Huot v. The Queen, docket 98-253-IT-I (Informal Procedure)

Date: 20000323

Docket: 98-253-IT-I

BETWEEN:

MAXIME HUOT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Order and Judgment

Lamarre Proulx, J.T.C.C.

[1]            At the beginning of this hearing, a motion to have the informal procedure apply was heard. The appellant had initially appealed under the general procedure. On March 16, 1999, a status hearing was held by conference call. The appellant was on his own at that hearing. One condition of the resulting order was that a list of documents drawn up in accordance with section 81 of the Tax Court of Canada Rules (General Procedure) was to be filed and served no later than April 30, 1999. On August 1, 1999, a motion was brought before the Court to have the appeals dismissed for failure to file and serve the list of documents.

[2]            At the hearing of that motion on September 7, 1999, the appellant explained to the Court that he had no documents to file because all the documents supporting the assessments were in the possession of the Minister of National Revenue (''the Minister''). On reading the Notice of Appeal and the Reply to the Notice of Appeal it seemed to me that this was indeed the case, although I did not consider it appropriate to rule immediately on the motion since the question in my mind was why an appellant unrepresented by counsel would be appealing under the general rather than the informal procedure. The appellant thereupon told the Court that he was unaware of the difference between the general and the informal procedures as to their effect and had simply signed the Notice of Appeal prepared and drafted for him by the accountant.

[3]            The Court then asked the lawyer bringing the motion whether the amounts of income tax at issue were within the prescribed limit for the application of the informal procedure. Counsel informed the Court in writing that they were. The appellant subsequently brought a written motion before the Court requesting permission to have the informal procedure apply. As counsel for the respondent opposed the motion, it was heard before the hearing of the appeals on the merits. The appellant explained that he seemed to recall the accountant thinking that, for the purposes of the prescribed limit, the amounts for all the taxation years under appeal had to be added up. The appellant himself knew nothing of the conditions and repercussions of the election. Counsel for the respondent argued that the respondent was an innocent party and should not have to pay for the appellant's ignorance.

[4]            The Court pointed out that Parliament itself allowed taxpayers to challenge assessments by the Minister, without incurring costs with respect to counsel for the Minister, where the amounts at issue are within the prescribed limit. It is in that spirit that a ruling on the appellant's motion to have the informal procedure apply must be made. Although it would have been preferable to bring the motion at the status hearing, it should be borne in mind that that hearing took place by conference call. Based on the facts established at the hearing and set out above, the Court therefore considers that granting the motion is in the interests of justice. The aforementioned motion to have the appeals dismissed for failure to file and serve the list of documents accordingly lapses.

[5]            The appeals themselves deal with the 1989 to 1993 taxation years. At issue is whether the appellant failed to declare income from video poker machines in computing his income for those taxation years.

[6]            The facts on which the Minister relied in reassessing the appellant are set out in paragraphs 6 and 7 of the Reply to the Notice of Appeal (''the Reply''), as follows:

[TRANSLATION]

6.              In making the reassessments at issue, the Minister of National Revenue made the following assumptions of fact inter alia:

(a)            During the 1989 to 1993 taxation years, the appellant was the sole proprietor of a convenience store located at 6 rue Palm in Montréal, Quebec.

(b)            As part of this business, the appellant made available to his customers a video poker gaming machine owned by Les Amusements Wiltron inc. or a corporation controlled by it (hereinafter collectively referred to as ''Wiltron'').

(c)            Under the agreement between the appellant and Wiltron, the net income generated by the gaming machine was to be divided between them based on predetermined percentages, with the appellant receiving not less than 50% of this income.

(d)            A Wiltron representative periodically visited the appellant's business in order to determine the net income to be shared and to collect the share owed to Wiltron.

(e)            Mechanical and electronic counters on each of the Wiltron gaming machines made it possible to calculate the net income generated since the previous visit.

(f)             Access to the counters was obtained using a key kept in the lessee's possession and another key brought by the Wiltron representative.

(g)            Any dispute between Wiltron and a lessee about the amount of income to be shared was settled by giving the lessee the benefit of the doubt.

(h)            In a search of the Wiltron premises, carried out under a warrant on August 10, 1993, Revenue Canada officers obtained reliable computer data, as indicated below, showing the net income generated by Wiltron's gaming machines (including the one located in the appellant's convenience store), and indicating, among other things, Wiltron's and the appellant's respective shares for each month of the 1991 to 1993 taxation years as well as Wiltron's share for the 1989 and 1990 taxation years (during which two years the appellant's share was at least equal to Wiltron's).

