Narula v. R. – TCC: Assessments and penalties based on bank deposit analysis of pizza shop owner

Bill Innes on Current Tax Cases New Window

Narula v. The Queen (December 12, 2014 – 2014 TCC 371) involved assessments and penalties against the owner of a pizza shop based on what the CRA auditor described as bank deposit analysis:

[3] The Respondent called the auditor, Larry Buddingh, as a witness. I found Mr. Buddingh to be credible. He explained that Mr. Narula did not have sufficient business records to conduct a normal audit and thus it was necessary to perform a bank deposit analysis. He explained how he had conducted the bank deposit analysis, the various adjustments that he had made to ensure that non‑taxable deposits, GST and transfers had been excluded from his calculations and the various adjustments that he had made to account for deposits for which Mr. Narula provided credible explanations. I found Mr. Buddingh’s methodology to be sound and accept his conclusion that Mr. Narula had $43,151 and $51,839 in unexplained deposits to his business and personal accounts in his 2006 and 2007 taxation years respectively.

Mr. Narula’s explanation for these deposits was that they were loans from his parents and a friend. The court rejected this evidence:

[5] Mr. Narula testified that his parents, who live in India, lent him $14,000 in 2006 and $15,000 in 2007 but he did not show how or when those funds were deposited to his bank accounts, explain the reason for the loans, demonstrate any repayment of the funds or offer an explanation of how the funds arrived from India. Based on the foregoing, I do not accept that Mr. Narula borrowed any funds from his parents in the years in question. Even if I had accepted that he did so, absent any evidence that those funds were actually deposited to his bank accounts, I would not have made any adjustments in any event.

[6] Mr. Narula also testified that he borrowed $11,000 from a friend named Mr. Mangat. Mr. Narula explained that he and Mr. Mangat were planning on buying a business, that he asked Mr. Mangat to lend him money for that purpose, that the business purchase had not gone through and that he kept the money. This explanation is very odd. Mr. Narula did not explain why Mr. Mangat would have permitted him to keep the borrowed funds when the business purchase for which the funds had been lent did not go through. Mr. Narula testified the funds, which were supposedly lent in September 2006, were deposited into his bank account in various round figures between October and December. He indicated that he had deposited funds when he needed to cover a cheque but he did not explain why he would not have simply deposited all of the money in the first place. Counsel for the Respondent pointed out that similar deposits in similar round figures were made throughout the year and submitted that it was far more likely that the deposits that Mr. Narula was referring me to were regular deposits of cash from the business than loan proceeds from an unnecessary loan. I agree. Mr. Narula did not call Mr. Mangat as a witness. I draw an adverse inference from that fact. Based on all of the foregoing, I do not accept that Mr. Narula borrowed any funds from Mr. Mangat in the years in question.

The Tax Court upheld gross negligence penalties on the basis, in part, of Mr. Narula’s experience in the business and the magnitude of unreported income:

[10] Mr. Narula has been in the pizza business since 2002. He clearly understands his obligations under the Income Tax Act to report all of his income yet he has not done so. The amount of unreported income is significant. It represents approximately 80% of Mr. Narula’s reported income in 2006 and 100% of his reported income in 2007. It also represents approximately 30% of his reported sales in both years.

As a result the appeal was dismissed with costs payable forthwith.