BETWEEN:
ROBERT
HOLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Kamloops,
British Columbia
on December 1, 2015)
Graham J.
[1]
The Minister of National Revenue believes that
Robert Hole was operating a marijuana grow-op in his 2003, 2004 and 2005
taxation years. Mr. Hole did not report any income from the sale of marijuana
in his tax returns for those years. The Minister projected the income that the
Minister believed Mr. Hole would have earned from growing marijuana in 2003,
2004 and 2005 and calculated the GST that should have been collected thereon in
Mr. Hole's reporting periods from January 1, 2003 to December 31, 2005. The
Minister reassessed Mr. Hole to add that income to his income and for the
related GST. The Minister also assessed gross negligence penalties on both the
income and the GST. Through a processing error, the penalties were not applied
to the 2005 income tax. Mr. Hole has appealed both the income tax and the GST
reassessments and the related penalties.
[2]
The Minister also believes that Mr. Hole failed
to report income that he earned as a logger. The Minister reassessed Mr. Hole
to include that alleged unreported logging income in his 2003, 2004, 2005 and
2006 tax years. The Minister also assessed Mr. Hole for the related GST in his
reporting periods from January 1, 2004 to December 31, 2005. The Minister
assessed gross negligence penalties on both the income and the GST. Again, due
to a processing error, the income tax penalties were only applied to Mr. Hole's
2003 and 2004 tax years. Mr. Hole has appealed the inclusion of the logging
income, the imposition of the GST and the related penalties.
Grow-Op Income
[3]
Turning first to the alleged grow-op. The RCMP
conducted a search of Mr. Hole's property in Clearwater, British Columbia in
August of 2005. They found marijuana plants in various stages of growth in two
locations. The first location was a machine shop on the property. The second
location was in the forest. The machine shop contained 90 mature marijuana
plants and 144 clones that were still in the vegetative stage of growth. The
forest location contained 172 mature plants. As a result of the search, Mr.
Hole was convicted of production of a controlled substance and of possession of
a controlled substance for the purpose of trafficking.
[4]
Sergeant Craig McMillan, of the RCMP, was called
by the respondent as an expert witness on grow-ops. Sgt. McMillan had prepared
an expert report for Mr. Hole's criminal trial. He tendered that report as his
expert report. He also provided significant evidence on how grow-ops worked.
[5]
Kelly Plato was an auditor with the Canada
Revenue Agency's special enforcement program. He was assigned to audit Mr. Hole's
2003 to 2006 tax years. The respondent called Mr. Plato as a witness. I found
Mr. Plato to be credible. Mr. Plato explained that he had used information from
Sgt. McMillan's expert report to project Mr. Hole's income from his grow-op for
2003, 2004 and 2005. I will describe these projections as a “yield analysis”. A
yield analysis is an alternative method of determining income that is sometimes
used by the Minister when the Minister believes that a taxpayer was operating a
grow-op and that the taxpayer's records are an inadequate means of verifying
the taxpayer's income from the grow-op. In simple terms, a yield analysis
determines income using four variables: the number of plants in each crop, the
yield of dried marijuana that will come from each plant, the frequency in which
plants are harvested and the price at which the marijuana is sold.
[6]
There are two primary ways in which a taxpayer can
challenge a yield analysis. The first is to prove that his or her records were
adequate and thus that his or her income should have been determined using
those records. Since operators of marijuana grow-ops very rarely keep the level
of records that would be necessary to determine their income in this manner,
the second, and more common, method of challenging a yield analysis is to
challenge the actual determination of income made by the Minister under the
yield analysis.
[7]
Mr. Hole focused his appeal on challenging the
actual determination of income under the yield analysis. However, rather than
challenging the appropriateness of one or more of the variables used by the
Minister in the analysis, Mr. Hole simply denied that he had ever made any
income from his grow-op. He testified that he did not grow marijuana in 2003 or
2004. He further testified that, while he did grow marijuana in 2005, he did
not make any money from doing so. He explained that the RCMP seized all of his
marijuana after the search and that, prior to that, he had had trouble growing
plants and had been unsuccessful in obtaining a crop. He explained that he was
growing the marijuana for his own personal use to treat pain that he suffers in
his foot.
[8]
I did not find Mr. Hole's explanation to be
plausible. The 2005 search was not the first time that the RCMP had found marijuana
on Mr. Hole's property. The property was also searched in 2002 and a grow-op
was found. British Columbia Hydro records for the property were entered into
evidence. They showed a consistent high usage of electricity from 2002 to 2005.
This strongly suggests that a grow-op existed throughout all of those years.
[9]
Mr. Hole argued that his property simply uses a
lot of electricity. He referred to the fact that he owned cattle and horses in
the years in question and explained that their care required a lot of
electricity. This explanation did not make sense for two reasons. First, if the
livestock required a lot of electricity, one would expect that the levels of
electricity to be high in 2003 and 2004 and to spike in 2002 and 2005 when the
electricity demands of the grow-ops were added to the already high electricity
needs of the livestock. No such spikes occurred. Second, the vast majority of
the examples given by Mr. Hole to explain the electricity needs of the
livestock involved caring for them in winter, yet there was no noticeable
pattern of higher winter usage of electricity. Mr. Hole testified that his
neighbours had similarly high hydro bills but he neither entered copies of
those bills into evidence nor called those neighbours as witnesses. I draw an
adverse inference from his failure to do so.
[10]
Mr. Hole's explanation that he was growing
marijuana for personal use was also not believable. The amount of marijuana
that would have yielded from the plants he was growing far outstripped his personal
needs. Sgt. McMillan opined that even based on a high rate of personal usage,
Mr. Hole would have yielded decades worth of marijuana from his operation if he
had been planning on using it solely for his personal purposes. Sgt. McMillan
further explained that since the THC in marijuana breaks down after about a
year even in optimal storage conditions, there would be no reason for an
individual to grow and stockpile years’ worth of marijuana for themselves.
[11]
Based on all of the foregoing I find that Mr. Hole
operated a grow-op on his property from 2003 to 2005.
[12]
The Minister assessed Mr. Hole based on the
following key assumptions about each of the variables in the yield analysis:
1) that he had 90 plants in each crop in his grow-op;
2) that he had harvested marijuana that dried down to three ounces from
each plant;
3) that he had harvested crops three times per year, and
4) that he had sold the resulting marijuana for $2,500 per pound (GST
included)
[13]
Mr. Hole did not demolish those assumptions.
[14]
The figure of 90 plants came from the number of
actual mature plants that the RCMP found in the machine shop in 2005. This
figure is conservative, as it ignores the 172 outdoor plants that they found
and ignores the fact that there were also 144 clones in the shop. Mr. Hole did not
provide me with any evidence on which I might reasonably conclude that he had
fewer than 90 plants per crop at any time.
[15]
There was no evidence as to how many ounces
would have been yielded from Mr. Hole's crop had they reached maturity before
the search. Sgt. McMillan testified that an average yield is three ounces
per plant. Mr. Hole did not provide any reasonable evidence to explain why his
yields would have been lower than that.
[16]
Sgt. McMillan testified that a normal operation
like Mr. Hole's would produce three to four crops per year. Thus I find the
three crop figure assumed by the Minister to be a conservative estimate. In
fact, I find it to be generous as it assumes that Mr. Hole was only growing one
crop at a time. The presence of the 144 clones in the vegetative stage of
growth indicates that he had two crops growing on different cycles. This would
have led to a far higher number of crops per year as the number of weeks
between harvests of one crop or the other would theoretically have been cut in
half. I note that Mr. Plato appropriately reduced the number of crops in 2005
to two crops to account for the fact that the RCMP shut down the operation in
August, 2005.