	WILTRON	CONVENIENCE STORE	WILTRON	CONVENIENCE STORE
	1989	1989	1990	1990
January	$    0	$    0	$ 688	$ 688
February	$ 772	$ 772	$ 744	$ 744
March	$ 644	$ 644	$1,982	$1,982
April	$ 178	$ 178	$1,402	$1,402
May	$ 212	$ 212	$ 736	$ 736
June	$ 185	$ 185	$2,296	$2,296
July	$ 117	$ 117	$ 537	$ 537
August	$ 353	$ 353	$2,100	$2,100
September	$ 681	$ 681	$ 604	$ 604
October	$ 272	$ 272	$ 915	$ 915
November	$ 529	$ 529	$1,117	$1,117
December	$ 520	$ 520	$1,335	$1,335

	WILTRON	CONVENIENCE STORE	WILTRON	CONVENIENCE STORE
	1991	1991	1992	1992
January	$1,338	$1,339	$1,099	$1,099
February	$2,082	$2,083	$ 429	$ 429
March	$1,513	$1,517	$ 447	$ 448
April	$1,754	$1,754	$ 342	$ 342
May	$ 948	$ 948	$ 502	$ 504
June	$1,162	$1,162	$ 410	$ 411
July	$ 476	$ 476	$ 380	$ 380
August	$1,023	$1,023	$ 533	$ 533
September	$ 489	$ 589	$ 501	$ 502
October	$1,262	$1,264	$ 354	$ 354
November	$ 455	$ 457	$ 259	$ 259
December	$ 395	$ 396	$ 271	$ 273

	WILTRON	CONVENIENCE STORE
	1993	1993
January	$ 330	$ 330
February	$ 181	$ 182
March	$ 170	$ 169
April	$ 167	$ 166
May	$ 257	$ 246
June	$ 414	$ 415
July	$ 550	$ 549
August	not available	not available
September	not available	not available
October	not available	not available
November	not available	not available
December	not available	not available

(i)             During the audit of his affairs, the appellant was unable to provide the auditors with either the cash register tapes or the deposit slips relating to the business's income. The appellant acknowledged that he had had a gaming machine but had not declared any income from video poker.

(j)             The appellant declared as income from video poker only $448 on January 16, 1991, $1,227 on January 30, 1991, $399.54 on February 16, 1991, and $373.84 on March 1, 1991.

(k)            The share of the income kept by the appellant was at least equal to the share remitted to the Wiltron representative on his periodic visits.

(1)            When first contacted by the auditor, the appellant stated that he had had a video poker machine for only a few days.

(m)           When the auditor informed him that the income from the video poker machine amounted to approximately $38,000 over the five-year period, the appellant acknowledged on reflection that the auditor was right and that he had not declared that income.

(n)            An examination of the appellant's books showed that, on certain days in early 1991, the appellant made two deposits on the same day and that, for some of those days, one of the deposits was indicated to be with respect to ''poker''.

(o)            The appellant deposited his receipts (or at least an amount supposedly representing his daily receipts) every day. The appellant was unable to provide the cash register tapes indicating his daily sales.

(p)            In his business's financial statements, the appellant claimed no salary expense and he declared the following gross income and net income (loss) on his T1 returns.

	1989	1990	1991	1992	1993
Gross income	$285,508	$415,319	$356,725	$294,343	$264,257
Net income (loss)	($ 14,112)	$ 4,875	$ 7,320	$ 7,857	$ 5,082

7.              In computing his business income for his 1989 to 1993 taxation years, the appellant knowingly, or under circumstances amounting to gross negligence, failed to include amounts of at least $4,463, $14,456, $10,448, $5,534 and $2,070 respectively, and he was therefore assessed penalties of $203.94, $1,754.22, $1,219.31, $721.90 and $152.21 for those taxation years under subsection 163(2) of the Income Tax Act.

[7]            The appellant's grounds for appealing are set out in his Notice of Appeal, as follows.

                [TRANSLATION]

3.              The said estimated video poker machine income is based on data from the computer system of the owner of the machines.

I dispute the inclusions in my income, for the following reasons:

1.              I dispute the video poker machine income that, in your view, I received during the years from 1989 to 1993 inclusive. The evidence on which you rely in that regard is based on data from the computer system of the owner of the machines, not on tangible evidence from a counter (for example, a weekly or monthly reading).

2.              These income figures are unrealistic. Logic and common sense is on my side: it is inconceivable that a business of this size, located in this neighbourhood (considered one of Montréal's poorest) could generate income such as you indicate for March, June and August 1990 and February 1991, for example. . . .

[8]            Only the appellant testified in support of his appeals. The respondent on the other hand called several witnesses. The appellant described himself as a pensioner and stated, with regard to his education, that he had completed Grade 5.

[9]            The appellant admitted subparagraphs 6(a) to 6(f) and 6(i) of the Reply. Concerning subparagraph 6(g), he said there were never any disputes between him and those who collected the money for Wiltron.

[10]          With respect to subparagraph 6(h), the appellant suggested that the average monthly income from the video poker machine might be $117. Wiltron collected on alternate Fridays.

[11]          As regards subparagraph 6(j) and the last part of subparagraph 6(n), the appellant stated that he never declared and never intended to declare income from video poker, and that he was at a loss to understand why references to video poker would have been found four times in his journal, some excerpts from which were produced as Exhibit I-2. He gave as the reason for his not declaring the video poker income the fact that the first person who came to recruit him as a Wiltron customer told him to discard the receipts Wiltron issued when the collections were made.

[12]          The appellant admitted subparagraph 6(k). Concerning subparagraph 6(l), he stated that he did not recall making any such statement to the auditor. He explained that what had in fact happened was that he had taken a first video poker machine on a trial basis, and then had had such a machine in his convenience store constantly. He denied subparagraphs 6(m) and (n). He admitted subparagraph 6(o), but added that he did not make deposits on Fridays, Saturdays or Sundays. He admitted subparagraph 6(p).

[13]          Under cross-examination, the appellant explained that he had purchased the convenience store in 1983 for his wife, who worked in a factory that produced bags. He himself worked until 1991 as an operator and machinist for Jenkins Canada Inc. and worked at the convenience store in the evenings. Apparently he gave up the video poker machine in 1994 and sold the convenience store early in 1996.

[14]          In 1996, Roland Lorrain, now retired, was a business file auditor with Revenue Canada. He had, that year, the special assignment of computing income from video poker. He phoned the appellant on January 18, 1996 and went to see him on January 22, 1996. He reviewed the journal and the ledger. Noting that some amounts entered in the ''income'' column were with respect to ''poker'', he subtracted those amounts from the appellant's unreported poker income. In computing the appellant's income, Mr. Lorrain included the income from video poker shown in the computer printouts found during the search of the Wiltron premises. He related again the conversation referred to in subparagraph 6(m) of the Reply. On February 13, 1996, he sent the proposed reassessment (Exhibit I-3) to the appellant.

[15]          In 1993, Pierre St-Aubin, now retired, was a regional computer investigator with Revenue Canada. He explained that he was a member of the team set up to search the Wiltron premises, where there were approximately 10 workstations, all but one of which were networked. The investigators seized three computers, including two that were on the network and the one that was not. Mr. St-Aubin stated that the data from the computers were accurately transferred to Revenue Canada's own computers. The hard disks from Wiltron's computers were removed and replaced with other hard disks containing similar data that were returned to Wiltron. The original hard disks were kept for the criminal proceedings. Additional copies were also made, in order to ensure that the electronic data were preserved. Wiltron used two software packages: ''Silent Partner'' for the network, and ''MKS'' for the stand-alone computer.

[16]          The Notices of Reassessment were filed as Exhibit I-4. The income tax returns for 1990 to 1995 were produced as Exhibit I-5. A computer printout containing the essential points of the return for 1989 was produced as Exhibit I-7.

[17]          Raymond Dugré is an investigator-analyst with Revenue Canada. He too participated in the August 10, 1993 search of the Wiltron premises. It was he who analysed the data seized there. He stated that Wiltron might have had 1,500 customers and perhaps 2,500 machines. He explained Exhibits I-8 to I-13, which will be discussed in the following paragraph. As Exhibit I-14, he produced a photocopy of the Cardex card found on the Wiltron premises, which showed Dépanneur Max as customer No. 153 and indicated the address and the home and office telephone numbers. As Exhibit I-15, Mr. Dugré produced the full set of the routes of the Wiltron collectors for the period from September 1992 to February 1993. Page LC-3 of Exhibit I-15 indicates that collections at Dépanneur Max were made on Fridays and that the store is located in Montréal's Saint-Henri neighbourhood. There is an asterisk beside some customers' names. The reason given for the asterisks was that collections were made from these customers weekly, because they were either very large customers or difficult ones. The profits from the video poker machines could be divided on a 50/50 or a 40/60 basis, depending on what was negotiated. Mr. Dugré explained that he dealt with the 1991, 1992 and 1993 taxation years, and that a decision had been made to reassess proportionally for the 1989 and 1990 taxation years.

