REASONS
FOR JUDGMENT
Graham J.
[1]
Janice Bonhomme is the sole shareholder,
director and officer of 1218395 Ontario Inc. (“121”). Over the years, both Ms.
Bonhomme and 121 have been involved in various capacities in the mining
industry. The Minister of National Revenue reassessed Ms. Bonhomme’s 2001 to
2005 tax returns to include what the Minister alleges were $666,176 in shareholder
benefits from 121 in Ms. Bonhomme’s income. The Minister assessed gross
negligence penalties in respect of some of those benefits. The Minister also
reassessed Ms. Bonhomme’s 2006 to 2009 tax years to deny $430,000 in Canadian
exploration expenses that Ms. Bonhomme had claimed in those years. Ms. Bonhomme
appealed the two sets of reassessments. The Appeals were heard on common
evidence but I will address them separately in these reasons.
I. 2001
to 2005 Tax Years
[2]
The alleged shareholder benefits that the
Minister included in Ms. Bonhomme’s income consisted of two categories: unexplained
deposits to Ms. Bonhomme’s personal bank accounts and shareholder benefits in
respect of the occupancy by Ms. Bonhomme and her family of a house owned by
121.
[3]
The issues in respect of 2001 to 2005 are:
(a) whether
the unexplained deposits to Ms. Bonhomme’s bank account represent unreported
income;
(b) whether any
unexplained deposits that occurred in Ms. Bonhomme’s otherwise statute barred
2001 and 2003 tax years can be assessed;
(c) whether
gross negligence penalties were properly applied to some of the unexplained
deposits;
(d) whether
Ms. Bonhomme had a housing benefit from her occupancy of the house owned by 121
and, if so, the amount of that benefit; and
(e) whether
any such housing benefit that occurred in Ms. Bonhomme’s otherwise statute
barred 2001 and 2003 tax years can be assessed.
[4]
I conclude that the Minister properly included
the unexplained deposits in Ms. Bonhomme’s income, that the deposits that
occurred in 2001 and 2003 can be assessed and that gross negligence penalties
were appropriately applied. I also conclude that Ms. Bonhomme had housing
benefits from her occupancy of the house, although not in the amounts assessed
by the Minister. Finally, I conclude that the housing benefits that occurred in
2001 and 2003 can be assessed, although also not in the amounts assessed by the
Minister.
A. Unexplained Deposits
[5]
The Minister conducted a bank deposit analysis
of Ms. Bonhomme’s accounts for her 2001 to 2005 tax years. A bank deposit
analysis is an alternative method of determining income that is sometimes used
by the Minister when the Minister believes that a taxpayer’s records are an inadequate
means of verifying the taxpayer’s income. A bank deposit analysis generally
involves reviewing each deposit that a taxpayer has made to his or her bank
account in excess of a certain amount. The Minister asks the taxpayer to
explain the source of each of those deposits. To the extent that the taxpayer
either cannot explain the source, provides an explanation that the Minister
does not accept or admits that the source is taxable and was not reported, the
Minister includes the deposit in the taxpayer’s income. If the taxpayer is able
to satisfy the Minister that a given deposit comes from a non-taxable source or
has already been reported in the taxpayer’s income, the Minister ignores the
deposit.
[6]
The CRA auditor who audited Ms. Bonhomme’s 2001
to 2005 tax years testified on behalf of the Respondent. I found him to be a credible
witness. He provided a detailed description of how he conducted the bank
deposit analysis of Ms. Bonhomme’s 2001 to 2005 tax years. There is no need for
me to repeat that description here. I found that the process that the auditor
followed was consistent with the foregoing description of a typical bank
deposit analysis. I also found him to have taken the normal and correct steps
to ensure that there was no double counting, that all deposits from
identifiable non-taxable sources had been removed and that all deposits from
identifiable taxable sources that had previously been reported as income had
also been removed.
[7]
The auditor divided the deposits for which he
had not received a suitable explanation into four categories:
(a) amounts that were recorded as “credit memos” in Ms. Bonhomme’s bank
account;
(b) amounts that Ms. Bonhomme appeared to have received from a company
known as Explorers Alliance Corporation (“EAC”);
(c) other deposits over $5,000; and
(d) 50% of all other deposits between $1,000 and $5,000.
[8]
The Minister treated these unexplained deposits
as amounts that Ms. Bonhomme had appropriated from 121 and thus assessed
her pursuant to subsection 15(1). The Minister applied gross negligence
penalties to the first three categories.
[9]
There are two primary ways in which a taxpayer
can challenge a bank deposit analysis. The first is to prove that his or her
records were adequate and thus that his or her income should have been
determined using those records. The second, and more common method, is to show
that the unexplained deposits came from a non-taxable source or were already
included in income. Ms. Bonhomme took the second approach.
[10]
Ms. Bonhomme’s primary position was that most of
the unexplained deposits were repayments of her shareholder loan to 121 and
thus were not taxable. She also argued that certain specific deposits came from
non-taxable sources. Despite my clear suggestion that Ms. Bonhomme should
address each of the unexplained deposits individually, she failed to do so. I
find that none of the deposits were repayments of Ms. Bonhomme’s shareholder
loan and that the deposits that Ms. Bonhomme argues came from other non-taxable
sources did not come from those sources.
[11]
Before turning to the four categories of
unexplained deposits, I will review the quality of the evidence provided by Ms.
Bonhomme.
[12]
Ms. Bonhomme did not testify in respect of the
bank deposit analysis. All evidence in support of her appeal of the bank
deposit analysis came from her husband, Lionel Bonhomme. I did not find Mr.
Bonhomme’s evidence to be reliable. He spoke in generalities and made sweeping
statements that frequently turned out to either be wrong or require significant
modification. His testimony was peppered with statements where he mixed up Ms.
Bonhomme and 121. There were other occasions where he mixed up himself and Ms.
Bonhomme, himself and 121, 121 and EAC, and EAC and other entities. When
Mr. Bonhomme referred to documents which were in evidence, I found that he
often overstated the nature or content of the documents. Mr. Bonhomme
frequently failed to answer questions even when the same question was put to
him a number of times. While it was sometimes difficult to tell whether he was
being evasive or simply had difficulty staying on track, it was clear that he
was being deliberately evasive on many of the more important questions. The way
in which Mr. Bonhomme spoke in generalities and confused parties allowed him to
change what appeared to have previously been his story without outright
contradicting himself. That said, there were a number of occasions where he did
contradict himself. As a result of all of the foregoing, I have given little
weight to Mr. Bonhomme’s testimony where it is not supported by documentary
evidence.
[13]
Despite the fact that he has a great deal of
accounting experience, Mr. Bonhomme did not maintain books and records for
121. No contemporaneous accounting records were kept. When faced with a court
order to file its late income tax returns, 121 prepared those returns using
trial balances that did not reflect the company’s actual transactions. The
trial balances were prepared on a cash basis rather than an accrual basis. They
do not reflect $290,000 in income that Mr. Bonhomme testified 121 had received
from August 2003 to December 2005.
With one exception in 2002, there are no debits to the shareholder loan
account. In other words, all but one of the unexplained deposits that Mr. Bonhomme
says were repayments of Ms. Bonhomme’s shareholder loan are not reflected as
such on the trial balances. In addition, the trial balances do not reflect
$339K that EAC owed 121, amounts owing on 121’s line of credit, interest
expenses purportedly incurred by 121 in respect of interest payable to Ms. Bonhomme,
and interest income purportedly earned by 121 on amounts owing to it by EAC.
There is no change in 121’s “loans and notes receivable” balance from 1997 to
2005 despite the fact that Mr. Bonhomme claims 121 was advancing funds to
and/or making reimbursable expenditures on behalf of EAC during this period.
Finally, all adjustments to the shareholder loan account on the trial balances
are clearly made as a result of plugs rather than through any actual recording
of the relevant transactions.
[14]
Mr. Bonhomme provided various poor explanations
for the foregoing lack of detail. His primary explanation was that, faced with
a court order to file its tax returns, 121 had tried to focus on the income
statement aspects of the reporting rather than the balance sheet aspects. I do
not accept this explanation. If 121 were truly focused on the income statement
aspects of its reporting, then why did it fail to report the $290,000 in income
it received from EAC? Mr. Bonhomme’s explanation that 121 did not need to do so
because EAC had renounced offsetting Canadian exploration expenses to 121 rings
hollow. That could be an explanation of why 121 did not think it owed any tax
but would not be an explanation of why it did not record its revenues. The
company managed to bookkeep its expenses despite the fact that it did not think
it owed any tax. It seems a bit too convenient that it happened to overlook
reporting substantially all of its revenue.
[15]
Even if I accepted Mr. Bonhomme’s explanations
of 121’s accounting, I do not know how I could rely on trial balances prepared
without regard for balance sheet items. If the balance sheet does not reflect
the money that 121 took from its line of credit, then how can I possibly be
confident that various expenditures were paid through the shareholder loan as
opposed to through the line of credit? If the balance sheet does not reflect
accounts payable, then how can I be sure that expenses claimed were actually
paid through the shareholder loan rather than simply remaining unpaid at the end
of a given year?
[16]
Mr. Bonhomme provided the auditor with what he
described as a reconciliation of the shareholder loan account. He started with the closing
balance of the account in 1997 and made adjustments to the account going
forward to 2005. Ms. Bonhomme relied on this reconciliation at trial as
supposed proof that, at all times, the shareholder loan account was in a credit
balance and thus she had not appropriated funds from 121. I do not accept that
the reconciliation shows this for a number of reasons.
(a) Like other spreadsheets prepared by Mr. Bonhomme that were entered
into evidence at trial, the reconciliation appears to me to represent what Mr.
Bonhomme wishes or believes the facts to be as opposed to a summary of a
careful analysis of what the underlying facts and documents have shown.
(b) The shareholder loan balance is increased by various amounts
described as “advances”. I was not provided with any documentary evidence that
those advances were made.
(c) The actual adjustments to the shareholder loan that appear in the
trial balances have not been included in the reconciliation. Instead, Mr. Bonhomme
has simply taken the loss reported by 121 each year and, on the assumption that
the loss was financed by the shareholder loan account, credited that loss to the
shareholder loan account. He did this despite the fact that the loss included
amortization -- a non-cash item that could not possibly have impacted the
shareholder loan.
(d) The shareholder loan balance is increased by amounts described as
“interest”. My understanding is that these amounts are supposed to represent
interest that 121 owed to Ms. Bonhomme on amounts borrowed by her. Mr. Bonhomme
made repeated reference to a director’s resolution that purportedly authorized
121 to pay interest to Ms. Bonhomme at 18% until such time as Ms. Bonhomme’s
shareholder loan balance was nil or her personal credit cards were paid off. My
understanding was that 18% was to represent the interest rate paid by Ms.
Bonhomme on her credit cards. No copy of the resolution was entered into
evidence. No copies of Ms. Bonhomme’s credit card statements showing her
outstanding balances were entered into evidence. No calculation showing how the
amount of interest was determined was entered into evidence. Ms. Bonhomme did
not report the interest in question as income on her tax returns.
(e) Most importantly, the reconciliation is simply a reconciliation of
one account in the abstract. It does nothing to address the overall concerns
that I have with the trial balances. It is still not a full accounting.
Whatever time pressures 121 faced to get its tax returns filed, it has had
years since then to create a proper set of accounting records that could be
relied upon. I draw an adverse inference from its failure to do so.
[17]
The following is an analysis of each of the four
categories of unexplained deposits identified by the auditor.
(1) Credit
Memos
[18]
The auditor testified that the amounts
identified as “credit memos” on Ms. Bonhomme’s bank account statements
were transfers from other accounts or banks. He explained that he had eliminated
all credit memos that related to transfers from Ms. Bonhomme’s own accounts and
those of her family and had been left with $268,470 in unexplained credit memos.
He stated that he was unable to determine exactly where those amounts came from
but that he thought they may have originated from EAC due to some information
he had received from Ms. Bonhomme.
I find that the Minister properly included all of these amounts in Ms.
Bonhomme’s income.
[19]
Many of the credit memos involved deposits of two
specific amounts: $4,990 and $9,990. Mr. Bonhomme explained that those deposits
represented deposits of $5,000 or $10,000 from EAC less a $10 transfer fee. Some
background is needed to understand Mr. Bonhomme’s explanation of these deposits.
Ms. Bonhomme was a shareholder of EAC until sometime in the early 2000’s. As of
2001, Ms. Bonhomme was owed $157,000 by EAC and 121 was owed $339K by EAC. In
2003, EAC found itself in financial difficulty. A Statement of Claim was filed
by 121 and 121 succeeded in obtaining a Writ of Seizure and Sale. EAC then entered
into what Mr. Bonhomme described as a “private creditor
arrangement” with its creditors including Ms. Bonhomme and 121. Mr.
Bonhomme explained that, despite its bleak financial situation, there was still
work that needed to be done in respect of EAC’s mining interests in order to
preserve those interests. He testified that, as a result, EAC entered into an
agreement with Ms. Bonhomme and 121 whereby one or both of Ms. Bonhomme
and 121 would provide services to EAC in exchange for a “management fee, a consulting fee” of $10,000 per
month.
Mr. Bonhomme stated that those monthly payments were to be matched by
renunciations of $10,000 in Canadian exploration expenses each month by EAC to
whomever had provided the services.
[20]
Aside from Mr. Bonhomme’s testimony, the only
evidence of this purported agreement came from a document described as being
minutes of a meeting held on August 12, 2003. The entire agreement is described
as follows:
“It was agreed
that 1218395 Ontario Inc arrange for the services and take the necessary steps
and the payments of exploration and other work have the flow thru credits
renounced In her company or herself as required .
This consideration was crucial due the amounts owed to her company
and herself.” [sic throughout]
[21]
The minutes are unsigned. They make no reference
to the payment of any money let alone $10,000 per month. They refer to
renunciations but do not specify the amount of such renunciations.
[22]
Ms. Bonhomme did not call either of the other
people supposedly present at the meeting as witnesses. I draw an adverse
inference from this fact. I specifically note that one of these individuals was
the president of EAC, Jean Claude Bonhomme. Jean Claude Bonhomme is Mr. Bonhomme’s
cousin. He resides in Toronto where the trial was held.
[23]
Mr. Bonhomme testified that 121 provided
services pursuant to this purported agreement from August 2003 until December
2005 and that Ms. Bonhomme provided the services from January 2006 to July
2009.
