Citation: 2014 TCC 61
Date: 20140228
Docket: 2010-3374(IT)G
BETWEEN:
9028-0157 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2010-3382(IT)G
BETWEEN:
DENIS LAJEUNESSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
D’Auray J.
INTRODUCTION
[1]
In these appeals, this
Court ordered on October 5, 2011, that the appeal of Denis Lajeunesse (Mr.
Lajeunesse) be consolidated with the appeals filed by 9028-0157 Québec Inc.
(9028) and Luc Lavoie. On May 4, 2013, Mr. Lavoie filed a discontinuance
with this Court. Consequently, the appeals of Mr. Lajeunesse and 9028 proceeded
on common evidence.
ASSESSMENTS OF 9028
[2]
The appellant 9028 challenges
the reassessments made by the Minister of National Revenue (Minister) for the
2005, 2006 and 2007 taxation years. The Minister added to the income of 9028 the
amounts of $130,365 for 2005, $614,828 for 2006 and $71,032 for 2007 as
unreported income pursuant to subsection 9(1) of the Income Tax Act (the
Act). The Minister argues that the [TRANSLATION] “unexplained” deposits to the personal bank
accounts of the shareholders must be included in computing the income of 9028, because
these amounts came from 9028:
|
Shareholder
|
2005
|
2006
|
2007
|
|
Denis Lajeunesse
|
$20,260
|
$481,000
|
|
|
Serge Lajeunesse
|
|
$24,000
|
|
|
Luc Lavoie
|
$90,105
|
$109,828
|
$71,032
|
|
Alain Martel
|
$20,000
|
|
|
|
Total
|
$130,365
|
$614,828
|
$71,032
|
[3]
Penalties were also
imposed on 9028 pursuant to subsection 163(2) of the Act.
ASSESSMENTS OF MR. LAJEUNESSE
[4]
Mr. Lajeunesse challenges
the assessments made by the Minister for the 2005 and 2006 taxation years. In
computing the income of Mr. Lajeunesse, the Minister added $495,260 for
2005 and $6,000 for 2006 as benefits conferred on shareholders, under subsection
15(1) of the Act.
[5]
The amount of $495,260 in
2005 represents two [TRANSLATION] “unexplained” deposits of $10,000 and $10,260
to the personal bank account of Mr. Lajeunesse and two investments of $195,000 and
$280,000, all with CIBC.
[6]
Penalties were also
imposed on Mr. Lajeunesse under subsection 163(2) of the Act.
ISSUES
9028
[7]
Did the Minister rightly
include $130,365, $614,828 and $71,032 in the income of 9028 as unreported
income for the 2005, 2006 and 2007 taxation years respectively? Further, was
the Minister right in imposing penalties under subsection 163(2) of the
Act?
Mr. Lajeunesse
[8]
Did the Minister
rightly include in the income of Mr. Lajeunesse $495,260 and $6,000 as
benefits conferred on shareholders, under subsection 15(1) of the Act, for the 2005
and 2006 taxation years respectively? Further, was the Minister tight in
imposing penalties under subsection 163(2) of the Act?
BURDEN OF PROOF
[9]
In tax matters, the
burden of proof is on the taxpayer. The taxpayer must refute the Minister’s assumptions
of fact. Thus, 9028 must prove that the Minister improperly included in
computing its income its shareholders’ personal deposits. As for Mr. Lajeunesse,
he must prove that the [TRANSLATION] “unexplained” deposits to his personal bank
account did not come from 9028.
[10]
However, the Minister has
the burden of proof with respect to the penalties imposed under subsection
163(2) of the Act. The Minister must show that 9028 and Mr. Lajeunesse knowingly, or under circumstances amounting
to gross negligence, made a false statement or omission in their 2005 and
2006 income tax returns, and that 9028 did so in its 2007 return.
THE EVIDENCE
[11]
During the years at
issue, namely 2005, 2006 and 2007, 9028 operated under the trade name Gufort
Électrique as an electrical contractor. The appellant 9028 was incorporated in
late 1995 or in 1996.
[12]
At the time, the shareholders
of 9028 were Mr. Lajeunesse, Serge Lajeunesse, Alain Martel and Luc Lavoie.
[13]
Mr. Lajeunesse was
the majority shareholder and president of 9028. He has a bachelor’s degree in real
estate. Serge Lajeunesse is Mr. Lajeunesse’s brother. He is an
electrician and is responsible for the residential component of 9028. Mr. Martel
is also an electrician and is responsible for the commercial component of 9028.
Mr. Lavoie is the accountant and comptroller of 9028.
