Date: 20010503
Docket: 1999-2429-IT-I; 1999-2430-IT-I; 1999-2437-IT-I; 1999-2440-GST-I
BETWEEN:
BADER SIDDIQI, SARWAT SIDDIQI, 985630 ONTARIO INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard on common evidence on January 15, 2001 at Ottawa, Canada.
[2] The main issue in the appeal of Bader Siddiqi (“Bader”) relates to the correctness of a Net Worth Assessment by the Minister of National Revenue ("Minister") which increased Bader's 1994 income by $46,966.00 and his 1995 income by $32,975.00. Related issues in that appeal were whether a stand-by charge of $5,570.00 was properly levied for 1994, whether Bader is entitled to a business investment loss of $57,112.00 in 1994 or 1995, whether "Personal Expenditures" were calculated correctly, whether certain gifts alleged by Bader actually took place, whether a lien of $100,000.00 on Bader's home in favour of the Hasty Market franchisor was a liability and whether penalties were properly assessed.
[3] The issue in the appeal of Sarwat Siddiqi (“Sarwat”), the spouse of Bader, is whether she was entitled in the 1995 year to a non-refundable tax credit of $5,380.00 in respect of her married status. If the Net Worth Reassessment of Bader is substantially correct, she will not be entitled to that credit because of the increased income of Bader and the necessity under paragraph 118(1)(a) of the Income Tax Act ("Act") to take into account Bader's income to determine eligibility to the said credit.
[4] The issue in the Goods and Services Tax ("GST") appeal of 985630 Ontario Inc. ("985630") is whether 985630 failed to report all of its income for the period May 1, 1993 to May 1, 1995 with the result that 985630 did not pay the GST on that unreported income. This will be determined by whether a Net Worth Assessment of 985630 and the Net Worth Assessment of Bader were correct. If the income from 985630 was the sole source of income for Bader, the Minister assumed that any increase in the assets of Bader as a result of the Net Worth Reassessment not attributable to some source, represented income of 985630. Another issue in the GST appeal is whether the Minister was correct in using a figure of 59% to represent the portion of taxable supplies taxed at the rate of 7%. The total amount in issue in this appeal is $8,661.00 plus a penalty.
[5] The issue in the Income Tax Appeal of 985630 is whether 985630 in fiscal years ended April 30, 1994 and April 30, 1995 had unreported income of $7,110.00 and $57,395.00 respectively. Another issue arising in this appeal is how to calculate a terminal loss on the disposition of 1097-1099 Cholette Crescent in December of 1993. These issues also relate to the correctness of the Net Worth Assessment of Bader. Further in this appeal penalties were assessed against 985630.
FACTS
1. Bader was an active owner, director and the sole shareholder of 985630.
2. 985630 operated a grocery store under the name Hasty Market.
3. 985630's business is mainly, if not totally, a cash business.
4. 985630's business is Bader's only or principal source of revenue.
5. In 1994 and 1995 Bader was married to and lived with Sarwat and had two children. Bader's mother also lived with the family.
6. Bader and 985630 reported the following income (loss) in 1994 and 1995:
|
1994 |
1995 |
|
|
985630 |
$ (42,464) |
$ (2,570) |
|
Bader |
$ 8,187 |
$ 798 |
7. According to the Net Worth Assessment the income of Bader during the 1994 and 1995 taxation years was understated by $46,966 and $32,975 respectively.
8. The Minister computed Bader's unreported income on the basis of a Net Worth Assessment resulting in the increase in the assets of Bader during the fiscal periods ended December 31, 1994 and December 31, 1995, and assumed that any increase in the assets of Bader not attributable to some source represented unreported income of 985630 that was appropriated by Bader (a partial copy of the Net Worth Assessment is shown below).
9. In 1994, Bader loaned funds to 1067287 Ontario Inc., which operated as Smoothy's Ice Cream ("Smoothy"), in the amount of $57,112.00.
10. Bader was the sole shareholder of Smoothy.
11. The Minister included the funds loaned to Smoothy in Bader's assets as a receivable. The assets of Smoothy were sold for $7,000.00 in 1996. Bader testified he knew in 1994 that the business of Smoothy was going nowhere and he therefore should be entitled to a business investment loss in 1994 or 1995.
12. Bader is a Certified General Accountant.
13. As a consequence of the understatement of income referred to above, the Minister levied penalties against Bader in the amounts of $5,080 in 1994 and $2,505 in 1995 pursuant to subsection 163(2) of the Act.
