Date:
20080721
Docket: A-395-07
Citation: 2008 FCA 241
CORAM: NADON
J.A.
PELLETIER
J.A.
TRUDEL
J.A.
BETWEEN:
RÉGENT LACROIX
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
PELLETIER J.A.
INTRODUCTION
[1]
In the
case of any reassessment beyond the normal reassessment period (the statutory
period), as in the case of the assessment of a penalty, the Income Tax Act
requires that the Minister prove that there was misconduct on the part of the
taxpayer in filing his or her tax return. How does the Minister discharge this
burden of proof where the reassessment, or the assessment of the penalty,
results from the application of the net worth method? Can the Minister
conclude, based on the discrepancy between a taxpayer’s assets and the income reported
in his or her tax return, on the one hand, and on the lack of a credible
explanation for this discrepancy, on the other hand, that there is an error
warranting an out-of-time reassessment or the assessment of a penalty? The Tax
Court of Canada judge concluded that the Minister could. Was the judge correct?
THE FACTS
[2]
In the
year 2001, the Canada Revenue Agency (the Minister) asked Régent Lacroix and
his spouse to prepare their personal balance sheets for each taxation year from
1995 to 2000. Mr. Lacroix’s balance sheet reported liquid assets totalling
$500,000 from the 1995 taxation year. This led to a more in-depth review of Mr. Lacroix’s
affairs. The Minister conducted this review using the net worth method, which
revealed a significant discrepancy between the Mr. Lacroix’s opening
balance and closing balance. This discrepancy was deemed to be income. The
Minister concluded that Mr. Lacroix had unreported income totalling
$145,667 for the 1997 taxation year, $231,570 for the 1998 taxation year,
$156,333 for the 1999 taxation year and $26,103 for the 2000 taxation year. The
Minister made reassessments for the taxation years in question, adding these
amounts to Mr. Lacroix’s income. However, two of these reassessments were
made outside the statutory period. Furthermore, the Minister did not confine
himself to simply increasing Mr. Lacroix’s income; he assessed penalties
against him because Mr. Lacroix, it would appear, knowingly, or under
circumstances amounting to gross negligence, filed false tax returns.
[3]
In so
doing, the Minister rejected Mr. Lacroix’s explanation as to the source of
the $500,000 in cash appearing in his balance sheet. According to Mr. Lacroix,
the cash came from a loan made to him by Gilles Pronovost. The two men first met
when Mr. Lacroix saved Mr. Pronovost ‘s son from drowning. This was
the beginning of a friendship between the two men. In the course of this
relationship, Mr. Lacroix told Mr. Pronovost about his dream of
setting up a real estate investment portfolio for himself. Feeling ever
grateful to Mr. Lacroix for having rescued his son, Mr. Pronovost
agreed to loan him $500,000, which he gave him in several instalments over a
period of two or three years beginning in 1993. All of these payments were made
in cash. Mr. Lacroix states that he kept the money locked in a safe at his
home. According to his balance sheet for 1995, Mr. Lacroix let this cash
build up for several years before he began setting up his real estate
portfolio. In 1996, he started acquiring properties, becoming the owner of 20
buildings, according to his personal balance sheet for the year 1999.
[4]
The
Minister reassessed Mr. Lacroix’s tax returns, and Mr. Lacroix wasted
no time in contesting those reassessments. When the Minister confirmed the
reassessments, Mr. Lacroix filed a notice of appeal for each of the
taxation years in question, namely 1997, 1998, 1999 and 2000. All of those
appeals were brought to trial before Justice Bédard of the Tax Court of Canada,
who dismissed each appeal: see Lacroix v. Canada, 2007 TCC 376, [2007]
T.C.J. No. 216. After setting out the evidence and citing long passages from
the testimonies of Mr. Lacroix and Mr. Pronovost in support, the
judge stated his findings with regard to credibility:
12. The
assessment of the credibility of the appellant and of Mr. Pronovost have
played an important role in my decision, given the almost complete lack of
documentary or objective evidence as to how the appellant used the $500,000 in
cash or where the $500,000 in cash allegedly held by Mr. Pronovost came
from. I would like to point out that I attach little probative value to the
testimonies of the appellant, his spouse and Mr. Pronovost . . . .
