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Citation: 2006TCC291
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Date: 20060809
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Docket: 2004-1927(IT)G
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BETWEEN:
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GABRIEL HOULE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Bédard J.
[1] The
Appellant is challenging reassessments made by the Minister of National Revenue
("the Minister"), using the net worth method, with respect to the
years 1998 to 2000 ("the relevant period"). The Minister added $2,761
in unreported income to the Appellant's income for 1998, as well as $50,909 for
1999 and $9,086 for 2000, and imposed a penalty for each of those years under
subsection 163(2) of the Income Tax Act ("the Act").
[2] The
Appellant submits that the Minister erred in computing his income using the net
worth method. In this regard, the Appellant submits as follows:
(i) His mother lent him $15,000 in 1999.
(ii) Not all of the loans to 9017-7197 Québec Inc. ("9017")
were made by him. Rather, he and his brother Jérôme Houle lent the money on an
equal basis.
(iii) He withdrew $9,000 in cash from his safety
deposit box in 1999, and $5,000 from the box in 2000.
(iv) The provincial tax amounts included as
adjustments in the net worth calculations are erroneous.
Background
[3] During the relevant period, the Appellant was
the owner of Bar Salon Chez Hélène Enr. ("Chez Hélène"). The
Appellant and his brother Jérôme Houle were also equal co-owners of Pub 17-13 Enr.
("Pub 17‑13"). In addition, the Appellant and his brother
Jérôme were equal shareholders of 9017-7197 Québec Inc. ("9017").
[4] The Minister used the net worth method to
determine the Appellant's unreported income because he had noticed that the
Appellant carried out a number of cash transactions and retained few of the
supporting documents needed to reconcile the various accounts in the financial
statements of his businesses, including the loans allegedly made to 9017.
Preliminary remarks
Burden of proof
[5] Firstly, we must address the burden of proof
that the Appellant must meet in his appeals. My colleague Tardif J. had the
opportunity to deal with the issue of the burden of proof in a case where, as
here, a taxpayer's unreported income had been determined by means of the net
worth method.
[6] In Bastille v. Canada, Docket 96-4370(IT)G,
December 9, 1998, 99 DTC 431, [1999] 4 C.T.C.
2155, Tardif J. wrote as follows at paragraphs 5 et seq.
[5] I
think it is important to point out that the burden of proof rests on the
appellants, except with respect to the question of the penalties, where the
burden of proof is on the respondent.
[6] A
NET WORTH assessment can never
reflect the kind of mathematical accuracy that is both desired and desirable in
tax assessment matters. Generally, there is a certain degree of
arbitrariness in the determination of the value of the various elements
assessed. The Court must decide whether that arbitrariness is reasonable.
[7] Moreover,
use of this method of assessment is not the rule. It is, in a way, an exception
for situations where the taxpayer is not in possession of all the information,
documents and vouchers needed in order to carry out an audit that would be more
in accordance with good auditing practice, and most importantly, that would
produce a more accurate result.
[8] The
bases or foundations of the calculations done in a net worth assessment depend
largely on information provided by the taxpayer who is the subject of the audit.
[9] The
quality, plausibility and reasonableness of that information therefore take on
absolutely fundamental importance.
[7] Another of my colleagues, Bowman T.C.J. (as he then was) made the following remarks in Ramey
v. The Queen, docket 91-547(IT), April 20, 1993, T.C.J. No. 142
(QL), [1993] 2
C.T.C. 2119, 93 DTC 791:
I am not unappreciative
of the enormous, indeed virtually insuperable, difficulties facing the
appellant and his counsel in seeking to challenge net worth assessments of a
deceased taxpayer. The net worth method of estimating income is an
unsatisfactory and imprecise way of determining a taxpayer's income for the
year. It is a blunt instrument of which the Minister must avail himself as a
last resort. A net worth assessment involves a comparison of a taxpayer's net
worth, i.e. the cost of his assets less his liabilities, at the beginning of a
year, with his net worth at the end of the year. To the difference so
determined there are added his expenditures in the year. The resulting figure
is assumed to be his income unless the taxpayer establishes the contrary. Such
assessments may be inaccurate within a range of indeterminate magnitude but
unless they are shown to be wrong they stand. It is almost impossible to
challenge such assessments piecemeal. The only truly effective way of disputing
them is by means of a complete reconstruction of a taxpayer's income for a
year. A taxpayer whose business records and method of reporting income are
in such a state of disarray that a net worth assessment is required is
frequently the author of his or her own misfortunes. . . .
