Tax Court of Canada Judgments

Citation: 2003TCC468

Date: 20030825

Dockets: 2000-3475(GST)I 2001-2901(IT)G

BETWEEN:

JOHN MOLENAAR,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

[OFFICIAL ENGLISH TRANSLATION]

REASONS FOR JUDGMENT

(Delivered orally from the Bench on June 6, 2003 at Sherbrooke, Quebec

and amended for greater clarity)

Archambault, J.

[1]      These are appeals by Mr. John Molenaar from assessments made under two acts, the Income Tax Act (the "Act") and the Excise Tax Act ("ETA"). Those made under the Act are for the 1993 to 1997 taxation years (relevant period). For the 1993 to 1996 taxation years, the Minister of National Revenue ("Minister") made assessments outside the normal assessment period and, pursuant to subsection 163(2) of the Act, assessed penalties for failure to report income. With the exception of the 1993 taxation year, penalties were also assessed for not having filed income tax returns within the prescribed period. The 1997 taxation year is not prescribed, as no income tax return was filed for that year. A penalty was assessed for failure to file within the prescribed period.

[2]      The assessment made under the ETA is for the period from January 1, 1994 to December 31, 1997. The 1993 calendar year is not involved because gross income earned during that period was less than $30,000. As a result, Mr. Molenaar was considered a small supplier. Prescription does not apply to this assessment, as Mr. Molenaar did not file a GST return. The only penalty imposed by the Minister was pursuant to section 280 of the ETA.

[3]      The amounts of the assessments made under the ETA (i.e., the amounts of unreported business income and unreported taxable supplies) were determined by the net worth method. According to the Minister, these amounts represent income from growing and selling marijuana and breeding and selling dogs.

[4]      It was agreed at the start of the hearing that there would be no challenge of the penalties for failing to file returns within the prescribed time or the penalty imposed under section 280 of the ETA.

Background Facts

[5]      Mr. Molenaar was born in 1953. In the mid 1970s, he worked for five years as a machinist on oil wells in northern Alberta for about six months each year. For the other six months of the year, he received unemployment insurance benefits. He reported net weekly earnings of approximately $2,000, for an annual net income of $52,000. He also reported being housed and fed by his Alberta employer.

[6]      In April 1981, at the age of 27, Mr. Molenaar received a serious back injury in a car accident in Vermont. His permanent disability was deemed to be 18 per cent by the Société de l'assurance automobile du Québec (SAAQ). He reported that he was never able to work again, except a few weeks with his Alberta employer. In light of the employer's dissatisfaction, Mr. Molenaar quit work. He claimed that, at the time of the accident, he had savings of more than $100,000. That amount was never deposited in a bank account, as Mr. Molenaar allegedly did not trust the banking system. According to Mr. Molenaar, his only source of income from 1981 to 1997 was his disability pension from the SAAQ, obviously except his employment income in 1981 (maybe) prior to the accident in April and during the few weeks following the accident.

[7]      After quitting work, Mr. Molenaar first went to live with his father and states that he received social assistance in the form of a loan while awaiting a settlement from his damage claim with the SAAQ. That settlement allegedly took place in late 1985 or 1986 and he claims that he then received $120,000 or $130,000. Starting in 1987, Mr. Molenaar received an annual disability pension of $9,900 and that amount was increased yearly - probably indexed - to attain $13,468 in 1997, for a total of $233,504 for the period from 1981 to 1997. This total includes a one-time payment of $3,082 by the SAAQ in 1981 for the effects of the accident.

[8]      Mr. Molenaar states that, in 1984 or 1985, he lived with a woman in an apartment in the town of Waterloo.

[9]      In 1986, several events occurred in Mr. Molenaar's life. In addition to settling his damage claim with the SAAQ, which I feel occurred at that time, he and his girlfriend had a daughter. Mr. Molenaar purchased a bungalow for $28,000, to which is added $40,000 for renovations over a period of three years. Those renovations included a major addition to the house: he put in new foundations for the addition of a living room and bedroom. To finance the purchase of the house and likely the expansion work, Mr. Molenaar borrowed $50,000. Although he claims to have had, at that time, $230,000 tucked away in a sock (allegedly the $100,000 that he had in April 1981 and the $130,000 received from the SAAQ), Mr. Molenaar preferred to borrow the $50,000 in order, in his words, to establish credit with the Caisse populaire in view of future financial needs. Still in 1986, Mr. Molenaar underwent heart surgery to replace a valve, which, in his opinion, increased his disability to 50 per cent. Finally, his father passed away and he inherited $8,000.

