REASONS FOR JUDGMENT
(Edited transcript of Reasons
given orally from the Bench
on October 31, 2008, at
Toronto, Ontario.)
[1] HONOURABLE MR. JUSTICE JORRÉ: I
will now render my decision in the appeal of Dharminder Singh Brar v. Her
Majesty the Queen.
[2] Mr. Brar appeals from an
assessment of his 2000, 2001 and 2002 taxation years where the Minister
determined his income by means of what is commonly referred to as the "net
worth method". He also appeals from gross negligence penalties imposed
pursuant to subsection 163(2) of the Income Tax Act.
[3] There were three witnesses, the Appellant,
the Appellant's spouse ― who testified briefly ― and the auditor.
[4] In the years in question the Appellant's
declared income was quite low, $849 in the 2000 taxation year, $114 in the 2001
taxation year and $2,965 in the 2002 taxation year respectively.
[5] In the course of the audit the
auditor obtained various information, including bank statements; he also
obtained, among other things, statements from the Appellant as to his expenses.
[6] The auditor's conclusion was that
the Appellant's net worth increased steadily from ― in round numbers ― about $21,000 on
December 31, 1999 to about $94,000 on December 31, 2002.
[7] After making various adjustments,
such as adding personal expenditures and deleting gifts received as well as
reported income the auditor concluded that there was a discrepancy between the
apparent income and the reported income of some $32,000 in the 2000 year,
$22,000 in the 2001 year and $46,000 in the 2002 year.
The net worth has an unusual feature
insofar as the Appellant got married in 2001 with the result that the auditor
took account of only the Appellant's net worth as of the end of 1999 and 2000,
but also took account of the Appellant and his spouse's net worth at the end of
2001 and 2002.
[8] At the
hearing I was concerned that the transition from taking account of only one
person to taking account of two persons not result in any errors; the evidence
I heard has satisfied me that subject to one correction, which I will discuss
below, that was correctly done.
[9] The auditor's method was, in effect,
the following: for the 2000 taxation year, in order to determine the change in
net worth he compared the Appellant's net worth at the end of 2000 with that of
the Appellant alone at the end of 1999.
[10] For the 2001 taxation year he
compared the net worth of the Appellant and the spouse at the end of the year
with that of the Appellant at the end of 2000. For 2002, he compared the Appellant
and his spouse's net worth at the end of the year with that of the Appellant
and his spouse at the end of 2001.
[11] For the 2002 year he also made an
adjustment which had the effect of reducing the net worth of the couple by the
net worth of the spouse on December 31, 2001.
[12] Clearly, one should compare like
with like and in 2001 the comparison should have been between the Appellant's
net worth only at the end of 2001 and his net worth only at the end of 2000.
[13] This would have been achieved, in
effect, by making in 2001 the adjustment that the auditor made in 2002, i.e.,
the reduction of the change in net worth by the amount of the Appellant's
spouse's net worth on December 31, 2001, the amount of that adjustment was
$2,412.34 and as a result the change in the net worth in 2001 should be
decreased by $2,412.34. Logically, this should produce an offsetting increase
in 2002.
[14] However, given that the court can
not increase an assessment and given that, as I will explain later, there are
no other changes in the 2002 year that I find to be necessary there will not be
an offsetting change in 2002.
[15] The Appellant's testimony was that
at the relevant times he did not work and only did odd jobs. He also testified
that at the time of his marriage in September 2001 he and his wife received
some $30,000 in gifts, later he said they received at least $37,000 in gifts.
[16] At one
point he said his parents did his tax returns, although when shown his returns
he agreed that they had been prepared by an accountant.
[17] From 2000 until some time in 2002
the Appellant lived with his parents. In 2002 he and his wife bought a home.
The Appellant was shown and agreed with the figures in the middle column of the
personal expenditure worksheet prepared by the auditor. The middle column is
the taxpayer's estimates of his expenditures. He also testified that his
parents paid most of his expenditures.
[18] He denied that he worked at V-Tech
Auto Centre during the period in issue. V-Tech Auto Centre belonged to his
mother's brother; however, he did occasionally go there and help out, although
he stated that he was never paid.
