97-3593(IT)I
BETWEEN:
JOAO P. MELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeal of Luso Construction Ltd.
#97-3573(GST)I on May 13, 1999 by
the Honourable Judge Lucie Lamarre
Appearances
Agent for the
Appellant:
Antonio Silva
Counsel for the
Respondent: Susan Tataryn
JUDGMENT
The
appeals from the assessments made under the Income Tax Act
for the 1991, 1992 and 1993 taxation years are dismissed in
accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 28th day of
May 1999.
J.T.C.C.
97-3573(GST)I
BETWEEN:
LUSO CONSTRUCTION LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the
appeals of Joao P. Melo #97-3593(IT)I on May 13,
1999 at Ottawa, Ontario by
the Honourable Judge Lucie Lamarre
Appearances
Agent for the
Appellant:
Antonio Silva
Counsel for the
Respondent: Susan Tataryn
JUDGMENT
The appeal
from the assessment made under Part IX of the Excise Tax
Act, notice of which is dated September 2, 1997, and bears
number 04BP-114556921 is dismissed in accordance with the
attached Reasons for Judgment.
Signed at Ottawa, Canada, this 28th day of
May 1999.
J.T.C.C.
Date: 19990528
Docket: 97-3573(GST)I
BETWEEN:
LUSO CONSTRUCTION LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
97-3593(IT)I
JOAO P. MELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre, J.T.C.C.
[1] These appeals
were heard on common evidence. The appeals of
Joao P. Melo ("appellant") were from
assessments under the Income Tax Act
("Act") for his 1991, 1992 and 1993 taxation
years whereby the Minister of National Revenue
("Minister") increased the appellant's total income
by the amounts of $19,405, $25,530 and $61,847 respectively. The
breakdown of these adjustments is as follows:
|
|
1991
|
1992
|
1993
|
|
|
|
|
|
|
Under-reported business income
|
$6,477
|
$19,817
|
$39,453
|
|
Personal expenses paid by
corporation
|
4,876
|
5,713
|
1,442
|
|
|
Underreported employment income
|
8,052
|
0
|
20,952
|
|
Total adjustments
|
$19,405
|
$25,530
|
$61,847
|
[2] The Minister used
the net worth method to determine the under-reported business
income, in accordance with subsection 152(7) of the
Act.
[3] The appeal of
Luso Construction Ltd. ("appellant corporation") was
from an assessment with respect to goods and services tax
("GST") issued by the Minister on September 2, 1997 for
the period from January 1, 1991 to July 31, 1993 and bearing the
number 04BP-114556921. The Minister assessed the appellant
corporation in respect of failure to remit GST in the amount of
$1,776.65 and on the basis that it over-claimed input tax credits
in the amount of $9,983.31. The Minister also assessed interest
and penalties. The appellant corporation's liability was
based on the assessment of its unreported income calculated using
the net worth method, in accordance with section 299 of the
Excise Tax Act. A summary of the net worth statements is
attached to these reasons for judgment.
[4] The only issue
before me is whether the Minister was right in including for the
taxation year 1992 an amount of $15,922.80 under the item
"Loan to Manuel Melo" in the personal assets
portion of the net worth statement.
[5] It is not
contested that the appellant corporation was controlled by the
appellant during the period in issue. Mr. Dino Eliopoulos, a tax
auditor for Revenue Canada, reviewed the net worth statements. He
explained that he first looked at the financial statements of the
appellant corporation. With respect to the shareholder's loan
account, he asked the appellant corporation for a breakdown of
that account and he analyzed all the credits and debits in that
account. For that purpose, he was provided by the appellant
corporation with a copy of its bank account passbook with the
Bank of Nova Scotia and a declaration of trust (Exhibit R-1). Mr.
Eliopoulos realized that a total amount of $15,922.80 had been
withdrawn from the appellant corporation's bank account in
1992, as summarized in Exhibit A-1, and was not in fact
accounted for in the shareholder's loan account or anywhere
else in the books of the appellant corporation. Mr. Eliopoulos
testified that during the audit, he had been told that the money
withdrawn by the appellant from the appellant corporation's
account would have been loaned to a certain Manuel Melo. This
amount of $15,922.80 was therefore recorded by the auditor in the
net worth statement under the item "Loan to Manuel
Melo", in the appellant's personal assets.
