Vittorio Coscarella v. Minister of National Revenue, [1984] CTC 3067, 85 DTC 3

Cardin, TCJ:—The Minister of National Revenue assessed Vittorio Coscarella, employing the “net worth” method of ascertaining income, and included in the computation of the appellant’s income for the 1976, 1977 and 1978 taxation years, amounts of $8,091.26, $16,917.04 and $19,811, respectively.

In his reply to notice of appeal, the respondent sets out the basis on which the net worth assessment was computed:

2. In so assessing the Appellant, the Respondent found or assumed the following facts:

(a) the Appellant, in his returns of income filed for the 1975 through 1978 taxation years, declared income as the sole proprietor of Riviera Pizza; Spaghetti House & Tavern; the Respondent, following service of the Appellant’s Notice of Objection, accepted that this business was carried on by the Appellant and his spouse, Car- mela, in partnership;

(b) during the 1976, 1977 and 1978 taxation years, the Appellant’s assets less liabilities

increased by not less than $11,966.34; $44,193.88 and $36,182.30 respectively.

(c) the Appellant’s personal expenses were not less than $7,798.07, $14,102.89 and $13,194.42 in the 1976, 1977 and 1978 taxation years, respectively;

(d) the Appellant’s income in the 1976, 1977 and 1978 taxation years was not less than $15,191.13, $23,114.04 and $21,083.64, respectively;

(e) in his returns of income filed with the Respondent for the relevant taxation years, the Appellant reported income of $14,199.75, $12,394.00 and $2,544.00 for the 1976, 1977 and 1978 taxation years, respectively;

(f) the Appellant was a person who, knowingly or under circumstances amounting to gross negligence in the carrying out of a duty or obligation imposed by the Income Tax Act, has made, or has participated in, assented to or acquiesced in, a statement in his income tax returns for the 19767, 1977 and 1978 taxation years inclusive, as a result of which the tax that would have been payable by the Appellant for those taxation years if the tax had been assessed on the basis of the information provided in the Appellant’s returns for those years is less than the tax payable by the Appellant for those years, as follows:

	1976	1977	1978
Amount of taxable income subject
to penalties	$8,091.26	$16,917.04	$19,811.64
Federal tax payable	3,234.99	5,905.90	3,858.01
Federal tax payable on basis of
information filed with returns	1,616.90	1,724.04	NIL
Difference	1,618,09	4,181.86	3,858.01
Penalty assessed on federal tax	404.52	1,045.47	964.50

3. The facts upon which the Respondent relied in assessing the Appellant to tax for the relevant taxation years are summarized on the attached Schedules I to III.

B. STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

4. The Respondent relies, inter alia, upon Sections 3 and 9 and Subsections 152(7) and 163(2) of the Income Tax Act, R.S.C. 1952, Chapter 148, as amended.

5. The Respondent submits that he properly has computed the Appellant’s income pursuant to Section 9 of the Income Tax Act for the relevant taxation years.

6. The Respondent admits that the penalty levied pursuant to subsection 163(2) of the Income Tax Act has been improperly computed, and hereby consents to judgment allowing this appeal in part and referring the assessments back to the Respondent for reconsideration and reassessment on the basis that the Appellant failed to include the following amounts in the computation of his income for the relevant taxation years within the meaning of subsection 163(2) of the Income Tax Act.

		1976	1977	1978
Apparent Income per Net Worth	$15,191.13		$23,114.04	$21,083.64
Income included in returns of
income filed	14,199.75		12,394.00	2,544.00
Unreported income	$	991.38	$10,720.04	$18,539.64

In his notice of appeal, the appellant states the reasons he opposes the Minister’s net worth assessment in the following terms:

(1) No allowance was made for money received by me and my wife in 1977 from Mr. Guzzo Giovanni (Copy of declaration by Mr. Guzzo Giovanni enclosed), also enclosed is a copy of the bank loan statement. This money was used to repay the bank loan.

(2) No allowance was made for 1977 for the $7,000 received by my son, Emery, from Mr. Tom Ciarlariello.

(3) No allowance was made for 1978 for the $11,000 received by my son Emery, from Mr. Tom Ciarlariello. (copy of declaration by Mr. Tom Ciarlariello enclosed).

(4) No allowance was made for money given to me by my son Emery in 1978 from his earnings. This amounted to approximately $5,000.00.

(5) No allowance was made for cash held by me at the end of 1975 and deposited in the bank as needed during the reassessed period. Approximate amount $20,000.00.

(6) Drawings from the business have been added to income. Drawings for 1976, 1977 and 1978 included $3,000.00 for each year for food. This has already been ad- justed for in net worth calculation. Consequently income is overstated by $3,000.00 for 1976, 1977 and 1978.

In his tax returns for the years 1975 to 1978 inclusively, the appellant had declared income as sole proprietor of “Riviera Pizza, Spaghetti House & Tavern” (Riviera Pizza). Following his notice of objection, the Minister of National Revenue accepted that the said business was carried out jointly by the appellant and his wife, in partnership (Exhibit R-1).

However, the respondent has not yet assessed the appellant’s wife for her share of the 50 per cent interest in the business. By agreement of the parties and with the consent of the Court, the computation of the appellant’s net worth assessments for 1976 to 1978 inclusive, for practical purposes, will be considered here on the assumption that the appellant is the sole proprietor of Riviera Pizza, the understanding being that the decision rendered and the quantum determined in this appeal will apply “mutatis mutandis” to the assessments to be made with respect to the half-interest of the appellant’s wife in Riviera Pizza.

It is to be noted that the Minister of National Revenue, in paragraph 6 of his reply, admits that the penalties levied pursuant to subsection 163(2) of the Income Tax Act, RSC 1952, c 148, were incorrectly computed and that the penalties imposed on the appellant should be computed on the basis of the revised unreported income of $991.38, $10,720.04 and $18,539.64 for the 1976, 1977 and 1978 taxation years respectively.

Counsel for the appellant, for his part, advised that paragraph 6 of the notice of appeal was being abandoned and the pertinent amendment to the notice of appeal was made accordingly, and accepted by the Court.

The appellant contends that the respondent’s net worth assessment was too high on three counts:

1. At the beginning of the period assessed, the appellant had savings of $20,000 kept in a box in his bedroom.

2. His wife had received a gift from her father in Italy, of which $18,000 remained.

3. Amounts of $17,708.44 and $3,594.72 received by his son from his father-in-law were transferred to him (the appellant).

The appellant’s net worth assessment was carried out by Gerry Michele DiDonato, an appeals officer with the Department of National Revenue. The reason for the net worth assessment was that during a preliminary examination of the appellant’s books and records, a discrepancy as to the source of income arose. The appellant had purchased and paid $52,000 cash for a property on Curtis Street, and neither the appellant nor his son Emery who, at the time, was working at Riviera Pizza could provide a reasonable explanation as to the source of that amount. No banking records prior to 1979 were available, and Mr DiDonato obtained a bank authorization from the appellant in order to continue his audit. The bank records revealed that in 1977 and 1978, loans totalling $73,000 had been made by the appellant and repaid within two years. The total interest paid on the loans was roughly $4,400 in 1975.

Tax returns for the years 1972 to 1976 showed that the appellant’s declared income was $3,668, $1,463, $7,462, $6,026 and $14,942 respectively. These amounts also appear in a bank computer printout (Exhibit R-2). The uncontradicted evidence was that the printout and other pertinent documents had been available and indeed discussed at length on five or six occasions by Mr DiDonato with the appellant’s solicitor, Mr Duncan Philipps, with his accountant Stanley Godawa and with the appellant’s son Emery before a final net worth assessment was established.

In order to substantiate the Minister’s net worth assessment, Mr DiDonato also prepared a document entitled “Source and Application of funds” (Exhibit R-3) which, to some degree, corroborated the Minister’s net worth assessment.

In the appellant’s net worth assessment, Mr DiDonato did take into account an amount of $5,000 which Emery Coscarella stated he had given to his father from his savings. However, no allowances were made for the amount of $20,000 alleged to have been the appellant’s savings and kept in cash in the appellant’s bedroom, nor for the amount of $18,000 allegedly received by the appellant’s wife from her father in Italy, nor for the amounts of $17,708.44 and $3,594.72 allegedly received by Emery Coscarella from his father-in-law and allegedly transferred to the appellant’s account.

With respect to the alleged savings of $20,000 which the appellant claims to have had in cash at the beginning of the assessment period, not only is it difficult to conceive that such an amount could have been saved from the low income reported by the appellant from 1972 to 1976, but the evidence as to how much money there was in the box allegedly used to keep the savings is inconsistent to say the least. The appellant testified that he kept a cash box in his bedroom in which there were savings of $20,000. The appellant’s wife, in evidence, stated that there was a box in the bedroom but that she did not know how much money was in it. She also stated that amounts were regularly withdrawn from the box to pay current bills. Emery Coscarella who administered the restaurant in the absence of his parents stated that there was a box in his parents’ bedroom which had some money in it which he used to pay bills. Emery Coscarella’s evidence is that there was never any more than $2,000 at any one time in the box used to pay current bills and that most of the restaurant income was deposited into their bank account.

In attempting to establish that the appellant’s wife’s father had given her a gift of $20,000, $2,000 of which she alleges to have spent in Italy, the appellant produced as Exhibit R-4 a foreign exchange certificate containing amounts of currency exchanged. However, contrary to the evidence of the appellant and his wife who both claimed that the $20,000 gift had been exchanged into Canadian funds partly in Italy and partly in France, the exchange certificate was issued at the Toronto International Airport for amounts considerably less than $20,000 (Exhibit R-4).

In order to prove that the appellant had indeed travelled to Italy, he produced a photocopy of a page of what he alleged to be his passport. However, the stamps on the passport did not indicate entrance into Italy but rather entrance into Venezuela in February of 1976.

With respect to the $17,708.44 and $3,594.72 which the appellant alleges was received by his son Emery from his father-in-law and transferred to him (the appellant), the evidence shows that the amounts had been received in a series of small amounts which could not be identified by Emery Coscarella either as to the amounts or as to the dates these amounts had allegedly been received from his father-in-law.

In this regard, counsel for the respondent produced as Exhibits R-6, R-7 and R-8 handwritten notes taken by Mr DiDonato, with proper authorization from a bank computer printout of transactions effected in bank account #102-542. Counsel for the appellant objected to the filing of these documents on the ground that they did not look like bank accounts and there was no indication as to who had prepared them. The respondent explained that the actual computer printouts operated by an employee of the bank could not be made public because of the confidential nature of the transactions made by the bank’s numerous other clients and which were also listed on the printouts. The evidence, which was not contradicted by the appellant nor his son Emery, is to the effect that the documents not being filed as Exhibits had not only been shown, but copies of Exhibits R-6-7-8 had been provided to the appellant, to his son Emery, to his accountant and to his former solicitor. The figures contained therein had been discussed on several occasions before the Minister’s assessment with the appellant, with his son and with the appellant’s representatives, and were accepted as being the deposits and withdrawals in Emery’s bank account #102-542. Counsel who represented the appellant at the hearing suggested he had not seen the said figures. Indeed, the exhibits are not, in themselves, conclusive evidence. However, I allowed the respondent to introduce the documents as part of the auditor’s notes on the basis that they already had been fully examined and discussed with the appellant, his son and his legal and accounting representatives before the reassessment.

I have no difficulty in accepting the appellant’s contention that Riviera Pizza was a family business involving members of the Coscarella family other than the appellant and his wife. I am also prepared to accept and take into account that the concept of business practices held by some persons of European background may differ somewhat from practices usually followed by Canadian business. However, these different practices must necessarily be limited, for tax purposes, to those that can be proven to a reasonable degree .. . and the testimony of the witnesses must be credible.

There are serious inconsistencies in the evidence given by the appellant, his wife, his son Emery and Emery’s father-in-law with respect to the three substantial amounts claimed by the appellant to have been in his possession or received during the taxation period under review. It is difficult to understand or, indeed, to believe that the appellant whose reported income for the years in question was decidedly low, would obtain loans on which interest had to be paid for purposes of renovating his business or purchasing a property on Garrard Street when he alleges to have had in his possession, at home, at least $38,000 which earned no interest whatever. The evidence here is not that the appellant refused entirely to use bank services — on the contrary, most of the income derived from the business and most of the business expenses were transactions through the bank. Why, then, would the appellant not have used this amount to at least earn interest income by depositing it in the bank?

The total amount of unreported income over the period of three years, as shown in the revised net worth discrepancy, is over $89,000 (Schedule I, p 2). As pointed out by the respondent, even if the appellant could have proven that he indeed had $58,000 in his possession (which he was unable to do), there would still exist a discrepancy of over $31,000.

The appellant did not succeed in proving that the Minister’s net worth assessment was wrong in any respect and the assessment stands. The facts and the figures which the respondent put in evidence are such that I must conclude that the appellant, whose reported income was low, could not have been unaware that he had not reported all his income for each of the three years reassessed. Indeed, it is also difficult to understand how and why no mention was made in the appellant’s tax returns for the pertinent years of the rental income derived from the property on Garrard Street, or the resulting capital gain or loss resulting from the disposition of the property. The respondent has satisfied the onus of establishing that the appellant, knowingly or under circumstances amounting to gross negligence, omitted to declare all his income in the 1976, 1977 and 1978 taxation years and is therefore subject to penalties.

The appeal for the 1976, 1977 and 1978 taxation years is allowed in part in accordance with paragraph 6 of the respondent’s reply to notice of appeal on the basis that the penalties levied pursuant to subsection 163(2) of the Income Tax Act were incorrectly computed and that the said penalties should be computed on the basis of the revised unreported income of the appellant, as mentioned in the reasons for judgment herein. The matter is referred back to the respondent for reconsideration and reassessment accordingly. In all other respects the appeal is dismissed.

Appeal allowed in part.