[24]
Mr. Bonhomme’s testimony on these payments was
inconsistent. He testified that EAC paid $10,000 each month. When confronted
with the actual list of unexplained credit memos, he changed his testimony to
state that a number of the first payments had actually been for only $5,000. Mr.
Bonhomme also testified that the payments were made promptly each month yet
there are some months where there is no deposit.
[25]
Mr. Bonhomme testified that the $10,000 per
month in payments made to 121 pursuant to this purported agreement were
deposited to Ms. Bonhomme’s personal bank account due to the fact that 121 did
not have a bank account in the years in question. He stated that 121 treated the
deposits as repayments of Ms. Bonhomme’s shareholder loan and thus that
they should not have been taxable in Ms. Bonhomme’s hands. I do not accept this
explanation. 121 did not report these amounts as revenue on its tax returns nor
did it record them as credits to Ms. Bonhomme’s shareholder loan account. The
money simply went from EAC into Ms. Bonhomme’s account without ever being
recorded or reported by either 121 or Ms. Bonhomme. Mr. Bonhomme’s explanation
is nothing more than a description of what, in retrospect, he wishes had
happened.
[26]
Based on all of the foregoing, I conclude that
the credit memos for $4,990 and $9,990 were amounts that Ms. Bonhomme
appropriated from 121.
[27]
There were five credit memos for $4,990 that
were deposited in the months prior to the purported agreement among EAC, 121
and Ms. Bonhomme. Mr. Bonhomme provided a variety of explanations of what
these amounts were. No documentary evidence was filed to support any of these
explanations. I find it difficult to believe Mr. Bonhomme’s explanation that
these credit memos were somehow different from the identical ones that
followed. Accordingly, I find that they were payments made by EAC to 121 that
were appropriated by Ms. Bonhomme.
[28]
Mr. Bonhomme testified that one deposit of
$10,990 and one deposit of $11,590 were combinations of the $10,000 per month
payments to 121 and reimbursements by EAC of amounts that 121 or Ms. Bonhomme
had spent on EAC’s behalf. He identified other deposits of $6,190 and $6,490
which he said were combinations of the $5,000 per month payments to 121 and
reimbursements. He also testified that a deposit of $3,990 was simply a
reimbursement. No documentary evidence was filed to support any of these
assertions. I am not prepared to accept them simply based on Mr. Bonhomme’s
testimony. I find that all of these amounts were payments made by EAC to 121
that were appropriated by Ms. Bonhomme.
[29]
Mr. Bonhomme testified that two other credit
memos for $7,990 and $4,990 may have been transfers from one of Ms. Bonhomme’s
brokerage accounts but he made no attempt to actually trace the transfers
through the brokerage accounts. I am not prepared to accept this assertion solely
based on Mr. Bonhomme’s testimony.
[30]
Mr. Bonhomme testified that an $18,990 credit
memo was a payout from Ms. Bonhomme’s automobile insurance company in respect
of a car accident. Again, Mr. Bonhomme failed to provide supporting documentary
evidence or a plausible explanation of why the day after this credit memo was
deposited, the insurance company would issue a cheque, rather than a further
credit memo, to Ms. Bonhomme for $19,309.76 (an amount accepted as non-taxable
by the auditor). I am not prepared to accept that the $18,990 is non-taxable
simply based on Mr. Bonhomme’s testimony.
[31]
There were two additional credit memos ($2,990
and $4,490) about which Mr. Bonhomme provided no testimony.
[32]
Based on all of the foregoing, I find that the $268,470
in credit memos were appropriations that Ms. Bonhomme made from 121 and were
correctly included in her income.
(2) Amounts
from Explorers Alliance Corporation
[33]
The auditor included $72,629 in Ms. Bonhomme’s
income on account of various amounts that he described as “consulting fees and EAC interest”
[34]
Ms. Bonhomme stated in a fax sent to the auditor
that the “amount of $72,629 consists mainly of interest
payment [sic] on the 339 k”.
The phrase “339 k” refers to the $339,000 that EAC owed to 121. This
explanation is completely inconsistent with the following explanations that Mr.
Bonhomme offered at trial.
[35]
There are eight deposits in this category. The
first five deposits total $32,990. Mr. Bonhomme acknowledged that these deposits
were all from EAC. In his direct testimony he explained that these deposits
were payments made to Ms. Bonhomme to cover the costs of an employee of 121. I do not accept Mr. Bonhomme’s
explanation. I note that 121’s trial balance for 2001 shows that a total of $0.20
was spent on salaries in that year. On cross-examination Mr. Bonhomme provided
a completely different explanation. He initially stated that these deposits were
consulting fees and then changed his mind and described them as reimbursements
of expenditures that 121 had made on behalf of EAC. No documents were filed
either evidencing the amounts expended, the invoicing of those amounts or how
the five totals were determined. These disbursements were not recorded in the
trial balances (either as expenses offset by revenue upon repayment or as short
term loans that were repaid). Similarly, there was no entry on the shareholder
loan account to record the receipt of these amounts. Accordingly, I do not
accept Mr. Bonhomme’s alternate explanation either. I find that these five
deposits were interest payments made to 121 by EAC that were not reported by
121 and were appropriated by Ms. Bonhomme.
[36]
The sixth deposit was for $26,213. Ms. Bonhomme
took the position that this deposit was a repayment of her shareholder loan. Mr.
Bonhomme testified that 121 had refinanced its mortgage in 2002 and that this
amount represented the proceeds that were left after the refinancing. The trial
balance for 2002 does show a repayment of the shareholder loan in relation to
the refinancing but that repayment is for $35,288. Mr. Bonhomme did not explain
why the deposit to Ms. Bonhomme’s bank account would differ from the amount of
the debit to the shareholder loan account. The $26,213 figure was described in Mr.
Bonhomme’s deposit spreadsheet as “interest EAC” and, as set out above, was
described in the fax to the auditor as interest. I find that this deposit was
an interest payment made to 121 by EAC that was not reported by 121, is not
related to the $35,388 recorded repayment of the shareholder loan account and
was accordingly appropriated by Ms. Bonhomme.
[37]
The seventh deposit was for $5,426. Mr. Bonhomme
initially took the position that that amount was never deposited to Ms.
Bonhomme’s bank account and that it instead represented interest charged to 121
by its bank on its line of credit.
This amount does appear on the 2002 trial balance as an expense incurred by 121
under the description “interest and bank charges”. However, when it was drawn
to Mr. Bonhomme’s attention that the same amount had been deposited in January
2003,
he changed his testimony and described the deposit as being a reimbursement for
delivering drill cores or drill bits on behalf of EAC and stated that it was a
coincidence that it was the same amount as the interest on the line of credit. Based on the trial balance
entry and the fax originally sent to the auditor, I find that the deposit was a
reimbursement by EAC of interest that 121 had incurred on its line of credit
and that the deposit was appropriated by Ms. Bonhomme.
[38]
Mr. Bonhomme testified that he could not recall
what the remaining $8,000 deposit was. He suggested that it may have been a
loan made to Ms. Bonhomme or proceeds from the sale of shares. In light of the fax sent to
the auditor and my conclusions in respect of the other amounts in this
category, I find that it was an interest payment from EAC to 121 that was
appropriated by Ms. Bonhomme.
