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Reference: 2004TCC497
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Date: 20040927
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Docket: 98-2464(IT)G
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BETWEEN:
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RAYMOND COULOMBE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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AND
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Docket: 98-2153(IT)G
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GAIL WHEELER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bédard J.
[1] The
Appellant Coulombe is appealing from his assessments for taxation years 1990,
1991, 1992, and 1993, and the Appellant Wheeler is appealing from her
assessments for taxation years 1989, 1990, and 1992.
[2] On
March 21, 1996, the Minister of National Revenue (the “Minister”) reassessed
the Appellant Coulombe for taxation years 1990, 1991, 1992, and 1993. The
reassessments for taxation years 1990 and 1991 were made after the expiration
of the normal reassessment period.
[3] On
March 21, 1996, the Minister reassessed the Appellant Wheeler for taxation
years 1989, 1990, and 1992. The reassessments for taxation years 1989 and 1990
were made after the expiration of the normal reassessment period.
[4] In
reassessing the Appellant Coulombe, the Minister, using the net worth method,
determined that the Appellant Coulombe had undeclared income of $99,270 in
1990, $131,644 in 1991, $56,398 in 1992, and $119,009 in 1993, as shown in
Appendix A, attached, and imposed a penalty for each of these years, in
accordance with subsection 163(2) of the Income Tax Act (the “Act”).
[5] In
reassessing the Appellant Wheeler, the Minister, using the net worth method,
determined that the Appellant Wheeler had undeclared income of $46,260 in 1989,
$5,531 in 1990, and $22,085 in 1992, as shown in Appendix B, attached, and
imposed a penalty for each of these years, in accordance with subsection 163(2)
of the Act.
[6] With
respect to the Appellant Coulombe, the Minister made the following assumptions
of fact, as set out in paragraph 88 of the Reply to the Notice of Appeal in the
Appellant Coulombe’s file (98-2464(IT)G) in making the reassessments at issue
in this case:
a) the Appellant Coulombe is
actively involved in a number of areas of economic activity, more specifically
in the construction industry;
b) the Appellant Coulombe submitted
to the Minister of National Revenue a statement of assets and liabilities,
dated September 1, 1989, compiled by Maheu Noiseux/Dallaire Alain Brodeur
Dextradeur, Chartered Accountants, and signed by the Appellant Coulombe, for
the period ended December 31, 1988 (with a comparative statement for the period
ended December 31, 1987), and a statement of capital reconciliation for 1988
(with a comparative statement of reconciliation for 1987);
c) the Appellant Coulombe submitted
to the Minister of National Revenue a statement of assets and liabilities,
dated June 12, 1991, compiled by Gilles Roberge, Accountant, and signed by the
Appellant Coulombe, for the period ended December 31, 1989 (with a comparative
statement for the period ended December 31, 1988), and a statement of capital
reconciliation for 1989 (with a comparative statement of reconciliation for
1988);
d) the Appellant Coulombe submitted
to the Minister of National Revenue a statement of assets and liabilities,
dated July 28, 1993, compiled by Gilles Roberge, Accountant, and signed by the
Appellant Coulombe, for the period ended December 31, 1990, and a statement of
capital reconciliation for 1990, with a comparative statement of assets and
liabilities for the period ended December 31, 1989, which was different from
the statement submitted in paragraph (c) above, and a comparative statement of
capital reconciliation for 1989, which was different from the reconciliation
submitted in paragraph (c) above;
e) the Appellant Coulombe submitted
to the Minister of National Revenue statements of assets and liabilities, dated
July 29, 1993, compiled by Gilles Roberge, Accountant, and signed by the
Appellant Coulombe, for the periods ended December 31, 1991, and December 31,
1992, and statements of capital reconciliation for these years;
f) the Appellant Coulombe
submitted to the Minister of National Revenue a statement of assets and
liabilities, dated February 17, 1995, compiled by Gilles Roberge, Accountant,
and signed by the Appellant Coulombe, for the period ended December 31, 1993
(with a comparative statement for the period ended December 31, 1992) and a
statement of capital reconciliation for 1993 (with a comparative reconciliation
for 1992);
g) the Appellant Coulombe paid in
cash for purchases and for the construction of buildings; he provided no
invoices from suppliers of goods or services relating to the construction of
buildings, and, upon disposition of the buildings, he collected, in whole or in
part, a cash sum equal to their selling price;
h) for certain loan repayments and
certain sales of buildings, the Appellant Coulombe or Gail Wheeler, as the case
may be, deposited the cheques in a bank account, and on the same day, withdrew
amounts of cash corresponding to all or substantially all the amounts of the
cheques;
i) the Appellant Coulombe failed
to enter in his personal statements a number of real estate assets and a number
of accounts receivable secured by mortgage;
j) the Appellant Coulombe failed