[17]
Sgt. McMillan testified that marijuana from
grow-ops is generally sold by the ounce or by the pound. The price per ounce is
higher than the price per pound. He opined that the price per pound in 2005
would have been $2,500 and that it would have been slightly higher in the prior
years. He explained that a grow-op the size of the one operated by Mr. Hole
would generally have sales both by the ounce and by the pound. Based on the
foregoing, I find that Mr. Plato's choice to assess based only on sales by
the pound and using the price of $2,500 was reasonable.
[18]
Mr. Plato calculated the GST on the marijuana
sales by making the generous assumption that the $2,500 per pound price
included GST.
[19]
Based on all the foregoing, I find that Mr. Hole
has not successfully challenged the Minister's projections that he had $118,282
in income from the sale of marijuana in each of his 2003 and 2004 tax years and
$78,855 in income from the sale of marijuana in his 2005 taxation year, nor
that he should have remitted GST on those sales.
[20]
I also find that the Minister has successfully
proven that Mr. Hole was grossly negligent in failing to report his income from
growing marijuana. The amount of unreported income is large. Mr. Hole only
reported $13,591 of income in 2003, no income at all in 2004, and $5,600 in
2005. His wife reported approximately $15,000 per year in each of those years. Banking
and other financial documents show that Mr. Hole made regular deposits of cash
to his bank account and paid almost $10,000 in cash in 2005 for down payments
on leases of two vehicles. He also regularly paid for other expenses using
cash. The banking documents also demonstrate that Mr. Hole and his wife were
spending far more money in 2003 to 2005 than their reported incomes could
support. There is no doubt in my mind that Mr. Hole knew he was operating a
marijuana business, knew that that business was profitable, knew that he was
required to report his income from that business in his tax returns and chose
not to do so. As such, the application of gross negligence penalties to both
the income tax and GST assessments is appropriate.
[21]
I note that there was no discussion or evidence
regarding expenses that Mr. Hole may have been entitled to claim against
his grow-op income. Clearly he had electricity expenses. My understanding is
that he also had a mortgage so presumably he had some interest expenses as
well. In addition to those, there would have been property tax expenses and
presumably some capital cost expenses and terminal losses relating to the
actual grow-op equipment. Mr. Hole did not provide me with any evidence as to
these or any other expenses. Thus I have no way of knowing how much they were
or whether they were already claimed by himself or his wife in respect of some
other business activity. In the absence of such evidence, I cannot allow any
deductions for expenses related to the grow-op.
Logging Income
[22]
Turning next to the alleged unreported logging
income. Mr. Hole admitted that he earned income from his business as a logging
contractor in 2003, 2004, 2005 and 2006, but he did not report any income from
that business nor did he report any net GST related thereto.
[23]
The Respondent entered numerous invoices issued
by Mr. Hole into evidence. Those invoices showed that Mr. Hole was actively
earning logging income. The Respondent also entered numerous cheques into
evidence showing that Mr. Hole was being paid for his services.
[24]
Mr. Plato determined the amount of Mr. Hole's
unreported logging income using another alternative method of assessment known
as a bank deposit analysis. A bank deposit analysis is an alternative method of
determining income that is sometimes used by the Minister when the Minister
believes that a taxpayer's records are an inadequate means of verifying the
taxpayer's income. In simple terms, a bank deposit analysis assumes that all
deposits that have been made to a taxpayer's bank account are income unless the
taxpayer is able to show otherwise.
[25]
Mr. Plato explained that he had totaled all of
the deposits made to the bank accounts owned by Mr. Hole and his wife and all
accounts owned jointly with their children. He explained that he deducted any
amounts that were transfers from other bank accounts and any amounts that had
already been reported as income. This left Mr. Plato with three types of
deposits: deposits that he knew were cheques relating to logging income;
deposits that he knew were cash; and deposits where he did not know what had
been deposited. Mr. Plato explained that he then made two adjustments. The
first was to back out any cash deposits. Mr. Plato explained that he had
excluded these deposits because he assumed that any cash that had been
deposited had come from the grow-op and he wanted to avoid double-counting the
same income. The second adjustment that Mr. Plato made was to exclude any
unknown deposits of less than $1,000 that were round figures. Mr. Plato
explained that he felt it was more likely than not that such deposits were
cash. He testified he did not exclude round-figure deposits over $1,000 because
he had noted that most of Mr. Hole's logging invoices were for round figures
and were over $1,000 and thus believed that excluding round figures over $1,000
would exclude logging income that had not been detected from the invoices.
