Date: 20010822
Docket: 2001-411-IT-I, 2001-412-GST-I
BETWEEN:
SUBODH MATHUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal under the Income Tax Act for the 1997 taxation year.
[2] By Notice of Assessment dated November 26, 1999 the Minister of National Revenue (the "Minister") initially assessed the Appellant's income tax return for the 1997 taxation year and in doing so included unreported income of $17,268.
[3] The Appellant served on the Minister a Notice of Objection dated December 6, 1999 with respect to the 1997 taxation year.
[4] By Notices of Reassessment dated December 19, 2000, the Minister reassessed the Appellant's 1997 income tax return and decreased the Appellant's total income by $4,430.
[5] This is also an appeal under the Excise Tax Act for the period July 1, 1994 to June 30, 1997.
[6] By Notice of (Re)Assessment numbered 00000002061 and dated September 22, 1999, the Minister assessed the Appellant for under reported GST payable for the quarterly reporting periods from July 1, 1994 to June 30, 1997 as follows:
|
Adjustments to GST |
$7,408.52 |
|
|
Adjustments to ITC |
6,779.93 |
|
|
Total adjustments |
$14,188.45 |
|
|
Penalty |
3,704.17 |
|
|
Other Penalty |
3,318.81 |
|
|
Interest |
2,787.39 |
|
|
Amount owing |
$23,998.82 |
[7] The Appellant served on the Minister a Notice of Objection dated December 6, 1999 with respect to the quarterly reporting periods from July 1, 1994 to June 30, 1997.
[8] By Notice of (Re)Assessment numbered 04BP-116795725 and dated October 31, 2000 the Minister reassessed the Appellant to recalculate his under reported GST payable for the quarterly reporting periods from July 1, 1994 to June 30, 1997 as follows:
|
Adjustments to GST |
$4,954.99 |
|
|
Adjustments to ITC |
3,732.49 |
|
|
Total adjustments |
$8,687.48 |
|
|
Penalty |
1,805.17 |
|
|
Other Penalty |
0 |
|
|
Interest |
1,277.80 |
|
|
Amount owing |
$11,770.45 |
[9] With respect to both appeals, the following pleaded assumptions of fact were admitted by the Appellant (paragraph 6 of the Reply to the Notice of Appeal):
6. (b) the Appellant was the owner of Roses Cafe Restaurant (the "Business");
(c) the Business operated as a restaurant business;
[10] With respect to the Income Tax Act appeal the following assumptions were admitted:
7. (e) during the period under appeal, the Appellant and Mrs. Jayne Mathur were married and had two young children;
(f) the Appellant and Mrs. Jayne Mathur reported $18,777 and $14,454, respectively, as net income in 1997 taxation year;
(i) the understated amounts were determined by the net worth method [attached as Schedule A to the Reply];
(j) the Respondent computed the Appellant's unreported income on the basis of a net worth analysis whereby the Respondent calculated the increase in the assets of the Appellant and Mrs. Jayne Mathur, during the fiscal periods ended December 31, 1996 and December 31, 1997, and assumed that any increase in the assets of the Appellant and Mrs. Jayne Mathur not attributable to some source represented unreported income of the Business that was appropriated by the Appellant (a copy of the Statement of Personal Net Worth is attached as Schedule "A");
[11] With respect to the Excise Tax Act appeal the following assumptions were admitted:
6. (e) at all relevant times, the Appellant was a registrant under Part IX of the Excise Tax Act (the "Act");
(f) at all relevant times, the Business had a December 31 business year-end for GST purposes;
(g) at all relevant times, the Appellant made taxable supplies in the course of his commercial activities;
(h) at all relevant times, the Appellant was required to collect and remit the GST on his taxable supplies on a quarterly basis;
[12] With respect to the Income Tax Act and the Excise Tax Act appeals the following assumption was not accepted:
7. (d) the Appellant's Business was predominantly a cash business;
[13] With respect to the Income Tax Act appeal the following assumptions were not accepted:
7. (g) in reporting income for the 1997 taxation year, the Appellant did not include all of the income received in those years;
(h) the income of the Appellant during the 1997 taxation year was understated by the amount of $12,838;
(k) the Appellant and Mrs. Jayne Mathur's personal expenditures in 1997 were not less than $33,762 (a copy of the Statement of Personal Expenditures (was) attached as Schedule "B").
