Citation: 2008TCC132
Date: 20080314
Docket:
2005-2621(IT)I
BETWEEN:
126632 CANADA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[OFFICIAL
ENGLISH TRANSLATION]
Tardif J.
[1] This is an
appeal regarding the 1995-1996 and 1998 taxation years. As for the 1997
taxation year, it is not subject to the appeal because there was no assessment
for that year. As a result, the Court does not have jurisdiction regarding the
1997 taxation year.
[2] The issues are:
(a) to
determine whether the Appellant's Amended Notice of Appeal against a new
notice, dated May 15, 2002, that no income tax was payable for the 1997
taxation year, is allowable;
(b) to
determine, if relevant, whether the amount of $9,429 was correctly added to the
calculation of the Appellant's income for the 1997 taxation year, as additional
income;
(c) to
determine whether the amounts of $5,547, $7,591 and $13,245 were correctly
added to the calculation of the Appellant's income for the 1995, 1996 and 1998
taxation years, respectively, as additional income.
[3] The Respondent
established the assessment under appeal based on the following presumptions:
[translation]
(a) the company "126632
Canada Ltd.", under the trade name "Le Café Fine Gueule"
operated a small restaurant and provided catering services during the period in
question;
(b) the
fiscal year of the company "126632 Canada Ltd." ended on
February 28 of each taxation year;
(c) the
ordinary shares of the company "126632 Canada Ltd.", during the
period in question, were held entirely by Nicole Blanchette;
(d) at
the company "126632 Canada Ltd.", Nicole Blanchette held the positions
of administrator, president and employee during the period in question;
(e) following the "Memorandum on
Objection" prepared by Revenue Quebec, the Minister approved the agreement
signed January 7, 2003, by Nicole Blanchette, representative of the company
"126632 Canada Ltd." and Rémi Boulay from Revenue Quebec, regarding
the 1995, 1996, 1997 and 1998 taxation years;
(f) following the agreement signed January 7,
2003, by Nicole Blanchette, representative of the company "126632 Canada
Ltd." and Rémi Boulay of Revenue Québec, the Minister adjusted the income
tax return of the company "126632 Canada Ltd." as follows:
|
|
1995
|
1996
|
1997
|
1998
|
|
(i)
additional income
|
$5,547
|
$7,591
|
$9,429
|
$13,245
|
(g) the
adjustments for the 1995, 1996 and 1997 taxation years were made possible
because the T2029 form, "Waiver in Respect of the Normal Reassessment
Period", was filed within the prescribed time for each of the years in
question, all signed by Nicole Blanchette on February 18, 2000, on behalf
of the company
"126632 Canada Ltd.";
(h) a
T2029 form, "Waiver in Respect of the Normal Reassessment Period",
was also filed for the 1998 taxation year;
(i) the
adjustments were calculated as follows for each of the taxation years:
|
|
|
1995
|
1996
|
1997
|
1998
|
|
(i)
|
Sales according to available
invoices
|
$7,401
|
$11,635
|
$9,478
|
$8,735
|
|
(ii)
|
Number of invoices
|
467
|
1 077
|
816
|
709
|
|
(iii)
|
Average sales
|
$15.85
|
$10.80
|
$11.62
|
$12.32
|
|
(iv)
|
Number of invoices missing
according to numerical order
|
638
|
1,365
|
1,402
|
1,831
|
|
(v)
|
Estimated additional sales
(iii) x (iv)
|
$10,085
|
$14,322
|
$16,866
|
$22,074
|
|
(vi)
|
Additional expenses
granted
|
$4,538
|
$6,731
|
$7,437
|
$8,829
|
|
(vii)
|
Additional income (v)-
(vi)
|
$5,547
|
$7,591
|
$9,429
|
$13,245
|
(j) the
additional expenses come from the increased cost of merchandise sold attributable
to the additional income so as to maintain the profit margins before adding the
additional income in question.
[4] First, the
Appellant was subject to assessments established by Revenue Quebec. Following
the settlement, the information was transmitted to the Canada Revenue Agency
(the "Agency"), which established the new assessments that are the
subject of this appeal.
[5] Revenue Quebec
first established assessments at more or less $200,000. The Appellant then
served her Notice of Objection. She also made arrangements to make anticipated
periodic payments.
