Citation: 2009 TCC 124
Date: 20090226
Docket: 2006-884(IT)G
BETWEEN:
RICHARD HÉBERT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
[1]
Richard Hébert is
appealing from reassessments made for the 1998, 1999 and 2000 taxation years. The
Appellant is a notary by profession. The Minister of National Revenue issued
reassessments in respect of the Appellant, including income that the Minister
claims to be unreported income, disallowed certain expenses that were claimed,
and imposed penalties under subsection 163(2) of the Income Tax Act
("the ITA").
[2]
With respect to gross
income, the Minister decided to conduct an audit using the bank deposit
analysis method. Under this method, deposits are assumed to be income unless
there is an alternative explanation.
[3]
The assessment was
significantly changed in the course of the audit and objection. The table below
summarizes the deposit amounts that the Minister considered income, the accounts
into which the deposits were made, the expenses disallowed, and the nature of
those expenses. The table takes the adjustments made at the objection stage
into account.
|
|
1998
|
1999
|
2000
|
|
|
|
|
|
|
Unreported professional fees
|
|
|
|
|
|
|
|
|
|
National Bank
|
$4,892 (*)
|
$1,903 (*)
|
$1,971 (*)
|
|
Caisse populaire ***6
|
$9,890 (*)
|
$9,450 (*)
|
$8,696 (*)
|
|
Caisse populaire ***1
|
$14,229 (*)
|
$2,931 (*)
|
$1,158 (*)
|
|
Caisse populaire ***4
|
|
|
$21,538 (*)
|
|
|
|
|
|
|
Disallowed expenses
|
|
|
|
|
|
|
|
|
|
Meal expenses
|
$201
|
$189
|
$419
|
|
Automobile expenses
|
$3,760
|
$2,606
|
$2,392
|
|
Utilities
|
$2,303
|
$2,243
|
$1,322
|
|
Other expenses
|
$3,528
|
$2,745
|
$3,768
|
|
|
|
|
|
|
Capital cost allowance
|
$2,763
|
$3,673
|
$4,831
|
|
|
|
|
|
|
Total adjustments
|
$41,566
|
$25,740
|
$46,095
|
|
|
|
|
|
|
(*) A penalty was applied to these amounts pursuant to
subsection 163(2) of the ITA.
|
As stated in the table, the Minister imposed a penalty
on the additional income in issue. No penalty was assessed on the
disallowed expenses.
[4]
Caisse populaire
accounts ***6 and ***4 are two different accounts at the Caisse populaire de
Pointe-aux-Trembles. Account ***4 is in US dollars. Caisse populaire
account ***1 is at the Caisse populaire de Tétreauville. There will be a
reference below to a cheque drawn on another account at the Caisse populaire
Ste‑Claire.
Facts
[5]
I will examine, in
turn, each of the facts and grounds raised by the Appellant to challenge the
assessments.
The deposits of C$21,538 (US$14,714) made
on April 13, 2000
[6]
The largest amounts
added to the Appellant's income are amounts totalling C$21,538 (US$14,714) deposited
into account ***4, a US-dollar account.
[7]
The amounts were in US dollars
—
a US$4,500 deposit, a US$54
deposit and a US$10,160 transfer from the Appellant's trust account.
[8]
According to the
Appellant, a man named Serge Gibeau, whom he had known for a long time,
came to see him. The Appellant testified as follows:
[TRANSLATION]
. . . So he says to me, "Listen," he says. "I did a
small transaction in the Bahamas and I want to invest more." He tells me
his story and says to me, "I have Canadian funds to send there at the
moment." I said there was no problem.
But at one point, since this was something that wasn't far off, I
said, "Listen. There is no problem. I still have a US-dollar account."
So he made a deposit into my Canadian‑dollar general trust account ...
the amount was, well, equivalent to, well, I don't know, let's say about $14,000
Canadian. And he asks if we could transfer that right away to, I think, the St.
Moritz Club, or something like that.
