Date: 20020523
Docket:
2001-219-IT-I
BETWEEN:
MICHEL
BOLAY,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
Angers,
J.T.C.C.
[1]
These are appeals from assessments concerning the appellant's
1993 and 1994 taxation years.
[2]
Following a request for an audit of a corporation of which the
appellant was a shareholder in 1995, the then Revenue Canada
auditor became aware of a certain investment by the appellant in
the corporation. The auditor wished to learn more and her work
led her to audit the appellant's personal income tax returns
for the 1993, 1994 and 1995 taxation years. She noted that the
income declared by the appellant for the taxation years at issue
was much lower than the deductions he claimed, and that his
standard of living was higher than his declared income would
allow. The auditor therefore decided to determine the
appellant's income using the net worth method.
[3]
Before she proceeded with this determination, a draft assessment
was first prepared and sent to the appellant. After the appellant
had had discussions with the auditor and the respondent's
objections officer and had made representations to them, on
October 27, 2000 the Minister of National Revenue ("the
Minister") issued reassessments for the appellant's 1993
and 1994 taxation years based on the net worth method. It is
these two taxation years that are the subject of the present
appeals.
[4]
The appellant is now retired. During the taxation years at issue,
he was a businessman. Originally from Switzerland, he immigrated
to Canada in November 1984. Before leaving Switzerland he
liquidated his assets, selling in particular shares he held in a
corporation known as Augumi S.A. (hereinafter referred to as
"Augumi"). He described Augumi as a nightspot operated
by him and his wife. It was precisely the sale of the
appellant's shares in Augumi that raised questions during the
audit by the Minister's representatives.
[5]
According to Exhibit I-5, the appellant's shares in Augumi
were sold on May 30, 1984. For that transaction, the appellant
advanced the purchasers credit for the balance of the sale price,
that is, 275,000 Swiss francs. That amount was to be repaid in
regular instalments at an annual interest rate of 7 per cent. The
purchasers did not comply with the terms and conditions of
reimbursement and on June 12, 1991, with the appellant's
consent, they sold those same shares to other purchasers. At the
time of this second transfer of the shares, the parties to the
contract agreed that the amount of the above-mentioned debt
was 355,088.10 Swiss francs on February 8, 1991, and
the new purchasers assumed responsibility for its repayment. A
table appended to this contract of sale (Exhibit I-6) shows the
calculation of the interest that was added to the principal of
the initial debt to obtain the figure of 355,088.10 Swiss francs
owed to the appellant. This contract also stipulated an annual
interest rate of 7 per cent. Although the appellant
claimed that the new purchasers had difficulty repaying him as
well, he acknowledged having received from them 60,000 Swiss
francs in each of the two taxation years at issue.
[6]
The appellant testified that he never really adapted to
Canada's tax system and therefore relied on his accountants.
He stated that he never sought to defraud Revenue Canada, and
acknowledged that omissions can occur. He explained that, in
1991, the new goods and services tax and the Quebec sales tax
created difficulties as regards tourists, thus negatively
affecting the performance of his businesses. That situation,
combined with a recession during those years, explained what the
appellant referred to as a considerable decrease in the income of
his businesses. He therefore used his personal wealth to get
through that difficult period.
[7]
The figures concerning that personal wealth are set out in an
appendix to the Reply to the Notice of Appeal, and were accepted
by the appellant. This appendix shows that the appellant had,
among other things, a number of investments in various
corporations in Canada and two debts owed to him in Switzerland:
one resulting from the sale of the shares in Augumi and another
owed by a corporation known as Mibo S.A. (hereinafter
referred to as "Mibo"). Also appended to the Reply to
the Notice of Appeal is a table showing the appellant's
personal expenditures during the taxation years at issue; the
appellant acknowledged and accepted those expenditure
figures.
[8]
According to the appellant, it was precisely because of the hard
years that he declared income of only $2,495 and $50,804 in
his tax returns for 1993 and 1994 respectively. In 1994, his
income consisted of $47,342 in taxable capital gains,
$1,045 in interest income, and $2,417 in net rental income.
In 1993, his income consisted of $2,495 in net rental
income.
[9]
According to the appellant's income tax returns for those
years, he made support payments of $32,115 and
$36,086 in 1993 and 1994 respectively. It was in fact the
nature of the difference between income declared and support paid
that led Ms. Phi Anh Tran to audit the appellant's
tax returns for the taxation years at issue.
