REASONS
FOR JUDGMENT
Lyons J.
I.
Introduction
[1]
The appellant operated a retail flower business
as a sole proprietor during the 2002, 2003, 2004, 2005 and 2006 taxation years
(“relevant years”) and was a goods and services tax registrant from January 1,
2002 to December 31, 2006 (the “reporting periods"). She appeals the reassessments
issued under the Income Tax Act (the “ITA”) for the relevant
years and under the Excise Tax Act (the “ETA”) for the reporting
periods. The appellant contends the relevant years are statute-barred, claims
all of her income was reported and suggests that the net worth assessment
conducted by the Minister of National Revenue contains a myriad of errors.
[2]
The Minister determined by the net worth method
that the appellant had unreported income in the amounts of $51,842, $77,774,
$68,403, $128,090 and $114,140, respectively, for a total unreported income of
$440,249 in the relevant years and imposed gross negligence penalties thereon
and reassessed each of the relevant years beyond the normal reassessment period.
The Minister also reassessed the appellant for goods and services tax and harmonized
sales tax (collectively “GST”) in the amount of $30,853.89, relating to the unreported income, for the reporting periods plus gross
negligence penalties and $13,001.48 in interest.
[3]
During and after the hearing, the respondent
conceded amounts that reduced the unreported income to $51,124.18, $119,101.32
and $48,474.23 for the 2002, 2005 and 2006 taxation years, respectively, for a
total revised unreported income of $364,876.73 for the relevant years. In turn,
this results in a revised amount in GST of $25,319.80 for the reporting
periods. The respondent acknowledges some errors were made but many of her concessions
were made after she received information from the appellant as part of the
trial process including evidence that surfaced at trial.
[4]
The issues are:
(a)
Whether the Minister properly increased the
appellant’s income, as revised above, by the amounts in the relevant years?
(b)
Whether the Minister is entitled to reassess
beyond the normal reassessment period for each of the relevant years?
(c)
Whether the appellant is liable for the revised
amount of GST for the reporting periods?
(d)
Whether gross negligence penalties, pursuant to
subsection 163(2) of the ITA and section 285 of the ETA, on the
revised unreported income, for the relevant years and reporting periods,
respectively, are justified in the circumstances?
II. Background Facts
[5]
Upon immigrating from South Korea to Canada in
1975, the appellant completed an online floral design course while working
full-time as a printing operator. After a few years, she became a waitress at a
restaurant where she worked for 22.5 years plus waitressed, part-time, at other
restaurants. For ten years, she picked worms at night during summer for live
bait companies.
[6]
Around 2000, the appellant developed severe pain
in her left arm and was unable to continue waitressing. She then paid
approximately $124,000 for the assets of a local retail flower business which
had two locations and about five employees. She sold one location in 2002 for
approximately $40,000. The remaining location generated approximately $180,000
in gross revenue each year until the appellant sold it in 2009.
[7]
David Lee Ko, the appellant’s son, testified he
attended university from 1994 to 2000. Whilst finishing university, he began
selling drugs and sold marijuana, ecstasy and cocaine until his arrest by the
RCMP in 2004. Drugs valued between $150,000 and $250,000 were seized but no
cash. Bail was granted and he was required to live his mother until his court
date in 2007. Ultimately, he pled guilty to conspiracy to traffic in ecstasy,
was sentenced to four years in prison and served eleven months before he was
released on parole. He has since lived in Hamilton.
[8]
The appellant testified that she never knew her
son was dealing drugs until she received a phone call from the RCMP. Shortly
after his arrest, her home was searched; the RCMP found a document showing a $125,000
Toronto Dominion Trust term deposit. Suspecting that she was in possession of
her son’s proceeds of crime, the RCMP informed the Canada Revenue Agency
(“CRA”).
[9]
In 2006 or 2007, she received a letter from the CRA
notifying her of an upcoming audit. On February 18, 2008, the appellant was
interviewed by the first CRA auditor and was asked to provide her books and
records to the CRA but failed to do so.
[10]
The appellant testified that she kept proper
business records, held onto receipts and tracked business expenses and sales
daily in a journal. She hired a chartered accountant to handle her GST/PST and income
tax filings who assisted from 2000 until his death in 2005. Most of her
business records were given to him to prepare financial statements and tax
filings. After his death, the documents were stored in his home (basement) and
a flood destroyed many of these documents. Later, she was able to recover some documents
from the accountant’s son.
[11]
Tanya Davis, a CRA auditor, testified on behalf
of the Minister (the “auditor”); she was a credible witness. In June 2009,
the appellant’s file was reassigned to her. She said that the process for
issuing requirements was underway, she was instructed by the first auditor to
continue to issue the requirements and did not ask the appellant for books and
records because the appellant was non-responsive to the first auditor’s request
for same in February 2008. She stated that the main reason the net worth was prepared was
because of the lack of books and records.
[12]
In January 2010, the auditor contacted the
appellant, met with her in May 2010, asked the appellant for her books and
records and discussed the CRA’s initial proposal letter. However, the appellant
did not provide the books and records directly to the CRA. Instead, she hired her church’s bookkeeper, Sathya Harrington, (“bookkeeper”).
The appellant said the bookkeeper was to help with the audit and she provided
receipts, journals, and other records to the bookkeeper and they met several
times to discuss same. The appellant claims no documentation was provided to the
CRA partly because she was relying on the bookkeeper and partly because, by the
time the appellant had gathered some of the required documentation, the CRA had
already completed its reassessments but nevertheless asserts that she was
willing to provide the documents to the CRA.
III. Analysis
Net
Worth Assessment
[13]
Subsection 152(7) of the ITA, the key provision,
reads:
152(7) Assessment not dependent on return or information. 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.
[14]
The Federal Court of Appeal in Hsu v Canada refers
to subsection 152(7) of the ITA as empowering the Minister to issue
“arbitrary” assessments using any appropriate method for determining the tax
payable by a taxpayer.
