Citation: 2010 TCC 249
Date: 20100506
Docket: 2008-1292(IT)I
BETWEEN:
VICHIT SAMBOUN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These are appeals under
the informal procedure from reassessments made under the Income Tax Act,
R.S.C. (1985) c. 1 (5th Supp.), as amended (the Act), in respect of
the 2000, 2001 and 2002 taxation years.
[2]
In making the
reassessments on March 18, 2005, the Minister of National Revenue
(the Minister) added the following amounts to the appellant's income after
conducting an audit using the net worth method.
|
2000 = $24,389
|
|
2001 = $12,652
|
|
2002 = $32,406
|
Penalties for negligence under subsection 163(2) of
the Act were added to the unreported income amounts for the 2000, 2001 and 2002
taxation years, namely, $3,962, $2,887 and $3,653 respectively.
[3]
The reassessment for
2000, which was made after the taxpayer's normal assessment period, was revised
on February 5, 2008, more specifically, the additional unreported
income earlier established at $24,389, was reduced by $3,230, that is, to
$21,159. Accordingly, the net family income for 2000, earlier established at
$41,537, was revised to $38,307, and the penalty under subsection 163(2)
of the Act was recalculated to take into account the decrease in the unreported
income for the year in question.
[4]
In determining the
taxes owed by the appellant for the 2000, 2001 and 2002 taxation years,
the Minister relied on the following facts set out in paragraph 28 of the
Reply to the Notice of Appeal:
[Translation]
(a)
During the years at issue, the appellant
operated a sewing business.
(b)
The appellant did sewing work for the company S
& F Clothing (Canada) Ltd.
(c)
The appellant did not report the income he
received from S & F Clothing (Canada) Ltd for the 2000, 2001 and 2002 taxation years.
(d)
The appellant has four children.
(e)
The appellant's spouse is Buntha Horng.
(f)
In her income tax returns for the 2000, 2001 and
2002 taxation years, Buntha Horng reported the following income:
|
2000: 2000: $8,640
|
|
2001: 2001: $9,073
|
|
2002: 2002: $23,438
|
(g)
In his income tax returns for the 2000, 2001 and
2002 taxation years, the appellant reported the following total income:
|
|
2000
|
2001
|
2002
|
|
- Net business income
|
$9,326
|
$0
|
$0
|
|
- Employment Income
|
$0
|
$17,274
|
$29,910
|
|
- Net rental losses:
|
($686)
|
($462)
|
$0
|
|
-Total income:
|
$8,640
|
$16,812
|
$29,910
|
[5]
According to the Canada
Revenue Agency (CRA) auditor, the audit of the appellant's business followed an
audit of S & F Clothing (Canada) Ltd
during which the appellant's invoices for the period from May to
September 2002 were found. They were invoices for piecework sewing. After
noticing that the amounts on those invoices had not been reported by the
appellant in his 2002 income tax return, the CRA audited the appellant using
the net worth method for the 2000, 2001 and 2002 taxation
years.
[6]
The appellant testified
at the hearing and explained that those invoices were for sewing work done by
his spouse at home. His spouse was employed by S & F Clothing (Canada) Ltd in 2000, 20001 and 2002, and she was even a
production manager in 2002. During the initial interview with the auditor, the
appellant stated that the agreement with S & F Clothing (Canada) Ltd was that the amounts paid for services rendered
did not have to be reported to the tax authorities and that no T4 slips would
be issued. At the hearing, the appellant explained that those invoices were
paid with cheques made out in his name. According to the auditor, the payment
of those invoices could not be traced in the appellant's bank accounts.
[7]
The CRA auditor also
noted that no rental income had been reported by the appellant in 2002 while
such income had been reported for the 2000 and 2001 taxation years. In his
testimony, the appellant acknowledged that, in 2002, he had purchased a rental
property located at 4154–4156 Cléroux
Street in Laval, Quebec, in a 50/50 partnership with his spouse. He
also stated that he had sold it in 2008 and given his former spouse the amount
that belonged to her (the couple separated in 2007). The appellant did not
explain why he had failed to report the rental income in his tax return for
2002.
[8]
In his submissions
following the receipt of his draft assessments, the appellant challenged, among
other things, the validity of the CRA’s assumptions used to estimate the cost
of living. Apart from the adjustments made with respect to the 2000 taxation
year, the appellant's submissions were not accepted by the CRA because the
assumptions made were based on the information provided by the appellant
himself without any supporting documents. Those assumptions were also
corroborated by the appellant's credit card and bank account statements.
