REASONS
FOR JUDGMENT
Favreau J.
[1]
The appellant brought an appeal before this
Court, under the informal procedure, against an assessment made by Revenu
Québec, acting as agent for the Minister of National Revenue (the Minister)
under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended
(the ETA), dated March 21, 2014, for the reporting periods from October 1, 2009, to December 31, 2009; from
October 1, 2010, to December 31, 2010; and from October 1, 2011,
to December 31, 2011 (the period at issue).
[2]
Pursuant to the
assessment dated March 21, 2014, the Minister is claiming a total of $5,169.65
from the appellant for net tax ($4,377), interest, and penalties for failing to
file ($175.08).
[3]
The Minister made the assessment on the basis of,
among other things, the following findings and assumptions of fact:
(a) The appellant has been a drug dealer for many years;
(b) On November 4, 2011, he was arrested in connection with an
investigation by the Sûreté du Québec in the regional county municipality of Etchemins;
(c)The appellant pleaded
guilty to two counts of trafficking in narcotics and two counts of possession
for the purpose of trafficking;
(d) He was sentenced to one year's imprisonment;
(e) The appellant never reported the income he earned from his drug
dealing business;
(f) Unable to access any accounting records kept by the appellant, the
respondent used an alternative method to determine the appellant's income,
namely, the net worth method, a recognized method that serves to uncover how
much a taxpayer's wealth increases from one year to the next;
(g) The net worth method was applied to the appellant only, as his
ex-spouse did not pay for any household expenses when they lived together;
(h) The auditor spoke to both the appellant and his ex-spouse as part of
his audit of the appellant;
(i) The respondent considered, among other things, the appellant's purchases,
including several vehicles, pieces of furniture and immovables, as well as the
tax paid on his other sources of income, his personal expenses and some
unexplained withdrawals;
(j) The amounts not reported by the appellant for the years audited are
as follows:
i)
2008: $15,671
ii) 2009: $32,682
iii) 2010: $25,501
iv) 2011: $59,365
(k) On the
basis that the income was business income, the Minister assessed the appellant
pursuant to the Excise Tax Act;
(l) Given that he could be considered to be a small supplier, he was not
assessed for 2008 and was assessed on only part of his income for 2009;
(m)
The amounts assessed are as follows:
|
Period
|
Nature of
amendment
|
Statutory
basis for penalty
|
Taxable
amount
|
GST
|
|
From 01.01.09 to 21.12.09
|
Unreported supplies
|
280.1 ETA
|
$2,682
|
$134
|
|
From 01.01.10 to 31.12.10
|
Unreported supplies
|
280.1 ETA
|
$25,501
|
$1,275
|
|
From 01.01.11 to 31.12.11
|
Unreported supplies
|
280.1 ETA
|
$59,365
|
$2,968
|
|
|
|
|
|
|
(n) The
appellant was assessed a penalty under section 280.1 of the Excise Tax
Act for failing to file his returns;
[4]
The appellant is challenging the validity of the
assessment for the following reasons set out in paragraphs 9 to 13 of his
notice of appeal:
[translation]
9. The net worth method used by the
respondent does not take into account the expenses paid by Ms. Rainville, instead considering that only the appellant paid all the
family's expenses;
10. Ms. Rainville paid for, among other things,
the groceries, telephone, cable, drugstore items, medical expenses, her
clothing, the alternative medical care she received and the expenses related to
her vehicle;
11. The expenses paid by Ms. Rainville were thus
paid out of the income added to the appellant by the respondent;
12. Therefore, the income added to the appellant
must be reduced by at least half, in light of the explanations above;
13. Furthermore, the appellant received gifts from
his father over the years at issue, which also reduces the business income
added by the respondent;
[5]
Ms. Rainville testified at the hearing, and all
the statements from her personal account at the National Bank of Canada for the
period from October 6, 2008, to November 3, 2011, were filed in
evidence. When questioned about the source of the deposits made to that account
(other than the monthly support payments of $307.33 that she received from the
father of her first daughter, the Canada child benefit in the amount of $442.77
a month, and the provincial family benefit in the amount of $812.25, payable
quarterly), Ms. Rainville was unable to give any explanation whatsoever, stating
that she could not remember. According to her, she did not have any other
sources of income. She acknowledged that she had a massage studio in the
basement of the appellant's home but claimed that she gave only two massages
for pay, all in all. Ms. Rainville stated that she paid for her own
personal expenses, such as her hairstyling, clothing, medical expenses, drugstore
items, alternative medical care and expenses related to her vehicle. She also
stated that she paid a share of the expenses related to the house's
furnishings, the spa, the trailer and two cars, a Ford Mustang and a Hyundai
Tucson, although she noted that the appellant had paid a larger share of these
expenses than she had.
