Citation: 2006TCC270
Date: 20060721
Dockets:
2003-3361(IT)G
2003-3362(IT)G
BETWEEN:
PATRICK FORTIN,
2960-0731 QUÉBEC INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] The appeal in
the matter of 2960-0731 Québec inc., 2003-3362(IT)G, pertains to the
1997, 1998, 1999, 2000 and 2001 taxation years. The appeal in the matter of
Patrick Fortin, 2003-3361(IT)G, pertains to the 1998, 1999 and 2000
taxation years.
[2] Since all the
facts are common to both matters, the parties agreed to have both cases heard
on common evidence.
[3] 2960-0731
Québec inc. (the "Corporation") is contesting the assessments made on
October 25, 2002, by which the Minister of National Revenue
(the "Minister") added unreported income to its reported income
for the 1999, 2000, and 2001 taxation years, as well as assessing the penalty
contemplated in subsection 163(2) of the Income Tax Act
(the "Act").
[4] For his part,
Patrick Fortin is contesting the assessments made on
November 25, 2002, by which the Minister, in computing his income for
the 1998, 1999 and 2000 taxation years, included additional income in the form
of benefits conferred by the Corporation, under subsection 15(1) of the Act,
and amounts representing benefits in respect of the use of an automobile. The
penalty set out in subsection 163(2) of the Act was also applied to these
assessments.
[5] In making the
reassessments, the Minister assumed the facts stated in the Reply to the Notice
of Appeal in each case. The facts so assumed in appeal number 2003‑3362(IT)G
are as follows:
[TRANSLATION]
(a) The
Appellant is in the business of used car sales.
(b) During
the taxation years in issue, Patrick Fortin was the sole shareholder of the
Appellant.
(c) During
the taxation years in issue, Patrick Fortin's only identifiable source of
income was the business carried on by the Appellant.
(d) In
her audit of the Appellant, the auditor noticed that its accounting system was
unreliable and that several advances to the Appellant by Patrick Fortin and by
third parties could not be substantiated. Likewise, several accounting entries
could not be justified either by Mr. Fortin or by the Appellant's
accountant.
(e) The
auditor proceeded to analyze the deposits and the different transactions on the
bank accounts of the Appellant, Patrick Fortin, and his spouse, Manon
Dufour, for the years in issue.
(f) This
audit, which was conducted using the transaction method, revealed that the
Appellant made a clerical error in the 2001 taxation year, and that it failed
to report the following income for the 1999, 2000, and 2001 taxation years:
|
|
1999
|
2000
|
2001
|
|
Net income
reported
|
($18,975)
|
$6,219
|
$13,432
|
|
Unreported income
|
$15,147
|
$39,996
|
$89,250
|
|
Disallowed
purchases, clerical error
|
|
|
$20,330
|
|
Discrepancy
|
$15,147
|
$39,996
|
$109,580
|
|
Revised net income
|
($3,828)
|
$46,215
|
$123,012
|
(g) The
addition of $15,147 in unreported income affects the business loss reported by
the Appellant for the 1999 taxation year as well as the carry-back of the loss
to the 1997 and 1998 taxation years. Consequently, the Minister reduced the
amount available for carry-back to the 1997 and 1998 taxation years, as follows:
|
|
1997
|
1998
|
total
|
|
Reduction
in the non-capital loss carry-back
|
$10,301
|
$4,846
|
$15,147
|
Taxation year ended February 28, 1999
(h) The amount of $15,147 which the Appellant
failed to report in its income for the taxation year ended February 28, 1999,
consists of an amount of $12,147 and an amount of $3,000.
The
amount of $12,147
(i) This
amount of $12,147 was credited to the "advance from
Manon Dufour" account on or about December 31, 1998.
(j) Neither
Manon Dufour nor Patrick Fortin was able to prove the source of this amount.
(k) This
amount did not come from Manon Dufour's bank accounts.
(l) Patrick
Fortin's only identifiable source of income is the Appellant.
(m) Consequently,
the Minister considered this amount of $12,147 to be unreported income of the
Appellant which Patrick Fortin appropriated and credited to the "advance
from Manon Dufour" account.
The
amount of $3,000
(n) This
amount of $3,000 was credited to the "advance from shareholder"
account on June 30, 1998.
(o) Patrick
Fortin did not prove the source of this amount.
(p) Consequently,
the Minister considered this amount of $3,000 to be unreported income of the
Appellant which Patrick Fortin appropriated and credited to the "advance
from shareholder" account.
