Date: 19990908
Docket: 98-2591-IT-I
BETWEEN:
ALAIN RUEST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1] This is an appeal from assessments for the 1993, 1994 and
1995 taxation years. The assessments were made using the net
worth method. In making the reassessments for the years in issue,
the Minister of National Revenue (the "Minister") made
in particular the following assumptions of fact:
[TRANSLATION]
(a) the appellant reported no business income for the 1993
taxation year;
(b) the appellant reported the following business income for
the 1994 and 1995 taxation years:
Taxation year Gross income Net income
1994 $10,000 $ 9,031
1995 $35,085 $21,185
(c) the appellant had a horse-selling business during the
years in issue;
(d) the appellant kept no books for his business;
(e) the Minister audited the appellant's affairs using the
net worth method;
(f) the amount of unreported income was determined using the
net worth method (a copy of the appellant's statement of net
worth . . . as schedules 1, 2, 3 and 4);
(g) the amounts not reported by the appellant which were
subject to the federal penalty for negligence are as follows:
Taxation Amounts subject
year to penalty
1993 $ 6,745.99
1994 $16,540.07
1995 $23,100.97
(h) by thus failing to report his income, 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 the returns of income filed
for the 1993, 1994 and 1995 taxation years, as a result of which
the tax which he would have been required to pay based on the
information provided in the returns of income filed for those
years was less than the amount of tax actually payable for those
years;
(i) as a result of the appellant's failure to report all
his income, the Minister assessed the following penalties in
accordance with subsection 163(2) of the Act for the 1993,
1994 and 1995 taxation years:
Taxation Penalty
year assessed
1993 $1,586.32
1994 $2,503.00
1995 $3,892.74
[2] The points at issue are clearly stated in paragraph 8
of the Reply to the Notice of Appeal, as follows:
[TRANSLATION]
(a) to determine whether the appellant correctly reported all
his income for the 1993, 1994 and 1995 taxation years;
(b) to determine whether the Minister was correct in assessing
a penalty against the appellant under subsection 163(2) of
the Act for the 1993, 1994 and 1995 taxation years.
[3] The appellant testified in support of his appeal and also
called one Pierre Paquette and his accountant,
Mr. Lemay, as witnesses. The appellant identified himself as
a self-employed worker. In 1993, he worked a few months and
became eligible for unemployment insurance benefits. In 1994 and
1995, he did work involving racehorses. This activity consisted
in buying, selling and racing horses. The purses and the profits
on horse transactions provided him with most of the income he
needed to live. The evidence in this regard is more than a little
sketchy.
[4] The assessments were made using the net worth method as
the appellant had no bookkeeping or accounting system for his
business. As the appellant's income was not sufficient to
justify his expenses and assets, Revenue Canada concluded that he
had received and benefited from income greater than that which he
had reported.
[5] In rebuttal, the appellant essentially contended that he
had used capital of more than $30,000 received from two different
sources. The first source, representing $20,000, was the sale of
a portion of his hockey card collection in Mississauga through
his friend Pierre Paquette. Mr. Paquette moreover
testified and confirmed the appellant's claims, completing
his testimony with a detailed written description of the items
and series sold and the amounts obtained for each series
(Exhibit A-1).
[6] Second, the appellant stated that he had received a gift
of $10,000 from his father in anticipation of the purchase of a
residence which in the end he never bought.
[7] In the appellant's view, this capital contribution of
more than $30,000 explained and justified the observed
discrepancies forming the basis of the assessments. The evidence
also established that the appellant made very little use of his
bank accounts in his economic activities, but dealt more often
than not in cash.
[8] A number of withdrawals were questioned, in particular
those of February 15, 1993 ($2,525), February 28, 1995
($3,746), April 12, 1995 ($5,000) and September 13,
1995 ($5,000). The evidence did not reveal the details concerning
the use of these funds. The appellant testified that the funds
were used either for his personal needs or to pay costs and
expenses related to the horses he owned.
[9] The evidence established that the appellant had reported
very modest income for the years prior to the years in issue:
$5,782 in 1988, $5,934 in 1989, $9,994 in 1990, $12,320 in 1991
and $15,698 in 1992.
[10] The appellant reported the following income for the years
in issue: $8,306 for 1993, $7,930 for 1994 and $31,249 for 1995.
In 1993, the appellant worked for only a very brief period of
time, from March to July, after which he collected unemployment
insurance benefits until he was no longer eligible.
[11] Subsequently, although a neophyte in the field, he became
interested in racehorses on the advice of a friend. He apparently
lived off the proceeds of race purses and profits made on various
horse transactions.
[12] The evidence also showed that the appellant owned or had
owned a number of motor vehicles during the periods in issue.
