He v. The King

He v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-02-16
Neutral citation
2024 TCC 21
File numbers
2018-4775(IT)G
Judges and Taxing Officers
Dominique Lafleur
Decision Content
Docket: 2018-4775(IT)G
BETWEEN:
YU XING HE,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on October 30 and 31, 2023, and November 1 and 2, 2023 at Toronto, Ontario
Before: The Honourable Justice Dominique Lafleur
Appearances:
Counsel for the Appellant:
David M. Piccolo
Counsel for the Respondent:
Benjamin Chamberland
Katie Beahen
JUDGMENT
IN ACCORDANCE with the attached Reasons for Judgment;
IT IS ORDERED as follows:
The Minister of National Revenue (the “Minister”) has met his burden to reassess the Appellant beyond the normal reassessment period under subparagraph 152(4)(a)(i) of the Income Tax Act (the “Act”) for the 2009 to 2012 taxation years, and to assess penalties under subsection 163(2) of the Act;
The appeal from the reassessments made under the Act for the 2009 to 2012 taxation years is allowed, and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the unreported income of the Appellant is to be reduced by taking into account the following adjustments to be made to the net worth calculations (which amounts include concessions made by the Respondent at the hearing and additional adjustments described below):
For 2009
Schedule I (Balance Sheet – Assets): add the deposit on the Splendid China Square Property for $46,275 (as it was included in 2008);
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Chen for $80,000 (as it was included in 2008);
Schedule III (Calculation of Discrepancy in Total Income per Net Worth): add deductions for $4,269.95 (cheque from the Government of Canada) and for $6,615 (non-taxable portion of the Appellant’s spouse’s capital gain on the sale of the Telegram Mews Property); and
Additional adjustments to the 2008 taxation year (as described below).
For 2010
Schedule I (Balance Sheet – Assets): add the deposit on the Splendid China Square Property for $46,275 (as it was included in 2008) and the deposit on the Fulham Property for $20,000;
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Chen for $60,000 (as the original loan was partially reimbursed) and a loan from Mr. Guo Lin He for $12,000; and
Schedule IV (Summary of Personal Expenditures) (with corresponding adjustments to Schedule III (Calculation of Discrepancy in Total Income per Net Worth)): reduce by an aggregate amount of $43,033, consisting of $20,000 (deposit on the Fulham Property), $20,000 (partial reimbursement of a loan from Mr. Chen) and $3,033 (Budget Rent-A-Car payments).
For 2011
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Yang for $5,300;
Schedule III (Calculation of Discrepancy in Total Income per Net Worth): add a deduction for $46,275 (refund of deposit on the Splendid China Square Property); and
Schedule IV (Summary of Personal Expenditures) (with corresponding adjustments to Schedule III (Calculation of Discrepancy in Total Income per Net Worth)): reduce by an aggregate amount of $146,524, consisting of $60,000 (reimbursement of the balance of a loan from Mr. Chen), $12,000 (reimbursement of a loan from Mr. Guo Lin He), $10,000 (reimbursement of a loan from Mr. Yang), $35,000 (amount paid to Mr. Chen) and $29,524 (Costco payments).
For 2012
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Yang for $5,300 (as it was included in 2011);
Schedule III (Calculation of Discrepancy in Total Income per Net Worth): add a deduction for $421 (non-taxable portion of the Appellant’s spouse’s capital gain on the sale of the Singer Property) and for $17,700 (gifts received by the Appellant); and
Schedule IV (Summary of Personal Expenditures) (with corresponding adjustments to Schedule III (Calculation of Discrepancy in Total Income per Net Worth)): reduce by an aggregate amount of $153,766, consisting of $20,000 (reimbursement of a loan from Mr. Yang), $23,314 (Costco payments) and $110,452 (representing a deposit for a property located at 4903‑14th Avenue, in Markham, Ontario).
3. Penalties assessed under subsection 163(2) of the Act shall be adjusted accordingly;
4. Additional assets and liabilities shall be added to Schedule I (Balance Sheet – Assets) and to Schedule II (Balance Sheet – Liabilities) for the 2008 taxation year (which year is not under appeal) to take into account concessions made by the Respondent at the hearing and additional adjustments described below:
Schedule I (Balance Sheet – Assets): Purcell Property for $493,000, deposit on the Telegram Mews Property for $89,120 and deposit on the Splendid China Square Property for $46,275; and
Schedule II (Balance Sheet – Liabilities): loan from Mr. Chen for $80,000 and liability (mortgage) in respect of the Purcell Property for $432,562.
5. Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 16th day of February 2024.
“Dominique Lafleur”
Lafleur J.
Citation: 2024 TCC 21
Date: 20240216
Docket: 2018-4775(IT)G
BETWEEN:
YU XING HE,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on October 30 and 31, 2023, and November 1 and 2, 2023 at Toronto, Ontario
Before: The Honourable Justice Dominique Lafleur
Appearances:
Counsel for the Appellant:
David M. Piccolo
Counsel for the Respondent:
Benjamin Chamberland
Katie Beahen
REASONS FOR JUDGMENT
Lafleur J.
I. REASSESSMENTS AND CONCESSIONS
[1] The Minister of National Revenue (the “Minister”) reassessed Mr. Yu Xing He (the “Appellant” or “Mr. He”) under the Income Tax Act (the “Act”) beyond the normal reassessment period pursuant to subparagraph 152(4)(a)(i) of the Act for the 2009 to 2012 taxation years. Applying the net worth method, the Minister added additional net business income totalling $6,281,338 in the calculation of Mr. He’s income. Furthermore, the Minister assessed penalties under subsection 163(2) of the Act for all taxation years.
[2] Following the Appellant’s objection, the Minister varied the reassessments by decreasing the unreported business income by an amount of approximately $3.6M to an aggregate of $2,658,753, namely: $352,662; $1,096,986; $637,631; and $571,474, for the 2009 to 2012 taxation years respectively. In varying the reassessments, the Minister determined that gains on real estate dispositions were to be considered on a capital account rather than on an income account. Some further adjustments were made to take into account additional assets, additional gifts, a change in the value of a shareholder’s’ loan account (reduction), and an additional reduction by taking into account the non-taxable portion of capital gains on the disposition of assets. Penalties assessed under subsection 163(2) of the Act were also adjusted accordingly.
[3] At the hearing, the parties jointly submitted a partial agreed statement of facts (Exhibit RA-1 – Partial Agreed Statement of Facts, attached to these reasons as Schedule A). These include specific facts regarding the Appellant’s background, reported income, assets and liabilities for the net worth analysis, and the calculation of discrepancy in total income per the net worth analysis. However, the parties did not agree on facts regarding various loans and gifts the Appellant alleged he received during the taxation years under appeal, the amount the Appellant contributed to the shareholders’ loan account of 2225903 Ontario Inc. (“Seasons”), and whether specific withdrawals found in various bank accounts were business expenses incurred for Seasons or personal expenditures of the Appellant.
[4] Under Exhibit R-6, the Respondent produced amended schedules, consisting of Schedule I (Balance Sheet – Assets), Schedule II (Balance Sheet – Liabilities), Schedule III (Calculation of Discrepancy in Total Income per Net Worth), Schedule IV (Summary of Personal Expenditures) and Schedule V (Analysis of Income Tax Discrepancy per Net Worth). These schedules were produced to replace the various schedules attached to the Reply to the Notice of Appeal and took into account various concessions made by the Respondent at the beginning and in the course of the trial, which I will describe below.
[5] At the beginning of the trial, the Respondent made the following concessions:
i)An amount of $493,000 representing the cost of a property located at 147 Purcell Square, in Toronto, Ontario (the “Purcell Property”), shall be added as an asset on Schedule I (Balance Sheet – Assets) for 2008, with a corresponding long term liability of $432,562 as a mortgage to be added to Schedule II (Balance Sheet – Liabilities) for 2008;
ii)An amount of $17,700 representing two gifts received by Mr. He shall be added to the deductions listed on Schedule III (Calculation of Discrepancy in Total Income per Net Worth) for 2012 (see Exhibit RA‑1, paras. 122–123); and
iii)An amount of $110,452 shall reduce the item “other” in the personal expenditures calculation in Schedule IV (Summary of Personal Expenditures) for 2012, which amount was already included in the asset section of the Balance Sheet (Schedule I: Balance Sheet – Assets) in respect of a property located at 4903-14th Avenue, in Markham, Ontario.
