Citation: 2011 TCC 46
Date: 20110127
Docket: 2009-3591(IT)I
BETWEEN:
JOCELYN HÉBERT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal against
the reassessment made on August 24, 2009, under the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.), as amended (the Act), for the 2004
taxation year.
[2]
The issues for
determination are
(a) whether the Minister
of National Revenue (the Minister) was justified in adding $30,110 to the
appellant’s income for the 2004 taxation year; and
(b) whether the Minister
was justified in applying a penalty of $2,057.93 for the 2004 taxation year pursuant
to subsection 163(2) of the Act.
[3]
During the year at
issue, the appellant operated, as a sole proprietorship, a garage whose main
activities consisted in collision repair for automobiles he purchased at
auctions and resold. About 50% of the appellant’s total sales from goods and
services provided to his brother’s, Denis Hébert, farming business.
[4]
In filing his income
tax return for the 2004 taxation year, the appellant reported a gross business
income, before the cost of goods sold, of $25,490, and a net income of $3,509,
as well as a gross rental income of $2,400 and a net income of $1,517, and
income derived from another source of $3,281.
[5]
In 2007, the Canada
Revenue Agency (the CRA) conducted an audit of the appellant’s business by an analysis of his bank deposits and accounting records so as to reconcile
the income. Over the course of the audit, the appellant provided his synoptic ledger, bank and credit card statements as well as all other
records requested by the auditor. The analysis of the deposits made into the appellant’s
personal and business bank accounts versus the record of cash receipts disclosed
that a number of deposits were made by clients of the appellant that had not
been invoiced, hence the addition of the amount of $30,110 in additional income
allocated to the appellant. In particular, the auditor was unable to associate
deposits with invoices respecting the two deposits totalling $20,500 ($10,000 deposited
on August 9, 2004, and $10,500 deposited on August 10, 2004) and
respecting other unexplained deposits totalling $9,610.
The deposits of $20,500
[6]
During her testimony at
the hearing, the appellant
explained that the purchase of motorcycles from a dealer was not properly executed
resulting in the acquisition of two expensive motorcycles on August 9, 2004, a
1997 Harley-Davidson that cost $7,915.22 and a 2004 Yamaha that cost
$11,438.08 for a total amount of $19,353.30. The appellant indicated that he
did not have the funds required to pay for the motorcycles and that the
available credit on his thirteen credit cards was insufficient. He therefore
turned to his mother, who loaned him $20,000 in cash on August 2, 2004. According
to the appellant, he made two deposits on the recommendation of a teller and
paid the purchase price of the motorcycles by cheque.
[7]
The appellant’s mother
testified at the hearing and she confirmed that she loaned the appellant $20,000
on August 2, 2004. She explained that the money borrowed derived from the
savings she accumulated in cash at her house, money she hid in her cold storage
room and kept in a cardboard box. According to her testimony, her savings came
from pension cheques she and her husband received. In cross-examination, she explained
that her family farm was sold in 1983 to the youngest of her five children. The
original farm was divided into three parts of which a smaller part still
belongs to her husband. She also confirmed that on the day of the loan she
signed an acknowledgement of debt that was prepared in advance by Gaétan
Hébert, one of the appellant’s brothers, without terms of repayment, or
interest. Finally, she confirmed that she did not make any other loans to the appellant.
[8]
Gaétan Hébert, a
retired accountant who does bookkeeping and prepares income tax returns and tax
reports, testified at the hearing and confirmed that he prepared the blank acknowledgement
of debt: the date, the amount of the loan, the interest rate, the name of the
lender and borrower were left blank. He also assisted his brother with the
audit.
[9]
The auditor, Caroline
Lacombe, testified at the hearing and she explained that the audit of the appellant’s
business began on March 15, 2007, when an initial interview was held with
the appellant. On that occasion, the auditor completed a form based on the
answers provided by the appellant. In response to the question about loans from
family and friends, the auditor did not indicate either “yes,” or “no.” The
auditor explained that the appellant was very hesitant in answering said question
and finally indicated that no amount greater than $1,000 was loaned to him
at the end of the year. The appellant signed said form for the years 2003, 2004
and 2005 without the auditor providing him with explanations regarding the extent
and significance of his answers.
