Citation: 2010TCC605
Date: 20101126
Docket: 2009-2837(IT)I
BETWEEN:
RICHARD SWARBRICK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1]
The Appellant, Richard Swarbrick,
is appealing the reassessment of the Minister of National Revenue of his 2001,
2002 and 2003 taxation years. Following a net worth assessment of these years
by the Minister of Revenue Quebec, the federal Minister reassessed to include unreported
income of $17,424, $5,543 and $9,206 in 2001, 2002 and 2003, respectively. The
Minister reassessed the 2001 and 2002 taxation years on December 24, 2007
beyond the normal reassessment period years under subsection 152(4) of the Income
Tax Act; the 2001 taxation year was originally assessed on May 13, 2002;
the 2002 taxation year, on April 28, 2003 for 2002. In respect of the 2003
taxation year, the Minister sent a notification that no tax was payable on
April 14, 2004.
[2]
The Minister also assessed
penalties under subsection 163(2) of the Act for all three taxation
years on the basis that the Appellant had filed false returns in circumstances
amounting to gross negligence.
[3]
The Minister’s reassessment was
based on the assumptions of fact set out in paragraph 8 of the Reply to the
Notice of Appeal:
a)
The MRQ had conducted an audit, using a cash
flow method, of the Appellant for the taxation years within their program of
“Indices des richesse”, such program undertakes to evaluate the income of
taxpayers where there are indications that the income as declared by a taxpayer
does not reflect the lifestyle of the taxpayer;
b)
Following the cash flow method the outflows of
funds were determined as follows, per Annex as attached:
i)
Personal expenses in the amounts of $16,372,
$14,085 and $13,141 respectively for the 2001, 2002 and 2003 taxation years,
such being based upon Statistics Canada amounts for a single person as the
personal expenses as provided by the Appellant were not considered reasonable;
ii)
NIL for any loan payments related to a
residence, such decision being based upon the fact that the Appellant
constructed his residence by himself and there was no evidence of any loan
payments related thereto;
iii)
Expenses for automobiles:
a)
Payments made for the acquisition of a Jaguar
CK8, $11,600, $17,400 and $17,400 respectively for the 2001, 2002 and 2003
taxation years;
b)
Payments made for the acquisition of a Dolph
535S, $3,172 for the 2003 taxation year; and
c)
$10,050 for the 2001 taxation year for the
acquisition of the Jaguar CK8;
iv)
Amounts paid for income tax, $11,409 and $3,169
respectively for the 2001 and 2002 taxation years;
v)
Capital payments on a $25,000 loan in the
amounts of $6,352 for each of the 2001, 2002 and 2003 taxation years;
c)
Following the cash flow method the inflow of funds
were determined in the following amounts, Annex attached.
i)
Available income as per total income declared by
the Appellant in the amounts of $38,359 and $67 for the 2001 and 2003 taxation
yeas, and as filed with MRQ, $17,464 less a tax adjustment of $111 for the 2002
taxation year;
ii)
GST and QST credits received by the Appellant in
the amounts of $569 and $462 for the 2002 and 2003 taxation years respectively;
iii)
Income tax refund from MRQ in the amount of
$2,460 for the 2003 taxation years; and
iv)
Non taxable income in the amounts of $17,541 and
$27,870 respectively for the 2002 and 2003 taxation years, such amounts being
salary insurance proceeds received by the Appellant.
9. In reassessing the Appellant beyond the
normal reassessment period for the 2001 and 2002 taxation years the Minister
considered:
a)
The materiality of the additional amounts of
income not reported representing 46% and 32% of the next income as declared by
the Appellant;
b)
The Appellant could not ignore that the outlays
of funds to maintain his lifestyle and acquisition of assets, income taxes
paid, and reimbursements of capital and interest paid on loans exceeded his
incomes as declared.
10. In assessing the penalties pursuant to
subsection 163(2) of the Act on the additional income, in the amounts of
$17,424, $5,543, and $9,206 respectively for the 2001, 2002 and 2003 taxation
years, the Minister considered:
a)
The materiality of the additional amounts of
income not reported representing 46%, 32% and [13.74%], respectively for the
2001, 2002 and 2003 taxation years, of the net income as declared by the
Appellant;
b)
The Appellant could not ignore that the outlays
of funds to maintain his lifestyle and acquisition of assets, income taxes
paid, and reimbursements of capital and interest paid on loans, exceeded his
income as declared.
[4]
The Appellant does not dispute that
the banking and loan records relied upon by the Minister reveal an overall
discrepancy of approximately $32,000 between the amounts available to him in
2001, 2002 and 2003 and what he actually spent during those years. His position
is, however, that such records do not take into account cash amounts kept in
his home and upon which he drew, as necessary, to meet his financial needs.