[6] The case then
followed a twisted path, and the time it took to handle the objection was very
long, despite various initiatives on the Appellant's part to help the case
progress.
[7] The assessment
that is the subject of this appeal was essentially established based on the
settlement reached with Revenue Quebec.
[8] Ms. Blanchette,
the Appellant's shareholder, testified. She described the company's only
economic activity, operating a restaurant.
[9] She agreed that
the accounting was not exemplary. She did, however, provide all available
documents.
[10] As the
Appellant's shareholder, Ms. Blanchette explained that she was determined
to put everything in order to keep the restaurant in operation, since she was
completely invested in it, and she admitted she did not have impeccable daily
accounting.
[11] She mentioned
many difficulties that she faced. To succeed in keeping the restaurant in
business, Ms. Blanchette explained that she had to give up some personal
belongings including her car, launch various services and even work elsewhere.
[12] She also
acquired the shares of the other shareholder who was less determined and
optimistic regarding the chances the company would survive; she changed the
business hours of the restaurant to reduce expenses; she also launched some new
services, such as preparing meals to be delivered and consumed outside the
restaurant.
[13] To bring the
business back up to par, she agreed to take charge of a canteen on a very busy
site, more favourable and more profitable than the Appellant's restaurant, with
the hope of making some money.
[14] Ms. Blanchette
described the facts surrounding the establishment of the assessment under
appeal. First, she indicated that the company was audited a few months earlier
by the Agency, following which the Appellant was subject to an assessment for a
minimal amount.
[15] She explained
that this audit was carried out in an atmosphere of mutual respect and
cooperation; during this audit, she provided all the documents available, and
she confirmed that she did not recall any snags or particular complaints.
[16] During the audit
that led to the assessment established by Revenue Quebec, the settlement of
which was used as a basis for the assessment currently under appeal, things
were done in a completely different manner.
[17] Ms. Blanchette
stated that the audit was carried out in a tense atmosphere and that relations
were very strained and difficult.
[18] Blaming Ms.
Blanchette for the mediocre quality of the accounting and criticizing her for
her lack of coherence in invoice management, the auditor from Revenue Quebec
allegedly established an assessment according to her evaluation and opinion, in
an arbitrary manner.
[19] The auditor
carried through with her threats and established an assessment with no
explanation, taking into consideration that allegedly missing invoices
represented undeclared sales for meals that she established as having an
average value of $40.
[20] This finding
ignored Ms. Blanchette's explanations for the "missing" invoices.
According to her, the servers used the same numbered pads for invoices to take
orders. The numbers on the invoices therefore did not necessarily follow each
other, which, in her opinion, would explain why certain invoices were not there
and could lead the auditor to conclude that a greater number of meals had been
sold than actually had been.
[21] The average
value of the meals was established arbitrarily from the auditor's personal
viewpoint, based on the style and mood of the restaurant. The facts available
at the time of the audit, such as the actual invoices establishing the average
meal price at $10, were brushed aside.
[22] The arbitrary
and clearly exaggerated evaluation led to an assessment of $200,000. Stunned by
the assessment, Ms. Blanchette stated she contacted the auditor from the Agency
who had carried out the audit in the preceding months to explain the situation
and, especially, for advice. This was unusual, to say the least, but very
telling of the context of the audit carried out by Revenue Quebec.
[23] Given that the
assessment established by Revenue Quebec would lead to the permanent closure of
the restaurant, Ms. Blanchette wanted to avoid this at all costs.
[24] Her ultimate
goal being to keep the restaurant afloat, Ms. Blanchette focused on the
tax issue in order to find a solution that would allow the restaurant to
survive.
[25] Ms. Blanchette
explained that she wanted to reach a settlement. To achieve this, she
accumulated a certain amount, the majority coming from activities carried out
primarily outside her place of business, namely operating the canteen.
Obviously, she challenged the validity of the assessment. The case dragged on
for months.
[26] She made an
arrangement based on her ability to pay and started saving in order to
eventually settle the case. When the time came, she and her counsel went to the
Revenue Quebec offices where they met with Rémi Boulay and his
supervisor to discuss and negotiate; they finally came to a settlement, which
was signed in the early afternoon that same day.
