Lépine v. R., [1999] 3 CTC 2490, 99 DTC 358

Dussault T.C.J.:

In the case of the appellant Michel Lépine, the appeals are from assessments for his 1990, 1991 and 1992 taxation years; in the case of the appellant Attaches Remorques du Quebec Inc., sometimes referred to as “the corporation”, the appeals are from assessments for its taxation years ending on January 31, 1991, 1992 and 1993.

In assessing the appellant Michel Lépine, the Minister of National Revenue (“the Minister”) relied on the facts set out in subparagraphs (a) to (k) of paragraph 6 of the Reply to the Notice of Appeal. Those subparagraphs read as follows:

[TRANSLATION]

(a) during the years at issue, the appellant was the majority shareholder and director of Attache-Remorque du Quebec Inc. (“the corporation”);

(b) the corporation operates a trailer hitch business;

(c) the corporation operates year-round, although it is busier from May to September;

(d) for its 1990, 1991 and 1992 taxation years, the appellant reported income (made up mainly of salaries and dividends) of $26,985, $52,983 and $45,348, respectively;

(e) personal expenses for such things as canteen meals eaten by the appellant and his spouse at the company’s garage and hockey tickets were paid by the corporation and deducted by it as entertainment expenses;

(f) the personal expenses referred to in subparagraph 6(e), which totalled $6,569, $11,049 and $3,581 for the 1990, 1991 and 1992 taxation years, respectively, were taxable benefits received by the appellant during the years at issue;

(g) the appellant did not reimburse the corporation for those expenses;

(h) by examining the bank accounts of the appellant and his spouse, the Minister was able to trace deposits that could not be justified by the appellant and that totalled $18,976, $27,736 and $28,780 for the 1990, 1991 and 1992 taxation years, respectively;

(i) in 1991, one of the corporation’s customers transferred $4,100 from its account to the appellant’s bank account to pay an invoice, and that amount was used to pay for camping equipment used by the appellant personally;

(j) in filing his income tax returns for the 1990 and 1991 taxation years, the appellant made a misrepresentation that was attributable to neglect, carelessness or wilful default or committed fraud in filing the returns or in supplying information under the Income Tax Act;

(k) since the appellant knowingly, or under circumstances amounting to gross negligence, made false statements in his tax returns for his 1990, 1991 and 1992 taxation years by not reporting income of $25,545, $38,785 and $32,301, respectively, penalties were assessed in accordance with subsection 163(2) of the Income Tax Act.

In assessing the appellant Attaches Remorques du Québec Inc., the Minister relied on the facts set out in subparagraphs (a) to (1) of paragraph 7 of the Reply to the Notice of Appeal. Those subparagraphs read as follows:

[TRANSLATION]

(a) the appellant was incorporated on February 28, 1983, under Part IA of the Quebec Companies Act;

(b) Michel Lépine was the appellant’s principal shareholder during the years at issue;

(C) during the years at issue, the appellant operated a business that made, installed and repaired trailer hitches in the Quebec area;

(d) the appellant operates year-round, although its busiest period is from May to September;

(e) an audit by the Minister determined that income of $19,276, $24,677 and $27,439 was not reported by the appellant for its taxation years ending on January 31, 1991, 1992 and 1993, respectively;

(f) those amounts were established by examining the bank accounts of the appellant’s principal shareholder and his spouse, which uncovered unjustified deposits for each of the taxation years at issue;

(g) to pay an invoice for $4,100, one of the appellant’s customers transferred that amount from its own bank account to the principal shareholder’s bank account, and the payment was not reported by the appellant as income for its taxation year ending on January 31, 1992;

(h) the $4,100 deposited in the bank account of the appellant’s principal shareholder was used to purchase camping equipment used by the said shareholder;

(i) for the taxation years ending on January 31, 1991, 1992 and 1993, respectively, the Minister disallowed $7,652, $8,697 and $3,583 as expenses incurred by the appellant, since those amounts were personal expenses of the appellant’s principal shareholder, Michel Lépine, that had been paid by the appellant;

(j) these disallowed expenses were mainly for the cost of meals eaten by Mr. Lepine and his spouse at the canteen at the company’s garage and the cost of hockey tickets;

(K) since the appellant knowingly, or under circumstances amounting to gross negligence, made false statements in its tax returns for its taxation years ending on January 31, 1991, 1992 and 1993, by not reporting income of $19,276, $28,777 and $27,439, respectively, while claiming expenses of $7,652, $8,697, $3,853 and $19,903 for a shareholder’s per- sonal expenses, penalties were assessed in accordance with subsection 163(2) of the Income Tax Act:

(1) in filing its income tax return for the fiscal year ending on January 31, 1991, the appellant made a misrepresentation that was attributable to neglect, carelessness or wilful default or committed fraud in filing the return or in supplying information under the Income Tax Act.

