Valerie Morrow v. Minister of National Revenue, [1985] 1 CTC 2424, 85 DTC 402

Bonner, TCJ: [ORALLY]:—The appellant appeals from assessments of income tax for the 1976, 1977, 1978 and 1979 taxation years. Throughout those years the appellant derived income from the rental of residential real estate located both in Alberta and in British Columbia.

The assessments in dispute were arrived at by the net worth method. This method involves measurement of net worth, that is to say, the excess of assets over liabilities at both the beginning and end of a period and the assumption that any increase over the period is income, except to the extent that some other source of the increase can be identified and eliminated. To the amount thus determined there is added an amount calculated to have been expended for day- to-day personal expenses over the period.

It is apparent that the net worth method leads to a result which is much less precise than that obtained by direct measurement, that is to say, the ascertainment of total revenues and the deduction of the costs of earning them.

The appellant testified yesterday that she kept records of her rental receipts and of her costs. Those costs were, she said, categorized and an envelope for the storage of invoices and receipts for each category was kept.

Further, Mrs Morrow said the records were turned over to her accountant whose responsibility it was to prepare the tax returns. She stated that she signed the returns in blank and did not read them or check them over before filing. She did not say that she checked the accountant’s efforts against her records at any time subsequent to the filing of her returns. On that evidence I cannot give any weight to her bland general assertion that the returns were accurate.

No financial records were tendered in evidence. Thus, a challenge on a direct measurement basis to the net worth results could not be arrived at on the basis of the evidence adduced. Furthermore, by failing to introduce her records the appellant missed the opportunity to challenge Mr Shaw’s evidence that her records were in disarray with the consequence that he had to resort to the net worth method.

The appellant did not produce any complete net worth calculation of her own. She did show that it is possible that the assessor made some errors in his calculations. For example, the assessor assumed that receipts from Army & Navy Stores were for clothing, but he admitted on cross-examination that Army & Navy sells not only clothing but also paint and quite obviously paint, if purchased there, could have been used on the rental dwellings and thus could have been an expense of earning income.

It is insufficient, however, in a case such as this to establish the mere possibility of error. There must be evidence pointing on the balance of probabilities to a conclusion that the assessments which have been challenged are too high.

The proper approach in a case such as this was laid down a number of years ago by Mr Justice Cameron in Chernenkoff v MNR, [1949] CTC 369 at 374; 49 DTC 680 at 683 as follows:

In effect, the appellant agrees that the “net worth’’ computation of her income is a satisfactory basis for arriving at her taxable income, but that some of the items — those which I have indicated — are wrong. When these are corrected in accordance with the evidence adduced — so she states — the result is that there is no taxable income for any of the years in question.

My opinion is that the appellant must do far more than she has attempted to do here if her appeal is to be successful. There can be no question that the onus lies on the appellant and that, in my view, means that she must establish affirmatively that her taxable income was not that for each of the years for which she was assessed. Two courses were open to her, the first being to establish her income with proper deductions and allowances, and that course could quite readily have been followed.

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. But that also she has failed to do.

The case is strongly parallel to the circumstances before me today. The assessments for 1976, 1977 and 1979 have therefore, on the evidence, not been shown to be wrong.

The assessment for the 1978 taxation year is a nil assessment and on the basis of the decision of the Federal Court of Appeal in the Garry Bowl case that appeal will be dismissed.

The appellant did not take issue with the fact that the assessment for 1976 was statute-barred, the first assessment for that year having been made on October 18, 1977. It is sufficient, therefore, to note only that having regard to the evidence of:

(a) the conduct of the appellant in signing a blank return of income for that and other years and failing totally to check the accountant’s work; and

(b) the evidence that the appellant’s personal expenditures during 1976 far exceeded her declared income;

I find that the Minister has established that the appellant made misrepresentation attributable to neglect in filing her return for the year.

Finally, I will observe that the other relief sought by the appellant which is listed in paragraph 2 of Exhibit A-l is beyond the jurisdiction of this Court. That jurisdiction is set forth in section 171 of the Income Tax Act.

For the foregoing reasons all appeals will be dismissed.

Appeals dismissed.