Citation: 2005TCC423
Date: 20050725
Docket: 2003-2985(IT)G
BETWEEN:
FABIEN PRUD'HOMME,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] In his income tax return for the year 1997, the
Appellant declared a business investment loss (BIL) of $170,000. Three-quarters
of that loss, i.e. $127,500, was claimed as a deductible business investment
loss. In an assessment, the notice of which is dated November 12, 2002, the
Minister of National Revenue ("the Minister") disallowed the
deduction claimed and imposed a penalty on the Appellant under subsection
163(2) of the Income Tax Act ("the Act"). The assessment
was made after the normal reassessment period.
[2] In making and
confirming the reassessment, the Minister relied on the following assumptions
of fact set out in subparagraphs 9(a) through (m) of the Reply to the
Notice of Appeal:
[TRANSLATION]
(a) The Appellant
is claiming a business investment loss in respect of Les habitations
Usitech Inc. (hereinafter "Usitech").
(b) Usitech
was incorporated in 1995 pursuant to the Business Corporations Act.
(c) In 2002, the
Canada Customs and Revenue Agency auditor examined the Usitech minute
book and found only one share certificate, which was issued to Michel Faille.
(d) According to
the minute book, Michel Faille was the only shareholder of Usitech.
(e) The Appellant
claims to have purchased 170 Class A shares in Usitech for a total of
$170,000, but never proved the payment.
(f) The Appellant
claims to have borrowed the money from Investissements Seahawk Ltée.
(g) Investissements Seahawk Ltée
was also owned by Michel Faille.
(h) The Appellant
never proved this loan from Investissements Seahawk Ltée.
(i) The Appellant
never proved that he repaid the loan.
(j) Investissements
Seahawk Ltée has filed no income tax return since July 31, 1995.
(k) Usitech has
never filed an income tax return and has never made any source deductions for
any employees.
(l) Usitech
has never declared bankruptcy.
(m) Michel Faille
implemented a scheme to enable taxpayers to lessen their tax burdens through
the use of fictitious losses.
[3] In addition, the Minister states as follows at
paragraph 10(n):
(n) Based on the
registration information submitted to the Inspecteur général des institutions
financières, Michel Faille was the majority shareholder of Usitech until
2000, when the corporation was officially deregistered.
[4] By imposing the
penalty and reassessing the Appellant outside the normal reassessment period,
the Minister relied on the following facts set out in subparagraphs 11(o) and
(p), which read as follows:
[TRANSLATION]
(o) The
facts set out in paragraphs (a) through (m) of this Reply to the Notice of
Appeal.
(p) The
Appellant knew that the business investment loss that he was claiming for the
1997 taxation year was fictitious.
[5] The parties also
produced a very brief agreement on the facts, which reads as follows:
[TRANSLATION]
AGREEMENT ON
THE FACTS
1. In his income
tax return for the 1997 taxation year, the Appellant claimed a deductible
business investment loss of $127,500.
2. Following an
audit by the Canada Customs and Revenue Agency, it was discovered that Michel
Faille had implemented a scheme to enable investors to claim a business
investment loss to which they were not entitled.
3. The same audit
uncovered the fact that the Appellant was one of the investors approached by
Michel Faille.
4. Thus, under the
circumstances, the Appellant was not entitled to the deduction claimed, because
the relevant requirements of the Income Tax Act had not been
met.
[6] Because of this
agreement, the Appellant is contesting only the penalty imposed under
subsection 163(2) of the Act at this time.
[7] The Appellant is a
certified real estate, equipment and machinery appraiser. After studying at the
Université du Québec à Montréal, he obtained his degree in 1987, and in 1990,
he founded his own company, Corporation Immobilière F.P.H.
("F.P.H."). In 1997, the company acquired the assets of another
company that had been doing business in the same field.
[8] While his income
was modest (roughly $20,000 – $30,000) in the early years, the
Appellant claimed that business picked up quickly because of the municipal
assessment challenges of the early 1990s. In 1992, 1993 and 1994, the company's
income was roughly $100,000 per year. In 1997, F.P.H. had a surplus of roughly
$250,000 on deposit in its bank account.
[9] The Appellant, who
was seeking a better return on this amount, contacted his
accountant François Vigneault, who told him that another accountant
named Benoît Desjardins was proposing a tax shelter with an attractive rate of
return. The Appellant, who said that he was willing to take certain risks in
relation to the investment, nonetheless claims to have checked with Mr.
Vigneault to ensure that everything was legal, because he wanted to maintain
his reputation and therefore did not want to do anything improper. Mr.
Vigneault allegedly reassured him in this regard and explained to him that the
investment involved the purchase of the losses of a Canadian corporation called
Usitech, which was in the prefabricated home business. The Appellant said that
he was interested in this information because he himself was in the real estate
business, and was aware that several companies, including Campeau and
Bonneville, were interested in this type of product, which had been marketed
rather successfully in Eastern European countries after their markets opened.
In addition, the Appellant said that he was not knowledgeable about investments
or taxation.
[10] The Appellant
explained that he then contacted Mr. Desjardins in or around September 1997. An
appointment was set up at Mr. Desjardins' office on De la Montagne Street in Montréal.
[11] At this first
appointment, Mr. Desjardins gave the Appellant his business card, which states
that he is a chartered accountant and identifies him as the Vice‑President
of Services financiers Seahawk Ltée. He explained to the Appellant that he had
just moved into offices on De la Montagne, which were larger than the previous
offices on de
Maisonneuve Street West. The Appellant explained that the offices filled the
entire floor and were new, modern and very nice, and that there were many
people there.
[12] According to the
Appellant, Mr. Desjardins introduced himself as a financial analyst
specializing in investments and tax shelters. Mr. Desjardins allegedly
told him that he had a team of specialists who scrutinized legislation so that
clients could benefit from it.
[13] Mr. Desjardins
allegedly explained the investment in Usitech as follows. The company was
indeed in the business of prefabricated homes, and was expanding, but had
accrued losses over its first years of operation and therefore needed funds.
According to the Appellant, Mr. Desjardins then told him that he chose certain
clients to become shareholders of the corporation, and that if the Appellant
wanted to invest, he could do so by purchasing shares.
Specifically, Mr. Desjardins allegedly proposed that the Appellant
purchase 170 shares in Usitech's share capital at $1,000 each for a total
of $170,000, which was the book value of the shares. The Appellant stated that
Mr. Desjardins told him that the market value of the shares was only $25,500
because of the accrued losses, so there was therefore a risk in investing.
However, according to the Appellant, the proposal was to borrow $170,000 to
purchase the shares, repay the loan in two to four instalments and then recover
the entire $170,000, less the market value of the shares, namely $25,500, which
Usitech would keep. Thus, the Appellant would have to pay $170,000 so that the
company could show this input of cash, but $144,500 would be returned to him.
The return yielded by this proposal was essentially a tax reduction resulting
from the ability to claim a BIL of $170,000.
[14] The Appellant stated
that Mr. Desjardins gave him a lot of information about Usitech and answered
his questions. According to the Appellant, "it was impressive" and
"everything looked properly arranged." As to whether the proposal was
lawful, the Appellant stated that Mr. Desjardins was very persuasive, and
in retrospect, a "sly fox."
[15] According to the
Appellant's explanations, he said that he would think about the proposal. He
then returned to see his accountant, and spoke with him about
Mr. Desjardins' proposal. Allegedly, Mr. Vigneault neither encouraged
nor discouraged him, stating that the proposal was beyond his ken as a personal
and small business accountant, but that it had worked for other taxpayers.
However, the Appellant claimed that Mr. Vigneault told him that
Mr. Desjardins was a well‑regarded acquaintance whose group consisted
of specialists, and that the proposal seemed "interesting on paper."
[16] A few weeks later,
the Appellant decided to accept the proposal. He then contacted Mr. Desjardins
again and asked him to prepare the necessary documents.
[17] At a meeting with
the Appellant in November 1997, Mr. Desjardins asked the Appellant to
sign a subscription letter for 170 Class A shares in the share capital of
Usitech in consideration of $170,000 (Exhibit A‑2). The Appellant
also signed a loan contract for $170,000, which was to be used to purchase 170
Class A shares in the share capital of Usitech (Exhibit A‑3).
[18] First of all, the
lender designated in the loan contract (Exhibit A‑3) is
Les Investissements Seahawk Ltée ("Seahawk"). The Appellant
claims that when he arrived at the meeting, the document had already been
signed by a Michel Faille on behalf of the lender. In addition, the document
was dated May 15, 1996. This date is clearly stated on both the
first page of the contract and on the second, directly above the signatures. I
should also note that this contract, which is only a few paragraphs in length
and alarmingly simple, states that share certificate No. A‑34,
issued to the borrower for 100 Class A shares, will be delivered to the
lender as security.
[19] However, the
subscription letter (Exhibit A‑2) is for 170 Class A shares,
not 100 Class A shares. The letter is also clearly dated
May 15, 1996. This date appears in bold directly above the Appellant's
signature.
[20] The Appellant stated
that the Appellant gave him certificate No. A‑34 for
170 Class A Usitech shares (Exhibit A‑5) at the November
1997 meeting. The certificate, signed by Michel Faille in his capacity as
President and Secretary‑Treasurer, is dated May 16, 1996.
[21] Lastly, the Appellant
alleged that he also received, at or shortly after the same meeting, a copy of
a resolution of Usitech's directors signed by Michel Faille, accepting the
subscription of 170 Class A shares by the Appellant and authorizing the
issuance of shares in his name. The date of May 15, 1996, is clearly stated on
both pages of the document (Exhibit A-4).
[22] The Appellant
testified that he never noticed the dates on the documents. He said that
he only examined the documents and realized that the date was inaccurate two
and a half years later, when he was informed that Revenu Québec was disallowing
the deduction that he had claimed.
[23] The Appellant
claimed that Mr. Desjardins told him, at their November 1997 meeting, that
the $170,000 in loan repayments could be made later in two, three or four
instalments.
[24] The Appellant, who
chose to make four payments, reported to Mr. Desjardins' office on
March 17, 1998, and handed him a first certified cheque for $50,000
payable to the order of Usitech. Mr. Desjardins then gave him a $47,000 bank
draft. The three other certified cheques, also made out to Usitech, were dated
March 24, 1998 ($47,500) April 2, 1998 ($45,000) and
April 9, 1998 ($27,500). Each cheque was handed to Mr. Desjardins
on the stated date and each time, Mr. Desjardins handed the Appellant a
bank draft in a given amount so that the total amount of the bank drafts that
Mr. Desjardins handed the Appellant was $144,500. (Exhibit A-6).
[25] Thus, as agreed,
Usitech kept $25,500. I should immediately note that while the $170,000 loan
agreement was signed with Seahawk (Exhibit A‑3), the Appellant
made the repayments using four cheques payable to Usitech.
[26] Following these
transactions, the Appellant claimed that he asked Mr. Vigneault, his accountant,
to prepare his 1997 income tax return and report a $170,000 BIL as directed by
Mr. Desjardins. According to the Appellant, Mr. Vigneault "knew the
process" so he made no unfavourable comments. At this point, I should note
that the Appellant's 1997 income tax return is dated April 6, 1998, and was
apparently delivered to the Canada Customs and Revenue Agency (CCRA) by hand on
April 17, 1998 (Exhibit I‑1). However, the most
interesting point is that the page on which the information about the $170,000
BIL is provided refers to the company as "Habitations Usite" and
gives the year of acquisition as 1996.
[27] According to the
Appellant, Revenu Québec notified him two and a half years later that the loss
he had claimed was disallowed. He told his accountant Mr. Vigneault about
this, and Mr. Vigneault allegedly replied that "it was too good to be
true" and that he was sorry. The Appellant also said that
Mr. Vigneault was stunned, and contacted Revenu Québec for an explanation,
whereupon he allegedly learned that the CCRA had investigated transactions
involving Michel Faille and that the results had been disclosed to
Revenu Québec. The Appellant explained that Mr. Vigneault felt guilty
and therefore looked after his file for two years without charge. Among other
things, Mr. Vigneault allegedly went with him to a meeting with Revenu Québec
officials and to a meeting with his counsel.
[28] The discussions with
Revenu Québec allegedly resulted in the penalty being withdrawn. As for the
discussions with the CCRA, the Appellant says that he retained
André Gauthier of the law firm of Heenan Blaikie to deal with the
officials in charge of the matter. The Appellant said that the discussions
always focussed on transactions involving Michel Faille, but that he maintained
that he did not know that individual.
[29] The Appellant
explained that this matter became a nightmare, that he considered himself a
victim and that he felt it was important to preserve his reputation in the eyes
of his clients and colleagues. He also stated that he had lost the $25,500 and
had obtained no tax deduction. Thus, he said, he experienced a significant
financial and emotional loss.
[30] He also said that he
had never made other investments, except to his RRSP.
[31] Yvon L'Écuyer
is now retired. At the relevant time, he was an investigator with the Special
Investigations section of the CCRA. Among other things, he investigated false
BIL claims made by roughly 60 taxpayers. These claims involved
Michel Faille and his confederates, as well as various accounting firms.
The scheme involved issuing false corporate share certificates and
"sell" fictitious losses to taxpayers in return for a variable
percentage of the income tax refunds obtained. The accounting firms involved
prepared the taxpayers' returns and charged 10-50% of the refunds that the
taxpayers obtained as a result of the false loss claims. In the Appellant's
case, Mr. L'Écuyer noticed that a Usitech share certificate had been issued in
1996 in consideration of $170,000, but that the Appellant's name was not
entered in the company's minute book. He also noticed that the company had
never filed an income tax return.
[32] Mr. L'Écuyer then
sent the Appellant a letter notifying him that the loss claim was being
disallowed and that he was preparing to impose a penalty under subsection
163(2) of the Act accordingly. The Appellant was given 30 days to provide
explanations or make representations. Since Mr. L'Écuyer received no respond
from the Appellant during that time, he decided to impose the penalty.
[33] Under
cross-examination, Mr. L'Écuyer explained that Michel Faille was a
chronic offender who had been selling false losses since 1994 and that the
transactions were primarily done through accounting firms or salespersons.
Apparently, due to a lack of evidence, Mr. Faille was apparently never
prosecuted criminally. However, charges have apparently been laid against
certain accounting firms.
[34] Mr. L'Écuyer
explained that all the taxpayers concerned were denied the losses, but that the
penalty under subsection 163(2) was not imposed on taxpayers who either
provided explanations that were considered satisfactory, or cooperated with the
CCRA.
[35] Turning back to the
Appellant, Mr. L'Écuyer admitted that he had spoken with the Appellant's
counsel, André Gauthier of Heenan Blaikie, but that he only did so once.
However, he claims that no documentation was produced, which is why the
penalty was not cancelled. Mr. L'Écuyer claims that he was not informed that
Revenu Québec had cancelled the Appellant's penalty.
[36] Counsel for the
Respondent maintains that the Appellant filed a false income tax return
knowingly or under circumstances equivalent to gross negligence when he
declared a BIL of $170,000, having never paid that amount, since he received
repayments from Mr. Desjardins.
[37] In her view, the
Appellant was merely seeking a way to avoid paying income tax and was wilfully
blind in that he presumed that the accountant Desjardins was acting in good
faith, and did not obtain additional information about Usitech's financial
situation (notably, he failed to ask for its financial statements.) She also
feels that the Appellant should have noticed that the documents were dated
May 1996, not November 1997. In support of her position, counsel for the
Respondent referred to the decisions in Venne v. Canada,
84 D.T.C. 6247, [1984] F.C.J. No. 314 (QL) (T.D.), Patricio v. Canada,
84 D.T.C. 6413, [1984] F.C.J. No. 540 (QL) (T.D.), Villeneuve v. Canada,
2004 D.T.C. 6077, [2004] F.C.J. No. 134 (QL) (C.A.)
and Lévesque Estate v. Canada, No. 94‑1792(IT)I,
March 21, 1995, 96 D.T.C. 3250, [1995]
T.C.J. No. 469 (QL).
[38] For his part,
counsel for the Appellant notes that subsection 163(2) is a penal provision
that must be interpreted strictly. In addition, he submits that the taxpayer
should be able to benefit from any reasonable interpretation that benefits him.
In this regard, he relies on the decision of the Federal Court of Appeal
in Chabot v. The Queen, 2002 DTC 6708.
[39] Counsel for the Appellant
notes that the Appellant was young and inexperienced at the relevant time and
that it was his accountant who recommended a tax shelter and referred him to
accountant Desjardins. Desjardins gave the Appellant the information about
Usitech and, with plausible explanations, convinced him to invest by becoming a
shareholder in the company and purchasing $170,000 of its share capital for
only $25,500.
[40] Counsel for the
Appellant submits that he had no reason to be fearful or suspicious, since it
appeared that everything was being done professionally and the Appellant
checked a second time with the accountant after meeting with the accountant
Desjardins. He also argues that the Appellant did not realize, at the time,
that the documents were antedated.
[41] Counsel for the
Appellant also notes that the Appellant's accountant was also bamboozled and
"did not catch on." It was so bad, he said, that the accountant later
expressed regret and looked after the Appellant's file free of charge for two
years. Thus, it cannot be concluded that the Appellant and his accountant were
in connivance with the machinations of the accountant Desjardins.
[42] Counsel for the
Appellant also notes that Michel Faille, the mastermind of the scheme, was not
prosecuted criminally, and that several taxpayers paid no penalty.
He notes that Revenu Québec agreed to cancel the penalty imposed on the
Appellant.
[43] In support of his
arguments, counsel for the Appellant refers to the decisions in Julian v.
The Queen, [2004] 3 C.T.C. 2501 (T.C.C.), Chabot, supra, Martin
v. The Queen, [2002] 2 C.T.C. 2773 (T.C.C.), Lamarre v. The Queen,
[2004] 1 C.T.C. 2508 (T.C.C.) and Villeneuve, supra.
[44] In referring to the
decision in Villeneuve, supra, he submits that a person can only be found
to have been wilfully blind if he or she was aware or seriously suspicious of a
scheme.
[45] In addition, in the
case at bar, counsel for the Appellant also notes that there was no arrangement
under which the Appellant was to pay another person a portion of the tax refund
obtained, as was done both in Villeneuve, supra, and Lamarre,
supra.
[46] In conclusion, he
submits that the Appellant was naïve and negligent but that a finding of gross
negligence is unwarranted because he had reason to believe that by becoming a
shareholder, he was well-founded in claiming Usitech's losses.
Analysis
[47] Obviously, the facts
on which the imposition of a penalty for gross negligence under subsection
163(2) of the Act is based must be analysed having regard to their
particular context, which means that drawing a comparison with the facts of
another situation would be a purely random exercise, if not patently dangerous.
[48] In addition, as a
matter of principle, the Federal Court of Appeal clearly established in Villeneuve,
supra, that the term "gross negligence" encompasses wilful
blindness as much as it encompasses an intentional act or a wrongful intent.
In Villeneuve, Létourneau J.A. stated as follows at paragraph 6:
6 With respect, I think the
judge failed to consider the concept of gross negligence that may result from
the wrongdoer's willful blindness. Even a wrongful intent, which often takes
the form of knowledge of one or more of the ingredients of the alleged act, may
be established through proof of willful blindness. In such cases the wrongdoer,
while he may not have actual knowledge of the alleged ingredient, will be
deemed to have that knowledge.
[49] While the evidence
was being summarized, I happened to notice certain errors or anomalies that should
have attracted the Appellant's attention and should certainly have given rise
to suspicions. The subscription letter signed by the Appellant is for 170 Class
A shares of Usitech and the total consideration is $170,000 (Exhibit A‑2).
However, paragraph 4 of the loan contract states that "Share Certificate
No. A‑34 issued to the Borrower representing ONE HUNDRED (100)
Class A shares" will be remitted to the lender as security
(Exhibit A‑3). Some people might possibly believe that this is a
mere mistake. However, the fact remains that both documents were signed at the
same time and were very short and very simple. It is difficult to believe that
the error was not noticed and corrected.
[50] In addition, since
the loan contract clearly identifies the lender as Seahawk (Exhibit A‑3),
one truly wonders why the Appellant agreed to make his four cheques payable to
the order of Usitech when they were supposed to be in reimbursement of the
$170,000 loan advanced by Seahawk (Exhibit A-6).
[51] I now turn to the date
of the documents. The Appellant claims that he signed the subscription letter
(Exhibit A-2) and the loan contract (Exhibit A‑3) in
November 1997 at a meeting with the accountant Desjardins. The copy of the
resolution of Usitech's directors approving the subscription (Exhibit A‑4)
and the share certificate (Exhibit A-5) were apparently given to him
contemporaneously, or roughly so. However, the first three documents are dated
May 15, 1996. The share certificate is dated May 16, 1996.
Clearly, all these documents were false because they stated that all the
transactions had occurred 18 months earlier. Yet the Appellant claims that
he did not realize that the dates were false. According to his testimony, he
only came to this realization two and a half years later, when Revenu Québec
notified him that the loss he claimed was being disallowed.
[52] There are two
reasons why I cannot accept this testimony by the Appellant. The first is that
the dates are clearly stated on the four documents, which are very short and
very simple. In addition, with respect to the subscription letter
(Exhibit A‑2), the date of May 15, 1996 is stated in bold letters
directly below the Appellant's signature. Thus, unless he was totally blind or
signed with both eyes closed, it would have been impossible for him not to
notice this. On the loan contract, which was also signed by the Appellant, the
date of March 15, 1996, appears both on the first page and above the signatures
on the second page. Even the most cursory examination of the document
would disclose this. Moreover, paragraph 3 of the loan contract
states that an interest rate of 7% will be payable for the duration of the loan
(Exhibit A‑3). This kind of element would also have tended to alert
the Appellant about the false contract date. As a matter of fact, there is no
evidence that the Appellant paid any kind of interest.
[53] The second reason is
that the Appellant's 1997 income tax return falsely states that the
transactions took place in May 1996, even though they actually took place in
November 1997. Indeed, the page setting out the details of the BIL of $170,000
involving "Usite" (Usitech) states the year as "96"
(Exhibit I‑1, page 15, BIL grid.) This information could only
have been passed from the Appellant to his accountant, either orally, or
through documents, so that the accountant could prepare the return. And both
the Appellant and his accountant knew that the information was false because
the first meeting with accountant Desjardins only occurred in September 1997,
and the documents were signed in November 1997.
Nonetheless, information to the effect that the purchase was made in 1996
was provided in the tax return, which the Appellant signed. Can one believe
that the Appellant failed once again to notice this discrepancy? Not in my
view.
[54] It is difficult
enough to imagine that the Appellant — a professional
appraiser — and his accountant, could have been
taken in so thoroughly by the accountant Desjardins' machinations that they
lost any sense of critical judgment and accepted his explanation that a BIL of
$170,000 could be claimed by purchasing shares for only $25,500. Assuming the
Appellant's accountant was unable to pass judgment on the transactions proposed
by the accountant Desjardins "because it was beyond his ken", it is
difficult to understand why the Appellant would have chosen to move forward
without getting more information. The stakes were high, the amounts were
considerable, and the proposed method, involving the use of more or less
fictitious cheques and simultaneous refunds with bank drafts, was suspect on
its face. But quite apart from this difficultly explainable naïveté, I cannot
believe that the Appellant did not realize that the four documents prepared by
the accountant Desjardins, and, in particular, the two documents that he
himself signed, bore a false date.
[55] In my opinion, this
element alone should have caused him or his accountant to become suspicious
about the legality of the entire operation. The Appellant did not react to this
anomaly; he accepted the documents, signed two of them, and subsequently signed
his income tax return containing the false information. These are indicia
of wilful blindness, if not deliberate conduct constituting gross negligence.
[56] In closing, I would
simply add that even if I had believed the Appellant's account, I would still
have made a finding of gross negligence because I would have had to
recognize that the Appellant accepted the documents, signed some of them, and
subsequently signed his income tax return without even taking a look or
summarily examining the contents of any document whatsoever despite the
significant amounts at stake. Such conduct goes beyond mere negligence.
[57] As a result of the
foregoing, the appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this
25th day of July 2005.
"P. R. Dussault"
Translation
certified true
on this 8th
day of February, 2006.
Garth McLeod,
Translator
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