Citation: 2007TCC745
Date: 20071213
Dockets: 2005-3248(IT)G
2005-3250(IT)G
2005-3258(IT)G
BETWEEN:
MICHAEL ARGENTO,
CHRISTINE ARGENTO,
PAYSAGISTE TERRA NOVA LTÉE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1] These are appeals
by Paysagiste Terra Nova Ltée (2005‑3258(IT)G), Michael Argento
(2005‑3248(IT)G) and Christine Argento (2005‑3250(IT)G). The
three appeals were heard on common evidence.
[2] In filing its tax
returns for the 1996, 1997, 1998 and 1999 taxation years respectively,
Paysagiste Terra Nova Ltée ("Terra Nova") reported the following net
business income (losses): ($4,745), ($1,564), $8,973 and $6,047.
[3] On June 3,
2002, after the normal reassessment period, the Minister of National Revenue
("the Minister") issued notices of reassessment against
Christine Argento, a shareholder of Terra Nova, for the 1996, 1997
and 1998 taxation years, adding the following amounts to her income as
benefits conferred on a shareholder by Terra Nova:
1996 1997 1998
$15,777 $23,352 $34,844
The Minister also assessed
penalties under subsection 163(2) of the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp.), as amended ("the Act").
[4] On June 6,
2002, after the normal reassessment period, the Minister issued notices of
reassessment against Michael Argento, another shareholder of
Terra Nova, for the 1996, 1997 and 1998 taxation years, adding to his
income as benefits conferred on a shareholder by Terra Nova the same
amounts as those added to Christine Argento's income and assessing
penalties under subsection 163(2) of the Act.
[5] On June 10,
2002, the Minister issued notices of reassessment against Terra Nova for
the 1996, 1997, 1998 and 1999 taxation years, adding $5,259, $34,080,
$50,534 and $58,073 to its income as unreported business income for those years
respectively, and assessing penalties under subsection 163(2) of the Act.
[6] The Minister relied
on the following facts in making the assessments at issue:
(a)
Christine
and Michael Argento each own 40 percent of Terra Nova's shares;
(b)
Terra
Nova's fiscal year ends on February 28 of each year;
(c)
Terra
Nova has existed since 1986 and operates a landscaping and excavation business;
(d)
Christine
Argento did Terra Nova's internal manual accounting;
(e)
Terra
Nova did landscaping work for various customers and subsequently destroyed the
sales invoices, and it did not report the income from that work in its tax
returns;
(f)
materials
purchased by Terra Nova were delivered to certain addresses but no sales
invoices were found and no income was reported with respect to those deliveries;
(g)
a
net worth statement for Christine and Michael Argento and a statement of
net worth differential were prepared by an auditor from the Canada Customs and
Revenue Agency ("the Agency");
(h)
the
net worth determination for Christine and Michael Argento shows that they
had cash inflows, over and above the income they reported, of at least $31,555.65
for 1996, $46,703.32 for 1997 and $69,688.43 for 1998;
(i)
the
accountant who represented Christine and Michael Argento during the Agency's
audit requested that that additional income be apportioned equally between
Christine and Michael Argento;
(j)
for
the years at issue, Terra Nova was the only source of income for Christine
and Michael Argento, apart from employment insurance benefits, modest
investment income and small capital gains;
(k)
the
unreported cash inflows of Christine and Michael Argento as shown by the
determination of their net worth are appropriations of the income earned by
Terra Nova but not reported by that corporation.
[7] The Minister made
the assessments at issue outside the normal reassessment period for
Terra Nova's 1996, 1997 and 1998 taxation years and, on the basis of the
facts set out hereunder, assessed penalties under subsection 163(2) of the
Act with respect to the amounts not reported by Terra Nova:
(a)
the lifestyle
of Christine and Michael Argento, Terra Nova's shareholders and officers,
was not consistent with the income they reported, and they could not have been
unaware of this;
(b)
the
amounts of income not reported by Terra Nova are high compared with its
reported income;
(c)
Michael Argento
signed Terra Nova's tax returns, which he had prepared by an outside
accountant, Joseph A. Pietracupa;
(d)
Terra Nova's
accountant prepared the accounting records using the information that Christine
and Michael Argento gave him;
(e)
Christine Argento
did Terra Nova's internal accounting, and either she or her spouse,
Michael Argento, deposited the amounts received by Terra Nova;
(f)
some
of the sales invoices for work done by Terra Nova were deliberately
destroyed;
(g)
since
it was on the basis of the deposits that the accountant determined the income
reported by Terra Nova, it follows that Terra Nova, through its
shareholders and officers, knowingly failed to report income in its tax
returns.
