Citation: 2006TCC514
Date: 20061023
Docket: 2005-529(IT)G
BETWEEN:
ROGER BLOUIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] Mr. Blouin is
appealing, under the general procedure,
(a) from the assessment dated October 21, 2002, by which
(i) the Minister of Revenue of Canada
("the Minister") included, in computing the Appellant's income
for the 1997 taxation year, an amount of $624,277, which was added to the
Appellant's income because the Minister determined that the Appellant
appropriated this amount from Les Constructions Roger Blouin Inc.
("the Corporation") and thereby received a benefit as a
shareholder under subsection 15(1) of the Income Tax Act
("the Act"), and
(ii) the Minister imposed a penalty on the
Appellant under subsection 163(2) of the Act in respect of his 1997 taxation
year; and
(b) from the assessment dated December 17, 2002, for the
1997 taxation year, by which the Minister claimed the sum of $529,189.68 from
the Appellant under subsection 160(1) of the Act.
The Appellant's testimony
[2] The Appellant
testified as follows:
(i)
He
was the sole director and shareholder of the Corporation since its
incorporation. The Corporation operated a construction business starting in 1975.
The Appellant was a shareholder and director of other corporations as well.
(ii)
On July 2, 1985, the Guarantee Company
of North America ("The Guarantee") and the Société Immobilière
du Québec ("SIMQ") granted the Corporation a contract to continue and
finish some construction work that another company had been unable to complete.
The Corporation completed the work on or about December 29, 1987.
(iii)
From
the completion date to June 19, 1991, the Corporation had undertaken
efforts to recover money (withholdings, extras and damages) that it was owed by
The Guarantee and SIMQ in connection with the performance of the contract
that was awarded to it on July 2, 1985.
(iv)
For
all intents and purposes, the Corporation ceased to carry on business on the
completion date of December 22, 1987, because it no longer had the financial
resources needed to operate.
(v)
Since
the negotiations with The Guarantee and SIMQ were at an impasse, the
Corporation launched an action against them to recover $1,097,683.03
(Exhibit A‑1, tab 5).
(vi)
In
order to preserve its reputation with its suppliers and bankers and with other
stakeholders in the construction field, the Appellant assumed or paid the
following debts of the Corporation in the early 1990s ("the
Liabilities"):
i)
a
$175,000 bank loan payable to the Bank of Nova Scotia;
ii)
an
account of $108,729.38 payable to Otis Canada Inc.;
iii)
an
account of $186,729.90 payable to P.P.G. Canada Inc.
iv)
an
account of $18,997 payable to Vézina Pouliot & Associés;
v)
an
account of $60,000 payable to the Municipalité de Charny; and
vi)
an
account of $54,000 payable to Entreprise d’Électricité R. Simard.
The Appellant was unable
to specify the dates on which he paid the Liabilities, but he claimed that he
assumed them in the early 1990s, that is to say, over a period extending from
1990 to 1994.
(vii)
The
Corporation retained the books, records and documentation related to its
operations (including the documentation related to the existence and payment of
the Liabilities) until the closing of its place of business in 1995. The
Appellant testified that he would have liked to retain all this documentation
in his apartment afterwards, but that it was too cramped. He added that his
efforts to retrieve the supporting documents in question from the Corporation's
creditors proved unsuccessful because some of the creditors were no longer in
business and others had a policy under which they would only retain supporting
documents for a certain number of years.
(viii)
The
Appellant paid the Liabilities from the personal savings that he and his spouse
had amassed over the years — savings that came from an average annual family
income of $70,000.
(ix)
In
March 1997, the Corporation received a net amount of $624,277 in an
out-of-court settlement of the proceedings that it had instituted to recover
the money. This amount consists of $720,000 minus the fees paid to the
Corporation's lawyers. The Appellant deposited a cheque for $624,277 in
his personal bank account on March 29, 1997 (Exhibit I‑1,
tab 9).