[5]
The judge
listed, one after the other, the numerous implausibilities supporting his
findings with regard to the witnesses’ credibility. Finally, the judge writes
the following:
20. My
analysis of the evidence leads me to find that it is more likely than not that
these loans never existed and that the notes (Exhibit A-4), the request for
repayment (Exhibit A-8) and the cheques made out to Mr. Pronovost were
merely a sham to hide the truth. Accordingly, it is difficult to arrive at any
other conclusion than that the appellant deliberately failed to report $516,000
in income. In my opinion, the Minister has discharged the burden of proof on
him and was therefore entitled to impose penalties under subsection 163(2) of
the Act on the appellant’s unreported income. Since the Minister’s burden of
proof is less under subsection 163(2) of the Act than under subsection 152(4),
I am also of the opinion that the Minister was entitled to make reassessments. Finally,
I note that the Minister does not, in my opinion, have to identify the source
of the appellant’s unreported income when this income is established using the
net worth method.
[6]
The
appellant challenges the judge’s conclusions, which are merely findings with
regard to the credibility of the witnesses who appeared before him. The judge
never determined the true source of the funds in question or how they were
applied, nor did he determine the true nature of the relationship between Mr. Lacroix
and Mr. Pronovost. He simply stated that he did not believe their
testimony and that the evidence they submitted had been fabricated. Therefore,
there was no evidence before the judge that would have allowed him to conclude
that the discrepancy detected using the net worth method was not income.
[7]
The appellant
submits that, notwithstanding the great deference that a court of appeal must
afford to a trial judge’s findings of fact, we must intervene because the judge
rejected out of hand all of the evidence supporting the appellant’s version of
the facts. The appellant notes, for example, that there is evidence of a number
of certified cheques made to the order of Mr. Pronovost from a trust
controlled by Mr. Lacroix. According to the appellant, this proves that
there was a loan and that it was repaid, except for $70,000. The appellant
draws the Court’s attention to other evidence that the judge wrongly failed to
consider or to which he did not give appropriate weight in assessing the
appellant’s credibility.
[8]
The assessment
of credibility is the task of the trial judge. There is nothing surprising in
the fact that some evidence supports the version of the facts proposed by one
party while other evidence undermines it. The trial judge is in a better
position to assess the true value of these disparate elements and draw the
proper conclusions. In the case at bar, the judge duly noted the evidence which
the appellant raises but deemed it to be fabricated and dismissed it. There is
nothing in the evidence or in the Income Tax Act, R.S. 1985, c. 1 (5th
Supp.), (the Act) that would warrant this Court’s intervention. The debate in
this appeal is at another level.
ANALYSIS
[9]
The
rejection of Mr. Lacroix’s explanation for the discrepancy between his
reported income and his net worth does not in itself justify a reassessment
beyond the statutory period or warrant the assessment of a penalty. There are
therefore two issues that remain to be decided:
1. Was the Minister
required to prove the source of the income detected through the application of
the net worth method to justify the inclusion of this income in the taxable
income of Mr. Lacroix?
2. Did the Minister
discharge the burden of proof on him under subparagraph 152(4)(a)(i) and
subsection 163(2) before, first, making a reassessment beyond the statutory
period and, second, assessing a penalty against the taxpayer?
[10]
It should
be noted that these are two distinct questions. The question of the source of
the income attributed to Mr. Lacroix in applying the net worth method must
be raised even when the Minister attempts to make a reassessment within the
statutory period. The first question therefore cannot be answered by relying on
case law that only addresses the second.
1- Was
the Minister required to prove the source of the income detected through the
application of the net worth method to justify the inclusion of this income in
the taxable income of Mr. Lacroix?
[11]
Mr. Lacroix
contests the judgment of the judge of the Tax Court of Canada on the basis of
case law of that court holding that the Minister, in applying the net worth
method, must not only show that the discrepancy between the taxpayer’s assets
and his reported income leads to the conclusion that the taxpayer earned
unreported income, but also demonstrate that the source of this income can be
determined:
77. The
Minister has the initial onus of proving that a taxpayer made a
misrepresentation in filing the tax return. It is insufficient for the Minister
to refer to a net worth statement showing discrepancies between available
income and reported income. The Minister must prove that this additional
income was from a source that should have been included in the taxpayer’s
return. The onus on the Minister will be greater if the taxpayer presents
plausible explanations showing a non-taxable source of this additional income.
[Emphasis
added]
[Dowling v. Canada, [1996] T.C.J.
