REASONS
FOR JUDGMENT
Lyons J.
[1]
Glen Pirart, the appellant, appeals the
reassessments made by the Minister of National Revenue issued against him on
the bases that he had unreported income in the amounts of $1,050,000 for 2005,
$1,200,000 for 2006, $1,350,000 for 2007, and $1,500,000 for 2008 (collectively
“unreported income” and “relevant years”) mostly and allegedly from a cocaine
business and assessed gross negligence penalties on those amounts in accordance
with subsection 163(2) of the Income Tax Act (the “Act”).
I. ISSUES
[2]
The issues are:
a)
Whether the 2005 and 2006 taxation years are
statute-barred?
b)
Whether the alleged unreported income was
properly included in the appellant’s income in the relevant years?
c) Whether gross negligence penalties under
subsection 163(2) of the Act were properly levied against the appellant relating
to unreported income for the relevant years?
[3]
Mr. Pirart testified on his own behalf and Albert
King, Kelsey Anderson, Chevy Pirart, Dennis Readings and Christine Pirart testified
on behalf of Mr. Pirart. Nils Erzinger, a Canada
Revenue Agency special enforcement auditor, and Corporal Christopher Boucher,
an RCMP officer, testified on behalf of the respondent. An expert evaluation
report, prepared by Sergeant Janos J. Korbely of the RCMP, was tendered on
behalf of the respondent.
II. FACTS
[4]
In September 2005, Mr. Pirart purchased land and
buildings on Schoolhouse Road, south of Nanaimo, British Columbia, where he
operated his auto-salvage business, Eco Tire and Auto
Parts Ltd. (“Eco”), selling scrap vehicles and parts. He had been in the auto-salvage
business since the mid‑1990s. Equity of $110,000,
from his Hemer Road house in Cedar, was used as a down payment (“Cedar house”).
During the relevant years, he reported net income of
$4,325 in 2005, $2,073 in 2006, $35,487 in 2007 and $37,442 for 2008 from the
operation of Eco. He admitted that
the net income from Eco in 2005 and 2006 seemed low and that there was
unreported income.
[5]
On April 8, 2009, the RCMP searched 12
building/outbuildings on a large rural property on McLean Road, in Nanaimo,
British Columbia (“Property”). These included Mr. Pirart’s residence
(“residence”) and structures controlled and used by him and other areas on the
Property. Cash seized from the search totalled approximately $765,700 (“Cash
seized”) contained in several duffle bags and packaged in bundles of
denominations of $20, $50 and $100 bills. Of the Cash seized,
$139,000 was found in the residence, $500,020 was located in a workshop next to
his residence (“shop”) and amounts of $100,000 U.S. and $25,000 were found in an
abandoned trailer at the far end of the Property. There was no evidence that
Mr. Pirart had any association with the cash in the trailer.
[6]
Mr. Pirart testified that of the Cash seized, only
$9,800 found in the residence belonged to him, the $500,020 in the duffle bag
belonged to Mark and Glenn Bolt (the “Bolt brothers”) and the remaining cash
belonged to Wendy Anderson including the $55,000 and $5,000 U.S. in the gun
safe and $75,000 in containers in the attic.
[7]
Six firearms, 1½ ounces of cocaine in his
business bag on the kitchen chair and 408 grams of cocaine located in an
ammunition box in his ensuite bathroom vanity were seized from his residence.
Mr. Pirart stated that the cocaine, the ammunition box and money counter
belonged to Wendy Anderson who sold cocaine, not him. She had wanted him to
drop off the 1½ ounces of cocaine at her store and he agreed to that because
she did not want to carry it around because her home had been raided the
previous year and she was charged with possession for purposes of trafficking
(“PPT”) in cocaine and was released on bail. He allowed her to store it, without
payment, in his residence out of love. When asked why he let her sell drugs
without protection, he responded by saying that he was unable to stop her. Wendy
Anderson died on July 26, 2009 from heart failure.
[8]
No female was arrested with respect to Mr.
Pirart’s residence and Corporal Boucher said that although he was aware of
Wendy Anderson, there was no evidence to suggest that she needed to be
investigated relating to the seized items at Mr. Pirart’s residence nor was evidence
found to charge anyone else with respect to the cocaine operation on the Property.
