Date: 20011010
Docket: 2000-2820-IT-I
BETWEEN:
DALE DUNCANSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
For the
Appellant:
The Appellant herself
Counsel for the
Respondent:
Caitlin Ward
Reasonsfor
Judgment
(delivered orally from the Bench on August 22,
2001at Yarmouth, Nova Scotia)
Campbell, J.
[1]
These appeals are from assessments under the Income Tax
Act (the Act) for the 1994, 1995 and 1996 taxation
years. These assessments were made using the net worth
method.
[2]
The issue is whether the Appellant understated her income in each
of the three taxation years by the amounts assessed. These
amounts were as follows:
$14,923 in 1994;
$11,160 in 1995; and
$13,700 in 1996.
It was conceded by Respondent counsel that the Minister had
erred in its assessment of the 1996 taxation year as the increase
to total income should have been $13,700 and not $13,716 as
assessed.
[3]
The net worth method was reviewed by Associate Chief Judge Bowman
in the case of Bigayan v. The Queen, [2000] 1 C.T.C. 2229
and also at 2000 DTC 1619, and I quote:
The net worth method, ..., 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 a 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.
[4]
During these years, the Appellant was the sole shareholder of
Vaughn Lake Construction Ltd. which dealt with wells, ceptics,
foundations and landscaping. Her husband was an employee of this
company. Since 1992, she has also operated a seasonal bed and
breakfast in which the corporate office was located. A trailer in
her name located on land across the street from the residence was
also rented commencing in December 1995. No income was reported
with respect to these two latter business activities.
[5]
Mrs. Duncanson stated that she relied on her accountant to
properly report on her behalf. She agreed there was an
intermingling of all business activities with personal, but
thought it would be appropriate to do this if she estimated her
personal portion of various items and eventually paid for these.
Few records, however, were kept to support this.
[6]
The Appellant and her spouse declared total income of $89,895 in
1994, $24,432 in 1995 and $17,440 in 1996. Relevant returns for
both the Appellant and her spouse were put into evidence by the
Respondent. By notices of reassessment dated April 9, 1999, the
Appellant was advised that her income tax liability had been
increased due to increases to her total income as follows:
in
1994
$15,564 increase to total income;
in
1995
$11,910 increase to total income; and
in
1996
$14,475 increase to total income.
[7]
On objection, the Minister reassessed and decreased the
assessments as follows:
in 1994 by a decrease in expenditures for a revised net worth of
$14,923;
in 1995 by a decrease in expenditures for a revised net worth of
$11,160; and
in 1996 by a decrease in expenditures for a revised net worth of
$13,716
(as noted earlier the revised net worth for 1996 should have
been $13,700 and not $13,716).
[8] A
schedule attached to the amended Reply to the Notice of Appeal
set out in detail the way in which the auditor arrived at these
figures.
[9]
Mr. Robert Diamond, an auditor with the CCRA, gave evidence on
the way he developed these figures. Since there were no source
documents for revenue, and the accuracy of figures could not be
confirmed, the net worth method was used. He explained that in
using the net worth method, he compared the Appellant's
financial statements at the beginning and end of each of the
relevant years. The net worth was determined by totalling assets
and then deducting total liabilities. From this figure the net
worth for the prior year was deducted. This showed an increase
each year of $104,702.18 in 1994, $11,383.64 in 1995 and
$9,130.87 in 1996. The auditor then added his determinations for
personal expenditures in each year at $21,930.67 in 1994,
$24,208.54 in 1995 and $22,009.26 in 1996. National averages as
determined by Statistics Canada were not used by the auditor in
establishing personal expenditures and Statistics Canada figures
were actually lower than the estimates which the auditor thought
were more reasonable in these circumstances. A deduction for
non-taxable items was then permitted. In the present case, the
amount of $21,815.24 was deducted for 1994 as a non-taxable
portion of capital gain. No deductions applied in 1995 or 1996.
This left total income as per the adjusted net worth at
$104,817.81 for 1994, $35,592.18 for 1995 and $31,140.13 for
1996. From these figures, the total reported income
for the household, meaning Dale and George Duncanson, was
deducted in each year. These final figures represented the
increases to total income in each year.