[15]
Considered a method of last resort, the Minister
may employ the net worth assessment when tax returns have not been filed, records
are insufficient, inaccurate information is provided, information is incapable
of verification or when a taxpayer refuses to provide information. The method is premised on the assumption
that an appreciation of a taxpayer’s wealth over a period of time can be
imputed as income for that period unless the taxpayer demonstrates otherwise.
[16]
Notwithstanding any error, defect or omission in
the assessment and until found otherwise, subsection 152(8) deems an
assessment, including a net worth assessment under subsection 152(7), to be valid
and binding.
[17]
Utilizing such method, the Minister is required
to show that the taxpayer’s net worth has increased between two points in time
but is not obliged to prove a taxable source of income. Once
an increase is demonstrated, the taxpayer has the onus to separate his or her
taxable income from gains resulting from non-taxable sources.
[18]
The appellant’s position is that the Minister’s
Net Worth Statement (“Statement”) is unreliable “defective, inaccurate and negligently
prepared”. Admittedly, errors occurred but not as many as the appellant
suggests and the inaccuracies were mostly because the appellant was unwilling to
provide books, records and information in a timely manner thus exacerbated the
inaccuracies.
[19]
I do not accept the appellant’s explanation that
she relied on the bookkeeper to provide the information. I prefer and accept
the evidence of the auditor. The auditor said she continued to ask the
bookkeeper for documents in July 2010 and September 2010 before issuing the
final proposal letter on October 15, 2010, and the subsequent reassessments. Suggesting
the auditor ought to have made a further request for information in June 2009
ignores the appellant’s failure to respond to the CRA’s first request 16 months
previously. Approximately 27 months after the CRA’s initial request was made,
only some of the appellant’s documents were provided to the CRA; these could
have been provided sooner without further prompting.
[20]
The jurisprudence recognizes that the net worth
method will not produce precise income figures. In Bigayan v Canada,
Justice Bowman, as he then was, remarks that inaccuracy is inherent in the method
and albeit it is a blunt instrument, sometimes it is the only means of approximating
the income of a taxpayer. The Court in Hsu recognizes:
30 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.
Statute-Barred
[21]
The onus is on the Minister to prove, on a
balance of probabilities, that the appellant made misrepresentations that were
attributable to neglect, carelessness or wilful default for the relevant years. The Minister will have discharged her burden of proof in a net
worth assessment involving statute-barred years once she establishes on the
basis of reliable information that there is a discrepancy between a taxpayer’s
assets and expenses and that discrepancy continues to be unexplained and
inexplicable. Then, it is for the taxpayer to identify the source of the income
and show that it is not taxable.
[22]
Appellant counsel emphasized that although the
appellant’s net worth calculation, produced at the hearing, shows cumulative
unreported income in the relevant years, her position is that she reported all
of her income.
[23]
The appellant, David Lee Ko, Neung Ja Jung and
Kumja Ro, her two sisters, and Michael Andrew Steele testified on behalf of the
appellant. Net worth assessments typically hinge on the credibility of the
appellant and witnesses and their articulation as to why the Minister’s
calculations are incorrect.
[24]
Criteria for assessing credibility is summarized
at paragraph 23 in Nichols v Canada, 2009 TCC 334, 2009 DTC 1203, in which Justice V.A. Miller states:
23 In assessing
credibility I can consider inconsistencies or weaknesses in the evidence of
witnesses, including internal inconsistencies (that is, whether the testimony
changed while on the stand or from that given at discovery), prior inconsistent
statements, and external inconsistencies (that is, whether the evidence of the
witness is inconsistent with independent evidence which has been accepted by
me). Second, I can assess the attitude and demeanour of the witness. Third, I
can assess whether the witness has a motive to fabricate evidence or to mislead
the court. Finally, I can consider the overall sense of the evidence. That is,
when common sense is applied to the testimony, does it suggest that the
evidence is impossible or highly improbable.
[25]
Other than some minor inconsistencies, applying
the criteria for assessing credibility I have concluded that in general the
appellant and the witnesses provided some specific, plausible and credible evidence
that challenge certain items and amounts on the Minister’s Statement as
detailed below.
[26]
The first alleged error, argued the appellant,
was the exclusion of her business assets and liabilities from the Minister’s
Statement. The auditor sought but was not provided with source documentation to
verify the amounts for these items as reported by the appellant in her tax
returns, thus the auditor did not err but excluded the items because these went
unsubstantiated. The Minister is not bound to accept information contained in
tax returns.
[27]
Initially, only the bank account balances were
included in this portion of the Statement. At the conclusion of the hearing,
the respondent made concessions to include amounts for equipment and a vehicle.
Both were valued at their undepreciated capital cost balances. The appellant’s
values differ from the respondent’s with respect to 2005 and 2006; the
difference is due to the appellant failing to adjust for the half-year rule
with respect to the addition of the vehicle in 2005. Therefore, the respondent’s
amount is correct for the line item “UCC per Schedule 1a – CCA”.
[28]
The next alleged error was the auditor’s failure
to consider the appellant’s business use of her motor vehicle. Similar to the
above, this went unsubstantiated. Ultimately, the respondent partly conceded
this item.
[29]
The auditor excluded amounts for the remaining
business assets because of insufficient documentation. The values ascribed by
the appellant to Accounts Receivable, Inventory, Prepaids, Goodwill and C.E.C.
Account were taken from the Notice to Reader Financial Statements and the
appellant’s tax returns. By excluding such amounts, approximately $60,000 of
additional “income” is created on a cumulative basis in the appellant’s net
worth calculation. I find that the amounts utilized by the appellant for the business
assets should not be excluded from the calculations in the Minister’s
Statement.
