Perlmutter v. The Queen, docket 2001-253-IT-G

x

Date: 20021009

Docket: 2001-253-IT-G

BETWEEN:

DAVE PERLMUTTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Lamarre, J.T.C.C.

[1]            These are appeals from reassessments made on August 3, 2000 for the appellant's 1991, 1992, 1993 and 1994 taxation years, whereby the Minister of National Revenue ("Minister") revised the appellant's taxable income to $276,190 for 1991, $255,951 for 1992, $182,905 for 1993 and $216,355 for 1994. As a result of those reassessments, the appellant was granted a total income tax refund of $255,586, including refund interest in the amount of $62,280 (as per Exhibits A-2, Tab 1, and R-3, Schedule C, page 3). It is my understanding that the appellant seeks a larger tax refund on the basis that the reassessments under appeal do not reflect a correct application of an agreement allegedly reached between the Canada Customs and Revenue Agency ("CCRA") and himself.

[2]            I must say at the outset that this case was presented to me in a very confusing way and that the figures kept changing: different ones were used at the audit, at the appeals stage and even at trial. In the circumstances, I will do my best to reproduce the facts as I understand them.

[3]            During the taxation years at issue, the appellant was involved in the practice of medicine in the provinces of Quebec and Ontario. In reporting his income for the 1991 through 1994 taxation years, he did not include all of the income he received in those years. In fact, he declared total income of $88,942 in 1991, $137,815 in 1992, $189,759 in 1993 and $134,315 in 1994, on which he paid a total of $214,733 in income tax, Canada Pension Plan ("CPP") and interest (see the Reply to the Notice of Appeal ("Reply"), paragraph 2, and Exhibit R-3, Schedule A).

[4]            By Notices of Reassessment dated August 29, 1996, the Minister reassessed the appellant's tax liability for the years in question to include, inter alia, unreported professional income of $71,258, $7,911, $193,811 and $86,289 respectively on which he was assessed a total of $376,219 in income tax, interest and penalties (see the Reply, paragraph 4, and Exhibit R-3, Schedule A).

[5]            On September 3, 1996, the Minister served on the appellant a requirement to pay an amount of $413,672 (the difference between $413,672 and $376,219 was not explained in Court). The appellant did not comply with the requirement to pay and, on September 13, 1996, he objected to the reassessment. The Minister then took jeopardy collection action against the appellant via garnishment and the amount of $413,672 was completely collected by June 6, 1997 (see the Reply, paragraphs 5 to 7).

[6]            The Minister further reassessed the appellant on August 25, 1997 for the 1991 through 1994 taxation years, including in the appellant's income additional unreported income amounts of $158,356, $247,543, $41,002 and $149,206 for each of those years respectively (see the Reply, subparagraph 8(a)).

[7]            In assessing the appellant, the Minister used the net worth method to calculate his income and determined that he had understated that income knowingly, or under circumstances amounting to gross negligence. As a consequence, penalties were assessed against the appellant under subsection 163(2) of the Income Tax Act ("Act").

[8]            By Notice of Objection dated August 27, 1997, the appellant objected to the August 25 reassessment (see the Reply, paragraph 9). On August 28, 1997, he was charged with 22 counts of tax evasion for the period between June 30, 1990 and May 2, 1995 (Exhibit R-1).

[9]            Two years later, on August 17, 1999, the appellant pleaded guilty in criminal proceedings to one count of having committed tax evasion by failing to declare an income amount of $172,413 in his tax returns for the 1991 through 1994 taxation years (see the transcript of the proceedings before J.P. Beaulne J. of the Ontario Court of Justice, and of the sentence, Exhibit R-2, page 4). It can be seen from this transcript at page 5, that "[t]he amount of income appearing in the information [was] reduced for prosecution purposes by removing income pertaining to uncashed cheques from the [Régie de l'assurance maladie du Québec ("RAMQ")]". The appellant ultimately agreed, in a plea bargain, to pay a fine of $50,000 for an offence under paragraph 239(1)(d) of the Act.

[10]          The appellant testified that he agreed to plead guilty to tax evasion based on the assurance he was given that the Minister would agree to a settlement regarding his civil tax liability for the relevant taxation years. Bruce Engel, the appellant's lawyer for the criminal proceedings, also testified. He stated that it was agreed that the appellant would plead guilty to one count of tax evasion and that he would have one year to pay a fine of $50,000. The Attorney General of Canada, according to Mr. Engel, agreed to withdraw all other criminal charges. In exchange for the guilty plea, Mr. Engel said, CCRA officials agreed not to pursue the appellant for more than $150,000 in taxes, penalties and interest for the relevant taxation years, based on an amount of $750,000 still owing to the Receiver General as per the CCRA's statement of account dated August 17, 1999 (see Exhibits A-3 and A-5, page 5). The appellant's testimony was that he agreed to pay the $150,000 within 30 days in full settlement of his tax liability.

