Citation: 2009 TCC 359
Date: 20090723
Docket: 2007-3132(IT)I
BETWEEN:
JEAN-LOUIS TREMBLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT, SECOND AMENDMENT
Angers J.
[1]
By reassessment dated
April 14, 2005, the Minister of National Revenue (the Minister), using the net
worth calculation method, established that the appellant neglected to declare
additional income of $20,631 for the 2001 taxation year, $17,945 for the 2002
taxation year, and $18,127 for the 2003 taxation year and imposed gross
negligence penalties for the taxation years in question.
[2]
In response to the
appellant's objection, the Minister established reassessments on April 20,
2007, reducing the appellant's income by $1,470 for the 2001 taxation year, and
by $7,433 for the 2002 taxation year, and increasing the income by $707 for the
2003 taxation year. The Minister imposed a gross negligence penalty on $19,161
for the 2001 taxation year, $10,512 for the 2002 taxation year and on $18,834
for the 2003 taxation year.
[3]
Was the Minister
correct in adding the $19,161, $10,512 and $18,834 to the appellant's business
income for the 2001, 2002 and 2003 taxation years respectively, and was he
justified in taxing the penalty provided for under subsection 163(2) of the Income
Tax Act (the Act)?
[4]
The appellant has been
a naturopath for more than twenty years and is self‑employed. When
preparing his income tax reports, the appellant declared net business income of
$10,80 for the 2001 taxation year, $15,560 for 2002, and $20,158 for 2003. The
appellant also had income from an apartment he rented out above his residence.
For the purposes of calculating the net worth, his spouse's income was added to
his.
[5]
The net worth
calculation was prepared on the ground that there are many gaps in the
appellant's bookkeeping and he carried out many cash transactions. The auditor
therefore obtained the data that would allow her to proceed with the
calculation in question. She first contacted the appellant's accountant who provided
much of the data used in the calculation. The appellant then changed
accountants and the new one only provided additional information bit by bit.
The appellant, with his spouse, also provided figures, some of which were used
in the calculation and, in some cases, data provided by Statistics Canada was
used.
[6]
At the objection stage,
as mentioned, some modifications were made, which led to a reduction of
business income for the 2001 and 2002 taxation years, and an increased
assessment for 2003. The reduction of income is attributable to a modification
made to the acquisition date of a motor vehicle, the UCC balance, and a tax
debt that was calculated twice.
[7]
The evidence heard at
the trial was mainly on certain amounts the auditor attributed to the personal
expenses category. The appellant states that in the years in question, he
inherited money from his father, annual gifts from his mother, and received
payments from his two sons who lived with him and his spouse.
[8]
In order to properly
understand the calculation of the net worth, I will only reproduce the tables
prepared for this purpose. I will not reproduce Appendices II, III and IV
because they are not under objection. Table V, of personal expenses, is
reproduced, however.
[Note: The
following tables are translations]
JEAN-LOUIS TREMBLAY 209-367-044 Appendix
V
TABLE ESTABLISHING PERSONAL
EXPENSES
Dec.
31, 01 Dec. 31, 02 Dec. 31, 03
Interest on loans
Loan 1
Loan 2
Loan 3
Loan 4
Loan 5
Other financial
fees
Donations
10.00 14.00 11.00 (2)
Gifts 200.00 200.00 200.00
Leisure
Sports
Movies/theatre
Travel
Other 100.00 100.00 100.00
Union dues
Legal fees
Contributions to
pension plans
Contributions to
the QPP
Contributions to
Employment Insurance
Taxes for Mr.
Tremblay
Fed. taxes paid
during the year
for the current year
0.00 0.00 (3)
Fed. taxes paid
during the year
for
previous year 385.01
826.44 1,614.53 (2)
Prov. taxes paid
during the year
for
the current year 0.00
0.00
Prov. taxes paid
during the year
for
the previous year 753.39 1,183.90 2,571.31 (2)
Taxes for his
spouse
Fed. taxes paid
during the year
for
the current year
0.00
Fed. taxes paid
during the year
for
the previous year 907.86 (272.08)
(115.37) (2)
Prov. taxes paid
during the year
for
the current year
Prov. taxes paid
during the year
for
the previous year 907.86 (385.33)
(226.76) (2)
Other expenses
TOTAL
28,862.35 25,744.80 26,996.50
Analysis of APPEALS—November 16, 2006, Submissions
(1) Corresponds to
personal part indicated on the T1
(2) Balance or
reimbursement according to tax report and detail of the T1 account (N.5). For
2001, the amount paid at the provincial level was estimated to be identical as
that paid at the federal level.
