Date: 20010822
Docket: 2001-411-IT-I, 2001-412-GST-I
BETWEEN:
SUBODH MATHUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1]
This is an appeal under the Income Tax Act for the 1997
taxation year.
[2]
By Notice of Assessment dated November 26, 1999 the Minister of
National Revenue (the "Minister") initially assessed
the Appellant's income tax return for the 1997 taxation year
and in doing so included unreported income of $17,268.
[3]
The Appellant served on the Minister a Notice of Objection dated
December 6, 1999 with respect to the 1997 taxation year.
[4]
By Notices of Reassessment dated December 19, 2000, the Minister
reassessed the Appellant's 1997 income tax return and
decreased the Appellant's total income by $4,430.
[5]
This is also an appeal under the Excise Tax Act for the
period July 1, 1994 to June 30, 1997.
[6]
By Notice of (Re)Assessment numbered 00000002061 and dated
September 22, 1999, the Minister assessed the Appellant for
under reported GST payable for the quarterly reporting periods
from July 1, 1994 to June 30, 1997 as follows:
|
Adjustments to GST
|
|
$7,408.52
|
|
Adjustments to ITC
|
|
6,779.93
|
|
Total adjustments
|
|
$14,188.45
|
|
Penalty
|
|
3,704.17
|
|
Other Penalty
|
|
3,318.81
|
|
Interest
|
|
2,787.39
|
|
Amount owing
|
|
$23,998.82
|
[7]
The Appellant served on the Minister a Notice of Objection dated
December 6, 1999 with respect to the quarterly reporting
periods from July 1, 1994 to June 30, 1997.
[8]
By Notice of (Re)Assessment numbered 04BP-116795725 and dated
October 31, 2000 the Minister reassessed the Appellant to
recalculate his under reported GST payable for the quarterly
reporting periods from July 1, 1994 to June 30, 1997 as
follows:
|
Adjustments to GST
|
|
$4,954.99
|
|
Adjustments to ITC
|
|
3,732.49
|
|
Total adjustments
|
|
$8,687.48
|
|
Penalty
|
|
1,805.17
|
|
Other Penalty
|
|
0
|
|
Interest
|
|
1,277.80
|
|
Amount owing
|
|
$11,770.45
|
[9]
With respect to both appeals, the following pleaded assumptions
of fact were admitted by the Appellant (paragraph 6 of the Reply
to the Notice of Appeal):
6. (b) the Appellant was
the owner of Roses Cafe Restaurant (the
"Business");
(c)
the Business operated as a restaurant business;
[10] With
respect to the Income Tax Act appeal the following
assumptions were admitted:
7. (e) during the period
under appeal, the Appellant and Mrs. Jayne Mathur were
married and had two young children;
(f)
the Appellant and Mrs. Jayne Mathur reported $18,777 and $14,454,
respectively, as net income in 1997 taxation year;
(i)
the understated amounts were determined by the net worth method
[attached as Schedule A to the Reply];
(j)
the Respondent computed the Appellant's unreported income on
the basis of a net worth analysis whereby the Respondent
calculated the increase in the assets of the Appellant and
Mrs. Jayne Mathur, during the fiscal periods ended
December 31, 1996 and December 31, 1997, and assumed that
any increase in the assets of the Appellant and Mrs. Jayne Mathur
not attributable to some source represented unreported income of
the Business that was appropriated by the Appellant (a copy of
the Statement of Personal Net Worth is attached as
Schedule "A");
[11] With
respect to the Excise Tax Act appeal the following
assumptions were admitted:
6. (e) at all relevant
times, the Appellant was a registrant under Part IX of the
Excise Tax Act (the "Act");
(f)
at all relevant times, the Business had a December 31 business
year-end for GST purposes;
(g)
at all relevant times, the Appellant made taxable supplies in the
course of his commercial activities;
(h)
at all relevant times, the Appellant was required to collect and
remit the GST on his taxable supplies on a quarterly basis;
[12] With
respect to the Income Tax Act and the Excise Tax
Act appeals the following assumption was not accepted:
7. (d) the Appellant's
Business was predominantly a cash business;
[13] With
respect to the Income Tax Act appeal the following
assumptions were not accepted:
7. (g) in reporting income
for the 1997 taxation year, the Appellant did not include all of
the income received in those years;
(h)
the income of the Appellant during the 1997 taxation year was
understated by the amount of $12,838;
(k)
the Appellant and Mrs. Jayne Mathur's personal expenditures
in 1997 were not less than $33,762 (a copy of the Statement of
Personal Expenditures (was) attached as Schedule
"B").
