Citation: 2009 TCC 567
Date: 20091104
Docket: 2008-3864(IT)I
BETWEEN:
BIYU LIANG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, C.J.
[1]
Biyu Liang appeals net
worth assessments for 2002 and 2003 and penalties imposed pursuant to
subsection 163(2) of the Income Tax Act ("Act").
The Minister of National Revenue ("Minister") increased the
appellant's declared income for 2002 and 2003 by $20,813 and $40,667
respectively.
[2]
Ms. Liang and her
husband, Hai Luc, each owned 50 per cent of the shares of the
Bihai Food Services Inc. ("Bihai"), a corporation carrying on the
business of a restaurant under the name "Shanghai Restaurant" in Leduc, Alberta, during the relevant years. Both the appellant and
her husband were also the only directors of the corporation. Both worked full
time at the restaurant.
[3]
At the time of the trial
Ms. Liang was separated from Mr. Luc and was in the process of
obtaining a divorce.
[4]
In assessing, the
Minister calculated the purported increases in the joint net worth of both
Ms. Liang and Mr. Luc. The Minister allocated 50 per cent
of the increases in net worth to the incomes of each of Ms. Liang and
Mr. Luc for 2002 and 2003. The Minister considered that the appellant and
her husband were appropriating cash from the Bihai. However, the appellant was
assessed only in accordance with sections 3, 9 and 152 of the Act.
[5]
Ms. Liang
immigrated to Canada in May 1994 from China.
She brought with her some clothing and between $30,000 and $40,000 in Canadian
currency. In China she says, she worked as a cashier in a
factory. She also worked as a bookkeeper in China.
Ms. Liang stated she knew very little English on her arrival here but
slowly learned the language by practicing with customers in a restaurant where
she worked and by reading. She also took a six-month English language course in
1997 or 1998. She described her English language skills as late as 2002 as
"poor". At trial, she was quite familiar and comfortable speaking
English.
[6]
Although she did keep
books in China she did not have any similar or accounting experience in Canada. She explained that in China
all transactions were in cash; there were no credit or debit cards at the time.
She took no accounting courses in Canada.
[7]
The Shanghai Restaurant
opened for business in May 2000. Mr. Luc previously had operated a small
Chinese restaurant from 1992 until he and the appellant opened Bihai. The Shanghai
Restaurant had 145 seats. At the restaurant Ms. Liang "did
everything". She worked as a waitress and dishwasher. She scheduled workers.
Her husband, she said, taught her how to record sales and she did so every
night. Her working hours were from eight or nine o'clock in the morning to
eleven o'clock or midnight almost every day.
[8]
Ms. Liang stated
that she received salary by monthly cheque of $3,000. She did not record the
cheques. At the end of the year, she explained, she summarized payroll and gave
the summary to the accountant, Mr. Paul Zhang, who "did the
books". Ms. Liang said that she put all the receipts into a file
which she gave to Mr. Zhang at the year‑end. Mr. Zhang was hired as
the corporation's accountant in 2001 and continued his services in 2002 and
2003.
[9]
According to
Ms. Liang it cost about $300,000 to open Shanghai Restaurant. Money came
from savings of about $200,000 and about $50,000 borrowed from her father‑in‑law.
About half of the savings was contributed by Ms. Liang. Costs of
construction, leasehold improvements, furniture and equipment were all paid
without any loan from a bank. Payments were made by both cash and cheque.
Suppliers to the restaurant were paid by cheque, she recalled. Amounts
contributed by her and Mr. Luc, the appellant says, were not recorded in
the shareholders's loan account.
[10]
The corporation,
according to Ms. Liang, wrote a cheque to reimburse Mr. Luc for his
contribution but did not repay her.
[11]
Ms. Liang
explained that the source of the $100,000 contribution to Bihai included the
$30,000 to $40,000 she had with her on her arrival in Canada
as well as another $40,000, "mostly in $100 bills, some $50 bills",
her parents gave her in 1999 when she and her children visited her family in China. The $40,000 was carried in her luggage and a purse.
