Citation: 2005TCC197
Date: 20050317
Docket: 2004-4367(IT)I
BETWEEN:
PASCAL PILON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] The Appellant has appealed an assessment concerning his 2001 taxation year. In determining the Appellant's income, the Minister of National Revenue (the "Minister") added $32,597 in unreported net business income. This omission caused the Minister to impose a $2,211 penalty on the Appellant for gross negligence under subsection 163(2) of the Income Tax Act (the "Act"). The amount of $32,597 consists of $30,159 in total unreported income, plus $2,438 in expenses that the Minister disallowed. The $2,438 consists of $2,400 claimed as storage fees for the period of January 1 to June 30, 2001, plus $38 claimed - and now accepted by the Respondent in paragraph 8 of the Reply to the Notice of Appeal -as expenses for towing his car.
[2] During the taxation year in question, the Appellant operated a cable installation business named Méga Câble Enr. On October 1, 2001, he incorporated 9108-7593 Québec Inc. (9108), a business corporation whose economic activities consisted of taking over the Appellant's operations. The Appellant is the sole shareholder and director of 9108. He is also the corporation's president. 9108 continued to operate the business under the name Méga Câble Enr.
[3] During an audit of companies that did business with the Appellant, several cheques made payable to Méga Câble Enr. were examined. This examination revealed that all the cheques predated September 30, 2001. The Minister added the total value of these cheques, namely $30,159, to the Appellant's income. The Appellant acknowledges that the amount is business income but argues that it was earned and reported by 9108.
[4] The Appellant also admits that he did not act on the Minister's request for an income tax return for 9108 in respect of the fiscal year commencing in 2001, a work sheet breaking down the income reported by 9108 and the income reported by the Appellant for the fiscal year commencing in 2001 and the taxation year in question, and, lastly, for the bank account of 9108 and the storage room lease.
[5] At the hearing, the Appellant, through his accountant, tendered in evidence a receipt and a note signed by Alain Leblanc of St-Colomban, certifying that he leased a 14-foot by 14-foot room to the Appellant from January to June 2001 for the sum of $2,400. The Appellant also tendered Mr. Leblanc's notice of assessment declaring this rental income. The Appellant testified that the room was used exclusively to store stock and materials used for his business and his trade. He denied storing personal items there. The Appellant testified frankly and spontaneously on this question, and I accept his claim he rented the room for business purposes. I therefore allow the $2,400 rental expense.
[6] The Appellant tendered in evidence a statement of income and expenses for 9108 in respect of the year ending September 30, 2002. That document, like the first income tax return for 9108, took an enormous amount of time to prepare. In fact, the first income tax return for 9108 was received by the Revenue Agency on October 8, 2004. According to the Appellant, this delay is attributable to the accountant's troubles sorting the Appellant's documentation, which had been given to him in a very full plastic bag. The Appellant admits that he has no knowledge of income tax and says that he relied on his accountant to take care of it. He does not know the date of the 9108 income tax return and claims to have incorporated because his accountant suggested that he do so.
[7] The Appellant acknowledges that the cheques predate the incorporation of 9108, but adds that they were payable to Méga Câble Enr., and that he relied on the accountant for his 2001 income tax return. The accountant, for his part, claims that he relied on the T-5018 slip made by S.S. Communication Enr., which sets out the contractual payments made to 9108 for the period ending August 31, 2001, i.e. one month prior to incorporation, as the basis for attributing this income to 9108. The amount stated on the T-5018 slip is $33,158.66.
[8] Thus, the issue in contention is the person or entity to which the income of $30,159 should be attributed. The amounts in question were undoubtedly paid before 9108 was incorporated. In fact, according to the T-5108 slip, they were paid until August 31, 2001, because the document indicates contractual payments from S.S. Communication Enr. to 9108. But the trouble with this is that 9108 only came into being on October 1, 2001, and that S.S. Communication Enr. could not enter into a contract with an entity that did not exist and make payments to such an entity before the date it began to exist. There is also no evidence before me that the subcontracting agreement was made by or on behalf of 9108 before its creation and then ratified after its incorporation. The fact that the cheques were payable to Méga Câble Enr., and that 9108 operated a business under the same name after its incorporation, does not mean that its pre-incorporation income can be attributed to it. We are dealing with two separate legal entities that operated a business under the same business name, but at different times. This does not mean that the pre-incorporation activities of a company can never be entered in the company's books (see Interpretation Bulletin IT-454). However, in the case at bar, no evidence has been adduced that could warrant doing so.
[9] In the case at bar, the Appellant had a company incorporated on the advice of his accountant, and simply continued his activities after October 1, 2001. Thus, based on the evidence, all the income produced by the Appellant prior to that date belongs to him. All the income paid by S.S. Communication Enr. was paid at least one month before the company was incorporated. The evidence does not show that the Appellant intended to incorporate for the purposes of its contractual obligations with S.S. Communication Enr., or that 9108 ratified contracts.
Penalty
[10] The Respondent imposed a penalty under subsection 163(2) of the Act, which reads as follows:
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
. . .
[11] 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 Act is being complied with or not. (See Vennev. Canada, [1984] F.C.J. No. 314 (QL), 84 DTC 6247.)
[12] Couture C.J.T.C.C., as he then was, stated as follows in Morin v. M.N.R., 88 DTC 1592, at 1593-94:
To escape the penalties provided in subsection 163(2) of the Act, it is necessary, in my opinion, that the taxpayer's attitude and general behaviour be such that no doubt can seriously be entertained as to his good faith and credibility throughout the entire period covered by the assessment . . .
[13] The burden is on the Respondent to prove, on a balance of probabilities, that the Appellant knowingly made a false statement or omission under circumstances amounting to gross negligence. Counsel for the Respondent relies on that fact that the income in question was not declared by the Appellant, and that this false statement constitutes gross negligence because the Appellant did not consider this question and relied on his accountant. In addition, he did not supply the supporting documentation regarding 9108, which was requested at the objection phase.
[14] While the Appellant did not declare the income from S.S. Communication Enr., 9108 did. The accountant's explanation, to the effect that he relied on the T-5108 slip in attributing the income to 9108, is apparent support for his decision. The Appellant does unquestionably seem to be lost when faced with the complexities of bookkeeping, and especially, the preparation of income tax returns. In my opinion, this is not a case of gross negligence or deliberate action on his part. While he did not ask himself any questions regarding the accountant's delays in submitting 9108's financial statements and income tax return, this does not call into question his good faith during the period covered by his assessment or his right to ask to whom the revenue is attributable. In my view, the circumstances of this case do not warrant the imposition of a penalty.
[15] The appeal is allowed in part and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment.
Signed at Edmundston, New Brunswick, this 17th day of March 2005.
"François Angers"
Translation certified true
on this 20th day of October 2005.
AvetaGraham, Translator
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