Léger v. The Queen, docket 96-4799-IT-G

Date: 20010508

Docket: 96-4799-IT-G

BETWEEN:

ANDRÉ LÉGER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

(Delivered orally from the bench

on June 9, 2000, at Québec, Quebec,

and amended for greater clarity)

Archambault, J.T.C.C.

[1]            André Léger is contesting net worth assessments made by the Minister of National Revenue (Minister) for the 1988 to 1991 taxation years (relevant period). To Mr. Léger's income, the Minister added unreported income of $34,447 in 1988, $242,439 in 1989, $74,255 in 1990 and $170,301 in 1991. Although some of the assessments may have been made after the normal assessment period, counsel for Mr. Léger stated at the start of the hearing that she was not going to contest their validity on that basis.

[2]            The Minister also assessed a penalty for each of the four taxation years at issue on the ground that Mr. Léger had knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his tax return. The Minister also assessed a late filing penalty in respect of two taxation years. Mr. Léger has not contested the latter penalty.

[3]            Mr. Léger argued that the Minister made mistakes in computing his income using the net worth method. To make it easier to understand the issues in this case, I am reproducing here a summary of the Minister's calculations:

[TRANSLATION]

ANDRÉ LÉGER

COMPARATIVE STATEMENT OF NET WORTH	12/31/87	12/31/88	12/31/89	12/31/90	12/31/91
ASSETS
Personal assets	158,249	187,412	443,600	451,378	532,768
Business assets	0	0	0	0	0
Total	158,249	187,412	443,600	451,378	532,768
DEBTS
Personal debts	44,135	63,056	98,399	73,040	66,859
Business debts	0	0	0	0	0
Total	44,135	63,056	98,399	73,040	66,859
NET WORTH	114,114	124,356	345,201	378,338	465,909
PREVIOUS YEAR'S NET WORTH		114,114	124,356	345,201	378,338
INCREASE (DECREASE) IN NET WORTH		10,242	220,845	33,137	87,571
ADJUSTMENTS ADDITIONS
Personal expenses		36,685	36,769	33,385	37,450
Capital loss		0	17,070	13,000	18,226
Tax paid		0	0	0	4,771
Unexplained withdrawals		37,851	7,284	55,662	49,681
Total		74,536	61,123	102,047	110,128
DEDUCTIONS
Race winnings		11,428	19,879	20,788	774
Tax refund		1,012	632	0	0
Total		12,440	20,511	20,788	774
TOTAL ADJUSTMENTS		62,096	40,612	81,259	109,354
TOTAL INCOME BASED ON ADJUSTED NET WORTH		72,338	261,457	114,396	196,925

REPORTED INCOME
André Léger		37,438	19,018	36,959	19,572
Carine Bonnardeaux		453	0	3,182	7,052
Total		37,891	19,018	40,141	26,624
TOTAL DISCREPANCY		34,447	242,439	74,255	170,301
					521,442

[4]            The mistakes referred to by Mr. Léger include the following:

- absence of property owned at the start of the relevant period;

- overvaluation of some property;

- addition of accounts receivable not belonging to Mr. Léger;

- absence of certain debts;[1] and

- addition of unexplained withdrawals.

Finally, according to Mr. Léger, part of the unreported income is race winnings that are not income for the purposes of the Act.

Background

[5]            Mr. Léger testified that he was raised by his father in a bar setting, with gambling, pool games, card games and horse racing. He said that he was able to make a lot of money at a very early age by helping his father in the bar, sharing the proceeds of his father's bets on the pool games he played and betting on races, which mainly involved betting on horses owned by his father or his father's friends.

[6]            Mr. Léger said that, during the relevant period, he lived with a de facto spouse with whom he had a child. That woman worked as a dancer in bars.

[7]            According to his own testimony, Mr. Léger succumbed to the temptation to make easy money by trafficking in drugs. Moreover, he stated that he was charged with conspiracy to traffic in about 1991 or 1992, a charge to which he pleaded guilty in about 1993. He said that he was forced to admit that he had made $100,000 from drug trafficking and that he was ordered to pay that amount - at the rate of $20,000 a year - to the Minister of Justice or, in default, to serve seven months in prison. He said that he did not have the money to pay and that he opted for prison instead.

[8]            The Minister's auditor explained in her testimony that her audit began as a result of information obtained from the Royal Canadian Mounted Police. She made net worth assessments because Mr. Léger did not seem to have reported his earnings from his unlawful activities. Although the auditor gave him several periods of time to provide her with his comments on the calculations in the statement of net worth, no comments were provided between January and the end of March 1995.

[9]            The auditor explained that she reviewed the bank accounts and tried to identify each withdrawal to determine how it had been used. Unfortunately, she could not determine from that review how some of the withdrawals, which totalled $150,478 for the relevant period, had been used.

[10]          In the course of her work, the auditor examined the books of account of a number of corporations in which Mr. Léger held interests. The evidence showed that a holding company, 2700867 Canada Inc. (Holding), owned shares in four subsidiaries (subsidiaries) in 1991:

•                50 percent of 27563949 Canada Inc. (BSI) (the other 50 percent was owned by a lawyer named Belley);

•                50 percent of 27564673 Canada Inc. (MCI);

•                50 percent of 175254 Canada Inc. (ELI) (the other 50 percent was owned by a Mr. Roy); and

•                100 percent of 170931 Canada inc. (ECI).

[11]          Mr. Léger testified that he, his father and Mr. Belley each owned a third of Holding. Before Holding acquired the four subsidiaries, its three shareholders owned those subsidiaries directly. They incorporated Holding to make it easier to manage their interests in the subsidiaries. BSI operated a cocktail lounge, MCI a mini-mall, ELI a 19-unit apartment building and ECI a commercial building.

[12]          The auditor found that Mr. Léger had about $150,000 invested in that group of corporations in 1991. According to Holding's books of account for 1991, Mr. Léger owned $35,000 worth of shares of that company's capital stock and had also advanced $40,473 to it, for a total investment of $75,473. According to Mr. Léger, that amount represented all of the funds invested by him in Holding and its subsidiaries. According to the auditor, amounts owed to Mr. Léger by the subsidiaries, namely a total of $61,528 in 1990 and $75,128 in 1991, had to be added to that investment. In a previous assessment for 1991, the Minister had added additional accounts receivable of $75,474 to the amount of those investments in Holding and the subsidiaries, but those accounts receivable were eliminated in the assessments at issue here, thus taking account of Mr. Léger's submission that they had been calculated twice. Based on her review of the accounts receivable of the corporations, the auditor also found that Mr. Léger had advanced a large part of the amounts himself by making cash deposits - often in small bills - at his credit union.

Analysis

Burden of proof

[13]          First of all, the burden of proof resting on Mr. Léger in his appeals must be dealt with.[2] My colleague Judge Tardif had an opportunity to discuss the burden of proof in a case that, like this one, raised the issue of the use of the net worth method.

[14]          In Bastille v. R., [1999] 4 C.T.C. 2155 (99 DTC 431), he wrote the following at paragraphs 5 et seq.:

5         I think it is important to point out that the burden of proof rests on the appellants, except with respect to the question of the penalties, where the burden of proof is on the respondent.

6         A NET WORTH assessment can never reflect the kind of mathematical accuracy that is both desired and desirable in tax assessment matters. Generally, there is a certain degree of arbitrariness in the determination of the value of the various elements assessed. The Court must decide whether that arbitrariness is reasonable.

7         Moreover, use of this method of assessment is not the rule. It is, in a way, an exception for situations where the taxpayer is not in possession of all the information, documents and vouchers needed in order to carry out an audit that would be more in accordance with good auditing practice, and most importantly, that would produce a more accurate result.

8         The bases or foundations of the calculations done in a NET WORTH assessment depend largely on information provided by the taxpayer who is the subject of the audit.

9         The quality, plausibility and reasonableness of that information therefore take on absolutely fundamental importance.

[15]          Another of my colleagues, Judge Bowman, stated the following in Ramey v. Canada, [1993] T.C.J. No. 142 (QL) ([1993] 2 C.T.C. 2119, 93 DTC 791), at paragraph 6:

I am not unappreciative of the enormous, indeed virtually insuperable, difficulties facing the appellant and his counsel in seeking to challenge net worth assessments of a deceased taxpayer. The net worth method of estimating income is an unsatisfactory and imprecise way of determining a taxpayer's income for the year. It is a blunt instrument of which the Minister must avail himself as a last resort. A net worth assessment involves a comparison of a taxpayer's net worth, i.e. the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary. Such assessments may be inaccurate within a range of indeterminate magnitude but unless they are shown to be wrong they stand. It is almost impossible to challenge such assessments piecemeal. The only truly effective way of disputing them is by means of a complete reconstruction of a taxpayer's income for a year. A taxpayer whose business records and method of reporting income are in such a state of disarray that a net worth assessment is required is frequently the author of his or her own misfortunes.

[16]          In the instant appeals, Mr. Léger was the only person who testified in support of his position. The auditor whose work led to the assessments testified for the respondent. In assessing the evidence provided by Mr. Léger, something must be said about the failure to call certain witnesses who could have confirmed what he said. In Huneault v. The Queen, T.C.C., No. 96-1435(IT)G, February 6, 1998, at page 7 (98 DTC 1488, at page 1491), my colleague Judge Lamarre referred to certain statements that were made by Sopinka and Lederman in The Law of Evidence in Civil Cases and cited by Judge Sarchuk of this Court in Enns v. M.N.R., 87 DTC 208, at page 210:

In The Law of Evidence in Civil Cases, by Sopinka and Lederman, the authors comment on the effect of failure to call a witness and I quote:

In Blatch v. Archer, (1774), 1 Cowp. 63, at p. 65, Lord Mansfield stated:

"It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted."

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.

In the case of a plaintiff who has the evidentiary burden of establishing an issue, the effect of such an inference may be that the evidence led will be insufficient to discharge the burden. (Levesque et al. v. Comeau et al. [1970] S.C.R. 1010, (1971), 16 D.L.R. (3d) 425.)

General assessment of Mr. Léger's credibility

[17]          In the case at bar, before analysing the relevant facts in detail, it is also helpful to make some general comments on the credibility of Mr. Léger, who, I repeat, was the only person to testify in support of his appeal and who filed only one genuine document to back up his position, namely a bank statement for his account at the credit union. The other two documents were an argument letter and a covering letter. The documents attached to those two letters were not filed at the hearing. They had been sent to the Minister at the objection stage.

[18]          In my view, it would be dangerous to give credence to Mr. Léger's testimony without probative corroborating evidence in the form of documents or of testimony from credible witnesses. The relevant events occurred more than nine to thirteen years before the hearing. It is difficult for a witness to remember all the specific facts needed to dispose of legal proceedings by relying on memory alone. Moreover, it is not surprising that Mr. Léger often gave vague, imprecise answers to the questions he was asked. One example is when he was asked how a $19,000 withdrawal had been used. Yet that was quite a substantial amount for someone who reports only about $30,000 in income a year.

[19]          On the other hand, some of his answers - although not many - were clear and precise, including his statement that he always reported all of his income to the tax authorities. Yet even if I allowed all the adjustments for all of what he has identified as mistakes by the Minister - aside from the $100,000 supposedly owed to the Minister of Justice, which I will come back to - Mr. Léger's unreported income (the amounts under "total discrepancy" in the above table) would be $198,413 in 1989 and $107,020 in 1991, for a total of $305,433. For 1988 and 1990, the result would be negative differences, but even if those negative differences were subtracted from the unreported income, the total would be $207,610!

[20]          Even if I took account of some of the race winnings he says he received, more than half of which were allowed by the Minister, we would be a long way from a result indicating that all of Mr. Léger's income was reported. Here, the fact that Mr. Léger pleaded guilty to conspiracy to traffic in drugs and admitted that he was involved in lucrative unlawful activities is also an important factor in assessing his credibility. Those activities could well be the source of the income not reported by Mr. Léger.

