Citation: 2007TCC246
Date: 20070612
Docket: 2006-2383(IT)I
BETWEEN:
EZIO CAROSIELLI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1] This is an appeal
by way of the informal procedure from a reassessment for the appellant’s 2000 taxation
year by which the Minister of National Revenue (the "Minister")
included $9,334 in the appellant’s income as unreported business income. Penalties
under subsection 163(2) of the Income Tax Act (the "Act")
were assessed on this amount.
[2] The appellant
disputes all of these items and argues as well that the year under appeal was
statute-barred.
[3] The reassessment
was made after an audit of the partnership known as Les Immeubles
Carosielli SENC ("IMCA"), in which the appellant and his three brothers
were partners, each having a 25% interest in the partnership. The Minister
found a discrepancy of $56,006 between the amounts deposited in IMCA’s accounts
and the amounts declared, or accounted for, by IMCA for the year 2000.
[4] IMCA owned commercial
and residential properties, including those located at 9030, 9040, 9050 and
9056 Maurice Duplessis in Montreal.
[5] The tenants of 9040
Maurice Duplessis included a daycare centre operated by Les Productions
Merveilles Inc., and the tenants of 9056 Maurice Duplessis included another
daycare centre, operated by 2439-9503 Québec Inc. carrying on business under
the name of Garderie Merveilles du Royaume Inc. The sole shareholder of the two
corporations operating the daycare centres was Luisa Sassano, the spouse
of the appellant. Luisa Sassano still owns and operates the said daycare centres
although their names have undergone some changes.
[6] During the 2000
taxation year but before September 1, 2000, the appellant and Luisa Sassano
formed a general partnership known as Les Immeubles Omnicentre RDP, SEC
("Omnicentre"), each having a 50% interest.
[7] On September 1,
2000, Omnicentre acquired from IMCA the properties situated at 9030, 9040, 9050
and 9056 Maurice Duplessis. The daycare centres remained as tenants at 9040 and
9056 Maurice Duplessis. Following the acquisition of the properties by Omnicentre,
the appellant ceased to be a partner in IMCA.
[8] Under a commercial
lease dated August 10, 1998, entered into between IMCA and 2439-9503 Québec
Inc., the lessee was entitled to 10 months’ free rent, the months in question to
be chosen jointly by the parties. When the properties were sold by IMCA to Omnicentre
on September 1, 2000, no free rent had been granted by IMCA.
[9] In a document titled
Confirmation of Agreement dated September 1, 2004, IMCA agreed as a
condition of the purchase of the properties by Omnicentre that the rent paid by
the two daycare centres from April 1, 2000, to September 30, 2000, amounting
to $54,677.40 ($9,112.90 per month for 6 months), would be reimbursed or
credited. The Confirmation of Agreement clearly states that this rent was in
fact credited to Garderie Royaume des Merveilles Inc. and that Garderie Royaume
des Merveilles Inc. did not include the amount thereof as an expense for the taxation
year ended March 31, 2001, and that IMCA did not include the said amount as income
for 2000.
[10] The audit conducted
by the Canada Customs and Revenue Agency (the “Agency”) revealed that IMCA
deposited the rental revenues received from the daycare centres for the months
of April to September 2000 in its bank account, the amount per month being
$5,199.71 for 9040 Maurice Duplessis and $3,913.19 for 9056 Maurice
Duplessis for a total of $54,677 for six months. The appellant’s share of such unreported
revenues of IMCA was determined to be $9,334.
[11] The appellant
explained that IMCA did not have the necessary funds to reimburse the daycare
centres for rent in 2000 and that IMCA treated the amount payable as a $50,000
non-interest bearing loan from Garderie
Royaume des Merveilles Inc., as shown in note 5 of the unaudited financial
statements of IMCA for its fiscal year ending on December 31, 2000.
[12] Despite the appellant’s statement that the loan from
the daycare centres has been repaid in full, IMCA did not provide any evidence of
repayment of the amount of $54,677 with respect to the rent paid by the daycare
centres, nor did it provide evidence showing that this amount was credited in
some other way.
[13] The two daycare centres owned and operated by Luisa
Sassano were regulated and subsidized by the Quebec government and were
required to file audited financial statements for each of their fiscal years, which
ended on March 31 of each year. As mentioned in paragraph 9 above, the daycare
centres did not claim as an expense the rent amounting to $54,677.40 paid to IMCA.
The financial and fiscal consequences of such an understatement of expenses by
the daycare centres were not disclosed nor discussed.
