Pushpa P. Thawani and Pritam L. Thawani v. Minister of National Revenue, [1992] 2 CTC 2095, 92 DTC 1791

Beaubier, T.C.C.J.:—These matters were heard together, on common evidence, by consent of all parties on February 12, 1992, on April 27, 28, 29, 1992, and May 1, 1992, in Winnipeg, Manitoba.

The witnesses called were Mr. Barry Atkinson, an accountant called by Mr. Thawani and called in rebuttal on behalf of both appellants and in addition the appellants themselves Pritam L. Thawani and Pushpa P. Thawani. Theresa Timmers, an auditor employed by the Minister of National Revenue was called on behalf of the respondent, the Minister.

At issue is the appeal by the appellants of net worth assessments upon them by the Minister of National Revenue for the years 1985 and 1986. It should be noted at the outset that the net worth assessments upon both appellants were in respect to all sources of income, and were not confined to one or two businesses as sometimes appeared to be the allegations by the appellants in argument.

The testimony of the appellants is that Mrs. Pushpa P. Thawani merely signed both her 1985 and 1986 income tax returns (filed as Exhibit R-6). She testified that she did not understand them. Mrs. Thawani relied on her husband, the appellant Pritam L Thawani, in respect to the preparation of documentation for income tax purposes and the filing of the returns. He prepared their income tax returns, financial statements, and the financial documents of the business she operated as “Aeshu Grocery”.

Mrs. Thawani was a school principal in India and immigrated to Canada in 1974. Mr. Thawani is a university graduate with a law degree awarded to him in India. He is also an immigrant to Canada. Both speak and understand the English language clearly and well.

In 1977, Mrs. Thawani started a business in Winnipeg, Manitoba, called Aeshu Grocery. Aeshu Grocery is a corner store in Winnipeg which measured approximately 16 feet by 35 feet in the years in question in this appeal. It is situated in a part of the Thawani's residence, the total area of which measured approximately 35 feet by 35 feet at the time it was visited by the auditor for Revenue Canada, Theresa Timmers. There is evidence that an addition was made to the premises in 1986. Mrs. Thawani hardly ever leaves the premises and operates the business from 7:00 a.m. until 1:00 p.m. on every day the law allows her to keep it open. She has no shoes or overshoes, or winter coat because she does not need them and she will not spend the money on them or on herself. She lives almost unbelievably frugally. Mr. Thawani spends money. Mrs. Thawani does not hesitate to spend money on her two sons who are now adults.

Mr. and Mrs. Thawani have charge cards together in both of their names. Mrs. Thawani uses hers for business purposes, not for herself, but she also lets her sons use her credit cards for their purposes and for the purpose of purchasing gifts she provides to them.

For the years in question Mr. Thawani filed income tax returns for himself which he prepared for himself (Exhibit R-1) as well as those he prepared for Mrs. Thawani.

The statements in the returns prepared by Mr. Thawani in respect to the "Aeshu Grocery” (hereinafter called "the business") showed the equity of Mr. and Mrs. Thawani to be equal in the business and also showed their drawings to be equal. In addition they showed assets which Mr. Thawani described in Court as belonging to him exclusively. Nonetheless in the returns filed on behalf of both Mr. and Mrs. Thawani the assets were shown in both returns as if they were all part of one entity. The same statements were filed for each taxpayer in the taxpayers respective income tax returns. In each year each taxpayer reported a net business income of $4,400.

As an example, the 1985 statement shows as part of the heading at the top the beginning words "Aeshu Grocery . . .” and below the top heading there is a first column titled "Expenses". Extracted in part from the listing under the title "Expenses" is the following:

The building allegedly repaired was a duplex at 618-620 Young Street, Winnipeg, on which $7,054 was spent by the Thawanis. There was an allegation that the property was in Mr. Pritam Thawani's sole name as a rental property, however no abstract of title or documentary evidence was filed respecting that allegation.