Mr. Eliopoulos said that the item under which it was
recorded is not relevant. Indeed, it could just as well have been
shown as an unidentified personal asset as, in fact, it was
earned by the appellant corporation and transferred out of its
bank account to the appellant. As a result, Mr. Eliopoulos
included that amount of $15,922.80 in the personal assets of the
appellant in the 1992 taxation year.
[6] Mr. Antonio
Silva, an accountant and the agent for both appellants, explained
that the $15,922.80 withdrawal was in payment of a bonus that was
declared by the appellant corporation in favour of the appellant
in 1990 but only paid in 1992. He said this is why the $15,922.80
was not accounted for in the shareholder's loan account but,
according to him, was reallocated to the accrued liability
account. He based this assertion on Exhibit R-2 in which there is
a journal entry for the appellant corporation reading as
follows:
LUSO CONST LTD.
RECONCILIATION OF SHAREHOLDER'S
ACCOUNT:
...
BAL AT 31 JUL 91
1991-92 ENTRIES:
...
General-Journal:
...
7. To reallocate from Accrued
Liabilities
(17,247.08)
8. Withdrawals from savings account
#2416123
17,247.08
[7] The discrepancy
between the amount of $15,922.80 and the amount of $17,247.08
referred to above was not explained. However, Mr. Silva said that
at the beginning of the 1990 year, the appellant corporation had
an accrued liability account of $30,000 and that the payment of
$15,922.80 was made to reduce that account.
[8] Mr. Silva is
therefore of the opinion that the amount of $15,922.80 should not
appear in the assets of the appellant corporation in the net
worth statement as, according to him, "it was no longer a
collectible asset for the appellant corporation".
[9] I fail to see the
merit of such an argument. I understand that it was only at the
hearing that the fact that the appellant corporation had declared
a bonus to the appellant in 1990, which was not paid at that
time, was brought out for the first time. Mr. Silva did not
produce any corporate resolution nor any specific evidence to
corroborate the fact that such a bonus was declared in 1990, that
the appellant corporation had an accrued liability account of
$30,000 in 1990, and that this account had been reduced to
reflect the payment of the bonus. Furthermore, even if such had
been the case, it would in my view change nothing as regards the
net worth statement.
[10] The amount of
$15,922.80 was included in the personal assets of the appellant
not in the business assets of the appellant corporation. The
Minister estimated the appellant's undeclared business income
using the net worth method. This amount of $15,922.80 was in fact
received by the appellant and rightly included in his personal
assets. The only known source of business income for the
appellant is the income from the appellant corporation. The
appellant corporation is therefore equally taxable on that amount
as it must have earned it in order to have been able to transfer
it to the appellant.
[11] The appellant and the
appellant corporation have the burden of showing on a balance of
probabilities that the net worth statement is wrong. The
appellant and the appellant corporation have not shown that by
the inclusion of that amount in the personal assets of the
appellant, the appellant corporation was taxed twice with respect
thereto. Indeed, there was insufficient evidence presented before
me to justify deleting that amount from the personal assets in
the appellant corporation's net worth statement.
[12] I will conclude with
the following passage from the decision of Bowman J. of this
Court in Ramey v. The Queen, 93 DTC 791 at p.
793:
...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.
[13] The appeals are
dismissed.
Signed at Ottawa, Canada, this 28th day of
May 1999.
J.T.C.C.
SCHEDULE 1
LUSO CONSTRUCTION
Period Ending July 31, 1993
NET WORTH STATEMENT
1990
1991
1992
1993
ASSETS
Business Assets
Cash on
Hand
$0.00
$0.00
$0.00
$0.00
Bank
Account
0.00
0.00
0.00
0.00
Inventory
0.00
0.00
0.00
0.00
Accounts
Receivable
0.00
0.00
0.00
0.00
Land
0.00
0.00
0.00
0.00
Building at
UCC
0.00
0.00
0.00
0.00
Equipment at
UCC
0.00
0.00
0.00
0.00
Business portion of auto at
UCC
0.00
O~00
0.00
0.00
Goodwill
0.00
0.00
0.00
0.00
C.E.C.