(3) Does not
correspond to any actual payment; therefore, it is not a personal expense.
JEAN-LOUIS
TREMBLAY 209-367-044 Appendix
I
CALCULATION OF CHANGE IN NET WORTH
Dec.
31, 01 Dec. 31, 02 Dec. 31, 03
Closing net worth
(Appendix II) 81,778.91 97,333.96 117,280.36
Minus
Opening net worth
(Appendix II) 65,955.42 81,778.91
97,333.96
------------------------------------------------------------
Increase
(reduction) of net worth 15,823.49 15,555.05
19,946.40
ADJUSTMENTS
ADD
Personal expenses
(Appendix V) 28,662.35 25,744.60 28,998.50
Loss on personal
property
Capital loss
Loans to
shareholders according to 15(2)
Taxable advantage
Loss on business
investment
Unexplained
withdrawal
Non-deductible
entertainment expenses (s. 67.1) 25.00
61.50 10.00 (1)
Allowance for
business income under T1139 (previous year)
Non-deductible
portion s. 31
Dividend increase
-------------------------------------------------------------------
Sub-total 28,687.35 25,806.10 27,006.50
DEDUCT
Non-taxable
capital gain
Non-taxable
portion of capital gain
Provincial family
and child allowance
Inheritance
Lottery, casino
winnings
Allowance for
business income under T1139 (current year)
Insurance claims
Undeclared CSST
GST/QST rebate
0.00 213.00 367.91 (2)
Other
-------------------------------------------------------------------
Sub-total
0.00 213.00 367.91
TOTAL INCOME USING
NET WORTH METHOD 44,510.64 41,148.15 48,584.99
TOTAL REPORTED
INCOME
Mr. Tremblay 13,941.00 20,370.00 23,761.00
Mr. Tremblay's
spouse 11,409.00 10,266.00
3,990.00
-------------------------------------------------------------------
Total reported
income 25,350.00 30,636.00 27,751.00
CHANGE IN NET
WORTH after additional allowance 19,160.84 10,512.15 18,833.99
Additional
allowance
CHANGE IN NET
WORTH before additional allowance 19,160.84 10,512.15 18,833.99
CHANGE IN NET
WORTH before APPEALS 20,631.00 17,945.00 18,126.50
CHANGE IN NET
WORTH after APPEALS 19.160.84 10,512.15 18,833.99
Adjustments
1,470.16 7,432.85 (707.49)
(1) According to
T1
(2) According to
payment information menu
JEAN-LOUIS
TREMBLAY 209-367-044 Appendix
V
TABLE ESTABLISHING PERSONAL EXPENSES
Dec.
31, 01 Dec. 31, 02 Dec. 31, 03
Food
Groceries
7,000.00 7,000.00 7,000.00 (4)
Restaurants
Various expenses
Clothes
500.00 500.00 500.00 (5)
Dry cleaning
Hairdresser
150.00 150.00 100.00
Personal care
500.00 500.00 500.00
Tobacco-beverages
Medication
1,213.00 757.00 867.00 (2)
Life and medical
insurance
1,500.00 1,500.00 750.00
Childcare fees
Cleaning
Expenses for
animals
Lottery
Education
Books
Tuition
Newspapers and
magazines
Automobile
Insurance 1,300.00
1,300.00 715.00
Gas 1,000.00
1,000.00 800.00
Maintenance/repairs
200.00 200.00 100.00
Licence
160.00 160.00 80.00
Registration
510.00 510.00 255.00
Property A
Rent
Municipal taxes
1,379.86 1,355.02 1,415.33 (1)
School taxes
Insurance
799.00 350.00 700.00
Interest on
mortgage
4,122.25 4,157.00 3,560.66 (1)
Heating
1,700.00 1,700.00 1,700.00
Electricity
1,064.12 808.65 1,498.80
Phone
1,000.00 1,000.00 1,000.00
Cable, Internet
800.00 800.00 800.00
Maintenance and
repairs
500.00 500.00 500.00
Services (snow
removal, landscaping…)
Other expenses
Property B
Rent
Municipal taxes
School taxes
Insurance
Interest on mortgage
Heating
Electricity
Phone
Cable, Internet
Maintenance and
repairs
Services (snow
removal, landscaping…)
Other expenses
[9]
The evidence submitted
at trial covers the amount attributed to certain categories found in the
personal expenses. The appellant and his spouse, as well as the respondent's
agent testified on the amounts in question. As mentioned, at the audit, the
appellant and his spouse provided certain figures regarding their personal
expenses (Exhibit I-1, Tab 15). According to the appellant, their estimated
cost of living on the first document includes 2001 and 2002 and the second
document is for 2003. He claims that the auditor should have divided the
estimate from 2001 and 2002 in half to reflect reality. After examining the two
forms, it seems clear to me that for certain categories, the amount indicated
for 2001 and 2002 is twice that of 2003, for example, the cost of life
insurance. However, the same amount, $100, appears in the category for shoes in
2001-2002 and in 2003. It is therefore difficult to reconcile all the figures,
but since almost all the amounts are in question, I will examine them
individually. There were also estimates and then at the trial, the appellant
provided many invoices. As for certain figures used by the auditor, they were
provided by the appellant, taken from the Statistics Canada data or determined
according to what seemed reasonable in the circumstances.
