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Citation: 2004TCC170 |
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Date: 20040330 |
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Docket: 2000-4512(GST)I 2001-125(IT)I |
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BETWEEN: |
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GLENN SIMON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Appellant: Michael Taylor
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REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Nanaimo, British Columbia, on June 13, 2003)
McArthur J.
[1] These appeals are from assessments under the Income Tax Act for 1995 and 1996 taxation years and from an assessment of goods and services tax under the Excise Tax Act, notice of which is dated April 16, 1999. By the income tax assessments, the Minister of National Revenue increased the Appellant's income by $46,654 in 1995 and $33,416 in 1996. Also, the Minister assessed the Appellant in the amount of $14,912 for GST for the period January 1, 1995 to December 31, 1996, plus interest and penalties. However, at the commencement of the hearing, counsel for the Respondent informed the Court that the income tax assessments were being reduced by $10,000 in each year and, therefore, the amounts in issue are $36,600 in 1995 and $23,400 in 1996.
[2] Before commencing with the merits of this case, I will say a few words concerning the Appellant's request for an adjournment. In recent weeks, the Appellant retained an accountant, Cameron McLean, who could not attend the hearing because of another commitment. The Appellant requested an adjournment and I agreed to adjourn the hearing for three days to June 12, 2003, to permit the accountant to attend. After a telephone call, the Appellant informed that his accountant was away until June 12 and could not be reached. This hearing had been adjourned four previous times; I believe twice upon the Respondent's request and twice to accommodate the Appellant. The Respondent strenuously opposed this adjournment and the previous adjournment that was granted on January 9, 2003. The Respondent referred to the process of the file as torturous. Apparently, on January 9, the Appellant advised that he had retained an accountant, Mr. McGuffie, who could not attend. Thirteen months earlier, Judge Rowe of this Court recommended to the Appellant that he obtain a representative to assist him with this complex appeal. Over the 13-month period, no Appellant representative contacted the Respondent. Therefore, the Respondent opposed another adjournment request. In addition to the background referred to, the Respondent's witness had come from Victoria. The Appellant was given over a year to obtain a representative and his adjournment request was denied.
[3] At the outset of the hearing, the Appellant's mother, who was his bookkeeper, indicated she had approximately 180 entries in her bluebook of advance loans she and her husband made to the Appellant in 1995 and 1996. The hearing was adjourned for approximately three hours to permit the Respondent's auditor to review these entries. They had little success. The Respondent conceded a reduction of $8,531 in 1996 and $480 in 1995. The Minister applied the net worth method of assessment, and for reasons that follow I find that the Minister was justified in so doing.
[4] An overview of this method is best set out by Bowman J. in Ramey v. Canada, (1993) 2 C.T.C. 2119 at 2122, where he stated:
... 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.
Facts:
[5] The Appellant operated a business under the name of G & H Auto Wrecking which bought and sold used cars, motorcycles and parts. He began in 1979 or 1980 after graduating from Grade 12 and he always had an aptitude for mechanics. Over the years, he borrowed from his parents and conventional lending institutions to purchase motorcycles and cars. In 1991, he purchased a tow truck. The Appellant and his mother testified on his behalf, and an auditor for the Minister of National Revenue testified on behalf of the Respondent. The evidence of the Appellant and his mother was somewhat difficult to discern. Incidents over the years that the Appellant had been in business tended to blend together. It was and is primarily a cash business and inadequate records were kept of the cash transactions.
[6] I believe during the years in question, the Appellant purchased a $75,000 property to carry on his business, without a down payment but by way of a $75,000 mortgage back to the vendor. At some later point, he refinanced to obtain an additional $10,000 or $15,000. He later lost the business through foreclosure. Also, at some point, he purchased a one-third interest in his parent's home, without cash, and refinanced that property, obtaining money for his business.
[7] In addition to borrowing from his parents, he borrowed through several credit cards that were, to use his expression, "always maxed out". He borrowed over $10,000 from a Canada Trust Powerline and that loan went into collection procedures. I believe Canada Trust obtained a $21,000 judgment against him during the relevant years. Canadian Tire took collection action to recover over $3,000 and his parents paid that debt. To stay in business, he borrowed from Avco Finance and his parents also paid that loan.