[14]
The sales (S) and
retained earnings (RE) of 9028 were as follows:
|
As at October 31, 2005
|
S $5,109,322
|
RE $817,099
|
|
As at October 31, 2006
|
S $6,664,533
|
RE $924,636
|
|
As at October 31, 2007
|
S $9,150,972
|
RE $1,102,881
|
[15]
Mr. Lajeunesse is
heavily involved in 9028 and devotes almost all of his time to it. He is always
looking for new projects. Among other things, he is present on the work sites
and is responsible for preparing specifications for projects, managing the projects,
purchasing the materials necessary for the projects and verifying
project-related invoices. His objective is clear: to operate 9028 so that it will
be profitable and continue to prosper.
[16]
At the hearing, Mr. Lajeunesse was
described as hardworking, thrifty and careful with his money. He invests his
money prudently and spends wisely. His conduct is the same when it comes to 9028;
he is as thrifty and careful with 9028’s money as he is with his own.
[17]
Mr. Lajeunesse did not
know Mr. Lavoie when he hired him in 1995 as 9028’s accountant and comptroller.
He was recommended by a contractor for whom Mr. Lavoie did accounting work.
According to Mr. Lajeunesse, he is so busy with his work that he does not
have time to deal with the internal paperwork of 9028, so he relies on Mr.
Lavoie for the accounting aspect of 9028.
[18]
Mr. Lavoie’s duties
with 9028 consist in preparing statements of account for clients, collecting on
those accounts, paying suppliers, paying accounts such as corporate credit
cards, preparing the payroll, verifying bank accounts and performing bank reconciliations.
Essentially, Mr. Lavoie is responsible for performing all accounting duties and
for submitting the financial statements of 9028 to be finalized by the external
accountant, Mr. Fournier.
[19]
Mr. Fournier is a
chartered accountant; he deals primarily with Mr. Lavoie and meets with Mr.
Lajeunesse once a year for the signing of the financial statements. The information
in the financial statements is provided by Mr. Lavoie.
[20]
Mr. Lajeunesse indicated
that he relies on Mr. Lavoie and Mr. Fournier to perform all the accounting
work for 9028. He does not review the financial statements of 9028 prepared by Mr.
Fournier. Mr. Lajeunesse signs 9028’s financial statements where Mr. Fournier tells
him to sign. Furthermore, he does not review 9028’s income tax returns before signing
them.
[21]
As for Mr. Lavoie, he stated
that while he is in charge of accounting and administration with 9028, he is
required to report to Mr. Lajeunesse. For instance, every morning Mr.
Lajeunesse tells him the priorities for the day. Moreover, all cheques for 9028
are signed by Mr. Lajeunesse, including paycheques and cheques in payment of suppliers.
According to Mr. Lavoie, while he has authority to sign cheques, Mr. Lajeunesse
insists on signing all cheques for 9028.
[22]
In their testimony, Mr.
Lajeunesse, Serge Lajeunesse and Mr. Martel indicated that during the
years at issue it was difficult to obtain clear answers from Mr. Lavoie. Mr.
Lavoie was evasive when he answered shareholders’ questions or else said he was
snowed under, that they should trust him and that everything was under control.
When the shareholders asked to see the statements of account, Mr. Lavoie
refused and again told them to trust him. The shareholders noticed unopened
envelopes containing credit card statements on top of a pile of paperwork by Mr. Lavoie’s
computer.
[23]
Mr. Lavoie left 9028 on
October 8, 2007, without giving notice to either Mr. Lajeunesse or the
other shareholders. Mr. Lavoie was suffering from depression and was hospitalized.
[24]
The Canada Revenue
Agency (CRA) turned up at 9028’s place of business on October 9, 2007, for the
purposes of an audit. Neither Mr. Lajeunesse nor the other shareholders had
been advised by Mr. Lavoie that the CRA had begun an audit and that an auditor would
be appearing at 9028’s place of business on October 9, 2007.
[25]
In light of that audit,
Mr. Lajeunesse hired a tax lawyer, Mr. Paradis, and a
chartered accountant, Ms. Payeur, to deal with the CRA with regard to the audit.
According to Mr. Lajeunesse, a number of accounting irregularities were
observed. It was noticed that Mr. Lavoie had cashed cheques for $75,000 to
$100,000 received from clients of 9028. It was also noted that Mr. Lavoie used 9028’s
credit card to pay approximately $19,000 in personal expenses. Again according
to Mr. Lajeunesse, Mr. Lavoie also gave himself a bonus of $225,000.
[26]
At the hearing, Mr.
Lavoie admitted to having cashed cheques made to the order of 9028 whose amounts
totalled approximately $75,000 and to having paid personal expenses with the
credit card of 9028. The ties between Mr. Lavoie and the other shareholders
have been severed and Mr. Lavoie has not been an employee of 9028 since October
2007. No legal action has been taken by the shareholders of 9028 against Mr.
Lavoie.
[27]
Mr. Fournier was not rehired
by Mr. Lajeunesse as 9028’s external accountant either. Mr. Lajeunesse is of
the view that Mr. Fournier should have been aware of the accounting
irregularities.
