Citation: 2009 TCC 461
Date: 20090915
Dockets: 2008-173(IT)I
2008-174(IT)I
BETWEEN:
DENIS QUENTIN and
9117-4508 QUÉBEC INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
These are appeals heard
on common evidence. The appellant is appealing from reassessments established
against it for the 2002, 2003 and 2004 taxation years, and the appellant
company is appealing from reassessments established against him for the 2003
and 2004 taxation years.
[2]
On September 8, 2006,
the Minister of National Revenue (the Minister) established reassessments
against the appellant for the 2002, 2003 and 2004 taxation years. In
establishing these reassessments, the Minister used the net worth method to
determine the appellant had unreported income in the amounts of $53,671 in
2002, $25,433 in 2003 and $4,301 in 2004, according to the details
provided in the attached Appendices 1, 2 and 3, and imposed a penalty for each
of these years in accordance with subsection 163(2) of the Income Tax Act (the
Act). In response to the objection filed by the appellant against these
September 8, 2006, reassessments, the Minister:
[translation]
(a)
established a
reassessment on August 27, 2007, for the 2002 taxation year:
(i)
reducing the previously
added income by $19,860;
(ii)
reducing the penalty
under subsection 163(2) of the Act accordingly;
(b)
amended the September
8, 2006, reassessments for the 2003 and 2004 taxation years on August 27, 2007.
[3]
On August 16, 2006, the
Minister established reassessments for the appellant company for the 2003 and
2004 taxation years. In doing so, the Minister used the net worth method to
determine that the appellant company had unreported income of $56,225 in 2003
and $27,179 in 2004, according to the details provided in the attached
Apendices 1, 2 and 3, and imposed a penalty for each of these years, in
accordance with subsection 163(2) of the Act. On August 29, 2006, the Minister
established reassessments for the 2003 and 2004 taxation years, correcting
previously imposed penalties for these taxation years. In response to the
objection filed by the appellant company against these August 29, 2006,
reassessments, the Minister:
(a)
established a
reassessment on August 1, 2007, for the 2003 taxation year:
(i)
reducing the previously
added income by $19,860;
(ii)
reducing the penalty
under subsection 163(2) of the Act accordingly;
(b)
amended the August 29,
2006, reassessment for the 2004 taxation year on August 1, 2007.
[4]
As for the appellant,
when establishing the reassessments that are the subject of the present case,
the Minister relied on the following presumptions of fact, stated at paragraph
8 of the Reply to the Notice of Appeal in Docket 2008‑173(IT)I :
[TRANSLATION]
(a)
During the taxation years in question, the
appellant was the sole shareholder of the company 9117-4508 Québec Inc.
(hereinafter, the Company); (admitted)
(b)
The Company operated a canteen; (admitted)
(c)
According to the CIDREQ company register system,
the Company was incorporated on June 6, 2002; (admitted)
(d)
The Company's fiscal year ended on March 31 of
each year; (admitted)
(e)
The Company and the appellant were audited by
the Minister; (admitted)
Advantage conferred on the appellant
(f)
In his income tax reports for the 2002, 2003 and
2004 taxation years, the appellant reported the following income: (admitted)
|
DESCRIPTION
|
2002
|
2003
|
2004
|
|
Employment income
|
$2,839
|
$0
|
$4,992
|
|
Employment-insurance benefits
|
$6,117
|
n/a
|
n/a
|
|
TOTAL
|
$8,956
|
$0
|
$4,992
|
(g)
In his income tax reports for the 1991, 1992,
1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000 and 2001 taxation years, the
appellant reported the following total income: (admitted)
|
YEAR
|
TOTAL
INCOME
|
|
1991
|
$6,149
|
|
1992
|
$9,795
|
|
1993
|
$10,570
|
|
1994
|
$23,426
|
|
1995
|
$13,380
|
|
1996
|
$14,659
|
|
1997
|
$11,363
|
|
1998
|
$8,231
|
|
1999
|
$12,824
|
|
2000
|
$17,319
|
|
2001
|
$17,567
|
(h)
In its income tax reports for the 2003 and 2004
taxation years, the Company reported the following net loss: (admitted)
|
2003
|
2004
|
|
($8,818)
|
($10,802)
|
(i)
During the audit, the Minister's auditor
(hereinafter the auditor) noted that regarding internal control:
(i) All the Company's sales were made in
cash; (admitted)
(ii) All operations (sales, deposits, bill
payments) were performed by the appellant; (admitted)
(iii)
The appellant also did the Company's accounting;
(admitted)
(iv)
There was no record or bookkeeping for the
balance sheet accounts; (denied)
(v)
There was no bookkeeping for the "amounts
owing to the shareholder" account; (denied)
(vi)
The shareholder himself indicated to his
accountant the "amounts owing to the shareholder"; (admitted)
(vii)
Internal control was non-existent; (denied)
(j)
In the Company's financial records, during the
period of April 1, 2002, to March 31, 2004, it was indicated that the appellant
