Citation: 2016 TCC 195
Date: 20160915
Docket: 2013-999(GST)G
BETWEEN:
LUC BOISVERT,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
[ENGLISH
TRANSLATION]
REASONS
FOR JUDGMENT
Favreau J.
[1]
Luc Boisvert filed an appeal before this
Court against the assessment dated February 29, 2012, issued by the
ministre du Revenu du Québec as an agent of 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) for the period from April 1,
2007, to December 31, 2008 (the relevant period).
[2]
Under the assessment dated February 29,
2012, the following amounts were assessed:
|
|
2007
|
2008
|
|
Adjustments to calculation of the reported net tax
|
$13,222.50
|
$8,345.83
|
|
Arrears interest
|
$3,192.82
|
$1,371.36
|
|
Instalment interest
|
|
$341.33
|
|
Penalty for failure to file
|
$528.89
|
$333.82
|
|
|
|
|
[3]
The adjustments made to the calculation of net
tax reported ($13,222.50 and $8,345.83 respectively) constitute amounts of
goods and services tax (GST) not collected or collectible on the appellant’s
undeclared business income.
[4]
In establishing the assessment in question, the
Minister based his conclusions on, among other things, the following
conclusions and assumptions of fact, stated in paragraph 18 of the Reply
to Notice of Appeal:
a) the
facts admitted above;
b) For the period in question, the appellant
was a "registrant" for the purposes of Part IX of the ETA;
c) The appellant’s commercial activity
related to supplying taxable goods or services, drug supplies constituting
taxable supplies;
d) the appellant failed to report and to
include his business income and thus he failed to include his undeclared
taxable sales in the calculation of his net tax.
e) as appears in greater detail in the
reasons and the amounts indicated in the excerpt of the audit report, entitled
"Appendix A," attached to this response as if the excerpt in
question were cited in this paragraph, the tax audit of the appellant was
conducted based on information obtained from police by the respondent to the
effect that the appellant was involved in operating a cannabis grow operation
in St‑Roch, Québec;
f) specifically, the search conducted on
August 13, 2008, and the police investigation revealed:
i) the presence of a cannabis grow operation in the hangar
of the appellant’s business, in which were found, according to the Sûreté du
Québec, a minimum of 1,650 plants;
ii) the existence of accounting documents pertaining to the
grow operation, discovered in the appellant’s residence and in the business’
office;
iii) the seizure of an amount of $10,100 found with documents
from the cannabis grow operation in a desk drawer in the business’ office;
iv) the seizure of seven (7) improperly stored firearms
from the appellant’s residence;
v) the seizure of eighteen (18) vehicles, parts or
motors from the appellant’s land that had been reported stolen or whose
identification numbers had been altered;
g) following the search in question, the
appellant was arrested and charges, including production of marijuana for the
purpose of trafficking, were brought against him;
h) subsequently, said charges were withdrawn
following an agreement with the Crown, whereby, in return, the amount of
$10,100 and the vehicles whose identification numbers had been modified were
confiscated;
i) on the basis of the search photographs
and the accounting documents pertaining to the grow operation, an expert report
was produced by Sergeant Suzanne De Larochellière, of the Sûreté du Québec, determining
the income and assessments for the period in question, as follows:
|
|
2008
|
2007
|
Total
|
|
Gross business
income
|
$166,916.67
|
$250,375.00
|
$417,291.67
|
|
(Small supplier)
|
($0.00)
|
($30,000.00)
|
($30,000.00)
|
|
Gross business income
subject to GST
|
$166,916.67
|
$220,375.00
|
$387,291.67
|
|
GST not collected
|
$8,345.83
|
$13,222.50
|
$21,568.33
|
|
Penalty for failure to file
|
$333.82
|
$528.89
|
$862.71
|
j) the drug trafficking activity of the appellant
constituted a "business" within the meaning of the law and this
"business" resulted in taxable transactions;
k) the amount of GST that the appellant was required
to collect and remit to the Minister during the period in question was 6% in 2007,
i.e. an amount of $13,222.50, and 5% in 2008, i.e. an amount of $8,345.83.
l) consequently, the appellant did not
declare the said amounts of $13,222.50 and $8,345.83 as GST collected or
collectible when calculating his net taxes for the period in question;
m) the appellant therefore owes the Minister
the amount of the adjustments made to his net tax reported for the period in
question, plus the interest and the penalty.
Appellant’s
testimony
[5]
The appellant is the manager, CEO and majority
shareholder of the company 9193‑2723 Québec Inc., operating under the
business name "St‑Roch Sports," whose commercial
activities involve the buying and selling of recreational vehicles, such as
snowmobiles, four-wheelers, jet-skis and recreational boats. The company 9193‑2723
Québec Inc. was incorporated on February 26, 2008, under Part IA of
the Quebec Companies Act.
[6]
The appellant’s salary is approximately $26,000
per year according to his testimony and his tax returns for the 2000 to 2009
taxation years.
[7]
As part of a police investigation that began in
2006, a search was conducted on August 13, 2008. The search targeted a
hangar located at 275 route 125, St‑Roch Ouest. This
hangar is located on the same land as the appellant’s residence, that is to say
at 765 rang Rivière Nord, St‑Roch Ouest. The residence belongs
to the appellant’s mother.