[8] In the instant appeals, Sandrine Nothomb, an
auditor with the Canada Customs and Revenue Agency ("the
Agency"), and Lucie Bouchard, an appeals officer, testified for the
Minister. The Appellant and his brother Jérôme also testified.
[9] In assessing the Appellant's evidence, his
failure to call certain witnesses and provide documentary evidence that could
have confirmed his assertions must be taken into account. In Huneault
v. The Queen, 98 DTC 1488, at paragraph 25, my colleague Lamarre J.
cited certain remarks made by Sopinka and Lederman in The Law of Evidence in
Civil Cases, as cited by Sarchuk T.C.J. of our Court in Enns v. M.N.R.,
Docket APP-1992(IT), February 17, 1987, 87 DTC 208, at
page 210:
In The Law of
Evidence in Civil Cases, by Sopinka and Lederman, the authors comment on
the effect of failure to call a witness and I quote:
In Blatch v. Archer,
(1774), 1 Cowp. 63, at p. 65, Lord Mansfield stated:
'It is certainly a maxim
that all evidence is to be weighed according to the proof which it was in the
power of one side to have produced, and in the power of the other to have
contradicted.'
The application of this
maxim has led to a well-recognized rule that the failure of a party or a
witness to give evidence, which it was in the power of the party or witness to
give and by which the facts might have been elucidated, justifies the court in
drawing the inference that the evidence of the party or witness would have been
unfavourable to the party to whom the failure was attributed.
In the case of a
plaintiff who has the evidentiary burden of establishing an issue, the effect
of such an inference may be that the evidence led will be insufficient to
discharge the burden. (Levesque et al. v. Comeau et al. [1970] S.C.R. 1010,
(1971), 16 D.L.R. (3d) 425.) (emphasis added)
Analysis
Loans to 9017
[10] The Minister alleges that the Appellant lent $789, $31,145 and $24,560
to 9017 in 1998, 1999 and 2000, respectively. The Appellant testified that
he and his brother Jérôme made these loans on an equal basis because the funds
came from the profits of Pub 17-13, which each of them owned on a 50/50 basis. According
to the Appellant, all the profits made by Pub 17‑13 during the
relevant period were invested in 9017 as loans. It should be noted that no
documentary evidence was adduced in support of the Appellant's allegations, and
that neither 9017 nor Pub 17-13 held books of account that would make it
possible to determine the dates on which the loans were made to 9017, the
nature of the loans (cash, goods and services paid on behalf of 9017, etc.) or
the source thereof. In addition, the Appellant's brother testified that he
made the following loans to 9017 and kept a record of those loans
(Exhibit A‑1):
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Loans from his share of the profits of Pub 17-13
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Loans made personally
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From 01/04/96 to 30/06/96
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$2,081.50
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$4,000.00
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From 01/07/96 to 30/09/96
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$4,453.50
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From 01/10/96 to 31/12/96
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$9,006.50
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From 01/01/97 to 31/03/97
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$3,250.00
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From 01/04/94 to 30/06/97
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From 01/07/97 to 30/09/97
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$400.00
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From 01/10/97 to 31/12/97
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From 01/01/98 to 01/03/98
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From 01/04/98 to 30/06/98
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$1,094.00
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$2,000.00
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From 01/07/98 to 30/09/98
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$1,886.50
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$1,275.00
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From 01/10/98 to 31/12/98
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$3,299.00
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From 01/01/99 to 31/03/99
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$6,018.50
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From 01/04/99 to 30/06/99
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$5,251.00
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From 01/07/99 to 30/09/99
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$3,128.00
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From 01/10/99 to 31/12/99
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$929.50
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$1,200.00
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From 01/01/00 to 30/03/00
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$1,775.00
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From 01/04/00 to 30/06/00
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$8,005.50
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From 01/07/00 to 30/09/00
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$4,229.00
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From 01/10/00 to 31/12/00
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$4,471.39
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$1,100.00
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[11] I should emphasize that Appellant's brother's net income was $10,796 in
1997, $19,525 in 1998, $14,523 in 1999 and $11,214 in 2000, and that the
Appellant's brother added that the personal funds from which he made the loans
to 9017 consisted of personal savings that he had amassed over the course of
his 23 years of work, and money that he had borrowed from a friend.