[10]
Ms. Phi Anh Tran testified that she received co-operation from
the appellant in auditing a corporation of which he was a
shareholder, but that he was less co-operative when she wanted to
audit his personal income tax returns. For 1995 taxation year the
appellant signed the necessary authorizations for the audit of
his bank records, but for 1993 and 1994 Ms. Phi Anh
Tran was obliged to require the appellant to provide documents
and information under paragraphs 231.2(1)(a) and
(b) of the Income Tax Act ("the
Act"). The notices of requirement were produced in
evidence as Exhibit I-7.
[11]
Having obtained this information, Ms. Phi Anh Tran sent the
appellant a draft assessment. She stated that the appellant did
not contest the balance sheet, but did produce a new statement of
net worth that included the Augumi debt owed to him. This was the
first reference to the existence of this debt.
Ms. Phi Anh Tran testified that she then asked the
appellant to confirm the bank transfers by producing deposit
slips or other documents establishing that money paid as a result
of this debt was transferred to his bank account in Canada; the
appellant was unable to produce any such documents. In fact,
Ms. Phi Anh Tran stated that she saw no deposits
to the appellant's personal bank account of money from an
investment in Switzerland, except with respect to the second
debt, the Mibo debt, and in that case the deposit was made in
1995.
[12]
Ms. Chantal Yelle testified for the respondent, stating that she
reassessed the appellant's assets, liabilities and net worth,
including the Augumi debt as an asset. She allowed this change
after receiving the documentary evidence establishing the
existence of this debt, that is, Exhibits I-5 and I-6. The
appellant told Ms. Yelle that, from this debt, he had received
$69,798 in each taxation year, and he asked that, in
assessing his net worth for the subsequent year, she reduce the
value of the debt by the amount thus received in each case, which
Ms. Yelle did. The appellant stated that he made the support
payments with the money received from this debt. He also
confirmed to Ms. Yelle that he accepted the calculation of his
personal expenditures for the taxation years at issue.
[13]
This exercise led Ms. Yelle to conclude that the appellant's
total personal expenditures were $109,106.94 in 1993 and
$109,015.17 in 1994. When she was informed of the Augumi
debt, she reassessed the appellant's net worth, including
that investment. The appellant had a negative net worth of
$70,031.48 at the end of 1993 and $65,776.99 at the end
of 1994. Ms. Yelle subtracted from the appellant's
personal expenditures for the years at issue the amount by which
his net worth was reduced for each of those years, thus arriving
at total income computed using the net worth method of
$39,075.46 in 1993 and $90,579.79 in 1994. However, the
actual source of this income remained unexplained since the
appellant was unable to establish that money from Switzerland was
transferred to his bank account in Canada. After the appellant
was given the appropriate deductions, his revised taxable income
increased to $6,960.46 in 1993 and $7,192.79 in 1994.
However, these increases changed nothing as regards tax payable,
except that the Minister assessed penalties in accordance with
subsection 163(2) of the Act.
Statute-barred
years
[14]
The respondent has the onus of producing evidence justifying the
reassessments for the 1993 and 1994 taxation years. The
respondent must satisfy the Court on a balance of probabilities
that the appellant made a misrepresentation attributable to
neglect, carelessness or wilful default, or committed some fraud
in filing his return or in supplying information, as stated in
subparagraph 152(4)(a)(i) of the
Act.
[15]
The burden of proof was described as follows by Strayer J. in
Venne v. Canada, [1984] F.C.J. No. 314 (Q.L.),
84 DTC 6247 (F.C.T.D.):
I am satisfied that it is sufficient for the Minister, in order
to invoke the power under sub-paragraph 152(4)(a)(i) of
the Act to show that, with respect to any one or more aspects of
his income tax return for a given year, a taxpayer has been
negligent. Such negligence is established if it is shown that the
taxpayer has not exercised reasonable care. This is surely what
the words "misrepresentation that is attributable to
neglect" must mean, particularly when combined with other
grounds such as "carelessness" or "wilful
default" which refer to a higher degree of negligence or to
intentional misconduct. Unless these words are superfluous in the
section, which I am not able to assume, the term
"neglect" involves a lesser standard of deficiency akin
to that used in other fields of law such as the law of
tort.
[16]
In the instant case, the appellant accepted as true the table
drawn up by the respondent setting out the appellant's
personal expenditures for the taxation years at issue. The
appellant explained that he used his personal wealth to offset
the insufficiency of his income to meet his financial
obligations. The appellant explained the source of the funds only
after the Minister insisted, a requirement to provide documents
and information was sent to the banks with which the appellant
did business, and a draft assessment was prepared. The appellant
then informed the Minster's representative of the Augumi
debt, and stated that he used the money from this debt to make
support payments and to offset the shortfall in his
income.
