1999-3424(IT)I
BETWEEN:
WESLEY TRELA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard with the appeals of Krystyna Trela (1999-3425(IT)I)
on July 21, 2000, at Toronto, Ontario, by
the Honourable Judge E.A. Bowie
Appearances
Counsel for the Appellant: Marcel Banasinski
Counsel for the Respondent: Andrea Jackett
JUDGMENT
The appeals from the assessment made under the Income Tax Act for the 1992, 1993, 1994 and 1995 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 14th day of August, 2000.
|
"E.A. Bowie" |
J.T.C.C.
1999-3425(IT)I
BETWEEN:
KRYSTYNA TRELA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard with the appeals of Wesley Trela (1999-3424(IT)I)
on July 21, 2000, at Toronto, Ontario, by
the Honourable Judge E.A. Bowie
Appearances
Counsel for the Appellant: Marcel Banasinski
Counsel for the Respondent: Andrea Jackett
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1992, 1993, 1994 and 1995 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 14th day of August, 2000.
|
"E.A. Bowie" |
J.T.C.C.
Date: 20000814
Docket: 1999-3424(IT)I
BETWEEN:
WESLEY TRELA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
1999-3425(IT)I
AND BETWEEN:
KRYSTYNA TRELA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench at Toronto, Ontario,
on July 21, 2000)
BOWIE J.T.C.C.
[1] These are my reasons for judgment in the appeals of Wesley Trela and Krystyna Trela. They appeal assessments for income tax for the years 1992, 1993, 1994 and 1995.
[2] Krystyna Trela and her son Wesley Trela, during the relevant period of time, were partners operating a business called Chris's Restaurant. It appears that theirs was a 50/50 partnership. It also appears that in operating the business they did not fulfil the duty that is cast on people carrying on business by section 230 of the Income Tax Act, which provides that every person carrying on business is required to keep books of account at that place of business, such that the amount of tax for which they are liable can be computed.
[3] The evidence given by the assessor in this case was that the restaurant had no cash register in it, and that there were no cash register tapes available when she went to conduct her audit. The Appellants' evidence, specifically the Appellant Krystyna Trela, was that she gave all her receipts and all the records that she had in connection with the business to an accountant by the name of Barbara at a firm by the name of Pagett's Accounting. She was very vague both as to the identity of the person, and as to what records she gave to her. From whatever records she had, this accountant prepared some income statements for Chris's Restaurant for the years 1991, 1992, 1993 and 1994, but on the evidence of the assessor, which I accept, they were not only unaudited statements, but they were statements which could not be verified from the records available. She therefore proceeded to make a net worth assessment applicable to the two partners, Krystyna and Wesley Trela.
[4] I find that this is a case in which the assessor was quite justified in taking the net worth approach to income. Indeed, when taxpayers do not keep proper records, auditors have no other choice but to apply the net worth method of assessing. As Bowman J. said in the case of A.A. Ramey v. Canada, which is reported at [1993] 2 C.T.C. 2119 at 2122:
... 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. ...
It is certainly true of the present case that the Appellants find themselves in the unfortunate position of having to dispute net worth assessments for four years solely by reason of their failure to have available accurate records.
[5] No issue was taken by the Appellants with the fact that some of the years, or at least one of them, under appeal was statute-barred at the time of the reassessment; nor could issue be taken with that, given the absence of recordkeeping. In addition to Bowman J.'s brief description of how the net worth assessing process works, I should point out, because it becomes relevant in this case, that in addition to taking into account the changes from year to year in the assets minus the liabilities of the taxpayers, and the personal expenditures for each year, it is also necessary to take into account any changes in the taxpayer's assets that may arise, for example, through loans, or otherwise, which are increased or decreased during the period. If, for example, a taxpayer borrows money, then that reflects on the balance sheet, and when the taxpayer repays the money, that reflects on the balance sheet as well.
[6] Finally, it must be taken into account, in moving from the income as assessed by the net worth method that the taxpayer has, in most cases, declared some income, and it is only the difference between income as computed by the net worth method and the income declared by the taxpayer that becomes a discrepancy to be added to the taxpayer's income.
[7] In the present cases the assessor had to contend with two additional facts, one being that the two taxpayers were in business together as partners; and the other being that, as well as the two taxpayers, the husband of Krystyna Trela, who is the father of Wesley Trela, and Wesley Trela's two brothers also lived in the household, and thereby caused household expenditures to be increased. These are all factors which the assessor had to, and did, take into account.
