Docket: 2007-2004(IT)G
BETWEEN:
IRINA DACHKOV,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
____________________________________________________________________
Appeal
heard on April 15 and 17, 2009, at Montréal, Quebec
Before: The Honourable
Justice C.H. McArthur
Appearances:
|
Counsel for the Appellant:
|
Isabel Marceau and
Alain Ménard
|
|
Counsel for the Respondent:
|
Claude Lamoureux
|
____________________________________________________________________
JUDGMENT
The appeals from the assessments made by the Minister
of National Revenue (the Minister) on September 1, 2005, for the 2000 and 2001 taxation
years are allowed in accordance with the attached Reasons for Judgment.
The appeal from the assessment made by the Minister for 2002 is dismissed in accordance with
the attached Reasons for Judgment.
Since these proceedings have resulted in
partial success, no costs are awarded.
Signed at Ottawa, Canada, this 13th day of August 2009.
"C.H. McArthur"
Citation: 2009TCC403
Date: 20090813
Docket: 2007-2004(IT)G
BETWEEN:
IRINA DACHKOV,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
McArthur J.
[1]
This appeal concerns Irina
Dachkov (the Appellant), who immigrated from Israel to Canada
in 1997. She is challenging the reassessment of the Canada Revenue Agency (CRA)
for the 2000, 2001 and 2002 taxation years.
[2]
The CRA added the amounts
of $18,664 for 2000, $70,272 for 2001 and $31, 149 for 2002 to
the Appellant’s tax returns and also imposed penalties on those amounts, which
were not included in the Appellant’s tax return (that is, $811.46 for 2000, $5,706.70 for
2001 and $1,504.13 for 2002).
Issues
[3]
The two parties agree
on the issues of this case:
a.
Was the CRA's reassessment
of the Appellant for the 2000 and 2001 taxation years in accordance with
subsection 152(4) of the Income Tax Act (the ITA) warranted?
b.
Did the CRA correctly add
to the income reported by the Appellant the amounts set out in paragraph two
above as unreported business income?
c.
Was the imposition, by
the CRA of the penalties against the Appellant warranted under subsection (2) of
the ITA?
Arguments of counsel for the Appellant
[4]
After having immigrated
to Canada in 1997 with her husband and two children,
the Appellant had to resort to social assistance. In view of the Appelant's
financial difficulties in 1998, her mother told her that she would help her with
a “gift” of money in the amount of US$110,500. According to the Appellant, that
money came from a family apartment located in Russia and she received that
amount in cash.
[5]
That money was handed
over to a friend of the family, Rita Bond, while she was on visit to Israel with
her husband in February 1999. Rita Bond’s husband, who was an Israeli diplomat, brought the
money to Chicago, where he was posted. The Appellant’s husband, Alexander Semionov,
who operates a trucking business, subsequently went to Chicago
for reasons related to the operation of his business and got the money from
Rita Bond.
[6]
After getting the money,
the Appellant’s husband gave it to her and she put all of it in a safety
deposit box at her bank. After having received that money, the Appellant
submitted a statement to social assistance that she no longer required financial
support from the government.
[7]
The Appellant submits
that, considering that she was without employment from 1997 to 2001, most of
the money she received from her mother was used to provide for her and her
family.
[8]
She started a business
as a sole proprietor which consisted in selling food prepared and cooked by her.
The business began operating in December 2001 and she suffered losses of
$15,255.91 in 2001 and $13,855.31 in 2002.
[9]
In 2004, the CRA conducted
an audit of the Appellant’s company. She co-operated fully so as to provide as
much information as possible. According to the Appellant, the CRA did not
identify any unreported income amount originating from the company she operated.
[10]
She submits that the CRA
erroneously failed to take into account in the Appellant’s assets the amount of
US$110,500 that she received from her mother.
[11]
The limitation period
expired as the reassessments for the taxation years were issued more than three
years following the initial assessment for each of the taxation years (para. 8 of
the Notice of Appeal).
[12]
She submits that the net
worth method used by the CRA is incorrect (para. 10 of the Notice of Appeal)
and that the CRA was not warranted in adding to the reported income the amounts
mentioned in paragraph two as unreported business income.
The Minister’s arguments
[13]
According to the CRA, it
was warranted in reassessing the Appellant because in filing her returns she provided
false information that is
attributable to neglect, carelessness or wilful default.
[14]
In addition, on the basis
of the results of the net worth assessment of the Appellant’s income, the CRA submits
that the amounts of $18,663.44, $70,272.98 and $31,149.36 were properly
attributed to her.