[14] With
respect to the Excise Tax Act appeal the following
assumptions were not accepted:
6. (i) the Appellant
did not keep adequate books and records regarding his
Business;
(j)
the Minister established that during the relevant periods, the
Appellant did not report all his taxable supplies in his GST
returns, and calculated a total discrepancy as follows:
Period
Increase/
Increase/
Net
ending
(Decrease)
(Decrease)
Increase/
to GST to
ITC's
(Decrease)
95/09/30
$312.10
$668.69
$980.79
95/12/31
(32.91)
668.69
635.78
96/03/31
10.69
668.69
679.38
96/06/30
1,070.93
668.70
1,739.63
96/09/30
966.91
264.43
1,231.34
96/12/31
710.41
264.43
974.84
97/03/31
1,311.74
264.43
1,576.17
97/06/30
605.12
264.43
869.55
Total
$4,954.99
$3,732.49
$8,687.48
(The Appellant agreed with the calculation but did not accept
that there was a discrepancy).
THE APPELLANT'S POSITION
[15] For the
Income Tax Act appeal the Appellant in his Notice of
Appeal stated the following:
REASONS FOR INCOME TAX APPEAL FOR
1997
The appellant submits that the "net worth" method
used by the Minister is incorrect and unwarranted. The net worth
method is generally applied when the books and records are
inadequate or non-existent. The appellant maintained a reasonably
good set of books and records for 1997 and filed the tax returns
from these records. The Minister made the decision to proceed
with a "net worth" assessment on the basis of two major
erroneous observations made by the auditor:
- An alleged discrepancy between
recorded sales and reported sales for the year 1996.
- A series of
"NS" entries on the cash register tapes.
"NS" stands for "Non Sale". The auditor
failed to appreciate the reasons for frequent "NS"
entries, suspected sales being diverted and not reported and
proceeded with a net worth approach.
The auditor failed to
substantiate the reason for employing the net worth when the
books and records were adequate.
The initial proposal showed the
following discrepancy:
1995
1996
1997
Total
$13,092 $17,577 $29,895
$60,564
However, after further
discussions and representations, the discrepancy was revised and
reassessed as follows:
1995
1996
1997
Total
$0
$0
$17,268 $17,268
Upon objection, the 1997
discrepancy was revised further to $12,838.
It is submitted that the net
worth method, based on estimates and assumptions, is
inappropriate and incorrect when the actual information is
readily available. The appellant has reported all
sales and maintains that there is no unreported income
whatsoever. It is the appellant's view that an alleged
discrepancy of $60,564, revised to $17,268, and then changed to
$12,838, all based on "net worth method", has no
ultimate validity. These are simply conjectures.
While maintaining the above
position, the appellant provides the following supporting facts
which, among other reasons, may have caused the discrepancy:
- Excludes calculations of GST
liability cumulatively from July 1, 1995 to June 30, 1997,
including interest.
- Loans from sister and sister-in-law
- see submission dated July 19, 1999.
- Overstatement of food and
transportation $1,300 and $2,000 respectively.
- Income of the Child -
Diya and the amount owing to the child not allowed -
$2,400.
- Overstatement of personal auto and
disallowance of 50% use and capital allowance on 50%.
- Disallowed 1997 trade accounts
payable which was reflected in the profit and loss statement as
expenses - $2,081. This is incorrect treatment.
- General overstatement of other
personal expenditures.