[27] Rémi Boulay,
who was present at the signing of the settlement, also testified. He admitted
that the case took a very unusual route; he indicated that he did not
understand or could not explain certain details, in particular regarding the
delays and the substantial gap between the first assessment and amount of the
settlement.
[28] Mr. Boulay
admitted that the elements such as the kindness, compassion, precariousness of
a taxpayer's financial situation or ability to pay, the possibility of ruining
or bankrupting someone are all factors that have no effect or influence on a
case review.
[29] According to the
auditor, only the relevant elements deemed valid are taken into consideration
during the review of a case at the objection stage or during discussions and
negotiations for the purpose of coming to a settlement.
[30] In other words,
the review that led to the settlement was the result of considerations of relevant
elements and facts that were considered relevant; nothing more and nothing
less.
[31] From this
statement, which corresponds exactly to the provisions of the Act, the
conclusion is that the initial assessment of $200,000 was grossly exaggerated, completely
arbitrary and totally disproportionate considering the difference between the
initial assessment and the one that was the subject of a settlement.
[32] The file was
subject to a settlement after a long meeting with Rémi Boulay and his supervisor.
[33] I noted that Mr.
Boulay was a reasonable, calm and thoughtful person, fully capable of
discussing or negotiating in a professional manner.
[34] The fact that
the settlement overshadowed all the arguments about the financial consequences
of the assessment is a rather convincing confirmation that the analysis carried
out during the audit in the field was botched up and that the findings used to
establish the initial assessment were extremely exaggerated, which is totally
unacceptable.
[35] The amount of
the settlement corresponds to barely 10% of the amount of the first assessment.
I restate again that Mr. Boulay clearly indicated that only the relevant facts
were to be taken into consideration when establishing an assessment.
[36] During the settlement,
the issue of interest was brought up and the Appellant stated that the time
between the assessment and the meeting was not her responsibility and it was a
relevant reason to justify waiving the interest calculated by Revenue Quebec.
This argument was dismissed by Revenue Quebec and the Appellant had to pay the
interest.
[37] Of course, on
this, the burden of proof is on the taxpayer who initiates an appeal; this does
not mean that those who are responsible for conducting an audit have the right
to do whatever they want, any way they want, on the basis that the taxpayers
will only need to prove the validity of their claims if they do not agree with
a first assessment.
[38] Audits are work
to be done seriously and professionally, while respecting the taxpayers' rights
and the applicable standards. Exaggeration and arbitrariness have no place in
this field.
[39] It is
unacceptable to establish an assessment based on any frustration or petty,
unjustified reactions. If an auditor is not able to carry out his or her work
in an acceptable manner, it is not the taxpayers' responsibility to accept the
consequences.
[40] What can we
conclude from the settlement, where only the elements deemed relevant by the
Minister, represented by Mr. Boulay in this case, were taken into
consideration, and which led to an amount that corresponded to only 10% of the
initial assessment? Does this not clearly show that the basis of the initial
assessment was highly exaggerated to the point where it is reasonable to call
the work a botched audit, or even irresponsible?
[41] Can such a
situation be used as a reasonable excuse to get out of the fundamental
responsibility regarding implementing an effective accounting system in terms
of keeping supporting data and documents?
[42] Was the
Appellant careful, vigilant and responsible in her obligation to keep adequate
accounting that would allow for reliable results during an audit, according to
the standards? The answer, clearly, is no.
[43] In this case,
however, it is clear to me that the Appellant's case was the subject of a
botched audit that led to findings that had no valid basis.
[44] The bases for
justifying the first assessment were highly exaggerated, to the point that the
finding must be that they were simply unreasonable.
[45] Moreover, this
became clear on the testimony of the auditor in charge of the case at the
objection stage, and the statements by counsel for the Respondent. The
following in an excerpt from the arguments:
[translation]
Simon-Nicolas
Crépin's Arguments (pages 79, 80, 81):
We
have heard about saving Ms. Blanchette's business. Mr. Boulay told you that the
bankruptcy aspect of a company has nothing to do with the assessment aspect.
...