[18]          Exhibits I-8, I-9 and I-16 are computer printouts of the appellant's income according to Wiltron. The appellant was reassessed on the basis of that information, which includes the convenience store's name, customer number and address, and the name of the contact person (Maxime Huot). Shown as well are the identical monthly receipts of Wiltron, the owner of the machine, and of the appellant, the lessee of the machine. These exhibits also contain records for the various machines installed at and removed from the convenience store, in addition to comparative yearly figures.

[19]          Exhibits I-10, I-11, I-12 and I-13 are similar computer data, but for different convenience stores located in the same neighbourhood or the same type of surroundings as the appellant's store. They indicate incomes comparable to or even higher than that earned by the appellant. These comparable figures were produced because the appellant had stated to counsel for the respondent and contended in his Notice of Appeal that competitors had lower video poker incomes than he and that, in those convenience stores' geographic location, it was impossible to earn the incomes determined by the Minister on the basis of Wiltron's computer data.

[20]          Exhibit I-17 is a document created using Wiltron's computer data on collections. For Dépanneur Max, it indicates $448 for January 14, 1991, $1,227 for January 28, 1991, $855 for February 11, 1991, $810 for February 25, 1991, and $119 for March 11, 1991, which explains subparagraph 6(j) of the Reply. It is because the amounts of $448 and $1,227 had been recorded in the journal as revenue and included in the appellant's income that Mr. Lorrain subtracted them from the amount added to the appellant's income.

[21]          Jacques Gosselin described himself as a business owner. He began working for Wiltron around 1988. Initially, he worked in collections and sales; later, he was put in charge of the collectors. It was he who determined the routes and conducted checks. Collectors were to fill in the record for the mechanical and electronic counters. They calculated the proceeds with the customers and requested payment from them. At the end of their visits, they took the counter slips they had left on the previous visit and left in the counters new slips on which they recorded the new readings from the counters. On the slips from previous visits, they also entered the new readings from the counters. The difference between the old and new readings was the amount to be divided between Wiltron and the customer. Cheques were accepted as payment very rarely; payments were usually made in cash. Each customer was given a receipt, of which Wiltron kept a copy. The collectors took the money along with the two types of documents, that is, the counter slips and the copies of the receipts, back to the office. The data were entered into a computer by one person.

[22]          The appellant's convenience store, known as Dépanneur Max, was Wiltron's customer No. 153. Mr. Gosselin explained that this customer number, 153, meant that the appellant was one of Wiltron's first customers, as customer numbers were assigned in numerical order. Mr. Gosselin stated as well that Dépanneur Max was not a large customer. He did not say, however, what he thought Dépanneur Max's income was: the question was not put to him and he produced no documentary evidence on that point. In Mr. Gosselin's opinion, the customer knew that income tax was payable.

[23]          Mr. Gosselin saw the counter slips produced as Exhibits I-18 and I-19. He said that the counter slip produced as Exhibit I-18 might have been from a business that Wiltron had acquired, because Wiltron used slips like that produced as Exhibit I-19. The slip shows the data referred to by Mr. Gosselin.

[24]          Michèle Gendron is now self-employed. From 1991 to 1994, she worked for Wiltron. She produced the printouts for the collectors' routes, and entered into the computer the data they brought back. Using the ''Silent Partner'' software, for each customer she entered the data from the counter slips and the figures for the amounts collected, as provided by the collectors. She also entered data on the location of the machines. The software was used to record the complete inventory of the machines.

[25]          Ronald Miron described himself as self-employed. He worked for Wiltron from 1991 to December 1994. For eight years previously, he had worked as a representative for a business that leased electronic games. With Wiltron, he was a collector. Routes were assigned to him, and he collected the money. Every morning, he reported to the office and found in his pigeonhole his route for the day. He was also given information about the types of machines and the percentages that had been set. When he arrived on a customer's premises, he asked for the key, read the counter and recorded the reading on the counter slip left in the machine. Using the previous and the new readings, he made out an invoice to the customer, indicating the respective shares of Wiltron and the customer. He gave one copy to the customer and handed the other copy over to Wiltron. He left in the counter a new slip indicating the current reading. Mr. Miron stated that he himself never told customers not to declare income from the gaming machines. He knew the appellant and the appellant's wife very well and showed a great deal of sympathy for them.

