|
Citation: 2005TCC83 |
|
Date: 20050304 |
|
Dockets: 2004-2206(IT)I 2004-2209(GST)I |
|
BETWEEN: |
|
YEUNG KWONG CHEUNG, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
AMENDED REASONS FOR JUDGMENT
Rowe, D.J.
[1] The appellant - Cheung - appealed from assessments of income tax for his 1999, 2000 and 2001 taxation years. When filing his return of income for the years under appeal, the appellant reported business income of $3,496 for 1999, $3,410 for 2000 and $3,495 for 2001 and total family income in the following amounts: 1999 - $6,996; 2000 - $9,355; 2001 - $10,465, as referred to within Schedule "A" of the Reply to the Notice of Appeal (Reply) filed in respect of appeal 2004-2206(IT)I. The Minister of National Revenue (the "Minister") undertook a net worth analysis and concluded the appellant's income in those years was under-reported for the years under appeal, as follows: 1999 - $42,892; 2000 - $42,024; 2001 - $42,139. Details of the appellant's personal expenditures - as assumed by the Minister - were provided in Schedule "B" of said Reply.
[2] The appellant was generating income as a practicing Certified General Accountant (CGA) and the Minister - pursuant to the relevant provisions of the Excise Tax Act (the "ETA") - issued a Notice of Assessment - number 11BU0500057, dated February 13, 2003 - in which Cheung was assessed for unreported Goods and Services Tax (GST) in the sum of $33,475.75 together with a penalty of $5,076.02 and interest of $3,300.51 for the reporting periods from January 1, 1998 to December 31, 2001. Following objection by the appellant, the Minister - by Notice of Decision dated December 10, 2003 - confirmed the assessment. The appellant appealed from this confirmation and counsel for the respondent applied for an Order that these appeals be consolidated and heard on common evidence. The application was granted pursuant to Rule 26 of the General Rules of Procedure which I held was applicable to the within proceedings since there was no corresponding rule in the Rules respecting informal procedure and there was a common question of law and/or fact arising out of the same series of occurrences.
[3] Yeung Kwong Cheung testified in Cantonese and the questions and answers and other aspects of the proceedings were translated from English to Cantonese and Cantonese to English by Linda Clipperton, interpreter.
[4] Cheung stated he was born in Hong Kong - in 1954 - and came to Canada in 1989. He is married and the father of two children born in 1994 and 1996, respectively. He and his wife and children live in Richmond, British Columbia, in a house purchased jointly with his mother in 1994. He and his wife each own 25% and his mother owns 50%. The house was purchased outright in accordance with the precepts of his culture which advocates a reduction of living expenses in order that a family may pursue a stable lifestyle devoid of worry about paying interest charges in respect of a large mortgage on a family home. In 1996, the appellant obtained his CGA designation and was a partner with Iris So in a two-person accounting firm - So & Cheung - without any employees. A business licence for the firm - issued by the City of Richmond - for the 2000 year was filed as Exhibit A-1. Cheung stated he is certain the Minister considered him to have been a sole practitioner in the accounting business even though it was always a partnership with Iris So, who had obtained her CGA designation about 1994. Iris So was the manager of business operations and signed documents on behalf of the partnership and was the sole signing authority on the So & Cheung bank account at the Hongkong Bank of Canada (HBC) in Richmond. Rent cheques to the landlord - Exhibit A-2 - were signed by So. Cheung stated So dealt with other matters such as completing a registration form - Exhibit A-3 - for purposes of the Business Watch program. Cheung explained the office procedure was as follows: he issued invoices to his clients and when paid, he handed the cheques to Iris So in order that she could deposit them to the firm bank account. Each month, So prepared a statement of expenses and classified them as pertaining to business or to personal expenditures. Then, So calculated his total earnings, subtracted his share of office and business expenses and issued him a cheque for the balance. Cheung prepared a diagram on a sheet with attached documents - Exhibit A-4 - in order to explain the process followed. Included in those documents is a sample invoice to a client, a photocopy of an adding machine tape, a statement of expenses prepared by So, and a copy of Cheung's Toronto-Dominion (TD) bank statement - for the period from September 30, 1999 to October 29, 1999 - in respect of the joint account operated with his wife. Cheung referred to the deposit of $1,900.36 on October 29, 1999, which corresponded to the amount of his entitlement according to the calculations undertaken by Iris So. Cheung referred to a Schedule for 1999 and attached documents- Exhibit A-5 - that he prepared in order to meet with Munief Mohammed - Canada Customs and Revenue Agency (CCRA) auditor. In that Schedule, according to Cheung's statement of net business income for 1999, he earned the sum of $20,434.66. Following the meeting with Mohammed, Cheung prepared a two-page statement of income and expenses - Exhibit A-6 - in which he also set forth his understanding of details of an agreement he considered had been reached as a result of discussions with Mohammed. By preparing said statement, Cheung acknowledged that his business income in 1999 was considerably greater than originally reported in his income tax return. In said statement, he referred to receipt of certain funds by way of gift and produced a Customer's Receipt - Exhibit A-7 - issued by Royal Bank of Canada (Royal) indicating he received the sum of $6,000 CAD which he attributed to his share of the estate of his deceased aunt. The appellant stated his mother had a pension from her previous service as a school principal in Hong Kong and contributed to family food purchases which he estimated were $4,300 per year. He filed - as Exhibit A-8 - a State of Title Certificate from the Land Title Office in New Westminster, B.C. indicating there was no mortgage on the family residence. He filed a City of Richmond tax certificate for 2000 - Exhibit A-9 - in respect of the family residence, showing a total amount payable of $1,310.40. Insurance for the house was $474 per year according to the invoice - Exhibit A-10 - issued by the insurer. The water, sewer and waste management invoice - Exhibit A-11 - issued by the City of Richmond indicated a total billing