[OFFICIAL ENGLISH TRANSLATION]
Date: 20020621
Docket: 2001-2004(IT)I
BETWEEN:
WARREN THIBAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
P. R. Dussault, J.T.C.C.
[1] These are appeals from assessments
made under the Income Tax Act (the "Act")
for 1997, 1998 and 1999.
[2] By those assessments, the Minister
of National Revenue (the "Minister") added to the
appellant's income the sums of $7,431, $31,758 and $6,644 for
1997, 1998 and 1999 respectively. Penalties under
subsection 163(2) of the Act were also assessed on
the basis of unreported income of $7,431 for 1997 and of $27,986
for 1998.
[3] In making those assessments, the
Minister assumed the facts stated in subparagraphs 6(a) to
(r) of the Reply to the Notice of Appeal (the "Reply").
Those subparagraphs read as follows:
[TRANSLATION]
Business Audit
(a) the appellant
has operated an automotive repair shop since the early 1990s and
also sells used cars;
(b) the appellant
made his repairs during the years in issue from his garage
located near his residence;
(c) the appellant
mainly repairs Mercedes automobiles;
(d) most of the
appellant's customers pay for his repairs in cash, and he
moreover pays cash for most of his purchases from suppliers;
(e) the appellant
does not always issue invoices for inexpensive repairs;
(f) for the
years in issue, the appellant reported net business income of
$9,948, $10,280 and $8,408 respectively;
(g) during the
taxation years in issue, the appellant owned no set of books or
records of account for his business;
(h) in view of the
poor internal control of the business, the Minister audited the
appellant's income using the net worth method (see
Schedules A to C and E to O);[1]
(i) most
personal expenses were estimated by analyzing bank withdrawals
and by adding the invoices of undeposited sales:
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1997
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1998
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1999
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analysis of withdrawals
undeposited sales
various headings
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$ 5,398
10,139
2,300
$17,827
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$ 7,271
13,934
8,432
$29,637
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$ 6,200
5,539
$11,739;
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(j) analysis
of the annual change in net worth yielded the following
results:
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1997
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1998
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1999
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net sales - vehicles disallowed expenses
taxable capital gain
unreported income - net worth method
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$ 1,033
10,557
$11,590
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$18,873
4,367
8,606
$31,846
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$15,000
1,200
4,021
3,364
$23,585;
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(k) during the
audit, vehicle sales for which the appellant had not considered
any tax implications were discovered and considered as part of
the commercial activities:
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1998
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1999
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proceeds of sales
vehicle purchases
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$58,588
38,715
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$15,000
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net unreported sales of used vehicles
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$19,873
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$15,000;
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(l) all parts
expenses were disallowed for the following reasons:
(i) the cost
of new parts necessary for repairs were charged to the
customer;
(ii) used parts came
from old cars purchased in 1992 and 1993;
(iii) the calculation of
the claim was the result of a simple estimate wholly unrelated to
actual expenditures;
Objection Stage
Adjustments - Revision of Additional Income
(Worksheet 1)
(m) the Minister was
convinced that the table of personal expenses should be revised
downward as follows:
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1997
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1998
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1999
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previous estimate
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$17,827
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$29,637
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$11,739
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less: undeposited invoices
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10,139
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13,934
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5,539
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7,688
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15,703
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6,200
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plus: personal expenses paid in cash
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5,980
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5,134
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5,134
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revised estimate
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$13,668
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$20,837
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$11,334;
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(n) in computing the
change in net worth, the Minister excluded an amount of $5,287
received in 1999 as insurance proceeds relating to a tool
theft;
(o) the Minister
considered as a capital gain the profit realized on the sale of
the "1983 Mercedes" in 1998 and the GMC truck in 1999;
the non-taxable portion was thus excluded from the calculation of
the change in net worth:
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1998
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1999
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non-taxable portion
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$1,288
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$1,250;
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(p) the Minister
added to the appellant's assets for the 1998 taxation year
the GMC truck at a cost of $10,000; that same asset, which was
sold in 1999, was removed from the balance sheet;
(q) following the
various adjustments made by the Minister, only the revised
amounts of $7,431 and of $27,986 were subjected to the penalty
under subsection 163(2) of the "Act"
for the 1997 and 1998 taxation years respectively;
(r) in failing to
report all his income for the 1997 and 1998 taxation years, the
appellant knowingly or under circumstances amounting to gross
negligence, made or participated in, assented to or acquiesced in
the making of a false statement or omission in the tax returns
filed for the 1997 and 1998 taxation years, as a result of which
the tax that he would have been required to pay according to the
information provided in the tax returns filed for those years was
less than the amount of tax payable for those years.
