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Citation: 2004TCC356
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Date: 20040511
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Docket: 2003-1674(IT)I
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BETWEEN:
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GÉRARD GODIN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] These appeals, under the informal procedure, are for the 1998, 1999 and 2000 taxation years.
[2] The question is whether the Minister of National Revenue (the "Minister") was entitled: a) to add to the Appellant as additional business income the amounts of $13,829, $5,000 and $2,994 for each of the years at issue; and b) to assess a penalty on this income for the 1998 and 1999 taxation years under subsection 163(2) of the Income Tax Act (the "Act").
[3] For his reassessment, the Minister relied upon the facts described at paragraphs 7 and 8 of the Reply to the Notice of Appeal (the "Reply"):
[TRANSLATION]
(7) In reassessing, the Minister modified the business expenses that were initially disallowed, which are not here disputed and, added as additional business income the amounts of $13,829, $5,000 and $2,994 that the Appellant had failed to declare in the 1998, 1999 and 2000 taxation years. A penalty in accordance with subsection 163(2) of the Act was assessed on the additional income for the 1998 and 1999 taxation years.
(8) For the reassessments at issue, the Minister assumed, inter alia, the following facts:
(a) The Appellant, in his own behalf, operates a business whose main activity is laying asphalt;
(b) In filing his income tax returns for the 1998, 1999 and 2000 taxation years, the Appellant declared gross business incomes of $263,850, $294,921 and $315,700 for each of the respective taxation years;
(c) On or about May 7, 2001, the Audit Division of the Canada Customs and Revenue Agency began an audit of the business operated by the Appellant;
(d) The Appellant, as well as his spouse, Gaétane Tremblay, submitted such things as all their bank statements for the audit;
(e) The Appellant had a single bank account for business and personal use with the Caisse populaire Ste-Anne de Beaupré, folio 7769;
(f) His wife had two bank accounts with the same institution, folios 20763 and 7766;
(g) In 1998, a number of business transactions were made on Ms. Tremblay's personal account, folio 7766, because the Appellant's bank account had been seized by the Ministère du Revenu du Québec;
(h) Ms. Tremblay, who kept the books for the business, confirmed to the auditor that certain deposits appearing in her bank account, folio 7766, were in fact business income;
(i) Personal deposits made to the wife's bank accounts included her salary, employment insurance benefits, as well as deposits to her line of credit;
(j) Ms. Tremblay had another account for rents generated by a building she owned;
(k) The deposits made into this account were from rents generated by a building that belonged to her;
(l) During the years referred to in this dispute, neither the Appellant nor his wife received any inheritance;
(m) The Appellant's wife stated that she received winnings from the casino totalling approximately $1,800 per year;
(n) She did not submit any evidence supporting this claim;
(o) All the deposits made in the business bank account were reconciled;
(p) The unexplained deposits, traced to the wife's personal account, folio 7766, were undeclared business income;
(q) At the objection stage, the Minister reconciled the additional personal deposits on the basis of evidence submitted and only considered as additional income those unexplained deposits greater than $500;
(r) The Appellant knowingly or in circumstances equivalent to gross negligence, made a false statement or omission in a document produced for each of the taxation years at issue, or participated in, assented to or acquiesced in the same; as a result, penalties amounting to $567.45 and $100 were assessed for the 1998 and 1999 taxation years.
[4] The Reasons for Appeal are at paragraphs 5 to 7 of the Notice of Appeal:
[TRANSLATION]
5. As appears in the Notices of Reassessment, Exhibit R-3, the additional income being assessed, Exhibit R-1, was revised to the following amounts:
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$13,829.00 for 1998;
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$5,000.00 $ for 1999;
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$2,994.00 $ for 2000;
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6. The Respondent's decision and the Notices of Assessment dated January 31, 2003, Exhibit R-3, are without merit for the reasons stated below;
7. In fact, the Respondent is still taxing the Appellant on additional income for the 1998, 1999 and 2000 taxation years while these amounts are in no way business income, although these amounts may have appeared in the deposits that were made at the time, which will be fully demonstrated during the investigation and hearing;
[5] On behalf of the Appellant, his Counsel admitted paragraphs 8 (a) to 8 (e), 8 (j) and 8 (l) of the Reply. He denied paragraphs 8 (f), 8 (h), 8 (p) and 8 (r) of the Reply. He denied as written paragraphs 8 (g), 8 (i), 8 (k), 8 (m) and 8 (n) of the Reply. He has no knowledge of paragraph 8 (o) of the Reply. He notes the admission contained at paragraph 8 (q).
