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Docket: 2005-1240(IT)I
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BETWEEN:
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ANDRÉ ROY,
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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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____________________________________________________________________
Appeals heard on February 2, 2006 at Québec, Quebec.
Before: The Honourable Justice P.R. Dussault
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Appearances:
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For the
Appellant:
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The Appellant
himself
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Counsel for the
Respondent:
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Michel Lamarre
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____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for
the 1999, 2000 and 2001 taxation years are dismissed in accordance with the
attached Reasons for Judgment.
Signed at Ottawa,
Canada, this 2nd day of May 2006.
Dussault
J.
Certified
true translation
David
Rettie
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Citation: 2006TCC226
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Date: 20060502
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Docket: 2005-1240(IT)I
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BETWEEN:
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ANDRÉ ROY,
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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
Dussault J.
[1] These are appeals from reassessments made under
the Income Tax Act ("the Act") for the 1999, 2000 and
2001 taxation years.
[2] By virtue of these reassessments, the Minister
of National Revenue ("the Minister") revised the Appellant's net
business income to $10,241 for 1999, $12,983 for 2000, and
$24,042 for 2001. The reassessment for the 1999 taxation year was made
after the normal reassessment period. In addition, the reassessments for each
of the years include a penalty for gross negligence under subsection 163(2)
of the Act.
[3] The facts on which the Minister relied in
making the reassessments are set out in paragraphs 7 to 9 of the Reply to the
Notice of Appeal, which read:
[TRANSLATION]
7. . . .
(a) During the years in issue, the Appellant operated a sole proprietorship
whose principal activity was to offer tourists guided tours of
Old Quebec City and the surrounding countryside in minibuses
throughout the year.
(b) During the years in issue, the Appellant operated his business
under the name La Tournée du Québec Métro Enr.
(c) During a tax audit, the Minister realized that there were no
books of account, and, during a test using the bank deposit method for the 2001
taxation year, an income discrepancy amounting to approximately $40,000 was
noted.
(d) Faced with this situation, the Minister audited the Appellant's
income using the net worth method; a copy of the Appellant's statement of net
worth is attached as an appendix hereto (pages 1-17).
(e) The following additional income amounts were established based
on the net worth method audit for the period from December 31, 1997,
to December 31, 2000:
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Taxation year
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(i) 1999
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$23,279
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(ii) 2000
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$21,053
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(iii) 2001
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$29,910
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$74,242
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(f) It is clear that the unreported income does not come from the
calculation of the personal expenses, the totals of which are as follows:
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Taxation year
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(i) 1999
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$6,220
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(ii) 2000
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$3,581
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(iii) 2001
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$3,602
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$13,403
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(g) Upon the Appellant's request, the
Minister granted him non-capital loss carry-forwards every year:
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Taxation year
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(i) 1999
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$1,075
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(ii) 2000
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$7,971
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(iii) 2001
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$19,859
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$28,905.
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8. Upon filing his income tax return for the 1999 taxation year,
the Appellant presented incorrect facts negligently, carelessly or by voluntary
omission, or committed fraud of some kind by providing certain information
based on the following criteria:
(a) the Appellant keeps no records or books of account and reported
whatever business income he felt like reporting; and
(b) the additional income represents roughly 50% of his reported
business income.
9. The Minister determined that the Appellant knowingly, or in
circumstances that warrant a finding of gross negligence, made a false
statement or omission in the income tax returns filed for the 1999, 2000 and
2001 taxation year, or that he made or participated in, assented to or
acquiesced in the making of, the false statement or omission, which resulted in
his paying less income tax than was payable for the years in issue based on the
information provided in the income tax returns filed for those years:
(a) The Appellant keeps no books of account, and reported such
business income as he felt like reporting.
(b) The Appellant's permanent record contains a letter in which the
Appellant undertakes to keep an adequate set of accounting records and books.
(c) The Appellant stated that he is a former teacher and indicated
that he was the shareholder of a corporation whose financial statements he
personally prepared.
(d) The additional income represents roughly 50% of his reported gross
business income.
[4] The Appellant, auditor Richard Paquet, and
appeals officer Line Gariepy testified.
[5] Mr. Paquet began his audit of the
Appellant's affairs for the 1999, 2000 and 2001 taxation years by asking the
Appellant to make his books, records, invoices, banking documents and other
relevant documents available to him (Exhibit A‑1). His first finding
was that the Appellant had no accounting records or books, and did not have
sales invoices, or bank deposit slips other than ATM deposit statements. In
addition, he obtained all the Appellant's account statements directly from
several financial institutions. The Appellant kept several accounts into which
amounts paid by customers using Visa, MasterCard and American Express credit
cards were directly deposited.