[8]
Within the hangar, a section was sub-divided. It
was a room constructed using plywood. The search confirmed the presence of a
cannabis grow operation in this room.
[9]
The appellant explained during his testimony
that this portion of the hangar had been rented out since 2006. The lease
agreement between St‑Roch Sports, as represented by the appellant
who acted as its manager, and Viviane Carpentier, dated October 1,
2006, was entered into evidence. The lease was for a one-year term, beginning
on October 1, 2006, and ending on September 30, 2007. According to
the information set out in the lease, the rental agreement was for storage purposes
only. The rent was $500 per month, payable by cheque. According to the
appellant, the tenant had signed postdated cheques dated for the 15th of each
month, which the appellant had filled out in front of her. The only cheque
entered into evidence is dated July 15, 2008, and was made out to St‑Roch
Sports & Plaisance. The cheque was endorsed for deposit into the account of
the company 9065‑4344 Québec Inc., but was returned for non-payment and
the company’s account was debited $505. The company 9065‑4344 Québec Inc.
operated under the business name "St‑Roch Sports et Plaisance"
and the appellant’s father was the manager, CEO, secretary and majority
shareholder of this company. The appellant’s father died in November 2007.
As of July 15, 2008, the company 9065‑4344 Québec Inc. was still in
operation and had an active bank account. During his testimony, the appellant
stated that this company belonged to him.
[10]
The appellant explained at the hearing that he
had been introduced to Ms. Carpentier by a customer, whose name he no
longer remembered. Ms. Carpentier had been unaccompanied at the two
meetings she had had with the appellant. The only piece of identification that
the appellant had requested when signing the lease was her driver’s licence.
The appellant added that he had met with Ms. Carpentier a third time when
selling her a used Chevrolet Malibu for $5,000 or $6,000, which she had paid in
cash.
[11]
The hangar’s electrical bills were paid by the
appellant but he declared that the system had been tampered with by the tenant.
[12]
According to the appellant’s testimony, the
hangar had a sliding door in front, a door on the right and an entrance door on
the left. The rented portion had its own door—the one on the left. The portion
of the hangar that the appellant used for his business served as storage for
parts and vehicles.
[13]
The appellant claimed that he made regular
visits to the hangar with customers. He specified that he only had access to
the hangar through the door on the right and that he did not have the key for
the rented portion.
[14]
Sworn statements made by the appellant’s mother,
Claire St‑Germain, and his former spouse, Louise Patenaude,
were offered into evidence and revealed that the appellant was the only one who
had access to the hangar and used it.
Testimony of Officer Frédéric Losier
[15]
Frédéric Losier, a police officer with the
Sûreté du Québec, testified at the hearing and explained how the police
investigation had gone. During the search, the police noted that the interior
of the rented room had been cleaned and that almost none of the cannabis pots
remained in their places, except for a few plants. The lights and the
ventilation system were still functional.
[16]
Mr. Losier explained that the rented room
in the hangar had been subdivided into four sections over two levels.
[17]
According to the photographs taken by
Marc Lacombe, the Sûreté du Québec technician responsible for taking
photographs during the search, and according to the investigation report, these
subdivisions housed 58 1000W lights suspended from the ceiling, fans,
two heat pumps, electrical ballasts, four water barrels, charcoal filters and
dried cannabis plants. There were 29 cannabis plants on site, which were
seized.
[18]
Mr. Losier also testified about the
equipment used for the cannabis grow operation. In order to vent the hot air
and the odour from the cannabis plants, heat pumps, air-conditioning equipment
and compressors were installed in the room. Charcoal filters were used to
purify the air and reduce odours.
[19]
A long black ventilation duct leading from the
room in question allowed air to be vented outside. This duct was visible from
the inside of the unrented portion of the hangar. A heat pump was also
installed in the unrented portion of the hangar. The appellant explained that
the dome was unheated prior to being rented and that he had authorized the
installation of a heating system.
[20]
Officer Losier testified that a second warrant
was obtained in order to seize two stolen vehicles that had been located in the
hangar using their serial numbers. In this regard, the appellant stated that
the stolen vehicles did not belong to him and that they had been stored at
customers’ requests.
[21]
Two other warrants were obtained in order to
search the appellant’s residence as well as the business located on the same
land as the hangar. The respondent’s counsel filed a bundle of documents as
evidence.
[22]
From the residence, seven improperly stored
firearms were seized. The appellant held a possession licence and had
registered five firearms. In addition, two keys to the left hangar door, which
led directly to the cannabis grow operation, were seized from the residence,
even though the appellant had declared that he did not have keys to that door.
Testimonies from other police officers
[23]
Christian Lévesque, detective sergeant with
the Sûreté du Québec, and police officer Bruce Labrie, testified regarding
the evidence seized during the search. In the bathroom of the residence, scraps
of paper related to the cannabis grow operation were found in a wicker basket.
