Citation: 2009 TCC 171
Date: 20090521
Docket: 2007-4110(IT)I
BETWEEN:
KAREN MIESEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau, J.
[1]
Mrs. Karen Miesen is appealing,
by way of the informal procedure, the reassessments dated July 5, 2007 under
the Income Tax Act R.S.C. 1985, c. 1 (5th Suppl.),
as amended (the "Act") , concerning her 1999, 2000 and 2001
taxation years.
[2]
The appellant filed her
income tax returns for the 1999, 2000 and 2001 taxation years on
November 29, 2000, September 13, 2001 and May 7, 2003
respectively. The initial assessments of the said tax returns are dated
January 4, 2001, October 16, 2001 and May 27, 2003 respectively
and the total income of the appellant for each of those years was assessed, as
declared, in the amounts of $13,083 (including $7,054 as other income) for the
1999 taxation year, $6,552 for the 2000 taxation year and $2,523 for the 2001
taxation year.
[3]
Following an audit
conducted by the Minister of Revenue Québec (the "MRQ"), the Canada
Revenue Agency (the “CRA”) reassessed the appellant on July 10, 2006 in
the following manner (such reassessments were beyond the normal reassessment
period):
(a) for the 1999 taxation
year, $16,276 was added as other income and accordingly penalties were applied pursuant
to subsections 162(1) (for late filing) and 163(2) (for false statements or
omissions) of the Act;
(b) for the 2000 taxation
year, $28,301 was added as other income and $2,225 was added to the net
business income subjecting the total amount of $30,526 to the penalties pursuant
to subsections 162(1) and 163(2) of the Act;
(c) for the 2001 taxation
year, $10,400 was added as other income and subjecting that amount to the
penalties pursuant to subsections 162(2) (for repeated late filing) and 163(2) of
the Act.
[4]
As a result of the
notices of objection filed by the appellant, CRA reassessed the appellant on
July 5, 2007, making the following adjustments:
(a) for the 1999
taxation year, the amount of the other income reassessed was reduced by $4,582
(to exclude from the deposits included in income the GST (Goods and Services
Tax) and QST (Québec Sales Tax) components) with an adjustment to the penalties
assessed under subsection 162(1) of the Act and a similar
reduction to the amount subjected to the penalties under subsection 163(2) of
the Act;
(b) for the 2000
taxation year, the amount of the other income reassessed was reduced by $14,018
(to exclude from the deposits included in income the non‑taxable gifts
and loans in the amounts of $8,500 and $5,518 and the GST and QST components)
with an adjustment to the penalties assessed under subsection 162(1) of
the Act and a similar reduction to the amount subjected to the
penalties under subsection 163(2) of the Act;
(c) for the 2001
taxation year, the amount of the other income reassessed was reduced by $2,860
(to exclude from the deposits included in income the GST and QST components)
with an adjustment to the penalties assessed under subsection 162(2) of
the Act and a similar reduction to the amount subjected to the
penalties under subsection 163(2) of the Act.
[5]
As a result of these
reductions and adjustments, the additional incomes in litigation, as determined
by the bank deposits audit methodology, are as follows:
For 1999 - $11,685;
For 2000 - $16,508;
For 2001 - $7,540.
[6]
The appellant does not
contest the late filing penalties nor the use of the bank deposits audit methodology.
[7]
The appellant was the owner
of a business known as "Les Entreprises Miesen" carrying on a
maintenance business since 1996. From 1996 to 1999, the company was known as "Studio
Couleur Enr." The company was registered for GST purposes but no GST return
was ever filed.
[8]
Following the review of
the income declared by the appellant and by her husband, Mr. Tino Travers,
and their lifestyle, the appellant and her husband were selected by the MRQ in
the audit project known as “Indices de richesse – VI”. As important
discrepancies between the declared income and the cost of living of the
appellant were discovered by the audit, the MRQ applied the bank deposits audit
methodology to determine the undeclared income of the appellant. That audit
revealed important discrepancies between the total net amount of deposits of
all business and personal accounts of the appellant versus the aggregate of (i)
the gross amount of business and rental income declared and (ii) the amount of allowances
received. The same exercise was done for the appellant’s husband and he also
appealed the reassessments issued to him.
