Citation: 2011 TCC 284
Date: 20110603
Docket: 2008-4167(IT)G
BETWEEN:
JOSEPH CARLO ST-PHILIPPE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan, J.
INTRODUCTION
[1]
This appeal concerns the
2002, 2003 and 2004 taxation years. The Minister of National Revenue (the Minister)
issued notices of reassessment against Joseph Carlo St-Philippe (the appellant)
based on the projection method, an alternative assessment method.
[2]
Upon filing his income
tax return for each of the taxation years in question, the appellant reported
net business income amounts of $9,393, $7,556 and $8,210, respectively. The
Minister made the following changes in relation to the years in question:
(a) the net business
income amounts were revised to $91,862, $81,938 and $35,981, respectively;
and
(b) penalties for gross
negligence, in the amounts of $7,365, $6,292 and $1,718, respectively, were
assessed.
[3]
The issues are as
follows:
(a) Did
the appellant receive the unreported income referred to above?
(b) Has the Minister shown
that the conditions for assessing a penalty for gross negligence have been met?
(c) Has the Minister met
his burden of proving the facts necessary to reassess the appellant after the
normal reassessment period for the 2002 taxation year?
FACTS
[4]
The appellant is a taxi
driver. He holds a T11 licence, which allows him to operate his business and,
therefore, work in the following municipalities: Côte Saint-Luc,
Hampstead, LaSalle, Montréal, Montréal‑Ouest, Mont-Royal, Outremont,
Saint‑Laurent, Saint‑Pierre, Verdun
and Westmount.
[5]
In making and
confirming the notices of assessment dated May 28, 2007, the Minister
relied on the following assumptions of fact:
[TRANSLATION]
(a) The appellant has been working in the taxi
business since 1977.
(b) During the periods in issue, the appellant
was a self-employed taxi driver.
(c) During the periods in issue, the appellant
operated just one taxi, which he did not sublease to anyone.
(d) In 1983, the appellant purchased a taxi
licence, valued at $15,500, from an individual.
(e) The appellant’s taxi licence is a class T11
Montréal licence, which entitles him to work in the following municipalities: Côte
Saint‑Luc, Hampstead, LaSalle, Montréal, Montréal-Ouest, Mont‑Royal,
Outremont, Saint-Laurent, Saint-Pierre, Verdun and Westmount.
(f) The appellant works as an independent taxi
driver, and uses the stands that the MUC makes available to taxis.
(g) During the periods in issue, the appellant
had no agreement with an airport, and no agreement to provide specialized
transit.
(h) According to the statistical data from the
Bureau du taxi de Montréal and the Commission des transports du Québec, the
gross business income generated from the use of a taxi licence amounts to
$64,385 per year.
(i) The appellant reported gross business income
of approximately $15,000 per year.
(j) In the course of the respondent’s audit, the
only documents that the respondent’s representatives were able to consult were some
bank statements and mechanical reports.
(k) The appellant claims that he paid expenses in
cash, directly from taxi revenues, which were not deposited.
(l) During the periods in issue, the appellant
used his vehicle exclusively (100%) for taxi income. He had other vehicles for
his personal use.
(m) The appellant provided no information about the
distance he drove annually.
(n) The appellant’s tax returns make no mention
of distances driven for business or personal purposes.
(o) The respondent’s auditor obtained the appellant’s
mechanical inspection reports for the years 2002 to 2004 from the Société de
l’assurance automobile du Québec (SAAQ).
(p) Given the lack of documents, the auditor
proceeded to reconstruct the appellant’s income using a projection method that
relied, among other things, on SAAQ and Commission des transports du Québec
data, as shown in Annex A hereto.
(q) On September 21, 2006, the respondent’s
auditor met with the appellant to explain the draft assessment to him.
(r) During that meeting, the projection method
used by the respondent was explained to the appellant. It was also explained to
him that the deadline for submitting his representations was October 23, 2006.
(s) On October 23, 2006, the auditor attempted to
contact the appellant on his cell phone in order to get his position on the draft
assessment, but she was unsuccessful because the number had been assigned to
another person.
