Citation: 2009TCC334
Date: 20090619
Docket: 2007-3070(IT)G
BETWEEN:
WALTER NICHOLS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller, J.
[1]
The Appellant’s income
tax liability for the 2001, 2002 and 2003 taxation years was reassessed on a
net worth basis to include in income the amounts of $208,300, $181,720 and
$147,229 respectively. He was assessed for failure to remit GST in the amount
of $37,607.04 for the period January 1, 2001 to December 31, 2003 in accordance
with the Excise Tax Act (“the ETA”). He was also assessed gross
negligence penalties pursuant to subsection 163(2) of the Income Tax Act
(“the Act”) and section 285 of the ETA and a late filing penalty pursuant to
subsection 162(1) of the Act in respect of his 2003 taxation year.
[2]
The Appellant’s 2001
and 2002 taxation years were reassessed beyond the normal reassessment period
pursuant to subparagraph 152(4)(a)(i) of the Act.
[3]
Both counsel agreed
that the focus of the hearing would be the income tax appeals and the same
decision should be made in both the income tax appeal and the GST appeal.
[4]
At the hearing, the
Appellant agreed that the net worth calculations were correct. It was his
position that the discrepancies in his income were from non-taxable sources. He
stated that the sources of the funds were a friend whose name is David Grant
(“Grant”); his former girlfriend, Ms. Villeneuve; and, winnings from casinos in
Las Vegas.
[5]
The only income that
the Appellant reported on his income tax returns for the three years in issue
was refund interest in the amount of $18.39 in 2001.
[6]
The Appellant stated
that he has a grade seven education. His legal name is Walter Dumonceaux but he
uses the name Nichols as that was his stepfather’s name. He is a machine
operator and as such he has experience in moving asbestos and PCBs. Over the
years, he also held various jobs in bars. He has been a DJ, a bartender and a
manager of various bars.
[7]
It was the Appellant’s
evidence that he met David Grant in 1995 through mutual friends. In 2001 he and
Grant made a business agreement whereby they would purchase vehicles in Canada and export them to the United States (U.S.). The
Appellant stated that the exchange rate on the U.S. dollar was approximately
1.50 percent, so that even if he sold a vehicle in the United States for less than the Canadian purchase price, a profit
could be made when the funds were transferred to Canadian dollars. The profit
from this business venture would be increased by applying for a refund of the
GST and PST.
[8]
According to the
Appellant, Grant agreed to provide the money to purchase the vehicles and to
cover all expenses; and, the Appellant would do “the leg work”. He testified
that during the period 2001, 2002 and 2003, Grant gave him $75,000 on each of
five or six occasions. The amounts were always given in cash. The Appellant stated
that sometime in 2002, he signed a paper to acknowledge that Grant had given
him money. He stated that he was not sure exactly how much Grant had given him
at that point in time but he believed that by the end of 2003, Grant had given
him a total of $350,000. Neither the Appellant nor Grant had a copy of the
document which they say was signed in 2002.
[9]
It was the Appellant’s
evidence that he used the money he received from Grant for personal
expenditures. Prior to spending it, he kept some of the money in a safe in his
home or in his company’s bank account.
[10]
During the period 2001,
2002 and 2003, the Appellant had two vehicles, a 1998 Corvette and a 2001 Grand
Jeep Cherokee. The Appellant reported the Corvette as a company asset; neither
of the vehicles was exported to the U.S. The Appellant
never exported any vehicles to the U.S.
[11]
According to the
Appellant, his second source of money was his girlfriend, Ms. Villeneuve. She
was an exotic dancer who worked in the Greater Vancouver Area. It was the
Appellant’s evidence that Ms. Villeneuve did not have a bank account. He stated
that when she was paid, she gave her money (either cash or cheque) to him and
he deposited it in his bank account. The Appellant stated that he gave Ms.
Villeneuve money “whenever she would ask for it”. The Appellant estimated that
Ms. Villeneuve earned a minimum of $50,000 each year.
