[OFFICIAL ENGLISH TRANSLATION]
Date: 20011101
Docket: 1999-3622(IT)I
BETWEEN:
EDMOUR CHAMPAGNE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench
on August 25, 2000, at Montréal, Quebec,
and edited for greater clarity.)
Archambault, J.T.C.C.
[1] Edmour Champagne is disputing
assessments for the 1994 and 1995 taxation years. Under
subsection 15(1) of the Income Tax Act (Act),
the Minister of National Revenue (Minister) included
additional amounts of $10,000 for 1994 and $11,452 for 1995 in
Mr. Champagne's income. The Minister also assessed a
penalty under subsection 163(2) of the Act in respect of
those two amounts. Lastly, for 1994, the Minister added a taxable
capital gain of $57,975 to Mr. Champagne's income.
[2] In making his assessment, the
Minister relied on the following facts stated in paragraph 5
of the Reply to the Notice of Appeal:
[TRANSLATION]
5. In making and confirming the reassessments for the 1994 and
1995 taxation years, the Minister made, in particular, the
following assumptions of fact:
(a) in filing his
income tax returns for the taxation years in issue, the appellant
reported the following income:
|
Description
|
1994
|
1995
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
- Employment income
|
$ 5,463
|
$5,200
|
|
- Taxable capital gain
|
$75,000
|
nil
|
|
|
|
|
(b) during the
taxation years in issue, the appellant was a shareholder and
employee of Garage Ed Champagne Inc. (hereinafter the
"corporation");
(c) during the
taxation years in issue, the corporation was a garage at which
automotive repairs were performed;
(d) most of the work
done by the corporation was for individuals;
(e) during the audit
for the 1994 and 1995 taxation years, the auditor observed that
the accounting for the appellant's business was
deficient;
ADDITIONAL INCOME
(f) during his
audit for the taxation years in issue, the auditor observed that
the "cash" item had been balanced by the "Owed to
shareholder" account and that, each year, the following type
of entry was made in the corporation's books:
|
1994
|
|
|
|
|
|
|
|
Description
|
Debit
|
Credit
|
|
|
|
|
|
- Cash
|
$10,000
|
|
|
- Owed to shareholder
|
|
$10,000
|
|
1995
|
|
|
|
|
|
|
|
Description
|
Debit
|
Credit
|
|
|
|
|
|
- Cash
|
$11,452
|
|
|
- Owed to shareholder
|
|
$11,452
|
(g) the auditor
asked the appellant to provide the Minister with details on the
origin of the investment funds of $10,000 for the 1994 taxation
year and $11,452 for the 1995 taxation year;
(h) at no time was
the appellant able to provide details such as the name(s) of the
person(s) who had advanced the funds, or documentary evidence of
money transactions (for example, deposit book, deposit slip or
proof of disbursement by the lender);
(i) for the
taxation years in issue, since the appellant was unable to show
the source of the funds so as to prove the investments in
question, the Minister taxed the amounts described for
subparagraph (g) above as additional income for the
corporation and as an appropriation of funds under
subsection 15(1) of the Act for the appellant;
(j) in thus
failing to report the additional income of $10,000 for the 1994
taxation year and $11,452 for the 1995 taxation year, the
appellant knowingly, or under circumstances amounting to gross
negligence, made or participated in, assented to or acquiesced in
the making of a false statement or omission in his income tax
returns filed for the 1994 and 1995 taxation years, as a result
of which the tax that the appellant would have had to pay based
on the information provided in his income tax returns filed for
those years was less than the amount of tax actually payable for
those years;
(k) accordingly, as
a result of his failure to report all his income, the appellant
was assessed penalties of an amount equal to the greater of $100
and 50 percent of those differences of tax, that is to say
penalties of $735.56 for the 1994 taxation year and $745.12 for
the 1995 taxation year, under subsection 163(2) of the
Act;
ADDITIONAL CAPITAL GAIN
(l) the
appellant held 70 common shares and 200 preferred
shares (hereinafter the "shares") in the
corporation;
(m) the appellant made an
election to report a capital gain on the shares he owned at the
