Citation: 2009 TCC 34
Date: 20090115
Docket: 2008-783(IT)I
BETWEEN:
LAVAL CÔTÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan J.
[1]
The Appellant appealed
from notices of reassessment issued by the Minister of National Revenue
("the Minister") in relation to the 2001, 2002 and 2003 taxation
years. The notices of reassessment were made using the net worth method.
[2]
The assumptions of fact
upon which the Minister relied in reassessing the Appellant are set out in
paragraphs 9, 10 and 11 of the Reply to the Notice of Appeal and read as
follows (and the answers given by the Appellant to each of the Minister's
assumptions of fact at the beginning of the hearing are set out following each
assumption):
[TRANSLATION]
9. In making and affirming the reassessments
dated April 5, 2006, in respect of the 2001, 2002 and 2003 taxation
years, the Minister relied on the following assumptions of fact:
(a) Following a tax audit of Chenil Chicoutimi Inc.,
of which the Appellant was the sole shareholder during the taxation years in
issue, it was learned that the Appellant's personal expenses were defrayed by
the corporation and that the Appellant's injections of funds into the corporation
might be from unreported income. (denied)
(b) The analysis of the personal bank accounts of
the Appellant and his spouse Michèle Morissette revealed unidentified deposits.
(denied)
(c) Given this situation, the Minister audited
the Appellant's income using the net worth method; a copy of the Appellant's
statement of net worth is attached as an appendix hereto (pages numbered 1
through 8). (denied)
(d) The Appellant's cost of living was
established primarily through the withdrawals from the couple's bank accounts
and from the personal expenses defrayed by the corporation. (denied)
(e) For the period from
December 31, 2000, to December 31, 2003, the net worth
audit identified the following unreported income amounts:
|
Taxation year
|
Additional income
|
|
|
|
|
(i) 2001
|
$35,395
|
|
|
|
|
(ii) 2002
|
$20,247
|
|
|
|
|
(iii) 2003
|
$18,010
|
|
|
|
|
|
$73,652
(denied)
|
(f) The details of the unreported income are as
follows:
|
|
2001
|
2002
|
2003
|
|
|
|
|
|
|
(i) Rental
income – trailer
|
$2,500
(denied)
|
|
|
|
|
|
|
|
|
(ii) Dividend
income
|
|
$2,664
(denied)
|
|
|
|
|
|
|
|
(iii) Taxable
capital gain
|
|
$1,000
(denied)
|
|
|
|
|
|
|
|
(iv) Taxable
benefits received from
Chenil
Chicoutimi Inc.
|
|
|
|
|
|
|
|
|
|
(a) personal
expenses paid
by
the corporation
|
$8,706
|
$6,549
|
$10,926
|
|
|
|
|
|
|
(b) taxable
capital gain -
tractor
|
|
$4,793
|
|
|
|
|
|
|
|
(c) other
income
|
$24,189
|
$5,241
|
$7,084
|
|
|
|
|
|
|
|
$35,395
|
$20,247
|
$18,010
|
|
|
|
|
(denied)
|
|
|
|
|
|
|
(v) During the period in issue, Michèle Morissette filed only
one income tax return: her return for the 2003 taxation year. (admitted)
|
10. Based on the following elements, the Minister determined
that the Appellant, upon filing his 2001 income tax return, made a
misrepresentation attributable to neglect, carelessness or wilful default:
(a) The unreported income, computed using the net
worth method, is considerable (122%) in relation to the reported income. (denied)
(b) The Appellant failed to report rental income
(trailer). (denied)
(c) Personal expenses were paid by the
corporation. (denied)
(d) Since the Appellant looks after the corporation's
revenues and expenditures, he should have known that the income reported in his
2001 income tax return was underestimated. (denied)
11. Based on the following elements, the Minister
determined that the Appellant knowingly, or in circumstances amounting to gross
negligence, made a false statement or omission in the income tax returns filed for
the 2001, 2002 and 2003 taxation years, or that he participated in, assented to
or acquiesced in the making of the false statement or omission, and that, as a
result, the tax that he was required to pay based on the information contained
in the income tax returns filed for those years was lower than the amount of
tax actually payable for those years:
(a) The Appellant failed to report rental income
(trailer) and dividends. (denied)
(b) The corporation paid for personal expenses
for each of the taxation years in issue. (denied)
(c) The corrected unreported income represents a
significant percentage of the reported net income for each year in issue:
(i) 2001- 122%,
(ii) 2002- 62%,
(iii) 2003- 60%.