Taxation year ended February 29, 2000
(q) The amount of $39,996 which the Appellant
failed to report in its income for the taxation year ended
February 29, 2000, consists of an amount of $31,996 and an amount of
$8,000.
The amount of $31,996
(r) This amount of $31,996 was credited to the
"advance from individuals" account (account 1020) by means of
adjusting entry #14.
(s) The
source of this amount was not proven by Patrick Fortin or by the Appellant's
accountant.
(t) The
Appellant's accountant made the adjusting entry because the deposits did not
balance at the end of the fiscal year, and he did so after Patrick Fortin
explained that the amount consisted of advances from individuals.
(u) The
analysis of the "advance from individuals" account shows that the individuals
who lent money to the Appellant, and the amounts lent, are properly identified
therein. The entries for this account are generally substantiated by deposit
slips and reimbursement cheques, unlike adjusting entry #14.
(v) Consequently,
the Minister considered this amount of $31,996 to be unreported income of the
Appellant which Patrick Fortin appropriated and credited to the "advance
from individuals" account.
The
amount of $8,000
(w) This
amount of $8,000 was credited to the "advance from Manon Dufour"
account on May 6, 1999.
(x) Neither
Manon Dufour nor Patrick Fortin was able to prove the source of this amount.
(y) This
amount did not come from Manon Dufour's bank accounts.
(z) Patrick
Fortin's only identifiable source of income is the business carried on by the Appellant.
(aa) Consequently,
the Minister considered this amount of $8,000 to be unreported income of the
Appellant which Patrick Fortin appropriated and credited to the "advance
from Manon Dufour" account.
Taxation year ended February 28, 2001
(bb) The amount of $89,250 which the Appellant
failed to report in its income for the taxation year ended
February 28, 2001, consists of an amount of $23,044 and an
amount of $66,206.
The
amount of $23,044
(cc) This
amount of $23,044 was credited to the "advance from individuals"
account by means of adjusting entry #2.
(dd) The
source of this amount was not proven by Patrick Fortin or by the Appellant's
accountant.
(ee) The
Appellant's accountant made this entry in order to balance the books.
(ff) Consequently,
the Minister considered this amount of $23,044 to be unreported income of the
Appellant which Patrick Fortin appropriated and credited to the "advance
from individuals" account.
The
amount of $66,206
(gg) This
amount of $66,206 was credited to the "advance from shareholder"
account by means of adjusting entry #1.
(hh) Patrick
Fortin's bank accounts were analyzed, but it was impossible to trace the source
of this amount.
(ii) Neither
Patrick Fortin nor the accountant was able to prove the source of this amount.
(jj) Patrick
Fortin asked the accountant to make this entry in order to balance the books,
without providing the accountant with supporting documents.
(kk) Consequently,
the Minister considered this amount to be unreported income of the Appellant
which Patrick Fortin appropriated and credited to the "advance from
shareholder" account.
Clerical error of $20,330
(ll) The Minister reduced the purchases by
$20,330 in order to take account of a clerical error in the Appellant's book of
account.
(mm) Patrick
Fortin admitted that a data entry error was made and that this amount should
have been credited to the purchases account.
(nn) Patrick
Fortin therefore accepted the changes made to the purchases account.
[6] The assumptions
of fact in appeal number 2003-3361(IT)G are as follows:
[TRANSLATION]
(a) During
the taxation years in issue, the Appellant was the sole shareholder of
2960-0731 Québec inc. (the "Corporation").
(b) The
Corporation is in the business of used car sales.
(c) During
the taxation years in issue, the Appellant’s only identifiable source of income
was the business carried on by the Corporation.
(d) In
her audit of the Corporation, the auditor noticed that the Corporation's
accounting system was unreliable and that several advances to the Corporation
by the Appellant and by third parties could not be substantiated. Likewise,
several accounting entries could not be justified either by the Appellant or by
the Corporation's accountant.
(e) The
auditor proceeded to analyze the deposits and the different transactions on the
bank accounts of the Corporation, the Appellant, and his spouse, Manon Dufour,
for the years in issue.