(t) Thereafter, a letter was mailed to the appellant,
telling him that he was being given one last period of 10 days, but the respondent’s
representative received no news from the appellant.
(u) The confirmed notices of reassessment dated
May 28, 2007, made the following changes:
|
|
2002**
|
2003
|
2004
|
|
Reported gross business income
|
$9,393
|
$7,556
|
$8,210
|
|
Unreported business income
|
$82,469
|
$74,382
|
$27,771
|
|
Revised net business income
|
$91,862
|
$81,938
|
$35,981
|
|
Amounts subject to penalty** 163(2) ITA:
|
$82,469
|
$74,382
|
$27,771
|
|
** The 2002 year became statute-barred on August 8, 2006.
|
[6]
The appellant’s income
tax file was selected for an audit as part of a taxi industry audit program
undertaken by the Canada Revenue Agency (CRA).
[7]
The evidence reveals that
the appellant did not keep adequate books and records for his business. The appellant
claims that the gross and net incomes that he reported for each year in
question are accurate because the figures are from sheets on which he recorded
his business revenues at the end of each day. However, the appellant
acknowledges that his notes make no reference to the number of trips made with
or without passengers, or to the kilometres driven, or to the income earned per
trip. Furthermore, the appellant claims that the work sheets on which the
information was recorded were destroyed during a fire in the apartment in which
he was living.
[8]
Due to the absence of
adequate accounting records, Diane Châteauvert, the CRA auditor responsible for
reviewing the appellant’s file, proceeded to do a net worth assessment.
The draft statement of net worth, adduced as Exhibit I‑18, shows
that the net income reported by the appellant was not sufficient to cover his
personal expenses.
[9]
Ms. Châteauvert used
the projection method to determine whether the appellant had earned income that
he did not report. For the 2002, 2003 and 2004 taxation years, the Minister determined
that the appellant drove a total of 112,327 km, 104,329 km and 50,574 km,
respectively, on the basis of the taxi maintenance records obtained from the
Société de l’assurance automobile du Québec (SAAQ). The Minister also took the
following numbers into consideration in determining the unreported income from
the appellant’s business:
|
Joseph Carlo St-Philippe
|
AUDIT
|
|
|
Projection Method
|
2002
|
2003
|
2004
|
|
Total km driven
|
Based on mechanical inspection reports
|
112,327
|
104,329
|
50,574
|
|
% business use
|
Based on information obtained
|
100%
|
100%
|
100%
|
|
TOTAL Kilometres on Business
|
112,327
|
104,329
|
50,574
|
|
% of km driven without customers
|
50% of km on business
|
50%
|
50%
|
50%
|
|
Kilometres on Business WITHOUT A CUSTOMER
|
56,164
|
52,165
|
25,287
|
|
Rate charged per km
|
2002 and 2003 = $1.20
2004 and 2005 = $1.30
|
$1.20
|
$1.20
|
$1.30
|
|
Number of trips
|
Average km per trip
|
5
|
5
|
5
|
|
Rate charged
per trip
|
2002 and 2003 = $2.50
2004 and 2005 = $2.75
|
$2.50
|
$2.50
|
$2.75
|
|
Tip percentage
|
5% – 15%
|
10%
|
10%
|
10%
|
|
|
|
Income earned for kilometres driven with customers
Income earned on a per-trip basis
Tips
|
$67,396.00
$28,081.75
$9,457.80
|
$62,597.40
$26,082.25
$8,867.97
|
$32,873.10
$13,907.85
$4,678.10
|
|
Gross income determined using projection method
|
$105,025.75
|
$97,957.82
|
$51,459.05
|
|
Minus:
|
|
Additional gas expenses
Other additional expenses
Reported gross income
Discrepancy
|
$0.00
$0.00
$22,556.40
$82,469.35
|
$0.00
$23,166.04
$74,381.58
|
$0.00
$23,687.75
$27,771.30
|
|
|
|
|
|
|
Martin Nadeau
Appeals Division
Laval TSO
|
|
|
|
|
[10]
The appellant claims
that the distances calculated by Ms. Châteauvert for the 2002 and 2003 taxation
years are inaccurate because they are from readings of two different odometers.