[4] Counsel for the respondent
admitted that the amount used to compute the penalty under
section 163(2) of the Act should be $27,896, not
$27,986, as stated in subparagraph 6(q) for 1998, and that
the penalty should be adjusted accordingly.
[5] The appellant and his companion,
Edith Campagna, testified. Michelle Laliberté,
auditor, and Martin Nadeau, objections officer, testified
for the respondent.
[6] In his testimony, the appellant
disputed both the audit conducted by Ms. Laliberté
and the assessment based on the net worth method and the results
obtained. He also challenged the process followed in response to
his objection and to the way in which Mr. Nadeau had handled
his case.
[7] The appellant complained that
authorities had refused to transfer his file from the Rouyn
office to the Laval office, when he himself had moved to
St-Sauveur in December 1999. Asserting that he had provided
all the documents and information required, the appellant claimed
that the draft assessment that Ms. Laliberté had sent
him on July 28, 2000, was based on a complex document of
which he understood nothing. In his view, despite repeated
requests, Ms. Laliberté had been unable to provide
him with satisfactory explanations of certain points,
particularly the fact that she had added what was described as
"undeposited sales" to the initial net worth
calculation and that she had treated certain transactions
involving automobiles and a motorcycle as representing personal
expenses. The appellant said that he had taken additional steps
to have the file transferred to the Laval office but without
success. The assessment, in accordance with the draft presented
to the appellant, was made on September 12, 2000.
[8] The appellant said that he had
tried to obtain additional explanations from persons met at the
Laval office who appeared to be "annoyed" by the file.
Lastly, he was simply advised to see a tax expert.
[9] At the objection stage, the
appellant particularly criticized Martin Nadeau for
proposing to him at the outset that he set aside the statement of
net worth prepared by the auditor and reassess him on the basis
of specific transactions. Mr. Nadeau purportedly refused to
consider the statement of net worth that he himself had prepared.
According to the appellant, Mr. Nadeau also refused to allow
him to submit new documents from third parties or to meet those
persons, even though, the appellant said, they could have
attested to certain things.
[10] The appellant said that Mr. Nadeau
had also refused to give him the auditor's report
(Form T-20), which the appellant had been unable to
obtain under the Access to Information Act.
Mr. Nadeau purportedly told him that the report had been
lost. The appellant said that he did not receive the report until
July 12, 2001. He further asserted that he had noted certain
signs of disagreement between the officials over the way in which
the statement of net worth had initially been prepared (see
Exhibit A-1).
[11] In response to the appellant's
objection, reassessments were finally made on May 9, 2001,
including the adjustments stated in subparagraphs (m) to (q)
of the Reply.
[12] At the hearing, the appellant disputed
the assessments made in response to his objection, claiming that
the statement of net worth prepared by the auditor,
Ms. Laliberté, was incorrect as a whole, and he filed
his own statement of net worth (Exhibit A-8).