(a) Cable - Internet
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimate
|
800.00
or
half
|
800.00
or
half
|
520.00
|
|
According to invoices at trial
|
|
425.50
|
578.52
|
|
According to calculations
|
800.00
|
800.00
|
800.00
|
The respondent accepts that in 2003, the actual amount
would be as indicated on the invoices, $578.52. For 2001 and 2002, the bills
submitted for cable start in March 2002 for a total of $425.50. Since the
appellants indicated on the form that they paid this expense in 2001 and 2002,
it seems appropriate to find that a similar service was provided in 2001. There
is no expense for an Internet subscription. I therefore consider the expense to
be $500 in 2001, $515.20 in 2002 and $578.52 in 2003.
(b) Licence and registration
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimate:
-
licence
-
registration
|
160.00
or
half
510.00
or
half
|
160.00
or
half
510.00
or
half
|
80.00
255.00
|
|
According to calculations:
-
licence
- registration
|
160.00
510.00
|
160.00
510.00
|
80.00
255.00
|
|
According to receipts at trial:
-
licence
- registration
|
48.00
221.00
|
48.00
221.00
|
40.00
221.00
|
On this issue, the respondent accepts the amounts as
indicated on the receipts.
(c) Telephone
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimate
|
1,000.00
or half
|
1,000.00
or half
|
550.00
|
|
According to bills at trial
|
590.03
|
646.88
|
628.31
|
|
According to calculations
|
1,000.00
|
1,000.00
|
1 000.00
|
In this section, the respondent notes that some bills
are missing but the amounts claimed are very close to those indicated on the
bills, in particular $578.10, $648.57 and $629.69 for the three years,
respectively. The amounts will therefore be adjusted arbitrarily to $585, $648
and $629 for each of those years, respectively.
(d) Electricity and heating
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimate:
heating
|
1,700.00
or half
|
1,700.00
or half
|
1,000.00
|
|
According to bills at trial
|
977.79
|
805.77
|
1,577.36
|
|
According to calculations:
-
heating
-
electricity
|
1,700.00
1,064.12
|
1,700.00
608.65
|
1,700.00
1,498.80
|
The evidence showed that the heating costs should have
been included with the electricity. The bills the respondent submitted (Exhibit
I-3) provide a different total under this category and I accept these figures
as the actual expense for the category; these are $1,357.27, $826.21 and
$1,498.80 for the three years, respectively.
(e) Insurance (property)
No amount was indicated by the appellant for this
category in the estimate he provided at the audit. At the hearing, the
appellant provided the property-insurance bill for 2003, which was $621.30 and
he claimed that the same amount applied for the two preceding years. The figures
used by the respondent in calculating the net worth for the three years were
$799, $350 and $700, respectively. The respondent now claims that according to
Exhibit I-4, a statement from the insurance firm for each of the policies, the
amount should have been $900.62, $550.45 and $621.30, respectively, for the
years in question on the ground that in 2001, the insurance premium was
$1,100.90 at the May 2001 renewal, and then the coverage was reduced, and it
was lowered to $592.96 when the appellant switched from lessee to owner after
acquiring the residence. On June 26, 2002, the renewal premium was $550.45.
