1997.
[107]
In conclusion, apart
from the changes set out above at paragraph 73, there is no evidence warranting
additional changes.
IV. The penalties under subsection
163(2) of the ITA
[108] Subsection 163(2) of the ITA applies to
[e]very person who, knowingly, or under circumstances
amounting to gross negligence, has made…a false statement or omission in a
return . . .
[109]
In Venne v. Canada, Justice Strayer
stated as follows:
Gross negligence must be taken to involve greater neglect than
simply a failure to use reasonable care. It must involve a high degree of
negligence tantamount to intentional acting and indifference as to whether the
law is complied with or not.
[110]
It must also be borne
in mind that the burden of proof is on the Minister. In Lacroix v.
Canada,
Justice Pelletier stated:
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.
27 In Richard Boileau v. M.N.R., 89 D.T.C. 247, Judge
Lamarre Proulx stated as follows, at page 250:
Indeed, the Appellant was unable to contradict the basic elements of
the net worth assessments. However, in my view, this is not sufficient for
discharging the burden of proof which lies on the Minister. To decide otherwise
would be to remove any purpose to subsection 163(3) by reverting the Minister's
burden of proof back onto the Appellant.
28 In a similar vein, in Farm Business Consultants Inc. v.
Her Majesty the Queen, [1994] 2 C.T.C. 2450, 95 D.T.C. 200, Judge
Bowman wrote the following at paragraph 27:
27 A court must be extremely cautious in sanctioning the
imposition of penalties under subsection 163(2). Conduct that warrants
reopening a statute-barred year does not automatically justify a penalty and
the routine imposition of penalties by the Minister is to be discouraged . . .
. Moreover, where a penalty is imposed under subsection 163(2) although a civil
standard of proof is required, if a taxpayer's conduct is consistent with two
viable and reasonable hypotheses, one justifying the penalty and one not, the
benefit of the doubt must be given to the taxpayer and the penalty must be
deleted . . .
29 This last passage highlights the dialectic specific to
certain reassessments made using the net worth method. In the case at bar, the
Minister found undeclared income and asked the taxpayer to justify it. The
taxpayer provided an explanation that neither the Minister nor the Tax Court of
Canada found to be credible. Accordingly, there is no viable and reasonable
hypothesis that could lead the decision-maker to give the taxpayer the benefit
of the doubt. The only hypothesis offered was deemed not to be credible.
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 explanations he gave were
found not to be credible. In my view, given such circumstances, one must come
to the inevitable conclusion that the false tax return was filed knowingly, or
under circumstances amounting to gross negligence. 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 . . . .
33 As Justice Létourneau so aptly put it in Molenaar v.
Canada, 2004 FCA 349, 2004 D.T.C. 6688, 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.
[111]
The respondent adduced
the net worth that formed the basis of the assessments under appeal. The
appellant's evidence that I have accepted explains a significant portion of the
assessments:
|
|
1997
|
1998
|
1999
|
|
|
|
|
|
|
Additional
income assessed
|
$345,308.25
|
$242,475.36
|
$640,054.30
|
|
|
|
|
|
|
Reductions of
additional income by virtue of these reasons for judgment
|
$209,559.85
|
$65,251.50
|
$586,448.24
|
|
|
|
|
|
|
Additional
income remaining
|
$135,748.40
|
$177,223.86
|
$53,606.06
|
|
|
|
|
|
|
Income reported
by taxpayer
|
$28,202.07
|
$18,903.59
|
$41,089.00
|
[112]
However, the appellant
has not shown that the respondent erred about the remaining additional income.
The total additional income remaining in the table hereinabove for the three
taxation years is more than $360,000, and the total income reported by the
taxpayer is less than $90,000. The income omitted is four times greater than
the income reported. Therefore, there has been a significant omission of
income.
[113]
Under such
circumstances, I cannot avoid the conclusion that the omission of the
additional income is the result of gross negligence.
[114]
Consequently, the
penalties under subsection 163(2) will be maintained, but only on the remaining
additional income amounts.
V. The assessment made beyond the normal
period
[115]
Since subparagraph
152(4)(a)(i) of the ITA provides that an assessment may be made beyond
the normal period if there has been a misrepresentation attributable to
neglect or carelessness, and since there is necessarily neglect in cases of
gross negligence, the Minister was clearly entitled to make the assessments
beyond the normal period.
VI. Conclusion
[116]
For these reasons, the
appeal will be allowed, and the matter will be referred back to the Minister
for reconsideration and reassessment on the basis that
(a) the appellant's income
must be reduced by
(i) $209,559.85 for the
1997 taxation year,
(ii) $65,251.50 for the
1998 taxation year, and
(iii) $586,448.24for the
1999 taxation year; and
(b) the interest and
penalties must be adjusted accordingly.
[117] Before signing the judgment, I will ask the
registrar to contact the parties in order to seek their comments regarding the
form of the judgment in relation to the 2001 taxation year, and to ask them
whether they wish to make representations concerning costs.
Signed at Ottawa, Ontario, this 10th day of January 2011.
"Gaston Jorré"
Translation certified true
on this 14th day of November 2011
François Brunet, Revisor
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