Garage Gilles Gingras v. The Queen

Garage Gilles Gingras v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2010-07-02
Neutral citation
2010 TCC 343
File numbers
2008-4125(IT)I
Judges and Taxing Officers
Alain Tardif
Subjects
Income Tax Act
Decision Content
Docket: 2008-4125(IT)I
BETWEEN:
GARAGE GILLES GINGRAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeals heard on common evidence with the appeals of
Gilles Gingras (2008-4127(IT)I),
on October 5, 2009, at Sherbrooke, Quebec.
Before: The Honourable Justice Alain Tardif
Appearances:
Counsel for the Appellant:
Richard Généreux
Counsel for the Respondent:
Anne Poirier
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 2003, 2004 and 2005 taxation years are allowed in part, to the extent that the changes to be made in Gilles Gingras’ personal file, number 2008-4127(IT)I, should be taken into account. The penalties are confirmed, subject to the various changes.
Signed at Ottawa, Canada, this 2nd day of July 2010.
“Alain Tardif”
Tardif J.
Translation certified true
on this 31st day of August 2010.
Tu-Quynh Trinh, Translator
Docket: 2008-4127(IT)I
BETWEEN:
GILLES GINGRAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeals of
Garage Gilles Gingras, (2008-4125(IT)I)
on October 5, 2009, at Sherbrooke, Quebec.
Before: The Honourable Justice Alain Tardif
Appearances:
Counsel for the Appellant:
Richard Généreux
Counsel for the Respondent:
Anne Poirier
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 2003, 2004 and 2005 taxation years are allowed in part, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessments on the basis of the following:
- the appellant Gilles Gingras received $200 per month from his spouse as reimbursement for an undivided share of the trailer, for the years 2003, 2004 and 2005;
- Mr. Gingras inherited $4,500, which was paid in cash, thus inflating his assets by the same amount; and,
- lastly, $1,000 should be subtracted from Mr. Gingras’ cost of living for the taxation years at issue.
The penalties are confirmed, subject to the changes to be made, all according to the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 2nd day of July 2010.
“Alain Tardif”
Tardif J.
Translation certified true
on this 31st day of August 2010.
Tu-Quynh Trinh, Translator
Citation: 2010 TCC 343
Date: 20100702
Dockets: 2008-4125(IT)I
2008-4127(IT)I
BETWEEN:
GARAGE GILLES GINGRAS,
GILLES GINGRAS,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] These are two appeals in which the parties have agreed to proceed on common evidence on the basis that the appellant Gilles Gingras owned all of the shares of the appellant Garage Gilles Gingras. In Mr. Gingras’ file, number 2008-4127(IT)I, the issues are as follows:
[translation]
a) For the 2003, 2004 and 2005 taxation years, the Minister was justified in adding $22,836, $14,667 and $1,072, respectively, to Mr. Gingras’ income as taxable benefits conferred on him by the Company;
b) For the 2004 and 2005 taxation years, the Minister was justified in adding $2,760 and $2,619, respectively, to Mr. Gingras’ income as taxable benefits conferred on him by the Company;
c) For the 2003, 2004 and 2005 taxation years, the Minister was justified in adding $1,545, $1,956 and $1,892, respectively, to Mr. Gingras’ income as taxable benefits for the use of the Company’s cars; and,
d) For the 2003, 2004 and 2005 taxation years, the Minister was justified in assessing penalties against Mr. Gingras under subsection 163(2) of the Act.