[14] The appellant argues that the tax treatment of the rent
paid by the daycare centres was neutral because there was no inclusion in
income for IMCA and no deduction of an expense for the daycare centres. For
this reason, the appellant considers that he did not make any misrepresentation
in computing his income and that he should not be subject to the gross
negligence penalties.
[15] Unfortunately, I do not agree with the appellant. Mr.
Carosielli is a lawyer who was the manager of IMCA from 1985 to 2000. As such,
he knew the importance of keeping proper books and records for IMCA, which was
not done for the 2000 taxation year. The auditor of the Agency testified that
the revenues derived from the rents for each property could not be clearly
identified as they could for the 2001 and 2002 taxation years.
[16] The appellant is a well-informed taxpayer who knew the
importance of declaring all his revenues and who was knowledgeable about the
fiscal implications of reporting them.
[17] The appellant bears the burden of demonstrating on the
balance of probabilities that the Minister was not justified in adding $9,334 to
his income for the 2000 taxation year in accordance with section 9 of the Act.
The appellant must present sufficient evidence to demonstrate that the amounts deposited
in IMCA’s bank account are not income subject to tax.
[18] The absence of such evidence has convinced me that the
evidence presented is clearly insufficient to allow me to conclude that the appellant
has met his burden of proof. The appellant’s decision not to include the rent
paid by the daycare centres and not to deduct it as a business expense in the
computation of IMCA’s income may make sense from a business or financial point
of view, but does not constitute strict compliance with the requirements of the
Act.
Penalties
[19] The Minister assessed penalties under subsection 163(2)
of the Act and he submits that, by failing to report the additional
income in the amount of $9,334 for his 2000 taxation year, the appellant knowingly
or under circumstances amounting to gross negligence made a false statement or
omission or participated in, assented to or acquiesced in the making thereof.
[20] In Venne v. The Queen, 84 DTC 6247 at page 6256,
Strayer J. analyzes gross negligence in the following terms:
. . . “Gross negligence" must be taken to
involve greater neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional acting, an
indifference as to whether the law is complied with or not . . ..
And in Morin v. M.N.R., 88
DTC 1596, at page 1597, Chief Judge Couture of this Court stated:
To escape the penalties provided in
subsection 163(2) of the Act, it is necessary, in my opinion, that the
taxpayer’s attitude and general behaviour be such that no doubt can seriously
be entertained as to his good faith and credibility throughout the entire
period covered by the assessment . . ..
[21] I have concluded that the explanations put forward by the appellant
for not reporting his share of the rent paid by the daycare centres are
unlikely. This entire affair demonstrates a certain attitude of indifference
towards fiscal obligations on the part of the parties involved.
[22] The Confirmation of Agreement was executed by the parties
four years after the sale of the properties by IMCA to Omnicentre, and after the
beginning of the tax audit by the Agency.
[23] In the case at bar, I am convinced that, on the balance of
probabilities, the Minister was justified in assessing penalties for the year
in question.
Prescribed year
[24] As with the penalties, the Minister bears the burden of
proving the justification of the assessment for the prescribed year. The Minister
must convince the Court on the balance of probabilities that the appellant made
a misrepresentation attributable to neglect, carelessness or wilful default or
committed fraud in filing his return or in supplying information, as set forth
in subparagraph 152(4)(a)(i) of the Act.
[25] In another excerpt from Venne, supra,
Strayer J. describes this burden of proof as follows, at page 6251:
I am satisfied that it is sufficient for the
Minister, in order to invoke the power under sub-paragraph 152(4)(a)(i)
of the Act to show that, with respect to any one or more aspects of his income
tax return for a given year, a taxpayer has been negligent. Such negligence is
established if it is shown that the taxpayer has not exercised reasonable care.
This is surely what the word "misrepresentation that is attributable to
neglect" must mean, particularly when combined with other grounds such as
"carelessness" or "wilful default" which refer to a higher
degree of negligence or to intentional misconduct. Unless these words are
superfluous in the section, which I am not able to assume, the term
"neglect" involves a lesser standard of deficiency akin to that used
in other fields of law such as the law of tort.
[26] I have already dealt with the evidence and the appellant’s
conduct. As I have concluded that his explanations were unlikely, I
therefore find that there was misrepresentation of the facts regarding the appellant’s
income during the prescribed year, thus justifying the assessment made for his 2000
taxation year.
[27] For these reasons, the appeal is dismissed.
Signed at Montreal, Quebec, this 12th day of June 2007.
"R. Favreau"
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