Citation: 2006TCC199
Date: 20060718
Docket: 2004-3072(IT)I
BETWEEN:
YOUSSEF DRIDI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
(Delivered orally from the bench on February 6, 2006, at Québec, Quebec and and amended for greater clarity and precision.)
Archambault J.
[1] Youssef Dridi is appealing from the assessments made by the Minister of National Revenue (Minister) for the 2000, 2001 and 2002 taxation years (relevant period). The Minister included in Mr. Dridi's income undeclared income that he calculated according to the net worth method. The amounts included, after adjustment at the objection stage, come to $8,483 for 2000, $24,086 $ for 2001 and $7,782 for 2002.
[2] At the beginning of the hearing, the following facts were admitted by Mr. Dridi, i.e. those set out in subparagraphs 7(a), (b), (c) and (f) of the Reply to the Notice of Appeal:
[translation]
(a) During the years at issue, the Appellant operated a taxi business;
(b) In his income tax returns, the Appellant declared a net business income of $4,296 for the 2000 taxation year, $2,420 for the 2001 taxation year and $12,460 for the 2002 taxation year;
(c) The Appellant's tax returns for the taxation years at issue were audited by the Minister of National Revenue;
. . .
(f) Cost of living expenses were determined by the audit based on the data provided by the Appellant's agent.
[3] In order to keep matters short, and considering the irrelevance of the question, it was agreed that the Court did not need to decide on the status - employee or contractor - of Mr. Dridi during the relevant period. Only the amount of income is at issue. The Court must determine whether Mr. Dridi was entitled to deduct, in calculating the discrepancy according to the net worth method for the year 2000, an amount of $7,000 that he allegedly received as a gift in August 2000 from his sister, a Tunisian, when she was visiting Quebec. The other issue has to do with the penalties for late filing of tax returns and penalties assessed under subsection 163(2) of the Income Tax Act (Act) for a false statement in a tax return made knowingly or under circumstances amounting to gross negligence.
Factual Context
[4] Mr. Dridi studied computer science in a college of general and professional education, or "CEGEP," in the 1980s. He returned to CEGEP in 1997 to study international trade.
[5] Among the jobs he did after his studies, he mentioned working as procurement inspector on the Valcartier military base from 1989 to 1992. He also owned a café from 1985 to 1986, and again from 1993 to 1996. His duties as café owner included filing GST and QST returns. He has also indicated that he used the services of an accountant to file his income tax returns.
[6] Mr. Dridi said that he started to drive a taxi in 1997. According to his memory, he did so year round from 1998 to 2002, except for the month of December 2002, when he went to Tunisia to get married. However, the evidence shows that his memory failed him concerning the 2000 taxation year, as Mr. Dridi declared employment insurance benefits of $5,780 in his tax return for that year. When I asked him to estimate the period for which these benefits had been paid to him, he indicated that it was probably six months.
[7] Mr. Dridi used the services of an accountant to help him file his tax returns for the relevant period. He did not know if she was a member of a professional body, but it appears most likely that she was an ordinary accountant. The name of this person appears on each of the tax returns filed by Mr. Dridi for the relevant period (Exhibit I-1). He stated that he gave the accountant all of the documents and vouchers that he had in an envelope. He relied on her for the returns to be filed and correct.
[8] Mr. Dridi stated that, after the Minister's audit, he lost confidence in this accountant, especially after noting that she did not wish to testify at the hearing. It must be mentioned that the Minister's audit started at the beginning of May 2003, when the 2002 return had not yet been filed. The Minister points out that the income declared for 2002 is much higher than that declared 2000 and 2001. Indeed the net income from the taxi operation declared by Mr. Dridi came to $4,296 for 2000 (to which he added $5,780 in employment benefits), $2,420 in 2001 and $12,460 in 2002.
[9] It must also be mentioned that the three returns were filed late, according to the seal appearing on the last page of each of the returns marked I-1. The 2000 return was filed in July 2001, the 2001 return on May 16, 2002, and the 2002 return on June 13, 2003.
[10] In her arguments, counsel for Mr. Dridi submitted that Mr. Dridi had declared all the income that he had earned. In support of this claim, she mentioned the fact that Mr. Dridi had given his accountant all his documents and that he had counted on her for the declared income to be exact. I would like to mention that this evidence is far from being sufficient for a taxpayer who has the burden to prove that the income estimated by the Minister is incorrect. Mr. Dridi's evidence would have to be much more convincing and probative with regard to the inexactness of the numbers determined by the net worth method. I would like to recall here what I said in Léger v. The Queen, 2001 DTC 471, at pages 473 and 474:
[13] First of all, the burden of proof resting on Mr. Léger in his appeals must be dealt with. My colleague Judge Tardif had an opportunity to discuss the burden of proof in a case that, like this one, raised the issue of the use of the net worth method.