[6] The Appellant's first witness was Louis Lavoie, General Manager of the Caisse populaire Mont Ste-Anne. He has known the Appellant and his wife, Gaétane Tremblay for about twenty years. In 1998, he was General Manager of the Caisse Ste-Anne de Beaupré whose name was changed to its current name. He states that in March 1998, the Appellant's account, which was both his business and personal account, was seized by Quebec tax authorities. The seizure order is part of Exhibit A-4 and is dated March 12, 1998. At the end of Exhibit A-4 is the release granted on April 6, 1998.
[7] Mr. Lavoie states that at the time of the seizure in March 1998, the Appellant's line of credit was heavily used. The Appellant had to resort to a mortgage loan to pay Revenu Québec and free himself from the seizure.
[8] The witness explained that the deposits made through the bank machine did not include a deposit slip. The transactions are registered locally and the payment instruments are sent to the clearing centre for processing which photographs them for all the Desjardins financial institutions. It is therefore possible to trace the documents but this requires some effort. According to the witness, according to the record retention standards that must be followed by financial institutions, cheques are kept for between 20 and 25 years. Each bank is responsible for the preservation of the payment instruments drawn on its clients' accounts.
[9] He gave some explanations of the initialisms used for registering transactions: DGA means deposit at a bank machine, DSL means deposit made at the counter without updating the passbook.
[10] The second witness was Josée Rousseau. She is now a business services advisor at the Corporate Financial Centre, Région Est de la Capitale. She began working at the Caisse populaire Ste-Anne de Beaupré in 1986 and has known the Appellant and his wife since then. In 1998, she was the business officer at the Caisse. She left the Caisse in November 1999.
[11] She produced as Exhibit A-5 the computerized statement for accounts 7766 and 20763 dated January 1, 1998, to December 31, 1998. These are microfiches of all the transactions that took place on these accounts for the year 1998. Account 7766 is Ms. Tremblay's account. Account 20763 is one of the Appellant's accounts. The information regarding the Appellant's accounts could be clearer. It would seem that the Appellant predominantly used account 7769 for business and personal purposes. Moreover, Exhibit A-5, presented as a computerized statement of Ms. Tremblay's account, contained computerized statements belonging to other individuals, which complicated the explanations. We were occasionally in an account that had nothing to do with Ms. Tremblay.
[12] Ms. Rousseau also gave some explanations of the initialisms in the microfiche: MGA means passbook updated at the bank machine, DCN means that a cheque has cleared.
[13] On April 30 in Exhibit A-5, there is a deposit of $1,000 and on May 1, a deposit of $5,000. Then on May 1st, at 11:37 a.m. there is a transfer from one account to another in the amount of $6,000.
[14] Microfiches for account 7769, the Appellant's account, were filed as Exhibit A-6; in them we see a deposit of $6,000 made on May 1st. The witness concludes that the transfer from Ms. Tremblay's account was made to the Appellant's account.
[15] The next witness was Gaétane Tremblay. She explained that her husband's business is an excavation and paving business. She does not share ownership of the business. She is employed by the business as a clerk-accountant. She has held this position since the business started. She answers the telephone, does estimates, keeps the books, handles billing, deposits at the Caisse, payroll, in short, everything that has to do with administration of the business.
[16] She states that when the business account was seized in 1998, there were discussions with Mr. Lavoie with regard to new financing. It was necessary to take out a mortgage loan to increase the line of credit and pay the provincial and federal goods and services tax bill. The Appellant even had to take money out of an RRSP that year.
[17] She filed, as Exhibit A-7, a document prepared by the Minister's auditor, Bobby J. Frank Youemto, entitled "Dépôts inexpliqués, Folio 7766" [Unexplained deposits, Folio 7766].
[18] She said that she had other accounts in banks either for personal purposes such as an RRSP loan, lines of credit or for her rental properties.
[19] Counsel for the Appellant asked her what steps she had taken to trace the deposits appearing in Exhibit A-7. Ms. Tremblay stated that she had primarily done business with a Louisette Lachance at the Caisse, whose job was to help trace records indicated on microfiche. There are records that she traced but none for 1999, as the film was foggy. Nor had she been able to trace the copies of the cheques deposited at the bank machine.