[13] The appellant more particularly
challenged the following points:
1. The auditor's
addition of amounts identified as "undeposited sales"
to personal expenses;
2. The treatment given to
the proceeds of the sale of a 1987 Suzuki, a 1980 Mercedes and a
1982 Mercedes, which were added to personal expenses instead of
being included in assets;
3. The selling price set
for a 1990 Toyota, a 1983 Mercedes and a 1992 GMC truck;
4. The treatment given to
insurance proceeds received following a tool theft in 1998;
5. The addition of losses
on personal-use property to the change in net worth;
6. The addition of
business income, not a capital gain, from the sale of the 1983
Mercedes in 1998 and of the 1992 GMC truck in 1999;
7. The refusal to accept
additional business expenses relating to parts from two Mercedes
vehicles acquired in 1992 and 1993;
8. The fact that a number
of assets were not indicated under the heading "Fixed
Assets" in the balance sheet. The appellant added those
assets in his own statement of net worth and said that he had
disposed of them in 1998 and 1999;
9. The fact that he had
received the cash surrender value of approximately $4,600 when he
cancelled a life insurance policy with Clarica in 1998;
10. The fact that he had not taken
into account the repayment in 1998 of a $5,000 loan made to a
friend in 1988;
11. The fact that the estimate of
personal expenses was much too high;
12. The fact that the sale in 1998 of
a 1980 Mercedes belonging to his daughter had been included;
13. The failure to consider that the
sale proceeds of a 1988 Oldsmobile given to his son in July 1998
and resold the next day were owed to his son;
14. The penalties assessed for 1997
and 1998.
[14] In the years in issue, the appellant
operated an automotive repair business, working mainly with
Mercedes automobiles at his private garage in Rouyn, Quebec. The
cost of repairs was billed to customers at a rate of $30 an hour.
The cost of parts ordered was charged directly to customers. The
cost of certain parts from old cars of the same make acquired by
the appellant was billed to customers at half the price of new
parts. On this point, the appellant moreover claimed additional
business expenses, which were disallowed. I will address this
point later. In 80 percent of the cases, customers paid the
invoices in cash.
[15] The appellant asserted that he had
reported all his income, which equalled the amounts in the
invoices issued, to which a slight increase was made, he said, to
account for minor jobs worth approximately $10 each for which no
invoices were issued. The appellant admitted, however, that all
of his jobs had been recorded in personal agendas, which had been
destroyed. The 1999 agenda, which was still in his possession at
the time of the audit and had been requested by
Ms. Laliberté, was never handed over to her and was
destroyed by the appellant. The appellant had no other records
and kept no other form of accounting during the years in
issue.
[16] At the time of the audit, the appellant
told Ms. Laliberté that he had not deposited all the
amounts billed and paid by his customers and that he had kept
some cash to pay his expenses. Ms. Laliberté compared
the amounts billed with those deposited and, giving the appellant
the benefit of the doubt, found that large sums representing
amounts billed to customers had not been deposited. Throughout
the exercise, she assumed that the appellant could not reasonably
have deposited amounts billed to his customers before the date of
the invoice or even two months thereafter. She concluded
that the appellant had retained those amounts to pay personal
expenses in cash, and she therefore added them to the personal
expenses determined on the basis of the bank statements.
[17] In his testimony, the appellant
challenged the way in which the auditor had proceeded, asserting
that the amount of a deposit made on a Friday, for example, did
not necessarily correspond to the total of one or more invoices
since it was possible for him to receive cash from a number of
customers in a given week and deposit only a portion of it. Even
if this explanation were accepted, the exercise
Ms. Laliberté had engaged in was not as simplistic as
the appellant in fact wanted to suggest in his testimony.
[18] In any event, point 1 raised by
the appellant in his objection was resolved in his favour by
Mr. Nadeau, who reassessed solely on the basis of the change
in net worth, to which he had added the appellant's personal
expenses paid in cash, based on information provided by the
appellant at the time of the audit. The total of the amounts that
were added to undeposited sales was therefore excluded by
Mr. Nadeau on the ground that the amounts in question could
just as easily have been used to purchase goods as to pay
personal expenses. As a result, point 1 is no longer an
issue.