[12] There is no questioning the fact that the Appellant's evidence on this
point essentially turns on his testimony. I should reiterate that the Appellant
testified that he and his brother Jérôme lent this money in equal amounts and that it came
from the profits made by Pub 17-13, a business that they co-owned on a 50/50 basis.
It should be noted that, in his testimony, the Appellant did not once
state that any part of these loans might have come from a different source. Yet
the Appellant's brother testified that he lent 9017 $400, $15,573 and $12,283.50
in its 1998, 1999 and 2000 taxation years, respectively, and that some of the
money that he lent came from his savings and from money that he borrowed from a
friend. How, then, can the Appellant claim that he and his brother Jérôme lent
money to 9017 on an equal basis? The onus was on the appellant to show that the
Minister was wrong on this point. The evidence adduced by the Appellant on this
point consisted essentially of his testimony, which was contradicted by his
brother's testimony. Given this, how can one believe the Appellant's
testimony, which was not supported by adequate documentary evidence or by the
testimony of credible witnesses? I hold that the Appellant did not
discharge his onus of proof with respect to this point.
Safety deposit box
[13] At the objection stage, the Appellant claimed that he took $9,000 in
cash from his safety deposit box on May 19, 1999, and $5,000 in cash
from his safety deposit box on July 28, 2000. He told the Minister
that he accessed his safety deposit box on May 19, 1999, and on July
28, 2000, and that the cash taken from the box on those occasions consisted
of deposits that he had made into the bank accounts of 9017, Pub 17-13 and Chez
Hélène. Therefore, he asked the Minister to reduce his net worth difference by
that amount. Specifically, the Appellant claimed that the aforementioned cash
amounts taken from his safety deposit box consisted in the following amounts
that he had deposited:
(i) $2,600, deposited
into Chez Hélène's bank account on May 19, 1999. Based on a deposit slip,
the Minister had been able to ascertain that this amount had been
deposited into that bank account.
(ii) $1,000,
deposited into Pub 17‑13's bank account on May 19, 1999. Based on a
deposit slip, the Minister had been able to ascertain that this amount had been
deposited into that bank account.
(iii) $1,000, deposited
into the bank account that 9017 held at a branch of the Laurentian Bank on May 19, 1999. The Minister had not received the deposit slip
corresponding to this amount from the Appellant or from the bank.
(iv) $750, deposited
into Chez Hélène's bank account on May 20, 2000. Based on a deposit slip,
the Minister had been able to determine that this amount had been deposited
into that bank account.
(v) $1,000, deposited into
the bank account that 9017 held at a branch of the Laurentian Bank, on May 20,
1999. The Minister had been unable to obtain the deposit slip corresponding to
this amount from the Appellant or the bank concerned.
(vi) $1,600, deposited
into the bank account that 9017 held at a branch of the Laurentian Bank, on May 21, 1999. The Minister had been unable to obtain the deposit
slip corresponding to this amount from the Appellant or the bank concerned.
(vii) $400, deposited into
a bank account (folio 15221) that the Appellant held at a branch of the
National Bank of Canada, on July 28, 2000. Based on a deposit slip, the
Minister had been able to ascertain that this amount had been deposited into that
bank account.
(viii) $400, deposited into
a bank account (folio 49003‑4) that the Appellant held at a branch of the
Laurentian Bank, on July 28, 2000. Based on a deposit slip, the Minister had
been able to ascertain that this amount had been deposited into that bank
account.
(ix) $2,600 deposited into
Pub 17-13's bank account on July 31, 2000. The Minister had been able to
obtain a deposit slip from the Appellant proving that this amount had been
deposited into that bank account.
(x) $1,000, deposited
into Chez Hélène's bank account on July 31, 2000. The Minister had been
unable to obtain the deposit slip corresponding to this amount from the
Appellant or the bank concerned.