[14] With respect to the Excise Tax Act appeal the following assumptions were not accepted:
6. (i) the Appellant did not keep adequate books and records regarding his Business;
(j) the Minister established that during the relevant periods, the Appellant did not report all his taxable supplies in his GST returns, and calculated a total discrepancy as follows:
Period Increase/ Increase/ Net
ending (Decrease) (Decrease) Increase/
to GST to ITC's (Decrease)
95/09/30 $312.10 $668.69 $980.79
95/12/31 (32.91) 668.69 635.78
96/03/31 10.69 668.69 679.38
96/06/30 1,070.93 668.70 1,739.63
96/09/30 966.91 264.43 1,231.34
96/12/31 710.41 264.43 974.84
97/03/31 1,311.74 264.43 1,576.17
97/06/30 605.12 264.43 869.55
Total $4,954.99 $3,732.49 $8,687.48
(The Appellant agreed with the calculation but did not accept that there was a discrepancy).
THE APPELLANT'S POSITION
[15] For the Income Tax Act appeal the Appellant in his Notice of Appeal stated the following:
REASONS FOR INCOME TAX APPEAL FOR 1997
The appellant submits that the "net worth" method used by the Minister is incorrect and unwarranted. The net worth method is generally applied when the books and records are inadequate or non-existent. The appellant maintained a reasonably good set of books and records for 1997 and filed the tax returns from these records. The Minister made the decision to proceed with a "net worth" assessment on the basis of two major erroneous observations made by the auditor:
- An alleged discrepancy between recorded sales and reported sales for the year 1996.
- A series of "NS" entries on the cash register tapes. "NS" stands for "Non Sale". The auditor failed to appreciate the reasons for frequent "NS" entries, suspected sales being diverted and not reported and proceeded with a net worth approach.
The auditor failed to substantiate the reason for employing the net worth when the books and records were adequate.
The initial proposal showed the following discrepancy:
1995 1996 1997 Total
$13,092 $17,577 $29,895 $60,564
However, after further discussions and representations, the discrepancy was revised and reassessed as follows:
1995 1996 1997 Total
$0 $0 $17,268 $17,268
Upon objection, the 1997 discrepancy was revised further to $12,838.
It is submitted that the net worth method, based on estimates and assumptions, is inappropriate and incorrect when the actual information is readily available. The appellant has reported all sales and maintains that there is no unreported income whatsoever. It is the appellant's view that an alleged discrepancy of $60,564, revised to $17,268, and then changed to $12,838, all based on "net worth method", has no ultimate validity. These are simply conjectures.
While maintaining the above position, the appellant provides the following supporting facts which, among other reasons, may have caused the discrepancy:
- Excludes calculations of GST liability cumulatively from July 1, 1995 to June 30, 1997, including interest.
- Loans from sister and sister-in-law - see submission dated July 19, 1999.
- Overstatement of food and transportation $1,300 and $2,000 respectively.
- Income of the Child - Diya and the amount owing to the child not allowed - $2,400.
- Overstatement of personal auto and disallowance of 50% use and capital allowance on 50%.
- Disallowed 1997 trade accounts payable which was reflected in the profit and loss statement as expenses - $2,081. This is incorrect treatment.
- General overstatement of other personal expenditures.
[16] For the Excise Tax Act appeal the Appellant in his Notice of Appeal stated the following:
REASONS FOR OBJECTION - GST
1. The GST payable for 1996 and 1997 was calculated by the appellant from the sales journals and cash register tapes (2 tapes). These amounts reflect the actual amounts collected by the appellant.
