Citation: 2007TCC679
Date: 20071107
Docket: 2001-4347(IT)G
BETWEEN:
KEVIN BLACK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 19 and 20, 2007 and Reasons
for Judgment
delivered orally from the bench on September 20, 2007,
in Fredericton,
New Brunswick
and edited from the transcript on November 7, 2007
REASONS FOR JUDGMENT
Rossiter, J.
Introduction
[1] This matter is
the result of an arbitrary net worth assessment by the Respondent against the
Appellant for the 1995 to 1998 income tax years since the Appellant failed to
respond appropriately, if at all, to the requests and inquiries from the
Respondent for documentation and information to establish his income for the
years in question.
[2] The Respondent's
net worth assessment has attributed to the Appellant's income as follows:
1995 - $22,316 With $4,246 income
reported by the Appellant
1996 - $56,631 With $15,104 income
reported by the Appellant
1997 - $92, 797 With $14,400 income
reported by the Appellant
1998 - $79,430 With $24,250 income
reported by the Appellant
[3] The Appellant
appealed the various assessments or reassessments by the Notice of Appeal dated
December 4, 2001 with the Respondent replying by Notice of Reply on February
1st, 2002.
Issues
[4] As agreed to by
the parties at the beginning of the hearing, there are really two (2) issues:
1. Whether the Appellant's income
as reported is understated in each of the years in question, 1995 through to
1998, both years inclusive;
2. Did the Minister appropriately
assess a gross negligence penalty with respect to the Appellant for 1995 through
to 1998, both years inclusive?
Facts
[5] The Appellant's
Notice of Appeal lays out certain assertions of fact and the Respondent's reply
in paragraph 11 lays out the assumptions of fact relied upon by the Respondent.
[6] I will not
review these in detail here, other than to provide a thumbnail sketch of the
factual background:
1. The Appellant did file 1995
through to 1998 income tax returns for income levels as previously mentioned;
2. The Appellant is alleged to
have acquired a certain number of assets over the relevant years, either
directly or through others, including real estate, motor vehicles, motorcycle,
snowmobile, seadoos, trailers, which were in excess of his visible and alleged
actual earnings;
3. The Appellant carried out
these acquisitions by himself or through family members when he was a
beneficial owner of the assets in questions (that was what was alleged by the
Respondent);
4. The assets are listed in
schedule "A" of the Reply and include:
1995 Karavan trailer;
1996 Karavan trailer;
A 1996 seadoo;
A 1997 Yamaha snowmobile;
A 1996 seadoo (2nd);
A 1997 Dodge Ram 250, Super Cab with plow;
A 1997 Wells Cargo trailer;
A 1997 Harley Davidson motorcycle;
A Thompson boat and trailer Carrera 245;
A house at King
George Highway;
A 1988 Corvette Convertible;
A 1985 Pontiac Trans-Am and Lumina (they were not
applicable).
Law
[7] The law in this
matter is fairly clear. Net worth assessments are performed by Revenue Canada where
there is a concern that a taxpayer's reported income does not reflect the
reality of his or her situation.
[8] The basic
principle according to Vern Krishna, the Fundamentals of Canadian Income Tax
Law, Carswell's edition, Toronto, 2002, at page 152 is that income is equal to the
difference between a taxpayer's wealth at the beginning and at the end of the
year, plus any amount consumed by the taxpayer during the year. This method of
calculation is very basic and does not take into account any monies borrowed by
the taxpayer, which would have a diminishing effect on the net worth estimated
by CRA.
[9] Reference is
made to subsections 152(7) and 152(8) of the Income Tax Act. I will not
review those in detail. Suffice to say that they are significant in terms of
giving power to the Respondent to deal with circumstances such as we have here.
[10] The burden of
proof regarding a net worth assessment based upon the assumptions made by the
Minister is with the taxpayer, to establish that the factual findings upon
which the Minister based the assessment were wrong.
[11] The adage that
the taxpayer knows best the facts relating to a situation is equally true in
situations of net worth assessment.