The money was not declared to Canada customs since she did not know she had to.
[12]
In 2002, Ms. Liang
again visited China and returned with $35,000 given to her by
her parents. The money from China, Ms. Liang declared, was kept at her
home in a "closet and under the bed". Her husband was aware she had
money but not how much. Ms. Liang did not inform her husband of the money
she had since he had "gambling issues". She attempted to hide the
money from him. Ms. Liang used the money, in part, to purchase a car for
about $28,000.
[13]
Ms. Liang
explained that she was the only daughter in her family which included five
brothers. Her parents had given her brothers cash in the past but she did not
know how much.
[14]
After 2003, she said she
received additional cash gifts from her mother on the latter's visit to Canada.
[15]
Ms. Liang declared
that she always had about $30,000 to $40,000 in cash at home. This amount was
increased in 2003 as a result of her mother's gift. When asked by respondent's
counsel the reason she told the Canada Revenue Agency ("CRA") that
she only had $1,000 or $2,000 in cash, Ms. Liang replied "I
forgot". She estimated that at the end of 2003, she would have had $35,000
to $40,000 in cash.
[16]
Ms. Liang's mother
now lives in Canada with Ms. Liang and she testified on
behalf of her daughter through an interpreter. Wan Chun Zhang immigrated
to Canada in 2005 bringing about $300,000 with her.
Ms. Zhang had worked in a pot and pan factory in China
until she retired in 1988. Upon her retirement from the factory, she began
selling pots and pans from a pushcart and also sold pots to others selling from
pushcarts. She said she made more money from this activity than working at the
factory. She kept her profits at home since she did not trust banks.
[17]
Ms. Zhang
corroborated her daughter's testimony that on Ms. Liang's visit to China with her children in 1999, she gave her daughter
$40,000 in Canadian currency. She said she exchanged Chinese currency for
Canadian currency at a market. Ms. Zhang said Ms. Liang visited China again in 2002 and she gave Ms. Liang $35,000 to
buy a new car. Ms. Zhang visited Canada in 2003 when
she gave her daughter $20,000 and helped her out with hydro and utility bills.
Ms. Zhang did not inform her son‑in‑law of the gift.
Ms. Liang had previously stated that she received money from her mother
but did not recollect the amount.
[18]
While Ms. Liang
was in China, Ms. Zhang recalled Ms. Liang
stayed at her home and ate meals at her home, all without charge.
[19]
Under cross‑examination
Ms. Zhang was unable to remember how much money she earned from selling
pots since "it was a long time ago" and she did not keep records.
[20]
Ms. Zhang stated
that she made gifts to her children in Canada
every two or three months but could not say how much since she did not
"keep track". However, she remembered the gifts to Ms. Liang
because they were "big numbers". She gave her sons cash only when
they need it and only "a little bit".
[21]
Respondent's counsel
noted that Ms. Zhang deposited $103,850 to her bank account in March of
this year and $50,000 in April. Ms. Zhang said she had kept the cash at
home until the deposit. She had deposited $40,000 in her account before March;
she said this was money for her grandson who moved to a different province and
she was afraid he would be cheated.
[22]
Ms. Liang said
that she did not smoke, drink or gamble, although Mr. Luc did smoke with
customers and did gamble. She declared that she paid the household expenses,
services, telephone and hydro and shopped for groceries. Mr. Luc may have
paid for such expenditures if Ms. Liang were busy. He would make such
payments for food perhaps four or five times a year, she suggested.
[23]
The appellant estimated
family expenses for the period January 1, 2001 to September 30, 2004.