[2] In making the reassessments, the respondent relied on the following assumptions of fact listed in Mr. Gingras’ file, 2007‑4127(IT)I:
[translation]
a) During the taxation years at issue, the appellant Gilles Gingras was the sole shareholder and director of the company “Garage Gilles Gingras” (hereafter, the “Company”);
b) During the taxation years at issue, Mr. Gingras was also employed by the Company;
c) The Company’s fiscal year ended August 31 of each year;
d) According to the Minister’s records, during the taxation years at issue, the Company carried on a general car repair business;
e) During the taxation years at issue, the Company operated under the “Autopro” banner;
f) Most of the Company’s customers were private individuals;
g) The Minister’s auditor (hereafter, the “auditor”) conducted an audit of Mr. Gingras and the Company for the taxation years at issue;
h) The auditor carried out the following:
i) A general audit of the Company’s file;
ii) An audit of purchase invoices and cheque returns;
iii) A sample audit of sales invoices;
iv) An analysis of bank deposits in the Company’s accounts;
v) An analysis of bank deposits in Mr. Gingras’ personal bank account;
vi) An estimate of Mr. Gingras’ net worth;
i) Regarding the internal audit of the Company’s business, during her audit of the taxation years at issue, the auditor noted the following:
i) Mr. Gingras’ sister kept the Company’s books and records;
ii) Mr. Gingras prepared certain sales invoices whenever his sister was not working;
iii) At the end of the year, Mr. Gingras turned over the books and records to his accountant to prepare the Company’s financial statements and T2 income tax returns;
iv) Mr. Gingras approved the Company’s financial statements and T2 income tax returns;
j) During her audit of the taxation years at issue, the auditor also noted the following:
i) The reported income was higher than the amounts deposited;
ii) The deposits were never explained;
iii) Mr. Gingras bought and sold used cars;
iv) No books were kept regarding the purchase and sale of used cars;
v) No income from that activity was reported by either the Company or Mr. Gingras;
vi) The transactions noted at paragraph 18. j) iii) were made in cash, no income was deposited in the bank accounts, and no amount was withdrawn from the bank accounts to purchase the cars;
vii) The estimate of the net worth indicated discrepancies;
k) In light of the foregoing, the auditor used the indirect “net worth” method to audit the Company’s and Mr. Gingras’ files for the taxation years at issue;
l) The auditor determined Mr. Gingras’ cost of living for the taxation years at issue on the basis of his bank account withdrawals;
m) Using the indirect “net worth” method, the auditor determined that there was $22,836, $14,667 and $1,072, respectively, in unreported income for Mr. Gingras’ 2003, 2004 and 2005 taxation years (see Schedules I and II for details);
n) Since Mr. Gingras’ sole “active” source of income during the taxation years at issue was the Company, the auditor deemed that the unreported income determined using the indirect “net worth” auditing method was the Company’s unreported income;
o) Further to her audit, the auditor made the following changes to Mr. Gingras’ income for the taxation years at issue:
Description
2003
2004
2005
ADDITION/(DEDUCTION)
Taxable benefit
‑ cars
$1,545
$1,956
$1,892
Benefit to
the shareholder
$0
$2,760
$2,619
Benefit to
the shareholder
$22,836
$14,667
$1,072
TOTAL
$24,381
$19,383
$5,583
[3] In the file of the appellant Garage Gilles Gingras, number 2008‑4125(IT)I, the issues are as follows:
[translation]
a) For the 2003 taxation year, the Minister was authorized to make a reassessment after the normal reassessment period;
b) For the 2003, 2004 and 2005 taxation years, the Minister was justified in adding $15,203, $17,398 and $5,616, respectively, to Garage Gilles Gingras’ net business income;
c) For the 2004 and 2005 taxation years, the Minister was justified in disallowing the amounts of $2,760 and $2,619, respectively, claimed by Garage Gilles Gingras as business expenses;
d) For the 2003, 2004 and 2005 taxation years, the Minister was justified in assessing penalties against Garage Gilles Gingras under subsection 163(2) of the Act.