to report profits and interest income relating to a number of real property
transactions;
k) using the Discrepancy per Net
Worth method, the Minister of National Revenue determined that the Appellant
Coulombe had undeclared income totalling $99,270 in 1990, $131,644 in 1991,
$56,398 in 1992, and $119,009 in 1993, based on the information provided in
Appendix A, attached, which is an integral part of this reply;
l) the Appellant Coulombe made a misrepresentation that was
attributable to neglect, carelessness, or wilful default, in filing his income
tax returns for taxation years 1990 and 1991;
m) the Appellant Coulombe knowingly, or under circumstances amounting
to gross negligence, failed to report income in the amounts of $99,270 in his
1990 income tax return, $131,644 in his 1991 income tax return, $56,398 in his
1992 income tax return, and $119,009 in his 1993 income tax return. The
Minister of National Revenue imposed a penalty on the Appellant Coulombe in the
amounts of $12,379 for taxation year 1990, $17,408 for taxation year 1991,
$6,960 for taxation year 1992, and $15,148 for taxation year 1993, in
accordance with subsection 163(2) of the Income Tax Act;
[7] With
respect to the Appellant Wheeler, the Minister made the following assumptions
of fact, as set out in paragraph 9 of the Reply to the Notice of Appeal in the
Appellant Wheeler’s file (98-2153(IT)G), in making the reassessments at issue
in this case:
a) during the
taxation years at issue, the Appellant Wheeler was actively involved in the
real estate industry;
b) during the
period at issue, the Appellant Wheeler was the common-law spouse of Mr. Raymond
Coulombe;
c) in her 1990
income tax return, the Appellant Wheeler reported net business income in the
amount of $7,300;
d) in filing her
T1 income tax returns for taxation years 1989, 1990, and 1992, the Appellant
Wheeler failed to report all of her income;
e) further to
investigation and application of the net worth method, the Minister of National
Revenue determined that the Appellant Wheeler’s net worth increased from $56.00
as of December 31, 1988, to $84,279 as of December 31, 1992, as it appears in
more detail in the Appellant Wheeler’s statement of assets and liabilities
attached hereto as Appendix A, making it an integral part as if stated
at length;
f) the
Appellant Wheeler failed to report income in the amount of $46,260 in 1989,
$5,531 in 1990, and $22,085 in 1992, for a total of $73,876, as it appears in
more detail in the Calculation of Discrepancy per Net Worth, attached hereto as
Appendix B, making it an integral part as if stated at length
g) for taxation
years 1989 and 1990, the Appellant Wheeler made a misrepresentation attributable to neglect,
carelessness, or wilful default in filing her income tax returns;
h) the Appellant Wheeler knowingly, or under
circumstances amounting to gross negligence, made a false statement or omission
in the tax returns she filed for 1989, 1990, and 1992.
[8] The
objections raised by the Appellants involve:
(i) the reassessments made by the
Minister after the expiration of the normal
reassessment period;
(ii) the Minister’s application of a
penalty on the additional income for each of taxation years 1990, 1991, 1992,
and 1993 with respect to the Appellant Coulombe, and for each of taxation years
1989, 1990, and 1992 with respect to the Appellant Wheeler;
(iii) the presumption of validity
with respect to the assessments made using the net worth method, taking into
account the fact that the calculations made to determine net worth, as carried
out by the Respondent, contained a multitude of errors;
(iv) the costs;
(v) with respect to the additional
income for the taxation years at issue, the following specific elements:
a) Cash on hand on December 31, 1988
[9] The
Appellant Coulombe maintains that the Minister did not take into account the
fact that he had cash in the amount of $185,120 on December 31, 1988. He
contends that this sum resulted from the 1988 sale of his residence to Ms.
Mary-Lou Lancaster and the sale of a Case 1150 bulldozer.
b) Receipt of insurance proceeds following a fire in a commercial
building known as Bar Station 88
[10] The Appellant Coulombe contended that he collected insurance proceeds
in the sum of $30,076 in 1989 following a fire in a commercial building he had
sold to a third party. According to the Appellant Coulombe, the sum of $30,076
represented the balance of the mortgage debt owed to him by this third party at
the time of the fire.
c) Payment in the sum of $35,000 in 1993 to Ms. H. Allan
[11] The Appellant Coulombe maintained that he held the first mortgage for
the building owned by Ms. Allan and that Ms. Allan had sold the building on
May 18, 1993. Although the Appellant Coulombe collected $82,435.84 as a
repayment of the mortgage debt, he claimed that the amount owed to him by
Ms. Allan was $50,000. The Appellant Coulombe claimed that he paid
Ms. Allan a sum of $35,000 in cash on the same day, in accordance with a
verbal agreement concluded between them.
d) Sale of a Caterpillar 225 excavator in 1989
[12] The Appellant Coulombe claimed that, in 1989, he sold this excavator
for the sum of $35,000 to Équipement P. Lacroix Inc.
e) Cash deposit to account number 7223 at the Caisse populaire de
Waterloo
[13] The Appellant Coulombe claimed that he and the Appellant Wheeler had
made a number of deposits of smaller cash amounts to this account during the
period at issue to cover disbursements and cheques drawn from the account.