Corporal Boucher, a credible witness, stated that the RCMP had not observed a
cocaine transaction “or something like that”. Consequently, charges for
trafficking were not recommended such that Mr. Pirart was charged only with PPT
in cocaine. He also said that a “large number” of firearms, ammunitions, and
explosives were seized from the shop.
[9]
Despite the large quantity of guns found at his
residence, Mr. Pirart denies having a “gun business,” had sold some guns and
admitted that the ammunition was his. He claims that some guns belonged to
Dennis Paugh who owned and also lived on another part of the Property with his
family and was an arborist and hunting and fishing guide. Mr. Pirart lived rent
free at the residence because when Mr. Paugh was not around, he was comforted
that Mr. Pirart lived on the Property. Mr. Pirart said that whilst he worked in
the shop, it remained unlocked and the Bolts, his son and two others had access
to the shop.
[10]
Albert King testified he had represented Wendy
Anderson in 2008. Her home had been searched and she was charged with PPT in marihuana,
under three kilograms, and PPT in cocaine. She pled guilty, was released on
bail in September 2008 but the charges were abated because of her death in 2009.
He refreshed his memory of the events including a search of the Court Registry
for the nature of the charges on the indictment sheet tendered as Exhibit A-2.
Mr. King also represented Mr. Pirart when he was charged in 2009 and
produced at the tax appeal photographs taken by the RCMP during the search of
the Property which were given to him as part of the Crown disclosure and were
tendered at the Tax Court hearing.
[11]
Kelsey Anderson, Wendy Anderson’s daughter,
testified that she was 18 and living at her mother’s home when it was searched,
Kelsey Anderson was charged but said she had never sold cocaine and the charges
were withdrawn against her. After the search at her mother’s home, her mother
spent five to six days per week at Mr. Pirart’s residence and corroborated that
Mr. Pirart was a good friend of her mother’s for 40 years and one year before
she passed away, they started dating.
[12]
Chevy Pirart, Mr. Pirart’s son, indicated that
he knew Wendy Anderson for 24 years; she had been a long-term friend of his
father’s before becoming his partner.
[13]
Between 2005 and up to August 2008, Mr. Pirart
lived with his former spouse, a housekeeper in the hotel industry, and their
two youngest children until separation in 2008. They did not live a lavish
lifestyle as corroborated by his bank statements and credit card statements. In
cross-examination, he disagreed that his outlay of funds greatly exceeded his
reported net income for the relevant years. He claims that other than Eco and
the marihuana business, he had no other businesses and denied he sold cocaine.
[14]
Dennis Readings, a retired Certified General
Accountant, prepared Mr. Pirart’s personal and corporate tax returns for
15 years. He indicated that Mr. Pirart purchased the shares of Eco for $200,000
and the land and buildings at Schoolhouse Road for $260,000 with a vendor take-back
mortgage of $350,000.
[15]
Mr. Erzinger conducted a desk review. As a
preliminary step, he prepared a Source and Application of Funds test (“test”)
with a timeline for the relevant years which is standard in the special
enforcement program with information updated during the audit as it becomes
available. He
explained that information is compiled looking at known taxable and non-taxable
sources of funds for Mr. Pirart and his household compared with the
application of funds that reveals the discrepancies. The application of funds
comprise known expenditures and outlays for Mr. Pirart and the household plus
estimated personal expenses, imputing a family of two adults, based on
information from Statistics Canada.
[16]
Mr. Erzinger confirmed that the $375,000 “Seized
cash disbursement”, shown under the 2008 and “Application of Funds” columns,
relates to the Minister’s assumption 8 p) of the Reply to the Amended Notice of
Appeal (“Reply”) and represents the Cash seized on April 13, 2009, with the
accumulation of profits from five kilograms of cocaine sales per month.
[17]
After that test, the auditor conducted an
analysis under the projection method because the cocaine business is largely
cash-based. He confirmed that the projection method is the basis for the
reassessments and is premised on the Cash seized, his communications with law
enforcement officials and his knowledge and training as a special enforcement
auditor.