14. Deleting "Personal Expenditures" the Net Worth Assessment reads as follows:
Schedule A
Bader Siddiqi v. Her Majesty the Queen
Net Worth Statement – for Income Tax Purposes
|
31-Dec-94 |
31-Dec-95 |
|
|
Increase (decrease) in net worth |
44,629.62 |
20,109.01 |
|
Adjustments to arrive at total income for tax purposes Additions: |
||
|
Personal expenditures |
30,127.00 |
31,196.00 |
|
Personal income tax payments – spouse |
184.00 |
170.00 |
|
HBP repayment |
- |
1,200.00 |
|
30,311.00 |
32,566.00 |
|
|
Deductions: |
||
|
Terminal loss on sale of 1097-1099 Cholette Crescent |
- |
- |
|
Income tax refunds – client |
232.34 |
759.56 |
|
Gifts-cash from shareholder's mother |
7,200.00 |
7,200.00 |
|
Income tax refunds – spouse |
211.12 |
231.19 |
|
7,643.46 |
8,190.75 |
|
|
Total income per adjusted net worth |
67,297.16 |
44,484.26 |
|
Less: total income reported |
||
|
Client |
8,187.00 |
798.00 |
|
Spouse |
6,574.00 |
10,712.00 |
|
Discrepency |
52,536.16 |
32,974.26 |
|
Standby charges, assessed |
5,570.00 |
- |
|
Discrepency in total income per net worth |
46,966.16 |
32,974.26 |
Schedule A
Bader Siddiqi v. Her Majesty the Queen
Net Worth Statement – Balance Sheet
|
Personal assets |
31-Dec-93 |
31-Dec-94 |
31-Dec-95 |
|
Royal Bank #5775218 |
499.66 |
143.77 |
2,497.68 |
|
Royal Bank #4096521 |
375.91 |
30.48 |
30.61 |
|
CIBC #0602167 |
377.71 |
55.99 |
190.37 |
|
T.D. RRSP #009865026 |
10,516.05 |
- |
- |
|
T.D. GIC #8014052-02 |
- |
- |
5,000.00 |
|
Royal Mutual Fund #452913 |
7,000.00 |
- |
- |
|
Royal Mutual Fund #034208165 |
- |
10,516.05 |
11,716.05 |
|
Vista – RRSP Manulife |
- |
1,800.00 |
2,200.00 |
|
CIBC Mutual Fund #7515893 |
1,100.00 |
2,300.00 |
3,500.00 |
|
Ford Taurus 1988 |
2,000.00 |
- |
- |
|
Delta 88 |
- |
2,000.00 |
2,000.00 |
|
Loan to Syed M. |
- |
28,000.00 |
- |
|
Residence |
174,000.00 |
174,000.00 |
174,000.00 |
|
Shareholder loan – Hasty |
- |
- |
5,990.00 |
|
Shareholder loan – Hasty – representations |
- |
- |
28,000.00 |
|
Shareholder loan – Smoothy's |
- |
57,112.98 |
58,634.71 |
|
Jewelry – ring – Maison d'Or |
- |
1,200.00 |
1,200.00 |
|
Total assets |
195,869.33 |
277,159.27 |
294,959.42 |
|
Personal liabilities |
|||
|
BNS – line of credit |
2,571.14 |
(5.43) |
8,733.88 |
|
Bank of Montreal – line of credit 29648035918 |
(0.64) |
4,940.00 |
8,785.33 |
|
Amex #034166101245 |
- |
- |
5,751.80 |
|
T.D. visa |
- |
- |
568.99 |
|
Amex #373566101241007 |
- |
224.49 |
1,102.97 |
|
Amex #373501977211008 |
51.45 |
- |
- |
|
Shareholder loan 985630 Ontario Inc. |
- |
4,100.00 |
- |
|
Mortgage payable – Royal |
124,922.14 |
119,845.35 |
117,952.58 |
|
Syed A. |
- |
25,000.00 |
- |
|
Qamar Massod |
- |
9,200.00 |
10,000.00 |
|
Naim Tarin |
- |
900.00 |
400.00 |
|
Royal loan - #003 |
- |
- |
8,600.00 |
|
127,544.09 |
164,204.41 |
161,895.55 |
|
|
Net worth |
68,325.24 |
112,954.86 |
133,063.87 |
|
Increase (decrease) in net worth |
n/a |
44,629.62 |
20,109.01 |
15. Sarwat calculated her non-refundable tax credit for the married status based on Bader's net income in the amount of $0 for the 1995 taxation year.
16. Bader's net income for the 1995 taxation year was reassessed to in excess of $30,000.00.
17. 985630 was a registrant under Part IX of the Excise Tax Act effective June 24, 1992.
18. 985630 was incorporated under the Ontario Business Corporations Act.
19. 985630 was required to file GST returns on a quarterly basis and had a business year end of May 1 for GST purposes.
20. During the period under appeal, 985630 made taxable supplies in the course of its commercial activities.
21. In reporting the GST for the period of May 1, 1993 to May 1, 1995, 985630 did not include all of the income received in those years.
