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Citation: 2007TCC86
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Date: 20070518
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Docket: 2006-697(GST)G
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BETWEEN:
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RENÉ PATOINE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
from a reassessment of goods and services tax ("GST") bearing number
02307594 and dated December 1, 2005, in an amount of $16,139.89, made under the Excise Tax
Act (the "Act"), concerning the period from January 1, 1998, to December 31, 2003. The reassessment imposes
$10,086.21 in tax, $4,909.05 in penalties and $1,144.63 in interest.
[2] Essentially, at
issue is whether the reassessment dated December 1, 2005, is warranted
under sections 165, 168, 225,
228 and 285 and subsections 221(1), 280(1), 298(4) and 299(4) of the Act.
[3] The Appellant asks
that the tax, penalties and interest be cancelled. In addition, he submits that
the reassessment dated December 1, 2005, concerns the years 1998 and 1999 and
part of 2000 and must be cancelled because it is time-barred.
[4] The assessment currently
under appeal was made by the Minister of National Revenue (the
"Minister") on the basis of the following assumptions of fact:
(a) The
facts admitted above;
(b) The
Appellant is a registrant for the purposes of the GST;
(c) As a registrant, the
Appellant is also an agent of the Minister with the obligation of collecting
and remitting the GST applicable to the taxable supplies he makes;
(d) The Appellant is operating
a business;
(e) In 1992, the
Appellant registered for the GST for the purposes of his agricultural
activities;
(f) The Appellant has
also been a practicing accountant since 1965;
(g) From January 1, 1998, to December 31, 2003 (the period in issue), the
Appellant's professional activities consisted of keeping books, preparing
financial statements, preparing income tax returns and providing other
accounting services;
(h) The Appellant was
also a lecturer, inter alia at the CEGEP level, in accounting and bookkeeping;
(i) He was also a
representative of Sigma informatique Inc., a company for which he gave training
on Sigma Finance software;
(j) During the
period in issue, the Appellant operated a transportation company under the name
of Transport mon rêve à moi: this business ceased operations in March
2003;
(k) The Appellant
also sold dog, horse and sleigh harnesses for which he did not collect any GST;
(l) The Appellant
did his own bookkeeping and prepared his own tax statements;
(m) He did not use the
services of an external auditor and did not put in place an internal control system;
(n) The Appellant's bookkeeping
shows many shortcomings in spite of his experience in accounting;
(o) For example, his business
expenses include his own personal expenses and undocumented expenses;
(p) On April 3, 1998, and on September 18, 1998, the Appellant made an
application to cancel the registrations with regard to the two enterprises he
operated, even though his tax returns for the four calendar quarters preceding
the quarter in question showed taxable supplies of $34,269;
(q) In addition,
during the period subsequent to April 18, 1998, the Appellant still had annual income greater than
$30,000;
(r) The Appellant did
not always invoice every client for whom he prepared income tax returns;
(s) An examination of
the Appellant's invoice books shows that from 1999 to 2002, he only invoiced
341 of his 2,170 clients, that is, 14.7% of his clientele for whom he prepared
electronic income tax returns;
(t) The Appellant
received income from commissions and training income for which the Sigma
company paid him the applicable GST, which the Appellant did not remit to the
Minister;
(u) On the one hand, the
Appellant was reimbursed for his travel expenses by Sigma Inc. and, on the
other hand, claimed them as business expenses for tax purposes, in addition to
claiming the related inputs for tax purposes;
(v) To
support the expenses for which he claimed the inputs, the Appellant submitted
irrelevant invoices, invoices that had even been amended after having been
submitted twice to representatives of the Minister, and invoices for personal
expenses that were not incurred in relation to the Appellant's commercial
activities, for expenses for which no invoice was available and for which various
reasons were given at one time or another to explain the lack of any invoice, and
for expenses claimed twice;
(w) Among
the personal expenses that were refused, we find the following:
·