These smaller cash deposits, according to the Appellant Coulombe, were made in
the amounts of $10,300 for taxation year 1990, $8,350 for 1991, $6,100 for
1992, and $2,900 for 1993.
f) Loans made to the Appellant Wheeler totalling $50,000
[14] The Appellant Wheeler maintained that she borrowed $30,000 from the
Appellant Coulombe in 1989, and $20,000 in 1993.
g) Claim for deduction for the depreciation of capital property
[15] Counsel for the Appellant Coulombe maintained that the Appellant
Coulombe was entitled to a deduction for depreciation for the periods at issue
(as set out in Exhibit A-93) with respect to assets the Appellant Coulombe used
in the operation of his construction and real estate development business.
h) Personal expenditures
[16] The Appellant Coulombe maintained that the amounts identified as
personal expenditures at items entitled “J.I. Case,” “Ford Credit,” and “GMAC
Finance” in the “Table of Personal Expenditures,” used in the calculation of
net worth prepared by the Respondent (Appendix A), were not personal expenditures.
Preliminary remarks
[17] It should be noted that I have not heard the evidence relating to the
other points at issue initially, because counsel for the parties reached an
agreement in principle in this matter in the course of the hearing. This
agreement was signed by the parties after the hearing, as shown in Appendix C,
attached.
[18] During the years at issue, the Appellant Coulombe operated real estate
development, construction, and money-lending businesses. During these years,
he reported only $813 in business income, and that was in 1993. He admitted
that he did not keep any accounting records. The Appellant Coulombe conducted
cash transactions as often as possible. It is my opinion that the Appellant
Coulombe’s modus operandi can be illustrated by citing the following
two passages, excerpted from the testimony he gave upon examination by his
counsel:
Q. And over than $186,000
cash on hand, but you have zero at the end of 1988. Can you explain, at the end
of 1987, can you remember how much money you had in your pocket, cash on hand?
A. I don't keep in my
pocket, I bury it, first of all, and I have no bank account, that's the truth,
I don't care. My money is all cash and I pay cash. I buy something, I pay the
taxes, oh yes. I pay the taxes right then and there, so I'm not screwing
nobody, not screwing the government, you know, but I always pay cash. I get a
better deal, that way I don't know, that's the way I do it, I do. I buy lumber,
I buy anything, you know, you go, you deal. I go to four different lumberyards
on a $100 item and I can save $20. Believe it or not, you know, I could pay all
stupid labour just on what I save.
[...]
Q. You are in business since
a long time ago now, do you agree that you never kept proper books, accounting
books?
A. No, I couldn't, I'd be
more at the books than I would be at the site, you know what I mean. You know,
I always figured if I build a house and it costs me 45 and I sold it for 65, I
make $20,000. Okay, then I declare it, you know, but I can't start declare
every lousy thing all the way up. There's a certain price you pay to build a
house, I mean, cement, $100 a meter, $100 a meter, two by four, $3, it's $3, I
mean, and they got that, the government got that, they got everything down tight,
they know what a nail is worth, you can't beat them. It's just the profit, you
make a little bit of profit, you make money and I love that business, I like
that. And I like to build, I like to build.
[19] The Appellant Wheeler, the common-law spouse of the Appellant
Coulombe, worked in the real estate industry. During the years at issue, she
reported only $7,300 in business income, and that was in 1990. She kept no
accounting records. The evidence presented by the Appellant Wheeler involved
cash loans for the sums of $30,000 in 1989 and $20,000 in 1993 only, lent to
her by the Appellant Coulombe.
Analysis
Cash on hand as of December 31, 1988
[20] The Appellant Coulombe maintained that the
Minister did not take into consideration the fact that he had $185,120 in cash
on December 31, 1988. In his explanation for the source of these funds, the
Appellant Coulombe testified that he had sold a Case 1150 bulldozer to
Équipement P. Lacroix Inc. for $45,000 in 1988. In support of this testimony,
he filed the contract of purchase for the bulldozer as Exhibit A-66, showing
that he did, in fact, make the purchase on March 16, 1987, for the sum of
approximately $35,000. During his testimony, he explained that he had realized
a profit on the sale of the bulldozer because he had repaired it himself.
[21] The evidence also showed that the Appellant Coulombe received the sum
of $90,120 from the 1988 sale of his residence to Ms. Mary-Lou Lancaster, which
explains in part, according to the Appellant Coulombe’s counsel, the fact that
his client had a sum of $185,120 in cash as of January 1, 1989.
[22] In his argument, counsel for the Appellant Coulombe maintained that
the Appellant Coulombe’s testimony regarding the $185,120 in cash, which he had
in his possession on December 31, 1988, was credible and plausible, given his
client’s way of doing business—always keeping substantial amounts of cash on
hand in order to conduct cash transactions as often as possible. He contended
that this testimony was more plausible than the calculation of net worth
prepared by the Respondent (Appendix A), which shows unquestionably that at the
end of each of the taxation years at issue, the Appellant Coulombe had
substantial amounts of cash.
[23] However, I find it difficult to believe the Appellant Coulombe’s
testimony and to agree with his counsel’s arguments.
[24] The Appellant Coulombe’s financial statements as of December 31, 1988,
prepared by the accounting firm of Maheu Noiseux and signed by the Appellant
Coulombe (Exhibit I-16), show that the Appellant Coulombe had only $653 in cash
on that date.
[25] It should be noted that, oddly enough, the Appellant Coulombe did not
raise these points until three weeks before the hearing. The assessments had
been made in 1996, and the parties had held a number of negotiation sessions
thereafter. Counsel for the parties reached a settlement on January 19, 2003,
which the Appellants refused to sign afterwards. At no time during the
negotiations leading to this settlement did the Appellant Coulombe’s
representatives raise these major points with the Respondent.
[26] Admittedly, the Appellant Coulombe filed the agreement of purchase for
the bulldozer as Exhibit A-66 during the hearing. This agreement shows that
the Appellant Coulombe purchased it on March 16, 1987, for approximately
$35,000. However, the Appellant Coulombe was unable to file any other
supporting documents to corroborate his testimony. He was unable to locate the
agreement through which he re-sold the equipment or the cheque issued by the
buyer, because the Appellant Coulombe kept few supporting documents, and it was
not possible for him to obtain copies of these documents from the buyer, who
has since declared bankruptcy.
[27] Is it possible that the proceeds from the sale of the residence and
the bulldozer, assuming that this sale took place and involved the price
stated, were used in 1988 to purchase other assets, cover the Appellant
Coulombe’s living expenses, or settle debts?
[28] The Appellant Coulombe was to file evidence showing that, on the
balance of probabilities, the Minister was wrong about these points in
dispute. The Appellant Coulombe cannot satisfy this obligation by making vague
and imprecise assertions that are contradicted by written documents such as financial
statements, which he produced himself. Such assertions have significant
influence on credibility, which is at the core of this issue. It is difficult
to not have serious doubts about the Appellant Coulombe’s assertions where they
are not supported by serious documentary evidence or by independent and
credible testimony. Ultimately, the Appellant Coulombe is the author of his
own misfortune. For these reasons, I conclude that the Appellant Coulombe very
likely did not have $185,120 in cash on December 31, 1988.
Receipt of insurance proceeds following a fire in a
commercial building known as Bar Station 88
[29] Essentially, the Appellant Coulombe claimed that he collected $30,076
in 1989 following a fire in a commercial building he had sold to a third
party. The sum of $30,076 represented, according to him, the debt owed to him
by this third party at the time of the fire.
[30] The Appellant Coulombe’s evidence in this matter consisted solely of
his testimony. It is my opinion that the testimony he gave when he was
examined by his counsel is worthy of note, because it illustrates perfectly the
type of assertion that can be qualified as vague and imprecise:
Q. Maybe the other amount is
a little bit more tricky. Here, Bar Station '88, you collect $30,076, could you
explain the transaction?
A. That was the building we
bought, me and David Picken?
Q. Can you recall when
exactly you?
A. '87, I don't know, '87,
'88 or whenever, you know. We bought it together and we put it up for sale, we
sold it, it was a company, so I mean, the only way you get your money out is
shares. The guy I sold it to, it burnt after I don't know a year after, not
even that.
Q. When the building was
fired, you were not the owner at that moment?
A. No, no, no. And when he
got the insurance money, what he owed us left, he paid us. Just simple as that,
I mean, just... we sell the house, something happened, he paid me.
Q. And does this amount make sense,
$30,000?
A. That's what it was, yes.
The building we sold it for $60,000, a big building, you know, that's not much
money for a building. To start a business running, it's just a building.
[31] This testimony fails to identify the third party buyer, the date of
the fire, the nature of the debt the Appellant Coulombe was owed at the time of
the fire, and the date the building was purchased and sold.
[32] The Appellant Coulombe’s testimony was not supported by any
documentary evidence whatsoever. In fact, the Appellant Coulombe did not see
fit to file the contract through which he acquired this building, to show, at
least, that he was the owner, or the contract through which he sold it, to show
that he had advanced a loan for the balance of the selling price. He also did
not find it necessary to file in evidence the cheque he cashed following the
fire, or to support his testimony with other independent, credible testimony.
The Appellant Coulombe’s failure to supply evidence,
which was in his power to supply, and by which the facts might have been
elucidated, constitutes grounds for this Court to infer that the Appellant
Coulombe’s evidence would have been unfavourable to him.
[33] It should also be noted that the Appellant Coulombe’s financial
statements as of December 31, 1988 (Exhibit I-16), do not show that he was the
owner of the building or that he was owed a debt by the third party buyer.
[34] Moreover, oddly enough, the Appellant Coulombe did not raise this
point until three weeks prior to the hearing, even though the assessments had
been made in 1996, and they were the subject of a number of negotiation
sessions between the parties.
[35] The Appellant Coulombe—need I recall—was to present evidence tending
to demonstrate that, on the balance of probabilities, the Minister was wrong
about the point in dispute. The Appellant Coulombe cannot discharge this onus
by making vague and imprecise assertions. It is even more evident that he
cannot discharge this onus by making assertions that are contradicted by
written documents, such as the financial statements he produced himself. As I
stated earlier, it is difficult for me to believe such assertions, where they
are not corroborated by serious documentary evidence or by independent,
credible testimony.
[36] For these reasons, I conclude that the Appellant Coulombe did not
collect the sum of $30,076 during taxation year 1989.
Payment of $35,000 in 1993 to Ms. H. Allan
[37] The evidence shows the following:
(i) On April 26, 1989, Ms. Allan purchased a building from
Mr. Vic Sullivan, who advanced a loan at the time of the sale for the
balance of the $70,000 selling price, and who secured the debt with a first
mortgage. The interest rate on this debt was 11% and was to be repaid in 60
equal and consecutive monthly instalments of $710.95.