[12]
The Appellant stated
that in 2000 he won approximately $40,000 at the Desert Inn in Las Vegas. On cross-examination, he admitted that he had spent
most, if not all, of this $40,000 prior to the years in issue. He also stated
that in 2001 or 2002 or 2003, he won either $15,000 or $20,000 at the Mirage in
Las Vegas. He did not know the exact amount that he
had won or when he had won it. However, when his counsel presented him with
various exhibits, the Appellant stated that he had won $10,000 in 2001 at the
Mirage.
[13]
The Appellant was the
sole shareholder and director of Dalsea Holdings Ltd. (“Dalsea”). He testified
that Dalsea was a company he “bought off the shelf” and it never carried on any
business. When he was asked how he determined the amount of money he deposited
into Dalsea’s bank account, he stated:
“Well, I have no business experience, but, you know, just for
like bookkeeping and certain things that were costs, I would deposit money into
-- cash into that account and then write cheques on costs, to like the
bookkeeper and whatever else I had to -- whatever other expenses I had.”
[14]
The Appellant stated
that he wrote cheques on the company bank account but none of these cheques
were for personal expenses. He wrote several cheques payable to himself and in
the re-line on the cheques, he wrote “Pay Day”. When asked why he wrote “Pay
Day” if Dalsea was not carrying on business and he was not receiving a salary
from Dalsea, the Appellant stated that he just wanted to withdraw some money
from the account.
[15]
At all relevant times,
the Appellant had a personal bank account.
[16]
On November 10, 2003,
the Appellant was charged in Los
Angeles, California with
possession of marijuana for sale, possession of money over $100,000 which was
obtained as a result of trafficking of marijuana and three other counts. On
March 15, 2004, the Appellant plead “no contest” to these two counts. The
Superior Court of the State of California found that there was a factual basis for
the Appellant’s plea and it accepted the plea.
[17]
At the hearing of these
appeals, it was the Appellant’s evidence that he went to Los Angeles on holiday with his girlfriend, Ms. Villeneuve. He
was only in possession of the marijuana and the money because he was doing a
favour for a friend. According to the Appellant, his friend asked him to rent a
car and to exchange the key to that car for a box that he would receive from a
person whom he would meet in the lobby of a hotel. The Appellant was to be paid
$60,000 for doing this favour. The Appellant stated that he did not realize
when he agreed to this favour that it involved marijuana.
[18]
The Appellant explained
that he only entered a guilty plea to the counts because he did not want to
spend time in the Los Angeles County Jail awaiting a trial.
[19]
David Grant testified
on behalf of the Appellant. He confirmed the Appellant’s testimony about the
agreement between him and the Appellant. He stated that he was looking for a
legitimate business to be involved in and he gave the Appellant $374,000, in
cash, over the period of three years. He did not keep a record of the amounts
that he gave the Appellant nor did he sign a partnership agreement with the
Appellant.
[20]
Grant stated that, in
2000, he used money which he had inherited to expand an ATM business which he
had started in 1997. In 2002 he incorporated the business and it was called ATM
Network Inc. He expanded this business from one machine in 1997 to thirty-two.
He stated that the revenues from one machine were $3,000 each month and by the
time he had 32 machines, his revenues were between $16,000 and $40,000 each
month. There was no evidence as to which year Grant had 32 machines.
[21]
In 2001, Grant started,
what is colloquially called, marijuana grow-ops with several partners. He
described the grow-ops as “basically farming operations”. He stated that he
earned revenues of several million dollars from this business. On September 7,
2007, Grant was charged with committing the indictable offences of unlawful
production of and trafficking in Cannabis (Marihuana). Grant stated that he
will go to trial on these charges in September of this year.
Analysis and Conclusion
[22]
This is a case where
the decision depends entirely on my findings of credibility taken in the
context of all the evidence adduced at the hearing. I must determine whether
the Appellant has shown on a balance of probabilities that the Minister’s
assessments are incorrect. In considering the evidence adduced, I may believe
all, some or none of the evidence of a witness or accept parts of a witness’
evidence and reject other parts.
