Citation: 2006TCC286
Date: 20060609
Dockets: 2004-3849(IT)G
BETWEEN:
LUC LABBÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This appeal
pertains to the 1999, 2000 and 2001 taxation years.
[2] Essentially, the
question to be decided is whether the Respondent properly imposed a penalty on
income from payments under a contract between the Appellant and Itochu
International ("Itochu") for the 1999, 2000 and 2001 taxation years,
and on a total of $828 in personal expenses of the Appellant paid by Aalexx International,
a corporation controlled by the Appellant, in the course of the 2001 taxation
year.
[3] In establishing and confirming the
penalties concerning the 1999,
2000 and 2001 taxation years on December 15, 2003,
the Minister of National Revenue ("the Minister") relied on the
following assumptions of fact:
[TRANSLATION]
10 (a) The
Appellant is a businessman and has a degree in agronomy. He specializes in the marketing
of soybeans. (admitted)
(b) The
Appellant is the sole shareholder of Aalexx International Inc. ("Aalexx").
(admitted)
(c) On
February 17, 2003, the Appellant was notified that Aalexx would be
audited. (admitted)
(d) At
the time of the audit, Guy Morin, the auditor, asked the Appellant, by
letter dated February 17, 2003, to make available to him a list
of books and records concerning Aalexx, along with the Appellant's personal
banking records. (admitted)
(e) A
part of the Appellant's personal banking records were missing from the
documents submitted to the auditor. (denied)
(f) The
missing banking records included amounts received from Itochu International
Inc. ("Itochu") between June 1, 1999, and
December 31, 2002. (denied)
(g) In
1999, the Appellant entered into a agri-food consulting services contract
with Itochu. (admitted)
(h) Itochu's
head office is in New York, USA. (denied)
(i) Pursuant
to the contract between Itochu and the Appellant, the Appellant was to perform
research and inform Itochu of developments in the North American soy-based
product market. (admitted)
(j) The
contract between Itochu and the Appellant was renewed until December 31,
2002. (admitted)
(k) Itochu
paid the Appellant monthly, in U.S. currency, by bank transfer or wire. (denied)
(l) Solely
in the expectation of receiving bank transfers or wires from Itochu, the Appellant
opened personal bank account No. 450‑6192 at the Royal Bank of
Canada. (denied because of the word "solely")
(m) The Appellant received the following amounts
from Itochu:
|
1999
|
2000
|
2001
|
|
C$32,643
|
C$38,022
|
C$18,671
|
(admitted)
(n) During
the years in issue, the Appellant had his tax returns prepared by an accounting
firm. (admitted)
(o) The
Appellant failed to include, in his income, the amounts received from Itochu
during the 1999, 2000 and 2001 taxation years. (denied)
(p) In
addition, Aalexx paid various personal expenses of the Appellant totalling
$1080 during the year 2001. (no knowledge)
11 In
confirming the reassessment in respect of the 2000 taxation year, and making a
reassessment on July 29, 2004 in respect of the 2001 taxation year, the
Minister of National Revenue made the following factual assumptions:
(a) The
facts set out in subparagraphs 10(a) through (p) above. (admitted)
(b) The
Appellant's personal expenses paid by Aalexx during the 2001 taxation year
total $828, which is $252 less than the amount assumed in making the
reassessment of December 15, 2003. (admitted)
12 In
making a reassessment concerning the 1999 taxation year on December 15, 2003,
outside the normal assessment period, and in confirming it, the Minister of
National Revenue considered the following facts:
(a) The
facts set out in subparagraphs 10(a) through (o) above. (admitted)
(b) Following
his university studies in agronomy and a one-year internship, the Appellant
found employment as a broker for Maple Leaf Canada in Toronto, where he
acquired expertise in global soybean marketing. (admitted)
(c) The
Appellant held this job as broker at Maple Leaf Canada for eight years.
(admitted)
(d) In order to do this brokerage work in the
area of international trade, the Appellant had to know the rules that pertain
to export, customs formalities in importing countries, and obtaining the
necessary certificates and authorizations. (denied)
(e) In
order to complete the documents required by governments, the Appellant had to
be familiar with the statutory provisions applicable to international trade
activities, including tax provisions. (denied)
(f) In
May 1995, the Appellant decided to settle in Quebec and establish Aalexx in
order to pursue his activities in the same field of expertise and offer
agri-food consulting services. (admitted)
(g) For
the purposes of his work for Aalexx, the Appellant had to have the up‑to‑date
legal knowledge required to do business in the field of international trade.
(denied)
(h) The
amount of income that the Appellant failed to report for the years in issue is
significant. (no knowledge)
(i) The
Appellant never intended to report the income from his contract with Itochu,
even after the termination of his contract in December 2002. (denied)
(j) The
existence of the contract between Itochu and the Appellant was revealed by the
Appellant's representative after the tax audit was undertaken in February 2003.
(denied)
[4] The Appellant admitted certain facts,
including the facts set out in subparagraphs 10(a), (b), (c), (d), (g), (i), (j),
(m) and (n), subparagraphs 11(a) and 11(b), and subparagraphs 12(a), (b), (c) and
(f).
[5] Since
the appeal is essentially about whether penalties could lawfully be imposed in
respect of the years in issue, the Respondent, through auditor Guy Morin,
adduced evidence that she thought was relevant to justify the penalties under
appeal.
[6] For
his part, the Appellant represented himself; the purpose of his testimony was to
show that the penalties were neither warranted nor appropriate.
[7] The
facts are relatively straightforward.
[8] On
February 17, 2003, the Respondent sent a letter to Aalexx International, a corporation
held solely by the Appellant, clearly setting out all the documents and
information that the Appellant was to assemble so that the audit, which began
with a visit to the Appellant's place of business, could proceed. The request
in question, produced as Exhibit I-2, is worth reproducing:
[TRANSLATION]
February 17, 2003
AALEXX INTERNATIONAL
. . .
Attention: Mr. Luc Labbé
Re: 2001 and 2002
income tax returns
Further to our telephone
conversation of February 17, I hereby confirm that I will be visiting your
place of business on February 24, 2003.
The purpose of the visit is to
examine your accounting books and records and obtain any other relevant information
on your income tax returns. In this regard, please make all the applicable
records for the 2000 and 2001 years available to me, including:
·
Trial
balance, adjusting entries and spreadsheet
·
Minute
books of all the corporations in the group
·
Revenue
journal, expense journal and general ledger
·
List
of accounts receivable and accounts payable
·
Cancelled
cheques along with the bank statements
·
Sales
and purchase invoices
·
Shareholders'
personal bank accounts
·
Organization
chart of the group's corporations
The duration of the audit will
depend on the state of your books, the size and complexity of your business and
your cooperation. I will keep you informed of the progress of the audit
throughout.
If appropriate, I will provide you
with any audit adjustment proposal, in which case you will have 30 days to make
representations, and I will be pleased to discuss any areas of disagreement.
Enclosed is a leaflet entitled
"What You Should Know About Audits". I encourage you to read it
so that we can discuss it when I visit. Also enclosed is Information Circular
78-10R3, Books and Records Retention/Destruction.
If you have any questions in
preparation for this visit, please contact me at (418) 649-4993.
. . .
[9] During
the audit, the Appellant gave the auditor information about two accounts with
the Royal Bank of Canada.
[10] Guy Morin began the audit forthwith. On March 5, 2003, Mr. Morin got a
call from Mr. Dagenais, the tax lawyer who represented the Appellant. He asked
to meet with Mr. Morin, and an appointment was set up for
March 6, 2003.
[11] New facts were brought to the auditor's attention at that appointment,
including a contract with Itochu International and a third bank account at the
Royal Bank of Canada.
[12] Following these revelations, auditor Guy Morin met with the Appellant again,
at his office, on March 13. There, the Appellant confirmed the information
imparted by his representative Mr. Dagenais, the tax lawyer.
