[OFFICIAL ENGLISH TRANSLATION]
Date:
20030128
Docket:
2000-1317(IT)G
BETWEEN:
LORENZO
CARON,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench
on September 6, 2002, at Québec, Quebec,
and subsequently amended for greater clarity)
Archambault,
J.T.C.C.
[1] Dr. Lorenzo Caron has appealed from the
reassessments made by the Minister of National Revenue (the Minister)
with respect to the 1992 to 1995 taxation years. First, he challenges the
imposition of penalties in respect of the income consisting of unreported fees
for the 1992 to 1995 taxation years. In addition, in respect of the 1992 and
1993 taxation years, he contends that the reassessments made after the normal reassessment
period are statute-barred. Finally, he contends that he is entitled to deduct
an amount of $182,365 as an allowable business investment loss.
Facts
[2] In making his reassessments, the Minister relied on the facts that
he set out in paragraph 17 of his Amended Reply to the Notice of Appeal, which
are reproduced below:
[TRANSLATION]
a. During the years
at issue, the appellant practised the profession of physician;
b. He worked at the
Centre local des services communautaires (CLSC) des Blés d'Or and was
compensated for this work by the Régie de l'assurance-maladie du Québec;
c. The Régie de
l'assurance-maladie du Québec issued to the appellant, for each of the years at
issue, a relevé 1 (provincial) [Employment and Other Income] reporting the
compensation received annually for the services rendered at the CLSC des Blés
d'Or;
d. In addition, the
RAMQ paid the appellant, as a self-employed worker, the following additional
amounts: $15,040 in 1992, $15,079 in 1993, $26,122 in 1994 and $38,256 in
1995;
e. Those amounts were
paid to the appellant by cheque;
f. Those amounts do
not appear on the relevés 1 issued annually in the appellant’s name;
g. An audit of the
RAMQ’s information records by the ministère du Revenu du Québec in 1997
indicated that the appellant had failed to report all of his income;
h. As of 1997, the
appellant knew that he had failed to report all of his income to the Minister
of National Revenue;
i. By failing to
report all of his income, the appellant made a representation that is
attributable to neglect, carelessness or wilful default, or committed a fraud,
justifying the making of a reassessment after the normal reassessment period
provided for in paragraph 152(4)(a)(i) of the Act;
j. The appellant,
knowingly, or under circumstances amounting to gross negligence, failed to
report this additional income, justifying the application of the penalty
provided for in subsection 163(2) of the Act;
k. For the 1995
taxation year, the appellant claimed a loss as a business loss [sic];
l. At the audit
stage, although duly required to do so, the appellant did not submit any
document in support of his claim; consequently, his loss was disallowed.
[3] At the outset of the hearing,
Dr. Caron admitted the facts set out in subparagraphs 17(a), (b), (c),
(d), (f), (h), (k) and (l) of the Amended Reply to the Notice of Appeal.
Counsel for the respondent admitted that an amount of $1,875 out of the
$182,365 at issue was deductible in 1995 as an allowable business investment
loss. As for the rest, it would not be deductible in 1995 because Dr. Caron did
not pay the amounts owed under his surety until 1996. Therefore, since the
property used for the payment made in 1996 was disposed of in 1996—and not in
1995—the amount of the taxable capital gain and that of the net depreciation
recapture resulting from that disposition should not have been added to the
1995 income but rather should have been included with the income of 1996.
Consequently, counsel for the respondent agrees that these amounts may be
excluded from the 1995 income.
[4] The Court notes in general that the evidence adduced by Dr. Caron
was vague, imprecise and incomplete. The evidence,
nonetheless, revealed the following facts. Dr. Caron is a doctor who
practised from 1957 to 1988 in Sayabec, in the Matapedia Valley. After
thirty-one years in medical practice, he retired and moved to Montréal. It is
there that, on the recommendation of his lawyer, he invested in two companies:
first, in a company known under the corporate name of Docteur Océan, which
operated a fish market, and also in 2628‑5296 Québec inc. (5296),
a numbered company, which according to Dr. Caron, was supposed to hold the
equipment used in the business of Docteur Océan. Dr. Caron held
between 30% and 33 1/3% of the shares of Docteur Océan and four of
the six shares of the capital stock of 5296. In order for the two companies to
obtain financing, Dr. Caron had to provide letters of indemnity (surety):
one in February 1989, for up to $150,000 for the debts of 5296, and one in
November 1989, for up to $175,000 for the debts of Docteur Océan.
Docteur Océan was operated for just one year, between March 1989 and
April 1990, the date on which it sold its business. I assume that 5296
also sold its equipment at that time.
