[OFFICIAL ENGLISH TRANSLATION]
Date: 20020619
Docket: 2001-1780(IT)I
BETWEEN:
ARTHUR DOYON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2001-1781(IT)I
BETWEEN:
BAR LE VILLAGEOIS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common
evidence under the informal procedure. At issue in both cases are
the taxation years from 1996 to 1998. The appeals are from
assessments of the appellant Arthur Doyon (the
"appellant") made on a net worth basis.
[2] With respect to Bar Le Villageois
Inc. (the "appellant company"), the Minister of
National Revenue (''the Minister'') added the
assumed undeclared income of Arthur Doyon, the
company's sole shareholder, to the respective amounts of
$7,819, $13,159 and $10,439. The Minister also disallowed
housing expenses of $6,606, $6,253 and $6,264, as well as
alcoholic beverage expenses of $329, $335 and $340.
[3] With respect to the appellant, the
Minister added the above-noted amounts to the categories of
appropriation of funds, housing benefits, and other benefits
(beverages), obtaining totals of $14,754, $19,747 and $17,043
respectively.
[4] In 1996, the appellant declared
income of $23,874, most of which was employment income of $21,782
from Alimentation Doyon et fils Inc., an incorporated family
business. For 1997, the appellant declared income of $8,350, that
is, employment income of $3,879 and employment insurance
benefits of $3,705. However, according to the calculation of his
net worth (Exhibit I-1), in 1997 he received a
disability insurance payment of $3,243 and a provincial
income tax refund of $2,245. In 1998, he declared income of
$17,752, including $14,189 in disability benefits from the
Régime des rentes du Québec (Exhibit I-8). Also in
1998, he withdrew $3,563.94 from a Registered Retirement
Savings Plan (''RRSP'').
[5] The report of the audit made on a
net worth basis or the "appellant's balance sheet"
was adduced as Exhibit I-1. Raymond Parent, an auditor
for Revenue Canada, explained the net worth he had calculated. He
stated that he had used this method because the appellant
company's accounting system was inadequate.
[6] Mr. Parent adduced as Exhibit
I-5 the withdrawals made from the appellant's bank account
during the taxation years at issue, totalling $29,060,
$24,429 and $20,828 respectively. Mr. Parent
pointed out that these figures corroborated the accuracy of the
assessments, particularly the total amounts of the
appellant's personal expenses (set out in appendix 5 to
Exhibit I-1) for the taxation years at issue. Those
amounts were $26,882, $26,867 and $27,206 respectively.
These expenses included housing expenses averaging $6,300.
[7] With respect to his current
situation, the appellant testified that he is disabled, that the
bar has been closed since April 2000, and that his spouse left
him in November 1998 because she was tired of living from day to
day. He has not owned a car since 1996. Although he advanced
money to the appellant company, he had obtained the money either
by working for Alimentation Doyon et fils Inc., the family
business, or by selling his shares in that business in 1995. He
tried to boost sales figures by hiring musicians but was
unsuccessful and had to close the bar. At present he is still
repaying the line of credit. The appellant further stated that
the income he reported was the only taxable income he had earned
in the taxation years at issue. He stated that he could not
understand the present assessments because all he had done was to
put his own money into his business without ever turning a
profit.
[8] The main issue in this case is the
amount of rent representing approximately $6,000 each year that
was considered a benefit to the appellant and was included in his
personal expenses. Those expenses claimed by the appellant were
disallowed. In the Minister' opinion, they were an annual
benefit that was taxable in the appellant's hands because he
lived with his spouse and son on the second floor of the building
in which the bar was located and which was owned by the appellant
company. The Minister estimated that the appellant occupied 50
per cent of the building space for personal use. The Minister
divided in two the actual building expenses for maintenance and
repairs, taxes, insurance, mortgage interest, electricity, water
and heating.
[9] Mr. Doyon explained that the
building was formerly a village hotel. On the top floor are six
rooms, which are rarely used. The appellant stated that the
building space he occupied should have been estimated at
25 per cent since the building had a basement that was used
as storage for the bar and, if use of the rooms on the third
floor was made, they were used for the bar.
[10] In computing the appellant's income
for each of the taxation years at issue, amounts for his personal
consumption of products such as beer were assessed and
disallowed. These amounts were small and there is no point in
discussing them.
[11] The calculation of net worth noted the
construction of a common wall, to which the appellant was obliged
under civil law to contribute $3,801 in 1998. However, according
to Exhibit I-2, he had to take out a loan for the full
amount that same year.
[12] The net worth indicated ownership in
1995 of a car of such minimal value that no amount was assigned
to it. The document also indicated that the car was sold in 1996
for $600, an amount that was deducted. In the subsequent
years from 1996 to 1998, the appellant had no car.
[13] The net worth did not include ownership
of any real property.
[14] The calculation of net worth took into
account advances of $19,199, $11,580 and
$13,390 respectively. According to the appellant, the source
of these advances was money received from the 1995 sale of his
shares in Alimentation Doyon et fils Inc., the family
business. In 1996, he apparently received $9,000 plus
employment income, for a total of $21,782. As well, the
accountant for the appellants noted that the amounts of these
advances were established in large part on the basis of
accounting entries, which the Minister's representative
appeared to question. All things considered, this point remained
rather unclear, as did the nature of the amount received from
Alimentation Doyon et fils Inc. in 1996.
[15] From 1996 to 1998, based on the
appellant's net worth, he had bank balances of $6,261,
$6,785 and $4,827 respectively but also had bank loans
of $11,740, $7,780 and $7,542 respectively.
[16] The appellant company's balance
sheet as at December 31, 1998, showed an accumulated deficit of
$101,993.
[17] Arthur Doyon was paid no wages. He paid
his spouse $5,000 and $6,706 in 1996 and 1998. Other
than these amounts, wages were accounting entries just like
advances from the director to the corporation.
Conclusion
[18] Concerning the housing benefit,
Wilbrod Poulin, the accountant for the appellants, suggested
during the arguments that this amount should have been accounted
for in the appellant company's financial statements and not
included as a housing benefit in computing the appellant's
personal expenses. That benefit should have been deducted from
the shareholder's advances to the corporation, and this would
have reduced the company's losses.
[19] I told the accountant that it was
unfortunate that he had not made this point when testifying or
had not inquired of one of the Minister's two representatives
who testified at the hearing about this because such a point
usually constitutes evidence. Counsel for the respondent
nevertheless responded to this point, stating that the financial
statements could not be altered.
[20] With respect, I do not share that view.
That view may be valid if the corporation is not an appellant as
well; but in this case both the corporation and its shareholder
are appellants, and the corporation may therefore alter the
presentation of how its income is computed. Since this was the
only argument made against the suggestion by the appellants'
accountant, I accept the suggestion on the ground that it is
reasonable given that it takes into consideration the economic
situation in which the shareholder was given this benefit. The
corporation paid the shareholder no wages, and thus it would be
surprising for it to demand payment of rent. Since this benefit
must be accounted for, this may be done by reducing the advances
from the shareholder to the corporation; in this way, it need not
be included in the appellant's income.
[21] Furthermore, I am convinced that the
undeclared income cannot have been as great an amount as was
indicated on the balance sheet drawn up by the Minister. I take
as weighing in favour of this point the fact that in 1998 the
appellant resorted to collapsing an RRSP. When someone is obliged
to collapse an RRSP in order to live, that person is at the point
of survival, not the point of failing to declare income. The
Minister' representative emphasized the total amounts of the
bank withdrawals (Exhibit I-5), but we must realize that
the sources of most of these withdrawals were bank loans or the
line of credit.
[22] It is difficult to understand why these
assessments were made on the basis of net worth in the case of a
person whose assets, in fact, consisted of only some $5,000 in
bank accounts at year end, and whose loans always amounted to
nearly half as much. As well, when the appellant company ceased
its operations, there were apparently no offers to purchase or
attempts to sell, which directly or indirectly suggests that it
was not a profitable business.
[23] Generally, the net worth method is used
in the case of a taxpayer who, over the years, has acquired many
real estate properties, luxury vehicles, or Canadian or foreign
bank accounts, but has not declared income corresponding to the
increase in wealth or provided plausible explanations. It is
surprising to see the net worth method used as a basis for
assessments in a case such as the present one, where over the
years there has been a decrease rather than an increase in the
taxpayer's wealth.
[24] The evidence has not satisfied me that
during the taxation years at issue, the appellant spent or earned
more taxable income than he declared. I therefore consider that
there is no reason to include any additional undeclared taxable
income for those years.
[25] With respect to the appellant company,
its appeal is allowed, except that 25 per cent of the
housing expenses must be excluded from the business expenses.
That amount must be used to reduce the amount owed by the
appellant company to the appellant Arthur Doyon.
[26] The appeals are allowed, with costs, in
favour of the appellants.
Signed at Ottawa, Canada, this 19th day of June 2002.
J.T.C.C.
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