[11]          Between August 16 and August 18, 1999, the appellant met with representatives of the Minister with respect to the settlement of his tax liability. As a result, the discrepancy in total income per net worth for the 1991 through 1994 taxation years was reduced by $40,110, $156,031, $234,813 and $151,419 respectively (see the Reply, paragraph 12).

[12]          On July 5, 2000, the Minister made the appellant an offer to settle whereby the appellant would receive a refund of $222,970 plus interest. This offer was made by letter (Exhibit A-1) and was based on the following assumptions:

·                      the total amount of tax, interest and penalties assessed against the appellant prior to the plea bargain was $1,352,779 (as per the CCRA's own Schedule);

·                      this amount of $1,352,779 was reduced to $698,431 by excluding from the appellant's income the RAMQ cheques that the appellant had received but refused to cash (in an alleged protest against the Government of Quebec) and that were now stale-dated;

·                      the total amount owing by the appellant prior to the plea bargain (with the inclusion in his income of the RAMQ cheques but otherwise reflecting an adjustment for certain amounts attributed to the appellant's brother) was $979,719, as per the appellant's own figures at the time;

·                      the appellant had already paid $739,809 toward his tax debt, as per his own figures at the time.

[13]            On that basis, the Minister accepted the fact that 74 per cent ($739,809 divided by $979,719) of the appellant's debt prior to the plea bargain (according to the appellant's figures) had been paid. The Minister thus proposed that only 74 per cent of the revised tax debt (tax, interest and penalties) calculated by excluding the RAMQ cheques from income would represent his total tax liability. That meant that the amount of total tax owing for settlement purposes would be revised down to $516,839 (74% x $698,431). As the appellant had already paid $739,809 toward his tax debt, he would thus receive a refund of $222,970 plus interest, for an approximate total refund of $239,960 (see Exhibit A-1).

[14]            By memorandum dated July 19, 2000 (Exhibit A-2, Tab 2), Ms. Danie Huppé-Cranford of the Appeals Division at the CCRA, who had made the offer of July 5, 2000, instructed the Tax Centre in Shawinigan to reassess the appellant for the 1991 through 1994 taxation years in such a way that he would receive a refund of no less than $239,960 including interest. According to her instructions, the Tax Centre was to recalculate the amounts assessed (tax, penalties and interest) by recalculating the penalties on the revised discrepancy in total income per net worth (excluding the uncashed cheques from RAMQ) of $194,904, $121,436, $6,446 and $96,341 for each of the years 1991 through 1994 respectively (see also Schedule A to the Reply). If this failed to yield the intended refund amount of $239,960, the shortfall would be corrected by cancelling penalties.

[15]            In accordance with the offer to settle and the subsequent memorandum, the Minister reassessed the appellant for the 1991 through 1994 taxation years on August 3, 2000 (Exhibit A-2, Tab 1) by:

·                      reducing the appellant's net worth discrepancy by $40,192, $136,942, $228,367 and $139,154 for each of the years at issue respectively such that his revised taxable income for those years was $276,190, $255,951, $182,905 and $216,355 respectively (see Schedule A of the Reply and Exhibit A-2, Tab 1);

·                      reducing the gross negligence penalties for the years in question by $57,778, $67,142, $61,456 and $45,426 respectively (see subparagraph 15(b) of the Reply; see also Exhibit R-3, Schedule A (for 1991-1993), and Exhibit R-5 and Exhibit A-2, Tab 1 (for 1994));

·                      reducing arrears interest for the years in question by $75,451, $121,814, $62,776 and $74,768 respectively (see subparagraph 15(c) of the Reply and Exhibit A-2, Tab 1).

[16]            A refund in the amount of $255,586 (including $62,280 in refund interest) was sent to the appellant on August 9, 2000 (see Exhibit R-3, Schedule C, page 3, and Exhibit A-2, Tab 1).

[17]            The appellant returned the cheque to the Minister who deposited it in the appellant's installment account for the year 2000.

[18]            On September 27, 2000, the Minister advised the appellant that his request in February 2000 (as per Exhibit A-2, Tab 6) for cancellation of arrears interest was denied, but indicated that all gross negligence penalties would be cancelled in accordance with the fairness provisions of the Act (Exhibit A-2, Tab 8).