[6] Mr. Paquet began by analysing the deposits into
the Appellant's various accounts for the year 2001. From a total of $87,656 in
deposits, he subtracted $19,693, which, according to his analysis, consisted of
transfers between accounts. Then, he added $15,000 to account for expenses
which, in his opinion, had been paid in cash. Based on this first analysis, the
Appellant's net business income for the 2001 taxation year was $82,962, even
though he reported only $43,200, hence the $32,762 discrepancy for the year
(Exhibit I-1).
[7] This initial observation, and the fact that the
Appellant did not keep any records or books of account, are what induced
Mr. Paquet to determine the Appellant's income for the three years using
the net worth method. The detailed calculations are set out in the 17-page
appendix to the Reply to the Notice of Appeal. Using this method,
Mr. Paquet established that the Appellant failed to report $74,243 in
income for the three years —
specifically, $23,279.36 for 1999, $21,053.27 for 2000, and $29,910.58 for
2001. According to Mr. Paquet, these amounts consisted of additional income
from the Appellant's business, either in the form of revenues from the actual
guided tours, or in the form of tips.
[8] Mr. Paquet also said that the Appellant
gave him a box containing invoices. However, Mr. Paquet explained that since
the Appellant had no accounting system that could justify the deducted expenses
by means of vouchers, he was unable to reconcile the deducted expenses,
including the expenses for the 2001 taxation year, based on the documents that
the Appellant had submitted to him.
[9] Mr. Paquet further reported that the Appellant
told him that he collected sales taxes, which were supposedly included in the
tour prices. However, Mr. Paquet was unable to find any registration
number, returns or tax remittances in the Appellant's name. Apparently, the
only thing that was found was a GST registration number that was issued to
La Tournée du Québec Inc. and was valid until
1998. However, Mr. Paquet stated that there were no amounts in the system.
The Appellant apparently incorporated the company in 1983, and the
business was operated by the company for an unspecified period.
[10] According to Mr. Paquet, the significant
discrepancies determined by the net worth method — discrepancies in the range of 50% to 75%
— caused him to make a
reassessment in respect of the 1999 year beyond the normal reassessment period
and to add a penalty contemplated in subsection 163(2) of the Act.
Moreover, in Mr. Paquet's opinion, the amounts deducted for certain
expenses were round numbers and represented fictitious expenses that he was
unable to reconcile with the documents submitted. Lastly, Mr. Paquet
stressed the fact that the Appellant gave his undertaking to keep appropriate
records and books for his business as far back as 1982, and yet failed to
comply with this undertaking during the three years covered by the audit
(Exhibit I‑5).
[11] Line Gariepy is an appeals officer. After
the Appellant objected to the assessments made by Mr. Paquet, she
confirmed them, but concluded that the additional income determined by the net
worth method consisted of tips in connection with the tour guide business
operated by the Appellant (Exhibit A‑3). I should note that it
seems unrealistic to believe that the additional income assessed for the 1999,
2000 and 2001 years consisted exclusively of tips that the Appellant received
in connection with the operation of his business. However, the assessments were
not made on this basis; rather, they were based on the assumption that the
income was derived from the operation of the business, whether it consisted of
tips or not.
[12] The Appellant is not contesting the set of
calculations by Mr. Paquet, which show a $74,000 discrepancy for the 1999,
2000 and 2001 taxation years. However, rather than representing unreported
income earned in the course of these years, he submits that it essentially
consists of his savings over the past 20, 25 or even 30 years, which he kept in
cash at home and invested in his business.
[13] The Appellant
explained that he obtained his first tourist guide permit in 1973 when he was a
teacher. He left teaching in 1983, and allegedly received a $31,000 severance
bonus. Then, he incorporated La Tournée du Québec Inc., referred to above. He
allegedly operated the tourist guide business through this company for an
unspecified number of years, after which he operated the business as a sole
proprietor again. It can be seen from the Notification of Confirmation for the
years in question, attached to the Notice of Appeal, that the Appellant
reported losses of $6,419, $8,541, $12,688 and $15,032 for each of the
years 1995 through 1998. This represents a total $42,680 for the four years
prior to the three years in issue.
[14] Though the Appellant
stated that the permits in his possession cost him nothing (other than the
permit acquired in 1973 for $5,000), he estimated their value at more than
$300,000, which he considers his pension plan (Exhibits A‑4 and
A‑5). According to the Appellant, the permit that he acquired in 1996
following a hearing before the Commission des transports du Québec is the most
important permit that he obtained for the operation of his business. The costs
of the hearing were the Appellant's only expense for the permit.