[9]
In her notice of appeal,
the appellant submitted that she did not have any undeclared taxable income or
any other taxable income of any nature whatsoever in respect of each and every
one of the relevant taxation years. Moreover, the appellant submitted that CRA
did not take into account the following specific adjustments to be made
regarding various non‑taxable amounts received by the appellant’s family
including, inter alia, the following items described in
subparagraphs 15 d) i) to vii) of her notice of appeal:
i) as was explained to
the MRQ’s auditor, the Appellant’s husband, Mr. Tino Travers (in
respect of whom a similar Notice of Appeal is being filed with this Honourable
Court) was unable to work for some time in view of the fact that he literally
“broke his neck” and, consequently, was thereafter unable to perform the same
work tasks as he had in the past;
ii) as a result, this created enormous financial
problems for the Appellant’s family;
iii)
in this context, the Appellant’s extended family
therefore provided financial assistance to the Appellant’s family during the
periods covered by the Initial Reassessments and Assessments;
iv)
moreover, the Appellant’s family also received
financial assistance from various friends of the family;
v)
furthermore, the Appellant’s husband received
“non‑taxable disability payments” and, at this point in time, it is
unclear whether or not the CRA and/or Respondent took same into account;
vi)
as well, the Appellant and/or her husband also
contracted and utilized funds from a “line of credit” with a financial
institution; and
vii)
finally, the Appellant and/or husband also
utilized all available credit cards to their maximum capacity.
[10]
Mrs. Miesen testified
at the hearing and most of her testimony consisted in describing the financial
assistance provided by the family members (gifts and loans) and friends during
this difficult financial period. The husband of the appellant, their two sons
and the appellant's mother also testified at the hearing and they all stated
that the appellant received, during the 1999, 2000 and 2001 taxation years,
financial assistance from them and from the appellant's sister, Mrs. Ilona
(Miesen) Csonka, from her mother-in-law, Mrs. Elisabeth Travers, and from
an uncle of her husband, Mr. Curt Ulle. Some documentary evidence in the
form of affidavits from Mrs. Ilona (Miesen) Csonka, Mrs. Elisabeth Travers and
Mr. Curt Ulle were filed at the hearing but none of these individuals appeared
in court.
[11]
At the objection level,
the gifts and loans from family members made by cheques were accepted (for example,
the $2,000 loan and gift from Mrs. Ilona (Miesen) Csonka as well as
the loans that were repaid (for example, the $6,000 loan from Mr. Peter Gorht).
The cash advances were not accepted because they cannot be identified in the
bank accounts' deposits. The appellant’s accountant, Mr. Claude Leroux,
stated to the auditor for the MRQ at the end of the audit that he has not been
able to identify any more gifts or loans in the appellant’s bank accounts.
[12]
Contrary to what was
stated in the notice of appeal, the evidence shows that the appellant omitted
to declare in her tax return for the 2000 taxation year, the amount of $2,225
of business income from her main clients, namely Service de courtage Stehr,
Storaway and Alfred Stehr enr. The appellant filed her tax return for the 2001
taxation year in May of 2003 after an informal and formal requests to do so.
The tax return filed for the 2001 taxation year shows that no tax was payable
by the appellant.
Analysis
[13]
The reassessments for
the 1999, 2000 and 2001 taxation years were issued beyond the three-year limitation
period and, in this situation, the respondent must comply with subparagraph 152(4)(a)(i)
of the Act which reads as follows:
152(4) Assessment and reassessment [limitation period] -- The Minister may at any time make an assessment, reassessment or
additional assessment of tax for a taxation year, interest or penalties, if
any, payable under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that no tax is
payable for the year, except that an assessment, reassessment or additional
assessment may be made after the taxpayer's normal reassessment period in
respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect,
carelessness or wilful default or has committed any fraud in filing the return
or in supplying any information under this Act, or
[. . .]
[14]
Judge Lamarre of this
Court described the effect of subparagraph 152(4)(a)(i) of the Act
in paragraphs 80 and 81 of Dowling v. Canada, 96 D.T.C. 1250, in
the following terms :
According to these provisions, the Minister may assess beyond the
normal limitation period if the taxpayer has made a misrepresentation that is
attributable to neglect, carelessness, or wilful default. The Minister has the
onus of proving this misrepresentation; however, once the Minister establishes
a right to reassess after the normal period, the burden of proof shifts to the
taxpayer to show that an amount should not be included in his income for the
purposes of making an assessment after that period because the failure did not
result from any misrepresentation that is attributable to negligence,
carelessness, or wilful default. See Caron v. Canada (1995), 1 C.T.C. 205 (T.C.C.)