[4] In making the reassessments, the respondent relied on the following assumptions of fact listed in Garage Gilles Gingras’ file, 2008-4125(IT)I:
[translation]
a) During the taxation years at issue, Mr. Gingras was the sole shareholder (hereafter, the “shareholder”) and director of the appellant Garage Gilles Gingras;
b) During the taxation years at issue, the shareholder was also employed by Garage Gilles Gingras;
c) Garage Gilles Gingras’ fiscal year ended August 31 of each year;
d) According to the Minister’s records, during the taxation years at issue, Garage Gilles Gingras carried on a general car repair business;
e) During the taxation years at issue, Garage Gilles Gingras operated under the “Autopro” banner;
f) Most of Garage Gilles Gingras’ customers were private individuals;
g) The Minister’s auditor (hereafter, the “auditor”) conducted an audit of Garage Gilles Gingras and the shareholder for the taxation years at issue;
h) The auditor carried out the following:
i) A general audit of Garage Gilles Gingras’ file;
ii) An audit of purchase invoices and cheque returns;
vii) A sample audit of sales invoices;
viii) An analysis of bank deposits in Garage Gilles Gingras’ accounts;
ix) An analysis of bank deposits in the shareholder’s personal bank account;
x) An estimate of the shareholder’s net worth;
i) Regarding the internal audit of Garage Gilles Gingras’ business, during her audit of the taxation years at issue, the auditor noted the following:
i) The shareholder’s sister kept Garage Gilles Gingras’ books and records;
ii) The shareholder prepared certain sales invoices whenever his sister was not working;
v) At the end of the year, the shareholder turned over the books and records to his accountant to prepare Garage Gilles Gingras’ financial statements and T2 income tax returns;
vi) The shareholder approved Garage Gilles Gingras’ financial statements and T2 income tax returns;
j) During her audit of the taxation years at issue, the auditor also noted the following:
i) The reported income was higher than the amounts deposited;
ii) The deposits were never explained;
iii) The shareholder bought and sold used cars;
iv) No books were kept regarding the purchase and sale of used cars;
v) No income from that activity was reported by either Garage Gilles Gingras or the shareholder;
vi) The transactions noted at paragraph 19. j) iii) were made in cash, no income was deposited in the bank accounts, and no amount was withdrawn from the bank accounts to purchase the cars;
vii) The estimate of the net worth indicated discrepancies;
k) In light of the foregoing, the auditor used the indirect “net worth” method to audit Garage Gilles Gingras’ and the shareholder’s files for the taxation years at issue;
l) The auditor determined the shareholder’s cost of living for the taxation years at issue on the basis of his bank account withdrawals;
m) Using the indirect “net worth” method, the auditor determined that there was $22,836, $14,667 and $1,072, respectively, in unreported income for the shareholder’s 2003, 2004 and 2005 taxation years (see Schedules I and II for details);
n) Since the shareholder’s sole “active” source of income during the taxation years at issue was Garage Gilles Gingras, the auditor deemed that the unreported income determined using the indirect “net worth” method was Garage Gilles Gingras’ unreported income;
o) The auditor allocated the “net worth difference” obtained for each of the shareholder’s taxation years, taking into account Garage Gilles Gingras’ fiscal years (see Schedule III for details);
p) Further to her audit, the auditor made the following changes to Garage Gilles Gingras’ net business income for the taxation years at issue:
Description
2003
2004
2005
ADDITION/(DEDUCTION)
Undeclared
business income
$15,203
$17,398
$5,616
Travel expenses
disallowed
$0
$2,760
$2,619
TOTAL
$15,203
$20,158
$8,235
[5] The respondent submitted that the facts collected during the audit, namely, several acts of negligence and signs of indifference regarding the obligation to comply with the Income Tax Act (“Act”), justified the reassessment after the normal reassessment period.
[6] The main basis for imposing penalties is that the discrepancies between the amounts reported and what they should have been were significant.
[7] The appellants’ evidence was mainly in the form of grievances against the respondent regarding the method and means of making the assessments under appeal.
[8] The appellants submitted that the use of the net worth method was unjustified, for the following reasons. Firstly, the Agency made that choice even before conducting the analysis and on‑site audit, on the pretext that Mr. Gingras had paid cash for a recreational vehicle and that the amount was particularly substantial, given the modest income that he had reported for that year.
[9] Secondly, the appellants stated that the Agency had jumped to the wrong conclusion that Mr. Gingras had personally carried on a business buying and selling used cars. On this point, Mr. Gingras submitted that he had never operated a business for the purposes of purchasing and selling several exclusively family‑oriented cars.