[6] Furthermore, during the trial, the Respondent conceded the following:
i)An amount of $89,120 representing the total deposits made for the purchase of a property located at 3610-25 Telegram Mews, in Toronto, Ontario (the “Telegram Mews Property”), shall be added as an asset on Schedule I (Balance Sheet – Assets) for 2008;
ii)An amount of $6,615, representing the non-taxable portion of Mr. He’s spouse’s capital gain on the sale of the Telegram Mews Property, shall be added to the deductions listed on Schedule III (Calculation of Discrepancy in Total Income per Net Worth) for 2009; and
iii)An amount of $421, representing the non-taxable portion of Mr. He’s spouse’s capital gain on the sale of a property located at 1911-33 Singer Court (the “Singer Property”), shall be added to the deductions listed on Schedule III (Calculation of Discrepancy in Total Income per Net Worth) for 2012.
[7] Given the above concessions, and according to the Respondent, the Appellant’s unreported business income using the net worth assessment method for the 2009 to 2012 taxation years was respectively established at $196,490; $1,096,986; $637,631; and $442,901, for a total of $2,374,008.
[8] At trial, Mr. He testified, as did Mr. Benjamin Battiste, the Canada Revenue Agency (the “CRA”) appeal officer who reviewed Mr. He’s files at the CRA’s appeal level. Furthermore, Mr. He called the following individuals to testify: Mr. Fei Chen (Mr. He’s nephew), Mr. Guo Lin He (Mr. He’s cousin), and Mr. Hui Min Shi (Mr. He’s brother-in-law).
[9] All statutory references that follow in these reasons are to the Act unless otherwise stated.
II. BACKGROUND
[10] Mr. He immigrated to Canada in 2003, after completing his high school education in China. His first job in Canada was in a supermarket, around 2007. In 2009, he planned to open a supermarket with partners. Between 2009 and 2012, Mr. He was married and living with his spouse and two minor children in Scarborough, Toronto, Ontario.
[11] Since 2004, he and his spouse have jointly owned the Purcell Property, part of which has been rented out since its purchase. Mr. He has also been involved in the purchase and sale of multiple pre-construction properties.
[12] Mr. He and his spouse reported the following net income for income tax purposes (see Exhibit RA-1, Partial Agreed Statements of Facts, paras. 7–42):
2009: $19,458 (including taxable capital gains and net rental income);
2010: $22,301 (including net rental income and net business income);
2011: $25,189 (including taxable capital gains and net rental income); and
2012: $20,570 (for Mr. He only, including net rental income and employment income; no evidence was adduced at trial on the net income reported by his spouse, but she reported net rental income of $6,857).
[13] As mentioned above, the reassessments at issue were determined by a net worth analysis. This method is “based on an assumption that if one subtracts a taxpayer’s net worth at the beginning of a year from that at the end, adds the taxpayers expenditures in the year, deletes non-taxable receipts and accretions to value of existing assets, the net result, less any amount declared by the taxpayer, must be attributable to unreported income earned in the year, unless the taxpayer can demonstrate otherwise” (see Bigayan v. R (1999), [2000] 1 CTC 2229, 2000 DTC 1619 [Bigayan], at para. 2).
[14] The personal expenditures of Mr. He were determined by the CRA by adding all withdrawals, cheques, drafts and debit memos found in various bank accounts statements and credit cards statements, and deducting all transfers made between bank accounts and all business expenses paid through these bank accounts.
[15] Mr. He attributes the discrepancy between his reported income and his net worth to various loans he had received from friends and family over the years, as well as large gifts mostly from his father-in-law, who lives in China.
III. ISSUES
[16] The issues arising from this appeal are as follows:
i)Given the concessions made by the Respondent at the hearing, has unreported income been properly determined for the 2009 to 2012 taxation years as being respectively $196,490; $1,096,986; $637,631; and $442,901, for a total of $2,374,008?
ii)Were the 2009 to 2012 taxation years properly reassessed beyond the normal reassessment period pursuant to subparagraph 152(4)(a)(i)?
iii)Were penalties under subsection 163(2) properly assessed for the 2009 to 2012 taxation years?
IV. POSITIONS OF THE PARTIES
A. The Respondent’s position
[17] The examination of the various bank accounts shows that the Mr. He did not report all of his income, the source of which is unknown to the Minister. As the Appellant is unable to offer a credible explanation for the source of these funds, the Minister has met his burden to reassess the Appellant beyond the normal reassessment period under subparagraph 152(4)(a)(i) as well as to assess penalties under subsection 163(2). The evidence also showed that Mr. He was given opportunities to make representations in that respect.