(ii) On the same day, Mr. Sullivan sold his mortgage claim to the
Appellant Coulombe for the sum of $50,000.
(iii) On May 18, 1993, Ms. Allan sold the building to Mr. Marcel
Doucet and Ms. Marguerite Beaudin.
(iv) On May 18, 1993, the executing notary in the sale issued a cheque
for the sum of $82,435.84, payable to Ray Coulombe, in trust for H. Allan.
(v) On May 26, 1993, the Appellant Wheeler deposited a cheque for the
sum of $82,435.84 to account number 7223 at the Caisse populaire de Waterloo
(the “account”), held jointly by herself and the Appellant Coulombe.
(vi) On May 26, 1993, the Appellant Wheeler withdrew $85,000 from the
account.
[38] The Appellant Coulombe maintained that he gave $35,000 in cash to
Ms. Allan on May 26, 1993, because he considered that she owed him no more
than $50,000. The Appellant Coulombe’s evidence in this matter consisted
essentially of his testimony, which is worthy of note, because I feel that it
raises more questions than it answers:
Q. And we have a contract here, A-3 and Miss
Allan sold to Doucet and Beaudin. Could you explain to the Court from the
beginning?
A. The beginning, Mr. Sullivan owned it. He
wanted to sell it to Mrs. Allan. Actually, he said, "Ray, he says, I sold
it for $70,000, he says, just give me 50 and get the hell out of here".
You know, I took the first mortgage for $50,000, $50,000 first mortgage, you
know, $70,000 but what happened, Your Honour, the place burnt and the insurance
didn't pay. So therefore, I was screwed. So I made her build back, I didn't
care if she went in debt or what she did, I didn't care, I said you build it
back. I helped. And I said we'll sell it. But in the meantime, I had a power of
attorney on her. That's the only way I could control her, I mean, I didn't know
if she was going to take off or go with the money or what, I didn't know. So I
said, "I'm going to take a power of attorney, when you sell it, I'm going
to get my money".
But, when we sold it, Your Honour, all I
took was my $50,000. I was so glad to get that, you know what I mean, and the rest
I gave to her because she was all right. She worked hard, she didn't mean to
have that canteen burn or whatever it was, you know what I mean, and she had to
put a lot of money back in. She didn't make nothing either. She had to rebuild
it with no insurance. So I said, give me my $50,000, and I took my $50,000 and
I gave her the rest and that was it. As simple as that, I can't say no more.
Your Honour, what I mean, what can I say, that's exactly what happened. Mr.
Sullivan is dead otherwise he could, it don't matter.
[39] This testimony provides no information about the date of the fire in
the building, the date of reconstruction, the amount really owed by Ms. Allan
at the time of the sale, or the amount of capital and interest paid to the
Appellant Coulombe between April 26, 1989, and May 18, 1993.
[40] I feel that it would have been interesting to hear the testimony of
Ms. Allan, who could have confirmed the Appellant Coulombe’s assertions.
I would also have liked to know more about the power of attorney that enabled
the Appellant Coulombe to collect the amount of the selling price.
[41] It should also be noted that, oddly enough, this point was not raised
until three weeks prior to the hearing, rather than during earlier
negotiations.
[42] The Appellant Coulombe was to produce evidence tending to show that,
on the balance of probabilities, the Minister was wrong about the point in
dispute. Thus, I must conclude that the Appellant Coulombe did not discharge
this onus. The explanations provided by the Appellant Coulombe are, very
simply, unlikely in the circumstances.
1989 sale of a Caterpillar 225 excavator
[43] The Appellant Coulombe testified that he sold the excavator at issue
to Équipement P. Lacroix Inc. in 1989 for the sum of $35,000. In support of
his testimony, he filed in evidence, as Exhibit A-66, the agreement of purchase
for this equipment.
[44] However, the Appellant Coulombe was unable to file any other
supporting documents (such as the contract of sale or the cheque issued by the
buyer) to corroborate his testimony. No independent, credible witness
confirmed the Appellant Coulombe’s assertions in this respect.
[45] Once again, the December 31, 1988, financial statements (Exhibit I-16)
do not show that the Appellant Coulombe was the owner of this excavator.
[46] Why did the Appellant Coulombe raise this point just three weeks prior
to the hearing, rather than during earlier negotiations?
[47] For these reasons, and given the Appellant Coulombe’s testimony, which
was, in my opinion, not very credible, I conclude that the Appellant Coulombe
has failed to persuade me that, on the balance of probabilities, the Minister
was wrong on this point.
Cash deposits to account number 7223 at the Caisse
populaire de Waterloo
[48] In his arguments, counsel for the Appellant Coulombe maintained that:
a) the Appellant Coulombe and the Appellant Wheeler held account
number 7223 at the Caisse populaire de Waterloo jointly;
b) the Appellant Wheeler deposited small amounts ($100, $200, $300,
or $400) to the account with the cash that belonged to the Appellant Coulombe;
counsel submitted that the total of the amounts deposited to the account were
$10,300 in taxation year 1990, $8,350 in 1991, $6,100 in 1992, and $2,900 in
1993;
c) the amounts deposited were used to cover disbursements and
cheques drawn on the account.
[49] The Appellant Coulombe’s evidence on this point consists essentially
in the testimony of the Appellant Wheeler and Mr. Roberge, the Appellants’
accountant. It should be noted that the Appellant Coulombe did not testify in
this respect.
[50] Essentially, the Appellant Wheeler testified that she drew cheques on
the account to pay the Appellant Coulombe’s small invoices and that she
deposited the sums necessary to cover the cheques to the account containing the
Appellant Coulombe’s cash. Her testimony provides no information about the
amounts deposited during the periods at issue.
[51] Mr. Roberge’s testimony provided us with information about the amounts
deposited to the account by the Appellant Wheeler. His testimony revealed that
he had determined the amounts deposited to the account on the basis of his
analysis of the deposits as they appeared in the bank book, without verifying
any other supporting documents, that is, without examining whether the deposits
could have come from another of the Appellant Coulombe’s bank accounts or
whether they might represent cheques deposited, for example.
[52] Ultimately, the Appellant Coulombe’s assertions rely essentially on
the cogency of the testimony of the Appellant Wheeler, his common-law spouse.
[53] The onus was on the Appellant Coulombe to demonstrate that, on the
balance of probabilities, the Minister was wrong on this point. I conclude
that he did not satisfy this obligation. The Appellant Wheeler’s testimony
simply did not persuade me.
Loans totalling $50,000 made to the Appellant
Wheeler
[54] The Appellant Wheeler maintained that the Appellant Coulombe had
loaned her $30,000 in cash in 1989 and $20,000 in 1993. This is the only
evidence provided by the Appellant Wheeler with respect to her assessments for
the periods at issue. It should be noted immediately that the loan agreements
were not made in writing.
[55] The Appellant Wheeler’s evidence in support of this point consists
solely of her testimony and the testimony of the Appellant Coulombe, a witness
that cannot be considered to be independent in this case.
[56] The Appellant Coulombe’s testimony upon examination by his counsel in
this matter is worthy of full citation to illustrate what I consider to be a
masterpiece of vague and imprecise assertions:
Q. Can you recall the loan?
A. That was a piece of land, I told her, I
said, we'll build a house and make you some money. You know what I mean, she
has the right to make money, just because she's a woman it doesn't mean she is
no good. So, I'm just saying she has the right to make money, so I made the
land, she had the land, I said, "I'll lend you the money, we'll build a
house and you sell the house". That's what happened, first time, it didn't
go through, it was (inaudible), but the second time, it went through. When she
sold the house, she paid me back, so she made $20,000. Just like that, there's
nothing. I helped her out. She had no money, I could have did it myself, but
just the idea, to show her she can be responsible too, I'm not going to be
around forever, she's younger than I am, I've got kids, you know.
Q. You did two different loans for $50,000?
A. Yes, the other one was for another house.
Q. And the other one?
A. It was for another house, that's the house
they seized, she never had the chance to get the money back, we sold it, but
they seized all the money. So, literally [sic] she still owes me
$20,000.
Q. Presently she owes...
A. I never got the money. She never got the
money, what am I going to do? I mean, she's my wife. But she was supposed to
make maybe $10,000 on that.
[57] The Appellant Wheeler’s testimony upon examination by her counsel and
cross-examination by the Respondent’s counsel is also worthy of full citation,
for the same reason:
Q. Mrs. Wheeler, it was said in the testimony
of Mr. Coulombe that you received a loan of 30 and $20,000 in 1989 and
1993. Can you explain to the Court what you did exactly with the money?
HIS HONOUR: Which loans are we
talking about, the 31?
Me ROBERT JODOIN: The first one.
HIS HONOUR: The $30,000 loan?
A. I had a piece of land and we discussed doing
something together so that I could make a few dollars and I took the money and
we built a house which was then sold.
Me ROBERT JODOIN:
Q. Can you remember
when you sold it?
A. No, I think he just said, but I'm not sure.
Q. After 1993?
A. No, before that, the first one.
Q. And with the second one?
A. It's the same idea, it was a property that I
bought, I borrowed the money and I haven't been able to pay it back yet. I
will.
Q. You haven't paid, presently it is not paid?
A. No.
[...]
CROSS-EXAMINED BY Me MARTIN GENTILE:
Q. To go back again to the first house that was
built and that you sold, if I understand correctly, it was sold to Mr.
Beauregard in the same year it was built or you do not recall?
A. Honestly, if I had the paper with me I'd
tell you.
Q. This is only the document that Mr. Paquette
prepared and obviously in '89 we don't see anything, so this means...
A. That it was old.
Q. ... probably it was sold in '89 and then in
'90 you took it back from him?
A. Yes.
[Translation] HIS HONOUR: In what year
was it repossessed?
Me MARTIN GENTILE: 90.
I have no further
questions, thank you.
[58] According to these testimonies, it appears that the Appellant Wheeler
borrowed $30,000 in 1989, and $20,000 in 1993, and that the loans were used to
build two buildings on land that belonged to her.
[59] However, these testimonies are silent on or vague about a number of
matters, namely:
a) the identity of the buyers;
b) the situs of the buildings;
c) the selling price of the buildings and the terms of payment;
d) the terms of the loans;
e) the date the loans were repaid, if repayment took place.