[8] The Appellants' attack on the net worth assessments is a limited one, but before I get to it I should indicate that the results of the reassessments were to add to the income of each of the Appellants $27,063 in the 1992 taxation year; $19,160 in 1993; $25,435 in 1994; and $23,749 in 1995. The specific challenges made to these by the Appellants I shall deal with in turn. First, the Appellants say that when the assessor removed from the income statements prepared for Chris's Restaurant in each year, the amount shown as an expense for interest and bank charges and then placed that amount into the personal expenses of the household, that in effect it was to charge it twice against the Appellants. This submission, however, ignores the fact that the income statement, being an unreliable document which cannot be substantiated, plays no part in the determination of income by the net worth method. In fact, the assessor in this case was assessing both income tax and goods and services tax, and she therefore had to use the income statement, such as it was, in an attempt to ascertain the liability of the partnership in respect of goods and services tax. It is for that reason only that the income statement had some relevance to her.
[9] There is no appeal before me in relation to the goods and services tax and the income statements, which were admitted into evidence as Exhibit A-2, have no relevance in connection with determining the accuracy or lack of it, of the net worth determinations of income of the two partners. The fact is that the Appellant Krystyna Trela did in fact make payments on the mortgage on the house in which she and her three sons and her husband lived. She said in her evidence that she made mortgage payments of $2,800 per month, and those are consistent with the amounts of $33,878 for the first of the years in question and reduced to slightly under $26,000 for the last of the years. These amounts, having been paid by her, have to come out of her income or some other source of funds, and are therefore properly taken into account by the assessor in the net worth assessment. I find that the first contention of the Appellants has no merit.
[10] The next contention advanced on behalf of the Appellants was that while there are only two partners in this business and two persons being assessed in respect of the unrecorded and unreported income, the expenses of five people living in the household were taken into account. The reason for this, quite simply, is twofold. First, that it is impossible, or next to impossible, to determine the household expenses and living expenses of two only, out of a household of five members. Secondly, Krystyna Trela said in her evidence, and this is corroborated as well by the evidence of Wesley Trela, that the majority of the household expenses were paid by Krystyna out of the proceeds of the restaurant business. There is no doubt that some contributions to household expenses were made by Krystyna Trela's husband, and by the other two sons, all of whom worked casually at one time or another in the restaurant business. However, it is clear that the restaurant business was the main contributor in paying the household expenses.
[11] Furthermore, the assessor, having made her ascertainment of the unreported income on the basis, as she freely admits, of household expenditures that are attributable to all five members of the household, then arrived at the increase to be made, or the adjustments to be made, to the income as reported of the two Appellants, and in doing so she took into account the income that had been earned and reported by Tadeusz Trela, the husband of Krystyna, and by her other two sons, John and Adam. By removing these amounts from the adjusted net worth, as she did at the lower part of Schedule 3 of her working papers, she effectively gave credit for the contributions of those three individuals to household expenses, so there is not, as counsel for the Appellants contends, charged against the two Appellants the contributions to household expenses of the other three members of the household. This point too, therefore, has no merit.
[12] The next contention that arises is that there was a source of funds that did not get taken into account in the course of these assessments. The Appellant Krystyna Trela said in her evidence that in 1993 she borrowed $8,000 from a Mr. Bonchuk of which she repaid $6,000 in 1994, and of which $2,000 remained outstanding. It was not brought out in her evidence for how long it remained outstanding, but I take it that she meant it remained outstanding after the period covered by these assessments. The evidence was not corroborated in any way. Mr. Bonchuck did not appear to substantiate what Ms. Trela had to say about this loan, nor were there any cancelled cheques indicating a repayment of it. Nevertheless, that evidence was not challenged by counsel for the Crown and she does not ask me to disbelieve it. The effect of this, then, is that $8,000 in 1993 of the total amount making up the aggregate increment of net worth and household expenses came not from income, but from Mr. Bonchuck, and $6,000 went to repay that in 1994, and the net worth assessments should be adjusted on that account.
