Citation: 2009 TCC 275
Date: 20090526
Docket: 2007-2876(IT)G
BETWEEN:
GIOVANNI SPRIO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
The appellant was
reassessed by the Minister of National Revenue (Minister) under
subsection 152(7) of the Income Tax Act (ITA) using the net worth
method to compute unreported income totalling $474,356, together with penalties
totalling $53,459 assessed pursuant to subsection 163(2) of the ITA for the
taxation years 1996 through 2002. The Minister reassessed after the normal
reassessment period under subsection 152(4) of the ITA for taxation years 1996
through 1999. For those four years, the Minister must show that there was
misrepresentation that is attributable to neglect, carelessness, wilful default
or fraud by the taxpayer in filing his returns or in supplying information
under the ITA.
[2]
In Venne v. The
Queen, 84 DTC 6247, [1984] F.C.J. No. 314 (QL) (Federal Court, Trial Division),
Strayer J. defined as follows, at page 6251 (DTC) the onus placed on the
Minister when invoking his power to reassess under subparagraph 152(4)(a)(i)
of the ITA:
I am satisfied that it is sufficient for the Minister, in order to
invoke the power under subparagraph 152(4)(a)(i) of the Act to show
that, with respect to any one or more aspects of his income tax return for a
given year, a taxpayer has been negligent. Such negligence is established if it
is shown that the taxpayer has not exercised reasonable care. This is surely
what the words "misrepresentation that is attributable to neglect"
must mean, particularly when combined with other grounds such as
"carelessness" or "wilful default" which refer to a higher
degree of negligence or to intentional misconduct. Unless these words are
superfluous in the section, which I am not able to assume, the term
"neglect" involves a lesser standard of deficiency akin to that used
in other fields of law such as the law of tort. See Jet Metal Products
Limited v. The Minister of National Revenue (1979) 79 DTC 624 at
636-37 (T.R.B.).
[3]
Furthermore, in Molenaar
v. Canada, 2004 F.C.J. No. 1731 (QL), 2004 FCA 349, the Federal Court
of Appeal added the following at paragraphs 2 to 4:
2 Counsel for the appellant submitted that for this period,
from 1993 to 1996, for which the limitation period had run, the Ministère
should have the burden of proving that the "cash in" so found was
taxable income. In other words, in order to limit the application of the net
worth method, there would be a presumption in the taxpayer’s favour that
unreported and unexplained "cash in" comes from non-taxable income.
3 With respect, such a presumption would make the net worth
method useless and inapplicable for all practical purposes. Additionally, it
would undermine the very basis of our taxation system, which is founded on
voluntary reporting, since it would amount to favouring a crafty taxpayer who
is best able, most effectively and for the longest time, to conceal his or her
income and his or her failure to report it.
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.
[4]
In Hsu v. Canada, 2001 F.C.J. No. 1174 (QL), 2001 FCA 240, the
Federal Court of Appeal had previously stated, at paragraph 29:
29 Net worth assessments are a method of last resort,
commonly utilized in cases where the taxpayer refuses to file a tax return, has
filed a return which is grossly inaccurate or refuses to furnish documentation
which would enable Revenue Canada to verify the return (V. Krishna, The Fundamentals of Canadian
Income Tax Law, 5th ed. (Toronto: Carswell, 1995) at 1089). The net worth
method is premised on the assumption that an appreciation of a taxpayer’s
wealth over a period of time can be imputed as income for that period unless
the taxpayer demonstrates otherwise (Bigayan, supra, at 1619). Its purpose is
to relieve the Minister of his ordinary burden of proving a taxable source of
income. The Minister is only required to show that the taxpayer’s net worth has
increased between two points in time. In other words, a net worth assessment is
not concerned with identifying the source or nature of the taxpayer’s
appreciation in wealth. Once an increase is demonstrated, the onus lay entirely
with the taxpayer to separate his or her taxable income from gains resulting
from non-taxable sources (Gentile v. The Queen, [1988] 1 C.T.C. 253 at 256
(F.C.T.D.)).
[5]
Therefore, for the statute-barred
years, the Minister must first establish that the taxpayer made a
misrepresentation by not reporting all his income for each of those taxation
years. The Minister must then show that, in failing to report, the taxpayer did
not exercise reasonable care or was simply negligent. This involves demonstrating
a lesser degree of deficiency than intentional misconduct.
[6]
Where the taxpayer has
filed a return which is grossly inaccurate, or refuses to furnish documentation
which would enable the Minister to verify the return, the Minister may have
resort to the net worth method to determine the amount by which income is
understated.