2. Similarly, the appellant prepared a working paper showing the input tax credits claimable in 1996 and 1997.
3. Based on the working papers referred to in (1) and (2) above, the taxpayer arrived at the GST liability for 1996 and 1997.
4. CCRA accepted these figures as calculated by the appellant and adjusted them for:
(a) a reasonableness test and
(b) GST related to an automobile "disposed of" in 1996 for $14,029.
5. There should be no further adjustment of GST under 4(a) above as the calculations referred to in (1) and (2) above are based on actual records maintained by the appellant. The adjustment for a "reasonableness test" is unwarranted in light of (1) and (2) above.
6. The taxpayer received approximately $6,000 each in "tips" during 1996 and 1997. These amounts are not subject to GST.
7. The inclusion of GST for the automobile as per 4(b) above should be reduced by 50% as the automobile continued to be in "mixed use", personal and business, and the business portion is estimated to be 50%.
Based on the facts and reasons above, the GST liability is as follows:
1996 1997 Total
GST balance unpaid $ 379 $2,695 $3,074
ITC adjustment for over claim 2,675 1,057 3,732
Automobile - deemed change
of use - 50% 491 n/a 491
$3,545 $3,752 $7,297
In conclusion, it is submitted that CCRA adjustment for GST and ITC above is without justification and therefore, incorrect.
JURISPRUDENCE AND LEGISLATION
[17] In Ramey v. The Queen, 93 DTC 791 (T.C.C.) at page 793 Judge Bowman (as he then was) described the net worth method as follows:
A net worth assessment involves a comparison of a taxpayer's net worth, i.e., the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary.
[18] According to subsection 152(4) of the Income Tax Act, the Minister may reassess a taxpayer at any time within the normal reassessment period, which is extended if some conditions occur. This provision must be read with subsections 152(7) and (8). The former provides that the Minister is not bound by the information supplied by the taxpayer; the latter purports a presumption of validity of the assessment or reassessment. Thus, the burden is on the Appellant to prove that the reassessment is incorrect. Judge Lamarre stated this rule as follows in Dowling v. The Queen, 96 DTC 1250 (T.C.C.) at p. 1251:
The Appellant has the burden of showing that the basis of the Minister's assessment is wrong or that there are errors in certain items of the assessments [...] Therefore, when a taxpayer is faced with a reassessment based on a net worth calculation, he can either try to present evidence enabling the Court to determine his real net income or he can seek to prove that the net worth assessment is wrong.
[19] A net worth assessment for GST purposes is authorized by subsection 299(1) of the Excise Tax Act and reads:
299. (1) The Minister is not bound by any return, application or information provided by or on behalf of any person any may make an assessment, notwithstanding any return, application of information so provided or that no return, application or information has been provided.
[20] The net worth assessment under subsection 299(1) of the Excise Tax Act is almost identical to the powers of the Minister to issue a net worth assessment under subsection 152(7) of the Income Tax Act. With respect to GST cases, it has been established that the onus is on the Appellant to show that on the balance of probabilities the assessment that imposes the liability of tax is in error. With respect to the Appellant's onus, Christie A.C.J.T.C.C. (as he then was) stated in SDC Sterling Development Corp. v. Canada, [1997] G.S.T.C. 103 (T.C.C.) at page 103-5:
The onus is on the Appellant to show that the reassessment is in error. This can be established on a balance of probabilities. Where the onus lies has been settled by numerous authorities binding on this Court. It is sufficient to refer to two judgments of the Supreme Court of Canada in this regard: Anderson Logging Co. v. The King, [1925] S.C.R. 45 and Johnston v. M.N.R., [1948] S.C.R. 486.
[21] However, in auditing an appellant, the auditors of the CCRA have "a duty to perform audits which meet a minimum standard of reliability".[1] If the audit meets a minimum standard of reliability, the onus is on the Appellant to show that the assessment is in error.
THE BURDEN OF PROOF ANALYSIS
[22] The Appellant in order to be successful must refute the net worth/reasonableness test calculations and conclusions of the Respondent's audit. This means the Appellant must address on a line-by-line, conclusion-by-conclusion basis with precise evidence, not broad based global or vague assertions without specifics.