[10]     On September 11, 1997, Mr. Molenaar was arrested by the Sûreté du Québec for growing marijuana. The marijuana plants were grown on a lot next to his home. Plants were also found hanging to dry on the second floor of his shed next to his house. According to the Sûreté du Québec investigator, Mr. Molenaar's marijuana growing facilities were excellent. They included a dehumidifier, a fan and a partly underground irrigation system connected to his house or shed used to irrigate the plants growing on the lot next to his house. Again according to the Sûreté investigator the marijuana produced was well irrigated and excellent fertilizer was used. He described the facilities as being a [translation]"gem of a pot grow".

[11]     When Mr. Molenaar was arrested, the Sûreté du Québec seized 78 marijuana plants, including three young plants in the basement of his residence. There was a total of 105 kg of marijuana, estimated by the Sûreté du Québec to be worth $1,586,000. Four firearms were also seized, including a 12-guage shotgun near the back door of Mr. Molenaar's residence.

[12]     A few minutes prior to his arrest, Mr. Molenaar stated that he was unaware of the existence of marijuana plants on his land. When confronted with the presence of marijuana drying on the second floor of his shed, he admitted to being caught and that it was all his and attempted to negotiate an agreement with the Sûreté du Québec investigator to destroy the marijuana and [translation] "forget the whole thing", in Mr. Molenaar's words as reported by the Sûreté du Québec investigator.

[13]     At the Sûreté du Québec station, Mr. Molenaar denied knowing a certain Sylvain Choinière. He refused to answer questions regarding his marijuana activities without his lawyer being present. Criminal proceedings against him led to an acquittal because the Crown had no evidence to present.

[14]     In his testimony at the hearing at this Court, the Sûreté du Québec investigator indicated that Mr. Molenaar had a reputation in the area as a marijuana grower.

[15]     At the hearing, Counsel for Mr. Molenaar produced a Le Soleil newspaper article from August 13, 2002, reporting a serious "pot" growing problem in Quebec. The article states that the number of files related to cannabis growing "literally exploded" between 1993 and 2001, from 373 to 1,837.

[16]     In October 1998, the ministère du Revenu du Québec ("Revenu Québec") began an audit of Mr. Molenaar based on information received regarding his growing of marijuana. As the Revenu Québec auditor noted the absence of accounting books and a lifestyle beyond what was possible with the income reported by Mr. Molenaar, he determined income by the net worth method. The auditor noted that Mr. Molenaar had not reported any income on his income tax returns from 1993 to 1996, although slips from the SAAQ were included. According to the appeals officer who testified at the hearing, those amounts were not subject to federal tax.

[17]     The Revenu Québec auditor indicated that Mr. Molenaar was very co-operative in calculating differences in net worth. During his first interview with the auditor, Mr. Molenaar stated that he had no money other than that in the bank or in his pocket, which he estimated at $100 to $200. At that time, the Auditor asked him "Do you keep money anywhere?" He answered "No." He also signed a statement filed as Exhibit I-2, in which he stated:

[translation]

That the pocket money I kept during the audit period was approximately $200 and remained constant. That I did not receive gifts of money during the audit period. That I never kept money in my safe during the audit period. That I did not receive the following taxable incomes: CSST, inheritance, life insurance and lottery winnings during the audit period. That my only source of non-taxable income was the amount from the SAAQ during the audit period. That I did not borrow or lend money to people during the audit period.

[18]     Mr. Molenaar also signed a proxy to allow the Revenu Québec auditor to obtain information from third parties, particularly the bank, Caisse populaire, city, school board, chiropractor, dentist and boarding school attended by his daughter. In calculating expenses constituting Mr. Molenaar's cost of living, the auditor used the figures provided him by third parties, those provided by Mr. Molenaar and those from Statistics Canada, adjusted to reflect the information provided by Mr. Molenaar. For instance, instead of retaining an amount of $793 per year for restaurant expenses, the auditor accepted the figure of $350 per year as put forward by Mr. Molenaar. The same holds true for clothing for his daughter, the cost of which was deemed to be $150 per year. Mr. Molenaar signed the auditor's work sheet to indicate that he agreed with the figures established based on adjusted Statistics Canada data.