[13] That brings me to the final item in dispute, and that is that the Appellants say that the personal expenses attributed to the family by the assessor are too high. It appears from the assessor's evidence, and from Exhibit A-2, that the assessor, in approaching the subject of personal expenditures, looked first to the Appellants for an estimate of their personal expenditures and, to some extent, estimates were forthcoming. The evidence of the Appellants was to the effect that to the extent that the assessor was given estimates they were given by the accountant and not by the Appellants personally. It is evident from Exhibit A-4 that there are more of the items as to which personal expenditures were taken into account for which no estimates were given than those for which estimates were given. Both of the Appellants in their evidence went through the amounts for personal expenditure that had been used by the assessor, and they took issue with a total of 16 different items as they were enumerated for the year 1991.
[14] It was contended by the Appellants in their evidence that there would be no significant difference in personal expenditures for the 1992 year and subsequent years from those for the year 1991, and consequently all of the evidence was directed to that one year. I find that, to some extent, the amounts are overstated. In saying this, I make no criticism of the assessor because she appears to have followed a reasonable procedure, having requested estimates from the Appellants, and when she was given estimates she appears to have used those estimates. When she was not given estimates she used average data obtained from Statistics Canada documents suitable for a family of five. However, it is obvious that not all families of five have identical expenses, and there were certain items which, on the basis of the evidence, I think should be reduced.
[15] The first category of expenditures was food, and that was not challenged by the Appellants. The second is shelter, and it was suggested by the Appellants in their evidence that it was approximately $200 too high and that the sub-item of $403 for travel or accommodation should be reduced to $200. I am not going to direct any adjustment to that item. It came out in the evidence that the Appellant Krystyna Trela had travelled on one occasion to Florida for a week and on another occasion she travelled to Calgary. The Appellants' $200 estimate was nothing better than a guess, and that item stands. Under household operations, the Appellants contend that the amount is approximately $200 too high. The specific item with which issue is taken is pet expenses, and I am satisfied that the pet expenses, and therefore the subtotal for household operations, should be reduced by $200.
[16] The next category is clothing, and Krystyna Trela gave evidence that her expenditures on clothing would be about $1,000, rather than the $2,142 attributed, and there is also an item for boy's wear of $170, which counsel for the Crown agreed would be unlikely in a family comprised only of adults. The clothing subtotal should be reduced by $1,100. Under transportation, amounts of $470 for commuter transportation and $801 for intercity transportation, including air travel are challenged. I am of the view that this category should be reduced by a total of $700. It is clear that the family does some travel by public transport and some intercity travel.
[17] Under health care, the items challenged are $224 for eye care and $453 for private and public health insurance. Mr. Trela testified that nobody in the family during those years needed eye care and that the family had no health insurance and, accordingly, this category should be reduced by $677. The next sub-category is personal care, and an amount of $881 taken from the Statistics Canada data was challenged, it being suggested that $200 would be more appropriate. I found the evidence on this item to be extremely vague, and I doubt very much that the appropriate number is as low as $200. That item I direct no adjustment to. The next sub-category is recreation, and a number of items within that were challenged. The item is made up of such things as toys, games, photographic goods and services, recreational vehicles and boats and the like. It would include cable TV, and the evidence was that the family has cable TV at home and on the restaurant premises, so there is some significant expenditure there, but I do believe from the evidence that this family is probably somewhat below average in its expenditures, probably a good deal below average in its expenditures on recreation, and I direct that that item should be reduced by $1,000. The other two items challenged were under gifts and contributions where the amount attributed was $460. It was suggested by the Appellants that this should be reduced to $200, and, again, I find the evidence sufficiently vague that I would not direct any adjustment there.
[18] Finally, under the category of miscellaneous, the item challenged is union and professional dues, which have been included at $208, and Mr. Trela's evidence was that there were no union dues payable at that time, so the personal expenses should be reduced by that $208.
[19] In summary, therefore, the personal expenditures in each year should be reduced by a total of $3,885. The appeals are therefore allowed; the reassessments referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.
Signed at Ottawa, Canada, this 14th day of August, 2000.
|
"E.A. Bowie" |
J.T.C.C.
COURT FILE NO.: 1999-3424(IT)I and 1999-3425(IT)I
STYLE OF CAUSE: Wesley Trela and Krystyna Trela and
Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: July 21, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge E.A. Bowie
DATE OF JUDGMENT: August 14, 2000
APPEARANCES:
Counsel for the Appellant: Marcel Banasinski
Counsel for the Respondent: Andrea Jackett
COUNSEL OF RECORD:
For the Appellant:
Name: Marcel Banasinski
Firm: Kozlowski & Company
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada