Barbieri v. R. – TCC: Court modifies net worth assessments to delete properties jointly owned with son

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Barbieri v. The Queen (January 22, 2015 – 2015 TCC 15, Graham J.).

Précis: This was a decision on a net worth assessment of the taxpayer. Most of his arguments were unsuccessful. In the case of three houses however he argued that he had bought the properties for his son who had in fact reported the rental income and the gains on the sale of the properties. The taxation years in question would be statute-barred if the Crown could not demonstrate misrepresentation by the taxpayer. The Court held that the Crown had failed to meet that onus in the case of the three houses.  In light of the mixed success the Court did not award costs.

Decision:  This an example of a taxpayer managing to salvage something from a net worth assessment. The appellant had been assessed income tax and for his 2006, 2007 and 2008 taxation years as well as GST for the period from January 1, 2007 to December 31, 2008. He raised a number of defences most of which were rejected by the Court:

[2] Mr. Barbieri raised issues concerning:

(a) approximately $80,000 in cash held by him in a safety deposit box;

(b) an $18,000 gift that he made to his son, Marco Barbieri;

(c) a $20,000 loan that he made to his ex-girlfriend;

(d) $40,000 that he borrowed from his brother;

(e) the valuation of a property located in Surrey;

(f) the valuation of a property located in Port Moody;

(g) the amount of personal expenditures included in the net worth calculation;

(h) whether his 2006, 2007 and 2008 taxation years were statute barred; and

(i) the ownership of three residential properties.

He was more successful however on his last point. The three residential properties were owned jointly with his son, Marco. Two were rental properties and the third was Marco’s home. The appellant testified that he was on title as an accommodation party to facilitate obtaining financing:

[17] Mr. Barbieri testified that he held his interest in these properties in trust for Marco and that the only reason that he was on title and was a co-borrower was that the banks would not lend money to Marco alone. Mr. Barbieri admits that he funded the down payments on the properties and paid various expenses relating to the properties including various mortgage payments. He submits that he made these payments because he wanted to help Marco to establish himself financially, not because he was a beneficial owner. Marco reported all of the rental income from the Mission and Maple Ridge properties on his tax returns. Mr. Barbieri testified that, when the properties were ultimately sold, Marco reported the relevant capital gains and received all of the proceeds. Trust deeds indicating that Mr. Barbieri held his interest in the properties in trust for Marco were entered into evidence for all three properties.

[18] The question that I must determine is whether Mr. Barbieri was misleading the banks into believing that he was a beneficial owner of the properties or whether he was trying to mislead the Minister into believing that he was not a beneficial owner of the properties. The evidence is capable of supporting either conclusion. I take little comfort from the fact that Marco reported the rental income on the Mission and Maple Ridge properties as he had no other income to speak of in the years in question and thus the cost of his reporting the rental income was relatively minor.

[19] Marco was not called as a witness. Counsel for the Respondent asked me to draw an adverse inference from that fact. I am not willing to do so. Mr. Barbieri’s 2006, 2007 and 2008 taxation years are statute barred unless the Respondent can demonstrate that Mr. Barbieri made a misrepresentation. The onus to show the misrepresentation is on the Respondent. Therefore, if the Respondent believed that Marco would have provided evidence that contradicted Mr. Barbieri’s evidence, it is the Respondent, not Mr. Barbieri, who should have called Marco as a witness.

The taxation years in question would be statute-barred if the Crown could not demonstrate misrepresentation by the taxpayer.

[20] Based on all of the foregoing, I am not satisfied that the Respondent has shown that Mr. Barbieri made a misrepresentation in failing to report rental income from the Mission and Maple Ridge properties or in claiming that he was not a beneficial owner of those properties.

This conclusion resulted in a number of related, consequential adjustments to the net worth assessment including removing the three properties as assets, removing the mortgages on the properties as liabilities and adding the down payment made by the appellant on the properties to his personal expenses.

The Court chose not to award costs:

[27] Given the parties’ mixed success and in light of the Respondent’s decision not to pursue a number of upwards adjustments that should have been made to Mr. Barbieri’s income, I will not be awarding costs.