[OFFICIAL ENGLISH TRANSLATION]
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Citation: 2004TCC587
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Date: 20040907
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Docket: 2003-4443(IT)I
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BETWEEN:
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MICHEL LEFRANÇOIS,
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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
Tardif J.
[1] This is an appeal under the
Income Tax Act (the "Act") concerning the 1998,
1999 and 2000 taxation years. The notices of assessment for the
years concerned were made using the net worth method.
[2] The assessments dated
September 22, 2003, for 1998, 1999 and 2000 are based on the
following assumptions of fact:
[TRANSLATION]
UNREPORTED INCOME
(a) in his returns
of income for the 1998, 1999 and 2000 taxation years, the
Appellant reported the following total income:
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Year
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1998
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1999
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2000
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Total income
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$7,273
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$8,326
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$9,124
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(b) during the
taxation years in issue, the Appellant ran a business operating
as Garage Michel Lefrançois (hereinafter the
"business");
(c) during the
taxation years in issue, the Appellant was the only person
operating his business;
(d) the Appellant
had been buying and selling vehicles for some 15 years;
(e) the Appellant
did not bill his customers;
(f) an audit
of the Appellant's income and expenditures was conducted by
an auditor of the Minister for the 1998, 1999 and 2000 taxation
years;
(g) the auditor
chose to use the indirect audit method of calculating the
difference in net worth for the following reasons:
(i) the
bookkeeping and records were deficient;
(ii)
significant assets had been purchased during the period audited
relative to the low income reported by the Appellant;
(h) by the net worth
method, the auditor determined that the Appellant had failed to
include the following amounts in his returns of income for the
1998, 1999 and 2000 taxation years (see details in
Schedule II):
[TRANSLATION]
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Description
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1998
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1999
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2000
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Net business
income
Taxable capital
gain
Total
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$19,395
0 $
$19,395
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$4,440
$13,500
$17,940
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$9,895
0 $
$9,895
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Short-Term Assets
(i) the
Appellant had two bank accounts, the balances of which at the end
of each of the years were as follows:
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Description
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1997
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1998
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1999
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2000
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Caisse populaire
de l'Ange-Gardien
Caisse populaire
de Beauport
Total
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$10,837
$1,396
$12,233
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$6
$843
$849
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$1,159
$2,262
$3,851
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$935
($10)
$925
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(j) the
Minister's auditor analyzed the transactions conducted in the
Appellant's accounts;
(k) at the start of
the audit, the Appellant told the Minister's auditor that he
kept amounts of approximately $1,000 to $1,500 at home;
(l) the
auditor therefore considered that he had cash on hand of $1,500
for each of the years 1997, 1998, 1999 and 2000;
(m) the auditor had no
convincing reason to allow a larger amount of cash on hand for
each of the years referred to in the previous paragraph;
Chris-Craft Boat
(n) in 1985, the
Appellant bought a used Chris-Craft boat for $5,000;
(o) on
March 26, 1999, the Appellant bought a 1989 Triple E -
Regency C675X camper and assigned in return a trailer bearing the
Chris-Craft boat;
(p) on the basis of
the information provided, the Minister's auditor set the
selling price of the boat at $23,000;
(q) the
Minister's auditor determined a taxable capital gain of
$13,500 [($23,000 - $5,000) x 75%];
(r) the Appellant
mentioned that he himself had repaired the boat;
(s) the objections
officer estimated the cost of the parts purchased to repair the
boat at $9,000 and increased the adjusted cost base of the boat
to $14,000;
(t) the
taxable capital gain realized was thus determined to be $6,750
[($23,000 - $14,000) x 75%];
Chevrolet Pick-up Truck
(u) on June 4,
1997, the Appellant purchased a Chevrolet pick-up
truck;
(v) the
Minister's auditor estimated the cost of the truck at
