Citation: 2010 TCC 313
Date: 20100615
Docket: 2008-514(IT)G
BETWEEN:
RICHARD POULIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
The appellant in this
appeal is also a concerned party in Komutel Inc. v. The Queen
2008-515(IT)G as the sole shareholder of Komutel. The appeals were heard
separately despite being somewhat connected.
[2]
The appellant initiated
his appeal by a notice, which contains the following:
[translation]
Year 2003
3.
The appellant is the director, president,
secretary and majority shareholder of the company 9098‑5854 Québec Inc.,
as appears from the Enterprise Register statement, Exhibit P‑1;
4.
The appellant is also the director, president,
secretary and majority shareholder of the company Komutel Inc., formerly B2C
Web Support Inc., as appears from the Enterprise Register statement,
Exhibit P‑2;
5.
During the fiscal year of the company 9098‑5854
Québec Inc. ending March 31, 2003, the accountant in charge of the
company’s bookkeeping, Pierrot Poulin, made a mistake in the adjusting entry in
the accounting records;
6.
Mr. Poulin made the following entry:
[translation]
|
|
Debit
|
Credit
|
|
Capital asset
|
$26,835.00
|
|
|
Advances to a director
|
|
$26,835.00
|
7.
The purpose of this entry was to record the
transfer of certain personal assets by the appellant to his business;
8.
However, contrary to what was recorded in the
accounting records, the transfer was made to the company B2C Web Support Inc.
Consequently, this transfer entry was also made in B2C Web Support Inc.’s
accounting records;
9.
On the basis of this accounting entry, the
Agency added to the appellant’s taxable income the amount of twenty‑six thousand
eight hundred and thirty‑five dollars ($26,835.00) credited to the advances
to a director account.
Year 2004
10.
The Agency added thirty‑seven thousand
seven hundred and thirty‑two dollars ($37,732.00) to the appellant’s
taxable income for the year 2004;
11.
The amount thus added corresponded to two
adjusting accounting entries recorded in the company 9098‑5854 Québec
Inc.’s advances to a director account, namely: an entry for thirteen thousand
nine hundred and thirty‑two dollars ($13,932.00) and another for twenty‑three
thousand eight hundred dollars ($23,800.00).
[3]
The respondent stated
in her reply that the assessment was justified given the following assumptions
of fact:
[translation]
a)
The appellant had an assistive technology
product for Web/Internet customer service and was looking for financial
partners.
b)
The company Capital Vision (“Capital Vision”)
was willing and had the capital to invest in technology.
c)
On April 4, 2001, Capital Vision,
represented by its president, Benoît Beaudin, and the appellant, an independent
contractor, signed an agreement that included the following provisions:
i)
a contract of employment for Richard Poulin
under the terms of the agreement;
ii)
an undertaking from Capital Vision to create a
business (and incorporate it under federal law for this purpose) with
51 per cent of the common voting shares to be held by Capital Vision and
49 per cent by Richard Poulin, and 49 per cent of the non‑voting
preferred shares to be held by Capital Vision and 51 per cent by Richard
Poulin;
iii)
an investment of $350,000 by Capital
Vision, namely,
·
$200,000 initial investment in the business
according to a timetable extending from April to September 2001;
·
$100,000 paid to the company to be
incorporated, in the form of advances reimbursable from profits; and
·
$50,000 in cash paid to Richard Poulin, on
terms to be established.
d)
The company 9098‑5854, a management
company, was incorporated on December 4, 2000, under Part IA of the Quebec Companies Act.
e)
During the years at issue, the appellant was the
sole shareholder, president and director of the company 9098‑5854.
f)
The appellant was also the sole shareholder,
president and director of the company B2C WEB Support Inc., now known as
Komutel Inc. (hereafter “Komutel”), which was incorporated on April 23,
2001, under the Canada Business Corporations Act.
g)
There was no proper external audit of the
financial statements of 9098‑5854 and Komutel for the fiscal years ending
March 31, 2003 and 2004.
h)
The financial statements of 9098‑5854 and
Komutel for the fiscal year ending March 31, 2004, were prepared by
Gestion Zéro Huit, owned by Pierrot Poulin.
i)
Pierrot Poulin is also the accountant who kept the
books for 9098‑5854 and Komutel for the fiscal year ending March 31,
2004.
j)
During the fiscal years ending March 31,
2003 and 2004, the company 9098‑5854 made accounting entries recording
cash advances by it to the appellant and cash advances by the appellant to it.
k)
The Canada Revenue Agency’s audit included an
analysis of the advances from a director account in 9098‑5854’s financial
statements and adjusting entries for each of the fiscal years ending
March 31, 2003 and 2004 (see Schedule I for details).
Advance of $26,835
l)
During the fiscal year ending March 31,
2003, 9098‑5854 paid $26,835 for the purchase of office equipment.
m)
An invoice for $26,835 was made out to 9098‑5854,
and payment was made by cheque by Komutel.
n)
This equipment was used solely for the
operations of Komutel, not those of 9098‑5854.
o)
The value of this equipment was included in the
assets of Komutel and 9098‑5854.
p)
The following adjusting entry was made in 9098‑5854’s
accounting records for the fiscal year ending March 31, 2003:
[translation]
|
|
Debit
|
Credit
|
|
Capital asset
|
$26,835.00
|
|
|
Advances to a director
|
|
$26,835.00
|
q)
The company 9098‑5854 claimed $2,684 and
$4,830 in depreciation costs related to that equipment for each of the
fiscal years ending March 31, 2003 and 2004, respectively.
r)
Even though $26,835 was credited to the advances
from directors account in the company’s financial statements, the appellant
never paid this amount.
Advance of $23,800
s)
During the 2004 taxation year, the company 9098‑5854
paid the appellant $23,800.
t)
During the audit, no justification was provided
for the $23,800 payment to the appellant.
u)
At the objection stage, the appellant’s agent
submitted that the $23,800 represented salary owed to the appellant.
Advance of $13,392 (sic)
v)
Under an agreement entered into with the
appellant, Capital Vision invested money in the companies 9098‑5854 and
Komutel.
w)
The company 9098‑5854 owed Capital Vision
$13,392 (sic) for the 2004 fiscal year.
x)
The $13,392 (sic) represented
the difference between a $130,500 advance by Capital Vision and a $116,568 subscription
receivable from Capital Vision.
y)
During the audit, the auditor found that the
$13,392 (sic) that 9098‑5854 owed to Capital Vision
was included in the amounts debited in the company’s adjusting journal entries as
advances from directors.
z)
There is no evidence that the appellant actually
advanced $13,392 (sic) to 9098‑5854.
[4]
Essentially, the
appellant admitted that, when a furniture purchase invoice was recorded, a
mistake was made: $26,835 was entered into both companies’ accounting
records. He stated that he had immediately corrected the mistake discovered by
the auditor.
[5]
He also asserted that
certain accounting changes had been made following the recommendation of an
auditor involved in the research and development credit aspect of the case. He
confidently stated that some of the amounts assessed had been part of his
salary, although these amounts were not actually laid out because the company
had been unable to pay him. He added that the taxes on this unpaid salary had
nevertheless been paid.
[6]
As for the $13,932, the
appellant was unable to provide any explanations.
[7]
With respect to the
facts, the reply to the notice of appeal seems to describe them quite well.
Just as in the other case, Komutel 2008-515(IT)G, the issue stems from the
deficiencies in bookkeeping—the extent of which is viewed differently by the
parties—which led the Minister to add certain amounts to the taxpayer’s income as
benefits under subsection 15(1) of the Income Tax Act (ITA),
namely: $26,835 in 2003 and $37,731.64 in 2004.
[8]
The first dispute
arises out of a purchase of furniture pursuant to a deal initiated and planned
by Beaudin that generated a very substantial initial investment in the related
case. In the appellant’s opinion, the asking price was somewhat excessive.
[9]
The appellant explained
that B2C Web Support Inc. (later, Komutel Inc.) had insufficient liquid assets
at the time of the purchase. The furniture was therefore billed to and paid for
by the company 9098, which was subsequently reimbursed by B2C, thus explaining
the erroneous double entry in the records. Consequently, the
$26,835 purchase was recorded as an expense for both companies.
[10]
The appellant
acknowledged that it was the Canada Revenue Agency auditor who discovered the
irregularity. The appellant stated that he had immediately admitted that the
expenditure had been recorded in two places and consequently arranged for the
appropriate corrections to be made.
[11]
He stated that the
mistake was due to the fact that he would put his personal financial information
and the financial information for 9098 and B2C in the same box, for the
attention of his accountant, who failed to correctly sort that information.
[12]
As for the second
dispute, the appellant explained that it had arisen from changes made to
maximize research and development credits, following another CRA auditor’s advice.
On this point, he submitted that the $33,951 in employment income
indicated on his T4 for 2003 included the $25,143.65 benefit taxed in
2004.
[13]
He added that the taxes
on this amount had been paid, even though he had not received it as the company
had had insufficient funds to pay him, which was why everything had been
recorded as an [translation]
“advance to the shareholder”.
[14]
The auditor explained
why he had assessed the taxpayer $26,835 for 2003 under
subsection 15(1) of the ITA. He stated that the furniture purchase invoice
had been made out to one company, while the cheque had been issued by the
other, thus confirming the appellant’s testimony on this point.
[15]
After having noted that
these items appeared in B2C’s and 9098’s financial statements, he stated that
the appellant had told him that they would be removed from 9098’s assets, since
this did not reflect reality. When asked what he had then done, the auditor
answered as follows:
[translation]
Q. What did you do at that point to make a correction and delete the
purchase of the asset from 9098’s books?
A. The asset had been advanced to the director, so the asset had to
be deleted from the records. Then we eliminated the $26,835 in assets and the “advance
to the director” entry. This is an amount that could be taken out by
Mr. Poulin afterwards without any tax consequences. That is why we used
15(1) to tax this amount in the year 2003.
[16]
As regards the year
2004, the auditor used his worksheet in explaining that he had found in the
taxpayer’s accounting records sizeable sums recorded as unpaid salary, as receipts
of funds by the shareholder ($24,000) and as adjusting entries ($45,424.01).
The amounts were added to the taxpayer’s income under subsection 15(1) of
the ITA, because they [translation]
“could be taken out by the shareholder without any tax consequences for future
years”, and in the absence of acceptable explanations by Mr. Poulin, he
dealt with these amounts to the taxpayer’s disadvantage.
[17]
It is appropriate to
reproduce below the excerpt from the analysis document on which the auditor’s
testimony was based:
|
[translation]
|
|
Date
|
F/S
|
CRA
|
Analysis
|
|
April-04-01
|
$0.00
|
$0.00
|
Start-up of the
company
|
|
March-31-02
|
$4,323.00
|
$4,323.00
|
Company’s loss
absorbed by the shareholder
|
|
_________________________________________________
|
|
March-31-02
|
$4,323.00
|
$4,323.00
|
Balance on
March 31, 2002
|
|
================================================
|
|
|
|
|
|
|
March-31-03
|
$26,835.00
|
$0.00
|
Purchase of assets
already included in B2C Web Support
|
|
March-31-03
|
$1,819.00
|
$1,819.00
|
Taxes paid by
the shareholder and receivable by the company
|
|
March-31-03
|
-$12,976.00
|
-$12,976.00
|
Company’s earnings
for the year
|
|
_________________________________________________
|
|
March-31-03
|
$20,001.00
|
-$6,834.00
|
Balance on March
31, 2003
Difference of
$26,835 on March 31, 2003
|
|
================================================
|
|
|
|
|
|
|
March-31-04
|
$0.00
|
$7,492.37
|
Shareholder’s
advance from B2C Web
|
|
March-31-04
|
$25,143.65
|
$0.00
|
Unpaid salary
(missing sales entry)
|
|
March-31-04
|
$45,424.01
|
$0.00
|
Plug confirmed
by the accountant
|
|
March-31-04
|
$0.00
|
$0.00
|
Debt to Groupe
Capital Vision
|
|
March-31-04
|
$712.00
|
$712.00
|
Tax payment RQ
|
|
March-31-04
|
$783.00
|
$783.00
|
Tax payment RC
|
|
March-31-04
|
$73.49
|
$73.49
|
Tax payment RC
|
|
March-31-04
|
$0.00
|
$23,800
|
Amounts received
by the shareholder
|
|
March-31-04
|
-$100.00
|
-$100.00
|
Subscription
receivable
|
|
March-31-04
|
-$1,726.45
|
-$1,726.45
|
National Bank
reconciliation
|
|
March-31-04
|
-$24,000.00
|
-$24,000.00
|
Received by the
shareholder
|
|
March-31-04
|
-$1,879.37
|
-$1,879.37
|
Taxes receivable
2003
|
|
_________________________________________________
|
|
March-31-04
|
$64,491.33
|
-$1,618.96
|
Balance on March
31, 2004
Difference of
$64,566.64 ($26,835 + $13,931.64 + $23,800)
|
|
|
|
|
|
|
Conclusion: An
additional $64,566.64 could therefore be attributed to the shareholder. This
amount could thus be taxed as a taxable benefit under 15(1).
|
[18]
As for the $24,000, the
auditor stated that the appellant had already accounted for this amount. He
therefore decided to allow him the amount on the basis that he required a bare
minimum on which to live.
[19]
He stated that he had
obtained a number of statements from the appellant, but others were non-existent.
In the auditor’s opinion, it was not possible, on the basis of the documentary
evidence, to establish a link between the salary paid in 2003 and the $23,800.
He also claimed that the appellant had never showed him a connection between
the 2004 cash receipts and the unpaid salary in 2003.
[20]
The auditor’s testimony
is by no means clear and coherent. Among other things, he denied having
received and accepted some of the appellant’s explanations. He also stated that
he had drawn certain conclusions on the basis of the appeal officer’s file, while
his own notes seem to contradict his testimony.
[21]
The respondent
acknowledged that the auditor’s notes do not indicate any amount, that they
mention only a decrease in the assessment and that, in any event, they are not
very clear.
[22]
The auditor’s testimony
is not a model of clarity and coherence. To support the validity of the
assessment, the auditor seizes on details, namely the fact that the accountant
who had allegedly made the mistake failed to testify and that the appellant is
the sole shareholder of both companies concerned.
[23]
In the respondent’s
opinion, that the appellant was the one who handed over the documents to his
accountant precludes characterizing the double entry as an accounting error. It
is true that this behaviour may be described as negligent, particularly since
it made the accountant’s job more difficult and increased the risk of errors
occurring, which is in fact what did happen. However, the appellant
spontaneously admitted to the mistake and hastened to correct it.
[24]
The appellant’s
explanations, albeit peculiar, seem to be credible and reasonable, especially
since the auditor’s testimony was odd, to say the least. At the outset, he
stated—and rightly so—that the appellant bore the burden of proof. Would this
fact justify rather confused testimony that was incomplete on certain aspects
and contradictory as to the other points?
[25]
In support of their
respective positions, the parties referred to a number of decisions. Not that
these decisions are irrelevant, but I think it is important to note that mere
evidence of a mistake does not automatically result in tax consequences. The
mistake may be intentional or unintentional. It may be a clerical error. Each
case must be the subject of a specific analysis, and so the case law must be
considered with some reservation.
