Citation: 2007TCC42
Date: 20070718
Docket: 2004-4442(IT)G
BETWEEN:
PATRICK GODON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an
appeal concerning the 1997, 1998 and 1999 taxation years under the Income
Tax Act ("the Act"). The assessments were made using the net
worth method.
[2] The issues are
as follows:
(a) Did
the Appellant fail to include in his income the amounts of $52,575.07 for the
1997 taxation year, $28,401.21 for the 1998 taxation year, and $5,678.29 for
the 1999 taxation year?
(b) Did
the Minister duly issue the reassessments for the 1997 and 1998 taxation years
beyond the normal reassessment period in accordance with subsection 152(4)
of the Income Tax Act?
(c) Is
the Appellant liable to pay the penalty imposed by the Minister under subsection 163(2)
of the Income Tax Act for each of the taxation years in issue?
[3] In making and confirming the assessments and penalties concerning the 1997,
1998 and 1999 taxation years, the Minister of National Revenue
("the Minister") relied on the following assumptions of fact.
[TRANSLATION]
20. . . .
(a) The
Appellant has a son named Gabriel Godon who was born in July 1998.
(b) During
the taxation years in issue, the Appellant had a 50% interest in a
Trois-Rivières-based business that sold used vehicles. The business operated
under the name Automobiles G.G.R. Enr.
(c) Steven
Godon, the Appellant's brother, also had a 50% interest in the business that
operated under the name Automobiles G.G.R. Enr.
(d) During
the taxation years in issue, the Appellant owned or co-owned several
income-producing buildings.
(e) The
Minister audited the Appellant using the net-worth differential method.
(f) The
Appellant had a net worth of $42,381.71 as at December 31, 1996,
$76,672.99 as at December 31, 1997, $86,500.90 as at
December 31, 1998, and $74,315.41 as at December 31, 1999, as shown
in the table entitled [TRANSLATION] "Personal Balance Sheet" and the
related explanatory pages, attached as Appendix B and forming an integral part
of this Reply and of the facts relied on by the Minister in making and confirming
the reassessments for the taxation years in issue.
(g) The
Appellant incurred personal expenses of $30,538.21 for the 1997 taxation year,
$29,998.71 for the 1998 taxation year and $30,276.76 for the 1999 taxation year,
as shown in the [TRANSLATION] "Personal Expenses Sheets"
attached as Appendix C and forming an integral part of this Reply and of the
facts relied on by the Minister in making and confirming the reassessments for
the taxation years in issue.
(h) The Appellant's total income under the net
worth method was $66,375.33 for the 1997 taxation year, $41,215.75 for the
1998 taxation year and $18,492.73 for the 1999 taxation year, as shown in the
table entitled [TRANSLATION] "Calculation of the Difference in
Net Worth" attached as Appendix A and forming an integral part of
this Reply and of the facts relied on by the Minister in making and confirming
the reassessments for the taxation years in issue.
(i) The
Appellant reported an income of $13,800.26 for the 1997 taxation year, $12,936.18
for the 1998 taxation year and $12,814.54 for the 1999 taxation year.
(j) The
Appellant had $52,575.07 in unreported income for the 1997 taxation year, $28,401.21
for the 1998 taxation year and $5,678.19 for the 1999 taxation year.
21. . . .
(a) The
facts set out in subparagraphs 20(a) through (j) hereof.
(b) The
unreported income established by the net worth method is significant in
relation to the income reported in each of the taxation years in issue, as
shown below:
|
Taxation year
|
Reported income
|
Additional unreported income
|
|
1997
|
$13,800.26
|
$52,575.07
|
|
1998
|
$12,936.18
|
$28,401.21
|
|
1999
|
$12,814.54
|
$5,678.19
|
(c) The
Appellant did his own daily accounting and made his own bank deposits and he
personally looked after the payment of both his personal and business expenses.
(d) The Appellant's tax returns for the taxation
years in issue were prepared by specialized professionals who were in a
position to inform the Appellant about the exact extent of his obligations
under the Income Tax Act.
(e) The
Appellant signed his own income tax returns.
(f) The
Appellant knew the contents of his income tax returns.
(g) The
Appellant knew about the income that he was not reporting.
[4] At the
beginning of the hearing, the Respondent said that, upon reviewing the
Appellant's file in preparation for trial, she determined that the unreported
income amounts should be reduced; and changes were also made to the personal
expenses.
[5] The corrections
are set out at paragraph 9 of these Reasons for Judgment. The Respondent
sought permission to file an Amended Reply to the Notice of Appeal in order to
explain and justify the changes that reduced the income.
[6] If the
application had been granted, the Respondent would have had to bear the burden
of proof with respect to the changes.
[7] Even though the
acceptance of the amendments to the Reply to the Notice of Appeal would have
shifted the burden of proof with respect to the new elements, the Appellant
emphatically objected to amending the pleading on the ground that he was taken
by surprise and therefore could not assert his rights adequately if an Amended
Reply to the Notice of Appeal were allowed.
[8] It should also be
noted that he did not move for an adjournment, and added that he was ready to
proceed on the basis of the original Reply to the Notice of Appeal.
[9] In view of the
grounds of the objection to the filing of the Amended Reply to the Notice of
Appeal, I ruled in favour of the Appellant and therefore dismissed the
application for leave to file an Amended Reply to the Notice of Appeal.
[10] The Respondent, who
bore the burden of proof with respect to the amended elements, was obviously
not able to make such proof.
[11] Consequently,
the parties proceeded on the basis of the usual rules — specifically, that the burden of proof with
respect to the assessments under appeal was on the Appellant, and the burden of
proof with respect to the penalties was on the Respondent. Although leave to
amend was not granted, I will set out the desired changes because they
constitute an admission favourable to the Appellant.
|
Income stated in assessment
|
Taxation year
|
Revised amounts
|
|
$52,575.07
$28,401.21
$5,678.19
|
1997
1998
1999
|
$46,406.67
$13,552.77
$4,132.96
|
|
Expenses
stated in assessment
|
Taxation
year
|
Revised
amounts
|
|
$30,538,21
$29,998,71
$30,276,76
|
1997
1998
1999
|
$23,182.78
$24,794.63
$24,886.90
|
[12] Only the
Appellant testified in support of his appeal. His testimony is very easy to
summarize. He said that he joined the workforce at a very young age, showing an
immediate interest in several kinds of activities ranging from construction to
auto sales.
[13] The audit of the
Appellant's file was very cursory; some might even say that it was slapdash. Indeed,
the evidence showed that the figures on which the assessments were based were
obtained during a brief interview at the auditors' office in Québec.
[14] The Appellant was
certainly entitled to complete his file at the objection stage and provide all
the facts, information, documents or numbers in support of his objection and
his allegations. Thus, there is no reason to consider at any greater length the
quality of the work giving rise to the assessment, especially since the system under
which we operate is based on self‑assessment. In such a system, it is the
taxpayer's duty to supply all the information needed for a quick and efficient
audit.
[15] The Appellant also
became interested in real estate at a very young age. He and his brother
bought several properties. Generally speaking, they bought buildings that
needed repair work, and then did that work in order to increase the buildings'
value.
[16] The buildings in
question were generally fixer-uppers sold by financial institutions that had
repossessed them. They were repaired or renovated with the proceeds of a loan
that sometimes covered both the purchase and repair costs.
[17] The Appellant
also stated that he lived very modestly and that his expenses were minimal because
he lived with his mother. Although he has a young child, he submitted that he
paid absolutely nothing for his child, who lived with his mother somewhere else.
However, he admitted in his Notice of Appeal that his expenses amounted to
$18,000 per year.
[18] According to the
documentary evidence, which consists primarily of notarized deeds, the
Appellant obtained loans covering either the full purchase price or, in certain
cases, more than the purchase price, thereby enabling the Appellant to make certain
repairs that increased the value of the buildings purchased.
[19] The numerous
transactions did indeed show that the Appellant and his brother were active in
the real estate market. The evidence also showed that the Appellant could
easily borrow large amounts; sometimes, few details regarding the use of the
funds were provided, other than the fact that the loans were generally for
repairs or improvements to the buildings purchased.
