Citation: 2009 TCC 33
Date: 20090203
Docket: 2007-3472(IT)G
BETWEEN:
MICHEL CORRIVEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
The Appellant is
appealing from assessments made by the Minister of National Revenue (the Minister)
with respect to the 2002, 2003 and 2004 taxation years. In reassessing the
Appellant, the Minister added, for the taxation years in question, $24,225,
$67,855 and $29,539, respectively, to the Appellant’s income as unreported
business income. The Minister also imposed penalties under subsection 163(2)
of the Income Tax Act (the Act) for each of the taxation years in question.
[2]
During the three
taxation years in question, the Appellant operating a taxi business and the
income derived from that business represents the Appellant’s sole source of
income. The Appellant purchased a first taxi licence (no. 88) in 1980 for $15,000.
On August 25, 1999, he purchased another operating licence (no. 36)
with a partner from his brother Marcel Corriveau for $73,000. His brother
financed the purchase up to $50,000 repayable in six years. On April 19,
2001, the Appellant also purchased another taxi permit (no. 58). He paid
$24,140 cash to the seller and the seller financed the balance of $50,000 by
accepting amortized payments over 48 months.
[3]
On February 26, 2003, the
Appellant sold licence no. 88 for $86,500. The Appellant had to collect from
the purchaser payments of $1,000 per month over 120 months. On that
same date, the Appellant purchased his partner’s share, that is, 50% of licence
no. 36, by giving him $7,000 cash and committing to make ten monthly payments
of $500. The Appellant also committed to pay the company’s debts. In 2006, the
Appellant sold licence no. 58. Hence, in 2002, the Appellant operated his
business with two and a half licences. At the beginning of 2003, he sold a
licence and purchased his partner’s share, and therefore he had two taxi licences
in his name in 2003 and 2004.
[4]
For the taxation years
in question, the Appellant reported the following business income:
|
|
Gross Revenues
|
Net Income
|
|
|
|
|
|
2002
|
$84,677.84
|
$13,142.41
|
|
2003
|
$88,957.79
|
$9,585.40
|
|
2004
|
$94,153.44
|
$14,726.19
|
[5]
The Respondent added
the income of $24,225, $67,855 and $29,539, respectively, to the Appellant’s
income for the years in question using the net worth method of computation.
According to the auditor, the person to whom the Appellant’s file was entrusted
in June 2005 was forced to use the net worth method of computation following a
review of the accounting records of the business owing to the Appellant’s weak accounting
controls and the fact that numerous transactions were conducted in cash.
[6]
The Appellant had to hire
drivers to ensure the operation of the taxi licences he held during the years in
question. Once the drivers completed their workweek, the Appellant recorded their
gross receipts for the week in notebooks, gave them 36% of that gross revenue
and the drivers kept their tips. He kept a notebook for each of his drivers for
each of the three taxation years in question. It was possible for him to roughly
verify his drivers’ income by examining the taximeters and the kilometres travelled.
It was also possible for him to verify his drivers’ income as approximately 70%
of the income from the taxi runs derived from taxi chits submitted by customers.
The taxi chits were used by various government departments, by businesses such
as garages and certain major companies. Each month, taxi chits so received were
submitted to the cooperative that had issued them and, on every 10th day of the
following month, the Appellant received his payment by cheque.
[7]
The Appellant did not treat
his own income as a driver in the same way. In fact, he did not keep any
records for himself as a driver. He stated that he worked 30 to 40 hours
per week during the years in question. He entered his hours on pieces of paper which
he did not keep. He stated however that it would be possible for him to
determine his income as a driver considering that the amounts are entered in
his quarterly reports on the sales tax and the goods and services tax which he
prepared himself and which were necessary to subtract from the amount reported
as income what he paid his drivers and that would be his income. The auditor
did not accept that approach.
[8]
Therefore, the auditor,
with the help of the Appellant, prepared a personal expenses sheet to determine
the Appellant’s cost of living. For certain expenses, the amount provided by
the Appellant was used, and for the rest, the amount used corresponds to that determined
by Statistics Canada. The Appellant identified four headings where he objected
to the amounts used by the auditor for the purposes of the case. Under the
heading [TRANSLATION] “Lodging, Electricity and Heat,” he stated that he uses
wood to heat his home and that he lives alone and, therefore, the amount of
$1,800 should be reduced. The Appellant did not provided any evidence to
justify a reduction in costs. Furthermore, the amount used by the auditor is
that provided by the Appellant and not that of Statistics Canada.
[9]
Under the heading
[TRANSLATION] “Transportation,” the figures used are those of Statistics Canada.
The Appellant stated that his taxi was parked at his door but did not provide
any evidence that justified a reduction. Under the headings [TRANSLATION] “Education” and
[TRANSLATION] “Gifts,” the Appellant argued that there was simply nothing to
report and, therefore, the Appellant’s annual cost of living, according to him,
should be reduced by $1,292.17 for those two headings for the three years.
[10]
The Appellant’s cost of
living was set at $14,707.70 for the year 2002, at $16,956.62 for
2003 and at $16,275.30 for 2004. The increase is related to the health care and
entertainment expenses reported by the Appellant for 2003 and 2004.
[11]
The auditor therefore proceeded
to determine the cost of the Appellant’s assets and his liabilities. He met
with the Appellant on November 1, 2005, and subsequently prepared a first draft.
The auditor found that the discrepancy between his calculations and those of
the Appellant quite significant; therefore, he contacted the Appellant again
who told him that he had cash in hand, that is, $5,000. The draft was accordingly
amended and the auditor met the Appellant again with the final draft on December
19, 2005. The Appellant informed the auditor at the time that he would talk
to his accountant.
[12]
On January 19, 2006, the
auditor received a letter from the Appellant’s accountant explaining that the Appellant
had understood that the auditor asked him how much money he needed to run the
business, to which he answered that he had $5,000 in hand. Now, It appears
that the Appellant, according to his accountant, had $93,650 in hand in 2001
and that it was money the Appellant had earned since he has been working. Although
the figures were amended accordingly, there is still a discrepancy of $4,223, $4,286 and
$20,640, respectively, for the years in question between the Appellant’s calculations
and those of the auditor.
[13]
About a month later, the
Appellant’s accountant informed the auditor that the amount of money the Appellant
had in hand in 2003 should be reduced by $30,000, since that amount represented
a loan from the Appellant’s brother. That change did not affect the discrepancy
calculated by the Appellant’s accountant. The Appellant indicated in writing to
the auditor where the cash, a total of about $88,000, came from and which he
had obtained over the years. Furthermore, during his cross-examination, the Appellant
explained that the actual amount he had in hand was not $63,650 but rather about
fifty thousand dollars, which he kept in his home in cash. These particulars
were not taken into account by the auditor, who stuck to his calculations.
[14]
The Appellant testified
that he was an innkeeper and operated a country bar until the business was sold
in 1978 for $25,000 cash. He submits that he kept that money in addition
to the tips he received because, at the time, no one reported their tips, and
that, over the years, he has accumulated a nest egg. He stated that he
inherited money from his parents in 1991, namely $9,000 (according to
Exhibit I‑5), and from two other family members also. According to
Exhibit I‑5, his inheritance was $6,500 between 1970 and 1980 and
$3,500 in 1991. Exhibit A‑6 was filed as pertaining to the winding up
of the estate of the Appellant’s mother dated September 16, 1991, and was
described as being a deposit slip. In my view, it was a cheque stub and it did
not show the name of the beneficiary.
[15]
The Appellant testified
that, when he purchased his partner’s share of licence no. 36 in February
2003, his brother Marcel Corriveau loaned him $30,000 in three
instalments of $10,000 in consideration of the promissory notes of which
he did not adduce copies in evidence. A portion of that money was used to
purchase two Honda cars (Exhibit A‑7) for the operation of taxi
licence nos. 36 and 58. One of those cars was paid for in cash and the
other car was paid for in part with the $6,000 cheque (Exhibit A‑8) and
in part in cash. The Appellant did not have to reimburse that money to his
brother who passed away in 2004. The only amount he deposited in his bank
account was $6,000, which he used to cover the $6,000 cheque.
[16]
In the Appellant’s personal
assets for the 2004 taxation year, the auditor entered a $10,000 investment
with Desjardins Securities. The Appellant explained that he had initially loaned
that money to his son and that his son reimbursed it in increments. Once the
$10,000 was reimbursed, the Appellant invested that money with Desjardins as
his son worked for that institution. On cross‑examination, he stated that
he had deposited a portion of the money reimbursed by his son and used another
portion of the money to pay for operating expenses for his taxi business.
[17]
The Appellant’s
accountant submitted three work sheets during the audit in order to narrow the
gaps between his assessment of the Appellant’s net worth and that of the
Respondent’s auditor and for the purpose of taking into consideration the
amounts of money the Appellant had in hand, the $30,000 advanced by his
brother, the $10,000 reimbursed by his son and finally a
$3,000 reduction per year in the Appellant’s personal expenses. The final
gap, according to the Appellant’s accountant, was $1,223, $1,286 and $7,460 for
the respective taxation years. According to the accountant, who had already
been the owner of a taxi business, it was almost impossible that the
calculations of the Respondent’s auditor were due to the income earned from
the operation of his taxis given that the income from a taxi business is
similar from year to year.
[18]
There had been an
increase in taxi fares in 2003 and in 2005. That increase was approved by the Commission
des transports du Québec following public hearings held before three of its
members. The reports of the hearings were adduced so as to enable the Court to compare
the income reported by the Appellant with the average income that was submitted
and analyzed by the Commission in setting the new fares. The analysis of the operating
costs took into account fixed costs, variable costs, the salary and benefits drivers
earn based on current and proposed fares. The purpose of this exercise, for the
Appellant, was to demonstrate that the income and expenses reported by him were
average for taxi businesses in Quebec for the three years in question. Working
on average 30 to 40 hours per week, the Appellant also worked fewer hours than
his drivers.
[19]
As for the Respondent’s
auditor, he testified about a conversation he had with the Appellant regarding
the explanations given by his accountant concerning the $93,650 the Appellant
had in hand. The Appellant is said to have told him that he did not have that
money in hand. According to the auditor, when he asked him whether he had put
the money elsewhere, the Appellant said no.
[20]
The auditor explained
that he imposed penalties for each of the years because the Appellant did his
own bookkeeping without taking into account his income as a driver and, more
particularly, because the gap between the reported income and that established
by the net worth method of computation was significant. The auditor acknowledged
however that the Appellant’s bookkeeping was beyond reproach, except for the source
documents with the Appellant’s income.
[21]
Was the Minister
justified in adding $24,225, $67,855 and $29,539 to the Appellant’s income as
unreported income for the 2002, 2003 and 2004 taxation years, respectively, and
in imposing penalties for each of the taxation years in question?
[22]
Counsel for the Appellant
argues that the income and expenses, as reported by the Appellant, are in the
averages established in the report of the Commission des transports on the setting
of taxi service fares. He explained the increase in the Appellant’s net worth for
each year by stating that the Appellant had more than $60,000 in cash, and that
he used that money to offset the his lost income, as was the case for the $30,000 his
brother loaned him and the $10,000 loan reimbursement, by his son, in 2004. Counsel
for the Appellant also argued that a reassessment of the Appellant’s cost of
living would reduce that item by about $3,000 per year. The Appellant claims
that, in the case at bar, it was inappropriate for the Minister to proceed by the
net worth method of computation.
[23]
As for counsel for the
Respondent, he argues that the evidence offered by the Appellant rests
primarily on the Appellant’s credibility as he was unable to provide supporting
documentation or to support his allegations through testimony. The explanations
given by the Appellant for the increase in his net worth are unreliable as he
gave several versions of the facts from the audit until the hearing of the case.