[15]
Finally, the CRA submits
that the penalties were properly imposed against the Appellant under subsection
163(2) of the ITA.
[16]
One of the questions
before me is: Was the CRA's reassessment of the Appellant beyond the normal reassessment period, which is four
years, warranted?
[17]
The subsection in
question is 152(4) of the ITA and it 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 or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, 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
or in supplying any information under this Act. . .
[Emphasis
added.]
[18]
The expression “normal
reassessment period” is defined as follows in subsection 152(3.1) of the ITA:
(3.1)
For the purposes of
subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal reassessment
period for a taxpayer in respect of a taxation year is
(a) where at the end of the year the
taxpayer is a mutual fund trust or a corporation other than a
Canadian-controlled private corporation, the period that ends 4 years after the
earlier of the day of mailing of a notice of an original assessment under this
Part in respect of the taxpayer for the year and the day of mailing of an
original notification that no tax is payable by the taxpayer for the year; and
(b) in any other case, the period that
ends 3 years after the earlier of the day of mailing of a notice of an original
assessment under this Part in respect of the taxpayer for the year and the day
of mailing of an original notification that no tax is payable by the taxpayer
for the year.
[19]
The taxation years in question
for the reassessment are those of 2000 and 2001. As to the 2002 taxation year,
the limitation period does not apply and, therefore, is not affected by the
above provisions. The CRA submits that the Appellant knowingly omitted to
include the amounts of $18,664 (2000) and $70,272 (2001); therefore,
under subparagraphs 152(4)(a)(i), it can make a reassessment after the
period provided for in subsection 152(3.1) of the ITA.
[20]
In Boucher v. R., Sharlow J. of the Federal Court of Appeal made
the following comments:
. . . the existence of a misrepresentation
by the taxpayer, without more, does not give the Minister the authority to
reassess after the expiry of the normal reassessment period.
[21]
When the CRA wants to
reassess a taxpayer, it has the onus of proving more than a mere omission on his
part. According to Bonner J. in Jencik v. R.,
the CRA has a number of criteria to establish in order to make a reassessment
in accordance with subsection 152(4):
11 The well-known rule which places
on the taxpayer the onus of establishing that facts as found or assumed or
assessment are incorrect does not apply in appeals from statute-barred
reassessments unless the Minister first establishes facts which show that he
was entitled to reassess when he did.
. . .
13 I should add that the onus encompasses
not only proof of the falsity of the Appellant's representations regarding his
business income but also proof that they were attributable to neglect,
carelessness or wilful default as pleaded.
(Emphasis added.)
[22]
Bowie J. agrees with
the principles set out in Jencik. He mentions them with approval in Gardner.
He refers to M.N.R. v. Taylor,
where Cameron J. wrote as follows:
. . . the burden of
proof lies on the Minister to first establish to the satisfaction of the Court
that the taxpayer (or person filing the return) has 'made any misrepresentation
or committed any fraud in filing the return or in supplying any information
under this Act.'
(Emphasis added.)
[23]
In Ver,Bowman J. imposed an additional onus on the
Minister, that of including the specific facts showing the taxpayer’s fraud
which must be set out in the Reply to the Notice of Appeal:
Finally, the Reply to the Notice of Appeal is
inadequate in a case of this type. Bald assertions that the Minister
"assumed" a misrepresentation are inappropriate where the Minister
must prove a misrepresentation. The precise misrepresentation alleged to
have been made must be set out with particularity in the reply and proved with
specificity. Three essential components must be alleged in pleading
misrepresentation:
(i) the representation;
(ii) the fact of its having been made; and
(iii) its falsity.
(Emphasis added.)
[24]
In 943372 Ontario
Inc. v. R., Bowman J. reiterated that it is important
that the Reply to the Notice of Appeal contain allegations of misrepresentation:
Before I examine some aspects of the evidence in
greater detail, I should say that the replies to the notices of appeal were not
helpful. The Minister had the initial onus of establishing misrepresentation
justifying the opening up of the statute-barred years. In such cases
specificity and precision in the replies are of paramount importance.
[25]
Finally, in Markakis
v. M.N.R.,
Rip J. held that, in addition to alleging fraud or misrepresentation in the
taxpayer’s tax return, the CRA must also prove misrepresentation or fraud. To
that effect, Rip J. made the following remarks:
13 For the Minister to show the
taxpayer has not exercised reasonable care requires, in my view, something more
than simply submitting evidence that the taxpayer has made deposits to his bank
accounts in amounts greater than his employment income and advising the Court
that he, the Minister, does not accept the taxpayer's explanation of the source
of funds.