[10] Lastly, the appellants stated that the company’s accounting and management was totally beyond reproach. As for Mr. Gingras personally, he stated that he was under no obligation to keep records or do any kind of accounting, as he was not operating and had not operated any business. In other words, Mr. Gingras argued that nothing in the Income Tax Act required him to keep personal accounting records.
[11] First, the auditor was questioned at length by counsel for the appellants. She had to explain in detail the work that she had done leading to the assessments under appeal.
[12] She stated, among other things, that she had been puzzled by the fact that there had been many cash transactions, including one especially large transaction for the purchase of a trailer.
[13] She also stated that the decision to use the net worth method had been made prior to the start of the audit, when she had noted that cash transactions had been made to purchase goods, including the trailer.
[14] During her testimony on the file of the appellant Garage Gilles Gingras, the auditor acknowledged that the books had been properly kept and that she had noticed no irregularities save for the fact that the reported income was greater than the amounts deposited and that there were unexplained deposits.
[15] Mr. Gingras stated that, on August 12, 2005, he had received an inheritance on his mother’s death and was paid his part of the succession, $4,500, in cash. A written document signed by his sister, dated August 25, 2005, confirmed this statement. He also claimed to have been reimbursed $3,850 for the cost of repairs to his car following an accident in which his daughter had been the driver. This amount is of no consequence, given that it was paid for repairs costing no doubt the same amount.
[16] The car was registered to Mr. Gingras because his daughter benefited from lower insurance premiums.
[17] Consequently, the cheque reimbursing the cost of the repairs was made out to Mr. Gingras. The issue of the ownership of certain cars that were registered to Mr. Gingras but of which the purchase and operating costs were paid by others, either his spouse or his daughters, was not questioned or challenged.
[18] He also explained the type of transactions that he would make and for which he would pay cash.
[19] For Mr. Gingras, it was a normal, common and useful practice, given the nature of his activities, and it was a feature of his personality and family culture. He explained that he had gotten into the habit of keeping large sums in cash for reasons of practicality and efficiency.
[20] Mr. Gingras also stated that his spouse gave him most of the cheques that she received but that, in return, he had to pay the household expenses. He also stated that the trailer purchased in June 2003 for $26,900 had been acquired jointly with his spouse, in accordance with the handwritten note on the purchase contract, in exchange for a new trailer. There was no evidence regarding the ownership of the new trailer given in exchange, valued at $15,000.
[21] He emphatically denied having told the auditor that he did not usually have more than a few hundred dollars on hand, given that he always had more substantial liquid assets in his possession. In addition, he implied that he also kept large sums of cash elsewhere.
[22] Regarding the significance of his cash transactions, which was one of the determinative factors relied on by the tax authorities to justify using the net worth method, Mr. Gingras submitted that, in his opinion, this justification was not valid: he spent little and would therefore rapidly accumulate as much as several thousands of dollars, which he usually kept in ready cash. He thus concluded that he had reported all of his income.
[23] He also stated that he had never operated any businesses, although he admitted to having bought and sold several cars during the three years covered by the appeal.
[24] He explained that he would buy and sell the cars used by his daughters and spouse. He and his spouse drove a convertible, which they would put in storage for the winter, during which time they would use [translation] “clunkers” for their personal needs and to accommodate certain clients.
[25] Given the number of people involved, namely, his daughters, his spouse and himself, they needed several cars, in particular because of his habit of putting his convertible in storage each winter. As the cars were cheap, he would often replace them. Consequently, he would buy and sell many cars.
[26] Even though his spouse and two daughters were concerned in this matter, they did not testify. It would have been extremely interesting to have certain clarifications and information on their part, as they were often involved in Mr. Gingras’ explanations. A number of times, he claimed, among other things, that his spouse would give him almost all of the cheques that she received.
[27] As regards the company’s file, Mr. Gingras, its sole shareholder, claimed that the company’s management and accounting were adequate and irreproachable. On this point, he explained that, as he lacked the necessary knowledge, he employed two people to handle the company’s accounting and ensure compliance with all tax obligations. The two people in question testified on the nature of their work.