[14] In Bastille v. R., 99 DTC 431, ([1999] 4 C.T.C. 2155), he wrote the following 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.
[15] Another of my colleagues, Judge Bowman, stated the following in Ramey v. Canada, [1993] T.C.J. No. 142 (QL) ([1993] 2 C.T.C. 2119, 93 DTC 791), at paragraph 6:
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.
[Emphasis added.]
[11] These are the principles that must guide me on Mr. Dridi's appeals. Unfortunately, I do not find the evidence he has submitted regarding the existence of the gift he claims to have received in August 2000 to be probative; in fact, it raises a number of doubts. First of all, when Mr. Dridi was questioned at the initial meeting with the Respondent's auditor, he stated that he had not received a gift, a bequest, lottery winnings or any loans other than those that appear in his balance sheet and which the Minister took into account in his calculation of undeclared income. Not only did he not mention the existence of a gift at the initial meeting, he also did not do so at the second meeting, during which the auditor presented him with her draft assessment.[1] It wasn't until two months later, after having changed accountants, that Dridi mentioned to the Minister the existence of this gift of $7,000.
[12] Based on Mr. Dridi's testimony, he had part of the $7,000 at the end of the 2000 taxation year since, he said, he used part of this sum in 2000, part in 2001 and part in 2002. It is disconcerting to note that Mr. Dridi did not declare this asset when determining his net worth. For his balance sheet and the net worth calculations to be complete, cash on hand would have to appear. However, there is no amount indicated in the "cash on hand" line item. The only piece of evidence corroborating the version presented by Mr. Dridi is an alleged written statement made by his sister in Tunisia, and he only supplied a copy of the translation of this statement. Even though this hearsay evidence can be admissible since these are informal procedure appeals and this Court is not bound by the rules of procedure (subsection 18.15(4) of the Tax Court of Canada Act), the probative value of the evidence remains a question that is left to the discretion of the Court. Obviously, a third party statement made outside the presence of the Court does not have the same probative value as that of a witness who is present and may be cross-examined. Not only that, in this case the original of the statement was not filed at the hearing and no signature appears on the copy, except for that of the Tunisian translator. The original should have been filed to establish that it was signed and to have the signature recognized by Mr. Dridi.
[13] This statement however was just one of the means of proof available to Mr. Dridi. There were many other ways to establish the existence of the gift of $7,000. Unfortunately for him, he did not introduce any other evidence of this gift to him. There is no trace of this sum being deposited in a bank account; such a deposit could, at the least, constitute circumstantial evidence of receipt of the gift. It is true that, as Mr. Dridi stated in his testimony, that there is no obligation in Canada to deposit money received into a bank account. Mr. Dridi had every latitude to keep the sum in question at home. The problem with this conduct is that when it is necessary to prove the existence of a gift, one is deprived of a means of proof. Moreover, Mr. Dridi did not summon any eyewitnesses of the payment of the sum of $7,000.
[14] Mr. Dridi's testimony alone is insufficient, due to his conduct during the Minister's audit, a conduct that raises a number of doubts as to his credibility. Without corroborating evidence, I was not satisfied beyond the balance of probabilities that Mr. Dridi received the gift in question. Moreover, what Mr. Dridi said to explain the fact that he did not deposit the amount of the gift in a financial institution seems somewhat unusual. He made reference to cultural characteristics of the community he belongs to justify his conduct. I must mention that people of that community are not the only ones to act in that manner. Many native born Quebeckers do the same thing. At one time - and I would not be surprised if it were still the case today - people put their savings in a wool sock. In any case, regardless of the motivation and the cultural traits involved, the fact that a person does not deposit their money at the bank deprives them of a means of proof.
