Citation: 2005TCC368
Date: 20050601
Docket:
2004-3839(IT)I
BETWEEN:
H.L.S. LESSARD
ÉLECTRIQUE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR
JUDGMENT
Lamarre Proulx J.
[1] This is an appeal under
the informal procedure.
[2] The point for
determination is whether certain amounts must be included in computing the
Appellant's income and whether there was any intent to understate income within
the meaning of subsection 163(2) of the Income Tax Act.
[3] The reassessment was
based on the inclusion of an amount of $45,000 in computing the
Appellant's income for 2000. The events surrounding the addition of the $45,000
amount in computing the Appellant's income are described in
subparagraphs 4(d) to (h) of the Reply to the Notice of Appeal (the
"Reply") as follows:
[TRANSLATION]
...
(d) the
Minister audited the books and records of "H.LS Lessard Électrique
Inc.", and the deposit method was used to audit revenues for the fiscal
year ending March 31, 2000;
(e) an
adjusting entry was made on March 31, 2000, crediting the sum of $45,000
to the "Loans to directors" account and debiting the same amount from
the "Construction
Revenue" account;
(f) the
said adjusting entry was supported by a terse notation: "Non-taxable
deposit";
(g) the
said adjusting entry was not supported by any documentation, and no explanation
was provided to the Minister concerning the "Non-taxable deposit"
notation;
(h) the
Minister analyzed the deposit slips of the corporation's bank account for the
period from April 1, 1999, to March 31, 2000, and found no
non-taxable deposits of $45,000 or any non-taxable deposits that might total
the said amount;
[4] At the hearing, the
auditor from the Minister of National Revenue (the "Minister")
explained that the underlying logic of the aforementioned entries might have
been that one or more deposits totalling $45,000 had come from
the director, which would explain why the debit from the "Construction
Revenue" account and the crediting of a corresponding amount to the
"Loans to directors" account were characterized as a
"non-taxable deposit". However, as stated in subparagraph 4(h),
there was no evidence of those deposits made by the shareholder.
[5] At the hearing, the
Appellant party, represented by Viviane Pépin, did not try to prove those
deposits either. Ms. Pépin described herself as an accounting technician
who kept the Appellant's books on a monthly basis, or more often if necessary.
[6] The agent contended that
outside accounting errors had been made and that the Appellant's income should
be reduced by two amounts: $18,598.31, a payment from an insurance company,
and $22,000, which was entered in the financial statements for work in
progress.
[7] Mr. Lessard, the
president and owner of the Appellant, explained that, in 1992, the Appellant
had won a subcontract for the installation of generators. As a result of
defective work or human error, one of the generators had exploded before the
Appellant had received full payment under its contract from the general
contractor. Following extensive negotiations, the Appellant's lawyers obtained
a certain amount from the insurance company. What was shown at the hearing was
a deposit slip for an amount of $18,598.31 from those lawyers.
[8] The accounting
technician had recorded the amount of $18,598.31 under accounts receivable. Mr. Lessard
said that the original claim had previously been taken into account and had not
been deleted from accounts receivable because it had never been considered a
bad debt.
[9] The Appellant did not
have the list of its accounts receivable for 2000. Furthermore, in
adding the said amount to accounts receivable, the Appellant had come up with a
negative amount of $16,492.36, which, according to the Minister's auditor is
impossible and, according to him, tends to prove that the said amount was no
longer in accounts receivable. The amount thus must have been entered under
construction revenue, where the outside accountant's adjusting entry had put
it.
[10] As to the amount of $22,000
included in computing the Appellant's income for 2000 for work in progress, the
president of the Appellant said that there was no such work in progress. However,
he admitted that, in 2001, an adjusting entry had removed that amount of income
from the financial statements. He contended, however, that only 2000 was in
issue and that I should not be concerned with what happened in 2001. He also
admitted reluctantly that one must provide proof of a certain amount of
positive income in order to retain the right to an electrical contractor's
licence. That fact was confirmed by the agent for the Appellant.
[11] The Minister's auditor
explained that that amount in fact had no impact. It was a temporary entry that
was bound to be deleted the following year. That may be seen from
Exhibits I‑1
and I‑2.
Analysis and Conclusion
[12] It would have been
helpful to read the letter from the lawyers who sent the payment of the amount
in order to determine its exact nature. That letter was not submitted, but I
must conclude from Mr. Lessard's explanation that it was indeed payment of
compensatory damages by an insurance company.
[13] The case law rule is that
an amount paid to replace an amount that would have been included in computing
income shall be included in that computation. This is not a rule whose
application was very clear. The rule has just been vastly clarified by the
Supreme Court of Canada in Tsiaprailis v. Canada, 2005 D.T.C.
5125, and I cite portions of paragraphs 7 and 15 of the Reasons:
[7] … As
she explains, in assessing whether the monies will be taxable, we must look to
the nature and purpose of the payment to determine what it is intended to
replace. The inquiry is a factual one. The tax consequences of the damage or
settlement payment is then determined according to this characterization. In
other words, the tax treatment of the item will depend on what the amount is
intended to replace. This approach is known as the surrogatum principle. …
[15] The
determinative questions are: (1) what was the payment intended to replace?
And, if the answer to that question is sufficiently clear, (2) would the
replaced amount have been taxable in the recipient's hands?
[14] If the reason for not
including the amount had been a doubt as to the obligation to include a
compensatory amount received from an insurance company in computing income, the
penalty might have been incorrectly assessed. However, the reason given for not
including the amount was that the account receivable had never been written
off. That statement was made without evidence. Furthermore, no document
concerning the payment of that amount was filed.
[15] As to the amount of
$22,000 recorded for work in progress, counsel for the Respondent stated that
the Appellant had elected to be taxed on work in progress for its own reasons.
That was its choice. That amount was erased from the financial statements in
2001. It cannot also be deleted in 2000.
[16] The agent for the
Appellant blamed the accountant who had prepared the financial statements. In
her view, he had made unauthorized entries and had made errors in his
accounting.
[17] The accountant did not
come to testify in order to confirm that he in fact had made the non-taxable
deposit entry in the amount of $45,000 or to explain why he had done so. The
only reading of the evidence adduced is not at all conclusive on this point.
[18] In view of the lack of
valid evidence to the contrary and of the Appellant's divergent explanations
concerning the non-inclusion of the amount of $45,000, I can only conclude that
the incorrect entry was made at the request of the sole director of the
Appellant.
[19] The appeal is accordingly
dismissed.
Signed at Ottawa, Canada, this 1st
day of June 2005.
"Louise Lamarre Proulx"
Translation certified true
on this 7th day of February, 2006.
Garth McLeod,
Translator
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