[19]     The Revenu Québec auditor also indicated that his department had obtained information regarding the existence of a kennel permit issued by the city where Mr. Molenaar lived. At the time of his visit to Mr. Molenaar's home (limited to outside), the auditor noted the presence of three or four dog cages.

[20]     I have prepared a table that briefly summarizes the net worth calculations by the Revenu Québec auditor (and that include additional adjustments that he recognized as valid in his testimony):

	1993	1994	1995	1996	1997	TOTAL
Personal expenses	10,487	15,263	19,008	15,919	9,746
Signed personal expenses	15,952	19,546	18,552	22,913	29,520
Subtotal	26,439	34,809	37,560	38,832	39,266
Adjustments	(82)	(63)		(70)	(524)
		(1,462)
Personal expenses	26,357	33,284	37,560	38,762	38,742	174,705
Difference in net worth	(2,300)	32,973	(16,861)	29,762	(5,347)
Adjustment	(12,636)	(2,532)	43,075	(13,822)	(1,993)
		(5,000)
Unexplained difference	11,421	58,725	63,774	54,702	31,402	220,024

[21]     I note that the Revenu Québec auditor erred regarding rolling stock and that adjustments have been made to the calculations to reflect this. The auditor indicated that Mr. Molenaar and his Counsel had been given the opportunity to present new evidence, but had not taken that opportunity.

[22]     At the hearing, Mr. Molenaar did not present evidence revealing any errors in the calculation of the differences in net worth, particularly regarding personal expenses and the figures indicated in the statements. He simply stated that he had signed the work sheet regarding personal expenses without knowing the exact consequences. According to him, it was a rough estimate, but he also stated that he had tried to be honest and polite in his meeting with the auditor.

[23]     Cross-examined by Counsel for Mr. Molenaar regarding the personal expenses, the auditor admitted that he had no evidence of the date of payment of the $4,000 bail ordered by the Court of Quebec in late 1997. In his testimony, Mr. Molenaar did not deny the existence of that bail and did not indicate that it had only been paid in 1998, which would have been outside the audit period. However, Exhibit A-1, at Tab 8, indicates the following for September 12, 1997: "Bail: granted, undertaking (conditional)". Below this is the indication: "$4,000 pers. Order: Release". Further, on October 31, 1997, we see an indication that the accused was present and at liberty during a preliminary hearing.

[24]     In his testimony, Mr. Molenaar stated that he had used the savings tucked away in a sock to pay the following expenses:

-       $159,000 in cars, snowmobiles, motorcycles and boats in the period from 1992 to 1997;

-       $18,000 for the house and renovation;

-       $24,000[1] to repay loans and interest on loans of $50,000 (house) and $10,000 (rolling stock).

[25]     Mr. Molenaar also indicated that he had used the savings tucked away in a sock for the purchase of two surveillance cameras and a video acquired in 1986, at a total cost of approximately $1,800 or $1,900, for the purchase of firearms in 1988 and 1999 at a cost of $3,500, for the purchase in 1986 of a parabolic antenna at a cost of $1,500 to $2,000 and for the purchase of a fence in 1986.

[26]     Mr. Molenaar stated that breeding dogs was only a pastime for him (although he is described as a dog breeder in a credit report) and that his expenses related to breeding dogs exceeded his proceeds from sales (although he was unable to indicate the amount of his losses). He informed the Court that the kennel permit that he had obtained from the city was necessary for anyone with more than two dogs.

[27]     Mr. Molenaar also admitted that he had accepted an offer by Mr. Sylvain Choinière to grow marijuana on his land in exchange for a one third / two thirds split,[2] but that he received nothing in 1997 because of the seizure by the Sûreté du Québec. His motives for accepting the offer were that his stash of money was shrinking, being almost gone, and he had major expenses to pay, particularly sending his daughter to the boarding school: "it cost a lot" he stated. Again according to Mr. Molenaar, it was Mr. Choinière who did all the work, as he was unable because of his disability. He was unable to cut the plants, transport the fertilizer, dry the plants or bury the irrigation system. It was also Mr. Choinière who provided all the equipment needed to grow the marijuana. At the end of his testimony, Mr. Molenaar stated that he had not received any income from growing marijuana from 1993 to 1996 and that he had no other sources of income during the relevant period.

