Cheung v. The Queen

Cheung v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2005-01-31
Neutral citation
2005 TCC 83
File numbers
2004-2206(IT)I
Judges and Taxing Officers
Dwayne W. Rowe
Subjects
Income Tax Act
Decision Content
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. N