She divided each calendar year into two periods, January 1 to
September 30 ("period 1") and October 1 to
December 31 ("period 2"). (Bihai's fiscal year ended on
September 30.) For food, she estimated the cost at $3,762 for
period 1 in each year and $1,254 for period 2 of each year. In fact, all
expenses for shelter, house operations, clothing, transportation, healthcare,
personal care, reading material, education and miscellaneous are the same for
all years. For example, healthcare is $792 in period 1 and $264 in
period 2, education is $150 in period 1 and $90 in period 2, for
all years. Recreation expenses were $500 for 2001 and 2003 and $2,500 for 2002
when the appellant went to China. There are no expenses for tobacco,
alcohol, security and gifts. There is no claim for mortgage interest,
insurance, property and property tax. In all, she claimed expenses of $13,334
in 2001 and 2003 and $15,334 in 2002. For the period January 1 to
September 30, 2004, her claim is $9,600.
[24]
In cross‑examination
Ms. Liang said that in preparing her list of expenditures, she erred in
omitting such items as mortgage interest, insurance, gifts to her children at
Chinese New Year and Christmas; car maintenance and Canada Pension Plan, among
others. Because she "hardly used" her credit card, she did not
"mention" it to the CRA. The CRA calculated non‑business
purchases by credit card for the 2002 calendar year aggregated $10,229. In
2003, such purchases totalled $25,234. Ms. Liang declared many of the
purchases as "family purchases".
[25]
During the years in
appeal, Ms. Liang's two children were five and seven years old.
[26]
All sales from the
restaurant were recorded in a book, Ms. Liang recalled. Sales were added
from the cash register; all debit and credit cards were entered on the cash
register. Once or twice a week, Ms. Liang said she would reconcile
deposits with sales records. Much of the deposits to the restaurant's bank
account were in $20 bills. According to the CRA documentation produced through
Irene Kennerfeldt, a CRA appeals officer, not all sales were
"rung" through the cash register. Sales paid with a debit or credit
card were recorded at the amount that was swiped and immediately deposited into
the corporation's bank account. The cash sales were only recorded at what is
entered into the cash register.
[27]
Ms. Liang
testified she had a shareholder's loan account with Bihai but could not
remember how much money she or Mr. Luc had advanced to the company.
Respondent's counsel produced a history of the shareholder loan amounts for the
company's 2002 to 2004 taxation years which Ms. Liang acknowledged, was
"probably" correct. The shareholders account in Bihai prepared by the
CRA personnel show opening balances owing to shareholders as of October 1
in 2001, 2002 and 2003 at $71,120; $47,487 and $96,581, respectively.
[28]
Ms. Liang was
questioned by respondent's counsel as to certain statements she purportedly
made to CRA officials at a meeting in April 2005. She denied telling CRA
officials that her parent's gifts to her children were about $10 to $15; she
insisted they were amounts in $50 bills. She denied receiving a gift of $40,000
from Mr. Luc's parents. She also asserted that her husband's parents contributed
$50,000 to get the business started, not $25,000, as she stated earlier, as
indicated in CRA documentation. Mr. Luc said his parents gave him $30,000
to $40,000. An affidavit of Ms. Liang's former lawyer indicated that
Ms. Liang told him that she received a gift of $25,000 but did not tell
her husband.
[29]
While Ms. Liang
admitted that as a waitress in the restaurant she received tips, she did not
report tips in her tax return which, she said, was prepared by her husband.
Ms. Liang declared she did not know she had to report tips. On a good day,
she said, she would get about $30 to $50 in tips, most days it varied between
$20 and $30.
[30]
Ms. Liang
testified that she prepared tax returns on the basis of what Mr. Luc
taught her. Only after CRA started the audit of the years in appeal did she attempt
to learn the correct way to prepare various tax returns. Ms. Liang
reported income of $24,000 from her employment at the restaurant although she
testified that she received monthly pay cheques of $3,000.
[31]
The starting costs of
Bihai, Mr. Luc said, was $200,000 which, he said, was "saved up"
by Ms. Liang and him; each had about $100,000 to $150,000 by the year
2000. He stated that his wife told him that she kept cash at home,
approximately $25,000 to $30,000. However, he added, the cash at home was not
from savings. The amounts saved had been deposited into bank accounts.