[15] The Appellant said
that despite the value of his permits, financial institutions would not
recognize them as loan collateral, so he had to operate the business using his
own savings and therefore needed cash. I understand that the Appellant also
criticized the auditor for not taking account of the value of his various
permits for the purposes of his assessments. In this regard, I would simply
note that the fact that the permits were not included in the Appellant's assets
had no bearing on the net worth calculations, because no new permits were
acquired between 1998 and 2001, the Appellant made no expenditures with respect
to any permits during this period, and he did not dispose of any of his
permits.
[16] The Appellant also
explained that two of the vehicles that were used to transport tourists were
1979 models that he purchased in 1983, and that a third vehicle was a 1980
model, which enabled him to save money on insurance premiums because he was not
insured for damage to these vehicles.
[17] The Appellant stated
that the clients of his business were recruited through tourist information
offices or directly through his website. He said that most tourists pay by
Visa, MasterCard or American Express. Although the tour prices did not
include taxes, the Appellant claimed that taxes were added upon payment, that
he was a sales tax registrant, and that the taxes were remitted annually.
[18] As far as his
lifestyle is concerned, the Appellant said that his expenses were limited,
notably because he was single, never went out, never went to restaurants or
movies, and did not travel. He added that he owned only one house, which he has
never renovated, and which does not even have hot water.
[19] The Appellant
reiterated that he reported all his business income, including tips, and that
the clients paid this money by credit card or in cash. With reference to
Exhibit I‑1, which pertains to the deposits, tracked down by
Mr. Paquet, into his various bank accounts in 2001, the Appellant stated
that these were either deposits from various financial institutions in respect
of credit‑card payments; deposits of cash from customers; or deposits of
money from his own savings, accumulated over approximately 30 years, and kept
in envelopes each of which contains $5,000 in cash. In fact, at the hearing, he
displayed one of these envelopes, which contained fifty $100 bills.
[20] On
cross-examination, the Appellant admitted that this was the first time that he
provided this explanation regarding the existence and use of the savings that
he kept at home in cash. He also said that he had never been asked for
explanations before and that in any event, he was told that his explanations
were of no interest.
[21] As for his Notice of
Objection to the assessments in issue, the sole ground of which is an error in
the calculation of the penalty imposed under subsection 163(2) of the Act,
the Appellant said that he wrote whatever struck his fancy, and that his accountant
told him to keep his best arguments for the judge.
[22] We know that the
Appellant incurred $42,680 in losses during the years 1995 through 1998.
According to the Appellant, the $74,000 discrepancy that the auditor
arrived at through his calculations for the 1999, 2000 and 2001 taxation years
does not constitute additional income. Rather, he claims, they are losses that
he incurred during these years and that he covered by resorting to the savings
that he had allegedly accumulated over the previous years. As for the years
subsequent to 2001, the Appellant admitted that he has not filed his returns
and that it is therefore not possible to ascertain whether his operations
during those years resulted in a profit or a loss. However, based on the
results of 1995 to 2001 and the explanations provided by the Appellant, he
incurred more than $116,000 in losses, which he covered by resorting to the
savings that he had built up over previous years.
[23] It is difficult to
imagine how the business operated by the Appellant could have generated enough
profits to enable him to accumulate such significant savings in the past, given
that all he posted during the years 1995 through 2001, and possibly during the
years thereafter, were losses. The explanations provided by the Appellant are
even more difficult to accept in view of his assertion that the permit obtained
in 1996 was the most important one for his business, since one would normally
expect such a permit to improve his returns.
[24] Mr. Paquet, the
auditor, used the net worth method to make the assessments for the years 1999,
2000 and 2001. He did so following his initial observation that the total
deposits into the Appellant's several bank accounts exceeded the income
reported in 2001. He also did so because the Appellant did not keep such
records and books of account as would enable the tax payable to be determined,
despite his undertaking, back in 1982, to keep such records and books
(Exhibit I‑5).
[25] At the hearing, the Appellant admitted that he did not
keep records and books of account. Moreover, he did not produce invoices or
other documents through which the income generated by his activities during the
1999, 2000 and 2001 years could be established or even approximated.
