[OFFICIAL ENGLISH
TRANSLATION]
Date: 20020910
Docket: 2001-1238(IT)I
BETWEEN:
PIERRE MÉRETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on August 1,
2002, at Montréal, Quebec,
and revised at Ottawa, Ontario, on September 10,
2002.)
Lamarre, J.T.C.C.
[1] These are appeals, heard
under the informal procedure, from assessments made by the Minister of National
Revenue ("Minister") under the Income Tax Act ("Act")
for the 1996 and 1997 taxation years. In assessing the appellant, the Minister
made the following adjustments:
1996 1997
Unreported
income $20,000
Interest benefit $384
Automobile
benefit $5,383 $8,584
Shareholder
benefit $9,695
Grossed-up
dividends $27,812
Disallowed
expenses $3,303 $2,613
Total
adjustments $28,686 $49,088
[the Minister]
assessed the penalty provided for under subsection 163(2) of the Income
Tax Act (hereinafter the Act) on the unreported income of $20,000 in 1996, for
an amount of $2,314.04.
[2] With respect to the
unreported income, the
appellant admitted that he failed to report the sum of $20,000 that he received
on January 15, 1997. At the time of the audit in 1999, he himself requested
that this amount be included in his income for 1996 (see the auditor's report:
Exhibit A‑2, tab 3, page 3, second last paragraph; that
same request was made at the provincial level: see Exhibit A‑2,
tab 5).
[3] In actual fact, Micronomic Enr., which the appellant
controls, rendered technical computer services to Transtronic Inc., a
corporation in which he and his spouse hold 50 percent of the shares and
for which he acts as chairman of the board of directors as well as controller,
director of marketing, finance and human resources (see letter from the
appellant's accountant to the Canada Customs and Revenue Agency, Exhibit A‑1,
tab 4, page 1, under the heading "Car Benefit").
[4] A number of invoices were
prepared by Micronomic Enr.
for services rendered to Transtronic Inc. in 1996 totalling approximately
$20,000 (see the auditor's report at page 3, filed as Exhibit A‑2,
tab 3). In addition, an invoice for $20,000 was prepared by Micronomic
Enr. on April 18, 1997 (included in Exhibit I‑1), stating that
technical and consulting services had been rendered during the period from
January 1 to June 1, 1997. There is also a resolution of the board of
directors of Transtronic Inc., signed, inter alia, by the appellant as
chairman and secretary of the board on January 14, 1997, authorizing a
budget of $20,000 for computer consulting services concerning [translation] "all developments for
1996 which, already started, will be fully completed by Micronomic Enr."
(Exhibit I‑2). In addition, a cheque for $20,000 made out to the
appellant and dated January 15, 1997, referring to a "bonus" and
to resolution "R9712" of January 14, 1997, referred to
above, was signed by the appellant on behalf of Transtronic Inc.
(Exhibit I‑3). It is this amount that the appellant admitted that he
had not reported in his tax returns and which is at issue in the instant case.
[5] According to the additional
information that the appellant's accountant provided at the time of the
objection to the assessments in issue and which appears in Exhibit A‑1, tab 4, at
page 4, under the heading "Penalty and Interest", the amount of
$20,000
[TRANSLATION]
... represents an amount paid by
Transtronic Inc. to Pierre Mérette for services rendered by Mr. Merette’s
personal business, Micronomic Enr., in exchange for services rendered in 1996.
The invoice was struck from the books of Micronomic Enr., with a note entered
by Pierre Mérette in the general journal of Micronomic Enr. in computer
format. On June 30, 1996, the amount was allocated to the expenses of
Transtronic Inc. for its fiscal year ending on December 31, 1996. For
Pierre Mérette, the amount was reported in 1996 as a bonus.
