REASONS
FOR JUDGMENT
D’Auray J.
I. BACKGROUND
[1]
The company 9109-1165 Québec Inc. operates a
business under the name Galerie L’Art Ancien (“Galerie L’Art” or “Corporation”)
in Québec City. Mr. Marc Levert is a shareholder and director of the Corporation,
acting as its President.
[2]
In 2003, the Corporation became a member of the
ITEX network.
[3]
ITEX is a trade network in which members can buy
and sell goods and services. Under an ITEX membership contract, the currency
used by members is the ITEX dollar, equivalent to one Canadian dollar. For
example, in the case at hand, the Galerie L’Art could sell a painting over the
ITEX network for 10,000 ITEX dollars and purchase goods or services using those
ITEX dollars.
[4]
During the years in dispute, namely the 2006,
2007, 2008, 2009, and 2011 taxation years, the Corporation conducted several
transactions over the ITEX network.
[5]
In calculating its revenues for the taxation
years in dispute, the Corporation never reported the sales that it made over
the ITEX network or claimed the deduction on purchases that it made over the
ITEX network to earn business income.
[6]
On November 27, 2012, the Minister of National
Revenue (the “Minister”) made reassessments against the Corporation for the
2006, 2007, 2008, and 2009 taxation years to include the sales made over the
ITEX network in the calculation of its revenues. The Minister also allowed
certain expenses as deductions, including purchases made by the Corporation over
the ITEX network to earn income. The Minister also imposed a penalty under subsection
163(2) of the Income Tax Act (the “Act”) for each of the years
subject to the reassessments.
[7]
For the 2006 and 2007 taxation years, the
Minister also added amounts to the calculation of Mr. Levert’s income as
benefits conferred on a shareholder, under subsection 15(1) of the Act.
However, for the 2008 and 2009 taxation years, the Minister added amounts to
the calculation of Mr. Levert’s income as benefits conferred on a person under
section 246 of the Act. A penalty was also imposed by the Minister under
subsection 163(2) of the Act for each of the years in question in the
reassessments.
[8]
The reassessments against the Corporation for
the 2006 and 2007 taxation years were made by the Minister after the normal
reassessment period. The Corporation did not file a notice of objection for its
2008 taxation year as required by the Act. It must also be noted that
the assessment for the 2011 taxation year does not include the disputed issues
because, for that year, it was simply a loss carryover by the Corporation in
2011. The outcome for the 2011 taxation year will therefore be determined based
on the judgment in the case at hand.
[9]
Finally, the reassessments made against Mr.
Levert for the 2006, 2007, and 2008 taxation years were also made by the Minister
after the normal reassessment period.
II. FACTS
[10]
The Galerie L’Art is a corporation that operates
in the arts sector, its primary activity being the buying and selling of paintings.
[11]
As mentioned previously, the Galerie L’Art
became a member of the ITEX trade network in 2003. As such, it was required to
pay monthly fees of $21 under the membership contract. Fees were also payable
each time a sale or purchase transaction was conducted by the Corporation
through the ITEX network.
[12]
The relevant conditions of the ITEX network
membership contract are as follows:
[Translation]
GENERAL CONDITIONS
WHEREAS ITEX QUEBEC (ITEX) manages a network
of businesses and professionals who exchange their goods and services through
commercial trade in the normal course of business, and provides them with
timely record keeping services and administrative follow-up on commercial trade
transactions between them;
WHEREAS, by means of this agreement, the
parties wish to establish their rights and obligations under membership in the
ITEX network;
[…]
ITEX DOLLAR (ID): An accounting unit used to
facilitate debit and credit transactions between members, and to allow members
to make the appropriate entries in their own accounting, commercial and tax
systems. For the purposes of all commercial trade transactions, one ID is equivalent
to one Canadian dollar ($1); an ID cannot be exchanged for cash.
[…]
MEMBER IN GOOD STANDING: A member who
complies with the terms hereof and the Rules established by ITEX and is current
in the payment of all amounts owed to ITEX in Canadian cash dollars or ID. Only
members in good standing [...] Services of ITEX;
[…]
9. COMMERCIAL TRADE TRANSACTION
[…]
A. The transaction voucher provided by
ITEX must be legibly completed and include the parties’ account numbers and the
amount and date of the transaction. The voucher must be signed by the debit
party (the buyer);
9.7 Through its computer services, by fax
and through regional agencies, ITEX shall provide the member with access to its
personalized account statements, reflecting the activities in its account(s).
The monthly account statements shall be deemed accurate as disclosed, unless
the member advises ITEX in writing of any inaccuracy within thirty (30) days of
the date on which the account statement was issued. ITEX may require reasonable
fees for any copies of the member’s files.
[…]
12. TAX ASPECTS
When acting as a credit party (seller), the
member must collect the appropriate taxes on ID and/or Canadian currency
transactions and remit them as required by law. ITEX cannot be held accountable
for payment of any taxes on behalf of any member. Transactions conducted in
ID are generally treated as taxable transactions for tax purposes and the
member acknowledges having been informed and advised of this.
[…]
I, the undersigned, state that I have
read and understood the GENERAL CONDITIONS governing the use of an ITEX account
and agree personally, on behalf of my company and on behalf of all authorized
signatories to respect and comply with the terms of the GENERAL CONDITIONS and
any amendments thereto.
[…] (print) MARC LEVERT signature of
broker(s) _________
Authorized signature: (s) Marc
Levert Title ____________ Date ____________
[13]
The Corporation never included the transactions
that it conducted over the ITEX network in its financial statements. It kept no
documentary evidence of such transactions.
[14]
The Corporation never reported its transactions over
the ITEX network on its income tax returns.
[15]
In making the reassessments, the Minister added
sales made by the Corporation over the ITEX network to the calculation of its
revenues. The Minister also allowed the Corporation the deduction of certain
purchases as business expenses. Those adjustments are reproduced below:
|
Added revenues
|
2006
|
2007
|
2009
|
|
Unreported ITEX sales
|
$108,700
|
$52,477
|
$90,540
|
|
ITEX fees allowed
|
$9,038
|
$4,033
|
$6,622
|
|
Purchases allowed
|
$63,900
|
$12,471
|
$20,325
|
|
Meals allowed
|
$183
|
$259
|
$216
|
|
|
|
|
|
[16]
Ms. Couturier, an Appeals Officer with the
Canada Revenue Agency (the “CRA”) during the period in question, testified at
the hearing. She stated that she was responsible for examining the notices of
objection from the appellants.