Therefore, from January to June 2001, the appellant would have paid $91.74 per
month for 6 months, for $550.44, and $42.32 per month for the other 6 months,
for $253.96, for a total of $804.40 in 2001. He would have paid $550.45 in
2002, and $621.70 in 2003. These figures will be used for the purposes of these
reasons.
(f) Insurance (automobile)
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimate
|
1,300.00
or
half
|
1,300.00
or
half
|
715.00
|
|
Appellant, according to 2003 bill
|
728.70
|
728.70
|
728.70
|
|
According to calculations
|
1 300.00
|
1 300.00
|
715.00
|
The appellant claims that he owned two vehicles from
2001 to 2003, but only insured one at a time. However, Exhibit I-2 shows he was
billed for two cars. In May 2001, he paid $518.70 in insurance premiums for the
Cadillac and he renewed the insurance for the Volkswagen in September 2001 for
$454.65. The appellant therefore paid $973.35 in 2001 in this category, minus
$144 for an NSF check, which led to the cancellation of the policy in February
2002, leaving a $156 credit. The total spent in 2001 was therefore $817.35
($973.35—$156.00). In 2002, according to Exhibit I-2, the appellant paid
$976.50 in car insurance premiums, and in 2003, $728.70.
(g) Insurance (life and medical)
The respondent accepted the amounts the appellant
submitted in this category. The amounts are therefore $1,250.36 for 2001 and
2002 and $1,325.36 for 2003.
(h) Gas, maintenance, repairs
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimate:
-
gas
-
repairs
|
1,000.00
or
half
200.00
or
half
|
1,000.00
or
half
200.00
or
half
|
800.00
100.00
|
|
According to calculations:
-
gas
-
repairs
|
1,000.00
200.00
|
1,000.00
200.00
|
800.00
100.00
|
In this category, no specific or reliable evidence was
submitted. The appellant claims that he used his vehicles very rarely and his
work place is very close to home. The respondent used the appellant's estimates
without reducing them in half for 2001 and 2002. The respondent claims that the
amounts are lower than those established by Statistics Canada, and I agree. The
amounts of $1,200 for 2001 and 2002, and $900 for 2003 are retained in the
circumstances.
(i) Groceries
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimates:
|
7,000.00
or half
|
7,000.00
or half
|
4,000.00
|
|
According to calculations:
|
7,000.00
|
7,000.00
|
7,000.00
|
According to the appellant, he and his spouse live a
simple and modest life, which explains his calculations. As a result, he claims
the Statistics Canada amounts cannot be used because they are just averages and
actual expenses are higher or lower than the average. The respondent claims
that the data used as a basis is more realistic than the appellant's data.
According to Statistics Canada, it would cost $6,161.26 per year for groceries
and restaurants for two adults. The respondent used the amount provided by the
appellant, $7,000 per year, but the appellant claims that these expenses were
for 2001 and 2002. It is difficult to establish a specific amount for this
category based on the evidence submitted. In the circumstances, I find it
reasonable to establish this amount arbitrarily at $5,200 per year.
(j) Clothes
In this category, the appellant distributed
his estimated costs into three categories as follows:
|
|
2001
$
|
2002
$
|
2003
$
|
|
Shoes
|
100(50)
|
100(50)
|
100
|
|
Clothes
|
100(50)
|
100(50)
|
100
|
|
Cosmetics
|
20(10)
|
20(10)
|
50
|
[10]
According to the net
worth calculations, the respondent established all three at $500 per year.
According to Statistics Canada, expenses for two people in this category are
$2,091.22 per year. Even if the appellant spends very little in this category,
his estimate is still considerably less than the Statistics Canada data. The
amounts used by the respondent therefore seem more reasonable in the
circumstances and will therefore be retained.
(k) Hairdresser
|
|
2001
$
|
2002
$
|
2003
$
|
|
Appellant, according to estimate
|
150(75)
|
150(75)
|
100
|
|
According to calculations
|
150
|
150
|
100
|
According to Statistics Canada, expenses for two
people in this category are around $377.56 per year. The amounts used by the
respondent are more than reasonable in the circumstances and will therefore be
retained.
(l) Personal care
This category does not appear in the appellant's
estimate and the evidence on the category's contents is unclear. It is,
however, a realistic expense. According to Statistics Canada, this expense for
two people is $837.85 (Tab 17) per year. The respondent puts this amount at
$500 per year, which seems reasonable under the circumstances.