[6] Again according to the
additional information provided by the accountant, from January to June 1997,
the amount of $20,000 was entered in the books of Micronomic Enr. as an invoice
for services rendered to Transtronic Inc. In fact, the adjusting entries were
not transmitted to Transtronic Inc., and that amount, according to the
accountant, was considered as an advance to the appellant until the end of
1997. It subsequently remained forgotten.
[7] The appellant admitted that
he had failed to report as part of his income the amount of $20,000, which he
had received on January 14, 1997. He explained that he had not reported that
amount as part of his 1996 income because he believed it was a bonus that did
not have to be declared until 1997. He further explained to the objections
officer that that amount had not been reported in 1997 because there had been
two computer thefts at Micronomic Enr., as a result of which the note in
the general journal that was to be transmitted to Transtronic Inc. was lost
(see report on objection, Exhibit A‑1, tab 5, page 4).
According to the accountant's explanations, the computer thefts occurred in
January and March 1997 (see Exhibit A‑1, tab 4, page 4).
In Court, the appellant said that the thefts had taken place in March 1998 (see
also Exhibit A‑2, tab 11). He also mentioned that the ice storm
in January 1998 was one of the causes of his failure. Lastly, the appellant
explained that, with reported income of $111,000 in 1997, he had not noticed
that his income was understated by $20,000.
[8] I find that the
explanations given by the appellant and his accountant are both confusing and
misleading as to the reasons why this amount of $20,000 was not reported and as
to the year in which that amount should have been included in the appellant's
income. I do not see how the fact that an error occurred in adjusting the
accounting entries between Micronomic Enr. and Transtronic Inc. absolves the
appellant of his responsibility to report all his income. Regardless of whether
the amount was paid as a bonus in 1997 or for services rendered in 1996, it was
up to the appellant to include it in his income for one of those years,
depending on the actual source of that income.
[9] The appellant is no doubt
partly responsible for the confusion surrounding the nature of the payment of
the $20,000 in question. He cannot now contend that, because of such confusion
or other reasons which, in my view, are irrelevant (such as the ice storm), he
failed to include that amount in his income.
[10] The appellant is the one who controls Micronomic Enr.
(an unincorporated entity) and he is the chairman of the board of directors and
financial controller of Transtronic Inc. He prepares his income tax returns
himself. It was he who signed the cheque for $20,000 that was made out to him.
It is inconceivable, in my view, that he should fail to report such income in
1996 or even in 1997.
[11] Having regard to all the
documents substantiating the existence of that income, to the appellant's level
of education (the appellant is a business executive, an engineer by training,
and holds an MBA in marketing and finance from the École des Hautes Études Commerciales), his business
knowledge and the fact that he was closely linked to the affairs of Transtronic
Inc. and Micronomic Enr., it was for him to take the necessary measures to
ensure that he reported all his income either in his 1996 taxation year or in
his 1997 taxation year. Regardless of the source of the $20,000 paid to the
appellant, the appellant had a duty to include it in his income for one of the
years, even if it meant subsequently amending his tax returns if an error was
made. The appellant merely kept quiet about the existence of that income.
[12] At the time of the audit, the Minister included the amount in 1996 at
the request of the appellant, who benefited as a result since the penalty was
smaller in view of his lower income in 1996. Having regard to the confusion
surrounding the source of that income, the Minister was able to consider, and
this Court is also able to do so, that it was an amount taxable in 1996.
Moreover, this course is fully justified considering that the appellant argued
through his accountant at the objections stage that the amount of $20,000 had
been paid in consideration for services rendered by Micronomic Enr. in 1996
(which may be supported by the resolution of the board of directors of
Transtronic Inc. dated January 14, 1997) and that Transtronic Inc. wrote
the amount off as an expense in 1996.
[13] I find that the appellant
is therefore in a poor position at this point to dispute what was done by the
Department of National Revenue ("Department") at his own request and
to now argue that the amount should have been included in 1997 to avoid the tax
payable on that income as well as the penalty assessed as a result of that
failure (since this Court may not increase the amount of the assessment in
1997).
[14] I find that the respondent
adequately showed that the appellant knowingly, or under circumstances
amounting to gross negligence, failed to report the amount of $20,000 in his income for 1996. In the
circumstances, and for these reasons, I therefore find that the assessment made
for 1996 is valid with respect to the inclusion of unreported income of $20,000
and with respect to the assessment of the penalty of $2,314.04 under
subsection 163(2) of the Act.
[15] With respect to the
interest of $384 included in
1997, the appellant now agrees that it be included in his income and that
amount is no longer in dispute. Therefore, the assessment made for 1997 remains
unchanged in this regard.
[16] As to the shareholder
benefit, there was a consent to judgment and that benefit is now reduced to $1,250 for 1997.
[17] With respect to the
grossed-up dividends of $27,812
received by the appellant and assessed in 1997, subsection 82(3) of the Act,
to which the appellant referred, clearly does not apply here. Only dividends
received by a spouse for which the taxpayer is entitled, inter alia, to
a married tax credit under paragraph 118(1)(a) may be the object of
an election under subsection 82(3) of the Act. Therefore, if such
an election may be made, the spouse with the higher income will include the
dividend income of the other spouse in his or her income to enable the couple
to maximize the dividend tax credit and the married tax credit and thus reduce
the tax payable (see Interpretation Bulletin IT‑295R4, Taxable Dividends
Received After 1987 by a Spouse, April 27, 1990, Exhibit A‑2,
tab 19). The appellant did precisely the opposite. He did not include his
dividend income in his tax return but added it to the income of his spouse who
had a much smaller income.
[18] Furthermore, according to
the tax returns that were filed (Exhibit A‑1,
tabs 1 and 2), the incomes of the appellant and his spouse were too high
to entitle them to that election since the appellant did not appear to be
entitled to a married tax credit with respect to his spouse for 1997.
[19] In conclusion on this
issue, the appellant could not
include in his spouse's income the amount of the grossed-up dividend of
$27,812, which he received in 1997. The dividend amount must be included in his
own income in 1997, and the assessment is confirmed on this point.
[20] With respect to the
automobile benefit, the Act provides two benefits where a vehicle is
made available to an employee by an employer.
[21] First, there are standby
charges for an automobile under paragraph 6(1)(e) of the Act. There is a benefit
calculated under paragraph 6(1)(e) of the Act from the
moment a vehicle is made available to the taxpayer, regardless of whether he
uses it for personal purposes. There is a presumption in the Act that personal
use amounts to 12,000 km per year. Thus, there is a benefit that is
calculated in accordance with a formula provided for in subsection 6(2) of
the Act. That benefit may be reduced if the appellant can show on clear
evidence, first, that the employer required him to use the automobile in
connection with or in the course of his employment and, second, that he drove
the vehicle less than 12,000 km per year or less than 1,000 km per
month for personal use. Here, the burden of proof is on the appellant.
[22] The appellant admits that he used a 1996 Mazda
626 Cronos that was made available to him by Transtronic Inc. to travel
from home to work. These are personal expenses, and that was even acknowledged
by Judge Bowman in his decision respecting the appellant for 1991 and 1992
(see Mérette v. Canada, [1995] T.C.J. No. 1569 (Q.L.),
Exhibit I‑5). It was calculated that the travel alone amounted to
11,400 km per year. No other tangible evidence enables me to say that
there were any changes on this point. Moreover, the appellant states that he
travelled 33,000 km a year in that automobile. This shows us that the
appellant used the vehicle for personal purposes at least 34 percent of
the time it was used. Thus the appellant does not meet the first condition
established by subsection 6(2) to be able to change the calculation of the
taxable benefit under paragraph 6(1)(e) of the Act, that is
to say, that all or substantially all the distance travelled by the automobile
was not travelled in connection with or in the course of his employment.
[23] In addition, no other solid
evidence was brought proving that the Mazda was not used for personal purposes to a maximum of 12,000 km
a year. The evidence of the car lease provides that there is a penalty if the
Mazda is driven more than 25,000 km a year. This is not really evidence
that the appellant used it solely for business purposes. It can only show that
the car was driven more than 25,000 km a year.
[24] As a result, I am unable to
reverse the presumption of subsection 6(2), and I therefore confirm the benefit, as
calculated in Schedule A of the Reply to the Notice of Appeal, that is,
$4,414 for 1997 and $2,207 for 1996. That settles the issue of the standby
charge benefit.
[25] The second taxable benefit
provided for under the Act is the one under paragraph 6(1)(a),
which is connected to the automobile's operating expenses. Here the appellant
received an allowance of $5,000 in 1996 and $6,000 in 1997 from Transtronic
Inc. to cover the operating expenses of the automobile. The only element in
dispute, from what I understand, is the percentage of personal use. The
appellant feels he used the Mazda solely for business purposes.
[26] In my view, and as I said
earlier, the appellant's claim cannot be accepted. First, travel from home to
the office is personal in nature. The appellant said he was required to take
the Mazda home because of the
insurance; I have no evidence that the insurer required this. At the time of
the objection, he explained that the board of directors of Transtronic Inc. had
decided that the appellant was to take the automobile to his home in the
evening. No document attests to this either. The appellant is the chairman of
Transtronic Inc.'s board of directors, and I find that his testimony alone,
after the fact, is in itself insufficient to substantiate his claims.
[27] Furthermore, the appellant did not actually provide a
record of his business travel. In fact, this is not his first experience before
the Court on this issue. He filed documents showing the automobile's operating
costs but that does not show me whether he used it for personal purposes or
business purposes.
[28] The appellant said that he
had leased a 1997 Pontiac
Sunfire in the summer of 1996. However, the insurance documents show that the
car was not insured until October 1996 (see Exhibit A‑2,
tab 6). The appellant, I imagine, hoped to show that he had used his
Pontiac mainly for personal purposes and the Mazda for business purposes and
that his spouse used another car that he owned, a 1989 Ford Escort.
[29] However, I realize that
there is no evidence of insurance as well for the Ford Escort either in 1996 or in 1997, which leads me
to assume that this automobile was not used very much. Rather, it is highly
likely that the Pontiac was used by the appellant's spouse and that the
appellant used the Mazda.
[30] I find from all this that the appellant did not show on the balance
of evidence that he used the Mazda solely for business purposes. I therefore
consider, having regard to the evidence, which was deficient on this point,
that the proposal of 50 percent accepted by the Minister and which
corresponds to the percentage accepted by this Court in Judge Bowman's
decision on the same issue raised by the appellant for 1991 and 1992 seems completely
reasonable.
[31] The appellant did not satisfactorily prove otherwise,
and I therefore confirm the value of the taxable benefit calculated by the
Minister under paragraph 6(1)(a), that is, $3,031 for 1996 and
$3,879 for 1997; and the total taxable benefit for the year for the use of an
automobile, as calculated by the Minister, that is, $5,383 for 1996 and $8,584
for 1997 (see Schedule A of the Reply to the Notice of Appeal).
[32] It now remains for me to
consider the expenses of the appellant's personal automobile, which he used for
his business, Micronomic Enr.
The appellant says that he used his personal car to travel once a week to the
head office of Transtronic Inc., which was the main client of Micronomic Enr.
He calculated that the business use was between 60 to 69 percent. I
find that quite high.
[33] First, starting in June 1996, the Mazda had to be available at the
office for the employees of Transtronic Inc. The appellant could therefore not
leave it at home once a week in order to use his own car.
[34] The appellant said that he used his car occasionally
on weekends for his business. The record for 1997 (there is none for 1996)
showing his travel is not very lengthy and does not show many trips (see
Exhibit A‑6). Furthermore, the appellant received an allowance from
Transtronic Inc. for the use of an automobile. The appellant reported income
from Micronomic Enr. of $19,675 in 1996 and $150 in 1997. However, the evidence
showed that he made $20,000 more and that he did not report that amount.
[35] Having regard to all this,
I find that I will set the personal automobile's business use for Micronomic Enr. at 10 percent maximum.
The appellant is therefore entitled to 10 percent of the total automobile
expenses reported on the T2124 F form of his tax returns, which appear in
Exhibit A‑1, tab 1, that is, 10 percent of $4,780 for 1996
and 10 percent of $4,355 for 1997—$478 for 1996 and $435 for 1997.
[36] The appeals are therefore
allowed solely to reflect the amounts conceded at the start of the hearing and
the last two amounts I have just allowed for operating expenses of an automobile for Micronomic Enr. For the
rest, the evidence is insufficient and I cannot grant any further relief.
Signed at
Ottawa, Canada, this 10th day of September 2002.
J.T.C.C.
Translation certified true
on this 2nd day of December
2003.
Sophie Debbané, Revisor
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