[17]
Ms. Couturier stated that, in making the
reassessments against the appellants, she relied on the account statements provided
by Mr. Arès, the ITEX representative. The account statements show the purchase
and sale transactions carried out by Galerie L’Art over the ITEX network since
its registration in 2003.
[18]
Ms. Couturier stated that she asked Mr. Levert
several times to provide documents to prove his allegations. In that regard,
her notes in the file show that she gave Mr. Levert several opportunities to
provide her with the documents. She extended the set deadlines several times to
allow Mr. Levert to provide her with the documents. However, having not
received the documents from Mr. Levert concerning the transactions conducted by
the Corporation over the ITEX network, she relied on the documents provided by
Mr. Arès from ITEX.
[19]
Ms. Couturier examined the description of each
purchase and only allowed as business deductions the purchases that she felt
had ben made for the purpose of earning business income. Thus, the expenses
incurred by the Corporation over the ITEX network that were deemed by Ms.
Couturier to be personal were all disallowed. According to Ms. Couturier, the
personal transactions conducted by the Corporation over the ITEX network
accounted for 55% of all of the Corporation’s purchase transactions.
[20]
The only changes made by Ms. Couturier during
the objection stage were as follows: she allowed the Corporation the deduction of
all ITEX fees for all of the years in question and the deduction of a $325
expense for the 2009 taxation year.
[21]
According to Ms. Couturier, the Corporation was
never reimbursed for the personal expenditures that it incurred for the benefit
of Mr. Levert. The Minister therefore added amounts to the calculation of Mr.
Levert’s income as benefits conferred on a shareholder and as benefits
conferred on a person:
|
Income added
|
2006
|
2007
|
2008
|
2009
|
|
Benefit conferred on
a shareholder un subsection 15(1) of the Act
|
$70,211
|
$14,524
|
N/A
|
N/A
|
|
Benefit conferred on
a person under subsection 246(1) of the Act
|
N/A
|
N/A
|
$2,868
|
$5,135
|
[22]
At the hearing, Mr. Levert claimed several times
that, if Ms. Couturier had done her work correctly and had obtained not
only the transaction account statements indicating the sales and purchases by
the Corporation over the ITEX network, but also the ITEX vouchers or cheques
justifying each sale or expenditure, she would have realized that the Corporation
often sold objects of art at a loss.
[23]
Moreover, although Mr. Levert admitted that he
benefitted from certain transactions by the Corporation over the ITEX network,
he argued that he did not benefit at all from other transactions.
Mr. Levert also argued at the hearing that he was not a shareholder of the
Corporation during the 2006 and 2007 taxation years.
III. ISSUES
A. The Corporation’s appeal
[24]
The issues are as follows:
1. Did the Minister
have good reason, after the normal reassessment period, to make reassessments
against the Corporation for the 2006 and 2007 taxation years under subparagraph
152(4)(a)(i) of the Act?
2. Did the Minister
have good reason to add the amounts of $35,579, $35,714 and $63,377 as
unreported income for the 2006, 2007, and 2009 taxation years, respectively?
3. Did the Minister
have good reason to impose a penalty on the Corporation under subsection 163(2)
of the Act for the 2006, 2007, and 2009 taxation years?
B. Mr.
Levert’s appeal
[25]
The issues are as follows:
1. Did the Minister
have good reason, after the normal reassessment period, to make reassessments
of Mr. Levert for the 2006, 2007, and 2008 taxation years under subparagraph
152(4)(a)(i) of the Act?
2. Did the Minister
have good reason, under subsection 15(1) of the Act, to add amounts of
$70,211 and $14,524 to Mr. Levert’s income as benefits conferred on a
shareholder for the 2006 and 2007 taxation years, respectively?
3. Did the Minister
have good reason, under section 246 of the Act, to add amounts of $2,868
and $5,135 to Mr. Levert’s income as benefits conferred on a person for the
2008 and 2009 taxation years, respectively?
4. Did the Minister
have good reason to impose a penalty on Mr. Levert under subsection 163(2) of
the Act for the 2006, 2007, 2008, and 2009 taxation years?
IV. POSITIONS
OF THE PARTIES AND ANALYSIS
A.
Could the Minister make reassessments against the Corporation
and Mr. Levert after the normal reassessment period under subparagraph 152(4)(a)(i)
of the Act?
(1) Against the Corporation
[26]
I will first determine whether the Minister had
the authority to make reassessments against the Corporation for the 2006 and
2007 taxation years under subparagraph 152(4)(a)(i) of the Act.
[27]
Subparagraph 152(4)(a)(i) of the Act
states the following:
(4) The Minister may at any time make an assessment, reassessment
or additional assessment of tax for a taxation year, interest or penalties, if
any, payable under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that no tax is
payable for the year, except that an assessment, reassessment or additional
assessment may be made after the taxpayer’s normal reassessment period in
respect of the year only if
a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to
neglect, carelessness or wilful default or has committed any fraud in filing
the return or in supplying any information under this Act,
[Emphasis
added.]
[28]
In College Park Motor Products Ltd., at paragraph 20 of his
reasons, Bowie J. indicated the scope of subparagraph 152(4)(a)(i)
of the Act:
[20] At the risk of redundancy, I wish to
reemphasize that the purpose of subparagraph 152(4)(a)(i) is not penal
but remedial. It balances the need for taxpayers to have some finality in
respect of their taxes for the year with the requirement of a self-reporting
system that the taxing authority not be foreclosed from reassessing in those
instances where a taxpayer’s conduct, whether through lack of care or attention
at one end of the scale, or willful fraud at the other end, has resulted in an
assessment more favourable to the taxpayer than it should have been. [...]
[Emphasis
added.]