22. According to the Net Worth Assessment of 985630, the income reported by 985630 during the 1994 and 1995 taxation year ends was understated by the amounts of $7,110 and $57,395 respectively.
23. The Minister computed 985630's unreported income on the basis of a net worth analysis which calculated the increase in the assets of Bader for the fiscal periods ended April 30, 1994 and April 30, 1995, and assumed that any increase in the assets of Bader not attributable to some source represented unreported income of 985630 that was appropriated by Bader (a copy of the Net Worth Assessment of 985630 will follow below).
24. The Minister used 59% of total sales as the percentage attributable to taxable supplies taxed at the rate of 7%.
25. The percentage of 59% was allegedly based on the Input Tax Credits claimed by 985630 on the purchases of inventory.
Schedule A
Bader Siddiqi v. Her Majesty the Queen
Net Worth Statement – for GST Purposes
|
30-Apr-94 |
30-Apr-95 |
|
|
Discrepency in total per net worth |
(10,596.77) |
50,017.99 |
|
Adjustments to arrive at net tax for GST purposes |
||
|
Additions to arrive at gross revenues |
||
|
Personal expenditures |
30,127.00 |
31,196.00 |
|
Personal income tax payments – spouse |
180.12 |
184.00 |
|
HBP repayment |
- |
1,200.00 |
|
Non-deductible portion of capital losses |
25,515.00 |
- |
|
Corporation sales |
767,413.00 |
208,002.00 |
|
Total consideration on supplies received |
812,638.35 |
290,599.99 |
|
Deductions (transactions not subject to GST) |
||
|
Income tax refunds – client |
232.34 |
759.56 |
|
Income tax refunds – spouse |
211.12 |
231.19 |
|
Gifts from shareholder's mother |
7,200.00 |
7,200.00 |
|
Net salaries or wages received |
14,761.00 |
11,510.00 |
|
Zero rated supplies |
323,996.09 |
111,069.06 |
|
346,400.55 |
130,769.81 |
|
|
Total consideration for taxable supplies |
466,237.80 |
159,830.18 |
|
GST collectible reported on GST returns |
28,666.00 |
5,300.00 |
|
Total consideration (incl. GST) for taxable supplies |
494,903.80 |
165,130.18 |
|
Actual GST collectible/payable (7/107 of the above figure) |
32,376.88 |
10,802.91 |
|
Deduct: ITC allowable on supplies used in commercial activities |
33,419.00 |
9,082.94 |
|
Net tax calculated |
(1,042.12) |
1,719.97 |
|
Net tax paid (refund) reported per GST returns |
(4,752.87) |
(3,782.90) |
|
Discrepency in net tax paid (refund) per net worth |
3,710.75 |
5,502.87 |
|
Adjustment |
- |
552.00 |
|
Discrepency in net tax paid |
3,710.75 |
4,950.87 |
|
Total discrepency in net tax paid for the 2 years |
8,661.62 |
Schedule A
985630 Ontario Inc. v. Her Majesty the Queen
Net Worth Statement – for Income Tax Purposes
|
30-Apr-94 |
30 Apr-95 |
|
|
Increase (decrease) in net worth |
(10,596.77) |
50,017.99 |
|
Adjustments to arrive at total income for tax purposes Additions: |
||
|
Personal expenditures |
30,127.00 |
31,196.00 |
|
Personal income tax payments – spouse |
180.12 |
184.00 |
|
HBP repayment |
- |
1,200.00 |
|
Non-deductible portion of capital losses |
25,515.00 |
- |
|
55,822.12 |
32,580.00 |
|
|
Deductions: |
||
|
Terminal loss on sale of 1097-1099 Cholette Crescent |
12,000.00 |
- |
|
Income tax refunds – client |
232.34 |
759.56 |
|
Gifts-cash from shareholder's mother |
7,200.00 |
7,200.00 |
|
Income tax refunds – spouse |
211.12 |
231.19 |
|
19,643.46 |
8,190.75 |
|
|
Total income per adjusted net worth |
25,581.89 |
74,407.24 |
|
Less: total income reported |
||
|
Client |
8,187.00 |
798.00 |
|
Spouse |
6,574.00 |
10,712.00 |
|
Discrepency in total income per net worth |
10,820.89 |
62,897.24 |
|
Discrepency in total income per net worth |
10,820.89 |
62,897.24 |
|
Deduct: additional GST expense allowed |
3,710.75 |
5,502.87 |
|
Underreported business income per net worth |
7,110.14 |
57,394.37 |
26. The Minister computed 985630's unreported income on the basis of the Net Worth Assessment of Bader whereby the Minister calculated the increase in the assets of Bader during the fiscal periods ended April 30, 1994 and April 30, 1995, and assumed that any increase in the assets of Bader not attributable to some source represented unreported income of 985630 that was appropriated by Bader.
