Date: 20000613
Docket: 1999-194-IT-I; 1999-245-IT-I
BETWEEN:
DANIEL DUMAS,
LES ENTREPRISES DANIEL DUMAS INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1]
These appeals were heard together under this Court's informal
procedure in accordance with the election made by both the
appellant corporation and the appellant Daniel Dumas in
their notices of appeal. The appellant Daniel Dumas's
motion of April 13, 1999 to have the general procedure
govern his appeals was dismissed by an order issued on
July 14, 1999.
[2]
The appellant Les Entreprises Daniel Dumas Inc. ("EDD
Inc.") instituted an appeal from the assessments made for
the 1994, 1995 and 1996 taxation years, which ended on
May 31 each year. The points at issue concern additional
income of $14,084, $95,636 and $83,073 for those years
respectively as well as the related penalties assessed under
subsection 163(2) of the Income Tax Act (the
"Act"). The unreported income added allegedly
came from Les Tourbes Nirom Peat Moss Inc. ("Nirom
Inc.").
[3]
Daniel Dumas's appeals concern assessments for the 1993,
1994 and 1995 taxation years. According to amendments made to the
Amended Reply to the Notice of Appeal by counsel for the
respondent at the hearing, the matter concerns amounts of $4,512,
$24,108 and $90,227 added to the appellant's income for 1993,
1994 and 1995 respectively as well as the related penalties
assessed under subsection 163(2) of the Act. The
amounts added to the appellant's income were so added in
respect of taxable benefits received from EDD Inc.
[4]
Daniel Dumas is EDD Inc.'s sole shareholder and
director. The corporation sells and markets peat moss produced by
four companies which are shareholders of Nirom Inc. As a
shareholder of one of the four corporations, Daniel Dumas
has a 20 percent indirect interest in Nirom Inc.
EDD Inc.'s revenue came from Nirom Inc. and was
paid to it by the latter either as commissions or as
transportation expenses or as a service loan. As is the case for
EDD Inc., Nirom Inc.'s taxation year ends on May 31
of each year.
[5]
Subparagraphs 7 (c) and (d) of the Amended Reply to the
Notice of Appeal in the case of EDD Inc. (1999-245(IT)I)
contain the following allegations:
[TRANSLATION]
7.
In making the reassessments in issue, the Minister made in
particular the following assumptions of fact:
(c)
the appellant's balance sheet for each of the years was
balanced with the "Owed to director" account;[1]
(d)
as the "Owed to director" account on the
appellant's books was a dummy account,
(i)
the appellant's expenses were overstated by the amount of the
shareholder's personal expenses;
(ii)
and the appellant's income was understated.
[6]
Daniel Dumas and Richard Brillant, C.A., testified
for the appellants. Marie-Claude Marcoux, a technical
adviser who conducted the audit, and Jeannine Claveau, an
appeals officer, testified for the respondent.
[7]
As a result of calculations made by the appellants'
accountant, Richard Brillant, C.A., based on the
financial statements of EDD Inc. and Nirom Inc.
(Exhibit A-1), Mr. Dumas admitted that certain
amounts of income received by EDD Inc. had not been reported
although they had been deducted by Nirom Inc. These
included, for EDD Inc.'s 1994 taxation year, an additional
amount of $1,487 received as revenue from transportation, for the
1995 taxation year, an additional amount of $83,593 received by
EDD Inc. as commissions, for EDD Inc.'s 1996 taxation
year, and an additional amount of $3,470 also received as
commissions.
[8]
Mr. Dumas also admitted that the same amounts should be
included in his personal income for each of the years 1993, 1994
and 1995 respectively.
[9]
Mr. Dumas emphasized that EDD Inc. and he had acted in
good faith at all times and that it had been admitted that the
aforementioned amounts had been received but not reported, and so
the assessed penalties should be set aside in both cases.
[10] In his
testimony, Daniel Dumas first complained about the absence
of any real communication with Ms. Marcoux during the audit
conducted in the fall of 1996 and winter of 1997. He stated that,
for the purposes of the audit, all the amounts deposited at the
bank had been considered as income whereas he had received
non-taxable amounts, in particular damages in connection with an
accident his wife had had in Virginia. However, Mr. Dumas
adduced no specific evidence that such amounts were received. The
relation between these amounts and those assessed was not
established either. Mr. Dumas referred as well to the
expenses initially disallowed which he said had been the subject
of an agreement made following the objections to the assessments
in 1998.
