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Citation: 2007TCC143
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Date: 20070416
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Docket: 2006-1502(IT)I
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BETWEEN:
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MARINA JANE CARLIN,
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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] During the 2002 and 2003 taxation years, the Appellant and her common law husband, Richard E. Nelson, lived at 1042 Habgood Street in White Rock, British Columbia (the "Property").
[2] The Property was owned by Stoppa Holdings Ltd. ("Stoppa").
[3] Stoppa was a Limited Company incorporated under the B.C. Company Act.
[4] When the Appellant filed her income tax return for the 2002 and 2003 taxation years, the only income reported by her consisted of social assistance payments in the amount of $6,120.00 and $4,080.00 received from the Province of British Columbia for the 2002 and 2003 taxation years respectively.
[5] Richard E. Nelson filed his 2002 and 2003 income tax returns and reported net income of $22,809.00 and $18,204.00 for the 2002 and 2003 taxation years respectively.
[6] Mr. Jason McCrea, an auditor employed by the Canada Revenue Agency (the "CRA"), carried out a net worth audit of the Appellant. When he completed his net worth audit Mr. McCrea determined that there was a net worth discrepancy between the revenue reported by the Appellant and her common law spouse for the 2002 and 2003 taxation years. The calculations used by Mr. McCrea were as follows:
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2002
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2003
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Income per adjusted
net worth
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$49,089.67
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$70,503.30
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Deduct total revenue
reported - Appellant
- Spouse
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$ 6,120.00
$27,749.00
$33,869.00
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$ 4,080.00
$18,668.00
$22,748.00
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Discrepancy per net worth unreported income
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$15,220.67
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$47,755.30
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[7] By letter dated January 20, 2005, Mr. McCrea wrote to the Appellant. In his letter Mr. McCrea stated that the CRA would make the following adjustments to her taxable income: (Exhibit A-3):
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Net Rental Income:
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Year
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Reported on T1 (line 126)
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Corrected Amount
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Adjustment
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2002
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$0.00
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$22,920.00
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$22,920.00
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2003
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$0.00
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$22,920.00
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$22,920.00
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Other Income:
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Year
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Reported on T1 (line 130)
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Corrected Amount
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Adjustment
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2002
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$0.00
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$10,000.00
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$10,000.00
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2003
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$0.00
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$10,000.00
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$10,000.00
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Net Business Income:
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Year
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Reported on T1 (line 135)
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Corrected Amount
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Adjustment
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2002
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$0.00
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$0.00
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$0.00
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2003
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$0.00
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$14,835.30
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$14,835.30
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[8] By Notice of Assessment dated March 10, 2005 the Minister of National Revenue (the "Minister") reassessed the Appellant. The Reassessments were based upon the proposal as outlined by Mr. McCrea in his letter dated January 20, 2005.
[9] The Appellant filed Notices of Objection and the Minister issued a Notification of Confirmation. The Appellant then filed Notices of Appeal to the Court.
B. ISSUE
[10] The issues are whether:
(a) the Minister properly included the following rental income received from the Property in the 2002 and 2003 taxation years:
Rental Income
2002 $22,920.00
2003 $22,920.00
(b) the Minister properly included the income received from personal services provided by the Appellant in the 2002 and 2003 taxation years:
Other Income
2002 $10,000.00
2003 $10,000.00
(c) the Minister properly included the income received by the Appellant from the Business in the 2003 taxation year:
Business Income
2003 $14,835.30
C. ANALYSIS AND CONCLUSION
(a) Rental income
[11] Richard Nelson, the Appellant's common law husband, acted as the Appellant's agent and testified on behalf of the Appellant and on his own behalf. Mr. Nelson testified that he and the Appellant paid rent of $810.00 per month to Stoppa Holdings for the upstairs portion of the Property. He testified that the Appellant collected $700.00 rent per month for the downstairs portion on behalf of Stoppa and paid this amount to Stoppa. The shares of Stoppa were owned by the Appellant's parents. A letter from Mr. and Mrs. Stoppa indicated that Stoppa received rental income from the rental of the Property. The letter also stated that all of the rent that was paid to Stoppa was deposited in Stoppa's bank account. The letter said that the rental payments were used by Stoppa to pay mortgage payments and property taxes levied on the property (Exhibit A-1).
[12] Based on the testimony of Mr. Nelson including the cross-examination and the information contained in Exhibit A-1, I am not convinced that the evidence establishes that the Appellant received rental income of $22,920.00 from the Property in each of the 2002 and 2003 taxation years. I have concluded that the rent paid for the Property was received by Stoppa.
(b) Other Income
2002 $10,000.00
2003 $10,000.00
[13] Mr. McCrea testified that the Appellant told him that she had received $10,000.00 per year from a tenant by the name of Noel Joberg. Mr. McCrea said that he understands that the money was paid to the Appellant for helping to manage Mr. Joberg's money and for driving Mr. Joberg to various places during the years in question since Mr. Joberg did not have a driver's licence.
[14] There was also a reference to the fact that in 2002 Mr. Joberg bought a computer for the Appellant at a cost of $4,250.00. (See Exhibit R-1, Tab 3, page 2.)
[15] Mr. Nelson maintained that in the 2002 and 2003 years Mr. Joberg did not give the Appellant $10,000.00 per year. Mr. Nelson stated that the Appellant managed money for Mr. Joberg. A letter dated November 7, 2005 from Mr. Joberg confirms this point (Exhibit A-2). Mr. Joberg said in his letter, "In 2002 and 2003 Marina Carlin acted as a financial guardian".
[16] I am not satisfied on the evidence produced that the Appellant received $10,000.00 in 2002 and 2003 from Mr. Joberg.
[17] However, as is indicated above Mr. Joberg provided $4,250.00 to the Appellant to enable her to purchase a computer. I believe that the payment of $4,250.00 should be included in the Appellant's income for the 2002 taxation year.
(c) Business Income
[18] Mr. Nelson admitted that the Appellant earned income from a business of designing websites for escorts. Mr. Nelson said that the business was started as a hobby by the Appellant and eventually became a valuable business. Mr. Nelson said that the Appellant received the following amounts from this business:
2002 $15,220.67
2003 $14,835.30
[19] Counsel for the Respondent argued in the alternative that if I find that any of the amounts as outlined above are not income, the Reassessment should still be upheld because of the net worth calculations prepared by Mr. McCrea.
[20] I am not prepared to accept this alternative argument for the following reasons:
1. The Minister used specific amounts as outlined in the auditor's letter of January 20, 2005 to reassess the Appellant. The Minister did not use the amounts contained in the net worth discrepancy in preparing the Reassessments. (See Exhibit A-3.)
2. Net worth calculations are arbitrary and not always accurate. In this connection I cite the following court decisions:
In Ramey v. The Queen, 93 DTC 791, Justice Bowman (now Chief Justice Bowman) said at paragraph 6 and I quote:
... 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. Mr. Boudreau stated that Mr. Allan Ramey's records were inadequate, that he had a history for years prior to 1981 of being assessed on a net worth basis and that his business, that of owning coin operated machines, such as pinball machines and slot machines of various types, was cash based and was therefore difficult to audit. ...
In Bigayan v. The Queen, [2000] DTC 1619 Justice Bowman said at paragraph 2:
The net worth method, as observed in Ramey v. The Queen, 93 DTC 791 (T.C.C.) is a last resort to be used when all else fails. Frequently it is used when a taxpayer has failed to file income tax returns or has kept no records. It is a blunt instrument, accurate within a range of indeterminate magnitude. It is based on an assumption that if one subtracts a taxpayer's net worth at the beginning of a year from that at the end, adds the taxpayer's expenditures in the year, deletes non-taxable receipts and accretions to value of existing assets, the net result, less any amount declared by the taxpayer, must be attributable to unreported income earned in the year, unless the taxpayer can demonstrate otherwise. It is at best an unsatisfactory method, arbitrary and inaccurate but sometimes it is the only means of approximating the income of a taxpayer.
I wish to emphasize Chief Justice Bowman's comments from Bigayan when he referred to net worth calculations and said "It is at best an unsatisfactory method, arbitrary and inaccurate ...".
3. Mr. Nelson also testified that the Appellant suffers from medical problems. Based on the testimony of Mr. Nelson and the exhibits that were submitted by Mr. Nelson, I have concluded that the Appellant was confused when she provided information to Mr. McCrea regarding rental income and payments made to her by Mr. Joberg.
[21] After carefully considering the testimony and the exhibits I have concluded that the Appellant should include the following amounts in her income:
2002 $4,250.00
$15,220.67 *
2003 $14,835.30 *
[22] If the Appellant is successful in future years in designing and selling websites, I urge her to maintain proper accounting records and include any profits received from this business in her income.
[23] The appeals are allowed, without costs, and the Minister is to make the adjustments referred to above.
Signed at Vancouver, British Columbia, this 16th day of April 2007.
Little J.
* (Note: During the hearing, Mr. Nelson admitted that these amounts were received by the Appellant.)
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