Citation: 2006TCC314
Date: 20060615
Docket: 2002-3406(IT)G
BETWEEN:
SERGE TARDIF,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] The appellant is
appealing from reassessments made against him on September 24, 2001. The
reassessments pertain to his 1997, 1998 and 1999 taxation years. The Minister
of National Revenue ("the Minister") added to the appellant's
reported income additional income for each of the taxation years in issue and
assessed penalties with respect to the income added as shareholder benefits.
The additional income attributed to the appellant can be summarized as follows
for each taxation year, with references to the relevant provisions of the Income
Tax Act ("the Act"):
|
|
1997
|
1998
|
1999
|
|
Rental income
(Hôtel
Biencourt Inc.) (subs. 9(1) of the Act)
|
$14,400.00
|
$14,400.00
|
|
|
Shareholder
benefits
(subs. 15(1)
of the Act)
|
$82,687.00
|
$28,453.00
|
$33,343.00
|
|
Shareholder
debt (loans) (subs. 15(2) of the Act)
|
|
$186,429.00
|
$94,251.00
|
|
Interest on
loans (deemed benefit)
(subs. 80.4
of the Act)
|
$1,755.00
|
$2,922.00
|
$713.00
|
|
Penalties
(subs. 163(2) of the Act)
|
$9,979.01
|
$3,135.69
|
$3,479.11
|
[2] The respondent
notified the appellant and the Court that $27,000 had been added in error as a
shareholder benefit for 1997, and thus, the amount of $82,687 has now been
changed to $55,687.
[3] During the taxation
years in issue, the appellant was the sole shareholder of Hôtel Biencourt Inc.
("Biencourt"), Les Exploitations Forestières S. Tardif Inc.
("Exploitations Forestières"), Le câble du Haut‑Pays Inc.
("Haut‑Pays") and Télé‑câble St‑Eugène de Ladrière
Inc. ("Télé‑câble"). During the taxation year in issue, the appellant
was also the majority shareholder of Les Distributions Stec Inc.
("Stec"), a director of a non-profit company called
Télécâble 13, a director of the Emballage Unik corporation
("Unik") and a member of the Place Aulmier partnership
("Place Aulmier"). All the amounts added to the appellant's income are
from financial transactions between the appellant and these various entities.
[4] The audit of the appellant
and of Biencourt, Exploitations Forestières, Haut‑Pays and Télé‑câble,
began in October 2000, and a draft assessment was sent to the appellant on
March 8, 2001. The appellant was asked to comment on the draft and provide
any other relevant documents. The auditor contacted the appellant's accountants
and gave them time to produce evidence on the basis of which she could change
the draft assessment. She received certain documents from the appellant on July 16, 2001,
but no changes could be made to the draft assessment on the basis of those
documents. Accordingly, the file was submitted to the team leader and the
disputed reassessments were issued.
[5] In her testimony,
the auditor provided detailed explanations of each heading under which income
was added. Thus, for each of the three years in issue she showed the connection
between the accounting information contained in the general ledgers of the
corporations in question, the financial statements of those corporations, the
spreadsheets of the accountants retained by the appellant and the corporations,
and the banking transaction history of the appellant's personal account. The
auditor was also able to reconcile the spreadsheets with the financial statements
and thus to confirm the nature of the advances to the shareholder or director from
the way that they were entered in the financial statements of the corporations
in question. Except in a few cases, the documentation that she was provided
with contained nothing that might show that these were intercompany
transactions. Even the appellant's accountants concluded that they were
advances to a shareholder. The auditor also explained in detail the tax
consequences of the advances or loans to the appellant by his corporations, and
the calculation of the interest on these loans.
[6] All this
information is contained in a summary that the respondent adduced in evidence and
that contains all the sources of her information as well as the conclusions she
drew to complete her audit. The following is a summary of the explanations
concerning each of the four additional income headings.
1 – Taxable benefits under
subsection 15(1) of the Act
[7] The amounts of
$55,687, $28,453 and $33,343 represent unreported income of Exploitations Forestières
and Biencourt. The funds were deposited into the appellant's personal account
at the Caisse populaire de Squatec, folio 3858. On analyzing the
deposits, the auditor observed that the accounting method used by the two
corporations for deposits and withdrawals was that when such deposits were
made, the "advances to shareholder" account of the corporations was
debited and the corresponding revenue was credited to the corporations' sales,
and when cheques were issued or withdrawals were made from folio 3858 and the
amounts paid to the two corporations, the corporations' "advances to
shareholder" account was credited and the corresponding expense was
debited. However, the auditor noticed that some of the two corporations'
deposits were not debited to the "advances to shareholder" account.
