Lebel v. R., [1999] 4 CTC 2602

Tardif T.C.J.:

This is an appeal for the 1993 and 1994 taxation years. The following allegations were made in support of the assessments giving rise to the instant appeal:

[TRANSLATION]

10. In arriving at these reassessments dated January 15, 1997 the Minister assumed the following facts, inter alia:

(a) as the result of a review of records relating specifically to the sale of crabs at the Port-Cartier wharf, the Minister identified the appellant’s share of unreported sales, namely a total of $3,041 for the 1993 taxation year;

(b) with respect to the sale of herring, the auditor found invoices for sales by the appellant to “Poissonnerie du Havre inc.” and “Poissonnerie Jean-Guy Laprise inc.” for the 1994 taxation year:

(i)	Poissonnerie du Havre inc.	$4,135
(ii)	Poissonnerie Jean-Guy Laprise.	$1,714;

(c) by failing to report the income mentioned in the preceding paragraph the appellant knowingly or under circumstances amounting to gross negligence made or participated in, assented to or acquiesced in the making of, a false statement or omission in the tax returns filed for the 1993 and 1994 taxation years, as a result of which the tax payable according to the information provided in the tax returns filed for those years was less than the amount of tax actually payable for those years;

(d) for the 1994 taxation year the appellant claimed the sum of $11,272 on two of his residences as [TRANSLATION] “maintenance and repairs”; the Minister’s auditor, on the basis of the 1992 and 1993 taxation years, disallowed 90 percent of the said amount ($10,146) as business expenses;

(e) the appellant reported the sum of $6,772 as vehicle expenses for the 1994 taxation year, but claimed only $5,079, or 75% of the total expense; the Minister’s auditor, convinced that the situation was unchanged in relation to the 1992 and 1993 taxation years, only allowed 50 percent of the total expense ($3,386);

(f) the depreciation expense on the vehicles was reduced from $1,125 to $750 for the 1994 taxation year on the basis of the explanations given regarding vehicle expenses in the preceding paragraph;

(g) the appellant claimed an amount of $30,000 payable to his wife as management fees for the 1994 taxation year; the Minister’s auditor disallowed the expense for the following reasons:

(i) the appellant’s wife has no other client and has no experience or training in accounting;

(ii) the appellant’s wife could not list the work she had allegedly done;

(111) the companies which purchased the appellant’s catches prepared the unloading reports, did the payroll and made the source deductions;

(iv) the appellant’s wife was not dealing with him at arm’s length;

(v) the appellant’s annual work period went from April I to September 30;

(vi) the appellant’s wife devoted only one hour a day to her husband’s business.

The appellant and his accountant Mario Rail testified in support of the appeal. It appeared from their testimony that the appellant had relied completely on the advice of his accountant as to the manner in which his tax returns should be done, and in particular, with respect to the eligible operating expenses.

The appellant’s evidence showed that certain income was not reported, namely an amount of $3,041 for the 1993 taxation year and $5,849 for the 1994 taxation year.

The evidence further showed that the appellant owned three pieces of immovable property.

The appellant argued that the three properties he owned were used for his fishing activities. When asked to explain how and to what extent the properties in question contributed to the income from his fishing operation, his testimony regarding such contribution was not very convincing. The appellant even indicated that the site on the îles de Mai was a heavy financial burden, not easily accessible and impractical.

It is apparent that this site may at one time have been associated with commercial fishing activities. This secondary residence on the îles de Mai was undoubtedly an important part of the family’s assets in that it represented family continuity in fishing. At the same time, during the years at issue it did not really have the importance claimed for it with respect to the fishing activities in 1993 and 1994.

The very low contribution of this residence had moreover direct consequences and effects on the relevance of the amount claimed for expenses relating to the use of a 4 X 4 truck. The appellant indicated that the use of such a truck was necessary primarily in order to get to this residence. The appellant also admitted that this was his means of transport for personal purposes.

Finally, the appellant and his accountant testified that the fees in the amount of $30,000 paid to Françoise Lebel, the appellant’s wife, were justified, realistic and reasonable.

The appellant indicated that his wife had always been closely associated with the fishing operations; she had never received anything, unlike many fishermen’s wives, who received a salary, which was augmented by unemployment insurance benefits between fishing seasons.

In 1994 income made a substantial leap because of the high prices paid for crabs. It was undoubtedly because of this that the accountant suggested paying the wife a salary.

On the accountant’s advice, it was decided at that time to pay fees of $30,000 to the appellant’s wife, who, to ensure some consistency, formed a management company, setting May 30 of each year as the end of its fiscal year.

Such planning clearly allowed the appellant to reduce his income by an equivalent amount; moreover, the income then became taxable in his wife’s hands in the following year, since the appellant’s fiscal year corresponded to the calendar year.

The appellant’s wife testified briefly at the respondent’s request: she admitted she had always been directly and actively involved in the fishing operations. She further honestly admitted that in 1994 she had actually done more or less the same work she had done in previous years without pay. She could have claimed that the increase in income reflected a considerable increase in work; but no, she testified quite frankly, which was to her credit.

The respondent called Réjean Guay, who was responsible for the audit from which the assessment resulted. Réjean Guay explained the procedure followed and gave the reasons prompting him to recommend the assessment of penalties. In a very short interview, he directly and expressly asked the appellant whether he had reported all his income or if he had concealed certain fish sales to persons other than the plant. As he received an answer in the negative the auditor concluded that there was gross negligence on the basis of which it could be argued that the income was knowingly concealed and that consequently penalties should be assessed.

In order to justify the negligence, the accountant assumed part of the responsibility himself. Amazingly, the accountant vigorously argued that gifts of fish subsequently sold by the donees was income which they had received, and was not income in the hands of the appellant, the donor of the fish.

It is not possible to conclude from the evidence as a whole, the appellant’s explanations and the circumstances surrounding these payments that the appellant deliberately or knowingly concealed the income not reported in 1993 and 1994.

The appellant completed a register which was brought to his accountant’s attention following the audits. This register indicated the quantities of fish divided between the fishermen on the appellant’s boat. The appellant explained that such accounting was necessary to ensure that the division was fair; one of the persons receiving a share was entitled to a 10 percent commission, which he could not be entirely paid in fish. The quantities involved were not large or significant.

The respondent’s counsel stated that this was probably the tip of the iceberg. If that was the case, the Department had not put very much effort into getting to the bottom of the matter: an interview lasting barely half an hour, a dubious visit and a chance discovery by another auditor on microfilm.

Analysis

The sum of $30,000 paid to the appellant’s wife as fees seems to me to be greatly exaggerated and completely unreasonable. On the other hand, I consider that the explanations given justified the payment of reasonable fees, which I set at $15,000.

As regards the procedure followed by the respondent in allocating the disallowed expenses both for the immovable property and for the truck, I am of the opinion that the Department calculated everything correctly. The available evidence, essentially provided by the appellant’s explanations, was that his accountant clearly set too high a value on the use of the residences in effectively carrying on the fishing activities. The same was true for the truck.

Moreover, this conclusion follows from the appellant’s own assessment that the îles de Mai site was not of strategic importance; on the contrary, he stated that he kept this residence at great cost out of respect for the memory of his father and his ancestors. That is certainly praiseworthy, but it does not mean that the property is necessary for the fishing operations to the extent claimed.

The percentages and amounts allocated by the respondent both to the immovable property and to the use of the truck are reasonable and require no intervention by the Court.

As regards the penalties assessed, I do not feel that the respondent discharged the burden of proof upon her: the evidence showed that the amounts were relatively insignificant, and especially that the appellant was convinced that the income in question was not his. This is all the more likely as even the person responsible for his returns for the years in question was firmly convinced of this. Finally, I do not think that I can or should dismiss all or any part of the evidence submitted by the appellant. The appellant, his accountant and his wife testified frankly and in a credible manner.

For these reasons, the appeal is allowed in part to the extent that the penalties assessed are nullified for 1993 and 1994 and the amount of fees paid to the appellant’s wife is reduced to $15,000. The appeal is dismissed with respect to the other points as the Department correctly calculated the expenses for maintenance and repair of the two residences and the truck, both as to operating expenses and as to depreciation.

Appeal allowed in part.