Jean-Paul Biron v. Minister of National Revenue, [1985] 1 CTC 2014, 85 DTC 121

Cardin, TCJ [TRANSLATION]:—The appeal of Jean-Paul Biron is against tax assessments made by the respondent for the 1974 to 1980 taxation years inclusive, by the “‘net worth” method.

The appellant, married to Dame Isabelle Biron under the regime of community of property, was a farmer at Ste-Brigitte-des-Saults in the province of Quebec. Although Mrs Biron had shared in the farm work for many years, she herself established that there had never been any profit-sharing agreement or partnership between her and the appellant during the years in question.

It was further established that she did not receive any income from offices or employment or from businesses or property, except for some investment income from 1973 to 1980.

The study of the appellant’s file was begun by Renaud Fleurent, an auditor for the Department of National Revenue, on February 23, 1981. The first meeting with the appellant took place on April 7, 1981, and Mr Fleurent noted that the ledgers and books on farming operations covering several years were extremely elementary and inadequate, so that it was impossible to audit the appellant’s tax returns. Mr Fleurent therefore sent the appellant a letter dated April 7, 1981 (Exhibit A-l) in which he asked the appellant to prepare and keep books and ledgers on the operation of the business.

Mr Fleurent died on April 15 and Mr Lemire, another auditor for the Department of National Revenue, continued the investigation on August 10, 1981. He used the “net worth’’ method because there were no records on the five sources of income, namely milk, stock and strawberry sales, farm subsidies and investments.

In his calculation of net worth, Mr Lemire included Mrs Biron’s income in that of the appellant. As of 1967, Mrs Biron’s sole source of income was investments. The respondent alleged that during the period at issue the appellant, who did not dispute this allegation, had transferred to his wife some of his property, which was the source of her investment income (Exhibit I-13).

Using the ‘‘net worth’’ method, it appeared that during the taxation years the appellant had earned and omitted to report the following net income:

These amounts were computed as appears in Exhibit I-3 (the appellant’s capital continuity), supported by appendices 1 to 10 of Exhibit 1-3. In addition, the respondent imposed penalties of $308.81 for 1974, $494.99 for 1975, $95.08 for 1976, $564.25 for 1977, $740.60 for 1978 and $1,022.63 for 1979. No penalty was imposed for 1980, however, since the respondent had agreed that an error had been made in the appellant’s return for the 1980 taxation year. These penalties were imposed under subsection 163(2) of the Act, RSC 1952, c 148, as amended.

It was admitted that since the respondent’s assessments for the 1974, 1975 and 1976 taxation years had not been issued within the four-year period, they were prescribed under paragraph 152(4)(b). However, under subsection 152(7) the respondent is not bound by returns or information supplied by a taxpayer, and may at any time assess the tax if the taxpayer has made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under the Act (sub- paragraph 152(4)(a)(i), or if the taxpayer has filed a waiver in prescribed form with the Minister four years from the day of mailing of a notice of the original assessments (subparagraph 152(4)(a)(ii) ).

With regard to the 1976 taxation year, the record contains, as Exhibit I-4, a form (T-2029) waiving the four-year period, which was signed by the appellant. As for the waiver for the 1974 and 1975 taxation years, and the one for 1976 (Exhibit 1-4), the validity of which the appellant seemed to view with some reservation, counsel for the respondent succeeded, in my opinion, in proving that the appellant wilfully misrepresented the facts by omitting from his tax returns certain substantial amounts which he or his wife had received as income for each of the years at issue.

In the circumstances, since the respondent proved misrepresentation within the meaning of subparagraph 152(4)(a)(i), he was justified in reassessing the appellant for the 1974, 1975 and 1976 taxation years. However, the appellant still has the burden of showing that the respondent’s assessments for the years 1974 to 1980 inclusive are incorrect.

The assessment by the “net worth’’ method reveals that from 1974 to 1980, there was a marked increase in the appellant’s capital. In fact, the appellant capitalized twice as much money as the amounts of income reported during that period. The appellant’s assets increased from $5,480.72 at December 31, 1973 to $192,000 at December 31, 1980 (Exhibits 1-1 and 1-2).

Despite this increase in capital, which was not disputed, the appellant had not reported any taxable income for the years 1974, 1975 and 1976. For the years 1977 to 1980 inclusive, the reported income was clearly so much less than the income received that his tax returns did not represent the income that he had actually realized from 1974 to 1980 inclusive (Exhibit I-1).

The submissions of the appellant, who has the burden of establishing that the respondent’s assessments were incorrect, consisted of vague generalities and assumptions. The appellant contended that in his capital reconciliation, the respondent underestimated his capital at December 31, 1973. As proof of the validity of his allegation, the appellant stated that in 1967 his wife’s capital amounted to $37,000, and he contended that it was generally admitted that capital doubles every seven years. On this premise he calculated that his capital in 1973 ought to have been $74,000, less $10,000 in operating costs. On the basis of this contention, the appellant calculated that his capital at December 31, 1973 was therefore $64,000, and not $5,480 as established by the respondent in his assessments, and concluded that the respondent’s subsequent calculations are consequently incorrect. The appellant’s calculation is obviously only an assumption and certainly does not prove that the appellant’s capital at December 31, 1973 was $64,000. Moreover, the appellant not only denied that there was a considerable discrepancy in capital between 1973 and 1980 but, in his calculation of the capital continuity, the appellant used the increase in capital established by the respondent for the years 1974 to 1980 (Exhibit A-2).

In that calculation, the taxpayer submitted that personal expenses, as established by the accountant, rose from $2,000 in 1974 to $4,000 in 1980. In her testimony, Mrs Biron said that both her and her husband’s personal expenses were less than $2,000 a year. The appellant fixed the amount of personal expenses at $1,200 a year, or $100 a month for two persons. None of those amounts are realistic: the credibility of the appellant and his wife on this point is questionable, to say the least, and I do not accept the appellant’s figures for personal expenses.

Another item in the appellant’s capital continuity table (Exhibit A-2) which casts doubt on the appellant’s credibility is the $1,000 gift Mrs Biron was supposed to have received every year from her parents. These amounts were never mentioned to the auditor and appeared only in table A-2. The evidence shows that Mrs Biron’s father is ninety-two and her mother eighty-six years of age, both are invalids and receive a monthly pension of $700.

In summarizing the facts, I conclude that neither table A-2 nor the testimony of the appellant and his wife are such that the appellant succeeded in establishing that the respondent’s assessments by the “net worth” method, based on figures supplied mainly by the appellant or his wife, are incorrect. Furthermore, the appellant did not establish that he had reported all his income from 1974 to 1980 and he was not able to satisfy the Court that he was unaware that he had received more income than reported for the years 1974, 1975 and 1976. The appellant therefore knowingly supplied incorrect information in his tax returns for 1974, 1975 and 1976, and the respondent had the right to reassess the appellant for those years.

The Court is considering only the 1974 to 1980 taxation years inclusive, for which the appellant admitted that there was no income sharing between him and his wife. In argument, the appellant stated that it should be the taxpayer’s right to decide whether or not to share income between spouses and that, as of 1981, he wanted his wife’s income to be shared between them.

Obviously, it is the right of the taxpayer and his wife to decide whether they want income to be shared in future, but the necessary steps must first be taken to create a legal partnership or a valid declaration of income sharing must be made before such arrangements are recognized by the respondent for tax purposes.

For these reasons, I conclude that the respondent did not err in adding to the appellant’s income the amounts not reported by him for the years 1974 to 1980 inclusive, as established by the respondent’s assessments based on the “net worth” method. The penalties imposed for the years 1974 to 1979 are also upheld.

The appeal is dismissed.

Appeal dismissed.