(f) This
audit, which was conducted using the transaction method, revealed that the
Appellant appropriated funds of the Corporation and failed to report the
following benefits for his 1998, 1999 and 2000 taxation years:
|
|
1998
|
1999
|
2000
|
|
Total
income reported
|
nil
|
$7,500
|
$12,000
|
|
Plus:
Appropriated funds
|
$20,547
|
$27,163
|
$95,947
|
|
Auto
benefit
|
$5,141
|
$5,141
|
$2,815
|
|
Discrepancy
|
$25,688
|
$32,304
|
$98,762
|
|
Revised
net income
|
$25,688
|
$39,804
|
$110,762
|
1998
taxation year: $25,688
(g) The
amount of $25,688 which the Appellant failed to report in his income for the
1998 taxation year consists of the following amounts:
|
$2,900
|
$2,500
|
$12,147
|
$3,000
|
$5,141
|
The
amounts of $2,900 and $2,500
(h) The
Appellant claims that the amounts of $2,900 and $2,500 were advances to the
Corporation by Jean Daneau and Réjean Desjardins and that both amounts
were repaid.
(i) These
amounts were debited to the Corporation's "advance from individuals"
account.
(j) These
amounts were paid to the Appellant by the Corporation in the form of cheques made
out to him.
(k) The
Appellant cashed both cheques.
(l) The
Appellant did not show that these amounts were repayments of advances that Jean
Daneau and Réjean Desjardins had made.
(m) Consequently,
the Minister considered both amounts appropriations of funds by the Appellant,
and added them in computing his income.
The amount of $12,147
(n) This amount of $12,147 was credited to the
Corporation's "advance from Manon Dufour" account on or about
December 31, 1998.
(o) Neither
Manon Dufour nor the Appellant was able to prove the source of this amount.
(p) This
amount did not come from Manon Dufour's bank accounts.
(q) The
Appellant's only identifiable source of income is the Corporation.
(r) Consequently,
the Minister considered this amount of $12,147 to be unreported income of the
Corporation which the Appellant appropriated and credited to the "advance
from Manon Dufour" account. This amount was included in computing the
Appellant's income.
The
amount of $3,000
(s) This
amount of $3,000 was credited to the Corporation's "advance from
shareholder" account on June 30, 1998.
(t) The
Appellant did not prove the source of this amount.
(u) Consequently,
the Minister considered this amount of $3,000 to be unreported income of the
Corporation which the Appellant appropriated and credited to the "advance
from shareholder" account. This amount was included in computing the
Appellant's income.
Benefit
in respect of the use of an automobile: $5,141
(v) During
the 1998 taxation year, the Corporation made a 1997 Chevrolet Blazer Tahoe
automobile available to the Appellant.
(w) The
value of the benefit to be included in respect of this automobile in computing
the Appellant's income was established at $5,141.
1999 taxation year: $32,304
(x) The amount of $32,304 which the Appellant
failed to report in his income for the 1999 taxation year consists of the
following amounts:
|
$26,663
|
$8,000
|
$5,141
|
Total
$39,804
|
(y) From
this total of $39,804, the Minister subtracted the $7,500 that the Appellant
reported as commission income in his 1999 income tax return.
The
amount of $26,663
(z) An
amount of $31,996 was credited to the Corporation's "advance from
individuals" account (account 1020) by means of adjusting entry #14.
(aa) The
source of this amount was not proven by the Appellant or by the Corporation's
accountant.
(bb) The
Corporation's accountant made this adjusting entry because the deposits did not
balance at the end of the fiscal year, and he did so after the Appellant
explained that the amount consisted of advances from individuals.
(cc) The
analysis of the Corporation's "advance from individuals" account
shows that the individuals who lent money to the Corporation, and the amounts
lent, are properly identified therein. The entries in this account are
generally substantiated by deposit slips and reimbursement cheques, unlike
adjusting entry #14.
(dd) Consequently,
the Minister considered this amount of $31,996 to be unreported income of the
Corporation which the Appellant appropriated and credited to the "advance
from individuals" account.
(ee) The
amount of $31,996 is allocated to the Appellant's 1999 and 2000 taxation years
on a prorated basis, according to the relevant number of months (namely, 10 in
1999 and two in 2000), since the Corporation's fiscal year ends on February 28
of each year.
(ff) Thus,
for 1999, the amount that the Minister included as appropriated funds in
computing the Appellant's income is $26,663 (10/12 x $31,996).
The
amount of $8,000
(gg) This
amount of $8,000 was credited to the Corporation's "advance from
Manon Dufour" account on May 6, 1999.
(hh) Neither
Manon Dufour nor the Appellant was able to prove the source of this amount.
(ii) This
amount did not come from Manon Dufour's bank accounts.