[5] As a result of this bad experience, Dr. Caron decided to return to
the practice of medicine in Fortierville, a
municipality situated south of the St. Lawrence River, between Trois-Rivières
and Québec, as a CLSC employee. His basic annual salary was $76,000. His normal
workweek was thirty-five hours. There was a possibility of overtime, which
would have made a forty-seven hour week in total. In addition to his work as a
CLSC employee, Dr. Caron could render professional services to elderly people
in their home, first in Fortierville and, subsequently, in Deschaillons and
Saint‑Pierre-les-Becquets. He was entitled to fees for these services.
[6] In 1992, the income from employment
reported by Dr. Caron amounted to $103,874. This amount corresponds to what is
indicated on the T4 slips prepared by the Régie de l'assurance maladie du
Québec (RAMQ). In addition to this income from employment,
Dr. Caron earned fees of $15,040 for house calls. Since those fees did not
appear on the T4, Dr. Caron did not report them.
[7] Dr. Caron followed the same course of action in 1993, 1994 and 1995. His income from employment was $110,328 in 1993;
$110,263 in 1994; and $105,352 in 1995. His income in the form of fees amounted
to $15,079 in 1993; $26,122 in 1994; and $38,256 in 1995. Following a call from
an employee of the ministère du Revenu du Québec, who had informed him that he
was failing to report the fees that he received, Dr. Caron reported an amount
of $26,959 in fees for 1996. His income from employment for 1996 was $101,624.
[8] Dr. Caron explained that he had not
amended his income from previous years because of his financial difficulties
and the health problems that he was experiencing. In particular, he had
heart problems in December 1994 that were followed by a convalescence that
lasted until the end of May 1996. However, Dr. Caron said he had changed
his way of calculating his fees, inter alia, by adding up the deposits
made by the Régie to his bank account.
[9] For the preparation of his tax returns, Dr. Caron said he had
always given all his documents to his accountant with the firm Raymond Chabot Martin Paré, in Matane. He said he also submitted not
only the T4s but also the semi-monthly statements from RAMQ, as well as all the
invoices received in order to enable the accountant to prepare his statements
of income and expenses. This accountant had handled Dr. Caron’s tax affairs
since 1965. He continued to do so even after Dr. Caron settled in the
Fortierville area. When it came time to communicate his tax information to his
accountant, Dr. Caron took the opportunity to go to Matane and visit family
members living in that region.
[10] It was Dr. Caron’s accountant who signed the tax returns and he
did so without his client’s reviewing them first. The
accountant subsequently sent Dr. Caron his report in which he urged him to
check his returns carefully to be sure they were accurate. Dr. Caron seems
to have changed accountants around 1995 or 1996: he then retained the services
of a tax expert from the city of Québec.
[11] After a number of lawsuits—at least
four—brought by the bank against him beginning in November 1990 for the payment
of amounts owed, inter alia, because of the sureties and following
lengthy negotiations between his lawyer and the bank’s lawyers, in September
1995, Dr. Caron agreed to pay $10,000 in twelve monthly payments of $833.37
beginning on October 11, 1995. He also agreed to let the bank exercise the
hypothecary remedies of taking in payment under article 2778 of the Civil
Code of Québec (C.C.Q.), on the expiry of the 60-day notice
given in December 1995. The notices refer—by implication—only to the
surety of $150,000 given for the debts of 5296. The unpaid balance of the
bank’s claim therefore amounts to $137,000 and the accumulated interest is
$81,184 for a total of $218,184.
[12] A judgment of the Superior Court rendered in April 1996 gave effect to the transfers of certain immovables (the
immovables) on January 3 and 8, 1996. These transfers created a taxable
capital gain of $57,150 and a depreciation recapture of $31,041 for
Dr. Caron.
Analysis
Unreported income and penalties
[13] It was up to the respondent to prove the
facts enabling the Minister to make reassessments after the normal reassessment
period. The respondent had to prove that Dr. Caron had made a
misrepresentation attributable to neglect, carelessness or wilful default. The
same is true, moreover, with regard to the imposition of the penalties, except
that with respect to this element, it was necessary to establish that he had
made a false statement knowingly or under circumstances amounting to gross
negligence. The burden of proof was on Dr. Caron with regard to the deduction
of the allowable business investment loss.