No. 301, [1996] 2 C.T.C. 2340, at paragraph 77 (Dowling).]
[12]
In Dowling,
a professional golfer’s tax returns for a number of taxation years were
reassessed using the net worth method. Two of the years reassessed by the
Minister fell outside the statutory period. The passage cited above, upon which
Mr. Lacroix relies, is taken from the analysis of the burden of proof on
the Minister where the Minister attempts to make a reassessment beyond the statutory
period.
[13]
Just as in
the instant case, Mr. Dowling had an explanation for the discrepancy
detected using the net worth method. The Court rejected this explanation but
also considered the Minister’s theory as to the source of the unreported
income, namely an underestimation of the income generated by Mr. Dowling’s
golf pro shop. The Court conducted this analysis to determine whether the
Minister had proven that Mr. Dowling had knowingly misrepresented the
facts in his tax return. The Court then scrutinized the evidence with great
care and concluded that Mr. Dowling’s golf pro shop had a profit margin of
60%, not 15% as he claimed. From this, the Court concluded as follows at
paragraph 95:
95. Since the
respondent (the Crown) showed that the appellant misrepresented his income from
his business, the next step was to show that this misrepresentation was due to
negligence, carelessness, or wilful default. A number of cases have held that a
failure to keep adequate business records will constitute negligence. In the
present case, the appellant failed to keep the cash register tapes as
supporting documentation of his sales. As well, the appellant combined his
personal finances with those of his business in one bank account. These actions
amounted to negligence on the part of the appellant . . . .
[14]
Upon
reading the reasons of the Court, it becomes clear that the Court had
considered the question of the source of the income in order to decide if the
taxpayer had been negligent in respect of this source, or if had acted
knowingly or under circumstances amounting to gross negligence. The question of
the income’s source was raised in the context of evidence of misconduct on the
part of the taxpayer.
[15]
The same
problem arose in Corriveau v. Canada, 97-767 (IT)I, [1998] T.C.J. No.
1112. The net worth method did not reveal a significant discrepancy between the
income reported in the taxpayer’s tax return and the additions to his assets during
the period in question. The Tax Court of Canada was not satisfied with the evidence
adduced by the Minister regarding the source of this income, in that the Court still
had doubts as to whether the taxpayer’s conduct amounted to negligence,
carelessness or wilful omission:
31. If I
cannot be specific as to Mr. Corriveau’s gross negligence, I cannot find
that the conditions for the application of section 163 of the Act have been
met.
[Corriveau,
at paragraph 31.]
[16]
Again, the
question of the source of the unreported income was raised wholly in the
context of evidence of the taxpayer’s misconduct in filing his tax return.
[17]
The Court
conducted the same analysis in Léger v. Canada, 96-4799 (IT)G, [2000]
T.C.J. No. 911, at paragraphs 48 to 51.
[18]
In my
view, this jurisprudence does not establish a rule to the effect that the
Minister may not use the net worth method to add unreported income to a
taxpayer’s income unless the Minister can establish the source of the
unreported income. Our tax collection system is based on the taxpayer’s
self-reporting of the income he or she has earned during a taxation year. Should
the Minister doubt, for whatever reason, the accuracy of the taxpayer’s return,
the Minister may conduct an investigation in such manner as deemed necessary. The
Minister may then make a reassessment. If the taxpayer appeals the reassessment,
the Minister does not have to prove the facts giving rise to the reassessment. In
the reply to the notice of appeal, the Minister need only set out the
presumptions of fact used in the reassessment. The onus is on the taxpayer, who
knows everything there is to know about his or her own affairs, to “demolish”
the Minister’s assumptions; otherwise, they are presumed to be true.
[19]
The
Supreme Court has endorsed this approach on a number of occasions, including in
Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, to name just one
example. In that case, the Court stated the following at paragraphs 92-93:
92 . . . The Minister, in making assessments, proceeds
on assumptions (Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098 (Ex.
Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the
Minister’s assumptions in the assessment (Johnston v. Minister of National
Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C. 5359
(F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact
assumptions made by the Minister but no more: First Fund Genesis Corp. v.
The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93 This initial onus of “demolishing” the Minister’s
exact assumptions is met where the Appellant makes out at least a prima facie
case: Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R.,
82 D.T.C. 1679 (T.R.B.) . . . . The law is settled that unchallenged and
uncontradicted evidence “demolishes” the Minster’s assumptions: see for example
MacIsaac v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p.
