Nadon v. R., [1999] 4 CTC 2296, 99 DTC 354

Lamarre Proulx 7.C.J.:

The appellant is appealing from assessments made by the Minister of National Revenue (“the Minister”) under section 160 of the Income Tax Act (“the Act”).

A notice of original assessment was issued on January 24, 1994, for $67,513.19. Another notice of assessment was issued on January 4, 1996, for $4,563.62, which was in addition to the amount of the original assessment.

The facts on which the Minister relied in making the assessments are set out as follows in paragraph 23 of the Reply to the Notice of Appeal (“the Reply”):

[TRANSLATION]

(a) On May 9, 1989, the appellant purchased a lot in the town of Repentigny;

(b) In the summer of 1989, the appellant had a house built on the lot, the street address of the house being 821 boulevard de I’ Assomption;

(c) Some of the goods and services used in building the appellant’s house were paid for by Roca Inc.;

(i) The payments that were made by Roca Inc. for the goods and services used in building the house owned by the appellant and that were taken into account in making the assessment of January 24, 1994, were, inter alia, as follows:

Supplier/contractor	Date	Amount
G. Roy Ltée	02-10-89	$18,885.40
Techni-Flamme	06-06-89	$2,500.00
Boiseries Raymond Inc.	04-08-89	$229.45
G. Roy Ltée	25-06-89	$17,734.35
Boiseries Raymond Inc.	02-10-89	$10,568.00
G. Roy Ltée	25-08-89	$17,595.99
Total		$67,513.19

(j) Moreover, in making the assessment of January 4, 1996 (notice of which is numbered 08999) for $4,563.62, which was in addition to the amount of the assessment of January 24, 1994, the Minister of National Revenue assumed, inter alia, the following facts:

• all of the facts alleged in subparagraphs (a) to (h) above;

• an amount of $4,563.62 should be added to the table appearing in subparagraph (i) above, as follows:

Supplier/contractor	Date	Amount
Prud’homme et frères Ltée	15-07-89	$4,563.62

(k) The payments made by Roca Inc. for the construction of the appellant’s house constituted transfers totalling $72,076.81 ($67,513.19 + $4,563.62);

(I) At the time the transfers in question were made, no consideration was given to Roca Inc. by the appellant;

(o) At the time the transfers in question were made, the appellant and Roca Inc. were related persons, since the appellant was the spouse of Roca Inc.’s sole shareholder and director, Dany Pomerleau;

I have not reproduced the facts establishing the transferor’s tax liability at the time of the transfer, since that liability was not disputed at the hearing.

The facts set out in the Notice of Appeal and relied on by the appellant are as follows:

[TRANSLATION]

l. The appellant is Dany Pomerleau’s spouse.

2. At all times relevant to this case, Dany Pomerleau was a shareholder and director of Coffrages Roca Inc. (hereinafter “Roca”), which operated in the field of construction and more specifically formwork.

3, In 1989, after selling her previous home, the appellant had a new home built at 821 boulevard de l’Assomption in Repentigny.

4. Since Roca was in the construction industry and thus had easy access, and on better terms, to various suppliers and contractors, the appellant’s spouse suggested to her that it might be helpful to use the following procedure in ordering certain materials and having certain services provided for the construction of the house:

(a) certain materials and/or services would be ordered by Roca;

(b) the supplier or contractor would initially be paid for the materials or services by Roca directly;

(c) since Roca at that time needed cash on hand for its business, the appellant would then give her spouse, Dany Pomerleau, cash to cover the amounts so advanced to her by Roca for the construction of her home;

(d) finally, the appellant’s spouse would use those amounts for Roca’s business.

5. Since the appellant had no reason to refuse to proceed on this basis, the procedure was used for a few materials suppliers and contractors.

6. According to Assessment at Revenue Canada-Taxation, the suppliers and contractors used and the amounts paid to each of them by the appellant were as follows:

Supplier/contractor	Amounts paid
Groupe A. Roy	$18,885.40
	$17,734.35
	$17,595.99
		Total:	$54,215.74
Techni-Flamme			$2,500.00
Boiserie-Raymond	$	229.45
	$10,568.00

Supplier/contractor	Amounts paid
	Total:	$10,797.45
Prud’homme Frère		$4,563.62
Total		$72,076.81