[8] Counsel for the appellants
does not challenge the Minister's use of the net worth method for Christine and
Michael Argento or the issuance of the notices of reassessment outside the
normal reassessment period, and he acknowledged at the hearing that
Terra Nova's accounting was incomplete.
[9] The points disputed
by counsel for the appellants are as follows:
(a)
the
opening balance in the bank accounts of Christine and Michael Argento at
the Royal Bank of Canada at the start of the period;
(b)
the
way that the $4,000 balance of an inheritance received by
Christine Argento was treated; and
(c)
the C$25,300
in loans made by Michael Argento's brother.
[10] Counsel for the appellants
alleges that, in determining the net worth of Christine and
Michael Argento, the Minister did not take account of their bank account
balances at the start of the period. He filed in evidence a copy of a statement
for a mutual fund investment plan at the Royal Bank of Canada in
Christine Argento's name showing a credit balance of $17,063.03 as at
December 31, 1995, and a statement from the same bank, also in
Christine Argento's name, dated February 19, 1996, and showing that
$17,784.12 had been withdrawn and the account closed (Exhibit A‑1, documents
filed together). A copy of a statement for a term investment certificate in the
amount of $15,000 issued by the Royal Bank of Canada in Michael Argento's name and
having a two‑year term running from January 26, 1995, was also filed
(Exhibit A‑2). These bank account statements totalled
$32,063.03 at December 31, 1995.
[11] According to the
auditor, Valérie Tremblay, the bank statements in question were requested on
October 17, 2001, but were never provided during the audit. She also said
that a requirement to produce the said statements had not been served on the
Royal Bank of Canada because the interest amounts involved were not
significant.
[12] In fact, counsel for
the appellants did not produce the bank statements from the Royal Bank of
Canada until March 22, 2007, the day before the hearing, through a letter to
counsel for the respondent (Exhibit I‑10).
[13] Quite apart from the
matter of the late filing of that documentary evidence, it must be asked
whether or not the Minister has to take those bank statements into account in
determining the net worth of Christine and Michael Argento.
[14] Counsel for the respondent
argues that, if the credit balance shown on the bank statements was held during
the entire period, no adjustments to the net worth calculation are necessary.
[15] Counsel for the appellants
submits that the credit balance shown on the bank statements must appear in
assets at the start of the period even absent any evidence that at maturity the
investments were deposited or transferred into the accounts at the Bank of
Montreal, that is, the personal bank accounts of Christine and
Michael Argento, after the accounts at the Royal Bank of Canada were
closed.
[16] The evidence discloses
that Christine Argento closed her account at the Royal Bank of Canada on
February 19, 1996, and withdrew the balance of $17,784.12, but it is not
known what became of that sum. No evidence was filed to show that it was
transferred into an account at another bank or financial institution.
[17] With regard to
Exhibit A‑2, no evidence was filed concerning the renewal, transfer
or other use of the $15,000 represented by a deposit certificate maturing on
January 27, 1997.
[18] Since
subsection 152(8) of the Act creates a presumption that arbitrary
assessments are valid and places the initial onus on the taxpayer to disprove
the state of affairs assumed by the Minister (George R.H. Hsu v. Her Majesty
the Queen, 2001 FCA 240, paragraph 22), it must be asked
here whether the appellants have succeeded in discharging this onus. In my
opinion, they have not. During their respective testimony, Christine and
Michael Argento were incapable of providing additional explanations concerning
the use of the amounts withdrawn from the accounts at the Royal Bank of Canada.
Since the evidence in this regard is incomplete, it is my view that the appellants
have not discharged their burden of proof.
[19] The balance of
$4,000 from an inheritance was received by Christine Argento in
two cheques from her sister, Rosemary West: one, for $1,000, dated
September 10, 1998, and the other, for $3,000, dated April 7, 1998
(Exhibit A‑5). Christine Argento inherited $38,836.67 from her
mother's estate. In calculating net worth, the Minister took that $38,000 into
account even though the mother's will was not filed and no evidence was
produced to show that the amount had been deposited. The two cheques were
produced on March 22, 2007 by counsel for the appellants in his letter to
counsel for the respondent (Exhibit I‑10). Ms. West did not
testify to explain why she had written the cheques. Since the Minister accepted
without proof the amount Christine Argento received as an inheritance from
her mother's estate in November 1997, I am of the opinion that the
Minister must also recognize the balance of $4,000 from that inheritance.
[20] The third and final
point in dispute relates to the loans or gifts made to Michael Argento by
his brother, Domenico Argento, an engineer, who was eight years his
senior and living in the United States at the time. Copies of
eight cheques for US$5,000 each, which were written to Mr. Argento
and drawn on a Fleet account, and copies of the endorsements on those cheques
were produced on March 22, 2007, by counsel for the appellants in the
letter he sent counsel for the respondent (Exhibit I‑10).