[18]
In his report, Mr. Erzinger concluded that a
conservative estimate of monthly sales was approximately five kilograms per
month and confirmed that the $500,020 amount formed the core of the Cash seized
which the Minister assumed was based on the five kilograms. All the
assumptions pertaining to the cocaine operation were subsumed into assumption 8
p) of the Reply except assumption 8 q), which was calculated based on
assumption 8 p) as follows:
p) the Appellant sold an average at least 5
kilograms of cocaine per month during 2005 through 2008; and
q)
the Appellant’s net income from the Cocaine Business was at least
$1,050,000, $1,200,000, $1,350,000 and $1,500,00 for the 2005, 2006, 2007 and
2008 taxation years, respectively.
III. ANALYSIS
[19]
Mr. Pirart asserts that other than the $9,800
found in his business bag, the cash and cocaine seized from his residence
belonged to Wendy Anderson. The $500,020 seized from
the shop, integral to the Cash seized, belonged to the Bolt Brothers. This is
not evidence that he ran a cocaine operation nor can it be imputed to him
because he had no interest in the $500,020 as found under the Consent Order
issued by the Supreme Court of British Columbia (“SCBC”). He accepts his
conviction of PPT in cocaine and had planned to “transport” 1½ ounces for and
to Wendy Anderson, but denies that he sold or intended to sell cocaine. His
stance is buttressed by the findings of the trial judge in the various criminal
court rulings which do not indicate that he was involved in the sale of cocaine
which is not a necessary ingredient to constitute trafficking.
Abuse of Process
[20]
The respondent argues that the doctrine of abuse
of process applies to prevent Mr. Pirart from challenging his conviction of PPT
in cocaine and he is precluded from testifying, advancing findings and taking a
stance contrary to the rulings in the criminal proceedings. He cannot argue
that the cocaine operation belonged to Wendy Anderson and that he had nothing
to do with it, given that he never did so during the criminal proceedings.
Is the conviction being re-litigated?
[21]
Albert King, his lawyer in the criminal
proceedings, advised him that it was not worth arguing that the cocaine
belonged to Wendy Anderson because it was found in his residence and is
sufficient for a conviction of PPT. Mr. Pirart contends
that the doctrine does not apply, he is not challenging the conviction nor
re-litigating the issue as he accepts that he planned to transport the smaller
quantity of cocaine for and to Wendy Anderson.
[22]
Abuse of process is a flexible doctrine with the
integrity of the adjudicative process at its core with principles such as
judicial economy, consistency and finality as to the administration of justice.
In Toronto (City) v Canadian Union of Public Employees (C.U.P.E.), Local 79,
2003 SCC 63, [2003] 3 S.C.R. 77 [CUPE], the Supreme Court of Canada
indicated that judges have an inherent and residual discretion to prevent an
abuse of the court’s process and described the common law doctrine as
proceedings “unfair to the point that they are contrary to the interest of
justice” and bring the administration of justice into disrepute.
The follows observations were made at paragraph 51:
51 … First,
there can be no assumption that relitigation will yield a more accurate result
than the original proceeding. Second, if the same result is reached in the
subsequent proceeding, the relitigation will prove to have been a waste of
judicial resources as well as an unnecessary expense for the parties and
possibly an additional hardship for some witnesses. Finally, if the result in
the subsequent proceeding is different from the conclusion reached in the first
on the very same issue, the inconsistency, in and of itself, will undermine the
credibility of the entire judicial process, thereby diminishing its authority,
its credibility and its aim of finality.
[23]
On December 5, 2011, Mr. Pirart was found guilty
of PPT of cocaine and possession of a loaded, prohibited firearm. The judgment dealt very briefly with the charge of PPT of cocaine. Ms. McCormick was the search warrant expert to whom Mr. King had
parcelled out part of the case. Mr. King stated in his testimony that she “sort
of guided” their handling of the case. The facts were sparse and he conceded
only that the Crown had proven the charge of possession for the purpose of
trafficking beyond a reasonable doubt. This is illustrated in the following
exchange:
At the conclusion of the trial, Ms.
McCormick, on behalf of Mr. Pirart, acknowledged that the totality of the
evidence supported a conclusion that the Crown had proven Count 1 beyond a
reasonable doubt. I agree with that submission. It was appropriate for the
defence to concede the Crown had proven that count beyond a reasonable doubt.
As such, there is obviously a verdict of guilty on Count 1.
[24]
For the reasons that follow, I find that Mr.