(a) Cash on Hand
[30]
The auditor admitted to having erred in not
showing “cash on hand” of $8,000 at the end of 2002. This warrants an
adjustment in favour of the appellant.
[31]
The appellant contends an alleged error was made
relating to the “Sale of Jewellery” for $15,900 in cash in 2004. Jewellery was sold,
she says, for an estimated $17,000 and that was deposited into her bank
accounts in 2004 and spent in 2004. Hence, the
proceeds should not be shown as a separate asset at the end of 2004.
[32]
The auditor’s notes indicate that on July 23,
2010, the bookkeeper told the auditor that the amount of proceeds for the sale
of jewellery is $15,900. The auditor testified the cash proceeds were not shown
as being deposited into (or coming out of) the appellant’s bank accounts in
2004. Consequently, she assumed that cash was held by the appellant in 2004 and
spent in 2005.
[33]
I prefer and accept the auditor’s evidence as more
reliable than the appellant’s estimate. Notably, the appellant’s year-end bank
account balances increased by $1,772 from 2003 to 2004, and $18,760 from 2004 to
2005, therefore supports the inclusion of $15,900 as an asset at the end of
2004 congruent with the calculation on the Minister’s Statement.
(b) Bank
of Montreal Personal Account ending in #88 (“BOM Account”)
[34]
Another alleged error was having the incorrect
2006 year-end balance for the appellant’s BOM Account.
[35]
Since the auditor was not provided with the
December 2006 bank statement for the BOM Account, she relied on the information
provided to her that showed the November 2006 closing balance of $13,975.86. Her
working papers show a balance of $19,975.86 as at December 27, 2006 in the BOM
Account. The amount used by the Minister for the December 31, 2006 balance in the
Toronto‑Dominion Canada Trust (“TDCT”) Personal Account ending in #46
includes a $15,000 transfer. The appellant demonstrated that $15,000 was
transferred on December 28, 2006 from the BOM Account to TDCT Personal Account.
Therefore, an adjustment of $15,000 is necessary and is to be subtracted from
$19,975.86. As such, I find that the appellant’s amount of $4,975.86 is the
correct amount.
(c) TDCT
DISA Account ending in #05 (“TDCT Account”)
[36]
I agree with the appellant that interest income in
the amounts of 25 cents, 4 cents and $12.50, earned in 2002, 2005, and
2006, respectively, were erroneously assumed by the auditor to be allocable to
a regular savings account. The TDCT Account is a registered retirement savings
plan (“RRSP”) account such that the interest earned is non-taxable until
withdrawn. Those amounts in the years noted are to be adjusted and removed from
the Minister’s Statement.
(d) Accounts
Receivable – Loans to Family
[37]
A significant amount of evidence focused on the
inter-family loans. The appellant described herself as a “penny-pinching”
person, who enjoyed saving money and was able to loan money to her family.
Although she claims she maintained records of the loans, she said records were
discarded after repayment of same. I fail to see how the appellant can suggest
the auditor erred in not recognizing all family loans were repaid, when she did
not furnish satisfactory documentation as to repayments of same. I will address
the loans separately.
[38]
The appellant testified that she made the
following loans in the amounts of:
a)
$10,000 to her sister-in-law, Jennifer Kim, in
2000. The appellant was repaid $5,000 by cash in 2001 and 2002 and $5,000 by
cheques in 2002 and 2003 with no interest.
b)
$26,000 to her sister, Neung Ja Jung, in 2001 by
cheque plus she loaned a further $25,000 to Ms. Jung in 2003. The first loan
was repaid from 2002 to 2006 and the second was repaid over 2.5 years by
depositing amounts into the appellant’s bank account. There
were no written loan agreements between the appellant and Ms. Jung nor the
appellant and her sister-in-law.
Ms. Jung corroborated the amounts were loaned in 2001 and 2003. She
indicated that the first amount was used for living expenses and to run businesses
in Vancouver. This was repaid by a combination of cheques and wire transfers over
roughly five years. The second amount was repaid within about 30 months. Ms.
Jung claims she kept track of her repayments by memory only.
c)
$60,000 to her sister, Kumja Ro, in 2004 by
cheque. This loan was repaid to the appellant in cash over two years. To
finance this loan, the appellant borrowed $90,000 from TD Canada Trust and
retained $30,000 to help pay for her son’s legal expenses.
Ms. Ro corroborated that the loan was made to her in 2004 with two
$30,000 cheques and that her husband prepared a written agreement reflecting
the $60,000 loan. She explained the funds were to pay her son’s legal fees as he was
arrested for drug trafficking, plus for other expenses. The loan was repaid, by
cash, within a year or two and repayment began within a month or two after
receiving the loan.
[39]
The auditor verified some loan advances
totalling $111,900 and repayments totalling $20,400 by reviewing the appellant’s
bank records. The total amount of loan advances she verified was $111,900. Consequently,
this resulted in an ending loan receivable balance of $91,500 in 2006.
[40]
According to the auditor, the appellant’s
outstanding loan balance at the end of 2001 was $18,000 which she created to
account for the three verified loan repayments in 2002 and 2003 as “I had to
make sure the opening balance made sense for 2001.”
[41]
Conversely, the appellant argues that the
outstanding loan balance at the end of 2001 was $36,514.73, comprised of $10,500
owing from Ms. Kim and $26,014.73 owing from Ms. Jung. Although the appellant
testified that the $26,000 loan was made in 2001 by cheque, no copy of that
cheque was entered into evidence nor was a copy of the appellant’s bank
statement showing the withdrawal of $26,000 from her account.
[42]
The auditor testified that she was unaware of
the $26,000 loan made to Ms. Jung in 2001. Her working papers, however,
identified a loan repayment of $10,000 from “Hans Lee Jung” on October 22,
2002.