[21]          In view of all these circumstances, even if I were not certain that he had knowingly lied, I could at the very least conclude that some of the explanations Mr. Léger gave the Court were obviously wrong.

Absence of $25,000 in petty cash at the start of the relevant period

[22]          I will deal first with the assets that Mr. Léger allegedly had at the beginning of the relevant period. He testified that he had $25,000 in cash in a strongbox at his home. Obviously, if that amount were allowed, it would have the effect of reducing the difference in the increase in his assets and his net worth and would therefore lead to a reduction in his income. Although Mr. Léger testified at length about the fact that, as a teenager, he made a great deal of money working in his father's bar and by sharing the proceeds of his father's bets and winning on races, all of these facts are not probative evidence showing on a balance of probabilities that Mr. Léger had the above-mentioned $25,000 on December 31, 1987.

[23]          It is possible that Mr. Léger made that money before 1988, but it is just as possible to imagine that he spent it at the races, in card games, on his other gambling activities and on his girlfriends. If Mr. Léger really had that $25,000 in a strongbox hidden in his home, why was his line of credit as high as $28,375 at the start of the relevant period? Why did he need to borrow $42,000 to repay the $16,000 mortgage on his home and put about $25,000 back on his line of credit? Mr. Léger testified that he used a line of credit because his money was invested in term deposits. Yet a review of his balance sheets shows that the $35,000 or so in term deposits existed at the end of 1987 and throughout the relevant period. I am therefore not satisfied by his explanation that he had an additional $25,000 on January 1, 1988.

[24]          If it had to be believed that, as he claimed, Mr. Léger always had a lot of money hidden in his home and that he kept the $25,000 there, then it would also have to be believed that, if he had it at the beginning of 1988, he also had it at the end of the relevant period. Accordingly, if an asset is added at the start of the period and for each year in the relevant period, we end up with no difference. This adjustment would have no effect on the "total discrepancy" calculated by the Minister.

[25]          I will add that Mr. Léger's assertion that he kept that substantial amount hidden in his home because he feared that the banks would go bankrupt does not strike me as very credible. First of all, Mr. Léger had term deposits worth at least $35,000 during each year in the relevant period. Moreover, as far as I know, none of the very large banking companies in Canada has gone bankrupt. It is therefore difficult to imagine that this really prompted Mr. Léger to keep $25,000 in his home.

Adjustment of $26,484 for the renovation of a home

[26]          One of the adjustments made by the Minister in calculating the cost of Mr. Léger's assets in 1988 was the addition of $26,484 for the cost of renovations or improvements made by Mr. Léger that year to a home on Rue Mont-Luc. The evidence showed that almost all of that amount had been obtained through a $42,000 loan taken out on December 17, 1987. Of the latter amount, $16,000 was to be used to refinance the first mortgage on the home, while the balance of $26,000 was to be used to reimburse the line of credit used to pay for the renovation work. According to the documentary evidence, the loan was received on January 15, 1988. The bank statements (Exhibit I-6) corroborate this evidence or, in any event, support this interpretation of the facts, since the bank account was credited with $26,455.17 on January 15, 1988.

[27]          The auditor apparently considered - and this was also what counsel for the respondent maintained in his arguments - that the home renovations were financed using the line of credit and that the deposit of $26,455.17 made it possible to put $25,000 back on the line of credit on January 22, 1988 (Exhibit I-6).

[28]          In testifying, Mr. Léger denied having made such renovations; however, Exhibit I-3, the credit application he signed, states that the $26,000 was to be used to finance renovations.

[29]          Given the date on which the loan was obtained, I think it is quite reasonable to conclude that if - as the auditor believed - the amount was used to repay a line of credit that had financed the renovation costs, then obviously those costs were incurred before January 1, 1988. Accordingly, the cost of the home on Rue Mont-Luc should be increased as at December 31, 1987, and not as at December 31, 1988, which was when the auditor did so. This adjustment is beneficial for Mr. Léger, since it leads to an increase in his 1987 assets that has the effect of reducing the difference for 1988.