[23]
In assessing
credibility I can consider inconsistencies or weaknesses in the evidence of
witnesses, including internal inconsistencies (that is, whether the testimony
changed while on the stand or from that given at discovery), prior inconsistent
statements, and external inconsistencies (that is, whether the evidence of the
witness is inconsistent with independent evidence which has been accepted by
me). Second, I can assess the attitude and demeanour of the witness. Third, I
can assess whether the witness has a motive to fabricate evidence or to mislead
the court. Finally, I can consider the overall sense of the evidence. That is,
when common sense is applied to the testimony, does it suggest that the
evidence is impossible or highly improbable.
[24]
When I consider the
totality of the evidence presented, I conclude that neither the Appellant nor
Grant is credible. In particular, some of the evidence that has led to my
conclusion is as follows.
Dalsea
[25]
The Appellant has
stated that Dalsea did not carry on business. Yet, he had a bank account opened
in Dalsea’s name; he hired a bookkeeper and an accountant to prepare Financial
Statements, accounts, trial balances, journal entries and general ledger for
2001, 2002 and 2003. The Appellant also filed income tax returns (“T2s”) for
Dalsea in 2000 and 2001 wherein he declared that Dalsea was in the business of
auto racing and consulting. The Appellant signed the T2s and he reported that
Dalsea had revenues of $75,052 and $43,169 for the years ending September 30,
2000 and September 30, 2001 respectively.
[26]
If Dalsea did not carry
on business, then the only other conclusion which I can draw from the evidence
is that the business records were produced to give the appearance that Dalsea
was in business. This suggests to me that Dalsea was a front for some activity.
I need not speculate on the activity.
Ms. Villeneuve
[27]
Ms. Villeneuve was not
a witness at the hearing of these appeals. It was the Appellant’s evidence that
he had not seen Ms. Villeneuve since he was released from jail in Los Angeles. However when Grant was asked in cross-examination
whether the Appellant continued his relationship with Ms. Villeneuve after he
got out of jail, Grant answered yes. He stated:
Q Do you remember when she and
Mr. Nichols' relationship finally broke down?
A Yeah, it I think it was two
years ago, at least a year and a half ago. Possibly three. I didn't really pay
a whole lot of attention when that happened, but it's been a while.
Q Do you remember whether he
continued the relationship after he got out of jail?
A After he got out of jail he
certainly did try and get together with her, yes.
Q Do you remember whether they
actually did reconcile for some time, after his jail term?
A You know what? When you say
"reconcile", I'd have to say they were together but she wasn't living
there.
Q
All right.
A I don't know details of
reconciliation in the words that you put it, so.
Q
So together for a while.
A Yeah. It's possible. I never witnessed her moving in there, so
I don't know. But they were, you know, together.
U.S. Conviction
[28]
The Appellant stated
that he entered a plea of “no contest” in the U.S.
because he did not want to spend time in the Los Angeles County Jail awaiting a
trial. He described the jail as a horrific place. I accept his evidence with
respect to his description of the jail. However, the court in the U.S. found that there was a factual basis for the
Appellant’s plea and it accepted the plea. As well, on the Declaration for Bail
Deviation sheet, the reason given for deviating from the bail set in the Felony
Bail Sheet confirmed that the authorities in the U.S.
considered the Appellant to be a leader in the conspiracy. They wrote:
“Defendant is
Canadian Citizen. No local ties other than narcotics co-conspirators. Defendant
held leadership position in narcotic conspiracy involving international
transaction. Defendant possessed over $100,000 in narcotic proceeds and
conspiracy involved well over 100 lbs. of high grade marijuana. Defendant
participated in two transactions on two separate occasions.”
[29]
At the hearing in the U.S., the Appellant stated that he understood that a plea
of “no contest” had “the same force and effect as a guilty plea”.
The Vehicles
[30]
At the hearing of this
appeal, the Appellant first stated that he had only purchased a truck to
export. After further questions from counsel for the Respondent, the Appellant
recalled that he had paid out the lease on his 1998 Corvette with the intention
to export the Corvette to the U.S. At the discovery which was held in this
matter, the Appellant stated that he had purchased or leased three vehicles
with the intention of exporting them.
[31]
The evidence disclosed
that the Appellant originally leased the 1998 Corvette in August 1999 under the
name of Dalsea. He bought out the lease in June 2002 using the proceeds of a
loan in the amount of $30,000 from the Toronto Dominion Bank (“the TD”).