. . .
14 To assess beyond the four-year limit as set out in subsection
152(4) the Minister must establish that a taxpayer made a misrepresentation
that is attributable to neglect, carelessness or wilful [sic]
default, or that the taxpayer committed a fraud in filing his income tax
return. It is not enough to suggest misrepresentation or fraud. The
Minister's evidence was not sufficient to meet his onus under subsection 152(4)
and consequently I must find that Mr. Markakis cannot be said to
have made a misrepresentation in 1976.
The present assessment
[26]
The CRA submits that
the Appellant omitted to include business income when she filed her income tax
return, and that she thereby made a misrepresentation in filing her return.
[27]
According to her, the
amount of US$110,500 was a gift of money from her mother and, therefore, it was
not necessary under the ITA for the Appellant to report the gift in her tax
return. According to the Appellant’s mother’s letter, that money belonged in
any case to the Appellant prior to her arrival in Canada.
In both cases, the amount must not be reported on her tax return.
[28]
She changed her story as
to how she acquired the US$110,500. In her first version, the Appellant stated
that she received that amount directly from her mother when she visited her
daughter in Canada in February 1999. That is what the Appellant
told the CRA auditor on May 26, 2004.
[29]
During a second meeting
with the CRA on August 17, 2004, the Appellant stated that the money finally
made its way to the Appellant through the hands of friends of the family in Israel and her husband.
[30]
According to the test
formulated by Bowman J. in Ver, the Minister should have made the allegations
of misrepresentation in the Reply to the Notice of Appeal. The Minister should
have also set out the specific facts demonstrating that a misrepresentation was
made and those facts should have been ". . . set
out with particularity in the reply and proved with specificity." In
looking at the Reply to the Notice of Appeal, and more specifically at
paragraphs 47 (h), (i), (m), (n) and 52, the Minister did not set out with particularity the precise misrepresentation of the Appellant’s tax return.
[31]
Furthermore, the CRA had the
burden of proving that the Appellant made a misrepresentation in filing her tax
return, but also that the misrepresentation was caused by neglect, carelessness
or wilful default. No evidence of fraud, neglect or carelessness was adduced before
the Court according to the testimonies of the auditor and technical advisor.
[32]
Although counsel for the
Respondent may have certainly undermined the Appellant’s credibility in some
respects, he failed to prove in his oral argument that she made any
misrepresentation concerning her tax return. Furthermore, the CRA assessed the
Appellant nil business income because the Appellant’s business only began in
December 2001 (Exhibit A-2). The Minister’s submissions that there must have been
business income earned from the taxpayer’s business for 2000 are groundless as
the evidence clearly shows that the business began in 2001, in the month of
December.
[33]
In that respect, I reject the Minister’s
presumptions concerning the amounts of $18,664 and $70,272 attributed to
the Appellant’s business income for 2000 and 2001. In conclusion, the Respondent
failed to specify the relevant facts, therefore the Appellant did not know what
case she had to meet. The assessments for 2000 and 2001 were issued beyond the period
provided for in subsection 152(4) of the ITA. The Respondent had the burden
to show that the Appellant made
any misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud—in filing her return for 2000 and 2001; she
has not met that burden.
[34]
I am therefore of the
view that the years 2000 and 2001 are statute-barred and that the CRA did not
meet its burden of proving that there was misrepresentation on the Appellant’s
part.
The
net worth method (hereinafter NWM)
[35]
In Hsu v.
Canada, no specific method to determine the tax
payable by the taxpayer is set out.
[36]
In conclusion, the use
of the net worth method is provided for in the ITA, and the CRA was thus entitled
to treat the undeclared amounts in the Appellant’s tax return as business
income.
[37]
The NWM may be used by
the CRA when a taxpayer has not provided a satisfactory answer as to the source
of reported income. The CRA has the authority to do so, regardless of the
amount claimed on the taxpayer’s tax return. Although the burden is on the
taxpayer to reject the assessment, it is the CRA who has the burden of proving
that the audit was properly conducted.
[38]
I believe that the CRA often uses
the NWM without having complete knowledge of the facts. The CRA therefore
requires the taxpayer to fully disclose to it all of his or her sources of
income. That is why the CRA must also fully disclose the bases for measuring
the taxpayer’s income. The taxpayer must show that the NWM and the information
contained therein are invalid. In that respect, Tardif J. made the following remarks in 126632
Canada Ltée v. R.,
in referring to Hickman Motors Ltd. v. R.:
61 It is the Appellant's
responsibility to show that the Minister's presumptions are unfounded; once
this is done, the Minister can no longer simply rely on the result of an
unacceptable audit to establish assessments.