made investments of $49,260; (admitted)
(k)
Considering the above, the auditor used the
indirect audit method of "net worth differential" to carry out her
audit for the taxation years in question; (admitted)
(l)
Using the indirect "net worth" method,
the auditor determined that the following amounts were unreported by the
appellant (see detail in appendices): (admitted)
|
2002
|
2003
|
2004
|
|
$53,671
|
$25,433
|
$4,301
|
(m)
At the objection stage, an analysis of the
"net worth" was carried out by the Minister's officer (hereinafter,
the officer); (no knowledge)
(n)
Further to this analysis, the officer determined
that the $19,860.22 submitted as an adjustment to the total income as of
December 31, 2002, under "Money from the company 9117-4508 Qc Inc."
had already been taken into consideration when establishing the appellant's
personal assets; (admitted)
(o)
As a result, the Minister reduced the benefit
conferred on the appellant from $53,671 to $33,811 for the 2002 taxation
year. (admitted)
[5]
Regarding the appellant
company, to establish the reassessments that are the subject of the present
case, the Minister relied on the following presumptions of fact, stated at
paragraph 8 of the Reply to the Notice of Appeal in docket 2008‑174(IT)I:
[translation]
(a)
During the taxation years in question, Denis
Quentin was the sole shareholder of the appellant company (hereinafter, the
shareholder);
(b)
The appellant company operated a canteen;
(c)
According to the CIDREQ company registration
system, the appellant company was incorporated on June 6, 2002;
(d)
The appellant company's fiscal year ended March
31 of each year;
(e)
The shareholder and the appellant company were
audited by the Minister;
Unreported income
(f)
In his income tax reports for the 2002, 2003 and
2004, the shareholder reported the following income:
|
DESCRIPTION
|
2002
|
2003
|
2004
|
|
Employment income
|
$2,839
|
$0
|
$4,992
|
|
Unemployment insurance benefits
|
$6,117
|
n/a
|
n/a
|
|
TOTAL
|
$8,956
|
$0
|
$4,992
|
(g)
In his income tax reports for the 1991, 1992,
1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000 and 2001 taxation years, the
shareholder reported the following total income:
|
YEAR
|
TOTAL
INCOME
|
|
1991
|
$6,149
|
|
1992
|
$9,795
|
|
1993
|
$10,570
|
|
1994
|
$23,426
|
|
1995
|
$13,380
|
|
1996
|
$14,659
|
|
1997
|
$11,363
|
|
1998
|
$8,231
|
|
1999
|
$12,824
|
|
2000
|
$17,319
|
|
2001
|
$17,567
|
(h)
In its income tax reports for the 2003 and 2004
taxation years, the appellant company reported the following net losses:
|
2003
|
2004
|
|
($8,818)
|
($10,802)
|
(i)
During the audit, the Minister's auditor
(hereinafter the auditor) noted that regarding internal control:
(i) All the appellant company's sales were
made in cash;
(ii) All operations (sales, deposits, bill
payments) were performed by the shareholder;
(iii)
The shareholder also did the appellant company's
accounting;
(iv)
There was no record or bookkeeping for the
appellant company's balance sheet accounts;
(v)
There was no bookkeeping for the "amounts
owing to the shareholder" account;
(vi)
The shareholder himself indicated to his
accountant the "amounts owing to the shareholder" in the appellant
company's balance sheet;
(vii)
Internal control was non-existent;
(j)
In the appellant company's financial records, for
the period of April 1, 2002, to March 31, 2004, it was indicated that the
shareholder made investments of $49,260;
(k)
Considering the above, the auditor used the
indirect audit method of "net worth differential" to carry out her
audit for the taxation years in question;
(l)
Using the indirect "net worth" method,
the auditor determined that the following amounts were unreported by the
shareholder (see detail in appendices):
|
2002
|
2003
|
2004
|
|
$53,671
|
$25,433
|
$4,301
|
(m)
Considering the only source of income for the
shareholder during the taxation years in question was the operation of the
appellant company, the auditor determined that the amounts $56,225
($53,671 + $2,554) and $27,179 ($22,878 + $4,301) for the
2003 and 2004 taxation years, respectively, were unreported income in the
appellant company;
(n)
Considering the above, the Minister imposed the
amounts of $56,225 and $27,179 on the appellant company for its 2003 and 2004
taxation years respectively, as unreported income;
(o)
At the objection stage, a "net worth"
analysis was carried out by the Minister's officer (hereinafter, the officer);
(p)
Further to this analysis, the officer determined
that the $19,860.22 submitted as an adjustment to the total income as of
December 31, 2002, under "Money from the company 9117-4508 Qc Inc.",
had already been taken into consideration when establishing the shareholder's
personal assets;
(q)
As a result, the Minister reduced the appellant
company's unreported income from $56,225 to $36,365 for its 2003
taxation year.
