Tardif T.C.J.:
1 The appellant opted for the informal procedure for his appeal from assessments for the 1986, 1987, 1988 and 1989 taxation years. The Reply to the Notice of Appeal states the points at issue as follows:
[TRANSLATION](a) whether the appellant declared all her income for the 1986, 1987, 1988 and 1989 taxation years;
(b) whether the Minister was justified in assessing the appellant as he did for the 1986, 1987, 1988 and 1989 taxation years;
(c) whether the Minister was justified in imposing on the appellant for those years the payment of the penalties specified in s. 163(2) of the Act.
2 ln assessing the appellant the Department of National Revenue relied on ss. 3,9, 152 and 163(2) of the Income Tax Act (“the Act”), as amended and as applicable to the 1986, 1987, 1988 and 1989 taxation years.
3 In making the reassessments of January 9, 1992 and March 10, 1994 the Minister assumed inter alia the following facts:
[TRANSLATION](a) when she reported her income for the 1986, 1987, 1988 and 1989 taxation years the appellant did not include all the income she received in those years;
(b) the amounts not reported by the appellant were $11,310 in 1986, $12,865 in 1987, $10,370 in 1988 and $10,074 in 1989;
(c) the amounts not reported were determined by the so-called net worth method, as indicated by the appendices attached hereto and constituting an integral part hereof;
(d) during the taxation years at issue, the appellant worked in a bar as a waitress; she had two income properties built in 1986 and 1987;
(e) the appellant kept no accounting records during the years at issue;
(f) to audit the income reported by the appellant during the years at issue the respondent had to use the net worth method;
(g) the respondent determined the appellant's income inter alia by analyzing the contracts tracked down at various suppliers or at the registry office, in addition to the tax returns filed for the taxation years at issue and the information supplied by the appellant and her representative;
(h) in not including the income mentioned in paragraph (b) above in her income for the 1986 and 1987 taxation years, the appellant negligently, carelessly or by deliberate omission misrepresented the facts;
(i) further, by thus omitting to report her income mentioned in paragraph (b) above, the appellant did knowingly, or under circumstances amounting to gross negligence, make or participate in, assent to or acquiesce in the making of, a false statement or omission in income lax returns filed for the 1986, 1987, 1988 and 1989 taxation years, with the result that he tax which she would have had to pay on the basis of the information supplied in the income tax returns filed for those years was less than the amount of the tax actually payable for those years.
4 What this Court must in fact decide is whether the expenses incurred by the appellant for the use of her automobile and for her personal needs were correctly estimated by the respondent. Secondly, it must be determined whether the penalties imposed by the Minister were justified under s. 163(2) of the Income Tax Act. The final point for determination is whether, in calculating the appellant's net worth, the Minister correctly estimated the construction costs of the two buildings which she owned, located respectively at 2393, 2395 and 2397 and at 2401, 2403 and 2405 rue Louis-Riel in Jonquière.
Facts
5 It appears from the evidence that the appellant, a student, was closely associated with the construction of the two buildings at issue here, the first of which was constructed in 1986, being numbers 2393, 2395 and 2397 on Louis-Riel Street in Jonquière, and the second in 1987, being 2401, 2403 and 2405 on Louis-Riel Street.
6 The appellant's testimony indicated that she was very knowledgeable in the area of building construction. As she comes from a family of which several members have a great deal of experience in construction, she also had the benefit of some good advice. The appellant also benefited from the fact that her family was well known to materials suppliers. She thus obtained rebates and discounts when purchasing the materials necessary to put up her two buildings.
7 The construction was handled primarily by her father. The appellant helped him but was chiefly responsible for site management: she looked after the hiring of subcontractors for lot preparation and for the foundations, the plumbing and the electrical work. She shopped around among various materials suppliers to obtain the best materials at the best possible price. She coordinated deliveries while physically assisting her father, who worked on the site full time.
8 The Court considers that the weight of the evidence showed that the appellant was closely associated with the construction of the two income properties on Louis-Riel Street in Jonquière. Despite her youth and her being a student, the evidence indicated genuine involvement. Although her participation in the construction of the buildings was probably not as significant as described, she obviously benefited from the assistance of members of her family, who put their shoulders to the wheel in order to help her carry out her project.
