Citation: 2011 TCC 509
Date: 20111031
Docket: 2008-2778(IT)G
BETWEEN:
DANIEL DOMPIERRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
The appellant is
appealing from assessments dated February 23, 2007, for the 2002, 2003 and 2004
taxation years.
[2]
The appeal was heard
under the Tax Court of Canada Rules (General Procedure). The original
version of these reasons is in French.
[3]
The Minister of
National Revenue (the Minister) added to the appellant’s income the amounts of
$3,274 for 2002, $20,801 for 2003 and $13,862 for 2004. The Minister also
imposed penalties for gross negligence under subsection 163(2) of the Income
Tax Act (ITA).
[4]
The Minister estimated
the appellant’s income using the “net worth” method. He attributed this income
estimated through the net worth method to three different sources, namely:
(a) in very large part,
the appellant's fishing hut rental business;
(b) in part, unreported rental
income; and
(c) in part, an unreported
capital gain related to the sale of his share in a hunting camp.
[5]
At the beginning of the
hearing, the appellant informed the Court that he was disputing the following
aspects of the net worth determination:
(a) rental income other
than the amounts reported in the appellant’s income tax returns;
(b) the capital gain,
since, according to the appellant, although he sold a hunting camp, the
adjusted cost base was such that there was no gain;
(c) the inclusion of any
profits from the seasonal fishing hut rental business because, according to the
appellant, that business belongs to his two sons and not to him;
(d) the fact that the net
worth determination does not take into account a lump sum payment of about
$41,000 that the appellant received from the Quebec Commission de la santé et
de la sécurité du travail (CSST) in 2001;
(e) the fact that the
personal expenses estimated by the Minister are too high; and, lastly,
(f) the fact that the
respondent did not take into account expenses for the fishing hut rental
business totalling $6,656 for 2002, $8,953 for 2003 and $15,456 for 2004.
[6]
There is a
contradiction between paragraphs 5(c) and (f). If the appellant is not the
owner, he cannot deduct expenses of his children’s business that he paid because
the payments would be gifts or loans that he made to his children.
[7]
Later on in the
hearing, the appellant claimed that there was another error in the net worth
determination: the respondent apparently did not take into account that the
appellant had sold a truck to his son for $10,000 in 2004.
The facts
[8]
The appellant, his two
sons (Frédéric Dompierre and Bruno Dompierre) and Pierre Marinier from the
Canada Revenue Agency testified.
[9]
Before the period at
issue, the appellant worked at the paper mill in Gatineau. He had an industrial accident which required in three surgeries, and,
as a result, he receives workmen’s compensation benefits from the CSST.
[10]
That compensation was
approximately $27,000 for 2002, $34,000 for 2003 and $32,000 for 2004.
[11]
The appellant testified
that [Translation] “the Quebec Commission
des lésions professionnelles took me off the job market”.
[12]
There is no
disagreement as to the existence of a seasonal fishing hut rental business. According
to the appellant, that business belonged to his two sons, while according to
the respondent, it belonged to the appellant.
[13]
The sum total of the
appellant’s evidence in this regard is that the business never kept any
accounting records.
Neither the appellant nor his sons included income from the business in their
income tax returns.
[14]
The additional income
determined by the respondent in the assessments was calculated by the net worth
method. There were no calculations, as such, of the income from the fishing hut
business.
[15]
The Minister concluded
that part of the additional income calculated by the net worth method came from
the appellant’s selling of his share in a hunting camp because he had obtained
information that the appellant had sold that share for $5,000.
[16]
The effect of that sale
is not an increase in the additional income calculated but rather a
$2,500 reduction in the additional income estimated by the net worth method.
[17]
As for the additional
income from rent payments, the Minister concluded that some cheques deposited
in the appellant’s account were from the tenant and represented rent payments.
Consequently, he concluded that the difference between the total of these
cheques and the rent included in the appellant’s income was additional income
from rent payments.
[18]
The amount the Minister
attributed as income from the fishing hut rental business is simply the amount
of additional income calculated by the net worth method after deducting the
amounts attributed to additional rent and to the sale of the appellant’s share
in the hunting camp.
Who owns the fishing hut rental business?
[19]
The appellant and his
two sons testified that the business belonged to the appellant’s sons. In
support of this testimony, there is a contract of sale between Roland Létang
and the two sons whereby the latter bought 25 fishing huts from Mr. Létang
for $6,000.
[20]
However, it can be seen
that there were changes to the dates on which the purchasers were to make the payments
and that those changes are initialled “R.L” and “D.D.” for Daniel Dompierre,
the appellant.
[21]
It was the appellant
who made the payments for the huts. At best, his sons reimbursed him only very
partially.
[22]
As I indicated earlier,
neither the appellant nor his sons reported income from that business in their
income tax returns.
[23]
In order to operate,
the business had to lease land from the City of Gatineau. The only document filed in evidence with regard to that is a lease signed
on December 6, 2005, between the City of Gatineau and the appellant as the lessee.
According to the appellant, his sons signed a similar lease with the City in
2002, but he had signed such leases with the City in 2003 and 2004.
[24]
The appellant managed
the business.
During the busiest period, he could work many hours.
[25]
According to the
appellant, the work he did for the business was volunteer work.
[26]
One finds, among the
documents provided by the appellant,
a [Translation] “Baitfish Permit”.
This permit was issued in the appellant’s name.
[27]
When the fishing huts
were sold in 2006, it was the appellant who signed the receipt for the payment
of $1 for the sale of approximately 30 fishing huts.
[28]
The first page of
Exhibit I-3
indicates “Daniel Dompierre” as the business’s name and gives the appellant’s
address as the business’s address. The second page indicates that the nature of
the business was [Translation] “ice
fishing, fishing hut rental, sale and rental of fishing equipment/seasonal
activity 2003/12/22 to 2004/03/22”. Finally, on the last page of that Exhibit,
it can be seen that the appellant and his two sons are shown as the business’s owners
[29]
For various reasons, I
cannot accept the appellant’s evidence on this point.
[30]
Considering, among
other things, the involvement of the appellant, who contributed a significant
amount of time and money to the business, who acted as manager of the business and
who is mentioned more often than his sons in the documents I have just
described, and considering the fact that it is illogical for a manager who is
not an owner to sign a lease with the City and the fact that his sons hardly
contributed at all to purchasing the huts,
I can only conclude that he was the owner.
[31]
Another reason that leads
me to that conclusion is that it was the appellant who received the profits from
the fishing hut rental business.
[32]
However, in the
circumstances of this case, for reasons that I will explain below, the result
would be the same even if the appellant were not the owner. See paragraphs 40
to 44 below.
Business expenses
[33]
The appellant contends
that the respondent should have taken into account expenses for the fishing hut
rental business totalling $6,656 for 2002, $8,953 for 2003 and $15,456 for
2004.
[34]
In support of this
claim, the appellant submitted a series of photocopies of receipts that were
categorized by year.
[35]
For the following
reasons, I do not believe the appellant when he claims that he incurred these
expenses for the business.
[36]
These copies of
receipts were filed without any testimony or documents explaining the nature of
each expense or the connection between the expense and an activity of the business.
The appellant’s testimony on this is essentially as follows:
[Translation]
Mr. FRÉCHETTE:
Q. Okay. Now, Exhibit A-18, Tab 18. They
are the business expenses for 2004, totalling 15,456 dollars and 39 cents.
Mr. Dompierre, are these the expenses related to your
business or not?
A. Yes. Yes, yes.
[37]
In cross-examination,
the appellant admitted that there might have been one or two invoices that had slipped
in among the copies and that had nothing to do with the business.
[38]
In addition, a review
of the receipts filed in evidence showed the following:
(a) There are numerous
receipts for gasoline and other vehicle-related expenses, but there is
absolutely nothing in the evidence that would allow one to determine what
vehicles were used in the business or the percentages of business use and
personal use.
(b) There are many
receipts
(i) for which it is
impossible to determine, from the receipt, the nature of the purchase, and
(ii) that are either barely
legible or illegible.
(c) In the absence of any
explanation, when the nature of the purchase appears on the receipt, one must
guess at the connection between the purchase and the business.
(d) There is at least one
instance where the same receipt appears twice.
(e) In one case, the
receipt indicates a reimbursement to the appellant.
(f) There are some things
that cannot be connected to the business.
[39]
The appellant did not
convince me that he had incurred the expenses claimed in order to earn income.
[40]
In the circumstances of
this case, even if the appellant was not the owner, that fact would not change
much of anything.
[41]
If the appellant was
not the owner, even if he paid expenses related to the fishing hut rental
business, the amounts paid would not be deductible as the appellant would not
have incurred the expenses in order to earn business income. The amounts would
be loans or gifts that he made to his sons.
[42]
Such expenses or gifts would
have to be funded from the appellant’s income or assets, and it is entirely
logical to include them in personal expenses in estimating the appellant’s income
by the net worth method.
[43]
If the appellant were
not the owner, in order for such expenses to result in a decrease in the income
estimated by the net worth method, all of the following conditions would have
to be met:
(a) It would, as is the
case for an owner, have to be demonstrated that the expenses were indeed
related to the fishing hut rental business.
(b) It would also have to
be demonstrated that the amounts were loans, not gifts.
(c) It would have to be
demonstrated that, throughout the year, the business (that is, his sons, if it was
his sons’ business) repaid the appellant the amounts that he had paid for the
business’s purchases.
If these conditions are met, as long as the appellant
was repaid, the incurred and repaid expenses would have to be removed from the
personal expenses estimate used in the net worth calculations.
[44]
Since the first
condition is not met, the expenses would not be deductible even if the
appellant were not the owner of the business.
The CSST payment in 2001
[45]
I accept that the
appellant received a sum of over $41,000 from the CSST in 2001. However,
since the year 2001 is not at issue before this Court, all that matters is
whether there are errors in the net worth calculations at December 31, 2001.
[46]
The appellant acknowledged
that he had spent a significant part of that $41,000 in 2001. The balance at
December 31, 2001, in one of his accounts with the caisse populaire, was
included in the net worth calculations.
[47]
There is nothing in the
evidence to suggest that the appellant’s net worth at December 31, 2001,
was greater than that calculated by the Minister.
[48]
Consequently, the fact
that he received a sum of money from the CSST has no impact on the net worth
calculations.
Personal expenses
[49]
The appellant
challenged the personal expenses found in Appendix IV of the Reply to the
Notice of Appeal. According to the appellant, those amounts (around $19,000 for
2002, $20,000 for 2003 and $21,000 for 2004) are too high.
[50]
The amounts are based
on information obtained by the auditor from the appellant and on Statistics
Canada’s averages.
[51]
However, the auditor
explained that, after analyzing deposits into the appellant’s bank account and
bank account withdrawals, he had concluded that the amounts in Appendix IV were
much too low, and he used the analysis of withdrawals to estimate personal
expenses.
[52]
Consequently, Appendix
IV was not used to calculate the net worth.
[53]
The amounts based on
the analysis of withdrawals appearing under [Translation]
“Personal Expenses” in Appendix III of the Reply to the Notice of Appeal are
$70,661 for 2002, $54,315 for 2003 and $61,207 for 2004.
[54]
Since the appellant did
not demonstrate that there were errors in the calculation of the withdrawals and
since I did not accept the evidence with respect to the business expenses that
the appellant claims to have incurred (see above), there is no need to make any
changes to the personal expenses.
Sale of the truck for $10,000 in 2004
[55]
The appellant did not
testify concerning the sale of the truck.
[56]
He did, however, cross-examine
the auditor on that sale. The auditor replied that, since there were no
documents, he was not satisfied that such a sale, had taken place, and that,
consequently, he did not take it into account.
[57]
In replying, the
auditor referred to one of his conclusions on the last page of Tab 7, Exhibit
I-1 (document dated May 9, 2006); therefore, the discussion on this subject
between the auditor and the appellant took place before May 9, 2006.
[58]
It is surprising that
the appellant did not testify or file documents concerning the sale of the
truck, considering that there had been disagreement on this issue ever since
the audit and that a sale of a vehicle generates a certain amount of paperwork
— for insurance purposes, among other things.
[59]
Although the appellant
did not testify on this matter, it can be seen in the auditor’s conclusion to
which I have just referred that the auditor noted that the taxpayer’s position
was that the sale of the truck had been reflected in the $10,000 deposit made
on April 26, 2004,
in one of his accounts with the caisse populaire.
[60]
In rebuttal, the appellant
called as witness Frédéric Dompierre, who stated that he had bought a truck
from his father for $10,000. He was not sure of the year, but believed that it
was in 2004.
[61]
Frédéric Dompierre
testified as follows:
[Translation]
Q. Mr. Dompierre, you heard Mr. Marinier speak of
10,000 dollars for a truck. Do you have anything to say about that?
A. The purchase of the truck: my father gave me a
receipt as well. I transferred the 10,000 dollars into his account from my
account.
Q. Was this a long time ago?
A. Yes. It has been - I bought it - what year was it? 2004,
I believe.
Q. 2004?
A. I’m not sure. But I have the papers.
. . .
Q. How
did you pay for it?
A. By putting money in his account. I made the transfer
at the same caisse, from my account; I don’t know the account number by heart;
I deposited the money into my father’s account, through the caisse.
[62]
Frédéric Dompierre did
not bring the documents relating to the purchase of the truck with him to the
hearing, although he testified that he had at home a receipt that his father
had given him.
[63]
In Appendix I of the
Reply to the Notice of Appeal, on the first page of the list of personal
assets, one sees that there are four vehicles that belong to the appellant: a
1997 Ford pickup, a 1979 Ford F250, a 1988 Ford COF and a 1986 Ford pickup.
[64]
According to that list,
the appellant owned these four vehicles during the entire period.
[65]
The appellant did not directly
dispute this.
So, unless a truck is missing from the asset list, it must be one of
these four trucks that was sold, but which one?
[66]
Frédéric Dompierre did
not describe the truck he purchased.
[67]
The documents show that
the appellant still owned the 1988 Ford COF in December 2004, and that he still
owned the 1997 Ford pickup on April 30, 2004.
[68]
If the son purchased one
of the vehicles on April 26, 2004, it could only have been the 1979 Ford F250
or the 1986 Ford pickup.
[69]
I cannot believe that
the son would have paid $10,000 on April 26, 2004, for a 1979 or 1986 vehicle (which
would have been about 25 years old in one case and 18 in the other).
[70]
Consequently, I find
that the appellant did not sell a vehicle for $10,000 in 2004.
Rental income
[71]
According to the
appellant, the respondent was wrong in assessing additional rental income amounts
of $1,263 for 2002, $1,398 for 2003 and $1,673 for 2004.
[72]
The appellant testified
that, although he deposited the tenant’s old age pension cheque, he handed over
to the tenant in cash the difference between the amount of that cheque and
$600.
[73]
I accept the appellant’s
testimony in this regard. That means that a part of the amount of the
withdrawals was used to reimburse the tenant the difference between the amount
on the cheque and the rent. Consequently, the amount of personal expenses must
be reduced by the total amount the tenant was reimbursed. The practical result
is that the appellant’s income will be decreased by $1,263 for 2002, $1,398 for
2003 and by $1,673 for 2004.
Hunting camp
[74]
The appellant testified
that he had initially paid $1,250 for his share in the hunting camp; the other
three purchasers also paid $1,250 for the camp. He also testified that, later,
two of the other three had sold their shares and that he had purchased another
share for $1,250, which is to say that he paid a total of $2,500 for his share
in the hunting camp.
[75]
He also testified that
he had incurred other expenses because the owners of the camp had enlarged it,
but he gave no details.
[76]
I accept that the
hunting camp cost $2,500. The following changes must therefore be made to net
worth for 2003. On the one hand, there will be a $2,500 deduction to take into
account the cost of the camp; on the other hand, the deduction that the auditor
allowed for the non-taxable portion of $1,250 will have to be decreased.
[77]
Accordingly, the
practical result is a $1,250 decrease in income for 2003.
Penalties under subsection 163(2) of the ITA
[78]
Although the appellant
did not directly dispute the penalties, I will nonetheless briefly consider
this issue. Subsection 163(2) provides the following:
(2) Every person who, knowingly, or under circumstances amounting to
gross negligence, has made . . . a false statement or omission in a return . .
. .
[79]
The burden of proof
with respect to the penalties is on the Minister, and
. . . “[g]ross 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. . . .
[80]
During the three years
in question, the appellant operated a business, but he never kept accounting records
and never included one cent of income from that business in his income tax
returns.
[81]
During the three years
at issue, the appellant failed to report over $32,000 of his income, including
more than $18,000 for 2003. In other words, the appellant reported about
$36,000 or $37,000 per year;
the total unreported amount over the three years is almost equal to the amount
that he reported annually during this period.
[82]
Given these facts, I do
not see how I could make any other finding than the following: the appellant
knew that he had not included all of his income.
[83]
Accordingly, there was
gross negligence and the penalties are justified.
[84]
The penalties will
obviously have to be adjusted to take into account the decreases in income with
respect to rent and the hunting camp.
Conclusion
[85]
Accordingly, limited
changes should be made to the assessments.
[86]
The appeal is allowed
and the matter will be referred back to the Minister for reconsideration and
reassessment on the basis that
(a) the appellant’s income
for 2002 is to be decreased by $1,263;
(b) the appellant’s income
for 2003 is to be decreased by $2,648;
(c) the appellant’s income
for 2004 is to be decreased by $1,673;
(d) the penalties under
subsection 163(2) are to be adjusted accordingly.
[87]
Since the appellant’s
success is rather limited in relation to the total assessed, the appellant shall
pay the respondent’s costs.
Signed at Ottawa, Ontario, this 31st day of October 2011.
“Gaston Jorré”
on this 23rd day of December 2011.
Erich Klein, Revisor
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