[OFFICIAL ENGLISH TRANSLATION]
Date: 20020625
Docket: 2001-1131(IT)I
BETWEEN:
ROBERT DEMERS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Garon, C.J.T.C.C.
[1] These reasons for judgment concern
only the appeal instituted from the reassessment of the Minister
of National Revenue made for the 1994 taxation year, although in
his Notice of Appeal, the appellant purportedly also included the
Minister's assessment for the 1995 taxation year. At the
start of the hearing, the Court was informed that the appellant
had discontinued his appeal for 1995 when he filed the required
document.
[2] By his reassessment for the 1994
taxation year, the Minister of National Revenue disallowed the
deduction of $47,068.80 representing the wages of the employees
of Les Entreprises Robert Demers Inc.
[3] The only issue in this appeal
concerns the application of subparagraph 152(4)(a)(i)
of the Income Tax Act. The point for determination is
whether the Minister of National Revenue could reassess after the
normal period for doing so had expired.
[4] The appellant was his own
principal witness. Johanne Tremblay, an auditor with the
Canada Customs and Revenue Agency, testified for the
respondent.
[5] The essential facts relating to
the assessment in appeal may be summarized in a few words.
[6] The appellant was the sole
shareholder and director of the business corporation Les
Entreprises Robert Demers Inc., hereinafter called the
"corporation". The corporation was incorporated in 1983
and operated in the fields of painting and wallpaper
application.
[7] In 1993, the corporation submitted
a bid to Construction Defco Inc. and subsequently contracted with
that company, at an unspecified date, for painting, wallpaper and
staining work to be performed at a hotel in the Holiday Inn chain
located in Kuwait. In the context of the contract in Kuwait, the
appellant defrayed the corporation's expenses in respect of
the work performed in Kuwait by paying the wages of its
employees. Those expenses had been billed to the appellant by
Michel Allard of P-Omax Canada International Ltd.
Two invoices issued in February and April 1994 were filed in
respect thereto. They were paid a few days later by the
appellant. To make those payments, the appellant used his
personal funds from an RRSP and part of the proceeds from the
sale of a rental property that he owned. The corporation was not
able to pay those expenses because it was, to use the
appellant's expression, "operating at a loss" in
1993 and 1994. I note in passing that, on March 24, 1993,
the corporation signed an exclusive commercial agency contract
with Press-O-Max Canada Inc. respecting wallpaper
applications in the Middle East and Pakistan. However, that
contract was not directly related to the work concerned in the
instant case.
[8] In his testimony, the appellant
stated that he had claimed the deduction of the expense amounting
to $47,068.80 in his own tax return because it was he who had
paid out the funds in question. On this point, he added that his
personal tax return for 1994 and that of the corporation for the
same period had been prepared by the same accountant, who had
been acting for him and for the corporation for a number of years
and to whom he had handed over all the appropriate documentation
for the period concerned. Incidentally, at the relevant time, the
corporation's fiscal year ended on December 31. The
appellant admitted that the revenue from the contract performed
in Kuwait was included in the corporation's income. The
corporation had a separate bank account from that of the
appellant and a line of credit that had been granted to it by a
financial institution. The appellant feared that that institution
would recall its line of credit if the corporation paid the
expense relating to the employee wages in question.
Analysis
[9] To determine whether the Minister
of National Revenue could validly assess the appellant, I must
now apply to the facts of the instant appeal
subparagraph 152(4)(a)(i) of the Act, which,
at the relevant time, read as follows:
Subject to subsection (5), the Minister may at any time assess
tax for a taxation year, interest or penalties, if any, payable
under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that
no tax is payable for the year, and may
(a) at any
time, if the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to
neglect, carelessness or wilful default or has committed any
fraud in filing the return or in supplying any information under
this Act, or
...
[10] Subparagraph 152(4)(a)(i)
of the Act enables the Minister, in particular, to
reassess at any time after the normal reassessment period has
expired if a taxpayer has made a misrepresentation that is
attributable to neglect, carelessness or wilful default or has
committed any fraud in filing his return or in supplying any
information under the Act. The onus is on the Minister of
National Revenue to make that proof.
[11] With respect to the application of
subparagraph 152(4)(a)(i) of the Act,
Strayer J.A. of the Federal Court of Appeal wrote as follows
in Nesbitt v. Canada, 96 DTC 6588; [1996] F.C.J.
No. 1470 (QL):
Whether or not there is misrepresentation through neglect or
carelessness in the completion of a return is determinable at the
time the return is filed. A misrepresentation has occurred if
there is an incorrect statement on the return form, at least one
that is material to the purposes of the return and to any future
reassessment.
[12] In the instant case, it has been
established that it was the corporation, not the appellant, which
contracted with Construction Defco Inc. and dealt with
Press-O-Max Canada Inc. under that contract with
respect to the painting and wallpapering contracts at a Holiday
Inn in Kuwait. The revenues and expenditures relating to that
contract must unquestionably be included in the calculation of
the income from the corporation's business. The appellant
could not claim the deduction of $47,068.80 in computing his own
income because that expense paid by the appellant solely
concerned the corporation's business. The business was the
only party that had to include that expense in computing its
income or loss for the 1994 taxation year. The appellant himself
did not operate a painting business; he had incorporated a
business corporation for that purpose. The appellant was totally
clear on this point in his testimony. The fact that the appellant
claimed a deduction in respect of that expense in computing his
own income constitutes a misrepresentation for the purposes of
subparagraph 152(4)(a)(i) of the Act.
[13] The appellant alleges that the Minister
of National Revenue had in hand all the necessary information in
the tax returns of the appellant and the corporation to make the
necessary changes to those returns and to reassess within a
reasonable period of time. Such an argument was dismissed in
Nesbitt, supra, in which Strayer J.A.
wrote:
It remains a misrepresentation even if the Minister could or
does, by a careful analysis of the supporting material, perceive
the error on the return form. It would undermine the
self-reporting nature of the tax system if taxpayers could
be careless in the completion of returns while providing accurate
basic data in working papers, on the chance that the Minister
would not find the error but, if he did within four years, the
worst consequence would be a correct reassessment at that
time.
[14] For
subparagraph 152(4)(a)(i) of the Act to apply,
not only must there be an error or inaccuracy in a taxpayer's
tax return or in the documentation provided to the Minister of
National Revenue, but the taxpayer must also have failed to show
due diligence, as appears from the decision of Strayer J. in
Venne v. Canada, 84 DTC 6247; [1984] F.C.J.
No. 314 (QL), when he was a judge in the Federal Court,
Trial Division. In his conclusion, Strayer J. made the
following comments:
I am satisfied that it is sufficient for the Minister, in
order to invoke the power under sub-paragraph
152(4)(a)(i) of the Act to show that, with respect to any
one or more aspects of his income tax return for a given year, a
taxpayer has been negligent. Such negligence is established if it
is shown that the taxpayer has not exercised reasonable care.
This is surely what the word "misrepresentation that is
attributable to neglect" must mean, particularly when
combined with other grounds such as "carelessness" or
"wilful default" which refer to a higher degree of
negligence or to intentional misconduct. Unless these words are
superfluous in the section, which I am not able to assume, the
term "neglect" involves a lesser standard of deficiency
akin to that used in other fields of law such as the law of tort.
See Jet Metal Products Limited v. The Minister of
National Revenue (1979), 79 DTC 624, at 636-37
(T.R.B.).
[15] In my view, it is clear from the
evidence that the appellant did in fact distinguish between
himself and the legal personality of the business corporation.
The following excerpt from the appellant's testimony in
cross-examination is in my opinion indicative of his
understanding of the interaction between himself and the
corporation with respect to the revenues and expenses relating to
this contract:[1]
[TRANSLATION]
Q. All right. So they billed Robert Demers personally,
not Entreprises Robert Demers. Was that because you asked
them to proceed that way?
A. It was because I was the one who had provided the money;
they sent the invoice to me.
Q. Okay. So you told him: "I'm the one who's
paying, send me the invoice."
A. Well, no, he sent it to me so that I would pay it because
until it was sent to me, I didn't know what the amount
was.
Q. So, in that case, why did you not include the Kuwait income
in your personal tax return?
A. Because the contract was with Entreprises
Robert Demers.
The court noted that he did not directly answer the question
as to whether it was he who had asked the Press-O-Max
representative to make out the invoice in his name.
[16] I am unable to believe that the
appellant did not realize that it was illogical to include the
revenue from the contract in question in the corporation's
income and to deduct from his own income the expenses relating to
that contract in respect of the wages of the corporation's
employees.
[17] Furthermore, in his testimony, the
appellant admitted that the persons who had performed the work
here in question were indeed the employees of the corporation. He
did not apply the same logic to this expense as the one he
applied to the corporation's income, as appears from the
excerpt from his testimony cited above.
[18] All things considered, I cannot accept
the appellant's explanations regarding the $47,068.80
deduction. As a result, I am satisfied that he did not show due
diligence when, in computing his personal income, he deducted the
wages of the corporation's employees who had performed the
work in Kuwait in issue in the instant case.
[19] The main reason (or one of the reasons)
why the appellant personally deducted the expense of $47,068.80
is that he feared that if the corporation were to assume the
expense, the financial institution involved would recall the line
of credit granted to the corporation given the difficult
situation in which it found itself. Nor am I forgetting that in
handling the expense relating to the employees' wages under
the Kuwait contract the way the appellant did, that also
appreciably reduced his own income and, consequently, the income
tax he himself had to pay as an individual.
[20] The appellant claims that the error
cannot be attributed to him since he had relied on the authority
of the accountant who, for a number of years, had prepared his
tax returns and those of the corporation.
[21] It is well-settled case law that a
taxpayer cannot be released from his responsibility by entrusting
the preparation of his tax returns to an accountant. See on the
subject the decision of Rouleau J. of the Federal Court,
Trial Division, in Can-Am Realty Limited et al. v.
The Queen, 94 DTC 6293:
... it is the taxpayer himself who carries the ultimate
responsibility for ensuring his tax returns contain accurate
data. That obligation is not altered by the fact the taxpayer has
engaged the professional services of an accountant or other agent
to prepare and complete his returns.
[22] I therefore reach the conclusion that
the appellant made a misrepresentation of the type contemplated
in subparagraph 152(4)(a)(i) of the Act and
that the Minister of National Revenue has therefore discharged
the burden that was on him.
[23] For these reasons, the assessment in
appeal is confirmed and the appeal is dismissed.
Signed at Ottawa, Canada, this 25th day of June 2002.
C.J.T.C.C.
Translation certified true
on this 8th day of September 2003.
Sophie Debbané, Revisor
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