(x)
Neither
the Corporation nor the Appellant reported the $720,000 in income from the
out-of-court settlement. The Appellant explained that he had never thought
the Corporation had to report the income from the settlement. He added
that he had not even thought of consulting his accountants to find out how the
corporation should treat the settlement cheque.
[3] The evidence also revealed
that the Corporation, in its financial statements attached to the returns that
it filed for its 1991, 1992, 1993, and 1994 taxation years, did not account for
the advances that the Appellant made to it during those years.
The Respondent's position
[4] The Respondent
submits that the Corporation did not owe the Appellant any money at the time
that he deposited the amount of $624,277 into his bank account. The Respondent
submits that the Minister properly added $624,277 to the Appellant's income for
his 1997 taxation year because the Appellant appropriated this amount from the
Corporation and therefore received a benefit as a shareholder within the
meaning of subsection 15(1) of the Act.
[5] At the time that
the Appellant deposited the $624,277 cheque into his personal bank account
("the Transfer"), the Corporation owed the Minister $529,189.
Since the Appellant and the Corporation were at arm's length at the time of the
Transfer, and the Minister was of the opinion that the Transfer was an
appropriation of funds (that is to say, a transfer for no consideration),
the Respondent submits that the Minister properly assessed the Appellant
for $529,189 under section 160 of the Act.
[6] Lastly, the
Respondent submitted that the Appellant, either knowingly or under
circumstances that warrant a finding of gross negligence, made a false
statement in his income tax return for his 1997 taxation year when he failed to
report the $624,277 in income, and that the Minister was therefore justified in
imposing a penalty under subsection 163(2) of the Act in respect of his 1997
taxation year.
The Appellant's position
[7] The Appellant
submits that the Corporation owed him $603,456 at the time of the Transfer
because he had paid the Liabilities, which totalled $603,456, prior to the
Transfer. Thus, he says, the $603,456 which the Corporation paid him was not an
appropriation of funds, but, rather, a reimbursement of the advances that he
had made to the Corporation. He adds that since he did not appropriate funds
belonging to the Corporation, the Minister has no lawful basis on which to
assess him for $529,189 under section 160 of the Act. In the alternative, the
Appellant challenges the Corporation's tax debt at the time of the Transfer,
arguing that the $720,000 received by the Corporation as part of the
out-of-court settlement was not income earned by Corporation, but, rather, in
the nature of a capital payment.
[8] Counsel for the
Appellant submits that the Respondent has not met her burden of proof with
respect to the penalty under subsection 163(2) of the Act.
[9] Lastly, in the
event that I determine that the Appellant did not advance a total of $603,456
prior to the Transfer, counsel for the Appellant asks that
I retrospectively treat the Transfer as a liquidation dividend.
Analysis and conclusion
[10] The Appellant's
evidence with respect to the assumption of the Liabilities consisted
essentially of his testimony, since there was practically no documentary
evidence to speak of. Thus, the assessment of his credibility plays an
important role, as his testimony was not supported by adequate documentation or
by independent, credible witnesses. It is true that the testimony of a single
person may be sufficient to meet one's persuasive burden. That being said, the
Appellant must understand that a judge does not have to believe an
uncontradicted witness. Indeed, his uncontradicted account can be
determined implausible based on the circumstances revealed by the evidence or
on common-sense principles. It is even more difficult to believe a witness
whose account of the facts is contradicted by objective evidence that he
himself has provided, who is content to make general and unverifiable comments,
and who provides evasive, ambiguous and unintelligible explanations. Moreover,
the hesitations of this witness, the time that he took to answer questions, his
attitude, and the holes in his memory, often raise even more doubts in this
judge's mind with respect to the credibility of the witness.
[11] In the case at bar,
I find the Appellant's assertions with respect to the Liabilities to be
implausible and without credibility because his testimony on the subject was
contradicted by the financial statements of the Corporation for the 1991, 1992,
1993 and 1994 fiscal years, which were attached to the tax returns filed by the
Corporation for those years. Indeed, the advances which the Appellant purportedly
made to the Corporation during those years, advances which, as stated, totalled
$603,456, were not recorded in those financial statements. The Appellant's
explanations, to the effect that he did not consider it necessary to account
for such advances to the Corporation in its financial statements because the
Corporation was not carrying on business, are simply implausible in my view.