[60] Obviously, the Appellant Wheeler did not submit any supporting
documents to corroborate her testimony.
[61] It should also be noted that this point was not raised until three
weeks prior to the hearing, at which time—need I recall—a number of negotiation
sessions had been held between the parties, and this point was never raised.
[62] Considering the lack of credibility of these two witnesses, from my
perspective, it is difficult to believe their vague and imprecise testimony,
which, may I remind you, was not corroborated by any supporting documents
whatsoever, or by independent and credible testimony. It is my opinion that
the Appellant Wheeler did not show that, on the balance of probabilities, the
Minister was wrong on this point.
Claim for capital cost allowance
regarding capital property
[63] In his arguments, counsel for the Appellant
Coulombe submitted to the Court that evidence was provided, during the hearing,
that the assets listed in Exhibit A-93 belonged to the Appellant Coulombe
during the years at issue, that the Appellant Coulombe had used them in the
operation of his construction and real estate development business, and,
consequently, the Appellant Coulombe was entitled to the capital cost allowance.
[64] Should the depreciation of property be considered in the calculation
made by the Respondent on the basis of the net worth method?
[65] Subsection 152(7) of the Act authorizes the Minister to make an
assessment in the absence of a taxpayer’s return or without consideration for
the information provided in such a return. This is known as an arbitrary
assessment.
[66] An arbitrary assessment is usually based on the net worth method, which
consists in evaluating the increase of a taxpayer's capital (assets less
liabilities) during a given period and adding consumption expenditures during
that same period.
From the result thus obtained, various tax-exempt
amounts such as gifts, bequests, gambling winnings, and the non-taxable portion
of realized capital gains, as well as any previously reported income, are
subtracted. The balance represents the additional income, which is the subject
of the 'arbitrary' assessment. This method thus determines the change in net worth between the
start and end of a given year.
[67] The net worth method does not take into
account the depreciation of assets. Depreciation is reflected in amortization,
and it is an accounting transaction which consists in allocating the cost of an
asset over its useful life. From the taxpayer's standpoint, there is no cash
outflow. Accordingly, depreciation must not be computed under the net worth
method. I must conclude,
therefore, that the Minister did not make an error in failing to take into
account the depreciation of assets in his document entitled “Calculation of
Discrepancy per Net Worth” (Appendix A).
[68] However, it is my opinion that nothing in the Act prevents the
Appellant Coulombe from claiming the capital cost allowance, as long as he can
demonstrate that, on the balance of probabilities, he was the owner of the
property at issue and that he used it for the purpose of earning business
income during the periods at issue.
[69] The evidence provided by the Appellant Coulombe persuaded me that he
was the owner of the property listed in Exhibit A-93 during the periods at
issue and that he used this property to earn business income. It is,
therefore, my opinion that the Appellant Coulombe is entitled to a capital cost
allowance, even though he failed to report the business income earned:
(i) in 1991, from the property listed for that year in Exhibit A-93:
the Case 450C bulldozer, purchased for $53,810, and the Case 580K backhoe,
purchased for $61,000;
(ii) in 1992, from the property listed for that year in Exhibit A-93:
the Case 580K backhoe, purchased for $54,000, and the Case 550 bulldozer,
purchased for $46,000. The evidence (Exhibit A-64) showed that, on April 22,
1992, the Appellant Coulombe purchased the Case 580K backhoe for $54,000 and
the Case 550 bulldozer for $46,000, and that in exchange, in the course of this
transaction, he gave the two pieces of equipment listed for 1991 in Exhibit
A-93: the Case 450C bulldozer and the Case 580K backhoe;
(iii) in 1993, from the Case 580K backhoe purchased in 1992, the Case
550 bulldozer purchased in 1992, and the “Inter” truck purchased in 1993 for
$12,619.
Personal expenditures
[70] The Appellant Coulombe maintained that the expenditures entered at
items entitled “J.I. Case,” “Ford Credit,” and “GMAC Finance” in the “Table of
Personal Expenditures” from the calculation of net worth made by the Respondent
(Appendix A) had been incurred for the purpose of earning income from his
businesses, and they were not personal expenditures.
[71] The Appellant Coulombe testified that these expenditures were linked
to the purchase of a bulldozer (Case), an excavator (Case) and a pick-up truck,
and that they were used solely in the operation of his various construction and
real estate development businesses; they were not for personal use.
[72] The Appellant Coulombe’s testimony on this fact appeared to me likely
and credible. The evidence showed very clearly the nature of the Appellant
Coulombe’s activities, and it appears to me likely and probable that this type
of equipment was used for the purpose of such activities; in fact, it is
difficult for me to conclude otherwise.
Penalties
[73] Was the Minister correct in imposing a penalty with respect to the
additional income for each of the taxation years at issue, in accordance with
subsection 163(2) of the Act?