[12] The degree of
proof required for the rebuttal of the ministerial presumptions need only be prima
facie.
[13] The taxpayer must
show that the impeached assessment is an assessment which ought not to have
been made, that is to say, he must establish facts upon which it can be
affirmatively asserted that the assessment was not authorized by the taxing
statute or which bring the matter into such a state of doubt that, on the tax
principles, the liability of the Appellant must be negated.
[14] The true facts
may be established of course by direct evidence or probable inference. The
Appellant may adduce facts constituting a prima facie case which
remains unanswered, but in considering whether this has been done, it is
important not to forget, if it be so, that the facts are, in a special degree
if not exclusively, within the Appellant's control.
[15] Even if the
Minister is free to choose the method of arbitrary assessments such as net
worth assessments, he is nonetheless obliged to disclose the basis of the
formulation used.
[16] Given that the
net worth assessment is based on "the best evidence available", and
absent evidence from the taxpayer that the assessment is incorrect, the latter
will be "valid and binding".
Analysis
[17] The Respondent
referred to the case of HSU v. R., a Federal Court of Appeal case of
July 24, 2001, which I am bound to follow. I bring your attention specifically
to paragraphs 23, 24, 25, 34, 35 and 36 - they are well worth reading, but I
will not read them at this particular time, suffice it to say that they are
certainly authoritative in the case which we are dealing with today.
[18] The comments in
that particular case are particularly applicable to the case at bar as it
appears to me from the evidence that notwithstanding the efforts of the
Respondent, the Appellant has done nothing to ensure a full, complete and
correct audit.
[19] Why the Appellant
would ignore the requests for information and documentation from CRA to support
his position is beyond comprehension. He is only hurting himself and putting a
greater burden upon himself as time progresses.
[20] Now at the Tax
Court of Canada here, the burden of disproving the assessments and
reassessments lay squarely with the Appellant. It is necessary to consider
whether the Appellant successfully discharged that onus.
[21] Here, the
Appellant tried to discharge the onus, the burden, by assuming that the onus of
showing that one or more of the assumptions relied upon by the Minister were in
error.
[22] Before I get into
the specifics of this particular case, I must comment on the issue of
credibility.
[23] Credibility is an
issue in this particular case, as it is in most net worth cases. The Federal Court
of Appeal has confirmed in the 2006 case of Berube v. Her Majesty the Queen,
[2006] DTC 6354, that a Tax Court judge is correct in assessing the taxpayer's
credibility when the latter introduced his or her own facts in an attempt to
prove that the Minister erred in the assessment.
[24] In assessing the
credibility of the Appellant, I look to a variety of factors.
Number one (1), his demeanour and presentation on the
witness stand.
Number two (2), the sureness with which he presents
his evidence.
Number three (3), his organization and preparation of
his case and evidence, recognizing the fact that he was without legal counsel.
Number four (4), whether there is corroboration,
either in viva voce evidence or documentary evidence, to substantiate
his evidence.
Number five (5), any conflicts in this evidence or
other information before the Court.
Number six (6), any contradictions that there may be
in his evidence.
Number seven (7), how the Appellant stands up to and
responds to cross‑examination.
Number eight (8), whether his story has a ring of
truth or a ring of untruth.
Number nine (9), whether the best evidence available
has been produced and if not, why.
Number ten (10), the reasonableness and the
practicality of the explanation offered by the Appellant in relation to his
course of conduct, and finally how important facts come out. Do they come out
through cross-examination only or by the Appellant's own volition?
These
factors plus others are things which the judge looks to in assessing the
credibility of a witness.
[25] In dealing with
this arbitrary assessment by the Respondent, let me start by saying that
although it is recognized as a crude and inaccurate and basic manner of doing
an income assessment to use the net worth method described by Mr. Currie,
I believe that the method used, although the real instrument available to him
in the circumstances is one which is inaccurately described, and I say this for
the benefit of CRA as opposed to the benefit of the Appellant. It is really
erroneous to describe what the Respondent is doing as a net worth assessment
used to determine the income of the taxpayer.