[32]
His parents' gift,
Mr. Luc recalled, was "probably in 2001 or 2002". They would
give him money "when I needed it", usually about $2,000 to $3,000 at
a time. The money, he believed, was used for the restaurant although he did not
keep track of it. Mr. Luc estimated the leasehold improvements for Bihai
Restaurant cost about $100,000. He said he had "no clue" as to the
exact amount or the origin of the money, although he did refer to the money
coming from cash on hand and bank accounts. He indicated that his wife did the
bookkeeping.
[33]
Mr. Luc confirmed
that his wife was an accountant in China but had no accounting experience in Canada. In his view the accounting was a mess. Mr. Luc
said he knew how to operate a restaurant but knows nothing about bookkeeping.
He insisted Ms. Liang did the bookkeeping and it was she who kept track of
the shareholder's loan to Bihai. He would sign what she put before him.
[34]
According to
Mr. Luc, Ms. Liang gave him a monthly allowance of $500. This was
what he lived on. He denied taking money out of the restaurant's cash register.
Any cheques the company paid on his behalf for his Visa account was reported as
wages, he stated. His wages in 2002 were from $2,000 to $3,000 per month. He
reported income of $24,000 from Bihai in each of his 2002 and 2003 tax returns.
Again, he said that his wife did all the accounting.
[35]
Mr. Luc testified
that he has two brothers and four sisters. His parents gave gifts to all his
brothers and sisters, including himself. Any money he received from his
parents, he asserted, he gave to Ms. Liang. The gifts were in $100 bills,
some in $20 bills, and were made every four or five months. His parents, now
retired, still give him gifts from their savings. Mr. Luc said that he had
no idea what Ms. Liang did with the money he gave her, although he knew
that she visited China alone in 1998 or 1999 and with their two children later
on. He had no idea if she brought money with her on her return to Canada.
[36]
Mr. Luc
acknowledged that he gambled, about two or three times a month, and stated that
he won more than he lost. Here too, he said, he gave the winnings to
Ms. Liang.
[37]
Ms. Liang had bank
accounts but, Mr. Luc stated, he did not. The Visa account was in both
their names. When they first received the Visa card, he recalled that he used
the card "most" for gambling but later on Ms. Liang used the
card to pay bills. Mr. Luc also used the card to pay personal expenses
such as gas and clothes "here and there". In 2002 and 2003,
Mr. Luc estimated that he spent $200 a month on clothing. He volunteered
that most of Ms. Liang's Visa charges were for purchases made for their
children. Groceries for the restaurant were also paid by Visa.
[38]
Mr. Luc said he
smoked a package of cigarettes a week, each package costing $7 or $8. He also
contributed to a Registered Education Savings Plan for his children as well a
contributing $4,000 to his registered retirement savings plan for 2002 and
$6,000 for 2003.
[39]
Ms. Kennerfeldt
testified that the appellant was assessed on a net worth basis on the
recommendation of the auditor responsible for her file after interviews with
the appellant and Mr. Luc and a review of the corporation's books and
records as well as a review of Ms. Liang's and Mr. Luc's lifestyles.
In the auditor's view, their lifestyle could not be supported by their assets
at the time. Ms. Kennerfeldt prepared various working papers to support the
assessments.
[40]
The appellant complained
that the cash she brought with her from China
was not included in the net worth statement. This, Ms. Kennerfeldt states
is not an issue since the amount would have been included as an asset at the
beginning of the period in issue and throughout, that is, it would not affect a
change in net worth.
[41]
Ms. Kennerfeldt
explained the various documents prepared by the CRA officials in support of the
increases in net worth of the appellant. These included various working papers
analyzing shareholders accounts and credit card statements as well as net worth
working papers. The sources, Ms. Kennerfeldt stated, were the appellant's
own documents. She could not tell from the auditor's working papers if the
personal bank accounts at the Bank of Nova Scotia and the Royal Bank were joint
accounts or in the name of Ms. Liang only. There were two accounts only at
the Bank of Nova Scotia, one to make mortgage payments and one a daily interest
savings account. The account at the Royal Bank was an interest savings account,
as far as I can determine. Ms. Kennerfeldt explained that the family had
three different cars and, when sold, their sales prices were added to the
appellant's assets. The Liang‑Luc home was purchased for $191,000, with a
cash payment of $120,000. Ms. Kennerfeldt testified that adjustments were
made to schedules to reflect various discrepancies. Adjustments were made to
personal expenditures, source deductions for tax and Canada Pension Plan for
both Mr. Luc and Ms. Liang. Income was calculated on a calendar basis
for each.
[42]
Ms. Kennerfeldt
stated that at the assessment level no gifts were recognized by the CRA.
Ms. Liang's Notice of Objection referred to a gift in 2002 of $25,000 from
her parents but the auditor did not get any explanation from Ms. Liang as
to the source of this gift. Thus, based on any representation from the
appellant, it was difficult to reconcile what money was coming from whose
parents, Ms. Kennerfeldt concluded.
[43]
The CRA calculated its
own estimate of expenses for Ms. Liang based on Statistics Canada sources,
to provide a four person household, two people over 20 years of age and
two people under 20 years of age. According to CRA, Ms. Liang and
Mr. Luc's expenses for 2002 and 2003 were $43,934 and $22,713 respectively.
At the appeals level, these amounts were reduced to $43,934 and $22,713 for
2002 and 2003, respectively. This is quite a contrast to Ms. Liang's
estimates of $15,334 in 2002 and $13,334 in 2003.
[44]
As far as gambling
expenses by Mr. Luc are concerned, Ms. Kennerfeldt said the CRA gave
a "zero in and out". Thus his winnings were considered to equal her
winnings; there was no gain or loss. The CRA estimated the cost of food in each
year at $10,800, shelter in 2002 at $15,951 and in 2003 at $14,976, household
operation for both years at $1,020, healthcare at $2,250 for both years, for
example.
[45]
The CRA assessed
Ms. Liang subsection 163(2) penalties. Ms. Kennerfeldt produced
the penalty recommendation report. The CRA had questioned Bihai's Goods and
Services Tax ("GST") returns. The report included recommendations for
penalties to the corporation under GST legislation and the shareholders
personally. In short, the penalties were recommended since the shareholders
increased "other net assets by purchasing a home, paying off the $60,000
mortgage in three years, buying a new car for cash, and increasing their bank
account balances". Their personal living expenditures were "very
low", half of Statistics Canada averages and the appellant could not
supply her actual expenses. The appellant would reconcile cash and take daily
cash sales home at the end of the day and deposit it later with cash sales from
other days, sometimes months, without reconciling the amounts deposited; in the
CRA's view "due care" was not taken by Ms. Liang.
[46]
In cross‑examination,
counsel referred to Ms. Liang's evidence that $120,000 of the home
purchase came from a bank account withdrawal, $40,000 from a parent and $46,621
from the sale of a previous residence. Ms. Kennerfeldt cited CRA working
papers to the effect that the $20,000 came from a bank account and $117,000 was
the down payment for the home; the residence had been included as an asset in
Ms. Liang's net worth.
[47]
Appellant's counsel was
concerned — rightly so — that the family expenses were divided equally
between Ms. Liang and Mr. Luc even though one of them may have
incurred more expenses than the other. Similarly any gift received by one of
the spouses would reduce purported income accordingly. And if the company paid
more expenses for one shareholder than another, that too should have been
reflected in the preparation of the net worth statements. Also, Mr. Luc's
gambling "wins" may have been more than his losses, but there is no
evidence supporting this submission.
[48]
Counsel for the
appellant concentrated on three items in her argument: shareholders' loan,
gifts from the appellant's mother and personal expenses.
[49]
Counsel submitted that
Ms. Liang and Mr. Luc used their personal savings to start up Bihai
restaurant in the amount of approximately $200,000, or $100,000 each. The
evidence of Mr. Luc was that the start up costs for the restaurant,
including leasehold improvements, was the approximately $200,000 advanced by
the shareholders, yet the CRA did not recognize the amount as a loan to the
corporation by its two shareholders.