6381; Zink v. M.N.R., 87 D.T.C. 652 (T.C.C.) . . . .
[20]
Applying the net worth method changes nothing in this method
of proof. Where the Minister presumes that the income detected using the net
worth method is taxable income, the onus is on the taxpayer to demolish this
presumption. If the taxpayer presents credible evidence that the amount in
question is not income, the Minister must then go beyond these assumptions of
fact and file evidence proving the existence of this income.
[21]
In the case at bar, the assumptions of fact on which the
Minister relied included the following:
[translation]
22.
. . .
(l)
The appellant did not report all of his income in his tax returns for the years
1997, 1998, 1999 and 2000;
(m) After
conducting an audit using the net worth method, the Minister found that the
appellant had underestimated his taxable income, in the following
amounts . . .
1997 $145,667
1998 $231,570
1999 $156,333
2000 $26,103
[Emphasis
added]
[22]
The amount
and the nature of the unreported income having been alleged by the Minister in
his assumptions of fact, the onus was on the taxpayer to prove to the judge of
the Tax Court of Canada that the amounts detected using the net worth method
were not taxable income.
[23]
In the
case at bar, Mr. Lacroix did not deny that he had access to a source of
funds in addition to his reported income; however, he argued that these funds
were not income because they were merely loans that had been extended to him by
his friend, Mr. Pronovost. The judge of the Tax Court of Canada rejected
this explanation, which means that the Minister’s assumptions of fact,
including the one regarding the taxable nature of the income earned by Mr. Lacroix,
are presumed to be true. The Court could therefore conclude that Mr. Lacroix
had underestimated his taxable income in the amounts set out in the reply to
the notice of appeal for each of the taxation years in question.
[24]
This
reasoning in no way places an unfair burden on the taxpayer. The taxpayer is
aware of the facts and has the means to prove them. It would be most
unrealistic to have the Minister bear the onus of uncovering a source of income
whose existence can be detected only indirectly, that is, using the net worth
method.
2. Did
the Minister discharge the burden of proof on him under subparagraph 152(4)(a)(i)
and subsection 163(2) before, first, making a reassessment beyond the statutory
period and, second, assessing a penalty against the taxpayer?
[25]
The
provisions in question read as follows:
|
152.(4) The Minister
may at any time make an assessment, reassessment or additional assessment of
tax for a taxation year, interest or penalties, if any, payable under this
Part by a taxpayer or notify in writing any person by whom a return of income
for a taxation year has been filed that no tax is payable for the year,
except that an assessment, reassessment or additional assessment may be made
after the taxpayer’s normal reassessment period in respect of the year only
if
(a) the
taxpayer or person filing the return
(i) has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing the return or in supplying any
information under this Act, or
…
163.(2) Every person
who, knowingly, or under circumstances amounting to gross negligence, has
made or has participated in, assented to or acquiesced in the making of, a
false statement or omission in a return, form, certificate, statement or
answer (in this section referred to as a “return”) filed or made in respect
of a taxation year for the purposes of this Act, is liable to a penalty of
the greater of $100 and 50% of the total of…
…
|
152.(4) Le ministre
peut établir une cotisation, une nouvelle cotisation ou une cotisation
supplémentaire concernant l’impôt pour une année d’imposition, ainsi que les
intérêts ou les pénalités, qui sont payables par un contribuable en vertu de
la présente partie ou donner avis par écrit qu’aucun impôt n’est payable pour
l’année à toute personne qui a produit une déclaration de revenu pour une
année d’imposition. Pareille cotisation ne peut être établie après l’expiration
de la période normale de nouvelle cotisation applicable au contribuable pour
l’année que dans les cas suivants:
a) le
contribuable ou la personne produisant la déclaration:
(i) soit a fait une
présentation erronée des faits, par négligence, inattention ou omission
volontaire, ou a commis quelque fraude en produisant la déclaration ou en
fournissant quelque renseignement sous le régime de la présente loi,
[…]
163.(2) Toute personne
qui, sciemment ou dans des circonstances équivalant à faute lourde, fait un
faux énoncé ou une omission dans une déclaration, un formulaire, un
certificat, un état ou une réponse (appelé «déclaration» au présent article)
rempli, produit ou présenté, selon le cas, pour une année d’imposition pour l’application
de la présente loi, ou y participe, y consent ou y acquiesce est passible d’une
pénalité égale, sans être inférieure à 100 $, à 50 % du total des montants
suivants:…
[…]
|
[26]
Although
the Minister has the benefit of the assumptions of fact underlying the
reassessment, he does not enjoy any similar advantage with regard to proving
the facts justifying a reassessment beyond the statutory period, or those facts
justifying the assessment of a penalty for the taxpayer’s misconduct in filing
his tax return. The Minister is undeniably required to adduce facts justifying
these exceptional measures.
