Fortin v. R., 97 D.T.C. 950, [1998] 2 C.T.C. 2163

Archambault T.C.J.:

1 Transport Jean-Guy Fortin Ltée (Transport Jean-Guy), Transport Bernard Fortin Inc. (Transport Bernard), J.B. Fortin Inc. (J.B.F.) (Groupe Fortin) and Jean-Guy Fortin are disputing assessments of income tax and penalties made by the Minister of National Revenue (Minister) for the 1987, 1988 and 1989 taxation years (relevant years). Mr. Fortin's spouse, Gabrielle Fortin, is disputing similar assessments in respect of the 1986 to 1989 taxation years as are his children Jean-Claude and Bernard in respect of the 1987 taxation year.

2 In the case of Groupe Fortin, the Minister added unreported income and disallowed certain expenses as well as a portion of capital cost allowance. The Minister further considered Transport Jean-Guy, Transport Bernard and 2312-9620 Québec Inc. (9620) to be associated with the meaning of section 256 of the Income Tax Act[FN1: <p>S.C. 1970-71-72, c. 63.</p>] (Act) during each of the relevant years.

3 As to Jean-Guy Fortin, the Minister considered that he had appropriated all the unreported income of Transport Jean-Guy and Transport Bernard and he added them to Mr. Fortin's income. The Minister also added to that income an unexplained deposit of $125,809 and unreported income from a business that Mr. Fortin had carried on.

4 Under subsection 56(2) or subsection 15(1) of the Act, the Minister added to Mrs. Fortin's income the unreported income of J.B.F. that was given to her husband for the 1986 to 1989 taxation years.

5 As to Bernard and Jean-Claude Fortin, the Minister added to their business income amounts from the sale of timber which they had not reported.

6 The appellants' penalties were assessed on the basis of the total amount of additional tax assessed by the Minister.

7 The facts on which the Minister relied in making these assessments are stated in the replies to the notices of appeal filed by the appellants. In particular, the reply to the notice of appeal in the case of Jean-Guy Fortin sets out the following facts:

[TRANSLATION]

(a) during the years in issue, the appellant was the sole shareholder of “Transport Jean-Guy Fortin Ltée” which operated a wood transportation business;

(b) during a search, two letters of prête-nom were tracked down, one certifying that the actual shareholder of “Transport Bernard Fortin Inc.” was Jean-Guy Fortin and the other that Jean-Claude Fortin held shares of “2312-9620 Québec Inc.” only as a prête-nom for Jean-Guy Fortin;

(c) during the years in issue, the appellant failed to report income arising mainly from the sale of wood to the Syndicat des producteurs de bois du Saguenay Lac St-Jean [Saguenay Lac St-Jean timber producers' syndicate] and to other parties; in addition, the appellant performed snow removal work for the Délisle school board; this unreported income was as follows:

1987	$37,160.86
1988	$55,888.38
1989	$ 3,300.00

(d) during the years in issue, “Transport Bernard Fortin Inc.” failed to report the following business income:

1987	$94,251.00
1988	$45,040.90
1989	$16,725.91

(e) during the years in issue, “Transport Jean-Guy Fortin Ltée” failed to report the following business income:

1987	$27,349.34
1988	$33,764.72
1989	$25,960.35

(f) cheques totalling the amounts stated in subparagraphs (d) and (e) above were deposited in a personal account of the appellant's at the Caisse populaire Notre-Dame-du-Rosaire or simply cashed by the appellant at the counter of the said Caisse populaire;

(g) in 1987, “Transport Jean-Guy Fortin Ltée” sold by auction one Atlas semi-trailer, two axles and one 1980 Ford F-150 4X4 pick-up truck for $11,700 without recording those dispositions;

(h) in 1989, “Transport Jean-Guy Fortin Ltée” received two cheques totalling $44,739.81 from the Phoenix Continental insurance company following a fire; the appellant personally cashed both cheques and the company did not report it;

(i) on August 24, 1987, the sum of $262,083.14 was deposited in account number 25-013-94 at the National Bank of Canada in Jonquière; this account is in the appellant's name;

(j) during the years in issue, the following three companies were associated

• Transport Jean-Guy Fortin Ltée,

• Transport Bernard Fortin Inc.,

• 2312-9620 Québec Inc.;

(k) in computing his income for his 1987, 1988 and 1989 taxation years, the appellant knowingly, or under circumstances amounting to gross negligence, failed to report substantial amounts of income which was subject to tax.

[TRANSLATION]

(a) during the years in issue, the appellant operated a transportation and snow removal business and its sole shareholder was Gabrielle Fortin;

(b) during an audit conducted by an agent of the Department of National Revenue, that agent discovered a number of cheques issued in the appellant's name that had not been deposited in the appellant's bank account or entered in the appellant's accounting records;

(c) the said cheques were mainly from the “Municipalité de Lamarche” and were or snow removal and road maintenance work performed by the appellant for the municipality as well as for the purchase of heating oil; in addition, certain cheques were issued for transportation services provided by the appellant for “Consolidated Bathurst” and “Abitibi Price”;

(d) during the years in issue, the appellant failed to report the following amounts of business income:

1987	$10,794.55
1988	$26,311.97
1989	$34,573.56

representing the total amounts of the cheques described in the above subparagraphs;

(e) the scheme resorted to was as follows: the cheques issued in the appellant's name were deposited in a personal bank account of Jean-Guy Fortin's at the Caisse populaire Notre-Dame-du-Rosaire (Mr. Fortin being Gabrielle Fortin's spouse and a director of the appellant) or simply cashed by Gabrielle Fortin or her spouse at the counter at the said Caisse populaire;

(f) in computing its income for each of the years in issue, the appellant knowingly, or under circumstances amounting to gross negligence, failed to report substantial amounts of income which was subject to tax.

8 At the start of the hearing, counsel for the appellants admitted that the amounts of income not reported by Groupe Fortin were income and that all the amounts that the Minister had taxed in the individuals' hands had been received by them. He asserted however that the amounts that those individuals had appropriated were not income in their hands because they were used to pay wages under the table and to pay for parts and business meals for Groupe Fortin. Furthermore, he argued that Groupe Fortin, Jean-Guy Fortin and his two sons were entitled to deduct under-the-table expenses incurred for the purpose of earning income from their respective businesses. Counsel for the appellants did not raise other arguments against these assessments. He also withdrew his challenge of the disallowance of the capital cost allowance. Everything turns on the question of the deduction of expenses for which there were no vouchers, as virtually all of the expenses in question were paid under the table. It goes without saying that if these expenses are proven to have been incurred the penalty cannot apply.

Facts

9 Jean-Guy Fortin is a businessman and has been mayor of Lamarche for 27 years. That municipality, located in the Lac St-Jean area, has a population of approximately 500 to 600 inhabitants. Mr. Fortin, who is from a family of 16 children, left school early having completed only grade 5. He worked with his father as a woodcutter instead.

10 He very soon became interested in transporting timber for the region's paper mills. In his testimony, Mr. Fortin noted with emotion how, through his efforts, he had been able to obtain from Consolidated Bathurst (Consol) transportation contracts that would last many years and enable him to build a flourishing transportation business. He also observed that the fact he was mayor had definitely not hurt him when it came to obtaining this large contract.

11 During the 1970s and until 1986, Jean-Guy Fortin held an interest in a logging company, Les Entreprises forestières du Lac St-Jean (Entreprises forestières). His interest was originally limited to one-third, but he subsequently acquired the interests of his co-shareholders. That business apparently ceased its operations in 1986.

12 In the early 1980s, Transport Jean-Guy had about 125 employees and 85 to 90 pieces of equipment, namely trucks, trailers and all the equipment required for transporting goods. The permit authorizing Transport Jean-Guy to haul wood chips limited it to picking them up within a radius of five miles of Lamarche and delivering them within a radius of 30 miles of five neighbouring counties. This type L permit originally belonged to Jean-Guy Fortin personally.

13 As Mr. Fortin wanted to obtain a contract for transportation outside that area, he tried to secure another permit, the VR permit. However, his lawyer informed him that it was impossible for one person to hold both permits. The proposed solution was to use another company and the new permit was obtained in the name of Transport Bernard.

14 On July 17, 1984, Bernard Fortin, who was then 18 years of age, was the registered holder of 50) shares of Transport Bernard. He claims to have expressed the wish to own his own company long before Transport Bernard was set up. During his examination, however, he said he did not know how many shares he held or their subscription price. He even thought he held 50, the same number as his brother Jean-Claude held in 9520, a company that provided management services to Entreprises forestières. He did not recall how he had paid a total of $5,000 for the 500 shares. He thought he had used his own money because he had worked at a grocery store of his uncle's until the age of 14 and then at his father's garage.

15 However, in a declaration of beneficiary signed on July 17, 1984, Bernard Fortin admitted that his shares in fact belonged to his father Jean-Guy Fortin. This document states:

[TRANSLATION]

Declaration of Beneficiary

I the undersigned, Bernard Fortin, residing at 85 Principale, Notre-Dame-du-Rosaire, declare and say that:

• 1. I am the registered holder of 500 shares of the capital stock of Transport Bernard Fortin Inc., which shares are represented by certificate no. 1.

• 2.These shares are held by me, but in fact belong to Jean-Guy Fortin and neither I nor my estate nor my heirs or assigns have any right, title, or interest of any kind whatever to or in those shares.

• 3. All dividends, repayments or any other distributions to be declared or paid on these shares shall be the property of Jean-Guy Fortin and shall be paid directly to him.

• 4. I undertake to transfer or dispose of these shares as and to whomever Jean-Guy Fortin may decide from time to time and I undertake and agree to exercise my voting right in respect of these shares in the manner which Jean-Guy Fortin shall indicate to me from time to time.

AND I HAVE SIGNED at Notre-Dame-du-Rosaire this 17th day of July 1984.

And it is signed.

[My emphasis.]

16 Jean-Guy Fortin explained this declaration's existence by stating that he had found his son Bernard to be unreliable given his behaviour: “He was a swinger. He drank and may have been on something else as well.” In November 1984, Jean-Claude Fortin signed a similar declaration in respect of the 50 shares he held in the capital stock of 9620. He was 16 years of age at the time.

17 Jean-Guy Fortin kept these declarations of beneficiary in a safe in the basement of his residence and he said every member of the family had access to the safe. However, at the time of the Minister's search at the residence in July 1991, Jean-Claude Fortin stated that he could not open it. They had to wait for his father to do so.

18 Prior to 1991, Jean-Guy Fortin apparently decided that his son Bernard's behaviour was satisfactory and he allegedly informed his two children that he no longer needed the declarations of beneficiary. However, he did nothing to destroy them or return them to his children. He was furthermore unable to say exactly when this announcement had been made. He believed it was during the relevant years.

19 His two children, who were present when he testified, testified themselves on the following day. Unlike their father, they remembered the date very clearly: it was in the fall of 1986 and therefore prior to the relevant years. Thus, Jean-Guy Fortin apparently cancelled the declarations of beneficiary when Bernard was 21 years of age and Jean-Claude only 18. He waived Jean-Claude's declaration at the same time because he did not want to discriminate against him. Furthermore, Jean-Claude's behaviour was proper; he was not interested in a university education and had earlier become involved in Groupe Fortin's operations.

20 Bernard was studying economics at UQAM during the relevant years. In 1990, he took his MBA at Université Laval. Both children are currently involved in the management of Groupe Fortin and are apparently shareholders of Transport Jean-Guy. Bernard claimed he had always been interested in Groupe Fortin, even when he was away from home pursuing his studies.

21 Jean-Guy Fortin was evasive in his answers to many questions. He did not know, for example, who had decided not to enter some of Groupe Fortin's income in the books or who had decided in which bank account, that of Groupe Fortin or Jean-Guy Fortin's personal account, that income was to be deposited. Nor did he know what criteria were used. Mr. Fortin stated that his secretary played a major role in Groupe Fortin's operations and that he had a great deal of confidence in her. Her name moreover appears on certain deposit slips. Groupe Fortin's chief financial officer confirmed that the secretary was authorized to sign cheques and that she had done the bookkeeping, possibly with another employee, Mr. Vaillancourt.

22 Mr. Fortin furthermore did not recognize or had trouble recognizing his signature which appeared as an endorsement on a few cheques payable to Transport Jean-Guy. It should be noted that his signature differed depending on whether he signed as mayor, as a consumer or as endorser of Groupe Fortin's cheques. He had particular trouble recognizing his signature on the reverse of three of the four cheques from the Régie de l'assurance-automobile du Québec payable to Transport Jean-Guy which were deposited in his personal bank account. However, three tellers at the Caisse populaire de Notre-Dame-du-Rosaire (Caisse populaire), where he regularly did business, recognized quickly and without hesitation his signature on those cheques as well as on a cheque issued by the municipality of Lamarche which he had signed as mayor. It should be added that Mr. Fortin did not know whether he had deposited them in his personal account himself. It is nevertheless more than likely that he did so because it was he who had endorsed them and the Caisse Populaire always requires that everyone who appears at the counter to cash a cheque endorse the cheque again. The amounts of these cheques were part of the income added to Mr. Fortin's income by the Minister, who considered that Mr. Fortin had appropriated those amounts to his own use, and Mr. Fortin admitted he had done so.

23 During the relevant years, Transport Bernard's principal activity was bulk hauling and that company had four or five employees. Transport Jean-Guy's principal activities were concentrated on the hauling of wood chips. That company had 50 to 60 pieces of equipment and approximately 30 unionized employees. A collective agreement governed the working conditions of those individuals. They were paid by cheque for their regular work performed from Monday to Friday.

24 Mr. Fortin stated that it was hard to get his employees to work weekends and holidays and while they were collecting unemployment insurance benefits. The most difficult period, he said, was in winter and spring. He said he had managed to get them to work by paying them under the table, in cash, without deductions at source or T4 slips, and without claiming the expense in computing the company's income. He said he had paid them $100 a day. He estimated that these wages paid under the table totalled $1,500 per week on average. He provided no particulars as to the names of the individuals to whom these payments were made, except in the case of Mr. Murray and Gilles Tremblay. Nor did he confirm the amounts paid to those two individuals. He said he did not know.

25 Gilles Tremblay, who has been employed by Groupe Fortin for 21 years, testified under the Court's protection with respect to any self-incriminating testimony. He confirmed that he had been the lead hand in timber hauling. He had approximately five to seven men under him. He admitted that he and some of his men had been paid $100 a day so that they would agree to work weekends and holidays. He was unable to estimate either the amounts so received for each of the relevant years or the number of days he had worked clandestinely. He and his men did not work in this fashion every single weekend, except possibly for a two-or three-month period during those years.

26 Transport Jean-Guy paid Gilles Tremblay and his men in cash in envelopes that might contain between $700 and $1,200. Gilles Tremblay's gross weekly salary was $400 for the work he did during the week. He said that he had seen his employer, Jean-Guy Fortin, pay one supplier $5,000 in cash, but he believed that that was at the time when Entreprises forestières was active.

27 Claude Murray, who has been employed by Groupe Fortin for many years, also testified under the Court's protection. He stated that he had worked clandestinely from mid-November 1986 to mid-February 1987 and a month or a month and a half during the spring of 1987 cutting timber for Messrs. Fortin.

28 He said he had been the lead hand in charge of about six or seven workers who were paid an average hourly wage of $10. They worked about 40 to 45 hours a week. He himself was paid $12 an hour. He identified four other workers who had worked as he had: G. Trépanier at $10, A. Dufour at $10, Mr. Munger, as well as Mr. Murray's 16-year-old son, who was paid $8 an hour.

29 Mr. Murray stated that, when he worked for Groupe Fortin, he had not done any clandestine work. If he worked a weekend, he took that time off during the week. He said he did not know whether other employees of Transport Jean-Guy had done clandestine work. Furthermore, the people on his own crew did not subsequently work during the relevant period.

30 Jean-Guy Fortin stated that when purchasing parts from suppliers or individuals he had had to pay cash or risk not obtaining the part he needed. He estimated that it had cost him on average roughly $2,500 a week to pay salaries under the table and to pay for parts.

31 Lastly, Jean-Guy Fortin stated that he had used the money not reported as income to take “those who were most deserving” out to dinner. He did not identify those individuals. He estimated that his disbursements amounted to approximately $15,000 a year.

32 Mr. Fortin said he had an inexpensive lifestyle but provided no evidence to corroborate this statement. However, on April 10, 1987, Mr. Fortin bought himself a Mercedes for $47,809, $40,500 of which was given as a down payment. This amount was paid out of an anonymous account at the Caisse populaire, namely account No. 910. This account was opened on February 12, 1987, and closed a few weeks later on June 8, 1987. The only two deposits to that account were cheques from Consol payable to Transport Bernard and totalling $74,971. The statement for this account shows a debit of $40,500 for April 17, 1987.

33 Mr. Fortin purchased another automobile for approximately $14,000 on April 15, 1987. Jean-Guy Fortin's name appears as the buyer on the purchase contract. He traded in a car worth roughly $2,000 and the balance payable was $12,200. This sum was paid out of Caisse populaire account No. 860, which belonged to Jean-Guy Fortin. The debit was made on April 23 and the sum of $12,200 was transferred to account No. 860 from the anonymous account, No. 910, the next day. This automobile was apparently for the use of his son Bernard, who was 21 years of age at the time.

34 The balance of account No. 910, which was $21,270.60 when the account was closed, was transferred to Jean-Guy Fortin's account No. 860. The balance of $7,309 owing on the Mercedes was paid out of account No. 860. The debit was made on May 6, 1987.

35 Including the two transfers from account No. 910, the total of the deposits made to account No. 860 which were identified by the investigator as unreported income and added by him to Mr. Fortin's income came to more than $50,000 out of total deposits of approximately $140,000 in 1987, in other words over one-third of that total.

36 Mr. Fortin identified a bank credit of $51,548 in favour of Louise Mancheron as representing a gift of $3,000 or $4,000 to that woman's husband, who was Mr. Fortin's godson, and the rest was supposedly for the purpose of paying employees whom Mr. Fortin was unable to identify. Neither Ms. Mancheron nor her husband testified in corroboration of Mr. Fortin's explanation.

37 In July and August 1989, Transport Jean-Guy received two cheques totalling $44,739 from an insurance company as compensation for the loss of equipment caused by a fire in a building housing an office. Mr. Fortin stated that that building was owned by another company, Les Placements Jean-Guy Fortin. Mr. Fortin admitted that he had personally cashed those cheques, but he claimed that he had used them in part to build a new office. He did not remember who had done the work, but he believed he had paid wages for it. There was no voucher or any other evidence to corroborate Mr. Fortin's claim. However, the special investigations investigator indicated that he had not included in Mr. Fortin's income an amount of $131,250 paid to a construction company for rebuilding the office. He had furthermore treated the new building as replacement property.

38 In his analysis of the bank deposits, the Minister's investigator tried to identify the source of an amount of $262,083 deposited in Jean-Guy Fortin's account No. 25-013-94 at the Jonquière branch of the National Bank on August 24, 1987. The bank statement for that account gives as an address that of the National Bank branch. On the same day, Mr. Fortin withdrew an amount of $300,000 from that account. He did not remember what he had done with the money. Nor did he know whether that money was used to pay expenses under the table. In attempting to identify the source of the $262,083 deposit, the investigator was able to trace a number of cheques from customers totalling $136,276, of which certain amounts had been included in Groupe Fortin's income. The amounts that had not been so included were included by the investigator. As to the balance of $125,806, the investigator was unable to trace either the cheques or the deposit slips.

39 Mr. Fortin claims that this amount was transferred to account No. 25-013-94 from an account at the Alma branch of the National Bank. A letter from the commercial accounts manager at that branch confirms that a certified cheque for $100,000 and a cash amount were received from Mr. Fortin on June 8, 1987, and that a 75-day bank acceptance was issued to him. The certified cheque was apparently drawn on Caisse populaire account No. 860 on June 5, 1987. Mr. Fortin testified that he had received a sum of $25,000 in cash. August 24, the day on which the amount of $262,083 was deposited, was the seventy-seventh day after June 8. It is therefore probable that this was indeed the amount used to make that deposit.

40 Being unable to trace its source, the investigator included the amount of $125,806 as additional income of Mr. Fortin's. Mr. Fortin was able to indicate only that the amount came from account No. 860. He did not explain the source of the $25,000.

41 Gratien Marcel, C.A., engagement partner at the Alma office of the firm Raymond Chabot Martin Paré, testified in his capacity as an accountant with a view to establishing, in his words, “whether it was realistic and likely” that the appellants would have incurred, for the purpose of earning income, expenses in addition to those that had already been deducted in computing income for 1988 and 1989. His expert report does not concern 1987 because a fire destroyed certain documents pertaining to that year.

42 The following are the most relevant passages of his report.

[TRANSLATION]

Expert Report

for Transport Jean-Guy Fortin Ltée

Background

The Department of Revenue's audit determined that additional income totalling $92,161 should be added to the income reported for the fiscal years ended in 1987, 1988 and 1989. The profits thus obtained, without even considering investment income, differ significantly from the much more modest profits earned during this period by businesses in this industry (trucking), whose ratios fluctuate at around the 3 per cent level, whereas schedule “” shows an average profit of 12.88 per cent for those three years....