[19] The Appellant was also asked if he
went to school in the period. He was not sure but he thought that it was in
1999 that he enrolled in Sheridan College in a business management course. He
believed he attended for a year and a half. Again, he stated that this was
paid for by his parents.
[20] In 2001 he took an automotive
course which cost $3,000 and which he testified that either his parents or wife
paid for.
[21] Among the expenses added by the
auditor to those the Appellant gave the auditor were the cost of wedding photos
and the cost of his honeymoon. He testified that his mother-in-law paid for the
photos and an uncle paid for the honeymoon.
[22] In cross-examination the Appellant
did agree that he was working at the very end of 2002. The Appellant took the
position that the numbers in the net worth could not be right. He testified
that he did not have the income added by the Minister. His evidence was very
general, unspecific and vague.
[23] Except in three main areas the Appellant
led little evidence or no evidence to challenge the numbers for various assets,
liabilities and adjustments which form the basis of the net worth.
[24] One specific challenge was that he
said that no account was taken of money which his father had saved up for him
over the years and had given to him as a lump sum. He referred to his father as
saving "bonuses up".
[25] I am not
sure what this refers to and perhaps it is a reference to what used to be
called baby bonus, the family allowance, and became subsequently the Canada
Child Tax Benefit. He provided no detail as to the quantum of this lump sum
gift or when it was given. I would expect a son to remember if his father gave
him a large sum, at least in round numbers, the sum and when that occurred, at least
the year.
[26] One would also, for a large sum,
expect that it would be possible to show a corresponding bank deposit or
investment. We were provided with no details in evidence as to this.
[27] I also note that if this happened
prior to 2000 such a gift would, in any event, be reflected in the opening net
worth. I am not persuaded that any such gift was made during the period of the
net worth.
[28] There was also some mention of
gambling winnings. This was apparently made primarily at earlier stages of this
matter during the objection process and eventually documentation was produced
to the auditor.
[29] The documentation received
apparently showed gambling losses in two years and gambling gains in one year
and these were incorporated into the net worth. There was no evidence of any
other gambling winnings.
[30] Finally, the specific area of
contention by the Appellant was the question of the wedding gifts mentioned
earlier.
[31] I would first note in his Notice of
Appeal that the Appellant also alleged that he and his wife received an
unspecified amount in engagement gifts as well as an unspecified amount of
financial help from his parents in buying their house.
[32] In the course of the evidence of
this hearing I did not hear the Appellant say anything about either of those
sums alleged in his Notice of Appeal.
[33] As for the alleged wedding gifts,
the Appellant produced wedding gift cards to the auditor with an amount that
was written on the back of each card, this amount represented the specific gift
given to the Appellant and his wife by the particular guests at the wedding;
these amounts from various guests totalled some $17,186. The auditor testified
that, to use the auditor’s own words, "he gave the Appellant the benefit
of the doubt" and accepted that the couple had received the entire
$17,186. I shall return to this amount in a moment.
[34] As for the other gifts which would
bring the total to what the Appellant said was at least $37,000, it was the Appellant's
evidence that they were given to the couple in envelopes without cards and as a
result he was not able to provide any details.
[35] While there may have been some such
amounts, one would expect that if $30,000, or possibly more, were collected at
the wedding or the reception, then within a very short period of time there
would be corresponding bank deposits that could be shown in a straightforward
way through bank records. There was no such evidence tendered.
[36] There is nothing in the evidence
before me that could justify a conclusion that there was some $20,000 of
additional gifts beyond the $17,000 accepted by the auditor.
[37] Overall I do not accept the Appellant's
evidence. Considering the large amounts of money that flowed through his
accounts I cannot accept that he would have been unable to provide more details
and clearer answers and at least some documentation.
[38] During the course of cross-examination
the Appellant was shown a number of documents apparently signed by him. His
evidence was that he had never signed these documents, had never participated
in the relevant transactions. He also testified that he subsequently learned
his sister had signed them; indeed, he took the position that his sister had
created many of his problems.
[39] Whether or not he signed these
documents, nothing in them actually affects the numbers used in computing the
net worth. For example, the documents in R-2 relate to a loan application with
the Toronto Dominion Bank; that application is for a loan account numbered
9180668-01 which appears to be entirely different from the number of the TD
line of credit in the net worth which is account 136-423429.
[40] If I am
wrong in this and this is one and the same account the consequence of removing
the line of the credit shown in the net worth would be to decrease his net
worth by $19.50 in 2001 and to increase it by $7,669.69 in 2002, not a change
helpful to the Appellant.
[41] One matter
which I raised was a step in the audit methodology of adding to the assets
large withdrawals. My concern was that there be no double counting between
large withdrawals and either expenditures which are added in the adjustments to
the change in net worth or to new assets acquired in the course of the year.
[42] The auditor explained this step, as
I understand it, in the following way: first, the cutoff for large withdrawals
was that they had to be amounts in excess of $500 and in effect amounts under
that are assumed for ongoing expenses; however, for the larger amounts it is
assumed that the cash withdrawn is saved and held by the Appellant unless there
is an explanation for the use of the large withdrawals.
[43] As a general proposition I can
accept the step as a logical one in a net worth. The larger the amount of a
withdrawal, the more one would expect that one should be able to pin down the
use of it. I would add that it seems to me that this step requires great
caution.
[44] I would note also that if a large
withdrawal were used for personal expenditure which had not been included in
the expenditures added in the adjustments, the effect would be offsetting and
one would logically decrease the amount of the large withdrawal added, but
increase the expenditures, an offsetting change with no effect on the ultimate
discrepancy according to the net worth.
[45] In any event, as no specific
challenge was made to the inclusions of these amounts there is no basis on
which I can conclude that any of these amounts for large withdrawals should be
adjusted.
[46] I would like to come back to the
$17,000 in wedding gifts. Earlier I said the auditor had accepted that there was
$17,000 in gifts; however, he divided this in two on the basis that half was to
the Appellant and half to the spouse and only deducted one half of the amount.
[47] Since at that
point in time the Appellant and his spouse had common expenditures I am not
persuaded in the circumstances that it was appropriate to divide the gift in
two. It appears to be more appropriate to allow as a deduction in the
adjustments of the whole of the amount of the $17,186 in gifts as opposed to
half of them.
[48] I also
accept that there may be a small amount of additional gifts in one form or
another that the Appellant could not document at that date and it would be
appropriate to consider such an amount to be $2,000.
[49] As the Respondent correctly pointed
out, a net worth is a blunt instrument and does not produce a perfect result;
however, where, as here, there is substantial unreported income and no
possibility of using proper books and records to construct financial statements
then it is inevitable that the Minister will be obliged to use an alternative
methodology to make as good an estimate of income as possible in the
circumstances.
[50] I now turn to the penalties under
subsection 163(2). I am satisfied that there is gross negligence in failing to
report the added income.
[51] The amount of the unreported income
is very large in relation to the reported income. In 2000 a total of $849 was
reported. The Appellant's income was in fact over $31,000 higher. In 2001 the Appellant
reported $114, his income was roughly $9,000 higher. In 2002 he reported
$2,965, in fact, his income was some $46,000 higher.
[52] The Appellant could not have been
unaware of such large discrepancies. Clearly he was indifferent as to whether
the law was complied with or not. The penalties are fully justified.
[53] To sum up, the appeal will be
allowed without costs in respect of the 2001 taxation year. It will be
dismissed in respect of 2000 and 2002.
[54] For the year 2001 the reassessment
will be sent back to the Minister for reconsideration and reassessment on the
basis that the net worth discrepancy, and as a result the Appellant's income,
should be reduced by the following:
a) by
the $2,412.34 that I explained earlier relating to properly making the
transition from the Appellant being single to being married;
b) by
an additional amount of $8,593, that is to say, the other half of the wedding
gifts which the auditor recognized; and
c) by
a further amount of $2,000 in other gifts.
[55] The three items result in a total
reduction in income in the 2001 taxation year of $13,005.34.
[56] Also in the 2001 year the penalties
under subsection 163(2) that were levied should be adjusted downwards to
reflect the decrease in income resulting from the changes I have just ordered. Thank
you very much.
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