[19]            By Notices of Objection dated September 27, 2000, the appellant objected to the calculation of arrears interest and to the amount of refund interest for the 1991 through 1994 taxation years in the August 3, 2000 reassessments (see the Reply, paragraph 20). The Minister confirmed the appellant's tax liability for the said years by Notice of Confirmation dated October 20, 2000 (see paragraph 22 of the Reply). However, the Minister reassessed for the appellant's 1994 taxation year on November 23, 2000, cancelling all remaining gross negligence penalties -- an amount of $17,198 -- pursuant to the fairness provisions of the Act. This reassessment resulted in a further decrease in arrears interest of $3,645 and in refund interest of $5,928 for the 1994 taxation year. As a result, the Minister reissued a refund cheque to the appellant on February 15, 2001 for a total amount of $276,148 (including a total interest refund of $68,208). The appellant again returned the cheque to the Minister, who deposited it into the appellant's 2001 installment account (see Exhibit R-3, Schedule C, page 4 and Schedule B).

Arguments of the parties

[20]            The appellant disputes the correctness of the August 3, 2000 reassessments. Specifically, he claims that these reassessments do not reflect the agreement reached in the plea bargain and should be corrected accordingly. The appellant argues that, on or about August 16, 1999, the Minister and the appellant settled the matter of the latter's income tax liability. The settlement was allegedly based on the following assumptions of fact:

·                      at the time of the plea bargain, total tax, penalties and interest still owing by the appellant amounted to $750,000;

·                      at the time of the plea bargain, a total of $628,405 had been paid toward the total debt (of which amount $214,733 was paid on the initial assessments and $413,672 was obtained through the jeopardy collection).

[21]          The appellant argues that under the plea bargain agreement he was to pay $150,000 in full and final settlement of his tax debt and that he did so. Moreover, the amounts of the RAMQ cheques were to be included in his income for the relevant taxation years, thus allowing him to claim those amounts as a bad debt in the future.

[22]          The appellant disagrees with the content of the settlement offer dated July 5, 2000 and with that of the reassessments dated August 3, 2000 in three main respects:

(1)              the reassessments excluded from his income the amount of the uncashed RAMQ cheques; he argues that this amount should have remained included in his income so that he could deduct it in the future as a bad debt;

(2)              the tax, penalty and interest amounts in the Notices of Reassessment dated August 3, 2000 were arrived at by recalculating penalties on the revised discrepancy in total income per net worth (excluding the RAMQ cheques) of $194,904, $121,436, $6,446 and $96,341 for each of the years in question respectively; if this failed to yield the intended refund amount of $239,960 (arrived at in the settlement offer of July 5, 2000, Exhibit A-1), the shortfall was to be corrected by cancelling penalties; the appellant argues that this method was flawed and inconsistent with the offer of July 5, 2000, as, in his view, the reduction of 74 per cent should have been applied proportionately to the tax, penalty and interest components of his income tax liability and the uncashed RAMQ cheques should have been included in his income;

(3)              the total amount of refund interest for the 1991 through 1994 taxation years was reassessed at $62,280 in the August 3, 2000 reassessments (and increased to $68,208 by the November 23, 2000 assessment); the appellant disputes this amount, which is to be included in his income, as being too high, and notes that he expected the refund interest amount to have been in the order of $17,000 (as per the July 5, 2000 offer).

[23]          To the above, the respondent replies that the appellant orally accepted the Minister's settlement offer dated July 5, 2000 and is therefore barred from contesting the August 3, 2000 reassessments. The respondent further argues that this Court has no jurisdiction under subsection 171(1) of the Act to review a discretionary decision made by the Minister pursuant to subsection 220(3.1) of the Act in respect of arrears interest. The respondent further submits that an appeal for cancellation of arrears interest cannot be included in an income tax appeal instituted pursuant to section 169 of the Act. Finally, the respondent submits that the amount of refund interest was properly calculated in accordance with subsection 164(3) of the Act.

Analysis

[24]          In commencing these proceedings, the appellant was motivated by two principal objectives: to be able to deduct as a bad debt from his income in future taxation years the amount of the RAMQ cheques he never cashed, and to minimize the tax payable on the tax refund he received.

[25]          The main question in this appeal is whether the appellant should be allowed to successfully challenge the August 3, 2000 reassessments in order that his expectations might be met.

[26]          At the outset, it must be said that the August 3, 2000 reassessments were made in a most unusual fashion. Indeed, instructions were given by Ms. Huppé-Cranford that the reassessments be made with a target refund amount (tax, penalties and interest) in mind rather than by calculating in the usual way the tax, interest and penalties on the revised taxable income.