Nature of Operations

During the fiscal years ended in 1987-1988 and 1988-1989, “Transport Jean-Guy Fortin Ltée” (company) earned its income from hauling timber and wood chips by truck under two big contracts signed with Consolidated Bathurst (Consol) and Price Ltée (Price). Those contracts, which were guaranteed for periods varying from one to three years, set rates on a per-trip basis, depending on the nature of the goods transported, as well as providing for hourly rates for waiting periods or loading. These agreements were renewed each year and the prices indexed based on the initial contract.

To ensure a constant profit margin, the company negotiated a collective agreement covering a period of three years (1988 to 1991) with its employees based on the same scales as those agreed upon with Price and Consol...

For example, a driver who hauled wood chips from Notre-Dame-du-Rosaire to Port Alfred (for Consol) in 1988 received $51.24 for his trip and, if he had to wait more than one hour during loading, he received $8.19 per additional hour of waiting. The company received $8.21 per tonne (with a basic average of 29 wet tonnes being provided for in the contract) representing income of at least $238.09 for that trip. It also received $20 an hour for waiting during loading. Direct labour costs thus never exceed 25 per cent of revenue.

Methodology

As there should be a close and constant relationship between wages paid to drivers and the business's revenue, we examined the wages paid to drivers in relation to revenues, considering the rates in effect for each transportation contract. By weighting the activities, we calculated that gross wages provided for in the agreement represented an average of 20.7 per cent of billings. We then determined on a month-by-month basis the differences between the minimum cost of the drivers and what appears in the payroll journal.

Where the rate was less than the standard, we calculated an amount identified as “other wages” in order to determine the drivers' “revised wages”.

In an attempt to explain such variances, we then compared attendance with wages paid according to each employee's card and the seniority roster.

Observations

By comparing wages paid to a wages to sales ratio of 20 per cent, we observed significant variances for five months in 1987-1988: $2,326 in December 1987, $3,060 in February 1988, $4,157 in June, $3,302 in August, $6,003 in October and $201 in November for a total of $19,049 for the 1987-1988 fiscal year. Similarly there were significant variances for six months in 1988-1989: $11,486 in January 1989, $8,702 in February, $5,935 in March, $6,345 in April, $8,611 in May and $5,941 in October, for a total of $47,020 for the 1988-1989 fiscal year (schedules).

Having regard to the other wages, the revised wages represent a “total percentage” for the fiscal year of 22.05 per cent in 1987-1988 and 21.72 per cent in 1988-1989, since vacation time, which is paid for although no work is done and which represents 8 per cent of wages, has to be considered. Average seniority was approximately nine years in 1988 (10 years in 1989), which entitled a driver to paid vacation leave of four weeks at 8 per cent of his gross earnings in the current year (schedules).

By comparing attendance to wages paid, we observed that certain drivers worked during months for which variances were observed, whereas, according to the payroll journals, they were not officially paid.

Financial Ratios

Average wages in the industry represent 28.3 per cent of turnover and, considering the other wages to be added to the business's income statement, the industry standard has still been met (Schedule M). Furthermore, the ratio remains constant for the three years under investigation.

Conclusion

As the business billed for work performed by employees whose wages do not appear as expenses in the accounting records, the bottom line was increased for these fiscal years by at least the following amounts:

1987 - 1988	$16,723
1988 - 1989	$47,020

N.B.An amount of $2,326 for December 1987 was not considered since the payroll journal for the full year was not available as a result of a fire.

Some expenses were thus incurred but not deducted. It remains to be determined whether those expenses may have been assumed by other businesses in the group.

We have examined the same periods and made the same types of comparisons (wages vs. revenues) for the other companies and our findings are as set out below.

For “Transport Bernard Fortin Inc.”, we observed variances of $3,996 in February 1988, $4,665 in March and $3,979 in August, for a total of $12,640 for the 1987-1988 fiscal year. Similarly, we observed variances between the wages to revenue ratio and the industry average of $4,847 in January 1989, $4,023 in March, $2,333 in August and $6,223 in October, for a total of $17,426 for the 1988-1989 fiscal year.

For “J.B. Fortin Inc.”, there were full quarters in which there was income but no wages were deducted. Profits represented as much as 61.59 per cent of sales for the 1987-1988 fiscal year, and 37.79 per cent of sales for 1988-1989.

Thus, all the businesses were in a much better financial position than was the case in the industry as a whole and it is reasonable to believe that customers' cheques may have been cashed and used to pay these non-deducted expenses, since the periods coincide and:

• (1) this type of payment results in savings (employee benefits not paid);

• (2) it was the only way to get personnel during certain periods of employee unemployment;

• (3) this arrangement was to the financial benefit of the company/companies;

43 Gratien Martel also produced a report for Jean-Guy Fortin for 1987 and 1988 which contains the following:

[TRANSLATION]

Background

The Minister added to Mr. Fortin's income cheques representing payment for the sale of timber in amounts totalling $157,114 and allowed no deduction for the expenses incurred for the purpose of producing that timber on the ground that the companies had already deducted the expenses in their tax returns.

Determinat on of Costs

The timber sold had to be felled, transported, piled, limbed, then loaded and delivered before payment could be received. The industry ratios indicate that wages will vary at around 45 per cent of revenue in this type of activity (Schedule A).