[32]
On cross-examination,
he stated that he used the money he received from Grant to make the lease
payments on the Corvette. Then he stated that the lease payments were being
made by the car dealership, Totem Mercury Sales Limited, from whom he leased
the vehicle.
[33]
At the hearing when the
Appellant was asked if he used the money from Grant to pay for the 2001 Grand Jeep
Cherokee (the “Jeep”), he agreed. At the discovery in this matter, the
Appellant was asked how he paid for the Jeep and he answered:
352 Q How did you pay for it?
A I think how that one was, is there was somebody -- somebody
else that was into the car business and they had actually purchased it, and I
was to give them the money for it and what happened -- I can't really
remember. Like the actual purchase, I know it was purchased at Maple Ridge
Chrysler, but when it was actually bought and purchased from Maple Ridge
Chrysler I wasn't -- I didn't do it personally. Somebody else did it. But if
I can, I'm not sure.”
[34]
In conclusion, the
Appellant’s evidence was vague, confusing, nonsensical and contradictory.
Loans from the TD Canada Trust
[35]
On September 27, 2000,
the Appellant applied for a mortgage in the amount of $330,000 from the TD
Canada Trust (“TD”). According to the application, the Appellant’s previous
employer was the Pink Panther Showroom Pub (“the Pub”) where he earned $80,000
and his present employer was Unique Loading Services Inc. (“Unique”) where he
earned $145,200. He stated that he had been employed by the Pub for 4 years and
by Unique for 10 months. His assets were listed as Automobiles - $110,000,
Other - $100,000.
[36]
In cross-examination,
the Appellant stated that he thought he was the club manager at the Pub and
that he never “drew a cheque”. He first stated that he received free room and
board in exchange for managing the Pub. On further questioning, the Appellant
admitted that he received cash but he did not receive $80,000.
[37]
The Appellant also
admitted that he did not receive $145,200 from Unique. He stated that he worked
for Unique in 2000 and he received approximately $8,000.
[38]
The Respondent also
submitted documents from the TD concerning the loan which the Appellant
acquired to pay out the lease on the Corvette. One document reads: “Client
looking to buy out a friend’s lease. Full buy out is $42,365 which includes
$5365 GST/PST. Client will put down $12,365 which will come from his TD
account.”
[39]
In his loan application
dated June 18, 2002, the Appellant stated that he was a consultant with Unique
Loading for 2 years 6 months and that his gross monthly salary was $9,167.
[40]
To support his
application for the loan, the Appellant gave TD a letter dated June 18, 2002
from Unique Loading Services Inc. which read:
“This letter is to certify that Walter
Nichols of Dalsea Holdings Ltd. has been employed by Unique Loading services
Inc. as a sub contractor for the last 3 years.
Walter is an excellent employee and we do
not foresee any problems with his employment with us in the future. He
presently earns an average of $9850.00 @ month gross.”
[41]
When he was questioned
about the loan documents, the Appellant stated that he was confused. He
ultimately agreed with counsel for the Respondent, that each time he needed
money, he went to Randy Murphy (the owner of Unique Loading) to get a letter
which would state that he had a job. The Appellant agreed that he and Randy
Murphy intentionally misled the bank.
Grant’s Testimony
[42]
Grant stated that he
earned thousands each month from his ATM Network Inc. business. I have no doubt
that this was true; but, the evidence showed that his business did not report a
substantial amount of these revenues in the 2003 and 2004 taxation years.
[43]
The Respondent tendered
two documents which were titled “Cortax Return and Schedules” as an exhibit.
Chris Lew, a litigation officer, with the Canada Revenue Agency (“CRA”) stated
that the documents were computer printouts from the CRA’s system. The
information on the printouts is from the tax return filed for ATM Network Inc.
(“ATM”). Counsel for the Appellant objected to the entry of these documents as
exhibits on the basis that the Respondent did not call, as a witness, the
person who entered the information into the computer.
[44]
I allowed the documents
to be entered as an exhibit (exhibit R-3)[1].