[28] Mr. Gingras’ cross‑examination revealed to the Court that he was thoroughly familiar with both his and the company’s files. At times, he would act arrogant so as to avoid answering a question or create a diversion whenever the issue became particularly sensitive.
[29] Mr. Gingras admitted that the sales figures of the company, of which he was the sole shareholder, remained essentially the same throughout the years: $415,000, $422,000, $411,000, $423,000, $400,000 and $397,000, respectively.
[30] However, the net income for the same years, namely, 2003, 2004, 2005, 2006, 2007 and 2008, increased significantly: $33,000, $30,000, $25,000, $70,692, $69,671 and $54,397, respectively. The substantial increases in net income starting in 2007 were unexplained.
[31] As for whether Mr. Gingras had actually carried on a business buying and selling cars, the evidence showed that he had purchased and sold a number of cars, not for commercial purposes but, rather, for personal or family purposes. He would buy cars for his two daughters, his spouse and himself.
[32] These were usually used cars, worn out by several years of frequent use, which is why they were continually replaced. Mr. Gingras and his spouse also had a passion for convertibles, which they would put in storage for the winter, requiring them to find a replacement car and thus explaining the large number of cars in their possession.
[33] After having heard Mr. Gingras’ explanations and seen in particular the table that he had prepared, the auditor, Chantal Boisvert, admitted that she probably would not have concluded that it was a business if, at the time of the audit, she had heard the explanations that were given at the hearing.
[34] Regarding the existence of a business, the auditor’s about‑face is rather peculiar, for the evidence revealed nothing new, except that Mr. Gingras had prepared a table for quickly and efficiently viewing the number and nature of the car transactions.
[35] During the audit, the auditor was obviously uncomfortable with her conclusion that Mr. Gingras had personally operated a business for buying and selling cars, since, at that point, she treated the profit generated by one of the transactions involving the sale of a car as a capital gain, thus validating Mr. Gingras’ theory that the purchase and sale of cars did not constitute a business.
[36] I note that the evidence revealed nothing new, aside from presenting an edited version of the information available. Thus, the determination that Mr. Gingras had carried on a business is inconsistent with the conclusion that the profit made through one of the transactions had been treated as a capital gain.
[37] In answer to the criticism made against her, the auditor stated that the debate was pointless, since her initial interpretation had had no bearing on the assessment: she had accepted the explanations that the price paid for the cars usually corresponded to the price at which they had been sold, meaning that these transactions generated no profit.
[38] The auditor accepted Mr. Gingras’ explanations on the absence of any profit or benefit in the various transactions involving cars. In other words, she concluded that the various transactions had no effect on Mr. Gingras’ asset base, except in one case, where it was determined that the most profitable transaction constituted a capital gain.
[39] She accepted Mr. Gingras’ explanations on this subject but did not take into consideration the note on the co‑ownership of the trailer because it was a handwritten addition that she did not find to be credible.
[40] Mr. Gingras claimed to have little or no knowledge in accounting, which is why he relied on two people to ensure compliance with his tax obligations. In their testimony, these two people, his sister, Rita Bergeron, who generally worked three days a week, and Benoit Rochette, who was in charge of reviewing and preparing the results used for the annual returns, confirmed Mr. Gingras’ testimony regarding the nature of their jobs.
[41] Mr. Gingras denied having told the auditor that he usually had only a few hundred dollars on hand. Instead, he claimed that he had said that he always kept significantly greater amounts on him.
[42] Even though Mr. Gingras maintained that he lacked knowledge in tax matters, he insisted on the importance of balancing the accounts and seemed confident, quite savvy and comfortable. It seemed obvious that he would answer only those questions that bore out his theory, avoiding the ones he did not want to answer or giving general and somewhat confused answers whenever he thought that they would not support his argument.
[43] Mr. Gingras gave no specific explanations; with his ability to avoid certain questions, his tremendous confidence and, lastly, his arrogance, he revealed only what he actually wanted to reveal.