[24]
In the appellant’s business, the key to the
padlock on the pedestrian door on the right side of the hangar was found in a
set of keys hanging on the hangar bulletin board. In addition, various papers
with notes related to the operating costs of the cannabis grow operation, along
with $10,100 in cash found in one of the desk drawers, were seized from the
main office. Other documents related to the cannabis grow operation were found
near the office, for example in the garbage.
[25]
Suzanne De Larochellière, a drug
expert for the Sûreté du Québec, testified at the hearing regarding her expert
report. Firstly, she listed the main steps in cannabis production. Then, she
gave her analysis of the documents seized from the hangar and the appellant’s
business regarding cannabis production. She noted that the growth period was
four weeks and that the flowering stage lasted eight weeks, for a total of
12 weeks. Given the division of the space into four rooms, one room was
used for growing and the three other rooms were used for flowering.
[26]
The marks left by the pots on the floor indicate
that quite a number of plants were grown there. Ms. De Larochellière
counted 112 cannabis plants that were cultivated in one of the rooms.
[27]
After observing the photographs and the
accounting documents offered into evidence, the expert noted that a total of
1,650 cannabis plants had been acquired and cultivated. In addition, the
documents regarding operating costs allowed her to pinpoint seven harvests. The
documents were not dated, but Ms. De Larochellière noted that the
costs were consistently divided in two throughout the documents, which implies
that the harvest was shared. Furthermore, there were entries regarding the
costs of acquiring cuttings (babies) and costs associated with cultivation.
[28]
Ms. De Larochellière prepared her
expert report on the basis of the prices indicated in the documents and not
based on market prices.
[29]
According to the documents submitted into
evidence, the harvests and production yields were as follows:
|
Quantity (pounds)
|
Price/pound
|
Total price
|
|
28 pounds
|
$1,400
|
$39,200
|
|
33 pounds
|
$1,575
|
$51,975
|
|
36 pounds
|
$1,450
|
$52,200
|
|
22 pounds
|
$1,450
|
$31,900
|
|
35 pounds
|
$1,400
|
$49,000
|
|
18 pounds
|
$1,450
|
$26,100
|
|
16 pounds
|
$1,400
|
$22,400
|
|
|
|
|
[30]
According to Ms. De Larochellière, it
is not possible for the appellant to have been unaware of the presence of the
cannabis grow operation, due to the odour and the equipment used.
[31]
According to Ms. De Larochellière, the
cost of the materials used for production was approximately $50,000.
[32]
Marie‑Josée Caza, a research officer
with the Agence du Revenu du Québec (ARQ), conducted the audit of this matter
and testified at the hearing on her audit report and regarding the notice of
assessment.
[33]
Ms. Caza declared that the appellant had
refused to answer questions during the audit. She therefore proceeded with an
analysis of the appellant’s personal situation, which allowed her to discover
that he owned very few assets in his own name. In fact, the three buildings
located at 275 route 125 and at 765 rang Rivière Nord in
St-Roch Ouest belonged to the appellant’s mother. The appellant owned a vehicle
purchased in 2006 and three trailers. On May 27, 2008, the appellant
purchased land that had belonged to his brother, located in the municipality of
Petite-Rivière-Saint‑François in the Charlevoix region. The sale had been
made for $9,346 in cash, even though the municipal assessment valued the
property at $61,700.
[34]
Ms. Caza conducted the assessment on the
basis of the Sûreté du Québec’s investigation report and
Ms. De Larochellière’s expert report. The assessment period is from
January 1, 2007, to December 31, 2008. The 2007 taxation year is
covered by the assessment following the positive result of the police
investigation showing that cannabis production began in 2006. Indeed, Mr. Losier
testified at the hearing that a thermal imaging test had been done by a Sûreté
du Québec police officer. This test had indicated abnormal heat coming from the
hangar.
[35]
In order to determine the number of harvests in 2007,
production was determined on the basis of a period of eight weeks. The
calculation of income from the sale of marijuana was based on the Sûreté du
Québec’s expert report. The cost to purchase cuttings ranged from $5 to $8 per
unit. The average sale price for the amount of one pound was $1,450, whereas
the average gross income per harvest was $41,729 and the net income was
$15,748. Ms. Caza determined that six harvests had taken place in 2007 and
four harvests had taken place in 2008, on the basis of an eight-week flowering
period. In 2007, the net profit was $94,489 and in 2008, it was $62,993.
[36]
The production costs were not taken into account
given the lack of evidence and invoices, but the assessment factors in business
expenses and the 50% share attributable to another person.
Other relevant facts
[37]
The appellant argues that the papers with
handwritten amounts of money on them related to drugs are not his and are not
from his office. As for the money found in his office, the appellant explained
that he uses cash in operating his recreational vehicle buying and selling
business.
[38]
The appellant was arrested on the spot during
the search on charges of cannabis production and possession of stolen vehicles.
He had a sum of $1,182 on his person. Upon his arrest, the appellant claimed
that the site was rented, but that he did not know the tenant’s name. Following
an agreement, the charges were withdrawn.
[39]
The appellant stated that he had been unable to
contact Ms. Carpentier, the signatory of the lease. The respondent
summoned her by subpoena, but she failed to appear. The respondent’s
counsel entered into evidence a statement written by Ms. Carpentier, in
which she claims that she never rented a portion of the hangar and that she was
not the one who signed the lease. The following is an excerpt from this
statement:
[translation]
I never rented at
275 route 125 in St-Roch Ouest. It was not me who signed the
lease and this is not my signature and I always sign with two "n"s.