9 The appellant and her father testified briefly regarding automobile expenses and expenses for personal needs and food costs. Their testimony disclosed the interest which the appellant had in cars and motorcycles. On this point, the Court feels that the evidence is entirely unsatisfactory and changes nothing. The figures used for the calculation of net worth were very reasonable. Further, the Court understood from the evidence that the information on the costs came from the appellant herself.
10 The appellant next pleaded her ignorance of tax law regarding her duty to report her rental income. She kept no journal in which to enter income and expenditures relating to the two buildings. She testified in a very vague and confused way concerning income and concerning losses resulting from non-occupancy of certain apartments. Ignorance of the Act is not a valid excuse and the absence of accounting records tends to show a certain indifference which constitutes blameworthy negligence, especially in a tax system based on self-assessment by the taxpayer.
11 This carelessness and disregard of Tier tax responsibilities was confirmed by her obviously deliberate failure to report the tips she received in connection with her employment.
12 In tax law this is gross negligence which fully justifies the application of the penalties prescribed by the Act. The explanations given both by the appellant and by her father regarding motor vehicle purchases seemed to me to be absurd and absolutely without credibility. In the circumstances, I have no hesitation in affirming that the penalties imposed were justified.
13 The Minister moreover indicated that the appellant had put forward essentially the same explanations and justifications at the time of the audit. Further, she had at that time apparently more or less accepted the conclusions of the respondent's auditor. The respondent appeared surprised at the appellant's continuing to contest points which had apparently been settled during the informal negotiations and discussions.
14 The very poor quality of the evidence submitted tended to suggest that the appellant simply wanted to use her appeal related to the valuation of her two buildings to attempt to obtain a review of her entire file for the years at issue. The weakness of her evidence provides the Court with no basis whatever for reconsidering what appears in the circumstances to have been properly assessed.
15 The Court accordingly upholds and affirms the Department's assessment relating to the expenses claimed for automobile use and the amount of the appellant's food expenditures.
16 It appears from the evidence that the appellant deliberately chose not to report either her rental income from the two buildings or the tips she received in the course of her duties as a waitress and barmaid. I do not accept the excuse of ignorance since in my view there can be no doubt that a woman who is so much involved in business, despite her youth, and who comes from a family whose members have been active in construction and in business, knew or should have known the basic tax rules on these matters.
17 The appellant convincingly demonstrated her ability and her talent in managing a construction site and in the same breath would like to appeal for sympathy based on her ignorance of matters that are really quite basic.
18 In my opinion, the issue turns essentially on the valuation of the two buildings. On this question of valuing the buildings, I have taken the liberty of examining together the various approaches taken with regard to the two buildings:
Table of Information on the Two Buildings Construction Costs of Which are at Issue
| 1986 Building — No. 2401-2403-2405 Louis-Riel |
| | | | Exhibit |
| Cost of land | | | $18,000.00 | I-5 |
| Value assigned at audit | | | $80,858.70 | I-3 |
| Value assigned in discussions with a view to settlement | | | $59,958.70 | I-7 |
| Value given in building permit application | | | $90,000.00 | A-11 |
| Value assigned by appraiser for obtaining financing | | | $107,000.00 | I-1 |
| Price obtained in June 1991 sale | | | $81,276.24 | I-5 |
| Price in purchase offer in April 1991 | | | | |
| $175,000 % 2 | = | $87,500.00 | A-18 |
| Value according to appellant | | | $46,964.66 | A-10 |
| Appellant's expert witness 69,032.91 - 18,000 $ | | $51,000.00 | A-9 |
| Respondent's expert witness | | | $101,704.00 | I-5 |
| 1987 Building - No. 2393-2395-2397 Louis-Riel | | | |
| | | | Exhibit |
| Cost of land | | | $20,000.00 | I-5 |
| Value assigned at audit: | | | $82,015.00 | I-3 |
| Value assigned in discussions with a view to settlement | | | $60,135.50 | I-7 |
| Value given in building permit application | | | $125,000.00 | A-13 |
| Value assigned by appraiser for obtaining financing | | | | N/D |
| Price obtained in June 1991 sale | | | $81,354.70 | I-5 |
| Price in purchase offer in April 1991 | | | | |
| $175,000 % 2 | = | $87,500.00 | A-18 |
| Value according to appellant | | | $15,545.98 | A-12 |
| Appellant's expert witness 69,032.91 $ - 18,000 $ | | | $51,982.00 | A-9 |
| Respondent's expert witness | | | $105,117.00 | I-5 |
19 Like most cases in which a valuation is involved, this case gives rise to two diametrically opposed positions. The valuation prepared by the Department was filed within the prescribed deadlines and the quality of its presentation was impeccable. That does not mean however that the Court must therefore accept the conclusions in that valuation.
