[OFFICIAL ENGLISH
TRANSLATION]
Date:
20021011
Docket:
2002-1676(IT)I
BETWEEN:
DANIEL MICHAUD,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2002-1678(IT)I
BETWEEN:
JOSÉE
MICHAUD,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif,
J.T.C.C.
[1] The parties agreed to proceed on common evidence for the two
cases, that is, Daniel Michaud (2002-1676(IT)I) and Josée Michaud
(2002-1678(IT)I).
[2] The appeals were for the 1998 and 1999 taxation years.
[3] For both cases, the assessments were made using the net worth
method and the penalties provided for under section 163 of the Income Tax
Act (the “Act”) were added to them.
[4] The female appellant was not present to support her appeal; she
had instructed her brother, also an appellant, and the accountant Richard Ruet
to represent her by proxy.
[5] The appellants’ evidence was comprised of the testimony of the
male appellant, his father and the accountant Richard Ruet.
[6] All testified in a sympathetic manner. The appellant explained
that his father had wanted to create a job for his sister, the female
appellant, when he purchased the village’s restaurant.
[7] Unreliable and even irresponsible in her new position, his sister
essentially lost control of the situation and his father had to ask his son,
who was working as a butcher in Montreal at the time, to help him by taking
charge of the restaurant, which was not doing very well.
[8] The appellant explained that, although he had been the manager of
his meat department, he had very little experience in administration and
accounting. He stated he had done his best to manage the restaurant properly
and satisfactorily but that, because of his lack of knowledge of and experience
in the restaurant business, he was the reason behind the total confusion in the
accounting.
[9] He explained that the additional income attributed to him by the
net worth method was essentially derived from the restaurant’s income that did
not belong to him and that had gone through his account so that his sister
would not take the income for objectionable purposes.
[10] In other words, because of his sister’s irresponsibility, the
appellant deposited the income from the restaurant into his own account so that
his sister would not have access to it. He maintained the income could not be
attributed to him, as a result of which the calculation of his net worth had
been distorted by an amount equivalent to the deposits belonging to the
restaurant.
[11] As for the additional income attributed to his sister, Josée
Michaud, the appellant explained that the respondent had confused income with
disbursements made by his father. According to the appellant, his father had
had to inject funds through loans and advances to ensure that the operations
could continue; the restaurant was not generating sufficient income to cover
all of the expenses and even less to justify additional income.
[12] In support of his claims with respect to his sister’s case, he
filed a document indicating the dates and various amounts disbursed by his
father with clarifications and explanations (Exhibit A-1), amounts totalling
approximately $23,404.85 for 1998. Exhibit A-1 is reproduced below:
[TRANSLATION]
|
Restaurant du Lac
|
|
To: Lac des Aigles
acknowledgment
Josée Michaud –Lac-des-Aigles
|
Date: April 28, 1998
|
|
Further to the request of this
date, April 28, 1998, I undertake to pay Gratien Michaud the following
amounts:
|
|
April 28/ 98
|
given to Langis Dubé for
restaurant purchase
|
$5,000.00
|
|
May 4/ 98
|
given for revolving fund
|
$3,000.00
|
|
31-7-98
|
paid GST and QST
|
$3,000.00
|
|
30-9-98
|
paid for fire system
|
$1,500.00
|
|
5-8-98
|
paid for lawyer’s fee and Josée
|
$1,500.00
|
|
2-11-98
|
paid GST and QST
|
$5,000.00
|
|
3-12-98
|
insurance for Restaurant du Lac
|
$2,904.85
|
|
4-6-98
|
paid for notary’s contract
|
$1,500.00
|
|
|
Total:
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$23,404.85
|
|
|
|
|
[13] The accountant Richard Ruet subsequently confirmed the appellant’s
testimony. He testified that the business had not generated sufficient income
to justify the income attributed to the appellant by the net worth method. He
argued that the discrepancies noted between the income that had been reported
and that which had been attributed were largely the result of numerous cash
infusions by the appellants’ father, Gratien Michaud.
[14] He also stated that he had noted a number of obvious errors with
respect to the treatment of some of the accounting data the appellants had
provided to the Malette Maheu accounting firm. He indicated he had made
the necessary corrections.
[15] However, he did not provide any detailed or coherent accounting
information to discredit the assessments made using the net worth method. He
essentially claimed that the appellants had no concept of administration and
that the business did not generate sufficient income to justify the additions
established by the net worth method.
[16] Lastly, the appellants’ father confirmed the testimony of his son
Daniel Michaud and described the circumstances surrounding the acquisition of
the restaurant. He explained that at the time of the acquisition the sellers had
been on the verge of bankruptcy with their business, which meant that in
addition to assuming a debt of over $75,000, he had had to pay a number of
accounts, including notary’s fees, the goods and services tax (GST) account and
the sprinkler.