[18] The amount of unreported income, as calculated and detailed in the various schedules found under Exhibit R-6, should be included in the calculation of Mr. He’s income.
[19] Mr. Battiste’s testimony was clear that a thorough analysis of the Appellant’s records was made, with no need for estimates.
[20] Mr. He lacks credibility when he claims that he had received various loans and gifts over the years, as the issue of these loans and gifts was not raised at audit or on appeal, but only during discovery.
[21] Further, no credible evidence was adduced at trial to allow the Court to conclude that Mr. He did receive these loans and gifts.
[22] Apart from concessions already made by the Respondent at trial, no other adjustments should be made to the net worth calculations.
B. The Appellant’s position
[23] The requirements for reassessing beyond the normal reassessment period were not met by the Minister as the evidence showed that Mr. He carefully reviewed his tax returns before filing them, and that he knew gifts and loans were not taxable. The Court has to take into account the fact that Mr. He was a recent immigrant, having arrived in Canada in 2004. Mr. He did not show any carelessness or neglect in filing his tax returns, and it cannot be concluded that he willfully underreported his income. The evidence showed that Mr. He actively sought his accountant’s advice. Furthermore, for the same reasons, the Minister did not meet his burden in respect of penalties assessed under subsection 163(2).
[24] However, if the Court is satisfied that the Minister met the requirements for reassessing Mr. He beyond the normal reassessment period under subparagraph 152(4)(a)(i), 38 adjustments (including adjustments referred to in the concessions made by the Respondent as described above) to the schedules attached to the Reply to the Notice of Appeal should be made to arrive at unreported income totalling $998,916, specifically: (-$752); $315,405; $460,406; and $223,857 for the 2009 to 2012 taxation years respectively. These adjustments to the net worth calculations include the various loans and gifts Mr. He allegedly received from friends and family members, including his father-in-law.
V. CONCLUSION
[25] In accordance with these reasons, I find that the Minister has met his burden to reassess Mr. He beyond the normal reassessment period under subparagraph 152(4)(a)(i) for the 2009 to 2012 taxation years, and to assess penalties under subsection 163(2).
[26] Further, in accordance with these reasons, the appeal from the reassessments made under the Act for the 2009 to 2012 taxation years is allowed, with costs to the Respondent, and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the unreported income of Mr. He is to be reduced by taking into account the following adjustments to be made to the net worth calculations (which amounts include concessions made by the Respondent at the hearing and additional adjustments described below):
For 2009
Schedule I (Balance Sheet – Assets): add the deposit on the Splendid China Square Property for $46,275 (as it was included in 2008);
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Chen for $80,000 (as it was included in 2008);
Schedule III (Calculation of Discrepancy in Total Income per Net Worth): add deductions for $4,269.95 (cheque from the Government of Canada) and for $6,615 (non-taxable portion of Mr. He’s spouse’s capital gain on the sale of the Telegram Mews Property); and
Additional adjustments to the 2008 taxation year (as described below).
For 2010
Schedule I (Balance Sheet – Assets): add the deposit on the Splendid China Square Property for $46,275 (as it was included in 2008) and the deposit on Fulham Property for $20,000;
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Chen for $60,000 (as the original loan was partially reimbursed) and a loan from Mr. Guo Lin He for $12,000; and
Schedule IV (Summary of Personal Expenditures) (with corresponding adjustments to Schedule III (Calculation of Discrepancy in Total Income per Net Worth)): reduce by an aggregate amount of $43,033, consisting of $20,000 (deposit on the Fulham Property), $20,000 (partial reimbursement of a loan from Mr. Chen) and $3,033 (Budget Rent-A-Car payments).
For 2011
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Yang for $5,300;
Schedule III (Calculation of Discrepancy in Total Income per Net Worth): add a deduction for $46,275 (refund of deposit on the Splendid China Square Property); and
Schedule IV (Summary of Personal Expenditures) (with corresponding adjustments to Schedule III (Calculation of Discrepancy in Total Income per Net Worth)): reduce by an aggregate amount of $146,524, consisting of $60,000 (reimbursement of the balance of a loan from Mr. Chen), $12,000 (reimbursement of a loan from Mr. Guo Lin He), $10,000 (reimbursement of a loan from Mr. Yang), $35,000 (amount paid to Mr. Chen) and $29,524 (Costco payments).