This
is what Ms. Blais of Revenue Quebec noted, and I agree with Ms. Gérin on this,
and agree with the parties that the assessments were exaggerated. I think
the A-10 agreement is a better reflection of reality.
...
You
must definitely decide which is a more credible version. Was this an
agreement between a taxpayer and a tax body? Ms. Blanchette told you: it was
that or I was bankrupt. You have Mr. Boulay who testified something resembling:
bankruptcy is not my field. I do not handle cases on the person's ability to
pay. I handle cases based on the available data. If there is a subsequent
problem with bankruptcy, it is the recovery section that takes care of it.
[Emphasis added.]
[46] Taking for
granted that the settlement with Revenue Québec is a sufficient and
satisfactory basis for justifying the assessment under appeal, counsel for the
Respondent stated (at page 79): [translation] It
would be, Mr. Justice, exceptional to me for a taxpayer to accept a settlement
with a tax body, be it Revenue Quebec or the Canada Revenue Agency, to pay more
income tax than they actually owe." This statement makes complete sense
and is very reasonable.
[47] However, after
being the subject of an assessment, the amount of which was around $200,000,
would it not be reasonable to settle for an amount representing around 10% of
the amount, considering there had been some small deficiencies in terms of
acceptable accounting?
[48] Moreover, the
very strange circumstances and context of this case also justify that a
reasonable person would want to put an end to this tax saga.
[49] Ms. Blanchette
had invested everything to meet the challenge of keeping her business afloat,
despite having to face a first assessment, for an astronomical amount.
[50] After this
ordeal, a reasonable person would have accepted the settlement, considering the
extreme power of tax auditors.
[51] First, Ms.
Blanchette was fully aware that her bookkeeping had some deficiencies and that
a number of documents were missing, which led her to feel a certain amount of
guilt. This is another element that led her to accept the settlement Revenue
Quebec proposed.
[52] She cooperated,
she followed up and took initiatives to resolve the case and still, it was
months before a settlement was reached, which was attributable to her.
[53] The settlement
was accepted in order to be rid of the threat the assessment posed, like a
sword of Damocles, to the survival of the business. Why did the Appellant
present her case before the Court after settling with Revenue Québec?
[54] At one point,
Ms. Blanchette had an amount she thought was sufficient to cover her
obligations before the two tax bodies. Given that she still had money after the
first settlement, she thought she could come to an agreement with the Canada
Revenue Agency.
[55] This would
likely have happened if it had not been the interest that was added to the
principle of the assessment, which was mentioned during the settlement.
[56] It was mentioned
that interest would not be added. On one hand, Revenue Quebec had the power to
waive it, and on the other, the facts and circumstances from the evidence were
such that it was highly likely there would be mention of the interest being
waived, which is not what happened in reality.
[57] As indicated
above, in tax matters, the burden of proof is on the person who initiates the
appeal. In this case, the burden is on the Appellant.
[58] Considering the
facts from the evidence, I do not believe that the settlement was acceptable
evidence to justify the validity of the assessment under appeal, even more so
because the settlement was clearly for the sole purpose of settling a file of
great concern.
[59] Could the Agency
use Revenue Quebec's calculations to establish its assessments? Counsel for the
Respondent admitted (see page 6 of the transcript) that the Agency did not verify
the amounts provided by Revenue Quebec but merely took the same figures.
[60] I will cite the
statements by Madam Justice L’Heureux‑Dubé in Hickman Motors Ltd.. v. R.,
1997 CarswellNat 3047, [1998] 1 C.T.C. 213,
148 D.L.R. (4th) 1, 97 D.T.C. 5363, 131 F.T.R. 317
(note), 213 N.R. 81, [1997] 2 S.C.R. 336 regarding the burden
of proof:
92 It
is trite law that in taxation the standard of proof is the civil balance of
probabilities: Dobieco Ltd.. v. Minister of National Revenue,
[1966] S.C.R. 95, and that within balance of probabilities, there can be
varying degrees of proof required in order to discharge the onus, depending on
the subject matter: Continental Insurance Co. v. Dalton Cartage Co.,
[1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102 (T.C.C.), at
p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge
Estates Ltd.. v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the
initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the
assessment (Johnston v. Minister of National Revenue, [1948] S.C.R.