The appellant used an old 1983 Mercedes during the years in question. He had to
replace the odometer on that car twice and, on both occasions, he installed a
used odometer. According to the appellant, the SAAQ took readings from the
replacement odometers, which resulted in false readings of the distances the appellant
had driven. The distance displayed on the replacement odometers was higher than
the distance on the odometers they replaced. The taxpayer claims that he cannot
possibly have driven 50,000 km each year, and that the distance of 50,574 km
for 2004 actually corresponds to the distances driven in 2003 and 2004
combined.
[11]
Ms. Châteauvert admitted
that the kilometres calculated for 2002 and 2003 seem very high, and she tried
to determine again the distance driven by the Appellant on the basis of his
annual gasoline consumption, which resulted in a much lower figure than the one
used for the purposes of the projection method. The respondent tried to settle
the matter on this new basis, but the taxpayer refused.
[12]
I note that there are
errors in the distance calculations based on consumption, and that the respondent
has consented to a settlement of this file based on the assumption that the
taxpayer drove 50,574 kilometres in the course of each of the years in question.
Counsel for the respondent provided new calculations based on this assumption
for 2002 and 2003. Using these calculations, the appellant’s unreported net
income would be $24,730.29 for the 2002 taxation year and $24,120.65 for the
2003 taxation year.
ANALYSIS
[13]
It is a settled
principle of Canadian tax law that the Minister may make arbitrary assessments
using any appropriate method having regard to the specific circumstances. Did the appellant
earn unreported income?
[14]
The numbers used by the
Minister in this case derive from the application of taxi industry regulations
and from statistics established by the Commission des transports du Québec in a
public inquiry held to set the rates applicable to Montreal Island and
other parts of Quebec. The statistics in question were accepted by the various associations
that represented Montreal Island taxi drivers in the public debates.
The appellant does not accept the Minister’s calculations, but has not
proposed any alternative method for consideration, and is unable to specify the
number of fares that he earned each day on business, and the income derived
from those fares. The corrections to be made to the calculations based on
the reduced distances driven in 2002 and 2003 are set out in Schedule I to
these reasons.
Assessment and reassessment (limitation
period)
[15]
The term “normal
reassessment period” is defined as follows in subsection 152(3.1) of the Income
Tax Act (ITA):
152(3.1) Definition of “normal reassessment period” — For
the purposes of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal
reassessment period for a taxpayer in respect of a taxation year is
(a) where at the end of the year the taxpayer is a mutual
fund trust or a corporation other than a Canadian-controlled private
corporation, the period that ends 4 years after the earlier of the day of
mailing of a notice of an original assessment under this Part in respect of the
taxpayer for the year and the day of mailing of an original notification that
no tax is payable by the taxpayer for the year; and
(b) in any other case, the period that ends 3 years after the
earlier of the day of mailing of a notice of an original assessment under this
Part in respect of the taxpayer for the year and the day of mailing of an
original notification that no tax is payable by the taxpayer for the year.
[16]
Subparagraph 152(4)(a)(i)
of the ITA pertains to the limitation period for making assessments or
reassessments:
152(4) Assessment and reassessment — The Minister
may at any time make an assessment, reassessment or additional assessment of 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, except that an
assessment, reassessment or additional assessment may be made after the
taxpayer’s normal reassessment period in respect of the year only if
(a) the taxpayer or the 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,
…
[Emphasis added.]
[17]
Justice Bowman, as he
then was, stated in Biros v. The Queen that “[t]he Minister has the
onus of establishing misrepresentation in order to open up the statute-barred year.”
[18]
Justice Bowie noted as
follows in College Park Motors Ltd. v. The Queen:
20 … subparagraph 152(4)(a)(i) is not penal but
remedial. It balances the need for taxpayers to have some finality in respect
of their taxes for the year with the requirement of a self-reporting system
that the taxing authority not be foreclosed from reassessing in those instances
where a taxpayer’s conduct, whether through lack of care or attention at one
end of the scale, or willful fraud at the other end, has resulted in an
assessment more favourable to the taxpayer than it should have been. This,
quite rightly, is not a penalty case. ...
[19]
Justice Bowie also
stated that subparagraph 152(4)(a)(i) “…is not at all concerned with
establishing culpability on the part of the taxpayer. Other provisions of the Act
are in place to do that. …”
[20]
Justice Tardif reviewed the case law
regarding the meaning of “neglect” and “misrepresentation” in
subparagraph 152(4)(a)(i) in Savard v. The Queen. He quoted, with approval, the
following remarks of Judge Cardin of the Tax Review Board in J.J. Froese
v. M.N.R.:
… I do not believe that in this context any inference other than
their generally accepted meaning can or should be given to the words “neglect”
or “carelessness” which is the contrary of the reasonable care that is
ordinarily, usually, or normally given by a wise and prudent person in any
given circumstances.
[21]
Justice Strayer of the
Federal Court stated the following in Venne v. Canada with respect to
the Minister’s burden:
… [I]t is sufficient for the
Minister, in order to invoke the power under subparagraph 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 words “misrepresentation that is attributable to
neglect” must mean, particularly when combined with other grounds such as “carelessness”
or “willful default” which refer to a higher degree of negligence or to
intentional misconduct. …
[22]
Justice Strayer concluded that the
taxpayer had not demonstrated reasonable care in preparing and producing his
income tax returns, and noted that “[t]his conclusion is based partly on the
magnitude of the unreported income.”
[23]
The Federal Court of
Appeal (FCA), per Justice Pelletier, recognized in Lacroix v. Canada that in the majority of cases, the Minister would have
difficulty showing direct evidence of the taxpayer’s state of mind at the time
the income tax return was filed:
32 …Insofar as the Tax Court of Canada is satisfied
that the taxpayer earned unreported income and did not provide a credible
explanation for the discrepancy between his or her reported income and his or
her net worth, the Minister has discharged the burden of proof on him within
the meaning of subparagraph 152(4)(a)(i) and subsection 162(3) [sic].
[24]
The remarks of Justice
Létourneau of the FCA in Molenaar v. Canada are to the same
effect as the remarks of Justice Pelletier in Lacroix:
4 Once the Ministère establishes on the basis of reliable
information that there is a discrepancy, and a substantial one in the case at
bar, between a taxpayer’s assets and his expenses, and that discrepancy
continues to be unexplained and inexplicable, the Ministère has discharged its
burden of proof. …
Penalties
[25]
Subsection 163(2) of
the ITA imposes a penalty on a taxpayer who, knowingly, or under circumstances
amounting to gross negligence, makes a false statement or omission in an income
tax return:
163(2) False statements or omissions — Every person
who, knowingly, or under circumstances amounting to gross negligence, has made
or has participated in, assented to or acquiesced in the making of, a false
statement or omission in a return, form, certificate, statement or answer (in
this section referred to as a “return”) filed or made in respect of a taxation
year for the purposes of this Act, is liable to a penalty of the greater of
$100 and 50% of the total of.…
[26]
Subsection 163(3) of
the ITA puts the burden on the Minister to prove that the circumstances
justifying a penalty pursuant to subsection 163(2) are present:
163(3) Burden of proof in respect of penalties — Where,
in an appeal under this Act, a penalty assessed by the Minister under this
section or section 163.2 is in issue, the burden of establishing the facts
justifying the assessment of the penalty is on the Minister.
[27]
According to subsection 163(2)
and the case law, the burden is on the Minister to establish the facts
justifying the assessment of a penalty under subsection 163(2). In Corriveau
v. Canada, Judge Archambault described the Minister’s
burden as follows:
26 … [H]e must prove: (1) that the taxpayer made a false statement
or omission in a return, and (2) that the false statement or omission was made
knowingly or under circumstances amounting to gross negligence.
[28]
In Venne, Justice
Strayer stated the following with respect to subsection 163(2):
… One must
keep in mind, as Cattanach, J. said in the Udell case supra that
this is a penal provision and it must be construed strictly. The subsection
obviously does not seek to impose absolute liability but instead only
authorizes penalties where there is a high degree of blameworthiness involving
knowing or reckless misconduct….
[29]
In Morin v. M.N.R., Chief Judge Couture stated the following:
To escape the
penalties provided in subsection 163(2) of the Act, it is necessary, in my
opinion, that the taxpayer’s attitude and general behaviour be such that no
doubt can seriously be entertained as to his good faith and credibility
throughout the entire period covered by the assessment. …
[30]
In Venne, the
FCA stated the following:
…“Gross 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….
[31]
In Farm Business
Consultants Inc. v. Canada,
Judge Bowman stated the following:
22 … If, however, it is misrepresentation attributable to “wilful
default” it is much more difficult to conclude that it is not equally a “false
statement” which the appellant made "knowingly" within the meaning of
subsection 163(2). …
The
judge also said that the terms “neglect” and “carelessness” in subparagraph
152(4)(a)(i) are included in the term “gross negligence” in subsection
163(2), and that the term “wilful default” in subparagraph 152(4)(a)(i)
is implicitly included in the term “knowingly” in subsection 163(2):
23 …“Neglect, carelessness, wilful default or ... fraud” (négligence,
inattention, omission volontaire ou ... fraude) cover a wide range of
non-feasance or misfeasance, innocent or intentional, to which a
misrepresentation in a return may be attributable. There is no hiatus between
the words in this series, which starts with ordinary neglect and proceeds by
gradual degrees to fraud which would justify a penalty under subsection 163(2).
The type of carelessness or neglect encompassed by subparagraph 152(4)(a)(i)
may include, but is not as extensive as, that contemplated in the words “gross
negligence” in subsection 163(2) (“faute lourde”) which implies conduct
characterized by so high a degree of negligence that it borders on
recklessness. It would be difficult to conclude that the state of mind required
for “wilful default” (“omission volontaire”) is not the same as that
implicit in the word “knowingly” (“sciemment”).
[32]
In Lacroix, the FCA
concluded that the taxpayer had committed gross negligence. According to the
Court, the taxpayer had not provided a credible explanation for the
misrepresentation of facts in his income tax return:
29 … In the case at bar, the Minister found
undeclared income and asked the taxpayer to justify it. The taxpayer provided
an explanation that neither the Minister nor the Tax Court of Canada
found to be credible. Accordingly, there is no viable and reasonable hypothesis
that could lead the decision-maker to give the taxpayer the benefit of the
doubt. The only hypothesis offered was deemed not to be credible.
30 The facts in evidence in this case are such that the
taxpayer’s tax return made a misrepresentation of facts, and the only
explanation offered by the taxpayer was found not to be credible. Clearly,
there must be some other explanation for this income. It must therefore be
concluded that the taxpayer had an unreported source of income, was aware of
this source and refused to disclose it, since the explanations he gave were
found not to be credible. In my view, given such circumstances, one must come
to the inevitable conclusion that the false tax return was filed knowingly, or
under circumstances amounting to gross negligence. This justifies not only a
penalty, but also a reassessment beyond the statutory period.
[33]
The above remarks by
the FCA in Lacroix sum up the conclusion that must be reached in this
case. The Minister has met his burden of proof. The Minister showed the
discrepancies between the gross business income reported by the appellant and
the net business income determined using the alternative assessment method.
Although the appellant does not accept the Minister’s calculations, he offers
no other reliable calculation method. Indeed, the appellant did not keep
adequate books and records, and is therefore unable to specify the number of
paid trips that he drove for his business, or the income that he earned
therefrom.
[34]
The draft statement of
net worth prepared by the auditor shows that the income reported by the appellant
would not enable him to support himself financially. The appellant has
offered no credible explanation for the discrepancy between the meagre net
income that he reported and the cost of living.
CONCLUSION
[35]
For all these reasons,
the taxpayer’s appeal is allowed for the 2002 and 2003 taxation years. The
reassessments are referred back to the Minister in order for the net unreported
income for the 2002 and 2003 taxation years to be calculated in accordance with
Schedule I to this judgment. The penalties will be reduced in accordance with these
calculations.
[36]
The appeal for the 2004
taxation year is dismissed. There will be no award concerning costs or
disbursements.
Signed at Ottawa, Canada, this 3rd day of June 2011.
“Robert J. Hogan”
Translation
certified true
on this 30th day September
2011
François Brunet,
Reviser
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