(jj) The
Appellant's only identifiable source of income is the business carried on by
the Corporation.
(kk) Consequently,
the Minister considered this amount of $8,000 to be unreported income of the
Corporation which the Appellant appropriated and credited to the Corporation's
"advance from Manon Dufour" account. This amount was included in
computing the Appellant's income.
Benefit
in respect of the use of an automobile: $5,141
(ll) During
the 1999 taxation year, the Corporation made a 1997 Chevrolet Blazer Tahoe
automobile available to the Appellant.
(mm) The
value of the benefit to be included in respect of this automobile in computing
the Appellant's income was established at $5,141.
2000
taxation year: $98,762
(nn) The
amount of $98,762 which the Appellant failed to report in his income for
the 2000 taxation year consists of the following amounts:
|
$22,725
|
$5,514
|
$55,172
|
$19,203
|
$5,333
|
$2,815
|
Total
$110,762
|
(oo) From
this total of $110,762, the Minister subtracted the $12,000 that the Appellant
reported as commission income in his 2000 income tax return.
The
amount of $22,725
(pp) The
Corporation's "advance to shareholder" account indicates that this
amount of $22,725 was attributed to the Appellant between January 1 and
December 31, 2000.
(qq) During
this same period, the "advance to shareholder" account was credited with
$20,330, although this amount should have been credited to the Corporation's
purchases account.
(rr) The
Appellant admitted that a data entry error was made, and that this amount
should have been credited to the Corporation's purchases account.
(ss) As
a result of this change, $22,725 was debited to the Corporation’s "advance
to shareholder" account, and this was a benefit that the Corporation
conferred on the Appellant.
The amount of $5,514
(tt) This amount of $5,514 was added in
computing the Appellant's income because the Corporation's adjusting entry #15,
dated February 28, 2001, shows that it was a refund of tax to the
Corporation that was collected by the Appellant.
The
amount of $55,172
(uu) An
amount of $66,206 was credited to the Corporation's "advance from
shareholder" account by means of adjusting entry #1.
(vv) The
Appellant's bank accounts were analyzed, but it was impossible to trace the
source of this amount.
(ww) Neither
the Appellant nor the accountant was able to prove the source of this amount.
(xx) The
Appellant asked the accountant to make this entry in order to balance the
Corporation's books, without providing the accountant with supporting
documents.
(yy) Consequently,
the Minister considered this amount of $66,206 to be unreported income of the
Corporation which the Appellant appropriated and credited to the Corporation's
"advance from shareholder" account.
(zz) The
amount of $66,206 is allocated to the Appellant's 2000 and 2001 taxation years
on a prorated basis, according to the relevant number of months (namely, 10 in
2000), since the Corporation's fiscal year ends on February 28 each year.
(aaa) Thus,
for the year 2000, the amount that the Minister included as appropriated funds
in computing the Appellant's income is $55,172 (10/12 x $66,206).
The
amount of $19,203
(bbb) An
amount of $23,044 was credited to the Corporation's "advance from
individuals" account by means of adjusting entry #2.
(ccc) The
source of this amount was not proven by the Appellant or by the Corporation’s
accountant.
(ddd) The
Corporation's accountant made this entry in order to balance the books.
(eee) Consequently,
the Minister considered this amount of $23,044 to be unreported income of the
Corporation which the Appellant appropriated and credited to the Corporation's
"advance from individuals" account.
(fff) The
amount of $23,044 is allocated to the Appellant’s 2000 and 2001 taxation years
on a prorated basis, according to the relevant number of months (namely, 10 in
2000), since the Corporation's fiscal year ends on February 28 each year.
(ggg) Thus,
for the year 2000, the amount that the Minister included as appropriated funds
in computing the Appellant's income is $19,203 (10/12 x $23,044).
The
amount of $5,333
(hhh) This
amount of $5,333 is included in computing the Appellant's income for the 2000
taxation year because it is part of the amount of $31,996,
referred to in subparagraphs 13(z) through (ff) of this Reply, allocated
to the Appellant's 1999 and 2000 taxation years on a prorated basis, according
to the relevant number of months (namely, 10 in 1999 and 2 in 2000).
(iii) For
the year 2000, the amount that the Minister added to the Appellant's income as
appropriated funds is $5,333 (2/12 x $31,996).
Benefit
in respect of the use of an automobile: $2,815
(jjj) During
the 2000 taxation year, the Corporation made a 1999 Chevrolet Blazer Tahoe
automobile available to the Appellant.
