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Citation: 2010 TCC 45
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Date: 20100129
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Docket: 2007-4312(IT)G
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BETWEEN:
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SUNNY J. DOCHERTY,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A.
FACTS
[1] The Appellant resides in Maple Ridge, British Columbia.
[2] In the 2001 and 2002 taxation years,
the Appellant was employed by Lordco Parts Ltd. (“Lordco”).
[3] In the 2001 and 2002 taxation years,
the Appellant reported income as follows:
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2001
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-
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Lordco; and
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$20,692.00
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-
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Employment
Insurance Benefits.
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(Note: the
Appellant received employment insurance benefits in 2001 because she gave
birth to a daughter in that year)
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2002
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-
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1. Lordco; and
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$21,467.38
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-
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2. Rent from a rental property:
Less expenses:
Net Loss:
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$14,400.00
15,367.44
$ -967.44
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(See Exhibit R-3)
[4] In the 2001 and 2002 taxation years,
the Appellant lived at 2012 Mead Street in New Westminster
(the “Mead Street Property”) with her infant daughter, her father (Robert
Docherty), her mother (Tracey Docherty) and her boyfriend (Keith Desaulnier).
Mr. Desaulnier testified that he lived with Sunny Docherty and her parents
in the 2001 and 2002 years until June 30, 2002.
[5] In January 2002, the Appellant purchased
a home located at 19226 Hammond Road, in Pitt Meadows, British Columbia (the “Hammond Road Property”) at a cost of $219,000.00. In 2002,
the Hammond Road Property was rented by the Appellant to her father’s brother. Note:
Cash required to purchase: $219,000.00 – $202,027.50 = $16,972.50 (see Exhibit
A-3).
[6] In June 2002, the Appellant purchased a home located at 13371 McCauley Crescent in Maple Ridge, British Columbia (the “McCauley Crescent Property”) at a cost of $379,000.00. Note:
Cash required to purchase: $379,000.00 – $264,000.00 = $115,000.00 (see Exhibit
A-2).
[7] The Appellant, her daughter and her parents lived in the
McCauley Crescent Property after it was purchased in June 2002.
[8] When the Appellant filed her income tax return for the 2001
taxation year, she reported the income that she received from Lordco, plus
Employment Insurance benefits.
[9] When the Appellant filed her income tax return for the 2002
taxation year, she reported the income from Lordco, plus rental income minus
expenses from the Hammond Road Property.
[10] Officials of the Canada Revenue Agency (the “CRA”) reviewed the
Appellant’s income tax returns for the 2001 and 2002 taxation years. Officials
of the CRA noted that in 2002 the Appellant (age 24), with earned income of
$20,692.00 in 2001 and $21,467.38 in 2002 (total $42,159.38), had purchased two
homes in 2002 at a total cost of $598,000.00.
[11] The Minister of National Revenue (the “Minister”) carried out a
net worth analysis on the Appellant for the 2001 and 2002 taxation years. Following
the net worth analysis, the Minister determined that the Appellant’s lifestyle
and personal expenditures, including the purchase and maintenance of the
Hammond Road Property and the MacCauley Crescent Property, exceeded her
reported income in the 2001 and 2002 taxation years.
[12] On June 6, 2006, the Minister Reassessed the Appellant’s 2001
and 2002 taxation years to include the following unreported income:
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Unreported Income
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2001
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-
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$ 22,430.00
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2002
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-
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$152,081.00
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[13] The Minister also imposed the following penalties:
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2001
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$ 3,179.00
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2002
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-
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$21,260.98
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B.
ISSUES
[14] The issues are:
(a)
Did the Appellant receive unreported income of
$22,430.00 and $152,081.00 in the 2001 and 2002 taxation years respectively?
(b)
Is the Appellant liable for the gross negligence
penalties that were imposed by the Minister in the 2001 and 2002 taxation years?
C.