of $502.90 for the year 2000. Cheung estimated the annual bill for BC Hydro was about $1,000 and that he spent approximately $300 per year for the purchase of small items needed for maintenance of the home. He estimated annual telephone costs were around $360 and produced a typical bill - Exhibit A-12 - in the sum of $29.70 - for the month of January, 1999. As a result of his calculations, Cheung concluded that his household expenses were only about $3,600 per year. He stated his family did not spend much money on clothing and considered an annual expenditure of $1,500 was reasonable rather than the amount of $3,118.83 assumed by the Minister. With respect to transportation, Cheung stated the family used a 1993 Honda Civic registered in his wife's name and the annual cost of insurance was $1,187 for the period May, 1999 to May, 2000, as shown on the Insurance Corporation of British Columbia (ICBC) Owner's Certificate, filed as Exhibit A-13. The appellant estimated gasoline consumption required an expenditure of $15 per week - $780 per year - as fuel prices were much lower during the years under appeal as indicated by the photocopy - Exhibit A-14 - of 3 gas station receipts ranging from $14.51 to $16.97. The appellant stated he and his family were not required to pay Medical Services Plan of British Columbia (MSP) premiums due to their low annual family income. Cheung stated that because the children were young, he and his wife did not go out much and entertainment was limited mainly to watching television. The cable connection cost $51.25 per month according to the statement - Exhibit A-15 - issued by Rogers Cable TV in January, 1999. Cheung referred to a draft income tax return - Exhibit A-16 - he had prepared in order to reflect what he considered would have been an accurate portrayal of his tax situation - in 1999 - if it had been filed for that taxation year. In that draft, he calculated his net income - and taxable income - was $19,734. Cheung's annual CGA membership - Exhibit A-17 - was in the sum of $682.66. Cheung acknowledged that he had originally reported the sum of $3,496 as constituting business income for 1999 rather than the sum of $20,434 he currently adopts as the proper amount and - further - regards that amount as one which had been accepted by Mohammed as representing the true state of Cheung's business revenue. Cheung stated he prepared a statement - Exhibit A-18 - showing the effect on the total of personal expenditures once the proper amount for income tax had been inserted rather than using the inflated figure supplied by the Minister which was based on an excess amount of income. The net result - according to Cheung - was that he and his wife and children had personal expenditures of $20,060 in 1999. The appellant stated he had only been practicing as a CGA since 1996 and his clients were mostly Asians who were not accustomed to paying expensive accounting fees. He denied that the income of the accounting practice was $117,692.31 - as assumed by the Minister - based on Statistics Canada (StatsCan) numbers gathered in respect of revenue earned by accountants. Cheung referred to the GST return - Exhibit A-19 - filed by Iris So - on behalf of So & Cheung for the 1997 year - in which the sum of $39,037 was reported as gross revenue. Cheung explained his rates were dependent on the sort of work performed. If it was something that ordinarily would be done by a bookkeeper, then he charged his time out at between $8 and $10 per hour but when performing the type of work usually associated with an accountant holding a designation, he billed clients at $25-$30 per hour. Since So & Cheung had no accounting students or other employees, the ordinary work had to be performed by him and/or Iris So in order that they could offer competitive rates for those tasks and retain their clients for more lucrative work such as preparing financial statements and income tax returns. Cheung stated the firm's rent was only $600 per month because he and So occupied only 400 square feet in an upstairs office and they kept other expenses to a minimum so that their total office expenses were about $10,000 per year. Their joint revenue was approximately $50,000 which permitted them to divide the $40,000 profit in accordance with their own billings to personal clients. Cheung stated that even though his explanation for personal and business expenses related primarily to 1999, there would be very little difference in those numbers - representing either income or expenses - in the following years, 2000 and 2001.
[5] Turning to the matter of the GST assessment, the appellant stated he was not registered for GST as a sole proprietor until May, 2002, as he and Iris So did not dissolve their partnership until the end of 2001. The appellant stated he had determined his taxable income was $20,434.66 for the 1999 taxation year and that it was probably 7% higher in 2000 and had increased by the same percentage again in 2001 for a total gain of nearly 15% in comparison with 1999 revenue. Cheung acknowledged that he reported business income in the sums of $14,300, $14,380 and $14,811, respectively for 1999, 2000 and 2001. He explained this understatement of income on the basis that he had been confused - three years consecutively - because he had reported only 6 months business income - instead of a complete year - for 1999, and continued thereafter to make the same mistake. Cheung stated that although he and So divided business expenses equally, they did not share revenue on the same basis. His share of revenue was based strictly on payments deposited to the bank for work performed for his own clients and once his 50% share of monthly office expenses was calculated - by So - she issued him a cheque for the proper net amount. Each deposit slip was marked by So to indicate whether the cheque was from one of his clients and she would make the notation "YK" beside the entry to denote it was to be credited to him. The appellant stated that all invoices were sent to clients on So & Cheung letterhead and a client would not be aware of the system in place between himself and Iris So to apportion revenue based upon which person had performed the work. Since the firm did not have a lot of clients and most of them handed over a cheque while in the office, Cheung stated it was not difficult to identify which partner was entitled to the proceeds of a cheque. The appellant stated that even though he made an error when calculating the amount of GST owed, the arrears were not in the amount claimed by the Minister in accordance with the document - Exhibit A-21 - prepared by Munief Mohammed.
[6] Yeung Kwong Cheung was cross-examined by counsel for the respondent. Cheung agreed the issue before the Court was the amount of under-reported income for the years under appeal but stated the sums suggested by the auditor were incorrect. Cheung confirmed that in the course of his accounting practice he prepared income tax returns - both personal and corporate - and had passed a written examination - in English - in order to become qualified as a CGA. He also agreed he was bound by the code of conduct and ethics as established by his professional association. Counsel referred the appellant to a web listing for the firm of Y.K. Cheung & Co. and to the preferred areas of practice listed thereon which included performing accounting work in the hospitality industry and for businesses involved in retail, preparing tax returns and dealing with non-resident taxation issues. The appellant agreed that listing accurately described his current practice. Counsel directed the appellant to his 1999 tax return - Exhibit R-2 - which was not filed until August 11, 2000. In that return, the appellant reported his gross business income was $14,300 and his taxable income was only $3,690. According to the Statement of Professional Activities - Form T2032 - filed with the tax return, the appellant's business income was $14,300 and his expenses were in the sum of $10,804, resulting in net income of $3,496. Counsel suggested to the appellant that it should have been apparent these numbers were not correct and Cheung agreed he had been negligent when filing the return in that manner. In filing his return of income for the 1999 taxation year, Cheung acknowledged he had included a receipt for a charitable donation - in the sum of $3,810 - issued by the Anglican Church of Canada, Diocese of New Westminster. He explained that he and his wife, as well as his mother and friends of their family, made donations using envelopes with a particular number printed thereon so that the contents were credited to his donation account since it had been established in his name. The appellant conceded he had reported all his business expenses in 1999 even though he had reported less than 50% of his income. Cheung stated that when filing his 2000 and 2001 returns, he had relied on the 1999 revenue as a basis for reporting and had not noticed the error until it was made apparent during the audit procedure. The appellant agreed that when signing his 1999 return - filed August 11, 2000 - he certified the information given on the return and in any documents attached was correct and that the return was complete and disclosed all his income. Cheung was referred to his return of income for the 2000 taxation year - Exhibit R-3 - wherein he reported gross business revenue in the sum of $14,380 and expenses of $10,970.11, resulting in net business income of $3,409.89. The return was filed on August 10, 2001. The appellant agreed he had reported rent in the sum of $3,150, a greater amount than in the previous year when it had been only $2,730. Cheung explained he had been in a hurry when he filed his returns and had not taken into account the proper amount of gross business income during the years under appeal. The appellant filed his 2001 tax return - Exhibit R-4 - on July 19, 2002 and reported gross business income in the sum of $14,811 which, after deducting expenses of $11,316, resulted in net business income of $3,495. Cheung reiterated his admission that he had been negligent when filing these returns and conceded he had not properly disclosed his income. Cheung agreed he received the letter - dated August 29, 2002 - from Munief Mohammed in which Mohammed listed items numbered #1 to #14 that he wanted produced for inspection. Cheung agreed he had not produced most of the items requested, including any general ledgers or journals and that he had not shown Mohammed the documents now entered as Exhibits A-4, A-5 and A-6 in these proceedings in which he explained - inter alia - his method of receiving revenue as well as providing details of personal and household expenses. Cheung stated that during the meeting with Mohammed, he accepted that his income had been under-reported for the years under appeal. He stated he informed Mohammed that he was unable to produce statements on the So & Cheung account because Iris So had been the sole signing authority and the bank would not give him that information. Since all cheques payable to So & Cheung had been deposited to the firm bank account, Cheung stated it would not have been difficult for the Minister to confirm the total amount of deposits to that account. The appellant recalled Mohammed had mentioned that he would be relying on certain information gathered by StatsCan in the course of his audit. However, Cheung stated he had not been informed by Mohammed that he was the subject of a net worth assessment. Instead, Cheung stated that upon leaving the meeting with Mohammed, he was convinced an agreement had been reached with regard to the correct amount of taxable income in each of the three years at issue but never received any subsequent confirmation - from Mohammed - of that arrangement. Cheung stated he attempted to arrange a meeting with Mohammed's supervisor but was refused. However, he still provided additional information prior to the final assessment being issued. In terms of providing a full set of statements with respect to the personal joint account at TD, Cheung stated he considered that course of action would have been too expensive since the bank charged a fee for that service. Although the Appeals Officer requested bank statements on the So & Cheung account, the appellant stated he made it clear that he was in no position to provide information because Iris So had been the sole signatory. In response to a query from the Bench, Cheung stated he had not asked So to provide this information because their relationship had suffered as a result of the dissolution of their partnership. He agreed with counsel's suggestion that the only statement - Exhibit A-4 - ever produced with respect to the TD account had not been shown to the Appeals Officer nor had he provided the information in Exhibits A-4, A-5 and A-6. The appellant stated that when meeting with the Chief of Appeals, he handed over a copy of what is currently Exhibit A-20, pertaining to the 1999 taxation year. Cheung explained that in his own mind there was no point in providing any further bank statements because the Notice of Confirmation had been issued and he had been advised that the only remaining course of action was to appeal to the Tax Court of Canada. He confirmed that Exhibit A-4 - the diagram and chart with attached documents and photocopies of adding machine tape and TD bank statement - had not been produced to counsel for the respondent until September 15, 2004. The opening entry on the statement for the period ending October 29, 1999, showed a balance of $8,378.63, as of September 30, 1999. Cheung stated the Appeals Officer had not requested any statements on his TD joint account and agreed he was aware there is a duty to provide information to the Minister, particularly following a demand for specific items. Cheung stated his position was that even though he had not reported all his income for the years under appeal, the position advanced by the auditor on behalf of the Minister was incorrect and was based on unreliable information.
[7] Munief Mohammed testified he is employed as an auditor by Canada Revenue Agency (CRA) - successor to CCRA - and that his duties include verifying information contained in an income tax return and examining documents relevant to that return. He stated his audit of the appellant commenced in a normal manner and that he had been aware Cheung was a CGA. He contacted Cheung by telephone and stated he acceded to the appellant's somewhat unusual request that the meeting not take place for one month in order that Cheung have sufficient time to prepare. Mohammed stated that - usually - auditors attend at the taxpayer's place of business but Cheung wanted to attend an interview at Mohammed's office. In the interim, Mohammed sent Cheung the letter - Exhibit R-5 - requesting that he produce certain documents and records. At the meeting, Mohammed stated he informed Cheung of the purpose of the audit and that it pertained to both income tax returns and GST arrears. At that time, Cheung produced some documents such as invoices to clients and other pieces of paper pertaining to expenses as well as a sheet on which the numbers purported to record Cheung's income. Mohammed stated the expenses appeared to be in order but he wanted to verify Cheung's income and needed to examine ledgers or deposit records and bank statements. Mohammed stated Cheung promised to fax bank statements as soon as he returned to his own office but never did so even though he had been advised of potential consequences for failing to comply with demands for information. While speaking to the appellant, Mohammed stated he learned Cheung, a married professional with two young children, was in a situation similar to his own and had commented to Cheung that in his personal experience it required an annual cash flow of at least $48,000 to maintain a reasonable lifestyle and to make payments on a residential mortgage. Mohammed stated Cheung advised he did not have a mortgage on his family home and that his mother also paid some household expenses. Mohammed stated he was prepared to take that information into account when calculating the personal and household expenses and the amount of income required to cover the cost thereof and that even though Cheung's expenditures might be lower than the general averages - as compiled by StatsCan - the onus was on the appellant to demonstrate that was so. In the course of their discussions, Mohammed suggested Cheung's net business income - as reported - was too low by at least $15,000 per year and that in the absence of reliable documentary and other evidence pertaining to income and expenses, the net worth method would be utilized and during that process much of the information would be from numbers, amounts and averages collected by StatsCan. Apart from that explanation to Cheung, Mohammed stated he is aware that the net worth procedure is well known to anyone who has obtained an accounting designation such as CGA. Mohammed made notes of his interview with Cheung and included them in a typed document - Exhibit R-6 - he prepared in which he also detailed other steps taken in the course of his dealings with the appellant. In addition, Mohammed completed a Memo for File - Exhibit R-7 - in which he recorded ongoing activity in respect of the Cheung audit. At all times material, Mohammed had voicemail at his office and stated he had not received any messages from Cheung as the appellant had claimed. During the interview with Cheung, Mohammed stated the appellant had not disclosed that he had been in a partnership with Iris So and that after two months, Cheung had not provided any bank statements on the account used by that accounting firm. Mohammed referred to the Statement of Professional Activities, as contained in the 1999 tax return - Exhibit R-2 - on which the appellant stated he was entitled to "100%" of the partnership and, as a result, considered the appellant had intended to show he was a sole proprietor. Mohammed stated he consulted with his Team Leader and decided to prepare a proposed net worth assessment based on averages and information obtained from StatsCan and sent a copy of his finished work to the appellant with the intent that it would "shock him into providing some bank statements". As noted - in Exhibit R-7 - Mohammed telephoned Cheung on October 31, 2002 and asked for bank statements which had not been provided, as promised earlier. At that point, Mohammed noted Cheung denied having been asked for said statements, hung up the phone and did not respond when Mohammed called back immediately thereafter. When preparing his net worth assessment, Mohammed stated he used the relevant schedules contained in the document - Exhibit R-8 - and was concerned mainly with the amount of personal expenditures required to sustain a family of four in circumstances similar to the Cheungs. In Schedule IV of said exhibit, Mohammed estimated Cheung's income was $50,019.25 in 1999, $51,377.24 in 2000 and $52,689.66 in 2001. He agreed these figures included an allowance for income tax of $15,684.95 in 1999, $16,110.78 in 2000 and $16,522.42 in 2001, as though those sums had been paid or - at least - were required to have been paid. Later, Mohammed prepared an amended statement - Exhibit R-9 - pertaining to a calculation he had undertaken in respect of the amount of GST that should have been remitted by the appellant for the period covered by the assessment issued pursuant to the ETA. Several worksheets were sent to the appellant for his perusal including one in which Mohammed had used a StatsCan figure taken from the bottom 25% of the complete range of income earned by accountants in Canada and then applied a factor of 42.5% of gross revenue to represent business expenses normally associated with an accounting practice. For 1999, Mohammed determined that Cheung's accounting practice should have grossed the sum of $117,692.31 and since GST is collected on the gross amount collected from clients, the appellant should have remitted $8,238.46 since no Input Tax Credits (ITCs) were claimed in respect of said income. Using the same method, Mohammed calculated the appellant should have remitted the sum of $8,462.13 in 2000 and $8,678.35 in 2001, based on gross revenues of $120,887.55 and $123, 976.38, respectively. Even though there was an acknowledgement that those amounts of gross revenue would be subject to 42.5% expenses - on average - Mohammed stated he was not permitted to take into account the effect of any potential ITCs, because in order to do so there has to be compliance with section 169(4) of the ETA which requires supporting documentation. Upon receiving a fax from Cheung containing a number for a GST account, Mohammed stated he checked the CRA system but could not find any GST account in that name that had been registered to receive remittances from the appellant's accounting practice, although Cheung had a total of 5 separate accounts for GST pertaining to other business activities. Although the GST return - Exhibit A-19 - was not disclosed to Mohammed during the course of the audit, he has since confirmed the appellant should be credited with the sum of $1,084.85 in order to represent his 50% share of the GST remitted during the period ending July 31, 2001 when Iris So had been sending in the returns and remittances on behalf of So & Cheung.
[8] In cross-examination by the appellant, Munief Mohammed stated he had been compelled to calculate GST on the basis of gross revenue and had not been aware Cheung was operating within a partnership with Iris So, particularly in light of the representation during all 3 years at issue that the appellant was entitled to 100% of the proceeds set forth on the Statement of Professional Activities contained in the returns filed for 1999, 2000 and 2001 taxation years. In addition, no bank statements were ever produced to confirm the amount of deposits to the So & Cheung bank account during that period. Mohammed stated he had never been provided with the draft tax return - Exhibit A-16 - upon which Cheung currently relies to assert that his taxable income was $19,734 for the 1999 taxation year. Mohammed stated he informed Cheung at the outset of their meeting that his reported income was probably too low by approximately $20,000 per year and that the final figure used for purposes of a reassessment would result from the detailed process as later demonstrated within the working papers. Mohammed denied that he had agreed to any so-called arrangement whereby the reassessment for the years at issue would be limited only to those additional amounts conceded by the appellant. Mohammed stated that the methodology employed to issue the assessments - for income tax and GST - was a last resort and he would not have had to use the net worth assessment method if Cheung had provided reliable information concerning his business income and personal expenditures.
[9] In re-examination by counsel for the appellant, Munief Mohammed was referred to the bank statement - last page of Exhibit A-4 - for one month in 1999 and agreed the total withdrawals from that account were in the sum of $4,669.79 which - when annualized - amounted to over $56,000.
[10] By way of rebuttal evidence, the appellant was permitted to state that the expenditures for the month ending October 29, 1999 - as reflected by that particular bank statement - are unreliable within the context of an entire year because he recalled he was required to pay wages - on behalf of a client - for that client's business and had used the TD joint account for that purpose. The appellant was also permitted to file - as Exhibit A-22 - photocopies of deposit slips to the So & Cheung account for 1999. He stated these copies demonstrated the amount of revenue generated by him during that year since cheques payable to the firm by his own clients were identified on said slips by the notation "YK" in the various columns next to the amounts.
[11] Counsel for the respondent stated the Minister was willing to concede that the appellant should receive credit for 50% of the GST remittances made by his former accounting firm - So & Cheung - during the assessed period from January 1, 1998 to December 31, 2001, as follows:
1998 - $122.35
1999 - $400.17
2000 - $408.18
2001 - $122.35
[12] Counsel advised these amounts would be taken into account by the Minister upon issuing any reassessment required in order to comply with these Reasons.
[13] Prior to dealing with submissions relating to relevant jurisprudence, counsel agreed with my observation that the method followed by Munief Mohammed, whereby he added an amount for income tax as though it had been paid by the appellant, was not a reliable indicator of annual cash flow since it was merely an hypothetical amount that should have been paid if the appellant had earned an amount sufficient to permit him to retain approximately $36,000 per year - after tax - for personal expenditures.
[14] Counsel pointed out that the only penalties to which the appellant had been subjected were administrative in nature according to the relevant provisions of the ETA. Counsel submitted that in order to arrive at a reasonable amount of income generated by the appellant during the years under appeal, it was necessary for the auditor to use StatsCan data because the appellant consistently neglected and/or refused to provide proper information in relation to his accounting practice and in respect of his personal and family expenditures. In view of that fact, Schedules "A" and "B" - attached to the Reply in the income tax appeal- were relied on by the Minister in paragraph 11(f) of the assumptions, and counsel submitted the onus was on the appellant to demonstrate the basis for those calculations was wrong and that other numbers should be preferred by the Court. Counsel submitted the methodology employed by the auditor was correct and should be adopted - generally - in order to arrive at the amount of income that the appellant should have reported during the years at issue. Overall, counsel submitted the evidence was capable of supporting a conclusion that the annual net business income of the appellant was at least $35,000 per year in 1999, 2000 and 2001 and that the gross income of the business - for purposes of determining the proper amount of GST remittances - was approximately $50,000. Counsel further submitted that since there were no eligible ITCs to reduce the amount payable, the GST arrears were based on gross revenue for the period covered by the assessment.
[15] The appellant submitted that he was unable to provide banking information on the account of So & Cheung because his former partner had been the sole signatory and none of those records were in his possession. The appellant conceded he had not correctly reported his income during the years under appeal. However, he submitted the numbers used by the auditor to arrive at annual income were flawed and that his calculations - contained in Exhibit A-6 - for the 1999 taxation year should be viewed as a more realistic representation of his revenue. The appellant stated he was prepared to abide by that amount and suggested it was also applicable to the 2000 and 2001 taxation years since there was only a small difference in both income and expenses since 1999. The appellant referred to his testimony in respect of particular expenditures and submitted his evidence and documentary proof should be preferred instead of the estimated amounts used by the auditor which were based on statistical averages and did not apply to his personal circumstances. The appellant submitted that his share of the small accounting practice was not capable of generating the average gross revenue of between $115,000 and $120,000, and that those amounts were used by the auditor to determine the amount of GST that should have been remitted. The appellant referred to the inheritance of $6,000 that he received in 1999 and to the evidence that his accounting practice did not incur much expense. He submitted it was apparent that he and his family typically spent about 50% of the amount expended by the average Canadian family on the various categories listed in Schedule "B" of the Reply, filed with respect to appeal 2004-2206(IT)I.
[16] First, I will deal with the income tax appeals for the 1999, 2000 and 2001 income tax years.
[17] Pursuant to subsection 152(7) of the Income Tax Act, (the "Act") the Minister is empowered to issue assessments - sometimes referred to as "arbitrary" assessments - and to use any appropriate method having regard to circumstances. Subsection 152(8) grants a presumption of validity to such assessments and the traditional onus rests on an appellant to demonstrate the assumptions of the Minister are incorrect.
[18] In the case of Hsu v. The Queen, 2001 DTC 5459, the Federal Court of Appeal considered the appeal of the taxpayer who had been reassessed by the Minister on the basis of a net worth assessment. The judgment of the Court was delivered by Desjardins J.A. and at paragraph 29 and following, she stated:
[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 appeciation of a taxpayer's wealth over a period of time can be imputed as income for that period unless the taxpayer demonstrates other-wise (Bigayan, ... 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 appeciation 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 source (Gentile v. The Queen, [1988] 1 C.T.C. 253 at 256 (F.C.T.D.)).
[30] By its very nature, a net worth assessemnt 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.
[31] Despite his contention that the Minister's pleadings were inadequate, the appellant was not deceived concerning the case against him. In the auditor's October 4, 1996, proposal letter, the basis of the proposed reassessments was communicated to the appellant. Any confusion arising from the methodology set out in that letter was clarified by Schedule "A" of the Minister's reply. In the light of these documents, the appellant cannot now be heard to say that the Minister determined the amount of the tax without giving him a fair opportunity of meeting the case against him.
[32] The Tax Court judge did not err in concluding that the Minister's approach was a variation of a net worth assessment. The Minister's modification did not fundamentally change the nature of the assessment. The Minister was entitled to make a rough estimate of net worth based on an estimated annual appreciation. I do not, therefore, accept the appellant's characterization that the Minister relied on an unpleaded "property income" method. Consequently, the Tax Court judge, in my view, correctly concluded that the burden of disproving the reassessments lay squarely upon the appellant.
[33] I would add that it was open to the Tax Court judge to conclude that the Minister's method for determining the appellant's income was reasonable and logical in the circumstances of this case. Although the Minister's reassessments were clearly arbitrary, it cannot be forgotten that this approach was the direct result of the appellant's refusal to disclose any financial information or documentation. In Dezura, ... [(1947), 3 DTC 1101] at 1103-1104, the President of the Exchequer Court of Canada explained:
The object of an assessment is the ascertainment of the amount of the taxpayer's taxable income and the fixation of his liability in accordance with the provisions of the Act. If the taxpayer makes no return or gives incorrect information either in his return or otherwise he can have no just cause for complaint on the ground that the Minister has determined the amount of tax he ought to pay provided he has a right of appeal therefrom and is given an opportunity of showing that the amount determined by the Minister is incorrect in fact. Nor need the taxpayer who has made a true return have any fear of the Minister's power if he has a right of appeal. The interests of the revenue are thus protected with the rights of the taxpayers being fully maintained. Ordinarily, the taxpayer knows better than any one else the amount of his taxable income and should be able to prove it to the satisfaction of the Court. If he does so and it is less than the amount determined by the Minister, then such amount must be reduced in accordance with the finding of the Court. If, on the other hand, he fails to show that the amount determined by the Minister is erroneous, he cannot justly complain if the amount stands. If his failure to satisfy the Court is due to his own fault or neglect such as his failure to keep proper account or records with which to support his own statements, he has no one to blame but himself.
[34] As the Tax Court judge observed, the appellant has done nothing to ensure a full, complete and correct audit. The appellant has consistently failed to provide any evidence which would prove his actual income during the period in question. Accordingly, he cannot complain that the Minister has proceeded on the basis of speculative assumptions.
[35] Given that the burden of disproving the reassessments lay squarely with the appellant, it is necessary to consider whether the appellant successfully discharged that onus. In M.N.R. v. Pillsbury Holdings Ltd. ((1964), 64 DTC 5184 at 5188 (Ex.Ct.)), the Court explained that an appellant can satisfy this burden in three ways:
(a) challenging the Minister's allegation that he did assume those facts;
(b) assuming the onus of showing that one or more of the assumptions were wrong; and
(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.
[36] The appellant did not attempt to demonstrate that the Minister's assumptions were wrong in fact. Further, for the reasons set out above, I have rejected the appellant's contention that the Minister proceeded other than by way of a net worth assessment. Therefore, the only issue is whether the assumptions, as pleaded, operate to support the Minister's reassessments.
[19] In the case of Bigayanv. The Queen, 2000 DTC 1619, Bowman, T.C.J. (as he then was) at paragraphs 2-4, inclusive, described the net worth method of assessment as follows:
[2] The net worth method, as observed in Ramey v. The Queen, 93 DTC 791, 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 the 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.
[3] The best method of challenging a net worth assessment is to put forth evidence of what the taxpayer's income actually is. A less satisfactory, but nonetheless acceptable method is described by Cameron, J. in Chernenkoff v. Minister of National Revenue, 49 DTC 680 at page 683:
In the absence of records, the alternative course open to the appellant was to prove that even on a proper and complete "net worth" basis the assessments were wrong.
[4] This method of challenging a net worth assessment is accepted, but even after the adjustments have been completed one is left with the uneasy feeling that the truth has not been fully uncovered. Tinkering with an inherently flawed and imperfect vehicle is not likely to perfect it. The appellant chose to use the second method.
[20] By way of illustrating the inherent difficulty in assessing income by way of the net worth method, Judge Bowman - at paragraphs 14 and 15 commented:
[14] I am faced here with two sets of unreliable numbers. The Department of National Revenue in many instances used figures taken from Statistics Canada ("StatsCan") for the expenditures made by a family consisting of a husband and wife and three children. No one from StatsCan was called, nor was the assessor who used them. The appellant's counsel had therefore no opportunity to cross-examine on the figures used. I was given no evidence of the way the StatsCan figures are arrived at. Both counsel agreed that the StatsCan figures are a "national average", whatever that may mean. What figures go into the determination of that average, what methodology is used, what areas were taken as representative, whether any weighting was done by reference to the area from which the figures were taken - all these and many other questions remain unanswered.
[15] The appellant's estimates are just about as unreliable. The figures given in 1996 differ significantly from these given in 1999 at trial. I should have thought that the earlier estimates would likely be more accurate.
[21] With respect to the use of StatsCan numbers, Judge Bowman went on to note that he was not prepared to make any adjustment in respect of the personal expenditures because, "unreliable as the StatsCan figures may be they at least represent the Minister's assumptions that it was the appellant's onus to demolish".
[22] The category of personal expenditures is important in any consideration of the reliability of a net worth assessment. An examination of cash flow is critical because, as individuals and families are keenly aware, there must have been a source from which funds were available so they could be spent. The position of the appellant - in comparison to that of the Minister - was set out on the second page of Exhibit A-6, in respect of the 1999 taxation year. The figure used by Munief Mohammed for a family of two adults and two children as representing the cost of food was $6,083.24. The appellant testified this sum was excessive and that the sum of $4,300 was a better estimate of the amount needed to feed himself and his family because his mother also contributed to the purchase of groceries. Cheung stated that because there was no mortgage on the house, the amount expended on taxes, insurance, water, sewage and waste management, and ordinary maintenance amounted to less than $3,000 per year. The figure used by Mohammed for the category of Household Operation was $2,878.84. The appellant estimated the proper expenditure under this category was only $880 per year and testified that his telephone bill was about $300 per year. There was no estimate provided for the cost of electricity and/or gas other than the appellant's comment during his direct examination that hydro cost about $1,000 per year. According to StatsCan, the normal clothing allowance for a family of two adults and two young children - in 1999 - was $3,118.83. The appellant testified he and his wife did not go out much and estimated they spent only $1,500 on clothing in that year. Because their family car was a 1993 Honda Civic and used about $800 per year in gasoline and was insured at an annual cost of $1,187, the appellant asserted the sum of $2,300 was sufficient to cover the costs of transportation rather than the sum of $4,250.96 assumed by the auditor. The appellant's reported income for the years under appeal was so low that the family's MSP coverage was subsidized by the government and he paid only about $300 in premiums instead of the normal amount of $1,089.35. The appellant's position was that the sum of $500 was sufficient to account for expenditures of Personal Material - whatever that may be - instead of the sum of $1,162.39 relied on by the Minister. The appellant testified that the cost of cable television - about $600 per year - constituted the main entertainment expense for his family and because the children were young, he and his wife stayed at home except for visiting friends and attending church. As a result, he took the position that $800 was an adequate amount to attribute to the Recreation category instead of the sum of $3,654.12 gleaned from StatsCan data. Regarding the matter of expenditures for Education, the Minister assumed the sum of $762.75 was reasonable; the appellant stated the amount actually expended for this purpose was nil. The category of Security - according to page 16 of Exhibit R-9 - is composed of amounts payable for life insurance premiums, Employment Insurance (EI) premiums, Canada Pension Plan (CPP) contributions and pension funds, excluding any Registered Retirement Savings Plan (RRSP). The Minister assumed the total expenditure within this category was $4,114.27 while the appellant's estimate was $1,120. It is obvious the appellant - a self-employed CGA - would not be paying EI premiums nor would he be participating in any pension plan other than a CPP contribution in an amount based on reported taxable income. The appellant increased - to $3,000 - the amount attributable to Gifts and Contributions from the sum of $1,272.99 used by the Minister. The appellant agreed his miscellaneous expenditures were $1,000 and that the Minister's figure of $1,018.39 was reasonable. The appellant did not pay the sum of $15,684.95 in income tax as assumed by the Minister. Instead, he paid nothing because his reported income in each of the years under appeal was Nil. An amount payable - but not paid - cannot be considered as a cash flow requirement. One does not expend a deemed amount and - therefore - if not actually paid, a debt - contingent or fully mature - does not diminish the supply of money available for other current purposes. The situation would be different if the method employed by the auditor was a net worth in the usual sense where the difference in assets over liabilities during the period under examination would be determined by also taking into account any outstanding debt for unpaid income tax on monies earned. In the within appeals, the assessment mechanism utilized was for the purpose of determining the amount of income required to service the cash flow requirements of Cheung and his family for the years under appeal without regard to the accumulation of additional assets or any increase in equity with respect to existing property that could have been attributable only to unreported income.
[23] The next question is whether the net business income from the accounting practice was sufficient to provide for the needs of the appellant and his family if it produced only $30,000 gross per year, as claimed by the appellant. I am satisfied on an examination of the documentary evidence as well as the testimony of the appellant, that he had a small accounting practice that catered to Cantonese-speaking clients and that much of his work was billed out at rates usually applicable to services provided by a student or an employee working at or near minimum wage. The office was located in a small space on the second floor and according to the amounts identified on the deposit slips - Exhibit A-22 - the gross income from his own clients was about $29,000 in 1999, assuming - for the moment - that all deposit slips were photocopied by the appellant and also that all fees were payable by cheque since there is no indication any cash was deposited. The appellant testified that he and Iris So merely split office and related business expenses rather than income and according to his own Statement of Professional Activities - supplied with his 1999 tax return - his total business expense was $10,804. This expense increased to $10,970.11 in 2000 and to $11,316 in 2001. The expenses were in line with the StatsCan average used by Mohammed in his working paper but the gross income was low even when compared with the bottom quartile of earnings for Canadian accountants.
[24] The appellant suggested the figures supplied for 1999 should be used for the 2000 and 2001 years and in terms of amounts attributable to categories of personal expenditures that - without more - is not unreasonable since the Minister's total estimate - based on StatsCan figures - increased only 2.7% between 1999 and 2000 and by a further 2.5% in 2001. However, there is no method by which to determine the amount of the appellant's gross business income in 2000 and 2001 other than his own estimate that it might have increased a total of 15% during those years as compared to 1999. There are no records upon which to arrive at this conclusion and the appellant chose not to provide any details of his income other than by creating his own sheets containing numbers that he asserted were reliable. The appellant is not very credible overall. He was filing his returns in July and August of each year - well past the end of the busy April 30th filing deadline - and his claim that he was pressed due to professional demands does not make sense since he was only generating a small monthly gross income from his practice. His explanation that he reported only 6 months business in 1999 - and thereafter perpetuated the same mistake when filing returns for 2000 and 2001 - is ludicrous. The appellant is a CGA and according to the ethics of his professional association was bound to report his income - and that of his clients - in an honest, forthright manner. His attitude throughout was difficult to understand and he attempted to delay, hide, obfuscate, dodge and twist at every opportunity. He is extremely fortunate that the Minister did not levy penalties under the Act for under-reporting income in the years under appeal as he was - by his own admission - negligent. One could go further than that and conclude it was deliberate. I am astounded that someone who has lived in Greater Vancouver since 1989 and who obtained a CGA designation by successfully completing a course of study - and passed a written examination in English - can assert that he requires an interpreter in order to appear in Court. It is not as though Cheung was required to speak about a topic with which he was not familiar; that would be understandable since a general ability to speak a language adequately for everyday purposes is often insufficient in a formal setting in which a command of formal and/or technical language is required. The subject matter of these appeals was Cheung's failure to report his business income and to remit GST, as required. He is a practicing CGA, yet was unable to testify about these matters except through a Cantonese interpreter. The appellant's explanation that the amount of money - $4,669.79 - going through his personal bank account in October, 1999, was not representative of normal monthly flow - because he paid some wages for a client from that account - is not reasonable nor is it remotely credible. He did not cooperate with Munief Mohammed - as alleged - and while there is no duty to do so other than by providing information demanded by the Minister, the appellant attempted to blame Mohammed for not obtaining certain information relevant to the audit. In respect of these matters, I accept Mohammed's version of events.
[25] The issue still remains: how does one determine the amount of the appellant's business income for the years under appeal. The remainder of the appellant's income and personal deductions were not at issue so a determination of net business income for those years will enable the Minister to reassess the appellant using that number for the relevant taxation year and applying it to other calculations, as required. Further, the Minister can use the gross amount of business income in each year for the purpose of determining the amount of GST owing for the period covered by the assessment after taking into account the amounts to be credited to the appellant as conceded by counsel earlier. Pursuant to the provisions of subsection 241(1) of the ETA, the effective date of the appellant's GST registration was changed from a date in 2002 to January 1, 1998.