(denied)
[3]
The Minister also
imposed the following penalties for gross negligence:
|
Taxation year
|
Penalty imposed
|
Amounts subject to penalty
|
|
|
|
|
|
(i) 2001
|
$4,697.78
|
$35,595
|
|
|
|
|
|
(ii) 2002
|
$2,210.75
|
$20,247
|
|
|
|
|
|
(iii) 2003
|
$1,712.18
|
$18,010
|
[4]
In addition to
testifying personally, the Appellant called three witnesses: his sister-in-law
Marie‑Reine Ménard, his sister-in-law Lise Champagne, and his
wife Michelle Morissette.
[5]
Ms. Ménard testified
that she was very close to the late Imelda Boivin, who was her mother-in-law
and the Appellant's wife's mother and who died in May 1999.
Ms. Ménard explained to the Court that her mother-in-law was worried about
whether she would have enough money to meet her needs in the event that she lived
to a very old age. Hence, she testified, Ms. Boivin saved a
great deal of her income.
[6]
Ms. Ménard testified
that she knew that her mother-in-law had a safe deposit box at Caisse populaire
de Chicoutimi, where she cashed her Old Age Security (OAS) cheques. Ms. Boivin
kept a bit of money for her day-to-day needs and deposited the rest into her safe
deposit box. However, Ms. Ménard admitted that she never went with
Ms. Boivin when she used the box.
[7]
Ms. Champagne's account
of the facts was the same as Ms. Ménard's. She explained to the Court
that the Appellant's wife was the late Ms. Boivin's only daughter. She
prepared Ms. Boivin's income tax returns for many years.
She explained that Ms. Boivin saved a lot of money for her old age
and that she placed her money in her safe deposit box at the Caisse populaire
de Chicoutimi. Ms. Boivin had a strongbox in the closet of her unit at the
seniors' residence in which she lived, and she used it to set aside some cash.
[8]
Michelle Morissette testified
that her mother lived with her father until he died, that is to say, for 45
years. Following his death, she sold the principal residence and moved to a
small apartment. She remarried and was married to Paul Tremblay of
Chicoutimi-Nord for 10 years, until he died. Ms. Morissette testified
that her mother did not pay for anything during this second marriage. Mr. Tremblay
covered all the expenses that were incurred. Mr. Tremblay bequeathed a bit
of money and some movable property to her mother. Ms. Morissette explained
to the Court that her mother was constantly worried about falling ill and being
hospitalized. She did not want to be a burden to her children.
[9]
Ms. Morissette testified
that her mother had a safe deposit box at the Caisse populaire de
Chicoutimi-Nord on Roussel Street for more than 20 years. She cashed her
OAS cheques and placed most of the proceeds in her safe deposit box. She kept a
bit of cash to cover the bare minimum, that is to say, her petty expenses.
Ms. Morissette also testified that her mother kept a metal strongbox in
her closet at the seniors' residence.
[10]
Ms. Morissette explained
that she chose to live near her mother in Chicoutimi in order to take care of
her. She was surprised to learn that she was her mother's universal legatee.
She testified that she went to the Caisse populaire Desjardins and that, upon
opening her mother's safe deposit box, she found $35,000 in cash. With the
proceeds of the insurance and from the sale of the movable property, the total
amount that Ms. Morisette obtained from her mother's succession was $66,900.
[11]
Ms. Morissette told the
Court that, following her mother's death, she obtained a safe deposit box under
her name at the Caisse populaire de Chicoutimi, on Ste‑Geneviève Boulevard,
near her house. She stated that, over the course of several months, she
deposited all the amounts that she had received from her mother.
[12]
The Appellant adduced
an undated letter addressed to appeals officer Sophie Rousseau of the
Canada Revenue Agency (CRA) and prepared by his accountant Serge Brassard. It
was filed as Exhibit A‑1. In the letter, Mr. Brassard explains
to the appeals officer that the total amount received by Michelle Morissette from
the succession was $66,900. Mr. Brassard explained that his client, the Appellant,
used approximately $19,000, which left approximately $47,900, which he
accounted for in the Appellant's personal balance sheet as at
December 31, 2000. The letter explains that the Appellant's net worth
as at December 31, 2000, should be increased from $136,736, the
amount calculated by the CRA auditor, to $203,636, in order to take this
significant cash amount into account.
