Date: 20000913
Docket: 98-2145-IT-G
BETWEEN:
GILLES BLAIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(delivered orally from the bench on March 22,
2000,
at Montréal, Quebec, and revised)
Archambault, J.T.C.C.
[1] The Minister of National Revenue
(Minister) issued reassessments in respect of the 1993 and
1994 taxation years. For 1993, the Minister added an amount of
$5,330 as salary income to Mr. Blain's income. For 1994, the
Minister added $47,728 representing the value of assets that Mr.
Blain had allegedly appropriated. Those assets belonged to Ballon
Beko Ltée (BBL), a company in which Mr. Blain held 72% of
the shares. The Minister also assessed penalties under subsection
163(2) in respect of the two taxation years in question. Mr.
Blain's appeal concerns only the 1994 taxation year.
[2] At the start of the hearing, Mr.
Blain admitted the facts in subparagraphs 4 (a), (b), (c)
and (d) of the Reply to the Notice of Appeal.
Factual background
[3] Mr. Blain holds a bachelor's
degree in administration. Incorporated in 1985, BBL operates a
business that sells latex balloons on which it generally places
printing of some description.
[4] BBL owns equipment that it
purchased from foreign manufacturers and had to upgrade to meet
its own needs and quality standards. Mr. Blain stated moreover
that he spent a great deal of time improving the performance of
that equipment. BBL employs a dozen workers—about eight of
whom are full-time employees, including its two
shareholders—and a secretary. On occasion, extra staff has
to be hired.
[5] Mr. Blain's joint shareholder
primarily handles the production, staff and orders for raw
materials; Mr. Blain takes care of sales, marketing, banking,
purchasing equipment and negotiations with suppliers regarding
the price of the raw materials.
[6] The secretary handles the
bookkeeping, and an outside accountant, a CGA, prepares the
financial statements, including the year-end adjusting entries.
BBL's fiscal year ends on March 31. The CGA also prepares the
company's income tax returns. BBL's sales figure rose
from $35,000 in 1985 to approximately $855,900 in 1993.
[7] After filing its tax return for
the 1994 taxation year, dated October 10, 1994, BBL filed amended
financial statements dated August 12, 1995, in order to claim an
additional reserve of $64,845 for a bad debt.
[8] In November 1995, the
Minister's auditor began working on the BBL file. In the
course of his audit, he noted that the corporation had claimed
capital cost allowance on equipment, some of which had allegedly
been purchased in 1994. According to the statement of changes in
financial position as at March 31, 1994, which was part of the
financial statements of August 12, 1995, BBL purchased $82,987
worth of fixed assets in 1994. That amount was shown on Form
T2S(8) filed with the original tax return of October
10, 1994 for the 1994 taxation year.
[9] As supporting documentation with
respect to part of that equipment (fictitious equipment),
the company's representative provided three invoices, each
for approximately $22,097 ($66,289.71 in total), which Mr. Blain
acknowledged in his admissions were false invoices.
[10] The $66,289.71 amount also appears
in BBL's accounting records as an adjusting entry, as
follows: [TRANSLATION] "Entry 204 re: invoice
11161-62-63: 1610 equipment $66,289.71 to debit, 4011
sale of product, $66,289.71 to credit."
[11] During the audit, the auditor noted
that the three invoices referred to above were each copies of the
same document, bearing the same date and same fax transmission
time, the only difference being the number on each. The first
copy is numbered 11161, the second, 11162, and the third,
11163. Moreover, an examination of the copies of the invoices
shows that the figures "2" and "3" in these
numbers have been carefully altered by hand. If they are not
examined with care, one might not realize that the figures are
handwritten.
[12] The auditor went to see the supplier,
who confirmed that these invoices were only purchase orders and
not invoices for goods and services delivered. There was
therefore no sale of equipment to BBL by that supplier. The
auditor also noted that there was a purchase order bearing number
11163, but it had been sent to one of the supplier's other
clients.
[13] As he had been informed by Mr. Blain
that the purchase of the equipment from this supplier had been
financed in part by a $55,000 loan advanced by the Federal
Business Development Bank, the auditor went to that bank to
verify Mr. Blain's statements. He learned then that the funds
in question had been used to refinance other machinery than that
covered by the three false invoices.
[14] Having noted that the invoices were
false, the auditor concluded that the $66,289.71 in sales revenue
had been appropriated by BBL's two shareholders and, in a
letter dated February 18, 1997, he informed Mr. Blain that he
planned to include in his income his share (72%) of that revenue,
that is, $47,728, as an appropriation of funds.
[15] The Minister's auditor stated that
he had given the draft assessment to Mr. Blain on February
25, 1997, and explained to him that he had until March 18,
1997, to provide his comments. It should be added that the draft
assessment also applied to the 1993 taxation year and that the
auditor intended to increase Mr. Blain's income by
adding unreported salary income of $5,330. A similar draft
assessment was also given to Mr. Blain's joint
shareholder.
[16] The auditor also gave Mr. Blain a draft
assessment for BBL in which he informed Mr. Blain of his
intention to add to that company's income an amount
equivalent to the capital cost allowance claimed by BBL for the
fictional equipment. The $66,289.71 in revenue shown in entry
number 204 was thus not subtracted from the income reported
by BBL. For the 1993 taxation year, the auditor also disallowed
an amount of $39,175 as an expense for the purchase of goods for
which BBL did not provide supporting documentation, which amount
appears in the accounting records as an adjusting entry. This
time, the entry corresponding to the purchase was posted to the
[TRANSLATION] "owed to directors" account.
[17] At the meeting of March 18, 1997,
Mr. Blain and his accountant told the auditor that Mr. Blain
accepted all the changes except those resulting from the three
false invoices. A few days later, new amended financial
statements for the 1994 taxation year, dated April 4, 1997, were
filed with the Minister. The amount appearing under the
[TRANSLATION] "owed to shareholders" balance sheet item
was reduced by $39,175 to reflect the fact that the auditor had
disallowed an equivalent amount for the purchase of goods and
that BBL accepted that change. However, the income statement
showed no reduction of revenue by $66,289.71.
[18] In his testimony, Mr. Blain
categorically denied that BBL had paid the $66,289.71 to him and
his joint shareholder. He said that his company did not have the
means to do so and to have done it would have caused it
irreparable harm. In addition, he maintained that, if the
adjusting entry showing the purchase of fictional equipment at a
cost of $66,289.71 were cancelled, the inclusion of an equivalent
amount in the company's sales would also have to be
cancelled. According to him, it made no sense to cancel only half
of the adjusting entry.
[19] Mr. Blain also said he did not know who
could have given the false invoices to the accountant, but
acknowledged that it might have been him. Asked [TRANSLATION]
"Who would have altered them and why would that person have
done so?" he answered that it was his accountant who had
made the accounting entries. When I asked him why the accountant
would have done that, he offered this explanation: he (Mr. Blain)
had complained on several occasions that BBL's equipment was
undervalued; he had had to spend a great deal of time on
upgrading the performance of that equipment; and BBL should
receive research and development credits.
[20] According to Mr. Blain, BBL ceased
operations in 1998, after which BBL's banker called its line
of credit in February 1998.
Analysis
[21] First, it is important to remember that
the onus was on Mr. Blain to show that the inclusion of the
appropriated funds for the 1994 taxation year is wrong. However,
it was the respondent who had the burden of establishing that
Mr. Blain knowingly, or in circumstances amounting to gross
negligence, made a false statement in his income tax return.
Appropriation of $47,728
[22] I will first deal with the issue of the
appropriation. On the one hand, Mr. Blain categorically
denied receiving $47,728 from BBL because that company could not
afford to pay it. I note that there was no corroborating evidence
regarding BBL's difficult financial situation.
[23] I note, however, that Mr. Blain, in his
testimony, made reference to the fact that BBL had claimed a
reserve for a bad debt of $64,845. It was because of BBL's
bad financial situation and a bad investment made by BBL in
another company that the reserve was deducted. That reserve for a
bad debt was disallowed by the auditor and it would seem,
according to the auditor's testimony, that BBL accepted the
disallowance. Confirmation of the acceptance was apparently given
at the meeting of March 18, 1997.
[24] On the other hand, Mr. Blain took great
offence at the doubt cast by counsel for the respondent on his
credibility. I am not in a position to state that Mr. Blain is a
barefaced liar or has no credibility. However, the evidence
clearly shows that Mr. Blain could make mistakes in telling his
version of the facts.
[25] Here are a few examples of instances
where he is clearly mistaken. Mr. Blain says he filed his
amended financial statements of April 4, 1997, before he learned
that the auditor had discovered the three false invoices. In the
course of argument, I pointed out to Mr. Blain that, according to
the auditor's reply to one of his questions, the draft
assessment had been completed on February 18, 1997. Since
Mr. Blain said that it was possible that the draft was not
sent to him until after April 4, 1997, I then decided to
reopen the evidence to question the auditor further on the
circumstances surrounding the sending of the draft
assessment.
[26] The new testimony revealed that the
draft assessment had indeed been completed on February 18, 1997,
that it had been given to Mr. Blain on February 24, 1997,
and that it was on March 18, 1997, at a meeting, that
Mr. Blain and his accountant had provided their comments to
the auditor.
[27] Thus, the evidence clearly reveals
that, contrary to Mr. Blain's assertions, when he filed his
financial statements of April 4, 1997, he knew very well that the
Minister had discovered the false invoices and that he was
disallowing the inclusion of an amount of $66,289.71 for fixed
assets, and that he was keeping an equivalent amount in BBL's
income.
[28] Mr. Blain's income tax returns for
the 1993 and 1994 taxation years indicate that he earned no
income during those two years. Questioned on his source of funds
for meeting his personal needs, Mr. Blain said he used money paid
to him by BBL and that the amounts in question may have been
repayment of advances he had made to the company. Yet, an
examination of the financial statements for 1993 and 1994 reveals
that not only did the balance of the "owed to
shareholders" account not decrease, but, on the contrary, it
increased by an amount of approximately $6,000. It was instead
the shareholders who increased their advances to the company.
That is a situation which consequently casts serious doubt on
Mr. Blain's version.
[29] I also note that Mr. Blain informed the
auditor that the purchase of the fictional equipment had been
financed by the Federal Business Development Bank whereas the
evidence shows that the funds obtained from that bank were used
instead to refinance other machinery. It is important to remember
here that it was Mr. Blain, and not his joint shareholder, who,
generally speaking, negotiated with the bankers and handled
equipment purchasing. It is therefore rather surprising to note
that Mr. Blain was mistaken when he told the auditor about the
source of the financing for the purchase of the fictional
equipment.
[30] I also note that Mr. Blain is not above
cheating. When he explained the circumstances surrounding
BBL's deduction of a reserve for a bad debt, he told the
Court that BBL's investment in another company had been
uncollectable for two years and that he had waited for two years
to deduct the reserve because he did not want to alert his banker
to BBL's true financial situation.
[31] It must also be noted that, although
Mr. Blain declared no income for 1993, he accepted the
Minister's addition to his income of $5,330 in salary. That
amount was unreported income in respect of which the Minister
assessed a penalty under subsection 163(2). I would point out
here that the taxpayer does not object to the assessment for the
1993 taxation year. It is quite understandable that a taxpayer
might forget to declare an amount of $5,000 if he is earning
$100,000, but to forget $5,000 when one is declaring no income at
all is rather surprising.
[32] Although it cannot be established with
certainty that the answers given by Mr. Blain are manifestly
wrong, I find some of the answers provided by him in his
testimony implausible. It must be remembered that it was Mr.
Blain who signed BBL's tax returns. He said he signed them
without examining them carefully and without looking at the
financial statements, and yet he held a bachelor's degree in
administration and was the one who handled negotiations with the
banker. He stated that he did not notice in Form T2S(8) attached
to the tax return for 1994 that the amount of purchases was
$82,987 in 1994. He made the same assertion about the same
amount, described as relating to the purchase of fixed assets,
that appeared in the amended financial statements dated August
11, 1995, and that were filed with the Minister before the audit
began in November 1995. The acquisition cost of the fictional
equipment represented approximately 80% of all those purchases!
In note 4 of the financial statements filed with the original tax
return, the fixed asset amount under the equipment item is
$202,771 and the net value goes from $78,083 in 1993 to $133,764
in 1994, an increase of 71.3% of the book value (($133,764 -
$78,083) ÷ $78,083). I find it rather surprising that Mr.
Blain did not note such an increase. It was, after all, the same
Mr. Blain who said he had complained in the past that BBL's
equipment was undervalued and who claimed he had pressured his
accountant in that regard.
[33] In addition to this evidence, which
inclines me to believe that Mr. Blain's version of the facts
is not credible, there are other indicia that militate against
Mr. Blain's position. Chief among them is the
fabrication of false invoices. I believe that the evidence in
that respect is very clear; it was a deliberate act by someone:
the three invoices that were provided to the Minister are copies
of the same sales order; the time and date of transmission are
the same for all three. The fact that someone altered the invoice
numbers by hand clearly indicates that the false invoices were
deliberately fabricated. On a balance of probabilities, Mr. Blain
at the very least knew that these invoices had been
falsified.
[34] It cannot be concluded here that it
was, as Mr. Blain claims, a simple accounting error. There is no
evidence that it was BBL's accountant who fabricated the
false invoices. It would be rather surprising in any event that a
professional, a member of a professional body, would be a party
to such skullduggery. It is not impossible that he was: there are
of course undesirables in all human groupings. But the accountant
did not testify at the hearing to explain his version of the
facts.
[35] I would point out that in Enns v.
The Minister of National Revenue, APP-1992(IT), at page
3, Judge Sarchuk of this Court cited a passage from Sopinka and
Lederman, The Law of Evidence in Civil Cases, in which the
authors comment that the failure to call a witness may be
considered as a circumstance unfavourable to an appellant's
position. The relevant passage reads as follows:
The application of this maxim has led to a well-recognized
rule that the failure of a party or a witness to give evidence,
which it was in the power of the party or witness to give and by
which the facts might have been elucidated, justifies the court
in drawing the inference that the evidence of the party or
witness would have been unfavourable to the party to whom the
failure was attributed.
[36] It is important to note here that, in
his testimony, Mr. Blain stated that his accountant was not in
good health and could not come and testify. However, I also note
that no doctor's note was produced to confirm the
accountant's state of health.
[37] What could have been said to explain
the fact that someone fabricated the three invoices in question
and that equipment that had not really been purchased by BBL was
capitalized? The main explanation put forward by Mr. Blain was
that he found that his equipment was undervalued on the balance
sheet and had told his accountant so. He thought it was unfair
that BBL could not receive tax credits for research and
development; according to him, that could explain why his
accountant would have made the adjusting entries referred to
above.
[38] Is it possible that the purpose of thus
increasing the company's assets was to show its financial
situation in a more favourable light? I should note that the
above explanation was not offered with any great conviction by
Mr. Blain when he testified. He mainly emphasized the
undervaluation of his equipment for the purposes of research and
development tax credits.
[39] I should also mention that BBL did not
see fit to object to the Minister's decision disallowing the
deduction for the reserve for a bad debt. The evidence is not
sufficient to establish accurately and with certainty the
company's true financial situation at that time. For the two
financial years 1993 and 1994, BBL initially filed financial
statements showing profits for those two years. For 1993, the
amount of net profit before tax was $18,330 and, for 1994,
$13,855.
[40] In support of his argument that he had
not received the $47,728 that the Department had characterized as
an appropriation in assessing him, Mr. Blain asked why he would
have appropriated that amount when his share of the amounts owed
the directors was $84,270.24. As counsel for the respondent
pointed out, the fact that Mr. Blain did not use the
mechanism of reimbursement of his advances as a means of being
paid the amounts in question allowed him to receive the payments
without any tax consequences for subsequent taxation years.
