REASONS
FOR JUDGMENT
Graham J.
[1]
Kulwant Singh Narula operated a pizza restaurant
as a sole proprietorship from 2002 to 2007. Mr. Narula and his wife were the
only people who worked in the business. The Minister of National Revenue
reassessed Mr. Narula’s 2006 and 2007 taxation years using a bank deposit
analysis and applied gross negligence penalties. Mr. Narula has appealed that
reassessment.
[2]
The parties agree that, unless the Minister can
demonstrate that Mr. Narula made a misrepresentation in his 2006 tax return,
his 2006 taxation year is statute‑barred.
Bank Deposit Analysis
[3]
The Respondent called the auditor, Larry
Buddingh, as a witness. I found Mr. Buddingh to be credible. He explained that
Mr. Narula did not have sufficient business records to conduct a normal audit
and thus it was necessary to perform a bank deposit analysis. He explained how
he had conducted the bank deposit analysis, the various adjustments that he had
made to ensure that non‑taxable deposits, GST and transfers had been
excluded from his calculations and the various adjustments that he had made to
account for deposits for which Mr. Narula provided credible explanations. I
found Mr. Buddingh’s methodology to be sound and accept his conclusion that Mr.
Narula had $43,151 and $51,839 in unexplained deposits to his business and
personal accounts in his 2006 and 2007 taxation years respectively.
[4]
Mr. Narula offered very little in the way of
explanation for these deposits. His sole explanations involved loans from his
parents and a friend.
[5]
Mr. Narula testified that his parents, who live
in India, lent him $14,000 in 2006 and $15,000 in 2007 but he did not show how
or when those funds were deposited to his bank accounts, explain the reason for
the loans, demonstrate any repayment of the funds or offer an explanation of
how the funds arrived from India. Based on the foregoing, I do not accept that
Mr. Narula borrowed any funds from his parents in the years in question. Even
if I had accepted that he did so, absent any evidence that those funds were
actually deposited to his bank accounts, I would not have made any adjustments
in any event.
[6]
Mr. Narula also testified that he borrowed
$11,000 from a friend named Mr. Mangat. Mr. Narula explained that he and Mr.
Mangat were planning on buying a business, that he asked Mr. Mangat to lend him
money for that purpose, that the business purchase had not gone through and
that he kept the money. This explanation is very odd. Mr. Narula did not
explain why Mr. Mangat would have permitted him to keep the borrowed funds when
the business purchase for which the funds had been lent did not go through.
Mr. Narula testified the funds, which were supposedly lent in September
2006, were deposited into his bank account in various round figures between
October and December. He indicated that he had deposited funds when he needed
to cover a cheque but he did not explain why he would not have simply deposited
all of the money in the first place. Counsel for the Respondent pointed out
that similar deposits in similar round figures were made throughout the year
and submitted that it was far more likely that the deposits that Mr. Narula was
referring me to were regular deposits of cash from the business than loan
proceeds from an unnecessary loan. I agree. Mr. Narula did not call Mr. Mangat
as a witness. I draw an adverse inference from that fact. Based on all of the
foregoing, I do not accept that Mr. Narula borrowed any funds from Mr. Mangat
in the years in question.
[7]
Since I have found the auditor’s methodology to
be sound and have not accepted Mr. Narula’s limited explanations for the unexplained
deposits, I am left to conclude that Mr. Narula did not report all of his
income from the pizza business. For the reasons set out below concerning the
gross negligence penalties, I find that Mr. Narula’s failure to report this
income in 2006 was due to carelessness, neglect or wilful default.
Gross Negligence Penalties:
[8]
I find that Mr. Narula was grossly negligent in
failing to report these amounts. Mr. Narula used a cash register which he
testified would either produce a receipt for a customer or produce a record for
the business in the form of Z‑tapes but not both. I have difficulty
believing this explanation as I cannot imagine why a cash register company
would put such a feature in their machines. Even if a company were trying to
create a cash register that could be used for tax evasion, I would expect that
the user of such a machine would want to be able to produce Z-tapes for sales
where the customer had asked for a receipt as those are exactly the types of
sales that are more likely to cause problems in an audit since the receipt
creates evidence of the sale in the hands of a third party. Mr. Narula gave
conflicting testimony as to how often the cash register produced Z-tapes and
conflicting testimony as to whether those tapes were destroyed or not. He also
gave conflicting testimony as to whether he recorded sales separately in what
he described as an “order book” or simply totalled his deposits to his bank
account and, in any event, did not enter such a book into evidence. Based on
all of the foregoing, I find that Mr. Narula made no attempt to maintain an
accurate bookkeeping system, has attempted throughout the litigation to
obfuscate what records were actually kept and, in fact, appears to have taken
active steps to destroy what few records were produced.
[9]
Mr. Narula had an external accountant in the
years in question. While there was some passing suggestion that any failure to
report income may have been the accountant’s fault, there was no evidence of
this fact and no consistent explanation of what information was and was not
provided to the accountant. Furthermore, Mr. Narula did not ask his accountant
any questions on this point when the accountant was testifying.
[10]
Mr. Narula has been in the pizza business since
2002. He clearly understands his obligations under the Income Tax Act to
report all of his income yet he has not done so. The amount of unreported
income is significant. It represents approximately 80% of Mr. Narula’s reported
income in 2006 and 100% of his reported income in 2007. It also represents
approximately 30% of his reported sales in both years.
[11]
Based on all of the foregoing, I find that Mr.
Narula was grossly negligent in failing to report all of his income from the
pizza business.
Conclusion:
[12]
Based on all of the foregoing, the appeal is
dismissed with costs payable to the Respondent forthwith.
Signed at Ottawa,
Canada, this 19th day of December 2014.
“David E. Graham”
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