[43]
The appellant demonstrated loan repayments,
totalling $30,310, were deposited into her bank account by Ms. Jung at branches
in British Columbia. Since the appellant loaned Ms. Jung a further $25,000 in 2003, and
a total of $40,310 was repaid between 2002 to 2006,
I accept that Ms. Jung’s outstanding loan balance at the end of 2001 was at
least $15,000.
[44]
I find that Ms. Kim borrowed $10,000 in 2000
and repaid $5,000 in cash in 2001 and repaid $5,000 by cheque in 2002. Consequently,
her outstanding loan balance at the end of 2001 was $5,000. Based on that and
Ms. Jung’s outstanding loan balance, I conclude that the ending loan balance is
$20,000 in 2001.
[45]
The Minister verified $10,000 being repaid in
2002. I conclude, however, per her evidence that the amount of repayments she
received total $10,200 for 2002. Given that, the ending loan balance is $9,800
in 2002.
[46]
The Minister verified $8,000 was repaid and
$27,500 (comprise of transfers of $25,000, $1,800, and $700) was loaned in 2003
to Ms. Jung. The appellant identified $9,600 as repaid, which I accept, and $25,000
as the amount loaned which I reject as she failed to explain what the $1,800 and
$700 transfers were for. I find, therefore, that the $27,500 constitutes the
total amount loaned to Ms. Jung in 2003. Hence, the ending loan balance is
$27,700 in 2003.
[47]
The Minister verified $1,000 being repaid and
$63,200 (which comprise two $30,000 cheques paid to Mr. Ro; $3,000 paid to
the appellant’s daughter, Ms. Yeri Ko; and $200 paid to Ms. Jung) as the total
amount loaned in 2004. The appellant identified $6,960 being repaid, which I
accept, and $60,000 being loaned which I reject as the appellant failed to explain
what the amounts paid to Ms. Ko and Ms. Jung were for. I conclude that the
$63,200 constitutes the total amount loaned in 2004. As such, the ending loan
balance is $83,940 in 2004.
[48]
The Minister verified $1,400 being repaid and
$1,700 (comprise of transfers of $300 and $1,400) was loaned in 2005 to Ms.
Jung. The appellant identified $15,450 as repaid, which I accept, and $1,400 as
the amount which I reject as the appellant did not explain what the $300 transfer
relates to. I accept that $1,700 is the total amount loaned in 2005.
[49]
The appellant’s net worth calculations along
with her “Loans from Family” schedule show $60,000, the loan to Ms. Ro, was
added in 2004 but not carried into 2005 and 2006. This
suggests that the $60,000 loan was repaid in full by the end of 2005. However,
this is incorrect because both the appellant and Ms. Ro testified that it
took over one year for the loan to be repaid. Mr. Ro also signed a letter dated
December 9, 2010, stating that he and his wife borrowed $60,000 from the
appellant in 2004 and repaid it during 2004, 2005, and 2006. The question becomes whether Ms. Ro repaid any of the $60,000 loan
to the appellant between 2004 and 2006. The appellant and Ms. Ro testified that
the repayments were all made by cash; Ms. Ro said that she and her husband often
repaid the appellant several thousand dollars at a time.
[50]
However, the auditor’s working papers indicate
that the Line of Credit was fully paid off between October 2004 and November
2005. The payments were a combination of cash deposits and transfers from
other accounts. Those deposits ranged in amount from $3,360 to $6,000 and only
occurred in 2005. The total cash deposits applied against the Line of Credit in
2005 was $19,360. Based on the testimony of the appellant and Ms. Ro together
with the auditor’s working papers that the $19,360 represents cash repayments
from Ms. Ro, it reduces the ending loan balance in 2005 by $19,360.
Consequently, the ending loan balance is $50,740 in 2005.
[51]
The Minister verified no amounts being repaid
and $1,500 (comprise of transfers of $1,000 and $500) was loaned in 2006 to Ms.
Jung. The appellant identified $4,500 as repaid, which I accept, and no amounts
as being loaned which I reject as she did not explain what the $1,500 was for.
I find the $1,500 constitutes the total amount loaned in 2006. Since the
appellant failed to produce any documentary evidence regarding the repayment of
the $60,000 loan in 2006, I conclude that the ending loan balance is $47,740 in
2006.
(e) Investments
[52]
I agree with the appellant there was an error in
methodology relating to the valuation of the appellant’s investments at fair
market value (“FMV”) and the related exclusion of the 2001 value of these
investments. The respondent made concessions by revising the investment values
to their cumulative contribution amounts and revised the amounts to reflect
only the appellant’s contributions to her investment accounts. The income
generated on the non-registered investments was not included in the calculation
because the auditor believed that doing so would double-tax the appellant.
While this belief is incorrect, it is favourable to the appellant.
(i) 2001
Value
[53]
The Minister’s Statement shows $150,782.01 as
the value of the appellant’s Toronto-Dominion (“TD”) Canada Trust investments
at the end of 2001. After the trial commenced and the investment amounts were
revised, the respondent removed the $150,782. The auditor explained the removal
was because the amount represented the FMV of the investments and contributions
to the appellant’s investment accounts. The respondent failed to realize,
however, that part of the $150,782 represents cumulative contributions made by
the appellant to her TD Canada Trust investment accounts. Removing that
portion of the $150,782 artificially increases the appellant’s net worth in the
relevant years. As such, that “cost” portion of the $150,782 must be included
in the net worth Statement as an asset at the end of 2001.
(ii) TD
Canada Trust Guaranteed Investment Certificates (“GICs” or “GIC”)
[54]
The Minister recognized only one TD Canada Trust
asset in the appellant’s net worth calculation during the years 2002 to 2006. The
asset is a $125,000 GIC purchased in 2002 that accumulates interest at 4.6% per
annum. The Minister did not include the accrued interest income in the net worth
calculation. I agree with the appellant that this approach is incorrect.
