Citation: 2011 TCC 119
Date: 20110223
Docket: 2009-1759(IT)I
BETWEEN:
JEAN FRANTZ BORNO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau, J.
[1]
These are appeals under
the informal procedure in respect of the 2003, 2004 and
2005 taxation years. In his reassessments made under the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.), as amended (the Act), dated
June 28, 2007, the Minister of National Revenue (the Minister) added
to the appellant's income the amounts of $17,596 for the 2003 taxation
year, $35,387 for the 2004 taxation year and $39,380 for the
2005 taxation year and imposed a penalty for gross negligence under
subsection 163(2) of the Act in the amount of $936.61 for the 2003
taxation year, $3,976.91 for the 2004 taxation year and $6,548.80 for the
2005 taxation year.
[2]
When filing his income
tax returns for the taxation years at issue, the appellant reported a net
business income of $6,165 for the 2003 taxation year, $2,072 for the
2004 taxation year and $2,975 for the 2005 taxation year.
[3]
On May 20, 2004,
the Minister issued a determination stating that no tax was payable for the
2003 taxation year.
[4]
The issues are as
follows:
(a)
whether the appellant
earned the unreported income described above;
(b)
whether the Minister
satisfied his burden of proof with respect to the facts that must be shown to
allow him to make a reassessment after the normal reassessment period for the
2003 taxation year; and
(c)
whether the Minister
set out conditions that support the imposition of a gross negligence penalty.
The facts
[5]
The appellant is a taxi
driver. He has held a T-11 permit since April 2003, which allows him to
operate a business throughout the Montréal island except for the east and west
parts of Montréal and the Montréal International Airport. The permit cost him
$145,000. The cost of the taxi permit was financed through a $110,000 hypothec
issued by the Société Financière Speedo (1993) Ltée. The
appellant owned his taxi cab, which was a 1996 Chevrolet Lumina in 2003 and
2004 and a 2000 Honda Accord in 2005.
[6]
The appellant lived in
Anjou from 2003 to July 2005. On June 21, 2005, the appellant
and his spouse purchased a residence located at 3630 Jacqueline Street in
Laval, which cost them $152,000 and was financed through a hypothec of $114,000
on the residence and a new hypothec on the taxi permit for part of the $38,000
difference.
[7]
The appellant's tax
file was selected for an audit as part of an audit program for the taxi industry
conducted by the Canada Revenue Agency (CRA).
[8]
The evidence showed
that the appellant kept no accounting records for the taxation years at issue
other than a handful of expense invoices (about 10 in total). The appellant
kept no notes, not even on scrap paper. Every quarter, he calculated his sales
and expenses from memory and provided that information to his accountant.
[9]
Isabelle St-Amand, the
CRA auditor assigned to the appellant's file, applied the projection method, an
indirect auditing method. The additional business income added to the
appellant's income was calculated based on the discrepancies obtained between
the income earned according to the projection method and the business income
that was initially reported. Given the lack of adequate records, the auditor
then estimated the net worth. The additional income for 2003 determined
through the approximate net worth method was higher than the additional income
determined through the projection method, but for 2004, it was lower than
the additional income determined through the projection method. For 2005,
the additional income was more or less the same for both methods. However, the
cost of living used to determine the approximate net worth was established by
Statistics Canada for a family of five while the appellant had a family of
seven including five children 18 and under. The use of the net worth method
allegedly resulted in a much higher additional income than that determined
through the projection method. According to the auditor, the total income
reported by the appellant and his spouse was clearly insufficient to cover the
cost of living expenses for a family of seven.
[10]
The auditor indicated
that she did not analyze any of the appellant's bank deposits because he had no
business or personal bank records.
[11]
For the 2003, 2004 and
2005 taxation years, the Minister estimated that the appellant travelled a
total of 55,783 km, 79,233 km and 85,394 km respectively based
on the taxi's maintenance records obtained from the Société de l'assurance automobile
du Québec. The Minister also took into account the following data to establish
the appellant's unreported income:
The table is on the next page.
|
|
2003
|
2004
|
2005
|
|
Total mileage
|
55,783 km
|
79,233 km
|
85,394 km
|
|
Personal travel percentage
|
35%
|
35%
|
35%
|
|
Business mileage
|
36,259 km
|
51,501 km
|
55,394 km
|
|
Percentage without clients
|
45%
|
45%
|
45%
|
|
Mileage with clients
|
16,317 km
|
23,175 km
|
24,927 km
|
|
Average rate per km
|
$1.20
|
$1.30
|
$1.30
|
|
Average distance per trip
|
5 km
|
5 km
|
5 km
|
|
Number of trips per year
|
3,263
|
4,635
|
4,985
|
|
Starting rate
|
$2.50
|
$2.75
|
$2.75
|
|
Base income for trips
|
$8,158
|
$12,747
|
$13,710
|
|
Income for mileage travelled with clients
|
$19,580
|
$30,128
|
$32,405
|
|
Tips (8%)
|
$2,219
|
$3,430
|
$3,689
|
|
Total income
|
$29,957
|
$46,305
|
$49,805
|
|
Gross income reported by appellant
|
$13,592
|
$12,521
|
$11,784
|
|
Disallowed expenses
|
$1,231
|
$1,603
|
$1,359
|
|
Unreported income
|
$17,596
|
$35,387
|
$39,380
|
[12]
The Minister also
disallowed the deduction of part of the expenses claimed by the appellant
because his personal use of the vehicle was 35% rather than 10% as reported in
his tax returns:
|
|
2003
|
2004
|
2005
|
|
Total motor vehicle expenses
Business-related
Claimed vehicle expenses
Business-related (adjusted)
Revised vehicle expenses
|
4,924
90%
4,431
65%
3,200
|
6,411
90%
5,770
65%
4,167
|
5,435
90%
4,892
65%
3,533
|
|
Difference
|
1,231
|
1,603
|
1,359
|
The appellant's position
[13]
The appellant
completely disagrees with the reassessments and asks that they be entirely
vacated, including the disallowed expenses and penalties. In his Notice of
Appeal, the appellant stated the following points as reasons for his
disagreement:
–
determining personal
travel, such as driving to and from work, and travel for family reasons, such
as taking children to school and his spouse to work and going to church on
Sunday and to buy groceries;
–
mileage without a
client;
–
method of determining
the starting rate; and
–
rate of tips received.
Analysis
Arbitrary assessments and assessments outside the
normal reassessment period
[14]
As the Federal Court of
Appeal pointed out in Hsu v. Canada, 2001 FCA 240, paragraph 22,
the Minister may make arbitrary assessments using any method appropriate in the
circumstances:
Subsection 152(7) of the Act empowers the
Minister to issue "arbitrary" assessments using any method that is
appropriate in the circumstances. . . .
Subsection 152(8) grants a presumption of
validity to these assessments and places the initial onus upon the taxpayer to
disprove the state of affairs assumed by the Minister . . . . Notwithstanding the fact that such an
assessment is "arbitrary", the Minister is obliged to disclose the
precise basis upon which it has been formulated . . . . Otherwise, the
taxpayer would be unable to discharge his or her initial onus of demolishing
the "exact assumptions made by the Minister but no more" . . . .
[15]
The words "normal
reassessment period" are defined as follows in subsection 152(3.1) of the
Act:
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) if 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 four years after the earlier of the day of sending of a
notice of an original assessment under this Part in respect of the taxpayer for
the year and the day of sending 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 three years after
the earlier of the day of sending of a notice of an original assessment under
this Part in respect of the taxpayer for the year and the day of sending of an
original notification that no tax is payable by the taxpayer for the year.
[16]
Subparagraph 152(4)(a)(i)
of the Act stipulates that the following circumstances would allow the Minister
to make a reassessment outside of the normal reassessment period:
152(4) Assessment and reassessment
[limitation period] – 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 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
[17]
With respect to the
Minister's burden of proof for making a reassessment outside of the normal
reassessment period, Justice Strayer stated the following in the
second paragraph of his conclusions in Venne v. Canada, [1984]
F.C.J. No. 314 (F.C.T.D.):
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 words "misrepresentation that is attributable to
neglects" 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. . .