[26] Each time one looks for independent corroboration for a material statement coming from Cheung's mouth, it is not there. He relies on his figures as contained in Exhibit A-5 - pertaining to the 1999 taxation year - on the basis these calculations accurately reflect the income and expenses of his accounting practice. In those calculations, he states his rent was in the sum of $3,000. However, in the Statement of Professional Activities contained in his tax return - Exhibit R-2 - he reported rental cost of $2,730. Within Exhibit A-5, the appellant showed an insurance expense of $700 whereas in the statement included in his return, that expense was only $460. According to Exhibit A-5, the total office expenses were $5,074.02 yet the overall business expenses amounted to $10,804.00 according to the 1999 tax return filed by the appellant. If the allowable portion of Meals and Entertainment expense - $1,673 - was claimed as a business expense in the statement within the return, then why would it be excluded as an expense when preparing Exhibit-A-5? The appellant seems to have a bizarre concept of accounting principles whereby he claims a charitable donation for amounts paid to the church by other people. He reports income for 2000 and 2001 based on a guess of what he reported in 1999 when he failed to include - by his own admission - 6 months revenue. Sometimes, he reports expenses on the wrong line in the activity statement. The fact this man is practicing as a CGA should be a matter of concern for the Certified General Accountants Association of British Columbia even allowing - by analogy - for the fullest extent of the adage - perhaps myth is a better word - that it is the shoemaker's children who have no shoes and that lawyers are prone to die intestate.
[27] The time has come for me to decide the probable amount of net business income earned by the appellant for the years under appeal and to determine the gross business income of his accounting practice so the Minister can re-calculate the amount of GST that should have been remitted for the period covered by the assessment. However, I can only make pots with the clay I am given; in this instance, the insufficient raw material was shaped by turning it around and around on an off-kilter wheel, firing it a garage-sale kiln and then allowing the end product to remain unglazed so that imperfections remain exposed.
[28] I am satisfied that the lifestyle of the appellant and his family consumed less financial resources than the average Canadian family in similar circumstances as revealed by StatsCan data. I find the estimates of the appellant with respect to the categories of food, household operation, transportation, clothing and health care are too low. Even though MSP coverage was subsidized due to the appellant's low reported income, there are other expenditures associated with family health and any family with two young children will be visiting the local pharmacy on a regular basis in order to purchase a variety of products to be used for the care of the children and in the household generally. For the 1999 year, the evidence leads me to conclude that the appellant required the sum of $27,000 to meet the needs of himself and his family. I am aware he received a share - $6,000 - of his aunt's estate in August, 1999, but those funds were probably not devoted to household expenses since the bank statement on the TD joint account - last page of Exhibit A-4 - indicates there was a balance of $8,378.63 on September 30, 1999. In 1999, the appellant claimed business expenses in the sum of $10,804 including the sum of $1,950 in "legal, accounting and other professional fees". I do not know the purpose of said expenditure in that year or for other amounts claimed in subsequent years under the same category but the auditor - Munief Mohammed - appeared to be content with the expense side of the statements for all of the years under appeal.
[29] I find the appellant's gross income from his accounting practice must have been at least $40,000 because there were some personal expenses already paid by So & Cheung - as recorded by Iris So - prior to him receiving his cheque for his entitlement from the total proceeds deposited to the firm's bank account. After deducting the claimed expenses in the sum of $10,804, I conclude the appellant's net business income - in 1999 - was $29,196, rounded up to $29,200.
[30] For the 2000 taxation year, it is reasonable to conclude that the appellant's gross business income increased 10% - over 1999 - and was $44,000. As a result, and after deducting $10,970.11 in expenses - as claimed in his return - I find his net business income was $33,029.89, rounded down to $33,000.
[31] For the 2001 taxation year, I find the appellant's gross business income increased by a further 10% - to $48,400 - and after deducting claimed business expenses of $11,316, that he earned net business income in the sum of $37,084, rounded up to $37,100.
[32] With respect to the GST appeal, I find the appellant's gross business income for the following taxation years was as follows:
1998 - $36,000
1999 - $40,000
2000 - $44,000
2001 - $48,400
[33] Therefore, the appeal from the GST assessment is allowed and is referred back to the Minister for reconsideration and reassessment on the basis that the amount of GST payable for the period under assessment is calculated on the gross business income for the years as stated above, and that any determination of arrears incorporates the concession by counsel for the respondent that the appellant be credited - during the assessed period from January 1, 1998 to December 31, 2001 - for the following amounts:
1998 - $122.35
1999 - $400.17
2000 - $408.18
2001 - $122.35
[34] The appellant's income tax appeals with respect to 1999, 2000 and 2001 are allowed and the assessments with respect to each year are referred back to the Minister for reconsideration and reassessment on the basis the appellant's net business income was in the following amount:
1999 - $29,200
2000 - $33,000
2001 - 37,100
[35] The appellant's level of success in the within income tax and GST appeals - heard together - is not sufficient to award costs. In any event, I would not have awarded costs to the appellant since his refusal to provide counsel for the respondent with copies of material and documents - upon which he based his appeal - precluded the possibility of any agreement with respect to certain matters at issue in these proceedings.
Signed at Sidney, British Columbia, this 4th day of March 2005.
|
"D.W. Rowe" |
Rowe, D.J.
|
CITATION: |
2005TCC83 |
|
COURT FILE NO.: |
2004-2206(IT)I and 2004-2209(GST)I |
|
STYLE OF CAUSE: |
Yeung Kwong Cheung and H.M.Q. |
|
PLACE OF HEARING: |
Vancouver, British Columbia |
|
DATE OF HEARING: |
September 24, 2004 |
|
AMENDED REASONS FOR JUDGMENT BY: |
The Honourable D.W. Rowe, Deputy Judge |
|
DATE OF AMENDED REASONS: |
March 4, 2005 |
|
APPEARANCES: |
|
For the Appellant: |
The Appellant himself |
|
Counsel for the Respondent: |
Bruce Senkpiel |
|
COUNSEL OF RECORD: |
|
For the Appellant: |
|
Name: |
|
|
Firm: |
|
|
For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |