Citation: 2010 TCC 283
Date: 20100617
Dockets: 2008-3811(IT)G,
2008-397(IT)G
BETWEEN:
MIGUEL SANCHEZ,
9065-7420 QUEBEC INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
These are two appeals
in which the parties agreed to proceed on common evidence.
[2]
From the start, the
agent for the appellants has acknowledged that, in the main, the assumptions of
fact and inherent calculations were sufficiently correct; hence, he limited his
evidence to explanations concerning the source of the funds estimated in the
assessments.
[3]
In support of the
assessments under appeal, the respondent relied on several facts. The facts in
question are set out in the Replies to the Notices of Appeal.
[Translation]
Miguel Sanchez (2008-3811(IT)G)
11. In determining the appellant's tax
liability for the 2003, 2004 and 2005 taxation years, the
Minister relied on the following assumptions of fact:
(a)
The appellant is the majority shareholder in
9065‑7420 Québec Inc. (the company);
(b)
The company, which does business under the name
Sports Bazar, is a sports shop that specializes in the sale of bicycles, skis,
snowboards, skates, clothes and accessories.
(c)
The company also offers repair services and
equipment rentals.
(d)
The company's fiscal year ends on June 30.
Shareholder benefit
(e)
The appellant is actively involved in the
company's operations.
(f)
Books and records kept by the company were inadequate
during the period at issue.
(g)
The company failed to report income from
treadmill sales and bicycle repairs during the period at issue.
(h)
Having noticed that the appellant's reported
income was small, the Minister conducted an audit using the net worth
differential method.
(i)
After auditing the appellant using the net worth
differential method, the Minister established that the appellant had failed to
report some income as set out in the tables found in Appendix A attached,
constituting an integral part of this Reply to the Notice of Appeal.
(j)
As the company is the appellant's main source of
income, the unreported income determined by means of the net worth differential
method was considered a shareholder benefit from the company.
Business investment loss
(k)
The appellant claimed for the 2003 taxation year
a business investment loss in the amount of $67,594 relative to one thousand
(1,000) shares of 9110‑8068 Québec Inc. as well as a debt to that same
company.
(l)
The appellant did not owe $29,046 to 9110-8068 Québec
Inc.
12. In imposing on the appellant the penalty
set out in subsection 163(2) [sic] of the Income Tax Act,
the Minister relied on the following facts:
(a)
The facts stated in paragraphs (a) to (j) of
section 11 above.
(b)
The amounts of the appellant's unreported income
are very significant in comparison with the reported income for the
2003, 2004 and 2005 taxation years, as shown below:
|
|
2003
|
2004
|
2005
|
|
Total reported
income
|
$25,706
|
$18,118
|
($132)
|
|
Unreported
income
|
$66,994
|
$26,532
|
$9,691
|
(c)
Not all of the company's sales were adequately
invoiced, and they were often paid in cash.
(d)
Books and records kept by the company were
inadequate during the period at issue; among other things, no inventory was
kept.
(e)
The appellant signed his income tax returns for the
2003 and 2004 taxation years.
(f)
The appellant was aware of the existence of the
income that he did not report.
9065-7420 Québec Inc. (2008-397(IT)G)
10. In determining the appellant's tax
liability for the 2002, 2003, 2004 and 2005 taxation years, the Minister
of National Revenue relied on the following facts:
(a)
The appellant, which does business under the
name Sports Bazar, is a sports shop that specializes in the sale of bicycles,
skis, snowboards, skates, clothes and accessories.
(b)
The company also offers repair services and
equipment rentals.
(c)
Miguel Sanchez is the majority shareholder in
the appellant.
(d)
The appellant's fiscal year ends on June 30.
(e)
Miguel Sanchez was actively involved in the
appellant's activities.
(f)
Books and records kept by the appellant were
inadequate during the period at issue.
(g)
The appellant failed to report income from
treadmill sales and bicycle repairs during the period at issue.
(h)
Having noticed that Miguel Sanchez's reported
income was small, the Minister audited him using the net worth differential
method.
(i)
After auditing Miguel Sanchez using the net
worth differential method, the Minister established that Mr. Sanchez had
failed to report some income as set out in the tables found in Appendix A
attached, constituting an integral part of this Reply to the Notice of Appeal.
(j)
Miguel Sanchez’s unreported income, determined
by the net worth differential method, was attributed to the appellant pro rata
its fiscal years, as shown below:
|
|
2003
|
2004
|
2005
|
|
Reported
income
|
($58,943)
|
$30,154
|
$25,540
|
|
Unreported
income
|
$46,845
|
$18,957
|
$22,862
|
|
Revised income
|
($12,098)
|
$49,111
|
$48,402
|
(k)
An amount of $441 in expenses for the 2005
taxation year was claimed twice by the appellant, and therefore, disallowed by
the Minister.
(l)
The appellant's non-capital loss for the 2003
taxation year was reduced following the addition of the appellant's unreported
income; the loss carried over to the 2002 taxation year was thus revised to
$5,400.
(m)
Following the reduction of the appellant's
non-capital loss for the 2003 taxation year, the non‑capital loss
balances for the 2004 and 2005 taxation years were revised to zero.
11.
In imposing on the appellant the penalty set out
in subsection 163(2) of the Income Tax Act, the Minister relied on
the following facts:
(a)
The facts stated in paragraphs (a) to (m) of
section 10 above.
(b)
The amounts of the appellant's unreported income
are very significant in comparison with the reported income for the 2003, 2004
and 2005 taxation years, as shown below:
|
|
2003
|
2004
|
2005
|
|
Reported
income
|
($58,943)
|
$30,154
|
$25,540
|
|
Unreported
income
|
$46,845
|
$18,957
|
$22,862
|
(c)
Not all of the appellant's sales were adequately
invoiced, and they were often paid in cash.
(d)
Books and records kept by the appellant were
inadequate during the period at issue; among other things, no inventory was
kept.
(e)
The appellant was aware of the existence of the
income it did not report.
[4]
In the Replies to the
Notices of Appeal, the respondent indicated that the issues were as follows:
[Translation]
Miguel Sanchez (2008-3811(IT)G)
(a)
Whether the Minister was correct in including in
the appellant's income for the 2003, 2004 and 2005 taxation years the amounts
of $52,441, $26,531 and $9,691 respectively.
(b)
Whether the Minister was correct in disallowing
the business investment loss of $29,046, and accordingly, was also correct in
disallowing the deductible business investment loss of $14,523 for the
2003 taxation year.
(c)
Whether the Minister was correct in imposing the
penalty provided for in subsection 162(3) of the Income Tax Act for
the 2003, 2004 and 2005 taxation years respecting the
appellant's unreported income.
9065-7420 Québec Inc. (2008-397(IT)G)
(a) Whether the Minister was correct in
including in the appellant's income for the 2003, 2004 and
2005 taxation years the amounts of $46,845, $18,957 and $22,862
respectively.
(b) Whether the Minister was correct in
refusing $441 in expenses claimed by the appellant for the 2005 taxation
year.
(c) Whether the Minister was correct in
revising the non‑capital losses for the 2002, 2004 and 2005 taxation
years.
(d)
Whether the Minister was correct in imposing the
penalty provided for in subsection 162(3) of the Income Tax Act for
the 2003, 2004 and 2005 taxation years respecting the appellant's
unreported income.
[5]
The appellants stated
that they had reported all of their income. They added that the discrepancies
noted can be explained, first, by the very simple lifestyle of
Mr. Sanchez, his personal needs being very minimal, and second, by transfers
of very significant amounts of money by Mr. Sanchez and his family members
living in France.
[6]
The witnesses were
Mr. Sanchez; his father; his manager, Jean‑Claude Putseys; and
his accountant, Steve Lapierre, CGA, who was responsible for accounting
for the business and also for Mr. Sanchez personally.
[7]
Mr. Sanchez's father
gave a long explanation of the family background and of his son’s cycling
career. Since the father himself was a high-level cyclist, his son showed great
interest in this very demanding sport at a very young age. Very talented and
determined, his son quickly became a champion in that demanding sport and
started entering cycling races at the age of 13.
[8]
He regularly took part
in numerous races and competitions all over Europe, but mainly in Spain, where his family owned two apartments.
[9]
Mr. Sanchez and his
father indicated that Mr. Sanchez was regularly given large purses, which
were always paid to him in cash; he never received cheques. Both
Mr. Sanchez and his father stated that in Europe the customs and
traditions are very different from those in Canada.
[10]
The father explained
that his son was a very simple man only interested in cycling. Almost all of
the money that he won, which was paid to him in cash, was deposited in a safe
that he himself had made, being a mechanic by training.
[11]
According to
Mr. Sanchez and his father, in Europe, unlike in North America, cyclists
are very well paid. At the age of 18, Mr. Sanchez had to do his military
service, but was dismissed very quickly for medical reasons. After that, he
returned to competition with even more success than before, becoming
professional.
[12]
To explain and validate
his son's passion for cycling, Mr. Sanchez's father said that Miguel was
not very successful with girls given the small amount of time that he spent on
them.
[13]
The father explained
that his son had accumulated a very large amount of money in the safe. His
needs were modest, and his living expenses were often covered by event
organizers or sponsors.
[14]
The father also stated
that very expensive bicycles were provided to his son at no cost and his father
had paid only for his first bicycle.
[15]
He explained that his
son lived in Spain while he was racing. The
two apartments that the family owned were in that country.
[16]
Mr. Sanchez's father
mentioned often that his son had significant amounts of money and that he often
loaned it to the members of his family and to his friends. Those transactions
were always done in cash.
[17]
The father also
indicated that the family had inherited the two apartments it owned in Spain and that they needed significant renovations, which
Mr. Sanchez had undertaken to pay for.
[18]
Mr. Sanchez's father
also stated that his son, who lived very modestly in France,
had given him two new cars. According to his father, Mr. Sanchez kept
large sums of cash money in a safe in his residence, and he was generous
towards all the members of his family.
[19]
Mr. Sanchez's
father also mentioned a loan obtained at an advantageous rate from a bank where
his brother-in-law worked. When he was asked for more details, things got so
complicated that he ended up saying that they were rather deposits to obtain
special credits during the purchase of a residence.
[20]
The evidence also
showed that Mr. Sanchez had operated a small business in Belgium that was not as successful as he would have liked. It
may even have failed.
[21]
At one point, Mr.
Sanchez met a Canadian woman, and things went very quickly. They got married
after a few months of dating. After having three children, his spouse
decided to go back to Quebec, Canada. The couple thus settled in Quebec.
Mr. Sanchez immersed himself in a business specializing in products he
knew well, that is, bicycles.
[22]
Mr. Sanchez stated that
his relationship with his spouse had deteriorated so much that they ended their
marriage. In regard to that, he stated that he organized his financial affairs
so that his former spouse knew as little as possible about them because he
feared that she would ask for too much with respect to child support.
Mr. Sanchez explained how he had come to buy a second business, which also
sold bicycles. He maintained that he believed that in this way he could
increase the business's revenue.
[23]
His father explained
that, after Mr. Sanchez had chosen to settle in Quebec with his family, he
visited his son regularly with his spouse, that is, every year except two or
three years. Every time he brought his son significant amounts of money, though
he never exceeded the limit of CAD$10,000 per person. He indicated that it was
Canadian currency obtained at a currency exchange office in his neighbourhood
in France where he lived.
[24]
Everything related to
the many exchange transactions performed at an office in his neighbourhood by
him and by another of his sons, Mr. Sanchez's brother, was explained in a
slightly confused way.
[25]
No receipts or other
documents were provided justifying any transactions in which the father first
obtained Canadian currency at an exchange office and then brought significant
sums of money in cash together with his spouse during their annual visits to Canada.
[26]
Even in that regard Mr.
Sanchez's father was not very precise. He explained that he and his spouse came
often to Quebec because they enjoyed substantial benefits
with the airline their daughter worked for. He never stated the dates of those
many trips or the amounts brought into the country, only mentioning that they
did not exceed $10,000 per person.
[27]
Jean-Claude Putseys,
who claims to be a manager having operated his own business, explained that
Mr. Sanchez had retained his services as a manager for the appellant
company. He stated that Mr. Sanchez had difficulty focusing on the
management of his business. He also explained that Mr. Sanchez always
seemed absent-minded and that he directed his attention mainly to cycling and
competition.
[28]
Mr. Putseys stated that
the management was so unsound that he had to inject funds out of his own
pocket. He indicated that that he had to make deposits quite often because the
business did not generate enough income to cover its expenses. In such a
situation, he would talk to Mr. Sanchez, who most of the time gave him the
cash necessary without telling him where it had come from.
[29]
The auditor also
testified. Given that it was acknowledged that the discrepancies noted and the
calculations were not being challenged, her testimony was very brief.
[30]
She explained that she
had asked Mr. Sanchez whether he had received or obtained sums of money
from a source other than the business he operated. She found out that
Mr. Sanchez sold exercise machines for cash. Mr. Sanchez also told her
that he had money in a safe abroad. She stated that she had wanted to learn
more about it, but indicated that she had given up because Mr. Sanchez was
tight‑lipped and even aggressive on the subject.
Analysis
[31]
The father's story is
full of generalities, which do not make it possible to make calculations on the
amounts accumulated. For example, it was said that Mr. Sanchez had
participated in many races since the age of 13 and that he had often won, thus
starting to accumulate savings at that young age.
[32]
In his argument, the
agent for Mr. Sanchez stated to the Court that Mr. Sanchez started earning
money when he was 13 years old and that the amount accumulated, which
exceeded $200,000, represented in fact an average of less than $20,000 per
year.
[33]
It is not enough to
state, claim or maintain that, since the age of 13, an adolescent had been
winning cycling races that enabled him to pocket every year sums of $20,000 and
more; such allegations must be supported with convincing evidence.
[34]
Now, is it possible in
Europe to earn money as an amateur in cycling races, something that is
evidently not possible outside Europe? Is it possible to become a professional
athlete before reaching the age of majority? Those are very legitimate
questions, which have been disregarded and remain unanswered.
[35]
Overall, the evidence
and explanations with regard to the source of over $200,000 kept in a safe at
Mr. Sanchez's parents' house are neither clear nor consistent.
[36]
To accept the
appellants' arguments would be to reward the party that has the most
imagination and talent for fabricating all kinds of stories to explain and
justify the discrepancies that gave rise to the tax assessments.
[37]
The appellants would
like their appeals to be allowed on the grounds that Mr. Sanchez has
trouble focusing, that he is a poor manager, that he grew up in an environment
where customs are different and that, in any case, he could not have earned the
income that is attributed to him because the field in which his business
specializes is very competitive. And the backdrop to all of this is that
Mr. Sanchez, who is not well educated, is a very high-level athlete who
had earned significant amounts of money.
[38]
The Court is
sympathetic towards the appellants and it is satisfied that they would have
succeeded if the burden of proof required had been that which applies in
criminal cases, namely, beyond a reasonable doubt.
[39]
In this case, the
burden of proof is that of the balance of probabilities. Assessing the evidence
is a difficult task, which must be guided more by reasoning than by intuition;
in other words, it is essential to verify all impulses that are basically
intuitive, especially if the intuitive finding is not supported by any
evidence.
[40]
Evidence can be based
on testimony and be sufficiently credible to support a coherent finding. Such
evidence must, however, be clear, precise, detailed, balanced and, especially,
reasonable.
[41]
When testimony is
rather vague, or even confused, on a particular subject – especially an unusual
one – it is important to refer to reliable and credible references.
[42]
In this case, the
appellant maintained that, in view of his the burden of proof, he was not
required to show when, how and why he had accumulated very large amounts of
money in a safe built in his father's house. He claimed only that the safe
contained a great deal of money without stating a precise amount or giving
details with respect to the amounts he won in cycling races and the dates he
won them on.
[43]
I do not share the
appellants' opinion regarding the scope of the burden of proof; agreeing with
such an opinion would result in absurdity.
[44]
Accordingly, an
18-year-old who wins $50,000 in the lottery could report that amount dozens of
times throughout his active life. Every time he has to explain or justify a
discrepancy between his income and his expenses, he could show the Loto‑Québec
cheque.
[45]
In this case, there is
not even the equivalent of a cheque, and the Appellants are of the opinion that
the Court should assume that the safe, located in Mr. Sanchez's parents'
residence in France, is still well stocked.
[46]
Certain facts, for
example, that the appellant was an accomplished athlete who was very
successful, seem to have been very well established.
[47]
Other evidence,
however, raises questions and seems to support the conclusion that the
explanations are so doubtful that they must be disregarded and found
unreasonable and not credible.
[48]
It is never easy to
assess a person's credibility; unfortunately, there is no totally fool-proof, magic
recipe. Reasonableness is usually the norm, but it is not sufficient.
[49]
My approach has always
been to quantify the available evidence to arrive at a conclusion based on the
balance of probabilities.
[50]
In this case, I repeat
that I sympathize with the appellants. Mr. Sanchez's athletic abilities
and his numerous victories in Europe are not at issue although better evidence
would have been preferred.
[51]
Did he really save
close to $200,000 stowed, in this case, in a safe at his parents' residence? To
say he did would require a leap of faith; there is no real basis therefor.
[52]
Furthermore, that
allegation should be examined on the basis of the appellants' explanations. The
evidence established the following:
·
Mr. Sanchez is a
generous person who does not hesitate to lend money interest-free to his
friends and extended family.
·
Mr. Sanchez gave two
new vehicles to his father, who evidently does not have a significant amount of
income.
·
Mr. Sanchez paid for
the repairs of two apartments owned by his family following the death of his
relatives.
·
Mr. Sanchez
unsuccessfully operated a business that he had to close down in Belgium.
·
Mr. Sanchez is married
and is the father of three children; he and his family immigrated to Canada; Mr. Sanchez created or acquired a business; Mr.
Sanchez acquired a competitor's business.
·
Mr. Sanchez stated that
he did everything in his power to reduce the financial appetite of his former
spouse, who had custody of the three children. This is very surprising for
someone who describes himself as caring deeply for his family. Am I to
understand that his own children are excluded from what he considers his
family?
·
Mr. Sanchez stated that
his family was the most important thing to him and that he never questioned the
management of the large amounts of money in the safe.
·
Mr. Sanchez never
mentioned exactly how much money was in the safe at specific times.
·
Mr. Sanchez became
aggressive when the auditor wanted to know a little more about the contents of
the safe.
·
There was a total absence
of documentary evidence with regard to the amounts imported by his parents.
·
There is an absence of
written evidence with respect to the transactions that allegedly took place at
the exchange office.
·
There is an absence of
circumstantial evidence with respect to the dates on which the money imported
was deposited and the dates of his parents' visits.
·
The amounts of money
imported, namely $10,000, complies with the restrictions imposed by subsection
12(1) of the Proceeds of Crime (Money Laundering) and Terrorist Financing
Act, S.C. 2000, c. 17.
·
A notable improvement
in Mr. Sanchez's financial situation coincides with the arrival of the
manager.