[15] There is another fact that raises a certain doubt as to Mr. Dridi's credibility. He indicated that he had obtained a loan of $20,000 in 2002 to pay off the price of his residence on Mont-Thabor Avenue in full. First he was refused by the caisse populaire; however, he managed to obtain a loan from the Bank of Montreal by refinancing the loan guaranteed by a hypothec on the rental building that he owned on Côte d'Abraham. When analyzing the fluctuations of Mr. Dridi's liabilities in his balance sheet, it is noted that the amount of this hypothec came to $55,296 in 1999, to $53,636 in 2000 and $51,229 in 2001; considering the $49,555 appearing in the balance sheet as the outstanding balance on December 31, 2002, and which, claims Mr. Dridi, relate to both the property on Côte d'Abraham and the one on Mont-Thabor Avenue, one notices that the amount of this debt decreased annually by approximately $2,000. It is unlikely that Mr. Dridi would have been able to finance the purchase price of $20,000 with his own funds. To accept his version of the facts, it would have to be understood that he reimbursed, on top of the $2,000 paid each year, the sum $20,000 before the end of 2002. So, in either case, there was a significant payout of funds from an unknown source that allegedly paid for the Appellant's personal residence.
[16] There is no voucher or banking document that can support Mr. Dridi's version. The memory can play tricks on us. We might think we made a payment of $20,000, then completely forget the circumstances in which it was made. A good example of such a situation is when Mr. Dridi stated that he worked the entire year in 2000, when in all likelihood he only worked for six months. During the other six months, he apparently received employment insurance benefits.
[17] Also disconcerting is the fact that Mr. Dridi never provided any data on his cost of living, despite being asked by the Minister's auditor. He simply waited for the auditor to make an estimate largely based on data from Statistics Canada and partially on information appearing in Mr. Dridi's income tax returns, i.e. statements of real estate rental; After that, all he did was attack the numbers used by the Minister, stating, for example, that he did not drink or smoke and that this line item must be eliminated from his expenses. To grant a deduction of $7,000 in the calculation of the discrepancy revealed by the net worth method, the Court must be satisfied that this method was applied in accordance with good practice, in the most complete and precise manner possible. All of Mr. Dridi's assets and all of his expenses related to cost of living should have been indicated to the Minister for the purposes of the calculation under this method. The fact that he did not declare funds that he had on hand raises serious doubts as to whether the Minister's calculations are complete. The deduction of certain amounts in the calculation of the discrepancies cannot be allowed without knowing if all the amounts that should be included are there. In this case, it is known that certain assets are absent from Mr. Dridi's balance sheet and that Mr. Dridi did not supply any data on his cost of living. It is estimated by the Minister at $228 per month.
[18] For all of these reasons, I conclude that the evidence submitted by Mr. Dridi regarding the existence of a gift of $7,000 is insufficient. I was not satisfied on a balance of probabilities that Mr. Dridi received this gift, and even if he had, I would not be able to grant him a deduction. Mr. Dridi was the "author of his own misfortunes."
[19] This leaves the matter of the penalties. To my knowledge, the Court has no authority to cancel, under any principle of equity, a late filing penalty. That is why I asked counsel for Mr. Dridi if she knew of any decisions in case law that acknowledge such an authority of the Court; she did not know of any either. This Court has the duty of ensuring that the Minister's assessments are established in accordance with the relevant legislative provisions. Inasmuch as these provisions have been respected, the Court cannot intervene. However, subsection 220(3.1) of the Act grants the Minister discretion to cancel penalties or interest. For example, the Minister can waive interest or cancel penalties if he has misled the taxpayer. Since Mr. Dridi's tax returns were filed late, late filing penalties are justified.
[20] With regard to the penalty provided in subsection 163(2) of the Act, I will Mr. Justice Strayer in Venne v. Canada (Minister of National Revenue - M.N.R.) (F.C.T.D.), [1984] F.C.J. No. 314 (QL), the classic judgment on this subject. He mentions that at pages 11 and 14 of the QL text quoted by counsel for the Respondent:
I have come to the conclusion that the defendant has not sufficiently proven that the misstatements were made "knowingly" by the plaintiff in his tax returns for the years in question. I should note here, as it is relevant to the whole question of the application of penalties under sub-section 163(2), that there seems to be a certain element of subjectivity recognized in the case law with respect to assessing the knowledge or gross negligence of a taxpayer with respect to misstatements in his returns . . .
. . . "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.
[Emphasis added.]
[21] Obviously, the Minister has the burden of proving the basis of the penalty, that is, demonstrate that Mr. Dridi made a false statement in his income tax return either knowingly or in circumstances amounting to gross negligence. A preliminary remark is called for. Although it may be true that this is a penal matter, that does not make it a criminal matter. If that had been the case, the Minister's burden of proof would have been much heavier, i.e. proof beyond all reasonable doubt. In matters of administrative penalties, the Minister's burden of proof is to establish the relevant facts on a balance of probabilities. Here, the Court must decide whether Mr. Dridi knowingly made a false statement, or if there was negligence tantamount to intentional acting or indifference as to whether the law was complied with or not.
