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Citation: 2003TCC465
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Date: 20030703
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Docket: 2000‑2551(IT)I
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BETWEEN:
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ALTA MURA CONSTRUCTION
INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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and
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Docket: 2000‑3079(IT)I
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BETWEEN:
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MARCEL PICARD,
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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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[OFFICIAL ENGLISH
TRANSLATION]
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REASONS FOR JUDGMENT
Lamarre Proulx, J.
[1] These appeals
were heard on common evidence. The case concerns amounts totalling $30,000
received from an individual for the construction of a garage. The taxation
years in issue are 1992 and 1993. Those amounts were added to the income of the
appellant Alta Mura as business income. An amount of $24,947 was added to
the income of the appellant Marcel Picard as a taxable benefit. The Minister of
National Revenue (the "Minister") assessed the two appellants the
penalty provided for in subsection 163(2) of the Income Tax Act
(the "Act").
[2] It is admitted
that those amounts involve the construction of a garage. However, the
appellants claimed that the sums were recorded as shareholders' advances of another
corporation because the cash used to pay certain subcontractors came from that
corporation and the subcontractors had been paid on behalf of the owner of the
garage, not on behalf of Alta Mura.
[3] The point for
determination is thus whether those amounts should have been included in
Alta Mura's calculation, whether the same amounts should have been
considered as appropriated by the appellant Mr. Picard and whether, in both
cases, the penalty was correctly assessed.
[4] The facts stated
in the Notice of Appeal of the appellant Alta Mura are stated in paragraphs 2
to 8:
[TRANSLATION]
2. In 1992 and 1993, Alta Mura Construction Inc. undertook to
manage the construction of a garage at Jacques Doyon's private residence.
3. At the time, Jacques Doyon and Alta Mura Construction
Inc. had agreed that this company alone would manage the project. Moreover, Jacques Doyon
undertook to pay directly the subcontractors and suppliers called upon to work
on the garage construction project.
4. At the time the construction work was performed, 173672 Canada
Inc., of which Marcel Picard, a shareholder of Alta Mura Construction
Inc., is also a shareholder, advanced various amounts of money to
Jacques Doyon on numerous occasions for the payment of the fees and
expenses of the subcontractors and suppliers.
5. More particularly, that company advanced amounts totalling
approximately $30,000 to Jacques Doyon.
6. Jacques Doyon subsequently repaid 173672 Canada Inc., by
various means, the amounts advanced to him when the garage at his residence was
being built.
7. The amounts thus repaid by Jacques Doyon were paid to
173672 Canada Inc. by means of cheques payable to cash. Those cheques were
moreover deposited to the account of 173672 Canada Inc., all of which will be
more amply shown at the hearing of this appeal.
8. In summary:
— advances were made to Jacques Doyon by 173672 Canada Inc.;
— Jacques Doyon repaid those advances to 173672 Canada Inc.
[5] The facts on
which the Minister relied in the case concerning the appellant Alta Mura
Construction Inc. are described in paragraph 13 of the Reply to the Notice
of Appeal (the "Reply"):
[TRANSLATION]
(a) Alta Mura Construction Inc. was incorporated on
July 14, 1987;
(b) The appellant operates a construction business;
(c) The appellant's fiscal year for the year in issue commenced on
July 1, 1992, and ended on June 30, 1993;
(d) According to the information entered in the appellant's federal
income tax return for the 1993 taxation year, its shareholders were:
Marcel Picard, who held 93 percent of voting shares, and
Raymond Picard, who held the remaining 7 percent;
(e) Marcel Picard is also the principal shareholder of 173672
Canada Inc. (hereinafter the "corporation");
(f) The appellant and the corporation are related corporations
operating in St‑Georges de Beauce;
(g) The appellant bid on a contract to build a garage at the
personal residence of Jacques Doyon located on Promenade Sartigan in St‑Georges
de Beauce;
(h) The appellant won the contract and performed the said work for
$58,143, including GST and QST;
(i) That amount was paid by means of a cheque for $28,143 made out
to "Alta Mura Construction", the appellant, and three cheques of
$10,000 each;
(j) The three cheques were cashed as follows:
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Deposit
date
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Cheque
amt.