So then, I said "Listen. It can't be done today because I have
work at the office all day." We put it off for a couple of business days,
and in the meantime, he had collected funds from his children, his two sons,
his wife, his brother-in-law, his friends ... it was ... it must have been an
opportunity, a tremendously profitable opportunity, and I said "Listen, if
you want, come meet me at the Caisse populaire on" ... well, I'm
not confused about the date ... it was April 13, 2000, and I said
we'd complete it then.
In the meantime, when he showed up that morning, he had succeeded in
raising even more funds ... but that time, he had done more careful planning
... the funds were in US dollars, and he ... well, he gave me cheques that were
deposited into my account, and I transferred what he gave me from the general
trust fund to the account in question and finally made a $14,500 transfer to
... I can tell you ... it was St. Moritz Holdings Limited with SUB ... UBS
Bank in Stamford (inaudible) Connecticut. The transfer probably went
through there.
So this was ... this was done in the course of my
activities as a notary. It involved "in trust" accounting which,
at that time, was separate from my personal accounting, so I absolutely don't
see the connection there. And in fact, I submitted an affidavit from
Mr. Gibeau which plainly states that these were funds that he asked me to
have transferred for him, to an investment club abroad.
[9]
In support of his
testimony, the Appellant adduced a sworn declaration by Mr. Gibeau dated
November 18, 2004.
Mr. Gibeau did not testify. The declaration of November 18, 2004,
states:
[TRANSLATION]
- In 2000, jointly with my wife, I made an
investment in bank instruments, based on the advice of my friends and
acquaintances in Quebec.
- The investment was US$14,500 (plus US$55 in
bank transfer fees), which corresponds to approximately $21,000 in Canadian
funds.
- When I said that I intended to invest this sum
of US$14,500, I was informed that the funds had to be transferred to the
Bahamas at the express request of the advisors associated with this investment
project.
- I asked Richard Hébert, who had been my notary
for more than 30 years, if he could help me transfer these funds to the Bahamas since neither my spouse nor I had
a US‑dollar bank account.
- Mr. Hébert was asked to do this favour because
we had known him since 1970, when I was working for the Town of
Pointe-aux-Trembles and he looked after all my personal transactions and
documents.
- Mr. Hébert did not charge any fee for this
favour.
- And so, on April 13, 2000, I met Mr. Hébert
in person at the Caisse populaire de Pointe-aux-Trembles, located at the corner
of Notre-Dame Street East and St‑Jean-Baptiste Boulevard, and, after ascertaining
the current exchange rate, I handed him Canadian currency equivalent to
US$14,500, in accordance with my agreement to transfer it to Nassau, Bahamas, to
make the planned investment.
- I was present with Mr. Hébert throughout the
execution of the transaction, and, at my request, the funds were transferred to
St. Moritz Holdings Ltd. in Nassau, Bahamas.
- The funds transfer was executed at my request
for the purpose of making a personal investment with my wife.
[10]
The $4,500 deposit is
from a bank draft of US$2,000 and a bank draft of US$2,500 from the National
Bank of Canada.
[11]
Page 1 of Exhibit A-4 is
a request dated April 13, 2000, for the transfer of US$14,500. The
Appellant is named as the sender. The receiving bank is UBS (Bahamas) Ltd. in
Stamford, Connecticut. The transferee of the payment is St. Moritz
Holdings Ltd. Mr. Gibeau's name is not on the document.
[12]
The auditor confirmed
that the transfer was from the trust account. However, there is no
documentary evidence regarding the trust account and the origin of the amount
of US$10,160.
[13]
I do not accept the
Appellant's evidence regarding this deposit, because it is impossible to
reconcile his testimony with Mr. Gibeau's declaration. First of all, the
declaration refers to a single meeting on April 13, 2000 at which Mr. Gibeau
gave the Appellant all the funds, not the two meetings that took place
accordingly to the Appellant. Secondly, the declaration refers only to a
Canadian-dollar amount and, contrary to the Appellant's testimony, makes no
reference to a portion in US dollars.
[14]
On cross-examination,
the Appellant was asked to account for this discrepancy. His answer was
that Mr. Gibeau no longer had the documents when he signed the sworn
declaration.
