Citation: 2012 TCC 136
Date: 20120517
Docket: 2009-2561(GST)G
BETWEEN:
GASTON DIONNE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
On May 10, 2007, the appellant was assessed by the Minister
of National Revenue (the Minister), under the Excise Tax Act (ETA), an
amount of $47,288.43 representing
unremitted goods and services tax (GST) for the period from January 1, 2001, to
September 30, 2005. The appellant duly objected to the assessment and, on July 10,
2009, the Minister confirmed the assessment but adjusted the amount thereof for
part of the period in issue, namely, the period from January 1, 2003, to
December 31, 2004. The adjusted amount was $47,867.07 on July 10, 2009.
[2]
At the objection stage,
many transactions were examined and placed under various headings, but the
transactions contested by the appellant were the ones under the headings [Translation] “business income” and [Translation] “other income” by the
auditor. Ultimately, it is only the latter heading that is at issue in this
case.
[3]
The [Translation] “other income” totals
$192,242 and it represents a series of bank deposits the appellant was unable
to explain to the auditor’s satisfaction and that she considered as being in
respect of taxable supplies. The amount of GST on the [Translation] “other income” is, therefore, $13,456.96.
[4]
During the period in issue,
the appellant ran a real estate business, which operated under the name Immobilier
de l'Estuaire Inc. (hereinafter the company). He was the shareholder and acted
as a real estate agent. He also conducted real estate transactions, namely, the
purchase and sale of properties, on his own behalf. Over the course of the
years from 1999 to 2004, the appellant personally acquired 13 properties and
sold 11. For some of those purchases, the appellant carried out renovations and
all the invoices pertaining to each of the properties were kept in a folder.
[5]
In 1999, the appellant was
seriously injured in a car accident. He suffers, as a result of that accident, from a permanent partial disability for which he receives monthly benefits from the Société
d'assurance automobile du Québec (SAAQ) and for which he also received lump
sums. Among the effects of the accident is craniocerebral trauma causing restrictions
that have serious effects on the appellant's day-to-day life in that he has
difficulty managing and organizing his affairs. He succeeded very well,
however, in giving coherent testimony and answering questions clearly.
[6]
Johanny Tremblay is a tax
audit technician with the Ministère du Revenu du Québec. She began her audit in
November 2005 and found that the appellant kept no accounting records. She
therefore chose to proceed by means of an alternative audit method, namely, the
deposit method. Accordingly, she made a list of all deposits for the purpose of
comparing them with the income reported. The appellant’s sources of income, from
what she was able to tell, were rent, his SAAQ benefits, the sale of properties
and, finally, deposits that remained unexplained.
[7]
She looked at four bank
accounts of the appellant’s, focussing on a period of three years. In 2002, the
appellant made in the four accounts deposits totalling $462,114.14. For 2003,
the total is $248,522.22 and, for 2004, it is $581,966.95. Deducted from those
amounts were non-business-related deposits such as loans, deposits from his line
of credit, certain deposits from other accounts that were traceable, traceable bank
transfers, and SAAQ benefits. She then subtracted the business income reported,
that is, rental income and other income, to finally arrive at the figures found
under the heading [Translation] “other income” and totalling $88,956.24, $62,820.05 and $40,465.83
for 2002, 2003 and 2004 respectively. The total of those three figures comes to
the $192,242.62 that remained unexplained. At the objection stage, the auditor learned
that the appellant also held accounts with the National Bank and the Business Development Bank of Canada. She did not, however, verify the transactions.
Ms. Tremblay acknowledged that it is possible that among the unexplained
deposits there are transactions that are not of a commercial nature and which
are, therefore, non-taxable. She was unable, however, to put forward any hypotheses
in that regard.
[8]
Ms. Tremblay also took
into consideration, in her alternative method, certain loans from members of
the appellant’s family and, when supporting documentation was submitted to her,
she granted the amount and reduced accordingly the amount of the unexplained deposits.
[9]
Nicole Ruest, who is an
auditor for Revenu Québec, reviewed the appellant’s claim with respect to inputs
and everything related to the real
estate transactions. As for
the issue of the unexplained deposits under the heading [Translation]
“other income,” she did not receive
from the appellant or his accountants any explanation that would have allowed her
to subtract from those deposits any amount that would not be taxable. She
therefore taxed the full amount.