[11]
The appellant also asks
for the difference to be reduced because he received a $9,500 inheritance from
his father at the end of 1999 or beginning of 2000. His father died in June
1998. The payment was made by cheque and he allegedly deposited it to his bank
account. He stated he did not have proof of the deposit and did not know
whether the money could be traced in his bank account.
[12]
According to the
evidence, none of the bank statements indicate this amount was deposited during
the years in question. If, however, the amount was deposited to the account
before the years in question, the amount would appear in the opening balance
sheet of the net worth calculation. If the amount had been used to pay personal
or other expenses during the years in question, the evidence submitted does not
support that argument. I therefore cannot rule that the difference should be
reduced by this amount.
[13]
The appellant also
claims that during the three years in question, his two sons, 34 and 31 years
old, paid him $50 in room and board per week. They both testified at the
hearing to confirm this statement, but the cross-examination created some doubt
as to the length of their stay at their parents' house and their ability to pay
this room and board for the full three years. At any rate, even if I were to
grant this request to reduce the appellant's cost of living, I would then have
to increase the grocery expenses, which would produce no overall effect. As
such, the difference will not be reduced.
[14]
Lastly, the appellant
claims he received $2,000 from his mother in 2001 and $1,000 in 2002 and in
2003. They were gifts for his birthday, in December each year. This is
confirmed by a letter signed by his mother and submitted to evidence. The
evidence as to what the appellant used this money for is not clear, and neither
is the fact the money was deposited. I conclude, however, that it was received
and in all likelihood was used to pay personal expenses. I therefore allow the
application to reduce the difference for a corresponding amount.
[15]
The appellant's spouse
worked for her parents and received compensation in return that she evaluated
at around $1,500 for the period of 2000 to 2002. Her mother died in 2002 and
she continued to do work for her father shortly thereafter. She received $20 or
$40 a week for her services. She admits she occasionally received nothing. The
appellant's spouse did not deposit this money and allegedly spent it on
herself. Since part of this money was received outside the period in question,
I authorize a $500 reduction in the difference per year for the three years in
question.
[16]
The following table
reflects the calculation based on the conclusions I came to regarding personal
expenses:
|
|
December 31,
2001
$
|
December 31,
2002
$
|
December 31,
2003
$
|
|
Food (groceries)
|
5,200.00
|
5,200.00
|
5,200.00
|
|
Clothes
|
500.00
|
500.00
|
500.00
|
|
Hairdresser
|
150.00
|
150.00
|
100.00
|
|
Personal care
Medication
Life and medical insurance
Car insurance
Gas / repairs
Licence
Registration
Municipal taxes
Property insurance
Mortgage interest
Electric heating
Telephone
Cable - Internet
Maintenance and repairs (property)
Other non-challenged expenses
Total
|
500.00
1,213.00
1,250.36
817.35
1,200.00
48.00
221.00
1,379.86
804.40
4,122.25
1,357.27
585.00
500.00
500.00
3,264.12
23,612.61
|
500.00
757.00
1,250.36
976.50
1,200.00
48.00
221.00
1,355.02
550.45
4,187.00
826.21
648.00
515.20
500.00
1,666.93
21,051.67
|
500.00
867.00
1,325.36
728.70
900.00
48.00
221.00
1,415.33
621.70
3,560.66
1,498.80
629.00
578.52
500.00
4,154.71
23,348.78
|
[17]
If I transfer the new
personal expenses amounts to the net worth calculation as well as the amounts
granted at paragraphs 14 and 15, the new difference is $11,611.10 for 2001,
$4,319.22 for 2002 and $13,686.27 for 2003. The appellant therefore earned
income he did not declare. In the circumstances, the Minister met his burden
regarding the penalties and is justified in setting penalties under the Act.
This justification is stronger considering the appellant had to realize that
once the calculations were made for expenses regarding the mortgage, taxes, car
and income tax payments, he had nothing left to live on. The appellant
therefore wilfully, or in circumstances equal to gross negligence, made false
statements in his income tax reports for the three years in question by not
declaring all his income.
[18]
The appeal is allowed
in part and the assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment.
The present reasons for judgment, amended a second
time, replace the amended reasons for judgment dated August 21, 2009.
Signed at Ottawa, Canada, this
17th day of September 2009.
"François Angers"
Translation
certified true
on this 20th day
of October 2009.
Elizabeth Tan,
Translator
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