[29]
At the hearing, Mr. Levert provided
contradictory versions. He first stated that the Corporation had made a mistake
in not reporting its sales and that he was responsible for that. Mr. Levert was
under the impression that the sales and purchases were of equal value. Thus, as
the sales were of the same value as the purchases, he decided that the Corporation
did not need to report any transactions over the ITEX network. However, it
seems that the evidence of that allegation by Mr. Levert is not exact. The
sales and purchases were not automatically equivalent.
[30]
Mr. Levert also stated that the Corporation did
report the ITEX transactions because it had incurred losses on sales conducted over
the ITEX network and because the Corporation preferred to not report those
losses to avoid [translation] “undergoing an audit”.
[31]
In light of those contradictory versions, Mr.
Levert’s credibility as President of the Corporation is seriously in doubt.
That said, apart from the contradictory versions to explain why the Corporation
did not report its sales over the ITEX network, other indicators show that the Corporation
was not diligent and that it made a voluntary omission in its income tax
returns for the 2006 and 2007 taxation years.
[32]
For example, Mr. Levert signed the ITEX
membership contract for the Corporation. Clause 12 of that contract mentions
the taxable nature of sales conducted over the ITEX network. His testimony that he had not
read the contract before signing it and that he did not know that transactions over
the ITEX network were taxable does not hold water.
[33]
Mr. Levert has been in business for more
than 20 years. If he in fact signed a contract for the Corporation without
reading it, that shows negligent behaviour as President of the Corporation.
[34]
Mr. Levert also acknowledged that the Corporation
made false statements by not reporting the ITEX transactions in its income tax
returns. The Corporation apparently did so to avoid a CRA audit. What is clear
from his testimony is that the Corporation made a voluntary omission from its
income tax returns to avoid such an audit.
[35]
In light of those facts, the conditions set out
in subparagraph 152(4)(a)(i) of the Act are met. The Minister
therefore had the authority to make reassessments for the 2006 and 2007
taxation years after the normal reassessment period.
(2) Against Mr. Levert
[36]
Mr. Levert argued that it is normal for him to
not have included in the calculation of his income the value of certain
benefits that he received in the statute-barred years, as he believed that the
transactions conducted over the ITEX network simply did not need to be
reported.
[37]
In my opinion, that explanation is not credible,
for several reasons, such as:
-
At the hearing, Mr. Levert acknowledged that he
had personally benefitted from several purchases by the Corporation over the
ITEX network and that their treatment by the Minister was therefore legitimate.
He also acknowledged not having reimbursed the Corporation.
-
That is also acknowledged in a letter to the CRA
on July 25, 2012, from Mr. Boileau, the accountant representing the Corporation
during the objection stage. In her draft assessment, the Minister had made an
assessment against Mr. Levert’s spouse under subsection 15(1) (benefit conferred
on a shareholder). In response to the letter from the CRA, the accountant, Mr.
Boileau, indicated the following:
[Translation]
We disagree with
your draft assessment.
[…]
It was Mr. Marc
Levant who received those benefits.
[Emphasis
added.]
[38]
Of the expenditures incurred by the Corporation,
we note those for dental care, glasses and travel for family vacations. Those
types of expenditures were clearly not incurred by the Corporation to earn
business income in this case.
[39]
In light of the facts, I am of the opinion that,
by not reporting the benefits conferred on him by the Corporation in his income
tax returns, Mr. Levert misrepresented the facts, by negligence or by voluntary
omission in not including the benefits conferred on him by the Corporation in his
income tax returns for the 2006, 2007, and 2008 taxation years. The Minister
therefore had good reason to make reassessments, after the normal reassessment
period, against Mr. Levert for the 2006, 2007, and 2008 taxation years.
B.
Addition of transactions over the ITEX network to the
calculation of the Corporation’s revenues and addition of benefits conferred on
Mr. Levert by the Corporation to the calculation of his income
[40]
I must now determine whether the Minister had
good reason to add amounts for unreported sales to the Corporation’s revenues
and analyze whether certain expenditures by the Corporation over the ITEX
network were personal in nature or whether they were incurred to earn business
income.
[41]
I must also analyze whether the Minister was
right in adding amounts for benefits conferred by the Corporation on a
shareholder to Mr. Levert’s income under subsection 15(1) of the Act for
the 2006 and 2007 taxation years, and amounts as benefits conferred on a person
under subsection 246(1) of the Act for the 2008 and 2009 taxation years.
[42]
In that regard, Mr. Levert argued that he did
not benefit from several purchases by the Corporation over the ITEX network. He
claimed that the Minister should not have included certain purchases in the
calculation of his income. He also claimed that those purchases were correctly
deducted as expenses in the calculation of the Corporation’s revenue, as they
were incurred to earn business income.
[43]
Mr. Levert also raised a new argument for the
first time at the hearing, that the Minister could not make a reassessment
under subsection 15(1) of the Act, which refers to benefits conferred by
a corporation on a shareholder, as he was not a shareholder in the Corporation
during the 2006 and 2007 taxation years.
[44]
In that regard, Mr. Levert claimed that he filed
bankruptcy on July 5, 2005, and that all of his shares in the Corporation were
transferred to the bankruptcy trustee, LeBlond & Associés.
[45]
A letter from the trustee, LeBlond & Associés,
dated November 4, 2005,
indicates that Mr. Levert’s spouse, Ms. Lise Girard, purchased the
undivided half of a building and all of the shares held by Mr. Levert in the Corporation
on November 4, 2015, for $20,000. The appellant claimed that, as such, he
could not hold shares in the Corporation, as they had all been transferred to
his spouse by the trustee.
[46]
According to the judgment by the Superior Court
of Quebec in Mr. Levert’s bankruptcy, he was discharged from his bankruptcy on
February 28, 2007, after the years in dispute for which the Minister made
reassessments under subsection 15(1) of the Act (benefit conferred on a
shareholder).
[47]
In a conference call after the hearing to
discuss the points to be addressed in the written arguments and to discuss an
extension of the deadline for filing written arguments following Mr. Levert’s
hospitalization, the respondent acknowledged that Mr. Levert was not a
shareholder in the Corporation in 2006 and 2007. However, as she did at the
hearing, the respondent argued in her written observations that, regardless,
under section 246 of the Act, a benefit was conferred on Mr. Levert by
the Corporation as a taxpayer in 2006 and 2007.
