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Citation: 2004TCC77
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Date: 20040323
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Dockets: 1999-1967(IT)G
1999-1968(IT)G
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BETWEEN:
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COUPE DE VÊTEMENTS ZUREK INC.,
JEAN ZUREK,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
(Delivered orally from the bench on June 20, 2003,
at Montréal, Quebec, and amended for greater clarity.)
Archambault J.
[1] Coupe de vêtements Zurek
Inc. ("Vêtements Zurek") and Mr. Jean Zurek are
appealing from the assessments made by the Minister of National
Revenue (the "Minister") under the Income Tax Act (the
"Act") for the 1996 taxation year.
[2] The issues at bar are as
follows. With respect to Vêtements Zurek, the
Minister disallowed the deduction of expenses totalling $113,571
in the computation of its income, representing the payments made
to three subcontractors (the "three subcontractors"): Confection
P.T.P. (P.T.P.), $7,100; Hakara Pres (H.P.), $103,371; and,
Confection K.V.D. (K.V.D.), $3,100. The Minister also
issued a penalty under subsection 163(2) of the Act. With
respect to Mr. Zurek, the Minister included the sum of $113,571
in his income, under subsection 15(1) of the Act, as
appropriation of funds. He also issued a penalty pursuant
to subsection 163(2) regarding this sum.
The facts
[3] At the outset of the hearing,
counsel for the Appellants admitted some facts set out in each
amended Reply to the Notice of Appeal. In the case of
Vêtements Zurek, the facts are set out in the following
paragraphs of section 6:
(a) the Appellant
works in the field of clothing cutting;
(b) it leases fairly
large premises which contain five cutting tables, three electric
cutting scissors, and a fusing machine;
(c) the Appellant's
shareholders are Jean Zurek, holding 75% of the shares (225
common shares) and Patrick Zurek, holding 25% of the shares (75
common shares). Patrick Zurek is the son of Jean Zurek;
(d) Jean Zurek
manages the Appellant's operations and Patrick Zurek handles
transportation;
(e) Jean Zurek
stated that, during the 1996 taxation year, the Appellant had
only one employee;
(f) the
Appellant's financial statements for the financial year ended
December 31, 1996, show wage expenses in the amount of
$10,243;
(l) all of the
invoices from subcontractors for the expenses at issue were paid
by certified cheque signed by the Appellant [or Patrick Zurek].[1]
[4] In the case of Mr. Zurek, the
facts are set out in the following paragraphs of section 6:
(a) Coupe de
vêtements Zurek Inc. (hereinafter the "company") operates
in the field of clothing cutting;
(b) it leases fairly
large premises which contain five cutting tables, three electric
cutting scissors, and a fusing machine;
(c) the Appellant's
shareholders are Jean Zurek, holding 75% of the shares (225
common shares) and Patrick Zurek, holding 25% of shares (75
common shares). Patrick Zurek is the son of the
Appellant;
(d) the Appellant
manages the company's operations and Patrick Zurek handles
transportation;
(e) the Appellant
stated that, during the 1996 taxation year, the company had only
one employee;
(f) the
Appellant's financial statements for the financial year ended
December 31, 1996, show wage expenses in the amount of
$10,243;
(l) all of the
invoices from subcontractors for the expenses at issue were paid
by certified cheque signed by the Appellant [or Patrick Zurek][2].
[5] The evidence presented at the
hearing revealed the following facts. Vêtements Zurek
has operated a fabric cutting business since approximately 1992;
the fabric and patterns are provided by its clients. Mr.
Jean Zurek is the President of Vêtements Zurek, and he has
been a cutter for more than forty years. In addition to
marking and cutting for Vêtements Zurek, he manages the
business, and, among other things, signs the cheques.
However, he works only part-time at the business; in 1996, he
spent 10 to 15 hours per week, or two to three hours per day, at
Vêtements Zurek. The balance of his time, 25 hours,
was spent operating a restaurant in which he has a 50%
interest. This restaurant incurred losses for each of the
years from 1996 to 1998; his share of the losses was $5,710 in
1996, $9,248 in 1997, and $9,000 in 1998.
[6] Mr. Zurek's wages from
Vêtements Zurek are regular. He earned employment
income of $25,200 in 1994, and $18,000 in 1995. He earned
no employment income in 1996. Mr. Zurek stated that he
lived on his savings that year, because he had no other
established source of income. In 1997, his employment
income from Vêtements Zurek was $14,999. He had no
income in 1998. It should be noted that Mr. Zurek reported
some interest income for the 1992 to 1996 taxation years, ranging
from $1,137 in 1996 to $4,805 in 1993.