We used two techniques to obtain the labour cost:

• (1) as large businesses (Price, Consol, Alliance, etc.) allow appreciably the same price per cubic metre for conventional as for mechanized cutting, we calculated an average of the rates in the cutting sectors and distributed wages and other related expenses for each activity; using this method, we arrived at a labour cost of $5.90 per cubic metre for felling, which we applied to the quantities produced (Schedule B);

• (2) we obtained a scale of flat rates for the manual felling of whole trees, which scale can be converted to cubic metres by means of the logging equivalency table (schedules C and D); by estimating the diameter of the trees at 20 cm for this industry, we arrived at a flat rate of $0.943 per stem; as there are approximately seven stems per cubic metre, the labour cost for felling would thus be $6.60 per cubic metre.

We elected to use the first method since by comparing the ratio of labour cost ($68,783) to revenue ($157,114), we arrived at a percentage equivalent to that of the industry as a whole, namely 43.33 per cent as compared to 45 per cent for the industry.

Costs Already Assumed by the Companies

Analysis of the income statements of the companies in question revealed that wages were already less than or similar to those in the industry, whereas, if the companies had assumed the expenses of those operations, industry ratios would have been exceeded. Furthermore, profitability would have been affected as a result, whereas in fact all the companies in question are achieving much higher profits than is the case in their respective industries.

Analysis

44 It is well-settled case law that the burden of proof is on the appellants in disputing income tax assessments. However, subsection 163(3) of the Act provides that the burden of establishing the facts justifying the assessment of a penalty under subsection 163(2) of the Act is on the Minister.

45 I intend to address in turn each of the following points: the question of associated corporations, the expenses paid under the table, the unexplained deposit of $125,806, the expense of $44,739 and the penalties.

Association Corporations

46 The Minister treated Transport Jean-Guy, Transport Bernard and 9620 as associated corporations within the meaning of section 256 of the Act because Jean-Guy Fortin owned the shares of all those companies. The argument turns entirely on the question of whether Mr. Fortin was the true owner of the shares of Transport Bernard and 9620. The burden was on these three corporations to show on a balance of probabilities that Mr. Fortin was not the true owner of the shares of Transport Bernard and 9620.

47 I do not believe they succeeded in so demonstrating. First of all, the declarations of beneficiary signed by Mr. Fortin's children, who were the shareholders shown in the registers of those two companies, establish beyond a shadow of a doubt that Jean-Guy Fortin was not only the true owner of the shares of both corporations, but also the owner of the income therefrom. Writings are the best evidence. Although I believe that it is possible to contradict a validly made document before this Court, highly conclusive testimonial or circumstantial evidence is necessary in order to do so, particularly where the very parties who signed the document are involved.

48 The fact that the declarations of beneficiary were still in existence at the time of the search in July 1991 creates a presumption that they were still in effect. Indeed, nothing prevented Jean-Guy Fortin from using them during the relevant years. It should be noted that these declarations do not stipulate that ownership of the shares was transferred by Bernard and Jean-Claude by way of guarantee of some obligation or as a guarantee of good behaviour on their part.

49 What evidence was provided here to explain the existence of the declarations in question? I do not find that Jean-Guy Fortin spoke frankly on these matters in his testimony. He was not clear and precise in his explanations and he was unable to indicate the date on which the declarations were supposedly cancelled. I do not find the explanation he gave very credible.

50 There was no convincing evidence describing the problem posed by the behaviour of Bernard Fortin, a young man who had always been interested in having his own company and who was studying economics at university. I likewise give little credence to the ground — discrimination against Jean-Claude Fortin — which was put forward to explain why Jean-Guy Fortin cancelled Jean-Claude's declaration at the same time as Bernard's Jean-Claude Fortin was only 18 years of age at the time. It seems to me that Bernard could also have complained of discrimination since his father had waited for him to reach the age of 21 before cancelling his declaration of beneficiary, whereas, in Jean-Claude Fortin's case, he did so when he was only 18.

51 I also found the testimony of Bernard and Jean-Claude Fortin not to be very credible. They indicated that they quite clearly remembered the date of the discussion between them and their father concerning the cancellation of the declarations of beneficiary. However, Bernard Fortin did not remember the number of shares he held in Transport Bernard and, above all, he did not recall the amount that he had invested. It seems to me that if he had saved $5,000 from working several summers when he was that young, he would have remembered investing such a large amount. I further noted that Bernard and Jean-Claude Fortin testified after their father had done so the previous day, at which time they had been present.

52 In my view, one of the most significant reasons for doubting the versions given by Mr. Fortin and by his children is the conduct of Jean-Guy Fortin during the relevant years; Jean-Guy Fortin conducted himself as the owner of the shares of Transport Bernard. It was he who appropriated two cheques from Consol totalling $74,971 payable to Transport Bernard and who used them to purchase, in his own name, a Mercedes costing $47,809 and another automobile costing $14,000. Mr. Fortin claims that his son Bernard used the latter vehicle. If Bernard Fortin had been the true owner of the shares of Transport Bernard, it seems to me the automobile would have been purchased in his name. He was 21 years of age at the time. By putting Bernard's automobile in his own name, Jean-Guy Fortin acted like a father who uses “his” resources to benefit his son while at the same time retaining ownership of the benefit (here an automobile) conferred.

53 I further note that Transport Bernard earned significant income during the relevant years. Having regard to Jean-Guy Fortin's equity shown on Transport Jean-Guy's balance sheet, I would be surprised if Jean-Guy Fortin had actually intended to benefit his son by transferring to him such significant amounts of revenue earned by Transport Bernard, as indicated in the income statements for the years 1984 to 1989.