(kkk) The
value of the benefit to be included in computing the Appellant's income in
respect of this automobile was established at $2,815.
[7] Having observed
that the Corporation's accounting system was utterly defective, the auditor
proceeded using the indirect method; she accordingly analyzed the deposits and
various transactions on the bank accounts of the Corporation, Patrick Fortin
and his spouse. Thus, the assessments are based on this analysis and on the entries
in the various bank records.
[8] The Minister
found that there were many unexplained large deposits into the Corporation's
bank account. On the basis of this finding, he determined that the Corporation
had failed to declare substantial amounts of income and that Mr. Fortin
had appropriated funds of the Corporation.
[9] In other words,
the respondent claims that the Corporation failed to report significant amounts
of business income and that Patrick Fortin appropriated unreported
income.
[10] In view of the
various findings and the lack of sufficient data to carry out an analysis, the
auditor concluded that both appellants had shown gross negligence and wanton
disregard warranting the imposition of the penalties set out in subsection
163(2) of the Act.
[11] For their part,
the two appellants and their witnesses (Messrs. Daneau and Desjardins, and
Manon Dufour, Mr. Fortin's ex-spouse) provided different explanations to
account for the various deposits and withdrawals. Broadly speaking, the
explanations were somewhat vague and imprecise; they were essentially
circumstantial explanations.
[12] The evidence
disclosed that Patrick Fortin and the Corporation of which he was the sole
shareholder and director purchased and sold used vehicles.
[13] During the
taxation years in issue, Mr. Fortin's only source of income was the Corporation;
in other words, his sole source of income was the activities of the Corporation,
whose business was buying and selling used cars.
[14] Jean Daneau, an
unemployed independent worker, and Réjean Desjardins, a salesperson, both
said that they had been involved in various transactions with Patrick Fortin,
the Corporation, or both. Both witnesses said that they had on several
occasions been involved in commercial transactions as lenders, borrowers or
investors in the Corporation, through loans, or as partners or associates, or
with respect to the purchase or sale of cars.
[15] Neither witness
spoke about specific, detailed transactions. They spoke in general terms and
did not refer to any document or writing capable of confirming their very vague
testimony. They had known each other for many years, did business in the same
field, and exchanged all kinds of financial services.
[16] Manon Dufour,
Patrick Fortin’s ex-spouse, also testified. She said that she had been very
much involved in his business because she advanced money to him and co-operated
unreservedly; once, for example, she agreed to act as prête-nom on the
purchase of a boat. She explained that she had received a large sum of
money from an insurance company following the loss of her vehicle.
[17] She also said
that she had looked after Patrick Fortin’s travel for a while because his
driver's licence had been suspended.
[18] As for Patrick
Fortin’s testimony, which was the main component of the evidence, he explained
the circumstances that led to his purchase of the used-car business and the
difficulties that he had faced in operating it. He stated that it was generally
always difficult. He explained that he turned to the services of
Messrs. Daneau and Desjardins and his then spouse.
[19] First, his car
inventory was confiscated, and, later, a crime was committed at his place of
business.
[20] He asserted
that, while he had absolutely nothing to do with either of them, these far-from-ordinary
incidents had an adverse effect on his business. In fact, I wondered why
he stayed at this location rather than moving, especially since he claimed that
these incidents had been very bad for business.
[21] Describing
himself as a neophyte in accounting and adding that such things held no
interest at all for him, he said that he relied on his accountant, who
performed work for him throughout the periods in issue.
[22] The evidence on
this point disclosed that the accountant had a very limited mandate, which was
essentially confined to the closing process, and that the day-to-day and
routine activities were entrusted to a woman who clearly had little or no
skill.
[23] Patrick Fortin
also explained that he exaggerated the number of cars in his inventory so that
the overall picture of the business would look better. He also submitted false
and misleading documents to the financial institution with which he did
business in order to avoid having his line of credit called. In general, his
testimony was ambiguous and did not refer to any specific, documented fact that
could substantiate certain explanations.
[24] On the other
hand, the work of the auditor, Jannette Mercier, was absolutely
impeccable. She obtained all the available documents, and this enabled her
to do serious and responsible work. She considered the explanations that the
parties concerned submitted to her and verified the information provided to
check whether it made sense and, above all, was plausible.