[55]
The Minister failed to recognize the appellant’s
other TD Canada Trust GICs because they did not represent “new” contributions in
the relevant years. The difficulty with this is it assumes the TD Canada Trust
GICs were held continuously throughout the relevant years, thus the respondent
assumes that the appellant never sold these investments and used the proceeds
to purchase other assets, decrease liabilities or pay for various expenses. The
appellant argues that she did sell these investments in 2003 and 2004 and used
some of the proceeds to purchase Berkshire investments.
Her argument is plausible based on my review of Exhibit A-1, tab 12. Therefore,
I find that the appellant’s TD Canada Trust GIC amounts for the relevant
years are more accurate.
[56]
The “cost” values of the appellant’s other TD
Canada Trust GIC investments should be included in the Minister’s net worth
calculations in the Statement as at the end of 2001. However, since no evidence
was presented as to the cost values, the cost values equal to the 2002 values suffice
for the end of 2001. I find that the appellant’s other TD Canada Trust GIC
investments should be valued at $106,787.66 as at the end of 2001.
(iii) Berkshire
Investments
[57]
The respondent alleges that the total cumulative
contributions made by the appellant to her Berkshire investment accounts during
the years 2002 to 2006 were $273,000. The appellant argues that the total cost of
same, along with the cumulative income earned on those investments, is equal to
$247,155.05 for the same period.
[58]
However, the appellant’s amount does not reflect
the appellant’s investments in Berkshire account number ending in 07-R which is
an RRSP account. The contributions to that account are $26,500 which is roughly the
difference in the amount as between the parties (which differ by the amount of
$24,844.95). Based on the evidence, I find the respondent’s Berkshire investments
amounts to be correct and the cumulative contributions to the appellant’s RRSP
account should be reflected on a separate line in the net worth calculations.
(iv) Berkshire
RRSP
[59]
The auditor testified that she included in the
net worth calculation the cumulative investment contributions from the
appellant’s bank accounts to the appellant’s TD Canada Trust and Berkshire
investment accounts. In doing so, the auditor did not distinguish between
contributions made to registered and non‑registered accounts. As noted, the appellant contributed a total of $26,500 to her
Berkshire RRSP account from 2004 to 2006. The Berkshire RRSP contributions have
been shown on a separate line in the net worth calculations.
(v) AIG
Life Insurance
[60]
The appellant testified that she purchased $18,000
of AIG Life Insurance in 2004. The respondent noted that the appellant paid an additional $18,000
to AIG in 2005. The auditor testified that the first $18,000 was paid by cheque on
November 12, 2004 and the second $18,000 was paid by bank draft on December 8,
2005. The appellant did not challenge the auditor on cross-examination on
either of these amounts. Thus, I find the amounts in the Minister’s Statement for the AIG
Life Insurance to be correct.
[61]
For the same reasons noted above in respect of the
appellant’s business assets, the appellant’s business liabilities are to be
included in the Minister’s net worth calculation in the amounts provided by the
appellant.
[62]
The appellant alleges the auditor erred in using
Statistics Canada averages and data (collectively “averages”) as it is much
higher than personal expenses she actually expended each year.
[63]
Assumptions were made by the auditor based on the
averages because the appellant failed to provide clear documentary evidence. Under
this category, the auditor attempted to categorize the amounts drawn from the appellant’s
personal bank accounts. If the auditor was unable to identify the nature of an
amount and believed it was a personal expense, she listed it under “miscellaneous”
or “other”. If amounts were drawn out of the appellant’s personal bank accounts
to pay credit card balances, the auditor reviewed the credit card statements to
verify whether the amounts were for personal expenditures. If the auditor did
not have credit card statements, she presumed the whole amounts to be personal
expenditures. After this categorization, Statistics Canada figures were used
for any personal expenditures categories that were blank.
[64]
In Cox v Canada,
Associate Chief Justice Bowman, as he then was, made a downward adjustment to
the Statistics Canada figures used in a net worth assessment based on evidence
that the appellant’s lifestyle was meagre, did not conform to the average
Statistics Canada norm and other information was absent.
(a) Family
[65]
In the present case, the Statistics
Canada figures were averages for a two‑person household. The appellant
testified that her elderly mother lived with her during the relevant years. Her
daughter lived with her during 2001, 2002 and half of 2003. Ms. Ro lived with
her for just over a year commencing in September in 2003 and her son lived with
her during 2004, 2005, 2006 and part of 2007.
[66]
The appellant received monthly payments of
$1,100 from her mother, $500 from her daughter and $800 from her sister. Her
mother also gave her cash gifts that she received from relatives. These were
sizable amounts, such as $8,000, $7,000 and $3,000. The appellant used the
funds from her family for household expenses.
[67]
Mr. Ko said he has a very close relationship
with his mother but never told her about his drug dealings before he was
arrested and never gave her cash from those activities. Whilst selling drugs, Mr.
Ko said he was “spending like a maniac” and not saving his money. He made
relatively large purchases. To “invest”, he would purchase more drugs for resale.
[68]
From 2000 to 2004, he did not live with his
mother but worked part-time for her business and full-time from 2004 to 2007. He
said he would give her his employment earnings from the flower business. During
2000 to 2004, he would repay her in cash, in relatively small amounts over
time, for his personal Royal Bank Visa credit card charges which was tied to
his mother’s account and she invariably paid the Visa bills. All of which
corroborated his mother’s testimony.
[69]
The appellant said that aside from reimbursing
her for his credit card charges, her son never gave her any cash.
[70]
In her testimony, Ms. Ro described the appellant
as a “workaholic” whom she had lived with for one year commencing in September
2003 and had paid her about $800 monthly to cover household expenses and Ms. Ro
spent between $200 and $400 monthly on groceries for the family. Again, this
corroborated the appellant’s testimony.
(b) Methodology
[71]
I am satisfied that the appellant lived
frugally and provided sufficient evidence and estimates to show she mostly
spent less on personal expenditures than the Statistics Canada averages. I accept, in general, her evidence as credible as it relates to the
personal expenditures. Unless otherwise detailed below, various Personal
Expenditures categories will be adjusted by removing Statistics Canada averages
and are replaced with the appellant’s estimates provided her estimates are less
than the Statistics Canada averages.
(c) Food
[72]
When only her mother was living with her, the appellant
spent approximately $200 monthly on food purchased from stores and they rarely
ate at restaurants; she spent approximately $100 monthly on food purchased from
restaurants during the relevant years. When her son lived with her, she spent
approximately $400 monthly on food and her daughter paid for her own groceries.
[73]
I conclude that the appellant spent
approximately $2,400 on food from stores in each of 2002 and 2003 and
approximately $4,800 on food from stores in each of 2004, 2005, and 2006. I
find she spent approximately $1,200 per year on food purchased from
restaurants. Thus, “food from stores” is reduced to $2,400 in 2002 and “food
from restaurants” is reduced to $1,200 for each of 2002 and 2003.
(d) Shelter
[74]
Property taxes were about $3,500 to $3,800 per
year, home insurance was $500 per year and utilities were about $1,080 per
year. In 2003, she incurred home renovation expenses approximating $10,000 to
fix a leak in the roof and windows of her home. No adjustments, in my opinion,
are necessary to this category, as the amounts on the Minister’s Statement are
derived from the appellant’s bank account and credit card statements.
(e) Household
Operations
[75]
Telephone expenses were about $1,200 to $1,500
per year. Pet expenses were a few hundred dollars per year. Cleaning supplies
were about $100 per year. Paper, plastic and foil supplies were about $200 per
year. Accepting that evidence, “cleaning supplies” are reduced to $100 and
“paper, plastic and foil supplies” are reduced to $200 for each of the 2002 and
2003 years, respectively.
(f) Clothing
[76]
The appellant did not recall buying any clothing
for herself as she received clothing from her aunt and cousins in Korea who owned
a clothing factory and may have spent $300 to $500 per year on clothing for her
mother. They had hand-washed but never dry-cleaned their clothing. She never
purchased clothing for her son.
[77]
For 2002, I find that the amount for “women’s
wear” is $400. For each of 2002 and 2003, I conclude the amounts for “clothing
material, notions and laundry” are each reduced to nil. For 2003 and 2004, whilst
the amounts for “women’s wear” and “men’s wear” are not Statistics Canada
averages, these are reduced to $400 and nil, respectively, because the excess
amounts spent on these items belonged to Mr. Ko’s who testified that he used
the appellant’s credit card to purchase clothing for himself and his girlfriend
in 2003.
(g) Transportation
[78]
Beginning in 2002, the appellant leased a car
for approximately $9,324 per year. She spent about $5,800 per year on gas and
insurance. It was used 80% for business. I conclude that the personal
expenditures related to the car would have been about $3,025 per year. Hence, the Ministers amounts for 2002, 2003 and 2004 will be
reduced by 80% to account for the business usage of the appellant’s motor
vehicle.
(h) Health
Care
[79]
The appellant spent approximately $650, in
total, from 2002 to 2006 on medication and eye care. While the amounts in the
Minister’s Statement in 2003 and 2004 are higher than the appellant’s estimates,
no adjustments are warranted because the amounts in the Statement are based on the
appellant’s bank account and credit card statements.
(i) Personal
Care
[80]
The appellant cut her own hair and her mother’s
such that no money was spent. An estimated $50 monthly was spent on personal
care. However, this amount and any other amounts related to personal care were
already included in her estimate of the cost of groceries in the “food”
category above. I find that the “personal care supplies & equipment” and
“hair cutting, washing, styling” will each be reduced to nil.
(j) Recreation
[81]
Except for $960 spent on cable television, she
did not spend any money on entertainment nor recreation and had no time to
exercise in 2002. I find that other than $960, the “recreation services” will
be reduced to nil.
[82]
As for 2003 and 2004, the auditor allocated
$6,950 and $12,002, respectively, to the “Recreation” category. While these amounts
are taken from the appellant’s bank account and credit card statements, she
testified that she has been very involved with her church in Kitchener over the
past 40 years and often purchases groceries and decorations for church
functions. Her son also testified that from 2002 to 2004, he used her credit
card to make substantial purchases. That, combined with her frugal lifestyle
and her testimony, leads me to conclude that the amount for this category is
reduced to $1,000 for each of 2003 and 2004 to account for the cable
television.
(k) Printed
Matter
[83]
The appellant testified that she did not read
magazines or newspapers. Instead, she listened to radio and watched
television. When she wanted to read books, she borrowed them from her church
library. No adjustments, in my view, are necessary as the amounts on the
Minister’s Statement have been taken from the appellant’s bank account and
credit card statements.
(l) Tobacco
and Alcohol
[84]
Neither the appellant nor her mother drank
alcohol or smoked. With respect to the “tobacco and smokers’ supplies” for 2003
and 2004 and alcoholic beverages for 2004, although the amounts were taken from
the appellant’s bank account and credit card statements, I infer these
expenditures belonged to her son who used her credit card. Hence, the amounts
are to be reduced to nil in each of 2003 and 2004.
(m) Security
[85]
The only subcategory within “Security” is “life
insurance premium”. The appellant had life insurance but could not remember
exactly how much her life insurance premiums were. The life insurance premium in
2004 is substantial ‑ $18,522. The Minister reduced this amount by
$18,000 through an adjustment in the “ADJUST TO ACTUAL” subcategory. The net amount for 2004 is therefore $522 with no adjustments
necessary.
(n) Gifts
and Contributions
[86]
The appellant regularly made cash donations to
her church. The amounts shown for “other (flowers, toys, etc.)” for 2002, 2004
and 2005 will be reduced to nil because of her explanation that as the head of
her church’s kitchen, she would often purchase food and decorations for the
church and was reimbursed by the church. The evidence as to her role was
corroborated by Michael Steele in his testimony. This information was not known
to the auditor prior to trial.
(o) Miscellaneous
[87]
The appellant indicated that almost all of the
expenses included in the “Miscellaneous” category by the Minister were for
business purposes. I accept her explanation as plausible and find that the category
“other from banks” is reduced as follows:
|
2003
|
$361.77
|
|
2005
|
$2,194.92
|
|
2006
|
$3,648.87
|
(p) Other
[88]
The appellant testified that almost all of the
expenses included in the “Other” category by the Minister were for business
purposes.
(i) Citi Mastercard
[89]
Mr. Steele testified that all of the Citi
Mastercard expenses comprising the amounts of $3,126.41 and $1,471.82 in 2003
and 2004 were business related.
[90]
For 2003, the respondent made a concession, and
made a similar concession in 2004, that eliminated the entire balance under the
subcategory “CITI MasterCard – no statements”. Yet, as part of the respondent’s
concessions in 2003, $5,191.08 was added as additional personal expenditures
under the subcategories “Citi Mastercard (Purchases)” and “Citi Mastercard
(Interest)”. No explanation for this addition was given at trial so that the appellant
could have an opportunity to challenge it. Given that, an adjustment is necessary
to eliminate respondent’s addition of $5,191.08 in “CITI Mastercard” personal
expenditures.
(ii) Cheques
[91]
According to Mr. Steele, $640.47 of the
Minister’s amount of $60,640.47 in 2004 represents the maturing of a GIC and claims
the auditor failed to take into account the deposit of the $640.47 into the
appellant’s bank account and only recognized the withdrawal of it such that it
should not appear as a “personal expenditure” because it was used to purchase a
GIC. In his explanation, Mr. Steele referred to Exhibit R-5, tab
37, pages 14 and 15. However, those documents are not supportive of his
statement that the amount was used to purchase a GIC. No adjustment is
necessary.
(iii) Adjust
to Actual
[92]
The appellant paid $2,210.19 in 2003 to a law
firm for assistance with the sale of one of her business locations. She further noted that work done by that law firm was purely
business. The Minister categorized this amount as a personal expense. For 2003, the subcategory “Adjust to Actual” should be reduced by $2,210.19
to recognize that the appellant’s legal expense was business related.
[93]
The appellant paid $1,434.34 as a business
expense in 2004 to a delivery company to deliver flowers from her business. The Minister categorized this amount as a personal expense. The respondent has conceded to a reduction of $1,500 to the
subcategory “Cash Withdrawals (adjust to actual)”.
Presumably this relates to the delivery expense. As such, no adjustment is
necessary.
[94]
The appellant corroborated her son’s testimony that
she did not always pay Mr. Ko all of his employment earnings from the flower
business. Her position is that all of his reported “other income” should be
deducted. He testified he frequently gave back his employment earnings to his
mother in order to help her out and as a method to reimburse her for his credit
card purchases. Since he did not testify that he gave all of his earnings to
his mother, a deduction for only half of his reported “other income” is
appropriate such that an adjustment is to be made in each taxation year to
account for his employment income from the appellant’s business that was not
actually paid to him.
(a) Income
tax refund
[95]
Mr. Steele said that in 2003 the appellant’s daughter
received a refund of $177 but he could not locate the source documents
evidencing the refund during the hearing nor did the appellant provide any
testimony relating to this item. I find the amount
on the Minister’s Statement to be more reliable.
(b) Money from father to daughter
[96]
Mr. Steele also testified that in 2004 the
appellant received $3,000 from her ex-husband as a gift to be given to their
daughter. However, the appellant testified that $3,000 was given to her by
her mother, who received it as a gift from the appellant’s sister-in-law. It is unclear whether Mr. Steele and the appellant were referring
to the same $3,000. I find the amount on the Minister’s Statement to be more
reliable.
(c) Loan
repayment from family
[97]
The amounts on the Minister’s Statement under
the subheading “Loan repayment from family” are the “Transfers in From Family
as repayment, verified” amounts. Although the
appellant argued that the loan repayments in each year were higher than the amounts
on the Minister’s Statement, she did not challenge the amounts on the Statement
shown under “Deductions”. Despite that, the amounts on the Minister’s Statement
are to be adjusted consistent with my earlier findings as to the loan
repayments in each of the relevant years.
(d) Reimbursement
of expenses from church
[98]
Mr. Steele presented evidence of numerous
expenditures that he stated were incurred by the appellant on behalf of her
church that related to her role as the head of her church’s kitchen for which
she was reimbursed. Again, this related to her role as the head of her church’s kitchen
for which she was reimbursed by the church. I accept the evidence on this
aspect and her amounts as reliable.
(e) Return of Capital on Investments
[99]
Mr. Steele testified that a deduction should be
given for a return of capital amount in 2005.
[100] I disagree given the respondent’s approach to accounting for the
appellant’s investments. The return of capital presumably relates to the appellant’s
Berkshire Investments which have been included in the net worth calculation on
a cumulative contribution basis. Reinvested dividends, interest and return of
capital amounts were not accounted for using the cumulative contribution basis.
Accordingly, I find the Minister’s approach to be correct and no such deduction
is warranted.
(f) Sister’s support
[101] Mr. Steele indicated that Ms. Ro paid the appellant $1,000 per month
while living with the appellant.
[102] This information was taken from the auditor’s working papers. Those papers contain notes which state that Ms. Ro moved in with
the appellant in mid‑2004, remained there until 2008 and she provided
financial support to the appellant during that time in the range of $800 to
$1,000 per month. However, the auditor’s note conflicts with both Ms. Ro’s and
the appellant’s testimony that Ms. Ro lived with her for one year commencing September
2003 and paid the appellant $800 monthly. Therefore, the deductions for 2004,
2005, and 2006 should be $3,200, $7,200 and $0, respectively. Yet, the Minister
has conceded to deductions of $4,800, $9,600, and $9,600 for 2004, 2005, and
2006, respectively. I conclude for this category that the amounts on the
Minister’s Statement are more reliable.