[6]
The objections raised
by the appellant are in regard to:
(i)
the Minister
establishing the reassessment for the 2002 taxation year after the end of the
normal reassessment period;
(ii)
the Minister applying a
penalty regarding the additional income for each of the 2002, 2003 and 2004
taxation years;
(iii)
the additional income
for the taxation years in question, the specific elements of which are:
(a) Cash on hand on
March 31, 2002
[7]
The appellant claimed
that the Minister did not take into consideration that he had around $40,000 in
cash on March 31, 2002. He claimed this amount came from savings he had
collected over his 18 years of work.
(b) $10,000 loan
granted to the appellant
[8]
The appellant claimed
he borrowed $10,000 from his cousin, Christian Romestin, in 2003.
(c) Cost of living
[9]
The appellant claimed
that his cost of living during the period in question was not $12,000 as the
Minister claimed, but around $6,000 a year.
Preliminary remarks
[10]
I will note that in his
Reply to the Notice of Appeal, the Minister claimed that the appellant's sole
source of income for the taxation years in question was the "operation of
the appellant company". In other words, the Minister alleged that the
appellant's unreported income necessarily came from operating the appellant company's
canteen. However, the evidence submitted by the appellant showed that it had
granted the appellant loans or advances of $20,000 before the canteen even
began operating. As a result, at the hearing, the Minister admitted that the
$20,000 the appellant invested could not have come from the appellant company's
canteen operations and he admitted that the amount was necessarily cash the
appellant claimed to have on March 31, 2002. Therefore, the Minister agreed to
reduce the amount previously added to the appellant's income for the 2002
taxation year under the August 27, 2007, reassessment by $20,000. The Minister
also agreed to reduce the amount previously added to the appellant company's
income for the 2003 taxation year under the August 1, 2007, reassessment by $20,000.
I will note that because of the evidence submitted by the appellant, the
Minister admitted that the appellant had borrowed $10,000 from his cousin in
2003. The result is the Minister agreed to reduce the amount previously added
to the appellant's income for the 2003 taxation year under the September 8,
2006, reassessment by $10,000. The Minister also agreed to reduce the amount
previously added to the appellant company's income for the 2004 taxation year
under the August 29, 2006, reassessment by $10,000. As a result, the amounts of
the appellant's unreported income that are still in question for the 2002, 2003
and 2004 taxation years are: $13,811, $15,433, and $4,301,
respectively. As a result, the amounts of the appellant company's unreported
income that are still in question for the 2003 and 2004 taxation years are:
$13,811 and $17,179, respectively.
[11]
The appellant's
testimony showed that:
(i)
on March 31, 2002, he
had around $40,000 in cash that he kept at his residence. The appellant
explained that this cash was gifts from his parents, and also mostly savings he
had collected from his employment income over the 18 previous years. The
appellant stated that, in particular, he saved around $15,000 in 1994, 1995 and
1996. I immediately note that the evidence showed that the average net income
(excluding income of $17,750 in 1994 related to the crystallization of a
capital gain) for the three years was $11,238. The appellant added that he had
around $5,000 in cash when he arrived in Canada
in 1988. Lastly, the appellant testified that he kept this cash at his
residence instead of depositing it in a bank because he did not trust the
Canadian banking system.