[26]
I found Mr. Plato's methodology to be fair in
the circumstances. I was initially very concerned that the use of two
alternative methods of assessment in the same tax year could result in a
serious risk of income being double-counted. However, I am satisfied that Mr.
Plato took sufficient steps to reduce the risk of double-counting.
[27]
There are two primary ways in which a taxpayer
can challenge a bank deposit analysis. The first is to prove that his or her
records were adequate and thus that his or her income should have been determined
using those records. The second, and more common, method is to challenge the
actual determination of income made by the Minister under the bank deposit
analysis.
[28]
Mr. Hole focused his appeal on challenging the actual
determination of income. He attacked a number of deposits related to sales of
equipment and parts and services provided by his son that it turned out had
already been excluded from the bank deposit analysis by Mr. Plato. Mr. Hole
also focused on other deposits that involved the sale of vehicle parts in the
amounts of $3,200 and $1,000. He testified that the parts came from a vehicle
that he had purchased so that his son could use the engine. In essence, Mr.
Hole was arguing that the sale was a sale of personal use property. I am not
prepared to accept Mr. Hole's explanation. He did not provide any evidence of
how much he paid to buy the vehicle, why he bought the whole vehicle instead of
just the engine or when he bought the vehicle. He claims to have sold the
vehicle to the same company that he sold used parts and equipment to and that
he provided his logging services to. Mr. Hole did not call any witnesses from
that company to testify as to the sale of the vehicle parts, nor did he call
his son as a witness. I draw an adverse inference from his failure to do so.
[29]
Mr. Hole also challenged one cheque that was
deposited to his son's bank account. Mr. Hole's son has the exact same name as
he does. The cheque was endorsed by his son. However, Mr. Hole had a pattern of
depositing his own funds into accounts held by his children. As such, the mere
fact that the cheque was deposited to his son's account is not enough for me to
back out that amount. I draw an adverse inference from Mr. Hole's failure to
call either his son or someone from the company to whom the services in
question were provided as a witness in respect of that cheque.
[30]
Based on all of the foregoing, I find that Mr.
Hole has failed to demolish the Minister's assumptions that he earned income
from logging in the amounts of $7,000, $39,869, $34,226, and $25,452 in his 2003,
2004, 2005 and 2006 tax years respectively. Mr. Hole has similarly failed to
demolish the Minister's assumption that he failed to collect GST on those sales
in 2004 and 2005.
[31]
I also find that the Minister has successfully
proven that Mr. Hole was grossly negligent in failing to report his logging
income. Mr. Hole did the work in question, issued invoices for that work,
received payment for those invoices and deposited the payments in his or his
families’ bank accounts. He knew that he was earning income and he simply chose
not to report any of it on his tax returns.
[32]
Mr. Hole claimed that he did not need to report
his logging income because he earned too little to be taxable. Even if I
believed that his income was below the basic personal exemption, that would not
excuse his knowingly filing a false return. An individual who earns too little to
be taxable has two choices. Either he can file a tax return and report all of
his income or he can simply not file a return. Filing a return without
disclosing his income not only presents a false return, it also means that his
income will be incorrectly determined for the purposes of various low-income
credits such as the GST credits provided to taxpayers and that his spouse may
receive the benefit of his personal exemption when she files her return.
[33]
Based on all of the foregoing, the appeals are
dismissed.
This Judgment is
issued in substitution for the Judgment dated March 8, 2016.
Signed at Ottawa, Canada,
this 25th day of July, 2017.
“David E. Graham”
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