[39]
In Lai v. The Queen
the taxpayer declared income that was inconsistent with his standard of living as
he omitted to include certain information on his tax return. The taxpayer claimed
that the amounts included in his income were loan repayments from his brother. The amounts came from the sale of a property in his
country of origin.
[40]
As in the case before us, the
auditor in Lai asked the taxpayer to provide satisfactory documentary
evidence; he was unable to do so.
[41]
The Court found as
follows:
33 As inherently unreliable as
net worth assessments may be, the Appellant has not provided me with any basis
upon which the Minister's assessment might be challenged. The auditor's
evidence was straightforward. She reviewed the methodology she used to arrive
at her assessment and her approach was reasonable in these circumstances. In
fact she gave the Appellant the benefit of the doubt when using the Statistics
Canada figures.
[42]
Counsel for the
Respondent referred to Lacroix v. R.
In that case, the Federal Court of Appeal had to decide whether the Tax Court
of Canada (Court) was correct in saying that the evidence provided by the Minister
was unsatisfactory as to the taxpayer’s source of income following the NWM used.
The Federal Court of Appeal rejected that claim.
[43]
Finally, as to the Minister’s
burden of proof concerning the issuance of a reassessment beyond the four-year
limit prescribed by the ITA, in Lacroix the Federal Court of
Appeal held that
The Minister is undeniably required to adduce facts
justifying these exceptional measures.
The penalties
[44]
According to the auditor, Noëlla Bonici,
the Appellant always co-operated with her to provide her with all the documents
needed to conduct her investigation.
[45]
According to Ms.
Tremblay, the second auditor, documents were missing. Therefore, she decided to
use the NWM. Also, the testimony of Ms. Tremblay contradicts that of Ms. Bonici
in those cases where the Appellant understood or did not understand what the
CRA officers were saying to her.
[46]
The Appellant opened
her books so as not to obstruct the work of the CRA when asked to do so by its
officers. This demonstrates a willingness to co-operate with the CRA which weighs
in the Appellant’s favour.
[47]
I have difficulty
believing that the Appellant made false statements in her tax return. In
addition, despite the fact that counsel for the Respondent made a remarkable
attempt to discredit the Appellant, he was unable to demonstrate that the false
statements were made knowingly or in circumstances amounting to gross
negligence.
[48]
The penalties against
the Appellant for 2000 and 2001 must therefore be set aside.
[49]
Even if I had held that
those years were not statute-barred, counsel for the Respondent admitted before
the Court that the Minister would be incapable of adducing evidence of the source
of income for 2000 and 2001:
[TRANSLATION]
If you say yes, it is credible and that this source of income is not
taxable, then I can tell you today that the Minister is incapable of adducing
evidence as to the source of income for 2000 and 2001. It is impossible, because
it is illogical to believe that a delicatessen that was inexistent made $18,000.
It just does not make any sense.
[50]
The Appellant was
successful in shifting the burden of proof to the Minister by demonstrating
clearly that she did not earn any business income in 2000 and 2001, as alleged
in the Reply to the Notice of Appeal. Again, the Minister was unable to meet
his burden of proof and, according to Hickman Motors Ltd. (supra),
the Appellant must succeed in her claim for 2000 and 2001.
The year 2002
[51]
I must now just rule on
the 2002 taxation year which is not statute-barred and therefore the burden is
on the Appellant to disprove the Minister’s allegations.
[52]
According to counsel
for the Appellant, there is a discrepancy of $31,149.36 for the year 2002 which
the Appellant was unable to explain. She has the burden of rebutting the
Minister’s presumptions at this stage with credible evidence and she could have
done so had she clearly shown where the money she received came from. In 2002,
the Appellant’s business had been in existence since 2001 and therefore the argument already invoked
for 2000 and 2001 did not avail to her.
[53]
Counsel for the Respondent
was quite effective at discrediting the Appellant. A number of points deserve
to be made. The first is the fact that she did not keep any record of the amount
of money she withdrew from the safety deposit box. Although the Appellant was
under no duty to do so, it remains that this would have added more credibility
to her version of the facts.
[54]
As for the US$110,500, there
is no evidence of a locker or safety deposit box. There is no evidence of
entrance into Canada or Israel.
