REASONS
FOR JUDGMENT
Rossiter C.J.
A. Overview:
[1]
This matter comes to the Court by way of Notices
of Appeal filed by the Appellant with respect to income tax for the taxations
years 2004, 2005 and 2006, as well as reassessments for the GST reporting
periods January 1, 2004 to December 31, 2006 and a similar GST reassessment
with respect to the Appellant being a member of a partnership for the same
period of time.
[2]
The Appellant was married with three children
during the periods in question. The Appellant’s financial affairs intermingled
with those of her husband and her eldest child (son) with respect to the
businesses of importing goods, rugs, bicycles, boats, all-terrain vehicles and
motorcycles. This intermingling was carried on into acquisition of assets and
liabilities, use of credit cards, acquisition and payment of loans; basically there
was a total intermingling of the financial affairs of the Appellant with her
husband and her son and their business ventures.
[3]
The Respondent conducted a net worth audit on
the Appellant, her husband and her son, dividing liability equally between the
three. The Minister carried out an assessment with respect to GST plus
penalties and interest for the husband, the son as well as a variety of
partnerships that they may have been involved in their business endeavours.
Objections were filed and confirmations were issued and the appeals were
undertaken.
B. Factual
Background:
[4]
The Appellant was married to a Saadolha Mehrabi.
From their marriage there were born three children, one of whom was their son, Amin
Mehrabi (“Amin”). The Appellant moved
to Canada in 1997 and separated from her husband in 2009, divorcing in 2012.
Upon moving to Canada the Appellant became aware of her husband’s extra-marital
affairs. She remained in the same household as her husband until the separation
for the sake of the children because she did not want to cause them harm. She
maintained the household during this period of time with little communication
with the husband, not enjoying the normal benefits of the matrimonial
relationship including normal communications, socialization, a conjugal
relationship and the like. During the relevant period of time (2004 to 2006)
the Appellant worked outside the home using her income to provide food and
basic clothing for the children. Also, during this time, the Appellant’s
husband was self-employed in a trucking business and conducted business activities
with respect to the sale of motorcycles, boats, and importations of bicycles
and an import and export rug business. During the same period of time Amin was
the sole director and shareholder for a company named Atlas Energy Limited
which was in the business of buying and selling all terrain vehicles, dirt
bikes, and motorcycles. The Appellant was not involved in these businesses. The
Appellant’s husband and Amin failed to maintain appropriate records and books
of their business affairs.
[5]
Suspicions arose on information received by the
Respondent through the Fintrax system with respect to the activities of the
Appellant, her husband and Amin which resulted in an audit of June, 2008 to
November, 2010. During the conduct of the audit, a net worth assessment was
completed on a factual basis with information obtained for the basis of the net
worth from comprehensive disclosure carried out and obtained via normal
authorizations from the Appellant, the husband and Amin as well as requirement
notices from third parties. There was a significant lack of documentation,
books, records of accounts but the Canada Revenue Agency (“CRA”) was able to conduct a factual audit
and complete the net worth assessment for the Appellant, the husband and Amin’s
affairs. There were numerous bank accounts in a variety of banks (RBC, TD Bank
as well as trust companies); there were a wide variety of credit cards, loans
and mortgages and payments. There was real estate owned in Port Moodie and
Coquitlam, B.C. as well as Toronto, Ontario. There were a variety of
corporations intermingled in the business and financial affairs of the family.
[6]
During the relevant period the Appellant asserts
that she was simply the wife of the husband, in a marriage of convenience as
opposed to a traditional marriage. She was a practising Muslim and, in
practising her faith she was basically totally subservient to her husband. She
was not involved in the retention or obtaining advice from legal counsel or
accountants who may have been involved in their financial affairs or during the
course of this appeal, other than to attend at the lawyer’s office on one
occasion when a Notice of Appeal was to be filed. She could not afford the
lawyer so she did not seek or obtain any further advice. The Appellant asserted
that in approximately 2000 her husband demanded from her a Power of Attorney.
She gave him a general Power of Attorney which continued to exist until after
the separation in 2009. She did not have a copy of the Power of Attorney as it was
retained by her husband. She had no knowledge or involvement in the family
finances, or business or financial affairs of the husband nor Amin. She
attended when and if required by her husband to sign any and all documents
which he required for businesses and basically did what she was told as and
when required, playing no role in the business affairs, the operations or
activities or her husband or her son, Amin.