[28]
Ms. Piché of the CRA testified
for the respondent. She is a CPA-CGA and has been working for the CRA since
2001. The files were assigned to her in light of the modest income reported by the
shareholders as compared to the sales of 9028. In addition, Ms. Piché noticed
high interest income in the personal bank account of Mr. Lajeunesse for
the 2005 taxation year when he had not reported interest income in his prior income
tax returns.
[29]
Ms. Piché therefore undertook
an analysis using the deposit method for each shareholder of 9028. She asked each
shareholder to provide explanations as to the source of the deposits. The Minister’s
assessments against 9028 represent deposits, which, according to Ms. Piché, were
not justified by the shareholders, that is, the [TRANSLATION] “unexplained” deposits.
[30]
In March 2010, Mr.
Paradis, as counsel for 9028, Mr. Lajeunesse, Serge Lajeunesse and Alain Martel
filed written submissions with the CRA regarding the penalties imposed on his
clients under subsection 163(2) of the Act. Although the submissions differed
for each shareholder, Mr. Paradis argued that Mr. Lajeunesse, Serge Lajeunesse
and Mr. Martel relied entirely on the accountants–Mr. Lavoie and Mr. Fournier–to
adequately report their income and the income of 9028. Thus, they should not be
penalized under subsection 163(2), especially since they have no training or
experience in accounting. Mr. Paradis does not dispute that the [TRANSLATION] “unexplained”
deposits must be included in his clients’ income. Rather, he argues that the
penalties should be deleted. In that regard, on March 4, 2010, Mr. Paradis,
as counsel for Mr. Lajeunesse, wrote the following to the CRA:
[TRANSLATION]
Moreover,
the taxpayer had intended to file voluntary returns. However, his new representatives
told him that while his intended course was highly commendable, it would be in
vain as a tax audit had already been initiated. You will understand my client’s
discomfort.
LEGISLATION
[31]
The appellant 9028 received
an assessment under subsection 9(1) of the Act, that is,
an assessment in respect of the taxpayer’s income for a taxation year from a
business.
[32]
The shareholders of
9028 received an assessment under subsection 15(1) of the Act for benefits
conferred on shareholders, that is to say, an assessment based on the value of
the benefit conferred by 9028 on each of its shareholders.
[33]
The Minister imposed
penalties on 9028 and on the shareholders under subsection 163(2) of the Act, which
provides that every person who, knowingly, or under circumstances amounting to
gross negligence, has made a false statement or omission in an income tax
return is liable to a penalty of the greater of $100 and 50% of the tax payable
on the unreported amounts.
Submissions of and evidence applicable to Mr.
Lajeunesse
[34]
The deposits at issue
for Mr. Lajeunesse for the 2005 taxation year are the following:
a
deposit of $10,260 on October 21, 2005;
a
deposit of $10,000 on October 26, 2005;
a
certificate of deposit of $195,000 dated November 16, 2005;
a
certificate of deposit of $280,000 dated December 7, 2005.
[35]
The deposit at issue
for Mr. Lajeunesse for the 2006 taxation year is the following:
a deposit of $6,000 on February 28, 2006.
[36]
Mr. Lajeunesse submits
that the amounts deposited to his personal bank accounts are not from 9028. He explains
that the amounts deposited to his accounts come from cash he had accumulated
over time.
[37]
According to Mr.
Lajeunesse, a portion of his cash was derived from real estate transactions that
he conducted alone or with other individuals between 1983 and 1988. However, the
evidence shows that of six properties owned by Mr. Lajeunesse during those
years, three were repossessed by financial institutions. Mr. Lajeunesse argues
that, despite the repossession of those properties by the financial institutions,
he increased his cash holdings through the amounts obtained by refinancing. He explained
that he used a portion of those amounts to renovate the properties and kept the
remainder in cash. Since he did not trust financial institutions, he kept those
cash amounts at his home. He did not deem it appropriate to inform the trustee
responsible for his bankruptcy that he had cash in his possession at the time
of his assignment in bankruptcy in 1997.
[38]
Mr. Lajeunesse says that
his cash also came from a convenience store that he operated for about a year
and a half. In that regard, he admitted that he did not report all the income
from the convenience store and that he did not report either the $20,000 in
cash he received on the sale of the convenience store.
[39]
As for the capital gains
on the properties he sold, he does not recall whether he reported capital gains
on those properties.
[40]
As for the certificate
of deposit of $195,000 dated November 16, 2005, it was a gift from Ms. Gaboury,
whom Mr. Lajeunesse refers to as his second mother, as he spent part of his
youth with the Gaboury family. It was in 2002 or 2003 that Ms. Gaboury, who
had cancer at the time, gave Mr. Lajeunesse an envelope containing cash so that
he would keep an eye on her son, who had alcohol and gambling problems. Mr. Lajeunesse
does not recall the exact amount he received from Ms. Gaboury. Ms. Gaboury
died the year after she gave Mr. Lajeunesse the envelope with the cash. At
the hearing, Mr. Lajeunesse indicated that he received between $150,000 and
$195,000 from Ms. Gaboury.