[10]
The appellant explained
the financial difficulties he has endured since his accident and particularly during
the period at issue. He reviewed his real property acquisitions, the renovations
carried out and the resales. Some of those transactions did not yield any profit,
he said. He also explained that only one of the four bank accounts was personal.
The three other accounts existed because he had taken out loans from the
institutions concerned. He made deposits in those accounts to cover the
payments. Moreover, the majority of the deposits were made in his personal
account.
[11]
The appellant testified
that his financial difficulties led to his making many transfers from one
account to the other so as to be able to cover the cheques in circulation. He
used the Internet to make the transfers. He also turned to his two brothers and
his mother, borrowing money from them in order to cover the cheques in
circulation and avoid being overdrawn. However, he has no document to
corroborate all those transactions and is not able to identify the deposits used
for that purpose. A number of them were made at automatic teller machines
and there is no deposit
slip to identify the source of
the amounts deposited.
[12]
The appellant’s two
brothers testified that they regularly lent money to the appellant because he
was short of money all the time. They explained the difficulties the appellant experienced
with respect to the management of his affairs after his accident and particularly
when renovating his properties and when he converted one of them into a seniors’
residence. During the period in issue, the total of the amounts loaned by each
of the two brothers was close to $20,000, it was said, but only some of them could
be identified during the audit; in such instances, copies of the cheques were
put in evidence. Although the two brothers do not have supporting documentation
for the other advances, they explained that there were many advances and for
amounts varying between $1,000 and $3,000 each time. Finally, they explained
that their brother’s lifestyle is not consistent with the income Revenu Québec
attributes to him considering his financial difficulties, particularly during
the period in issue.
[13]
The appellant called as
a witness Marcel Léveillé, a chartered accountant. Mr. Léveillé was retained in
December 2006 so that he could help the appellant with his challenge. He
reviewed the deposits made at the four financial institutions where the appellant
has an account, but many supporting documents were missing. He made a compilation
of the properties purchased and sold by the appellant. The appellant’s sources
of income were the rent from residential and commercial rental properties, the
profits, if any, made from the sale of properties, and the benefits paid by the
SAAQ. He made submissions to Revenu Québec to show that it was impossible for
the appellant to have had the income that was attributed to him considering his
debts, the NSF cheques he issued and his other financial difficulties.
[14]
In January 2011, he proceeded
to determine the appellant’s net worth. I would note that Mr. Léveillé did not testify as an expert on accounting
matters. His report was, nevertheless, admitted into evidence. Mr. Léveillé wanted
to demonstrate, through the net worth method, that Revenu Québec’s assessments
were ill-founded since, in order for the income that Revenu Québec attributes to
the appellant to have been generated, the appellant’s net worth would have had
to increase by $96,000 in 2002, $164,000 in 2003 and $99,000 in 2004, which is
not the case.
[15]
In order to determine the
appellant’s net worth and prepare a balance sheet for each year, Mr. Léveillé
took the amount of the cash on hand and the balance owing on the loans according
to the bank statements. For the properties, he relied on the agreements of
purchase, adding expenditures for renovations and expansions. The amounts payable
include those owing as a result of various legal proceedings, those payable for
renovations as well as property taxes outstanding at the end of the year. He
added personal expenses, income reported, the non-taxable amounts received from
the SAAQ as well as the additional income assessed, except for business income
and other income and the amounts disallowed by Revenu Québec. Mr. Léveillé calculated
a discrepancy of $28,846 for 2002, $7,790 for 2003 and $9,999 for 2004, which,
in his view, is a far cry from the income established by the Minister.
[16]
In his testimony, Mr. Léveillé
said that he found that the appellant transferred money from one account to the
other, but added that he could give no assurances in that regard. In cross-examination,
Mr. Léveillé acknowledged that the amount he determined as personal expenses on
the personal balance sheet is purely arbitrary. He did not question the appellant
about his cost of living, but rather based his determination on the amount the
appellant received from the SAAQ. Nor did he calculate the appellant’s cost of
living on the basis of the withdrawals made by the appellant from his bank
accounts. He was unable to explain with certainty certain expenses related to a
residential move and simply speculated as to the amount.
[17]
In his testimony, Mr.