[22] On several occasions, I have cancelled penalties assessed by the Minister when an assessment was made according to the net worth method, in particular in cases where the income attributed to the taxpayer could have been that of another taxpayer. In Sophie St-Pierre v. Her Majesty the Queen (1999-4239(IT)G), an unreported judgment, the taxpayer had been assessed while her husband may have been involved in drug trafficking. She was unable to meet her duty to demonstrate that the amount of undeclared income assessed by the Minister was false. However, in that case, I was not convinced by the Minister's evidence that the taxpayer had made a false statement, since that income could have been her husband's. In Dowling v. Canada, [1996] T.C.J. No. 301 (QL), 96 DTC 1250, it was argued, as a defence, that there had been "gambling" earnings. Judge Lamarre accepted this argument and concluded that the discrepancy was not "so great that it could not have been explained in part by the appellant's gambling activities." (QL, para. 113; DTC, p. 1263). Thus, when there is the possibility that income may be attributable to another taxpayer or that the sums in question do not constitute income for tax purposes, it may indeed occur that the Minister fails in his attempt to establish that the taxpayer knowingly made a false statement in his or her income tax return or made such a statement in circumstances amounting to gross negligence.
[23] Here I find that the Respondent has proven, on a balance of probabilities, that the income revealed by the discrepancies in net worth constitute income for tax purposes and that that income is Mr. Dridi's.
[24] One piece of evidence that led me to this conclusion is Mr. Dridi's top line, which I found in a file analysis from the Caisse populaire Desjardins dated March 15, 2001 (Exhibit I-3). This analysis concerns a financing application from Mr. Dridi for the purchase of a taxi permit. The sheet accompanying this analysis indicates a gross annual income of $69,600 and a net annual income of $4,658.[2] Mr. Dridi was unable to explain where this figure came from. In my opinion, the caisse populaire did not invent it, and it is very likely that it was supplied by Mr. Dridi himself. Mr. Dridi indicated in his testimony that his share of the gross revenue was 40% when his taxi income was percentage-based and that this arrangement was less lucrative than owning a taxi. This is likely the reason why he acquired another taxi permit, after having sold his first permit and the rental building on Côte d'Abraham. If it was not more lucrative, why acquire another taxi permit?
[25] If you apply 40% to the gross revenue of $69,600, it comes to $27,840. The amounts calculated by the Minister using the net worth method for Mr. Dridi's income from taxi operation total $17,567.[3] Of this figure of $17,567, $5,780 is from employment insurance benefits and the balance of $11,787 would represent income from operating a taxi for six months. If we round this taxi income to $12,000 and multiply by two, that gives us approximately $24,000 in taxi income for 12 months. This amount is, after all, fairly close to $27,840. For 2001, the income established by the net worth method is $29,318.[4] The income for that year adjusted according to the net worth method is slightly greater than $27,840. For 2002, the adjusted income comes to $25,483, also an amount close to $27,840. In my opinion, the income adjusted according to net worth is perfectly reasonable and plausible and represents income from operating the taxi.
[26] Being satisfied on a balance of probabilities that the discrepancies constitute income from operating the taxi, I conclude that the Minister discharged his burden of proof with regard to the application of the penalty for false statement. Mr. Dridi is not, as was the case in Venne, an uneducated taxpayer. He studied at CÉGEP: first in computer science, then in international trade. To study computer science, in my opinion, it is necessary to have a very thorough intellect and a good sense of logic. Furthermore, with regard to the course in international trade, I cannot imagine that accounting and finance were not involved in this course. Mr. Dridi also had experience in running businesses. He ran a food service business on at least two occasions. He knew that records had to be kept, not only to manage the business properly, but also to respect his tax obligations. On top of all that, there is also his experience as procurement inspector at the military base. So, not only did Mr. Dridi have a CÉGEP education, giving him a good grasp of the importance of keeping records in operating a taxi, he also had practical experience.
[27] I am satisfied, on a balance of probabilities, that he knew he earned much more than he declared. I infer from this situation that he knowingly, or at the very least with indifference as to whether the law was complied with or not, made false statements in his income tax returns for 2000, 2001 and 2002.
[28] For all of these reasons, Mr. Dridi's appeals are dismissed.
Signed at Ottawa, Canada, on this 18th day of July 2006.
"Pierre Archambault"
Translation certified true
on this 18th day of December 2006.
Gibson Boyd, Translator
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