[19] At the time of the audit,
Ms. Laliberté observed that the appellant had
conducted many transactions involving motorcycles, automobiles,
mainly Mercedes vehicles, and also an airplane. The appellant
never included those numerous transactions in his tax returns. He
said that he had considered them as strictly personal and
unrelated to his business. However, he also failed to report the
capital gains resulting from those transactions. In a few
transactions, the appellant had merely acted as an intermediary.
Some had involved cash amounts and no invoices had been issued.
However, the auditor traced a number of large deposits. (See the
Reply to the Notice of Appeal, Schedule 3.)
[20] In certain transactions that were
noted, no deposit could be traced, and the sale proceeds were
added to personal expenses on the basis that they had been used
for that purpose. In his testimony, the appellant stated that he
had definitely deposited at least a portion of the amounts
received. That question concerns point 2. Contrary to the
appellant's claim, the 1987 Suzuki, sold in 1997 for $1,300,
was in fact recorded at a cost of $1,300 in fixed assets for
1996. The same was true of the 1982 Mercedes sold in 1997 for
$1,000, which was entered in fixed assets for 1996 at a cost of
$1,000. Here I find that the total amount of $2,300 should not be
added to the change for 1997 since, as is the case of the
"undeposited sales" identified in relation to the
repairs billed, it is plausible that the proceeds of the sale of
those assets might have been used to acquire other fixed assets.
In my view, they should be treated in the same way as
Mr. Nadeau treated the "undeposited sales". That
question was addressed in point 1 above.
[21] As to the 1980 Mercedes, it is not
indicated in the appellant's fixed assets. That automobile
was purchased in 1997 and registered in the name of the
appellant's daughter. It is not known exactly who paid the
price at the time. The appellant claimed that the cost was
between $3,000 and $3,500 and that he had made many repairs to
it. In 1998, the appellant registered it in his name and resold
it immediately thereafter for $4,200. The appellant claimed that
he had deposited a sum of between $3,500 and $3,800 in his
daughter's bank account but could not bring any evidence of
that. First, since the appellant resold the automobile in the
same year it was acquired, it is normal for it not to appear in
fixed assets for 1998. No cost was allowed. However, since they
were not deposited, the total proceeds of $4,200 were added to
the appellant's personal expenses. Here again, those proceeds
could as easily have been used to acquire other fixed assets as
to pay the appellant's personal expenses since they were not
deposited. In my view, for the same reasons as those given
earlier in relation to the 1987 Suzuki and the 1982 Mercedes, the
amount of $4,200 must be deducted from the change in the
appellant's net worth for 1998.
[22] Point 3 concerns the selling price
of three vehicles. The first, a 1990 Toyota truck, was
acquired by the appellant in 1996 for $10,781.68, and it was
entered at that cost in fixed assets for 1996 and 1997. In 1998,
the appellant exchanged that truck for a 1983 Mercedes, without
any additional disbursement on either side. The selling price
stated in the contract was $7,850 (Exhibit A-6). The
appellant claimed that both vehicles were worth $10,000 and that
he had had no control over the price, which the merchant had
fixed in the contract. In the absence of additional evidence, I
find I must rely on the price stated in the contract. The sale of
the 1990 Toyota truck resulted in a personal-use property loss of
$2,931.58, the treatment of which is examined in relation to
point 5.
[23] Still in 1998, the 1983 Mercedes thus
acquired was exchanged for a 1992 GMC truck. The price fixed in
the contract was $13,000 (Exhibit A-7). Initially, no
additional amount was paid on either side. The Mercedes having
been bought for $7,850, according to the contract, and resold for
$13,000, the profit of $5,150 was treated as business income. At
the objection stage, Mr. Nadeau treated the transaction as
resulting in a capital gain and reduced the change in net worth
for 1998 by the amount of the non-taxable portion of the gain
(25 percent), that is, $1,288 (Exhibit I-30). In
the absence of additional evidence, I find that the use of the
price fixed in the contract was entirely warranted.