[10]
During the audit, the
auditor noted that the bookkeeping was inadequate and incomplete, that sales and expenses invoices were missing and that taxes had been
included in the expenditures. In the analysis report on the appellant’s
thirteen credit cards, the amounts of money from the credit cards and deposited
into the bank accounts were excluded from the unreported income. The analysis of
said credit card accounts revealed that in August 2004 the appellant had an
available balance of $25,798.99 and that between August 4, 2004, and December
31, 2004, four cash advances totalling $17,000 were taken from credit cards.
[11]
The auditor completed
her audit in June 2007 and on June 26, 2007, she submitted a draft assessment. On
July 18, 2007, she met with the appellant and his accountant but no explanation
was provided by the appellant, nor did the appellant make any reference to the
$20,000 loan obtained from his mother. In fact, it was not until August 4,
2007, when the appellant’s file was closed, that the appellant submitted the
acknowledgement of the $20,000.
[12]
The reason provided by
the appellant for not disclosing the loan earlier was to prevent his other
family members from finding out the magnitude of the loan from his mother.
Although the appellant’s brother is the one who submitted the acknowledgement
of debt to his mother, he was unaware of either the amount or exact terms of
the loan at the time it was made and thereafter, during the audit.
[13]
The CRA did not accept
the explanations provided by the appellant and an analysis of the mother’s
income for the years 1995 to 2009 was conducted to verify whether she had the
necessary income to accumulate $20,000 in savings. The analysis was filed
as Exhibit I‑2. The review revealed that she had declared income of
about $10,000 per year including interest income of $2,000 on the
certificates of deposits for the years 2003 and 2004. The interest income then fell
to $1,600 in 2005 and to about $1,100 in 2006 and 2007.
The other deposits of $9,610
[14]
During her testimony, the
auditor explained that she used the net deposit method. She also confirmed that
she prepared a net worth estimate which she did not take into account as the
appellant’s inventory was not maintained properly and did not yield probative
results.
[15]
The auditor also explained
that she made year-end adjustments that increased the appellant’s gross income
by $2,430.84 in 2004. Moreover, she confirmed that she had gained access
to the appellant’s bank records and invoices which would have allowed her to
make the same adjustments at the beginning of 2004 but that she did not. Nor
did she take into account an invoice of about $10,525 ($12,106.38 with
taxes) dated December 18, 2003, which was paid in cash and of which part of the
proceeds was partially deposited into one of the appellant’s bank accounts. The
CRA did not allow an adjustment to be made at the beginning of the year because
the appellant was unable to determine exactly the proportion of money he kept
at home and that which he claimed to have deposited. The appellant was unable
to establish that the deposits made in early 2004 could be quantitatively attached
facture to the invoice of December 18, 2003. Furthermore, the auditor indicated
that she made every possible effort to correlate the amounts deposited in early
2004 to the 2003 year-end invoices even though the appellant’s accounting did
not show any accounts receivable at the end of 2003.
Analysis and conclusion
[16]
In his written
submissions, counsel for the appellant adopted the following explanations given
by Bédard J. of this Court in 9116-0762 Québec Inc. (Belle‑Or) v. The
Queen, 2010 TCC 116 (CanLII):
[9] Hickman
Motors Ltd. v. Canada,
[1997] 2 S.C.R. 336 is to the effect that the Minister uses assumptions to make
assessments and the taxpayer has the initial burden of demolishing the
Minister's assumptions. This is met where the taxpayer makes out at least a prima facie case that demolishes the Minister's
assumptions. Then, after the taxpayer has met the initial burden, the onus
shifts to the Minister to rebut the prima facie case
made out by the taxpayer and to prove the assumptions. As a general rule, a prima facie case is defined as one with evidence that
establishes a fact until the contrary is proved. In Stewart
v. M.N.R., [2000] T.C.J. No. 53, Cain J. states that "[A] prima facie case is one supported by evidence which raises
such a degree of probability in its favour that it must be accepted if believed
by the Court unless it is rebutted or the contrary is proved. Moreover, in Orly Inc. v. Canada, 2005 FCA 425, at paragraph 20, the
Federal Court of Appeal stated that "the burden of proof put on the
taxpayer is not to be lightly, capriciously or casually shifted..."
considering "[i]t is the taxpayer's business." The Federal Court of
Appeal also stated in the same decision that it is the taxpayer who "knows
how and why it is run in a particular fashion rather than in some other ways. .
. . He has information within his reach and under his control." . . .