THE APPELLANT'S EVIDENCE
[23] The Appellant called three witnesses: The primary witness was the Appellant himself, followed by a waitress who worked in the Appellant's restaurant and the CCRA auditor.
[24] The Appellant's evidence on his own behalf was not specific but generalized in the sense of what his practice and procedure was in the operation of his restaurant. His evidence did refer to his simplified recording practices (Exhibit A-1). The Appellant, when cross-examined on the exhibits filed that were prepared by the Appellant's wife, the Appellant was not overly specific.
[25] At the commencement of the audit, the Appellant admitted to the auditor his returns for GST and ITCs were estimates only and that only after contact with the CCRA auditor did the method change.
[26] With respect to the net worth income tax assessment the Appellant's evidence responses to personal expenses such as food consumption was suspect. In direct examination he said he never ate in the restaurant. On cross-examination it became apparent he ate in the restaurant on a regular basis. Further, with respect to the family food consumption, the Appellant's estimate of food costs for a family of four ($40.00/week) was questionable in view of the Statistics Canada statistics cited by the auditor that food for a family of four for one year was averaged at $7,000.
[27] The Appellant during the audit changed his position in relation to personal loans. Originally his position was that he did not have personal loans. Later he took the position there were personal loans from his sister, sister-in-law and daughter. The Appellant's evidence at trial in relation to these purported loans was not supported by documentary evidence or evidence from other witnesses.
[28] In particular the Appellant asserted that his wife borrowed money from his sister-in-law to buy food for his family. This evidence is difficult to accept in the absence of other supporting evidence given the Appellant's business and family assets.
[29] The Appellant's statements about the number of no sale "NS" entries on the restaurant cash register tape for each day is suspect when this evidence is compared with the evidence of the waitress witness about limited NS entries per patron billing. The Appellant's agent's submission that the NS entries were a non-issue in this litigation is not sustainable - there was a continuous NS access to the cash register that leaves the Court in doubt as to the veracity of the tape. Further, the Appellant's response about cash receipts from restaurant services provided to external festivals and events leaves a doubt whether most or all monies were deposited in bank accounts.
[30] The one potential witness who was not called although present for part of the hearing was the Appellant's wife. She looked after the Appellant's restaurant books and records. She also structured the Appellant's responses to the auditor's inquiries. The Appellant's wife was a party with respect to a purported undocumented personal loan that formed a significant part of the audit. Another potential significant witness not called was the Appellant's daughter who could have clarified what actually happened to her wages - did she receive them, did she not receive them, if she was paid in clothing or in money?
THE WAITRESS' EVIDENCE
[31] The waitress' evidence was brief and directed to how patron's billings took place and what happened in terms of access to the restaurant's cash register.
THE AUDITOR'S EVIDENCE
[32] The CCRA auditor was questioned in terms of why and how the audit took place and what was the result of the audit. The auditor conducted a net worth audit because his initial inquiries showed:
(i) the cash register tapes for the restaurant had a high number of no sale (NS) entries. This lead the auditor to a conclusion the restaurant tapes were unreliable;
(ii) the Appellant's restaurant sales report for GST returns did not correlate with the Appellant's income tax returns;
(iii) the payroll journal and other documents took several months to produce and the payroll and salary numbers were irreconcilable; and
(iv) the 1997 income tax return was not provided in a timely manner.
[33] In the CCRA net worth assessment several items were estimated including personal expenditures for food. The auditor indicated a family of four from Statistics Canada figures required more than $40/week for food.
[34] The auditor also considered the question of wages paid to a daughter of the Appellant for services rendered in the restaurant and whether the daughter actually received the wages or whether such wages were outstanding as a loan. He concluded the transaction was not outstanding in an accounting sense.
[35] In relation to transportation expenses the Appellant was allowed vehicle expenses for one vehicle. However, during the course of the audit, the Appellant asked that 50% of the vehicle expenses be allowed for a second vehicle. No transportation logs were presented to the Court nor evidence presented to support the assertion. The auditor in the net worth assessment adopted the original approach used by the Appellant in his income tax return and allowed the expenses only for the first vehicle.