I cannot imagine that an experienced businessman, and one as well-advised
as the Appellant, could be so unaware of the potential consequences of a
failure to account for the advances in the Corporation's financial statements.
[12] In addition, I find
it very difficult to believe that the Appellant retained no documentary
evidence related to the payment of the Liabilities. I can understand that the
Corporation was unable, after the complete closure of its place of business in
1995, to retain all the books, records and documents related to its operations.
I can also understand that the Appellant was unable to store all this
documentation in his apartment because of its space limitations. However, these
space limitations surely did not prevent the Appellant from retaining at least
the six cheques with which the Liabilities were paid. Once again, I find it
implausible that a businessman as well-informed as the Appellant could have
minimized the importance of retaining such supporting documents, assuming they
existed.
[13] I can also
understand that it could sometimes be very difficult to find supporting
documents that go so far back in time. The Appellant's evidence with respect to
his efforts to find these documents were, once again, wholly dependent on his
unverifiable general statements. The absence of any documentary or testimonial
evidence pertaining, at the very least, to the Appellant's efforts to find this
documentation, simply added to my doubts about the existence of the purported
advances.
[14] The Appellant's
explanations about the source of the funds that served to cover the Liabilities
were also general and deliberately imprecise. I find it implausible that the
Appellant saved roughly $604,000 from his low household income. Once again, the
Appellant could have substantiated his assertions with documentary evidence
showing that he had this amount of capital at the time that he assumed the
Liabilities. It is difficult to believe that it was absolutely impossible to
track down any documentation directly or indirectly showing the existence of
such capital, or to find an independent, credible witness who could have
substantiated the Appellant's assertions on the subject. Once again, the
absence of any documentary evidence which, at the very least, substantiated the
Appellant's efforts to track down such documentary evidence, merely added to my
doubts as to the existence of such capital.
[15] The Appellant's explanations
regarding the Corporation's failure to report the $720,000 in income from its
2003 taxation year further added to my doubts about the Appellant's
credibility. I find it implausible that it never occurred to an experienced
businessman like the Appellant that the Corporation should perhaps have
recorded an amount as small as $720,000 in its income, or that the issue should
at least be raised with the Corporation's accountants or tax specialists.
[16] As I stated, the
Appellant deposited a cheque for $624,277 into his personal bank account. The
cheque was made payable to the Corporation under the terms of an out-of-court
settlement of the action to collect a debt. The Appellant claimed that he
did not appropriate this amount from the Corporation. He claimed that the
Corporation owed him $603,456 at the time that the cheque was cashed because he
had paid off the Liabilities, which totalled $603,456, before then. Thus, he
submitted that the $603,456 which the Corporation thereby paid him constituted
a reimbursement of the advances that he had made to the Corporation, not an
appropriation of funds. I note that the cheque cashed by the Appellant was for
$624,277 and that the Liabilities that he claims to have paid off totalled
$603,456. Thus, there remains a $20,821 difference between the two amounts — a
difference that the Appellant never explained.
[17] For these reasons,
the Appellant has not satisfied me that he paid the Liabilities prior to the
Transfer. Therefore, the Minister properly added the sum of $624,277 to the
Appellant's income for the 1997 taxation year. In my opinion, when the
Appellant cashed the $624,277 cheque payable to the Corporation, he
appropriated this amount from the Corporation and thereby received a benefit as
a shareholder within the meaning off subsection 15(1) of the Act.
[18] The issue of the
penalties for the 1997 taxation year remains to be addressed. The Respondent
submitted that the penalties in respect of the 1997 taxation year should be
upheld. They were imposed pursuant to subsection 163(2) of the Act, which reads
as follows:
163(2) False statements or omissions.