Four of the cheques are dated June 30, 1998, one is dated
January 25, 1999, and three are dated March 15, 1999 (Exhibit A‑3,
documents filed together). Only the four cheques dated June 30, 1998,
are relevant here, since the cheques with a 1999 date on them are outside the
net worth period for Christine and Michael Argento. Of the
four cheques dated June 30, 1998, two were cashed on November 17,
1998, and the other two on January 7, 1999, more than six months
after they were issued.
[21] Domenico Argento
did not testify and therefore did not confirm why the cheques were issued to
his brother and whether they were loans or gifts.
[22] Michael Argento
did testify. He explained that his brother was well off and had often provided
him with money to help him start out in business. He also explained that his
brother gave him several cheques at once so that he would have more flexibility
in using them. He confirmed that he did not repay the amounts his brother lent
him. Finally, he said that he had not cashed two of the cheques dated
June 30, 1998 earlier because he had not needed them at the time.
[23] Since the answers given
on the written examination for discovery of Christine and Michael Argento
referred to a US$55,000 loan from Michael Argento's brother in 1998, I
must admit in evidence the cheques written by Dominico Argento to
Mr. Argento that were given to counsel for the respondent on March 22,
2007. Indeed, counsel for the respondent filed a copy of two of those cheques,
for US$5,000 each and dated June 30, 1998, that were cashed on
November 17, 1998 (Exhibit I‑7).
[24] Although no loan
agreement was filed in evidence and Michael Argento's brother did not
testify, I will not draw any negative inference from this failure to testify,
as counsel for the respondent suggested I should on the basis of the decision
rendered by Bédard J. in Houle v. Her Majesty the Queen,
2006 TCC 291.
[25] I do not think that
the witness would have given evidence unfavourable to his brother. The filed
photocopies of the cheques and endorsements are sufficient to establish that
Michael Argento did in fact receive the cheques and that the Minister had
to take them into account in determining the net worth of Christine and
Michael Argento.
[26] However, only the
two cheques dated June 30, 1998, are relevant given that the net worth determination
for Christine and Michael Argento covered the period from December 31,
1995, to December 31, 1998. Those two cheques, which total
C$15,371.25, were deposited in Pépinière Beaconsfield Inc.'s bank account, as
shown by the statement from the Bank of Montreal for the month of
November 1998 (Exhibit A‑3, documents filed together).
[27] The audit of
Terra Nova's affairs began following an anonymous tip. Since there were
discrepancies between the purchase invoices and sales invoices, the auditor
used the net worth method to determine the income of Christine and
Michael Argento. Terra Nova's accounting system was not computerized:
everything was done manually by Christine Argento. The outside accountant
prepared the financial statements and tax returns on the basis of the information
provided by Christine Argento. The sales invoices were consistent with the
financial statements, but some invoices were missing, in particular those
marked as cancelled. For example, counsel for the respondent filed an invoice
dated June 2, 1996, issued to Bob Henzell, which was paid by cheque
on June 25, 1996 (Exhibit I‑9) but the amount did not appear in
Terra Nova's income. Christine Henzell testified at the hearing and
confirmed that Terra Nova had done some work and that the invoice had been
paid by cheque.
[28] Counsel for the appellants
acknowledges that Terra Nova's accounting was incomplete and contained
errors, but he submits that Terra Nova was not negligent. In my opinion,
the appellants deliberately failed to keep proper accounting records and report
substantial income over several years. Thus, there was in the present case the
degree of negligence required to justify the assessment of penalties under
subsection 163(2) of the Act for the taxation years under appeal.
[29] Accordingly, the
appeal from the notices of reassessment for the 1996, 1997 and 1998 taxation
years of Paysagiste Terra Nova Ltée is dismissed with costs and the appeal from
the notice of reassessment for the 1999 taxation year of Paysagiste Terra
Nova Ltée is allowed in part, without costs, so as to reduce its unreported income
for that taxation year by $19,371.25.
[30] The appeals from the
notices of reassessment for the 1996 and 1997 taxation years of Christine and
Michael Argento are dismissed with costs and the appeals from the notices
of reassessment for the 1998 taxation year of Christine and
Michael Argento are allowed in part, without costs, so as to reduce the
unreported income of Christine and Michael Argento for that year by $9,685.62
for each of those two appellants.
[31] In all other
respects, the appeals are dismissed with costs.
Signed at Montreal, Canada,
this 13th day of December 2007.
"Réal Favreau"
Translation certified true
on this 29th day of May 2008.
Erich Klein, Revisor
Email this Content