Date: 19981028
Dockets: 96-4009-IT-G; 96-4010-IT-G
BETWEEN:
MICHEL LÉPINE, ATTACHES REMORQUES DU QUÉBEC
INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
(delivered orally from the bench at Québec, Quebec, on
September 11, 1998)
P.R. Dussault, J.T.C.C.
[1] In the case of the appellant Michel Lépine, the
appeals are from assessments for his 1990, 1991 and 1992 taxation
years; in the case of the appellant
Attaches Remorques du Québec Inc.,
sometimes referred to as “the corporation”, the
appeals are from assessments for its taxation years ending on
January 31, 1991, 1992 and 1993.
[2] In assessing the appellant Michel Lépine, the
Minister of National Revenue (“the Minister”) relied
on the facts set out in subparagraphs (a) to (k) of paragraph 6
of the Reply to the Notice of Appeal. Those subparagraphs read as
follows:
[TRANSLATION]
(a) during the years at issue, the appellant was the majority
shareholder and director of Attache-Remorque du Québec
Inc. (“the corporation”);
(b) the corporation operates a trailer hitch business;
(c) the corporation operates year-round, although it is busier
from May to September;
(d) for its 1990, 1991 and 1992 taxation years, the appellant
reported income (made up mainly of salaries and dividends) of
$26,985, $52,983 and $45,348, respectively;
(e) personal expenses for such things as canteen meals eaten
by the appellant and his spouse at the company’s garage and
hockey tickets were paid by the corporation and deducted by it as
entertainment expenses;
(f) the personal expenses referred to in subparagraph 6(e),
which totalled $6,569, $11,049 and $3,581 for the 1990, 1991 and
1992 taxation years, respectively, were taxable benefits received
by the appellant during the years at issue;
(g) the appellant did not reimburse the corporation for those
expenses;
(h) by examining the bank accounts of the appellant and his
spouse, the Minister was able to trace deposits that could not be
justified by the appellant and that totalled $18,976, $27,736 and
$28,780 for the 1990, 1991 and 1992 taxation years,
respectively;
(i) in 1991, one of the corporation’s customers
transferred $4,100 from its account to the appellant’s bank
account to pay an invoice, and that amount was used to pay for
camping equipment used by the appellant personally;
(j) in filing his income tax returns for the 1990 and 1991
taxation years, the appellant made a misrepresentation that was
attributable to neglect, carelessness or wilful default or
committed fraud in filing the returns or in supplying information
under the Income Tax Act;
(k) since the appellant knowingly, or under circumstances
amounting to gross negligence, made false statements in his tax
returns for his 1990, 1991 and 1992 taxation years by not
reporting income of $25,545, $38,785 and $32,301, respectively,
penalties were assessed in accordance with subsection 163(2) of
the Income Tax Act.
[3] In assessing the appellant Attaches Remorques du
Québec Inc., the Minister relied on the facts set out in
subparagraphs (a) to (l) of paragraph 7 of the Reply to the
Notice of Appeal. Those subparagraphs read as follows:
[TRANSLATION]
(a) the appellant was incorporated on February 28, 1983, under
Part 1A of the Quebec Companies Act;
(b) Michel Lépine was the appellant’s principal
shareholder during the years at issue;
(c) during the years at issue, the appellant operated a
business that made, installed and repaired trailer hitches in the
Québec area;
(d) the appellant operates year-round, although its busiest
period is from May to September;
(e) an audit by the Minister determined that income of
$19,276, $24,677 and $27,439 was not reported by the appellant
for its taxation years ending on January 31, 1991, 1992 and 1993,
respectively;
(f) those amounts were established by examining the bank
accounts of the appellant’s principal shareholder and his
spouse, which uncovered unjustified deposits for each of the
taxation years at issue;
(g) to pay an invoice for $4,100, one of the appellant’s
customers transferred that amount from its own bank account to
the principal shareholder’s bank account, and the payment
was not reported by the appellant as income for its taxation year
ending on January 31, 1992;
(h) the $4,100 deposited in the bank account of the
appellant’s principal shareholder was used to purchase
camping equipment used by the said shareholder;
(i) for the taxation years ending on January 31, 1991,
1992 and 1993, respectively, the Minister disallowed $7,652,
$8,697 and $3,583 as expenses incurred by the appellant, since
those amounts were personal expenses of the appellant’s
principal shareholder, Michel Lépine, that had been paid
by the appellant;
(j) these disallowed expenses were mainly for the cost of
meals eaten by Mr. Lépine and his spouse at the
canteen at the company’s garage and the cost of hockey
tickets;
(k) since the appellant knowingly, or under circumstances
amounting to gross negligence, made false statements in its tax
returns for its taxation years ending on January 31, 1991, 1992
and 1993, by not reporting income of $19,276, $28,777 and
$27,439, respectively, while claiming expenses of $7,652, $8,697,
$3,853 and $19,903 for a shareholder’s personal expenses,
penalties were assessed in accordance with subsection 163(2) of
the Income Tax Act;
(l) in filing its income tax return for the fiscal year ending
on January 31, 1991, the appellant made a misrepresentation that
was attributable to neglect, carelessness or wilful default or
committed fraud in filing the return or in supplying information
under the Income Tax Act.
[4] So much for the essential technical aspects of the Replies
to the Notices of Appeal.
[5] Michel Lépine is no longer contesting the addition
to his income, as personal expenses, of the expenses referred to
in subparagraphs (e), (f), (g) and (i) of paragraph 6 of the
Reply to the Notice of Appeal in his case.
[6] Attaches Remorques du Québec Inc. is no longer
contesting the Minister’s disallowance of its deduction of
the expenses referred to in subparagraphs (i) and (j) of
paragraph 7 of the Reply to the Notice of Appeal in its case, or
the addition to its income of the $4,100 referred to in
subparagraphs (g) and (h) of paragraph 7 of the Reply to the
Notice of Appeal.
[7] Michel Lépine is therefore contesting the following
amounts, which were added to his income as an appropriation of
the corporation’s funds: $18,276 for 1990, $23,636 for 1991
and $28,780 for 1992.
[8] The contested amounts included in the corporation’s
income as unreported income based on its taxation year ending on
January 31 of each year are as follows: $19,276 for the year
ending on January 31, 1991, $24,677 for the year ending on
January 31, 1992, and, finally, $27,439 for the year ending on
January 31, 1993.
[9] The respondent’s position is grounded mainly on the
fact that the amounts assessed as income not reported by either
Mr. Lépine or the corporation were income from the
business operated by the corporation that Mr. Lépine
appropriated for his own use.
[10] This position is based on the argument that the appellant
Michel Lépine was unable to provide any justification
satisfactory to the tax authorities for deposits totalling the
contested amounts in joint personal bank accounts he had with his
spouse. Almost all of the amounts in question were deposited in
one account at the National Bank of Canada, and the particulars
thereof are set out in Exhibit I-2, Tab 9. In fact, only one
other deposit, an amount of $3,000, was made at the
Caisse populaire Giffard on November 31, 1991.
[11] The Revenue Canada auditor, Michel Audet, inferred from
this that the unjustified deposits were from cash sales that the
corporation did not issue invoices for and did not report, and
that Mr. Lépine had appropriated the proceeds of those
sales. About 40 percent of the sales made by the business or
corporation are cash sales, and Mr. Lépine is the person
who controls all the financial aspects of the business.
[12] Mr. Lépine argued that Attaches Remorques du
Québec Inc. had reported all of the income it earned from
operating its business, that he himself had reported all of his
income from the corporation and that he had therefore not
appropriated the assessed amounts in any way. His position is
based on the argument that the deposits in his personal bank
accounts were actually from loans he received from acquaintances
or friends as well as the repayment of a loan and the repayment
of another debt incurred by his brother,
Jacques Lépine.
[13] Thus, Mr. Lépine said that he borrowed the
following amounts:
(1) on April 8, 1990, $5,000 from Marcel Lalancette;
(2) on May 6, 1990, $5,000 from Robert Hamel;
(3) on January 12, 1991, $5,000 from Origène
Guénette;
(4) on April 10, 1991, $5,000 from Marcel Lalancette;
(5) on May 5, 1991, $5,000 from Robert Hamel;
(6) on January 12, 1992, $5,000 from Origène
Guénette;
(7) on June 6, 1992, $2,500 from Marcel Lavallée;
(8) on July 4, 1992, $2,500 from Richard Amyot; and
(9) on October 10, 1992, $3,000 from Origène
Guénette.
[14] There were thus nine loans totalling $38,000. According
to Mr. Lépine, all of the loans were repaid in 1994, 1995
and 1996.
[15] Mr. Lépine said that a $7,500 loan made to his
brother, Jacques Lépine, in 1986 was repaid in 1990.
Jacques Lépine allegedly used the loan to make the cash
down payment required to purchase some real property. Jacques
Lépine had allegedly owed another $7,500 since 1987 in
connection with a joint venture that he had been supposed to
start with the appellant Michel Lépine but had withdrawn
from at the last minute. Michel Lépine said that that
amount was repaid in 1991. He also said that the two amounts of
$7,500 — one paid back in 1990 and the other in 1991
— were repaid in a number of instalments.
[16] All of the loans referred to above were allegedly made
and repaid in cash. According to the appellant Michel
Lépine, each of the transactions was initially recorded in
a document that, in each case, was destroyed when the debt was
repaid. No accounts were provided with respect to any of the
transactions. However, after being pressured by Revenue Canada to
provide vouchers or sworn statements to support his claims,
Michel Lépine contacted the above-mentioned
individuals in 1996 to have them sign documents attesting the
transactions. The documents adduced in evidence in this regard
are Tabs 20 to 31 of Exhibit A-1. All of these documents were
prepared and signed in 1996. Michel Lépine said that
he remembered the exact date of each transaction and that
therefore each document bore that date and the parties certified
that they had signed it on that original date.
[17] I will reproduce the document at Tab 21 as an example. It
reads as follows:
[TRANSLATION]
May 6, 1990
ACKNOWLEDGMENT OF LOAN
I, Michel Lépine, acknowledge that I owe Robert Hamel
five thousand dollars ($5,000.00).
The loan shall be repayable on demand and shall not bear
interest.
In witness whereof, we have signed at Québec on May 6,
1990.
[signature]
Michel Lépine
[signature]
Robert Hamel
[18] I would add that when the documents were submitted to
Revenue Canada, no reference was made to the fact that they had
not been prepared and signed until 1996. At the start of the
audit in 1994, Mr. Lépine had said that the documents no
longer existed because they had been destroyed once the loans
were repaid.
[19] Michel Audet of Revenue Canada began auditing the
appellant corporation in August 1994, and Mr. Lépine was
apparently informed of the proposed assessments against him and
the corporation in February 1995. The assessments were finally
issued starting on September 1, 1995.[1] Although Mr. Lépine had stated
following the audit that the deposits in his bank accounts could
be explained by loans from friends, and although, according to
Mr. Audet, Mr. Lépine’s lawyer indicated a few of
the lenders’ names, after March 1995 Mr. Audet never,
before closing the file — and before the reassessments were
issued — he never, I repeat, received any documents
whatsoever concerning the alleged transactions. Yet according to
the appellant Michel Lépine, the money he borrowed in
1990, 1991 and 1992 was not repaid until 1994, 1995 and 1996. So
if, as he says, the original documents were not destroyed until
the loans were repaid, then the question arises —
since at least part of the loans had not yet been repaid at the
end of 1994, in 1995 or even in 1996 — why no original
documents could be filed, given that they would not yet have been
destroyed at that time. In my opinion, the answer is clear. The
documents never existed, since in all likelihood the loans never
existed either. Although I do not know this for a certainty, it
seems to me that that is what the evidence suggests on a balance
of probabilities.
[20] Counsel for the respondent admitted that the testimony of
Mr. Hamel, Mr. Guénette, Mr. Lavallée and Mr.
Amyot, if they had testified, would have been along the same
lines as Mr. Lépine’s testimony. Although they were
available, those individuals did not testify because of that
admission. However, the respondent did not admit that the
testimony they might have given would have been true. Counsel for
the appellants nevertheless saw the admission as a corroboration
of Michel Lépine’s testimony with regard to both the
loans and the repayments. So be it. Both truth and falsehood can
be corroborated. In so far as I believe that Mr.
Lépine’s testimony is not credible, this does not
advance the appellants’ case in any way. The documents
prepared and signed in 1996 are false on their very face, and
this has been admitted by Mr. Lépine. Each of them was
prepared and signed not on the date it bears, but a number of
years later. This is what is commonly referred to as fabricating
evidence. In my opinion, the fact that Mr. Lépine did not
see fit to reveal this when the documents were first submitted to
Revenue Canada’s representative in 1996 merely adds one
more aspect to the attempt to mislead Revenue Canada’s
representatives.
[21] I would also point out that the documents concerning
Jacques Lépine’s debts to the appellant
Michel Lépine were also fabricated in 1996. While
Jacques Lépine and Michel Lépine gave the same
testimony with respect to the loan allegedly made in 1986, their
testimony about the loan made or debt incurred in 1987 was not
entirely consistent. Was it a loan or an acknowledgement of debt?
Each witness has his own version. What is more, no details on
dates or amounts were given for the repayments made in 1990 and
1991 (according to the documents prepared and signed in 1996). In
this regard, reference can be made to Exhibit A-1, Tabs 20,
23 and 27. I will conclude here simply by saying —
euphemistically — that it is somewhat difficult to believe
that no one ever kept any accounts, even in the form of household
or other papers, concerning the transactions with Michel
Lépine, if only to indicate the dates the loans were
repaid. So much for the alleged origin or source of the funds.
However, it is important to go further and look at
Michel Lépine’s bank deposits in relation to
what he claims to be their source.
[22] First of all, no attempt was made to reconcile the
amounts deposited in Mr. Lépine’s personal
accounts with the amounts he claims were the source of the
deposits. The total amount he says he borrowed is $38,000. To
that sum must be added the $15,000 allegedly repaid by his
brother, Jacques Lépine, which would give a total of
$53,000. The contested amounts assessed as
Michel Lépine’s additional income for the years
at issue total $70,692, which means that there is a difference of
$17,692 for which no explanation of any kind has been provided.
This is a significant indication that the funds in all likelihood
came from the corporation’s activities involving unrecorded
cash transactions. Based on the evidence adduced, there can be no
other plausible source.
[23] Mr. Lépine said that he borrowed money from his
friends and acquaintances because of his personal financial
problems, which resulted mainly from the problems experienced by
Attaches Remorques du Québec Inc. Those problems were in
turn connected with those of another corporation that operated a
different business in the field of rustproofing. Referring to the
problems experienced, the indebtedness of Attaches Remorques du
Québec Inc. and his personal indebtedness to financial
institutions (mainly the Federal Business Development
Bank and the National Bank of Canada), Mr. Lépine
said that it had become impossible for him to borrow more money
from those institutions and that he could no longer meet his
personal obligations to them, which was why he had to go to his
friends and acquaintances.
[24] The evidence shows that, despite these problems and the
threat of bankruptcy, Michel Lépine nonetheless continued
to borrow from the National Bank each year to contribute to
his RRSP. In April or May 1991, an additional loan of $30,000 was
taken out in the appellant corporation’s name at a
different branch of the National Bank to finance the
purchase of a trailer that was resold in May 1992. It is
also to be observed that, in spite of the problems referred to,
Mr. Lépine’s income increased substantially in
1991, as he was paid nearly $23,000 in dividends in addition to
his $29,000 salary. Mr. Lépine’s explanation of
these facts has not convinced me that his financial situation was
as terrible as he described it or that he was under a constant
and immediate threat that the bank would seek repayment of the
credit it had given. There was no evidence that the bank took any
real steps along those lines, although Mr. Lépine did
state that he was threatened with such action at one point if he
transferred his RRSPs to another institution, an insurance
company, to shelter them from seizure.
[25] According to Mr. Lépine, he deposited the entire
amounts he borrowed from his friends and acquaintances, as well
as the entire amounts he received from his brother Jacques, in
his personal bank account at the National Bank so that he could
meet his recurring obligations. However, Mr. Lépine said
that, to ensure that the bank was not aware of his personal loans
and did not take advantage of a large deposit by using it as a
source of repayment of loans it had made him, he deposited the
proceeds of the various cash loans he received, a small amount at
a time, based on his needs and the monthly payments he had to
make. On examining the list of deposits that Revenue Canada
considers unjustified, it is indeed impossible to find an amount
that corresponds to the total amount of a loan allegedly received
by Mr. Lépine. It is even impossible to correlate the
dates of the alleged loans and the dates of the deposits in any
meaningful way. Needless to say, the same is true of the amounts.
Mr. Lépine’s explanation of this is again, in my
opinion, not very credible. First of all, it is hard to believe
that a person who has just been given, for example, $5,000 in
cash, would deposit all of it, little by little — $100,
$200 or $300 at a time — without using some of the cash to
pay day-to-day expenses. Moreover, in the list of unexplained
deposits, there are a number of anomalies in light of Mr.
Lépine’s explanations or lack of explanation. For
instance, why were there deposits as precise as $210, $310, $344
and $1,036 or, better yet, $1,219.51 and $1,340.50? For someone
who managed a business whose sales ranged from $527,000 to
$668,000 a year during the years at issue, this micrometric
— one might say surgical — precision in the method of
planning to meet obligations by making very numerous deposits of
minimal amounts (one might almost say in dribs and drabs), often
between $50 and $200, seems suspect. It is all the more so given
his explanation of the source of the funds, when the amounts he
was depositing involved not just dollar figures, but dollars and
cents.
[26] Why were there deposits as large — relatively
speaking, of course — as $2,300 or $2,700, or both as
precise and as large — still relatively speaking — as
$1,763.55 or $1,557.06?
[27] Finally, what is the explanation for the fact that Mr.
Lépine allegedly needed money and borrowed $3,000 on
October 10, 1992, when five days earlier, on
October 5, 1992, he had deposited $2,700, the source of
which remains unknown?
[28] All things considered, I conclude that it is more likely
that the deposits in Mr. Lépine’s personal bank
accounts were from cash transactions that no invoices were issued
for and that were not recorded in the appellant
corporation’s books than from the alleged loans received
and made by Mr. Lépine. Even if I had accepted all of Mr.
Lépine’s arguments concerning those loans, I would
still have had to find that it has not been shown on a balance of
probabilities that those loans were the source of the otherwise
not justified deposits in his personal bank accounts. Of course,
the significant difference between the deposits and what is
claimed to be the amounts of the loans received and made is an
important factor. The specific characteristics of the deposits
that I have just noted are another very important factor.
[29] In view of the evidence adduced, I am also of the view
that Mr. Audet conducted his audit correctly, honestly and
faultlessly. The nature of the appellant corporation’s
business, the large number of small cash transactions and the
large number of parts kept in stock meant that he had to explore
certain audit areas more than others, which is what he did.
[30] He did not find the unreported income in the
business’s books and records, since that income could not,
of course, be traced there. He found it in
Mr. Lépine’s personal bank accounts.
[31] The evidence adduced does not satisfy me on a balance of
probabilities that the conclusions Mr. Audet reached and the
subsequent assessments were incorrect in any way whatsoever.
[32] As for the penalties, I consider them justified in the
circumstances, given the nature of the additional income assessed
and the position and role of the appellant Michel Lépine
in the affairs of the appellant
Attaches Remorques du Québec Inc.
[33] The appeals are therefore dismissed, the whole with costs
to the respondent.
Signed at Ottawa, Canada, this 28th day of October 1998.
“P.R. Dussault”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 16th day of June
1999.
Erich Klein, Revisor
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