[13] Surprised by these new facts, the auditor decided to research more
thoroughly; he noticed that the information that was provided did not cover the
1999 taxation year, so he immediately obtained all the information from the
Royal Bank of Canada that was connected with the information supplied by
Mr. Dagenais.
[14] The auditor also says that he noticed that the corporation had paid a
substantial amount of personal expenses.
[15] These included expenses related to landscaping, trips abroad, and
meals. The Appellant did not deny these facts.
[16] In short, the auditor submitted that the penalties were justified and
appropriate having regard to the Appellant's considerable knowledge, his
experience with transactions, his studies, his expertise and his skills as a
businessman with broad knowledge and understanding. In other words, the auditor
submitted that by reason of the facts, circumstances and context, and in view
of the Appellant's experience, skills and knowledge, he had concluded that the
conditions for the imposition of the penalties had been fulfilled.
[17] At one point, the Appellant, a high-level employee of Maple Leaf Canada in Toronto, Ontario for
almost ten years, decided to go his own way in the soybean business. He left Ontario and settled in Quebec, where he started up and developed a business that would enable him to
profit from his knowledge and experience in the local and international soybean
trade.
[18] Over the years that he worked for Maple Leaf Canada, the
Appellant built a relationship of trust with Itochu's management, and, when he
decided to leave Maple Leaf, he entered into a contract with Itochu under
which he agreed to be a consultant or resource person who would keep his
Japanese clients informed about the state of the North American soybean
market.
[19] The Appellant claimed that his clients were particularly concerned
about the debate regarding GMOs (genetically modified organisms). Since the
Japanese are huge consumers of soybeans and Japan is a major market for producer nations such as Canada, Itochu could look to the Appellant, a specialist on the spot, to keep
them informed about the various developments in this area.
[20] The Appellant explained
that he understood that the contract essentially provided for advances paid for
information that he was to transfer to the other party's satisfaction.
[21] According to the
Appellant, he risked having to reimburse all the money he obtained if the
recipients of the information expressed their dissatisfaction.
[22] This rather unusual
understanding and interpretation of the terms of the contract supposedly led
him to open a dedicated U.S.‑dollar account that would enable him to
maintain a parallel accounting, separate from his regular operations, purportedly
in case he would later have to reimburse the amounts he received.
[23] When asked to
explain this interpretation of the terms of the contract, which were actually quite
clear — terms whose wording and meaning is not open to such a conclusion or
interpretation — the visibly uncomfortable Appellant tried to make arguments in
support of his assessment. Among other things, he referred to professional
misconduct, trickery, negligence, and all kinds of grievances and shortcomings
that had absolutely nothing to do with the terms of the contract, but rather
were in the nature of breaches of his legal obligation which did not
intrinsically have anything to do with the terms of the contract. If such an
approach were accepted, it would have the effect of suspending the taxation of
income from professional fees until the expiry of the limitation period of an
action in negligence or otherwise. This is thoroughly preposterous and
completely unreasonable, not to mention an implausible explanation or excuse.
[24] In fact, the
contract was automatically renewed a few times, and the Appellant said that his
contractual relationship with Itochu International stemmed from the bond of
trust that he built with the management of that company while employed by Maple
Leaf Canada, a contention that tends to contradict the logic of his arguments.
[25] Describing himself
as someone who had developed exceptional expertise on soybeans, the Appellant
said that he was fundamentally honest and in good faith, and had very little if
any knowledge of tax law, which required him to retain the services of people
who could counsel him on the subject.
[26] A dynamic and
prosperous businessman and an excellent father, the Appellant argued that he
had been careless, clumsy, and clearly somewhat negligent. He claimed that
he never intended to hide a thing, and that, throughout his life, he had a
social conscience, was a good corporate and individual citizen, and honoured
all his tax obligations.
[27] His explanations
about the way in which his file had been handled were nebulous to say the
least: he said that he gave the accountants the contractual documents, which he
had apparently never spoken about before since the contract had ended some
months earlier.