$23,000;
(w) the Appellant filed a
copy of the truck purchase invoice with the objections
officer;
(x) the objections
officer increased the purchase price of the truck to $25,867 to
take sales taxes into account;
(y) the truck was
sold for $19,000 in 1999;
(z) a $4,000 loss
was determined by the Minister's auditor;
(aa) based on the information
provided to the objections officer, the loss incurred by the
Appellant in 1999 was corrected to $6,867;
1994 Oldsmobile Car
(bb) on February 16, 1998,
the Appellant bought a 1994 Oldsmobile car;
(cc) based on the information
provided, the Minister's auditor estimated the cost of the
car at $13,500;
(dd) the Appellant filed a copy
of the car purchase invoice with the objections officer;
(ee) the objections officer
increased the purchase price of the car to $14,953 to take sales
taxes into account;
Triple E - Regency Camper
(ff) the Appellant
purchased a 1989 Triple E - Regency C675X camper, the
delivery date of which was March 26, 1999;
(gg) the Appellant paid the
vendor $8,000 and assigned in return a trailer bearing the
Chris-Craft boat, for which the vendor credited an amount
of $20,999;
(hh) the Minister's auditor
estimated the cost of the camper at $30,995;
(ii) the Appellant
filed a copy of the camper purchase invoice with the objections
officer;
(jj) the objections
officer reduced the purchase price of the camper to $29,950 based
on the information supplied by the Appellant;
(kk) on July 25, 2000, the
camper was exchanged for a Catalina camper;
(ll) a $3,995 loss
was determined by the Minister's auditor;
(mm) based on the information provided to
the objections officer, the loss incurred by the Appellant in
2000 was corrected to $2,950;
1990 Catalina Camper
(nn) on July 25, 2000, the
Appellant exchanged the 1989 Triple E - Regency camper for a
1990 Catalina camper;
(oo) the Minister's auditor
set the purchase price of the Catalina camper at $27,000;
(pp) as the Appellant had paid
the vendor $8,000 in addition to the Chris-Craft boat and
trailer, for which the vendor had credited an amount of $20,999,
the objections officer set the purchase price of the Catalina
camper at $28,999;
Gasoline Expenses
(qq) on the basis of the
information obtained, the Minister's auditor estimated the
following amounts in respect of gasoline expenses for the various
motor vehicles used by the Appellant for his personal use:
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Description
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1998
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1999
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2000
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1994 Oldsmobile
S-10 Pick-up
Chris-Craft boat
Other
Total
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$2,340
$609
$4,540
$ 0
$7,489
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$2,340
$148
$0
$2,080
$4,568
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$2,340
$0
$0
$3,580
$5,920
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(rr) based on the
additional information provided to the objections officer, the
following amendments were made to the gasoline expenses stated in
the previous paragraph:
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Description
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1998
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1999
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2000
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(Reductions)
1994 Oldsmobile
Chris-Craft boat
Other
Total
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($3,210)
($2,270)
$0
($5,480)
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($3,210)
$0
($1,040)
($4,250)
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($3,210)
$0
($2,938)
($6,148)
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(ss) the facts stated in
subparagraphs 30(s), (t), (w), (x), (aa), (dd), (ee), (ii),
(jj), (mm), (pp) and (rr) were assumed for the first time when
the reassessments of September 22, 2003, were made for the
1998, 1999 and 2000 taxation years.
FEDERAL PENALTIES FOR NEGLIGENCE
31. By the reassessments
of February 22, 2002, the Minister assessed penalties under
subsection 163(2) of the Act in respect of the additional
income, established by the net worth method, of $19,395 for 1998
and $9,895 for 2000, for the following reasons:
(a) the unreported income of $19,395 in 1998 and $9,895
in 2000 was high enough relative to gross income that the
Appellant could not plead ignorance of the omissions from his
returns of income or the existence of any false statement;
(b) the reported income appeared relatively low compared
to the Appellant's standard of living;
(c) although the Appellant did not have much knowledge
of tax matters, he was in a position to inquire;
(d) the Appellant was the only person operating his
business;
(e) the bookkeeping was virtually non-existent, and
there was no filing system for the business, no sales invoices
were issued, and most of the supporting documents for the
purchase of automotive parts did not exist.
32. At the time of the
reassessments of September 22, 2003, the penalties assessed
under subsection 163(2) of the Act were reduced as a result
of the changes made by the objections officer; they were
therefore applied to the net income increases of $14,918 for the
1998 taxation year and $5,747 for the 2000 taxation year.