Following the appellant's submissions, the CRA made him a very attractive
settlement offer but he refused it because he did not want to pay penalties or
interest or give up his right of appeal.
[9]
At the hearing, the
appellant respectfully submitted that two amounts should have been subtracted
from the additional income for 2002 in connection with the appellant and his
spouse's purchase of a residence located at 812 7th Avenue in Laval. The residence belonged to the brother of
the appellant's spouse. The statement of disbursements of the executing notary
refers to the fact that an amount of $23,750 was paid in advance to the seller
on a total sale price of $95,000. As stated by the notary in a note dated
May 28, 2007, the $23,750 down payment was not supported by any
specific evidence other than the signature on the statement of disbursements
that attests to it. No documentary evidence (cheques, receipts or bank
statements) or testimonial evidence on the part of the seller, the appellant's
spouse or representative from the appellant's financial institution was
submitted in order to corroborate the payment of $23,750 by the appellant and
his spouse. Accordingly, the $23,750 cannot be subtracted from the unreported
income.
[10]
The other point raised
by the appellant concerns the amount of $13,726.85 representing the balance of
the sale price for the residence. The brother of the appellant's spouse
instructed the notary retained to give that amount directly to his sister. A
cheque dated April 16, 2002, in the amount of $13,726.85 payable to
Buntha Horng was therefore drawn on the notary's trust account. The cheque
in question was endorsed by the appellant's spouse and deposited in a bank
account that was unknown to the CRA and not audited by them. The respondent
refuses to subtract the $13,726.85 from the appellant’s additional unreported
income because no other documentary evidence corroborated who was the owner of
the bank account that the cheque was deposited in. Even though the information
concerning the bank account in question was not provided, the Court is of the
opinion that there is enough evidence for the $13,726.85 to be subtracted from
the appellant’s additional unreported income for the 2002 taxation year.
[11]
Apart from the
$13,726.85 discussed in the paragraph above, the appellant did not explain the
substantial gap between his assets and his expenses, as established by the
CRA's net worth analysis. Although certain weaknesses or errors concerning some
components of the net worth were noted at the hearing, those weaknesses or
errors do not make it possible to discredit the merits of the exercise. The
weaknesses or errors noted primarily concern two credit cards of the appellant,
which the CRA did not take into account despite the fact that they had obtained
the account statements for them, as well as some bank accounts including the
one in which the cheque for $13,726.85 was deposited, regarding which the CRA
found no information.
[12]
I think it is important
to point out that the net worth method is essentially based on a set of
components provided in part by the taxpayer himself as well as by a review of
documents and supporting papers, by statistical data and by mathematical calculations.
To completely discredit the validity of a net worth, the taxpayer must provide
evidence that would make it possible to identify the source of his unreported
income and show that it is not taxable.
[13]
It is entirely up to
the appellant to justify the gaps noted by means of the net worth method. To do
so, he must establish, on the balance of probabilities, the plausibility,
reasonableness, fairness and consistency of his claims. In this case, the
appellant has not discharged his burden of proof.
[14]
The appellant did not
report the income from S & F Clothing (Canada) Ltd
for the 2000, 2001 and 2002 taxation years and did not report
rental income for the 2002 taxation year.
[15]
Accordingly, it was
warranted for the Minister to make reassessments in accordance with
subsection 152(4) for the 2000 taxation year after the normal assessment
period because the appellant made a misrepresentation that is attributable to
neglect, carelessness or wilful default or has committed fraud in filing the
return or in supplying information for that taxation year.
[16]
The Minister also
correctly established the goods and services tax credit in respect of the
appellant for the 2000 taxation year under section 122.5 of the Act, which
is calculated based on net family income.
[17]
In the light of the
facts above, the Court is of the opinion that the penalties imposed on the
appellant for the 2000, 2001 and 2002 taxation years were appropriate and imposed
in compliance with subsection 163(2) of the Act, because the appellant,
knowingly, or under circumstances amounting to gross negligence, has made a
false statement or omission in his returns by not adding to his income
substantial amounts for the 2000, 2001 and 2002 taxation years.
[18]
For these reasons, the
appeals from the reassessments made under the Income Tax Act for the
2000 and 2001 taxation years are dismissed and the appeal from the
reassessment for the 2002 taxation year is allowed in part, and the
reassessment is referred back to the Minister for reconsideration and
reassessment in order to subtract the unreported income of $13,726.85 with
adjustments to interest and penalties.
Signed at Ottawa, Canada, this 6th day of May 2010.
"Réal Favreau"
on this 18th
day of November 2010
François Brunet,
Revisor
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