These deposits were never explained; they can be found in the summary tendered
in evidence by the auditor. They are the deposits that the appellant
appropriated, that is, those that were not accounted for or credited to the two
corporations' "advances to shareholder" account and that are referred
to above. It would appear from the deposit slips that the appellant also appropriated
some other deposits, and these were never explained.
2 – Penalties on the
aforementioned additional income
[8] The auditor assessed
penalties on the aforementioned amounts on the basis that the proposed
adjustments are very large in relation to the income that the appellant
reported in each of the years in issue, namely, 214%, 95% and 113%
respectively. She maintains that, in light of how much unreported income was
involved, the appellant knew or ought to have known that he had not reported
all his income in his tax return. She maintains that he was negligent in managing
his affairs and in his bookkeeping, and that, given his business experience, he
understood the importance of the taxation aspect and, above all, knew that he
had to give his accountants all the information necessary to prepare his tax
returns.
[9] The appellant had
been audited in 1984 and he was told at the time about the importance of
adequate bookkeeping. In the case at bar, his bookkeeping left a good deal to
be desired and a number of documents to substantiate transfers from the
corporations to his personal account were missing. The auditor doubts that the
salary of $313 weekly paid to the appellant would have been sufficient to cover
the expenses that he incurred to meet his family obligations. Her conclusion is
that he must have used the advances and other benefits obtained from the
corporations to fulfil his obligations and financial responsibilities.
3 – Shareholder
debt or loans under subsection 15(2) of the Act for the 1998 and 1999 taxation
years
[10] Under this heading,
the auditor added to the appellant's income for the 1998 and 1999 taxation
years, in accordance with the provisions of subsection 15(2) of the Act, amounts
representing loans from Exploitations Forestières, Télé‑câble and Haut‑Pays
or indebtedness to those corporations.
[11] In the case of
Exploitations Forestières, advances totalling $117,052 at August 31, 1998, and
$75,368 at August 31, 1999, were established on the basis of Exploitations
Forestières's own accounting, as shown in the "advances to
shareholder" account in the accounting records. In addition, during its
fiscal year ended August 31, 1998, Exploitations Forestières advanced
$14,628 to Stec, and the auditor had to attribute this sum to the appellant
because he is Stec's majority shareholder and because Stec had never produced any
financial statements since its incorporation in 1993. It was therefore
impossible to verify whether Stec owed money to Exploitations Forestières. The appellant
provided no cheque, bank statement or transfer document that might show that
these advances were paid to Exploitations Forestières. The accountant for the appellant
and for the corporations entered these advances under "advances to a
director" (the director being the appellant) in the financial statements
of Exploitations Forestières, which explains why the advances were attributed
to the appellant.
[12] In the case of Haut‑Pays,
advances totalling $1,326 at August 31, 1998, and $3,155 at
August 31, 1999, were established by the auditor on the basis of Haut‑Pays's
books, as shown in the "advances to shareholder" account. Haut‑Pays
had also advanced a total of $33,467 at August 31, 1998, and $2,417 at
August 31, 1999, to Télécâble 13, and the auditor attributed
these advances to the appellant for reasons similar to those given regarding the
advances by Exploitations Forestières to Stec described above. The appellant
acknowledged and conceded that the advances by Haut‑Pays to Place Aulmier
totalling $3,000 at August 31, 1998, were correctly attributed to him
by the auditor. Lastly, Haut‑Pays had made to Emballage Unik at
August 31, 1998, a $3,000 advance, which the auditor attributed to
the appellant for the same reasons as those described above. Moreover, the
evidence disclosed that the advances were used to satisfy a judgment against the
appellant in his capacity as guarantor of a loan to Emballage Unik by the Caisse populaire
Desjardins de St‑Cyprien.
[13] With respect to the
advances by Télé‑câble, the auditor established on the basis of Télé‑câble's
own accounting, as shown in the "advances to shareholder" account in
the accounting records, that a total of $1,000 in advances was made for each
fiscal year ended August 31. As for the advances by Télé‑câble to
Télécâble 13 amounting to $2,456 at August 31, 1998, they were
attributed to the appellant for the reasons set out above. Télé‑câble
also advanced to Place Aulmier amounts of $10,500 at August 31, 1998, and
$12,311 at August 31, 1999, which the appellant acknowledges are attributable
to him.