[28]     However, Mr. Molenaar did not contradict the testimony by the Sûreté du Québec investigator regarding his admission to growing marijuana and the attempted negotiation prior to his arrest.

Analysis

[29]     First, the burden of proof is on the Respondent for the prescribed years, those from 1992 to 1996. The Minister must, on the balance of probabilities, demonstrate that there was misrepresentation of facts attributable to neglect, carelessness or wilful default. The burden of proof is also on the respondent as regards the penalty assessed under subsection 163(2) of the Act, that is to say the Respondent must demonstrate that Mr. Molenaar knowingly, or in circumstances equivalent to gross negligence, made a false statement on his income tax returns. As regards the rest, Mr. Molenaar bears the burden of proving that the assessments were incorrect for all the years in question (assuming, of course, that the Minister establishes his right to make an assessment outside the normal assessment period). This burden applies both to the assessments made under the Act and those made under the ETA.

[30]     The net worth method has always been recognized as regards income tax assessments under the Act. As regards the ETA (more recent act), several decisions by this Court have recognized that the Minister may use this same method to establish the amount of GST due by a taxpayer or registrant. This was also recognized in a decision rendered by General Procedure in Luso Construction Ltd. v. Canada, [1999] T.C.J. No 323 (QL) 99 GTC 3170 and in decisions under Informal Procedure, particularly Mathur v. The Queen, 2001 GTC 563, Siddiqi v. Canada, [2001] T.C.J. No 284 (QL) 2001 GTC 426, Aubé v. Canada, [2002] T.C.J. No 279 (Q.L.), 2002 GTC 330 and Pal v. The Queen, 2002 GTC 257.

[31]     In Mathur, my colleague Hamlyn, J. analyzes very well the jurisprudence and legislation as follows:

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 [sic] may make an assessment, notwithstanding any return, application of [sic] 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 Johnstonv. 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". 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.

                                                                                      [Emphasis added.]

[32]     The end result of the appeals depends here, in large part, on the credibility of the testimony by Mr. Molenaar in contradicting the evidence presented by the Respondent regarding the key elements in this case, those of Mr. Molenaar's involvement in growing marijuana, the existence of a dog breeding business and the unexplained differences revealed by the net worth method. It also depends on the credibility of Mr. Molenaar's testimony to the effect that the differences were financed by savings accumulated prior to 1993 and tucked away in a sock.

[33]     At face value, Mr. Molenaar's credibility is undermined because, on two occasions, he lied to the Sûreté du Québec investigator. He did so when he denied knowing of the existence of marijuana plants in his field and when he denied knowing Mr. Choinière. As revealed by the evidence, Mr. Molenaar later admitted to the Sûreté du Québec investigator that he was aware of the marijuana plants. Obviously, the presence of plants hanging in his shed and the plants found in his basement is significant. In his testimony before this Court, he also admitted that had accepted an offer from Mr. Choinière to grow marijuana on his land.

[34]     There are also several contradictions, not only between the statements by Mr. Molenaar to the Revenu Québec auditor and those made to this Court, but also between the various statements made at the hearing. For instance, he told the auditor that he did not keep money anywhere but in financial institutions, except for some pocket money (between $100 and $200), but at the hearing, Mr. Molenaar stated that he kept a total of $230,000 in savings tucked away in a sock, made up of his $100,000 in savings at the time of his accident in April 1981 and from his work for his Alberta employer, and the $130,000 received from the SAAQ in 1986. He stated that this was enough to finance his lifestyle for the relevant period. He also stated that he could not remember whether he had told the auditor of his stash of money. He later changed this version and stated he had mentioned the existence of "old money" to the auditor several times.

[35]     Another contradiction, in my opinion, is his claim that he was unable to bury the drainage lines, transport fertilizer or cut and hang marijuana plants. In response to a question by his Counsel regarding the consequences of his disability, he stated that he could only take care of his dog breeding: [translation] "Because of my shortness of breath and my condition, that was about all I could do, take care of dog breeding." However, later in his testimony, he also stated that he did the major renovation on his house himself and built the two-storey shed, even after having his heart surgery in 1986. He did state that he had received help, that he exchanged his services for those of friends, which he described as "bartering", and that he had subcontracted the laying of the foundations for the extension to his house. However, the work he needed to do his own renovations was demanding. Even if he received help, he must have done a lot of work himself. It is difficult to believe that his friends did all the work for him. I find it highly unlikely that he was unable to bury the drainage lines, transport fertilizer or hang marijuana plants.