[11] With
respect to the unreported income, Mr. Dumas stated that he
had been told [TRANSLATION] "that everything that didn't
balance would be included in income" and that [TRANSLATION]
"things would balance out elsewhere". He also said that
he had sent extensive documentation on all transactions and that
officials had refused to meet his representative on the pretext
that the matter was already closed.
[12] With the
aid of Exhibit A-1, and more particularly its first
three pages, Mr. Dumas then traced the only amounts which,
according to him, had not been included in EDD Inc.'s
income but had been deducted by Nirom Inc. as either
commissions or transportation expenses. These were the
above-mentioned amounts of $1,487, $83,593 and $3,470 for EDD
Inc.'s 1994, 1995 and 1996 taxation years. The explanations
provided as to why these amounts had not been included in EDD
Inc.'s income remained quite vague. My understanding of
Mr. Dumas's testimony regarding 1994 and 1995 is that
the non-included income represented year-end adjustments with
respect to commissions in 1994 and with respect to transportation
in 1995, whose amounts were allegedly paid later. For 1996, the
amount of $3,470 was said to represent an additional payment of
an advance on commissions. He said there had been 27 payments
instead of 26 and that there had simply been an omission to add
the additional payment to income for the year.
[13] In
cross-examination, Mr. Dumas said he was EDD Inc.'s
only director and that he had been responsible for keeping the
books, although he had not made all the entries himself over the
years in issue. Another person made the entries in 1995 and 1996.
However, he was the only person who signed the cheques.
Mr. Dumas was one of four directors of Nirom Inc; he
did not make book entries but did sign the cheques.
[14] Counsel
for the respondent had Mr. Dumas file a number of documents
in evidence, including EDD Inc.'s annual financial
statements for the years in issue (Exhibits I-2,
I-3 and I-4), a record of transfers made by
EDD Inc. to Mr. Dumas from January 1 to
December 31, 1993 (Exhibit I-1), a statement of
revenue and expenditure concerning the transportation of peat
moss by EDD Inc. for Nirom Inc. from June 1994 to May
1995 (Exhibit I-5) and a cheque for $6,518.68 dated
May 31, 1995 made out by Nirom Inc. to EDD Inc.
(Exhibit I-6). Counsel for the respondent tried to
show by these means that only the amount of $6,518.68 was
included in EDD Inc.'s income as representing the
transportation revenue for May 1995, whereas an amount of
$95,568.68 should have been so included, a difference of
$89,050.
[15]
Richard Brillant is the appellants' accountant and a
partner with Groupe Malette Maheu. He became involved in the
appellants' files toward the end of the audit conducted by
Ms. Marcoux of Revenue Canada in 1998. However, it was
Raymond Malenfant from the same firm who undertook a review
of EDD Inc.'s financial statements based on information
provided by Mr. Dumas during the years in issue. It was
mainly with Mr. Malenfant that Ms. Marcoux communicated
in the course of her audit.
[16] According
to Mr. Dumas, Mr. Malenfant had serious heart trouble
on two occasions and was only working part time. For this reason,
the appellants' files were transferred to Mr. Brillant
in early 1998. Mr. Dumas testified that this was also the
reason why Mr. Brillant had been called as a witness, not
Mr. Malenfant.
[17] In his
testimony, Mr. Brillant tried, with the aid of
Exhibit A-1 which he himself had prepared, to explain
that only the admitted amounts of $1,487, $83,593 and $3,470 had
not been reported by EDD Inc. for 1994, 1995 and 1996
respectively. Thus, with respect to the 1995 taxation year,
Nirom Inc.'s comparative financial statements for
1995-1994 (Exhibit A-1, page 13) show that
transportation expenses amounted to $1,207,102, while commissions
paid totalled $186,615.[2] Nirom Inc.'s comparative financial statements
for 1996-1995 (Exhibit A-1, page 23) show
transportation expenses of $1,293,102 and commissions of $100,615
for 1995. According to Mr. Brillant, the difference of
$86,000 added to Nirom Inc.'s transportation expenses
was not, subject to adjustment, included in EDD Inc.'s
income. And yet, in the reconciliation exercise represented by
Exhibit A-1, the commission income included in
EDD Inc.'s income for the 1995 taxation year was
apparently $75,435, while the transportation income was only
$1,207,102 (Exhibit A-1, page 2). On the same
page, it is indicated that Nirom Inc. claimed an expense of
$161,745 in respect of commissions paid.[3] If an amount of $2,717 representing
commissions paid to third parties is subtracted, the balance of
$159,028 should have been included in EDD Inc.'s income.