Account
0.00
0.00
0.00
0.00
Total Business
Assets
$0.00
$0.00
$0.00
$0.00
Personal Assets
Cash on
Hand
$
100.00
$
100.00
$
100.00
$ 100.00
Bank Account #I -TD Bank
0220688
573.08
4,243.85
1,707.70
1,989.36
TD Bank 108004
(Sonia-DTR)
484.93
396.27
410.66
418.05
Investments
0.00
0.00
0.00
0.00
Safety Deposit
Box
0.00
0.00
0.00
0.00
RRSP's
0.00
0.00
3,400.00
6,800.00
Personal Automobile -
Isuzu
0.00
0.00
14,643.76
14,643.76
Auto
#2
0.00
0.00
0.00
0.00
Cookware
1.00
1,988.92
1,988.92
3,017.02
Household
Furnishings
1.00
2,047.00
3,219.26
3,219.26
Residence
75,000.00
75,000.00
75,000.00
75,000.00
Shareholder Loan-Luso
Construction
(198.16)
4,753.23
0.00
24,099.00
Common Shares-Luso Construction
Lt
10~00
10.00
10.00
10.00
Loan to Manuel
Melo
0.00
0.00
15,922.80
15,922.80
Unidentified
Assets
2,809.68
5,309.68
Hermes Investment
Club
3,800.00
Personal Assets
Assessed
$75,971.85
$88,539.27
$119,212.78 S154,328.93
Appeals adjustment-unidentified
asset
(2,500.00)
double counted as Hermes
Total Personal Assets
Reassessed
$75,971.85
$88,539.27
$119,212.78 $151,828.93
Total
Assets
$75,971.85
$88,539.27
$119,212.78 $15I,828.93
LIABILITIES
Business Liabilities
Bank
Overdraft
$
0.00
$
0.00
$
0.00
$ 0.00
Trade Accounts
Payable
0.00
0.00
0.00
0.00
Sales Tax
Payable
0.00
0.00
0.00
0.00
Loan
Payable
0.00
0.00
0.00
0.00
Mortgage
Payable
0.00
0.00
0.00
0.00
Total Business
Liabilities
0.00
0.00
0.00
0.00
Personal Liabilities
Bank
Overdraft
$
0.00
$
0.00
$
0.00
$ 0.00
Credit Card Balance
#1
0.00
0.00
0.00
0.00
Credit Card Balance
#2
0.00
0.00
0.00
0.00
Mortgage Payable-personal
res.
33,178.94
30,650.42
28,023.43
0.00
Personal Car
Loan-Isuzu
0.00
0.00
11,673.94
7,714.18
Total Personal
Liabilities
$33,178.94
$30,650.42
$39,697.37
S 7,714.18
TOTAL
LIABILITIES
$33,178.94
$
30,650.42
$39.697.37
$ _71714.18
NET WORTH (total assets less
total
$42,792.91
$57,888.85
$79,545.41
$144,114~75
liabilities)
NET WORTH of prior
year
$42,792.91
$57,888.85 $ 79,545.41
INCREASE (decrease) in Net
Worth
$15,095.94
$21,626.56
S 64~569.34
Schedule 1 - Joao
JoaoMelo
12/31/97
REVISED NET WORTH STATEMENT
31-Jul-90
31-Dec-90
31-Dec-91
31-Dec-92 31-Jul-93
ASSETS
Business
assets
-
-
-
-
-
Personal Assets
Personal Assets assessed
75,971.85
66,770.52
98,806.95
116,710.00
154,328.93
Adjustments:
Unidentified asset is
double counted as
Hermes
(2,500.00)
TOTAL
ASSETS
75,971.85
66,770.52
98,806.95
116,710.00
151,828.93
LIABILITIES
Business liabilities
-
-
-
-
-
Personal liabilities
33,178.94
32,054.16
43,577.22
36,865.61
7,714.18
Net
Worth
42,792.91
34,716.36
55,229.73
79,844.39
144,114.75
Net Worth of Prior
Year
42,792.91
34,716.36
55,229.73
79,844.39
Increase or (Decrease) in Net
Worth
(8,076.55)
20,513.37
24,614.66
64,270.36
COURT FILE
NO.:
97-3573(GST)I and 97-3593(IT)I
STYLE OF
CAUSE:
Luso Construction Ltd. v. The Queen
and
Joao P. Melo v. The Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
May 13, 1999
REASONS FOR JUDGMENT BY:
The Honourable Judge Lucie Lamarre
DATE OF
JUDGMENT:
May 28 1999
APPEARANCES:
Agent for the
Appellant:
Antonio Silva
Counsel for the
Respondent: Susan Tataryn
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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