(ii)
his cost of living
during the years in question was not $1,000 a month as the Minister claimed,
but around $500 a month. The appellant explained the low cost of living: he did
not smoke, he only drank alcohol on occasion, he essentially fed himself with
products from his farm and had almost no hobbies, except for the occasional
snowmobile ride on an old snowmobile he himself had fixed up. The appellant
added that the municipal and school taxes for the farm where he lived during
the years in question had been paid by Denis and Francis Quentin during those
years. The appellant explained that the payment of these taxes was considered
rent Messrs. Quentin paid in return for the use of part of his farm. Lastly, the
appellant noted that Quebec's tax authorities recognized his cost of
living during these years was around $500 a month.
[12]
Moreover, the evidence
showed that the average net income (excluding the $17,750 income related to the
crystallization of a capital gain in 1994) during the period of 1991 to 2005
was $10,106. I note that the evidence makes no mention of the appellant's
income for 1984 to 1991.
Analysis and conclusion
[13]
I would state again
that because of the Minister's admissions at the hearing, the amounts of the
appellant's unreported income that were still in question for the 2002, 2003
and 2004 taxation years were $13,811, $15,433 and $4,301, respectively. I
would also state that because of the Minister's admissions at the hearing, the
appellant company's unreported income still in question was $13,811 for the
2003 taxation year and $17,179 for the 2004 taxation year.
[14]
In this case, the only issue
I need to determine seems to be whether the appellant's testimony regarding his
cost of living is credible, since essentially, the evidence he submitted in
this regard is based on his testimony. Only such a low cost of living could
make the appellant's version likely and credible, that he was able to save
around $40,000 from his employment income from 1984 to 2002, despite a very low
average net income during those years. I would state again that, on this
subject, the Minister admitted at the hearing that the appellant had saved
around $20,000 during those years.
[15]
In this case, the
appellant convinced me that his cost of living was around $500 a month for
2002, 2003 and 2004. This means the difference according to net worth for the
appellant established by the Minister is reduced by $4,500 in 2002, $6,000 in
2003 and $1,500 in 2004; it also means the difference according to net worth
for the appellant company established by the Minister is reduced by $6,000 for
the 2003 taxation year and $6,000 for the 2004 taxation year. The appellant
also convinced me that his cost of living was very low during the preceding
years and he was thus able to save around $40,000, notwithstanding his
otherwise low income. To me, his uncontested testimony on this subject seemed
likely, believable, sincere and spontaneous. The following reinforced my
feeling that the appellant was sincere: during the hearing, the appellant
testified that the municipal and school taxes for his farm had been paid by Mr.
Quentin during the relevant years. I then asked him if he had documentary
evidence to support this testimony. The appellant said the evidence existed,
but he did not have it with him because he did not know he needed to bring it
to the hearing. To test his credibility, I suspended the hearing so he could go
get this documentary evidence (Exhibit A-6) (and other documentary evidence
linked to the payment of the appellant company's accounts before it began
operating the canteen). The appellant submitted this documentary evidence upon
the return of the hearing.
[16]
Considering my findings
regarding the appellant's cost of living for 2002, 2003 and 2004, and the cash
he had on hand March 31, 2002, the differences according to net worth
established by the Minister for the appellant and the appellant company are
explained, and therefore the appeals of the appellant and the appellant company
are allowed.
Signed at Ottawa, Canada, this 15th day of September 2009.
"Paul Bédard"
CITATION: 2009 TCC 461
COURT FILE NO.: 2008-173(IT)I
2008-174(IT)I
STYLE OF CAUSE: DENIS QUENTIN and 9117-4508 QUÉBEC INC. AND HER MAJESTY THE
QUEEN
PLACE OF HEARING: Rimouski,
Quebec
DATE OF HEARING: July 6, 2009
REASONS FOR
JUDGMENT BY: The Honourable Justice Paul Bédard
DATE OF JUDGMENT: September 15, 2009
APPEARANCES:
|
For the
appellants:
|
The appellant Denis Quentin himself
|
|
Counsel for the respondent:
|
Vlad Zolia
|
COUNSEL OF RECORD:
For the appellants:
Name:
Firm:
For the respondent: John H. Sims,
Q.C.
Deputy
Attorney General of Canada
Ottawa, Canada
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