26. Bader or 985630 disposed of a one-half share in the property located at 1097-1099 Cholette Crescent ("Property") in December, 1993.
27. The Property was transferred to Bader's brother (who owned the other one-half share of the Property) for the balance of the mortgage of $54,485.00.
28. According to the Minister, the fair market value of the Property in December, 1993 was $136,000.00 ($68,000.00 for 50% of the Property).
29. Bader reported the following amounts:
|
Proceeds of disposition |
$54,485.00 |
|
Adjusted cost base |
80,000.00 |
|
Terminal loss |
$25,515.00 |
30. In calculating the increase in the assets of Bader during the fiscal periods ended April 30, 1994 and April 30, 1995, the Minister allowed a terminal loss computed as follows:
|
Proceeds of disposition |
$68,000.00 |
|
Adjusted cost base |
80,000.00 |
|
Terminal loss |
$12,000.00 |
ANALYSIS AND DECISION
[6] I accept the credibility of Bader. Based on his testimony, I allow the $15,000.00 claimed as a gift from his father as an additional asset in the base year 1993 and I allow as additional assets gifts of $6,000.00 in 1994 and gifts of $6,000.00 in 1995. I find, however, that the standby charge of $5,570.00 was proper and there is no need to amend the Net Worth Assessment in that regard.
[7] In connection with the nature and validity of the Net Worth Assessment, I refer to the decision of Bowman, T.C.J, as he then was, in Ramey v. The Queen, 93 DTC 791 and in particular the following quotation at page 793:
... The 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.
[8] I find further that there should be no business investment loss allowed with respect to the 1994 and 1995 taxation years as the earliest year that that loss could have occurred would have been in 1996 when the assets of Smoothy were sold for $7,000.00. In this connection I refer to the decision of Hamlyn, J. in Campbell v. Her Majesty the Queen, 2000 DTC 2528 at page 2530 where he stated:
A debt is usually considered to have become a bad debt when the taxpayer has exhausted all legal means of collection. The question of when a debt is to be considered uncollectible is a matter of the taxpayer's own judgment as a prudent, pragmatic businessman. However, the Court must be satisfied that the taxpayer acted in a pragmatic, business like manner in making the determination of uncollectibility.
[9] As to the terminal loss I find that the $12,000.00 figure is correct and since it has been allowed no adjustment to the Net Worth Assessment is required.
[10] As to the 59% attributed by the Minister to taxable supplies, I find that the main product sold by 985630 was non-taxable groceries. I conclude therefore that the suggested figure of 53% is more reasonable than the figure of 59%. However, the figure of 53% is to apply to both 1994 and 1995.
[11] As to the personal expenditures, I accept the testimony of Revenue Canada's auditor, Mr. Maheux and the explanations he has given and find that the personal expenditures should be as set forth in the Net Worth Assessment of Bader.
[12] As to the $9,200.00 and $10,000.00 loans by Qamar Massod, I accept the position of the Minister and see no need to amend the Net Worth Assessment of Bader.
[13] As to the $100,000.00 lien, it is not to be taken into account in the Net Worth Assessment of Bader as it was not a true liability. It was only a lien taken as security for Bader's obligations under the franchise arrangement re the Hasty Market business.
[14] As to the penalties, notwithstanding the analysis by counsel for the Minister, I do not believe that the Minister has adequately discharged the burden of proof in this regard. In my opinion, most of the problems, which have arisen in these appeals, arose from certain misunderstandings and unintentional actions of Bader and 985630 not from wilful acts or gross negligence.
[15] Therefore the appeal of Bader is allowed and the matter is referred back to the Minister for reconsideration and reassessment on the following basis: considering the gift in 1993 of $15,000.00, the gifts in 1994 and 1995 of $6,000.00, the Net Worth Assessment of Bader is amended such that the discrepancy in total income for 1994 should be $25,966.00 ($46,966.00 - $21,000.00) and for 1995 should be $26,975.00 ($32,975.00 - $6,000.00).
1. The appeal of Sarwat is dismissed because the income of Bader in 1995 exceeded $5,918.00.
2. The GST appeal of 985630 is allowed and the matter is referred back to the Minister for reconsideration and reassessment to the extent only of changing the figure from 59% to 53% as representing the percentage of taxable supplies in 1994 and 1995.
3. The Income Tax appeal of 985630 is allowed and the matter is referred back to the Minister for reconsideration and reassessment to the extent of giving effect to the above changes in the Net Worth Assessment of Bader.
Signed at Ottawa, Canada, this 3rd day of May, 2001.
"T. O'Connor"
J.T.C.C.