[41] I also note that there was no evidence
that the amounts owed to the two shareholders were divided up in
proportion to their share in the capital stock of BBL and there
was no evidence establishing the amount of Mr. Blain's
advances to BBL. I find it rather surprising that Mr. Blain does
not remember to which shareholder BBL owed the $14,284[1] appearing in the
"owed to shareholders" account. That amount represented
the balance of a $15,000 amount indicated in note 5 of the
financial statements of August 12, 1995.[2]
[42] Another possible argument in support of
Mr. Blain's position is the fact that it would be rather
surprising that a taxpayer like BBL would have reported
additional income of $66,289.71 if the intention was for the
shareholders to appropriate the money without declaring it as
income in their own tax returns. Often, in such circumstances,
the taxpayers hide the income. It is important to note that,
without the inclusion in BBL's income of the $66,289.71, that
company would have recorded a loss. Indeed, even after including
it, BBL only declared net income of $12,401. Of the $66,289
declared by BBL, only 18.7% ($12,401 ÷ $66,289) was
actually subject to tax. Moreover, by increasing its fixed assets
by $66,289.71, BBL could obtain, not just for 1994 but also for
subsequent years, a reduction in income through capital cost
allowance. The rate of depreciation for the equipment in question
was 20%. Therefore, the scheme used by BBL to artificially
increase its assets allowed it to absorb the additional income
that it might have been tempted not to report.
[43] There are also other facts that, in
themselves, would not be a sufficient basis for concluding that
Mr. Blain appropriated the $47,728; however, those circumstances,
added to the ones I have already described, comfort me in my
conclusion in this appeal.
[44] First of all, Mr. Blain maintains that
the $66,289 should be deducted from BBL's income because it
is the second part of an adjusting entry that, according to him,
the accountant made in error. If that argument were to be
accepted, the gross revenue of the company for 1994 would fall to
$756,119, which would represent an approximately 12% decrease by
comparison with the revenue reported for 1993.
[45] In addition, if Mr. Blain and BBL
strongly believed that the Minister should have decreased
BBL's income by $66,289, why did BBL, in its amended
financial statements of April 4, 1997, not decrease its income by
that amount? As we saw earlier, it is clear that those financial
statements were filed after BBL and Mr. Blain were told that the
amount appearing as the cost of the fictional equipment had to be
excluded.
[46] On the whole of the evidence and on a
balance of probabilities, I find that Mr. Blain appropriated
$47,728 in the 1994 taxation year and that that amount must be
included in his income under subsection 15(1) of the Income
Tax Act as a benefit conferred by BBL on Mr. Blain as a
shareholder.
Penalty
[47] Having reached that conclusion, it
remains for me to deal with the question of the penalty. As
counsel for the respondent argued, if I found on a balance of
probabilities that Mr. Blain had appropriated $47,728, it would
be relatively easier to find that he had knowingly, or in
circumstances amounting to gross negligence, made a false
statement in his tax returns. It seems to me that it is
reasonable to believe that Mr. Blain knew of the existence of the
false invoices and that they were a device to allow him to
appropriate assets belonging to BBL.
[48] It is important to remember that Mr.
Blain holds a bachelor's degree in administration and that he
had been managing a business since 1985. It may be inferred from
this that he is a taxpayer who is well aware of his tax
obligations. Failure to report income actually received of
$47,728 in a case where the return that was filed showed no
income is the conduct of a person who knowingly or, at the very
least, in circumstances amounting to gross negligence, made a
false statement in his return. I find therefore that the
respondent met the onus that was on her.
[49] For these reasons, Mr. Blain's
appeal is dismissed with costs.
Signed at Ottawa, Canada, this 13th day of September 2000.
J.T.C.C
Translation certified true
on this 23rd day of November 2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
98-2145(IT)G
BETWEEN:
GILLES BLAIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on March 21, 2000, and judgment
delivered orally
on March 22, 2000, at Montréal, Quebec,
by
the Honourable Judge Pierre Archambault
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Michel Lamarre
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1994 taxation year is dismissed, the whole with
costs.
Signed at Ottawa, Canada, this 11th day of April 2000.
"Pierre
Archambault"
J.T.C.C.
Translation certified true
on this 23rd day of November 2001.
Erich Klein, Revisor
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