For 2012
Schedule II (Balance Sheet – Liabilities): add a loan from Mr. Yang for $5,300 (as it was included in 2011);
Schedule III (Calculation of Discrepancy in Total Income per Net Worth): add a deduction for $421 (non-taxable portion of Mr. He’s spouse’s capital gain on the sale of the Singer Property) and for $17,700 (gifts received by Mr. He); and
Schedule IV (Summary of Personal Expenditures) (with corresponding adjustments to Schedule III (Calculation of Discrepancy in Total Income per Net Worth)): reduce by an aggregate amount of $153,766, consisting of $20,000 (reimbursement of a loan from Mr. Yang), $23,314 (Costco payments) and $110,452 (representing a deposit for a property located at 4903-14th Avenue, in Markham, Ontario).
[27] Penalties assessed under subsection 163(2) shall be adjusted accordingly.
[28] In accordance with these reasons, I also find that additional assets and liabilities shall be added to Schedule I (Balance Sheet – Assets) and to Schedule II (Balance Sheet – Liabilities) for the 2008 taxation year (which year is not under appeal) to take into account concessions made by the Respondent at the hearing and additional adjustments described below:
Schedule I (Balance Sheet – Assets): Purcell Property for $493,000, deposit on the Telegram Mews Property for $89,120 and deposit on the Splendid China Square Property for $46,275; and
Schedule II (Balance Sheet – Liabilities): loan from Mr. Chen for $80,000 and liability (mortgage) in respect of the Purcell Property for $432,562.
VI. ANALYSIS
A. The net worth method
[29] The Minister is not bound by a return or information supplied by a taxpayer, or on his or her behalf, and may use an alternative audit method to assess the tax payable (subsection 152(7)).
[30] As indicated above, the Minister used a net worth method to reassess Mr. He for the 2009 to 2012 taxation years. Mr. Battiste, the CRA appeal officer, testified that the audit conducted by the CRA was a thorough review of financial records, as no estimates or statistics were used to determine the unreported income. The bank withdrawal method was used under the net worth analysis. The auditor obtained various bank accounts statements (including line of credit statements) and credit card statements through the CRA’s power to obtain information and did a withdrawal analysis. The CRA was able to identify 10 bank accounts and lines of credits held by Mr. He and his spouse. Mr. He did not provide any bank statements or credit cards statements to the CRA. Under the withdrawal analysis, specific amounts were recognized as business expenses, and inter-account transfers and mortgage payments were identified, and these amounts were removed from the calculation of personal expenditures found in Schedule IV (Summary of Personal Expenditures) to avoid any double counting of amounts.
[31] I found that the testimony of Mr. Battiste was clear and credible.
[32] As a general rule, in an appeal to this Court, the burden of proof rests on the taxpayer. A taxpayer thus bears the burden of demolishing the Minister’s assumptions of fact and proving, on a balance of probabilities, the facts justifying his or her position. On the other hand, the Minister has the burden of proving, on a balance of probabilities, the facts justifying the assessment of penalties under subsection 163(2) (subsection 163(3)) and the facts justifying reassessment beyond the normal reassessment period (subparagraph 152(4)(a)(i)).
[33] In the case at bar, reassessments were made beyond the normal reassessment period. The Minister will discharge his burden under subparagraph 152(4)(a)(i) if he establishes that “there is a discrepancy . . . between a taxpayer’s assets and his expenses, and that discrepancy continues to be unexplained and inexplicable” (see Molenaar v. Canada, 2004 FCA 349 at para. 4, cited with approval in Lacroix v. The Queen, 2008 FCA 241 [Lacroix], at para. 33).
[34] Further, as stated in Lacroix (at para. 32):
[i]nsofar as the Tax Court of Canada is satisfied that the taxpayer earned unreported income and did not provide a credible explanation for the discrepancy between his or her reported income and his or her net worth, the Minister has discharged the burden of proof on him within the meaning of subparagraph 152(4)(a)(i) and subsection 162(3) [sic].
[35] If the Minister discharges his burden under subparagraph 152(4)(a)(i), it will then be on Mr. He to identify the source of the income and to show, on a balance of probabilities, that the income is not taxable. Mr. He will have to prove, on a balance of probabilities, the facts justifying his position. Mr. He can also challenge the net worth reassessment by establishing that the net worth method was inherently flawed (see Bigayan, supra, at paras. 3–4).