[17] Since his ability to pay was modest, he made disbursements only
during the first year, in 1998, after which time he stopped intervening, having
used up his available resources. He said that all of the disbursements had been
made in cash and that there was no documentary evidence to attest to their
accuracy, such as receipts, deposit or withdrawal slips or cheques.
[18] The auditor responsible for establishing the additional income by
the net worth method explained that he had analyzed several boxes of documents,
had met and spoken with the appellants, and had made a number of corrections on
the basis of their explanations.
[19] In cross-examination, the appellants’ accountant referred to a
document that he himself had prepared and submitted in connection with the
objection relating to various contributions or advances made by the appellants’
father. The document in question indicated a total of nearly $45,000 in
disbursements spread out over the two years in issue, 1998 and 1999.
[20] Although favourable, the evidence nonetheless gave rise to some
very serious doubts as to the likelihood of the explanations given. How can the
accountant Richard Ruet, who was perfectly familiar with the facts of the case,
have submitted a document indicating that the appellants’ father had invested
close to $45,000 in 1998 and 1999 when the person directly concerned
unequivocally stated in response to a question from the Court that his
financial participation had been solely for 1998? This is moreover attested by
Exhibit A-1 and not for an amount of $45,000 but rather for $23,404.85. This is
a significant discrepancy, especially for a retired person whose financial
capacity was limited and even modest.
[21] Overall, the auditor added the following unreported income to the
appellants’ reported income for the years in issue:
[TRANSLATION]
|
APPELLANTS’ ADDITIONAL INCOME
ESTABLISHED THROUGH THE NET WORTH
METHOD
|
|
|
1998
|
1999
|
TOTAL
|
|
Josée Michaud
|
$17,291
|
$39,271
|
$56,562
|
|
Daniel Michaud
|
$12,113
|
$ 1,719
|
$13,832
|
|
Total
|
$29,404
|
$40,990
|
$70,394
|
Accordingly, a total of $70,394 in income was added to the appellants’
reported income. If the accountant’s explanations at the time of the objections
were credible, an amount of more than $25,000 would remain unaccounted for,
representing the total income added minus all of the investments indicated.
[22] Surprisingly, during the proceedings, the advances from the
appellants’ father had dropped to $23,404.85, leaving an unexplained balance of
$46,989.15, or $70,394 — $23,404,85.
[23] Did the appellants’ father make $45,000 or $23,404 in advances? He
himself had stated an amount of only $23,404, while adding that a portion of
that amount had not been injected into the business’ operating account.
[24] Aside from those fairly surprising revelations, the evidence also
established that the business’ accounting operations were in a genuine muddle;
everything was so confused that even the accountants were having difficulty
figuring things out.
[25] The appellant also admitted he did not have a regular weekly
salary; his pay consisted of withdrawals from the cash to pay expenses, such as
gas and car repairs. How was this controlled and accounted for? The answers
were never obtained.
[26] The appellants therefore did not discharge the burden of proof that
was on them. They tried to explain the origin of some of the funds the
respondent had considered to be income, but the explanations were inconsistent
and above all contradictory.
[27] The evidence adduced was not only deficient but also incomplete. To
prove their case, it was not sufficient to create doubt with respect to a small
portion of the origin of the income attributed. The appellants had to establish
in a plausible manner on a balance of probabilities that the income that was
added was not justified. The only evidence adduced consisted in arguing that
the appellants’ father had made certain advances the amounts of which remain
unclear.
Penalties
[28] Penalties were added to the assessments under
subsection 163(2) of the Act, which reads as follows:
False statements or omissions
(2) Every person
who, knowingly, or under circumstances amounting to gross negligence, has made
or has participated in, assented to or acquiesced in the making of, a false
statement or omission in a return, form, certificate, statement or answer (in
this section referred to as a "return") filed or made in respect of a
taxation year for the purposes of this Act, is liable to a penalty of the
greater of $100 and 50% of the total of
...
[29] It was established on a balance of probabilities that the
appellants were not competent to take care of the accounting properly. It seems
that the income from the business was deposited periodically into the male
appellant’s personal account. At another point, the appellants’ father had
signed the cheques pertaining to the restaurant’s business. The appellant
admitted he paid personal expenses from the restaurant’s income.
[30] All of these facts are more than sufficient to conclude that there
was gross negligence.
[31] The appellant’s total indifference, the ignorance and the absence
of coherent accounting are elements that, when combined, constituted such
carelessness that this certainly is gross negligence. The amounts added to the
appellants’ income were neither marginal nor insignificant; on the contrary,
they were considerable having regard to the facts as a whole.
Signed at Ottawa, Canada, this 11th day of
October 2002.
J.T.C.C.
Translation
certified true
on
this 29th day of December 2003.
Sophie
Debbané, Revisor
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