Date: 19991110
Docket: 97-2699-IT-G
BETWEEN:
DOMINIC BIGAYAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman J.T.C.C.
[1] These appeals are from assessments for the appellant's 1992, 1993 and 1994 taxation years. By those assessments the Minister of National Revenue increased the appellant's income by $20,495.27, $14,895.00 and $42,031.78 respectively, using the net worth method of determining income. Also, penalties were imposed under subsection 163(2) of the Income Tax Act.
[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.
[5] Mr. Bigayan carried on business as a sole proprietorship under the name D.B. Erectors & Son, which did building maintenance and small appliance repairs. The principal source of income appears to have been fees for building maintenance from a manager of buildings in Regina, Adam Niesner.
[6] In 1992, Mr. Bigayan declared gross revenue of $21,882.67. In 1993, he declared gross revenue of $35,808, comprised of $19,780 from building maintenance, $6,428 from appliance repairs and $9,600 from rental revenue. In 1994, he declared gross revenues of $23,200 ($19,200 presumably from building maintenance and $4,000 from appliance repairs).
[7] After expenses and capital cost allowance, he declared a net income of $6,600 in 1992, $11,467 in 1993 and $1,362 in 1994.
[8] The revenue assessor, Mr. C. McEachern, concluded that the appellant, who lived with his wife and three children, could not have afforded to live on the income that he declared. He called for records but was apparently dissatisfied and proceeded to do the net worth assessment which is the subject of these appeals.
[9] Mr. McEachern was not called as a witness. Evidently, he had left the government service and moved to British Columbia. Mr. Mark Tomczak, a senior business auditor with the Department of National Revenue, testified. He was a credible and conscientious witness, but apart from describing the procedures performed in a net worth assessment, his testimony was all hearsay and of little assistance. One striking example of this was an analysis that Mr. McEachern made of some printouts provided by the accountant for Adam Niesner setting out the fees received by the appellant for building maintenance. This analysis was marked as Exhibit R-9, but I attach no evidentiary value to it. It is at least double hearsay. In the result Mr. McEachern did not use it, but proceeded with the net worth assessment. It is of some interest to note, however, that Mr. McEachern's (unused and unproved) summary shows fees of $23,981.57 received in 1992, compared with $12,787.05 reported, $23,924.70 compared with $19,780 reported in 1993 and $31,249.07 compared with $19,200 reported in 1994. Why this information was never used or properly proved remains a mystery.
[10] Since both parties appear to have accepted the net worth method, I shall deal with the case on that basis.
[11] Using that method the Minister concluded that the appellant's income, using an adjusted net worth, was as follows:
1992 1993 1994
$48,722.27 $44,084.00 $55,234.78
From these figures the Minister deducted the amounts reported by the appellant and his spouse:
appellant $6,600 $11,467 $1,362
spouse $21,627 $17,722 $11,841
Thus, the appellant's income for the three years was increased by $20,495.27, $14,895.00 and $42,031.78 respectively.
[12] The largest component in the net worth was the personal expenditures of the appellant. Schedule B to the reply to the notice of appeal sets out the appellant's estimate of his various expenditures, supplied by him to the Department of National Revenue in 1996, (Exhibit A-20), and the Minister's adjustments. I shall not set these out in detail. They comprise several pages of estimates of the cost of food, shelter, clothing, transportation, health care, personal care, recreation, ready material, education, security, gifts, miscellaneous and other.
[13] In addition to the figures in the reply, at trial the appellant revised his estimate in some cases. In many, he accepted the Minister's figures. The totals are as follows:
|
Appellant's original Estimate |
Minister's adjustment |
Minister's Revised Amount |
Appellant's Revision at trial |
|
|
1992 |
$28,895 |
$9,004 |
$41,574 |
$22,719 |
|
1993 |
$32,613 |
$9,004 |
$45,453 |
$28,198 |
|
1994 |
$35,741 |
$12,503 |
$52,176 |
$32,122 |
[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.
[16] Highly unsatisfactory as the method may be, I am prepared to make certain adjustments to the net worth assessments:
(a) The 1992 assessment fails to take into account three RRSPs owned at the end of 1991 by the appellant in the amounts of $3,562, $3,950 and $3,961, as well as a loan of $3,800 for a total of $15,273, as well as a judgment from Manitoba for $3,000 in respect of a very old debt.
In the result the appellant's income for 1992 should be reduced from $27,095 to $8,822.
(b) The 1993 assessment should be reduced by $2,000 (a loan) and $3,415 amount received from the Saskatchewan Government Insurance ("SGI") in respect of a personal injury for a total of $6,415, so that the income for 1993 should be reduced from $26,362 to $20,947.
(c) The assessment for 1994 should be reduced by $1,790 in respect of a loan and $2,903 [$5,753 - $2,850] received from SGI ($2,850 had already been taken into account). In the result the appellant's income for 1994 should be reduced from $43,393 to $38,700.
[17] I am not prepared to make any adjustment in respect of the personal expenditures. Unreliable as the StatsCan figures may be they at least represent the Minister's assumptions that it was the appellant's onus to demolish. The appellant's estimates, six years after the event, and differing substantially from his estimates in 1996 are simply too questionable to warrant putting much reliance on them.
[18] In some cases the Minister's figures were based on the appellant's own estimates. It is not without some significance that even if I accepted all of the appellant's adjustments for 1994 (including a reduction of the personal expenditures from $52,176 to $32,122) we still end up with a discrepancy between the amount arrived at using the appellant's net worth adjustment, of $14,688 (not, as suggested by the appellant, $11,835) which fails to take into account the SGI payments of $2,850.
[19] The appellant also contended that the net worth for all three years should be reduced by $2,600, the amount of the appellant's son's student loan. In the absence of any evidence that the student loans ever formed part of the family assets or were ever used to pay any of the family bills. I cannot accept this suggestion.
[20] Also, for 1992, if I accepted all of the appellant's adjustments, including a reduction of the personal expenditures from $41,572 to $22,716 we would have ended up with a net income of minus $10,034, even though the appellant declared income of $6,600. The same anomaly would occur in 1993.
[21] These considerations cast serious doubts on the appellant's estimate of his personal expenditures.
[22] Two further points should be mentioned. The assessment for 1992 was made outside the normal reassessment period and normally the onus would be on the respondent to establish a misrepresentation attributable to neglect, carelessness, wilful default or fraud for the purposes of subparagraph 152(4)(a)(ii). The point was not raised in the notice of appeal and so the respondent was not put on notice that she had any onus to meet.
[23] The second point was to do with the penalties that were imposed under subsection 163(2). The onus is clearly on the respondent to justify the penalties. The assessor who made this assessment, Mr. McEachern, was not called and it is insufficient for someone else, in this case Mr. Mark Tomczak, who had nothing to do with the assessment, to testify that Mr. Bigayan's records were missing or inadequate.
[24] I do not think that the gross negligence necessary to justify the assessment of penalties has been established, even though I am not satisfied that Mr. Bigayan's reporting of his income was particularly accurate. In the same way as I have concluded that the appellant has failed to meet the onus of proof in challenging the Minister's assumption about his personal expenditures, I am holding that the Minister of National Revenue has failed to establish the factors necessary to justify the imposition of penalties.
[25] The appeals are allowed and the assessments made under the Income Tax Act for the 1992, 1993 and 1994 taxation years are referred back to the Minister of National Revenue for reconsideration and reassessment:
(a) to reduce the appellant's income as set forth in these reasons; and
(b) to delete the penalties imposed.
[26] Success is divided and there will be no order for costs.
Signed at Ottawa, Canada, this 10th day of November 1999.
"D.G.H. Bowman"
J.T.C.C.