[26] Described as a
statement of comparative net worth is a wrong description. It does not describe
net worth.
[27] When the assets
are described, they do not reflect their true value as of the dates the net
worth purportedly speaks. It reflects the value of the asset at a particular
day and keeps them at that same value throughout the entire period for which
the net worth is being calculated.
[28] The use of this
phrase is not in keeping with any normal accounting, business, academic
terminology and is an inaccurate description of what the Respondent is doing.
[29] What the
Respondent should describe it as doing is a statement of changes in net assets
on a cash basis. This is what the Respondent is preparing, and this is what
they are using to arrive at the annual income figure of the taxpayer.
[30] The title does
not change the method of what the Respondent is doing, it is only an inaccurate
description of what they are doing. The Respondent should change the
description of their efforts accordingly in the future.
[31] In dealing with
the assets used by the Respondent in determining the net worth of the
Appellant, and therefore his income from 1995 through to 1998 inclusive, I have
the following to say:
[32] The method used
by the Respondent, although arbitrary, was reasonable and logical in the
circumstances of the case. This approach is a direct result of the Appellant's
refusal to disclose financial information and documentation.
[33] I accept the
evidence of Mr. Currie in relation to the evaluations in all items where he
received confirmation from a third party, such as cost, and this includes:
A 1995 Karavan trailer;
A 1996 Karavan trailer;
A 1996 seadoo (1st);
A 1996 seadoo (2nd);
A 1997 Yamaha snowmobile;
A 1997 Harley Davidson.
[34] I also accept the
evidence of Mr. Currie regarding the values of the boat, the Corvette and the
house, as all were reasonable in the circumstances.
[35] On the boat and
the Corvette, he relied upon information from third parties who were involved
in the business and professionals in their area.
[36] I believe he had
a legitimate concern in relation to the arm's length nature of the transaction
in relation to the Corvette and the resulting value attributed to the same by
the Appellant for tax reasons.
[37] Turning to the
particular assets:
1995
Karavan trailer – 1996 Karavan trailer – 1996 seadoo (1st) and 1997 Yamaha
snowmobile – 1996 seadoo (2nd) – 1997 Wells Cargo trailer
[38] All of these
items were admitted by the Appellant, or there was no evidence adduced
sufficient to rebut the assumptions put forth by the Respondent, and as a
result they stand in relation to the comparative net worth (and I do not like
using that, the comparative net worth, but we will for the rest of this
appeal), so the comparative net worth statement put forth by the Respondent.
1997 Dodge Ram 250 truck
[39] In terms of the 1997 Dodge Ram 250 truck, I believe the Appellant has
met the burden of this particular item by his evidence, but most importantly by
the exhibit A-9.
[40] This shows a
purchase price of $45,497.72, all inclusive, less a trade-in of $21,495 plus
cash of $8,000 for a net of $18,989.28.
[41] The comparative
net worth statement (and again I do not like using that phrase to describe what
was done) should be amended accordingly.
[42] It is only
unfortunate the Appellant did not bring forth this information to the
Respondent initially, and then this issue would not even be on this plate.
A
1997 Harley Davidson motorcycle
[43] The evidence of
the Respondent is that it is an asset of the Appellant because of intelligence
from police authorities and because the Appellant was seen operating it.
[44] The Respondent
confirmed exhibits A-5, A-6 and A-7 in their own evidence. These Exhibits were
confirmed by the Respondent, coupled with the evidence of the Appellant, are
all consistent.
[45] The Appellant
admitted driving the bike about 10 times. You cannot drive a bike without a
valid licence, and he had a valid bike licence, but yet third parties confirmed
who purchased the bike. I believe the Appellant met the burden upon this
particular item and it should be removed from the comparative net worth
statement.
The
Thompson boat
[46] I find the
Appellant has not met the burden on this particular item. He drove it consistently,
countless times. He was known at the marina as the owner of the boat. Exhibit
A-10 were not accepted or confirmed by the Respondent, and therefore little
weight can be attached to it unless corroborated by the purchaser and the
purported registered owner, Paul Black.
[47] The Appellant has
the control of the best evidence and it is his obligation to produce this
evidence to rebut the assumptions presented. He had ample time to do so, and
he did not do so to his own detriment. This item therefore remains in the
comparative net worth statement.
750
King George Highway
[48] The Appellant
says he had this property put in his name for $1 from his brother Paul so he
could obtain financing on a purchase in British
Columbia.
[49] In fact, he never
formerly applied for financing or a mortgage, all he did was go to a bank and
he presented a picture of the house to the banker.
[50] The house was put
in his name and was conveyed back to Paul Black some two years and five months
later and some 18 months after he received notice from CRA that he was under
investigation for income tax.
[51] Why the time
delays? Why the unusual time lines? Why not just tell the banker: "I have
some property I can use as collateral if necessary?" Why not show some
sign of the $50,000 he had in cash? If the house is only worth $50,000, why not
show the $50,000 Canada Savings Bond or some other instrument of that nature if
he is looking for collateral?
[52] No real
satisfactory reasonable explanation was provided by the Appellant. No evidence
was produced by the Appellant regarding a variety of items in relation to the
house. Who occupied the house and when? Who paid the hydro bill and in whose
name was the hydro bill? Who paid the telephone bill and in whose name was the
telephone bill? Who paid the cable T.V. bill? Who paid the property tax bill?
Who paid the insurance bill? Who collected the rents, if any? Who paid for snow
removal? Who would cut the grass? Who conducted all these items?
[53] The burden was on
the Appellant and he has not satisfied me, on a balance of probabilities, on
this particular item, and it shall remain in the comparative net worth
statement.
Expenses attributable to the Appellant
[54] The Appellant offered no explanation regarding personal expenses
attributable to him save and except that he thought that they were too high,
and he paid one half of the rent in British Columbia on the property occupied
by him, his common law spouse and his mother-in-law.
[55] 50 % of the rent
alone is $7,200 a year or $600 a month. There was no other information. This
does not even include heat, light, telephone, sewer, water, cable television.
The information provided by the Respondent was reasonable and the source of
this information was very reliable, Statistics Canada. Again, the Appellant had
the opportunity of discharging the burden but had not provided any information
with respect to his living expenses or personal expenses during the period of
time in question, save and except the rent.
[56] He has failed to
discharge the burden on this particular point, and I accept the evidence of the
Respondent.
[57] On credibility, I
found the Appellant to be blunt and direct. He admitted items when I believe he
knew he had no choice. He could certainly have better prepared himself and
better presented his case. He could have and should have provided corroborative
evidence.
[58] He wanted CRA to
prove their case when in fact he had to disprove their case. He had a cavalier
attitude. I accepted the Appellant's evidence when corroborated by third
parties, but otherwise found it self-serving.
[59] He should have
made a greater effort to defend his claim. It was there to defend with some
time and attention, and all of this goes to his credibility.
[60] I would dismiss
the appeal subject to the adjustments I have mentioned, that is the adjustment
with respect to the Dodge Ram truck to reflect the purchase price less the
trade-in, less the $8,000, leaving a net of approximately $19,000, and I direct
that it be adjusted accordingly in the comparative net worth, as well as the
removal of the Harley Davidson motorcycle.
[61] As to the gross
negligence penalty assessed by the Respondent, I agree that the circumstances
are such that the gross negligence penalty is applicable.
[62] The standard of
living of the Appellant was inconsistent it appears with his level of income as
shown. The discrepancies of incomes were quite significant. The lack of
cooperation in the investigation was to his own detriment. His failure to
disclose was to his own detriment. There appeared to be an attitude of
avoidance at all costs, and the penalty is appropriate under the circumstances.
[63] Judgment accordingly.
Signed at Ottawa, Canada,
this 7th day of November, 2007.
"E. P. Rossiter"
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