4 – Interest
[14] The auditor tendered
a table setting out the calculation of interest at the prescribed rates under
section 80.4 of the Act.
5 – Rent
[15] In 1997 and 1998,
Biencourt was the lessee of an immovable owned by the appellant. Biencourt's
records for the fiscal years ended August 31, 1997, and
August 31, 1998, included an adjusting entry showing that the $14,400
in rent was assumed by Biencourt. In computing his income for the two taxation
years in question, the appellant did not include the rental income, which explains
why the auditor added it to his income. The auditor asked the appellant for explanations
in this regard, but he provided none to her, nor did he provide any at the
hearing of his appeals.
[16] According to the
auditor, none of the loans or advances described above come within the
exclusions in subsections 15(2.2), (2.3), (2.4), (2.5) and (2.6).
[17] In his testimony,
the appellant spoke of his frustration with the accountants that he had retained
for his personal purposes and the corporations' for the taxation years in
question. In particular, he said that he did not understand how an accountant
that he had never met or retained could have prepared and signed the financial
statements of his various corporations. However, this frustration sheds no
light on the content of the financial statements and on what they reveal, nor
do they provide any enlightenment as to the basis for the assessments.
[18] According to the appellant,
the accounting complications began in 1997, when Revenu Québec seized the bank
accounts of Biencourt and Exploitations Forestières. The appellant accordingly
began to deposit both corporations' revenues into his personal account at the caisse
populaire in order to prevent them from being seized, and he used that account
to pay both corporations' bills. He claims that all these transactions
were accounted for, but says that, according to his accountant, they had to be
entered in the books as "advances to shareholder."
He tendered a working document for 1997, which shows the nature of the
transactions on his personal account as opposed to the corporations'
transactions. However, none of this information can be used to rectify or
change anything in the audit or to provide explanations regarding the deposits
that the auditor was unable to clarify. The appellant did not call as witnesses
the accountants who prepared the spreadsheets that were used to prepare the
financial statements.
[19] Apart from the appellant
himself, the appellant's secretary was the only person who testified. She
explained how she did things, and confirmed that the corporations' revenues were
deposited into the appellant's personal account and that their debts were paid
out of that account. She asked the appellant's accountants how to make sense of
it all, but says she never got an answer. However, she recalls having indicated
"advance to shareholder" if she deposited corporate revenue into the appellant's
personal account. She basically confirmed the auditor's assertion regarding the
manner in which these transactions were accounted for.
[20] The appellant's
evidence as a whole is clearly insufficient to allow me to find on a balance of
probabilities that the reassessments in issue are erroneous, except for the
change that the respondent acknowledged at the beginning of the hearing.
The appellant's explanations and his willingness to explain how he
operated are not enough for me to make any change to the additional income. The
auditor's work is based on the financial statements, the spreadsheets and the
work of the accountants for the appellant and his corporations, and in the absence
of this evidence or of an admission that the accounting method used was
incorrect, I am unable to change or correct a thing. The appellant is the
person most familiar with his case and who is in a position to defend it. His way
of doing things leads to consequences that are reflected in the assessments
issued against him.
[21] As for the loans or
advances that the auditor attributed to him, the appellant did not establish
that they could have been intercompany loans or advances, which it was all the
more incumbent upon him to do since his accountants had entered them in the
financial statements as advances to a shareholder. However, I cannot allow the
interest that the auditor attributed to the appellant under section 80.4 of the
Act. Paragraph 80.4(3)(b) states that subsections (1) and (2) do not
apply in respect of any loan or debt that that was, as here, included in
computing the income of a person under Part I of the Act. For these reasons,
the interest thus attributed should not be allowed.
[22] In my opinion, the respondent
has discharged her burden of proof with respect to the penalties. The auditor's
assessments of penalties meet the requirements of the Act. The appellant's
bookkeeping lacked thoroughness and, in particular, does not enable a
distinction to be drawn between his personal affairs and the income of his
corporations. He was not unaware that this would have an impact on his income
tax returns and could constitute false statements in those returns. In the
circumstances of this case, I find that the appellant was not oblivious of the
fact that his standard of living was such that he required additional income in
the form of benefits from his corporations; consequently, he had to report that
income.