[14] On the issue of the respondent’s burden of proof with respect to
the statute-barred taxation years and the imposition of penalties, the classic
decision is the one rendered by Judge Strayer in Venne
v. Canada, [1984] F.C.J. No. 314 (QL). In that decision, Judge Strayer
made the following comments regarding the degree of negligence required to
enable the Minister to make an assessment after the normal assessment period
provided for in paragraph 152(4)(a) of the Income Tax Act (Act):
I am satisfied that it is sufficient for the Minister,
in order to invoke the power under sub-paragraph 152(4)(a)(i) of the Act to
show that, with respect to any one or more aspects of his income tax return for
a given year, a taxpayer has been negligent. Such negligence is established if
it is shown that the taxpayer has not exercised reasonable care. This is surely
what the words "misrepresentation that is attributable to neglects" [sic]
must mean, particularly when combined with other grounds such as
"carelessness" or "wilful default" which refer to a higher
degree of negligence or to intentional misconduct....
[15] Judge Strayer relied on the following facts to conclude that there
was a misrepresentation attributable to neglect:
First, there is ample evidence that the
taxpayer did not read his returns before signing them.... Secondly, the errors
in the income tax returns should have been sufficiently obvious that a
reasonable man of even limited education and experience, especially one who
was apparently a very successful businessman and investor, should have
noticed.
[Emphasis
added.]
[16] As for the element of gross negligence that must be present when a
penalty is imposed under subsection 163(2) of the Act,
Judge Strayer had this to say:
... "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.
[17] This interpretation of Judge Strayer, as
he was then, was adopted by the Federal Court of Appeal in Findlay v. Canada,
[2000] F.C.J. No. 731 (QL) (2000 DTC 6345).
[18] Two decisions cited by Dr. Caron must also be mentioned, namely, Johnson v. Canada, [1993] T.C.J. No. 787
(QL), (94 DTC 1009); and Glass v. Canada, [1993] T.C.J. No.
892 (QL), (94 DTC 1091). In Johnson, a dentist withdrew from
his professional corporation an amount of $181,211 that was recorded as a
dividend but was not reported as income in the dentist’s tax return prepared by
his accountant. In that case, the taxpayer had said that he had completely
relied on the accountant. Judge Beaubier of this Court found that there
had been negligence on Mr. Johnson’s part but it did not involve gross
negligence.
[19] Similarly, in Glass, Judge McArthur
concluded that a farmer, who had forgotten to include in his tax return an
amount of $124,500 from the sale of livestock and who had relied on his
accountant, had been negligent; however, this negligence did not amount to
gross negligence.
[20] In the case at bar, I, too, find that there was clearly negligence
on Dr. Caron’s part in the preparation of his tax returns. The fact that he did not check the returns before they were sent
to the Minister and that he did not do so afterwards, even when his own
accountant had urged him to do so, certainly indicates a lack of due diligence
on the part of Dr. Caron.
[21] However, although I reach this conclusion with a great deal of
hesitation, I have not been satisfied on a balance of probabilities that Dr.
Caron had committed gross negligence according to the definition of this
concept given in the Venne case.
[22] Although Dr. Caron is a doctor and one expects that a person
having completed such demanding studies would have a more respectful attitude
towards his tax obligations, I believe that there are mitigating circumstances
here that justify my giving him the benefit of the doubt. First of all, Dr. Caron was under severe financial stress and it
seems that he lost almost everything in the Docteur Océan venture. Moreover, in
connection with the 1995 taxation year, which is the year for which the amount
of unreported income is the most substantial, that is, approximately $38,256,
at the time he filed his tax return, Dr. Caron was convalescing as a result of
his heart problems. Dr. Caron said he had never noticed the omission of
the unreported income and said he had a fairly poor understanding of figures.
His misfortune in the business field leads me to believe that he certainly
lacks ability in that regard.
[23] Another reason for giving him the benefit of the doubt is the fact
that he relied on his accountant, to whom he had given all the relevant
documents, which should have enabled the accountant to discover the unreported
income. It is important to remember the principle adopted
by the courts that the negligence of the accountant cannot be attributed to the
taxpayer. Here, it is possible that Dr. Caron’s accountant did not make all the
verifications necessary in order to analyse the statements that were sent to
him. See, inter alia, the decisions in Venne, Findlay and Udell
v. Minister of National Revenue, [1970] Ex. C.R. 176 (70 DTC 6019).
[24] Yet another reason is the fact that Dr. Caron did not default on
his obligations towards his creditors, including the tax authorities, when he
could have done like certain persons who, in similar circumstances, declare
themselves bankrupt. In addition, no evidence was
adduced to establish that Dr. Caron had committed tax evasion in the past. The
fact that Dr. Caron has changed his way of reporting his income and now reports
all of the income that he earns from practicing his profession is a factor
favouring his position.