[14] Ms. Bouchard testified that she agreed to subtract the amounts set out
in subparagraphs (i), (ii), (vii) and (viii) above from the net worth totals
initially established by the Agency's audit branch. She said that she did so
because she thought that it was realistic and plausible that cash amounts
thereby deposited could have come from the Appellant's safety deposit box, since
the Appellant supplied deposit slips showing that the cash was deposited on the
same day that he accessed his safety deposit box. Ms. Bouchard added that
she refused to subtract the amounts set out in the other subparagraphs from the
net worth totals initially established by the audit branch, either because the
Appellant had been unable to support his allegations with deposit slips, or
because the cash was not deposited into the bank accounts in question on the
same day that the Appellant accessed his safety deposit box, even if, in such
cases, the Appellant had produced deposit slips showing that the cash in issue
had been deposited into the bank accounts in question a few days after the
Appellant had accessed his safety deposit box.
[15] In my opinion, the Minister should have subtracted the amounts set out
in subparagraphs (iv) and (ix) above from the net worth totals. As we have
seen, Ms. Bouchard did not accept the Appellant's allegations in those instances
because the cash was not deposited into the bank accounts in question on the
same day that the Appellant accessed his safety deposit box, even though the
Appellant had shown, by means of deposit slips, that cash amounts were
deposited a few days after the Appellant accessed his safety deposit box. In my
opinion, this short period between the time that the safety deposit box was
accessed and the time that the cash was deposited into the bank accounts
concerned does not, in and of itself, make the Appellant's claims implausible.
[16] In addition, it is my opinion that the Minister properly did not
subtract the amounts set out in subparagraphs (iii), (v), (vi) and (x) above
from the net worth totals because the Appellant's allegations in this regard
were not supported by deposit slips. The Appellant's evidence before me is no
different from the evidence that he submitted to Ms. Bouchard, except that he
claimed that he attempted, without success, to obtain from his banker the
deposit slips showing that he deposited cash amounts into the bank accounts
concerned. Naturally, the Appellant had failed to retain these supporting
documents. It seems that certain taxpayers learn nothing from their mistakes.
The Appellant knew that he had to retain these supporting documents and keep
adequate books of account. Indeed, he had already been assessed for unreported
income by means of the net worth method. As I have explained, it is difficult
for me to believe the Appellant's testimony when it is not supported by adequate
documentary evidence or by the testimony of credible witnesses.
$15,000 loan
[17] The Appellant claims that his mother lent him $15,000 in cash in 1999,
and that he repaid his mother on September 24, 2003. It should be noted
that no loan contract was offered in evidence, and that the Appellant's mother
did not testify. However, the Appellant offered a $15,000 bank draft dated
September 24, 2003, payable to Hélène Houle (Exhibit A‑4),
in evidence. It would have been most interesting to hear the Appellant's
mother's testimony on this point. The Appellant was capable of calling her as a
witness. The mother's testimony could perhaps have helped clarify certain
facts. This omission forces the Court to infer that the evidence of his witness
would have been unfavourable to the Appellant. The effect of this inference on
the Appellant, who bore the burden of proof as to this point, is that the
evidence adduced is insufficient and that he did not discharge his burden of
proof.
Income tax
refunds
[18] In the net worth calculation attached to the
Reply to the Notice of Appeal, the Minister reduced the Appellant's unreported
income by $10,276 and $10,827 for the 1999 and 2000 taxation years,
respectively, on account of Quebec income tax refunds cashed by the Appellant
during the years concerned. The $10,276 refund cashed by the Appellant in the
1999 taxation year was related to the 1998 taxation year, and the $10,827
refund was related to the 1999 taxation year.
[19] The provincial notice of assessment issued on November 22, 1999, in
respect of the Appellant's 1998 taxation year, stated as follows:
[TRANSLATION]
Income tax $0.00
Mandatory QPP contributions $741.82
Contribution to the Health Services Fund $106.74
Tax credit for child-care expenses $8,250.00
Property tax refund $372.00
Other credits $2,502.00
Interest $56.79
[20] The Appellant argues that if he had not had to contribute to the
Québec Pension Plan (QPP) and the Health Services Fund (HSF) in 1999 for the
1998 tax year, he would have cashed an $11,181.05 tax refund with respect to
that year, instead of a $10,276 refund, in 1999. Furthermore, he argued that
his QPP and HSF contributions were included in his cost of living as initially
established by the Minister and that these inclusions were prejudicial to him. Therefore,
he asked that his unreported income for 1999 be reduced by $11,181.05, not by $10,276.