54 Nor should it be forgotten that these corporations wished to take advantage of the small business deduction provided for in section 125 of the Act. I cannot help observing that each of the members of the family (Jean-Guy Fortin, his spouse and his two children) had his own corporation which operated a transportation business, and that it was Jean-Guy Fortin who ran them all. As Mr. Fortin managed J.B.F., a corporation “apparently” belonging to Mrs. Fortin, and also appropriated funds belonging to it, one may well wonder whether Mrs. Fortin was not acting, as were her two children, as a mandatory for her husband. This question was not raised by the Minister, however, and I do not have to decide it.

55 To further its case, Groupe Fortin could have shown that Bernard Fortin was the true owner of Transport Bernard's shares by proving that he had personally received the dividends declared by that corporation during the relevant years and that he had had the enjoyment of them. However, no evidence was adduced on this point.

56 If to all these facts we add the fact that it was Jean-Guy Fortin who received the proceeds of the sale of timber, allegedly by Bernard and Jean-Claude Fortin, the whole would suggest that Mr. Fortin used his children as prête-noms to hold his corporations and businesses.

57 In conclusion, I believe that the whole of the evidence is far from sufficient to contradict the declarations of beneficiary and to show that Jean-Guy Fortin was not the true owner of the shares of Transport Bernard and 9620. These two corporations were associated with Transport Jean-Guy during the relevant years.

Under-the-table Expenses

58 The burden was also on the appellants to show that, for the purpose of earning business income, they incurred additional expenses out of their unreported income. For an expense to be deductible, it is important to establish that it has been incurred for the purpose of earning income. To do so, one must know who paid the amounts claimed as expenses, when they were paid, what these amounts were, to whom they were paid and for what purposes.

59 Even if a taxpayer's activities are illegal or the payment he makes is illegal, he is nevertheless generally entitled to deduct his expenses. Minister of National Revenue v. Eldridge (1964), 64 D.T.C. 5338 (Can. Ex. Ct.), was cited and I would add the decision rendered by Judge Kempo of this Court in United Color & Chemicals Ltd. v. Minister of National Revenue (1992), 92 D.T.C. 1259 (T.C.C.), which had to do with the deduction of kickbacks.

60 Furthermore, it is clearly recognized in the case law that if a taxpayer does not have all the vouchers required to support the deduction of an expense, he may nevertheless provide other proof. In particular, there may be cited in this regard the decision of the Federal Court of Appeal in Sidhu v. Minister of National Revenue (1993), 93 D.T.C. 5453 (Fed. C.A.). What proof is there in this instance? There was circumstantial evidence and some direct evidence.

—Direct Evidence

61 With respect to direct evidence, no voucher was filed in support of the deduction of the expenses claimed by the appellants. Not only were there no vouchers, there were also no accounting records, no black book nor any other document that might support the appellants' claims that they had incurred those expenses during the relevant years.

62 Jean-Guy Fortin's answers to questions respecting these expenses paid under the table were always highly evasive. I must note that I had the distinct impression he had decided before appearing in Court not to reveal either the names of the persons to whom those amounts were paid or what the actual amounts were. I believe that if he had wished to provide this information he could have done so. Mr. Fortin's answers gave the impression that he knew nothing, although he was the top man and the person responsible for the success of the Groupe Fortin businesses. Furthermore, Mr. Murray confirmed that Mr. Fortin gave him the envelopes for the under-the-table payments to the members of his crew.

63 Jean-Guy Fortin hid behind his secretary, Ms. Blackburn, who also attended to the management of the business. However, she was not called to appear as a witness in these appeals. If she had handled the under-the-table payments, it would have been helpful to hear her testimony. At the time of the hearing, she was still employed by Groupe Fortin since, during the hearing, she faxed certain documents that were filed as evidence.

64 In his testimony, Gilles Tremblay told how he had received amounts of money during the relevant years for work performed on weekends. He was unable however to determine either the number of days for which he had received this under-the-table remuneration or the total amount received in each of the relevant taxation years.

65 The only exception here was the testimony of Claude Murray. Mr. Murray not only confirmed that he had received payments under the table for cutting timber for Messrs. Fortin, but he was also able to provide the Court with the names of five persons who had been paid under the table and their average hourly wages. After considering his testimony, I am satisfied that at least five individuals worked 40 hours a week for 17 weeks cutting timber. The amount of the expenses incurred by Messrs. Fortin in respect of wages for this crew of five individuals thus represents $34,000.

—Circumstantial Evidence

66 Mr. Martel of Raymond Chabot Martin Paré filed a report analyzing Transport Jean-Guy's financial situation. This witness impressed me with the professionalism he displayed in preparing this report. All the report provides, however, and all it can provide, is an analysis of Transport Jean-Guy's profit ratios based on that company's financial statements, and the observation that those ratios were higher than the average ratios determined by surveys conducted by Dunn & Bradstreet or by other similar studies conducted by government organizations.

67 Furthermore, his report can do no more than note that Transport Jean-Guy's ratios of wages to sales were lower than those prepared by Dunn & Bradstreet. That firm's figures can represent only the average of the ratios of businesses surveyed by that firm and are valid only to the extent that the figures provided to it are valid.

68 In any case, the validity of those figures is not really the issue. They do not prove that the appellants incurred expenses for the purpose of earning income nor do they prove what the amount of those expenses was. If the Minister were to be able to tax a business by adding on unreported income on the ground that the income reported by that business was lower than the average income appearing in the Dunn & Bradstreet surveys, the vast majority of Canadians would view such a practice as totally unfair. In my view, it is just as inappropriate to adopt such a practice as a means of proving expenses paid under the table. The fundamental reason for rejecting such a practice is that it does not constitute proof that income was earned or that an expense was incurred.

