Citation: 2010 TCC 172
Date: 20100325
Docket: 2008-3233(IT)I
BETWEEN:
MAURICE MOMPÉROUSSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan J.
INTRODUCTION
[1]
This is an appeal for
the 2003, 2004 and 2005 taxation years. The Minister of National Revenue (the
Minister) issued a Notice of Reassessment to Maurice Mompérousse (the
appellant) using an alternative method, the projection method.
[2]
In producing his income
tax returns for each of the taxation years at issue, the appellant declared the
amounts $1,095, $2,321 and $5,072, respectively, as business income. The
Minister made the following changes for the years at issue:
(a) revision of net
business income to the amounts $14,374, $19,704 and $17,366 respectively,
(b) establishment, as a
penalty for gross negligence, amounts of $2,136.23, $2,247.39 and $1,186.70
respectively.
[3]
The issues are whether:
(a) the appellant earned the
undeclared income described above,
(b) the Minister set out
conditions that support the imposition of a gross negligence penalty,
(c) the Minister satisfied
the burden of proof with respect to the facts that must be shown to allow the
establishment of a Notice of Reassessment after the standard reassessment
period for the 2003 taxation year.
THE FACTS
[4]
The appellant is a taxi
driver. He has a T-11 licence that allows him to operate his business in
downtown Montreal and Montreal
North. He owns his taxi,
which cost approximately $45,000. He financed the purchase of this car with the
assistance of a financial institution. He has a taxi permit for which he paid
around $56,000.
[5]
The appellant lives in Laval with his spouse and their four children. The couple
owns a home that cost approximately $95,000.
[6]
The appellant’s tax
file was chosen to be audited by an audit program used by the Canada Revenue
Agency (CRA) for the taxi industry.
[7]
The evidence shows that
the appellant did not maintain adequate books and accounting records for his
company. The appellant keeps notes in an agenda where he marks the total for
one week’s work by issuing approximate gross receipts at the end of each week.
He did not account for the number of trips with or without passengers, nor the
kilometrage, nor the revenue earned for each trip.
[8]
Émilie Bergeron, CRA
auditor in charge of examining the appellant’s file, analyzed the appellant’s
bank deposits. The analysis showed that the appellant only deposited a part of
the income necessary to pay the car loan and mortgage into the business
account. The majority of the appellant’s personal expenses were paid in cash
from his business income. The auditor then estimated the net worth, given the
insufficient bookkeeping. This net worth determination in tab 5 of Exhibit I-1
shows that the family income declared cannot provide for the needs of a family
with four children.
[9]
Ms. Bergeron used the projection
method to establish the existence of undeclared income. For the 2003, 2004 and
2005 taxation years, the Minister assumed that the appellant traveled a total
of 46,048 km, 45,668 km and 43,758 km, respectively, based on the taxi’s
maintenance records, obtained from the Société de l’assurance automobile du
Québec. The Minister also took into account the following data to establish the
appellant’s undeclared business income:
|
|
|
2003
|
2004
|
2005
|
|
|
|
|
|
|
|
(a)
|
total kilometrage
|
46,048
|
45,668
|
43,758
|
|
|
|
|
|
|
|
(b)
|
less: personal kilometrage
|
18,419
|
18,267
|
17,503
|
|
|
|
|
|
|
|
(c)
|
appellant’s kilometrage —
business
|
27,629
|
27,401
|
26,255
|
|
|
|
|
|
|
|
(d)
|
trips with clients (50 %)
|
13,814
|
13,700
|
13,127
|
|
|
|
|
|
|
|
(e)
|
rate … per kilometre
|
$1.20
|
$1.30
|
$1.30
|
|
|
|
|
|
|
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(f)
|
number of trips (5 km/client)
|
2,76[3]
|
2,740
|
2,625
|
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|
|
|
|
|
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(g)
|
income — fare … per
kilometre
|
|
|
|
|
|
|
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|
|
|
13,814 x $1.20
|
$16,577
|
|
|
|
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13,700 x $1.30
|
|
$17,810
|
|
|
|
13,127 x $1.30
|
|
|
$17,065
|
|
|
|
|
|
|
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(h)
|
departure fare — client
|
$2.50
|
$2.75
|
$2.75
|
|
|
|
|
|
|
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(i)
|
tips
|
10%
|
10%
|
10%
|
[10]
The analysis of the
data above allowed the Minister to identify gaps between the gross business
income declared and the net business income calculated using the projection
method:
|
|
|
2003
|
2004
|
2005
|
|
|
|
|
|
|
|
(i)
|
income [per] kilometres [traveled]
|
$16,577
|
$17,810
|
$17,065
|
|
|
|
|
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|
|
(ii)
|
income — departure fee
per client
|
|
|
|
|
|
|
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2,763 x $2.50
|
$6,907
|
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2,740 x $2.75
|
|
$7,535
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|
2,625 x $2.75
|
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$7,220
|
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|
|
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(iii)
|
tips
|
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|
|
|
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($16,577 + $6,907) x 10%
|
$2,349
|
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|
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($17,810 + $7,535) x 10%
|
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$2,535
|
|
|
|
($17,065 + $7,220) x 10%
|
_______
|
_______
|
$2,429
|
|
|
|
|
|
|
|
(iv)
|
revised gross business income
|
$25,833
|
$27,880
|
$26,714
|
|
|
|
|
|
|
|
(v)
|
less: gross declared business income
|
$13,660
|
$13,040
|
$17,387
|
|
|
|
|
|
|
|
(vi)
|
gaps — gross business
revenue
|
$12,173
|
$14,840
|
$9,327
|
[11]
Following the
appellant’s failure to declare the total income from his taxi company, the
Minister established a gross negligence penalty, based on the undeclared net
income.
[12]
The Minister also disallowed,
as a result of the business expenses related to the taxi for the years at
issue, a part of the appellant’s expenses because his rate of personal vehicle
use was 40%, rather than the 20% indicated on his income tax return:
|
|
|
2003
|
2004
|
2005
|
|
|
|
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|
(i)
|
revised personal use
|
40%
|
40%
|
40%
|
|
|
|
|
|
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(ii)
|
disallowed expenses (vehicle fees
[automobile])
|
|
|
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|
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|
(a) $5,530 x 20%
|
$1,106
|
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(b) $12,713 x 20%
|
|
$2,543
|
|
|
|
|
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(c) $14,833 x 20%
|
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$2,967
|
[13]
Following the calculations
above, the Minster made the following changes when calculating the appellant’s
income:
|
|
|
2003
|
2004
|
2005
|
|
|
|
|
|
|
|
(i)
|
undeclared gross business income
|
$12,173
|
$14,840
|
$9,327
|
|
|
|
|
|
|
|
(ii)
|
disallowed business expenses
|
$1,106
|
$2,543
|
$2,967
|
|
|
|
|
|
|
|
|
|
$13,279
|
$17,383
|
$12,294
|
ANALYSIS
[14]
It is a well-established
fact that within the Canadian tax system, the Minister may establish arbitrary
assessments, using any appropriate method, while considering specific
circumstances.
Did the appellant earn undeclared income?
[15]
In this case, the total
kilometrage traveled by the appellant during each year in question comes
directly from reading the odometer, which for regulatory purposes, is done
every six months. The other data held by the Minister comes from regulations
applicable to the taxi industry or from statistics established by the
Commission des transports du Québec during a public inquiry, the purpose of
which is to set the rates applicable to Montreal Island and elsewhere in Quebec. The statistics were accepted by
various associations that participated in public debates on behalf of taxi
drivers on Montreal Island. The appellant does not accept the Minister’s
calculations, but does not offer any alternative method for consideration, he
is unable to specify the number of paid trips made each day for his own business
and the corresponding income.
Assessment and reassessment (limitation
period)
[16]
The term “normal
reassessment period” is defined as follows by subsection 152(3.1) of the Income
Tax Act (the ITA):
152(3.1) Definition of “normal
reassessment period” —For the purposes
of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal reassessment
period for a taxpayer in respect of a taxation year is
(a) where at the end of the year the
taxpayer is a mutual fund trust or a corporation other than a Canadian-controlled
private corporation, the period that ends 4 years after the earlier of the day
of mailing of a notice of an original assessment under this Part in respect of
the taxpayer for the year and the day of mailing of an original notification
that no tax is payable by the taxpayer for the year; and
(b) in any other case, the period
that ends 3 years after the earlier of the day of mailing of a notice of an
original assessment under this Part in respect of the taxpayer for the year and
the day of mailing of an original notification that no tax is payable by the
taxpayer for the year.
[17]
Subparagraph 152(4)(a)(i)
of the ITA focuses on the limitation period for making these assessments:
152(4) Assessment and reassessment —The Minister may at any time make an assessment, reassessment or
additional assessment of tax for a taxation year, interest or penalties, if
any, payable under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that no tax is
payable for the year, except that an assessment, reassessment or additional
assessment may be made after the taxpayer’s normal reassessment period in
respect of the year only if
(a) the taxpayer or person filing the
return
(i) has made 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,
…
[My emphasis.]
[18]
Chief Justice Bowman
(as he was then known) said in Biros v. The Queen that “The Minister has
the onus of establishing misrepresentation in order to open up the statute‑barred
year.”
[19]
Justice Bowie
reiterated this in College Park Motors Ltd. v. The Queen:
20 …subparagraph
152(4)(a)(i) is not penal but remedial. It balances the need for
taxpayers to have some finality in respect of their taxes for the year with the
requirement of a self-reporting system that the taxing authority not be
foreclosed from reassessing in those instances where a taxpayer’s conduct,
whether through lack of care or attention at one end of the scale, or willful
fraud at the other end, has resulted in an assessment more favourable to the
taxpayer than it should have been. This, quite rightly, is not a penalty case. …
[20]
The judge also stated
that subparagraph 152(4)(a)(i) “…is not at all concerned with establishing
culpability on the part of the taxpayer. Other provisions of the Act are
in place to do that. …”
[21]
Justice Tardif reviewed
the caselaw regarding the meaning of “neglect” or “misrepresentation” in subparagraph 152(4)(a)(i) in Savard v. The
Queen
The judge quoted, with approval, the following from Justice Carling from the Tax
Review Board in J.J. Froese v. M.N.R.:
I do not believe that in this context any inference other than their
generally accepted meaning can or should be given to the words
"neglect" or "carelessness" which is the contrary of the
reasonable care that is ordinarily, usually, or normally given by a wise and
prudent person in any given circumstances.
[22]
Justice Strayer of the
Federal Court declared the following in Venne v. Canada with respect to
the Minister’s burden:
[I]t
is sufficient for the Minister, in order to invoke the power under
sub-paragraph 152(4)(a)(i) of the Act to show that, with respect to any
one or more aspects of his income tax return for a given year, a taxpayer has
been negligent. Such negligence is established if it is shown that the taxpayer
has not exercised reasonable care. This is surely what the words "misrepresentation
that is attributable to neglects" must mean, particularly when combined
with other grounds such as "carelessness" or "wilful
default" which refer to a higher degree of negligence or to intentional
misconduct.
[23]
Justice Strayer
concluded that the taxpayer did not demonstrate reasonable care in preparing
and producing his income tax returns and noted that “[t]his conclusion is
based partly on the magnitude of the unreported income.”
[24]
The Federal Court of
Appeal (the FCA), per Justice Pelletier, recognized in Lacroix v. Canada that in the majority of cases, the
Minister would have difficulty showing direct evidence of the taxpayer’s state
of mind at the time the income tax return was filed:
32 …Insofar
as the Tax Court of Canada is satisfied that the taxpayer earned unreported income
and did not provide a credible explanation for the discrepancy between his or
her reported income and his or her net worth, the Minister has discharged the
burden of proof on him within the meaning of subparagraph 152(4)(a)(i)
and subsection 162(3) [sic].
[25]
The analysis of Justice
Létourneau of the FCA in Molenaar v. Canada followed in the
same vein as Justice Pelletier’s analysis in Lacroix :
4 Once the Ministère establishes on
the basis of reliable information that there is a discrepancy, and a substantial
one in the case at bar, between a taxpayer's assets and his expenses, and that
discrepancy continues to be unexplained and inexplicable, the Ministère has
discharged its burden of proof. …
Penalties
[26]
Subsection 163(2) of
the ITA penalizes a taxpayer who knowingly or in circumstances amounting to
gross negligence, makes a false statement or omission in a return:
163(2) False statements of omission — Every person who, knowingly, or under circumstances amounting to
gross negligence, has made or has participated in, assented to or acquiesced in
the making of, a false statement or omission in a return, form, certificate,
statement or answer (in this section referred to as a “return”) filed or made
in respect of a taxation year for the purposes of this Act, is liable to a
penalty of the greater of $100 and 50% of the total of:
…
[27]
Subsection 163(3) of
the ITA puts the burden on the Minister to prove that the circumstances
justifying a penalty pursuant to subsection 163(2) are present:
163(3) Burden of proof in respect of penalties — here, in an appeal under this Act, a penalty assessed by the
Minister under this section or section 163.2 is in issue, the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
[28]
In subsection 163(2)
and in caselaw, it is up to the Minister to show the facts justifying a penalty
pursuant to subsection 163(2).
In Corriveau v. Canada, Judge Archambault describes the Minister's
burden as follows:
26 Since the Minister has the burden
of establishing the facts justifying the assessment of penalties, he must
prove: (1) that the taxpayer made a false statement or omission in a return,
and (2) that the false statement or omission was made knowingly or under
circumstances amounting to gross negligence.
[29]
In Venne,
Justice Strayer said, with respect to subsection163(2):
One must keep in mind, as
Cattanach, J. said in the Udell case supra that this is a penal provision and
it must be construed strictly. The sub-section obviously does not seek to impose
absolute liability but instead only authorizes penalties where there is a high
degree of blameworthiness involving knowing or reckless misconduct.
[30]
In Morin v. M.N.R., Chief Judge Couture said:
To escape the penalties
provided in subsection 163(2) of the Act, it is necessary, in my opinion, that
the taxpayer's attitude and general behaviour be such that no doubt can
seriously be entertained as to his good faith and credibility throughout the
entire period covered by the assessment ….
[31]
In Venne, the
FCA says:
"Gross negligence"
must be taken to involve greater neglect than simply a failure to use
reasonable care. It must involve a high degree of negligence tantamount to
intentional acting, an indifference as to whether the law is complied with or
not.
[32]
In Farm Business
Consultants Inc. v. Canada,
Justice Bowman says:
22 …If,
however, it is misrepresentation attributable to "wilful default" it
is much more difficult to conclude that it is not equally a "false
statement" which the appellant made "knowingly" within the
meaning of subsection 163(2). …
The judge also said that the expressions “neglect” and
“carelessness” in subparagraph 152(4)(a)(i) are included in the
expression “gross negligence” in subsection 163(2) and the expression “wilful
default” in subparagraph 152(4)a)(i) is implicitly included in the
expression “knowingly” in subsection 163(2):
23 …"Neglect,
carelessness, wilful default or... fraud" (negligence, inattention,
omission volontaire ou... fraude) cover a wide range of non-feasance or
misfeasance, innocent or intentional, to which a misrepresentation in a return
may be attributable. There is no hiatus between the words in this series, which
starts with ordinary neglect and proceeds by gradual degrees to fraud which
would justify a penalty under subsection 163(2). The type of carelessness or
neglect encompassed by subparagraph 152(4)(a)(i) may include, but is not as
extensive as, that contemplated in the words "gross negligence" in
subsection 163(2) ("faute lourde") which implies conduct
characterized by so high a degree of negligence that it borders on
recklessness. It would be difficult to conclude that the state of mind required
for "wilful default" ("omission volontaire") is not the
same as that implicit in the word "knowingly"
("sciemment").
[33]
In Lacroix, the FCA
concluded that the taxpayer had committed gross negligence. According to the Court,
the taxpayer had not provided a credible explanation for the misrepresentation
of facts in the income tax return:
29 …In
the case at bar, the Minister found undeclared income and asked the taxpayer to
justify it. The taxpayer provided an explanation that neither the Minister nor
the Tax Court of Canada found to be credible. Accordingly, there is no viable
and reasonable hypothesis that could lead the decision-maker to give the
taxpayer the benefit of the doubt. The only hypothesis offered was deemed not
to be credible.
30 The
facts in evidence in this case are such that the taxpayer’s tax return made a
misrepresentation of facts, and the only explanation offered by the taxpayer
was found not to be credible. Clearly, there must be some other explanation for
this income. It must therefore be concluded that the taxpayer had an unreported
source of income, was aware of this source and refused to disclose it, since
the explanations he gave were found not to be credible. In my view, given such
circumstances, one must come to the inevitable conclusion that the false tax
return was filed knowingly, or under circumstances amounting to gross negligence.
This justifies not only a penalty, but also a reassessment beyond the statutory
period.
[34]
The FCA comments in Lacroix
summarize the conclusion applicable in this case. The Minister has met his
burden of proof. The Minister has highlighted the gaps between the gross
business income declared by the appellant and the net business income
calculated using the projection method. Even though the appellant does not accept
the Minister’s calculations, he does not offer any viable replacement. The
appellant did not keeping adequate books or accounting registers and is
therefore incapable of specifying how many paid trips he made for his business
and the corresponding income. The appellant maintains that his business only
earned a modest income. He explained that he bought his taxi permit for the
capital gain potential resulting from the resale of the permit, not for the
company’s annual income. The Court strongly doubts that this permit would
increase in value if the business were not profitable. It is also unlikely that
a financial institution would agree to approximately $100,000 in financing for
the appellant to run a tax business that, according to him, would only enable
him to earn the modest income declared.
[35]
The estimate of the net
earnings by the auditor show that the family income declared cannot support the
needs of a family with four children. The appellant did not offer any credible
explanations for the gap between the cost of living for his family and the
modest net income declared.
Travel expenses
[36]
In his income tax
returns for the 2003, 2004 and 2005 taxation years, the appellant claimed
amounts of $12,565, $10,719 and $12,315, respectively, as expenses for earning
business income. In his 2003 income tax return, the appellant indicated that
80% of the kilometrage he traveled in his taxi was to earn business income. The
appellant testified at the trial that this percentage was also applicable in
2004 and 2005.
[37]
The evidence shows that
during the audit, the appellant told the auditor that the return trip from his
home in Laval to Montreal was 40 km, which he traveled five times a
week, 48 weeks of the year. The appellant argued that this kilometrage should
be excluded from the calculation of his income because he was only able to
serve customers on Montreal Island. However, according to the appellant, he insisted
that the expenses to travel from home to Montreal Island remain business expenses because he uses his residence as a
place to store his car and handle all the administrative duties for his taxi business.
[38]
The evidence shows that
the auditor classified this return trip kilometrage as personal kilometrage,
reducing the percentage of commercial use from 80% to 60%. As a result the
Minister disallowed the appellant expenses of $1,106 for 2003, $2,543 for 2004
and $2,967 for 2005. I believe the Minister was incorrect in deeming these
expenses as personal ones. The appellant’s main tool for generating business
income is his car. He must keep his car someplace safe to ensure that it is
available the next day to serve clients. He cannot work without a safe place to
keep his car to prevent theft or damages. As a result, I find that the return
kilometrage represents a business expense and not a personal one. On this
subject, I would draw attention to Interpretation Bulletin IT-521R “Motor
Vehicle Expenses Claimed by Self-Employed Individuals”, which reads as follows:
General Remarks
24. Although expenses incurred in
travelling between different premises of the same business are deductible by an
individual who otherwise qualifies, expenses incurred by the individual for the
purpose of travelling between the individual's home and place of business are
not, unless it is established that the home is the base of business operations.
If the individual has an office or other fixed place of business located
elsewhere, the home is normally regarded as not being the base of business
operations. The fact that all services are rendered at some other person's
place of business does not necessarily make that place the individual's base of
business operations. The individual's home may be the base of business
operations even though a room therein is not set aside and used solely for the
purpose of earning income.
The following are examples of homes that may be regarded as the base
of business operations:
…
(c) the home of a plumber, electrician or painter whose office is
at home where all supplies are kept, who has no other place of business and who
renders all services to customers at whatever places are necessary to fulfill
contractual obligations.
[My emphasis.]
[39]
I make no legitimate
distinction between the case of the plumber described previously and the one of
the appellant. The appellant must park his car in a secure area. He uses his
home to do administrative work. As a result, the expenses incurred by the
appellant for the return trip home are business expenses. I emphasize that this
conclusion will not affect the calculations of the appellant’s income, as
argued by counsel for the respondent. The evidence shows that the appellant was
not able to do business anywhere other than on Montreal Island.
CONCLUSION
[40]
For these reasons, I
allow this appeal in part only. The reassessments are referred back to the
Minister to permit the deduction of additional business expenses of $1,106 for
2003, $2,543 for 2004 and $2,967 for 2005. All the other elements of the
reassessments remain unchanged.
Signed at Ottawa, Canada, this
25th day of March 2010.
“Robert J. Hogan”
Translation
certified true
on this 11th day
of June 2010.
Bella Lewkowicz,
Translator
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