The Minister has the initial onus of proving that a taxpayer made a
misrepresentation in filing the tax return. It is insufficient for the Minister
to refer to a net worth statement showing discrepancies between available
income and reported income. The onus on the Minister will be greater if the
taxpayer presents plausible explanations showing a non-taxable source of this
additional income. [. . .]
[15]
In the present case, I
do not consider the testimonies of the appellant and that of her husband as
being credible. No reasonable or plausible explanation showing a non‑taxable
source of additional income was given except for some financial assistance
received from certain family members, in excess of $35,000 over a three-year
period. The financial assistance in question represents a fairly large amount
of money, the receipt of which is difficult to establish because most of it has
been paid in cash. The evidence clearly shows that the appellant omitted to
declare in her 2000 taxation year return, business income in the amount of
$2,225. Mr. D.C. Nguyen, an appeal officer of MRQ who dealt with the notices of
objection filed by the appellant and her husband, testified at the hearing that
both taxpayers recognized at a previous meeting that they had undeclared income
but not to the extent of the amounts assessed. In his report, the MRQ auditor,
Mr. Sébastien Simard, referred to a telephone conversation he had on April
21, 2005 with Mr. Claude Leroux, the accountant representing both the appellant
and her husband, in the course of which the latter stated that he did not know
the source of certain amounts of money deposited in the bank accounts. Mr. Simard
also noted in his audit report that Mr. Leroux expressed some doubt about the
honesty of the appellant's husband considering his attitude when he questioned
him on the source of the money deposited. Mr. Simard testified at the hearing
and confirmed the above-mentioned fact (as Mr. Leroux did not testify at the
hearing, this statement should be taken for what it is worth).
[16]
I also noted some
inconsistencies in the information provided by the appellant concerning the
financial assistance obtained from her family members. In the questionnaire
entitled “Declaration concerning your financial situation for the 1999, 2000
and 2001 taxation years” signed by the appellant on July 1, 2003, the
appellant declared that she had received (i) gifts from Mrs. Ilona (Miesen)
Csonka and Mr. John Csonka in the amount of $300 per month during 2000 and
2001; (ii) gifts from Mrs. Carin Ulle and Mr. Curt Ulle in the amount
of $300 (U.S.) per week during five months in 2001; and (iii) loans from Mrs.
Ilona (Miesen) Csonka and Mr. John Csonka in the amount of $2,000 and from Mr. Peter
Gorht in the amount of $6,000. No reference was made in that declaration to the
loans received from the appellant's mother‑in‑law, Mrs. Elisabeth
Travers (Exhibit R-3) nor to the financial assistance provided by the
appellant's mother and the appellant's sons. The statement of assistance dated
November 24, 2003 and signed by Mrs. Ilona (Miesen) Csonka and Mr.
John Csonka (Exhibit R-2) refers to many more amounts of financial assistance
than those declared by the appellant and does not specify whether they are
gifts or loans.
[17]
The remarks of Judge
Pinard of the Federal Court – Trial Division in Duval v. Canada, 94
D.T.C. 6431, that have been repeated by Judge Lamarre in Dowling, supra,
in paragraph 84 are applicable to this case:
[. . .] the taxpayer's omissions, unwillingness to
disclose information, inconsistencies in testimony, and manoeuvring led to the
conclusion that the taxpayer had knowingly made a misrepresentation in respect
of his income tax returns such that the limitation period did not apply.
[18]
The respondent did show
that the appellant had unreported income from her business and that this
misrepresentation was due to negligence, carelessness, or wilful default, mainly
attributable to the failure to keep adequate business records and the lack of
care on the part of the appellant in filing her income tax returns.