[44] Mr. Gingras is a person who states and claims only what he really wants to state and claim. He has clearly understood that using cash generally leaves fewer traces, and this practice allows him some latitude, in particular the possibility of giving any number of explanations regarding both the source and use of the money, so as to render the various facts compatible with the theory of the increase in assets.
[45] Mr. Gingras submitted that he was penalized by the respondent’s method of calculating the difference on which the assessments are based, since, as a result of this method, certain additions were accounted for twice: once in the calculation of the cost of living and again in the assets in terms of an increase in assets.
[46] The topic of the trailer raised several questions, including with respect to the ownership of the unit given in exchange and valued at $15,000.
[47] Mr. Gingras claimed that he acquired the trailer in 2003. When asked about the ownership of the trailer in question, he gave no specific explanations, aside from the fact that his spouse gives him $200 per month. The start date of the payments was not established, but the handwritten note on the contract suggests that they began at that point.
[48] Regarding the question of ownership, the auditor stated that she had assumed that Mr. Gingras was the sole owner of the trailer, on the basis of the registered title. She therefore implied that the spouse’s name had been added after the fact, as the name did not appear on the registration certificate.
[49] Was Mr. Gingras’ spouse the co‑owner of the trailer given in exchange and valued at $15,000, that is, $7,500 for her undivided share? Despite its significance, this question was not answered, except for the general explanation that she paid $200 per month for the duration of the periods covered by the assessments.
[50] The first grievance noted was that the net worth method was unjustified and inappropriate, if not abusive. According to the appellants, this one allegation alone was enough to lead to the conclusion that the assessments should be vacated and the penalties cancelled. In other words, the appellants submitted that using the net worth method to reassess without reason or justification should be sanctioned by the outright vacation of the resulting assessments.
[51] Relying on case law, including a decision of the former Chief Justice of this Court, the Honourable Donald Bowman, the appellants vigorously argued that the use of the net worth method to reassess was a special, if not exceptional, method to be used solely in cases where a business was being carried on and where it was absolutely impossible to determine the income otherwise.
[52] In this regard, Mr. Gingras stated that he has never carried on a business for buying and selling cars and was therefore under no obligation to keep records pursuant to section 230 of the Act.
[53] Proceeding on the basis that Mr. Gingras had indeed operated such a business, the respondent faulted him for the lack of reliable and credible information regarding that business.
[54] However, the evidence shows that, even before verifying whether there were records and adequate accounting, the Agency had already decided how it would conduct the audit, which started with the company.
[55] The appellants’ strategy mainly consisted in complaining about, criticizing and vehemently challenging the Agency’s approach. Put another way, the appellants claimed that there was no reason or ground for using the net worth method to audit either Mr. Gingras’ or Garage Gilles Gingras’ files.
[56] According to the appellants, the net worth method was unjustified in the company’s case, as the evidence revealed that the management was adequate, a point that was also confirmed by the auditor. In Mr. Gingras’ case, as there was no business, he did not need to keep any accounting records or other documentation to prove the accuracy of his income. Again according to Mr. Gingras, the Act in no way requires an individual who does not carry on a business to keep accounting records.
[57] The appellants would like the Court in a way to draw on the penal and criminal approach, where the sanction for an irregularity in an investigation, such as in obtaining or executing a warrant, is often the acquittal or release of the accused.
[58] The procedure is not that strict in tax matters. The State has a wide range of means at its disposal, including the net worth method, to verify whether people have properly fulfilled their tax obligations.
[59] The jurisdiction of the Tax Court of Canada is limited to deciding whether the assessment is correct or not. It is true that audits should follow standard accounting practices. It is true that audits call for professionalism and transparency. Needless to say, any breach of these key principles is regrettable.
[60] However, I do not think that breaches, even significant ones, are sanctioned or remedied by vacating the assessment. An assessment cannot be vacated, or even reduced, if the only grounds of attack are the auditor’s conduct and method of evaluation. In other words, an assessment must be based solely on the Act, not the conduct—even if it was improper—of the auditor or auditors.
[61] The Tax Court of Canada lacks the jurisdiction to sanction improper conduct, except of course where the abuse or abuses distorted, changed or even falsified the calculation of the assessment or one of its bases.
