Martin v. The Queen, docket 97-3756-IT-I (Informal Procedure)

Date: 19991110

Docket: 97-3756-IT-I

BETWEEN:

LORNE W. MARTIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman J.T.C.C.

[1] These appeals are from assessments for the appellant's 1994 and 1995 taxation years.

[2] Following an investigation by the Ontario Provincial Police into alleged drug dealing by the appellant — an investigation that resulted in a conviction — material relating to the appellant's financial affairs was given to the Department of National Revenue and was analyzed by an investigator, Mr. Michael L. Towns, of that department. Correspondence between Mr. Towns and the appellant ensued. The result was the issuance of net worth assessments for the years 1994 and 1995.

[3] It is not necessary for me to repeat what has been said about net worth assessments in other cases. The statutory basis is found in subsections 152(4) and 152(7) of the Income Tax Act. The effect of subsection 152(7) has been articulated in Dezura v. Minister of National Revenue, [1948] Ex. C.R. 10; Morrow v. The Queen, 92 DTC 6380; Kerr v. The Queen, 89 DTC 5348; Chernenkoff v. Minister of National Revenue, 49 DTC 680 and Ramey v. The Queen, 93 DTC 791. The means of determining a taxpayer's income by the net worth method is necessarily somewhat arbitrary and imprecise and it is used only as a last resort.

[4] Here Mr. Towns followed the traditional method of determining (or attempting to determine) the appellant's net worth at the beginning and end of each year in question and adding to the difference his expenditures. His task was not made easier by the aggressive and combative attitude shown by the appellant, who addressed Mr. Towns in his letters as "Mr. Inquisitor" or "Mr. Freudian Special".

[5] The best way of challenging a net worth assessment is to show what one's true income is, or prove that the income is in fact what was declared in the income tax return. In the appeals from net worth assessments that I have seen this is never done. Rather, the far more unsatisfactory method is followed whereby the appellant attempts to chip or whittle away at the components of the net worth assessment.

[6] That is what Mr. Martin attempted to do here.

[7] In 1994 and 1995, the appellant declared $8,916.87 and $24,052.99 in income. In reassessing the appellant for those years, the Minister increased his income by $22,964 and $9,790 respectively.

[8] The appellant's principal arguments against the net worth assessment centred on Mr. Towns' determination of his expenditures and his assumption that they were attributable to unreported income. Specifically he made the following arguments:

(a) Mr. Towns' addition of the expenditures was arithmetically wrong. I invited him to put in some evidence to this effect, but he did not do so.

(b) Mr. Towns failed to give effect to his allegation that he had received gifts from a rich uncle, who died in 1995. The identity of this individual and the amount and timing of the gifts were not established. Generally speaking, when one attempts to challenge a net worth assessment on the basis of the generosity of a rich uncle it is a good idea to establish the identity of the benefactor and the extent of his largesse.

(c) Mr. Towns failed to give effect to a settlement of $675,574.87 that the family received in 1986 in a malpractice action against some doctors and a hospital. The appellant received about $7,000 to $8,000 and his mother received about $25,000. What happened to the rest was never made clear. His mother died in 1987 and had $25,000 in her bank account. The appellant inherited a substantial portion of her estate, although the size of the estate was not put in evidence. The appellant was the executor and stated that in that position had his mother's $25,000 "to play with".

None of these amounts was shown to be the source of the funds necessary to fund his expenditures in 1994 and 1995.

(d) Mr. Towns failed to take into account moneys that the appellant had saved from his income earned in 1987 to 1993. Apparently, he earned and declared a total of about $240,000 over those seven years. There is no evidence that he saved any of these amounts or used his savings to fund his expenditures in 1994 and 1995. In fact, the net worth assessment proceeded on the basis that at the end of 1993 and the beginning of 1994 he had no cash on hand or bank accounts other than one containing $30.99. If, as he alleges, he had substantial savings which he held in cash in a sock or beneath his mattress, he did nothing to correct Mr. Towns' assumption to the contrary and he did not establish before me that he had any such reserves of cash.

(e) Mr. Towns did not give effect to his contention that he had lottery winnings. I saw no evidence of lottery winnings.

(f) Mr. Towns failed to give effect in determining his credit card payments that formed part of his expenditures that he was paying one credit card account out of another one. He did not establish that this ever happened.

[9] In short, there is no basis upon which I can find that the appellant has demonstrated any error in the assessments, with one exception. In determining the expenditures of the appellant in 1995, Mr. Towns included $1,642.40 as a payment to Wayne Larsen Enterprises Inc., an automobile repair business. In fact, the payment appears to have been made by a cheque from Zurich Insurance Company. The expenditures for 1995 and therefore the appellant's income as assessed by the Minister should be reduced accordingly by $1,642.40.

[10] The appeal for 1994 is dismissed. The appeal for 1995 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to reduce the appellant's income by $1,642.40.

[11] There will be no order for costs.

Signed at Ottawa, Canada, this 10th day of November 1999.

"D.G.H. Bowman"

J.T.C.C.