Repair and maintenance
of a television, electrical appliances and electrical tools;
·
Purchase of cookware;
·
Purchase of dishwashing
soap, laundry detergent and fabric softener;
·
Repair of a lawn mower
and a chain saw and purchase of chain oil;
·
Purchase of a sink mat
and a chimney sweep brush;
·
Purchase of lawn and garden
accessories and maintenance equipment;
·
Expenses for swimming
pool maintenance;
·
Expenses for snow
removal at his cottage;
·
Invoices for groceries
purchased at Costco;
·
Purchase of bird seed
and feed for dogs, cats and small domestic animals;
·
Purchase of clothing
for himself and family members;
·
Registration fees for
his spouse's automobile;
·
His membership fees at
Costco and the Association québécoise de gérontologie;
·
Expenses for which no
tax input credit is allowed, including a subcontract awarded to his wife and
life insurance premiums;
(x) The Appellant
does not keep any logbook for the automobiles he uses for his business
activities;
(y) He also claims
input tax credits for the maintenance and repair of automobiles belonging to
his spouse and children;
(z) He even claimed inputs
for purchases of unleaded gasoline, whereas the automobile used for business
purposes runs on diesel;
(aa) The Appellant also
claimed inputs for expenses incurred by the enterprise belonging to his spouse,
who was unable to claim them because of her small supplier status;
(bb) This is not the
Appellant's first audit under the Act;
(cc) He once again
claimed inputs for expenses which had been refused in the past because of their
personal nature;
(dd) The
above-mentioned facts which show the Appellant's carelessness in respect of his
obligations as a registrant, his training in the field of accounting, his
professional activities in the field of accounting, the fact that this is not
his first audit of this sort, and the large amounts at stake lead to the conclusion
that the Appellant made a false statement or an omission in a return when he applied
to cancel his registration;
(ee) The Appellant also
made a false statement or an omission in his return forms by not reporting all
the taxable supplies he made;
[5] Several facts
stated in the Notice of Appeal and the Reply to Notice of Appeal were admitted.
Facts stated in
Notice of Appeal admitted by respondent
[translation]
1. The Appellant is
appealing from notice of reassessment number 02307594, dated December 1, 2005, for
the period from January 1,
1998, to December 31, 2003.
2. On November 12, 2004, Revenu Québec sent the Appellant a notice of
reassessment for the period from January 1, 1998 to December 31, 2003.
3. Following
this notice of reassessment, Revenu Québec claimed unpaid tax from the
Appellant under the Excise Tax Act as well as penalties and interest
under this Act for a total amount of twenty-one thousand nine hundred and
forty-six dollars and fifteen cents ($21,946.15).
4. On or about
January 27, 2005, the Appellant filed a notice of objection challenging this
notice of reassessment dated November 12, 2004.
5. Following the
submissions made by the Appellant in support of his objection, Revenu Québec
issued a reassessment dated December 1, 2005, to claim unpaid tax from the
Appellant under the Excise Tax Act as well as penalties and interest
under that Act for a total amount of sixteen thousand one hundred and
thirty-nine dollars and eighty-nine cents ($16,139.89).
Facts
. . .
9. These businesses
were registered for GST purposes under numbers 11936 6847 RT0001 and
130898521RT respectively.
. . .
14. The notice of
reassessment dated November
12, 2004, was issued following
an audit by a representative of Revenu Québec.
. . .
Facts stated in
Reply to Notice of Appeal admitted by appellant
[translation]
9.- Following an
audit of the Appellant, the Minister reassessed the Appellant's GST for the
period from January 1, 1998, to December 31, 2003, in an amount of $13,301.24 in tax plus $6,871.95 in penalties
and $1,862.96 in interest, as of November 12, 2004. The notice of assessment
dated November 12, 2004, bears number 2307202;
10.- On January 31,
2005, the Appellant filed a notice of objection to the Minister's assessment;
11.- Following the
Appellant's submissions in support of his objection, in rendering a decision on
the objection by means of a notice of reassessment, the Minister made a
reassessment for an amount of $10,086.21 in tax, $4,909.05 in penalties and
$1,144.63 in interest. The notice of reassessment dated December 1, 2005, bears number 2307594;
12.- The Minister assessed
the Appellant on the basis of the following assumptions of fact and conclusions:
. . .