[39]
Based on all of the foregoing, I find that all
of the $72,629 in deposits were appropriations that Ms. Bonhomme made from 121
and that they were correctly included in her income.
(3) Deposits
of $5,000 or more
[40]
The auditor included $131,749 in Ms. Bonhomme’s
income in respect of other unexplained deposits of $5,000 or more.
[41]
Mr. Bonhomme provided very little oral testimony
to support Ms. Bonhomme’s position that these amounts were not
appropriations from 121. This was true despite the fact that I made it very
clear to Ms. Bonhomme that, if she wanted to succeed in her appeal, she needed
to focus on identifying the source of each unexplained deposit.
[42]
There are six deposits of $10,000 each. Mr.
Bonhomme suggested that some of those deposits may have been $10,000 per month
payments from EAC that were paid by cheque rather than credit memo. To the
extent that Mr. Bonhomme’s explanations regarding repayments of Ms.
Bonhomme’s shareholder loan were intended to cover those or any other deposits
in this category, I reject the explanations for the same reasons set out above.
[43]
The only item in this category that Mr. Bonhomme
specifically identified was a $20,000 deposit that he says was a loan from a
colleague that he played poker and blackjack with. That colleague was not
called as a witness. I draw an adverse inference from that fact.
[44]
Mr. Bonhomme testified that various other
amounts had also been lent to Ms. Bonhomme in the years in question but did not
specifically identify any of the deposits as representing those amounts. I find
that none of the deposits of $5,000 or more was a loan. Four documents that Mr.
Bonhomme said supported the loans were entered into evidence.
(a)
The first document was a handwritten letter on
the letterhead of a company called Colbert Drilling and Exploration Co. The letter was dated after
the audit began. It is internally inconsistent. It describes an outstanding
loan of $16,000 “payable to Colbert Drilling from
1218395 Ont. Inc.” and then in the next line states that “[t]hese monies were loaned to Janice Bonhomme for her
Comanpy”. Mr. Colbert was not called as a witness. I draw an adverse
inference from that fact.
(b)
The second document is a handwritten list
purporting to show amounts owing and repaid.
It appears that the total amount lent was $40,500. Mr. Bonhomme testified that
this document related to a loan made personally by Mr. Colbert. The document is
unsigned. The borrower is described as Mr. Bonhomme not Ms. Bonhomme. Again, I
draw an adverse inference from the fact that Mr. Colbert was not called as a
witness.
(c)
The third document is a list of amounts
purportedly lent to Ms. Bonhomme by Mr. Bonhomme’s cousin, Jean Claude
Bonhomme.
The document is unsigned. The document shows the dates that various amounts
were supposedly advanced. Mr. Bonhomme did not tie those amounts into the
unexplained deposits. There is only one amount that I can easily see ties into
the unexplained deposits. The auditor already recognized that amount as being
non-taxable.
Again, Jean Claude Bonhomme was not called as a witness. I draw an adverse
inference from that fact.
(d)
The last document was a list of loans prepared
by Mr. Bonhomme during the audit.
A list of loans prepared by a witness is hardly evidence of those loans being
made. There were no documents entered into evidence to support these loans
other than those already described above and the lenders were not called as
witnesses.
The list combines amounts lent to 121 with amounts lent to Ms. Bonhomme. The
list cannot be readily reconciled to the unexplained deposits and Mr. Bonhomme
made no attempt to do so in his testimony. I have no way of knowing whether the
amounts described thereon have or have not been included in the list of
unexplained deposits. The list includes the $20,000 loan described above. The
purported $16,000 loan from Colbert Drilling is shown as a loan from Mr.
Colbert. There is no reference at all to the $40,500 loan advanced by Mr.
Colbert personally. The list also includes various amounts on credit cards. There
was no evidence indicating whether the credit card amounts were cash advances
or simply an accumulation of purchases.
[45]
Based on all of the foregoing, I find that the $131,749
in unexplained deposits of $5,000 or more were appropriations that Ms. Bonhomme
made from 121 and were correctly included in her income.
(4) Deposits
between $1,000 and $5,000
[46]
The auditor included $68,362 in Ms. Bonhomme’s
income in respect of other unexplained deposits between $1,000 and $5,000. The
auditor found $136,726 in such deposits but chose to include only 50% of them
in Ms. Bonhomme’s income. I find his decision to be reasonable.
[47]
Despite my recommendation to the contrary, Ms.
Bonhomme provided no oral or documentary evidence of why any of these amounts
should not be included in her income. To the extent that the explanations
regarding loans from third parties or repayments of shareholder loans were
intended to cover these deposits, I reject them for the same reasons set out
above.
[48]
Based on all of the foregoing, I find that the
$68,362 in unexplained deposits were appropriations that Ms. Bonhomme made from
121 and were correctly included in her income.
(5) Statute
barred years
[49]
Ms. Bonhomme’s 2001 and 2003 tax years are
statute barred. Thus, for those years, I must determine whether Ms. Bonhomme
made misrepresentations in not reporting the deposits to her bank account as
income and whether those misrepresentations were attributable to carelessness,
neglect or wilful default.
[50]
I have no problem finding that Ms. Bonhomme made
misrepresentations in not reporting the 2001 and 2003 deposits in her tax
returns. Given the lack of proper books and records, I find that it was
appropriate for the auditor to conduct a bank deposit analysis. That analysis
revealed significant amounts of unexplained deposits. Ms. Bonhomme reported
only $1,472 in income in 2001. The Minister included a further $76,210 in Ms.
Bonhomme’s income as a result of the bank deposit analysis. Ms. Bonhomme
reported $34,349 in income in her 2003 tax year. The Minister included a
further $91,557 in Ms. Bonhomme’s income as a result of the bank deposit
analysis. As set out in detail above, I do not accept Ms. Bonhomme’s
explanations of why these amounts should not be treated as income. Faced with
significant unexplained deposits, identifiable sources of income that could
have given rise to those deposits and no plausible alternative explanation for
the deposits, it is appropriate to conclude that Ms. Bonhomme made
misrepresentations by not including those amounts in her income.
[51]
It would be difficult to describe Ms. Bonhomme
as being diligent in respect of her tax affairs from 2001 to 2005. At best she
was indifferent as to whether she complied with her tax obligations or not. Her
2001 tax return was the only return that she filed on time during this period. Her
2003 tax return was not filed until 2005. Her 2002, 2004 and 2005 tax returns
were not filed until 2007. Ms. Bonhomme deposited amounts belonging to 121 into
her personal bank account in 2001 and 2002. In late 2002, the company bank
account was closed and all of 121’s banking from that point forward was carried
on through Ms. Bonhomme’s personal account. No plausible explanation was
provided for why this occurred. Despite the mingling of the accounts, no
records were maintained to trace the source of deposits. Ms. Bonhomme was the
sole director, officer and shareholder of 121. In order for Ms. Bonhomme to
properly file her 2001 to 2005 tax returns, she needed to keep proper books and
records for that company. She did not do so. She did not cause 121 to maintain
contemporaneous books and records. Ms. Bonhomme pled guilty in the Ontario
Court of Justice to failing to file tax returns for 121 in breach of a
requirement to do so. The returns that were filed were prepared based on only
partial information and failed to reflect significant sources of income that
Ms. Bonhomme asserts were received by 121. Ms. Bonhomme maintains that much of
the money that she received from 121 was a repayment of her shareholder loan
yet she failed to maintain proper books and records that would have reflected
the amount of that loan and the relevant credits and debits thereto.
[52]
Based on the foregoing, I find that the Minister
has successfully opened Ms. Bonhomme’s otherwise statute barred years in
respect of the unexplained deposits.
(6) Gross
negligence penalties
[53]
The Minister assessed gross negligence penalties
on the first three categories of unexplained deposits. In total, those three
categories represent $472,848 in unreported income that arose between 2001 and
2005. This is a significant amount of unreported income. In that same period,
Ms. Bonhomme reported only $101,273 in income. Thus her reported income
represents approximately 20% of her total income.
[54]
Ms. Bonhomme demonstrated an indifference as to
whether she complied with the Income Tax Act or not. As set out above, she
was late in filing her returns for four of the five years in question. She
comingled her and 121’s affairs unnecessarily. Neither she nor 121 kept proper
books and records that would have allowed her to determine her income. She only
filed returns for 121 when forced to do so by court order under threat of
imprisonment.
[55]
At a minimum, Ms. Bonhomme knew that significant
amounts of money were being deposited to her personal bank account, that she
and 121 were not filing tax returns and that they were being pressured by the
Minister to do so. The deposits to which the penalties were applied were not
insignificant deposits. With only three exceptions, they were all deposits of
$5,000 or more. The primary source of revenue for Ms. Bonhomme and her husband
from 2003 to 2005 was the $10,000 per month that was received by 121. Yet
neither 121 nor Ms. Bonhomme reported those amounts in their returns. Ms.
Bonhomme simply took them along with the other deposits.
[56]
Ms. Bonhomme provided very little testimony at
trial. She merely stated that she had relied on Mr. Bonhomme to prepare her
taxes and trusted that he had done so properly. She suggested that she had not
reviewed her returns but had simply signed them. It was clear that Ms.
Bonhomme knew little, if anything, about the affairs of 121 let alone her own
tax affairs. Mr. Bonhomme controlled everything to do with 121 and Ms.
Bonhomme’s interest therein. He was retained by either Ms. Bonhomme or 121 to
provide his services to EAC and others on their behalf. He was paid a small fee
for doing so. That said, I am not prepared to allow Ms. Bonhomme to use Mr.
Bonhomme as a shield. Her tax returns and the maintenance of proper books and
records for herself and 121 were her responsibilities, not his. Mr. Bonhomme is
not an arm’s length accountant who made a mistake that Ms. Bonhomme could not
have detected. He is her husband. He has a clear financial interest in her
paying less tax. While he has accounting experience and experience in preparing
tax returns, he is not a professional and she should not have blindly relied on
him. She knew that substantial amounts of money were being deposited to her
bank account and that returns were not being filed but she did nothing to
ensure that her income was correctly reported.
[57]
I also do not accept Ms. Bonhomme’s submission
that the entire problem arose because she could not afford to pay an accountant
to prepare her and 121’s returns. I think that the entire problem arose because
she and her husband chose to use their financial resources to prop up Ms.
Bonhomme’s mining investments rather than to comply with their obligations
under the Income Tax Act. In essence, Ms. Bonhomme is arguing that, to
the extent she earned income but did not report it, she did so because she had
already spent it and thus could not afford to hire an accountant. That is not a
defence.
[58]
Based on all of the foregoing, I find that the
gross negligence penalties imposed by the Minister were appropriate.
B. Housing Benefits
[59]
121 purchased a three-bedroom raised bungalow in
Timmins, Ontario in 1997.
Initially the house was used solely for the residential purposes of Ms. Bonhomme
and her family. Mr. Bonhomme testified that, beginning in September 2001 and
continuing throughout the period in question, 121 began using the basement and
the garage for business purposes. Ms. Bonhomme and her family continued to
reside in the rest of the house. The Minister assessed Ms. Bonhomme
shareholder benefits in respect of her use of the house. I conclude that the
amounts assessed should be reduced in each of the years.
[60]
The Federal Court of Appeal in Fingold v. The
Queen
and Youngman v. The Queen
established that to determine the value of the benefit from a house, I first
have to determine what the benefit is (i.e. what 121 did for Ms. Bonhomme) and
then determine what price Ms. Bonhomme would have had to pay, in similar
circumstances, to get the same benefit from a company of which she was not a
shareholder.
[61]
It is clear that the benefit that 121 conferred
on Ms. Bonhomme was providing her and her family with a house that they wanted
to live in in the town where they wanted to live. The house was purchased by
121 in 1997 as a home for the family. At that time 121 had an office at a
different location. It was not until September of 2001 that 121 left its other
office and began using the basement and garage of the house as its office. The
change to using part of the house for business purposes did not alter the fact
that Ms. Bonhomme was receiving a benefit. The primary purpose of 121’s
ownership of the house was still to provide Ms. Bonhomme and her family with a
place to live.
[62]
Having established that the benefit conferred on
Ms. Bonhomme was the provision of a house (or part thereof), the next step is
to determine what she would have had to pay to obtain the same benefit from a
company of which she was not a shareholder.
[63]
121 reported rental income of $6,000 per year
from Ms. Bonhomme in its tax returns. The adjusting journal entries made by 121
indicate that Ms. Bonhomme paid this rent by purchasing goods and services
for 121. Ms. Bonhomme takes the position that $6,000 per year is the
amount she would have had to pay to obtain the same benefit from an unrelated
company. Thus, Ms. Bonhomme submits that she should not have been assessed in
respect of her use of the house as she has already paid an appropriate price
for its use.
[64]
The Minister assessed Ms. Bonhomme housing benefits
in the range of $20,000 to $30,000 per year. The auditor calculated the
benefits by adding two different components together: the imputed return on
investment and the personal expenses.
(a)
Return on Investment: The auditor calculated what he felt was an appropriate rate of
return that 121 could have earned on the capital it had tied up in the house
had it used that capital for purposes other than providing a house to Ms.
Bonhomme. He did so by taking the greater of the cost of the house and what he
believed to be the fair market value of the house at the beginning of each year
and multiplying that amount by the average prescribed interest rate found in
Regulation 4301(c) for the year.
(b)
Personal Expenses:
The auditor totalled all amounts paid in the year on account of property taxes,
insurance, utilities, maintenance and mortgage interest and included those
amounts in the housing benefit.
[65]
I am not satisfied with the approach taken by either
party or with the evidence provided to me. I simply have too many questions
that were not addressed by the evidence. The Minister bears the onus of proof
for 2001 and 2003 as those years are statute barred. Ms. Bonhomme bears the
onus of proof for the remaining years. I will consider each group of years
individually.
(1) Statute
barred years
[66]
Ms. Bonhomme’s 2001 and 2003 tax years are
statute barred. In those years, the Minister must prove that Ms. Bonhomme
received a rental benefit in excess of $6,000 per year. I have four concerns
with the auditor’s approach:
(a)
his calculation of return on
investment;
(b)
his calculation of personal
expenses;
(c)
his failure to consider 121’s
business use of the house; and
(d)
his failure to account for
the rent Ms. Bonhomme paid.
[67]
My first concern is with how the auditor calculated
the return on investment. As set out above, he took the greater of the cost of
the house and its fair market value in each year and multiplied that amount by
the average prescribed rate for the year. I do not have any concerns with the
auditor’s use of the prescribed rates.
I do, however, have a concern with the base to which he applied those rates.
[68]
The auditor started with an assumed fair market
value of $215,000 in 2001 and increased it by assumed appreciation of $5,000 per
year. The Minister cannot make assumptions of fact when assessing statute
barred years. The Respondent did not provide any evidence of the actual fair
market values of the house in 2001 and 2003. As a result, I am not prepared to
allow the Respondent to use fair market value to calculate the housing benefits
in those years.
[69]
Since the auditor’s approach was to use the
greater of cost and fair market value, in the absence of evidence of fair
market value, it is appropriate for me to substitute the cost of the property
into his calculations. The property was purchased for $192,329 including
disbursements.
My adjustments as a result of this substitution are set out in the chart below.
[70]
My second concern with the auditor’s methodology
is how he calculated the personal expenses. The auditor included the interest
that 121 paid on its mortgage each year. I accept that it was appropriate to
include that amount in 2001. The interest was paid by 121 and represents a cost
that 121 incurred for the purpose of providing the house to Ms. Bonhomme. However,
the property was refinanced in 2002 when 121’s bank called its loans. The
company originally borrowed $125,000 to purchase the house in 1997. The balance
of that loan at the time of the refinancing was $96,446. The company borrowed
$162,056 when it refinanced. The additional $65,610 borrowed on the refinancing
was clearly not used to acquire the house and thus should not have been
included as part of the housing benefit. In my view, an appropriate way to
determine the amount of interest to include in the housing benefit at any time
after the refinancing would be to multiply the interest paid by 40.5% (being
the ratio of the non-house borrowing to the total borrowing). My adjustment as a result
of this change is set out in the chart below.
[71]
I am not entirely satisfied with the auditor’s
decision to include the interest payments in the benefit. He both calculated
the return on investment on the borrowed funds and added the cost of those
funds to the benefit. This arguably results in double counting. I believe it
may have been more appropriate to use a higher rate of return and ignore the
interest costs. However, as the parties made no submissions on this point and I
find the rate of return used by the auditor to have been generously low in the
first place, I am prepared to accept the method he used.
[72]
The remaining items that the auditor included in
the personal expenses were the property taxes, utilities, insurance and
maintenance expenses. The auditor concluded that Ms. Bonhomme paid these
expenses personally but he nonetheless included them in calculating the housing
benefit. He did so on the basis that Ms. Bonhomme’s shareholder loan had been
improperly credited with other payments that exceeded the amount of these
personal expenses. His reasoning was not challenged by Ms. Bonhomme and I
accept it.
[73]
My third concern is that the auditor did not
take into account 121’s business use of the house. Mr. Bonhomme testified that
from September 2001 to December 2005, the basement and garage of the house were
used for 121’s business purposes. Those portions of the house appear to
represent approximately 50% of its square footage. Mr. Bonhomme’s evidence on
this point was not seriously challenged on cross-examination. While I have, in
general, found Mr. Bonhomme not to be a reliable witness, I am prepared to
accept his evidence on this point. Accordingly, I find that Ms. Bonhomme’s
housing benefit should have been reduced by 50% in the corresponding period.
[74]
My final concern is that the auditor did not
reduce the amount of Ms. Bonhomme’s housing benefits to take into account
the $6,000 per year in rental income reported by 121 as being rent received
from her. The explanation that the auditor provided for not accounting for these
payments was unsatisfactory. I find that the benefits should have been reduced
by these amounts.
[75]
The following is a summary of the adjustments
that I find should be made to the statute barred years.
|
|
2001
|
2003
|
|
benefit assessed
|
$29,688
|
$25,225
|
|
less: assessed return on investment
|
($11,825)
|
($6,750)
|
|
plus: proven return on investment
|
|
|
|
less: inappropriate interest expense
|
-
|
|
|
benefit before business use
|
$28,411
|
$19,640
|
less: business use of house |
($4,740)
|
($9,820)
|
|
adjusted benefit
|
$23,701
|
$9,820
|
|
less: rent paid
|
($6,000)
|
($6,000)
|
|
proven benefit
|
$17,701
|
$3,820
|
[76]
Even taking into account the reductions to the benefit,
I find that the remaining under-reported benefits of $17,701 and $3,820 are omissions
attributable to carelessness or neglect. Ms. Bonhomme clearly did not make any
attempt to properly value the benefit that she was receiving.
[77]
As a result of all of the foregoing, Ms.
Bonhomme’s 2001 and 2003 housing benefits will be reduced by $11,987 and $21,405 respectively.
(2) Non-statute
barred years
[78]
The Minister made assumptions of fact that the housing
benefits received by Ms. Bonhomme in 2002, 2004 and 2005 were $20,809, $24,848
and $24,396 respectively.
[79]
Ms. Bonhomme provided no evidence to support her
position that the appropriate benefit was the $6,000 per year that had already
been reported by 121. She failed to adequately explain how the $6,000 per year
figure was calculated. She made no effort to challenge the approach used by the
auditor or any component thereof. She did not question the appropriateness of the
return on investment rate used by the auditor. She did not provide any evidence
as to the actual fair market value of the property in those years let alone
expert evidence. She did not question whether the fair market value of a
property is the appropriate starting point to determine the return on
investment as opposed to its cost. She did not challenge any of the personal
expenses. Finally, she did not question any of the alleged errors in the
shareholder loan account which the auditor used to justify his inclusion in the
housing benefit of the interest, property tax, insurance, utilities and
maintenance expenses that she had paid. In summary, Ms. Bonhomme failed to
demolish the Minister’s assumptions.
[80]
All that said, despite the fact that these
arguments were not raised by Ms. Bonhomme, I cannot overlook the auditor’s
failure to account for the fact that a portion of the interest was not related
to the purchase of the house, that 50% of the house was used for business
purposes and that Ms. Bonhomme paid $6,000 in rental income. These are such
glaring errors that I cannot simply ignore them.
[81]
Based on the foregoing, the following is a
summary of the adjustments that I find should be made to the non-statute barred
years:
|
|
2002
|
2004
|
2005
|
|
benefit assessed
|
$20,809
|
$24,848
|
$24,396
|
|
less: non-house interest
|
($110)
|
($4,392)
|
($4,148)
|
|
benefit before business use
|
$20,699
|
$20,456
|
$20,248
|
|
less: 50% business use
|
($10,350)
|
($10,228)
|
($10,124)
|
|
adjusted benefit
|
$10,349
|
$10,228
|
$10,124
|
|
less: rent paid
|
($6,000)
|
($6,000)
|
($6,000)
|
|
appropriate benefit
|
$4,349
|
$4,228
|
$4,124
|
[82]
As a result of the foregoing, the housing
benefits for 2002, 2004 and 2005 will be reduced by $16,460, $20,620 and $20,272
respectively.
II. 2006
to 2009 Tax Years
[83]
Ms. Bonhomme claimed Canadian exploration
expenses of $120,000 in each of her 2006, 2007 and 2008 tax years and of
$70,000 in her 2009 tax year. As set out above, Ms. Bonhomme takes the position
that in 2003 EAC entered into an agreement with Ms. Bonhomme and 121 whereby
one or both of Ms. Bonhomme and 121 would provide services to EAC in
exchange for a payment of $10,000 per month and a matching renunciation of
Canadian exploration expenses. From 2006 to 2009 those payments were made to
Ms. Bonhomme personally. Ms. Bonhomme reported them in her income. She
then claimed corresponding amounts of Canadian exploration expenses to offset
them. I conclude that she was not entitled to do so.
[84]
Ms. Bonhomme did not testify in respect of the
Canadian exploration expenses that she had claimed. All evidence in support of
her appeal of that issue came from Mr. Bonhomme. As set out above, I did not
find Mr. Bonhomme’s evidence to be reliable. His testimony in respect of this
issue was particularly unreliable.
[85]
Throughout her appeal, Ms. Bonhomme offered a
series of inconsistent and sometimes incomprehensible explanations of why she was
entitled to the Canadian exploration expenses she had claimed. The following is
a summary of those explanations in the order that they were offered:
(a)
The expenses were “incurred
by, on behalf of, or for [her] benefit”.
(b)
She was in a joint venture.
(c)
She was in an “arrangement, which is like a
receivership, a foreclosure, a friendly arrangement where [she] takes over the
management of assets in exchange for 10,000 a month and an accompanying CEE…The
principle is if you’re managing something and there’s a CEE credit available,
you’re entitled to a renunciation privately or as a syndicate member”.
(d)
She held “royalty interests” and “net profit
interests” over some properties operated by EAC and she was acting to protect
her interests in those royalties and her outstanding debt owed by EAC.
(e)
She was in a partnership.
(f)
She was in a limited liability partnership for
Canadian exploration expenses.
[86]
The only position that Ms. Bonhomme appeared not
to adopt at one point or another was that she had received the CEE through
flow-through shares. This is presumably because she was not a shareholder of
EAC in the years in question.
[87]
The evening before the parties were to make
submissions, I informed Mr. Bonhomme’s counsel that, in light of the
vagueness of Mr. Bonhomme’s testimony and the complexity of the Canadian
exploration expense provisions of the Act, when he made his submissions
I wanted him to walk me through the specific provisions that Ms. Bonhomme says
allow her to claim the expenses. He failed to do so. He mentioned subsection 66(10.4)
but was unable to offer any explanation of how it applied. His submissions on
the subsection were limited to reading the preamble aloud and then moving on to
discuss an alleged partnership between Ms. Bonhomme and EAC. Subsection
66(10.4) does not cover partnerships or any of the myriad of relationships that
Mr. Bonhomme described in his testimony. The subsection relates to
renunciations by one corporation in favour of another corporation. Since Ms.
Bonhomme is not a corporation, I fail to see how the subsection could apply.
[88]
Ms. Bonhomme’s counsel did not direct me to any
other section of the Act.
[89]
Ultimately, it appeared to me during submissions
that Ms. Bonhomme had settled on a single position as to why she believed she was
entitled to claim Canadian exploration expenses. I carefully set out my
understanding of that position at the end of counsel’s submissions on the issue.
Ms. Bonhomme’s counsel agreed that the following is the reason that Ms.
Bonhomme believes she is entitled to claim Canadian exploration expenses:
“Ms. Bonhomme is
a partner with EAC. She is entitled to CEE from EAC’s resource pool as a
partner who had agreed to provide services to EAC in exchange for money and
CEEs.”
[90]
This position can be easily disposed of. There
is no reliable evidence that Ms. Bonhomme and EAC were in a partnership. There
was no written partnership agreement entered into evidence nor were the terms
of any such agreement described. There was no reliable description of who the
partners were. No partnership tax returns were filed and no T5013’s were issued.
Ms. Bonhomme did not enter EAC’s returns into evidence so I have no way of
knowing whether it reported partnership income or not. I draw an adverse
inference from the failure of anyone from EAC to testify as to the existence of
a partnership.
[91]
As set out above, there was no reliable evidence
as to who the partners were. Ms. Bonhomme presented the argument as if she and
EAC were the sole partners. However, 121 had claimed Canadian exploration
expenses arising from the same relationship in its 2003 to 2005 tax returns.
Therefore, if a partnership did exist, 121 would have had to have been a partner
at that time. There was no mention of any change in partnership from 121 to Ms.
Bonhomme which suggests that both Ms. Bonhomme and 121 would have been partners
from 2003 to 2009. I heard evidence that there were other creditors who were
also partners in the partnership and that the partnership was, beginning in
2006, managed by a company called EAC Creditors Inc. I saw evidence that EAC
disposed of “all of [its] interests in its mineral
properties” to a subsidiary of EAC called International Explorers &
Prospectors Inc. (“IEPI”) in 2008 which leaves me wondering how or why EAC
would have continued to be a partner after that time and how, when and whether
IEPI became a partner.
[92]
There was no indication of what business the
partners were supposedly carrying on in common with a view to a profit. Ms.
Bonhomme was clearly carrying on the business of providing services to EAC but
that does not make her a partner of EAC. I asked Ms. Bonhomme’s counsel how
EAC’s relationship with Ms. Bonhomme was any different than my relationship
with my drycleaner – they provide a service and I pay them money. He was unable
to provide me with an explanation.
[93]
At a number of points, Mr. Bonhomme actually
testified that Ms. Bonhomme was not in a partnership with EAC. For example,
he stated that:
“So at that time,
I did not want to be a partner with [EAC]. I controlled $1.3 million of
judgments according to bankruptcy and instead I reached a friendly creditor
arrangement and agreed to work in exchange for the CEE…”
“[Ms. Bonhomme’s
lawyers] wanted me to state that I was a partner with [EAC]. And I said I
refused that because they were bankrupt and I did a friendly creditor
arrangement.”
“I always refused
to be a partner of [EAC]”
[94]
I find that Mr. Bonhomme’s use of the word “I”
in the foregoing statements was meant to refer to Ms. Bonhomme and/or 121. Mr.
Bonhomme frequently had trouble distinguishing between himself, Ms. Bonhomme
and 121.
[95]
Even if Ms. Bonhomme were a partner in a
partnership with EAC, her explanation of how she obtained the Canadian
exploration expenses still makes no sense. To reiterate, Ms. Bonhomme says that
“[s]he is entitled to CEE from EAC’s resource pool as a
partner who had agreed to provide services to EAC in exchange for money and
CEEs.” A partnership incurs Canadian exploration expenses and then allocates
them to its partners. Ms. Bonhomme’s explanation of why she should be able to
claim the expenses clearly describes the expenses as being EAC’s, not the
partnership’s. Throughout his testimony Mr. Bonhomme described the Canadian
exploration expenses as being transferred,
granted
or renounced
by EAC. Only once did he describe them as being something that “the partnership agreed to renounce”. Furthermore, Ms. Bonhomme’s
explanation describes her as becoming entitled to the expenses not by virtue of
her being a partner but rather in exchange for services that she provided. Ms. Bonhomme
did not direct me to any mechanism in the Act by which a service
provider could be paid with Canadian exploration expenses. Finally, there is no
evidence that any such partnership incurred expenses that would qualify as
Canadian exploration expenses. All of the evidence indicates that, to the
extent such expenses were incurred, they were incurred by EAC or IEPI.
[96]
Ultimately, it appears to me that, Ms.
Bonhomme’s claim of Canadian exploration expenses is little more than a
convenient excuse as to why she should not have to pay tax on the $430,000 of
income that she received from 2006 to 2009. I have heard no rational explanation
of why she would be entitled to the expenses. There is no supporting evidence
from third parties and no reliable documentary evidence. It is not my role to
wade into the bog of Mr. Bonhomme’s conflicting and unreliable testimony
and try to extract something of substance that fits nicely into the complexities
of the Act. It is Ms. Bonhomme’s job to point me to the evidence
and show me how it works with the Act. She has failed to do so. I am not
going to go through the Act and rule out every possible means by which
Ms. Bonhomme could have become entitled to Canadian exploration expenses under
her ever shifting explanations of why she might be entitled to them. She has
had ample time and opportunity to clarify her position. The foregoing position
is the best that she could come up with. I have found that position to be
unsupportable. That is enough to dispose of the Appeal of Ms. Bonhomme’s 2006
to 2009 tax years.
[97]
That said, given that Ms. Bonhomme has already
appealed a decision that I made in a related matter and given her tendency to
come up with new reasons why she should be able to claim the Canadian
exploration expenses, I feel I should make some additional findings of fact for
the benefit of the Federal Court of Appeal should she also choose to appeal this
decision. Accordingly, I find that:
(a)
Ms. Bonhomme was not a shareholder of EAC after 2002;
(b)
Ms. Bonhomme became a shareholder of IEPI in
2008 as part of a debt conversion;
(c)
no T101’s from EAC were filed with Ms.
Bonhomme’s returns or entered into evidence;
(d)
no T101’s from IEPI were filed with Ms.
Bonhomme’s returns or entered into evidence;
(e)
no Schedule 12’s for EAC or IEPI were entered
into evidence;
(f)
no T1229’s were filed with Ms. Bonhomme’s
returns or entered into evidence; and
(g)
EAC did not file its tax returns for its
taxation years ending December 31, 1998 to 2009 until 2011 at the earliest.
[98]
I also find that, beyond what I would describe
as musings or wishes during Mr. Bonhomme’s testimony, there was no reliable evidence:
(a)
that EAC renounced any Canadian exploration
expenses to Ms. Bonhomme in the years in question;
(b)
that IEPI renounced any Canadian explorton
expenses to Ms. Bonhomme in the years in question;
(c)
that EAC or IEPI incurred Canadian exploration
expenses in the amounts claimed by Ms. Bonhomme;
(d)
that Ms. Bonhomme incurred expenses on her own
behalf that would qualify as Canadian exploration expenses;
(e)
that Ms. Bonhomme was a party to a joint
venture;
(f)
to the extent that Ms. Bonhomme was a member of
a joint venture, that she incurred expenses as part of that joint venture that
would qualify as Canadian exploration expenses;
(g)
that Ms. Bonhomme was a member of a limited
partnership; or
(h)
to the extent that Ms. Bonhomme was a member of
a limited partnership, that that limited partnership incurred expenses that
would qualify as Canadian exploration expenses.
[99]
Ms. Bonhomme called a chartered accountant named
Michael Johnston as a witness. Mr. Johnston had reviewed and analyzed
spreadsheets originally prepared by a deceased partner in his firm, Jeff Hunter.
My understanding is that Mr. Hunter was the accountant for EAC. Those
spreadsheets set out Canadian exploration expenses purportedly accumulated by
EAC. I found Mr. Johnston to be a credible witness and do not blame him for the
following findings. Despite Mr. Bonhomme’s desire to hear the contrary, I find
that Mr. Johnston did not testify that EAC had renounced any Canadian
exploration expenses to Ms. Bonhomme. At best, Mr. Johnston was able to
testify that EAC’s financial records indicated that there were amounts that may
have qualified as Canadian exploration expenses that were not used by EAC in
the years in question and were thus potentially available to be renounced and
that those amounts equalled the amounts that Ms. Bonhomme and 121 say were
renounced to them from 2003 to 2009. Outside of his discussions with Mr.
Bonhomme, Mr. Johnston had no independent knowledge of whether those expenses
were renounced to Ms. Bonhomme and, if so, when or through what mechanism.
He had not seen any documents that would indicate that any Canadian exploration
expenses were renounced to Ms. Bonhomme nor had he seen anything in EAC’s
accounting records to that effect. He had no knowledge of the shareholdings of
EAC and made no mention of a partnership whose partners included Ms. Bonhomme
and EAC. It is clear to me that anything on Mr. Johnston’s spreadsheets that
suggests or concludes that Canadian exploration expenses were renounced by EAC,
let alone renounced to a particular person, only appears on those spreadsheets
because Mr. Bonhomme told Mr. Johnston or Mr. Hunter that that was the case.
The information is not the result of any independent review.
III. Costs
[100] The parties agreed that I could rule on costs without the need for
additional submissions.
[101] It took almost six days of court time for Ms. Bonhomme to enter her
evidence. In my view, that evidence could have been entered in two days. A day
of court time was wasted when Ms. Bonhomme arrived on the first day of trial
with documents that had not previously been disclosed to the Respondent. Another
half day was wasted by calling Mr. Johnston, a witness whose evidence added
nothing.
A further half day was wasted when Ms. Bonhomme advised on the second day of
trial that she needed time to meet with tax counsel. That counsel was never
retained.
[102] When Mr. Bonhomme finally took the stand he wasted extensive court
time. He was not prepared. He did not present his evidence in a logical or
coherent manner. He did not know where to find the documents that he needed.
His vague and inconsistent answers wasted time as did his tendency to wander
completely off topic. His evasiveness only added to the wasted time.
[103] The entire Canadian exploration expense issue was without merit. The
bank deposit analysis issue was something that, had Ms. Bonhomme taken the time
to analyze her case, conduct examinations for discovery and marshal her
evidence, could most likely have been resolved out of Court or, at the very
least, substantially simplified. While Ms. Bonhomme enjoyed significant success
on the housing benefits, this success represented less than 9% of the income in
issue, took up relatively little court time and was entirely due to concerns
that I had with the auditor’s calculations as opposed to anything that Ms.
Bonhomme raised.
[104] Based on all of the foregoing, I award costs to the Respondent. The
two Appeals were commenced two years apart and are sufficiently different that
it is appropriate to award separate costs for each Appeal. One set of costs
shall be paid in each Appeal in accordance with the tariff for Class “C”
proceedings for all matters prior to preparation for trial and for all services
after judgment. In my estimation, the hearing of the Appeals should have been
completed in the four days that were originally scheduled for trial instead of
the eight days that were ultimately used. In light of the need for counsel for
the Respondent to prepare twice for trial, I award two sets of costs in each
Appeal in accordance with the tariff for Class “C” proceedings for preparation
for trial (i.e. $1,900 per Appeal). Since the Appeals were heard on common
evidence, it would not be appropriate to award separate costs for the hearing
of the Appeals. However, in light of the unnecessarily long trial and the
resulting waste of both the Court’s and the Respondent’s resources, I award one
set of costs in accordance with the tariff for Class “C” proceedings for the
first four days of trial and double costs for the remaining four days for a
total of $24,000 in hearing costs. Only one set of disbursements shall be paid.
Signed at Ottawa, Canada, this 14th
day of June 2016.
“David E. Graham”
Email this Content