ANALYSIS AND DECISION
[15] The Reassessments under appeal were prepared after the Minister
prepared a net worth analysis. Reassessments based upon a net worth analysis
have been considered by Canadian Courts on a number of occasions. For example,
in Ramey v. The Queen, 93 D.T.C. 791, Justice Bowman (later Chief
Justice Bowman) said at page 793:
… 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. It is
almost impossible to challenge such assessments piecemeal. The only truly
effective way of disputing them is by means of a complete reconstruction of a
taxpayer's income for a year. A taxpayer whose business records and method
of reporting income are in such a state of disarray that a net worth assessment
is required is frequently the author of his or her own misfortunes. …
(Underlining
added)
[16] I must determine whether the evidence provided by the Appellant
and her father or any other witness is sufficient to explain whether the Appellant
is subject to tax on the net worth analysis.
[17] During the hearing, the Appellant stated that she was employed
by Lordco in 2001 and that she received the income noted above. The Appellant also
said that she received Employment Insurance benefits in 2001 after she gave
birth to a baby daughter. In 2002, she received income from Lordco, plus some
rental income from the Hammond Road Property. The Appellant maintained that she
had no other source of income in the 2001 or 2002 taxation years.
[18] Counsel for the Respondent asked the Appellant how she was able
to pay her living expenses in 2001 and 2002, plus obtain the funds required to
purchase the properties and pay the regular operating expenses of the Hammond
Road Property and the McCauley Crescent Property.
[19] The Appellant said that in 2001 and 2002, she received funds
from her “family unit”. According to the Appellant, the family unit is made up
of the following:
(a)
the Appellant;
(b)
the Appellant’s former boyfriend (Keith Desaulnier);
(c)
Robert Docherty (father); and
(d)
Tracey Docherty (mother).
[20] The Appellant said that in 2002, she also received gifts from
her grandmother, Billie Stubbert.
[21] The Appellant said that the funds that were received by her from
the family unit, which she used to enable her to purchase the two above
properties, may be summarized as:
(a)
Gift from her grandmother – Billie Marlene Stubbert
- $30,000.00;
(b)
Inheritance - $40,000.00; and
(c)
Gifts from three friends of her father -
$30,000.00.
[22] In addition, the Appellant maintained that she received
financial assistance from her father, her mother and her former boyfriend.
[23] Robert Docherty confirmed the evidence of the Appellant. Robert Docherty
said that when his mother’s father, William Geary, died in 1993, he left an
estate consisting of some real estate plus $70,000.00 in cash. Mr. Docherty
said that the $70,000.00 in cash was left to Mr. Docherty and his family ($40,000.00)
plus $30,000.00 in cash to Mr. Geary’s daughter, Billie Stubbert.
[24] Counsel for the Minister maintains that evidence regarding the
amounts of $40,000.00 and $30,000.00 is not sufficient to establish that these
amounts were given to the Appellant to enable her to purchase and maintain the
McCauley Crescent Property and the Hammond Road Property.
[25] I have carefully considered the testimony of the Appellant and the
testimony of her father and I have concluded that there is no basis for the
position adopted by the Minister to ignore the sworn testimony with respect to
the amounts of $30,000.00 (gift) and $40,000.00 (inheritance).
[26] I have accepted the Appellant’s testimony, confirmed by her
father, that she and/or the family unit received the following gifts or
inheritance:
(a)
Gift from grandmother - Billie Stubbert -
$30,000.00; and
(b)
Inheritance received by father - $40,000.00.
[27] The Appellant testified and Mr. Docherty testified that three
friends of Mr. Docherty advanced $10,000.00 each to the Appellant to
enable the Appellant to purchase a home. Exhibit A-1, Tab 4 reads as follows:
Oliver & Co.
202 – 2963 Glen Drive
Coquitlam, B.C.
V3B 2P7
Attention: Keith Oliver
Re: Sunny Docherty
[...]
Dear Sir,
At the request of Ms. Docherty’s authorized
representative we attest to the following:
Ms. Docherty’s parents were former partners and business
associates of ours in a company called D.E. Installations Ltd.
As a result of a lengthy civil litigation brought to
bear on D.E. Installations Ltd. the Docherty’s lost their family home. When
their daughter Sunny was in a position [to] purchase a home for herself and
family we gifted to her $10,000.00 each, by cheque as a gift to help her and
her family out.