[24] Shortly thereafter, it was realized
that the odometer of the 1992 GMC truck had been tampered with,
and the appellant, who said he had wanted to alert the police,
was given a cheque for $3,000 by the merchant. Although the
appellant considered that that amount had been given to him to
buy peace, I find the auditor was correct in setting the
acquisition cost of the truck for the appellant at $10,000. That
truck was resold in 1999 for $15,000. The auditor considered the
$5,000 profit as business income. As a result of the
appellant's objection, however, Mr. Nadeau treated the
transaction as giving rise to a capital gain and subtracted the
non-taxable portion (25 percent), that is, $1,250 from the
change in net worth for 1999.
[25] Since the 1990 Toyota had been
considered by the auditor as the appellant's personal
vehicle, and thus as personal-use property, the 1983 Mercedes and
the 1992 GMC truck, which were subsequently acquired one after
the other by exchange, were considered in the same way, and the
matter was straightened out at the objection stage.
Mr. Nadeau treated those two transactions as giving rise to
a capital gain, not business income, and the non-taxable portion
of the two gains was deducted from the change in net worth
for 1998 and 1999 (Exhibit I-30).
[26] Point 4 concerns the treatment of
the insurance proceeds of $5,287 received in 1999 in relation to
a tool theft. That question was settled by Mr. Nadeau in
response to the appellant's objection, and the amount was
deducted from the change in net worth for 1999
(Exhibit I-30).
[27] Point 5 concerns the addition of
personal-use property losses to the change in net worth. First,
there was a loss of $2,333.72 from the sale of a trailer in 1997.
The appellant himself set the cost of the trailer at $4,533.72
and the selling price was $2,200. The other loss of $2,931.58 was
incurred in 1998 on the exchange of the 1990 Toyota truck for the
1983 Mercedes. It was established on the basis of its cost and of
the selling price fixed in the contract (Exhibit A-6).
I have addressed the question of the price in relation to
point 3 above. Those losses were added for the purpose of
establishing the change in net worth for 1997 and 1998. They were
not deductible for tax purposes because the reduction of the
value of the property is supposed to represent an element of
personal consumption. They must be added to establish the change
so as not to conceal the receipt of unreported additional
income.
[28] Point 6 was discussed in relation
to point 3. In addition, the 1992 GMC truck was added to the
change in net worth for 1998 at a cost of $10,000, and the same
amount was deducted from the change in net worth for 1999. That
treatment is correct.
[29] Point 7 concerns the additional
parts expenses that were disallowed. The appellant, who in 1992
and 1993 purchased two Mercedes vehicles for parts for a
total price of $9,000 (see Exhibit A-9), claimed that
he should be allowed to deduct the cost of parts used for repairs
billed to his customers over three years. The auditor
disallowed the deduction on the ground that the total cost of the
automobiles had been claimed in the years prior to 1996. The
appellant brought no new evidence in his testimony, even though
he disputed that point. The reassessment made by Mr. Nadeau
in response to the appellant's objection was based solely on
the method of change in net worth, to which were added the
personal expenses paid in cash for each of the years 1997, 1998
and 1999 respectively, such that this element has no impact on
the assessment in issue.
[30] Point 8 concerns personal property
the appellant asserted that he owned at the start of the years in
issue and which he purportedly disposed of in 1998 and 1999.
Those assets are listed in his own statement of net worth filed
in evidence (Exhibit A-8). Apart from furniture and
the engine discussed below, the items and the amounts stated are
as follows:
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1996
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1997
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1998
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1999
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300+++ differential
Ramsey winch
Torch set
Snowmobile parts
Framed charcoal
drawing,
Charlotte
Trailer awning
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645
1,500
625
2,000
800
1,300
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645
1,500
625
2,000
800
1,300
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1500
625
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[31] In cross-examination, the appellant
admitted that the amounts stated represented the cost of that
property "from memory" or its selling price, as was the
case for the "Ramsey winch" or the torch, for example.