However, as only $75,435 was included, Mr. Brillant
determined that the unreported commission income was $83,593. He
also set Nirom Inc.'s transportation expense at
$1,207,102, that is, the same amount as that which he indicated
as being EDD Inc.'s transportation income
(Exhibit A-1, pages 2 and 10). And yet, as stated
above, although the amount of $1,207,102 is that shown as
Nirom Inc.'s transportation expense for 1995 in its
1995-1994 comparative statements (Exhibit A-1,
page 13), it is the amount of $1,293,102 that appears in the
1996-1995 comparative statements (Exhibit A-1,
page 23).
[18] However,
Exhibit I-5 shows total transportation income of
$1,123,018.68 for EDD Inc. for the fiscal year ended on
May 31, 1995. That amount includes revenues of $6,518.68
entered for transportation for May 1995. Yet,
Exhibit I-6 shows a total of $95,568.68 for
transportation for May 1995. According to these last two
documents, total transportation revenues for 1995 should
therefore be $1,212,068.68, not the $1,123,018.68 shown in
Exhibit I-5, or $1,207,102, the figure appearing in
the 1995-1994 comparative financial statements (see
Exhibit A-1 pages 2, 10, 12 and 13). Thus,
according to these two documents alone, transportation income for
the fiscal year ended on May 31, 1995 would be $4,966.68
greater than the amount indicated in the financial statements.
This amount should normally be added to the unreported amount of
$83,593 in revenue from commissions.
[19] In
addition, the T-20 report filed in evidence by
Ms. Marcoux shows two additional adjustments to EDD
Inc.'s transportation income for 1995: a $76,000 rebate paid
on May 31, 1995 and an exchange rate adjustment of $8,091,
for a total of $84,091. If this amount, which is consistent with
the worksheets submitted by the taxpayer, is added to the
transportation income of $1,212,069 mentioned above, one arrives
at a total of $1,296,160 which was apparently received as
transportation income by EDD Inc. in 1995
(Exhibit I-8, page 5). This amount is slightly
greater than the $1,293,102 figure shown as Nirom Inc.'s
transportation expense in the 1996-1995 comparative
statements (Exhibit A-1, page 23).
[20]
Mr. Dumas explained in his testimony that the transportation
expenses for a year were first of all billed at the rate agreed
upon the previous year and that this rate was then periodically
revised. He stated that certain year-end adjustments were thus
required to reflect the expenses actually paid by Nirom Inc.
and the amounts received by EDD Inc. on that account.
[21] If the
transportation expenses of $1,293,102 and commissions of
$100,615, shown in Nirom Inc.'s comparative statement
for 1996-1995, are added for the 1995 taxation year, we
obtain a total of $1,393,717 (Exhibit A-1,
page 23). This total reduced by an amount of $2,717 for
commissions paid to a third party (Exhibit A-1,
page 2), namely $1,391,000, should normally be shown as
revenue of EDD Inc. for 1995 in its 1996-1995 income
statement. Yet, a figure of $1,282,537 is indicated: $75,435 as
commission income and $1,207,102 as transportation revenue
(Exhibit A-1, page 16). The difference is
$108,463. The same difference is obtained, still taking into
account the commission expenses paid to a third party, when the
figures in the comparative statements of EDD Inc. and
Nirom Inc. for 1995-1994 (Exhibit A-1,
pages 12 and 13) are compared. The difficulty stems both
from the fact that, in Nirom Inc.'s financial
statements, commissions paid were subsequently transformed into
transportation expenses and from the fact that a portion of the
$186,615 in total commissions paid, namely $24,870, represents
"commissions US". If the "commissions US" do
not constitute income for EDD Inc., as
Exhibit A-1 suggests, the traced difference of
$108,463, less this amount of $24,870, yields the result which
Mr. Brillant reached, that is, $83,593. However, the
transformation of a portion of the commissions, only part of
which would have gone to EDD Inc., into transportation
expenses normally payable by Nirom Inc. exclusively to
EDD Inc. should have resulted in an increase in the
latter's income.
[22] Thus, as
may be seen, the amendments or corrections made to the figures
shown in the various documents and in the income statements
create an enormous amount of confusion and make difficult any
precise and accurate reconciliation.
[23] For 1994
and 1996, the explanations given were brief. The figures used in
Exhibit A-1 correspond to those appearing in the
income statements of Nirom Inc. and EDD Inc. According to
those documents, unreported income amounted to only $1,487 for
the 1994 taxation year and $3,470 for the 1996 taxation year.
