Date: 20011010
Docket: 2000-2820-IT-I
BETWEEN:
DALE DUNCANSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
For the Appellant: The Appellant herself
Counsel for the Respondent: Caitlin Ward
Reasonsfor Judgment
(delivered orally from the Bench on August 22, 2001at Yarmouth, Nova Scotia)
Campbell, J.
[1] These appeals are from assessments under the Income Tax Act (the Act) for the 1994, 1995 and 1996 taxation years. These assessments were made using the net worth method.
[2] The issue is whether the Appellant understated her income in each of the three taxation years by the amounts assessed. These amounts were as follows:
$14,923 in 1994;
$11,160 in 1995; and
$13,700 in 1996.
It was conceded by Respondent counsel that the Minister had erred in its assessment of the 1996 taxation year as the increase to total income should have been $13,700 and not $13,716 as assessed.
[3] The net worth method was reviewed by Associate Chief Judge Bowman in the case of Bigayan v. The Queen, [2000] 1 C.T.C. 2229 and also at 2000 DTC 1619, and I quote:
The net worth method, ..., is a last resort to be used when all else fails. Frequently it is used when a taxpayer has failed to file income tax returns or has kept no records. It is a blunt instrument, accurate within a range of indeterminate magnitude. It is based on an assumption that if one subtracts a taxpayer's net worth at the beginning of a year from that at the end, adds the taxpayer's expenditures in a year, deletes non-taxable receipts and accretions to value of existing assets, the net result, less any amount declared by the taxpayer, must be attributable to unreported income earned in the year, unless the taxpayer can demonstrate otherwise. It is at best an unsatisfactory method, arbitrary and inaccurate, but sometimes it is the only means of approximating the income of a taxpayer.
[4] During these years, the Appellant was the sole shareholder of Vaughn Lake Construction Ltd. which dealt with wells, ceptics, foundations and landscaping. Her husband was an employee of this company. Since 1992, she has also operated a seasonal bed and breakfast in which the corporate office was located. A trailer in her name located on land across the street from the residence was also rented commencing in December 1995. No income was reported with respect to these two latter business activities.
[5] Mrs. Duncanson stated that she relied on her accountant to properly report on her behalf. She agreed there was an intermingling of all business activities with personal, but thought it would be appropriate to do this if she estimated her personal portion of various items and eventually paid for these. Few records, however, were kept to support this.
[6] The Appellant and her spouse declared total income of $89,895 in 1994, $24,432 in 1995 and $17,440 in 1996. Relevant returns for both the Appellant and her spouse were put into evidence by the Respondent. By notices of reassessment dated April 9, 1999, the Appellant was advised that her income tax liability had been increased due to increases to her total income as follows:
in 1994 $15,564 increase to total income;
in 1995 $11,910 increase to total income; and
in 1996 $14,475 increase to total income.
[7] On objection, the Minister reassessed and decreased the assessments as follows:
in 1994 by a decrease in expenditures for a revised net worth of $14,923;
in 1995 by a decrease in expenditures for a revised net worth of $11,160; and
in 1996 by a decrease in expenditures for a revised net worth of $13,716
(as noted earlier the revised net worth for 1996 should have been $13,700 and not $13,716).
[8] A schedule attached to the amended Reply to the Notice of Appeal set out in detail the way in which the auditor arrived at these figures.
[9] Mr. Robert Diamond, an auditor with the CCRA, gave evidence on the way he developed these figures. Since there were no source documents for revenue, and the accuracy of figures could not be confirmed, the net worth method was used. He explained that in using the net worth method, he compared the Appellant's financial statements at the beginning and end of each of the relevant years. The net worth was determined by totalling assets and then deducting total liabilities. From this figure the net worth for the prior year was deducted. This showed an increase each year of $104,702.18 in 1994, $11,383.64 in 1995 and $9,130.87 in 1996. The auditor then added his determinations for personal expenditures in each year at $21,930.67 in 1994, $24,208.54 in 1995 and $22,009.26 in 1996. National averages as determined by Statistics Canada were not used by the auditor in establishing personal expenditures and Statistics Canada figures were actually lower than the estimates which the auditor thought were more reasonable in these circumstances. A deduction for non-taxable items was then permitted. In the present case, the amount of $21,815.24 was deducted for 1994 as a non-taxable portion of capital gain. No deductions applied in 1995 or 1996. This left total income as per the adjusted net worth at $104,817.81 for 1994, $35,592.18 for 1995 and $31,140.13 for 1996. From these figures, the total reported income for the household, meaning Dale and George Duncanson, was deducted in each year. These final figures represented the increases to total income in each year.