[28] I, however,
believe that the Appellant quickly understood the gravity of his situation and
sought counsel forthwith on how to proceed. His advisors clearly chose a
pre-emptive strategy aimed at softening the blow from the eventual discovery of
the secret account.
[29] This was clearly
sound advice, because the deadline for filing the tax return for the 2003
taxation year had not yet passed. Thus, the Appellant thought that he could
probably avoid the imposition of penalties for the 2000 and 2001 taxation years
and the lack of an assessment for 1999.
[30] The explanations
provided by the Appellant, namely that the U.S.‑dollar account was not
secret and was not referred to in the request of February 17, 2003,
are neither credible nor plausible, especially since it was an active account
on which transactions involving relatively large amounts were made.
[31] Moreover, if the
Appellant had been so convinced that his arguments regarding the interpretation
of the contract were sound, the natural thing for him to do would have been to
disclose the account in question at the same time as the other two accounts,
and thereupon provide his interpretation of the account. This would have
been a prudent, wise and entirely reasonable approach for someone with the
Appellant's capacities to adopt. Instead, the representations were made by the
Appellant's legal representative and accountant several weeks later, after the auditor’s
visit and analysis of the records.
[32] At the time that
the contract was signed, the Appellant had nine years of business dealings with
Itochu behind him as an employee of Maple Leaf Canada. Japan is an extremely
important market for soy — so important, in
fact, that the Appellant said it represented 70% of the market for that
product.
[33] The facts, the
explanations and the overall context support only one conclusion: the Appellant
obtained a special contract under which he was essentially paid for his
experience, expertise and knowledge.
[34] Given this
special characteristic, I believe that the Appellant knew very well that this
was a contract of limited duration, and that the monetary consideration would probably
never show up anywhere, given where the other party to the contract was based.
[35] Indeed, how
could an informed, prosperous, dynamic businessman, with highly developed
knowledge in a rather specific economic field, claim that his fees could be the
subject of a claim for reimbursement? Such an interpretation is neither
reasonable nor supported by anything in the contract. In fact, such an
explanation is totally irreconcilable with the Appellant's knowledge and
experience. Whether an excuse is accepted will depend on its
reasonableness, and the tests of reasonableness can vary depending on the
status and knowledge of the person making the excuse.
[36] The excuse given
by the Appellant in the case at bar is simply ludicrous and has no basis in fact
or in the terms of the contract.
[37] A very careful businessman,
he simply decided to try his luck and refrain from reporting the income from
this private contract with a foreign company. He was caught, and that made it
imperative for him to find reasons and justifications for something that would
initially seem almost impossible to explain.
[38] The Appellant
undoubtedly assumed that the Respondent's burden of proof was similar to the
burden applicable to criminal cases, namely proof beyond a doubt, and tried to depict
himself as a rather naïve and negligent man, hastening to specify that this was
not gross negligence, but at most a minor breach or a wholly involuntary mistake
or negligence. And this, it was submitted, was a sufficient basis to conclude
that the Respondent did not prove her case beyond a doubt.
[39] First of all,
that is not the nature of the burden of proof in the instant case, and
secondly, the Respondent showed persuasively that the Appellant acted in such a
way that the requirements of subsection 163(2) of the Act were met and that the
penalties were fully warranted under the circumstances; this is the case for
the 1999 taxation year, in respect of which, once again, the Respondent
discharged the burden of proof by showing unequivocally, and above all on a
strong preponderance of the evidence, that the Appellant had clearly and intentionally
planned to conceal his income from the Japanese company.
[40] I do not accept
the Appellant's explanation that he might ultimately have to reimburse the
amounts received. I reject his arguments because of his own explanations
regarding the creation of the account, the use of its contents, and the failure
to declare it despite the formal demand sent to him, and because of his
experience and knowledge, the way in which everything was disclosed, and the
fact that his interpretation of the contract that he signed with the company is
completely unsustainable.
[41] For all these
reasons, the appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this
9th day of June 2006.
"Alain Tardif"
Translation
certified true
on this 19th
day of February 2008.
Brian
McCordick, Translator
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