[41]
Depending on the amount
he received from Ms. Gaboury (between $150,000 and $195,000), the $195,000 certificate
of deposit consists of the amount or a portion of the amount given by Ms.
Gaboury and a portion of the cash held by Mr. Lajeunesse.
[42]
As for the other certificate
of deposit, of $280,000, dated December 7, 2005, Mr. Lajeunesse explained
that the $280,000 came from Yves Bélanger, a promoter for Prescon.
Prescon sells condominiums in Laval, specifically the Martingal project. Mr. Lajeunesse
explained that Prescon had to sell a certain number of condominiums for bank
financing purposes. Mr. Bélanger asked him to purchase a condominium so as
to increase sales in the Martingal project. To that end, Mr. Bélanger gave
Mr. Lajeunesse $280,000 in cash so that he could purchase a condominium in the
Martingal project. Mr. Lajeunesse and Mr. Bélanger agreed that Mr. Lajeunesse
would repay that amount to Mr. Bélanger in the following months. Mr.
Lajeunesse indicated that he signed an acknowledgement of indebtedness to Mr. Bélanger.
In a matter of months, Prescon made an assignment in bankruptcy. Mr. Lajeunesse
became $280,000 richer because Mr. Bélanger never attempted to recover the amount
from Mr. Lajeunesse.
[43]
As for the deposits of $10,260
on October 21, 2005, $10,000 on October 26, 2005, and $6,000 on February 28, 2006, they came
out of the cash accumulated by Mr. Lajeunesse since 1983 through the refinancing
and sale of properties.
[44]
Thus, Mr. Lajeunesse argues
that the evidence adduced during the hearing showed that the so-called [TRANSLATION] “unexplained” deposits for his 2005 and
2006 taxation years did not come from 9028.
ANALYSIS - MR. LAJEUNESSE
[45]
Subsection 15(1) of the
Act taxes a shareholder of a corporation who has a benefit conferred on him by
that corporation. In Chopp
v. R., [1998] 1 C.T.C. 407, 98 D.T.C. 6014, Justice Denault upheld
the interpretation of subsection 15(1) of the Act given by Judge Mogan of this Court,
i.e., that a benefit may be conferred without any knowledge the part of the shareholder if the circumstances are such
that the shareholder ought to have known that a benefit was conferred and did
nothing to reverse the benefit:
In allowing the taxpayer's appeal, Mogan,
J.T.C.C. interpreted subsection 15(1) as follows:
I think a benefit may be
conferred within the meaning of subsection 15(1) without any intent or
actual knowledge on the part of the shareholder or the corporation if the
circumstances are such that the shareholder or corporation ought to have
known that a benefit was conferred and did nothing to reverse the benefit if it
was not intended. I am thinking of relative amounts. . . . Shareholders
should not be encouraged to see how close they can sail to the wind under
subsection 15(1) and then plead relief on the basis of no proven intent or
knowledge.
. . .
As
to Judge Mogan’s interpretation of subsection 15(1) of the Income Tax Act,
we find no reason to intervene. . . .
[Emphasis added.]
[46]
In light of the
evidence, I am of the view that Mr. Lajeunesse ought
to have known that a benefit was conferred on him by 9028.
[47]
At the hearing, Mr.
Lajeunesse put forward hypotheses without, however, supporting them with
adequate evidence. He therefore failed to refute the Minister’s assumptions of fact
with respect to the benefit conferred.
[48]
For instance, Mr.
Lajeunesse argues that he accumulated cash through the sale of the properties, but
on the evidence submitted I cannot ascertain the profit made by him on the sales.
My analysis of the properties that were not repossessed by the financial
institutions and with regard to which I have documentary evidence does not show
any substantial accumulation of cash.
[49]
I am unable to determine
whether the refinancing of the properties generated cash and, if it did, what
monetary value may be assigned to the refinancing. I have no evidence, either
documentary or testimonial, as to the monetary value of the refinancing.
[50]
Mr. Lajeunesse indicated
that he keeps at his home $100,000 to $200,000 in cash. However, during her
testimony, his former common-law spouse, Ms. St‑Laurent, gave the
following answer regarding Mr. Lajeunesse’s cash holdings:
[TRANSLATION]
Mr. Paquin
Q. Explain
to the Court what you saw.
A. Well,
you mean the money?
Q. Yes.
A. Yes. There was a small safe and there was cash in it. I
don’t know; there was $2,000, $3,000; I don’t know. He always had money in that
safe.
[51]
Moreover, the versions regarding
the [TRANSLATION] “unexplained” deposits changed at the
various stages of the case. In March 2010, Mr. Paradis pointed out to the CRA that
since Mr. Lajeunesse had no training in accounting, he relied on the internal
and external accountants for the amounts he reported in his income tax returns
for the 2005 and 2006 taxation years. He also submitted that his client did not
fail to report income under circumstances amounting to gross negligence. Mr.
