Hayat Seifeddine, Jim Seifeddine and Akinsdale Foods Ltd. v. Minister of National Revenue, [1988] 1 CTC 2405, 88 DTC 1269

Brulé, T.C.J.:—The personal appellants are husband and wife and the corporation is a company owned equally by them. All three are appealing from reassessments of income tax for the 1979 to 1982 taxation years inclusive. All were reassessed based on statements of net worth pursuant to subsection 152(7) of the Income Tax Act (the Act) and in addition penalties were imposed as provided by subsection 163(2) of the Act.

The proceedings took place over two days and at the conclusion of the first session the Minister’s counsel announced that the penalties would be dropped.

Both personal appellants assisted in the management of the company which operated a convenience store. All filed income tax returns for the years under appeal but subsequently Revenue Canada reviewed these and the company operations and prepared net-worth statements. In evidence it was stated that some six statements in all were prepared, each previous one being revised as more information was forthcoming. The net-worth statement presented to the Court was shown not to be accurate and so an adjournment was granted to produce a new one. This latter statement was handed to the Court but there was no discussion as to its contents.

Minister's Position

Counsel for the Minister pointed out that the net-worth approach was necessary as the auditor could not obtain sufficient information for a normal reassessment. In the absence of proof that the net worth was wrong it must be considered as correct. Further, counsel pointed out that the final net- worth statement was not shown to be wrong.

Several cases were placed before the Court, but I do not intend to review all of these. It was stressed in Lisunia Chernenkoff v. M.N.R., [1949] C.T.C. 369; 49 D.T.C. 680, that the onus lies on the appellant to show that the assessed income was incorrect and that proper records be produced. The Court said at page 375 (D.T.C. 683):

In the absence of records, the alternative course open to the appellant was to prove that even on a proper and complete "net worth" basis the assessments were wrong.

This reasoning was followed in several of the other quoted cases.

The Minister’s counsel concluded by asking the Court to refer the matter back for reassessment on the basis of the latest net-worth statement.

Appellants' Position

Counsel stated that the appellants had successfully replied to the assumptions made by the Minister in the reply to notice of appeal. He admitted that the accounting method used to charge the appellants with income taken from the store was somewhat unusual, nevertheless the procedure was established by the company's accountant who gave evidence that the method worked.

A misunderstanding of this, plus the mixing of personal assets such as a rental property owned by the personal appellants, the double charging for food and automobile usage, the so-called unidentified assets, the sale of the business and the confusion between personal and corporate year-ends all contributed to the inaccuracy of the net-worth statements.

The appellants’ counsel stated that there were so many fundamental errors in the net-worth statements that they were unreliable, as the evidence showed, and should not be considered.

Analysis

The problem in these appeals stems from the manner in which the personal appellants received compensation from the company. At the outset of the operation the two personal appellants loaned funds to the corporate appellant, thus creating shareholder loan accounts. Sales were recorded and moneys were deposited in the bank. The shortfall between the deposits and the sales were considered as cash withdrawals by the personal appellants. This system had been put in place by the company's accountant, both here and in the previous store the personal appellants operated. He attested to it being accurate. Certain cash payments for deliveries were recorded separately and rationalized in the final determination of income received by the two personal appellants.

One problem contributed to some upset in the system when the store had two break-ins during 1981.

Many of the items on the net-worth statement first introduced to the Court were explained by the accountant and by Mrs. Seifeddine.

In the case of Nabil T. Nesrallah v. The Queen, [1986] 1 C.T.C. 11; 85 D.T.C. 5585, the Court in allowing the appeal said that while the taxpayer's own evidence was unreliable in many aspects, the evidence as a whole established the case for the appellant. Reed, J. referred to Anderson Logging Co. v. The King, [1917-27] C.T.C. 198; 52 D.T.C. 1209, where the Supreme Court of Canada set out at page 202 (D.T.C. 1211), referring to the appellant and the applicable principles, as follows:

He must shew that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering whether this has been done it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellant's cognizance;

The major difficulty in assessing the evidence in these appeals arises from the confused testimony of Revenue Canada's auditor. A Mr. Yu who held a management accountant's certificate had a great deal of difficulty in answering questions put both by the appellants’ counsel and by the Court. He could not seem to justify figures in the statement and included figures in the final statement which the Court felt had been properly explained in the first session of the hearing. He did not seem to comprehend a simple accounting procedure such as charging the appellants for personal consumption of goods from the store by crediting sales revenue and debiting shareholder loan accounts. The auditor also included a figure of over $40,000 on the statement when a letter addressed to him from the Royal Bank of Canada showed a property involved to have been sold before the end of the net worth period.

As Cardin, T.C.J. said in allowing similar appeal in the case of Subhash Mehta v. M.N.R., [1985] 1 C.T.C. 2211 at 2214; 85 D.T.C. 219 at 221:

. . . I do not believe that the Court can properly be asked to second-guess the assessor as to what the appellant's undeclared income in 1978 really was.

In the yet unreported decision of Sara Shlien v. M.N.R., Couture, C.J.T.C.C. said:

In my opinion the evidence adduced at the hearing demonstrates clearly that the Respondent's decision of assessing the increase in the Appellant's net worth as income for the 1980 taxation year was not reached on sound and fundamental principles of law.

I believe the same situation exists in these appeals and as a result they are allowed and will be referred back to the Minister for reconsideration and reassessment. The appellants are entitled to one set of costs on a party and party basis.

Appeals allowed.