Ferme Jules Côté & Fils Inc. v. Her Majesty the Queen and Jules Côté v. Her Majesty the Queen, [1996] 3 CTC 2361 (Informal Procedure)

Lamarre J.T.C.C.: — This case concerns, first, an appeal from an assessment of the appellant Ferme Jules Côté & Fils Inc. for the 1987 taxation year, and second, appeals by the informal procedure from assessments of the appellant Jules Côté for the 1987 and 1988 taxation years. These appeals were heard on common evidence. In calculating its income for the 1987 taxation year the appellant Ferme Jules Côté & Fils Inc. failed to report income of $8,433 from the sale of farm animals which took place in that taxation year. In assessing the appellants the Minister of National Revenue (the “Minister”) added this sum of $8,433 to the income of the appellant Ferme Jules Côté & Fils Inc. and disallowed a deduction of the same amount. He added the amount to the income of the appellant Jules Côté for the 1987 taxation year pursuant to subsection 15(1) of the Income Tax Act (the “Act”) and imposed a penalty on him under subsection 163(2) of the Act. The Minister further added an amount of $5,250 to the income of the appellant Jules Côté for the 1988 taxation year as unreported salary income from the company Proboeuf Canada Inc.

Facts

In making these assessments the Minister relied on the facts set out in subparagraphs (a) to (h) of Paragraph 8 of the Reply to the Notice of Appeal (93-1574(IT)G) and subparagraphs (a) to (j) of Paragraph 11 of the Reply to the Notice of Appeal (93-1573(IT)G). These facts read as follows:

(a) the appellant is the principal shareholder in a farming operation doing business as “Ferme Jules Côté et Fils Inc.” (the “company”), in which the principal activity is the fattening of cattle and pigs;

(b) as principal shareholder the appellant is the sole signatory for the said company and it is he who takes almost all the decisions concerning Ferme Jules Côté et Fils Inc.;

(c) the company’s sales accounting system is based on the bills supplied by customers and documentation from the slaughterhouses; purchases and expenses are paid for by cheque;

(d) during its 1987 taxation year the company sold farm animals to Les Entreprises René Leclerc Inc. for an amount totalling $8,433;

(e) this amount of $8,433 was paid to Jules Côté by Les Entreprises Ren Leclerc Inc. in cash;

(f) an audit of the company’s books indicated that the sum of $8,433 did not appear among the company’s sales made during its 1987 taxation year;

(g) further, the appellant alleged that he used the money from Les Entreprises Ren Leclerc Inc. to purchase new animals from Jean-Yves Gagnon;

(h) an audit of Jean-Yves Gagnon’s bills indicated that there were no bills confirming any sale by Jean-Yves Gagnon to Ferme Jules Côté et Fils Inc. during the 1987 taxation year;

(i) during the 1988 taxation year the appellant received the sum of $5,250 from Proboeuf Canada Inc. as salary income;

(j) as the appellant knowingly or in circumstances amounting to gross negligence made a false statement or omission in his income tax return for the 1987 taxation year by allocating himself money, namely an amount of $8,433, belonging to the company Ferme Jules Côté et Fils Inc., a penalty in the amount of $405.94 was imposed pursuant to subsection 163(2) of the Income Tax Act) [1]

[Translation.]

As to the salary income of $5,250 added to Jules Côté’s income for the 1988 taxation year, counsel for the appellant admitted that part of this amount, namely $1,711.42, had to be included in the appellant’s income for 1988 as salary from Proboeuf Canada Inc. I accepted the testimony of Armand Perreault, an accountant and shareholder-director of Proboeuf Canada Inc. in 1988, and documents entered in evidence in this regard, indicating that the difference of $4,538.58 represented reimbursement of expenses incurred by the appellant for that company during 1988. The amount of $4,538.58 accordingly should not be included in the appellant’s income for 1988.

As regards the unreported sales of $8,433 included in the income of the appellant Ferme Jules Côté & Fils Inc., I understand from the evidence and pleadings that the appellant admitted making these sales to Les Entreprises René Leclerc Inc. but considered that it should be allowed to deduct the amount since it said it used the proceeds of this sale of animals to buy other animals. As to the inclusion of this amount in the appellant Jules Côté’s income for the 1987 taxation year, he argued that he did not benefit from this sum of money since it was used to buy other farm animals for the business operated by Ferme Jules Côté & Fils Inc. Accordingly, in his opinion the sum of $8,433 should not be included in his income for 1987 and the penalty should thus not apply.