(b) The Appellant is
a registrant for the purposes of the GST;
(c) As a registrant, the
Appellant is also an agent of the Minister under a duty of collecting and
remitting the GST applicable to the taxable supplies he makes;
(d) The Appellant is operating
a business;
(e) In 1992, the
Appellant registered for the GST for the purposes of his agricultural
activities;
(f) The Appellant has
also been a practicing accountant since 1965;
(g) From January 1,
1998, to December 31, 2003 (the period in issue), the Appellant's
professional activities consisted of keeping books, drafting financial
statements, preparing income tax returns and providing other accounting
services;
(h) The Appellant was
also a lecturer, inter alia at the CEGEP level, in accounting and
bookkeeping;
(i) He was also a
representative of Sigma informatique Inc., a company for which he gave training
on Sigma Finance software;
(j) During the
period in issue, the Appellant operated a transportation company under the name
of Transport mon rêve à moi: this enterprise ceased operations in March
2003;
. . .
(l) The Appellant
did his own bookkeeping and prepared his own tax reports;
(m) He did not use the
services of an external auditor and did not put in place an internal control system;
(n) The Appellant's
bookkeeping shows many shortcomings in spite of his experience in accounting;
(o) For example, his business
expenses include his own personal expenses and undocumented expenses;
(p) On April 3, 1998,
and on September 18, 1998, the Appellant made an application to
cancel the registrations with regard to the two enterprises he operated, even though
his tax returns for the four calendar quarters preceding the quarter in
question showed taxable supplies of $34,269;
(q) In addition,
during the period subsequent to April 18, 1998, the Appellant still had annual income
greater than $30,000;
(r) The Appellant did
not always invoice every client for whom he prepared income tax returns;
. . .
(t) The Appellant
received income from commissions and training income for which the Sigma
company paid him the applicable GST, which the Appellant did not remit to the
Minister;
. . .
(x) The Appellant
does not maintain any logbook for the automobiles he uses for his business
activities;
[6] In support of his submissions,
the Appellant called two persons to testify. These two persons, who operated a
service station with a convenience store in the small community where he
resided, essentially stated that the Appellant purchased only gasoline and
diesel fuel and never bought any other product sold at their convenience store,
such as food or beer.
[7] France Morasse, who
worked at that time at the credit union where the Appellant did business,
explained the Appellant's usual way of depositing cheques. His way of doing
things was so unusual that she asked the Appellant why he did it. The answer
she received was the one submitted by the Appellant.
[8] Instead of simply
depositing certain cheques, he cashed them in and then immediately deposited
the cash.
[9] According to the
Appellant, this generally involved small amounts which he cashed in this way
because he believed there were fewer chances that the cheques would be refused
because of "not sufficient funds".
[10] On another point, the
Appellant's son testified that the two amounts, one of $300 and another of $400,
were from him and his brothers and sisters to pay back the Appellant for the
purchase of tickets for a show, with an additional amount of $40 to cover the
Appellant's fuel costs for a more than three-hour trip. In spite of the dubious
explanations, which did not convince me, the Minister's representative accepted
this explanation as being adequate; therefore, there is no use in dwelling on
this point.
[11] Martin Bérard testified
as an expert witness. His expert witness status was accepted by the respondent.
Mr. Bérard had prepared numerous documents, divided into two categories.
[12] First, he explained
the work regarding income. He enclosed copies of the supporting documentation
which had led him to make some corrections. However, the expert unequivocally
admitted that the reassessment was in part well founded with respect to both
income and expenses.
[13] Following the
testimony given by this expert and discussions with the auditor in charge of
the case, the parties agreed to make some changes in favour of the Appellant,
which had the effect of closing the gap between the two positions as regards
income. The respondent's admissions concerned the following amounts.
The table is on the
following page.