[36] The Appellant's agent directed questions to the auditor about the auditor's view of the Appellant's trustworthiness. In the view of the auditor, the Appellant was seen as an honourable individual, not deceitful or dishonest. These attributes do not, however, confer credibility or affirm reliability of the Appellant's position. What is needed is clear uncontroverted specific evidence to rebut the net worth findings and conclusions. The many enumerated deficiencies left the auditor in doubt and indeed at the conclusion of this case the deficiencies left the Court in doubt as to the strength and reliability of the evidence.
CONCLUSION
[37] There is a distinction between negotiation practices and procedures between the taxpayer and the taxing authority officials during the audit, proposal, reassessment and objection stages and the practices and procedures with the onus and evidentiary burden in an appeal under the Income Tax Act and the Excise Tax Act in the Tax Court of Canada.
[38] The global overview questioning and the generalized answers of the Appellant's evidence and the questions directed by the Appellant's agent to the CCRA auditor were more reflective of an audit negotiation than the giving of precise direct evidence to rebut the CCRA net worth assessment.
[39] The extensive questioning by the Appellant's agent of the auditor as to why and how the audit was completed as well as the inquiry into the net worth conclusion was extensive. I conclude the auditor's net worth assessment was unambiguous, straightforward and credible.
[40] I conclude the Appellant's records produced by the Appellant's wife were somewhat suspect to the point they were not reliable. The strength of the exhibits could not be tested as the Appellant's wife was not tendered as a witness. The Appellant has not met the onus incumbent upon him to show the net worth assessment was wrong.
[41] Throughout the trial the Appellant's agent said every penny of the Appellant's income had been accounted for. This conclusion on the evidence, however, does not necessarily follow. The frailties of the evidence overwhelm the Appellant's assertion. I conclude the assessments under the Income Tax Act and the Excise Tax Act are unassailed.
DECISION
[42] Both appeals are dismissed.
Signed at Ottawa, Canada, this 22nd day of August 2001.
"D. Hamlyn"
J.T.C.C.
COURT FILE NO.: 2001-411(IT)I
STYLE OF CAUSE: Subodh Mathur and
Her Majesty the Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: August 7, 8 and 9, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge D. Hamlyn
DATE OF JUDGMENT: August 22, 2001
APPEARANCES:
Agent for the Appellant: K. E. Koshy
Counsel for the Respondent: Yves Parent
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, CanadaCOURT FILE NO.: 2001-412(GST)I
STYLE OF CAUSE: Subodh Mathur and
Her Majesty the Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: August 7, 8 and 9, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge D. Hamlyn
DATE OF JUDGMENT: August 22, 2001
APPEARANCES:
Agent for the Appellant: K. E. Koshy
Counsel for the Respondent: Yves Parent
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
2001-411(IT)I
BETWEEN:
SUBODH MATHUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Subodh Mathur (2001-412(GST)I) on August 7, 8 and 9, 2001 at Ottawa, Ontario, by
the Honourable Judge D. Hamlyn
Appearances
Agent for the Appellant: K.E. Koshy
Counsel for the Respondent: Yves Parent
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 22nd day of August 2001.
|
"D. Hamlyn" |
J.T.C.C.
2001-412(GST)I
BETWEEN:
SUBODH MATHUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Subodh Mathur (2001-411(IT)I) on August 7, 8 and 9, 2001 at Ottawa, Ontario, by
the Honourable Judge D. Hamlyn
Appearances
Agent for the Appellant: K.E. Koshy
Counsel for the Respondent: Yves Parent
JUDGMENT
The appeal from the assessment made under the Excise Tax Act notice of which is dated September 22, 1999 and bears number 00000002061 for the period from July 1, 1994 to June 30, 1997 is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 22nd day of August 2001.
|
"D. Hamlyn" |
J.T.C.C.
Ottawa, Canada