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Deposit
amt.
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Folio
#
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12/23/92
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$10,000
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$10,000
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8180
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01/07/93
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$10,000
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$10,000
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8180
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02/19/93
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$10,000
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$
5,000
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8180
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(k) Folio 8180 belongs to 173672 Canada Inc.;
(l) The cheques dated 12/23/92 and 01/07/93 were endorsed by
Jacques Doyon and countersigned to the account number of 173672 Canada Inc.;
(m) Marcel Picard countersigned the cheque dated 02/19/93 and
withdrew $5,000 in cash to deposit only $5,000 in the corporation's account;
(n) The payer was "Les Entreprises Huard et Doyon Inc."
and the amounts paid were posted to advances to shareholders in that
corporation's books;
(o) For the recipient, the three cheques for $10,000 each were
posted partially ($25,000) to the "Shareholders' Advances" account of
173672 Canada Inc., and the difference of $5,000 was withdrawn in cash and is
not recorded in the corporation's books;
(p) The amount of $30,000 was not included in the corporation's
income;
(q) The amount of $30,000 was not reported by the appellant as
business income despite the fact that it had won the contract and performed the
work at Jacques Doyon's residence;
[6] With respect to
Alta Mura, counsel for the appellants made certain admissions and denials.
She admitted subparagraphs 13(a) to (e); denied subparagraph 13(f);
admitted subparagraph 13(g); denied subparagraph 13(h) because the
total value of the work was greater than $58,143; denied
subparagraph 13(i) for the same reason; admitted subparagraphs 13(j)
and (k); denied subparagraph 13(l) because the cheques were purportedly
not countersigned to the bank account of 173672 Canada Inc.; admitted
subparagraph 13(m); denied subparagraph 13(n); admitted
subparagraph 13(o) partially, except the final part, which states: [TRANSLATION] "is
not recorded in the corporation's books", which she denied; admitted
subparagraph 13(p) to the extent that the corporation referred to is the
appellant, not 173672 Canada Inc.; and denied subparagraph 13(q) because
the $30,000 was not income of Alta Mura.
[7] The Notice of
Appeal and Reply for the appellant Marcel Picard describe identical facts,
except that they concern the appropriation of the amount not reported by the
appellant Alta Mura and posted to the "Shareholders'
Advances" account of 173672 Canada Inc.
[8] The appellant
Marcel Picard testified. He is the president of the appellant. The appellant
is a construction business. During the years in issue, it had a bank account at
the St‑Côme en Beauce Caisse populaire, the number of which was 8515.
[9] In the years in
issue, Mr. Picard was a shareholder of another corporation, 173672 Canada
Inc., a clothing store. That corporation's bank was also the St‑Côme
Caisse populaire. Its account number was 8180.
[10] A document book
containing 19 tabs was filed as Exhibit A‑1. Tab 1
contains a bid dated September 18, 1992, made to Jacques Doyon by the
appellant to build a garage at his residence in accordance with the plans and specifications.
The price is $108,383. Mr. Doyon purportedly considered the cost too high.
He requested another bid on the basis of new plans involving a structure made
of steel rather than concrete. The second bid is dated October 26, 1992,
and the proposed price was $89,600.
[11] Mr. Picard
then explained a complicated plan whereby Mr. Doyon apparently asked him
to perform certain work. For certain other work, he said he had retained the
right to choose subcontractors or workers. However, Mr. Picard managed the
project in all respects.
[12] The work began in
early November. Tab 11 of Exhibit A‑1 contains a list of
cheques of folio 8515, showing notations such as "UL" and
"JD". Those are Mr. Picard's notations. "JD" means
Jacques Doyon and "UL" means Université Laval. The invoices marked
JD total $50,102. They were included in computing the income of the appellant
Alta Mura. It should be noted here that no specific statement of the costs of
the garage's construction was submitted to the Court.
[13] Tab 12
contains the breakdown of the amounts paid in cash to the subcontractors
purportedly hired by Jacques Doyon, according to Mr. Picard's
statement. These are not invoices but rather notes made by Mr. Picard
following the audit by tax authorities.
[14] Tab 15 of
Exhibit A‑1 contains the statement of bank account 8180 of 173672
Canada Inc. It shows cash withdrawals in the amount of $7,000 on
November 9 and a further withdrawal of $20,000 on December 18.
According to Mr. Picard, that cash was used to pay the subcontractors.
There is no indication of the tax treatment of those amounts in the
corporation's books.
[15] According to
Mr. Picard, those subcontractors should have been paid by Mr. Doyon
himself but he was the one who paid them with amounts taken from the account of
173672 Canada Inc. Mr. Doyon was slow in paying and the subcontractors started
pressing him. He felt responsible for paying the subcontractors because, as he
explained, he ultimately represented the owner.
[16] At the end of
November, Mr. Doyon told him that he wanted some work to be done at the
Dunkin Donuts restaurant on Boulevard Lacroix in St‑Georges. He
asked him to come to the premises to show him the work to be done and asked him
for an estimate of the cost of the work. Mr. Picard purportedly estimated
the work at $28,000, plus taxes. He gave the price orally around
December 5, 1992, and Mr. Doyon told him that he would start the work
around December 14.
[17] Mr. Doyon called
him on or around December 8 or 9, 1992, telling him that the work would be
done the following year but that he would appreciate it if Mr. Picard
would prepare him an invoice now. Tab 3 contains that invoice. It is dated
December 9, 1992, is in Alta Mura's name and concerns the "Dunkin
Donuts Expansion" project. The invoice states that the work was performed
for the agreed upon price of $28,459, plus taxes, for a total of $31,669.20.
[18] Mr. Picard
explained that he had prepared that invoice even though the work had not begun
because Mr. Doyon had asked him to do so. He understood that the fiscal
year-end at Dunkin Donuts was December 31, 1992, and that that invoice
would make it possible to take a capital cost allowance.
[19] Mr. Picard
said that he had prepared that invoice at the same time as those of the garage.
Tabs 16 and 17 contain two invoices from Alta Mura for
Jacques Doyon's garage. They are dated December 10, 1992. One invoice
is for $41,633.19 and the other is for $1,669.20. The second invoice was for
rock excavation, as agreed upon.
[20] Tab 5
contains a cheque dated December 12, 1992, for $31,669.20 from Gestion
Huard et Doyon Inc. paid to Alta Mura Construction Inc. The amount
corresponded to the amount of the purportedly fictitious invoice shown at
tab 3. Mr. Picard purportedly told Mr. Doyon: [TRANSLATION] "The
work isn't done; I've come to pick up a payment of $44,000." The
cheque for $31,669 was nevertheless deposited to the account of the appellant
Alta Mura on December 12, 1992.
[21] Tab 7
contains a cheque dated December 22, 1992, made out by Les Entreprises
Doyon et Huard to Jacques Doyon for $10,000. The endorsement on the cheque
shows account 8180 as the beneficiary and the amount was deposited to that
account. Tabs 8 and 9 contain the same type of cheque and endorsement.
Only the dates are different; they are January 6 and February 19,
1993.
[22] Mr. Picard
explained that those amounts were deposited to account 8180 because he had
made advances to that corporation and had advanced approximately $27,000 to
Mr. Doyon to pay the subcontractors.
[23] Tab 6 includes
a cheque dated February 19, 1993, written to the order of the appellant
Alta Mura for $28,145.54 by Les Entreprises Doyon et Huard.
[24] It should be noted
that, if all the cheques prepared by Les Entreprises Doyon et Huard are added
together, they come to a total of nearly $89,600, the price agreed upon in the
second bid.
[25] Mr. Picard
said he had never done the work at the Dunkin Donuts restaurant.
[26] In
cross-examination, Mr. Picard said he had paid subcontractors $28,000 and
had not kept copies of the invoices because he had handed them over to
Mr. Doyon for him to pay. He said he had completed the list of
subcontractors appearing in tab 12 in 1996.