Léveillé acknowledged that the appellant had made many transactions at automated
teller machines, including, obviously, a number of deposits, but said that he
was unable to obtain from the financial institutions any supporting documentation
or any document identifying the source of the funds. He reiterated the appellant’s
position that the appellant took advantage of the interval between the moment a
cheque is drawn on a bank account and the moment it is deposited into another
banking institution then transferred again to another institution; thus, the
same money might appear in three or even four bank accounts, but it is always
the same money. He said that this way of doing things could explain the large
number of deposits. He said as well that the multiple loans the appellant obtained
from his two brothers and his mother can also explain certain deposits, as
those loans were not entered in the accounting records. Mr. Léveillé did not
attempt to verify this. He explained that, for there to be income, it is
necessary to identify the source, which the deposit method fails to do. Finally,
he acknowledged being unable to establish a link between the withdrawals made
by the appellant from his company and the deposits.
[18]
He also acknowledged
that the net worth method is itself flawed. In cross‑examination, he admitted
that it is possible that some of the appellant’s assets might not be identified,
just as it is possible that there might be unidentified debts, and that the result
is a distortion of the net worth. With respect to the issue of the advances made
by the company to the appellant, Mr. Léveillé stated that the information is
not derived from the company’s financial statements but emerges from documents that
the appellant’s accountant provided to him. He acknowledged that $10,000 should
have been added to the appellant’s assets, which amount represents the value of the Class A shares the appellant held in the company. Mr. Léveillé
also acknowledged not having questioned the appellant on his personal cost of
living; he stated that he proceeded on the basis of an amount based on the
income the appellant received from the SAAQ. He acknowledged that the amount indicated
is purely arbitrary. Certain expenses attributed by him to the appellant’s
properties are based on speculation also.
[19]
The issue is therefore
whether the Minister properly determined the amount of taxable supplies made by
the appellant during the period in issue.
[20]
There is no doubt that
in the case at bar the invoices and other supporting documentation, just like
the appellant’s accounting records, were lacking or deficient. Moreover, the appellant
acknowledged this shortcoming and his lack of rigour in his bookkeeping and in the
transactions on his bank accounts. He even admitted that he did not keep
separate his personal accounts and those of his company. That, therefore, opens
the door to assessments based on an alternative method, in this case, the
deposit method.
[21]
For his part, the appellant,
to counter the method used by the Minister, also availed himself of an alternative
method, namely, the net worth method. The reason the appellant used that method
is that, according to him, it is impossible that he could have earned all the
income the respondent attributes to him without there being a consequential
increase in his assets. What the two methods used in the case at bar do not indicate,
however, is in what proportion the income is taxable having regard to the
business activities described by the appellant. In both methods, unreported and
potentially taxable income is attributed to the appellant, but is all of that
income taxable?
[22]
It is recognized as a
matter of law that the alternative method is unsatisfactory and imprecise and that it is an instrument to be used as a last resort (see Khullar Au Gourmet International
Ltd. v. Canada, [2003] T.C.J. No. 348 (QL), [2003] G.S.T.C. 100. It is also
recognized that objective standards which are either official or generally recognized
by the industry must be used, failing which evidence of their reliability must
be adduced at trial. I reproduce in that regard the following passage from the judgment
of Dussault J. of this Court in Brasserie Futuriste de Laval Inc. v. R.,
[2008] G.S.T.C. 36, paragraph 158 (affirmed by the Federal Court of Appeal,
2007 FCA 393):
. . . If the tax authorities believe that the
only way to determine the sales of a taxpayer whose accounting is deficient and
who does not have the appropriate documents is to mark up its sales by a
certain percentage, they must still show, by means of evidence regarding
industry standards or otherwise, and, if not by an expert, then with
statistics, that the markup being applied is a recognized, reasonable and
appropriate standard for the taxpayer's business. I cannot accept the
submission by counsel for the Respondent that the presumption of an assessment's
validity automatically carries with it a presumption that all the assumptions
on which the Minister relied to make the assessment are valid and that no
evidence of any kind need ever be offered. The 200% markup that Ms. Morand
used may well constitute a recognized, reliable and reasonably applicable
standard in this case, though I doubt it under the circumstances. It is also
possible that the appropriate markup was 175%, 150% or even less. In short,
when a taxpayer can raise a serious doubt, it must be shown that the markup
used is not a purely subjective standard, but, rather, a standard that is
objective, reliable and acceptable under the circumstances. One cannot hide
behind the presumption of an assessment's validity in order to avoid having to
offer such evidence. To claim otherwise is to open the door to arbitrariness by
allowing the tax authorities to propound any theory with the assurance that it
would be deemed valid. Just because a taxpayer has failed to meet its
obligations, has deficient accounting, does not have the appropriate documents,
or has destroyed those documents, does not mean that all assumptions are
warranted and that those assumptions will be deemed valid under all
circumstances. In income tax cases where a taxpayer is assessed by means of the
indirect net worth method, and, for lack of anything better, his personal
expenses are determined by means of assumptions, this is done by using minimum
objective standards drawn from official statistics published by Statistics
Canada with respect to the cost of living for individuals and households in
different parts of the country, not by relying on numbers that stem from the
auditor's impressions. In my opinion, this approach is also applicable to GST
cases. . . .