DETAILS
OF CHANGES MADE TO INCOME
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Income determined by RQ before notice
of appeal
Reduction of taxable supplies 2006‑10-26
Supporting document (salary deposit)
Supporting document (income from an account
transfer)
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2003
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2002
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2001
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2000
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1999
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1998
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$49,392.99
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$42,597.73
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$41,721.76
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$32,680.55
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$41,504.64
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$37,968.87
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$284.83
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$250.00
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$500.00
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Reduction of taxable supplies 2007‑01‑31
Supporting
document (release of debt by Daniel Brisson)
Supporting
document (spouse's income deposited in his account)
Supporting
document (income from an account transfer)
Supporting
document (income from an account transfer)
Confirmation
by Patrick Patoine
of 2
deposits used to reimburse tickets for a show
Supporting
document (insurance deposits)
Supporting
document (insurance deposits)
Supporting
document (reimbursement of tuition paid by Mr. Patoine and reimbursed by Jean
Patoine)
Final
income determined by RQ
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$700.00
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$700.00
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$1,077.76
$800.00
$300.00
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$1,900.00
$1,353.28
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$700.00
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__
$3,162.59
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$2,000.00
_______
$5,253.28
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$250.00
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0.00
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$500.00
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$48,692.99
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$39,435.14
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$36,468.48
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$32,430.55
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$41,504.64
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$37,468.87
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[14] As regards the
second category, expenses, the auditor explained that he redid the analysis
using the available documents. From this analysis, he drew his own conclusions
as to whether or not certain expenses were allowable.
[15] He admitted having
reached certain conclusions on the basis of verbal explanations given by the
Appellant. He also admitted having accepted as being sufficient certain
handwritten notes on certain invoices. Clearly, he did not examine the content
of some of the documents in detail.
[16] Whenever he
concluded that some expenses had to be refused, Mr. Bérard noted the reason under
the heading "comments".
[17] There are numerous
comments or observations under this heading, some of which appear repeatedly:
[translation]
·
expenses
reimbursed by Sigma;
·
amounts
sometimes mentioned twice;
·
several
invoices in the spouse's name;
·
two
invoices in the spouse's name;
·
one
invoice without tax not allowable because the automobile was in the spouse's
name;
·
invoice
for lawnmower repair;
·
amount
refused because gasoline expenses are included in the income tax return of Cécile
Patoine;
·
sometimes
there was only one invoice for a transaction—impossible to determine whether it
is for gasoline or diesel;
·
invoices
made out to Garage P.E. Grimard;
·
handwritten
document;
·
amounts
reimbursed in full by Sigma;
·
insurance
costs are not allowable;
·
expenses
allowable for only 50%;
·
refused
because no payment made to spouse;
·
no
invoice supplied;
·
already
included in household maintenance;
·
included
in office supplies;
·
three
invoices without tax;
·
not
allowable because the automobile is in the spouse's name;
·
invoice
already entered;
·
not
allowable because invoice in name of Les Éditions Lemay CIL enr.
[18] These comments and
observations say a great deal about not only the poor quality of certain
documents and accounting records in the claimant's tax file, but also the
Appellant's negligence and carelessness with respect to his obligations.
[19] Finally, the
Appellant testified. He gave surprising, even shocking explanations for someone
who has several graduate degrees, but especially for someone who gives accounting
courses, and not to illiterate persons but to Secondary V and CEGEP-level
students. I consider it important to note certain admissions:
[translation]
(d) The Appellant is operating
a business; (admitted)
. . .
(f) The Appellant has
also been a practicing accountant since 1965; (admitted)
. . .
(h) The Appellant was
also a lecturer, inter alia at the CEGEP level, in accounting and
bookkeeping; (admitted)
(i) He was also a
representative of Sigma informatique Inc., a company for which he gave training
on Sigma Finance software; (admitted)
. . .
(o) For example, his business
expenses include his own personal expenses and undocumented expenses; (admitted)
. . .