[10] Mrs.
Duncanson testified that she and her husband had a very frugal
lifestyle. They raised their own animals for food, grew much of
their own food crop, did most of their vehicle repairs. I accept
that they buy clothing second-hand, do not eat in restaurants
except when they travel occasionally and do not travel except on
business. She represented herself as a hard working individual,
but while I accept the evidence produced on this type of
lifestyle, I cannot place a great deal of weight on
guess-timates. Not all of the income was accounted for and
reported. There was little adequate documentation. The auditor
relied primarily on bank documents and the Appellant's
representations. There was a co-mingling of all corporate and
rental business activities together with personal activities, to
such an extent that makes it almost impossible to determine what
should be attributed to the Appellant as revenue and expenditures
and what should be attributed to the corporation and other
business activities. Both Visa and Mastercard were used to
purchase both personally and for the business. In slow periods
the Appellant would personally pay certain corporate accounts
such as fuel bills. Some of these personal payments she
attributed to reimbursement for any personal use of the company
vehicle. She employed the same method for other bills (accounts)
such as telephone bills in the corporate name. The Appellant felt
she must have reported rental income from her trailer but she was
unsure if she had done so through the company or personally.
[11] Mrs.
Duncanson had many issues going on during this time and although
she did her best under the circumstances, she admitted difficulty
in keeping appropriate records for the various activities. There
was no reliable, coherent separation of the business and personal
expenses. Items in the Appellant's personal account related
to business and vice-versa. This makes the task of reconstructing
the true incomes of the Appellant and the business monumental, if
not impossible.
[12] The
evidence was also inadequate in establishing many items relating
to personal expenditures. Loans to the Appellant's son made
via payments to his lawyer were undocumented and no precise
figures were provided in this respect through either the
testimony of the Appellant or her son. The Appellant claimed
entire amounts for vehicle insurance through the company returns,
although there would undoubtedly be some personal use of this
truck. I accept the Appellant's evidence that the personal
element was limited, but it is realistic to attribute some
portion for personal use. In addition, there were discrepancies
between the Appellant's daughter's testimony on property
tax payments on the residence owned by the Appellant but occupied
by the daughter and what the bank statement revealed.
[13] It was
reasonable for the net worth method to be used by the auditor as
the basis for an assessment in these circumstances. To my way of
thinking, it is an unsatisfactory method and is very capable of
producing inaccurate results. However, when proper records are
not kept or are otherwise unavailable, it is sometimes the only
"last resort" method that can be used — however
imprecise the result may be. The best way to counter an
assessment based on the net worth method is for the taxpayer to
provide evidence of what the taxpayer's actual income is. The
Appellant was not able to do so in this case. Income was not
accounted for and was not properly documented. Other cases have
noted a second, less satisfactory, method to challenge such an
assessment and that is to prove that on a proper and complete net
worth basis the assessments are inherently wrong. Again, the
Appellant has not been successful in disputing the auditor's
figures calculated by using this method. As was stated in the
Bigayan case, piecemeal tinkering with a net worth
assessment is inherently unsatisfactory.
[14] Although
I have sympathy for the Appellant's position, she
accomplished little else here except for piecemeal tinkering
which was not sufficient to overcome the Minister's
reassessments based on the net worth method. The Appellant's
appeal in the matter of Dale Duncanson is therefore
dismissed.
Signed at Ottawa, Canada, this 10th day of October 2001.
"D. Campbell"
J.T.C.C.
COURT FILE
NO.:
2000-2820(IT)I
STYLE OF
CAUSE:
Dale Duncanson and
Her Majesty the Queen
PLACE OF
HEARING:
Yarmouth, Nova Scotia
DATE OF
HEARING:
August 20 and 22, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge Diane Campbell
DATE OF ORAL
JUDGMENT:
October 10, 2001
APPEARANCES:
For the
Appellant:
The Appellant herself
Counsel for the
Respondent:
Caitlin Ward
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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