Date: 20010129
Docket: 98-2652-IT-I
BETWEEN:
ROBERT L. BAKER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] These are appeals with respect to the 1990, 1991, 1992 and 1993 taxation years.
[2] The Appellant failed to file income tax returns for the 1990, 1991 and 1992 taxation years as and when required by subsection 150(1) of the Income Tax Act ("Act").
[3] The Appellant filed income tax returns on March 10, 1994 for the 1990, 1991, 1992 and 1993 taxation years and declared total income in the following amounts:
Taxation Year Total Income Reported
1990 $7,753.35
1991 $5,630.42
1992 $8,033.11
1993 $6,318.51
[4] In assessing the Appellant for the 1990, 1991, 1992 and 1993 taxation years, by concurrent Notices of Assessment thereof mailed on March 22, 1996, the Minister of National Revenue ("Minister") increased the Appellant's total income by the following amounts:
Taxation Year Increase in Total Income
1990 $ 4,450.00
1991 $11,860.00
1992 $42,385.00
1993 $58,578.00
[5] Subsequently, the Minister reassessed the Appellant for the 1990 and 1993 taxation years, by concurrent Notices of Reassessment mailed on July 20, 1998, in which the Minister deleted unemployment insurance benefits in the amount of $1,452.00 in the 1990 taxation year and reduced unreported business income in the amount of $5,905.00 in the 1993 taxation year. For the 1991 and 1992 taxation years, the Minister issued a Notification of Confirmation dated July 20, 1998 confirming the assessments.
[6] At issue is the net assessment of the Appellant's business income for the 1990, 1991, 1992 and 1993 taxation years.
[7] The Appellant did not have any employment income for the 1990, 1991, 1992 and 1993 taxation years.
[8] The Appellant was the owner of two rental properties situated at 40 and 44 Dekay Street, Kitchener, Ontario. No mortgage was taken on the two properties. The Appellant only reported rental income from the 44 Dekay Street property.
[9] At all times the Appellant resided at 44 Dekay Street, Kitchener, Ontario.
THE APPELLANT'S EVIDENCE
[10] In addition to his bank accounts, the Appellant stated that he kept a significant amount of cash at home ($30,000-$50,000) derived from savings prior to 1990.
[11] The Appellant said that he used cash to give interest-free loans to friends and acquaintances and to his daughter, son-in-law and a tenant friend, and that most of these loan receivables were repaid during the taxation years in question.
[12] The primary focus of the Appellant's evidence-in-chief was exhibit A-1 and A-2. Exhibit A-2 is a reconstructed net worth summary for the years 1989 through to 1993 prepared by the Appellant from the Revenue Canada, Taxation audit documents and schedules from the Respondent's pleadings.
[13] The Appellant also stated that the various withdrawals from the bank accounts referred to in the net worth calculations were made for cashing government cheques (mostly welfare and social assistance cheques) of various friends, acquaintances and tenants. These cheques would then be deposited in the Appellant's bank accounts.
[14] The significant cash he saved prior to 1990 was not taken into consideration by the Minister in the net worth assessment. The cash on hand as well as the withdrawals referred to in the Minister's net worth assessments were used to provide funds for the cashing of cheques for friends, tenants and relatives and those same cheques received were deposited in the Appellant's bank account. The funds were also used for personal purchases, paying bills and other personal living expenses. All transactions including rent receipts and the paying of personal or business expenditures were on a cash basis.
[15] The Appellant stated that in the loans given no interest was charged, no discounts were sought or received. No records were kept. He maintained he kept all details in his head and at any given time there could be up to 20 loans outstanding with varying balances and repayment plans.
[16] The Appellant also maintained he bought or acquired items at auctions on behalf of Rightzal Bros., an industrial company. The principal of Rightzal Bros. was a friend of the Appellant. Once again the Appellant maintained the transferred items was not a commercial enterprise and specifically there was no interest charged, no discount sought or profit attained. He stated his only reward was that from time to time he was given some gas for his automobile.
[17] The Appellant also addressed the loans given to his daughter, his former son-in-law, his long-standing tenant and others. He stated these loans came from existing funds and were used by the borrowers to purchase vehicles, boats, trailers or real property. Once again, in relation to these transactions, the Appellant maintained there were no elements of commerciality, nor did these transactions result in the creation of increased net worth.
[18] In answer to detailed questions about the personal loans receivable and the unidentified asset transactions (as set forth in exhibit A-2) the Appellant's recollection and ability to articulate events was generalized but he and his witnesses did address all the issues.
ISSUES
[19] Did the Minister correctly assess the Appellant's business income for the relevant taxation years, thereby increasing the Appellant's business income for the 1990, 1991, 1992 and 1993 taxation years by $2,998.00, $11,860.00, $42,385.00 and $52,673.00 respectively? Did the Minister correctly levy late filing penalties for the 1990, 1991 and 1992 taxation years in the amounts of $164.34, $541.98 and $92.45 respectively?
LEGISLATION AND JURISPRUDENCE
NET WORTH ANALYSIS
[20] In Ramey v. The Queen, 93 DTC 791 at page 793 Judge Bowman described the net worth method as follows:
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.
[21] According to subsection 152(4), the Minister may reassess a taxpayer at any time within the normal reassessment period, which is extended if some conditions occur. This provision must be read with subsections 152(7) and (8). The former provides that the Minister is not bound by the information supplied by the taxpayer; the latter purports a presumption if validity of the assessment or reassessment. Thus, the burden is on the Appellant to prove that the reassessment is incorrect. Judge Lamarre stated this rule as follows in Dowling v. Canada, 96 DTC 1250 at p. 1251:
The Appellant has the burden of showing that the basis of the Minister's assessment is wrong or that there are errors in certain items of the assessments [...] Therefore, when a taxpayer is faced with a reassessment based on a net worth calculation, he can either try to present evidence enabling the Court to determine his real net income or he can seek to prove that the net worth assessment is wrong.
[22] The Appellant's burden to rebut the Minister's assessments based on the net worth method: The Minister would reassess the Appellant based on the net worth method pursuant to subsection 152(7) of the Act. If there is discrepancy between the increase in the net worth of the Appellant and the amount of income he reported for that year, the Appellant has the onus to explain this discrepancy.
EVIDENCE ANALYSIS
[23] The initial reaction to the Appellant's explanation in relation to the net worth assessment is one of scepticism and suspicion.
[24] Counsel for the Appellant recognized this evidentiary problem from the outset and took great pains over three days of hearing to take the Appellant and the witnesses through the lengthy factual explanations surrounding the Appellant's financial affairs and how those affairs related to the Minister's net worth assessment.
[25] Aside from himself the Appellant called four witnesses in support of his position: his daughter, his long-term tenant, a long-standing social friend, and his son. All the witnesses had been financially involved with the Appellant. They had all borrowed money from the Appellant or the Appellant had cashed cheques on their behalf.
[26] Notwithstanding the close personal relationship, the evidence of the Appellant's witnesses supported the Appellant's version of the churning of the Appellant's existing (asset) monies with no evidence of wealth creation or commerciality.
[27] The Appellant's daughter's evidence was clear and non-evasive. She was in some doubt about the details of the divorce order she received and in particular, details surrounding the purchase of a boat that involved her ex-spouse, but in all other details she confirmed the Appellant's evidence as it related to herself or as she understood it.
[28] The evidence of the long-term tenant indicated the relationship was close to the point the tenant had a power of attorney over the Appellant's bank account and the tenant had access to the Appellant's substantial cash stored in the basement of the home. There is no doubt the tenant benefited from the financial relationship she had with the Appellant. However the evidence did show the transactions as they related to the tenant's vehicle purchases and land purchases did not change the Appellant's net worth.
[29] The long-standing friend's evidence supported the Appellant's evidence that he cashed cheques and loaned money to friends and acquaintances without discount or interest charges.
[30] As stated, the Appellant's evidence was focused on exhibit A-2 and was directed to all aspects of the net worth assessment. In essence his unassailed position was his several activities of loaning money, cashing cheques, buying construction materials and property for a friend at auctions was done with existing funds and without monetary benefit to himself.
[31] The Respondent called two witnesses, the Revenue Canada auditor and the Appellant's former son-in-law.
[32] The auditor explained how the audit was conducted and the problems he had in preparing the net worth assessment. The auditor's evidence as to what he did based on the facts he found was clear. He did explain that he ignored the Appellant's cash on hand throughout the audit as he felt the cash was unchanged and did not affect the Appellant's transactions.
[33] The former son-in-law's evidence conflicted with the evidence of the Appellant and the evidence of his former spouse, the Appellant's daughter. In particular, the ex son-in-law's evidence in relation to rent paid, boat payments, vehicle ownership and the use of recreational vehicles was diametrically opposed to that of the Appellant and the Appellant's daughter. I have concluded his evidence was not convincing and was imprecise on details whereas the Appellant and his daughter addressed those same details with specifics.
THE BURDEN OF PROOF ANALYSIS
[34] The Appellant, in order to fully succeed, had to refute on a balance of probabilities the net worth conclusions of the Respondent's audit.
[35] From the Respondent's point of view the Appellant conducted his financial affairs in a peculiar fashion. He kept large amounts of cash in his basement. His record keeping was in his head. Amongst many things, his activities led to suspicions he was circumventing the income tax laws. As alleged by the Respondent's counsel, the Appellant appeared to be in the money lending and cheque cashing business, he appeared to be selling construction materials as a business activity, he appeared to be helping individuals to circumvent welfare laws and he appeared to be hiding assets in the names of others.
[36] What the Appellant and his witnesses effectively did, was to address every element of the Minister's audit on a line by line, conclusion by conclusion basis. The effect of this evidence was to show on a balance of probabilities the net worth assessment for the years in question was wrong. The specifics of the evidence showed the Appellant did have significant cash at the commencement of the audit in his basement and for the audit period the cash was not static and was used in part to finance his loan and other activities and as such should have been taken into account in the audit. Moreover, on a regular and continuous basis the Appellant loaned money and cashed cheques without reward and these activities did not create new additional net worth value. Further, the evidence showed he was not in the money lending and cheque cashing business, nor did he sell construction materials as a business activity. The ultimate conclusion is his net worth did not increase for the audit period as alleged and assessed. This conclusion does not mean I believe all the Appellant's financial dealings have been thoroughly explained or explored. The conclusion simply means the Appellant has met the burden of proof in relation to the assessments.
DECISION
[37] The appeal is allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the net worth assessment beyond the declared income does not form part of the Appellant's income and the Appellant is not liable to the penalties assessed in that amount.
Signed at Ottawa, Canada, this 29th day of January 2001.
"D. Hamlyn"
J.T.C.C.