[50]
The appellant also
submits that I recognize gifts of $35,000 the appellant received from her
mother in China in 2002, and the $20,000 received from her
mother in Canada in 2003 and that the gifts were made only
for the benefit of Ms. Liang and not all for Mr. Luc.
[51]
Finally, counsel
submits that Ms. Liang did not gamble. Any gambling losses and winnings
are those of Mr. Luc. Also, as far as expenses are concerned,
Ms. Liang's cost of travel to China in 2002 was
approximately only $2,000.
[52]
Respondent's counsel
argued that there was not enough evidence to rebut the net worth calculations
or the penalties since Bihai did not report all its income in its financial
statements. She referred to my colleague Woods J.'s remark in Poopathie
Co. v. R.,
… A net worth
analysis is used by the Agency when a taxpayer does not have sufficient books
and records to verify the income reported on the tax return. The frailties of
the net worth approach have been recognized in judicial decisions but it is
accepted as an appropriate method if proper books and records are not kept.
Presumably the reason for this is that the assessor has no other way to
estimate the income earned. Based on the evidence presented, I agree with the
respondent that a net worth approach is appropriate in this case because the
appellant corporation's books and records are inadequate.
[53]
Where a taxpayer has
been assessed on the basis of increases in his or her net worth over the years,
that taxpayer has the burden of proof as in any other tax appeal. At the same
time, however, it is the Crown that has the onus of establishing that penalties
assessed under subsection 163(2) were correctly assessed.
[54]
I am troubled by the
testimonies of Ms. Liang, Ms. Zhang and Mr. Luc. Some of their
evidence confirms that a significant portion of Ms. Liang's income was not
reported and other evidence questions whether Ms. Liang or Mr. Luc
was responsible for the financial "mess" in Bihai's books.
[55]
Both Ms. Liang and
Mr. Luc reported employment income from Bihai for each of the years in
appeal of $24,000. However, both Ms. Liang and Mr. Luc testified that
Bihai was paying them by cheque $3,000 a month; Ms. Liang therefore ought
to have reported $36,000 employment income from Bihai for 2002 and 2003. Also,
Ms. Liang testified that she received tips working in the restaurant. Some
days she would received as much as $50 in tips, but most days she would receive
from $20 to $30. If she worked 300 days a year and received an average of $25
in tips, she would have received tips of $7,500. Based on these calculations
she admitted under reporting $19,500 of income in each year.
[56]
Ms. Zhang
testified that while she remembered the quantum of gifts she gave
Ms. Liang, she did not remember the amounts of gifts she gave to her other
children and grandchildren. She only could remember "big numbers",
she stated she apparently did well in China since she entered Canada with $300,000 in 2005. I have no doubt that she did
make gifts to Ms. Liang. It is possible that Ms. Liang purchased her
car in 2002 for $28,000 with the proceeds of the $35,000 gift. Both
Ms. Liang and her mother testified that a $35,000 gift was made and the
Crown's cross-examinations did not weaken their testimony given in examinations‑in‑chief.
[57]
Ms. Liang testified
that although she worked as a bookkeeper in China,
she entered Canada with no knowledge of Canadian bookkeeping
practices and that Mr. Luc taught her about bookkeeping and reporting for
income tax and GST purposes. According to Mr. Luc, he knew nothing about
bookkeeping and he left any bookkeeping to Ms. Liang.
[58]
I nevertheless do agree
with the appellant that on the basis of reasonable probability the costs of
starting up the restaurant were advanced by the corporation's shareholders. The
real income from the Shanghai restaurant is not reflected in its
financial statements or in any other document. However, it is doubtful that
this restaurant could have generated over $200,000 of income in a period of
months. The only reasonable sources of the start up costs were the shareholders
of the corporation. Therefore, the CRA should recognize that Ms. Liang did
advance $100,000 to the corporation in the year 2000. Whether this will assist
Ms. Liang in reducing the assessments of income is questionable since it
will be included in the opening of the shareholders' loan account.