[7]
The financial operations of the Appellant, the
husband and Amin, as well as the corporations, were so intermingled that it was
impossible to determine who was responsible for what in the financial affairs
of the family as a whole or who owned what asset or owed what liability or
earned what revenue. The auditor did conduct a detailed
and comprehensive factual based net worth. At the end of the day, the
Respondent was unable to allocate the responsibility with respect to GST except
on an equal basis, such was the lack of records and accounts of the Appellant,
the Appellant’s husband and Amin.
C. Issues:
[8]
1. Did the Minister correctly reassess the
Appellant for unreported income and if so did the Minister correctly levy
penalties and assess for unpaid GST in relation to the unreported amounts?
[9]
2. Does the existence and exercise of a Power
of Attorney from the Appellant to her husband affects the liability of the
Appellant for the taxes and penalties assessed?
Law and Analysis:
[10]
Subsection 152(7) of the Income Tax Act
permits the Minister to perform net worth assessments. The Federal Court of
Appeal in Hsu v R, 2001 FCA 240, stated:
23
Subsection 152(8) grants a presumption of
validity to these assessments and places the initial onus upon the taxpayer to
disprove the state of affairs assumed by the Minister (Dezura v. Minister of
National Revenue (1947), 3 D.T.C. 1101 (Can. Ex. Ct.), at 1102).
Notwithstanding the fact that such an assessment is “arbitrary”, the Minister
is obliged to disclose the precise basis upon which it has been formulated (Johnston
v. Minister of National Revenue (1948), 3 D.T.C. 1182 (S.C.C.), at 1183).
Otherwise, the taxpayer would be unable to discharge his or her initial onus of
demolishing the “exact assumptions made by the Minister but no more” (Hickman
Motors Ltd. v. R. (1997), 97 D.T.C. 5363 (S.C.C.), at 5376).
… 31
By its very nature, a net worth assessment is an
arbitrary and imprecise approximation of a taxpayer’s income. Any perceived
unfairness relating to this type of assessment is resolved by recognizing that
the taxpayer is in the best position to know his or her own taxable income.
Where the factual basis of the Minister’s estimation is inaccurate, it should
be a simple matter for the taxpayer to correct the Minister’s error to the
satisfaction of the Court.
[11]
Justice Bowman, as he then was, outlined some
general principles related to net worth assessments in Ramey v R, [1993]
2 CTC 2119,
[6] … 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.
[12]
In regards to the gross negligence penalties,
the FCA’s decision in Lacroix c R, 2008 FCA 241, provides guidance on
the application of such penalties in the context of a net worth assessment. The
Court stated:
30
The facts in evidence in this case are such that
the taxpayer’s tax return made a misrepresentation of facts, and the only explanation
offered by the taxpayer was found not to be credible. Clearly, there must be
some other explanation for this income. It must therefore be concluded that the
taxpayer had an unreported source of income, was aware of this source and
refused to disclose it, since the explanation he gave was found not to be
credible. In those circumstances, the conclusion that the false tax return was
filed knowingly, or under circumstances amounting to gross negligence, is
inescapable. This justifies not only a penalty, but also a reassessment beyond
the statutory period.
… 32
What, then, of the burden of proof on the
Minister? How does he discharge this burden? There may be circumstances where
the Minister would be able to show direct evidence of the taxpayer’s state of
mind at the time the tax return was filed. However, in the vast majority of
cases, the Minister will be limited to undermining the taxpayer’s credibility
by either adducing evidence or cross-examining the taxpayer. Insofar as the Tax
Court of Canada is satisfied that the taxpayer earned unreported income and did
not provide a credible explanation for the discrepancy between his or her
reported income and his or her net worth, the Minister has discharged the
burden of proof on him within the meaning of subparagraph 152(4)(a)(i)
and subsection 162(3) [sic].
[13]
I am satisfied on the evidence presented before
me that there was a comprehensive and detailed analysis conducted by the
Respondent in doing a factual net worth. I am satisfied that the net worth assessment
conducted involved a detailed and comprehensive comparison of the Appellant’s,
the husband’s and the son, Amin’s net worth and the cost of their assets less
liabilities at the beginning of the relevant periods and their net worth at the
end of the relevant periods. I have no doubt that some of the assessments may
be somewhat inaccurate within the indeterminate magnitude, but they have not
been shown to be wrong as they stand. I have only had the Appellant before us
in this matter. No real substantive records were introduced by the Appellant
nor was there any real dispute with respect to the method of underreporting
income. The main issue of the Appellant’s case surrounds the Power of Attorney
given by the Appellant to her husband, the effect of that Power of Attorney, its
use by the husband and the implications of its use by the husband on the
Appellant and her liability for tax arising from its use.
