Tremblay v. R., [1998] 3 CTC 2080, 98 DTC 1241

Dussault T.C.J.:

These are appeals from assessments for the appellant’s 1988, 1989, 1990 and 1991 taxation years. The income reported by the appellant for each of those years respectively was $16,294, $20,943, $20,960 and $25,792.

By those assessments the Minister of National Revenue (“the Minister”) increased the appellant’s income by a total of $254,015.85, broken down as follows:

He also imposed the following penalties pursuant to s. 163(2) of the Income Tax Act (“the Act”) for each of the years:

1988 - $5,393.01

The assessments for the 1988, 1990 and 1991 taxation years were made on December 13, 1994 after the appellant objected to reassessments made for the four years at issue on October 12, 1993. As a result of the objections the income added for those years was slightly reduced, the capital gains deduction allowed and the penalties assessed were reduced accordingly. The assessment of October 12, 1993 tor the 1989 taxation year was simply affirmed. The assessments of October 12, 1993 for the 1988 and 1989 taxation years were made after the usual reassessment period.

The October 12, 1993 assessments and the December 13, 1994 assessments were made by the “net worth” method, as the appellant had not as alleged “reported her income in full”.

In his testimony Jean-Louis Cantin, an auditor with Revenue Canada, mentioned a request for an audit of the balance sheets and commercial operations of the appellant, who during the years at issue operated a business selling piece goods. After asking for documentation in support of the tax returns submitted, Mr. Cantin found out that the cash register tapes of the business were not available. He concluded that he could not audit the operations of the business properly and so had to proceed by the net worth method to establish the appellant’s income.

Mr. Cantin used information contained in the tax returns and documents supplied by the appellant and her accountant or obtained from the registry office, building contractors, automobile depositories or other agencies to establish the additional income not reported by the appellant. This income is set out in detail in the documents submitted as Appendix A to the Reply to the Notice of Appeal. All the transactions were checked with the official documents and information obtained. The documents concerning these transactions were entered in evidence and Mr. Cantin explained the auditing of items in the assets and liabilities and the results obtained.

Further, referring to various contracts Mr. Cantin determined that the appellant had, among other things, made several real estate deals giving rise to capital gains in 1988, 1990 and 1991 and that those gains had not been reported. The taxable portion of those gains was added to the appellant’s income and the capital gains deduction provided for by s. 110.6 of the Act was initially denied. Similarly, Mr. Cantin found out that interest income on financing provided to certain purchasers in 1990 and 1991 also went unreported.

The appellant, who acted as her own agent, was the only person to testify on her behalf. She submitted no documents.

In her testimony, the appellant stated first that her godfather had given her $100,000 cash in small notes three or four months before his death after it was agreed that she would say nothing to anyone and on condition that she helped her godmother if necessary. The latter died a year or a year and a half later, alone in her house, without the appellant having to spend any money on her. What is more, in the presence of police officers the appellant’s brother then found an additional $35,000 to $40,000 hidden in a black kettle in the basement of the house. The appellant said she only spoke of the $100,000 to her mother who is now dead. In cross-examination the appellant described this gift as being an amount of $100,000, $110,000 or even $120,000 in $20 notes which her godfather had given her in a grocery bag which she took with her and hid among boxes at the back of a cupboard. The appellant said she later put the money in one or two safety deposit boxes in the bank and changed over $60,000 into $1,000 notes, including $20,000 on a single occasion. She said she began making investments once her godmother was dead. The appellant said she did not remember the months or years in which these various events occurred, simply stating that her godfather had died either in 1986 or 1987.

The appellant also stated that she often went on cruises and won $25,000 on one of them. She said she loaned part of this amount to people who needed it, including one André Labrie who she said was now unbeatable. The appellant provided no further details as to the place, date or manner in which she made this gain.

The appellant further stated she had always reported all her income and that her accountant at the time, a Mr. Fortin, found everything was done correctly.

In cross-examination the appellant first confirmed the correctness of the various components of the assets and liabilities, as set out in Appendix A of the Reply to the Notice of Appeal, and the correctness of the transactions described. She later argued that a transaction involving a Toyota Tercel licensed in her name should actually have been attributed to her son, who repaid the loan directly, but finally admitted that the car was hers. Concerning another automobile, a Subaru Justy also licensed in her name, the appellant said she had contracted a loan herself to pay the purchase price but her son was repaying her directly and she was depositing the money in her account from which the monthly payments were taken.

The appellant stated that she made sure the content of her tax returns was accurate before signing them. She later said she signed without checking.

Concerning her business, the appellant said she worked in it and then that she did not work there, simply going to check on it and looking after purchasing. She said she gave all her documents to her accountant every month or every three months, the latter gave her cheques to sign, especially for both levels of government, and he gave her “his papers”. Yet, in the audit the appellant did not have the cash register tapes in her possession so that it was impossible to check the actual commercial operations of the business.

As to the various real estate transactions engaged in over the years, the appellant argued that her assets actually came from a gift of $100,000 from her godfather and said it was really always the same money that was used. Accordingly, she said, she made no capital gains. When shown the documents she then said either that she did not remember the amount of a particular transaction or that the amount shown on the contract was not correct.

The appellant’s testimony regarding the unreported interest was just as vague and confused, giving first one version and then its opposite. Accordingly, the appellant first admitted she received interest on loans made to purchasers in certain real estate transactions and stated that the interest had been reported. When asked to admit that it had not been reported, she said it was probably because there was no interest or because very little interest had actually been paid.

As mentioned before, Mr. Cantin testified about making the assessments using the net worth method, explaining in detail the various items shown in the appellant’s assets and liabilities for the years at issue, indicating the source of the information obtained and the calculations made. After discussions with the appellant’s accountant, Mr. Pichette, minor changes were made, reducing certain of the appellant’s personal expenses established partly by estimate and adding to the assets at the start of the period an amount of $2,000 placed in an RRSP account that had not initially been taken into account. According to Mr. Cantin, these were the only changes made to the net worth as a result of Mr. Pichette’s comments. Mr. Cantin said he also discussed the matter with Mr. Savard, the appellant’s spouse, and obtained no further information.

In his testimony Mr. Cantin also stated that according to the information obtained from the bank the appellant had no safety deposit box.

As far as the penalties were concerned, Mr. Cantin said he took into account the size of the amounts in question, the annual recurrence, the fact that certain amounts of interest had not been reported and that the capital gains made were never reported. I note that it was only after the objections were made followed by the assessments on December 13, 1994 that the capital gains deduction was allowed for 1988, 1990 and 1991. Mr. Cantin did not testify on this point.

The appellant’s arguments amount to very little. She never opened a book or consulted the documents. She did not want to know anything or to be concerned with anything. The accountants Fortin and Pichette looked after everything. She said she initially told the accountant Pichette about the gift of $100,000. According to her, her spouse Mr. Savard was not aware of it. She said that she did not want him to know about it either.

Referring to various points in the appellant’s testimony, counsel for the respondent noted first the many contradictions and varying stories given by the appellant, especially as regards unreported interest and capital gains on several real estate transactions engaged in during the period at issue, which must obviously have been known to her. Since it seemed clear that the appellant knew that all her income had not been reported and that the information contained in her returns was inaccurate she could not, counsel submitted, be allowed to put the blame on her accountant.

Counsel for the respondent also argued that the Court could not accept the appellant’s testimony regarding the gift of $100,000 from her godfather and the winnings of $25,000, or her contradictory comments on the interest and capital gains. Further, he said, the audit by the net worth method with supporting documents disclosed unreported income much greater than what she said she received from her godfather or won on a cruise. Counsel for the respondent concluded that the appellant had knowingly filed false tax returns. At the very least, he said, taking into account the circumstances, and in particular the size of the amounts in question and the annual recurrence, the appellant had committed gross negligence by signing her returns without checking them, which either way justified both the assessments beyond the usual assessment period for 1988 and 1989 and the penalties under s. 163(2) for the four years.

In support of his arguments counsel for the respondent referred to the decisions in the following cases:

° Communications & Services (Royal) Inc. c. R. (1993), 94 D.T.C. 1163 (T.C.C.);

e Sigouin c. Ministre du Revenu national (1992), 93 D.T.C. 206 (Fr.) (T.C.C.);

• Morin v. Minister of National Revenue (1992), 92 D.T.C. 1241 (Eng.) (T.C.C.);

° Girard v. Minister of National Revenue (1988), 89 D.T.C. 63 (T.C.C.);

• Venne v. R. (1984), 84 D.T.C. 6247 (Fed. T.D.);

° Howell v. Minister of National Revenue, April 1, 1981, case 79-245 (T.R.B.) [reported [1981] C.T.C. 2241 (T.R.B.)];

° R. v. Cloutier (1978), 78 D.T.C. 6485 (Fed. T.D.).

I agree with the conclusions of counsel for the respondent. The assessment of the appellant’s unreported income for each of the years at issue using the net worth method was fully justified in the circumstances, since the appellant from the outset was unable to provide all the documents that would have been required for an audit of the operations of her business, and in particular the cash register tapes which mysteriously and inexplicably disappeared. In the circumstances, the natural inference is simply that they were deliberately hidden. This is an act for which the appellant must be held responsible and the fault for which she cannot, just by saying so, shift the blame to her accountant, who was not called to testify.

The painstaking, detailed and well-documented audit by Mr. Cantin used to make the assessments by the net worth method leaves little doubt as to the scope and level of the income not reported by the appellant during the years at issue. While the amounts are large, it can also be seen that part comes from profits made on several real estate transactions spread over several years which were never reported by the appellant in her tax returns. The same is true of interest on loans made by the appellant to purchasers in some of those transactions. The confused explanations and contradictory stories told by the appellant in this regard at different points in her testimony can only lead to the conclusion that there was deliberate concealment of the amounts at issue. Furthermore, the appellant’s statement that she checked nothing before signing her tax returns, and in short, that she did not want to know anything about it, also shows in the circumstances a measure of indifference regarding her tax obligations.

In the circumstances, the lack of credibility which I place on the appellant’s testimony also applies to her allegations about the gift of $100,000 received from her godfather and the winnings of $25,000 on a cruise: some aspects of the appellant’s description of these events were surprising to say the least. She had no memory of the dates or even the exact amount in the first case and no relevant details in the second. It is conceivable that extraordinary things do happen: however, on analysing the evidence as a whole it is quite simply impossible to conclude on a balance of probabilities that such events were responsible for the appellant’s assets.

As to the penalties assessed under s. 163(2) of the Act, the facts set out above lead the Court to conclude that these were justified. I take the liberty here of referring to the judgment of Strayer J., then sitting at the Federal Court Trial Division, in Venue, supra, in which he analysed “gross negligence” as follows:

“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. [1]

[My emphasis.]

Additionally, in his decision in Morin, supra, at 1239, Chief Judge Couture of this Court said the following:

To escape the penalties provided in subsection 163(2) of the Act, it is necessary, in my opinion, that the taxpayer’s attitude and general behaviour be such that no doubt can seriously be entertained as to his good faith and credibility throughout the entire period covered by the assessment, ...

The appellant did not persuade the Court either of her good faith or credibility. On the contrary, the evidence submitted led it to conclude that if she did not deliberately avoid her tax obligations she was at least completely indifferent as to whether the Act was complied with.

Clearly, this observation leads the Court to conclude that the Minister was also justified in making assessments for the 1988 and 1989 taxation years beyond the usual assessment period specified in the Act.

The appeals are dismissed with costs to the respondent.

Appeals dismissed.