[20] One of the
significant assets that the Respondent took into account was a motorcycle. The
Appellant explained the facts surrounding the purchase of the
Harley Davidson motorcycle, which the Minister valued at $20,000 and the
Appellant valued at approximately $5,500.
[21] In support of
his $5,500 valuation, the Appellant offered a letter from his insurance company
(Exhibit A-1), which states:
[TRANSLATION]
LUSSIER
Insurance and Financial Services Inc.
February 4, 2003
Patrick Godon
. . .
FURTHER
TO YOUR REQUEST, THIS IS TO INFORM YOU THAT WE CAN COVER YOU FOR A MAXIMUM
VALUE OF $6,902 FOR YOUR REBUILT 1997 HARLEY DAVIDSON MOTORCYCLE BEARING THE SERIAL NO. 2SAAQ19705140084.
. . .
[22] The Appellant said
that the reason for the low value was that the motorbike was rebuilt from
various spare parts, most of which were used. Thus, according to the Appellant,
the value of the motorbike is essentially the aggregate value of the used
components utilized, or roughly $5,000.
[23] In other words,
the value of the motorbike never exceeded the value of the sum of its parts. In
fact, the Appellant said that he resold the parts for roughly $5,000 after
realizing that the rebuild had not yielded the desired results.
[24] After saying
that he resold the motorbike in question, the Appellant revised that statement
and acknowledged that he still owned the frame, a very important component
because the registration certificate from the Société de
l'assurance automobile is attached to it, which means that he is still the
registered owner of the motorbike, or, rather, a part of it.
[25] Upon applying
for a loan from a credit union, the Appellant himself valued the motorbike at $21,000
(Exhibit I‑1, tab 8, page 3). Thus, it is easy to
understand how the Respondent went about establishing the value of the
motorbike at $20,000.
[26] The Appellant explained
that he did not smoke and that his lifestyle required only a very modest
income. The Appellant provided no detailed evidence regarding the amount
that he needed to cover his personal expenses.
[27] Although he has
a child, he said that he has never contributed to the child's various financial
needs and has never made any support payments to the child's mother.
[28] However, the
evidence discloses that he was clearly concerned for and interested in his
child's needs because he opened a bank account under the child's name. I therefore
did not believe him when he said that he did not help with his child's various
needs.
[29] Indeed, the fact
that the Appellant took the initiative to open bank account under his child's
name attests to his interest and concern for his child's well‑being, a
fact that completely contradicts the assertion that he did not incur any
expenses towards his child's needs.
[30] Such concern and
interest are, after all, entirely incompatible with a total indifference to the
child's day‑to‑day needs. I should note that if this had been the
only questionable or implausible aspect of the Appellant's explanations, I
would perhaps have been more receptive, but the Appellant's testimony showed
that he had no trouble supplying a version of the facts that benefited him, however
questionable, clumsy and implausible it might be.
[31] As for the Appellant's
personal expenses, they were established according to the data which he himself
supplied at the interview at the beginning of the audit, and which were
complemented by data published by Statistics Canada.
[32] In this regard, the
Appellant essentially argued that he did not smoke, and that his expenses were
reduced to a minimum since he paid a third of his lodging expenses and nothing
for his son.
Analysis
[33] There are
several approaches to property valuation. The amount that a purchaser who
is under no obligation to buy would have to pay in order to purchase the
property from an owner who is under no obligation to sell is undoubtedly the
best one. In fact, it is the definition of the actual value of property of any
kind.
[34] Where
motorbikes, cars, boats, ATVs and RVs are concerned, there are also various
guides based on the amounts obtained at many sales, generally at auctions. While
these publications are obviously not always of iron‑clad reliability,
they do provide some guidance. The value of vehicles also depends to a great
extent on their condition and on the degree of wear and tear, so it is essential
to describe the condition of the vehicle in order to determine its true value
using such guides, which mostly provide average values.
[35] Where motorbikes
are concerned, especially ones bearing the famous Harley Davidson brand, there
is another market, namely the market for modified vehicles. It is more
difficult to establish a value in that market because the number of potential
buyers is naturally lower.