[24]
The Minister is entitled
to conduct an investigation in such manner as deemed
necessary if the Minister doubts, for whatever
reason, the accuracy of a taxpayer’s return. That is what the Federal Court
of Appeal stated in Régent Lacroix v. Her Majesty The Queen,
2008 FCA 241, at paragraph 18 of the decision. In the case at bar, the
auditor in charge of the Appellant’s case saw that the Appellant did not keep
any personal income records, despite the fact that those kept by his drivers
were in order. The auditor also established that the Appellant conducted many
cash transactions, considering that taxi services were paid in part in cash and
that the Appellant did not report his tips. There were therefore, in the case
at bar, very few ways of verifying income. Furthermore, several expenses were
paid for in cash. I concede that it is not illegal to be paid in cash or to pay
for expenses in cash, except that this approach is risky when having to justify
one’s income and expenses. In my view, the use, by the auditor, of the net
worth method of computation in this case, was warranted.
[25]
When this method
reveals an increase in the net worth of a taxpayer which cannot be explained by
the amount of his or her reported income, the onus is on the taxpayer to demonstrate
that the increase is not attributable to a failure on his or her part to report
taxable income. In this case, the Appellant, through his accountant, provided us
with three different tables representing the computation of his net worth which,
although established from the one prepared by the auditor, reflect changes made
by the Appellant, that is, the amount of cash he had, namely $30,000 borrowed
from his father, $10,000 reimbursed by his son and a reduction in his cost
of living by about $3,000 for each of the years in question.
[26]
First, I wish to point
out that the last table (Exhibit A‑12) which represents the sum of
the Appellant’s explanations still reveals a discrepancy of about $1,200 for
2002 and 2003 and of $7,460 for 2004. Furthermore, the decrease in the
discrepancy, according to the calculations provided by the Appellant’s accountant,
rests primarily, as already mentioned, on the hypothesis that the Appellant had
$63,650 in cash at his home in 2001 and that he used that money to offset his
lost income or reduce the gap, that is to say, of $20,000 in 2002 and $33,659 in
2003. It should also be noted that the Appellant did not challenge the
auditor’s information as to the total assets of the business or the Appellant’s
and the business’s liabilities for the purposes of his accountant’s
calculations.
[27]
At the time of the
audit, the Appellant stated that he had $5,000 in hand in 2001 and during
the three years in question. That amount is indicated in the Appellant’s
balance sheet table prepared by the auditor. The auditor was then told that the
Appellant thought he had been asked how much money he kept to run the business.
The Appellant’s accountant offered a first table (Exhibit I‑5) according
to which the Appellant had $93,560 in hand in 2001. The accountant explained
that it was difficult for the Appellant to disclose to a stranger that he had
close to $100,000 in his “nest egg.” About a month later, the Appellant’s
accountant amended that amount, setting at $63,500 the amount belonging to
the Appellant and adding the $30,000 borrowed in 2003 from the Appellant’s
brother (Exhibit I‑4). In the third table (Exhibit A‑12), the
accountant added the $10,000 from the reimbursement of a loan he made to
his son and reduced his cost of living expenses.
[28]
At the hearing, the Appellant
provided a few explanations justifying the fact that he had cash that he
accumulated over the years. However, the explanations given only provided
insight as to a portion of the total amount he stated he had in hand and, if I
take into consideration the fact that he spent that money in 2002, in 2003 and
in 2004, leaving him with only $1,000 in 2004, he would have had to have spent
a portion of it in the years prior to 2001. Not only did the amount of cash he
had in hand increase from $5,000 to $93,650 before being subsequently
reduced to $63,650 , but the Appellant also told the auditor, when the
latter asked him a few questions about the $93,650, that he did not have that
money at the time. At the trial, he testified that he only had about fifty
thousand dollars in cash at home. At the end of the day, the evidence is hardly
reliable and it casts doubt on the accuracy of the amount suggested by the Appellant
under that item.
[29]
In my view, the same is
true of the explanations put forward by the Appellant regarding the money he had
received from his brother. He explained that he signed promissory notes to his
brother, but none of them were adduced in evidence. He stated that he had purchased
cars with that money, but once again those purchases were apparently cash
transactions, except for a $6,000 cheque that was drawn on his bank
account in which he deposited the
money borrowed from his brother. Proof that the amount had been deposited could
possibly have substantiated the Appellant’s claims, as would an inventory of
the assets of his brother’s estate and the estate’s waiver on the Appellant’s loan
repayment.