[23]
That said, the burden
is still on the appellant to prove his case on a balance of probabilities, that
is to say, to produce sufficient evidence to demolish the Minister's assumptions which are the basis for the assessment. It
is a matter of presenting at least a prima facie case.
[24]
In the case at bar, I
think it is important to stress the fact that the appellant’s taxable business
activities can be summarized as consisting of the rental of commercial premises,
the purchase and sale of properties, and the renovation of properties. It is
not a retail business. It should also be noted that the heading [Translation] “other income” has nothing
to do either with the transactions relating to the aforementioned properties or
with commercial rental income. Involved here are unexplained deposits in the
appellant’s personal accounts, deposits whose source is unknown.
[25]
In his evidence, the appellant
told of his financial difficulties and the means he used to deal with those difficulties.
It became apparent during the audit that the appellant used his bank accounts
to take advantage of the interval between the moment a cheque is drawn on a
bank account and the moment the amount of the cheque is deposited into another
account, which meant that the same money could appear in three or four different
accounts. It was not possible, however, to identify through the audit all the instances
of this because the amounts did not match. The appellant testified that he did it
over the Internet and that this was a common practice for him. It is therefore
impossible in this case to specify any amount of money that was used in that way.
[26]
The appellant also
testified that on several occasions he had had to borrow money from his two
brothers and his mother. His two brothers testified with regard to that, and while
they did not have any supporting documentation to confirm the advances they
made to the appellant during the period in issue, their testimony was credible.
I therefore find as a fact that they both advanced to the appellant amounts
between $15,000 and $20,000 during that period, that is, amounts exceeding the
amount of the advances that were traced during the audit.
[27]
There is no doubt that
the net worth established by Mr. Léveillé contains flaws that skew the results.
I believe, however, that in spite of those flaws, it is difficult, considering
all of the evidence, to conclude that the appellant was able to earn during the
period in issue all the income the Minister would like to attribute to him. I
must, therefore, give some weight to the balance sheet prepared by Mr. Léveillé
and I conclude that it cannot all be income that is subject to income tax or to
the GST.
[28]
If I take into consideration
the loans obtained from his brothers, the overlap of the deposits in several
accounts, the net worth established and the appellant’s testimony, it is possible
to rather substantially reduce the amount indicated under the heading [Translation]
“other income,” except that
the reduction would be purely arbitrary.
[29]
The remaining balance
under that heading constitutes income that is subject to income tax, but in the
present circumstances is it subject to the GST? The tax audit technician who
compiled the deposits acknowledged, in her testimony, that she did not know
whether the source of all the deposits was of a commercial nature and that it
was possible that some were not subject to the GST. The difficulty lies in the
fact that the appellant’s business activities generate rental income and income
from the purchase and the sale of properties that were taxed under headings
other than the heading [Translation] “other income.” The Minister simply chose to tax all the
unexplained deposits without excluding whatever may not have been taxable and, in
that respect, he perhaps had no more choice than I have, at least with respect
to the balance that remains unexplained.
[30]
In light of all these
facts, I conclude that it is probable that the amount to be attributed under
the heading [Translation] “other
income” is not $192,000. I am therefore prepared to arbitrarily reduce the amount
and I set it at $100,000.
[31]
Given the nature of the
appellant’s business activities, but taking into consideration the fact that
the Excise Tax Act taxes more business activities than it does not tax, I
find that 80% of the income I have determined is taxable under the ETA.
[32]
The appeal is allowed
in part and the assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment in accordance with these Reasons for
Judgment. There is no award of costs.
Signed this
17th day of May 2012.
“François Angers”
Translation certified true
on this 28th day
of February 2013.
Erich Klein,
Revisor
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