Annexed to each reply by the Minister of National Revenue there was a series of Schedules I to IV detailing the net worth of the parties and the basis upon which it was determined. The discrepancy between incomes reported in the income tax returns and the final calculations in the net worth was divided evenly among the appellants in the sums of $29,953.90 each for 1985 and $19,775.57 each for 1986.

Mrs. Thawani gave detailed evidence respecting her personal expenditures and those made in her name for 1985 and 1986 as particularized in Schedules II and III of the appendix to the replies.

With respect to Mrs. Thawani's comments on Schedule II, the 1985 statement, versus those determined by the Minister of National Revenue, the Court finds as follows:

Natural Gas and Hydro—$107.90. Mrs. Thawani's figure is adopted in view of the fact that the determination by the auditor for the Minister of National Revenue represents a percentage with no particular reason for the percentage. On the other hand Mrs. Thawani's testimony as to her personal frugality, the manner in which she lives and works and the fact that Mr. Thawani was often away for months at the time during the assessment periods in question, indicate to the Court that in fact the natural gas and hydro expenses respecting the premises were very largely related to the business.

Phone—The figure of the Minister of National Revenue is accepted since the long distance calls, even to Mr. Thawani, were not proved necessary for the Aeshu Grocery, nor were they necessary, so far as the evidence is before the Court, to the operation of any of the other enterprises which were under the management of Mr. Thawani.

Water—The Minister of National Revenue's figure is accepted since the submission of Mrs. Thawani was merely a percentage reduction of the Minister of National Revenue's figure without any adequate reason as to why the Minister's figure should be changed.

Property Taxes—The Minister of National Revenue's figures are appropriate in view of the evidence respecting the total size of the premises in relation to that occupied by the business.

It should be noted that Mrs. Thawani devoted considerable testimony to the deductibility of some dinnerware that she purchased on the basis that it was for resale at the Aeshu Grocery but could not be sold. This is not accepted by the Court; dinnerware is not a product sold in a small corner grocery. The Minister of National Revenue also capitalized $3,409.69 of the alleged "repairs"; the appellants did not present detail as to exactly what was spent and on what items it was spent and the reason for these expenditures on repairs. The appellants did not meet the onus upon them respecting this item.

All of the MasterCard, Visa, Sears and Eatons payments are accepted for 1985 and 1986 as determined by the Minister of National Revenue. The appellants failed to lead detailed evidence respecting these matters to refute the figures presented by the Minister of National Revenue. Indeed, Mrs. Thawani's testimony in cross-examination was that she made her credit cards available to her sons for their personal use on various occasions.

Similarly, the appellants failed to lead evidence to allow the airline tickets to be treated by the Court as other personal expenditures. The appellants disputed the airline ticket charge as March 2, 1985 Delhi, Bangkok, Hong Kong— one way (December 23, 1985 amount used) $2,571. The appellants did not deny that the trip had been taken. They did not lead any evidence that the amount in question was wrong and they did not present the ticket in question, nor did they present any person to allege that he or she had taken or had paid for the trip. The assumption of the Minister respecting this ticket was not refuted.

With respect to Schedule III, the 1986 statement of the Minister, the Court finds that the natural gas and hydro expenditures incurred personally by Mrs. Thawani amounted to $138 on the same basis as the determination respecting 1985 was made. The remaining figures determined in Schedule III by the Minister of National Revenue are accepted by the Court on the basis that the appellants did not meet the onus of proof upon them to provide evidence to refute the expenditures determined by the Minister of National Revenue for 1986.

Other than that already described, there was no evidence submitted by the appellants to refute the assumptions of the Minister of National Revenue.

An argument was made on behalf of the appellants that the Minister should not have engaged in the net worth assessment. The evidence is that the audit of the appellants arose as a result of information submitted to officers of the Minister of National Revenue from an outside source. Upon review of the income tax returns of the appellants, it was evident that the income reported by the appellants for each of the years in question was $4,400 a piece. The business statements attached to the income tax returns showed unusual entries, as is evident from the material contained in this judgment. An auditor attended at Aeshu Grocery and interviewed the appellants. At that time the evidence from the auditor is that there were no cash register tapes, the inventory records were sparse at best and were not itemized, and that Mr. Thawani did the accounting, such as it was. In the course of that interview the auditor determined that a net worth was the only approach to the assessments in question and proceeded on that basis.

