Another Case of Unreported Income

Case Citation
Zhang v. The Queen (2013 TCC 19) [TCC] [CanLII]
Unreported income.
[1] Wen Zhang appeals assessments made under the Income Tax Act in which Mr. Zhang’s income was determined by what was referred to as an application of funds method. Under this method, the Minister assumed that Mr. Zhang’s personal expenditures were funded from unreported income to the extent that the expenditures exceeded other known sources of funds. Mr. Zhang submits that the assessed amounts were loans and not unreported income.
| 152(4)—Assessment and reassessment |
| 152(3.1)—Definition of “normal reassessment period” |
Cases Cited
[5] Mr. Zhang testified that when his brother and sister lost their jobs in China, he suggested that they start a business of selling crystal minerals on eBay.
[9] The eBay business earned annual revenues in the neighbourhood of $1,000,000 during the period at issue.
[11] The Canada Revenue Agency (CRA) became aware that Mr. Zhang had eBay accounts, and they contacted him for further information. In the initial call Mr. Zhang denied having eBay or PayPal accounts, but he acknowledged the accounts in a subsequent conversation. After further investigation, the CRA determined that Mr. Zhang had approximately 40 bank accounts associated with the eBay business to which significant deposits were made.
[12] The CRA was not provided with any business records to verify the reported income. Accordingly, income was determined using the “application of funds” method. The starting point was a determination of Mr. Zhang’s actual personal expenditures. These amounts were then reduced by known sources of funds, and the balance was assumed to be unreported income from the consulting business.
[16] The first issue is whether the assessed amounts are income or loans.
[17] One of the major difficulties that I have with Mr. Zhang’s position is that it depends largely on his own self-interested testimony. No business records were provided for either the eBay business or Mr. Zhang’s consulting business, and there was no contemporaneous supporting documentation regarding either the commissions or the loans.
[19] First, Mr. Zhang did not provide detailed testimony as to the assistance that he provided for the eBay business. For example, in the notice of appeal Mr. Zhang stated that he taught the brother and sister how to sell on eBay and that he opened eBay and PayPal accounts for them. However, it came out in cross-examination that Mr. Zhang opened a great many bank accounts for the business and managed the funds. This suggests that Mr. Zhang may have been quite involved in the day‑to-day business activity and may have earned more than the modest commission that was reported in the income tax returns.
[20] Second, there was no clear reconciliation between what Mr. Zhang said he earned as commission and what was reported in the income tax returns. Mr. Zhang provided some explanations but the explanations seem to raise more questions than answers.
[22] Further, if Mr. Zhang owed money to his sister and brother I find it implausible that he would not keep a record of these amounts.
[23] The lack of contemporaneous documentation is a serious problem in this case because there is nothing to corroborate Mr. Zhang’s self-interested testimony. Taxpayers are required to keep satisfactory records so that their income can be verified.
[26] A second issue concerns the assessment for the 2006 taxation year which was made beyond the normal reassessment period. The Crown submits that the assessment was properly made under s. 152(4) of the Act because the under‑reporting of income was willful.
[27] The Crown bears the burden to establish that the failure to report income was careless, negligent or willful. It has met this burden by establishing that Mr. Zhang withdrew more from the eBay business than what was reported, and that he attempted to hide this source of income from the CRA. A credible case has been made that Mr. Zhang knowingly under-reported the income, and Mr. Zhang has failed to provide reliable evidence to rebut this finding. I would conclude that the assessment for the 2006 taxation year is not statute barred.
[28] The appeal will be dismissed.
A paragraph beginning with a number in square brackets is a direct quote from the case.

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