[25] Finally, there are the decisions handed
down in Glass and Johnson that have influenced me. In the
circumstances of the instant case, it would be hard to be less generous than my
colleagues have been. There would be an injustice in not treating Dr. Caron’s
appeals in a similar fashion.
Allowable business investment loss
[26] Let us deal now with the matter of the allowable business
investment loss. The relevant provisions are those of
section 38, paragraph 39(1)(c) and subsection 50(1) of the Act.
In order to be able to claim a business investment loss in this case, there
must be a disposition of a debt. The debt in question exists not because of Dr.
Caron's liability
for it under the sureties but rather because of his
paying amounts under these sureties. It is only after paying the amounts owed
by Docteur Océan and 5296, for which he was a surety, that Dr. Caron could
exercise his remedy against those companies under articles 2356 and 1656 C.C.Q. The most relevant portions of these two
articles are:
2356. A surety who has bound himself with
the consent of the debtor may claim from him what he has paid in
capital, interest and costs, ...
1656. Subrogation takes place by operation of law
...
(3) in favour of a person who pays
a debt to which he is bound with others ...
[Emphasis
added.]
[27] Counsel for Dr. Caron submitted that the
debt arose at the time the bank served the 60-day notice in December 1995. I
believe this interpretation is wrong. So long as Dr. Caron had not paid
the amounts owed to the bank and so long as the 60 days had not expired, any
person with an interest could pay the amounts owed to the bank. In such a case,
the hypothecary remedy could not have been exercised since the bank would have
been paid. Therefore, it is clear that Dr. Caron could have a debt on 5296 only
from the time when he would have actually paid the bank.
[28] Consequently, in 1995, Dr. Caron had no debt in relation to Docteur Océan and 5296 other than the debt of $2,500
representing the total monthly payments of $833 paid beginning in
October 1995. It is the amount that counsel for the respondent agreed to
allow as a business investment loss; the allowable amount is $1,875,
representing 75% of $2,500.
[29] Accordingly, the payments made on January 3 and 8, 1996, by the
transfer of the immovables did not take place in 1995
but rather in 1996, and the debt of Dr. Caron in relation to 5296 did not arise
until that time. There could therefore not have been a bad debt in 1995 with
regard to those payments.
[30] As for the other debts, two amounts could have been treated as
losses. There is the amount of $15,709, referred to in
Dr. Caron’s Notice of Appeal. The evidence in respect of this amount is too
vague and uncertain for me to conclude that there was payment of such an amount
in 1995. The only evidence filed with the Court is a letter from Dr. Caron’s
accountant listing the various amounts for which Dr. Caron could claim a
deduction for losses. Even this letter is silent as to when the National Bank
seized the proceeds from the sale of a property [TRANSLATION] “in partial settlement of an endorsement”. The evidence does not
show what endorsement is involved or when the seizure was made. For example, it
may have been possible to obtain some date relating to the seizure from the
registry office. Given the lack of evidence, the Court is unable to find, in
respect of this debt, that there was a loss representing a business investment
loss.
[31] As for the amount of $10,000, for which a discharge from the Bank
of Montreal was produced in evidence, the discharge is dated November 11, 1994. Consequently, the payment would have been made in 1994 while the
deduction for the loss was not claimed until 1995. In any case, I am not
satisfied that this was an amount owed by Docteur Océan, since the
defendant in the action brought by the Bank of Montreal was Dr. Caron and it is
indicated on the tax return that Dr. Caron was the one who purchased, by an
installment sales contract, the vehicle for which the amount of $10,000 was
paid. It might have been useful to adduce the defence to this action to support
the assertions in Dr. Caron’s testimony that the vehicle had been acquired by
Docteur Océan. It seems fairly surprising to me that Dr. Caron agreed to
pay an amount of $10,000 if the contract indicated, as he claimed, that the
purchaser was Docteur Océan. I am not satisfied on a balance of probabilities
that it was Docteur Océan who was the owner of this vehicle. Furthermore, there
was no reference to the above two amounts in the argument of counsel for Dr.
Caron.
[32] In conclusion, Dr. Caron’s appeals are allowed in respect of the
1992 to 1995 taxation years, and the reassessments are referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that all of the penalties should be cancelled and, in respect of the 1995 year,
on the basis that (i) the taxable capital gain of
$57,150 and the net depreciation recapture of $31,041 are to be excluded
from income; and (ii) the amount of $1,875 is to be deducted from income as an
allowable business investment loss. In view of the outcome, the Court awards the
respondent 25% of its costs.
Signed at Ottawa, Canada, this 28th day of
January 2003.
J.T.C.C.
Translation certified true
on this 7th day of April 2004.
Sophie Debbané,
Revisor
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