[45]
For the taxation years
ending January 31, 2003 and January 31, 2004, ATM reported revenues of $36,679
and $62,931, respectively. For the same years it reported net income/loss of $0
and -$49,027.
[46]
It was Grant’s
testimony that the Appellant owned a “couple of strip clubs in the old days”.
He stated that he trusted the Appellant and he did not require that the
Appellant give collateral for the $374,000 nor did he keep a log of the amount
that he gave to the Appellant. He always gave the Appellant cash which was from
ATM and/or the marijuana business.
[47]
When he was asked if he
knew how the Appellant was spending the money, Grant stated:
A Well, he told me he was
investing in cars and purchasing them and sending them up -- to the United States. I didn't know what he did with the money. I had a bit of an
idea towards the end of 2003.
Q
So do you know which vehicles he bought to resell?
A
I have no idea.
Q
Do you know whether he sold any vehicles?
A
Do not know.
Q Did you ever ask him to
report back on what he was doing with the money?
A
No, I did not.
Q Didn't you become concerned
that you weren't seeing any results?
A
Yes, I started becoming concerned in 2003.
Q
By that point you'd already put in how much?
A
200,000 for sure, 250 maybe, by 2003.
Q And you never asked for any
of the money back? Or be repaid?
A Not, not at that point, no. Not until he had been arrested, then
when he was released I just asked him if he had any idea if he could ever repay
the money, and he said, "There's no possible way," and I didn't
pursue it after that. I knew that there was no way I was going to see the
money.
[48]
It is unbelievable that Grant
would become concerned in 2003 about the money he had allegedly given to the
Appellant ($250,000) and then he would continue to give the Appellant a further
$124,000 in that same year. I agree with counsel for the Respondent that the
absence of any documentation to corroborate the Appellant’s explanation is
significant.
[49]
This entire explanation has the
blush of a tall tale. It does not have the ring of commonsense. I find it
impossible to believe that Grant would continue to give money to the Appellant
over a period of three years without asking the Appellant to account for it. According
to Grant he didn’t even ask the Appellant what he was doing with the money.
[50]
My analysis of the evidence has
led me to conclude that the Appellant’s explanation for the discrepancy between
his reported income, which one must remember was essentially nil, and his net
worth is implausible and an affront to common sense.
Conclusion
[51]
The income tax
reassessments for the 2001 and 2002 taxation years were made beyond the normal
reassessment period pursuant to subparagraph 152(4)(a)(i) of the Act and
the onus is on the Respondent to show that the taxpayer has made a
misrepresentation that is attributable to neglect, carelessness, wilful default
or fraud in filing his return.
[52]
In its recent decision
in Lacroix v. The Queen[2],
the Federal Court of Appeal discussed how the Minister of National Revenue (the
“Minister”) can discharge the burden of proof in a situation where the taxpayer
has been assessed on a net worth basis beyond the normal reassessment period.
Pelletier, J.A. speaking for the court stated:
[30] The
facts in evidence in this case are such that the taxpayer’s tax return made a
misrepresentation of facts, and the only explanation offered by the taxpayer
was found not to be credible. Clearly, there must be some other explanation for
this income. It must therefore be concluded that the taxpayer had an unreported
source of income, was aware of this source and refused to disclose it, since
the explanations he gave were found not to be credible. In my view, given such
circumstances, one must come to the inevitable conclusion that the false tax
return was filed knowingly, or under circumstances amounting to gross
negligence. This justifies not only a penalty, but also a reassessment beyond
the statutory period.
…
[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). (emphasis
added)
[53]
I have concluded that the
Appellant has not provided a credible explanation for the discrepancy between
his reported income (which was nil) and his net worth. There was no credible
evidence to counter the Minister’s assumptions. I am satisfied that the
Appellant earned unreported income. As a result, the Minister has discharged
its burden with respect to subparagraph 152(4)(a)(i), subsection 163(2)
of the Act and section 285 of the ETA. The late filing penalty for the 2003
taxation year was properly assessed in accordance with subsection 162(1) of the
Act.
[54]
The appeals are dismissed with
costs.
Signed at Ottawa,
Canada, this 19th day of June 2009.
“V.A. Miller”
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