[16] For the
Excise Tax Act appeal the Appellant in his Notice of
Appeal stated the following:
REASONS FOR OBJECTION - GST
1. The GST payable for 1996 and 1997
was calculated by the appellant from the sales journals and cash
register tapes (2 tapes). These amounts reflect the actual
amounts collected by the appellant.
2. Similarly, the appellant prepared a
working paper showing the input tax credits claimable in 1996 and
1997.
3. Based on the working papers
referred to in (1) and (2) above, the taxpayer arrived at the GST
liability for 1996 and 1997.
4. CCRA accepted these figures as
calculated by the appellant and adjusted them
for:
(a) a
reasonableness test and
(b)
GST related to an automobile "disposed of" in 1996 for
$14,029.
5. There should be no further
adjustment of GST under 4(a) above as the calculations referred
to in (1) and (2) above are based on actual records maintained by
the appellant. The adjustment for a "reasonableness
test" is unwarranted in light of (1) and (2) above.
6. The taxpayer received approximately
$6,000 each in "tips" during 1996 and 1997. These
amounts are not subject to GST.
7. The inclusion of GST for the
automobile as per 4(b) above should be reduced by 50% as the
automobile continued to be in "mixed
use", personal and business, and the business
portion is estimated to be 50%.
Based on the facts and reasons above, the GST liability is as
follows:
1996
1997
Total
GST balance
unpaid
$
379
$2,695
$3,074
ITC adjustment for over
claim
2,675
1,057
3,732
Automobile - deemed change
of use -
50%
491
n/a
491
$3,545
$3,752
$7,297
In conclusion, it is submitted that CCRA adjustment for GST
and ITC above is without justification and therefore,
incorrect.
JURISPRUDENCE AND LEGISLATION
[17] In
Ramey v. The Queen, 93 DTC 791 (T.C.C.) at page 793 Judge
Bowman (as he then was) described the net worth method as
follows:
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.
[18] According
to subsection 152(4) of the Income Tax Act, the Minister
may reassess a taxpayer at any time within the normal
reassessment period, which is extended if some conditions occur.
This provision must be read with subsections 152(7) and (8).
The former provides that the Minister is not bound by the
information supplied by the taxpayer; the latter purports a
presumption of validity of the assessment or reassessment. Thus,
the burden is on the Appellant to prove that the reassessment is
incorrect. Judge Lamarre stated this rule as follows in
Dowling v. The Queen, 96 DTC 1250 (T.C.C.) at p. 1251:
The Appellant has the burden of showing that the basis of the
Minister's assessment is wrong or that there are errors in
certain items of the assessments [...] Therefore, when a taxpayer
is faced with a reassessment based on a net worth calculation, he
can either try to present evidence enabling the Court to
determine his real net income or he can seek to prove that the
net worth assessment is wrong.
[19] A net
worth assessment for GST purposes is authorized by
subsection 299(1) of the Excise Tax Act and
reads:
299. (1) The Minister is not bound by any return, application
or information provided by or on behalf of any person any may
make an assessment, notwithstanding any return, application of
information so provided or that no return, application or
information has been provided.
[20] The net
worth assessment under subsection 299(1) of the Excise Tax
Act is almost identical to the powers of the Minister to
issue a net worth assessment under subsection 152(7) of the
Income Tax Act. With respect to GST cases, it has been
established that the onus is on the Appellant to show that on the
balance of probabilities the assessment that imposes the
liability of tax is in error. With respect to the
Appellant's onus, Christie A.C.J.T.C.C. (as he then was)
stated in SDC Sterling Development Corp. v. Canada, [1997]
G.S.T.C. 103 (T.C.C.) at page 103-5:
The onus is on the Appellant to show that the reassessment is
in error. This can be established on a balance of probabilities.
Where the onus lies has been settled by numerous authorities
binding on this Court. It is sufficient to refer to two judgments
of the Supreme Court of Canada in this regard: Anderson
Logging Co. v. The King, [1925] S.C.R. 45 and Johnston v.
M.N.R., [1948] S.C.R. 486.
[21] However,
in auditing an appellant, the auditors of the CCRA have "a
duty to perform audits which meet a minimum standard of
reliability".[1] If the audit meets a minimum standard of reliability,
the onus is on the Appellant to show that the assessment is in
error.