69 Mr. Martel's work cannot serve as confirmation that a particular appellant spent a particular amount in a particular year for a particular purpose. The exercise carried out by Mr. Martel was essentially a guessing game. According to his testimony, he was only given highly evasive answers as to the amounts paid under the table and as to the names of the individuals who had received those amounts. Furthermore, Mr. Martel felt he was treated like an auditor of the Minister when he asked Groupe Fortin employees for details. They wanted him to limit his work to an analysis of existing financial statements. Mr. Fortin would have liked to have it believed that all the unreported income was used solely to pay business expenses. However, the evidence showed that such was not the case. Mr. Martel's opinion cannot corroborate the evasive and largely unreliable testimony of Mr. Fortin, who estimated, without any other probative evidence to support the assertion, that he had spent about $2,500 a week.

70 In conclusion, it is my view that, with the exception of Messrs. Fortin in respect of an amount of $34,000, the appellants were unable to prove that they had incurred additional expenses for the purpose of gaining or producing income from their timber sales business.

Unexplained Deposit of $125,806

71 In his argument, counsel for the Minister admitted that the unexplained deposit of $125,806 would not constitute income for Jean-Guy Fortin if I found that this amount came in large part from the deposit made at the Alma branch of the National Bank. As mentioned above, I am satisfied that the sum of $100,000 from account No. 860 at the Caisse populaire was used to make the deposit at the Alma branch of the National Bank and subsequently to make the deposit at the Jonquière branch of the same bank. I would add furthermore that the facts set out in the reply to the notice of appeal were insufficient to support the inclusion of this $125,806 deposit in Jean-Guy Fortin's income.

Expense of $44,739

72 Counsel for the appellants attempted to establish that the amount of $44,739 paid by an insurance company as compensation for a loss caused by a fire was reinvested in the purchase of furniture which the investigator would have seen when he went to the appellants' premises. Clearly this evidence is entirely insufficient to establish that the amount in question was used for these purposes.

Penalties

73 The total unreported income for each of the taxpayers for the relevant years amounts to $564,733: $148,601 for Transport Jean-Guy, $156,018 for Transport Bernard, $71,681 for J.B.F., $96,348 for Jean-Guy Fortin, and $92,085 for his two sons. The total amounts indicated for Jean-Guy Fortin and his children do not include income amounts that were not reported by Groupe Fortin and that the Minister added to the incomes of these individuals as appropriations. The total amounts that Jean-Guy Fortin appropriated and that belonged to his corporations or to his wife's corporation, J.B.F., came to $376,300. Of that amount, $71,680 represented an amount which Jean-Guy Fortin appropriated from J.B.F. and which must be included in Mrs. Fortin's income under subsection 56(2) of the Act because she was the sole shareholder of J.B.F. and because she permitted the appropriation.

74 These are significant amounts and I believe it is reasonable to conclude in the circumstances that all the appellants knowingly, or under circumstances amounting to gross negligence, made a false statement.

75 Groupe Fortin and Jean-Guy, Bernard and Jean-Claude Fortin admitted that they had earned the unreported income and Jean-Guy Fortin admitted that he received the amounts that the Minister treated as an appropriation of property belonging to his corporations or to his wife's.

76 Groupe Fortin entered neither its expenses nor its revenues in its accounting records, as the Act requires it to do. It is possible that the appellants may have used a portion of the amounts in question to pay employees under the table, to purchase equipment or parts or even to pay expenses which counsel for the appellants identified as “entertainment” expenses. However, I have no probative evidence as to the amount of those expenses except for a sum of $34,000 in respect of which the penalty cannot apply. Contrary to the appellant's claims that all the amounts that Jean-Guy Fortin appropriated were used to pay under-the-table expenses, the evidence shows that at least $60,000 was used for personal purposes, that money being an amount belonging to Transport Bernard used by Jean-Guy Fortin for the purchase of two cars in his name.

77 The appellants clearly placed themselves in a highly vulnerable position by not retaining vouchers, by not keeping complete records and by refusing, for obvious reasons, to provide the names of the recipients and the amounts that were paid to them under the table. Having admitted through their counsel that they received the amounts that the Minister considered to be appropriations, Jean-Guy Fortin and Mrs. Fortin received or allowed to be received an amount of $376,300 without providing any satisfactory evidence of its use for business purposes for the benefit of their respective corporations. The evidence shows that at least a portion of that amount was used for personal purposes. I was not convinced on a balance of probabilities that the amount of $376,300 was used to pay Groupe Fortin's under-the-table expenses. I therefore believe that all the circumstances here point to gross negligence by all the taxpayers.

78 For these reasons, the appeals of Gabrielle Fortin, Groupe Fortin and Jean-Guy Fortin for the 1988 and 1989 taxation years are dismissed.

79 The appeals of Jean-Guy, Bernard and Jean-Claude Fortin in respect of the 1987 taxation year are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that Jean-Guy Fortin does not have to include an amount of $125,806.51 in his income and that Jean-Guy, Bernard and Jean-Claude Fortin are entitled to deduct their share of a wage expense of $34,000 in computing their business income. This share is to be determined according to their share of total gross receipts from the sale of timber.

80 The whole without costs except in respect of the appeal of Transport Jean-Guy Fortin Ltée.