[36] In order to successfully challenge the reassessments at issue, Mr. He must present detailed and cogent testimony, and supporting evidence where possible, to explain the various withdrawals found in his bank accounts and why they should not be included in the calculation of the personal expenditures. Mr. He can also succeed either by establishing, on a balance of probabilities, new facts, not considered by the Minister, showing that the unreported income was not taxable (for example, by proving he had received various gifts and loans), or by demonstrating that the Minister’s assumptions of fact are wrong. For example, Mr. He can present evidence supporting he owned additional assets and incurred more liabilities.
[37] It is possible that Mr. He’s burden will not be met if the Respondent successfully challenges the evidence adduced at the hearing, if the evidence is contradictory or if the Court draws a negative inference from Mr. He’s failure to produce evidence or to call witnesses to establish a central facts relied upon by him.
[38] Thus, Mr. He’s credibility and the sufficiency of his evidence will be determinative (Landry v. The Queen, 2009 TCC 399, at paragraph 47; Roy v. The Queen, 2006 TCC 226). This Court, however, may also consider the overall reasonableness of the reassessments in its determination of whether to allow the appeal.
[39] Courts have recognized that a net worth assessment is an arbitrary and imprecise approximation of a taxpayer’s income. However, the Federal Court of Appeal noted the following in Hsu v. The Queen, 2001 FCA 240, at para. 30:
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.
[40] For the following reasons, which I will elaborate upon later herein, I find that the Minister has established, on a balance of probabilities, facts justifying the reassessments made beyond the normal reassessment period for the 2009 to 2012 taxation years and facts justifying the assessment of penalties under subsection 163(2). I find that Mr. He had earned unreported income that he failed to report. Further, I also find that Mr. He did not provide credible explanations for the discrepancy between his reported income and his net worth. Some parts of Mr. He’s testimony were credible, and, as such, I find that some adjustments must be made to the Minister’s calculations under the net worth assessment. However, I also find that other parts of Mr. He’s testimony were not credible and, as such, I did not accept all the adjustments raised by the Appellant.
B. Credibility of Mr. He, reassessment beyond the normal reassessment period and penalties
(1) Credibility of Mr. He
[41] When assessing the credibility of a witness, I can consider inconsistencies, the attitude and demeanour of the witness, motives the witness may have to fabricate evidence, and the “overall sense of the evidence”. As stated by Justice Valerie Miller in Nichols v. The Queen, 2009 TCC 334:
[23] In assessing credibility I can consider inconsistencies or weaknesses in the evidence of witnesses, including internal inconsistencies (that is, whether the testimony changed while on the stand or from that given at discovery), prior inconsistent statements, and external inconsistencies (that is, whether the evidence of the witness is inconsistent with independent evidence which has been accepted by me). Second, I can assess the attitude and demeanour of the witness. Third, I can assess whether the witness has a motive to fabricate evidence or to mislead the court. Finally, I can consider the overall sense of the evidence. That is, when common sense is applied to the testimony, does it suggest that the evidence is impossible or highly improbable.
[42] In assessing the evidence adduced at trial, I can accept all, some or reject all of a witness testimony and I can also accept part of a witness evidence and reject other parts (see Ha v. The Queen, 2011 TCC 271, at para. 21).
[43] According to the Respondent, Mr. He lacks credibility. Mr. He had motive to mislead the Court, as he does not want to pay the taxes at issue. Mr. He alleges that the income as reported was correct, but his explanations as to how he sustains his family of four in Toronto is based on large gifts received from his father-in-law, and loans received from friends and family members, but no documentary evidence was adduced in that respect. Further, there were inconsistencies and weaknesses in his testimony.
[44] I agree with the Respondent. For the following reasons, I find that Mr. He’s testimony regarding the alleged large gifts received from his father-in-law was not credible, and I totally reject that part of Mr. He’s testimony. Among other things, there was no corroboration and no supporting documentation produced at trial; further, there were inconsistencies between his testimony at trial and his answers on discovery; and finally, the issues of the gifts from Mr. He’s father-in-law were not raised at audit, or at the objection level, but only at trial.