[27]          However, on the evidence before me, it is very difficult to determine whether the Minister revised the appellant's taxable income in an inappropriate manner. Ms. Huppé-Cranford testified that she made some adjustments, among which was the deletion of the uncashed RAMQ cheques from the appellant's income. At that time, it was quite obvious that the appellant would never recover the amounts of those cheques and it seems to me that Ms. Huppé-Cranford treated the appellant's case in a most sensible manner.

[28]          Furthermore, when she was assigned the appellant's file at the appeals level, she had heard different versions concerning the plea bargain (there was nothing in writing) from the appellant and from the Special Investigations Unit of the CCRA. She said that she had received instructions to solve one remaining issue, which was the matter of whether or not the uncashed cheques should be included in the computation of the appellant's income for the 1991 through 1994 taxation years. I understand from her testimony that the appellant's accountant at the time, Mr. Steve Saslov, agreed to a recalculation of the appellant's taxable income without the inclusion of the uncashed RAMQ cheques. This led to the July 5, 2000 offer which, in the words of Ms. Huppé-Cranford, was accepted on the phone on that same date by the appellant. She therefore gave instructions to the Tax Centre to reassess the appellant. She explained that the only way to arrive at the compromise tax refund amount (including refund interest and penalties) of $239,960 accepted by the appellant was to cancel the penalties, as she had the power to do under the fairness provisions in the Act. As a matter of fact, having recalculated the appellant's taxable income without including the uncashed cheques, she had no other choice than to calculate the proper amount of tax to be paid on that taxable income in accordance with the Act. That is why she instructed the Tax Centre to recalculate the penalties on the revised taxable income and, if necessary, to cancel the remaining penalties in order to get to the amount of total tax liability agreed upon by both parties.

[29]          In view of this rather unusual situation, I do not see anything particularly reprehensible in the way Ms. Huppé-Cranford dealt with the reassessments. Keeping in mind that the Minister first reassessed the appellant on a net worth basis, it was not necessarily an easy task to make the adjustments requested by the appellant and the Special Investigations Unit of the CCRA.

[30]          Under subsection 152(8) of the Act, an assessment shall be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment. Although, as I said earlier, the August 3, 2000 reassessments were made in an unusual fashion as a consequence of the special circumstances of this particular case, I find that the appellant did not disprove their validity. It is true that the uncashed RAMQ cheques could have remained in the appellant's income for the years in question. However, the Minister found that it was to the appellant's advantage to take them out of income as he would never recover the amounts thereof, and this was accepted at the time by the appellant's accountant (as per Ms. Huppé-Cranford's testimony).

[31]          I find that this was fair treatment, and I am not in a position to change it anyway, as it is not possible for me to increase the amount of tax on an assessment that is appealed before this Court (which would inevitably be the result, if I was to put back in the appellant's income the amount of the uncashed RAMQ cheques).

[32]          The next question is whether at any time the Minister and the appellant had settled the matter of the appellant's tax liability in some other fashion and, in the affirmative, whether the Minister is bound by that settlement.

[33]          In my view, no such definitive settlement was ever reached by the parties with respect to the appellant's income tax liability for the reasons explained hereunder.

[34]          Bruce Engel, the appellant's lawyer in the criminal proceedings, testified that CCRA officials agreed not to pursue the appellant for more than $150,000 in taxes, penalties and interest. However, in this Court, he stated the following at page 32, lines 9-19, in volume 1 of the Proceedings at Trial:

. . . But Revenue Canada indicated 150 and he's got 30 days, but there was an uncertainty with respect to the $150,000.

              What Revenue Canada said, they will review everything, and it may be at a point where less than 150 is owing, but they undertook not to pursue him for more than that. And that was expressed promise that I heard, that Mr. Perlmutter heard, and it was very obvious. The deal was the 150; they would get that information forthwith, and we would have to pay the 150 - it was 150, no more than 150 - within 30 days. [Emphasis added.]

[35]            He further stated at page 34, lines 9-15:

. . . The amount, there was uncertainty with respect to the 150, that was going to be dealt with afterwards by Mr. Perlmutter. He at that point retained an accountant, a Mr. Steve Saslov, to deal with Revenue Canada to resolve these amounts, and he expressly indicated he didn't want me involved in that. [Emphasis added.]

[36]          Most telling, however, is the following statement by Mr. Engel during the criminal proceedings before Beaulne J. on August 17, 1999, which is found at pages 8-9 of Exhibit R-2:

MR. ENGEL: And there's also a verbal commitment with respect to the $150,000 owing or whatever that amount - which should be determined later this week, we were hoping to have that all figured out this morning, but that may take yet a few days, but that amount that is still outstanding will be repaid by Dr. Perlmutter over - over time. [Emphasis added.]

