Date: 20000516
Dockets: 98-2207-GST-I; 98-2252-IT-G
BETWEEN:
MARCELLE MELIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the appellant's 1991, 1992, 1993 and 1994 taxation years made under the Income Tax Act, and from an assessment dated July 3, 1997 in respect of these years made under the Excise Tax Act. The cases were heard together because the issue is the same: did the appellant understate her sales from an antique business that she carried on? The issue is purely one of fact and the determination depends on a finding of credibility.
[2] The appellant came to Canada from Venezuela in 1983. Her husband Mirko was involved in a business which went bankrupt. In or about 1989 she started an antique business, assisted by her husband whose sole occupation since that time appears to have been working in the business.
[3] The business has never been profitable and has sustained losses or realized nil or minimal profit since its inception.
[4] The audit was commenced in 1995 although the reassessments were not issued until 1997. There was some allegation of irregularities in the way in which the audit was instituted and conducted. There may or may not be merit in the allegation, but I make no finding on this point because it is not really germane to my disposition of the appeals.
[5] Over the four-year period amounts totalling $120,000 were deposited to the appellant's bank account. The appellant says that these deposits were amounts received from her mother, Liliane Monteforte, a resident of Venezuela. The Minister of National Revenue says that they represent unreported cash sales and therefore added $30,000 per year to the appellant's income, and also to the appellant's sales for the purpose of computing the GST payable in that period. Moreover, the Minister noted a difference of $21,241 over the four years between the sales reported for income tax purposes and those reported in the GST returns. The Minister assumed that this difference represented sales that were underreported in the GST returns. Accordingly, for GST purposes, the Minister increased the appellant's sales by $21,241.
[6] In addition to the tax imposed the Minister imposed penalties under subsection 163(2) of the Income Tax Act and section 285 of the Excise Tax Act, on the basis that the appellant's presumed understatement of sales was made knowingly or under circumstances amounting to gross negligence.
[7] Both Mr. and Mrs. Melis testified. Although Mrs. Melis was nominally the owner of the business it is obvious she knew very little about the financial aspects of its operation. Mr. Melis testified that all sales were recorded in the sales journal and that this, as well as the book with copies of receipts, was given to the officials of the Department of National Revenue. I accept this testimony.
[8] It appears that the business involved going to antique shows in various places and setting up a booth there.
[9] Both Mr. and Mrs. Melis appear to have relied heavily upon an accountant or bookkeeper. Mr. Melis said that the financial statements in the income tax return were "all wrong". I am inclined to think there may have been inaccuracies, but I question whether he had sufficient knowledge to know the extent of the inaccuracies. In any event the Minister appears to have accepted the accuracy of the statements except for the assumed understated sales.
[10] Both the appellant and her husband testified that the appellant's mother, Mrs. Monteforte, made gifts to her of at least $120,000. Mrs. Monteforte, a woman in her seventies, has been married twice and is once divorced and once widowed. She has from her two marriages a considerable fortune of which she keeps a substantial portion outside of Venezuela. She comes several times a year to Canada.
[11] She testified that she would acquire Canadian dollars in cash in Venezuela and bring these amounts on her person to Canada and give them to her daughter. She also testified that she would sometimes give cash (US or Canadian dollars) to her grandsons who lived in California when they visited Venezuela and they would bring it to Canada and give it to Mrs. Melis.
[12] The totals deposited to the bank in the four years were:
1991 $10,000.00
1992 $9,822.00
1993 $41,757.50
1994 $58,420.00
[13] Mrs. Melis testified that in fact her mother gave her far more than $120,000. Mrs. Monteforte testified that the figure was at least $200,000. In 1994 apparently Mrs. Monteforte gave her daughter $20,000 as a down payment on a house.
[14] The question that must be decided is whether the appellant, her husband and her mother are credible witnesses. I think that one may start from the proposition that for a septuagenarian widow to carry amounts totalling at least $120,000 in cash over four years from Venezuela seems somewhat improbable. It would be simpler and safer to wire the money. Mrs. Monteforte stated that she did not wish to pay the commissions. I also have this impression that the whole family was somewhat paranoid in their distrust of banks, particularly Venezuelan banks.
[15] There are other problems with the story that have to be considered. In 1994 Mr. and Mrs. Melis bought a house and put a mortgage on it for $150,000. Counsel for the respondent asked me to conclude that no bank would have loaned such an amount to people who had no income such as Mr. and Mrs. Melis. That may or may not be so, but banking practices in this country are not of such notoriety that I can take judicial notice of them. Such evidence could have been elicited on discovery, if one was held, or an official of the bank might have been subpoenaed and required to produce the loan application.
[16] Mr. and Mrs. Melis testified that in the years in question there were no cash sales since everyone bought the antique items with credit cards. There were in fact two in 1995 that were put in evidence. One was a ring costing $390 (with tax) and another item for $239.04. The two cash sales that I mentioned were recorded in the deposit slips as cash sales.
[17] The absence of cash sales may seem a little odd, but it is not wholly incredible. Most people these days have credit cards and it seems probable that people who go to antique shows and have sufficient disposable income to buy non-essential things such as antiques would have and use credit cards.
[18] It is interesting if not particularly edifying to look at the numbers. The following figures are taken from the appellant's returns of income.
1991 sales $20,451
opening inventory $60,582
purchases $4,143
closing inventory $59,815
cost of goods sold $4,910
gross profit $14,709
1992 sales $20,085
opening inventory $59,815
purchases nil
closing inventory $59,286
cost of goods sold $529
(how can that be if there were sales of $20,085?)
gross profit $18,778
1993 sales $21,692
opening inventory $59,286
purchases $7,474
closing inventory $59,239
cost of goods sold $7,521
gross profit $14,171
1994 sales $21,729
opening inventory $59,239
purchases $2,759
closing inventory $59,046
cost of goods sold $2,952
[19] Other expenses reduced the net income to nil or virtually nil. One of the biggest items of expense is the business use of their home. None of these expenses were questioned by Revenue Canada.
[20] I find the figure for cost of goods sold in each year puzzling. However, what light do these figures cast on the question that must be decided here? One is that if the appellant was really interested in obviating the effect of additional cash sales this could easily have been done by increasing the deduction for cost of goods sold.
[21] What is even more improbable than the gifts from the appellant's mother and the absence of cash sales is the hypothesis upon which the assessment is based that there were $30,000 in additional cash sales in each year. Since the reported credit card sales were only about $20,000 or $21,000 it would mean, if one accepted the Crown's theory, that there were $30,000 additional cash sales each year, that 60% of the appellant's sales were for cash and that there were no costs associated with those sales. This improbability, coupled with the obviously incorrect arbitrary attribution of exactly $30,000 to each year makes the assessments so questionable that they cannot stand. Indeed, the arbitrary nature of the assessment is all the more striking when one considers that the departmental officials had precise information concerning the dates and the amounts of the cash deposits.
[22] There are a number of other points that should be mentioned. Counsel for the respondent pointed out that Mr. and Mrs. Melis, on the basis of the returns of income, had no income for 10 years and could not have survived. The point is a valid one, but it is based on the theory that they were living off the allegedly suppressed sales of $30,000 per year without any assistance from Mrs. Melis' mother. I find the appellant's hypothesis more convincing and more probable.
[23] Since the case turns on the credibility of witnesses I should mention that I found Mr. and Mrs. Melis credible witnesses, albeit confused and naive. Mrs. Monteforte was a very credible witness. I have no reason to believe that any of these witnesses were lying. Even the occasional vagueness, inconsistencies, confusion about numbers and lapses of memory bolster my conclusion that they were trying to tell the truth and were not working from a pre-orchestrated script.
[24] The appellant's final witness was Mr. J.R. Giles, CA. Mr. Giles was consulted after the audit commenced. He was an impressive witness with a rather distinguished background. He retired from the Department of National Revenue in 1990. From 1986 to 1990 he was the Director – Taxation in the Toronto District Office and from 1977 to 1986 he was Director – Taxation of the Hamilton District Office. Prior to 1977 he worked in both the Audit Branch and the Special Investigations Branch of the Department of National Revenue.
[25] He reviewed all of the appellant's financial records and found some errors in the income tax and GST returns. He noted, however, that in general Mr. Melis kept meticulous records.
[26] I shall not set out the detailed schedules that he prepared and submitted in evidence as part of the notice of objection beyond noting that he prepared a statement of source and application of funds, an analysis of the bases of the sales, an analysis of the amounts advanced by Mrs. Monteforte, and a statement of net worth of the appellant as of January 1, 1991 and December 31, 1994. He assumed that Mrs. Monteforte loaned $120,000 to her daughter. I do not think that for the purposes of these appeals anything turns on whether the amounts given by her to her daughter were loans or gifts. If it were relevant I would find that the amounts given by her to the appellant were gifts. On this assumption her net worth on December 31, 1994 would change from a deficit of $15,400 to a positive figure of $104,600 compared to $112,271 on January 1, 1991.
[27] According to Mr. Giles the explanation for the difference in the sales reported over the four years for income tax purposes of $82,347, based on bank deposits, and $61,106 reported for GST purposes based on sales invoices is simply that the former included GST and provincial sales tax, whereas the latter did not. This is a partial explanation. 115% of $61,106 is $70,271.90, a difference of $9,165.90. In addition the accountant who prepared the returns included in income other deposits, such as $10,000 received from Mrs. Monteforte in 1991 and other non-taxable items such as tax refunds or insurance claims. These two amounts substantially account for the difference.
[28] Mr. Giles' conclusion from his examination of the records is that there was no understatement of sales for GST purposes but rather an overstatement of revenues for income tax purposes. I agree.
[29] I find no reason to disagree with the submissions contained in the notice of objection prepared by Mr. Giles. They are consistent with the evidence adduced before me.
[30] The appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment:
(a) to delete from the appellant's income for income tax purposes, the sum of $30,000 included by the Minister in each of the taxation years 1991, 1992, 1993 and 1994;
(b) to delete from the appellant's sales for the purposes of determining the goods and services tax the sums of $120,000 and $21,241 included by the Minister in the periods from January 1, 1991 to December 31, 1994;
(c) to delete the penalties imposed under subsection 163(2) of the Income Tax Act and section 285 of the Excise Tax Act.
Signed at Ottawa, Canada, this 16th day of May 2000.
"D.G.H. Bowman"
A.C.J.