However, it is difficult to take the exercise any further since
the explanations provided by Mr. Dumas and Mr. Brillant
essentially concerned a reconciliation that was attempted between
the expenses claimed by Nirom Inc., based on its income
statements, in respect of transportation expenses and commissions
and the revenue reported by EDD Inc., also based on its
income statements. First, since what is involved is unreported
income, a simple comparison of income statements does not
necessarily provide an overall picture of the situation since
amounts not reported by EDD Inc. were not necessarily
deducted by Nirom Inc. and are therefore not necessarily
represented in its income statements.
[24] But there
is more. The reconciliation exercise which Mr. Dumas and
Mr. Brillant conducted was not at all intended to demolish
the allegations of fact made in subparagraphs 7 (c) and
(d) of the Reply to the Notice of Appeal, which are reproduced in
paragraph [5] of these reasons. Those allegations are that
the corporate appellant's balance sheet was balanced with the
"Owed to director" account and that since that account
was a dummy account, the expenses were overstated and, more
important for us here, income was understated.
Exhibit A-1, on which Messrs. Dumas and Brillant
relied and which contains some 28 pages, provides no
explanation on this point.
[25] It was in
fact by analyzing EDD Inc.'s "Owed to director"
account and the transfers made to Mr. Dumas that the
auditor, Ms. Marcoux, came to the following conclusions:
(1) that EDD Inc. had understated its revenues,
(2) that EDD Inc. had overstated its expenses by paying
certain personal expenses of its sole shareholder Mr. Dumas,
and (3) that EDD Inc. had made large transfers to
Mr. Dumas of amounts that were not owed him. As the figures
shown in the worksheets prepared by Mr. Dumas himself and
given to Ms. Marcoux differed significantly from those
appearing in the financial statements, Ms. Marcoux proceeded
with an in-depth analysis of income and expenses since the
accountant at the time, Mr. Malenfant, had apparently told
her that the balance of the "Owed to shareholder"[4] account
[TRANSLATION] "was established by determining the difference
in order to balance the balance sheet"
(Exhibit I-8, page 4). (See also
Exhibits I-1 to I-4 and I-12 to
I-14.) Apart from the payment of certain personal expenses,
Ms. Marcoux determined the existence of additional revenues
of EDD Inc. of $21,744, $95,636 and $100,435 for the 1994,
1995 and 1996 taxation years respectively. The question of
personal expenses was settled at the objection stage. As for the
discrepancies in the "Owed to shareholder"[5] account attributable to
additional revenues, Ms. Marcoux determined that, for 1995,
these discrepancies were in respect of, among other things,
unreported transportation income of $89,058 referred to above.[6] For 1996, she
determined that an amount of $2,621 had not been reported as
commission income and that amounts totalling $85,793 entered as
additional capital investment by the shareholder and reported as
such by the accountant did not correspond to Mr. Dumas's
actual investments, but were simply cash transfers by
EDD Inc. into its own investments.
[26] Two
adjustments were subsequently made to the additional income
initially determined for EDD Inc.'s 1994 and 1996 taxation
years and they actually correspond to investments by
Mr. Dumas. The amounts concerned are $7,660 for the 1994
taxation year and $17,362 for the 1996 taxation year. The amounts
of additional revenue were thus reduced by those amounts for
those two years and are now $14,084 and $83,073 for those years
respectively. The $95,636 figure remained unchanged for the 1995
taxation year.
[27] Neither
Mr. Dumas nor Mr. Brillant commented on the
calculations shown in Exhibit I-8. In her testimony,
Ms. Marcoux also explained the analytical work on the basis
of which she had determined that transfers of funds from EDD Inc.
constituted taxable benefits received by Mr. Dumas in the
1993, 1994 and 1995 taxation years. Once again, the analysis
focused on changes in the "Owed to director" account,
having regard to EDD Inc.'s financial statements and the
worksheets filed by the accountant and prepared by Mr. Dumas
himself (Exhibits I-1, I-11, I-12 and
I-13). As stated above, significant differences were noted
between the figures shown in the worksheets and those in the
financial statements. Ms. Marcoux concluded from this that
the balance of the "Owed to director" account shown in
the financial statements was fictitious, that it had been used to
balance the balance sheet and that it in fact represented
unreported income and personal expenses of Mr. Dumas paid by
EDD Inc.
[28]
Ms. Marcoux also noted large transfers from EDD Inc. to
the shareholder's personal account after the end of each year
in order to cancel the account's balance. She thus observed
transfers of $60,000 in July 1994, $130,000 in July 1995 and
$105,191 in July 1996.