Except for the charcoal drawing, no invoice or other document was
filed in evidence either to establish the date on which the
property was acquired and the price paid or to establish its sale
and the price obtained. The appellant provided no other
information about the buyers and the circumstances of those
transactions. It should be noted that the existence of those
assets was not mentioned to the auditor, despite the fact that
she had asked the appellant to make a list of his assets. In his
testimony, the appellant stated that he had not understood the
importance of that request. In the case of the "framed
charcoal drawing", the appellant filed in evidence an
undated certificate, signed by a certain Francine Tardif,
who stated that she had acquired the work at a price of $800,
paid in cash (Exhibit A-11). Counsel for the
respondent objected to that evidence being admitted on the ground
that she was unable to cross-examine the author of the document.
I find the objection valid.
[32] As to the automobile engine sold to
Johnex Motosports in 1998, the appellant entered a cost of $5,850
in his own statement of net worth (Exhibit A-8). He
explained that he acquired the property personally a number of
years earlier and that he resold it because he had been offered a
good price. The auditor treated the item as part of the inventory
of the business and allowed the appellant a cost of $2,800,
which, in her view, was the amount the appellant initially said
he had paid. At the hearing, the appellant denied that he had
stated that amount. However, no additional evidence was brought
concerning the actual cost of the engine.
[33] In the statement of net worth prepared
by the auditor, the value of the furniture the appellant owned at
the start of and throughout the audit period was set at $10,000.
In his own statement of net worth (Exhibit A-8), the
appellant set the cost of his furniture at $6,000 at the start of
the period and in 1997 and 1998. In 1999, the amount shown is
$1,900. The appellant explained that, when he moved to
St-Sauveur with his companion, Ms. Campagna, he sold
furniture since she already had some. There is no evidence of
what was sold, to whom or at what price.
[34] All things considered, on this point,
the evidence adduced by the appellant is insufficient to allow me
to reduce the changes in net worth for the years in issue on the
basis of the figures simply recorded in his own statement of net
worth, since there is no evidence on which the authenticity of
the transactions and the figures put forward can be verified.
[35] Point 9 concerns the cash
surrender value of $4,600, which the appellant claims he received
from the Clarica insurance company as a result of the 1998
cancellation of a life insurance policy on his son. The bank
statements (Exhibits A-2, A-3 and A-4)
clearly show monthly payments of $14.86 for a life insurance
policy with Metlife/La Metro in 1997, in 1998 and until June
1999. In July 1999, the same payment is identified under the name
of Mutual Life, and from July to December 1999, under the name of
Clarica. The appellant filed no other document on that point. I
find that the evidence does not establish that a cash surrender
value of $4,600 was received in 1998.
[36] Point 10 concerns the repayment
the appellant purportedly received in the amount of $5,000, which
he said he lent to a friend named Carole Cossette in 1988.
The appellant filed two documents in evidence (jointly as
Exhibit A-10). The first, dated August 11, 2000,
is only initialled and confirms that an amount of $5,000 was
remitted to the appellant in 1998 as final payment of a debt
contracted by a third person, the details of which are
confidential. The second document, dated February 4, 2001,
was signed by "C. Cossette". It states that an
amount of $5,000 was borrowed from the appellant in 1989, without
interest, and that it was entirely repaid by
Réjean Blais in 1998.[2] Counsel for the respondent objected to this
evidence being admitted on the ground that those persons had not
been called as witnesses and that she therefore could not
cross-examine them. I find the objection valid, particularly
since the appellant admitted in his testimony that Mr. Blais
and his spouse, who owned a Mercedes, had exchanged it for a more
recent one in 1998. In conclusion, in light of the doubt raised
and the absence of acceptable evidence, I find that there is no
reason to make an adjustment on this point.