[3] The points for determination are,
first, whether the Minister of National Revenue (the
"Minister") was correct in adding the following amounts
to the Appellant's income:
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1998
1999
2000
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$14,918
$6,750
$5,747
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[4] Second, the Court must determine
whether the penalties were warranted.
[5] At the start of the hearing,
counsel for the Appellant told the Court that the Appellant's
evidence would focus mainly on the question of the cash on hand
at the start of the period, that is, in 1997.
[6] The Appellant explained that, at
that time, he had held approximately $107,328.71 in cash,
consisting of the following items:
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Insurance indemnity as a result of his spouse's
death
Term deposit held by his spouse
Cash in his possession: between $10,000 and $15,000
Various insurance indemnities paid in three instalments
of $5,000, $27,221.84 and $21,000
Proceeds from the sale of land
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$5,006.87
$10,000.00
$15,000.00
$53,321.84
$24,000.00
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Total
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$107,328.71
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[7] The Appellant then stated that he
was a mechanics buff and had decided to treat himself to the
vehicles he had always dreamed of. He had therefore acquired a
number of assets, the cost of which is not here in issue.
[8] He explained that he had had to
draw down the capital he had held at the start of the period in
issue, that is, in 1997, to make his dreams come true, since his
income was $7,273 in 1998, $8,326 in 1999 and $9,124 in 2000.
[9] As to his cost of living, he
stated that he was not very demanding and was very moderate in
his expenses, which he valued at $250 a week. He also mentioned
that his girlfriend paid for him when they went out to a
restaurant, that she had borne the acquisition cost of a cabin in
1996, and that she had also paid more than half of the garage
expenses.
[10] Those were the essential points of the
Appellant's testimony. I found the first part of that
testimony quite convincing, it being based mainly on documents,
that is, copies of the insurance indemnity cheques following his
spouse's death, a copy of the term deposit that he held at
the time of death, various insurance indemnity cheques as a
result of the fire at his mobile home and a copy of the contract
certifying the sale of the land on which the house destroyed by
fire had stood. Matters deteriorated, however, when he explained
his lifestyle, his passions, the modest nature of his personal
expenses, and his girlfriend's extreme generosity.
[11] However, the enormous gap between the
Appellant's conspicuous lifestyle (luxury vehicle, truck,
boat, camper) and his income, which he advanced all kinds of
fantastic explanations to say he had supplemented, seriously
undermined the plausibility of those explanations of how he had
used the insurance indemnities and other amounts he said he had
possessed at the start of the period, that is, in 1997.
[12] The Respondent first stated that she
did not agree with the valuation of cash on hand in 1997. She
called Christine Verreault and Claude Rony,
respectively auditor and appeals officer, as witnesses.
[13] First, Ms. Verreault explained
that the audit had arisen from the finding that the Appellant had
acquired a large number of assets, whereas his income was very
modest. The unchallenged evidence revealed the acquisition of a
residence, cars, a truck, a boat and a camper.
[14] Ms. Verreault said that she had
had to proceed by the net worth method because there was a total
lack of reliable data and it was impossible to proceed by the
usual method.
[15] Not only did the Appellant not have
adequate accounting, he systematically refused to cooperate in
any way and took various steps to mislead and lie to the auditor.
In particular, he misrepresented himself as another person and
his girlfriend as his daughter. He even denied the obvious fact
that he owned a boat.
[16] To illustrate the nature of the
problems encountered during the audit, I think it useful to cite
a passage from the report prepared by Ms. Verreault
(Exhibit I-2):
[TRANSLATION]
[. . .]
I told him that I had seen an advertisement for a 1985
Chris-Craft for sale in the advertising invoices for the
purchase of his vehicles. He told me that that was his boat.
He wondered how I knew that he had a boat. I told him I
had seen it in his invoices. He told me that must have been an
invoice that was lying around. He explained to me that it was
a boat that had belonged to one of his friends who had had an
accident in the river. He had hit a shoal and the boat had taken
on water. He said his friend had sold him the boat for $5,000
to $6,000 so that he would take care of it and repair it.
Which is what he did, and he said he subsequently put it up for
sale in 1998. Not being able to sell it to an individual, he said
he decided to exchange it for a 1999 camper at Géant
Motorisé. He told me he had owned that boat for
12 years and that he had used it at the time to travel a
little with his friends (Lac St-Joseph, Lac Champlain,
Sorel) but that gasoline expenses had been shared with the
occupants every time. I asked him whether he had tied it up
somewhere at a marina, and he told me that he had not, that
he had stored the boat at the home of one of his friends in
l'Ange-Gardien (Yvon Chouinard).
I asked to see the paper on which he had recorded the payments
made to his sister-in-law. On it he had recorded instalments of
$1,000 on October 31, 1995, $4,000 on July 10, 1996,
$4,000 on August 2, 1997, $4,000 on August 15, 1998,
$4,000 on September 10, 1999, and, lastly, $4,000 on
June 11, 2000. He told me that he had no invoices for the
renovations because they had done virtually all of them
themselves with friends and that I would find no invoices for
1997 and subsequent years since everything had been done well
before that.
I asked him whether he had found invoices for purchases of his
motor vehicles. He told me he had not and that he had checked
with Cécil Bilodeau, a dealer, but that they had
nothing about that because they had all been lost in the fire. He
mentioned to me that his Oldsmobile Regency had been bought in
February 1998 for $13,500 (taxes included without exchange)
and paid for in cash with insurance money. He said his
pick-up was bought in March 1997 for $21,000 (taxes
included without exchange) and paid for in cash with the
insurance money. He said he had kept it for a year and sold
it to an individual in 1998 for $19,000. He told me that that
truck had been bought to transport his boat, but that he had
decided to sell it.
I explained to him that we were going to look at the estimate
of his lifestyle because it did not appear to correspond to his
reported income. He told me that he lived on the income from his
insurance. I told him that we were nevertheless going to estimate
his cost of living. He told me he knew how that worked, that I
was going to ask him how much it cost him to live. I told him
that was what we wanted to estimate.
He estimated $75 a week for food and $30 a month for
restaurants. He often spoke to me about Gisèle, who
brought him prepared meals (submarine sandwiches, Chinese food,
etc.). For housing, I told him I had nearly all the expenses, the
principal paid to his sister-in-law every year, the hydro bills
(he had oil heating for his garage and residence), the Bell
bills, and municipal and school taxes. I asked him whether he was
still with Desjardins for home insurance. He told me he was with
AXA Assurances for everything. He communicated with
Michel Boutin, who confirmed for him the following premiums
for the last year: his motor home ($448), the Pontiac Sunbird
($256), his Oldsmobile ($403), and the residence ($303). We
estimated $200 a year for clothing. He told me that his daughters
and Gisèle had bought him most of his clothing.
As to his vehicles, for his Oldsmobile (123,000 to
157,000 km travelled since the purchase in 1997), he
estimated two fill-ups, that is, two times $45, maintenance
and repairs at $100 (parts purchased at scrapyards), and
registration at $250. For his motor home, maintenance at $100,
registration at $425. For his second motor home purchased in
2000, he told me he had not had to pay anything because the owner
had taken it back in view of the old vehicle's operating
problems. He said he was friendly with the owner of Géant
Motorisé St-Ambroise.
As for health care, Mr. Lefrançois paid nothing
for glasses or dental work. As for medication, he takes
medication (anti-inflammatories) from his brother who is an
invalid. He said toiletries represented approximately $30 a
year.
Mr. Lefrançois admitted to me that he
had lied when I called his residence in April. He told me I had
never spoken to his brother and that he did not live at his home,
but came only two or three days, no more. He also told me that he
had not wanted to go and pick up the letter from the post office
because he believed it was someone to whom he had sold the car
and who wanted to take him to small claims court. He told me that
it scared him and that he wanted to run away. He told me he knew
that I took him for a liar and he wanted to tell me the truth. He
told me he was aware that I had realized all that.
With regard to recreation, he told me he went fishing at the
cottage of Gisèle's mother and that that cost
approximately $50 in gas and $75 in groceries. He goes there
approximately five times a year. He pays dues of $45 a year to
the Fédération des Campeurs. As for his boat, he
mentioned $600 in gas to go to Sorel (he told me it consumes
12 gallons an hour). He goes to his daughter's
campground in his motor home and that costs him $20 for five
gallons of gas. He told me that he went to his brother's home
in North Carolina in 1999, but that that had only cost him $150
with his motor home and that he had stayed with his brother for
15 days. He told me he had lent his credit card to his
brother, who went to Daytona once, but that that was the only
time and that he himself had not gone there. He told me he was
not in the habit of using his car and that it was just for
emergencies. He is used to paying for everything in cash, and
he told me he did not like leaving a trail behind him.
He told me he gives approximately $45 to $50 in gifts to each
of his daughters each year and $100 to Gisèle. He told me
that Gisèle gives him a lot of gifts. There is a dog at
the house. He told me that was for Gisèle and that she
cannot keep it in her apartment, but that she pays for it (food,
veterinarian, etc.). Mr. Lefrançois told me that he
buys a case of 24 beers every two weeks and six or seven
bottles of wine a year.
[17] The net worth method is never the ideal
assessment method since, by its very nature, it must involve
using essentially arbitrary figures. However, a person who is
assessed in this manner can provide explanations and
justifications to refute and challenge the components of such an
assessment through documents, testimony and other means.
[18] Failing documents and testimony by
credible persons duly informed on the points at issue, the
credibility of the person concerned by such an assessment is of
decisive importance.
[19] In the instant case, on the evidence as
a whole, I lend no credence to the Appellant, whose testimony was
a patchwork of fabrications and gross lies.
[20] He tried to discredit the auditor by
insinuating that she had lied to him, that she had not identified
herself and, what is even more surprising, that she had
frightened him.
[21] However, he lied to her shamelessly
about his identity, passing himself off as his brother and saying
that the person concerned by the audit worked outside at a place
that he could not indicate. He provided a number of utterly
contradictory explanations about the substantial amounts
received. His first version was that he had made major repairs
and improvements to his residence. He told the Court that he had
simply cashed the amount in order to keep it cash at his
home.
[22] After offering to show the auditor a
large sum of money that he kept in cash at his home, he changed
his mind and never agreed to do so.
[23] He admitted that he had not attended to
the registered mail that had been sent to him because, as a
seller of cars worth $500 to $1,000, he must often have been the
object of claims in small claims court; the experience had taught
him not to pick up his mail and that stratagem had spared him a
lot of problems.
[24] To justify the $40,000 withdrawal from
the bank, he said that he did not trust the banks since his
account had previously been emptied without his knowledge. He
also said that he had no need of the residence, but that he had
bought it for his girlfriend. He spoke of minor repairs that he
had done himself with friends. As a result, the explanation,
given to the auditor, that he had withdrawn $40,000 for major
repairs no longer stood at the hearing. The repairs had
diminished in magnitude and the withdrawal had remained in cash
and been kept at home.
Penalties
[25] The penalties assessed are warranted on
the evidence as a whole. The weight of the evidence is that the
Appellant is not only a person wholly indifferent to his tax
liabilities, but also one who deliberately does everything he can
to avoid them. He pays in cash, keeps no documents, and displays
a disturbing ability to fabricate explanations to explain the
inexplicable.
[26] In connection with the audit of his
file, the Appellant made false and misleading statements on a
number of occasions and systematically refused to cooperate. The
audit work was a laborious process. It is obvious to me that the
Appellant deliberately chose to live and to organize his affairs
so as to avoid paying any tax.
[27] I am moreover convinced that the
assessments issued were probably well below what they should have
been.
[28] The persons who conducted the audit,
analysis and revision did a professional, judicious and
impeccable job given the numerous constraints and barriers the
Appellant raised for them.
[29] For all these reasons, I confirm the
merits of the reassessments issued and determine that the
penalties assessed were entirely warranted.
[30] The appeal is subsequently dismissed,
the whole with costs.
Signed at Ottawa, Canada, this 7th day of September 2004.
Tardif J.
Certified true translation
Colette Dupuis-Beaulne
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