[25] Since she was
unable to obtain all the reliable information from the accountant, and as her
auditing work was limited to attempting to make sense out of incomplete,
inadequate and totally unreliable data, the auditor analyzed all available
documents, particularly the most reliable ones, namely, the microfiches
obtained from the Caisse populaire.
[26] Using the
microfiches and the various bank statements of Patrick Fortin’s spouse, the
auditor tried to follow the trail of the activities and connect the various
dots in a reasonable manner. The results that she obtained were not consistent
with the appellants' contentions, and thus, the explanations that were provided
could not be considered plausible.
[27] In my opinion,
it is difficult, if not impossible, to draw any conclusion at all from the
explanations of Patrick Fortin and his witnesses.
[28] The assessments
pertained to very specific transactions that could or should normally have been
explained or justified rather easily if Patrick Fortin had had a basic
accounting system or had managed his business with a modicum of order.
[29] The accountant,
who was called to the rescue, was unable to clarify or explain a thing. He made
several references to numerous shortcomings or deficiencies in the accounting,
and added that he could practically never obtain information, and therefore constantly
and regularly had to make adjusting entries, the bases of which were frequently
arbitrary in that he could not verify their accuracy or veracity with the
people involved.
[30] The accountant
claims that from the first year that he worked for Patrick Fortin, he strongly
recommended that Mr. Fortin replace the person who did his bookkeeping, but
this was never done.
[31] In response to
the Court's questions, the accountant, Claude Caron, said that no consideration
would be enough for him to accept such a mandate today, given the impossibility
of producing work that is of a certain quality and that is acceptable according
to the standards of his profession.
[32] Neither the
accountant, nor the two witnesses, nor Patrick Fortin were able to provide
probable or reliable explanations. They referred to certain transactions such
as the sale of a boat and a $40,000 insurance settlement, and to vague
explanations provided by friends, in an attempt to show that everything was
transparent or consistent and aboveboard.
[33] In other words, relying
on a small number of isolated facts, Patrick Fortin and his witnesses sought to
use certain data that were incomplete, albeit precise in some respects — for example, the sale of the boat and the
insurance settlement — to claim that
they explained all the inconsistencies and all the discrepancies in the figures.
[34] For her part,
the auditor, Jannette Mercier, specifically analyzed each contention and
quickly realized that they were patently improbable and contained numerous
inconsistencies and implausibilities.
[35] In fact, the
auditor correctly noted that it was mathematically impossible for Patrick
Fortin to have advanced money on a regular basis when his reported income was
utterly marginal, indeed ridiculously low.
[36] Patrick Fortin
placed considerable emphasis on the fact that business had always been very
difficult because he was the victim of devastating publicity, notably following
an enormous seizure of allegedly stolen vehicles in 1995, following his
acquisition of the used-car business in 1994 from a person who had had some
trouble with the law.
[37] Having had
absolutely nothing to do with the charges at the root of that seizure, Patrick
Fortin held on to the establishment and continued to deal with his vendor, that
is, the former owner.
[38] What is more, it
appears that they did business frequently: their transactions included
advances, remittances, loans, reimbursements, co-ownership of vehicles, and so
forth.
[39] If the situation
was that difficult for his business, it is hard to understand why Patrick
Fortin continued to operate at that location, especially since perception is
often a very important factor in the success of a commercial endeavour.
[40] There was also
gunfire at the same location in 1999, another incident that would have led to a
dubious reputation and been very detrimental to the success of the business.
[41] According to
Patrick Fortin, business was not very good. He said that in order to avoid
having his line of credit called in, he falsified his inventory so that he
could submit acceptable figures.
[42] Since he
believed himself to be of questionable solvency, he used his spouse as a prête-nom
for certain transactions, such as the purchase of a boat and a snowmobile.
[43] In order to
secure financing from the Caisse populaire, he submitted a false balance sheet
in which he exaggerated the value of certain assets considerably.
[44] He stated that
he paid $18,000 for a boat when the actual amount laid out was $12,000. When
taking out a loan, he put the boat's value at $16,000. He did not recall the
name of the seller, but he did remember that the false annotation
"advance" was simply intended to avoid taxes on the transaction.
[45] When the
questions became technical, Patrick Fortin's memory failed him; he said that he
did not understand figures. It was all Greek to him, he added.
[46] He also said
that he spoke very little with the accountant other than to tell him to arrange things so that they would
look good.