That course of action was justified in the circumstances and nothing has been brought forward by the appellant which has given the Minister of National Revenue any alternative respecting the said assessments.

In the foregoing circumstances the appeal is allowed only insofar as to vary the personal expenditures contained in Schedules II and III respectively for natural gas and hydro in 1985 from $539.52 to $107.90 and in 1986 from $551.98 to $138; in all other respects the assessments are confirmed. These matters are therefore referred back to the Minister of National Revenue for reconsideration and reassessment on the foregoing bases.

In addition to the reassessments, the Minister of National Revenue levied penalties against the appellants for the 1985 and 1986 taxation years pursuant to subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). For each appellant these amounted to the sum of $1,565.20 in 1985 and $1,217.07 in 1986. Subsection 163(2) begins with the phrase "Every person who, knowingly, or under circumstances amounting to gross negligence . . . has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return . . . is liable to a penalty. . . ."

The evidence is that the Thawanis’ investments included bonds, gold, a mortgage receivable, a rental property, and term deposits. In addition, both the Thawanis had a number of bank accounts. Neither Mr. nor Mrs. Thawani reported interest from any source in the years in question.

The statements contained in the income tax returns filed by both appellants were prepared by Pritam L. Thawani who, according to the evidence of the appellants, controlled all of the money of the appellants, invested all the money of the appellants, and prepared all financial statements and income tax returns. He is a man with a law degree and a good command of English. The financial statements contained in the income tax returns were prepared in a manner that was, at best, grossly negligent. The Minister of National Revenue has submitted that in fact Pritam L. Thawani prepared these statements knowingly. As a result of the evidence of the auditor in respect to her interviews with Mr. and Mrs. Thawani, and as a result of hearing Mr. Thawani give evidence and of the statements by Mrs. Thawani as to Mr. Thawani's financial activities, the Court has no doubt that Mr. Thawani acted knowingly in making false statement in a return. The penalties assessed against Pritam L. Thawani are therefore confirmed for both 1985 and 1986 subject to adjustments to be based upon the revisions to the net worth respecting the natural gas and hydro for 1985 and 1986.

With respect to Pushpa P. Thawani, the question is whether her actions were done in circumstances amounting to gross negligence. Mrs. Thawani signed an income tax return in each year showing her income to be $4,400. Nonetheless she spent substantial funds on at least one international trip, she allowed her sons to use her credit cards for charge purposes, and she had a number of bank accounts and yet no interest was reported by her.

The difference between the amount of income reported by Mrs. Thawani and the amount of income determined by virtue of the reassessment is substantial. Mrs. Thawani failed to record her revenue both in the Aeshu Grocery and in respect to her bank accounts. She admitted that the assessment by the Minister of National Revenue in respect of food stocks removed from the grocery for personal use was valid, she allowed her credit cards to be used by her sons for their personal benefit and treated that as a business expense, and she used the credit cards herself for an international trip and treated the charges on the credit card as a business expense. The knowledge she displayed on the witness stand was such that no one could believe that she did not know that the expenditures she was incurring from time to time for herself, her household, and her family were personal and not business related and yet she states that she merely signed her income tax returns. She was a school principal in India, she operates a grocery store in Canada, and her command of English is good. She knew she was signing an income tax return. Her duties respecting that income tax return are clearly set forth on the income tax return itself. All of these facts indicate that Mrs. Pushpa P. Thawani was grossly negligent as determined by the Minister of National Revenue. The penalties are confirmed, subject to revision pursuant to the direction contained in this judgment for both 1985 and 1986 respecting revisions to the net worth on account of natural gas and hydro usage for 1985 and 1986. Therefore the penalties are to be adjusted accordingly when the net worth is adjusted by the Minister of National Revenue.

Appeals dismissed.