[6]
Ms. Rainville explained that she had kept
the trailer, the Ford Mustang and the Hyundai Tucson after separating from the
appellant in 2011. She stated that she had paid part of the cost of these items
using a $21,000 line of credit that she had with her ex-spouse, although she
could no longer recall any details about that line of credit. She also said
that she owned the two vehicles because they were registered in her name.
[7]
According to her, all the expenses related to
their home were paid by her ex‑spouse.
[8]
On cross-examination, counsel for the respondent
filed in evidence two statements by Ms. Rainville, one dated March 21,
2013, and the other dated August 29, 2013.
[9]
In the statement dated March 21, 2013, Ms. Rainville
stated as follows, and I quote:
[translation]
Further to a previous discussion with Dany
Harvey and Claude Thériault, auditors for Revenu Québec, I freely, voluntarily
and without pressure declare the following facts to be true: my family
allowances, GST/QST refunds and support payments were not intended to pay the daily
household expenses. Luc Reny alone contributed to the household expenses and
paid for everything. Once a month, we spent the weekend at the Hôtel Québec, in
Québec, and we dined out in restaurants twice a week, always at Luc's expense.
I confirm that these facts occurred during the years audited.
[10]
In the statement dated August 29, 2013, Ms. Rainville
stated as follows:
[translation]
Further to a previous discussion with Dany Harvey, an auditor for
Revenu Québec, I freely, voluntarily and without pressure declare the following
facts to be true: Luc Reny gave me a $3,000 gift
certificate from Dr. Ferland’s dental clinic and paid for jewellery from
jewellery stores Bijouterie du Lac and Bijouterie Mozart. In addition, the loan
for the Hyundai Tucson was $8,000 and was paid off after selling the Harley. After that, I am not sure, but I think that we made a
$5,000 cash down payment on the 2005 Wild Travel trailer. Regarding the
furniture from J. Veilleux, I paid for about half of the furniture. As for
the items from Dumoulin, I paid for the television only; Luc paid for the home
theatre system.
[11]
On cross-examination, Ms. Rainville repeated
that she did not work in the years 2008 to 2011 and that her only sources of
income were her family allowances, tax refunds, support payments and Canadian
tax benefits. She also stated that her ex-spouse did not give her money every
month, that both parents paid for her daughter's clothes and school supplies,
and that her ex-spouse paid for the groceries. Finally, she stated that she did
not take any vacations down south when she lived with her ex-spouse.
[12]
The appellant, too, testified at the hearing. He
explained that from 2008 to 2011, he worked as a roof truss installer for Toitures
Fecteau. He earned $28,000 to $31,000 a year and was entitled to receive
unemployment benefits for one to two months a year. He did not contest the
estimated income from drug dealing, but he stated that he left the baggies of
drugs with his ex-spouse, who in turn gave them to the clients who came to pick
them up at the house. His ex-spouse collected the money from the clients and
kept it for herself. According to the appellant, his ex-spouse did not
reimburse him for the drugs sold.
[13]
According to the appellant, the household
expenses were divided in half, and his ex-spouse used one of his credit cards
because she did not have any in her own name. When they separated, his ex-spouse
left with all the furniture in the house, except for the home theatre system,
as well as the trailer and the two vehicles, of which each of the spouses had paid
about half the cost. The Hyundai was financed and paid for using the joint line
of credit.
[14]
Counsel for the appellant filed a statement
dated November 4, 2011, that the appellant had made at the police station
after being arrested for trafficking in narcotics and possession for the
purpose of trafficking. The following is an excerpt from that statement:
[translation]
. . . Nancy does not work. I am the breadwinner. I clear about $450 a week. So that is why I decided to sell drugs to make
ends meet and pay for a few little extras for my family. With that money, I
paid for dinners in restaurants and treats. . . . As for the
money, well, when my girlfriend and I separated on July 25, 2011, I had
very little money. Nancy left with a trailer, a 2004 Mustang and a 2005 Jeep.
She also left with all the household items. She really took everything. I had a
couple of plates left. Everything was in her name as far as the vehicles are
concerned. . . .
[15]
The appellant explained that during the years
2008 to 2011, he had received gifts from his father in the neighbourhood of
$200 a month and $1,000 at Christmas.
[16]
On cross-examination, the appellant acknowledged
that he had pleaded guilty to charges of trafficking in and possession of
narcotics, was sentenced to one year's imprisonment and served two months and
three weeks of that sentence before being released.
[17]
Counsel for the respondent filed an intake
interview questionnaire that the appellant had filled out on March 6,
2013, while he was in prison. In section 2, entitled [translation] "Non-taxable
income", the appellant stated that he had not received any gifts or
inheritances. In section 4,
entitled [translation] "Miscellaneous",
the appellant stated that the 2005 Wild Travel trailer belonged to his ex-spouse,
who had financed it with the National Bank's St-Prosper branch, and that the Hyundai
Tucson and the 2004 Ford Mustang, which were registered in Nancy Rainville's
name, had been paid for by him and Nancy.
[18]
Dany Harvey, an auditor
at Revenu Québec, testified at the hearing, and his audit report and his
calculation of the appellant's net worth were entered in evidence. Mr. Harvey
noted that the appellant's income was lower than the value of his assets. He
explained that he had not taken Ms. Rainville's assets into account when
establishing the appellant's net worth because she had told him that the
family's only income came from the appellant and that the appellant paid all
the family's expenses. However, the payments made by the appellant in respect
of the assets belonging to Ms. Rainville
were added to the appellant's balance sheets. For example, in 2011, the cost of
the furniture bought from Ameublements J. Veilleux totalled $11,844, but as Ms. Rainville
stated that she had paid 50% of the bill, only $5,922 was added to the
appellant's balance sheets for 2011. Another example concerns the 2005 Wild
Travel trailer belonging to Ms. Rainville. The trailer was purchased in
2010 with a cash payment of $5,000. According to Ms. Rainville, the
appellant contributed half of the cash payment. As the trailer is not included
in the appellant's assets, the $2,500 payment he made was treated as an
additional expense to the appellant's cost of living.
[19]
During Mr. Harvey's testimony, counsel for
the respondent filed a document stating the income of the appellant's father
for the 1995 to 2014 taxation years. For the years 2008 to 2011, the
appellant's father's income ranged from $14,500 to $18,200 a year.
Appellant's position
[20]
According to counsel for the appellant, the appellant's
net worth was not computed correctly because the calculations do not take
Ms. Rainville's assets and income into account. Ms. Rainville
testified that she had paid for numerous household expenses and had made
payments on her trailer and her two vehicles. Her reported income was clearly
insufficient to cover all these expenses. She did not report her income from
her massage studio or from the drug dealing at the house. Furthermore, Ms. Rainville
was unable to explain where the deposits to her personal bank account came
from.
[21]
The appellant's net worth is also inaccurate
because the gifts from the appellant's father were not taken into account.
Respondent's position
[22]
According to counsel for the respondent, only
the expenses mentioned in paragraph 10 of the notice of appeal are at
issue, namely, the groceries, telephone, cable, drugstore expenses, medical expenses,
clothing, Ms. Rainville's alternative medical care and the expenses
related to her vehicles.
[23]
In the respondent's view, the appellant did not
provide any evidence regarding the amounts actually paid by Ms. Rainville for
the expenses set out in the preceding paragraph, and the vehicles belonging to Ms. Rainville
were excluded from the appellant's net worth. The appellant did not submit any
evidence of the gifts from his father, and his father was not called as a
witness to corroborate the gifts in question.
Analysis
[24]
In this case, the use of the net worth method to
determine the appellant's income in the years from 2008 to 2011 was entirely justified,
given that the appellant did not report his income from drug dealing and that
there are no financial records whatsoever regarding this business activity. The
appellant did not dispute the estimated income from drug dealing.
[25]
Nor did the appellant dispute the attribution of
all the drug dealing income to him alone. The quantity of narcotics seized when
he was arrested was considerable, and he was the owner.
[26]
In the circumstances, the Minister has
discharged his burden of proof, having established, on the basis of reliable
data, a substantial discrepancy between the appellant's assets and his expenses
that is both unexplained and unexplainable. The onus is therefore on the
appellant to identify the source and non-taxable nature of his income.
[27]
In my opinion, all the evidence heard at the
hearing shows, on a balance of probabilities, that during the relevant period the
appellant earned significant amounts from trafficking in narcotics and that
these activities represent the source of all the appellant's unreported taxable
income.
[28]
The appellant alleges that the Minister
miscalculated his net worth by failing to take into account certain expenses
paid by Ms. Rainville. As no evidence that Ms. Rainville paid these
expenses was filed at the hearing, this allegation by the appellant is based
solely on the testimony given by Ms. Rainville at the hearing, which
testimony completely contradicts her statement dated March 21, 2013, in
which she stated that the appellant paid for all the household expenses,
including trips to Québec and restaurant meals.
[29]
Moreover, Ms. Rainville was unable to
explain where the money deposited in her personal bank account came from. Her
income from her first daughter's support payments, Canada child benefits and
provincial family benefits were clearly insufficient to cover the expenses
listed in paragraph 10 of the notice of appeal. According to Ms. Rainville,
she had no other sources of income. In the circumstances, the only plausible
explanation is that the money deposited in Ms. Rainville's personal bank
account came from her ex-spouse's illegal activities and that, in reality, he
was the one who indirectly paid the household expenses.
[30]
Finally, the appellant's allegation that he had
received gifts from his father must be rejected because the appellant did not
submit any documentary evidence of the gifts or provide any testimony
corroborating them. It is unlikely that the income of the appellant's father in
the years 2008 to 2011 was sufficient to allow him to make such gifts to the appellant.
[31]
For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 18th day of November 2015.
"Réal Favreau"
Translation certified true
on this 29th day
of December 2015.
Michael Palles,
Translator
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