Date: 20020523
Docket: 2001-219-IT-I
BETWEEN:
MICHEL BOLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Angers, J.T.C.C.
[1] These are appeals from assessments concerning the appellant's 1993 and 1994 taxation years.
[2] Following a request for an audit of a corporation of which the appellant was a shareholder in 1995, the then Revenue Canada auditor became aware of a certain investment by the appellant in the corporation. The auditor wished to learn more and her work led her to audit the appellant's personal income tax returns for the 1993, 1994 and 1995 taxation years. She noted that the income declared by the appellant for the taxation years at issue was much lower than the deductions he claimed, and that his standard of living was higher than his declared income would allow. The auditor therefore decided to determine the appellant's income using the net worth method.
[3] Before she proceeded with this determination, a draft assessment was first prepared and sent to the appellant. After the appellant had had discussions with the auditor and the respondent's objections officer and had made representations to them, on October 27, 2000 the Minister of National Revenue ("the Minister") issued reassessments for the appellant's 1993 and 1994 taxation years based on the net worth method. It is these two taxation years that are the subject of the present appeals.
[4] The appellant is now retired. During the taxation years at issue, he was a businessman. Originally from Switzerland, he immigrated to Canada in November 1984. Before leaving Switzerland he liquidated his assets, selling in particular shares he held in a corporation known as Augumi S.A. (hereinafter referred to as "Augumi"). He described Augumi as a nightspot operated by him and his wife. It was precisely the sale of the appellant's shares in Augumi that raised questions during the audit by the Minister's representatives.
[5] According to Exhibit I-5, the appellant's shares in Augumi were sold on May 30, 1984. For that transaction, the appellant advanced the purchasers credit for the balance of the sale price, that is, 275,000 Swiss francs. That amount was to be repaid in regular instalments at an annual interest rate of 7 per cent. The purchasers did not comply with the terms and conditions of reimbursement and on June 12, 1991, with the appellant's consent, they sold those same shares to other purchasers. At the time of this second transfer of the shares, the parties to the contract agreed that the amount of the above-mentioned debt was 355,088.10 Swiss francs on February 8, 1991, and the new purchasers assumed responsibility for its repayment. A table appended to this contract of sale (Exhibit I-6) shows the calculation of the interest that was added to the principal of the initial debt to obtain the figure of 355,088.10 Swiss francs owed to the appellant. This contract also stipulated an annual interest rate of 7 per cent. Although the appellant claimed that the new purchasers had difficulty repaying him as well, he acknowledged having received from them 60,000 Swiss francs in each of the two taxation years at issue.
[6] The appellant testified that he never really adapted to Canada's tax system and therefore relied on his accountants. He stated that he never sought to defraud Revenue Canada, and acknowledged that omissions can occur. He explained that, in 1991, the new goods and services tax and the Quebec sales tax created difficulties as regards tourists, thus negatively affecting the performance of his businesses. That situation, combined with a recession during those years, explained what the appellant referred to as a considerable decrease in the income of his businesses. He therefore used his personal wealth to get through that difficult period.
[7] The figures concerning that personal wealth are set out in an appendix to the Reply to the Notice of Appeal, and were accepted by the appellant. This appendix shows that the appellant had, among other things, a number of investments in various corporations in Canada and two debts owed to him in Switzerland: one resulting from the sale of the shares in Augumi and another owed by a corporation known as Mibo S.A. (hereinafter referred to as "Mibo"). Also appended to the Reply to the Notice of Appeal is a table showing the appellant's personal expenditures during the taxation years at issue; the appellant acknowledged and accepted those expenditure figures.
[8] According to the appellant, it was precisely because of the hard years that he declared income of only $2,495 and $50,804 in his tax returns for 1993 and 1994 respectively. In 1994, his income consisted of $47,342 in taxable capital gains, $1,045 in interest income, and $2,417 in net rental income. In 1993, his income consisted of $2,495 in net rental income.
[9] According to the appellant's income tax returns for those years, he made support payments of $32,115 and $36,086 in 1993 and 1994 respectively. It was in fact the nature of the difference between income declared and support paid that led Ms. Phi Anh Tran to audit the appellant's tax returns for the taxation years at issue.