[48]
The respondent submitted that, under subsection
152(9) of the Act, the Minister may raise a new argument in support of
the reassessments for the 2006 and 2007 taxation years. Subsection 152(9) reads
as follows:
152(9) Alternative basis for assessment
At any time after the normal reassessment
period, the Minister may advance an alternative basis or argument — including
that all or any portion of the income to which an amount relates was from a
different source — in support of all or any portion of the total amount
determined on assessment to be payable or remittable by a taxpayer under this
Act unless, on an appeal under this Act
(a) there is
relevant evidence that the taxpayer is no longer able to adduce without the
leave of the court; and
(b) it is not
appropriate in the circumstances for the court to order that the evidence be
adduced.
[49]
In this regard, the Federal Court of Appeal
found, in Walsh,
that the Minister may invoke subsection 152(9) of the Act if she is
satisfied that the following three conditions are met:
[18] The following conditions apply when the
Minister seeks to rely on subsection 152(9) of the Act:
1) the
Minister cannot include transactions which did not form the basis of the
taxpayer’s reassessment;
2) the
right of the Minister to present an alternative argument in support of an
assessment is subject to paragraphs 152(9)(a) and (b), which
speak to the prejudice to the taxpayer; and
3) the
Minister cannot use subsection 152(9) to reassess outside the time limitations
in subsection 152(4) of the Act, or to collect tax exceeding the amount in the
assessment under appeal.
[50]
It goes without saying that the Minister cannot
use subsection 152(9) of the Act to increase the tax payable compared to
the amount payable as set out in the assessment. This well-established
principle is confirmed by the Federal Court of Appeal in Anchor Pointe
Energy Ltd.:
39 In my opinion, he was not. This case is
unlike cases such as Pedwell v. The Queen, 2000 D.T.C. 6050 (F.C.A.),
where the Minister sought to take into account different transactions than
the ones that formed the basis of the reassessments that were made within
the normal reassessment period. I do not say that taking into account other
transactions is the only thing the Minister cannot do after expiry of the
normal reassessment period. Anything that increases tax payable from what
would have been the case prior to expiry of the normal reassessment period
would be objectionable.
[Emphasis
added.]
[51]
Moreover, in this case, it must be remembered
that M. Levert raised this means of defence for the first time at the hearing.
Mr. Levert did not feel the need to mention during the audit stage or during
the objection stage that he was not a shareholder during the 2006 and 2007
taxation years. As well, a large number of documents signed by Mr. Levert
indicate that he was a shareholder of the Corporation in 2006 and 2007. For
example, the Corporation’s 2006 income tax return and the annual returns filed
with the Registraire des entreprises du Québec indicate that Mr. Levert was a
shareholder. In light of those documents, it is easy to understand why the
Minister, in making the reassessments against Mr. Levert, cited subsection
15(1) of the Act.
[52]
As indicated by Bonner J. in Chan, if the conditions in subsection 152(9) are met, the Minister can
raise new grounds to support the assessment if they are grounds that she was
unaware of in making the reassessments:
[…] Allowing the Minister to plead and to
establish that the assessment of tax which he has made is supportable having
regard to the law and to facts of which the Minister was unaware when he made
the assessment does not, as counsel suggests, constitute allowing the Minister
to appeal from his own assessment. Clearly, the Act does not permit the
Minister to appeal from his own assessment, but that is not an accurate
description of what the Minister now seeks to do. He does not suggest that his
assessment was wrong. Rather, he suggests that the assessment is right but for
reasons of which he was previously unaware. The Appellant’s argument
confuses the reasons for making an assessment with the assessment itself. What
is assessed is not a reason but rather is “the tax for the year”. I refer to subsection
152(1) of the Act. The amendment to section 152 emphasizes the existence of
the distinction between the assessment and the arguments which may support it
and thus makes it clear that it can be said that the Minister is attempting to
appeal his assessment only where the Minister is seeking to increase the amount
of tax assessed. […]
[Emphasis added.]
[53]
I am of the opinion that the respondent can
invoke subsection 246(1) of the Act in support of the reassessments
against Mr. Levert for the 2006 and 2007 taxation years. The factual background
of the assessments is the same. Consequently, Mr. Levert has not suffered any
harm. The tax payable did not increase. In this case, as in Chan, the respondent, on behalf of
the Minister, is not claiming that the assessments were incorrect; she is
simply raising new grounds, as is allowed under subsection 152(9) of the Act.
C.
Can certain purchases deemed to be personal by the
Minister be deducted in the calculation of the Corporation’s revenues and not
considered as benefits conferred by the Corporation on Mr. Levert?
[54]
Mr. Levert claimed that he did not benefit from
some of the purchases by the Corporation, as those purchases were made to earn
business income and should therefore not be included in his income as benefits
conferred on a taxpayer by a person, namely the Corporation.
[55]
Mr. Levert argued throughout the audit,
during the first stage of the hearing, and even during the continuation of the
hearing, that it is up to the CRA to obtain documents to justify the
reassessment.
[56]
However, during the first part of the hearing on
December 9, 2015, I informed Mr. Levert that he would be best to find evidence
to support his allegations. I also mentioned that he was responsible for contacting
the people involved in the disputed transactions to establish, as he claimed,
that some of the purchases by the Corporation were made to earn business income
or that he did not receive a benefit, as he had sold ITEX dollars to
non-members. I also told him that he would be best to have his accountant, Mr.
Boileau, testify, as well as Mr. Arès, the ITEX representative.
[57]
When the hearing resumed on November 24, 2016,
just under a year after the first day of hearing, Mr. Levert had not summoned
any witnesses and still had no relevant evidence to allow him to claim that
certain purchases by the Corporation over the ITEX network were made to earn
business income and not for personal reasons. At the end of the hearing, Mr.
Levert asked me for additional time to provide documentary evidence. I granted
that request. Following Mr. Levert’s hospitalization, I extended the
deadlines a few times so he could provide documents in support of his
arguments.
[58]
The Court received the following documents on
December 14, 2016, from the Corporation:
1. In a bundle, copies of ITEX gift certificates, filed as Exhibit
A-10.
2. Bank statement showing a deposit of $29,525 to the Corporation’s
bank account, filed as Exhibit A-11.
3. Handwritten invoice, dated June 13, 2008, indicating the sale of a
batch of jewellery to Mr. Claude Belley, filed as Exhibit A-12.
4. Notarized contract dated June 13, 2008, regarding the sale of land
by Mr. Claude Belley to the Corporation for $25,000, filed as Exhibit
A-13.
[59]
On December 29, 2016, the respondent also filed
the following documents:
1. A copy of the Corporation’s detailed general ledger for the period
from February 28, 2008 to November 30, 2008, filed as Exhibit I-25.
2. A copy of printouts from the Galerie d’Art le Belley website and the
Registraire des entreprises website, filed as Exhibit I-26.
3. A copy of an email exchange with Mr. Claude Belley, filed as
Exhibit I‑27.
[60]
As I have already indicated, Mr. Levert is not
challenging the fact that he benefited from certain purchases by the Corporation
over the ITEX network. However, he argued that certain purchases should not
have been added to his income as benefits conferred on a person, as he did not
benefit from them. According to Mr. Levert, the following purchases were made
by the Corporation over the ITEX network to earn business income.
[61]
The purchases challenged by Mr. Levert are as
follows:
1. D. N. Autos and Groupe
TC
2. Mazda MPV
3. Jewellery
4. Fenestration Rénov
Concept
4. Déry
Capital Inc.
(1) D.
N. Autos and Groupe TC
[62]
Regarding the D.N. Autos and Groupe TC transactions,
the respondent claimed that they involved the purchase of an automobile and
motorcycle valued at $5,000 and $6,000 respectively, both made by the Corporation
over the ITEX network. In her testimony, Ms. Couturier from the CRA indicated
that they were personal purchases, as the entries in the Corporation’s
financial statements under rolling stock (motor vehicles) were not changed,
namely that no assets were added to that item in the Corporation’s financial
statements during the 2005 and 2006 taxation years.
[63]
Mr. Levert argued that he had indicated several
times that no transactions over the ITEX network were entered in the Corporation’s
financial statements. Thus, the grounds cited by Ms. Couturier for including
those transactions in his income as benefits conferred on him does not make sense.
[64]
However, during his testimony, Mr. Levert gave
two factual versions regarding those transactions.
[65]
Mr. Levert first claimed that the Corporation
sold ITEX dollars to non-ITEX members in 2006 for an amount 10% to 20% below
their value. According to Mr. Levert, after having sold the ITEX dollars
to Mr. Vachon, a non-ITEX member, in exchange for cash, the Corporation allegedly
obtained ITEX gift certificates for him so he could buy the car and motorcycle
over the ITEX network. To support that version of the facts, Mr. Levert had
examples of gift certificates sent to the Court after the hearing. Those gift
certificates, however, are not related to the transactions conducted with D.N.
Autos and Groupe TC.
[66]
Mr. Levert then stated that the Corporation had
purchased the motorcycle and the car for resale, thus to earn business income.
Mr. Levert claimed, however, that the vehicles were never registered in the Corporation’s
name, which is why he had no supporting documents for the transactions in
question. He claimed that the vehicles were purchased from D.N. Autos and
Groupe TC over the ITEX network and sold by means of a power of attorney signed
by D.N. Autos and Groupe TC. No evidence was filed to support that claim
by Mr. Levert.
[67]
Mr. Levert stated that, although the ITEX
membership contract prohibits ITEX members from selling ITEX dollars for cash,
many members were selling them, including him.
[68]
At the hearing, the respondent reiterated that
she had asked Mr. Levert several times to show that the amount allegedly paid
by Mr. Vachon for the purchase of the car and motorcycle had been deposited to
the Corporation’s account. The respondent argued that, as Mr. Levert did not
feel the need to have Mr. Vachon testify and/or to prove that the amount
received for that sale had been deposited to the Corporation’s account, Mr.
Levert did not reverse the burden of proof and the assessments should be upheld
in that regard.
[69]
I agree with the respondent. Mr. Levert was not
able to show that his first version of the facts was true. If, in fact, the Corporation
sold ITEX dollars for an amount 10% to 20% below their value, the Corporation
did not show that that amount had been deposited to its bank account. I am
therefore of the opinion that neither the Corporation (Regarding the deduction)
nor Mr. Levert (regarding the benefit conferred) reversed the burden of proof.
[70]
As for Mr. Levert’s second version of the facts,
it does not hold water. For example, if the vehicles were never registered in the
Corporation’s name, how can Mr. Levert claim that the Corporation sold the
vehicles to earn business income? The Société de l’assurance automobile du
Québec could not transfer to a third party vehicles that the Corporation never
owned, as it had never registered them in its name. Moreover, if that version
from Mr. Levert were true, which I strongly doubt, no evidence was submitted to
establish that the amounts received for the car and the motorcycle were
deposited to the Corporation’s bank account.
[71]
Consequently, I am of the opinion that the
Minister correctly made the reassessments regarding the transactions with
D.N. Autos and Groupe TC, both for the Corporation and Mr. Levert.
(2) Mazda MPV
[72]
According to Mr. Levert, the Corporation
purchased a Mazda MPV from the Auberge Manoir Ville Marie over the ITEX network
for 6,000 ITEX dollars. In support of his claim, Mr. Levert filed as evidence a
notarized contract dated August 29, 2009, representing the deed of sale of the Corporation’s
assets.
We see that, according to the terms of the document, one of the assets excluded
from the sale was a Mazda vehicle. According to Mr. Levert, that shows that the
Corporation owned the vehicle and that the vehicle was used for business
purposes.
[73]
The respondent did not present any convincing
arguments regarding this claim by Mr. Levert. According to the assets sales
contract, the Corporation remained the owner of the Mazda MPV. The balance of
probabilities is in the Corporation’s favour. To carry out its activities, it
had to own a vehicle.
[74]
I am therefore of the opinion that, for the 2009
taxation year, the Corporation could deduct $6,000 for the purchase of the
Mazda MPV and that that amount should not have been included as a benefit
conferred on a person in the calculation of Mr. Levert’s income for the 2009
taxation year.
(3) Jewellery
[75]
Regarding the transaction related to the
purchase of jewellery, Mr. Levert argued during the audit stage that the Corporation
had purchased the jewellery over the ITEX network for $18,860 in 2006 and that
it had sold the jewellery on July 11, 2008, for $29,525.03. Consequently,
that purchase was made to earn business income.
[76]
During the objection stage and at the hearing,
Mr. Levert changed his version of the facts regarding that transaction. Mr.
Levert argued that the Corporation had exchanged the jewellery for land held by
Mr. Claude Belley in the parish of Saint‑Didace. In support of that
claim, following the hearing, Mr. Levert filed a transaction receipt made out
to Mr. Claude Belley, dated June 13, 2008, indicating an amount of $25,000. The
receipt indicates the following: [translation] “batch of jewellery valued at
$25,000.00 in payment (consideration) for land located in Saint-Didace in
Maskinongé”.
[77]
Mr. Levert also filed as evidence the deed of sale
for the land, also dated June 13, 2008, by which Mr. Claude Belley sold the
land in Maskinongé to the Corporation. However, there is no mention of the
exchange of jewellery in the deed of sale. The clause regarding the price reads
as follows:
[Translation]
Price
This sale is conducted for the price of
TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), paid by the buyer before this date,
thus final discharge by the seller.
[78]
Mr. Levert stated that the Corporation then sold
that land for $28,000 to 9161-4032 Québec Inc. represented by its President,
Mr. Alain Gravel. The notarized deed of sale is dated July 7, 2008.
[79]
According to Mr. Levert, he did not benefit in
any way from that transaction, as the proceeds of the sale of the land to Alain
Gravel’s company, namely $28 000, was deposited to the Corporation’s
account on July 11, 2008, as shown in the bank statement submitted by the
appellant.
[80]
For her part, the respondent submitted that the
purchase of the jewellery was a personal transaction carried out by the Corporation
over the ITEX network. Consequently, the respondent argued that the Corporation
cannot deduct the purchase of the jewellery in the calculation of its revenues
for the 2006 taxation year and that the amount of the purchase must be added to
the calculation of Mr. Levert’s income for the 2006 taxation year.
[81]
According to the respondent, the sale of the
land for $28,000 on July 7, 2008, was not reported by the Corporation.
Moreover, the entries in the Corporation’s general ledger indicate a deposit of
$29,525.03, but that deposit was cancelled by the withdrawal of the same
amount, with the note [translation] “sale of personal land”. According to the
respondent, the Corporation’s general ledger shows that the transaction related
to the land was personal.
[82]
Moreover, the respondent argued that the bank
statement
shows that the deposit of $29,525.03 is immediately followed by a
withdrawal of $30,000 by Mr. Levert from the Corporation’s bank account.
According to Ms. Couturier’s worksheet, the accounting entry submitted by the Corporation
during the objection shows that the [translation] “owed to directors” item was
credited the same amount, which shows the personal nature of the transaction.
[83]
Finally, the respondent argued that Mr. Levert’s
version of the facts is not very credible because, during the objection stage,
his accountant, Mr. Boileau, apparently withdrew from the case, indicating that
Mr. Levert had too many conflicting versions regarding that transaction and
[translation] “that there was apparently never any land involved.”
[84]
That said, the accountant was also an ITEX
member and, as he did not testify, his statements as reported by Ms. Couturier
from the CRA are hearsay.
[85]
As well, in response to an email from the
respondent, the seller of the land, Mr. Belley, said: [translation] “although I
preferred art works, I may have received a batch of jewellery in exchange for
that land, probably for part of it and the rest in paintings”.
[86]
Mr. Levert is not a credible person. He also did
not help his case by choosing to not have the seller of the land, Mr. Bailey,
or the accountant, Mr. Boileau, testify at the hearing. However, I doubt
that the jewellery was purchased for personal reasons. The Corporation’s
activities are not limited to the sale of paintings, but also include the sale
of antiques. Moreover, the bank statement shows that the amount from the sale
of the land was deposited into the Corporation’s bank account. The evidence is
far from perfect for the Corporation, but I have decided to give it the benefit
of the doubt. Consequently, the Corporation can deduct the $18,660 in the
calculation of its revenues for the 2006 taxation year, and that amount must
not be included in the calculation of Mr. Levert’s income, also for the 2006
taxation year.
(4) Fenestration Rénov Concept
[87]
As for the Rénov Concept transaction, it appears
from the documents from ITEX that the Corporation purchased windows and window
installation services over the ITEX network.
[88]
Mr. Levert claimed that it was a transaction
conducted with a non‑member following the Corporation’s sale of ITEX
dollars. During the objection, Mr. Levert argued that the windows were sold to
a non-member, Mr. Martin Pouliot.
At the hearing, however, Mr. Levert argued that it was instead a certain Mr.
Duchesné who had purchased the ITEX dollars. In that regard, it would have been
easy to have Mr. Pouliot or Mr. Duchesné testify to prove that they had
purchased the windows following the Corporation’s sale of ITEX dollars. Mr.
Levert could also have had a representative of Rénov Concept testify to prove
that the windows were not purchased by Mr. Levert or installed at his
residence. Necessarily, the Corporation must also demonstrate the use and
accounting of the amounts received to prove that the amounts received in
exchange for the ITEX dollars benefited the Corporation, not Mr. Levert
personally.
[89]
Ms. Couturier concluded that this transaction
was personal in nature because the Corporation rented premises for its
operations. As the Corporation owned no real property, the transaction was
necessarily personal and conferred a benefit on Mr. Levert. Ms. Couturier
assumed that the purchase of the windows over the ITEX network was for the
personal residence of Mr. Levert and his spouse, Ms. Girard.
[90]
Mr. Levert kept no accounting of the ITEX
dollars sold by the Corporation in exchange for cash. Mr. Levert also chose to
not have Mr. Duchesné and/or Mr. Pouliot testify, or a representative
of Rénov Concept. An invoice was surely prepared following the installation of
the windows by Rénov Concept. I advised Mr. Levert several times to have
individuals testify who could confirm his statements or at last try to obtain
the invoice from Rénov Concept to prove that he did not receive a benefit
in relation to those windows and to prove that the amounts received were
deposited in the Corporation’s bank account. Mr. Levert chose to not have the
individuals who were allegedly involved in the transaction testify. It is
therefore hard for me to not draw a negative inference from Mr. Levert’s
inaction.
[91]
I am of the opinion that the reassessment
related to this transaction must be upheld, namely that the Corporation could
not deduct $5,000 in 2006 and that amount was correctly added as a benefit
conferred by the Corporation in the calculation of Mr. Levert’s income.
(5) Déry Capital Inc.
[92]
According to the Corporation’s account
statements obtained from ITEX, the transaction involving Déry Capital Inc.
involved the purchase by the Corporation of life insurance for $15,000.
[93]
According to the Appeals Officer, Ms. Couturier,
the only way to obtain a deduction for a life insurance policy in the
calculation of the Corporation’s revenues is to prove that the life insurance
policy is required by a financial institution to secure a loan. During the
objection, the Appeals Officer concluded that that purchase was necessarily
personal, as no loan appears in the company’s financial statements. Thus,
according to her, that expenditure cannot constitute a business expense.
[94]
For his part, Mr. Levert submitted that it was
again a transaction conducted following the Corporation’s sale of ITEX dollars
to non-members and that he did not benefit from that transaction.
[95]
Mr. Levert submitted that it was Mr. Duchesné
who purchased the insurance from Déry Capital Inc. using ITEX gift certificates.
Once again, although he was advised several times, Mr. Levert did not feel the
need to have Mr. Duchesné or Mr. Déry from Déry Capital Inc. testify—which
would have been easy—to establish that the insurance was purchased by Mr.
Duchesné. Mr. Levert also did not file any evidence in support of his claim
regarding that transaction.
[96]
The reassessment related to that transaction
must therefore be upheld, both for the Corporation and Mr. Levert.
[97]
I must also note that it is not easy to draw a
line between matters in the appeals in this case. In addition to him presenting
different versions of the facts, Mr. Levert’s testimony was so confused at
times that it was not easy to circumscribe. The Appeals Officer, Ms. Couturier,
relied on statements by Mr. Arès from ITEX to understand how ITEX works.
He told Ms. Couturier that ITEX does not issue gift certificates, which is
inaccurate. Mr. Arès also indicated that members cannot sell ITEX dollars to
non-members, which is true according to the membership contract, but according
to Mr. Levert, that is also a false statement by Mr. Arès, as he knew that
members were selling ITEX dollars. It is clear that, in providing information
to the CRA, all of the actors in these transactions, namely Mr. Arès from ITEX,
Mr. Boileau (the accountant) and Mr. Levert, protected their own interests.
V.
Did the Minister have good reason to impose a penalty
on the Corporation and/or on Mr. Levert under subsection 163(2) of the Act
for the 2006, 2007, 2008, and 2009 taxation years?
[98]
Subsection 163(2) of the Act states the
following:
163(2) False
statements or omissions Every person who,
knowingly, or under circumstances amounting to gross negligence, has made or
has participated in, assented to or acquiesced in the making of, a false
statement or omission in a return, form, certificate, statement or answer (in
this section referred to as a “return”) filed or made in respect of a taxation
year for the purposes of this Act, is liable to a penalty of the greater of
$100 and 50% of the total of
(a) the amount, if any, by which
(i) the amount,
if any, by which
(A) the tax for
the year that would be payable by the person under this Act
exceeds
(B) the amounts
that would be deemed by subsections 120(2) and (2.2) to have been paid on
account of the person’s tax for the year
if the person’s
taxable income for the year were computed by adding to the taxable income
reported by the person in the person’s return for the year that portion of the
person’s understatement of income for the year that is reasonably attributable
to the false statement or omission and if the person’s tax payable for the year
were computed by subtracting from the deductions from the tax otherwise payable
by the person for the year such portion of any such deduction as may reasonably
be attributable to the false statement or omission
exceeds
(ii) the amount,
if any, by which
(A) the tax for
the year that would have been payable by the person under this Act
exceeds
(B) the amounts
that would be deemed by subsections 120(2) and (2.2) to have been paid on
account of the person’s tax for the year
had the person’s
tax payable for the year been assessed on the basis of the information provided
in the person’s return for the year,
[…]
[99]
In De Gennaro, Owen J. of this Court
explained the burden of proof on the Minister when a penalty is assessed under
subsection 163(2) of the Act. In this regard, he wrote the following at
paragraphs 33 and 34 of his reasons:
[33] Under
subsection 163(3) of the ITA, the Minister has the burden of establishing the
facts that justify the assessment of a penalty under subsection 163(2) of the
ITA. This burden is described by the Federal Court of Appeal in Lacroix v.
The Queen, 2008 FCA 241, at paragraph 26 as follows:
Although the Minister has the benefit
of the assumptions of fact underlying the reassessment, he does not enjoy any
similar advantage with regard to proving the facts justifying a reassessment
beyond the statutory period, or those facts justifying the assessment of a
penalty for the taxpayer’s misconduct in filing his tax return. The Minister is
undeniably required to adduce facts justifying these exceptional measures.
[34] The
manner in which this burden may be satisfied is described by the Court at
paragraph 32:
What, then, of the burden of proof on
the Minister? How does he discharge this burden? 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) [sic].
[100] The Minister must therefore prove in the appeals in this case that
the Corporation and Mr. Levert:
1) knowingly
made a false statement or omission in their income tax returns;
2) under
circumstances amounting to gross negligence, made a false statement or omission
in their income tax returns.
A. The Corporation
[101] The respondent must therefore prove that the Corporation, under the
first part of the criteria set out in subsection 163(2) of the Act, knew
when filing its income tax returns that the disputed statements were false, or
that it failed to report revenue. If that condition is not met by the
respondent, under the second part of the criteria in subsection 163(2), she
must establish that, under circumstances amounting to gross negligence, the Corporation
made a false statement or failed to report revenue in filing its income tax
returns.
[102] The Corporation was incorporated on October 17, 2011.
Mr. Levert, for his part, has 20 years of experience in business. The Corporation
has been a member of the ITEX network since 2001 through another corporation.
[103] Mr. Levert was also an auditor on the Parity committee of the
automotive services industry for about 30 years. As an auditor, Mr. Levert
ensured that companies carrying on activities in the automotive services
industry correctly reported the hours worked by their employers to the Parity
Committee. Mr. Levert stated that it is important for employee hours to be
correctly accounted in order to eliminate the black market and foster healthy
competition in the automotive services industry. He also stated that, in his
opinion, ITEX offered a market that was equivalent to a black market. Though
not a tax expert, Mr. Levert therefore knows what constitutes a black market
and understands that a corporation that only reports a portion of its sales is
involved in the black market.
[104] The Corporation chose to not report any ITEX transactions, as it
wanted to avoid an audit, due to the sales that it claimed to be conducting at
a loss. According to a second version of the facts, the Corporation allegedly
did not report its transactions over the ITEX network because it was under the
impression that its sales and purchases over the ITEX network balanced.
[105] First, why remain in the ITEX network if the Corporation was only
losing on transactions conducted over the network? Moreover, if there were in
fact losses, those losses should have been deducted in the calculation of its
revenues. The evidence also established that the statement by Mr. Levert was
false, as the sales were not always equivalent to the purchases. In any event,
as an experienced business man and President of the Corporation, Mr. Levert
knew that, regardless of the nature of a business’s transactions, they must be
included in a corporation’s financial statements and entered in that
corporation’s income tax returns. As well, Mr. Levert never stated at the
hearing that he did not know that ITEX transactions should be included in the
calculation of the Corporation’s revenues.
[106] In my opinion, Mr. Levert knew that the Corporation had failed to
include the ITEX transactions in its 2006, 2007, and 2009 income tax returns.
That is surely why he did not keep any documents regarding the Corporation’s
transactions over the ITEX network. It is also clear that, under the membership
contract, transactions conducted over the network are taxable. In this regard,
clause 12 of the contract states that:
[Translation]
When acting as a credit party (seller), the
member must collect the appropriate taxes on ID and/or Canadian currency
transactions and remit them as required by law. ITEX cannot be held accountable
for payment of any taxes on behalf of any member. Transactions conducted in IT
are generally treated as taxable transactions for tax purposes and the member
acknowledges having been informed and advised of this.
[107] In light of these facts, the respondent has established that the Corporation
knowingly made false statements and omissions in its income tax returns for the
2006, 2007, and 2009 taxation years.
[108]
In any event, if I have erred regarding the
first part of the criteria set out in subsection 163(2) of the Act, I am
of the opinion that the facts that I have mentioned supra, particularly
the fact that the Corporation did not report its revenues to avoid an audit,
shows that the Corporation, under circumstances amounting to gross negligence,
made false statements and failed to include in its returns revenue from
transactions conducted over the ITEX network. Strayer J. of the Federal Court
stated the following in Venne:
[...] ‘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. […]
[109] In my opinion, in light of its actions, the Corporation acted
intentionally and showed indifference to compliance with the Act.
B. Mr.
Levert
[110] Applying the same reasoning to Mr. Levert, I am also of the opinion
that, in his income tax returns for the 2006, 2007, 2008, and 2009 taxation
years, Mr. Levert knowingly made a false statement and knowingly failed to
include in his income benefits conferred by the Corporation.
[111] For example, Mr. Levert knew that, because he was not reimbursing
the Corporation for personal expenditures paid by the Corporation for his
benefit, the value of the benefits thus conferred had to be included in the
calculation of his income on his income tax returns. In the case at hand, 55%
of the Corporation’s expenditures were personal in nature. Mr. Levert knew that
the dental care, glasses, or family trips purchased by the Corporation over the
ITEX network constituted personal expenditures for the Corporation and a
benefit for him. Mr. Levert is also not a novice regarding the application of
subsection 163(2) of the Act. He was previously assessed a penalty under
subsection 163(2) of the Act for the 1999 to 2001 taxation years in
relation to unreported income established using the net worth method. Mr.
Levert also did not object to the assessments for those years.
[112] Moreover, for the 2006, 2007, 2008, and 2009 taxation years, the benefits
received by Mr. Levert are significant. Indeed, the Minister added amounts of
$70,211, $14,524, $2,868, and $5,135, respectively, to the calculation of his
income, while Mr. Levert initially reported total income of $18,630, $11,769,
$9,671, and $16,305, respectively.
[113] Thus, in light of these facts, I am of the opinion that the Minister
established that Mr. Levert knowingly failed to report income in his returns for
the 2006, 2007, 2008, and 2009 taxation years, income received as benefits
conferred by the Corporation.
[114] If I have erred in this conclusion, I am of the opinion that the
facts established that Mr. Levert, under circumstances amounting to gross
negligence, failed to report some of his income in his income tax returns. The
amount of the personal expenditures by the Corporation over the ITEX network
represents 55% of all purchases. Moreover, Mr. Levert showed indifference to
compliance with the Act. His actions showed indifference to the Act;
expenditures such as family trips, dental care, and glasses are clearly
personal in nature.
VI. Disposition
A. The Corporation
[115]
The appeal is allowed in that the appealing
corporation could deduct an amount of $18,660 from the calculation of its
revenues for the 2006 taxation year, and $6,000 for the 2009 taxation year as
business expenses under subsection 9(1) of the Act. The penalties
imposed under subsection 163(2) of the Act shall be recalculated in that
regard.
[116] In all other regards, the reassessments for the 2006, 2007, 2009,
and 2011 taxation years previously made by the Minister remain unchanged.
[117] Regarding the 2008 taxation year, this Court does not have the
jurisdiction to hear the appeal for that taxation year, as a notice of
objection for that taxation year was not filed with the Minister. The appeal is
therefore quashed.
[118] Without costs.
B. Mr.
Levert
[119] Mr. Levert’s appeal is allowed in that Mr. Levert was not required
to include as benefits conferred on a person an amount of $18,660 for the 2006
taxation year and $6,000 for the 2009 taxation year. The penalties imposed
under subsection 163(2) shall be recalculated in that regard.
[120] In all other regards, the reassessments for the 2006, 2007, 2008,
and 2009 taxation years previously made by the Minister remain unchanged.
[121] Without costs.
Signed at Ottawa, Canada, this 10th
day of October 2017.
“Johanne D’Auray”
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