[36]     I will now address the Respondent's evidence regarding the unexplained differences in net worth, indicating considerable unreported income. The calculations by the Revenu Québec auditor indicate differences totalling $220,024 during the relevant period, a five-year period. This is an average annual difference of $44,000, while Mr. Molenaar reported no income and had only an average annual pension of $13,101, child tax credits and GST refunds as sources of income. According to my calculations, these sources of income, during the relevant period, gave him $74,160, i.e., $65,507 from the SAAQ, $4,432 from child tax credits and $4,221 in GST refunds. During that same period, he had a cost of living of $174,705. I identified cash payments of $111,017 for the purchase of cars, boats, motorcycles and snowmobiles. These were payments made by Mr. Molenaar from his own funds; I do not include the money borrowed on trade-in value. There was also the purchase of furniture at a cost of $7,022. Considering only these elements, I arrive at a deficit of $218,584 ($74,160 - $174,705 - $111,017 - $7,022), which is approximately the difference identified by the net worth method.

[37]     The Revenu Québec auditor's calculation of the differences is based in part on objective information. There are documents such as credit cards, invoices and confirmation from suppliers, such as the chiropractor and the boarding school. Another part of the information is from Statistics Canada, but this information was adjusted based on observations by Mr. Molenaar. He personally approved these figures by signing the work sheet prepared by the auditor. Even if he did not understand all the consequences of the information that he provided to the auditor, Mr. Molenaar was required to give him honest and accurate answers. Furthermore, he admits to being honest in his discussions with the auditor.

[38]     I find the figures in the auditor's calculations to be reasonable. For instance, the $150-per-year cost for clothing for his daughter and $133 for Mr. Molenaar seem quite low, as do the restaurant costs of $350 per year. The amount of approximately $147 per year for health care seems incredibly low for a person with a physical disability. In addition, some of Mr. Molenaar's expenses were not added to his cost of living, particularly the $1,000 for keeping his dogs. The auditor's calculations also do not include adjustments for large unidentified bank deposits, as is often the case when the Minister uses the net worth method.

[39]     There were certain double-entry errors and adjustments were made to correct them, which, I note, was done at the Respondent's request, either at the beginning of the hearing or during testimony by the auditor, who found them himself. The only weak points that I have found in the auditor's calculations consist, on the one hand, of the addition of an "other visa transactions" column, which could result in double entries, and, on the other hand, the $4,000 bail which could have been paid after the relevant period. These "other visa transactions" total $6,996. If we add to this the $4,000 bail, the amount that could be questionable totals $10,996. Compared to the unexplained differences of $220,024, this is a small amount, representing five per cent. I note that Mr. Molenaar gave no evidence to show that these figures were incorrect. It is also likely that the bail was in fact paid in 1997, as its purpose was to secure Mr. Molenaar's release and he was released in late 1997.

[40]     Let us now look at Mr. Molenaar's explanation regarding the total difference of $220,024, which, according to him, was financed using his alleged savings of $230,000 hidden in a sock. I would first like to deal with the matter of the $130,000 from the SAAQ and, in particular, the nature of that amount. According to Mr. Molenaar, it was back pay because it had taken four or five years to negotiate settlement of the pension. The memo from the SAAQ confirms that the only one-time payment made to Mr. Molenaar was that of $3,082. Thus, the $130,000 cannot be an additional one-time payment as suggested in a question by Counsel for Mr. Molenaar in his cross-examination of the auditor.