7. The appellant submits that the amounts actually paid by Roca to the

suppliers and contractors referred to in the preceding paragraph totalled
$46,971.37 rather than $72,076.81 because the cheques made out to
Groupe A. Roy that were taken into account by Revenue Canada were
partly for legitimate expenses of Roca. The appellant submits that the
expenses paid by Roca in connection with the suppliers and contractors
referred to in the preceding paragraph were therefore as follows:
Supplier/contractor	Amounts paid
Groupe A. Roy	$ 1,765.06
	$ 4,557.85
	$21,622.39
		Total:	$27,945.30
Techni-Flamme			$2,500.00
Boiserie-Raymond	$	229.45
	$11,733.00
		Total:	$11,962.45
Prud’ homme Frère			$4,563.62
Total			$46,971.37

8. As she had promised, the appellant repaid Roca shortly afterwards, i.e. before the end of January 1990, by giving her spouse, Dany Pomerleau, who was acting for Roca, cash to cover the amount of all the expenses relating to the construction of the home that Roca had advanced to the appellant by paying directly the materials suppliers or contractors concerned.

At the start of the hearing, counsel for the appellant explained the context in which the appellant was assessed. Criminal proceedings had been brought against the appellant’s husband Danny Pomerleau, and Coffrages Roca Inc. (or Roca), of which he is the president, for having paid Roca’s employees in cash without reporting their wages. Mr. Pomerleau and the corporation were convicted, and Mr. Pomerleau had to serve time in prison. During the investigation, documents were seized by Revenue Canada, including a book of disbursements kept by Danny Pomerleau for the period from May to December 1989 with respect to the family home that the appellant had had built in Repentigny. Counsel explained that, as stated in the Notice of Appeal, the evidence would show that Roca helped the appellant with the construction but that the appellant repaid Roca for the expenses incurred on her behalf. The appellant admitted that the amount Roca paid on her behalf was $57,000 and not $46,000. She said that she sold a house she owned and took out a mortgage to pay for the property at issue in this case.

Counsel for the respondent told the Court at the start of the hearing that the amount involved was $62,998.47 rather than $72,000 because some of the cheques taken into account by the Minister had been used to pay for materials for Roca.

The appellant and her spouse, Danny Pomerleau, testified at the request of counsel for the appellant. No one testified for the respondent.

On May 9, 1986, the appellant purchased a lot located on 87th avenue in Rivière-des-Prairies for $13,500. The purchase contract was filed as Exhibit A-l. On June 17, 1986, the appellant obtained a $50,000 mortgage. The mortgage contract was filed as Exhibit A-2. The family’s home, owned by the appellant, was built on the lot. The appellant explained that the lot, like the neighbouring lots, increased in value in a short time. On May 11, 1989, she sold the house. She initially agreed that the potential purchasers could rent it. The lease was for $9,000, and the first rental payment was to be made on July I, 1989. The lease agreement was filed as Exhibit A-3. It included a clause containing a promise to purchase for $186,250. The contract of sale was filed as Exhibit A-4. Although this contract is not dated, the appellant’s testimony and the relevant clauses of the promise to purchase indicate that it was entered into in January 1990.

On May 9, 1989, the appellant purchased a lot in Repentigny for $35,000. The purchase price was payable on July 1, 1989 (Exhibit A-8b). No explanation has really been given of how the lot was paid for. Exhibit A-8 is a cheque for $10,000 from the Interprovincial Lottery Corporation made out to the appellant and her husband and dated December 20, 1988. The appellant said that she used that amount to pay for the lot. Otherwise, there is no explanation of how it was paid for. Although the appellant said she was working at that time, she made no mention of what her job was or how much she earned.

The appellant explained that, while the house was being built, her husband put together a file containing all the invoices paid by her and those paid by Roca so that they would know how much she had to repay Roca and also so that they could keep track of the budget. Her husband was in partnership with his father, Camille Pomerleau. While all the shares were in the name of the appellant’s husband, her father-in-law was nonetheless a fifty-fifty partner.

Exhibit A-10 is a contract for a $20,000 loan from a credit union dated August 30, 1989. The loan was to be repaid in full by September 30, 1989. Exhibit A-9 is a deed for a $130,000 mortgage on the property in Repen- tigny, which is dated August 17, 1989. The appellant said that that entire amount was deposited in her bank account on October 16, 1989 (Exhibit A- 5). She explained that, on the same date, the credit union repaid itself the balance of the $20,000 loan out of the mortgage funds, as can be seen from Exhibits A-5 and A-l l. A balance of $108,400 (same exhibits) therefore remained, and it was withdrawn in cash on November 1, 1989. According to the appellant, that amount was given to her husband to pay the contractors who worked on the house.

There was also $118,000 from the sale of the house in Rivière-des- Prairies in January 1990. That amount was the sale price less the payment of the mortgage on the house sold; it appears as a credit for January 5, 1990 in Exhibit A-6. On the same date, the appellant paid $65,000 out of that amount as a partial repayment of the mortgage and withdrew $52,753 in cash. Those debits are shown in Exhibits A-6 and A-12. The appellant said that there is still a balance owing on the mortgage on the second house. The $52,753 were deposited in another account of the appellant on January 5, and $50,000 was withdrawn in cash on January 26, 1990 (Exhibit A-12). The appellant said that she gave it to her husband to repay the amounts Roca had expended on the house.

Exhibit A-13 is a list of invoices totalling $57,000 that were paid by Roca and that the appellant said she repaid by giving her husband the $50,000. There is thus a $7,000 difference. She said that her husband estimated that the materials remaining at and recovered from the building site were worth $7,000 and that her father-in-law agreed.

In his testimony, Danny Pomerleau said that, although he was Roca’s sole director on paper, his father, Camille Pomerleau, had an important administrative role, since he was part owner of Roca. That is why Danny Pomerleau kept a book of disbursements with respect to the property in Repentigny. His father wanted to know what had been paid by Roca and what had been paid by the appellant. It was understood by his father and him that the appellant would repay Roca for its contributions. It was on the basis of that book that the appellant was assessed.

Exhibit A-14, which is also reproduced at Tab 88 of Exhibit I-1, is a compilation prepared by Danny Pomerleau of the total costs relating to the house at 821, boulevard de l’Assomption. Tab 85 of Exhibit 1-1 and Exhibit A-13 are descriptions of the payments made by Roca that were to be repaid by the appellant. The amounts shown total $59,090 and “about $57,000”, respectively.

Based on the evidence, $59,090 seems to be the most likely amount. Tab 85 is a document prepared by Danny Pomerleau, and it does not state that the amount indicated is approximate. That was also the amount accepted by counsel for the respondent. However, to that amount, counsel for the respondent added the supplying of veneers, which Mr. Pomerleau estimated at $2,500 in the exhibit found at Tab 88, although he qualified that inclusion with the words “myself, Danny”. Roca owned the veneers and had loaned them to the appellant. Mr. Pomerleau did not include that sum in the amounts to be paid to Roca by the appellant, as shown by the document found at Tab 85 of Exhibit I-1.

Counsel for the appellant argued that the appellant did not have to concern herself with how Coffrages Roca used the money. What matters is that she gave Mr. Pomerleau the money she owed so that her debt to Roca could be paid. She did not have to check on how the money was used by Mr. Pomerleau.

As regards the $50,000 that the appellant claims to have given her husband as payment of what she owed him, counsel for the respondent argued that there is no evidence that the amount in question was used to pay Roca. Nor is there any written document giving a discharge for the amounts owed. Counsel for the respondent did not seem to be disputing the fact that the amount was withdrawn by the appellant from her account in cash. Nor did he seem to be disputing the estimated value of the materials recovered. Indeed, he made no mention of this. However, he did dwell on the supplying of veneers, which was estimated at $2,500 by Danny Pomerleau.

On this last point, counsel for the appellant submitted that this inclusion was not mentioned in the Reply and that he was not prepared to make arguments on it. I cannot but find that the Reply did not refer to the inclusion of a service provided free of charge to the appellant by Roca and estimated at $2,500 by Danny Pomerleau, and it is my view that the inclusion does in fact take the other party by surprise. I am therefore not allowing the inclusion at this late stage.

As regards the $50,000 given to Roca by the appellant to pay off her debt to that company, I have to determine whether I believe what the two spouses stated. They each testified without the other present, and what they said was consistent. None of the Minister’s officials testified, so I do not know whether the appellant and her husband previously said something different. The version given by the spouses strikes me as plausible. It seems to be true that Danny Pomerleau’s father owned 50 percent of Roca. This is confirmed by a passage from the criminal judgment filed at Tab 79 of Exhibit 1-1. His interest in knowing what was paid by Roca in the construction of the house is therefore plausible, as is the requirement that the amounts so expended be repaid. The same passage from the judgment also confirms that these individuals were in the habit of dealing with large sums of money in cash. Since the $7,000 estimate for the materials remaining at the building site has not been challenged by counsel for the Minister, I accept it as well. What remains is therefore the difference between $59,090, which I accepted in paragraph 17 of these reasons as the amount of Roca’s advances, and the $57,000 repaid by the appellant, namely $2,090, which becomes the amount of the appellant’s assessment.

The appeal is allowed with costs to the appellant and the assessment is referred back to the Minister so that it may be set at the amount referred to above.

Appeal allowed.