[OFFICIAL ENGLISH TRANSLATION]
Date: 20020607
Docket: 98-1988(IT)G
BETWEEN:
RÉGIS SIROIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the
1992, 1993, 1994 and 1995 taxation years.
[2] Only the appellant testified in
support of his appeal. He stated that he had completed
Grade 6 and had been obliged to work at various jobs to earn his
living. In particular, he drove trucks, worked as a
mechanic and did odd jobs, while at the same time he bought and
sold various assets.
[3] At one point, he purchased an
outfitting business on the North Shore along with four airplanes,
which he used to transport some of his clients to the site of the
outfitting business. The weather was not always favourable
for flying, which made it difficult to reach the site and this
had direct and significant effects on the viability of that
business. As a result, the appellant sold it along with
some of the airplanes.
[4] The appellant made a profit,
$50,000 of which he used to purchase the outfitting business
Le Chasseur Inc., located in the region where he
lived.
[5] Since this business was located
near the appellant's home, it was easier for him to be
involved in the business and he could count on a larger and more
reliable client base.
[6] In order to complete the
transaction, the appellant also had to borrow $100,000 from
the credit union, a loan for which his spouse acted as
guarantor.
[7] After providing an introductory
background, the appellant described the premises of the
outfitting business ''Le
Chasseur Inc.'' He explained in great detail
how he purchased two mobile homes. The circumstances
surrounding the purchase of the mobile homes were explained and
described from every angle.
[8] The appellant stated that he was
obliged to change his original plan of selling the mobile homes
at a very small profit. After the supposed purchaser lost
interest, the appellant then decided to make the mobile homes
part of the inn being built at a strategic location on the site
of the outfitting business.
[9] A number of the appellant's
explanations concerning the mobile homes were unclear. In
particular, he stated that he purchased the mobile homes for over
$20,000 including transportation costs and intended to sell
them for a consideration of $20,000. Later in his
testimony, he stated that he could easily have made a profit of
tens of thousands of dollars by selling the mobile homes in
Rimouski. In justifying the incorporation of the mobile
homes to the inn, the appellant claimed that this operation was
very profitable. If it was so profitable to use the mobile
homes in the construction of the inn, why did the appellant want
to sell the mobile homes for $20,000 after purchasing
them? That question remained unanswered.
[10] Throughout his testimony, the appellant
constantly referred to factors that were irrelevant with respect
to the merits of his appeal. For example, he repeated that
he was hardworking, brave, honest and responsible. He
repeatedly stated and strongly emphasized that he had always
fully assumed his tax liabilities.
[11] Those statements might have been
helpful and somewhat relevant if they had been complementary or
had supplemented appropriate evidence.
[12] Generally and specifically concerning
the most important points of his appeal, the appellant adduced no
direct evidence; essentially, he provided explanations that were
not always coherent and were based for the most part on
assumptions such as the following:
[translation]
''The outfitting business couldn't
afford that; it never had anything more than what it took to keep
it running;''
''Sure, I had sold a gizmo;''
''I had income that the Department accepted
without question; why is it not the same for the
expenses?''
[13] The appellant adduced no credible,
plausible evidence concerning the expenses claimed or deducted
from his declared income. Such evidence was vital,
particularly since, given the activities of the various sets of
assets for which he was responsible, the appellant might very
well have claimed the same expenses twice.
[14] This potential confusion of expenses is
moreover made quite clear in paragraphs 26, 27 and 28 of the
appellant's Notice of Appeal.
[translation]
26. Since the appellant
was, at all relevant times, the single and sole shareholder and
officer of the outfitting business Le Chasseur Inc.,
this business was, in fact, the appellant's alter ego.
27. In this situation, it
was normal for the appellant to pay his business's operating
costs directly when the business could not afford to do so, or
when circumstances obliged him to assume responsibility
personally on behalf of his business.
28. To all intents and
purposes, there were no significant tax repercussions regardless
of whether the appellant or his outfitting business assumed
responsibility for paying expenses.