[37]          This statement was further supported during Mr. Engel's re-examination by the appellant's counsel (see the Proceedings at Trial, vol. 1, page 57, lines 18-22).

[38]          By contrast, the appellant's self-serving testimony supported the position that there was a definite commitment made on behalf of the Minister that his income tax liability would be settled for a total payment of $150,000, which amount he did indeed pay.

[39]          The evidence referred to above suggests that in all likelihood the parties did not settle the appellant's income tax liability at the time of the plea bargain. Obviously, the amount of $150,000 was discussed as a starting point for the negotiations. However, Mr. Engel's testimony indicates that no definite commitment was given during the criminal proceedings.

[40]          There was moreover no clear evidence on what transpired during the negotiations following the plea bargain. Mr. Engel was no longer involved and Mr. Steven Saslov, the appellant's accountant at the time, was not called to testify. The reconciliation of the appellant's account for the 1991 through 1994 taxation years (Exhibit R-3, Schedule C) does not clearly show a payment of $150,000 by the appellant following the plea bargain. However, it seems to be accepted by the respondent that the appellant did indeed pay the $150,000 (see the testimony of Ms. Huppé-Cranford at page 184 of the Proceedings at Trial, vol. 1). It is thus probable that an agreement in principle was reached for a total settlement amount of $150,000. But most probably few of the technicalities of the settlement were properly worked out in August 1999. This is suggested by Ms. Huppé-Cranford's testimony at page 157, lines 11-20 of the Proceedings at Trial, vol. 1:

              Q. Were you able to look into the plea bargaining issue?

              A. I tried. I must say that it was very difficult, because Mr. Perlmutter would have different ways of explaining it from one time to another, for one thing. For another thing, there was nothing written. And I did meet with Special Investigations on one occasion and they also had mixed ideas of what the actual understanding was. So I had two parties that had different ideas of what this plea bargaining was and what exactly it entailed.

[41]          It is also obvious from letters sent to the appellant by the CCRA on February 24, 2000 and March 28, 2000 that certain issues, specifically the treatment of the RAMQ cheques, were still outstanding in early 2000 (see Exhibits A-6 and A-2, Tab 5).

[42]          The settlement offer dated July 5, 2000 appears, then, to have been the first attempt at spelling out all the details of the settlement. At trial, the appellant clearly indicated that at no time was that offer acceptable to him. Ms. Huppé-Cranford's testimony suggests that the appellant initially accepted the offer on the phone, but later, when he examined it in detail, found it unacceptable.

[43]          Based on the above, it is arguable that at no time was there complete and full agreement with respect to the settlement of the appellant's income tax liability. There may have been an agreement in principle; however, a number of details were never settled. Such being the case, I am unable to find that the parties reached a full settlement in the present case. Even if they had done so, the case law establishes that neither party is bound by an agreement made with respect to the manner in which the taxpayer will be assessed (see Cohen v. The Queen, 80 DTC 6250 (F.C.A.) and Consoltex v. The Queen, 97 DTC 724 (T.C.C.)).

[44]          Finally, it is equally clear that this Court has no power to review fairness decisions made by the Minister under subsection 220(3.1) of the Act.

[45]          For all these reasons, the appeals will be dismissed, with costs.

Signed at Ottawa, Canada, this 9th day of October 2002.

"Lucie Lamarre"

J.T.C.C.COURT FILE NO.:                                   2001-253(IT)G

STYLE OF CAUSE:                                               Dave Perlmutter v. The Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           April 17, 2002

REASONS FOR JUDGMENT BY:      the Honourable Judge Lucie Lamarre

DATE OF JUDGMENT:                                       October 9, 2002

APPEARANCES:

Counsel for the Appellant: Emilio S. Binavince

Counsel for the Respondent:              Roger Leclaire

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Emilio S. Binavince

Firm:                  Binavince Smith

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2002-1369(IT)I

ENTRE :

JEAN-PAUL RICHER,

appelant,

et

SA MAJESTÉ LA REINE,

intimée.

Appel entendu le 18 septembre 2002 à Trois-Rivières (Québec) par

l'honorable juge Alain Tardif

Comparutions

Pour l'appelant :                                     L'appelant lui-même

Avocat de l'intimée :                            M^e Alain Gareau

JUGEMENT

                L'appel des cotisations en vertu de la Loi de l'impôt sur le revenu pour les années d'imposition 1997, 1998 et 1999 est rejeté, selon les motifs du jugement ci-joints.

Signé à Ottawa, Canada, ce 11^e jour d'octobre 2002.

« Alain Tardif »

J.C.C.I.