end of February 22, 1994, in his income tax return for the
1994 taxation year, as follows:
|
-F.M.V. of shares
at February 22, 1994:
|
$180,000
|
|
|
|
|
-ACB
|
$ 80,000
|
|
|
|
|
-Deemed proceeds of
disposition:
|
$180,000
|
|
|
|
|
-Capital gain
covered by the election:
|
$100,000
|
|
|
|
|
-Taxable capital gain
($100,000 X 75 percent):
|
$ 75,000
|
|
|
|
|
-Capital gains
deduction
($100,000 X 75 percent):
|
$ 75,000
|
(n) during the audit
for the taxation years in issue, the agent for the appellant,
Fortunat Voyer, told the auditor that he had arbitrarily
fixed the designated proceeds of disposition of the shares at
$180,000 and the ACB of the shares at $80,000 to produce a
capital gain of $100,000 on which the capital gains deduction
would be claimed;
(o) the agent never
provided any evidence whatever with regard to the ACB of the
shares;
(p) according to the
auditor's analysis of the corporation's balance sheet,
the only assets of any value were the building and the land;
(q) the Minister
determined the fair market value of the shares as of
February 22, 1994, as follows:
|
Description
|
Amount
|
|
|
|
|
- Common shares
|
$95,000
|
|
- Preferred shares
|
$ 2,000
|
|
|
|
|
Total
|
$97,000
|
(r) the actual ACB
of the shares was as follows:
|
Description
|
Amount
|
|
|
|
|
- Common shares
|
$ 700
|
|
- Preferred shares
|
$2,000
|
|
|
|
|
Total
|
$2,700
|
(s) since:
(i) the fair
market value of the shares that were held by the appellant in the
corporation on February 22, 1994, and that were covered by
his election under subsection 110.6(19) of the Act
was established by the Minister at $97,000;
(ii) and the amount
designated as the proceeds of disposition of the appellant's
shares exceeds 11/10 of the amount of that fair market value;
the election cannot be revoked or amended under
subsection 110.6(28) of the Act;
(t)
consequently, the Minister has:
(i) determined
a presumed capital gain of $177,300 resulting from the deemed
disposition of those shares (see calculation appended
hereto);
(ii) calculated an
additional capital gain of $57,975 which he has included in the
appellant's income for the 1994 taxation year;
(iii) has revised the new
ACB of the shares to $23,700.
At the start of the first hearing day on July 12, 2000,
counsel for Mr. Champagne admitted the facts set out in
subparagraphs 5(l), (m), (n), (o), (p) and (r). The
admission of subparagraph (m) was withdrawn during the
hearing. As to subparagraph (q), counsel admitted that the
amounts did not exceed the figures adopted by the Minister. With
respect to subparagraphs (s) and (t), the matters dealt with
therein were questions of law, not of fact; no admissions were
therefore in order regarding those subparagraphs.
[3] Mr. Champagne adduced no
evidence at the hearing to contradict the facts stated in
subparagraphs (a) to (i). The other relevant facts revealed
in the evidence will be referred to in the context of my
analysis.
Analysis
Taxable Capital Gain
• Statutory Provisions
[4] I will first discuss the question
of the inclusion of the taxable capital gain in
Mr. Champagne's income. The relevant statutory
provisions are subsections 110.6(19), (24) and (28) of the
Act, which provide as follows:
(19) Election for property owned on February 22,
1994. Subject to subsection (20), where an
individual (other than a trust) or a personal trust (each of
which is referred to in this subsection and subsections (20) to
(29) as the "elector", elects in prescribed form to
have the provisions of this subsection apply in respect
of
(a) a capital property (other . . .) owned at the
end of February 22, 1994 by the elector, the property shall be
deemed, except for the purposes of sections 7 and 35 and
subparagraph 110(1)(d.1)(ii),
(i) to have been disposed of by the elector at
that time for proceeds of disposition equal to the greater of
. . .
(ii) to have been reacquired by the elector immediately after
that time at a cost equal to
. . .
(24) Time for election. An election made
under subsection (19) shall be filed with the Minister
(a) where the elector is an individual (other than a
trust),
(i) if the election is in respect of a business of the
elector
. . .
(ii) in any other case, on or before the individual's
balance-due day, for the 1994 taxation year, and
. . .
(28) Election that cannot be revoked or amended.
An election under subsection (19) cannot be revoked or
amended where the amount designated in the election exceeds
11/10 of
(a) if the election is in respect of a property other
than an interest in a partnership, the fair market value of the
property at the end of February 22, 1994;
(b) if the election is in respect of an interest . . .
.
[Emphasis added.]
• Form and Guide
[5] Counsel for the respondent and the
respondent's witness, namely the Minister's agent who
signed the Reply to the Notice of Appeal, admitted that the
prescribed form for the purposes of the election provided for in
subsection 110.6(19) of the Act is form T664 and that
Mr. Champagne had neither attached that form to his return
when he filed it nor sent it in at a later date. The form is a
document printed on both sides of the page, which contains the
five steps involved in making the election provided for under
subsection 110.6(19) of the Act. It is stated at the
beginning of that form that one completed election form is to be
filed on or before its filing due date. It is further stated
that: "[f]or further information on the election and
instructions on how to complete this form, see the Capital
Gains Election Package", a guide that was filed as
Exhibit I-3 at the hearing.
The last step, which appears on the reverse of the form, is
very important in my view. It is the certification, which is
drafted as follows:
I, (Print name) of (Print address) hereby elect to have the
provisions of subsection 110.6(19) of the Income Tax
Act apply in respect of each property specified above, and
certify that the information given in this election form is true,
correct, and complete in every respect.
[6] The guide describes how to elect
at page 1:
You elect by filing Form T664, Election to
Report a Capital Gain on Property Owned at the End of
February 22, 1994.
[Emphasis added.]
[7] At page 6, the guide repeats
essentially the same information under the heading "How do
you elect?" but adds the following:
You can file an election for all or some
of your capital properties. If you elect to report a capital gain
on more than one capital property, you only have to file one
form. However, we consider you to have filed a separate
election for each property.
If you elect to report a capital gain on the eligible capital
property of your business, you have to elect on all the
eligible capital property of the business.
[Underlining added.]
[8]
The guide also provides the following information at page 7
under the heading "What is the filing due date for the
election?":
You usually have to file the election by April 30,
1995. You file the election by completing
Form T664, Election to Report a Capital Gain on
Property Owned at the End of February 22, 1994. You
should attach Form T664 to your 1994 income tax return.
If you file your return electronically (EFILE), you have to
submit a paper copy of your election form to us. For more
information, contact the preparer or your electronic record.
[Underlining added.]
[9] Also at page 7, the guide
states the risks which a taxpayer's decision to make an
election may entail:
If the amount you designate in the election as proceeds of
disposition is more than the fair market value of the
property at the end of February 22, 1994, we may not allow
you to cancel or amend your election. For more information, see
the section called "Cancelling or amending your
election" on page 17 in Chapter 3. If you are
electing on the eligible capital property of your business, or
your interest in, or your shares of, a flow-through entity, you
should refer to the chart, which begins on page 18.
Essentially similar information is provided in the following
passage on page 17:
Cancelling or amending your election
If you designate proceeds of disposition for a property that
are more than 110% of the fair market value of the property at
the end of February 22, 1994, we will not allow you to
cancel or amend your election on that property. You should,
therefore, be careful not to designate proceeds that are more
than the fair market value.
Case Law
[10] The necessity of filing an election
form in order to comply with the provisions of the Act has been
recognized in case law. In The Queen v. Adelman,
93 DTC 5376, the facts were similar in many respects to
those in the instant case. That case also raised a question
concerning an election form used for the purposes of computing
capital gains. It was an election respecting cost for income tax
purposes, commonly called the "election re cost on valuation
day", valuation day generally meaning December 31,
1971.
[11] I cite the headnote in
Adelman:
Included in the taxpayer's 1985 tax return was a schedule
incorporating calculations using Valuation Day values as the
adjusted cost base for certain common shares. The prescribed
Form T-2076 for use in making the Valuation Day
election under subsection 26(7) I.T.A.R., however, was not
included with that return. In reassessing the taxpayer for his
1985 taxation year, the Minister proceeded on the basis that the
taxpayer had failed to make the Valuation Day election . . . .
The taxpayer's appeal to the Tax Court of Canada was allowed.
The Crown appealed to the Federal Court - Trial Division.
. . . The Tax Court Judge had considered himself bound by
another decision of the Tax Court of Canada in Trynor et al.
v. M.N.R. (88 DTC 1294). There, it had been decided
that the requirement under subsection 26(7) I.T.A.R. (that the
taxpayer "shall" make the Valuation Day election on
prescribed form) is directory rather than mandatory.
[12] The relevant provisions were
subsection 26(7) of the Income Tax Application Rules,
1971 (ITAR) and section 4700 of the Income Tax
Regulations (Regulations), which sets out in the
following terms the manner in which the form in question is to be
filed:
Any election by an individual under subsection 26(7) of the
Income Tax Application Rules, 1971 shall be made by filing
with the Minister the form prescribed.
[13] In Adelman, Strayer J.
conducted the following analysis at page 5378:
Section 11 of the Interpretation Act provides as
follows:
11. The expression "shall" is to be construed as
imperative and the expression "may" as permissive.
Subsection 3(1) of that Act provides as follows:
3. (1) Every provision of this Act applies, unless a contrary
intention appears, to every enactment, whether enacted before or
after the commencement of this Act.
This means that the requirement in section 11 that
"shall" is to be construed as imperative should apply
in the interpretation of every "enactment" unless a
contrary intention appears in that "enactment". By
virtue of subsection 2(1) of the Interpretation Act
"enactment" means an Act or regulation or any
portion of an Act or regulation. . . .
and
"regulation" includes [a] . . . form . . . made or
established
(a) in the execution of a power conferred by or under the
authority of an Act . . .
. . .
We may therefore apply the requirements of sections 11 and 3
of the Interpretation Act - to the effect that
"shall" is to be interpreted as imperative unless
found in an enactment where the context indicates otherwise - to
the interpretation of section 4700 of the Income Tax
Regulations. As noted above, that section says that an
election under subsection 26(7) of the Income Tax Application
Rules, 1971 "shall" be made by filing the
prescribed form. Is there any basis for interpreting this as
directory only? An authoritative statement of the criteria for
treating "shall" as other than imperative may be found
in the decision of the Supreme Court of Canada in Re
Manitoba Language Rights, where the following
statement was made:
As used in its normal grammatical sense, the word
"shall" is presumptively imperative. . . . It is
therefore incumbent upon this Court to conclude that Parliament,
when it used the word "shall" in s. 23 of the
Manitoba Act, 1870, intended that those sections be
construed as mandatory or imperative, in the sense that they must
be obeyed, unless such an interpretation of the word
"shall" would be utterly inconsistent with the context
in which it has been used and would render the section irrational
or meaningless. . . .
. . .
I am unable to say that giving the word "shall"
in section 4700 of the Regulations an imperative meaning would be
irrational or meaningless. It does not seem at all irrational
for the Regulations to require that a taxpayer clearly express
his election not only to establish the cost of his first property
disposed of after valuation day to be its value on valuation day
but also to accept that all other property owned by him before
1972, when disposed of in future, should have attributed to it an
acquisition cost equal to its value on valuation day. It is
not irrational for the Minister to be satisfied, through the use
of the prescribed form, that the taxpayer understands the
implications of his election.
[Emphasis added.]
[14] Strayer J.'s decision was
confirmed by the Federal Court of Appeal in Adelman v. Her
Majesty the Queen, 97 DTC 5529.
[15] There are also two other decisions by
the Federal Court of Appeal: Attorney General of Canada v.
MacIsaac et al., 2000 DTC 6020, and Partanen v. The
Queen, 99 DTC 5436. That Court found therein that the
prescribed form was likewise mandatory for the purposes of
section 118.3 concerning the disability tax credit.
Subsection 118.3(1) of the Act provides that, for that
credit to be claimed, certain conditions must be met, including
the following:
Where
. . .
(a.2) . . . a medical doctor [or other such person] . .
. has certified in prescribed form that the impairment is . .
.
(b) the individual has filed for a taxation year with
the Minister the certificate described in paragraph
(a.2).
[16] It is instructive to look at paragraphs
118.3(1)(a.2) and (b) because their wording
is quite similar to that of the provisions which I have to
interpret here.
[17] It should be noted that
subsection 118.3(1) of the Act does not contain the word
"shall" but simply states "where . . . the
individual has filed". Similar wording appears in
subsection 110.6(19) of the Act, which provides that
"[s]ubject to subsection (20), where an individual . .
. elects in prescribed form to have the provisions of this
subsection apply in respect of . . .".
[18] If the usual meaning of the terms
employed is adopted, one realizes that the presumption stated in
subsection 110.6(19) of the Act applies only where an
individual elects in prescribed form. If no election is made, the
presumption must not be applied.
[19] Even if one could have any doubt
regarding the wording of subsection 110.6(19) of the
Act-which I do not-subsection 110.6(24) specifies that the
form "shall" be filed with the Minister within the time
prescribed in that subsection. As stated in Adelman,
supra, there are no grounds for believing that it is
unreasonable to apply the imperative meaning of the word
"shall". It was natural for Parliament to wish to
ensure that taxpayers not make an election inadvertently and that
they fully realize all the consequences of their actions. This is
particularly true where there may be very heavy tax consequences
if a taxpayer elects an amount greater than the fair market
value. In the case at bar, if subsection 110.6(19) of the
Act applied and the election had been the one the Minister
assumed, there would be a taxable capital gain of $57,975,
whereas, if the election had been properly made or if there had
been no election, there would have been no amount to include in
the taxpayer's income.
[20] In addition to the tax that
Mr. Champagne would have to pay on that taxable capital gain
of $57,975 in 1994, there would probably be other costly tax
consequences on a subsequent disposition of the shares since the
adjusted cost base (ACB) is deemed to be equal not to the
amount of the proceeds of disposition in 1994, but, in this
instance, to a much smaller amount, $23,700. As a consequence,
Mr. Champagne would realize an additional capital gain even
if the disposition was made at the fair market value established
on February 22, 1994. There could, as it were, be double
taxation.
[21] I find the argument of counsel for the
respondent and her witness that Mr. Champagne made his
election by filing Schedule 3 of his income tax return and
the T657 form to be utterly without foundation. Those forms were
necessary to compute the capital gains and the capital gains
deduction provided for in section 110.6 of the Act, but they
did not constitute the form contemplated by
subsections 110.6(19) and (24) of the Act. Counsel and her
witness contended that the Minister was able to find in those
forms the relevant information enabling him to conclude that an
election had been made. First of all, I would like to note that
the same argument was made by the taxpayer in Adelman,
supra, and that the Minister nevertheless concluded that
the election had not been validly made. Since, in Adelman,
the Minister denied the taxpayer the benefit of the election
regarding cost provided for in subsection 26(7) of the ITAR,
it would be totally unfair to reach a different conclusion here,
as counsel for Mr. Champagne moreover observed.
[22] In my view, there is in the case at bar
another factor that is unfavourable to the respondent's
argument. Subsection 110.6(19) of the Act not only expressly
requires that a prescribed form be filed, it also requires that
an individual have elected to have "the provisions of this
subsection apply in respect of" any property or business
referred to therein. There is absolutely no mention of a
certification of this kind in Schedule 3 or in the T657
form. That certification is found only on the T664 form.
Consequently, one of the conditions for the application of
subsection 110.6(19) was not met and there is no other
provision of the Act by virtue of which a disposition of the
shares of Garage Ed. Champagne Inc. (GEC) held
by Mr. Champagne could be deemed to have taken place. As
there was no disposition of those shares, there is no taxable
capital gain to be included in Mr. Champagne's
income.
Unreported Income
[23] With respect to the second issue, the
relevant provision of the Act is as follows:
15(1) Where at any time in a taxation year a benefit is
conferred on a shareholder . . . by a corporation . . . the
amount or value thereof shall . . . be included in computing the
income of the shareholder for the year.
[24] In this instance, the Minister
determined that GEC conferred a benefit on Mr. Champagne
when, in the [TRANSLATION] "Owed to shareholder"
account, it credited that shareholder with the amount of $10,000
in 1994 and $11,452 in 1995, and the Minister included those
amounts in Mr. Champagne's income. In other words, by
its accounting entries, GEC acknowledged that it owed
Mr. Champagne $10,000 for 1994 and $11,452 for 1995, and
Mr. Champagne could withdraw those amounts from GEC without
having to include them in his income and pay the resulting
tax.
[25] At the time the assessment was made, no
evidence was provided to the Minister that those amounts had been
advanced to GEC by Mr. Champagne. On the second day of
hearing before this Court, on August 22, 2000, that is, more
than one month after the first day, GEC's accountant who
had prepared its financial statements testified, explaining that
Mr. Champagne had always refused to provide the Minister
with the necessary information on the advances because, in his
view, the money deposited with GEC and credited to the "Owed
to shareholder" account represented loans made by
Mr. Champagne's brother, Michel Champagne, who had
until then refused to have his name "appear". The
accountant described Michel Champagne as a retiree. In his
testimony, however, Michel Champagne admitted that he worked
year-round at his own garage located one mile from his home.
He has continued working, even in the last two years, but at
GEC.
[26] In support of his assertions, the
accountant filed receipts signed by a representative of GEC,
which acknowledged loans received from Michel Champagne. For
the 1994 fiscal year, there were three receipts totalling
$10,000. For 1995, there were seven totalling $9,000. Those
receipts were dated between December 1993 and October 1995, but
all had been prepared after July 12, 2000, the first day of
the hearing. According to the accountant, each receipt might
relate to numerous small loans which Michel Champagne had
made when goods were sold or services supplied to GEC. Some of
the loans, he said, were deposited directly in GEC's bank
account. However, there was no evidence that the signature
appearing on the deposit slips was that of
Michel Champagne.
[27] The accountant also filed invoices for
goods and services supplied to GEC, and on those invoices there
was generally a notation indicating payment in cash.
Michel Champagne's name appears on only one of those
documents, and it was not proved that the signature was his. The
fact that an invoice bears a notation indicating payment in cash
does not prove that the money necessarily came from a third party
such as Michel Champagne. On certain invoices, there is a
space reserved for the customer's signature. I saw
Michel Champagne's signature on none of those documents.
In some cases, that space remained blank or contained the name of
another person, such as that of a certain Mr. Bellemare.
[28] The accountant asserted that he sat
down with Michel Champagne to identify and analyze those
documents. In his testimony, however, Michel Champagne said
that he did not know the accountant, apart from the fact that he
had caught glimpses of him on rare occasions at GEC and had spent
at most 10 minutes with him signing papers in preparation
for the hearing of these appeals. It must certainly have taken a
number of hours of work to find the invoices with respect to
which Michel Champagne advanced the money, since there are
no indications, except those mentioned above, of the source of
the funds used to pay the said invoices. In the circumstances, it
cannot be concluded that Michel Champagne's testimony
corroborates that of the accountant. On the contrary, it raises
serious doubts.
[29] First of all, the name of the person
who signed the receipts in question on behalf of
"Garage Edmond [sic] Champagne" was not
determined. Moreover, the accountant was not present when the
loans were made. Most of his testimony constitutes mere hearsay
and thus cannot convincingly confirm the existence of the
loans.
[30] Furthermore, my analysis of the
financial statements for the years 1993 to 1995 shows that the
accountant's allegations are not corroborated. In note 4
to the balance sheet for 1994, I see that the amount of the
[TRANSLATION] "Loan owed to an individual"[1] for 1993 and 1994
amounts to $22,381. Note 5 to the same balance sheet, at the
[TRANSLATION] "Financing activities" item under the
heading [TRANSLATION] "Changes in financial position",
indicates that a note for $22,381 was issued for 1993 while there
was nothing for 1994. As to the item "Owed to
shareholder", in note 4 to the 1994 balance sheet it
can be seen that the account increases from $1,125 in 1993 to
$7,992 for 1994. An excerpt from the ledger providing details on
adjustments made to that account for 1994 was filed at the
hearing. There was a series of withdrawals appearing as debits
totalling $3,333. On the credit side, there is an adjusting entry
to November 30, 1994, the end date of GEC's fiscal year,
in respect of the amount of $10,000, on the basis of which entry
the Minister established the amount of the benefit.
[31] In note 4 to the 1995 balance
sheet, under the item "Loan owed to an individual", it
may be seen that the amount of $22,381 referred to above remains
unchanged. There is, of course, in note 5 to the balance
sheet, at the "Financing activities" item under the
heading "Changes in financial position", no mention of
any change. The balance of the "Owed to shareholder"
account increased from $7,792 in 1994 to $13,264 in 1995.
Unfortunately, no document was filed that could explain this
change in that account in 1995.
[32] Edmour Champagne did not testify
on either of the two hearing days. There is thus no evidence from
an officer or a shareholder of GEC that loans were made to GEC by
Michel Champagne. The receipts prepared more than five to
seven years after the loans were allegedly granted have no
probative value, or very little, in establishing the existence of
those loans. Only Michel Champagne's testimony could
have established the existence thereof. However, his testimony
was so hesitant, demonstrated so much reticence and was so vague
that it did not convince me on a balance of probabilities that he
had made the loans in question to GEC. This behaviour is all the
more surprising since he was at the hearing when the accountant
testified to explain his version of the facts. It was impossible
to obtain from Michel Champagne clear, precise and
convincing answers indicating that he had actually lent money to
GEC. On the important questions, counsel for Mr. Edmour
Champagne was unable to elicit detailed answers. He had to pose
flagrantly leading questions and, even in those circumstances,
there was still hesitation and reticence on the part of
Michel Champagne. On the secondary and less important
questions he was slightly, but only ever so slightly, more
talkative. When asked why he had refused to have his name appear,
he evaded the question by answering that his brother and he had
always helped each other out.
[33] Michel Champagne did not know how
much money he had lent his brother or GEC: he did not keep
records or written notes of the amounts of his loans, which I
find quite surprising. The money came in most cases from amounts
he kept at his home, not from his bank account. Consequently,
there is no trace that might confirm the existence of such loans.
He said he had been repaid with pieces of equipment that he could
use in the bodywork he did at his own garage. He also said that
he did not know how many such pieces he had been given in
repayment of the loans.
[34] I find that Edmour Champagne
failed to discharge his burden of showing that he received no
benefit when GEC credited him with the amounts of $10,000 in 1994
and $11,452 in 1995.
The penalty
[35] The onus was on the Minister to show
that Mr. Champagne knowingly, or under circumstances
amounting to gross negligence, made or participated in, assented
to or acquiesced in the making of, a false statement or omission
in his income tax returns filed for the 1994 and 1995 taxation
years.
[36] I find that the Minister failed to
discharge that burden. He called neither his auditor nor
Mr. Champagne as witnesses. Furthermore, the circumstances
of the appeals are not such that it is reasonable to infer that
Mr. Champagne knew that he was receiving a taxable benefit
when the "Owed to shareholder" account was credited
with an amount of money, and that he also knew that that amount
had to be included in his income. It must be kept in mind, as I
have just mentioned, that what is involved is accounting entries
made by GEC's accountant, and it was not shown that
Mr. Champagne knew their significance. Furthermore, it
should be added that Mr. Champagne received only an amount
of $3,300 in 1994, with the rest of the benefit being credited to
him in the "Owed to shareholder" account. Nor is there
sufficient evidence to show that the amounts in question came
from income not reported by GEC.
[37] For all these reasons,
Mr. Champagne's appeals are allowed and the assessments
are referred back to the Minister for reconsideration and
reassessment on the basis that Mr. Champagne did not make a
valid election under subsection 110.6(19) of the Act, that
his income for 1994 is to be reduced by a taxable capital gain
amount of $57,975, and that the penalties for 1994 and 1995 are
to be set aside, the whole subject to section 18.1 of the
Tax Court of Canada Act.
[38] Mr. Champagne is entitled to a
lump sum of $1,000 as costs with respect to his appeal for
1994.
Signed at Montréal, Quebec, this 1st day of November
2001.
J.T.C.C.
Translation certified true
on this 28th day of February 2003.
Erich Klein, Revisor
Email this Content