So much for the essential technical aspects of the Replies to the Notices of Appeal.

Michel Lépine is no longer contesting the addition to his income, as personal expenses, of the expenses referred to in subparagraphs (e), (f), (g) and (i) of paragraph 6 of the Reply to the Notice of Appeal in his case.

Attaches Remorques du Quebec Inc. is no longer contesting the Minister’s disallowance of its deduction of the expenses referred to in subparagraphs (i) and (j) of paragraph 7 of the Reply to the Notice of Appeal in its case, or the addition to its income of the $4,100 referred to in subparagraphs (g) and (h) of paragraph 7 of the Reply to the Notice of Appeal.

Michel Lépine is therefore contesting the following amounts, which were added to his income as an appropriation of the corporation’s funds: $18,276 for 1990, $23,636 for 1991 and $28,780 for 1992.

The contested amounts included in the corporation’s income as unreported income based on its taxation year ending on January 31 of each year are as follows: $19,276 for the year ending on January 31, 1991, $24,677 for the year ending on January 31, 1992, and, finally, $27,439 for the year ending on January 31,1993.

The respondent’s position is grounded mainly on the fact that the amounts assessed as income not reported by either Mr. Lépine or the corporation were income from the business operated by the corporation that Mr. Lépine appropriated for his own use.

This position is based on the argument that the appellant Michel Lépine was unable to provide any justification satisfactory to the tax authorities for deposits totalling the contested amounts in joint personal bank accounts he had with his spouse. Almost all of the amounts in question were deposited in one account at the National Bank of Canada, and the particulars thereof are set out in Exhibit -2, Tab 9. In fact, only one other deposit, an amount of $3,000, was made at the Caisse populaire Giffard on November 31, 1991.

The Revenue Canada auditor, Michel Audet, inferred from this that the unjustified deposits were from cash sales that the corporation did not issue invoices for and did not report, and that Mr. Lépine had appropriated the proceeds of those sales. About 40 percent of the sales made by the business or corporation are cash sales, and Mr. Lépine is the person who controls all the financial aspects of the business.

Mr. Lépine argued that Attaches Remorques du Quebec Inc. had reported all of the income it earned from operating its business, that he himself had reported all of his income from the corporation and that he had therefore not appropriated the assessed amounts in any way. His position is based on the argument that the deposits in his personal bank accounts were actually from loans he received from acquaintances or friends as well as the repayment of a loan and the repayment of another debt incurred by his brother, Jacques Lépine.

Thus, Mr. Lépine said that he borrowed the following amounts:

(1) on April 8, 1990, $5,000 from Marcel Lalancette;

(2) on May 6, 1990, $5,000 from Robert Hamel;

(3) on January 12, 1991, $5,000 from Origène Guénette;

(4) on April 10, 1991, $5,000 from Marcel Lalancette;

(5) on May 5, 1991, $5,000 from Robert Hamel;

(6) on January 12, 1992, $5,000 from Origène Guénette;

(7) on June 6, 1992, $2,500 from Marcel Lavallée;

(8) on July 4, 1992, $2,500 from Richard Amyot; and

(9) on October 10, 1992, $3,000 from Origène Guenette.

There were thus nine loans totalling $38,000. According to Mr. Lépine, all of the loans were repaid in 1994, 1995 and 1996.

Mr. Lépine said that a $7,500 loan made to his brother, Jacques Lépine, in 1986 was repaid in 1990. Jacques Lépine allegedly used the loan to make the cash down payment required to purchase some real property. Jacques Lépine had allegedly owed another $7,500 since 1987 in connection with a joint venture that he had been supposed to start with the appellant Michel Lépine but had withdrawn from at the last minute. Michel Lépine said that that amount was repaid in 1991. He also said that the two amounts of $7,500 — one paid back in 1990 and the other in 1991 — were repaid in a number of instalments.

All of the loans referred to above were allegedly made and repaid in cash. According to the appellant Michel Lépine, each of the transactions was initially recorded in a document that, in each case, was destroyed when the debt was repaid. No accounts were provided with respect to any of the transactions. However, after being pressured by Revenue Canada to provide vouchers or sworn statements to support his claims, Michel Lépine contacted the above-mentioned individuals in 1996 to have them sign documents attesting the transactions. The documents adduced in evidence in this regard are Tabs 20 to 31 of Exhibit A-1. All of these documents were prepared and signed in 1996. Michel Lépine said that he remembered the exact date of each transaction and that therefore each document bore that date and the parties certified that they had signed it on that original date.

I will reproduce the document at Tab 21 as an example. It reads as follows:

[TRANSLATION]

May 6, 1990

Acknowledgment of Loan

I, Michel Lépine, acknowledge that I owe Robert Hamel five thousand dollars ($5,000.00).

The loan shall be repayable on demand and shall not bear interest.

In witness whereof, we have signed at Quebec on May 6, 1990.

[signature]

Michel Lépine

[signature]

Robert Hamel

I would add that when the documents were submitted to Revenue Canada, no reference was made to the fact that they had not been prepared and signed until 1996. At the start of the audit in 1994, Mr. Lépine had said that the documents no longer existed because they had been destroyed once the loans were repaid.

Michel Audet of Revenue Canada began auditing the appellant corporation in August 1994, and Mr. Lépine was apparently informed of the proposed assessments against him and the corporation in February 1995. The assessments were finally issued starting on September 1, 1995. [1] Although Mr. Lépine had stated following the audit that the deposits in his bank accounts could be explained by loans from friends, and although, according to Mr. Audet, Mr. Lépine’s lawyer indicated a few of the lenders’ names, after March 1995 Mr. Audet never, before closing the file — and before the reassessments were issued — he never, I repeat, received any documents whatsoever concerning the alleged transactions. Yet according to the appellant Michel Lépine, the money he borrowed in 1990, 1991 and 1992 was not repaid until 1994, 1995 and 1996. So if, as he says, the original documents were not destroyed until the loans were repaid, then the question arises — since at least part of the loans had not yet been repaid at the end of 1994, in 1995 or even in 1996 — why no original documents could be filed, given that they would not yet have been destroyed at that time. In my opinion, the answer is clear. The documents never existed, since in all likelihood the loans never existed either. Although I do not know this for a certainty, it seems to me that that is what the evidence suggests on a balance of probabilities.

Counsel for the respondent admitted that the testimony of Mr. Hamel, Mr. Guenette, Mr. Lavallée and Mr. Amyot, if they had testified, would have been along the same lines as Mr. Lépine’s testimony. Although they were available, those individuals did not testify because of that admission. However, the respondent did not admit that the testimony they might have given would have been true. Counsel for the appellants nevertheless saw the admission as a corroboration of Michel Lépine’s testimony with regard to both the loans and the repayments. So be it. Both truth and falsehood can be corroborated. In so far as I believe that Mr. Lépine’s testimony is not credible, this does not advance the appellants’ case many way. The documents prepared and signed in 1996 are false on their very face, and this has been admitted by Mr. Lépine. Each of them was prepared and signed not on the date it bears, but a number of years later. This is what is commonly referred to as fabricating evidence. In my opinion, the fact that Mr. Lépine did not see fit to reveal this when the documents were first submitted to Revenue Canada’s representative in 1996 merely adds one more aspect to the attempt to mislead Revenue Canada’s representatives.

I would also point out that the documents concerning Jacques Lépine’s debts to the appellant Michel Lépine were also fabricated in 1996. While Jacques Lépine and Michel Lépine gave the same testimony with respect to the loan allegedly made in 1986, their testimony about the loan made or debt incurred in 1987 was not entirely consistent. Was it a loan or an acknowledgement of debt? Each witness has his own version. What is more, no details on dates or amounts were given for the repayments made in 1990 and 1991 (according to the documents prepared and signed in 1996). In this regard, reference can be made to Exhibit A-l, Tabs 20, 23 and 27. I will conclude here simply by saying — euphemistically — that it is somewhat difficult to believe that no one ever kept any accounts, even in the form of household or other papers, concerning the trainsactions with Michel Lépine, if only to indicate the dates the loans were repaid. So much for the alleged origin or source of the funds. However, it is important to go further and look at Michel Lépine’s bank deposits in relation to what he claims to be their source.

First of all, no attempt was made to reconcile the amounts deposited in Mr. Lépine’s personal accounts with the amounts he claims were the source of the deposits. The total amount he says he borrowed is $38,000. To that sum must be added the $15,000 allegedly repaid by his brother, Jacques Lépine, which would give a total of $53,000. The contested amounts assessed as Michel Lépine’s additional income for the years at issue total $70,692, which means that there is a difference of $17,692 for which no explanation of any kind has been provided. This is a significant indication that the funds in all likelihood came from the corporation’s activities involving unrecorded cash transactions. Based on the evidence adduced, there can be no other plausible source.

Mr. Lépine said that he borrowed money from his friends and acquaintances because of his personal financial problems, which resulted mainly from the problems experienced by Attaches Remorques du Quebec Inc. Those problems were in turn connected with those of another corporation that operated a different business in the field of rustproofing. Referring to the problems experienced, the indebtedness of Attaches Remorques du Quebec Inc. and his personal indebtedness to financial institutions (mainly the Federal Business Development Bank and the National Bank of Canada), Mr. Lépine said that it had become impossible for him to borrow more money from those institutions and that he could no longer meet his personal obligations to them, which was why he had to go to his friends and acquaintances.

The evidence shows that, despite these problems and the threat of bankruptcy, Michel Lépine nonetheless continued to borrow from the National Bank each year to contribute to his RRSP. In April or May 1991, an additional loan of $30,000 was taken out in the appellant corporation’s name at a different branch of the National Bank to finance the purchase of a trailer that was resold in May 1992. It is also to be observed that, in spite of the problems referred to, Mr. Lépine’s income increased substantially in 1991, as he was paid nearly $23,000 in dividends in addition to his $29,000 salary. Mr. Lépine’s explanation of these facts has not convinced me that his financial situation was as terrible as he described it or that he was under a constant and immediate threat that the bank would seek repayment of the credit it had given. There was no evidence that the bank took any real steps along those lines, although Mr. Lépine did state that he was threatened with such action at one point if he transferred his RRSPs to another institution, an insurance company, to shelter them from seizure.

According to Mr. Lépine, he deposited the entire amounts he borrowed from his friends and acquaintances, as well as the entire amounts he received from his brother Jacques, in his personal bank account at the National Bank so that he could meet his recurring obligations. However, Mr. Lépine said that, to ensure that the bank was not aware of his personal loans and did not take advantage of a large deposit by using it as a source of repayment of loans it had made him, he deposited the proceeds of the various cash loans he received, a small amount at a time, based on his needs and the monthly payments he had to make. On examining the list of deposits that Revenue Canada considers unjustified, it is indeed impossible to find an amount that corresponds to the total amount of a loan: allegedly received by Mr. Lépine. It is even impossible to correlate the dates of the alleged loans and the dates of the deposits in any meaningful way. Needless to say, the same is true of the amounts. Mr. Lépine’s explanation of this is again, in my opinion, not very credible. First of all, it is hard to believe that a person who has just been given, for example, $5,000 in cash, would deposit all of it, little by little — $100, $200 or $300 at a time — without using some of the cash to pay day-to-day expenses. Moreover, in the list of unexplained deposits, there are a number of anomalies in light of Mr. Lépine’s explanations or lack of explanation. For instance, why were there deposits as precise as $210, $310, $344 and $1,036 or, better yet, $1,219.51 and $1,340.50? For someone who managed a business whose sales ranged from $527,000 to $668,000 a year during the years at issue, this micrometric — one might say surgical — precision in the method of planning to meet obligations by making very numerous deposits of minimal amounts (one might almost say in dribs and drabs), often between $50 and $200, seems suspect. It is all the more so given his explanation of the source of the funds, when the amounts he was depositing involved not just dollar figures, but dollars and cents.

Why were there deposits as large — relatively speaking, of course — as $2,300 or $2,700, or both as precise and as large — still relatively speaking — as $1,763.55 or $1,557.06?

Finally, what is the explanation for the fact that Mr. Lépine allegedly needed money and borrowed $3,000 on October 10, 1992, when five days earlier, on October 5, 1992, he had deposited $2,700, the source of which remains unknown?

All things considered, I conclude that it is more likely that the deposits in Mr. Lépine’s personal bank accounts were from cash transactions that no invoices were issued for and that were not recorded in the appellant corporation’s books than from the alleged loans received and made by Mr. Lepine. Even if I had accepted all of Mr. Lépine’s arguments concerning those loans, I would still have had to find that it has not been shown on a balance of probabilities that those loans were the source of the otherwise not justified deposits in his personal bank accounts. Of course, the significant difference between the deposits and what is claimed to be the amounts of the loans received and made is an important factor. The specific characteristics of the deposits that I have just noted are another very important factor.

In view of the evidence adduced, I am also of the view that Mr. Audet conducted his audit correctly, honestly and faultlessly. The nature of the appellant corporation’s business, the large number of small cash transactions and the large number of parts kept in stock meant that he had to explore certain audit areas more than others, which is what he did.

He did not find the unreported income in the business’s books and records, since that income could not, of course, be traced there. He found it in Mr. Lépine’s personal bank accounts.

The evidence adduced does not satisfy me on a balance of probabilities that the conclusions Mr. Audet reached and the subsequent assessments were incorrect in any way whatsoever.

As for the penalties, I consider them justified in the circumstances, given the nature of the additional income assessed and the position and role of the appellant Michel Lépine in the affairs of the appellant Attaches Remorques du Quebec Inc.

The appeals are therefore dismissed, the whole with costs to the respondent.

Signed at Ottawa, Canada, this 28th day of October 1998.

Appeals dismissed.