Pirart was not re-litigating his conviction at the tax appeal in testifying and
calling other witnesses relating to Wendy Anderson, his intent to transport the
1½ ounces of cocaine, the cocaine operation and that he was not involved in
selling cocaine, all of which is admissible evidence.
PPT under the Controlled Drugs and
Substances Act and Criminal Code
[25]
Section 5 of the Controlled Drugs and
Substances Act (“CDS Act”) states:
5. (1) No person shall traffic in a
substance included in Schedule I, II, III or IV or in any substance represented
or held out by that person to be such a substance.
(2) No person
shall, for the purpose of trafficking, possess a substance included in Schedule
I, II, III or IV.
[26]
“Traffic” is defined in subsection 2(1) of the CDS
Act as follows:
“traffic” means, in respect of a substance
included in any of Schedules I to IV,
(a) to sell, administer, give,
transfer, transport, send or deliver the substance,
(b) to sell an authorization to
obtain the substance, or
(c) to offer to do anything mentioned
in paragraph (a) or (b),
otherwise than
under the authority of the regulations.
[27]
“Possession” is defined by the CDS Act with
reference to subsection 4(3) of the Criminal Code, RSC, 1985, c. C-46:
4(3) For the purposes of this Act,
(a) a person has anything in possession when
he has it in his personal possession or knowingly
(i) has it in the
actual possession or custody of another person, or
(ii) has it in any place, whether or not that place belongs to or is
occupied by him, for the use or benefit of himself or of another person; and
(b) where one of two or more persons, with
the knowledge and consent of the rest, has anything in his custody or possession,
it shall be deemed to be in the custody and possession of each and all of them.
[28]
Under the legislation, PPT is broadly defined
and could include the transport of a substance belonging to another person as
submitted by Mr. Pirart. The jurisprudence confirms
that the legislation as written, means sale is not a necessary element of drug
trafficking.
[29]
The respondent resiled from her initial position
that Kelsey Anderson should not be allowed to testify because she had not
testified at the criminal trial. Under the criminal law sphere, an accused is
under no obligation to testify nor is required to answer the prosecution’s case
by calling any witnesses albeit there may be some pressure to call witnesses.
Although Mr. Pirart was not permitted to testify at sentencing because he chose
not to testify at the criminal trial, that does not preclude him or the
witnesses he may call from testifying at the tax appeal. The respondent can
also impeach any witnesses that Mr. Pirart brought forward on the basis of
different evidence tendered at the criminal trial.
[30]
The respondent relies on a decision of this
Court in which the conviction was admissible as prima facie evidence of
the facts underlying the conviction after a full trial.
Unlike the case relied on by the respondent, Mr. Pirart
is not seeking to challenge the facts relating to his criminal conviction nor
suggest that he was wrongfully convicted. Based on his lawyer’s advice at the
criminal trial, he accepts that he intended to transport cocaine for Wendy
Anderson. The evidence adduced
by Mr. Pirart and his witnesses that he did not sell cocaine nor was involved
in a cocaine operation, his intent to transport to Wendy Anderson and her
history plus the advice from his lawyer is supplemental and different from the
sparse facts that surfaced at the criminal proceedings and surrounding the conviction.
As to whether Mr. Pirart is to be believed depends on credibility as discussed
below. I am of the view that Mr. Pirart was not re‑litigating his
conviction and find that there is no abuse of process based on his position at
the tax appeal.
Did Mr. Pirart have the unreported income in
the relevant years as assessed by the Minister?
[31]
With respect to 2005 and 2006 involving
reassessments beyond the normal reassessment periods, subsection 152(5) of the Act
places the onus on the Minister to establish a prima facie case. The
onus was not met based on the reasons below.
[32]
With respect to 2007 and 2008, the general rule
for tax appeals places the initial onus of proof on the taxpayer to demolish
the Minister’s assumptions in the reassessments.
[33]
The expert report describes a cocaine operation
as breaking down cocaine into consistent weights, the presence of a cutting agent,
measuring cup, cash counter and vacuum sealer all point to this conclusion, as
does the volume of cocaine seized and bundles of cash. The report provides a
valuation of the cocaine. That is inextricably linked to the ownership of the
operation and the Cash seized. The report assumes that the Cash seized was
linked to the cocaine operation.
Source and Application of Funds Test
[34]
Whilst the auditor’s “Source and Application of
Funds” document noted significant discrepancies in Mr. Pirart’s income and spending,
the auditor made some errors in his document. For example, he assumed that Mr.
Pirart paid for the De Courcy Drive property. However, Christine Pirart, Mr.
Pirart’s mother and a credible witness, explained that in 1989 she had purchased
it and paid $30,000 from her own savings. When she encountered marital
difficulties, she transferred this property to Mr. Pirart in February 2006 and
in July of that year separated from her partner. I accept her explanation. During
cross-examination, Mr. Erzinger, a credible witness, acknowledged that there
was no information to challenge her evidence that she had transferred it into
her son’s name for no consideration.
[35]
The auditor also assumed that Mr. Pirart paid cash
into Eco but that was contrary to the testimony of Mr. Pirart’s accountant,
also a credible witness and whose explanation I accept, that the $310,393
journal entry that he made did not involve any cash contribution by Mr. Pirart
to Eco. Rather, it consisted of $264,000 for the property purchased previously
in Mr. Pirart’s name, $30,000 for a management fee and a credit from a previous
iteration of Eco. In cross‑examination, Mr. Erzinger agreed that he had
no reason to refute Mr. Readings’ testimony relating to the journal entry.
[36]
The auditor admitted that the $110,000 proceeds
from the sale of Cedar house was not included in his document, nor was the
rental agreement, which he was unaware of, that was made with the tenants of
the 2730 McLean’s Road property (“2730”). Visa expenditures of Mr. Pirart’s
former spouse were imputed in 2008 as household expenses but her income was not
factored in. Such errors were attributable to Mr. Pirart, not the auditor, because
Mr. Pirart failed to submit documents to the auditor as requested.
Projection Method
[37]
Under the projection method, the Cash seized was
one of the sources for his assumption regarding monthly sales of five kilograms
of cocaine per month. At examinations for discovery, he stated that his view
was that the entire amount of Cash seized was Mr. Pirart’s property. However,
at the Tax Court hearing, he acknowledged that he was unaware that the SCBC had
issued a Consent Order (“Order”) relating to the $500,020 and the Bolt brothers.
This is one of the flaws in the projection method used for the relevant years.
[38]
On April 15, 2015, the SCBC issued an Order
arising from civil forfeiture proceedings (“action”) between the Director of
Civil Forfeiture v The Owners and all Others Interested in the Money, in
Particular, Mark Bolt, Glenn Bolt and Glen Pirart, the defendants. The
Order was entered in evidence in the tax appeal. Representatives of the parties
signed the Order which indicates that the action is dismissed against $180,020 and $320,000 was forfeited under
section 5 of the British Columbia Civil Forfeiture Act from proceeds of
unlawful activity.
[39]
That provision forfeits to the government the
interest in property that a court finds to be the proceeds of unlawful
activity. It states:
5 (1) Subject to section 6, if proceedings
are commenced under section 3(1), the court must make an order forfeiting to
the government the whole or the portion of an interest in property that the
court finds is proceeds of unlawful activity.
(2) Subject to section 6 and section 13(1),
if proceedings are commenced under section 3(2), the court must make an order
forfeiting to the government property that the court finds is an instrument of
unlawful activity.
[40]
Mr. Pirart argues as a result of the Order, the $500,020
cannot be imputed to him for the purposes of valuation or as evidence that he
ran a cocaine operation because the dismissal of the action is to have the same
effect as if it had been pronounced after a hearing on the merits.
[41]
In my view, the Order is somewhat ambivalent.
That said, his argument relating to evidence is problematic in that it fails to
recognize the more restrictive wording in the Order. It states that “The action is dismissed against
$180,020 of the $500,020 which has been paid into court, said dismissal to have
the same effect as if it had been pronounced after a hearing of the merits”
such that the remaining $320,000 was then forfeited
under section 5 as proceeds from
unlawful activities. Based on that wording, the $320,000 could be attributable
to Mr. Pirart, the Bolt brothers or “others” all named as parties in the
forfeiture proceedings and noting that the $180,020 was paid to the Bolt brothers’ lawyer, in trust.
[42]
Another difficulty in imputing the entire amount,
or a portion, to Mr. Pirart is that after the preamble but before the actual
Order, the Court declares “1. The Defendant Glen Pirart has no interest in the
property that is the subject of this proceeding.” Compounding that difficulty
is the fact that “property” is not defined nor used elsewhere in the Order. Given
that the subject of the proceeding is the $500,020 (described as “Money” at the
top of the Order), it appears that the word property encompasses the entire
$500,020.