486; Kennedy v. M.N.R., 73 D.T.C. 5359 (F.C.A.), at p.
5361). The initial burden is only to “demolish” the exact
assumptions made by the Minister but no more: First Fund
Genesis Corp. v. The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93
This initial onus of “demolishing” the Minister’s exact assumptions is met
where the appellant makes out at least a prima facie case: Kamin
v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C.
1679 (T.R.B.)… The law is settled that unchallenged and uncontradicted evidence
“demolishes” the Minister’s assumptions: see for example MacIsaac v.
M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87
D.T.C. 652 (T.C.C.). As stated above, all of the appellant’s evidence in
the case at bar remained unchallenged and uncontradicted...
94
Where the Minister’s assumptions have been “demolished” by the appellant, “the
onus . . . shifts to the Minister to rebut the prima facie case”
made out by the appellant and to prove the assumptions: Magilb
Development Corp. v. The Queen, 87 D.T.C. 5012 (F.C.T.D.), at p.
5018. Hence, in the case at bar, the onus has shifted to the Minister to
prove its assumptions that there are “two businesses” and “no income”.
95 Where
the burden has shifted to the Minister, and the Minister adduces no evidence
whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac,
supra, where the Federal Court of Appeal set aside the judgment of the
Trial Division, on the grounds that (at p. 6381) the “evidence was not
challenged or contradicted and no objection of any kind was taken
thereto”. See also Waxstein v. M.N.R., 80 D.T.C. 1348
(T.R.B.); Roselawn Investments Ltd.. v. M.N.R., 80 D.T.C. 1271
(T.R.B.). Refer also to Zink, supra, at p. 653, where, even
if the evidence contained “gaps in logic, chronology, and substance”, the
taxpayer’s appeal was allowed as the Minister failed to present any evidence as
to the source of income…
[61] It is the
Appellant's responsibility to show that the Minister's presumptions are
unfounded; once this is done, the Minister can no longer simply rely on the
result of an unacceptable audit to establish assessments.
[62] The Appellant
was in possession of certain elements to dismiss the claims.
[63] Given the
context surrounding the settlement between the Appellant and Revenue Quebec, it
has no relevance in this case. To support this finding, I refer to the
statements by Lamarre Proulx J. in Abderrahman v. R., 2000 CarswellNat
1976, 2000 D.T.C. 2565 (Fr.), [2002] 1 C.T.C. 2429, 2000 CarswellNat
3611, at paragraph 47:
… the document may
have been relevant if the amounts allowed had been allowed for reasons related
to the facts or the Act that were explained in the offer or another
attached document. The amounts were allowed solely to settle the dispute, and
that was also why they were proposed to the individual taxpayer. That offer is
therefore of no use to the debate herein and in that sense it is not relevant...
[64] Despite the
above, I will use a much simpler reasoning to address this case.
[65] Counsel for the
Respondent indicated the following in his observations:
Simon-Nicolas
Crépin's arguments (pages 78, 79, 81, 82):
[translation]
We
agree, Ms. Gérin, this is an issue of credibility, Mr. Justice. You have two
contradictory versions from Mr. Blanchette before you.
…
You must definitely
decide which version is more credible. Was there an agreement between a
taxpayer and a tax body? Ms. Blanchette says: it was that or I was bankrupt.
…
Now, it is really a
question of credibility, Mr. Justice. You must decide, considering the
circumstances. Do the A-10 agreement and the deficient accounting by the
Appellant's company carry more weight than the testimony you heard before you
today, namely that it was not deficient accounting. It was a way of operating
and the missing invoices were not really invoices, and the A-10 agreement was,
I believe, to settle everything to avoid bankruptcy and to eventually be able
to continue with the business. And I did not at all think I would owe taxes to
the Agency by signing that form. For that reason…
[66] However, there
is nothing in the evidence would lead me to believe that Ms. Blanchette is not
trustworthy. On the contrary, I feel she testified frankly, honestly and
sincerely.
[67] She answered
questions addressed to her precisely and directly. As a result, I allow the
appeal and vacate the assessment under appeal.
Signed at Ottawa,
Canada, this 14th day of March 2008.
"Alain Tardif"
on this 6th day of May 2008.
Elizabeth Tan, Translator
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