[36] In order to ascertain
the actual value of the motorbike in the instant case, the Court must make
a decision based on evidence that is essentially incomplete and oral. Clearly,
the best evidence rule was not of great concern to the Appellant, who, as I
have stated, bore the burden of proof.
[37] The Appellant himself
provided completely contradictory information, namely a letter from an
insurance broker who clearly fixed the insurable value arbitrarily; that value
is very different from the actual value and from the value that the Appellant
himself quoted for the motorbike upon applying for a loan from a credit union.
[38] The burden of
proof that must be met is heavy. It is not enough to express one's disapproval
and assert something different that favours one's position and is unfavourable
to what was determined. The best evidence rule is undoubtedly the ideal way to
meet a burden of proof.
[39] In the case at
bar, the motorbike was a very important asset. Evidence that is more persuasive
than mere assertions was needed to dispute the value that was assigned to that
asset based on a very acceptable premise, namely the Appellant's own valuation upon
applying for credit. Moreover, in cases such as these, there are various ways to
reliably determine the value of an item, notably through specialists who have
the skills necessary to determine value for insurance purposes.
[40] It is difficult
for me to see how an insurer can determine the value of insurable property
without the involvement of a competent appraiser. How could the insurer issue
an opinion of the type reproduced in Exhibit A‑1? One thing that is
absolutely certain is that this is not the best evidence, especially
considering that the person who signed the document did not testify to explain
or justify his valuation.
[41] For all these
reasons, I set the value of the motorbike at $20,000 in accordance with the
valuation which the Appellant himself provided upon making a duly signed
declaration, a valuation that he reconfirmed on a subsequent date when he submitted
a new application for credit to a financial institution.
[42] The Appellant
submitted that his personal expenses were minimal because he lived with his
brother and mother and therefore split what were already modest expenses three
ways. He also said that, during the period covered by the assessments, he was
the father of a young child for whom he paid no support and incurred no
expenses related to custody or care.
[43] Nevertheless, the
Appellant made the following admission at paragraph 7 of his Notice of
Appeal:
[TRANSLATION]
7. The Appellant estimates his personal expenses
at $18,000 per annum during the years in issue.
[44] This appeal is
no exception to what appears to have become a veritable rule that applies to
disputed assessments that were made using the alternative audit method known as
the "net worth method".
[45] Indeed, the
Appellant, having devoted most of his energy to showing various weaknesses or
even certain mistakes in the instant case, would like to be rewarded by having
his assessment vacated outright.
[46] In other words,
those who spoke on the Appellant's behalf, including the Appellant's
representative in the case at bar, seem to take it for granted that proof of a
mistake or of a lack of rigour in handling a file is sufficient to have a net
worth assessment vacated outright.
[47] Our tax system
is based on the principle of self‑assessment. Thus, the tax liability of
any taxpayer is determined based on a reporting of the taxpayer's full income,
less the amounts and expenses that the Act allows to be deducted, such as any
expenses incurred to earn income.
[48] A taxpayer's foremost
responsibility is to determine his income. In order to carry out this
fundamental duty, the taxpayer must be vigilant and organized, and must be able
to file a return that accurately reflects his true income and be in possession
of all relevant evidence, information or documents.
[49] Now, the
calculation of income and allowable expenses necessarily implies the
implementation of an accounting system based on which the taxpayer can compute
the taxable income that he must report. Any other conduct exposes the taxpayer
to the risk of trouble and inconvenience for which he alone is responsible.
[50] During an audit,
which is a foreseeable event for all taxpayers, one must be able to justify and
explain the accuracy of the income that one has reported, and prove that one's
assets and reported income are consistent with each other.
[51] In order to make
such a showing, the phrases "maybe", "I don't recall" and
"roughly" are not recommended. They are definitely not the way to
meet one's burden of proof.
[52] Every taxpayer
has a duty to retain all supporting documents related to his income. If he
fails to meet that duty, he risks encountering serious problems if he wishes to
dispute an assessment, however arbitrary it may be, and such an assessment will
often have been made by means of an alternative method owing to the
impossibility of using the traditional approach.