Accounts receivable

[30]          The Minister added property described as "accounts receivable" as assets for 1990 and 1991. I will not go back over the facts I have already set out above. I conclude that the evidence provided to me was clearly insufficient for me to find that accounts receivable from the four subsidiaries totalling $61,528 in 1990 and $75,128 in 1991 were not advances owed to Mr. Léger.

[31]          Mr. Léger adduced no documentary evidence - share certificates, records or minute books from Holding - confirming the identity of that company's real shareholders. There was no documentary evidence, and in particular no accounting record, that showed that the $61,528 and $75,128 could have actually belonged to someone other than Mr. Léger. No witness appeared to state under oath that he or she was owed those amounts. As I have already stated, the auditor found that the advances to the four subsidiaries came from cash deposits made by Mr. Léger at the credit union. In calculating Mr. Léger's accounts receivable, she also took care to exclude the advances that had been determined to be from Mr. Belley and the $75,474 that might have been counted twice.

Overvalued assets

[32]          The assets that were allegedly overvalued included the property on Boulevard St-René purchased in 1989. On the balance sheet, the auditor entered $134,350 as its cost. Mr. Léger maintained that the cost of the property should instead be $119,508. An adjustment sheet (Exhibit I-8) that was probably prepared for the closing of the sale seems to support Mr. Léger's assertion.

[33]          However, the respondent also filed another document (notary's statement) (Exhibit I-7), which is a true copy of a sheet taken from the notary's accounting records that contains figures very different from those on the adjustment sheet. The notary's statement indicates that Mr. Léger deposited $64,000 on October 24, 1989, and that the notary received $70,000 from the Caisse populaire St-René-Goupil on November 1, 1989. The notary's statement also provides information about how the amounts given to the notary were used. Moreover, it is much more specific than what appears on the adjustment sheet. For example, it indicates that a portion of the amounts, namely $50,098.27, was given to the credit union, while another portion, $37,650, was given to a Mr. Farley and a Ms. Gauthier.

[34]          Finally, the balance remaining in the bank account, $45,699, was paid to Jean-Pierre Chartier "in trust". Mr. Chartier was likely acting as a mandatary for the vendors, since the notary's statement does not show any payment to the vendors, whom the adjustment sheet identifies as René Cossette and 159322 Canada Inc.

[35]          In my opinion, the notary's statement has much greater probative value than the adjustment sheet. First of all, I note that the adjustment sheet is not signed. It is therefore possible that it was prepared as a draft but that it does not reflect what actually happened when the sale was closed. It is also possible that the adjustment sheet shows a price lower than the one actually agreed on by the purchasers and the vendor, as it can be imagined sometimes happens.

[36]          In testifying, Mr. Léger said that the amount of the mortgage he obtained was more than he needed to finance the purchase of the property in question and that around $10,000 or $12,000 was given back to him by a broker. It is interesting to note that the adjustment sheet does not show any amount owed as a real estate brokerage fee.

[37]          In the circumstances, I conclude that the cost of the property on Boulevard St-René was the amount determined by the auditor, namely $134,350.

Debts

·          $100,000 penalty owed to the Minister of Justice

[38]          I see absolutely no way in which Mr. Léger could reduce his unreported income for the relevant period based on this figure. First of all, the amount was allegedly negotiated in 1993, a year that is clearly outside the relevant period. Furthermore, even if it had been included in that period, Mr. Léger testified that he could not afford to pay the amount and had to serve time in prison instead. The $100,000 is therefore of no relevance in calculating his net worth.

·          $22,000 car loan

[39]          There remains the question of the $22,000 car loan that Mr. Léger sought to include in calculating his liabilities. As was the case for the other items contested by Mr. Léger, I did not find the evidence he provided to me concerning the existence of such a loan convincing. He could have filed a copy of the cheque or could even have called his father to testify. Moreover, his answers to the questions concerning the existence of the loan were very evasive. He no longer remembered which car the loan had been obtained for or what the amount of the loan was. Mr. Léger has failed in his attempt to prove that he had an additional debt of $22,000.