[27] The witness of the
respondent was Alain Gingras, a financial management officer with Revenu
Québec. Exhibit I‑1 is his audit report. That audit began after
another audit that he had conducted of the Dunkin Donuts business. He realized
that three cheques had been made out to Mr. Doyon but signed over to
another person or another bank account not belonging to him. Mr. Doyon
said that person was Mr. Picard. The audit at Mr. Doyon's was
conducted in the summer of 1994 and that at Mr. Picard's was
conducted in the summer of 1995.
[28] According to the
auditor, all the payments concerned the construction of the garage. The $30,000
amount was added to Alta Mura's income for the period ending on
June 30, 1993. Since that amount had been posted to the
"Advances" account of 173672 Canada Inc., the auditor included the
amount as a shareholder benefit in computing Mr. Picard's income. The auditor
said it was an appropriation of funds.
[29] The auditor sent
the draft assessments. On the submissions of Mr. Picard and his
accountant, he asked that documentation or proof of expenses against the
$30,000 be sent to him. Mr. Picard did not provide that evidence. He said
he had not kept the money for himself, but he was unable to prove to whom he
had given it. The amounts paid in cash appearing in tab 12 were not traced
by the auditor.
Conclusion
[30] It is impossible
to understand why Mr. Picard would have paid subcontractors or workers
hired by Mr. Doyon, especially without any means of proving that he did
so. Nor is it possible to understand why the money needed to pay those
subcontractors or workers came from 173672 Canada Inc., when that corporation
was not in construction and was not the corporation that had the garage
construction contract. The only plausible explanation is that Mr. Picard
wanted to hide the income.
[31] It must be noted
that, if the investigation had not been conducted at Mr. Doyon's premises,
Mr. Picard would never have reported or declared the $30,000 deposited to
the bank account of 173672 Canada Inc.
[32] The entries
concerning the shareholders' advances account of 173672 Canada Inc. were not
introduced. The evidence is also silent as to the tax treatment of those
alleged withdrawals to pay Mr. Doyon's subcontractors or workers. It
should be noted here that no financial statement either of the appellant
Alta Mura or that corporation were filed in evidence. One accountant in
fact testified at the request of counsel for the appellants, but her testimony
consisted of general remarks on advances to shareholders' accounts, not on the
specific account at issue in these appeals.
[33] Counsel for the
appellants referred to cash. There is no evidence that the appellant
Alta Mura was short of cash. It had just received a number of cheques from
Mr. Doyon. She also stated that the three $10,000 cheques were deposited
to Mr. Picard's "Advances" account to offset the amounts of cash
paid to the subcontractors. However, as noted above, the tax treatment of those
withdrawals purportedly made in order to pay the subcontractors was not
explained. It is not known under what item those withdrawals were posted or how
the "Shareholders' Advances" account was calculated.
[34] I have no evidence
that the amounts referred to in tab 12 of Exhibit A‑1 as
payments made to subcontractors were in fact paid. There was no written
agreement on the subject between Mr. Doyon and Mr. Picard.
Mr. Doyon, who came and testified at the request of counsel for the
respondent, did not at all corroborate that alleged agreement. Those to whom
these amounts of money were purportedly remitted did not appear in Court
either. Counsel for the appellants stated that it was unreasonable not to allow
the deduction of the amounts referred to in tab 12 of Exhibit A‑1
because the appellant Alta Mura could not have made a profit of that size.
This is impossible to determine in the absence of accounting records showing
the costs specific to Alta Mura's various projects.
[35] The appellants
admitted that the $30,000 had been received in respect of the construction of
the garage. Therefore, that amount had to be taken into account by the
appellant Alta Mura, which is in the construction business.
[36] The Minister
included the sum of $24,947, not $30,000, in Mr. Picard's income when it
accepted the assessment of the facts made by the Court of Quebec in an appeal
involving the same facts put before this Court.
[37] I find that there
is no valid evidence enabling me to vary the Minister's assessment with respect
to benefits to a shareholder. The appellant Mr. Picard adduced no evidence
contrary to the Minister's position that he had appropriated the amounts in
question.
[38] As to the
penalties assessed under subsection 163(2) of the Act, I believe
there is sufficient evidence of concealment in this case for them to be warranted.
[39] The appeals are
accordingly dismissed.
Signed at Ottawa, Canada, this 3rd day of July 2003.
Judge Lamarre
Proulx
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