[7] Patrick Zurek, born in 1969, works
on a full-time basis for Vêtements Zurek, although in 1996,
he earned no income, and he received only an allowance for his
vehicle, which he did not include in his income (he also did not
include some rental income). His duties included preparing
invoices to the manufacturers who are clients of Vêtements
Zurek. He also handled the payment of invoices from
subcontractors. Except for two cheques dated in July 1996,
all of Vêtements Zurek's cheques filed with the Court were
signed by Patrick Zurek, namely, the cheques payable to
subcontractors and to the owner of the building leased by
Vêtements Zurek.
[8] In 1996, Vêtements Zurek had
a workshop on Louvain Street in Montréal. This
workshop measured 10,000 square feet. The monthly rent, as
set out in the lease, was $3,000. However, the rent paid in
1996 was only approximately $2,000. This workshop contained
five work tables, three electric cutting scissors, a fusing
machine, a fabric spreader, and a fabric drill.
[9] Vêtements Zurek has
approximately 15 or 16 clients who are manufacturers,
including Point Zero and Sport Collection. Vêtements
Zurek provides these manufacturers with detailed invoices, which
specify the quantity of and unit price for the cuts to be made,
and the pattern number.
[10] Its clients also include Gramar, a
company that operates a cutting business and contracts out its
surplus work to Vêtements Zurek. Gramar paid
Vêtements Zurek $66,994 in 1996, which represents 39% of
Vêtements Zurek's sales figures for the year. Unlike
the invoices Vêtements Zurek submits to manufacturers, its
invoices to Gramar are not detailed. They do not identify a
pattern number, quantity, or unit price. They simply
describe the type of garment cut and the total price. The
figures on these invoices are generally rounded off. Nine
of the eleven invoices are for $5,000 or nearly $5,000. In
his testimony, Mr. Jean Zurek stated that 1996 had been a
difficult year. Vêtements Zurek's contracts were more
complex and not profitable. He explained that the lack of
profitability was due to the fact that Vêtements Zurek
earned $18 per hour for the cuts, whereas its base cost was $15,
plus 20% to 25% for employee benefits. However, the payment
received by Vêtements Zurek was calculated on a piecework
basis rather than an hourly rate.
[11] Vêtements Zurek's sales figures
decreased from 1994 to 1996, and it incurred the following
losses:
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Sales Figures
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Profits (Losses)
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1994
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$402,632
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($4,859)
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1995
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$272,418
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($6,877)
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1996
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$170,730
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($14,363)
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[12] During these years, Vêtements
Zurek had wage expenses, including directors' wages, and expenses
for payments to subcontractors:
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Wages
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Payments to subcontractors
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Directors
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Other employees
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1994
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$69,900
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$81,135
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$148,995
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1996 [sic]
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$35,257
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$33,257
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$113,420
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1996
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0
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$10,243
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$124,961
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[13] It appears that in 1996, the $10,243
salary was paid to an employee who worked during a substantial
part of the year. According to Mr. Zurek, he and his son
also worked at cutting. Upon analysis of the payments made
to subcontractors, the evidence shows that there were four
subcontractors. Firstly, Mr. Yipi provided services in
January 1996 (as he did in 1995). Mr. Zurek stated that Mr.
Yipi had wound up his operations in January 1996 and that he knew
his address. The payments made to Mr. Yipi were not
disallowed as a deduction by the Minister.
[14] With respect to the payments made to
the three subcontractors, Mr. Zurek stated that the three
subcontractors were represented by a Mr. Vichard; he could not
specify whether this was his first or last name. According
to him, Vichard was the businessperson who operated the three
subcontractors. Unlike the situation with Mr. Yipi, Mr.
Zurek (or his son) did not know Vichard's address. All he
knew was his telephone number and that of his brother. Mr.
Zurek stated that he had visited the workshop of one of the
subcontractors on Parc Street on one occasion. He claimed
that he met Vichard when he was working for one of
Vêtements Zurek's clients, Casadawa. Vichard
allegedly contacted him and offered him an attractive sum for
cutting work. According to Mr. Zurek, his son Patrick was
present during the negotiations with Vichard.
[15] Like the Vêtements Zurek invoices
submitted to Gramar, the invoices to the three subcontractors
were not detailed; they contained no pattern number, quantity, or
unit price. They simply indicated the type of garment cut
and the extended price. In general, these invoices
contained rounded-out figures. During cross-examination,
Mr. Zurek was unable, at first, to correlate the invoices sent to
Vêtements Zurek's clients with the subcontractor
invoices. An analysis of the invoices and bank statements
enables this correlation. Vêtements Zurek's bank
statements show that, on January 23, 1996, a cheque for $5,696
from Gramar was deposited, and that Vêtements Zurek wrote a
cheque for $5,500 payable to Mr. Yipi on the same day.