[14]
The Appellant presented herself as a well spoken
lady who had a sincere love for children, making them a priority in their life.
She presented herself as a truthful person who wanted to present to the Court
her life experiences and how the situation arose which placed her before the
Court. She answered all questions directly, told her story, although in
somewhat of an emotional manner when it involved very difficult issues such as
care for her children or the infidelity of her husband; she described in detail
the hardships of the relationship. She showed the resolve she had with respect
to her religion and how her resolve with her religion led her to basically be a
subservient spouse to her husband in all matters. She did not avoid answering
difficult questions and maintained eye contact; she did not avoid any of the
difficulties but was simply trying to present her side of the story and did so
in a reasonable, calm and direct fashion. During cross-examination, albeit
brief, she again responded in a fair and direct fashion answering all questions
presented.
[15]
I am, however, of the view that the law does not
support the suggestion that a Power of Attorney can resolve a person such as
the Appellant from a tax liability in the circumstances of this particular
case.
[16]
In Caron v. R., [2002] 3 C.T.C. 2369,
Justice Dussault stated that the Power of Attorney in that case was exercised
for and on behalf of the Appellant. He stated in part as follows:
In my view, Andre
Caron’s deposits of cheques made out in his own name or of amounts belong to
him in the Appellant’s bank account constitute transfers of property within the
meaning of section 160 of the Act since he legally divested himself of
ownership of those amounts in favour of the Appellant, the sole account holder.
The Power of Attorney obtained from the Appellant and dated May 7, 1992
(Exhibit A-2) did not transfer ownership of those amounts back to him but
simply gave him a mandate to administer them for and on behalf of the Appellant
as her agent. Such a Power of Attorney in no way implies that the Appellant
gave up her ownership of the amounts deposited in her account since, under the
very terms of the Power of Attorney, all the powers set out therein must be
exercised for her and on her own behalf.
[17]
In the appeal before the Court the particulars
of the Power of Attorney were not provided, nor was a copy of the Power of
Attorney produced.
[18]
Justice Lamarre, as she then was, in Drapeau
v. R., 2010 TCC 314, affirmed at 2011 FCA 133, stated the following the
following in the context of a Power of Attorney. The Court said in obiter:
… that if carte blanche was given, the
Appellant must face the consequences. If the Appellant’s hypothesis was real,
he certainly did not take steps to support it. He took the risk, and if he
actually gave Mr. Dagenais carte blanche, in the absence of better evidence, he
must now fact the consequences.
[19]
In that case, the testimony related to a
director’s resignation and whether the Power of Attorney existed lacked
credibility.
[20]
Also, in Greenwood v. R., 2000 Carswell
Nat. 209, where the tax consequences were attributed to a true owner of funds,
i.e. who the Power of Attorney was executed on behalf of, Associate Chief
Justice Alban Garon, as he then was, stated in part as follows:
[59] The U.K.
account earned 15,121.63 pounds over a period of six years. The Appellant did
not include these interest amounts in computing his income because in his
opinion it was not his income. According to the Appellant, the account belonged
to his mother and it was merely held in the Appellant’s name under a General
Power of Attorney. When the Appellant’s mother died in January, 1995, he had
the account transferred to a join account held by him and his wife.
…
[64] With some
hesitation, I have concluded that it is likely that the monies in the above
account with the Leeds & Holbeck Building Society belonged to his mother
during the years in issues. Among other facts, I took into account the General
Power of Attorney dated August 22, 1985, the deposit the Appellant had made in
1984 in partial reimbursement of a withdrawal made earlier on this account, the
transfer of the monies to a joint account held by the Appellant and his wife on
his mother’s death.
[21]
As noted, I do not believe that the Power of
Attorney in this particular case can absolve the Appellant from a tax dispute.
The Appellant must face and accept the consequences of the Power of Attorney
she gave her husband and its use by the husband. We do not have the particulars
of the Power of Attorney nor was a copy of it provided to the Court in the
course of evidence, so we have not even had the opportunity to examine the
extent of the Power of Attorney. Quite simply, the Appellant has failed to
establish the Power of Attorney, its extent and how or why she should be
absolved from its consequences to her in this tax dispute. Also, I have found
that the net worth assessment was properly conducted. The appeal is dismissed.
Signed at Edmonton, Alberta, this 24th day of August
2015.
“E.P. Rossiter”
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