Counsel for the Respondent reiterated the fact that the taxpayer made up stories
about how the money made its way to Canada. That
significant amount of money which represents the Appellant’s parents’ life
savings travelled through the hands of perfect strangers of the Appellant’s
mother.
[55]
One of those strangers
is Rita Bond, who came from Chicago to testify at trial. The transfer of that money
was facilitated by Ms. Bond’s partner, an Israeli diplomat working in Chicago. As counsel for the Appellant quite aptly stated, the
diplomat risked his career for a perfect stranger by transporting such a
significant amount of money to the United States, no less.
[56]
Furthermore, that
significant amount of money was merely carried in a purse, nonchalantly. Finally,
the money was initially in $1,000 bills. The Appellant changed her story again,
saying that the bills were in $100 and $50 denominations, which would make for
a physically large amount to carry.
[57]
Finally, the money was
kept in the Appellant’s residence. However, the Appellant changed her version once
again, saying that the money was kept in a safety deposit box at the bank. According
to counsel for the Respondent, the Appellant could have easily sought confirmation
from the bank to show that she did actually have a safety deposit box, but the
Appellant never provided any evidence to that effect.
[58]
Counsel for the
Respondent was able to discredit the witness, Alexander Semionov, by showing
that there were two auditors who questioned him, and not one, as stated by the
Appellant. In addition, Mr. Semionov has been active in international transport
for a number of years using his own truck. He must know the consequences of not
declaring an amount exceeding $10,000.
[59]
A notarized letter by an
Israeli notary supports the Respondent’s arguments while further discrediting the
Appellant. In the notarized letter (Exhibit A-8) it is stated clearly that the
money belongs to the Appellant. However, she would have had us believe,
throughout the entire trial, that it was a gift from her mother. Also, the letter
from the notary is dated December 27, 2004, whereas the money was given to Ms.
Bond in February 1999.
[60]
Another important fact
is that, since her teenage years in the U.S.S.R., the Appellant has had a lack
of confidence in financial institutions. Furthermore, she had a bank account in
Israel so that she could receive financial assistance from
the Israeli government. Also, the Appellant was an accountant in Russia and as stated by counsel for the Respondent
[TRANSLATION], “. . . she is not illiterate. . . . She knows how money works.
[61]
She wanted to give the impression
that she feared banks. The Appellant needed money and was on the brink of
bankruptcy and her family did not want to put anything in the bank because,
according to her and her family, banks were not a sure thing. Despite that, it
was shown that she used four bank accounts and she conducted a number of transactions
totalling a few thousand dollars.
[62]
Why not have the
Appellant’s mother come? Why not provide documentation as to the existence of
the safety deposit box? Why not provide receipts demonstrating the exchange of
US funds into Canadian dollars?
[63]
Instead, a friend of
the family is called to testify to recount facts that are just peripheral. This
seems quite strange to me and the Appellant was unable to rebut the Minister’s
allegations. For these reasons, the appeal for the 2002 taxation year is
dismissed.
Penalty for 2002
[64]
The issue is whether
the CRA has failed to meet the burden of proving the facts warranting the imposition
of penalties under subsection 163(2) of the ITA for similar reasons given for
2000 and 2001.
[65]
I am
not sure about the source of the US$110,500 in respect of which there is no explanation.
One thing is for sure, the source of the $18,663.44 and the $70,272.98 for
2000 and 2001 was not unreported income from the Appellant’s delicatessen, contrary to what was surmised by the
CRA. As for the amount of $31,149.36 for 2002, although its source is dubious, the
Appellant did not refute the CRA’s conclusion concerning the penalty imposed under
subsection 163(2) for that year. In that regard, the CRA showed, for 2002, that
the Appellant knowingly, or
under circumstances amounting to gross negligence, made or participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer filed or made in respect of a
taxation year for the purposes of this Act, is liable to a penalty. The origin of the $31,149.36 in
2002 remains a mystery. The business, the delicatessen, operated full-time in 2002.
The best theory is that of the Respondent that the $31,149.56 was income.
I accept that the business suffered operational losses in 2001. The Appellant
continues still today to operate her business, which, I believe, has
experienced sustained growth.
[66]
The appeals for 2000
and 2001 are allowed without costs and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment.
[67]
The appeal for 2002 is
dismissed without costs.
Signed at Ottawa, Canada, this 13th day of August 2009.
"C.H. McArthur"
Translation
certified true
on this 13th day
of October 2009.
François Brunet,
Revisor
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