(q) In addition,
during the period subsequent to April 18, 1998, the Appellant still had annual income greater than
$30,000; (admitted)
(r) The Appellant did
not always invoice every client for whom he prepared income tax returns; (admitted)
[20] He never kept a
logbook for the use of the three automobiles, which would have allowed him to
distinguish the use of these vehicles for business activities from personal use.
He arbitrarily determined the percentage of use for personal purposes, for business
purposes and for use by his spouse. According to him, the authorities should be
satisfied with his explanations and that is all.
[21] He stated that he prepared
several hundred federal and provincial income tax returns for fees of $5, $10
or $15, claiming that some community groups such as C.L.S.C.s did the same thing.
[22] Not only did he claim
insignificant fees for his work, but he also testified to that he had to adopt
a special habit, since small cheques were the ones most often refused because
of "not sufficient funds".
[23] It would have been far
more relevant to have persons testify to the Appellant's great generosity, as I
do not believe that he generally completed income tax returns for $5 or $10,
especially since, according to his testimony, these small cheques were the ones
which gave him problems.
[24] He stated that he
had put in place three distinct computerized accounting systems while admitting
having used some expenses more than once. In other words, the same expense was
attributed to different business activities. He also admitted having claimed
input tax credits (ITCs) for expenses related to a business operated by his
spouse, who could not claim them because she was not registered.
[25] The Appellant also
admitted having claimed ITCs for personal expenses.
[26] The personal
expenses in question were listed at paragraph 12(w) of the Reply to Notice of
Appeal and described as follows:
[translation]
(w)
Among the personal expenses that were refused, we find the following:
·
Repair and maintenance
of a television, electrical appliances and electrical tools;
·
Purchase of cookware;
·
Purchase of dishwashing
soap, laundry detergent and fabric softener;
·
Repair of a lawn mower
and a chain saw and purchase of chain oil;
·
Purchase of a sink mat
and a chimney sweep brush;
·
Purchase of lawn and
garden accessories and maintenance equipment;
·
Expenses for swimming
pool maintenance;
·
Expenses for snow
removal at his cottage;
·
Invoices for groceries
purchased at Costco;
·
Purchase of bird seed
and feed for dogs, cats and small domestic animals;
·
Purchase of clothing
for himself and family members;
·
Registration fees for
his spouse's automobile;
·
His membership fees at
Costco and the Association québécoise de gérontologie;
·
Expenses for which no
tax input credit is allowed, including a subcontract awarded to his wife and
life insurance premiums;
[27] To explain why he
made claims for what were essentially personal expenses, the Appellant stated
that, during a previous audit, the Minister had accepted 20% of the expenses
for flowers, the swimming pool and so on, which appears to me to be a very
surprising and even audacious interpretation. Given that the Appellant had been
audited in the past, it is quite simply surprising that he did not mend his
ways with regard to the quality of his records and essential supporting
documentation so as to his meet his tax obligations, which are clearly
specified in the Act.
[28] He also claimed feed
expenses for small animals because he had a guard dog, which was just as valid
as having an alarm system, an expense which would have been partially allowable.
However, the evidence did not show whether the cats also helped to guard the
premises, perhaps chasing mice.
[29] Finally, he tried to
give all kinds of explanations, which were somewhat relevant in some cases and totally
inadequate in others, particularly for the groceries bills at Costco, which he stated
were for goods related to his office and automobiles.
[30] It is surprising that
a person with such training and experience would give explanations like these,
especially since he had been audited several times in the past.
[31] Did the Appellant
not apply for the cancellation of his GST registration even though his income
was greater than the $30,000 limit established under the Act? Once again, in
spite of the obviously false and misleading statements, he claimed that the
errors were due to misinformation.
[32] There are two
possible causes of misinformation: the first is the incompetence of the person
giving the information, and the second is the incompetence, the poorly worded
question or simply the bad faith of the person seeking the information.
[33] Once again, there is
more than enough evidence to find that the appellant completely disregarded his
duty to comply with the provisions of the Act, which required that his accounting
be consistent and in compliance with standards of good accounting practice.