Every person who, knowingly, or under circumstances amounting to gross
negligence, has made or has participated in, assented to or acquiesced in the
making of, a false statement or omission in a return, form, certificate,
statement or answer (in this section referred to as a "return") filed
or made in respect of a taxation year for the purposes of this Act, is liable
to a penalty of the greater of $100 and 50% of the total of
. . .
Subsection 163(3) of the Act
provides that the Minister has the burden of proof. It reads:
Burden of proof in respect of penalties. Where, in an appeal under this
Act, a penalty assessed by the Minister under this section or section 163.2 is
in issue, the burden of establishing the facts justifying the assessment of the
penalty is on the Minister.
[19] Thus, the onus was
on the Minister to establish the facts warranty the imposition of the
penalties. In the case at bar, this means that the Minister had to prove that
the taxpayer made a false statement or omission in a tax return, and that this
false statement or omission was made knowingly or under circumstances amounting
to gross negligence. The Minister's onus is not to make proof beyond a
reasonable doubt, but, rather, simply to make proof on a balance of
probabilities.
[20] Generally, the
Minister cannot discharge his burden of proof simply by arguing that the
taxpayer was unable to refute the assessment. In Dowling v. Canada,
[1996] T.C.J. No. 301, docket 93-934(IT)G, 96 DTC 1250,
my colleague Lamarre J. explained this point as follows, at paragraph
102:
The Minister must present evidence to the
effect that the taxpayer made a false statement or omission in filing the
return. This evidence must amount to more than just showing that the net worth
statement was not disproved. Once the Minister proves, on a balance of
probabilities, that a false statement or omission was made in the return,
evidence must be presented that this misrepresentation was made knowingly or
under circumstances amounting to gross negligence. In Venne, supra,
Justice Strayer defined gross negligence at 6256:
. . . "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.
. . . The sub-section obviously does not
seek to impose absolute liability but instead only authorizes penalties where
there is a high degree of blamewortheness [sic] involving knowing or
reckless misconduct [6258].
[21] Here, the appellant
signed his tax return knowing full well that he had appropriated $624,277 from
the Corporation. He made a voluntary omission of tremendous proportions. In my
opinion, the Minister has discharged his burden of proof in the instant case
and was therefore warranted in imposing the penalty contemplated in subsection
163(2) of the Act on the Appellant's unreported income, which totalled $624,277
in 1997.
[22] With respect to the
assessment in the amount of $529,189 against the Appellant under section 160 of
the Act, I note that the Appellant submitted that:
(i)
the
Minister was not warranty in assessing the Appellant under section 160 of the
Act because he did not appropriate funds from the Corporation; and
(ii)
the
Corporation had no tax liability at the time of the Transfer because the
$720,000 payment that the Corporation received as part of the out-of-court
settlement was not income earned by the Corporation, but, rather, in the nature
of a capital payment.
[23] Lastly, as I have
stated, counsel for the Appellant asked me to treat the transfer like a
liquidation dividend if I were to find that he had not advanced $603,456 to the
Corporation as of the date of the Transfer.
[24] First of all, I am
of the opinion that the amount of $720,000 which was received by the
Corporation in connection with the out-of-court settlement of the action to
collect a debt from The Guarantee and SIMQ was clearly compensation awarded by
reason of a failure to pay an amount that would have constituted income if it
had been received. Thus, I hold that the compensation was income.
[25] As for the request
by counsel for the Appellant to treat the cashing of the $603,456 cheque as a
liquidation dividend, I simply cannot accept it. First of all, that argument
was raised for the first time in the oral submissions by counsel for the
Appellant, without having been raised in the Notice of Appeal. In addition, the
Appellant never proved that the Corporation authorized the distribution of a
liquidation dividend. On the contrary, the Appellant incessantly repeated that
the cashing of the cheque payable to the Corporation effected a set-off because
it was a reimbursement of advances that he had made to the Corporation prior to
the Transfer.
[26] For these reasons,
the appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 23rd day of October 2006.
"Paul Bédard"
Translation certified true
on this 20th day of February 2008.
François Brunet, Revisor
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