[45] According to Mr. He, he received approximately $30,000 as a gift from his father-in-law every year, and his spouse also received gifts from her father every year.
[46] More particularly, Mr. He testified that he had received the following gifts from his father-in-law:
-in 2009: $30,000, but according to Mr. He’s undertakings, he received $22,280 (see Exhibit R-4, Respondent’s Read-Ins, p. 13);
-in 2010: $100,000 (according to Mr. He’s undertakings – Exhibit R‑4, Respondent’s Read-Ins, p. 15);
-in 2011: Mr. He did not remember the exact amount received (according to Mr. He’s undertakings, he would have received $47,536 – Exhibit R‑4, Respondent’s Read-Ins, p. 15); and
-in 2012: $68,000 (according to Mr. He’s undertakings – Exhibit R-4, Respondent’s Read-Ins, p. 17).
[47] Mr. He testified that it was his spouse who received the funds purported to be gifts from his father-in-law and deposited these amounts in one of their bank accounts. However, at the hearing, Mr. He was not able to show in which bank accounts these funds were deposited. Furthermore, Mr. He testified that the funds were not sent directly to his spouse by his father-in-law, who lives in China, because of transfer difficulties between China and Canada. He testified that some friends of his spouse’s sister who live in Canada transferred the funds to his spouse. Then, his father-in-law reimbursed the families of these friends in China. Mr. He did not remember the names of any of these friends. Mr. He testified that gifts from his father-in-law were always delivered to him and his spouse in the same manner.
[48] Mr. He testified that no formal documentation was prepared as these were transfers between family members.
[49] At the hearing, the Respondent asked the Court to draw an adverse inference from the failure to call Mr. He’s spouse to testify, because her testimony would have been central to establishing that gifts were received from Mr. He’s father-in-law over the years.
[50] As stated by the Federal Court of Appeal in Imperial Pacific Greenhouses Ltd. v. The Queen, 2011 FCA 79 [Imperial Pacific] (at para. 14), a Tax Court judge can draw an adverse inference from a party’s failure to call a witness, especially if the witness’s evidence would have been central to establishing an important fact.
[51] In the case at bar, the testimony of Mr. He’s spouse was central to establishing the existence of these large gifts from Mr. He’s father-in-law, and particularly, in showing how funds were transferred from her father (indirectly through her sister’s friends) to their bank accounts. I did not receive any explanation justifying Mr. He’s spouse’s absence at trial. I find that I should draw an adverse inference from Mr. He’s failure to call his spouse at the hearing, and I find that her testimony would have been unfavourable to Mr. He.
[52] For all these reasons, no adjustments shall be made to the net worth calculations in respect of those alleged gifts from Mr. He’s father-in-law.
[53] Furthermore, I have significant concerns about Mr. He’s testimony regarding various funds allegedly received as loans from friends and family. As indicated below, I accept that he had received some funds during the 2009 to 2012 taxation years as loans, but not to the extent that would justify the discrepancy between his reported income and his net worth.
[54] At audit and the CRA’s appeal, Mr. He did not raise the fact that he had received specific funds as loans from friends and family. It was only on discovery and at trial that Mr. He raised these alleged specific loans from friends and family.
[55] At audit and the CRA’s appeal, Mr. He maintained that he participated in a traditional Chinese loan arrangement called “Fujian Arrangement” (Exhibit R-1, Respondent’s Book of Documents, Tab 20 - Letter from Mr. He’s agent dated May 15, 2015, and addressed to the CRA auditor) and that would justify in part the discrepancy between his reported income and his net worth.
[56] However, Mr. He did not participate in a traditional Chinese lending program during the 2009 to 2012 period (Exhibit RA-1, Partial Agreed Statement of Facts, para. 127).
[57] At trial, Mr. He testified that the reference to the Fujian Arrangement by his representative at the time of audit was just given as an example. Mr. He testified that he was not participating in such an arrangement during the 2009 to 2012 taxation years. However, the letter from Mr. He’s representative clearly states that “Mr. He participated in a number of these mutual lending groups”, referring to the Fujian Arrangement (see Exhibit R-1, Respondent’s Book of Documents, Tab 20, p. 180) to justify the discrepancy between his reported income and his net worth.
[58] Again, I have significant concerns about Mr. He’s evidence regarding the various funds he had received as loans, given the above-described inconsistencies and the justification changing at trial from what was advanced at audit and at CRA appeal.