[19]
On the other hand, the appellant's
explanations as to the origin of some unexplained deposits is not without some
plausibleness in light of the circumstances, namely the appellant's husband's
physical condition. In particular, it seems to me that it would have been just
and equitable that all financial assistance provided by Mrs. Ilona (Miesen)
Csonka and Mr. John Csonka should have been accepted considering the fact that
$2,500 provided in 2000 has been allowed by CRA (it should be noted that an
amount of $500 was not even mentioned in the statement of assistance submitted
by Mrs. Ilona (Miesen) Csonka and Mr. John Csonka). This by itself establishes
a prima facie evidence that the document signed by Mrs. Ilona (Miesen)
Csonka and Mr. John Csonka is true and can be relied upon. Consequently,
the amounts of $2,890 for the 1999 taxation year, $1,760 for the 2000 taxation
year and $1,800 for the 2001 taxation year should be applied against the
additional income assessed in each of those years.
Penalties
[20]
The respondent
submitted that penalties under subsection 163(2) of the Act should
be assessed against the appellant for her 1999, 2000 and 2001 taxation years
considering the following facts:
(a) the importance and
materiality of the amounts of $4,631, $16,508 and $7,540 for the 1999,
2000 and 2001 taxation years respectively, in relation to the amounts reported
by the appellant for those taxation years which were $13,083, $6,552 and
$2,523 respectively;
(b) the omission of
revenues was repetitive for the three consecutive years audited;
(c) the appellant claimed
the amounts identified as additional income were received from her family
without being able to substantiate same in any manner except for the amounts
allowed at the objection level;
(d) part of the revenues
received by the appellant were cash receipts;
(e) the income tax returns
were prepared by an accountant doubtful as to the exact sources of income which
the appellant did not want to disclose to his accountant.
[21]
Subsection 163(2) of
the Act reads as follows:
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, (in
this section referred to as a "return") a false statement or omission
in a return, form, certificate, statement or answer 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 [. . . ]
[22]
By virtue of subsection
163(3) of the Act, the burden of proof is on the Minister:
Burden of proof in respect of penalties -- Where, in an appeal under this Act, any penalty assessed by the
Minister under this section is in issue, the burden of establishing the facts
justifying the assessment of the penalty is on the Minister.
[23]
In the present case,
the Minister has presented evidence to the effect that the taxpayer made a
false statement or omission in filing her tax return for the 2000 taxation
year. In justifying the penalties, the Minister must also prove that this false
statement or omission was made knowingly or under circumstances amounting to
gross negligence. In Venne v. Canada, 84 D.T.C. 6247 (F.C.T.D.), Justice
Strayer defined gross negligence at page 6256 in the following manner:
“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. [. . .]
[. . .] The sub-section obviously does not seek to impose
absolute liability but instead only authorizes penalties where there is a high
degree of blameworthiness [sic] involving knowing or reckless
misconduct. [. . .]
[24]
In this instance, the
appellant’s attitude and general behaviour are such that doubts can seriously
be entertained as to her good faith and credibility throughout the entire
period covered by the reassessments from 1999 to 2001. The appellant’s
bookkeeping of her business activities was incomplete and she failed to justify
the important discrepancies between the income reported and the amounts
deposited in her bank accounts. I do not think that it would be reasonable to
assume that the discrepancies were exclusively attributable to non‑taxable
receipts from family members. The appellant never disclosed the exact sources
of income to her accountant who has been retained to prepare her tax returns
for the 2001 and 2002 taxation years. The appellant filed her 2001 tax returns
more than a year after the normal due date. Finally, the omission of revenues
was repetitive for the three consecutive years audited.
[25]
Considering all the
facts and circumstances of this case, I consider that the appellant had
knowingly or under circumstances amounting to gross negligence failed to report
all her income for the taxation years in question.
Conclusion
[26]
The appeals are allowed
in part and the matter is referred back to the Minister for reconsideration and
reassessment on the basis that the additional unreported income should be reduced
by $9,944 (being the total of $7,054 admitted by the parties at the
commencement of the hearing and $2,890 allowed by virtue of this judgment) for
the 1999 taxation year, by $1,760 for the 2000 taxation year and by $1,800 for
the 2001 taxation year. The penalties under subsections 162(1), 162(2) and
163(2) of the Act should be adjusted accordingly.
These
Amended Reasons for Judgment are issued in substitution for the Reasons for Judgment
dated March 27, 2009.
Signed at Ottawa, Canada, this 21st
day of May 2009.
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