[15]
While I can understand
how Mr. Gibeau might forget certain details, I do not accept that he could have
forgotten the fact that he brought approximately C$15,000 to his notary one day,
and some US$4,700 (approximately C$6,500) another day, as opposed to
approximately C$21,500 on the date of the funds transfers.
[16]
However, before we
leave this transaction, a change must be made. The auditor, Mr. Gélinas,
testified that the portion of the deposit that consists of a US$10,160 transfer
into the US-dollar account comes from a C$10,160 transfer from the trust
account, due to a mistake by the financial institution. This error
resulted in a C$4,712 gain. That $4,712 gain is not income. Consequently, the
amount of $21,538 must be reduced by $4,712.
The $12,500 cheque dated
November 18, 1998
[17]
The Appellant deposited
a $12,500 cheque dated November 18, 1998, into account ***1
at the Caisse populaire de Tétreauville.
The cheque was for the purchase of a BMW.
[18]
The BMW belonged to 104493
Canada Ltd., a corporation of which the Appellant is a shareholder.
The Respondent included this amount of $12,500 on the basis that it was an
appropriation by a shareholder.
[19]
According to the Appellant,
the corporation, which was created long before the taxation years in issue, was
never operated. However, instead of purchasing his cars himself, the Appellant
decided that the company would purchase the cars that he used. He said that he
had paid the purchase price of his cars, and that he used the $12,500 to pay
for a part of the company's purchase of a new car on
February 22, 1999.
[20]
I do not accept that
evidence. 104493 Canada Ltd. never filed an income tax return, and no
accounting or corporate documents were adduced at trial. Although a contract of
purchase between M.G.B. Auto Inc. and the company, dated
February 22, 1999, was adduced,
the only document adduced in relation to the source of the funds and the method
of payment of the price, less the trade-in value, is a $6,000 cheque from the Caisse
populaire Ste-Claire, which is not where the $12,500 was deposited. The remainder of
the amount payable under the contract was from a cheque in the amount of
$8,953.25, drawn on the account at the National Bank.
[21]
Even assuming that the
Appellant initially paid for the BMW and that the $12,500 was in payment of
part of the February 22, 1999, purchase price of the new vehicle, this
is of no help to the Appellant.
[22]
There are ways for a
shareholder to contribute capital, and, under certain conditions, for the
company to repay that contribution, but nothing in the evidence shows that this
was done in relation to the $12,500 from the sale of the BMW in 1998.
[23]
Moreover, nothing in
the evidence demonstrates that the company asked the Appellant to keep the
funds in order to use them for the purchase of a new car for the company.
[24]
Consequently, it can
only be an appropriation.
The deposits into account ***6, the $4,000 cheque from
Denise Legault and the $5,000 debt to Mr. Bastien
[25]
According to the
auditor, the Appellant made cash deposits in the amounts of $9,890, $9,450 and
$8,696.18.
In making his assessments, the Minister assumed that these amounts were
unreported income.
[26]
The Appellant submits
that these deposits are explained by withdrawals of funds from accounts at the
National Bank and at another caisse populaire, by a $4,000 gift from Denise
Legault-Hébert, and by a $5,000 loan from Mr. Bastien, as shown in Exhibit
A-2.
[27]
Denise Legault testified.
She was married to the Appellant and gave him a $4,000 gift by cheque dated
May 25, 1999. A copy of both sides of the cheque was tendered in
evidence, and it appears that this amount was deposited into the Appellant's
account at the National Bank. Ms. Legault wrote this cheque after
receiving an inheritance from her father.
[28]
I accept
Ms. Legault's testimony, and the fact that the Appellant received the
cheque in question. I will come back to this amount of $4,000 later.
[29]
According to the
Appellant, Mr. Bastien, a Florida resident, lent him C$5,000, as shown by
the acknowledgment of debt signed by the Appellant on March 23, 1998.
We have no document signed by Mr. Bastien in this regard, and
Mr. Bastien did not testify.
[30]
The amount of $5,000
was not deposited into account ***6 at the caisse populaire.
