[OFFICIAL ENGLISH TRANSLATION]
Date: 19980820
Docket: 98-341(IT)I
BETWEEN:
GEORGETTE TREMBLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] The appellant is appealing from
reassessments by the Minister of National Revenue (the
"Minister") for the 1991, 1992 and 1993 taxation years.
Those reassessments were made using the net worth method.
[2] The facts on which the Minister
relied in making the reassessments are set out in
paragraph 4 of the Reply to the Notice of Appeal as
follows:
[TRANSLATION]
a. when she
reported her income for the 1991, 1992 and 1993 taxation years,
the appellant did not include all the income she had received in
those years;
b. the amounts
of income not reported by the appellant amounted to $17,614 in
1991, $24,096 in 1992 and $45,679 in 1993;
c. the
unreported amounts were determined using the so-called net
worth method (copies of the appellant's net worth statement
and the accompanying schedules are attached hereto);
d. when filing
her tax returns for the 1991 and 1992 taxation years, the
appellant made a misrepresentation that is attributable to
neglect, carelessness or wilful default;
e. in thus
failing to report all her income, the appellant knowingly, or
under circumstances amounting to gross negligence made or
participated in, assented to or acquiesced in the making of, a
false statement or omission in the tax returns filed for the
1991, 1992 and 1993 taxation years, as a result of which the tax
which she would have been required to pay based on the
information provided in the tax returns filed for those years was
less than the amount of tax payable for those years;
f. as a
result of the appellant's failure to report all her income,
the Minister, in the notices of reassessment of June 3,
1996, assessed penalties against the appellant of $1,222.56,
$1,671.11 and $3,851.06 for the 1991, 1992 and 1993 taxation
years respectively, in accordance with subsection 163(2) of
the Income Tax Act (the "Act").
[3] The income reported for 1991, 1992
and 1993 was $4,979, $4,792 and $3,087 respectively, and the
additional income was $17,614, $24,096 and $45,679
respectively.
[4] The following grounds were
advanced in the notice of appeal:
[TRANSLATION]
The facts we wish to rely on are as follows:
The cost of living as determined by Statistics Canada is an
arbitrary figure;
In the appeal, we will be able to provide a statement from the
mortgagee concerning the source of an amount of $20,000 that was
used to reduce the mortgage at the time it was renewed in 1993
and which should in no way be considered as income.
[5] The appeal was set down for
hearing on July 22, 1998. By letter dated July 15,
1998, received by fax that same day, the agent for the appellant
requested an adjournment in order to be able to determine the
source of a sum of $20,000 which had been used in 1993 to reduce,
by that amount, the mortgage on a house acquired by the appellant
in 1992. That request was denied. The same request was repeated
at the start of the hearing. The Court having asked where,
according to the appellant, that amount had come from, the
appellant's agent answered that he had not asked her but said
that he wanted to obtain the answer to that question from the
financial institution where the deposit had been made. As the
deposit could not have been made except with the appellant's
knowledge, it was she first of all who had to explain its source,
if it had not come from her income for the year. It should be
noted that the appellant was not present at the hearing. As the
Court found the reason for the request for an adjournment
invalid, the request was dismissed and the hearing of the case
proceeded.
[6] The appellant's agent
indicated to the Court three grounds for contesting the
reassessments: the first was that the amount of the spouse's
contribution was too high. When he understood that that amount
did not increase, but rather reduced the appellant's net
additional income, the agent dropped that point. The second point
was that the cost of living amount determined for the appellant
and her husband was too high, and the third point had to do with
the source of the sum of $20,000 which had been used in 1993 to
reduce a mortgage loan.
[7] Jean-Claude Delisle, an
auditor at Revenue Canada, explained the report he had prepared
for the purpose of establishing the appellant's net worth for
the three years in issue. That report was filed as
Exhibit I-1.
[8] The net worth determination was
based on documents. Nothing was estimated except certain expenses
relating to the cost of living of a family of two adults. I
cite the auditor's explanatory notes found in
Exhibit I-1:
[TRANSLATION]
Following the filing of personal balance sheets by the T/P, we
used the net worth method to audit her tax returns. We proceeded
to examine her bank accounts at financial institutions. All the
balance sheet items were audited using contracts, invoices or
other relevant supporting documents, adjusted where
necessary.
. . .
Additional income:
We established this additional income by looking at variations
in capital. Using contracts and an analysis of the T/P's bank
accounts, we corrected certain assets shown on the T/P's
balance sheets and entered others which did not appear in the
original balance sheets. Personal expenses were determined based
on the T/P's data on the one hand and on Statistics Canada
data on the other.
The great majority of the additional income came from the
acquisition of 3250 Rue Duc de Milan in Beauport, in which
her son Mario lives. Our audit showed us that the T/P lives in
her residence on Boulevard Blanche in Baie-Comeau with her
spouse, Guilmond Tremblay. She also works in that region.
The income not reported by Mrs. Tremblay was used to acquire
the Beauport residence and to make mortgage, tax, insurance,
maintenance and other payments.
. . .
We submitted the written draft to the T/P on
September 28, 1995. At the request of J.L. Martel, the
T/P's agent, we also sent him a copy. On November 3,
1995, Mr. Martel communicated with us and he was provided
with all the information he requested. Another discussion took
place with Mr. Martel on February 6, 1996. On
February 26, I met Mr. Martel at his Baie-Comeau
offices and finalized the information required as well as our
position regarding this file (see the T2020 in the file).
. . .
Mr. Martel had "no quarrel with our figures".
However, no final agreement could be obtained from the T/P's
agent. As for Mrs. Tremblay, we never were able to contact
her.
[9] The auditor's explanatory
notes concerning the assessment of a penalty under
subsection 163(2) of the Act read as follows:
[TRANSLATION]
The amounts established by the net worth method are
significant.
The increase in net worth and the benefit from personal
expenses are not consistent with the total income reported.
The taxpayer could not be unaware that her returns were
incomplete and that her income was understated.
The balance sheets were prepared on the basis of information
obtained from third parties and/or from the client, and from
copies of microfiches from banking institutions. The personal
expenses were determined in accordance with Statistics Canada
data, and we have added certain payments not included in the
Statistics Canada data.
[10] Schedule 4 of the net worth
report is the compilation of the personal expenses of the
appellant and her husband, Guilmond Tremblay. As indicated
in paragraph 8 of these reasons, that compilation was based
in large part on information provided by the appellant's
accountant and on statistics on the cost of living for
two adults.
[11] The expenses were put at approximately
$26,000 a year. Mr. Tremblay said in his testimony that the
couple did not spend more than $300 a week. However, the
compilation of personal expenses contains a number of headings:
food, housing, household maintenance, clothing, transportation,
health care, personal care, recreation, reading material and
other material, education, tobacco and alcoholic beverages,
security, gifts and contributions, miscellaneous, and personal
income tax. It should be noted that none of the headings was
specifically attacked by the appellant's agent or her
witness.
[12] Once the personal expenses compilation
was done, the auditor showed it to the appellant's accountant
and it was reduced by approximately $5,000 to the present amount.
The auditor said that the accountant was satisfied with the
statement of the appellant's personal expenses. As to the
appellant, the auditor never succeeded in contacting her.
[13] The penalties were assessed on account
of the large difference between the income reported and that
established by the net worth method, as referred to in
paragraph 9 of these reasons. The appellant was informed in
writing of the Minister's intention to assess a penalty under
subsection 163(2) of the Income Tax Act (the
"Act"), but no representations were made on the
subject by her agents. It should also be noted that this aspect
was not raised in the notice of appeal.
Conclusion
[14] Subsections 163(2) and 163(3) of
the Act read as follows:
(2) False statements or omissions - 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
. . .
(3) Burden of proof in respect of penalties -
Where, in any appeal under this Act, any penalty assessed by the
Minister under this section is in issue, the burden of
establishing the facts justifying the assessment of the penalty
is on the Minister.
[15] With regard to the net worth determined
by the Minister's auditor, as no valid evidence against it
was adduced, I must therefore conclude on a balance of
probabilities that the net worth was correctly determined and
that the Minister's reassessments were correctly made in fact
and in law.
[16] As for the penalties, no specific
representations concerning them were made in the notice of
appeal. However, since these are appeals under the informal
procedure and the appellant was not represented by counsel, I
consider in the circumstances that the assessment, including the
assessment of the penalties, is disputed. The appellant was not
present at the hearing and was not subpoenaed by the
respondent.
[17] The burden of proving the facts
establishing the intention to misrepresent or of proving the
existence of circumstances indicating the intention to
misrepresent is on the Minister. I would have preferred to have
the appellant subpoenaed to come to the hearing and testify
concerning the assessment of the penalty because the appellant
was the principal witness as regards that evidence. However, the
Minister's official who established the income by the net
worth method came to explain to the Court on what he had relied
in so doing. He had also requested explanations from the
appellant, who never responded. In the circumstances and in light
of the substantial difference between the income initially
reported and the additional income established based on objective
information, I find that the Minister discharged his burden of
proof concerning the assessment of the penalties.
[18] Therefore, the appeals are
dismissed.
Signed at Ottawa, Canada, this 20th day of August 1998.
J.T.C.C.
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