[103] Based on the foregoing adjustments, I find and conclude that the
cumulative unreported income discrepancy for the relevant years is now reduced
to the total amount of $109,951 which comprise increases in the appellant’s
unreported income by the following amounts:
A. $4,595 in 2002;
B. $13,654 in 2003;
C. $17,713 in 2004;
D. $45,383 in 2005; and
E. $28,606 in 2006.
[104]
The reassessments
for relevant years were made outside the normal reassessment period. The onus,
therefore, is upon the respondent to establish a misrepresentation attributable
to neglect, carelessness, wilful default or fraud in accordance with subparagraph
152(4)(a)(i) of the ITA.
[105]
Appellant counsel said that the remaining
discrepancy “… can be explained through the repayment of loans, by the expenses
from David, the church’s expenses and cash from other sources. Just because of
the inherent unreliable nature of net worths, we weren’t able to pick up.”
[106]
Even after making adjustments to the Minister’s
net worth calculations based on the evidence presented at trial, it is apparent
that there still exists a discrepancy between the income reported by the
appellant (along with her son and mother) and the income calculated using the
net worth method. In my opinion, the appellant did not adequately explain the
remaining income discrepancy. Consequently, I find that the Minister discharged
her burden of proof in re-opening the statute-barred years for the relevant
years.
Gross
Negligence Penalties
[107] The Minister assessed the appellant for gross negligence penalties (on
the unreported income) under subsection 163(2) of the ITA for each of
the relevant years and section 285 of the ETA for the reporting periods.
The burden of establishing the facts justifying the penalties is on the
Minister.
[108] In Laplante v Canada, Justice Bédard
provided a summary of the law on gross negligence penalties:
11 The concept
of "gross negligence" accepted in the case law is that defined by Mr.
Justice Strayer in Venne v Canada (Minister of National Revenue – MNR) …:
… "Gross negligence" must
be taken to involve greater neglect than simply a failure to use reasonable
care. It must involve a high degree of negligence tantamount to intentional
acting, an indifference as to whether the law is complied with or not. …
12 In Da Costa v Canada... the Honourable Chief Justice
Bowman … made the following remarks:
[9] …
The question in every case is …
(a) “was the taxpayer negligent in making a misstatement or
omission in the return?” and
(b) “was the negligence so great as to justify the use of the
somewhat pejorative epithet ‘gross’?”
…
[11] In drawing the line between
“ordinary” negligence or neglect and “gross” negligence a number of factors
have to be considered. One of course is the magnitude of the omission in
relation to the income declared. Another is the opportunity the taxpayer had to
detect the error. Another is the taxpayer’s education and apparent
intelligence. No single factor predominates. Each must be assigned its proper
weight in the context of the overall picture that emerges from the evidence.
…
13 Further, in Villeneuve v Canada ... the Federal Court of
Appeal made it clear that "gross negligence" could include wilful
blindness in addition to an intentional act and wrongful intent. …
[109] The auditor testified that the single largest reason for applying
the gross negligence penalties was the magnitude of the purported amount of $440,249
in unreported business income for the relevant years. The
respondent pointed out that, in addition to the materiality of the unreported
income, the appellant: (1) did not provide adequate books and records to the CRA;
(2) had an accountant and bookkeeper helping over the years and could have
asked them questions; (3) was directly involved in maintaining her books and
records and would have been aware of what numbers were being used to prepare
her returns; and (4) signed her returns.
[110] The appellant testified that she filed her income tax returns every
year, on time, since immigrating to Canada. She was aware that she needed to
report all of her income from business and did so. She emphatically denied that
she received money from her son’s drug-dealing activities as corroborated by
him. When she purchased the business, she was aware that she was required to
keep all of her books and records for income tax purposes, hired an accountant
and provided him with receipts, account statements and accounting records for
that purpose. Upon completing the tax filings, her accountant would review them
with her; she relied on his expertise.
[111] The Minister has not, in my view, satisfied her burden of
establishing facts that justify the assessment of gross negligence penalties in
these circumstances such that the benefit of the doubt goes to the appellant. The
picture that emerges is that whilst her books and records were lacking, she
nevertheless maintained books and records, hired a chartered accountant (and
later a bookkeeper) to assist her with her tax filings but he passed away. Additionally, the appellant retrieved some but not all books and
records from the accountant’s son even though some documents were destroyed by
a flood.
[112] Of some import is the significant reduction in the magnitude of her
unreported income, based on the evidence presented at trial and the Minister’s
concessions, as compared with her declared income. Viewing the totality of the
evidence and the circumstances, I am not convinced that the misstatements in
her tax filings are tantamount to intentional acts that amount to a level of
reprehensible recklessness.
[113] I conclude that the Minister satisfied
the onus with respect to the statute‑barred issue. The appellant produced
some credible evidence to demolish some of the Minister’s assumptions as to the
quantum of unreported income during the relevant years. The Minister has
failed to satisfy the onus respecting the imposition of gross negligence penalties
for the relevant years and reporting periods.
[114] In light of the foregoing, the appeals for the relevant years are to
be allowed, in part, and the reassessments referred back to the Minister for
reconsideration and reassessment to account for the concessions made by the
respondent and in accordance with these reasons for judgment relating to the
unreported income and gross negligence penalties, for the relevant years and
reporting periods, with the result that the appellant’s liability for GST
requires adjustments for the reporting periods.
[115] The appellant is awarded one set of party and party costs.
Signed at Vancouver,
British Columbia, this 4th day of May 2017.
“K. Lyons”
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