20 As to the valuation filed at the appellant's request and prepared at the last minute by Danny Fleury, a contractor, it is obviously not comparable in quality of presentation. Here again, the Court does not feel this is sufficient ground for rejecting that valuation out of hand solely on this basis, or on account of the fact that it was filed the very morning of the hearing. Both valuations have shortcomings which prompt the Court to go beyond them. First of all, the valuation prepared by the respondent's appraiser, Mr. Laberge, is a detailed, thorough and very articulate piece of work. Mr. Laberge has experience which is very relevant to the preparation of such a valuation and he submitted work that was clearly more readable than that of Danny Fleury. At the same time, this valuation was clearly prepared with a view to confirming a somewhat intuitive initial valuation, which was required by the auditor in the early stages of the audit.
21 Further, Mr. Laberge's valuation does not take into account at all certain accepted and well-established realities in the construction industry, namely volume discounts and rebates for prompt payment.
22 The valuation is based on the consideration of all the legal and regulatory requirements applicable to the construction industry and on the assumption of complete and absolute compliance with the original plans and specifications. Finally, the valuation refers to historical data regarding the properties, which data were relied on by counsel as possible indications of the validity of the conclusions arrived at by his expert witness.
23 The Court refers in particular to the building permits, one of which set the cost of the work at $90,000.00 while the other set it at $125,000.00. In view of the similarity between the two buildings and the short time between their respective dates of construction, this suggests a completely different conclusion, namely that the total amount shown on one building permit has no real significance in estimating the actual cost of construction.
24 Mr. Laberge's report also referred to a valuation prepared by the firm of Brisson, Tremblay, Fleury before work was begun. In the Court's view this valuation is of no assistance. It was a valuation done by Brisson, Tremblay, Fleury (Exhibit I-1) on August 12, 1986, where what was being appraised was not a completed construction but merely a project that was under way. The object of the exercise was to obtain financing, as clearly indicated by the heading [TRANSLATION] “PURPOSE OF VALUATION”.
25 To state matters clearly, there was at that time a definite advantage to having the buildings appraised at as high a value as possible with a view, obviously, to making it easier to obtain a loan with which to complete the project without laying out any cash.
26 Although a valuation should ordinarily not be influenced by the interests of the person requesting it, what happens in practice is an entirely different matter and the result quite often corresponds to the expectations of the person paying for the valuation.
27 In my opinion, the valuation prepared by Brisson, Tremblay, Fleury is irrelevant. Moreover, the appraiser's comments are quite revealing in this respect. He said the following:
[TRANSLATION]
Appraiser's Comments
The appraised property is located in a developing sector close to main services, places of business and the Jonquière CEGEP.
The subject property is located on a street corner (Louis-Riel and Du Foulon). It is in the immediate vicinity of newer properties of good quality and varying styles.
We are of the view that the market value of this property after construction has been completed will be $107,000.00, bearing in mind that the building will be constructed with good quality materials and considering the manpower employed.
Inspections will be required to check the quality of construction and the progress of the work. Any alterations to the plan submitted should be passed on to the appraiser so that their impact on the value may be determined.
1st inspection: foundation;
2nd inspection: insulation;
3rd inspection: final.
(My emphasis.)
28 Counsel for the appellant, for his part, made in his written submission a whole series of objections to the testimony of Mr. Laberge, the respondent's expert witness:
[TRANSLATION]
For example, Mr. Laberge considers it necessary for the carpet and linoleum to be laid by the supplier.
In the same vein, the smoothing of the cement advised by Mr. Laberge was done by Roland Roy on a do-it-yourself basis, once again to keep costs down.
(B) Bricks
With regard to this item, Mr. Laberge tells us he did not take it into account in his adjustment to the amount of $8,004.00.
On the other hand, he considered that between 3,000 and 3,500 bricks would have been necessary for the front of the building. (p. 11)
As you can see from Exhibit 1-6 (p. 5 of Mr. Laberge's report), not all of the front of the building is brick. The area of the doors and windows, among other things, must be subtracted.
Mr. Laberge tells us that he went to the sites of the two buildings and inspected them, yet he admitted:- he did net go into the basements of the buildings;
- he never look photos of the inside of the apartments visited so as to provide the Court with information or their condition;
- he calculated 4 steel doors in his appraisal, whereas in fact there are only 3.
Mr. Laberge testified that the prices on which he relied in his appraisal were those which are given to a contractor, that any discounts which may be given are based only on volume.
It was surprising, then, to find the following:- Mr. Laberge several times admitted comparing the prices offered to an individual with prices offered to a contractor, (pp. 42, 44 and 46)
- Mr. Laberge maintained it is impossible to get discounts when payment is made in 30 or 60 days.
This is completely contrary to what Lyne Tremblay, who worked in accounting at Bétonnière Arvida and Bétonnière de la Bale, told us.
In her testimony, she said that she gave the appellant a discount as she would be paying within 30 days. (See testimony of Lyne Tremblay and Exhibits A-4, A-5.)
It is all the more surprising when we know that Lyne Tremblay was working for Bétonnière Arvida and Bétonnière de la Baie in 1986 and that it was to this supplier that Mr. Laberge went for the prices of concrete, (p. 43)
The price given by Mr. Laberge for patio doors was $1,000.00 each. When he was shown Exhibit A-8 (pp. 39 to 42) he answered:
It is possible they could have been had for $470.00 or $500.00”. (p. 41)
29 The primary distinction between the two valuations here is largely a matter of their writers' training, the one having a more practical background than the other. Mr. Laberge's report was the result of an approach in which everything was calculated on the basis of prices which had been checked but which were theoretical and taking into account materials whose quality and quantity were specified by legal documents having to do with construction.
30 These documents always specified minimum quality standards which always required the use of good or very good quality materials. In general, the Department's report is much more complete, more detailed and more in accordance with standard practice in this area.
31 This does not mean that the Court dismisses the work done by Danny Fleury, who showed he had significant practical experience which was certainly a valid basis for issuing credible advice and opinions. Flying in the face of everyday experience, the practical approach suggested a substantially lower overall price than the theoretical one.
32 Mr. Fleury's analysis was so simple that it could only be discredited on the question of his calculations and of the quantities taken into account. However, in his testimony he indicated that plans and specifications are not always followed to the letter and that the quality of materials varies considerably. In other words, the evidence showed that the cost of a building could vary considerably even based on the same plans and specifications.
33 In his written submission counsel for the respondent for his part pointed out several defects. In this regard he said the following:
[TRANSLATION]
We must also add that Mr. Fleury, who has only been a building contractor since 1991, was not a contractor during the years at issue, that is, the years in which the buildings were put up, namely 1986 and 1987. Moreover, it is quite natural for the valuation prepared by Mr. Fleury to correspond to that put forward by the appellant as with respect to most of the building materials he relied on the invoices supplied to him by the appellant. Another important fact is that Mr. Fleury tool: no taxes into account in arriving at his valuation.
As mentioned in the appellant's submissions, Gaston Laberge demonstrated in his testimony, after a brief analysis of Mr. Fleury's report, that Mr. Fleury had erred in at least a dozen items and that this represented a discrepancy of some $8,000, and we should remind the Court that Mr. Laberge only had a few hours to examine Mr. Fleury's report. Let us have a look at a few of the items in question:1. At p. 2 of Mr. Fleury's report, in the upper section, namely “Foundation and basement laths”, the item “Styrofoam”, which is estimated at 1 in. × 2 in. × 8 ft., should have been 11/2in. Styrofoam, as established by Mr. Laberge and not denied by Mr. Fleury. This has an impact in two ways: first, the cost of this item is modified, but also the 1-in. Styrofoam is not in accordance with the building code.