[43]
Viewed in that light and recognizing that the
ultimate effect of the Order is a dismissal of the entire action and
notwithstanding the forfeiture, it could also be construed as Mr. Pirart
contends as a pronouncement after a hearing on the merits vis-à-vis the entire
amount. That said, I construe it to mean that the $320,000,
or a portion, could be imputed to Mr. Pirart assuming other evidence is
available to show his involvement in the cocaine operation.
[44]
The respondent asserts that the Order is
effectively a non-binding settlement agreement because the facts are untested.
I find that assertion to be untenable because a consent order is binding on the
original parties as long as it was intended to be dispositive of an issue. In Campbell
v Campbell, [1955] 1 DLR 304 (BCSC) [Campbell], the Court stated
that a consent order is “valid and binding until set aside on appropriate
grounds in an action brought for that purpose.” That was enunciated after
citing and upholding the following principle:
The truth is, a
judgment by consent is intended to put a stop to litigation between the parties
just as much as is a judgment which results from the decision of the Court
after the matter has been fought out to the end. And I think it would be very
mischievous if one were not to give a fair and reasonable interpretation to
such judgments, and were to allow questions that were really involved in the
action to be fought over again in a subsequent action.
[45]
Even if a certain provision of a consent order
is unenforceable, this does not annul the rest.
[46]
In the present case, the Order clearly intended
to be dispositive of the issues. It was to have the same effect as if it had
been pronounced after a hearing on the merits with respect to the $180,000, the
Order was not set aside and notably it was also signed by the Minister of
National Revenue.
[47]
Other sources of information used by the auditor
was described as informal information from law enforcement officials regarding Mr.
Pirart’s alleged cocaine sales, upon which he based his calculations, and his
“inherent knowledge” and SEP training. Because information
from law enforcement officials was exclusively within the knowledge of the
Minister, no onus would be placed on Mr. Pirart to rebut a specific assumption
made by the Minister relating to the specific information provided which is
consistent with the principle in Transocean Offshore Ltd v Canada, 2005
FCA 104, 2005 DTC 5201 (FCA). The Federal Court of Appeal in that case stated
that there may be exceptions to the general rule that, in a tax appeal, the
Crown’s factual assumptions are to be accepted as true unless rebutted. This
would involve situations where shifting the burden may be warranted. Some
aspects of the specific information were not fully developed by the respondent.
[48]
The auditor assumed that the equipment belonged
to Mr. Pirart and was unaware of Kelsey Anderson’s testimony that she was
confident that the ammunition box belonged to her mother and that her mother
ran a cocaine operation for many years.
Credibility
[49]
As to whether or not the unreported income
resulting from the cocaine operation was properly included into his income
during the relevant years depends on my findings of credibility. The
consistency of a witness’s testimony with other known facts or probabilities
can be considered. In assessing the credibility of witnesses, including Mr.
Pirart, I can accept all, some or none of their evidence and can consider
inconsistencies or weaknesses in the evidence and the overall sense of the
evidence. When common sense is applied to the testimony, does it suggest that
the evidence is possible, impossible, probable or highly improbable.
All of which will impact the credibility of a witness.
[50]
I have reservations about aspects of Mr. Pirart’s
testimony and his credibility. For example, he testified that he and Dennis
Paugh had purchased 2730, which is adjacent to the Property, in 2005 as a
foreclosure property with a vendor take-back mortgage. They bought it because
the original tenants were going to be removed and the kids knew each other and
because they “had cows and stuff over there.” They allowed the tenants to
remain on the property for five years in exchange for rent.
[51]
It was purchased for $177,000 and mortgaged for
$120,000. He stated that despite the $57,000 difference, they were only going to
have to pay $10,000 each. When asked how he came up with the $10,000, he said
that it was “not a huge stretch to come up with,” and that he “probably sold a
car or something” or that it could have come from either the house or the car
or both. At examinations for discovery, he stated that the $10,000 might have
come from the sale of his Cedar house. His response was unconvincing, evasive
and cavalier regarding the $10,000 for someone that reported such low income. Other
concerns revolve around the existence of four hydro meters and his explanation
of those, his failure to report sales from his marihuana business and his financial
motivation relating to family court proceedings. Despite those reservations and the discrepancies with regard to his
income and expenditures, in and of itself, it is not indicative of a cocaine
operation.
[52]
The respondent asserted that little weight should
be given to Kelsey Anderson’s testimony because the ammunition box did not have
distinguishing characteristics, and because she could not definitively say that
specific items belonged to her mother. I disagree.
[53]
In her testimony, Kelsey Anderson confirmed from the photographs, and consistent with Mr. Pirart’s testimony, that
several personal items and objects belonged to her mother (clothing, toiletries
and other items). She was confident it was her mother’s ammunition box who
owned it her whole life and stored her “stuff” in it (cocaine and accessories)
and did so in a certain manner (scale at the bottom and plastic container on
top) and in a certain place (in the vanity) when Kelsey Anderson resided with
her mother at their home.
[54]
Kelsey Anderson was candid in saying that she
was unsure if the money counter in the photograph was
her mother’s and although not illustrated in the photographs, she was able to
describe the scale similar to the one described by Corporal Boucher that is
used in such operations. In her testimony and in cross‑examination, Kelsey
Anderson was unequivocal in stating that she had witnessed her mother selling marihuana
and cocaine “daily” all her life to hundreds of people and used the proceeds to
support Kelsey.
[55]
Albert King stated that when representing
clients he told them to “keep their mouths shut,” told them what to do, did not
allow his clients to give him instructions with regard to the criminal
proceedings and did not ask anything of them unless he asks his client a
specific question. He said that this fell short of duress. At the sentencing hearing, Mr. King stated that while Mr. Pirart had
knowledge and control of all the cocaine, he was only going to traffic 1½ ounces
found in his business bag but Mr. Pirart was not allowed to testify for the
purposes of sentencing because he had not testified at the criminal trial.
[56]
The testimony from Kelsey Anderson and Mr. King,
both credible witnesses, provided strong corroborative evidence of various aspects
of Mr. Pirart’s evidence. This includes but is not limited to Kelsey Anderson’s
testimony relating to the ammunition box and the manner it and the cocaine and
accessories were maintained; her mother’s belongings at his residence; the raid
at her mother’s home the previous year pursuant to which she was charged with
the PPT of cocaine and her observation of daily drug sales by her mother her
entire life. Mr. King’s testimony, against his own interest, was also
meaningful.
[57]
On balance, that evidence coupled with the
nature of Mr. Pirart’s relationship with Wendy Anderson and the fact that in
2008 she was charged with drugs offences, and I note a loaded, prohibited
firearm, is compelling and tends to corroborate Mr. Pirart’s testimony making
it possible that the cocaine operation was not his, he did not sell cocaine
thus did not profit from it. Apart from that, the Court rulings from the
criminal proceedings do not indicate he was selling cocaine, that was not
observed by the police, fingerprints on three of the bundles of cash were not his,
others had access to the unlocked shop and the findings in the SCBC Order. In
my opinion, these factors tend to support his evidence and position that the
cocaine operation was not his and he was merely “transporting” the smaller
quantity to and for Wendy Anderson and allowing her to store the rest.
[58]
Consequently, I find that Mr. Pirart demolished
the Minister’s assumptions relating to the cocaine operation and sales for the relevant
years. Because the calculations under the projection method affected the 2005
and 2006 statute‑barred years, I also find that the Minister did not
discharge her onus relating to the 2005 and 2006 taxation years. I conclude
that Mr. Pirart did not have income from cocaine sales during the relevant
years.
Marihuana business
[59]
In his testimony, Mr. Pirart said that he was
involved in growing, packaging and the sale of marihuana and claims he started
a grow operation in 2007 at his residence. When asked
about the four hydro meter accounts in his name since 2005, inexplicably his
response was that there were a couple of different meters; one for his
residence and one for the shop but he failed to explain the others. It appears
that the marihuana operation business commenced earlier than he admits.
[60]
The marihuana found in his residence was his. He
indicated that he grew marihuana plants in 2007 and 2008, cut off clones and
sold them to other growers in 2007, 2008 and 2009. He also harvested dried marihuana
from an offsite location, packaged it at his residence and sold it. He
estimates that he had received, but did not report, $20,000 to $30,000 in income
from these activities. This is based on the score
sheet that has numbers recorded and/or crossed out. He claims that these
activities were started due to financial pressures from marital difficulties
and legal bills for divorce and custody proceedings.
[61]
The expert report valued the potential profit
that Mr. Pirart could have made from this business based on Mr. Pirart’s own
testimony over the course of 14 months as $42,700.
[62]
Based on the evidence, I find that he had a marihuana
business in 2008 yielding $32,400 in unreported income. He admitted to growing marihuana
in 2007 and had four hydro accounts as early as 2005, I infer from his
activities relating to marihuana that in 2007 he also generated income and
would have netted $32,400 in unreported income.
Were gross negligence penalties properly
applied in 2007 and 2008?
[63]
Given my findings relating to the cocaine
operation and marihuana business, the last issue before me is whether gross
negligence penalties were properly applied only to the 2007 and 2008 taxation
years and only relating to the the unreported income from the marihuana sales. Subsection
163(2) of the Act states:
(2) Every person who, knowingly, or under
circumstances amounting to gross negligence, 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 for the purposes of
this Act, is liable to a penalty […]
[64]
In Venne v Canada (Minister of National
Revenue – MNR), [1984] FCJ No. 314 (QL), 84 DTC 6247 (FCTD), the Federal
Court stated: “Gross negligence involves a high degree of negligence,
tantamount to intentional acting, and indifference as to whether the law is
complied with or not.”
[65]
The same Court in Panini v Canada, 2006
FCA 224, 2006 DTC 6450 (FCA) confirmed that willful blindness could also lead
to gross negligence and “arises where a person who has become aware of the need
for some inquiry declines to make the inquiry because he does not wish to know
the truth. He would prefer to remain ignorant.”
[66]
In Molenaar v Canada, 2004 FCA 349, 2004
DTC 6688 (FCA), the Court stated:
4 Once the
Ministère establishes on the basis of reliable information that there is a
discrepancy, and a substantial one in the case at bar, between a taxpayer's
assets and his expenses, and that discrepancy continues to be unexplained and
inexplicable, the Ministère has discharged its burden of proof. It is then for
the taxpayer to identify the source of his income and show that it is not
taxable.
[67]
In Lacroix v Canada, 2008 FCA 241, 2009
DTC 5029 (FCA), the Federal Court of Appeal commented on the Crown’s burden of
proof with respect to gross negligence penalties:
32 … Insofar as
the Tax Court of Canada is satisfied that the taxpayer earned unreported income
and did not provide a credible explanation for the discrepancy between his or
her reported income and his or her net worth, the Minister has discharged the
burden of proof on him within the meaning of subparagraph 152(4)(a)(i)
and subsection 162(3).
[68]
In cross-examination, Mr. Readings said that he
had prepared the corporate returns based on financial statements but was
unaware of income from Mr. Pirart’s marihuana business.
[69]
Mr. Pirart conceded that he had received income
from sales of marihuana in 2007 and 2008 but did not report the same because he
did not think he had to report it. The amounts generated from
the marihuana business were substantial compared to the income he reported. I
reject his explanation as not credible. He could have sought advice from his
accountant. I find that he was willfully blind and indifferent as to whether he
complied with the law or not. In my view, gross negligence penalties pursuant
to subsection 163(2) of the Income Tax Act are well-founded based on
unreported income in the amount of $32,400 in each of the 2007 and 2008
taxation years relating to his marihuana business.
[70]
For the foregoing reasons, the appeals from the
reassessments relating to:
a)
the 2005 and 2006 taxation years are allowed and
the reassessments are vacated;
b) the 2007 and 2008 taxation years are dismissed to the extent that
Mr. Pirart generated income in the amount of $32,400 in each of those
years from the marihuana business which he failed to report in his returns and
gross negligence penalties are to be applied to that amount in each of those
years; and
c)
the 2007 and 2008 taxation years are allowed, in
part, and referred back to the Minister for reconsideration and reassessment on
the basis that the remainder of the unreported income for each of those years
allocable to the cocaine operation and sales are to be deleted from his
income.
[71]
Given the mixed success, there will be no order
as to costs.
Signed at Edmonton,
Alberta, this 21st day of June 2016.
“K. Lyons”
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