Date: 19990614
Docket: 97-3519(IT)I
BETWEEN:
TATIANA SEMERIKOV,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
97-3520(IT)I
FEOKTIST SEMERIKOV,
Appellant
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Watson, D.J.T.C.C.
[1] These appeals
relate to the Appellant, Tatiana Semerikov's 1992 and
1994 taxation years and to the Appellant, Feoktist
Semerikov's 1992, 1993 and 1994 taxation years. They are
husband and wife. The appeals were heard on common evidence in
Edmonton, Alberta on June 3, 1999 under the informal procedure.
In reassessing Feoktist Semerikov for these years, the Minister
of National Revenue (the "Minister") revised his
taxable income as follows:
Taxation
Increase
(Decrease)
Revised Taxable
Year
In Taxable
Income
Income
1992
$38,411
$57,494
1993
(656)
11,744
1994
81,071
94,657
Total
$118,826
$163,895
[2] In reassessing
Tatiana Semerikov, the Minister advised her that she was in
receipt of a Child Tax Benefit ("CTB") overpayment in
the amount of $2,149.75 for the base taxation year 1992 and
$3,004.92 for the base taxation year 1994 because of the revised
family net income.
[3] The reassessment
in relation to Feoktist was made applying the "net
worth" method under section 152(7) of the Income Tax
Act (the "Act"). It provides:
"The Minister is not bound by a return or information
supplied by or on behalf of a taxpayer and, in making an
assessment, may, notwithstanding a return or information so
supplied or if no return has been filed, assess the tax payable
under this Part."
[4] In so reassessing
Feoktist, the Minister made the following assumptions of
fact:
"(a)
in the 1992, 1993, and 1994 taxation years, the Appellant owned
and operated a farm in the vicinity of Plamondon, Alberta;
(b)
the 1992, 1993, and 1994 taxation years, the Appellant owned a
50% share of Trak Reforestation Inc. ("Trak");
(c)
the 1992, 1993, and 1994 taxation years, the Appellant earned
business income from a logging operation;
(d)
in the 1992 and 1993 taxation years, the Appellant received
benefits from Trak in the amounts of $8,027.00 and $2,000.00
respectively (the "Benefits");
(e)
the Benefits were made up of amounts reimbursed by Trak for
travel and automobile expenses that were deducted by Trak and by
the Appellant against his business income from the logging
operation;
(f) in reporting
income for the 1992 and 1993 taxation years, the Appellant failed
to report the Benefits;
(g)
the income of the Appellant, from all sources, for the 1992 and
1994 taxation years was understated by the amounts of $31,384.67
and $81,071.37 respectively;
(h)
the understated amounts referred to in subparagraph 6(g) herein
were determined by the net worth method (a copy of the Statement
of Personal Net Worth is attached as Schedule "A");
(i) as a result
of the net worth determination method referred to above, the
Appellant's income for the 1993 taxation year was reduced by
$656.43, as shown in the attached Schedule A; and,
(j) as a result
of the net worth determination method referred to above, the
Appellant's income for the 1992 and 1994 taxation years was
increased by $39,411.67 and $81,071.37 respectively, as shown in
the attached Schedule A."
[5] At the hearing of
the appeals, the agent for the Appellants admitted paragraphs (a)
to (c) and (h) to (j) and denied paragraphs (d) to (g).
[6] The issues to be
decided are:
(a) whether Feoktist's
income from all sources for the 1992 and 1994 taxation years
was understated by the amounts of $31,384.67 and $81,071.37, as
calculated by the net worth method;
(b) whether Feoktist received the
Benefits in his capacity as a shareholder of Trak or,
alternatively, in his capacity as an employee of Trak in the 1992
and 1993 taxation years; and
(c) whether Tatiana is
entitled to Child Tax Benefit payments in excess of the amount
allowed by the Minister for the 1992 and 1994 taxation years.
[7] The Appellants
have the onus of establishing on a balance of probabilities that
the Minister's reassessments were ill-founded in fact and in
law; they must adduce sufficient or reliable evidence justifying
a conclusion that they have, on a balance of probabilities, shown
an error on the part of the Minister.
[8] Bowman, J. of
this Court, in the case of Anthony A. Ramey v. The Queen,
93 DTC 791, at page 793, stated as follows:
"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."
[9] In the case of
Luay Zalzalah v. The Queen, 95 DTC 5498, Heald, D. J.
states at page 5499:
"The plaintiff frankly acknowledged that he did not keep any
books or records during the taxation years here under review.
This matter was also raised in the proceedings before the Tax
Court of Canada where Lamarre Proulx, TCJ stated
The Minister cannot and should not allow business deductions that
cannot be proven by documentary evidence. That would bring the
administration of the Income Tax Act in the sphere of
arbitrariness.
I agree with that view of the matter. Likewise, in the case of
Holotnak v. The Queen, Cullen, J. considered the
requirements of section 230 and stated as follows:
Section 230 of the Act requires taxpayers to keep adequate
books and records. "Adequate" is not defined but it
would seem that these records should support whatever the
taxpayer is claiming for tax purposes.
The onus of proof that the expenses were incurred for the purpose
of earning income is on the taxpayer (Wellington Hotel
Holdings Limited v. M.N.R. 73 DTC 5391). Specifically, with
regard to assessments, the onus is on the taxpayer to prove that
the Minister's assumptions and assessments are wrong
(Strayer, J. in Schwarz v. The Queen, 87 DTC 5274) quoting
from Johnston v. M.N.R., [3 DTC 1182] [1948]
S.C.R. 486). The Schwarz case (supra) also involved
a situation where the plaintiff's purchases were not
supported by vouchers. As Strayer, J. points out, the onus is on
the taxpayer to prove wrong the M.N.R.'s reassessment as the
taxpayer is in a better position to prove what actually
happened."
[10] Feoktist had two
sources of income in the years at issue as follows: the small
family owned enterprise, Trak, co-owned by himself and
Dimitri Scherbakov, his brother-in-law, which operated on a
seasonal basis from May to November and a logging operation from
November to April carried on by himself alone.
[11] Feoktist is unable to
read English, so he left all the accounts, records and books with
his two accountants; there were two separate accountants, one
looking after the Trak operation, the other his logging and
personal accounts. He signed his income tax returns but was
unable to read them before doing so.
[12] In the operation of
Trak, both he and his brother-in-law used personal funds when in
need, for the purposes of Trak's expenses, especially during
the periods in the bush, looking after Trak's 10 to 20
employees. As he explained in his testimony, he and Dimitri
Scherbakov worked as "partners".
[13] In late 1995 or early
1996, when the Appellants were audited by Revenue Canada, he
referred the auditors to his two accountants. At the hearing
there was no evidence from the two accountants, books, ledgers or
other supporting documentation provided by the Appellants. The
only witness was Feoktist, one of the Appellants; he relied on
his memory for the details of what went on during the years 1992,
1993 and 1994 and understandably his testimony was mostly vague
and incomplete rather than reliable.
[14] Taking into
consideration all of the circumstances, including the testimony
of the Appellant and the Revenue Canada auditor, the admissions
and documentary evidence provided by the Respondent, in the light
of the well-established case law, I am satisfied that the
Appellants have failed in their onus of establishing on a balance
of probabilities that the Minister was ill-founded in fact
and in law in his reassessments.
[15] Accordingly, the
appeals are dismissed.
Signed at Ottawa, Canada, this 14th day of
June 1999.
D.J.T.C.C.
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