[17]
In the case at bar, the
appellant must therefore demonstrate by prima facie evidence that he
actually borrowed $20,000 from his mother. To that end, the appellant submits
that he demolishes the Minister’s assumptions by
putting in evidence an acknowledgement of debt supported by the credible and unrebutted
testimonies of his mother and his brother, Gaétan Hébert.
[18]
Contrary to the appellant’s
submissions, I do not believe that the appellant was successful in demolishing the
presumption of validity of the
Minister’s reassessment. First,
I fail to see why the appellant would have borrowed $20,000 from his
mother when he surely had the money necessary to pay for one of the two motorcycles.
The error, if there is one, was that he purchased a second motorcycle and not
he purchased two motorcycles.
[19]
The appellant claimed
that the loan from his mother was made because he could no longer withdraw money
from his credit cards as their respective limit had been reached. However,
based on the analysis report on the credit card accounts, there are
discrepancies with the appellant’s submissions as on the one hand, the credit limits,
when taken in conjunction with the balances indicated for the month of August 2004,
reveal that at the time the appellant had an available balance of $25,798.99 and
that, on the other hand, the appellant availed himself, between August 4 and
December 31, 2004, of four cash advances on his credit cards for an amount
totalling $17,000.
[20]
The appellant’s brother,
Gaétan Hébert, confirmed that he prepared the acknowledgement of debt but did
not specify the exact date on which he prepared it and submitted it to his
brother or mother. However, the appellant’s mother stated that she signed the
acknowledgement of debt on the day of the loan, August 2, 2004. I doubt
that was the case and the document in question could have very well have been
prepared and signed days or even months after the loan, if there is one, was
made. The doubt about the date of the signing of the acknowledgement of debts
stems from the fact that the appellant did not disclose the existence of the
loan of $20,000 during the initial interview. It has been demonstrated
that the form completed by the auditor did not specifically indicate the loan
of $20,000 in 2004. Moreover, the appellant did not disclose the existence
of the loan either during the audit or the meeting of July 18, 2007, with the
auditor to discuss the draft assessment.
[21]
The explanations provided
by the appellant that he did not want to disclose the existence of the loan to
prevent his other family members from finding out the amount of the loan made
by his mother are not satisfactory as at least one other family member, the appellant’s
brother, was aware that such a loan may have been made to the appellant by the mother
in order to have prepared the draft acknowledgement of debt.
[22]
As for the testimony of
the appellant’s mother, she appeared to be sincere and credible but not reliable
owing to her relationship to the appellant and the fact that her testimony was
inconsistent with that of her son on one important point: she stated that
she did not make any other loans to the appellant, other than the loan of August
2, 2004, when the appellant claimed that he had obtained other loans from his
mother. While it is not impossible that the appellant’s mother managed to save
$20,000 over a number of years, considering her income, the fact still
remains that $20,000 is a very large amount of money to keep at home in a
cardboard box.
[23]
As of the date of the
hearing in 2010, no reimbursement had been made by the appellant on the loan
and the motorcycles still had not been sold.
[24]
Under the circumstances,
the loan theory has the appearance of an explanation after the fact. The appellant
failed to meet his initial burden and demonstrated that the amount of $20,000 deposited
on August 9 and 10, 2004, did not constitute unreported income but derived rather
from a loan made to him by his mother to fund the purchase of the motorcycles.
[25]
With respect to the
other unexplained deposits totalling $9,610, the appellant failed to meet his
initial burden and demolish the Minister’s assumptions. The explanations
provided by the auditor for not making any adjustments in early 2004, which are
described in paragraph 15 above, appear to be justified and reasonable under
the circumstances.
[26]
The imposition of the
penalty provided for in subsection 163(2) of the Act in the amount of $2,057.93 for
2004 is justified under the circumstances. The facts in evidence are such that
the appellant’s tax return made a misrepresentation of facts, and the only
explanations offered by the appellant were found not to be credible. In my
view, given such circumstances, one must come to the inevitable conclusion that
the false tax return was filed knowingly, or under circumstances amounting to
gross negligence. In the case at bar, the unreported income is important in
relation to that which was not. It is hard to imagine how a taxpayer who has
the capacity to manage a garage and 13 credit cards could forget to report
54% of his income for the year 2004.
[27]
For these reasons, the appeal
is dismissed.
Signed at Ottawa, Canada, this 27th day of January 2011.
Favreau
J.
Translation certified true
on this 25th day
of March 2010.
Daniela Possamai,
Translator
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