Lefrancois v. R., [1999] 4 CTC 2615

Tardif T.C.J.:

This is an appeal for the 1993, 1994 and 1995 taxation years. During those three years the appellant did some work as a consultant for the company known as Scierie des Outardes.

Thus the appellant received but did not report the following income: The amounts of the unreported income are not in dispute; the only disputed matters were the penalties assessed and the respondent’s refusal to accept the expenses submitted.

The penalties assessed were as follows:

The expenses the appellant would like to have deducted from income break down as follows:

As the amount of the income was admitted by the appellant, the Court must first consider the validity of the appellant’s arguments regarding the expenses and costs involved in the performance of the contract which produced the income described above and admittedly received by the appellant.

Lyne Mailloux, who was responsible for the appellant’s file, testified regarding the facts and circumstances surrounding the discovery of the unreported amounts. She indicated that the appellant had offered little or no co-operation.

According to Ms. Mailloux, the appellant offered no explanation to justify the fact that his principal place of business was at his private residence. Accordingly, because of this she concluded that the appellant’s principal place of business was Baie-Comeau, which is where the head office of Scierie des Outardes was located. Consequently, she disallowed the expenses claimed, characterizing them as personal expenses.

It seems to me to be important to take a number of facts into account. The appellant had a career as a superintendent with Scierie des Outardes.

A break in the relationship occurred when the appellant decided to retire. He was originally from the South Shore where he decided, for reasons of a personal nature, to return permanently: he purchased a residence there.

There is no doubt that his South Shore residence became his domicile from the moment his plan to settle there permanently came to fruition. His experience, talents and expertise went with him.

As he was known and recognized for his experience in a very specialized field relating to watercourses and forestry, he was offered work as a consultant by the Scierie des Outardes, his former employer.

The work offered required the appellant to travel to the North Shore, and he had to incur the expenses inherent in such travel.

The respondent refused to deduct the amount of the expenses claimed, arguing that the appellant’s principal place of business was in Baie- Comeau, at the head office of the Scierie des Outardes.

This was an arbitrary conclusion not supported by any fact or document whatever. In fact, the respondent blamed the appellant for doing what she did herself, namely determining the principal place of business without any documentation to support or back up his claim.

Where was the appellant’s principal place of business? I feel it is important to make a distinction between an individual’s place of business and the place where business is conducted. Certainly, the work done by the appellant was performed in the Baie-Comeau area.

The place where work is done or the duration of its performance has nothing at all to do with determining the location of the principal place of business. Such reasoning would lead to absurd results. Thus, a firm’s principal place of business could change constantly based on where it obtains and performs its contracts.

The question of the principal place of business of an individual or a firm is a mixed question of law and fact. There are certain indicia or facts which are very helpful in determining where the principal place of business is located. I refer among other things to advertising directed at a particular territory, advertisements in telephone directories, business cards, the place of business, the location of commercial premises, the location of secretarial services, the location of the decision-making centre, the trade name declaration, and so on.

Obviously the larger the organization the more available, significant and numerous this type of indicia will be. In the instant case the appellant was

alone and furthermore retired: in other words, he had chosen to end his working life.

But an offer, a work opportunity, presented itself. He thought about it and on consideration decided to accept the offer, thus terminating his retirement. It was only from that precise moment that he became a contractor. So he launched his business. Was it appropriate at that point to register a trade name, place advertisements, set up an office, hire a secretary, and so on?

At the time the appellant had only one customer and could quite easily manage his affairs from his home without any expenditure other than for transportation. Why would it have been necessary to expend large sums of money (all deductible) to prove to Revenue Canada that his principal place of business was at home?

I do not accept this reasoning. Moreover, the weight of the evidence indicates that the appellant’s principal place of business was at his home. Where could he always be reached? Where was his mail sent? Where did the Department contact him’?

Furthermore, the work to be done was not in Baie-Comeau. The appellant had to go into the forested areas outside the city to perform his contract.

None of the facts and circumstances surrounding the obtaining of and the claim with respect to the contract which gave rise to the unreported income lend any support at all to the conclusion adopted by the respondent. In this connection, the Court finds the appellant was fully entitled to deduct from income the expenses claimed. They were reasonable and acceptable expenses, although it would have been better to have vouchers confirming the actual amount of the expenses incurred in performing the contract in the years at issue.

Was the respondent justified in assessing penalties? I would answer in the affirmative without hesitation. The amounts of income not reported were from an objective viewpoint substantial, especially if considered in terms of the income reported by the appellant for the three taxation years in question.

The explanations given by the appellant and his agent cannot explain, much less justify, such completely gross negligence. It is entirely unlikely that the appellant, having for a number of years had great responsibilities that required him to calculate, forecast and plan, could have thought that he did not have to report such significant amounts of income simply because the payer company had not given him a T4 slip or specific information on the amounts earned and paid. These are unacceptable and improbable explanations.

The appellant had signed a contract. Under that contract, he was to perform certain work. He knew or ought to have known that performance of the work would produce income which would have to be included in his annual income.

The unreported income, which came from a single business, was owed to the appellant as a result of considerable work performed over lengthy periods. The excuse of forgetfulness or ignorance is completely inadmissible and can be no basis for avoidance of the penalties assessed.

The appellant argued that he had failed to report income because the Scierie des Outardes gave him no T4 slip and he did not know the length of the contract.

Here again, the large amount earned completely destroys the validity of such an excuse, especially as the appellant was a responsible, well-informed man with great experience of the world. He cannot plead that kind of carelessness as a way of avoiding such a fundamental obligation.

In view of the amounts at issue, the circumstances surrounding the processing of the file, the three-year length of the contract and also the appellant’s experience of the world and his intellectual abilities, the Court is of the opinion that the respondent has discharged her burden of showing that the appellant knowingly earned and failed to report large sums.

The appellant’s explanations and justifications for the failure to report are, from an objective viewpoint, lacking in credibility, and above all, insufficient. Considerable sums were involved; they were obtained as the result of demanding and important work done over long periods. The lack of documentation from the company paying for the services is not a valid excuse.

My brother Judge Pierre Dussault has clearly stated the scope of the taxpayer’s duty in such a matter. He said the following in Comptois c. R. (97- 1134(IT)I) [reported (1998), [1999] 2 C.T.C. 2687 (T.C.C.)], at paragraphs 53 and 55:

In so far as all the persons concerned knew that the union’s procedure was incorrect and that the situation had to be regularized, since they had realized that the money paid for “union leave” was income, it is hard to see how they could have been in good faith when they deliberately refrained from reporting the money received on the ground that T-4s had not been issued. Knowing that the union had never issued any and that this situation was irregular does not mean it can still be argued that they thought it was the issuing of the T-4s rather than the receipt of the money that was determinative.

There is no need to refer to a list of precedents on the concept of gross negligence and extenuating circumstances that should be considered for the purposes of s. 163(2) of the Act when the evidence shows that a taxpayer deliberately failed to report money received that he or she knew to be taxable. The fact that the failure results from being too trusting or from a manifestation of union solidarity does not reduce the individual responsibility imposed on every taxpayer. In the circumstances, to fail to act, to wait or to close one’s eyes is to commit a deliberate act. That is precisely what the word “knowingly” used in s. 163(2) of the Act means when the conditions for imposing a penalty are set out as follows: “Every person who, knowingly ... has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return ... is liable to a penalty....”

For all these reasons, the appeal is allowed in part in that the appellant is entitled to deduct expenses amounting to $5,328.56 for the 1993 taxation year, $8,582.64 for the 1994 taxation year and $11,053.04 for the 1995 taxation year.

The appeal is dismissed so far as the penalties are concerned.

Appeal allowed in part.