Paradis implicitly admitted that his client, Mr. Lajeunesse, failed to include amounts
in computing his income, albeit not under circumstances justifying the application
of the penalties under subsection 163(2) of the Act. Moreover, Mr. Paradis
wrote that his client would have made a voluntary disclosure had voluntary
disclosure not proven impossible as the audit was already in progress.
[52]
In his Notice of Appeal
filed with this Court in October 2010, the fault of the accountant is Mr.
Lajeunesse’s main argument.
[53]
During the examination
for discovery on November 24, 2011, the representations made by Mr. Paradis
seem to have been abandoned. Mr. Lajeunesse argued rather that the [TRANSLATION] “unexplained”
deposits came from cash accumulated over the years from the sale and refinancing
of various properties he owned from 1982 to 1988, and this notwithstanding the
fact that he made an assignment in bankruptcy in 1997.
[54]
Furthermore, the
evidence given on the examination for discovery was that Ms. Gaboury had given
him a [TRANSLATION] “little more than $100,000” so that Mr. Lajeunesse could
look after her son. The amount received from Ms. Gaboury increased to $150,000
and possibly $195,000 during the hearing. It is not very often that this type
of gift occurs in a person’s life; I find it hard to believe that a person would
not be able to remember the amount of a gift, especially when it is a
substantial amount.
[55]
Moreover, no evidence was
introduced to corroborate Mr. Lajeunesse’s version regarding the gift he
allegedly received from Ms. Gaboury. None of Ms. Gaboury’s six children
testified to corroborate Mr. Lajeunesse’s testimony. No evidence of the deposit
of that amount in the bank was provided by Mr. Lajeunesse.
[56]
Mr. Lajeunesse argues
that the certificate of deposit of $195,000 (which includes Ms. Gaboury’s gift)
was reinvested a number of times with CIBC, but no document was entered into
evidence in that regard. In addition, leaving aside 2006, the year for which the
auditor, Ms. Piché, noticed a high interest amount in the personal bank account
of Mr. Lajeunesse, interest income had never been reported by him in his
previous income tax returns.
[57]
I am not persuaded by
the testimony of Mr. Lajeunesse. There are many flaws in his testimony.
[58]
Nor I am persuaded by
the version of the facts presented by Mr. Lajeunesse regarding the $280,000 certificate
of deposit. I find it hard to believe that Mr. Lajeunesse received $280,000 from
Mr. Bélanger to purchase a condominium in the Martingal project and that,
following Prescon’s bankruptcy, Mr. Bélanger never attempted to recover
that amount.
[59]
Furthermore, Mr.
Lajeunesse did not adduce any evidence establishing the purchase of a condominium
in the Martingal project. For instance, no offer to purchase was filed in evidence,
nor was a copy of the cheque that Mr. Lajeunesse purportedly made out to
Prescon for the purchase of the condominium. The acknowledgement of indebtedness
that Mr. Lajeunesse said he signed in favour of Mr. Bélanger was not filed in evidence
either. Mr. Lajeunesse said he did not keep a copy of that document. Moreover, Mr. Bélanger
did not testify at the hearing to corroborate Mr. Lajeunesse’s version.
[60]
The evidence shows that
9028 worked on the Martingal condominium project. The appellant 9028 registered
a legal hypothec as security for payment for the work. The evidence also shows
that 9028 removed the legal hypothec. While this assumption was not admitted by
Mr. Lajeunesse, it is reasonable to assume, as alleged by the respondent, that
the amount given to Mr. Lajeunesse by Mr. Bélanger was in payment for the
work performed by 9028 on the Martingal condominium project prior to the impending
bankruptcy of Prescon.
[61]
Accordingly, in light
of the evidence, the amounts of $195,000 and $280,000 were rightly included in Mr.
Lajeunesse’s income as benefits conferred on a shareholder. As for the amounts of
$10,260 and $10,000 for the 2005 taxation year and $6,000 for the 2006 taxation
year, I am of the view that these amounts are also from 9028. The available
documentary evidence shows low profits on the sale of properties from 1983 to 1988
and, as I mentioned above, I have no evidence, not even oral, regarding the amounts
pertaining to the refinancing.
ANALYSIS – 9028
Other shareholders (Serge Lajeunesse, Alain Martel and
Luc Lavoie)
[62]
The other shareholders of
9028 also received assessments under subsection 15(1) of the Act with
respect to the [TRANSLATION] “unexplained” deposits to their personal bank
accounts. They did not appeal their assessments. However, the deposits of these
shareholders were added to the income of 9028 and penalties under subsection 163(2)
of the Act were assessed against 9028 on those amounts. Thus, I must consider
whether these deposits are to be included in computing the income of 9028.
Alain Martel
[63]
Alain Martel received
an assessment for $20,000 in 2005 and he paid the amount owing. According to
his testimony, the deposit came from logging activities involving payment under
the table. On February 27, 2009, Mr. Paradis indicated on behalf of Mr. Martel,
in his written submissions to the CRA, that the $20,000 came from logging
activities.
[64]
I believe the testimony
of Mr. Martel. There was no contradiction between his testimony, the version he
provided to the CRA and what Mr. Paradis alleged in his submissions to the CRA.
Thus, the amount of $20,000 did not come from 9028 and should be deducted from
the income of 9028 for the 2005 taxation year.
Serge Lajeunesse
[65]
As for Serge
Lajeunesse, he received an assessment in 2006 for an amount of $24,000. According
to the representations made by Mr. Paradis to the CRA on February 27, 2009,
[TRANSLATION] “his client, Serge Lajeunesse, had no knowledge that the income was
not reported by the company and the company’s comptroller never told him that
the amount was taxable”.
[66]
There is nevertheless inconsistency
as to the source of the amount in question. Serge Lajeunesse first indicated
to the auditor, Ms. Piché, that it was a loan from a third party. Then, Mr.
Paradis raised the matter of the fault of the accountant. At the hearing, Serge Lajeunesse
indicated that the $24,000 came from [TRANSLATION] “odd jobs”. Following his assignment in
bankruptcy in 2009-2010, Serge Lajeunesse was not required to repay that amount.
[67]
With three different
versions, I find it difficult not to question the testimony of Serge
Lajeunesse. Thus, he did not discharge his burden of proof. I am of the view
that the amount of $24,000 came from 9028.
Luc Lavoie
[68]
During his testimony, Mr.
Lavoie admitted that a portion of the [TRANSLATION] “unexplained” deposits to his personal bank
account came from cheques made to the order of 9028 which he cashed. Mr. Lavoie
estimates the value of the cheques cashed that he diverted to himself at between
$75,000 and $100,000.
[69]
He also admitted to
having used the corporate credit card of 9028 to pay some of his personal expenses
by transferring amounts from his personal account to the credit card of 9028. According
to the testimony of Mr. Lajeunesse, the amount was $19,000.
[70]
It is clear that the misappropriated
funds came from 9028; thus, these amounts were correctly included in computing
the income of 9028. Mr. Lavoie discontinued his appeal and therefore the
assessments issued against him under subsection 15(1) are upheld.
[71]
I note that, in
assessing 9028, the Minister added as [TRANSLATION] “unexplained” deposits amounts greater than
those admitted by Mr. Lavoie during his testimony. The following amounts,
namely: $90,105 in 2005, $109,828 in 2006 and $71,032 in 2007, were added to
the income of 9028 as business income. According to the respondent, the [TRANSLATION]
“unexplained” deposits to the bank accounts of Mr. Lavoie come from 9028.
[72]
On that point, no evidence
was presented by counsel for 9028 showing that a portion of the deposits to the
personal bank accounts of Mr. Lavoie did not come from 9028. The burden was on 9028
to prove that a portion of the [TRANSLATION] “unexplained” deposits did not come from 9028.
In light of the absence of evidence, I must accept the facts assumed by the Minister
in the Reply to the Notice of Appeal, more specifically in paragraph 14(d)
thereof.
PENALTIES UNDER SUBSECTION 163(2)
[73]
The onus is on the respondent
to prove, in order to establish the validity of the penalties imposed under
subsection 163(2) of the Act, that Mr. Lajeunesse and 9028 knowingly,
or under circumstances amounting to gross
negligence, made a false statement or omission in their income tax returns.
[74]
The Federal Court,
Trial Division in Venne v. R., [1984] C.T.C. 223, 84 DTC
6247, ruled on the notion of gross negligence:
34
(4) Imposition of penalties - As
noted earlier, in order for the defendant to levy penalties under subsection
163(2) of the Income Tax Act it is necessary that the taxpayer have
"knowingly, or under circumstances amounting to gross negligence . . .
participated in, assented to or acquiesced in the making of" a false
statement in a return, etc. . . .
. .
.
37.
. . . “Gross negligence”
must be taken to involve greater neglect than simply a failure to use
reasonable care. It must involve a high degree of negligence tantamount to
intentional acting, an indifference as to whether the law is complied with or
not.
[75]
Since the decision in Villeneuve
v. R., 2004 FCA 20, it is established that gross negligence includes wilful
blindness:
[6] With respect, I think the judge failed to
consider the concept of gross negligence that may result from the wrongdoer's
willful blindness. Even a wrongful intent, which often takes the form of
knowledge of one or more of the ingredients of the alleged act, may be
established through proof of willful blindness. In such cases the wrongdoer,
while he may not have actual knowledge of the alleged ingredient, will be
deemed to have that knowledge.
[76]
The Federal Court of Appeal
stated in Lacroix v. R., 2008 FCA 241, that the Minister has discharged
his burden of proof under subsection 163(2) of the Act when the taxpayer has
earned income that he has not reported and for which he has not been able to
provide an explanation:
[32] . . . There may be circumstances where the Minister would be able
to show direct evidence of the taxpayer's state of mind at the time the tax
return was filed. However, in the vast majority of cases, the Minister will be
limited to undermining the taxpayer's credibility by either adducing evidence
or cross-examining the taxpayer. 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).
[77]
At the hearing, Mr.
Paquin, for Mr. Lajeunesse and 9028, limited his argument regarding the
penalties to the following:
[TRANSLATION]
So,
on the issue of penalties, while it is my view that we have succeeded in reversing
the burden of proof as regards the respondent’s assumptions, I humbly submit
that the respondent has certainly not discharged her
burden of proof with respect to penalties.
[78]
However, at the hearing,
the testimony of Mr. Lajeunesse, Serge Lajeunesse and Alain Martel was
all to the same effect. According to them, if errors occurred in computing
their income or the income of 9028, the responsibility for that lay with the
accountants, particularly 9028’s internal accountant, Mr. Lavoie. Thus, the Minister
could not impose penalties on 9028 and Mr. Lajeunesse, as Mr. Lavoie
was responsible for the omissions. They did not have any training in accounting
and relied entirely on their internal accountant, Mr. Lavoie.
Penalties - Mr. Lajeunesse
Fault of the accountant
[79]
The Federal Court of Appeal
has stated that when a taxpayer shows that an error has occurred through the
fault of the taxpayer’s accountant, the Minister must in turn show that the
taxpayer is responsible for the accountant’s gross negligence.
[80]
The respondent contends
that the fault of the accountant does not come into play in the present appeal.
She argues that the only breaches of the accountant’s duty that were adduced in
evidence during the hearing are that Mr. Lavoie was evasive when answering the questions
of the three shareholders, that he refused to show the statements of account to
the shareholders and that he did not open the envelopes containing the credit
card statements.
[81]
The respondent
therefore argues that there is no nexus between Mr. Lajeunesse’s unreported
income and the breaches by the accountant, Mr. Lavoie.
[82]
The respondent also
argues that the funds of 9028 misappropriated by Mr. Lavoie have no
connection with the deposits added to Mr. Lajeunesse’s income.
[83]
Furthermore, the
respondent argues that it is difficult to attribute fault to Mr. Lavoie in
light of the testimony of Mr. Lajeunesse, as Mr. Lajeunesse admitted that he
himself deposited the amounts at issue to his personal bank account. Mr. Lajeunesse
also indicated that he did his own income tax returns most of the time, although
he could not recall whether it was he who had done them for the years at issue.
[84]
I agree with the
respondent that the fault of the accountant does not come into play in the
present appeal. There is no nexus between Mr. Lajeunesse’s unreported income
for the 2005 and 2006 taxation years and the fault committed by the accountant,
Mr. Lavoie.
Gross negligence - Mr. Lajeunesse
[85]
First of all, the
respondent argues that the discrepancies between the reported income and the
income determined in the assessments are substantial.
[86]
Mr. Lajeunesse reported
total income of $35,526 for the 2005 taxation year and total income of $57,438 for
the 2006 taxation year. Mr. Lajeunesse’s unreported income represents 1386% of
his total reported income for 2005 and 11% of his total reported income for
2006.
[87]
Moreover, the
respondent submits that it is difficult to understand how a man as thrifty and prudent
as Mr. Lajeunesse could be so negligent and nonchalant with respect to the reporting
of his income.
[88]
The respondent also
submits that Mr. Lajeunesse’s conduct clearly reflects an indifference with
respect to taxation statutes. In that regard, the respondent notes that during
his testimony Mr. Lajeunesse indicated that if he did not receive T4 or T5
slips he simply did not report the income.
[89]
The respondent further argues
that, as Mr. Lajeunesse himself deposited the money to his personal bank
accounts, he can hardly claim that he did not know where those amounts came
from. He stated moreover that he had become “clean-cut” since the hiring
of a new accountant, Ms. Payeur, for 9028. He indicated, however, that he
did not report all of his income in the 1980s.
[90]
I am of the view that the
respondent showed that Mr. Lajeunesse had a reckless attitude with regard to
his tax obligations.
[91]
In my view, Mr.
Lajeunesse knew that he had not reported all of his income for the 2005 and
2006 taxation years. I am of the view that his behaviour with regard to his tax
obligations is tantamount to intentional acting or
indifference as to whether the law is complied with or not.
[92]
Furthermore, the appellant’s
argument that he cannot be held responsible for a false statement or omission because he did not have any training in accounting
is not a valid argument against a penalty for gross negligence. That the appellant
lacked the interest and time, owing to his extra heavy workload, to properly
complete his income tax returns does not in any way relieve him from his duty
to report all of his income.
[93]
Thus, the Minister rightly
imposed on Mr. Lajeunesse penalties under subsection 163(2) for the 2005 and
2006 taxation years.
Penalties - 9028
[94]
As I mentioned earlier,
the penalty assessed against 9028 with respect to the [TRANSLATION] “unexplained” deposit of Alain Martel
will have to be deleted, since I have found that the $20,000 did not come from
9028.
[95]
I am also of the view
that the penalty should be deleted with respect to the [TRANSLATION] “unexplained” deposits of Mr. Lavoie added
to the income of 9028.
[96]
In a similar case, Vachon
v. R., 2013 TCC 330, Mr. Vachon had been the victim of a swindle
perpetrated by his accountant. In his reasons for judgment, Justice Tardif wrote
the following regarding the behaviour of Mr. Vachon, at paragraphs 77 et seq.:
77 In this case, the appellant was very experienced, very
educated and had the specific abilities to assess human resources skills. He
should have been able to put into practice his own expertise, which would have
quickly allowed him to discover the fraud and the significant and crude abuse
perpetrated by his accountant. Despite this reality, there is no doubt that the
appellant did not want to avoid his tax burden for the benefit of Mr. Simard.
78 Penalties imply gross negligence, wilful default, wilful
blindness, etc. The basis for imposing a penalty is closer to a criminal law
concept.
79 Criminal law is a field with very specific rules. First of
all, in tax matters, the burden of proof is on the respondent, not the taxpayer
who is being assessed the penalty.
80 In tax law, the degree of proof required is the
balance of probabilities, whereas in criminal law, it is much more stringent;
there must be proof beyond a reasonable doubt.
81 In tax law, there is no requirement for proof beyond a
reasonable doubt at all; there must, however, be a likelihood that the person
being assessed has committed a fault to the degree that it could be considered
gross negligence and not a fault resulting from a lack of vigilance.
82 In criminal law, unless the mandator is complicit or is
associated implicitly or explicitly with the facts and behaviour attributed to
the mandatary, or benefits from the scheme, the mandator cannot be responsible
for the criminal responsibility resulting from the mandatary's facts and behaviour,
which benefited the mandatary to the detriment of his or her mandator.
83 In this case, it seems clear to me that there is
no such complicity. The appellant's negligence and carelessness are not
sufficient to lead to a conclusion that there was wilful blindness; in fact, it
would be unreasonable to accept that a person would voluntarily or
involuntarily accept that amounts paid for his or her tax debts would benefit
someone else.
[97]
I am of the view that in
this appeal, just like the appellant in Vachon, the mandator, 9028, was
not complicit in or associated with, either implicitly
or explicitly, the acts and behaviour attributed to the mandatary, Mr.
Lavoie. The mandator, 9028, cannot be required to bear
responsibility flowing from the acts and behaviour of the mandatary, who
benefited to the detriment of his mandator. Just as in Vachon, it
is true that Mr. Lajeunesse, as president of 9028, could have been more vigilant.
That said, it is difficult for a person to detect that he or she is being
defrauded by his or her employees and by shareholders.
[98]
The evidence shows that
9028 learned that it had been the victim of misappropriation only after it
hired the new accountant, Ms. Payeur, in 2007. Thus, in my view, it cannot
be held that there was gross negligence on the part of 9028 with respect to the
amounts that were diverted to the accountant, Mr. Lavoie.
[99]
The evidence is not precise
as to the quantum of the amounts misappropriated by Mr. Lavoie. The
figures put forward are from $75,000 to $100,000 with respect to the cheques cashed,
and approximately $19,000 for personal expenses paid through the corporate
credit card. Mr. Lajeunesse referred to a bonus of $225,000. These amounts cover
the amount of the [TRANSLATION] “unexplained” deposits of Mr. Lavoie.
[100]
Thus, I am of the view
that the penalty must be deleted with respect to the [TRANSLATION] “unexplained” deposits of Mr. Lavoie added
to 9028’s income as business income under subsection 9(1) of the Act.
[101]
As for the [TRANSLATION]
“unexplained” deposits added to the income of Mr. Lajeunesse and his brother, Serge
Lajeunesse, I am of the view that these individuals were aware that the funds came
from 9028. Accordingly, 9028 committed gross negligence in failing to include
those amounts in its income under subsection 9(1) of the Act; the Minister was
fully justified in imposing the penalty with respect to those amounts under subsection
163(2) of the Act.
CONCLUSION
[102]
The appeal of Mr. Lajeunesse
is dismissed.
[103]
The appeal of 9028 is
allowed on the basis that the Minister should not have included in computing
the income of 9028 an amount of $20,000 as business income for the 2005
taxation year. The penalties imposed with regard to the amounts of $20,000 and
$90,105 for 2005, an amount of $109,828 for 2006 and an amount of $71,032 for
2007 are deleted. In all other respects, the assessments with regard to 9028
remain unchanged.
[104]
Costs are awarded to the
respondent.
Signed at Montreal, Quebec, this 28th day of February 2014.
“Johanne D’Auray”
Translation
certified true
on this 10th day
of December 2014.
Erich Klein,
Revisor
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