According to the Appellant, he had access to approximately $45,000 in cash made
up of an advance on inheritance of $21,000 received from his father in late
1999 following the sale of the family home;
line of credit proceeds of $20,000; and personal loan proceeds of $4,000
advanced by the Bank of Montreal on February 16, 2000.
[5]
In rejecting the Appellant’s
contentions, counsel for the Respondent referred the Court to Lacroix v. Her
Majesty the Queen in which the Federal Court of Appeal reviewed the law
in respect of the onus and burden of proof borne by the parties in an appeal of
a net worth assessment involving a reassessment beyond the normal reassessment
period and the imposition of gross negligence penalties. Pelletier, J.A. held
that the onus is on the taxpayer, not the Minister, to prove the source of the
additional income identified by the net worth assessment; it remains for the
Minister, however, to prove the existence of circumstances justifying the
reassessment of otherwise statute-barred years and the imposition of penalties
under subsection 163(2):
What, then, of
the burden of proof on the Minister? How does he discharge this burden? There
may be circumstances where the Minister would be able to show direct evidence
of the taxpayer’s state of mind at the time the tax return was filed. However,
in the vast majority of cases, the Minister will be limited to undermining the
taxpayer’s credibility by either adducing evidence or cross-examining the
taxpayer. Insofar as the Tax Court of Canada is satisfied that the taxpayer
earned unreported income and did not provide a credible explanation for the
discrepancy between his ... reported income and his … net worth, the Minister
has discharged the burden of proof on him within the meaning of subparagraph
152(4)(a)(i) and subsection 163(2).
[6]
In holding that on the evidence
presented the Minister had satisfied the evidentiary burden imposed by these
provisions, the appellate Court paid particular heed to the role of the trial
judge in assessing the credibility of the evidence presented:
The assessment
of credibility is the task of the trial judge. There is nothing surprising in
the fact that some evidence supports the version of the facts proposed by one
party while other evidence undermines it. The trial judge is in a better
position to assess the true value of these disparate elements and draw the
proper conclusions. In the case at bar, the judge duly noted the evidence which
the appellant raises but deemed it to be fabricated and dismissed it. There is
nothing in the evidence or in the Income Tax Act …that would warrant
this Court’s intervention….
[7]
Given the Court’s emphasis in Lacroix
on the trial judge’s assessment of credibility and the Crown’s reliance on that
case, it is useful to review some of the evidentiary weaknesses identified by
Bédard, J.:
[12] The
assessment of the credibility of the appellant and of Mr. Pronovost have played
an important role in my decision, given the almost complete lack of documentary
or objective evidence as to how the appellant used the $500,000 in cash or
where the $500,000 in cash allegedly held by Mr. Pronovost came from. I would
like to point out that I attach little probative value to the testimonies of
the appellant, his spouse and Mr. Pronovost. In this regard, I note at this
point that courts are not required to believe witnesses, even if they are not
contradicted. Their version may be implausible as a result of circumstances
revealed by the evidence, or simply on the basis of common sense.
[13] In
addition to the implausibility of the appellant's story, I note that the
explanation he gave during his testimony about how he used the $500,000 in cash
allegedly loaned to him by Mr. Pronovost contradicted the answer given on this
point on examination for discovery. I would point out that on discovery, the
appellant answered that the $500,000 was essentially spent [TRANSLATION]
"on renovations made to the properties". However, I note that the
appellant testified that the $500,000 in cash had been used to pay off his line
of credit, which had been used to purchase the properties and renovate them. I
would also point out that the appellant's expert very clearly showed that the
money from the loans made by Mr. Pronovost had not been used to renovate
the buildings and that only part of this money was used to make down payments
when the real estate was purchased. I also note that the appellant did not
submit any documentary evidence showing that he had made several cash deposits
(ranging from $4,000 to $5,000) to pay off his line of credit in full. I infer
from this that this evidence would have been unfavourable to him.
[14] Besides
the implausibility of Mr. Pronovost's story, I note that his answers were
generally evasive, imprecise, ambiguous, elusive, equivocal, unintelligible and
laborious. The time he took to answer questions, his hesitations, his facial
expression and his frequent memory gaps only added to my doubts about his
credibility. Of course, the fact that the events took place several years ago
may explain certain inaccuracies or memory gaps, but it is quite a stretch to
accept this as a reason for his inability to tell Mr. Heppell and Mr. LeBlanc
the amounts of the loans he allegedly made to the appellant. He could have
occasionally substantiated his allegations and established his credibility with
adequate and serious evidence, especially concerning the value of his assets,
which apparently was $4 million when he made the loans, and concerning the
advances repaid to him by his company. I note that these advances were
allegedly used to make some of the loans to the appellant.