2. Again on the second page of his report, Mr. Fleury indicates that in the item “Excavation and backfilling” crushed stone was also included, namely the stone under the concrete. The problem is that he used the amount of $1,013 found in the invoice supplied by Mr. Roy which was filed as Exhibit A-2. As we know, in her testimony Ms. Roy indicated that this invoice, which was issued by Jacques Lavigne, did not include the excavation, and certainly not the backfilling. We can therefore conclude that it did not include the crushed stone either. It can thus be seen that Mr. Fleury confined himself to the invoices supplied to him by Ms. Roy and that in many cases there was certainly an error in his valuation of certain items included in the construction cost of the said buildings.
3. On the same page, in the item “Smoothing of cement”, it can be seen that according to Mr. Laberge, the amount of $250 indicated is well below what it should be. Counsel for the appellant explained in his submissions that on this point it was Roland Roy, the appellant's father, who had done the smoothing on a do-it-yourself basis, with the result that this item was lower than if the work had been done by an expert. However, nowhere in Mr. Fleury's valuation is there any indication that certain items were assigned a ower cost because the service was provided by the appellant's father.
34 Although the format of Mr. Laberge's report is of better quality than Mr. Fleury's work, I do not feel that this is a sufficient basis for rejecting the appellant's valuation in favour of the respondent's. Accordingly, I do not entirely agree with either of the valuations as each has its virtues and its shortcomings.
35 The appellant had the burden of presenting evidence that the respondent's conclusions regarding the value of the buildings at issue here were exaggerated.
36 Did she succeed in showing this, and to what extent? The Court feels that the appellant did show that the valuation submitted by the respondent was not realistic. But does this mean that the appellant's own valuation should be accepted without reservation?
37 I disagree with the appellant's valuation as regards the amount of the savings, the volume of materials purchased and the savings which were possible for prompt payment. The burden of proof on the appellant required that several witnesses be called or that more complete and detailed documentation be provided. It was not enough to call one or two suppliers in order to show that the rules by which the appellant and a particular supplier played were similar or comparable to those followed with all the other suppliers.
38 The Court feels there was definitely some exaggeration in the description given by the appellant's father of the quality of construction. According to his testimony the work was slipshod; the materials used were of poor quality, inferior to what was recommended or advisable: he gave the glue as an example. These explanations and comments seem to me all the more unreasonable as the two buildings in question were rental properties to be managed by his own daughter and later by his son. In the circumstances, it would have been quite ill advised to put up buildings of mediocre quality since quality is often synonymous with higher value, lower maintenance costs and greater durability.
39 During its audit of the appellant the Department, admittedly with a view to a settlement, had agreed to set the value of the buildings at $59,958.70 and $60,135.50 (Exhibit 1-7). The Court feels that this valuation was quite close to reality.
40 In view of the evidence available the Court has no choice but to intervene and to find that the construction cost for the 1986 building, Nos. 2401,2403 and 2405, was $60,000.00, and for the 1987 building, Nos. 2393, 2395 and 2397, $62,000.00.
41 For these reasons, the appeals are essentially allowed as to the construction costs of the two buildings, the first of which was built in 1986, having street numbers 2401,2403 and 2405, and the other in 1987, having street numbers 2393, 2395 and 2397, which costs are set at $60,000.00 and $62,000.00.
42 As to the expenses for personal needs and the automobile expenses, I find that the valuation made of these by the respondent was fair and reasonable and I affirm the assessment in this regard.
43 As regards the penalties imposed, the Court upholds these since the evidence clearly showed that the appellant committed gross negligence in failing to keep accounts setting out the income from and operating expenses of her two apartment buildings. She also deliberately failed to report the amounts of tips she received in the course of her employment.
44 The appeals are allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the cost of construction of the building at 2401, 2403 land 2405 was $60,000.00 and of the building at 2393, 2395 and 2397, $62,000.00; the whole without costs.
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