The cheque that the employees showed me, dated July 15, 2008, for the
amount of $500, is one of a series of postdated cheques that I had made out for
a car loan. When signing the cheques, I left the "pay to the order
of" and "memo" portions blank. The lender had given me $5,000 in
cash, which I had to repay with postdated cheques. I believe that the money was
loaned to me in November or December 2007. I do not know the lender’s last
name. At the exchange, he was big and husky, with dark hair. I have never had
an import-export company and I have never rented hangar space to store
anything.
[40]
For his part, the appellant submits that he was
not aware of the cannabis grow operation in the rented space. According to his
testimony, the rented space was completely closed-off and the ceiling was
insulated. Thus, it was not possible to see the lights at night.
[41]
The main question is whether the appellant was
operating a business selling drugs, which constitute taxable supplies for which
GST was payable.
[42]
In the event that the appellant did make taxable
supplies related to the sale of cannabis, was the Minister justified, in the
circumstances, in using an alternative audit method?
[43]
The appellant submits that the audit relies
exclusively on the police investigation, which includes elements of hearsay
that are inadmissible as evidence and that their admission would bring the
administration of justice into disrepute.
[44]
In addition, the appellant argues that the
Minister did not demonstrate the existence of a business operated by the
appellant.
[45]
Alternatively, the appellant argues that the
Minister’s assessments are erroneous given that they are based on undated
documents consisting solely of estimates. In addition, there is no evidence to
establish that cannabis was produced during the 2007 taxation year.
Furthermore, the assessment does not take into consideration the value of the
production materials and equipment, which is estimated at $50,000.
[46]
Regarding the calculation of income, the
appellant disputes the production period. According to him, it is inaccurate to
calculate a production period of just eight weeks.
[47]
The appellant cites a Court of Quebec (CQ) case,
NDIBU v. Agence de revenu du Québec, 2015 QCCQ 1022, where
the taxpayer challenged the validity of the results of an audit conducted using
the arbitrary and approximative "cost of living" method. In that
case, Justice Dortélus took into consideration that the main information
available to the Revenu Québec auditor was from the police report. The court
held that the taxpayer had submitted sufficient evidence to demolish, prima
facie, the assumption of validity of the assessments. The appellant claims
that there is no inconsistency with the facts in this case.
[48]
The Minister submits that the appellant operated
a business during the period at issue and that the supplies created by this
business constituted taxable supplies for which GST was payable by the buyers
and that the appellant had the duty to collect and remit said GST.
[49]
Due to the appellant’s incomplete accounting
books and records, the Minister submits that it was justified to use an
indirect or alternative audit method in order to determine the amount of
taxable supplies made by the appellant.
[50]
The Minister also submits that it was justified
to impose upon the appellant the interest and penalties provided for in
sections 280 and 280.1 of the ETA.
[51]
The Minister raises several inconsistencies with
regard to the lease. Firstly, Ms. Carpentier failed to appear despite
being subpoenaed. She nonetheless made and signed a written statement saying
that she had never rented a portion of the hangar, nor signed any lease.
Secondly, the appellant had declared, at the time of his arrest, that he did
not know the tenant’s name. Furthermore, the lease was not submitted to the ARQ
until May 17, 2011, after the assessment was issued. The Minister pointed
out that the lease had been signed using two different inks and that there was
an error in the tenant’s name.
[52]
The set-up of the cannabis production room, the
odour, and its location right in the hangar constitute more than probative
evidence that the appellant was aware of the cannabis grow operation’s
existence.
[53]
The evidence, such as the cash, the key to the
door of the rented portion of the hangar, as well as the seized documents
regarding the cannabis grow operation, allow for the conclusion to be drawn
that the appellant knew that cannabis was being produced in the hangar.
[54]
The Minister submits that the appellant’s
statements are in no way corroborated.
[55]
Regarding the burden of proof, the Minister
cites 9116-0762 Québec Inc. (Belle-Or) v. The Queen, 2010 TCC 116,
at paragraph 9, which states that the taxpayer has the initial burden of
demolishing the Minister’s assumptions.
[56]
Furthermore, the Minister refers this Court to Brown
v. The Queen, 2012 TCC 251, 2013 FCA 111, where the
taxpayer was charged with, but never convicted of, drug trafficking. In Brown,
Justice Hogan recalled at trial that the standard of proof is always that
of the balance of probabilities and not of proof beyond a reasonable doubt. In
addition, the judge added that "[i]t is well established in tax appeals
that the onus is on the taxpayer to disprove an assessment issued within the
normal assessment period." (paragraph 58).
[57]
In Brown, in appeal, the Federal Court of
Appeal (FCA) confirmed that the documents sent by the police to the Canada
Revenue Agency were admissible as evidence given that the search and seizures
were legal.
[58]
The general question is whether the appellant,
during the period at issue, operated a business selling illegal drugs. The
concept of a business is defined in section 123 of the ETA:
"business" includes a profession, calling, trade, manufacture or undertaking
of any kind whatever, whether the activity or undertaking is engaged in for
profit, and any activity engaged in on a regular or continuous basis that
involves the supply of property by way of lease, licence or similar
arrangement, but does not include an office or employment.
[59]
A commercial activity is defined as follows in
section 123 of the ETA:
commercial
activity of a person means
(a) a business carried on by the person (other than a business carried
on without a reasonable expectation of profit by an individual, a personal
trust or a partnership, all of the members of which are individuals), except to
the extent to which the business involves the making of exempt supplies by the
person,
(b) an adventure or concern of the person in the nature of trade (other
than an adventure or concern engaged in without a reasonable expectation of
profit by an individual, a personal trust or a partnership, all of the members
of which are individuals), except to the extent to which the adventure or
concern involves the making of exempt supplies by the person, and
(c) the making of a supply (other than an exempt supply) by the person
of real property of the person, including anything done by the person in the
course of or in connection with the making of the supply.
[60]
The law is well settled: the illegal sale of
drugs constitutes a commercial activity and that the resulting cannabis
supplies are considered to be taxable supplies for GST purposes. (See in this
regard John Molenaar v. The Queen, 2003 TCC 468, at
paragraph 56.)
[61]
Furthermore, Justice Angers in Ouellette v.
The Queen, 2009 TCC 443, made the following comment:
17 This Court has already ruled that income from growing
marijuana is taxable income under the Income Tax Act and that marijuana
supplies are "taxable supplies" for the purposes of the Act
(see John Molenaar v. The Queen, 2003 TCC 468). It is therefore obvious that the same
goes for selling all other types of drugs and illegal substances. . . .
[62]
Lastly, the Court of Quebec, in Robitaille v.
Québec (Sous-ministre du Revenu), 2010 QCCQ 9283, reviewed the
case law and 65302 British Columbia Ltd. v. Canada, [1999] 3 SCR 804,
a Supreme Court of Canada case and eventually decided that a commercial
activity, even when pursued for illegal purposes, is nonetheless subject to tax
law. In addition, the Court of Quebec states that the obligation remains to
collect tax on supplies resulting from this activity and to remit it to the tax
authorities.
[63]
In a tax case, the burden of proof rests with
the taxpayer and the initial onus is on the taxpayer to demolish the Minister’s
assumptions, on the basis of a prima facie case, and thus demonstrate
that the assessment is erroneous. (See, in this regard, Hickman Motors Ltd. v.
Canada, [1997] 2 S.C.R. 336.)
[64]
The assessments and reassessments issued by the
Minister are presumed to be valid under subsection 299(3) of the ETA.
[65]
Justice Bédard, in Belle-Or, a case previously
cited by the appellant’s counsel, summarized the burden of proof that rests
with the appellant in the following manner:
9 Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336
is to the effect that the Minister uses assumptions to make assessments and the
taxpayer has the initial burden of demolishing the Minister’s assumptions. This
is met where the taxpayer makes out at least a prima facie case that
demolishes the Minister’s assumptions. Then, after the taxpayer has met the
initial burden, the onus shifts to the Minister to rebut the prima facie
case made out by the taxpayer and to prove the assumptions. As a general rule,
a prima facie case is defined as one with evidence that establishes a
fact until the contrary is proved. . . .
[66]
In Amiante Spec Inc. v. Canada, 2009 FCA 139,
the Federal Court of Appeal explained as follows what a prima facie case
is:
[23] A prima facie case is one “supported by evidence which raises
such a degree of probability in its favour that it must be accepted if believed
by the Court unless it is rebutted or the contrary is proved. It may be
contrasted with conclusive evidence which excludes the possibility of the truth
of any other conclusion than the one established by that evidence” (Stewart
v. Canada, [2000] T.C.J. No. 53, paragraph 23).
[67]
When the burden of proof is reversed, the
Minister must prove the facts in terms of the standard of the balance of
probabilities.
[68]
The facts in this case are similar to those in
the TCC’s decision in Molenaar, above, which was confirmed by the FCA.
In summary, the taxpayer was arrested for growing cannabis after a search in a
hangar near his home. A Sûreté du Québec investigator testified as to the high
calibre of the marijuana grow operation facilities. Despite having admitted to
his involvement in this operation, the taxpayer was acquitted for insufficient
evidence. Justice Boyle, of this Court, stated that this acquittal was in no
way conclusive for the purposes of appeals against assessments issued under the
Income Tax Act (ITA) and the ETA. In view of all of the evidence, the
judge came to the conclusion that, on the basis of the balance of
probabilities, the taxpayer was involved in the marijuana grow operation and thus
had earned business income.
[69]
In Lavie v. The Queen, 2006 TCC 655,
the Minister had determined that the taxpayer was a person who had acquired
cocaine from the Hells Angels Nomads, using a pseudonym. The Minister had
established by assumption, on the basis of the data collected during police
investigations, that the appellant was operating a commercial activity selling
cocaine. The appellant denied having sold cocaine during the period at issue
and stated that he was not living at the residence that had been searched. Justice Lamarre,
as she then was, held that the burden rested with the Minister:
17 In the case at bar, the Minister determined, by means of
presumptions, that the Appellant personally trafficked in cocaine. The Minister’s
assessment is based on inferences drawn from police investigations. This is
not a case involving the application of the self-reporting tax system. In
view of this, it is my opinion that the Respondent cannot justify her
assessment merely by presumptions which the taxpayer has little or no means to
rebut. . . .
[My emphasis.]
[70]
Subsequently, Lamarre J. said she was
satisfied with the prima facie case made by the appellant. Thereupon,
the burden of proof was reversed and it fell on the Minister to prove the
assumptions of fact. In conclusion, the judge reiterated that it was an
arbitrary assessment based on inferences drawn from police investigations and
the evidence was insufficient to establish that the appellant had sold illegal
substances. In her reasons, Lamarre J. made the following comments:
18 As I have said, the assessment in the instant case is an
arbitrary assessment based on presumptions made in the wake of police
investigations, and in my opinion, a reversal of the burden of proof is called
for here. Since the Appellant denied trafficking in cocaine and denied being
the "Bilav" referred to in the Hells Angels accounting documents
whose contents are unknown to the Appellant, I am of the view that it is up to
the Minister to show, on a balance of probabilities, that the assessment is
well-founded. While all unlawful activity should understandably not be
encouraged, but, rather, denounced, it would also be improper to arbitrarily
attribute sales of illicit substances, without sufficient evidence, to an
individual who is suspected of trafficking in narcotics but has not been
charged with such an offence. The remarks made by Associate Chief Justice
Bowman (as he then was) in Chomica v. Canada, [2003] T.C.J. No. 57
(QL), at paragraph 16 of his decision, appear relevant to the instant
case:
I start from the observation that in
my view the whole business smells to high heaven. It was operated by unsavoury
characters who, if they were lucky, managed to keep one jump ahead of the law
and, if they were not, got caught. However just because I have or happen to
dislike and distrust people who are involved in these schemes does not mean
that I can totally ignore the rules of evidence and base my decision on
visceral instincts and inadmissible evidence.
[My emphasis.]
[71]
Despite the preceding, the FCA had previously
stated in Orly Automobiles Inc. v. Canada, 2005 FCA 425, that
"the burden of proof put on the taxpayer is not to be lightly,
capriciously or casually shifted" (paragraph 20). The principle
behind this statement is that the taxpayer knows and possesses information that
the Minister does not.
[72]
The recent decision rendered by the Quebec Court
of Appeal (QCA) in Pinard v. R., 2015 QCCA 1715, is
relevant in this case even though it is a criminal law judgment. As in this
case, it is a case that deals with circumstantial evidence.
[73]
At trial, the CQ found the accused guilty of
trafficking cannabis. Subsequently, the QCA set aside the CQ’s verdict for the
primary reason that the evidence was not convincing beyond a reasonable doubt
that the only logical inference could be that the accused was guilty.
[74]
Concretely, the accused was the owner of the
building that was searched, wherein a cannabis grow operation was found. The
facts were different from the present case in that there was no evidence that
the accused had occupied the space, and nothing indicated that he had set foot
there before. In addition, no other evidence was offered to prove that the
accused was aware of the cannabis grow operation at this location. The police
proceeded to arrest him since he was found in the primary suspect’s residence.
[75]
In its reasons, the QCA refers to a case decided
by the Supreme Court of Canada, R. v. Jackson, [2007] 3 SCR 514,
in order to compare the respective facts. In Jackson, the accused had
been arrested on the very premises of the marijuana grow operation, and his
participation was therefore assumed. The Court cites an excerpt from Justice Fish,
wherein he found at paragraph 10 that "it was open to the trial judge
to conclude, as he did, that the appellant’s presence at the scene of the crime
was consistent only with his culpable involvement in the production of marijuana
with which he was charged." Yet, the QCA states that the accused’s
participation cannot be inferred based on the simple fact that he owns the
building.
[76]
After analyzing the facts in Pinard,
above, Justice Biche makes the following observations regarding inferences
that can be made on the basis of circumstantial evidence:
37 As the Nova Scotia Court of
Appeal observed in R. v. Murphy29, however, it cannot be
ruled out that the control required for the offences of production or
possession can be inferred from the accused’s occupancy of the premises where
they were committed: "[t]he fact of tenancy or occupancy of
premises does not create a presumption of possession of all that is found in
those premises, but I accept that a trier of fact can infer possession from
occupancy." But there is no evidence here of occupancy, which cannot
be inferred from the mere fact that the appellant is the owner of 180. As in Murphy,
there is no evidence showing that the appellant occupied 180 or 106, or even
that he ever set foot in 180, and we cannot reasonably infer that because he is
the titled owner of the property, that he actually occupied the premises. An
inference of this kind would, moreover, be contrary to the daily reality of
property owners, many of whom never occupy their property.
38 Of course, it is possible not
to occupy premises and still know and control what goes on there or be
complicit therein. In the case at bar, however, we cannot draw this inference
from the mere fact that the appellant is the owner of 180 and that he was
arrested on a neighbouring property. At the most, we can infer from the
appellant’s title to 180 that he knew of the existence of the plantation, but
from this presumed knowledge we cannot infer, directly or by complicity, that
he had control (whether for the purpose of production or possession for the
purpose of trafficking), which cannot be the merely legal control exercised as
owner of the property.
[My emphasis.]
[77]
The QCA’s conclusion was that the totality of
the circumstances did not demonstrate, beyond a reasonable doubt, that the
accused was guilty. It was specified that the fact that the accused owned the
building did not, in itself, prove his guilt.
[78]
In view of the preceding, a conclusion regarding
an individual’s guilt can be reasonably drawn when there is sufficient
evidence. This evidence must be considered as a whole.
[79]
Subsection 286(1) of the ETA sets out the
obligation of a business owner to keep books and records:
286(1) Keeping
books and records Every person who carries on a
business or is engaged in a commercial activity in Canada, every person who is
required under this Part to file a return and every person who makes an
application for a rebate or refund shall keep records in English or in French in
Canada, or at such other place and on such terms and conditions as the Minister
may specify in writing, in such form and containing such information as will
enable the determination of the person’s liabilities and obligations under this
Part or the amount of any rebate or refund to which the person is entitled.
[80]
An alternative audit method can be used by the
Minister in order to reconstruct a taxpayer’s income in certain circumstances.
[81]
In Desroches v. The Queen, 2013 TCC 81,
and 9100-8649 Québec inc. v. The Queen, 2013 TCC 160,
I stated that the case law holds that the Minister can resort to
alternative audit methods in the event that the taxpayer does not file tax
returns or does not keep reliable accounting books and records.
[82]
An alternative audit method can allow for the
value to be determined of illegal substances produced and sold by the taxpayer.
For this purpose, expert reports, testimonies from expert witnesses, partial
agreements on the facts as well as the taxpayer’s confessions can be used.
[83]
An alternative audit method was used in Reny
v. The Queen, 2015 TCC 279, where the appellant had pleaded
guilty to charges of drug trafficking and possession for the purposes of
trafficking. More specifically, the Minister used the "net worth"
method. In that case, I decided that the use of such a method was warranted,
given the total absence of accounting records and given the existence of
inexplicable discrepancies in the appellant’s assets.
[84]
Subsequently, 9100-8649 Québec inc. was recently
cited by Justice D’Auray in 9103-4348 Québec inc. v. The Queen,
2015 TCC 220, as well as by Justice Masse in Syed v. The
Queen, 2014 TCC 307, in which it was recalled that it was
necessary to use alternative methods in cases wherein the taxpayer does not
have reliable accounting records.
[85]
D’Auray J. specified at paragraph 46
of 9103-4348 Québec inc. v. The Queen, above, that "[i]t does not
suffice that books and accounting records exist and are consistent with one
another; they must also be reliable."
[86]
These cases hold that the alternative audit
method used to establish an assessment is warranted if the taxpayer’s
accounting books and records are not reliable. For example, this method is
justified when the taxpayer conducts business only in cash and his or her cost
of living cannot be determined through documentary evidence.
[87]
In view of the case law and the evidence as a
whole, I am of the opinion that the appellant was operating a business based on
the sale of illegal substances.
[88]
In my opinion, the appellant did not provide prima
facie evidence that the Minister’s assumptions of fact were erroneous. The
appellant argued that the portion of the hangar where cannabis had been grown
was rented to Ms. Carpentier and he submitted into evidence a signed lease
agreement to that effect and denied any participation in or knowledge of the
illegal activities that occurred there. However, a number of elements that
suggest the opposite were submitted into evidence.
[89]
Despite the existence of the lease, the
appellant’s version is inconsistent with Ms. Carpentier’s written
statement. Ms. Carpentier should have been summoned by the appellant to
testify at the hearing. It is therefore impossible to verify
Ms. Carpentier’s version of the facts.
[90]
In addition, the appellant’s statement that he
did not have access to the rented portion of the hangar was contradicted by the
discovery, within his residence, of keys to the rented portion of the hangar. As
for the money and the documents found in his office, the appellant gave no
credible explanation.
[91]
The appellant’s case does not constitute a prima
facie case, given that it is contradicted. Consequently, the Minister’s
assumptions have not been demolished.
[92]
In my opinion, the facts in this case are quite
different from those in a recent QCA case, Pinard v. R., cited above.
The appellant was not the owner of the hangar but evidence revealed that he
regularly used this building for storage purposes and often brought customers
there. In addition, his business and the residence in which he lived were
located near the cannabis production site. Several pieces of evidence found in
the appellant’s residence and business allow him to be linked to the production
of cannabis. These circumstances constitute more than probative evidence that
the appellant was aware of the cannabis grow operation’s existence. It is
therefore reasonable, in the light of the evidence, to draw the conclusion that
the appellant participated in these illegal activities.
[93]
As held in Molenaar, cited above, the
fact that the criminal charges were withdrawn is in no way relevant in this
case. Also, Brown, cited by the respondent, reitirated that the burden
of proof is not the same as in criminal cases where the standard is beyond a
reasonable doubt.
[94]
In view of all of the evidence of record, I am convinced
that, on the balance of probabilities, the Minister demonstrated the appellant’s
knowledge of and participation in illegal cannabis grow operation activities.
[95]
The testimony of the Sûreté du Québec expert,
Ms. De Larochellière, enlightened the Court as to common practices in
the field of cannabis cultivation and allowed production yields to be
determined. No evidence was offered by the appellant to contradict
Ms. De Larochellière’s expert report. I therefore accept her
testimony, and the expert report appears quite relevant to me in determining
the income earned from production of the illegal substances in question.
[96]
I consider the alternative audit method to be warranted
in this case since there is no trace of business transactions, as everything
was done in cash. In that regard, let us recall that the appellant had
approximately $1,000 in cash on his person when he was arrested, and that an
amount of $10,100 was found in a desk at his business. The documents related to
cannabis production that were found in the appellant’s business and residence
are the only records that could be found. The Minister was therefore justified
in referring to them in order to establish the assessment at issue.
[97]
By contrast, I noted a discrepancy between the
evidence submitted, that is to say the documents regarding cannabis production
revenue, and Ms. Caza’s audit report. In order to establish an average of
gross sales, Ms. Caza referred to the Sûreté du Québec expert report. In
her calculations, she took into consideration only six of the seven harvests
that are found in the evidence. Indeed, photograph #104 in Exhibit A‑2
was not considered by Ms. Caza.
[98]
Consequently, there is a discrepancy in the
average price per pound of cannabis, which would be $1,446 rather than $1,454,
and the average gross sales per harvest would be $38,968 and the average net
profit per harvest would be $14,502:
|
Quantity (pounds)
|
Price/pound
|
Gross sales
|
Profit
|
|
Photo 121
|
28
|
$1,400
|
$39,200
|
$14,436
|
|
Photo 121
|
33
|
$1,575
|
$51,975
|
$20,925
|
|
Photo 121
|
36
|
$1,450
|
$52,200
|
$20,530
|
|
Photo 121
|
22
|
$1,450
|
$31,900
|
$11,150
|
|
Photo 121
|
35
|
$1,400
|
$49,000
|
$18,725
|
|
Photo 57
|
18
|
$1,450
|
$26,100
|
$8,723
|
|
Photo 104
|
16
|
$1,400
|
$22,400
|
$7,025
|
|
Average
|
27
|
$1,446
|
$38,968
|
$14,502
|
|
|
|
|
|
|
[99]
The ARQ auditor, Ms. Caza, had determined
that the average net profit per harvest was $15,748, and that, consequently,
the net profit in 2007 was $94,489 and the net profit in 2008 was $62,993.
[100] The document that the Minister failed to consider at the audit and
assessment stages appears to me to be all the more relevant since it is an
exhibit that is found in both the appellant’s and the respondent’s evidence.
The auditor referred to it in her cross‑examination, but the parties did
not request that corrections be made to the assessment, given that the
appellant contested the entirety of the assessment in question. The calculation
of the average gross sales per harvest (six in 2007 and four in 2008)
has a direct impact on the amounts of net tax for the statement periods from
April 1, 2007, to December 31, 2008.
[101] Under section 309 of the ETA, this Court does not have the
power to change the assessment; rather, it must refer the entire matter back to
the Minister for reconsideration and reassessment:
309 (1) The
Tax Court may dispose of an appeal from an assessment by
(a) dismissing it; or
(b) allowing it and
(i) vacating the assessment, or
(ii) referring the assessment back to the Minister for reconsideration and
reassessment.
[102] That provision differs from subsection 171(1) of the ITA, which
provides as follows:
171 (1) The Tax Court of Canada may dispose of an appeal by
(a) dismissing
it; or
(b) allowing
it and
(i) vacating
the assessment,
(ii)
varying the assessment, or
(iii) referring the
assessment back to the Minister for reconsideration and reassessment.
[103] Unlike in the case of an appeal from an assessment established under
the ITA, there is no remedy that allows this Court to modify an assessment
established under the ETA.
[104] In view of the evidence submitted before this Court, I am of the
opinion that, on the balance of probabilities, the appellant operated a
commercial cannabis grow operation and that the sale of these substances
constituted taxable supplies for the purposes of GST. The appellant has not offered
any uncontradicted evidence that would allow for the Minister’s assumptions of
fact to be demolished.
[105] For these reasons, the appeal of the assessment is allowed and the
assessment is referred back to the
Minister for reconsideration and
reassessment on the basis that the average gross sales per harvest were $38,968
and that, as a result, the business’ gross income was $155,872 rather than
$166,916.67 in 2008 and $233,908 rather than $250,375 in 2007, such that the
GST not collected by the appellant is equal to $7,793.60 for 2008 and
$12,234.48 for 2007.
[106] The penalties for failing to file a return under section 280.1
of the ETA are justified in this case, given the appellant’s failure to declare
the GST amounts from taxable supplies. The penalty amounts will need to be
modified on the basis of the new calculation of the net tax for the statement
periods from April 1, 2007, to December 31, 2008, for the appellant.
Signed at
Ottawa, Canada, this 15th day of September 2016.
"Réal Favreau"
Translation certified true
On this 23rd day of June 2017
François Brunet, Reviser
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