[37] Point 11 concerns the estimate of
personal expenses. At the objection stage, Mr. Nadeau
deducted the amounts the auditor had added to personal expenses
as "undeposited sales", and he simply added the
personal expenses paid in cash, that is to say, those that had
not been paid out of the appellant's bank account
(Exhibit I-30). To do this, Mr. Nadeau used the
estimate provided by the appellant (Exhibit I-5),
making certain adjustments in light of the information contained,
in particular, in the appellant's bank statements and tax
returns (Exhibit I-31). The appellant claimed that the
expenses paid in cash were lower than those established by
Mr. Nadeau. He contended, on the one hand, that a friend, a
certain Marcel Asselin, who had worked in three-month
periods in Indonesia, had come to live with him in a room in the
basement for approximately two months in 1998 and several
months in 1999. By way of rent, that person had purportedly paid
certain hydro and telephone bills in cash. On the other hand, the
appellant stated that his girlfriend had come to live with him in
1998 and that she too had paid certain expenses in cash. In 1999,
it was he who apparently went to live at her place and did not
pay any expenses.
[38] In her testimony, the appellant's
companion, Ms. Campagna, said that the appellant was very
thrifty and lived on little money. She also confirmed that she
had paid certain food, hydro and telephone expenses. She said
that Marcel Asselin had also paid certain bills in 1998 and
1999. However, the appellant did not explain how he had
determined his personal expenses precisely as he had done in his
own statement of net worth (Exhibit A-8), having
regard to the information previously provided to the auditor
(Exhibit I-5). The total difference between the
amounts estimated by the appellant for food and electricity and
those estimated by Mr. Nadeau was $2,100 for 1998. It should
be noted that Mr. Nadeau indicated no separate amount for
telephone expenses (see Exhibit I-31). In the absence
of details and additional evidence, I am prepared to concede
one-half of the difference to the appellant, that is, an amount
of $1,050 for 1998.
[39] For 1999, the total difference between
Mr. Nadeau's estimate and that of the appellant for food
and electricity was $1,857. Here I would have been prepared to do
the same as for 1998 had it not been for the fairly surprising
result to which the adjustments previously made by
Mr. Nadeau led. For 1999, the result of the adjustments made
by Mr. Nadeau at the objection stage was that the net change
plus personal expenses amounted to only $6,644, more than $1,000
less than the taxable capital gains (75 percent) the
appellant realized that year and did not report: $4,021 in
respect of an airplane and $3,750 in respect of the 1992 GMC
truck, for a total of $7,771. I therefore find that there is no
reason to reduce further the amount assessed.
[40] Concerning point 12, an adjustment
of $4,200 was previously made, which I discussed earlier in
point 2.
[41] Point 13 concerns a transaction
the appellant conducted in 1998 for a certain Mr. Bonapace,
who wanted to acquire a 1990 Mercedes that was in Toronto. The
appellant went to Toronto to buy the automobile, which was then
transferred to Mr. Bonapace. It appears the car was then
completely cleaned by the appellant's son. Mr. Bonapace,
who wanted to transfer his licence plates to the Mercedes,
purportedly then gave his car, a 1988 Oldsmobile, to the
appellant's son. It should be noted that the auditor,
Ms. Laliberté, noted that the appellant first told
her that the car had been given to him (Exhibit I-8,
page 7), and then he apparently told her that it had in fact
been given to his son. The appellant resold the car the next day
to his neighbour, Joelle Rivard, for $1,500. Although he
deposited the money in his own account, the appellant said he
told his son that the money was for his education. At the
hearing, the appellant maintained that version and filed in
evidence a cheque dated August 17, 2000, for $1,500 made out
to his son (Exhibit A-14). Not without some
hesitation, I decided to give the appellant the benefit of the
doubt on this point. Assuming that the $1,500 belonged to the
appellant's son and thus represented a debt, the change in
net worth for 1998 will have to be reduced by an equal
amount.