[10] Ms. Phi Anh Tran testified that she received co-operation from the appellant in auditing a corporation of which he was a shareholder, but that he was less co-operative when she wanted to audit his personal income tax returns. For 1995 taxation year the appellant signed the necessary authorizations for the audit of his bank records, but for 1993 and 1994 Ms. Phi Anh Tran was obliged to require the appellant to provide documents and information under paragraphs 231.2(1)(a) and (b) of the Income Tax Act ("the Act"). The notices of requirement were produced in evidence as Exhibit I-7.
[11] Having obtained this information, Ms. Phi Anh Tran sent the appellant a draft assessment. She stated that the appellant did not contest the balance sheet, but did produce a new statement of net worth that included the Augumi debt owed to him. This was the first reference to the existence of this debt. Ms. Phi Anh Tran testified that she then asked the appellant to confirm the bank transfers by producing deposit slips or other documents establishing that money paid as a result of this debt was transferred to his bank account in Canada; the appellant was unable to produce any such documents. In fact, Ms. Phi Anh Tran stated that she saw no deposits to the appellant's personal bank account of money from an investment in Switzerland, except with respect to the second debt, the Mibo debt, and in that case the deposit was made in 1995.
[12] Ms. Chantal Yelle testified for the respondent, stating that she reassessed the appellant's assets, liabilities and net worth, including the Augumi debt as an asset. She allowed this change after receiving the documentary evidence establishing the existence of this debt, that is, Exhibits I-5 and I-6. The appellant told Ms. Yelle that, from this debt, he had received $69,798 in each taxation year, and he asked that, in assessing his net worth for the subsequent year, she reduce the value of the debt by the amount thus received in each case, which Ms. Yelle did. The appellant stated that he made the support payments with the money received from this debt. He also confirmed to Ms. Yelle that he accepted the calculation of his personal expenditures for the taxation years at issue.
[13] This exercise led Ms. Yelle to conclude that the appellant's total personal expenditures were $109,106.94 in 1993 and $109,015.17 in 1994. When she was informed of the Augumi debt, she reassessed the appellant's net worth, including that investment. The appellant had a negative net worth of $70,031.48 at the end of 1993 and $65,776.99 at the end of 1994. Ms. Yelle subtracted from the appellant's personal expenditures for the years at issue the amount by which his net worth was reduced for each of those years, thus arriving at total income computed using the net worth method of $39,075.46 in 1993 and $90,579.79 in 1994. However, the actual source of this income remained unexplained since the appellant was unable to establish that money from Switzerland was transferred to his bank account in Canada. After the appellant was given the appropriate deductions, his revised taxable income increased to $6,960.46 in 1993 and $7,192.79 in 1994. However, these increases changed nothing as regards tax payable, except that the Minister assessed penalties in accordance with subsection 163(2) of the Act.
Statute-barred years
[14] The respondent has the onus of producing evidence justifying the reassessments for the 1993 and 1994 taxation years. The respondent must satisfy the Court on a balance of probabilities that the appellant made a misrepresentation attributable to neglect, carelessness or wilful default, or committed some fraud in filing his return or in supplying information, as stated in subparagraph 152(4)(a)(i) of the Act.
[15] The burden of proof was described as follows by Strayer J. in Venne v. Canada, [1984] F.C.J. No. 314 (Q.L.), 84 DTC 6247 (F.C.T.D.):
I am satisfied that it is sufficient for the Minister, in order to invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the words "misrepresentation that is attributable to neglect" must mean, particularly when combined with other grounds such as "carelessness" or "wilful default" which refer to a higher degree of negligence or to intentional misconduct. Unless these words are superfluous in the section, which I am not able to assume, the term "neglect" involves a lesser standard of deficiency akin to that used in other fields of law such as the law of tort.
[16] In the instant case, the appellant accepted as true the table drawn up by the respondent setting out the appellant's personal expenditures for the taxation years at issue. The appellant explained that he used his personal wealth to offset the insufficiency of his income to meet his financial obligations. The appellant explained the source of the funds only after the Minister insisted, a requirement to provide documents and information was sent to the banks with which the appellant did business, and a draft assessment was prepared. The appellant then informed the Minster's representative of the Augumi debt, and stated that he used the money from this debt to make support payments and to offset the shortfall in his income.