[27]
In
Richard Boileau v. M.N.R., 89 D.T.C. 247, Judge Lamarre Proulx stated as
follows, at page 250:
Indeed, the
Appellant was unable to contradict the basic elements of the net worth
assessments. However, in my view, this is not sufficient for discharging the
burden of proof which lies on the Minister. To decide otherwise would be to remove
any purpose to subsection 163(3) by reverting the Minister’s burden of proof
back onto the Appellant.
[28]
In a
similar vein, in Farm Business Consultants Inc. v. Her Majesty the Queen,
[1994] 2 C.T.C. 2450, 95 D.T.C. 200, Judge Bowman wrote the following
at paragraph 27:
27 A court
must be extremely cautious in sanctioning the imposition of penalties under
subsection 163(2). Conduct that warrants reopening a statute-barred year does
not automatically justify a penalty and the routine imposition of penalties by
the Minister is to be discouraged . . . . Moreover, where a penalty is imposed
under subsection 163(2) although a civil standard of proof is required, if a
taxpayer’s conduct is consistent with two viable and reasonable hypotheses, one
justifying the penalty and one not, the benefit of the doubt must be given to
the taxpayer and the penalty must be deleted . . . .
[29]
This last
passage highlights the dialectic specific to certain reassessments made using
the net worth method. In the case at bar, the Minister found undeclared income
and asked the taxpayer to justify it. The taxpayer provided an explanation that
neither the Minister nor the Tax Court of Canada found to be credible. Accordingly,
there is no viable and reasonable hypothesis that could lead the decision-maker
to give the taxpayer the benefit of the doubt. The only hypothesis offered was
deemed not to be credible.
[30]
The facts
in evidence in this case are such that the taxpayer’s tax return made a
misrepresentation of facts, and the only explanation offered by the taxpayer
was found not to be credible. Clearly, there must be some other explanation for
this income. It must therefore be concluded that the taxpayer had an unreported
source of income, was aware of this source and refused to disclose it, since
the explanations he gave were found not to be credible. In my view, given such
circumstances, one must come to the inevitable conclusion that the false tax
return was filed knowingly, or under circumstances amounting to gross
negligence. This justifies not only a penalty, but also a reassessment beyond
the statutory period.
[31]
Paragraph
20 of Justice Bédard’s reasons for decision, cited above, sets out precisely
this situation, which amply justifies his conclusions with regard to the
penalties and the reassessment beyond the statutory period.
[32]
What,
then, of the burden of proof on the Minister? How does he discharge this
burden? There may be circumstances where the Minister would be able to show
direct evidence of the taxpayer’s state of mind at the time the tax return was
filed. However, in the vast majority of cases, the Minister will be limited to
undermining the taxpayer’s credibility by either adducing evidence or
cross-examining the taxpayer. Insofar as the Tax Court of Canada is satisfied
that the taxpayer earned unreported income and did not provide a credible
explanation for the discrepancy between his or her reported income and his or
her net worth, the Minister has discharged the burden of proof on him within
the meaning of subparagraph 152(4)(a)(i) and subsection 162(3).
[33]
As Justice Létourneau so aptly put it in Molenaar
v. Canada, 2004 FCA 349, 2004 D.T.C. 6688, at paragraph 4:
4. Once the
Ministère establishes on the basis of reliable information that there is a
discrepancy, and a substantial one in the case at bar, between a taxpayer’s
assets and his expenses, and that discrepancy continues to be unexplained and
inexplicable, the Ministère has discharged its burden of proof. It is then for
the taxpayer to identify the source of his income and show that it is not
taxable.
[34]
For these
reasons, I would dismiss the appeal with costs.
“J.D. Denis Pelletier”
“I
concur.
M.
Nadon J.A.”
“I
concur.
Johanne
Trudel J.A.”
Certified
true translation
Michael
Palles
Email this Content