[29] Analyzing
next all the transfers made to Mr. Dumas each month for the
periods from June to December 1993, January to December 1994 and
January to December 1995 (see Exhibit I-16), Ms.
Marcoux determined that Mr. Dumas had appropriated funds
totalling $12,172, $24,108 and $90,227 for 1993, 1994 and 1995
respectively. The amount of $12,172 initially assessed for 1993
was subsequently reduced to $4,512 to reflect two capital
investments made by Mr. Dumas in EDD Inc. on
November 23, 1993, one of $2,660 and the other of $5,000,
for a total of $7,660 (see Exhibit I-17, page 6).
The adjustment to EDD Inc.'s unreported income for its
1994 taxation year to reflect this amount of $7,660 is mentioned
above.
[30] The other
adjustment, of $17,362, made to EDD Inc.'s unreported
income for its 1996 taxation year was not taken into account in
the assessment for Mr. Dumas's 1995 taxation year since
the transfer or investment by Mr. Dumas was made in April
1996 (Exhibit I-17, page 6).
[31] The
testimony of Jeannine Claveau, the appeals officer,
essentially corroborated Ms. Marcoux's testimony.
Ms. Claveau stated that she had not found it normal that
EDD Inc. had incurred operating losses in its 1995 and 1996
taxation years and that, being basically a service-providing
company, it had not had all its expenses reimbursed by
Nirom Inc.
[32]
Ms. Claveau also explained that all the expenses and balance
sheet items had been audited and that the balance sheet did not
balance except with the "Owed to director" account. She
said that all the other items "balanced".
Ms. Claveau also stated that the matter of the expenses had
been settled and that the adjustments to unreported income had
been made on the presentation of evidence that actual capital
investments had been made by Mr. Dumas. These were the
adjustments referred to above. According to Ms. Claveau, there
was no other evidence that Mr. Dumas had made additional
investments in EDD Inc.
[33] The
explanations provided by Ms. Marcoux and Ms. Claveau
concerning their analyses of the financial statements, and more
particularly of the "Owed to director" account, were
not directly contradicted by Mr. Dumas or Mr. Brillant.
Mr. Dumas in fact was content with getting Ms. Claveau
to admit that entertainment expenses necessarily had to be
incurred in order to market and sell peat moss around the
world.
[34] As stated
above, the reconciliation done by Mr. Brillant
(Exhibit A-1) concerned only EDD Inc.'s
income statements as compared with those of Nirom Inc. and
the document filed in evidence contains absolutely no useful
information respecting the "Owed to director" item, the
analysis of which was the factor that triggered the
assessments.
[35] Upon
analysis of the testimony and the documentary evidence presented
by the appellants, I am certainly unable to conclude that they
showed on a balance of probabilities that the assessments made
were incorrect with respect both to EDD Inc. and to
Mr. Dumas personally.
[36] As to the
penalties assessed under subsection 163(2) of the
Act, the reasons given were that Mr. Dumas, being the
only person doing EDD Inc.'s bookkeeping, could not have been
unaware that the results reported in the financial statements
contained false statements and, more particularly, that the
balance of the "Owed to shareholder" account shown in
the financial statements did not correspond to what was indicated
in his own worksheets. The size of the unreported amounts
relative to the taxable income reported was also considered.
Lastly, Mr. Dumas's appropriation of funds when he knew,
given the documents he himself had prepared, that EDD Inc.
did not really owe him the amounts that had been transferred to
him, was taken into consideration by Ms. Marcoux in her
report on this point (see Exhibit I-8).
[37]
Considering the evidence adduced and having regard to the reasons
given, I find that the false statements could only have been made
knowingly and that this alone is sufficient reason to uphold the
penalties.
[38] I will
add in closing that, as counsel for the respondent emphasized, in
the circumstances of these cases, a negative inference can very
definitely be drawn from the fact that Mr. Malenfant, the
appellants' accountant who prepared the financial statements,
was not called as a witness. On this point, reference may be made
to, inter alia, Enns v. M.N.R.,
87 DTC 209 and the authorities cited. I do not find
sufficient the reasons given by Mr. Dumas for not asking
Mr. Malenfant to testify.
[39] As a
result of the foregoing, the appeals of Les Entreprises
Daniel Dumas Inc. for the 1994, 1995 and 1996
taxation years and the
appeals of Daniel Dumas for the 1993, 1994 and 1995
taxation years are dismissed.
Signed at Ottawa, Canada, this 13th day of June 2000.
"P.R. Dussault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 30th day of April
2001.
Erich Klein, Revisor
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