[59]
With respect to
personal expenses used in the calculation of Ms. Liang's net worth, the
Minister erred in allocating family expenses equally between the appellant and
Mr. Luc. For example, any amounts reflected in Ms. Liang's net worth
concerning gambling should be deleted. Any gifts, in particular the gift of
$35,000 received in 2002, given to Ms. Liang by her family belonged to her
only and should not be divided with Mr. Luc. Related to the $35,000 gift
is the purchase by Ms. Liang of an automobile in 2002 for $28,000 (from
the gift of $35,000). In preparing a schedule of Ms. Liang's and
Mr. Luc's assets, the CRA included the price of the car, $28,000; later it
split the $28,000, allocating $14,000 to each of Ms. Liang and
Mr. Luc. All of the $28,000 should be allocated to Ms. Liang.
[60]
The Minister should
also recognize at $2,000 the cost of Ms. Liang's travel and stay in China.
[61]
Subsection 163(2)
of the Act provides a penalty for every person who knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
asserted to or acquiesced in the making of a false statement or omission in a
return … filed or made in respect of a taxation year for the purposes of the Act
. The respondent has the burden of establishing the facts justifying the
assessment of a penalty under subsection 163(2).
[62]
In the appeal at bar,
it is clear that Ms. Liang made or participated in, asserted to or
acquiesced in the making of a false statement or omission in her income tax
returns for 2002 and 2003. It was Ms. Liang who was in charge of Bihai's
books and records in 2002 and 2003. It was Ms. Liang who assembled the
information for, and prepared, her tax returns for 2002 and 2003. Finally, it
was Ms. Liang who knew she "under reported" her income for each
year or, due to the admittedly poor state of the books and records for which
she was responsible, ought to have known, that there were omissions of income
in the tax returns for 2002 and 2003.
[63]
The facts in the appeal
at bar do not resemble those in Fortis
where no evidence was led by the Minister to establish any fact justifying the
assessment of subsection 163(2) penalties. The penalties were based on net
worth assessments but at trial it became clear that the income tax assessed by
the Minister was a minimum amount.
[64]
The appellant admitted,
for example, that she received salary of $36,000 for each year but she reported
employment income of $24,000 for each year and she failed to report the amount
of tips she received in each of the two years in appeal. These are two items
Ms. Liang knowingly omitted in filing her tax returns for 2002 and 2003
and increases in net worth would have reasonably included these amounts. I also
found her estimates of personal expenses very low and not at all reasonable
since, among other things, she omitted some important items such as mortgage
and insurance costs. Any amounts of unreported income in excess of the amounts
knowingly omitted by Ms. Liang in tax returns were due to circumstances
caused by Ms. Liang's gross negligence in the making or participating in
the making of a false statement or omission in her 2002 and 2003 tax returns. I
am satisfied that the amounts to be added to Ms. Liang's income in accordance
with these reasons are the minimum amounts she failed to report.
[65]
Therefore, the appeals
will be allowed but only:
a) to include $100,000
in Ms. Liang's shareholder opening loan account in Bihai;
b) to increase
Ms. Liang's assets in 2002 by a gift of $35,000 she received from her
mother;
c) to value assets
personally owned, or personal debt owing by a particular shareholder of Bihai
in the calculation of that shareholder's net worth; therefore, the cost of the
car purchased by Ms. Liang shall be included as her asset, subject to
adjustment, and any debt or asset from gambling shall not be included in
calculating her net worth; and
d) to value her cost of
travel to China in 2002 at $2,000
provided that her tax liability for 2002 and 2003
shall not be increased as a result.
[66]
The appeals from
penalties assessed in accordance with subsection 163(2) of the Act
are allowed to permit the Minister to calculate the penalties on the reduced
amount of unreported income, if any, set out in these reasons.
[67]
Costs of the appeal in
favour of the respondent.
Signed at Ottawa, Canada, this 4th
day of November 2009.
"Gerald J. Rip"
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