[74] In this case, the answer is very simple. It is my opinion that the
Minister was correct in imposing a penalty for each of the taxation years at
issue, because he showed that the Appellants knowingly made a misrepresentation
attributable to wilful default. Let me recall that the Appellant Coulombe
reported a mere $813 in income earned from the operation of his numerous
businesses during the years at issue, and that the Appellant Wheeler reported
only $7,300 in business income during the years at issue. The difference
between the income reported and the actual income earned is considerable. The
taxpayers kept no accounting records. They kept only very few supporting
documents—only the ones that were advantageous to the case at hand. The
Appellant Coulombe provided the Minister with statements that only vaguely
reflected reality. Obviously, the Appellant Coulombe ensured that the
transactions he conducted were carried out in cash as often as possible. The
evidence and the general attitude of the Appellants show that they used the
perfect plan to remove themselves from the self-assessment system, for which
they do not appear to have much respect.
Time-barred
[75] On March 21, 1996, was the Minister correct in making reassessments
for taxation years 1990 and 1991 for the Appellant Coulombe, and for 1989 and
1990 for the Appellant Wheeler, in accordance with subparagraph 152(4)(a)(i)
of the Act?
[76] This subparagraph stipulates that the Minister may make an assessment after the taxpayer's normal reassessment period if the taxpayer has
made any misrepresentation that is attributable to neglect, carelessness or
wilful default, and the burden of proof lies with the Minister.
[77] I have found that, in dealing with the preceding issue, the Minister
did discharge the burden of proof placed upon him in these cases with respect
to the penalties imposed under subsection 163(2) of the Act. It should
be noted that the burden of proof imposed on the Minister with respect to
penalties is heavier than that imposed with respect to the time-bar. Based on
the preceding, the Appellants clearly made a misrepresentation. It is my
opinion, therefore, that the Minister was correct in reassessing the Appellant
Coulombe for taxation years 1990 and 1991, and the Appellant Wheeler for
taxation years 1989 and 1990.
Validity of
the assessments
[78] Counsel for the Appellant Coulombe maintained that the Appellants
established, through their testimony, the exhibits filed, and the work of
Mr. Gilles Roberge, that the Respondent’s calculation of net worth
contained so many errors, which the Respondent has acknowledged, that the
Appellants may refute the presumption of the validity of the assessments in
this matter.
[79] Counsel for the Appellant Coulombe supported this argument by relying
on the decisions rendered in P.W. Lee v. M.N.R., (1953), 9 Tax
A.B.C. 70, S. Shlien v. M.N.R., [1988] 1 C.T.C. 2244, Canada v.
AKI (N.T.), [1992] 2 C.T.C. 145, and Succession André Leroux v.
Deputy Minister of Revenue of Quebec, Court of Quebec, Montréal
500-02-060765-976, April 19, 2002, Gérald Locas J.
[80] Thus, from the perspective of the Appellant Coulombe’s counsel, the
innumerable errors in the work of the Respondent enable him to refute the
presumption of validity of the assessments at issue here and to simply have
them vacated.
[81] While the Appellants raise the fact that the parties concluded a
settlement agreement to support their assertions whereby the Respondent’s work
in determining their income using the net worth method contains countless
errors, it is my opinion that this has not been shown. The tax consequences of
this settlement agreement were not placed in evidence, nor was the fact that
the changes made through the agreement to the document filed as Exhibit A-3
correspond necessarily to errors committed by the investigator in preparing
this document. The agreement could contain just as many changes to the
Appellants’ benefit as changes to the Respondent’s benefit. Moreover, there is
no evidence that all these changes had an impact on net worth, and,
consequently, on the Appellants’ undeclared income.
[82] The Respondent initiated negotiations in good faith and signed the
settlement agreement. As with any agreement, this is a series of compromises
between the parties for the purpose of avoiding legal action or to limit the
duration of such action. This settlement agreement was concluded without any
admission regarding the parties’ allegations.
[83] However, the evidence presented to me on the points disputed during
the hearing clearly showed that, throughout the taxation years at issue, the
Appellants failed to report substantial amounts of income. It should be noted
that the Appellants had reported only small amounts of business income during these
years. Not only did they not report all their income, but they kept no
accounting books or records that would enable their income for the years at
issue to be established.
[84] I agree fully with Mr. Jean-Pierre Paquette, the investigator in these
cases, that the net worth method was the only appropriate method to use in the
circumstances. Approximately ten of the points dealing with the net worth
established were disputed during the hearing, and my decisions with respect to
the vast majority of these points show clearly that these are not errors in the
calculation of net worth. I feel that Mr. Paquette’s work was carried out
conscientiously, given the circumstances. One criticism made of Mr. Paquette
is that he relied on the statements provided by the taxpayer himself. How can
anyone have the audacity to criticize him for this fact?
[85] Ultimately, because no evidence was presented with respect to the
countless errors, I see no point in analyzing the decisions made by the
Respondent in this case, and I conclude that the assessments made using the net
worth method are valid. It is my opinion that, in exercising his discretion,
the Minister was entitled to use this method—although it is not a perfect
method—to establish the Appellants’ income, because they kept no accounting
records. On the other hand, the Appellants were entitled to dispute their
assessments, and because these assessments are deemed to be valid, they had to
demonstrate that, on the balance of probabilities, the assessments were unsound
in law and in fact.
[86] Based on the circumstances and the evidence
presented at the hearing, the Respondent is awarded costs in both cases at
issue.
Signed at Ottawa, Canada, this 27th day of September
2004.
Bédard
J.
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