[15] The balance of the evidence showed that
the appellant had deliberately chosen to organize his affairs in
a confused manner so that no one could make sense of them.
He also refused to cooperate during the audit. At the
hearing, he provided blatantly implausible and incoherent
explanations that were meant to deceive.
[16] Instead of providing vouchers as
evidence of his purchases (expenses of all kinds for himself),
the appellant reduced his income by an amount equivalent to the
expenses that were disallowed.
[17] The appellant never provided tangible
evidence of the expenses that were claimed and disallowed; he
even argued that if the respondent accepted the income, she had
no reason to question the expenses. Instead of providing evidence
of the expenses deducted from his declared income, he filed an
amended return in which he reduced his income by an amount
equivalent to the expenses that were disallowed.
[18] In support of his appeal, of which he
had the burden of proof, the appellant adduced no direct,
substantial, documented evidence; instead, his evidence was
circumstantial and made up of explanations such as the
following:
''Could be;''
''We arranged it so that it would work
out;''
''You need income to have
expenses;''
''It's Greek to me;''
''We needed an invoice;''
''I needed that expense;''
''I was paying an accountant.''
[19] Taken as a whole, the appellant's
testimony showed that he was not as resourceless or inexperienced
as he wished to indicate. On the contrary, he was a shrewd,
crafty, and very canny businessperson.
[20] In terms of accounting, the appellant
simply had a notebook in which he made jottings. At the end
of the year, he tore out the relevant pages and gave them to his
accountant so that the accountant could prepare the
appellant's income tax returns.
[21] For the outfitting business, to which
he made constant reference, the appellant stated that he had set
up a model accounting system. The ''director's
advance'' account, with its many entries, is a very
concrete and important indication of the significance the
appellant attached to those accounting entries.
[22] Why were the appellant's personal
affairs in a complete and incomprehensible mess when there was an
acceptable accounting system for the outfitting business?
That question was never answered.
[23] For the appellant's personal
affairs, the accounting information was so deficient, inadequate
and incomplete that even the accountant, Claude Lavigne, who
obviously did not testify, apparently advised the auditor to
proceed using the net worth method, and indeed made the following
statements set out in Exhibit I-2, ''Statement of Facts
and Reasons for Objection'', dated August
5, 1997.
[translation]
...
Statement of Facts and Reasons for Objection
1992 Taxation Year
The department's representative considered a total of
$40,714.77 to be appropriation of funds whereas those
disbursements are expenses incurred for the outfitting business
Le Chasseur Inc. when the inn was built. An
amount of $20,714.77 is supported by vouchers that we
consider to be adequate. The cheque for $20,000 issued
by the outfitting business Le Chasseur Inc. to
Benoit Dupont has to do with the purchase of two mobile
homes previously purchased from Régis Sirois.
As a result, we object that these amounts be considered as
appropriation of funds.
...
Statement of Facts and Reasons for Objection
1993 Taxation Year
Régis Sirois' net business income was computed on
the basis of income and expenses for the year ended December
31, 1991, for which year we had vouchers as evidence of the
figures set out in the statement of income and expenses.
Since no accounts were kept by Régis Sirois for his
business operations, the income for the 1992 to 1995 taxation
years has been estimated, as were the expenses, by taking into
consideration net income, which is closely related to
Mr. Sirois' cost of living.
We therefore object to Revenue Canada's disallowing only the
expenses not supported by vouchers given that the income was not
supported by vouchers either.
We also object that an amount of $15,014.56 be considered
appropriation of funds since, the cheques for fishing and hunting
reservations amounting to $4,000 at the very most, the outfitting
business Le Chasseur Inc. cannot have had this
income.
We consider that this amount is included in Régis
Sirois' 1993 income totalling $43,126, and that it
cannot in any way be considered income earned by the outfitting
business Le Chasseur Inc.
...
Statement of Facts and Reasons for Objection
1994 Taxation Year
Régis Sirois' net business income was computed on
the basis of income and expenses for the year ended December
31, 1991, for which year we had vouchers as evidence of the
figures set out in the statement of income and expenses.
Since no accounts were kept by Régis Sirois for his
business operations, the income for the 1992 to 1995 taxation
years has been estimated as were the expenses, by taking into
consideration net income, which is closely related to
Mr. Sirois' cost of living.
We therefore object to Revenue Canada's disallowing only the
expenses not supported by vouchers given that the income was not
supported by vouchers either.
...
Statement of Facts and Reasons for Objection
1995 Taxation Year
Régis Sirois' net business income was computed on
the basis of income and expenses for the year ended December
31, 1991, for which year we had vouchers as evidence of the
figures set out in the statement of income and expenses.
Since no accounts were kept by Régis Sirois for his
business operations, the income for the 1992 to 1995 taxation
years has been estimated as were the expenses, by taking into
consideration net income, which is closely related to
Mr. Sirois' cost of living.
We therefore object to Revenue Canada's disallowing only the
expenses not supported by vouchers given that the income was not
supported by vouchers either.
We also object that the expenses incurred by the outfitting
business Le Chasseur Inc. for the rental of the
Ford 4 x 4 be considered appropriation of funds
since that vehicle was needed for the company's business
operations. It was used to transport goods (including
construction materials, food, gasoline, and a snowmobile) and to
patrol an area of over 200 square kilometres.
...
[24] When asked why and how he was unable to
adduce appropriate documentary evidence in support of his
statements, the appellant answered that he had lost a box of
relevant documents as a result of flooding in his home
basement.
[25] The appellant was repeatedly unable to
explain the source of the funds used; he claimed that the funds
might have come from one of his five loans or from his mother,
spouse or other family members, but he still did not provide
appropriate documentary evidence in support of these
statements.
[26] How did the appellant obtain a
$100,000 loan from a credit union to purchase a business
that was losing money when he had no stable, regular
employment? He did so because his spouse had a good job, a
garage, and acted as guarantor.
[27] The appellant regularly referred to
points that he had never raised or set out at the meetings during
the audit, although he considered these points decisive at the
hearing. I refer in particular to the appellant's
explanations as to why he requested cooperation from a certain
Dupont in obtaining a document that did not reflect
reality. With respect to one advance to the company, he
admitted failing to state the corresponding amount as income of
the business, which he himself had declared to be inoperative.
He refused to hand over to the auditor the log of his
airplane's flying time in order that she examine it. He
gave no explanation or valid evidence to support expenses that
were nevertheless quite substantial in relation to income.
In the appellant's opinion, the respondent did not question
his income and therefore had no reason to question his expenses,
which he claimed went hand-in-hand with his income.
[28] Despite the opportunity of making a
quick and easy substantial profit on the sale of the two mobile
homes he had purchased, the appellant preferred to make the
mobile homes part of the inn that was being built.
[29] No plausible, verifiable explanation
was provided for the source of the $18,500 cash payment for
the two mobile homes. More importantly, the appellant
stated that, in an outlying area, mobile homes could be stolen or
vandalized and were therefore very vulnerable assets; as a result
he felt obliged to pay cash and to move the mobile homes as soon
as the sale had taken place. The receipt for $18,500 in
payment for the mobile homes (Exhibit A-2) is dated
July 12, 1992, whereas the ''truck rental''
invoice for $4,606.96 to transport the mobile homes
(Exhibit A-12) is dated October 23, 1992¾a
difference of over two months between these two dates.
[30] The appellant never kept adequate
accounts; he explained that he owned a notebook, in which he made
jottings and from which, at the end of the year, he tore out
pages to provide the accountant with the information they
contained
[31] During the review, that accountant
stated that the appellant's statements of income and expenses
were prepared on the basis of the appellant's cost of
living. The accountant even suggested that, in reviewing
the appellant's case, the auditor proceed using the net worth
method.
[32] The appellant had formally stated that
the company he controlled was inoperative. Despite that
solemn declaration, the evidence showed that the appellant had
used invoices from that company on the pretext that they were the
only ones available.
[33] The appellant leased major machinery
from the company Asphalte G.M.P. Inc.; however, this machinery
was never shown anywhere in the accounting books.
[34] To travel to the site of the outfitting
business, the appellant used a 4 x 4 truck,
purchased by him personally but apparently used solely for the
operations of the outfitting business. The appellant
explained that he had had to proceed in this fashion in order to
obtain the manufacturer's guarantee.
[35] According to the appellant, the truck
was used almost exclusively for the operations of the outfitting
business. Here again, the appellant's oral explanation
was neither supported nor documented. The appellant kept no
record of kilometrage driven.
[36] On this point, it is indisputable that
the appellant in fact had the benefit of the vehicle for personal
use. To what extent did he use it for personal
purposes? Only a record could have established this
figure. What is certain is that the appellant enjoyed the
right to use the truck.
[37] The appellant not having considered it
appropriate to keep such a record-which was moreover relevant
given his testimony that the vehicle had been purchased by him
personally but was intended solely for the operations of the
outfitting business-he must bear the consequences of the
confusion that he alone created.
[38] The evidence established that the
appellant could use the vehicle for personal purposes; there is
no need to alter the assessment, which was correct under the
circumstances.
[39] Given the evidence of the
appellant's actions, the Minister was fully justified in
making a reassessment for the 1992 taxation year, even though the
normal period for making a reassessment had expired. An
impressive number of factors clearly showed that the appellant
had neglected and indeed deliberately failed to provide
information that was essential in computing his income. In
particular, this point was made clear by the appellant's
refusal to provide evidence of the expenses claimed. He
went so far as deliberately reducing his income by an amount
equivalent to the expenses disallowed by the respondent. I
consider this type of behaviour quite indicative of the
appellant's firm intentions of deliberately concealing
information that was essential in computing his actual
income.
Penalties
[40] The evidence showed that, despite
having had little education, the appellant was a very canny
person with very good business experience. His knowledge
was more extensive and thorough than he claimed to have.
[41] The appellant was aware of the
importance of invoices, going so far as to writing some up when
they were not available. He knew that any earnings from the
outfitting business Le Chasseur Inc. had to be heavily
taxed.
[42] The appellant knew the maximum amount
of a business' non-taxable sales.
[43] The appellant was a skillful, canny
businessperson, not the naïve, inexperienced labourer he
purported to be.
[44] The appellant was entirely aware of the
tax consequences of his actions. He regularly used cash,
often in substantial amounts, in his transactions. Nothing
in the Act prevents taxpayers from using cash in any
transactions. However, this does not exempt individuals
from the obligation to provide adequate, plausible, verifiable
explanations regarding the source or use of funds flowing in
their asset bases.
[45] Since the appellant was responsible for
three sets of finances: those belonging to him, those of the
outfitting business Le Chasseur Inc. and, lastly, those
of R.S. Air Inc., at one time inoperative according to
the appellant, he used them indiscriminately.
[46] For his personal finances, the
appellant did not keep any accounting records except for a
loose-leaf notebook, the relevant pages of which were given to
the accountant at the end of the year. Accounting
information was so deficient that even the accountant, who
obviously did not testify, advised the auditor to proceed using
the net worth method. The appellant went so far as to
express surprise that the respondent wanted vouchers as evidence
of the expenses.
[47] At all times and during all the
periods, the appellant was aware of and familiar with all the tax
consequences of his actions. He himself controlled the
information, which he did not even share with his accountant,
whom he still found reason to criticize at times.
[48] The appellant had the knowledge and the
ability to manage his affairs so as to ensure that they were
transparent and accessible for audit. He chose to do
otherwise, organizing his affairs in such a way that the
confusion would allow him to avoid his obligations.
[49] These actions largely suffice to
conclude that there has been gross negligence that justifies the
assessment of the penalties provided for in the Act.
[50] Therefore, the appeal is dismissed,
with costs.
Signed at Ottawa, Canada, this 7th day of June 2002.
J.T.C.C.
Translation certified true
on this 26th day of August 2003.
Sophie Debbané, Revisor
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