[47] He said that his
financial statements showed completely fictitious and generally inflated
inventory. Cash played an important role in his activities; cash inflows and
outflows were frequent and the amounts often large, but Patrick Fortin said
that they were absolutely necessary.
[48] The taxation
system is based on the principle of self-assessment. Most Canadian
taxpayers have very little leeway in terms of the exact amount of income that
they must report as they are taxed at the source, so the income they receive
has generally already been taxed.
[49] However, other
taxpayers, including Patrick Fortin during the years in issue, must keep
accounting records that make it possible to establish their revenues and expenditures.
[50] Those records
must be complete, clear and consistent in order that expenditures and revenues
may be explained. The fact that audits are often conducted and requests for
information often made a few years after transactions have taken place makes it
all the more important to keep such accounting records.
[51] While it is not
essential that such accounting be so absolutely perfect as to be a veritable
model of conformity with good practice in the field, it does have to enable
plausible and reasonable determinations to be made; otherwise, it might be
extremely difficult to prove anything.
[52] All assessments
are presumed to be accurate, and those who wish to challenge the validity of an
assessment have the burden of proof, except in certain situations, such as
those involving penalties, where the burden is on the Canada Customs and
Revenue Agency.
[53] Indirect or
circumstantial evidence obviously is not as reliable and certain as direct
evidence, so it is necessary, even essential, that its incomplete or partial
bases be of very high quality, as opposed to being simplistic, vague and
general assertions by a person who does not hesitate to submit false and
misleading explanations and documents to avoid certain troubles or
inconveniences.
[54] Such a burden of
proof is demanding; it requires evidence that rests on credible and reasonable
foundations. If necessary, such evidence can be derived essentially from oral
explanations, in which case there is little room for confusion or inconsistencies;
moreover, the person who adduces such evidence must be very credible, otherwise
his testimony risks being limited or incomplete in scope.
[55] In addition, the
explanations must be clear, consistent and complete; they must not be
outlandish, confused or even implausible or unreasonable.
[56] There is nothing
exceptional about these requirements; essentially, they provide a measure of
fairness and justice for all of the country's taxpayers.
[57] Anyone who disregards
basic accounting rules or who recklessly flouts administrative discipline risks,
through his recklessness, negligence and carelessness, being unable to meet his
burden of proof and consequently having his contentions rejected.
[58] With respect to
the shareholder benefit, it is important to consider the particular facts of
the case. There can obviously be explanations or justifications that will compel
us not to treat certain entries as benefits within the meaning of subsection
15(1) of the Act.
[59] However, this
assumes the existence of a context, circumstances and precise, relevant facts
that are validated ideally by documentary evidence.
[60] Where such
evidence does not exist and the facts reveal a patent lack of care on the part
of the actors involved in processing the data, accepting the mostly verbal
representations would have the effect of rewarding negligence, carelessness and
recklessness.
[61] In the case at
bar, Patrick Fortin and the Corporation whose shares were all owned by him
operated informally and without the slightest administrative discipline.
[62] Moreover, even
if Patrick Fortin had succeeded in showing that his claims were reasonable, he
would have had to demonstrate through his conduct that he was credible.
[63] The fact that he
admitted to falsifying the inventory in order to present a more favourable
picture, that he altered the financial statements submitted to the financial
institution that financed him, that he disregarded the accountant's
instructions on how to do his bookkeeping, and that he used the services of an
accountant essentially to make things look good all point, in case of doubt, to
a finding that he was not credible.
[64] With a modicum
of good will and a genuine intention to meet his tax obligations, it would have
been easy and straightforward for Patrick Fortin to present adequate and coherent
accounting records that would have made it possible for the questions raised in
any tax audit to be answered.
[65] Not only did
such accounting records not exist, but Patrick Fortin had the audacity to claim
that his accountant was responsible for certain instances of confusion or
error, and to hide behind the accountant's work, claiming that his affairs were
well organized and that everything had been properly justified with cogent
evidence considering the skill of the accountant, whom he did not call as a
witness.
[66] Actually, the
accountant did testify, at the respondent's request. Moreover, this Court does
not read the accountant's testimony as the appellants do, and it definitely
does not share the appellants' interpretation of that testimony. A few excerpts
from the accountant's testimony are very revealing and clearly show the
appellants' interpretation of that testimony to be quite simply inappropriate, indeed
wrong-headed.
Pages 157-58 of the
transcript:
[TRANSLATION]
Q. . . . you mean
that cash inflows and outflows could be shown that would have the
effect . . . all other things being equal, of lowering all
that?
A. Yes.
Q. O.K. So,
if, for example, the $20,722 came from . . . In other words, the $66,000 minus
the $20,000, those are net transactions on this account?
A. Mm-hmm.
Q. So $40,000
more at the end of the year, is that right?
A. Yes.
Q. O.K.
Great. Could you tell me why you advised Mr. Fortin to change accountants,
bookkeepers, as they are called?
A. Well,
listen, it wasn't complicated: things were a complete mess. The first year that
Patrick came to my office, I suggested he find someone else. But it went on for
four, five years . . . I don't know, I don't remember anymore. And, at some
point, because you have to understand that the more a client does things right,
the less it will cost him at our firm.
So at some
point, when you want to do a notice to reader that is supposed to be a
financial statement that costs maybe $1,000, but it winds up costing $2,500 or
$3,000 because you try to locate everything and track everything down; the
client isn't happy. And it's a sure thing that at some point, that you can't produce
. . . It has to be brought to a conclusion somewhere along the line. So you put
time, you put time into trying to balance everything. And the cash doesn't
balance. The cash, it's like the number one item in a file. If the cash account
doesn't balance, you have serious problems afterwards. So that was why.
And I wasn't sure his bookkeeper understood what she was doing.
Q. O.K. And
the inventory portion, could that have had an impact? Let's say Mr. Fortin
inflated his inventory, could that have affected the "advance"
account?
A. No, not at
all.
Q. No?
A. No,
because in that case the inventory, the figure corresponding to inventory goes
into purchases. Cars are bought and there is no outflow of money there. Even if
I affect the inventory somewhat by changing my figure as I feel like it, I
don't have any cash inflows or outflows . . .
Page 86 of
the transcript:
[TRANSLATION]
Q. All
right. Now, you said earlier that the accountant for the taxation years 99,
2000, and 2001, among others, told you it didn't balance, didn't you say that
earlier?
A. Well, as
he said, it never balanced. He often criticized me for that.
Q. What do
you mean by "not balancing"?
A. Well,
probably because of my inventory, which was inflated.
Q. Your
inventory was inflated?
A. Yes, he
always asked me for a list of my inventory. So I gave him a list and topped it
up.
Q. You topped
it up?
A. Yes, to
show a profit at year-end.
Q. Did your
accountant ever tell you there was an enormous number of deposits into the
company that weren't accounted for?
A. No. His
only criticism was . . . the person who did my bookkeeping . . .
[67] Patrick Fortin
claimed that the accountant never spoke to him about the significant carry-overs
and never justified or explained anything, whereas the accountant expressly
stated that his accounting was deficient, that he often had to ask questions,
and above all, that he strongly recommended that Patrick Fortin change
bookkeepers.
·
The
financial statements show advances from third parties but provide no details;
the third parties in question did not testify.
·
Patrick
Fortin spoke about losing his driver's licence, but provided no evidence in
this regard despite a formal undertaking at the examination for discovery.
·
He
says that he knows nothing about accounting, but stated that he personally
inflated the inventory so that the accounting would look better.
·
Despite
the accountant's strong and very serious recommendation regarding the quality
of the work based on which he had to prepare the financial statements, Patrick
Fortin did not change his habits in the slightest.
·
He
has a disconcerting knack for providing false and misleading information.
·
He
has little compunction about preparing and submitting false documents.
·
There
is a complete lack of simple, clear, consistent explanations.
[68] Only one
conclusion can be drawn from all these factors: the circumstantial
evidence adduced by the appellants is not plausible and must quite simply be
rejected.
[69] With respect to
the penalties, the evidence disclosed that Patrick Fortin had no compunction
about falsifying certain documents; in fact, he was prepared to do anything to
achieve his ends. He was much more aware and informed in the field of
accounting than he claimed, and he managed his business in a way that clearly
only he understood. He used external resources such as an accounting clerk and
an actual accountant solely to submit accounting documents that appeared
correct and acceptable. Such conduct is utterly unacceptable and is tantamount
to gross negligence because he completely disregarded his obligations.
[70] Accordingly, the
appeals are dismissed in that the assessments and penalties are confirmed on
the basis that they are wholly in accordance with the Act. The respondent
is entitled to her costs.
Signed at Ottawa, Canada, this 21st day of
July 2006.
"Alain Tardif"
on this 29th
day of January 2008.
Erich Klein,
Revisor
Email this Content