[8] His mother testified that in 1995 and 1996, she and her husband advanced $46,000 and $42,000 to the Appellant, respectively. He and his business were obviously insolvent. He lived very frugally at his parent's home. The thrust of the Appellant's position is that the increase reflected in the equity of his assets is as a result of unpaid loans or advances from his parents, again over $40,000 in each year. The Minister did not have much choice other than taking the net worth approach to determine the Appellant's income. The auditor could not trace the cash flowing in and out of the business. There were no ledgers with double entry. The onus was on the Appellant to keep proper books and records, and I refer to section 30 of the Income Tax Act.
[9] The Appellant's attempt to challenge the assessments on a piecemeal basis was without success. He aggressively attacked the auditor's inclusion as a personal expenditure, $7,900 for vehicle expenses in 1995, without establishing a lower amount, general statements to the effect that the amount is too high or insufficient. I make no adjustments in respect of the personal expenditures. The Minister's assumptions are the best we have. I find the auditor was very fair with the amounts she attributed for personal expenditures, $16,600 in 1995 and $12,185 in 1996. I see no need to review her amounts in any detail. The auditor used the Appellant's opening inventory in his income tax returns to arrive at his net worth for 1994, 1995 and 1996. These adjusted amounts appear to be $211,000, $255,000 and $283,000. Deducting the 1994 amount from the 1995 amount, and the 1995 amount from 1996, she arrived at an increase in net worth.
[10] The Appellant attempted to recreate his records by entering photocopies of cheques written by his mother, Dorothy Simon, on her joint bank account with her husband Helmut. These totalled $46,742 in 1995, and $41,991 in 1996. There were about 19 cheques in 1995, and 15 in 1996, payable predominantly to the Appellant or to ICBC Salvage which is an auto insurance company from where the Appellant purchased most of his salvaged vehicles. Attached to these cheques were the bank statements of Dorothy and Helmut to demonstrate that the amounts of the cheques were withdrawn from their accounts.
[11] The Appellant apparently repaid only $1,200 of the $80,000 advanced in 1995 and 1996 by his parents. Counsel for the Respondent submitted that this evidence was inadequate stating: "We don't know if particular amounts payable to the Appellant were used for his business". With his cash business, the Minister added: "We don't know if he paid his parents back in cash". Further, Dorothy testified that over approximately 10 years, she and her husband advanced over $447,000 to Glenn for his business and that amount has not been repaid. Counsel for the Respondent submitted that it is highly unlikely that they had $447,000 to advance, knowing what has been reported in their income tax returns over the years. Dorothy stated that she came from money, her husband was a welder of over 40 years and they sold timber from the land abutting their residence. The Respondent's evidence included that their income tax returns showed farm losses in each year.
[12] We appear to be left with this. First, the Appellant had a predominantly cash business, kept inadequate records, and the Minister correctly conducted a net worth assessment. Second, the Minister added to the Appellant's income the amount of $46,600 in 1995 and $33,400 in 1996, and also assessed him $12,728 for underreported GST. Third, Dorothy and Helmut Simon advanced at least $40,000 in each of the relevant years to the Appellant. There is no direct evidence of repayment of these funds in 1995 or 1996, other than $1,200. I am left with a great deal of uneasiness, if not suspicion, with respect to the Appellant's position that only $1,200 was repaid. This arises mostly because his parents did not appear to have a means to support themselves, their son and his business, no matter how generous they might have been.
[13] There was evidence that Glenn purchased an interest in the family home without cash payment. The reason for this is difficult to understand. His parents appear to have made most of the mortgage payments. The Appellant spoke in generalities of refinancing the home to insert funds into the business. I accept that the Appellant was insolvent in 1995 and 1996, and there is no evidence of inordinate personal spending. If he hid cash, where did it go? His lifestyle was extremely modest. No evidence was advanced with respect to the penalties, and the relevant statutory provisions were not referred to in the Minister's Reply.