[17] As well, in Exhibits I-4 and I-6, which contain the appellant's personal balance sheets as at March 31, 1993 and February 1, 1995, the Augumi debt is not included in the list of the appellant's investments. These two balance sheets were prepared in order to obtain bank loans and, while unaudited, they are statements made by the appellant that do not disclose all his assets.
[18] Although at first glance the appellant's explanations appear to indicate the source of the money, the fact remains that no evidence was produced to prove to the satisfaction of the Minister or the Court that, during the taxation years at issue, there were indeed transfers of funds whose source was Switzerland and the Augumi debt. The Minister's auditor stated that for the taxation years at issue she saw no deposits to the appellant's personal bank account of money from investments in Switzerland, except for the Mibo debt, with respect to which the transfer was made to the appellant's personal bank account in 1995. Given this lack of evidence, the question of the source of the money remains unanswered, and the difference between the appellant's expenditures and his income remains unexplained. There has, therefore, been misrepresentation regarding the appellant's income. I am satisfied that the respondent has discharged the burden of producing the necessary evidence to justify the reassessments for the statute-barred taxation years.
Calculation of the variation in net worth
[19] Was the Minister justified in adding income of $36,581 for 1993 and $39,736 for 1994? The appellant accepted the figures of $109,106.94 for 1993 and $109,015.17 for 1994 as representing his personal expenditures for those years. He declared income of $2,494.60 for 1993 and $50,844.11 for 1994. He did not contest the calculations of net worth used to determine the variation in net worth. These calculations reduced his net worth by $70,031.48 for 1993 and by $65,776.99 for 1994. One can readily conclude that the appellant used his personal wealth to cover, to the extent of the above-mentioned amounts by which his net worth was reduced, personal expenditures of $109,106.94 in 1993 and $109,105.17 in 1994. However, in order to cover the balance of his expenditures, he would have required additional income of $39,075.46 in 1993 and $90,579.79 in 1994. Subtracting from these amounts the income declared for each of these taxation years, we obtain shortfalls of $36,580.86 in 1993 and $39,735.68 in 1994.
[20] As we know, the appellant explained that in each of the taxation years at issue he received $69,798 from a debt owed to him in Switzerland. However, he was unable to establish the source of this money by producing evidence of deposits or transfers to his personal bank account. Moreover, the auditor testified that she audited the appellant's personal bank accounts and that, except in 1995, no money from Switzerland was deposited in them. The source of the money remains, therefore, unexplained.
[21] In Hsu v. Canada, [2001] F.C.J. No. 1174, Desjardins J.A. of the Federal Court of Appeal explained as follows the justification for using the net worth method to compute a taxpayer's income:
29 Net worth assessments are a method of last resort, commonly utilized in cases where the taxpayer refuses to file a tax return, has filed a return which is grossly inaccurate or refuses to furnish documentation which would enable Revenue Canada to verify the return (V. Krishna, The Fundamentals of Canadian Income Tax Law, 5th ed. (Toronto: Carswell, 1995) at 1089). The net worth method is premised on the assumption that an appreciation of a taxpayer's wealth over a period of time can be imputed as income for that period unless the taxpayer demonstrates otherwise (Bigayan, supra, at 1619). Its purpose is to relieve the Minister of his ordinary burden of proving a taxable source of income. The Minister is only required to show that the taxpayer's net worth has increased between two points in time. In other words, a net worth assessment is not concerned with identifying the source or nature of the taxpayer's appreciation in wealth. Once an increase is demonstrated, the onus lay entirely with the taxpayer to separate his or her taxable income from gains resulting from non-taxable sources (Gentile v. The Queen, [1988] 1 C.T.C. 253 at 256 (F.C.T.D.)).
30 By its very nature, a net worth assessment is an arbitrary and imprecise approximation of a taxpayer's income. Any perceived unfairness relating to this type of assessment is resolved by recognizing that the taxpayer is in the best position to know his or her own taxable income. Where the factual basis of the Minister's estimation is inaccurate, it should be a simple matter for the taxpayer to correct the Minister's error to the satisfaction of the Court.
