Luso Construction Ltd. v. R, [1999] 3 CTC 2317 (Informal Procedure)

Citations
[1999] 3 CTC 2317

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Text of decision

Lamarre T.C.J.:

These appeals were heard on common evidence. The appeals of Joao P. Melo (“appellant”) were from assessments under the Income Tax Act (“Act”) for his 1991, 1992 and 1993 taxation years whereby the Minister of National Revenue (“Minister”) increased the appellant’s total income by the amounts of $19,405, $25,530 and $61,847 respectively. The breakdown of these adjustments is as follows:

1991		1992	1993
Under-reported business income	$6,477	$19,817	$39,453
Personal expenses paid by corpora

tion 4,876 5,713 1,442

Underreported employment income 8,052 0 20,952

Total adjustments $19,405 $25,530 $61,847

The Minister used the net worth method to determine the under-reported business income, in accordance with subsection 152(7) of the Act.

The appeal of Luso Construction Ltd. (“appellant corporation”) was from an assessment with respect to goods and services tax (“GST”) issued by the Minister on September 2, 1997 for the period from January 1, 1991 to July 31, 1993 and bearing the number 04BP-114556921. The Minister assessed the appellant corporation in respect of failure to remit GST in the amount of $1,776.65 and on the basis that it over-claimed input tax credits in the amount of $9,983.31. The Minister also assessed interest and penalties. The appellant corporation’s liability was based on the assessment of its unreported income calculated using the net worth method, in accordance with section 299 of the Excise Tax Act. A summary of the net worth statements is attached to these reasons for judgment.

The only issue before me is whether the Minister was right in including for the taxation year 1992 an amount of $15,922.80 under the item “Loan to Manuel Melo” in the personal assets portion of the net worth statement.

It is not contested that the appellant corporation was controlled by the appellant during the period in issue. Mr. Dino Eliopoulos, a tax auditor for Revenue Canada, reviewed the net worth statements. He explained that he first looked at the financial statements of the appellant corporation. With respect to the shareholder’s loan account, he asked the appellant corporation for a breakdown of that account and he analyzed all the credits and debits in that account. For that purpose, he was provided by the appellant corporation with a copy of its bank account passbook with the Bank of Nova Scotia and a declaration of trust (Exhibit R-1). Mr. Eliopoulos realized that a total amount of $15,922.80 had been withdrawn from the appellant corporation’s bank account in 1992, as summarized in Exhibit A-1, and was not in fact accounted for in the shareholder’s loan account or anywhere else in the books of the appellant corporation. Mr. Eliopoulos testified that during the audit, he had been told that the money withdrawn by the appellant from the appellant corporation’s account would have been loaned to a certain Manuel Melo. This amount of $15,922.80 was therefore recorded by the auditor in the net worth statement under the item “Loan to Manuel Melo”, in the appellant’s personal assets. Mr. Eliopoulos said that the item under which it was recorded is not relevant. Indeed, it could just as well have been shown as an unidentified personal asset as, in fact, it was earned by the appellant corporation and transferred out of its bank account to the appellant. As a result, Mr. Eliopoulos included that amount of $15,922.80 in the personal assets of the appellant in the 1992 taxation year.

Mr. Antonio Silva, an accountant and the agent for both appellants, explained that the $15,922.80 withdrawal was in payment of a bonus that was declared by the appellant corporation in favour of the appellant in 1990 but only paid in 1992. He said this is why the $15,922.80 was not accounted for in the shareholder’s loan account but, according to him, was reallocated to the accrued liability account. He based this assertion on Exhibit R-2 in which there is a journal entry for the appellant corporation reading as follows:

Luso Const Ltd.

Reconciliation of Shareholder’s Account:

BAL AT 31 JUL 91

1991-92 ENTRIES:

General- Journal:

7. To reallocate from Accrued Liabilities (17,247.08)

8. Withdrawals from savings account #2416123 17.247.08

The discrepancy between the amount of $15,922.80 and the amount of $17,247.08 referred to above was not explained. However, Mr. Silva said that at the beginning of the 1990 year, the appellant corporation had an accrued liability account of $30,000 and that the payment of $15,922.80 was made to reduce that account.

Mr. Silva is therefore of the opinion that the amount of $15,922.80 should not appear in the assets of the appellant corporation in the net worth statement as, according to him, “it was no longer a collectible asset for the appellant corporation”.

I fail to see the merit of such an argument. I understand that it was only at the hearing that the fact that the appellant corporation had declared a bonus to the appellant in 1990, which was not paid at that time, was brought out for the first time. Mr. Silva did not produce any corporate resolution nor any specific evidence to corroborate the fact that such a bonus was declared in 1990, that the appellant corporation had an accrued liability account of $30,000 in 1990, and that this account had been reduced to reflect the payment of the bonus. Furthermore, even if such had been the case, it would in my view change nothing as regards the net worth statement.

The amount of $15,922.80 was included in the personal assets of the appellant not in the business assets of the appellant corporation. The Minister estimated the appellant’s undeclared business income using the net worth method. This amount of $15,922.80 was in fact received by the appellant and rightly included in his personal assets. The only known source of business income for the appellant is the income from the appellant corporation. The appellant corporation is therefore equally taxable on that amount as it must have earned it in order to have been able to transfer it to the appellant.

The appellant and the appellant corporation have the burden of showing on a balance of probabilities that the net worth statement is wrong. The appellant and the appellant corporation have not shown that by the inclusion of that amount in the personal assets of the appellant, the appellant corporation was taxed twice with respect thereto. Indeed, there was insufficient evidence presented before me to justify deleting that amount from the personal assets in the appellant corporation’s net worth statement.

I will conclude with the following passage from the decision of Bowman J. of this Court in Ramey v. R. (1993), 93 D.T.C. 791 (T.C.C.) at p. 793:

... Fhe net worth method of estimating income is an unsatisfactory and imprecise way of determining a taxpayer’s income for the year. It is a blunt instrument of which the Minister must avail himself as a last resort. A net worth assessment involves a comparison of a taxpayer’s net worth, i.e., the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary. Such assessments may be inaccurate within a range of indeterminate magnitude but unless they are shown to be wrong they stand. It is almost impossible to challenge such assessments piecemeal. The only truly effective way of disputing them is by means of a complete reconstruction of a taxpayer’s income for a year. A taxpayer whose business records and method of reporting income are in such a state of disarray that a net worth assessment is required is frequently the author of his or her own misfortunes.

The appeals are dismissed.

Appeals dismissed.

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