[20] During her testimony, Ms. Tremblay gave explanations for the deposits in her bank account. Thus, she explained the origin of the first unexplained deposit for 1998 in the amount of $830 as being from the sale of living room furniture she had had since 1972. She explained the origin of two $1,000 amounts by the $5,000 that she kept at home. She explained the $5,000 deposit on May 1, 1998, as a loan through a line of credit from the MBNA. The latter document was not produced. Other deposits were from repayment of loans made to girlfriends for playing at the casino or casino winnings. A few deposits came from payments made by renters of her income properties. With regard to the amount of $2,610.35 dated November 1, 1999, she said this was repayment for payment of the business portion of the Visa card.
[21] She filed as Exhibit A-16 three cheques paid on behalf of the business from her account 7766. Two are dated March 31, 1998, and are in the amounts of $774 and $150, respectively. The third is dated April 21 and is in the amount of $500. She explained that during the seizure period, she had to write some cheques on her own account for business purposes.
[22] Mr. Youemto stated that during his audit, he met with Mr. Godin very briefly. He met primarily with Ms. Tremblay.
[23] Mr. Youemto said that he did not include a few deposits related to casino winnings. With regard to rental income, this was deposited in an account specific to rental income. Ms. Tremblay at no time told him there was rental income that had been deposited in her personal account. Nor had she mentioned during their meeting loans she made to her girlfriends.
[24] He explained that the business income was accounted for through the deposits. He did not make any comment regarding whether or not it was an acceptable accounting practice or whether he asked the taxpayer to change this method of determining his income.
[25] The auditor indicated that for the three years assessed, 1998, 1999 and 2000, the Appellant had filed income tax returns showing negative income. Because the additional income was greater than $5,000, he assessed penalties.
[26] He obtained the microfiches from the bank but did no additional research with the bank.
[27] Gérard Godin testified at the request of Counsel for the Respondent. He admitted that his business's account and his personal account were the same account, i.e., the account bearing number 7769. Account 20163 was opened at the time of the seizure. An RRSP deposit had been made in it. He believed he had deposited $10,000 from his RRSP into the account. He also explained that his wife manages the administrative portion of his business.
[28] Appeals officer Nicole Turcotte testified. She filed her report as Exhibit I-6. She explained that she had removed deposits of $500 or less from additional income. She asked for proof that deposits greater than $500 were not business income. A few other amounts were removed. There had been, in fact, an RRSP amount that had been deposited in Ms. Tremblay's bank account. This was on August 13, 1998, in the amount of $5,520. She did not include it. She explained that during the audit, certain deposits had been used to pay the business portion of the Visa account. She traced another for 1999 in the amount of $1,437.42.
Arguments
[29] Counsel for the Appellant argued that most individuals could not explain the deposits they had made at bank machines three years previously. The burden of proof must be reasonable. Assessments must not end up being arbitrary. Counsel for the Appellant argued that no link had been established between Ms. Tremblay's income and that of the business.
[30] He referred to the decision of the Supreme Court of Canada in Canderel Ltée v. Canada, [1998] 1 S.C.R. 147, and particularly to paragraph 52:
52 Revenue Canada is free to indicate its disapproval of the taxpayer's chosen method of computation by means of assessment. In Johnston v. M.N.R., [1948] S.C.R. 486, this Court held that the onus is on the taxpayer, in the face of an assessment, to establish that the factual findings on which the assessment is based are wrong. However, to satisfy this onus where the dispute is over the appropriate method of computation, the taxpayer need only show that his or her income was calculated in a manner consistent with the foregoing paragraph, that is, that the figure attained was in conformity with the then-existing legal framework and represents an accurate picture of his or her financial position for the year in question. The onus then shifts to the Minister to prove either that the figure does not constitute an accurate picture of income or that some other method of computation would yield a more accurate picture. In so doing, however, I emphasize that the Minister is not entitled to rely on particular well-accepted business principles as being inherently preferable over others. If the method chosen by the taxpayer is otherwise acceptable by law and in accordance with such well-accepted principles, then it is no answer for the Minister to say that other principles should have been employed unless to do so would have yielded a more accurate picture of income.
[31] Counsel argued that in Entreprise Godin, there had been an audit. Nothing demonstrated that the income had not been determined in accordance with an appropriate computation method.
[32] Thus, the burden of proof ought to be shifted. The onus should be on the Minister to prove that the figure is not a true picture of the income or that another computation method would give a truer picture.
[33] Counsel concluded saying that the burden of proof imposed on the taxpayer is unreasonable and that it is unreasonable to add income to the Appellant's business from his wife's personal account.
[34] Counsel for the Respondent referred to Venne v. Canada (Minister of National Revenue - M.N.R.) (F.C.T.D.) [1984] F.C.J. No. 314 (QL), at page 18:
. . . "Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. . . .
