Rita Bettencourt and Francisco Bettencourt v. Her Majesty the Queen, [1993] 2 CTC 3070

Mogan, T.C.C.J. (orally):— The appeals of Francisco Bettencourt and his wife Rita Bettencourt were heard together on common evidence. The taxation years under appeal are 1986, 1987 and 1988. During those years, the appellants were the principal shareholders of a corporation called Active Building Maintenance Ltd. which I shall refer to as “the Company" because it is the only corporation involved in this appeal. There was some doubt in the evidence as to whether the shares of the Company were owned 100 per cent by the husband or owned 50/50 between husband and wife. In the view that I take of the appeal, it is not material whether the shares were owned all by the husband or part by him and part by his wife.

In the years under appeal, certain amounts were paid out by the Company. The Minister of National Revenue concluded that those amounts were received indirectly by the husband and so the Minister added the following amounts to the husband's reported income for the respective years:

The husband has brought this appeal contending that those amounts were not received by him and ought not to be included in his income. For 1986 and 1987, other amounts were paid out by the Company which the Minister concluded were received indirectly by the wife. The Minister added those amounts to her reported income as follows:

She also claimed that those moneys were never received by her and she appeals on the basis that they should not be included in her income.

The story behind these amounts is a tangled web. The company carries on the business of cleaning office buildings. Its employees are relatively low-paid persons who come into commercial buildings after hours, usually starting around five o'clock in the afternoon, and perform the usual cleaning functions: vacuuming the floors, emptying wastepaper baskets and that type of thing. It is a well-known business seen in the downtown districts of every large city that has office buildings.

The personal history of the appellants is that they came to Canada from Portugal in 1971 and, with limited education, it was the kind of work that they fell into on arriving in Canada. Mr. and Mrs. Bettencourt themselves were employees of a company that carried on the business of building cleaning. The appellants are obviously industrious, hard-working and enterprising people because, in 1979, they started their own business which is the one I refer to as the company. At first, they obtained a small contract to clean a bank but expanded that to other larger government buildings. By the years under appeal (1986, 1987 and 1988) they had between 100 and 140 employees. These employees were usually recruited from individuals who had recently immigrated to Canada because the wages paid were at the lower end of the wage scale near the minimum wage. It was easier to recruit employees from that community than from people who had been in Canada a long time and had higher education.

Mr. Douglas Davis who was an auditor for the Income Tax Department visited the premises of the company sometime around 1988 or 1989 for the purpose of performing an audit. He reviewed all of the normal books and records available at the premises. One of the things he discovered was a discrepancy of $51,837 between the payroll account and what is sometimes referred to as the T4 Summary which is a summary of T4 slips issued to employees in January or February with respect to their earnings in the prior year.

The payroll ledger for the company in a given year would show, for example in 1986, that a certain amount of money had been paid out to all employees. But when Mr. Davis tried to reconcile that ledger with the T4 summary for 1986 which was the statement of income reported to the Income Tax Department and also reported individually to the employees, there was a discrepancy of $13,157. The discrepancy was a deficiency in the T4 summary account. That is to say, the company was showing additional salaries and wages of $13,157 as having been paid to some persons but there were no persons in the T4 summary to pick up the slack and show that amount as having been paid to them.

Mr. Davis then pressed his audit further and found that there were two other individuals named Bettencourt in the payroll summary being Francisco Jr. and Steven, the two sons of the appellants. They appeared in the payroll record as receiving salary and wages and, indeed, the amounts paid to them made up this precise discrepancy of $13,157 for 1986. Putting all three years together, those amounts made up for the total discrepancy of $51,837. Mr. Davis also noted that the salary and wages paid to the two sons were in gross amounts with none of the usual source deductions for income tax, Canada Pension Plan, unemployment insurance or other appropriate amounts that are normally withheld and remitted.

When Mr. Davis questioned the husband appellant, Francisco Bettencourt, about this situation involving cheques to the sons, there commenced a series of statements some of which were false. I shall have to determine in this case which statements were false. Mr. Bettencourt told Mr. Davis that the amounts were, in fact, paid to the sons; that the sons had performed useful work over long hours working for the company; that the sons were actually employed; and they were, therefore, appropriately on the payroll. The husband also stated that because of their relatively young ages, he kept most of the money although it was the sons' wages. He would give them some of their wages from time to time. That statement was apparently made in late December 1989.

I must trace the evidence of two important witnesses. The evidence of Mr. Bettencourt is that immediately after that conversation with Mr. Davis he was talking with his accountant. When he told his accountant what he had told Mr. Davis, the accountant advised him to tell him the truth. What Mr. Bettencourt had first told Mr. Davis was totally untrue. A few days later, while Mr. Davis was still on the premises performing the audit, there was a second conversation in which Mr. Bettencourt reversed his earlier statement and said that his sons did not work for the company at any time; they were only twelve and fourteen years of age; they were in full-time attendance at school; and they were not employed in any way by the company. The money shown as paid to the sons was not paid for work done by them. That money was paid to either one or two brothers who had come from Portugal and were employed by the company. It was their wages.

Mr. Davis’ evidence was consistent with Mr. Bettencourt's to the extent that he came back a few days later and received this second story reversing the first story. And so, there is no conflict in the evidence of Mr. Davis and Mr. Bettencourt on what happened on those two days in late December 1989.

Mr. Davis asked Mr. Bettencourt to produce some documentary evidence that this brother, or these two brothers, came from Portugal and worked for the company. The evidence of Mr. Bettencourt was that only one brother came but Mr. Davis referred to his notes and stated that he was told that there were two brothers employed. In any event, as the story progressed, it does not really matter what was said on that date because shortly thereafter it had narrowed down to one brother named Jacinto. Mr. Davis was finally told that Jacinto was a brother of Francisco Bettencourt; that Jacinto had worked for the company; and that these were his wages. When Mr. Davis asked for proof of that, Mr. Bettencourt said that he had had Jacinto's passport but that he had thrown it away. Subsequently, that was also acknowledged to be not true. Mr. Bettencourt did not throw away Jacinto's passport because he had never seen or had Jacinto's passport.

Out of this tangled series of statements, the Minister concluded that Jacinto either did not exist or, if he did exist, had never worked for the company and that he was just a man of straw behind whom the two appellants were hiding in order to take money out of the company. When Mr. Davis was asked why the assessments under appeal were issued, he said the two appellants were assessed because it was not proven to him as the field auditor that Jacinto had worked for the company.

I refer to that evidence because there was some argument as to what assumptions the Minister had relied upon when issuing the assessments. I am satisfied that Mr. Davis, the field auditor who did the ground work for this assessment, had concluded that, without regard to whether Jacinto existed or not, Jacinto had not worked for the company. I think that was a reasonable inference for Mr. Davis to draw at the time because, if Jacinto did work for the company, both appellants had been so successful in covering up any paper trail that might have led an outside person like Mr. Davis to find that any wages, were in fact, paid to Jacinto. At that point in the proceedings, I think Mr. Davis’ conclusion was well-founded.

Mr. Bettencourt testified and stated under oath that the true and complete story is as follows. He comes from a large family in the Azores with six daughters and four sons. Jacinto is his younger brother. Jacinto came to Canada in late 1985 or early 1986, a very young man with a young wife and two or three infant children, one less than a year old. Jacinto arrived here with a Portuguese passport as a visitor to visit relatives in Canada and simply stayed on as an illegal immigrant or, if that phrase is too harsh, a person who apparently was not authorized to be in Canada for a protracted period and was specifically prevented from taking employment here. Jacinto began to work for the company sometime in 1986. He worked from 1986 through 1987 and through 1988. He did not have a Social Insurance Number and all these amounts in dispute here were really funnelled into Jacinto’s hands as his income, being the gross wages he earned for the hours he worked without any source deductions for income tax, Canada Pension Plan or unemployment insurance.

Mr. Bettencourt wanted to help his brother. Jacinto was very much in need of help because he was supporting his young family and otherwise could not have found employment in Canada without having a Social Insurance Number or without answering some possibly embarrassing questions about his immigration status. The employment continued and, somehow or other, in 1988 or 1989, Jacinto obtained a Social Insurance Number. At that time, according to the husband appellant, Jacinto was put on the payroll and the usual source deductions were taken. Jacinto objected to the fact that his income was suddenly reduced by reason of the source deductions and left the employment of the company a few weeks after he was actually put on the payroll. He had stopped living with the appellants. Apparently, they had provided shelter and residence to Jacinto, his wife and children for some extended time.

The last item in the Jacinto story is the fact that he apparently was deported from Canada, although there is no direct evidence of the deportation. According to the evidence of the husband appellant and statements made by counsel for the respondent, Jacinto is no longer in Canada.

The question in this appeal comes down to who owned this aggregate amount of $51,837 because that is the total of all amounts which were added to the reported incomes of both appellants.

Counsel for the respondent argued that there is a special onus here, a heavier onus, on the appellants because of the admitted fraudulent scheme which they embarked upon with respect to their payroll. It is not too offensive to characterize it as a fraudulent scheme because it was a falsified payroll— cheques issued to individuals like the sons who were not employees of the company and were either to receive the money and give it to their parents or, if the parents' testimony is to be believed, were simply conduits to filter the money through to Jacinto; and the employment of Jacinto who was not put on the payroll. There was deception here— misrepresentation with an intent to deceive. I was referred to a decision of the Associate Chief Judge in Pa/Ian v. M.N.R., [1990] 1 C.T.C. 2257, 90 D.T.C. 1102 (T.C.C.), where, at page 2264 (D.T.C. 1107), he stated:

It must be understood that if taxpayers create a documented record of things said and done by them, or by them in concert with others, to achieve a commercial purpose and then seek to repudiate those things with evidence of allegations of conduct that is morally blameworthy in order to avoid an unanticipated assessment of tax, they face a formidable task. And that task would not be accomplished, in the absence of some special circumstance, an example of which does not occur to me, by their oral testimony alone. That evidence must be bolstered by some other evidence that has significant persuasive force of its own.

I accept that statement. If the misrepresentation in this appeal had related to what the Associate Chief Judge referred to as "a commercial purpose" (in which I would include income tax evasion); I would have no hesitation in applying his statement. But I distinguish what he said from the facts herein. I think there was no commercial purpose in the fraud which was finally disclosed in this appeal. I would call the purpose domestic and not commercial. It was to avoid the deportation of a brother. There was not a profit-and-loss motive in this fraud. It was a fraud on the Immigration Department. What happened here was serious: false cheques issued to sons for wages which they had not earned because they had not worked; false statements made to officers of Revenue Canada, Taxation trying to determine who earned certain income; sudden decisions to repudiate those statements without full disclosure at the time; and no identification of Jacinto at a time when he might have been questioned by Mr. Davis.

I have serious doubts about the manner in which this appeal should be resolved, but I am deciding it today because those doubts would not be assisted with the passage of time. The basic issue is: who received the money ultimately for personal disposition and, therefore, whose income was it?

The Minister issued these assessments because he was not satisfied that Jacinto had ever worked for the company and, according to the respondent's counsel, the assessments were based on the fact that the appellants were the last persons to whom the funds could be traced. At the time of assessment, that was the reasonable thing to do. I have concluded, however, that the appellants should succeed. They have overcome the foundation of the assessments. The Minister’s assumption on which the assessments were based is contained in the following words of the respondent's reply to the notice of appeal of Francisco Bettencourt:

(i) during 1986, 1987 and 1988 taxation years, cheques in the total amounts of $800, $15,305 and $17,656 respectively, were endorsed by the appellant's sons and an employee of Active (either one M. Santos and/or "Castro") and negotiated for cash;

(j) the proceeds from the cheques detailed in subparagraph (i) were received by the appellant, as follows: $800 in 1986; $15,305 in 1987 and $17,656 in 1988;

In the reply of Rita Bettencourt, there are similar assumptions; that certain cheques were endorsed by the sons of the appellant Rita Bettencourt and deposited in a bank account for which she and the sons had signing authority; and that she received these amounts. The Minister did a detailed analysis and traced into Rita's accounts the cheques which were endorsed by her and the sons, and then deposited into her account in the Royal Bank. The Minister added to the husband's income the cheques which were negotiated for cash and apparently not deposited in any bank account.

I am inclined to believe what the appellants now state is the true and complete story. I conclude that Jacinto did come to Canada. He did work as was described by both of the appellants and he was paid. I believe them on the basis of their credibility but also, at the commencement of the hearing, counsel for the Minister made certain admissions which clearly eased the burden that was otherwise on the appellants. Those admissions were as follows: the Minister admitted that Jacinto did, in fact, exist as the brother of Francisco Bettencourt (the husband appellant); that Jacinto did, in fact, work for the company during the years under appeal; and that Jacinto was in Canada until the end of 1988.

The reason I think that, on a balance of probabilities, the appellants have reversed the onus and thrown it back on the Minister is this: if the Minister is satisfied that Jacinto worked for the company, then I would assume that Jacinto was compensated for his work. These people came from poverty in their native country. People like that who come to Canada seeking to improve their lives usually are willing to work very hard. They have to be paid. And from the way in which both appellants described Jacinto and his needs, I conclude that he was in desperate need of the three necessities of life — food, shelter and clothing. He could not work for his brother's company without being paid if, during that time, he could have worked for somebody else and been paid. I take judicial notice of the fact that 1986, 1987 and 1988 were buoyant years in the Canadian economy. There was very little unemployment. If Jacinto was working for his brother's company for no pay during those years he probably could have got work some place else for which he would have been paid. In my opinion, the Minister’s assumption that the money ended up in the hands of the appellants has been rebutted. The appeals should be allowed.

Having reached that conclusion, I make one further comment. I would not criticize the Minister for having issued these assessments. Given the trail of deception which was carried out by the appellants, not just the oral statements which were later reversed but also the fabrication of false documents which made it so difficult to trace the income in question, I do not know what else the Minister could have done. If I add the two amounts which were added to the reported 1986 incomes of the appellants — $12,357 for Rita and $800 for Francisco — I find that, in 1986, the sum of those amounts, $13,157, was in fact paid by the company to Jacinto Bettencourt without any source deductions. Similarly, for 1987, I find that the two amounts of $5,719 and $15,305, making a total of $21,024, were paid by Active Building Maintenance Ltd. to Jacinto Bettencourt and not to the appellants. Similarly, in 1988, I find that the amount of $17,656 was paid by Active Building Maintenance Ltd. to Jacinto Bettencourt and not to Francisco Bettencourt.

Because the appeal of Rita Bettencourt is allowed on the main issue, her appeal with respect to the child tax credit is also allowed.

Appeals allowed.