[16] A correlation was also made in at least
three instances between Vêtements Zurek and its three
subcontractors. An exact price correlation was made in two
instances and a nearly exact correlation was made in the
third. As we will see later, there is not necessarily a
correlation with the work performed. With respect to price,
Vêtements Zurek's bank accounts show that the deposit of a
cheque for $8,546.63 from Gramar was made on July 11, 1996, and
that a certified cheque for the same amount, $8,546.63, was drawn
on July 12. Another cheque from Gramar for $5,697.75 was
deposited on October 16, 1996, and Vêtements Zurek wrote a
certified cheque for the same amount, $5,697.75, payable to
H.P. The final example I would like to point out is the
cheque for $5,697 from Gramar, deposited on April 18, 1996, and
on the same day, Vêtements Zurek made out a certified
cheque for $5,726 to H.P. The three invoices for the
payments made to H.P. do not provide the same description of cuts
as those described in the invoices sent to Gramar. The
invoice sent to Gramar, which corresponds with the first cheque
for $8,546.63, describes the cutting of pants, vests, blazers,
and skirts, whereas the H.P. invoice describes the cutting of
vests, blouses, and 14 samples. The second invoice sent to
Gramar, which corresponds with the cheque for $5,697.75,
describes the cutting of pants, blouses, skirts, and jumpers,
whereas the H.P. invoice describes the cutting of "body,"
blouses, and pants. Finally, the third invoice sent to
Gramar, which corresponds with the cheque for $5,697, describes
the cutting of vests, pants, blouses, and dresses, whereas the
H.P. invoice describes the cutting of pants and
blouses.
[17] The explanation Mr. Zurek gave during
his testimony is that Vichard was free to describe whatever he
wanted to on his invoices. It is important to note that Mr.
Zurek did not deny the existence of the correlation between the
H.P. invoices and the Gramar invoices. For example, he did
not say that this was not the same order.
[18] These figures and these three examples
show that the price charged to Gramar by Vêtements Zurek is
the same as the price it paid to H.P. This raises the
following question: How does Vêtements Zurek make a
profit? Mr. Zurek responded that he earned a 10% profit on
the services provided by the three subcontractors. His
explanation as to how he arrived at this percentage was
relatively strained and confusing, but it can apparently be
summarized as follows: he would have the three subcontractors
perform more work, specifically, 10% more cuts, than he could
invoice his clients for.
[19] All of the invoices submitted by the
three subcontractors were filed at the hearing, and additional
comments are necessary. Firstly, with respect to the
invoices from P.T.P., dated February 6 and 12, 1996, the name
"P.T.P." is entered by hand, whereas the name that initially
appeared on the invoice was K.V.D., which was crossed out and
replaced with P.T.P. Thus, the GST number that appears on
the invoice is that of K.V.D. Mr. Zurek acknowledged in his
testimony that these invoices had not been issued in February
1996. They had been issued at a later date, at the request
of the accountant, because they were missing. The
accountant likely pointed out that there were two certified
cheques payable to P.T.P. for the month of February 1996, for
which no corresponding invoices existed.
[20] Moreover, 43 invoices from H.P. were
issued for the period beginning February 13, 1996, and ended
December 2, 1996. Those issued prior to June 13, 1996, are
not numbered consecutively. Those issued for the period
beginning June 13 and ended November 4, 1996, all contain
consecutive invoice numbers; these are all the numbers from
218278 to 218300, except for 218298. It appears that the
handwriting on these invoices is that of the same person, using
the same pen. As indicated in the working papers of the
auditor who analyzed Vêtements Zurek's accounts with the
Caisse populaire du Quartier-Chinois, H.P. deposited a number of
cheques from clients throughout 1996, on a regular basis.
The numerous deposits indicate that H.P. did not have only one
client during the period beginning June 13 and ended November 4,
1996. Having only one client could have explained the
consecutively numbered invoices. According to Mr. Zurek,
the only possible explanation for this situation is that his
supplier, H.P., used a separate invoice book for each
client. However, as I noted earlier, from February to June,
the invoices issued by H.P. were not consecutively numbered.
[21] It should also be noted that the
invoices from H.P. and K.V.D., beginning on April 15, which start
with invoice number 169195, were issued, in all likelihood, by
one person, using the same pen. With respect to the
invoices issued prior to April 15, 1996, they appear to be
written out by someone other than the person I just mentioned,
yet this handwriting is strangely similar to the one that appears
on the invoices that Vêtements Zurek sent to its
clients. These invoices can be divided into two groups: the
invoices issued from February 13 to March 18, numbered 268023 to
268231, written in blue ink, and those issued from March 25 to
April 9, numbered 268238 to 268243, written in black ink.