[62] As for the authority to use the net worth method, I have compiled a number of decisions, beginning with those not involving businesses.
Hsu v. Canada 2001 FCA 240
[63] A taxpayer who had immigrated to Canada in 1992 had reported owning property and shares with a value of $3 million. However, in his income tax returns for the years 1993 and 1994, he had reported $1,207 and $636, respectively. The Minister asked the taxpayer to provide documentation justifying his income. He refused to do so, and the Minister therefore made an assessment using the net worth method, estimating the taxpayer’s income to be 10 per cent of $3 million. The relevant paragraphs of that decision are as follows:
[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 appreciation of a taxpayer’s wealth over a period of time can be imputed as income for that period unless the taxpayer demonstrates otherwise (Bigayan, supra, 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 appreciation 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 sources (Gentile v. The Queen, [1988] 1 C.T.C. 253 at 256 (F.C.T.D.)).
[30] By its very nature, a net worth assessment 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.
. . .
[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, supra 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 D.T.C. 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.
(Emphasis added)
[64] That case illustrates the fact that the net worth method is commonly used as a last resort whenever taxpayers refuse to cooperate and provide documentation justifying their expenses and income. Taxpayers then have the burden of disproving the Minister’s estimate, in particular by producing appropriate documentation to support their allegations. Thus, even individuals not carrying on a business must keep some accounting records.
Landry v. The Queen 2009 TCC 399
[65] In that case, a former erotic dancer had received several gifts from someone who had once been a client. The tax authorities assessed her using the net worth method. In his decision, Justice Hogan explained that this method is used as a last resort in situations where the taxpayer provides no documentation:
[42] The net worth method is arbitrary, unsatisfactory and imprecise. It is a blunt instrument of which the Minister must avail himself as a last resort, for instance where the taxpayer’s accounting makes it impossible to adequately assess his or her income and expenses for a given period. Judge Bowman (as he then was) had this to say about the net worth method at paragraph 6 of Ramey v. Canada:
[6] . . . A net worth assessment involves a comparison of a taxpayer’s net worth, i.e. the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary. Such assessments may be inaccurate within a range of indeterminate magnitude but unless they are shown to be wrong they stand . . . .
[66] The passage above shows the relevance and validity of an assessment using the net worth method whenever an individual fails to keep proper accounting records, even if the individual is not carrying on a business. Paragraphs 46 to 50 are equally relevant:
[46] With regard to the burden of proof, it is up to the appellant to rebut the assumptions of fact on which the Minister based himself in making the assessments for the 2000 and 2001 taxation years. The standard of evidence that the appellant must meet in order to rebut the Minister’s assumptions is proof on the balance of probabilities. Essentially, the onus of proving the inaccuracy of the assessments in this case is on the appellant, who must provide prima facie evidence to show that the amounts thus arrived at do not represent, from a tax standpoint, the true state of her income. It is up to the appellant to identify the source and establish the non‑taxable nature of her income. The Federal Court of Appeal stated that onus in Lacroix:
[19] The Supreme Court has endorsed this approach on a number of occasions, including in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, to name just one example. In that case, the Court stated the following at paragraphs 92-93:
92. . . . The Minister, in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. Minister of National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C. 5359 (F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93. This initial onus of “demolishing” the Minister’s exact assumptions is met where the Appellant makes out at least a prima facie case: Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679 (T.R.B.). . . . The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions: see for example MacIsaac v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87 D.T.C. 652 (T.C.C.) . . .
[20] Applying the net worth method changes nothing in this method of proof. Where the Minister presumes that the income detected using the net worth method is taxable income, the onus is on the taxpayer to demolish this presumption. If the taxpayer presents credible evidence that the amount in question is not income, the Minister must then go beyond these assumptions of fact and file evidence proving the existence of this income.
[47] The credibility of the appellant and the sufficiency of the evidence against the net worth calculations play a crucial role. The fate of the appeal will depend entirely on those two factors.
[48] Judge Bowman (as he then was) stated the best method of challenging such assessments in Bigayan:
[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 t