[22] In the circumstances, I am satisfied that the appellant's net worth increased in each of the taxation years at issue, and that he has not successfully discharged his onus of justifying these increases.
Penalties
[23] Under subsection 163(2) of the Act, the Minister assessed a penalty against the appellant for each of the taxation years at issue. This subsection read as follows:
(2) False statements or omissions. Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50% of the total of . . . .
[24] Thus the burden is on the respondent to establish on a balance of probabilities that the appellant made a false statement in his income tax returns for the taxation years at issue, and that he did so knowingly or under circumstances amounting to gross negligence.
[25] I concur with Strayer J. who, in Venne (supra), stated concerning the concept of gross negligence:
. . . "Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.
[26] I have already dealt with the appellant's conduct in the context of the statute-barred years and the same findings of fact apply in analysing the evidence regarding the penalties for the two taxation years at issue. I also take into account the testimony of Revenue Canada auditor Ms. Phi Anh Tran, who spoke of the appellant's lack of co-operation in disclosing his personal affairs, although he co-operated very well during the audit of the corporation in which he was a shareholder. Ms. Phi Anh Tran testified that she had obtained authorization from the appellant to audit his bank records for 1995, but said that she was obliged to resort to notices of requirement (Exhibit I-7) to obtain information concerning the two taxation years at issue. The respondent's evidence also showed that the Augumi debt bore interest at an annual rate of 7 per cent and that, according to Exhibit I-6, the accrued interest was capitalized when the shares were transferred on June 12, 1991.
[27] After gathering all this information, Ms. Phi Anh Tran prepared a draft assessment concerning the appellant; only after sending this draft assessment to him did she learn that the Augumi debt existed and that the appellant had used repayment amounts received in respect of this debt to meet his needs. While she asked the appellant to confirm his statements by producing bank transfer documents or deposit slips, neither he nor his representative were able to produce any.
[28] It must be remembered that the appellant is an experienced businessman. He has managed a number of businesses in Canada since arriving here and is not unaware of taxpayers' obligation to declare all their income. Why was he so reluctant to disclose the Augumi debt?
[29] Since the appellant accepted the calculation of his personal expenses and was unable to prove the source of the income he needed in order to meet them, we must conclude that he did not declare all his income, possibly including the interest from the Augumi debt. I am satisfied that the respondent has discharged her burden of proof and has established on a balance of probabilities that the appellant knowingly or under circumstances amounting to gross negligence made a false statement in his income tax returns for the taxation years at issue.
[30] Lastly, the appellant contested the assessment of a penalty when the assessments for the two taxation years at issue are "nil". Once the conditions set out in subsection 163(2) have been met, penalties may be imposed. On this point, I quote from MacDonald v. Canada, [1997] T.C.J. No. 277 (Q.L.), citing Chopp et al.:
4 I would only refer to one item of case law - that of Chopp et al v. M.N.R. (87 D.T.C. 374) at p. 375, since it has a certain over arching [sic] relevance:
My initial reaction at the hearing was that penalties could not be levied in respect of taxation years where the reassessments are nil regarding tax payable because of a misconception that penalties under subsection 163(2) were invariably 25% of an amount related to actual tax payable. On reflection I am satisfied that penalties of the kind mentioned can be assessed even if no tax is payable in a taxation year provided, of course, that the essential requirements of subsection 163(2) are met. This rule is understandable. For obvious reasons Parliament desires that, in the preparation of their self-assessments under section 150 of the Act, taxpayers shall not knowingly or in a grossly negligent manner be involved in the making of false statements or omissions. Conduct of this kind attracts penalties per se notwithstanding that there is no liability for tax in a particular taxation year because for example, losses are carried over from another year.
[31] For these reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 23rd day of May 2002.
"François Angers"
J.T.C.C.
Translation certified true on this 26th day of June 2002.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2001-219(IT)I
BETWEEN:
MICHEL BOLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on April 8, 2002, at Montreal, Quebec, by
the Honourable Judge François Angers
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Claude Lamoureux
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1993 and 1994 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 23rd day of May 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 26th day of June 2002.
Erich Klein, Revisor