The last two invoices from H.P. are from December 1996; invoice
169328 is dated December 2, and invoice 169329 is dated December
9. It is interesting to note that one invoice with an
earlier number, 169326, is dated May 21, 1996, and is a part of a
series of eight invoices beginning April 15, with invoice number
169195, and ended, as I noted, on May 21.
[22] Finally, the last two invoices for the
period were issued by K.V.D. and are dated December 16 and 20,
1996. It is interesting to note that the numbers on these
invoices are inverted, that is, the December 16 invoice is
numbered 869814, and the December 20 invoice is numbered
869804. I also note that the invoices issued in February
1996, supposedly by P.T.P., to which I referred earlier, also
bear invoice numbers that are part of the same sequence found in
December 1996 for K.V.D. These are numbers 869803 and
869821. I also note that they appear to have been issued by
one person, using the same pen.
[23] According to Mr. Jean Zurek, Vichard
would come to pick up bolts of fabric and patterns from
Vêtements Zurek's workshop. Vichard would collect 10
to 75 bolts containing 50 to 60 metres of fabric. The value
of these fabrics ranged from $2 to $4 per metre; 50 bolts
containing 50 metres at $3 per metre would be worth $7,500.
Using the maximum figures, 75 bolts containing 60 metres worth $4
per metre represents a value of $18,000. According to Mr.
Zurek, Vichard would come by himself most of the time, but on
occasion, he came with the truck driver, whose name Mr. Zurek did
not know. Vichard would issue a receipt, but Mr. Zurek did
not keep any of them; the receipts were no longer useful once the
cut fabric was returned. Because Vêtements Zurek did
not know Vichard's address, nor that of the three subcontractors,
and it did not know where the bolts of fabric were being
transported to, Mr. Zurek acknowledged that, in the
circumstances, he was at risk of not being able to locate his
supplier. However, Vichard required that he be paid by
certified cheque. Where Vêtements Zurek did not have
sufficient funds in its bank account, the cheques from
manufacturers or from Gramar were deposited on the same day or
the previous day, as seen above, to cover the certified
cheque.
[24] According to Mr. Jean Zurek, Vichard
would come two or three times per week to check whether there was
any work; sometimes, Vichard would call. According to Mr.
Zurek, Vichard's work ended in February 1997. It appears to
me that he gave three different explanations for the termination
of the relationship. He indicated that he had stopped doing
business with Vichard because there was no more work. On
another occasion, he indicated that he stopped dealing with
Vichard, because things were better without him, and more money
was made because the cuts were easier and simpler. And in
yet another instance, he stated that he had given Vêtements
Zurek to Patrick.
[25] The Respondent's evidence involves the
work of the Minister's various auditors. This evidence
revealed the facts that led the Minister to show interest in the
cases of Mr. Zurek and Vêtements Zurek. Firstly, it
was noted that major expenses for subcontractors had been
incurred in 1996, the invoices were not detailed (unlike the
invoices issued by Vêtements Zurek to its clients), and all
the payments made to the three subcontractors were by certified
cheque which were immediately cashed.
[26] In April 1997, during the first meeting
between the Minister's auditor and Mr. Zurek, Mr. Zurek stated
that he did not know the name or address of his
subcontractors. He then identified Vichard, who he claimed
was a Chinese truck driver with whom he did business. When
the auditor informed him that he was at risk of having the
deduction for the payments made to these three subcontractors
disallowed, Mr. Zurek called Vichard on the telephone in the
presence of this auditor. When Vichard learned that Mr.
Zurek was in the company of an auditor, he said that he was busy
and that he would have to call him back, which he never did.
Mr. Zurek stated that he was not in contact with Vichard
again. The auditor indicated that he attempted to call
Vichard back, with no success; the telephone number provided by
Mr. Zurek was no longer in service.
[27] The other steps taken by this auditor
and other auditors, namely the ministère du Revenu du
Québec ("MRQ") auditors, revealed that the three
subcontractors could not be located, either because they were
non-existent or because they had not carried out any activities
at the addresses obtained from various records.
Specifically with regard to H.P., the Canada Customs and Revenue
Agency ("CCRA") and the MRQ GST and QST records indicated
that H.P. was a business owned by Mr. Hakara Pres. The
business was registered on December 18, 1995, and the
registrant's file was closed on March 9, 1998. This
registrant's business was described as a garment-making business;
the registrant did not, however, file a GST return. The
address for H.P. was listed as 2285 Hogue Street, Unit 304,
Saint-Laurent. The building's custodian told an MRQ auditor
in April 1997 that H.P. had not operated a business from this
address. Other attempts to locate the premises from which
H.P. could have carried on its activities were also
unsuccessful.
