Poulin v. MNR, 87 DTC 113, [1987] 1 CTC 2171 (TCC)

Taylor, T.C.J.:—This is an appeal against income tax assessments, for the years 1973, 1974, 1975, 1976, 1977 and 1979, heard in Toronto, Ontario, on December 9, 1986, in which the Minister of National Revenue taxed the appellant under subsection 15(1) of the Income Tax Act, and in addition added penalties under subsection 163(2) of the Income Tax Act. The notice of appeal read:

Statement of Facts and Reasons

1. Mr. Poulin’s 1973, 1974 and 1975 taxation years were reassessed. These taxation years should not be subject to a reassessment since they were statute barred at the time the Notices of Reassessment were issued.

2. Mr. Poulin’s 1976 through 1979 taxation years were reassessed by adding certain amounts to his income pursuant to the provisions of Subsection 15(1). These amounts were in fact loans by the corporation to the shareholder and should have been taxed in his hands subject to the provisions of Subsection 15(2).

3. The taxpayer was assessed a penalty under Subsection 163(2) for taxation years 1973 through 1979. These penalties should not have been levied.

The parties filed an “Agreed Statement of Facts” at the start of the hearing as follows:

1973 Taxation Year

1. The Appellant, who at all material times was a shareholder of J. Raymond Poulin Ltd., received two refunds from the Ontario Ministry of Revenue, Gasoline Tax Branch, for fuel tax paid by J. Raymond Poulin Ltd., which refunds were deposited to the Appellant’s personal bank account. The first refund related to claim number P4537 and was in the amount of $2,866.71; the second related to claim number R3838 and was in the amount of $3,031.12 (total $5,897.83).

1974 Taxation Year

2. The Appellant received $538.72 from Royal Insurance Company and deposited the proceeds to the Appellant’s personal bank account. Proceeds were compensation for an inventory loss of J. Raymond Poulin Ltd.;

1975 Taxation Year

3. (a) The Appellant received a refund from the Ontario Ministry of Revenue, Gasoline Tax Branch, in the amount of $4,825.62. The amount was in satisfaction of claim number M2440 for a refund of fuel tax paid by J. Raymond Poulin Ltd. The refund was deposited to the personal bank account of the Appellant.

(b) the Appellant deposited to his personal bank account a further amount of $1,200.00, being proceeds from the sale of a tractor which was a capital asset of J. Raymond Poulin Ltd.

1976 Taxation Year

4. (a) The amount of $1,649.75 was paid by Dalloire Construction and deposited to the Appellant’s personal account. This was sales income of J. Raymond Poulin Ltd.

(b) The amount of $400.00 was paid by Oba General Stores and deposited to the personal bank account of the Appellant. This amount was sales income of J. Raymond Poulin Ltd.

(c) The Appellant received a refund from the Ontario Ministry of Revenue, Gasoline Tax Branch, in the amount of $7,162.50. The amount was in satisfaction of claim number N1233 for a refund of fuel tax paid by J. Raymond Poulin Ltd. The refund was deposited to the personal bank account of the Appellant.

1977 Taxation Year

5. The Appellant deposited to his personal bank account insurance proceeds in the amount of $65,000.00; being compensation for the total loss of a Debarker- Slasher owned by J. Raymond Poulin Ltd. Payment of the proceeds was made by three companies:

(i) Hanover Insurance Company for $21,666.67;

(ii) Orion Insurance Company for $21,666.66; and

(iii) Sovereign General Insurance Company for $21,666.66.

(Total: $64,999.99)

1979 Taxation Year

6. (a) The amount of $420.00 was deposited by the Appellant to his personal bank account. This amount was sales income of J. Raymond Poulin Ltd. (Newaygo contract).

(b) During the 1979 taxation year, J. Raymond Poulin Ltd. paid $1,213.00 for a trip to Florida for the Appellant and certain other persons. The Appellant did not include the sum of $1,213.00 in the computation of his income for his 1979 taxation year or any other taxation year.

The Minister in the reply to notice of appeal submitted a schedule providing details of the assessments for purposes of imposition of the penalties:

In so assessing the Minister relied, inter alia upon subsections 15(1), 152(4) and 163(2), and upon paragraph 6(1 )(a) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, s. 1, as amended. The Minister submitted that the appellant had .. made misrepresentations attributable to neglect, carelessness or wilful default or committed fraud in filing his returns of income . . ." with respect to the taxation years, alleged to be “statute barred". With regard to the penalties imposed, the Minister contended that the appellant “. .. knowingly or under circumstances amounting to gross negligence failed to report the amounts . . ."; and that the amounts at issue were either appropriations or a benefit to Mr. Poulin in his capacity as a shareholder.

In the alternative the Minister submitted that the amounts at issue were appropriations or benefits to Mr. Poulin “. . . in respect of, in the course of, or by virtue of his employment with J. Raymond Poulin Limited. . . ."

In an attempt to expedite the hearing, Mr. Ormston provided the Court with the testimony and evidence of Mr. John Douglas Hawkins, at the times material an assessor with Revenue Canada. In the conduct of his examination of the affairs of J. Raymond Poulin Ltd., Mr. Hawkins noted that the “shareholder's loan account” of Mr. Raymond Poulin had increased steadily during the years 1973 through 1979, in that the starting balance (1973) of $14,016 had reached $45,240 by 1979. The amounts indicated in the “Agreed Statement of Facts" (supra) were a reflection of deposits in the personal bank account of Mr. Poulin (Caisse Populaire) with no recording of these alleged “withdrawals”, in the books and records, or in the financial statements or tax returns of the company or Mr. Poulin. Mrs. Fernande Poulin (who testified later) was the “office-manager, bookkeeper" for the company, and according to Mr. Hawkins kept a satisfactory set of records. Mr Hawkins also met with the public accountant for the company, who prepared both the company and personal returns (a Mr. Bisson A.P.A.; and the firm of André Gagné and Bryan Gagnon, Chartered Accountants are indicated at certain times during the relevant period as providing income tax preparation assistance to Mr. Poulin). In general it was Mr. Hawkins’s understanding that the books and records from which the financial statements and tax returns (corporate and personal) were prepared, were those brought to the accountants by Mrs. Poulin. From what Mr. Hawkins was able to determine, the critical amounts at issue in this appeal had never been detailed to the accountant. There were other situations and circumstances (gas rebates, sales of assets, etc.) not dissimilar to the amounts in issue in this appeal, which had been properly recorded and treated as company income in the books and records. The regular bank account of the company was at the Canadian Imperial Bank of Commerce, (C.I.B.C.) not the Caisse Populaire. Copies of cheques deposited at the Caisse Populaire, at issue in this appeal, and/or relevant deposit slips were filed with the Court. None of these documents contained any reference to the appellant, Mr. Poulin, but there was reference (initials, etc.) from Mrs. Poulin. It was stated by Mr. Hawkins that the major (almost exclusive) source of revenue for the company was the Ontario Paper Company Limited, from which cheques, in payment of the accounts submitted by the company, were deposited directly from Ontario Paper (never going to Mrs. Poulin or the appellant) into the C.I.B.C. Mr. Hawkins also noted that he had received the utmost cooperation and assistance from Mrs. Poulin and the accountant during the examination of the affairs. He had not met with Mr. Poulin, or reviewed the proposed assessments with him directly — but understood this had been done by either or both of Mrs. Poulin and the accountant.

Mrs. Fernande Poulin testified that she did not have much education or background in accounting or running an office — and that for periods up to six months at a time she would be alone while her husband (the appellant) was away in the bush cutting wood. She recognized that some — perhaps all — of the amounts in issue should have been regarded as income of the company. The company had been incorporated in 1968, and before that the operation of cutting wood and selling it to Ontario Paper had been carried on by her husband and herself on a personal basis. There were probably two reasons she made some deposits in the “Caisse” — according to her. She knew at all times that the company owed her husband money (the shareholder's loans), although she did not know at any one time the exact amount since that was made up by the accountant after the year end. The fiscal year was June 1 to May 31. And also the Caisse was open later in the day than C.I.B.C. and opened on Saturdays. Bank records from the Caisse personal account were introduced, and these did show that some amounts (for machinery payments, etc.) had been made out of that account, and some transfers made to the company bank account therefrom. It did appear that proper credit had been taken by Mr. Poulin for these transfers to the company in all or almost all cases, but again there was no indication that a record of company funds deposited in his personal account had been made for the company purposes. This was then the reason Mr. Poulin’s “shareholder's loan account'' had escalated so much during the years in question — particularly after the receipt of the $65,000 insurance payment (supra) in 1977. Mrs. Poulin had the authority to make deposits to the account at the “Caisse”, but she did not have the signing authority for cheques on it, or withdrawals from it. She agreed she had not turned over to the accountant any of the records, deposit slips, etc. relating to the “Caisse” which were the subject of this appeal. Mrs. Poulin prepared the T-4 slips for the employees including her husband, and agreed she had not indicated thereon any such deposits in his personal accounts as “income” of any kind. As she explained it, Mr. Poulin took very little interest in the office work, and rarely if ever saw the accountant — certainly not to review in detail the income tax returns. She had deposited the $65,000 insurance money in the personal account, because they intended to rebuild the mill which had been burned down — and that was the purpose of some of the transfers of the money to the company account — at least two amounts, one for $15,000 and one for $20,000. A schedule of the "shareholder's loan account" showing all the entries therein for 1968 through 1982 was submitted to the Court. It appeared there had always been a balance an amount of credit to Mr. Poulin (not taking into account the detailed effect of the changes which would have resulted, had the amounts at issue in the appeal been recorded therein). Mrs. Poulin did submit some very elementary information (receipts) which she alleged represented other amounts of expenditures from the "Caisse" on company business for which Mr. Poulin had not apparently been credited.

Analysis

There is one major matter to deal with before the merits of the assessments as such can be examined. That is whether the statute-barred years — 1973, 1974 and 1975 should be brought back into the assessment picture by the Minister. I say only "1973, 1974 and 1975” since these are the years referenced as "statute barred" by the appellant, although there could be a reason that 1976 is also statute barred because the fiscal year and the calendar year are not the same. I have made no effort to determine this, and it was not detailed at the hearing. In order for the Minister to assess these years, as I understand the case law in this set of circumstances (see Carl G. Wilson and Murray Wilson v. M.N.R., [1976] C.T.C. 2245; 76 D.T.C. 1187 (T.R.B.); Jet Metal Products Limited v. M.N.R., [1979] C.T.C. 2738; 79 D.T.C. 624 (T.R.B.); and Lucien Venne v. The Queen, [1984] C.T.C. 223; 84 D.T.C. 6247 (F.C.T.D.)), that requires the Minister to substantiate that there is at least one item for each taxation year “statute barred" which falls into the category of ". . .any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act . . .” (subsection 152(4)). It was the Minister's approach in this appeal in argument, to contend that the evidence and testimony demonstrated "gross negligence" for all the years at issue, which then automatically cover the "statute-barred" years according to counsel. Counsel for the appellant agreed that the “onus” on the Minister was greater where a penalty was imposed (subsection 163(2)) than when it was merely a requirement to re-open the year for taxation (subsection 152(4)).

While I would say that in general the requirement under subsection 163(2) of the Act, is somewhat more onerous than that under subsection 152(4) — (the opinion of counsel for the appellant), I do point out that the requirement under subsection 163(2) is simply not an extension of that requirement under subsection 152(4). I am perfectly satisfied in the circumstances of this case, that there was “‘neglect” or "carelessness", as indicated in subsection 152(4). But I have a problem with whether there was any "misrepresentation". I am not satisfied at all that there was “wilful default" or "fraud", (other parts of subsection 152(4)). Therefore what was misrepresented — if anything? Certainly the amount at issue in 1974 was income of the company, and was not reported as income thereof. In fact even after the hearing, I am still not aware if the company has been reassessed as it appears might have been in order. In that situation, for the company, in filing its tax returns, there was the prospect of "misrepresentation", even “wilful default” or "fraud". But as I see it, it is not the “neglect, carelessness or wilful default” which warrants the re-opening of a taxation year under subsection 152(4), it is the misrepresentation which arises therefrom, "in filing the return or in supplying any information under the Act". For example, in filing his own personal return for the year 1974, there had been no evidence produced by the Minister that Mr. Poulin was aware at all that he was under-reporting his income — if it can be said that he was doing so. For what reason would he report as his income in that year an amount of $538.72 which had been deposited in his personal bank account, apparently without his knowledge, arising out of the proceeds of an insurance claim, placed in that bank account rather than the company bank account by his wife probably because the Caisse was open that day? As the principal shareholder of the company, Mr. Poulin did misrepresent its income, but I fail to see how it can be said he minimized his own income — which is the only point at issue here. For the years 1973, 1974 and 1975 the appeal will be allowed in that the Minister has not shown that Mr. Poulin made any “misrepresentation" regarding his taxable income, as it was known to him at that time. Further I fail to see how it can be said that Mrs. Poulin's failure to bring the bank deposits at issue to the attention of the accountant, or the accountant’s failure to enquire into the affairs of Mr. Poulin sufficiently to uncover them, can be attributed to Mr. Poulin within the framework of the term “misrepresentation". (See Columbia Enterprises Ltd. v. M.N.R., [1978] C.T.C. 3082; 78 D.T.C. 1783 (T.R.B.); The Queen v. Columbia Enterprises Ltd., [1981] C.T.C. 180; 81 D.T.C. 5133 (F.C.T.D.) and The Queen v. Columbia Enterprises Ltd., [1983] C.T.C. 204; 83 D.T.C. 5247 (F.C.A.).)

Turning then to the remaining years — 1976, 1977 and 1979 there is a slightly different problem, even before we review the “penalty” imposition. The amounts at issue in 1976 and 1979 were income of the corporation, other than the $1,213 in 1979 which was a non-deductible expense to the corporation. I am equally satisfied that for these years the provisions of subsection 15(1) of the Act should apply to the appellant “as a shareholder". While I appreciate the efforts of his counsel to attribute to these transactions some form of relationship to the alleged “credit" in his shareholders' loan account, I cannot agree that this kind of post-facto reconstruction of the situation and procedures should absolve the appellant from the income tax assessments. Equally the assertion that subsection 15(2) regarding some form of “loans” should apply does not persuade me. The critical requirements from subsection 15(2) were not fulfilled “at the time the loan was made" (if the amounts can be called “loans’’). Further “bona fide" arrangements for repayments were not made, and all in all, at least the transactions would form a “series of loans and repayments".

The explanations from Mrs. Poulin were to the effect that the small amounts of sales (Dalloire Construction $1,649.75, Oba General Stores $400, Newaygo, $420) were so infrequent — and had nothing to do with their regular, only customer for wood, Ontario paper — that she did not consider it wrong at all when she deposited them in the personal account. From the years 1973 through 1976, some of the gas tax rebates had been put into the company funds, only the ones noted here had been put in the personal account. She never deposited anything in the company account, all amounts coming by automatic transfer from Ontario Paper. Counsel for the respondent did not attempt to show that Mr. Poulin had “knowingly" participated in the filing of a tax return which on the surface he should have known might have included the amounts at issue, if he considered them income. At the minimum, I need to reach the conclusion that Mr. Poulin had “. . .under circumstances amounting to gross negligence . . . participated in, assented to or acquiesced in the making of ... an omission. . .” in order to uphold the Minister’s imposition of penalty on these amounts of sales, and also on the gas tax rebate of $7,162.50. In my view, I can only do that by agreeing that Mr. Poulin had been “grossly negligent" in allowing his wife Fernande Poulin the authority and responsibility she exercised with regard to his personal affairs, as well as the company business affairs. It would not be difficult to argue that rather than being "grossly negligent” he had been very prudent in ensuring to the best of his ability that operations were conducted in generally a good fashion (the testimony of Mr. Hawkins). There was no reference to chaotic or incomplete records, nor was there any indication that matters relating to income tax liability, either corporate or personal were regularly treated in a haphazard way by Mrs. Poulin. Mr. Poulin had every reason to have confidence in Mrs. Poulin when he was away for long periods of time in the bush — and it would seem in general she lived up to that confidence. Apparently he had neither the time, the inclination, nor the training to check into details which might have shown up the inaccuracies at issue. Mrs. Poulin agreed that the amount of $1,213 for the trip to Florida was put in the corporation records as an expense in error — simply because it had been paid out of company funds at the time. I am not prepared to find that the appellant was "grossly negligent” with respect to the years 1976 and 1979.

I turn then to the year 1977, which of course is the most critical. In dealing with this I start from the knowledge that Mr. Poulin did not deposit to the C.I.B.C. bank account — this was done directly by Ontario paper. Certainly the insurance cheque must have been a welcome and a noticed sight (the three cheques came the same day, in the same envelope according to Mrs. Poulin). Although the "gross” part of "gross negligence” in my mind does not have solely a relationship to "quantum”, an amount of this size simply could not be overlooked. This is not a small sales item, a disposal of a used piece of machinery, or a gas tax rebate on all of which we have been prepared to give Mr. Poulin the benefit of the doubt. I am quite satisfied that he must have been aware of the banking in the personal “Caisse” account of these insurance proceeds. It is difficult to imagine how an amount of $65,000 under these circumstances was missed even by the accountant when the corporation tax returns were being prepared. Obviously some assets of considerable cost were destroyed in the fire. However, again, this problem is not with the corporation tax matters, it is for Mr. Poulin. It would have been impossible for Mr. Poulin to miss seeing the enormous change in his personal bank account at the Caisse — clearly a balance in the amount of more than $2,000 or $3,000 was unusual. Mrs. Poulin placed the $65,000 there with his knowledge or at least with his acquiescence and he left it there. This amount was "appropriated” by Mr. Poulin, as that term is used in subsection 15(1) of the Act.

On the "penalty” imposition, in taking some of the funds out — putting the $15,000 and $20,000 amounts in the company, — either he or Mrs. Poulin made sure that he received credit in his "shareholders’ loan account” for these amounts by the accountant. Again it is difficult to imagine how some questions were not raised by his accountants with regard to these large transfers, but there was no evidence presented about that. When making these transfers, $15,000 in 1978 and $20,000 in 1980, Mr. Poulin did not adjust or correct the 1977 non recorded company deposit of $65,000 in 1977. I am satisfied that during the calendar year 1977 through 1982 (see Exhibit A-1 "Shareholders’ Account Analysis”) Mr. Poulin was well aware that $65,000 of company funds either in whole or in part, remained in his personal bank account, without proper reference being made in the company accounts. As indicated above, I believe he was “grossly negligent” with regard to the retention and deposit of the $65,000 amount in the first place in 1977, but by any reasonable review, his conduct thereafter with regard to the use of the funds confirms his complicity in the matter. I would just note for the record that the assertion of counsel that the amount for 1977 he considered for assessment under subsection 15(2) of the Act, rather than under subsection 15(1) of the Act are rejected for essentially the same reasons as those provided herein for the years 1976 and 1979. For 1977 the assessment and the penalty will be upheld.

Summary

The appeal is allowed in part. The appeals for the years 1973, 1974 and 1975 including penalties imposed are to be allowed. For the years 1976 and 1979, the amounts of income tax are upheld, but penalties imposed are to be deleted. With regard to the year 1977 the assessment of income tax and the imposition of penalties are to be upheld. In all other respects the appeal is dismissed. Costs should not be awarded.

Appeal allowed in part.