[26]
Generally, accountants,
like all professionals, must bear the consequences of their mistakes, but
still, the error must stem from a failure to follow good practice.
[27]
If the mistake was made
because the documents were somewhat disorderly or possibly in a state of
confusion, it might be correctable without any tax penalty being incurred.
[28]
Here, the accountant
made an unintentional mistake as a result of having been given possibly
confusing documents, in my view. In addition, the circumstantial evidence in
this case suggests that Mr. Poulin was overwhelmed by the situation, as he
had to deal with a number of constraints in the management of a potentially
promising project, but one whose progress toward growth and profitability was
proving to be slow and difficult.
[29]
The evidence shows
that, after having obtained the appellant’s explanations regarding 9098’s
purchase of furniture and B2C’s payment for that furniture, the auditor did not
investigate beyond this point.
[30]
The purchase of
furniture by 9098 led to its resale to B2C. Even though the auditor’s
conclusion is justified by the way in which the transaction was carried out and
by the entries in the various records, the appellant’s quick and spontaneous
explanations should have been taken into account given the context.
[31]
Just as in Komutel’s
case, the auditor’s approach was to identify certain facts or points justifying
an assessment while assuming that the appellant would merely have to show that
the assessment was invalid. Moreover, the auditor seems, for no reason, to have
doubted that the appellant had acted in good faith.
[32]
The auditor had every
right to require explanations concerning any part of the taxpayer’s accounting
and assume that any unexplained disbursements were transfers subject to
subsection 15(1) of the
ITA, if it was logical to do so. However, in his testimony, the auditor does
not even claim that the amounts that remained without explanation and that were used, to Mr. Poulin’s
disadvantage, in the computation of his income, had in fact been transferred to
Mr. Poulin. Had the auditor requested an explanation, he would have obliged
Mr. Poulin to provide justification in order to avoid having this part of
the assessment upheld. Once again, he deemed it necessary to include these
amounts in Mr. Poulin’s income under subsection 15(1) of the ITA
because he claimed that Mr. Poulin could withdraw them.
[33]
Clearly, the auditor
was mistrustful and skeptical regarding the appellant’s explanations. The
inconsistencies or confused or vague explanations validated this mistrust to
such a degree that he found the appellant not to be credible.
[34]
Although the fairly general
confusion characterizing both this case and that of Komutel might elicit some
mistrust, it would have been preferable that the auditor have put more effort
into investigating the case instead of withdrawing from it on the pretext that
the appellant bore the burden of proof before the Court.
[35]
Contrary to the
auditor’s interpretation, I am of the view that the explanations given
spontaneously are credible. If the appellant had wanted to disguise the facts
or deliberately hide some of them, obviously he would have behaved differently.
Furthermore, he admitted to being unable to explain certain points, including
the $13,931 that the respondent in fact referred to in final argument.
[36]
The appellant’s
explanations were spontaneous and transparent. The auditor admitted that the
appellant had cooperated with him. He interpreted the discrepancies in the
explanations given as being attempts to avoid tax liability.
[37]
On a balance of
probabilities, the appellant was negligent to some extent with respect to his responsibility
to keep clear accounting records supported by appropriate documentary evidence.
[38]
However, he
demonstrated his good faith, borne out by irreproachable cooperation. The
burden of proof was on the appellant, and while the evidence was far from perfect,
it supports the conclusion that the explanations given are credible, so much so
that it appears reasonable to me to find them probable.
[39]
Nevertheless, on one point,
the respondent’s submissions were correct: the appellant gave no explanation
regarding the $13,931.
[40]
For all of these
reasons, the appeal is allowed in part, and the case will be referred back to the CRA for reassessment on the basis that the
appellant received a
benefit of $13,931 under subsection 15(1) of the ITA in 9098‑5854’s
2004 taxation year. No costs will be awarded.
Signed at Ottawa, Canada, this 15th day of June 2010.
“Alain Tardif”
on this 10th day
of November 2010.
Erich Klein, Revisor
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