THE BURDEN OF PROOF ANALYSIS
[22] The
Appellant in order to be successful must refute the net
worth/reasonableness test calculations and conclusions of the
Respondent's audit. This means the Appellant must address on
a line-by-line, conclusion-by-conclusion basis with precise
evidence, not broad based global or vague assertions without
specifics.
THE APPELLANT'S EVIDENCE
[23] The
Appellant called three witnesses: The primary witness was the
Appellant himself, followed by a waitress who worked in the
Appellant's restaurant and the CCRA auditor.
[24] The
Appellant's evidence on his own behalf was not specific but
generalized in the sense of what his practice and procedure was
in the operation of his restaurant. His evidence did refer to his
simplified recording practices (Exhibit A-1). The Appellant,
when cross-examined on the exhibits filed that were prepared by
the Appellant's wife, the Appellant was not overly
specific.
[25] At the
commencement of the audit, the Appellant admitted to the auditor
his returns for GST and ITCs were estimates only and that only
after contact with the CCRA auditor did the method change.
[26] With
respect to the net worth income tax assessment the
Appellant's evidence responses to personal expenses such as
food consumption was suspect. In direct examination he said he
never ate in the restaurant. On cross-examination it became
apparent he ate in the restaurant on a regular basis. Further,
with respect to the family food consumption, the Appellant's
estimate of food costs for a family of four ($40.00/week) was
questionable in view of the Statistics Canada statistics cited by
the auditor that food for a family of four for one year was
averaged at $7,000.
[27] The
Appellant during the audit changed his position in relation to
personal loans. Originally his position was that he did not have
personal loans. Later he took the position there were personal
loans from his sister, sister-in-law and daughter. The
Appellant's evidence at trial in relation to these purported
loans was not supported by documentary evidence or evidence from
other witnesses.
[28] In
particular the Appellant asserted that his wife borrowed money
from his sister-in-law to buy food for his family. This evidence
is difficult to accept in the absence of other supporting
evidence given the Appellant's business and family
assets.
[29] The
Appellant's statements about the number of no sale
"NS" entries on the restaurant cash register tape for
each day is suspect when this evidence is compared with the
evidence of the waitress witness about limited NS entries per
patron billing. The Appellant's agent's submission that
the NS entries were a non-issue in this litigation is not
sustainable - there was a continuous NS access to the cash
register that leaves the Court in doubt as to the veracity of the
tape. Further, the Appellant's response about cash receipts
from restaurant services provided to external festivals and
events leaves a doubt whether most or all monies were deposited
in bank accounts.
[30] The one
potential witness who was not called although present for part of
the hearing was the Appellant's wife. She looked after the
Appellant's restaurant books and records. She also structured
the Appellant's responses to the auditor's inquiries. The
Appellant's wife was a party with respect to a purported
undocumented personal loan that formed a significant part of the
audit. Another potential significant witness not called was the
Appellant's daughter who could have clarified what actually
happened to her wages - did she receive them, did she not
receive them, if she was paid in clothing or in money?
THE WAITRESS' EVIDENCE
[31] The
waitress' evidence was brief and directed to how patron's
billings took place and what happened in terms of access to the
restaurant's cash register.
THE AUDITOR'S EVIDENCE
[32] The CCRA
auditor was questioned in terms of why and how the audit took
place and what was the result of the audit. The auditor conducted
a net worth audit because his initial inquiries showed:
(i)
the cash register tapes for the restaurant had a high number of
no sale (NS) entries. This lead the auditor to a conclusion the
restaurant tapes were unreliable;
(ii)
the Appellant's restaurant sales report for GST returns did
not correlate with the Appellant's income tax returns;
(iii)
the payroll journal and other documents took several months to
produce and the payroll and salary numbers were irreconcilable;
and
(iv) the
1997 income tax return was not provided in a timely manner.
[33] In the
CCRA net worth assessment several items were estimated including
personal expenditures for food. The auditor indicated a family of
four from Statistics Canada figures required more than $40/week
for food.