[26]          Linda Moreau now works as a secretary and receptionist. She held a similar position with Wiltron from September 1989 to November 1993. Her work there involved taking calls, co-ordinating repairs to the machines and entering data into a computer. Ms. Moreau was shown Exhibit I-19, a counter slip; it was the right slip. When she received counter slips from the collectors, she entered the readings from the counters into the computer under each customer's name. She then gave the slips to her immediate supervisors.

Argument and conclusion

[27]          The appellant argued that Jacques Gosselin's testimony confirmed that the video poker machines in his convenience store did not produce a great deal of income, and again suggested that they generated only $117 per month.

[28]          Counsel for the respondent argued that, while the 1989 to 1992 taxation years were statute-barred under subsection 152(4) of the Income Tax Act (''the Act''), the appellant had admitted that he had reported no income from video poker. The Minister was thus entitled to reassess the appellant for those years.

[29]          Concerning the amounts added to the appellant's income, counsel for the respondent argued that there was no reason Wiltron would have exaggerated those amounts. In fact, if any changes had had to be made to the appellant's income as recorded by Wiltron, they would have decreased rather than increased it. Jacques Gosselin's testimony that the income generated by the appellant was marginal must be understood in the context of the higher incomes earned by other gaming machine lessees. The collectors issued receipts to the appellant, and there is no reason to believe that the data entered in Wiltron's computer were not reliable. In any case, the appellant destroyed those receipts and in so doing became the author of his own misfortune. Counsel for the respondent therefore asked the Court to rule that, on a balance of evidence, the appellant's income from video poker machines was as determined by the Minister on the basis of the data obtained from the owner of the machines.

[30]          Counsel for the respondent further argued that, since the appellant knowingly failed to declare the income from these machines, he was subject to penalties assessed under subsection 163(2) of the Act.

[31]          The allegations made by the respondent in the Reply to the Notice of Appeal have been fully proven by the witnesses who were officers of the Minister, and their testimony was corroborated by the witnesses who were employees of Wiltron. The witnesses were not present during each other's testimony. The appellant was aware of the evidence the respondent was going to adduce, and yet he produced no contrary evidence. For example, he did not ask either Jacques Gosselin or Ronald Miron any questions about the approximate amount of the income from the machines at his convenience store. Mr. Miron, who was the regular collector for the appellant's store for several years, could have recalled the approximate average monthly income amount, but the appellant did not ask him any questions. One can only think that the suggested figure of $117 a month is unreasonable. It is hardly plausible that a business leasing video poker machines would set up an entire leasing and collection system, involving a number of employees, for the meagre income suggested by the appellant.

[32]          As regards the penalties assessed under subsection 163(2) of the Act, the evidence has clearly established that, in computing his income, the appellant knowingly failed to include the income from the video poker machines. The penalties assessed are therefore in accordance with the Act.

[33]          As for the years for which the Minister made reassessments outside the normal reassessment period, since the appellant made a misrepresentation attributable to wilful default, the Minister was entitled to reassess for those years.

[34]          The appeals are dismissed.

Signed at Ottawa, Canada, this 23rd day of March 2000.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

98-253(IT)I

BETWEEN:

MAXIME HUOT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Motion and appeals heard on January 17 and 18, 2000, at Montréal, Quebec, by

the Honourable Judge Louise Lamarre Proulx

Appearances

For the Appellant:                                                                                 The Appellant himself

Counsel for the Respondent:                                              Bernard Fontaine

                                                                                                                Valérie Tardif

ORDER AND JUDGMENT

                Upon a motion by the appellant under subsection 16(1) of the Tax Court of Canada Rules (Informal Procedure) to have the informal procedure apply;

                And upon hearing the statements of the parties;

                The motion is granted and the informal procedure will apply to the appeals;

                And the appeals from the assessments made under the Income Tax Act for the 1989, 1990, 1991, 1992 and 1993 taxation years are dismissed;

                The whole in accordance with the attached Reasons for Order and Judgment.

Signed at Ottawa, Canada, this 23rd day of March 2000.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]