It is our understanding that these cheques are clearly
shown to be deposited in her personal bank account prior to the purchase of her
home.
Should you require any further information please
contact Ms. Docherty’s representative.
Yours truly,
“Frank Folino” “Mike Gabriele”
“Fred Chow”
Frank Folino Mike
Gabriele Fred Chow
(Note: Mr.
Folino also was the Indemnitor of the Mortgage that was obtained when the
McCauley Crescent Property was purchased (see Exhibit A-2).)
[28] Counsel for the Appellant filed Exhibit A-1, Tab 4, containing
copies of the bank account maintained at Westminster Savings for the Appellant
and her mother, Tracey Docherty. The bank statement for April 27, 2002 shows a
cheque deposit in the amount of $10,000.00 and on the same day, a further
cheque deposit in the amount of $10,000.00. The bank statement for May 4, 2002
shows that a cheque from Mike Gabriele in the amount of $10,000.00 was
deposited in the bank account.
[29] I have accepted the testimony of the Appellant and her father
that Mr. Docherty’s three friends provided financial assistance to the
Appellant in the total amount of $30,000.00 (see Exhibit A-1, Tab 4) to enable
her to purchase the McCauley Crescent Property.
[30] In accepting the evidence concerning the gifts of $30,000.00, I
have noted the following facts:
(a)
Some time prior to 2001, Mr. and Mrs. Docherty
owned a family home.
(b)
Mr. Docherty was one of the Plaintiffs in a
lawsuit. The lawsuit was settled and Mr. and Mrs. Docherty suffered financial
costs and lost their family home (see Exhibit A‑1, Tab 4).
(c)
After Mr. and Mrs. Docherty lost their family
home, they lived with their daughter (the Appellant) and Mr. Desaulnier in the
Mead Street Property.
(d)
Mr. Docherty owned and ran his own electrical
business and had income from this source.
(e)
Tracey Docherty reported income from various
sources.
(f)
Mr. Desaulnier had income in 2001 and 2002 and
he testified that he provided financial assistance to Ms. Docherty to pay for
some of the family expenses. He has no record of the amount that he paid.
(g)
In other words, the family unit provided some of
the money that made it possible for the Appellant to purchase the two
properties and to pay some of the normal operating expenses of those
properties.
[31] While there is no direct evidence on this point, it is possible
that the homes located at McCauley Crescent and Hammond Road were registered in
the Appellant’s name and not Mr. Docherty’s name because Mr. Docherty was
concerned with the legal issues that he was then facing in the lawsuit (see
Exhibit A-1, Tab 4) and he did not wish to jeopardize his legal position
by registering either the McCauley Crescent Property or the Hammond
Road Property in his name.
[32] I have concluded, based on the evidence, that in the years under
review, the Appellant obtained funds from the following sources:
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1.
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Billie Stubbert
(gift)
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$30,000.00
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2.
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Robert Docherty (inheritance
from Mr. Geary)
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$40,000.00
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3.
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Gifts from Messrs.
Folino, Gabriele and Chow
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$30,000.00
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4.
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Funds provided by
Keith Desaulnier (Note: the evidence from Mr. Desaulnier on this issue was
vague and I found him to be an unreliable witness. However, I am prepared to
recognize that he made some financial contributions.)
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$10,000.00
$5,000.00
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- 2001
- 2002
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$115,000.00
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Funds available to
the Appellant in 2001 and 2002:
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$115,000.00
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Funds included by
the Minister in the Appellant’s income:
2001 -
2002 -
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$ 22,000.00
152,200.00
$174,200.00
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The Minister is to
remove the following amounts from the Appellant’s income:
2001 -
2002 -
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$10,000.00
$105,000.00
$115,000.00
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[33] Note: It should be noted that I have accepted all of the
items raised by counsel for the Appellant except the argument concerning
further financial contributions made by Tracey Docherty and the funds provided
by Mr. Desaulnier. Tracey Docherty was not called by the Appellant as a
witness and the evidence regarding any financial contributions from her was
vague and uncertain.