[59] For these reasons, only particular loans, as alleged by Mr. He, that were sufficiently supported through corroborating testimony at trial will be accepted to reduce Mr. He’s unreported income as determined by the net worth assessment. These acceptable loans will be enumerated below. However, the acceptance of these particular loans do not justify the discrepancy between Mr. He’s reported income and his net worth.
(2) Reassessment beyond the normal reassessment period
[60] The relevant portion of subparagraph 152(4)(a)(i) reads as follows:
152(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 . . . , 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 . . . .
[61] As indicated above, the Minister has the onus to establish, on a balance of probabilities, the facts required to justify reassessing after the expiration of the normal reassessment period. The Minister must show to the Court, on a balance of probabilities, that Mr. He made a misrepresentation in filing his returns and that this misrepresentation was attributable to neglect, carelessness or wilful default. The Respondent did not raise fraud in this appeal.
[62] In order to make a determination under subparagraph 152(4)(a)(i), the Court must assess all of the evidence admitted during the hearing (see Vine Estate v. Canada, 2015 FCA 125, at paras. 24–25).
[63] The Appellant argues that if the Court is satisfied that Mr. He earned unreported income and did not give a credible explanation for the discrepancy between his reported income and his net worth, then the Minister has met his burden under subparagraph 152(4)(a)(i) (see Lacroix, at para. 32).
[64] For the following reasons, I find that the Minister has discharged his burden to reassess Mr. He beyond the normal reassessment period for the 2009 to 2012 taxation years (see Lacroix, at para. 32). I find that all requirements in subparagraph 152(4)(a)(i) are met in the case at bar.
[65] Firstly, Mr. He made a misrepresentation in filing his returns for 2009 to 2012. The case law holds that an incorrect statement in an income tax return amounts to a misrepresentation (Nesbitt v. The Queen, 96 D.T.C. 6045, [1996] F.C.J. No. 19 (F.C.T.D.) (QL); D’Andrea v. The Queen, 2011 TCC 298, at para. 35).
[66] Because I do not accept Mr. He’s testimony on the alleged large gifts received from his father-in-law and on various alleged funds received as loans from friends and family (other than some loans as will be discussed below), and as I am drawing an adverse inference from the failure to call Mr. He’s spouse to testify, I conclude that, on a balance of probabilities, Mr. He must have earned income he had not reported in filing his returns and hence made a misrepresentation in filing his returns.
[67] I also conclude, on a balance of probabilities, that Mr. He would not have had sufficient revenue to support a family of four living in Toronto during the 2009 to 2012 taxation years. This conclusion reinforces my finding that Mr. He must have earned income he had not reported, which would explain the discrepancy between his reported income and his net worth.
[68] At first, in making his arguments, the Respondent referred only to Mr. He’s reported net income for income tax purposes. However, at trial, I asked the Respondent to redo his calculations, as Mr. He would have had funds available to him from the sale of properties and from the renting of properties. Furthermore, I asked the Respondent to consider in his calculations other amounts received by Mr. He and his spouse during that time (for example, the amount received under the Canada Child Benefit). On that revised basis, considering capital contributions made to Seasons during those years, as well as expenses incurred on mortgages (capital and interests), tuition fees and rental expenses, Mr. He would have had very little to nominal revenue to sustain his family needs during the 2009 to 2012 taxation years.
[69] Secondly, I have to determine whether that misrepresentation was attributable to neglect, carelessness or wilful default. For the following reasons, I find that the misrepresentation was attributable to wilful default.
[70] According to the Appellant, when Mr. He reviewed his tax returns, he made sure to report all taxable income earned. Discrepancies in his net worth came from the borrowing of funds, gifts he received and proceeds from the sale of properties. The Appellant also took the position that Mr. He could not have wilfully made a misrepresentation when filing his returns, as he was a new immigrant to Canada at the time, having been in Canada for only five years in 2009. Furthermore, Mr. He did not speak the language and still needed interpretation at the hearing of this appeal. In addition, as Mr. He had carefully reviewed his tax returns, he could not be found to have been careless or neglectful.
[71] According to the Respondent, the evidence showed that Mr. He had made a misrepresentation attributable to wilful default, or at the very least, he had made misrepresentation attributable to neglect or carelessness. Mr. He testified that he was aware of his obligations to accurately report his income under the Act. When asked the