[34] The
auditor also considered the question of wages paid to a daughter
of the Appellant for services rendered in the restaurant and
whether the daughter actually received the wages or whether such
wages were outstanding as a loan. He concluded the transaction
was not outstanding in an accounting sense.
[35] In
relation to transportation expenses the Appellant was allowed
vehicle expenses for one vehicle. However, during the course of
the audit, the Appellant asked that 50% of the vehicle expenses
be allowed for a second vehicle. No transportation logs were
presented to the Court nor evidence presented to support the
assertion. The auditor in the net worth assessment adopted the
original approach used by the Appellant in his income tax return
and allowed the expenses only for the first vehicle.
[36] The
Appellant's agent directed questions to the auditor about the
auditor's view of the Appellant's trustworthiness. In the
view of the auditor, the Appellant was seen as an honourable
individual, not deceitful or dishonest. These attributes do not,
however, confer credibility or affirm reliability of the
Appellant's position. What is needed is clear
uncontroverted specific evidence to rebut the net worth findings
and conclusions. The many enumerated deficiencies left the
auditor in doubt and indeed at the conclusion of this case the
deficiencies left the Court in doubt as to the strength and
reliability of the evidence.
CONCLUSION
[37] There is
a distinction between negotiation practices and procedures
between the taxpayer and the taxing authority officials during
the audit, proposal, reassessment and objection stages and the
practices and procedures with the onus and evidentiary burden in
an appeal under the Income Tax Act and the Excise Tax
Act in the Tax Court of Canada.
[38] The
global overview questioning and the generalized answers of the
Appellant's evidence and the questions directed by the
Appellant's agent to the CCRA auditor were more reflective of
an audit negotiation than the giving of precise direct evidence
to rebut the CCRA net worth assessment.
[39] The
extensive questioning by the Appellant's agent of the auditor
as to why and how the audit was completed as well as the inquiry
into the net worth conclusion was extensive. I conclude the
auditor's net worth assessment was unambiguous,
straightforward and credible.
[40] I
conclude the Appellant's records produced by the
Appellant's wife were somewhat suspect to the point they were
not reliable. The strength of the exhibits could not be tested as
the Appellant's wife was not tendered as a witness. The
Appellant has not met the onus incumbent upon him to show the net
worth assessment was wrong.
[41]
Throughout the trial the Appellant's agent said every penny
of the Appellant's income had been accounted for. This
conclusion on the evidence, however, does not necessarily follow.
The frailties of the evidence overwhelm the Appellant's
assertion. I conclude the assessments under the Income Tax
Act and the Excise Tax Act are unassailed.
DECISION
[42] Both
appeals are dismissed.
Signed at Ottawa, Canada, this 22nd day of August 2001.
"D. Hamlyn"
J.T.C.C.
COURT FILE
NO.:
2001-411(IT)I
STYLE OF
CAUSE:
Subodh Mathur and
Her Majesty the Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
August 7, 8 and 9, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge D. Hamlyn
DATE OF
JUDGMENT:
August 22, 2001
APPEARANCES:
Agent for the
Appellant:
K. E. Koshy
Counsel for the
Respondent:
Yves Parent
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, CanadaCOURT FILE
NO.:
2001-412(GST)I
STYLE OF
CAUSE:
Subodh Mathur and
Her Majesty the Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
August 7, 8 and 9, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge D. Hamlyn
DATE OF
JUDGMENT:
August 22, 2001
APPEARANCES:
Agent for the
Appellant:
K. E. Koshy
Counsel for the
Respondent:
Yves Parent
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
2001-411(IT)I
BETWEEN:
SUBODH MATHUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal
of Subodh Mathur (2001-412(GST)I) on August 7, 8 and
9, 2001 at Ottawa, Ontario, by
the Honourable Judge D. Hamlyn
Appearances
Agent for the
Appellant:
K.E. Koshy
Counsel for the
Respondent:
Yves Parent
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1997 taxation year is dismissed in accordance with
the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 22nd day of August 2001.
J.T.C.C.
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