[41]     As regards the $130,000, I believe there is oversight on the part of Mr. Molenaar. The most reliable information regarding the disability pension is that provided by the SAAQ. That information indicates the annual amounts to which Mr. Molenaar was entitled. The amounts paid for 1981 to 1986 total $101,343. In his testimony, however, Mr. Molenaar spoke of $130,000. The difference between these two amounts could, at least in part, be explained by interest, but there is not evidence in that regard. In addition, the annual amounts indicated for the period related to the arrears (i.e., 1981 to 1986) are greater than the amounts paid later. Payments began at $9,900 (in 1987) and increased each year to reach $13,468 (1997). It is thus highly likely that the $101,343 paid in 1986 already included the interest on the arrears. In my opinion, the evidence from the SAAQ has much more probative value than Mr. Molenaar's testimony, which is only a very approximate estimate. His testimony is based solely on a recollection of what happened 17 years earlier and is in no way supported by any other evidence.

[42]     I will now comment on Mr. Molenaar's statement that, at the beginning of the relevant period, in early 1993, he still had $100,000 in savings available to finance the unexplained differences determined by the net worth method. First, I note that there is no evidence that this $100,000 existed other than the statement by Mr. Molenaar more than 22 years after the fact. That money, according to Mr. Molenaar's own statement, was never deposited in any bank account. It is quite surprising that such a large amount of money earned as employment income (probably reported to tax authorities) would be kept in a sock. Furthermore, Mr. Molenaar never informed the auditor of the existence of this $100,000 in savings. On the contrary, he denied the existence of any money other than in his bank account, except some pocket money. Under such circumstances, Mr. Molenaar's testimony regarding this matter cannot be relied upon.

[43]     Furthermore, even if I were to accept the fact that Mr. Molenaar had that $100,000 in April 1981 (i.e., at the time of his accident), it is unlikely that he would still have any of those alleged savings or the savings from the SAAQ disability pension paid prior to 1993. In light of Mr. Molenaar's low income, it is more likely that the savings in question would have been used before the beginning of the relevant period, in which case Mr. Molenaar's statement that he had no other money would be the correct one.

[44]     This is the analysis on which I relied in making this conclusion. The following table confirms that the $100,000 would not have been enough to cover the cost of living for the period from 1981 to 1992. It instead shows a deficit of $5,834:

8,000		1986 inheritance
167,997		1981-1992 disability pension from the SAAQ
100,000		Accumulated savings as of 1981
275,997		Total (source of income)
(139,764)		Cost of living
(142,067)		Adjusted 1992 net worth
(5,834)		(Deficit) surplus

[45]     This table reflects three sources of income available to Mr. Molenaar: the $8,000 inheritance received following the death of his father in 1986, the amounts paid by the SAAQ from 1981 to 1992 and the savings accumulated as of 1981. I estimated Mr. Molenaar's cost of living of $139,764 as follows. During the relevant period, the average cost of living was $34,941. Assuming that the average cost of living for the period from 1981 to 1992 was only one third of that amount, we arrive at an average cost of living of $11,647. The total cost of living for that 12-year period is thus $139,764. Mr. Molenaar also acquired assets during the period prior to 1993. I use the net worth amount at the end of December 1992, which reflects only the assets at that time, as identified by the auditor. This figure excludes all other assets that Mr. Molenaar may have acquired prior to 1993, but that he no longer owned as of December 31, 1992. Nor does it include any furniture, as the auditor made no indication in this regard in the financial statement for 1992. Nor does it include the cost of the surveillance cameras and video ($1,800 or $1,900 in 1986), the parabolic antenna (between $1,500 and $2,000 in 1986), the fence (1986) or the firearms ($3,500 in 1988 and 1989).

[46]     I did not take into account any social assistance, as Mr. Molenaar indicated that such assistance was in the form of loans and I assume that the amounts were repaid from the $101,343 that he received from the SAAQ for the period from 1981 to 1986.

[47]     If I now assume - less beneficial for Mr. Molenaar and probably more realistic - a cost of living of 50% of $34,941, or $17,471, I arrive at a deficit of $75,716, as indicated in the table below:

8,000		1986 inheritance
167,997		1981-1992 disability pension from the SAAQ
100,000		Accumulated savings as of 1981
275,997		Total (source of income)
(209,646)		Cost of living
(142,067)		Adjusted 1992 net worth
(75,716)		(Deficit) surplus

[48]     Another indicator supporting this conclusion that the $100,000 in savings was used before 1993 is the fact that, from 1984 to 1992, Mr. Molenaar purchased cars, motorcycles, snowmobiles and boats at a minimum total cost of $92,696[3] in cash (i.e., with his own money). I must indicate that the amounts in question here do not include trade-in values. If we add the $18,000 cash paid for the purchase of the house to the figure of $92,696, we get a minimum amount of $110,696 spent by Mr. Molenaar from 1984 to 1992.