[7]
Once the Minister has
established that there is a discrepancy between the taxpayer’s net worth at the
end of the year and his net worth at the beginning of the year plus the amount
of personal expenditures in the year (but excluding non-taxable income and
accretions to the value of existing assets), the burden is then shifted to the
taxpayer to establish that the net result should not be considered income from
a taxable source (see Bigayan v. R., 1999 CarswellNat 2288 (TCC) at
paragraph 2).
[8]
In the present case,
the appellant reported a total of $124,232 in income for the whole period from
1996 through 2002 (see paragraph 6 of the Reply to the Notice of appeal), that
is, approximately 20 percent of the total income that should have been reported
according to the appellant’s net worth for that period, as determined by the
Canada Revenue Agency (CRA).
[9]
In 1999, the appellant
was arrested and accused of "dry" conspiracy to import drugs. In
August 2003, he was incarcerated, having received a sentence of four years.
[10]
Mr. Yvon Talbot,
the auditor for the CRA, works in the organized crime department. In early
2003, he was asked to audit the appellant following the publication of a
newspaper article stating that the appellant had built a large house in Laval, Quebec. The article also stated that the appellant
was linked to drug trafficking.
[11]
As the income reported
by the appellant was relatively small and he did not have a bank account in his
name per se, Mr. Talbot explained that he did not have much choice other
than to use the net worth method. Mr. Talbot was referred to the
appellant’s then lawyer. They refused to fill in a questionnaire prepared by
the CRA. From the information he had, Mr. Talbot was aware that the
appellant had deposited his cheques in his parents’ bank accounts up until
2000, and in his girlfriend’s bank account in 2000 and subsequent years.
Mr. Talbot did not receive authorization from the appellant and the
members of his family to access their bank accounts.
[12]
In order to establish
the appellant’s net worth, Mr. Talbot proceeded on a combined basis,
taking into account the assets and liabilities of both parents of the appellant
up until 2000, and of the appellant’s girlfriend for 2000 and subsequent years.
Due to the lack of cooperation from the appellant, Mr. Talbot served
notice on the banks that they were to provide information in relation to the
appellant’s parents’ and girlfriend’s bank accounts for the period under
review.
[13]
Following this notice,
the banks gave information on the parents’ accounts as of the month of
March 1996. It appears that the balance in the parents’ account on
December 31, 1995 was higher than on March 1, 1996 by
approximately $1,600. This could have an impact on net worth as long as the
withdrawals for the months of January and February 1996 were also taken
into account. They were not. As a matter of fact, the evidence (bank books
provided by the appellant at trial) revealed that the withdrawals from those
bank accounts for that two‑month period amounted to approximately $4,500.
[14]
If the auditor had had
that information, those withdrawals would have been added to the personal
expenditures and that would have affected the net worth by increasing the
discrepancy as at March 1, 1996 to approximately $2,900 ($4,500 less
$1,600). Therefore, the fact that the information was missing was beneficial to
the appellant rather than detrimental.
[15]
Furthermore, apart from
the money in the bank accounts of the parents and the cars owned by the
appellant at the beginning of the period under review (December 31, 1995),
no other assets that were owned by them were taken into account. At trial, counsel
for the appellant said that as at December 31, 1995 the parents held
savings bonds and owned a house. Mr. Talbot said that the assets that were owned
by the appellant or his parents at the beginning of the period
(December 31, 1995) and not disposed of during the period under
review, and that were, therefore, still in their possession at the end of the
period (December 31, 2002), were not taken into account in the net
worth.
[16]
Indeed, those assets
owned at both the beginning and end of the period are of no use in determining
the existence of income during that period. The same reasoning applies for the
girlfriend. Her assets and liabilities were considered in net worth as of 2000.
All the assets that belonged to her as at December 31, 1999 and that
had not been disposed of at the end of the period were not taken into account.
If the parents or the girlfriend had savings bonds or any other property that was
cashed or disposed of during the period under review, this was not mentioned to
Mr. Talbot at the time of his audit. No further information was provided
in court in that regard. With respect to the girlfriend, the money she had in
her bank accounts as at December 31, 1999 was taken into account
($8,509 added for the year 2000 in Appendix 1 to the net worth statement and
$8,503 deducted in the adjustments, second page of the net worth statement).
[17]
Mr. Talbot also
added to the assets an amount of $50,005 for the year 1999 as an account
receivable. This amount was provided by the appellant’s father as bail for his
son pending his hearing on charges of "dry" conspiracy to import
drugs. This amount was reimbursed in 2003, that is, after the period under
review. The effect of this, therefore, was to increase the appellant’s income for
1999, but the reimbursement in 2003 could not apply so as to retroactively
cancel that increase over the period under review.
[18]
Cars and motorcycles
were an important part of the assets shown in the net worth statement. Most of
them were transferred to the appellant’s mother during the period under review
at no cost to her. Because Mr. Talbot did a combined net worth
determination, the transfer to the mother did not have any impact. The cars and
motorcycles that belonged to the appellant prior to the period under review
were included in the assets because they were disposed of during the period under
review. Mr. Talbot determined the value either from the sales contract or
according to the red book for used vehicles. When the vehicles were disposed
of, they were removed from assets, which had the effect of decreasing net worth.
In the case of the 1992 Harley, an adjustment was made by adding back in
assets the proceeds of sale for that motorcycle sold in 1998 because those proceeds
were not deposited in a bank account. However, with regard to two motorcycles
that were purchased by the appellant’s mother prior to 2000 (the 1997 Harley
and the 1998 Harley), assets were reduced by removing the two motorcycles
in the year of sale, but the proceeds amounts were not added back in making the
adjustments because the sales occurred after 2000 and Mr. Talbot did not
take into account the money going through the appellant’s parents’ bank
accounts after 2000. Therefore, these two transactions were considered in the
appellant’s net worth, to his advantage. Mr. Talbot, however, added back
in assets the small losses on each vehicle sold.
[19]
The sole vehicle that
seems to really be an issue for the appellant is the Porsche 912 (1967)
that was stolen in 1999. Mr. Talbot reduced assets by the amount paid by
the insurance company to the appellant’s then lawyer. The amount was $30,783.
However, Mr. Talbot added back that amount in 2000 as an adjustment under
"Sommes utilisées pour le Vol de la Porsche 1967 (Payé à Lebovics, Cytrynbaum,
...)" (second page of the net worth statement). Mr. Talbot testified
that he was not aware whether that amount was paid to the appellant or to his
mother.
[20]
It appears that an
amount of $30,783 was paid to the lawyers but an amount of $27,983 was paid into
the appellant’s mother’s bank account in January 2001 (Exhibit R-1, Tab
28, page 5). It would appear, therefore, that only the difference between the
amount paid by the insurer ($30,783) and that deposited in the mother’s bank account
($27,983), that is, $2,800, would have been paid to the lawyer. So the
appellant would be right to say that the adjustment in 2000 concerning the
amount paid to the lawyers with respect to the Porsche should be $2,800 instead
of $30,783. This would reduce the net worth for 2000 by $27,983. However, the
amount in the mother’s bank account should be increased by $27,983 for 2001, as
this amount was deposited in her account. The effect would be to raise net
worth by $27,983 for 2001, which cannot be done at this stage. The appeal of
the assessment cannot benefit the CRA, since the CRA cannot appeal from its own
assessment.
Furthermore, for 2001, Mr. Talbot did not include in net worth the amounts in
the mother’s account since the appellant was no longer living with his parents at
that time.
[21]
With respect to the
personal expenditures, the appellant seems to take issue with the municipal tax
amount. Mr. Talbot added that amount on the basis of the information appearing
on the city’s invoice (Exhibit R-1, Tab 23). A document from the City of Montreal shows that the taxes have been paid (Exhibit R-1,
Tab 47). The appellant says that the payment thereof could be part of the
withdrawals from the bank accounts, which have also been included in personal
expenditures. The appellant says that there could thus be a double counting of
these amounts.
[22]
Mr. Talbot denied that assertion.
First, he said he has not seen any withdrawal from the bank accounts for
payment of municipal taxes. Second, the withdrawal items in personal
expenditures all relate to small unidentified withdrawals (Exhibit R-1, Tab
15). According to the tax invoice, Mr. Talbot stated, the municipal taxes
have been paid and the payment does not seem to have come from the withdrawals
added to the personal expenditures. There thus does not appear to have been any
double counting in that regard, according to Mr. Talbot, and I agree.
[23]
There is another item
that was challenged by the appellant: an amount of $9,553 for the year 2000
that was added to net worth through the adjustments under the item "Perte
sur vente de la residence 3956 Du Commissaire (Annexe V)" ([TRANSLATION]
"Loss on sale of residence at 3956 Du Commissaire
(Appendix V)" (second page of the net worth statement). In Appendix V,
Mr. Talbot notes that the house located at 3956 Du Commissaire (the
house in Laval) was sold for $200,000 in May 2000. He determines
the total cost of the house to have been $209,553, and therefore there was a
loss of $9,553 on the sale. Mr. Talbot explained in Court that he did not
believe that the appellant suffered a loss when the house was sold. He said
that the value of the house was much higher at the time. According to the Service
de l’évaluation of the City of Laval, the value of the residence for 2003 was
$338,300 (Exhibit R-1, Tab 57).
[24]
It is my understanding
that because Mr. Talbot did not believe that there really was a loss on
the sale of the house, he added that ostensible loss to the net worth. In my
view, this amount should be struck out. Mr. Talbot had already added to
personal expenditures all the withdrawals from the bank account that were used
for the construction of the house. Mr. Talbot acknowledged that the
contract of sale was for $200,000. He met the purchaser, who did not mention
having paid more. He had no evidence that the taxpayer had actually spent more
on the house. The value that was provided by Mr. Talbot was for 2003
whereas the house was sold in 2000. I find that Mr. Talbot was not
justified in adding the amount of the loss to the net worth.
[25]
With respect to the
"retraits inexpliqués" ([TRANSLATION] "unexplained
withdrawals") in the adjustments (second page of the net worth statement),
counsel for the respondent advised the Court at the beginning of the trial that
the amounts of $30,000 for the year 1998 and $65,000 for the year 2000 were
conceded, which would thus reduce the net worth by those same amounts.
[26]
Finally, at trial, Mr.
Talbot conceded that the amounts of $2,359 for the year 2000 and $4,717 for the
year 2001 under the item "taxes municipales (condo)" in personal expenditures
should be cut in half, the reason being that those amounts were taxes on the
condominium purchased in 2000 by the appellant’s girlfriend and his mother.
Because he did not take into account the personal expenditures of the mother
for the years 2000 and later, Mr. Talbot acknowledged that the mother’s
portion should be struck out.
[27]
The appellant also
challenged the combined net worth method as such. He relied on this Court’s
decision in Francisco v. R., 2002 CarswellNat 3887, in which Judge Bowie
determined that a net worth assessment done by combining the assets and the
liabilities of two different taxpayers for the purpose of computing an estimate
of their combined incomes was not valid. Judge Bowie said at paragraphs 15 and
17:
15 In my view, there is no validity to the methodology
whereby a combined net worth assessment of the unreported income of two people
is generated, and then some part attributed to each of them, thus requiring
that they then individually disprove the amount that has been assessed against
them. . . .
. . .
17 . . . To put it another way, by combining the net worth
assessment process the Minister has given one-half the benefit of Ms.
Francisco’s decreased net worth to Mr. Kittar. It is obvious that, quite apart
from any allocation problem that might arise at the end of the process, it can
never be valid to combine the assets and the liabilities of two different
taxpayers for the purpose of computing an estimate of their combined incomes because
the effect is to assume, quite incorrectly, that any changes in the assets and
any changes in the liabilities of either one of them during the period being
assessed are shared between them. Without the need for the Appellant to lead
any evidence at all, it is evident that the assessment done by this method is
simply not valid. . . .
[28]
Judge Bowie had earlier
stated, at paragraphs 8 and 9:
8 It is trite to say that the net worth method is one of
last resort, applied where more conventional approaches cannot be used because
of a lack of reliable records. It is used most frequently in situations where
the taxpayer conducts a business that has many cash transactions and the
business records are incomplete, non-existent or unreliable. In the present
case, the Appellant was operating a business which had virtually no cash
transactions. Its records were not incomplete, although I accept Ms.
DeGregorio’s evidence to the effect that the state of the books of Aurora made it difficult to be satisfied
that all of the compensation had been properly recorded. The assessors had to
make substantial adjustments to the two loan accounts of the Appellant and Mr.
Kittar before the net worth process could begin. Nevertheless those adjustments
were ones that they were able to make and it is not at all clear to me why the
Minister felt it necessary to resort to the net worth method in the present
case. It is, of course, open to the Minister to use the net worth method of
assessment whenever he considers it appropriate: see subsection 152(7) of the Act.
9 This method of assessment has been called a blunt
instrument, and there is no question that the Minister in this case took a very
blunt instrument to this Appellant. The assessors chose to compute the net
worth assessment of the Appellant and of Mr. Kittar on a combined basis. Ms.
DeGregorio said that this was done because they lived together and shared household
expenses. Rather than do two computations of their incomes on an individual
basis, attributing part of the personal living expenses to each of them, the
assessments were made by combining the assets and the liabilities of Mr. Kittar
and the Appellant at the end of each period, and using the change in their
combined net worth, together with their combined personal living expenses, to
produce an estimate of their combined incomes for each relevant year. . . .
[29]
The appellant
questioned both the use of the net worth method (instead of using all deposits
to determine the appellant’s income) and the use of combined net worth. Mr. Talbot
explained that the deposits method was not used because he did not know whether
all transactions were recorded. With respect to combined net worth, the
appellant deposited his cheques in his parents’ and girlfriend’s bank accounts
and had access to these accounts. Up until 2000, the appellant lived with his
parents, and from 2000, with his girlfriend. It was therefore logical to
combine the assets and liabilities.
[30]
I agree with the
respondent that the combined net worth method was appropriate in the present
circumstances. Subsequent to the Francisco decision, there have been
cases in which the combined net worth method has been used and accepted by the
courts and confirmed by either the Federal Court of Appeal or the Quebec Court
of Appeal (see Morneau v. Canada, [2003] F.C.J. No. 1828 (QL), 2003 FCA
472, and Québec c. Chenel, [2005] J.Q. no 13110 (QL), 2005
QCCA 794). In Chenel, the Quebec Court of Appeal stated at paragraph 38:
38 Le ministère peut aussi, à mon avis, utiliser la méthode
dite de l’avoir net combiné lorsqu’il y a des indices qu’un contribuable
utilise l’unité familiale pour camoufler l’ampleur de ses revenus. Il est
évident que le ministère devra faire montre de grande prudence et qu’il ne
pourra consolider, pour fins de calcul, les revenus de deux époux ou conjoints
de fait que lorsqu’il y a confusion manifeste des patrimoines et des passifs et
dépenses.
[31]
In the present case,
the appellant used indifferently his parents’ or girlfriend’s accounts to do
his transactions. One of his parents’ accounts was used by him to pay all the
construction costs of the new home in Laval. The appellant
transferred almost all his vehicles to his mother for no consideration. The CRA
was certainly more than justified in using the combined net worth method,
keeping in mind the very low income reported by the appellant and his expensive
lifestyle.
[32]
The appellant also
challenged the fact that all unreported income was assessed in his hands rather
than being shared with his parents or with his brother who also lived with the
family. The parents’ combined reported income was approximately $26,000 for
each year. Mr. Talbot explained that the only possible source of income for the
parents was their pension income. Once the respondent has shown a discrepancy,
it is up to the appellant to show that the amount of that discrepancy should
not be taxable in his hands. Here, the appellant did not produce any evidence to
show that his parents had other sources of income or that part of the
unreported income should be attributed to his brother. Therefore, the CRA was
justified in including the amount of that discrepancy in the income of the
appellant, who could easily, considering his involvement in conspiracy to
import drugs, have received income from illicit activities related thereto.
[33]
Finally, the appellant
argued that the discrepancy was attributable to his lottery winnings. He filed
some sports bet tickets together with cheques he received from Loto-Québec for
the years 2001 and 2002 (Exhibit R-1, Tab 80). I added up the amounts of the
winning tickets and their cost. The total of the cheques received in 2001 was
$7,709 and the total cost of the winning tickets was $1,030. In 2002, the
appellant received a total of $59,118 and the cost of the winning tickets was
$10,092. Therefore, the net profit from his sports bets was $6,679 in 2001 and
$49,026 in 2002. I am satisfied that these net amounts are non-taxable receipts
from lottery tickets.
[34]
As for the penalties,
they are justified with respect to the remaining portion of the unreported
income. The Minister has established, first, that the appellant made a
misrepresentation attributable to negligence for the statute-barred years, and
further, that he was grossly negligent in not declaring all his income for each
of the years under review, as applicable.
[35]
The appeals are allowed
in that account is taken of the deletion from income of the amounts conceded by
the respondent (that is, $30,000 (unexplained withdrawals) for 1998, $65,000 (unexplained
withdrawals) and half of $2,359 ($1,179.50) (Municipal taxes (condo)) for 2000,
and half of $4,717 ($2,358.50) (Municipal taxes (condo)) for 2001), together
with the ostensible loss on the residence in 2000 ($9,553), the amount not paid
to the lawyers in 2000 out of the insurance proceeds for the loss of the
Porsche ($27,983), and the net lottery winnings ($6,679 in 2001 and $49,026 in
2002). I have recalculated the unreported income to be $44,117 for 1996,
$45,580 for 1997, $17,063 for 1998, $79,563 for 1999, $0 for 2000, $74,353 for
2001, and $40,407 for 2002. The penalties assessed under subsection 163(2) of
the ITA are maintained with respect to this remaining unreported income.
Signed at Montreal, Quebec, this 26th
day of May 2009.
"Lucie Lamarre"
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