[35] Counsel also referred to Robert Girard v. The Minister of National Revenue, 89 DTC 60, on page 62:
For an appellant to avoid liability under the Act when he fails to report income, he cannot simply attribute the omission to circumstances apparently beyond his control and try to place the blame on third parties. When he signs his tax return for a taxation year he also signs the following certificate:
I hereby certify that the information given in this return and in any documents attached is true, correct and complete in every respect and discloses my income from all sources.
This statutory formula appears to me to be quite clear and to require no explanation. When signed by a taxpayer it creates a presumption that the return is correct, based on the fact that the taxpayer was aware of and satisfied with its contents when he signed it. The same is true for all additions that must be completed and filed with the statement without exception, if the circumstances so require.
I do not suggest that the fact that a taxpayer signed such a certificate automatically makes him liable to the penalty mentioned in s. 163(2) if he commits any offence in the return. I admit that there are a whole range of circumstances in which he will be entirely free of liability under this subsection; but for him to succeed in persuading the Court that the offence committed by him resulted from independent circumstances beyond his control, and so avoid liability, he must show that in the circumstances he exercised reasonable attention and diligence in preparing and filing his return.
I cannot agree that in the situation under consideration the appellant did not "knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act . . . [make] a false statement or omission in a return", as required by the subsection, in failing to report income of $46,460 for the taxation year 1976 resulting from disposing of the Motel Hong Kong and the Château.
. . . I cannot help concluding that he demonstrated a lack of care sufficient to justify a finding of gross negligence on his part.
Analysis and Conclusion
[36] It is not the accounting method that the Minister is questioning but the fact that all of the business's income was not declared. Thus, there is no shift of proof as suggested by Counsel for the Appellant relying on Canderel, supra.
[37] It is true that it can be difficult for a taxpayer to remember deposits made in a bank account. On the other hand, normally, these deposits are not great in number and are usually of the same type, like employment or pension income. The situation is quite different in the case of an individual in business. This individual ought to keep a log of these deposits.
[38] The Appellant's wife had several rental properties and had a special account for this income. Thus, it was not this income that was at issue. She managed her husband's business. Although her husband was the Appellant, he only testified at the request of the Respondent and his testimony was very brief. The administrative aspect of the business was taken care of by the Appellant's wife. This is a family business and the assumption that deposits over $500 and of varying amounts come from the Appellant's business is highly plausible.
[39] The explanations given by the Appellant's wife regarding the origin of the amounts deposited in her personal account are hardly plausible. They were in no way corroborated with written proof or testimony. Moreover, these are explanations that were made neither during the audit nor the objection.
[40] On the other hand, there is evidence that $6,000 was transferred to the business's funds in 1998. This amount was used to cancel deposits of $1,000 and $5,000. There is also Exhibit A-16, which indicates that payments in the amounts of $774, $500 and $150 were made for business purposes in 1998 from the Appellant's bank account, due to the freeze on the Appellant's account. These amounts would not have been taken into account by the auditor as Ms. Tremblay traced these cheques shortly before the hearing.
[41] These amounts can be deducted from the total of the unexplained deposits for 1998. The amounts of additional income for the other years remains as determined by the Minister.
[42] Regarding the penalties assessed under subsection 163(2) of the Act on the additional income, springing from the unexplained deposits, the burden of proof in on the Respondent. I would have liked to have clearer evidence from the Respondent that this was indeed an appropriation of monies from the business by the Appellant's wife. Assessment of the penalty was based on the amount of additional income. Because the additional income was over $5,000, the auditor assessed the penalty. The additional income also included disallowed expenses.
[43] It would have been possible for the auditor to check with the bank where the deposits made by Ms. Tremblay in her account originated and thus establish the links between the business income and the deposits made in the personal account of the Appellant's spouse. According to the evidence, certain deposits were made in cash but a number were made by cheque. All the documents required for this check were kept by the bank. If the transactions were not all examined, at least a sampling could have been done. In any case, I am of the opinion that the link between the business income and the unexplained deposits has not been established by an adequate preponderance of evidence to assess a penalty under subsection 163(2) of the Act.
[44] The appeal is allowed and the whole is referred back to the Minister for reassessment bearing in mind that the additional income for 1998 must be reduced by the amount of $7,424 and that the penalties be cancelled for the years in which they were assessed.
Signed at Ottawa, this 11th day of May 2004.
Lamarre Proulx J.
Translation certified true
on this 23rd day of September 2004.
Sharon Winkler Moren, Translator
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