Jean Bouchard v. Minister of National Revenue, [1993] 1 CTC 2622, 93 DTC 1163

Lamarre Proulx, T.C.C.J.:—These are appeals from reassessments for 1980, 1981, 1982 and 1983. These reassessments were made by the respondent using the net worth method. This method is used by the Minister of National Revenue (the "Minister") where bad bookkeeping or an absence of bookkeeping by the taxpayer requires it.

The facts on which the Minister relied in assessing the appellant are described in paragraph 6 of the reply to the notice of appeal, as follows:

In making the reassessments for the appellant's 1980, 1981, 1982 and 1983 taxation years, the respondent took for granted, inter alia, the following facts:

(a) during the years in issue, the appellant was a self-employed advertising representative;

(b) the appellant kept no books concerning his business;

(c) in his income tax returns for 1980, 1981, 1982 and 1983, the appellant did not report all his income for the said years;

(d) to determine the income earned by the appellant for those years, the respondent had to proceed by the so-called“ net worth” method, the results of which appear in schedules I to V to the present reply to the notice of appeal and form an integral part thereof;

(e) for his 1980, 1981, 1982 and 1983 taxation years, the appellant knowingly or in circumstances amounting to gross negligence made a false statement or omis- sion in not declaring all his income for the said years, thus rendering himself liable to the penalty provided in subsection 163(2) of the Income Tax Act; . . .

[Translation.]

I reproduce the table concerning income appearing at page 2 of the reply.

The penalties provided in subsection 163(2) of the Income Tax Act (the "Act") were assessed in the following amounts:

The appellant admitted paragraphs 6(a) and (b) of the reply to the notice of appeal. The only item in the statement of assets and liabilities [sic] that was disputed in any substantial way by the taxpayer was the" Investments" part. He filed his own balance sheet as at December 31, 1983, as Exhibit A-1 I reproduce here the statement of investments as prepared by the Minister, as it appears in schedule 2 to the reply to the notice of appeal, and that prepared by the taxpayer for the year ended December 31, 1983 (Exhibit A-1).

1979 1980 1981 1982 1983

Investments

Quebec Bonds $10,000 $10,000 $10,000 $10,000 $10,000 Quebec Bonds — $ 3,000 $ 3,000 $ 3,000 $ 3,000 Quebec Bonds — $ 2,800 $ 2,800 $ 2,800

—

Quebec Bonds $10,000 —

—

Quebec Bonds — $15,000 $15,000 $15,000 $15,000 Canadian Bonds $ 100 $ 100 $ 100 $ 100 Canadian Bonds $5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 Canadian Bonds $12,000 —

—

Crédit foncier $10,000 —

—

—

Shares C.A.I. Inc. — — $ 2,000 $ 2,000 $ 2,000

Total $47,000 $33,100 $37,900 $37,900 $37,900

[Translation.]

That of the taxpayer in Exhibit A-1 :

A comparative study of the taxpayer's balance sheet and that prepared by the Minister’s auditor led the latter to say at the hearing, following a review of his records, that the investment total for 1980 could be reduced by $20,000. There was an amount of $5,000 in bonds which should not have been included from the outset. The auditor had included in the investments the amount, debited from the taxpayer by the bank, of $15,000, the fate of which the taxpayer was unable to explain. It appears, however, that it was not used to purchase bonds. Part of this amount of $15,000 could have been used to pay that part of the personal expenses that was estimated in the amount $4,362, the other part of the personal expenses having been computed on the basis of cheques. The taxpayer said that the sum was used to pay income taxes which, at $37,300.16, were exceptionally high in 1980 as a result of assessments for previous years. The auditor said, however, that he had taken the source of the income tax payment into account.

Based on a document signed by a person who was not present to testify, the appellant tried to show the Court that he spent no money on his personal expenses. In the absence of the witness, this evidence cannot be allowed. In any case, the Minister's estimate was very conservative, as is shown by Exhibit I-6, a document prepared by the Minister's auditor concerning the taxpayer's personal expenses.

I believe that the penalties were rightly assessed. The appellant's testimony was evasive. The appellant said that it was up to the Minister's representative to determine the facts and that he could not remember them after that many years. However, the taxpayer had already been assessed on a net worth basis for previous years and assessed penalties. He should have known that, as a person in business, he had to keep adequate, even if summary, accounts of his revenue and expense. I believe that the taxpayer had the ability to do so, if I can rely on Exhibit A-1, his balance sheet as at December 31, 1983, a document which he himself prepared and prepared well. In the absence of any bookkeeping on the taxpayer's part and in light of a very conservative net worth assessment by the Minister which proved income was greater than that declared, the Court can only find that there was gross negligence on the taxpayer's part giving rise to assessment of the penalties provided by subsection 163(2) of the Act.

Concerning the four-year limitation period for reassessment provided in subsection 152(4) of the Act which would apply to 1980, I cite the remarks of Reed, J. in Patricio v. The Queen, [1984] C.T.C. 360, 84 D.T.C. 6413 (F.C.T.D.) at page 365 (D.T.C. 6418):

The plaintiff was obviously annoyed by the fact that the discrepancies assessed by the Minister were not large amounts. I notice in the jurisprudence that when the discrepancies are large there is a tendency by the courts to more easily find gross negligence. When the discrepancies are large it becomes difficult to believe that a taxpayer could have inadvertently failed to notice the discrepancy (even when relying more or less completely on an accountant to make out the return). Thus, large discrepancies may often be a compelling feature leading to a finding of gross negligence. However, the discrepancies assessed do not have to be large to constitute gross negligence. A determination of gross negligence is one that is to be made in the light of all the circumstances of the case.

. . .. Having found that the defendant appropriately assessed the plaintiff on the basis of gross negligence, it is automatically open to the defendant, under section 152(4)(a)(i) to reassess the plaintiff beyond the four-year limitation period otherwise applicable. All that is required under that section is neglect or carelessness.

This Court is therefore of the view that, in light of the appellant's negligence in reporting his income correctly, this four-year limitation period does not apply to 1980.

The Court is also of the view that the investment total for 1980 must be reduced by $20,000, that is the amount of $5,000 which should not have been included for any of the years and the amount of $15,000 which should not have been included for the years 1980 to 1983 inclusive. This $15,000 amount could be added to personal expenses and the estimated amount of expenses subtracted. However, since the tax paid that year was very high, this seems to create a distortion of the taxpayer's usual income, and since the situation regarding the $15,000 amount is unclear, I think it is better to believe that it might have been used to pay taxes. The Minister shall therefore reassess the taxpayer on this basis for 1980.

As regards 1981, 1982 and 1983, the Court asked the respondent to inform it by letter of the effect which the $20,000 reduction in the investment total for 1980 had on the assessments for those years, and, the respondent and appellant having made their comments on this point, the Court is satisfied that the difference determined under the net worth method would remain unchanged for 1981, 1982 and 1983.

The appeals for 1981, 1982 and 1983 are therefore dismissed.

Appeals dismissed in the most part.