[42] Point 14 concerns the penalties
assessed for 1997 and 1998. First, it should be noted that, as a
result of the objection, Mr. Nadeau reduced the penalties
assessed by the auditor. Two transactions that had initially
been treated as resulting in business income, those involving the
1983 Mercedes in 1998 and the 1992 GMC truck in 1999, were
instead treated as resulting in taxable capital gains (see
point 3 above). Since no penalty had been assessed in
respect of the taxable capital gain resulting from the sale of an
airplane in 1999, Mr. Nadeau stated in his testimony that it
had been decided that no penalty would be assessed in relation to
the taxable capital gains realized on the sale of the 1983
Mercedes in 1998 or the 1992 GMC truck in 1999.
[43] Subject to the adjustments made to
reflect the reduction of the additional amounts included in the
appellant's income for 1997 and 1998, I find that the penalty
must be confirmed.
[44] The appellant, who operated a business
during the years in issue, had a duty to keep adequate accounting
and appropriate records as required by section 230 of the
Act, which he did not do. In addition, the agendas he
owned and in which certain income from his business was recorded
were deliberately destroyed. The agenda for 1999 was destroyed
after the auditor had requested it. Since most of the customers
of the business paid in cash and the appellant deposited only a
portion of that money in the bank, keeping and maintaining
appropriate records was all the more necessary to make it
possible to audit the results of his operations with a minimum of
thoroughness. The appellant stated that the information he had,
including that entered in his agendas, had been given to his
accountant. However, he admitted that he did not verify the
accuracy of the returns filed. An audit of the results of his
operations proving impossible, the authorities had to resort to
the net worth method, which, as we know, entails certain
difficulties.
[45] Moreover, during the years in issue,
the appellant conducted numerous transactions involving vehicles
and property of all kinds, which he never reported in his tax
returns. I know here that the auditor, Ms. Laliberté,
said that with the aid of a document obtained from the
Société d'assurance automobile du Québec
(Exhibit I-16), she had counted some
11 transactions involving purchases and sales of Mercedes
vehicles since 1994. In his testimony, the appellant stated that
the transactions he had conducted were strictly personal.
However, it is fairly difficult to accept that he could have
believed that he did not even have to report the resulting
capital gains, as he asserted.
[46] The amounts added to the
appellant's income were significant in relation to his
reported income. The cooperation, which he said he showed during
and after the audit, cannot conceal the fact that he deliberately
destroyed documents that might indeed have contained personal
information but also information concerning the operation of his
business, which, as a result, he refused to communicate to tax
authorities.
[47] As a result of the foregoing, I find
that the penalties under subsection 163(2) of the Act
must be confirmed and that they must simply be adjusted on the
basis of the additional amounts ultimately added to the
appellant's reported income for 1997 and 1998.
[48] In short, the appeal from the
assessment made for 1997 is allowed and the assessment is
referred back to the Minister for reconsideration and
reassessment on the basis that the amount of $7,431 added to the
reported income shall be reduced by $2,300 to $5,131 and the
penalty under subsection 163(2) of the Act shall be
adjusted accordingly.
[49] The appeal from the assessment made for
1998 is allowed, and the assessment is referred back to the
Minister for reconsideration and reassessment on the basis that
the amount of $31,758 added to the reported income shall be
reduced by $6,750 ($4,200 + $1,050 + $1,500) to $25,008, and the
penalty under subsection 163(2) of the Act shall be
computed on the basis of additional income of $21,146.
[50] The appeal from the assessment for the
1999 taxation year is dismissed.
Signed at Ottawa, Canada, this 21st day of June 2002.
J.T.C.C.
Translation certified true
on this 17th day of September 2003.
Sophie Debbané, Revisor
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