.
[18]
Justice Pelletier of
the Federal Court of Appeal indicated the following in Lacroix v. Canada,
2008 FCA 241, at paragraph 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].
[19]
In addition, Justice
Pelletier supported his reasoning by referring to the following statements of
Justice Létourneau of the Federal Court of Appeal in Molenaar v. Canada,
2004 FCA 349, at paragraph 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. It is then for the taxpayer to identify the
source of his income and show that it is not taxable.
Penalties
[20]
Subsection 163(2) of
the Act allows the Minister to penalize a taxpayer who, knowingly or under
circumstances amounting to gross negligence, makes a false statement or
omission in a return. Subsection 163(2) of the Act reads as follows:
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 . . .
[21]
However, subsection
163(3) of the Act imposes on the Minister the burden of proving that the
circumstances justifying a penalty for gross negligence are present. Subsection
163(3) reads as follows:
(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.
[22]
In Venne, supra,
Justice Strayer specified the intended meaning of "gross negligence":
. . . "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. . . .
[23]
In Lacroix, supra,
the Federal Court of Appeal found that the taxpayer, knowingly or under
circumstance amounting to gross negligence, filed a false tax return because he
was unable to provide a credible explanation as to the source of his unreported
income:
29. . . . 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.
Conclusion
[24]
Based on the facts in
evidence in this case, the appellant made false statements or omissions in his
2003, 2004 and 2005 tax returns and the appellant's explanations are not
considered credible or corroborated. In such circumstances, the finding is that
the false statements in a return were made knowingly or under circumstances
amounting to gross negligence. That justifies not only the imposition of a
penalty but also making a reassessment for the 2003 taxation year outside the
normal reassessment period.
[25]
The Minister has
discharged his burden of proof. He showed that there were significant
discrepancies between the gross business income reported by the appellant and
the net business income determined through the projection method. The data used
by the Minister concerning the mileage travelled by the appellant each year at
issue come directly from odometer readings, which are done every six months for
regulatory reasons. The other data used by the Minister come from regulations
applicable to the taxi industry or from statistics established by the
Commission des transports du Québec following a public inquiry, the purpose of
which was to set the rates applicable to the Montréal island and elsewhere in
Quebec. Those statistics were accepted by various associations that
participated in public debates on behalf of taxi drivers on the Montréal island
(see paragraph 15 of Justice Hogan's decision in Maurice Mompérousse v.
The Queen, 2010 TCC 172).
[26]
The appellant does not
acknowledge the validity of the Minister's calculation method and of the
assumptions used but offers no viable replacement method. The appellant did not
keep adequate books and accounting records, which would allow him to specify
the number of paid trips he made and the resulting income. The appellant has
not discharged the burden of proof required.
[27]
In her audit report,
the auditor stated that, according to the statistical data of the Montréal
Bureau du taxi and the Commission des transports du Québec, gross business
income from operating a taxi permit was about $58,680 per year while the
appellant reported only a gross business income of about $12,500 per year. At
that level of income, the Court very much doubts that the taxi permit could
have been valued at around $150,000 in April 2003, based on the data of the
Montréal Bureau du taxi.
[28]
The net worth estimate
prepared by the auditor shows that the total income earned by the appellant and
his spouse was clearly insufficient to cover the cost of living expenses of a
family of seven. The appellant did not offer any credible explanations for the
discrepancy between the cost of living for his family and the modest net income
reported.
[29]
The penalty imposed
under subsection 163(2) of the Act for the 2003, 2004 and 2005 taxation
years is justified given that the amount of unreported income was very
significant, namely, 74% of the net business income for the 2003 taxation year,
94% for the 2004 taxation year and 93% for the 2005 taxation year and
given that the appellant kept no accounting records and provided approximations
of his income and expenses in his tax returns.
[30]
For those reasons, the
appeals from the reassessments are dismissed.
Signed at Ottawa, Canada, this 23rd day of February
2011.
“Réal Favreau”
on this 28th day of March 2011
Margarita
Gorbounova, Translator
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