[28] According to RAPID, the Minister's
database of taxpayer income tax returns, Mr. Hakara Pres had no
business income from 1993 to 1995; income from social assistance
and employment insurance is shown for these years. Mr. Pres
did not file an income tax return for 1996. The MRQ's
records for 1996 show the same information. These records
show income from social assistance for 1995. The payroll
source deduction service ("PSD") has no record of an employer
named H.P. According to the MRQ's anti-tax evasion office,
H.P. was considered an "accommodator."
[29] A verification with the parity
committee on the application of provincial decrees enacting the
terms and conditions of employment of workers in the garment
manufacturing industry yielded no results. H.P. was an
unknown business.
[30] A verification with the Caisse
populaire du Quartier-Chinois provided the following
information. A certificate of registration with the
Inspector General of Financial Institutions ("IGIF") was
discovered. According to the certificate, Hakara Pres had
been operating a garment manufacturing business since December
18, 1995, and his address was 2285 Hogue Street, Unit 304,
Saint-Laurent. Although Hakara Pres was identified as the
owner of this business on the certificate submitted to the Caisse
populaire, the sole cheque-signing authority for the business was
a Mr. Li. H.P.'s account was opened on December 18, 1995,
and closed on December 24, 1996. Records showed deposits
totalling $7.4 million, of which approximately 90% were certified
cheques. Cash withdrawals totalled $4.7 million. A
total of $374,000 in cheques were payable to H.P. The
registration with the IGIF was cancelled on October 8, 1997.
[31] According to the statements of the
Société de l'assurance automobile du
Québec ("SAAQ") [Quebec automobile insurance corporation],
Mr. Pres had not owned a vehicle since 1995. One of the
auditors contacted Mr. Pres' sister, Stella, who told him that
her brother was not involved in the clothing industry, that he no
longer lived with her, and that he was now living with his
girlfriend. Stella gave the auditor the friend's telephone
number. The auditor, however, was unable to contact Mr.
Pres.
[32] Research on K.V.D. revealed the
following information. According to the CCRA's registers,
the person registered for the purposes of the GST was a Mr. Vuthy
To. The registration took place in December 1996, and a GST
return was not filed. According to the RAPID database, Mr.
To did not have any business income. For the 1993 to 1995
taxation years, he had slips relating to employments in the
fields of decorating, food service, and garage operations.
For 1995, he had a T4 slip showing a sum of $3,000 and social
assistance payments. An income tax return was not filed for
1996; however, it appears that Mr. To received social assistance
that year. According to Mr. To's former girlfriend, he had
not operated a business, and his work did not involve the
clothing industry. The bank statement issued by the Caisse
Populaire du Quartier-Chinois shows that the signing authority
for the K.V.D. account was also Mr. To.
[33] The auditors' research with respect to
P.T.P. showed the following information. According to the
bank accounts located at the National Bank, ScotiaBank, and CIBC,
the accounts were opened beginning on December 14, 1995, and
closed on November 30, 1996. The signing authorities for
cheques drawn on the accounts at these three banks were Sorm Han,
who declared bankruptcy in 1996 according to the RAPID data, and
Mr. Lan Hung. The total of the deposits made to these bank
accounts was $9.3 million, $1.3 million of which was deposited in
August 1996. Cash withdrawals made on the same day the
cheques were deposited, or the next day, totalled $8.8
million. There were no records of payments for overhead
expenses such as electricity, rent, or telephone. According
to the CCRA and MRQ records, P.T.P. was not a GST or QST
registrant. However, a business called Confection Belle Han
Sorm was registered in November 1995, in Mr. Sorm Han's
name. I stress again that the GST number appearing on the
invoices issued by P.T.P. was K.V.D.'s GST registration
number.
[34] The auditors were able to identify 11
addresses that could have a relation with P.T.P. These
addresses were essentially residential or industrial
addresses. With respect to the industrial addresses,
research showed that, in each case, there was no lease binding
the owner of the premises with P.T.P. during the relevant
period. Moreover, in some instances, the premises at issue
were vacant. The parity committee on information was able
to provide some information about P.T.P., but there was only one
entry, made in March 1996, respecting a subcontractor, involving
the sum of $4,300. An MRQ investigator confirmed that Mr.
Sorm Han had been found guilty ex parte of criminal
offences committed between December 1995 and November 1996,
involving input tax credits that had been claimed illegally.