[17]
As well, in Exhibits I-4 and I-6, which contain the
appellant's personal balance sheets as at March 31, 1993 and
February 1, 1995, the Augumi debt is not included in the list of
the appellant's investments. These two balance sheets were
prepared in order to obtain bank loans and, while unaudited, they
are statements made by the appellant that do not disclose all his
assets.
[18]
Although at first glance the appellant's explanations appear
to indicate the source of the money, the fact remains that no
evidence was produced to prove to the satisfaction of the
Minister or the Court that, during the taxation years at issue,
there were indeed transfers of funds whose source was Switzerland
and the Augumi debt. The Minister's auditor stated that for
the taxation years at issue she saw no deposits to the
appellant's personal bank account of money from investments
in Switzerland, except for the Mibo debt, with respect to which
the transfer was made to the appellant's personal bank
account in 1995. Given this lack of evidence, the question of the
source of the money remains unanswered, and the difference
between the appellant's expenditures and his income remains
unexplained. There has, therefore, been misrepresentation
regarding the appellant's income. I am satisfied that the
respondent has discharged the burden of producing the necessary
evidence to justify the reassessments for the
statute-barred taxation years.
Calculation
of the variation in net worth
[19]
Was the Minister justified in adding income of $36,581 for
1993 and $39,736 for 1994? The appellant accepted the figures of
$109,106.94 for 1993 and $109,015.17 for 1994 as
representing his personal expenditures for those years. He
declared income of $2,494.60 for 1993 and
$50,844.11 for 1994. He did not contest the calculations of
net worth used to determine the variation in net worth. These
calculations reduced his net worth by $70,031.48 for 1993 and by
$65,776.99 for 1994. One can readily conclude that the appellant
used his personal wealth to cover, to the extent of the
above-mentioned amounts by which his net worth was reduced,
personal expenditures of $109,106.94 in 1993 and
$109,105.17 in 1994. However, in order to cover the balance
of his expenditures, he would have required additional income of
$39,075.46 in 1993 and $90,579.79 in 1994.
Subtracting from these amounts the income declared for each of
these taxation years, we obtain shortfalls of $36,580.86 in
1993 and $39,735.68 in 1994.
[20]
As we know, the appellant explained that in each of the taxation
years at issue he received $69,798 from a debt owed to him in
Switzerland. However, he was unable to establish the source of
this money by producing evidence of deposits or transfers to his
personal bank account. Moreover, the auditor testified that she
audited the appellant's personal bank accounts and that,
except in 1995, no money from Switzerland was deposited in them.
The source of the money remains, therefore,
unexplained.
[21]
In Hsu v. Canada, [2001] F.C.J. No. 1174, Desjardins
J.A. of the Federal Court of Appeal explained as follows the
justification for using the net worth method to compute a
taxpayer's income:
29
Net worth assessments are a method of last resort, commonly
utilized in cases where the taxpayer refuses to file a tax
return, has filed a return which is grossly inaccurate or refuses
to furnish documentation which would enable Revenue Canada to
verify the return (V. Krishna, The Fundamentals of Canadian
Income Tax Law, 5th ed. (Toronto: Carswell, 1995)
at 1089). The net worth method is premised on the assumption
that an appreciation of a taxpayer's wealth over a period of
time can be imputed as income for that period unless the taxpayer
demonstrates otherwise (Bigayan, supra, at 1619). Its purpose is
to relieve the Minister of his ordinary burden of proving a
taxable source of income. The Minister is only required to show
that the taxpayer's net worth has increased between two
points in time. In other words, a net worth assessment is not
concerned with identifying the source or nature of the
taxpayer's appreciation in wealth. Once an increase is
demonstrated, the onus lay entirely with the taxpayer to separate
his or her taxable income from gains resulting from non-taxable
sources (Gentile v. The Queen, [1988] 1 C.T.C. 253 at
256 (F.C.T.D.)).
30
By its very nature, a net worth assessment is an arbitrary and
imprecise approximation of a taxpayer's income. Any perceived
unfairness relating to this type of assessment is resolved by
recognizing that the taxpayer is in the best position to know his
or her own taxable income. Where the factual basis of the
Minister's estimation is inaccurate, it should be a simple
matter for the taxpayer to correct the Minister's error to
the satisfaction of the Court.
[22]
In the circumstances, I am satisfied that the appellant's net
worth increased in each of the taxation years at issue, and that
he has not successfully discharged his onus of justifying these
increases.