[34] His spouse operated
a business selling harnesses, saddles and other similar items. These items were
acquired at auctions, repaired and resold. The Appellant argued that this was
only a hobby that generated just a few thousand dollars in income a year.
According to him, the small size of the business warranted a lack of an
accounting of the purchase and selling prices. His spouse reported the income
from her small business.
[35] As an accounting
specialist, how could the Appellant justify such aberrations on one hand and
then, on the other hand, claim the ITCs if his spouse was not registered? The
documented and proper calculation of the purchase price of goods acquired for
business purposes is not a whim left to the good intentions of persons
operating a business; it is a duty that makes it possible to have a reliable
and, above all, credible accounting.
[36] Although there was
no accounting, he admitted having claimed ITCs for this business activity carried
out by his spouse. His logic is quite surprising for someone who teaches
accounting at the college level.
[37] I find that the
evidence given by the Appellant is not credible at all. He retained the services
of a chartered accountant, Martin Bérard, who from the outset acknowledged the correctness
of a very large number of items on which the assessment was based.
[38] The explanations,
observations or comments made in support of the submission that certain
expenses should have been allowed are insufficient. It is not enough to find someone
with professional training in accounting who is ready to endorse certain facts
and actions to submit that the auditors' findings were unfounded, inappropriate
or unacceptable.
[39] Indeed, Mr. Bérard
was admitted and acknowledged to be an expert. However, his testimony showed
that he was ready to accept the unacceptable. I refer in particular to certain
invoices which were not in compliance with accepted practice and to his quick
acceptance of verbal explanations given by his client, the Appellant, particularly
about the use of automobiles. He did not even know how the automobile that ran
on diesel, a motor home, was used.
[40] I attach no value or
credibility to the evidence adduced by the Appellant.
[41] I am of the opinion,
especially considering that he had been audited in the past, that the Appellant
deliberately chose confusion and disorder over clarity and consistency, in
spite of his numerous business activities, believing that this would serve him
well for tax purposes.
[42] If such is the case,
this was a very bad decision and an unacceptable explanation, given the
Appellant's training and experience. It is totally incomprehensible and
unacceptable that a person as skilled as the Appellant would make do with a
such an incomplete and, above all, weak system or method, which is neither
credible nor reliable.
[43] True, the Appellant
and his spouse were engaged in a number of business activities. However, these
were activities which were relatively simple to manage and to structure in an
accessible and coherent manner. It was also just as easy to obtain proper
supporting documentation which was neither confusing nor equivocal.
[44] I satisfied that the
Appellant believed that he could cheat the system by setting up an imprecise
system. The large number of errors noted, several of which were quite flagrant,
excludes any possibility of his having acted in good faith.
[45] The Appellant had
the intelligence, talent and knowledge to be able to submit a file that could
have been a veritable model of compliance. Instead, he chose to confuse matters,
obtain incomplete supporting documentation and grossly exaggerate certain
claims. The obvious lack of good faith, the equally obvious bad faith shown by
certain facts and acts, the rampant abuse evident in the use of certain
supporting documents and the reckless audacity with regard to the handling of
some information amply warrant the imposition of penalties under the Act.
[46] As regards the
arguments concerning prescription, they entirely unfounded, because the record
shows the Appellant's gross negligence and utter carelessness to such an extent
that I have absolutely no hesitation whatsoever in concluding that the
Appellant wilfully and deliberately chose to act in a manner obviously designed
to mislead the tax authorities and allow him to evade his obligations.
[47] Considering that the
respondent admitted that some of the Appellant's arguments were well founded, I
must allow the appeal in respect of these admissions. Accordingly, the record
is referred back to the Minister for reconsideration and reassessment taking
into consideration the admissions in paragraph 13 of these Reasons for Judgment,
which specify the very minor changes to be made to the assessment under appeal.
[48] The penalties are
very much warranted, and I confirm that they are well founded. Costs are
awarded to the respondent.
Signed at Ottawa, Canada, this
18th day of May 2007.
Tardif J.
Translation
certified true
on this 19th day of
February 2008.
François Brunet,
Revisor
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