[53] Indeed, where,
on their face, the numbers available during an audit raise serious doubts as to
their veracity, or where the taxpayer is unable to provide consistent,
plausible explanations supported by appropriate documents, the auditor may
switch to an alternative method such as the net worth method.
[54] If the taxpayer
feels that the selected method has yielded an erroneous or implausible result,
then, at the time that the draft assessment is submitted, at the objection
stage and, lastly, in court, he can prove that all relevant information and
documents required to make possible a review of his file using the traditional
method are available.
[55] In the case at
bar, the Appellant criticizes the Respondent for failing to devote sufficient
effort to the assessment under appeal. I acknowledge that the person
responsible for the file clearly took some shortcuts and came to somewhat hasty
conclusions, which, in fact, were inaccurate, since the numbers on which the
assessment was based were revised downward after certain documents were
examined.
[56] After I
sustained the objection and denied the filing of an Amended Reply to the Notice
of Appeal, the Respondent essentially asserted that the unreported income was
lower than the amounts set out in the assessment. Given the impact on the
assessment, the reductions should be considered an admission favourable to the
Appellant.
[57] This admission
is obviously not sufficient for me to conclude that the Appellant has met his
burden of proof. At paragraph 7 of his Notice of Appeal, the Appellant admitted
that he had personal expenses of $18,000, adding that this was a completely
arbitrary estimate that was not thoroughly analysed item by item.
Moreover, I do not believe the Appellant when he says that he did not
contribute toward the expenses associated with the care of his child.
[58] Therefore, I
consider the personal expense amount determined by the Minister to be
reasonable.
[59] The discrepancy
between the assessed income and the reported income is considerable. And the
discrepancy between the reported income and the admission concerning personal
expenses is also very large — so large, in
fact, that this element alone warrants the imposition of penalties.
[60] The Appellant had
several sources of income. He needed to have a minimum level of organization
and discipline to compute his income correctly. Clearly, his income tax return
was not of great concern to him.
[61] Just as a
picture is worth a thousand words, a comparison of reported income with
admitted personal expenses has attested eloquently, and, without a doubt,
convincingly, to the fact that the allegations made by the Appellant, who
claims to have reported all his income, are mathematically impossible.
[62] To explain the
discrepancies, the Appellant said that the difference between his income and
his personal expenses resulted from the numerous loans that the evidence shows
were made.
[63] The Appellant is
articulate, very intelligent, and entirely capable of understanding the
requirements of the Income Tax Act with respect to his income and
expenses.
[64] Did the
Appellant not acknowledge spending roughly $18,000 while earning an income of
roughly $13,000, for a difference of $5,000, a considerable amount in view of
the income and expenses?
[65] A person equipped
with basic common sense would understand that this is implausible. And the
Appellant is, and was, a person who would know that. He signed his returns
despite this obvious fact.
[66] The burden of
proof concerning the assessments was on the Appellant. Has the Appellant
discharged that burden of proof? His main argument was that the value
attributed to one of his assets, the motorbike, was totally inaccurate and
considerably exaggerated.
[67] In support of
his submissions, he adduced deficient evidence that was of no probative
value, especially because it totally contradicted his own valuation, which he provided
upon applying to a credit union for a loan.
[68] The Respondent
herself reduced the Appellant's unreported income and expenses, thereby
reducing the assessment in the Appellant's favour. I give effect to these admissions
and order that the file be reassessed on the basis that, for the purposes of
such reassessment, the unreported income for the years 1997, 1998 and 1999, and
the personal expenses for these same years, are as stated at paragraph 9.
[69] As for the
penalties, I confirm that they are warranted; however, they must also be
revised in accordance with the reassessments.
[70] For all these
reasons, I allow the appeal because the admissions reduce the assessment under
appeal; therefore, the matter is referred back to the Minister for
reconsideration and reassessment on the basis that the personal expenses and
unreported income are as stated at paragraph 9. There shall be no order
regarding costs.
Signed at Ottawa, Canada, this 18th day of
July 2007.
"Alain Tardif"
Translation
certified true
on this 20th
day of February 2008.
François
Brunet, Revisor
Email this Content