[34] With respect to Mr. Desaulnier, I have also accepted that Mr.
Desaulnier (the former boyfriend) contributed a total of $15,000.00 to the
family unit and not $30,000.00 as suggested by the Appellant in Paragraph 6 of
the Notice of Appeal. In my opinion, there was insufficient and unreliable
evidence from Mr. Desaulnier to support the $30,000.00 claim made by the
Appellant.
[35] At page 11 of the Argument, counsel for the Respondent said:
… and what Your Lordship ought to do is to set aside
the reassessment, which will result in the original assessment being accepted
and none of this extra money being taxable, and obviously the gross negligence
penalties will fall by the way side.
(Transcript,
page 11, lines 5-10)
In response to
counsel’s argument, I must note that I am bound to follow the evidence. I
cannot extend my conclusions beyond what the evidence tells me.
[36] I understand that the income reported by Robert Docherty and
Tracey Docherty in 2001 and 2002 was included in the Net Worth
Calculations prepared by the Auditor (see comments by Mr. Lamarre, Transcript p.
51, lines 22-24).
[37] Since I have allowed the appeals and eliminated some of the
unreported income, it follows that the penalties imposed by the Minister will
be reduced accordingly.
[38] The appeals will be allowed and the Minister is ordered to
recognize the adjustments as outlined in paragraph [32] above.
[39] I am not prepared to allow any costs in this matter because
success has been divided. Furthermore, I have concluded that the Appellant
should have provided more evidence to the Auditor or to the Court to confirm some
of the testimony. I am referring, in particular, to the letter signed by
Messrs. Frank Folino, Mike Gabriele and Fred Chow (Exhibit A-1,
Tab 4). One or more of these individuals should have been subpoenaed as a
witness for the Appellant in order to provide verbal testimony on the gifts
made to enable the Appellant to purchase the properties. In addition, I wish to
note that the evidence indicates that the Appellant and her father were
uncooperative, hostile, rude and unreasonable in their dealings with the
Auditor. I refer to the letter sent to the Auditor by Mr. Docherty on
December 20, 2005 (the Appellant’s father and authorized representative). In
the letter (Exhibit R-4), the following comment is found:
Be advised that I am seeking legal counsel with
respect to filing a criminal complaint against yourself and superiors with
respect to this matter. I am also concurrently investigating a tort claim of
misfeasance to be filed against yourself and team leader.
Do no destroy any documentation, notes, records,
working paper on any other information with respect to this file.
[40] By an undated letter (Exhibit R-2), the Appellant wrote to the
Auditor. In her letter, the Appellant said:
…
As a result Mr. Pandher you and CCRA must comply with
the Law as must I. For you to interpert Section 231 as a requirement for me to
attend the meeting on December 8, 2004 shows your complete lack and skill in
comprehending the English language and the intent of Section 231 of the Income
Tax Act, which you purport to be authorized to administer.
I would be more than happy to attend a meeting at the
business premises being audited with my representatives if that is what you
wish and require. For your information those premises would be the company
vehicle, as all business is carried on from it and it does contain the books
and records.
…
As to your reference to IC71-14R3T and CCRA’s normal
practices I refer you to paragraph 3 already brought to your attention. It
would appear that you normal practices are that of extorsion, blackmail and
cohersion under the guise of “inducement”.
[41] My comment with respect to the comments contained in the two
letters is that this is not how a taxpayer should respond to reasonable
requests made by an Auditor of the CRA who is trying to determine if a taxpayer
has reported all of her income.
[42] In the Court decision of Ramey v. The Queen (quoted at
paragraph [15] above), former Chief Justice Bowman said that a taxpayer whose
business records and method of reporting income are in such a state of disarray
that a net worth assessment is required is frequently the author of his or
her own misfortunes.
[43] I believe that this is the situation here, where the Appellant
had insufficient records to properly establish where the cash came from to
enable her to purchase and pay the operating expenses of the Hammond Road
Property, the McCauley Crescent Property and other living expenses in 2001 and
2002.
Signed at Vancouver, British Columbia, this 29th day of January 2010.
Little
J.
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