[14] If I accept the Appellant's submission that his parents loaned him over $40,000 each year, we would end up with a minus amount of net income each year even though the Appellant declared income in 1995 of $8,149 and $454 in 1996. The following statement of Hamlyn J. in Saikely v. M. N. R., 93 DTC 397, applies equally to the present situation.
... the evidence was without precision, records, or acceptable documentation.
The taxpayer may attack the assessments in various ways. A taxpayer may prove the sum of his increase arose from non-taxable receipts, such as inheritance or gambling, that his net worth at the beginning of the period was undervalued, or that his assets at the end were overvalued, that liabilities existing in the end were admitted or undervalued, that the money had been borrowed or the income losses were greater than assessed. Whatever is alleged by the taxpayer must be proved by him. A mere statement is not enough; more cogent evidence is required to disprove a net worth assessment.
The lack of precision, the lack of connection, the lack of records, the lack of documentation, the absence of an essential witness or witnesses and, quite frankly, the general evasiveness of the Appellant's testimony leads this Court to the conclusion that the Appellant has not discharged the onus placed upon him.
Much of the foregoing also applies to the GST, obviously. Also, the following comment by Tardif J. in Entrepreneur Peintre J.L. Incorporated v. The Queen, [1999] T.C.J. No. 253, is also relevant to the Appellant's GST appeal:
[11] The burden of proof was on Mr. Labranche. He had to prove, on the balance of evidence, the validity of his argument that he had never done work subject to the Goods and Services Tax; he also had to show that the applicable taxes had been collected and remitted. Based on those two facts, he had to justify the differences observed by the respondent by giving plausible, probable and reasonable explanations.
[12] The best way of proving this would have been to adduce extensive documentary evidence showing the consistency and accuracy of the financial data. The exceptional quality of the testimony of one or more witnesses could perhaps have minimized certain omissions and made up for certain flaws or weaknesses attributable to the passing of time or to the inexperience of the individuals subject to the obligations set out in the Act.
[13] In this regard, I consider it important to point out and stress the obligation that Mr. Labranche had to have such documentation in his possession in order to account for his management of government funds. As an agent, he had to collect the tax and remit it to the respondent in accordance with the procedures expressly set out in the Act. In other words, he had to account for his management by showing that all of the taxes had been collected and remitted in accordance with the Act's provisions.
[15] As stated, the Appellant did not have effective documentary evidence. He could not establish that he was eligible for further GST input tax credits. The Appellant submitted no evidence to permit a reduction in GST assessment. The Minister's review of the Appellant's business affairs has been continuing for years. There were no surprises presented at the hearing. The Appellant bought and sold, primarily with cash. He had a duty to keep adequate records to permit that cash to be traced. Notwithstanding all of this, it is clear that his family advanced him substantial funds and he did not have excess funds on hand during 1995 and 1996, evidenced by his frugal lifestyle, his overdue credit cards, the judgment, the foreclosure and his borrowing from five or six different sources. I am satisfied that there was no saved, hidden cash.
[16] With this in mind, the appeals are allowed only to the extent that they are referred back to the Minister to make such adjustments resulting from the concessions made by counsel for the Respondent at the outset of the hearing to reduce the income tax assessments by $10,000 in 1995 from $46,600 to $36,600, and in 1996 from $33,400 to $23,400. The GST appeal is dismissed. No penalties are assessed and no costs are granted.
Signed at Ottawa, Canada, this 30th day of March, 2004.
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"C.H. McArthur" |
McArthur J.
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CITATION: |
2004TCC170 |
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COURT FILE NO.: |
2000-4512(GST)I and 2001-125(IT)I |
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STYLE OF CAUSE: |
Glenn Simon and Her Majesty the Queen |
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PLACE OF HEARING: |
Nanaimo, British Columbia |
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DATE OF HEARING: |
June 10, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice C.H. McArthur |
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DATE OF JUDGMENT: |
July 2, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Michael Taylor |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |