Tax Court of Canada Judgments

Docket: 2003-1836(IT)I

BETWEEN:

PETER JENCIK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on January 6 to 9, 2004 at Toronto, Ontario

Before: The Honourable Justice Michael J. Bonner
Appearances:
Agent for the Appellant:	Louanne M.G. Belzner
Counsel for the Respondent:	Bonnie Boucher

____________________________________________________________________

JUDGMENT

          The appeals from the reassessments made under the Income Tax Act for the 1994, 1995, 1996, 1997 and 1998 taxation years are allowed and the reassessments are vacated.

Signed at Toronto, Ontario, this 20th day of April 2004.

"Michael J. Bonner"

Bonner, J.

Citation: 2004TCC295

Date: 20040420

Docket: 2003-1836(IT)I

BETWEEN:

PETER JENCIK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Bonner, J.

[1]      These are appeals from reassessments of income tax for the taxation years 1994, 1995, 1996, 1997 and 1998. Three issues must be addressed:

a)        was the Minister of National Revenue (the "Minister") entitled to reassess by reason of misrepresentations of the sort described in subparagraph 152(4)(a)(i) of the Income Tax Act (the "Act");

b)       to the extent that he was so entitled, did the Appellant establish that the Minister's additions to declared income were too high; and

c)        was the Minister justified in assessing penalties under subsection 163(2) of the Act.

[2]      Subsection 152(4) of the Act provides in part:

(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if

(a)         the taxpayer or person filing the return

            (i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

...

[3]      The term "normal reassessment period" is defined in subsection 152(3.1) of the Act. It reads:

(3.1) For the purposes of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal reassessment period for a taxpayer in respect of a taxation year is

(a)         where at the end of the year the taxpayer is a mutual fund trust or a corporation other than a Canadian-controlled private corporation, the period that ends 4 years after the earlier of the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year; and

(b)         in any other case, the period that ends 3 years after the earlier of the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year.

[4]      The dates and mailing dates of notices of the original assessments for 1994 to 1998 were, respectively, May 1, 1995, May 6, 1996, September 15, 1997, May 4, 1998 and March 25, 1999.

[5]      The Minister reassessed tax on November 7, 2001 for all five years. All those reassessments were made after the "normal reassessment period" defined in subsection 152(3.1) of the Act. The Minister's right to reassess for 1994 to 1998 (the "statute barred years") was therefore dependant on the Appellant having made misrepresentations attributable to neglect, carelessness or wilful default or having committed fraud as set out in subparagraph 152(4)(a)(i) of the Act. It is settled law that the onus is on the Respondent to establish that such misrepresentations were made.

[6]      I turn first to the pleaded misrepresentations. The Respondent pleaded in paragraph 9 of the Reply to the Notice of Appeal that in reassessing he made certain assumptions of fact including the following:[1]

(g)         in computing income for the 1994, 1995, 1996, 1997 and 1998 taxation years, the Appellant failed to report income in the amounts of $6,151.00, $13,943.00, $2,872.00, $22,760.00 and $24,173.00 in the 1994, 1995, 1996, 1997 and 1998 taxation years, respectively (the "Unreported Income ") as per Exhibit "A" attached hereto;

(d)         the unreported income was determined by a review of the Appellant's bank accounts undertaken by officials of the Canada Custom and Revenue Agency;

(e)         the review of the Appellant's bank accounts for the years under appeal indicated significant deposits, which were unaccounted for;

(h)         the unreported income was determined after allowing for reasonable expenses as per Exhibit "A" attached hereto;

(j)          in not reporting income in the amounts of $6,151.00, $13,943.00, $2,872.00, $22,760.00 and $24,173.00 for the 1994, 1995, 1996, 1997 and 1998 taxation years, the Appellant made misrepresentations that are attributable to neglect, carelessness or wilful default;

(k)         in failing to report the Unreported Income, the Appellant understated his income by the amounts of $6,151.00, $13,943.00, $2,872.00, $22,760.00 and $24,173.00 in the 1994, 1995, 1996, 1997 and 1998 taxation years, respectively, and, in so doing, knowingly or under circumstances amounting to gross negligence in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in the income tax returns filed by him for the 1994, 1995, 1996, 1997 and 1998 taxation years, as a result of which the federal tax that would have been payable by him for the said taxation years, if the tax had been assessed on the basis of the information provided in his income tax returns, was less than the federal tax in fact payable by the amounts of $ nil, $1,953.41, $ nil, $3,139.89 and $4,582.76 in the 1994, 1995, 1996, 1997 and 1998 taxation years respectively.

[7]      Exhibit "A" referred to in (g) and (h), supra, reads:

Revised Amounts for Reassessment
Tax Year		1994	1995	1996	1997	1998
Business Income* Expenses:		8,931	16,623	5,512	26,407	28,211
	Purchases Membership	320	320	320	390	393
	Business Insurance
	Meals & Entertainment
	Office Supplies	50	50	50	50	50
	Tools	100
	Legal & Accounting	50	50	50	60	75
	Cell Phone
	ETR					46
	Casual Labor					500
	Uniforms
	Office in the Home	995	1,007	683	1,234	1,186
	Parking
	Vehicle	1,121	1,144	1,162	1,176	1,109
	Bank & Interest	144	109	376	738	680
	Office Help
	Total expenses	2,780	2,680	2,640	3,647	4,039
Revised Unreported Business Income		6,151	13,943	2,872	22,760	24,173
Vehicle:
	Gas	2,195	2,242	2,278	2,314	2,046
	repairs	720	735	747	759	761
	Insurance	1,477	1,509	1,532	1,557	1,554
	License	90	90	90	74	74
	CCA
	Total	4,482	4,576	4,647	4,704	4,435
	25% Business Use	1,121	1,144	1,162	1,176	1,109
Home Office:
	Gas/Hydro/Water	2,191	2,238	2,273	2,310	2,266
	Property Tax	1,807	1,846	1,875	1,906	1,645
	Insurance	388	397	403	409	394
	Mortgage Interest	2,250	2,231		3,600	3,600
	Total	6,636	6,712	4,551	8,225	7,905
	15% Business Use	995	1,007	683	1,234	1,186

Note:      - bank and interest charges taken at 50% claimed

for home office Statistics Canada figures were used for everything except the mortgage which we accepted

                        - for vehicle used Statistics Canada figures

            * This is a reference to the bank deposits.

[8]      The next question is whether the Respondent has established that the Appellant made the misrepresentations alleged. It must be noted that the misrepresentations relied on must be pleaded with particularity. In Gardner v. R., [2001] 4 C.T.C. 2868, Bowie J. said the following at 2872:

            The requirement to plead the misrepresentation specifically is found stated this way in Odgers' Principles of Pleading and Practice, Twenty-second Ed., at page 100:

Each party must state his whole case. He must plead all facts on which he intends to rely, otherwise he cannot strictly give any evidence of them at the trial.

In this Court it has been put this way by Bowman J., as he then was, in Ver v. R.:

Finally, the Reply to the Notice of Appeal is inadequate in a case of this type. Bald assertions that the Minister "assumed" a misrepresentation are inappropriate where the Minister must prove a misrepresentation. The precise misrepresentation alleged to have been made must be set out with particularity in the reply and proved with specificity. Three essential components must be alleged in pleading misrepresentation:

(i)     the representation;

(ii)    the fact of its having been made; and

(iii)    its falsity.

[9]      In this case, the relevant representations relate to the reporting of business income. The fact of making them was not seriously disputed. Moreover those elements of the Respondent's case were sufficiently established by the production of copies of the Appellant's returns for 1994, 1995 and 1996[2] and by the production of printouts[3] which, as the witness Raymond Maciel testified, were copies of CCRA computer records of information taken from the Appellant's 1997 and 1998 tax returns. The Appellant's return for 1994 declares no business income. The returns for 1995 and 1996 declare business income of $146.00 and $2,930.00 respectively. The computer records for 1997 and 1998 indicate that no business income was reported.

[10]     The next question is whether the Appellant's representations regarding business income were false. Proof by the Minister that the Appellant misrepresented his income requires more than an assertion by the Minister that he "assumed" that the Appellant did so. In Markakis v. M.N.R., [1986] 1 C.T.C. 2318, Rip J. stated at page 2321:

The question I must first deal with in respect of the 1976 tax assessment is whether the respondent has met the onus of establishing that Mr. Markakis made misrepresentation attributable to neglect, carelessness or wilful default in filing his 1976 income tax return. It is sufficient for the Minister to show that a taxpayer is negligent if he has not exercised reasonable care: Lucien Venne v. The Queen, [1984] C.T.C. 223 at 228; 84 D.T.C. 6247 at 6251.