[13]
The Appellant explained
that in 2001, 2002 and 2003, he and his wife lodged people suffering from
psychiatric or mental problems in their home. One such person was referred
to them by the Institut Roland-Saucier of Chicoutimi, and the other was recommended
by an official from the municipality of Chicoutimi-Nord. These individuals
had no family and lived on social assistance. In 2002, the Appellant
had two adults, Bruno Simard and Fernande Girard, in his home. They paid
monthly rents of approximately $650 and $625, respectively. The Appellant
and his wife received a total of $14,700 in 2001, $14,700 in 2002 and $7,400 in
2003. In 2003, only Bruno Simard lived with the couple; he paid an annual
allowance of $7,500. The Appellant explained that, in 2001, he met
Ms. Simard's tutor, who asked him to take care of Mr. Simard in his
home. The Institut Roland‑Saucier, Chicoutimi's psychiatric hospital,
communicated with the Appellant's spouse and placed Ms. Girard in the
Appellant's home. The Appellant alleged that he thought that the allowances
that he received for the care of the two individuals were not taxable. He acknowledged
that he did not include those amounts in his income tax returns.
In addition, he corroborated his wife's account regarding the inheritance
and regarding the placement of the amounts inherited into the safe deposit box.
The Appellant says that he and his wife used these amounts to cover living
expenses and to defray the costs of building their new residence, which they
have since sold so that they could move to Gatineau.
[14]
Guy Dion, the CRA
auditor responsible for the Appellant's file, testified that the Appellant
had been the subject of a net worth assessment at his Chicoutimi business,
which was located close to his principal residence. At the beginning of his
audit, he noticed that the Appellant had few internal controls that would have
enabled him to conduct an audit using traditional methods. Mr. Dion told
the Court that he audited the Appellant's and Ms. Morissette's bank
accounts. Ms. Morissette had two bank accounts, and the Appellant had only
one. He explained that, during the audit of the bank accounts, he noticed that
many cheques had been cashed directly by the teller and were not deposited into
the couple's bank accounts. Mr. Dion described these transactions as
"zero deposits". He succeeded in determining that the cheques
were cashed without any deposits into the Appellant's and his wife's bank
account. Consequently, he decided to proceed using the net worth method.
[15]
Mr. Dion prepared
a list of the Appellant's assets as at December 31, 2000. At that time,
the net balance was $136,736. For the years 2001, 2002 and 2003, he did a
complete audit of the banking transactions. Calculations of the net worth
differential are attached to Appendix 6 of the Reply to the Notice of Appeal. Mr. Dion
prepared a list of the Appellant's and his wife's personal expenses for the years
2001, 2002 and 2003. He treated all the withdrawals or cheque-cashing as personal
expenses, unless he could establish that the amounts were used to pay expenses
incurred by the kennel business wholly owned by the Appellant. He also
added to the Appellant's income all personal expenses that the corporation paid
on the Appellant's behalf. According to his calculations, the Appellant's
personal expenses amounted to $50,652 in 2001, $48,584 in 2002 and $40,309 in
2003. He added these amounts to the calculation of the Appellant's net
worth. He subtracted some non-taxable amounts and some net income reported
by the Appellant and his wife. Following his complete calculations, he
determined that the Appellant's unreported income was $35,395 for the 2001
taxation year, $20,247 for the 2002 taxation year, and $18,010 for the 2003
taxation year.
[16]
He testified that he
did not take account of the cash amounts that Ms. Morissette might have
received upon her mother's death. He told the Court that he found no signs
that these amounts were deposited into the Appellant's and his wife's bank
accounts in 2001, 2002 or 2003. In addition, he explained to the Court that
since his correction for personal expenses took into account only amounts
directly withdrawn from the accounts, and cheques cashed by the Appellant, his
calculations would be distorted if he took into account amounts that were not
deposited into the bank account. The auditor said that if he had taken into
account the $47,900 that the Appellant says should be added to his assets at
the beginning of the period, the only effect would have been to require
him to increase the Appellant's personal expenses. Since he found that the
construction expenses for the Appellant's and his wife's new residence were
paid from the cheques drawn on the bank accounts, he explained that he should
not take into account the cash amounts that Ms. Morissette might have held.