[31]
The Appellant has not
explained how this amount got into account ***6. He has not testified as to
whether it was a cheque that he received from Mr. Bastien, and, if so,
where the amount was deposited, or whether it was cash, and, if so, where the
cash was deposited.
[32]
I do not accept the
Appellant's evidence with respect to this amount.
[33]
There is another reason
why I cannot accept it. Since we see no such deposit into account ***6, the
Appellant must have deposited it into one or more other accounts. In the list
at Exhibit A‑2, this amount is added to different amounts withdrawn
from other accounts. This amounts to counting the same sum twice: once when it
was deposited into an account, and another time when it was withdrawn from it.
[34]
For the same reason,
although I accept that the Appellant received $4,000 from Denise Legault, I
cannot agree to its being added to the amounts withdrawn from other accounts
which, according to the Appellant, are the source of the deposits into account ***6.
Since the amount of $4,000 was deposited at the National Bank, this would, once
again, amount to counting it twice.
[35]
There remain the other
amounts listed in Exhibit A-2. The Appellant has provided no explanation to
reconcile the withdrawals and deposits. He has not proven that he had
other sources of money to cover small day-to-day expenses.
[36]
The amounts deposited
into account ***6 range from $140 to $926.18. Most of the amounts are $800
or $900. There were 13 deposits in 1998, and 12 deposits in the other two
years. The withdrawals listed in Exhibit A‑2 are $7,047.53 in 1998,
$13,383.11 in 1999 and $7,628.62 in 2000. In all, there are nine withdrawals in
1998, twelve in 1999 and five in 2000, and the dates and amounts cannot be reconciled
with the deposit amounts. To cite but one example, although there was a deposit
almost every month in Exhibit A‑2, there were no withdrawals between
October 14, 1999, when the Appellant withdrew $1,600, and
September 6, 2000, when the Appellant withdrew $4,845.62.
[37]
I do not accept the
Appellant's evidence with respect to the deposits
into account ***6. However, I will come back to the amount of $4,000
later.
The NSF cheques and the National Bank
account
[38]
The Appellant tendered
Exhibit A‑3, a list of NSF cheques which does not include certain
cheques that replaced them. The total amounts of such cheques is $2,574 in
1998, $1,822.61 in 1999, and $1,958.29 in 2000.
[39]
If I understand her
position correctly, the Respondent accepts that the cheques bounced, but did
not take them into account because she wanted evidence that they were deposited
and that the amounts truly were bad debts.
[40]
I have trouble
understanding the first requirement, because the account statements show that for
each bounced cheque, the bank debited the account. The bank cannot
debit the account unless the amount of the cheque was initially credited to the
account.
[41]
As for the second
reason for not taking the bounced cheques into account, I would note that this
is an assessment which, as far as the gross income is concerned, is based on a
method that assumes that unexplained deposits constitute income. The income
estimate involved produces a result that reflects cash accounting. I do not
believe that in using this method, one can disregard the fact that certain
cheques bounced. Indeed, this explains why certain deposited amounts cannot be
considered income.
[42]
Moreover, even if it
were possible to combine a gross income estimate that is based on the
unidentified deposit method with certain principles of accounting modified by
the ITA which reflect a non-cash method of accounting, the fact is that under
the circumstances of this case, the net amounts of the NSF cheques are at least
doubtful claims, if not bad debts.
[43]
Consequently, I accept
that the income amounts set out in the assessments should be reduced by $2,574
in 1998, $1,822.61 in 1999, and $1,958.29 in 2000.
[44]
If these amounts are
deducted from the income that the Minister added on account of deposits in the
National Bank, the difference remaining is only $2,318 in 1998, $80.39 in 1999,
and $12.71 in 2000.
[45]
The amounts in 1999 and
2000 are minimally different. There was also the deposit of the $4,000 cheque
from Denise Legault into the account in 1999. Since the deposits method is an
estimation method that uses cash accounting, there can very well be differences
in timing between the Appellant's professional income as stated in the
financials, and the amounts deposited into his business account at the National
Bank. Hence, I find that there is no significant difference between the income
reported by the Appellant and the deposits into the account at the National
Bank. Thus, no additional income in the respective amounts of $2,318, $80.39,
and $12.71, can be considered to have been deposited into the account at the National
Bank.