For the Minister to show the taxpayer has not exercised reasonable care requires, in my view, something more than simply submitting evidence that the taxpayer has made deposits to his bank accounts in amounts greater than his employment income and advising the Court that he, the Minister, does not accept the taxpayer's explanation of the source of funds...

[11]     The well-known rule[4] which places on the taxpayer the onus of establishing that facts as found or assumed or assessment are incorrect does not apply in appeals from statute-barred reassessments unless the Minister first establishes facts which show that he was entitled to reassess when he did.

[12]     Here the reassessments rested on the premise that the "unexplained" deposits in the Appellant's bank account were the revenues of an undisclosed business, and that the expenses of that business were not greater than set out in Schedule A to the Reply with the consequence that the profits were properly calculated by the Minister. The onus which rested on the Minister included proof of the factual elements of that premise.

[13]     I should add that the onus encompasses not only proof of the falsity of the Appellant's representations regarding his business income but also proof that they were attributable to neglect, carelessness or wilful default as pleaded.

[14]     The position taken by the Appellant's representative was rather complex. She maintained throughout that the assessments were statute barred and that the burden was on the Minister to establish that he had the right to reassess. She also took what was in essence an alternative position, namely that the reassessments were too high.

[15]     She argued that some if not all bank deposits were monies borrowed by the Appellant and that one deposit in 1997 was counted twice. Finally with respect to quantum, she argued that the Minister underestimated the cost of earning the alleged revenues. With respect to penalties her position was that the Appellant "simply erred on his returns".

[16]     At the hearing evidence was given by Raymond Maciel, an appeals officer with CCRA, by Ferdinando Di Spirito, an auditor with CCRA and by the Appellant.

[17]     Mr. Maciel issued the reassessments under appeal following objection under section 165 of the Act by the Appellant to the reassessments of November 7, 2001.

[18]     The Appellant did not maintain books and records of any business activity conducted by him during the years under appeal. Accordingly the Minister had to face the task of reconstructing revenues and expenses of the business which he believed was carried on by the Appellant.

[19]     The witness Ferdinando Di Spirito was a GST auditor. He obtained records of deposits in the Appellant's accounts. He was able to obtain some information from the records of other taxpayers, in particular a Mr. Patterson, of payments to the Appellant. None of the payers was called to show either that the Appellant carried on business or that the payments were the revenues of the business.

[20]     The witness Raymond Maciel was the appeals officer who dealt with the Appellant's representative. She made submissions with respect to the source of the bank deposits. She contended that for 1994, 1995 and 1996 the otherwise unexplained deposits were advances on the Appellant's line of credit. She contended that the Patterson payments were counted twice. She accepted that some deposits for 1997 and 1998 represented business receipts but asserted that expenses exceeded revenues for 1997 and that revenues exceeded expenses for 1998 by less than $2,000.

[21]     It is clear from the evidence of Mr. Maciel that the reassessments made under section 165 of the Act rest on acceptance by the Minister of some but not all of the representations made by Ms. Belzner, the Appellant's representative, both as to revenues and as to expenses.

[22]     The Appellant testified at the hearing. I note that on the one hand I have serious reservations about his credibility. On the other had his evidence provided no support for the assumptions on which the Respondent relied.

[23]     The misrepresentations alleged in the Reply rest on Mr. Maciel's conclusions. Those conclusions rest in turn on the assumption that bank deposits were the revenues of a business. In my opinion that assumption is unsupported by any inference which can reasonably be drawn from the evidence. Equally the Respondent failed to show that costs of earning the revenues alleged did not exceed such revenues. In short the Respondent's case rests on conjecture. That is not enough to discharge the onus.

[24]     For the foregoing reasons, the appeals will be allowed and the reassessments will be vacated.

Signed at Toronto, Ontario, this 20th day of April 2004.

"Michael J. Bonner"

Bonner, J.

CITATION:

2004TCC295

COURT FILE NO.:

2003-1836(IT)I

STYLE OF CAUSE:

Peter Jencik and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

January 6 to 9, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice Michael J. Bonner

DATE OF JUDGMENT:

April 20, 2004

APPEARANCES:

Agent for the Appellant:

Louanne M.G. Belzner

Counsel for the Respondent:

Bonnie Boucher

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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