·
Mr. Sanchez admitted
that he had made cash sales that were not disclosed to the business's
accountant.
[53]
In other words, the
evidence has also revealed the following:
(a)
inconsistencies in the
father's testimony;
(b)
Mr. Sanchez's selective
memory;
(c)
comments and
observations that everything was done to conceal from his former spouse the
state of his personal finances;
(d)
inconsistencies in Mr.
Sanchez's testimony with respect to his deep concern for his family given his
attitude towards his three children;
(e)
absence of reliable
information in regard to the contents of the safe;
(f)
disproportional and
aggressive reactions to the auditor's questions regarding the amounts of money transfered
from abroad;
(g)
total absence of
follow-up with respect to the contents of the safe;
(h)
cultural explanations;
(i)
small amount of
documentary evidence provided by the appellants.
[54]
I reproduce here a
passage from the decision I rendered in Ruest v. Canada, [1999] T.C.J.
No. 586, at paragraph 27:
To convince the Court, he had to show on the balance of evidence
that his claims were plausible, reasonable, correct and coherent. It was not
enough to criticize and raise certain minor grievances in order to enable the
Court to conclude that everything balanced as a result of the amount received
at a particular moment.
[55]
From the start, the
explanations were at best quite unusual. In such a situation, it was imperative
for the appellants to submit reasonably cogent circumstantial evidence if they
could not submit direct evidence.
[56]
Why was it only Mr.
Sanchez's father who testified? Why not his mother, who was said by Mr. Sanchez
to be more methodical and disciplined and a better administrator?
[57]
The appellants' main
witness testified. Mr. Sanchez's father was the main witness. His answers and
explanations were rather vague and confused although he seemed sufficiently at
ease. He was assisted by an interpreter, who helped him understand and also to
respond even though he knew French well enough to sometimes answer the
questions he was asked before the interpreter had even finished translating
them.
[58]
A review of the
evidence did not enable the Court to find documents supporting deposits of
large amounts of money, any receipts, exchange receipts or copies of customs
declarations. None of that documentary evidence was available, but it seems to
me that the appellants should have been able to find at least a few supporting
documents.
[59]
The burden of proof on
Mr. Sanchez was not merely to hypothesize about the sources of some funds,
as is done in criminal cases, but to show on a balance of probabilities the
truthfulness of his version of the facts.
[60]
In Canada, the taxation system is based on the principle of
self-reporting in accordance with laws that certainly are complicated but
precise. When a person chooses to settle in Canada,
he or she must accept that reality and comply with it just as all Canadians do.
[61]
Explanations regarding
the customs and traditions and the culture and habits of a taxpayer's country
of origin are neither a justification nor an excuse for failing to comply with Canada’s taxation laws.
[62]
All Canadian taxpayers
can be audited and asked to disclose in a reliable and reasonable manner
information requested by tax authorities.
[63]
In this case, why did
Mr. Sanchez not bring with him to Canada the money he had in Europe? He was going to settle in Canada with his family: he
had to have needed money, and according to his own testimony, he knew very well
that he could not live off cycling racing as he had done in Europe. Why did he not at least determine the amount of his
assets kept in the safe? Why did his father borrow money in 2000 while he had
access to the well-stocked safe?
[64]
The agent for the
appellants is asking the Court to disregard the confusion and inconsistencies in
their evidence on the ground that cultural differences and sympathy support the
appellants' argument. However, the Court's duty is first and foremost to ensure
that people who are subject to taxation laws comply with them.
[65]
To avoid an assessment
established by means of the net worth method, it is not sufficient to submit a
story that looks plausible and whose goal is to explain all the discrepancies
between income and net worth. An alibi is a very valid form of defence, but it
must also be established and proven convincingly and decisively.
[66]
The appeals are
dismissed with costs to the respondent.
Signed at Ottawa, Canada, this 17th day of June 2010.
"Alain Tardif"
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