[35] The Minister's auditor indicated that
the assessments at issue had been made on the following basis:
the deduction for any amounts paid to the three subcontractors by
Vêtements Zurek were disallowed, because these three
subcontractors were considered "accommodators," and it was
thought that their invoices were false invoices. He
concluded that Mr. Jean Zurek had appropriated all the funds
allegedly paid to the three subcontractors, because Mr. Zurek
provided him with all the information relating to these three
subcontractors, and Mr. Zurek appeared to be in a position of
control. He noted specifically that Mr. Zurek did not
appear to represent anyone else. It should be noted that
the Replies to the Notice of Appeal show that, among the facts
assumed by the Minister, Jean Zurek had signed all the cheques on
behalf of Vêtements Zurek, and he directed the operations
of this business. The auditor indicated that penalties had
been issued because Vêtements Zurek had claimed a deduction
for expenses relating to services it had not received, and the
invoices supporting these expenses were false. He also
issued penalties to Mr. Zurek, because Mr. Zurek had appropriated
amounts remitted to the alleged subcontractors; thus, he had
withdrawn money from Vêtements Zurek without paying income
taxes.
Analysis
[36] Firstly, I will recall the rules
respecting the burden of proof, because they explain, in part,
each party's failure. The onus of showing that the income
tax amounts required were not owing was on Vêtements Zurek
and Mr. Zurek; they were required to disprove the facts assumed
by the Minister. In this case, the Minister assumed the
following key facts: no work had been given to subcontractors,
and false invoices, which the Minister deemed to be
"accommodating" invoices, were purchased. Jean Zurek was
responsible for the administration of Vêtements Zurek, and
he had signed all the cheques. Jean Zurek had received cash
from "accommodators" and, therefore, had appropriated funds from
Vêtements Zurek. With respect to the penalties issued
under subsection 163(2) of the Act, a penalty is applicable where
a taxpayer knowingly, or under circumstances amounting to gross
negligence, makes a false statement or omission, and the onus of
establishing this fact is on the Respondent. It was,
therefore, the duty of the Respondent to establish specifically
that services had not been rendered by the subcontractors.
[37] I will address the first issue, namely,
the disallowed deduction of payments made to the three
subcontractors. In this case, Vêtements Zurek was
required to demonstrate that it had, in fact, subcontracted work
and that it had paid the sum of $113,571 to three subcontractors
for work done on its behalf. Unfortunately for
Vêtements Zurek, it failed to do so. The evidence it
submitted was insufficient to persuade the Court that, on the
balance of probabilities, this sum had been paid for work done on
its behalf. Essentially, the only evidence in support of
the fact that Vêtements Zurek truly paid the amount for
which the deduction was disallowed was provided by Mr.
Zurek. There was no witness to corroborate his
testimony. Specifically, his son Patrick did not testify,
even though, in my view, he was most often in contact with
Vichard. According to Mr. Zurek, Patrick was present during
the initial negotiations. Patrick's signature appears on
all but two cheques. Patrick worked at the business on a
full-time basis, whereas Jean Zurek worked for only 10 to 15
hours per week. Moreover, the testimony of the employee who
worked for Vêtements Zurek in 1996 could have been
heard. This employee could have confirmed seeing Vichard
coming to pick up the bolts of fabric and returning the cut-out
garments. The absence of these two witnesses lead me to
perceive a negative inference, namely, that their testimony would
have been adverse to the case of the Appellants. In this
respect, I rely on the case law established in Huneault
v. The Queen, 98 DTC 1488, at page 1491, in which my
colleague, Lamarre J., cites some decisions and one author:
[. . .]
I would recall here the comments contained in The Law of
Evidence in Civil Cases, by Sopinka and Lederman, which were
cited by Judge Sarchuk of this Court in Enns v. M.N.R., 87 D.T.C.
208, at 210:
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In The Law of Evidence in Civil Cases, by Sopinka
and Lederman, the authors comment on the effect of failure
to call a witness and I quote:
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In Blatch v. Archer, (1774), 1 Cowp. 63,
at p. 65, Lord Mansfield stated:
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"It is certainly a maxim that all evidence is to be
weighed according to the proof which it was in the power of
one side to have produced, and in the power of the other to
have contradicted."
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The application of
this maxim has led to a well-recognized rule that the
failure of a party or a witness to give evidence, which it
was in the power of the party or witness to give and by
which the facts might have been elucidated, justifies the
court in drawing the inference that the evidence of the
party or witness would have been unfavourable to the party
to whom the failure was attributed.
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In the case of a
plaintiff who has the evidentiary burden of establishing an
issue, the effect of such an inference may be that the
evidence led will be insufficient to discharge the
burden.
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[38] In support of this statement, Sarchuk
J. cites Lévesque v. Comeau, 1970 S.C.R.
1010. At page 1012 of this Supreme Court of Canada decision,
Pigeon J. writes:
[. . .]
Appellant Lola [sic] Levesque's expert examined her
for the first time more than a year after the accident, and after
she had consulted several doctors and undergone different
examinations in the meantime. She alone could bring
before the Court the evidence of those facts and she failed to do
it. In my opinion, the rule to be applied in such
circumstances is that a Court must presume that such evidence
would adversely affect her case.
[39] In addition to the absence of
corroboration of Mr. Jean Zurek's testimony, I noted a number of
contradictions in his testimony. Some of them involve the
reference I made above with respect to the explanation for the
termination of the business relationship with Vichard. It
appears to me more likely that the business relationship with him
was terminated because the tax authorities showed interest in
Vêtements Zurek's subcontractors at the time. In
fact, an auditor went to the Hogue Street premises in April 1997
to obtain information about H.P. It can, therefore, be
assumed that the investigation had been ongoing for some
time.
[40] In addition to these contradictions,
Mr. Zurek's testimony contained unlikely or evasive responses,
which I shall reiterate. Firstly, Mr. Zurek was unable to
correlate the cheque deposits with the invoices from the three
subcontractors and Gramar, and the description of the cutting
work done for Gramar is different from the description of the
work done by H.P. I recall that Mr. Zurek did not deny the
correlation that may have existed between the invoices, aside
from the description of the cutting work performed. Bolts
of fabric worth up to $18,000 were given to a person whose full
name and address was unknown to Mr. Zurek. Also, there are
explanations for the lack of profitability, which were based on
the assertion that payments were made on an hourly basis,
whereas, actually, all the work performed by Vêtements
Zurek was paid on a piecework basis, according to the evidence I
heard. Finally, there is Mr. Zurek's strained and confusing
description of how he established a 10% profit.
[41] Furthermore, the evidence is
insufficient, in my view, owing to the very suspicious nature of
the documentary evidence filed with the Court. Obviously, I
am referring to the invoices from the three subcontractors.
Firstly, Mr. Zurek admitted that the invoices from P.T.P. were
back-dated. Moreover, I have the clear impression that the
invoices from the three subcontractors were not issued at the
time the cut garments were delivered, but some time afterwards,
and all at once. The following facts lead me to such a
conclusion: the invoices are numbered consecutively from June to
November 1996; the order of the invoice numbers for the last two
K.V.D. invoices issued in December 1996 is inverted, and invoices
used in December 1996 are numbered according to the same series
as the invoices used in May 1996; the fact that the invoices for
April to December were written by the same person, using the same
pen; and the fact that the handwriting on the invoices prior to
April 1996 is similar to the handwriting that appears on the
invoices issued by Vêtements Zurek to its clients, which
gives the impression that the invoices from the three
subcontractors could have been issued by the person who issued
the invoices for Vêtements Zurek's clients.
[42] Obviously, there is also the lack of
correlation between the description of the cutting work done for
Gramar and that provided by H.P. Added to this is the fact
that the invoices from the three subcontractors provided generic
information rather than details, and the fact that the figures
appearing in these invoices were rounded off, unlike those in the
invoices that appeared to be legitimate and that were sent to
Vêtements Zurek's various manufacturer-clients. Not
only does this evidence fail to persuade the Court that these
invoices from subcontractors are bona fide, but, on the contrary,
they appear, in all respects, to be false invoices.
[43] In addition to the general comments on
the Appellants' testimonial and documentary evidence, the
Respondent provided evidence in support of the non-existence of
the businesses of Mr. Pres and Mr. To, who, according to the
testimony gathered by the auditors, were not involved in the
clothing industry. These are the two individuals who were
carrying on business under the name of H.P. and K.V.D.
Finally, there is the criminal conviction of Mr. Han, who
operated P.T.P.
[44] Therefore, the evidence as a whole has
failed to persuade me that, on the balance of probabilities,
Vêtements Zurek made the payments at issue to the
subcontractors during 1996.
[45] I will now address the second issue,
namely, Mr. Jean Zurek's appropriation of funds. Before
analyzing the relevant facts, I would like to reiterate the steps
taken by the auditor to conclude that Jean Zurek appropriated the
funds. It is true that it is a matter of practice for the
Minister to state, in his Reply to the Notice of Appeal, the
facts he has assumed. It is also true that the burden of
proof rests with the taxpayer, who must disprove the facts
assumed by the Minister in making his assessments. This is
the rule, because the taxpayer is in the best position to refute
or disprove these facts. However, it is important to note
that, where the Minister assumes certain facts, there must be a
reasonable basis for these facts; he cannot simply fabricate
facts that suit his purpose. He must rely on the facts he
was able to observe during his audit. The facts assumed may
stem from direct evidence, or, as nothing prevents it,
circumstantial evidence.