[21] The provincial notice of assessment issued on
September 18, 2000, in respect of the Appellant's 1999 taxation year,
stated as follows:
[TRANSLATION]
Income tax $0.00
Mandatory QPP contributions $741.82
Contributions to the Health Services Fund $106.74
Tax credit for child-care expenses $8,250.00
Property tax refund $372.00
Other credits $2,502.00
Interest $56.79
[22] The Appellant argues that if he had not had to contribute to the QPP
and HSF in 2000 for the 1999 tax year, he would have cashed a $12,059.40
provincial tax refund with respect to that year, instead of a $10,827 refund, in 2000.
Further, he argues that his QPP and HSF contributions were included in his cost
of living as initially established by the Minister and that these inclusions
were prejudicial to him. Therefore, he asks that his unreported income for 2000
be reduced by $12,059.40, not by $10,827.
[23] In addition, Ms. Bouchard's testimony, and her Report on
Objection (Exhibit I‑20, page 4), show that the following QPP
and HSF contributions by the Appellant were included in his cost of living:
1998 1999 2000
QPP $26.62 $741.82
$1,114.05
HSF $147.82 $106.74 $117.96
[24] In her testimony, Ms. Bouchard admitted that the QPP and HSF
contributions initially added to the Appellant's personal expenses for each of
the years in the relevant period were the contributions stated in the
Appellant's T1 income tax returns for each of those years, even though the
contributions had been paid by the Appellant in the subsequent year. Ms. Bouchard
acknowledged that the Minister erred in failing initially to use cash accounting
in this regard. Based on Ms. Bouchard's testimony, and her Report on
Objection (Exhibit I-20), I am satisfied that she corrected the error,
firstly by subtracting from the Appellant's cost of living the QPP and HSF
contributions that had initially been added for each year of the relevant
period, and secondly by adding, to that cost of living, the QPP and HSF
contributions that the Appellant actually paid in each of those years.
[25] In my opinion, the evidence shows that the Minister did not err in
reducing the Appellant's unreported income from a given year within the
relevant period by the income tax refunds actually cashed by the Appellant in
that given year, and in adding, to the Appellant's personal expenses in a given
year within the relevant period, the contributions that the Appellant actually
made in that year. In my opinion, if I added the QPP and HSF amounts that the
Appellant actually paid in a given year within the relevant period to the tax
refunds cashed by the Appellant in that year, this would have the effect of
cancelling the amounts added to the Appellant's personal expenses in that year.
Penalties
[26] I must also consider the penalties that were imposed under subsection
163(2) of the Act. With respect to this issue, the onus is on the Respondent to
prove that a penalty must be imposed. In Venne v. Canada (Minister of
National Revenue -M.N.R.), [1984] F.C.J. No. 314, Strayer J. discussed
the degree of negligence that is required in order for penalties to be imposed.
Gross negligence must be interpreted to mean negligence tantamount to intentional
acting — recklessness as to
whether the Act is complied with. In the case at bar, even after the conceded reductions,
the unreported income for the years 1999, 1999 and 2000 is high in comparison
with what was reported. The Appellant was aware of his obligation to report all
his income. The Appellant is a knowledgeable businessperson. In my opinion, he deliberately
failed to keep adequate books of account so that the tax authorities would be confused.
In view of these facts, and of the fact that the Appellant repeatedly
failed to report all his income, I hold that the Appellant showed the degree of
negligence required to warrant the imposition of the penalties for the three
years in issue.
Conclusion
[27] Consequently, the Appeal from the assessment in respect of the 1998
taxation year is dismissed, and the appeals from the assessments in respect of
the 1999 and 2000 taxation years are allowed to the extent that the Appellant's
unreported income should be reduced by $750 for the year 1999 and by $2,600 for
the year 2000.
[28] In all other respects, the appeals are dismissed.
Signed at Ottawa, Canada, this 9th day of August 2006.
Bédard
J.
Translation
certified true
on this 20th day of February
2008.
François
Brunet, Revisor
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