[15] In
any event, I am of the opinion that the whole story about the loans as told by
the appellant, his spouse and Mr. Pronovost is implausible. I am also of the
opinion that the note and the request for the repayment of the loan were written
and signed after the beginning of the audit for the purpose of hiding the
truth. I am also of the opinion that the payment in the amount of $430,000 was
made for the same purpose.
[16] On
this point, Mr. Pronovost's story about the rescue of his son, Patrice, who was
then 16 years old, seemed to me to be simply implausible and not very credible.
First of all, his testimony about the circumstances explaining how his son fell
into the Richelieu River leave me perplexed to say the least. I also have a lot
of difficulty imagining that a 16-year-old teenager whose fragile state was
solely due to allergies could almost drown while the motor of the boat from
which he fell was stopped. I find this story all the more implausible because
Mr. Pronovost explained that he had not yet informed his spouse of the heroic
act performed by the appellant to rescue their son, who died in 1997, I would
point out. He did not tell this story because, according to him, he was afraid
that his wife would accuse him of having been negligent during this incident.
[8]
Such deficiencies were not present
in the present case. The Appellant and his brother, Terrance Swarbrick,
testified at the hearing. Unlike the witnesses in Lacroix, the Appellant
and his brother were, on balance, persuasive. Their evidence was direct and to
the point, in no small part because the relevant transactions were much less
intricate and better documented than in Lacroix. Another distinction is
that no witnesses were called for the Respondent. While I understood counsel
for the Respondent to say that the Crown’s witness had become unavailable at
the last minute, the fact remains that if, from the Minister’s perspective,
there was more to this story than met the eye, no such evidence was before the
Court. There was also documentary evidence to corroborate the Appellant’s claim
of having received an inheritance payment from his father and to verify the
existence of loans, loan payments and cash deposits (which the Appellant
candidly admitted he had made). Notwithstanding counsel for the Respondent’s
dim view of his money management style, the Appellant’s direct evidence of his preference
to keeping cash at home rather than relying on banks remained unshaken on cross‑examination.
I accept the Appellant’s testimony that sometime in the 1980’s he got into the
habit of keeping cash at home; he took some pride in explaining that he had
built his own home, complete with a hiding place for his money secure enough to
withstand a fire, should it come to that. While somewhat eccentric, this
practice is not unlawful. It renders more onerous, however, the Appellant’s burden
of proof.
[9]
Turning, then, to a consideration
of the sources of funds identified by the Appellant, in respect of the advance
on inheritance, I am satisfied by the testimony of the Appellant, corroborated
by his brother, the notarized letter from his father and the real estate documents regarding the sale of the family home, that the Appellant received
$21,000 from that source in 1999. I also accept his evidence that rather than
putting the money in a bank account, he kept in it a secure location in his
home.
[10]
The Appellant also claimed to have
had access to $20,000 in cash taken from a line of credit established in
anticipation of buying a replacement vehicle for his 1979 Fiat Spider. As it
turned out, the purchase of the new vehicle was financed, as assumed by the
Minister and corroborated by the bank statements in evidence. This claim was unchallenged on cross-examination. The Appellant also said
that at the request of the Bank of Montreal, he had taken out a personal loan for
$25,000 on February 16, 2000. While no formal documents for the line of credit
were in evidence, it is referred to in Exhibit A-5, the letter from the
Bank of Montreal describing the $25,000 loan transaction (separately documented
by promissory note). According to that letter and the Appellant’s
testimony, the loan proceeds were immediately applied by the bank to pay off the
existing line of credit of $20,000 and an overdrawn amount of $1,000 on the
Appellant’s personal account. That would have left $4,000 to be squirreled away
at the Appellant’s residence with his other funds; meanwhile, he was required
to (and did) make monthly payments of $529.33 on the personal loan.
These payments were taken into account in the net worth assessment.
[11]
The result is that as of 2001, the
Appellant would have had approximately $45,000 in cash from non-taxable sources
available to him during the taxation years under appeal. Applying the test in Lacroix,
I am satisfied on a balance of probabilities that the Appellant has provided a
credible explanation for the $32,000 discrepancy between reported income and
his net worth. Accordingly, the Minister was not justified in reassessing
beyond the normal reassessment period for 2001 and 2002 or in reassessing on
unreported income of $9,206 in 2003. There being no basis for the amounts
assessed, it follows that the imposition of gross negligence penalties was also
unjustified.
[12]
For the reasons set out above, the
appeals of the 2001, 2002 and 2003 taxation years are allowed and the
reassessments are vacated.
Signed at Ottawa,
Canada, this 26th day of November, 2010.
“G. A. Sheridan”
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