[46] In this case, the assumption of facts
whereby Jean Zurek appropriated funds from the "accommodators"
does not seem reasonable, for a number of reasons. This
"accommodation" would certainly have required a payment to the
"accommodators." Thus, a portion of the sums at issue would
not have been collected by Mr. Zurek. However, and this is
a more important fact, it is not reasonable to infer that only
Jean Zurek would have appropriated property from Vêtements
Zurek and that Patrick would not have. Moreover, it appears
illogical to me to consider Mr. Zurek the only person to have
appropriated property simply because he is the person who
provided the auditor with the information relevant to the
relationships between Vêtements Zurek and its
subcontractors. What could have been reasonable is an
inference whereby an appropriation took place because Jean Zurek
managed everything, he was in a position of control, and he could
have made the appropriation without the knowledge of the other
shareholder. In this case, the evidence showed that Patrick
Zurek was the person most often in contact with Vichard.
Patrick signed all the cheques except for two in July 1996; it is
reasonable to believe that Patrick was on vacation during that
time. Patrick was the one who worked on a full-time basis
for Vêtements Zurek, whereas his father spent only 10 to 15
hours per week at this business. Also, Patrick was
with his father during the negotiations with Vichard.
Therefore, in this case, the facts cited in support of the
assessment have certainly been disproved, in part, based on the
evidence.
[47] I point out that an appropriation could
reasonably have been made on the basis of the interest of each of
the two shareholders in Vêtements Zurek, that is,
distributed 75/25. An appropriation distributed on an equal
basis would also have been possible, given that Patrick worked in
the business on a full-time basis and his father spent only 10 to
15 hours per week there. This fact could have mitigated the
significance of the distribution of shares between father and son
in a proportion of 75 to 25. I note that an explanation
could have helped Jean Zurek's case. In fact, he could have
explained that the amounts were paid to employees or bona fide
subcontractors under the table to reduce his production costs,
but he did not provide such evidence. Only the
representative from the Caisse populaire du Quartier-Chinois
suggested this possibility.
[48] The evidence on the whole did not
persuade me that, on the balance of probabilities, Jean Zurek did
not benefit from at least a portion of the cash paid to the three
subcontractors. However, given the unreasonable nature of
the steps taken by the auditor to allocate all the sums paid to
the three subcontractors to Jean Zurek, for which a deduction was
disallowed, I feel that the amount added to the income of Jean
Zurek must be reduced by at least half. This figure appears
to me to be a reasonable amount in the circumstances.
[49] With respect to the penalties, I
believe that the Respondent did not successfully establish that,
on the balance of probabilities, Vêtements Zurek and Jean
Zurek knowingly, or under circumstances amounting to gross
negligence, made a false statement in their income tax
returns. For me to conclude that they did so, the
Respondent would have had to persuade me that the payment was not
made in consideration of work from which Vêtements Zurek
did not profit. Thus, it is possible that the money was
used to pay workers who performed work for Vêtements Zurek
under the table. I am not satisfied that Jean Zurek and his
son, Patrick, could have performed all the work themselves;
counsel for the Respondent agreed that they could not have done
this work. Even if they did, it is possible, as counsel
raised in her arguments, that the cash paid to the three
subcontractors could have been used to pay Jean and Patrick Zurek
for their services under the table.
[50] In the circumstances, it is difficult
to be satisfied that Vêtements Zurek obviously claimed a
deduction to which it was not entitled. Therefore, I cannot
conclude that a false statement was made knowingly or in
circumstances amounting to gross negligence.
[51] With respect to the penalty imposed in
relation to the appropriation by Jean Zurek, the same approach
must be taken. In this case, the Respondent's evidence did
not persuade me that the amounts at issue were necessarily
remitted to Jean Zurek, in the same way as the evidence did not
persuade me that Jean Zurek did not receive this money.
There is no evidence of unexplained deposits in his bank
accounts. It is possible that the money was, in fact, used
to pay workers other than Jean Zurek under the table. Finally, I
cannot be sure of the sharing of the appropriation that may have
occurred between Jean and Patrick. The burden of proof
regarding penalties was on the Respondent, and the Respondent
failed to discharge this burden.
[52] For all these reasons, the appeals are
allowed without costs, and the assessments are referred back to
the Minister for reconsideration and reassessment, on the basis
that the penalties must be deleted and the amount to be added to
the income of Jean Zurek as appropriation is $56,785.
Signed at Québec, Quebec, this 23rd day of
March 2004.
Archambault J.
Translation certified true
on this 30th day of November, 2004.
Colette Dupuis-Beaulne, Translator
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