http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/144890/index.do
Kim v. The Queen (June 10, 2016 – 2016 TCC 150, Smith J.).
Précis: Mr. and Mrs. Kim operated a laundry and dry-cleaning business as equal partners. They were reassessed for unreported business income in the 2010 and 2011 taxation years on a net worth basis. Gross negligence penalties were sustained. There was no order as to costs since these were informal procedure appeals.
Decision: This was a fairly classic case of net worth assessements:
[6] Mr. Kim reported total income from all sources of $11,659 and $27,123 for the 2010 and 2011 taxation years, respectively, and Ok Cha Kim reported total income of $11,844 and $11,695, for the 2010 and 2011 taxation years, respectively. This included their respective share of the net business income noted above and represented total combined income of $23,503 and $38,818 for the 2010 and 2011 taxation years, respectively.
[7] The Minister assumed, for the purposes of the reassessment, that the Appellant’s income for the subject years was not commensurate with their personal lifestyle.
[8] During the audit stage, the Minister requested that the Appellants provide a budget of their annual personal expenditures and on the basis of the information provided (and on the basis of statistical data from Statistics Canada, as explained below), the Minister prepared the following Summary of Personal Expenditures (“SPE”) for the subject taxation years (Schedule 4 to the Reply):
Summary of personal expenditures
|
|
Dec. 31, 2010
|
Dec. 31, 2011
|
|
Food
|
8,689
|
8,942
|
|
Shelter
|
11,291
|
11,918
|
|
Household operations
|
3,172
|
3,195
|
|
Clothing
|
2,804
|
2,886
|
|
Transportation
|
4,417
|
4,417
|
|
Health care
|
4,106
|
3,909
|
|
Personal care
|
120
|
120
|
|
Tobacco and alcohol
|
-
|
923
|
|
Security
|
3,692
|
13,540
|
|
Gifts & contributions
|
2,275
|
4,295
|
|
Miscellaneous
|
1,540
|
1,540
|
|
|
42,106
|
55,685
|
[9] The Minister assumed for the purpose of the reassessment, that this reflected an accurate statement of the Appellants’ annual personal expenditures. Since the total income reported by the Appellants was insufficient to cover those expenditures, the Minister conducted a net worth and bank audit analysis following which it was concluded that the Appellants’ net worth had increased by $11,177 in 2010 and by a further $4,804 in 2011.
[10] On the basis of the net worth calculation and taking into consideration the assumed personal expenditures as well as the total income reported, as noted above, the Minister concluded that the Appellants had failed to report additional business income, calculated as follows:
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Description:
|
2010
|
2011
|
|
Assets
|
$424,653
|
$422,588
|
|
Less: Liabilities
|
259,377
|
252,508
|
|
Net Worth
|
165,276
|
170,080
|
|
Less: Net Worth of Prior Year
|
154,100
|
165,276
|
|
Increase in Net Worth
|
11,176
|
4,804
|
|
Add: Personal Expenses
|
42,106
|
55,685
|
|
Add: Other expenses
|
563
|
3,914
|
|
Less: Total Income Reported
|
23,503
|
38,818
|
|
Total Unreported Income
|
$30,342
|
$25,585
|
|
|
|
Mr. Kim gave evidence which the Court by and large did not accept. One adjustment was made to the appellant’s personal expenses in each taxation year:
[16] Mr. Kim admitted that as a result of an error made by him in his initial summary for 2010, the amount described under the category of “Security” should be reduced to $1,440 (and the Minister admitted that a corresponding error had been made for the 2011 calendar year which required a similar downward adjustment).
Apart from that adjustment the reassessments, including the gross negligence penalties, were affirmed:
[42] The Court therefore concludes that the Minister has properly reassessed the Appellants for additional unreported business income for the taxation years in question. Taking into consideration the adjustments to the SPE noted above (notably to the “Security” category), I find that the Appellants had total additional unreported net business income of $28,090 and $13,454 for the 2010 and 2011 taxation years, respectively and consequently, that each Appellant had additional unreported income of $14,045 and $6,727 for the 2010 and 2011 taxation year, respectively.
…
[49] For all the foregoing, I would refer the reassessment back to the Minister for reconsideration and reassessment on the basis set out in paragraph 42 above.
[50] The Minister is entitled to gross negligence penalties calculated accordingly.
There was no order as to costs as both appeals were informal procedure.