[26] The Appellant is not
contesting the discrepancy of more than $74,000 calculated by the auditor for
these three years. He claims that this amount is, indeed, a shortfall, which he
offset using the savings he accumulated and kept in cash in the course of the
20, 25 or 30 previous years. The only evidence that he provided was that he
did, indeed, possess cash. This evidence alone does not even go part of the way
back to the source in such a manner as to permit us to conclude that the funds
come from his after-tax savings and are not unreported income. It is
certainly not illegal to keep significant amounts of cash. However, it is up to
those who keep such cash to show where it comes from when doubts as to its
origin have been raised. This case highlights the importance of this obligation,
especially where, as here, the Appellant is unable to produce records and books
of account and other documents through which the accuracy of his reported
income can be verified. The auditor faced the same problem and had to use the
indirect net worth method to make the assessments. In Ramey v. Canada,
93 DTC 791, [1993] 2 C.T.C. 2119, [1993] T.C.J. No. 142 (QL),
Bowman J.T.C.C. noted the difficulties involved in challenging such assessments
in the following terms at paragraph 6 of his reasons:
.
. . 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.
[27] Where there are no
records and books of account to speak of, a taxpayer's mere assertion that the
discrepancy identified by the net worth method results from the use of cash
savings accumulated by the taxpayer over the course of previous years is
markedly insufficient to constitute the evidence necessary to establish on a
balance of probabilities that the assessments are erroneous.
[28] I would add that the
Appellant's version of the facts concerning the existence and use of his cash
savings, which seeks to explain the discrepancy identified by the auditor, was
only presented at the hearing of the instant appeals, and that this casts
serious doubt on the veracity of the Appellant's statement. Indeed, in his
Notice of Objection to the assessment for the 2001 taxation year, the only
thing that the Appellant questioned was the calculation of the penalty imposed
under subsection 163(2) of the Act:
[TRANSLATION]
I
object to your method of calculating the penalty, because you calculated a
penalty at a rate of 1,204.52% of net tax payable.
According
to the rules set out in 163(2), it is $100.00 or 50% of the tax payable, that
is to say $129.00 x 50% = $64.50.
The
penalty should be $100.00, not $1,297.51.
[29] At the hearing, the Appellant stated that his Notice of
Objection amounts to quasi-random musings. This is quite stunning, considering
the fact that the assessments had the effect of adding more than
$74,000 to his reported income for the 1999, 2000 and 2001 taxation years.
[30] As for the Notice of
Appeal pertaining to these three years, it can be summarized by the following
sentence: [TRANSLATION] "The assessment is unfounded."
[31] I will close by
stating that it is difficult to understand why the Appellant needed such large
amounts of cash to operate his tour guide business, especially since he had
eight different bank accounts with financial institutions during the three
years for which the reassessments were made (Exhibit I‑1).
[32] All in all, I find
that the evidence adduced by the Appellant in connection with the use of
savings accumulated over the course of previous years in order to cover the gap
of more than $74,000 identified by the auditor for the 1999, 2000 and 2001
taxation years is insufficient to establish, on a balance of probabilities,
that the assessments which added part of this amount to his income for each of
these years are erroneous.
[33] With regard to the question of penalties, it is
important to begin by recalling subsection 230(1) of the Act, which reads as
follows:
230. (1) Every person carrying on business and every
person who is required, by or pursuant to this Act, to pay or collect taxes or
other amounts shall keep records and books of account (including an annual
inventory kept in prescribed manner) at the person's place of business or
residence in Canada or at such other place as may be designated by the
Minister, in such form and containing such information as will enable the taxes
payable under this Act or the taxes or other amounts that should have been deducted,
withheld or collected to be determined.
[34] This provision does
not articulate a mere right. On the contrary, it prescribes a formal obligation
to keep such records and books of account as will enable the taxes payable to
be determined. As far back as 1982, the Appellant gave his undertaking to
comply with this obligation at the request of the authorities (Exhibit I‑5).
Despite this undertaking, more than 20 years later, it is clear that no record
or book of such kind was kept or could be tendered in evidence. For a taxpayer
who has been operating the same business for such a long time, this obstinate
refusal to comply with this obligation can only lead to the filing of false tax
returns which force the authorities to use another, indirect method, namely the
net worth method, to determine his income.
[35] In Venne v.
Canada, 84 DTC 6247 (F.C.T.D.), [1984] F.C.J. No. 314
(QL), Strayer J. described gross negligence in the following terms, at page 13:
.
. . "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.
[36] In my opinion, the
foregoing facts establish that the Appellant was guilty of gross negligence,
thereby warranting the imposition of the penalty set out in
subsection 163(2) of the Act. Moreover, there is no basis to support a
finding that the penalty was calculated erroneously. The same facts entitled
the Minister to reassess the taxpayer for the 1999 year after the normal
reassessment period.
[37] In light of the
foregoing, the appeals from the reassessments for the 1999, 2000 and 2001
taxation years are dismissed.
Signed at Ottawa,
Canada, this 2nd day of May 2006.
Dussault
J.
Certified true
translation
David Rettie
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