[23] For the foregoing
reasons, the appeals are dismissed in part. The assessments are referred
back to the Minister for reconsideration and reassessment on the basis of the
Consent to Judgment reducing the taxable benefit for 1997 from $82,687 to
$55,687, plus related penalties, and cancelling the
interest added to the loans taxed in the appellant's hands under
subsection 15(2) of the Act. The respondent is entitled to her costs.
Signed at Ottawa, Ontario, this 15th day of June 2006.
"François Angers"
Translation
certified true
on this 31st day
of October 2007.
Erich Klein, Revisor
APPENDIX
Relevant
statutory provisions
Subsections
15(1) and 15(2)
(1) Benefit conferred on shareholder — Where at any time in a taxation year a benefit is
conferred on a shareholder, or on a person in contemplation of the person
becoming a shareholder, by a corporation otherwise than by
(a) the
reduction of the paid-up capital, the redemption, cancellation or acquisition
by the corporation of shares of its capital stock or on the winding-up,
discontinuance or reorganization of its business, or otherwise by way of a
transaction to which section 88 applies,
(b) the payment of a
dividend or a stock dividend,
(c) conferring,
on all owners of common shares of the capital stock of the corporation at that
time, a right in respect of each common share, that is identical to every other
right conferred at that time in respect of each other such share, to acquire
additional shares of the capital stock of the corporation, and, for the purpose
of this paragraph,
(i) where
(A) the voting rights attached to a
particular class of common shares of the capital stock of a corporation differ
from the voting rights attached to another class of common shares of the
capital stock of the corporation, and
(B) there are no other differences
between the terms and conditions of the classes of shares that could cause the
fair market value of a share of the particular class to differ materially from
the fair market value of a share of the other class,
the shares of the particular class shall
be deemed to be property that is identical to the shares of the other class,
and
(ii) rights are not considered
identical if the cost of acquiring the rights differs, or
(d) an action described in
paragraph 84(1)(c.1), (c.2) or (c.3),
the amount or value thereof shall, except
to the extent that it is deemed by section 84 to be a dividend, be included in
computing the income of the shareholder for the year.
(2) Shareholder debt —
Where a person (other than a corporation resident in Canada) or a partnership
(other than a partnership each member of which is a corporation resident in Canada) is
(a) a shareholder of a
particular corporation,
(b) connected with a shareholder of a particular
corporation, or
(c) a member of a partnership, or a
beneficiary of a trust, that is a shareholder of a particular corporation
and the person
or partnership has in a taxation year received a loan from or has become
indebted to the particular corporation, any other corporation related to the
particular corporation or a partnership of which the particular corporation or
a corporation related to the particular corporation is a member, the amount of
the loan or indebtedness is included in computing the income for the year of
the person or partnership.
Subsection 80.4(1)
(1) Loans [to employees — deemed interest] — Where a person or partnership receives a loan or
otherwise incurs a debt because of or as a consequence of a previous, the
current or an intended office or employment of an individual, or because of the
services performed or to be performed by a corporation carrying on a personal
services business, the individual or corporation, as the case may be, shall be deemed
to have received a benefit in a taxation year equal to the amount, if any, by
which the total of
(a) all
interest on all such loans and debts computed at the prescribed rate on each
such loan and debt for the period in the year during which it was outstanding,
and
(b) the
total of all amounts each of which is an amount of interest that was paid or
payable in respect of the year on such a loan or debt by
(i) a person or partnership (in this
paragraph referred to as the "employer") that employed or intended to
employ the individual,
(ii) a person (other than the debtor)
related to the employer, or
(iii) a person or partnership to or for
whom or which the services were or were to be provided or performed by the
corporation or a person (other than the debtor) who does not deal at arm's
length with that person or any member of that partnership,
exceeds the total of
(c) the
amount of interest for the year paid on all such loans and debts not later than
30 days after the end of the year, and
(d) any portion
of the total determined in respect of the year under paragraph (b) that
is reimbursed in the year or within 30 days after the end of the year by the
debtor to the person or entity who made the payment referred to in that
paragraph.
Paragraph 80.4(3)(b)
(3) Where ss.
(1) and (2) do not apply — Subsections (1) and (2) do not apply in respect of any loan or
debt, or any part thereof,
. . .
(b) that was included in computing the
income of a person or partnership under this Part.
Subsection 163(2)
(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
. . .
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