[49]     As a result, at the beginning of the relevant period, not only would there have not been any of the alleged $100,000 in savings left (that had been accumulated as of 1981), but the deficit that I determined could even indicate other unreported income during the period from 1981 to 1992. In any case, it does not explain how Mr. Molenaar was able to accumulate a net worth of $142,067 as of December 31, 1992.

[50]     In conclusion, Mr. Molenaar did not have or no longer had savings tucked away in a sock as of December 31, 1992. As a result, it is reasonable to conclude that the unexplained differences stem from taxable income earned during the relevant period.

[51]     I would now like to comment on the evidence of the existence of a marijuana growing and dog breeding business. The evidence presented at the hearing by the Sûreté du Québec investigator reveals that marijuana was being grown on Mr. Molenaar's land. The acquittal for lack of evidence is not conclusive for the purposes of this appeal. Furthermore, Mr. Molenaar admitted in his testimony that he had been involved in growing marijuana with Mr. Choinière in 1997. However, he states that he received, "pocketed" in his words, no money in 1997 and none from 1993 to 1996.

[52]     In my opinion, this statement by Mr. Molenaar is not credible for the aforementioned reasons. I will again invoke some of these grounds. There are the lies to the Sûreté du Québec investigator, the contradictions that I have already noted in Mr. Molenaar's testimony, the evidence of major differences identified by the net worth method, and the other indicators revealed, for example, by the cash purchase of a large amount of rolling stock. Less important, but added to the aforementioned facts, is Mr. Molenaar's reputation in the area for growing marijuana and the considerable increase in pot growing from 1993 to 2001, as revealed in the Le Soleil article. Finally, there is the economic value of the marijuana seized in 1997, approximately $1.5M.

[53]     In my opinion, all the evidence that I have seen at the hearing shows, on the balance of probabilities, that Mr. Molenaar, during the relevant period, received large amounts from his marijuana growing activities and that those activities represent the source of all taxable income not reported by Mr. Molenaar.[4] As a result, it is not necessary to determine whether the dog breeding was a pastime or business.

[54]     Having found that Mr. Molenaar was involved in growing marijuana, that he earned business income at least equal to the differences determined by the net worth method and that that income was not included in his income tax returns for the period from 1993 to 1996, I also conclude that it was by wilful default, or at the very least circumstances equivalent to gross negligence, that that income was omitted. Mr. Molenaar knew or should have known that he was required to report the income earned from his marijuana growing operation - even though it was a criminal activity - and, as a result, the penalty established by the Minister under subsection 163(2) of the Act for the period from 1993 to 1996 was justified.

[55]     For the same reasons, it goes without saying that Mr. Molenaar made a misrepresentation attributable to neglect, carelessness or wilful default and that the Minister was justified in making an assessment of Mr. Molenaar outside the normal assessment period.

[56]     As regards the appeal under the ETA, it was agreed that it would be heard on common evidence with the appeals under the Act and, if I find that the unexplained differences represent money earned from growing marijuana, then supplying marijuana is considered as "taxable supplies", the amount of which is equal to the amount of unreported income established for the purposes of the Act. In light of my conclusions noted above, the GST assessment should not be changed, except to decrease the amount of taxable supplies to reflect the adjustments made to the unexplained differences during the hearing.

[57]     In the result, the appeals are allowed and the assessments are referred back to the minister for re-examination and reassessment on the assumption that the unreported income for the purposes of the Act and the taxable services for the purposes of the ETA are: $11,421.35 for 1993, $58,727.76 for 1994, $63,775.28 for 1995, $54,703.30 for 1996 and $31,403.37 for 1997. The 1993 figure is only valid for the purposes of the Act. The period from January 1 to December 31, 1993 is not subject to an assessment under the ETA. The respondent is awarded costs, but only for the appeals under the Act, as the appeal under the ETA is governed by Informal Procedure.

Signed at Ottawa, Canada, this 25^th day of August, 2003.

"Pierre Archambault"

Archambault, J.

Translation certified true

on this 22^nd day of March 2004.

Gerald Woodard, Translator

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