Lastly, he explained to the Court that he had no evidence of the amount that
Ms. Morissette received, and that she could have used these amounts for
living expenses in prior years, or to make major investments that she held as
at December 31, 2000, the date of the opening balance sheet.
[17]
Mr. Dion admitted
that he did not take into account the fact that the amounts paid for Mr. Simard's
and Ms. Girard's lodging might not be taxable under the Income Tax
Act ("the Act"). He did not exclude these amounts when
computing the withdrawals that he treated as personal expenditures by the
Appellant.
Analysis
[18]
The Appellant asserts
that the amounts that he and his wife received to lodge Ms. Girard and Mr. Simard
in their principal residence (which was partly transformed into a foster home
for disabled persons) are not taxable. The basis for that claim is paragraph 81(1)(h)
of the Act, which reads:
81. (1) Amounts not included in income — There shall not be included in computing
the income of a taxpayer for a taxation year,
. . .
(h) Social assistance -- where the taxpayer is an individual (other than a trust), a social
assistance payment (other than a prescribed payment) ordinarily made on the
basis of a means, needs or income test under a program provided for by an Act
of Parliament or a law of a province, to the extent that it is received
directly or indirectly by the taxpayer for the benefit of another individual
(other than the taxpayer's spouse or common-law partner or a person who is
related to the taxpayer or to the taxpayer's spouse or common-law partner), if
. . .
[Emphasis added.]
[19]
According to this
provision, a person who provides lodging to a social assistance recipient, and
who receives payments directly or indirectly, does not pay tax on those amounts.
In the case at bar, the Appellant and his wife testified that they lodged
social assistance recipients in their home, and that the tutors of those
recipients used their benefits to pay for the lodging. Furthermore, the
Appellant and his wife testified that these amounts were deposited into their
bank account. In my opinion, their uncontradicted testimony is prima facie
evidence that the Appellant and his wife received non-taxable amounts that
should have been excluded from the bank withdrawals that were treated as
unreported income. This prima facie evidence shifted the burden of proof
to the Minister. Since the Minister adduced no evidence with respect to this
point, I must conclude that the amount of $14,700 must be subtracted
from the Appellant's unreported income for each of the years 2000 and 2001, and
that the amount of $7,400 must be subtracted from the unreported income for the
year 2003.
[20]
As to the second point
in issue, I must conclude that the Appellant has not succeeded in showing that
the amounts from Ms. Boivin's succession were deposited into his personal
bank account in 2001, 2002 and 2003. Since only the funds deposited into and
withdrawn from the couple's bank account in 2001, 2002 and 2003 were treated as
personal expenses for the purpose of computing the adjusted net worth, there is
no risk that the capital of Ms. Boivin's succession was treated as
unreported income.
[21]
I must point out that
the Respondent has the burden of proving, on a balance of probabilities, the
circumstances that warrant the imposition of a penalty under
subsection 163(2) of the Act. In my opinion, the Respondent has failed to
meet this burden of proof. First of all, the method used by the auditor to
complete the calculation of the adjusted net worth is very imprecise.
The auditor assumed that all the withdrawals from the couple's bank
account were personal expenses. In my opinion, a calculation based on an
examination of actual expenditures, or based on public statistics, would have
led to a better calculation of the couple's personal expenses. The evidence
adduced is sufficient to establish unreported income where the burden is on the
Appellant. But where a penalty is involved, it is insufficient, because the
burden is on the Minister. I should note that, after adjusting for the non‑taxable
amounts referred to above, the Appellant's unreported income is $20,895 for the
2001 taxation year, $5,547 for the 2002 taxation year, and $10,610 for the
2003 taxation year. Once these adjustments are made, the unreported
income as a percentage of reported income is lower than that noted by the
Respondent. For all these reasons, I order that the assessments be referred
back to the Minister for reassessments that reduce the Appellant's net
unreported income under the assessments in issue by $14,700 for each of the
years 2001 and 2002 and by $7,400 for the year 2003. I also order that the penalties
imposed under subsection 163(2) of the Act be cancelled.
Signed at Ottawa, Canada, this 15th day of January 2009.
"Robert J. Hogan"
Translation
certified true
on this 5th day of
February 2009.
Brian McCordick,
Translator
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