Capital assets: 1992 1993 1994
1995
Automobiles:
1979 Pontiac Trans Am 5,500.00 5,500.00 5,500.00
1984 Honda Prelude 1,500.00 1,500.00 1,500.00 1,500.00
1992 Jimmy Blazer 29,250.70 29,250.70 29,250.70 29,250.70
Motorcycles:
1993 Harley Davidson FLST 18,605.16 18,605.16
1995 Harley Davidson FLST 21,825.62 21,825.62
1965 Harley Davidson 1200 500.00
1957 Harley Davidson 1200 1,110.00
Snowmobiles:
1993 Ski-Doo Mack Z 11,236.00
1993 Ski-Doo Mack XTC 9,167.20 9,167.20 9,167.20
Suzuki ATV 300.00 300.00 300.00 300.00
________________________________________________
66,891.86 64,323.06 67,543.52 63,153.52
Total assets 77,513.58 65,565.74 78,852.87
79,627.39
[13] In tax law, the burden of proof is on the appellant, who
must show on the balance of evidence that his claims are valid.
To do so, he must demonstrate by means of coherent and plausible
evidence that those claims rest on a credible and verifiable
foundation.
[14] An assessment made using the net worth method supposes an
analysis and consideration of a number of components relating to
a period of one or more years. The result of the exercise is the
revelation of certain discrepancies which generally provide the
basis for the assessment. The easy, or indeed simplistic, reply
or response to explain the discrepancy or discrepancies is to say
that there was a sudden, new cash inflow which explains and
justifies everything.
[15] This is of course possible and plausible, but
nevertheless requires a degree of reliability in which there is
little room for doubt. In other words, this kind of verbal
evidence, supported by writings of dubious quality, definitely
requires corroboration from a source beyond the control of the
person benefiting from the cash contribution.
[16] Furthermore, I think it equally important to be able to
show how and how often the amounts received were used or spent.
In other words, a taxpayer who receives some substantial amount
of money will have to demonstrate the manner in which the funds
were used. The explanation that the funds were deposited and kept
in a safe-deposit box or held in the form of cash in the home for
use if needed is not very convincing.
[17] Saying that capital was obtained from a very particular
or exceptional source in order to explain and justify all
discrepancies or operations that do not balance may raise doubts
concerning plausibility.
[18] In the instant case, the appellant certainly explained
and justified the mathematical discrepancies by saying that he
had received a cash inflow of $30,000 (from the sale of hockey
cards and a gift from his father). Is this evidence, consisting
essentially of testimony by the appellant and
Pierre Paquette, decisive? Should the Court be satisfied
with this explanation and find in the appellant's favour?
[19] I would say at the outset that I very much doubt the
likelihood of this cash inflow. It would have been helpful to
have corroborated this explanation in order to substantiate and
strengthen it, given the fact that it was a very particular
explanation, but also a surprising one as to the accuracy of the
total amount and the strategic moment when the appellant was able
to benefit from it.
[20] It appeared to me to be equally surprising that the
appellant did not reveal earlier on that he had had the benefit
of such a cash inflow. Indeed, the evidence showed that the
discussions and negotiations were at a very advanced stage when
the two amounts totalling more than $30,000 were first
mentioned.
[21] In view of the income reported by the appellant both
during and prior to the years in issue, I am very sceptical and
puzzled as to the truth concerning this capital contribution. It
is possible, indeed easy to forget a cash inflow of a few hundred
dollars. However, where the amounts represent the total of
several years' taxable income, questions arise if the
recipient claims to have forgotten them.
[22] As noted above, Revenue Canada uses the net worth method
in making an assessment where it is unable to assess on the basis
of standard accounting methods, that is to say, by means of an
accounting supplemented by the appropriate supporting
documentation. However, the fact that this is a special
assessment procedure in no way alters the prevailing rule with
respect to challenging the assessment's validity before the
Tax Court of Canada: the burden of proof is still on the
appellant.
[23] In disputing an assessment based on the net worth method,
appellants often seem to believe they need only point out a few
weaknesses, errors or defects in the assessment process in order
to completely disprove their validity.
[24] I think it important to point out that an assessment made
by means of the net worth method is the result of an evaluation
based on a set of components provided in part by the taxpayer
himself but which also come from certain discoveries, from
statistical information, and lastly, from essentially
mathematical deductions.
[25] The component data are usually questioned or disputed by
one party or the other. Following the discussions and
negotiations, if the taxpayer is still not satisfied with the
assessment, he may institute an appeal before this Court. He must
in that case show that his income balances with the detailed
statement of his expenses.
[26] In the instant case, the appellant essentially took issue
with the fact that the respondent should have found it strange
that he had borrowed to purchase a motor vehicle rather than use
his available funds. It is indeed not unusual or unreasonable to
purchase a vehicle by means of a loan even if one has all or some
of the money needed. However, I would point out that the burden
was on the appellant, not the respondent, to justify or explain
the use of the funds stated to be available.
[27] Since the assessments resulted from the observed
discrepancy between income and expenses relative to capital or
assets, the burden was solely on the appellant to explain that
discrepancy. To convince the Court, he had to show on the balance
of evidence that his claims were plausible, reasonable, correct
and coherent. It was not enough to criticize and raise certain
minor grievances in order to enable the Court to conclude that
everything balanced as a result of the amount received at a
particular moment.
[28] This, I agree, might have required a colossal amount of
work, but it should nevertheless be pointed out that a taxpayer
assessed by means of the net worth method is himself responsible
for the manner in which he has been assessed in that he
deliberately and knowingly chose not to have any accounting
system and to keep no record of his income and expenses.
[29] After the lack of consistency was raised against him, the
appellant suddenly contended that he had received an amount of
approximately $30,000 at the start of the reference period,
explaining that he had obtained this amount through the sale of
hockey cards and a gift from his father.
[30] I did not believe the appellant's explanations
respecting that capital contribution. First of all, the
explanation was late in coming. Second, the sheer chance and the
coincidence that the amounts were what they were cast doubt on
the whole thing. Lastly, the money became available at exactly
the right time. That represents many strokes of good fortune and
coincidences. Even so, it was not impossible. The appellant
should have known that his highly unusual explanations would have
triggered a certain scepticism. Consequently, he should have
provided fuller and more convincing evidence as to the source of
the $30,000 capital amount.
[31] Why did he refuse to answer the questions asked by the
auditor of his case? Why did he require that all the information
be screened by his accountant? Why did he not mention the source
of the $30,000 at the very outset? Why did he contend that he
never used credit cards? Why did he claim that a commission had
been paid to Mr. Paquette, when Mr. Paquette himself
stated that he had not received any commission?
[32] All these points do nothing to enhance the already poor
quality of the evidence. Quite the contrary, they deprive it of
the minimum quality required for it to be accepted.
[33] I also think it appropriate to mention certain facts
which speak for themselves:
- The income reported compared to the motor vehicles
owned;
- The passage under the heading [TRANSLATION]
"Safe-deposit Box" in Schedule B to the Notice of
Appeal reads as follows:
[TRANSLATION]
(1) Safe-deposit Box
I have had a safe-deposit box at the Caisse Populaire de
St-Rédempteur since March 17, 1993 and
Suzanne Gagnon is designated as attorney. The safe-deposit
box is used solely to keep insurance policies and
Suzanne Gagnon has never had access to the box even though
she has been designated attorney.
[34] Exhibit I-6 establishes that the appellant
visited his safe-deposit box 22 times between March 17,
1993 and August 22, 1996.
[35] I also think it appropriate to reproduce the content of
headings 2, 3 and 4, which show quite clearly how easily the
appellant is able to make untruthful statements:
[TRANSLATION]
(2) 1993 T4 Supplementary
This slip was prepared based on information which I had
provided to my employer, indicating Suzanne Gagnon's
address because I did not want to risk losing my job by giving my
actual address.
(3) Purchase of a vehicle on October 14, 1992
Enclosed please find a letter signed by
Mr. Carol Nadeau explaining why the address given was
not the actual address.
(4) Driver's licence
I enclose a copy of my driver's licence issued on
March 15, 1995 which indicates my actual address.
[36] In Schedule 1 for 1994, the appellant stated:
[TRANSLATION]
. . . there remains additional income of
$1,540.07 which I consider is explained by an error in computing
my travelling expenses for 1994.
. . .
[37] In Schedule 1 for 1995, the appellant stated:
[TRANSLATION]
. . . there remains additional income of
$3,554.72 which I consider is explained by an error in computing
my travelling expenses for 1995.
. . .
[38] Assessing the credibility of testimony is undoubtedly one
of the most difficult aspects of our work and prudence demands
that we consider the most objective elements possible rather than
relying essentially on intuition. Consequently, a number of facts
and elements should be considered in discounting the value of
testimony.
[39] In this case, I am convinced on the balance of evidence
that I should attach no value to the appellant's testimony.
He took an enormous risk in deciding to adduce evidence
consisting essentially of his own testimony and that of two
persons over whom he clearly had ascendancy. To support, enhance
or strengthen his explanations, he should have relied on
something other than simply his testimony and that of
Pierre Paquette. The burden of proof was on him in this
regard. He had to show on the balance of evidence that his
explanations were plausible and reasonable.
[40] As to the penalties, the burden of proof was on the
respondent. Did she discharge the burden of showing that the
penalties were validly assessed? My answer is that she did, in
view of the fact that the appellant himself admitted he had
concealed income. I refer to the Notice of Appeal for the 1995
taxation year dated October 2, 1998, the last paragraph of
which reads as follows:
[TRANSLATION]
I agree that additional income of $3,555 should be considered
for 1995.
[41] The appellant may not have had an obligation to have
careful, detailed and exemplary accounting records in his
possession. However, he did have an obligation to prove that his
claims were plausible. On this point, the evidence adduced failed
to convince me. Moreover, the evidence as a whole could be
summarized in a single sentence: "Everything that did not
balance could be explained by the $30,000."
[42] The respondent's evidence showed that the appellant
made a number of untruthful statements for the obvious purpose of
concealing income. In view of those untruthful statements, the
total lack of cooperation, the size of the amounts at issue
having regard to the income reported and the admission of gross
errors, I conclude that the respondent discharged the burden of
proof with respect to the assessment of penalties.
[43] For all these reasons, the Court dismisses the appeal and
confirms that the penalties were validly assessed.
Signed at Ottawa, Canada, this 8th day of September 1999.
"Alain Tardif"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 21st day of July
2000.
Erich Klein, Revisor
Email this Content