In presenting his evidence counsel for the appellants called Jean- Yves Gagnon, an animal dealer for 25 years, and the appellant Jules Côté himself. Mr. Gagnon said that on September 17, 1987 he sold Ferme Jules Côté & Fils Inc. 14 calves which he said he delivered to Mr. Côté’s premises himself for the sum of $8,400, as indicated by the document filed as Exhibit A-l. Mr. Gagnon said that at his request he was paid in cash for this sale. Similarly, he said he sold three cattle to Ferme Jules Côté et Fils Inc. on May 10, 1988 for $2,725 and received the proceeds of this sale in cash, as indicated by the document filed as Exhibit A-2. He said he asked to be paid in cash as this was more to his advantage. However, he did not elaborate on the nature of this advantage. He also did not know whether he had reported these sales in his tax returns.

Jules Côté admitted that in 1987 and 1988 Ferme Jules Côté & Fils Inc. sold Les Entreprises René Leclerc Inc. animals amounting to $8,433 and $2,775 in each of these years respectively. He mentioned that the proceeds of these two sales were paid to him personally in cash. However, he testified that the money was kept at his home while he was waiting to purchase the animals referred to by Mr. Gagnon in his testimony. He said Ferme Jules Côté & Fils Inc. had a turnover of some $1 million and an audited accounting system. These sales were usually made by cheque. The sales made to Entreprises René Leclerc Inc. were not entered in the books, nor were the purchases from Mr. Gagnon. He maintained that he never received any bills from Entreprises René Leclerc Inc. According to his version of the facts, Mr. Leclerc told him not to deposit the money in the bank. Further, he maintained that it was due to an oversight that Ferme Jules Côté & Fils Inc. did not claim the purchase price of the animals from Mr. Gagnon against its income.

Counsel for the respondent called René Leclerc and Richard Pomerleau, who worked part-time for Mr. Leclerc in 1987 and 1988. Mr. Leclerc, who is a farmer and seller of animals, filed as Exhibits 1-3 and I-5 bills establishing the purchase of farm animals from Ferme Jules Côté & Fils Inc. for $8,432.27 in 1987 and $2,775 in 1988. He also drew cheques in these amounts on his own business in his own name to pay Ferme Jules Côté & Fils Inc. in cash through Mr. Pomerleau. Copies of these cheques were filed as Exhibits I-4 and I-6. He said he did not know why the money was paid to Jules Côté personally or whether the latter received the bills filed as Exhibits I-3 and I-5. However, he mentioned that he generally did as his customers asked him to do. Mr. Pomerleau confirmed that he paid customers in cash if they requested it and this appeared to happen quite frequently. He said that he did not know whether the bills filed as Exhibits 1-3 and 1-5 were sent to Ferme Jules Côté & Fils Inc. but he stated categorically that he had definitely given Mr. Côté or someone else a small bill recording the purchases made. He did not keep a copy of such small bills.

The last witness to be heard was Jean Proulx, a Revenue Canada business file auditor. He made the assessments in the instant appeals. I understand from his testimony that it was as the result of an audit made at the premises of Les Entreprises René Leclerc Inc. (though it was not made by him) that the information was included in the appellants’ file. He said that in the course of his audit he met with Jules Côté, who categorically denied having made any cash transactions with anyone in the course of his business. After being confronted with the bills filed as Exhibits 1-3 and 1-5, Jules Côté then told Mr. Proulx that he had used the proceeds of these sales to buy other animals. After making his audit, Mr. Proulx found no trace of these purchases in the books of Ferme Jules Côté & Fils Inc. or in Mr. Gagnon’s books. He admitted that Mr. Côté showed him the bills filed as Exhibits A-1 and A-2, but he said that these bills seemed to have been newly made up at the time of his audit in 1991, compared with others which he had seen at Mr. Gagnon’s premises on the same kind of paper for 1987 and which appeared to be much older. Additionally, he did not see these bills in Mr. Gagnon’s books.

Analysis

The appellants had the burden of proving on a balance of probabilities that the sum of $8,433 paid by Les Entreprises René Leclerc Inc. to Jules Côté personally in 1987 was used to buy other farm animals for Ferme Jules Côté & Fils Inc. and did not benefit Mr. Côté personally in any other way. The evidence on this point is contradictory in several respects. First, the purchases do not appear anywhere in the books of Ferme Jules Côté & Fils Inc., nor are they shown in Mr. Gagnon’s books. This fact, which was established by Mr. Proulx, was not contradicted by the testimony submitted in evidence. Further, Mr. Côté’s story seems to have changed as the audit progressed. After categorically denying that he concluded any cash transactions, Mr. Côté subsequently changed his story and submitted bills indicating that he used the proceeds of the unreported sale to purchase other animals for his business. However, these purchases were not entered as expenses in calculating the income of the business for 1987. Mr. Côté maintained that this was an oversight. This explanation does not seem to be sufficient to establish the truth of what he said on a balance of probabilities. What actually appeared from the evidence was that the purchases Mr. Côté claimed to have made in 1987 correspond exactly to the amount of the unreported sales for that year and that the bills setting out these facts were submitted after Mr. Proulx showed Mr. Côté that he had evidence that sales had not been reported by the appellant Ferme Jules Côté & Fils Inc. As to Mr. Gagnon’s testimony, given to corroborate the testimony of the appellant Jules Côté, I note that Mr. Gagnon indicated that he did not know whether he had reported income from the sale to Mr. Côté and that he found it more advantageous to be paid in cash. Without wishing to sit in judgment on Mr. Gagnon, his testimony actually suggested to me that he did not report his income and caused me to doubt his credibility when he said that he delivered the animals to Mr. Côté’s premises himself. The suggestion made by counsel for the appellants that Mr. Côté did not see fit to disclose these purchases before in order to protect Mr. Gagnon, who had some interest in concealing the sales from Revenue Canada, is not a reason which could justify such conduct. At the very least this testimony, taking the other evidence into account, creates a serious doubt in my mind as to whether the purchases were actually made. I therefore consider that the appellant Ferme Jules Côté & Fils Inc. did not discharge the burden of proof upon it to establish that the Minister erred in disallowing the deduction of $8,433 in calculating its business income for 1987.

Additionally, as the sum of $8,433 was received by Mr. Côté personally, a fact which he did not deny, it leads me to conclude based on the foregoing that the Minister was justified in including this amount in Mr. Côté’s income pursuant to subsection 15(1) of the Act as a benefit conferred on a shareholder.

As to the penalty imposed on the appellant Jules Côté pursuant to subsection 163(2) of the Act, it was the respondent who had the burden of showing that the appellant Jules Côté knowingly or in circumstances amounting to gross negligence failed to report a taxable benefit. It has already been stated by this Court that the degree of evidence necessary to discharge this burden pursuant to subsection 163(3) of the Act is for the respondent to establish on a balance of probabilities that the appellant failed to report the income knowingly or in circumstances amounting to gross negligence. [2]

On the question of evidentiary standard required in imposing a penalty under subsection 163(2) of the Act, Marceau J. when he was in the Trial Division of the Federal Court said the following in Cloutier v. R..(sub nom. Cloutier v. The Queen), [1978] C.T.C. 702, 78 D.T.C. 6485, at page 705 (D.T.C. 6487):

However, I fail to see how such argument contributes to solution of the case, as I understand it.

The question before the Court is whether the circumstances in which the omission occurred are such that gross negligence may be attributed to the taxpayer: “gross negligence” being taken to mean a relatively serious act of negligence, which is difficult to explain and socially inadmissible.

[Translation.]

The concept of gross negligence has also been considered by the courts many times. The decision most often cited when a penalty is in question is that of the Federal Court Trial Division in Venne v. R. (sub nom. Venne v. The Queen), [1984] C.T.C. 223, 84 D.T.C. 6247. Strayer J. said the following about “gross negligence”, at page 234 (D.T.C. 6256):

“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.

Additionally, in Farm Business Consultants Inc. v. R. (sub nom. Farm Business Consultants Inc. v. Canada), [1994] 2 C.T.C. 2450, Judge Bowman of this Court noted that in a case in which the subsection 163(2) penalty was in question the Court, even when it applies the evidentiary standard appropriate to a civil proceeding, must analyze the evidence very minutely and require a higher balance of probabilities than in the case of evidence to be presented for any less serious matter. Thus, if a taxpayer’s actions can support two reasonable and viable assumptions, one justifying the penalty and the other not, the taxpayer must be given the benefit of the doubt. In the instant case, as I mentioned above, the various versions presented both in the evidence and in the documents filed gives rise to some doubt as to what actually occurred. I therefore consider that in the case of the penalty the taxpayer should be given the benefit of the doubt, since the respondent did not show the Court on the balance of probabilities required for such evidence that Jules Côté knowingly or in circumstances amounting to gross negligence retained for his personal use the money received from Entreprises René Leclerc Inc. In any case, the evidence on the point is contradictory. This is why I feel that the penalty imposed on Jules Côté for the 1987 taxation year pursuant to subsection 163(2) of the Act was not justified in the circumstances.

For these reasons, the appeal is dismissed in respect of the appeal by Ferme Jules Côté & Fils Inc. for the 1987 taxation year. The appeal by Jules Côté for the 1987 taxation year is allowed solely as to the imposition of the penalty. Jules Côté’s appeal for the 1988 taxation year is allowed on the basis that only the sum of $1,711.42 is to be included in the appellant’s income as salary from Proboeuf Canada Inc.

Each of the parties will pay its own costs.

Appeal allowed in part.