Penalties
[23]
Under subsection 163(2) of the Act, the Minister assessed
a penalty against the appellant for each of the taxation years at
issue. This subsection read as follows:
(2) False statements or omissions. Every person who,
knowingly, or under circumstances amounting to gross negligence
in the carrying out of any duty or obligation imposed by or under
this Act, 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 as required by or under this Act or a regulation,
is liable to a penalty of the greater of $100 and 50% of the
total of . . . .
[24]
Thus the burden is on the respondent to establish on a balance of
probabilities that the appellant made a false statement in his
income tax returns for the taxation years at issue, and that he
did so knowingly or under circumstances amounting to gross
negligence.
[25]
I concur with Strayer J. who, in Venne (supra),
stated concerning the concept of gross negligence:
.
. . "Gross negligence" must be taken to involve greater
neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional
acting, an indifference as to whether the law is complied with or
not.
[26]
I have already dealt with the appellant's conduct in the
context of the statute-barred years and the same findings of fact
apply in analysing the evidence regarding the penalties for the
two taxation years at issue. I also take into account the
testimony of Revenue Canada auditor Ms. Phi Anh Tran, who spoke
of the appellant's lack of co-operation in disclosing his
personal affairs, although he co-operated very well during
the audit of the corporation in which he was a shareholder.
Ms. Phi Anh Tran testified that she had obtained
authorization from the appellant to audit his bank records for
1995, but said that she was obliged to resort to notices of
requirement (Exhibit I-7) to obtain information concerning the
two taxation years at issue. The respondent's evidence also
showed that the Augumi debt bore interest at an annual rate of
7 per cent and that, according to Exhibit I-6,
the accrued interest was capitalized when the shares were
transferred on June 12, 1991.
[27]
After gathering all this information, Ms. Phi Anh Tran
prepared a draft assessment concerning the appellant; only after
sending this draft assessment to him did she learn that the
Augumi debt existed and that the appellant had used repayment
amounts received in respect of this debt to meet his needs. While
she asked the appellant to confirm his statements by producing
bank transfer documents or deposit slips, neither he nor his
representative were able to produce any.
[28]
It must be remembered that the appellant is an experienced
businessman. He has managed a number of businesses in Canada
since arriving here and is not unaware of taxpayers'
obligation to declare all their income. Why was he so reluctant
to disclose the Augumi debt?
[29]
Since the appellant accepted the calculation of his personal
expenses and was unable to prove the source of the income he
needed in order to meet them, we must conclude that he did not
declare all his income, possibly including the interest from the
Augumi debt. I am satisfied that the respondent has discharged
her burden of proof and has established on a balance of
probabilities that the appellant knowingly or under circumstances
amounting to gross negligence made a false statement in his
income tax returns for the taxation years at issue.
[30]
Lastly, the appellant contested the assessment of a penalty when
the assessments for the two taxation years at issue are
"nil". Once the conditions set out in subsection 163(2)
have been met, penalties may be imposed. On this point, I quote
from MacDonald v. Canada, [1997] T.C.J. No. 277
(Q.L.), citing Chopp et al.:
4
I would only refer to one item of case law - that of Chopp et al
v. M.N.R. (87 D.T.C. 374) at p.
375, since it has a certain over arching [sic]
relevance:
My initial
reaction at the hearing was that penalties could not be levied in
respect of taxation years where the reassessments are nil
regarding tax payable because of a misconception that penalties
under subsection 163(2) were invariably 25% of an amount
related to actual tax payable. On reflection I am satisfied that
penalties of the kind mentioned can be assessed even if no tax is
payable in a taxation year provided, of course, that the
essential requirements of subsection 163(2) are met. This rule is
understandable. For obvious reasons Parliament desires that, in
the preparation of their self-assessments under section 150 of
the Act, taxpayers shall not knowingly or in a grossly negligent
manner be involved in the making of false statements or
omissions. Conduct of this kind attracts penalties per se
notwithstanding that there is no liability for tax in a
particular taxation year because for example, losses are carried
over from another year.
[31]
For these reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 23rd day of May
2002.
"François
Angers"
J.T.C.C.
Translation certified
true on this 26th day of June 2002.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein,
Revisor
[OFFICIAL ENGLISH
TRANSLATION]
2001-219(IT)I
BETWEEN:
MICHEL BOLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on April 8, 2002, at Montreal,
Quebec, by
the Honourable Judge François
Angers
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Claude Lamoureux
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for the 1993 and 1994 taxation years are dismissed in
accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada,
this 23rd day of May 2002.
J.T.C.C.
Translation certified
true
on this 26th day of June
2002.
Erich Klein, Revisor
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