[10] Mrs. Duncanson testified that she and her husband had a very frugal lifestyle. They raised their own animals for food, grew much of their own food crop, did most of their vehicle repairs. I accept that they buy clothing second-hand, do not eat in restaurants except when they travel occasionally and do not travel except on business. She represented herself as a hard working individual, but while I accept the evidence produced on this type of lifestyle, I cannot place a great deal of weight on guess-timates. Not all of the income was accounted for and reported. There was little adequate documentation. The auditor relied primarily on bank documents and the Appellant's representations. There was a co-mingling of all corporate and rental business activities together with personal activities, to such an extent that makes it almost impossible to determine what should be attributed to the Appellant as revenue and expenditures and what should be attributed to the corporation and other business activities. Both Visa and Mastercard were used to purchase both personally and for the business. In slow periods the Appellant would personally pay certain corporate accounts such as fuel bills. Some of these personal payments she attributed to reimbursement for any personal use of the company vehicle. She employed the same method for other bills (accounts) such as telephone bills in the corporate name. The Appellant felt she must have reported rental income from her trailer but she was unsure if she had done so through the company or personally.
[11] Mrs. Duncanson had many issues going on during this time and although she did her best under the circumstances, she admitted difficulty in keeping appropriate records for the various activities. There was no reliable, coherent separation of the business and personal expenses. Items in the Appellant's personal account related to business and vice-versa. This makes the task of reconstructing the true incomes of the Appellant and the business monumental, if not impossible.
[12] The evidence was also inadequate in establishing many items relating to personal expenditures. Loans to the Appellant's son made via payments to his lawyer were undocumented and no precise figures were provided in this respect through either the testimony of the Appellant or her son. The Appellant claimed entire amounts for vehicle insurance through the company returns, although there would undoubtedly be some personal use of this truck. I accept the Appellant's evidence that the personal element was limited, but it is realistic to attribute some portion for personal use. In addition, there were discrepancies between the Appellant's daughter's testimony on property tax payments on the residence owned by the Appellant but occupied by the daughter and what the bank statement revealed.
[13] It was reasonable for the net worth method to be used by the auditor as the basis for an assessment in these circumstances. To my way of thinking, it is an unsatisfactory method and is very capable of producing inaccurate results. However, when proper records are not kept or are otherwise unavailable, it is sometimes the only "last resort" method that can be used — however imprecise the result may be. The best way to counter an assessment based on the net worth method is for the taxpayer to provide evidence of what the taxpayer's actual income is. The Appellant was not able to do so in this case. Income was not accounted for and was not properly documented. Other cases have noted a second, less satisfactory, method to challenge such an assessment and that is to prove that on a proper and complete net worth basis the assessments are inherently wrong. Again, the Appellant has not been successful in disputing the auditor's figures calculated by using this method. As was stated in the Bigayan case, piecemeal tinkering with a net worth assessment is inherently unsatisfactory.
[14] Although I have sympathy for the Appellant's position, she accomplished little else here except for piecemeal tinkering which was not sufficient to overcome the Minister's reassessments based on the net worth method. The Appellant's appeal in the matter of Dale Duncanson is therefore dismissed.
Signed at Ottawa, Canada, this 10th day of October 2001.
"D. Campbell"
J.T.C.C.
COURT FILE NO.: 2000-2820(IT)I
STYLE OF CAUSE: Dale Duncanson and
Her Majesty the Queen
PLACE OF HEARING: Yarmouth, Nova Scotia
DATE OF HEARING: August 20 and 22, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge Diane Campbell
DATE OF ORAL JUDGMENT: October 10, 2001
APPEARANCES:
For the Appellant: The Appellant herself
Counsel for the Respondent: Caitlin Ward
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada