Date: 19981022
Docket: 97-2451-IT-I
BETWEEN:
LUCIEN LEBEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1] This is an appeal for the 1993 and 1994 taxation years.
The following allegations were made in support of the assessments
giving rise to the instant appeal:
[TRANSLATION]
10. In arriving at these reassessments dated January 15,
1997 the Minister assumed the following facts, inter
alia:
(a) as the result of a review of records relating specifically
to the sale of crabs at the Port-Cartier wharf, the Minister
identified the appellant's share of unreported sales, namely
a total of $3,041 for the 1993 taxation year;
(b) with respect to the sale of herring, the auditor found
invoices for sales by the appellant to "Poissonnerie du
Havre inc." and "Poissonnerie
Jean-Guy Laprise inc." for the 1994 taxation
year:
(i) Poissonnerie du Havre inc. $4,135
(ii) Poissonnerie Jean-Guy Laprise $1,714;
(c) by failing to report the income mentioned in the preceding
paragraph 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 1993 and 1994 taxation years, as
a result of which the tax payable according to the information
provided in the tax returns filed for those years was less than
the amount of tax actually payable for those years;
(d) for the 1994 taxation year the appellant claimed the sum
of $11,272 on two of his residences as [TRANSLATION]
"maintenance and repairs"; the Minister's auditor,
on the basis of the 1992 and 1993 taxation years, disallowed
90 percent of the said amount ($10,146) as business
expenses;
(e) the appellant reported the sum of $6,772 as vehicle
expenses for the 1994 taxation year, but claimed only $5,079, or
75% of the total expense; the Minister's auditor, convinced
that the situation was unchanged in relation to the 1992 and 1993
taxation years, only allowed 50 percent of the total expense
($3,386);
(f) the depreciation expense on the vehicles was reduced from
$1,125 to $750 for the 1994 taxation year on the basis of the
explanations given regarding vehicle expenses in the preceding
paragraph;
(g) the appellant claimed an amount of $30,000 payable to his
wife as management fees for the 1994 taxation year; the
Minister's auditor disallowed the expense for the following
reasons:
(i) the appellant's wife has no other client and has no
experience or training in accounting;
(ii) the appellant's wife could not list the work she had
allegedly done;
(iii) the companies which purchased the appellant's
catches prepared the unloading reports, did the payroll and made
the source deductions;
(iv) the appellant's wife was not dealing with him at
arm's length;
(v) the appellant's annual work period went from
April 1 to September 30;
(vi) the appellant's wife devoted only one hour a day
to her husband's business.
[2] The appellant and his accountant Mario Rail testified
in support of the appeal. It appeared from their testimony that
the appellant had relied completely on the advice of his
accountant as to the manner in which his tax returns should be
done, and in particular, with respect to the eligible operating
expenses.
[3] The appellant's evidence showed that certain income
was not reported, namely an amount of $3,041 for the 1993
taxation year and $5,849 for the 1994 taxation year.
[4] The evidence further showed that the appellant owned
three pieces of immovable property.
[5] The appellant argued that the three properties he
owned were used for his fishing activities. When asked to explain
how and to what extent the properties in question contributed to
the income from his fishing operation, his testimony regarding
such contribution was not very convincing. The appellant even
indicated that the site on the Îles de Mai was a heavy
financial burden, not easily accessible and impractical.
[6] It is apparent that this site may at one time have been
associated with commercial fishing activities. This secondary
residence on the Îles de Mai was undoubtedly an important
part of the family's assets in that it represented family
continuity in fishing. At the same time, during the years at
issue it did not really have the importance claimed for it with
respect to the fishing activities in 1993 and 1994.
[7] The very low contribution of this residence had moreover
direct consequences and effects on the relevance of the amount
claimed for expenses relating to the use of a 4 x 4
truck. The appellant indicated that the use of such a truck was
necessary primarily in order to get to this residence. The
appellant also admitted that this was his means of transport for
personal purposes.
[8] Finally, the appellant and his accountant testified that
the fees in the amount of $30,000 paid to
Françoise Lebel, the appellant's wife, were
justified, realistic and reasonable.
[9] The appellant indicated that his wife had always been
closely associated with the fishing operations; she had never
received anything, unlike many fishermen's wives, who
received a salary, which was augmented by unemployment insurance
benefits between fishing seasons.
[10] In 1994 income made a substantial leap because of the
high prices paid for crabs. It was undoubtedly because of this
that the accountant suggested paying the wife a salary.
[11] On the accountant's advice, it was decided at that
time to pay fees of $30,000 to the appellant's wife, who, to
ensure some consistency, formed a management company, setting
May 30 of each year as the end of its fiscal year.
[12] Such planning clearly allowed the appellant to reduce his
income by an equivalent amount; moreover, the income then became
taxable in his wife's hands in the following year, since the
appellant's fiscal year corresponded to the calendar
year.
[13] The appellant's wife testified briefly at the
respondent's request: she admitted she had always been
directly and actively involved in the fishing operations. She
further honestly admitted that in 1994 she had actually done more
or less the same work she had done in previous years without pay.
She could have claimed that the increase in income reflected a
considerable increase in work; but no, she testified quite
frankly, which was to her credit.
[14] The respondent called Réjean Guay, who was
responsible for the audit from which the assessment resulted.
Réjean Guay explained the procedure followed and gave the
reasons prompting him to recommend the assessment of penalties.
In a very short interview, he directly and expressly asked the
appellant whether he had reported all his income or if he had
concealed certain fish sales to persons other than the plant. As
he received an answer in the negative the auditor concluded that
there was gross negligence on the basis of which it could be
argued that the income was knowingly concealed and that
consequently penalties should be assessed.
[15] In order to justify the negligence, the accountant
assumed part of the responsibility himself. Amazingly, the
accountant vigorously argued that gifts of fish subsequently sold
by the donees was income which they had received, and was not
income in the hands of the appellant, the donor of the fish.
[16] It is not possible to conclude from the evidence as a
whole, the appellant's explanations and the circumstances
surrounding these payments that the appellant deliberately or
knowingly concealed the income not reported in 1993 and 1994.
[17] The appellant completed a register which was brought to
his accountant's attention following the audits. This
register indicated the quantities of fish divided between the
fishermen on the appellant's boat. The appellant explained
that such accounting was necessary to ensure that the division
was fair; one of the persons receiving a share was entitled to a
10 percent commission, which he could not be entirely paid
in fish. The quantities involved were not large or
significant.
[18] The respondent's counsel stated that this was
probably the tip of the iceberg. If that was the case, the
Department had not put very much effort into getting to the
bottom of the matter: an interview lasting barely half an hour, a
dubious visit and a chance discovery by another auditor on
microfilm.
Analysis
[19] The sum of $30,000 paid to the appellant's wife as
fees seems to me to be greatly exaggerated and completely
unreasonable. On the other hand, I consider that the explanations
given justified the payment of reasonable fees, which I set at
$15,000.
[20] As regards the procedure followed by the respondent in
allocating the disallowed expenses both for the immovable
property and for the truck, I am of the opinion that the
Department calculated everything correctly. The available
evidence, essentially provided by the appellant's
explanations, was that his accountant clearly set too high a
value on the use of the residences in effectively carrying on the
fishing activities. The same was true for the truck.
[21] Moreover, this conclusion follows from the
appellant's own assessment that the Îles de Mai site
was not of strategic importance; on the contrary, he stated that
he kept this residence at great cost out of respect for the
memory of his father and his ancestors. That is certainly
praiseworthy, but it does not mean that the property is necessary
for the fishing operations to the extent claimed.
[22] The percentages and amounts allocated by the respondent
both to the immovable property and to the use of the truck are
reasonable and require no intervention by the Court.
[23] As regards the penalties assessed, I do not feel that the
respondent discharged the burden of proof upon her: the evidence
showed that the amounts were relatively insignificant, and
especially that the appellant was convinced that the income in
question was not his. This is all the more likely as even the
person responsible for his returns for the years in question was
firmly convinced of this. Finally, I do not think that I can or
should dismiss all or any part of the evidence submitted by the
appellant. The appellant, his accountant and his wife testified
frankly and in a credible manner.
[24] For these reasons, the appeal is allowed in part to the
extent that the penalties assessed are nullified for 1993 and
1994 and the amount of fees paid to the appellant's wife is
reduced to $15,000. The appeal is dismissed with respect to the
other points as the Department correctly calculated the expenses
for
maintenance and repair of the two residences and the truck,
both as to operating expenses and as to depreciation.
Signed at Ottawa, Canada, this 22nd day of
October 1998.
"Alain Tardif"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 31st day of May
1999.
Erich Klein, Revisor
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