[46]
Consequently, I find
that no additional income was deposited into the account at the National Bank.
Miscellaneous cheques totalling $724.80
[47]
During the trial, the
Appellant testified about two groups of cheques totalling $720.44 and $724.80, which
were allegedly deposited on October 30, 1998, and
November 4, 1998, respectively, into account ***1. The amount of
$720.44 was already allowed at the objection stage.
[48]
As for the amount of $724.80
consisting of cheques in the amounts of $0.14, $594.31, $99.50, $0.85 and
$30.00 respectively, I accept the Appellant's evidence.
[49]
Consequently, the
amount of additional income in account ***1 for 1998 must be reduced by
$724.80.
The amount of $2,000 deposited into account ***1 on
May 20, 1999
[50]
According to the
Appellant, this amount was related to work that the Appellant had to do for a
client. The client had been billed in 1995 or 1996. The Appellant asked his
son, who had been recently called to the Bar, to do the work, and he gave the
fees to his son. After some time, he apparently noticed that his son had not
done the work, and he did the work himself and asked his son to give him back
the fees. His son gave him back the $2,000, which came from his son's trust account.
[51]
I am unable to rule
that this amount of $2,000 is not income. No documentary evidence
concerning the client's account and the manner that the account was dealt with
in the Appellant's financial statements has been provided. Moreover, if the
Appellant billed the client in 1995 or 1996 and then paid his son to do the
work, he may have deducted the same amount as an expense. If so, assuming that
the amount was paid back by the Appellant's son in 1999 for the reasons just
given, it should be included in the gross income in order to charge back the
prior deduction.
The expenses
[52]
In meal expenses, the
Appellant claimed $931 in 1998, $1,145 in 1999, and $1,283 in 2000. Following
the objection stage, the disallowed amounts were changed to $201, $189 and
$419, respectively. The Minister's breakdown was based on the assumption
that weekday meals were business meals and that weekend meals were not.
[53]
Nothing in the
Appellant's evidence would lead me to rule that the breakdown should be
different.
[54]
As for the automobile
expenses, the amounts in question were claimed as depreciation, insurance and
registration expenses.
[55]
The Appellant did not
contest the disallowance of the depreciation, because it is clear that only the
owner can claim depreciation.
[56]
As for the insurance
and registration, since the Appellant ultimately did not contest these two
expenses, I will simply remark that I do not see how such expenses could be
deductible by the Appellant. Registration is a responsibility of the company.
The insurance beneficiary is the company. This is not a situation where there
is a contract of lease between the company and the Appellant under which the
Appellant is required to make certain payments in consideration of the lease of
the car.
[57]
Another type of
disallowed expense was cellular telephone expenses billed to Denise Legault.
According to Ms. Legault, the Appellant, her husband, used the telephone, and
she had another cell phone that she did not use.
[58]
The Appellant testified
that he used the telephone. He also testified that the telephone was under his
wife's name because he was able to obtain a relatively inexpensive contract
with the help of a friend who was able to put the contract under a general
contract with General Electric. According to the Appellant, [TRANSLATION]
". . . obviously, if the end-user is a notary, that doesn't
exactly fit, so that's why he put the usage contract under Denise Hébert's
name, and that's all there is to say."
[59]
The Appellant did not
claim any cellular telephone expenses other than those related to the phone
under Denise Legault's name.
[60]
The Appellant also
claimed the costs of a second telephone line in his residence. He testified
that he installed a second line at the time that he was attempting to do
business in Vietnam, where there is a 12-hour time difference, and that the
telephone enabled him to communicate from home. He used this second line for a
fax machine and a computer.
[61]
In her examination-in-chief,
when Denise Legault was asked who used the second telephone line, she said that
the Appellant and his son used it for the computer and the internet, but that
she did not use it. Other than that, she was unable to say for what purpose the
computer was used.
[62]
With respect to the
cellular telephone, I accept the Appellant's evidence. As a result, the amounts
of $422.93, $435.22 and $354.54 are deductible in 1998, 1999 and 2000,
respectively.
[63]
As for the second
telephone line, I find that the Appellant used it for business, but that his
son also used it. Consequently, half this expense will be deductible, that is
to say, $397.35 in 1998, $353 in 1999, and $350.10 in 2000.
The penalties under subsection 163(2)
[64]
With respect to the
imposition of the penalties, the issue to be determined is whether the
Appellant "knowingly, or under circumstances amounting to gross
negligence, has made . . . a false statement or omission in
a return" within the meaning of subsection 163(2) of the ITA.
[65]
I must take into
account what Strayer J. stated in Venne v. The Queen, Docket T-815-82,
April 9, 1984, 84 DTC 6247 (F.C.T.D.) "'Gross negligence'
must be taken to involve a greater neglect than simply a failure to use
reasonable care. It must involve a high degree of negligence tantamount to
intentional acting, an indifference as to whether the law is complied with or
not."
[66]
I must also take into
account what Nadon J.A. stated in his decision in Panini v. Canada,
2006 FCA 224, at paragraph 43: ". . . the law will impute
knowledge to a taxpayer who, in circumstances that dictate or strongly suggest
that an inquiry should be made with respect to his or her tax situation,
refuses or fails to commence such an inquiry without proper
justification."
[67]
The Appellant reported
gross income of approximately $79,000 in 1998, $86,000 in 1999 and $85,000 in
2000, and net income of approximately $25,000, $33,000 and $19,000 in the same
years.
[68]
The additional amounts
of unreported income, after taking into account the changes that must be made
to the assessments, are $10,894 in 1998 (not counting the $12,500 cheque), $12,381
in 1999, and $26,680 in 2000.
[69]
These amounts — approximately $45,000 altogether during
the three years in issue, or 18% of the reported gross income — are large both in absolute terms and in
relation to the gross and net income reported.
[70]
During the years in
question, the Appellant had no employees, apart from the occasional
secretarial assistance of his wife. He looked after the finances and the clerical
tasks, and certainly had a good idea of the financial circumstances of his
notarial practice.
[71]
In view of the
circumstances disclosed, I rule that there was gross negligence with respect to
the deposits of unreported income in the amounts of $10,894 in 1998, $12,381 in
1999, and $26,680 in 2000.
[72]
However, the situation
with respect to the $12,500 from the proceeds of the sale of the car is
different, and there was no gross negligence in connection with that amount.
Summary
[73]
The appeal is allowed
and the matter is referred back to the Minister for reconsideration and
reassessment on the basis that
(a) the additional income
set out in the assessments is to be reduced as follows:
|
|
1998
|
1999
|
2000
|
|
|
|
|
|
|
Deposits – National Bank
|
$4,892.00
|
$1,903
|
$1,971
|
|
Caisse populaire ***1
|
$724.80
|
―
|
―
|
|
Caisse populaire ***4
|
―
|
―
|
$4,712
|
|
|
|
|
|
|
Total reduction
of additional income
|
$5,616.80
|
$1,903
|
$6,683
|
(b) the amounts subject to
the penalty under subsection 163(2) are as follows:
|
1998
|
1999
|
2000
|
|
|
|
|
|
$10,894
|
$12,381
|
$26,680, and
|
(c) the Appellant's
expenses are to be increased as follows:
|
|
1998
|
1999
|
2000
|
|
|
|
|
|
|
Cellular telephone
|
$422.93
|
$435.22
|
$354.54
|
|
Second line — residential
|
$397.35
|
$353.00
|
$350.10
|
|
|
|
|
|
|
Total increase
in expenses
|
$820.28
|
$788.22
|
$704.64
|
[74]
Since the Appellant has
been successful only in part in his challenge to the Minister's position following
the objection stage, and since the outcome of these proceedings largely favours
the Minister, the Minister shall have two-thirds of his costs.
Signed at Ottawa, Canada, this 26th
day of February 2009.
"Gaston Jorré"
Translation certified
true
on this 24th day
of June 2009.
François Brunet, Revisor
Email this Content