[30]
The Appellant stated
that he had invested $10,000 with Desjardins Securities and that that money was
from the reimbursement of a loan made to his son. The terms and conditions of
the loan repayment were not provided. All the Appellant said is that that money
was used to fund investments and expenses, thus leaving the Court uncertain as
to the exact amount of that money. The Appellant’s son did not testify.
[31]
The only evidence that
seems to somewhat support the Appellant’s submission and that in part supports
his explanations is that his income and expenses were average for the industry
according to what was recognized by the Commission des transports du Québec in
its decision regarding the setting of taxi service fares. It is therefore possible
that the Appellant did not generate the income determined by the Minister from his
taxi business.
[32]
There is no doubt that
the use of the net worth method of computation produces imprecise results. A
taxpayer who chooses to operate his or her business without properly maintaining
his or her records and without keeping his or her supporting documents to back
up cash transactions will have a more difficult time meeting his or her burden
of proof. His or her credibility will definitely be put to the test.
[33]
In the case at bar, based
on the evidence as a whole, I am willing to reduce the Appellant’s total cost
of living by $3,000 per year for each of the years in question. I accept
the fact that the Appellant leads a relatively sedentary life and that he
perhaps did not incur all the expenses determined by the auditor, even though
the information concerning those expenses came from the Appellant himself. Still,
in that case, they are approximate amounts but I believe a reduction is warranted
here.
[34]
In my view, a reduction
in the business income attributed to the Appellant by the net worth method of
computation is also warranted on the simple ground that his income as
calculated by the auditor would be far greater than the industry’s average calculated
by the Commission des transports du Québec. That being said, it is however impossible
to determine the amounts that would be appropriate in the circumstances on the
basis that the average and amounts are approximate. As for the money the Appellant
had in hand, he was unable, at least convincingly, to not only offer an
approximate amount but to also show on a balance of probabilities where part of
that money came from.
[35]
The Appellant and his
accountant told the auditor at one point that the Appellant had $93,650 in hand
before backtracking and explaining that part of that amount, that is, $30,000, was
in fact a loan given by the Appellant’s brother which he did not have to repay.
The Appellant later reduced the amount of $63,650 to about fifty thousand
dollars after having initially told the auditor that he did not have any cash
in hand. Those contradictions cast doubt on, and also undermine the Appellant’s
credibility. Three different reports from the Appellant’s accountant were
needed to arrive at the result proposed by the Appellant owing to his contradictory
statements.
[36]
The same is true of the
reimbursement of the loan made to his son and which the Appellant subsequently
invested. No specific details were provided as to the exact amount of the loan
made to his son or the exact amounts of the reimbursement or the date of the
payments. The Appellant’s son, in my view, could have testified to substantiate
those claims. I therefore infer from this that his testimony would not have
been helpful to the Appellant.
[37]
Taking all these
factors into account, I reduce on a strictly arbitrary basis the Appellant’s
unreported business income by $10,000 for each of the taxation years in question.
[38]
I am also of the view
that the Minister has met the burden of proof with respect to the imposition of
penalties. Pelletier J.A., in Lacroix (supra), made the following
comments with regard to the Minister’s burden of proof relating to the
imposition of penalties following a net worth assessment:
32 What, then, of the burden of proof
on the Minister? How does he discharge this burden? There may be circumstances
where the Minister would be able to show direct evidence of the taxpayer’s
state of mind at the time the tax return was filed. However, in the vast
majority of cases, the Minister will be limited to undermining the taxpayer’s
credibility by either adducing evidence or cross-examining the taxpayer.
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).
33 As
Justice Létourneau so aptly put it in Molenaar v. Canada, 2004 FCA 349,
2004 D.T.C. 6688, at paragraph 4:
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.
[39]
The appeals are allowed
in part and the assessments are referred back to the Minister for
reconsideration and reassessment on the basis that the Appellant’s total cost
of living is reduced by $3,000 for each of the years in question and that
the business income is reduced by $10,000 for each of the taxation years
as well. The penalties are imposed on the amount of the unreported income once
the reductions are made. The Respondent will be entitled to 70% of her costs.
Signed at Ottawa, Canada, this 3rd day of February 2009.
“François Angers”
Translation
certified true
on this 12st day
of May 2009.
François Brunet, Reviser
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