Race winnings

[40]          In calculating Mr. Léger's net worth, the Minister allowed him part of the $100,263 in race winnings that he wanted to deduct from his unreported income. Since he had received some vouchers, the Minister accepted $11,428 in 1988, $19,879 in 1989, $20,788 in 1990 and $774 in 1991 as adjustments, for a total of $52,869. Although the Minister allowed those adjustments, I am not certain that those winnings are necessarily tax-exempt. Mr. Léger is not someone who bets on horses at random but someone who bets only on the eight horses owned by his father. Those activities are closely related to the business run by this father. However, it is not my intention to reverse the Minister's decision in this regard, since the question was not argued. I conclude, however, that no probative evidence was adduced showing that Mr. Léger had race winnings over and above those the Minister has already allowed for the relevant period. Mr. Léger is therefore not entitled to any adjustment for such amounts.

Unexplained withdrawals

[41]          In my opinion, the unexplained withdrawals that the Minister used to make adjustments must be excluded from the net worth calculation. It seems to me that those adjustments are redundant, since I consider it possible that some of the assets acquired during the relevant period were financed in part using those unexplained withdrawals. One example I can give is the purchase of a car: the contract of sale states that the price was paid in cash.

[42]          Some of the withdrawals - amounts ranging from $150 to $500 - may have been used to pay for groceries or meals in restaurants, but the Minister's calculations already include an addition for "personal expenses". Some of the withdrawals may also have been used to make the advances to the four subsidiaries. Part of the withdrawals may have been financed using the line of credit. Moreover, the auditor was unable to determine to what extent the withdrawals may have been used to repay the line of credit or included in subsequent deposits.

[43]          Generally speaking, it strikes me as highly questionable to add unexplained withdrawals in computing unreported income using the net worth method. The risk of some of a taxpayer's assets being counted twice is too high. In my view, the following withdrawals should be excluded: $7,284 for 1989, $55,662 for 1990 and $49,681 for 1991. The result of this is that Mr. Léger's income is reduced by the same amount.

[44]          I must state at this point that the calculations I made to take account of the changes made to the computation of the total discrepancy amounts (that is, the unreported income) resulted in negative unreported income of $29,888 for 1988. For the other taxation years, the amounts of unreported income are positive: $235,155 for 1989, $18,593 for 1990 and $120,620 for 1991, for a total of $374,368 in unreported income. To eliminate the negative difference for 1988, I kept part of the unexplained withdrawals as an adjustment, namely $29,888 out of the $37,851 added by the auditor.

[45]          In short, based on my calculations, the total unreported income for the relevant period, as computed by the Minister, is reduced by $147,074.[3] Part of that amount is attributable to the $26,484 adjustment for the cost of renovating the house on Rue Mont-Luc, and the balance of $120,590 is attributable to the elimination of the unexplained withdrawals.

Penalties

[46]          There remains the issue of the penalties for each year in the relevant period. The respondent argued that the penalties should be maintained for those taxation years. They were assessed under subsection 163(2) of the Act, which reads as follows:

163(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty . . . .

Subsection 163(3) of the Act specifies that the burden of proof is on the Minister. It reads as follows:

163(3) Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

[47]          It was therefore up to the Minister to establish the facts justifying the assessment of the penalties, that is, to prove in the instant case that the taxpayer made a false statement or omission in a tax return and that the false statement or omission was made knowingly or under circumstances amounting to gross negligence. The burden on the Minister is not proof beyond a reasonable doubt but merely proof on a balance of probabilities. Raising a reasonable doubt would therefore not be sufficient to overturn the penalty.

[48]          In Dowling v. The Queen, 93-934(IT)G, at pages 25-26 (96 DTC 1250, at page 1261), my colleague Judge Lamarre described the Minister's burden of establishing the facts justifying the assessment of penalties where a net worth assessment is made:

The Minister must prove that the taxpayer made a false statement or omission in filing its return. The fact that there is a discrepancy between the taxpayer's increase in net worth and the amount of income reported for a year will not be sufficient evidence of this. In Richard Boileau v. M.N.R., 89 DTC 247, Judge Lamarre Proulx stated at 250:

Indeed, the Appellant was unable to contradict the basic elements of the net worth assessments. However, in my view, this is not sufficient for discharging the burden of proof which lies on the Minister. To decide otherwise would be to remove any purpose to subsection 163(3) by reverting the Minister's burden of proof back onto the Appellant.

[49]          In Boileau, the Minister relied only on the fact that the taxpayer had been unable to reverse the net worth assessments. It was held that the Minister had not adequately discharged his burden of proof, and the penalties were deleted. Judge Lamarre provided the following explanation at page 26 (DTC: at pages 1261-62):

The Minister must present evidence to the effect that the taxpayer made a false statement or omission in filing the return. This evidence must amount to more than just showing that the net worth statement was not disproved. Once the Minister proves, on a balance of probabilities, that a false statement or omission was made in the return, evidence must be presented that this misrepresentation was made knowingly or under circumstances amounting to gross negligence. In Venne, supra, Justice Strayer defined gross negligence at 6256:

..."Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

...The sub-section obviously does not seek to impose absolute liability but instead only authorizes penalties where there is a high degree of blamewortheness [sic] involving knowing or reckless misconduct [6258].

[50]          In Corriveau v. R., 1998 CarswellNet 2792 ([1999] 2 C.T.C. 2580), I concluded, as my colleague Judge Lamarre had in Dowling, that the penalties should be deleted, but I did so for the following reason:

It is also possible that the unreported amounts are from unlawful activities, but there is no evidence that Mr Corriveau engaged in or was convicted of such activities.

[51]          Here, that evidence was provided to me. Mr. Léger admitted that he pleaded guilty to conspiracy to traffic in drugs and, given the size of the amounts determined using the net worth method, I have no hesitation in concluding that Mr. Léger made an omission in filing his tax return and that the omission was attributable to gross negligence at the very least.

[52]          For these reasons, Mr. Léger's appeals must be allowed and the assessments must be referred back to the Minister for reconsideration and reassessment on the basis that the $34,447 in unreported income must be eliminated from Mr. Léger's income for 1988 and that the penalty must also, of course, be deleted for that year. For the 1989 to 1991 taxation years, the unreported income is $235,155 rather than $242,439 for 1989, $18,593 rather than $74,255 for 1990 and $120,620 rather than $170,301 for 1991. The amount of the penalties must be determined on the basis of these new amounts of unreported income.

[53]          In view of the results obtained on both sides, I conclude that the Minister is entitled to only half of the costs.

Signed at Ottawa, Canada, this 8th day of May 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 24th day of September 2002.

Stephen Balogh, Revisor

[OFFICIAL ENGLISH TRANSLATION]

96-4799(IT)G

BETWEEN:

ANDRÉ LÉGER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on June 8 and 9, 2000, at Québec, Quebec, by

the Honourable Judge Pierre Archambault

Appearances

Counsel for the Appellant:                  Marie-France La Haye

Counsel for the Respondent:                              Martin Gentile

JUDGMENT

                The appeals from the assessments made under the Income Tax Act (Act) in respect of the 1988, 1989, 1990 and 1991 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts of additional income computed using the net worth method and identified under "total discrepancy" in the statement of net worth prepared by the respondent are nil for 1988, $235,155 for 1989, $18,593 for 1990 and $120,620 for 1991.

                The penalty under subsection 163(2) of the Act for 1988 is deleted and the penalties for 1989 to 1991 are to be computed on the basis of the new amounts of unreported income determined in accordance with this judgment.

                The respondent is entitled to 50 percent of the costs.

Signed at Ottawa, Canada, this 14th day of June 2000.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 24th day of September 2002.

Stephen Balogh, Revisor

[OFFICIAL ENGLISH TRANSLATION]